EXHIBIT 13
FINANCIAL REPORTS
- --------------------------------------------------------------------------------
22 Management's Discussion and Analysis of
Financial Condition and Results of Operations
27 Selected Financial Data
28 Report of Independent Public Accountants
28 Consolidated Statements of Operations
29 Consolidated Balance Sheets
30 Consolidated Statements of
Shareholders' Equity
31 Consolidated Statements of Cash Flows
32 Notes to Consolidated Financial Statements
21
MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
SUMMARY
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 indicated prior period:
Period to Period
Relationship to Increase
Consolidated Revenue (Decrease)
Fiscal Year Fiscal Years
1993 1992 1991 1992-93 1991-92
- ---------------------------------------------------------------
Revenue 100.0% 100.0% 100.0% 0.1% 14.3%
- -------------------------------------------
Costs and Expenses
Operating costs
and expenses 76.1 75.0 71.8 1.7 19.4
Selling and
administrative
expenses 15.0 14.3 14.6 4.9 11.7
Restructuring and
special charges 28.8 - - N/A -
Interest income (0.1) (0.2) (0.3) (36.2) (29.0)
Interest expense 1.4 1.6 1.9 (11.6) (3.4)
- -------------------------------------------
121.2 90.7 88.0 33.8 17.8
- -------------------------------------------
Earnings before
income taxes and
cumulative effect
of changes in
accounting
principles (21.2) 9.3 12.0 (327.0) (10.9)
Income taxes (8.5) 3.6 4.6 (332.3) (8.9)
- -------------------------------------------
Net earnings before
the cumulative
effect of changes
in accounting
principles (12.7%) 5.7% 7.4% (323.5%) (12.1%)
===========================================
In 1987, the Company made two long-term strategic acquisitions to enter the
North American Oil Recovery Service and expand its ability to service large and
small industrial customers' fluid waste disposal needs. Subsequent to these
acquisitions, substantial capital and other infrastructure investments were made
to accommodate future anticipated growth. In 1990, the Company made the
strategic decision to develop and expand its business in Western Europe on a
direct basis. The implementation of this strategy has required investments in
the acquisition of its joint venture partners' interests in operations in
several countries, acquisition of other related businesses and accompanying
infrastructure investments.
In 1991, 1992 and 1993, the Company's net earnings before restructuring and
special charges declined 7%, 12% and 24%, respectively. The 1991 and 1992 net
earnings decline occurred despite revenue growth of 18% and 14%, respectively,
while 1993 revenue was virtually flat with 1992. The cost increases underlying
these earnings declines are the result of the aforementioned strategic and
infrastructure investments made primarily in anticipation of future long-term
growth. The Company has not yet realized the growth it had anticipated from
these investments. The Company has also experienced increases in environmental
compliance costs. In addition, the Company's 1992 earnings were adversely
affected by costly regulatory problems encountered at its Puerto Rico
operations, which are more fully described below.
The Company's revenues have grown at a slower rate than anticipated primarily
because of lowered demand for the Company's services. The Company believes that
the lower demand has been caused by a number of factors including customers'
waste and cost minimization efforts, sluggish economies in North America and
Europe and slower than expected development of the European operations.
The Company has developed, test-marketed and has now begun a conversion of its
parts cleaners to a new parts cleaner service to address the waste minimization
concerns of its customers. The new service employs a premium non-hazardous
solvent and a separation system that extends the life of the solvent used for
cleaning and degreasing. In conjunction with the conversion of its parts
cleaners to new technology and a comprehensive review of its operations, the
Company adopted a restructuring plan in the fourth quarter of 1993, more fully
described below, to address the Company's disappointing 1993 earnings
performance.
In 1992, net earnings declined $6.2 million or 12% (before the cumulative effect
of changes in accounting principles) to $45.3 million. The Company's 1992 net
earnings decline includes a decline in net earnings of $14.7 million from the
Company's Puerto Rico operations. A portion of this decline is attributable to
pre-tax charges totaling approximately $11.4 million ($7.3 million after-tax) to
record the estimated costs to reduce excess storage of hazardous waste fluids to
permitted levels, provide for possible environmental remediation of waste water
discharges and for related penalties. These charges were recorded as a result
of a Company investigation of its Puerto Rico operations, conducted in the third
quarter of 1992, which revealed the storage of hazardous waste in two large,
off-site, unpermitted tanks. Upon discovery of the problem, the Company
reported its findings to the appropriate authorities and commenced a corrective
action program including curtailment of business activities for a period of
approximately twenty days.
In 1992 and 1993, the Company has incurred substantially higher costs than 1991
and prior years to process waste-derived fuel collected from its Puerto Rico
customers. During 1992 and 1993, the local cement kiln outlet, used by the
Company's Puerto Rico operations to burn its waste-derived fuels, has been
unable to do so on a
22
sustained basis, which resulted in excess waste-derived fuel that was shipped to
the U.S. mainland for processing at higher costs. Although the cement kiln in
Puerto Rico is permitted to burn waste-derived fuel under the Boiler and
Industrial Furnace (BIF) regulations on an interim basis, the kiln operation is
having difficulty maintaining the new permit operating parameters, and has also
encountered other operating constraints which have interrupted the burning of
waste-derived fuel. Although the Company increased prices to its customers in
Puerto Rico to cover a portion of the added costs, revenue from the Puerto Rico
operations has declined significantly, as compared to the pre-investigation
level. The reduction in revenue is due primarily to lower volumes received from
customers, including a limitation in the types of waste streams handled.
OTHER TRENDS, EVENTS AND UNCERTAINTIES
While the Company generally benefits from increased governmental regulation, as
a leading environmental services company, it is also the focus of regulatory
scrutiny. The Company has committed significant human and capital resources in
its attempt to ensure its operations are in compliance with all applicable
regulations. The Company's goal is to fully comply with all regulations and thus
avoid any fines or penalties. Nonetheless, given its extensive operations, the
technical aspects of the regulations, and the varying interpretations of the
requirements from jurisdiction to jurisdiction, the Company may incur fines and
penalties from time to time. While the Company does not anticipate that the
amount of fines and penalties 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 by the Company. The Company paid approximately $1.0 million,
$3.0 million and $2.0 million in 1993, 1992 and 1991, respectively, for
environmental fines and penalties.
State and local authorities are increasingly adopting legislation and
regulations which impose various taxes, assessments and fees upon the
generators, transporters and handlers of waste and hazardous waste. The Company
may or may not be able to pass on such taxes and fees to its customers through
price increases, depending on competitive alternatives.
In May, 1993, U.S. EPA Administrator, Carol Browner, announced an initiative to
bring existing hazardous waste incinerators and industrial furnaces under the
control of facility specific permits. In this announcement, the Agency made it
clear that facilities awaiting permits, such as cement kilns, would be among the
first priorities to be permitted. This permitting initiative will involve
tighter scrutiny of these kilns and may require more stringent performance
standards. It is possible that data generated during the permit process in 1994
may provide sufficient information for decisions to be made regarding continued
use of hazardous waste-derived fuels by certain cement kilns in the U.S. It is,
therefore, anticipated that a certain percentage of the cement kilns presently
burning hazardous waste derived fuels will need to make significant investments
to achieve permit compliance or may decide to cease the practice of using these
fuels.
The Company produces waste-derived fuel primarily from its Envirosystems and
Fluid Recovery Services. The waste-derived fuel is supplied to cement kilns as
an alternative fuel source. Most of the waste-derived fuel is supplied to cement
plants with which the Company has exclusive contracts to provide the waste-
derived fuel. Due to the BIF regulations, these cement plants, as well as the
others that burn waste-derived fuel, are incurring higher costs. As a result of
these increased costs, the owners of the cement plants with which the Company
has exclusive contracts, are demanding increased prices to burn the waste-
derived fuel supplied by the Company. The Company is currently engaged in
discussions to resolve the owners' demands. It is likely that as a result of
these discussions, the Company will incur increased charges to burn waste-
derived fuel.
The cement kiln used by the Company's Puerto Rico operation has completed
certain tests required under BIF regulations to obtain a Part B permit to burn
waste-derived fuel. The test results have been submitted to the EPA for its
evaluation and final determination. The EPA has issued Notice of Deficiencies to
which the Company and the cement kiln operator are responding.
EFFECTS OF PETROLEUM PRODUCT PRICE CHANGES
Through its Oil Recovery operations, the Company re-refines and markets
petroleum based products at prices positively correlated to crude oil prices
over the long-term. The Company's various service operations also consume
petroleum based products, the cost of which are positively correlated to crude
oil prices over the long-term. Consequently, any meaningful increase or decrease
in crude oil prices will have both positive and negative effects on earnings.
Generally, the Company's earnings are positively affected by higher crude oil
prices and are negatively affected by lower crude oil prices. The speed at which
the Company is able to raise prices on its Parts Cleaner Service (and some re-
refined lubricating oil products) is restricted somewhat by committed price
contracts.
23
LIQUIDITY AND CAPITAL RESOURCES
Capital spending in 1993, 1992 and 1991 for additions of equipment at customers
and property, excluding business acquisitions, totaled $96 million, $143 million
and $168 million, respectively. To implement its strategy to develope its
business in Europe directly, the Company expended an additional $19 million and
$42 million in 1992 and 1991, respectively, for business acquisitions in the
major Western European markets. These capital expenditures and acquisitions were
financed primarily by cash from operations and long-term debt. Long-term debt
decreased $12 million in 1993. In 1992, long-term debt increased by $57 million.
The Company expects to finance its 1994 capital expenditures entirely through
internally generated funds. In 1994, the Company expects that its long-term debt
as a percentage of total capital will decline from the 44% at January 1, 1994.
As more fully described in Note 5 to the Consolidated Financial Statements, the
Company and its subsidiaries have lines of credit aggregating approximately $370
million. As of January 1, 1994, total borrowings under these lines were $182
million. The Company expects its capital expenditures for equipment at customers
and property additions for the full year 1994 will be less than $100 million.
The Company does intend to lease equipment and property to a greater extent than
it has in the recent past.
A portion of the Company's capital expenditures are, directly or indirectly,
related to the protection of the environment and the prevention of discharge of
waste materials into the environment. Estimated capital expenditures relating to
compliance with current environmental laws and regulations in the Company's
existing business, approximate $3.7 million for 1994 and $10.5 million for the
years 1995 through 1998. In the fourth interim period of 1993, the Company
recorded restructuring and special charges of $136 million net, ($229 million
pre-tax) or $2.36 per share. For a discussion of the effects of these charges on
cash flows, refer to the section on page 26, entitled "Restructuring and Special
Charges".
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 1, 1994, are presented below:
Percentage
Increase (Decrease)
(Expressed in thousands) Fiscal Years
1993 1992 1991 1992-93 1991-92
________________________________________________________________________________
North America
Automotive/Retail
Repair Services $248,700 $251,069 $235,625 (1%) 7%
Industrial Services 212,940 197,270 163,920 8% 20%
Oil Recovery
Services 113,277 114,671 95,568 (1%) 20%
Other Service Areas 141,117 150,261 141,438 (6%) 6%
____________________________________________________________
Total North America 716,034 713,271 636,551 0% 12%
Europe 79,474 81,271 58,450 (2%) 39%
____________________________________________________________
Consolidated $795,508 $794,542 $695,001 0% 14%
____________________________________________________________
____________________________________________________________
NORTH AMERICA: The 1993 revenue decline of the Company's North American
Automotive/Retail Repair Service was due entirely to an 8% decline in service
volumes, partially offset by service charges which averaged 7% higher in 1993
than 1992. The 1993 service volume decline is primarily a result of lengthening
in the average time interval between services and a decline in parts cleaner
machines in service. Revenue growth of the Company's North American
Automotive/Retail Repair Service in 1992 was due primarily to increased prices
of the Parts Cleaner Service. The Parts Cleaner Service volumes declined in
1992 primarily as a result of lengthening in the average time interval between
services, partially offsetting the favorable effect of increased prices.
The Company's North American Industrial Services include revenues from the Fluid
Recovery Service of $96.8 million in 1993, $85.0 million in 1992, and $66.6
million in 1991. The 14% and 28% revenue increases in the Industrial Fluid
Recovery Service in 1993 and 1992, respectively, were due primarily to increased
volume. North American Industrial Services include revenue from the Industrial
Parts Cleaner Service of $116.1 million in 1993, $112.2 million in 1992 and
$97.3 million in 1991. Revenue growth of the Industrial Parts Cleaner Service
in 1993 was primarily due to increased prices. The Parts Cleaner
Service volumes declined 5% in 1993 primarily as a result of lengthening in the
average time interval between services, partially offsetting the favorable
effect of increased prices. Approximately 34% of the 1992 increased revenue from
the Industrial Parts Cleaner Service was due to volume, with the balance due to
increased prices.
The 1993 revenue decline reported by the North American Oil Recovery Services
was primarily due to lower prices realized in 1993 for sales of re-refined
lubricating oil and
24
collection of used oil. Partially offsetting the negative effect of lower
prices, was a shift in sales mix from lower value industrial fuel to higher
value re-refined lubricating oil which was enabled by a 12% and 50% expansion of
the Company's East Chicago, Indiana, re-refinery in 1993 and 1992, respectively.
The revenue growth realized in 1992 by North American Oil Recovery Services was
due primarily to a shift in sales mix from lower value industrial fuel to higher
value re-refined lubricating oil. In May, 1991, the Company started up a new oil
re-refining plant in East Chicago, Indiana. In addition, the collection revenues
in 1992 increased due to a 14% increase in the volume of used oil collected.
EUROPE: The European revenue decline in 1993 was attributable to weaker
European currencies, which lowered 1993 revenue by approximately $9.0 million.
Exclusive of the change in exchange rates, European revenue increased nearly 9%.
Approximately 50% of this 1993 revenue increase is attributable to the
acquisition of the Company's joint venture partner's 50% interest in the Spanish
Joint Venture completed in September, 1992. The remaining 1993 increase in
European revenue is a result of volume growth in France and Italy and
approximately 3% higher prices charged for European parts cleaner services in
1993 than 1992. Prior to 1990, the Company's consolidated European operations
consisted of its wholly-owned subsidiary in the United Kingdom and a small
operation in the Republic of Ireland. During 1990 and 1992 the Company made a
series of acquisitions which included Germany's largest solvent recycler, two
German parts cleaner service companies and the Company's joint venture partner's
interests in the Belgian, French, Italian and Spanish parts cleaner operations.
Approximately 70% of the 1992 revenue growth realized by the Company's European
operations was derived from the acquired European operations.
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 three fiscal years in the period ended January 1, 1994.
- -------------------------------------------------------------------------------
Gross Profit Margin
- -------------------------------------------------------------------------------
1993 1992 1991
- -------------------------------------------------------------------------------
North America
Automotive/Retail
Repair Services 31% 36% 37%
Industrial Services 33% 33% 34%
Oil Recovery Services 8% 9% 5%
Other Service Areas 12% 8% 22%
Total North America 24% 25% 28%
Europe 22% 24% 29%
Consolidated 24% 25% 28%
The North American gross margins in 1993 and 1992 were adversely affected by
expansion costs incurred in anticipation of growth in demand for the Company's
services that was not fully realized in either year. In addition, the Company
incurred higher costs in 1993 and 1992 for environmental compliance in its
branch, distribution and recycling network. These higher fixed expansion and
environmental compliance costs affected all of the North American services
except for Oil Recovery Services, in varying degrees. These costs have been
especially adverse on the Automotive/Retail Repair Service gross margin because
of the decline in service volumes and corresponding effect on revenue.
The 1993 decline in gross profitability of the Company's Oil Recovery Services
is primarily due to lower prices realized in 1993 for sales of lubricating oil
and the collection of used oil. In 1993 and 1992, the Company's re-refining
volume was near available capacity.
The 1993 improvement in North America Other Service Areas gross profitability is
primarily due to a $10.5 million reduction in 1993 from 1992 in the gross loss
of the Company's Puerto Rico Envirosystems Operations. This improvement in the
Puerto Rico operations is attributable to the costly 1992 regulatory problems
discussed earlier. Partially offsetting the favorable effects of the Puerto
Rico operations are $2.2 million higher costs incurred in 1993 than 1992 by the
Company's U.S. Envirosystems operations for alternative waste fuel processing
costs. These higher fuel processing costs are the result of regulatory
constraints on cement kilns which serve as the Company's primary outlet for
waste fuels.
The 1993 decline in Europe's gross profit margin from 1992 is due primarily to
increased costs coupled with weak volume and revenue growth realized by the
Company's UK and German parts cleaner service operations.
The Company's North American 1992 gross profitability was adversely affected by
certain environmental regulatory and compliance costs incurred. 1992 gross
profits from the Other Service Areas reflect a $19.8 million decline in the
gross profits from the Company's Puerto Rico operations. This decline stems from
the regulatory problems discussed earlier. Gross profits of Other Service Areas
were also adversely effected by a $2.0 million charge to settle a dispute with
the State of Kentucky regarding hazardous waste fees and penalties for alleged
violations.
Underlying the 1992 improvement in the Oil Recovery Services gross margin was a
greater sales mix of higher value lubricating oil and a 14% increase in used oil
gallons collected.
The decline in the Company's European gross profitability in 1992 was primarily
due to the German and the United Kingdom operations which were adversely
affected by weak economic activity. In addition, the Company incurred some
redundant costs and other costs in connection with its acquisition in Germany.
25
SELLING AND ADMINISTRATIVE EXPENSES: Selling and administrative expenses
increased 5% in 1993, representing a significant slow down in the growth of
these expenses. Selling and administrative expenses increased at a slower rate
than revenue in 1992. The dollar increases in selling and administrative
expenses in both years were primarily due to additional employees and employee
expenses and increases in compensation and benefits.
RESTRUCTURING AND SPECIAL CHARGES: During the fourth interim period of 1993 the
Company adopted a restructuring plan based upon the decision to convert its core
Parts Cleaner Service to new technology and other strategic actions to better
focus the Company on its core environmental services, reduce its current cost
structure and improve the value of its services to its customers. 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 of $179 million includes $93 million of asset write-downs
and $86 million of other restructuring charges. The after-tax restructuring
charges of $106 million includes an estimated $34 million of costs that will
require cash outflows after 1994 and $72 million of non-cash items.
The Company developed the restructuring plan in response to its poor operating
results during 1993. A major factor in the Company's earnings performance in
1993 is the lack of growth in its core Parts Cleaner Service coupled with higher
expansion and environmental compliance costs. The Company believes that the
lack of growth in its core Parts Cleaner Services in 1993 was due to a number of
factors, including customers' desires to minimize hazardous waste generation
and/or reduce costs, as well as the sluggish economy. Based upon the Company's
test marketing, the Company believes that the new parts cleaner service it has
developed responds to the changing needs of the marketplace. The new parts
cleaner extends the life of the solvent and reduces the number of annual
services required. As a result, the customer generates less waste and the
annual cost of the service is less. The Company has priced the service such
that the customer, on an annual basis, will pay approximately 10% less than he
currently pays for the standard parts cleaner service. However, since the unit
is serviced less frequently, the Company's annual service cost is also lower.
If the customer uses the recommended service intervals, the Company expects its
annual gross profit margins on the new service will be higher than on the
existing service.
As part of the restructuring plan, the Company has provided for the write-down
of the cost of parts cleaner machines expected to be replaced with the new parts
cleaners, as well as the cost of converting the customers to the new service.
The Company plans a major effort to convert a large portion of its current parts
cleaner service customers to the new parts cleaner service over the next two to
three years. This new service has been well received in test markets and the
Company believes it will result in better customer retention and market
penetration.
The anticipated conversion of a large portion of the Company's parts cleaners to
the new technology will reduce the amount of solvent recycling capacity
required. Accordingly, the restructuring charge includes a write-down of
recycling capacity.
With the anticipated future collection of less spent solvent from the Company's
parts cleaner service, the Company plans to convert many of its branch permitted
hazardous waste storage facilities to transfer locations, eliminating the need
for permits required under the Resource Conservation and Recovery Act (RCRA),
thus reducing unnecessary operating costs driven by RCRA-imposed requirements.
The non-cash restructuring charge includes the write-off of the capitalized cost
of the permits at the affected facilities.
Other elements of the restructuring plan include the following:
. a work force reduction of approximately 375 jobs and payment of severance
benefits,
. a write-down of inventories and other assets for discontinuing certain
minor business activities, including the sale of Allied Products, that are
not essential to providing customers with quality environmental services,
and
. accrual of costs and asset write-downs related to the curtailment or sale
of certain operations.
In addition to the restructuring charges, the Company recorded a $50 million
special charge ($30 million after-tax or $0.52 per share) representing a change
in estimate for remediation costs. These additional remediation costs have been
estimated prior to conducting detailed individual site investigations to
ascertain the existence and extent of contamination, and are related to all
operating and previously closed sites. The Company expects the expenditures for
these remediation costs will occur over several years beginning with 1995.
The Company expects a net earnings benefit in 1994 in the range of $12 million
to $15 million as a direct result of cost reductions and other actions resulting
from the restructuring plan and the accounting change. This does not include
the impact of potential higher margins from the Company's new parts cleaner
service.
26
INTEREST INCOME: The $480,000 and $542,000 declines in interest income in 1993
and 1992 are due primarily to lower interest rates.
INTEREST EXPENSE: Interest expense decreased $1,460,000 and $446,000 in 1993
and 1992, respectively, due to lower interest rates. Interest expense excludes
$4,513,000 and $5,168,000 of interest capitalized during 1993 and 1992,
respectively.
INCOME TAXES: The effective income tax rate was 40% in 1993, 39% in 1992 and
38% in 1991. The increase in the effective tax rate in 1993 is primarily due to
an increase in the U.S. statutory income tax rate. The increase in the
effective tax rate in 1992 was primarily due to the absence of low-taxed income
from the Company's Puerto Rico operations in 1992.
ACCOUNTING CHANGES: The Company adopted Statement of Financial Accounting
Standards (SFAS) No. 112 on accounting for post-employment benefits in fiscal
year 1993. The effect of adopting this accounting change was not material. The
Company adopted SFAS No. 106 on accounting for post-retirement benefits and SFAS
No. 109 on accounting for income taxes in fiscal year 1992. The cumulative
prior years' effect of SFAS No. 106 reduced net earnings by $2.9 million, or
five cents per share. The cumulative prior years' effect of SFAS No. 109
increased net earnings by $3.2 million, or six cents per share. The effects of
adopting SFAS Nos. 106 and 109 are more fully discussed in Notes 7 and 8 to the
Consolidated Financial Statements.
SELECTED FINANCIAL DATA
FISCAL YEAR /1/
- ----------------------------------------------------------------------------------------
1993 1992/4/ 1991 1990 1989
- ----------------------------------------------------------------------------------------
(Expressed in thousands, except per share amounts)
STATEMENT OF OPERATIONS DATA
- ----------------------------------------------------------------------------------------
Revenue $ 795,508 $ 794,542 $695,001 $588,987 $478,117
Net earnings (loss) (101,346)/2/ 45,637/3/ 51,551 55,198 45,987
Earnings (loss) per share (1.76)/2/ 0.79/3/ 0.90 1.05 0.91
Cash dividends per share 0.360 0.340 0.320 0.267 0.240
BALANCE SHEET DATA
- ----------------------------------------------------------------------------------------
Current assets 193,724 188,717 182,275 169,772 139,143
Current liabilities 149,415 140,988 128,156 102,720 82,040
Working capital 44,309 47,729 54,119 67,052 57,103
Total assets 995,378 1,006,446 903,824 718,548 538,002
Long-term debt 288,633 300,724 243,724 122,158 138,406
Shareholders' equity 362,664 492,095 463,621 429,833 260,630
- ----------------------------------------------------------------------------------------
/1/ The per share data has been restated to reflect stock splits.
/2/ Includes restructuring and special charges, net of tax benefit, of $136
million ($229 million pre-tax) or $2.36 per share.
/3/ Includes $300,000 ($.01 per share) increase in net earnings from net
cumulative prior years effect of adopting Statement of Financial Accounting
Standards (SFAS) No. 106 on accounting for post-retirement benefits and
SFAS No. 109 on accounting for income taxes.
/4/ Fiscal year 1992 was a fifty-three week year. All other years presented
were fifty-two week.
27
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 1, 1994, and
January 2, 1993, and the related consolidated statements of operations,
shareholders' equity and cash flows for each of the three fiscal years in the
period ended January 1, 1994. 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 1, 1994, and January 2, 1993, and the results of
their operations and their cash flows for each of the three fiscal years in the
period ended January 1, 1994, in conformity with generally accepted accounting
principles.
As discussed in Notes 7 and 8 to the consolidated financial statements,
effective December 29, 1991, the Company changed its methods of accounting for
post-retirement benefits other than pensions and income taxes.
Chicago, Illinois, Arthur Andersen & Co.
February 10, 1994
CONSOLIDATED
STATEMENTS OF OPERATIONS
Safety-Kleen Corp. and Subsidiaries
For The Years Ended January 1, 1994, January 2, 1993 and December 28,1991
Fiscal Year
- -------------------------------------------------------------------------------------------------------------
1993 1992 1991
- -------------------------------------------------------------------------------------------------------------
(Expressed in thousands, except per share amounts)
REVENUE $ 795,508 $794,542 $695,001
- -------------------------------------------------------------------------------------------------------------
COSTS AND EXPENSES
Operating costs and expenses 605,815 595,572 498,911
Selling and administrative expenses 119,037 113,433 101,592
Restructuring and special charges 229,000 - -
Interest income (846) (1,326) (1,868)
Interest expense 11,111 12,571 13,017
- -------------------------------------------------------------------------------------------------------------
964,117 720,250 611,652
- -------------------------------------------------------------------------------------------------------------
EARNINGS (LOSS) BEFORE INCOME TAXES AND CUMULATIVE
EFFECT OF CHANGES IN ACCOUNTING PRINCIPLES (168,609) 74,292 83,349
INCOME TAXES (67,263) 28,955 31,798
- -------------------------------------------------------------------------------------------------------------
NET EARNINGS (LOSS) BEFORE CUMULATIVE EFFECT
OF CHANGES IN ACCOUNTING PRINCIPLES (101,346) 45,337 51,551
CUMULATIVE EFFECT OF CHANGES IN ACCOUNTING
PRINCIPLES - 300 -
- -------------------------------------------------------------------------------------------------------------
NET EARNINGS (LOSS) $(101,346) $ 45,637 $ 51,551
- -------------------------------------------------------------------------------------------------------------
EARNINGS (LOSS) PER COMMON AND COMMON
EQUIVALENT SHARE
Earnings (loss) before cumulative effect of changes in
accounting principles $ (1.76) $ 0.78 $ 0.90
Cumulative effect of changes in accounting principles - 0.01 -
- -------------------------------------------------------------------------------------------------------------
EARNINGS (LOSS) PER SHARE $ (1.76) $ 0.79 $ 0.90
- -------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
28
CONSOLIDATED BALANCE SHEETS
Safety-Kleen Corp. and Subsidiaries
As of January 1, 1994 and January 2, 1993
JANUARY 1, 1994 JANUARY 2, 1993
- -------------------------------------------------------------------------------------------------------------------
ASSETS (Expressed in thousands)
- -------------------------------------------------------------------------------------------------------------------
CURRENT ASSETS
Cash and cash equivalents $ 17,375 $ 30,565
Trade accounts receivable, less allowances of $8,432 and $7,399, respectively 98,678 100,013
Refundable taxes 19,500 802
Inventories 34,362 37,913
Prepaid taxes 10,527 8,410
Prepaid expenses and other 13,282 11,014
- -------------------------------------------------------------------------------------------------------------------
193,724 188,717
- -------------------------------------------------------------------------------------------------------------------
EQUIPMENT AT CUSTOMERS AND COMPONENTS, AT COST, LESS
Accumulated Depreciation of $30,922 and $32,711, respectively 63,026 80,412
- -------------------------------------------------------------------------------------------------------------------
PROPERTY, AT COST
Land 46,651 44,815
Buildings and improvements 223,081 210,954
Leasehold improvements 29,274 29,949
Machinery and equipment 341,994 359,883
Autos and trucks 146,190 142,955
- -------------------------------------------------------------------------------------------------------------------
787,190 788,556
Less accumulated depreciation and amortization 233,971 203,599
- -------------------------------------------------------------------------------------------------------------------
553,219 584,957
- -------------------------------------------------------------------------------------------------------------------
INTANGIBLE ASSETS, AT COST
Goodwill 80,913 86,756
Other 63,055 68,663
- -------------------------------------------------------------------------------------------------------------------
143,968 155,419
Less accumulated amortization 37,254 27,884
- -------------------------------------------------------------------------------------------------------------------
106,714 127,535
- -------------------------------------------------------------------------------------------------------------------
OTHER ASSETS
Prepaid taxes, net 72,194 17,244
Other 6,501 7,581
- -------------------------------------------------------------------------------------------------------------------
78,695 24,825
- -------------------------------------------------------------------------------------------------------------------
$995,378 $1,006,446
===================================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
- -------------------------------------------------------------------------------------------------------------------
CURRENT LIABILITIES
Current portion of long-term debt $ 888 $ 429
Trade accounts payable 58,417 59,895
Accrued salaries, wages and employee benefits 20,988 21,380
Other accrued expenses 46,033 45,142
Restructure liability 21,742 -
Income taxes payable 1,347 14,142
- -------------------------------------------------------------------------------------------------------------------
149,415 140,988
- -------------------------------------------------------------------------------------------------------------------
LONG-TERM DEBT, LESS CURRENT PORTION 288,633 300,724
- -------------------------------------------------------------------------------------------------------------------
DEFERRED INCOME TAXES 61,540 58,845
- -------------------------------------------------------------------------------------------------------------------
RESTRUCTURE LIABILITY 62,431 -
- -------------------------------------------------------------------------------------------------------------------
OTHER LIABILITIES 70,695 13,794
- -------------------------------------------------------------------------------------------------------------------
COMMITMENTS AND CONTINGENT LIABILITIES (NOTE 9)
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 57,683,756 shares and 57,668,498 shares, respectively 5,768 5,767
Additional paid-in capital 183,612 183,286
Retained earnings 194,261 316,374
Cumulative translation adjustments (20,977) (13,332)
- -------------------------------------------------------------------------------------------------------------------
362,664 492,095
- -------------------------------------------------------------------------------------------------------------------
$995,378 $1,006,446
===================================================================================================================
The accompanying notes are an integral part of these financial statements.
29
CONSOLIDATED STATEMENTS
OF SHAREHOLDERS' EQUITY
Safety-Kleen Corp. and Subsidiaries
For The Years Ended January 1, 1994, January 2, 1993 and December 28, 1991
TOTAL COMMON ADDITIONAL CUMULATIVE
SHAREHOLDERS' STOCK $.10 PAID-IN RETAINED TRANSLATION
EQUITY PAR VALUE CAPITAL EARNINGS ADJUSTMENTS
- -----------------------------------------------------------------------------------------------
(Expressed in thousands)
Balance at December 29, 1990 $ 429,833 $5,672 $161,487 $ 256,937 $ 5,737
Net earnings 51,551 - - 51,551 -
Cash dividends (18,195) - - (18,195) -
Stock options exercised and
related tax benefits 3,973 23 3,950 - -
Change in cumulative
translation adjustments (3,541) - - - (3,541)
- -----------------------------------------------------------------------------------------------
Balance at December 28, 1991 463,621 5,695 165,437 290,293 2,196
Net earnings 45,637 - - 45,637 -
Cash dividends (19,556) - - (19,556) -
Stock options exercised and
related tax benefits 6,118 27 6,091 - -
Stock issued for businesses
acquired 11,803 45 11,758 - -
Change in cumulative
translation adjustments (15,528) - - - (15,528)
- -----------------------------------------------------------------------------------------------
Balance at January 2, 1993 492,095 5,767 183,286 316,374 (13,332)
Net (loss) (101,346) - - (101,346) -
Cash dividends (20,767) - - (20,767) -
Stock options exercised and
related tax benefits 327 1 326 - -
Change in cumulative
translation adjustments (7,645) - - - (7,645)
Balance at January 1, 1994 $362,664 $5,768 $183,612 $ 194,261 $(20,977)
===============================================================================================
The accompanying notes are an integral part of these financial statements.
30
CONSOLIDATED STATEMENTS OF CASH FLOWS
Safety-Kleen Corp. and Subsidiaries
For The Years Ended January 1, 1994, January 2, 1993 and December 28, 1991
FISCAL YEAR
- --------------------------------------------------------------------------------------------------------
1993 1992 1991
- --------------------------------------------------------------------------------------------------------
Cash flows from operating activities:
Net earnings (loss) $(101,346) $ 45,637 $ 51,551
- --------------------------------------------------------------------------------------------------------
Adjustments to reconcile net earnings to net cash provided
by operating activities
Depreciation of equipment at customers and property 65,808 63,714 51,235
Amortization of intangible and other assets 15,673 12,011 9,068
Provisions for doubtful accounts receivable 6,822 7,053 6,921
Change in deferred income tax assets and liabilities, net (85,856) (5,193) 3,820
Write-down of non-current assets due to restructuring 88,028 - -
Other 10,332 8,812 3,219
(Increase) Decrease in assets,
net of effects from business acquisitions:
Short term investments - - 2,833
Trade accounts receivable (4,601) (3,323) (17,492)
Inventories 3,800 4,009 (6,860)
Prepaid expenses and other (2,205) (121) (255)
Increase (Decrease) in liabilities,
net of effects from business acquisitions:
Trade accounts payable and accrued expenses (1,312) 15,265 (2,409)
Restructure reserve 84,173 - -
Other liabilities 56,901 1,543 (718)
- --------------------------------------------------------------------------------------------------------
Total adjustments 237,563 103,770 49,362
- --------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 136,217 149,407 100,913
- --------------------------------------------------------------------------------------------------------
Cash flows used in investing activities:
Equipment at customers additions (20,846) (15,361) (20,904)
Property additions (74,991) (128,127) (147,589)
Payment for business acquisitions, net of cash acquired (2,414) (4,928) (46,137)
Other assets additions, net (18,557) (16,594) (8,697)
- --------------------------------------------------------------------------------------------------------
Net cash used in investing activities (116,808) (165,010) (223,327)
- --------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Net borrowings (payments) under line-of-credit agreements (11,634) 40,655 126,124
Proceeds from stock option exercises 326 6,089 3,899
Cash paid for dividends (20,767) (19,556) (18,195)
- --------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities (32,075) 27,188 111,828
- --------------------------------------------------------------------------------------------------------
Effect of exchange rate changes on cash (524) (1,003) 175
- --------------------------------------------------------------------------------------------------------
Increase (Decrease) in cash and cash equivalents (13,190) 10,582 (10,411)
- --------------------------------------------------------------------------------------------------------
Cash and cash equivalents at beginning of year 30,565 19,983 30,394
- --------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 17,375 $ 30,565 $ 19,983
========================================================================================================
- --------------------------------------------------------------------------------------------------------
Supplemental Information:
- --------------------------------------------------------------------------------------------------------
Cash paid during the year for:
Interest (net of amount capitalized) $ 10,375 $ 13,053 $ 12,205
Income taxes $ 18,603 $ 33,556 $ 28,639
- --------------------------------------------------------------------------------------------------------
Consideration given up and liabilities
assumed in business acquisitions $ 4,823 $ 30,630 $ 68,894
========================================================================================================
The accompanying notes are an integral part of these financial statements.
31
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Safety-Kleen Corp. and Subsidiaries
1 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 1992 has fifty-three weeks while fiscal years 1993
and 1991 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 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. Depreciation is
computed principally using the straight-line method.
Intangible Assets and Related Amortization
Goodwill consists primarily of the cost of acquired businesses in excess of
market value of net assets acquired. Other intangible assets consist primarily
of costs to obtain customers, regulatory operating permits and computer
software. Goodwill is amortized using the straight-line method over 40 years.
Amortization of other intangible assets is computed using the straight-line
method over the expected life of the related intangible asset, which principally
ranges from 3 years to 15 years.
Environmental Remediation Costs and Liabilities
In 1993 the Company recorded a $50 million pre-tax charge 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. The Company reviews the adequacy of
its liability for environmental remediation on a periodic basis and records
additional costs and liabilities accordingly.
Earnings (Loss) Per Share
Earnings (loss) per share amounts are based on the average shares of common
stock outstanding during each year and common stock equivalents of stock
options, if dilutive.
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.
Reclassifications
Certain prior year amounts have been reclassified to be consistent with current
year presentation.
2 ACQUISITIONS
All acquisitions made during the three fiscal years ended January 1, 1994 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.
3 SEGMENT INFORMATION
The Company and its subsidiaries operate in the United States, the Commonwealth
of Puerto Rico, Canada and in seven European countries consisting of the United
Kingdom, the Republic of Ireland, France, Belgium, Italy, Germany, and Spain.
The Company also operated in Portugal during 1991 and 1992. Spain and Portugal
were operated as fifty percent owned joint ventures until
32
September of 1992. In September of 1992, the Spanish Joint Venture became a
wholly-owned subsidiary of the Company and the Company sold its interest in the
Portuguese Joint Venture. A summary of certain data with respect to these
operations for the fiscal years ended January 1, 1994, January 2, 1993 and
December 28, 1991, is presented below.
1993 1992 1991
- ------------------------------------------------------------------
(Expressed in thousands)
- ------------------------------------------------------------------
REVENUE
United States and Puerto Rico $ 665,592 $ 656,266 $571,925
Canada 50,442 57,003 64,626
Europe 79,474 81,273 58,450
- ------------------------------------------------------------------
Consolidated $ 795,508 $ 794,542 $695,001
==================================================================
TOTAL ASSETS
United States and Puerto Rico $ 770,389 $ 785,737 $711,082
Canada 76,763 70,383 72,669
Europe 148,226 150,326 120,073
- ------------------------------------------------------------------
Consolidated $ 995,378 $1,006,446 $903,824
==================================================================
NET EARNINGS (LOSS) BEFORE
CUMULATIVE EFFECT OF CHANGE
IN ACCOUNTING PRINCIPLES
United States and Puerto Rico $ (84,454) $ 43,221 $ 49,779
Canada (4,693) 3,214 3,652
Europe (12,199) (1,098) (1,880)
- ------------------------------------------------------------------
Consolidated $(101,346) $ 45,337 $ 51,551
==================================================================
CUMULATIVE EFFECT OF CHANGE
IN ACCOUNTING PRINCIPLES
United States and Puerto Rico $ - $ (1,786) $ -
Canada - - -
Europe - 2,086 -
- ------------------------------------------------------------------
Consolidated $ - $ 300 $ -
==================================================================
NET EARNINGS (LOSS)
United States and Puerto Rico $ (84,454) $ 41,435 $ 49,779
Canada (4,693) 3,214 3,652
Europe (12,199) 988 (1,880)
- ------------------------------------------------------------------
Consolidated $(101,346) $ 45,637 $ 51,551
==================================================================
The Company operates primarily in one business segment providing generators of
hazardous and non-hazardous liquid wastes with liquid recovery services.
4 INVENTORIES
The Company's inventories consist primarily of solvent, oil, allied products
(carried at lower of cost or market), and supplies. LIFO inventories at January
1, 1994 and January 2, 1993, were $4.7 million and $8.0 million, respectively.
Under the FIFO method of accounting (which approximates current or replacement
cost) inventories would have been $1.8 million and $4.5 million higher,
respectively.
5 FINANCIAL ARRANGEMENTS AND LONG-TERM DEBT
Long-term debt consisted of the following:
JANUARY 1, JANUARY 2,
1994 1993
- ------------------------------------------------------------
(Expressed in thousands)
- ------------------------------------------------------------
9.25% Senior Notes due in 1999 $100,000 $100,000
Unsecured notes payable to banks
under financing agreements:
Revolving lines of credit 120,576 113,387
Uncommitted lines of credit 61,557 78,146
Other 7,388 9,620
- ------------------------------------------------------------
289,521 301,153
Less-current portion 888 429
- ------------------------------------------------------------
Total long-term debt $288,633 $300,724
============================================================
The long-term debt as of January 1, 1994 is due as follows:
In thousands
- ------------------------------------------------------------
1995 $ 43,140
1996 $ 15
1997 $143,759
1998 $ 869
1999 and thereafter $100,850
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 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 expires in
September, 1996. The effect of these swaps reduces the interest rate on the
Notes from 9.25% to 7.08% through September, 1996. At that time the interest
reverts to a variable rate. The variable rate is based on the U.S. Dollar
London Interbank Offered Rate (LIBOR) determined at 6-month intervals.
Subsequent to January 1, 1994, the Company intends to combine its existing $100
million revolving credit term loan facility and its $80 million revolving credit
facility into one revolving credit agreement. The existing agreements provide
for interest rates to be determined at the time of borrowing based on a choice
of formulas as specified in
33
the agreements. A facility fee based on the Company's credit ratings is paid on
the total amount of the lines of credit. At January 1, 1994, $75 million of
borrowings were outstanding at an average interest rate of 3.5%.
At January 1, 1994, the Company had uncommitted lines of credit totalling $130
million. Borrowings under these lines were $62 million at an average interest
rate of 3.5%.
The Company has the ability to convert other bank borrowings to its revolving
credit facilities. Since the committed facilities extend beyond 1994 and the
Company intends to renew these obligations, $143 million of the loans payable to
banks have been classfied as long-term debt.
The Company's German subsidiary has two revolving credit agreements totalling 91
million Deutschmarks (U.S. $52 million) that extend credit until June, 1995. The
interest rate determined at the time of each borrowing is LIBOR plus 0.5%. A
commitment fee of 0.125% per annum is paid quarterly on the unused portion of
the facility. At January 1, 1994, 74 million Deutschmarks ($43 million U.S.) of
borrowings were outstanding under these facilities at an average interest rate
of 6.5% (prior to the effect of the interest rate swap described below).
In May, 1992, the Company's German subsidiary executed an interest rate swap
agreement which expires in May, 1997. The interest rate on DM 70 million (U.S.
$40 million) was swapped from rates based on 6-month DM LIBOR to rates based on
6-month U.S. Dollar LIBOR. At January 1, 1994, the effective interest rate was
5.9%.
The interest rate swap agreements have been entered into with major financial
institutions which are expected to fully perform under the terms of the
agreements. The Company monitors the credit ratings of these counterparties and
considers the risk of default to be remote.
At January 1, 1994, the fair value of the three swap agreements noted above was
approximately $2.7 million less than the Company's carrying value. 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 $6.7 million since their inception.
The Company's credit agreements include provisions, among others, relative to
maintenance of working capital and interest coverage ratios. The Company has
obtained waivers of the interest coverage ratio requirement for the fourth
interim period, 1993. The noncompliance was a result of the restructuring and
special charges that the Company recorded in 1993 and is more fully described in
Note 10 to the Consolidated Financial Statements. The Company expects to be in
compliance with all loan provisions as of the next reporting period.
6 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 Split
In March, 1991, the Company effected a three-for-two stock split recorded in the
form of a stock dividend. All references to the number of common share and per
common share amounts below have been restated to reflect the split.
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")
Under the Option Plans, options to purchase up to 5,937,500 shares (of which
2,750,000 shares were authorized under the 1993 Stock Option Plan) 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 Option Plans 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.
Incentive Options, Non-Qualified Options and SARs become exercisable at such
time or times, and are subject to such conditions, as determined at the time
of grant by the Compensation Committee of the Board of Directors.
34
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, options to purchase 15,000 shares were automatically granted effective
February 5, 1988, to each of the seven outside Directors serving on the board at
that date. Any new outside Director elected or appointed after February 5,
1988, would also be 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 the initial grant of options to such Director if such
Director is still serving on the Board at that time. Options are exercisable
25% annually, on a cumulative basis, starting one year from date of grant and
terminating ten years after the grant date.
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 quoted market price for the date preceding the
date of grant. Employees with less than six months of service or who hold
options under the Option Plans are not eligible to participate in this Plan.
A summary of the status of the Company's stock option plans for the three fiscal
years ended January 1, 1994, is presented below.
Available
Price for Future
Shares Range Exercisable Grants
- -----------------------------------------------------------------------
Outstanding Options
@ 12/29/90 1,825,701 $15.55-$27.42 630,005 2,722,518
1991 Activity:
Granted 518,814 $23.85-$32.25
Exercised (259,731) $15.55-$29.59
Cancelled (54,961) $18.58-$32.00
- ------------------------------
Outstanding Options
@ 12/28/91 2,029,823 $17.08-$32.25 990,435 2,258,665
1992 Activity:
Granted 429,080 $26.33-$28.13
Exercised (282,698) $17.08-$29.59
Cancelled (99,445) $18.58-$32.00
- ------------------------------
Outstanding Options
@ 1/2/93 2,076,760 $17.08-$32.25 1,134,476 1,929,030
1993 Activity:
Authorized 2,750,000
Granted 879,101 $13.50-$24.00
Exercised (15,258) $17.33-$19.42
Cancelled (212,188) $17.33-$32.00
- ------------------------------
Outstanding Options
@ 1/1/94 2,728,415 $13.50-$32.25 1,447,846 4,012,117
==============================
Shareholders' Rights Plan
Pursuant to a plan adopted by the Company in December, 1988, 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 (except pursuant to certain cash tender offers for all shares),
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.
7 PENSION AND EMPLOYEE BENEFIT PLANS
The Company has noncontributory pension plans covering substantially all full-
time employees in the United States. Domestic pension costs are funded in
compliance with ERISA requirements. Employees become eligible to participate,
generally, after completing one year of service.
The Company's consolidated pension costs for fiscal years 1993, 1992 and 1991
were $7.2 million, $4.0 million, and $3.4 million, respectively. The 1993
pension costs include $2.4 million incurred in conjunction with a restructuring
plan more fully described in Management's Discussion and Analysis of Financial
Condition and Results of Operations - Restructuring and Special Charges on page
26.
The following table sets forth the domestic plans' combined funded status at
January 1, 1994, and January 2, 1993:
35
January 1, 1994 January 2, 1993
- -------------------------------------------------------------------
(Expressed in thousands)
- -------------------------------------------------------------------
Actuarial present value of
benefit obligation:
Vested benefits $ 27,700 $19,198
Nonvested benefits 4,674 1,685
- -------------------------------------------------------------------
Accumulated benefit obligation 32,374 20,883
Effect of projected compensation
levels 18,851 13,442
- -------------------------------------------------------------------
Projected benefit obligation 51,225 34,325
Plan assets at fair value 33,645 28,878
- -------------------------------------------------------------------
Projected benefit obligation
greater than plan assets (17,580) (5,447)
Unrecognized net loss 13,036 3,446
Unrecognized net assets to be
amortized over 16-20 years (99) (368)
Unrecognized prior service cost 315 579
- -------------------------------------------------------------------
Unfunded accrued pension cost
recognized in the
Consolidated Balance Sheets $ (4,328) $(1,790)
- -------------------------------------------------------------------
The Plans' assets consist of cash, cash equivalents, equity funds, pooled funds
of real estate, common stock of the Company and a group annuity contract. Net
periodic pension cost for the Company's domestic plans in 1993, 1992 and 1991
includes the following components:
1993 1992 1991
- -----------------------------------------------------------
(Expressed in thousands)
- -----------------------------------------------------------
Service cost-benefits earned
during the year $ 3,374 $ 2,499 $ 2,192
Interest on projected
benefit obligation 3,339 2,818 2,338
Actual return on plan assets (2,034) (2,243) (1,826)
Charges due to restructuring 2,376 - -
Net amortization and deferral (1,007) (33) 9
- -----------------------------------------------------------
Net periodic pension cost $ 6,048 $ 3,041 $ 2,713
===========================================================
Actuarial assumptions used to determine the projected benefit obligation and the
expected net periodic pension costs were:
1993 1992 1991
- --------------------------------------------------------------
Projected Benefit Obligation Assumptions:
Discount rates 7.25% 8.75% 8.75%
Rates of increase in
compensation levels 5.0% 6.0% 6.0%
Net Periodic Pension Cost Assumption:
Expected long-term rate of
return on assets 10.0% 10.0% 10.0%
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.
Under the Safety-Kleen Corp. Savings and Investment Plan eligible employees may
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 did not make a matching contribution in 1993. The Company's expense for
contributions was $1.1 million in 1992, and $0.1 million in 1991.
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 Company adopted Statement of Financial Accounting Standards (SFAS) No. 106
on accounting for employees' post-retirement benefits during the fourth quarter
of 1992 retroactive to the beginning of the year. This statement requires the
accrual of the cost of providing post-retirement health care coverage over the
active service period of the employee. Prior to 1992, these costs were charged
to operating expenses in the year paid and were immaterial. The Company elected
to immediately recognize the accumulated liability in 1992.
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 1, 1994, and January 2, 1993:
January 1, 1994 January 2, 1993
- ------------------------------------------------------------------------
(Expressed in thousands)
- ------------------------------------------------------------------------
Accumulated post-retirement
benefit obligation (APBO):
Retirees, beneficiaries
and dependents $ 1,626 $ 600
Active employees 6,345 4,100
- ------------------------------------------------------------------------
7,971 4,700
- ------------------------------------------------------------------------
Plan asset at fair value - -
- ------------------------------------------------------------------------
APBO greater than plan assets (7,971) (4,700)
- ------------------------------------------------------------------------
Unrecognized net loss 1,567 -
- ------------------------------------------------------------------------
Accrued post-retirement benefit cost $(6,404) $(4,700)
- ------------------------------------------------------------------------
APBO discount rate assumption 7.25% 8.75%
Net periodic post-retirement benefit cost for 1993 of $1,805,000 included
$735,000 for service cost of benefits earned, $489,000 for interest cost on the
APBO; and $581,000 for one-time curtailment charge due to the restructuring. Net
periodic benefit costs for 1992 were not material.
36
The health care cost trend was assumed to be 11% in 1994 decreasing steadily to
an ultimate trend of 4.5% in 1998.
If the health care cost trend rate increases one percent for all future years,
the accumulated post-retirement benefit obligation as of January 1, 1994, would
have increased 17.1%. The effect of this change on the aggregate of the service
cost and interest cost for 1993 would be an increase of 21.3%.
The Company also adopted SFAS No. 112 on accounting for post-employment benefits
during 1993. The effect of adopting this change was not material.
8 INCOME TAXES
The components of earnings before income taxes consisted of the following for
each of the last three fiscal years.
1993 1992 1991
- ------------------------------------------------------------------------------
(Expressed in thousands)
- ------------------------------------------------------------------------------
Domestic $(137,043) $73,234 $78,451
Foreign (31,566) 1,058 4,898
- ------------------------------------------------------------------------------
$(168,609) $74,292 $83,349
==============================================================================
Effective December 29, 1991 the Company adopted SFAS No. 109 on accounting for
income taxes. This adoption resulted in an increase in net earnings of $3.2
million or $.06 per share for the cumulative effect of prior years' income. The
effect of the adoption on income for the year ended January 2, 1993, was not
material.
Under SFAS No. 109, deferred tax assets and liabilities are computed 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:
1993 1992 1991
- ------------------------------------------------------------------------------
(Expressed in thousands)
- ------------------------------------------------------------------------------
CURRENT
- ------------------------------------------------------------------------------
Federal $ 878 $24,468 $20,161
State 1,361 5,877 4,926
Commonwealth of Puerto Rico (1,726) - 393
Foreign - 1,646 2,687
DEFERRED
Federal (2,871) 5,364 5,045
Foreign (15,841) 2,725 1,481
PREPAID
Federal (35,926) (1,130) (1,715)
State (8,340) - -
Commonwealth of Puerto Rico (5,657) (5,361) -
Foreign 859 (4,634) (1,180)
- ------------------------------------------------------------------------------
Total provision (benefit) $(67,263) $28,955 $31,798
==============================================================================
The following table reconciles the statutory U.S. federal income tax rate to the
Company's consolidated effective tax rate:
1993 1992 1991
- ------------------------------------------------------------------------------
Statutory U.S. federal tax rate (35.0%) 34.0% 34.0%
Increase (decrease) resulting from:
Provision for state income tax,
net of federal benefit (2.9) 5.3 3.9
Difference in foreign statutory rates (3.3) (1.6) 0.1
Puerto Rico Commonwealth tax
and U.S. federal tax exemption, net - (0.6) (2.0)
Other 1.3 1.9 2.2
- ------------------------------------------------------------------------------
Effective tax rate (39.9%) 39.0% 38.2%
==============================================================================
Temporary differences and carry forwards which give rise to deferred tax assets
and liabilities are as follows:
January 1, 1994 January 2, 1993
- ------------------------------------------------------------------------------
(Expressed in thousands)
- ------------------------------------------------------------------------------
Deferred tax assets-current
Environmental reserves $ 1,628 $ 1,580
Insurance reserves 6,551 5,275
Other 2,348 1,555
- ------------------------------------------------------------------------------
Total deferred tax assets - current 10,527 8,410
- ------------------------------------------------------------------------------
Deferred tax assets - non-current
Restructuring charges
not currently deductible 37,084 -
Net operating loss (NOL)
carry forwards of subsidiaries 16,233 18,845
Environmental reserves 21,113 1,613
Valuation allowance (4,560) (6,083)
Other 2,324 2,869
- ------------------------------------------------------------------------------
Total deferred tax assets
non-current 72,194 17,244
- ------------------------------------------------------------------------------
Total deferred tax assets $ 82,721 $ 25,654
==============================================================================
Deferred tax liabilities
Restructuring and special charges $ 14,061 $ -
Depreciation (62,338) (51,190)
Tax lease agreements (7,682) (7,496)
Other (5,581) (159)
- ------------------------------------------------------------------------------
Total deferred tax liabilities $(61,540) $(58,845)
==============================================================================
37
The following summarizes the detail of the deferred income tax provision
(benefit) for 1991, which has not been restated for the adoption of SFAS No.
109:
1991
- --------------------------------------------------------------
(Expressed in thousands)
- --------------------------------------------------------------
Federal
Depreciation $ 6,443
Tax lease agreements (1,398)
Other (1,715)
- --------------------------------------------------------------
Total Federal 3,330
- --------------------------------------------------------------
Foreign 301
- --------------------------------------------------------------
Total deferred tax (benefit) $ 3,631
==============================================================
The NOLs that have no expiration total approximately $9.9 million or 61% of the
total NOLs available to the Company. The remaining NOLs of approximately $6.3
million consist of NOLs with expiration dates as follows:
In Thousands
- ------------------------------------------------------
1994 $ 633
1995 $1,911
1996 $1,107
1997 $ 862
1998 $ 184
1999 $1,302
2000 $ 301
The Company has recorded a valuation allowance of approximately $4.6 million for
unrealized NOLs that may expire before the Company is able to utilize such NOLs.
The valuation allowance account balance of $4.6 million represents approximately
72% of the NOLs that are due to expire as compared to a valuation allowance
percentage of approximately 54% of the NOLs due to expire at the end of 1992.
The valuation account balance activity is summarized in the table below.
1993
- -------------------------------------------------------------
(Expressed in thousands)
- -------------------------------------------------------------
Balance - beginning of year $6,100
Increase (Decrease):
Change in German tax rate (300)
Adjust valuation balances (905)
Cumulative translation adjustment (335)
- -------------------------------------------------------------
Balance - end of year $4,560
=============================================================
9 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 liquid 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. Based on its past experience and its knowledge of pending cases,
the Company believes it is unlikely that the Company's actual liability on the
cases now pending will be materially adverse to the Company's financial
condition. It should be noted, however, that many environmental laws are written
in a way in which the Company's potential liability can be large and it is
always possible that the Company's actual liability on any particular
environmental claim will prove to be larger than anticipated or accrued for by
the Company. It is also possible that expenses incurred in any particular
reporting period for remediation costs or fines, penalties or judgments could
have a material impact on the Company's earnings for that period.
Federal regulations also govern hazardous waste storage tanks and all
underground tanks which are used to store chemicals of the type used by the
Company. The Company is in the process of removing underground storage tanks at
certain of its locations. The Company believes there are instances where costs
may be incurred by the Company to do remedial cleanup work at some of the
Company's operating sites. In 1993 the Company recorded a $50 million pre-tax
special charge ($30 million after-tax or $0.52 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. The Company's accrued liabilities for
such costs are reflected in current and non-current liabilities in the Company's
Consolidated Balance Sheets as follows:
Jan. 1, 1994 Jan. 2, 1993
- --------------------------------------------------------------
(Expressed in millions)
- --------------------------------------------------------------
Current Liabilities-
Other accrued expenses $10.7 $12.9
Non-current Liabilities-
Other liabilities 55.8 5.8
Total $66.5 $18.7
==============================================================
38
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
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 losses were to be incurred.
The Company leases certain of its branches, vehicles and other equipment. These
leases are accounted for as operating leases. Related rental expenses were
$20.8 million in 1993, $20.3 million in 1992 and $14.7 million in 1991.
Aggregate minimum future rentals are payable as follows:
In Millions
- ------------------------------------------
1994 $16.1
1995 14.4
1996 11.7
1997 9.5
1998 7.0
Future Years 16.7
- ------------------------------------------
Total $75.4
==========================================
10 RESTRUCTURING AND SPECIAL CHARGES
During the fourth interim period of 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) in the fourth quarter. The pre-tax restructuring charge
includes $93 million of asset write-downs and $86 million of other restructuring
charges.
In addition to the restructuring charges, the Company recorded an additional $50
million special charge ($30 million after-tax or $0.52 per share) representing a
change in estimate for remediation costs. These additional remediation costs
have been estimated prior to conducting detailed individual site investigations
to ascertain the existence and extent of contamination, and are related to all
operating and previously-closed sites.
11 INTERIM RESULTS OF OPERATIONS (UNAUDITED)
Earnings (Loss)
Revenue Gross Profit Net Earnings (Loss) Per Share
- ------------------------------------------------------------------------------------------------------------------
Period 1993 1992 1993 1992 1993/1/ 1992/2/ 1993/1/ 1992/2/
- ------------------------------------------------------------------------------------------------------------------
First (12 Weeks) $181,818 $173,939 $ 43,051 $ 47,388 $ 8,635 $12,395 $ 0.15 $0.22
Second (12 Weeks) 189,314 184,099 47,725 52,115 10,487 14,459 0.18 0.25
Third (12 Weeks) 182,047 184,637 43,391 41,940 5,809 6,173 0.10 0.10
Fourth (16 And 17 Weeks) 242,329 251,867 55,526 57,527 (126,277) 12,610 (2.19) 0.22
- ------------------------------------------------------------------------------------------------------------------
Total $795,508 $794,542 $189,693 $198,970 $(101,346) $45,637 $(1.76) $0.79
==================================================================================================================
/1/ During the fourth interim period the Company recorded restructuring and
special charges of $136 million, net of tax benefits, ($229 million pre-
tax) or $2.36 per share which is more fully described in Note 10 to the
Consolidated Financial Statements and the Management's Discussion and
Analysis of Financial Condition and Results of Operations - Restructuring
and Special Charges on page 26.
/2/ During the first interim period of 1992, the Company adopted SFAS No. 109
on accounting for income taxes. The cumulative prior years' effect of SFAS
No. 109 increased net earnings by $3.2 million or $.06 per share. The
first interim period of 1992 has also been restated to reflect the
retroactive adoption of SFAS No. 106 on accounting for post-retirement
benefits. The cumulative prior years' effect of SFAS No. 106 reduced net
earnings by $2.9 million or $.05 per share.
39
BOARD OF DIRECTORS
Donald W. Brinckman, Founder, Chairman and Chief
Executive Officer, Safety-Kleen Corp.
John G. Johnson Jr., President and Chief Operating Officer,
Safety-Kleen Corp.
Kenneth L. Block, Chairman Emeritus, A. T. Kearney, Inc.
(international management consulting firm)
Richard T. Farmer, Chairman and Chief Executive Officer,
Cintas Corporation (uniform manufacturer and supplier)
Russell A. Gwillim, Chairman Emeritus, Safety-Kleen Corp.
Egdar D. Jannotta, Managing Partner,
William Blair & Company (investment banking firm)
Karl G. Otzen, President, Gerhard & Company
(product development consulting firm)
Paul D. Schrage, Senior Executive Vice President,
McDonald's Corporation (restaurant franchiser
and operator)
W. Gordon Wood, Retired Vice President,
Safety-Kleen Corp.
OFFICERS
Donald W. Brinckman, Founder, Chairman, Chief
Executive Officer and Director
John G. Johnson Jr., President, Chief Operating
Officer and Director
Hyman K. Bielsky, Senior Vice President General Counsel
Robert J. Burian, Senior Vice President Human Resources
Michael H. Carney, Senior Vice President Marketing
Joseph Chalhoub, Senior Vice President Processing,
Engineering and Oil Recovery
David A. Dattilo, Senior Vice President Sales and Service
Scott E. Fore, Senior Vice President Environment,
Health and Safety
F. Henry Habicht II, Senior Vice President
Strategic/Environmental Planning
William P. Kasko, Senior Vice President Operations
and Information
Robert W. Willmschen Jr., Senior Vice President
Finance and Secretary
Glenn R. Casbourne, Vice President Engineering
Wallace K. Louder, Vice President Information Systems
Clark J. Rose, Vice President Technical Services
Laurence M. Rudnick, Treasurer
John Rycombel, Controller
40
CORPORATE DATA
Corporate Office
Safety-Kleen Corp., 1000 North Randall Road,
Elgin, IL 60123,
Telephone: 708/697-8460
Auditors
Arthur Andersen & Co., 33 W. Monroe Street,
Chicago, IL 60603.
Registrar and Transfer Agent
First Chicago Trust Company of New York,
Post Office Box 2500, Jersey City, NJ 07303
Annual Meeting
The Annual Meeting of Shareholders of Safety-Kleen Corp.
will be held at 10:00 a.m., Friday, May 13, 1994, at
The Westin Hotel, O'Hare, 6100 River Road,
Rosemont, IL 60018.
Stock Listing
Safety-Kleen stock is traded on the New York
Stock Exchange.
Stock Symbol SK
Form 10-K
Safety-Kleen's Annual Report to the Securities and
Exchange Commission on Form 10-K is available, on
request, from Safety-Kleen's Corporate Secretary.
Shareholder Dividend Reinvestment Plan
Safety-Kleen offers a dividend reinvestment plan for
shareholders of record. Further information may be
obtained from the Company's Registrar and Transfer
Agent as follows:
First Chicago Trust Company of New York
Post Office Box 2598
Jersey City, NJ 07303
Telephone: (800) 446-2617
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 1, 1994
was 7,283.
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.
1993 1992
______________________________________________________
Cash Cash
Prices Dividends Prices Dividends
High Low Paid High Low Paid
March 31 $24.75 $20.00 $0.09 $28.75 $22.63 $0.085
June 30 21.13 16.13 0.09 30.38 24.13 0.085
September 30 18.00 14.38 0.09 30.75 26.38 0.085
December 31 18.13 13.13 0.09 32.25 23.25 0.085
_________________________________________________________________________
$0.36 $0.340
_________________________________________________________________________
_________________________________________________________________________
The Company has continuously paid quarterly cash
dividends since March, 1979. The Company expects to
continue its policy of paying regular cash dividends,
although there is no assurance as to future dividends, as
they are dependent upon future earnings, capital
requirements, financial condition of the Company and
other factors.
(C) 1994 Printed in U.S.A. Printed on recycled paper.
Safety-Kleen Corp. is an Equal Opportunity Employer m/f
41