Exhibit 13 FINANCIAL REVIEW 23. Management's Discussion and Analysis of Financial Condition and Results of Operations 28. Selected Financial Data 29. Report of Independent Public Accountants 30. Consolidated Statements of Operations 31. Consolidated Balance Sheets 32. Consolidated Statements of Shareholders' Equity 33. Consolidated Statements of Cash Flows 34. Notes to Consolidated Financial Statements [SAFETY-KLEEN LOGO] 22 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW 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: RELATIONSHIP TO PERIOD TO PERIOD CONSOLIDATED INCREASE REVENUE (DECREASE) FISCAL YEAR FISCAL YEARS 1995 1994 1993 1994-95 1993-94 - - -------------------------------------------------------------------------------- Revenue 100% 100% 100% 8.6% (0.5%) - - --------------------------------------------------------- Costs and Expenses: Operating costs and expenses 73.1 73.3 76.1 8.4 (4.3) Selling and administrative expenses 14.2 14.2 15.0 8.8 (5.5) Restructuring charge (credit) (1.8) - 22.5 N/A N/A Special charge for environmental remediation costs 1.4 - 6.3 N/A N/A Interest income (0.1) (0.1) (0.1) 37.0 (16.0) Interest expense 2.4 1.9 1.4 33.0 36.9 - - --------------------------------------------------------- 89.2 89.3 121.2 8.5 (26.7) - - --------------------------------------------------------- Earnings (loss) before income taxes 10.8 10.7 (21.2) 9.0 N/A Income taxes 4.6 4.4 (8.5) 12.8 N/A - - --------------------------------------------------------- Net earnings (loss) 6.2% 6.3% (12.7%) 6.4% N/A - - --------------------------------------------------------- SUMMARY OF 1993, 1994 AND 1995 FINANCIAL RESULTS In 1994 and 1995, the Company's net earnings before restructuring and special charges increased 45% and 6%, respectively, from the prior year. The Hazardous Waste Service Industry in general has experienced lower demand in recent years as companies have endeavored to reduce costs and minimize the amount of hazardous wastes they generate. These waste-minimization and cost- saving efforts have also adversely affected demand for Safety-Kleen's services as has slower than expected development of the Company's European operations. However, the Company believes that the small quantity generators of wastes it specializes in serving are not as greatly impacted by waste minimization efforts. After three years of relatively flat revenues through 1994, the Company experienced a 9% increase in revenue in the current year. The Company believes its emphasis on recycling and reuse, rather than incineration or disposal of wastes, and its development of new non-hazardous and other waste minimization services that help customers reduce the amount of fluid waste they generate contributed to the Company's improved revenue performance in 1995. CYCLONIC PARTS CLEANER SERVICE In order to address the waste minimization concerns of its customers, the Company began converting its existing Model 16 and Model 30 red sink-on-a-drum parts cleaners in the United States to a new Cyclonic Parts Cleaner Service in 1993. The new service employs a premium non-hazardous solvent and patented cyclonic separation technology that continuously removes dirt particles from the solvent during use. As a result, the solvent stays cleaner longer, extending the life of the solvent and reducing the number of annual services required. With the new cyclonic parts cleaner service, customers need service less frequently and generate less waste on an annual basis, which reduces the cost of the parts cleaner service to Safety-Kleen and also provides customers with the potential to reduce their cost. In conjunction with this conversion of parts cleaners to new technology and a comprehensive review of its operations, the Company adopted a restructuring plan in 1993. The restructuring plan is more fully described below in "Results of Operations" under the subheading "Restructuring and Special Charges." At December 30, 1995, the Company was servicing approximately 493,000 parts cleaner machines at customer locations in the United States. These machines consisted of approximately 162,000 cyclonic parts cleaners, 94,000 red Models 16 and 30 parts cleaners and 237,000 other Safety-Kleen and customer owned parts cleaners. The Company does not expect to convert a large portion of the remaining Model 16 and 30 parts cleaner machines to the cyclonic technology. Accordingly, the Company has determined that it will no longer focus sales and marketing efforts on actively converting existing red units to the cyclonic machines. Instead, it will convert existing red units in response to market demand. OTHER TRENDS, EVENTS AND UNCERTAINTIES While the Company can benefit from increased governmental regulation, as a leading environmental services company, it is also the focus of regulatory scrutiny. The Company's goal is to fully comply with all regulations and other governmental requirements and thus avoid any fines and penalties, and the Company has committed significant human and capital resources to the pursuit of this goal. Nonetheless, given its extensive operations, the technical aspects of the regulations, and the varying interpretations of the requirements 23 [SAFETY-KLEEN LOGO] 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 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. The Company paid approximately $1 million, $4 million and $1 million in 1995, 1994 and 1993, respectively, for environmental fines, penalties and forfeitures. 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 the emission sources, generators, transporters and handlers of hazardous and non-hazardous waste. The Company may or may not be able to pass on the costs associated with such legislation and regulations to its customers through price increases. EFFECTS OF PETROLEUM 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 (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. Consequently, any meaningful increase or decrease in crude oil prices will have both a positive and negative effect 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 for its services and products is restricted somewhat by committed price contracts. LIQUIDITY AND CAPITAL RESOURCES Capital spending in 1995, 1994 and 1993 for additions of equipment at customers and property, excluding business acquisitions, totaled $78 million, $88 million and $96 million, respectively. These capital expenditures were financed primarily by cash from operations. Long-term debt remained unchanged during 1995, while decreasing $5 million and $12 million in 1994 and 1993, respectively. The Company expects that its capital expenditures for equipment at customers and property additions for the full year 1996 will be approximately $70 million. The Company also expects to be able to finance these expenditures entirely through internally generated funds. The Company and its subsidiaries have lines of credit aggregating approximately $385 million. As of December 30, 1995, total borrowings under these lines were $128 million. The Company also expects to continue to lease equipment and property at approximately the same level as 1995, which is higher than its recent past. The Company entered into a note purchase agreement with two insurance companies in January of 1995, 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 sale of the notes were used to repay existing bank borrowings. A portion of the Company's capital expenditures are related to compliance with environmental laws and regulations. The Company estimates capital spending of approximately $9 million in 1996 and $18 million in aggregate in the years 1997 through 2000 in order to comply with current environmental laws and regulations in connection with the Company's existing business. 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 December 30, 1995 are presented below: PERCENTAGE OF INCREASE(DECREASE) (Expressed in millions) FISCAL YEARS 1995 1994 1993 1995-94 1994-93 - - ----------------------------------------------------------------- North America Automotive/Retail Repair Services $239.7 $237.8 $248.7 1% (4%) Industrial Services 241.6 222.1 212.9 9% 4% Oil Recovery Services 129.0 117.8 113.3 10% 4% Other Service Areas 149.8 128.2 141.1 17% (9%) - - ----------------------------------------------- Total North America 760.1 705.9 716.0 8% (1%) Europe 99.2 85.4 79.5 16% 7% - - ----------------------------------------------- Consolidated $859.3 $791.3 $795.5 9% (1%) - - ----------------------------------------------- 24 [SAFETY-KLEEN LOGO] North American Automotive/Retail Repair Services The increase in North American Automotive/Retail Repair Services revenue included price increases of approximately 4% in 1995. These price increases were partially offset by a change in the Company's mix of services. The continued conversion of existing customers to the Cyclonic Parts Cleaner Service accounted for most of the change in mix. Lack of sales from discontinued allied products accounted for $6.4 million of the 1994 revenue decline. Most of the remaining $4.5 million revenue decline was due to a change in mix of services as the Company increased prices by approximately 3% in 1994. North American Industrial Services Revenue from the Company's North American Industrial Services includes Fluid Recovery Service revenue of $122.8 million in 1995, $109.1 million in 1994 and $96.8 million in 1993. Approximately 2 percentage points of the 13% increase in Fluid Recovery Service revenue in 1995 can be attributed to higher prices. The remaining increase was due to higher volume and change in product mix. The 13% increase in Fluid Recovery Service revenue in 1994 was due primarily to higher volume, partially offset by quantity and regional discounts offered in 1994. The North American Industrial Parts Cleaner Service accounts for the remaining North American Industrial Services revenue of $118.8 million in 1995, $113.0 million in 1994 and $116.1 million in 1993. The increased revenues in 1995 included price increases of approximately 4%. The mix of services has also changed as many customers have converted from the red sink-on-a-drum to the new cyclonic technology. The 1994 decrease in Industrial Parts Cleaner Service revenue was due almost entirely to the lack of sales from discontinued allied products. The favorable impact of 4% price increases was offset primarily by changes in the mix of services performed. North American Oil Recovery Services The increase in revenue experienced in 1995 from the North American Oil Recovery Services was primarily due to an increase of 8% in the price of base lube oil sales and an increase of 20% in the average revenue per gallon of used oil, oily water and antifreeze collected from the automotive market. A 16% increase in the volume of lubricating oil sales, partially offset by 7% lower average lube oil sales prices, accounts for the 1994 revenue increase. North American Other Service Areas Revenue from Other Service Areas increased by $21.6 million in 1995, of which $19.5 million was from the Company's new Imaging Services business. Revenue from Other Service Areas decreased by $12.9 million in 1994 due primarily to the lack of sales from discontinued allied products and the planned lower Envirosystems volume as a result of the reduction of toll recycling capacity. Europe A strengthening of European currencies against the U.S. dollar increased revenue by approximately $7.0 million in 1995. Exclusive of exchange rate effects, revenues in Europe increased approximately 8% due to higher volumes and prices throughout most of the European operations. Foreign exchange rates account for approximately 24% of the increase in revenue in 1994 over 1993, while the remaining increase experienced in 1994 was due to higher volumes and prices throughout most of the European operations. OPERATING COSTS AND EXPENSES The following table shows 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 December 30, 1995. Gross Profit Margin - - --------------------------------------------------- 1995 1994 1993 - - --------------------------------------------------- North America Automotive/Retail Repair Services 37% 35% 31% Industrial Services 30% 33% 33% Oil Recovery Services 15% 11% 8% Other Service Areas 17% 19% 12% Total North America 27% 27% 24% Europe 25% 24% 22% Consolidated 27% 27% 24% North American Automotive/Retail Repair Services The North American Automotive/Retail Repair Services gross margin improved in 1995 from 1994 due mainly to improved pricing, a shift in the mix towards more cyclonic parts cleaners with higher profit margins, and lower worker's compensation costs. The 1994 gross margin improvement was primarily due to the Company's lower cost structure which resulted from its restructuring plan and the change in accounting estimate for remediation costs implemented in the fourth interim period of 1993. 25 [SAFETY-KLEEN LOGO] North American Industrial Services The gross margin for the Company's North American Industrial Services declined in 1995 from 1994 due mainly to higher recycling and plant costs. In the second interim period of 1995, the Company completed negotiations and extended its long-term exclusive supply arrangements with two cement plants and entered into arrangements to manage the waste-derived fuels program at two additional plants. The Company's cost per gallon for disposal of waste-derived fuel under the new agreements is higher than its historical cost per gallon. In addition, three of these plants were unable to burn normal volumes of waste-derived fuel during the third interim period of 1995 due to unscheduled fuel burning outages, resulting in higher costs. Gross margins remained unchanged from 1993 to 1994. The favorable benefits realized from the lower cost structure in 1994, as a result of the restructuring plan and change in accounting estimate for environmental remediation costs implemented in 1993, were offset by lower parts cleaner service volume and lower average revenue per drum in the Fluid Recovery Service. North American Oil Recovery Services Improved pricing on base lube oil sold and higher automotive collection charges for used oil, oily water and antifreeze account for most of the improvement in the Oil Recovery Services 1995 gross margin over 1994. The improvement in the 1994 gross profit margin can be attributed to improved pricing, a lower cost structure in the automotive used oil collection business resulting from the Company's restructuring plan that was implemented in 1993, and certain plant processing improvements. North American Other Service Areas Higher losses realized in the new Imaging Services business caused the North American Other Service Areas gross profit margin to decrease in 1995. The gross margins on the North American Other Service Areas, excluding Imaging Services, increased by two percentage points due mainly to improved pricing in selected markets and higher volumes in the Puerto Rico Envirosystems business. The increase in gross profit margin in 1994 resulted primarily from the elimination of the lower margin allied product businesses contemplated by the Company's restructuring plan. A $2.2 million increase in alternative waste fuel processing costs in the Company's U.S. Envirosystems operations adversely affected North American Other Service Areas gross profit margin in 1993. Europe The increase in Europe's 1995 gross profit margin over 1994 is due mainly to improved pricing and volumes. The increase in Europe's 1994 gross profit margin is mainly attributable to work force reductions, and elimination of lower margin businesses in connection with the Company's restructuring plan implemented in 1993. SELLING AND ADMINISTRATIVE EXPENSES The 9% increase in selling and administrative expenses the Company experienced in 1995 resulted primarily from additional employees and related employee expenses, increases in compensation and related benefits. Selling and administrative expenses decreased 5% in 1994, primarily due to work force reductions implemented as part of the Company's restructuring plan. RESTRUCTURING AND SPECIAL CHARGES The Company adopted a restructuring plan in 1993 based on 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 this plan, the Company recorded a restructuring charge of $179 million ($106 million after-tax or $1.84 per share). The pre-tax restructuring charge of $179 million included $93 million of asset write-downs and $86 million of other restructuring charges. The after-tax restructuring charge of $106 million included an estimated $34 million of costs requiring cash outflows and $72 million of non-cash items. The Company's restructuring activities proceeded substantially in accordance with the original plan during 1994. In the fourth quarter of 1995, the Company recorded a $15.2 million (pre-tax) credit to income to reduce the amount of restructuring reserves previously established in 1993 to the expected required levels. The Company also recorded a $12 million (pre-tax) charge to increase the Company's reserves for environmental remediation costs at its facilities in North America in the fourth quarter of 1995. The Company's restructure reserves declined $36.5 million in 1995 and $25.2 million in 1994 . The Company incurred approximately $7 million and $20 million of after-tax cash flows in 1995 and 1994, respectively. In 1994, the Company also received a $10.8 million refund of estimated tax payments made in 1993. The Company does not expect to incur significant additional after tax cash flows associated with the restructuring in 1996 and beyond, as estimated cash expenditures will be offset by tax benefits yet to be received. 26 [SAFETY-KLEEN LOGO] As part of the restructuring plan, the Company provided for the write-down of the cost of parts cleaner machines expected to be replaced with the new cyclonic parts cleaners, as well as the cost of converting customers to the new service. The Company anticipated that converting a large portion of its existing parts cleaners to the new cyclonic technology would result in less spent solvent being collected from the Company's parts cleaner service. Accordingly, the Company decided to convert many of its branch permitted hazardous waste storage facilities to transfer locations, thereby eliminating the need for permits required under the Resource Conservation and Recovery Act (RCRA) and reducing unnecessary operating costs driven by RCRA-imposed requirements. The non-cash restructuring charge included the write-off of the capitalized cost of the permits at these affected facilities. The restructuring charge also included a write-down of recycling capacity because the collection of less spent solvent would reduce the amount of solvent recycling capacity required. Other elements of the restructuring plan included: (i) a work force reduction of approximately 375 jobs and payment of severance benefits; (ii) a write-down of inventories and other assets for discontinuing certain minor business activities, including the sale of allied products; and (iii) accrual of costs and asset write-downs related to the curtailment or sale of certain operations. In addition to the restructuring charge, the Company recorded a $50 million special charge ($30 million after-tax or $.52 per share) representing a change in estimate for remediation costs. These additional remediation costs were estimated prior to conducting detailed individual site investigations to ascertain the existence and extent of contamination, and were related to all operating and previously closed sites. The Company expects the expenditures for these remediation costs will occur over several years. The $12 million special charge for environmental remediation costs in 1995 resulted from a refinement of the estimates for environmental liabilities. The Company experienced an estimated net earnings benefit of $16 million in 1994 compared to 1993 that was directly attributable to cost reductions and other actions resulting from the restructuring plan and the special charge in 1993. INTEREST INCOME The $263,000 increase in interest income in 1995 was caused primarily by higher interest rates. A lower average investment balance accounts for the $135,000 decline in interest income in 1994. INTEREST EXPENSE Higher interest rates account for the $5.0 million increase in interest expense in 1995. Interest expense excludes $2.1, $2.4 and $4.5 million of interest capitalized during 1995, 1994 and 1993, respectively. Interest expense increased $4.1 million in 1994 due mainly to increased interest rates and lower capitalized interest. The impact of the interest rate swaps executed in the United States and Germany in 1992 and 1993 resulted in interest expense savings of $.6, $1.8 and $3.6 million in 1995, 1994 and 1993, respectively. INCOME TAXES The effective income tax rate was 42% in 1995, 41% in 1994 and 40% in 1993. The higher effective tax rate in 1995 was due to the tax effects of the restructuring credits and remediation charges discussed above. The effective income tax rate in 1995 before the restructuring credits and additional remediation charges was 40%. The lower rate before such items was due primarily to a decrease in non-deductible expenses. The increase in the effective tax rate in 1994 was primarily due to an increase in non-deductible expenses. ACCOUNTING CHANGES The Company is required to adopt Statement of Financial Accounting Standards (SFAS) No. 121 on Accounting for the Impairment of Long Term Assets and for Long-Term Assets to be Disposed Of for fiscal year 1996. The Company does not believe that the adoption of SFAS No. 121 will have a material impact on the financial position or results of operations of the Company. 27 SELECTED FINANCIAL DATA FISCAL YEAR/(4)/ - - ----------------------------------------------------------------------------------------------------- 1995 1994 1993 1992/(3)/ 1991 (Expressed in thousands, except per share amounts) STATEMENT OF OPERATIONS DATA - - ----------------------------------------------------------------------------------------------------- Revenue $ 859,251 $791,267 $795,508 $794,542 $695,001 Net earnings (loss) 53,303 50,094 (101,346)/(1)/ 45,637/(2)/ 51,551 Earnings (loss) per share 0.92 0.87 (1.76)/(1)/ 0.79/(2)/ 0.90 Cash dividends per share 0.36 0.36 0.36 0.34 0.32 BALANCE SHEET DATA - - ----------------------------------------------------------------------------------------------------- Current assets 206,208 197,221 202,887 188,717 182,275 Current liabilities 162,676 165,455 149,415 140,988 128,156 Working capital 43,532 31,766 53,472 47,729 54,119 Total assets 1,009,050 973,444 950,664 1,006,446 903,824 Long-term debt 283,715 284,125 288,633 300,724 243,724 Shareholders' equity 433,435 396,336 362,664 492,095 463,621 /(1)/ Includes restructuring and special charges, net of tax benefit, of $136 million ($229 million pre-tax) or $2.36 per share. /(2)/ Includes $300,000 ($.01 per share) increase in net earnings from the 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. /(3)/ Fiscal year 1992 was a fifty-three week year. All other years presented were fifty-two weeks. /(4)/ Certain prior year asset and liability amounts have been reclassified to be consistent with current year presentation. 28 [SAFETY-KLEEN LOGO] 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 December 30, 1995 and December 31, 1994, and the related consolidated statements of operations, shareholders' equity and cash flows for each of the three fiscal years in the period ended December 30, 1995. 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 December 30, 1995 and December 31, 1994, and the results of their operations and their cash flows for each of the three fiscal years in the period ended December 30, 1995, in conformity with generally accepted accounting principles. Chicago, Illinois, /s/ Arthur Andersen LLP February 5, 1996 29 CONSOLIDATED STATEMENTS OF OPERATIONS Safety-Kleen Corp. and Subsidiaries For The Years Ended December 30, 1995, December 31, 1994 and January 1, 1994 FISCAL YEAR -------------------------------------------------------- 1995 1994 1993 - - ---------------------------------------------------------------------------------------------------------------- (Expressed in thousands, except per share amounts) - - ---------------------------------------------------------------------------------------------------------------- REVENUE $859,251 $791,267 $ 795,508 - - ---------------------------------------------------------------------------------------------------------------- COSTS AND EXPENSES: Operating costs and expenses 628,469 579,509 605,815 Selling and administrative expenses 122,319 112,434 119,037 Restructuring charge (credit) (15,217) - 179,000 Special charge for environmental remediation costs 11,956 - 50,000 Interest income (974) (711) (846) Interest expense 20,230 15,209 11,111 - - ---------------------------------------------------------------------------------------------------------------- 766,783 706,441 964,117 - - ---------------------------------------------------------------------------------------------------------------- EARNINGS(LOSS) BEFORE INCOME TAXES 92,468 84,826 (168,609) INCOME TAXES 39,165 34,732 (67,263) - - ---------------------------------------------------------------------------------------------------------------- NET EARNINGS (LOSS) $ 53,303 $ 50,094 $(101,346) - - ---------------------------------------------------------------------------------------------------------------- EARNINGS (LOSS) PER COMMON AND COMMON EQUIVALENT SHARE $ 0.92 $ 0.87 $ (1.76) ================================================================================================================ The accompanying notes are an integral part of these financial statements. 30 CONSOLIDATED BALANCE SHEETS Safety-Kleen Corp. and Subsidiaries As of December 30, 1995, and December 31, 1994 DECEMBER 30, 1995 December 31, 1994 - - -------------------------------------------------------------------------------------------------------------------------- ASSETS (Expressed in thousands) - - -------------------------------------------------------------------------------------------------------------------------- CURRENT ASSETS Cash and cash equivalents $ 22,238 $ 21,015 Trade accounts receivable, less allowances of $7,969 and $8,868, respectively 110,120 102,908 Refundable taxes 1,170 6,091 Inventories 36,020 32,137 Deferred tax assets 17,984 18,256 Prepaid expenses and other 18,676 16,814 - - -------------------------------------------------------------------------------------------------------------------------- 206,208 197,221 - - -------------------------------------------------------------------------------------------------------------------------- EQUIPMENT AT CUSTOMERS AND COMPONENTS, AT COST, LESS accumulated depreciation of $44,072 and $38,917, respectively 117,383 96,605 - - -------------------------------------------------------------------------------------------------------------------------- PROPERTY, AT COST Land 49,469 47,215 Buildings and improvements 242,886 236,125 Leasehold improvements 31,745 29,817 Machinery and equipment 391,519 365,676 Auto and trucks 129,026 132,284 - - -------------------------------------------------------------------------------------------------------------------------- 844,645 811,117 Less accumulated depreciation and amortization 315,092 273,075 - - -------------------------------------------------------------------------------------------------------------------------- 529,553 538,042 - - -------------------------------------------------------------------------------------------------------------------------- INTANGIBLE ASSETS, AT COST Goodwill 95,233 87,484 Other 100,077 78,456 - - -------------------------------------------------------------------------------------------------------------------------- 195,310 165,940 Less accumulated amortization 68,008 52,015 - - -------------------------------------------------------------------------------------------------------------------------- 127,302 113,925 - - -------------------------------------------------------------------------------------------------------------------------- OTHER ASSETS Deferred tax assets 24,957 23,083 Other 3,647 4,568 - - -------------------------------------------------------------------------------------------------------------------------- 28,604 27,651 - - -------------------------------------------------------------------------------------------------------------------------- $1,009,050 $973,444 ========================================================================================================================== LIABILITIES AND SHAREHOLDERS' EQUITY - - -------------------------------------------------------------------------------------------------------------------------- CURRENT LIABILITIES Current portion of long-term debt $ - $ 10 Trade accounts payable 62,795 61,629 Accrued salaries, wages and employee benefits 29,197 23,178 Other accrued expenses 27,397 28,298 Restructure liability 10,450 24,637 Insurance reserves 13,101 13,484 Accrued environmental liabilities 11,561 11,730 Income taxes payable 8,175 2,489 - - -------------------------------------------------------------------------------------------------------------------------- 162,676 165,455 - - -------------------------------------------------------------------------------------------------------------------------- LONG-TERM DEBT, LESS CURRENT PORTION 283,715 284,125 - - -------------------------------------------------------------------------------------------------------------------------- DEFERRED TAX LIABILITIES 43,111 25,789 - - -------------------------------------------------------------------------------------------------------------------------- RESTRUCTURE LIABILITY 12,069 34,357 - - -------------------------------------------------------------------------------------------------------------------------- ACCRUED ENVIRONMENTAL LIABILITIES 42,713 37,954 - - -------------------------------------------------------------------------------------------------------------------------- OTHER LIABILITIES 31,331 29,428 - - -------------------------------------------------------------------------------------------------------------------------- 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 57,868,541 shares and 57,754,963 shares, respectively) 5,787 5,775 Additional paid-in capital 186,365 184,789 Retained earnings 256,052 223,569 Minimum pension liability adjustment (1,226) - Cumulative translation adjustments (13,543) (17,797) - - -------------------------------------------------------------------------------------------------------------------------- 433,435 396,336 - - -------------------------------------------------------------------------------------------------------------------------- $1,009,050 $973,444 ========================================================================================================================== The accompanying notes are an integral part of these financial statements. 31 CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY Safety-Kleen Corp. and Subsidiaries For The Years Ended December 30, 1995, December 31, 1994 and January 1, 1994 TOTAL COMMON ADDITIONAL MINIMUM CUMULATIVE SHAREHOLDERS' STOCK $.10 PAID-IN RETAINED PENSION TRANSLATION EQUITY PAR VALUE CAPITAL EARNINGS LIABILITY ADJ. ADJUSTMENTS - - ---------------------------------------------------------------------------------------------------------------------------------- (Expressed in thousands) - - ---------------------------------------------------------------------------------------------------------------------------------- Balance at January 2, 1993 $ 492,095 $ 5,767 $183,286 $ 316,374 $ - $(13,332) Net earnings (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) Net earnings 50,094 - - 50,094 - Cash dividends (20,786) - - (20,786) - Stock options exercised and related tax benefits 1,184 7 1,177 - - Change in cumulative translation adjustments 3,180 - - - 3,180 - - ---------------------------------------------------------------------------------------------------------------------------------- Balance at December 31, 1994 396,336 5,775 184,789 223,569 - (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 adjustments 4,254 - - - 4,254 - - ---------------------------------------------------------------------------------------------------------------------------------- Balance at December 30, 1995 $ 433,435 $ 5,787 $186,365 $ 256,052 $(1,226) $(13,543) ================================================================================================================================== The accompanying notes are an integral part of these financial statements. 32 CONSOLIDATED STATEMENTS OF CASH FLOWS Safety-Kleen Corp. and Subsidiaries For The Years Ended December 30, 1995, December 31, 1994 and January 1, 1994 FISCAL YEAR ------------------------------------- 1995 1994 1993 - - ---------------------------------------------------------------------------------------------------------------------- (Expressed in thousands) - - ---------------------------------------------------------------------------------------------------------------------- Cash flows from operating activities: Net earnings (loss) $ 53,303 $ 50,094 $(101,346) - - ---------------------------------------------------------------------------------------------------------------------- Adjustments to reconcile net earnings to net cash provided by operating activities Depreciation of equipment at customers and property 61,681 63,112 65,808 Amortization of intangible and other assets 16,120 14,618 15,673 Provisions for doubtful accounts receivable 4,225 5,067 6,822 Change in deferred income tax assets and liabilities, net 26,504 22,247 (85,856) Writedown of non-current assets due to restructuring - - 88,028 Other 2,584 (2,440) 10,332 (Increase) decrease in assets, net of effects from business acquisitions: Trade accounts receivable (8,433) (9,072) (4,601) Inventories (1,088) 2,472 3,800 Prepaid expenses and other (2,001) (2,412) (2,205) Increase (decrease) in liabilities, net of effects from business acquisitions: Trade accounts payable and accrued expenses 703 18,644 (1,312) Restructure liability (36,475) (25,179) 84,173 Environmental liabilities 4,459 (16,820) 47,804 Other liabilities 3,360 5,575 9,097 - - ---------------------------------------------------------------------------------------------------------------------- Total adjustments 71,639 75,812 237,563 - - ---------------------------------------------------------------------------------------------------------------------- Net cash provided by operating activities 124,942 125,906 136,217 - - ---------------------------------------------------------------------------------------------------------------------- Cash flows used in investing activities: Equipment at customers additions (34,874) (42,623) (20,846) Property additions (43,235) (45,349) (74,991) Payment for business acquisitions, net of cash acquired (12,682) (1,845) (2,414) Other assets additions, net (12,671) (7,446) (18,557) - - ---------------------------------------------------------------------------------------------------------------------- Net cash used in investing activities (103,462) (97,263) (116,808) - - ---------------------------------------------------------------------------------------------------------------------- Cash flows from (used in) financing activities: Net borrowings (payments) under line-of-credit agreements (51,565) (5,404) (11,634) Proceeds from issuances of senior notes 50,000 - - Proceeds from stock option exercises 1,930 1,184 326 Cash dividends paid (20,820) (20,786) (20,767) - - ---------------------------------------------------------------------------------------------------------------------- Net cash from (used in) financing activities (20,455) (25,006) (32,075) - - ---------------------------------------------------------------------------------------------------------------------- Effect of exchange rate changes on cash 198 3 (524) - - ---------------------------------------------------------------------------------------------------------------------- Increase (decrease) in cash and cash equivalents 1,223 3,640 (13,190) - - ---------------------------------------------------------------------------------------------------------------------- Cash and cash equivalents at beginning of year 21,015 17,375 30,565 - - ---------------------------------------------------------------------------------------------------------------------- Cash and cash equivalents at end of year $ 22,238 $ 21,015 $ 17,375 ====================================================================================================================== Supplemental Information: - - ---------------------------------------------------------------------------------------------------------------------- Cash paid during the year for: Interest (net of amount capitalized) $ 18,997 $ 14,241 $ 10,375 Income taxes (net of refunds received) $ 11,231 $ 10,222 $ 18,603 - - ---------------------------------------------------------------------------------------------------------------------- Consideration given up and liabilities assumed in business acquisitions $ 17,268 $ 2,261 $4,823 ====================================================================================================================== The accompanying notes are an integral part of these financial statements. 33 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Safety-Kleen Corp. and Subsidiaries 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Nature of Business The Company is a business-to-business marketing and service company focusing on the environmental needs of business through recycling and reuse of fluid waste. It is a leading provider of services to generators of spent solvents and other hazardous and non-hazardous liquid wastes and byproducts, the world's largest provider of parts cleaner services and one of the world's largest collectors and re-refiners of used oil. The Company serves hundreds of thousands of customers in North America and Europe, through a network of 235 branch facilities. 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 years 1995, 1994 and 1993 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 3 to 20 years; autos and trucks 4 to 10 years; and leasehold improvements over the shorter of 10 years or 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 a period of time not to exceed forty years. 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 business unit's 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, regulatory operating permits and computer software. Amortization of other intangible assets is computed using the straight-line method over the expected lives of the intangible assets, which principally range from 2 years to 10 years. Environmental Remediation Costs and Liabilities The Company reviews the adequacy of its liability for environmental remediation on a periodic basis and records adjustments to costs and liabilities accordingly. 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. In 1995, the Company recorded a $12 million pre-tax charge to refine its estimates of environmental liabilities. 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 dilutive stock options and warrants. 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. 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 revenues and expenses during the reporting period. Actual results could differ from those estimates. Reclassifications Certain prior year amounts have been reclassified to be consistent with current year presentation. 34 [SAFETY-KLEEN LOGO] 2. ACQUISITIONS All acquisitions made during the three fiscal years ended December 30, 1995 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 seven European countries, consisting of 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 December 30, 1995, December 31, 1994, and January 1, 1994 is presented below. 1995 1994 1993 - - -------------------------------------------------------- (Expressed in thousands) - - -------------------------------------------------------- REVENUE United States and Puerto Rico $ 698,792 $648,555 $665,592 Canada 61,286 57,332 50,442 Europe 99,173 85,380 79,474 - - -------------------------------------------------------- Consolidated $ 859,251 $791,267 $795,508 - - -------------------------------------------------------- TOTAL ASSETS United States and Puerto Rico $ 766,276 $742,140 $729,772 Canada 68,482 68,550 72,882 Europe 174,292 162,754 148,010 - - -------------------------------------------------------- Consolidated $1,009,050 $973,444 $950,664 - - -------------------------------------------------------- NET EARNINGS (LOSS) United States and Puerto Rico $ 44,446 $ 47,766 $(84,454) Canada 3,751 1,552 (4,693) Europe 5,106 776 (12,199) - - -------------------------------------------------------- Consolidated $53,303 $50,094 $(101,346) - - -------------------------------------------------------- The 1995 net earnings by segment, excluding the impact of the $15.2 million credit to income for the writedown of restructuring reserves previously established in 1993 and the $12 million charge for the refinement of the Company's environmental remediation reserves at its facilities in North America, were as follows: Expressed in thousands ---------------------------------------- USA & Puerto Rico 49,383 Canada 1,856 Europe 2,064 ------------------------------------- Consolidated 53,303 ------------------------------------- The Company operates primarily in one business segment-providing businesses with environmentally safe and convenient solutions for managing fluid waste and other recoverable resources. 4. INVENTORIES The Company's inventories consist primarily of solvent, oil and supplies. LIFO inventories at December 30, 1995 and December 31, 1994 were $5.3 million and $5.0 million, respectively. Under the FIFO method of accounting (which approximates current or replacement cost) inventories would have been unchanged at December 30, 1995 and $1.0 million higher at December 31, 1994. 5. FINANCIAL ARRANGEMENTS AND LONG-TERM DEBT Long-term debt at December 30, 1995 and December 31, 1994 consisted of the following: DECEMBER 30, December 31, 1995 1994 - - ----------------------------------------------------------------- (Expressed in thousands) - - ----------------------------------------------------------------- 9.25% Senior Notes due in 1999 $100,000 $100,000 8.05% Senior Notes due in 1998 50,000 - Unsecured notes payable to banks under financing agreements: Revolving lines of credit 89,771 105,085 Uncommitted lines of credit 37,580 73,533 Other 6,364 5,517 - - ----------------------------------------------------------------- 283,715 284,135 Less-current portion - 10 - - ----------------------------------------------------------------- Total long-term debt $283,715 $284,125 - - ----------------------------------------------------------------- 35 [SAFETY-KLEEN LOGO] The long-term debt as of December 30, 1995 is due as follows: Expressed in thousands ----------------------------------------- 1997 $ 55,902 1998 $ 50,625 1999 $100,045 2000 $ 77,045 2001 and thereafter $ 98 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 converted $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 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. 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 totalling $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 December 30, 1995, $40 million of borrowings were outstanding at an average interest rate of 5.9%. At December 30, 1995, the Company had uncommitted lines of credit totalling $165 million. Borrowings under these lines were $38 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 1996 and the Company intends to renew these obligations, $83 million of the loans payable to banks have been classified as long-term debt. The Company's German subsidiary has a revolving credit agreement totalling 76 million Deutschmarks (U.S. $53 million) that extends credit until December, 1997. The interest rate determined at the time of each borrowing is 6 month LIBOR plus 0.5%. A commitment fee of 0.125% per annum is paid quarterly on the unused portion of the facility. At December 30, 1995, 72 million Deutschmarks ($50 million U.S.) of borrowings were outstanding under these facilities at an average interest rate of 4.4% (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. $49 million) was swapped from rates based on 6-month DM LIBOR to rates based on 6-month U.S. Dollar LIBOR. At December 30, 1995, the effective interest rate was 8.0%. At December 30, 1995, the Company's other subsidiary operations have miscellaneous line of credit agreements totalling $7 million (U.S.). At December 30, 1995, there were no borrowings under these lines of credit. All of the Company's interest rate swap agreements have been entered into with major financial institutions which are expected to fully perform under the terms of the agreements. The Company monitors the credit ratings of these counterparties and considers the risk of default to be remote. The fair value of the three interest rate swap agreements and the interest cap agreement noted above was approximately $6.4 million greater than the Company's carrying value at December 30, 1995 and $2.7 million less than the Company's carrying value at December 31, 1994. 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, $1.8, and $3.6 million in 1995, 1994, and 1993, 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. 36 [SAFETY-KLEEN LOGO] The Company's credit agreements include provisions, among others, relative to maintenance of minimum shareholders' equity and interest coverage ratios. At December 30, 1995, the Company's required minimum shareholders' equity was $411 million. December 30, 1995, the Company was in compliance with all such loan provisions. 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 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 1995 Employee Stock Purchase Plan (the "ESPP") Under the Option Plans, options to purchase up to 5,937,500 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 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. 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 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. 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, 1,064,571 available option shares not granted as of December 31, 1994 expired. An additional 66,188 shares granted in 1994 that were cancelled in 1995 have expired. Officers of the Company, employees with less than six months of service, or employees who hold options under the 1985 Stock Option Plan were not eligible to participate under the old ESPP. At the Annual Meeting of Shareholders held in May, 1995, the shareholders approved the ESPP. 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 new 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 new ESPP) are eligible to participate. 37 [SAFETY-KLEEN LOGO] The following is a summary of the status of the Company's stock option plans for the three fiscal years ended December 30, 1995: AVAILABLE FOR PRICE FUTURE SHARES RANGE EXERCISABLE GRANTS - - ------------------------------------------------------------------------------- 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 1994 Activity: Expired (1,064,571) Granted 853,408 $13.50-$15.88 Exercised (71,207) $16.65-$16.65 Cancelled (271,341) $13.50-$32.00 - - -------------------------------------- Outstanding Options @12/31/94 3,239,275 $13.50-$32.25 1,829,500 2,365,479 1995 Activity: Expired (66,188) Authorized 1,500,000 Granted 1,228,846 $15.41-$16.88 Exercised (133,992) $13.50-$15.63 Cancelled (233,762) $13.50-$32.25 - - -------------------------------------- Outstanding Options @ 12/30/95 4,100,367 $13.50-$32.25 2,142,623 2,804,207 - - -------------------------------------------------------------------------------- STOCK WARRANTS The Company issued 200,000 stock warrants on January 27, 1995 in conjunction with an acquisition. These warrants give the owner of the stock warrants the right to purchase up to 200,000 shares of the Company stock at a price of $17.79 per share. The warrants expire on January 27, 2000. The value of these stock warrants is not material. 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 four noncontributory pension plans covering substantially all full time employees in the United States. 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 1995, 1994 and 1993 were $4.9 million, $5.5 million, and $7.2 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. 38 [SAFETY-KLEEN LOGO] The following table sets forth the domestic plans' combined funded status at December 30, 1995, and December 31, 1994: DECEMBER 30, 1995 December 31, 1994 - - ----------------------------------------------------------------------------------------- (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: Vested benefits $32,439 $ 7,314 $26,346 $ 1,681 Nonvested benefits 7,014 2,170 3,915 40 - - ----------------------------------------------------------------------------------------- Accumulated benefit obligation 39,453 9,484 30,261 1,721 Effect of projected compensation levels 14,063 420 11,985 759 - - ----------------------------------------------------------------------------------------- Projected benefit obligation 53,516 9,904 42,246 2,480 Plan assets at fair value 43,869 5,644 38,984 - - - ----------------------------------------------------------------------------------------- Projected benefit obligation (greater) than plan assets (9,647) (4,260) (3,262) (2,480) Unrecognized net loss (gain) 7,338 1,541 3,824 (558) Unrecognized net assets to be amortized over 16-20 years (349) 267 (709) 618 Unrecognized prior service cost 238 280 435 (80) Adjustment to recognize minimum liability - (2,019) - - - - ----------------------------------------------------------------------------------------- Unfunded accrued pension cost recognized in the Consolidated Balance Sheets $(2,420) $(4,191) $ 288 $(2,500) - - ----------------------------------------------------------------------------------------- In accordance with SFAS No. 87 on Employers' Accounting for Pensions, the Company has recorded an additional minimum pension liability in 1995 for each defined benefit plan that has an accumulated benefit obligation which exceeds the plan assets at fair value. The additional minimum pension liability was recorded as a $1,226,000 reduction to shareholders' equity at December 30, 1995, net of applicable deferred income taxes. 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 in 1995, 1994 and 1993 includes the following components: 1995 1994 1993 - - ------------------------------------------------------------------------ (Expressed in thousands) - - ------------------------------------------------------------------------ Service cost-benefits earned during the year $ 3,451 $ 4,235 $ 3,374 Interest on projected benefit obligation 4,274 3,909 3,339 Return on plan assets (10,405) (334) (2,034) Charges due to restructuring - - 2,376 Net amortization and deferral 6,493 (3,318) (1,007) - - ------------------------------------------------------------------------ Net periodic pension cost $ 3,813 $ 4,492 $ 6,048 - - ------------------------------------------------------------------------ Actuarial assumptions used to determine the projected benefit obligation and the expected net periodic pension costs were: 1995 1994 1993 - - ---------------------------------------------------------------------------- Projected Benefit Obligation Assumptions: Discount Rates 7.3% 8.5% 7.3% Rates of increase in compensation levels 4.0% 5.0% 5.0% 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. 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 $1.9 million in 1995, and $1.5 million in 1994. The Company did not make a matching contribution for 1993. 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. 39 [SAFETY-KLEEN LOGO] The following table reconciles the funded status of the plan to the accrued post-retirement benefit cost recognized in the Consolidated Balance Sheets at December 30, 1995 and December 31, 1994: DECEMBER 30, 1995 December 31, 1994 - - ------------------------------------------------------------------------------ (Expressed in thousands) - - ------------------------------------------------------------------------------ Accumulated post-retirement benefit obligation (APBO): Retirees, beneficiaries and dependents $ 1,055 $ 1,505 Active employees 5,575 4,494 - - ------------------------------------------------------------------------------ 6,630 5,999 - - ------------------------------------------------------------------------------ Plan assets at fair value - - - - ------------------------------------------------------------------------------ APBO greater than plan assets (6,630) (5,999) Unrecognized net loss (gain) (1,453) (1,399) - - ------------------------------------------------------------------------------ Accrued post-retirement benefit cost $(8,083) $(7,398) - - ------------------------------------------------------------------------------ APBO discount rate 7.25% 8.50% - - ------------------------------------------------------------------------------ Net periodic post-retirement benefit costs recognized for 1995, 1994 and 1993 are as follows: 1995 1994 1993 - - --------------------------------------------------------- (Expressed in thousands) - - --------------------------------------------------------- Service costs-benefits earned during the year $511 $ 786 $ 735 Interest costs on APBO 436 498 489 Curtailment charge due to restructuring - - 581 Other (87) (44) - - - --------------------------------------------------------- Net periodic post- retirement benefit cost $860 $1,240 $1,805 - - --------------------------------------------------------- The health care cost trend was assumed to be 9% for 1995 decreasing by 2% per year through 1997, then 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 December 30, 1995 would have increased 19%. The effect of this change on the aggregate of the service and interest cost for 1995 would be an increase of 21%. The Company 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 (loss) before income taxes consisted of the following for each of the last three fiscal years. 1995 1994 1993 - - --------------------------------------------------------- (Expressed in thousands) - - --------------------------------------------------------- Domestic $74,492 $81,275 $(137,043) Foreign 17,976 3,551 (31,566) - - --------------------------------------------------------- $92,468 $84,826 $(168,609) - - --------------------------------------------------------- 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: 1995 1994 1993 - - --------------------------------------------------------- (Expressed in thousands) - - --------------------------------------------------------- CURRENT Federal $16,505 $12,352 $ 878 State 5,087 5,692 1,361 Commonwealth of Puerto Rico (376) (883) (1,726) Foreign 662 1,365 - DEFERRED Federal 7,247 6,590 (2,871) Foreign 2,087 928 (15,841) PREPAID Federal 1,949 10,090 (35,926) State - - (8,340) Commonwealth of Puerto Rico - - (5,657) Foreign 6,004 (1,402) 859 - - --------------------------------------------------------- TOTAL PROVISION $39,165 $34,732 $(67,263) - - --------------------------------------------------------- The following table reconciles the statutory U.S. Federal income tax rate to the Company's consolidated effective tax rate: 1995 1994 1993 - - ---------------------------------------------------------- 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 3.6 4.4 ( 2.9) Difference in foreign statutory rates 2.2 (0.3) (3.3) Other 1.6 1.8 1.3 - - ---------------------------------------------------------- Effective tax rate 42.4% 40.9% (39.9%) - - ---------------------------------------------------------- 40 [SAFETY-KLEEN LOGO] Temporary differences and carryforwards which give rise to deferred tax assets and liabilities are as follows: DECEMBER 30, December 31, January 1, 1995 1994 1994 - - --------------------------------------------------------------------------------- (Expressed in thousands) - - --------------------------------------------------------------------------------- Deferred tax assets-current Restructure reserves $ 4,278 $ 7,773 $ 7,609 Environmental reserves 2,625 1,628 1,628 Insurance reserves 5,908 6,399 6,551 Bad debt reserve 1,800 1,659 1,554 Other 3,373 797 2,348 - - --------------------------------------------------------------------------------- Total deferred tax assets - current 17,984 18,256 19,690 - - --------------------------------------------------------------------------------- Deferred tax assets - non-current Restructuring charges not currently deductible 17,494 24,842 29,475 Net operating loss (NOL) carryforwards of subsidiaries 20,149 18,679 16,233 Insurance reserves 4,822 3,605 - Environmental reserves 14,382 19,382 21,113 Other 3,273 1,484 770 Valuation allowance (3,676) (3,217) (4,560) - - --------------------------------------------------------------------------------- Total deferred tax assets non-current 56,444 64,775 63,031 - - --------------------------------------------------------------------------------- Total Deferred Tax Assets $ 74,428 $ 83,031 $ 82,721 - - --------------------------------------------------------------------------------- Deferred Tax Liabilities Restructuring and special charges $ 13,820 $ 12,726 $ 14,061 Depreciation (80,250) (68,828) (62,338) Tax lease agreements (7,253) (7,539) (7,682) Other (915) (3,840) (5,581) - - --------------------------------------------------------------------------------- Total Deferred Tax Liabilities $ (74,598) $(67,481) $(61,540) - - --------------------------------------------------------------------------------- As of December 30, 1995, the Company has undistributed earnings of foreign consolidated subsidiaries of approximately $20.4 million. Since it is the Company's intention to reinvest the earnings into the foreign subsidiaries ongoing operations, the Company does not provide for deferred taxes on possible future remittances of the undistributed earnings. If the reinvested earnings were to be remitted, the U.S. income taxes under the current law would not be material. At December 30, 1995, the tax assets derived from Net Operating Loss carryforwards (NOLs) that have no expiration total approximately $15.4 million or 77% of the total NOL tax assets available to the Company. The remaining NOL tax assets of approximately $4.7 million consist of NOL tax assets with expiration dates as follows: Expressed in Thousands ------------------------------------ 1996 $1,341 1997 $ 765 1998 $ 636 1999 $1,560 2000 $ 402 The Company has recorded a valuation allowance of approximately $3.7 million for unrealized NOL tax assets that may expire before the Company is able to utilize such NOLs. The valuation allowance account balance of $3.7 million represents approximately 79% of the NOL tax assets that are due to expire as compared to a valuation allowance percentage of approximately 57% of the NOLs due to expire at the end of 1994. The valuation account activity is summarized in the table below. 1995 - - ------------------------------------------------------------------------- (Expressed in thousands) - - ------------------------------------------------------------------------- Balance - beginning of year $3,217 Adjust valuation balances 259 Cumulative translation adjustment 200 - - ------------------------------------------------------------------------- Balance - end of year $3,676 - - ------------------------------------------------------------------------- 9. SPECIAL CHARGE FOR ENVIRONMENTAL COST, 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, 41 [SAFETY-KLEEN LOGO] and it is always possible that the Company's actual liability in any particular case or 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 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 permitted 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. 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 uninsured losses were to be incurred. The Company leases many of its branches, vehicles and other equipment. These leases are accounted for as operating leases. Related rental expenses were $24.8 million in 1995, $21.2 million in 1994 and $20.8 million in 1993. Aggregate minimum future rentals are payable as follows: Expressed in Periods Millions - - ------------------------------------------------------------------------------ 1996 $23.1 1997 19.1 1998 14.0 1999 8.0 2000 5.5 Future Years 16.9 - - ------------------------------------------------------------------------------ Total 86.6 - - ------------------------------------------------------------------------------ 10. RESTRUCTURING CHARGE 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 included $93 million of asset writedowns 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 expected required levels. 11. PROPERTY PLANT & EQUIPMENT HELD FOR SALE The net book value of property intended for sale as a result of planned recycling capacity reductions, facility shutdowns and other restructuring actions taken during the fourth interim period of 1993 was $11.2 and $16.4 million as of December 30, 1995 and December 31, 1994, respectively. 12. ACCOUNTING CHANGES The Company is required to adopt Statement of Financial Accounting Standards (SFAS) No. 121 on Accounting for the Impairment of Long Term Assets and for Long-Term Assets to be Disposed Of for fiscal year 1996. The Company does not believe that the adoption of SFAS No. 121 will have a material impact on the financial position or results of operations of the Company. 42 [SAFETY-KLEEN LOGO] 13. INTERIM RESULTS OF OPERATIONS (UNAUDITED) (Expressed in thousands, except per share amounts) EARNINGS REVENUE GROSS PROFIT NET EARNINGS PER SHARE - - ------------------------------------------------------------------------------------------------------------------------------- Interim Period 1995 1994 1995 1994 1995 1994 1995 1994 - - ------------------------------------------------------------------------------------------------------------------------------- First (12 Weeks) $194,559 $176,812 $ 52,142 $ 45,500 $12,071 $ 9,705 $0.21 $0.17 Second (12 Weeks) 203,192 183,334 54,206 48,880 12,131 11,468 0.21 0.20 Third (12 Weeks) 197,529 182,149 52,290 48,644 11,126 12,212 0.19 0.21 Fourth (16 Weeks) 263,971 248,972 72,144/(1)/ 68,734 17,975/(1)/ 16,709 0.31 0.29 - - ------------------------------------------------------------------------------------------------------------------------------- Total $859,251 $791,267 $230,782 $211,758 $53,303 $50,094 $0.92 $0.87 =============================================================================================================================== /(1)/ In the fourth interim period of 1995, the Company recorded normal year-end adjustments to accruals and other accounts which were more favorable than those approximately $1.4 million in recorded in the same period of 1994. These adjustments resulted in an increase of gross profit and $2 million in net earnings ($.03 per share) in the fourth interim period of 1995 compared to 1994. 43 [SAFETY-KLEEN LOGO] BOARD OF DIRECTORS Donald W. Brinckman, Founder and Chairman, Safety-Kleen Corp. John G. Johnson Jr., President and Chief Executive Officer, Safety-Kleen Corp. Richard T. Farmer, Chairman, Cintas Corporation (uniform manufacturer and supplier) Russell A. Gwillim, Chairman Emeritus, Safety-Kleen Corp. Edgar D. Jannotta, Senior Principal, William Blair & Company, L.L.C. (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) Marcia Williams, President, Williams & Vanino, Inc. (environmental/management consulting firm) W. Gordon Wood, Retired Vice President, Safety-Kleen Corp. CORPORATE OFFICERS Donald W. Brinckman, Founder, Chairman of the Board and Director John G. Johnson Jr., President, Chief Executive Officer and Director Hyman K. Bielsky, Senior Vice President General Counsel Roy D. Bullinger, Senior Vice President Business Management and Marketing Robert J. Burian, Senior Vice President Human Resources Michael H. Carney, Senior Vice President Marketing Services and Customer Care Joseph Chalhoub, Senior Vice President, Operations, Oil Recovery and Envirosystems 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 Corporate Development and Environment Robert W. Willmschen Jr., Senior Vice President Finance and Secretary Lawrence G. Davenport, Vice President Information Services and Chief Information Officer Clark J. Rose, Vice President Manufacturing and Technical Services Laurence M. Rudnick, Treasurer Clifford J. Schulz, Controller 44 [SAFETY-KLEEN LOGO] CORPORATE DATA CORPORATE OFFICE Safety-Kleen Corp., 1000 North Randall Road, Elgin, IL 60123 Telephone: (847) 697-8460 AUDITORS Arthur Andersen LLP, 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 10, 1996, 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 under the 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 December 30, 1995 was 7,110. 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. 1995 1994 - - ---------------------------------------------------------------------- CASH Cash PRICES DIVIDENDS Prices Dividends HIGH LOW PAID High Low Paid March 31 $17.88 $14.50 $ .09 $18.50 $13.63 $0.09 June 30 18.00 15.13 .09 18.25 13.63 0.09 September 30 17.13 13.50 .09 18.00 15.38 0.09 December 31 15.63 14.00 .09 16.38 12.75 0.09 - - ---------------------------------------------------------------------- $0.36 $0.36 - - ---------------------------------------------------------------------- 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)1996 Printed in U.S.A. [RECYCLE LOGO] Printed on recycled paper. Safety-Kleen Corp. is an Equal Opportunity Employer m/f 45