UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K/A
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended August 31, 2001
Commission File Number 1-8368
SAFETY-KLEEN CORP.
(Exact name of registrant as specified in its charter)
Delaware 51-0228924
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1301 Gervais Street, Columbia, South Carolina 29201
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (803) 933-4200
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
None
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
Title of each class
Common Stock Par Value $1.00
Rights to Purchase Common Stock
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Sections 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [ ] No [X]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this form 10-K. [ ]
The aggregate market value of the common stock held by non-affiliates of the
registrant was $35,274,259 as of March 11, 2002.
The number of shares of the issuer's common stock outstanding was 100,783,596 as
of March 11, 2002.
TABLE OF CONTENTS
The following Items have been amended in their entirety:
ITEM PAGE
- ---- ----
PART II
6. Selected Consolidated Financial Data...................................................... 3
7. Management's Discussion and Analysis of Financial Condition and Results of Operations..... 4
7A. Quantitative and Qualitative Disclosures About Market Risk................................ 28
8. Financial Statements and Supplemental Data................................................ 30
PART IV
14. Exhibits, Financial Statement Schedules and Reports on Form 8-K........................... 91
Signature................................................................................. 92
2
PART II
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The information set forth below should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the Company's Consolidated Financial Statements and the Notes thereto, included
elsewhere in this Annual Report ($ in thousands, except per share amounts).
YEARS ENDED AUGUST 31, 2001 2000 1999 1998 1997
---- ---- ---- ---- ----
Revenues $ 1,514,583 $ 1,586,273 $ 1,624,038 $ 1,172,731 $ 641,945
Impairment and other charges 52,884 367,793 11,287 64,882 253,484
Operating (loss) income (168,336) (620,170) 6,876 (2,223) (294,749)
Loss before reorganization items, income taxes,
minority interest and extraordinary items (174,930) (759,073) (185,272) (123,535) (341,220)
Reorganization items (42,284) (60,923) -- -- --
Extraordinary items, net of tax 5,591 -- -- (18,783) --
Net loss (229,078) (833,191) (223,155) (103,211) (301,544)
Loss per share before extraordinary items - basic
and diluted (2.33) (8.27) (2.52) (1.35) (8.74)
Net loss per share - basic and diluted (2.27) (8.27) (2.52) (1.65) (8.74)
Dividends per common share -- -- -- -- --
Weighted average common stock outstanding - basic and
diluted 100,784 100,725 88,537 62,322 34,508
Total assets 3,013,793 3,131,868 3,635,314 3,869,475 1,513,741
Long-term debt, including current portion 62,223 65,421 2,095,016 2,340,806 938,687
Liabilities subject to compromise 2,481,274 2,500,973 -- -- --
During fiscal 2001, the Company's Chemical Services Division ceased operations
at two incinerators, a wastewater treatment facility and a transportation
facility. As a result of these closures, the Company recorded a provision for
early facility closures and post-closures of $45 million. The Company also
recorded net asset impairment charges of $8 million due primarily to a
wastewater treatment facility which lost several significant customers due to
adverse business conditions and a reduction in the estimated fair value of the
former headquarters of Old Safety-Kleen.
Extraordinary items consist of certain trade accounts payable claims that the
Company, pursuant to Bankruptcy Court approval, settled during fiscal 2001.
Under the terms of these settlements, the Company paid certain vendors less than
the amount of pre-petition liabilities to the vendors as of the Chapter 11
filing date. The consolidated extraordinary gains from these settlements
amounted to approximately $6 million in fiscal 2001. No income tax provision or
benefit with respect to these items was required.
3
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis provides information which management
believes is relevant to an assessment and understanding of the consolidated
results of operations and financial condition of Safety-Kleen Corp. (the
"Registrant" or "Safety-Kleen") (collectively referred to with its subsidiaries
as the "Company"). The following discussion and analysis should be read in
conjunction with the Company's Form 10-K for the period ended August 31, 2001,
Form 10-Q for the quarter ended November 30, 2001, and the Company's audited
Consolidated Financial Statements and related Notes thereto and other
information included elsewhere herein.
On November 29, 2001, the Company filed its Form 10-K for the period ended
August 31, 2001, which omitted certain information responsive to Items 6, 7, 7A,
8 and 14. As described in greater detail below "Factors That May Affect Future
Results - Uncertainties Relating to the Company's Internal Controls," the
Company, with the assistance of Jefferson Wells International and Arthur
Andersen LLP, is working to correct material deficiencies in the Company's
internal controls. Despite the progress made by the Company in correcting the
deficiencies, the Company was not able to prepare and obtain an audit of its
Consolidated Financial Statements for the fiscal year ended August 31, 2001,
within the time limitations imposed by federal securities laws and regulations.
This amended Form 10-K provides financial and other previously omitted
information.
BUSINESS, ORGANIZATION AND BANKRUPTCY
Safety-Kleen was incorporated in Delaware in 1978 as Rollins Environmental
Services, Inc. ("Rollins"), later changed its name to Laidlaw Environmental
Services, Inc. ("LESI") and subsequently changed its name to Safety-Kleen Corp.
Through its Chemical Services and Branch Sales and Service divisions, the
Company provides a range of services designed to collect, transport, process,
recycle or dispose of hazardous and non-hazardous industrial and commercial
waste streams. The Company provides these services in 50 states, ten Canadian
provinces, Puerto Rico, Mexico and Saudi Arabia from approximately 375
collection, processing and other locations.
In May 1998, LESI completed the acquisition of the former Safety-Kleen Corp.
("Old Safety-Kleen"). Management believes that the Company experienced
substantial difficulties in the integration of the operations of Old
Safety-Kleen with those of LESI following the acquisition of Old Safety-Kleen.
The implementation of the Company's post-acquisition strategy to combine key
elements of the more decentralized LESI business structure with that of the
strongly centralized Old Safety-Kleen business, particularly in the United
States, adversely affected post-acquisition operations and cash flows and
ultimately impacted management's expectation of the long-term economic
performance of the underlying businesses. Changing the existing regionalized
LESI pricing structure to the more uniform national pricing structure of the Old
Safety-Kleen business resulted in a reduction of the overall pricing realized by
the Company. Converting several of LESI's service centers from profit centers
with one manager to cost centers with two managers during fiscal 1999 and 2000
resulted in poor cost and pricing controls. Transferring the Old Safety-Kleen
industrial waste collection business to a co-managed waste-collection business
diluted pricing and negatively impacted customer service. Requiring the use of
Company-owned waste disposal facilities, even when lower-cost, external options
were available, resulted in higher overall operating costs.
In addition, management believes that the loss of key employees of the Old
Safety-Kleen business due to post-acquisition strategies and the relocation of
Old Safety-Kleen's corporate office from Elgin, Illinois to Columbia, South
Carolina resulted in a significant loss of institutional knowledge concerning
historical business practices of the Old Safety-Kleen business. Many of the
internal accounting and operational information systems and processes that had
historically been used to monitor and manage the costs and performance of the
Old Safety-Kleen business were discontinued shortly after the acquisition and,
to date, have not been satisfactorily replaced. In addition, significant
difficulties in relocating and converting the Old Safety-Kleen's accounts
receivable and cash application functions to the LESI headquarters in Columbia,
South Carolina and, subsequently, converting to new accounts receivable software
resulted in significant problems regarding customer billing, dispute resolution,
cash application and, ultimately, cash realization. See "Factors That May Affect
Future Results - Uncertainties Related To the Company's Internal Controls"
below.
On June 9, 2000, Safety-Kleen and 73 of its domestic subsidiaries (collectively,
the "Debtors") filed voluntary petitions for relief (the "Chapter 11 Cases")
under Chapter 11 of the United States Bankruptcy Code, 11 U.S.C. ss.ss.
101-1330, as amended (the "Bankruptcy Code") in the United States Bankruptcy
Court for the District of Delaware (the "Bankruptcy Court"). The Chapter 11
Cases are being jointly administered, for procedural purposes only, before the
Bankruptcy Court under Case No. 00-2303(PJW). Excluded from the filings were
certain of Safety-Kleen's non-wholly-owned domestic subsidiaries and all
Safety-Kleen's indirect foreign subsidiaries.
The Company has incurred and will continue to incur significant costs associated
with the reorganization. The amount of these costs, which are being expensed as
incurred, is expected to significantly affect future results until the Company
emerges from its reorganization under the Chapter 11 proceedings.
Consummation of a plan or plans of reorganization is the principal objective of
the Chapter 11 Cases. A plan of reorganization sets forth the means for
satisfying claims against and interests in the Debtors, including the
liabilities subject to compromise. Generally, pre-petition liabilities are
subject to settlement under such a plan or plans of reorganization, which must
be voted upon by creditors and equity holders and approved by the Bankruptcy
Court. The Debtors have retained Lazard Freres & Co. LLC, an investment bank, as
corporate restructuring advisor to assist them in formulating and negotiating a
plan or plans of reorganization for the Debtors. Although the Debtors expect to
file a reorganization plan or plans as soon as reasonably possible, there can be
no assurance that a reorganization plan or plans will be proposed by the Debtors
or confirmed by the Bankruptcy Court, or that any such plan or plans will be
consummated.
4
As part of this reorganization effort, the Company prepared a marketing book for
the sale of the Chemical Services Division which has been distributed to
interested parties. On February 22, 2002, the Company entered into a definitive
agreement with Clean Harbors, Inc. ("Clean Harbors") to sell its Chemical
Services Division, excluding the Company's landfill in Pinewood, S.C. Pursuant
to the terms of the agreement, Clean Harbors would purchase the Chemical
Services Division's net assets from the Company for $46 million in cash, subject
to defined working capital adjustments, and the assumption of certain
liabilities, which includes environmental liabilities valued at approximately
$265 million as of August 31, 2001. The book value of the net assets to be
disposed, net of the liabilities to be assumed, at August 31, 2001 was in excess
of $300 million. On March 8, 2002, the Bankruptcy Court approved the bidding and
auction procedures for the sale of the Company's Chemical Services Division.
Pursuant to the bidding procedures, all qualified bidders interested in
purchasing some or all of the Chemical Services Division must submit an
alternative qualified bid on or before May 30, 2002. There can be no assurance
that the Bankruptcy Court and/or the various regulatory agencies will approve
the sale of the Chemical Services Division to Clean Harbors or an alternative
purchaser, or that the Company will be able to complete the sale of the Chemical
Services Division.
Currently, it is not possible to predict the length of time the Debtors will
operate under the protection of Chapter 11, the outcome of the Chapter 11
proceedings in general, or the effect of the proceedings on the business of the
Company or on the interests of the various creditors and security holders.
Under the Bankruptcy Code, post-petition liabilities and pre-petition
liabilities subject to compromise must be satisfied before shareholders can
receive any distribution. The ultimate recovery to shareholders, if any, will
not be determined until the end of the case when the fair value of the Debtors'
assets is compared to the liabilities and claims against the Debtors. There can
be no assurance as to what value, if any, will be ascribed to the common stock
in the bankruptcy proceedings. The Company does not believe the shareholders
will receive any distribution upon consummation of a plan or plans of
reorganization.
The Company's Consolidated Financial Statements have been prepared on a going
concern basis which contemplates continuity of operations, realization of
assets, and payment of liabilities in the ordinary course of business and do not
reflect adjustments that might result if the Debtors are unable to continue as a
going concern. The Company's history of significant losses, stockholders'
deficit and the Debtors' Chapter 11 Cases, as well as issues related to
compliance with debt covenants and financial assurance requirements, raise
substantial doubt about the Company's ability to continue as a going concern.
Continuing as a going concern is dependent upon, among other things, the
Debtors' formulation of a plan or plans of reorganization, the success of future
business operations, and the generation of sufficient cash from operations and
financing sources to meet the Company's obligations. The Consolidated Financial
Statements do not reflect: (a) the realizable value of assets on a liquidation
basis or their availability to satisfy liabilities; (b) aggregate pre-petition
liability amounts that may be allowed for unrecorded claims or contingencies, or
their status or priority; (c) the effect of any changes to the Debtors' capital
structure or in the Debtors' business operations as the result of an approved
plan or plans of reorganization; or (d) adjustments to the carrying value of
assets (including goodwill and other intangibles) or liability amounts that may
be necessary as the result of actions by the Bankruptcy Court.
The Company's Consolidated Financial Statements as of and for the fiscal years
ended August 31, 2001 and 2000 have been presented in conformity with the
AICPA's Statement of Position 90-7, "Financial Reporting By Entities In
Reorganization Under the Bankruptcy Code" ("SOP 90-7"). The statement requires,
among other things, a segregation of liabilities subject to compromise by the
Bankruptcy Court as of the bankruptcy filing date and identification of all
transactions and events that are directly associated with the reorganization of
the Company.
OTHER MATTERS
On September 5, 2001, the Bankruptcy Court entered an order approving employment
and indemnification agreements with Ronald A. Rittenmeyer, in accordance with
which he became Chairman of the Board, Chief Executive Officer and President of
Safety-Kleen. Mr. Rittenmeyer had been appointed to the Board of Directors of
Safety-Kleen in April 2001. Also on September 5, 2001, the Bankruptcy Court
approved termination and consulting agreements with David E. Thomas, Jr. and
Grover C. Wrenn; the Company terminated their executive positions and they were
appointed non-executive Vice Chairmen of the Board of Directors.
In addition to Mr. Rittenmeyer, three new independent outside directors have
been named to the Board of Directors of Safety-Kleen since March 2000. Kenneth
K. Chalmers was appointed in May 2000, and Peter E. Lengyel and David W. Wallace
were each appointed in March 2001.
On August 17, 2000, Larry W. Singleton, previously unaffiliated with the
Company, was elected Senior Vice President and Chief Financial Officer, and on
November 27, 2001, was elected Executive Vice President and Chief Financial
Officer by the Board of Directors.
On October 18, 2001, the Bankruptcy Court entered an order approving employment
and indemnification agreements with Thomas W. Arnst. On November 27, 2001, Mr.
Arnst was elected Executive Vice President and Chief Administrative Officer by
the Board of Directors.
On November 27, 2001, David M. Sprinkle, who had served as the President of the
Chemical Services Division of the Company since May 2000, was elected Chief
Operating Officer of Safety-Kleen by the Board of Directors. On October 17,
2001, Roy D. Bullinger, who had served as the President of the Branch Sales and
Service Division since May 2000, ceased to be employed by the Company.
On November 27, 2001, James K. Lehman was elected to the position of Senior Vice
President, General Counsel and Secretary of Safety-Kleen. On November 16, 2001,
Henry Taylor, who had served as Senior Vice President, General Counsel and
Secretary of Safety-Kleen, ceased to be employed by the Company.
5
INVESTIGATION OF FINANCIAL RESULTS; RESTATEMENT OF CONSOLIDATED
FINANCIAL STATEMENTS
On March 6, 2000, the Company announced that it had initiated an internal
investigation of its previously reported financial results and certain of its
accounting policies and practices. This investigation followed receipt of
information by Safety-Kleen's Board of Directors, on February 24, 2000, alleging
possible accounting irregularities that may have affected the previously
reported financial results of the Company. The Company conducted a comprehensive
internal review of its accounting records for fiscal 1997 to 2000 and engaged
Arthur Andersen LLP as its new independent public accountants to, among other
things, conduct an audit of the Company's Consolidated Financial Statements for
the same periods. In addition, the Company is the subject of ongoing
investigations by the Securities and Exchange Commission and a grand jury
sitting in the United States District Court for the Southern District of New
York relating to the same matters. The Company has responded to subpoenas issued
by the Securities and Exchange Commission and the grand jury and is cooperating
with each of the investigations.
The Board appointed a special committee, consisting of four directors who were
then independent outside directors of Safety-Kleen, to conduct the internal
investigation (the "Special Committee (Investigation)"). The Special Committee
(Investigation) was later expanded to five directors, with the addition of
another independent outside director. As a result of the preliminary findings of
the investigation and the results of the audit conducted by Arthur Andersen LLP,
the Company restated its previously reported financial results for fiscal 1999,
1998 and 1997 in Form 10-K/A filed on July 9, 2001.
On September 13, 2001, the Board of Directors dissolved the Special Committee
(Investigation) and established the Special Committee (Conflicts of Interest in
Litigation). The Special Committee (Conflicts of Interest in Litigation) is
authorized to manage all litigation involving the Company and any member of the
Board of Directors. The new committee is comprised of Ronald A. Rittenmeyer,
Kenneth K. Chalmers, Peter E. Lengyel and David W. Wallace, each of whom was
appointed to the Board subsequent to March 6, 2000 and is not personally
involved in such litigation (see Note 14 of Notes to Consolidated Financial
Statements).
6
RESULTS OF OPERATIONS
The Company is organized along the lines of its two primary business
activities-Chemical Services and Branch Sales and Service. The services provided
by the Chemical Services Division include the collection, treatment, and
disposal of a wide variety of hazardous and non-hazardous waste. The Company
disposes of waste primarily through its network of thermal destruction
incinerators, landfills and wastewater treatment facilities, and in certain
instances after accumulating and treating waste at Company-owned service
centers. The Branch Sales and Service Division provides parts cleaner services
and other services to automotive repair, commercial and manufacturing customers.
These other services include, but are not limited to, hazardous and
non-hazardous waste collection, treatment, recycling and disposal.
The Company eliminates material intersegment and intrasegment revenue in
presenting consolidated financial results. The majority of intersegment revenue
eliminations relate to the Chemical Services Division, which bills for the waste
streams it receives from the Branch Sales and Service Division.
The Company currently classifies as "Corporate" in its segment reporting, the
cost of certain Company-wide functions and services consisting primarily of
legal, accounting, finance and information technology. In addition, this
category includes the incremental cost of the Company's efforts related to its
internal accounting review for fiscal 1997 through 2000, the audits of these
periods and the various investigations of its financial results. Certain
intersegment eliminations are recorded in Corporate.
Set forth below are certain operating items expressed as a percentage of
revenues:
FOR THE YEARS ENDED AUGUST 31,
------------------------------
2001 2000 1999
----- ----- -----
Revenues 100.0% 100.0% 100.0%
----- ----- -----
Expenses:
Operating 80.0 87.6 76.6
Depreciation and amortization 9.5 10.7 9.9
Selling, general and administrative 18.1 17.6 12.4
Impairment and other charges 3.5 23.2 0.7
----- ----- -----
111.1 139.1 99.6
----- ----- -----
Operating (loss) income (11.1) (39.1) 0.4
Interest expense, net (0.3) (8.9) (11.5)
Other (expense) income (0.1) 0.1 (0.4)
Equity in earnings of associated companies 0.0 0.1 0.1
----- ----- -----
Loss before reorganization items, income taxes,
minority interest and extraordinary items (11.5) (47.8) (11.4)
Reorganization items (2.8) (3.8) 0.0
----- ----- -----
Loss before income taxes, minority interest and
extraordinary items (14.3) (51.6) (11.4)
Income tax expense (1.2) (0.8) (2.4)
----- ----- -----
Loss before minority interest and extraordinary
items (15.5) (52.4) (13.8)
Minority interest 0.0 0.0 0.1
----- ----- -----
Loss before extraordinary items (15.5) (52.4) (13.7)
Extraordinary items, net of tax (early
extinguishment of debt) 0.4 0.0 0.0
----- ----- -----
Net loss (15.1)% (52.4)% (13.7)%
===== ===== =====
7
CLOSED FACILITIES
Closed facilities represent certain facilities that have ceased operations or
been sold. Ceased operations at a facility indicates that the facility has
stopped accepting and disposing of waste or has significantly reduced the amount
of waste acceptance and disposal to levels that typically precede a facility
closure. A facility closure indicates that a facility has ceased operations,
completed the decontamination process and the appropriate regulatory agencies
have certified the decontamination. Also included in closed facilities are
certain business activities that the Company no longer performs.
The following is a summary of facilities in the Chemical Services Division which
ceased operations or were sold ("closed facilities") in fiscal 2001 and 2000:
2001
Line of Business Location Status Fiscal Quarter
---------------- -------- ------ ---------------
Transportation Burton, MI Ceased operations 1st
Incinerator Coffeyville, KS Ceased operations 1st
Incinerator Bridgeport, NJ Ceased operations 2nd
Wastewater Treatment Hilliard, OH Ceased operations 2nd
Additional Services-(Consulting) Boulder, CO Sold 4th
2000
Line of Business Location Status Fiscal Quarter
---------------- -------- ------ ---------------
Landfill Pinewood, SC Ceased operations 4th
Landfill Rosemount, MN Sold 4th
Additional Services - (Harbor Dredging) Northeastern US Ceased operations 4th
Effective December 1, 2001, the Burton, Michigan facility was reopened as a
transportation rail hub. The Pinewood, South Carolina facility stopped accepting
waste in the first quarter of fiscal 2001. However, due to pending litigation
against Pinewood, waste disposal was significantly reduced in the fourth quarter
of fiscal 2000 and Pinewood was treated as if it had ceased operations in that
quarter. The Pinewood landfill continued to operate as a transportation center
until December 2001.
FISCAL 2001 OPERATIONS
The Company's operating loss of $168 million in fiscal 2001 includes the effect
of several significant expenses resulting from a number of unusual events.
During fiscal 2001, the Chemical Services Division ceased operations at two
incinerators, a wastewater treatment facility and a transportation facility. As
a result of these closures, the Company recorded a provision for early facility
closures and post-closures of approximately $45 million. The Company also
recorded net asset impairment charges of approximately $8 million due primarily
to a wastewater treatment facility which lost several significant customers due
to adverse business conditions and a reduction in the estimated fair value of
the former headquarters of Old Safety-Kleen.
The Company incurred approximately $55 million in fiscal 2001 of auditing,
non-audit assistance, consulting, legal and other professional fees associated
primarily with (i) the investigation and restatement of its Consolidated
Financial Statements for fiscal 1997 through 1999; (ii) the preparation of its
Consolidated Financial Statements for fiscal 2000; (iii) a comprehensive review
of all the Company's major fiscal 2001 general ledger accounts; (iv) the
preparation of its unaudited Consolidated Financial Statements for the first
nine months of fiscal 2001 and related Form 10-Q/A; (v) other finance and
accounting services; and (vi) litigation and compliance matters and expenses
related to the various investigations concerning the Company's previously
reported financial results. These costs are classified as "Selling, general and
administrative" expenses in the Company's consolidated statements of operations.
The Company expects (i) the legal costs described above to decrease when the
aforementioned matters are resolved, and (ii) the cost of auditing and non-audit
assistance to continue in fiscal 2002 and for an indefinite period thereafter,
although at a somewhat lower level, since the restatement and audit for fiscal
years 1997 through 1999 and audit for fiscal 2000 was completed by July 2001.
The Company expects the auditing and non-audit costs to be further reduced when
its internal controls and processes are satisfactorily improved. See "Factors
That May Affect Future Results - Uncertainties Relating to the Company's
Internal Controls" below.
8
FISCAL 2001 COMPARED TO FISCAL 2000
REVENUES
Consolidated revenues decreased 4.5% ($71 million) to approximately $1,515
million in fiscal 2001, compared to approximately $1,586 million in fiscal 2000,
with the following increase or decrease by business segment: Chemical Services
decreased 15.3% ($100 million); and Branch Sales and Service increased 2.1% ($21
million). Intersegment revenue decreased by approximately $8 million in fiscal
2001 compared to 2000.
Chemical Services combined external and intersegment revenues in fiscal 2001
were approximately $555 million compared to approximately $655 million in fiscal
2000. Approximately $56 million of the decline was due primarily to closed,
ceased or sold facilities (see "Results of Operation - Closed Facilities"
paragraph above) which included closures at its Bridgeport, Coffeyville,
Hilliard and Burton facilities ($41 million) in fiscal 2001 and its Pinewood and
Harbor Dredging operations ($15 million) in fiscal 2000. Excluding closed
facilities, Chemical Services fiscal 2001 revenues decreased $44 million
compared to fiscal 2000 due primarily to: (i) waste streams brokered by Chemical
Services for Branch Sales and Service and reported as revenue by Chemical
Services in fiscal 2000 ($13 million) but disposed of directly by Branch Sales
and Service in fiscal 2001; (ii) a 40% waste stream volume reduction at a
Canadian landfill facility ($20 million) due to, among other things, lower event
business, price increases and management of remaining permitted capacity against
the new permit process; and (iii) other Chemical Services facilities, primarily
service centers, experienced $11 million of net decreases. Included in the
revenue items discussed above are intersegment revenues of approximately $49
million and $56 million for fiscal 2001 and 2000, respectively.
The Branch Sales and Service combined external and intersegment revenues in
fiscal 2001, were approximately $1,020 million compared to approximately $999
million in fiscal 2000 due to revenue increases in the following lines of
business: oil re-refining 12.6% ($17 million), industrial waste collection
services 4.9% ($11 million), vacuum truck services 21.0% ($10 million) and
integrated customer compliance services 43.8% ($6 million); which were somewhat
offset by decreases in parts cleaner services 4.2% ($14 million), oil collection
services 9.2% ($7 million) and $2 million of other net decreases in the
remaining lines of business.
The increase in oil re-refining revenue was due to a shift to a higher priced
product mix and higher crude oil prices. Selling prices in oil re-refining
products have a high correlation to the price of crude oil. The higher crude oil
prices also negatively impact revenue in oil collection services as competition
for oil increases during times of high oil prices. The increase in industrial
waste collection services revenue is the result of changes in waste routing
which accelerated processing and reduced waste on hand, as well as, refinements
to estimates of disposal cycle times. The increase in vacuum truck services
revenue was due to improved marketing and sales efforts in that market. The
increase in customer compliance services was a result of the Company's on-line
service offering and an increased sales focus in this area. The decline in
revenue from parts cleaner services reflects a continuing trend that the Company
believes results from sales to a relatively mature and slow growth solvent-based
parts cleaner market. Branch Sales and Service intersegment revenue is generated
primarily by waste streams from Chemical Services processed by Branch Sales and
Service recycling centers. Included in the revenue items discussed above are
intersegment revenues of approximately $11 million and $12 million for fiscal
2001 and 2000, respectively.
OPERATING EXPENSES
Consolidated operating expenses in fiscal 2001 were approximately $1,212 million
compared to $1,389 million in fiscal 2000 with the following decrease by
business segment: Chemical Services decreased 23.2% ($134 million); Branch Sales
and Service decreased 4.2% ($35 million); Corporate decreased 53.6% ($16
million); and intersegment expense decreased by approximately $8 million.
Chemical Services combined external and intersegment operating expenses were
approximately $441 million (79.5% of revenues) in fiscal 2001 compared to $575
million (87.7% of revenues) in fiscal 2000. The decrease in operating expenses
is due primarily to closed facilities, ceased operations and other expense
reductions related to revenue declines. Excluding closed facilities, fiscal 2001
operating expenses decreased $59 million. Also excluding closed facilities,
operating expenses as a percentage of revenues were 74.8% and 78.1% for fiscal
2001 and 2000, respectively.
Branch Sales and Service combined external and intersegment operating expenses
were approximately $817 million (80.2% of revenues) in fiscal 2001 compared to
$852 million (85.4% of revenues) in fiscal 2000. The relative improvement is due
to the following: (i) fiscal 2000 included approximately $25 million of
unusually large charges for amounts related to its parts cleaner service
machines and the effect of increasing its reserve for obsolete inventory while
fiscal 2001 includes approximately $7 million of such charges; (ii) disposal
charges were down $13 million partially due to a shift towards lower cost
external options; (iii) environmental charges were down $6 million due to
charges for changes in estimates for environmental reserves in fiscal 2000; and
(iv) other cost decreases of $5 million. These improvements were somewhat offset
by $7 million of higher utility costs in fiscal 2001 due to natural gas price
increases.
Corporate operating expenses were approximately $14 million in fiscal 2001
compared to $30 million in fiscal 2000. The decrease is due primarily to the
loss on the final sale of the Company's European operations and the charge for
certain uncollectible accounts which were included in fiscal 2000 operating
expense and did not recur in fiscal 2001.
9
DEPRECIATION AND AMORTIZATION EXPENSE
Consolidated depreciation and amortization expense was approximately $144
million and $170 million in fiscal 2001 and 2000, respectively. The decrease of
$26 million was due primarily to the write-down of impaired assets in fiscal
2000 (see Note 17 of Notes to Consolidated Financial Statements).
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Consolidated selling, general and administrative expenses of approximately $274
million for 2001 were essentially unchanged compared to approximately $279
million in fiscal 2000. However, fiscal 2001 includes an increase of $48 million
in professional fees relating to the investigation, restatement and audit of the
fiscal 1997 through 1999 Consolidated Financial Statements and for the fiscal
2000 audit, as well as other items discussed in greater detail above. In fiscal
2001, the Company also recorded a charge of $14 million for uncollectible
accounts, while fiscal 2000 included a charge of $74 million, a decrease of $60
million. The charge in fiscal 2000 was higher principally due to business system
and integration difficulties, which began in fiscal 1999 and continued
throughout fiscal 2000. Improvements have been made in accounts receivable due
to expanded collection efforts and certain system and process changes, including
cash application procedures. The Company is continuing to develop and implement
strategies for further improvements.
IMPAIRMENT AND OTHER CHARGES
Impairment and other charges were approximately $53 million in fiscal 2001. As
described above, the Company decided to cease operations at several locations
during 2001, which resulted in a provision for early facility closures and
post-closures of $45 million. The Company also recorded $8 million of net
impairment charges primarily related to a wastewater treatment facility and the
former headquarters of Old Safety-Kleen. The fiscal 2000 impairment charges of
approximately $368 million (see Note 17 of Notes to Consolidated Financial
Statements) were primarily related to the Debtors' Chapter 11 Cases in June
2000.
The components of fiscal 2001 impairment and other charges consist of the
following ($ in millions):
CHEMICAL BRANCH SALES
SERVICES AND SERVICE TOTAL
-------- ----------- -----
Provision for early facility closure:
Bridgeport incinerator $34 $-- $34
Coffeyville incinerator 9 -- 9
Hilliard wastewater treatment facility 1 -- 1
Burton transportation facility 1 -- 1
--- --- ---
45 -- 45
Asset impairment and other charges
1 7 8
--- --- ---
Total $46 $ 7 $53
=== === ===
The components of fiscal 2000 impairment and other charges consist of the
following ($ in millions):
CHEMICAL BRANCH SALES
SERVICES AND SERVICE TOTAL
----------- ------------- ---------
Service centers and landfills related to
western operations $118 $ -- $118
Other landfills and incinerators 119 -- 119
Harbor facility - closed 22 -- 22
Pinewood landfill 16 -- 16
Former headquarters of Old Safety-Kleen -- 19 19
Other facilities 74 -- 74
---- ---- ----
Total $349 $ 19 $368
==== ==== ====
INTEREST EXPENSE, NET
Consolidated net interest expense was approximately $5 million and $142 million
in fiscal 2001 and 2000, respectively. Fiscal 2001 interest expense principally
represents the interest on the Canadian portion of the outstanding balance of
the Company's Senior Credit Facility, (see Note 10 of Notes to Consolidated
Financial Statements) for which the interest rate is based on the Canadian Prime
or Canadian Bankers Acceptance, both being variable in nature. In accordance
with SOP 90-7, contractual interest on the domestic pre-petition debt of $245
million
10
in fiscal 2001 and $61 million in fiscal 2000 has not been accrued for in the
accompanying Consolidated Financial Statements since the date of the Chapter 11
Cases. No interest payments have been made on either Canadian or domestic debt
in fiscal 2001.
OTHER (EXPENSE) INCOME
Other expense in fiscal 2001 was approximately $1 million compared to other
income of approximately $1 million in fiscal 2000.
DERIVATIVE (LOSSES) GAINS
The Company incurred a decline of approximately $1 million in the market value
of a stock purchase warrant in fiscal 2001 compared to an approximate $1 million
gain on unrelated derivative contracts in fiscal 2000.
EQUITY IN EARNINGS OF ASSOCIATED COMPANIES
On August 11, 2000, the Company completed the sale of its remaining 44% interest
in its European operations. Accordingly, there was no earnings of associated
companies in fiscal 2001 compared to approximately $2 million in fiscal 2000.
REORGANIZATION ITEMS
Consolidated reorganization items, as reported in the accompanying consolidated
statements of operations, are comprised of income and expense items that were
realized or incurred by the Debtors as a direct result of the Company's decision
to reorganize under Chapter 11 (see Note 18 of Notes to Consolidated Financial
Statements). Reorganization items were approximately $42 million in fiscal 2001
compared to $61 million in fiscal 2000. The change was due primarily to the
write-off of $42 million in deferred financing costs related to pre-petition
debt in fiscal 2000 partially offset by an increase in professional services
directly related to the Chapter 11 Cases and accrued employee retention plan
costs as approved by the Bankruptcy Court in fiscal 2001.
INCOME TAXES
At August 31, 2001, the Company had net operating loss carryforwards for U.S.
federal income tax purposes of approximately $1.2 billion expiring in the years
2006 through 2021. The Company cannot currently conclude that it will likely
realize all the benefits of these loss carryforwards and an appropriate
valuation allowance has been established. The income tax provision reflects
state and foreign taxes payable of approximately $15 million, plus other net
deferred tax expenses of approximately $3 million. Implementation of a plan or
plans of reorganization will likely reduce the availability of some or all of
these net operating loss carryforwards.
EXTRAORDINARY ITEMS (EARLY EXTINGUISHMENT OF DEBT)
The Company, pursuant to Bankruptcy Court approval, has settled certain
pre-petition trade accounts payable claims during fiscal 2001. Under the terms
of these settlements, the Company paid certain vendors less than the amount
recorded in the Company's financial records as being owed to the vendors as of
the date of the Chapter 11 Cases. The Company has reported the resulting gain
from the early extinguishment of this debt as an extraordinary item. The
consolidated gains from these settlements amounted to approximately $6 million
in fiscal 2001. No income tax provision or benefit with respect to these items
is required.
11
FISCAL 2000 COMPARED TO FISCAL 1999
REVENUES
Consolidated revenues decreased $38 million to approximately $1,586 million in
fiscal 2000 compared to $1,624 million in fiscal 1999, with the following
increase or decrease by business segment: Chemical Services decreased 9.2% ($66
million); and Branch Sales and Service increased 4.5% ($44 million).
Intersegment revenue and other revenue increased $16 million in fiscal 2000
compared to fiscal 1999.
Chemical Services combined external and intersegment revenues in fiscal 2000
were approximately $655 million compared to $721 million in fiscal 1999. This
decline of approximately $66 million was mainly attributable to the following:
(i) approximately $20 million less revenue in fiscal 2000 from the curtailment
of the Division's harbor dredging operations; (ii) approximately $20 million of
lower landfill revenues, almost half of which is related to the Pinewood
Facility which significantly reduced waste disposal while certain litigation is
pending; (iii) approximately $18 million less revenue in fiscal 2000 due to
curtailments in the operation of seven other transportation and specialty
facilities; and (iv) approximately $8 million in other revenue reductions.
Included in the revenue items above are intersegment revenues of $56 million and
$50 million for fiscal 2000 and 1999, respectively.
Branch Sales and Service combined external and intersegment revenues in fiscal
2000 were approximately $999 million compared to $955 million in fiscal 1999.
The Branch Sales and Service increase of approximately $44 million was primarily
comprised of an increase in the Division's North American operations of $81
million partially offset by a decrease in its European operations of
approximately $40 million (on December 23, 1998, the Company announced the
recapitalization of its European operations resulting in the sale of 56% of the
Company's equity interest in those operation (See equity in earnings of
associated company below)) and other net increases of $3 million. The increase
of $81 million for the North American operations is primarily due to increases
in the oil collection, re-refining and automobile recovery business which
benefited from (i) approximately $27 million of higher sales attributable to the
acquisition of the First Recovery business on September 1, 1999 (the "First
Recovery Acquisition"); (ii) approximately $37 million of higher revenue at its
used oil re-refineries, resulting primarily from higher prices attributable to
an increase in crude oil commodity pricing and from an increase in sales volumes
from the East Chicago, Indiana site, which was temporarily idled during
approximately six weeks of fiscal 1999 while it corrected a remediation issue;
and (iii) approximately $17 million greater net revenue in certain other lines
of business. Revenues from the parts cleaner services line of business declined,
continuing a trend, which the Company believes results from sales to a
relatively mature and slow growth solvent-based parts cleaner market. Revenues
in other lines of business had relatively unchanged results. Included in the
revenue items discussed above are intersegment revenues of $12 million and $1
million for fiscal 2000 and 1999, respectively.
OPERATING EXPENSES
Consolidated operating expenses were approximately $1,389 million in fiscal 2000
compared to $1,243 million in fiscal 1999 with the following increase by
business segment: Chemical Services increased 4.4% ($24 million); Branch Sales
and Service increased 18.0% ($129 million); and Corporate increased by 50.0%
($10 million) and intersegment expense increased by approximately $17 million.
Chemical Services combined external and intersegment operating expenses were
approximately $575 million (87.7% of revenues) in fiscal 2000, compared to $551
million (76.4% of revenue) in fiscal 1999. Chemical Services operating expenses
increased substantially as a percentage of revenue in fiscal 2000. This increase
was largely due to (i) lower operating margins at the Pinewood Facility which
accrued for all of its remaining site closure and post-closure cost targets in
view of the assumption that there will probably not be significant additional
waste disposal activity at the facility and (ii) lower margins at the harbor
dredging operations as a result of declining revenues while many operating
expenses continued.
Branch Sales and Service combined external and intersegment operating expenses
were approximately $852 million (85.4% of revenues) in fiscal 2000 compared to
$723 million (75.6% of revenues) in fiscal 1999 due to (i) approximately $25
million of charges related to its parts cleaner service machines and the effect
of increasing its reserve for obsolete inventory; (ii) approximately $20 million
of higher costs associated with the oil re-refinery business consistent with the
higher commodity pricing and volumes discussed above; (iii) approximately $20
million of higher costs due to the First Recovery Acquisition; (iv) other
increases such as disposal costs resulting from the requirement to use internal
waste disposal facilities during part of fiscal 2000, even when lower-cost
external options were available; (v) higher fuel and maintenance costs due to
the age of the transportation fleet and increased fuel prices; and (vi) higher
labor and fringe benefit costs. These increases were reduced by approximately
$25 million related to the European operations, which were no longer
consolidated in fiscal 2000.
Corporate operating expenses were approximately $30 million in fiscal 2000
compared to $20 million in fiscal 1999. These expenses consist primarily of
taxes, (other than taxes on earnings), rental payments and other operating
expenses.
DEPRECIATION AND AMORTIZATION EXPENSE
Consolidated depreciation and amortization expense increased in fiscal 2000 by
approximately $9 million to $170 million compared to $161 million in fiscal
1999. The increase was primarily due to a change in the estimated lives in
fiscal 2000 of parts cleaner service machines at customers in the Branch Sales
and Service Division.
12
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Consolidated selling, general and administrative expenses were approximately
$279 million in fiscal 2000 compared to $202 million in fiscal 1999. This
increase of $77 million resulted primarily from an increase in professional
services fees and a $61 million increase in the provision for uncollectible
accounts during fiscal 2000.
IMPAIRMENT AND OTHER CHARGES
The components of fiscal 2000 impairment and other charges consist of the
following ($ in millions):
CHEMICAL BRANCH SALES
SERVICES AND SERVICE TOTAL
-------- ----------- -----
Service centers and landfills related to western operations $118 $ -- $118
Other landfills and incinerators 119 -- 119
Harbor facility - closed 22 -- 22
Pinewood landfill 16 -- 16
Former headquarters of Old Safety Kleen -- 19 19
Other facilities 74 -- 74
---- ---- ----
Total $349 $ 19 $368
==== ==== ====
The components of fiscal 1999 impairment and other charges consist of the
following ($ in millions):
CHEMICAL BRANCH SALES
SERVICES AND SERVICE TOTAL
-------- ----------- -----
Write-down of non-landfill permits $ 9 $-- $ 9
Property, plant and equipment 2 -- 2
--- --- ---
Total $11 $-- $11
=== === ===
The amounts shown as related to western operations pertain to facilities that
are located in the western area of the United States. Their markets have been
adversely affected by competitive conditions, including an oversupply of
available services, which have limited the Company's ability to increase prices
to recover increased costs, including those related to new environmental
regulations.
Included in other landfills and incinerators is an incinerator constructed to
burn contaminated soils. Although significant revenue resulted from unusual
events in fiscal 1999 and 2000, the general level of demand for these services
has and is expected to continue to decline. In addition, new environmental
regulations are projected to significantly increase capital expenditures and
operating costs in the future. Also included in other landfills and incinerators
is a landfill which has been the primary disposal site for the soil burned at
the Company owned incinerator. The projected declines in volumes generated at
the incinerator are projected to have an adverse effect on volumes at the
landfill.
As discussed in Note 14 of Notes to Consolidated Financial Statements, the
Safety-Kleen (Pinewood), Inc. facility ("the Pinewood Facility") has been the
subject of lengthy, complex and protracted legal proceedings. The Company
recorded an impairment charge related to the Pinewood Facility in fiscal 1997 as
a result of the projected effects of adverse legal developments in that year. On
the basis of the additional adverse outcomes of these proceedings, the Company
has concluded that it would be imprudent to assume that this facility will be
able to generate any significant future revenue. Accordingly, an additional
charge has been recorded for the impairment of the remaining net book value of
fixed assets at the Pinewood Facility. Appropriate reserves for closure and
post-closure costs at the Pinewood Facility have been fully provided and
included in operating costs.
INTEREST EXPENSE, NET
Consolidated interest expense was approximately $142 million and $186 million in
fiscal 2000 and 1999, respectively. Interest expense decreased primarily because
contractual interest expense of approximately $61 million on pre-petition
domestic funded debt attributable to the period from the date of the Debtors'
Chapter 11 Cases to August 31, 2000, has not been accrued in the Consolidated
Financial Statements in accordance with SOP 90-7. Prior to the date of the
Debtors' Chapter 11 Cases, the additional borrowings incurred under the Senior
Credit Facility needed to fund the Company's negative cash flow from operations
through that date resulted in additional interest expense over fiscal 1999.
13
DERIVATIVE GAINS (LOSSES)
The net market value of certain derivative contracts used for trading purposes
increased $1 million during fiscal 2000 compared to a decline of $6 million
during fiscal 1999. There were no outstanding derivative contracts as of August
31, 2000.
EQUITY IN EARNINGS OF ASSOCIATED COMPANIES
On August 11, 2000, the Company completed the sale of its remaining 44% interest
in its European operations. The Company received approximately $34 million in
cash and, subject to contingencies, approximately $1 million in deferred
payments. From these proceeds and the proceeds of the sale of the Company's
Rosemount facility, approximately $19 million was paid to the Company's
pre-petition lenders of the Senior Credit Facilities as an adequate protection
payment related to the security interest in both of these assets held by such
lenders. These payments are classified as a reduction in the "Liabilities
Subject to Compromise" associated with these lenders in the Consolidated
Financial Statements at August 31, 2000.
Equity in earnings of associated companies during fiscal 2000 primarily reflects
the Company's share of the results of operations attributable to the Company's
44% interest in its European operations from September 1, 1999 to August 11,
2000, the date of sale of the Company's remaining interest.
On December 23, 1998, the Company announced the recapitalization of its European
operations resulting in the sale of 56% of the Company's equity interest in
those operations. Equity in associated companies during fiscal 1999 reflect the
Company's share attributable to the Company's remaining 44% interest in the
results of its European operations.
REORGANIZATION ITEMS
Consolidated reorganization items as reported in the accompanying consolidated
statement of operations are comprised of income, expense and loss items that
were realized or incurred by the Debtors as a direct result of the Company's
decision to reorganize under Chapter 11 (see Note 18 of Notes to Consolidated
Financial Statements). Reorganization items were as follows ($ in millions):
Write-off of deferred financing costs related to pre-petition domestic borrowings $ 42
Professional fees directly related to the filings 15
Losses on early termination of qualifying hedge contracts 3
Other 1
----
$ 61
====
INCOME TAXES
At August 31, 2000, the Company had net operating loss carryforwards for U.S.
federal income tax purposes of approximately $802 million expiring in the years
2006 through 2020. The Company cannot currently conclude that it will likely
realize all the benefits of these loss carryforwards and an appropriate
valuation allowance has been established. The income tax provision reflects
state and foreign taxes payable of approximately $5 million, plus other net
deferred tax expenses of approximately $8 million. Implementation of a plan or
plans of reorganization will likely reduce the availability of some or all of
these net operating loss carryforwards.
14
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The Company considers critical accounting policies and estimates as matters that
materially effect the Company's operating results and financial position, which
require management's judgement and are inherently uncertain. The Company has
determined that the following accounting policies and estimates are critical to
the understanding of the Company's Consolidated Financial Statements:
BASIS OF PRESENTATION
The Company's Consolidated Financial Statements have been prepared on a going
concern basis which contemplates continuity of operations, realization of
assets, and payment of liabilities in the ordinary course of business and do not
reflect adjustments that might result if the Debtors are unable to continue as a
going concern. The Company's history of significant losses, deficit in
stockholders' equity and the Debtors' Chapter 11 Cases, as well as issues
related to compliance with debt covenants and financial assurance requirements
raise substantial doubt about the Company's ability to continue as a going
concern. Continuing as a going concern is dependent upon, among other things,
the Debtors' formulation of a plan or plans of reorganization, the success of
future business operations, and the generation of sufficient cash from
operations and financing sources to meet the Company's obligations. The
Consolidated Financial Statements do not reflect: (i) the realizable value of
assets on a liquidation basis or their availability to satisfy liabilities; (ii)
aggregate pre-petition liability amounts that may be allowed for unrecorded
claims or contingencies, or their status or priority; (iii) the effect of any
changes to the Debtors' capital structure or in the Debtors' business operations
as the result of an approved plan or plans of reorganization; or (iv)
adjustments to the carrying value of assets (including goodwill and other
intangibles) or liability amounts that may be necessary as the result of actions
by the Bankruptcy Court.
The Company's Consolidated Financial Statements as of and for the fiscal years
ended August 31, 2001 and 2000 have been presented in conformity with SOP 90-7.
This statement requires, among other things, a segregation of liabilities
subject to compromise by the Bankruptcy Court as of the bankruptcy filing date
and identification of all transactions and events that are directly associated
with the reorganization of the Company. In recording liabilities subject to
compromise, the Company must make certain estimates relating to the amounts it
expects to eventually pay to settle certain liabilities. The actual amounts
required to settle these claims could significantly differ from the amounts
currently recorded.
LANDFILL ACCOUNTING AND ENVIRONMENTAL LIABILITIES
The Company has material financial commitments for the costs associated with (i)
the final closure and post-closure activities at its landfill facilities and
(ii) remedial liabilities at sites that it owns or operates and at sites to
which it has transported or disposed of waste, including 55 Superfund sites as
of February 28, 2002. Estimates for the costs of these activities are developed
by the Company's engineers, accountants and external consultants. These
estimates are based on an evaluation of site specific facts and circumstances,
including the Company's interpretation of current regulatory requirements and
proposed regulatory changes, as well as its estimate of its participation level.
These estimates are subject to change due to various circumstances including,
but not limited to, (i) permit modifications; (ii) changes in legislation or
regulations; (iii) technological changes; and (iv) results of environmental
studies. The Company's extensive experience in the environmental services
business, as well as its involvement with a large number of sites, provides a
reasonable basis for estimating its aggregate liability. The Company believes
that a significant change to the cost estimates used in determining its
environmental liabilities could have a material impact on the Consolidated
Financial Statements.
Landfill capacity, which is the basis for the amortization of site costs and for
the accrual of final closure and post-closure obligations, represents total
airspace that management believes is probable of ultimately being permitted
based on established criteria. The Company applies a comprehensive set of
criteria for evaluating the probability of obtaining a permit for future
expansion airspace at existing sites, which provides management a sufficient
basis to evaluate the likelihood of success of unpermitted expansions. Remaining
landfill capacity divided by annual usage estimates is used to calculate
estimated remaining site lives. Changes in estimates of remaining landfill site
lives, as well as, inflation and discount rate assumptions used to record the
landfill closure and post-closure liabilities, could also have a material impact
on the Consolidated Financial Statements.
In June 2001, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("SFAS") No. 143, "Accounting for Asset
Retirement Obligations." SFAS No. 143 will require, upon adoption, that the
Company recognize as a component of asset cost, the fair value of a liability
for an asset retirement obligation in the period in which it is incurred if a
reasonable estimate of fair value can be made. Under this statement, the
liability is discounted and accretion expense is recognized using the
credit-adjusted risk-free interest rate in effect when the liability was
initially recognized. SFAS No. 143 is effective for Consolidated Financial
Statements issued for fiscal years beginning after June 15, 2002. The Company
will be required to adopt SFAS No. 143 at the earlier of its emergence from
bankruptcy or September 1, 2002. The Company is currently in the process of
evaluating the impact of SFAS No. 143; however, the adoption of this standard is
expected to result in the recognition of additional assets and liabilities, and
may result in a significant charge to operations in the period of adoption.
ASSET IMPAIRMENTS OTHER THAN GOODWILL
The Company periodically evaluates whether events and circumstances have
occurred that indicate that the remaining useful life of any of its tangible and
intangible long-lived assets (other than goodwill) may warrant revision or that
the remaining balance might not be recoverable.
15
When factors indicate that the tangible and intangible assets should be
evaluated for possible impairment, the Company uses an estimate of the future
undiscounted cash flows generated by the underlying assets to determine if an
impairment is indicated. As required by SFAS No. 121, the asset balances used in
this test include an allocation of any goodwill which was recorded in connection
with their acquisition. If an impairment is indicated by this test, the Company
adjusts the book value of the allocated goodwill, if any, and then the book
value of the impaired long-lived assets to their estimated fair values and
records a provision for impairment in the income statement. The Company believes
that a significant change to the estimates of undiscounted cash flows could have
a material adverse impact on the Consolidated Financial Statements.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets." This statement supersedes SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed Of" and the accounting and reporting provisions of APB Opinion No.
30, "Reporting the results of Operations - Reporting the Effects of Disposal of
a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions" for the disposal of a segment of a business (as
previously defined in that opinion). SFAS No. 144 is effective for Consolidated
Financial Statements issued for fiscal years beginning after December 15, 2001.
The Company will be required to adopt SFAS No. 144 at the earlier of its
emergence from bankruptcy or September 1, 2002. In addition, the statement (i)
changes the criteria for classifying an asset as held-for-sale; and (ii)
broadens the scope of businesses to be disposed of that qualify for reporting as
discontinued operations and changes the timing of recognizing operating losses
on such operations prior to their discontinuance. The Company is currently in
the process of evaluating the potential impact that the adoption of SFAS No. 144
will have on its consolidated financial position and results of operations.
BUSINESS COMBINATIONS AND GOODWILL
Goodwill resulting from business combinations accounted for as purchases is
tested for impairment using undiscounted estimated future cash flows, excluding
interest, when facts and circumstances indicate that an impairment may have
occurred. The Company believes that the Chapter 11 Cases and the events that led
up to it meet this criteria. As discussed above, a portion of goodwill may also
be tested as part of an impairment test of related long-lived assets.
In July 2001, the FASB issued SFAS No. 141, "Business Combinations", and SFAS
No. 142, "Goodwill and Other Intangible Assets". SFAS No. 141 requires that the
purchase method of accounting be used for all business combinations initiated or
completed after June 30, 2001. SFAS No. 141 also specifies criteria for
intangible assets acquired in a business combination to be recognized and
reported apart from goodwill. SFAS No. 142 requires that goodwill and intangible
assets with indefinite useful lives no longer be amortized, but instead be
tested for impairment at least annually in accordance with the provisions of the
statement. SFAS No. 142 also requires that intangible assets with definite
useful lives be amortized over their respective estimated useful lives and
reviewed for impairment in accordance with SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of."
The Company is required to adopt the provisions of SFAS No. 141 immediately for
new transactions and SFAS No. 142 at the earlier of its emergence from
bankruptcy or September 1, 2002. Early adoption of SFAS No. 142 is permitted.
The Company's existing goodwill and intangible assets will continue to be
amortized prior to the adoption of SFAS No. 142. Upon adoption of SFAS No. 142,
the Company must evaluate its existing intangible assets and goodwill. The
Company will be required to reassess the useful lives and residual values of all
recorded intangible assets, and make any necessary amortization period
adjustments by the end of the second fiscal quarter following adoption.
Additionally, to the extent an intangible asset is identified as having an
indefinite useful life, the Company will be required to test the intangible
asset for impairment in accordance with the provisions of SFAS No. 142 by the
end of the second fiscal quarter following adoption. Any impairment loss will be
measured as of the date of adoption and recognized as the cumulative effect of a
change in accounting principle.
As of September 1, 2002, the Company expects to have unamortized goodwill of
approximately $1.2 billion ($96 million related to Chemical Services Division
and $1.1 billion related to the Branch Sales and Service Division), which will
be subject to the transition provisions of SFAS No. 142. Amortization expense
related to goodwill and other intangible assets was $71 million, $73 million and
$74 million for each of the three years ended August 31, 2001, 2000 and 1999,
respectively. The Company believes it will likely incur a significant write-down
in the value of its intangible assets at the earlier of its emergence from
bankruptcy, as provided by SOP 90-7, or the adoption of SFAS No. 142.
LITIGATION CONTINGENCIES
Legal proceedings covering a wide range of matters are pending or threatened in
the United States and foreign jurisdictions against the Company and/or former
and/or current officers, directors and employees. Various types of claims are
raised in these proceedings, including shareholder class action and derivative
lawsuits, product liability, environmental, antitrust, tax, and breach of
contract. Management consults with legal counsel in estimating reserves and
developing estimates of ranges of potential loss.
The Company has claims where management has assessed that an unfavorable outcome
is probable. As of August 31, 2001, the aggregate estimated potential loss on
these claims range from approximately $19 million to approximately $71 million
and the Company has recorded reserves of approximately $26 million, including
$19 million subject to compromise, representing its best estimate of losses to
be incurred.
16
Additionally, the Company has substantial claims where management has assessed
that an unfavorable outcome is probable or, at least, reasonably possible and
which, if incurred, may have a material adverse effect on the Company's
financial condition. The Company, however, has not recorded reserves related to
these claims as management believes the potential loss is not currently
estimable.
The actual outcomes from these claims could differ from these estimates. These
estimates do not include the impact, if any, that the Debtors' bankruptcy
proceedings may have on the treatment of these claims.
REVENUE RECOGNITION
The Company recognizes revenue in accordance with SEC Staff Accounting Bulletin
("SAB") No. 101, "Revenue Recognition in Consolidated Financial Statements." SAB
No. 101 requires that four basic criteria must be met before revenue can be
recognized: (i) persuasive evidence of an arrangement exists; (ii) delivery has
occurred or services rendered; (iii) the fee is fixed and determinable; and (iv)
collectibility is reasonably assured.
The Company recognizes revenue upon disposal for its waste collection and
disposal activities, and over the applicable service intervals for its parts
cleaner and related businesses. Consulting and oil collection services revenue
is recognized when services are performed. Revenue from product sales is
recognized upon delivery to the customers. Unearned revenue has been recorded
for services billed but not earned in the accompanying consolidated balance
sheets. Direct costs associated with the handling and transportation of waste
prior to disposal and other variable direct costs associated with the Company's
parts cleaner and related businesses are capitalized as a component of other
current assets in the accompanying consolidated balance sheets and expensed when
the related revenue is recognized. Deferral periods related to unearned revenue
and the related direct costs typically range from one to six months. Although
changes in the volume of activity would create changes in recognized revenues,
the generally short time interval required to earn revenue decreases the impact
of such variations.
SAFETY-KLEEN (PINEWOOD), INC.
As further discussed in Note 14 of Notes to Consolidated Financial Statements,
by an order from the South Carolina Department of Health and Environmental
Control dated May 19, 1994, the Company was ordered to establish and maintain an
environmental impairment fund ("EIF") in the amount of $133 million in 1994
dollars ($151 million in 2001 dollars) by July 1, 2004, as financial assurance
for potential environmental clean up and potential restoration of environmental
impairment at the Safety-Kleen (Pinewood), Inc. facility ("the Pinewood
Facility"). The EIF has two components: (i) the GSX Contribution Fund, which was
to be funded by Safety-Kleen (Pinewood), Inc. in annual cash payments over a ten
year period; and (ii) the State Permitted Sites Fund, a legislatively created
fund derived from fees on waste disposal at the Pinewood Facility. Under the
Order, at the end of the 100-year post-closure care period, funding of the GSX
Contribution Fund will be subject to evaluation by an independent arbitrator,
who will determine what level of funding, if any, is still required. The Company
is entitled to seek recovery of any excess amount so determined. Upon
termination of the GSX Contribution Fund, any remaining trust assets would
revert to Safety-Kleen (Pinewood), Inc. As of August 31, 2001, there was
approximately $20 million in the GSX Contribution Fund and approximately $15
million in the State Permitted Sites Fund. Subject to the automatic stay
provisions of the Debtors' Chapter 11 Cases, the Company would be required to
fund, in 2001 dollars, approximately $110 million and $6 million to the GSX
Contribution Fund in fiscal 2002 and 2003, respectively, to comply with
financial assurance provisions of the Order.
The Company has recorded a restricted asset of $20 million related to the GSX
Contribution Fund. Additionally, the $15 million in the State Permitted Sites
Fund is not considered an asset of the Company. The obligation to contribute the
remaining $116 million to the GSX Contribution Fund has been treated as a
commitment to restrict additional assets and no liability related to the
obligation has been recorded in the Consolidated Financial Statements.
17
LIQUIDITY AND CAPITAL RESOURCES
BANKRUPTCY
The matters described under this caption "Liquidity and Capital Resources", to
the extent that they relate to future events or expectations, may be
significantly affected by the Chapter 11 proceedings. These proceedings will
involve, or result in, (i) various restrictions on the Company's activities;
(ii) limitations on financing; (iii) the need to obtain Bankruptcy Court
approval for various matters; (iv) uncertainty as to relationships with vendors,
suppliers, customers and others with whom the Company may conduct or seek to
conduct business; and (v) uncertainty as to the sale of the Company's Chemical
Services Division.
CASH AND CASH EQUIVALENTS
The Company's primary sources of liquidity are cash flows from operations,
existing cash, proceeds from the sale of non-core assets and businesses and the
Second DIP Facility (as hereinafter defined).
As of August 31, 2001, cash and cash equivalents at the Company's domestic and
Canadian facilities was approximately $75 million and $41 million, respectively.
As of January 31, 2002, cash and cash equivalents at the Company's domestic and
Canadian facilities was approximately $61 million and $27 million, respectively.
The Company's ability to utilize the cash at the Canadian facilities for
domestic operating, capital expenditure, financial assurance and environmental
liability requirements is limited as a result of the bankrupt status of the
Debtors, the requirements of the Senior Credit Facility, and tax consequences.
As of March 3, 2002, no amounts had been drawn on the First DIP Facility (as
hereinafter defined) and approximately $75 million of letters of credit had been
issued. In addition, the Company had approximately $9 million of additional
availability under the First DIP Facility as of that date. The Company is using
its existing cash and cash from operations to meet its operating, capital
expenditure, financial assurance and environmental liability requirements.
CASH FLOWS FROM OPERATING ACTIVITIES
The Company generated approximately $100 million from operations during fiscal
2001 compared to cash used in operations of $59 million in fiscal 2000. This
increase is attributed primarily to (i) improvements in accounts receivable
collections; (ii) the timing of payments on certain accrued liabilities such as
professional fees, payroll and related costs, property taxes and other operating
items; and (iii) continued suspension of interest payments on pre-petition and
Canadian debt.
Consolidated net cash flow from operations subsequent to August 31, 2001 (i)
will need to accommodate substantially increased costs to replace certain
financial assurance programs; (ii) will need to fund the payment of the accrued
liabilities noted above as they become due; (iii) could be affected by the
potential loss of "event-based" business in the Chemical Services Division; and
(iv) will need to fund the cash requirements for the deactivation and closure of
certain facilities.
CASH FLOWS FROM INVESTING ACTIVITIES
The Company operates in an industry that requires a high level of capital
investment. The Company's capital investment requirements primarily relate to
(i) trucks and other vehicles; (ii) parts cleaner service machines placed at
customer locations; (iii) computer related technology; (iv) equipment at waste
collection and disposal facilities; and (v) construction and expansion of its
landfill sites. Capital expenditures in fiscal 2001 totaled $71 million. During
fiscal 2001, the Company deferred certain non-essential capital expenditures and
expects to continue to defer capital spending in fiscal 2002. However, in fiscal
2003 and beyond, the Company expects capital expenditure requirements to
significantly increase over the spending levels of fiscal 2002, primarily due to
a return to more normal operating requirements and the need to comply with new
regulatory requirements for incinerators. In addition, the Company expects to
upgrade certain of the Company's Branch Sales and Service transportation fleet
and oil re-refining facilities in fiscal 2002 and beyond.
CASH FLOWS FROM FINANCING ACTIVITIES
The change in net cash flow from financing activities has decreased due to
payments on the Company's industrial revenue bonds, the Debtors' Chapter 11
Cases and the Company's default on the Canadian debt. The Company has been able
to meet current liquidity needs with cash provided by operating activities and
letters of credit issued under the First DIP Facility. As of August 31, 2001, no
amounts had been borrowed against the First DIP Facility and approximately $48
million of letters of credit had been issued.
18
CONTRACTUAL COMMITMENTS AND COMMERCIAL OBLIGATIONS
As described more fully in Notes 10, 11 and 14 of the Notes to Consolidated
Financial Statements and Item 7A, at August 31, 2001, the Company had certain
cash obligations associated with contractual commitments and commercial
obligations. Based on original contractual terms, these commitments and
obligations are due as follows ($ in millions):
CONTRACTUAL COMMITMENTS
LESS THAN 1
TOTAL YEAR 1 - 3 YEARS 4 - 5 YEARS AFTER 5 YEARS
------ ----------- ----------- ----------- -------------
Subject to compromise:
- ---------------------
Long-term debt (variable rate)(1) $1,538 $1,538 $ -- $ -- $ --
Long-term debt (fixed rate)(1) 634 634 -- -- --
Accrued interest 67 67 -- -- --
Derivative contracts 69 69 -- -- --
Environmental liabilities 11 2 8 1 --
Pinewood-EIF funding 116 110 6 -- --
Other 5 5 -- -- --
------ ------ ---- ---- ----
Subtotal contractual commitments
subject to compromise 2,440 2,425 14 1 --
Not subject to compromise:
- -------------------------
Current portion of long-term debt (variable 62 62 -- -- --
rate)
Environmental liabilities(2) 596 41 94 45 416
Operating leases 112 37 41 21 13
Unconditional purchase obligations 171 48 80 43 --
Other 33 19 14 -- --
------ ------ ---- ---- ----
Subtotal contractual commitments
not subject to compromise 974 207 229 109 429
------ ------ ---- ---- ----
Total contractual cash obligations $3,414 $2,632 $243 $110 $429
====== ====== ==== ==== ====
OTHER COMMERCIAL COMMITMENTS
LESS THAN 1
TOTAL YEAR 1 - 3 YEARS 4 - 5 YEARS AFTER 5 YEARS
------ ----------- ----------- ----------- -------------
First DIP Facility letters of credit $ 48 $ 48 $ -- $ -- $ --
Letters of credit(3) 92 92 -- -- --
Guarantees(3)
6 6 -- -- --
---- ---- ---------- ---------- --------
Total commercial commitments $146 $146 $ -- $ -- $ --
==== ==== ========== ========== ========
(1) All fixed and variable rate long-term debt subject to compromise are
classified above as "Less than 1 year" due to default provisions.
Amounts subject to compromise may be subject to future adjustments and
settled at amounts substantially less than contract values. See Notes
10 and 11 of the Notes to Consolidated Financial Statements.
(2) Anticipated payments of environmental liabilities (based on current
estimated costs) and anticipated timing of necessary regulatory
approvals to commence work of closure, post-closure and remediation
activities are presented on a consolidated basis. Certain environmental
liabilities are discounted in the consolidated balance sheet primarily
for certain of the Company's landfill related reserves. See Notes 3 and
9 of the Notes to Consolidated Financial Statements.
(3) Subject to compromise.
Contractual commitments and other commercial commitments included as subject to
compromise may be settled in amounts and terms that differ from the above
schedule. Settlements and maturities are dependent on a plan or plans of
reorganization to be filed with the Bankruptcy Court (see "Factors That May
Affect Future Results - Uncertainties Relating to Bankruptcy Proceedings").
Other commercial commitments are contingent obligations of the Company.
19
EBITDA ANALYSIS
Management evaluates the Company's performance using several factors, of which
the primary financial measure is operating (loss) income before depreciation and
amortization and impairment and other charges ("EBITDA") (see Note 25 of Notes
to Consolidated Financial Statements). In addition, the Company uses Adjusted
EBITDA, which is calculated by adding back to EBITDA certain other non-cash
charges which management believes are similar to depreciation and amortization.
This Adjusted EBITDA measure is used by the Company to plan for its
environmental, capital expenditure and other requirements. Further adjustments
are made for significant items that, in management's opinion, are unusual and
affect the applicable period.
A summary of annual EBITDA reflecting management adjustments is as follows (in
thousands):
YEAR ENDED AUGUST 31,
----------------------------------------
2001 2000 1999
--------- --------- --------
Operating (loss) income $(168,336) $(620,170) $ 6,876
Add:
Depreciation and amortization 143,710 169,902 161,314
Impairment and other charges 52,884 367,793 11,287
--------- --------- --------
EBITDA $ 28,258 $ (82,475) $179,477
Loss on disposal of equipment (non-cash) 2,910 43,813 27,921
--------- --------- --------
Adjusted EBITDA $ 31,168 $ (38,662) $207,398
Unusual items:
Accounting, legal, consulting and other costs 55,342 7,400 --
--------- --------- --------
Adjusted EBITDA after unusual items $ 86,510 $ (31,262) $207,398
========= ========= ========
Capital expenditures were $71 million, $53 million and $72 million in fiscal
2001, 2000 and 1999, respectively. Environmental spending totaled $23 million in
fiscal 2001. Due to the accounting issues surrounding the restatement of the
Company's Consolidated Financial Statements in the fiscal 2000 10-K/A, the
Company is unable to determine the environmental cash spending amounts for
fiscal 2000 and 1999. In reaching this conclusion, the Company has considered
(i) the significant volume of transactions involved; (ii) the risk that other
environmental related cash expenditures could have been incurred but recorded in
other accounts; and (iii) the lack of historical systems and controls which
provided for the tracking and administering of all of the costs by one
department.
In determining Adjusted EBITDA, the Company also normally adds back any non-cash
provision for environmental liabilities. Due to the accounting issues
surrounding the restatement of the Company's Consolidated Financial Statements
in the fiscal 2000 10-K/A, the Company is unable to determine the provision for
environmental liabilities (non-cash) amounts for fiscal 2000 and 1999.
Accordingly, the amount for fiscal 2001 of $35 million has not been reflected in
the calculation of Adjusted EBITDA above.
DIP FACILITY
On July 19, 2000, the Bankruptcy Court granted final approval of a one-year $100
million Revolving Credit Agreement underwritten by Toronto Dominion (Texas),
Inc. as general administrative agent and CIT Group/Business Credit, Inc. as
collateral agent (the "First DIP Facility") with an aggregate sublimit for
letters of credit of $35 million. The actual amount available under the First
DIP Facility was subject to a borrowing base computation. The First DIP Facility
was amended on eleven occasions through March 15, 2002, which amendments have,
among other things, extended the maturity date, increased the aggregate limit
for letters of credit to $95 million, increased the sublimits for letters of
credit for certain uses and waived the Debtors' non-compliance with certain
affirmative covenants under the First DIP Facility.
On March 20, 2002, the Bankruptcy Court approved a $200 million Second Amended
and Restated Debtor-in-Possession Credit Facility (the "Second DIP Facility").
The Second DIP Facility extends the maturity date of the First DIP Facility
until the earlier of March 22, 2003, or the effective date of a plan or plans of
reorganization. In addition, it reduces the aggregate amount of borrowings
available from $100 million to $75 million, which continues to be subject to
borrowing base limitations ("Tranche A"). The Second DIP Facility also creates a
new tranche under the credit facility in the amount of $125 million ("Tranche
B"). Tranche B is available for cash borrowings and letters of credit, and has
the same maturity date as Tranche A.
Proceeds from Tranche A or Tranche B may be used for general corporate purposes.
Tranche A is available for letters of credit or cash borrowings, with a
sub-limit of $45 million available for environmental letters of credit. The
letter of credit sub-limit under Tranche B is $50
20
million, and there is a further sub-limit of $40 million available for
environmental letters of credit, including the replacement of certain existing
cash collateral pledged to support financial assurance with respect to certain
facilities.
Tranche A letters of credit are priced at 3% per annum (plus a fronting fee of
0.25% to the Agent) on the outstanding face amount of each letter of credit. In
addition, the Debtors pay a commitment fee of 0.50% per annum on the unused
amount of Tranche A, payable monthly in arrears. Tranche B letters of credit are
priced at 12% per annum (plus a fronting fee of 0.25% to the Agent) on the
outstanding face amount of each letter of credit, payable monthly in arrears. In
addition, the Debtors pay a commitment fee of 2.5% on the unused amount of
Tranche B letters of credit.
Interest charged for cash borrowings under Tranche A is the greater of Prime
Rate plus 1% per annum and the Fed Funds Rate plus 0.5% per annum, or LIBOR plus
3% per annum, depending on the nature of the borrowings. Interest charged for
cash borrowings under Tranche B is the greater of Prime Rate plus an applicable
margin of 7.25%, or 12% per annum. Beginning September 1, 2002, the applicable
margin on Tranche B cash borrowings increases monthly by 0.5% per annum. The
Debtors are also required to pay as additional interest, paid in kind, a fee
equal to 3% of the average daily outstanding Tranche B cash borrowings,
compounded and accrued monthly, and fully payable upon the termination of the
Second DIP Facility, provided that, if the termination does not occur prior to
September 1, 2002, the amount of such fee increases each month by 1% per annum.
The commitment fee on Tranche B is calculated at a rate equal to 4% per annum on
the average daily unused cash portion of Tranche B, payable monthly in arrears.
In addition, the Debtors are required to pay an extension fee on the Tranche B
commitments, payable as follows, if the Second DIP Facility remains outstanding
at such dates: 1.2% on September 1, 2002; 1.2% on December 1, 2002 and 1.2% on
March 22, 2003.
On the closing date, March 22, 2002, the Debtors were required to establish a $5
million interest escrow account. Tranche A and Tranche B fees and interest will
be paid from this account. On the earlier of depletion of the escrowed funds or
six months after the closing date of the Second DIP Facility, additional funds
must be deposited in the escrow account in order to assure that $5 million will
be escrowed for this same purpose.
In the event of the sale of the Company's Chemical Services Division, the net
proceeds, after reserves for certain selling expenses, interest and fees on the
Second DIP facility, shall be applied to prepay the Tranche B loans and the
availability under Tranche B will be reduced by $17 million. Net proceeds of
certain other asset sales, after reserves for certain selling expenses, interest
and fees on the Second DIP facility, are to be used to repay Tranche A and then
Tranche B.
The Second DIP Facility benefits from superpriority claim status as provided for
under the Bankruptcy Code. Under the Bankruptcy Code, a superpriority claim is
senior to unsecured pre-petition claims and all other administrative expenses
incurred in a Chapter 11 case. As security, the Second DIP Facility lenders were
granted certain priority, perfected liens on certain of the Debtors' assets.
Pursuant to the final order approving the Second DIP Facility, such liens are
not subordinate to or pari passu with any other lien or security interest (other
than (a) liens for certain administrative expenses and (b) liens in favor of
Safety-Kleen's Chief Executive Officer).
As of March 22, 2002, no cash borrowings have been made under the First DIP
Facility (as amended, the Tranche A facility) and approximately $75 million of
letters of credit have been issued. As of March 22, 2002, no cash borrowings
have been made under the Tranche B facility and no amounts have been issued for
letters of credit. The Debtors are jointly and severally liable under the Second
DIP Facility.
FINANCIAL ASSURANCE MATTERS
As described in greater detail in Note 14 of Notes to Consolidated Financial
Statements, on August 7, 2001, the Company obtained the collateral necessary to
enable it to replace Frontier Insurance Company ("Frontier") surety bonds at
approximately 114 facilities, pursuant to Bankruptcy Court approval obtained on
July 11, 2001. The replacement at these facilities will occur upon state
acceptance of the replacement coverage. Several states have approved the
replacement insurance policies, which Indian Harbor Insurance Company has
issued, and in those states the Company now has financial assurance coverage
that complies with applicable law. The Company expects the remaining affected
states and the EPA to approve the Indian Harbor policies in the near future. On
or about November 5, 2001 and December 31, 2001, the Company provided the
collateral necessary to enable it to replace Frontier surety bonds at additional
facilities, pursuant to Bankruptcy Court approval obtained on November 5, 2001.
As of January 1, 2002, the Company was in a position to provide replacement
financial assurance coverage at all but approximately 18 inactive facilities
(actual replacement is dependent upon acceptance by regulators of the
replacement policies). There is no guarantee that the Company will be able to
provide the required financial assurances at these inactive facilities.
The Company understands that, on August 27, 2001, Frontier entered a
rehabilitation proceeding that the New York Superintendent of Insurance will
administer pursuant to New York law. The Company further understands that in
such a proceeding, the Superintendent takes possession of the property of
Frontier and conducts its business. Because Frontier continues to provide
substantial amounts of financial assurance coverage at various facilities that
the Company owns and operates, the Company is investigating the extent to which,
if at all, the New York rehabilitation proceeding will impact the rights of the
Company or the states or the EPA with respect to these financial assurance
surety bonds. The Company has not been notified of any change in the validity of
such bonds.
21
The Company is currently subject to a Consent Agreement and Final Order with
the EPA (and similar agreements in certain other states) requiring the
replacement of Frontier at its facilities. The Company is in a position to
replace Frontier at all its active facilities, subject to approval by state
and/or federal regulators of the replacement policies. The current EPA deadline
for the replacement of Frontier at inactive facilities in the Branch Sales and
Service Division is March 31, 2002. The deadline for replacement of Frontier at
inactive facilities in the Chemical Services Division is July 31, 2002. Most,
but not all, states are likely to accept this July 31, 2002 deadline. There can
be no assurance that the Company will be able to complete its replacement of
Frontier on a schedule acceptable to the EPA and the states. If it does not, the
Company could be assessed additional penalties.
INFLATION AND COMMODITY PRICE RISKS
During the periods presented herein, the Company's business has not been and is
not expected to be significantly affected by inflation in the near future.
The Company operates a large fleet of vehicles in order to transport products
and waste streams. The Company also purchases petroleum and petroleum waste
products for processing in its oil re-refining operations. As a result, the
Company is exposed to fluctuations in both revenues and expenses as a result of
potential changes in the price of petroleum products. The Company believes that
its oil business creates a partial hedge against the risk of increased fuel
expense that might result from an increase in petroleum prices. While the
Company does not use derivative contracts to hedge its petroleum price risk, it
does enter into volume discount arrangements to purchase fuel for its fleet and
natural gas for certain of its re-refineries.
22
FACTORS THAT MAY AFFECT FUTURE RESULTS
The provisions of the Private Securities Litigation Reform Act of 1995 (the
"Act") provide companies with a "safe harbor" when making forward-looking
statements. This "safe harbor" encourages companies to provide prospective
information about their companies without fear of litigation. The Company wishes
to take advantage of the "safe harbor" provisions of the Act and is including
this section in its Annual Report on Form 10-K/A in order to do so. Statements
that are not historical facts, including statements about management's
expectations in fiscal 2002 and beyond, are forward-looking statements and
involve various risks and uncertainties. Factors that could cause the Company's
actual results to differ materially from management's projections, forecasts,
estimates and expectations include, but are not limited to, the following:
BUSINESS AND MARKET RISKS
The hazardous and industrial waste management industry, in which the Company
competes, is highly competitive. The sources of competition vary by locality and
by type of service rendered, with competition coming from the other major waste
services companies and hundreds of privately owned firms which offer waste
services. The Company also competes with municipalities and larger plants, which
provide "on site" waste services for their own waste materials. In addition, the
Company competes with many firms engaged in the transportation, brokerage and
disposal of hazardous wastes through recycling, waste-derived fuels programs,
thermal treatment or landfilling. The principal methods of competition for all
the Company's services are price, quality, reliability of service rendered and
technical proficiency in handling industrial and hazardous wastes properly.
In the United States, the original generators of hazardous waste remain liable
under federal and state environmental laws for improper disposal of such wastes.
Even if waste generators employ companies that have proper permits and licenses,
knowledgeable customers are interested in the reputation and financial strength
of the companies they use for management of their hazardous wastes. The Company
believes that its technical proficiency and reputation are important
considerations to its customers in selecting and continuing to utilize the
Company's services, but that its current bankruptcy proceedings may adversely
affect some of its customers' perceptions of its financial strength.
PROFIT IMPROVEMENT INITIATIVES
The Company has embarked on several initiatives to improve profitability in the
future. In fiscal 2002, the Company began to institute a new pricing structure,
as well as a modified compensation structure to better reward exceptional
performance. The Company continues to evaluate and implement other profit
improvements such as improved route logistics and energy cost savings
arrangements. The Company anticipates a significant cost savings from reductions
in headcount. Since September 1, 2001, the Company has reduced its headcount by
over 1,000 employees through planned reductions and normal attrition. In fiscal
2002, the Company intends to begin to upgrade its information technology systems
through the implementation of an enterprise resource planning system and hand
held electronic devices in the field operations. While the Company believes
these initiatives will increase revenue, reduce costs and improve operating
efficiencies, there can be no guarantee such results will be achieved. In
addition, the new technology and system upgrades may initially cause problems
that could adversely affect the Company's operations or financial systems until
resolved.
The Company has retained a consulting firm to evaluate the Company's current
operations and recommend business options for the Company following the Debtors'
confirmation of a plan or plans of reorganization. The Company is uncertain as
to each business option that may be recommended by the consulting firm and what
steps, if any, the Company may take as a result of such recommendations.
UNCERTAINTIES RELATING TO THE COMPANY'S INTERNAL CONTROLS
Management has identified numerous critical issues which may require resolution
prior to the Company's emergence from its reorganization proceedings. The
Company has identified material deficiencies in many of its financial systems,
processes and related internal controls and has commenced efforts to correct
these conditions. During October 2000, Arthur Andersen LLP reported to the Audit
Committee of the Board of Directors that the Company had material weaknesses in
its internal controls and that these conditions would be considered in
determining the nature, timing and extent of their audit tests for fiscal years
1997 through 2000. During September 2001, Arthur Andersen LLP reported to the
Audit Committee that the identified material weaknesses continued to exist and
would again be considered in determining the nature, timing and extent of their
audit tests for fiscal year 2001.
The Company continues the process of correcting these conditions by filling key
financial accounting and reporting positions in the organization, adding
information technology controls and improving its financial systems and
processes. The Company intends to continue to utilize substantial internal and
external resources to supplement these initiatives until it is satisfied that
its internal controls no longer contain material weaknesses. The Company cannot
estimate, at this time, how long it will take to completely develop and
establish an adequate internal control environment.
The Company contracted with outside accountants, including those from Arthur
Andersen LLP, who provided significant hours of work to assist the Company's
corporate and field accounting personnel with the analysis and financial
reporting support necessary to prepare the Company's Consolidated Financial
Statements for fiscal year 2000 and the quarterly and annual Consolidated
Financial Statements for fiscal 2001. The Company has been taking steps to
develop a comprehensive program that, over time, will establish a satisfactory
system of internal
23
controls and a timely and reliable financial reporting process. As part of this
program, a comprehensive review has begun of the process-flow and related
controls surrounding all major transaction cycles starting with the
transaction's origination at both field and corporate locations. The Company
identified and implemented accounting policies that conform to generally
accepted accounting principles for use in its financial reporting. In addition,
the program contemplates the development and implementation of the required
internal policies and processes regarding all major general ledger accounts and
related internal controls. The Company has engaged Jefferson Wells International
to assist the Company's internal auditors and to provide assistance in
developing, evaluating, and implementing process improvement recommendations.
Arthur Andersen LLP also continues to assist the Company in its efforts to
correct the identified internal control deficiencies. An evaluation of the
Company's system needs, including, among other things, those related to its
general ledger and financial reporting, is in progress and in January 2002 the
Company began negotiations with a third party consultant to assist with the
design and implementation of new operational and financial information systems.
The Company will continue to utilize substantial internal and supplemental
external resources until it is satisfied that its internal controls no longer
contain material weaknesses and it is capable of preparing timely and reliable
financial reporting. Accordingly, the Company will continue to incur significant
costs and effort to close its books at each interim and annual period.
UNCERTAINTIES RELATING TO BANKRUPTCY PROCEEDINGS
The Company believes that its revenue since the date of the Chapter 11 filings
is being adversely impacted by the Chapter 11 Cases, particularly with respect
to "event-based" business in the Chemical Services Division. The Company's
future results are dependent upon the Company's successfully confirming and
implementing a plan or plans of reorganization. The Company has not yet
submitted a plan or plans of reorganization to the Bankruptcy Court for approval
and cannot make any assurance that it will be able to obtain such approval in a
timely manner. Failure to obtain this approval in a timely manner could
adversely affect the Company's operating results, its ability to obtain
financing to fund its operations and its relations with its customers.
Furthermore, the Company cannot predict the ultimate amount of all settlement
terms for the liabilities of the Company that will be subject to compromise
under a plan or plans of reorganization.
As of August 31, 2001, proofs of claim in the approximate amount of $174 billion
have been filed against the Debtors by, among others, secured creditors,
unsecured creditors and security holders. The Company is in the process of
reviewing the proofs of claim and once this process is complete, will file
appropriate objections to the claims in the Bankruptcy Court. As of August 31,
2001, the Company believes it has identified approximately $171 billion of such
claims that are duplicative or without merit. The Company believes that the
amount of these claims that are in excess of the $2.5 billion recorded as
"Liabilities subject to compromise" in the accompanying Consolidated Financial
Statements as of August 31, 2001 are: (i) duplicative or without merit; (ii) do
not meet the criteria to be recorded as a liability under generally accepted
accounting principles; and (iii) will not have a material effect on the
Consolidated Financial Statements, but there can be no assurance that the
Company is correct and these claims may have a material effect on the
Consolidated Financial Statements.
Once a plan or plans of reorganization is approved and implemented, the
Company's operating results may be adversely affected by the possible reluctance
of prospective lenders and customers to do business with a company that recently
emerged from bankruptcy proceedings.
On February 22, 2002, the Company entered into a definitive agreement with Clean
Harbors, Inc. ("Clean Harbors") to sell its Chemical Services Division,
excluding the Company's landfill in Pinewood, S.C. Pursuant to the terms of the
agreement, Clean Harbors would purchase the Chemical Services Division's net
assets from the Company for $46 million in cash, subject to defined working
capital adjustments, and the assumption of certain liabilities, which includes
environmental liabilities valued at approximately $265 million as of August 31,
2001. The book value of the net assets to be disposed, net of the liabilities to
be assumed, at August 31, 2001 was in excess of $300 million. On March 8, 2002,
the Bankruptcy Court approved the bidding and auction procedures for the sale of
the Company's Chemical Services Division. Pursuant to the bidding procedures,
all qualified bidders interested in purchasing some or all of the Chemical
Services Division must submit an alternative qualified bid on or before May 30,
2002. There can be no assurance that the Bankruptcy Court and/or the various
regulatory agencies will approve the sale of the Chemical Services Division to
Clean Harbors or an alternative purchaser, or that the Company will be able to
complete the sale of the Chemical Services Division.
EFFECT OF LAIDLAW'S FINANCIAL SITUATION ON THE COMPANY
On June 28, 2001, Laidlaw Inc. ("Laidlaw") and five of its subsidiary holding
companies, Laidlaw Investments Ltd., Laidlaw International Finance Corporation,
Laidlaw One, Inc., Laidlaw Transportation, Inc. and Laidlaw USA, Inc.
(collectively, "Laidlaw Debtors") filed voluntary petitions for reorganization
under Chapter 11 of the Bankruptcy Code in the United States Bankruptcy Court
for the Western District of New York. On the same day, Laidlaw and Laidlaw
Investments Ltd. filed cases against the Company under the Canada Companies'
Creditors Arrangement Act (CCAA) in the Ontario Superior Court of Justice in
Toronto, Ontario. In an effort to resolve these claims, the parties will
participate in a mediation which is presently anticipated to be held in April
2002. As a result of the Laidlaw Debtors' filings, claims and causes of action
the Company may have against the Laidlaw Debtors may be subject to compromise in
Laidlaw Debtors' Chapter 11 or CCAA proceedings.
The Company is unable to predict the outcome or impact of these matters and
there can be no assurance that they will not have a material adverse effect on
the Company and its operations.
24
LEVERAGE
The Company is currently in default under its senior debt obligations, which are
substantial. During the pendency of its bankruptcy proceedings, the Company may
only obtain additional debt financing with the approval of the Bankruptcy Court,
and has already obtained $200 million in such debt financing through the Second
DIP Facility discussed above. To date, there have been no cash borrowings
against this $200 million Second DIP Facility. As of March 3, 2002, letters of
credit in the aggregate amount of approximately $75 million had been issued
under the First DIP Facility. In addition, the Company had approximately $9
million of additional availability under the First DIP Facility as of that date.
Depending on the resolution of its bankruptcy proceedings and the plan or plans
of reorganization adopted, the Company could emerge from bankruptcy highly
leveraged with substantial debt service obligations, including, as discussed
above, obligations or commitments regarding financial assurance requirements.
Thus the Company is particularly susceptible to adverse changes in its industry,
the economy and the financial markets. In addition, the Company's ability to
obtain additional debt financing may be limited by restrictive covenants under
the terms of credit agreements and any other debt instruments. Those limits on
financing may restrict the Company's ability to service its debt obligations
through additional debt financing if cash flow from operations is insufficient
to service such obligations. The Second DIP Facility matures on the earlier of
March 22, 2003 or the effective date of a plan or plans of reorganization or the
earlier termination of the Revolving Credit Commitments as defined therein.
ENVIRONMENTAL REGULATION AND LEGAL PROCEEDINGS
The Company's operations are subject to certain federal, state, and local
requirements, which regulate health, safety, environment, zoning and land-use.
Operating and other permits are generally required for incinerators, landfills,
transfer and storage facilities, certain collection vehicles, storage tanks and
other facilities owned or operated by the Company, and these permits are subject
to revocation, modification and renewal. Although the Company believes that its
facilities meet federal, state and local requirements in all material respects
(except for financial assurance matters described below) and have all the
required operating and other permits, it may be necessary to expend considerable
time, effort and money to keep existing or acquired facilities in compliance
with applicable requirements, including new regulations, and to maintain
existing permits and approvals and to obtain the permits and approvals necessary
to increase their capacity.
The Company is required to provide certain financial assurances with respect to
certain statutorily required closure, post-closure and corrective action
obligations related to various operating facilities. These financial assurances
may take the form of insurance, guarantees, bonds, letters of credit or deposits
of cash, to the extent acceptable to the United States, Canadian or other
foreign, state, territorial, federal, provincial or local courts, executive
offices, legislatures, governmental agencies or ministries, commissions or
administrative, regulatory or self-regulatory authorities or instrumentality's
requiring such assurances. As of January 1, 2002, the Company was in a position
to provide replacement financial assurance coverage at all but approximately 18
inactive facilities (actual replacement is dependent upon acceptance by
regulators of the replacement policies). There is no guarantee that the Company
will be able to provide the required financial assurances at these inactive
facilities.
The Company is a party to environmental and other litigation, claims and
administrative proceedings arising from its operations. The Company is unable to
predict the outcome or impact of these matters and there can be no assurance
that they will not have a material adverse effect on the Company and its
operations.
The Company believes that many of the claims and litigation matters described
above are subject to resolution in its bankruptcy proceedings. The outcomes of
such proceedings are unknown and subject to a number of uncertainties as
described above.
SAFETY-KLEEN (PINEWOOD), INC.
As further discussed in Note 14 of Notes to Consolidated Financial Statements,
by an Order dated May 19, 1994 the Company was ordered to establish and maintain
an environmental impairment fund in the amount of $133 million in 1994 dollars
by July 1, 2004, as financial assurance for potential environmental clean up and
restoration of environmental impairment at the Pinewood Facility. Subject to the
automatic stay provisions of the Debtors' bankruptcy proceedings, the Company
would be required to fund, in 2001 dollars, approximately $110 million and $6
million in fiscal 2002 and 2003, respectively, in order to comply with the
financial assurance provisions of the Order. The Company is unable to predict
the outcome or impact of this matter and there can be no assurance that it will
not have a material adverse effect on the Company and its operations. The
funding obligation does not impact the Company's accounting for the landfill and
environmental liabilities recorded for Pinewood of approximately $54 million as
of August 31, 2001.
MATTERS RELATED TO INVESTIGATION OF FINANCIAL RESULTS
Former and/or current officers, directors and employees of the Company and/or
Laidlaw are parties to various claims filed by shareholders and bondholders on
behalf of various alleged classes of Company shareholders and bondholders,
asserting federal securities law claims.
The Company is the subject of ongoing investigations by the SEC and a grand jury
sitting in the United States District Court for the Southern District of New
York relating to the same matters. The Company has responded to subpoenas issued
by the SEC and the grand jury and is cooperating with each of the
investigations.
25
In addition to the above, two shareholder derivative lawsuits were filed on
behalf of the Company against certain of its directors and former directors
alleging breach of state law fiduciary duties by the defendants. These claims
seek to recover damages on behalf of the Company against the director defendants
in an unspecified amount as well as related relief. These actions are subject to
an automatic stay under the Bankruptcy Code during the pendency of the Company's
bankruptcy proceedings.
On December 13, 2000, thirteen lenders to Safety-Kleen Services, Inc., sued
PricewaterhouseCoopers LLP, in the State Court of Fulton County Georgia,
alleging negligent misrepresentation by PricewaterhouseCoopers LLP, in
connection with the Consolidated Financial Statements of Safety-Kleen and its
subsidiaries for fiscal years 1997, 1998 and 1999. The case is captioned Toronto
Dominion (Texas), Inc., et al. v. PricewaterhouseCoopers LLP, Civil Action No.
00 VS 02679 F. The complaint has been amended twice, and the plaintiffs now
number over 90 lenders to Safety-Kleen Services, Inc. On October 23, 2001,
PricewaterhouseCoopers LLP, filed a motion for leave to file a third-party
complaint naming Safety-Kleen and former Safety-Kleen officers Kenneth W.
Winger, Michael J. Bragagnolo, and Paul B. Humphreys as third party defendants
in a third party claim for indemnity or contribution. The Georgia state court
granted leave and PricewaterhouseCoopers, LLP has now served a third party
complaint against the Company. The Company is moving to enjoin the third party
complaint and argues that it contravenes the automatic stay provisions of
federal bankruptcy law.
The Company is unable to predict the outcome or impact of these matters and
there can be no assurance that they will not have a material adverse effect on
the Company and its operations.
INDEPENDENT PUBLIC ACCOUNTANTS
AUDIT FEES
Beginning on August 2, 2000, Arthur Andersen LLP, was engaged by the Company as
its new independent accountant to audit the Company's Consolidated Financial
Statements. The aggregate fees billed for professional services rendered by
Arthur Andersen LLP for the restatement audit of the Company's annual
Consolidated Financial Statements for fiscal 1997 through 1999 and the audit of
fiscal 2000 were approximately $21 million. The aggregate fees expected to be
billed for the audit of the Company's annual Consolidated Financial Statements
for fiscal 2001 are approximately $5 million.
FINANCIAL INFORMATION SYSTEMS DESIGN AND IMPLEMENTATION FEES
Arthur Andersen LLP did not provide financial system design and implementation
support for fiscal 2001 and 2000.
ALL OTHER FEES
All other fees for professional services rendered by Arthur Andersen LLP totaled
approximately $17 million and $1 million for fiscal 2001 and 2000, respectively.
These services were comprised of audit-related fees of approximately $16 million
in fiscal 2001 relating primarily to assistance to the Company's accounting
staff during the restatement of fiscal years 1997 to 1999 and audit of fiscal
2000.
The remaining fees billed for professional services, which were rendered in
connection with the investigation by the Special Committee of the Company's
Board of Directors, tax preparation, and other assistance and consulting,
aggregated approximately $1 million and $1 million in fiscal 2001 and 2000,
respectively.
The Company has engaged Arthur Andersen LLP, among others, to assist the Company
in correcting identified internal control deficiencies beginning in fiscal 2002.
Accordingly, the Company expects to be billed by Arthur Andersen LLP for
professional fees related to these services in fiscal 2002.
MATTERS PERTAINING TO ARTHUR ANDERSEN LLP
The Company's independent public accountant, Arthur Andersen LLP, has informed
the Company that on March 14, 2002, it was indicted on federal obstruction of
justice charges arising from the government's investigation of Enron
Corporation. Arthur Andersen LLP has indicated that it intends to contest
vigorously the indictment.
The Company's management and Audit Committee have been carefully monitoring this
situation. As a public company, the Company is required to file with the SEC
periodic financial statements audited or reviewed by an independent, certified
public accountant.
The SEC has said that it will continue accepting financial statements audited by
Arthur Andersen LLP, and interim financial statements reviewed by it, so long as
Arthur Andersen LLP is able to represent to the Company that it has applied its
normal quality control procedures in the manner required to render its opinion
or perform audit related services. The Company received such representations
from Arthur Andersen LLP for its fiscal 2001 audit.
26
The Company does not know the scope or impact of the indictment, or whether
additional indictments may be made by the Department of Justice. The result of
the indictment or other lawsuits against Arthur Andersen LLP, among other
things, may cause the Company to select another independent auditor and select
other resources to assist the Company in correcting its internal control
deficiencies. In that case, the Company may incur significant expense in
familiarizing the new auditors with the Company's accounting and the Company may
incur additional expense in familiarizing the new resources with its internal
control deficiencies.
27
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
In the normal course of business, the Company is exposed to market risk
including changes in interest rate risk and currency exchange rates.
Interest Rate Risk - At August 31, 2001, the Company had fixed and variable rate
debt denominated in U.S. dollars, and variable rate debt denominated in Canadian
dollars. Due to the uncertainty resulting from the Chapter 11 Cases, the fair
value of the Company's long-term debt as of August 31, 2001 is not determinable.
The following table details the original maturities (at book value) and interest
rate indices (including the default rate on the Senior Credit Facility) for all
variable rate debt as of August 31, 2001, segregated between debt subject to
compromise and debt not subject to compromise ($ in millions):
VARIABLE RATE DEBT 2002 2003 2004 2005 2006 THEREAFTER TOTAL
- ------------------ ---- ---- ---- ---- ---- ---------- -----
Subject to compromise
Senior Credit Facility dated April 3, 1998
Tranche A (Prime + 3.375%) $204 $ 84 $ 64 $ -- $ -- $ -- $ 352
Tranche B (Prime + 3.75%) 10 4 97 282 -- -- 393
Tranche C (Prime + 5.00%) 10 4 4 96 279 -- 393
Revolving credit (Prime + 3.375%) -- -- 340 -- -- -- 340
---- ---- ---- ---- ---- --------- ------
Subtotal domestic credit facility 224 92 505 378 279 -- 1,478
Promissory note dated May 15, 1997 (6 month LIBOR) 20 40 -- -- -- -- 60
---- ---- ---- ---- ---- --------- ------
Subtotal variable rate indebtedness subject to
compromise1 244 132 505 378 279 -- 1,538
==== ==== ==== ==== ==== ========= ======
Not subject to compromise
Canadian tranche of April 3, 1998, senior credit 46 -- -- -- -- -- 46
facility2, 3
Canadian demand note2 16 -- -- -- -- -- 16
---- ---- ---- ---- ---- --------- ------
Subtotal Canadian denominated variable rate debt 62 -- -- -- -- -- 62
---- ---- ---- ---- ---- --------- ------
Consolidated variable rate debt $306 $132 $505 $378 $279 $ -- $1,600
==== ==== ==== ==== ==== ========= ======
1 All debt subject to compromise is classified as such in the
consolidated balance sheet. See Note 11 of Notes to Consolidated
Financial Statements.
2 The floating interest on these borrowings is based on Canadian Prime
plus 1.375% or the Canadian Bankers Acceptance rate plus 2.375%. The
interest rate applied is at the Company's discretion.
3 The Canadian tranche of the Senior Credit Facility, while not subject
to compromise, was in default at August 31, 2001, and is classified as
current debt in the consolidated balance sheet.
In accordance with the provisions of default under the Canadian Senior Credit
Facility, the floating interest rate will increase an additional 2% if all or a
portion of any principal of any loan, any interest payable thereon, any
commitment fee or any Reimbursement Obligation or Acceptance Reimbursement
Obligation or other amount payable hereunder shall not be paid when due. Due to
continuing defaults, the outstanding loan balance is classified as a current
liability as of August 31, 2001 and 2000, and interest continues to accrue at
Prime plus 3.375%.
The following table details the rates and maturities for all fixed rate debt,
all of which is subject to compromise as of August 31, 2001 ($ in millions):
FIXED RATE DEBT 2002 2003 2004 2005 2006 THEREAFTER TOTAL
---- ---- ---- ---- ---- ---------- ----
9.25% Senior Subordinated Notes due 2008 $ -- $ -- $ -- $ -- $ -- $325 $325
9.25% Senior Notes due 2009 -- -- -- -- -- 225 225
Industrial revenue bonds with rates
ranging from 6.0% to 7.75% -- 6 2 2 2 69 81
Other 3 -- -- -- -- -- 3
---- ---- ---- ---- ---- ---- ----
Total fixed rate debt $ 3 $ 6 $ 2 $ 2 $ 2 $619 $634
==== ==== ==== ==== ==== ==== ====
The Company's Senior Credit Facility dated April 3, 1998, included provisions,
which expired March 31, 2000, requiring the Company to obtain interest rate
protection for a notional amount equal to at least 40% of Consolidated Total
Funded Debt bearing variable interest. The Company entered into pay fixed swaps,
in part, to satisfy this provision of the agreement. As discussed in Note 19 of
Notes to Consolidated Financial Statements, the Company entered into a number of
other derivative transactions including interest rate swaps, swaptions, bond
indexed equity swaps, and forward start swaps which were used for trading
purposes. As of August 31, 1999, the Company had derivative contracts
outstanding with notional amounts of approximately $2 billion. In March 2000,
the Company's existing derivative contracts, including those entered into to
satisfy interest rate protection requirements, were involuntarily terminated as
a result of cross-default provisions between the Company's Senior Credit
Facility and its International Swap Dealers Association Master Agreements. The
notional amount of
28
these contracts was $2 billion. See Note 19 of Notes to Consolidated Financial
Statements for detail of the Company's fiscal 2001, 2000 and 1999 derivative
activity.
In June 2000, the Company entered into a $40 million debtor-in-possession credit
agreement. In July 2000, the Company increased the amount that could be borrowed
under that arrangement, including letters of credit, to $100 million. As of
March 3, 2002, no amounts had been drawn under the First DIP Facility and $75
million of letters of credit had been issued. Any borrowings under the First DIP
Facility will bear interest at the greater of Prime Rate plus 1% per annum and
the Fed Funds Rate plus 0.5% per annum or LIBOR plus 3% per annum, depending on
the nature of the borrowings. On March 20, 2002, the company obtained an
additional $100 million of credit under the terms of the Second DIP Facility.
See Notes 10 and 29 of Notes to Consolidated Financial Statements for further
discussion of the First DIP Facility and the Second DIP facility.
Currency Exchange Rate Risk - The Canadian operations expose the Company to
currency exchange rate risks. However, that risk is mitigated by the fact that
approximately 11% of the Company's revenues are generated in Canada. In
addition, the Canadian assets are partially hedged through Canadian denominated
debt. Currently, the Company does not enter into any hedging arrangements to
reduce this exposure. The Company is not aware of any facts or circumstances
that would significantly impact such exposures in the near-term. If, however,
there was a sustained decline of the Canadian dollar versus the U.S. dollar,
then the Consolidated Financial Statements could be adversely affected.
29
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA
PAGE
NUMBER
Report of Independent Public Accountants ................................................................. 31
Consolidated Statements of Operations for the Years Ended August 31, 2001, 2000 and 1999 ................. 32
Consolidated Balance Sheets as of August 31, 2001 and 2000 ............................................... 33
Consolidated Statements of Cash Flows for the Years Ended August 31, 2001, 2000 and 1999 ................. 34
Consolidated Statements of Changes in Stockholders' Equity (Deficit) and Other
Comprehensive Income (Loss) for the Years Ended August 31, 2001, 2000 and 1999 ......................... 35
Notes to Consolidated Financial Statements ............................................................... 36
Report of Independent Public Accountants on Financial Statement Schedule ................................. 89
Schedule II -- Valuation and Qualifying Accounts for the Years Ended August 31, 2001, 2000 and 1999 ...... 90
All other schedules have been omitted since they are inapplicable or not
required, or the information has been included in the Consolidated Financial
Statements or the notes thereto.
30
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Safety-Kleen Corp.:
We have audited the accompanying consolidated balance sheets of Safety-Kleen
Corp., a Delaware corporation, and subsidiaries (the "Company"), as of August
31, 2001 and 2000, and the related consolidated statements of operations,
changes in stockholders' equity (deficit) and other comprehensive income (loss)
and cash flows for the three years ended August 31, 2001. 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 auditing standards generally accepted
in the United States. 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.
As discussed in Note 28, the Company has not presented quarterly financial data
for the fiscal year ended August 31, 2000 that the Securities and Exchange
Commission requires to supplement, although not required to be part of, the
basic financial statements.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Safety-Kleen Corp.
and subsidiaries as of August 31, 2001 and 2000, and the results of their
operations and their cash flows for the three years ended August 31, 2001, in
conformity with accounting principles generally accepted in the United States.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. The Company has experienced
significant losses in the last five fiscal years and has a stockholders' deficit
of $345.7 million at August 31, 2001. In addition, as discussed in Notes 1 and 3
to the financial statements, on June 9, 2000, Safety-Kleen Corp. and certain of
its subsidiaries each filed a voluntary petition for relief under Chapter 11 of
the United States Bankruptcy Code and continue to operate their respective
businesses as debtors-in-possession. Management's plans in regard to these
matters, including its intent to file a plan of reorganization acceptable to the
Bankruptcy Court and the Company's creditors, are also described in Notes 1 and
3. These matters, among others, raise substantial doubt about the Company's
ability to continue as a going concern. In the event a plan of reorganization is
accepted, continuation of the business thereafter is dependent on the Company's
ability to achieve successful future operations. The accompanying consolidated
financial statements do not include any adjustments relating to the
recoverability and classification of recorded asset amounts or the amounts and
classification of liabilities that might be necessary should the Company be
unable to continue as a going concern.
/S/ ARTHUR ANDERSEN LLP
Charlotte, North Carolina
February 28, 2002,
except with respect
to the matters discussed
in Note 29, as to which
the date is March 20, 2002.
31
SAFETY-KLEEN CORP.
(DEBTOR-IN-POSSESSION AS OF JUNE 9, 2000)
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
FOR THE YEARS ENDED AUGUST 31,
---------------------------------------------
2001 2000 1999
----------- ----------- -----------
Revenues $ 1,514,583 $ 1,586,273 $ 1,624,038
----------- ----------- -----------
Expenses:
Operating 1,212,350 1,389,362 1,242,594
Depreciation and amortization 143,710 169,902 161,314
Selling, general and administrative 273,975 279,386 201,967
Impairment and other charges 52,884 367,793 11,287
----------- ----------- -----------
1,682,919 2,206,443 1,617,162
----------- ----------- -----------
Operating (loss) income (168,336) (620,170) 6,876
Interest expense, net (excluding contractual interest of
$245,436 in fiscal 2001 and $60,756 in fiscal 2000) (5,036) (141,879) (186,180)
Other (expense) income (1,000) 494 (1,308)
Derivative (losses) gains (558) 713 (5,923)
Equity in earnings of associated companies -- 1,769 1,263
----------- ----------- -----------
Loss before reorganization items, income taxes, minority
interest and extraordinary items (174,930) (759,073) (185,272)
Reorganization items (42,284) (60,923) --
----------- ----------- -----------
Loss before income taxes, minority interest and
extraordinary (217,214) (819,996) (185,272)
items
Income tax expense (17,874) (13,023) (39,094)
----------- ----------- -----------
Loss before minority interest and extraordinary items (235,088) (833,019) (224,366)
Minority interest 419 (172) 1,211
----------- ----------- -----------
Loss before extraordinary items (234,669) (833,191) (223,155)
Extraordinary items, net of tax (early extinguishment of 5,591 -- --
debt)
----------- ----------- -----------
Net loss $ (229,078) $ (833,191) $ (223,155)
=========== =========== ===========
Basic and diluted loss per share:
Loss before extraordinary items $ (2.33) $ (8.27) $ (2.52)
Extraordinary items 0.06 -- --
----------- ----------- -----------
Net loss $ (2.27) $ (8.27) $ (2.52)
=========== =========== ===========
Weighted average common stock outstanding-basic and
diluted 100,784 100,725 88,537
=========== =========== ===========
See accompanying Notes to Consolidated Financial Statements.
32
SAFETY-KLEEN CORP.
(DEBTOR-IN-POSSESSION AS OF JUNE 9, 2000)
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT FOR PAR VALUE AMOUNT)
AUGUST 31,
---------------------------
2001 2000
----------- -----------
ASSETS:
Current assets:
Cash and cash equivalents $ 116,057 $ 84,282
Accounts receivable, net 259,024 307,342
Inventories and supplies 43,564 51,914
Deferred income taxes 38,729 28,554
Other current assets 36,042 49,731
----------- -----------
Total current assets 493,416 521,823
----------- -----------
Property, plant and equipment, net 763,603 772,875
Intangible assets, net 1,727,984 1,798,285
Other assets 28,790 38,885
----------- -----------
Total assets $ 3,013,793 $ 3,131,868
=========== ===========
LIABILITIES:
Current liabilities:
Accounts payable $ 49,575 $ 65,838
Current portion of environmental liabilities 41,218 41,122
Income taxes payable 28,107 24,534
Unearned revenue 70,380 90,953
Accrued other liabilities 154,824 69,211
Current portion of long-term debt 62,223 65,421
----------- -----------
Total current liabilities 406,327 357,079
----------- -----------
Environmental liabilities 340,442 285,634
Deferred income taxes 100,500 92,659
Other long-term liabilities 29,985 9,197
Liabilities subject to compromise 2,481,274 2,500,973
Minority interests 947 1,296
COMMITMENTS AND CONTINGENCIES (NOTE 14)
STOCKHOLDERS' EQUITY (DEFICIT):
Common stock, par value $1.00 per share; 250,000 shares
authorized;
100,784 shares issued and outstanding in 2001 and 2000 100,784 100,784
Additional paid-in capital
1,359,972 1,359,972
Accumulated other comprehensive loss
(8,300) (6,666)
Accumulated deficit
(1,798,138) (1,569,060)
----------- -----------
Total stockholders' equity (deficit)
(345,682) (114,970)
----------- -----------
Total liabilities and stockholders' equity (deficit) $ 3,013,793 $ 3,131,868
=========== ===========
See accompanying Notes to Consolidated Financial Statements.
33
SAFETY-KLEEN CORP.
(DEBTOR-IN-POSSESSION AS OF JUNE 9, 2000)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
YEAR ENDED AUGUST 31,
-------------------------------------
2001 2000 1999
--------- --------- ---------
Cash flows from operating activities:
Net loss $(229,078) $(833,191) $(223,155)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Extraordinary items (5,591) -- --
Non-cash reorganization items 8,272 45,963 --
Equity in undistributed earnings of associated companies -- (1,769) (1,263)
Impairment and other charges 52,884 367,793 11,287
Depreciation and amortization 143,710 169,902 161,314
Provision for uncollectible accounts 13,505 74,337 14,177
Derivative losses (gains) 558 (713) 5,923
Loss on sale of investment -- 4,969 --
Loss on disposal of equipment 2,910 43,813 27,921
Deferred income taxes (17) 8,252 28,448
Change in accounts receivable 33,331 (84,250) (51,500)
Change in accounts payable (14,785) 55,452 45,099
Change in income taxes payable 3,655 (8,840) 61,163
Change in accrued other liabilities 81,453 70,377 (29,056)
Change in environmental liabilities 11,359 31,408 (2,197)
Change in unearned revenue (20,363) (1,914) 4,778
Change in liabilities subject to compromise (1,406) -- --
Change in other, net 19,528 (476) (34,405)
--------- --------- ---------
Net cash provided by (used in) operating activities 99,925 (58,887) 18,534
--------- --------- ---------
Cash flows from investing activities:
Net cash expended on acquisition of businesses -- (27,072) (14,904)
Proceeds from sales of property, plant & equipment 5,209 9,998 5,982
Purchases of property, plant & equipment (71,332) (53,098) (71,827)
Decrease in long-term investments 8,846 11,783 1,783
Proceeds from sale of business -- 31,581 129,124
--------- --------- ---------
Net cash provided by (used in) investing activities (57,277) (26,808) 50,158
--------- --------- ---------
Cash flows from financing activities:
Issuance of common stock on exercise of options -- 26 212
Borrowings of long-term debt -- 252,697 236,910
Repayments of long-term debt (10,080) (67,154) (377,425)
Bank financing fees -- (4,047) (10,303)
Bank overdraft -- (45,244) 39,773
Change in derivative liabilities -- 21,759 40,454
Change in other, net -- 146 --
--------- --------- ---------
Net cash provided by (used in) financing activities (10,080) 158,183 (70,379)
--------- --------- ---------
Effect of exchange rate changes on cash (793) 1,722 (3,564)
--------- --------- ---------
Net increase (decrease) in cash and cash equivalents 31,775 74,210 (5,251)
Cash and cash equivalents at:
Beginning of year 84,282 10,072 15,323
--------- --------- ---------
End of year $ 116,057 $ 84,282 $ 10,072
========= ========= =========
See accompanying Notes to Consolidated Financial Statements.
34
SAFETY-KLEEN CORP.
DEBTOR-IN-POSSESSION AS OF JUNE 9, 2000
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
AND OTHER COMPREHENSIVE INCOME (LOSS)
(IN THOUSANDS)
ACCUMULATED
OTHER
COMMON ADDITIONAL COMPREHENSIVE ACCUMULATED
STOCK PAID-IN CAPITAL INCOME (LOSS) DEFICIT TOTAL
--------- -------------- ------------- ----------- ---------
BALANCE AT AUGUST 31, 1998 $ 87,746 $1,200,047 $(9,511) $ (512,714) $ 765,568
========= ========== ======= =========== =========
Comprehensive loss:
Net loss -- -- -- (223,155) (223,155)
Other comprehensive income
(loss):
Foreign currency translation
adjustments -- -- 582 -- 582
Unrealized gain (loss) on
marketable securities -- -- (285) -- (285)
---------
Total comprehensive loss (222,858)
---------
Issuance of shares in payment for
directors' fees 6 87 -- -- 93
Issuance of shares for repurchase
of subordinated convertible
debenture 11,321 138,679 -- -- 150,000
Issuance of shares in payment for
interest on subordinated convertible
debenture 1,545 20,941 -- -- 22,486
Exercise of stock options 18 194 -- -- 212
--------- ---------- ------- ----------- ---------
BALANCE AT AUGUST 31, 1999 $ 100,636 $1,359,948 $(9,214) $ (735,869) $ 715,501
========= ========== ======= =========== =========
Comprehensive loss:
Net loss -- -- -- (833,191) (833,191)
Other comprehensive income (loss):
Foreign currency translation
adjustments -- -- 2,571 -- 2,571
Unrealized gain (loss) on
marketable securities -- -- (23) -- (23)
---------
Total comprehensive loss (830,643)
---------
Issuance of shares to non-employees 146 -- -- -- 146
Exercise of stock options 2 24 -- -- 26
--------- ---------- ------- ----------- ---------
BALANCE AT AUGUST 31, 2000 $ 100,784 $1,359,972 $(6,666) $(1,569,060) $(114,970)
========= ========== ======= =========== =========
Comprehensive loss:
Net loss -- -- -- (229,078) (229,078)
Other comprehensive income (loss):
Foreign currency translation
adjustments -- -- (2,131) -- (2,131)
Unrealized gain (loss) on
marketable securities -- -- 497 -- 497
---------
Total comprehensive loss (230,712)
--------- ---------- ------- ----------- ---------
BALANCE AT AUGUST 31, 2001 $ 100,784 $1,359,972 $(8,300) $(1,798,138) $(345,682)
========= ========== ======= =========== =========
See accompanying Notes to Consolidated Financial Statements
35
SAFETY-KLEEN CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BUSINESS, ORGANIZATION AND BANKRUPTCY
BUSINESS AND ORGANIZATION
Safety-Kleen Corp. (the "Registrant" or "Safety-Kleen") (collectively referred
to with its subsidiaries as the "Company"), was incorporated in Delaware in 1978
as Rollins Environmental Services, Inc. ("Rollins"), later changed its name to
Laidlaw Environmental Services, Inc. ("LESI") and subsequently changed its name
to Safety-Kleen Corp. Through its Chemical Services and Branch Sales and Service
divisions, the Company provides a range of services designed to collect,
transport, process, recycle or dispose of hazardous and non-hazardous industrial
and commercial waste streams. The Company provides these services in 50 states,
ten Canadian provinces, Puerto Rico, Mexico and Saudi Arabia from approximately
375 collection, processing and other locations.
On May 15, 1997, pursuant to a stock purchase agreement among Rollins, Laidlaw
Inc., a Canadian corporation ("Laidlaw"), and its subsidiary, Laidlaw
Transportation Inc. ("LTI"), Rollins acquired the hazardous and industrial waste
operations of Laidlaw (the "Rollins Acquisition"). As a result of the Rollins
Acquisition, Laidlaw owned 67% of the issued common shares of LESI. Accordingly,
the business combination was accounted for as a reverse acquisition using the
purchase method of accounting, with Rollins being treated as the acquired
company. Coincident with the closing of the Rollins Acquisition, the continuing
legal entity changed its name from Rollins Environmental Services, Inc. to
Laidlaw Environmental Services, Inc.
On May 26, 1998, LESI completed the acquisition of the former Safety-Kleen Corp.
("Old Safety-Kleen"). The acquisition of Old Safety-Kleen has been accounted for
under the purchase method. Effective July 1, 1998, LESI began doing business as
Safety-Kleen Corp. and its stock began trading on the New York Stock Exchange
("NYSE") and the Pacific Exchange, Inc. ("PCX") under the name Safety-Kleen
Corp. and the ticker symbol SK. The stock was suspended from trading on the NYSE
and the PCX on June 12, 2000 and was removed from listing and registration on
the NYSE on July 20, 2000, and the PCX on September 29, 2000. The stock now
trades over the counter as SKLNQ.
BANKRUPTCY
On June 9, 2000, Safety-Kleen and 73 of its domestic subsidiaries (collectively,
the "Debtors") filed voluntary petitions for relief (the "Chapter 11 Cases")
under Chapter 11 of the United States Bankruptcy Code, 11 U.S.C. ss.ss.
101-1330, as amended (the "Bankruptcy Code") in the United States Bankruptcy
Court for the District of Delaware (the "Bankruptcy Court"). The Chapter 11
Cases are being jointly administered for procedural purposes only, before the
Bankruptcy Court under Case No. 00-2303 (PJW). Excluded from the filing were
certain of Safety-Kleen's non wholly-owned domestic subsidiaries and all
Safety-Kleen's indirect foreign subsidiaries.
The Debtors remain in possession of their properties and assets, and the
management of the Debtors continues to operate their respective businesses as
debtors-in-possession under Sections 1107 and 1108 of the Bankruptcy Code. As
debtors-in-possession, the Debtors are authorized to manage their properties and
operate their businesses, but may not engage in transactions outside the
ordinary course of business without the approval of the Bankruptcy Court.
Under Section 365 of the Bankruptcy Code, subject to the approval of the
Bankruptcy Court, the Debtors may assume or reject executory contracts and
unexpired leases. Parties affected by these rejections may file proofs of claim
with the Bankruptcy Court in accordance with the reorganization process. Claims
for damages resulting from the rejection of executory contracts or unexpired
leases will be subject to separate bar dates, generally thirty days after entry
of the order approving the rejection. At various times since the commencement of
the Chapter 11 Cases, the Bankruptcy Court has approved the Debtors' requests to
reject certain contracts or leases that were deemed burdensome or of no further
value to the Company. As of February 27, 2002, the Debtors had not yet completed
their review of all contracts and leases for assumption or rejection, but
ultimately will assume or reject all such contracts and leases. The Debtors have
until the confirmation of a plan or plans of reorganization to assume or reject
executory contracts, nonresidential real property leases, and certain other
leases. The Debtors cannot presently determine or reasonably predict the
ultimate liability that may result from rejecting such contracts or leases or
from the filings of rejection damage claims, but such rejections could result in
additional liabilities subject to compromise (see Note 11).
Consummation of a plan or plans of reorganization is the principal objective of
the Chapter 11 Cases. A plan of reorganization sets forth the means for
satisfying claims against and interests in the Debtors, including the
liabilities subject to compromise. Generally, pre-petition liabilities are
subject to settlement under such a plan or plans of reorganization, which must
be voted upon by creditors and equity holders and approved by the Bankruptcy
Court. The Debtors have retained Lazard Freres & Co. LLC, an investment bank, as
corporate restructuring advisor to assist them in formulating and negotiating a
plan or plans of reorganization for the Debtors. Although the Debtors expect to
file a reorganization plan or plans as soon as reasonably possible, there can be
no assurance that a reorganization plan or plans will be proposed by the Debtors
or confirmed by the Bankruptcy Court, or that any such plan or plans will be
consummated.
As provided by the Bankruptcy Code, the Debtors initially had the exclusive
right to submit a plan or plans of reorganization for 120 days from the date the
petitions were filed. On October 17, 2000, the Debtors received Bankruptcy Court
approval to extend the exclusive period to file a plan or plans of
reorganization in the Chapter 11 Cases from October 7, 2000, to April 30, 2001,
and extended the Debtors' exclusive right to solicit acceptances of such plan or
plans from December 6, 2000, to June 29, 2001. On May 16, 2001, the Debtors
received
36
Bankruptcy Court approval to further extend the exclusive period to file a plan
or plans of reorganization in the Chapter 11 Cases to September 19, 2001, and
extended the Debtors' exclusive right to solicit acceptances of such plan or
plans to November 19, 2001. On February 11, 2002, the Debtors received
Bankruptcy Court approval to further extend the exclusive period to file a plan
or plans of reorganization in the Chapter 11 Cases to April 30, 2002 and
extended the Debtors' exclusive right to solicit acceptances of the plan or
plans to June 30, 2002.
Currently, it is not possible to predict the length of time the Debtors will
operate under the protection of Chapter 11, the outcome of the Chapter 11
proceedings in general, or the effect of the proceedings on the business of the
Company or on the interests of the various creditors and security holders. Under
the Bankruptcy Code, post-petition liabilities and pre-petition liabilities
subject to compromise must be satisfied before shareholders can receive any
distribution. The ultimate recovery to shareholders, if any, will not be
determined until the end of the case when the fair value of the Debtors' assets
is compared to the liabilities and claims against the Debtors. There can be no
assurance as to what value, if any, will be ascribed to the common stock in the
bankruptcy proceedings. The Company does not believe the common shareholders
will receive any distribution upon consummation of a plan or plans of
reorganization.
2. RESTATEMENT OF CONSOLIDATED FINANCIAL STATEMENTS
As more fully discussed in Note 14, on March 6, 2000, Safety-Kleen announced
that it had initiated an internal investigation ("the Company Investigation") of
its previously reported financial results and certain of its accounting policies
and practices. This investigation followed receipt by Safety-Kleen's Board of
Directors of information alleging possible accounting irregularities that may
have affected the previously reported financial results of the Company.
Following this announcement, PricewaterhouseCoopers LLP, the Company's
independent accountants at that time, notified the Company that it was
withdrawing its previously issued reports of independent public accountants on
the fiscal years 1999, 1998 and 1997 Consolidated Financial Statements. On
September 14, 2000, the Bankruptcy Court approved the Company's motion to engage
Arthur Andersen LLP (i) to act as its independent public accountants; (ii) to
conduct an audit of the Company's Consolidated Financial Statements with respect
to fiscal years 2000, 1999, 1998, and 1997; (iii) to continue assisting with the
Company Investigation; and (iv) to provide other services. The Company restated
its previously reported Consolidated Financial Statements for each of the three
years ended August 31, 1999, 1998 and 1997 in the Company's Form 10-K/A for the
year ended August 31, 2000 filed with the SEC on July 9, 2001.
Numerous class action lawsuits, and two derivative lawsuits were filed against
the Company, certain officers, former directors, and others, asserting various
claims under the federal securities laws and certain state statutory and common
laws. The complaints that did name the Company were subsequently amended
eliminating the Company as a defendant and adding certain other defendants,
including Directors of the Company. As discussed in Note 14, the Company is
aware that the SEC and a grand jury convened by the United States Attorney for
the Southern District of New York have undertaken formal investigations with
respect to alleged irregularities relative to the Company's previously issued
Consolidated Financial Statements. The Company is cooperating with each of the
investigations. These investigations have not been completed, and the Company is
currently unable to predict the outcome of these investigations.
The Company incurred approximately $55.3 million and $7.4 million in fiscal 2001
and 2000, respectively, of auditing, non-audit assistance, consulting, legal and
other professional costs associated primarily with (i) the investigation and
restatement of its Consolidated Financial Statements in fiscal 1997 through
1999; (ii) the preparation of its Consolidated Financial Statements for fiscal
2000; (iii) a comprehensive review of the Company's major fiscal 2001 general
ledger accounts; (iv) the preparation of its unaudited Consolidated Financial
Statements for the first nine months of fiscal 2001 and related Form 10-Q/A; (v)
other finance and accounting services; and (vi) litigation and compliance
matters and expenses related to the various investigations concerning the
Company's previously reported financial results. These costs are classified as
"Selling, general and administrative" expenses in the Company's consolidated
statements of operations.
3. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A summary of the basis of presentation and the significant accounting policies
followed in the preparation of these Consolidated Financial Statements is as
follows:
BASIS OF PRESENTATION
The accompanying Consolidated Financial Statements have been prepared on a going
concern basis, which contemplates continuity of operations, realization of
assets, and payment of liabilities in the ordinary course of business, and do
not reflect adjustments that might result if the Debtors are unable to continue
as a going concern. The Debtors' history of significant losses, stockholders'
deficit and their Chapter 11 Cases, as well as issues related to compliance with
debt covenants and financial assurance requirements discussed in Notes 10 and
14, raise substantial doubt about the Company's ability to continue as a going
concern. The Debtors intend to file a plan or plans of reorganization with the
Bankruptcy Court. Continuing as a going concern is dependent upon, among other
things, the Debtors' formulation of a plan or plans of reorganization, the
success of future business operations, and the generation of sufficient cash
from operations and financing sources to meet the Company's obligations. The
Consolidated Financial Statements do not reflect: (i) the realizable value of
assets on a liquidation basis or their availability to satisfy liabilities; (ii)
aggregate pre-petition liability amounts that may be allowed for unrecorded
claims or contingencies, or their status or priority; (iii) the effect of any
changes to the Debtors' capital structure or in the Debtors' business operations
as the result of an approved plan or plans of reorganization; or (iv)
adjustments to the carrying value of assets (including goodwill and other
intangibles) or liability amounts that may be necessary as a result of actions
by the Bankruptcy Court.
37
The Company's Consolidated Financial Statements as of and for the fiscal years
ended August 31, 2001 and 2000 have been presented in conformity with SOP 90-7.
This statement requires, among other things, a segregation of liabilities
subject to compromise by the Bankruptcy Court as of the bankruptcy filing date
and identification of all transactions and events that are directly associated
with the reorganization of the Company. In recording liabilities subject to
compromise, the Company must make certain estimates relating to the amounts it
expects to be allowed in the bankruptcy proceeding. The actual amounts required
to settle these claims could significantly differ from the amounts currently
recorded.
CONSOLIDATION
The accompanying Consolidated Financial Statements include the accounts of
Safety-Kleen and all of its majority-owned subsidiary companies. All significant
intercompany balances and transactions have been eliminated in consolidation.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents consist of cash on deposit and term deposits in
investments with initial maturities of three months or less. These investments
are stated at cost, which approximates market value.
RESTRICTED FUNDS HELD BY TRUSTEES
Restricted funds held by trustees are included in other assets and consist
principally of financial assurance funds deposited in connection with landfill
final closure and post-closure obligations, amounts held for landfill and other
construction arising from industrial revenue financings, and amounts held to
establish a GSX Contribution Fund for the Safety-Kleen (Pinewood), Inc. facility
("Pinewood Facility") (see Note 14). These amounts are principally invested in
fixed income securities of federal, state and local governmental entities and
financial institutions. Realized investment earnings and trust expenses are
recorded currently in the consolidated statements of operations.
The Company considers its landfill closure, post-closure, construction and
escrow investments totaling $4.1 million and $12.4 million at August 31, 2001
and 2000, respectively, to be held to maturity. The Company has the ability and
management has the intent to hold investment securities to maturity. Reductions
in market value considered by management to be other than temporary are reported
as a realized loss and reduction in the cost basis of the security. At August
31, 2001 and 2000, the aggregate fair value of these investments approximate
their net book value and substantially all of these investments mature within
one year. The GSX Contribution Fund for the Pinewood Facility totaling $20.2
million and $19.1 million at August 31, 2001 and 2000, respectively, has been
treated as if it were available for sale (see Note 14). Accordingly, unrealized
gains and losses resulting from changes between the cost basis and fair value of
the securities, in this fund, are recorded in the consolidated statements of
changes in stockholders equity (deficit) as adjustments to other comprehensive
income (loss).
Additionally, $15.0 million of the cash proceeds resulting from the Company's
fiscal 2000 disposition of its 44% interest in Safety-Kleen Europe Limited (see
Note 13) and its Rosemount facility had been restricted by order of the
Bankruptcy Court, for use in securing certain insurance coverages previously
provided by Laidlaw, as well as reimbursing certain costs of the agent for the
pre-petition lenders. As a result of these restrictions, the proceeds have been
included in other current assets in the accompanying consolidated balance sheet
as of August 31, 2000. During fiscal 2001, the entire amount of the proceeds
were used to pay certain pre-petition debt and to pay insurance and other
professional fees related to bankruptcy.
INVENTORIES AND SUPPLIES
Inventories consist primarily of solvent, oil and oil products, drums,
associated products for resale, supplies and repair parts, which are valued at
the lower of cost or market as determined on a first-in, first-out basis.
Inventories also include precious metals which are recorded at market value. The
Company periodically reviews its inventories for obsolete or unsaleable items
and adjusts its carrying value to reflect estimated realizable values.
INVESTMENTS IN AFFILIATES
Investments in affiliates over which the Company has significant influence are
accounted for by the equity method and included in other assets in the
accompanying consolidated balance sheets. Equity earnings are recorded to the
extent that any increase in the carrying value is determined to be realizable.
The Company held no significant investment interests in equity method investees
at August 31, 2001 and 2000.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are recorded at cost. Expenditures for major
renewals and improvements, which extend the life or usefulness of the asset, are
capitalized. Items of an ordinary repair or maintenance nature, as well as major
maintenance activities at incinerators, are charged directly to operating
expense as incurred. The Company capitalizes environmentally related
expenditures which extend the life of the related property or mitigate or
prevent future environmental contamination.
During the construction and development period of an asset, the costs incurred,
including applicable interest costs, are classified as construction-in-process.
Once an asset has been completed and placed in service, it is transferred to the
appropriate category and depreciation
38
commences. In addition, the Company capitalizes applicable interest costs
associated with partially developed landfill sites, which are included in land,
landfill sites and improvements (see Note 6).
Depreciation and amortization of other property, plant and equipment is provided
on a straight-line basis over their estimated useful lives, with the exception
of landfill assets, which is provided on a units of production or capacity
basis. Leasehold improvements are capitalized and amortized over the shorter of
the improvement life or the remaining term of the lease plus renewal period.
INTANGIBLE ASSETS
The Company evaluates the excess of the purchase price over the amounts assigned
to tangible assets and liabilities (excess purchase price) associated with each
of its acquisitions to value the identifiable intangible assets. Any portion of
the excess purchase price that cannot be separately identified represents
goodwill. The Company evaluates the estimated economic lives of each intangible
asset, including goodwill, and amortizes the asset over that life.
Customer list -- The Company has evaluated the value associated with the
customer lists of acquired companies. The value is based on a number of
significant assumptions, including category of customer, estimated duration of
customer relationship and projected margins from existing customers. Based on
its evaluation, the Company believes the acquired customer lists have estimated
lives, ranging from 11 to 30 years, which it uses to amortize these assets.
Software -- The Company has evaluated the value associated with the software of
acquired companies. The value is based on a number of significant assumptions,
primarily the cost to replace the existing software. The Company believes the
acquired software has an estimated life of 5 years, which it has used to
amortize these assets.
Permits -- The Company has reflected the excess of the fair value of
non-landfill facilities over the tangible assets acquired as permits. The
Company has determined the value of acquired permits based on either a
discounted cash flow or other appraisal method. The Company has evaluated and
determined that the acquired non-landfill permits have estimated economic lives
in excess of 40 years, but believes 40 years is an appropriate period for
amortization of these assets. Accordingly, the Company is amortizing the value
of permits over a period of 40 years.
Goodwill -- The remaining excess purchase price of acquired companies, after
allocation to permits and the identified intangible assets discussed above, has
been classified as goodwill. The Company considers legal, contractual,
regulatory, obsolescence and competitive factors in determining the useful life
and amortization period of this intangible asset. The Company believes the
goodwill associated with the acquired companies has estimated lives ranging from
40 years to an undeterminable life. As such, the Company has amortized the
goodwill over 40 years.
Goodwill is reviewed for impairment when events or circumstances indicate it may
not be recoverable. If it is determined that goodwill may be impaired and the
estimated undiscounted future cash flows, excluding interest, of the underlying
business are less than the carrying amount of the goodwill, then an impairment
loss is recognized. The impairment loss is based on the difference between the
fair value of the underlying business and the carrying amount. The method of
determining fair value differs based on the nature of the underlying business.
IMPAIRMENT OF LONG-LIVED ASSETS
In accordance with SFAS No. 121, "Accounting for the Impairment of Long-Lived
Assets and Long-Lived Assets to Be Disposed Of", the Company periodically
evaluates whether events and circumstances have occurred that indicate that the
remaining useful life of any of its tangible and intangible assets may warrant
revision or that the carrying amounts might not be recoverable. When factors
indicate that the tangible and intangible assets should be evaluated for
possible impairment, the Company uses an estimate of the future undiscounted
cash flows generated by the underlying assets to determine if a write-down is
required. If a write-down is required, the Company adjusts the book value of the
underlying goodwill and then the book value of the impaired long-lived assets to
their estimated fair values. The related charges are recorded in impairment and
other charges in the accompanying consolidated statements of operations (see
Note 17).
DEFERRED FINANCING COSTS
Deferred financing costs are amortized over the life of the related debt
instrument and are included in other assets in the accompanying consolidated
balance sheets as of August 31, 2001 and 2000. Related amortization expense was
$3.6 million, $4.3 million and $48.4 million in fiscal 2001, 2000, and 1999
respectively. As a result of the Chapter 11 Cases discussed in Note 1, financing
costs of $41.5 million related to pre-petition debt were expensed in fiscal 2000
as reorganization items.
LANDFILL ACCOUNTING AND ENVIRONMENTAL LIABILITIES
Environmental liabilities include accruals for the estimates of the Company's
obligations associated with:
- - Regulatory mandated landfill cell closure, final closure and
post-closure activities. The Company accrues cell closure costs over
the life of the cell, and accrues final closure and post-closure costs
over the life of the landfill, as capacity is consumed.
39
- - Regulatory mandated closure and post-closure activities for facilities
other than landfills, such as incinerators. The Company accrues these
costs when management commits to a definitive plan of closure with
respect to the facility.
- - Costs associated with remedial environmental matters at the Company's
facilities. The Company accrues for these costs on a site-by-site
basis, when management deems such obligations to be probable and
reasonably estimable.
- - Sites named on the United States Environmental Protection Agency's
National Priorities List ("Superfund") with which the Company is
allegedly connected. The Company typically accrues its estimate of its
obligations related to these sites no later than the completion of a
remedial investigation and/or feasibility study.
Accruals are adjusted if, and as, further information relative to the underlying
obligations develop or circumstances change. Changes in estimated landfill cell
closure, final closure and post-closure liabilities are recognized
prospectively. Changes in the Company's estimates of its obligations relative to
non-landfill closure and post-closure activities, remedial situations and
Superfund sites are recorded in the period in which the estimates change.
In conjunction with the acquisitions of certain facilities, the Company has
obtained varying amounts and types of indemnification from potential
environmental liabilities existing at the time of acquisition. Such indemnities
typically cover all or a portion of the costs associated with the remediation of
such pre-existing environmental liabilities, and may be for a limited period of
time. No liabilities are recorded at the acquisition date if it is probable that
the indemnifying party has the intent and financial ability to perform under
those indemnities. Indemnifications contractually required of Laidlaw have not
been considered in the determination of the Company's environmental liabilities
(see Note 23).
Site costs -- Site costs include the costs of landfill site acquisition,
permitting, preparation and improvement. These amounts are recorded at cost,
which includes capitalized interest, as applicable. Site costs, net of
amortization, are combined with management's estimate of the costs required to
complete construction of the landfill to determine the amount to be amortized
over the remaining estimated useful economic life of a site. Amortization of
site costs is recorded on a units-of-consumption basis, such that the site costs
should be completely amortized at the date the landfill ceases accepting waste.
Final closure and post-closure obligations for landfills -- Final closure costs
include the costs required to cap the final cell of the landfill and the costs
required to dismantle certain structures for landfills and other landfill
improvements. In addition, final closure costs include regulatory mandated
groundwater monitoring, leachate management, financial assurance and other costs
incurred in the closure process. Post-closure costs include substantially all
costs that are required to be incurred subsequent to the closure of the
landfill, including, among others, groundwater monitoring, leachate management,
and financial assurance. Regulatory post-closure periods are generally 30 years
after landfill closure, but may be as long as 100 years after landfill closure.
Final closure and post-closure obligations are discounted. Final closure and
post-closure obligations are accrued on a units-of-consumption basis, such that
the present value of the final closure and post-closure obligations is accrued
at the date the landfill discontinues accepting waste.
Landfill capacity -- Landfill capacity, which is the basis for the amortization
of site costs and for the accrual of final closure and post-closure obligations,
represents total permitted airspace, plus unpermitted airspace that management
believes is probable of ultimately being permitted based on established
criteria. The Company applies a comprehensive set of criteria for evaluating the
probability of obtaining a permit for future expansion airspace at existing
sites, which provides management a sufficient basis to evaluate the likelihood
of success of unpermitted expansions. Those criteria are as follows:
40
- - Personnel are actively working to obtain the permit or permit
modifications (land use, state and federal) necessary for expansion of
an existing landfill, and progress is being made on the project.
- - At the time the expansion is included in the Company's estimate of the
landfill's useful economic life, it is probable that the required
approvals will be received within the normal application and processing
time periods for approvals in the jurisdiction in which the landfill is
located. The Company expects to submit the application within the next
year and expects to receive all necessary approvals to accept waste
within the next five years.
- - The owner of the landfill or the Company has a legal right to use or
obtain land associated with the expansion plan.
- - There are no significant known political, technical, legal, or business
restrictions or issues that could impair the success of such expansion.
- - A financial feasibility analysis has been completed, and the results
demonstrate that the expansion has a positive financial and operational
impact such that management is committed to pursuing the expansion.
- - Additional airspace and related additional costs, including permitting,
final closure and post-closure costs, have been estimated based on the
conceptual design of the proposed expansion.
Exceptions to the criteria set forth above may be approved through a
landfill-specific approval process that includes prompt approval from
Safety-Kleen's Chief Financial Officer and review by the Audit Committee of the
Board of Directors. As of August 31, 2001 and 2000, there were two unpermitted
expansions included in the Company's landfill accounting model, which together
represented approximately 1% of the Company's remaining airspace at these dates.
Neither of these expansions represented exceptions to the Company's established
criteria.
As of August 31, 2001, the Company has 10 active landfill sites (including the
Company's non-commercial landfill), which have estimated remaining lives (based
on anticipated waste volumes) and property, plant and equipment, net, as follows
($ in thousands):
REMAINING LIVES NUMBER OF PROPERTY, PLANT
(YEARS) SITES AND EQUIPMENT, NET
----------------- -------------- --------------------
0-5 3 $ 19,984
6-10 -- --
11-20 4 40,803
21-40 -- --
40 + 3 16,862
--- --------
10 $ 77,649
=== ========
Amortization of cell construction costs and accrual of cell closure obligations
- -- Landfills are typically comprised of a number of cells, which are constructed
within a defined acreage (or footprint). The cells are typically discrete units,
which require both separate construction and separate capping and closure
procedures. Cell construction costs are the costs required to excavate and
construct the landfill cell. These costs are typically amortized on a
units-of-consumption basis, such that they are completely amortized when the
specific cell ceases accepting waste. Cell closure costs, which are the costs
required to construct the cell cap, are accrued over the life of the cell. Those
costs are typically accrued on a units-of-consumption basis, such that the total
amount required to cap the cell is accrued when that specific cell ceases
accepting waste. In some instances, the Company has landfills that are
engineered and constructed as "progressive trenches." In progressive trench
landfills, a number of contiguous cells form a progressive trench. In those
instances, the Company amortizes cell construction costs, and accrues cell
closure obligations, over the airspace within the entire trench, such that the
cell construction costs will be fully amortized, and the cell closure costs will
be fully accrued, when that specific progressive trench ceases accepting waste.
Final closure and post-closure obligations for facilities other than landfills
- -- Final closure costs include costs required to dismantle and decontaminate
certain structures, financial assurance and other costs incurred during the
closure process. Post-closure costs, if required, include associated maintenance
and monitoring costs and financial assurance costs as required by the closure
permit. Post-closure periods are performance based and are not generally
specified in terms of years in the closure permit, but may generally range from
10 to 30 years or more. These obligations generally are not discounted.
Remedial liabilities, including Superfund liabilities -- Remedial liabilities
include the costs of removal or containment of contaminated material, the
treatment of potentially contaminated groundwater and maintenance and monitoring
costs necessary to comply with regulatory requirements.
Discounting of long-term environmental related liabilities -- Costs of future
expenditures for landfill final closure and post-closure are discounted based on
management's expectations of when it will incur the expenditure. Generally,
remediation obligations are not discounted. However, in limited instances,
certain remediation obligations are discounted if they are closely connected to
the regulatory post-closure
41
obligations and/or the amount and timing of the cash payments are fixed and
reliably determinable. The interest accretion relative to these discounted
liabilities is reflected in operating expenses.
CREDIT CONCENTRATION
Concentration of credit risks in accounts receivable is limited due to the large
number of customers comprising the Company's customer base throughout North
America. The Company performs periodic credit evaluations of its customers. The
Company establishes an allowance for uncollectible accounts based on the credit
risk applicable to particular customers, historical trends and other relevant
information.
DERIVATIVES AND OTHER FINANCIAL INSTRUMENTS
Prior to fiscal 2001, certain of the Company's debt agreements required the use
of interest rate swap agreements to minimize the impact of interest rate
fluctuations on floating interest rate long-term borrowings. As such, the
Company entered into pay-fixed swap agreements which hedged the exposures from
floating-rate interest cash flows on debt, with terms to ten years through the
termination of the swap. These swaps were accounted for as qualifying hedges as
described below. In addition, the Company also utilized a receive-fixed swap as
a hedge against fair value changes of fixed-rate long-term debt. The Company
also entered into derivative contracts for trading purposes (mark-to-market
contracts), certain of which produced immediate cash flows. The following is a
summary of the derivatives that the Company has used and the related accounting
treatment:
Qualifying hedges -- Instruments used as hedges must be effective at managing
the risk associated with the exposure being hedged and must be designated as a
hedge at the inception of the contract. Accordingly, changes in fair values or
cash flows of these hedge instruments must have a high degree of offsetting
effect on changes in fair values or cash flows of the underlying hedged items.
Interest rate swaps that meet these criteria are accounted for under the
deferral or accrual method. If a derivative does not meet these criteria, or if
the designated hedged item ceases to exist, then the Company subsequently
accounts for the derivative at its fair value, with gains or losses on
derivative contracts recognized through earnings. During fiscal years 1997
through 2000, it was not always possible to obtain documentation to support
hedge accounting. Therefore, the following criteria were used to identify those
derivative instruments to which hedge accounting (i.e. accrual accounting) would
be applied:
- - The derivative's notional amount must not exceed the aggregate
principal of hedged debt outstanding.
- - At-market interest rate swaps are accounted for as an individual
contract such that the swap is entirely treated as a hedge or entirely
marked to fair value.
- - At-market swap maturities (plus extensions) must be no greater than ten
years.
- - The floating rate on the hedged debt and floating leg of the at-market
interest rate swap must reset to market at least every six months based
on a LIBOR index.
Swap termination/amortization -- If a terminated interest rate swap received
hedge accounting before termination, the fair value at the termination date is
deferred as a component of the hedged item and amortized over the remaining swap
life if either the debt remains outstanding or it is probable that the existing
debt will be replaced. Otherwise, the fair value at the termination date will be
reported in earnings at that date. If the terminated swap was already being
reported at fair value, then the change in fair value of the terminated swap
since the previous reporting period is recorded in earnings.
Swap modification -- A modification of an existing interest rate swap is
considered a termination of the existing swap and the execution of a new
interest rate swap.
Mark-to-market contracts -- All noninterest rate swap derivatives (e.g.,
futures, forwards and options primarily based on interest rates, but that
include other underlyings), as well as interest rate swaps not meeting the
qualifying hedge requirements discussed above, are measured at fair value
through earnings from inception to maturity.
Written options other than termination/extension clauses -- All interest rate
swaps with written option components attributable to terms other than permanent
terminations or extensions are considered written options in their entirety and
are measured at fair value through earnings from inception to maturity.
Off-market swaps -- Certain interest rate swaps had terms at inception that
deviated from market, which caused their fair value to not equal zero at the
inception of the contracts. For these instruments, the Company segregated the
contract between a fixed-rate borrowing and an at-market swap. The borrowing is
repaid through allocating a portion of the settlement payments under the actual
swap. The portion of the contract settlements that generates the cash flows
arising from the off-market terms is recorded as interest expense and a
reduction of the fixed-rate borrowing using the effective interest method. The
remaining cash flows are reported as an at-market swap, which is treated as a
qualifying hedge if it meets the criteria described above or as a mark-to-market
contract if it does not meet the criteria.
42
Financial statement presentation -- Prior to their involuntary termination, the
fair value of derivative instruments accounted for as mark-to-market contracts
were included in other current assets for those with a positive fair value, or
in derivative liabilities for those with a negative fair value. The net book
values of amortizing fixed-rate borrowings that result from off-market swaps are
included in derivative liabilities. At August 31, 2001 and 2000, all derivative
liabilities are included in liabilities subject to compromise. Interest income
and expense that resulted from the settlement of all interest rate swap
transactions, as well as interest expense on any segregated fixed-rate
borrowings, were recorded in the applicable interest income or expense caption
in the consolidated statements of operations. Gains and losses on transactions
not receiving hedge accounting were recorded in derivative (losses) gains.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities", which establishes accounting and reporting
standards requiring that every derivative instrument (including certain
derivative instruments embedded in other contracts) be recorded in the balance
sheet as either an asset or liability measured at its fair value. The Statement
requires that changes in a derivative's fair value be recognized currently in
earnings unless specific hedge accounting criteria are met. Special accounting
for qualifying hedges allows a derivative's gains and losses to offset related
results on the hedged item in the income statement, and requires that a company
must formally document, designate and assess the effectiveness of transactions
that receive hedge accounting. In June 1999, the FASB issued SFAS No. 137,
"Accounting for Derivative Instruments and Hedging Activities - Deferral of the
Effective Date of FASB Statement No. 133", which delayed the original effective
date of SFAS No. 133 until fiscal years beginning after June 15, 2000. In June
2000, the FASB issued SFAS No. 138, "Accounting for Certain Derivative
Instruments and Certain Hedging Activities", which amends SFAS No. 133. SFAS No.
138 addresses a limited number of issues related to the implementation of SFAS
No. 133. On September 1, 2001, the Company adopted the provisions of SFAS No.
133, as amended. The adoption of SFAS No. 133 had no impact on the previously
terminated interest rate derivatives or related derivative liabilities reported
as liabilities subject to compromise.
On December 15, 2000, the Bankruptcy Court approved a multi-year marketing and
distribution agreement between the Company and SystemOne Technologies, Inc.
("SystemOne"). A warrant received in conjunction with this agreement is being
accounted for as a derivative under SFAS No. 133. The warrant does not qualify
for hedge accounting treatment, and as such, changes in the fair value of the
warrant are reported in earnings.
REVENUE RECOGNITION
The Company recognizes revenue in accordance with SEC Staff Accounting Bulletin
("SAB") No. 101, "Revenue Recognition in Consolidated Financial Statements." SAB
No. 101 requires that four basic criteria must be met before revenue can be
recognized: (i) persuasive evidence of an arrangement exists; (ii) delivery has
occurred or services have been rendered; (iii) the fee is fixed and
determinable; and (iv) collectibility is reasonably assured.
The Company recognizes revenue upon disposal for its waste collection and
disposal activities, and over the applicable service intervals for its parts
cleaner and related businesses. Consulting and oil collection services revenue
is recognized when services are performed. Revenue from product sales is
recognized upon delivery to the customers. Unearned revenue has been recorded
for services billed but not earned in the accompanying consolidated balance
sheets. Direct costs associated with the handling and transportation of waste
prior to disposal and other variable direct costs associated with the Company's
parts cleaner and related businesses are capitalized as a component of other
current assets in the accompanying consolidated balance sheets and expensed when
the related revenue is recognized. Deferral periods related to unearned revenue
and the related direct costs typically range from one to six months.
STOCK-BASED COMPENSATION
As permitted by SFAS No. 123, "Accounting for Stock-Based Compensation", the
Company has elected to apply APB Opinion No. 25, "Accounting for Stock Issued to
Employees", in accounting for its stock option plans. Accordingly, no
compensation cost has been recognized because the option exercise price of all
options granted was equal to the market price of the underlying stock on the
date of the grant. The Company has provided the pro forma disclosure of the fair
value of options granted as required by SFAS No. 123 (see Note 20).
INCOME TAXES
Income taxes are calculated in accordance with SFAS No. 109, "Accounting for
Income Taxes". Deferred income taxes reflect the tax consequences on future
years of differences between the tax bases of assets and liabilities and their
financial reporting amounts. Future tax benefits, such as net operating loss
carryforwards, are recognized to the extent that realization of such benefits is
more likely than not.
FOREIGN CURRENCY
Foreign subsidiary balances are translated according to the provisions of SFAS
No. 52, "Foreign Currency Translation". The functional currency of each foreign
subsidiary is in its respective local currency. Assets and liabilities are
translated to U.S. Dollars at the exchange rate in effect at the balance sheet
date and revenue and expenses at the average exchange rate for the year. Gains
and losses from the translation of the Consolidated Financial Statements of the
foreign subsidiaries into U.S. dollars are included in stockholders' deficit as
a component of other comprehensive income (loss).
43
Gains and losses resulting from foreign currency transactions are recognized in
other (expense) income in the accompanying consolidated statements of
operations. The Company recognized a loss from foreign currency transactions of
$1.0 million in fiscal 2001, a gain of $0.5 million in fiscal 2000 and a loss of
$1.3 million in fiscal 1999. Recorded balances, that are denominated in a
currency other than the functional currency, are adjusted to the functional
currency using the exchange rate at the balance sheet date.
LOSS PER SHARE
Basic and diluted loss per share are calculated according to the provisions of
SFAS No. 128, "Earnings per Share". Basic loss per share excludes any dilutive
effects of options and convertible securities. Basic loss per share is computed
using the weighted average number of common shares outstanding during the year.
Diluted loss per share is computed using the weighted average number of common
and common stock equivalent shares outstanding during the period. Common stock
equivalent shares are excluded from the computation if their effect is
antidilutive. For all periods presented, the effect of the Company's common
stock options and subordinated convertible debenture are excluded from the
dilutive loss per share calculation since inclusion of such items would be
antidilutive. At August 31, 2001, 2000, and 1999 there were 584,650, 1,046,863
and 1,200,988 options to purchase shares of common stock at a weighted average
exercise price of $13.90, $13.84 and $13.90 per share, respectively.
USE OF ESTIMATES
The preparation of the Consolidated Financial Statements in conformity with
accounting principles generally accepted in the United States requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the Consolidated Financial Statements and the reported amounts of
revenue and expenses during the reporting period. Certain estimates require
management's judgement, and when applied, materially effect the Company's
Consolidated Financial Statements. The Company considers the "Basis of
Presentation" (see above), environmental liabilities, asset impairments,
litigation contingencies, Safety-Kleen (Pinewood), Inc. and recent accounting
developments to include estimates that required or will require management's
judgement. These estimates involve matters that are inherently uncertain in
nature and have a material effect on the Consolidated Financial Statements.
Actual results could differ materially from those estimates.
RECENT ACCOUNTING DEVELOPMENTS
In July 2001, the FASB issued SFAS No. 141, "Business Combinations", and SFAS
No. 142, "Goodwill and Other Intangible Assets". SFAS No. 141 requires that the
purchase method of accounting be used for all business combinations initiated or
completed after June 30, 2001. SFAS No. 141 also specifies criteria for
intangible assets acquired in a business combination to be recognized and
reported apart from goodwill. SFAS No. 142 requires that goodwill and intangible
assets with indefinite useful lives no longer be amortized, but instead be
tested for impairment at least annually in accordance with the provisions of
SFAS No. 142. SFAS No. 142 also requires that intangible assets with definite
useful lives be amortized over their respective estimated useful lives to their
estimated residual values, and reviewed for impairment in accordance with SFAS
No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of." The Company is required to adopt the provisions of
SFAS No. 141 immediately for new transactions and SFAS No. 142 at the earlier of
its emergence from bankruptcy or September 1, 2002. Early adoption of SFAS No.
142 is permitted.
The Company's existing goodwill and intangible assets will continue to be
amortized prior to the adoption of SFAS No. 142. Upon adoption of SFAS No. 142,
the Company must evaluate its existing intangible assets and goodwill. Upon
adoption of SFAS No. 142, the Company will be required to reassess the useful
lives and residual values of all recorded intangible assets, and make any
necessary amortization period adjustments by the end of the second fiscal
quarter following adoption. Additionally, to the extent an intangible asset is
identified as having an indefinite useful life, the Company will be required to
test the intangible asset for impairment in accordance with the provisions of
SFAS No. 142 by the end of the second fiscal quarter following adoption. Any
impairment loss will be measured as of the date of adoption and recognized as
the cumulative effect of a change in accounting principle.
As of September 1, 2002, the Company expects to have unamortized goodwill of
approximately $1.2 billion, which will be subject to the transition provisions
of SFAS No. 142. Amortization expense related to goodwill and other intangible
assets was $71.4 million, $73.4 million and $74.3 million for each of the three
fiscal years ended August 31, 2001, 2000 and 1999, respectively. The Company
believes it will likely incur a significant write-down in the value of its
intangible assets at the earlier of its emergence from bankruptcy, as provided
by SOP 90-7, or the adoption of SFAS No. 142.
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement
Obligations." SFAS No. 143 will require, upon adoption, that the Company
recognize as a component of asset cost, the fair value of a liability for an
asset retirement obligation in the period in which it is incurred if a
reasonable estimate of fair value can be made. Under this statement, the
liability is discounted and accretion expense is recognized using the
credit-adjusted risk-free interest rate in effect when the liability was
initially recognized. SFAS No. 143 is effective for Consolidated Financial
Statements issued for fiscal years beginning after June 15, 2002. The Company
will be required to adopt SFAS No. 143 at the earlier of its emergence from
bankruptcy or September 1, 2002. The Company is currently in the process of
evaluating the impact of SFAS No. 143; however, the adoption of this standard is
expected to result in the recognition of additional assets and liabilities, and
may result in a significant charge to operations in the period of adoption.
44
In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets." This statement supersedes FASB statement No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of" and the accounting and reporting provisions of APB
Opinion No. 30, "Reporting the Results of Operations - Reporting the Effects of
Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently
Occurring Events and Transactions" for the disposal of a segment of a business
(as previously defined in that opinion). SFAS No. 144 is effective for
Consolidated Financial Statements issued for fiscal years beginning after
December 15, 2001. The Company will be required to adopt SFAS No. 144 at the
earlier of its emergence from bankruptcy or September 1, 2002. The new rules
change the criteria for classifying an asset as held-for-sale. The standard also
broadens the scope of businesses to be disposed of that qualify for reporting as
discontinued operations, and changes the timing of recognizing losses on such
operations. The Company is currently in the process of evaluating the potential
impact that the adoption of SFAS No. 144 will have on its consolidated financial
position and results of operations.
OTHER MATTERS
Certain prior year amounts have been reclassified to conform to current year
presentation.
4. RESTRICTIONS ON CASH AND CASH EQUIVALENTS
Cash and cash equivalents of approximately $41 million and $8 million were held
by the Company's Canadian operations as of August 31, 2001 and 2000,
respectively. The Company's ability to utilize cash held by Canadian operations
for domestic operating, capital expenditure, financial assurance and
environmental liability requirements is limited as a result of the bankrupt
status of the Debtors, the requirements of the Senior Credit Facility and tax
consequences.
5. ACCOUNTS RECEIVABLE
Accounts receivable at August 31, 2001, and 2000 consist of the following ($ in
thousands):
2001 2000
--------- ---------
Trade accounts receivable $ 298,946 $ 361,078
Accrued revenue
20,293 15,345
Other receivables
9,735 16,172
Allowance for uncollectible accounts (69,950) (85,253)
--------- ---------
$ 259,024 $ 307,342
========= =========
6. PROPERTY, PLANT AND EQUIPMENT
Net property, plant and equipment at August 31, 2001 and 2000 consist of the
following ($ in thousands):
RANGE OF
ESTIMATED USEFUL
2001 2000 LIVES
---------- --------- ------------------
Land $ 76,413 $ 80,007 N/A
Landfill sites and improvements 194,309 191,607 0-126 years
Buildings 229,763 238,599 20-40 years
Machinery and equipment 581,945 530,482 3-40 years
Lesser of useful
Leasehold improvements 19,977 19,437 life or lease term
Construction in process 18,242 11,551 N/A
---------- ----------
Total property, plant and equipment 1,120,649 1,071,683
Less: Accumulated depreciation and amortization (357,046) (298,808)
---------- ----------
Property, plant and equipment, net $ 763,603 $ 772,875
========== ==========
Machinery and equipment includes the cost of Company-owned parts cleaner service
machines placed at customers' locations as part of the Company's parts cleaner
service offering, as well as such machines and replacement parts on-hand for
future placement at customers' locations. Depreciation commences when a unit is
placed in service at a customer location. The combined net book value of such
machines was $94.7 million and $77.4 million at August 31, 2001 and 2000,
respectively.
Depreciation and amortization expense related to property, plant and equipment
was $72.4 million, $96.5 million and $87.0 million in fiscal 2001, 2000 and
1999, respectively.
45
Included within property, plant and equipment is an administrative office
building held for sale, which was the former headquarters of Old Safety-Kleen in
Elgin, Illinois. The building, including land and related improvements, has been
recorded at its estimated fair value, less estimated costs to sell, of
approximately $9.6 million and $17.0 million, as of August 31, 2001 and 2000,
respectively.
During fiscal 2001, the Company had no capitalized interest costs, as
contractually required interest payments have been stayed by bankruptcy. During
fiscal 2000 and 1999, the Company capitalized total interest costs of $1.2
million and $2.4 million, respectively.
7. INTANGIBLE ASSETS
Intangible assets at August 31, 2001 and 2000 consist of the following ($ in
thousands):
2001 2000
----------- -----------
Customer lists $ 220,000 $ 220,000
Software 50,000 50,000
Permits, non-landfill 384,590 384,010
Goodwill 1,351,373 1,352,993
----------- -----------
Total intangible assets 2,005,963 2,007,003
Less: accumulated amortization (277,979) (208,718)
----------- -----------
Intangible assets, net $ 1,727,984 $ 1,798,285
=========== ===========
The amortization expense associated with customer lists was $12.7 million in
each of fiscal 2001, 2000 and 1999. The amortization expense associated with
software was $10.0 million in each of fiscal 2001, 2000 and 1999. The
amortization expense associated with non-landfill permits was $12.5 million in
fiscal 2001 and $12.2 million in each of fiscal 2000 and 1999. The amortization
expense associated with goodwill was $36.1 million, $38.5 million, and $39.4
million in fiscal 2001, 2000 and 1999, respectively.
8. ACCRUED OTHER LIABILITIES
Accrued other liabilities at August 31, 2001 and 2000 consist of the following
($ in thousands):
2001 2000
-------- -------
Accrued interest payable $ 9,614 $ 2,062
Accrued employee salaries and benefits 39,491 28,387
Accrued professional fees 42,658 1,540
Accrued insurance 16,061 7,408
Accrued taxes 15,648 10,963
Accrued other 31,352 18,851
-------- -------
Total $154,824 $69,211
======== =======
Included in accrued other is the current portion of capital lease obligations of
$4,641; the long-term portion of capital lease obligations is classified in
other long-term liabilities in the accompanying consolidated balance sheets.
9. CLOSURE, POST-CLOSURE AND ENVIRONMENTAL REMEDIATION LIABILITIES
The Company records environmentally related accruals for both its landfill and
non-landfill operations. See Note 3 for further discussion of the Company's
methodology for estimating and recording these accruals.
Final closure and post-closure liabilities -- The Company has material financial
commitments for the costs associated with requirements of the United States
Environmental Protection Agency (the "EPA"), and the comparable regulatory
agency in Canada for the final closure and post-closure activities at the
majority of its facilities. In the United States, the final closure and
post-closure requirements are established under the standards of the EPA, and
are implemented and applied on a state-by-state basis. Estimates for the cost of
these activities are developed by the Company's engineers, accountants and
external consultants, based on an evaluation of site-specific facts and
circumstances, including the Company's interpretation of current regulatory
requirements and proposed regulatory changes. Such estimates may change in the
future due to various circumstances including, but not limited to, permit
modifications, changes in legislation or regulations, technological changes and
results of environmental studies. Final closure and post-closure plans are
established in accordance with the individual site permit requirements. Landfill
post-closure periods are generally expected to be for a period of 30 years after
closure, but may extend to a period of 100 years. See Note 14 for a discussion
of the Pinewood Facility.
46
For purchased landfills, the Company assesses and records the present value of
the estimated closure and post-closure liability based upon the estimated final
closure and post-closure costs and the percentage of airspace consumed as of the
purchase date. Thereafter, the difference between the liability recorded at the
time of acquisition and the present value of total estimated final closure and
post-closure costs to be incurred is accrued prospectively on a units of
consumption basis over the estimated useful economic life of the landfill.
Remedial liabilities, including Superfund liabilities -- The Company
periodically evaluates potential remedial liabilities at sites that it owns or
operates and at sites to which it has transported or disposed of waste,
including 55 Superfund sites as of February 28, 2002. The majority of the issues
at Superfund sites relate to allegations that the Company, or its predecessors,
transported waste to the facilities in question, often prior to the acquisition
of the alleged potentially responsible party ("PRP") by Safety-Kleen. The
Company periodically reviews and evaluates sites requiring remediation,
including Superfund sites, giving consideration to the nature (i.e., owner,
operator, transporter or generator) and the extent (i.e., amount and nature of
waste hauled to the location, number of years of site operations or other
relevant factors) of the Company's alleged connection with the site, the
regulatory context surrounding the site, the accuracy and strength of evidence
connecting the Company to the location, the number, connection and financial
ability of other named and unnamed PRPs and the nature and estimated cost of the
likely remedy. Where the Company concludes that it is probable that a liability
has been incurred, provision is made in the Consolidated Financial Statements,
based upon management's judgment and prior experience, for the Company's best
estimate of the liability. Such estimates, which are inherently subject to
change, are subsequently revised if and when additional information becomes
available.
Revisions to remediation reserve requirements may result in upward or downward
adjustments to income from operations in any given period. The Company believes
that its extensive experience in the environmental services business, as well as
its involvement with a large number of sites, provides a reasonable basis for
estimating its aggregate liability. It is reasonably possible that
technological, regulatory or enforcement developments, the results of
environmental studies or other factors could necessitate the recording of
additional liabilities and/or the revision of currently recorded liabilities
that could be material. The impact of such future events cannot be estimated at
the current time.
Discounted environmental liabilities -- When the Company believes that both the
amount of a particular environmental liability and the timing of the payments
are fixed or reliably determinable, its cost in current dollars is inflated
using estimates of future inflation rates (2.9% at each of August 31, 2001 and
2000) until the expected time of payment, then discounted to its present value
using a risk-free discount rate (5.8% at each of August 31, 2001 and 2000). The
portion of the Company's recorded environmental liabilities (including closure,
post-closure and remedial obligations) that is not inflated or discounted was
approximately $278.0 million and $236.0 million at August 31, 2001 and 2000,
respectively. Had the Company not discounted any portion of its liability, the
amount recorded would have been increased by approximately $122.9 million and
$132.1 million at August 31, 2001 and 2000, respectively. The Company estimates
it will provide $213.9 million in additional environmental reserves (including
the inflation and discount factors referred to above) over the remaining site
lives of its facilities based on current estimated costs.
The Company has recorded liabilities for closure, post-closure and remediation
obligations as of August 31, 2001 and 2000 as follows ($ in thousands):
2001 2000
-------- --------
Current portion of environmental liabilities $ 41,218 $ 41,122
Non-current portion of environmental liabilities 340,442 285,634
Balances included in liabilities subject to compromise (see Note 11) 11,096 9,579
-------- --------
Total $392,756 $336,335
======== ========
In the following table, reserves for environmental matters are classified as of
each balance sheet date based on their classification at August 31, 2001.
Reserves for closure, post-closure and remediation as of August 31, 2001 and
2000, respectively, are as follows ($ in thousands):
2001 2000
-------- --------
Landfill facilities:
Cell closure $ 24,926 $ 26,028
Final closure 22,222 17,732
Post-closure 67,356 59,198
Remediation 23,490 21,562
-------- --------
137,994 124,520
-------- --------
Non-landfill facilities:
Remediation, closure and post-closure for closed sites 174,085 130,896
Remediation (including Superfund) for open sites 80,677 80,919
-------- --------
254,762 211,815
-------- --------
Total $392,756 $336,335
======== ========
47
All of the landfill facilities included in the table above are active as of
August 31, 2001, except the Pinewood Facility. Total closure and post-closure
reserves related to the Pinewood Facility were $51.0 million and $44.6 million
as of August 31, 2001 and 2000, respectively. Total environmental remediation
reserves related to the Pinewood Facility were $2.9 million and $0.4 million as
of August 31, 2001 and 2000, respectively. The South Carolina Department of
Health and Environmental Control has required that an environmental impairment
fund ("EIF") be established for any potential environmental clean-up and
restoration of environmental impairment at the Pinewood Facility. The obligation
to contribute to the EIF has been treated as a commitment to restrict assets and
no liability related to the obligation has been recorded as of August 31, 2001
and 2000 (see Notes 3 and 14).
The changes to environmental liabilities for the year ended August 31, 2001 are
as follows ($ in thousands):
AUGUST 31, CHARGES TO RECLASSIFICATIONS AUGUST 31,
2000 EXPENSE AND OTHER PAYMENTS 2001
-------- ---------- ----------------- -------- ----------
Landfill facilities $124,520 $20,956 $ (887) $ (6,595) $137,994
Non-landfill Facilities:
Remediation, closure and post-closure 130,896 54,143 1,549 (12,503) 174,085
for closed sites
Remediation (including Superfund) for
open sites 80,919 4,406 (718) (3,930) 80,677
-------- ------- ------- -------- --------
Total $336,335 $79,505 $ (56) $(23,028) $392,756
======== ======= ======= ======== ========
Approximately $44.8 million of the charges to expense in the table above
represent the provision for early facilities closures and post-closures and are
included in "Impairment and other charges" in the consolidated statements of
operations for the year ended August 31, 2001 (see Note 17); the remainder is
included in "Operating" expenses.
Anticipated payments (based on current estimated costs) and anticipated timing
of necessary regulatory approvals to commence work on closure, post-closure and
remediation activities for each of the next five years and thereafter are as
follows ($ in thousands):
Year ending August 31,
2002 $ 42,946
2003 55,380
2004 47,114
2005 24,210
2006 21,444
Thereafter 415,533
--------
Subtotal 606,627
Less:
Reserves to be provided (net of discount of
$122.9 million) over remaining site lives (213,871)
--------
Total $392,756
========
48
10. LONG-TERM DEBT AND OTHER FINANCING
Long-term debt and other financing at August 31, 2001 and 2000 consisted of the
following ($ in thousands):
2001 2000
----------- -----------
First DIP Facility $ -- $ --
Domestic Borrowings and other financing subject to compromise:
Senior Credit Facility:
Term Loans 1,137,750 1,137,750
Revolver 340,000 340,000
Senior Subordinated Notes, due June 1, 2008 325,000 325,000
Senior Notes, due May 15, 2009 225,000 225,000
Promissory note, due May 2003 60,000 60,000
Industrial revenue bonds, due 2003-2027 80,603 90,900
Other 3,237 11,425
----------- -----------
2,171,590 2,190,075
----------- -----------
Canadian Borrowings:
Senior Credit Facility 45,910 48,269
Operating Facility 16,313 17,152
----------- -----------
62,223 65,421
----------- -----------
Total debt 2,233,813 2,255,496
Less: Current portion not subject to compromise (62,223) (65,421)
Less: Liabilities subject to compromise (see Note 11) (2,171,590) (2,190,075)
----------- -----------
Long-term debt $ -- $ --
=========== ===========
DIP FACILITY
On July 19, 2000, the Bankruptcy Court granted final approval of a one-year $100
million Revolving Credit Agreement underwritten by Toronto Dominion (Texas),
Inc. as general administrative agent and CIT Group/Business Credit, Inc. as
collateral agent (the "First DIP Facility") with an aggregate sublimit for
letters of credit of $35 million. The actual amount available under the First
DIP Facility was subject to a borrowing base computation. The First DIP Facility
was amended on ten occasions through February 28, 2002, which amendments have,
among other things, extended the maturity date, increased the aggregate limit
for letters of credit to $95 million, increased the sublimits for letters of
credit for certain uses and waived the Debtors' non-compliance with certain
affirmative covenants under the First DIP Facility. The Debtors are jointly and
severally liable under the First DIP Facility. As of August 31, 2001, no amounts
have been drawn on the First DIP Facility and approximately $48 million of
letters of credit have been issued.
See Note 29 regarding the eleventh amendment to the First DIP Facility and the
Second Amended and Restated DIP Facility.
OTHER DOMESTIC BORROWINGS
Senior Credit Facility -- In April 1998, the Company repaid its then existing
bank credit facility and established a $2.2 billion Senior Credit Facility (the
"Senior Credit Facility") pursuant to a credit agreement between the Company and
a syndicate of banks and other financial institutions. In June 1998, the
availability of the Senior Credit Facility was permanently reduced by $325
million to $1.875 billion by the subsequent issuance of the Senior Subordinated
Notes described below. The Senior Credit Facility consists of five parts: (i) a
$550 million six-year Senior Secured Revolving Credit Facility with a $200
million letter of credit sublimit and $400 million sublimit for loans (the
"Revolver"); (ii) a $455 million six-year senior secured amortizing term loan;
(iii) a $70 million six-year senior secured amortizing term loan; (iv) a $400
million minimally amortizing seven-year senior secured term loan; and (v) a $400
million minimally amortizing eight-year senior secured term loan. The term loans
referred to in clauses (ii), (iii), (iv) and (v) are collectively referred to
herein as the "Term Loans."
Interest costs on the Senior Credit Facility are reset periodically, at least
annually, and vary depending on the particular facility and whether the Company
chooses to borrow under Eurodollar or non-Eurodollar loans. Interest rates
applicable to the Senior Credit Facility ranged from 7.56% to 12.88%, including
a 2% default premium, effective June 1, 2000.
As of August 31, 2001, the Term Loans have been drawn in full and borrowings
outstanding under the Revolver totaled $340 million. In addition, there were
approximately $83.0 million of letters of credit issued under the terms of the
Revolver. As a result of the Debtors' Chapter 11 Cases, all additional
availability under the Revolver has been terminated, although the letters of
credit remain outstanding.
Domestic borrowings of Safety-Kleen Services, Inc. (formerly known as LES, Inc.)
(the "Domestic Borrower") under the Senior Credit Facility are collateralized by
substantially all of the non-hazardous tangible and intangible assets of the
domestic subsidiaries of the Domestic Borrower, plus 65% of the capital stock of
Safety-Kleen's foreign wholly-owned subsidiaries, including, but not limited to,
Safety-Kleen's
49
primary Canadian subsidiaries, Safety-Kleen Canada Inc. and Safety-Kleen Ltd.
(the "Canadian Borrower"). In addition, substantially all of the capital stock
of the Domestic Borrower and its wholly-owned or majority-owned domestic
subsidiaries is pledged to the Domestic Senior Credit Facility lenders (the
"Domestic Lenders") and such domestic subsidiaries guarantee the obligations of
the Domestic Borrower to the Domestic Lenders.
Senior Subordinated Notes -- On May 29, 1998, the Domestic Borrower, a
wholly-owned subsidiary of Safety-Kleen, issued $325 million 9.25% Senior
Subordinated Notes due 2008 in a Rule 144A offering. In accordance with an
Exchange and Registration Rights Agreement entered at the time of the issuance
of the aforementioned notes, the Company filed a registration statement with the
SEC on June 24, 1998, pursuant to which the Company exchanged the 9.25% Senior
Subordinated Notes due 2008 for substantially identical notes of the Company
(the "1998 Notes"). Net proceeds from the sale of the 1998 Notes, after the
underwriting fees and other expenses, were approximately $316.8 million. The
proceeds were used to repay a portion of the borrowings outstanding under the
Senior Credit Facility.
The 1998 Notes mature on June 1, 2008. Interest is payable semiannually, on
December 1 and June 1. The 1998 Notes will be redeemable, in whole or in part,
at the option of the Company, at any time and from time to time at a redemption
price as defined in the indenture. Upon a change in control of the Company, each
holder of the 1998 Notes may require the Company to repurchase all or a portion
of the holder's 1998 Notes at 101% of the principal amount, plus accrued
interest.
The 1998 Notes are general unsecured obligations of the Domestic Borrower,
subordinated in right of payment to all existing and future senior indebtedness,
as defined, of the Domestic Borrower. The 1998 Notes will rank senior in right
of payment to all existing and future subordinated indebtedness of the Domestic
Borrower, if any. The payment of the 1998 Notes are guaranteed on a senior
subordinated basis by Safety-Kleen and are jointly and severally guaranteed on a
senior subordinated basis by the Domestic Borrower's wholly-owned domestic
subsidiaries. No foreign direct or indirect subsidiary or non wholly-owned
domestic subsidiary is an obligor or guarantor on the financing (see Note 27).
Senior Notes -- On May 17, 1999, Safety-Kleen issued $225 million 9.25% Senior
Notes due 2009 in a Rule 144A offering which were subsequently exchanged for
substantially identical notes of Safety-Kleen in an offering registered with the
SEC in September 1999 (the "1999 Notes"). Net proceeds, after the underwriting
fees and other expenses, were approximately $219 million and were used to
finance the cash portion of the purchase price for the repurchase of the
pay-in-kind debenture ("PIK Debenture"), for expenses relating to the repurchase
and for general corporate purposes.
The 1999 Notes mature on May 15, 2009, with interest payable semi-annually on
May 15 and November 15. The 1999 Notes will be redeemable, in whole or in part,
at the option of Safety-Kleen, at any time and from time to time at a redemption
price as defined in the indenture. Upon a change in control of Safety-Kleen,
each holder of the 1999 Notes may require Safety-Kleen to repurchase all or a
portion of such holder's 1999 Notes at 101% of the principal amount thereof,
plus accrued interest.
The 1999 Notes are unsecured and rank equally with all existing and future
senior indebtedness and are senior to all existing and future subordinated
indebtedness. The 1999 Notes are not guaranteed by Safety-Kleen's subsidiaries.
The Senior Credit Facility, the 1998 Notes and the 1999 Notes contain negative,
affirmative and financial covenants including covenants restricting debt,
guarantees, liens, mergers and consolidations, sales of assets, transactions
with affiliates, the issuance of stock to third parties and payment of dividends
and establishing a total leverage ratio test, a fixed charge coverage test, an
interest coverage ratio test and a maximum contingent obligation to operating
cash flow ratio test. As a result of the Chapter 11 Cases, Safety-Kleen, which
was not in compliance with the covenants at the time of the Chapter 11 Cases,
classified the entire portion of domestic borrowings as liabilities subject to
compromise.
Other Borrowings -- The $60.0 million promissory note and $25.7 million of the
Industrial revenue bonds are guaranteed by Laidlaw (see Notes 14 and 23) and the
bonds are secured by the properties financed.
CANADIAN BORROWINGS
Senior Credit Facility - The Canadian Borrower and Safety-Kleen's Canadian
subsidiaries participated in the Senior Credit Facility under which it
established and initially borrowed $70.0 million (USD) from a syndicate of five
banks. The term loan has a floating interest rate based on Canadian prime plus
1.375% or Canadian Bankers Acceptance, ("CB/A") plus 2.375%, at the Company's
discretion. As a result of the Debtors' filing for Chapter 11 bankruptcy
protection, its Canadian subsidiaries are in default of the loan conditions and
a notice of default has been issued by the banks making the loan payable on
demand. In accordance with the provisions of default under the Senior Credit
Facility, the floating interest rate will increase an additional 2% if all or a
portion of any principal of any Loan, any interest payable thereon, any
commitment fee or any Reimbursement Obligation or Acceptance Reimbursement
Obligation or other amount payable hereunder shall not be paid when due.
Accordingly, the outstanding loan balance is classified as a current liability
as of August 31, 2001 and 2000, and interest continues to accrue at the Canadian
prime plus 3.375%.
Canadian Operating Facility -- On April 3, 1998, the Canadian Borrower entered
into a letter agreement with the Toronto Dominion Bank providing an operating
line of credit of up to $35.0 million (CDN). The letter agreement has a floating
interest rate based on Canadian prime plus 1.375% or CB/A plus 2.375% for
Canadian borrowings and prime plus 1.375% or LIBOR plus 2.375% for U.S.
borrowings, at the
50
Company's discretion. On March 4, 2000, Toronto Dominion Bank cancelled this
letter agreement at which time the Canadian Borrower had borrowings of $17.2
million and letters of credit totaling $3.6 million. The full amount borrowed
was in default at August 31, 2001 and 2000, due to breaches of loan covenants by
the local subsidiary. Accordingly, the outstanding loan balance is classified as
a current liability as of August 31, 2001 and 2000.
Borrowings by the Canadian Borrower under the Senior Credit Facility and the
Canadian Operating Facility are collateralized by substantially all of the
tangible personal property of Safety-Kleen's Canadian subsidiaries and by the
guarantees of the Domestic Borrower's domestic, wholly-owned and majority-owned
subsidiaries. Additionally, 35% of the common stock of Safety-Kleen Canada Inc.
and of the Canadian Borrower is pledged in favor of the Canadian Senior Credit
Facility Lenders and the Canadian Operating Facility Lenders.
SUBORDINATED CONVERTIBLE DEBENTURE
On May 15, 1997, the Company issued a $350 million 5% subordinated convertible
PIK Debenture due May 15, 2009, to Laidlaw, in partial payment for the Rollins
Acquisition described in Note 1.
Interest on the PIK Debenture was payable semiannually, on November 15 and May
15 until maturity. Interest payments due during the first two years after
issuance of the PIK Debenture were required to be satisfied by the issuance of
Safety-Kleen's common stock, based on the market price of the common shares at
the time the interest payments were due. At the Company's option, any other
interest or principal payments, other than optional early redemption, could have
been satisfied by issuing common stock, based on the market price of the stock
at the time such payments are due. During the fiscal year ended August 31, 1999,
the Company issued 1,545,399 of common shares to Laidlaw, in satisfaction of
interest payments due.
On August 27, 1999, the Company repurchased the PIK Debenture for an aggregate
purchase price comprised of (i) $200 million in cash; (ii) 11,320,755 shares of
common stock; and (iii) 376,858 shares of common stock in satisfaction of
accrued and unpaid interest on the PIK Debenture to the date of purchase. The
cash portion of the purchase price was financed with the issuance of the 1999
Notes.
As discussed in Note 14, the Company filed an action against Laidlaw and its
affiliate companies LTI and Laidlaw International Finance Corporation ("LIFC")
to recover funds of over $200 million related to the repurchase of the PIK
Debenture.
INTEREST EXPENSE
During fiscal 2001, the Company did not enter into any interest rate swap
agreements to hedge interest rate exposures as all of the Company's
variable-rate debt is currently classified as liabilities subject to compromise
and accrued interest on pre-petition debt is usually disallowed by the
Bankruptcy Court. However, during fiscal 2000 and 1999, the Company did enter
into interest rate swap agreements (see Note 19). Interest expense incurred
under the Company's credit facilities and other borrowings was $5.0 million,
$141.9 million and $186.2 million (net of interest income of $3.7 million, $3.6
million and $7.6 million) for fiscal years ended August 31, 2001, 2000 and 1999,
respectively (excluding contractual interest on domestic borrowings of $245.4
million for fiscal 2001 and $60.8 million for fiscal 2000, after the June 9,
2000 bankruptcy filing (see Note 11).
11. LIABILITIES SUBJECT TO COMPROMISE
The principal categories of claims classified as liabilities subject to
compromise under bankruptcy reorganization proceedings are identified below. All
amounts below may be subject to future adjustment depending on Bankruptcy Court
action, further developments with respect to disputed claims, or other events,
including the reconciliation of claims filed with the Bankruptcy Court to
amounts included in the Company's records (see Note 1). Additional pre-petition
claims may arise from rejection of additional executory contracts or unexpired
leases by the Debtors. Under a confirmed plan or plans of reorganization, all
pre-petition claims may be paid and discharged at amounts substantially less
than their allowed amounts.
51
Recorded liabilities -- On a consolidated basis, recorded liabilities subject to
compromise under Chapter 11 proceedings as of August 31, 2001 and 2000,
consisted of the following ($ in thousands):
2001 2000
----------- -----------
Accrued litigation $ 18,880 $ 19,891
Derivative liabilities 69,461 69,461
Trade accounts payable 112,052 126,454
Accrued insurance liabilities 15,583 18,019
Environmental liabilities 11,096 9,579
Accrued interest 67,147 67,147
Senior Credit Facility:
Term loans 1,137,750 1,137,750
Revolver 340,000 340,000
Adequate protection payments (18,088) (18,950)
Senior Subordinated Notes 325,000 325,000
Senior Notes 225,000 225,000
Promissory note 60,000 60,000
Industrial revenue bonds 80,603 90,900
Other 36,790 30,722
----------- -----------
$ 2,481,274 $ 2,500,973
=========== ===========
During fiscal 2001, the Debtors entered into Bankruptcy Court approved
settlements to pay approximately $12.6 million in settlement of approximately
$18.2 million of pre-petition liabilities related to certain critical vendors.
Extraordinary gains of $5.6 million have been reported in the accompanying
statements of operations as a result of these settlements in fiscal 2001.
As a result of the Chapter 11 Cases, principal and interest payments may not be
made on pre-petition debt without Bankruptcy Court approval or until a plan or
plans of reorganization defining the repayment terms has been confirmed. The
total interest on pre-petition debt that was not paid or charged to earnings for
the period from June 9, 2000 to August 31, 2001 was $306.2 million. Such
interest is not being accrued since it is not probable that it will be treated
as an allowed claim. The Bankruptcy Code generally disallows the payment of
interest that accrues post-petition with respect to unsecured or undersecured
pre-petition liabilities.
Contingent liabilities -- Contingent liabilities as of the Chapter 11 filing
date are also subject to compromise. At August 31, 2001, the Company was
contingently liable to banks, financial institutions and others for
approximately $88.1 million for outstanding letters of credit, which included
$0.8 million of performance bonds securing performance of sales contracts and
other guarantees in the ordinary course of business.
The Company is a party to litigation matters and claims that are normal in the
course of its operations. Generally, litigation related to "claims", as defined
by the Bankruptcy Code, is stayed. Also, as a normal part of their operations,
the Company undertakes certain contractual obligations, warranties and
guarantees in connection with the sale of products or services. The outcome of
the bankruptcy process on these matters cannot be predicted with certainty.
Adequate protection payments -- On August 11, 2000, the Company completed the
sale of its remaining 44% interest in its European operations. The Company
received approximately $34 million in cash and subject to contingencies,
approximately $1 million in deferred payments. From these proceeds and the
proceeds of the sale of the Company's Rosemount facility, approximately $19
million was paid to the Company's pre-petition lenders of the Senior Credit
Facility as an adequate protection payment related to the security interest in
both of these assets held by such lenders. These payments are classified as a
reduction in the "Liabilities Subject to Compromise" associated with these
lenders in the Consolidated Financial Statements at August 31, 2000.
52
12. ACQUISITIONS
During the third quarter of fiscal 1999, the Company recorded adjustments to the
initially allocated fair values from the acquisition of Old Safety-Kleen,
primarily related to legal, environmental, and tax exposures and adjustments
related to the carrying value of certain assets, resulting in a net increase to
goodwill of $52.2 million. In fiscal 2000, additional goodwill of $19.0 million
was recorded related to the recognition of tax contingencies existing at the
date of acquisition.
During fiscal 2000 and 1999, the Company completed various acquisitions, all of
which were paid for in cash. All of these acquisitions have been accounted for
under the purchase method of accounting. The Company has included the results of
operations for each of these acquired companies from the date of acquisition.
The following table summarizes these acquisitions ($ in thousands):
2000 1999
-------- -------
Number of acquisitions 3 7
======== =======
Total purchase price paid $ 27,072 $14,904
Less: fair value of net (assets) liabilities acquired (20,476) 2,124
-------- -------
Goodwill recorded $ 6,596 $17,028
======== =======
No acquisitions occurred during fiscal 2001.
13. SALE OF EUROPEAN OPERATIONS
On December 23, 1998, the Company announced the recapitalization of its European
operations and the formation of a new entity, Safety-Kleen Europe, Limited. The
recapitalization was based on a total enterprise value of $190.0 million,
including investments in Safety-Kleen Europe, Limited by Electra Fleming and the
senior management group of Safety-Kleen Europe, Limited. In exchange for the
contribution of the European operations of Old Safety-Kleen, Safety-Kleen
received a 44% equity interest in Safety-Kleen Europe, Limited and $154.0
million in gross cash proceeds, including $22.0 million related to dividends
previously declared. Electra Fleming, a third party, purchased a 44% equity
interest, and the senior management group acquired a 12% equity interest (on a
fully-diluted basis). The proceeds from the sale were used to pay down
borrowings under the revolver tranche of the Senior Credit Facility. The
allocation of fair value of net assets assumed in the acquisition of Old
Safety-Kleen was revised to reflect the enterprise value of the recapitalization
based on the sale price of the Company's 56% equity interest in Safety-Kleen
Europe, Limited, resulting in no gain or loss on the transaction.
As a result of this recapitalization, the Company removed approximately $117.9
million of goodwill from the consolidated balance sheet, ceased to consolidate
the results of the European operations and began to account for the investment
by the equity method.
On August 11, 2000, SK Europe, Inc., an indirect subsidiary of Safety-Kleen,
sold its remaining 44% interest in Safety-Kleen Europe, Limited to Electra
European Fund LP. The Company received $34.4 million in cash and, subject to
certain contingencies, an additional $1.3 million in deferred payments. The
transaction resulted in a loss before income taxes of $5.3 million, including
the recognition of $4.0 million of cumulative foreign currency losses.
14. COMMITMENTS AND CONTINGENCIES
LEASE COMMITMENTS
The Company enters into operating and capital leases primarily for real property
and vehicles under various terms and conditions. As discussed in Note 11,
commitments related to certain operating and capital leases are subject to
compromise and additional claims may arise from the rejection of unexpired
leases. Rent expense for all operating leases amounted to $51.3 million, $51.2
million and $57.9 million in fiscal 2001, 2000 and 1999, respectively.
53
The following table presents the contractually stated minimum future lease
payments ($ in thousands):
CAPITAL OPERATING
LEASES LEASES
------- ---------
Year ending August 31,
2002 $ 5,528 $ 36,464
2003 4,644 24,254
2004 10,727 17,110
2005 -- 12,181
2006 -- 8,530
Thereafter -- 13,209
-------- ----------
Total minimum payments 20,899 $ 111,748
Less: amount representing interest (1,750) ==========
--------
Obligation under capital leases $ 19,149
========
Assets recorded under capitalized lease agreements included in property, plant
and equipment consist of the following as of August 31, 2001, and 2000
($ in thousands):
2001 2000
-------- -------
Property under capital leases $ 33,983 $ 8,450
Accumulated amortization (14,834) (1,444)
-------- -------
Net property under capital leases $ 19,149 $ 7,006
======== =======
A significant portion of the assets recorded under capital leases at August 31,
2000 related to an aircraft which was returned to the lessor in September 2000.
PURCHASE COMMITMENTS
On December 15, 2000, the Bankruptcy Court approved a multi-year marketing and
distribution agreement between Safety-Kleen Systems, Inc., a subsidiary of
Safety-Kleen, and SystemOne. The agreement, which includes a five-year minimum
purchase commitment, appointed the Company as the exclusive North American
marketer of, distributor of, and service provider for, the line of parts
cleaning equipment manufactured by SystemOne. Under the terms of the agreement,
the purchase price for each unit of equipment shall consist of a "standard
price" plus a "deferred price." The Company shall pay to SystemOne the standard
price at the time of purchase and the deferred price for each unit of equipment
purchased in 36 equal monthly payments. The Company may terminate the agreement
as of December 15, 2002, by providing written notice to SystemOne of such
termination on or before June 18, 2002. The Company's obligation to pay the
deferred portion of the purchase price for equipment purchased prior to the
termination date shall survive any termination of the marketing and distribution
agreement with SystemOne. In connection with the agreement, the Company received
a warrant to purchase SystemOne stock (see Notes 3 and 19). The following table
presents the contractually stated minimum purchase commitments and deferred
price, assuming no early termination of the agreement ($ in thousands):
STANDARD DEFERRED TOTAL
PRICE PRICE COMMITMENT
-------- -------- ----------
Year ending August 31,
2002 $14,847 $ 805 $ 15,652
2003 17,523 1,667 19,190
2004 21,278 2,621 23,899
2005 25,534 3,159 28,693
2006 9,012 3,615 12,627
Thereafter -- 4,553 4,553
------- ------- --------
Total minimum commitments $88,194 $16,420 $104,614
Less: Amount representing interest -- (1,536) (1,536)
------- ------- --------
Obligations under SystemOne agreement $88,194 $14,884 $103,078
======= ======= ========
Effective July 2000, the Company entered into an outsourcing arrangement with
Acxiom Corporation to outsource certain information technology operations and
support previously performed at the former headquarters of Old Safety-Kleen. The
term of the agreement is five years from the date of integration, which
commenced in September 2001, and the cost is approximately $0.6 million per
month for a total commitment of approximately $35 million over the five-year
period.
Effective July 2001, the Company entered into an agreement with Unisys
Corporation and certain of its affiliates to provide outsourced information
technology support functions related to personal computer and related network
needs. The agreement provides for a monthly fee
54
estimated at approximately $0.5 million based on, among other things, the actual
number of workstations, laptops and servers used. The term of the agreement is
for five years.
LIABILITY INSURANCE
The Company, through premiums paid to Laidlaw (see Note 23), carried general
liability, vehicle liability, employment practices liability, pollution
liability, directors and officers liability, worker's compensation and
employer's liability coverage, as well as umbrella liability policies to provide
excess coverage over the underlying limits contained in these primary policies.
Effective September 1, 2000, the Company obtained its insurance requirements
from a third-party insurance company.
The Company's directors and officers liability insurance is due to expire on
April 3, 2002. The Company is working to obtain new coverage. There can be no
assurance that the Company will be able to obtain directors and officers
liability insurance coverage to replace this expiring coverage. If the Company
does not obtain such coverage there can be no assurance that it will not have a
material adverse effect on the Company and its operations.
The Company's insurance programs for certain worker's compensation, general
liability (including product liability) and vehicle liability are self-insured
up to certain limits. Claims in excess of these self-insurance limits are fully
insured. For self-insured worker's compensation, general liability (including
product liability), property, and vehicle liability, the Company estimates these
liabilities based on actuarially determined estimates of the incurred but not
reported claims plus any portion of incurred but not paid claims and premiums.
These estimates are generally within a range of potential ultimate outcomes. All
employee-related health care benefits are fully self-insured and the Company's
liabilities include both an accrual for an estimate of the incurred but not
reported claims that is calculated using historical claims data and an accrual
for the incurred but not paid claims and premiums.
The Company's liabilities for unpaid and incurred but not reported claims as of
August 31, 2001 and 2000 were $42.2 million and $35.1 million, respectively,
under its current risk management program. Certain product and worker's
compensation liabilities have been classified as long-term liabilities based
upon actuarial projections of future claims payments. These liabilities as of
August 31, 2001 and 2000 were $10.6 million and $9.2 million, respectively. In
addition, $15.6 million and $18.0 million of the self-insured liabilities as of
August 31, 2001 and 2000, respectively, are subject to compromise. While the
ultimate amount of claims incurred are dependent on future developments, in
management's opinion, recorded reserves are adequate to cover the future payment
of claims. However, it is reasonably possible that recorded reserves may not be
adequate to cover the future payment of claims and there is no guarantee that
the Company will have the cash or funds available to pay any or all claims.
Adjustments, if any, to estimates recorded resulting from ultimate claim
payments will be reflected in results of operations in the periods in which such
adjustments are known.
EMPLOYMENT AGREEMENTS
The Company is party to employment agreements with certain executives, which
provide for compensation and certain other benefits. The agreements also provide
for severance payments under certain circumstances.
FINANCIAL ASSURANCE MATTERS
Under the Resource Conservation and Recovery Act ("RCRA"), the Toxic Substances
Control Act ("TSCA"), and analogous state statutes, owners and operators of
certain waste management facilities are subject to financial assurance
requirements to ensure performance of their closure, post-closure and corrective
action obligations. Safety-Kleen and certain of its subsidiaries as owners and
operators of RCRA and TSCA waste management facilities are subject to these
financial assurance requirements. Applicable regulations allow owners and
operators to provide financial assurance through a surety bond from an approved
surety. Under federal regulations and in virtually all states, to qualify as an
approved surety for the purposes of providing this type of financial assurance,
a surety company must be listed on Circular 570, which is maintained and
distributed publicly by the United States Department of the Treasury.
In compliance with the law, starting in 1997, the Company procured surety bonds
issued by Frontier Insurance Company ("Frontier") as financial assurance at
numerous locations. Of the total amount of financial assurance required of the
Company under the environmental statutes, which approximated $500 million as of
May 31, 2000, slightly more than 50% of such requirements were satisfied through
assurances provided by Frontier in the form of surety bonds.
On June 6, 2000, the U.S. Treasury issued notification that Frontier no longer
qualified as an acceptable surety on Federal bonds and had been removed from
Circular 570 on May 31, 2000. Accordingly, effective May 31, 2000, the Company
and its affiliates no longer had compliant financial assurance for many of its
facilities. Under applicable regulations, Safety-Kleen and its affected
subsidiaries were required to obtain compliant financial assurance within sixty
days, and in some states, more quickly (although the surety bonds issued by
Frontier no longer qualify as acceptable federal bonds, they remain in place and
effective until replaced). Immediately following this U.S. Treasury
announcement, the Company notified the EPA of its lack of audited Consolidated
Financial Statements for fiscal 1999, 1998 and 1997 and the difficulties that
certain alleged accounting irregularities would cause the Company in attempting
to obtain compliant financial assurance for its facilities covered by the
Frontier bonds. The Company and the EPA also contacted states in which the
non-compliant facilities were located and apprised such states of these facts.
55
The Company and the EPA, acting on behalf of many, but not all, affected states,
then engaged in negotiations resulting in the entry of a Consent Agreement and
Final Order ("CAFO"), which the Bankruptcy Court approved on October 17, 2000.
Some states referred their enforcement authority to the EPA for purposes of this
CAFO and thus are, in effect, parties to the CAFO. Other states entered
separate, but similar, consent agreements with the Company. Some states have
never entered separate written agreements, but have allowed the Company to
continue operating while it obtains coverage to replace the Frontier bonds.
The main component of the EPA CAFO (and of the consent agreements in various
states) is a compliance schedule for Safety-Kleen and its affected subsidiaries
to obtain compliant financial assurance for the facilities covered by the
Frontier bonds. That schedule has been modified on several occasions since the
CAFO was entered and as the Company has replaced Frontier at various facilities.
The Company believes that most, but not all, states that have retained primary
jurisdiction on this issue and which have facilities where Frontier has not yet
been replaced will accept the March 31, 2002 and July 31, 2002 deadlines
described above. However, the Company has not concluded agreements with all such
states. South Carolina has not followed the EPA schedule, as discussed below.
The Company may seek further extensions from the EPA and the states, but the
CAFO does not obligate the EPA and the states to grant such further extensions.
Under the CAFO, the EPA reserves the right, in consultation with an affected
state, to determine in its discretion and in accordance with applicable law, to
modify these requirements. There can be no assurance that the Company will be
able to complete its replacement of Frontier on a schedule acceptable to the EPA
and the states. If it does not, the Company could be assessed penalties in
addition to those discussed in the next paragraph.
The CAFO imposed a penalty on Safety-Kleen Services, Inc. The penalty has grown
to approximately $1.6 million as delays have ensued in the replacement of
Frontier, and additional states have joined the CAFO (see discussion below).
Some states have imposed financial assurance penalties in addition to this
amount. The Company believes such penalties, if asserted, would total
approximately $1.0 million through January 31, 2002.
The State of South Carolina has not entered any consent agreement with the
Company that would extend any financial assurance regulatory deadline with
respect to facilities owned or operated by Safety-Kleen (Pinewood), Inc.
Moreover, South Carolina has not agreed to the July 31, 2002 deadline for the
replacement of Frontier at inactive facilities and has notified the Company that
it is assessing daily penalties that escalate to a maximum of $6,000 per day at
an inactive facility in that state that does not yet have coverage to replace
Frontier. In the EPA CAFO and in some state consent agreements, the Company
agreed to a schedule by which the EPA and certain states may monitor the
Company's efforts to obtain compliant financial assurance. Among other things,
the schedule required the Company to provide audited restated Consolidated
Financial Statements for fiscal years 1997-1999 and the audited Consolidated
Financial Statements for fiscal 2000 by certain deadlines. The Company did not
meet the deadlines by the original due dates but subsequently provided the
required information to the EPA and participating states. Accordingly, the EPA
and certain states may impose additional penalties on the Company.
Under the CAFO, until such time as the affected facilities have obtained
compliant financial assurance, the Company and its affected facilities must not
seek to withdraw an existing irrevocable letter of credit from Toronto Dominion
Bank, which is subject to compromise, in the amount of $28.5 million for the
benefit of Frontier and shall take all steps necessary to keep current the
existing Frontier surety bonds.
In the CAFO, the Company waived certain arguments they otherwise could have
asserted under the Bankruptcy Code with respect to their financial assurance and
certain other obligations under environmental laws. The Company's lenders and
the unsecured creditors committee have reserved their right to assert certain of
such arguments.
The Company understands that, on August 27, 2001, Frontier entered a
rehabilitation proceeding that the New York Superintendent of Insurance will
administer pursuant to New York law. The Company further understands that in
such a proceeding, the Superintendent takes possession of the property of
Frontier and conducts its business. The Company has been informed that these
rehabilitation proceedings are unlikely to affect the validity of the remaining
Frontier bonds at its facilities; however, there can be no guarantee that the
remaining Frontier bonds at the Company facilities will continue to be valid.
As of January 1, 2002, the Company was in a position to replace Frontier at all
its active facilities (actual replacement occurs as regulators review and accept
the replacement policies the Company has little or no control over the timing of
this process). The current EPA deadlines for replacement of Frontier at inactive
facilities are March 31, 2002 for such facilities in the Branch Sales and
Service Division and July 31, 2002 for such facilities in the Chemical Services
Division.
As of August 31, 2001, the Company had provided financial assurances in the form
of insurance policies and performance bonds to the applicable regulatory
authorities totaling approximately $500.0 million, in connection with closure,
post-closure and corrective action requirements of certain facility operating
permits. Letters of credit of approximately $73.0 million are held to meet
various financial assurance requirements. Restricted assets of $24.3 million are
held in trust for landfill closure, post-closure and environmental impairment
(see Note 3). Insurance policies with limits of approximately $92.0 million are
held to cover any bodily injury or property damage to third parties caused by
accidental occurrences at certain of the Company's facilities.
56
CHAPTER 11 PROCEEDINGS
As described in Note 1, the Debtors filed voluntary petitions for relief under
Chapter 11 of the Bankruptcy Code on June 9, 2000. Management continues to
operate the business of the Debtors as debtors-in-possession under Sections 1107
and 1108 of the Bankruptcy Code. In this proceeding, the Debtors intend to
propose and seek confirmation of a plan or plans of reorganization. Pursuant to
the automatic stay provision of Section 362 of the Bankruptcy Code, virtually
all pending pre-petition litigation against the Debtors is currently stayed.
As of August 31, 2001, proofs of claim in the approximate amount of $174.0
billion have been filed against the Debtors by, among others, secured creditors,
unsecured creditors and security holders. The Company is in the process of
reviewing the proofs of claim and once this process is complete, will file
appropriate objections to the claims in the Bankruptcy Court. As of August 31,
2001, the Company believes it has identified approximately $170.8 billion of
such claims that are duplicative or without merit. The Company believes that the
amount of these claims that are in excess of the $2.5 billion recorded as
"Liabilities subject to compromise" in the accompanying Consolidated Financial
Statements as of August 31, 2001 are: (i) duplicative or without merit; (ii) do
not meet the criteria to be recorded as a liability under generally accepted
accounting principles; and (iii) will not have a material effect on the
Consolidated Financial Statements, but there can be no assurance that the
Company is correct and these claims may have a material effect on the
Consolidated Financial Statements.
As a result of the Chapter 11 Cases, the Company has not paid certain real
estate taxes and certain taxing authorities have asserted liens against the real
estate.
Currently, it is not possible to predict the length of time the Debtors will
operate under the protection of Chapter 11, the outcome of the Chapter 11
proceedings in general, or the effect of the proceedings on the business of the
Company or on the interests of the various creditors and security holders. Under
the Bankruptcy Code, post-petition liabilities and pre-petition liabilities
subject to compromise must be satisfied before shareholders can receive any
distribution. The ultimate recovery to shareholders, if any, will not be
determined until the end of the case when the fair value of the Debtors' assets
is compared to the liabilities and claims against the Debtors. There can be no
assurance as to what value, if any, will be ascribed to the common stock in the
bankruptcy proceedings. The Company does not believe the shareholders will
receive any distribution upon the consummation of a plan or plans of
reorganization.
ACTIONS INVOLVING LAIDLAW INC.
Laidlaw owns 43.6% of the outstanding common stock of Safety-Kleen and has
various other arrangements and relationships with the Company. On November 7,
2000, Laidlaw, on behalf of itself and its direct and indirect subsidiaries
(collectively referred to as the "Laidlaw Group"), filed a proof of claim in the
unliquidated amount of not less than $6.5 billion against the Debtors in the
Chapter 11 Cases. The Laidlaw Group claims against the Debtors fall into the
following general categories: 1) claims for indemnification; 2) contribution and
reimbursement in connection with certain litigation matters; 3) claims against
the Debtors for fraudulent misrepresentation, fraud, securities law violations,
and related causes of action; 4) insurance claims; 5) guaranty claims; 6)
environmental contribution claims; 7) tax reimbursement claims; and 8)
additional miscellaneous claims. On April 19, 2001, Safety-Kleen, on behalf of
itself and its direct and indirect subsidiaries, filed with the Bankruptcy Court
an objection to the proof of claim filed by Laidlaw Group.
On April 19, 2001, the Company filed an action against Laidlaw and its
affiliates, LTI and LIFC (collectively the "Laidlaw Defendants") in the Debtors'
Chapter 11 Cases, Adv. Pro. No. 01-01086 (PJW). This action seeks to recover a
transfer of over $200 million in August 1999 (the "Transfer") made to or for the
benefit of the Laidlaw Defendants, holders of 43.6% of Safety-Kleen's common
stock. The Company asserts that the transfer is recoverable either as a
preference payment to the extent the Transfer retired pre-existing debt or as a
fraudulent transfer to the extent the Transfer redeemed equity or was made with
intent to hinder, delay or defraud creditors. In the action, the Company seeks
to recover the Transfer, plus interest and costs occurring from the first date
of demand from the Laidlaw Defendants.
On June 28, 2001, Laidlaw and five of its subsidiary holding companies, Laidlaw
Investments Ltd., LIFC, Laidlaw One, Inc., LTI and Laidlaw USA, Inc.
(collectively, "Laidlaw Debtors") filed voluntary petitions for reorganization
under Chapter 11 of the Bankruptcy Code in the United States Bankruptcy Court
for the Western District of New York Case Nos. 01-14099K through 01-1404K. On
the same day, Laidlaw and Laidlaw Investments Ltd. filed cases under the Canada
Companies' Creditors Arrangement Act (CCAA) in the Ontario Superior Court of
Justice in Toronto, Ontario. On October 16, 2001, the Company and the Official
Committee of Unsecured Creditors filed a proof of claim in the unliquidated
amount of not less than $4.6 billion, subject to statutory trebling, plus
punitive damages, interest, and costs, against Laidlaw Debtors in the
above-referenced Chapter 11 cases. The claims against Laidlaw Debtors fall into
the following general categories: 1) claims for fraud, racketeering, breach of
fiduciary duty, and other related misconduct; 2) preference and fraudulent
transfer claims; 3) breach of contract, misrepresentation, and other related
misconduct; 4) guaranty claims; and 5) indemnification, contribution, and
reimbursement claims. Laidlaw Debtors have not yet filed an objection to the
proof of claim filed by the Company. The Company intends to vigorously pursue
this claim. Similarly, certain directors of Safety-Kleen filed a proof of claim
against Laidlaw Debtors. To the extent these directors are successful in
obtaining payments that otherwise would have gone to the Company, their
interests could be deemed materially adverse to the interests of the Company. As
a result of Laidlaw Debtors' filings, claims and causes of action the Company
may have against Laidlaw Debtors may be subject to compromise in the Laidlaw
Debtors' Chapter 11 or CCAA proceedings.
In December 2001, pursuant to the Safety-Kleen/Laidlaw Mediation Discovery
Protocol, the Debtors, the Debtors' secured lenders, the Debtors' Official
Committee of Unsecured Creditors, certain of the Debtors' directors, Laidlaw
Debtors and the Laidlaw Debtors creditors' committee and subcommittees agreed to
undertake, on an expedited and consolidated basis, limited preliminary discovery
to obtain
57
information to assist in presenting submissions to a mediator in an effort to
resolve certain outstanding claims between and among the parties in the Debtors'
and Laidlaw Debtors bankruptcy cases. A mediation is presently anticipated to be
held in April 2002. The resolution of these matters could have a material
adverse effect on the Company's financial condition.
LEGAL PROCEEDINGS
Legal proceedings covering a wide range of matters are pending or threatened in
the United States and foreign jurisdictions against the Company and/or former
and/or current officers, directors and employees. Various types of claims are
raised in these proceedings, including shareholder class action and derivative
lawsuits, product liability, environmental, antitrust, tax, and breach of
contract. Management consults with legal counsel in estimating reserves and
developing estimates of ranges of potential loss.
The Company has claims where management has assessed that an unfavorable outcome
is probable. As of August 31, 2001, the aggregate estimated potential loss on
these claims range from approximately $19.4 million to approximately $71.1
million and the Company has recorded reserves of approximately $25.9 million,
including $18.9 million subject to compromise, representing its best estimate of
losses to be incurred.
Additionally, the Company also has substantial claims where management has
assessed that an unfavorable outcome is probable or, at least, reasonably
possible and which, if incurred, may have a material adverse effect on the
Company's financial condition. The Company, however, has not recorded reserves
related to these claims as management believes the potential loss is not
currently estimable.
The actual outcomes from these claims, the most significant of which are
discussed below, could differ from these estimates.
MATTERS RELATED TO INVESTIGATION OF FINANCIAL RESULTS
As previously reported on March 6, 2000, the Company announced that it had
initiated an internal investigation of its previously reported financial results
and certain of its accounting policies and practices following receipt by
Safety-Kleen's Board of Directors of information alleging possible accounting
irregularities that may have affected the previously reported financial results
of the Company since fiscal 1998. The internal investigation was subsequently
expanded to include fiscal years 1998 and 1997. The Board appointed a special
committee, consisting of four directors who were then independent outside
directors of the Company, to conduct the internal investigation (the "Special
Committee (Investigation)"). The Special Committee (Investigation) was later
expanded to five directors, with the addition of one additional independent
outside director. The Special Committee (Investigation) engaged the law firm
Shaw Pittman, and Shaw Pittman engaged the accounting firm Arthur Andersen LLP,
to assist with the comprehensive investigation of these matters. The Board
placed Kenneth W. Winger, Safety-Kleen's President and Chief Executive Officer
and a director, Michael J. Bragagnolo, Executive Vice President and Chief
Operating Officer, and Paul R. Humphreys, Senior Vice President of Finance and
Chief Financial Officer, on administrative leave on March 5, 2000. The Company
accepted the resignations of Messrs. Winger, Bragagnolo, and Humphreys, as
officers, in mid-May 2000 and of Mr. Winger, as a director, on June 9, 2000, and
subsequently terminated the employment of these individuals in July 2000. On
September 13, 2001, the Board of Directors dissolved the Special Committee
(Investigation) and established the Special Committee (Conflicts of Interest in
Litigation). The Special Committee (Conflicts of Interest in Litigation) is
authorized to manage all litigation involving the Company and any member of the
Board of Directors. The new committee is comprised of Ronald A. Rittenmeyer,
Kenneth K. Chalmers, Peter E. Lengyel and David W. Wallace, each of whom was
appointed to the Board subsequent to March 6, 2000 and is not personally
involved in such litigation.
Beginning in March 2000, a number of lawsuits were filed, on behalf of various
classes of investors, including bondholders and shareholders, against the
Company, certain officers, former directors, and others. The complaints that did
name the Company were subsequently amended eliminating the Company as a
defendant and adding certain other defendants, including certain Directors of
Safety-Kleen. The complaints allege, among other things, that the defendants
made false and misleading statements and violated certain federal securities
laws. Generally, the actions seek to recover damages in unspecified amounts that
the plaintiffs allegedly sustained by acquiring shares of Safety-Kleen's common
stock or purchasing debt of the Company. Although the Company is not a party to
these actions, certain of the individual defendants who are present or former
officers or directors of the Company have made demands to be indemnified by the
Company in connection with the action.
Shortly after the Company's March 6, 2000, announcement, Company representatives
met with officials of the SEC and advised the SEC of the alleged accounting
irregularities and the Company's internal investigation with respect to the
allegations. On March 10, 2000, the Company was advised that the SEC had
initiated a formal investigation of the Company.
On or about March 22, 2000, Safety-Kleen was served with a subpoena issued by a
Grand Jury sitting in the United States District Court for the Southern District
of New York seeking production of documents sought by the SEC in its
investigation. The Company has responded to the subpoena. The Company is
cooperating with each of the investigations.
On October 4, 2001, the Company, along with Robert Luba, the Estate of John
Rollins, Sr., John Rollins, Jr., David E. Thomas, Jr., Henry B. Tippie, James L.
Wareham, and Grover C. Wrenn filed an action in the Circuit Court of South
Carolina, Richland County, against PricewaterhouseCoopers LLP and
PricewaterhouseCoopers LLP (Canada), Civil No. 3:01-4247-17 (the "PWC Action").
The PWC Action alleges, among other things, that the defendants were negligent
and reckless in failing to comply with applicable industry and professional
standards in their review and audit of the Company's Consolidated Financial
Statements and in the negligent and reckless failure to detect
58
and/or report material misstatements in those Consolidated Financial Statements.
The Complaint alleges causes of action for breach of contract, breach of
contract accompanied by a fraudulent act, professional negligence, negligent
misrepresentation, violations of the South Carolina Unfair Trade Practices Act
and a declaratory judgment for indemnification on behalf of the plaintiff
directors. The Complaint seeks in excess of $1.0 billion from the defendants.
The Company intends to pursue this claim vigorously.
On November 13, 2001, the Company, along with Robert Luba, the Estate of John
Rollins, Sr., John Rollins, Jr., David E. Thomas, Jr., Henry B. Tippie, James L.
Wareham, and Grover C. Wrenn filed an action in the Circuit Court of South
Carolina, Richland County, against National Union Fire Insurance Company of
Pittsburgh, PA and American Home Assurance Company, Civil No. 01CP404813 (the
"Insurance Action"). The Insurance Action alleges that the defendants wrongfully
denied insurance coverage under certain directors and officers insurance
policies for the various securities actions detailed above. The Complaint
alleges causes of action for declaratory judgment and breach of contract. The
Complaint also seeks insurance coverage for plaintiffs' for costs associated
with defending the securities actions and for any liability plaintiffs may
ultimately incur. The Company intends to pursue this claim vigorously.
On December 13, 2000, thirteen lenders to Safety-Kleen Services, Inc., sued
PricewaterhouseCoopers, LLP, in the State Court of Fulton County Georgia,
alleging negligent misrepresentation by PricewaterhouseCoopers, LLP, in
connection with the Consolidated Financial Statements of Safety-Kleen and its
subsidiaries for fiscal years 1997, 1998 and 1999. The case is captioned Toronto
Dominion (Texas), Inc., et al. v. PricewaterhouseCoopers LLP, Civil Action No.
00 VS 02679 F. The complaint has been amended twice, and the plaintiffs now
number over 90 lenders to Safety-Kleen Services, Inc. On October 23, 2001,
PricewaterhouseCoopers LLP, filed a motion for leave to file a third-party
complaint naming Safety-Kleen and former Safety-Kleen officers Kenneth W.
Winger, Michael J. Bragagnolo, and Paul B. Humphreys as third party defendants
in a third party claim for indemnity or contribution. The Georgia state court
granted leave and PricewaterhouseCoopers, LLP has now served a third party
complaint against the Company. The Company is moving to enjoin the third party
complaint and argues that it contravenes the automatic stay provisions of
federal bankruptcy law.
PRODUCTS LIABILITY CASES
From time to time, the Company is named as a defendant in proceedings wherein
persons claim personal injury resulting from the use of the Company's parts
cleaner equipment and/or cleaning products. A number of such legal proceedings
are currently pending in various courts and jurisdictions throughout the United
States. These proceedings typically involve allegations that the solvent used in
the Company's parts cleaner equipment contains contaminants and/or that the
Company's recycling process does not effectively remove the contaminants that
become entrained in the solvent during its use. In addition, certain claimants
assert that the Company failed to adequately warn the product user of potential
risks. In the aggregate, the plaintiffs' claims are in excess of $150 million.
The Company maintains insurance which it believes will provide coverage for
these claims over self-insured retentions and deductibles which, in the
aggregate, the Company believes are less than $10 million. The Company believes
that these claims are not meritorious and intends to vigorously defend itself
and the safety of its products against any and all such claims.
GENERAL ENVIRONMENTAL
The Company's hazardous and industrial waste services are continuously regulated
by federal, state, provincial and local laws enacted to regulate the discharge
of materials into the environment or primarily for the purpose of protecting the
environment. This inherent regulation of the Company necessarily results in its
frequently becoming a party to judicial or administrative proceedings involving
all levels of governmental authorities and other interested parties. The issues
that are involved generally relate to applications for permits and licenses by
the Company and their conformity with legal requirements and alleged violations
of existing permits and licenses. At February 28, 2002, subsidiaries of
Safety-Kleen were involved in eight proceedings in which a governmental
authority is a party relating primarily to activities at waste treatment,
storage and disposal facilities where the Company believes sanctions involved in
each instance may exceed $100,000.
The most significant environmental and regulatory proceedings are discussed
below:
i. Safety-Kleen (Pinewood), Inc.
A subsidiary of Safety-Kleen, Safety-Kleen (Pinewood), Inc. ("Pinewood"), owns
and operated a hazardous waste landfill (the "Pinewood Facility") near the Town
of Pinewood in Sumter County, South Carolina. By an order dated May 19, 1994
("Order"), the South Carolina Board of Health and Environmental Control
("Board") approved the issuance by the Department of Health and Environmental
Control ("DHEC") of a RCRA Part B permit (the "Permit") for operation of the
Pinewood Facility. The Permit included provisions governing financial assurance
and capacity for the facility.
The Order established Pinewood's total permitted capacity of hazardous and
non-hazardous waste to be 2,250 acre feet, including the amount of hazardous
waste disposed prior to the date of the Order. South Carolina law requires that
hazardous waste facilities provide evidence of financial assurance for potential
environmental cleanup and restoration in form and amount to be determined by
DHEC. The Order required Pinewood to establish and maintain the EIF in the
amount of $133 million in 1994 dollars ($151 million in 2001 dollars) by July 1,
2004 as financial assurance for potential environmental cleanup and restoration
of environmental impairment at the Pinewood Facility. The total fund requirement
amount is to be adjusted annually by the Implicit Price Deflator for the Gross
National Product as published by the U.S. Department of Commerce. The EIF has
two components: (i) the GSX Contribution Fund, which was to be funded by
Pinewood in annual cash payments over a ten year period; and (ii) the State
Permitted Sites Fund, a legislatively created fund derived from fees on waste
disposal
59
at the Pinewood Facility. Under the Order, at the end of the 100-year
post-closure care period, funding of the GSX Contribution Fund will be subject
to evaluation by an independent arbitrator, who will determine what level of
funding, if any, is still required. The Company is entitled to seek recovery of
any excess amount so determined. Upon termination of the GSX Contribution Fund,
any remaining trust assets would revert to Pinewood. In 1993 and 1994, Pinewood
paid approximately $15.5 million cash into the GSX Contribution Fund, which has
grown to approximately $20.2 million as of August 31, 2001.
In June 1995, the South Carolina legislature approved regulations (the
"Regulations") governing financial assurance for environmental cleanup and
restoration. The Regulations gave owner/operators of hazardous waste facilities
the right to choose from among six options for providing financial assurance.
The options included insurance, a bond, a letter of credit, a cash trust fund
and a corporate guaranty, subject to a financial soundness test.
From June 1995, under authority of the Regulations, Pinewood submitted financial
assurance for potential environmental cleanup and restoration by way of a
corporate guaranty by Laidlaw or insurance. Pinewood also left in place the GSX
Contribution Fund. On September 15, 1995, DHEC issued a declaratory ruling
finding that the Regulations were applicable to the financial assurance
requirements for Pinewood.
Pinewood appealed the May 19, 1994, DHEC order and the opposing parties appealed
the May 19, 1994, DHEC Order and the September 15, 1995, DHEC declaratory ruling
and the appeals were consolidated in the South Carolina Circuit Court in the
case captioned Laidlaw Environmental Services of South Carolina, Inc. et al.,
Petitioners vs. South Carolina Department of Health and Environmental Control
and South Carolina Board of Health and Environmental Control, Respondents -
Energy Research Foundation, et al., Intervenors, Docket Numbers C/A
94-CP-43-175, 94-CP-43-178, 94-CP-40-1412 and 94-CP-40-1859. The opposing
parties included Citizens Asking for a Safe Environment, Energy Research
Foundation, County of Sumter, Sierra Club, County of Clarendon, Senator Phil
Leventy, the South Carolina Department of Natural Resources and the South
Carolina Public Service Authority.
The South Carolina Court of Appeals issued a decision on April 4, 2000
(substituting for a January 17, 2000 ruling) ruling that (i) the Regulations
were invalid due to insufficient public notice during the promulgation procedure
and ordering Pinewood to immediately comply with the cash financial assurance
requirements of the May 19, 1994 Order; and (ii) both non-hazardous and
hazardous waste count against Pinewood's capacity from the beginning of waste
disposal, thereby reducing the remaining permitted capacity.
On June 13, 2000, the South Carolina Supreme Court denied Pinewood's petition
for a writ of certiorari. On June 14, 2000, DHEC sent notice by letter to the
Pinewood Facility directing that Pinewood cease accepting waste for disposal in
30 days and submit a closure plan. DHEC based this directive on the decision of
the Court of Appeals that all non-hazardous waste disposed at Pinewood should be
counted against Pinewood's hazardous waste capacity limit and DHEC's resulting
conclusion that there is no remaining permitted capacity at Pinewood.
On June 22, 2000, DHEC notified Pinewood that the Court of Appeals' decision
vacated the Regulations and, therefore, Pinewood has the sole responsibility to
provide cash funding into the EIF in accordance with the May 19, 1994 Order. The
DHEC notice also directed Pinewood to provide information to DHEC within 15 days
on how Pinewood would comply with the Order including payment into the GSX
Contribution Fund. As of August 31, 2001, there was approximately $20.2 million
in the GSX Contribution Fund and approximately $14.7 million in the State
Permitted Sites Fund. In 2001 dollars, the total EIF funding requirement is
approximately $151.3 million. To comply with the financial assurance provisions
of the Order, Pinewood would have to contribute the following payments (in 2001
dollars) as follows, subject to the automatic stay provisions discussed below ($
in thousands):
Amount due during fiscal year:
2002 $ 109,811
2003 6,625
---------
Total $ 116,436
=========
Additionally, on June 9, 2000 (on the same day, but after, Pinewood filed its
petition for bankruptcy protection in the Bankruptcy Court), DHEC issued an
Emergency Order finding that Frontier (the issuer of the bonds used by Pinewood
to provide for financial assurance for the costs of closure and post-closure,
and third party liability) no longer met regulatory standards for bond issuers.
Based on this finding, DHEC ordered Pinewood to cease accepting waste for
disposal by August 28, 2000, unless it could provide acceptable alternative
financial assurance by June 27, 2000.
On July 7, 2000, in the legal action captioned: In re: Safety-Kleen Corp., et
al. Debtor, Chapter 11 Cases, Delaware Bankruptcy Court, Case Nos. 00-203 (PJW),
Adversary Proceeding No. 00-698-Safety-Kleen (Pinewood), Inc. v. State of South
Carolina, et al., District of South Carolina (MJP) Case No. 3:00-2243-10,
Pinewood commenced legal proceedings in the United States District Court for the
District of Delaware challenging DHEC's June 9, 2000, Emergency Order and DHEC's
June 14 and June 22, 2000 notice letters. Pinewood sought to stay and/or enjoin
DHEC and the State of South Carolina from enforcement of these directives on the
grounds that the actions of DHEC were invalid under various provisions of the
United States Constitution, violated the automatic stay provision of the
Bankruptcy Code and/or should be enjoined under the equitable powers of the
Bankruptcy Court. As an alternative cause of action, Pinewood demanded that it
be compensated for the taking of its property without just compensation under
provisions of the Constitutions of the United States and the State of South
Carolina.
60
On July 12, 2000, the Delaware U.S. District Court issued an Order transferring
the case to the United States District Court for the District of South Carolina.
On August 25, 2000, the U.S. District Court for the District of South Carolina
issued rulings that (i) denied South Carolina's motion to dismiss Pinewood's
claims upon jurisdictional grounds and certified the issue for an immediate
appeal to the United States Court of Appeals for the Fourth Circuit; (ii) held
that the June 9, 2000 Emergency Order was subject to the automatic stay
provisions of Section 362 of the Bankruptcy Code; and (iii) denied Pinewood's
motion for a preliminary injunction with respect to the June 14, 2000 DHEC
letter. The State of South Carolina and Pinewood appealed the District Court's
ruling to the United States Court of Appeals for the Fourth Circuit.
On December 19, 2001, the United States Court of Appeals for the Fourth Circuit
issued its decision on the appeals from Pinewood and DHEC. The Fourth Circuit
(i) affirmed the District Court's ruling that Pinewood's action was not barred
for failing to state a claim, or on other jurisdictional grounds, (ii) reversed
the District's Court's ruling as to the automatic stay, holding that the
automatic stay does not apply to DHEC's efforts to enforce the financial
assurance requirements, and (iii) affirmed the District Court's denial of
Pinewood's motion for a preliminary injunction. On January 22, 2002, DHEC issued
a letter to Pinewood directing that various investigative and other actions be
taken with respect to the landfill and current Pinewood operating procedures. On
January 29, 2002, DHEC issued a letter to Pinewood requiring that it submit a
closure plan within 30 days. Pinewood has appealed both the January 22 and
January 29 directives while at the same time continuing discussions with DHEC to
resolve all open issues. On February 28, 2002, the Company submitted a
conceptual closure plan that it believes meets the intent of DHEC's January 29,
2002 letter. There can be no assurance that these matters will be resolved in
favor of the Company and there can be no assurance as to whether the outcome may
have a material adverse effect on the Company's financial position or results of
operations.
ii. Ville Mercier Facility
On January 12, 1993, Safety-Kleen Services (Mercier) Ltd. ("the Subsidiary")
filed a declaratory judgement action (Safety-Kleen Services (Mercier) Ltd. v.
Attorney General of Quebec; Pierre Paradis, in his capacity as Minister of the
Environment of Quebec; Ville Mercier; and LaSalle Oil Carriers, Inc.) in the
Superior Court for the Province of Quebec, District of Montreal. The legal
proceeding seeks a court determination of the liability associated with the
contamination of former lagoons that were located on the Company's Ville Mercier
property. The Subsidiary asserts that it has no responsibility for the
contamination on the site. The Minister filed a Defense and Counterclaim in
which it asserts that the Subsidiary is responsible for the contamination,
should reimburse the Province of Quebec for past costs incurred in the amount of
$17.4 million (CDN), and should be responsible for future remediation costs. The
legal proceedings are in the discovery stage.
The contamination on the Ville Mercier facility dates back to 1968, when the
property was owned by an unrelated company. In 1968, the Quebec government
issued two permits to the unrelated company to dump organic liquids into lagoons
on the Ville Mercier property. By 1972, groundwater contamination had been
identified and the Quebec government provided an alternate water supply to the
municipality of Ville Mercier. Also in 1972, the permit authorizing the dumping
of liquids was terminated and a permit to operate an organic liquids incinerator
on the property was issued. (The entity to which this permit was issued was
indirectly acquired by Safety-Kleen in 1989.) In 1973, the Quebec government
contracted with the incinerator operator to incinerate the pumpable liquids in
the lagoons. In 1980, the incinerator operator removed, solidified and disposed
of the non-pumpable material from the lagoons in a secure cell and completed the
closure of the lagoons at its own expense. In 1983, the Quebec government
constructed and continues to operate a groundwater pumping and treatment
facility near the lagoons.
The Company believes that the Subsidiary is not the party responsible for the
lagoon and groundwater contamination and the Subsidiary has denied any
responsibility for the decontamination and restoration of the site. In November
1992, the Minister of the Environment ordered the Subsidiary to take all the
necessary measures to excavate, eliminate or treat all of the contaminated soils
and residues and to recover and treat all of the contaminated waters resulting
from the aforementioned measures. The Subsidiary responded by letter,
reiterating its position that it had no responsibility for the contamination
associated with the discharges of wastes into the former Mercier lagoons between
1968 and 1972 and proposing to submit the question of responsibility to the
Courts for determination as expeditiously as possible through the cooperation of
the parties' respective attorneys, resulting in the filing of the pending
action.
On or about February 9 and March 12, 1999, Ville Mercier and three neighboring
municipalities filed separate legal proceedings against the Subsidiary and
certain related companies together with certain former officers and directors,
as well as against the Government of Quebec (Ville Mercier v. Safety-Kleen
Services (Mercier) Ltd., et. al.; Ville de Chateauguay v. Safety-Kleen Services
(Mercier) Ltd., et. al.; Municipality of Ste-Martine v. Safety-Kleen Services
(Mercier) Ltd., et. al.; and St.Paul de Chateauguay v. Safety-Kleen Services
(Mercier) Ltd., et. al.). The lawsuits assert that the defendants are jointly
and severally responsible for the contamination of groundwater in the region,
which Plaintiffs claim was caused by contamination from the former Ville Mercier
lagoons, and which they claim caused each municipality to incur additional costs
to supply drinking water for their citizens since the 1970's and early 1980's.
The four municipalities claim a total of $1.6 million (CDN) as damages for
additional costs to obtain drinking water supplies and seek an injunctive order
to obligate the defendants to remediate the groundwater in the region. The
Subsidiary will continue to assert that it has no responsibility for the ground
water contamination in the region. The legal proceedings are in the discovery
stage.
61
iii. Marine Shale Processors
Beginning in the mid-1980's and continuing until July 1996, Marine Shale
Processors, Inc., located in Amelia, Louisiana ("Marine Shale"), operated a kiln
which incinerated waste producing a vitrified aggregate as a by-product. Marine
Shale contended that its operation recycled waste into a useful product, i.e.
vitrified aggregate, and therefore, was exempt from RCRA regulation and
permitting requirements as a Hazardous Waste Incinerator. The EPA contended that
Marine Shale was a "sham-recycler" subject to the regulation and permitting
requirements as a Hazardous Waste Incinerator under RCRA, that its vitrified
aggregate by-product is a hazardous waste, and that Marine Shale's continued
operation without required permits was illegal. Litigation between the EPA and
Marine Shale with respect to this issue began in 1990 and continued until July
1996 when Marine Shale was ordered to shut down its operations by U.S. Fifth
Circuit Court of Appeals.
During the course of its operation, Marine Shale produced thousands of tons of
aggregate, some of which was sold as fill material at various locations in the
vicinity of Amelia, Louisiana, but most of which is stockpiled on the premises
of the Marine Shale facility. Moreover, as a result of past operations, soil and
groundwater contamination may exist on the Marine Shale site.
In November 1996, an option to buy Marine Shale was obtained by Earthlock
Technologies, Inc. ("Earthlock") formerly known as GTX, Inc. with the intent to
operate the facility as a permitted Hazardous Waste Incinerator. Subsequently,
Marine Shale, Earthlock and the EPA reached a settlement, including a required
cleanup of the aggregate and the facility, and the Louisiana Department of
Environmental Quality issued a draft permit to Earthlock for operation of the
Marine Shale facility as a RCRA-permitted Hazardous Waste Incinerator. Appeals
were filed by opposition parties and in October 1999, a Louisiana State Court
Judge ruled that the draft permit was improperly issued. Earthlock appealed this
decision and in October 2000, the Appeals Court reversed the lower court and
affirmed the permit issuance. The opposition parties filed applications for
Supervisory Writs with the Louisiana Supreme Court, and these applications were
denied in April 2001. There may be further legal challenges to the permit and it
is uncertain whether or when Earthlock will exercise its purchase option and
begin operation of the Marine Shale facility.
The Company was one of the largest customers of Marine Shale. In the event
Marine Shale does not operate, the potential exists for an EPA action requiring
cleanup of the Marine Shale site and the stockpiled aggregate under CERCLA. In
this event, the Company would be exposed to potential financial liability for
remediation costs as a PRP under CERCLA.
iv. RayGar Environmental Systems International Litigation
On August 7, 2000, RayGar Environmental Systems International, Inc. filed its
First Amended Complaint in the United States District for the Southern District
of Mississippi, Hattiesburg Division, Civil Action No. 2:9CV376PG, against
Laidlaw, Laidlaw Investments, Ltd., LTI, LESI, LES, Inc. (a wholly-owned
subsidiary of Safety-Kleen now known as Safety-Kleen Services, Inc.), Laidlaw
Environmental Services (U.S.), Inc. (an indirect wholly-owned subsidiary of
Safety-Kleen and predecessor to Safety-Kleen Services, Inc.), Laidlaw OSCO
Holdings, Inc. (a wholly-owned subsidiary of Safety-Kleen now known as
Safety-Kleen OSCO Holdings, Inc.), Laidlaw International, and Safety-Kleen
alleging a variety of Federal antitrust violations and state law business torts.
RayGar seeks damages it has allegedly sustained as a result of the defendants'
actions in an amount of not less than $450 million in actual compensatory
damages and not less than $950 million for punitive damages.
The dispute arises from an unsuccessful effort pursuant to an agreement between
RayGar and the Company, to obtain RCRA and related permits for the operation of
a wastewater treatment facility in Pascagoula, Mississippi. The action has not
proceeded against the Company due to the Chapter 11 Cases.
v. Federated Holdings, Inc. Litigation
On November 6, 2000, Federated Holdings, Inc. (FHI) filed a lawsuit against
Laidlaw, Laidlaw Investments, Ltd., LTI, LESI (now Safety-Kleen), LES, Inc.,
Laidlaw OSCO Holdings, Inc., Laidlaw International, and Safety-Kleen in the
United States District Court for the Southern District of Mississippi,
Hattiesburg Division, Civil Action No. 2:00CV286 alleging a variety of Federal
antitrust violations and state law business torts. FHI seeks damages it has
allegedly sustained as a result of the defendants' actions in an amount of not
less than $200 million in actual compensatory damages and not less than $250
million for punitive damages.
The dispute arises from an unsuccessful effort pursuant to an agreement between
FHI and a Safety-Kleen subsidiary to obtain RCRA and related permits for the
operation of a hazardous waste landfill in Noxubee County, Mississippi. The
action has not proceeded against the Company due to the Chapter 11 Cases.
vi. Hudson County Improvement Authority Litigation
In July 1999, Hudson County Improvement Authority ("HCIA") filed suit in the
Superior Court, Hudson County, New Jersey against SK Services (East), L.C. ("SK
Services East") (an indirect wholly-owned Safety-Kleen subsidiary),
Safety-Kleen, American Home Assurance Company, and Hackensack Meadowlands
Development Commission. An Amended Complaint was filed on August 18, 1999, in
which HCIA sought damages and injunctive relief evicting SK Services East from a
175 acre site in Kearny, New Jersey owned by HCIA. SK Services
62
East had been using the site pursuant to an Agreement and Lease dated as of
February 2, 1997 (the "Agreement and Lease") for the processing and disposal of
processed dredge material. HCIA alleged that certain conditions precedent to SK
Services East's right to continue operations at the site had not occurred, that
as a result the Agreement and Lease had automatically terminated, that SK
Services East owed HCIA approximately $11 million in back rent, and that SK
Services East was obligated to finish the remediation of the site and its
preparation for development as a commercial property. In January 2000, the Court
granted HCIA summary judgment on its motion to declare the Agreement and Lease
null and void as a result of the failure of the conditions precedent. This
ruling effectively terminated the relationship between SK Services East and HCIA
leaving only the issue of the determination of the rights and responsibilities
of the parties in the unwinding of the relationship. In May 2000, HCIA filed for
summary judgment seeking an order declaring that SK Services East is obligated
to complete all measures required under the Remedial Action Work Plan for the
site. SK Services East filed a brief opposing the motion. In June 2000, HCIA
withdrew its pending motion, with the Court's understanding that the motion
could be re-filed if the automatic stay in connection with the Company's Chapter
11 bankruptcy protection is lifted. On July 11, 2001 the Bankruptcy Court
entered an Order authorizing the Company's rejection of the executory contracts
and the unexpired lease to which SK Services East and HCIA were parties. The
Order does not limit, abridge, or otherwise effect HCIA's right to assert and
seek remedies regarding its pre- and/or post-petition claims against the Company
for damages and other relief. Also on July 11, 2001 the Bankruptcy Court granted
HCIA's motion to modify the Bankruptcy Code's automatic stay, and entered an
Order permitting the Superior Court of New Jersey, Hudson County, to make its
final determination regarding SK Services East contractual obligations under the
Agreement and Lease. The Superior Court held oral argument on this matter in
September 2001 and advised the parties that the Court wanted the parties to make
good faith efforts to reach an agreement as to the remaining obligations before
the Court issues a decision. Representatives of all the parties involved in the
remediation development activities at the Kearny, NJ site met on December 5,
2001 for preliminary discussions of a final resolution of all open issues. The
Company has recorded its expected remaining liability related to the rejected
lease as a component of liabilities subject to compromise in the accompanying
consolidated balance sheet as of August 31, 2001.
vii. ECDC Environmental, L.C. Claim
Certain subsidiaries of Safety-Kleen entered into a long-term contract (the
"4070 Contract") with General Motors Corporation ("GM") to manage certain GM
waste products. One requirement of the 4070 Contract was to provide a dedicated
cell for GM waste products at a landfill facility owned by ECDC Environmental,
L.C. ("ECDC"), which was then a Safety-Kleen subsidiary. In November 1997, the
Company sold its interest in ECDC to an affiliate of Allied Waste Industries,
Inc. Pursuant to the sale, ECDC, Safety-Kleen and certain Safety-Kleen
subsidiaries entered the GM Waste Disposal Agreement (the "WDA") governing the
obligations of the parties with respect to the continued management of GM waste
in the dedicated cell at the ECDC landfill.
By letter dated May 15, 2000, the Company was notified of GM's intent to
terminate the 4070 Contract for default, effective December 31, 2000. Under the
WDA, default by the Company under the 4070 Contract would have obligated the
Company to pay certain costs, rebates and damages to ECDC in accordance with the
terms of the WDA.
The Debtors including those subsidiaries of Safety-Kleen which were parties to
the 4070 Contract and the WDA, filed for protection under Chapter 11 of the
Bankruptcy Code. In anticipation of the Company's rejection of the 4070 Contract
pursuant to 11 U.S.C. ss.365, on October 30, 2000, ECDC filed a claim for not
less than approximately $11.0 million plus other additional, and unspecified
damages for the Company's breach of the 4070 Contract and WDA. Subsequently, the
Bankruptcy Court granted the motion by Safety-Kleen and certain of its
subsidiaries, which were parties to the 4070 Contract and the WDA, to reject
both the 4070 Contract and the WDA, effective December 1, 2000.
viii. Bryson Adams Litigation
In 1996, a lawsuit was filed in the federal court in Baton Rouge, Louisiana,
under the caption Carleton Gene Rineheart et al. v. CIBA-GEIGY Corporation, et
al., U.S. District Court for the Middle District of Louisiana, CA #96-517,
Section B(2). In October 1999, a substantially similar lawsuit was filed in
state court in Lafayette Parish, Louisiana, under the caption of Bryson Adams,
et al. v. Environmental Purification Advancement Corporation, et al., Civil
Action No. 994879, Fifteenth Judicial District Court, Parish of Lafayette, State
of Louisiana. In December 2000, these two cases were consolidated with Adams
designated as the lead case. In this consolidated litigation, plaintiffs are
suing for alleged personal injury and/or property damage arising out of the
operation of certain waste disposal facilities near Bayou Sorrel, Louisiana. The
initial Bryson Adams lawsuit was filed on behalf of 320 plaintiffs against 191
defendants.
A Safety-Kleen subsidiary which owns and operates a hazardous waste deep
injection well in Bayou Sorrel, Louisiana is named as a defendant. A different
Safety-Kleen subsidiary is also named as a defendant for its alleged role as a
generator and arranger for disposal or treatment of hazardous waste at certain
of the disposal facilities which are named in the litigation. It is alleged that
the Safety-Kleen subsidiary was the operator of the injection well in question
from 1974 through the present. In addition to the claims asserted by the
plaintiffs, there is the potential that the customers of the injection well, who
are also defendants, may assert claims for indemnification against the Company.
The action has not proceeded against the Company subsidiaries due to the filing
of their Chapter 11 Bankruptcy petition on June 9, 2000.
63
ix. FUSRAP Waste Disposal at Safety-Kleen (Buttonwillow), Inc.
Safety-Kleen (Buttonwillow), Inc., a subsidiary of Safety-Kleen, owns and
operates a hazardous waste landfill in Kern County California. The facility
accepted and disposed of construction debris that originated at a site in New
York which was part of the federal Formerly Utilized Sites Remediation Program
(FUSRAP). The construction debris was low-activity radioactive waste and was
shipped to the site by the U.S. Army Corps of Engineers (USACE). FUSRAP was
created in the mid-1970s in an attempt to manage various sites around the
country contaminated with residual radioactivity from activities conducted by
the Atomic Energy Commission and United States military during World War II. The
California Department of Health Services (DHS) has claimed that the facility did
not lawfully accept the waste. Both DHS and the Department of Toxic Substances
Control (DTSC) have filed claims in the Company's Bankruptcy proceedings
preserving the right of the agencies to seek penalties and possibly compel
removal of the material should an ongoing investigation reveal the subsidiary
acted improperly. DHS claimed penalties in the amount of $0.6 million and
potential removal costs of $15.5 million should DHS have to oversee and/or
conduct the removal. The proof of claim filed by the DTSC was in the amount of
$15.0 million for potential penalties plus an unspecified amount for any costs
the DTSC may incur should the subsidiary be forced to remove the waste. The
subsidiary and the USACE contend the material was properly disposed of and will
vigorously resist the imposition of any penalties or any efforts to require that
waste be removed.
STOCKHOLDERS' EQUITY (DEFICIT)
COMMON STOCK SHARES
Safety-Kleen is authorized to issue 250 million shares of its $1 par value
common stock and one million shares of its $1 par value preferred stock. The
Board of Directors determines the terms and conditions of each issue of
preferred stock. No preferred stock has been issue.
COMMON STOCK
SHARES
OUTSTANDING
(in thousands)
------------
Balance at August 31, 1999 100,636
==========
Issuance of shares to non-employees 146
Exercise of stock options 2
Balance at August 31, 2000 and 2001 100,784
==========
There was no issuance of shares or exercise of stock options in fiscal 2001.
OTHER COMPREHENSIVE INCOME (LOSS)
Other comprehensive income (loss) for all periods presented consists of net
(loss) income, foreign currency translation adjustments and unrealized gains and
losses on investments classified as available for sale under SFAS No. 115,
"Accounting for Certain Investments in Debt and Equity Securities".
Accumulated other comprehensive income (loss) consists of the following
components ($ in thousands):
FOREIGN UNREALIZED ACCUMULATED
CURRENCY (LOSS)/GAIN ON OTHER
TRANSLATION MARKETABLE COMPREHENSIVE
ADJUSTMENT SECURITIES INCOME (LOSS)
---------- ---------- -------------
Balance at August 31, 1998 $(9,505) $ (6) $(9,511)
Other comprehensive income (loss) 582 (285) 297
------- ----- -------
Balance at August 31, 1999 (8,923) (291) (9,214)
Other comprehensive income (loss) 2,571 (23) 2,548
------- ----- -------
Balance at August 31, 2000 (6,352) (314) (6,666)
Other comprehensive income (loss) (2,131) 497 (1,634)
------- ----- -------
Balance at August 31, 2001 $(8,483) $ 183 $(8,300)
======= ===== =======
64
16. DISCLOSURE ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
Carrying amounts reported in the consolidated balance sheets for cash and cash
equivalents, accounts receivable, accounts payable and accrued other liabilities
approximate fair value due to the short-term nature of these instruments.
Long-term investments - The fair value of the restricted funds held by trustees
approximates carrying value (see Note 3).
Long-term debt - Due to the uncertainty resulting from the Chapter 11 Cases
discussed in Note 1, the fair value of the Company's long-term debt as of August
31, 2001 and 2000 is not determinable.
Fair value estimates are made at a specific point in time based on relevant
market information about the financial instruments. These estimates are
subjective in nature and involve uncertainties and matters of significant
judgement and therefore, cannot be determined with precision. Changes in
assumptions could significantly affect these estimates.
17. IMPAIRMENT AND OTHER CHARGES
The accompanying consolidated statements of operations reflect an element of
operating expenses described as "Impairments and other charges". Included in
this caption are provisions for impairments of assets determined in accordance
with SFAS No. 121 and related provisions for closure, post-closure, and other
liabilities for facilities to be closed, where appropriate.
SFAS No. 121 requires the assessment of long-lived assets for impairment
whenever events ("triggering events") occur which may indicate that those assets
have become impaired. Triggering events may be events, which directly cause
impairment (e.g., decisions to close facilities or the effects of new government
regulations) or may be indicators of the existence of other direct causes of
impairment (e.g., continuing or increasing losses, declining customer demand,
etc.).
The Company believes that the Chapter 11 Cases and the events that led up to it
constitute triggering events. In connection with its comprehensive review of its
operations, the Company evaluated the recoverability of long-lived assets at
August 31, 2001 and 2000 by reference to estimated future cash flows. As a
result, the Company identified certain impairments that have been recorded in
fiscal 2001, 2000 and 1999.
Fair values for impaired assets were determined for landfills, incinerators,
wastewater treatment and other facilities, primarily based on future cash flow
projections discounted using rates appropriate for the risks involved with the
identified assets. For those facilities that were to be sold, management based
fair value on their best estimate of sales value less cost to sell.
2001
The components of fiscal 2001 impairment and other charges consisted of the
following ($ in thousands):
CHEMICAL BRANCH SALES
SERVICES AND SERVICE TOTAL
-------- ------------ -------
Provision for early facility closure:
Bridgeport incinerator $34,123 $ -- $34,123
Coffeyville incinerator 9,017 -- 9,017
Hilliard wastewater treatment facility 1,174 -- 1,174
Burton transportation facility 459 -- 459
------- ------- -------
44,773 -- 44,773
Asset impairment and other charges 935 7,176 8,111
------- ------- -------
Total $45,708 $ 7,176 $52,884
======= ======= =======
During fiscal 2001 the Company ceased operations at two incinerators, a
wastewater treatment facility and a transportation facility. As a result of
these closures, the Company recorded a provision for early facility closures and
post-closures of approximately $44.8 million. Certain post-closure costs are
expected to be incurred over a period approximating 30 years. The Company also
recorded $8.1 million of net impairment charges primarily related to a
wastewater treatment facility and the former headquarters of Old Safety-Kleen.
65
2000
The components of fiscal 2000 impairment and other charges consisted of the
following ($ in thousands):
CHEMICAL BRANCH SALES
SERVICES AND SERVICE TOTAL
-------- ----------- -----
Asset impairments:
Service centers and landfills related to western $118,336 $ -- $118,336
operations
Other landfills and incinerators 118,622 -- 118,622
Harbor facility - closed 22,600 -- 22,600
Pinewood landfill 15,724 -- 15,724
Former headquarters of Old Safety-Kleen -- 18,688 18,688
Other facilities 73,823 -- 73,823
-------- -------- --------
Total $349,105 $ 18,688 $367,793
======== ======== ========
The amounts shown, as related to western operations, relate to facilities which
are located in the western area of the United States. Their markets have been
adversely affected by competitive conditions, including over supply of available
services, which have limited the Company's ability to increase prices to recover
increased costs, including those related to new environmental regulations.
Included in other landfills and incinerators is an incinerator constructed to
burn contaminated soils. Although significant revenue resulted from unusual
events in 1999 and 2000, the general level of demand for these services has and
is expected to continue to decline. In addition, new environmental regulations
are projected to significantly increase capital expenditures and operating costs
in the future. Also included in this amount is a landfill which has been the
primary disposal site for the soil burned at this Company owned incinerator. The
projected declines in volumes generated at the incinerator are projected to have
a continuing adverse effect on volumes at the landfill.
As discussed in Note 14, the Pinewood Facility has been the subject of lengthy,
complex and protracted legal proceedings. The results of the proceedings have
been adverse to the Company, accordingly, the Company has concluded that it
would be imprudent to assume that this facility will generate any significant
future revenue. An additional charge was recorded for the impairment of the
remaining net book value of fixed assets at the Pinewood Facility. Appropriate
reserves for closure and post-closure costs at Pinewood have been fully provided
and included in operating costs.
1999
The components of fiscal 1999 impairment charges consisted of the following ($
in thousands):
CHEMICAL BRANCH SALES
SERVICES AND SERVICE TOTAL
-------- ----------- -----
Write-down of non-landfill permits $ 9,195 $ -- $ 9,195
Property, plant and equipment 2,092 -- 2,092
------- ------- -------
Total $11,287 $ -- $11,287
======= ======= =======
Impairment and other charges in fiscal 1999 were primarily due to factors
relating to decisions made by management as a result of changes in business
conditions or legal issues. These charges represent the write-down of certain
property, plant and equipment and intangibles.
66
18. REORGANIZATION ITEMS
Reorganization items as reported in the accompanying fiscal 2001 and 2000
statement of operations are comprised of income, expense and loss items that
were realized or incurred by the Debtors as a direct result of the Company's
decision to reorganize under Chapter 11. During fiscal 2001 and 2000,
reorganization items were as follows ($ in thousands):
2001 2000
-------- --------
Professional fees directly related to the filing $ 28,161 $ 15,297
Write off of deferred financing costs related to pre-petition domestic -- 41,533
borrowings
First DIP Facility commitment fees and amortization of financing costs 4,908 498
Losses on early termination of qualifying hedge contracts -- 3,400
Rejected operating leases 4,384 532
Interest earned on cash accumulated during Chapter 11 (4,408) (337)
Accrued employee retention plan costs 8,104 --
Other 1,135 --
-------- --------
$ 42,284 $ 60,923
======== ========
Professional fees included within reorganization items exclude professional fees
incurred in conjunction with the Company's investigation and restatement of its
Consolidated Financial Statements described in Note 2.
The net cash payments made during fiscal 2001 and 2000 with respect to the
reorganization items listed above were approximately $16.5 million and $6.7
million, respectively.
19. DERIVATIVES AND RISK MANAGEMENT
INTEREST RATE DERIVATIVES
From time to time during fiscal 2000 and fiscal 1999, the Company entered into
derivative contracts, which include swaps, option contracts, and forward
agreements or combinations thereof. Derivatives which were not designated as
hedges or were ineffective throughout the hedge period did not qualify for hedge
accounting treatment. These transactions often took the form of financing
arrangements whereby the Company received cash proceeds at the outset of the
contract in exchange for an obligation to exchange swap settlements in the
future at off-market terms. The fair market value of such instruments which fail
to qualify for hedge accounting treatment are reflected as assets or
liabilities, with the periodic change in market value recognized in earnings in
the Company's Consolidated Financial Statements. During March 2000, the
Company's existing derivative contracts were involuntarily terminated from
cross-default provisions between the Company's Senior Credit Facility, and its
International Swap Dealers Association Master Agreements. As a consequence of
these terminations, the Company has a net derivative liability of $69.5 million
at August 31, 2001 and 2000, which is reflected in the accompanying Consolidated
Financial Statements as a liability subject to compromise (see Note 11) and
ranks pari passu with amounts due under the Senior Credit Facility.
The Company also entered into a variety of derivatives in prior years, including
interest rate swaps, options, swaptions and forward agreements, which were not
designated as hedges or were ineffective throughout the hedge period. Such
instruments do not qualify for hedge accounting treatment. These transactions
often took the form of financing arrangements whereby the Company received cash
proceeds at the outset of the contract in exchange for an obligation to exchange
swap settlements in the future at off-market terms. The fair market value of
such instruments, which fail to qualify for hedge accounting treatment, are
reflected as assets or liabilities, with the periodic change in market value
recognized in earnings in the Company's Consolidated Financial Statements.
Credit risk related to the Company's interest rate derivatives arose from the
possible inability of counterparties to meet the terms of their contracts on a
net basis. All of the Company's interest rate swap agreements as a result, were
entered into with major financial institutions, which were expected to fully
perform under the terms of the agreements. The Company's credit exposure on
swaps was related not to the notional balances of the interest rate swaps, but
to the current and potential replacement costs of all profitable contracts at
fiscal year end. Credit exposure varied with the market value of the swaps.
As of the bankruptcy filing date (June 9, 2000), the Company had $3.4 million in
deferred losses associated with the early termination of qualifying hedge
contracts, all of which were charged to reorganization items in the fiscal year
ended August 31, 2000.
67
The following table summarizes the net gains and (losses) on the Company's
derivative contracts used for trading purposes in fiscal 2000 and fiscal 1999 ($
in thousands):
FOR THE YEARS ENDED AUGUST 31,
------------------------------
2000 1999
Interest rate swaps $(4,697) $ 5,855
Interest rate swaptions 7,235 (8,578)
Bond forward agreements (1,407) (921)
Bond indexed equity swaps (418) (2,279)
------- -------
Total $ 713 $(5,923)
======= =======
The following table summarizes the fair value of the Company's derivative
contracts used for trading purposes for the fiscal year ended August 31, 2000
and August 31, 1999 ($ in thousands):
2000 1999
------------------------------------------ --------------------------------------------
GROSS GROSS GROSS GROSS
AVERAGE POSITIVE NEGATIVE AVERAGE POSITIVE NEGATIVE
FAIR VALUE FAIR VALUE FAIR VALUE FAIR VALUE FAIR VALUE FAIR VALUE
---------- ---------- ---------- ---------- ---------- ----------
Interest rate swaps $ (1,311) $ -- $ -- $ (345) $3,020 $(13,893)
Interest rate swaptions (2,967) -- -- (2,802) -- (25,904)
Bond forward agreements -- -- -- -- -- --
Bond indexed equity swaps (1,102) -- -- (599) -- (1,819)
Forward start swaps (2,716) -- -- (196) -- (1,331)
-------- ------ ------ -------- ------ --------
Total $ (8,096) $ -- $ -- $ (3,942) $3,020 $(42,947)
======== ====== ====== ======== ====== ========
Derivative financial instrument fair values represent an approximation of
amounts the Company would have paid to or received from counterparties to
terminate its positions prior to maturity, and are based on capital market rates
prevailing at August 31, 2000 and 1999.
In addition to the derivatives used for qualifying hedges and for trading
purposes described above, the Company has segregated from derivative contracts
entered into or modified at off-market terms, $16.1 million of amortizing
fixed-rate borrowings as of August 31, 2000. These amounts are included in
liabilities subject to compromise as of August 31, 2000. The Company also
classified $53.4 million in terminated derivatives as liabilities subject to
compromise as of August 31, 2001 and 2000 (see Note 11).
OTHER DERIVATIVES
On December 15, 2000, the Bankruptcy Court approved a multi-year marketing and
distribution agreement between the Company and SystemOne. In connection with the
agreement, the Company received a warrant with a five-year term to purchase
1,134,615 shares of SystemOne at a price of $3.50 per share. The warrant has
been recorded as a derivative asset at its estimated fair market value of $1.1
million at August 31, 2001. Changes in the fair value from the date of inception
are charged to earnings, resulting in a derivative loss of $0.6 million being
recorded during the fiscal year ended August 31, 2001.
20. STOCK OPTION PLANS
The Company has the following stock option plans:
The 1993 Stock Option Plan of the former Rollins Environmental Services, Inc.
The 1997 Directors Stock Option Plan
The 1997 Stock Option Plan
All outstanding employee stock options granted by Rollins were fully vested on
May 15, 1997, in accordance with the terms of the acquisition of Old
Safety-Kleen referred to in Note 1.
68
Option activity for the fiscal years ended August 31 is as follows:
2001 2000
---------------------------- -------------------------------
Weighted Average Weighted Average
Shares Exercise Price Shares Exercise Price
------ -------------- ------ --------------
Outstanding at beginning of year 1,046,863 $13.844 1,200,988 $13.901
Exercised -- -- (2,000) $12.750
Expired or canceled (462,213) $13.772 (152,125) $14.307
--------- ----------
Outstanding at end of year 584,650 $13.901 1,046,863 $13.844
========= ==========
Options available for grant 2,549,640 2,087,427
Options exercisable 327,225 $14.001 388,200 $13.953
1999
------------------------------
Weighted Average
Shares Exercise Price
--------- --------------
Outstanding at beginning of year 754,250 $14.844
Granted 538,625 $13.250
Exercised (18,250) $11.613
Expired or canceled (73,637) $19.125
---------
Outstanding at end of year 1,200,988 $13.901
=========
Options available for grant 635,302
Options exercisable 202,113 $14.439
2001 2000
------------------------------------- ----------------------------------------
Weighted Weighted
Average Weighted Average Weighted
Range of Remaining Average Remaining Average
Exercise Options Contractual Exercise Options Contractual Exercise
Price Outstanding Life Price Outstanding Life Price
- -------------- ------------ ---------- -------- ------------ ----------- ---------
$10.50-$11.50 6,750 2.26 years $11.500 6,750 3.26 years $11.500
$12.75-$15.75 565,750 6.94 years $13.794 1,027,063 5.23 years $13.773
$16.50-$23.00 12,150 0.73 years $20.480 13,050 1.69 years $20.665
----------- ---------
$10.50-$23.00 584,650 6.76 years $13.901 1,046,863 5.17 years $13.844
=========== =========
1999
--------------------------------------
Weighted
Average Weighted
Remaining Average
Range of Options Contractual Exercise
Exercise Price Outstanding Life Price
-------------- ----------- ---- -----
$10.50-$11.50 6,750 4.26 years $11.500
$12.75-$15.75 1,178,688 8.51 years $13.794
$16.50-$23.00 13,050 2.69 years $20.665
$30.00-$35.50 2,500 0.25 years $35.500
--------
$10.50-$35.50 1,200,988 8.41 years $13.901
=========
Effective July 9, 1997, the directors of Safety-Kleen set aside 1.5 million
shares of its $1 par value common stock for issuance under the 1997 Stock Option
Plan. Effective October 5, 1999, the number of shares set aside was increased by
10 million shares. All options under this plan are for a term of ten years from
the date of grant and become exercisable with respect to 20% of the total number
of shares subject to the option, approximately one year after the date of grant,
and with respect to an additional 20% at the end of each 12-month period
thereafter on a cumulative basis during the succeeding four years. The plan
provides for the granting of stock options to certain senior employees and
officers of the Company at the discretion of the Board of Directors. All options
are subject to certain conditions of service. Options for 471,125 shares were
granted during fiscal 1999 at an exercise price of $13.25. No options were
granted during each of fiscal 2001 and 2000.
Effective July 9, 1997, the directors of the Safety-Kleen set aside 135,000
shares of its $1 par value common stock for issuance under the 1997 Directors
Stock Option Plan. Effective October 5, 1999, the number of shares set aside was
increased by 300,000 shares. All options under
69
this plan are for a term of ten years from the date of grant and become
exercisable with respect to 20% of the total number of shares subject to the
option, approximately one year after the date of grant, and with respect to an
additional 20% at the end of each 12-month period thereafter on a cumulative
basis during the succeeding four years. All options are subject to certain
conditions of service. Options for 67,500 shares were granted during fiscal 1999
at an exercise price of $13.25. No options were granted during fiscal 2001 and
2000.
In accordance with the disclosure requirements of SFAS No. 123, the fair value
of each option grant during fiscal 1999, has been estimated as of the date of
grant using the Black-Scholes option pricing model with the following weighted
average assumptions:
AUGUST 31, 1999
------------------
Risk-free interest rate 5.3%
Expected life 7.0 years
Dividend rate 0.0%
Expected volatility 60.8%
As required by SFAS No. 123, the Company has determined that the weighted
average estimated fair values of options granted during fiscal 1999, were $8.22
per share. Had compensation cost for these plans been determined based on the
Black-Scholes value at the grant dates for awards as prescribed by SFAS No. 123,
pro forma net income and earnings per share would have been as follows ($ in
thousands, except per share data):
YEAR ENDED AUGUST 31,
2001 2000 1999
----------- ----------- -----------
Net loss:
As reported $ (229,078) $ (833,191) $ (223,155)
Pro forma (231,044) (835,157) (225,121)
Net loss per share
As reported $ (2.27) $ (8.27) $ (2.52)
Pro forma (2.29) (8.29) (2.54)
21. EMPLOYEE BENEFIT PLANS
Defined benefit plans
As of August 31, 2001, the Company did not sponsor any significant active
defined benefit pension plans. For plans terminated during fiscal 2000, all
accumulated benefits have been distributed to plan participants.
In January 1998, certain union organizations granted their permission to
terminate the LES Union Pension Plan and, during July 1998, the Application for
Determination Upon Termination was filed with the Internal Revenue Service. The
final settlement payout for the LES Union Pension Plan was in May 1999. All
remaining participants represented by union organizations not granting
termination permission were transferred to another "mirror image" plan, the Deer
Park Union Pension Plan, effective February 1, 1998. In March 1999, management
obtained the remaining union organizations' permission to terminate the Deer
Park Union Pension Plan. Plan assets were distributed to participants in March
2000.
As a result of the acquisition of Old Safety-Kleen, the Company acquired three
defined benefit plans. The Safety-Kleen Corp. Sales Employees' Pension Plan (the
"Sales Plan") is a noncontributory defined benefit pension plan that originally
covered certain U.S. employees of Old Safety-Kleen, including branch managers
and sales representatives. Other salaried employees, excluding branch managers
and sales representatives, were covered under the Salaried Employee's Pension
Plan (the "Salaried Plan"). Hourly-paid employees were covered under the
Hourly-Paid Employees' Pension Plan (the "Hourly Plan"). On July 10, 1998, the
Company announced its intention to discontinue benefit accrual and to terminate
all three plans. Effective September 30, 1998, the Salaried Plan and the Hourly
Plan, (collectively the "Transferring Plans"), were merged into the Sales Plan.
Upon merging of the Transferring Plans, the Sales Plan received the interest in
the assets of the trust fund of the Transferring Plans and assumed the
accumulated benefit obligation of the Transferring Plans. After the merger, the
Transferring Plans ceased to exist. The Sales Plan was subsequently terminated
December 24, 1999 and accumulated benefits were distributed to participants on
March 31, 2000.
70
Changes in the projected benefit obligations and pension plan assets relating to
the Company's defined benefit pension plans as of August 31, 2001 and 2000, are
set forth in the following table ($ in thousands):
2001 2000
----- --------
Change in benefit obligation
Net benefit obligation at beginning of year $ -- $ 90,641
Settlement loss -- 3,415
Benefits paid -- (94,056)
----- --------
Net benefit obligation at end of year $ -- $ --
===== ========
Change in plan assets
Fair value of plan assets at beginning of year $ 387 $ 92,635
Net plan assets acquired -- --
Actual return on plan assets 26 1,808
Contributions 17 --
Benefits paid (44) (94,056)
Commissions, fees and expenses (44) --
----- --------
Fair value of plan assets at end of year $ 342 $ 387
----- --------
Accrued benefit surplus $ 342 $ 387
===== ========
There was no periodic pension costs for the Company's defined benefit pension
plans for the years ended August 31, 2001 and 2000. Effective as of October 14,
1997, the Company adopted a Supplemental Executive Retirement Plan (SERP) for
certain eligible employees. The SERP is an unfunded plan that provides for
benefit payments in addition to those payable under a qualified retirement plan.
As of August 31, 2001, a liability of approximately $1.8 million related to the
SERP plan is recorded in other long-term liabilities.
Defined contribution plan
The Company offers to all eligible employees the opportunity to participate in
the Company's defined contribution employee benefit plan (the "Safety-Kleen
401(k) Plan"). Employees are allowed to contribute up to 15% of their annual
salary to the Safety-Kleen 401(k) Plan, and during fiscal 2001, the Company made
matching contributions limited to 75% of the first 6% of an employee's eligible
compensation. Employer contribution expense for fiscal years ended August 31,
2001, 2000, and 1999 was $10.6 million, $11.8 million, and $11.8 million,
respectively. In fiscal 2002, the Board of Directors has determined to suspend
matching contributions indefinitely.
Other
The Company provides medical benefits to approximately 70 former employees of
Old Safety-Kleen. At the date of the acquisition of Old Safety-Kleen, the plan
was frozen and subsequently terminated. The Company currently provides benefits
to those remaining participants as required by the provisions of COBRA.
Effective September 8, 2000, the Company implemented the Senior Executive
Retention Plan to provide a financial incentive to certain employees to remain
with the Company during the turnaround and restructuring process. Under the
terms of this plan, participants must be actively employed by the Company
through the retention period, which ended on December 31, 2001. In addition, the
Company has entered into retention bonus agreements for certain key executives
whereby bonuses are payable upon the occurrence of certain defined events, such
as filing of a plan of reorganization or the consummation of the sale of
substantially all of the assets of the Company. The Company recognized $8.1
million of expense related to these arrangements as a reorganization item in the
accompanying fiscal 2001 statement of operations.
71
22. INCOME TAXES
For financial reporting purposes, income (loss) before income taxes and
extraordinary items, showing domestic and foreign sources, was as follows ($ in
thousands):
YEAR ENDED AUGUST 31,
---------------------------------------------
2001 2000 1999
--------- --------- ---------
Domestic $(238,992) $(814,878) $(197,253)
Foreign 22,197 (5,290) 13,192
--------- --------- ---------
Loss before income taxes and extraordinary items $(216,795) $(820,168) $(184,061)
========= ========= =========
The income tax expense before extraordinary items is as follows ($ in
thousands):
YEAR ENDED AUGUST 31,
--------------------------------------
2001 2000 1999
------- ------- -------
Current:
Federal $ -- $ -- $ --
State 8,494 594 915
Foreign 6,475 4,177 9,731
Deferred:
Federal -- 6,029 24,274
State -- 689 2,774
Foreign 2,905 1,534 1,400
------- ------- -------
Income tax expense $17,874 $13,023 $39,094
======= ======= =======
A reconciliation of the income tax expense calculated by applying the domestic
statutory federal income tax rate to the loss before income taxes is as follows
($ in thousands):
YEAR ENDED AUGUST 31,
--------------------------------------
2001 2000 1999
---- ---- ----
Federal income tax expense (benefit)
at statutory rate (35.0)% (35.0)% (35.0)%
State income tax expense (benefit) (1.9)% (3.6)% (0.3)%
Change in valuation allowance 39.6% 36.2% 39.3%
Foreign country rate differential 1.0% 0.1% 0.5%
Goodwill 5.6% 4.5% 7.6%
Other (1.1)% (0.6)% 9.1%
----- ----- -----
Income tax expense 8.2% 1.6% 21.2%
===== ===== =====
Deferred tax assets and liabilities consisted of the following ($ in thousands):
YEAR ENDED AUGUST 31,
---------------------------
2001 2000
--------- ---------
Deferred tax assets:
Allowance for uncollectible invoices $ 31,592 $ 34,010
Deferred revenue 20,964 47,180
Accrued liabilities 178,958 161,255
Tax attribute carryovers 496,883 330,194
Deferred financing costs 12,543 16,710
Other 7,496 4,862
--------- ---------
Total gross deferred tax assets 748,436 594,211
Less -Valuation allowance (458,207) (386,095)
--------- ---------
Net deferred tax assets 290,229 208,116
--------- ---------
Deferred tax liabilities:
Excess of tax over book depreciation (180,665) (213,172)
Interest (119,415) (23,695)
Other (51,920) (35,354)
--------- ---------
Total gross deferred tax liabilities (352,000) (272,221)
--------- ---------
Net deferred tax liabilities $ (61,771) $ (64,105)
========= =========
72
As of August 31, 2001, the Company has net operating loss ("NOL") carryforwards
for U.S. federal income taxes of approximately $1.2 billion expiring in the
years 2006 through 2021 and capital loss carryforwards of $24 million expiring
in 2005. Such NOLs are subject to limitations of both Treasury Regulation
1.1502-21 and Internal Revenue Code "IRC" Section 382. At August 31, 2001,
interest carryovers of approximately $15 million limited by IRC Section 163(j)
are available against U.S. federal tax without expiration. The carryovers are
based on tax returns as currently filed and are subject to change based on the
Company's detailed review and analysis of all restatement adjustments for tax
purposes, as it is not practicable to determine the impact or related interest
and penalties, if any, of the restatement adjustments on amended returns at this
time. The Company's tax returns are subject to periodic audit by the various
jurisdictions in which it operates. These audits, including those currently
underway, can result in adjustments of taxes due or adjustments of the NOLs,
which are available to offset future taxable income. Implementation of a plan or
plans of reorganization will likely reduce the availability of some or all of
these NOL carryforwards.
Valuation allowances have been established for uncertainties in realizing the
benefit of certain tax loss carryforwards and other deferred tax assets. In
assessing the realizability of carryforwards and other deferred tax assets,
management considers whether it is more likely than not that some portion or all
of the deferred tax assets will be realized. The Company adjusts the valuation
allowance in the period management determines it is more likely than not that
deferred tax assets will or will not be realized.
Until May 1997, the Company was included in the consolidated U.S. tax returns
filed by Laidlaw. As such, the Company is jointly and severally liable for any
taxes due with respect to those returns. Accordingly, the Company could be
responsible for taxes relating to adjustments to the 1997 and prior consolidated
tax returns of Laidlaw.
23. RELATED PARTY TRANSACTIONS
LAIDLAW INC.
Insurance premiums paid to Laidlaw, including those related to workers
compensation, general and auto liability, totaled approximately $0.1 million,
$14.8 million and $21.5 million in fiscal 2001, 2000 and 1999, respectively.
Rates paid under insurance contracts were determined on a similar basis as those
charged under similar contracts with third-party insurers.
On May 15, 1997, in connection with the Rollins Acquisition, the Company issued
a $350 million 5% subordinated convertible PIK Debenture due May 15, 2009, and
paid $349.1 million in cash to Laidlaw. On August 27, 1999, the Company
repurchased the PIK Debenture for (i) $200 million in cash, (ii) 11,320,755
shares of common stock and (iii) 376,858 shares of common stock in satisfaction
of accrued and unpaid interest on the PIK Debenture to the date of purchase.
During the fiscal year ended August 31, 1999, the Company issued a total of
1,545,399 common shares to Laidlaw in satisfaction of interest payments due
under the PIK Debenture.
Pursuant to the Rollins Acquisition, Laidlaw and LTI and indirect wholly-owned
subsidiaries of Laidlaw, agreed to jointly and severally indemnify the Company
for certain obligations and liabilities. Also pursuant to the Rollins
Acquisition, the Company agreed to jointly and severally indemnify Laidlaw and
LTI, for certain obligations and liabilities. Additionally, certain other
guaranties have been entered into by Laidlaw on behalf of the Company (See Notes
3 and 14).
Certain former directors or officers of the Company also served as directors or
officers of Laidlaw during fiscal 2000 and 1999. As of August 31, 2001, no
directors or officers of the Company served as directors or officers of Laidlaw.
Currently, there are substantial claims and counterclaims between the Company,
Laidlaw and its affiliates (see Note 14).
SAFETY-KLEEN EUROPE
During portions of fiscal 2000 and 1999, the Company accounted for its
investment in Safety-Kleen Europe, Limited under the equity method. During this
period, the Company provided Safety-Kleen Europe, Limited with information
technology services, inventory and reimbursement of certain building rents. In
fiscal 2000 and 1999, the Company invoiced Safety-Kleen Europe, Limited $1.9
million and $1.3 million, respectively, for information technology services and
inventory. Also during this period, the Company reimbursed Safety-Kleen Europe,
Limited $1.1 million and $0.1 million in fiscal 2000 and 1999, respectively, for
building rents and software.
RAYMOND JAMES & ASSOCIATES
David E. Thomas, Jr., Safety-Kleen's former Chairman and CEO and a member of
Safety-Kleen's Board of Directors since 1997, was previously Senior Managing
Director and Head of the Investment Banking Group of Raymond James & Associates,
Inc. ("Raymond James"). In December 2001, he returned to Raymond James as a
managing director. Raymond James has acted as financial advisor and in other
capacities to the Company for various matters, including acquisitions,
divestitures and securities offerings. The Company paid approximately $2.8
million to Raymond James for these services in fiscal 1999 and accrued
approximately $350,000 in fiscal 2000 for consulting services performed. As of
August 31, 2001 and February 28, 2002, Safety-Kleen has not paid Raymond James
the fiscal 2000 accrued amount.
73
ROLLINS TRUCK LEASING CORP.
Until February 26, 2001, Mr. Tippie, a director of Safety-Kleen, was Chairman of
the Board, Chairman of the Executive Committee, President and CEO of Rollins
Truck Leasing Corp. During fiscal 2001, 2000 and 1999, the Company paid Rollins
Truck Leasing Corp. approximately $0.4 million, $1.2 million and $2.7 million,
respectively, on account of truck rentals. Rollins Truck Leasing Corp. also
purchased certain supplies from the Company. During fiscal 2001 and 2000,
Rollins Truck Leasing Corp. paid approximately $0.1 million and $0.3 million,
respectively, to the Company for these supplies. In addition, in September 1998,
the Company guaranteed certain lease payments for vehicles leased by a
subcontractor of the Company from Rollins Truck Leasing Corp. Pursuant to the
provisions of the Bankruptcy Code, the Bankruptcy Court authorized the Company
to reject its contract with the subcontractor in November 2001. Rollins Truck
Leasing Corp. may possess an unsecured claim against the Company in its Chapter
11 Cases based upon the Company's guarantee.
AK STEEL CORPORATION
Mr. Wareham, a director of Safety-Kleen, was the President of AK Steel
Corporation until his retirement on March 1, 2002. During fiscal 2001, the
Company provided parts cleaner and other services to AK Steel Corporation, and
received approximately $0.2 million in payments for such services.
MATLACK SYSTEMS, INC.
Mr. Tippie is a director and shareholder of Matlack Systems, Inc. Mr. Rollins,
Jr., who is a member of the Safety-Kleen's Board of Directors, is Chairman of
the Board and a shareholder of Matlack Systems, Inc. During fiscal 2001 and
2000, the Company paid Matlack Systems, Inc. approximately $0.3 million and $0.4
million, respectively, for transportation services. During fiscal 2001 and 2000,
Matlack Systems, Inc. also purchased supplies and services from the Company of
less than $0.1 million and $0.6 million, respectively.
OTHER
In September 2000, the Company transferred ownership of a residential property
in Oakville, Ontario, to the spouse of Kenneth W. Winger, the former President
and Chief Executive Officer of Safety-Kleen and a former director of
Safety-Kleen, for $444,000. Laidlaw had originally purchased this property in
1995 from Mr. Winger's spouse for the same amount pursuant to an agreement with
Mr. Winger in connection with his relocation to the Company's South Carolina
offices. The property had been held by Safety-Kleen Ltd., a successor in
interest to Laidlaw Environmental Services Ltd. Based on a broker's opinion of
value, the Company believes that the price paid by Mr. Winger's spouse was fair
to the Company, taking into account the additional expense that the Company
would have had to incur to sell the property to a third party. Mr. Winger and
his spouse released the Company from further obligations and liability arising
under an agreement executed in March 2000 between the Company and Mr. Winger
concerning the transfer of the property and the payment by the Company of
certain relocation expenses.
The above related party transactions which involve certain current or former
directors or officers of the Company were conducted on terms similar to those of
third parties.
74
24. SUPPLEMENTAL SCHEDULE OF CASH FLOW INFORMATION
The supplemental cash flow disclosures and non-cash transactions are as follows
($ in thousands):
FISCAL YEARS ENDED AUGUST 31,
--------------------------------------
2001 2000 1999
---------- -------- ---------
Supplemental cash flow information:
Cash paid during the year for:
Interest $ -- $ 90,370 $ 186,517
========== ======== =========
Income taxes paid (refunded) $ 11,427 $ 10,525 $ (22,529)
========== ======== =========
Non-cash investing and financing activities:
Business combinations:
Fair value of assets acquired $ -- $ 48,990 $ 46,132
Less, cash paid, net -- (27,072) (14,904)
Fair value of liabilities assumed -- (21,918) (31,228)
---------- -------- ---------
Issuance of common stock to satisfy interest payment due
on subordinated convertible debenture $ -- $ -- $ 22,486
========== ======== =========
Issuance of common stock as consideration for
repurchase of subordinated convertible debenture $ -- $ -- $ 150,000
========== ======== =========
Non-cash transactions arising from sale of business:
Equity investment recorded as long-term investment $ -- $ -- $ 37,782
========== ======== =========
25. SEGMENT AND GEOGRAPHIC INFORMATION
Segment information has been prepared in accordance with SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information." The
accounting policies of the segments are the same as those described in the
summary of significant accounting policies. Performance of the segments is
evaluated on several factors, of which the primary financial measure is
operating income before depreciation, amortization and impairment and other
charges ("EBITDA"). Transactions between the segments are accounted for at the
Company's estimate of fair value based on similar transactions with outside
customers. In general, SFAS No. 131 requires that business entities report
selected information about operating segments in a manner consistent with that
used for internal management reporting.
The Company is organized along its two primary business activities - Chemical
Services and Branch Sales and Service. Chemical Services involves the treatment,
recycling and destruction of hazardous and non-hazardous waste at Company owned
and operated facilities. The Company operates thermal destruction incinerators,
landfills and wastewater treatment facilities. Branch Sales and Service involves
providing various services to both industrial and commercial customers and
government entities. These services include, but are not limited to, parts
cleaner services and hazardous and non-hazardous waste collection, treatment,
recycling and disposal. Each segment is managed independently from the other and
reports separately to senior management.
The Company currently classifies as "Corporate" in its segment reporting the
cost of certain Company-wide functions and services consisting primarily of
legal, accounting, finance and information technology. In addition, this
category includes the incremental cost of the Company's efforts related to its
internal accounting review for fiscal 1997 through 2000, the audits of these
periods and the various investigations of its financial results. Certain
intersegment eliminations are recorded in Corporate. As discussed in Note 1,
other components of income, expense and loss directly attributable to the
Chapter 11 Cases are classified as "Reorganization items" in the consolidated
statement of operations.
In 1999, the Company's general ledger and system of internal financial reporting
was aligned to report the financial results of its various segments and lines of
business based on the operational organization then in place. The Company
changed its system of internal financial reporting as a result of the
reorganization of its operations in the third quarter of fiscal 2000.
Substantial efforts were made to conform the prior year's reporting to the
fiscal 2000 organization and new reporting structure. In connection with these
efforts, management restated segment results to reflect service centers'
operations as profit centers. In addition, management reviewed certain
Company-wide selling, general and administrative expenses and attempted to
allocate these expenses consistently from year to year among the segments.
Management believes that the financial results for segment reporting purposes
during fiscal 1999 through fiscal 2001 are reasonable and in accordance with
SFAS No. 131.
75
The table below reflects certain information relating to the Company's
operations ($ in thousands):
BRANCH SALES CHEMICAL
AND SERVICE SERVICES CORPORATE TOTAL
----------- ---------- --------- ---------
FISCAL 2001:
Outside revenue $ 1,008,903 $ 505,631 $ 49 $ 1,514,583
Intersegment revenue 10,964 49,056 (60,020) --
Depreciation and amortization 112,198 29,344 2,168 143,710
Impairment and other charges 7,176 45,708 -- 52,884
EBITDA 51,818 36,832 (60,392) 28,258
Intangible assets, net 1,395,075 332,909 -- 1,727,984
Total assets 2,177,651 710,351 125,791 3,013,793
FISCAL 2000:
Outside revenue $ 986,627 $ 599,022 $ 624 $ 1,586,273
Intersegment revenue 12,353 55,964 (68,317) --
Depreciation and amortization 110,207 57,552 2,143 169,902
Impairment and other charges 18,688 349,105 -- 367,793
EBITDA (29,044) (12,836) (40,595) (82,475)
Intangible assets, net 1,450,581 347,704 -- 1,798,285
Total assets 2,242,270 754,135 135,463 3,131,868
FISCAL 1999:
Outside revenue $ 954,421 $ 671,436 $ (1,819) $ 1,624,038
Intersegment revenue 1,540 49,722 (51,262) --
Depreciation and amortization 104,574 55,212 1,528 161,314
Impairment and other charges -- 11,287 -- 11,287
EBITDA 115,754 106,933 (43,210) 179,477
Intangible assets, net 1,462,163 460,044 -- 1,922,207
Total assets 2,270,243 1,197,106 167,965 3,635,314
Outside revenue and intersegment revenue related to products and services within
the Branch Sales and Service segment is shown in the table below ($ in
thousands):
FISCAL YEARS ENDED AUGUST 31,
------------------------------------
2001 2000 1999
---------- -------- --------
Parts Cleaner Service $ 327,071 $341,303 $370,028
Paint Refinishing Services 58,287 60,629 66,281
Imaging Services 40,968 42,984 43,509
Dry Cleaner Services 19,723 20,038 19,940
Vacuum Truck Services 56,404 46,603 36,411
Integrated Customer Compliance Services 18,934 13,163 9,305
Industrial Waste Collection Services 234,127 223,156 224,144
Oil Collection Services 63,327 69,771 57,162
Oil Re-Refining 152,083 135,068 90,884
Automotive Recovery Services 27,617 25,017 18,937
Additional services 21,326 21,248 19,360
---------- -------- --------
Total outside and intersegment revenue $1,019,867 $998,980 $955,961
========== ======== ========
76
Outside revenue and intersegment revenue related to products and services within
the Chemical Services segment is shown in the table below ($ in thousands):
FISCAL YEARS ENDED AUGUST 31,
---------------------------------------
2001 2000 1999
--------- --------- ---------
Incineration $ 119,396 $ 120,196 $ 116,538
Landfill 87,140 101,748 111,666
Wastewater Treatment 39,126 54,786 46,049
Service Center 262,149 262,931 304,575
Additional services 97,212 103,569 81,864
Transportation 25,076 32,293 46,149
Closed Facilities and Ceased Operations 48,203 112,032 158,472
--------- --------- ---------
678,302 787,555 865,313
Less: Intrasegment revenue (123,615) (132,569) (144,155)
--------- --------- ---------
Total outside and intersegment revenue $ 554,687 $ 654,986 $ 721,158
========= ========= =========
The table below provides a reconciliation of EBITDA to operating (loss) income
($ in thousands):
FISCAL YEARS ENDED AUGUST 31,
2001 2000 1999
--------- --------- ---------
EBITDA $ 28,258 $ (82,475) $ 179,477
Depreciation and amortization (143,710) (169,902) (161,314)
Impairment and other charges (52,884) (367,793) (11,287)
--------- --------- ---------
Operating (loss) income $(168,336) $(620,170) $ 6,876
========= ========= =========
Information concerning principal geographic areas is as follows ($ in
thousands):
UNITED STATES CANADA EUROPE TOTAL
------------- ------ ------ -----
FISCAL 2001:
Outside revenue $1,350,983 $163,600 -- $1,514,583
Net property, plant and equipment 669,482 94,121 -- 763,603
FISCAL 2000:
Outside revenue $1,410,394 $175,879 -- $1,586,273
Net property, plant and equipment 665,756 107,119 -- 772,875
FISCAL 1999:
Outside revenue $1,419,921 $163,887 $40,230 $1,624,038
Net property, plant and equipment 1,016,889 118,239 -- 1,135,128
77
26. CONDENSED COMBINED FINANCIAL STATEMENTS OF ENTITIES IN BANKRUPTCY
The following condensed combined financial statements are presented in
accordance with SOP 90-7:
CONDENSED COMBINED CONSOLIDATING STATEMENT OF OPERATIONS
YEAR ENDED AUGUST 31, 2001
ENTITIES NOT
ENTITIES IN IN
REORGANIZATION REORGANIZATION CONSOLIDATED
In thousands PROCEEDINGS PROCEEDINGS ELIMINATIONS TOTALS
- ------------------------------------------ --------------- -------------- ------------ ------------
Revenues $ 1,394,828 $ 208,279 $(88,524) $ 1,514,583
Operating expenses 1,589,855 181,588 (88,524) 1,682,919
----------- --------- -------- -----------
Operating loss (195,027) 26,691 -- (168,336)
Interest expense, net (1) 1,707 (6,743) -- (5,036)
Other (expense) income (1,044) (514) -- (1,558)
Equity in earnings of associated companies 10,435 -- (10,435) --
----------- --------- -------- -----------
Loss before reorganization items, income
taxes and minority interest (183,929) 19,434 (10,435) (174,930)
Reorganization items (42,284) -- -- (42,284)
Income tax expense (8,456) (9,418) -- (17,874)
----------- --------- -------- -----------
Loss before minority interest (234,669) 10,016 (10,435) (235,088)
Minority interest -- 419 -- 419
----------- --------- -------- -----------
Loss before extraordinary items (234,669) 10,435 (10,435) (234,669)
Extraordinary items 5,591 -- -- 5,591
----------- --------- -------- -----------
Net loss $ (229,078) $ 10,435 $(10,435) $ (229,078)
=========== ========= ======== ===========
(1) Excluding contractual interest of $245,436 for Entities in Reorganization
Proceedings.
CONDENSED COMBINED CONSOLIDATING BALANCE SHEET
AS OF AUGUST 31, 2001
ENTITIES IN ENTITIES NOT IN
REORGANIZATION REORGANIZATION CONSOLIDATED
In thousands PROCEEDINGS PROCEEDINGS ELIMINATIONS TOTALS
- ---------------------------------- ----------- --------- ----------- -----------
ASSETS:
Current assets $ 400,870 $ 92,546 $ -- $ 493,416
Intercompany receivables 56,995 -- (56,995) --
Property, plant & equipment, net 668,141 95,462 -- 763,603
Investment in subsidiaries 29,534 -- (29,534) --
Intangibles assets, net 1,653,188 74,796 -- 1,727,984
Other assets 27,270 1,520 -- 28,790
----------- --------- ----------- -----------
$ 2,835,998 $ 264,324 $ (86,529) $ 3,013,793
=========== ========= =========== ===========
LIABILITIES:
Current liabilities $ 311,344 $ 94,983 -- 406,327
Intercompany payables -- 56,995 (56,995) --
Non-current liabilities 387,824 83,103 -- 470,927
Liabilities subject to compromise 2,481,274 -- -- 2,481,274
Minority interest 1,238 (291) -- 947
STOCKHOLDERS' EQUITY (DEFICIT) (345,682) 29,534 (29,534) (345,682)
----------- --------- ----------- -----------
$ 2,835,998 $ 264,324 $ (86,529) $ 3,013,793
=========== ========= =========== ===========
78
CONDENSED COMBINED CONSOLIDATING STATEMENT OF CASH FLOWS
YEAR ENDED AUGUST 31, 2001
ENTITIES IN ENTITIES NOT IN
REORGANIZATION REORGANIZATION CONSOLIDATED
In thousands PROCEEDINGS PROCEEDINGS TOTALS
- ------------------------------------------------------- -------------- ---------------- ------------
Net cash provided by (used in) operating activities $ 77,655 $ 22,270 $ 99,925
-------- -------- ---------
Cash flows from investing activities:
Proceeds from sales of property, plant and equipment 4,766 443 5,209
Purchases of property, plant and equipment (65,496) (5,836) (71,332)
Decrease (increase) in long-term investments 8,533 313 8,846
-------- -------- ---------
Net cash provided by (used in) investing activities (52,197) (5,080) (57,277)
-------- -------- ---------
Cash flows from financing activities:
Repayments of long-term debt (10,080) -- (10,080)
Change in intercompany accounts (14,419) 14,419 --
-------- -------- ---------
Net cash provided by (used in) financing activities (24,499) 14,419 (10,080)
Effect of exchange rate changes on cash (2,131) 1,338 (793)
-------- -------- ---------
Net increase (decrease) in cash and cash equivalents (1,172) 32,947 31,775
Cash and cash equivalents at:
Beginning of year 74,234 10,048 84,282
-------- -------- ---------
End of year $ 73,062 $ 42,995 $ 116,057
======== ======== =========
CONDENSED COMBINED CONSOLIDATING STATEMENT OF OPERATIONS
YEAR ENDED AUGUST 31, 2000
ENTITIES IN ENTITIES NOT
REORGANIZATION REORGANIZATION CONSOLIDATED
In thousands PROCEEDINGS PROCEEDINGS ELIMINATIONS TOTALS
- ------------------------------------------ -------------- ---------------- ------------ -----------
Revenues $ 1,521,435 $ 241,971 $(177,133) $ 1,586,273
Operating expenses 2,133,134 250,442 (177,133) 2,206,443
----------- --------- --------- -----------
Operating loss (611,699) (8,471) -- (620,170)
Interest expense, net (1) (136,425) (5,454) -- (141,879)
Other income (expense) 1,286 (79) -- 1,207
Equity in earnings of associated companies (18,152) -- 19,921 1,769
----------- --------- --------- -----------
Loss before reorganization items, income
taxes and minority interest (764,990) (14,004) 19,921 (759,073)
Reorganization items (60,923) -- -- (60,923)
Income tax expense (7,279) (5,744) -- (13,023)
----------- --------- --------- -----------
Loss before minority interest (833,192) (19,748) 19,921 (833,019)
Minority interest 1 (173) -- (172)
----------- --------- --------- -----------
Net loss $ (833,191) $ (19,921) $ 19,921 $ (833,191)
=========== ========= ========= ===========
(1) Excluding contractual interest of $60,756 for Entities in Reorganization
Proceedings
79
CONDENSED COMBINED CONSOLIDATING BALANCE SHEET
AS OF AUGUST 31, 2000
ENTITIES IN ENTITIES NOT IN
REORGANIZATION REORGANIZATION CONSOLIDATED
In thousands PROCEEDINGS PROCEEDINGS ELIMINATIONS TOTALS
- ---------------------------------- -------------- --------------- ------------ ------------
ASSETS:
Current assets $ 443,563 $ 78,260 $ -- $ 521,823
Intercompany receivables 57,370 -- (57,370) --
Property, plant and equipment, net 662,288 110,587 -- 772,875
Investment in subsidiaries 8,954 -- (8,954) --
Intangible assets, net 1,735,390 62,895 -- 1,798,285
Other assets 36,698 2,187 -- 38,885
---------- -------- -------- ----------
$2,944,263 $253,929 $(66,324) $3,131,868
========== ======== ======== ==========
LIABILITIES:
Current liabilities $ 257,499 $ 99,580 $ -- $ 357,079
Intercompany payables -- 57,370 (57,370) --
Non-current liabilities 299,617 87,873 -- 387,490
Liabilities subject to compromise 2,500,973 -- -- 2,500,973
Minority interest 1,144 152 -- 1,296
STOCKHOLDERS' EQUITY (DEFICIT) (114,970) 8,954 (8,954) (114,970)
---------- -------- -------- ----------
$2,944,263 $253,929 $(66,324) $3,131,868
========== ======== ======== ==========
CONDENSED COMBINED CONSOLIDATING STATEMENT OF CASH FLOWS
YEAR ENDED AUGUST 31, 2000
ENTITIES IN ENTITIES NOT IN
REORGANIZATION REORGANIZATION CONSOLIDATED
In thousands PROCEEDINGS PROCEEDINGS TOTALS
- ---------------------------------------------------------- -------------- --------------- ------------
Net cash provided by (used in) operating activities $(61,419) $ 2,532 $(58,887)
-------- -------- --------
Cash flows from investing activities:
Cash expended on acquisition of businesses (15,152) (11,920) (27,072)
Proceeds from sales of property, plant and equipment 9,794 204 9,998
Purchases of property, plant and equipment (43,692) (9,406) (53,098)
Decrease (increase) in long-term investments 16,758 (4,975) 11,783
Proceeds from sale of business 31,581 -- 31,581
-------- -------- --------
Net cash provided by (used in) investing activities (711) (26,097) (26,808)
-------- -------- --------
Cash flows from financing activities:
Issuance of common stock upon exercise of stock options 26 -- 26
Borrowings of long-term debt 235,545 17,152 252,697
Repayments of long-term debt (60,933) (6,221) (67,154)
Bank financing fees and expenses (4,047) -- (4,047)
Bank overdraft (24,739) (20,505) (45,244)
Change in derivative liabilities 21,759 -- 21,759
Change in intercompany accounts (39,054) 39,054 --
Change in other, net 146 -- 146
-------- -------- --------
Net cash provided by (used in) financing activities 128,703 29,480 158,183
-------- -------- --------
Effect of exchange rate changes on cash -- 1,722 1,722
-------- -------- --------
Net increase (decrease) in cash and cash equivalents 66,573 7,637 74,210
Cash and cash equivalents at:
Beginning of year 7,661 2,411 10,072
-------- -------- --------
End of year $ 74,234 $ 10,048 $ 84,282
======== ======== ========
80
27. SUMMARIZED FINANCIAL INFORMATION OF GUARANTOR/NON-GUARANTOR
In connection with the acquisition of Old Safety-Kleen, Safety-Kleen Services,
Inc. issued the 1998 Notes (see Note 10). The 1998 Notes are jointly and
severally guaranteed by Safety-Kleen and all wholly-owned domestic subsidiaries
on a full and unconditional basis. No foreign direct or indirect subsidiary or
non-wholly-owned domestic subsidiary is an obligor or guarantor on the
financing. Separate financial statements and other disclosures concerning each
of Safety-Kleen Services, Inc. and the subsidiary guarantors are not presented
because management believes they are not material to investors. Summarized
financial information for the Company on a combined basis is set forth below.
CONDENSED COMBINED CONSOLIDATING STATEMENT OF OPERATIONS
YEAR ENDED AUGUST 31, 2001
SUBSIDIARY
SAFETY-KLEEN SAFETY-KLEEN SUBSIDIARY NON- CONSOLIDATED
In thousands CORP. SERVICES, INC. GUARANTORS GUARANTORS ELIMINATIONS TOTALS
- --------------------------------- ------------ -------------- ---------- ---------- ------------ ------------
Revenues $ -- $ 50 $1,394,778 $208,279 $(88,524) $1,514,583
Operating expenses 234 26,309 1,560,332 184,568 (88,524) 1,682,919
--------- --------- ---------- -------- -------- ----------
Operating income (loss) (234) (26,259) (165,554) 23,711 -- (168,336)
Interest (expense) income, net(1) 156 (399) 1,950 (6,743) -- (5,036)
Other income -- -- (1,044) (514) -- (1,558)
Equity in earnings of associated
companies (229,539) (169,124) -- -- 398,663 --
--------- --------- ---------- -------- -------- ----------
Loss before reorganization
items, income taxes and
minority interest (229,617) (195,782) (164,648) 16,454 398,663 (174,930)
Reorganization items (33) (40,639) (1,612) -- -- (42,284)
Income tax (expense) benefit 572 7,207 (16,472) (9,181) -- (17,874)
--------- --------- ---------- -------- -------- ----------
Loss before minority interest (229,078) (229,214) (182,732) 7,273 398,663 (235,088)
Minority interest -- -- -- 419 -- 419
--------- --------- ---------- -------- -------- ----------
Loss before extraordinary items (229,078) (229,214) (182,732) 7,692 398,663 (234,669)
Extraordinary (loss) gain -- (325) 5,916 -- -- 5,591
--------- --------- ---------- -------- -------- ----------
Net income (loss) $(229,078) $(229,539) $ (176,816) $ 7,692 $398,663 $ (229,078)
========= ========= ========== ======== ======== ==========
(1) Excluding combined contractual interest of $245,436 for Safety-Kleen Corp.,
Safety-Kleen Services, Inc. and Subsidiary Guarantors.
81
CONDENSED COMBINED CONSOLIDATING BALANCE SHEET
AS OF AUGUST 31, 2001
SUBSIDIARY
SAFETY-KLEEN SAFETY-KLEEN SUBSIDIARY NON- CONSOLIDATED
In thousands CORP. SERVICES, INC. GUARANTORS GUARANTORS ELIMINATIONS TOTALS
- ------------------------------ ------------ -------------- ----------- ---------- ------------ ------------
ASSETS:
Current assets $ 165 $ 60,066 $ 338,665 $ 94,520 $ -- $ 493,416
Intercompany receivables 338,727 2,653,522 -- -- (2,992,249) --
Property, plant and equipment,
net -- 16,720 653,123 93,760 -- 763,603
Investment in subsidiaries (318,614) (982,969) -- -- 1,301,583 --
Intangible assets, net -- 37 1,646,669 81,278 -- 1,727,984
Other assets -- 608 26,662 1,520 -- 28,790
--------- ---------- ----------- -------- ----------- ----------
20,278 1,747,984 2,665,119 271,078 (1,690,666) 3,013,793
========= ========== =========== ======== =========== ==========
LIABILITIES:
Current liabilities 2 78,886 232,479 94,960 -- 406,327
Intercompany payables -- -- 2,938,941 53,308 (2,992,249) --
Non-current liabilities -- 56,299 331,525 83,103 -- 470,927
Liabilities subject to
compromise 365,958 1,930,792 181,313 3,211 -- 2,481,274
Minority interests -- 621 617 (291) -- 947
STOCKHOLDERS'
EQUITY (DEFICIT) (345,682) (318,614) (1,019,756) 36,787 1,301,583 (345,682)
--------- ---------- ----------- -------- ----------- ----------
$ 20,278 $1,747,984 $ 2,665,119 $271,078 $(1,690,666) $3,013,793
========= ========== =========== ======== =========== ==========
CONDENSED COMBINED CONSOLIDATING STATEMENT OF CASH FLOWS
YEAR ENDED AUGUST 31, 2001
SAFETY-KLEEN SUBSIDIARY
SAFETY-KLEEN SERVICES, SUBSIDIARY NON- CONSOLIDATED
In thousands CORP. INC. GUARANTORS GUARANTORS TOTALS
- ---------------------------------------------------- ------------ ------------ ---------- ---------- ------------
Net cash provided by (used in) operating activities $(6,766) $ 52,276 $ 28,970 $ 25,445 $ 99,925
------- -------- -------- -------- --------
Cash flows from investing activities:
Proceeds from sales of property, plant and
equipment -- -- 4,766 443 5,209
Purchases of property, plant and equipment -- (1,420) (63,988) (5,924) (71,332)
Proceeds from sale of investments 497 -- 8,036 313 8,846
------- -------- -------- -------- --------
Net cash provided by (used in) investing activities 497 (1,420) (51,186) (5,168) (57,277)
------- -------- -------- -------- --------
Cash flows from financing activities:
Repayments of long-term debt -- -- (10,080) -- (10,080)
Change in intercompany accounts 6,375 (44,374) 26,667 11,332 --
------- -------- -------- -------- --------
Net cash provided by (used in) financing activities 6,375 (44,374) 16,587 11,332 (10,080)
------- -------- -------- -------- --------
Effect of exchange rate changes on cash (2,131) -- -- 1,338 (793)
------- -------- -------- -------- --------
Net increase (decrease) in cash and cash equivalents (2,025) 6,482 (5,629) 32,947 31,775
------- -------- -------- -------- --------
Cash and cash equivalents at:
Beginning of year 2,153 63,880 8,201 10,048 84,282
------- -------- -------- -------- --------
End of year $ 128 $ 70,362 $ 2,572 $ 42,995 $116,057
======= ======== ======== ======== ========
82
CONDENSED COMBINED CONSOLIDATING STATEMENT OF OPERATIONS
YEAR ENDED AUGUST 31, 2000
SAFETY-KLEEN SUBSIDIARY
SAFETY-KLEEN SERVICES, SUBSIDIARY NON- CONSOLIDATED
In thousands CORP. INC. GUARANTORS GUARANTORS ELIMINATIONS TOTALS
- --------------------------------- ------------ ------------ ----------- ---------- ------------ ------------
Revenues $ -- $ 5,233 $ 1,516,202 $ 241,971 $ (177,133) $ 1,586,273
Operating expenses (323) 107,990 2,014,995 260,914 (177,133) 2,206,443
--------- --------- ----------- --------- ----------- -----------
Operating income (loss) 323 (102,757) (498,793) (18,943) -- (620,170)
Interest (expense) income, net(1) (28,110) 126,346 (235,129) (4,986) -- (141,879)
Other income -- 713 573 (79) -- 1,207
Equity in earnings of
associated companies (805,146) (831,906) -- -- 1,638,821 1,769
--------- --------- ----------- --------- ----------- -----------
Loss before reorganization items,
income taxes and minority
interest (832,933) (807,604) (733,349) (24,008) 1,638,821 (759,073)
Reorganization items -- -- (60,923) -- -- (60,923)
Income tax (expense) benefit (258) 2,458 (9,479) (5,744) -- (13,023)
--------- --------- ----------- --------- ----------- -----------
Loss before minority interest (833,191) (805,146) (803,751) (29,752) 1,638,821 (833,019)
Minority interest -- -- 1 (173) -- (172)
--------- --------- ----------- --------- ----------- -----------
Net loss $(833,191) $(805,146) $ (803,750) $ (29,925) $ 1,638,821 $ (833,191)
========= ========= =========== ========= =========== ===========
(1) Excluding combined contractual interest of $60,756 for Safety-Kleen Corp.,
Safety-Kleen Services, Inc. and Subsidiary Guarantors.
CONDENSED COMBINED CONSOLIDATING BALANCE SHEET
AS OF AUGUST 31, 2000
SUBSIDIARY
SAFETY-KLEEN SAFETY-KLEEN SUBSIDIARY NON- CONSOLIDATED
In thousands CORP. SERVICES, INC. GUARANTORS GUARANTORS ELIMINATIONS TOTALS
- ---------------------------------- ------------ -------------- ---------- ---------- ------------ ------------
ASSETS:
Current assets $ 42,657 $ 30,555 $ 368,903 $ 79,708 $ -- $ 521,823
Intercompany receivables 280,765 2,752,517 -- -- (3,033,282) --
Property, plant and equipment, net -- 27,730 634,918 110,227 -- 772,875
Investment in subsidiaries (87,323) (812,211) 4,356 -- 895,178 --
Intangible assets, net -- 58,565 1,669,182 70,538 -- 1,798,285
Other assets -- 3,107 33,591 2,187 -- 38,885
--------- ---------- ---------- -------- ----------- ----------
$ 236,099 $2,060,263 $2,710,950 $262,660 $(2,138,104) $3,131,868
========= ========== ========== ======== =========== ==========
LIABILITIES:
Current liabilities $ 22,946 $ 27,803 $ 208,120 $ 98,210 $ -- $ 357,079
Intercompany payables -- -- 2,976,112 57,170 (3,033,282) --
Non-current liabilities (22,081) 258,314 63,784 87,473 -- 387,490
Liabilities subject to compromise 350,204 1,860,848 289,216 705 -- 2,500,973
Minority interest -- 621 523 152 -- 1,296
STOCKHOLDERS'
EQUITY (DEFICIT) (114,970) (87,323) (826,805) 18,950 895,178 (114,970)
--------- ---------- ---------- -------- ----------- ----------
$ 236,099 $2,060,263 $2,710,950 $262,660 $(2,138,104) $3,131,868
========= ========== ========== ======== =========== ==========
83
CONDENSED COMBINED CONSOLIDATING STATEMENT OF CASH FLOWS
YEAR ENDED AUGUST 31, 2000
SAFETY-KLEEN SUBSIDIARY
SAFETY-KLEEN SERVICES, SUBSIDIARY NON- CONSOLIDATED
In thousands CORP. INC. GUARANTORS GUARANTORS TOTALS
- ------------------------------------------------------ ------------ ------------ --------- ----------- ------------
Net cash provided by (used in) operating activities $ 14,313 $ 143,263 $(214,846) $ (1,617) $(58,887)
-------- --------- --------- -------- --------
Cash flows from investing activities:
Cash expended on acquisition of businesses -- -- (15,152) (11,920) (27,072)
Proceeds from sales of property, plant and equipment -- 106 9,688 204 9,998
Purchases of property, plant and equipment -- (9,314) (34,377) (9,407) (53,098)
Decrease (increase) in long-term investments -- 10,460 6,298 (4,975) 11,783
Proceeds from sale of business -- -- 31,581 -- 31,581
-------- --------- --------- -------- --------
Net cash provided by (used in) investing activities -- 1,252 (1,962) (26,098) (26,808)
-------- --------- --------- -------- --------
Cash flows from financing activities:
Issuance of common stock on exercise of options 26 -- -- -- 26
Borrowings of long-term debt -- 227,000 8,545 17,152 252,697
Repayments of long-term debt -- (54,129) (6,804) (6,221) (67,154)
Bank financing fees (222) -- (3,825) -- (4,047)
Bank overdraft -- (24,739) -- (20,505) (45,244)
Change in derivative liabilities -- 21,759 -- -- 21,759
Change in other, net 146 -- -- -- 146
Change in intercompany accounts (34,605) (223,339) 214,741 43,203 --
-------- --------- --------- -------- --------
Net cash provided by (used in) financing activities (34,655) (53,448) 212,657 33,629 158,183
-------- --------- --------- -------- --------
Effect of exchange rate changes on cash -- -- -- 1,722 1,722
-------- --------- --------- -------- --------
Net increase (decrease) in cash and cash equivalents (20,342) 91,067 (4,151) 7,636 74,210
-------- --------- --------- -------- --------
Cash and cash equivalents at:
Beginning of year 22,495 (27,187) 12,352 2,412 10,072
-------- --------- --------- -------- --------
End of year $ 2,153 $ 63,880 $ 8,201 $ 10,048 $ 84,282
======== ========= ========= ======== ========
84
CONDENSED COMBINED CONSOLIDATING STATEMENT OF OPERATIONS
YEAR ENDED AUGUST 31, 1999
SAFETY-KLEEN SUBSIDIARY
SAFETY-KLEEN SERVICES, SUBSIDIARY NON- CONSOLIDATED
In thousands CORP. INC. GUARANTORS GUARANTORS ELIMINATIONS TOTALS
- -------------------------------- ------------ ------------ ----------- ---------- ------------ ------------
Revenues $ -- $ 403 $ 1,524,512 $243,339 $(144,216) $1,624,038
Operating expenses 14,677 47,750 1,474,720 224,231 (144,216) 1,617,162
--------- --------- ----------- -------- --------- ----------
Operating income (loss) (14,677) (47,347) 49,792 19,108 -- 6,876
Interest (expense) income, net (19,604) 81,224 (243,986) (3,814) -- (186,180)
Other income (expense) -- (5,923) 9 (1,317) -- (7,231)
Equity in earnings of associated
companies (181,962) (222,247) 1,263 -- 404,209 1,263
--------- --------- ----------- -------- --------- ----------
Loss before income taxes
and minority interest (216,243) (194,293) (192,922) 13,977 404,209 (185,272)
Income tax (expense) benefit (6,912) 12,331 (33,382) (11,131) -- (39,094)
--------- --------- ----------- -------- --------- ----------
Income (loss) before minority
interest (223,155) (181,962) (226,304) 2,846 404,209 (224,366)
Minority interest -- -- 1,197 14 -- 1,211
--------- --------- ----------- -------- --------- ----------
Net income (loss) $(223,155) $(181,962) $ (225,107) $ 2,860 $ 404,209 $ (223,155)
========= ========= =========== ======== ========= ==========
85
CONDENSED COMBINED CONSOLIDATING STATEMENT OF CASH FLOWS
YEAR ENDED AUGUST 31, 1999
SAFETY-KLEEN SUBSIDIARY
SAFETY-KLEEN SERVICES, SUBSIDIARY NON- CONSOLIDATED
In thousands CORP. INC. GUARANTORS GUARANTORS TOTALS
- ----------------------------------------------------- ------------ ------------ ---------- ---------- ------------
Net cash provided by (used in) operating activities $ 28,982 $ 277,722 $(341,114) $ 52,944 $ 18,534
--------- --------- --------- -------- ---------
Cash flows from investing activities:
Cash expended on acquisition of businesses -- -- (14,904) -- (14,904)
Proceeds from sales of property, plant and equipment -- 725 5,051 206 5,982
Purchases of property, plant and equipment -- (17,965) (40,263) (13,599) (71,827)
Decrease (increase) in long-term investments -- (10,460) (25,823) 38,066 1,783
Proceeds from sale of business -- -- 129,124 -- 129,124
--------- --------- --------- -------- ---------
Net cash provided by (used in) investing activities -- (27,700) 53,185 24,673 50,158
--------- --------- --------- -------- ---------
Cash flows from financing activities:
Issuance of common stock on exercise of options 212 -- -- -- 212
Borrowings of long-term debt 225,000 1,460 10,450 -- 236,910
Repayment of long-term debt (200,000) (164,678) (2,128) (10,619) (377,425)
Bank financing fees (5,936) (4,367) -- -- (10,303)
Bank overdraft -- 20,767 -- 19,006 39,773
Change in derivative liabilities -- 42,492 (2,038) -- 40,454
Change in intercompany accounts (25,763) (172,883) 291,266 (92,620) --
--------- --------- --------- -------- ---------
Net cash provided by (used in) financing activities (6,487) (277,209) 297,550 (84,233) (70,379)
--------- --------- --------- -------- ---------
Effect of exchange rate changes on cash -- -- -- (3,564) (3,564)
--------- --------- --------- -------- ---------
Net increase (decrease) in cash and cash equivalents 22,495 (27,187) 9,621 (10,180) (5,251)
Cash and cash equivalents at:
Beginning of year -- -- 2,731 12,592 15,323
--------- --------- --------- -------- ---------
End of year $ 22,495 $ (27,187) $ 12,352 $ 2,412 $ 10,072
========= ========= ========= ======== =========
86
28. QUARTERLY CONSOLIDATED RESULTS OF OPERATIONS (UNAUDITED)
As discussed in Note 2, the Company contracted with outside accountants,
including those from Arthur Andersen LLP, who provided significant hours of work
to assist the Company's corporate and field accounting personnel with the
analysis and financial reporting necessary to prepare the Company's fiscal 2000
Consolidated Financial Statements, related disclosures and other information
requirements of the Form 10-K/A for fiscal 2000. This effort included a
comprehensive review of substantially all of the accounts and resulted in a
large number of adjustments affecting each of the respective periods. While the
Company believes the adjustments have been reflected in the appropriate annual
fiscal period, the Company has not undertaken the extraordinary effort and
additional time and cost required to apply all of the adjustments to the
appropriate interim fiscal quarter. Therefore, the quarterly financial
information required by Item 302 of Regulation S-K relating to fiscal 2000
periods has not been included in this filing.
The quarterly financial results for fiscal 2001 are summarized as follows (in
thousands, except for per share data)
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
-------- -------- -------- --------
Revenues $376,917 $369,875 $374,615 $393,176
Impairments and other charges 9,476 35,297 -- 8,111
Operating loss (47,087) (66,997) (45,887) (8,365)
Other income (expenses), net (230) (329) 448 (889)
Reorganization items (9,400) (9,814) (5,467) (17,603)
Loss before income taxes, minority interest and (58,977) (78,430) (51,781) (28,026)
extraordinary items
Income tax (expense) benefit 670 (1,048) (2,041) (15,455)
Minority interest (45) (53) (20) 537
Extraordinary items 685 1,793 3,309 (196)
Net loss (57,667) (77,738) (50,533) (43,140)
Net loss per share - basic and diluted $ (0.57) $ (0.77) $ (0.50) $ (0.43)
The Company recorded certain adjustments in fiscal 2001, which related to
periods prior to fiscal 2001. Theses adjustments, which decreased the fiscal
2001 annual net loss by approximately $3.2 million, related primarily to
environmental, severance, and benefit related liabilities, the elimination of
certain intercompany transactions, adjustments to reported amounts related to
the Company's parts cleaner service machines, and the correction of certain
asset impairment charges recorded in fiscal 2000. The effect of these
adjustments to the Company's quarterly financial results summarized above was to
increase the net loss reported in the first, second and third quarters by $8.0
million, $2.8 million and $0.6 million, respectively; and to decrease the fourth
quarter net loss by $14.6 million.
The Company does not believe these adjustments are material to the annual
financial results in fiscal 2001 or fiscal 2000.
87
29. SUBSEQUENT EVENTS
AGREEMENT TO SELL THE CHEMICAL SERVICES DIVISION
On February 22, 2002, the Company entered into a definitive agreement with Clean
Harbors, Inc. ("Clean Harbors") to sell its Chemical Services Division,
excluding the Company's landfill in Pinewood, S.C. Pursuant to the terms of the
agreement, Clean Harbors would purchase the Chemical Services Division's net
assets from the Company for $46 million in cash, subject to defined working
capital adjustments, and the assumption of certain liabilities, which includes
environmental liabilities valued at approximately $265 million as of August 31,
2001. The book value of the net assets to be sold, net of the liabilities to be
assumed, at August 31, 2001 was in excess of $300 million. On March 8, 2002, the
Bankruptcy Court approved the bidding and auction procedures for the sale of the
Company's Chemical Services Division. Pursuant to the bidding procedures, all
qualified bidders interested in purchasing some or all of the Chemical Services
Division must submit an alternative qualified bid on or before May 30, 2002.
There can be no assurance that the Bankruptcy Court and/or the various
regulatory agencies will approve the sale of the Chemical Services Division to
Clean Harbors or an alternative purchaser, or that the Company will be able to
complete the sale of the Chemical Services Division.
DIP FACILITY
On March 20, 2002, the Bankruptcy Court approved a $200 million Second Amended
and Restated Debtor-in-Possession Credit Facility (the "Second DIP Facility").
The Second DIP Facility extends the maturity date of the First DIP Facility
until the earlier of March 22, 2003, or the effective date of a plan or plans of
reorganization. In addition, it reduces the aggregate amount of borrowings
available from $100 million to $75 million, which continues to be subject to
borrowing base limitations ("Tranche A"). The Second DIP Facility also creates a
new tranche under the credit facility in the amount of $125 million ("Tranche
B"). Tranche B is available for cash borrowings and letters of credit, and has
the same maturity date as Tranche A.
Proceeds from Tranche A or Tranche B may be used for general corporate purposes.
Tranche A is available for letters of credit or cash borrowings, with a
sub-limit of $45 million available for environmental letters of credit. The
letter of credit sub-limit under Tranche B is $50 million, and there is a
further sub-limit of $40 million available for environmental letters of credit,
including the replacement of certain existing cash collateral pledged to support
financial assurance with respect to certain facilities.
Tranche A letters of credit are priced at 3% per annum (plus a fronting fee of
0.25% to the Agent) on the outstanding face amount of each letter of credit. In
addition, the Debtors pay a commitment fee of 0.50% per annum on the unused
amount of Tranche A, payable monthly in arrears. Tranche B letters of credit are
priced at 12% per annum (plus a fronting fee of 0.25% to the Agent) on the
outstanding face amount of each letter of credit, payable monthly in arrears. In
addition, the Debtors pay a commitment fee of 2.5% on the unused amount of
Tranche B letters of credit.
Interest charged for cash borrowings under Tranche A is the greater of Prime
Rate plus 1% per annum and the Fed Funds Rate plus 0.5% per annum, or LIBOR plus
3% per annum, depending on the nature of the borrowings. Interest charged for
cash borrowings under Tranche B is the greater of Prime Rate plus an applicable
margin of 7.25%, or 12% per annum. Beginning September 1, 2002, the applicable
margin on Tranche B cash borrowings increases monthly by 0.5% per annum. The
Debtors are also required to pay as additional interest, paid in kind, a fee
equal to 3% of the average daily outstanding Tranche B cash borrowings,
compounded and accrued monthly, and fully payable upon the termination of the
Second DIP Facility, provided that, if the termination does not occur prior to
September 1, 2002, the amount of such fee increases each month by 1% per annum.
The commitment fee on Tranche B is calculated at a rate equal to 4% per annum on
the average daily unused cash portion of Tranche B, payable monthly in arrears.
In addition, the Debtors are required to pay an extension fee on the Tranche B
commitments, payable as follows, if the Second DIP Facility remains outstanding
at such dates: 1.2% on September 1, 2002; 1.2% on December 1, 2002 and 1.2% on
March 22, 2003.
Under the provisions of the Second DIP Facility, the Debtors are required to
establish a $5 million interest escrow account. Tranche A and Tranche B fees and
interest will be paid from this account. On the earlier of depletion of the
escrowed funds or six months after the closing date of the Second DIP Facility,
additional funds must be deposited in the escrow account in order to assure that
$5 million will be escrowed for this same purpose.
In the event of the sale of the Company's Chemical Services Division, the net
proceeds, after reserves for certain selling expenses, interest and fees on the
Second DIP facility, shall be applied to prepay the Tranche B loans and the
availability under Tranche B will be reduced by $17 million. Net proceeds of
certain other asset sales, after reserves for certain selling expenses, interest
and fees on the Second DIP facility, are to be used to prepay Tranche A and then
Tranche B.
The Second DIP Facility benefits from superpriority claim status as provided for
under the Bankruptcy Code. Under the Bankruptcy Code, a superpriority claim is
senior to unsecured pre-petition claims and all other administrative expenses
incurred in a Chapter 11 case. As security, the Second DIP Facility lenders were
granted certain priority, perfected liens on certain of the Debtors' assets.
Pursuant to the final order approving the Second DIP Facility, such liens are
not subordinate to or pari passu with any other lien or security interest (other
than (a) liens for certain administrative expenses and (b) liens in favor of
Safety-Kleen's Chief Executive Officer). The Debtors are jointly and severally
liable under the Second DIP Facility.
88
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON FINANCIAL STATEMENT SCHEDULE
To Safety-Kleen Corp.:
We have audited, in accordance with auditing standards generally accepted in the
United States, the Consolidated Financial Statements of Safety-Kleen Corp. and
subsidiaries included in this Form 10-K/A, and have issued our report thereon
dated February 28, 2002, except with respect to the matters discussed in Note
29, as to which the date is March 20, 2002. Our audits were made for the purpose
of forming an opinion on those statements taken as a whole. The schedule listed
in Item 14 of this Form 10-K/A is the responsibility of the Company's management
and is presented for purposes of complying with the Securities and Exchange
Commission's rules and is not part of the basic financial statements. This
schedule has been subjected to the auditing procedures applied in the audits of
the basic financial statements and, in our opinion, fairly states in all
material respects the financial data required to be set forth therein in
relation to the basic financial statements taken as a whole.
/S/ ARTHUR ANDERSEN LLP
Charlotte, North Carolina
February 28, 2002
89
SAFETY-KLEEN CORP.
SCHEDULE II -VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED AUGUST 31, 2001, 2000 AND 1999
CHARGE TO
BALANCE AT COSTS CHARGED BALANCE
BEGINNING AND TO OTHER AT END
DESCRIPTION (IN THOUSANDS) OF YEAR EXPENSES ACCOUNTS(A) DEDUCTIONS(B) OF YEAR
- ------------------------------------ ---------- --------- ----------- ------------- --------
Fiscal year ended August 31, 2001:
Allowance for uncollectible accounts $85,253 $13,505 $ (896) $(27,912) $69,950
Fiscal year ended August 31, 2000:
Allowance for uncollectible accounts $20,074 $74,337 $ (855) $ (8,303) $85,253
Fiscal year ended August 31, 1999:
Allowance for uncollectible accounts $10,940 $14,177 $4,151 $ (9,194) $20,074
(a) Reclassifications to/from other accounts
(b) Uncollectible amounts written off
90
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
FINANCIAL STATEMENTS AND SCHEDULES
See Index to Consolidated Financial Statements and Supplementary Data on
page 30.
EXHIBITS FILED
Exhibits required to be filed with this Annual Report on Form 10-K/A are
listed in the following Exhibit Index.
FORM 8-K
i. The Company filed a Current Report on Form 8-K on July 10, 2001, which
contained Item 5 and Item 7 related to the Company announcing the
issuance of the audited fiscal year 2000 Consolidated Financial
Statements and restatement and audit of fiscal years 1997 - 1999
Consolidated Financial Statements.
ii. The Company filed a Current Report on Form 8-K on August 13, 2001,
which contained Item 5 related to the status of insurance required to
cover closure, post-closure and correction action insurance for the
Company's facilities.
iii. The Company filed a Current Report on Form 8-K on August 15, 2001,
which contained Item 5 related to the Company announcing the
appointment of Ronald A. Rittenmeyer to the positions of Chairman,
Chief Executive Officer and President of the Company.
91
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this amendment to report to be signed on its behalf
by the undersigned, thereunto duly authorized.
DATE: March 27, 2002 SAFETY-KLEEN CORP.
-------------------------
(Registrant)
/s/ Larry W. Singleton
-------------------------
Larry W. Singleton
Chief Financial Officer
92
EXHIBIT INDEX
(3)(a) Restated Certificate of Incorporation of the Company dated May 13, 1997
and Amendment to Certificate of Incorporation dated May 15, 1997,
Certificate of Correction Filed to Correct a Certain Error in the
Restated and Amended Certificate of Incorporation of the Company dated
October 15, 1997, Certificate of Amendment to the Restated Certificate
of Incorporation of the Company dated November 25, 1998, and
Certificate of Amendment to the Restated Certificate of Incorporation
of the Company dated November 30, 1998, all filed as Exhibit (3)(a) to
the Registrant's Form 10-Q for the three months ended February 28,
2001, and incorporated herein by reference.
(3)(b) Amended and Restated Bylaws of the Company, filed as Exhibit(3)(b) to
the Registrant's Form 10-K for the year ended August 31, 2000,
and incorporated herein by reference.
(4)(a) Indenture dated as of May 29, 1998 between LES, Inc. (a subsidiary of
the Registrant), Registrant, subsidiary guarantors of the Registrant
and The Bank of Nova Scotia Trust Company of New York, as trustee filed
as Exhibit 4(b) to the Registrant's Form S-4 Registration Statement No.
333-57587 filed June 24, 1998 and incorporated herein by reference.
(4)(b) First Supplemental Indenture effective as of November 15, 1998 among
Safety-Kleen Services, Inc. the Registrant, SK Europe, Inc. and The
Bank of Nova Scotia Trust Company of New York, as trustee filed as
Exhibit (4)(f) to the Registrant's Form S-4 Registration Statement No.
333-82689 filed July 12, 1999 and incorporated herein by reference.
(4)(c) Second Supplemental Indenture effective as of May 7, 1999 among
Safety-Kleen Services, Inc. the Company, SK Services, L.C., SK Services
(East), L.C. and The Bank of Nova Scotia Trust Company of New York, as
trustee filed as Exhibit (4)(d) to the Company's Form 10-K filed
October 29, 1999 and incorporated herein by reference.
(4)(d) Indenture dated as of May 17, 1999 between the Company and the Bank of
Nova Scotia Trust Company of New York, as trustee filed as Exhibit
(4)(b) to the Registrant's Form S-4 Registration Statement No.
333-82689 filed July 12, 1999 and incorporated herein by reference.
(4)(e) Amended and Restated Credit Agreement among Laidlaw Chem-Waste, Inc.,
Laidlaw Environmental Services (Canada) Ltd., Toronto Dominion (Texas)
Inc., The Toronto-Dominion Bank, TD Securities (USA) Inc., The Bank of
Nova Scotia, NationsBank, N.A. and The First National Bank of Chicago
and NationsBank, N.A. as Syndication Agent dated as of April 3, 1998,
filed as Exhibit 4(f) to the Registrant's Form 10-Q for the three
months ended February 28, 1999 and incorporated herein by reference.
(4)(f) Supplement to the Amended and Restated Credit Agreement among Laidlaw
Chem-Waste, Inc., Laidlaw Environmental Services (Canada) Ltd., Toronto
Dominion (Texas) Inc., The Toronto-Dominion Bank, TD Securities (USA)
Inc., The Bank of Nova Scotia, NationsBank, N.A. and The First National
Bank of Chicago and NationsBank, N.A. as Syndication Agent dated as of
April 3, 1998, filed as Exhibit 4(e) to a subsidiary of the
Registrant's Form S-4 Registration Statement No. 333-57587 filed June
24, 1998 and incorporated herein by reference.
(4)(g) Waiver and First Amendment to the Amended and Restated Credit Agreement
dated as of May 15, 1998 among LES, Inc., Laidlaw Environmental
Services(Canada) Ltd., the Lenders, Toronto Dominion (Texas), Inc., The
Toronto Dominion Bank, TD Securities (USA) Inc., The Bank of Nova
Scotia, NationsBank, N.A., The First National Bank of Chicago and
Wachovia Bank filed as Exhibit 4(f) to a subsidiary of the Registrant's
Form S-4 Registration Statement No. 333-57587 filed June 24, 1998 and
incorporated herein by reference.
(4)(h) Commitment to Increase Supplement to the Amended and Restated Credit
Agreement dated as of June 3, 1998 among LES, Inc., Laidlaw
Environmental Services (Canada) Ltd., the Lenders, Toronto Dominion
(Texas), Inc., The Toronto Dominion Bank, TD Securities (USA) Inc., The
Bank of Nova Scotia, NationsBank, N.A., The First National Bank of
Chicago and Wachovia Bank filed as Exhibit 4(g) to a subsidiary of the
Registrant's Form S-4 Registration Statement No. 333-57587 filed June
24, 1998 and incorporated herein by reference.
(4)(i) Second Amendment to the Amended and Restated Credit Agreement dated as
of November 20, 1998 among Safety-Kleen Services, Inc. (formerly known
as LES, Inc.), Safety-Kleen Services (Canada) Ltd. (formerly known as
Laidlaw Environmental Services (Canada) Ltd.), the Lenders, Toronto
Dominion (Texas), Inc., The Toronto Dominion Bank, TD Securities (USA)
Inc., The Bank of Nova Scotia, NationsBank, N.A., The First National
Bank of Chicago and Wachovia Bank N.A., filed as Exhibit (4)(j) to the
Registrant's Form 10-Q for the three months ended February 28, 1999 and
incorporated herein by reference.
(4)(j) Waiver and Third Amendment to the Amended and Restated Credit Agreement
dated as of May 6, 1999 among Safety-Kleen Services, Inc. (formerly
known as LES, Inc.), Safety-Kleen Services (Canada) Ltd. (formerly
known as Laidlaw Environmental Services (Canada) Ltd.), the Lenders,
Toronto Dominion (Texas), Inc., The Toronto Dominion Bank, TD
Securities (USA) Inc., The Bank of Nova Scotia, NationsBank, N.A., The
First National Bank of Chicago and Wachovia Bank N.A. filed as Exhibit
(4)(l) to the Registrant's Form S-4 Registration Statement No.
333-82689 filed July 12, 1999 and incorporated herein by reference.
95
(4)(k) Fourth Amendment dated as of March 13, 2000 to the Amended and Restated
Credit Agreement dated as of May 6, 1999 among Safety-Kleen Services,
Inc. (formerly known as LES, Inc.), Safety-Kleen Services (Canada) Ltd.
(formerly known as Laidlaw Environmental Services (Canada) Ltd.), the
Lenders, Toronto Dominion (Texas), Inc., The Toronto Dominion Bank, TD
Securities (USA) Inc., The Bank of Nova Scotia, NationsBank, N.A., The
First National Bank of Chicago and Wachovia Bank N.A. filed as Exhibit
(4)(l) to the Registrant's Form 10-Q for the three months ended May 31,
2000 and incorporated herein by reference.
(4)(l) Consent dated as of March 16, 2000 to the Amended and Restated Credit
Agreement dated as of May 6, 1999 among Safety-Kleen Services, Inc.
(formerly known as LES, Inc.), Safety-Kleen Services (Canada) Ltd.
(formerly known as Laidlaw Environmental Services (Canada) Ltd.), the
Lenders, Toronto Dominion (Texas), Inc., The Toronto Dominion Bank, TD
Securities (USA) Inc., The Bank of Nova Scotia, NationsBank, N.A., The
First National Bank of Chicago and Wachovia Bank N.A. filed as Exhibit
(4)(m) to the Registrant's Form 10-Q for the three months ended May 31,
2000 and incorporated herein by reference.
(4)(m) Second Amended and Restated $200 million Debtor In Possession Credit
Agreement among Safety-Kleen Services, Inc., The Several Lenders from
Time to Time Parties thereto, Toronto Dominion (Texas), Inc., as
General Administrative Agent and Underwriter, Goldman Sachs Credit
Partners, L.P., as Co-Arranger and Underwriter, and The CIT
Group/Business Credit, Inc., as Collateral Agent and Underwriter dated
as of March 22, 2002.
(4)(n) Letter Agreement among Toronto Dominion (Texas), Inc., as
administrative agent, the Company and Safety-Kleen Systems, Inc. dated
December 12, 2000 relating to the Amended and Restated Marketing and
Distribution Agreement by Safety-Kleen Systems, Inc. and System One
Technologies Inc., filed as Exhibit (4)(o) to the Registrant's Form
10-Q for the three months ended February 28, 2001, and incorporated
herein by reference.
(4)(o) Registration Rights Agreement dated May 15, 1997 between the Company,
Laidlaw Transportation, Inc. and Laidlaw Inc. the form of which was
filed as Exhibit B to Annex A to the Registrant's Definitive Proxy
Statement on Form DEF 14A, filed on May 1, 1997 and incorporated herein
by reference.
(4)(p) Indenture dated as of May 1, 1993 between the Industrial Development
Board of the Metropolitan Government of Nashville and Davidson County
(Tennessee) and NationsBank of Tennessee, N.A., filed as Exhibit 4(f)
to the Registrant's Form 10-Q for the three months ended May 31, 1997
and incorporated herein by reference.
(4)(q) Indenture of Trust dated as of August 1, 1995 between Tooele County,
Utah and West One Bank, Utah, now known as U.S. Bank, as Trustee, filed
as Exhibit 4(h) to the Registrant's form 10-Q for the three months
ended May 31, 1997 and incorporated herein by reference.
(4)(r) Indenture of Trust dated as of July 1, 1997 between Tooele County, Utah
and U.S. Bank, a national banking association, as Trustee, filed as
Exhibit 4(j) to the Registrant's Form 10-Q for the three months ended
May 31, 1997 and incorporated herein by reference.
(4)(s) Indenture of Trust dated as of July 1, 1997 between California
Pollution Control Financing Authority and U.S. Bank, a national banking
association, as Trustee, filed as Exhibit 4(k) to the Registrant's Form
10-Q for the three months ended May 31, 1997 and incorporated herein by
reference.
(4)(t) Promissory Note dated May 15, 1997 for $60 million from the Company to
Westinghouse Electric Corporation, filed as Exhibit 4(n) to the
Registrant's Form 10-Q for the three months ended May 31, 1997 and
incorporated herein by reference.
(4)(u) Letter dated May 7, 1999 from Toronto-Dominion (Texas) Inc. (as
assignee of Westinghouse Electric Corporation) and agreed to by the
Company and Laidlaw Inc. amending the terms of the Promissory Note
dated May 15, 1997 (as referenced in Exhibit (4)(z)) filed as Exhibit
(4)(u) to the Registrant's Form S-4 Registration Statement No.
333-82689 filed July 12, 1999 and incorporated herein by reference.
(4)(v) Guaranty Agreement dated May 15, 1997 by Laidlaw Inc. to Westinghouse
Electric Corporation guaranteeing Promissory Note dated May 15, 1997
(as referenced in Exhibit (4)(z)) from Company to Westinghouse Electric
Corporation), filed as Exhibit 4(o) to the Registrant's Form 10-Q for
the three months ended May 31, 1997 and incorporated herein by
reference.
(4)(w) Rights Agreement dated as of October 15, 1999 between the Company and
EquiServe Trust Company, N.A., as Rights Agent, filed as Exhibit (c)1
to the Company's Current Report on Form 8-K filed on October 15, 1999
and incorporated herein by reference.
(4)(x) First Amendment to Rights Agreement, dated as of March 17, 2000,
between the Company and EquiServe Trust Company, N.A. filed as Exhibit
99.1 to the Company's Current Report on Form 8-K filed on March 17,
2000 and incorporated herein by reference.
(4)(y) Letter Agreement, dated October 12, 1999, between the Company and
Laidlaw Inc. filed as Exhibit 99.2 to the Company's Current Report on
Form 8-K filed on March 17, 2000 and incorporated herein by reference.
96
(4)(z) Other instruments defining the rights of holders of nonregistered debt
of the Company have been omitted from this exhibit list because the
amount of debt authorized under any such instrument does not exceed 10%
of the total assets of the Company and its subsidiaries. The Company
agrees to furnish a copy of any such instrument to the SEC upon
request.
(10)(a) Agreement and Plan of Merger dated as of March 16, 1998 by and among
Registrant, LES Acquisition, Inc., and Safety-Kleen Corp. included as
Annex A of Safety-Kleen's Revised Amended Prospectus on Form 14D-9
filed as Exhibit 62 to Safety-Kleen's Amendment No. 28 to Schedule
14-9A on March 17, 1998 and incorporated herein by reference.
(10)(b) Stock Purchase Agreement between Westinghouse Electric Corporation
(Seller) and Rollins Environmental Services, Inc. (Buyer) for National
Electric, Inc. dated March 7, 1995 filed as Exhibit 2 to the
Registrant's Current Report on Form 8-K filed on June 13, 1995 and
incorporated herein by reference.
(10)(c) Second Amendment to Stock Purchase Agreement (as referenced in Exhibit
(10)(b) above), dated May 15, 1997 among Westinghouse Electric
Corporation, Rollins Environmental Services, Inc. and Laidlaw Inc.,
filed as Exhibit 4(m) to the Registrant's Form 10-Q for the three
months ended May 31, 1997 and incorporated herein by reference.
(10)(d) Agreement for the sale and purchase of shares and loan stock held by SK
Europe, Inc. in Safety-Kleen Europe Limited between Safety-Kleen Europe
Limited and SK Europe, Inc. and the Company and The Electra Subscribers
and Electra European Fund LP dated as of July 6, 2000 Company filed as
Exhibit (10)(d) to the Registrant's Form 10-K for the year ended August
31, 2000 and incorporated herein by reference.
(10)(e) Rollins Environmental Services, Inc. 1982 Incentive Stock Option Plan
filed with Amendment No. 1 to the Company's Registration Statement No.
2-84139 on Form S-1 dated June 24, 1983 and incorporated herein by
reference.
(10)(f) Rollins Environmental Services, Inc. 1993 Stock Option Plan filed as
Exhibit (10)(e) to the Registrant's Current Form 10-Q for the three
months ended May 31, 2000 and incorporated herein by reference.
(10)(g) The Company's 1997 Stock Option Plan, filed as Exhibit 4.4 to the
Company's Registration Statement No. 333-41859 on Form S-8 dated
December 10, 1997 and incorporated herein by reference.
(10)(h) First Amendment to Company's 1997 Stock Option Plan, filed as Exhibit
(10)(g) to the Company's Form 10-Q for the three months ended November
30, 1999 and incorporated herein by reference.
(10)(i) The Company's Director's Stock Option Plan, filed as Exhibit 4.5 to the
Company's Registration Statement No. 333-41859 on Form S-8 dated
December 10, 1997 and incorporated herein by reference.
(10)(j) First Amendment to Company's Director's Stock Option Plan filed as
Exhibit (10)(i) to the Company's Form 10-Q for the three months ended
November 30, 1999 and incorporated herein by reference.
(10)(k) Stock Purchase Agreement dated February 6, 1997 among the Company,
Laidlaw Inc., and Laidlaw Transportation, Inc. filed as Exhibit A to
Annex A to the Definitive Proxy Statement on Form DEF 14A filed on May
1, 1997 and incorporated herein by reference.
(10)(l) Executive Bonus Plan for fiscal year 2000 filed as Appendix C to the
Definitive Proxy Statement on Form DEF 14A filed on October 29, 1999
and incorporated herein by reference.
(10)(m) The Company's U.S. Supplemental Executive Retirement Plan filed as
Exhibit 10(g) to the Company's Form 10-Q for the three months ended
November 30, 1997 and incorporated herein by reference.
(10)(n) Employment Agreement by and between Company and Grover C. Wrenn, dated
as of August 23, 2000 filed as Exhibit (10)(n) to the Registrant's Form
10-K for the year ended August 31, 2000 and incorporated herein by
reference.
(10)(o) Employment Termination And Consulting Agreement dated as of August 15,
2001 between Safety-Kleen Corp. and Grover C. Wrenn filed as Exhibit
(10)(o) to the Registrant's Form 10-Q/A for the three months ended May
31, 2001, filed on September 26, 2001 and incorporated herein by
reference.
(10)(p) Employment Agreement by and between Company and David E. Thomas, Jr.,
dated as of August 23, 2000 filed as Exhibit (10)(o) to the
Registrant's Form 10-K for the year ended August 31, 2000 and
incorporated herein by reference.
(10)(q) Employment Termination And Consulting Agreement, dated as of August 15,
2001 between Safety-Kleen Corp. and David E. Thomas, Jr. filed as
Exhibit (10)(q) to the Registrant's Form 10-Q/A for the three months
ended May 31, 2001, filed on September 26, 2001 and incorporated herein
by reference.
97
(10)(r) Employment Agreement by and between Company and Larry W. Singleton,
dated as of July 17, 2000 filed as Exhibit (10)(p) to the Registrant's
Form 10-K for the year ended August 31, 2000 and incorporated herein by
reference.
(10)(s) Employment Agreement by and between Safety-Kleen Corp. and Ronald A.
Rittenmeyer, dated as of August 8, 2001 filed as Exhibit (10)(s) to the
Registrant's Form 10-Q/A for the three months ended May 31, 2001, filed
on September 26, 2001 and incorporated herein by reference.
(10)(t) Company Indemnification Agreement delivered to Ronald A. Rittenmeyer by
Safety-Kleen Corp., effective as of August 8, 2001 filed as Exhibit
(10)(t) to the Registrant's Form 10-Q/A for the three months ended May
31, 2001, filed on September 26, 2001 and incorporated herein by
reference.
(10)(u) Employment Agreement by and between Safety-Kleen Corp. and Thomas W.
Arnst, dated as of October 4, 2001 filed as Exhibit (10)(u) to the
Registrant's Form 10-K for the year ended August 31, 2001, filed on
November 29, 2001 and incorporated herein by reference.
(10)(v) Agreement among Safety-Kleen Corp., Safety-Kleen Services, Inc. and
David M. Sprinkle dated October 17, 2001 filed as Exhibit (10)(v) to
the Registrant's Form 10-K for the year ended August 31, 2001, filed on
November 29, 2001 and incorporated herein by reference.
(10)(w) Form of Senior Executive Change of Control Agreement filed as Exhibit
(10)(q) to the Registrant's Form 10-K for the year ended August 31,
2000 and incorporated herein by reference.
(10)(x) Senior Executive Retention Plan filed as Exhibit (10)(r) to the
Registrant's Form 10-K for the year ended August 31, 2000 and
incorporated herein by reference.
(10)(y) Senior Executive Severance Plan filed as Exhibit (10)(s) to the
Registrant's Form 10-K for the year ended August 31, 2000 and
incorporated herein by reference.
(10)(z) Executive Retention Plan filed as Exhibit (10)(t) to the Registrant's
Form 10-K for the year ended August 31, 2000 and incorporated herein by
reference.
(10)(aa) Executive Severance Plan filed as Exhibit (10)(u) to the Registrant's
Form 10-K for the year ended August 31, 2000 and incorporated herein by
reference.
(10)(bb) Key Manager Retention Plan filed as Exhibit (10)(v) to the Registrant's
Form 10-K for the year ended August 31, 2000 and incorporated herein by
reference.
(10)(cc) Key Manager Severance Plan filed as Exhibit (10)(w) to the Registrant's
Form 10-K for the year ended August 31, 2000 and incorporated herein by
reference.
(10)(dd) Letter Agreement dated October 3, 2001 between JA&A Services, LLC and
the Company, filed as Exhibit (10)(dd) to Registrant's Form 10-Q for
the three months ended November 30, 2001 and incorporated herein by
reference.
(10)(ee) Second Amended and Restated Marketing and Distribution Agreement, dated
as of March 8, 2001 by and between SystemOne Technologies Inc. and
Safety-Kleen Systems, Inc., a subsidiary of the Registrant, filed as
Exhibit 10.16 to SystemOne Technologies Inc. Form 10-KSB for the year
ended December 31, 2000 and incorporated herein by reference.
(10)(ff) Letter Agreement dated as of September 27, 2001 between Jefferson Wells
International and Safety-Kleen Services, Inc., filed as Exhibit
(10)(ff) to Registrant's Form 10-Q for the three months ended November
30, 2001 and incorporated herein by reference.
(10)(gg) Letter Agreement dated February 1, 2001 between Arthur Andersen LLP and
the Company relating to services to the Company for Company process
improvement initiatives, filed as Exhibit (10)(gg) to Registrant's Form
10-Q for the three months ended November 30, 2001 and incorporated
herein by reference.
(10)(hh) Rider #1 dated December 5, 2001, to Letter Agreement dated February 1,
2001 between Arthur Andersen LLP and the Company relating to services
to the Company for Company process improvement initiatives, filed as
Exhibit (10)(hh) to Registrant's Form 10-Q for the three months ended
November 30, 2001 and incorporated herein by reference.
(10)(ii) Letter Agreement dated March 23, 2001 between Arthur Andersen LLP and
the Company relating to services to the Company for loan staff, filed
as Exhibit (10)(ii) to Registrant's Form 10-Q for the three months
ended November 30, 2001 and incorporated herein by reference.
98
(10)(jj) Rider dated December 5, 2001, to Letter Agreement dated March 23, 2001
between Arthur Andersen LLP and the Company relating to services to the
Company for loan staff filed as Exhibit (10)(jj) to Registrant's Form
10-Q for the three months ended November 30, 2001 and incorporated
herein by reference.
(10)(kk) Acquisition Agreement by and between Safety-Kleen Services, Inc. as
Seller and Clean Harbors, Inc. as Purchaser dated February 22, 2002
filed as Exhibit 10(a) to Registrant's Form 8-K filed February 26, 2002
and included herein by reference.
(10)(ll) First Amendment to Acquisition Agreement by and between Safety-Kleen
Services, Inc. as Seller and Clean Harbors, Inc. as Purchaser dated
March 8, 2002.
(21) Subsidiaries of Registrant, filed as Exhibit (21) to Registrant's Form
10-K for the year ended August 31, 2001 and incorporated herein by
reference.
(99.1) Consent Agreement and Final Order by and between the United States
Environmental Protection Agency and Safety-Kleen Corp. and certain of
its United States subsidiaries and affiliates filed as Exhibit (99.1)
to the Registrant's Form 10-K for the year ended August 31, 2000 and
incorporated herein by reference.
(99.2) Amended Consent Agreement and Final Order by and between the United
States Environmental Protection Agency and Safety-Kleen Corp. and
certain of its United States subsidiaries and affiliates as approved by
the United States Bankruptcy Court on May 16, 2001, filed as Exhibit
(99.2) to the Registrant's Form 10-K/A for the year ended August 31,
2000, filed on July 9, 2001 and incorporated herein by reference.
(99.3) Letter from the Company to the SEC with respect to representations
received from Arthur Andersen LLP.
99