U S LIQUIDS INC - 10-K Annual Report

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FORM 10-K

SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

(MARK ONE)

[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT
OF 1934

FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997

OR

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE TRANSITION PERIOD FROM _______________________ TO
________________________

COMMISSION FILE NUMBER: 001-13259

U S LIQUIDS INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

DELAWARE 76-0519797
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)

411 N. Sam Houston Parkway E., Suite 400 Houston, Texas 77060
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)

281-272-4500
(REGISTRANT'S TELEPHONE NUMBER INCLUDING AREA CODE)

SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:

TITLE OF SECURITIES EXCHANGES ON WHICH REGISTERED
- ---------------------------------- ------------------------------------
Common Stock, par value $.01 per American Stock Exchange
share

SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
None

Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]

Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of 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. Yes [X]

APPLICABLE ONLY TO REGISTRANTS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:

Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Section 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. Yes [X] No [ ]

(APPLICABLE ONLY TO CORPORATE REGISTRANTS)

Indicate the number of shares outstanding of each of the registrant's
classes of common stock, as of the latest practicable date.

Title Common Stock, par value $.01 per share Outstanding 7,499,022 as of
March 26, 1998

DOCUMENTS INCORPORATED BY REFERENCE

List hereunder the following documents if incorporated by reference and the
Part of the Form 10-K (e.g., Part I, Part II, etc.) into which the document is
incorporated: (1) Any annual report to security holders; (2) Any proxy or
information statement; and (3) Any prospectus filed pursuant to Rule 424(b) or
(c) under the Securities Act of 1933. The listed documents should be clearly
described for identification purposes (e.g., annual report to security holders
for fiscal year ended December 24, 1980).

Part III -- Proxy Statement for the Annual Meeting of Stockholders to be
held on May 5, 1998.

================================================================================

ITEM 1. BUSINESS

U S Liquids Inc. ("the Company") is a leading provider of services for
the collection, processing, recovery and disposal of liquid wastes. The Liquid
Waste Division collects, processes and disposes of liquid waste and recovers
by-products from these waste streams. The Oilfield Waste Division processes and
disposes of oilfield waste generated in oil and gas exploration and production.
Since its formation in November 1996, the Company has grown significantly by
acquiring businesses engaged in various aspects of the liquid waste industry and
by improving the operations and processing capabilities of its newly acquired
facilities. As a result of its acquisition program and internal development, the
Company has broadened its customer base and industry served and has expanded its
geographic presence.

The Company's executive offices are located at 411 N. Sam Houston Parkway
East, Suite 400, Houston, Texas 77060-3545, and its telephone number is (281)
272-4500.

THE LIQUID WASTE INDUSTRY

GENERAL. The Company is engaged in two segments of the liquid waste
industry: the collection, processing, recovery and disposal of liquid waste and
the processing and disposal of liquid waste generated in oil and gas exploration
and production. The Company's Liquid Waste Division processes waste at
facilities located in Louisiana and Texas. Certain of these facilities generate
salable by-products, principally fats, oils and feed proteins, which are derived
from waste streams and collected from generators by the Company and independent
collection companies. The Oilfield Waste Division processes and disposes of
exploration and production waste, which consists primarily of oil, grease,
chlorides and heavy metals found in oil-based and water-based drilling fluids,
as well as cuttings, saltwater, workover completion fluids, production pit
sludges and soil containing these materials, at landfarms located in Louisiana
and Texas.

LIQUID WASTE DIVISION. At its 13 permitted liquid waste facilities, the
Liquid Waste Division receives fees to collect, process and dispose of waste
such as industrial and commercial wastewaters, grease trap and grit trap waste,
and oil-contaminated water. The Company operates a fleet of vehicles to collect
waste directly from over 11,000 generators and receives waste from independent
transporters servicing thousands of additional generators. In addition, at
certain of its facilities, the Company processes used cooking oil and other food
processing residuals received from restaurants, meat processors, other food
processors, grocery stores and other generators to recover by-products
consisting of fats, oils and feed proteins which are sold for use as ingredients
in livestock feed and chemicals.

The Liquid Waste Division benefits from federal, state and local
regulations prohibiting the disposal of used cooking oil, grease and grit trap
waste and other waste in municipal collection and treatment systems. Although
restaurants, food manufacturing and preparation facilities, car washes and other
industrial operations have produced waste for years, regulations governing the
management of liquid waste, and the enforcement of such regulations, have become
increasingly stringent. For example, effective as of October 1993, Subtitle D of
RCRA banned the disposal of untreated bulk liquid wastes in landfills.

State and local regulations also have a significant impact on generators of
grease and grit trap waste and other liquid waste. For example, effective in
March 1997, the Texas Natural Resource Conservation Commission (the "TNRCC")
implemented state-wide "full pump" regulations requiring 100% evacuation of
all grease and grit traps and proper disposal of the full volume of each trap.
The state-wide "full pump" regulations, together with similar "full pump"
ordinances implemented by various municipalities, have increased demand for the
services provided by the Company's processing facilities in Texas. The failure
of governmental authorities to enforce such "full pump" regulations and
ordinances could, however, diminish the demand for the Company's services.

OILFIELD WASTE DIVISION. The Oilfield Waste Division processes and
disposes of exploration and production waste at five landfarming and landfilling
facilities located in Louisiana and Texas. During 1997, these facilities
processed and disposed of approximately 4.5 million barrels of waste through the
processes described in "Operations and Services Provided-Oilfield Waste
Division" below. The Company processes waste to below prescribed regulatory
levels and then transports the resulting material to on-site stockpile areas for
storage.

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The market for oilfield waste processing and disposal results from waste
produced in the drilling and production of oil and gas wells and governmental
regulations governing its treatment and disposal. Louisiana, Texas and certain
other oil and gas producing states have enacted comprehensive laws and
regulations governing the proper management of waste. Under Louisiana and Texas
regulations, if waste cannot be treated for discharge or disposed of at the well
where it is generated, it must be transported to a permitted disposal facility.
There are three primary alternatives for off-site processing and disposal of
waste available to generators in the Gulf Coast: (i) landfarming and landfilling
services, which the Company provides; (ii) underground injection; and (iii)
processing and conversion of the waste into a reuse product. In addition,
federal regulations restrict, and in some cases prohibit entirely, the discharge
of waste into U.S. waters. Consequently, many operators of exploration and
production facilities, including major and independent oil companies, are
retaining third parties such as the Company to manage their waste on an ongoing
basis.

The Company believes that market conditions in the Gulf Coast oilfield
waste disposal market are positive for the following reasons. First, offshore
drilling, which currently generates a substantial portion of the oil field waste
delivered to the Company, is strong. Second, the number of wells drilled to
depths in excess of 15,000 feet has steadily increased in the Gulf of Mexico and
inland over the past several years. The Company believes that the drilling of
deeper wells benefits the waste disposal market due to larger volumes and
complexities of drilling fluids used and the additional cuttings generated.
Finally, the Company believes that, as federal and state regulations governing
the disposal of waste are further tightened, a greater percentage of waste will
be transported from well sites for treatment and disposal, thereby increasing
the overall market. For example, effective as of January 15, 1997, federal
regulations prohibit the discharge of any waste in the coastal zone of the Gulf
of Mexico (generally including inland waters and transition zone onshore areas).
In addition, in September 1996, the comment period expired for proposed EPA
zero-discharge regulations for the territorial seas of Louisiana and Texas
(i.e., beginning at the line of ordinary low water along the part of the coast
that is in direct contact with the open sea and extending three nautical miles).
While limited temporary exemptions have been granted to some oil companies by
state regulators, these actions have been opposed by leading environmental
groups. In addition, several lawsuits have been filed challenging the validity
of these regulations. Accordingly, the timing of the implementation of these
regulations is uncertain. See "Regulatory Background."

The Company expects its Oilfield Waste Division to expand through growth of
existing operations and, potentially, expansion into new geographic areas.
However, the Company will continue to serve the offshore drilling and production
market through its contract with Newpark Resources ("Newpark"). The Company
believes that other waste treatment and disposal opportunities exist in other
regions of the United States, particularly in those states with significant oil
and gas exploration activity.

BUSINESS STRATEGY

The Company plans to become North America's leading provider of services
for the collection, processing, recovery and disposal of liquid wastes by
expanding through acquisitions and continued internal growth.

COMPLETED ACQUISITIONS (1997 AND 1998)

Between October 1, 1997 and March 26, 1998, the Company completed nine
acquisitions which collectively had $12,849,000 of revenues in 1997. These
acquisitions geographically extended the Liquid Waste Division's processing
operations to Louisiana and Massachusetts and expanded its market penetration in
existing Texas markets. The total cost of the acquisitions was $15,994,000,
including 473,000 shares of the Company's common stock ("Common Stock").

In connection with each acquisition, the Company assumed or succeeded to
certain liabilities of the acquired businesses, which may include environmental
liabilities. The Company has generally obtained representations from the sellers
of the acquired business that no undisclosed liabilities existed, and certain
rights to indemnification from the sellers against any such liabilities. There
can, however, be no assurance

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that undisclosed liabilities do not exist, or that the Company would receive
full or partial compensation pursuant to its rights to indemnification.

OPERATIONS AND SERVICES PROVIDED

The Company provides a broad range of services for the collection,
processing, recovery and disposal of liquid waste. As federal, state and local
regulations governing the disposal of liquid waste are further tightened, the
Company believes that the amount of liquid waste delivered to third parties for
processing and disposal will continue to increase.

LIQUID WASTE DIVISION

The Liquid Waste Division collects, processes and disposes of various types
of waste generated by businesses and individuals. Revenues are earned by tipping
fees paid by customers and from sales of by-products, principally fats, oils and
feed proteins processed from certain waste streams and collected from
generators. Brief descriptions of the types of waste most commonly managed by
the Company are set forth below:

GREASE AND GRIT TRAP WASTE AND OTHER INDUSTRIAL WASTEWATERS. Grease
trap waste from restaurants and other food manufacturing and preparation
facilities, grit trap waste from car washes and other types of industrial
wastewaters are transported to the Company's facilities in vacuum trucks,
trailers and other transportable containers. Using a variety of physical,
chemical, thermal and biological techniques, the waste is broken down into
constituent components. Water extracted from the waste is pretreated and
then discharged into the municipal sanitary sewer system and solid
materials are dried and disposed of in a solid waste landfill.

BY-PRODUCTS. The Company processes used cooking oil and other food
processing residuals received from restaurants, meat processors, other food
processors, grocery stores and other generators, as well as lower-grade
materials recovered from other waste streams, to generate usable
by-products, principally consisting of fats, oils and feed proteins of
various grades. The Company sells these by-products almost exclusively in
Mexico to producers of livestock feed and chemicals.

The Company believes that the primary constraint in its by-product
operations is its ability to procure cooking oils and other food processing
residuals which are used in the production of fats, oils and feed proteins.
These cooking oils and other food processing residuals are collected by Company
drivers on pre-established routes, from third party transporters and in bulk
purchases.

The fats, oils and feed proteins produced by the Liquid Waste Division are
commodities and are generally sold at prices prevailing at the time of sale
which are subject to significant fluctuation. Feed proteins are distributed by
truck from the various processing facilities to Laredo, Texas for mixing and
final preparation. The finished products are then distributed to customers by
truck and/or rail from Laredo.

OILFIELD WASTE DIVISION

At its five facilities located in Louisiana and Texas, the Oilfield Waste
Division treats and disposes of waste that is generated in oil and natural gas
exploration and production. These waste streams consist primarily of oil,
grease, chlorides and heavy metals found in oil-based and water-based drilling
fluids, as well as cuttings, saltwater, workover and completion fluids,
production pit sludges and soil containing these materials.

Landfarming involves six distinct stages. Oilfield waste is brought to the
Company's facilities in trucks and on barges and the delivered waste materials
are then tested. Waste which is not permitted to be treated at a facility in
accordance with applicable state regulations is rejected. Accepted waste is then
loaded into treatment cells at the rate of approximately 15,000 barrels per
acre. This loading process creates a layer of waste approximately two feet thick
across the treatment cell. Next, the treatment cell is flooded with fresh water
and mixed to dissolve salts and soluble materials. Saltwater is then pumped out
through a collection system and typically disposed of at a saltwater injection
well on-site. This flooding process is typically repeated several times. The
oilfield waste is then processed to remove organic contamination through

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biological degradation. The treatment cells are periodically agitated to ensure
that the microbes receive sufficient oxygen, sunlight and water. Total treatment
of a cell takes approximately nine to twelve months. In the final stage, the
remaining material is tested to ensure compliance with regulatory requirements.
Thereafter, the material is transported to on-site stockpile areas for storage.

The Company purchased the Oilfield Waste Division from Sanifill, Inc.
("Sanifill"). In connection with the acquisition, Sanifill assigned to the
Company its rights and obligations under a Disposal Agreement between Sanifill
and Newpark. Pursuant to the terms of the Disposal Agreement, through June 30,
2021, Newpark is obligated to deliver oilfield waste to the Company on an annual
basis for treatment and disposal at the Company's landfarming facilities in Elm
Grove, Louisiana, Bourg, Louisiana, Bateman Island, Louisiana and Mermentau,
Louisiana (the "Landfarms"). Specifically, under the terms of the Disposal
Agreement, during each such year, Newpark is obligated to deliver to the Company
for disposal at the Landfarms the lesser of (i) one-third of the barrels of
waste that Newpark receives for processing and disposal in Louisiana, Texas,
Mississippi, Alabama and the Gulf of Mexico (the "Territory") and (ii)
1,850,000 barrels of waste, in each case excluding saltwater. The number of
barrels of waste that Newpark is required to deliver to the Company in any year
is subject to adjustment by a number of barrels determined by dividing revenues
that the Company receives from the collection and disposal of oilfield waste or
site remediation in the Territory by the price per barrel that Newpark pays for
disposal under the Disposal Agreement. No reduction is made for revenues
received by the Company from (i) disposal at any of the Landfarms of waste that
is generated and collected on land and is delivered to the Landfarms from the
generation site by on-land transportation ("inland waste"), (ii) disposal of
waste at the Bustamonte, Texas facility and collection of waste within a
200-mile radius of the Bustamonte facility, and (iii) disposal of waste under
the Disposal Agreement.

The Disposal Agreement also governs the price to be paid by Newpark to the
Company for delivered waste. The contractual price is lower than the price that
the Company could obtain in the open market, and the Company expects such price
disparity to persist for an indefinite time period. Currently, Newpark is paying
to the Company $5.50 for each barrel of waste delivered to the Company under the
Disposal Agreement. On June 30, 1998 and on each subsequent December 31st and
June 30th occurring during the term of the Disposal Agreement, the per barrel
price to be paid by Newpark to the Company will be adjusted. Adjustments are
made based upon changes occurring in the average prices received by Newpark from
customers for waste treatment and disposal and other related services performed
by Newpark during the six-month period ending on the applicable adjustment date
compared, on a percentage basis, to the average prices received by Newpark from
customers for such disposal and services during the six-month period commencing
12 months prior to such adjustment date and concluding six months prior to such
adjustment date. The adjusted price will be applied retroactively to all
invoices received by Newpark from the Company during the six-month period
preceding the applicable adjustment date. In no event, however, will the price
paid by Newpark to the Company be less than $5.50 per barrel. The Company does
not presently believe that this adjustment mechanism will in the near future
result in a material increase in the price per barrel paid by Newpark.

Under the Disposal Agreement, the Company is obligated to indemnify Newpark
from any and all liabilities, including environmental liabilities, in connection
with the Company's ownership of the landfarm operation, except for liability
resulting from the delivery by Newpark or its customers of waste that does not
conform to the specifications of the Disposal Agreement, which generally require
Newpark and such customers to deliver only waste that is legally classified as
permitted waste.

As a result of its contractual arrangements with Sanifill and Newpark, the
Company is prohibited from engaging, directly or indirectly, in the collection,
transfer, transportation, treatment or disposal of waste generated in a marine
environment or transported in marine vessels or the site remediation and closure
business in the Territory prior to August 12, 2001. However, the Company is not
prohibited from marketing and conducting activities related to treatment and
disposal at any of the Landfarms of inland waste, disposal of waste at the
Bustamonte, Texas facility and collection of waste within a 200-mile radius of
the Bustamonte facility, and treatment and disposal of waste under the Disposal
Agreement.

4

In addition to waste received from Newpark (which is primarily generated
offshore), the Company receives waste generated on land within Louisiana and
Texas. Due to its contractual arrangements with Newpark which limit the
Company's offshore activities as well as the lower price per barrel paid to the
Company by Newpark, the Company intends to concentrate its marketing efforts
towards inland generators of waste. The Company believes that this strategy will
increase the total amount of waste that is delivered to the Company.

All of the Company's landfarms (except Elm Grove, Louisiana) have water
access, a key factor in enabling barge transport of the waste and reducing
transportation costs. As part of the Company's predecessor's contractual
arrangements with Newpark, however, the dock facilities at the Company's other
three Louisiana landfarms have been leased to Newpark until August 31, 2021.

The Company's Bustamonte, Texas facility generally accepts inland waste
generated within a radius of 150 miles. The Bustamonte facility uses a
combination of landfarming and landfilling, due primarily to the dry climate in
South Texas. The treatment process used is similar to Louisiana landfarming
although the waste is dispersed and dried, rather than flushed with fresh water,
prior to stockpiling in on-site, synthetically-lined landfilled areas.

COMPETITION

LIQUID WASTE DIVISION. The business of processing and disposing of liquid
waste is competitive and fragmented. Competitors compete primarily on the basis
of proximity to collection operations, tipping fees charged and quality of
service. With respect to the grease and grit trap waste markets, the Company
must often compete with area landfills that accept these materials. In addition,
in certain areas served by the Company, other companies (including one public
company) collect and process grease trap waste material.

The Liquid Waste Division must also compete for the procurement of used
cooking oil and other food processing residuals necessary to produce fats, oils
and feed proteins. The limited availability of these raw materials causes
competition among processors who bid for suppliers' materials. The amount of
used cooking oil and other food processing residuals processed directly affects
the amount of fats, oils and feed proteins produced. The Company purchases used
cooking oil and other food processing residuals utilized to produce these
by-products from clients on pre-established routes, independent transporters and
in bulk. A number of companies, some of which have substantially greater
resources than the Company, compete for such materials through purchases from
independent transporters and direct purchases from restaurants. Because the
Company competes with independent transporters in some markets with respect to
the collection of these materials, some independent transporters may be
reluctant to deliver collected materials to the Company for processing.

OILFIELD WASTE DIVISION. The Company estimates that over 90% of oilfield
waste generated in the Gulf Coast region is processed or disposed of on-site by
the generators of the waste or by independent third parties. The Company does
not provide any waste treatment or disposal services at the well-site. Under
state regulations, if waste cannot be treated for discharge or disposed at the
well where it is generated, it must be transported to a licensed waste disposal
or treatment facility. There are three primary alternatives for off-site
treatment and disposal of waste available to generators in the Gulf Coast: (i)
landfarming and landfilling services, which the Company provides; (ii)
underground injection; and (iii) processing and conversion of the waste into a
reuse product. In the geographic market served by the Company, there are over
100 permitted commercial facilities including landfarms, landfills and injection
facilities authorized to treat and dispose of waste.

Since August 1996, Newpark has controlled substantially all of the market
in the Gulf Coast for offshore, off-site waste disposal, certain of which is
directed to the Company in order for Newpark to fulfill its obligations to the
Company under the Disposal Agreement. Due to its contractual arrangements with
Newpark, the Company is prohibited from, among other things, competing with
Newpark for the collection or disposal of waste generated in a marine
environment or transported in marine vessels within Louisiana, Texas,
Mississippi, Alabama and the Gulf of Mexico. This prohibition expires on August
12, 2001. See "Operations and Services Provided."

5

In addition to present competition in the Gulf Coast region, one or more
third parties could establish additional transfer stations along the Gulf Coast
to accept waste for transport to an existing or newly constructed commercial
disposal facility. In 1997, a small private company established three such
transfer stations. Although the Company does not believe that these new transfer
stations have diverted a substantial amount of offshore generated NOW from
Newpark, to the extent these transfer stations or any subsequently established
transfer stations, individually or in the aggregate, diverted substantial
amounts of offshore generated waste from Newpark, the amount of waste ultimately
delivered to the Company could be reduced.

Newpark is also a competitor with respect to oilfield waste produced inland
in the Gulf Coast region. The Company competes for inland generated oilfield
waste with a number of smaller companies which treat and dispose of waste in
landfarm operations, landfills and injection wells, and with one company which
de-waters waste and disposes of the residual sludge in a landfill. Although
complete information regarding market share for inland generated waste is not
available, the Company estimates that it receives a substantial percentage of
all waste generated inland in Louisiana and Texas that is treated off-site by
third parties, excluding saltwater.

The Company believes that there are certain barriers to entry in the
off-site waste disposal business in the Gulf Coast region. These barriers
include formalized procedures for customer acceptance, licenses, permits, and
the need for specially equipped facilities and trained personnel.

REGULATORY BACKGROUND

The Company's business operations are affected both directly and indirectly
by governmental regulations, including various federal, state and local
pollution control and health and safety programs that are administered and
enforced by regulatory agencies. These programs are applicable or potentially
applicable to one or more of the Company's existing operations. Although the
Company intends to make capital expenditures to expand its liquid waste
processing capabilities, the Company believes that it is not presently required
to make material capital expenditures to remain in compliance with federal,
state and local laws and regulations relating to the protection of the
environment.

RCRA. RCRA is the principal federal statute governing hazardous and solid
waste generation, treatment, storage and disposal. RCRA and state hazardous
waste management programs govern the handling and disposal of "hazardous
waste." The EPA has issued regulations pursuant to RCRA, and states have
promulgated regulations under comparable state statutes, that govern hazardous
waste generators, transporters and owners and operators of hazardous waste
treatment, storage or disposal facilities. These regulations impose detailed
operating, inspection, training and emergency preparedness and response
standards and requirements for closure, financial responsibility, manifesting of
wastes, record-keeping and reporting, as well as treatment standards for any
hazardous wastes intended for land disposal. The Company does not accept
RCRA-regulated hazardous waste at any of its facilities. Consequently, the vast
majority of the Company's activities are not subject to the requirements adopted
under Subtitle C of RCRA.

The Company's Louisiana and Texas landfarms treat and dispose of oilfield
waste which is exempt from classification as a RCRA-regulated hazardous waste.
At various times in the past, proposals have been made to rescind the exemption
that excludes oilfield waste from regulation under RCRA. The repeal or
modification of this exemption by administrative, legislative or judicial
process would require the Company to change significantly its method of doing
business and would have a material adverse effect on the Company's business,
financial condition and results of operations. There is no assurance that the
Company would have the capital resources available to do so, or that it would be
able to adapt its operations.

In addition to its positive impact on the Oilfield Waste Division, RCRA
also indirectly affects the Liquid Waste Division by prohibiting, among other
things, the disposal of certain liquid wastes in landfills. This prohibition
increases demand for the services provided by the Liquid Waste Division.

CERCLA. The Comprehensive Environmental Response, Compensation and
Liability Act, as amended in 1986 ("CERCLA"), provides for immediate response
and removal actions coordinated by the EPA for releases of hazardous substances
into the environment and authorizes the government, or private parties, to
respond to the release or threatened release of hazardous substances. The
government may also

6

order persons responsible for the release to perform any necessary cleanup.
Liability extends to the present owners and operators of waste disposal
facilities from which a release occurs, persons who owned or operated such
facilities at the time the hazardous substances were released, persons who
arranged for disposal or treatment of hazardous substances and waste
transporters who selected such facilities for treatment or disposal of hazardous
substances. CERCLA has been interpreted to create strict, joint and several
liability for the cost of removal and remediation, other necessary response
costs and damages for injury to natural resources.

Despite the current exemption of oilfield waste under RCRA, if the
Company's operations resulted in the release of or improper disposal of
hazardous substances, the Company could incur CERCLA liability. Although the
Company is not aware of any such event, the Company or a business acquired by
the Company may have disposed or arranged for disposal of hazardous substances
that could result in the imposition of CERCLA liability on the Company in the
future. In addition, the Company would incur CERCLA liability if any hazardous
substances at the Company's facilities leached down into groundwater.

The Company is not aware of any claims against it or any of its
subsidiaries that are based on CERCLA. Nonetheless, the identification of one or
more sites at which cleanup action is required could subject the Company to
liabilities which could have a material adverse effect on the Company's
business, financial condition and results of operations.

THE CLEAN WATER ACT. The treatment and discharge of wastewaters at the
Company's facilities are subject to the requirements of the Clean Water Act and
comparable state statutes and federal and state enforcement of these
regulations. The Clean Water Act regulates the discharge of pollutants into
waters of the United States. The Clean Water Act establishes a system of
standards, permits and enforcement procedures for the discharge of pollutants
from industrial and municipal wastewater sources. The law sets treatment
standards for industries and wastewater treatment plants and provides federal
grants to assist municipalities in complying with the new standards. In addition
to requiring permits for industrial and municipal discharges directly into the
waters of the United States, the Clean Water Act also requires pretreatment of
industrial wastewater before discharge into municipal systems. The Clean Water
Act gives the EPA the authority to set pretreatment limits for direct and
indirect industrial discharges. In addition, the Clean Water Act prohibits
certain discharges of oil or hazardous substances and authorizes the federal
government to remove or arrange for removal of such oil or hazardous substances.
The Clean Water Act also requires the adoption of the National Contingency Plan
to cover removal of such materials. Under the Clean Water Act, the owner or
operator of a vessel or facility may be liable for penalties and costs incurred
by the federal government in responding to a discharge of oil or hazardous
substances.

The Clean Water Act also has a significant impact on the operations of the
Oilfield Waste Division's customers. EPA Region 6, which includes the Oilfield
Waste Division's current market, continues to issue new and amended National
Pollution Discharge Elimination System ("NPDES") general permits further
imiting or restricting substantially all discharges of produced water from the
Oil and Gas Extraction Point Source Category into waters of the United States.
These permits include:

o Onshore subcategory permits for Texas, Louisiana, Oklahoma and New
Mexico (56 Fed. Reg. 7698). These permits completely prohibit the
discharge of drilling fluids, drill cuttings, produced water or sand,
and various other oilfield wastes generated by onshore operations into
waters of the United States. These permits have the effect of
requiring that most oilfield waste processors follow established state
disposal programs. These general permits expired on February 25, 1996,
but pursuant to EPA policy, they are considered to remain in effect
until reissued by the EPA or superceded by other EPA action.

o Permits for produced water and produced sand discharges into coastal
waters of Louisiana and Texas issued on January 9, 1995 (60 Fed. Reg.
2387). Coastal means "waters of the United States . . . located
landward of the territorial seas". Under these regulations all such
discharges were required to cease by January 1, 1997.

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o The Outer Continental Shelf ("OCS") permit covering oil and gas
operations in federal waters in the Gulf of Mexico (seaward of the
Louisiana and Texas territorial seas) was reissued in November 1992
and modified in December 1993. The existing permit was combined with a
new source permit on August 9, 1996 (61 Fed. Reg. 41609). This permit
prohibits certain discharges of drilling fluids and drill cuttings and
includes stricter limits for oil and grease concentrations in produced
waters to be discharged. These limits are based on the Best Available
Treatment requirements contained in the Oil and Gas Offshore
Subcategory national guidelines which were published March 3, 1993.
Additional requirements include toxicity testing and bio-accumulation
monitoring studies of proposed discharges. The combined permit expired
on November 18, 1997; however, the expired permit will continue to be
effective for permittees that applied for a new permit prior to the
expiration date, until the EPA issues a new general permit for this
area or requires permittees to seek individual permits.

o A permit for the territorial seas of Louisiana was issued on November
4, 1997 (62 Fed. Reg. 59687). The permit became effective on December
4, 1997, except for the water quality based limits and certain
monitoring requirements that become effective May 4, 1998. The permit
prohibits the discharge of drilling fluids, drill cuttings and
produced sand. Produced water discharges are limited for oil and
grease, toxic metals, organics, and chronic toxicity. The territorial
seas part of the Offshore Subcategory begins at the line of ordinary
low water along the part of the coast which is in direct contact with
the open sea, and extends out three nautical miles. This permit covers
both existing sources and new sources. All discharges in state waters
must comply with any more stringent requirements contained in the
Louisiana Water Quality Regulations, LAC 33.IX.7.708. A similar permit
will be proposed for the Texas territorial seas in the future.

The combined effect of all of these permits closely approaches a "zero
discharge" standard affecting all waters except those of the OCS. The Company
and many industry participants believe that these permits and the requirements
of the Clean Water Act may ultimately lead to a total prohibition of overboard
discharge in the Gulf of Mexico.

THE CLEAN AIR ACT. The Clean Air Act provides for federal, state and local
regulation of emissions of air pollutants into the atmosphere. Any modification
or construction of a facility with regulated air emissions must be a permitted
or authorized activity. The Clean Air Act provides for administrative and
judicial enforcement against owners and operators of regulated facilities,
including substantial penalties. In 1990, the Clean Air Act was re-authorized
and amended, substantially increasing the scope and stringency of the Clean Air
Act's regulations. The Clean Air Act has very little impact on the Company's
operations.

STATE AND LOCAL REGULATIONS. Order 29-B of the Louisiana Department of
Natural Resources contains extensive rules regarding the generation, treatment,
storage, transportation and disposal of oilfield waste. Under Order 29-B,
on-site disposal of oilfield waste is limited and subject to stringent
guidelines. If these guidelines cannot be met, oilfield waste must be
transported and disposed of off-site in accordance with the provisions of Order
29-B. Moreover, under Order 29-B, most, if not all, active waste pits (a typical
on-site disposal method used by inland generators of oilfield waste) must be
closed or modified to meet regulatory standards; however, full enforcement of
this portion of Order 29-B has been deferred. Rule 8 of the Texas Railroad
Commission also contains detailed requirements for the management and disposal
of oilfield waste. Permits issued by state regulatory agencies are required for
each oilfield waste treatment facility operating within Louisiana and Texas. The
Company must perform tests before acceptance of any oilfield waste, as well as
during and after treatment to ensure compliance with all regulatory
requirements. Short-term emergency rules recently adopted by the Louisiana
Department of Natural Resources have increased the pre-treatment testing to be
conducted on oilfield waste delivered to the Company's Louisiana landfarms.

The closure of any of the Company's landfarms is also regulated by state
authorities. In general, closure of a landfarm involves a multi-phase process
whereby all injection wells at the landfarm are plugged and abandoned, all
surface equipment is removed from the site, the treatment cells and perimeter
containment levees are removed and the surface of the site is contoured and
vegetated. Additional regulatory requirements include monitoring the surface
runoff water, the soil pore water and the

8

groundwater for a period of five years. If, after five years, the water quality
meets the requirements specified in the state regulations, the site is certified
as closed.

The Liquid Waste Division's facilities are subject to direct regulation by
a variety of state and local authorities. Typically, the Company is required to
obtain processing, wastewater discharge and air quality permits from state and
local authorities to operate its facilities and to comply with applicable
regulations concerning, among other things, the generation and discharge of
odors and wastewater.

States and localities into which the Company may expand, by acquisition or
otherwise, may now or in the future have regulations with positive or negative
effects on the Company. It is possible that state or local regulations could
adversely affect the Company's execution of its acquisition strategy.

RISK MANAGEMENT

The Company has implemented various procedures designed to insure
compliance with applicable regulations and reduce the risk of damage or loss.
These include specified handling procedures and guidelines for regulated wastes,
ongoing training and monitoring of employees and maintenance of insurance
coverage. The Company carries a broad range of insurance coverages that
management considers adequate for the protection of its assets and operations.
This coverage includes general liability, comprehensive property damage,
workers' compensation and other coverage customary in its industries; however,
this insurance is subject to coverage limits and certain policies exclude
coverage from damages resulting from environmental contamination. The Company
could be materially adversely affected by a claim that is not covered or only
partially covered by insurance. There is no assurance that insurance will
continue to be available to the Company, that the possible types of liabilities
that may be incurred by the Company will be covered by its insurance, that the
Company's insurance carriers will meet their obligations or that the dollar
amount of such liabilities will not exceed the Company's policy limits.

ITEM 2. PROPERTIES

The Company's corporate offices are located in Houston, Texas. The
corporate offices were relocated from Lafayette, Louisiana in May 1997. The
current corporate offices consist of approximately 6,800 square feet of office
space occupied under a lease which expires on June 1, 2002.

The following table sets forth information relating to the processing
facilities owned or leased by the Liquid Waste Division:

APPROXIMATE
LOCATION SQUARE FOOTAGE OWNED/LEASED
- ------------------------------------- ------------------ --------------
Dallas, Texas........................ 6,000 Owned
Fort Worth, Texas.................... 14,000 Owned
Houston, Texas....................... 23,000 Owned
Houston, Texas....................... 5,000 Leased(A)
Houston, Texas....................... 7,000 Owned
Los Fresnos, Texas................... 9,000 Owned
San Antonio, Texas................... 5,700 Owned
San Antonio, Texas................... 1,000 Owned
Shreveport, Louisiana................ 28,000 Leased(B)
Braintree, Massachusetts............. 7,000 Leased(C)

- ------------

(A) Lease expires in October 1998, with option to renew for two years

(B) Lease expires in September 2007, with 3 ten-year renewal options

(C) Lease expires June 2002, with negotiable options

The Company also leases an administrative office in Fort Worth consisting
of approximately 2,000 square feet of office space and a facility located in
Laredo, Texas that is used as a terminal.

9

The following table sets forth information relating to the processing
facilities owned or leased by the Oilfield Waste Division.

AREA PERMITTED APPROXIMATE SQUARE
FOR FOOTAGE OF
LOCATION PROCESSING AND DISPOSAL OFFICE FACILITIES OWNED/LEASED
- ------------------------------------- ------------------------- ------------------- --------------

Bateman Island, Louisiana............ 115 acres 5,000 Leased(1)
Bourg, Louisiana..................... 140 acres 5,000 Leased(2)
Elm Grove, Louisiana................. 152 acres 500 Owned
Mermentau, Louisiana................. 277 acres 10,000 Owned
Bustamonte, Texas.................... 120 acres 1,000 Owned
Lacassine, Louisiana................. 100 acres 8,000 Owned

- ------------

(1) Lease expires in October 1999, with seven three-year renewal options.

(2) Lease expires in January 2000, with seven three-year renewal options.

All of the Company's facilities satisfy its present needs; however, as part
of its internal growth strategy, the Liquid Waste Division intends to expand the
size of certain of its facilities and increase the number and types of permitted
waste streams and treatment capabilities of such facilities. The Company
believes that the unutilized capacity of each of the leased landfarms is
sufficient for at least 25 years; which, in each case, exceeds the remaining
term (including options) of the lease agreement for such facility. The Company
also believes that the remaining capacity at each of the landfarms owned by the
Company is sufficient for at least 25 years.

ITEM 3. LEGAL PROCEEDINGS

Prior to the Company's purchase of the Oilfield Waste Division, three
lawsuits were brought against Campbell Wells based upon the operation of its
Bourg, Louisiana landfarm. In one of the lawsuits filed against Campbell Wells,
approximately 300 individuals residing in and around Grand Bois, Louisiana are
seeking unspecified monetary damages allegedly suffered as a result of (i) odors
allegedly emitted by waste received from Exxon Company U.S.A. ("Exxon") at the
landfarm in March 1994, and (ii) alleged air, water and soil contamination in
connection with ongoing operations at the landfarm. The Company was named as a
defendant in this action in January 1998. Trial in this matter on the claims of
ten plaintiffs is set to commence in the 17th Judicial District Court for the
Parish of Lafourche, Louisiana on July 13, 1998. A second lawsuit, brought by
one individual, seeks unspecified monetary damages allegedly suffered as a
result of odors allegedly emitted by waste received from Exxon at the landfarm
in March 1994. This lawsuit is also pending in the 17th Judicial District Court
for the Parish of Lafourche, Louisiana and trial is set to commence on July 13,
1998. The Company has not yet been named as a defendant in this action. In the
third lawsuit, six individuals filed suit on March 7, 1996 against Campbell
Wells in the Civil District Court for the Parish of Orleans, Louisiana, seeking
preliminary and permanent injunctive relief against certain treatment operations
conducted at the Bourg, Louisiana landfarm which the plaintiffs contend have
resulted and will result in adverse health effects by way of emissions of
alleged air pollutants. The plaintiffs' request for a preliminary injunction was
heard during the summer of 1996. On December 30, 1996, the court entered an
order granting in part and denying in part the relief requested by the
plaintiffs. Specifically, the court found that there was no evidence that
emissions resulting from the treatment operations complained of equaled or
exceeded any relevant safety standard, health standard or occupational standard
and, therefore, denied the plaintiffs' request for a temporary injunction
prohibiting such treatment operations. The court did, however, preliminarily
enjoin Campbell Wells (and, thus, indirectly the Company) from treating waste
received from Exxon Company U.S.A. in March 1994 in one particular treatment
cell located within 500 feet of a building in which one of the plaintiffs
resides. In connection therewith, the court ordered that the Commissioner of the
Louisiana Department of Conservation be made a party to the litigation and
substituted for the plaintiffs on the limited issue of whether Campbell Wells
has violated the location criteria for the particular treatment cell involved.
The Company was named as a defendant in this action in January 1998. No trial
date has been set for the plaintiffs' request for permanent injunctive relief;
however, based upon the court's rulings from the preliminary injunction trial
and initial discussions with the Louisiana Department of Conservation, the
Company believes that permanent injunctive relief that might be

10

entered in the action will not have a material adverse effect upon the Company's
consolidated financial position or results or operations.

Prior to the Company's purchase of the Oilfield Waste Division, a class
action lawsuit was filed in the Civil District court for the Parish of Orleans,
Louisiana against Campbell Wells seeking unspecified monetary damages allegedly
suffered as a result of alleged air, water and soil contamination in connection
with ongoing operations at the Mermentau, Louisiana landfarm. The Company has
not been named as a defendant in this lawsuit; however, there can be no
assurance that the Company will not subsequently be named as a defendant in this
lawsuit.

In connection with the Company's purchase of the Oilfield Waste Division,
Sanifill agreed, with certain enumerated exceptions, to retain responsibility
for all liabilities of Campbell Wells as of the closing date of the Campbell
Wells Acquisition including, without limitation, the contingent liabilities
associated with each of the above-referenced lawsuits. Sanifill also agreed in
the Campbell Wells Acquisition Agreement to indemnify the Company from and
against, among other things, the contingent liabilities associated with such
lawsuits. The obligation of Sanifill to indemnify the Company is limited to $10
million.

The Company believes that the ultimate disposition of the above-referenced
lawsuits will not have a material adverse effect on the Company's business,
results of operations or financial condition. This belief is based upon, among
other things, the following reasons: (i) Sanifill has agreed to retain
responsibility for the contingent liabilities associated with these lawsuits,
(ii) Sanifill has agreed to indemnify the Company against such contingent
liabilities up to a maximum of $10 million, (iii) the Company has been operating
the Bourg and Mermentau landfarms only since December 1996, approximately four
months after the last of the three lawsuits seeking monetary damages was
originally filed, and (iv) the results of air, water and soil testing conducted
in and around the Bourg landfarm by the Louisiana Department of Health and
Hospitals, the Louisiana Department of Natural Resources and the Louisiana
Department of Environmental Quality indicate that the Company's operations at
the landfarms are in compliance with all applicable rules and regulations. There
can be no assurance, however, that a judgment will not ultimately be entered
against the Company in one or more of these lawsuits. In the event a monetary
judgment is entered against the Company and Sanifill is not required or is
unable to completely indemnify the Company against such judgment, the Company's
business, results of operations and financial condition could be materially
adversely affected. In addition, notwithstanding any indemnification to be
provided by Sanifill, an adverse ruling against the Company in the lawsuit
seeking injunctive relief could materially adversely affect the Company's
operations at the Bourg landfarm (which operations contributed 12.2% of the
Company's revenues for the year ended December 31, 1997) and, therefore, the
Company's business, consolidated financial position and results of operations.

In August 1997, the Company was named as a defendant in a lawsuit
originally filed in 1994 against Campbell Wells and others in the District Court
of Jim Wells County, Texas. This dispute arose out of an application filed by
Waste Facilities, Inc. ("WFI"), the operator of a South Texas treatment
facility, to renew its permit. The action was dismissed as to the Company in
March 1998.

In February 1997, an action entitled JUDY GARCIA, ET AL V. RE-CLAIM
ENVIRONMENTAL was filed in the 51st Judicial District Court of Harris County,
Texas. This action was brought by the residents of an apartment complex located
adjacent to one of the Company's processing facilities and alleges that the
defendant is guilty of nuisance, trespass, negligence and gross negligence by
reason of its pollution of the air, soil and ground and surface water and the
release of noxious odors. The plaintiffs have requested unspecified monetary
damages. The Company denies liability and intends to vigorously defend the
action.

The Company believes that the nature of the liquid waste business makes it
susceptible to claims such as those described above. In addition, the Company
expects to become subject to various kinds of litigation, including claims for
personal injuries to employees and other persons in proximity to the Company's
operations, in the ordinary course of its business.

11

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

No matters were submitted during the fourth quarter of the fiscal year
covered by this report to a vote of security holders, through the solicitation
of proxies or otherwise.

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

MARKET INFORMATION. The Common Stock has been listed on the AMEX since
August 20, 1997. The trading symbol for the Common Stock is "USL." The closing
price for the Common Stock on March 18, 1998 was $18.88 per share. The following
table sets forth, for the periods indicated, the high and low closing prices for
the Common Stock as reported by AMEX.

QUARTER ENDED HIGH LOW
- ------------------------------------- --------- ---------
September 30, 1997................... $ 18.19 $ 13.13
December 31, 1997.................... $ 19.38 $ 12.75

The Company has not paid dividends on its Common Stock and does not
anticipate paying dividends in the foreseeable future. The Company intends to
retain future earnings, if any, to finance the expansion of its operations and
for general corporate purposes, including future acquisitions. Furthermore, the
Company is prohibited from declaring or paying cash dividends on its capital
stock under the terms of its revolving credit facility.

RECENT SALES OF UNREGISTERED SECURITIES. On January 2, 1998, the Company
issued to Glenn Pratt and Jack Bailey warrants to purchase a total of 20,000
shares of Common Stock in consideration of acquisition consulting services to be
provided to the Company. These sales were exempt from registration under Section
4(2) of the Securities Act, no public offering being involved.

USE OF PROCEEDS. On August 19, 1997, registration statement No. 333-30065
was declared effective by the Securities and Exchange Commission. The
registration statement registered 1,725,000 shares of Common Stock (including
225,000 shares to cover over-allotments) for sale by the Company at an initial
offering price of $9.50 per share. Van Kasper & Company and Sanders Morris Mundy
Inc. served as the managing underwriters in the offering. The $5,661,000 of
proceeds from the offering which remained at November 1, 1997 have been used to
reduce the Company's indebtedness to Sanifill.

ITEM 6. SELECTED FINANCIAL DATA

The consolidated income statement and balance sheet data below set forth
the consolidated financial data of the Company as of December 31, 1996 and 1997,
and for the years ended December 31, 1995, 1996 and 1997, derived from the
consolidated financial statements audited by Arthur Andersen LLP, which appear
elsewhere in this report. The consolidated income statement and balance sheet
data as of December 31, 1995 and for the year ended December 31, 1994 have been
derived from the financial statements audited by Arthur Andersen LLP which do
not appear in this report. The consolidated income statement and balance sheet
data below as of December 31, 1993 and for the year ended December 31, 1993 have
been derived from the unaudited consolidated financial statements of the
Company. The unaudited financial statements for 1993 have been prepared on the
same basis as the audited financial statements and in the opinion of the Company
reflect all adjustments consisting of normal recurring adjustments, necessary
for a fair presentation of such data (in thousands, except per share data).

12

INCOME STATEMENT DATA:

YEAR ENDED DECEMBER 31,
-----------------------------------------------------
1993 1994 1995 1996 1997
--------- --------- --------- --------- ---------

Revenues............................. $ 3,799 $ 8,039 $ 11,127 $ 14,285 $ 38,159
--------- --------- --------- --------- ---------
Gross profit......................... $ 1,873 $ 481 $ 1,192 $ 2,495 $ 13,986
Selling, general and administrative
expenses........................... 1,813 643 863 1,440 5,920
--------- --------- --------- --------- ---------
Income (loss) from operations........ $ 60 $ (162) $ 329 $ 1,055 $ 8,066
Interest and other expense, net...... 125 109 177 309 1,775
--------- --------- --------- --------- ---------
Income (loss) before income taxes.... $ (65) $ (271) $ 152 $ 746 $ 6,291
--------- --------- --------- --------- ---------
Net income (loss).................... $ (65) $ (182) $ 103 $ 491 $ 3,875
========= ========= ========= ========= =========

EARNINGS PER COMMON SHARE DATA:

1995 1996 1997
--------- --------- ---------
Basic Earnings per Common Share...... $ 0.06 $ 0.23 $ 0.65
========= ========= =========
Diluted Earnings per Common Share.... $ 0.06 $ 0.23 $ 0.55
========= ========= =========
Weighted Average Common Shares
Outstanding........................ 1,700 2,117 5,937
========= ========= =========
Weighted Average Common and Common
Equivalent Shares Outstanding...... 1,700 2,139 7,078
========= ========= =========

BALANCE SHEET DATA:

YEAR ENDED DECEMBER 31,
-----------------------------------------------------
1993 1994 1995 1996 1997
--------- --------- --------- --------- ---------

Total Assets......................... $ 1,277 $ 1,410 $ 3,007 $ 46,851 $ 55,016
Total Long-Term Debt, including
current maturities $ 1,320 $ 1,447 $ 2,010 $ 29,950 $ 17,436

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

THE FOLLOWING DISCUSSION SHOULD BE READ IN CONJUNCTION WITH THE COMPANY'S
CONSOLIDATED FINANCIAL STATEMENTS AND THE RELATED NOTES THERETO AND THE OTHER
FINANCIAL INFORMATION INCLUDED ELSEWHERE HEREIN.

OVERVIEW

The Company is a leading provider of services for the collection,
processing, recovery and disposal of liquid wastes. The Liquid Waste Division
collects, processes and disposes of liquid waste and recovers by-products from
these waste streams. The Oilfield Waste Division processes and disposes of
oilfield waste generated in oil and gas exploration and production. On December
13, 1996, the Company acquired its Oilfield Waste Division from Campbell Wells,
L.P. and Campbell Wells NORM, L.P. (referred to as the "Predecessor"to the
extent of the operations so acquired) which were wholly-owned subsidiaries of
Sanifill, Inc. In June 1997, the Company formed its Liquid Waste Division by
acquiring Mesa Processing, Inc., T&T Grease Services, Inc. and Phoenix Fats &
Oils, Inc. (the "Mesa Companies") and American Waste Water ("AWW"). Each of
these acquisitions was accounted for under the pooling-of-interests method of
accounting. During the fourth quarter of 1997, the Liquid Waste Division
acquired five companies (the "Acquired Entities"). The following discussion
addresses the results of operations and financial condition of the Company as
shown in the Consolidated Financial Statements which reflect the historical
results of operations of the Company for the period from its inception in
November 1996 through December 31, 1996 and for the year ended December 31,
1997, and of the Mesa Companies and AWW for all periods presented. The results
of operations of the Acquired Entities are included in the Company's results of
operations from their respective dates of acquisition. The following pro forma
discussion also addresses the operating results of the Predecessor for the
period from January 1, 1996 through December 13, 1996 and for the year ended
December 31, 1995, which are included on Page F-23, combined with the operating
results of the Company to the extent necessary to better analyze the Company's
historical

13

consolidated results of operations. The pro forma financial information assumes
that the Predecessor was acquired on January 1, 1995 and is not necessarily
indicative of the results the Company would have obtained had the Predecessor
been acquired on that date or of the Company's future results.

From January 1 through March 26, 1998, the Liquid Waste Division acquired
four companies which had aggregate revenues of $6.4 million in 1997. The
Company' s total cost for these acquisitions was $9.2 million, including 190,000
shares of Common Stock. The results of operations of companies acquired during
1998 are not included in the historical or pro forma results of operations
presented in this report. The Company has also entered into non-binding letters
of intent to acquire six other companies which had aggregate revenues of $58
million in 1997. The Company expects to complete these acquisitions during the
second quarter, although there can be no assurance that any of these companies
will be acquired.

The Liquid Waste Division derives revenues from two principal sources:
tipping and collection fees received for processing and disposing of waste and
revenue obtained from the sale of by-products (fats, oils and feed proteins
processed and recovered from waste streams). Tipping and collection fees charged
to customers vary per gallon by waste stream according to constituents of the
waste, expenses associated with processing the waste and competitive factors.
By-products are commodities and their prices fluctuate based on market
conditions. By-products are sold primarily to customers in Mexico. Because
substantially all of the Company's operations are conducted in the United States
and foreign sales are denominated and paid in U.S. dollars, the Company is
generally not subject to direct foreign exchange gains and losses. Although such
currency risk is borne by the Company's customers, foreign exchange rate
fluctuations could affect the Company's business by making its products more
expensive. The Company does not believe that fluctuations in the Mexican peso
and other foreign currencies have materially impacted its business in the past.

The Oilfield Waste Division derives revenues from fees charged to customers
for processing and disposing of oil and gas exploration and production waste.
These fees are based on the volume in barrels of waste delivered by a customer
and the composition of the waste. Currently, such fees range from $.40 per
barrel for salt water to $6.75 to $10.25 per barrel for oil-based drilling
fluids, depending upon the makeup of the waste. Accordingly, the Company
believes that total revenues are a better indicator of performance than is the
average fee charged. When waste is unloaded at a given site, the Company
recognizes the related revenue and records a reserve for the estimated amount of
expenses to be incurred to process the waste in order to match revenues with
their related costs. As processing occurs, generally over nine to twelve months,
the reserve is released as expenses are incurred.

Under the terms of a Disposal Agreement with Newpark, Newpark is obligated
to deliver to the Company the lesser of (i) one-third of the barrels of waste
that Newpark receives for processing and disposal in a designated territory and
(ii) 1,850,000 barrels of waste, in each case excluding saltwater. Deliveries
under the Disposal Agreement accounted for 37.4% of the Oilfield Waste
Division's revenues during 1997. The contract price is $5.50 per barrel,
adjusted semi-annually beginning June 30, 1998, with a price floor of $5.50 per
barrel. Although the contract price is lower than the price that the Company
could obtain in the open market, Newpark's delivery obligations under the
Disposal Agreement allow the Company to eliminate virtually all marketing and
transfer expenses on waste delivered under the Disposal Agreement. Accordingly,
the Company's gross margin on this waste volume generally is lower than the
gross margin on waste volume from customers other than Newpark, but the Company
believes that operating margins on waste volume from Newpark and other customers
are comparable. The Company expects a disparity between the contract price and
market price to continue for the duration of the Disposal Agreement. There is no
absolute floor on the variable minimum delivery requirements under the Disposal
Agreement and, therefore, a significant reduction in the volume of waste
generated in the territory or in Newpark's market share could materially
adversely affect the Company's results of operations. Due to certain noncompete
restrictions with Newpark related to waste generated offshore, the Company is
focusing its future marketing efforts toward inland waste generators. If its
marketing efforts are successful, the Company believes that both gross and
operating margins will improve.

14

Depreciation and amortization expenses account for a substantial portion of
the Company's expenses each period. Landfarms, which constitute approximately
37.5% of the Company's net property, plant and equipment, are amortized over 25
years. Other depreciable or amortizable assets are expensed over periods ranging
from three to 40 years. Amortization expenses relating to acquisitions have not
been significant in the past, but are expected to increase as the Company
pursues its acquisition strategy.

The Company anticipates that the Liquid Waste Division will represent a
growing share of the Company's business and that internal growth of the Liquid
Waste Division will continue at a faster rate than internal growth of the
Oilfield Waste Division. Internal growth of the Liquid Waste Division is
expected to continue because of enactment of state-wide "full pump"
regulations in Texas as well as recent and ongoing expansions of the Company's
processing facilities. In addition, the Company is focusing its acquisition
activity primarily in the Liquid Waste Division.

RESULTS OF OPERATIONS

YEARS ENDED DECEMBER 31, 1997 AND 1996

REVENUES. Revenues in 1997 totaled $38.2 million versus $14.3 million in
1996. Revenues increased by 22.5% to $38.2 million in 1997 from 1996 pro forma
revenues of $31.1 million. The Oilfield Waste Division contributed 52.2% of
consolidated revenues in 1997 and 56.8% of pro forma revenues in 1996. Within
the Liquid Waste Division, by-product sales contributed approximately 68% in
1997 and approximately 85% in 1996.

By-product sales increased by 8.8% from 1996 to 1997 and tipping and
collection fees increased by 180.1%. An 18.1% increase in the volume of
by-products sold was offset by 7.9% decrease in the average price per pound. The
increase in volumes was attributable to expanded output of brown grease as a
result of the expansion of the Dallas processing facility while the decrease in
selling prices was due to market conditions. Processing volumes in 1997
increased by 215.8%, reflecting growth of the Houston market and the effect of
acquisitions completed during the fourth quarter. The average price per gallon
decreased slightly from 1996 to 1997, and the Company expects average prices to
decline modestly during 1998. The Acquired Entities contributed $1.3 million to
the Liquid Waste Division's revenue in 1997. For the full year, the Acquired
Entities had combined revenues of $6.5 million.

Revenues from the Oilfield Waste Division increased by 12.8% over 1996 pro
forma revenues. The number of barrels received for processing increased by 30.0%
to 4,452,000 barrels in 1997 from 3,424,000 barrels in 1996, primarily due to
increased volumes of saltwater and inland generated waste. The Company does not
expect recent declines in oil prices to have a significant effect on volumes
because a substantial part of drilling activity in the Gulf relates to
exploration and production of gas. However, a prolonged downturn in oil and gas
prices could reduce processing volumes.

GROSS MARGINS. The Company's gross margin increased to 36.7% in 1997 from
17.5% in 1996, reflecting improved margins in the Liquid Waste Division, as well
as the contribution of the Oilfield Waste Division for the full year in 1997.
Pro forma gross margin was 33.8% in 1996. During 1997 and 1996, the Oilfield
Waste Division contributed to gross profit approximately 76.9% and 80.8% on a
pro forma basis, respectively.

Gross margin in the Liquid Waste Division increased to 17.8% in 1997 from
15.1% in 1996. This improvement is primarily attributable to the larger
proportion of processing operations in 1997, which provides higher margins than
do by-product sales. Gross margins were positively affected by higher throughput
in processing and by-product operations and lower raw materials costs, the
benefits of which were partially offset by increased personnel expenses. Gross
margin in the Oilfield Waste Division increased to 54.0% in 1997 from 48.1% on a
pro forma basis in 1996. This improvement is primarily the result of increased
volumes of inland waste in 1997.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. In 1997, selling, general
and administrative expenses increased to $5,920,000 from $1,440,000 in 1996. The
majority of the increase relates to the inclusion of the Oilfield Waste Division
for all of 1997 as compared to less than one month in 1996. Selling, general and

15

administrative expenses increased by 47.5% from 1996 on a proforma basis to
1997. Selling, general and administrative expenses increased to 15.3% of 1997
revenues from 12.7% of 1996 pro forma revenues, primarily due to higher
personnel costs and professional fees.

INTEREST AND OTHER EXPENSES. Net interest and other expenses increased to
$1,775,000 in 1997 from $309,000 in 1996, primarily as a result of interest
expense related to debt incurred in acquiring the Oilfield Waste Division and
the Acquired Entities.

YEARS ENDED DECEMBER 31, 1996 AND 1995

REVENUES. Revenues in 1996 totaled $14.3 million versus $11.1 million in
1995. On a pro forma basis revenues increased by 18.6% to $31.1 million in 1996
from $26.2 million. In 1995 of total pro forma revenues, the Oilfield Waste
Division contributed 56.8% in 1996 and 57.6% in 1995. Within the Liquid Waste
Division, by-product sales contributed approximately 85% of revenues in 1996 and
approximately 88% in 1995.

By-product sales increased by 16.1% from 1995 to 1996 and tipping and
collection fees increased by 57.1%. This increase in revenues from the sale of
by-products was due to a 4.5% increase in volumes and an 11.2% increase in the
average price per pound. The increase in volumes, in turn, resulted from
increased production of certain blends of product in response to market demand.
The increased price per pound was attributable to product mix and generally
higher market prices. Processing volumes in 1996 increased by 33.9% and the
average price per gallon increased by 16.9%. The increase in volumes reflects
growth of the Houston market. The increase in the average price per gallon was
primarily attributable to collection revenues obtained in the Company's
acquisition of a collection business in March 1996.

Pro forma revenues from the Oilfield Waste Division increased by 16.9%. The
number of barrels received for processing increased by 37.4% to 3,424,000
barrels in 1996 from 2,492,000 barrels in 1995, primarily due to increased
deliveries of pit remediation waste.

GROSS MARGINS. The Company's gross margin increased to 17.5% in 1996 from
10.7% in 1995, reflecting improved margins in the Liquid Waste Division, as well
as the addition of the Oilfield Waste Division at the end of 1996. Pro forma
gross margin was 33.8% in 1996, as compared to 31.7% in 1995. During 1996 and
1995, the Oilfield Waste Division contributed approximately 80.8% and 85.7%,
respectively, of pro forma gross profit.

Gross margin in the Liquid Waste Division increased to 15.1% in 1996 from
10.7% in 1995. This improvement is attributable to increased sales of
by-products, lower per unit processing costs, lower per unit costs of raw
materials, and increased revenues from processing operations, offset in part by
increased personnel expenses. The Company believes that gross margin on
by-product sales improved because of increased capacity and utilization of the
processing facilities, resulting in more efficient operations. Pro forma gross
margin in the Oilfield Waste Division increased to 48.1% in 1996 from 47.2% in
1995. This improvement is primarily the result of increased volumes in 1996.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. In 1996, selling, general
and administrative expenses increased to $1,440,000 from $863,000 in 1995. The
majority of the increase relates to the addition of the Oilfield Waste Division
at the end of 1996. On a pro forma basis, selling, general and administrative
expenses increased from $3,852,000 in 1995 to $3,964,000 in 1996. However, pro
forma selling, general and administrative expenses were reduced to 12.7% of 1996
pro forma revenues from 14.7% of 1995 pro forma revenues, primarily due to
improved economies of scale.

INTEREST AND OTHER EXPENSES. Net interest and other expenses increased to
$309,000 in 1996 from $177,000 in 1995, primarily as a result of interest
expense related to the acquisition of the Oilfield Waste Division.

LIQUIDITY AND CAPITAL RESOURCES

The Company had net working capital of $2,122,000 at December 31, 1997,
compared to net working capital of $223,000 at December 31, 1996. Improvement in
the working capital position relates primarily to

16

a $5 million decrease in current maturities of long-term debt because of the
payment of short-term debt from a portion of the proceeds of the Company's
initial public offering of Common Stock and the refinancing of short-term debt
under a $50 million line of credit obtained in December 1997.

The Company's capital requirements for its continuing operations consist of
its general working capital needs, scheduled principal payments on its debt
obligations and capital leases, and planned capital expenditures. At the end of
1997, approximately $800,000 of principal payments on debt obligations were
payable during the next twelve months. Capital expenditures for 1998 are
budgeted at approximately $3.8 million. Of this amount, approximately $1.2
million is budgeted to be invested in the Oilfield Waste Division on equipment
replacements and landfarm expansions. The remaining amount is budgeted to be
invested in the Liquid Waste Division for plant expansions, equipment and
vehicle upgrades.

At December 31, 1997, the Company had established a $3.3 million reserve to
provide for the cost of future closures of landfarms. The amount of this
unfunded reserve is based on the estimated total cost to the Company of closing
the facilities as calculated in accordance with the applicable regulations.
Applicable regulatory agencies require the Company to post financial assurance
with the agencies to assure that all waste will be treated and the facilities
closed appropriately. The Company has in place a total of $4.0 million of
financial assurance in the form of letters of credit and bonds.

In December 1997, the Company entered into a $50 million credit agreement
with a group of banks under which the Company may borrow to fund working capital
requirements and acquisitions. Amounts outstanding under the credit facility are
secured by, among other things, a lien on all or substantially all of the
Company's assets. The Credit Facility prohibits the payment of dividends and
requires the Company to comply with certain financial covenants. The Credit
Facility also places certain restrictions on, among other things, acquisitions
and other business combination transactions which may be consummated by the
Company. The Company does not believe that these restrictions will have a
material adverse effect on the Company's ability to fulfill its current
acquisition strategy. The debt outstanding under the Credit Facility may be
accelerated at the option of the lenders in the event that, among other things,
a change in control of the Company occurs or Michael P. Lawlor, W. Gregory Orr
or Earl J. Blackwell ceases to serve as an executive officer of the Company and
is not replaced within sixty days by an individual reasonably satisfactory to
the lenders. The Company had borrowed approximately $15.3 million under the
credit facility at year-end.

The Company's capital resources consist of cash reserves, cash which is
expected to be generated from operations and funds available under its line of
credit. The Company expects that these resources will be sufficient to provide
for the Company's capital requirements for continuing operations for at least
the next twelve months. In addition to capital required for its ongoing
operations, the Company will require additional capital to pursue its
acquisition strategy. Currently, the Company has identified and is in various
stages of negotiations to acquire six companies which, if completed on the terms
contemplated, would result in the issuance of approximately 786,000 shares of
Common Stock and the payment of cash and assumption of debt of approximately
$24.7 million. The Company anticipates that the cash required for these
acquisitions would be obtained under the line of credit. The Company also is
evaluating other potential acquisitions. The Company anticipates that future
acquisitions would also be made using a combination of Common Stock and cash
payments, some of which may be derived from borrowings under the line of credit.
In addition, the Company may seek to raise additional equity capital for all or
a substantial part of the consideration to be paid for future acquisitions or to
reduce its debt. In the event that the Common Stock does not maintain a
sufficient market value or potential acquisition candidates are unwilling to
accept Common Stock as part of the consideration for the sale of their
businesses, the Company would be required to utilize more of its cash resources
in order to continue its acquisition program. At the same time, the Company may
be unable to raise additional capital due to market conditions. As a result, the
timing of acquisitions over the longer term can be expected to be affected by
prevailing market conditions. In addition, if the Company were unable to secure
the capital necessary to carry out its acquisition program, the implementation
of the Company's growth strategy would be adversely affected.

17

YEAR 2000 COMPLIANCE

Many existing computer programs use only two digits to identify a year in
the date field. These programs were designed and developed without considering
the impact of the upcoming change in the century. If not corrected, such
computer applications could fail or create erroneous result by or at the Year
2000. The Company has determined that its computer programs are Year 2000
compliant. In the course of its due diligence review of future acquisitions, the
Company will assess the systems of the respective companies for Year 2000
compliance and make modifications if required.

FORWARD LOOKING STATEMENTS

Statements of the Company's or management's intentions, beliefs,
anticipations, expectations or similar statements concerning future events
contained in this report constitute "forward looking statements"as defined in
the Private Securities Litigation Reform Act of 1995. As with any future event,
there can be no assurance that the events described in forward looking
statements made in this report will occur or that the results of future events
will not vary materially from those described herein. Important factors that
could cause the Company's actual performance and operating results to differ
materially from the forward looking statements include, among other factors,
changes in the regulatory environment in which the Company operates, changes in
the level of economic activity in markets served by the Company, the
availability of capital to support the Company's growth strategy, the ability of
the Company to execute it business plan, changes in the level of exploration and
production of oil and gas, particularly in the Gulf Coast region, changes in the
level of competition faced by the Company in each of its markets, the loss of
business or inability to collect payment from one or more significant customers
and the adverse resolution of pending litigation affecting the Company's
landfarms.

ITEM 7A. MARKET RISK DISCLOSURE

Not applicable.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The financial statements and supplementary data required by this item are
included in this report beginning on page F-1.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

None

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

Incorporated by reference from the Proxy Statement for the Annual Meeting
of Stockholders to be held on May 5, 1998.

ITEM 11. EXECUTIVE COMPENSATION

Incorporated by reference from the Proxy Statement for the Annual Meeting
of Stockholders to be held on May 5, 1998.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

Incorporated by reference from the Proxy Statement for the Annual Meeting
of Stockholders to be held on May 5, 1998.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Incorporated by reference from the Proxy Statement for the Annual Meeting
of Stockholders to be held on May 5, 1998.

18

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K

(a) Financial Statements are filed as part of this report:

See Index to Financial Statements on Page F-1 of this Report.

(b) All schedules for which provision is made in the applicable accounting
regulations of the Commission are not required under the related
instructions, are inapplicable, or the information is included in the
consolidated financial statements, and therefore have been omitted.

(c) Reports on Form 8-K

None

(d) Exhibits:

EXHIBIT
NO. DESCRIPTION
- ----------------------------------------------------------------
3.1 -- Second Amended and Restated Certificate
of Incorporation of U S Liquids Inc.
(Exhibit 3.1 of the U S Liquids Inc.
Registration Statement on Form S-1 (File
No. 333-30065), effective August 19,
1997, is hereby incorporated by
reference).
3.2 -- Amended and Restated Bylaws of U S
Liquids Inc. (Exhibit 3.2 of the U S
Liquids Inc. Registration Statement on
Form S-1 (File No. 333-30065), effective
August 19, 1997, is hereby incorporated
by reference).
4.1 -- Form of Certificate Evidencing Ownership
of Common Stock of U S Liquids Inc.
(Exhibit 4.1 of the U S Liquids Inc.
Registration Statement on Form S-1 (File
No. 333-30065), effective August 19,
1997, is hereby incorporated by
reference).
+4.2 -- Credit Agreement, dated December 17,
1997, among U S Liquids Inc., Bank of
America National Trust and Savings
Association, as agent and issuing bank,
BankBoston, N.A. and Wells Fargo Bank,
N.A.
+4.3 -- Note, dated December 17, 1997, of U S
Liquids Inc. payable to Bank of America
National Trust and Savings Association.
+4.4 -- Note, dated December 17, 1997, of U S
Liquids Inc. payable to BankBoston, N.A.
+4.5 -- Note, dated December 17, 1997, of U S
Liquids Inc. payable to Wells Fargo
Bank, N.A.
+4.6 -- Security Agreement, dated December 17,
1997, executed by U S Liquids Inc. and
its subsidiaries in favor of Bank of
America National Trust and Savings
Association.
+4.7 -- Company Pledge Agreement, dated December
17, 1997, executed by U S Liquids Inc.
in favor of Bank of America National
Trust and Savings Association.
10.1 -- Asset Purchase Agreement, dated December
2, 1996, among U S Liquids Inc.,
Sanifill, Inc. and certain affiliates of
Sanifill, Inc. (Exhibit 10.1 of the U S
Liquids Inc. Registration Statement on
Form S-1 (File No. 333-30065), effective
August 19, 1997, is hereby incorporated
by reference).
10.2 -- Seller Noncompetition Agreement, dated
December 13, 1996, between U S Liquids
Inc. and Sanifill, Inc. (Exhibit 10.2 of
the U S Liquids Inc. Registration
Statement on Form S-1 (File No.
333-30065), effective August 19, 1997,
is hereby incorporated by reference).
10.3 -- Buyer Noncompetition Agreement, dated
December 13, 1996, between Sanifill,
Inc. and U S Liquids Inc. (Exhibit 10.3
of the U S Liquids Inc. Registration
Statement on Form S-1 (File No.
333-30065), effective August 19, 1997,
is hereby incorporated by reference).
10.4 -- NOW Disposal Agreement, dated June 4,
1996, among Sanifill, Inc., Oilfield
Waste Disposal Operating Co., and
Campbell Wells, Ltd. (Exhibit 10.4 of
the U S Liquids Inc. Registration
Statement on Form S-1 (File No.
333-30065), effective August 19, 1997,
is hereby incorporated by reference).

19

EXHIBIT
NO. DESCRIPTION
- ----------------------------------------------------------------

10.5 -- Noncompetition Agreement, dated August
12, 1996, between Sanifill, Inc. and
Newpark Resources, Inc. (Exhibit 10.5 of
the U S Liquids Inc. Registration State-
ment on Form S-1 (File No. 333-30065),
effective August 19, 1997, is hereby
incorporated by reference).
10.6 -- Assumption and Guarantee Agreement dated
August 12, 1996, among Newpark
Resources, Inc., Sanifill, Inc., and
Campbell Wells, Ltd. (Exhibit 10.6 of
the U S Liquids Inc. Registration
Statement on Form S-1 (File No.
333-30065), effective August 19, 1997,
is hereby incorporated by reference).

10.7 -- Lease and Access Agreement between
Campbell Wells, Ltd. and Newpark
Resources, Inc. (Exhibit 10.7 of the U S
Liquids Inc. Registration Statement on
Form S-1 (File No. 333-30065), effective
August 19, 1997, is hereby incorporated
by reference).

10.8 -- Sublease and Access Agreement between
Campbell Wells, Ltd. and Newpark
Resources, Inc. and underlying lease
agreement (Exhibit 10.8 of the U S
Liquids Inc. Registration Statement on
Form S-1 (File No. 333-30065), effective
August 19, 1997, is hereby incorporated
by reference).

10.9 -- Sublease and Access Agreement between
Campbell Wells, Ltd. and Newpark
Resources, Inc. and underlying lease
agreement (Exhibit 10.9 of the U S
Liquids Inc. Registration Statement on
Form S-1 (File No. 333-30065), effective
August 19, 1997, is hereby incorporated
by reference).

10.10 -- Consent to Assignment and Assumption of
Contracts, dated December 13, 1996,
among Sanifill, Inc., Campbell Wells,
L.P. and U S Liquids Inc. (Exhibit 10.10
of the U S Liquids Inc. Registration
Statement on Form S-1 (File No.
333-30065), effective August 19, 1997,
is hereby incorporated by reference).

10.11 -- Form of Nonqualified Stock Option
Agreement between U S Liquids Inc. and
certain individuals (Exhibit 10.11 of
the U S Liquids Inc. Registration
Statement on Form S-1 (File No.
333-30065), effective August 19, 1997,
is hereby incorporated by reference).

10.12 -- U S Liquids Inc. Amended and Restated
Stock Option Plan (Exhibit 10.12 of the
U S Liquids Inc. Registration Statement
on Form S-1 (File No. 333-30065),
effective August 19, 1997, is hereby
incorporated by reference).

10.13 -- U S Liquids Inc. Directors' Stock Option
Plan (Exhibit 10.13 of the U S Liquids
Inc. Registration Statement on Form S-1
(File No. 333-30065), effective August
19, 1997, is hereby incorporated by
reference).

10.14 -- Form of Grant of Incentive Stock Option
Agreement (Exhibit 10.14 of the U S
Liquids Inc. Registration Statement on
Form S-1 (File No. 333-30065), effective
August 19, 1997, is hereby incorporated
by reference).

*`10.15 -- Employment Agreement, dated February 13,
1998, between U S Liquids Inc. and W.
Gregory Orr.

*`10.16 -- Employment Agreement, dated February 13,
1998, between U S Liquids Inc. and Earl
J. Blackwell.

`10.17 -- Asset Purchase Agreement, dated December
15, 1997, among U S Liquids Inc., Mesa
Processing, Inc., Waste Technologies,
Inc., Kirk Johnson, Norman Johnson, John
Jetelina and Ron McMahan.

10.18 -- Agreement and Plan of Reorganization,
dated September 30, 1997, among U S
Liquids Inc., U S Liquids/Reclaim
Acquisition Corporation, Re-Claim
Environmental, Inc., John E. Tuma, Duane
F. Herbst, A. Travis Campbell, Russell
Reichert, Kenneth B. Holmes, R. L.
Smothers and Rainbow Investment Company
(Exhibit 2.1 to the Form 10-Q for the
quarter ended September 30, 1997 is
hereby incorporated by reference).

20

EXHIBIT
NO. DESCRIPTION
- ----------------------------------------------------------------
10.19 -- Purchase of Membership Interest
Agreement, dated September 30, 1997,
among U S Liquids Inc., Re-Claim
Environmental Louisiana LLC, John E.
Tuma and Reyncor Industrial Alcohol,
Inc. (Exhibit 2.2 of the Form 10-Q for
the quarter ended September 30, 1997 is
hereby incorporated by reference).
10.20 -- Purchase and Sale of Assets Agreement,
dated September 30, 1997, among T&T
Grease Service, Inc., A&B Enterprises,
Inc. and Earnest L. McCombs (Exhibit 2.3
to the Form 10-Q for the quarter ended
September 30, 1997 is hereby
incorporated by reference).
10.21 -- Stock Distribution Agreement, dated June
16, 1997, between U S Liquids Inc. and
Thomas B. Blanton (Exhibit 10.21 of the
U S Liquids Inc. Registration Statement
on Form S-1 (File No. 333-30065),
effective August 19, 1997, is hereby
incorporated by reference).
10.22 -- Form of Stock Distribution Agreement,
dated June 16, 1997, between U S Liquids
Inc. and the former stockholders of
American WasteWater Inc. (Exhibit 10.22
of the U S Liquids Inc. Registration
Statement on Form S-1 (File No.
333-30065), effective August 19, 1997,
is hereby incorporated by reference).
10.23 -- Stock Distribution Agreement, dated June
16, 1997, between U S Liquids Inc. and
W. Gregory Orr (Exhibit 10.23 of the U S
Liquids Inc. Registration Statement on
Form S-1 (File No. 333-30065), effective
August 19, 1997, is hereby incorporated
by reference).
10.24 -- Noncompetition Agreement, dated June 17,
1997, between U S Liquids Inc. and
Thomas B. Blanton (Exhibit 10.24 of the
U S Liquids Inc. Registration Statement
on Form A1 (File No. 333-30065),
effective August 19, 1997, is hereby
incorporated by reference).
10.25 -- Noncompetion Agreement, dated June 17,
1997, between U S Liquids Inc. and
William H. Wilson, Jr. (Exhibit 10.25 of
the U S Liquids Inc. Registration on
Form S-1 (File No. 333-30065), effective
August 19, 1997, is hereby incorporated
by reference).
10.26 -- Agreement to Vote Stock, dated June 16,
1997, among U S Liquids Inc., Thomas B.
Blanton, W. Gregory Orr, Earl J.
Blackwell, William M. DeArman and
certain other parties (Exhibit 10.26 of
the U S Liquids Inc. Registration
Statement on Form S-1 (File No.
333-30065), effective August 19, 1997,
is hereby incorporated by reference).
10.27 -- Estoppel, Waiver and Amendment
Agreement, dated June 16, 1997, between
Sanifill, Inc. and U S Liquids Inc.
(Exhibit 10.27 of the U S Liquids Inc.
Registration Statement on Form S-1 (File
No. 333-30065), effective August 19,
1997, is hereby incorporated by
reference).
10.28 -- Financial Advisory Agreement, dated May
15, 1997, between U S Liquids Inc. and
Sanders Morris Mundy Inc. and
supplemental letter dated July 10, 1997
(Exhibit 10.28 of the U S Liquids Inc.
Registration Statement on Form S-1 (File
No. 333-30056), effective August 19,
1997, is hereby incorporated by
reference).
10.29 -- Service Agreement, dated June 23, 1997,
between U S Liquids Inc. and Bellmeade
Capital Partners (Exhibit 10.29 of the U
S Liquids Inc. Registration Statement on
Form S-1 (File No. 333-30065), effective
August 19, 1997, is hereby incorporated
by reference).
10.30 -- Service Agreement, dated June 23, 1997,
between U S Liquids Inc. and Mark
Liebovit (Exhibit 10.30 of the U S
Liquids Inc. Registration Statement on
Form S-1 (File No. 333-30065), effective
August 19, 1997, is hereby incorporated
by reference).
10.31 -- Warrant, dated December 13, 1996, issued
by U S Liquids Inc. to Sanifill, Inc.
(Exhibit 10.31 of the U S Liquids Inc.
Registration Statement on Form S-1 (File
No. 333-30065), effective August 19,
1997, is hereby incorporated by
reference.

21

EXHIBIT
NO. DESCRIPTION
- ----------------------------------------------------------------
10.32 -- Warrant Agreement, dated May 15, 1997,
between U S Liquids Inc. and Sanders
Morris Mundy Inc. (Exhibit 10.32 of the
U S Liquids Inc. Registration Statement
on Form S-1 (File No. 333-30065),
effective August 19, 1997, is hereby
incorporated by reference).
10.33 -- Warrant Agreement among U S Liquids
Inc., Van Kasper & Company and Sanders
Morris Mundy Inc. (Exhibit 10.33 of the
U S Liquids Inc. Registration Statement
on Form S-1 (File No. 333-34875),
effective September 18, 1997, is hereby
incorporated by reference).
10.34 -- Warrant, dated June 23, 1997, issued by
U S Liquids Inc. to Bellmeade Capital

Partners (Exhibit 10.34 of the U S
Liquids Inc. Registration Statement on
Form S-1 (File No. 333-30065), effective
August 19, 1997, is hereby incorporated
by reference).
10.35 -- Warrant, dated June 23, 1997, issued by
U S Liquids Inc. to Mark Liebovit
(Exhibit 10.35 of the U S Liquids Inc.
Registration Statement on Form S-1 (File
No. 333-30065), effective August 19,
1997, is hereby incorporated by
reference).
10.36 -- Stock Purchase Agreement, dated
September 10, 1996, among Mesa
Processing, Inc., Jack C. Wolcott and
South Texas By-Products Company, Inc.
(Exhibit 10.36 of the U S Liquids Inc.
Registration Statement on Form S-1 (File
No. 333-30065), effective August 19,
1997, is hereby incorporated by
reference).
10.37 -- Non-Competition Agreement, dated
September 10, 1996, between Jack C.
Wolcott and Mesa Processing, Inc.
(Exhibit 10.37 of the U S Liquids Inc.
Registration Statement on Form S-1 (File
No. 333-30065), effective August 19,
1997, is hereby incorporated by
reference).
10.38 -- Stock Distribution Agreement, dated June
16, 1997, between U S Liquids Inc. and
Earl J. Blackwell (Exhibit 10.38 of the
U S Liquids Inc. Registration Statement
on Form S-1 (File No. 333-30065),
effective August 19, 1997, is hereby
incorporated by reference).
10.39 -- Stock Distribution Agreement, dated June
16, 1997, between U S Liquids Inc. and
William M. DeArman (Exhibit 10.39 of the
U S Liquids Inc. Registration Statement
on Form S-1 (File No. 333-30065),
effective August 19, 1997, is hereby
incorporated by reference).
*10.40 -- Employment Agreement, dated July 2,
1997, between U S Liquids Inc. and
Michael P. Lawlor (Exhibit 10.40 of the
U S Liquids Inc. Registration Statement
on Form S-1 (File No. 333-30065),
effective August 19, 1997, is hereby
incorporated by reference).
10.41 -- Warrant, dated January 1, 1998, issued
by U S Liquids Inc. to Glenn A. Pratt.
10.42 -- Amendment No. 1 to Financial Advisory
Agreement, dated August 18, 1997,
between U S Liquids Inc. and Sanders
Morris Mundy Inc. (Exhibit 10.42 of the
U S Liquids Inc. Registration Statement
on Form S-1 (File No. 333-30065),
effective August 19, 1997, is hereby
incorporated by reference).
10.43 -- Agreement and Plan of Merger, dated June
16, 1997, among U S Liquids Inc., AWW
Acquisition Corp., American WasteWater
Inc., William H. Wilson, Jr. and Michael
W. Minick. (Exhibit 2.1 of the U S
Liquids Inc. Registration Statement on
Form S-1 (File No. 333-30065), effective
August 19, 1997, is hereby incorporated
by reference).
10.44 -- Agreement and Plan of Merger, dated June
16, 1997, among U S Liquids Inc., Mesa
Acquisition Corp., T&T GS Acquisition
Corp., Phoenix F&O Acquisition Corp.,
Mesa Processing, Inc., T&T Grease
Service, Inc., Phoenix Fats & Oils, Inc.
and Thomas B. Blanton. (Exhibit 2.2 of
the U S Liquids Inc. Registration
Statement on Form S-1 (File No.
333-30065), effective August 19, 1997,
is hereby incorporated by reference).

22

EXHIBIT
NO. DESCRIPTION
- ----------------------------------------------------------------
10.45 -- Warrant, dated August 25, 1997, issued
by U S Liquids Inc. to Van Kasper &
Company. (Exhibit 10.45 of U S Liquids
Inc. Registration Statement on Form S-1
(File No. 333-34875), effective
September 18, 1997, is hereby
incorporated by reference).
10.46 -- Warrant, dated August 25, 1997, issued
by U S Liquids Inc. to Sanders Morris
Mundy Inc. Exhibit 10.46 of U S Liquids
Inc. Registration Statement on Form S-1
(File No. 333-34875), effective
September 18, 1997, is hereby
incorporated by reference).
10.47 -- Warrant issued by U S Liquids Inc. to
Sanders Morris Mundy Inc. (Exhibit 10.47
of U S Liquids Inc. Registration
Statement on Form S-1 (File No.
333-34875), effective September 18,
1997, is hereby incorporated by
reference).
+10.48 -- Warrant, dated January 1, 1998, issued
by U S Liquids Inc. to John Bailey.
+21.1 -- List of subsidiaries of U S Liquids Inc.
+23.1 -- Consent of Arthur Andersen LLP.
+27.1 -- Financial Data Schedule.

- ------------

+ Filed herewith

* Management Contract

23

SIGNATURES

PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON
ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED.

U S LIQUIDS INC.

Date: March 30, 1998 By: /s/Michael P. Lawlor
MICHAEL P. LAWLOR
CHAIRMAN OF THE BOARD AND
CHIEF EXECUTIVE OFFICER
Date: March 30, 1998 By: /s/W. Gregory Orr
W. GREGORY ORR
DIRECTOR, PRESIDENT AND
CHIEF OPERATING OFFICER
Date: March 30, 1998 By: /s/Earl J. Blackwell
EARL J. BLACKWELL
CHIEF FINANCIAL OFFICER,
SENIOR VICE PRESIDENT AND
SECRETARY

PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXHANGE ACT OF 1934, THIS
REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE
REGISTRANT AND IN THE CAPACITIES AND ON THE DATES INDICATED.

Date: March 30, 1998 By: /s/Michael P. Lawlor
MICHAEL P. LAWLOR
CHAIRMAN OF THE BOARD OF
DIRECTORS
Date: March 30, 1998 By: /s/W. Gregory Orr
W. GREGORY ORR
DIRECTOR
Date: March 30, 1998 By: /s/William A. Rothrock, IV
WILLIAM A. ROTHROCK, IV
DIRECTOR
Date: March 30, 1998 By: /s/James F. McEneaney
JAMES F. MCENEANEY
DIRECTOR
Date: March 30, 1998 By: /s/Alfred Tyler 2nd
ALFRED TYLER 2ND
DIRECTOR
Date: March 30, 1998 By: /s/Thomas B. Blanton
THOMAS B. BLANTON

24

INDEX TO FINANCIAL STATEMENTS

PAGE
------
U S LIQUIDS INC.
Report of Independent Public
Accountants..................... F-2
Consolidated Balance Sheets..... F-3
Consolidated Statements of
Income.......................... F-4
Consolidated Statements of
Stockholders' Equity............ F-5
Consolidated Statements of Cash
Flows........................... F-6
Notes to Consolidated Financial
Statements...................... F-7
U S LIQUIDS INC. PREDECESSOR
Report of Independent Public
Accountants..................... F-21
Balance Sheets.................. F-22
Statements of Income............ F-23
Notes to Financial Statements... F-24

F-1

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To U S Liquids Inc.:

We have audited the accompanying consolidated balance sheets of U S Liquids
Inc. (a Delaware corporation) and subsidiaries as of December 31, 1996 and 1997,
and the related consolidated statements of income, stockholders' equity and cash
flows for each of the three years in the period ended December 31, 1997. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.

In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
U S Liquids Inc. and subsidiaries as of December 31, 1996 and 1997, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1997, in conformity with generally
accepted accounting principles.

ARTHUR ANDERSEN LLP

Houston, Texas
March 3, 1998

F-2

U S LIQUIDS INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

DECEMBER 31,
--------------------
1996 1997
--------- ---------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents....... $ 5,604 $ 2,203
Accounts receivable, less
allowances of $265 and $342.... 4,843 5,436
Inventories..................... 339 567
Prepaid expenses and other
current assets................. 850 621
--------- ---------
Total current assets....... $ 11,636 $ 8,827
PROPERTY, PLANT AND EQUIPMENT, net... 34,582 39,110
DEFERRED INCOME TAXES................ 100 --
INTANGIBLE ASSETS, net............... 85 6,078
OTHER ASSETS, net.................... 448 1,001
--------- ---------
Total assets............... $ 46,851 $ 55,016
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current maturities of long-term
obligations.................... $ 5,817 $ 792
Accounts payable................ 2,984 2,154
Accrued liabilities............. 2,147 3,759
Advances from stockholders and
related-party notes payable.... 465 --
--------- ---------
Total current
liabilities.................. $ 11,413 $ 6,705
LONG-TERM OBLIGATIONS, net of current
maturities......................... 23,668 16,644
CELL PROCESSING RESERVE.............. 7,732 7,330
CLOSURE AND REMEDIATION RESERVES..... 2,500 3,275
DEFERRED INCOME TAXES................ -- 156
--------- ---------
Total liabilities.......... $ 45,313 $ 34,110
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value,
5,000,000 shares authorized,
none issued
Series A 72 percent
cumulative preferred stock,
$1.00 par value, 10,000 shares
authorized, issued and
outstanding as of December 31,
1996........................... $ 10 $ --
Common stock, $.01 par value,
30,000,000 shares authorized,
5,238,875 and 7,303,164 shares
issued and outstanding......... 52 73
Additional paid-in capital...... 1,379 17,190
Retained earnings............... 97 3,643
--------- ---------
Total stockholders'
equity....................... $ 1,538 $ 20,906
--------- ---------
Total liabilities and
stockholders' equity.... $ 46,851 $ 55,016
========= =========

The accompanying notes are an integral part of these consolidated financial
statements.

F-3

U S LIQUIDS INC.
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)

YEAR ENDED DECEMBER 31,
-------------------------------
1995 1996 1997
--------- --------- ---------
REVENUES............................. $ 11,127 $ 14,285 $ 38,159
COST OF OPERATIONS................... 9,935 11,790 24,173
--------- --------- ---------
Gross profit.................... $ 1,192 $ 2,495 $ 13,986
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES........................... 863 1,440 5,920
--------- --------- ---------
INCOME FROM OPERATIONS............... $ 329 $ 1,055 $ 8,066
INTEREST EXPENSE, net................ 159 397 1,734
OTHER (INCOME) EXPENSE, net.......... 18 (88) 41
--------- --------- ---------
INCOME BEFORE PROVISION FOR INCOME
TAXES.............................. $ 152 $ 746 $ 6,291
PROVISION FOR INCOME TAXES........... 49 255 2,416
--------- --------- ---------
NET INCOME........................... $ 103 $ 491 $ 3,875
========= ========= =========
Basic Earnings per Common Share...... $ 0.06 $ 0.23 $ 0.65
========= ========= =========
Diluted Earnings per Common Share.... $ 0.06 $ 0.23 $ 0.55
========= ========= =========
Weighted Average Common Shares
Outstanding........................ 1,700 2,117 5,937
========= ========= =========
Weighted Average Common and Common
Equivalent Shares Outstanding...... 1,700 2,139 7,078
========= ========= =========

The accompanying notes are an integral part of these consolidated financial
statements.

F-4

U S LIQUIDS INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE DATA)

PREFERRED STOCK COMMON STOCK ADDITIONAL RETAINED
----------------- ------------------- PAID-IN EARNINGS
SHARES AMOUNT SHARES AMOUNT CAPITAL (DEFICIT)
------- ------ --------- ------ ---------- ---------

BALANCE, December 31, 1994........... 10,000 $ 10 1,700,000 $ 17 $ 2 $ (483)
Net income...................... -- -- -- -- -- 103
Preferred stock dividends....... -- -- -- -- -- (7)
------- ------ --------- ------ ---------- ---------
BALANCE, December 31, 1995........... 10,000 $ 10 1,700,000 $ 17 $ 2 $ (387)
Net income...................... -- -- -- -- -- 491
Issuance of common stock........ -- -- 3,538,875 35 382 --
Preferred stock dividends....... -- -- -- -- -- (7)
Issuance of stock warrants...... -- -- -- -- 995 --
------- ------ --------- ------ ---------- ---------
BALANCE, December 31, 1996........... 10,000 $ 10 5,238,875 $ 52 $ 1,379 $ 97
Net income...................... -- -- -- -- -- 3,875
Distributions equal to the
current income taxes of
limited liability
corporation................... -- -- -- -- -- (171)
Preferred stock dividends....... -- -- -- -- -- (16)
Warrants issued in connection
with initial public
offering...................... -- -- -- -- 551 --
Common stock issued in initial
public offering............... -- -- 1,725,000 17 13,497 --
Retirement of preferred stock... (10,000) (10 ) -- -- -- --
Common stock issued in
acquisitions.................. -- -- 283,039 3 1,579 (142)
Warrants issued in connection
with consulting agreement..... -- -- -- -- 184 --
Common stock options
exercised..................... -- -- 56,250 1 -- --
------- ------ --------- ------ ---------- ---------
BALANCE, December 31, 1997........... -- $-- 7,303,164 $ 73 $ 17,190 $ 3,643
======= ====== ========= ====== ========== =========

The accompanying notes are an integral part of these consolidated financial
statements.

F-5

U S LIQUIDS INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)

YEAR ENDED DECEMBER 31,
-------------------------------
1995 1996 1997
--------- --------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income........................... $ 103 $ 491 $ 3,875
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation and amortization... 159 424 2,990
Non-cash compensation recorded
through issuance of warrants.. -- -- 184
Net gain on sale of property,
plant, and equipment.......... -- -- (65)
Deferred income tax provision
(benefit)..................... 31 (121) 64
Changes in operating assets and
liabilities, net of amounts
acquired:
Accounts receivable, net........ (539) (105) 68
Inventories..................... (288) 44 (228)
Prepaid expenses and other
current assets.................. (19) (635) 479
Intangible assets............... -- 96 (31)
Other assets.................... (20) (209) (479)
Accounts payable and accrued
liabilities................... 946 1,567 (784)
Closure, remediation and cell
processing reserves........... -- (13) (503)
--------- --------- ---------
Net cash provided by
operating activities.... $ 373 $ 1,539 $ 5,570
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property, plant and
equipment.......................... $ (916) $ (1,795) $ (4,829)
Proceeds from sale of property,
plant, and equipment............... -- -- 206
Net cash (paid for) acquired through
acquisitions....................... -- 5,985 (3,234)
--------- --------- ---------
Net cash provided by (used
in) investing
activities.............. $ (916) $ 4,190 $ (7,857)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments to stockholders and related
parties............................ $ (6) $ (139) $ (465)
Proceeds from issuance of long-term
obligations........................ 1,084 1,152 15,593
Principal payments on long-term
obligations........................ (564) (1,650) (30,111)
Interest accrued on related-party
notes payable...................... 50 56 --
Preferred stock dividends paid....... (7) -- (16)
Payments to retire preferred stock... -- -- (10)
Issuance of common stock............. -- 417 --
Proceeds from initial public offering
of common stock.................... -- -- 14,065
Proceeds from exercise of stock
options............................ -- -- 1
Distributions equal to the current
income taxes of limited liability
corporation........................ -- -- (171)
--------- --------- ---------
Net cash provided by (used
in) financing
activities.............. $ 557 $ (164) $ (1,114)
--------- --------- ---------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS................... $ 14 $ 5,565 $ (3,401)
CASH AND CASH EQUIVALENTS AT
BEGINNING OF PERIOD................ 25 39 5,604
--------- --------- ---------
CASH AND CASH EQUIVALENTS AT END OF
PERIOD............................. $ 39 $ 5,604 $ 2,203
========= ========= =========
SUPPLEMENTAL DISCLOSURES:
Cash paid for interest.......... $ 102 $ 339 $ 2,169
Cash paid for income taxes...... 2 7 2,745
Assets acquired under capital
leases.......................... 88 -- --
Liabilities assumed related to
acquisitions.................... -- 28,725 1,340
Common stock, warrants and
options issued for
acquisitions.................. -- 995 1,440

The accompanying notes are an integral part of these consolidated financial
statements.

F-6

U S LIQUIDS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. BUSINESS AND ORGANIZATION:

U S Liquids Inc. and subsidiaries (collectively "U S Liquids"or the
"Company") was founded November 18, 1996, and is a leading provider of
services for the collection, processing, disposal and recovery of liquid waste
in North America. On December 13, 1996, the Company acquired its Oilfield Waste
Division from Campbell Wells, L.P. and Campbell Wells NORM, L.P. (referred to as
"Campbell Wells" or "the Predecessor" to the extent of the operations so
acquired) which were wholly owned subsidiaries of Sanifill, Inc. ("Sanifill").
The Oilfield Waste Division treats and disposes of oilfield waste generated in
oil and gas exploration and production. In June 1997, the Company formed the
basis of its Liquid Waste Division by acquiring Mesa Processing, Inc., T&T
Grease Services, Inc. and Phoenix Fats & Oils, Inc. (the "Mesa companies" or
"Mesa") and American WasteWater ("AWW"). Each of these acquisitions was
accounted for under the pooling-of-interests method of accounting. The Liquid
Waste Division collects, processes and disposes of liquid waste and recovers
by-products from these waste streams.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

BASIS OF PRESENTATION

The consolidated financial statements include the accounts of the Company,
after elimination of all significant intercompany accounts and transactions. The
consolidated financial statements for 1997 represent the operations of the
Company, including combined revenues and net income of Mesa and AWW for the
pre-acquisition period in 1997 of $7,291,000 and $539,000 respectively, as well
as all other acquired companies' operations from their respective dates of
acquisition.

USE OF ESTIMATES

The preparation of financial statements requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities, the disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.

CASH AND CASH EQUIVALENTS

All highly liquid investments with an original maturity of three months or
less are classified as cash equivalents.

CONCENTRATIONS OF CREDIT RISK

Accounts receivable potentially subject the Company to concentrations of
credit risk. At December 31, 1996, 41 percent and 16 percent, respectively, of
total accounts receivable were associated with two customers. At December 31,
1997, 13 percent of total accounts receivable was associated with one customer.
In addition, sales to one customer represented 62 percent and 43 percent of
total revenues for the years ended December 31, 1995, and 1996, respectively.
Sales to two customers represented 22 percent and 17 percent, respectively, of
total revenues for the year ended December 31, 1997.

The Company's customers are concentrated in the oil and gas industry in
Louisiana and Texas, the collection of liquid waste business in Louisiana and
Texas and the chemical processing and livestock feed industries in Mexico. Total
sales to customers in Mexico represented 82 percent, 70 percent and 31 percent
of total revenues for the years ended December 31, 1995, 1996 and 1997,
respectively. Accounts receivable from customers in Mexico represented
approximately 9 percent and 20 percent of total accounts receivable at December
31, 1996 and 1997, respectively. Management performs ongoing credit analyses of
the accounts of its customers and provides allowances as deemed necessary.
Additionally, sales are dollar-denominated and the majority of international
sales are secured by letters of credit.

F-7

U S LIQUIDS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

INVENTORIES

Inventories are stated at the lower of cost or market and, at December 31,
1996 and 1997, consisted of finished grease products of $265,000 and $435,000,
respectively, and unprocessed grease of $74,000 and $132,000, respectively. Cost
is determined using the first-in, first-out (FIFO) method.

PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment are recorded at cost. Improvements or
betterments which significantly extend the life of an asset are capitalized.
Expenditures for maintenance and repair costs are charged to operations as
incurred. The cost of assets retired or otherwise disposed of and the related
accumulated depreciation are eliminated from the accounts in the year of
disposal. Gains and losses resulting from property disposals are included in
other income or expense. Depreciation is computed using the straight-line
method.

LONG-LIVED ASSETS

Long-lived assets consist primarily of the excess of cost over net assets
of acquired businesses (goodwill) and disposal sites. Management continually
evaluates whether events or circumstances have occurred that indicate the
remaining estimated useful life of intangible assets and other long lived assets
may warrant revision or that remaining balances may not be recoverable.

INCOME TAXES

The Company files a consolidated return for federal income tax purposes.
Income taxes for the Company are provided under the liability method considering
the income tax effects of transactions reported in the consolidated financial
statements which are different from the income tax return. The deferred income
tax assets and liabilities represent the future income tax consequences of those
differences, which will either be taxable or deductible when the underlying
assets or liabilities are realized or settled. Prior to May 1997, AWW was a
limited liability company (LLC), as defined by the Internal Revenue Code,
whereby it was not subject to taxation for federal income tax purposes. Under
LLC status, the equity owners reported their shares of AWW's federal taxable
earnings or losses on their personal income tax returns. In May 1997, AWW
converted to a C Corporation for federal income tax purposes and has recorded
current and deferred income tax assets and liabilities existing on the date of
conversion.

CLOSURE AND REMEDIATION RESERVES

As of December 31, 1997, the closure and remediation reserves represent
accruals for the total estimated costs associated with the ultimate closure of
the Company's landfarm facilities, including costs of decommissioning, statutory
monitoring costs and incremental direct administrative costs required during the
closure and subsequent postclosure periods. Management periodically reviews the
level of these reserves and will adjust such reserves if estimated costs change
over the remaining estimated life of the landfarm facilities. Landfarm facility
closure bonds and related letters of credit totaling $4 million are posted with
the states of Louisiana and Texas.

REVENUE RECOGNITION AND CELL PROCESSING RESERVE

When waste is unloaded at a given site, the Oilfield Waste Division
recognizes the related revenue and records a reserve for the estimated amount of
expenses to be incurred with the treatment of the oilfield waste in order to
match revenues with their related costs. The related treatment costs are charged
against the reserve as such costs are incurred.

The Liquid Waste Division recognizes revenue from processing services when
material is unloaded at the Company's facilities, if delivered by the customer,
or at the time the service is performed, if the

F-8

U S LIQUIDS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Company collects the materials from the customer's location. Sales revenue is
recognized when the by-product is shipped to the customer.

The Company's revenues consist of the following:

YEAR ENDED DECEMBER 31,
-------------------------------
1995 1996 1997
--------- --------- ---------
(IN THOUSANDS)
Processing revenues.................. $ 1,301 $ 2,875 $ 25,558
By-product sales..................... 9,796 11,378 12,383
Other revenues....................... 30 32 218
--------- --------- ---------
Total...................... $ 11,127 $ 14,285 $ 38,159
========= ========= =========

EARNINGS PER SHARE

Effective December 31, 1997, the Company adopted the provisions of
Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings Per
Share". Under these provisions, earnings per share amounts are based on the
weighted average number of shares of common stock and common stock equivalents
outstanding during the period. The weighted average number of shares used to
compute basic and diluted earnings per share for 1995, 1996, and 1997 is
illustrated below:

1995 1996 1997
------------ ------------ ------------
(IN THOUSANDS, EXCEPT SHARE DATA)
Numerator:
For basic and diluted earnings
per share --
Income available to common
stockholders.................... $ 103 $ 491 $ 3,875
============ ============ ============
Denominator:
For basic earnings per share --
Weighted-average shares......... 1,700,000 2,116,909 5,937,435
Effect of dilutive securities:
Stock options and warrants...... -- 21,657 1,140,670
------------ ------------ ------------
Denominator:
For diluted earnings per
share --
Weighted-average shares and
assumed conversions............. 1,700,000 2,138,566 7,078,105
============ ============ ============

At December 31, 1997, the Company had 10,000 employee stock options which
were not included in the computation of diluted earnings per share because to do
so would have been antidilutive for the period presented.

INSURANCE

The Company maintains various types of insurance coverage for its business,
including, without limitation, commercial general liability and commercial auto
liability, workers' compensation and employer liability, pollution legal
liability and a general umbrella policy. The Company has not incurred
significant claims or losses in excess of its insurance limits during the
periods presented in the accompanying consolidated financial statements.

RISK FACTORS

An investment in the Company's common stock involves a high degree of risk.
Those risks include, but are not limited to, government regulation, dependence
on the oil and gas industry and foreign customers,

F-9

U S LIQUIDS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

absence of a combined operating history, reliance on key personnel and risks
related to the Company's acquisition strategy.

OTHER

Certain prior year amounts have been reclassified to conform with the
current year presentation.

3. ACQUISITIONS:

1996 ACQUISITIONS

Effective December 14, 1996, U S Liquids Inc. purchased certain assets and
assumed certain liabilities of Campbell Wells by issuing a long-term promissory
note for $27,800,000 and warrants to purchase 1,000,000 shares of U S Liquids
Inc. common stock at an exercise price of $2.00 per share (the "Campbell Wells
Acquisition") to Sanifill. The total purchase price includes a calculation of
the fair value of the warrants at their date of issuance using the Black-Scholes
pricing model with the following assumptions:

Expected stock price volatility...... 35.55%
Risk free interest rate.............. 6.35%
Expected life of warrants............ 10 years

The Campbell Wells Acquisition was accounted for under the purchase method
of accounting, and the net assets and results of operations since the date of
the Campbell Wells Acquisition are included in the consolidated financial
statements. Costs were allocated to the net assets acquired based on
management's estimate of the fair value of the acquired assets and liabilities
at the date of the Campbell Wells Acquisition. The purchase price has been
allocated as follows (in thousands):

Acquired assets --
Cash and cash equivalents....... $ 6,001
Accounts receivable............. 3,980
Prepaid expenses and other
current assets.................. 61
Property, plant and equipment... 30,693
Deferred income tax asset....... 1,628
Other assets.................... 271
Assumed liabilities --
Accounts payable and accrued
liabilities..................... (1,966)
Closure, remediation and cell
processing reserves............. (10,245)
Deferred income tax liability... (1,628)
---------
Total purchase price....... $ 28,795
=========

The following table sets forth unaudited pro forma income statement data to
present the effect of the Campbell Wells Acquisition on the Company's results of
operations for the years ended December 31, 1995 and 1996. The income statement
data for Campbell Wells may not necessarily be indicative of the results of
operations that would have been realized had Campbell Wells been operated as a
stand-alone entity.

As a wholly owned subsidiary of Sanifill, Campbell Wells maintained a
noninterest bearing intercompany account with Sanifill for recording
intercompany charges for costs and expenses, intercompany purchases of equipment
and additions under capital leases and intercompany transfers of cash, among
other transactions. It is not feasible to ascertain the amount of related
interest expense which would have been recorded in the statements of income had
Campbell Wells been operated as a stand-alone entity. The following unaudited
pro forma income statement data includes the revenues and net income of the

F-10

U S LIQUIDS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Company, plus the acquired operations of Campbell Wells, as if the Campbell
Wells Acquisition was effective on the first day of the year being reported:

YEAR ENDED DECEMBER
31,
--------------------
1995 1996
--------- ---------
(IN THOUSANDS)
(UNAUDITED)
Revenue................................. $ 26,246 $ 31,138
Net income, excluding intercompany
interest expense........................ 1,251 2,370

Pro forma adjustments for all periods included in the preceding table
primarily relate to (a) the recording of interest expense on the debt incurred
to effect the Campbell Wells Acquisition, (b) the adjustment to depreciation
expense to reflect the revaluation of property, plant and equipment in
conjunction with the Campbell Wells Acquisition purchase price allocation, (c)
the adjustment of insurance expense to reflect the differences in insurance
expenses recorded by U S Liquids compared to the intercompany insurance expenses
allocated to Campbell Wells from Sanifill, and (d) the related income tax
effects of these adjustments. Pro forma balances do not include the effects of
the Company's initial public offering.

The pro forma combined results presented above are not necessarily
indicative of actual results which might have occurred had the operations and
management teams of the Company and the acquired operations of Campbell Wells
been combined at the beginning of the periods presented.

In March 1996, Mesa acquired all of the assets of the trap and septic
division of a grease processing company through the purchase of assets. In
September 1996, Mesa acquired all of the assets and assumed all liabilities of a
feed and tallow processing company through the purchase of stock. Mesa paid
$16,000 in cash, net of cash acquired, and issued $925,000 of debt obligations
in conjunction with both of these acquisitions. Both acquisitions were accounted
for under the purchase method of accounting, and the net assets and results of
operations of these acquisitions since their respective dates of acquisition are
included in the consolidated financial statements.

1997 ACQUISITIONS

During the fourth quarter of 1997, the Company completed four acquisitions
that were accounted for under the purchase method of accounting. Results of
operations of companies that were acquired and subject to purchase accounting
are included in the consolidated financial statements from the dates of such
acquisitions. The total costs of acquisitions accounted for under the purchase
method were $6,819,000. The consolidated balance sheet as of December 31, 1997,
includes allocations of the respective purchase prices and is subject to final
adjustment. The excess of the aggregate purchase price over the fair value of
the net assets acquired was approximately $5,726,000.

In addition, the Company has agreed in connection with certain transactions
to pay additional amounts to the sellers upon the achievement by the acquired
businesses of certain negotiated goals, such as targeted earnings levels.
Although the amount and timing of any payments of additional contingent
consideration depend on whether and when these goals are met, the maximum
aggregate amount of contingent consideration potentially payable if all payment
goals are met is $27,880,000 with the achieved goals providing approximately
$31,125,000 of pre-tax income. The contingent consideration is payable in cash
or, in some instances, cash and stock, at the Company's option.

On October 1, 1997, the Company completed a merger accounted for as a
pooling-of-interests, pursuant to which the Company issued 241,410 shares of its
common stock in exchange for all outstanding shares of the acquired company.
Periods prior to consummation of this merger were not restated to include the
accounts and operations of the acquired company as combined results are not
materially different from the results as presented.

F-11

U S LIQUIDS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The unaudited pro forma information set forth below presents the revenues,
net income and earnings per share of the Company, plus the acquired operations
of Campbell Wells and the 1997 acquisitions as if the acquisitions were
effective on the first day of the year being reported:

YEAR ENDED DECEMBER
31,
--------------------
1996 1997
--------- ---------
(IN THOUSANDS,
EXCEPT FOR PER SHARE
DATA)
(UNAUDITED)
Revenue................................. $ 34,766 $ 43,307
Net income.............................. 2,197 4,334
Basic earnings per common share......... 0.40 0.70
Diluted earnings per common share....... 0.38 0.59

The unaudited pro forma information is presented for informational purposes
only and is not necessarily indicative of the results of operations that
actually would have been achieved had the acquisitions been consummated at the
beginning of the periods presented.

4. PREPAID EXPENSES AND OTHER CURRENT ASSETS:

Prepaid expenses and other current assets at December 31, 1996 and 1997,
consist of the following:

1996 1997
--------- ---------
(IN THOUSANDS)
Prepaid insurance....................... $ 668 $ 152
Prepaid tax deposit..................... -- 51
Current deferred income tax asset....... 86 305
Other................................... 96 113
--------- ---------
Total.............................. $ 850 $ 621
========= =========

5. PROPERTY, PLANT AND EQUIPMENT:

Property, plant and equipment at December 31, 1996 and 1997, consist of the
following:

DEPRECIABLE
LIFE 1996 1997
----------- --------- ---------
(YEARS) (IN THOUSANDS)
Landfarm and processing sites........... 25 $ 14,781 $ 15,289
Land.................................... -- 508 739
Buildings and improvements.............. 5-39 14,496 17,021
Machinery and equipment................. 3-15 4,260 6,972
Vehicles................................ 3-5 1,176 2,602
Furniture and fixtures.................. 3-5 255 658
--------- ---------
Total.............................. $ 35,476 $ 43,281
Less -- Accumulated depreciation........ (894) (4,171)
--------- ---------
Net property, plant and
equipment........................ $ 34,582 $ 39,110
========= =========

F-12

U S LIQUIDS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

6. INTANGIBLE ASSETS:

Intangible assets at December 31, 1996 and 1997, consist of the following:

1996 1997
--------- ---------
(IN THOUSANDS)
Goodwill............................. $ 29 $ 5,755
Noncompete agreements................ 67 327
Permits.............................. -- 81
--------- ---------
Total........................... $ 96 $ 6,163
Less -- Accumulated amortization..... (11) (85)
--------- ---------
Net intangible assets........... $ 85 $ 6,078
========= =========

Intangible assets are recorded at cost and are being amortized on a
straight-line basis over five to forty years.

7. ACCRUED LIABILITIES:

Accrued liabilities at December 31, 1996 and 1997, consist of the
following:

1996 1997
--------- ---------
(IN THOUSANDS)
Insurance premium promissory note,
interest rate at 6.0%, due July
1997................................. $ 589 $ --
Accrued interest on related-party
notes payable...................... 204 --
Accrued salaries..................... 161 873
Income and other taxes payable....... 460 709
Accrued professional fees............ 303 1,490
Other................................ 430 687
--------- ---------
Accrued liabilities............. $ 2,147 $ 3,759
========= =========

8. INCOME TAXES:

The Company has implemented SFAS No. 109, "Accounting for Income Taxes,"
which provides for a liability approach to accounting for income taxes. The
components of the provision (benefit) for income taxes are as follows:

1995 1996 1997
--- --------- ---------
(IN THOUSANDS)
Current --
Federal......................... $ 12 $ 327 $ 2,253
State........................... 6 49 99
--- --------- ---------
Total...................... $ 18 $ 376 $ 2,352
=== ========= =========
Deferred --
Federal......................... $ 30 $ (107) $ 62
State........................... 1 (14) 2
--- --------- ---------
Total...................... $ 31 $ (121) $ 64
--- --------- ---------
Provision for income
taxes................... $ 49 $ 255 $ 2,416
=== ========= =========

F-13

U S LIQUIDS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The differences in income taxes provided and the amounts determined by
applying the federal statutory tax rate to income before provision (benefit) for
income taxes result from the following:

1995 1996 1997
--------- --------- ---------
(IN THOUSANDS)
Tax at statutory rate................... $ 52 $ 253 $ 2,202
Add --
State taxes, net of federal
benefit.......................... 6 24 66
Nondeductible expenses............. -- -- 157
Other.............................. (9) (22) (9)
--------- --------- ---------
Total......................... $ 49 $ 255 $ 2,416
========= ========= =========

For purposes of the consolidated federal tax return, the Company has net
operating loss carryforwards available to offset taxable income of the Company
in the future. The net operating loss carryforwards will begin to expire in
2011. In connection with certain acquisitions, ownership changes occurred
resulting in various limitations on certain tax attributes. However, the Company
expects full utilization of these tax attributes prior to their expiration.

Deferred income taxes are recognized for the tax consequences of temporary
differences by applying enacted statutory tax rates to differences between the
financial reporting and the tax bases of existing assets and liabilities. The
tax effects of significant temporary differences representing deferred income
tax assets and liabilities are as follows:

1996 1997
--------- ---------
(IN THOUSANDS)
Deferred income tax assets --
Closure and remediation reserves... $ 1,577 $ --
Accrued expenses................... 184 434
Net operating losses............... 135 41
Other.............................. 15 74
--------- ---------
Total......................... $ 1,911 $ 549
--------- ---------
Deferred income tax liabilities
Property, plant and equipment...... $ (1,622) $ (167)
Inventory.......................... (77) --
Investment in foreign
corporation...................... -- (59)
Other.............................. (26) (174)
--------- ---------
Total......................... $ (1,725) $ (400)
--------- ---------
Net deferred income tax
assets..................... $ 186 $ 149
========= =========

F-14

U S LIQUIDS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Net deferred income tax assets and liabilities are comprised of the
following:

1996 1997
--------- ---------
(IN THOUSANDS)
Current deferred income tax assets
Gross assets....................... $ 86 $ 521
Gross liabilities.................. -- (216)
Total, net................... $ 86 $ 305
Non-current deferred income tax assets
Gross assets....................... 100 152
Gross liabilities.................. -- (308)
--------- ---------
Total, net.................... $ 100 $ (156)
--------- ---------
Net deferred income tax
assets.................... $ 186 $ 149
========= =========

9. LONG-TERM OBLIGATIONS:

The Company's long-term obligations at December 31, 1996 and 1997, consist
of the following:

1996 1997
--------- ---------
(IN THOUSANDS)
Revolving Credit Facility............ $ -- $ 15,250
Note payable to Sanifill, interest at
7.5%, due in 19 quarterly
installments of $1,390,000,
maturing December 2001, secured by
substantially all of the assets of
U S Liquids........................ 26,410 --
Notes payable to banks and credit
institutions, interest ranging from
5.9% to 13.75%, maturing January
1997 to June 2014, secured by
vehicles and equipment............. 1,295 --
Notes payable to individuals,
interest ranging from
noninterest-bearing to 18.0%,
maturing January 1998 to June 2010,
secured by property, plant and
equipment.......................... 1,707 2,020
Notes payable to a corporation,
interest at prime rate plus 2.0%,
(10.5% at December 31, 1997)
maturing October 2000.............. -- 145
Other................................ 73 21
Less -- Current maturities of
long-term obligations.............. (5,817) (792)
--------- ---------
$ 23,668 $ 16,644
========= =========

On December 19, 1997, the Company entered into a revolving credit facility
with a bank group in the amount of $50,000,000. The initial draw of $15,250,000
was used to pay off the unpaid portion of the note payable to Sanifill, which
was not previously repaid with proceeds from the Company's initial public
offering. This facility is secured by substantially all of the assets of the
Company. Availability under this credit facility is tied to the Company's cash
flows and liquidity. The credit facility is available to fund working capital
requirements and acquisitions. The credit agreement requires the Company to
comply with certain financial covenants and requires the Company to obtain the
lenders' consent before making any acquisitions with a purchase price exceeding
$7 million, and prohibits the payment of cash dividends. The debt may be
accelerated upon a change in control of the Company or the departure of senior
management without a suitable replacement. Interest on the outstanding balance
is due quarterly and the facility matures on December 20, 2000. Advances bear
interest, at the Company's option, at the prime rate or London Interbank Offered
Rate ("LIBOR"), in each case, plus a margin which is calculated quarterly
based upon the Company's ratio of indebtedness to cash flow. The Company has
agreed to pay a commitment fee varying from 1/4 to 1/2 of 1 percent per annum on
the unused portion of the facility. As of December 31, 1997, the Company had
$34,750,000 available under this facility.

F-15

U S LIQUIDS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Principal payments of long-term debt obligations in excess of one year as
of December 31, 1997, are as follows:

LONG-TERM DEBT
--------------
(IN THOUSANDS)
Year ending December 31 --
1998............................ $ 792
1999............................ 389
2000............................ 15,561
2001............................ 149
2002............................ 146
Thereafter...................... 399
--------------
Total...................... $ 17,436
==============

Management estimates that the fair value of its debt obligations
approximates the historical value at December 31, 1997.

10. STOCK OPTIONS AND WARRANTS:

On November 20, 1996, U S Liquids established a stock option plan which
provides, as amended, for a maximum authorized number of shares equal to 15% of
all outstanding common stock at the end of each year, not to exceed a total of
3,000,000 shares. Options vest equally in three annual installments, commencing
on the first anniversary of the date upon which the options were granted, and
expire after being outstanding for a period of 10 years. During June 1997, U S
Liquids established a directors' stock option plan which provides for granting
10,000 options to each director upon their initial election and 5,000 options
each year thereafter. The directors' stock options vest on the date of grant and
expire after 10 years. At December 31, 1997, there were 281,250 nonqualified
stock options granted for corporate development purposes which are contingent
upon the successful completion of certain corporate development activities and,
accordingly, no calculation of the fair value of the nonqualified stock options
will be determined or recorded until the realization of such contingencies. The
Company issued stock warrants in connection with its' Campbell Wells
Acquisition, initial public offering, and as compensation for corporate
consulting. Warrants issued in connection with acquisitions or common stock
offerings are capitalized based on the fair market value on the date of grant.
Stock warrants issued as compensation for consulting activities are expensed as
incurred.

The following table summarizes activity under the Company's stock option
plan and warrants granted:

1996 1997
------------------- -------------------
OPTIONS WARRANTS OPTIONS WARRANTS
------- -------- ------- --------

Options and warrants outstanding,
beginning of year.................. -- -- 301,875 1,000,000
Granted (per share)
1996 ($.02-$2.00).......... 301,875 1,000,000 -- --
1997 ($.02-$16.00)......... 529,500 215,000
Exercised (per share)
1997 ($.02)................ (56,250) --
------- -------- ------- --------
Options and warrants outstanding, end
of year............................ 301,875 1,000,000 775,125 1,215,000
======= ======== ======= ========

The Company accounts for its employee stock options under the Accounting
Principles Board Opinion No. 25, in which no compensation expense is recognized
for employee stock options if there is no intrinsic value at the date of grant.
Had compensation expense for these employee stock options been determined
consistent with SFAS No. 123, "Accounting for Stock-Based Compensation," the
Company's net income

F-16

U S LIQUIDS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
and earnings per share would have been reduced to the following amounts (in
thousands, except per share data):

1996 1997
--------- ---------
Net income:
As reported..................... $ 491 $ 3,875
Pro forma....................... 488 1,726
Basic earnings per share:
As reported..................... $ 0.23 $ 0.65
Pro forma....................... 0.23 0.29
Diluted earnings per share:
As reported..................... $ 0.23 $ 0.55
Pro forma....................... 0.23 0.24

The effects of applying SFAS No. 123 in the disclosure may not be
indicative of future amounts.

The fair value of each employee stock option was estimated on the date of
grant using the Black-Scholes pricing model with the following assumptions:

1996 1997
---------- ---------------
Expected dividend yield.............. 0.00% 0.00%
Expected stock price volatility...... 35.55% 37.06%-38.78%
Risk-free interest rate.............. 6.17% 5.79%-6.47%
Expected life of options............. 10 years 10 years

During 1997, 529,500 options were granted which had a weighted average fair
value of $5.91 per option and a weighted average exercise price of $8.69 per
option.

The following table summarizes information about stock options outstanding
at December 31, 1997:

OPTIONS OUTSTANDING
----------------------------------------------------------------------------
NUMBER WTD. AVG.
RANGE OF OUTSTANDING AT REMAINING WTD. AVG.
EXERCISE PRICES 12/31/97 CONTRACTUAL LIFE EXERCISE PRICE
--------------- --------------- ---------------- ---------------
$ .02 308,125 9.1 $ .02
9.50-13.38 457,000 9.6 9.71
16.00 10,000 9.8 16.00
--------------- --------------- --- ---------------
$ .02-16.00 775,125 9.4 $5.94
=============== =============== === ===============

OPTIONS EXERCISABLE
- -----------------------------------
NUMBER
EXERCISABLE AT WTD. AVG.
12/31/97 EXERCISE PRICE
- --------------- ---------------
44,375 $ .02
-- --
-- --
- --------------- ---------------
44,375 $ .02
=============== ===============

11. COMMITMENTS AND CONTINGENCIES:

NONCOMPETE AND OILFIELD WASTE DISPOSAL AGREEMENTS

In conjunction with the Campbell Wells Acquisition, the Company assumed
certain rights and obligations pursuant to an earlier sales agreement entered
into during 1996 between Sanifill and Newpark Resources, Inc. ("Newpark"),
whereby Sanifill sold an unrelated portion of Campbell Wells to Newpark (the
"Newpark Transaction"). The Company has assumed Sanifill's position in a
noncompete agreement entered into between Sanifill and Newpark in conjunction
with the Newpark Transaction, in which Sanifill agreed not to compete with
Newpark in the collection of oilfield waste from offshore sources for a period
of five years.

US Liquids has also assumed a disposal agreement entered into between
Campbell Wells and Newpark in conjunction with the Newpark Transaction, in which
Newpark agreed to deliver, and Campbell Wells agreed to accept at its Louisiana
landfarms, certain quantities of oilfield waste each year for 25 years

F-17

U S LIQUIDS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

beginning June 1996, for a specified price, subject to adjustment, and at
specified annual minimum volume levels.

LEASES

The Company leases office facilities and certain equipment under
noncancelable operating leases for periods ranging from one to 27 years. Rent
expense was approximately $98,000, $171,000 and $736,000 for the years ended
December 31, 1995, 1996 and 1997, respectively. The following table presents
future minimum rental payments under noncancelable operating leases:

OPERATING LEASES
-----------------
(IN THOUSANDS)
Year ending December 31 --
1998....................... $ 1,141
1999....................... 1,144
2000....................... 945
2001....................... 568
2002....................... 462
Thereafter................. 6,959
-----------------
Total............... $11,219
=================

LEGAL PROCEEDINGS

Prior to the closing of the Campbell Wells Acquisition, three lawsuits were
brought against Campbell Wells based upon the operation of its Bourg, Louisiana
landfarm. In one of the lawsuits filed against Campbell Wells, approximately 300
individuals residing in and around Grand Bois, Louisiana are seeking unspecified
monetary damages allegedly suffered as a result of (i) odors allegedly emitted
by waste received from Exxon Company U.S.A. ("Exxon") at the landfarm in March
1994, and (ii) alleged air, water and soil contamination in connection with
ongoing operations at the landfarm. The Company was named as a defendant in this
action in January 1998. Trial in this matter on the claims of ten plaintiffs is
set to commence in the 17th Judicial District Court for the Parrish of
Lafourche, Louisiana on July 13, 1998. A second lawsuit, brought by one
individual, seeks unspecified monetary damages allegedly suffered as a result of
odors allegedly emitted by waste received from Exxon at the landfarm in March
1994. This lawsuit is also pending in the 17th Judicial District Court for the
Parrish of Lafourche, Louisiana and trial is set to commence on July 13, 1998.
The Company has not yet been named as a defendant in this action. In the third
lawsuit, six individuals filed suit on March 7, 1996 against Campbell Wells in
the Civil District Court for the Parrish of Orleans, Louisiana, seeking
preliminary and permanent injunctive relief against certain treatment operations
conducted at the Bourg, Louisiana landfarm which the plaintiffs contend have
resulted and will result in adverse health effects by way of emissions of
alleged air pollutants. The plaintiffs' request for a preliminary injunction was
heard during the summer of 1996. On December 30, 1996, the court entered an
order granting in part and denying in part the relief requested by the
plaintiffs. Specifically, the court found that there was no evidence that
emissions resulting from the treatment operations complained of equaled or
exceeded any relevant safety standard, health standard or occupational standard
and, therefore, denied the plaintiffs' request for a temporary injunction
prohibiting such treatment operations. The court did, however, preliminarily
enjoin Campbell Wells (and, thus, indirectly the Company) from treating waste
received from Exxon in March 1994 in one particular treatment cell located
within 500 feet of a building in which one of the plaintiffs resides. In
connection therewith, the court ordered that the Commissioner of the Louisiana
Department of Conservation be made a party to the litigation and substituted for
the plaintiffs on the limited issue of whether Campbell Wells has violated the
location criteria for the particular treatment cell involved. The Company was
named as a defendant in this action in January 1998. No trial date has been

F-18

U S LIQUIDS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

set for the plaintiffs' request for permanent injunctive relief; however, based
upon the court's rulings from the preliminary injunction trial and initial
discussions with the Louisiana Department of Conservation, the Company believes
that permanent injunctive relief that might be entered in the action will not
have a material adverse effect upon the Company's consolidated financial
position or results of operations.

Prior to the closing of the Campbell Wells Acquisition, a class action
lawsuit was filed in the Civil District Court for the Parrish of Orleans,
Louisiana against Campbell Wells seeking unspecified monetary damages allegedly
suffered as a result of alleged air, water and soil contamination in connection
with ongoing operations at its Mermentau, Louisiana landfarm. The Company has
not been named as a defendant in this lawsuit; however, there can be no
assurance that the Company will not subsequently be named as a defendant in this
lawsuit.

In connection with the Campbell Wells Acquisition, Sanifill agreed, with
certain enumerated exceptions, to retain responsibility for all liabilities of
Campbell Wells as of the closing date of the Campbell Wells Acquisition
including, without limitation, the contingent liabilities associated with such
lawsuits. The obligation of Sanifill to indemnify the Company is limited to $10
million.

In March 1998, the Company was dismissed as a defendant in a lawsuit
originally filed by Waste Facilities, Inc. in 1994 against Campbell Wells and
others in the District Court of Jim Wells County, Texas.

In February 1997, an action entitled JUDY GARCIA, ET AL V. RE-CLAIM
ENVIRONMENTAL was filed in the 51st Judicial District Court of Harris County,
Texas. This action was brought by the residents of an apartment complex located
adjacent to one of the Company's processing facilities and alleges that the
defendant is guilty of nuisance, trespass, negligence and gross negligence by
reason of its pollution of the air, soil and ground and surface water and the
release of noxious odors. The plaintiffs have requested unspecified monetary
damages. The Company denies liability and intends to vigorously defend the
action.

The Company is involved in various other legal actions arising in the
ordinary course of business. Management does not believe that the outcome of
such legal actions will have a material adverse effect on the Company's
consolidated financial position or results of operations.

F-19

U S LIQUIDS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

12. SEGMENT INFORMATION:

The Company has two reporting business segments: Oilfield Waste and Liquid
Waste. The following is a summary of key business segment information:

1995 1996 1997
--------- --------- ---------
(IN THOUSANDS)
Revenue --
Oilfield Waste..................... $ -- $ 826 $ 19,948
Liquid Waste....................... 11,127 13,459 18,211
--------- --------- ---------
Total......................... $ 11,127 $ 14,285 $ 38,159
========= ========= =========
Income from operations --
Oilfield Waste..................... $ -- $ 126 $ 9,341
Liquid Waste....................... 329 929 1,929
Corporate.......................... -- -- (3,204)
--------- --------- ---------
Total......................... $ 329 $ 1,055 $ 8,066
========= ========= =========
Identifiable assets --
Oilfield Waste..................... $ -- $ 41,152 $ 34,071
Liquid Waste....................... 3,007 5,699 17,870
Corporate.......................... -- -- 3,075
--------- --------- ---------
Total......................... $ 3,007 $ 46,851 $ 55,016
========= ========= =========
Depreciation and amortization expense --
Oilfield Waste..................... $ -- $ 78 $ 2,266
Liquid Waste....................... 159 346 645
Corporate.......................... -- -- 79
--------- --------- ---------
Total......................... $ 159 $ 424 $ 2,990
========= ========= =========
Capital expenditures --
Oilfield Waste..................... $ -- $ -- $ 2,042
Liquid Waste....................... 916 1,795 2,278
Corporate.......................... -- -- 509
--------- --------- ---------
Total......................... $ 916 $ 1,795 $ 4,829
========= ========= =========

13. SUBSEQUENT EVENTS (UNAUDITED):

Subsequent to December 31, 1997, the Company acquired four businesses
engaged in the collection, treatment and disposal of liquid wastes for
approximately $4,420,000 in cash, $1,781,000 in assumed debt, 20,000 stock
warrants and 189,865 shares of the Company's common stock using the purchase
method of accounting.

F-20

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To U S Liquids Inc.:

We have audited the accompanying balance sheets of the U S Liquids Inc.
Predecessor, which represents certain assets acquired and liabilities assumed by
U S Liquids Inc. from Campbell Wells, L.P. and Campbell Wells NORM, L.P.
(collectively "Campbell Wells") which were wholly-owned subsidiaries of
Sanifill, Inc., as of December 31, 1995 and December 13, 1996, and the related
statements of income for the years ended December 31, 1994 and 1995 and for the
period ended December 13, 1996. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

As discussed in Note 2, the accompanying financial statements have been
prepared pursuant to the purchase agreement effective December 14, 1996, between
Sanifill, Inc. and U S Liquids Inc. and were prepared for the purpose of
complying with Rule 3-05 of Regulation S-X of the Securities and Exchange
Commission and are not intended to be a complete presentation of Campbell Wells'
assets, liabilities, operating results or cash flows on a stand-alone basis.

In our opinion, the financial statements referred to above present fairly,
in all material respects, the balance sheet of the U S Liquids Inc. Predecessor
as of December 31, 1995 and December 13, 1996, and the results of its operations
for the years ended December 31, 1994 and 1995 and for the period ended December
13, 1996, pursuant to the purchase agreement referred to in Note 2 and in
conformity with generally accepted accounting principles.

ARTHUR ANDERSEN LLP

Houston, Texas
June 26, 1997
(March 3, 1998
with respect to note 8)

F-21

U S LIQUIDS INC. PREDECESSOR
BALANCE SHEETS
(IN THOUSANDS)

DECEMBER 31, DECEMBER 13,
1995 1996
------------ ------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents....... $ 286 $ 6,001
Accounts receivable, less
allowance of $200 and $172..... 6,393 4,053
Prepaid expenses and other
current assets.................. 324 61
------------ ------------
Total current assets....... $ 7,003 $ 10,115
PROPERTY, PLANT AND EQUIPMENT, net... 53,295 49,553
OTHER ASSETS......................... 243 232
------------ ------------
Total assets............... $ 60,541 $ 59,900
============ ============
LIABILITIES AND NET INTERCOMPANY
BALANCE
CURRENT LIABILITIES:
Accounts payable................ $ 2,875 $ 1,621
Accrued liabilities............. 115 336
------------ ------------
Total current
liabilities.................. $ 2,990 $ 1,957
CELL PROCESSING RESERVE.............. 7,803 7,745
CLOSURE AND REMEDIATION RESERVES..... 2,619 1,969
DEFERRED INCOME TAXES................ 12,571 14,554
------------ ------------
Total liabilities.......... $ 25,983 $ 26,225
COMMITMENTS AND CONTINGENCIES
NET INTERCOMPANY BALANCE............. 34,558 33,675
------------ ------------
Total liabilities and net
intercompany balance.... $ 60,541 $ 59,900
============ ============

The accompanying notes are an integral part of these financial statements.

F-22

U S LIQUIDS INC. PREDECESSOR
STATEMENTS OF INCOME
(IN THOUSANDS)

YEAR ENDED
DECEMBER 31, PERIOD ENDED
-------------------- DECEMBER 13,
1994 1995 1996
--------- --------- -------------
REVENUES............................. $ 14,847 $ 15,119 $16,853
COST OF OPERATIONS................... 7,478 8,635 9,136
--------- --------- -------------
Gross profit.................... $ 7,369 $ 6,484 $ 7,717
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES........................... 2,626 2,989 2,524
--------- --------- -------------
Income from operations.......... $ 4,743 $ 3,495 $ 5,193
INTEREST EXPENSE, excluding
intercompany interest expense...... 105 246 353
OTHER INCOME, net.................... (176) (51) (97)
--------- --------- -------------
INCOME BEFORE PROVISION FOR INCOME
TAXES.............................. $ 4,814 $ 3,300 $ 4,937
PROVISION FOR INCOME TAXES........... 1,945 1,400 2,044
--------- --------- -------------
NET INCOME........................... $ 2,869 $ 1,900 $ 2,893
========= ========= =============

The accompanying notes are an integral part of these financial statements.

F-23

U S LIQUIDS INC. PREDECESSOR
NOTES TO FINANCIAL STATEMENTS

1. THE ACQUISITION:

Effective December 13, 1996, U S Liquids Inc. ("U S Liquids") purchased
certain assets and assumed certain liabilities of Campbell Wells, L.P. and
Campbell Wells NORM L.P. ("Campbell Wells" the "U S Liquids Inc.
Predecessor," or the "Company"), which were wholly-owned subsidiaries of
Sanifill, Inc. ("Sanifill"), by issuing a long-term promissory note for $27.8
million and warrants to purchase 1,000,000 shares of U S Liquids common stock at
an exercise price of $2.00 per share (the "Campbell Wells Acquisition").
Assets not purchased and excluded from the accompanying predecessor financial
statements for all periods presented include transfer stations and other related
assets of Campbell Wells previously sold by Sanifill to Newpark Resources, Inc.
(the "Newpark Transaction").

The Company treats and disposes oilfield waste generated in the exploration
for and production of oil and natural gas. The Company has treatment facilities
located in Louisiana and Texas that service the Gulf Coast region of the United
States. The Company also treats oilfield naturally occurring radioactive
material at its treatment facility at Lacassine, Louisiana.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

BASIS OF PRESENTATION

These financial statements have been prepared to present the financial
position and results of operations of Campbell Wells related to the assets
acquired and liabilities assumed by U S Liquids Inc. under the terms of the
Campbell Wells Acquisition described in Note 1 and in conformity with generally
accepted accounting principles.

The balance sheets and statements of income may not necessarily be
indicative of the financial position or results of operations that would have
been realized had Campbell Wells been operated as a stand-alone entity. The
statements of income include the amounts allocated by Sanifill to Campbell Wells
for selling, general and administrative expenses based on a percentage of
revenues and direct payroll based costs. Management believes this allocation is
reasonable.

As a wholly-owned subsidiary of Sanifill, Campbell Wells maintained a
noninterest-bearing intercompany account with Sanifill for recording
intercompany charges for costs and expenses, intercompany purchases of equipment
and additions under capital leases, and intercompany transfers of cash, among
other transactions. It is not feasible to ascertain the amount of related
interest expense which would have been recorded in the accompanying statements
of income had Campbell Wells been operated as a stand-alone entity. Sanifill did
not maintain debt balances specifically related to the operations of Campbell
Wells nor did Sanifill allocate any interest charges to Campbell Wells relating
to Sanifill's corporate debt. The interest expense reflected in the accompanying
statements of income represents the interest portion of capital lease payments
which were paid by Sanifill and directly charged to Campbell Wells.

Due to the manner in which Sanifill intercompany transactions were recorded
and also due to carve out matters relating to intercompany transactions
associated with the portion of Campbell Wells which was sold by Sanifill to
Newpark, it is not feasible to present a detailed analysis of transactions
reflected in the intercompany balance with Sanifill. The change in the
intercompany balance with Sanifill (net of income) was ($409,000), $462,000, and
$3,776,000 for the years ended December 31, 1994, 1995 and for the period ended
December 13, 1996, respectively.

F-24

U S LIQUIDS INC. PREDECESSOR
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

It is also not feasible to present complete statements of cash flows,
including unaudited interim cash flow data, due to the nature and manner of
recording of intercompany transactions; however, the following information
presents certain cash flow data related to the operations of Campbell Wells:

CASH FLOW INFORMATION

YEAR ENDED
DECEMBER 31, PERIOD ENDED
-------------------- DECEMBER 13,
1994 1995 1996
--------- --------- ------------
(IN THOUSANDS)
Cash flows from operating activities
Net income......................... $ 2,869 $ 1,900 $ 2,893
Adjustments to reconcile net income
to net cash provided by operating
activities
Depreciation.................. 2,860 3,025 2,594
Deferred income tax provision
(benefit).................. 1,234 (413) 1,983
Changes in operating assets
and liabilities
Accounts receivable...... (3,118) 706 2,340
Prepaid expenses and
other current
assets................ (8) (130) 263
Other assets............. (41) 58 11
Accounts payable and
accrued liabilities... (228) 1,812 (1,033)
Closure, remediation and
cell processing
reserves.............. 340 (148) (708)
--------- --------- ------------
Net cash provided by operating
activities............................ $ 3,908 $ 6,810 $ 8,343
========= ========= ============

USE OF ESTIMATES

The preparation of financial statements requires management to make
estimates and assumptions that affect the reported amounts of assets acquired
and liabilities assumed, the disclosure of contingent assets acquired and
liabilities assumed at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual results
could differ from those estimates.

CASH AND CASH EQUIVALENTS

All highly liquid investments with an original maturity of three months or
less are classified as cash equivalents.

CONCENTRATIONS OF CREDIT RISK

Accounts receivable potentially subject the Company to concentrations of
credit risk. At December 31, 1995, two customers accounted for 17 percent and 11
percent, respectively, of the total accounts receivable balance. At December 13,
1996, 19 percent and 50 percent of the total accounts receivable are associated
with two customers, respectively.

In 1994, one customer accounted for 19 percent of total revenues. During
1995, two customers accounted for 33 percent and 22 percent, respectively, of
total revenues. During 1996, two customers accounted for 41 percent and 31
percent, respectively, of total revenues.

The Company's customers are concentrated in the oil and gas industry in
Louisiana and Texas.

PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment is recorded at cost. Improvements or
betterments which significantly extend the life of an asset are capitalized.
Expenditures for maintenance and repair costs are charged to operations as
incurred. The cost of assets retired or otherwise disposed of and the related
accumulated

F-25

U S LIQUIDS INC. PREDECESSOR
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

depreciation are eliminated from the accounts in the year of disposal. Gains and
losses resulting from property disposals are included in other income or
expense. Depreciation is computed using the straight-line method.

CLOSURE AND REMEDIATION RESERVES

The closure and remediation reserves represent accruals for the total
estimated future costs associated with the ultimate closure of the Company's
landfarm facilities, including costs of decommissioning and statutory monitoring
costs required during the closure and subsequent postclosure periods. Management
periodically reviews the level of these reserves and adjusts them to reflect its
current estimate of the total costs necessary to complete the closure and
remediation of its landfarm facilities. In conjunction with U S Liquids'
acquisition of certain assets and assumption of certain liabilities of Campbell
Wells, Sanifill has agreed to maintain landfarm facility closure bonds and
related letters of credit totalling $4 million posted with the states of
Louisiana and Texas through December 31, 1997, at which time U S Liquids will
replace these closure bonds and letters of credit with similar instruments.

REVENUE RECOGNITION AND CELL PROCESSING RESERVE

When waste is unloaded at a given site, Campbell Wells recognizes the
related revenue and records a reserve for the estimated amount of expenses to be
incurred with the treatment of the oil field waste in order to match revenues
with their related costs. The related treatment costs are charged against the
reserve as such costs are incurred.

INCOME TAXES

The operations of Campbell Wells were included in the consolidated U.S.
federal income tax return of Sanifill, Inc., and no allocations of income taxes
were reflected in the historical statements of operations. For purposes of these
predecessor financial statements, current and deferred income taxes have been
provided on a separate return basis.

NEW ACCOUNTING STANDARD

Effective January 1, 1996, the Company adopted the provisions of Statement
of Financial Accounting Standards (SFAS) No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of."
Under these provisions, the Company reviews certain long-lived assets for
impairment whenever events indicate that the carrying amount of an asset may not
be recoverable and recognizes an impairment loss under certain circumstances in
the amount by which the carrying value exceeds the fair value of the asset. In
making this assessment, the Company considered the estimated future undiscounted
cash flows of the Company's long-lived assets on the basis of continuing
operations, versus the current market value of such assets on a held for sale
basis. The adoption of SFAS No. 121 had no impact on the Company's financial
position or results of operations.

3. PREPAID EXPENSES AND OTHER CURRENT ASSETS:

Prepaid expenses and other current assets at December 31, 1995, and
December 13, 1996, consist of the following:

1995 1996
--------- ---------
(IN THOUSANDS)
Closure bond......................... $ 211 $ --
Prepaid expenses..................... 33 43
Notes receivable, current portion.... 33 16
Other................................ 47 2
--------- ---------
Total........................... $ 324 $ 61
========= =========

F-26

U S LIQUIDS INC. PREDECESSOR
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

4. PROPERTY, PLANT AND EQUIPMENT:

Property, plant and equipment at December 31, 1995, and December 13, 1996,
consist of the following:

DEPRECIABLE LIFE 1995 1996
----------------- ---------- ----------
(YEARS) (IN THOUSANDS)
Landfarm and treatment facilities. 25 $ 56,732 $ 56,573
Buildings and improvements........ 10-12 532 659
Machinery and equipment........... 3-5 7,494 6,445
Vehicles.......................... 3-5 826 755
Furniture and fixtures............ 3 355 359
---------- ----------
Total................... $ 65,939 $ 64,791
Less accumulated depreciation..... (12,644) (15,238)
---------- ----------
Total................... $ 53,295 $ 49,553
========== ==========

Included in property, plant and equipment at December 31, 1995, and
December 13, 1996 are approximately $3,133,000 and $3,133,000, respectively, of
assets held under capital leases.

5. OTHER ASSETS:

Other assets at December 31, 1995, and December 13, 1996, consist of the
following:

1995 1996
--------- ---------
(IN THOUSANDS)
Note receivable...................... $ 196 $ 196
Other................................ 47 36
--------- ---------
Total...................... $ 243 $ 232
========= =========

6. ACCRUED LIABILITIES:

Accrued liabilities at December 31, 1995, and December 13, 1996, consist of
the following:

1995 1996
--------- ---------
(IN THOUSANDS)
Engineering and testing fees......... $ 13 $ 140
Repairs and maintenance.............. -- 96
Accrued salaries and benefits........ 21 55
Escrow deposits...................... 34 --
Accrued commissions.................. 33 --
Other................................ 14 45
--------- ---------
Total...................... $ 115 $ 336
========= =========

F-27

U S LIQUIDS INC. PREDECESSOR
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

7. INCOME TAXES:

The components of the provision (benefit) for income taxes are as follows:

YEAR ENDED
DECEMBER 31, PERIOD ENDED
-------------------- DECEMBER 13,
1994 1995 1996
--------- --------- -------------
(IN THOUSANDS)
Current
Federal......................... $ 2,750 $ 1,622 $ 40
State........................... (2,039) 191 21
--------- --------- -------------
Total...................... $ 711 $ 1,813 $ 61
--------- --------- -------------
Deferred
Federal......................... $ (1,211) $ (511) $ 1,580
State........................... 2,445 98 403
--------- --------- -------------
Total...................... $ 1,234 $ (413) $ 1,983
--------- --------- -------------

$1,945 $1,400 $2,044
========= ========= =============

The difference in income taxes provided (benefited) and the amounts
determined by applying the federal statutory tax rate to income (loss) before
provision (benefit) for income taxes result from the following:

YEAR ENDED
DECEMBER 31, PERIOD ENDED
-------------------- DECEMBER 13,
1994 1995 1996
--------- --------- -------------
(IN THOUSANDS)
Tax at statutory rate................ $ 1,585 $ 1,104 $ 1,676
Add (deduct)
State income taxes, net of
federal benefit............... 269 191 280
Nondeductible expenses.......... 91 105 88
--------- --------- -------------
Total...................... $ 1,945 $ 1,400 $ 2,044
========= ========= =============

The tax effects of significant temporary differences representing deferred
income tax assets and liabilities are as follows:

DECEMBER 31, DECEMBER 31,
1995 1996
------------ ------------
(IN THOUSANDS)
Deferred income tax liabilities
Property and equipment.......... $ (4,511) $ (4,767)
Landfarm treatment facility..... (14,287) (14,286)
Other........................... (1,729) (2,924)
------------ ------------
Total...................... $(20,527) $(21,977)
============ ============
Deferred income tax assets
Closure accrual................. $ 2,015 $ 1,967
Depletion....................... 2,338 2,344
Processing reserve.............. 3,373 3,373
Other........................... 230 (261)
------------ ------------
Total...................... $ 7,956 $ 7,423
------------ ------------
Net deferred income tax
liabilities............. $ 12,571 $ 14,554
============ ============

F-28

U S LIQUIDS INC. PREDECESSOR
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

8. COMMITMENTS AND CONTINGENCIES:

NONCOMPETE AGREEMENT

Under the terms of the Newpark Transaction, Campbell Wells and Sanifill
agreed not to compete with Newpark Resources, Inc., in the collection of
oilfield waste from offshore sources for a period of five years. This agreement
was assumed by U S Liquids pursuant to the Campbell Wells Acquisition.

OILFIELD WASTE DISPOSAL AGREEMENT

In connection with the Newpark Transaction, Campbell Wells signed a
disposal agreement dated June 4, 1996, in which Newpark Resources, Inc., agreed
to deliver, and Campbell Wells agreed to accept at its Louisiana landfarms,
certain quantities of oilfield waste each year for 25 years beginning June 1996,
for a specified price, subject to adjustment, and at specified annual minimum
volume levels. This agreement was assumed by U S Liquids pursuant to the
Campbell Wells Acquisition.

LEASES

The Company leases office facilities under noncancelable leases. Rent
expense was approximately $214,000, $202,000 and $214,000 for the years ended
December 31, 1994 and 1995, and for the period ended December 13, 1996,
respectively.

LEGAL PROCEEDINGS

Prior to the closing of the Campbell Wells Acquisition, three lawsuits were
brought against Campbell Wells based upon the operation of its Bourg, Louisiana
landfarm. In one of the lawsuits filed against Campbell Wells, approximately 300
individuals residing in and around Grand Bois, Louisiana are seeking unspecified
monetary damages allegedly suffered as a result of (i) odors allegedly emitted
by waste received from Exxon Company U.S.A. ("Exxon") at the landfarm in March
1994, and (ii) alleged air, water and soil contamination in connection with
ongoing operations at the landfarm. The Company was named as a defendant in this
action in January 1998. Trial in this matter on the claims of ten plaintiffs is
set to commence in the 17th Judicial District Court for the Parrish of
Lafourche, Louisiana on July 13, 1998. A second lawsuit, brought by one
individual, seeks unspecified monetary damages allegedly suffered as a result of
odors allegedly emitted by waste received from Exxon at the landfarm in March
1994. This lawsuit is also pending in the 17th Judicial District Court for the
Parrish of Lafourche, Louisiana and trial is set to commence on July 13, 1998.
The Company has not yet been named as a defendant in this action. In the third
lawsuit, six individuals filed suit on March 7, 1996 against Campbell Wells in
the Civil District Court for the Parrish of Orleans, Louisiana, seeking
preliminary and permanent injunctive relief against certain treatment operations
conducted at the Bourg, Louisiana landfarm which the plaintiffs contend have
resulted and will result in adverse health effects by way of emissions of
alleged air pollutants. The plaintiffs' request for a preliminary injunction was
heard during the summer of 1996. On December 30, 1996, the court entered an
order granting in part and denying in part the relief requested by the
plaintiffs. Specifically, the court found that there was no evidence that
emissions resulting from the treatment operations complained of equaled or
exceeded any relevant safety standard, health standard or occupational standard
and, therefore, denied the plaintiffs' request for a temporary injunction
prohibiting such treatment operations. The court did, however, preliminarily
enjoin Campbell Wells (and, thus, indirectly the Company) from treating waste
received from Exxon in March 1994 in one particular treatment cell located
within 500 feet of a building in which one of the plaintiffs resides. In
connection therewith, the court ordered that the Commissioner of the Louisiana
Department of Conservation be made a party to the litigation and substituted for
the plaintiffs on the limited issue of whether Campbell Wells has violated the
location criteria for the particular treatment cell involved. The Company was
named as a defendant in this action in January 1998. No trial date has been set
for the plaintiffs' request for permanent injunctive relief; however, based upon
the court's rulings from the preliminary injunction trial and initial
discussions with the Louisiana Department of Conservation, the

F-29

U S LIQUIDS INC. PREDECESSOR
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

Company believes that permanent injunctive relief that might be entered in the
action will not have a material adverse effect upon the Company's consolidated
financial position or results of operations.

Prior to the closing of the Campbell Wells Acquisition, a class action
lawsuit was filed in the Civil District Court for the Parrish of Orleans,
Louisiana against Campbell Wells seeking unspecified monetary damages allegedly
suffered as a result of alleged air, water and soil contamination in connection
with ongoing operations at the Mermentau, Louisiana landfarm. The Company has
not been named as a defendant in this lawsuit; however, there can be no
assurance that the Company will not subsequently be named as a defendant in this
lawsuit.

In the Campbell Wells Acquisition Agreement, Sanifill agreed, with certain
enumerated exceptions, to retain responsibility for all liabilities of Campbell
Wells as of the closing date of the Campbell Wells Acquisition including,
without limitation, the contingent liabilities associated with such lawsuits.
The obligation of Sanifill to indemnify the Company is limited to $10 million.

In March 1998, the Company was dismissed as a defendant in a lawsuit
originally filed by Waste Facilities, Inc. in 1994 against Campbell Wells and
others in the District Court of Jim Wells County, Texas.

F-30

US LIQUIDS INC.
FORM 10-K
INDEX TO EXHIBITS

EXHIBIT
NO. DESCRIPTION
- ------------------------ ------------------------------------------------------------------------------------------

4.2 -- Credit Agreement, dated December 17, 1997, among U S Liquids Inc., Bank of America
National Trust and Savings Association, as agent and issuing bank, BankBoston, N.A. and
Wells Fargo Bank, N.A.
4.3 -- Note, dated December 17, 1997, of U S Liquids Inc. payable to Bank of America National
Trust and Savings Association.
4.4 -- Note, dated December 17, 1997, of U S Liquids Inc. payable to BankBoston, N.A.
4.5 -- Note, dated December 17, 1997, of U S Liquids Inc. payable to Wells Fargo Bank, N.A.
4.6 -- Security Agreement, dated December 17, 1997, executed by U S Liquids Inc. and its
subsidiaries in favor of Bank of America National Trust and Savings Association.
4.7 -- Company Pledge Agreement, dated December 17, 1997, executed by U S Liquids Inc. in favor
of Bank of America National Trust and Savings Association.
10.15 -- Employment Agreement, dated February 13, 1998, between U S Liquids Inc. and W. Gregory
Orr.
10.16 -- Employment Agreement, dated February 13, 1998, between U S Liquids Inc. and Earl J.
Blackwell.
10.17 -- Asset Purchase Agreement, dated December 15, 1997, among U S Liquids Inc., Mesa
Processing, Inc., Waste Technologies, Inc., Kirk Johnson, Norman Johnson, John Jetelina
and Ron McMahan.
10.41 -- Warrant, dated January 1, 1998, issued by U S Liquids Inc. to Glenn A. Pratt.
10.48 -- Warrant, dated January 1, 1998, issued by U S Liquids Inc. to John Bailey.
21.1 -- List of subsidiaries of U S Liquids Inc.
23.1 -- Consent of Arthur Andersen LLP.
27.1 -- Financial Data Schedule.