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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934 (NO FEE REQUIRED) FOR THE 1997 FISCAL YEAR ENDED JANUARY 3,
1998
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 (NO FEE REQUIRED) FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 1-8513
SAFETY-KLEEN(R) CORP.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
WISCONSIN 39-6090019
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
ONE BRINCKMAN WAY
ELGIN, ILLINOIS 60123
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER INCLUDING AREA CODE: (847) 697-8460
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
NAME OF EACH EXCHANGE ON
TITLE OF EACH CLASS WHICH REGISTERED
------------------------------------- ------------------------------
COMMON STOCK, $.10 PAR VALUE NEW YORK STOCK EXCHANGE
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
NONE
(TITLE OF CLASS)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES X NO __
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein and will not be contained,
to the best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. X
The aggregate market value of voting stock held by non-affiliates of the
registrant as of February 28, 1998 was approximately $1.5 billion.
Shares of Common Stock outstanding at February 28, 1998 were 59,930,589.
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the Registrant's Information Statement pursuant to Section
14(f) of Securities Exchange Act of 1934 and Rule 14f-1 thereunder dated
March 26, 1998, are incorporated by reference in Parts I, II and III.
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PART I
ITEM 1. BUSINESS
GENERAL
Safety-Kleen Corp. ("Safety-Kleen", "Company" or "Registrant") is a
leader in servicing the recycling and waste needs of companies in the
automotive/retail repair, industrial, imaging and other business sectors.
Approximately 3,000 Safety-Kleen specialists service customers from a branch
network that extends across North America and Western Europe.
Focusing primarily on the needs of smaller businesses, Safety-Kleen
performed nearly five million individual services and reclaimed more than 300
million gallons of contaminated fluid through a network of 230 branches
worldwide in 1997. The Company collects and recycles used products at thirteen
recycle centers, two lube oil re-refineries, and three fuel-blending facilities.
The Company operates in the continental U.S., Canada, the United
Kingdom, the Republic of Ireland, Puerto Rico, Belgium, France, Italy,
Spain and Germany. The Company has licensee operations in Japan and Korea.
Safety-Kleen Corp. was incorporated in July 1963 under the laws of the State of
Wisconsin. As used herein, the terms "Company" or "Safety-Kleen" or "Registrant"
refer to Safety-Kleen Corp. and its consolidated subsidiaries.
The Company groups its operations geographically into North America and
Europe. The Company further segregates its North American services into four
broad categories: Industrial Services, Automotive/Retail Repair Services, Oil
Recovery Services and Other Services. Each of the Company's services is
discussed in greater detail below and in "Management's Discussion and Analysis
of Financial Condition and Results of Operations" in Item 7 of this Annual
Report on Form 10-K.
---- * * * ----
On August 8, 1997, the Company issued a press release stating that it
had initiated a process to explore strategic alternatives for enhancing
shareholder value and had engaged William Blair and Company, L.L.C. ("William
Blair") to act as its financial advisor in connection therewith. As part of the
process, 50 potential buyers executed confidentiality and standstill agreements
(which were designed to encourage participation by creating a level playing
field for all interested parties and to protect Safety-Kleen's interests). On
November 20, 1997, the Company's Board of Directors ("Board") voted unanimously
to approve a merger agreement with SK Parent Corp., a Delaware corporation owned
equally by Phillip Services Corp., affiliates of Apollo Management, L.P. and
affiliates of Blackstone Management Partners III, L.L.C. (the "SK Parent Merger
Agreement").
Laidlaw Environmental Services, Inc. ("Laidlaw Environmental") also
contacted William Blair but repeatedly refused to execute a confidentiality and
standstill agreement and participate in the process like other potential buyers.
Laidlaw Environmental made an initial unsolicited exchange offer and two
subsequent revised exchange offers in an attempt to purchase Safety-Kleen. After
carefully reviewing the unsolicited offers from Laidlaw Environmental, the Board
continued to recommend the SK Parent Merger Agreement.
On March 9, 1998, the Company held a special meeting of shareholders for
the sole purpose of voting on the SK Parent Merger Agreement. It was announced
at the meeting, based on the advice of the Company's proxy solicitors, that the
Company would not achieve the affirmative vote of two-thirds of all outstanding
shares needed to approve the SK Parent Merger Agreement. The Board then
terminated the SK Parent Merger Agreement. The Board also announced that it
would begin negotiations with Laidlaw Environmental and would also continue to
explore other strategic alternatives for enhancing shareholder value including,
but not limited to, considering any new offers for the Company from any other
interested parties.
On March 16, 1998, the Company issued a press release stating the Board
unanimously approved a definitive merger agreement ("Merger Agreement") with
Laidlaw Environmental, providing for an exchange offer ("Exchange Offer")
followed by a back-end merger ("Merger"; together with the Exchange Offer, the
"Transaction"); the Merger Agreement provides for consideration per Safety-Kleen
share of $18.30 plus 2.8 shares of Laidlaw Environmental Common Stock in both
the Exchange Offer and the Merger.
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On April 1, 1998, Laidlaw Environmental accepted for exchange 56,138,238
shares, constituting approximately 94% of the outstanding shares of Safety-Kleen
and announced it expected to consummate the Merger approximately six weeks
thereafter. See also Item 12(c) Changes in Control, incorporated herein by
reference. Also on April 1, 1998, the Inspectors of Election issued their Final
Report of the vote on the SK Parent Merger Agreement, certifying that it
received 21,256,083 votes for approval out of 59,209,387 shares outstanding and
entitled to vote (I.E., 36% of the outstanding shares were voted in favor).
INDUSTRIAL SERVICES
The Company markets two major services to its Industrial Services
customers: its Parts Cleaner Service and its Fluid Recovery Service. 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 where he cleans and
maintains the equipment, removes the dirty solvent and replaces it with clean
solvent. The dirty solvent is recycled and reused. The Company provides a choice
of several models of parts cleaners to customers for their use as part of the
Parts Cleaner Service and provides service to customers who own their own parts
cleaner equipment. Safety-Kleen also offers a line of water-based cleaning
systems through its Parts Cleaner Service.
The Company's Fluid Recovery Service consists primarily of the
collection of a wide variety of waste solvents and other liquid and solid
containerized wastes generated by industrial customers in relatively small
quantities, averaging a few 55-gallon drums per pickup. Depending upon the
content, the material collected by the Company in its Fluid Recovery Service is
generally recycled into usable solvent, processed into a waste-derived fuel for
use in the cement manufacturing industry or disposed of through incineration.
Wastewater that is collected as part of the Company's Fluid Recovery Service is
treated and processed until it can be discharged into publicly-owned treatment
works in compliance with applicable laws and regulations. Included as part of
the Fluid Recovery Service is the Company's new Technical Field Services group
which provides comprehensive environmental and technical assistance to
industrial, commercial and institutional clients nationwide. These services
consist of Lab Pack Services, Waste Drum Management, and In-Plant Services. The
primary focus is the Lab Pack Services, which is defined as the proper
management of miscellaneous chemicals stored in small containers. The list of
chemicals to be removed at each site can be extensive and vary widely in
characteristics and quantities. Safety-Kleen prepares the paperwork and packages
the waste for shipment, and provides for the transportation and disposal
management.
AUTOMOTIVE/RETAIL REPAIR SERVICES
The primary component of the Company's Automotive/Retail Repair Services
is its Parts Cleaner Service. Safety-Kleen furnishes service stations, car and
truck dealers, small engine repair shops, fleet maintenance shops and its other
automotive/retail repair customers with the same high quality Parts Cleaner
Service that it provides to its Industrial Services customers. In 1996, the
Company introduced a new service line within the Automotive/Retail Repair
Services market--Vacuum Services. This service utilizes specialized vacuum
trucks that remove residual oil and sludge from underground oil/water separators
found at many automotive repair and small industrial locations.
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OIL RECOVERY 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 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 for which such used oil is suitable.
OTHER SERVICES
PAINT REFINISHING SERVICES. The Company's Paint Refinishing Services are
supplied to new and used car dealers, auto body repair and paint shops and
fiberglass product manufacturers. The Company provides a machine specially
designed to clean paint spray guns. Company representatives place a machine 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. Waste paint and paint booth filters are also
collected from these customers and blended into fuel for cement kilns. The
Company representatives also provide clean buffing pads and remove dirty pads
during regularly scheduled service calls. The dirty pads are washed, dried,
inspected and returned to the Company's distribution system.
DRY CLEANER SERVICES. The Company collects and recycles contaminated dry
cleaner wastes consisting primarily of used filter cartridges and sludge
containing perchloroethylene and mineral spirits.
IMAGING SERVICES. Through this service, the Company provides health
care, printing, photoprocessing and other businesses with on-site and off-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 an outside
processor.
ENVIROSYSTEMS SERVICES. Safety-Kleen's Envirosystem Service offers a
collection and recycling service for bulk wastes from larger-quantity generators
that is similar to its Fluid Recovery Service discussed above.
INTEGRATED CUSTOMER COMPLIANCE SERVICES. With the consummation of a
business acquisition in 1997, the Company has expanded its compliance services
offered to customers. Service offerings in this area include Material Safety
Data Sheets ("MSDS") Fax on Demand, an electronic MSDS management program; DOT
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.
EUROPE
Safety-Kleen has wholly-owned operations in seven countries in Western
Europe. The Company primarily provides its Automotive/Retail Repair and Paint
Refinishing Services in Europe. The Company also provides selected industrial
services in Germany and the United Kingdom.
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PRIMARY RAW MATERIALS
The primary hydrocarbon material used in the Company's Parts Cleaner
Service is a paraffinic hydro-treated petroleum fraction product that is
purchased from petroleum refiners and suppliers through short-term purchase
orders. It is not possible for the Company to accurately estimate the effect of
possible future petroleum product shortages on the Company's operations or those
of its customers. At the present time, the Company expects to be able to
purchase required quantities of such solvent at acceptable prices. For a
discussion of the effect of petroleum product price changes, refer to
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Effects of Petroleum Price Changes" appearing in Item 7 of this
Annual Report on Form 10-K.
The Company purchases a wide variety of other products and raw materials
and has not experienced any major shortages in the past. The Company believes
that sufficient alternative sources are available should it become necessary to
replace its current sources of supply for these products and materials.
COMPETITIVE CONDITIONS
The Company is the market leader in the United States in its Parts
Cleaner, Paint Refinishing, Dry Cleaner and used oil collection services. In
these services, the Company generally competes with local or smaller regional
companies. In its Fluid Recovery Service, the Company generally competes with
many firms engaged in the transportation, brokerage and/or disposal of hazardous
wastes through recycling, fuels programs or incineration. The price at which
Safety-Kleen sells its re-refined lube oil is primarily dictated by a market
dominated by large multinational oil companies. For a more complete discussion
of the market for the Company's lube oil, see the "Effects of Petroleum Price
Changes" in the Management's Discussion and Analysis of Financial Condition and
Results of Operations found under Item 7 of this Annual Report on Form 10-K.
The principal methods of competition for all of the Company's services
are price, quality, reliability of service rendered and technical proficiency in
handling hazardous wastes properly. Knowledgeable customers are interested in
the reputation and financial strength of the companies they use for management
of their hazardous wastes, because 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. 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.
PATENTS
The Company owns various patents covering certain of its cleaning units
and certain related accessories. The Company has an exclusive license to use a
patented cyclonic separator in parts cleaner applications. In the Company's
opinion, however, the continued conduct of its business operations does not
depend upon the existence of these patents.
EMPLOYEES
At January 3, 1998, the Company had approximately 7,300 employees.
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REGULATION
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 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 generally required by federal and state
environmental agencies for the Company's branch, accumulation center, solvent
recycling, fuel blending and oil processing facilities. 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.
Governmental regulations also 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.
Regulations similar to those in the United States apply to the Company's
Canadian operations. In general, environmental requirements are not as strict in
countries in which the Company operates outside North America, but there is a
general trend in Europe and other countries to strengthen environmental
requirements.
The Company has an internal staff of lawyers, engineers, geologists,
hydrogeologists, chemists 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
automotive and industrial hazardous and nonhazardous materials. Substantially
all of these materials are regulated in the United States as "solid wastes"
under the Resource Conservation and Recovery Act of 1976 ("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).
The Company's customers are increasingly attempting to avoid being
subject to hazardous waste regulations by replacing hazardous materials used in
their businesses with nonhazardous materials or otherwise reducing the amount of
hazardous waste they generate. Accordingly, the Company is collecting more
substances that are not regulated as hazardous wastes but may be regulated as
solid wastes.
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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 does not intend to pursue RCRA permits for its remaining facilities
because it will be limiting activities at these facilities to transfer
operations.
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's Fluid Recovery Service are
primarily recycled for reuse or processed into waste-derived fuel to be burned
in kilns used in the production of cement. The majority of such waste-derived
fuel is supplied to cement kilns with which the Company has exclusive supply
contracts. Cement kilns are subject to regulations which govern the burning of
hazardous wastes in boilers and industrial furnaces ("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 have met their
initial compliance certification requirements, and intend to continue to meet
their periodic certification requirements in the future. These kilns are also in
the process of obtaining their RCRA operating permits. The Company is assisting
these kilns in complying with such regulations. None of the kilns utilized by
the Company for disposition of the waste it collects are owned by the Company.
On April 19, 1996, the EPA published its proposed Hazardous Waste
Combustor Rule. 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. However, 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. 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 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.
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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 part cleaners to an alternative
cleaning solvent or solution prior to January 1, 1999. In addition, the Company
will continue to actively work 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.
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 large 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 each of these facilities prior to
shipping any materials to attempt to minimize its potential superfund liability
at these sites.
Proceedings are currently pending involving several sites with respect
to which the Company has been notified by the EPA or the appropriate state
agency that the Company may be a PRP. The Company is participating in settlement
discussions with the parties and the government at these sites. The Company's
volumetric share of the total waste at a majority of these sites is among the
smallest of the PRPs and the Company has a larger volumetric share at a minority
of these sites. From time to time, the EPA requests information from the Company
to ascertain if it may be a PRP at other 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.
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CAPITAL AND CERTAIN OTHER EXPENDITURES RELATED TO THE ENVIRONMENT. A
portion of the Company's capital expenditures are related to compliance with
environmental laws and regulations. The Company estimates capital spending of
approximately $6 million for the year 1998 and $13 million in the aggregate, for
the years 1999 through 2002 in order to comply with RCRA, the Clean Air Act and
other environmental laws and regulations currently in effect in conjunction with
the Company's existing business.
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, in certain cases, changes the use of a hazardous waste
management unit, formal closure procedures must be followed. These closure
procedures must be approved by federal or state environmental authorities. In
some cases, costs are incurred to complete remedial cleanup work at the site. In
addition, at certain of the Company's other operating sites, remedial cleanup
work is required as part of the RCRA Corrective Action Program or other state
and federal programs. As shown on the Company's Consolidated Balance Sheet and
more fully described in Note 10 to the Consolidated Financial Statements
included in Item 8 of this Annual Report on Form 10-K, the Company has accrued
liabilities of $41.3 million as of January 3, 1998 for remedial cleanup work,
superfund site liability, closure activities and certain other environmental
expenses related to its operating and previously closed sites.
ENFORCEMENT ACTIONS. The Company's goal is to fully comply with all
environmental regulations and other governmental requirements. The Company has
instituted several programs to enhance compliance, including suspending site
operations if appropriate corrective actions are not taken to remedy potential
defects. The Company conducts regular audits of its facilities to assess
compliance with federal and state environmental and safety laws and regulations.
Any potential deficiencies are identified and a corrective action plan is
prepared and implemented to eliminate the potential defect. In 1997, the Company
conducted over 480 such audits. The Company regularly conducts corporate
training courses and seminars focused on environmental control and safety
regulations, in addition to on-going weekly field training for its site
employees.
While the Company's goal is to fully comply with all environmental
regulations, given the Company's extensive operations, the technical aspects of
the regulations and the varying interpretations of the requirements from
jurisdiction to jurisdiction, the Company may face government enforcement
proceedings and incur fines and penalties or expenses for remedial work from
time to time. In the majority of situations where proceedings are commenced by
governmental authorities, the matters involved relate to alleged violations of
permits or orders under which the Company operates, or laws and regulations to
which its operations are subject, and are the result of varying interpretations
of the applicable requirements. Generally, these proceedings result from routine
inspections conducted by federal and state regulatory agencies. In 1991,
throughout its United States facilities, 201 regulatory proceedings were brought
by state or federal authorities against the Company. The number of regulatory
proceedings brought against the Company has declined each year since 1991 (I.E.,
there were 142 proceedings brought in 1992, 136 in 1993, 130 in 1994, 90 in
1995, 83 in 1996, and 62 in 1997). Administrative actions are counted in the
year notice of the violation is received by the Company, regardless of when the
inspection giving rise to the action was conducted. Some of the proceedings
brought in 1997 resulted from inspections performed in previous years. Of these
administrative actions in 1997, the majority of the alleged deficiencies related
to incomplete or incorrect manifests and other shipping documents and alleged
defects in site operating records, training record keeping and other paperwork.
The Company processed approximately 1.2 million manifests and completed several
million individual drum labels in 1997. Throughout its facility network, the
Company maintains over 200 sets of operating records and logs in which millions
of individual entries are made annually. A clerical error on a manifest, drum
label or site paperwork can result in a violation notice.
From time to time, the Company becomes subject to proceedings in which
governmental authorities may seek fines and/or penalties from the Company which
exceed $100,000 in each case. Six such proceedings were pending against the
Company at January 3, 1998.
The Company's practice is to attempt to negotiate resolution of claims
against the Company and its facilities. The Company has to date been able to
resolve cases on generally satisfactory terms. The Company is, however, prepared
to contest claims or remedies which the Company believes to be inappropriate
unless and until satisfactory settlement terms can be agreed upon. The Company
paid in the aggregate less than $0.5 million in 1997 for environmental fines and
penalties.
8
<PAGE>
POTENTIAL ENVIRONMENTAL LIABILITIES. 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.
FINANCIAL INFORMATION RELATING TO FOREIGN AND DOMESTIC OPERATIONS
AND INDUSTRY SEGMENTS
The Company operates primarily in one business segment--providing
businesses with environmentally safe and convenient solutions for managing fluid
waste and other recoverable resources. For a discussion of financial information
relating to foreign and domestic operations and industry segments refer to Note
4 to the Consolidated Financial Statements appearing in Item 8 of this Annual
Report on Form 10-K.
EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers of the Company as of April 1, 1998 are:
NAME AGE POSITION
- ------------------------- --- -----------------------------------------
Donald W. Brinckman 67 Chairman of the Board and Chief Executive
Officer
Joseph Chalhoub 52 President and Chief Operating Officer
Hyman K. Bielsky 43 Senior Vice President, General Counsel and
Managing Director, European Operations
Roy D. Bullinger 49 Senior Vice President Business Management
and Marketing
Robert J. Burian 60 Senior Vice President Human Resources
Andrew A. Campbell 51 Senior Vice President Finance and Chief
Financial Officer
Michael H. Carney 50 Senior Vice President Marketing Services
and Customer Care
David A. Dattilo 57 Senior Vice President Sales and Service
Scott E. Fore 43 Senior Vice President Environment, Health
and Safety
F. Henry Habicht, II 44 Senior Vice President Corporate Development
and Environment
Clark J. Rose 60 Senior Vice President Operations
Lawrence G. Davenport 55 Vice President Information Systems and
Chief Information Officer
Scott D. Krill 35 Assistant General Counsel and Secretary
Laurence M. Rudnick 52 Treasurer
Clifford J. Schulz 46 Controller and Chief Accounting Officer
9
<PAGE>
Mr. Brinckman was named Chief Executive Officer of the Company on
August 8, 1997, a position he previously held from 1968 to December 31, 1994.
He served as President of the Company from 1968 to August 1990, and
December 1991 to May 1993. Mr. Brinckman was appointed Chairman of the
Company's Board of Directors in August 1990. Mr. Brinckman is also a director
of Paychex, Inc., Rochester, New York and Snap-On Incorporated, Kenosha,
Wisconsin. Mr. Brinckman is Chairman of the Executive Committee and is a
member of the Environmental Committee.
Mr. Chalhoub was named President and Chief Operating Officer of the
Company on August 8, 1997. Previously he served as Senior Vice President
Operations, Oil Recovery and Envirosystems since July 1995. Prior to that, he
served as Senior Vice President, Oil Recovery since August 1990. In August 1991,
Mr. Chalhoub was assigned the additional responsibilities of overseeing the
processing and engineering departments. He was President of the Company's former
subsidiary, Breslube Holding Corp., since May 1987.
Mr. Bielsky was elected Senior Vice President General Counsel in
May 1993. He has also served as the Company's Managing Director of its European
operations since 1996. Mr. Bielsky served as Assistant General
Counsel-Commercial since January 1990 and as Associate Counsel since
joining the Company in 1987.
Mr. Bullinger was named Senior Vice President Business Management
and Marketing in June 1994. He served as Vice President
Sales-Central Division since 1985 and as a Regional Manager since joining
the Company in 1975.
Mr. Burian was appointed Senior Vice President Human
Resources in May 1993. He served as Senior Vice President Administration
since August 1990. Mr. Burian joined the Company in July 1986, as Vice
President Personnel.
Mr. Campbell was named Senior Vice President, Finance
and Chief Financial Officer in April of 1997. From 1994 to 1996, he served
as President and earlier as Vice President, Finance and Chief Financial
Officer for Duplex Products, Inc. He was Vice President, Finance and Chief
Financial Officer of Simmons Upholstered Furniture, Inc. from 1991 to 1994.
Prior to that, he held senior financial positions at General Electric
Company and Navistar International Corporation.
Mr. Carney was named Senior Vice President Marketing Services and
Customer Care in June 1994. He served as Senior Vice President Marketing since
August 1990 and Vice President Marketing since May 1987. He joined the Company
in 1976, serving in various marketing positions until his appointment to Vice
President Marketing.
Mr. Dattilo was named Senior Vice President Sales and Service in
August 1990. He served as Vice President Corporate Branch Sales and
Service since January 1980.
Mr. Fore was elected Senior Vice President Environment, Health and
Safety in May 1993. He served as Vice President Environment, Health and Safety
since August 1987, and was previously Associate General Counsel since joining
the Company in 1985.
Mr. Habicht joined the Company in March 1993. He served as Senior Vice
President Strategic/Environmental Planning from March 1993 to July 1995. In July
1995, he assumed responsibility for Environment, Health and Safety and Corporate
Accounts and became Senior Vice President of Corporate Development and
Environment. Prior to joining the Company, he served as Deputy Administrator of
the U.S. Environmental Protection Agency from 1989 to 1993.
Mr. Rose was named Senior Vice President Operations in August 1997.
He served as Vice President Manufacturing and Technical Services since
July 1995 and as Vice President Technical Services since August 1989.
Mr. Rose joined the Company in June 1984 as the Manager of Recycle Center
Operations.
Mr. Davenport joined the Company in June 1995 as Vice President
Information Services and Chief Information Officer. Prior to joining
Safety-Kleen, Mr. Davenport was employed by JB Hunt Transport, Inc. since
1989 and served as Senior Vice President Information Services for that
company since 1992.
10
<PAGE>
Mr. Krill was named Assistant General Counsel and Secretary in
May 1997. He served as Associate Counsel since joining the Company in
December 1993. Prior to that, Mr. Krill was an associate with the
firm of Gibson, Dunn & Crutcher.
Mr. Rudnick joined the Company in September 1979, and was appointed
Treasurer in January 1980.
Mr. Schulz was named Controller in December 1994. He served as
Controller North American Operations and Assistant Controller Cost and
Inventory since 1991 and 1987, respectively.
ITEM 2. PROPERTIES
The Company owns 13 solvent recycling plants in the U.S., 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 10 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 2 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 U.S., United Kingdom and Germany, averaging approximately
45,000 square feet. The Company has 19 accumulation centers across the U.S. Of
these, 14 are owned and 5 are leased. A typical accumulation center is
approximately 8,000 square feet. These centers serve branches by collecting
drums of waste from the Fluid Recovery Service, Dry Cleaner Service, Paint
Refinishing Service and other services. As truckload quantities are collected,
they are transported from the accumulation centers to the recycling plants.
In North America and Europe, the Company's sales and service
representatives operate out of 230 branch facilities. Of these, approximately
half are leased and half are owned. A typical branch is approximately 8,000
square feet.
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 285,000 square foot corporate headquarters building
located in Elgin, Illinois and a 66,000 square foot Technical Center located in
Elk Grove Village, Illinois.
The Company operates approximately 2,600 van-type vehicles, 570 straight
tanker-type service vehicles and 770 pieces of over-the-road equipment, most of
which are owned by the Company. The Company also operates approximately 1,000
leased railroad tanker cars.
11
<PAGE>
ITEM 3. LEGAL PROCEEDINGS
Reference is made to "Item 1. Business," subcaption "Regulation," for
information concerning certain environmental matters. The information set forth
under the heading "CERTAIN LEGAL MATTERS" in the Company's Information Statement
pursuant to Rule 14f-1 under the Securities Exchange Act of 1934 dated March 26,
1998 and filed herewith as Exhibit 99.1 (the "Information Statement") is
incorporated herein by reference for information regarding certain other legal
proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the
fourth interim period of the fiscal year ended January 3, 1998.
12
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
MARKET AND DIVIDEND INFORMATION
The Company's common stock is traded on the New York Stock Exchange. The
approximate number of record holders of the Company's common stock at January 3,
1998 was 7,267.
The following table shows the range of common stock prices and cash
dividends for the calendar quarters indicated. The quotations represent the high
and low prices on the New York Stock Exchange as reported by THE WALL STREET
JOURNAL.
1997 1996
Prices Prices
QUARTER HIGH LOW HIGH LOW
------------------------------------------------------------
First $18.75 $14.88 $15.75 $13.50
Second $16.00 $14.13 $17.00 $14.25
Third $21.88 $15.63 $18.13 $15.63
Fourth $29.00 $18.13 $17.25 $14.75
The Company has paid cash dividends for 76 consecutive quarters since
March 1979, including quarterly cash dividends of $0.09 per share in the first
quarter of 1998 and all quarters of 1997 and 1996, and expects to continue its
policy of paying a regular cash dividend prior to consummation of the Merger,
although there is no assurance as to future dividends, which are dependent
upon future earnings, capital requirements, the financial condition of the
Company and other factors.
13
<PAGE>
<TABLE>
<CAPTION>
ITEM 6. SELECTED FINANCIAL DATA
FISCAL YEAR
- ------------------------------------------------------------------------------------------------
1997(1) 1996 1995 1994 1993
- ------------------------------------------------------------------------------------------------
(Expressed in thousands, except per share amounts)
STATEMENT OF OPERATIONS DATA
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Revenue $1,007,903 $923,126 $ 859,251 $ 791,267 $795,508
Net earnings (loss) 63,170 (2) 61,109 53,303 50,094 (101,346)(3)
Earnings (loss) per share
Basic 1.08 1.05 0.92 0.87 (1.76) (3)
Diluted 1.07 1.05 0.92 0.87 (1.76) (3)
Cash dividends per share 0.36 0.36 0.36 0.36 0.36
BALANCE SHEET DATA
- ------------------------------------------------------------------------------------------------
Current assets $ 224,426 $ 230,133 206,208 197,221 202,887
Current liabilities 155,443 157,793 162,676 165,455 149,415
Working capital 68,983 72,340 43,532 31,766 53,472
Total assets 1,034,706 1,044,823 1,009,050 973,444 950,664
Long-term debt 214,234 276,954 283,715 284,125 288,633
Shareholders' equity 529,467 480,290 433,435 396,336 362,664
</TABLE>
(1) Fiscal year 1997 was a fifty-three week year. All other years presented
were fifty-two weeks.
(2) Includes approximately $3.2 million pre-tax charge to income for costs
associated with the project to evaluate strategic alternatives initiated by
the Company's Board of Directors in August 1997.
(3) Includes restructuring and special charges, net of tax benefit, of $136
million ($229 million pre-tax) or $2.36 per share.
14
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
SUMMARY OF 1997, 1996 AND 1995 FINANCIAL RESULTS.
In 1997 and 1996, the Company's net earnings increased 3% and 15%,
respectively, from the prior year. The following table sets forth for the
periods indicated (i) percentages which certain items reflected in the financial
data bear to consolidated revenue of the Company and (ii) the percentage
increase (decrease) of such items as compared to the prior period.
<TABLE>
<CAPTION>
RELATIONSHIP TO PERIOD TO PERIOD
CONSOLIDATED INCREASE
REVENUE (DECREASE)
FISCAL YEAR FISCAL YEARS
1997 1996 1995 1997-96 1996-95
----------- ---------- ----------- ---------- -----------
<S> <C> <C> <C> <C> <C>
Revenue 100.0% 100.0% 100.0% 9.2% 7.4%
Operating costs and expenses 74.3 72.8 73.1 11.5 6.9
----------- ---------- -----------
Gross profit 25.7 27.2 26.9 3.1 8.8
Selling and administrative
expenses 13.7 14.3 14.2 5.2 7.6
Restructuring (credit) - - (1.8) - N/A
Special charge for environmental
remediation costs - - 1.4 - N/A
----------- ---------- -----------
Operating income 12.0 12.9 13.1 0.8 7.0
Interest (income) (0.1) (0.2) (0.1) 1.1 43.5
Interest expense 1.8 2.1 2.4 (5.9) (4.9)
Merger related costs 0.3 - - N/A -
----------- ---------- -----------
Earnings before income taxes 10.0 11.0 10.8 (1.1) 9.9
Income taxes 3.7 4.4 4.6 (7.9) 3.5
=========== ========== ===========
Net earnings 6.3% 6.6% 6.2% 3.4% 14.6%
=========== ========== ===========
</TABLE>
LIQUIDITY AND CAPITAL RESOURCES
Capital spending in fiscal years 1997, 1996 and 1995 for additions of
equipment at customers and property, excluding business acquisitions, totaled
$56 million, $62 million and $78 million, respectively. These capital
expenditures were financed by cash from operations. Long-term debt decreased by
$63 million in 1997 and $7 million in 1996, while remaining unchanged during
1995.
The Company expects its capital expenditures for equipment at customers
and property additions for fiscal year 1998 will be approximately $70-75
million. The Company expects to be able to finance these expenditures entirely
through internally generated funds. As more fully described in Note 6 to the
Consolidated Financial Statements, the Company and its subsidiaries have lines
of credit aggregating approximately $251 million. As of January 3, 1998, total
borrowings under these lines were $58 million.
A portion of the Company's capital expenditures are related to
compliance with environmental laws and regulations. The Company estimates
capital spending of approximately $6 million in 1998 and $13 million in the
aggregate for the fiscal years 1999 through 2002 in order to comply with current
environmental laws and regulations in connection with the Company's existing
business.
15
<PAGE>
RESULTS OF OPERATIONS
REVENUES.
Total revenue derived from the Company's North American services and
European operations for each of the three fiscal years in the period ended
January 3, 1998, are presented below:
<TABLE>
<CAPTION>
PERCENTAGE OF
INCREASE (DECREASE)
(Expressed in millions) FISCAL YEARS
1997 1996 1995 1996-97 1995-96
------------- ------------- -------------- ------------- --------------
North America
<S> <C> <C> <C> <C> <C>
Industrial Services $306.0 $271.8 $241.6 13% 13%
Automotive/Retail
Repair Services 268.0 245.0 239.7 9% 2%
Oil Recovery
Services 156.3 150.8 129.0 4% 17%
Other Service Areas 167.7 149.2 149.8 12% -
-------------------------------------------
Total North America 898.0 816.8 760.1 10% 7%
Europe 109.9 106.3 99.2 3% 7%
-------------------------------------------
Consolidated $1,007.9 $923.1 $859.3 9% 7%
===========================================
</TABLE>
Revenues include sales of oil related products of $105.9, $103.5 and
$91.4 million for fiscal years 1997, 1996 and 1995, respectively. Other sales of
products were not material to the Consolidated Financial Statements.
NORTH AMERICAN INDUSTRIAL SERVICES.
FLUID RECOVERY SERVICE. Revenue from the Company's North American
Industrial Services includes Fluid Recovery Service revenue of $165.1 million in
1997, $143.0 million in 1996 and $122.8 million in 1995. Approximately 11
percentage points of the 16% increase in revenue experienced in 1997 is
attributed to expansion of the Company's new lab-pack and pass-by waste programs
introduced during 1996. The remaining 5 percentage point increase consists of an
increase of approximately 3 percentage points due to price and an increase of
approximately 2 percentage points due to volume. The 17% revenue increase
experienced in 1996 reflects volume increases of approximately 15% and price
increases of approximately 2%. This volume improvement is due, in part, to new
product and service offerings.
INDUSTRIAL PARTS CLEANER SERVICE. The North American Industrial Parts
Cleaner Service accounts for the remaining North American Industrial Services
revenue of $140.9 million in 1997, $128.8 million in 1996 and $118.8 million in
1995. The 9% revenue increase experienced in 1997 includes increases of 5% due
to price and 4% due to volume. The 8% revenue increase experienced in 1996
included volume increases of approximately 3% and price increases of
approximately 5%.
The Company's Parts Cleaner Service has three volume components: the
number of parts cleaner machines in service ("machines in service"); the
frequency with which the machines are serviced ("service interval"); and the
size or type of machines in service ("machine mix"). With respect to the first
two components, revenue is favorably impacted by increases in the number of
machines in service and the frequency with which those machines are serviced.
With respect to machine mix, Safety-Kleen offers many different types of parts
cleaning machines ranging from small units that are relatively inexpensive to
larger, more complex units with significantly higher service charges. An
increase in the percentage of higher-priced units in service favorably impacts
revenue.
16
<PAGE>
NORTH AMERICAN AUTOMOTIVE/RETAIL REPAIR SERVICES.
Approximately $15.3 million of the $23.0 million revenue increase in the
Automotive/Retail Repair Services market was generated from the continued
expansion of the Company's Vacuum Service business introduced during the second
half of 1996. The Automotive Parts Cleaner Service increased approximately $4.1
million, or 2%, during 1997 due to an increase in price of 5%, offset by a
volume decline of approximately 3%. The balance of the increase in revenue was
largely due to a higher volume of absorbent sales.
In 1996 as compared to 1995, higher revenue from the Automotive Parts
Cleaner Service contributed $1.4 million to the North American Automotive/Retail
Repair Services revenue increase. The remainder of the revenue increase came
from the addition of new services, including the Company's Vacuum Services
business. Price increases in the Company's Automotive Parts Cleaner Service,
which averaged 5% in 1996, were partially offset by a 4% volume decline.
NORTH AMERICAN OIL RECOVERY SERVICES.
The revenue increase of approximately $5.5 million in 1997 is primarily
due to an increase of $5.7 million, or 13%, in the oil collection business with
price increases and volume increases each contributing equally. A drop of 15%
and 8% in the average selling prices of base and blended lube oils,
respectively, resulted in a $9.5 million lower revenue in 1997 than 1996. This
revenue decline was partially offset by an increase of approximately $8.1
million from an increase in the volume of total lube oil sales. The remainder of
the change in revenue was generated primarily from increased fuel oil sales as a
result of an acquisition made during the second quarter of 1996.
The $21.8 million increase in revenue experienced in 1996 included
approximately $10 million of revenue derived from acquisitions. Approximately
40% of the remaining revenue increase is attributable to more favorable pricing;
60% resulted from higher volume.
NORTH AMERICAN OTHER SERVICE AREAS.
Revenue from Other Service Areas increased $18.5 million, or 12%, during
1997. Revenue from Imaging Services increased $7.1 million, or 33%, due
primarily to higher branch service revenue volume. Revenue from the Company's
Envirosystems business increased by $8.1 million, or 16%, during 1997 due mainly
to higher volume. The remaining $3.4 million of higher revenue is primarily due
to increased revenue in the Company's Paint Refinishing Services.
In 1996, revenue from Other Service Areas was flat with 1995. Increases
in Imaging Services revenue generated by the branch network were offset by a
decline in revenue caused by the elimination of low-margin Imaging Services
broker business.
EUROPE.
The continued weakening of European currencies against the U.S. dollar
decreased revenue by $7.0 million in 1997, compared to 1996. Exclusive of
exchange rate changes, revenues in Europe increased by $10.5 million, or 10%,
during 1997. Approximately 3 percentage points of this increase is attributable
to price increases and the balance is attributable to volume.
A weakening of European currencies against the U.S. dollar decreased
revenue by approximately $1.8 million in 1996. Exclusive of exchange rate
effects, revenues in Europe increased approximately 9%, as all major European
operations (except the Envirosystems operations in Germany) showed revenue
growth in local currency due mainly to higher volume.
17
<PAGE>
OPERATING COSTS AND EXPENSES.
The following table arrays the gross profit margins of the Company's
North American services and European operations for each of the three fiscal
years in the period ended January 3, 1998:
1997 1996 1995
---- ---- ----
North America
Industrial Services 31% 31% 30%
Automotive/Retail Repair Services 33% 36% 37%
Oil Recovery Services 7% 13% 15%
Other Service Areas 22% 21% 17%
Total North America 25% 27% 27%
Europe 28% 25% 25%
Consolidated 26% 27% 27%
NORTH AMERICAN INDUSTRIAL SERVICES.
The North American Industrial Services gross margin for 1997 was
consistent with 1996 levels as the impact of lower margins earned on the new
services due to startup costs were offset by improved margins earned on the
established businesses.
The North American Industrial Services gross margin for 1996 improved
slightly from 1995 due mainly to lower recycling costs and improved pricing in
the Fluid Recovery Service business caused by the reduction of price discounts.
NORTH AMERICAN AUTOMOTIVE/RETAIL REPAIR SERVICES.
The North American Automotive/Retail Repair Services margin decline of
3% in 1997 was largely attributed to service mix as a greater percentage of the
revenue was generated by the Vacuum Services business and Aqueous Parts Cleaning
business. These new businesses generate lower gross margins as they are
currently being expanded throughout North America.
The North American Automotive/Retail Repair Services gross margin in
1996 declined slightly from 1995 due to the impact of the new Vacuum Services
business in the U.S. which was operating at approximately break-even at the
gross profit level in 1996.
NORTH AMERICAN OIL RECOVERY SERVICES.
The North American Oil Recovery Service margin decline of 6% in 1997 can
be attributed to the decline of $9.5 million in revenue as a result of lower
lube oil prices.
While 1996 total gross profits of the Oil Recovery Services remained
relatively unchanged from 1995, the gross profit margin declined by 2 percentage
points in 1996. The decrease in margins is attributable principally to a 2%
decline in the average selling price of base lube oil, increased cost of natural
gas used at the Company's re-refineries, and lower margins earned on the $10
million of acquired business.
18
<PAGE>
NORTH AMERICAN OTHER SERVICE AREAS.
The improvement in gross margin in 1997 is generated by improved gross
margins earned by the Imaging and Envirosystems businesses due to improved
volume. The improvement generated from these businesses is partially offset by a
change in revenue mix as a greater percentage of revenue is being generated from
the Imaging business which, while improved, is still generating lower gross
margin rates than the established businesses due to added costs associated with
expanding the business across North America.
The improved margin in Other Services in 1996 over 1995 resulted
principally from the elimination of low-margin broker business in the Imaging
Services business during 1996 and lower waste-derived fuel processing costs and
other waste disposal costs.
EUROPE.
The European gross profit improvement realized in 1997 over 1996 was due
primarily to improved volume across all of Europe's major operations except the
Company's German Envirosystem operations which declined slightly in 1997.
The European gross profit margin in 1996 was unchanged from 1995. Lower
gross profit earned in the Company's German Envirosystems operation, due to
lower sales, were offset by improved margins in the other major operations in
Europe.
While foreign exchange rate changes resulted in a change in revenues, as
previously discussed, the changes did not have a material impact on European
gross margins. See Note 4 of Notes to Consolidated Financial Statement included
in Item 8 of this Annual Report on Form 10-K for further information regarding
European results of operations and investment.
SELLING AND ADMINISTRATIVE EXPENSES.
The 5% increase in selling and administrative expenses in 1997 is
largely due to the impact of the 53rd week and higher costs associated with the
Company's upgrading of its computer systems. The Company's selling and
administrative expenses as a percent of revenue has declined to 13.7% in 1997,
from 14.3% in 1996, due to lower employee related costs as a percentage of
revenue. Approximately $2.6 million of severance costs incurred in the third
interim period of 1997 were offset by adjustments to pre-established reserves of
a similar amount.
The 8% increase in selling and administrative expenses the Company
experienced in 1996, resulted primarily from additional employees and related
employee expenses, increases in compensation and related benefits and business
acquisitions.
RESTRUCTURING AND SPECIAL CHARGES.
The Company adopted a restructuring plan in 1993 based on the conversion
of its Parts Cleaner Service to new technology and other strategic actions to
better focus the Company on its core environmental services, reduce its cost
structure and improve the value of its services to its customers. In conjunction
with the adoption of the plan, the Company recorded a restructuring charge of
$179 million ($106 million after-tax or $1.84 per share). In 1993, the Company
also recorded a $50 million charge ($30 million after-tax or $0.52 per share)
representing a change in estimate for environmental remediation costs. In 1995,
the Company recorded a $15.2 million (pre-tax) credit to income to reduce the
amount of restructuring reserves established in 1993 to their expected required
levels. In 1995, the Company also recorded a $12 million (pre-tax) charge to
income to increase the reserves for environmental remediation at its facilities
in North America based on its refinement of the estimate for such liabilities
and its ongoing review of spending patterns. In 1996, the Company substantially
completed all of its restructuring activities and reclassified the remaining
reserves to "other accrued expenses" and "other liabilities" on the Company's
Consolidated Balance Sheet.
19
<PAGE>
INTEREST EXPENSE.
Interest expense declined by $1.1 million in 1997 due to lower average
borrowings as compared to 1996, offset partially by higher interest rates.
Slightly lower interest rates offset partially by a slightly higher average debt
balance resulted in a $1.0 million decrease in interest expense in 1996 as
compared to 1995. Interest expense excludes $2.1 million of interest capitalized
for each of the three fiscal years 1997, 1996 and 1995. The impact of the
interest rate swaps executed in the United States and Germany in 1992 and 1993
and more fully explained in Note 6 to the Consolidated Financial Statements
resulted in interest expense savings of $0.7, $0.1, and $1.6 million in 1997,
1996 and 1995, respectively.
MERGER RELATED COSTS.
On August 8, 1997, the Company issued a press release stating that it
had initiated a process to explore strategic alternatives for enhancing
shareholder value and had engaged William Blair and Company, L.L.C. ("William
Blair") to act as its financial advisor in connection therewith. As part of the
process, 50 potential buyers executed confidentiality and standstill agreements
(which were designed to encourage participation by creating a level playing
field for all interested parties and to protect Safety-Kleen's interests). On
November 20, 1997, the Company's Board of Director's ("Board") voted unanimously
to approve a merger agreement with SK Parent Corp., a Delaware corporation owned
equally by Phillip Services Corp., affiliates of Apollo Management, L.P. and
affiliates of Blackstone Partners III, L.L.C. (the "SK Parent Merger
Agreement").
Laidlaw Environmental Services, Inc. ("Laidlaw Environmental") also
contacted William Blair but repeatedly refused to execute a confidentiality and
standstill agreement and participate in the process like other potential buyers.
Laidlaw Environmental made an initial unsolicited exchange offer and two
subsequent revised exchange offers in an attempt to purchase Safety-Kleen. After
carefully reviewing the unsolicited offers from Laidlaw Environmental, the Board
continued to recommend the SK Parent Merger Agreement.
On March 9, 1998, the Company held a special meeting of shareholders for
the sole purpose of voting on the SK Parent Merger Agreement. It was announced
at the meeting, based on the advice of the Company's proxy solicitors, that the
Company would not achieve the affirmative vote of two-thirds of all outstanding
shares needed to approve the SK Parent Merger Agreement. The Board then
terminated the SK Parent Merger Agreement. The Board also announced that it
would begin negotiations with Laidlaw Environmental and would also continue to
explore other strategic alternatives for enhancing shareholder value including,
but not limited to, considering any new offers for the Company from any other
interested parties.
On March 16, 1998, the Company issued a press release stating the Board
unanimously approved a definitive merger agreement ("Merger Agreement") with
Laidlaw Environmental, providing for an exchange offer ("Exchange Offer")
followed by a back-end merger ("Merger"; together with the Exchange Offer, the
"Transaction"); the Merger Agreement provides for consideration per Safety-Kleen
share of $18.30 plus 2.8 shares of Laidlaw Environmental Common Stock in both
the Exchange Offer and the Merger.
On April 1, 1998, Laidlaw Environmental accepted for exchange 56,138,238
shares, constituting approximately 94% of the outstanding shares of
Safety-Kleen and announced it expected to consummate the Merger approximately
6 weeks thereafter. Also on April 1, 1998, the Inspectors of Election issued
their Final Report of the vote on the SK Parent Merger Agreement, certifying
that itreceived 21,256,083 votes for approval out of 59,209,387 shares
outstanding and entitled to vote (I.E., 36% of the outstanding shares were
voted in favor). The acceptance and exchange of tendered shares triggers the
change of control provision included in the Company's 1985 and 1993 Stock
Option Plans and the 1988 Non-Qualified Stock Option Plan for Outside Directors
which results in all granted options becoming 100% vested. Consistent with the
Merger Agreement, each holder of stock options will receive a cash-out amount,
with respect to each of his/her option shares, equal to the Exchange Offer
consideration (valued for this purpose at $30.30) reduced by the option
exercise price, provided that such holder agrees to the cancellation of all of
his/her outstanding options. Also consistent with the Merger Agreement,
each participant in the Employee Stock Purchase Plan will receive a
cash-out payment equal to his/her contributions plus an amount
equal to the number of shares subscribed for by the participant multiplied
by the difference between such Exchange Offer consideration and the market
price of the stock at the date of grant.
20
<PAGE>
The Company incurred $3.2 million in costs through January 3, 1998 in
conjunction with the process described above. During 1998, the Company
anticipates incurring approximately $140-160 million of additional costs
related to the process consisting primarily of the $75 million
of termination costs associated with the SK Parent Merger Agreement,
compensation expense associated principally with the cash-out of the stock
option plans and Employee Stock Purchase Plan described above and investment
banking and legal fees associated with the process. These estimated costs
do not include any severance related costs incurred as a result of the
integration of the Company and Laidlaw Environmental.
INCOME TAXES.
The effective income tax rate was 37% in 1997, 40% in 1996 and 42% in
1995. The effective tax rate in 1997 reflected lower non-deductible expenses in
1997 and the timing of certain tax benefits received in 1997 that were not
received in 1996. The effective tax rate in 1996 declined due to the tax effects
of the restructuring credits and remediation charges recorded in 1995. The
effective income tax rate in 1995, before the restructuring credits and
additional remediation charges, was 40%, which is consistent with 1996.
21
<PAGE>
OTHER TRENDS, EVENTS AND UNCERTAINTIES
The Company has committed significant human and capital resources to
fully comply with all environmental laws, regulations and other governmental
requirements. While the Company's goal is to achieve 100% compliance, given its
extensive operations, the technical aspects of the regulations, and the varying
interpretations of the requirements from jurisdiction to jurisdiction, the
Company may face government enforcement proceedings and incur fines and
penalties or expenses for remedial work from time to time. While the Company
does not anticipate any such fines, penalties or expenses will have a material
adverse impact on its financial condition, 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 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. The Company paid
less than $0.5 million in 1997 and 1996 for environmental fines, penalties and
forfeitures, compared to $1 million in 1995.
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.
The Company may not be able to pass on the costs associated with such
legislation and regulations to its customers through price increases.
On April 19, 1996, the U.S. Environmental Protection Agency ("EPA")
published its proposed Hazardous Waste Combustor Rule. 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, who are major outlets for the Company's waste-derived fuels, to
make capital improvements which would increase the cost of burning such fuels in
cement kilns. However, 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 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 actively work 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.
In September 1997, the Company discovered that its East Chicago, Indiana
main feed tank had become contaminated with polychlorinated biphenyls ("PCBs")
resulting in approximately 4 million gallons of contaminated oil. The Company
immediately notified the EPA and the Indiana Department of Environmental
Management ("IDEM") of the problem. The Company believes that the IDEM and EPA
will allow it to treat this contaminated material on-site. If the IDEM or EPA
determine that off-site treatment is required, the cost of such treatment could
be material to the results of operations in that period.
In recent years, companies have generally endeavored to minimize the
amount of waste they generate and reduce costs. These waste minimization and
cost savings efforts have adversely affected demand for Safety-Kleen's services,
although the Company believes that the small quantity generators of wastes it
specializes in serving are not as greatly impacted by waste minimization efforts
as larger generators. Certain Safety-Kleen service offerings are designed to
help customers reduce waste.
The Company is currently in the process of evaluating its information
technology infrastructure for the Year 2000 compliance. The Company does not
expect that the cost to modify its information technology
22
<PAGE>
infrastructure to be Year 2000 compliant will be material
to its financial condition or results of operations. The Company
does not anticipate any material disruption in its operations as a result
of any failure by the Company to be in compliance. The
Company does not currently have any information concerning the Year 2000
compliance status of its suppliers and customers. In the event that any of the
Company's significant suppliers or customers does not successfully and timely
achieve Year 2000 compliance, the Company's business or operations could be
adversely affected.
Laidlaw Environmental, in which Safety-Kleen shareholders are acquiring
stock pursuant to the Transaction, and Safety-Kleen and certain of their direct
and indirect subsidiaries each are large enterprises with operations in
different markets. The success of any business combination, including the
Merger, is in part dependent on the ability following the Merger to consolidate
operations and 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 as to the effect of the Merger on future
consolidated results or as to the timing or extent to which cost savings and
efficiencies anticipated by Laidlaw Environmental will be achieved.
As a result of the Transaction, Safety-Kleen's new parent, Laidlaw
Environmental will be highly leveraged with substantial debt service
obligations, including principal and interest obligations with respect to bank
debt of $2.1 billion. Therefore, Laidlaw Environmental will be particularly
susceptible to adverse changes in its industry, the economy and the financial
markets generally. In addition, Laidlaw Environmental'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 and those limits
on financing may therefore limit Laidlaw Environmental's ability to service its
existing debt obligations through additional debt financing if cash flow from
operations is insufficient to service such obligations.
EFFECTS OF PETROLEUM PRICE CHANGES
Through its Oil Recovery operations, the Company re-refines and markets
petroleum based products at prices that have generally been positively
correlated to crude oil prices over the long-term. However, during the second
half of 1996, sales prices for the Company's base lube oil declined by 15%, even
though crude oil prices increased by approximately 20% from mid-year to
year-end. The Company believes this lube oil selling price decline reflected the
market's reaction to construction of a new large lube oil refinery in the U.S.
and the expansion of a Canadian lube oil refinery which were expected to
increase the North American lube oil industry's capacity by approximately 10%.
The Company expects this added capacity will continue to negatively impact its
base lube oil selling prices unless and until some of the older, less-efficient
refineries in North America cease their operations. At the end of 1997, the
Company's selling price of base lube oil had decreased by approximately 10% from
the beginning of the year while the price of crude oil decreased by 27% during
the same period.
The Company's various service operations (such as its Parts Cleaner
Service) also consume petroleum-based products, the cost of which are positively
correlated to crude oil prices over the long-term. Generally, the Company's
earnings are positively affected by higher crude oil prices. The speed at which
the Company is able to raise prices for its services and products is restricted
somewhat by committed price contracts.
PRIVATE SECURITIES LITIGATION REFORM ACT DISCLOSURE
THIS REPORT CONTAINS VARIOUS FORWARD-LOOKING STATEMENTS, INCLUDING
FINANCIAL, OPERATING AND OTHER PROJECTIONS. THERE ARE MANY FACTORS THAT COULD
CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY, SUCH AS: DEVELOPMENTS RELATED TO THE
MERGER AGREEMENT AND THE INTEGRATION OF SAFETY-KLEEN'S BUSINESS AND OPERATIONS
WITH THOSE OF LAIDLAW ENVIRONMENTAL; ADOPTION OF NEW ENVIRONMENTAL LAWS AND
REGULATIONS AND CHANGES IN THE WAY SUCH LAWS AND REGULATIONS ARE INTERPRETED AND
ENFORCED; GENERAL BUSINESS CONDITIONS, SUCH AS THE LEVEL OF COMPETITION, CHANGES
IN DEMAND FOR THE COMPANY'S SERVICES AND THE STRENGTH OF THE ECONOMY IN GENERAL;
AND, PRICES FOR PETROLEUM BASED PRODUCTS. THESE AND OTHER FACTORS ARE
23
<PAGE>
DISCUSSED IN THIS REPORT, AND OTHER DOCUMENTS THE COMPANY HAS FILED WITH
THE SECURITIES AND EXCHANGE COMMISSION.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Not applicable.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Included below are the following financial statements and supplementary
data for the Company:
Index to Consolidated Financial Statements
<TABLE>
<CAPTION>
PAGE NO.
<S> <C>
Report of Independent Public Accountants........................................25
Consolidated Statement of Operations for fiscal years 1997, 1996 and 1995.......26
Consolidated Balance Sheets as of January 3, 1998 and December 28, 1996.........27
Consolidated Statements of Shareholders' Equity for fiscal years
1997, 1996 and 1995 ............................................................28
Consolidated Statements of Cash Flows for fiscal years 1997, 1996 and 1995......29
Notes to Consolidated Financial Statements......................................30-45
</TABLE>
24
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
TO THE BOARD OF DIRECTORS AND SHAREHOLDERS OF SAFETY-KLEEN CORP.:
We have audited the accompanying consolidated balance sheets of
Safety-Kleen Corp. (a Wisconsin corporation) and Subsidiaries as of January 3,
1998 and December 28, 1996, and the related consolidated statements of
operations, shareholders' equity and cash flows for each of the three fiscal
years in the period ended January 3, 1998. 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 in accordance with generally accepted auditing
standards. Those standards 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. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of Safety-Kleen Corp.
and Subsidiaries as of January 3, 1998 and December 28, 1996, and the results of
their operations and their cash flows for each of the three fiscal years in the
period ended January 3, 1998, in conformity with generally accepted accounting
principles.
Arthur Andersen LLP
Chicago, Illinois
February 12, 1998, except with respect to
the matters discussed in Note 12 as to
which the date is April 1, 1998.
25
<PAGE>
CONSOLIDATED STATEMENTS OF OPERATIONS
SAFETY-KLEEN CORP. AND SUBSIDIARIES
For the Fiscal Years Ended January 3, 1998,
December 28, 1996 , and December 30, 1995
<TABLE>
<CAPTION>
1997 1996 1995
- ------------------------------------------------------------------------------------------------
(Expressed in thousands, except per share amounts)
<S> <C> <C> <C>
REVENUE $1,007,903 $923,126 $859,251
Operating costs and expenses 748,986 671,971 628,469
- -------------------------------------------------------------------------------------------------
GROSS PROFIT 258,917 251,155 230,782
Selling and administrative expenses 138,492 131,665 122,319
Restructuring (credit) - - (15,217)
Special charge for environmental - - 11,956
remediation costs
- -------------------------------------------------------------------------------------------------
OPERATING INCOME 120,425 119,490 111,724
Interest income (1,414) (1,398) (974)
Interest expense 18,108 19,240 20,230
Merger related costs 3,231 - -
- -------------------------------------------------------------------------------------------------
EARNINGS BEFORE INCOME TAXES 100,500 101,648 92,468
Income taxes 37,330 40,539 39,165
- -------------------------------------------------------------------------------------------------
NET EARNINGS $63,170 $61,109 $53,303
=================================================================================================
EARNINGS PER SHARE:
Basic $1.08 $1.05 $0.92
Diluted $1.07 $1.05 $0.92
=================================================================================================
The accompanying notes are an integral part of these financial statements.
</TABLE>
26
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEETS
SAFETY-KLEEN CORP. AND SUBSIDIARIES
As of January 3, 1998 and December 28, 1996
ASSETS JANUARY 3, 1998 December 28, 1996
- ------------------------------------------------------ --------------------- ---------------------
(Dollars expressed in thousands, except
per share data)
CURRENT ASSETS
<S> <C> <C>
Cash and cash equivalents $11,202 $10,648
Trade accounts receivable, less allowances of
$7,634 and $8,416, respectively 131,092 132,436
Inventories 51,339 49,971
Deferred tax assets 10,694 11,973
Prepaid expenses and other 20,099 25,105
- ------------------------------------------------------ --------------------- ---------------------
224,426 230,133
- ------------------------------------------------------ --------------------- ---------------------
EQUIPMENT AT CUSTOMERS AND COMPONENTS, AT COST LESS
accumulated depreciation of $44,928 and $45,811,
respectively 127,631 124,491
- ------------------------------------------------------ --------------------- ---------------------
PROPERTY, AT COST
Land 50,130 49,340
Buildings and improvements 243,619 238,296
Leasehold improvements 35,894 34,168
Machinery and equipment 431,890 421,134
Autos and trucks 124,999 129,319
- ------------------------------------------------------ --------------------- ---------------------
886,532 872,257
Less accumulated depreciation and amortization 384,422 349,921
- ------------------------------------------------------ --------------------- ---------------------
502,110 522,336
- ------------------------------------------------------ --------------------- ---------------------
INTANGIBLE ASSETS, AT COST
Goodwill 91,219 92,112
Other 148,885 122,203
- ------------------------------------------------------ --------------------- ---------------------
240,104 214,315
Less accumulated amortization 95,568 77,106
- ------------------------------------------------------ --------------------- ---------------------
144,536 137,209
- ------------------------------------------------------ --------------------- ---------------------
OTHER ASSETS
Deferred tax assets 20,607 24,135
Other 15,396 6,519
- ------------------------------------------------------ --------------------- ---------------------
36,003 30,654
- ------------------------------------------------------ --------------------- ---------------------
$1,034,706 $1,044,823
====================================================== ===================== =====================
LIABILITIES AND SHAREHOLDERS' EQUITY
- ------------------------------------------------------ --------------------- ---------------------
CURRENT LIABILITIES
Current Maturities of Long Term Debt $37 $-
Trade accounts payable 75,284 69,684
Accrued salaries, wages and employee benefits 29,769 25,510
Other accrued expenses 28,343 29,237
Insurance reserves 12,614 13,621
Accrued environmental liabilities 8,382 8,941
Income taxes payable 1,014 10,800
- ------------------------------------------------------ --------------------- ---------------------
155,443 157,793
- ------------------------------------------------------ --------------------- ---------------------
LONG-TERM DEBT, LESS CURRENT PORTION 214,234 276,954
- ------------------------------------------------------ --------------------- ---------------------
DEFERRED TAX LIABILITIES 65,607 49,849
- ------------------------------------------------------ --------------------- ---------------------
ACCRUED ENVIRONMENTAL LIABILITIES 32,888 40,260
- ------------------------------------------------------ --------------------- ---------------------
OTHER LIABILITIES 37,067 39,677
- ------------------------------------------------------ --------------------- ---------------------
COMMITMENTS AND CONTINGENT LIABILITIES (NOTE 10)
- ------------------------------------------------------ --------------------- ---------------------
SHAREHOLDERS' EQUITY
Preferred stock ($.10 par value; authorized - -
1,000,000 shares; none issued)
Common stock ($.10 par value; authorized
300,000,000 shares; issued and outstanding 5,919 5,825
59,191,462 shares and 58,246,939 shares,
respectively)
Additional paid-in capital 212,504 192,755
Retained earnings 338,318 296,225
Cumulative translation adjustments (27,274) (14,515)
- ------------------------------------------------------ --------------------- ---------------------
529,467 480,290
- ------------------------------------------------------ --------------------- ---------------------
$1,034,706 $1,044,823
====================================================== ===================== =====================
The accompanying notes are an integral part of these financial statements.
</TABLE>
27
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
SAFETY-KLEEN CORP. AND SUBSIDIARIES
For The Fiscal Years Ended January 3, 1998,
December 28, 1996 and December 30, 1995
MINIMUM
TOTAL COMMON ADDITIONAL PENSION CUMULATIVE
SHAREHOLDERS' STOCK PAID-IN RETAINED LIABILITY TRANSLATION
EQUITY $.10 PAR CAPITAL EARNINGS ADJ. ADJUSTMENTS
VALUE
- --------------------------- ------------ ----------- ---------- ---------- ----------- -----------
(Expressed in thousands)
<S> <C> <C> <C> <C> <C> <C>
Balance at
December 31, 1994 $396,336 $5,775 $184,789 $223,569 $0 ($17,797)
Net earnings 53,303 - - 53,303 - -
Cash dividends (20,820) - - (20,820) - -
Stock options exercised
and related tax benefits 1,588 12 1,576 - - -
Minimum pension liability
adjustment (1,226) - - - (1,226) -
Change in cumulative
translation adjustment 4,254 - - - - 4,254
- --------------------------- ------------ ----------- ---------- ---------- ----------- -----------
Balance at December 30, $433,435 $5,787 $186,365 $256,052 ($1,226) ($13,543)
1995
Net earnings 61,109 - - 61,109 - -
Cash dividends (20,936) - - (20,936) - -
Stock issued for business
acquired 4,847 27 4,820 - - -
Stock options exercised
and related tax benefits 1,581 11 1,570 - - -
Minimum pension liability
adjustment 1,226 - - - 1,226 -
Change in cumulative
translation adjustments (972) - - - - (972)
- --------------------------- ------------ ----------- ---------- ---------- ----------- -----------
Balance at December 28, $480,290 $5,825 $192,755 $296,225 $0 ($14,515)
1996
Net earnings 63,170 - - 63,170 - -
Cash dividends (21,077) - - (21,077) - -
Stock options exercised
and related tax benefits 19,843 94 19,749 - - -
Change in cumulative
translation adjustments (12,759) - - - - (12,759)
- --------------------------- ------------ ----------- ---------- ---------- ----------- -----------
Balance at January 3, 1998 $529,467 $5,919 $212,504 $338,318 $0 ($27,274)
=========================== ============ =========== ========== ========== =========== ===========
The accompanying notes are an integral part of these financial statements.
</TABLE>
28
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS
SAFETY-KLEEN CORP. AND SUBSIDIARIES
For The Fiscal Years Ended January 3, 1998,
December 28, 1996 and December 30, 1995
1997 1996 1995
- -----------------------------------------------------------------------------------------------------
(Expressed in thousands)
Cash flows from operating activities:
<S> <C> <C> <C>
Net earnings $63,170 $61,109 $53,303
- -----------------------------------------------------------------------------------------------------
Adjustments to reconcile net earnings to net cash
provided
by operating activities
Depreciation of equipment at customers and property 60,815 60,830 61,681
Amortization of intangible and other assets 20,195 16,911 16,120
Provisions for doubtful accounts receivable 4,228 4,556 4,225
Change in deferred income tax assets and
liabilities, net 13,680 15,297 26,504
Other 9,492 9,461 2,584
(Increase) decrease in assets, net of effects from business acquisitions:
Trade accounts receivable (2,050) (25,251) (8,433)
Inventories (1,368) (13,499) (1,088)
Prepaid expenses and other 2,219 (5,152) (2,001)
Increase (decrease) in liabilities, net of effects from business
acquisitions:
Trade accounts payable and accrued expenses 4,188 1,990 703
Environmental liabilities (7,931) (5,073) 4,459
Restructure and other liabilities (2,624) (5,234) (33,115)
- -----------------------------------------------------------------------------------------------------
Total adjustments 100,844 54,836 71,639
- -----------------------------------------------------------------------------------------------------
Net cash provided by operating activities 164,014 115,945 124,942
- -----------------------------------------------------------------------------------------------------
Cash flows used in investing activities:
Equipment at customers additions (20,869) (23,854) (34,874)
Property additions (35,162) (37,670) (43,235)
Payment for business acquisitions, net of cash
acquired (13,458) (26,651) (12,682)
Other assets additions, net (26,962) (13,158) (12,671)
- -----------------------------------------------------------------------------------------------------
Net cash used in investing activities (96,451) (101,333) (103,462)
- -----------------------------------------------------------------------------------------------------
Cash flows from (used in) financing activities:
Net borrowings (payments) under line-of-credit
agreements (62,684) (6,760) (51,565)
Proceeds from issuance of senior notes - - 50,000
Proceeds from stock option exercises 16,940 1,576 1,930
Cash dividends paid (21,077) (20,936) (20,820)
- -----------------------------------------------------------------------------------------------------
Net cash from (used in) financing activities (66,821) (26,120) (20,455)
- -----------------------------------------------------------------------------------------------------
Effect of exchange rate changes on cash (188) (82) 198
- -----------------------------------------------------------------------------------------------------
Increase (decrease) in cash and cash equivalents 554 (11,590) 1,223
Cash and cash equivalents at beginning of year 10,648 22,238 21,015
- -----------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $11,202 $10,648 $22,238
=====================================================================================================
Supplemental Information:
Cash paid during the year for:
Interest (net of amount capitalized) $18,957 $19,607 $18,997
Income taxes (net of refunds received) 23,955 27,547 11,231
Consideration given up and liabilities assumed in
business acquisitions 16,706 30,858 17,268
The accompanying notes are an integral part of these financial statements.
</TABLE>
29
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SAFETY-KLEEN CORP. AND SUBSIDIARIES
1. NATURE OF BUSINESS
The Company is a leading provider of services to generators of spent
solvents and other contaminated waste streams as well as the leading provider of
parts cleaner services and one of the world's largest collectors and re-refiners
of used lube oil. The Company serves hundreds of thousands of customers in North
America and Europe, through a network of 230 branch facilities.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The Consolidated Financial Statements include the accounts of the
Company and its subsidiaries after elimination of all significant intercompany
balances and transactions. The Company's fiscal year ends on the Saturday
closest to December 31. Fiscal year 1997 has fifty-three weeks while fiscal
years 1996 and 1995 have fifty-two weeks.
EQUIPMENT AT CUSTOMERS AND RELATED DEPRECIATION
Equipment at customers is capitalized at manufactured or purchased cost.
Depreciation is computed using the straight-line method over a period of 3 to 13
years, commencing when the units are placed in service.
PROPERTY AND RELATED DEPRECIATION
Land, buildings and improvements, leasehold improvements, machinery and
equipment, and autos and trucks are capitalized at cost. Items of an ordinary
repair or maintenance nature are charged directly to operating expense.
Improvement costs are capitalized and charged to operations over the shorter of
the improvement life or the related asset life. Depreciation is computed
principally using the straight-line method over the estimated useful lives as
follows: buildings and improvements 5 to 40 years; machinery and equipment 2 to
20 years; autos and trucks 4 to 10 years; and leasehold improvements over the
shorter of 5 to 10 years, or the remaining term of the lease.
INTANGIBLE ASSETS AND RELATED AMORTIZATION
Goodwill consists primarily of the cost of acquired businesses in excess
of market value of net assets acquired. Goodwill is being amortized on a
straight-line basis over forty years or less. Subsequent to its acquisition, the
Company continually evaluates whether later events and circumstances have
occurred that indicate the remaining estimated useful life of goodwill may
warrant revision or that the remaining balance of goodwill may not be
recoverable. When factors indicate that goodwill should be evaluated for
possible impairment, the Company uses an estimate of the related undiscounted
operating income over the remaining life of the goodwill in measuring whether
the goodwill is recoverable.
Other intangible assets consist primarily of costs to obtain customers
and computer software. Amortization of other intangible assets is computed using
the straight-line method over the expected life of the intangible asset, which
principally ranges from 2 years to 10 years. The Company continually evaluates
whether later events and circumstances have occurred that indicate that the
remaining useful life of any of the other intangible assets may warrant revision
or that the remaining balance might not be recoverable. When factors indicate
that other intangible assets should be evaluated for possible impairment, the
Company uses an estimate of the related undiscounted cash flows, over the
remaining lives of the intangibles in measuring whether such intangibles are
recoverable.
30
<PAGE>
ENVIRONMENTAL REMEDIATION COSTS AND LIABILITIES
The Company has recorded estimates for remediation costs relating to all
operating and previously closed sites prior to conducting detailed individual
site investigations to ascertain the existence and extent of contamination. Such
estimates are based on the Company's past experience in remediating such sites.
The Company reviews the adequacy of its liability for environmental remediation
on a periodic basis and records adjustments to the costs and liabilities
accordingly. In 1995, the Company recorded a $12 million pre-tax charge to
refine its estimates of environmental liabilities based on its ongoing review of
spending patterns.
EARNINGS PER SHARE (EPS)
Effective December 15, 1997, the Company adopted Statement of Financial
Accounting Standard ("SFAS") No. 128 on "Earnings Per Share", which requires the
presentation of basic and diluted earnings per common share for all periods
presented.
Basic EPS amounts are based on the weighted average number of shares of
common stock outstanding of 58,414,996, 58,088,894 and 57,813,488 for fiscal
years 1997, 1996 and 1995, respectively, while diluted EPS amounts are based on
the weighted average number of shares of common stock outstanding during the
year and the effect of dilutive stock options and warrants. For fiscal years
1997, 1996 and 1995, the effect of potentially dilutive stock options and
warrants were 510,685, 63,461 and 43,456 shares, respectively. The Company had
additional stock options of 1,388,504, 3,454,836 and 3,498,286 at January 3,
1998, December 28, 1996 and December 30, 1995, respectively, which were not
included in the computation of diluted earnings per share because the options'
exercise price was greater than the average market price of the common share.
STATEMENT OF CASH FLOWS
Short-term investments with original maturities of 90 days or less are
considered to be cash equivalents for purposes of the Consolidated Statements of
Cash Flows and Consolidated Balance Sheets. Cash flows associated with items
intended as hedges of identifiable transactions are classified in the same
categories as the cash flows of the items being hedged. Refer to Note 6 for
further information regarding the Company's hedging agreements.
FOREIGN CURRENCY TRANSLATION
The financial statements of subsidiaries outside the United States are
generally measured using the local currency as the functional currency. Assets,
including goodwill, and liabilities of the subsidiaries are translated at the
rates of exchange at the balance sheet date. The resultant translation
adjustments are included in cumulative translation adjustments, a separate
component of shareholders' equity. Income and expense items are translated at
average period rates of exchange. Gains and losses from foreign currency
transactions of these subsidiaries are included in net earnings in the period in
which they occur and are not material.
REVENUE RECOGNITION
Revenues are recorded at the time of performance of services or shipment
of products. Revenue includes sales of oil related products totaling, $105.9,
$103.5 and $91.4 million for fiscal years 1997, 1996 and 1995, respectively.
Other sales of products were not material to the Consolidated Financial
Statements.
31
<PAGE>
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 the
disclosure of contingent assets and liabilities at the date of the financial
statements as well as the reported amounts of revenue 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.
NEW ACCOUNTING STANDARDS
In June 1997, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 130 on "Reporting Comprehensive Income," and SFAS No. 131 on
"Disclosures about Segments of an Enterprise and Related Information." SFAS No.
130 establishes standards for reporting comprehensive income in financial
statements and SFAS No. 131 expands certain reporting and disclosure
requirements for segments from current standards. The Company is not required to
adopt these statements until 1998 and is currently reviewing the impact of these
new standards.
3. ACQUISITIONS
All acquisitions made during the three fiscal years ended January 3,
1998 were accounted for using the purchase method and, accordingly, their
operating results have been included in the Company's Consolidated Statements of
Operations only since the respective dates of acquisition. The acquisitions were
not material either individually or in the aggregate.
4. SEGMENT INFORMATION
The Company and its subsidiaries operate in the United States, the
Commonwealth of Puerto Rico, Canada, the United Kingdom, the Republic of
Ireland, France, Belgium, Italy, Germany, and Spain. A summary of certain data
with respect to these operations for the fiscal years ended January 3, 1998,
December 28, 1996 and December 30, 1995 is presented below:
<TABLE>
<CAPTION>
1997 1996 1995
---------------- ----------------- ----------------
(Expressed in thousands)
REVENUE
<S> <C> <C> <C>
United States and Puerto Rico $834,680 $ 754,271 $ 698,792
Canada 63,345 62,529 61,286
Europe 109,878 106,326 99,173
- ----------------------------------------- ---------------- ----------------- ----------------
Consolidated $ 1,007,903 $ 923,126 $ 859,251
========================================= ================ ================= ================
TOTAL ASSETS
United States and Puerto Rico $802,602 $ 788,521 $ 766,276
Canada 73,265 75,750 68,482
Europe 158,839 180,552 174,292
- ----------------------------------------- ---------------- ----------------- ----------------
Consolidated $ 1,034,706 $1,044,823 $1,009,050
========================================= ================ ================= ================
NET EARNINGS
United States and Puerto Rico $ 54,178 $ 56,092 $ 44,446
Canada 656 1,614 3,751
Europe 8,336 3,403 5,106
- ----------------------------------------- ---------------- ----------------- ----------------
Consolidated $ 63,170 $ 61,109 $ 53,303
========================================= ================ ================= ================
</TABLE>
32
<PAGE>
In 1997, based on the Company's ongoing review of its accrued
environmental liabilities, approximately $2.0 million of excess reserves in
Europe were reversed and a $2.0 million charge was recorded in the United States
to cover estimated remediation costs. This transfer only impacted net earnings
by segment and had no impact on consolidated net earnings.
In 1995, the Company recorded a $15.2 million pre-tax credit to income
for the writedown of restructuring reserves previously established in 1993 and
the $12 million pre-tax charge for the refinement of the Company's environmental
remediation reserves at its facilities in North America.
The net earnings, by segment, excluding the 1997 transfer of
environmental reserves and the 1995 adjustments to restructuring and accrued
environmental liabilities, were as follows:
<TABLE>
<CAPTION>
1997 1996 1995
---------------- ----------------- ----------------
(Expressed in thousands)
<S> <C> <C> <C>
United States and Puerto Rico $55,378 $56,092 $49,383
Canada 656 1,614 1,856
Europe 7,136 3,403 2,064
- ----------------------------------------- ---------------- ----------------- ----------------
Total $63,170 $61,109 $53,303
========================================= ================ ================= ================
</TABLE>
The Company operates primarily in one business segment - providing
businesses with environmentally safe and convenient solutions for managing fluid
waste and other recoverable resources.
5. INVENTORIES
The Company's inventories consist primarily of solvent, oil and
supplies. LIFO inventories at January 3, 1998 and December 28, 1996 were $5.5
million and $4.8 million, respectively. Under the FIFO method of accounting
(which approximates current or replacement cost) inventories would have been
$0.4 and $0.3 million higher at January 3, 1998 and December 28, 1996,
respectively. The Company's inventories consist of the following:
<TABLE>
<CAPTION>
JANUARY 3, 1998 December 28, 1996
--------------------- ----------------------
(Expressed in thousands)
<S> <C> <C>
Oil $12,759 $14,997
Solvent, Drums and Other 38,580 34,974
----------------------------------- --------------------- ----------------------
Total $51,339 $49,971
=================================== ===================== ======================
</TABLE>
6. FINANCIAL ARRANGEMENTS AND LONG-TERM DEBT
Long-term debt at January 3, 1998 and December 28, 1996 consisted of the
following:
<TABLE>
<CAPTION>
JANUARY 3, 1998 December 28, 1996
--------------------- ---------------------
(Expressed in thousands)
<S> <C> <C> <C>
9.25% Senior Notes due in 1999 $ 100,000 $100,000
8.05% Senior Notes due in 1998 50,000 50,000
Unsecured notes payable to banks under financing agreements:
Revolving lines of credit 47,000 67,990
Uncommitted lines of credit 11,192 52,897
Other 6,079 6,067
- ---------------------------------------------------- --------------------- ---------------------
214,271 276,954
Less-current portion 37 0
- ---------------------------------------------------- --------------------- ---------------------
Total long-term debt $214,234 $276,954
==================================================== ===================== =====================
</TABLE>
33
<PAGE>
The long-term debt as of January 3, 1998 is due as follows:
EXPRESSED IN THOUSANDS
1999 $100,091
2000 108,653
2001 5,190
2002 60
2003 and thereafter 240
The $100 million of 9.25% Senior Notes ("the Notes") due September 1999
specify that, upon the occurrence of a credit agency rating decline below
investment grade, either in conjunction with a change in control or as a result
of other events as defined in the Notes, each holder of the Notes has the option
to require the Company to purchase all or any part of such holder's Notes at a
price equal to 100% of the principal amount plus accrued interest.
In May 1992, the Company executed interest rate swap agreements that
effectively convert $100 million of its fixed-rate borrowings into variable rate
obligations. These swap agreements expire in September 1999. In April 1993, the
Company executed an interest rate swap agreement that converted these $100
million variable rate obligations to a fixed rate. This agreement expired in
September 1996. The effect of these swaps reduced the interest rate on the Notes
from 9.25% to 7.08% through September 1996. Effective September 1996, the
interest rate reverted back to a variable rate. The variable rate is based on
the U.S. Dollar London Interbank Offered Rate (LIBOR) determined at 6-month
intervals. At January 3, 1998, the effective variable rate of interest on these
borrowings was 7.9%.
In May 1992, at the same time the Company entered into the $100 million
interest rate swap agreement, the Company entered into an interest rate cap
agreement, which protects the Company from rising interest rates. The cap has a
notional amount of $100 million, and expires on September 12, 1999. The cap
effectively limits the Company's interest rate exposure to 13.92% if LIBOR
exceeds 12%. The premium paid on the cap is being amortized to interest expense
over the term of the cap.
The Company has a U.S. revolving credit agreement totaling $160 million,
which expires in March 2000. The agreement provides for interest rates to be
determined at the time of the borrowing based on a choice of formulas as
specified in the agreement. The Company currently benefits from a competitive
bid option under the agreement which ensures that favorable market rates of
interest are secured. A facility fee based on the Company's credit ratings is
paid on the total amount of the line of credit. At January 3, 1998, $47 million
of borrowings were outstanding at an average interest rate of 6.2%.
At January 3, 1998, the Company had uncommitted lines of credit totaling
$82 million. Borrowings under these lines were approximately $11 million at an
average interest rate of 6.1%.
The Company has the ability to convert other bank borrowings to its
revolving credit facilities. Since the committed facilities extend beyond 1998
and the Company intends to renew these obligations, $63 million of the loans
payable to banks have been classified as long-term debt.
The Company's German subsidiary had a revolving credit agreement
totaling 76 million Deutschmarks (DM) (U.S. $42 million) that extended credit
until December 1997. The interest rate determined at the time of each borrowing
was 6-month LIBOR plus 0.5%. A commitment fee of 0.125% per annum was paid
quarterly on the unused portion of the facility. On December 15, 1997,
Safety-Kleen Corp.'s USA parent company purchased the outstanding credit
facility of the German subsidiary totaling approximately DM 71 million (U.S. $40
million) from Deutsche Bank for approximately $40 million. This note was
purchased through the use of additional U.S. borrowings through its revolving
credit facility.
In May 1992, the Company's German subsidiary executed an interest rate
swap agreement which expired in May 1997. The interest rate on DM 70 million
(U.S. $39 million) was swapped from rates based on 6-month DM LIBOR to rates
based on 6-month U.S. Dollar LIBOR.
34
<PAGE>
At January 3, 1998, the Company's other subsidiary operations have
miscellaneous line of credit agreements totaling $9 million (U.S.). At January
3, 1998, there were no borrowings under these lines of credit.
The Company's remaining interest rate swap agreement has been entered
into with major financial institutions which are expected to fully perform under
the terms of the agreements. The Company monitors the credit ratings of these
counterparties and considers the risk of default to be remote.
Interest expense excludes $2.1 million of interest capitalized for each
of the three fiscal years 1997, 1996 and 1995.
The fair value of the interest rate swap agreements and the interest cap
agreement noted above was approximately $1.8 and $2.1 million greater than the
Company's carrying value at January 3, 1998 and December 28, 1996, respectively.
This fair value is determined by obtaining quotes from brokers who regularly
deal in these types of financial instruments. These interest rate swaps have
resulted in a net savings of $0.7, $0.1, and $0.6 million in 1997, 1996, and
1995, respectively.
In January 1995, the Company entered into a note purchase agreement with
two insurance companies, under which the Company borrowed $50 million at a fixed
interest rate of 8.05% for 3 years expiring in January, 1998. Proceeds from the
note were used to repay existing bank borrowings. At the end of fiscal year
1997, the Company classified the $50 million in debt as non-current as it was
the Company's intention to repay the notes through the use of additional bank
borrowings under its revolving credit facilities. This action was consummated at
the end of January 1998.
The Company's credit agreements include provisions, among others,
relative to maintenance of minimum shareholders' equity and certain financial
ratios. At January 3, 1998, the Company's required minimum shareholders' equity
was $465 million and the Company was in compliance with its loan provisions.
7. CAPITAL STOCK
PREFERRED STOCK
The Board of Directors has the authority to issue up to 1,000,000 shares
of preferred stock, par value $.10 per share, at such time or times, in such
series, and with such designations and features thereof as it may determine,
including rate of dividend, redemption provisions and prices, conversion
conditions and prices and voting rights. No shares of preferred stock have been
issued.
STOCK OPTION AND EMPLOYEE STOCK PURCHASE PLANS
The Company has the following stock option and employee stock purchase
plans:
1. The 1985 and 1993 Stock Option Plans (The "Option Plans")
2. The 1988 Non-Qualified Stock Option Plan for Outside
Directors (The "Directors' Plan")
3. The Employee Stock Purchase Plan (the "ESPP")
35
<PAGE>
The Company accounts for these plans under Accounting Principles Board
(APB) Opinion No. 25 under which no compensation has been recognized at the date
of grant. Had compensation costs for these plans been determined based on the
fair value at the date of grant consistent with SFAS No. 123, on
"Accounting for Stock-Based Compensation," the Company's net income and
earnings per share ("EPS") for fiscal years 1997, 1996 and 1995 would have
been reduced to the following pro-forma amounts:
<TABLE>
<CAPTION>
1997 1996 1995
------------------ ------------------ ------------------
<S> <C> <C> <C>
Net Income: As Reported $63,170 $61,109 $53,303
(in thousands) Pro Forma $60,134 $59,398 $52,235
Basic EPS: As Reported $1.08 $1.05 $0.92
Pro Forma $1.03 $1.02 $0.90
Diluted EPS: As Reported $1.07 $1.05 $0.92
Pro Forma $1.02 $1.02 $0.90
</TABLE>
The fair value of each option granted under the Option Plans is
estimated on the date of grant using the Black-Scholes option-pricing model with
the following weighted average assumptions used for grants in 1997, 1996 and
1995.
1997 1996 1995
---------- ----------- -----------
Expected Lives (Years) 5.45 6.00 6.00
Dividend Yield 1.99% 1.68% 1.46%
Expected Volatility 27.23% 30.74% 30.50%
Risk Free Interest Rate 6.13% 5.41% 7.44%
The weighted average fair value of the shares granted under the Option
Plans in fiscal years 1997, 1996 and 1995 would be $5.17, $5.09 and $6.24,
respectively. No grants were made in 1997, 1996 and 1995 under the Directors'
Plan. The cost per ESPP share granted in 1997, 1996 and 1995 would be $3.46,
$3.30 and $3.49, respectively, based on a 10% discount on share price and a
Black-Scholes value of a 13-month option with a 2.08%, 2.23% and 2.23% dividend
yield rate in 1997, 1996 and 1995, respectively.
Because the SFAS No. 123 method of fair-value accounting has not been
applied to options granted prior to January 1, 1995, the resulting pro forma
compensation cost may not be representative of that to be expected in future
years.
At the Annual Meeting of Shareholders held in May 1996, the shareholders
approved an increase in the number of shares available for grant under the
Option Plans by 2,500,000 shares to a total of 8,437,500 shares. Under the
Option Plans, shares of the Company's common stock may be granted to officers
and other key employees at a price of 100% of the quoted market price at date of
grant. Options granted under the Plan may be either Incentive Stock Options or
Non-Qualified Stock Options. Stock Appreciation Rights (SARs) may be granted in
conjunction with Non-Qualified Stock Options whereby the grantee may surrender
exercisable Non-Qualified Options and receive a cash payment equal to the
difference between the option price and the market value of the common stock on
the exercise date. The exercise of Incentive Options, Non-Qualified Options and
SARs are subject to conditions as determined at the time of grant by the
Compensation Committee of the Board of Directors. All options granted since May
1990 have been for a 10-year life with 25% vesting per year beginning one year
from the date of grant. In November 1994, the Board extended the expiration date
on all stock options granted from February 1987 through May 1990 from their
original expiration date to November 30, 2004.
Under the Directors' Plan, options to purchase up to 300,000 shares of
the Company's common stock may be granted to outside Directors at a price of
100% of the quoted market price at the date of grant. Under the terms of the
Directors' Plan, each outside Director was granted an option to purchase 15,000
shares at the time the plan was adopted. Any new outside Director elected or
appointed after the date the plan was adopted would also be
36
<PAGE>
granted an option to purchase 15,000 shares of the Company's
common stock upon taking office. The Directors' Plan
also provides that a second option to purchase 15,000 shares be
granted to each outside Director on the fifth anniversary of their initial grant
of options if such Director is still serving on the Board at that time. Options
vest 25% annually, on a cumulative basis, starting one year from date
of grant and terminate ten years after the grant date.
The Option Plans and the Directors' Plan include a change of control
provision that results in all shares granted under these plans become 100%
exercisable should a change of control take place.
Under the ESPP, a total of 1,500,000 shares of the Company's common
stock may be purchased by employees of the Company and designated subsidiaries,
through payroll deductions, at 90% of the lower of the quoted closing market
price on the date of grant or the quoted closing market price on June 30 in the
year following the date of grant. Under the plan, all full-time employees
(except officers of the Corporation) of the Company and designated subsidiaries
on the grant date who were continuously employed since January 1 of the year in
which the grant date occurs (subject to certain restrictions on percentage of
ownership outlined in the ESPP) are eligible to participate. The Company had an
employee stock purchase plan ("Old ESPP") which was in effect from 1990 through
1994. Under terms of the Old ESPP, no further grants to purchase shares could be
made after December 31, 1994. Therefore, 66,188 shares granted under the Old
ESPP in 1994 that were canceled in 1995 have expired.
A summary of the status of the Company's stock option plans and the
employee stock purchase plans for the three fiscal years ended January 3, 1998
is presented below:
<TABLE>
<CAPTION>
Weighted Available
Shares Price Range Avg. Ex. Exercisable for Future
Price Grants
- ----------------------- ------------- ---------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Outstanding Options
@ 12/31/94 3,239,275 $13.50-$32.25 $20.54 1,829,500 2,365,479
- ----------------------- ------------- ---------------- ------------- ------------- -------------
1995 Activity:
Expired (66,188)
Authorized 1,500,000
Granted 1,228,846 $15.41-$16.88 $16.15
Exercised (133,992) $13.50-$15.63 $14.40
Canceled (233,762) $13.50-$32.25 $19.05
- ----------------------- ------------- ---------------- ------------- ------------- -------------
Outstanding Options @
12/30/95 4,100,367 $13.50-$32.25 $19.51 2,142,623 2,804,207
1996 Activity:
Authorized 2,500,000
Granted 977,759 $14.25-$17.50 $15.13
Exercised (102,536) $13.50-$16.25 $15.37
Canceled (115,789) $13.50-$32.25 $16.99
- ----------------------- ------------- ---------------- ------------- ------------- -------------
Outstanding Options @
12/28/96 4,859,801 $13.50-$32.25 $18.78 2,718,193 4,442,237
1997 Activity:
Granted 1,218,393 $14.17-$17.13 $16.78
Exercised (944,523) $13.50-$26.75 $17.93
Canceled (214,815) $13.50-$32.25 $17.21
- ----------------------- ------------- ---------------- ------------- ------------- -------------
Outstanding Options @
1/3/98 4,918,856 $13.50-$32.25 $18.51 2,517,985 3,438,659
- ----------------------- ------------- ---------------- ------------- ------------- -------------
</TABLE>
37
<PAGE>
STOCK WARRANTS
The Company, on January 27, 1995 issued 200,000 stock warrants in
conjunction with an acquisition. These warrants give the owner of stock warrants
the right to purchase up to 200,000 shares of the Company's common stock at a
price of $17.79 per share and expire on January 27, 2000.
The following table summarizes information about the Company's stock
option plans, employee stock purchase plan and stock warrants outstanding at
January 3, 1998.
<TABLE>
<CAPTION>
Options/Warrants Options/Warrants Exercisable
------------------------------------------------ --------------------------------
Weighted-Average
Remaining Weighted
Contractual Number Range of Weighted-Average Number Average
Life (Years) Outstanding Exercise Prices Exercise Price Exercisable Exercise Price
- ----------------- ------------------------------------------------ -----------------------------------
<S> <C> <C> <C> <C> <C> <C>
1 252,935 $13.50 -$19.46 $ 16.84 132,839 $ 19.22
1 56,325 24.00 - 32.00 29.01 56,325 29.01
2 216,650 13.50 - 19.33 17.62 214,287 17.65
2 30,100 24.00 - 32.00 28.45 30,100 28.45
3 2,063 13.50 - 16.25 15.88 1,225 15.68
3 245,875 24.00 - 32.25 31.96 245,875 31.96
4 10,101 13.50 - 19.42 16.10 6,201 16.36
4 190,725 24.00 - 32.25 27.12 190,725 27.12
5 34,050 13.50 - 21.75 18.72 24,637 19.67
5 332,100 24.00 - 24.00 24.00 332,100 24.00
6 434,887 13.50 - 17.37 15.05 332,792 14.69
7 1,504,003 15.88 - 23.92 17.44 1,002,967 17.93
8 741,792 14.25 - 15.13 15.12 147,912 14.64
9 1,067,250 15.63 - 17.50 17.08 - -
- ----------------------------------------------------------------------------------------------------
TOTAL 5,118,856 $13.50 -$32.25 $ 18.48 2,717,985 $ 20.41
- ----------------------------------------------------------------------------------------------------
</TABLE>
SHAREHOLDERS' RIGHTS PLAN
Pursuant to a plan adopted by the Company in December 1988 and amended
in 1991, each share of the Company's common stock carries the right to buy one
share of the Company's common stock at a price of $73.33 per share. The rights
will expire on November 21, 1998, unless earlier redeemed by the Company. The
rights will become exercisable if a person becomes an "acquiring person" by
acquiring 20% of the Company's common stock or announces a tender offer that
would result in such person owning 20% or more of the Company's common stock. If
someone becomes an acquiring person, the holder of each right (other than rights
owned by the acquiring person) will be entitled to purchase common stock of the
Company having a market value of twice the exercise price of the right. In
addition, if the Company is acquired in a merger or other business combination
transaction in which the Company's common stock is exchanged for cash or
securities, or 50% or more of its consolidated assets or earning power are sold,
each holder (other than the acquiring person) will have the right to purchase
common stock of the acquiring company having a market value of twice the
exercise price. The rights may be redeemed by the Company, at a price of 0.67
cent per right, at any time prior to anyone becoming an acquiring person. See
Note 12 to the Consolidated Financial Statements for a discussion regarding
subsequent events.
8. PENSION AND EMPLOYEE BENEFIT PLANS
The Company has four noncontributory pension plans covering
substantially all full time employees in the United States. These four domestic
pension plans consist of three qualified plans and one unfunded non-qualified
plan. The qualified plans are funded in compliance with ERISA requirements as
employees become eligible to participate, generally, after completing one year
of service.
The Company's consolidated pension costs for fiscal years 1997,
1996 and 1995 were $6.0 million, $6.0 million, and $4.9 million, respectively.
38
<PAGE>
The following table sets forth the domestic plans' combined funded
status at January 3, 1998 and December 28, 1996:
<TABLE>
<CAPTION>
JANUARY 3, 1998 December 28, 1996
- ----------------------------------------------------------------------------------------------
(Expressed in thousands)
ASSETS ACCUMULATED Assets Accumulated
EXCEED BENEFITS Exceed Benefits
ACCUMULATED EXCEED Accumulated Exceed
BENEFITS ASSETS Benefits Assets
- -------------------------------------- -------------- ------------- -------------- -------------
Actuarial present value of benefit obligation:
<S> <C> <C> <C> <C>
Vested benefits $57,034 $2,558 $44,213 $2,395
Nonvested benefits 4,869 323 4,427 141
- -------------------------------------- -------------- ------------- -------------- -------------
Accumulated benefit obligation 61,903 2,881 48,640 2,536
Effect of projected compensation levels 20,082 1,394 16,169 584
- -------------------------------------- -------------- ------------- -------------- -------------
Projected benefit obligation 81,985 4,275 64,809 3,120
Plan assets at fair value 77,858 - 64,204 -
- -------------------------------------- -------------- ------------- -------------- -------------
Projected benefit obligation
(greater) than plan assets (4,127) (4,275) (605) (3,120)
Unrecognized net loss (gain) 3,065 259 1,476 (629)
Unrecognized net assets to be
amortized over 16-20 years (498) 432 (568) 494
Unrecognized prior service cost 315 105 355 114
- -------------------------------------- -------------- ------------- -------------- -------------
Unfunded prepaid (accrued) pension
cost recognized in the
Consolidated Balance Sheets $ (1,245) $ (3,479) $ 658 $ (3,141)
====================================== ============== ============= ============== =============
</TABLE>
The Plans' assets consist of cash, cash equivalents, equity funds,
pooled funds of real estate and common stock of the Company.
Net periodic pension cost for the Company's domestic plans for fiscal
years 1997, 1996 and 1995 includes the following components:
<TABLE>
<CAPTION>
1997 1996 1995
- -------------------------------------- ------------------- ------------------ ------------------
(Expressed in thousands)
<S> <C> <C> <C>
Service cost-benefits earned during $4,898 $4,521 $3,451
the year
Interest on projected benefit 5,897 4,981 4,274
obligation
Return on plan assets (13,461) (9,422) (10,405)
Net amortization and deferral 7,092 4,593 6,493
- -------------------------------------- ------------------- ------------------ ------------------
Net periodic pension cost $4,426 $4,673 $3,813
====================================== =================== ================== ==================
Actuarial assumptions used to determine the projected benefit obligation and the
expected net periodic pension costs were:
1997 1996 1995
- -------------------------------------- ------------------- ------------------ ------------------
(Expressed in thousands)
Projected Benefit Obligation
Assumptions:
Discount Rates 7.3% 7.8% 7.3%
Rates of increase in
compensation levels 4.0% 4.5% 4.0%
Net Periodic Cost Assumption:
Expected long-term rate of
return on assets 10.0% 10.0% 10.0%
</TABLE>
39
<PAGE>
The Company also has pension plans covering employees of its Canadian
and British subsidiaries. Those plans are funded by purchase of insurance
contracts and units in a managed fund invested in stocks, fixed income
securities and real estate. Vested benefits are fully funded. The Company's
foreign subsidiaries are not required to report under ERISA and do not otherwise
determine the actuarial value of accumulated plan benefits as disclosed above
for the Company's domestic pension plans. These plans do not have a material
effect on the Company's financial condition or results of operations.
The Safety-Kleen Corp. Savings and Investment Plan allows eligible
employees to make contributions, up to a certain limit, to the Plan on a
tax-deferred basis under Section 401(k) of the Internal Revenue Code of 1986.
The Company may, at its discretion, make matching contributions out of its
profits for the year. The Company's expense for contributions was $2.4 million
in 1997, $3.2 million in 1996 and $1.9 million in 1995.
The Company offers a post-retirement medical insurance plan to its
domestic employees retiring prior to the normal retirement age of 65. Retirees
are eligible to continue this medical coverage until age 65. The plan is
currently unfunded and retirees electing this coverage are required to pay a
premium for the insurance.
The following table reconciles the funded status of the plan to the
accrued post-retirement benefit cost recognized in the Consolidated Balance
Sheets at January 3, 1998 and December 28, 1996:
<TABLE>
<CAPTION>
JANUARY 3, 1998 December 28, 1996
- --------------------------------------------------- ---------------------- ---------------------
(Expressed in thousands)
Accumulated post-retirement benefit obligation (APBO):
<S> <C> <C>
Retirees, beneficiaries and dependents $ 864 $1,310
Active employees 5,793 5,074
- --------------------------------------------------- ---------------------- ---------------------
6,657 6,384
- --------------------------------------------------- ---------------------- ---------------------
Plan assets at fair value - -
- --------------------------------------------------- ---------------------- ---------------------
APBO greater than plan assets (6,657) (6,384)
- --------------------------------------------------- ---------------------- ---------------------
Unrecognized net loss (gain) (2,885) (2,502)
- --------------------------------------------------- ---------------------- ---------------------
Accrued post-retirement benefit cost $(9,542) $(8,886)
=================================================== ====================== =====================
APBO discount rate assumption 7.3% 7.8%
- --------------------------------------------------- ---------------------- ---------------------
Net periodic post-retirement benefit costs recognized for fiscal years 1997,
1996, and 1995 are as follows:
1997 1996 1995
- ----------------------------------------- ----------------- ------------------ -----------------
(Expressed in thousands)
Service costs - benefits earned during
the year $578 $683 $511
Interest costs on APBO 453 478 436
Other (121) (57) (87)
- ----------------------------------------- ----------------- ------------------ -----------------
Net periodic post-retirement benefit cost $910 $1,104 $860
========================================= ================= ================== =================
</TABLE>
The health care cost trend was assumed to be 9% for 1995, 7% for
1996 and 5% for 1997 decreasing to an ultimate trend of 4.5% in 1998 and beyond.
If the health care cost trend rate increases one percent for all future
years, the accumulated post-retirement benefit obligation as of January 3, 1998
would have increased 14%. The effect of this change on the aggregate of the
service and interest cost for 1997 would be an increase of 21%.
At the end of 1994, the Company established a non-qualified Deferred
Compensation Plan. This plan allows corporate officers and other key management
personnel to defer a portion of their current compensation up to a certain
limit, as defined by the Plan. Distributions under the plan are made in
accordance with deferral elections as described in the plan. All expenses
associated with the Deferred Compensation Plan are recognized in the period in
which they are incurred. The Company has liabilities of approximately $1.6 and
$0.8 million recorded at January 3, 1998 and December 28, 1996, respectively,
associated with the Deferred Compensation Plan.
40
<PAGE>
In 1997, the Company invested $5.0 million in an irrevocable Rabbi Trust
that will provide the resources necessary to pay any liabilities currently
accrued for under the Deferred Compensation Plan and the unfunded non-qualified
domestic pension plan. The investment in the trust is included in "Other Assets"
on the Company's Consolidated Balance Sheets.
9. INCOME TAXES
The components of earnings before income taxes consisted of the
following for each of the last three fiscal years:
1997 1996 1995
- ------------------ ------------------- ------------------- ------------------
(Expressed in thousands)
Domestic $94,044 $93,986 $74,492
Foreign 6,456 7,662 17,976
- ------------------ ------------------- ------------------- ------------------
$100,500 $101,648 $92,468
================== =================== =================== ==================
Under SFAS No. 109 on Accounting for Income Taxes, deferred tax assets
and liabilities are calculated based on the difference between the financial
statement and income tax bases of assets and liabilities using the enacted tax
rates.
The provisions (benefits) for income taxes include the following:
<TABLE>
<CAPTION>
1997 1996 1995
- ------------------------------------- ------------------- ------------------- ------------------
(Expressed in thousands)
CURRENT
<S> <C> <C> <C>
Federal $16,020 $19,979 $16,505
State 4,484 5,956 5,087
Commonwealth of Puerto Rico 458 159 (376)
Foreign 2,066 704 662
DEFERRED
Federal 7,307 6,863 7,247
Foreign 1,916 4,105 2,087
PREPAID
Federal 5,706 5,077 1,949
Foreign (627) (2,304) 6,004
- ------------------------------------- ------------------- ------------------- ------------------
TOTAL PROVISION $37,330 $40,539 $39,165
===================================== =================== =================== ==================
The following table reconciles the statutory U.S. Federal income tax
rate to the Company's consolidated effective tax rate:
1997 1996 1995
- ------------------------------------- ------------------- ------------------- ------------------
Statutory U.S. federal tax rate 35.0% 35.0% 35.0%
Increase(decrease) resulting from:
Provision for state income tax
(net of federal benefit) 2.7 2.1 3.6
Difference in foreign statutory rates 0.2 1.6 2.2
Other (0.8) 1.2 1.6
- ------------------------------------- ------------------- ------------------- ------------------
Effective tax rate 37.1% 39.9% 42.4%
===================================== =================== =================== ==================
</TABLE>
41
<PAGE>
Temporary differences and carry forwards which give rise to deferred tax
assets and liabilities are as follows:
<TABLE>
<CAPTION>
JANUARY 3, 1998 December 28, 1996 December 30, 1995
- ------------------------------------- ------------------ -------------------- ---------------------
(Expressed in thousands)
Deferred Tax Assets - Current
<S> <C> <C> <C>
Environmental reserves $ 3,080 $ 2,395 $ 2,625
Insurance reserves 4,444 4,415 5,908
Bad debt reserve - 1,800 1,800
Restructure and Other 3,170 3,363 7,651
- ------------------------------------- ------------------ -------------------- ---------------------
Total deferred tax assets - current $ 10,694 $ 11,973 $ 17,984
===================================== ================== ==================== =====================
Deferred Tax Assets - Non-Current
Restructure charges not currently
deductible $ 11,872 $ 11,440 $ 17,494
Net operating loss (NOL) carry
forwards of subsidiaries 18,279 20,616 20,149
Insurance reserves 8,351 7,798 4,822
Environmental reserves 12,828 16,325 14,382
Other 5,294 5,458 3,273
Valuation allowance (2,879) (3,340) (3,676)
- ------------------------------------- ------------------ -------------------- ---------------------
Total deferred tax $ 53,745 $ 58,297 $ 56,444
assets-non-current
- ------------------------------------- ------------------ -------------------- ---------------------
Total Deferred Tax Assets $ 64,439 $ 70,270 $ 74,428
===================================== ================== ==================== =====================
Deferred Tax Liabilities
Restructuring and Special Charges $ (1,750) $ - $ 13,820
Depreciation (87,659) (76,115) (80,250)
Tax lease agreements (6,234) (6,852) (7,253)
Other (3,102) (1,044) (915)
- ------------------------------------- ------------------ -------------------- ---------------------
Total Deferred Tax Liabilities $ (98,745) $(84,011) $(74,598)
===================================== ================== ==================== =====================
</TABLE>
As of January 3, 1998, the Company has undistributed earnings of foreign
consolidated subsidiaries of approximately $30.1 million. The Company does not
provide for deferred taxes on possible future remittances of these earnings
since U. S. income taxes, under current law, on such remittances would not be
material.
As of January 3, 1998, the tax assets derived from Net Operating Loss
carry forwards (NOLs) consist of NOL tax assets with expiration dates as
follows:
EXPRESSED IN THOUSANDS
1998 $ 558
1999 1,539
2000 369
2001 395
2002 360
No Expiration 15,058
The Company has recorded a valuation allowance of approximately $2.9
million for unrealized NOL tax assets that may expire before the Company is able
to utilize such NOLs.
42
<PAGE>
The valuation allowance account balance of $2.9 million represents
approximately 89% of the NOL tax assets that are due to expire as it is more
likely than not that some portion of the deferred tax assets will not be
realized. The valuation account activity is summarized in the table below:
1997
- ----------------------------------- ------------------------------------------
(Expressed in thousands)
Balance - beginning of year $3,340
Adjust valuation balances 19
Cumulative translation adjustment (480)
- ----------------------------------- ------------------------------------------
Balance - end of year $2,879
=================================== ==========================================
10. SPECIAL CHARGE FOR ENVIRONMENTAL REMEDIATION COSTS,
OTHER ACCRUED EXPENSES AND LIABILITIES, COMMITMENTS AND
CONTINGENT LIABILITIES
The Company operates a large number of hazardous waste facilities for
the collection and processing of hazardous and non-hazardous wastes and is
subject to extensive and expansive regulation by federal, state and local
authorities.
In the ordinary course of conducting its business activities, the
Company becomes involved in judicial and administrative proceedings in which
governmental authorities seek remedial actions and/or fines and penalties. The
Company also has been notified by the EPA that it may be a responsible party at
several National Priority List ("NPL") sites. Generally, these proceedings by
federal and state regulatory agencies have been resolved by negotiation and
settlement. The Company does not anticipate that the amount of fines and
penalties will have a material adverse impact on its 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 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.
Under various federal, state and local regulations, the Company can be
required to conduct an environmental investigation of any of its operating or
closed facilities to determine the possible existence and extent of
environmental contamination. In the event that contamination is found, the
Company may be required to perform a remedial cleanup of the site. The Company
is currently engaged in investigation and cleanup work at many of its sites.
In 1993, the Company recorded a $50 million pre-tax special charge ($30
million after-tax or $.52 per share) for a change in estimate for remediation
costs relating to all operating and previously closed sites prior to conducting
detailed individual site investigations to ascertain the existence and extent of
contamination. This change results in earlier recognition of environmental
remediation costs and liabilities as compared with the Company's previous
practice which was to accrue the estimated cost of remedial cleanup work at the
time the need for such work was specifically identified based on site
investigation. In 1995, the Company recorded a $12 million pre-tax charge to
increase its reserves for environmental remediation based on a refinement of the
estimate for such liabilities and its ongoing review of spending patterns. The
Company intends to continue to operate at its active sites indefinitely.
Accordingly, the accrued environmental liabilities do not include estimates
for costs associated with the physical closure of such sites.
Federal environmental regulations require that the Company demonstrate
financial responsibility for sudden and non-sudden releases, as well as closure
and post-closure liabilities. One manner by which to make this demonstration is
through Environmental Impairment Liability (EIL) insurance coverage. The Company
has not been able to purchase large amounts of risk-transfer EIL insurance
coverage. The Company has EIL insurance coverage which it believes complies with
the Federal regulatory requirements. However, the Company must reimburse the
insurance carrier for all losses and expenses incurred by it under the policy.
The Company's income could be adversely affected in the future if it is unable
to obtain risk-transfer EIL insurance coverage and uninsured losses were to be
incurred.
43
<PAGE>
In September 1997, the Company discovered that its East Chicago, Indiana
main feed tank had become contaminated with polychlorinated biphenyls ("PCBs")
resulting in approximately 4 million gallons of contaminated oil. The Company
immediately notified the EPA and the Indiana Department of Environmental
Management ("IDEM") of the problem. The Company believes that the IDEM and EPA
will allow it to treat this contaminated material on-site. If the IDEM or EPA
determine that off-site treatment is required, the cost of such treatment could
be material to the results of operations in that period.
The Company leases many of its branches, vehicles and other equipment.
These leases are accounted for as operating leases. Related rental expenses were
$40.4 million in 1997, $31.5 million in 1996 and $24.8 million in 1995.
Aggregate minimum future rentals are payable as follows:
PERIODS EXPRESSED IN MILLIONS
--------------------------------- ------------------------------
1998 $ 32.6
1999 25.9
2000 16.3
2001 8.6
2002 5.8
Future Years 18.2
--------------------------------- ------------------------------
Total $107.4
================================= ==============================
11. RESTRUCTURING CHARGES
In 1993, the Company adopted a restructuring plan based on conversion of
its core parts cleaner service to new technology and other strategic actions. In
conjunction with the adoption of this plan, the Company recorded a special
charge of $179 million ($106 million after tax or $1.84 per share). The pre-tax
restructuring charge included $93 million of asset write downs and $86 million
of other restructuring charges. In 1995, the Company recorded a pre-tax credit
to income of $15.2 million to adjust the restructuring reserves to their
expected required levels.
In 1996, the Company substantially completed all of its restructuring
activities and reclassified the remaining restructure liabilities (which are
primarily associated with the European operations) to other accrued expenses in
current liabilities and other liabilities in non-current liabilities. At January
3, 1998 and December 28, 1996, other accrued expenses include $1.7 and $3.6
million, respectively, and other liabilities include $2.3 and $7.9 million,
respectively.
12. POTENTIAL SALE OF THE COMPANY
On August 8, 1997, the Company's Board of Director's ("Board") initiated
a process to review strategic alternatives which could include sale of all or
part of the Company. In conjunction with this process, the Company incurred $3.2
million of costs through January 3, 1998.
On March 15, 1998, the Board unanimously approved a definitive merger
agreement ("Merger Agreement") with Laidlaw Environmental Services, Inc.
("Laidlaw Environmental") which provides for an exchange offer
followed by a back-end merger. The Board also amended the Shareholders'
Rights Plan to exempt the Merger Agreement and the transactions pursuant
thereto. On April 1, 1998, Laidlaw Environmental announced that 94% of the
outstanding shares were tendered as of midnight, March 31, 1998, and that it had
accepted the tendered shares for exchange and expected to pay for such shares on
April 3, 1998.
For a further discussion of this matter, please refer to "Management's
Discussion and Analysis of Financial Condition and Results of Operations" found
in Item 7 of this Annual Report on Form 10-K under the sub-caption
"Merger-Related Costs."
44
<PAGE>
13. INTERIM RESULTS OF OPERATIONS (UNAUDITED)
(Expressed in thousands, except per share amounts)
<TABLE>
<CAPTION>
BASIC DILUTED
EARNINGS EARNINGS
REVENUE GROSS PROFIT NET EARNINGS PER SHARE PER SHARE
- --------------------------------------------------------------------------------------------------------------------------
INTERIM PERIOD 1997 1996 1997 1996 1997 1996 1997 1996 1997 1996
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
First (12 Weeks) $220,230 $201,723 $56,146 $ 55,900 $11,838 $13,077 $0.20 $0.23 $0.20 $0.23
Second (12 Weeks) 229,928 211,355 58,221 56,567 13,341 13,604 0.23 0.23 0.23 0.23
Third (12 Weeks) 230,014 213,098 58,662 57,824 15,118 (1) 14,004 0.26 0.24 0.26 0.24
Fourth (17 and 16 Weeks) 327,731 296,950 85,888 80,864 22,873 (2) 20,424 0.39 0.35 0.38 0.35
- ---------------------------------------------------------------------------------------------------------------------------
Total $1,007,903 $923,126 $258,917 $251,155 $63,170 (2) $61,109 $1.08 $1.05 $1.07 $1.05
===========================================================================================================================
</TABLE>
(1) Includes $2.6 million of pre-tax severance related costs incurred during
the period that were offset by a reduction of other pre-established
reserves.
(2) Includes $3.2 million pre-tax charge for merger related costs.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
None.
45
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information set forth under the heading "Executive Officers of the
Registrant" in Part I, Item 1 of this Annual Report on Form 10-K and under the
headings "BOARD OF DIRECTORS" and "SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING
COMPLIANCE" in the Information Statement is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information set forth under the heading "EXECUTIVE COMPENSATION" in
the Information Statement is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information set forth under the heading "COMMON STOCK OWNERSHIP OF
CERTAIN BENEFICIAL OWNERS AND MANAGEMENT" in the Information Statement is
incorporated herein by reference. The Company believes that, following the April
3, 1998 consummation of the Tender Offer, (i) Safety-Kleen has no holders of
more than 5% of its shares other than Laidlaw Environmental and its affiliates,
and (ii) Safety-Kleen's directors and executive officers own in aggregate less
than 1% of Safety-Kleen's outstanding shares.
(c) Changes in Control
On April 3, 1998, Laidlaw Environmental and its indirect wholly-owned
subsidiary LES Acquisition, Inc. ("LES"), consummated an exchange offer
("Exchange Offer") for Common Shares ("Shares") of Safety-Kleen Corp.
("Safety-Kleen"), purchasing 56,138,238 Shares, constituting approximately 93%
of the outstanding Shares. In the Tender Offer, Laidlaw Environmental paid, for
each Share, $18.30 cash and 2.8 shares of Laidlaw Environmental Common Stock.
Based upon 56,138,128 Shares purchased in the Exchange Offer, Laidlaw
Environmental paid approximately $1,027,330,000 plus approximately 157,185,000
shares of Laidlaw Environmental Common Stock in aggregate.
A subsidiary of Laidlaw Environmental already owned 601,000 Shares, thus
giving Laidlaw Environmental total beneficial ownership of 56,739,238 Shares,
constituting approximately 94% of the outstanding Shares. In addition to Laidlaw
Environmental, its parent, Laidlaw, Inc., may be deemed to have acquired control
of Safety-Kleen upon consummation of the Exchange Offer. Prior to the Change of
Control, no shareholder of Safety-Kleen held more than 6.45% of the outstanding
Shares, although the Emery Family Group in aggregate held approximately 10.75%
of the outstanding Shares; accordingly, Safety-Kleen believes that until April
3, 1998, control of Safety-Kleen resided with its Board of Directors and its
stockholder body as a whole.
The Exchange Offer was made pursuant to an Agreement and Plan of Merger,
dated as of March 16, 1998, by and among Laidlaw Environmental, LES and
Safety-Kleen. The Merger Agreement also provides, subject to limited customary
conditions, for a back-end merger (the "Merger") following consummation of the
Exchange Offer, in which the per Share consideration is to be the same as in the
Exchange Offer.
Pursuant to Section 6.8 of the Merger Agreement, Laidlaw Environmental
is entitled, promptly after its purchase in the Exchange Offer, to have present
Safety-Kleen directors resign and to designate, at its option, up to that number
of members, rounded to the nearest whole number, of Safety-Kleen's Board of
Directors, as will make the percentage of Safety-Kleen's directors designated by
Laidlaw Environmental approximately equal to the aggregate voting power of the
Shares held by Laidlaw Environmental. This will be accomplished either by
increasing the size of the Board, or at Laidlaw Environmental's election,
requesting resignations of incumbent directors. Information concerning Laidlaw
Environmental designees to become Safety-Kleen directors is included (under the
caption, "Board of Directors - the LLE Designees") in the Company's Information
Statement filed as Exhibit 99.1 hereto and incorporated herein by reference. It
is anticipated that Mr. Donald W. Brinckman, a
46
<PAGE>
director prior to the Change of Control, will remain on the
Safety-Kleen Board of Directors until the Merger.
The Merger Agreement is further described in Amendment No. 29 to
Safety-Kleen's Rule 14D-9 under the caption "Item 3. Identity and
Background - (b) (5) LLE Merger Agreement", which Amendment No. 29
is filed as Exhibit 99.2 hereto and incorporated herein by reference.
Laidlaw Environmental has advised Safety-Kleen (i) that the source of
the cash portion of the consideration used by Laidlaw Environmental to purchase
shares in the Exchange Offer is a credit facility ("Credit Facility")
established in the amount of $2.1 billion through TD Securities (USA), Inc.;
(ii) that Laidlaw Environmental will also use the Credit Facility to
fund the cash portion of the Merger consideration, to refinance Laidlaw
Environmental's existing bank debt, to refinance Safety-Kleen's existing and
outstanding indebtedness, and to pay fees and expenses related to the Exchange
Offer and the Merger; and (iii) that under the terms of the Credit Facility, the
Shares beneficially owned by Laidlaw have been pledged to Toronto Dominion
(Texas) Inc., as General Administrative Agent for the Lenders pursuant to the
Credit Facility. The Lenders are listed below:
Toronto Dominion (Texas), Inc.
The Toronto Dominion Bank
TD Securities (USA) Inc.
The Bank of Nova Scotia
The First National Bank of Chicago
NationsBank, N.A.
Wachovia Bank
Van Kampen American Capital Prime Rate Income Trust
Oak Hill Securities Fund, LP
Pilgrim American Prime Rate Trust
KZH Holding III Corporation
Jackson National Life Insurance Company
American General Annuity Insurance Company
Metropolitan Life Insurance Company
KZH-Crescent Corporation
KZH-Crescent 2 Corporation
Crescent/Mach I Partners, L.P.
Archimedes Funding, L.L.C.
First Allmerica Financial Life Insurance Company
ING High Income Principal Preservation Fund Holdings, LDC
KZH-ING-1 Corporation
Indosuez Capital Funding III, Limited
KZH-ING-2 Corporation
KZH Soleil Corporation
A further change in control of Safety-Kleen could result in the event of a
default under the Credit Facility and a foreclosure, by Toronto Dominion (Texas)
Inc. on behalf of the Lenders, on the Shares beneficially owned by Laidlaw
Environmental.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information set forth under the heading "CERTAIN RELATIONSHIPS AND
RELATED TRANSACTIONS" in the Information Statement is incorporated herein by
reference.
47
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
Item 14(a)1. List of Financial Statements.
The following consolidated financial statements of the Company are
included in Item 8 of this Annual Report on Form 10-K:
Consolidated Balance Sheets as of January 3, 1998 and
December 28, 1996.
Consolidated Statements of Operations for the fiscal years ended
January 3, 1998, December 28, 1996 and December 30, 1995.
Consolidated Statements of Cash Flows for the fiscal years ended
January 3, 1998, December 28, 1996 and December 30, 1995.
Consolidated Statements of Shareholders' Equity for the fiscal
years ended January 3, 1998, December 28, 1996 and December 30,
1995.
Notes to Consolidated Financial Statements.
Item 14(a)2. Financial Statement Schedule.
The following Consolidated Financial Statement Schedule of
Safety-Kleen Corp. and Subsidiaries is included in response to
Item 14(d):
PAGE NO.
Schedule II Allowance for Doubtful Accounts...... 54
Schedules other than the schedule listed above are omitted as the
information is not required or not applicable, or the required
information is shown in the financial statements or notes
thereto.
48
<PAGE>
Item 14(a)3. List of Exhibits.
<TABLE>
<CAPTION>
NUMBER DESCRIPTION
- ---------------- --------------------------------------------------------------------------------
<S> <C> <C>
3.1 Articles of Incorporation of the Registrant. (5)
3.2 By-Laws of the Registrant. (8)
4.1 Rights Agreement, dated November 9, 1988, between Safety-Kleen
Corp. and the First National Bank of Chicago. (1)
4.1.1 First Amendment to Rights Agreement dated as of August 10, 1990 between
Safety-Kleen Corp. and the First National Bank of Chicago. (3)
4.1.2 Second Amendment to Rights Agreement dated as of November 20, 1997 between
Safety-Kleen Corp. and the First National Bank of Chicago. (12)
4.1.3 Third Amendment to Rights Agreement dated as of March 11, 1998 between
Safety-Kleen Corp. and the First National Bank of Chicago. (15)
4.1.4 Fourth Amendment to Rights Agreement dated as of March 15, 1998 between
Safety-Kleen Corp. and the First National Bank of Chicago. (15)
4.2 Indenture Agreement dated August 15, 1989, between
Safety-Kleen Corp. and the Chase Manhattan Bank, executed in
connection with the Company's issuance and sale from time to
time of up to $200 million aggregate principal amount of Debt
Securities. (2)
4.2.1 Board of Directors' Resolution executed in connection with the issuance and
sale of $100 million aggregate principal amount of 9.25% Senior Notes due
September 15, 1999. (2)
4.2.2 Board of Directors' Resolution executed in connection with the
future issuance and sale of up to $100 million aggregate
principal amount of Series A Medium Term Notes. (2)
4.3 Note Purchase Agreement dated as of January 15, 1995, between
Safety-Kleen Corp. and certain Purchasers, executed in
connection with the Company's issuance and sale of its 8.05%
Senior Notes due January 30, 1998 in the aggregate principal
amount of $50 million. (9)
10.1 Safety-Kleen Corp. 1985 Stock Option Plan. (4)*
10.2 Safety-Kleen Corp. 1988 Non-Qualified Stock Option Plan for Outside
Directors. (1)*
10.3 Form of Safety-Kleen Corp. Severance Agreement. (11)*
10.3.1 Current Schedule of Participants to Safety-Kleen Corp. Severance Agreement.
(11)*
10.4 Severance Agreement with John G. Johnson, Jr. dated August 8, 1997. (11)*
10.5 Safety-Kleen Corp. 1993 Stock Option Plan. (6)*
10.6 Safety-Kleen Corp. Excess Benefit Plan. (6)*
10.7 Safety-Kleen 1997 Management Incentive Plan. (11)*
10.8 Safety-Kleen 1998 Management Incentive Plan. (11)*
49
<PAGE>
10.9 Amended and Restated Credit Agreement dated March 25, 1994, among the Chase
Manhattan Bank, N.A., the Northern Trust Company, the NBD Bank, N.A. and the
First National Bank of Chicago. (9)
10.10 Letter Agreement dated March 29, 1995 amending the Amended and
Restated Credit Agreement dated March 25, 1994, among the
Chase Manhattan Bank, N.A., the Northern Trust Company, the
NBD Bank, N.A. and the First National Bank of Chicago. (10)
10.11 Agreement and Plan of Merger dated as of November 20, 1997, by and among SK
Parent Corp., SK Acquisition Corp. and Safety-Kleen Corp. (13)
10.12 Agreement and Plan of Merger dated as of March 16, 1998, by and among Laidlaw
Environmental Services, Inc., LES Acquisition Inc. and Safety-Kleen Corp. (14)
21 Subsidiaries of the Registrant. (11)*
23 Consent of Experts.
27 Financial Data Schedule. (EDGAR Filing Only)
99.1 Registrant's Information Statement pursuant to Rule 14f-1
under the Securities Exchange Act of 1934 dated March 26,
1998.
99.2 Amendment No. 29, dated March 18, 1998, to Registrant's Schedule 14D-9 (as
amended and restated at January 6, 1998).
- -----------------------------------
</TABLE>
(1) Previously filed and incorporated herein by reference from
Registrant's Registration Statement on Form 8-A, dated December
28, 1988.
(2) Previously filed and incorporated herein by reference from
Registrant's Quarterly Report on Form 10-Q for the twelve weeks
ended September 9, 1989.
(3) Previously filed and incorporated herein by reference from
Registrant's Registration Statement on Form 8-A, dated August 27,
1990.
(4) Previously filed and incorporated herein by reference from
Registrant's Annual Report on Form 10-K for the fiscal year ended
December 29, 1990.
(5) Previously filed and incorporated herein by reference from
Registrant's Annual Report on Form 10-K for the fiscal year ended
December 28, 1991.
(6) Previously filed and incorporated herein by reference from
Registrant's Annual Report on Form 10-K for the fiscal year ended
January 2, 1993.
(7) Previously filed and incorporated herein by reference from
Registrant's Annual Report on Form 10-K for the fiscal year ended
January 1, 1994.
(8) Previously filed and incorporated herein by reference from
Registrant's Quarterly Report on Form 10-Q for the twelve weeks
ended September 9, 1995.
(9) Previously filed and incorporated herein by reference from
Registrant's Annual Report on Form 10-K for the fiscal year ended
December 31, 1994.
(10) Previously filed and incorporated herein by reference from
Registrant's Annual Report on Form 10-K for the fiscal year ended
December 30, 1995.
50
<PAGE>
(11) Previously filed and incorporated herein by reference from
Registrant's Quarterly Report on Form 10-Q for the twelve weeks
ended September 6, 1997.
(12) Previously filed and incorporated herein by reference from
Registrant's Registration Statement on Form 8-A/A, dated November
21, 1997.
(13) Previously filed and incorporated herein by reference from
Registrant's Proxy Statement dated January 6, 1998.
(14) Previously filed and incorporated herein by reference from Laidlaw
Environmental Services, Inc.'s Supplement to Amended Prospectus
dated March 18, 1998.
(15) Previously filed and incorporated herein by reference from
Registrant's Registration Statement on Form 8-A/A, dated March 30,
1998.
*Indicates each management or compensatory plan or arrangement
required to be filed as an exhibit to this form pursuant to Item
14(c) of this report.
(Copies of these exhibits can be obtained from the Company for its
reasonable out-of-pocket expense for furnishing such copies.)
Item 14(b). Reports on Form 8-K.
During the 16 weeks ended January 3, 1998, the Company filed Reports
on Form 8-K on November 21, 1997 and November 18, 1997, each reporting
on Items 5 and 7.
51
<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.
SAFETY-KLEEN CORP.
Date: April 3, 1998 By: /S/ SCOTT D. KRILL
------------------
ASSISTANT GENERAL COUNSEL AND SECRETARY
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 in the capacities and on the date indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- -----------------------------------------------------------------------------------------------
<S> <C> <C>
/S/ DONALD W. BRINCKMAN
Donald W. Brinckman Chairman of the Board and Chief Executive April 3, 1998
Officer
/S/ JOSEPH CHALHOUB
Joseph Chalhoub President, Chief Operating
Officer April 3, 1998
/S/ ANDREW A. CAMPBELL
Andrew A. Campbell Senior Vice President Finance,
Chief Financial Officer April 3, 1998
/S/ CLIFFORD J. SCHULZ
Clifford J. Schulz Controller, Chief Accounting Officer April 3, 1998
/S/ RICHARD T. FARMER
Richard T. Farmer Director April 3, 1998
/S/ RUSSELL A. GWILLIM
Russell A. Gwillim Director April 3, 1998
/S/ EDGAR D. JANNOTTA
Edgar D. Jannotta Director April 3, 1998
/S/ KARL G. OTZEN
Karl G. Otzen Director April 3, 1998
/S/ PAUL D. SCHRAGE
Paul D. Schrage Director April 3, 1998
/S/ MARCIA E. WILLIAMS
Marcia E. Williams Director April 3, 1998
/S/ W. GORDON WOOD
W. Gordon Wood Director April 3, 1998
</TABLE>
52
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and
Shareholders of Safety-Kleen Corp.:
We have audited in accordance with generally accepted auditing
standards, the consolidated financial statements of Safety-Kleen Corp. (a
Wisconsin corporation) and Subsidiaries (the "Company") included in this
Form 10-K and have issued our report thereon dated February 12, 1998, except
with respect to the matters discussed in Note 12 as to which the date is
April 1, 1998. Our audit was made for the purpose of forming an opinion
on the basic consolidated financial statements taken as a whole. The
Supplemental Schedule II is the responsibility of the Company's management and
is presented for purposes of complying with the Securities and Exchange
Commission's rules and is not part of the basic consolidated financial
statements. This schedule has been subjected to the auditing procedures
applied in the audit of the basic consolidated financial
statements and, in our opinion, fairly states in all material respects, the
financial data required to be set forth therein in relation to the basic
consolidated financial statements taken as a whole.
/S/ ARTHUR ANDERSEN LLP
Chicago, Illinois
February 12, 1998
53
<PAGE>
SCHEDULE II
SAFETY-KLEEN CORP. AND SUBSIDIARIES
ALLOWANCE FOR DOUBTFUL ACCOUNTS
FOR THE THREE YEARS ENDED JANUARY 3, 1998
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
---------------------------------------------------------
JANUARY 3, 1998 DECEMBER 28, 1996 DECEMBER 30, 1995
--------------- ----------------- -----------------
(Expressed in thousands)
<S> <C> <C> <C>
Balance at beginning of year $ 8,416 $ 7,969 $ 8,868
Provision charged to operating expenses 4,228 4,556 4,225
Write-offs net of recoveries (5,010) (4,109) (5,124)
------------- ------------- -------------
Balance at end of year $ 7,634 $ 8,416 $ 7,969
============= ============= =============
</TABLE>
54
EXHIBIT 23
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and
Management of Safety-Kleen Corp.:
As independent public accountants, we hereby consent to the incorporation of
our reports included in this Form 10-K, into the Company's previously filed
Registration Statements on Form S-8 (File No. 2-97490, File No. 2-67421, File
No. 33-34892, File No. 33-51396, File No. 2-97196, File No. 33-56371, File
No. 333-05813, File No. 333-05817 and File No. 333-28757) and on Form S-3
(File No. 22-806, File No. 33-18043, File No. 33-15010, File No. 33-27174,
File No. 33-30519, File No. 33-35008, File No. 33-44715 and File No.
333-03933).
/s/ ARTHUR ANDERSEN LLP
Chicago, Illinois
April 3, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL
INFORMATION EXTRACTED FROM THE CORPORATION'S
CONSOLIDATED BALANCE SHEETS, CONSOLIDATED
STATEMENTS OF OPERATIONS AND CONSOLIDATED
STATEMENTS OF CASH FLOWS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JAN-03-1998
<PERIOD-START> DEC-29-1996
<PERIOD-END> JAN-03-1998
<CASH> 11,202
<SECURITIES> 0
<RECEIVABLES> 138,726
<ALLOWANCES> 7,634
<INVENTORY> 51,339
<CURRENT-ASSETS> 224,426
<PP&E> 886,532
<DEPRECIATION> 384,422
<TOTAL-ASSETS> 1,034,706
<CURRENT-LIABILITIES> 155,443
<BONDS> 214,234
0
0
<COMMON> 5,919
<OTHER-SE> 523,548
<TOTAL-LIABILITY-AND-EQUITY> 1,034,706
<SALES> 0
<TOTAL-REVENUES> 1,007,903
<CGS> 0
<TOTAL-COSTS> 748,986
<OTHER-EXPENSES> 141,723
<LOSS-PROVISION> 4,228
<INTEREST-EXPENSE> 18,108
<INCOME-PRETAX> 100,500
<INCOME-TAX> 31,330
<INCOME-CONTINUING> 63,170
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 63,170
<EPS-PRIMARY> 1.08
<EPS-DILUTED> 1.07
</TABLE>
SAFETY-KLEEN CORP.
ONE BRINCKMAN WAY
ELGIN, ILLINOIS 60123-7857
INFORMATION STATEMENT PURSUANT TO
SECTION 14(F) OF THE SECURITIES
EXCHANGE ACT OF 1934 AND RULE 14F-1 THEREUNDER
MARCH 26, 1998
This Information Statement is being mailed on or about March 27, 1998; it is
related to Amendment No. 29 to Safety-Kleen's Solicitation/Recommendation
Statement on Schedule 14D-9 (the "Schedule 14D-9"), which Amendment No. 29 was
mailed to shareholders on or about March 18, 1998. You are receiving this
Information Statement in connection with the possible election of persons
designated by Laidlaw Environmental Services, Inc. ("LLE") to a majority of the
seats on the Board of Directors of Safety-Kleen (the "Board"). You are urged to
read this Information Statement carefully. You are not, however, required to
take any action. Capitalized terms used and not otherwise defined herein shall
have the meaning set forth in the Schedule 14D-9.
The Revised LLE Offer, made pursuant to the LLE Merger Agreement, is scheduled
to expire at Midnight on March 31, 1998, New York City time. Upon the expiration
of the Revised LLE Offer, if all conditions of the Revised LLE Offer have been
satisfied or waived, it is contemplated that the Offeror, an LLE subsidiary,
will purchase all Shares validly tendered pursuant to the Revised LLE Offer and
not withdrawn. The consummation of the Revised LLE Offer pursuant to the terms
of the LLE Merger Agreement would result in a change of control of Safety-Kleen.
The information contained in this Information Statement concerning LLE and the
Offeror has been furnished to Safety-Kleen by LLE and the Offeror, and
Safety-Kleen assumes no responsibility for the accuracy or completeness of such
information.
BOARD OF DIRECTORS
GENERAL
The Shares are the only class of voting stock of Safety-Kleen outstanding and
each Share is entitled to one noncumulative vote. As of February 28, 1998, there
were 59,930,589 Shares issued and outstanding. The Board currently consists of
eight members, and there are currently no vacancies; the size and composition of
the Board are subject to certain contractual commitments set forth in the LLE
Merger Agreement. See "BOARD OF DIRECTORS--Right to Designate Directors." The
Board of Directors currently is divided into three classes. The term of three
directors expires in 1998, with three current directors continuing in office
until 1999, and another two current directors continuing until 2000. Each
director of Safety-Kleen holds office until such director's successor is elected
and qualified or until such directors earlier resignation or removal.
RIGHT TO DESIGNATE DIRECTORS
Safety-Kleen has agreed in the LLE Merger Agreement that, promptly following
the purchase of Shares by LLE and Offeror pursuant to the Revised LLE Offer
(representing at least two-thirds of the outstanding Shares on a fully diluted
basis, assuming exercise of all outstanding options and other securities
exercisable for Shares), LLE shall be entitled to designate at its option, up to
that number of directors, rounded to the nearest whole number, of Safety-
Kleen's Board of Directors as will make the percentage of Safety-Kleen's
directors designated by LLE (the "LLE Designees") approximately equal to the
aggregate voting power of the Shares held by LLE. This will be accomplished
either by increasing the size of the Board or, at LLE's election, requesting
resignations of incumbent directors. Safety-Kleen's obligation to cause
designees of LLE to be elected or appointed to the Board of Directors of
Safety-Kleen is subject to Rule 14f-1.
1
<PAGE>
THE LLE DESIGNEES
LLE has advised Safety-Kleen that the LLE Designees will be selected by LLE
from among the persons described in the following table.
<TABLE>
<CAPTION>
AGE, BUSINESS EXPERIENCE AND OTHER
NAME AND BUSINESS ADDRESS DIRECTORSHIPS
------------------------- ----------------------------------
<C> <S>
Kenneth W. Winger Age 59. President and Chief Executive
Laidlaw Environmental Services, Inc. Officer of LLE, since May 1997;
1301 Gervais Street, Suite 300 President, Chief Operating Officer and
Columbia, SC 29201 Sole Director of Laidlaw Environmental
Services (U.S.), Inc. from July 1995 to
May 1997; Executive Vice President for
Business Development of Laidlaw Waste
Systems, Ltd. from January 1995 until
July 1995; Senior Vice President for
Corporate Development of Laidlaw Inc.
from May 1991 until December 1994.
Director of LLE and ViroGroup, Inc.
James R. Bullock Age 53. Chief Executive Officer and
Laidlaw Inc. President of Laidlaw, Inc. since October
3221 North Service Road 1993; for more than a year prior thereto,
Burlington, Ontario L7R 3Y8 President and Chief Executive Officer of
Canada Cadillac Fairview Corporation Limited.
Director of LLE, Laidlaw Inc. and Imasco
Limited.
John W. Rollins, Jr. Age 55. President and Chief Operating
Rollins Truck Leasing Corp. Officer and a director of Rollins Truck
2200 Concord Pike Leasing Co. and Chairman of the Board of
One Rollins Plaza Matlack Systems, Inc. (each for more than
Wilmington, DE 19803 five years); Senior Vice Chairman of the
Board of Rollins Environmental Services,
Inc., from 1988 until May 15, 1997.
Director of LLE and Dover Downs
Entertainment, Inc.
David E. Thomas, Jr. Age 40. Senior Managing Director and Head
Raymond James & of the Investment Banking Group of
Associates, Inc. Raymond James & Associates, Inc. since
880 Carillon Parkway July 1996; Managing Director of Raymond
St. Petersburg, FL 33716 James & Associates, Inc., from 1991 until
July 1996. Director of LLE and Reynolds,
Smith and Hills, Inc.
James L. Wareham Age 58. President of AK Steel Corporation
AK Steel Corporation since March 1997; Chief Executive Officer
703 Curtis Street of Wheeling-Pittsburgh Steel Corporation
Middleton, OH 45043 from 1992 until 1996.
Director of LLE.
Grover C. Wrenn Age 55. Chairman and Chief Executive
4 Wolfe Street Officer of Better Health Network, Inc.
Alexandria, VA 22314 since June 1996; Chief Executive Officer
of EnSys Environmental Products, Inc.
from April 1995 through December 1996;
President and Chief Executive Officer of
Applied Bioscience International from
1991 through March 1995. Director of LLE,
Strategic Diagnostics, Inc. and
Pharmakinetics Laboratories, Inc.
Leslie W. Haworth Age 54. Senior Vice President and Chief
Laidlaw Inc. Financial Officer of Laidlaw Inc. for
3221 North Service Road more than five years. Director of LLE.
Burlington, Ontario L7R 3Y8
Canada
</TABLE>
Each such person is a citizen of the United States except Messrs. Bullock,
Winger and Haworth. LLE has advised Safety-Kleen that each of the persons listed
in the table above has consented to act as a director, and that none of such
persons has during the last five years been convicted in a criminal proceeding
(excluding traffic violations and similar misdemeanors) or was a party to a
civil proceeding of a judicial or administrative body of
2
<PAGE>
competent jurisdiction and as a result of such proceeding was, or is, subject to
a judgment, decree or final order enjoining future violations of, or prohibiting
activities subject to, federal or state securities laws or finding any violation
of such laws. LLE has also advised Safety-Kleen that none of the persons listed
in the table above is a director of, or holds any position with, Safety-Kleen,
and that none of such persons beneficially owns any equity securities, or rights
to acquire any equity securities, of Safety-Kleen or, except for the LLE Merger
Agreement, has been involved in any transactions with Safety-Kleen or any of its
directors, executive officers or affiliates which are required to be disclosed
pursuant to the rules and regulations of the SEC, except that Mr. Thomas' firm
in the ordinary course of business holds Shares in street name for the benefit
of customers, with respect to which Mr. Thomas disclaims beneficial ownership.
The election of the LLE Designees will be accomplished at a meeting or by
written consent of the Board.
CURRENT BOARD OF DIRECTORS
Safety-Kleen's current directors are:
CLASS OF 2000
Director since 1986
RICHARD T. FARMER Age 63
Mr. Farmer has been Chairman of Cintas Corporation, a uniform manufacturer
and supplier, since 1968. Mr. Farmer was also Chief Executive Officer from
1968 until August 1, 1995. He has been employed by that company since 1957. He
is also a director of Fifth Third Bancorp, Cincinnati, Ohio. Mr. Farmer is
Chairman of the Board Affairs and Nominating Committee and a member of the
Compensation Committee.
Director since 1981
PAUL D. SCHRAGE Age 63
Mr. Schrage has been Senior Executive Vice President and Chief Marketing
Officer of McDonald's Corporation, a restaurant franchisor and operator, since
1984 and has been employed by that company since 1967. He is also a director of
McDonald's Corporation, Oak Brook, Illinois and Wolverine Worldwide, Inc.,
Rockford, Michigan. Mr. Schrage is the Chairman of the Audit Committee and a
member of the Board Affairs and Nominating Committee and the Environmental
Committee.
CLASS OF 1999
Director since 1968
DONALD W. BRINCKMAN Age 67
Mr. Brinckman was named Chief Executive Officer of Safety-Kleen on August 8,
1997, a position he previously held from 1968 to December 31, 1994. He served
as President of Safety-Kleen from 1968 to August 1990, and from December 1991
to May 1993. Mr. Brinckman was appointed Chairman of Safety-Kleen's Board of
Directors in August 1990. Mr. Brinckman is also a director of Paychex, Inc.,
Rochester, New York and Snap-On Incorporated, Kenosha, Wisconsin. Mr.
Brinckman is Chairman of the Executive Committee and is a member of the
Environmental Committee.
Director since 1994
MARCIA E. WILLIAMS Age 51
Ms. Williams was President of Williams & Vanino, Inc., an environmental
management consulting firm from 1991 to August 1997 when that firm merged with
Putnam, Hayes & Bartlett, Inc. where Ms. Williams serves as a Managing
Director. From 1988 until 1991, Ms. Williams was Vice President, Environmental
Policy and Planning for Browning-Ferris Industries, Inc. Between 1970 and 1988
Ms. Williams served in various positions with the United States Environmental
Protection Agency, including Director, Office of Solid Waste and Deputy
Assistant Administrator, Office of Pesticides and Toxic Substances. Ms.
Williams chairs the Environmental Committee.
3
<PAGE>
Director since 1968
W. GORDON WOOD Age 72
Mr. Wood was Vice President of Safety-Kleen from 1968 until he retired on
March 31, 1985. Mr. Wood is a member of the Audit Committee.
CLASS OF 1998
Director since 1968
RUSSELL A. GWILLIM Age 75
Mr. Gwillim was employed by Chicago Rawhide Manufacturing Company, an oil
seals manufacturer, from 1948 until his retirement in 1984. He served as its
President and Chief Executive Officer from 1969 until his retirement. Mr.
Gwillim was named Chairman Emeritus in August 1990. Prior thereto he was
Chairman of the Board of Directors of Safety-Kleen since 1968. Mr. Gwillim is
the Chairman of the Compensation Committee and a member of the Executive
Committee.
Director since 1979
EDGAR D. JANNOTTA Age 66
Mr. Jannotta has been employed by William Blair & Company, an investment
banking firm, since 1959 and served as Managing Partner from September 1977
through December 1994. Mr. Jannotta was Senior Partner of William Blair &
Company from January 1, 1995 until January 2, 1996, at which time the company
converted from a partnership to a limited liability company and Mr. Jannotta was
named Senior Director. He is also a director of AAR Corp., Elk Grove Village,
Illinois; Aon Corporation, Chicago, Illinois; Bandag, Incorporated, Muscatine,
Iowa; Molex Incorporated, Lisle, Illinois; Oil-Dri Corporation of America,
Chicago, Illinois and Unicom Corporation, Chicago, Illinois. Mr. Jannotta is a
member of the Compensation Committee and the Executive Committee.
Director Since 1984
KARL G. OTZEN Age 56
Mr. Otzen has been President of Gerhard & Company, a product development
consulting firm, since June 1, 1984. He is also Chairman of Gerhard-Sorenson
Company, a consumer products design and manufacturing firm. Mr. Otzen is a
member of the Audit Committee and the Board Affairs and Nominating Committee.
DIRECTORS COMMITTEES, MEETINGS AND COMPENSATION
BOARD COMMITTEES
The Board of Directors has, pursuant to its powers, designated Compensation,
Board Affairs and Nominating, Audit, Environmental and Executive Committees of
the Board. The committee members have been identified above.
Compensation Committee. The Compensation Committee is responsible for acting
on behalf of the Board of Directors in connection with administering Safety-
Kleen's Management Incentive Plan and Safety-Kleen's stock option plans,
determining compensation of all officers of Safety-Kleen and approving salary
grades of certain management positions. The Compensation Committee met five
times in 1997.
Board Affairs and Nominating Committee. The Board Affairs and Nominating
Committee's role is to identify and recommend qualified candidates to the Board
for election as directors, evaluate the performance, composition and operation
of the Board and its committees and review the Board's corporate governance
practices. The Board Affairs and Nominating Committee will consider nominations
of director candidates by shareholders, submitted in accordance with
Safety-Kleen's bylaws. The bylaws currently require persons
4
<PAGE>
submitting nominations to provide certain information not less than 60 nor more
than 90 days prior to the annual meeting, and in certain instances, within 10
days after the date of the annual meeting is announced. The Board Affairs and
Nominating Committee met twice during 1997.
Audit Committee. The primary functions of the Audit Committee are: to
recommend to the Board of Directors the selection of independent auditors; to
review the scope of the independent auditor's examination; to review with the
independent auditors the results of their audits; to review the adequacy of
internal controls with the independent auditors, Safety-Kleen's internal
auditors and certain officers of Safety-Kleen; and to perform such other duties
as shall from time to time be delegated to the Audit Committee by the Board. The
Audit Committee met three times in 1997.
Environmental Committee. The primary function of the Environmental Committee
is to monitor Safety-Kleen's environmental, health, and safety performance and
policies. The Environmental Committee met once in 1997.
Executive Committee. The Executive Committee exercises the powers of the full
Board of Directors with respect to the management of Safety-Kleen's business
where it would be impractical to either convene a special meeting of the full
Board of Directors to deal with any matter or delay action until the next
regular meeting of the Board of Directors. The Executive Committee met seven
times in 1997.
BOARD MEETINGS
In 1997, The Board of Directors met 11 times. During 1997, each incumbent
director attended at least 75%, in the aggregate, of all meetings of the Board
and the committee(s) on which such director served.
BOARD COMPENSATION
Directors who are employees of Safety-Kleen receive no additional compensation
for their services as directors. In 1997, directors who were not employees
received $16,000 in stock or stock equivalents as a retainer. Directors received
$2,000 for each Board and committee meeting attended. Meeting fees were paid in
cash, stock or stock equivalents as elected by the director. Directors were also
reimbursed for travel and other expenses related to attendance at Board and
committee meetings. In February 1988, a nonqualified stock option plan for
outside directors (the "Directors' Plan") was adopted by the Board and approved
by the shareholders at the 1988 annual meeting. The Directors' Plan allows
eligible directors of Safety-Kleen to purchase up to an aggregate of 300,000
shares of Common Stock at a price equal to the fair market value of the Common
Stock on the date such options are granted. Only directors who are not employees
of Safety-Kleen are eligible to participate in the Directors' Plan. Pursuant to
the Directors' Plan, an option to purchase 15,000 shares of Safety-Kleen's
Common Stock (i) was granted to each director serving on the Board on the date
the Director's Plan was adopted and (ii) is granted to each new outside director
at the time such director is named or appointed to the Board. The Directors'
Plan also provides for the automatic grant of a second option to purchase 15,000
shares to each outside director on the fifth anniversary of the initial grant of
options to such director, but only if such director is still serving on the
Board at that time. Options are exercisable 25 percent annually, on a cumulative
basis, starting one year from date of grant and expire ten years from date of
grant.
COMMON STOCK OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth the Common Stock ownership as of February 28,
1998 of (i) shareholders who, to the knowledge of Safety-Kleen, owned
beneficially more than 5% of the outstanding shares of Common Stock; (ii) each
of Safety-Kleen's directors; (iii) each named executive officer, as defined
below (see "Executive Compensation--Summary Compensation Table") and (iv)
Safety-Kleen's directors and executive officers as a group. The table does not
reflect sales of Shares made by certain of the directors and executive officers
commencing on March 18, 1998; information on such sales from March 18, 1998
through March 20, 1998 is shown on Annex I to this Information Statement. To the
knowledge of Safety-Kleen, and subject to applicable securities laws and
personal considerations, its directors and executive officers presently intend
to tender,
5
<PAGE>
pursuant to the Revised LLE Offer, or otherwise sell, any Shares which are held
of record or beneficially held by such persons.
<TABLE>
<CAPTION>
NUMBER OF PERCENTAGE OF
SHARES OUTSTANDING
BENEFICIALLY COMMON
NAME OWNED(1) STOCK(2)
- ---- ------------ -----------
<S> <C> <C>
FIVE PERCENT SHAREHOLDERS
Halcyon, Alan B. Slifka Management Co.
477 Madison Avenue, New York, NY 10022 3,769,400 6.45%
EMERY FAMILY GROUP
Joan Emery Lammers
1801 Seminary St., Alton, IL 62002 1,942,673(3) 3.24%
William H. Emery II
11388 SW Riverwoods Rd., Portland, OR 97219 1,645,510 2.75%
Lucy T. Otzen
100 Anchor Drive, #472, N. Key Largo, FL
33037 1,481,093(4) 2.47%
Edward W. Emery, Jr.
Route 18, Box 13, Bedford, IN 47421 34,100(5) *
Circle L Enterprises L.P.
Landmark Center, P.O. Box 1056, Lake Geneva,
WI 53147 1,367,520(4) 2.28%
DIRECTORS AND NAMED EXECUTIVE OFFICERS
Hyman K. Bielsky.............................. 75,918(6) *
Donald W. Brinckman........................... 907,108(7) 1.50%
Joseph Chalhoub............................... 375,071(8) *
David A. Dattilo.............................. 143,522(9) *
Richard T. Farmer............................. 43,390(10) *
Russell A. Gwillim............................ 183,493(11) *
F. Henry Habicht II........................... 67,346(12) *
Edgar D. Jannotta............................. 67,500(10) *
John G. Johnson, Jr........................... 135,338(13) *
Karl G. Otzen................................. 1,481,093(4) 2.47%
Paul D. Schrage............................... 31,180(10) *
Marcia E. Williams............................ 12,250(14) *
W. Gordon Wood................................ 71,317(10) *
ALL DIRECTORS AND EXECUTIVE OFFICERS AS A
GROUP
(23 individuals)............................. 4,282,891(15) 6.95%
</TABLE>
- - --------
*Denotes less than one percent of shares outstanding.
(1) Under regulations of the Securities and Exchange Commission, persons who
own or have the power to vote or dispose of shares, either alone or jointly
with others, are deemed to be the beneficial owners of such shares. Such
persons are also deemed to be the beneficial owners of shares beneficially
owned by certain close family members.
(2) Shares subject to options exercisable within 60 days of February 28, 1998
are considered outstanding for the purpose of determining the percent of
the class held by the holder of such option, but not for the purpose of
computing the percentage held by others.
(3) The shares shown for Joan Emery Lammers include 683,760 shares contributed
by or on behalf of Mrs. Lammers in December 1992 to Circle L Enterprises
L.P. (the "Circle L Limited Partnership"). See Note (4).
(4) Karl G. Otzen and Lucy T. Otzen (the "Otzens") are husband and wife. For
purposes of this table, each is deemed to own shares owned by the other,
and accordingly the same shares are shown opposite each of their names. In
December 1992, the Otzens caused 683,760 of the shares shown opposite each
of their
6
<PAGE>
names to be contributed to Circle L Limited Partnership. The general partner
which controls the Partnership is a corporation in which Karl G. Otzen, Lucy
T. Otzen, Joan Emery Lammers and her husband (the "Lammers") each own 25% of
the voting stock and each occupies one of the four positions on the Board of
Directors. Because the Otzens and Lammers share voting power over all of the
shares held by the Partnership, each of them may be deemed to "own" all
shares in the Partnership under the criteria governing this table. To
enhance clarity of presentation, however, the shares contributed to the
Partnership by Joan Emery Lammers are shown only opposite her name in the
table and the shares contributed by the Otzens are shown only opposite their
respective names. The shares shown opposite the Otzens' names also include:
773,233 shares owned by trusts of which the Otzens are co-trustees, 9,100
shares owned by a trust of which The Northern Trust Company is trustee and
15,000 shares subject to options exercisable by Karl G. Otzen within 60 days
of February 28, 1998.
(5) All shares are owned by a trust of which The Northern Trust Company is
trustee.
(6) Includes 71,537 shares subject to options exercisable within 60 days of
February 28, 1998 and 1,696 shares held in Safety-Kleen's 401(k) plan as to
which he does not have voting control.
(7) Includes 73 shares owned by his wife, 537,492 shares subject to options
exercisable within 60 days of February 28, 1998 and 1,268 shares held in
Safety-Kleen's 401(k) plan as to which he does not have voting control.
(8) Includes 275,000 shares owned by Breslube Industries, Ltd. of which 100% is
owned by Mr. Chalhoub. Also included are 59 shares owned by his wife, 75
shares owned by his son and 99,937 shares subject to options exercisable
within 60 days of February 28, 1998.
(9) Includes 112,177 shares subject to options exercisable within 60 days of
February 28, 1998.
(10) Includes 15,000 shares subject to options exercisable within 60 days of
February 28, 1998.
(11) Includes 30,223 shares owned by his wife and 15,000 shares subject to
options exercisable within 60 days of February 28, 1998. Mr. Gwillim is
also a co-trustee for 45,827 shares held in an irrevocable trust in which
he has no beneficial ownership; such shares are not included in the table.
(12) Includes 64,724 shares subject to options exercisable within 60 days of
February 28, 1998 and 222 shares held in Safety-Kleen's 401(k) plan as to
which he does not have voting control.
(13) Includes 130,912 shares subject to options exercisable within 60 days of
February 28, 1998 and 539 shares held in Safety-Kleen's 401(k) plan as to
which he does not have voting control.
(14) Includes 11,250 shares subject to options exercisable within 60 days of
February 28, 1998.
(15) Includes 1,727,218 shares subject to options exercisable within 60 days of
February 28, 1998 and 4,377 shares held in Safety-Kleen's 401(k) plan as to
which they do not have voting control.
7
<PAGE>
EXECUTIVE OFFICERS
The executive officers of Safety-Kleen are:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ----- --- --------
<S> <C> <C>
Donald W. Brinckman 67 Chairman of the Board and Chief Executive
Officer
Joseph Chalhoub 52 President and Chief Operating Officer
Hyman K. Bielsky 43 Senior Vice President, General Counsel and
Managing Director, European Operations
Roy D. Bullinger 49 Senior Vice President Business Management and
Marketing
Robert J. Burian 60 Senior Vice President Human Resources
Andrew A. Campbell 51 Senior Vice President Finance and Chief
Financial Officer
Michael H. Carney 50 Senior Vice President Marketing Services and
Customer Care
David A. Dattilo 57 Senior Vice President Sales and Service
Scott E. Fore 43 Senior Vice President Environment, Health and
Safety
F. Henry Habicht II 44 Senior Vice President Corporate Development
and Environment
Clark J. Rose 60 Senior Vice President Operations
Lawrence G. Davenport 55 Vice President Information Systems and Chief
Information Officer
Scott D. Krill 35 Assistant General Counsel and Secretary
Laurence M. Rudnick 52 Treasurer
Clifford J. Schulz 46 Controller and Chief Accounting Officer
</TABLE>
See "Board of Directors--Class of 1999" for Mr. Brinckman's background
information.
Mr. Chalhoub was named President and Chief Operating Officer of Safety-Kleen
on August 8, 1997. Previously he served as Senior Vice President Operations, Oil
Recovery and Envirosystems since July 1995. Prior to that, he served as Senior
Vice President, Oil Recovery since August 1990. In August 1991, Mr. Chalhoub was
assigned the additional responsibilities of overseeing the processing and
engineering departments. He was President of Safety-Kleen's former subsidiary,
Breslube Holding Corp., since May, 1987.
Mr. Bielsky was elected Senior Vice President General Counsel in May 1993.
He has also served as Safety-Kleen's Managing Director of its European
operations since 1996. Mr. Bielsky served as Assistant General Counsel-
Commercial since January 1990, and as Associate Counsel since joining Safety-
Kleen in 1987.
Mr. Bullinger was named Senior Vice President Business Management and
Marketing in June 1994. He served as Vice President Sales-Central Division
since 1985 and as a Regional Manager since joining Safety-Kleen in 1975.
Mr. Burian was appointed Senior Vice President Human Resources in May 1993.
He served as Senior Vice President Administration since August 1990. Mr.
Burian joined Safety-Kleen in July 1986, as Vice President Personnel.
8
<PAGE>
Mr. Campbell was named Senior Vice President, Finance and Chief Financial
Officer in April of 1997. From 1994 to 1996, he served as President and
earlier as Vice President, Finance and Chief Financial Officer for Duplex
Products, Inc. He was Vice President, Finance and Chief Financial Officer of
Simmons Upholstered Furniture, Inc. from 1991 to 1994. Prior to that, he held
senior financial positions at General Electric Company and Navistar
International Corporation.
Mr. Carney was named Senior Vice President Marketing Services and Customer
Care in June 1994. He served as Senior Vice President Marketing since August
1990 and Vice President Marketing since May, 1987. He joined Safety-Kleen in
1976, serving in various marketing positions until his appointment to Vice
President Marketing.
Mr. Dattilo was named Senior Vice President Sales and Service in August
1990. He served as Vice President Corporate Branch Sales and Service since
January, 1980.
Mr. Fore was elected Senior Vice President Environment, Health and Safety in
May 1993. He served as Vice President Environment, Health and Safety since
August, 1987, and was previously Associate General Counsel since joining
Safety-Kleen in 1985.
Mr. Habicht joined Safety-Kleen in March 1993. He served as Senior Vice
President Strategic/Environmental Planning from March 1993 to July 1995. In July
1995, he assumed responsibility for Environment, Health and Safety and Corporate
Accounts and became Senior Vice President of Corporate Development and
Environment. Prior to joining Safety-Kleen, he served as Deputy Administrator of
the U.S. Environmental Protection Agency from 1989 to 1993.
Mr. Rose was named Senior Vice President Operations in August 1997. He
served as Vice President Manufacturing and Technical Services since July 1995
and as Vice President Technical Services since August, 1989. Mr. Rose joined
Safety-Kleen in June, 1984 as the Manager of Recycle Center Operations.
Mr. Davenport joined Safety-Kleen in June 1995 as Vice President Information
Services and Chief Information Officer. Prior to joining Safety-Kleen, Mr.
Davenport was employed by JB Hunt Transport, Inc. since 1989 and served as
Senior Vice President Information Services for that company since 1992.
Mr. Krill was named Assistant General Counsel and Secretary in May 1997. He
served as Associate Counsel since joining Safety-Kleen in December 1993. Prior
to that, Mr. Krill was an associate with the firm of Gibson, Dunn & Crutcher.
Mr. Rudnick joined Safety-Kleen in September, 1979, and was appointed
Treasurer in January, 1980.
Mr. Schulz was named Controller in December 1994. He served as Controller
North American Operations and Assistant Controller Cost and Inventory since
1991 and 1987, respectively.
9
<PAGE>
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table specifies for the last three fiscal years the components
of the compensation packages of the Chief Executive Officer of Safety-Kleen, the
four other most highly compensated executive officers of Safety-Kleen and
Safety-Kleen's former Chief Executive Officer who served as such during part of
1997 (the "named executive officers").
ANNUAL COMPENSATION
<TABLE>
<CAPTION>
LONG-TERM
COMP.
AWARDS
($) OTHER SECURITIES ($) ALL
($) ANNUAL UNDERLYING OTHER
NAME AND ($) BONUS COMPENSATION OPTION/SARS COMPENSATION
PRINCIPAL POSITION YEAR SALARY (1)(2) (3) (#)(2) (4)
------------------ ---- ------ ------ ------------ ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
Donald W. Brinckman
(5) 1997 289,305 187,511 -- -- 3,800
Chairman and CEO 1996 417,062 183,968 -- 37,750 3,750
1995 404,615 84,840 -- 30,000 2,625
Joseph Chalhoub (5) 1997 278,931 171,246 -- -- 3,800
President and COO 1996 220,221 141,976 -- 22,450 3,750
1995 205,855 86,514 -- 28,600 2,859
Hyman K. Bielsky 1997 196,848 140,221 129,965 -- 3,800
Senior Vice Presi- 1996 185,540 124,775 -- 23,600 3,750
dent 1995 164,856 78,649 -- 19,600 2,625
David A. Dattilo 1997 213,771 130,302 -- -- 2,850
Senior Vice Presi- 1996 191,470 137,502 -- 25,800 3,750
dent 1995 185,444 78,815 -- 21,000 2,625
F. Henry Habicht II 1997 197,560 110,938 -- -- 2,737
Senior Vice Presi- 1996 190,916 128,019 -- 25,050 3,750
dent 1995 182,738 78,815 -- 20,900 2,266
John G. Johnson, 1997 238,646 16,986 -- -- 1,663,884
Jr. (5) 1996 417,901 272,010 -- 65,000 3,750
Former President 1995 391,661 119,170 -- 50,000 2,625
and CEO
</TABLE>
- - --------
(1) The amounts shown in the bonus column represent payments under Safety-
Kleen's Management Incentive Plan.
(2) Bonuses are paid and stock options are granted in February of each year
based on performance during the prior year. Accordingly, bonus payments and
option grants are reported in this table for the year to which they relate,
instead of the year in which they were paid or granted.
(3) The amounts shown in the Other Annual Compensation column for Mr. Bielsky
represent payments related to his international assignment as Managing
Director, European Operations.
(4) The compensation reported represents Company contributions to the Savings
and Investment Plan, a defined contribution plan. Amounts reported for Mr.
Johnson also include payments and accrued payments related to his
resignation discussed in note (5).
(5) Mr. Johnson resigned from Safety-Kleen on August 8, 1997. On that date, Mr.
Brinckman was named CEO and Mr. Chalhoub was promoted to President and COO
of Safety-Kleen.
10
<PAGE>
OPTIONS
See Amendment No. 29 to Schedule 14D-9, Item 3(b)(2)--"Certain Executive
Compensation and Other Employee-Related Matters in Connection with a Change of
Control of Safety-Kleen--Vesting of Stock Options" and Item 3(b)(3)--"Certain
Executive Compensation and Other Employee-Related Matters in Connection with the
LLE Merger--LLE Merger Agreement Provisions Relating to Benefit Plans,"
incorporated herein by reference.
Option/SAR Grants in Last Fiscal Year
The following table provides information related to option/SARs granted to the
named executive officers during fiscal 1997.
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
VALUE
AT ASSUMED ANNUAL RATES
OF STOCK PRICE
APPRECIATION
INDIVIDUAL GRANTS FOR OPTION TERM(4)
------------------------------------------- -------------------------
% OF TOTAL
OPTIONS/
NUMBER OF SARS
SECURITIES GRANTED TO EXERCISE
UNDERLYING EMPLOYEES OR BASE
OPTIONS/SARS IN FISCAL PRICE EXPIRATION
NAME GRANTED YEAR ($/SH) DATE 5% ($) (2) 10% ($) (2)
---- ------------ ---------- -------- ---------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Donald W.
Brinckman 37,750 3.46% 17.125 02/14/07 406,561 1,030,305
Joseph Chalhoub 28,650 2.62% 17.125 02/14/07 308,555 781,940
Hyman K.
Bielsky 23,600 2.16% 17.125 02/14/07 254,168 644,111
David A.
Dattilo 25,800 2.36% 17.125 02/14/07 277,861 704,155
F. Henry
Habicht II 25,050 2.29% 17.125 02/14/07 269,784 683,686
John G.
Johnson, Jr. 65,000 5.95% 17.125 02/14/07 700,038 1,774,035
Shareholders(3) N/A N/A N/A N/A 637,481,420 1,733,886,004
</TABLE>
- - --------
(1) All options are nonqualified, expire 10 years from date of grant, were
issued at fair market value on the date of grant and vest at the rate of
25% per year beginning one year from grant date. Options granted to
executive officers have a tandem limited stock appreciation right (LSAR)
which entitles the officer to elect to receive a Change of Control Value
(as described in the 1993 Stock Option Plan) of the option in cash in the
event a change of control occurs.
(2) The potential realizable value portion of the foregoing table illustrates
the gain that might be realized upon the exercise of the options
immediately prior to the expiration of their term, assuming the specified
compounded rates of appreciation of Safety-Kleen's Common Stock over the
term of the option. Actual gains, if any, on the stock option exercises are
dependent on the future performance of the Common Stock, overall market
conditions, as well as the option holders continued employment through the
vesting period. The amounts reflected in this table may not necessarily be
achieved.
(3) With respect to shareholders, the potential realizable value illustrates
the gain that might be realized on the 59,191,462 shares of Common Stock
issued and outstanding as of year end, assuming the specified compounded
rates of appreciation of Safety-Kleen's Common Stock over the term of the
options. The value is calculated based on the Exercise or Base Price of the
option grant on February 14, 1997 of $17.125 per share.
(4) If the transactions contemplated by the LLE Merger Agreement are
consummated, the options shown in the table will be cancelled in
consideration of a per Share payment equal to $13.175 (the difference
between $30.30 and the exercise price).
11
<PAGE>
Aggregated Option Exercises in Last Fiscal Year and Fiscal Year-End Option/SAR
Values
The following table provides information related to options exercised by the
named executive officers during fiscal year 1997 and the number and value of
options held at fiscal year end.
<TABLE>
<CAPTION>
NUMBER OF UNEXERCISED VALUE OF UNEXERCISED,
SHARES OPTIONS HELD AT IN-THE-MONEY OPTIONS AT
ACQUIRED FISCAL YEAR END (#) FISCAL YEAR END($)(1)
ON VALUE ------------------------- -------------------------
NAME EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- -------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Donald W.
Brinckman 0 0 537,492 0 $4,604,919 0
Joseph
Chalhoub 0 0 77,012 62,788 592,741 702,114
Hyman K.
Bielsky 0 0 53,487 50,688 491,259 567,448
David A.
Dattilo 0 0 90,090 59,325 686,662 664,425
F. Henry
Habicht
II 0 0 44,500 55,550 448,634 622,309
John G.
Johnson,
Jr. 0 0 85,375 131,225 843,687 1,464,625
</TABLE>
- - --------
(1) Represents the difference between the aggregate exercise price and the
closing price of Safety-Kleen's Common Stock on January 3, 1998 ($27.50).
See also "Option/SAR Grants in Last Fiscal Year," at footnote (4).
PENSION PLAN
The following table reflects annual pension benefits commencing at age 65
based upon assumed final pay amounts and years of credited service:
ESTIMATED ANNUAL PENSION BASED UPON
INDICATED YEARS OF CREDITED SERVICE FOR THE
PENSION PLAN AND THE EXCESS BENEFIT PLAN
<TABLE>
<CAPTION>
ASSUMED AVERAGE 10 15 20 25 30 35 40
ANNUAL FINAL PAY YEARS YEARS YEARS YEARS YEARS YEARS YEARS
- - ---------------- ----- ----- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C>
$250,000 41,155 61,733 82,310 102,888 123,465 123,675 123,885
300,000 49,490 74,235 98,980 123,725 148,470 148,680 148,890
350,000 57,825 86,738 115,650 144,563 173,475 173,685 173,895
400,000 66,160 99,240 132,320 165,400 198,480 198,690 198,900
450,000 74,495 111,743 148,990 186,238 223,485 223,695 223,905
500,000 82,830 124,245 165,660 207,075 248,490 248,700 248,910
550,000 91,165 136,748 182,330 227,913 273,495 273,705 273,915
600,000 99,500 149,250 199,000 248,750 298,500 298,710 298,920
650,000 107,835 161,753 215,670 269,588 323,505 323,715 323,925
700,000 116,170 174,255 232,340 290,425 348,510 348,720 348,930
750,000 124,505 186,758 249,010 311,263 373,515 373,725 373,935
800,000 132,840 199,260 265,680 332,100 398,520 398,730 398,940
850,000 141,175 211,763 282,350 352,938 423,525 423,735 423,945
</TABLE>
The Safety-Kleen Pension Plan for Salaried Employees (the "Pension Plan")
provides retirement benefits for life for salaried employees, including
executive officers, of Safety-Kleen and its participating subsidiaries. Pensions
are based on final pay, which is defined as the average annual earnings
(including commissions and incentive compensation) for the five consecutive
years which yield the highest average. For the named executive officers, covered
compensation is substantially the same as the sum of the Salary and Bonus
columns for 1996 on the Summary Compensation Table. The pensions are payable
monthly commencing the first calendar month after retirement. Various provisions
under the Internal Revenue Code of 1986, as amended (the "Code") limit the
accrued benefit payable under the Pension Plan, currently to $130,000, and limit
the amount of annual compensation that may be taken into account in determining
pension benefits, currently to $160,000.
12
<PAGE>
Under the Safety-Kleen Corp. Excess Benefit Plan (the "Excess Benefit Plan"),
executive officers are generally entitled to the difference between the benefits
actually paid to them under the Pension Plan and the benefits which they would
have received under the Pension Plan were it not for certain restrictions
imposed under the Code, discussed above. The Excess Benefit Plan also provides
that the executive officers' benefits are calculated on the highest five of
their last ten years' compensation and that any executive officer who has
attained both the age of 60 years and 30 years of service will receive an
unreduced pension benefit. In 1997, Safety-Kleen placed funds sufficient to pay
the benefits accrued under the Excess Benefit Plan in a so called Rabbi Trust.
The funds in the Rabbi Trust remain subject to the claims of Safety-Kleen's
creditors.
The amounts shown above are computed on straight-life annuity amounts and are
not subject to deduction for Social Security Benefits or other offset amounts.
The amounts are assumed payable under the Pension Plan option providing lifetime
benefits for the employee only, and would be reduced if the retiree elected a
surviving spouse's pension. Messrs. Brinckman, Chalhoub, Bielsky, Dattilo and
Habicht had 38 years, 20 years, 11 years, 30 years and 5 years, respectively, of
credited service under the Pension Plan as of December 31, 1997. Mr. Chalhoub's
benefits paid under the Pension Plan will be offset by benefits payable under a
defined contribution plan administered by Safety- Kleen Canada, Inc. which he
participated in for the first 17 years of his employment.
EMPLOYMENT CONTRACTS AND SEVERANCE ARRANGEMENTS
Safety-Kleen has agreed to provide executive life insurance to 37 of its
officers and key managers (including the named executive officers) whereby
Safety-Kleen and executive contribute to a life insurance policy owned by the
executive; during 1997, bonuses were paid in lieu of Safety-Kleen contributions
and are reflected in the Summary Compensation Table.
In August, 1997, Safety-Kleen entered into Change of Control Severance
Agreements with its 14 executive officers and five other employees of Safety-
Kleen who are not executive officers. The Board of Directors of Safety-Kleen
approved the Change of Control Severance Agreements in order to close the gap
between the prior change of control agreements adopted by Safety-Kleen in 1990
and current competitive practices for change of control agreements. Each Change
of Control Severance Agreement provides for, among other things: (a) a
three-year employment period, beginning on the date of a Change of Control (as
defined in such agreements; a Change of Control will occur upon consummation of
the Revised LLE Offer) at a guaranteed annual base salary equal to at least 12
times the highest base monthly salary payable during the 12-month period
immediately preceding the Change of Control, with increases consistent with
increases in base salary awarded to other peer executives of Safety-Kleen; (b) a
guaranteed bonus for each bonus plan performance period (under each bonus
arrangement) ending within such three year employment period; (c) continued
participation in the incentive, savings, retirement, welfare and other fringe
benefit plans sponsored by Safety-Kleen; (d) full vesting on the date of the
Change of Control of all stock options (or a lump sum payment of the spread of
all non-vested, forfeited options); and (e) full payment on the date of the
Change of Control, of the value of the executive's accrued benefits under
Safety-Kleen's excess benefit, supplemental retirement and any other
nonqualified retirement plans.
If, during the three year employment period, the executive's employment is
terminated by Safety-Kleen (other than for Cause (as defined in such agreements)
or by reason of the executive's death or disability), or if the executive
terminates employment for Good Reason (as defined in such agreements), the
executive will receive: (i) guaranteed annual base salary, guaranteed bonus and
accrued vacation pay through the date of termination; (ii) previously deferred
and unpaid compensation; (iii) an amount equal to three times the sum of the
executive's guaranteed base salary and guaranteed bonus in the year in which the
termination occurs; (iv) the value of the unvested portion of the executive's
accounts under qualified Safety-Kleen plans, (v) reimbursement for unpaid
benefits which would have accrued if the executive had remained employed by
Safety-Kleen until three years after the executive's termination of employment
under Safety-Kleen's excess benefit and supplemental plans; and (vi)
continuation of all medical, life insurance and other welfare benefits for a
period of three years from termination. The sum of the amounts referred to in
clauses (i) and (ii) is referred to as the "Accrued Obligations".
13
<PAGE>
If, during the three year employment period, the executive's employment is
terminated (i) by the Surviving Corporation for Cause, as defined, the executive
is entitled only to his guaranteed base salary through the date of termination,
plus any deferred compensation and accrued vacation pay not previously paid;
(ii) by the executive other than for Good Reason, the executive is entitled only
to the Accrued Obligations; (iii) by Safety-Kleen for disability, the executive
is entitled to receive the Accrued Obligations and disability and other benefits
at least equal to the greater of those provided to peer executives by the
Surviving Corporation immediately prior to the executives termination and those
provided to peer executives by Safety- Kleen at any time during the 90 day
period immediately preceding a Change in Control; and (iv) by the executive's
death, his estate is entitled to the Accrued Obligations and benefits at least
equal to the most favorable benefits provided to survivors of peer executives,
and at least as favorable in the aggregate as the most favorable provided to the
executive during the 90 days preceding closing of the Revised LLE Offer.
Each of the Change of Control Severance Agreements provides that if it is
determined that benefits received by the executive thereunder (or otherwise) are
subject to any excise tax under Section 4999 of the Internal Revenue Code or any
similar excise taxes, then Safety-Kleen will also pay the executive an amount
(the "Gross-up Payment") such that, after the payment of all income and excise
taxes, the executive will be in the same after-tax position that he would have
been in had no excise tax been imposed.
Each Change of Control Severance Agreement contains a non-compete provision
that during the period of the executive's employment and for one year
thereafter, prohibits the executive from certain participation in the business
of any company engaged in business that directly or materially competes with
Safety-Kleen, and certain other competitive activity. Each such agreement also
obligates the executive to maintain the confidentiality of Safety-Kleen's
Confidential Information (as defined in such agreement).
Severance payments that would be made to the persons who are parties to the
Change of Control Severance Agreements in the event they are all terminated
during the three year employment period after a Change of Control (other than
for Cause or by reason of the executive's death or disability) are approximately
$46,000,000 for all officers with Change of Control Severance Agreements,
including approximately $4,500,000 for Mr. Brinckman, $4,625,000 for Mr.
Chalhoub, $2,825,000 for Mr. Bielsky, $3,650,000 for Mr. Dattilo and $2,450,000
for Mr. Habicht.
The foregoing description of the Change of Control Severance Agreements does
not purport to be complete and is qualified in its entirety by reference to the
Change of Control Severance Agreement filed as Exhibit 4 to the Schedule 14D-9
and incorporated herein by reference.
Effective as of August 8, 1997, Safety-Kleen entered into a General Release
and Separation Agreement with John G. Johnson, Jr., pursuant to which he
resigned as a Director of Safety-Kleen and from his offices with Safety-Kleen
including that of Chief Executive Officer. Pursuant to the Agreement, Safety-
Kleen paid Mr. Johnson $175,000 and accrued vacation pay. Safety-Kleen also
agreed to make payments to him in the amount of $28,205 every two weeks, until
such payments aggregate $1.1 million. Upon a Change of Control (as defined in
Safety-Kleen's 1993 Stock Option Plan; consummation of the Revised LLE Offer
will constitute such a Change of Control), any portion of the $1.1 million not
already paid accelerates. Mr. Johnson relinquished his rights to bonuses, but
his options were vested and continued as though his employment had not
terminated. He also received certain medical and outplacement benefits and
exchanged releases with Safety-Kleen. The Agreement also subjects Mr. Johnson to
non-competition and non-interference obligations and provides that the
considerations exchanged do not constitute and shall not be interpreted as any
admission of fault on the part of either party.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Safety-Kleen's executive officers and directors are required to file under
the Exchange Act reports of ownership and changes of ownership with the
Securities and Exchange Commission and the New York Stock Exchange.
14
<PAGE>
Based solely on information provided to Safety-Kleen by executive officers and
directors, Safety-Kleen believes that during the preceding year all filing
requirements applicable to executive officers and directors under Section 16(a)
of the Exchange Act have been satisfied.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
During 1997, Safety-Kleen paid approximately $140,000 and $20,000 to Williams
& Vanino, Inc. and Putnam, Hayes & Bartlett, Inc., respectively, for
environmental management consulting services. Marcia E. Williams, was President
of Williams & Vanino until August of 1997 when that firm merged with Putnam,
Hayes & Bartlett, Inc. where Ms. Williams serves as a Managing Director. In
addition, Ms. Williams' husband is a partner with the law firm of Latham &
Watkins. Safety-Kleen utilized Latham & Watkins for certain legal services in
1997.
Edgar D. Jannotta, a director of Safety-Kleen is a Senior Director of William
Blair & Co. Safety-Kleen retained the services of William Blair pursuant to a
letter agreement (the William Blair Letter Agreement) dated August 8, 1997, to
render certain financial advisory and investment banking services in connection
with Safety-Kleen's analysis of strategic options including a possible business
combination (through tender offer, merger, sale or exchange of stock, sale of
all or a substantial part of its assets or otherwise) of Safety-Kleen with
another party (the "Possible Transaction"). In exchange for the services
provided, Safety-Kleen agreed to pay William Blair a quarterly retainer fee of
$25,000, payable in advance (with the first installment due upon execution of
the William Blair Engagement Letter), and an opinion fee of $300,000, payable in
the event William Blair renders a fairness opinion or advises the Board of
Directors that it is unable to render such an opinion. In addition, Safety-Kleen
agreed to pay William Blair an additional fee (subject to a credit of the
retainer fee and opinion fee) equal to 0.5% of the Equity Purchase Price
received by Safety-Kleen and its shareholders as a result of the consummation of
any Possible Transaction. Both the Revised LLE Offer and the LLE Merger, upon
consummation, would satisfy the definition of a Possible Transaction. The
William Blair Engagement Letter also provides that Safety-Kleen shall reimburse
William Blair for all itemized out-of-pocket expenses (including reasonable fees
and expenses of William Blair's counsel and any other independent experts
retained by William Blair) reasonably incurred by William Blair in connection
with its engagement by Safety-Kleen. Safety-Kleen and William Blair also entered
into a separate letter agreement, dated August 8, 1997, whereby Safety-Kleen
agreed to indemnify William Blair against certain liabilities in connection with
William Blair's engagement under the William Blair Engagement Letter.
CERTAIN LEGAL MATTERS
Between November 4 and 12, 1997, and on December 5, 1997, a total of seven
putative class actions were filed against Safety-Kleen and its directors in the
Circuit Court of Cook County, Illinois. The actions purport to have been brought
as derivative actions on behalf of Safety-Kleen. In general, the complaints
allege, among other things, that the director defendants (i) have refused to
seriously consider LLE's offer, and have failed to maximize shareholder value by
entertaining offers to purchase Safety-Kleen, (ii) have breached their fiduciary
and other common law duties due to plaintiffs and other class members in that
they have not exercised, and are not exercising, independent business judgment
and (iii) are acting to entrench themselves in their offices and positions and
maintain their salaries and perquisites, all at the expense and to the detriment
of the public shareholders of Safety- Kleen. As relief, the complaints seek,
among other things (i) a declaration that the action be certified as a proper
class action; (ii) injunctive relief requiring that the director defendants
carry out their fiduciary duties to plaintiff and other members of the class by
announcing their intention to, among other things, cooperate fully with any
entity or person, including LLE, having a bona fide interest in proposing any
transaction that would maximize shareholder value; and (iii) damages, costs, and
attorneys' fees. Safety-Kleen believes that the allegation contained in the
complaints are without merit and, if the plaintiffs elect to proceed with their
actions, intends to contest the actions vigorously on behalf of itself and the
Board of Directors.
15
<PAGE>
On December 5, 1997, six of the seven actions were consolidated into a single
action. On February 28, 1998, Safety-Kleen filed an answer denying the material
allegations of the consolidated complaint and asserting several defenses. On
March 12, 1998, Safety-Kleen filed a motion for judgment on the pleadings in the
consolidated case.
On November 17, 1997, Safety-Kleen filed a lawsuit in Federal District Court
for the Northern District of Illinois against LLE seeking a declaratory judgment
that LLE violated the "gun-jumping" prohibitions of federal securities law by
certain of its public announcements made before the effectiveness of the
registration statement with the Commission relating to the LLE shares it
proposes to use in its offer for Safety-Kleen. The suit also challenged LLE's
asserted right under Wisconsin law to demand such a shareholders' meeting at
that time.
On November 24, 1997, LLE answered the complaint, denying liability and
asserting several defenses. In addition, LLE and its subsidiary filed
counterclaims against Safety-Kleen and its directors. The counterclaims sought a
declaratory judgment that Safety-Kleen is required to hold a special meeting
under Wisconsin law, and assert claims against Safety-Kleen for violation of
certain Wisconsin statutes pertaining to furnishing of shareholder lists and
takeovers, and against the directors for breach of fiduciary duty in failing to
negotiate with LLE and entering into the Philip Merger Agreement, including the
termination fees and expenses, and for failure to amend its Rights Agreement, or
poison pill, to make it inapplicable to the then pending LLE offer, and a
derivative claim for corporate waste.
On December 4, 1997, the Federal District Court of the Northern District Court
of Illinois ruled that LLE could seek the approval of Safety-Kleen shareholders
at a special meeting to restore voting power to Shares that LLE may acquire in
excess of 20% of the outstanding Shares. Accordingly, Safety- Kleen scheduled a
special meeting of shareholders on January 9, 1998 to vote on such restoration
of voting power, at which shareholders voted to restore such voting power. The
Court also scheduled a preliminary hearing for January 28, 1998 on LLE's request
that the Rights Agreement be amended to make it inapplicable to LLE's then
pending offer and that the Court void the termination fee and certain other
provisions of the Philip Merger Agreement.
On January 28, 1998, the Federal District Court for the Northern District of
Illinois began a preliminary hearing on LLE's request that the Rights Agreement
be amended to make it inapplicable to LLE's then pending offer, that the Court
order Safety-Kleen's Board of Directors to take action to make the Wisconsin
Business Combination Statute inapplicable to LLE's then pending offer and the
merger contemplated thereby, and that the Court void the termination fee and
certain other provisions of the Philip Merger Agreement. The Court granted LLE's
request to withdraw its challenge to the termination fee. LLE also advised the
Court that it would not seek to delay the Safety- Kleen shareholders' meeting on
February 11, 1998.
On February 4, 1998, the Court issued a ruling affirming the decision of the
Board of Directors of Safety-Kleen to leave the Rights Agreement in place with
respect to the LLE offer in its form prior to its amendment on January 26, 1998.
The Court's decision did not address Safety-Kleen's ability to leave the Rights
Agreement in place with respect to the offer reflecting such amendment.
On February 5, 1998, the Federal District Court for the Northern District of
Illinois denied LLE's motion to find that the Board of Directors of Safety-
Kleen had violated the federal securities laws by not responding to LLE's
January 26 amendment to its offer prior to February 5, 1998.
On March 5, 1998, the Federal District court for the Northern District of
Illinois denied LLE's motion to require Safety-Kleen's board to make its Rights
Agreement, inapplicable to LLE's then pending tender offer (the "Amended LLE
Offer") before the March 9, 1998 shareholders' meeting. The Judge set another
hearing for Thursday, March 12 to again consider the motion, after taking
testimony. LLE committed to the court that it would extend the Amended LLE offer
on its then current terms through March 16. On March 12, 1998, the Court did not
hold a hearing, but scheduled a telephonic status report for March 13, 1998.
The LLE Merger Agreement includes a provision obligating the parties to take
all action necessary to dismiss with prejudice all pending litigation between
such parties. Accordingly, on March 16, 1998, the Federal
16
<PAGE>
District Court for the Northern District of Illinois, on motion of the
plaintiff, dismissed with prejudice LLE's action against Safety-Kleen, subject
to LLE's right to reinstate the case on or before April 16, 1998. Safety-Kleen
believes LLE's action to be without merit and intends, if it were reinstated, to
contest such action vigorously on behalf of Safety-Kleen and the Board of
Directors.
17
<PAGE>
ANNEX I
SAFETY-KLEEN CORP.
DIRECTORS AND EXECUTIVE OFFICERS
SALES OF STOCK
MARCH 18, 1998 THROUGH MARCH 20, 1998
<TABLE>
<CAPTION>
PRICE
# OF PER
NAME DATE SHARES SHARE
---- ---- ------ -----
<S> <C> <C> <C>
Hyman K. Bielsky 3/18/1998 2,685 $28.2500
Donald W. Brinckman 3/19/1998 10,000 28.1250
3/19/1998 2,040 28.0625
3/19/1998 63,000 28.0000
3/20/1998 138,400 27.5000
Roy D. Bullinger 3/18/1998 10,773 28.1875
Joseph Chalhoub 3/19/1998 142,100 27.8913
3/20/1998 102,900 27.4271
3/20/1998 30,000 27.3333
David A. Dattilo 3/19/1998 31,000 27.5000
Scott E. Fore 3/18/1998 21 28.3125
3/18/1998 1,683 28.5000
C. James Schulz 3/18/1998 1,925 28.3125
Richard T. Farmer 3/20/1998 28,390 27.5000
Russell A. Gwillim 3/19/1998 13,600 28.1167
Karl G. Otzen 3/18/1998 131,500 28.2626
3/19/1998 28,300 28.1167
3/20/1998 53,600 28.1167
Paul D. Schrage 3/19/1998 16,180 28.1250
W. Gordon Wood 3/18/1998 56,317 28.2500
</TABLE>
18
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
AMENDMENT NO. 29
TO
SCHEDULE 14D-9
(AS AMENDED AND RESTATED AT JANUARY 6, 1998)
----------------
SOLICITATION/RECOMMENDATION STATEMENT PURSUANT
TO SECTION 14(D)(4) OF THE
SECURITIES EXCHANGE ACT OF 1934
----------------
SAFETY-KLEEN CORP.
(NAME OF SUBJECT COMPANY)
SAFETY-KLEEN CORP.
(NAMES OF PERSON(S) FILING STATEMENT)
COMMON STOCK, PAR VALUE $0.10 PER SHARE
(INCLUDING THE ASSOCIATED COMMON SHARE PURCHASE RIGHTS)
(TITLE OF CLASS OF SECURITIES)
786484105
(CUSIP NUMBER OF CLASS OF SECURITIES)
DONALD W. BRINCKMAN
CHAIRMAN AND CHIEF EXECUTIVE OFFICER
ONE BRINCKMAN WAY
ELGIN, ILLINOIS 60123-7857
(847) 697-8460
(NAME, ADDRESS AND TELEPHONE NUMBER OF PERSON
AUTHORIZED TO RECEIVE NOTICES AND COMMUNICATIONS
ON BEHALF OF THE PERSON(S) FILING STATEMENT)
----------------
WITH A COPY TO:
DENNIS N. NEWMAN, ESQ.
SONNENSCHEIN NATH & ROSENTHAL
SEARS TOWER
CHICAGO, ILLINOIS 60606
(312) 876-8000
<PAGE>
===============================================================================
INTRODUCTION
Safety-Kleen Corp. ("Safety-Kleen") hereby amends and restates Amendment No.
28 to its Solicitation/ Recommendation Statement on Schedule 14D-9; such
Amendment No. 28 amended and supplemented Safety-Kleen's
Solicitation/Recommendation Statement on Schedule 14D-9, as amended and
restated at January 6, 1998 and amended by Amendments Nos. 1 through 27
inclusive (as amended, the "Schedule 14D-9"), with respect to the exchange
offer made by LES Acquisition, Inc. (the "Offeror"), a wholly-owned subsidiary
of Laidlaw Environmental Services, Inc. ("LLE"), for all of the outstanding
Shares. Capitalized terms not defined herein have the meanings assigned
thereto in the Schedule 14D-9.
ITEM 1. SECURITY AND SUBJECT COMPANY.
Item 1 of the Schedule 14D-9 is restated without change:
The name of the subject company is Safety-Kleen Corp., a Wisconsin
corporation ("Safety-Kleen"). The address of the principal executive offices
of Safety-Kleen is One Brinckman Way, Elgin, Illinois 60123. The title of the
class of equity securities to which this Statement relates is the common
stock, par value $0.10 per share (the "Common Stock"), of Safety-Kleen,
including the associated common share purchase rights (the "Rights") issued
pursuant to the Rights Agreement, dated as of November 9, 1988, as amended
(the "Rights Agreement"), between Safety-Kleen and The First National Bank of
Chicago, as Rights Agent. References herein to the "Shares" means shares of
the Common Stock and shall, unless the context requires otherwise, include the
Rights.
ITEM 2. TENDER OFFER OF THE BIDDER
Item 2 of the Schedule 14D-9 is hereby amended and restated to read as
follows:
On March 16, 1998 and March 18, 1998, LLE filed supplements to its amended
prospectus dated January 28, 1998 (the "Amended Prospectus," and as so
supplemented, the "Revised Amended Prospectus") with the Commission, amending
its exchange offer to acquire all of the outstanding Shares. Under the terms
and subject to the conditions described in the Revised Amended Prospectus, LLE
and the Offeror offer to exchange $18.30 net to the Seller in cash and 2.80
shares of LLE Common Stock (the cash and stock consideration is sometimes
collectively referred to herein as the "Revised LLE Offer Consideration"), for
each outstanding Share (the "Revised LLE Offer"). This Statement relates to
the Revised LLE Offer.
The Revised LLE Offer is made pursuant to an Agreement and Plan of Merger,
dated as of March 16, 1997 among Safety-Kleen, LLE and the Offeror ("LLE
Merger Agreement"). Safety-Kleen entered into the LLE Merger Agreement
following (i) the failure of the Agreement and Plan of Merger dated as of
November 20, 1997 by and among SK Parent Corp. (a newly formed company owned
by Philip Services Corp. and affiliates of two merchant banks), SK Acquisition
Corp. and Safety-Kleen ("Philip Merger Agreement; the merger contemplated
thereby is referred to below as the "Philip Merger") to receive shareholder
approval at the Safety-Kleen shareholders meeting on March 9, 1998, (ii)
termination of the Philip Merger Agreement by Safety-Kleen and (iii)
subsequent negotiations with LLE. The Philip Merger Agreement provided for
Safety-Kleen to pay SK Parent Corp.'s expenses related to the Philip Merger
(up to $25 million) upon such termination of the Philip Merger Agreement and,
upon entering into an agreement for a sale of Safety-Kleen (such as the LLE
Merger Agreement) within nine months after November 20, 1997, to also pay a
fee of $50 million to SK Parent.
The LLE Merger Agreement provides, among other things, for the making of the
Revised LLE Offer by the Offerer and further provides that, following the
completion of the Revised LLE Offer and the satisfaction or the waiver of
certain conditions set forth in the Merger Agreement, the Offerer will be
merged with Safety-Kleen (the "LLE Merger", and together with the Revised LLE
Offer, the "LLE Transaction"). The LLE Merger Agreement provides that in the
LLE Merger, Safety-Kleen shareholders would receive, per Share, the Revised
LLE Offer Consideration. The terms of the LLE Merger Agreement are summarized
in Item 3(b).
<PAGE>
If Safety-Kleen is a "resident domestic corporation" for purposes of the
Wisconsin Statutes, then unless LLE acquires beneficial ownership of at least
90% of the outstanding Shares, the subsequent merger of the Offeror into
Safety-Kleen would have to be approved by both (a) the holders of at least 80%
of the outstanding Shares and (b) the holders of 66 2/3% of the outstanding
Shares not held by LLE or its affiliates, unless certain fair price standards
are satisfied. There can be no assurance that LLE would obtain the required
shareholder approval or that the Revised LLE Offer Consideration would satisfy
those fair price standards. See "Item 8, Additional Information To Be
Furnished--(c) State Takeover Statutes" in the Schedule 14D-9 (as amended and
restated at January 6, 1998).
According to the Amended Prospectus, the address of the principal executive
offices of the Offeror and LLE is 1301 Gervais Street, Suite 300, Columbia,
South Carolina 29201.
ITEM 3. IDENTITY AND BACKGROUND.
Item 3(b)(2), (3) and (4) of the Schedule 14D-9 are hereby amended and
restated, and Item 3(b)(5) and (6) are hereby added, as follows:
(b)(2) Certain Executive Compensation and Other Employee-Related Matters in
Connection with a Change of Control of Safety-Kleen. The consummation of the
Revised LLE Offer will affect the compensation and benefits to the directors
and executive officers of Safety-Kleen as follows:
Vesting of Stock Options. All of the outstanding stock options to purchase
Shares granted by Safety-Kleen (including stock options related to limited
stock appreciation rights) immediately vest and become exercisable upon a
"change of control", which would occur upon consummation of the Revised LLE
Offer. In addition, within three days of a "change of control" of Safety-
Kleen, holders of options related to limited stock appreciation rights may
receive for each Share subject to such option, an amount in cash equal to the
excess, if any, of the change of control value (generally, the greater of the
highest price at which the Shares trade in the 180 days prior to such change
of control, or the offer consideration, which the Compensation Committee of
the Board, which administers the plans under which the options were granted,
has determined is $30.30 for this purpose) over the per Share exercise price
of such option, reduced by the amount of withholding or other taxes required
by law to be withheld. As of March 13, 1998, directors and executive officers
held in the aggregate options to purchase 2,285,614 Shares (including
2,180,614 options related to limited stock appreciation rights).
Change of Control Severance Agreements. In August, 1997, Safety-Kleen
entered into Change of Control Severance Agreements with its 14 executive
officers and five other employees of Safety-Kleen who are not executive
officers. The Board of Directors of Safety-Kleen approved the Change of
Control Severance Agreements in order to close the gap between the prior
change of control agreements adopted by Safety-Kleen in 1990 and current
competitive practices for change of control agreements. Each Change of Control
Severance Agreement provides for, among other things: (a) a three-year
employment period, beginning on the date of a Change of Control (as defined in
such agreements; a Change of Control would occur upon consummation of the
Revised LLE Offer) at a guaranteed annual base salary equal to at least 12
times the highest base monthly salary payable during the 12-month period
immediately preceding the Change of Control, with increases consistent with
increases in base salary awarded to other peer executives of Safety-Kleen; (b)
a guaranteed bonus for each bonus plan performance period (under each bonus
arrangement) ending within such three year employment period; (c) continued
participation in the incentive, savings, retirement, welfare and other fringe
benefit plans sponsored by Safety-Kleen; (d) full vesting on the date of the
Change of Control of all stock options (or a lump sum payment of the spread of
all non-vested, forfeited options); and (e) full payment on the date of the
Change of Control, of the value of the executive's accrued benefits under
Safety-Kleen's excess benefit, supplemental retirement and any other
nonqualified retirement plans.
If, during the three year employment period, the executive's employment is
terminated by Safety-Kleen (other than for Cause (as defined in such
agreements) or by reason of the executive's death or disability), or if the
executive terminates employment for Good Reason (as defined in such
agreements), the executive will
2
<PAGE>
receive: (i) guaranteed annual base salary, guaranteed bonus and accrued
vacation pay through the date of termination; (ii) previously deferred and
unpaid compensation; (iii) an amount equal to three times the sum of the
executive's guaranteed base salary and guaranteed bonus in the year in which
the termination occurs; (iv) the value of the unvested portion of the
executive's accounts under qualified Safety-Kleen plans; (v) reimbursement for
unpaid benefits which would have accrued if the executive had remained
employed by Safety-Kleen until three years after the Change of Control under
Safety-Kleen's excess benefit and supplemental plans; and (vi) continuation of
all medical, life insurance and other welfare benefits for a period of three
years from termination. The sum of the amounts referred to in clauses (i) and
(ii) is referred to as the "Accrued Obligations".
If during the three year employment period, the executive's employment is
terminated (i) by Safety-Kleen for Cause, as defined, the executive is
entitled only to his guaranteed base salary through the date of termination
plus any deferred compensation and accrued vacation pay not previously paid;
(ii) by the executive other than for Good Reason, the executive is entitled
only to the Accrued Obligations; (iii) by Safety-Kleen for disability, the
executive is entitled to receive the Accrued Obligations and disability and
other benefits at least equal to the greater of those provided to peer
executives by Safety-Kleen immediately prior to the executive's termination
and those provided to peer executives by Safety-Kleen at any time during the
90 day period immediately preceding a Change of Control; and (iv) by the
executive's death, his estate is entitled to the Accrued Obligations and
benefits at least equal to the most favorable in the aggregate as the most
favorable provided to the executive during the 90 days preceding a Change of
Control.
Each of the Change of Control Severance Agreements provides that if it is
determined that benefits received by the executive thereunder (or otherwise)
are subject to any excise tax under Section 4999 of the Internal Revenue Code
or any similar excise taxes, then Safety-Kleen will also pay the executive an
amount (the "Gross-up Payment") such that, after the payment of all income and
excise taxes, the executive will be in the same after-tax position that he
would have been in had no excise tax been imposed.
Each Change of Control Severance Agreement contains a non-compete provision
that during the period of the executive's employment and for one year
thereafter, prohibits the executive from certain participation in the business
of any company engaged in business that directly or materially competes with
Safety-Kleen, and certain other competitive activity. Each such agreement also
obligates the executive to maintain the confidentiality of Safety-Kleen's
Confidential Information (as defined in such agreement).
Payments that would be made to the persons who are parties to the Change of
Control Severance Agreements in the event they are all terminated during the
three year employment period after a Change of Control (other than for Cause
or by reason of the executive's death or disability) are approximately
$46,000,000 for all officers with Change of Control Severance Agreements,
including approximately $3,950,000 for Mr. Brinckman.
The foregoing description of the Change of Control Severance Agreements does
not purport to be complete and is qualified in its entirety by reference to
the Change of Control Severance Agreement filed as Exhibit 4 hereto and
incorporated herein by reference.
Investment Banking Fees. Mr. Jannotta, a director of Safety-Kleen, is a
Senior Director of William Blair & Company L.L.C. ("William Blair"). William
Blair will receive a fee from Safety-Kleen upon consummation of the Revised
LLE Offer. See "Item 5. Persons Retained, Employed Or To Be Compensated," in
the Schedule 14D-9, as amended and restated at January 6, 1998.
(b)(3) Certain Executive Compensation and Other Employee-Related Matters in
Connection with the LLE Merger.
Indemnification and Insurance. Pursuant to the LLE Merger Agreement, LLE has
agreed that all rights to indemnification existing in favor of the present or
former directors, officers, employees and agents of Safety-Kleen or any of its
subsidiaries as provided in Safety-Kleen's Articles of Incorporation and
Bylaws or the articles of incorporation and bylaws of any of Safety-Kleen
subsidiaries, as in effect on the date of the LLE Merger
3
<PAGE>
Agreement, shall survive the LLE Merger and continue in full force and effect
for not less than six years after the effective time of the LLE Merger. LLE
also agreed, subject to certain limitations, to cause to be maintained in
effect for not less than six years after the effective time of the LLE Merger
the current policies of directors' and officers' liability insurance
maintained by Safety-Kleen and its subsidiaries with respect to matters
occurring prior to the effective time of the LLE Merger.
LLE Merger Agreement Provisions Relating to Benefit Plans. In accordance
with the LLE Merger Agreement, Safety-Kleen will use its best efforts to
cancel the outstanding stock options not related to limited stock appreciation
rights for each Share subject to an option, paying cash in an amount equal to
the excess of $30.30 over the exercise price of the option, reduced by the
amount of withholding or other taxes required by law to be withheld. However,
as required by the terms of Safety-Kleen's outstanding stock options, holders
of options related to limited stock appreciation rights will receive for each
Share an amount in cash equal to the excess, if any, of the change of control
value (generally, the greater of (i) the highest price at which the Shares
trade in the 180 days prior to closing of the Revised LLE Offer, or (ii) the
Revised LLE Offer Consideration, which the Compensation Committee of the
Board, which administers the plans under which the options were granted, has
determined is $30.30 for this purpose) over the per Share exercise price of
such option, reduced by the amount of withholding or other taxes required by
law to be withheld.
As of March 13, 1998, directors and executive officers held in the aggregate
options to purchase 2,285,614 Shares (including 2,180,614 options related to
limited stock appreciation rights), including options that will vest upon
consummation of the Revised LLE Offer. Upon consummation of the LLE Merger,
(i) the directors who are not officers of Safety-Kleen who hold such options
would be entitled to receive approximately the following amounts: Richard T.
Farmer, $94,500, Russell A. Gwillim, $94,500, Edgar D. Jannotta $94,500, Karl
G. Otzen, $94,500, Paul D. Schrage, $94,500, Marcia E. Williams, $216,375, and
W. Gordon Wood, $94,500; and (ii) assuming that the Shares do not trade at a
price in excess of $30.30 prior to shareholder approval of the LLE Merger, all
directors and executive officers who served at any time since the beginning of
Safety-Kleen's last fiscal year as a group would collectively be entitled to
receive approximately $26,820,000, including approximately $6,035,000 for Mr.
Brinckman.
The LLE Merger Agreement provides that for a period of two years following
the effective time of the LLE Merger, LLE intends to provide employee benefit
plans and programs for the benefit of employees of the Surviving Corporation
and its subsidiaries that are in the aggregate no less favorable to such
employees than the employee benefit plans of Safety-Kleen and its affiliates
described in the Company disclosure schedule to the LLE Merger Agreement. All
service credited to such employees by Safety-Kleen through the effective time
of the LLE Merger shall be recognized by LLE or the Surviving Corporation for
purposes of eligibility and vesting under any employee benefit plan provided
directly or indirectly by LLE or the Surviving Corporation for the benefit of
the employees and in which the respective employees participate.
The LLE Merger Agreement also provides that LLE shall cause the Surviving
Corporation: (i) to honor (without modification) and assume the written
employment agreements, severance agreements and other agreements listed on the
disclosure schedule to the LLE Merger Agreement, all as in effect on the date
of the LLE Merger Agreement; and (ii) not to terminate, or adversely amend in
any manner which adversely affects, the benefits described in the Company
disclosure schedule to the LLE Merger Agreement that participants in such
plans are entitled to thereunder with respect to any periods prior to and
including the effective time of the LLE Merger. The LLE Merger Agreement also
states that LLE Parent intends to cause the Surviving Corporation to continue
to maintain an office in Elgin, Illinois. As permitted by the LLE Merger
Agreement, the Board of Directors has authorized the payment of an aggregate
of $3 million in special bonuses to executive officers. Mr. Brinckman did not
receive such a bonus.
(b)(4) Arrangements with LLE, its Executive Officers, Directors or
Affiliates.
Other than the LLE Merger Agreement, the Confidentiality Agreement dated
March 13, 1998 and existing and present business relationships (e.g.,
providing services to each other or considering the purchase or sale of
4
<PAGE>
discrete assets or operations or alliances) in the ordinary course of business
not material to Safety-Kleen or its affiliates and LLE or its affiliates or to
the relationship between them and the sale of certain assets of an LLE
subsidiary to Safety-Kleen in February 1996 and the accompanying cooperative
services agreement which is in the process of being terminated, as of the date
hereof there are no contracts, agreements, arrangements or understandings or
actual or potential conflicts of interest between Safety-Kleen or its
affiliates and LLE, the Offeror or their respective executive officers,
directors or affiliates that are required to be disclosed pursuant to the
rules and regulations of the Commission.
(b)(5) LLE Merger Agreement
Set forth below is a brief description of the material terms of the LLE
Merger Agreement and related matters. This description does not purport to be
complete and is qualified in its entirety by reference to the LLE Merger
Agreement, which is filed as an exhibit hereto and is incorporated herein by
reference.
The Revised LLE Offer. The LLE Merger Agreement provides that the Offeror
has extended until March 27, 1998 at Midnight EST (or a later date if required
by the Securities and Exchange Commission) the Revised LLE Offer to exchange
$18.30 in cash and 2.8 shares of LLE Common Stock for each outstanding Share
and that, upon the terms and subject to the prior satisfaction or waiver
(except that the Minimum Tender Condition and the Solvency Opinion Condition,
each as defined below, may not be waived) of the conditions of the Revised LLE
Offer, the Offeror will purchase all Shares validly tendered pursuant to the
Revised LLE Offer. Notwithstanding the proposed March 27, 1998 expiration date
set forth in the LLE Merger Agreement, the parties have acknowledged that the
Revised LLE Offer will be extended until March 31, 1998, the date ten business
days from the date hereof. The LLE Merger Agreement provides that if all
conditions to the Revised LLE Offer shall not have been satisfied or waived at
the scheduled or extended expiration date of the Revised LLE Offer, LLE may,
without the consent of Safety-Kleen, extend the Revised LLE Offer until the
earlier of June 30, 1998 or satisfaction or waiver of such conditions. In
addition, the Revised LLE Offer can be extended for up to five (5) business
days (but only twice) if at its scheduled or extended expiration, more than
two thirds, but fewer than 90%, of the issued and outstanding Shares have been
tendered. See "--Conditions of the Revised LLE Offer" for a description of the
conditions to LLE's obligation to purchase Shares pursuant to the Revised LLE
Offer.
The LLE Merger--General. The LLE Merger Agreement provides that the Offeror
will be merged with and into Safety-Kleen, with Safety-Kleen becoming a wholly
owned subsidiary of LLE. In the LLE Merger, each outstanding Share (other than
Shares held by LLE and its affiliates and treasury Shares) will be converted
at the Effective Time (as defined below) into the right to receive $18.30 net
in cash and 2.8 shares of LLE Common Stock. LLE will also make certain
payments necessary to satisfy Safety-Kleen's outstanding debt obligations.
Immediately prior to the Effective Time (as defined below) Safety-Kleen will
make certain payments with respect to outstanding options under Safety-Kleen's
stock option plans.
As soon as practicable after the conditions to consummation of the LLE
Merger described below have been satisfied or waived, and unless the LLE
Merger Agreement has been terminated as provided below, articles of merger
(the "Articles of Merger") will be filed with the Secretary of State of the
State of Wisconsin in accordance with the relevant provisions of the Wisconsin
Business Corporation Law ("WBCL"), a certificate of merger (the "Certificate
of Merger") will be filed with the Secretary of State of the State of Delaware
in accordance with the relevant provisions of the General Corporation Law of
the State of Delaware ("DGCL") and the parties will make such other filings,
recordings or publications required under the WBCL and the DGCL in connection
with the LLE Merger. The LLE Merger will become effective upon the date on
which the Articles of Merger have been received for filing by the Secretary of
the State of Wisconsin and the Certificate of Merger has been received for
filing by the Secretary of State of the State of Delaware, or such later date
as is agreed upon by the parties and specified in the Certificate of Merger
and Articles of Merger, and the time of such effectiveness is hereinafter
referred to as the "Effective Time." As a result of the LLE Merger, the
separate
5
<PAGE>
corporate existence of the Offeror will cease and Safety-Kleen will continue
as the Surviving Corporation under the name "Safety-Kleen Corp.," and will
become a wholly-owned subsidiary of LLE.
Conversion of Securities. At the Effective Time, each Share issued and
outstanding immediately prior to the Effective Time (other than Shares owned
by LLE, the Offeror or any subsidiary thereof or held in the treasury of
Safety-Kleen or any subsidiary of Safety-Kleen, which will be canceled without
payment) will be canceled and converted at the Effective Time into the right
to receive $18.30 net in cash and 2.8 shares of LLE Common Stock (the "LLE
Merger Consideration").
Pursuant to the LLE Merger Agreement, each share of common stock, par value
$.01 per share, of the Offeror issued and outstanding immediately prior to the
Effective Time shall be automatically converted into and become at the
Effective Time one share of common stock, par value $.01 per share, of the
Surviving Corporation.
Stock Options. The LLE Merger Agreement provides that Safety-Kleen will (a)
terminate its 1985 Stock Option Plan, 1993 Stock Option Plan and 1988 Non-
Qualified Stock Option Plan for Outside Directors (collectively the "Option
Plans"), immediately prior to the Effective Time without prejudice to the
rights of the holders of options awarded pursuant thereto and (b) grant no
additional options or similar rights under the Option Plans or otherwise on or
after the date of the LLE Merger Agreement. "Options" is defined under the
Merger Agreement to include each stock option granted by Safety-Kleen, whether
pursuant to the Option Plans or otherwise.
Safety-Kleen agrees in the LLE Merger Agreement to cancel all Options
(whether or not then exercisable) that Safety-Kleen has the right to cancel,
and to use its best efforts to obtain the consent of each holder of any
Options (whether or not then exercisable) that it does not have the right to
cancel, to the cancellation of his Options, with all such cancellations to
take effect immediately prior to the Effective Time. For Options which may be
settled at exercise by issuance of Shares or cash payment pursuant to the
terms of the applicable Option Plan, Safety-Kleen agrees, in consideration of
such cancellation, to pay to the holders of such Options, immediately after
purchase of Shares pursuant to the Revised LLE Offer, for each Share subject
to such Option, an amount in cash equal to the excess, if any, of the Revised
LLE Offer Consideration (valued for this purpose at $30.30) over the per Share
exercise price of such Option, reduced by the amount of withholding or other
taxes required by law to be withheld. In the case of Options related to
limited stock appreciation rights ("LSARs"), for each Share subject to such
Option, Safety-Kleen agrees to pay (consistent with the rights under the
Option Plans) upon cancellation of such Options, an amount in cash equal to
the excess, if any, of the change of control value (generally, the highest
price at which the Shares trade in the 180 days prior to closing of the
Revised LLE Offer or, if greater, the Revised LLE Offer Consideration (valued
for this purpose at $30.30), over the per Share exercise price of such Option,
reduced by the amount of withholding or other taxes required by law to be
withheld. As of March 13, 1998, directors, executive officers and other
employees held in the aggregate Options to purchase 3,899,068 Shares,
2,263,415 of which were Options related to LSARs.
Directors and Officers; Articles of Incorporation and Bylaws. The LLE Merger
Agreement provides that the directors of the Offeror immediately prior to the
Effective Time will be the initial directors of the Surviving Corporation and
that the officers of Safety-Kleen immediately prior to the Effective Time will
be the initial officers of the Surviving Corporation except to the extent that
LLE designates other or additional officers, until the earlier of their
resignation or removal or until their respective successors are duly elected
and qualified. The LLE Merger Agreement provides that, at the Effective Time,
the Articles of Incorporation and Bylaws of the Surviving Corporation will be
amended and restated to be in the form attached as exhibits to the LLE Merger
Agreement. See "(b)(2) Certain Executive Compensation and Other Employee-
Related Matters in Connection with the LLE Merger--Indemnification and
Insurance."
6
<PAGE>
The LLE Merger Agreement provides that promptly following the purchase by
LLE and the Offeror of shares pursuant to the LLE Offer, but subject to
compliance with Exchange Act Rule 14f-1, LLE shall be entitled to designate at
its option up to that number of directors, rounded to the nearest whole
number, of Safety-Kleen's Board of Directors, as will make the percentage of
Safety-Kleen's directors designated by LLE approximately equal to the
aggregate voting power of the Shares held by LLE (and the Offeror). Following
the election or appointment of LLE's designees and prior to the Effective
Time, any amendment to the Restated Articles of Incorporation or Bylaws of
Safety-Kleen, any termination of the LLE Merger Agreement by Safety-Kleen, any
extension by Safety-Kleen of the time for the performance of any of the
obligations or other acts of LLE or waiver or assertion of any of Safety-
Kleen's rights under the LLE Merger Agreement, and any other consent or action
by the Board of Directors with respect to the LLE Merger Agreement, will
require the concurrence of a majority of the directors (if any) not appointed
by LLE. After purchase of Shares pursuant to the Revised LLE Offer but before
LLE designees are named as Safety-Kleen directors, the Safety-Kleen Board of
Directors has agreed not to act without notice to and the participation of
LLE.
Representations and Warranties. Safety-Kleen, LLE and the Offeror have made
certain representations and warranties to each other in the LLE Merger
Agreement. Safety-Kleen represents and warrants, among other things, as to the
organization and qualifications to do business of Safety-Kleen and its
significant subsidiaries, its capitalization, its corporate authority to enter
into and perform the LLE Merger Agreement and the absence of conflict of such
actions with its other obligations, and its ownership of its subsidiaries.
Safety-Kleen also makes certain representations and warranties concerning its
financial reports, the absence of certain changes and liabilities, employee
benefit plans, litigation and legal matters, labor matters, tax matters,
environmental matters and title to its properties. LLE and the Offeror
represent and warrant, among other things, as to their respective organization
and qualification, capital stock, corporate authority to enter into and
perform the LLE Merger Agreement and the absence of conflict of such actions
with its other obligations, and interim operations of LLE and the Offeror. LLE
also makes certain representations and warranties concerning its financial
reports, employee benefit plans, litigation and legal matters, labor matters,
tax matters, environmental matters and title to its properties. The
representations and warranties of LLE, the Offeror and Safety-Kleen will
terminate upon consummation of the LLE Merger.
Conduct of Business Pending the LLE Merger. Pursuant to the LLE Merger
Agreement, Safety-Kleen has agreed that unless LLE shall otherwise agree in
writing (which agreement shall not be unreasonably withheld), prior to the
Effective Time:
(a) the business of Safety-Kleen and its subsidiaries will be conducted
in the ordinary and usual course of business, and Safety-Kleen will use its
reasonable best efforts to maintain and preserve intact its and its
subsidiaries' business organization, assets, employees, officers and
consultants and advantageous business relationships;
(b) neither Safety-Kleen nor any of its subsidiaries will directly or
indirectly do any of the following: (i) except in the ordinary course of
business, sell, pledge, dispose of or encumber any assets of Safety-Kleen
or of any of its subsidiaries; (ii) amend its charter or by-laws or similar
organizational documents; (iii) split, combine or reclassify any shares of
its capital stock or declare, set aside, make or pay any dividend or
distribution payable in cash, stock, property or otherwise with respect to
any of its capital stock (except as contemplated by the Rights Agreement
and except for (x) cash dividends to shareholders of Safety-Kleen declared
in the ordinary course of business and consistent with past practice and
(y) dividends by wholly owned subsidiaries of Safety-Kleen); (iv) redeem,
purchase or otherwise acquire or offer to redeem, purchase or otherwise
acquire any capital stock of Safety-Kleen; (v) adopt a plan of liquidation
or resolutions providing for the liquidation, dissolution, merger,
consolidation or other reorganization of Safety-Kleen; or (vi) authorize or
propose any of the foregoing, or enter into any contract, agreement,
commitment or arrangement to do any of the foregoing;
(c) neither Safety-Kleen nor any of its subsidiaries will, directly or
indirectly, (i) except for Shares (and the associated Rights) issuable upon
exercise of options outstanding under the Option Plans on the
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date of the LLE Merger Agreement, issue, sell, pledge, dispose of or
encumber, or authorize, propose or agree to the issuance, sale, pledge,
disposition or encumbrance of, any shares of, or any options, warrants or
rights of any kind to acquire any shares of or any securities convertible
into or exchangeable or exercisable for any shares of, its capital stock of
any class or any other securities in respect of, in lieu of, or in
substitution for Shares outstanding on the date hereof; (ii) make any
material acquisition, by means of merger, consolidation or otherwise, or
material disposition (other than disposition of assets in the ordinary
course of business), of assets or securities, or make any loans, advances
or capital contributions to, or investment in, any individual or entity
(other than to Safety-Kleen or a wholly owned subsidiary of Safety-Kleen);
(iii) except in the ordinary course of business, and other than
indebtedness to or guarantees for the benefit of Safety-Kleen or any
affiliate of Safety-Kleen and borrowings to fund payments to holders of
Options as contemplated by the LLE Merger Agreement, incur any indebtedness
or issue any debt securities or assume, guarantee, endorse or otherwise
become liable or responsible (whether directly, contingently or otherwise)
for, the obligations of any other individual or entity; (iv) change the
capitalization of Safety-Kleen (other than the incurrence of indebtedness
otherwise permitted in the LLE Merger Agreement); (v) except in the
ordinary course, change any assumption underlying, or method of
calculating, any bad debt, contingency or other reserve; (vi) pay,
discharge or satisfy any claims, liabilities or obligations (absolute,
accrued, contingency or otherwise), other than the payment, discharge or
satisfaction of liabilities in the ordinary course of business or as
required by applicable law; (vii) waive, release, grant or transfer any
rights of value or modify or change in any material respect any existing
license, lease, contract or other document, other than in the ordinary
course of business; or (viii) authorize any of the foregoing, or enter into
or modify any contract, agreement, commitment or arrangement to do any of
the foregoing;
(d) except for the payment to holders of Options as contemplated by the
LLE Merger Agreement, neither Safety-Kleen nor any of its subsidiaries will
(except for salary increases or other employee benefit arrangements in the
ordinary course of business consistent with past practice that, in the
aggregate, do not result in a material increase in benefits or compensation
expense to Safety-Kleen and its subsidiaries, taken as a whole, or as may
be required pursuant to any agreements in effect at the date of the LLE
Merger Agreement) adopt or amend or take any actions to accelerate any
rights or benefits under (except as may be required by law) any bonus,
profit sharing, compensation, stock option, pension, retirement, deferred
compensation, employment, severance, termination or other employee benefit
plan, agreement, trust, fund or other arrangement for the benefit or
welfare of any employee or any officer or director or former employee or,
in the ordinary course of business, consistent with past practice, increase
the compensation or fringe benefits of any employee or former employee or
pay any benefit not permitted by any existing plan, arrangement or
agreement;
(e) except in the ordinary course of business, neither Safety-Kleen nor
any of its subsidiaries will make any tax election or settle or compromise
any federal, state, local or foreign income tax liability;
(f) except in the ordinary course of business, neither Safety-Kleen nor
any of its subsidiaries will permit any insurance policy naming it as
beneficiary or a loss payee to be cancelled or terminated without notice to
LLE; and
(g) neither Safety-Kleen nor any of its subsidiaries will agree, in
writing or otherwise, to take any of the foregoing actions or any action
which would make any representation or warranty of Safety-Kleen in the LLE
Merger Agreement untrue or incorrect so as to result in any change(s) or
effect(s) that, individually, or in the aggregate, are materially adverse
to the financial condition, properties, business of Safety-Kleen and its
subsidiaries taken as a whole, or that would prevent or materially delay
Safety-Kleen from performing its obligations under the Merger Agreement (a
"Material Adverse Effect").
No Solicitation of Proposals. The LLE Merger Agreement provides that Safety-
Kleen (and its subsidiaries and affiliates) will not, and will use their best
efforts to ensure that their respective directors, officers, employees,
8
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representatives and agents do not, directly or indirectly, solicit or initiate
inquiries or proposals from, or provide any confidential information to, or
participate in any discussions or negotiations with, any person or entity
(other than LLE and its subsidiaries and their respective directors, officers,
employees, representatives and agents) concerning (a) any merger, sale of
assets not in the ordinary course (except for any sale of assets otherwise
permitted under the terms of the LLE Merger Agreement), or other similar
transaction involving Safety-Kleen or any subsidiary or division of Safety-
Kleen, or the sale of any equity interest in Safety-Kleen or any subsidiary,
or (b) any sale by Safety-Kleen or its subsidiaries of authorized but unissued
Shares or of any shares (whether or not outstanding) of any of Safety-Kleen's
subsidiaries (all such inquiries and proposals being referred to herein as
"Acquisition Proposals"), provided, however, that nothing contained in such
provisions of the LLE Merger Agreement prohibits Safety-Kleen or its Board of
Directors from (i) subject to certain duties to consult with LLE and the
Offeror, issuing a press release or otherwise publicly disclosing the terms of
the LLE Merger Agreement; (ii) proceeding with the transactions contemplated
by the LLE Merger Agreement; (iii) communicating to Safety-Kleen's
shareholders a position as contemplated by Rule 14e-2 promulgated under the
Exchange Act; (iv) making any disclosure to Safety-Kleen's shareholders which,
in the judgment of the Board of Directors of Safety-Kleen, with the advice of
outside counsel, should reasonably be made under applicable law (including,
without limitation, laws relating to the fiduciary duties of directors) or (v)
taking any non-appealable, final action ordered to be taken by Safety-Kleen by
any court of competent jurisdiction; and, provided, further, that the Board of
Directors of Safety-Kleen may, on behalf of Safety-Kleen, furnish or cause to
be furnished information and may direct Safety-Kleen, its directors, officers,
employees, representatives or agents to information, in each case pursuant to
appropriate confidentiality agreements, and to participate in discussions or
negotiations with any person or entity commencing any Acquisition Proposal
which was not solicited by Safety-Kleen or any of its subsidiaries or
affiliates or any of their respective directors, officers, employees,
representatives or agents, or which did not otherwise result from a breach of
such non-solicitation provisions of the LLE Merger Agreement, if (x) the Board
of Directors of Safety-Kleen concludes in good faith, after consultation with
its financial advisor, that such person or entity has made or is reasonably
likely to make a bona fide Acquisition Proposal for a transaction more
favorable to Safety-Kleen's Shareholders from a financial point of view than
the transactions contemplated hereby, and (y), in the opinion of the Board of
Directors of Safety-Kleen, only after receipt of advice from its independent
legal counsel, the failure to provide such information or access or to engage
in such discussions or negotiations would cause the Board of Directors of
Safety-Kleen to violate its fiduciary duties to Safety-Kleen's Shareholders
under applicable law (an Acquisition Proposal which satisfies clauses (x) and
(y) being hereinafter referred to as a "Superior Proposal").
Safety-Kleen has agreed pursuant to the LLE Merger Agreement to immediately
notify LLE of the terms of any proposal, discussion, negotiation or inquiry
(and to disclose any written materials received by Safety-Kleen in connection
with such proposal, discussion negotiation, or inquiry) and the identity of
the party making such proposal or inquiry which it may receive in respect of
any such transaction unless the Board of Directors of Safety-Kleen determines,
based on the advice of outside legal counsel to Safety-Kleen, that giving such
notice would cause the Board of Directors of Safety-Kleen to violate its
fiduciary duties to Safety-Kleen's shareholders under applicable law. Safety-
Kleen agrees pursuant to the LLE Merger Agreement to, and to cause each
subsidiary to, immediately cease and cause to be terminated any existing
activities, discussions or negotiations by Safety-Kleen, its subsidiaries or
any officer, director or employee of, or investment banker, attorney,
accountant or other advisor or representative of, Safety-Kleen or any
subsidiary with parties conducted prior to the date of the LLE Merger
Agreement with respect to any of the foregoing.
The LLE Merger Agreement also provides that, except as set forth therein,
neither the Board of Directors of Safety-Kleen nor any committee thereof shall
(a) withdraw or modify, or propose to withdraw or modify, in a manner adverse
to LLE or the Offeror, the approval or recommendation by the Board of
Directors of Safety-Kleen or any such committee of the LLE Merger Agreement or
the LLE Merger, (b) approve or recommend, or propose to approve or recommend,
any Acquisition Proposal, or (c) enter into any agreement with respect to any
Acquisition Proposal. Notwithstanding the foregoing, the Board of Directors of
Safety-Kleen may (subject to the terms of this and the following sentence)
withdraw or modify its approval or recommendation of the LLE Merger Agreement
or the LLE Merger, approve or recommend a Superior Proposal or enter into an
agreement with
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respect to a Superior Proposal at any time after the second business day
following LLE's receipt of written notice advising LLE that the Board of
Directors of Safety-Kleen has received a Superior Proposal, specifying the
material terms and conditions of such Superior Proposal and identifying the
person making such Superior Proposal; provided that Safety-Kleen shall not
enter into an agreement with respect to a Superior Proposal unless Safety-
Kleen has furnished LLE with written notice not later than noon (New York
time) two business days in advance of any date that it intends to enter into
such agreement and caused its financial and legal advisors to negotiate with
LLE to make such amendments to the terms and conditions of the LLE Merger
Agreement as would make the LLE Merger Agreement as so amended at least as
favorable to Safety-Kleen's shareholders from a financial point of view as the
Superior Proposal. In addition, the LLE Merger Agreement provides that if
Safety-Kleen proposes to enter into an agreement with respect to any
Acquisition Proposal, it shall concurrently with entering into such agreement
pay, or cause to be paid, to LLE the Termination Amount (as defined and
described in "--Fees and Expenses" below). The LLE Merger Agreement also
includes a provision authorizing the Safety-Kleen Board of Directors to
withdraw or modify the approval or recommendation by
the Board of Directors of Safety-Kleen of the Revised LLE Offer or the LLE
Merger if there is a material adverse change in the business or financial
condition of LLE prior to consummation of the exchange pursuant to the Revised
LLE Offer.
Conditions to Consummation of the LLE Merger. The respective obligations of
the parties to cause the LLE Merger to be consummated are subject to the
satisfaction or waiver of certain conditions, including, among other things:
(a) the approval of the LLE Merger Agreement by the vote of the holders of
two-thirds of Safety-Kleen's outstanding Shares; (b) no statute, rule, order,
decree or regulation shall have been enacted or promulgated by any domestic
government or any agency or authority of competent jurisdiction which
prohibits the consummation of the LLE Merger; (c) consummation of the LLE
Merger shall not result in violation of any applicable United States federal
or state law providing for criminal penalties; and (d) no preliminary or
permanent injunction or other order issued by any federal or state court of
competent jurisdiction in the United States preventing the consummation of the
LLE Merger shall be in effect; provided, however, that the parties to the LLE
Merger Agreement shall have used their best efforts to have any such
injunction or order vacated.
The obligations of LLE to effect the LLE Merger are further subject to the
condition that LLE and the Offeror shall have purchased all Shares duly
tendered and not withdrawn pursuant to the terms of the LLE Offer, provided
that this condition does not apply if the failure to purchase the Shares
constitutes a breach of the LLE Merger Agreement by LLE or the Offeror.
The obligation of Safety-Kleen to effect the LLE Merger is further subject
to the condition that Safety-Kleen shall have received an opinion or
certificate of a reputable expert firm confirming the solvency of the
Surviving Corporation after the LLE Merger and related financings addressed to
or for the benefit of the Board of Directors of Safety-Kleen so that the Board
of Directors of Safety-Kleen is entitled to rely thereon.
Termination. The LLE Merger Agreement may be terminated, and the LLE Merger
abandoned, prior to the Effective Time, either before or after its approval by
Safety-Kleen's shareholders, as follows: (a) by the mutual written consent of
Safety-Kleen and LLE; (b) by either LLE or Safety-Kleen if any governmental
body or regulatory authority of the United States of America shall have issued
an order, decree or ruling or taken any other action, in each case permanently
enjoining, restraining or otherwise prohibiting the LLE Merger and such order,
decree, ruling or other action shall have become final and non-appealable;
provided that such right to terminate the LLE Merger Agreement shall not be
available to any party that has breached its obligations under the LLE Merger
Agreement to use its commercially reasonable best efforts to take such actions
as are necessary to consummate the transactions contemplated by the LLE Merger
Agreement; (c) by either LLE or Safety-Kleen if the Shares tendered pursuant
to the Revised LLE Offer have not been acquired by LLE or the Offeror on or
before June 30, 1998; (d) by the Board of Directors of LLE, (i) if prior to
the exchange of tendered Shares pursuant to the Revised LLE Offer Safety-Kleen
shall have breached any of its representations and warranties or failed to
comply with any of the covenants or agreements (without, in each instance,
giving effect to any limitation as to "materiality" or "material adverse
effect" set forth therein) contained in the LLE Merger Agreement to be
complied with or performed by Safety-Kleen at or prior to consummation of the
LLE Merger
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and such breach or failure shall have resulted in a Material Adverse Effect,
or (ii) Safety-Kleen shall have received from a third party a bona fide
Acquisition Proposal, and the Board of Directors of Safety-Kleen, shall have
accepted such a proposal or (iii) the Board of Directors of Safety-Kleen shall
have withdrawn or modified in a manner adverse to LLE or the Offeror its
approval or recommendation with respect to the LLE Merger; or (e) by the Board
of Directors of Safety-Kleen, if (i) prior to the exchange of tendered Shares
pursuant to the Revised LLE Offer, LLE or the Offeror shall have breached in
any material respect any of its representations and warranties or failed to
comply in any material respect with any of the covenants or agreements
contained in the LLE Merger Agreement to be complied with or performed by LLE
or the Offeror, or (ii) if Safety-Kleen enters into a written agreement
concerning a transaction that constitutes a Superior Proposal, provided that
Safety-Kleen shall have complied with the provisions described under "--No
Solicitation of Proposals" above (including the payment of the Termination
Amount).
In the event of termination of the LLE Merger Agreement by either Safety-
Kleen or LLE, no party to the LLE Merger Agreement (or any of its directors,
officers, employees, agreements, legal and financial advisors or other
representatives) shall have any liability or further obligation to any other
party to the LLE Merger Agreement, except with respect to the covenants in the
LLE Merger Agreement relating to confidential information and payment of
expenses. In addition, LLE, the Offeror and Safety-Kleen will each remain
liable for any wilful breach by it of the LLE Merger Agreement.
Amendment. Subject to the applicable provisions of the WBCL and the DGCL,
the LLE Merger Agreement may be amended by the parties thereto, at any time
before or after any required approval of matters presented in connection with
the LLE Merger by the shareholders of Safety-Kleen; provided, however, that
after any such approval, there shall be made no amendment that by law requires
further approval by such shareholders without the further approval of such
shareholders. The LLE Merger Agreement may not be amended except by an
instrument in writing signed by the parties thereto. After the purchase of
Shares pursuant to the Revised LLE Offer but prior to the Effective Time, any
amendment to the LLE Merger Agreement requires the concurrence of a majority
of the Safety-Kleen directors (if any) not appointed by LLE.
Waiver. Subject to the applicable provisions of the WBCL and the DGCL, at
any time prior to the Effective Time, any party to the LLE Merger Agreement
may (a) extend the time for the performance of any of the obligations or other
acts of the other parties thereto, or (b) subject to certain limitations after
shareholder approval has been obtained, waive compliance with any of the
agreements or conditions contained herein. In addition to the provisions
contained in the LLE Merger Agreement regarding the failure to object to
notice of certain defaults, at any time prior to consummation of the LLE
Merger any party thereto may waive any inaccuracies in the representations and
warranties contained herein or in any documents delivered pursuant thereto.
Any agreement on the part of a party to the LLE Merger Agreement to any such
extension or waiver shall be valid only if set forth in an instrument in
writing signed by such party. After the purchase of Shares pursuant to the
Revised LLE Offer but prior to the Effective Time, any waiver by Safety-Kleen
under the LLE Merger Agreement requires the concurrence of a majority of the
Safety-Kleen directors (if any) not appointed by LLE.
Fees and Expenses. The LLE Merger Agreement provides that Safety-Kleen and
LLE will each pay its own expenses in connection with the LLE Merger Agreement
and the transactions contemplated thereby, but that if LLE terminates the LLE
Merger Agreement prior to the purchase of Shares pursuant to the Revised LLE
Offer because, (i) Safety-Kleen has accepted an Acquisition Proposal from a
third party, (ii) the Safety-Kleen Board of Directors has failed to recommend
approval of the LLE Merger to the Safety-Kleen Shareholders (if shareholder
approval is required), (iii) the Safety-Kleen Board of Directors withdraws or
modifies its approval or recommendation with respect to the LLE Merger, or
(iv) Safety-Kleen has breached a representation or warranty or failed to
comply with a covenant included in the LLE Merger Agreement and such breach or
failure has resulted in a material adverse effect on Safety-Kleen's business
or financial condition, LLE shall be entitled to reimbursement of up to $25
million in expenses incurred in connection with the Revised LLE Offer or the
LLE Merger Agreement. The LLE Merger Agreement also provides that if Safety-
Kleen terminates the LLE Merger
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Agreement because of a breach of a LLE representation or warranty or failure
to satisfy a covenant or agreement, Safety-Kleen shall be entitled to
reimbursement of up to $25 million in expenses incurred in connection with the
LLE Merger Agreement and the transactions contemplated thereby.
Effect on Benefit Plans and Related Matters. The Merger Agreement provides
that for a period of two years following the Effective Time, LLE intends to
cause the Surviving Corporation to provide employee benefit plans and programs
for the benefit of employees of the Surviving Corporation and its subsidiaries
that are in the aggregate no less favorable to such employees than the
employee benefit plans of the Company and its affiliates existing on the date
of the LLE Merger Agreement. All service credited to each employee by Safety-
Kleen through the Effective Time shall be recognized by LLE or the Surviving
Corporation for purposes of eligibility and vesting under any employee benefit
plan provided directly or indirectly by LLE or the Surviving Corporation for
the benefit of the employees and in which the respective employees
participate.
The LLE Merger Agreement also provides that LLE shall cause the Surviving
Corporation: (i) to honor (without modification) and assume Safety-Kleen's
written employment agreements, severance agreements and consulting agreements,
all as in effect on the date of the LLE Merger Agreement; and (ii) not to
terminate or adversely amend in any manner which adversely affects the
benefits that participants in such plans are entitled to thereunder with
respect to any periods prior to and including the Effective Time. The LLE
Merger Agreement also states that LLE intends to cause the Surviving
Corporation to continue to maintain an office in Elgin, Illinois for two years
after the Effective Time.
Notices. Safety-Kleen, LLE and the Offeror agree pursuant to the LLE Merger
Agreement to give prompt notice to each other at any time from the date of the
LLE Merger Agreement to the Effective Time of the obtaining by it of actual
knowledge as to the occurrence, or failure to occur, of any event which
occurrence or failure would be likely to cause a breach of any covenant,
representation or warranty contained in the LLE Merger Agreement so as to
result in a Material Adverse Effect or in a material adverse effect upon LLE
or any of its affiliates. If any party receiving a notice shall not object
thereto within five business days after receiving such Default Notice, then
such party shall be deemed to have waived all rights accruing to it as a
result of such breach. A party shall object to such a Default Notice by giving
timely notice of such party's objection thereto as provided herein to the
party giving such notice. For purposes of this provision, the "actual
knowledge" of a party to the LLE Merger Agreement means the best actual
knowledge of its chairman of the board, president and chief financial officer.
Exchange of Shares For Merger Consideration. Promptly after the Effective
Time, each shareholder of record of Safety-Kleen will be provided with written
instruction from a payment agent designated by LLE, with the prior approval of
Safety-Kleen (the "Exchange Agent") as to how Shares may be surrendered and
exchanged for payment of the LLE Merger Consideration. Certificates evidencing
Shares should not be surrendered for payment prior to receipt of written
instructions from the Exchange Agent. As of the Effective Time, LLE will
deposit with the Exchange Agent cash and LLE Common Stock sufficient to pay
the Revised LLE Offer Consideration.
Conditions of the Revised LLE Offer.
1. Minimum Tender Condition. The Revised LLE Offer is conditioned upon,
among other things, there being validly tendered and not withdrawn prior to
the Expiration Date a number of Shares which, together with Shares owned by
LLE and its affiliates, will constitute at least two-thirds of the total
number of outstanding Shares on a fully diluted basis (as though all
outstanding options or other outstanding securities convertible into or
exercisable or exchangeable for Shares, other than the Rights, had been so
converted, exercised or exchanged) as of the date the Shares are accepted for
exchange by LLE pursuant to the Revised LLE Offer. Under the terms of the LLE
Merger Agreement, this condition cannot be waived by LLE without the consent
of Safety-Kleen. As of March 16, 1998, LLE owned 601,100 Shares, or
approximately 1.03% of the outstanding Shares. LLE has
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stated that it believes that, based on its ownership of Shares and Safety-
Kleen's outstanding Shares at September 6, 1997, the Minimum Tender Condition
would be satisfied if at least an aggregate of 42,302,789 Shares (or 66 2/3%)
of the Shares expected to be outstanding immediately prior to the consummation
of the Revised LLE Offer had been validly tendered pursuant to the Revised LLE
Offer and not withdrawn.
2. Solvency Opinion Condition. Under the terms of the LLE Merger Agreement,
LLE has agreed that it will not purchase Shares pursuant to the Revised LLE
Offer unless, prior to such purchase, LLE has delivered to Safety-Kleen an
opinion or certificate of a reputable expert firm confirming the solvency of
the surviving corporation after the LLE Merger (which opinion may assume that
the purchase of Shares pursuant to the Revised LLE Offer and the LLE Merger
are consummated simultaneously) and related financings, addressed to or for
the benefit of the Board of Directors of Safety-Kleen. This condition cannot
be waived without the consent of the Safety-Kleen Board of Directors.
3. Certain Other Conditions of the Revised LLE Offer. Notwithstanding any
other provision of the Revised LLE Offer and subject to any applicable rules
and regulations of the Commission, including Rule 14e-1(c) under the Exchange
Act (relating to LLE's obligation to exchange or return tendered Shares
promptly after the termination or withdrawal of the Revised LLE Offer), and
subject to LLE's obligation under the LLE Merger Agreement to use its
commercially reasonable best efforts to consummate the transactions
contemplated by the LLE Merger Agreement (the "Best Efforts Obligation"), LLE
shall not be required to accept for exchange or exchange any Shares, may
postpone the acceptance for exchange or exchange for tendered Shares and may,
in its sole discretion, terminate or amend the Revised LLE Offer as to any
Shares not then exchanged, if at the Expiration Date the Minimum Tender
Condition has not been satisfied or waived or if on or after the date of
commencement of the Revised LLE Offer and on or prior to the Expiration Date
any of the following events shall not have occurred:
(a) The shares of LLE Common Stock (and accompanying Rights) which shall
be issued to the Safety-Kleen Shareholders in the Revised LLE Offer and the
LLE Merger shall have been authorized for listing on the NYSE, subject to
official notice of issuance.
(b) The Registration Statement registering the LLE Common Stock included
in the Revised LLE Offer shall have become effective under the Securities
Act, and no stop order suspending the effectiveness of the Registration
Statement shall have been issued and no proceedings for that purpose shall
have been initiated or threatened by the Commission.
(c) No order, injunction or decree issued by any court or agency of
competent jurisdiction or other legal restraint or prohibition preventing
the consummation of the Revised LLE Offer and/or the LLE Merger or any of
the other transactions contemplated by this Prospectus shall be in effect.
No statute, rule, regulation, order, injunction or decree shall have been
enacted, entered, promulgated or enforced by any court, administrative
agency or commission or other governmental authority or instrumentality
which prohibits, restricts or makes illegal the consummation of the Revised
LLE Offer and/or the LLE Merger.
(d) There shall not have occurred or been threatened (i) any general
suspension of trading in, or limitation on times or prices for, securities
on any national securities exchange or in the over-the-counter market in
the United States, (ii) any significant adverse change in interest rates,
the financial markets or major stock exchange indices in the United States
or abroad or in the market price of Shares, including, without limitation,
a decline of at least 10% in either the Dow Jones Average of Industrial
Stocks or the Standard & Poor's 500 Index from that existing at the close
of business on January 14, 1998, (iii) any change in the general political,
market, economic, regulatory or financial conditions in the United States
or abroad that could, in the reasonable judgment of LLE, have a material
adverse effect upon the business, properties, assets, liabilities,
capitalization, stockholders' equity, condition (financial or otherwise),
operations, license or franchises, results of operations or prospects of
Safety-Kleen or any of its subsidiaries or the trading in, or value of, the
Shares, (iv) any material change in United States currency exchange rates
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or any other currency exchange rates or a suspension of, or limitation on,
the markets therefor, (v) a declaration of a banking moratorium or any
suspension of payments in respect of banks in the United States, (vi) any
limitation (whether or not mandatory) by any government, domestic, foreign
or supranational, or governmental entity on, or other event that in the
reasonable judgment of LLE might affect, the extension of credit by banks
or other lending institutions, (vii) a commencement of a war or armed
hostilities or other national or international calamity directly or
indirectly involving the United States or (viii) in the case of any of the
foregoing existing at the time of the commencement of the Revised Offer, a
material acceleration or worsening thereof.
(e) The representations and warranties of Safety-Kleen set forth in the
LLE Merger Agreement shall be true and correct in all material respects.
(f) Safety-Kleen shall have performed all obligations and complied with
any agreement or covenant of Safety-Kleen to be performed or complied with
by it under the LLE Merger Agreement.
(g) The LLE Merger Agreement shall not have been terminated in accordance
with its terms.
The foregoing conditions (a) through (g) are for the sole benefit of LLE
and, subject to the Best Efforts Obligation, may be asserted by LLE regardless
of the circumstances giving rise to any such conditions or may be waived by
LLE in whole or in part (other than the condition relating to effectiveness of
this Registration Statement). LLE reserves the right to assert the failure of
a condition following expiration of the Revised LLE Offer but prior to
acceptance for exchange in order to delay exchange or avoid the obligation to
exchange properly tendered Shares: LLE will either promptly exchange such
Shares or promptly return such Shares.
(b)(6) Confidentiality Agreement
Safety-Kleen and LLE have entered into a bilateral confidentiality agreement
pursuant to which each party agrees to maintain the confidentiality of
information furnished to it by the other.
ITEM 4. THE SOLICITATION OR RECOMMENDATION.
Item 4(a) of the Schedule 14D-9 is hereby amended and restated, as follows:
(a) Recommendation Of The Board of Directors.
THE BOARD OF DIRECTORS OF SAFETY-KLEEN (THE "BOARD"), HAVING NEGOTIATED
IMPROVEMENTS IN LLE'S PROPOSED TRANSACTION REFLECTED IN THE TERMS OF THE
REVISED LLE OFFER, HAS UNANIMOUSLY DETERMINED TO APPROVE THE REVISED LLE OFFER
AND RECOMMENDS THAT SHAREHOLDERS OF SAFETY-KLEEN TENDER THEIR SHARES PURSUANT
TO THE REVISED LLE OFFER.
Rights Agreement. In light of its determination stated above, the Board
decided at its March 15, 1998 meeting to amend the Rights Agreement to exempt
LLE'S purchases of Shares pursuant to the LLE Merger Agreement.
Business Combination Statute. In light of its determination stated above,
the Board at its March 15 meeting approved the LLE Merger Agreement, thereby
rendering Section 180.1141 of the Wisconsin Statutes inapplicable to the LLE
Merger. Section 180.1141 would otherwise have restricted consummation of the
LLE Merger until three years after closing of the Revised LLE Offer.
14
<PAGE>
Item 4(b) of the Schedule 14D-9 is hereby amended and supplemented by adding
the following:
(b)(1) and (b)(2) Background and Reasons for the Recommendation.
Following unsuccessful negotiations on March 10 and March 11, 1998,
representatives of Safety-Kleen and LLE conducted negotiations on March 13,
14, and 15, 1998, concerning the terms of the LLE Merger Agreement and the
consideration payable thereunder. Also on March 14, Safety-Kleen and LLE
entered into a confidentiality agreement. As a result of these negotiations,
LLE agreed with Safety Kleen to amend the consideration in its proposed
transaction to $18.30 in cash and 2.8 shares of LLE Common Stock.
At a special meeting of the Board of Directors of Safety-Kleen on March 15,
Safety-Kleen's legal advisors advised the Board of the progress of the
negotiations with LLE. The Board discussed the LLE Transaction, including its
structure and the improvements reflected in the Revised LLE Offer
Consideration. William Blair then made a presentation and rendered its written
opinion to the effect that, as of such date and based upon and subject to
certain matters stated in such opinion, the consideration to be received by
the holders of Shares in the LLE Transaction is fair to such holders from a
financial point of view, and reviewed with the Board the financial analysis
performed by it in connection with its opinion (see "--Opinions of Financial
Adviser--March 15, 1997 Opinion").
In the course of reaching its determining with respect to the Revised LLE
Offer referred to in Item 4(a), the Board at its meeting on March 15, 1998,
consulted with Safety-Kleen legal counsel and William Blair, and considered a
number of factors, including, but not limited to:
(i) the Board's knowledge of Safety-Kleen's financial performance and
future opportunities and prospects;
(ii) the presentation of William Blair at the March 15, 1998 Board
meeting and the written opinion of William Blair dated March 15, 1998 that,
based upon and subject to the matters set forth therein and as of the date
thereof, the Revised LLE Offer Consideration to be received by Safety-
Kleen's shareholders in the LLE Transaction is fair to Safety-Kleen's
shareholders from a financial point of view; the full text of the March 15,
1998 opinion of William Blair is attached hereto as Annex A and should be
read in its entirety (See "--(3) Opinions of Financial Advisor--March 15,
1998 Opinion" below);
(iii) the fact that at the conclusion of the process of exploring
strategic alternatives, the Philip Merger, providing for $27 per share all
cash consideration, failed to obtain the approval of Safety-Kleen
shareholders, leaving no viable alternative of comparable value to the LLE
Transaction;
(iv) negotiated improvements reflected in the Revised LLE Offer
Consideration;
(v) the fact that the Revised LLE Offer Consideration has a value of
slightly over $30 (based on LLE's closing stock price of $4.25 on March 13,
1998), representing a premium of more than 68% over the closing price of
$17.81 per Share on August 7, 1997, the last trading day prior to the
public announcement that Safety-Kleen was considering strategic
alternatives and had retained William Blair in connection therewith; and
(vi) the terms and conditions of LLE Merger Agreement, including its
provisions concerning the improvement and protection, of benefits for
employees. The Board's consideration of these benefits was part of its
consideration under the Wisconsin Constituency Statute of the effects of
the LLE Merger Agreement on Safety-Kleen's employees.
In addition, the Board considered the fact that Mr. Jannotta, a Director of
Safety-Kleen, is a Senior Director of William Blair.
The foregoing describes all material factors considered and given weight by
the Board in connection with its evaluation of the Revised LLE Offer. In view
of the variety of factors considered in connection with its evaluation of the
Revised LLE Offer, the Board did not find it practicable to and did not
quantify or otherwise assign relative weights to the specific factors
considered in reaching its determinations and recommendation. In
15
<PAGE>
addition, individual members of the Board may have given different weight to
different factors. The Board viewed its position and recommendation as being
based on the totality of the information presented to and considered by it.
Following the March 15th Board meeting, Safety-Kleen, LLE and the Offeror
entered into the LLE Merger Agreement. Safety-Kleen and LLE also issued press
releases announcing the LLE Merger Agreement on March 16, 1998, which are
filed as Exhibits 58 and 59 to the Schedule 14D-9 and incorporated herein by
reference.
(3) Opinions of Financial Advisor.
March 15, 1998 Opinion. At the March 15, 1998 meeting of the Safety-Kleen
Board of Directors, William Blair rendered its oral opinion (which opinion was
subsequently confirmed by delivery of a written opinion dated March 15, 1998),
that, as of such date, and based upon and subject to the factors and
assumptions set forth in such opinion, the consideration to be received by
Safety-Kleen's shareholders in the LLE Transaction is fair to Safety-Kleen's
shareholders from a financial point of view. The full text of William Blair's
opinion to Safety-Kleen's Board of Directors dated as of March 15, 1998 is
attached hereto as Annex A and is incorporated herein by reference and should
be read in its entirety in connection with this Statement. The following
summary of William Blair's opinion is qualified in its entirety by reference
to the full text of William Blair's opinion. William Blair's opinion was
addressed to the Safety-Kleen Board of Directors for the purposes of its
evaluation of the LLE Transaction and does not constitute a recommendation to
any Safety-Kleen shareholder as to whether such shareholder should tender
Shares into the Revised LLE Offer.
In connection with its opinion, William Blair reviewed a final draft of the
LLE Merger Agreement, including its financial terms and conditions, as well as
certain financial and other information that was publicly available or
furnished to William Blair by Safety-Kleen, including certain internal
financial analyses, financial forecasts, reports and other information
prepared by the management of Safety-Kleen. William Blair held discussions
with members of management of Safety-Kleen concerning Safety-Kleen's
historical and current operations, financial condition and prospects. In
addition, William Blair (i) compared the financial position and operating
results of Safety-Kleen with those of publicly traded companies William Blair
deemed relevant for its opinion; (ii) compared certain financial terms of the
LLE Transaction to certain financial terms of other selected business
combinations William Blair deemed relevant for its opinion and (iii) conducted
such other financial studies, analyses and investigations and reviewed such
other factors as William Blair deemed appropriate for the purposes of
rendering its opinion. In connection with William Blair's review of the LLE
Transaction and the preparation of its opinion, William Blair: (a) analyzed
the historical revenue, operating earnings, net income, dividend capacity and
capitalization of both LLE and certain other publicly held companies that
William Blair believes to be comparable to LLE; (b) analyzed certain publicly
available financial and other information relating to LLE and the unaudited
pro forma combined financial information in the Revised Amended Prospectus and
performed a sensitivity analysis on such pro forma financial information based
upon variable synergy assumptions; (c) reviewed the historical market prices
and trading volume of the LLE Common Stock as well as its stock ownership and
analyzed factors which could influence the trading price of the LLE Common
Stock on the anticipated closing date for the Revised LLE Offer; and (d)
performed such other analyses as William Blair deemed appropriate. William
Blair's opinion with respect to the LLE Transaction reflects only limited
access to LLE management and no access to internal LLE projections.
In rendering its opinion, William Blair relied upon and assumed the
accuracy, completeness and fairness of all of the financial and other
information that was available to it from public sources and that was provided
to William Blair by Safety-Kleen. With respect to the financial projections
supplied to William Blair, William Blair assumed that they were reasonably
prepared and reflected the best currently available estimates and judgments of
the management of Safety-Kleen as to the future operating and financial
performance of Safety-Kleen. William Blair's opinion relates to financial
fairness only as of the opinion date; no opinion is expressed as to the
soundness of the financial condition of LLE subsequent to the effective time
of the LLE Transaction. William Blair did not assume any responsibility for
making any independent evaluation of Safety-Kleen's or LLE's respective assets
or liabilities or for making any independent verification of any of the
information reviewed by William Blair.
16
<PAGE>
William Blair's opinion was necessarily based on economic, market, financial
and other conditions as they existed on March 15, 1998, the date of William
Blair's opinion, and on the information made available to William Blair as of
such date. It should be understood that, although subsequent developments may
affect its opinion, William Blair does not have any obligation to update,
revise or reaffirm William Blair's opinion. The following is a summary of the
material factors considered and principal financial analyses performed by
William Blair to arrive at its opinion. William Blair performed certain
procedures, including each of the financial analyses described below, and
reviewed with the management of Safety-Kleen the assumptions upon which such
analyses were based, and other factors.
Current Nominal Value Received in the Revised LLE Offer. William Blair
reviewed the Revised LLE Offer and, pursuant to its terms, LLE and a
subsidiary propose to exchange, for each outstanding Share, cash in the amount
of $18.30 plus 2.8 shares of LLE Common Stock. William Blair noted that on
March 13, 1998, the LLE Common Stock closed at $4.25 per share. In addition,
William Blair noted that for the four days following the March 9, 1998 Safety-
Kleen shareholders meeting at which the Philip Merger was not approved, the
average closing price of the LLE Common Stock was $4.11, and that the stock
price at the time of the opinion of $4.25 would result in the stock portion
having a market value of $11.90 per Share. Therefore, at the time of the
opinion, the nominal value of the Revised LLE Offer was $30.20 per Share.
Factors which could affect LLE's share price prior to closing of the Revised
LLE Offer. William Blair identified several factors which could place downward
pressure on the price of the LLE Common Stock prior to the closing of the
Revised LLE Offer. The analysis utilized the same assumptions as set forth
under "The Merger--Opinions of Financial Advisor--December 20, 1997 Opinion"
in the Schedule 14D-9 as amended and restated on January 6, 1998 and "Recent
Developments--Opinion of Financial Advisor--January 31, 1998 Opinion" in the
Schedule 14D-9 as amended on February 9, 1998. The principal factors include:
1. Possible revision in financial analysts' estimates for accretion in
LLE's fiscal 1998 EPS resulting from a combination of Safety-Kleen and
LLE.
2. Possible price/earnings multiple contraction in the LLE Common Stock
prior to closing.
3. The substantial market overhang resulting from the fact that Safety-
Kleen shareholders would receive approximately 164 million shares of the
LLE Common Stock in the Revised LLE Offer.
4. The potential impact of an overall market correction.
Based on the foregoing William Blair concluded that it is likely that there
would be some downward movement in the LLE Common Stock price following an
announcement of a definitive agreement with LLE. However, William Blair noted
that these factors have already been communicated to investors and may already
be influencing the LLE Common Stock price. Furthermore, William Blair opined
that it is unlikely that such downward movement would be of substantial
magnitude prior to closing.
Summaries of Valuation Analyses. In connection with its opinion and the
presentation of its opinion to the Board of Directors of Safety-Kleen, William
Blair performed certain valuation analyses, including: (i) a comparison with
comparable publicly traded companies, (ii) a discounted cash flow analysis,
(iii) an analysis of certain comparable acquisitions and (iv) a premium
analysis. Such analyses are summarized below.
Analysis of Certain Publicly Traded Companies. William Blair reviewed and
compared certain financial information relating to Safety-Kleen to
corresponding financial information, ratios and public market multiples for
nine publicly traded companies in the environmental services industry. Five of
these companies are solid waste management companies (the "Solid Waste
Comparables") and four are in the industrial waste management industry (the
"Industrial Waste Comparables"). The Solid Waste Comparables are (i) Allied
Waste Industries, Inc., (ii) Browning-Ferris Industries, Inc., (iii) USA Waste
Services, Inc., (iv) Waste Management, Inc. and (v) Waste Management
International PLC. The Industrial Waste Comparables are (i) Clean Harbors,
Inc., (ii) Envirosource, Inc., (iii) LLE and (iv) Philip Services, Inc.
William Blair selected these companies
17
<PAGE>
because they are publicly traded companies which William Blair deemed most
comparable to Safety-Kleen's operations and financial condition. Although
William Blair compared the trading multiples of the selected companies at the
date of William Blair's opinion to the implied purchase multiples of Safety-
Kleen, none of the selected companies is identical to Safety-Kleen. The per
Share price calculations based on such multiples ranged from $24.24 to $28.18
per Share.
Among the information considered were revenue, operating income ("EBIT"),
earnings before interest, taxes, depreciation and amortization ("EBITDA"), net
income, earnings per share ("EPS"), gross profit margins, EBIT margins and net
income margins, growth in revenues and net income, return on assets and
equity, and capital structure. The multiples and ratios for Safety-Kleen and
the comparable companies were based on the most recent publicly available
financial information and on EPS estimates for 1998 and 1999 from First Call
Corporation, and used the closing share prices as of March 13, 1998.
William Blair observed that the multiples of common stock share price
("Price") to EPS, as well as multiples of market equity value plus book value
of total debt (including minority interests and preferred stock) less cash and
equivalents ("Enterprise Value") to revenues, EBIT and EBITDA implied by the
terms of the LLE Transaction compared favorably, from Safety-Kleen's
perspective, to the median of the corresponding multiples of the comparable
companies. Specifically, the terms of the Revised LLE Offer implied 2.0x
latest twelve month ("LTM") revenues, 17.0x LTM EBIT and 10.2x LTM EBITDA. By
comparison, the analysis of selected environmental service companies resulted
in a median multiple of 1.7x for Enterprise Value to LTM revenues, 14.6x for
Enterprise Value to LTM EBIT and 8.5x for Enterprise Value to LTM EBITDA. The
analysis of selected environmental service companies also resulted in a median
multiple of 26.8x for the Price to LTM EPS, 21.6x for Price to estimated
calendar 1998 EPS and 16.7x for Price to estimated calendar 1999 EPS. The
terms of the Revised LLE Offer implied 28.2x for Price to LTM EPS, 24.8x for
Price to estimated fiscal 1998 EPS and 22.0x for Price to estimated fiscal
1999 EPS.
Discounted Cash Flow Analysis. Using a discounted cash flow ("DCF")
analysis, William Blair estimated the net present value of the unleveraged
free cash flows that Safety-Kleen could produce on a stand-alone basis over a
five year period from 1998 to 2002. In estimating these cash flows the
management of Safety-Kleen made certain assumptions about the operating
performance of Safety-Kleen over the five year period. Such assumptions
include assumptions regarding volume growth and pricing in Safety-Kleen's
principal businesses. Over the five year period ending 2002, Safety-Kleen
management projected volume growth for three of Safety-Kleen's principal
businesses--North American Parts Cleaner Services, North American Industrial
Waste Services and Automotive Parts Cleaner Services--to be 3.2%, 5.0% and
0.0% and annual price increases to be 5.6%, 2.7% and 1.0%, respectively. In
its Oil Recovery Services business, Safety-Kleen management projected revenue
to increase at a compound annual rate of 11% over the five year period ending
2002. Approximately 62% of the Oil Recovery Services growth is expected to
result from increased sales of lubricating oils, primarily blended products.
Also, approximately 9% of the total increase in Oil Recovery Services revenue
over the same period reflects increases in base lubricating oil from $0.91 in
1998 to $ 1.00 by 2001. The balance of the increase reflects increases in oil
collection volume and price. The estimates for cash flows are based upon the
assumption that markets for the hazardous waste industry and that U.S. and
international economic conditions remain relatively stable. Without
limitation, these cash flow estimates assumed that certain possible changes or
developments in Safety-Kleen's business, which could potentially favorably
impact value, would not affect cash flow during such period. In calculating
the "terminal value", William Blair assumed multiples of Enterprise Value to
EBITDA ranging from 6.0x to 8.0x, which multiples William Blair believed to be
appropriate for such an analysis. The annual and terminal free cash flows were
discounted to determine a net present value of the unleveraged equity value of
Safety-Kleen. Discount rates in a range of 10.0% to 12.0% were chosen based
upon an analysis of the weighted average cost of capital of the publicly
traded comparable group of companies described above. The DCF analysis
indicated a valuation of the equity of Safety-Kleen of between $1.5 billion to
$1.8 billion, or $24.95 to $29.56 per share. As a result, William Blair
believes that the price to be paid in the Revised LLE Offer compares
favorably, from Safety-Kleen's perspective, to the values indicated by the DCF
analysis.
18
<PAGE>
Comparable Acquisitions. William Blair performed an analysis of selected
recent merger or acquisition transactions in the environmental services
industry. The selected transactions were chosen based on William Blair's
judgment that they were generally comparable, in whole or in part, to the
proposed transaction. In total William Blair examined sixteen transactions
that were announced between March 17, 1995 and March 11, 1998 involving
certain environmental services companies. The selected transactions were not
intended to be representative of the entire range of possible transactions in
the environmental services industry. Although William Blair compared the
transaction multiples of these companies to the implied purchase multiples of
Safety-Kleen, none of the selected companies is identical to Safety-Kleen.
William Blair reviewed the consideration paid in such transactions in terms
of the Enterprise Value of such transactions as a multiple of revenues, EBIT
and EBITDA for the latest twelve months prior to the announcement of such
transactions. Additionally, William Blair reviewed the consideration paid in
such transactions in terms of the price paid for the common stock ("Equity
Purchase Price") of such transactions as a multiple of net income for the
twelve months prior to the announcement of such transactions. William Blair
observed that the multiples of Equity Purchase Price to net income, as well as
multiples of Enterprise Value to revenues, EBIT and EBITDA implied by the
terms of the Revised LLE Offer compared favorably, from Safety-Kleen's
perspective, to the median of the corresponding multiples of the comparable
acquisitions.
Such analysis of the sixteen acquisitions in the environmental services
industry resulted in a median multiple of 1.7x for Enterprise Value to LTM
revenues, 18.2x for Enterprise Value to LTM EBIT, 9.3x for Enterprise Value to
LTM EBITDA and 25.3x for Equity Purchase Price to LTM net income. In contrast,
the implied purchase multiples for Safety-Kleen were 2.0x for Enterprise Value
to LTM revenues, 17.0x for Enterprise Value to LTM EBIT, 10.2x for Enterprise
Value to LTM EBITDA and 28.2x for Equity Purchase Price to LTM net income.
Premium Analysis. In addition to evaluating multiples paid in transactions
in the environmental services industry, William Blair considered, for twenty
six industrial transactions which were announced from March 29, 1996 to
February 9, 1998 and whose Enterprise Value ranged from $783.4 million to $2.8
billion, the premiums paid over each company's stock price prior to the
announcement of a transaction. The median premium paid in those transactions
was 42.5%, 39.8% and 28.7%, respectively, over each company's stock price one
month, one week and one day before each respective announcement. In contrast,
the premium paid over the price of the Shares on July 8, 1997, August 1, 1997
and August 7, 1997, or one month, one week and one day, respectively, prior to
the announcement that Safety-Kleen was evaluating strategic alternatives, was
75.1%, 71.3% and 69.6%, respectively. As a result, William Blair believes that
the premium paid over the price of the Shares compares favorably, from Safety-
Kleen's perspective, to the values indicated by the premium analysis.
ITEM 6. RECENT TRANSACTIONS AND INTENT WITH RESPECT TO SECURITIES.
Item 6(b) of the Schedule 14D-9 is hereby amended and restated as follows:
(b) To the best knowledge of Safety-Kleen, and subject to applicable
securities laws and personal considerations, its executive officers,
directors, affiliates and subsidiaries presently intend to tender, pursuant to
the Revised LLE Offer, or otherwise sell, any Shares which are held of record
or are beneficially owned by such persons.
ITEM 7. CERTAIN NEGOTIATIONS AND TRANSACTIONS BY THE SUBJECT COMPANY.
Item 7 of the Schedule 14D-9 is hereby amended and restated as follows:
(a) Other than as set forth or referenced in Items 3(b) or 4, no negotiation
is being undertaken or is underway by Safety-Kleen in response to the Revised
LLE Offer which relates to or would result in:
(1) an extraordinary transaction such as a merger or reorganization,
involving Safety-Kleen or any subsidiary of Safety-Kleen;
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<PAGE>
(2) a purchase, sale or transfer of a material amount of assets by
Safety-Kleen or any subsidiary of Safety-Kleen.
(3) a tender offer for or other acquisition of securities by or of
Safety-Kleen; or
(4) any material change in the present capitalization or dividend policy
of Safety-Kleen.
(b) Except as described above, in Item 3(b), there are no transactions,
board resolutions, agreements in principle or signed contracts in response to
the Revised LLE Offer which relate to or would result in one or more of the
matters referred to in Item 7(a).
ITEM 8. ADDITIONAL INFORMATION TO BE FURNISHED
Item 8(a) of the Schedule 14D-9 is hereby amended and supplemented by adding
the following:
(a) Rights Agreement
See Item 4(a) "--Rights Agreement," of this Amendment No. 29, incorporated
herein by reference.
Item 8(c) of the Schedule 14D-9 is hereby amended and supplemented by adding
the following:
(c) State Takeover Statutes
Item 8(c) of the Schedule 14D-9 is hereby amended and supplemented by adding
the following at the end of the paragraph therein captioned "Business
Combination Statute":
See Item 4(a) "--Business Combination Statute," of this Amendment No. 29,
incorporated herein by reference.
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<PAGE>
SIGNATURE
After reasonable inquiry and to the best of my knowledge and belief, I
certify that the information set forth in this statement is true, complete and
correct.
Safety-Kleen Corp.
By: /s/ Donald W. Brinckman
-----------------------
Name: Donald W. Brinckman
Title: Chairman and Chief
Executive Officer
Dated: March 18, 1998
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<PAGE>
EXHIBIT INDEX
Except as noted below, the following Exhibits have been previously filed in
connection with this Statement.
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------- -----------
<C> <S>
Exhibit 1 Excerpts from Safety-Kleen's Proxy Statement, dated March 28, 1997,
relating to Safety-Kleen's 1997 Annual Meeting of Shareholders.
Exhibit 2 Share Ownership of Certain Beneficial Owners and Management.
Exhibit 3 Agreement and Plan of Merger, dated as of November 20, 1997, by and
among SK Parent Corp., SK Acquisition Corp. and Safety-Kleen Corp.
Exhibit 4 Form of Change of Control Severance Agreement.
Exhibit 5 Letter to Shareholders of Safety-Kleen Corp., dated December 22,
1997.
Exhibit 6 Press Release issued by Safety-Kleen Corp., dated December 22,
1997.
Exhibit 7 Text of September 24, 1997 letter from Laidlaw Environmental
Services, Inc.
Exhibit 8 Text of November 4, 1997 letter from Laidlaw Environmental
Services, Inc.
Exhibit 9 Text of November 13, 1997 letter from Laidlaw Environmental
Services, Inc.
Exhibit 10 Complaint filed by Safety-Kleen Corp. v. Laidlaw Environmental
Services, Inc. (dated November 17, 1997, United States District
Court of Illinois Eastern Division).
Exhibit 11 Opinion of William Blair & Company L.L.C., dated November 20, 1997.
Exhibit 12 Text of November 20, 1997 letter from Laidlaw Environmental
Services, Inc.
Exhibit 13 Verified Answer, Affirmative Defenses, and Counterclaim filed by
Laidlaw Environmental Services, Inc. v. Safety-Kleen Corp., et al.
(dated November 24, 1997, United States District Court for the
Northern District of Illinois Eastern Division).
Exhibit 14 Opinion of William Blair & Company L.L.C., dated December 20, 1997.
Exhibit 15 Complaint filed by William Steiner against Donald W. Brinckman, et
al. (dated November 4, 1997, Circuit Court of Cook County, Illinois
Department, Chancery Division).
Exhibit 16 Complaint filed by Josh Kaplan against Donald W. Brinckman, et al.
(dated November 5, 1997, Circuit Court of Cook County, Illinois
County Department, Chancery Division).
Exhibit 17 Complaint filed by Gershon Knoll against Richard T. Farmer, et al.
(dated November 5, 1997, Circuit Court of Cook County, Illinois
County Department, Chancery Division).
Exhibit 18 Complaint filed by Larry Hanon against Safety-Kleen Corp. et al.
(dated November 5, 1997, Circuit Court of Cook County, Illinois
County Department, Chancery Division).
Exhibit 19 Complaint filed by Robin Fernhoff against Safety-Kleen Corp. et al.
(dated November 6, 1997, Circuit Court of Cook County, Illinois
County Department, Chancery Division).
Exhibit 20 Complaint filed by Epstein Family Trust against Safety-Kleen Corp.
et al (dated November 12, 1997, Circuit Court of Cook County,
Illinois County Department, Chancery Division).
Exhibit 21 Complaint filed by David Steinberg against Safety-Kleen Corp. et
al. (dated December 5, 1997, Circuit Court of Cook County, Illinois
County Department, Chancery Division).
Exhibit 22 Press Release issued by Safety-Kleen Corp., dated January 8, 1998.
Exhibit 23 Press Release issued by Safety-Kleen Corp., dated January 9, 1998.
Exhibit 24 Definitive Additional Materials.
Exhibit 25 Press Release issued by Safety-Kleen Corp., dated January 15, 1998.
Exhibit 26 Definitive Additional Materials.
Exhibit 27 Definitive Additional Materials.
</TABLE>
22
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------- -----------
<S> <C>
Exhibit 28 Definitive Additional Materials.
Exhibit 29 Press Release issued by Safety-Kleen Corp., dated January 27, 1998.
Exhibit 30 Press Release issued by Safety-Kleen Corp., dated February 4, 1998.
Exhibit 31 Letter to Shareholders of Safety-Kleen, dated February 2, 1998.
Exhibit 32 Press Release issued by Safety-Kleen Corp., dated February 2, 1998.
Exhibit 33 Opinion of William Blair & Company L.L.C., dated January 31, 1998.
Exhibit 34 Press Release issued by SK Parent, dated February 10, 1998.
Exhibit 35 Letter to Shareholders of Safety-Kleen Corp., dated February 12, 1998.
Exhibit 36 Press Release issued by Safety-Kleen Corp., dated February 13, 1998.
Exhibit 37 Press Release issued by Safety-Kleen Corp., dated February 16, 1998.
Exhibit 38 Press Release issued by Safety-Kleen Corp., dated February 18, 1998.
Exhibit 39 Press Release issued by Philip Services Corp., dated February 20, 1998.
Exhibit 40 Press Release issued by SK Parent Corp., dated February 20, 1998.
Exhibit 41 Press Release issued by Safety-Kleen Corp., dated February 20, 1998.
Exhibit 42 Definitive Additional Materials.
Exhibit 43 Press Release issued by SK Parent Corp., dated February 23, 1998.
Exhibit 44 Press Release issued by Safety-Kleen Corp., dated February 25, 1998.
Exhibit 45 Press Release issued by Safety-Kleen Corp., dated February 25, 1998.
Exhibit 46 Press Release issued by Philip Services Corp., dated February 26, 1998.
Exhibit 47 Letter to Shareholders of Safety-Kleen Corp., dated February 27, 1998.
Exhibit 48 Press Release issued by Safety-Kleen Corp., dated March 2, 1998.
Exhibit 49 Press Release issued by Safety-Kleen Corp., dated March 5, 1998.
Exhibit 50 Press Release issued by SK Parent Corp., dated March 5, 1998.
Exhibit 51 Definitive Additional Materials.
Exhibit 52 Definitive Additional Materials.
Exhibit 53 Definitive Additional Materials.
Exhibit 54 Press Release issued by Safety-Kleen Corp., dated March 6, 1998.
Exhibit 55 Press Release issued by Safety-Kleen Corp., dated March 9, 1998.
Exhibit 56 Press Release issued by Safety-Kleen Corp., dated March 10, 1998.
Exhibit 57 Press Release issued by Safety-Kleen Corp., dated March 12, 1998.
Exhibit 58 Press Release issued by Safety-Kleen Corp., dated March 16, 1998.
Exhibit 59 Press Release issued by Laidlaw Environmental Services, Inc. dated March 16,1998.
Exhibit 60 Form of Confidentiality Agreement, dated March 13, between Safety-Kleen Corp. and Laidlaw
Environmental Services, Inc.
Exhibit 61* Opinion of William Blair & Company L.L.C., dated March 15, 1998.
Exhibit 62** Revised Amended Prospectus (including the LLE Merger Agreement attached thereto
as Annex A).
</TABLE>
- - --------
*Filed herewith, replacing form of opinion filed with Amendment No. 28.
**The LLE Merger Agreement, including Schedule 1.1 thereto, included as Annex
A of the Revised Amended Prospectus, is incorporated by reference in the
Schedule 14D-9, but not included in the mailing to shareholders. No other
section of the Revised Amended Prospectus is incorporated by reference
herein or shall be deemed filed with the SEC by Safety-Kleen.
23
<PAGE>
EXHIBIT 61
ANNEX A
LOGO
March 15, 1998
Board of Directors
Safety-Kleen Corp.
One Brinckman Way
Elgin, IL 60123-7857
Dear Directors:
You have requested our opinion as to the fairness, from a financial point of
view, to the shareholders (the "Shareholders") of Safety-Kleen Corp. (the
"Company") of the consideration to be received pursuant to the terms of the
draft Agreement and Plan of Merger dated as of March 16, 1998 (the "Merger
Agreement") by and among the Company, Laidlaw Environmental Services, Inc.,
("Laidlaw Environmental") and LES Acquisition Inc. ("LES Acquisition"), a
wholly-owned subsidiary of Laidlaw Environmental.
Pursuant to the terms of, and subject to the conditions of, the Merger
Agreement, Laidlaw Environmental will make a tender offer for the common stock
of the Company at a per share price of $18.30 in cash and 2.8 shares of
Laidlaw Environmental common stock. Following the consummation of the tender
offer, LES Acquisition will be merged into the Company in a merger in which
each of the outstanding shares of common stock of the Company will be
converted into a right for the Shareholders to receive $18.30 in cash and 2.8
shares of Laidlaw Environmental common stock per each share of common stock of
the Company (the transactions pursuant to the Merger Agreement are
collectively, the "Transaction").
We have acted as financial advisor to the Company in connection with the
Transaction. In connection with our review of the Transaction and the
preparation of our opinion herein, we have: (a) reviewed the terms and
conditions of the Merger Agreement and the financial terms of the Transaction
as set forth in the Merger Agreement; (b) analyzed the historical revenue,
operating earnings, net income, dividend capacity and capitalization, of both
the Company and certain other publicly held companies in businesses we believe
to be comparable to the Company; (c) analyzed certain financial and other
information relating to the prospects of the Company provided to us by the
Company's management, including financial projections; (d) discussed the past
and current operations and financial condition and prospects of the Company
with senior executives of the Company; (e) reviewed the historical market
prices and trading volume of the common stock of the Company; (f) reviewed the
financial terms, to the extent publicly available, of selected actual business
combinations we believe to be relevant; (g) compared the historical revenue,
operating earnings, net income, dividend capacity and capitalization of both
Laidlaw Environmental and certain other publicly traded companies in
businesses we believe to be comparable to Laidlaw Environmental; (h) analyzed
certain publicly available financial information relating to Laidlaw
Environmental and the unaudited pro forma combined financial information
contained in the Amended Prospectus dated January 28, 1998 of Laidlaw
Environmental, and performed a sensitivity analysis on such pro forma
financial information based upon variable synergy assumptions; (i) reviewed
the historical market prices and trading volume of the Laidlaw Environmental
common stock as well as its stock ownership and analyzed factors which could
influence the trading price of the Laidlaw Environmental common stock on the
anticipated closing date of the Transaction; and (j) performed such other
analyses as William Blair deemed appropriate. We have not had access to and
have not analyzed financial and other information relating to the prospects of
Laidlaw Environmental, including projections.
We have assumed the accuracy and completeness of all such information and
have not attempted to verify independently any of such information, nor have
we made or obtained an independent valuation or appraisal of any of the assets
or liabilities of the Company. With respect to financial information, we have
assumed that it has been reasonably prepared on bases reflecting the best
currently available estimates and judgments of the Company's management, as to
the future financial performance of the Company. We assume no responsibility
for, and express no view as to, such forecasts or the assumptions on which
they are based. With your consent we have, in the rendering of this opinion,
applied certain assumptions as to synergy realization, which assumptions have
been disclosed to you in detail. Our opinion relates to financial fairness
only as of the opinion date, and we
<PAGE>
express no opinion as to the soundness of the financial condition of Laidlaw
Environmental subsequent to the consummation of the Merger. We understand that
other professionals who are expert in those areas will be providing advice on
those subjects. Our opinion is necessarily based solely upon information
available to us and business, market, economic and other conditions as they
exist on, and can be evaluated as of, the date hereof. William Blair's opinion
with respect to the Transaction reflects only limited access to Laidlaw
Environmental management and no access to internal Laidlaw Environmental
projections.
In rendering our opinion, we have assumed that the Transaction will be
consummated on the terms described in the Merger Agreement, without any waiver
of any material terms or conditions by the Company and that obtaining the
necessary regulatory approvals for the Transaction will not have a material
adverse effect on the Company.
William Blair & Company has been engaged in the investment banking business
since 1935. We undertake the valuation of investment securities in connection
with public offerings, private placements, business combinations, estate and
gift tax valuations and similar transactions. For our services, including the
rendering of this opinion, the Company will pay us a fee, a significant
portion of which is contingent upon consummation of the Transaction, and
indemnify us against certain liabilities. William Blair & Company has provided
investment banking and financial advisory services to the Company in the past
for which we have received customary compensation. Edgar D. Jannotta, Sr.,
Senior Director of William Blair & Company, serves as a member of the Board of
Directors of the Company.
Our engagement and the opinion expressed herein are for the benefit of the
Company's Board of Directors. It is understood that this letter may not be
disclosed or otherwise referred to without our prior written consent, except
that this opinion may be included in a Schedule 14D-9 and a proxy statement
mailed to Shareholders of the Company and filed with the Securities and
Exchange Commission with respect to the Transaction.
Based upon and subject to the foregoing, it is our opinion as investment
bankers that, as of March 15, 1998, the consideration to be paid to the
Shareholders of the Company in the Transaction pursuant to the Merger
Agreement is fair, from a financial point of view, to such Shareholders.
Very truly yours,
WILLIAM BLAIR & COMPANY, L.L.C.
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