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FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2000
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 EAST, SUITE 400, HOUSTON, TEXAS 77060-3545
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
(281) 272-4500
(REGISTRANT'S TELEPHONE NUMBER INCLUDING AREA CODE)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
TITLE OF SECURITIES EXCHANGE ON WHICH REGISTERED
------------------- ----------------------------
Common Stock, par value $.01 American Stock Exchange
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. [X]
The aggregate market value of the voting stock held by non-affiliates
of the registrant at March 15, 2001, was approximately $54,369,284. The
aggregate market value was computed by using the closing price of the common
stock as of that date on the American Stock Exchange. (For purposes of
calculating this amount only, all the directors and executive officers of the
registrant have been treated as affiliates.)
The number of shares of common stock, $.01 par value, of the registrant
outstanding at March 15, 2001, was 15,956,876.
DOCUMENTS INCORPORATED BY REFERENCE
None
TABLE OF CONTENTS
PART I
Item 1. Business...................................................................................1
Item 2. Properties ...............................................................................12
Item 3. Legal Proceedings ........................................................................14
Item 4. Submission of Matters to a Vote of Security Holders.......................................18
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters ....................18
Item 6. Selected Financial Data ..................................................................19
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations ....19
Item 7A. Quantitative and Qualitative Disclosures About Market Risk................................26
Item 8. Financial Statements and Supplementary Data...............................................26
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure......26
PART III
Item 10. Directors and Executive Officers of the Registrant........................................26
Item 11. Executive Compensation....................................................................28
Item 12. Security Ownership of Certain Beneficial Owners and Management............................35
Item 13. Certain Relationships and Related Transactions............................................36
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K..........................36
PART I
ITEM 1. BUSINESS
GENERAL
We are a leading national provider of liquid waste management services,
including collection, processing, recovery and disposal services. Our primary
focus of operations is industrial and commercial wastewater treatment, although
we also collect, process and dispose of oilfield waste. We operate 43 processing
facilities located in 13 states and Canada and serve over 50,000 customers. At
March 1, 2001, we employed approximately 1,200 persons full-time.
The Company was organized in November 1996. Since that time, we have
grown significantly by acquiring businesses engaged in various aspects of the
liquid waste industry.
Our executive offices are located at 411 N. Sam Houston Parkway East,
Suite 400, Houston, Texas 77060-3545, and our telephone number is (281)
272-4500. Our common stock is listed on the American Stock Exchange under the
trading symbol "USL."
INDUSTRY BACKGROUND
The wastewater treatment market is generally divided into two segments:
industrial and commercial wastewater treatment, which may include the treatment
of some hazardous wastes, and municipal wastewater treatment. Industrial and
commercial companies produce various types of wastewater (including hydrocarbon
contaminated water, landfill leachate, dated beverages and grease and grit trap
waste) that must be processed prior to disposal in local publicly-operated
treatment works ("POTWs") or for which municipalities charge higher rates.
Industrial and commercial companies also produce various types of hazardous
waste that must be disposed of in accordance with federal and state regulations.
Similarly, oil and gas exploration and production companies produce liquid waste
that must be disposed of in accordance with federal and state regulations.
Municipalities utilize or contract with third parties for the utilization of
water treatment technology to treat municipal wastewater.
In the United States, the growth in demand for wastewater treatment
services has been driven by many factors, including:
o Municipalities refusing to accept certain industrial
wastewaters due to limited treatment capabilities and a lack
of the resources needed to expand or to modernize their
POTWs;
o Industrial and commercial businesses avoiding POTW
surcharges by using others to process and dispose of their
wastewater;
o Industrial and commercial businesses outsourcing their
wastewater treatment needs;
o Continued industrial and commercial expansion; and
o Increasingly strict regulations governing the disposal of
wastewater, as well as more stringent enforcement of these
regulations.
REJECTION OF CERTAIN WASTEWATERS BY POTWs. In North America,
governmental regulation and enforcement have established strict standards for
potable water and the discharge of pollutants in wastewater. Municipalities have
spent billions of dollars building water purification and wastewater treatment
facilities. However, many of these municipalities are facing increasing
budgetary constraints and damage to their wastewater treatment facilities caused
by grease and other liquid wastes and have begun refusing to accept certain
liquid waste streams, thereby increasing the demand for wastewater treatment
services provided by the private sector. For example, the Dallas, Houston and
San Antonio POTWs do not accept grease or grit trap waste. Similarly, many POTWs
in the Northeast have ceased accepting commingled septage and grease trap waste.
In addition, in late 1997, the Houston POTWs ceased accepting septage generated
outside the Houston city limits.
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ECONOMIC BENEFIT OF PRETREATING CERTAIN WASTEWATERS. For years,
generators of industrial wastewater and other nonhazardous liquid waste have
discharged the waste directly into POTWs. However, the difficulties encountered
by POTWs in collecting and treating certain wastewaters have caused many
municipalities to increase the rates charged for accepting these wastewaters.
With respect to certain wastewaters, it is more economical for the generator to
deliver the waste to liquid waste management service providers such as the
Company than to discharge the waste directly into the POTW. For example, it is
currently more economical for many soft drink manufacturers to deliver their
dated beverages to us for processing and disposal than to discharge the
beverages directly into the POTW.
OUTSOURCING BY INDUSTRIAL AND COMMERCIAL BUSINESSES. Industrial and
commercial businesses prefer to focus on their primary business activities and
to downsize and outsource secondary business activities in which they may not
have much expertise. By outsourcing their wastewater treatment needs, they can
free-up capital for investment in their primary products and business
activities, eliminate a significant portion of their overhead and transfer risk
to experts in the field.
ECONOMIC EXPANSION. Many industrial companies have significantly
expanded their manufacturing and processing facilities. This industrial
expansion has increased the amount of wastewater generated. In addition,
continued commercial expansion throughout North America has generated additional
grease and grit trap waste and other liquid waste that must be processed by the
waste generators, POTWs or liquid waste management service providers such as the
Company.
INCREASINGLY STRICT REGULATIONS. Heightened public concern about water
quality has caused federal, state and local governments to adopt increasingly
strict regulations governing the processing and disposal of industrial
wastewater and other liquid wastes. For example, effective as of October 1993,
Subtitle D of the Resource Conservation and Recovery Act of 1976 ("RCRA") banned
the disposal of untreated bulk liquid waste in landfills. In addition, effective
in March 1997, the Texas Natural Resource Conservation Commission 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. Furthermore,
effective in January 2001, the United States Environmental Protection Agency
(the "EPA") implemented regulations that further restrict the discharge of
pollutants into U.S. waters and into POTWs by existing and new facilities that
treat or recover any hazardous or nonhazardous industrial waste, wastewater or
used material from off-site. Louisiana, Texas and certain other oil and gas
producing states have enacted comprehensive laws and regulations governing the
proper management of oilfield waste. Under Louisiana and Texas regulations, if
oilfield waste cannot be processed for discharge or disposed of at the well
where it is generated, it must be transported to a licensed oilfield waste
processing or disposal facility. In addition, federal regulations also restrict,
and in some cases prohibit entirely, the discharge of oilfield waste into U.S.
waters.
STRATEGY
Our objective is to be the largest and most profitable liquid waste
management company in each of the markets in which we operate. As a national
provider of liquid waste management services, we believe that we benefit from
numerous competitive advantages relative to smaller operators, including
servicing multiple customer locations, processing a wide variety of liquid waste
streams, achieving operating efficiencies and increased economies of scale and
adapting to changing regulations. Our strategy for achieving this objective
includes (i) generating additional internal growth; (ii) enhancing existing
operations; (iii) operating our businesses on a decentralized basis; and (iv)
divesting certain non-core operations. We intend to implement this strategy as
follows:
o INTERNAL GROWTH. To generate internal growth, we have
focused on increasing sales penetration in our current and
adjacent markets, soliciting new commercial and industrial
customers, expanding our collection infrastructure,
marketing upgraded services to existing customers and, where
appropriate, raising prices. We believe there are a number
of liquid waste generators that would prefer to have a
single source provider for the collection, processing and
disposal of all of their liquid waste streams, but are
unable to do so because the liquid waste management industry
is highly fragmented. Accordingly, we have positioned
ourselves as a multi-city, single source provider of liquid
waste management services for national and regional
generators of liquid waste. In addition, we intend to expand
the capacity and processing capabilities of certain of our
existing liquid waste management facilities, and to amend
our permits for certain facilities in order to receive
additional liquid waste streams.
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o OPERATIONAL ENHANCEMENTS. Operations have been strengthened
through the addition of a number of experienced executives
and mid-level managers. We have also updated and enhanced
the environmental compliance programs at our facilities and
provided additional training to our employees. In addition,
we intend to continue to improve our operations through
collection route densification and consolidation and
increased facility and equipment utilization.
o DECENTRALIZED MANAGEMENT. We manage our various businesses
on a decentralized basis, with local management maintaining
responsibility for the day-to-day operations, profitability
and growth of the business, while our executive officers
exercise strong strategic and financial oversight. We
believe that this structure allows us to capitalize on the
considerable local and regional market knowledge and
customer relationships possessed by local management.
o DIVESTITURES. During the fourth quarter of 2000, the Board
of Directors voted to sell certain non-core operations of
our Commercial Wastewater Division and to shut down our
Re-Claim Louisiana facility. We believe that by focusing on
our core operations, we will provide better service to our
customers and improve our profitability.
OPERATIONS AND SERVICES PROVIDED
Industrial and commercial businesses produce various types of
wastewater (including hydrocarbon contaminated water, landfill leachate, dated
beverages, grease and grit trap waste and certain hazardous wastes) that must be
disposed of in accordance with federal, state and local regulations. Similarly,
oil and gas exploration and production companies produce liquid waste that must
be disposed of in accordance with federal and state regulations. We accept
liquid waste from generators and independent collection companies, process the
liquid waste to remove contaminants and then dispose of the liquid waste in
accordance with applicable regulations. In addition, in certain instances, our
processing operations generate saleable by-products. Our services permit
generators of liquid waste to focus on their primary business activities, while
we perform the secondary operations of processing and disposing of their waste.
We collect, process, recover and dispose of liquid waste through a
number of subsidiaries that are organized into three divisions -- the Commercial
Wastewater Division, the Industrial Wastewater Division and the Oilfield Waste
Division. The operations of these three divisions are summarized below. See Note
20 to our consolidated financial statements for certain financial data of these
three divisions. See also Note 11 to our consolidated financial statements for
certain information about our foreign operations.
COMMERCIAL WASTEWATER DIVISION
Our Commercial Wastewater Division contributed approximately 70.1%,
65.7% and 68.2% of our 1998, 1999 and 2000 revenues, respectively. This Division
receives fees to collect, process and dispose of nonhazardous liquid waste such
as industrial wastewater, grease and grit trap waste, bulk liquids, dated
beverages, biosolids and septage. In addition, the Commercial Wastewater
Division generates revenues from the sale of by-products, including fats, oils,
feed proteins, industrial and fuel grade ethanol, solvents, aluminum, glass,
plastic and cardboard, recovered from waste streams. It operates a fleet of
vehicles to collect waste directly from customers, receives waste from
independent transporters servicing thousands of additional generators and also
receives waste shipped directly by the generators via rail and truck. Brief
descriptions of the types of liquid waste most commonly managed by the
Commercial Wastewater Division are set forth below:
INDUSTRIAL WASTEWATERS. Nonhazardous industrial wastewaters such as
hydrocarbon contaminated water, landfill leachate and printing solvents are
transported to our facilities in vacuum trucks, trailers and other transportable
containers. Using a variety of physical, chemical, thermal and biological
techniques, the liquid waste is broken down into constituent components. Water
extracted from the liquid waste is pretreated and then discharged into the POTW
and solid materials are dried and disposed of in an independent solid waste
landfill. In some instances, such as printing solvents, the contaminated
materials are processed and returned to the generator for reuse.
GREASE AND GRIT TRAP WASTE. Grease trap waste from restaurants and
other food manufacturing and preparation facilities and grit trap waste from car
washes are collected by our vehicles or independent parties and transported to
our facilities. Grease and grit trap waste
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are processed using a variety of physical, chemical, thermal and biological
techniques. Water extracted from the liquid waste is pretreated and then
discharged into the POTW and solid materials are dried and disposed of in an
independent solid waste landfill. By-products recovered from grease trap waste
are sold for use in producing various grades of fats, oils and feed proteins.
BULK LIQUIDS AND DATED BEVERAGES. We accept both liquid residuals and
dated packaged beverages from breweries, soft drink manufacturers and food
processors. Water extracted from the liquid waste is pretreated and then
discharged into the POTW. The remaining liquid waste is fermented and distilled
into both industrial and fuel grade ethanol, which is sold primarily to major
oil and chemical companies. Packaging of the dated beverages, whether aluminum,
glass, plastic or cardboard, is removed, separated and sold to recycling firms.
BIOSOLIDS. We accept and process liquid and dry cake biosolids, or
sludge, from municipal wastewater treatment facilities and private businesses
and process these biosolids into a product that is sold for use as a fertilizer
and landfill cover.
SEPTAGE. Septage is pumped from septic tanks by our vehicles or
independent parties and transported to our facilities. The septage is then
processed using a variety of physical, chemical, thermal and biological
techniques. Water extracted from the liquid waste is pretreated and then
discharged into the POTW and solid materials are dried and disposed of in an
independent solid waste landfill.
INDUSTRIAL WASTEWATER DIVISION
The Industrial Wastewater Division contributed approximately 15.6%,
26.3% and 23.0% of our 1998, 1999 and 2000 revenues, respectively. This Division
derives revenues from fees charged to customers for collecting, processing and
disposing of hazardous and nonhazardous liquid waste such as household hazardous
wastes, plating solutions, acids, flammable and reactive wastes, industrial
wastewater, petroleum fuels and antifreeze. Certain sludges and solid hazardous
wastes are also processed. The Industrial Wastewater Division also generates
revenues from the sale of by-products recovered from certain waste streams,
including industrial chemicals and recycled antifreeze products. The Industrial
Wastewater Division collects waste directly from customers, receives waste from
independent transporters and also receives waste shipped directly by the
generators via rail and truck. Brief descriptions of the types of liquid waste
most commonly managed by the Industrial Wastewater Division are set forth below:
HAZARDOUS WASTES. Hazardous wastes such as household hazardous wastes,
plating solutions, acids, and flammable and reactive wastes are transported to
certain of our facilities in trucks and other transportable containers and by
rail. Wastewaters suitable for treatment under the Clean Water Act are directed
into an appropriate process such as chemical precipitation or filtration. Sludge
and solid hazardous wastes are directed to our chemical fixation facility to be
pre-treated using chemical oxidation or reduction followed by fixation. After
testing, solid and semi-solid residues are shipped to an audited and approved
independent Subtitle D landfill and treated listed waste residues are sent to an
audited and approved independent Subtitle C landfill. Organic wastes that have
recoverable heat or solvent values are recycled using distillation techniques.
Solvents are sold back to the paint industry as thinners. Other organic wastes
are blended into fuels sold primarily to operators of cement or lime kiln
facilities.
INDUSTRIAL WASTEWATERS. Hazardous and nonhazardous industrial
wastewaters such as hydrocarbon contaminated water, landfill leachate, inks and
dated chemicals are transported to our facilities in vacuum trucks, trailers and
other transportable containers. Using a variety of physical, chemical, thermal
and biological techniques, the liquid waste is broken down into constituent
components. Water extracted from the liquid waste is pretreated and then
discharged into the POTW and solid materials are dried and disposed of in an
independent solid waste landfill.
PETROLEUM FUELS. Contaminated and off-specification petroleum fuels and
used oil are transported to our facilities in vacuum trucks, trailers and other
transportable oil containers. Using mechanical and gravity separation
techniques, these materials are processed to produce a fuel sold primarily to
operators of industrial furnaces. Resulting wastewater is transported to another
of our facilities for processing and disposal. Solid materials and sludges are
sent to one of our oilfield waste processing facilities.
ANTIFREEZE. Spent antifreeze from automobile dealers, service centers
and a wide variety of automotive and heavy equipment industries is collected by
our vehicles and transported to our facilities. The spent antifreeze is then
processed using a variety of physical, chemical and thermal processes to recover
and purify ethylene glycol, the active ingredient in antifreeze. The end result
is an antifreeze product meeting stringent ASTM specifications that is sold into
the wholesale coolant market.
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OILFIELD WASTE DIVISION
The Oilfield Waste Division contributed approximately 14.3%, 8.0% and
8.8% of our 1998, 1999 and 2000 revenues, respectively. At our six oilfield
waste facilities located in Louisiana and Texas, the Oilfield Waste Division
treats and disposes of waste that is generated in the exploration for and
production of oil and natural gas. Oilfield waste consists primarily of
oil-based and water-based drilling fluids (which contain oil, grease, chlorides
and heavy metals), as well as cuttings, saltwater, workover and completion
fluids, production pit sludges and soil containing these materials. In addition,
at two Louisiana locations, the Oilfield Waste Division cleans tanks, barges and
other vessels used in the storage and transportation of oilfield waste.
Landfarming, the treatment process utilized at our four Louisiana
oilfield waste facilities, involves several distinct stages. Oilfield waste is
brought to our facilities in trucks and on barges and the delivered waste
materials are then tested. Materials which do not qualify as permitted oilfield
waste under applicable regulations are rejected. Accepted waste is then loaded
into treatment cells, which are 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 remaining waste is
then processed to remove organic contamination through biological degradation.
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.
Newpark Resources, Inc. is the largest customer of the Oilfield Waste
Division. In September 1998, we entered into a disposal agreement with Newpark.
Under the terms of this disposal agreement, during the twelve-month periods
ending June 30, 1999, 2000 and 2001, we agreed to process and dispose of up to
375,000, 500,000, and 500,000 barrels of oilfield waste, respectively. In
return, Newpark agreed to pay us a disposal fee of not less than $30.0 million.
Newpark paid us $6.0 million of the disposal fee in 1998, $11.0 million in 1999
and $9.2 million in 2000. The remainder of the disposal fee is required to be
paid to us in monthly installments continuing through June 2001. In December
2000, Newpark exercised an option to extend the term of the disposal agreement.
Pursuant to the terms of this option, during the twelve-month period ending June
30, 2002, Newpark may deliver to us for processing and disposal up to 1,000,000
barrels of oilfield waste. In return, Newpark will pay us a fee of not less than
$8.0 million. Subject to certain conditions, Newpark may extend the term of the
disposal agreement for an additional year at a cost of approximately $8.0
million. Provided that Newpark continues to fulfill its obligations under the
disposal agreement, we are prohibited until June 30, 2002 from (i) accepting
from any customer other than Newpark any oilfield waste generated in a marine
environment or transported in a marine vessel, and (ii) engaging in the site
remediation and closure business, in each case within the states of Louisiana,
Texas, Mississippi and Alabama and the Gulf of Mexico. The term of these
prohibitions will be extended until June 30, 2003 if Newpark exercises its final
option to extend the term of the disposal agreement for an additional year.
SEASONALITY
We expect that the operations of the Oilfield Waste Division will
experience certain seasonal patterns consistent with the oil and gas exploration
and production activity in the Gulf Coast. Generally, the volume of oilfield
waste delivered to the Oilfield Waste Division has been lowest in the first
quarter of each calendar year. Prices for oil and natural gas are expected to
continue to be volatile and affect demand for our oilfield waste services.
Certain of the Commercial Wastewater Division's processing facilities in the
Northeast and Midwest may be affected by adverse weather conditions.
COMPETITION
The liquid waste industry is highly fragmented and very competitive.
Competition is primarily on the basis of proximity to collection operations,
collection and processing fees charged and quality of service. With respect to
certain waste streams (such as oilfield waste, bulk liquids and dated
beverages), we must compete with the generators of these waste streams, who
continually evaluate the decision whether to use internal disposal methods or to
utilize a liquid waste management company such as us. We must also compete with
area landfills for certain waste streams. We compete with Newpark Resources,
Inc. and a number of smaller companies for oilfield waste produced on land in
the Gulf Coast region.
We believe that there are certain barriers to entry in the liquid waste
industry. These barriers include the need for specially equipped facilities;
licenses, permits and trained personnel necessary to operate these facilities;
and formalized procedures for customer acceptance.
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REGULATION
GENERAL
Our 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 our existing operations.
FEDERAL REGULATION
The primary U.S. federal statutes affecting our business are
summarized below:
THE CLEAN WATER ACT. We treat and discharge wastewaters at our liquid
waste facilities and at our oilfield waste landfarms. These activities 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 general permits further limiting
or restricting substantially all discharges of produced water from the Oil and
Gas Extraction Point Source Category into waters of the United States. The
combined effect of all of these permits closely approaches a "zero discharge"
standard affecting all waters except those of the Outer Continental Shelf. We
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.
With the exception of the matters described in Item 3. Legal
Proceedings, below, we believe that each of our operating facilities is
currently in substantial compliance with the applicable requirements promulgated
pursuant to the Clean Water Act.
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. RCRA-regulated hazardous waste is
accepted for processing at our Detroit, Michigan, Tampa, Florida, East Palo
Alto, California and Chandler, Arizona facilities and, therefore, each of these
facilities is subject to the requirements of Subtitle C of RCRA. Our East Palo
Alto and Tampa facilities have each been issued RCRA Part B permits. Our East
Palo Alto facility is operating under a California Department of Toxic
Substances Control permit that expired in 1991, but that allows for on-going
operations. Our Chandler and Detroit facilities have operated under interim
status, as allowed by RCRA, since 1994 and 1991, respectively. Applications for
final Part B permits for these facilities have been submitted to the appropriate
regulatory authorities and we are currently working with the authorities to
obtain these final permits.
The Oilfield Waste Division's facilities treat and dispose of oilfield
waste, which is exempt from classification as a RCRA-regulated 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 us to change our method of doing business and could have a
material adverse effect on our business, results of operations and financial
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condition. There is no assurance that we would be able to adapt our operations
or that we would have the capital resources available to do so.
RCRA also indirectly affects our operations by restricting the disposal
of certain liquid wastes and sludges in landfills. This restriction increases
demand for the services provided by the Commercial Wastewater and the Industrial
Wastewater Divisions.
RCRA regulations also require us to provide financial assurance that
funds will be available when needed for closure and post-closure care at our
RCRA-regulated facilities, the cost of which could be substantial. Such
regulations allow the financial assurance requirements to be satisfied by
various means, including letters of credit, surety bonds, trust funds, a
financial (net worth) test, and a guarantee by a parent corporation. Under RCRA
regulations, a company must pay the closure costs for a facility owned by it
upon the closure of the facility and thereafter pay post-closure care costs.
With the exception of the matters described in Item 3. Legal
Proceedings, below, we believe that each of our operating facilities is
currently in substantial compliance with the applicable requirements promulgated
pursuant to RCRA.
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 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.
If our operations or facilities are responsible for the release or
improper disposal of hazardous substances, we could incur CERCLA liability. We
may also incur CERCLA liability as a result of environmental contamination
caused by hazardous substances, the transportation, treatment or disposal of
which we arranged or which was arranged by the owners of a business that we have
acquired.
With the exception of the matters described in Item 3. Legal
Proceedings, below, we are not aware of any material claims against us or any of
our subsidiaries that are based on CERCLA. Nonetheless, the identification of
any sites at which cleanup action is required could subject us to liabilities
which could have a material adverse effect on our business, results of
operations and financial condition.
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 reauthorized and amended, substantially increasing the scope and
stringency of the Clean Air Act's regulations. Compliance with the Clean Air Act
is not expected to have a material adverse effect on our business, results of
operations or financial condition.
STATE AND LOCAL REGULATIONS
Our waste processing facilities are subject to direct regulation by a
variety of state and local authorities. Typically, we are required to obtain
processing, wastewater discharge and air quality permits from state and local
authorities to operate these facilities and to comply with applicable
regulations concerning, among other things, the generation and discharge of
odors and wastewater. In addition, state laws and regulations typically govern
the manner in which a waste processing facility may be closed and require us to
post financial assurance to assure that all waste will be treated and a facility
closed appropriately.
Order 29-B of the Louisiana Department of Natural Resources contains
extensive rules regarding the generation, processing, 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. The Texas Railroad Commission has also adopted 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.
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We 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 adopted by the Louisiana Department of Natural
Resources have increased the pre-treatment testing to be conducted on oilfield
waste delivered to our Louisiana landfarms.
The states in which we operate have their own laws and regulations that
may be more strict than comparable federal laws and regulations governing
hazardous and nonhazardous waste disposal, water and air pollution, releases and
cleanup of hazardous substances and liabilities for such matters. Our facilities
and operations are likely to be subject to many, if not all, of these laws and
regulations. In addition, states and localities into which we may expand, by
acquisition or otherwise, may now or in the future have regulations with
positive or negative effects on us.
FACTORS INFLUENCING FUTURE RESULTS AND ACCURACY OF FORWARD-LOOKING STATEMENTS
In the normal course of our business, in an effort to help keep our
stockholders and the public informed about our operations, we may from time to
time issue or make certain statements, either in writing or orally, that are or
contain forward-looking statements, as that term is defined in the U.S. federal
securities laws. Generally, these statements relate to business plans or
strategies, projected or anticipated benefits or other consequences of such
plans or strategies, projected or anticipated benefits from acquisitions made by
or to be made by us, or projections involving anticipated revenues, earnings or
other aspects of operating results. The words "may," "will," "expect,"
"anticipate," "believe," "estimate," "continue" and similar expressions are
intended to identify forward-looking statements. We caution readers that such
statements are not guarantees of future performance or events and are subject to
a number of factors that may tend to influence the accuracy of the statements
and the projections upon which the statements are based, including but not
limited to those discussed below. As noted elsewhere in this report, all phases
of our operations are subject to a number of uncertainties, risks and other
influences, many of which are outside of our control, and any one of which, or a
combination of which, could materially affect the results of our operations and
whether forward-looking statements made by us ultimately prove to be accurate.
The following discussion outlines certain factors that could affect our
consolidated results of operations for 2001 and beyond and cause them to differ
materially from those that may be set forth in forward-looking statements made
by us or on our behalf.
RISKS RELATED TO OPERATING AND INTERNAL GROWTH STRATEGY
Key elements of our strategy are to improve the profitability and
increase the revenues of our existing operations and any subsequently acquired
businesses. We intend to improve the profitability of our existing operations
and any subsequently acquired businesses by various means, including achieving
operating efficiencies and economies of scale. Our ability to increase the
revenues of our existing operations and any subsequently acquired businesses
will be affected by various factors, including:
o The demand for liquid waste collection, processing and
disposal services;
o Our ability to expand the range of services offered to
customers;
o Our ability to develop national and regional accounts for
our liquid waste management services and other marketing
programs; and
o The demand for by-products we recover from certain liquid
waste streams.
Many of these factors are beyond our control, and there can be no
assurance that our operating and internal growth strategies will be successful
or that we will be able to generate cash flows adequate for our operations and
to support internal growth.
MANAGEMENT OF GROWTH
To manage our growth effectively, we must implement and improve our
operational, financial and management information systems and controls, and
train, motivate and manage our employees. We periodically review and upgrade our
management information systems, as well as hire additional management and other
personnel in order to maintain the adequacy of our operational, financial and
management controls. If we fail to manage our growth effectively, our business,
results of operations and financial condition could be materially and adversely
affected.
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COMPETITION
The liquid waste management industry is highly fragmented and very
competitive. We compete with other liquid waste processing facilities and
alternative methods of disposal of certain waste streams provided by area
landfills and injection wells, as well as the alternative of illegal disposal.
In addition, competitive products and services have been and are likely to
continue to be developed and marketed by others. Furthermore, future
technological change and innovation may result in a reduction in the amount of
liquid waste being generated or alternative methods of processing and disposal
being developed. The markets for the various by-products that we sell are also
very competitive. With respect to our oilfield waste operations, we must compete
with alternative methods of off-site disposal of oilfield waste. We also face
competition from customers who develop or enhance their own methods of disposal
instead of using the services of liquid waste management companies. Future
technological change and innovation may increase the amount of internal oilfield
waste processing and disposal as well as the number of competitors in this
market. Increased use of internal processing and disposal methods and other
competitive factors could have a material adverse effect on our business,
results of operations and financial condition.
Our competitors may be better capitalized, have greater name
recognition or be able to provide services or products at a lower cost. In
addition, as the liquid waste market matures, competition can be expected to
increase. As a result of these and other competitive factors, our strategy may
not be successful and we may not be able to generate adequate cash flows to fund
our operations.
FAILURE TO COMPLY WITH GOVERNMENTAL REGULATIONS
Our business is subject to numerous federal, state and local laws,
regulations and policies that govern environmental protection, zoning and other
matters. These laws and regulations have changed frequently in the past and it
is reasonable to expect additional changes in the future. If existing regulatory
requirements change, we may be required to make significant capital and
operating expenditures. Although we believe that we are presently in material
compliance with applicable laws and regulations, our operations may not continue
to comply with future laws and regulations. Governmental authorities may seek to
impose fines and penalties on us or seek to revoke or deny the issuance or
renewal of operating permits for failure to comply with applicable laws and
regulations. Under these circumstances, we might be required to curtail or cease
operations or conduct site remediation until a particular problem is remedied,
which could have a material adverse effect on our business, results of
operations and financial condition.
POTENTIAL IMPACT OF GOVERNMENTAL INVESTIGATION OF OUR DETROIT FACILITY
Our Detroit, Michigan facility is under investigation by the EPA and
the Federal Bureau of Investigation for possible violations of the Clean Water
Act, RCRA, and federal wire and mail fraud statutes. This investigation was
initiated in 1999 as a result of allegations that (i) the facility knowingly
discharged into the Detroit sewer system untreated hazardous liquid waste in
violation of city ordinances, the facility's permit and the Clean Water Act, and
(ii) without proper manifesting, the facility knowingly transported and disposed
of hazardous waste at an unpermitted treatment facility in violation of RCRA. We
have cooperated with the governmental agencies involved in this investigation,
but as of the date of this report, no announcement has been made by any of the
agencies regarding the investigation or any fines or penalties that may be
imposed against the facility. The imposition of a substantial fine or penalty
against the facility could have a material adverse effect on our business,
results of operations and financial condition.
RISKS RELATED TO OUR LONG-TERM DEBT
We have a revolving credit facility with a group of banks under which
we may borrow to fund our working capital requirements. The credit agreement
contains affirmative, negative, subjective and financial covenants. Our fourth
quarter 2000 results caused us to be out of compliance with certain of the
financial covenants of the credit facility. Effective March 19, 2001, the
terms of the credit facility were amended to, among other things, reduce the
amount of the credit facility from $150 million to $120 million, limit the
total amount of debt outstanding under the credit facility to $115 million
except with the approval of the banks, reduce the amount of secured debt that
we may owe to third parties from $20 million to $5 million, limit the amount
of capital expenditures that we may make in any fiscal year, increase the
interest rates payable under the credit facility, prohibit future acquisitions
by the Company without the banks' consent, and to waive our noncompliance with
and modify the terms of certain of our financial covenants. There can be no
assurance that we will be successful in complying with all of the financial
covenants contained in the amended credit agreement. Any such failure would
constitute an event of default under the amended credit agreement, allowing
the banks to call the loan and exercise their rights under the amended credit
agreement and other loan documents.
9
Our revolving credit facility matures on February 1, 2002.
Consequently, by such date, we must either extend the term of the credit
facility or obtain an alternative source of financing. Our failure to obtain
such an extension or an alternative source of financing would have a material
adverse effect on our business, results of operations, financial condition and
liquidity.
IMPACT OF FAILURE TO OBTAIN OR MAINTAIN NECESSARY GOVERNMENTAL APPROVALS
We operate in a highly regulated environment and are required to have
permits and approvals from federal, state and local governments. Any of these
permits or approvals or applications could be denied, revoked or modified under
various circumstances. In addition, if new environmental legislation or
regulations are enacted or existing legislation or regulations are amended or
are enforced differently, we might be required to obtain additional operating
permits or approvals. The process of obtaining or renewing a required permit or
approval can be lengthy and expensive and our efforts to obtain permits,
renewals or approvals may be opposed by citizens groups, adjacent landowners or
others. Our facilities in Chandler, Arizona and Detroit, Michigan have never
been granted Part B permits under RCRA and are continuing to operate under
interim status, as allowed by RCRA. In addition, our facility in East Palo Alto,
California is operating under a California Department of Toxic Substances
Control permit that expired in 1991, but that allows for ongoing operations.
Although applicable regulations allow these facilities to continue to operate,
we may not be successful in obtaining or maintaining these and other required
permits and approvals and that failure could have a material adverse effect on
our business, results of operations and financial condition.
POTENTIAL ENVIRONMENTAL LIABILITY
We may be subject to liability for environmental damage that our
processing facilities and collection operations may have caused or may cause
nearby landowners, particularly as a result of the contamination of drinking
water sources or soil, including damage resulting from conditions existing prior
to our acquisition of the facilities or operations. Liability may also arise
from any off-site environmental contamination caused by hazardous substances,
the transportation, treatment or disposal of which we arranged or which was
arranged by the owners of businesses that we have acquired. Any substantial
liabilities for environmental damage could have a material adverse effect on our
business, results of operations and financial condition. During the ordinary
course of our business, we may become involved in a variety of legal and
administrative proceedings relating to land use and environmental laws and
regulations, including actions or proceedings:
o By governmental agencies seeking to impose civil or criminal
penalties on us;
o By governmental agencies seeking to revoke or deny renewal
of one or more of our permits;
o By citizens groups, adjacent landowners or governmental
agencies opposing the issuance of a permit or approval to us
or alleging violations of the permits under which we
operate; or
o By citizens groups and adjacent landowners seeking to impose
liability on us for environmental damage at any of our
facilities (or facilities formerly owned by us or any
acquired business) or damage that those facilities or other
properties may have caused.
The adverse outcome of one or more of these proceedings could have a material
adverse effect on our business, results of operations and financial condition.
During the ordinary course of our operations, we have from time to time
received, and expect that we may in the future receive, citations or notices
from governmental authorities that our operations are not in compliance with our
permits or certain applicable environmental or land use laws and regulations. We
generally seek to work with the authorities to resolve the issues raised by
these citations or notices. However, we may not always be successful in this
regard and future citations or notices could have a material adverse effect on
our business, results of operations and financial condition.
10
INSUFFICIENCY OF INSURANCE
While we maintain liability insurance, it is subject to coverage limits
and certain policies exclude coverage for damages resulting from environmental
contamination. Although there are currently numerous sources from which such
coverage may be obtained, it may not continue to be available to us on
commercially reasonable terms or the possible types of liabilities that may be
incurred by us may not be covered by our insurance. In addition, our insurance
carriers may not be able to meet their obligations under the policies or the
dollar amount of the liabilities may exceed our policy limits. Even a partially
uninsured claim, if successful and of significant magnitude, could have a
material adverse effect on our business, results of operations and financial
condition. We also retain a risk for our self insured employee group health
claims resulting from uninsured deductibles per accident or occurrence which are
subject to an annual aggregate stop loss limit on a claim basis and on an
aggregate basis.
DEPENDENCE UPON OILFIELD WASTE EXEMPTION UNDER RCRA AND OTHER ENVIRONMENTAL
REGULATIONS
Oilfield waste is currently exempt from the requirements of RCRA, which
is the principal federal statute governing the handling and disposal of waste.
In recent years, proposals have been made to rescind or modify this exemption.
The repeal or modification of the exemption covering oilfield waste or
modification of applicable regulations or interpretations regarding the
processing and disposal of oilfield waste would require us to alter our method
of processing and disposing of oilfield waste. This could have a material
adverse effect on our business, results of operations and financial condition.
Each of our operations is also dependent to varying degrees on the existence and
enforcement of local, state and federal environmental regulations. Any repeal or
relaxation of those regulations, or a failure of governmental authorities to
enforce the regulations, could result in decreased demand for our services and,
therefore, could have a material adverse effect on our business, results of
operations and financial condition. Our operations may also be adversely
affected by new regulations or changes in other applicable regulations.
DEPENDENCE ON OIL AND GAS INDUSTRY
Demand for our oilfield waste processing and disposal services depends
in large part upon the level of exploration for and production of oil and gas,
particularly in the Gulf Coast region. This demand, in turn, depends on, among
other things, oil and gas prices, expectations about future prices, the cost of
exploring for, producing and delivering oil and gas, the discovery rate of new
oil and gas reserves and the ability of oil and gas companies to raise capital.
Historically, prices for oil and gas have been extremely volatile and have
reacted to changes in the supply of and demand for oil and natural gas, domestic
and worldwide economic conditions and political instability in oil-producing
countries. Current levels of oil and gas exploration and production activities
may not be maintained. Prices for oil and natural gas are expected to continue
to be volatile and affect demand for our oilfield waste services. A material
decline in oil or natural gas prices or exploration activities could materially
affect the demand for our oilfield waste services and, therefore, our business,
results of operations and financial condition.
RELIANCE ON KEY PERSONNEL
We are highly dependent on our executive officers and senior
management, and we likely will depend on the senior management of any
significant business we acquire in the future. The loss of the services of any
of our current executive officers or key employees or any member of senior
management of any acquired business could have a material adverse effect on our
business, results of operations and financial condition. In addition, debt
outstanding under our credit facility may be accelerated by the lenders if,
among other things, Michael P. Lawlor or Earl J. Blackwell ceases to serve as an
executive officer of the Company and is not replaced within 60 days by an
individual reasonably satisfactory to the lenders. We have tried to reduce some
of this risk by maintaining key man life insurance in the amount of $5.0 million
on both Mr. Lawlor and Mr. Blackwell.
VOLATILITY OF OUR STOCK PRICE
Our common stock was first publicly traded on August 20, 1997 and has
traded from a low of $1.75 per share to a high of $26.38 per share. The market
price of our common stock could continue to fluctuate substantially due to a
variety of factors, including:
o Quarterly fluctuations in results of operations;
o Announcement of the results of the governmental
investigation of our Detroit facility;
11
o Further changes to our revolving credit facility;
o Changes in the regulatory environment or market conditions
affecting the liquid waste management industry;
o Announcement and market acceptance of acquisitions;
o Changes in earnings estimates by analysts;
o Loss of key personnel;
o Changes in accounting principles or policies;
o Sales of common stock by existing stockholders;
o Announcements of key developments by competitors; and
o Economic and political conditions.
The market price for our common stock may also be affected by our
ability to meet analysts' expectations. Any failure to meet such expectations,
even slightly, could have an adverse effect on the market price of our common
stock.
ITEM 2. PROPERTIES
Our corporate offices are located in Houston, Texas. The corporate
offices consist of approximately 20,000 square feet of office space occupied
under a lease which expires on April 30, 2002.
The Commercial Wastewater Division operates 24 liquid waste processing
facilities. We believe that the specialized equipment, licenses and permits
necessary to operate these liquid waste processing facilities create a
significant barrier to entry into this industry. The following table sets forth
certain information relating to each such facility, including the types of
liquid waste most commonly managed:
FACILITY LOCATION LIQUID WASTES MANAGED OWNED/LEASED
Parallel CA......................... Rancho Cucamonga, California Bulk Liquids and Dated Beverages Owned
Parallel FL......................... Bartow, Florida Bulk Liquids and Dated Beverages Leased
National Solvent.................... Atlanta, Georgia Industrial Wastewaters Leased
D&H Holding......................... Hammond, Indiana Industrial Wastewaters; Grease and Leased
Grit Trap Waste; Septage
Parallel KY......................... Louisville, Kentucky Bulk Liquids and Dated Beverages Owned
Bio-Vac............................. Shreveport, Louisiana Grease and Grit Trap Waste Owned
A&A Environmental................... Linthicum Heights, Maryland Industrial Wastewaters Owned
Northern A-1........................ Kalkaska, Michigan Industrial Wastewaters Owned
Royal Recycling..................... Hamilton, Ontario, Canada Dated Beverages Leased
Gateway Terminal.................... Carteret, New Jersey Industrial Wastewaters Leased
Waste Stream........................ Weedsport, New York Biosolids Leased
E-Max Elwood........................ Elwood City, Pennsylvania Industrial Wastewaters Leased
E-Max Allegheny..................... Pittsburgh, Pennsylvania Industrial Wastewaters Leased
Austin Liquid Disposal.............. Austin, Texas Grease and Grit Trap Waste Leased
Environment Management.............. Austin, Texas Grease and Grit Trap Waste Owned
Mesa................................ Dallas, Texas Grease and Grit Trap Waste Owned
Amigo North......................... Giddings, Texas Petroleum Fuels Owned
Reclamation Technology.............. Haltom City, Texas Industrial Wastewaters; Grease and Leased
Grit Trap Waste
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FACILITY LOCATION LIQUID WASTES MANAGED OWNED/LEASED
American Wastewater................. Houston, Texas Industrial Wastewaters; Grease and Owned
Grit Trap Waste; Septage
Re-Claim TX......................... Houston, Texas Industrial Wastewaters Owned
South Texas (Mesa).................. Los Fresnos, Texas Grease and Grit Trap Waste Owned
Waste Technologies.................. San Antonio, Texas Grease and Grit Trap Waste Owned
Imperial (Mesa)..................... San Antonio, Texas Grease and Grit Trap Waste Owned
Amigo South......................... San Antonio, Texas Petroleum Fuels Owned
The Industrial Wastewater Division operates six waste processing
facilities. The following table sets forth certain information relating to each
such facility, including the types of waste most commonly managed:
FACILITY LOCATION LIQUID WASTES MANAGED OWNED/LEASED
Romic AZ............................ Chandler, Arizona Hazardous Wastes; Industrial Wastewaters Leased
Romic CA............................ East Palo Alto, California Hazardous Wastes; Industrial Wastewaters Owned
USL Florida......................... Tampa, Florida Household Hazardous Wastes Owned
Waste Research Augusta.............. Augusta, Georgia Industrial Wastewaters Owned
Waste Research Macon................ Macon, Georgia Industrial Wastewaters Owned
USL Detroit......................... Detroit, Michigan Hazardous Wastes; Industrial Wastewaters Owned
The Oilfield Waste Division operates six oilfield waste processing
facilities and seven commercial saltwater injection wells. The following table
sets forth certain information relating to each processing facility:
AREA PERMITTED APPROXIMATE
FOR OILFIELD SQUARE FOOTAGE
WASTE PROCESSING OF OFFICE
LOCATION AND DISPOSAL FACILITIES OWNED/LEASED
Bateman Island, Louisiana.......................................... 115 acres 5,000 Leased
Bourg, Louisiana................................................... 140 acres 5,000 Leased
Elm Grove, Louisiana............................................... 152 acres 500 Owned
Mermentau, Louisiana............................................... 277 acres 10,000 Owned
Bustamonte, Texas.................................................. 120 acres 1,000 Owned
San Isidro, Texas.................................................. 80 acres 1,000 Leased
In addition to the facilities described above, we also own a facility
in Lacassine, Louisiana consisting of approximately 8,000 square feet of office
and equipment storage space and approximately 130 acres of undeveloped land that
was previously used for landfarming of oilfield waste and naturally occurring
radioactive material ("NORM"). This facility has been closed in accordance with
Louisiana law. We also own a facility in Kansas City, Missouri that was
previously used for storage and bulking of various hazardous wastes and a
facility in Roseville, Michigan that was previously used for fuel blending and
solvent recycling. The Kansas City and Roseville facilities have not been
operational since 1992 and we have no plans to resume operations at either of
these facilities. We also lease the Re-Claim facility located in Shreveport,
Louisiana. This lease expires in September 2007. We are in the process of
closing this facility and expect that all operations at the facility will cease
by December 31, 2001.
We own other real estate, buildings and physical properties that we use
in our liquid waste collection operations. We also lease certain of our
collection and transportation facilities and administrative offices.
All of our facilities satisfy our present needs; however, as part of
our internal growth strategy, we intend to expand the capacity and processing
capabilities of certain of our liquid waste processing facilities and increase
the number and types of permitted waste streams of such facilities. We believe
that the remaining capacity of each of the landfarms that we lease is sufficient
for at least 25 years; which, in each case, exceeds the remaining term
(including options) of the lease agreement for such facility. We also believe
that the remaining capacity at each of the landfarms that we own is sufficient
for at least 25 years.
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ITEM 3. LEGAL PROCEEDINGS
REGULATORY PROCEEDINGS
In May 1998, we acquired from Waste Management, Inc. substantially all
of the assets of City Environmental, Inc. including, without limitation, a
hazardous and nonhazardous waste treatment facility located in Detroit,
Michigan. This facility has never been granted a final Part B permit under RCRA,
but has operated under interim status, as allowed by RCRA. On August 25, 1999,
the EPA and the Federal Bureau of Investigation ("FBI") executed a search
warrant at this facility, seeking electronic data, files and other documentation
relating to the facility's receipt, processing and disposal of hazardous waste.
As a result of the execution of the search warrant, the facility temporarily
ceased operations. According to the affidavit attached to the search warrant,
after receiving a telephone call from an employee at the facility in May 1999,
the EPA and the FBI began a joint investigation of the facility. The
investigation centers around allegations that (i) the facility knowingly
discharged into the Detroit sewer system untreated hazardous liquid waste in
violation of city ordinances, the facility's permit and the Clean Water Act, and
(ii) without proper manifesting, the facility knowingly transported and disposed
of hazardous waste at an unpermitted treatment facility in violation of RCRA.
According to the affidavit, the facility has been knowingly violating the Clean
Water Act and RCRA since 1997, which was before we acquired the facility. The
on-site investigation of our facility by the EPA and the FBI was completed in
August 1999. It is our understanding that the investigation is continuing, but
as of the date of this report no announcement regarding the investigation has
been made by the EPA or the FBI. All costs, except potential fines or penalties,
incurred or expected to be incurred in connection with the investigation of our
Detroit facility have been reflected in our consolidated financial statements at
December 31, 2000. See Note 3 to our consolidated financial statements. However,
due to the current status of the investigation, we are unable at this time to
project a reasonable estimate of potential fines or penalties (or range of
potential fines or penalties) that could be assessed against the facility.
Accordingly, we cannot project the ultimate outcome of the investigation or its
potential impact on us. The imposition of a substantial fine or penalty against
the facility could have a material adverse effect on our business, results of
operations, financial condition and liquidity.
After the completion of the on-site investigation of our Detroit
facility, we began conducting routine tests of materials in waste solidification
vaults in preparation for the reopening of the facility. During these tests, we
discovered that certain waste which had been received by the facility prior to
its August 25, 1999 closing was contaminated with PCBs, that this waste had
contaminated other waste in several of the waste solidification vaults and a
liquid feed tank, and that some of the PCB contaminated waste may have been
inadvertently delivered to a Waste Management landfill for disposal. Shortly
thereafter, Waste Management asserted a claim against us for damages relating to
the disposal of PCB contaminated materials at its landfill. In December 2000, we
agreed to reimburse Waste Management for the cost of disposing of all PCB
contaminated materials that we inadvertently delivered to its landfill. Based
upon the information available, we have continued to maintain a reserve to cover
the costs of disposing of any improperly delivered PCB contaminated materials.
As of December 31, 2000, the balance of this reserve was $1.3 million.
Shortly after the discovery of the PCB contamination, we determined
that a subsidiary of National Steel Corporation generated the PCB contaminated
materials and that the materials were not properly identified as required by law
when delivered to our Detroit facility. We have filed suit against National
Steel seeking to recover the costs incurred and losses suffered by our facility
as a result of its subsidiary's failure to disclose that its waste was
contaminated with PCBs, including any amounts ultimately determined to be owed
by us to Waste Management.
In addition to filing suit against National Steel, we also submitted
claims under our pollution liability insurance policy and our property
damage/business interruption insurance policy for losses incurred as a result of
the temporary closing of the facility and the delivery of any PCB contaminated
waste to Waste Management's landfill. Our claim under the pollution liability
policy has been denied and we do not intend to pursue this claim further. We are
currently awaiting a response from the insurance company on our claim under the
property damage/business interruption policy.
During the fourth quarter of 1999, the EPA notified us that it had
determined that our Detroit facility was no longer eligible to receive waste
generated as a result of removal or remedial activities under CERCLA. This
notification further advised that, in order for the facility to regain its
eligibility to receive such CERCLA waste, the facility must demonstrate that it
can again safely handle such waste. In accordance with the terms of the notice,
we have asked the EPA to reconsider its determination and we are currently
awaiting a response to this request. Although we believe that the EPA will
ultimately determine that the facility, as re-opened, can safely handle CERCLA
waste, there can be no assurances thereof. The facility's failure to regain its
eligibility to receive CERCLA waste would not have a material adverse impact
upon the operations of the facility.
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In June 1999, we were notified that the Louisiana Department of
Environmental Quality (the "LDEQ") was seeking to terminate the discharge permit
held by our Re-Claim Louisiana facility, which allows the facility to discharge
processed wastewater into the waters of the State of Louisiana. In its notice,
the LDEQ alleged that the proposed termination was justified based upon, among
other things, the facility's failure to comply with the terms of its permit, two
releases (spills) that occurred at the facility, and the facility's acceptance
and processing of hazardous materials not covered by the terms of its permit. In
January 2000, we entered into a tentative settlement agreement with the LDEQ
resolving the LDEQ's allegations. A settlement agreement was prepared by the
parties and signed by the Company, and the terms of the settlement agreement
have been published in accordance with Louisiana law. Under the terms of the
settlement agreement, we agreed to pay a civil assessment of $525,000 to the
LDEQ. In addition, we agreed to contribute $675,000 to certain Supplemental
Environmental Projects ("SEPs") approved by the LDEQ to benefit the environment.
In return, the LDEQ agreed to take no further action on its notice of intent to
terminate the permit held by our facility. These charges, which total $1.2
million, remain accrued as of December 31, 2000. This settlement agreement will
not become final until approved by the Louisiana Attorney General. This approval
has been delayed pending the enactment of legislation clarifying the LDEQ's
authority to use SEPs as part of its enforcement proceedings. We anticipate that
the settlement agreement will become final during 2001.
In the fourth quarter of 1999, the EPA notified us of certain alleged
violations of RCRA by our Re-Claim Louisiana facility. Among other things, the
EPA alleged that the facility accepted waste from CERCLA sites that it was not
permitted to accept and improperly disposed of such waste. Although we dispute
the EPA's allegations, we are attempting to negotiate a resolution with the EPA
which may include a civil assessment, modifications to our waste screening and
waste processing procedures and/or additional capital expenditures at the
facility. We believe that the ultimate outcome of this proceeding will not have
a material adverse effect on our business, results of operations or financial
condition.
The EPA also notified us in 1999 that it believed that approximately
3.0 million gallons of liquid waste received by our Re-Claim Louisiana facility
and stored off-site contained hazardous constituents and, therefore, the waste
could not be processed by our facility. Although we believed that the waste
could be handled as nonhazardous waste in accordance with the terms of the
facility's permit, we have delivered a portion of the waste to a third party for
disposal and are discussing with the EPA whether the remaining waste may be
processed by our facility. During 1999, we established a $2.5 million reserve
for costs incurred in the event that it was ultimately determined that this
waste had to be delivered to a third party for processing and disposal.
Additional adjustments were made in 2000 and as of December 31, 2000,
approximately $1.2 million of this reserve remains accrued.
During October and November of 1999, the California Department of Toxic
Substances Control (the "DTSC") inspected our processing facility in East Palo
Alto, California, and our transfer facility in Redwood City, California. On
November 29, 1999, the DTSC issued a summary of violations identifying various
alleged violations of California hazardous waste management laws and regulations
by the facilities. The DTSC has not initiated a formal enforcement action
seeking penalties against either facility. There can be no assurance, however,
that a formal enforcement action will not subsequently be brought against one or
both facilities. Although we dispute the alleged violations, we are attempting
to negotiate a resolution with the DTSC. We believe that the ultimate resolution
of these matters will not have a material adverse effect on our business,
results of operations, or financial condition.
Prior to its acquisition by the Company in January 1999, Romic
Environmental Technologies Corporation ("Romic") had entered into an
administrative consent order with the EPA relating to the cleanup of soil and
groundwater contamination at its facility in East Palo Alto, California. A
remedial investigation of the facility has been completed by Romic and forwarded
to the EPA. Romic is nearing completion of a corrective measures study for
submission to the EPA. The EPA will review this study and approve a plan for
final site remediation. Prior to its acquisition by the Company, Romic had also
been notified by the EPA and the DTSC that it was a potentially responsible
party under applicable environmental legislation with respect to the Bay Area
Drum Superfund Site in San Francisco, California, the Lorentz Barrel and Drum
Superfund Site in San Jose, California and the Casmalia Resources Hazardous
Waste Management Facility located near Santa Barbara, California, each of which
was a drum reconditioning or disposal site previously used by Romic. With
respect to each of these drum reconditioning or disposal sites, Romic and a
number of other potentially responsible parties have entered into administrative
consent orders and/or agreements allocating each party's respective share of the
cost of remediating the sites. Romic's share under these consent orders and/or
agreements is as follows: Bay Area -- 6.872%; Lorentz -- 5.62% and Casmalia
Resources -- 0.29%. Based upon the information currently available, we have
continued to maintain a reserve to cover Romic's estimated costs to remediate
the East Palo Alto facility and the three drum reconditioning or disposal sites.
As of December 31, 2000, the balance of this reserve was $4.0 million.
Management believes that this reserve is sufficient to satisfy Romic's
obligations under the consent orders and agreements; however, due to the
complex, ongoing and evolving process of investigating and remediating these
sites, Romic's actual costs may exceed the amount reserved.
15
In December 1999, we were notified by the EPA that D&H Holding Co.,
Inc., a company that we acquired in the fourth quarter of 1998, is a potentially
responsible party under CERCLA with respect to the Lenz Oil Services Superfund
Site in DuPage County, Illinois. During the first quarter of 2001, the Company
and a number of other potentially responsible parties entered into a consent
decree allocating each party's respective share of the cost of remediating this
site. Based upon the information available, we have continued to maintain a
reserve to cover our share of the estimated costs to remediate the Lenz Oil
Services site. As of December 31, 2000, the balance of this reserve was
$150,000. We have made demand upon the former stockholders of D&H Holding for
indemnification against any costs that we may incur in connection with the
remediation of this site.
The Company's non-saleable beverage operations, which operate under the
Parallel Products name, are subject to regulation by the U.S. Bureau of
Alcohol, Tobacco and Firearms (the "ATF"). In addition to regulating the
production, distribution and sale of alcohol and alcohol containing products,
the ATF is also responsible for collecting the federal excise taxes (the "FET")
that must be paid on distilled spirits, wine and beer. If alcoholic beverages on
which the FET have been paid are returned to bond at our Parallel Products'
premises for destruction, the party who has paid the FET on the destroyed
product is entitled to a refund. When our customers return distilled spirits,
wine or beer from commerce to one of our facilities for destruction, we
generally file a claim with the ATF on behalf of that customer for refund of the
FET paid on that product. The ATF periodically inspects the Parallel Products
facilities both to insure compliance with its regulations and to substantiate
claims for FET refunds. During the second quarter of 2000, the ATF conducted an
inspection at our Louisville, Kentucky facility. At the conclusion of the
inspection of our Louisville facility, the ATF preliminarily notified us that it
intends to deny certain refund claims totaling approximately $1.2 million due to
what the ATF alleges was inadequate, incomplete or unsubstantiated supporting
documentation. In addition, the ATF has proposed a civil penalty of $30,000
based on the alleged defects in our documentation. During the third quarter of
2000, the ATF began an inspection at our Parallel Products facility in Rancho
Cucamonga, California. It is our understanding that this investigation has been
completed, but as of the date of this report no announcement regarding the
investigation has been made by the ATF. We have worked closely with the ATF
throughout this inspection process and have implemented revised or upgraded
procedures at the facilities to assure that documentation for future refund
claims is in full compliance with the applicable requirements. We are also
engaging in discussions with the ATF concerning the potential denied claims and
believe that a satisfactory resolution can be reached. During 2000, we
established a reserve for any amounts we would be required to pay to our
customers in the event any of their refund claims are ultimately denied by the
ATF and to cover the proposed civil penalty. As of December 31, 2000, the total
of this reserve was $1.1 million.
LITIGATION
During the third quarter of 1999, six purported securities class action
lawsuits were filed against the Company and certain of its officers and
directors in the United States District Court for the Southern District of
Texas, Houston Division. These lawsuits have been consolidated into a single
action styled IN RE: U S LIQUIDS SECURITIES LITIGATION, Case No. H-99-2785, and
the plaintiffs have filed a consolidated complaint. The consolidated complaint
alleges violations of Sections 11, 12(a)(2) and 15 of the Securities Act of 1933
(the "Securities Act") on behalf of purchasers of the Company's common stock in
our March 1999 public offering and violations of Sections 10(b) and 20(a) of the
Securities Exchange Act of 1934 (the "Exchange Act") and Rule 10b-5 promulgated
thereunder on behalf of purchasers of the Company's common stock during the
period beginning on May 12, 1998 and ending on August 25, 1999. The plaintiffs
generally allege that the defendants made false and misleading statements and
failed to disclose allegedly material information regarding the operations of
the Company's Detroit facility and the Company's financial condition in the
prospectus relating to the Company's March 1999 stock offering and in certain
other public filings and announcements made by the Company. The remedies sought
by the plaintiffs include designation of the action as a class action,
unspecified damages, attorneys' and experts' fees and costs, rescission to the
extent any members of the class still hold common stock, and such other relief
as the court deems proper. During 2000, we filed a motion to dismiss the
plaintiffs' consolidated complaint. In January 2001, the court entered an Order
of Partial Dismissal which dismissed the claims asserted by the plaintiffs under
Sections 10(b) and 20(a) and Rule 10b-5 of the Exchange Act, but granted the
plaintiffs leave to file an amended complaint. The deadline for filing an
amended complaint has passed and the plaintiffs recently advised the court that,
while preserving all of their rights regarding the claims under Sections 10(b)
and 20(a) of the Exchange Act, they will proceed on the current complaint as
affected by the Order of Partial Dismissal. Accordingly, it is our understanding
that the lawsuit is proceeding with respect to the claims asserted under
Sections 11, 12(a)(2) and 15 of the Securities Act only.
In addition, one stockholder of the Company has filed a lawsuit against
certain of the officers and directors of the Company in connection with the
operation of the Company's Detroit facility and the securities class action
described above. BENN CARMICIA V. U S LIQUIDS INC., ET AL., was filed in the
United States District Court for the Southern District of Texas, Houston
Division, on September 15, 1999 and was subsequently consolidated with the
claims asserted in the securities class action described above. The plaintiff
purports to allege derivative claims on behalf of the Company against the
officers and directors for alleged breaches of fiduciary duty resulting from
16
their oversight of the Company's affairs. The lawsuit names the Company as a
nominal defendant and seeks compensatory and punitive damages on behalf of the
Company, interest, equitable and/or injunctive relief, costs and such other
relief as the court deems proper. We believe that the stockholder derivative
action was not properly brought and we have filed a motion to dismiss this
action in order to allow the Board of Directors to consider whether such
litigation is in the best interest of the Company and our stockholders. As of
the date of this report, no ruling has been made by the court on our motion to
dismiss.
On April 21, 1998, we acquired substantially all of the assets of
Parallel Products, a California limited partnership ("Parallel"). In addition to
the consideration paid at closing, we agreed that, if the earnings before
interest, taxes, depreciation and amortization ("EBITDA") of the businesses
acquired from Parallel exceeded a specified amount in any four consecutive
quarters during the three year period after the closing of the acquisition, we
would pay to Parallel an additional $2.1 million in cash and an additional $2.1
million in common stock. During the third quarter of 2000, Parallel filed suit
against the Company alleging that the acquired businesses achieved the specified
EBITDA amount for the four quarters ended December 31, 1999 and for the four
quarters ended March 31, 2000. Parallel is seeking a declaratory judgment that
the EBITDA amount specified in the acquisition agreement has been achieved and
that it is entitled to receive the contingent cash and stock payments described
above. Parallel also alleges that it is entitled to recover compensatory damages
of $4.2 million, punitive damages, interest, attorneys' fees and costs, and such
other relief as the court deems proper. We have denied that we have any
liability to Parallel and we have filed a counterclaim against Parallel alleging
that Parallel breached certain of the representations and warranties made to us
in the acquisition agreement.
On August 30, 2000, the former owners of Randee Corporation, a
corporation that we acquired in June 1999, brought an action against the Company
in the District Court of Angelina County, Texas. The plaintiffs, who received
cash and Company common stock in consideration for their stock in Randee
Corporation, allege that we made false and misleading statements and failed to
disclose allegedly material information regarding the Company in connection with
the acquisition. The remedies sought by the plaintiffs include rescission of the
acquisition, unspecified compensatory and punitive damages, and interest. We
have denied the allegations made by the plaintiffs and intend to vigorously
defend ourself in this action.
Our American Wastewater facility in Houston, Texas is the largest of
two facilities located in the Houston area that process and dispose of grease
trap waste collected by independent waste haulers. In recent months, a potential
competitor has been attempting to obtain a permit to build and operate another
grease trap waste disposal facility in Houston that would also service
independent waste haulers. On October 23, 2000, the Company and its subsidiary,
U S Liquids of Texas, Inc., were sued in the United States District Court for
the Southern District of Texas, Houston Division, in an action entitled
DOWNSTREAM ENVIRONMENTAL, L.L.C. AND DAN NOYES V. U S LIQUIDS INC., ET AL. In
this action, the plaintiffs allege, among other things, that (i) our employees
have made false statements about the plaintiffs in an attempt to generate
opposition to their permit application, and (ii) our facility restrains trade in
the grease trap waste disposal business by threatening to refuse access to the
facility to certain independent waste haulers or to impose onerous requirements
on such haulers for use of the facility; all for the purpose of creating or
maintaining a monopoly in the grease trap waste disposal business in Houston,
Texas. The plaintiffs are seeking, among other things, preliminary and permanent
injunctive relief, unspecified compensatory damages, punitive and treble
damages, interest, attorneys' fees and costs, and such other relief as the court
deems proper. We believe that the claims asserted by the plaintiffs are without
merit and we intend to vigorously defend ourself in this action.
In April 1998, we acquired substantially all of the assets of Betts
Pump Service, Inc. in return for cash and shares of Company common stock. As
part of the transaction, Betts Pump agreed that it would not sell one-half of
the shares of Company common stock it received in the transaction for at least
one year after the closing of the transaction, and a restrictive legend to that
effect was placed on the stock certificate representing these shares. On January
31, 2001, Keith Betts, Betts Pump and Betts Environmental, Inc. filed suit in
the District Court of Kaufman County, Texas against their former stockbroker and
the Company alleging that their stockbroker and the Company prevented the
plaintiffs from selling the restricted shares of Company common stock. The
plaintiffs have also alleged, among other things, that we made false and
misleading statements and failed to disclose allegedly material information
regarding the Company in connection with the acquisition. The plaintiffs are
seeking unspecified compensatory damages, treble damages under the Texas
Deceptive Trade Practices - Consumer Protection Act, punitive damages, interest,
attorneys' fees and costs. We deny that we have any liability to the plaintiffs
and intend to vigorously defend against these claims.
Our business is subject to numerous federal, state and local laws,
regulations and policies that govern environmental protection, zoning and other
matters. During the ordinary course of our business, we have become involved in
a variety of legal and administrative proceedings relating to land use and
environmental laws and regulations, including actions or proceedings brought by
governmental agencies, adjacent landowners, or citizens' groups. In the majority
of the situations where proceedings are commenced by governmental agencies, the
matters involved relate to alleged technical violations of licenses or permits
pursuant to which we operate or are seeking to
17
operate, or laws or regulations to which our operations are subject or are the
result of different interpretations of applicable requirements. From time to
time, we pay fines or penalties in governmental proceedings relating to our
operations. We believe that these matters will not have a material adverse
effect on our business, results of operations or financial condition. However,
the outcome of any particular proceeding cannot be predicted with certainty, and
the possibility remains that technological, regulatory or enforcement
developments, results of environmental studies, or other factors could
materially alter this expectation at any time.
It is not possible at this time to predict the impact the above
lawsuits, proceedings, investigations and inquiries may have on us, nor is it
possible to predict whether any other suits or claims may arise out of these
matters in the future. However, it is reasonably possible that the outcome of
any present or future litigation, proceedings, investigations or inquiries may
have a material adverse impact on our consolidated financial position or results
of operations in one or more future periods. We intend to defend ourself
vigorously in all the above matters.
We are 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.
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.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our common stock is traded on the American Stock Exchange under the
symbol "USL." The following table sets forth, for the periods indicated, the
range of the high and low sales prices for the common stock as reported on the
American Stock Exchange.
PRICE RANGE OF
COMMON STOCK
------------------
HIGH LOW
Year Ended December 31, 1999:
First Quarter................................. $26.38 $19.50
Second Quarter................................ 21.88 17.56
Third Quarter................................. 20.88 5.63
Fourth Quarter................................ 9.69 6.38
Year Ended December 31, 2000:
First Quarter................................. $10.25 $ 5.19
Second Quarter................................ 6.63 4.25
Third Quarter................................. 6.00 3.38
Fourth Quarter................................ 4.63 1.75
The number of holders of record of common stock at March 15, 2001 was
203.
We have not paid dividends on our common stock and do not anticipate
paying dividends in the foreseeable future. We intend to retain future earnings,
if any, to finance the expansion of our operations and for general corporate
purposes. We are also prohibited from declaring or paying cash dividends on our
capital stock under the terms of our revolving credit facility.
18
ITEM 6. SELECTED FINANCIAL DATA
The consolidated balance sheet and income statement data below set
forth our consolidated financial data as of December 31, 1999 and 2000, and for
the years ended December 31, 1998, 1999 and 2000, derived from the consolidated
financial statements audited by Arthur Andersen LLP, which appear elsewhere in
this report. The consolidated balance sheet and income statement data as of
December 31, 1996 and 1997 and for the years ended December 31, 1996 and 1997
have been derived from the financial statements audited by Arthur Andersen LLP
which do not appear in this report.
STATEMENTS OF OPERATIONS DATA:
YEARS ENDED DECEMBER 31,
--------------------------------------------------------
1996 1997 1998 1999 2000
------- ------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Revenues......................................... $14,285 $38,159 $121,460 $231,783 $247,859
Operating expenses............................... 11,369 21,353 79,027 165,773 193,724
Depreciation and amortization.................... 424 2,990 8,146 16,595 19,234
Selling, general and administrative expenses..... 1,437 5,350 12,927 26,242 33,162
Pooling costs.................................... -- 400 -- -- --
Special charges.................................. -- -- -- 15,138 17,787
------- ------- -------- -------- --------
Income (loss) from operations.................... 1,055 8,066 21,360 8,035 (16,048)
Interest and other expense, net.................. 309 1,775 3,555 6,674 10,279
------- ------- -------- -------- --------
Income (loss) before provision for income taxes.. 746 6,291 17,805 1,361 (26,327)
Provision (benefit) for income taxes............. 255 2,416 7,033 2,603 (950)
------- ------- -------- -------- --------
Net income (loss)................................ $ 491 $ 3,875 $ 10,772 $ (1,242) $(25,377)
======= ======= ======== ======== ========
Basic earnings (loss) per share.................. $ 0.23 $ 0.65 $ 1.04 $ (0.08) $ (1.61)
Diluted earnings (loss) per share................ $ 0.23 $ 0.55 $ 0.93 $ (0.08) $ (1.61)
Weighted average shares outstanding.............. 2,117 5,937 10,317 15,324 15,798
Diluted weighted average shares outstanding...... 2,139 7,078 11,637 15,324 15,798
BALANCE SHEET DATA:
YEARS ENDED DECEMBER 31,
--------------------------------------------------------
1996 1997 1998 1999 2000
------- ------- -------- -------- --------
(IN THOUSANDS)
Working capital ............................... $ 223 $ 2,122 $ 2,936 $ 10,189 $ 11,093
Total assets................................... 46,851 55,016 252,165 369,083 352,177
Long-term obligations, including
current maturities ........................ 29,950 17,436 68,394 104,826 111,519
Stockholders' equity........................... 1,538 20,906 124,944 190,148 164,870
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
THE FOLLOWING DISCUSSION REVIEWS OUR OPERATIONS FOR THE THREE YEARS
ENDED DECEMBER 31, 2000 AND SHOULD BE READ IN CONJUNCTION WITH OUR CONSOLIDATED
FINANCIAL STATEMENTS AND RELATED NOTES AND THE OTHER FINANCIAL INFORMATION
APPEARING ELSEWHERE IN THIS REPORT. THE INFORMATION IN THIS "MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS"
CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE SUBSTANTIAL RISKS AND
UNCERTAINTIES. YOU CAN IDENTIFY THESE STATEMENTS BY FORWARD-LOOKING WORDS SUCH
AS "MAY," "WILL," "EXPECT," "ANTICIPATE," "BELIEVE," "ESTIMATE," AND "CONTINUE"
OR SIMILAR WORDS. OUR ACTUAL RESULTS, PERFORMANCE OR ACHIEVEMENTS COULD DIFFER
MATERIALLY FROM THESE FORWARD-LOOKING STATEMENTS. FACTORS THAT COULD CAUSE OR
CONTRIBUTE TO SUCH DIFFERENCES INCLUDE THOSE DISCUSSED IN "BUSINESS-FACTORS
INFLUENCING FUTURE RESULTS AND ACCURACY OF FORWARD-LOOKING STATEMENTS" IN ITEM 1
OF THIS REPORT.
19
OVERVIEW
Prior to June 30, 1999, our subsidiaries were organized into two
divisions -- the Wastewater Division and the Oilfield Waste Division. However,
as the result of our acquisition of Romic Environmental Technologies Corporation
in January 1999, effective as of July 1, 1999, we created a third division known
as the Industrial Wastewater Division, and changed the name of the Wastewater
Division to the Commercial Wastewater Division. The Industrial Wastewater
Division currently includes the operations of Romic Environmental Technologies
Corporation, U.S. Liquids of Detroit, Inc., U.S. Liquids of Florida, Inc. and
Waste Research and Recovery, Inc. As a result of this change in management and
reporting structure, previously reported segment information has been restated
to reflect the current composition of each of the Divisions in accordance with
Statement of Financial Accounting Standards No. 131, "Disclosures about Segments
of an Enterprise and Related Information."
The Commercial Wastewater Division collects, processes and disposes of
nonhazardous liquid waste and recovers saleable by-products from certain waste
streams. The Industrial Wastewater Division collects, processes and disposes of
hazardous and nonhazardous waste and recovers saleable by-products from certain
waste streams. The Oilfield Waste Division processes and disposes of waste
generated in oil and gas exploration and production.
The Commercial Wastewater Division generated $169.0 million, or 68.2%,
of our revenues for the year ended December 31, 2000. This Division derives
revenues from two principal sources: fees received for collecting, processing
and disposing of nonhazardous liquid waste (such as industrial wastewater,
grease and grit trap waste, bulk liquids and dated beverages) and revenue
obtained from the sale of by-products, including fats, oils, feed proteins,
industrial and fuel grade ethanol, solvents, aluminum, glass, plastic and
cardboard, recovered from certain waste streams. Some of our by-product sales
involve the brokering of industrial and fuel grade ethanol produced by third
parties. Collection and processing fees charged to customers vary per gallon by
waste stream according to the 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.
The Industrial Wastewater Division generated $57.1 million, or 23.0%,
of our revenues for the year ended December 31, 2000. This Division derives
revenues from fees charged to customers for collecting, processing and disposing
of hazardous and nonhazardous liquid waste such as household hazardous wastes,
plating solutions, acids, flammable and reactive wastes, and industrial
wastewater. Certain sludges and solid hazardous wastes are also processed. The
Industrial Wastewater Division also generates revenues from the sale of
by-products recovered from certain waste streams, including industrial chemicals
and recycled antifreeze products. The fees charged for processing and disposing
of hazardous waste vary significantly depending upon the constituents of the
waste. Collection and processing fees charged with respect to nonhazardous
liquid waste vary per gallon by waste stream according to the constituents of
the waste, expenses associated with processing the waste and competitive
factors.
The Oilfield Waste Division generated $21.7 million, or 8.8%, of our
revenues for the year ended December 31, 2000. This Division derives revenues
from fees charged to customers for processing and disposing of oil and gas
exploration and production waste, and cleaning tanks, barges and other vessels
and containers used in the storage and transportation of oilfield waste. In
order to match revenues with their related costs, when waste is unloaded at one
of our sites, we recognize the related revenue and record a reserve for the
estimated amount of expenses to be incurred to process and dispose of the waste.
As processing occurs, generally over nine to twelve months, the reserve is
depleted as expenses are incurred. Our operating margins in the Oilfield Waste
Division are typically higher than in the Commercial Wastewater Division and in
the Industrial Wastewater Division.
Operating expenses include compensation and overhead related to
operations workers, supplies and other raw materials, transportation charges,
disposal fees paid to third parties, real estate lease payments and energy and
insurance costs applicable to waste processing and disposal operations.
Selling, general and administrative expenses include management,
clerical and administrative compensation and overhead relating to our corporate
offices and each of our operating sites, as well as professional services and
costs.
Depreciation and amortization expenses relate to our landfarms and
other depreciable or amortizable assets. These assets are expensed over periods
ranging from three to 40 years. Amortization expenses relating to acquisitions
have increased over time as a result of amortization of goodwill recorded in
connection with our acquisitions.
20
The seasonal nature of certain of our operations may materially affect
operating results. Accordingly, the operating results for any period are not
necessarily indicative of the results that may be achieved for any subsequent
period.
SPECIAL CHARGES
During the fourth quarter of 2000, we recorded special charges relating
primarily to decisions to dispose of or suspend certain operations offset by the
favorable effect of the settlement of a dispute. These special charges amounted
to a net expense before taxes of $17.8 million. The special charges included
$19.7 million for the estimated losses from the sale of certain operations of
the Commercial Wastewater Division, $10.2 million for the closure of our
Re-Claim Louisiana facility, $210,000 for legal fees associated with such
divestitures and closure, and an additional $470,000 for disposal of PCB
contaminated materials at our Detroit facility. During this period, we also
recognized net pre-tax income of $12.8 million relating to the termination of a
disposal agreement with Waste Management that was entered into in May 1998 in
connection with the acquisition of our Detroit facility. These special charges
reduced net income by $17.8 million (net of taxes, due to valuation allowances),
or $1.13 per share. See notes 5 and 10 to our consolidated financial statements.
RESULTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 2000 AND 1999
REVENUES. Revenues for the year ended December 31, 2000 increased $16.0
million, or 6.9%, from $231.8 million for the year ended December 31, 1999 to
$247.8 million for the year ended December 31, 2000. The Commercial Wastewater
Division contributed $152.4 million, or 65.7%, of 1999 revenues and $169.0
million, or 68.2%, of 2000 revenues. Collection and processing fees generated
$122.3 million, or 80.2%, and $128.0 million, or 75.7%, of the Commercial
Wastewater Division's revenues for 1999 and 2000, respectively. Revenues from
collection and processing of waste increased $5.7 million, or 4.7%, due
primarily to additional revenues generated from a major oil spill project.
By-product sales generated the remaining $30.1 million, or 19.8%, and $41.0
million, or 24.3%, of the Commercial Wastewater Division's revenues for 1999 and
2000, respectively. Revenues from the sale of by-products increased $10.9
million, or 36.2%, primarily due to higher brokered ethanol sales.
The Industrial Wastewater Division contributed $60.9 million, or 26.3%,
of 1999 revenues and $57.1 million, or 23.0%, of 2000 revenues. Collection and
processing fees generated $55.9 million, or 91.8%, and $52.2 million, or 91.4%,
of the Industrial Wastewater Division's revenues for 1999 and 2000,
respectively. Revenues from collection and processing of waste decreased $3.7
million, or 6.6%, due primarily to the temporary closing and subsequent recovery
period at our Detroit facility. By-product sales generated the remaining $5.0
million, or 8.2%, and $4.9 million, or 8.6%, of the Industrial Wastewater
Division's revenues for 1999 and 2000, respectively.
The Oilfield Waste Division contributed $18.5 million, or 8.0%, of 1999
revenues and $21.7 million, or 8.8%, of 2000 revenues. The Oilfield Waste
Division's revenues increased $3.2 million, or 17.3%, due primarily to increased
on-shore drilling activity.
OPERATING EXPENSES. Operating expenses increased $27.9 million, or
16.8%, from $165.8 million for the year ended December 31, 1999 to $193.7
million for the year ended December 31, 2000. As a percentage of revenues,
operating expenses increased from 71.5% in 1999 to 78.2% in 2000. This increase
was due primarily to normal fixed costs at our Detroit facility with a
significant drop in revenues due to the 1999 shut-down, and reduced margins on a
major project in the beverage sector of the Commercial Wastewater Division
compared to a similar project in 1999. In addition, a larger than expected
portion of the beverage business was attributable to the brokerage of ethanol,
which is a very low margin producer. This increase in operating expenses also
reflects the continued growth of the Commercial Wastewater Division, which has
lower margins than the Oilfield Waste Division.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expenses
increased $2.6 million, or 15.7%, from $16.6 million for the year ended December
31, 1999 to $19.2 million for the year ended December 31, 2000. As a percentage
of revenues, depreciation and amortization expenses increased from 7.2% in 1999
to 7.7% in 2000. This increase was attributable primarily to the decrease in
revenues at our Detroit and Re-Claim Louisiana facilities without a
proportionate decrease in depreciation and amortization expenses.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased $7.0 million, or 26.7%, from $26.2 million for
the year ended December 31, 1999 to $33.2 million for the year ended December
31, 2000. As a percentage of revenues, selling, general and administrative
expenses increased from 11.3% in 1999 to 13.4% in 2000. This increase resulted
primarily from increased legal fees, severance expenses associated with the
resignation of a senior executive officer and the elimination of our market
21
development department. In addition, bad debt expense increased primarily at our
Texas locations largely as a result of a single customer who was the primary
purchaser of grease from our Texas grease processing locations.
INTEREST AND OTHER EXPENSES. Net interest and other expenses increased
$3.6 million, or 53.7%, from $6.7 million for the year ended December 31, 1999
to $10.3 million for the year ended December 31, 2000. This increase resulted
primarily from higher interest rates and, to a lesser extent, increased
borrowings used to fund our working capital needs.
INCOME TAXES. The provision for income taxes decreased approximately
$3.6 million, or 136.5%, from $2.6 million in 1999 to a benefit of $1.0 million
in 2000 as a result of decreased taxable income. The effective tax rate for 1999
was 191.3%, compared to a benefit rate of 3.6% for 2000. The tax rate difference
was due to the impact of nondeductible expenses on taxable income.
YEARS ENDED DECEMBER 31, 1999 AND 1998
REVENUES. Revenues for the year ended December 31, 1999 increased
$110.3 million, or 90.8%, from $121.5 million for the year ended December 31,
1998 to $231.8 million for the year ended December 31, 1999. The Commercial
Wastewater Division contributed $85.2 million, or 70.1%, of 1998 revenues and
$152.4 million, or 65.7%, of 1999 revenues. Collection and processing fees
generated $57.0 million, or 67.0%, and $122.3 million, or 80.2%, of the
Commercial Wastewater Division's revenues for 1998 and 1999, respectively.
Revenues from collection and processing of waste increased $65.3 million due to
acquisitions completed in late 1998 and during 1999. By-product sales generated
the remaining $28.2 million, or 33.0%, and $30.1 million, or 19.8%, of the
Commercial Wastewater Division's revenues for 1998 and 1999, respectively.
Revenues from the sale of by-products increased $1.9 million, or 6.7%, primarily
as a result of the acquisition of Royal Recycling, Ltd. offset by the sale of
the fats and oils distribution business in December 1998.
The Industrial Wastewater Division contributed $18.9 million, or 15.6%,
of 1998 revenues and $60.9 million, or 26.3%, of 1999 revenues. Collection and
processing fees generated $18.9 million, or 99.9%, and $55.9 million, or 91.8%,
of the Industrial Wastewater Division's revenues for 1998 and 1999,
respectively. Revenues from collection and processing of waste increased $37.0
million due primarily to the acquisition of Romic Environmental. By-product
sales generated the remaining $5.0 million, or 8.2%, of the Industrial
Wastewater Division's revenues for 1999. Revenue from the sale of by-products
increased $5.0 million as a result of the acquisition of Romic Environmental in
January 1999. The increase in revenues of the Industrial Wastewater Division
would have been greater still but for the temporary closure of our Detroit
facility commencing on August 25, 1999. Revenues from the Detroit facility for
the six month periods ended December 31, 1998 and 1999 were $12.2 million and
$4.1 million, respectively.
The Oilfield Waste Division contributed $17.4 million, or 14.3%, of
1998 revenues and $18.5 million, or 8.0%, of 1999 revenues. The Oilfield Waste
Division's revenues increased $1.1 million, or 6.3%, due primarily to the
restructuring of our agreement with Newpark Resources, Inc. in September 1998.
OPERATING EXPENSES. Operating expenses increased $86.8 million, or
110.0%, from $79.0 million for the year ended December 31, 1998 to $165.8
million for the year ended December 31, 1999. As a percentage of revenues,
operating expenses increased from 65.1% in 1998 to 71.5% in 1999. This increase
was due primarily to the continued growth of the Commercial Wastewater and
Industrial Wastewater Divisions, which have higher operating expenses than the
Oilfield Waste Division, without a proportionate decrease in operating expenses
at our Detroit facility.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expenses
increased $8.5 million, or 105.0%, from $8.1 million for the year ended December
31, 1998 to $16.6 million for the year ended December 31, 1999. As a percentage
of revenues, depreciation and amortization expenses increased from 6.7% in 1998
to 7.2% in 1999. This increase was attributable primarily to the decrease in
revenues from our Detroit facility with no corresponding decrease in
depreciation and amortization expenses. This increase was also attributable to
higher capital expenditures in 1999, more acquisitions in 1999 and the timing of
the acquisitions.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased $13.3 million, or 103.1%, from $12.9 million
for the year ended December 31, 1998 to $26.2 million for the year ended
December 31, 1999. As a percentage of revenues, selling, general and
administrative expenses were 10.6% in 1998 and 11.3% in 1999. This increase
resulted primarily from the decrease in revenues from our Detroit facility
without a proportionate decrease in selling, general and administrative
expenses.
22
INTEREST AND OTHER EXPENSES. Net interest and other expenses increased
$3.1 million, or 86.1%, from $3.6 million for the year ended December 31, 1998
to $6.7 million for the year ended December 31, 1999. This increase resulted
primarily from interest expense incurred on borrowings used to fund the purchase
price for acquisitions completed in 1998 and 1999.
INCOME TAXES. The provision for income taxes decreased $4.4 million, or
62.9%, from $7.0 million in 1998 to $2.6 million in 1999 as a result of
decreased taxable income. The effective tax rate for 1998 was 39.5%, compared to
a 191.3% rate for 1999. The tax rate increase was due to the increased
proportion of nondeductible expenses relative to pretax book income, as well as
the recording of a valuation reserve on state tax losses generated at our
Re-Claim Louisiana facility.
LIQUIDITY AND CAPITAL RESOURCES
Our capital resources consist of cash reserves, cash generated from
operations and funds available under our revolving credit facility. We expect
that these resources will be sufficient to fund continuing operations through
January 2002; however, there can be no assurance that additional capital will
not be required sooner for our ongoing operations. Our revolving credit facility
matures on February 1, 2002 and, therefore, by such date, we must either extend
the term of our existing credit facility or obtain an alternative source of
financing. There can be no assurance that we will be able to obtain such an
extension or alternative financing when required. Our capital requirements for
continuing operations consist of our general working capital needs, scheduled
principal payments on our debt obligations and capital leases, and planned
capital expenditures.
OPERATING CASH FLOWS
Cash flows from operations were $3.0 million and $10.0 million for the
years ended December 31, 1999 and 2000, respectively. This increase in operating
cash flows was primarily attributable to a change in the Company's accounts
payable policy moving to a 60-day pay cycle for most vendors. The remainder of
the change resulted from a $2.2 million deferred income tax provision as of
December 31, 2000 compared to a $340,000 deferred income tax benefit at December
31, 1999 and from increased depreciation and amortization. We had net working
capital of $11.1 million at December 31, 2000, compared to net working capital
of $10.2 million at December 31, 1999. This increase in working capital was due
primarily to an increase in prepaid expenses and other current assets (see note
6 to our consolidated financial statements), partially offset by an overall
decrease in accrued expenses and other current liabilities (see note 9 to our
consolidated financial statements).
Our allowance for bad debts decreased $2.0 million, or 65.1%, from $3.1
million for the year ended December 31, 1999 to $1.1 million for the year ended
December 31, 2000. This decrease was primarily due to two factors. First, due to
the temporary closing of our Detroit facility in 1999, certain customers were
not paying the amounts owed to us. As a result, during the fourth quarter of
1999, we provided approximately $600,000 for uncollectible receivables.
Essentially all of this allowance was utilized in 2000 as these accounts were
written off. Second, during 2000, we continued to perform a detailed review of
our receivable balances at all of our locations and wrote off all of those
accounts deemed uncollectible.
At December 31, 2000, we had a $7.3 million reserve to provide for the
cost of future closures of facilities. The amount of this unfunded reserve is
based on the estimated total cost to close the facilities as calculated in
accordance with the applicable regulations. Regulatory agencies require us to
post financial assurance to assure that all waste will be treated and the
facilities closed appropriately. We have in place a total of $5.0 million of
financial assurance in the form of letters of credit and bonds to provide for
the cost of future closings of facilities. As of December 31, 2000, we also had
a $4.0 million unfunded reserve to provide for the costs to remediate soil and
groundwater contamination at our facility in East Palo Alto, California, and our
share of the costs to remediate drum reconditioning or disposal sites previously
used by our subsidiaries. In 2001, we expect to pay approximately $450,000 of
remediation reserves.
During the fourth quarter of 2000, we recorded special charges relating
primarily to decisions to dispose of or suspend certain operations offset by the
favorable effect of the settlement of a dispute. These special charges amounted
to a net expense before taxes of $17.8 million. The special charges included
$19.7 million for the estimated losses from the sale of certain operations of
the Commercial Wastewater Division, $10.2 million for the closure of our
Re-Claim Louisiana facility, $210,000 for legal fees associated with such
divestitures and closure, and an additional $470,000 for disposal of PCB
contaminated materials at our Detroit facility. During this period, we also
recognized net pre-tax income of $12.8 million relating to the termination of a
disposal agreement with Waste Management that was entered into in May 1998 in
connection with the acquisition of our Detroit facility. These special charges
reduced net income by $17.8 million (net of taxes, due to valuation allowances),
or $1.13 per share. All reserves have been recorded and we do not anticipate any
significant charges through December 2001. The majority of the charges are
non-cash with a total of $211,000 of 2000 special charges
23
and $3.6 million of 1999 special charges in accrued liabilities. We anticipate
the majority of these remaining charges will be paid in 2001. See Notes 5, 9 and
10 to our consolidated financial statements.
All costs, except potential fines or penalties, incurred or expected to
be incurred in connection with the investigation of our Detroit facility have
been reflected in our consolidated financial statements at December 31, 2000.
See Note 3 to our consolidated financial statements. However, due to the current
status of the investigation, we are unable at this time to project a reasonable
estimate of potential fines or penalties (or range of potential fines or
penalties) that could be assessed against the facility. Accordingly, we cannot
project the ultimate outcome of the investigation or its potential impact on us.
The imposition of a substantial fine or penalty against the facility could have
a material adverse effect on our business, results of operations, financial
condition and liquidity. In 2001, we expect to pay approximately $2.0 million in
legal fees relating to regulatory proceedings and on-going litigation. See Note
19 to our consolidated financial statements.
2001 operating cash flows from continuing operations are anticipated to
be approximately $15.9 million. This amount is net of all projected interest
costs and expected payments on special charge reserves, and does not include any
provision for potential fines and penalties or legal settlements which have not
yet occurred or been accrued. Operating cash flow will be a primary source of
funding our capital budget in 2001. Remaining amounts will be used to reduce
outstanding debts.
INVESTING ACTIVITIES
Capital expenditures made during 2000 for our continuing operations
were $19.2 million. The majority of the capital expenditures were for plant
expansions, equipment and vehicle upgrades. Capital expenditures for our
continuing operations for 2001 are estimated at approximately $9.2 million,
which includes capital expenditures for businesses that we anticipate selling in
2001. Approximately $5.3 million of this amount is scheduled to be invested in
the Commercial Wastewater Division for vehicles and plant expansions.
Approximately $3.1 million is scheduled to be invested in the Industrial
Wastewater Division for plant improvements and expansion and equipment.
Approximately $500,000 is budgeted for equipment and injection wells for the
Oilfield Waste Division. The remaining $300,000 will be used for software and
computer upgrades at our corporate headquarters.
In certain of our acquisitions, we agreed to pay additional
consideration to the owners of the acquired business if the future pre-tax
earnings of the acquired business exceed certain negotiated levels or other
specified events occur. To the extent that any contingent consideration is
required to be paid in connection with an acquisition, we anticipate that the
related incremental cash flows of the acquired business will be sufficient to
pay the cash component of the contingent consideration. During 2001, the former
owners of two businesses that we acquired in 1998 are entitled to receive
additional consideration totalling $6.9 million if the acquired businesses
satisfy certain targeted performance levels. Management does not expect either
of the acquired businesses to meet these targets and, therefore, we do not
anticipate paying any earn-outs in 2001.
For 2001, we expect to generate $20.7 million net proceeds from the
sale of assets. Upon receipt, these funds will be used to reduce the debt
balance on our credit facility and are not needed to fund ongoing operations.
FINANCING ACTIVITIES
At December 31, 2000, approximately $23.0 million of principal payments
on debt obligations were payable during the next twelve months. $20.7 million of
these payments represent our expected proceeds from operations held for sale (as
discussed above), the receipt of which will require concurrent payments on our
credit facility. The remaining $2.3 million of principal payments due are
expected to be funded from operating cash flows, which net of budgeted capital
expenditures is expected to be approximately $6.7 million.
We have a revolving credit facility with a group of banks under which
we may borrow to fund working capital requirements. Amounts outstanding under
the credit facility are secured by a lien on substantially all of our assets.
The credit facility, which matures on February 1, 2002, contains affirmative,
negative and subjective covenants, prohibits the payment of dividends and
requires us to comply with certain financial covenants.
As previously announced, our fourth quarter results caused us to be out
of compliance with certain of the financial covenants of the credit facility.
Effective March 19, 2001, the terms of the credit facility were amended to,
among other things, reduce the amount of the credit facility from $150 million
to $120 million, limit the total amount of debt outstanding under the credit
facility to $115 million except with the approval of the banks, reduce the
amount of secured debt that we may owe to third parties from $20 million to $5
million, limit the amount of capital expenditures that we may make in any fiscal
year, increase the interest rates payable under the credit facility,
24
prohibit future acquisitions by the Company without the banks' consent, and to
waive our noncompliance with and modify the terms of certain of our financial
covenants. The terms of our amended credit facility have significantly limited
our ability to enter into leases or new debts outside the facility. The capital
expenditures budgeted for 2001 are less than the capital expenditures permitted
by the credit facility.
As a result of the March 2001 amendments, the amount of the credit
facility will be permanently reduced by $5.0 million on each of July 31, 2001
and December 31, 2001. In addition, unless the amount of the credit facility has
previously or concurrently been reduced by at least $10 million, the amount of
the credit facility will be permanently reduced by an amount equal to the net
cash proceeds received by the Company from any sale of assets not in the
ordinary course of business, any issuance of equity (other than any equity
issued under the employee stock purchase plan), the issuance of certain debt, or
any settlement of our lawsuit against National Steel Corporation. Reductions of
the credit facility made as a result of any such sale of assets, issuance of
equity or debt, or settlement with National Steel Corporation will be applied
against the reductions of the credit facility scheduled to be made on July 31,
2001 and December 31, 2001. After such time as the amount of the credit facility
has been reduced to $110 million, the amount of the credit facility will be
permanently reduced by an amount equal to one hundred percent of the net cash
proceeds received from any sale of assets not in the ordinary course of business
and fifty percent of the net cash proceeds received by the Company from any
issuance of equity (other than any equity issued under the employee stock
purchase plan), the issuance of certain debt, or any settlement with National
Steel Corporation.
The outstanding balance under the credit facility has been classified
as long-term as of December 31, 2000. However, because the credit facility
matures on February 1, 2002, we have classified the outstanding debt balance
under the facility as a current liability as of February 1, 2001. Prior to the
maturity of the credit facility, we must either extend the term of the credit
facility or obtain an alternative source of financing.
The debt outstanding under the revolving credit facility may be
accelerated by the lenders if, among other things, a change in control of the
Company occurs or Michael P. Lawlor 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. At March 19, 2001, we had
borrowed approximately $104.0 million under the credit facility. Advances under
the credit facility bear interest, at our option, at the prime rate or London
Interbank Offered Rate ("LIBOR"), in each case, plus a margin which is
calculated quarterly based upon our ratio of indebtedness to cash flows. As of
March 19, 2001, amounts outstanding under the credit facility were accruing
interest at approximately 11.4% per year. By March 31, 2001, this rate is
expected to decrease to 10.9% due to the re-setting of interest rates on certain
of our LIBOR based notes.
During 1999, we had a $10.0 million credit facility with BankBoston,
N.A. under which we were able to borrow funds to purchase equipment. The
commitment for this facility expired on December 31, 1999, at which time we had
borrowed approximately $2.5 million. This amount is being repaid in 60 monthly
installments of principal and interest at 8.2%.
In September 1999, we repurchased and immediately cancelled 386,114
shares of our common stock for an aggregate purchase price of $3.0 million.
OPERATIONS HELD FOR SALE
During the fourth quarter of 2000, our Board of Directors voted to sell
certain non-core operations of the Commercial Wastewater Division. The types of
liquid waste managed at these facilities include industrial wastewaters,
biosolids and grease and grit trap waste. As of December 31, 2000, the carrying
value of these assets was written down to the fair value thereof less estimated
costs to sell. Because we intend to dispose of these assets during 2001 and
because our revolving credit facility requires us to pay to the banks the net
cash proceeds of all such sales, as of December 31, 2000, the operations held
for sale have been classified as current and the net cash proceeds expected to
be received from such sales have been classified as current maturities of
long-term obligations. See Note 5 to our consolidated financial statements.
25
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our financial instruments include cash and cash equivalents, accounts
receivable, accounts payable, notes and capital leases payable, and debt
obligations. The book value of cash and cash equivalents, accounts receivable,
accounts payable and short-term notes payable are considered to be
representative of fair value because of the short maturity of these instruments.
We estimate that the fair value of all of our debt obligations (including debt
associated with operations held for sale) approximates $111.4 million as of
December 31, 2000.
We do not utilize financial instruments for trading purposes and we
do not hold any derivative financial instruments that could expose us to
significant market risk. Our exposure to market risk for changes in interest
rates relates primarily to our obligations under our revolving credit
facility. As of both December 31, 2000 and March 19, 2001, $104.0 million and
$2.0 million had been borrowed under the revolving credit facility and the
equipment credit facility, respectively. As of March 19, 2001, amounts
outstanding under the revolving credit facility were accruing interest at
approximately 11.4% per year and amounts outstanding under the equipment
credit facility were accruing interest at approximately 8.2% per year. By
March 31, 2001, amounts outstanding under the revolving credit facility are
expected to be accruing interest at approximately 10.9% due to the re-setting
of interest rates on certain of our LIBOR based notes. A ten percent increase
in short-term interest rates on the variable rate debts outstanding as of
March 19, 2001 would approximate 50 basis points. Such an increase in interest
rates would increase our annual interest expense by approximately $527,000
assuming the amount of debt outstanding remains constant.
The above sensitivity analysis for interest rate risk excludes accounts
receivable, accounts payable and accrued liabilities because of the short-term
maturity of such instruments. The analysis does not consider the effect this
movement may have on other variables including changes in revenue volumes that
could be indirectly attributed to changes in interest rates. The actions that
management would take in response to such a change are also not considered. If
it were possible to quantify this impact, the results could well be different
than the sensitivity effects shown above.
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
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
GENERAL
The following is a brief account of the business experience during the
past five years of each of our directors and executive officers, including his
principal occupation and employment during that period, and the name and
principal business of any corporation or other organization in which each person
has been occupied or employed. Directorships in certain companies presently held
by a director or executive officer are also set forth.
Michael P. Lawlor (age 61) has served as a director of the Company
since June 1997. On August 25, 1997, Mr. Lawlor assumed the positions of
Chairman of the Board and Chief Executive Officer of the Company. From March
1996 to August 1997, Mr. Lawlor was a private investor. From December 1992 to
March 1996, Mr. Lawlor was Chief Executive Officer and a director of ITEQ,
Inc. f/k/a Air-Cure Technologies, Inc., a manufacturer of air treatment and
air moving and process systems, equipment and components. From 1970 to 1992,
Mr. Lawlor held various positions with Browning-Ferris Industries, Inc., a
national waste services company. Mr. Lawlor started with Browning-Ferris in
1970, became a corporate officer in 1978, and from 1970 to 1988 was
responsible for all of Browning-Ferris' landfill operations, during which
time total landfill revenues grew from $1 million to $500 million annually.
Mr. Lawlor was the Chairman of the Wildlife Habitat Enhancement Council, a
nonprofit conservation organization, from 1992 to 1996. Mr. Lawlor's term on
the Board of Directors expires in 2003.
26
Earl J. Blackwell (age 58) is a co-founder of the Company and has
served as Chief Financial Officer, Senior Vice President-Finance and Secretary
of the Company from November 1996 to the present. From 1991 to December 1996,
Mr. Blackwell was a Divisional Controller for Sanifill, Inc., a national waste
services company acquired by Waste Management, Inc. in 1996.
Gary J. Van Rooyan (age 55) became Vice President and General Counsel
of the Company in September 1998. Mr. Van Rooyan has been engaged in the
practice of law for over 25 years, nearly 15 of which have been in the waste
industry. From August 1996 until September 1998, Mr. Van Rooyan was Senior
Corporate Counsel for Browning-Ferris. From 1986 until August 1996, Mr. Van
Rooyan held positions as Regional General Counsel for various regions of
Browning-Ferris. From 1981 through 1985, Mr. Van Rooyan served as Senior Counsel
for the Dresser Atlas Oilfield Services Group of Dresser Industries. From 1975
until 1981, Mr. Van Rooyan was engaged in the private practice of law.
Harry O. Nicodemus IV (age 53) became Vice President and Chief
Accounting Officer of the Company in October 1999. From 1997 until August 1999,
Mr. Nicodemus was the Chief Financial Officer of American Residential Services,
Inc., a national provider of services for heating, ventilating and air
conditioning, plumbing and other systems in homes and small commercial
buildings. From 1996 until 1997, he served as the Controller of Drilex
International Inc., an oil and gas field services company located in Houston,
Texas. From 1994 until 1996, Mr. Nicodemus was the Vice President, Chief
Accounting Officer and Controller of American Ecology Corporation, a provider of
hazardous waste treatment services.
Steven J. Read (age 34) has served as Vice President and Treasurer of
the Company since October 1999. From April 1998 to October 1999, Mr. Read served
as Tax Director of the Company. From 1994 until 1998, Mr. Read was a Senior
Analyst in Finance, Acquisitions and Tax for TETRA Technologies, Inc. From 1993
until 1994, Mr. Read was a Finance Manager for American General Corporation.
From 1989 until 1993, Mr. Read held various positions at Ernst & Young, LLP.
W. Gregory Orr (age 45) is a co-founder of the Company and served as
the Chief Operating Officer and President of the Company from August 1997 to
November 2000. Mr. Orr also served as Chairman of the Board, Chief Executive
Officer and President of the Company from November 1996 to August 1997.
Mr. Orr currently is a private investor. From 1995 until December 1996, Mr. Orr
was the President and Chief Operating Officer of two subsidiaries of Sanifill,
Inc. Mr. Orr's term on the Board of Directors expires in 2003.
William A. Rothrock IV (age 48) became a director of the Company in
June 1997. Mr. Rothrock is a principal of Chaparral Group, LLC, a private
consulting firm. From 1990 to January 2001, he was Vice President-Business
Development for Sanifill, Inc. and, subsequently, Waste Management, Inc. From
1984 to 1990, Mr. Rothrock was Divisional Vice President-Landfill Marketing for
Browning- Ferris. Mr. Rothrock's term on the Board of Directors expires in 2002.
Alfred Tyler 2nd (age 58) became a director of the Company in June
1997. Mr. Tyler has over 20 years experience in the environmental services
industry, most recently as the President and Chief Executive Officer of
Enviro-Gro Technologies, a provider of sludge management services. In 1992,
Enviro-Gro was sold to Wheelabrator Technologies and Mr. Tyler resigned his
positions to manage his other investments. From 1989 to the present, Mr.
Tyler has been the President and the sole stockholder of Weston Investments,
Inc., a private investment company. Mr. Tyler is also the President of Days
Cove Reclamation Company, a landfill operation and construction company, and
a partner and managing director of Bedford Capital Corporation, a New York
consulting firm. In addition, Mr. Tyler is a member of the Board of Directors
of Synagro Technologies, Inc. Mr. Tyler's term on the Board of Directors
expires in 2001.
James F. McEneaney, Jr. (age 62) became a director of the Company in
October 1997. He is the retired President and Chief Operating Officer of Ryland
Homes, positions he held from 1980 to 1992. Mr. McEneaney also served as
Executive Vice President and a director of The Ryland Group, Inc. from 1981 to
1993. Mr. McEneaney also was a founder of The Fortress Group, Inc., which was
organized to consolidate home builders in North America. He served as the
company's Chief Executive Officer from July 1995 through December 1995, and as a
member of its Board of Directors from 1995 until May 1997. Since August 1993,
Mr. McEneaney has served as President of MacCan Associates, Inc., a management
consulting firm. Currently, Mr. McEneaney serves as Chairman of the Board of
Anne Arundel Health Systems, Inc. Mr. McEneaney's term on the Board of Directors
expires in 2001.
John N. Hatsopoulos (age 66) became a director of the Company in
December 1998. Currently, Mr. Hatsopoulos is the Chairman and Chief Executive
Officer of Tecogen, Inc., a manufacturer of cogeneration, air conditioning and
refrigeration equipment. Mr. Hatsopoulos served as Thermo Electron Corporation's
President from 1997 until 1999 and as its Chief Financial Officer and Executive
Vice President from 1988 until 1997. In addition, he is a member of the Board of
Directors of Premier, Inc., a privately held organization of hospitals and
health systems. Mr. Hatsopoulos' term on the Board of Directors expires in 2002.
27
Roger A. Ramsey (age 62) became a director of the Company in January
1999. Mr. Ramsey is the Chairman of VeriCenter, Inc., an application service
provider located in Houston, Texas. From 1990 through 1998, Mr. Ramsey served as
Chairman and Chief Executive Officer of Allied Waste Industries, Inc. Mr. Ramsey
is a member of the Board of Directors of Allied Waste. In addition, Mr. Ramsey
is a member of the Texas Christian University Board of Trustees and a director
of several private corporations. Mr. Ramsey's term on the Board of Directors
expires in 2003.
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth certain information with respect to the
compensation of the Chief Executive Officer and the four other former and
current executive officers of the Company (the "Named Executive Officers") whose
total salary and bonus for the year ended December 31, 2000 exceeded $100,000.
SUMMARY COMPENSATION TABLE
LONG-TERM
ANNUAL COMPENSATION COMPENSATION
---------------------------------------- AWARDS
OTHER ------------- ALL
ANNUAL STOCK OPTIONS OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION(1) (SHARES) COMPENSATION(2)
--------------------------- ---- -------- -------- --------------- ------------- ---------------
Michael P. Lawlor, 2000 $325,000 $ 0 $0 0 $ 5,250
Chairman of the Board and 1999 320,481 0 0 150,000 (3) 5,000
Chief Executive Officer 1998 175,000 269,750 0 150,000 (3) 3,433
W. Gregory Orr, 2000 $253,846 $ 0 $0 0 $159,115
Former President and 1999 271,250 0 0 120,000 (3) 5,000
Chief Operating Officer (4) 1998 149,231 228,250 0 120,000 (3) 981
Earl J. Blackwell, 2000 $220,000 $ 0 $0 0 $ 5,250
Chief Financial Officer, 1999 217,000 0 0 80,000 (3) 5,000
Senior Vice President 1998 119,380 182,600 0 80,000 (3) 3,554
and Secretary
Gary J. Van Rooyan, 2000 $156,908 $ 0 $0 12,500 $ 4,720
Vice President and General 1999 148,000 0 0 7,500 3,436
Counsel (5) 1998 44,625 45,000 0 50,000 0
Harry O. Nicodemus IV, 2000 $122,692 $ 0 $0 12,500 $ 3,017
Vice President and Chief 1999 34,500 0 0 25,000 0
Accounting Officer (6) 1998 N/A N/A N/A N/A N/A
- -------------------
(1) Excludes perquisites and other benefits, the aggregate amount of which does
not exceed the lesser of $50,000 or 10% of the total of such officer's
annual salary and bonus.
(2) With the exception of Mr. Orr, these figures represent contributions made
by the Company to the Company's 401(k) & Profit Sharing Plan on behalf of
the named officer. The 2000 figure for Mr. Orr includes $21,154 of
severance payments made to Mr. Orr during 2000, $32,711 of accrued vacation
and an additional $100,000 paid to Mr. Orr in connection with his
resignation as an executive officer of the Company.
(3) These stock options were canceled in October 1999 by the mutual agreement
of the executive officer involved and the Company. No consideration was
paid to any of the executive officers in connection with the cancellation
of these stock options.
(4) In November 2000, Mr. Orr resigned as an executive officer of the Company.
Mr. Orr remains a director of the Company.
(5) Mr. Van Rooyan was employed by the Company in September 1998.
(6) Mr. Nicodemus was employed by the Company in September 1999.
28
OPTIONS GRANTED
The following table sets forth information concerning stock options granted
during the last fiscal year to the Named Executive Officers.
OPTION/SAR GRANTS IN 2000 (1)
INDIVIDUAL GRANTS
- ------------------------------------------------------------------------------------------------------------------------------------
PERCENTAGE OF
OPTIONS TOTAL OPTIONS EXERCISE
GRANTED GRANTED TO PRICE EXPIRATION GRANT DATE
NAME (SHARES)(2) EMPLOYEES IN 2000 (PER SHARE)(3) DATE PRESENT VALUE(4)
---- ---------------- ----------------- --------------------- ----------------- -----------------
Michael P. Lawlor 0 N/A N/A N/A N/A
W. Gregory Orr 0 N/A N/A N/A N/A
Earl J. Blackwell 0 N/A N/A N/A N/A
Gary J. Van Rooyan 7,500 1.7% $6.81 03/21/10 $43,350
Gary J. Van Rooyan 5,000 1.1% $2.25 12/20/10 $ 9,200
Harry O. Nicodemus IV 7,500 1.7% $6.81 03/21/10 $43,350
Harry O. Nicodemus IV 5,000 1.1% $2.25 12/20/10 $ 9,200
- ------------------------
(1) No stock appreciation rights were granted in 2000.
(2) All options are exercisable 33.3% on the first anniversary date of the date
of grant, 33.3% on the second anniversary of the date of grant, and 33.4%
on the third anniversary of the date of grant. Options may be accelerated
as a result of a change in control or other event as described below.
(3) Exercise price is based upon fair market value on the date of the grant.
(4) The Black-Scholes option pricing model was chosen to estimate the grant
date present value of the options set forth in this table, using a weighted
average of assumption values for the grants shown in the table. The
Company's use of this model should not be construed as an endorsement of
its accuracy at valuing options. All stock option valuation models,
including the Black-Scholes model, require a prediction about the future
movement of the stock price. The following assumptions were made for
purposes of calculating the grant date present value: an option term of 10
years, weighted average volatility of 77.08%, no dividend yield, and
weighted average interest rate of 5.95%. The real value of the options in
this table depends upon the actual performance of the common stock during
the applicable period.
OPTION EXERCISES AND FISCAL YEAR-END VALUES
The following table provides certain information on stock option exercises
in 2000 by the Named Executive Officers and the value of such officers'
unexercised options at December 31, 2000.
AGGREGATED OPTION/SAR EXERCISES IN 2000 AND 12/31/00 OPTION/SAR VALUES(1)
NUMBER OF UNEXERCISED VALUE OF UNEXERCISED
OPTIONS AT DECEMBER 31, 2000 IN-THE-MONEY OPTIONS AT
NUMBER OF (SHARES) DECEMBER 31, 2000(2)
SHARES ACQUIRED ---------------------------- ---------------------------
NAME ON EXERCISE VALUE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- -------------- ------------ ------------- ----------- -------------
Michael P. Lawlor N/A N/A 300,000 0 $0 $ 0
W. Gregory Orr N/A N/A 0 0 0 0
Earl J. Blackwell N/A N/A 0 0 0 0
Gary J. Van Rooyan N/A N/A 35,834 34,166 0 313
Harry O. Nicodemus IV N/A N/A 8,333 29,167 0 313
- -------------------
(1) No stock appreciation rights are outstanding.
(2) Based on the closing price of the common stock on the American Stock
Exchange on the final trading day of 2000.
29
EMPLOYMENT CONTRACTS AND TERMINATION OF EMPLOYMENT AND CHANGE IN CONTROL
ARRANGEMENTS
Both Mr. Lawlor and Mr. Blackwell have entered into an employment agreement
with the Company. Under the terms of the employment agreements, the 2001 base
salaries of Mr. Lawlor and Mr. Blackwell are $325,000 and $220,000,
respectively, with each executive officer having the right to receive incentive
compensation at the discretion of the Board of Directors. Each employment
agreement is for a term of five years with the term to be extended an additional
one year on each anniversary date of the employment agreement, unless either
party gives notice that the term of the employment agreement should not be so
extended. If the employee's employment is terminated by the Company without
cause, then the employee will continue to receive his base salary and employee
benefits for the remainder of the term of his employment agreement and all stock
options previously granted to the employee will immediately become exercisable.
If his employment is terminated by the Company with cause, then the employee
will not be entitled to earn any further compensation or benefits under his
employment agreement. If the Company undergoes a "change in control," as that
term is defined in the employment agreements, then, under certain circumstances,
the employee will have the right to terminate his employment agreement and (i)
require the Company to pay to him a lump sum amount equal to approximately three
times his "base amount," as defined in Section 280G of the Internal Revenue
Code, and (ii) cause all stock options previously granted to him to immediately
become exercisable. This base amount is generally equal to the average annual
gross income of the employee for the five taxable years ending before the date
on which the change in control occurs. This payment will be in lieu of any
further compensation or benefits payable to the employee under the employment
agreement. The employment agreement also contains a covenant by the employee not
to compete with the Company at any time during his employment and for a period
of two years after the termination of his employment, except for a termination
subsequent to a change in control or a termination by the employee with cause.
Mr. Van Rooyan and Mr. Nicodemus have also entered into employment
agreements with the Company. Under the terms of the employment agreements, the
2001 base salaries of Mr. Van Rooyan and Mr. Nicodemus are $161,200 and
$140,000, respectively, with each employee having the right to receive an annual
bonus of up to fifty percent of his base salary based upon the performance of
the employee and the results of the Company's business and operations. Each
employment agreement has a term of three years with the term to be extended an
additional one year on each anniversary date of the employment agreement, unless
either party gives notice that the term of the employment agreement should not
be so extended. If the employee's employment is terminated by the Company
without cause, the employee will continue to receive his base salary and
employee benefits for a period of one year after the termination date, and all
stock options granted to the employee will immediately become exercisable. If
his employment is terminated by the Company with cause, then the employee will
not be entitled to earn any further compensation or benefits under his
employment agreement. If the Company undergoes a "change in control," then,
under certain circumstances, the employee will have the right to terminate his
employment agreement and (i) require the Company to pay to him a lump sum amount
equal to approximately three times his "base amount," as defined in Section 280G
of the Internal Revenue Code, and (ii) cause all stock options previously
granted to him to immediately become exercisable. In addition, upon the
occurrence of certain other triggering events (such as the removal or
involuntary resignation of the executive officer to whom the employee currently
reports or a change in the organizational structure of the Company's senior
management which results in the employee reporting to a person other than such
executive officer), the employee has the right to terminate his employment
agreement and (i) require the Company to pay to him a lump sum amount equal to
his then current base salary, and (ii) cause all stock options previously
granted to him to immediately become exercisable. Any such payment will be in
lieu of any further compensation or benefits payable to the employee under the
employment agreement. The employment agreement also contains a covenant by the
employee not to compete with the Company at any time during his employment and
for a period of two years after the termination of his employment, except for a
termination subsequent to a change in control or a termination by the employee
with cause.
In November 2000, Mr. Orr resigned as an executive officer of the Company.
In connection with his resignation, the Company and Mr. Orr entered into an
agreement which, among other things, (i) prohibits Mr. Orr from engaging for a
period of two years in certain activities that would compete with our business
operations, and (ii) requires us to make approximately $1.2 million in severance
payments to Mr. Orr. These payments will be made bi-weekly continuing through
February 12, 2005. In addition, shortly after his resignation, we made a
one-time payment of $100,000 to Mr. Orr.
30
DIRECTORS' COMPENSATION
Directors who are also employees of the Company or one of its subsidiaries
do not receive additional compensation for serving as directors. Each director
who is not an employee of the Company or one of its subsidiaries receives a fee
of $1,000 for each Board and committee meeting (unless held on the same day as a
Board meeting) actually attended. Directors are also reimbursed for
out-of-pocket expenses incurred in attending meetings of the Board of Directors
or committees thereof.
Under our Directors' Stock Option Plan, each director who is not an
employee of the Company and has not been an employee of the Company at any time
during the twelve months preceding his initial election or appointment to the
Board is automatically granted an option to purchase 10,000 shares of common
stock at the time of his or her initial election or appointment. In addition,
each outside director is automatically granted an option to purchase 5,000
shares of common stock on January 1 of each year. These options have an exercise
price equal to the fair market value of the common stock on the date of grant,
vest in full on the date of the grant and expire at the earlier of ten years
from the date of grant or one year after the director ceases to be a member of
the Board.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Messrs. McEneaney, Ramsey, Rothrock and Tyler served on the Compensation
Committee of the Board of Directors during 2000.
From 1990 to January 2001, Mr. Rothrock was Vice President - Business
Development for Sanifill, Inc. and, subsequently, Waste Management, Inc.
Sanifill, which is now an affiliate of Waste Management, has the right to
purchase 1,000,000 shares of common stock pursuant to the terms of a warrant
issued by the Company to Sanifill in December 1996. Set forth below is a summary
of certain transactions involving the Company and Waste Management that occurred
during 2000. We do not believe that Mr. Rothrock had a direct or indirect
material interest in any of the transactions described below:
o During 2000, certain of our businesses delivered waste to various
landfills operated by Waste Management.
o In May 1998, we acquired from Waste Management substantially all of
the assets of City Environmental, Inc. including, without limitation,
a hazardous and nonhazardous waste treatment facility located in
Detroit, Michigan. In connection with the acquisition of this
facility, the Company and Waste Management entered into (i) a disposal
agreement whereby the Company agreed, for a period of 20 years, to
deliver to certain landfills operated by Waste Management all of the
nonhazardous waste generated from the operations of the Detroit
facility, and (ii) a leachate disposal agreement whereby Waste
Management agreed, for a period of 20 years, to deliver to the Detroit
facility for processing and disposal all leachate (up to a maximum of
35 million gallons per year) from certain landfills operated by Waste
Management in the Detroit area. In addition, we also agreed, for a
period of 14 years commencing in May 2003, to pay to Waste Management
a monthly royalty fee equal to 6% of the net revenues derived from the
Detroit facility. In December 1999, we notified Waste Management that,
as a result of the temporary closure of the Detroit facility, we were
exercising our right to terminate the disposal agreement. Waste
Management subsequently notified us that the termination of the
disposal agreement constituted a breach of the agreement by the
Company. In December 2000, the Company and Waste Management agreed to
(x) terminate the Company's obligation to pay any monthly royalty fees
to Waste Management based upon the revenues of the Detroit facility,
and (y) terminate the disposal agreement, thus relieving the Company
of any further obligation to dispose of the nonhazardous waste
generated from the operations of our Detroit facility at Waste
Management's landfills. In return for the termination of the royalty
fee payments and the disposal agreement, we agreed to pay Waste
Management the sum of $3.3 million over the next two years. The
settlement did not affect Waste Management's obligation to deliver
leachate to our Detroit facility for processing and disposal. During
2000, Waste Management paid to the Company fees of approximately
$423,000 under this leachate disposal agreement.
31
STOCK PERFORMANCE GRAPH
The following graph shows the cumulative total stockholder return on our
common stock over the period commencing on August 20, 1997 (i.e., the date of
our initial public offering) and ending on December 31, 2000, as compared to the
returns of the American Stock Exchange Market Index (the "AMEX Index") and a
peer group that we selected (the "Peer Group"). The graph assumes $100 was
invested on August 20, 1997 in our common stock, the AMEX Index and the Peer
Group and assumes reinvestment of dividends.
[PERFORMANCE GRAPH]
08/20/97 12/31/97 12/31/98 12/31/99 12/31/00
------------------------------------------------------------------------------
12/31/00
- --------
U S Liquids Inc......................... $100.00 $103.67 $165.14 $ 61.47 $ 16.06
Peer Group.............................. 100.00 98.94 77.79 53.09 56.81
AMEX Index.............................. 100.00 105.48 104.05 129.72 128.13
32
The Peer Group is based one-fourth on an oil and gas field services
component (SIC Code 1389), one-fourth on an animal and marine fats and oils
component (SIC Code 2077), one-fourth on an air and water resource and solid
waste management component (SIC Code 9511), and one-fourth on a refuse systems
component (SIC Code 4953). The companies included in the Peer Group Index are as
follows: SIC Code 1389 -- BJ Services Co., Black Warrior Wireline Corp.,
Bouygues Offshore, S.A., Cal Dive International, Inc., Core Laboratories N.V.,
Eurasia Gold Fields, Inc., Global Industries, Ltd., Hanover Compressor Holdings,
ICO Inc., Infinity, Inc., Marine Shuttle Operations Inc., Newpark Resources,
Inc., Oceaneering International, Inc., OSCA Inc., Petrominerals Corporation,
Precision Drilling Corporation, Ramex Synfuels International Inc., Schlumberger
Limited, Simex Technologies, Inc., Superior Energy Services, Inc., Transcoastal
Marine Services, Inc., Upland Energy Corp., Varco International Inc., and
Willbros Group, Inc.; SIC Code 2077 -- Darling International, Inc. and Zapata
Corporation; SIC Code 9511 -- Brascan Corporation, nSTOR Technologies, Inc. and
Pan International Gaming; and SIC Code 4953 -- 3CI Complete Compliance Corp.,
Allied Waste Industries, Inc., American Ecology Corporation, ATG Inc., Avalon
Holdings Corporation, Biofarm Inc., Capital Environmental Resource, Inc.,
Casella Waste Systems, Inc., Clean Harbors, Inc., Commodore Applied
Technologies, Inc., Commodore Environmental Services, Inc., EarthCare Company,
Envirogen, Inc., Environmental Safeguards, Inc., Imperial Petroleum Recovery
Corp., Industrial Ecosystems Inc., Industrial Services of America, Inc.,
International Foam Solutions, KBF Pollution Management Inc., Med/Waste, Inc.,
Mercury Waste Solutions, Inc., MPM Technologies, Inc., Nesco Industries, Inc.,
Op-Tech Environmental Services, Inc., PDG Environmental, Inc., Perma-Fix
Environmental Services, Inc., Phoenix Waste Services Company, Inc, Probex
Corporation, Quadratech Inc., Quantum Group Inc., Republic Services, Inc., Rich
Coast Inc., Scherer Healthcare, Inc., Sevenson Environmental Services, Inc.,
Stericycle, Inc., Synagro Technologies, Inc., Technical Environment Solutions
Inc., Ustman Technologies Inc., Waste Connections, Inc., Waste Industries, Inc.,
Waste Management, Inc., Waste Systems International Inc., and Windswept
Environment Group, Inc.
REPORT OF THE COMPENSATION COMMITTEE
The Compensation Committee is responsible for establishing and reviewing
the Company's arrangements and programs for compensating executive officers of
the Company. The Compensation Committee is currently composed of Messrs.
McEneaney, Ramsey, Rothrock and Tyler.
The Company's executive compensation program is designed to provide
competitive compensation and benefit programs that attract and retain capable
executives who are integral to the success of the Company, reward them for
superior performance and provide them with an economic incentive to increase
stockholder value. The Compensation Committee believes its policies are best
implemented by providing compensation comprised of separate components, all of
which are designed to motivate executive performance. These components are a
salary, short-term incentive compensation (bonus) and, in appropriate cases,
long-term incentive compensation (stock options). The bonuses and stock options
are in addition to executives' yearly base salaries, which are intended to be
competitive with companies which the Compensation Committee believes are
comparable to the Company.
BASE SALARY
In setting each executive officer's base salary, the Compensation Committee
takes into consideration, among other things, the executive officer's level of
experience, responsibilities and performance and salaries for comparable
positions at other companies in the same or similar businesses of the Company.
In making salary recommendations or decisions, the Compensation Committee
exercises its discretion and judgment based on these and other relevant factors.
The Compensation Committee does not apply any specific formula to determine the
weight of any particular factor.
INCENTIVE BONUS AWARDS
Short-term incentive compensation plans are intended to provide executive
officers with an incentive to act in a manner that accentuates Company
performance and, therefore, stockholder value. The Compensation Committee
believes that growth in earnings per share is an appropriate measure of
short-term corporate performances. Accordingly, in 2000, the Compensation
Committee adopted an incentive compensation plan (the "Incentive Plan") under
which each Named Executive Officer was eligible to earn a cash bonus based upon
the growth of the Company's earnings per share in excess of targeted levels.
33
STOCK OPTIONS
In 1996, the Company established the 1996 Incentive Stock Option Plan (the
"Stock Option Plan"). The purpose of the Stock Option Plan is to promote the
long-term growth and profitability of the Company and the value of the common
stock by providing selected employees of the Company and its subsidiaries with
incentives to contribute to the success of the Company. The Stock Option Plan
provides for both the grant of incentive stock options pursuant to Section 422
of the Internal Revenue Code and options which do not qualify as incentive stock
options. In awarding options under the Stock Option Plan, the Compensation
Committee considers various factors, such as the past and expected future
performance of an employee and the extent to which an employee has been
compensated for his or her performance. The Compensation Committee has not
established any fixed formula for awarding options under the Stock Option Plan.
The exercise price for options issued under the Stock Option Plan must, in the
case of incentive stock options, be at least equal to the fair market value of
the common stock subject to the option at the time the option is granted, and in
the case of nonqualified stock options, be at least equal to 75% of the fair
market value of the shares subject to the option at the time it is granted.
COMPENSATION OF CHIEF EXECUTIVE OFFICER
The Compensation Committee applied the executive compensation policies and
programs described above in determining the total compensation of Michael P.
Lawlor, the Company's Chief Executive Officer. Mr. Lawlor's base salary for
2000 was $325,000. Under the terms of the Incentive Plan, Mr. Lawlor was
eligible to earn a cash bonus based upon the growth of the Company's earnings
per share. Because the Company's 2000 earnings per share did not equal the
minimum target established by the Committee, Mr. Lawlor did not receive any
bonus for the fiscal year ended December 31, 2000. No options or other
long-term incentives were granted to Mr. Lawlor in 2000.
DEDUCTIBILITY OF EXECUTIVE COMPENSATION
Section 162(m) of the Internal Revenue Code generally limits the annual tax
deduction for applicable remuneration paid to the Company's Chief Executive
Officer and certain other highly compensated executive officers to $1,000,000.
The Compensation Committee does not believe that the applicable remuneration to
be paid to the Company's executives will exceed the deduction limit set by
Section 162(m).
MEMBERS OF THE COMMITTEE
JAMES F. MCENEANEY, JR.
ROGER A. RAMSEY
WILLIAM A. ROTHROCK IV
ALFRED TYLER 2ND
34
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding beneficial
ownership of our common stock as of March 1, 2001 by (i) each stockholder of
the Company who is known by the Company to beneficially own more than five
percent of the outstanding common stock, (ii) each director and executive
officer, and (iii) all directors and executive officers as a group. Unless
otherwise indicated, all persons listed have an address c/o the Company's
principal executive offices and have sole voting and investment power with
respect to their shares of common stock, except to the extent authority is
shared by spouses under applicable law.
NAME AND ADDRESS NUMBER OF PERCENT OF
OF BENEFICIAL OWNER SHARES CLASS
------------------- ------- ------
Michael P. Lawlor(1)........................................................ 348,375 2.2%
Earl J. Blackwell(2)........................................................ 358,000 2.2
Gary J. Van Rooyan(3)....................................................... 40,555 *
Harry O. Nicodemus IV(4).................................................... 10,833 *
Steven J. Read(5)........................................................... 14,373 *
W. Gregory Orr(6)........................................................... 716,438 4.5
William A. Rothrock IV(7)................................................... 123,750 *
Alfred Tyler 2nd(8)......................................................... 55,000 *
James F. McEneaney, Jr.(9).................................................. 30,000 *
John N. Hatsopoulos(10)..................................................... 60,000 *
Roger A. Ramsey(11)......................................................... 20,400 *
Franklin Resources Inc.(12)................................................. 1,061,700 6.7
777 Mariners Island Boulevard, 6th Fl.
San Mateo, California
Sanifill, Inc.(13).......................................................... 1,000,000 5.9
1001 Fannin Street, Suite 4000
Houston, Texas 77002
All directors and executive officers as a group (11 persons)(14)............ 1,777,724 10.8
- --------------------
(1) Includes 35,100 shares held by The Lawlor Family, L.L.C., a limited
liability company, over which Mr. Lawlor, as the manager, has sole voting
and investment power, 10,000 shares held in an individual retirement
account for the benefit of Mr. Lawlor, 3,275 shares held by the U S Liquids
Employee Stock Purchase Plan for the benefit of Mr. Lawlor, and 300,000
shares which Mr. Lawlor has the right to acquire pursuant to the terms of a
stock option granted by the Company to him.
(2) Includes 180,000 shares held by The Earl J. and Christine J. Blackwell
Family LLC, a limited liability company, over which Mr. Blackwell, as the
manager, has sole voting and investment power, and 103,000 shares held in
an individual retirement account for the benefit of Mr. Blackwell.
(3) Includes 1,772 shares held by the U S Liquids Employee Stock Purchase Plan
for Mr. Van Rooyan and 38,333 shares which Mr. Van Rooyan has the right to
acquire pursuant to the terms of certain stock options granted by the
Company to him.
(4) Represents shares which Mr. Nicodemus has the right to acquire pursuant to
the terms of certain stock options granted by the Company to him.
(5) Includes 3,540 shares held by the U S Liquids Employee Stock Purchase Plan
for the benefit of Mr. Read and 10,833 shares which Mr. Read has the right
to acquire pursuant to the terms of certain stock options granted by the
Company to him.
(6) Includes 250,000 shares held by The Wiley Gregory & Genene M. Orr Family
LLC, a limited liability company, over which Mr. Orr, as the manager, has
sole voting and investment power, 100,000 shares held by a broker for the
benefit of Mr. Orr, 2,938 shares held by the U S Liquids Employee Stock
Purchase Plan for the benefit of Mr. Orr, 15,000 shares held by Mr. Orr's
wife, Genene Orr, and 15,000 shares held by Mr. Orr's wife as custodian for
two of Mr. Orr's children.
(7) Includes 51,250 shares which Mr. Rothrock has the right to acquire pursuant
to the terms of certain stock options granted by the Company to him.
(8) Includes 25,000 shares held by a corporation controlled by Mr. Tyler and
30,000 shares which Mr. Tyler has the right to acquire pursuant to the
terms of certain stock options granted by the Company to him.
(9) Includes 29,000 shares which Mr. McEneaney has the right to acquire
pursuant to the terms of certain stock options granted by the Company to
him.
(10) Includes 25,000 shares which Mr. Hatsopoulos has the right to acquire
pursuant to the terms of certain stock options granted by the Company to
him.
(11) Includes 20,000 shares which Mr. Ramsey has the right to acquire pursuant
to the terms of certain stock options granted by the Company to him.
35
(12) Includes shares owned by one or more open or closed-end investment
companies or other managed accounts which are advised by direct and
indirect investment advisory subsidiaries of Franklin Resources, Inc. A
Form 13G/A filed by Franklin Resources on February 7, 2000 states that (i)
such advisory subsidiaries of Franklin Resources have sole investment
and/or voting power over such shares, and (ii) Charles B. Johnson and
Rupert H. Johnson, Jr. are the principal stockholders of Franklin Resources
and, thus, may each be deemed to be the beneficial owner of such shares.
(13) Represents shares which Sanifill, Inc. has the right to acquire pursuant to
the terms of a warrant issued by the Company to Sanifill.
(14) Excludes 43,334 total shares subject to options granted to Messrs. Van
Rooyan, Nicodemus and Read that are not exercisable prior to May 1, 2001.
* Constitutes less than one percent of the outstanding common stock.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
See "Compensation Committee Interlocks and Insider Participation" in Item
11. Executive Compensation.
PART IV
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.
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.
(b) Reports on Form 8-K
On November 21, 2000, we filed a report on Form 8-K disclosing the
resignation of Mr. Orr as President and Chief Operating Officer.
(c) 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 -- Second Amended and Restated Bylaws of U S Liquids
Inc. (Exhibit 99.1 to the Form 8-K filed on March 2,
2001 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 -- Second Amended and Restated Credit Agreement, dated
February 3, 1999, among U S Liquids Inc., various
financial institutions and Bank of America National
Trust and Savings Association, as Agent. (Exhibit 4.2 of
the U S Liquids Inc. Registration Statement on Form S-3
(File No. 333-72403), effective March 11, 1999, is
hereby incorporated by reference).
36
4.3 -- First Amendment to Second Amended and Restated Credit
Agreement among U S Liquids Inc., various financial
institutions and Bank of America National Trust and
Savings Association, as Agent. (Exhibit 4.3 of the Form
10-K for the year ended December 31, 1999 is hereby
incorporated by reference).
4.4 -- Second Amendment to Second Amended and Restated
Credit Agreement among U S Liquids Inc., various
financial institutions and Bank of America National
Trust and Savings Association, as Agent. (Exhibit 4.4 of
the Form 10-K for the year ended December 31, 1999 is
hereby incorporated by reference).
4.5 -- Third Amendment to Second Amended and Restated Credit
Agreement among U S Liquids Inc., various financial
institutions and Bank of America National Trust and
Savings Association, as Agent. (Exhibit 4.7 of the Form
10-Q for the quarter ended June 30, 2000 is hereby
incorporated by reference).
+4.6 -- Fourth Amendment to Second Amended and Restated
Credit Agreement among U S Liquids Inc., various
financial institutions and Bank of America National
Trust and Savings Association, as Agent.
4.7 -- 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.
(Exhibit 4.6 of the Form 10-K for the year ended
December 31, 1997 is hereby incorporated by reference).
4.8 -- Company Pledge Agreement, dated December 17, 1997,
executed by U S Liquids Inc. in favor of Bank of America
National Trust and Savings Association. (Exhibit 4.7 of
the Form 10-K for the year ended December 31, 1997 is
hereby incorporated by reference).
**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 -- Estoppel and Waiver Agreement, dated April 10, 1998,
between U S Liquids Inc. and Sanifill, Inc. (Exhibit
10.59 of U S Liquids Inc. Registration Statement on Form
S-1 (File No. 333-52121), effective June 4, 1998, is
hereby incorporated by reference).
10.5 -- Settlement of Arbitration and Release between U S
Liquids Inc. and Newpark Resources, Inc. (Exhibit 99.1
to the Form 8-K filed on September 25, 1998 is hereby
incorporated by reference).
10.6 -- Payment Agreement, dated December 31, 1998, among U S
Liquids Inc., Newpark Resources, Inc., and Newpark
Environmental Services, Inc. (Exhibit 10.4 of U S
37
Liquids Inc. Registration Statement on Form S-3 (File
No. 333-72403), effective March 11, 1999, is hereby
incorporated by reference).
10.7 -- Option Agreement, dated December 31, 1998, among U S
Liquids Inc., Newpark Resources, Inc. and Newpark
Environmental Services, Inc. (Exhibit 10.5 of U S
Liquids Inc. Registration Statement on Form S-3 (File
No. 333-72403), effective March 11, 1999, is hereby
incorporated by reference).
10.8 -- Amendment to Option Agreement, dated January 10,
2000, among U S Liquids Inc., Newpark Resources, Inc.
and Newpark Environmental Services, Inc. (Exhibit 10.8
of the Form 10-K for the year ended December 31, 1999 is
hereby incorporated by reference).
10.9 -- Miscellaneous Agreement, dated September 16, 1998,
between Newpark Resources, Inc. and U S Liquids Inc.
(Exhibit 99.4 to the Form 8-K filed on September 25,
1998 is hereby incorporated by reference).
+*10.10 -- Employment Agreement, dated September 1, 1999,
between U S Liquids Inc. and Steven J. Read, as amended.
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 -- Agreement, dated November 15, 2000, between U S
Liquids Inc. and W. Gregory Orr. (Exhibit 99.2 to the
Form 8-K filed on November 21, 2000, is hereby
incorporated by reference).
*10.16 -- Employment Agreement, dated February 13, 1998,
between U S Liquids Inc. and Earl J. Blackwell. (Exhibit
10.16 of the Form 10-K for the year ended December 31,
1997 is hereby incorporated by reference).
+*10.17 -- Employment Agreement, dated September 1, 1999,
between U S Liquids Inc. and Harry O. Nicodemus IV, as
amended.
*10.18 -- 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).
**10.19 -- Agreement for Purchase and Sale of Assets, dated
April 21, 1998, among US Parallel Products of
California, Parallel Products of Kentucky, Inc.,
Parallel Products of Florida, Inc., Parallel Products,
DWA of Belvedere Company, The Estate of David W.
38
Allen, David W. Allen Trust No. 1, Peter Allen, Neal
Koehler and Richard Eastman. (Exhibit 2.1 to the Form
8-K filed on May 6, 1998 is hereby incorporated by
reference).
*10.20 -- 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).
10.21 -- Noncompetition Agreement of September 16, 1998
between U S Liquids Inc. and Newpark Resources, Inc.
(Exhibit 99.3 to the Form 8-K filed on September 25,
1998 is hereby incorporated by reference).
10.22 -- 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).
10.23 -- Amendment No. 1 to Warrant Agreement, dated April 20,
1998, among U S Liquids Inc., Van Kasper & Company and
Sanders Morris Mundy Inc. (Exhibit 10.61 of U S Liquids
Inc. Registration Statement on Form S-1 (File No.
333-52121), effective June 4, 1998, is hereby
incorporated by reference).
10.24 -- 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).
10.25 -- 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).
+*10.26 -- Employment Agreement, dated September 1, 1998,
between U S Liquids Inc. and Gary J. Van Rooyan, as
amended.
10.27 -- Leachate Treatment Agreement, dated May 8, 1998,
between City Management Corporation and US City
Environmental, Inc. (Exhibit 10.69 of U S Liquids Inc.
Registration Statement on Form S-1 (File No. 333-52121),
effective June 4, 1998, is hereby incorporated by
reference).
+21.1 -- List of subsidiaries of U S Liquids Inc.
+23.1 -- Consent of Arthur Andersen LLP.
- -------------------
+ Filed herewith
* Management Contract
** Schedules to this agreement will be furnished supplementally to the
Commission upon request.
39
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 21, 2001 By: /s/ Michael P. Lawlor
----------------------------------
Michael P. Lawlor
Chairman of the Board and
Chief Executive Officer
Date: March 21, 2001 By: /s/ Earl J. Blackwell
----------------------------------
Earl J. Blackwell
Chief Financial Officer,
Senior Vice President and
Secretary
Date: March 21, 2001 By: /s/ Harry O. Nicodemus, IV
----------------------------------
Harry O. Nicodemus, IV
Vice President and
Chief Accounting Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Date: March 21, 2001 By: /s/ Michael P. Lawlor
----------------------------------
Michael P. Lawlor
Chairman of the Board of
Directors
Date: March 21, 2001 By: /s/ W. Gregory Orr
----------------------------------
W. Gregory Orr
Director
Date: March 21, 2001 By: /s/ William A. Rothrock, IV
----------------------------------
William A. Rothrock, IV
Director
Date: March 21, 2001 By: /s/ James F. McEneaney, Jr.
----------------------------------
James F. McEneaney, Jr.
Director
Date: March 21, 2001 By: /s/ John N. Hatsopoulos
----------------------------------
John N. Hatsopoulos
Director
Date: March 21, 2001 By:/s/ Roger A. Ramsey
-----------------------------------
Roger A. Ramsey
Director
40
INDEX TO FINANCIAL STATEMENTS
U S LIQUIDS INC.
Report of Independent Public Accountants..................................... F-2
Consolidated Balance Sheets.................................................. F-3
Consolidated Statements of Operations........................................ F-4
Consolidated Statements of Stockholders' Equity.............................. F-5
Consolidated Statements of Cash Flows........................................ F-6
Notes to Consolidated Financial Statements................................... F-7
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, 1999 and
2000, and the related consolidated statements of operations, stockholders'
equity and cash flows for each of the three years in the period ended December
31, 2000. 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 auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the 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, 1999 and 2000, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 2000, in conformity with
accounting principles generally accepted in the United States.
ARTHUR ANDERSEN LLP
Houston, Texas
March 19, 2001
F-2
U S LIQUIDS INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
ASSETS
DECEMBER 31,
------------------------------
1999 2000
-------------- -------------
CURRENT ASSETS:
Cash and cash equivalents................................................................. $ 3,398 $ 2,176
Accounts receivable, less allowances of $3,063 and $1,070, respectively.................. 40,098 37,139
Inventories............................................................................... 2,029 2,254
Prepaid expenses and other current assets................................................. 12,653 14,941
Operations held for sale.................................................................. - 23,745
-------------- -------------
Total current assets................................................................... $ 58,178 $ 80,255
PROPERTY, PLANT AND EQUIPMENT, net........................................................... 115,625 108,246
INTANGIBLE ASSETS, net ...................................................................... 193,033 162,809
OTHER ASSETS, net............................................................................ 2,247 867
-------------- -------------
Total assets........................................................................... $369,083 $352,177
============== =============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current maturities of long-term obligations............................................... $ 5,327 $ 22,993
Accounts payable.......................................................................... 15,239 17,579
Accrued expenses and other current liabilities .......................................... 27,423 25,594
Operations held for sale.................................................................. - 2,996
-------------- -------------
Total current liabilities.............................................................. $ 47,989 $ 69,162
LONG-TERM OBLIGATIONS, net of current maturities............................................. 99,499 88,526
PROCESSING RESERVE, net of current........................................................... 4,630 5,445
CLOSURE AND REMEDIATION RESERVES, net of current............................................. 8,878 10,834
OTHER LONG-TERM LIABILITIES.................................................................. 11,566 2,577
DEFERRED INCOME TAXES........................................................................ 6,373 10,763
-------------- -------------
Total liabilities...................................................................... $178,935 $187,307
-------------- --------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value, 5,000,000 shares authorized, none issued or outstanding.. $ - $ -
Common stock, $.01 par value, 30,000,000 shares authorized, 15,780,868 and 15,818,729
shares issued and outstanding, respectively............................................ 158 158
Additional paid-in capital................................................................ 176,859 176,939
Retained earnings......................................................................... 13,173 (12,204)
Accumulated other comprehensive loss - foreign currency translation adjustment ........... (42) (23)
-------------- -------------
Total stockholders' equity............................................................. $190,148 $164,870
-------------- --------------
Total liabilities and stockholders' equity............................................. $369,083 $352,177
============== ==============
The accompanying notes are an integral part of these consolidated
financial statements.
F-3
U S LIQUIDS INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
YEARS ENDED DECEMBER 31,
------------------------------------------------
1998 1999 2000
-------------- ------------- -------------
REVENUES..................................................................... $ 121,460 $ 231,783 $ 247,859
OPERATING EXPENSES........................................................... 79,027 165,773 193,724
DEPRECIATION & AMORTIZATION.................................................. 8,146 16,595 19,234
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES................................................................. 12,927 26,242 33,162
SPECIAL CHARGES, net......................................................... - 15,138 17,787
-------------- ------------- -------------
INCOME (LOSS) FROM OPERATIONS................................................ $ 21,360 $ 8,035 $ (16,048)
INTEREST EXPENSE, net........................................................ 3,517 6,803 10,698
OTHER (INCOME) EXPENSE, net.................................................. 38 (129) (419)
-------------- ------------- -------------
INCOME (LOSS) BEFORE PROVISION (BENEFIT)
FOR INCOME TAXES......................................................... $ 17,805 $ 1,361 $ (26,327)
PROVISION (BENEFIT) FOR INCOME TAXES......................................... 7,033 2,603 (950)
-------------- ------------- -------------
NET INCOME (LOSS) ........................................................... $ 10,772 $ (1,242) $ (25,377)
============== ============= =============
Basic Earnings (Loss) per Common Share....................................... $ 1.04 $ (0.08) $ (1.61)
============== ============= =============
Diluted Earnings (Loss) per Common Share..................................... $ 0.93 $ (0.08) $ (1.61)
============== ============= =============
Weighted Average Common Shares Outstanding................................... 10,317 15,324 15,798
============== ============= =============
Weighted Average Common and Common Equivalent Shares
Outstanding.............................................................. 11,637 15,324 15,798
============== ============= =============
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)
ACCUMULATED
OTHER
COMPRE- ADDITIONAL COMPRE-
HENSIVE PREFERRED STOCK COMMON STOCK PAID-IN HENSIVE RETAINED
LOSS SHARES AMOUNT SHARES AMOUNT CAPITAL LOSS EARNINGS
---------- ------ ------ ------ ------ ---------- ----------- ----------
BALANCE, December 31, 1997 $ - - $ - 7,303 $ 73 $ 17,190 $ - $ 3,643
20,000 warrants issued in connection
with acquisition - - - - - 132 - -
Common stock issued in secondary public
offering, net of offering costs - - - 3,450 35 60,318 - -
Common stock issued in acquisitions - - - 1,634 16 32,639 - -
Common stock options exercised - - - 111 1 125 - -
Net income $ 10,772 - - - - - - 10,772
========== ------ -------- -------- -------- ---------- ---------- ----------
BALANCE, December 31, 1998 - $ - 12,498 $ 125 $ 110,404 $ - $14,415
Common stock issued in secondary public
offering, net of offering costs - - - 2,875 29 56,463 - -
Common stock issued in acquisitions - - - 636 6 12,846 - -
Common stock options and warrants
exercised - - - 158 2 142 - -
Repurchase and cancellation of common
stock - - - (386) (4) (2,996) - -
Comprehensive Loss:
Foreign currency translation adjustment (42) - - - - - (42) -
Net loss (1,242) - - - - - - (1,242)
---------- ------ -------- -------- -------- ---------- ---------- ----------
Total $ (1,284)
==========
BALANCE, December 31, 1999 - $ - 15,781 $ 158 $ 176,859 $ (42) $13,173
Common stock issued in acquisitions - - - 22 - 75 - -
Common stock options exercised and
employee stock purchases - - - 16 - 5 - -
Comprehensive Loss:
Foreign currency translation adjustment 19 - - - - - 19 -
Net loss (25,377) - - - - - - (25,377)
----------
Total $ (25,358)
========== ------ -------- -------- -------- ---------- ---------- ----------
BALANCE, December 31, 2000 - $ - 15,819 $ 158 $ 176,939 $ (23) $(12,204)
====== ======== ======== ======== ========== ========== ==========
TOTAL STOCK-
HOLDERS
EQUITY
------------
BALANCE, December 31, 1997 $ 20,906
20,000 warrants issued in connection
with acquisition 132
Common stock issued in secondary public
offering, net of offering costs 60,353
Common stock issued in acquisitions 32,655
Common stock options exercised 126
Net income 10,772
------------
BALANCE, December 31, 1998 $124,944
Common stock issued in secondary public
offering, net of offering costs 56,492
Common stock issued in acquisitions 12,852
Common stock options and warrants
exercised 144
Repurchase and cancellation of common
stock (3,000)
Comprehensive Loss:
Foreign currency translation adjustment (42)
Net loss (1,242)
------------
Total
BALANCE, December 31, 1999 $190,148
Common stock issued in acquisitions 75
Common stock options exercised and
employee stock purchases 5
Comprehensive Loss:
Foreign currency translation adjustment 19
Net loss (25,377)
Total
------------
BALANCE, December 31, 2000 $ 164,870
============
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)
YEARS ENDED DECEMBER 31,
--------------------------------------------------
1998 1999 2000
-------------- ------------- --------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)...................................................... $ 10,772 $ (1,242) $ (25,377)
Adjustments to reconcile net income (loss) to net cash provided by
operating activities:
Depreciation and amortization....................................... 8,146 16,595 19,234
Net (gain) loss on sale of property, plant, and equipment........... (147) 122 8
Deferred income tax provision (benefit)............................. 1,995 (340) 2,203
Changes in operating assets and liabilities, net of amounts acquired:
Accounts receivable, net......................................... (8,406) (4,196) (3,939)
Inventories...................................................... 1,017 (745) (224)
Prepaid expenses and other current assets........................ (3,909) (2,426) (1,045)
Intangible assets................................................ 112 (785) (1,248)
Other assets..................................................... (774) (778) 1,365
Accounts payable, accrued liabilities and other long-term
liabilities................................................. 6,622 (1) (9,961)
Closure, remediation and processing reserves..................... (1,406) (3,193) (915)
Impaired assets and assets held for sale, net.................... - - 29,876
-------------- ------------- --------------
Net cash provided by operating activities........................ $ 14,022 $ 3,011 $ 9,977
-------------- ------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment.......................... $ (14,347) $ (17,223) $ (19,192)
Proceeds from sale of property, plant, and equipment................ 1,143 1,688 973
Cash paid for acquisitions, net of subsequent purchase adjustments.. (101,648) (69,177) 14
-------------- ------------- --------------
Net cash used in investing activities............................ $ (114,852) $ (84,712) $ (18,205)
-------------- ------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of long-term obligations..................... $ 103,326 $ 96,270 $ 36,975
Principal payments on long-term obligations......................... (61,893) (68,050) (29,993)
Repurchase and cancellation of common stock......................... - (3,000) -
Proceeds from additional public offering of common stock, net of
offering costs................................................... 60,353 56,492 -
Proceeds from exercise of stock options and employee stock purchase
plan............................................................. 126 144 5
-------------- ------------- --------------
Net cash provided by financing activities........................ $ 101,912 $ 81,856 $ 6,987
-------------- ------------- --------------
EFFECT OF FOREIGN CURRENCY TRANSLATION ON CASH
AND CASH EQUIVALENTS............................................... $ - $ (42) $ 19
-------------- ------------- --------------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS......................................................... $ 1,082 $ 113 $ (1,222)
CASH AND CASH EQUIVALENTS AT BEGINNING OF
PERIOD.............................................................. 2,203 3,285 3,398
-------------- ------------- --------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD............................. $ 3,285 $ 3,398 $ 2,176
============== ============= ==============
SUPPLEMENTAL DISCLOSURES:
Cash paid for interest.............................................. $ 2,266 $ 6,870 $ 10,639
Cash paid (received) for income taxes............................... 5,310 5,786 (3,884)
Assets acquired under capital leases................................ 164 2,723 426
Liabilities issued and assumed related to acquisitions.............. 32,787 12,852 257
Common stock, warrants and options issued for acquisitions.......... 9,322 8,293 75
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, recovery and disposal 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" to the extent of the operations so acquired) which were wholly
owned subsidiaries of Sanifill, Inc. through a transaction accounted for as a
purchase. 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 Wastewater 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"). The acquisitions of Mesa and AWW were
accounted for under the pooling-of-interests method of accounting. The
Wastewater Division collects, processes and disposes of liquid waste and
recovers by-products from these waste streams. During 1998 and 1999, the Company
continued acquiring companies, principally for the Wastewater Division. As of
July 1, 1999, the Company created a third division, known as the Industrial
Wastewater Division, and changed the name of the Wastewater Division to the
Commercial Wastewater Division. The Industrial Wastewater Division derives
revenues from fees charged for the collection, processing and disposal of
hazardous and non-hazardous wastes, while the Commercial Wastewater Division
handles non-hazardous wastes.
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.
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 materially from those
estimates. Significant estimates made by management include operations held for
sale, processing reserves and reserves for closure and remediation of
facilities.
RISK FACTORS
Risk factors of the Company include, but are not limited to, compliance
with governmental and environmental regulations, potential environmental
liability and capital and financing availability.
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
Financial instruments that potentially subject the Company to
concentrations of credit risk consist primarily of cash and cash equivalents and
accounts receivable. The Company places its cash and cash equivalents with high
quality financial institutions and limits the amount of credit exposure with any
one institution. Concentrations of credit risk with respect to accounts
receivable are limited because a large number of geographically diverse
customers comprise the Company's customer base, thus spreading the trade credit
risk. At December 31, 1999 and 2000, no single group or customer represented
greater than 10% of total accounts receivable. The Company controls credit risk
through credit evaluations, credit limits, and monitoring procedures.
F-7
U S LIQUIDS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Management performs ongoing credit analyses of the accounts of its
customers and provides allowances as deemed necessary. The activity in the
allowance for doubtful accounts is as follows (in thousands):
BEGINNING
BALANCE BALANCE
AT OF OPERATIONS BALANCE AT
BEGINNING PURCHASED HELD FOR CHARGED TO END OF
OF PERIOD COMPANIES SALE EXPENSE WRITE-OFFS PERIOD
----------- ----------- ----------- ------------ ------------ ------------
Year ended December 31, 1998.............. $ 342 1,609 - 350 (624) $ 1,677
Year ended December 31, 1999.............. $ 1,677 742 - 2,923 (2,279) $ 3,063
Year ended December 31, 2000.............. $ 3,063 - (71) 3,130 (5,052) $ 1,070
INVENTORIES
Inventories are stated at the lower of cost or market and, at December
31, 1999 and 2000, consisted of processed by-products of $1,490,000 and
$1,589,000, respectively, and unprocessed by-products of $539,000 and $665,000,
respectively. Cost is determined using the first-in, first-out (FIFO) method.
OPERATIONS HELD FOR SALE
In December 2000, the Company approved the divestiture of several of
its non-core operations. The businesses that the Company is marketing for sale
and the portfolio of real estate that the Company has determined are surplus and
is marketing for sale, have been classified as operations held for sale. The
carrying values of these assets have been written down to estimated fair value,
less costs to sell. These charges are based on estimates and certain
contingencies that could materially differ from actual results and resolution of
any such contingencies. See further discussion in Notes 3 and 5.
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 expense 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. The Company periodically reviews its property, plant and equipment for
possible impairment, which is calculated based on the undiscounted cash flows to
be generated from the applicable asset, whenever events or changes in
circumstances might indicate that the carrying amount of an asset may not be
recoverable. See Note 3 for discussion relating to the write down of property,
plant and equipment as a result of the closure of the Re-Claim Louisiana
facility.
INTANGIBLE AND OTHER ASSETS
Intangible and other assets consist primarily of the excess of cost
over net assets of acquired businesses (goodwill), permits and noncompete
agreements. The Company evaluates the useful life of goodwill for each
acquisition, which is amortized on a straight-line basis over forty years.
Management periodically evaluates recorded goodwill balances, net of accumulated
amortization, for impairment by comparing the projected future undiscounted cash
flows generated by the operations associated with the goodwill to the carrying
amount of the goodwill. See Note 3 for discussion relating to the write down of
intangible and other assets as a result of the closure of the Re-Claim Louisiana
facility. Management believes that there have been no events or circumstances
that warrant revision to the remaining useful life or affect the recoverability
of goodwill in any of its other business units.
F-8
U S LIQUIDS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DEPRECIATION AND AMORTIZATION EXPENSES
Depreciation and amortization expenses are excluded from operating
expenses and selling, general and administrative expenses in the consolidated
Statements of Operations. These expenses are as follows:
YEARS ENDED DECEMBER 31,
----------------------------------------------------
1998 1999 2000
---------------- --------------- --------------
(IN THOUSANDS)
Operating expenses....................................................... $5,751 $10,751 $12,517
Selling, general and administrative expenses............................. 936 931 1,120
Goodwill amortization.................................................... 1,459 4,913 5,597
---------------- --------------- --------------
Total depreciation and amortization expenses....................... $8,146 $16,595 $19,234
================ =============== ==============
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 and are
measured using enacted tax rates and laws.
SELF-INSURANCE
The Company retains the risk for employee group health claims,
resulting from uninsured deductibles per accident or occurrence which are
subject to annual aggregate limits. Losses up to the deductible amount are based
upon the Company's known claims incurred and an estimate of claims incurred but
not reported. The accruals are based upon known facts and historical trends and
management believes such accruals to be adequate.
PROCESSING RESERVE
The Company records a processing reserve for the estimated amount of
expenses to be incurred with the treatment of waste in order to match revenues
with their related costs. The related treatment costs are charged against the
reserve as such costs are incurred, which generally cover a period of nine to
twelve months for the Oilfield Waste Division. At year end, the processing
reserve represents the estimated costs to process the volumes of waste on hand
for which revenue has already been recognized.
CLOSURE AND REMEDIATION RESERVES
As of December 31, 1999 and 2000, the closure and remediation reserves
represent accruals on a prospective basis for the total estimated costs
associated with the ultimate closure of the Company's landfarm facilities and
certain other 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.
REVENUE RECOGNITION
The Company 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 Company collects the materials from the
customer's location. The Company recognizes revenue at the time the Company's
facilities accept the waste because the customer has passed the legal and
regulatory responsibility and associated risk of disposing the waste to the
Company. By-product sales are recognized when the by-product is shipped to the
buyer.
On December 3, 1999, the United States Securities and Exchange
Commission ("SEC") released Staff Accounting Bulletin ("SAB") No. 101, Revenue
Recognition, to provide guidance on the recognition, presentation and disclosure
of revenue in financial statements. The Company adopted the provisions of SAB
No. 101 on October 1, 2000. Adoption of this statement did not result in a
material impact or change to the Company's revenue recognition policies.
F-9
U S LIQUIDS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's financial instruments include cash and cash equivalents,
accounts receivable, accounts payable, notes and capital leases payable, and
debt obligations. The book value of cash and cash equivalents, accounts
receivable, accounts payable and short-term notes payable are considered to be
representative of fair value because of the short maturity of these instruments.
The Company believes that the carrying value of its borrowings under the credit
agreement approximate their fair value as they bear interest at rates indexed to
the London Interbank Offered Rate ("LIBOR"). The Company estimates that the fair
value of all of its debt obligations (including debt associated with operations
held for sale) approximates $111.4 million at December 31, 2000.
TRANSLATION OF FOREIGN CURRENCY
The U.S. dollar is the functional currency for substantially all of the
Company's consolidated operations. For certain wholly-owned foreign equity
investments, the functional currency is the local currency. The accumulated
translation effects for equity investments using functional currencies other
than the U.S. dollar are included in the foreign currency translation adjustment
in stockholders' equity. For these operations, all gains and losses from
currency translations are included in comprehensive loss. Prior to 1999, the
Company had no foreign investments.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 133 - "Accounting for
Derivative Instruments and Hedging Activities." In June 1999, the FASB issued
SFAS No. 137, which amended the effective adoption date of SFAS No. 133. This
statement establishes accounting and reporting standards for derivative
instruments, including derivative instruments embedded in other contracts, and
for hedging activities. The statement, as amended and which is to be applied
prospectively, is effective for the Company's quarter ending March 31, 2001. The
Company adopted SFAS No. 133 as amended on January 1, 2001. Adoption of this
statement did not have a material impact on the financial position or results of
operations of the Company as it has not engaged or entered into any arrangements
usually associated with derivative instruments.
RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform with the
current year presentation.
3. SPECIAL CHARGES:
2000 OPERATIONS HELD FOR SALE OR CLOSURE
During the fourth quarter of 2000, the Company recorded special charges
relating primarily to decisions to dispose of or suspend certain operations
offset by the favorable effect of the settlement of a dispute. These special
charges amounted to a net expense of $17.8 million. The special charges include
estimated losses from the sale of certain operations in the Commercial
Wastewater Division for $19.7 million, the closure of the Re-Claim Louisiana
facility for $10.2 million, legal fees associated with the above for $210,000
and additional charges of $470,000 for the disposal of PCB contaminated
materials at the Company's Detroit facility (relating to 1999 special charges
discussed below). During this period, the Company also recognized net pre-tax
income of $12.8 million relating to the termination of a disposal agreement with
Waste Management, Inc. that was entered into in May 1998 in connection with the
acquisition of its Detroit facility. These special charges reduced net income by
$17.8 million (net of taxes, due to valuation allowances), or $1.13 per share.
As of December 31, 2000, $211,000 of these special charges remained in accrued
liabilities and are included with $3.6 million of remaining accrued liabilities
from 1999 special charges. See Notes 5, 9 and 10.
1999 BUSINESS INTERRUPTIONS AND REMEDIATIONS
During the third and fourth quarters of 1999, the Company recorded
special charges in the amount of $15.1 million. The components of these special
charges consisted of (i) $5.5 million for disposal of PCB contaminated material
improperly delivered to the Company's Detroit facility, the decontamination of
certain equipment exposed to the PCB contaminated materials and fines imposed by
regulatory authorities relating to the facility's acceptance of the PCB
contaminated materials, (ii) $2.5 million for disposal of liquid waste received
by the Company's
F-10
U S LIQUIDS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Re-Claim Louisiana facility, which waste is the subject of a dispute between the
Company and the Environmental Protection Agency ("EPA") as to the proper method
of disposal, net of $443,000 received from the Company's insurance carrier for
submitted claims, (iii) $2.0 million for fines imposed or expected to be imposed
by regulatory authorities relating to the operations of the Re-Claim facility,
(iv) $1.7 million for legal and professional fees incurred or expected to be to
incurred for matters arising in connection with the governmental proceedings
relating to the Detroit and Re-Claim facilities and the purposed securities
class action and shareholder derivative action arising therefrom, (v) $1.3
million for write-offs of capitalized acquisition costs related to acquisitions
not reasonably likely to occur because of the temporary cap on the Company's
revolving credit facility and its related effects on the Company's acquisition
program, (vi) $1.0 million for the cleanup of a spill at the Re-Claim facility
caused by an act of vandalism, (vii) $954,000 for severance and contract
termination costs related to certain personnel and acquisition consultants as a
result of the environmental issues at the Detroit and Re-Claim facilities, the
temporary cap on the Company's revolving credit facility and its related effects
on the Company's acquisition program, and (viii) $139,000 for other costs
related to the operations of the Detroit and Re-Claim facilities. These special
charges reduced net income by $10.4 million (net of taxes), or $0.68 per share,
for the fiscal year ended December 31, 1999. As of December 31, 2000, $3.6
million of these special charges remained in accrued liabilities. See Note 9.
See Note 19, "Regulatory Proceedings" for further discussion of incidents giving
rise to certain of the special charges.
4. ACQUISITIONS:
1998 AND 1999 ACQUISITIONS
During 1998 and 1999, the Company completed 29 and 22 acquisitions,
respectively. The acquisitions were accounted for under the purchase method of
accounting. Results of operations of companies that were acquired were included
in the consolidated financial statements from the dates of such acquisitions.
The costs of acquisitions were $109.1 million in cash and debt assumed and
1,656,015 shares of stock for 1998 and $73.6 million in cash and debt assumed
and 635,354 shares of stock for 1999. The excess of the aggregate purchase price
over the fair value of the net assets acquired was approximately $124.8 million
and $71.1 million for 1998 and 1999, respectively.
2000 ACQUISITIONS
During 2000, the Company acquired two businesses engaged in the
collection, processing and disposal of liquid wastes for approximately $532,000
in cash and debt assumed. Both of these acquisitions were accounted for under
the purchase method of accounting. The excess of the aggregate purchase price
over the fair value of the net assets acquired was approximately $417,000.
The unaudited pro forma information set forth below represents the
revenues, net income (loss) and earnings (loss) per share of the Company, the
1998 and 1999 acquisitions and the Company's secondary public offerings of
common stock in June 1998 and March 1999, as if these transactions were all
effective on January 1, 1998 and includes certain pro forma adjustments,
including the adjustment of amortization expenses to reflect purchase price
allocations, interest expense to reflect debt issued in connection with the
acquisitions, net of a reduction in interest expense on debt repaid in
connection with the Company's public offering of common stock, and certain
reductions of salaries and benefits payable to the previous owners of the
businesses acquired which were agreed to in connection with the acquisitions,
and the related income tax effects of these adjustments. No pro forma
information is presented for 2000 as no material acquisitions were completed in
2000.
YEARS ENDED DECEMBER 31,
---------------------------------
1998 1999
--------------- ---------------
PRO FORMA AMOUNTS (IN THOUSANDS)
Revenue............................................................................. $ 265,327 $ 249,349
Net income (loss)................................................................... $ 16,340 $ (1,238)
Basic earnings (loss) per common share.............................................. $ 1.06 $ (0.08)
Diluted earnings (loss) per common share............................................ $ 0.98 $ (0.08)
F-11
U S LIQUIDS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 and offerings been
consummated effective as of January 1, 1998.
The Company 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 $6.9 million with the achieved goals providing approximately
$9.6 million of pre-tax income. The contingent consideration is payable in cash
in the amount of $3.2 million and in stock with a total value of $3.7 million
(representing approximately 1.7 million shares at December 31, 2000 with the
stock closing price on that day of $2.1875).
5. OPERATIONS HELD FOR SALE:
During the fourth quarter of 2000, the Company's Board of Directors
voted to sell certain non-core operations in the Commercial Wastewater Division.
The types of liquid waste managed at these facilities held for sale include
industrial wastewaters, biosolids and grease and grit trap waste. As discussed
in Notes 2 and 3, the Company has recorded charges to write down the carrying
value of certain assets to fair value, less costs to sell. In determining fair
value, the Company considered, among other things, the range of preliminary
purchase prices being discussed with potential buyers. The results of operations
of these businesses are fully included in revenues and expenses in the
accompanying Statements of Operations.
Operational information included in the Statements of Operations
regarding the businesses classified as operations held for sale at December 31,
2000, is as follows:
YEARS ENDED DECEMBER 31,
-------------------------------------------
1998 1999 2000
------------ ------------ ------------
(IN THOUSANDS)
Operating revenues......................................... $ 26,531 $ 41,839 $ 40,321
Earnings (loss) before interest and taxes (EBIT) (a)....... 2,475 1,210 (198)
- ----------
(a) For those items included in the determination of EBIT (the earnings
measurement used by management to evaluate operating performance), the
accounting policies of the operations held for sale are the same as those
described in the summary of significant accounting policies (see Note 2).
EBIT is defined as income (loss) from operations excluding asset
impairments, interest and taxes.
Management believes these facilities will be divested prior to December
31, 2001. As such, the Company has classified its operations held for sale as
current. Information regarding the businesses classified as operations held for
sale as of December 31, 2000 is as follows (in thousands):
Cash and cash equivalents............................................................ $ 253
Receivables, net .................................................................... 5,501
Other current assets ................................................................ 625
Property and equipment and other non-current assets, net............................. 17,366
Current maturities of long-term debt................................................. (268)
Other current liabilities ........................................................... (2,707)
Long-term debt, less current maturities ............................................. (21)
--------
Net operations held for sale......................................................... $ 20,749
========
Current assets:
Operations held for sale....................................................... $ 23,745
Current liabilities:
Operations held for sale....................................................... (2,996)
--------
Net operations held for sale........................................... $ 20,749
========
F-12
U S LIQUIDS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. PREPAID EXPENSES AND OTHER CURRENT ASSETS:
Prepaid expenses and other current assets at December 31, 1999 and
2000, consist of the following:
1999 2000
-------- --------
(IN THOUSANDS)
Prepaid insurance............................................................ $ 2,189 $ 1,031
Current portion of note receivable........................................... 46 46
Current deferred income tax asset............................................ 3,841 7,318
Income taxes receivable ..................................................... 4,001 3,562
Other........................................................................ 2,576 2,984
-------- --------
Total.................................................................. $ 12,653 $ 14,941
======== ========
7. PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment at December 31, 1999 and 2000, consist of
the following:
DEPRECIABLE
LIFE (YEARS) 1999 2000
------------ --------- ---------
(IN THOUSANDS)
Land......................................................... - $ 12,568 $ 12,698
Landfarm and processing sites................................ 25 17,062 15,824
Buildings and improvements................................... 5-39 43,328 42,695
Machinery and equipment ..................................... 3-15 40,171 40,449
Vehicles..................................................... 3-5 12,828 12,148
Furniture and fixtures....................................... 3-5 5,069 5,727
Construction in progress..................................... - 4,934 6,967
--------- ---------
Total.................................................. $ 135,960 $ 136,508
Less-Accumulated depreciation................................ (20,335) (28,262)
--------- ---------
Net property, plant and equipment...................... $ 115,625 $ 108,246
========= =========
At December 31, 2000, net property, plant and equipment totaling $8.9
million was reclassified to operations held for sale prior to the adjustment to
fair value.
8. INTANGIBLE ASSETS:
Intangible assets at December 31, 1999 and 2000, consist of the
following:
1999 2000
--------- ---------
(IN THOUSANDS)
Goodwill................................................................... $ 197,352 $ 169,762
Noncompete agreements...................................................... 1,206 922
Permits.................................................................... 1,483 2,688
--------- ---------
Total................................................................ $ 200,041 $ 173,372
Less-Accumulated amortization.............................................. (7,008) (10,563)
--------- ---------
Net intangible assets................................................ $ 193,033 $ 162,809
========= =========
F-13
U S LIQUIDS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Goodwill represents the excess of cost over net assets of acquired
businesses and is amortized on a straight-line basis over forty years. The
remaining intangible assets are recorded at cost and are being amortized on a
straight-line basis over one to seventeen years. Amortization expense of
intangible assets for the years 1998, 1999 and 2000 was $2.0 million, $5.0
million and $5.7 million, respectively. At December 31, 2000, net goodwill
totaling $27.9 million was reclassified to operations held for sale prior to the
adjustment to fair value.
9. ACCRUED LIABILITIES:
Accrued liabilities at December 31, 1999 and 2000, consist of the
following:
1999 2000
-------------- -------------
(IN THOUSANDS)
Accrued salaries............................................................................. $ 3,608 $ 5,576
Income and other taxes payable............................................................... 698 603
Accrued professional fees and legal reserves................................................. 1,321 3,551
Accrued acquisition costs.................................................................... 2,972 -
Accrued special charges...................................................................... 9,505 3,858
Accrued processing costs..................................................................... 1,404 3,840
Accrued remediation and disposal reserves.................................................... 474 520
Accrued insurance............................................................................ 1,989 2,473
Current portion contract reserve (see Note 10 below)......................................... 4,500 -
Other........................................................................................ 952 5,173
-------------- -------------
Total accrued liabilities................................................................. $27,423 $25,594
============== =============
10. CONTRACT RESERVE:
The contract reserve at December 31, 1999 and 2000, consists of the
following:
1999 2000
-------------- --------------
(IN THOUSANDS)
Total reserve............................................................................. $16,066 $ -
Less -- Current portion................................................................... (4,500) -
-------------- --------------
Contract reserve.......................................................................... $11,566 $ -
============== ==============
The contract reserve represented the estimated deferred acquisition
costs associated with the purchase of City Environmental, Inc. ("CEI") from
Waste Management, Inc. ("WMI") in May 1998. In connection with the acquisition
of the assets of CEI, the Company and WMI entered into a disposal agreement
pursuant to which the Company agreed, for a period of 20 years, to deliver to
certain landfills operated by WMI, all of the nonhazardous waste generated from
the operations of CEI. During each of the first five years of this arrangement,
the amount to be paid by the Company to WMI for the first 120,000 cubic yards of
delivered waste was to be above market prices. During each of the remaining 15
years of this arrangement, the amount paid was to be at market prices. In
addition, WMI agreed, for a period of 20 years, to deliver to the Company for
processing and disposal all landfill leachate (up to a maximum of 35 million
gallons per year) from certain landfills operated by WMI. The processing fee
paid by WMI for delivered landfill leachate and the market price portion of the
landfill fee paid by the Company to WMI for delivered nonhazardous waste was to
be adjusted to reflect any increase in the Consumer Price Index. The Company
also agreed, for a period of 14 years commencing on May 2003, to pay to WMI a
monthly royalty fee equal to 6% of the net revenues derived from the assets of
CEI. The balance in the contract reserve account represented management's
estimate of the excess future payments for landfill fees above market prices to
be paid by the Company to WMI during the first five years of the landfill
disposal agreement. On December 20, 1999, the Company notified WMI that the
Company was exercising its right to terminate the disposal agreement under the
"force majeure" provision, as a result of the temporary closure of the Detroit
facility. Although WMI initially disputed the Company's right to terminate the
disposal agreement, an agreement was reached on December 21, 2000 to settle the
dispute and terminate the disposal agreement and related royalty agreement. The
leachate agreement remains in effect. Under the terms of the settlement, over
the next two years, the Company will pay to WMI $3.3 million. As such, on
December 21, 2000, the settlement was accrued for $3.3 million and the entire
balance of the contract reserve totaling $16.1 million was removed for a net
special
F-14
U S LIQUIDS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
income effect of $12.8 million. At December 31, 2000, the remaining accrual
under the settlement agreement was $2.8 million, of which $1.5 million is
current and included in accrued liabilities and the remainder of $1.3 million is
classified as other long-term liabilities.
11. REVENUES:
The components of domestic and foreign revenue are as follows:
YEARS ENDED DECEMBER 31,
-------------------------------------------------
1998 1999 2000
------------- --------------- --------------
(IN THOUSANDS)
United States.......................................................... $ 121,460 $ 226,566 $ 237,985
Canada................................................................. - 5,217 9,874
------------- --------------- --------------
Total............................................................ $ 121,460 $ 231,783 $ 247,859
============= =============== ==============
The sales and service revenue components are as follows:
YEARS ENDED DECEMBER 31,
-------------------------------------------------
1998 1999 2000
------------- --------------- --------------
(IN THOUSANDS)
Collection, processing and disposal service revenues.................. $ 93,228 $ 196,579 $ 201,861
By-product sales...................................................... 28,232 35,204 45,998
------------- --------------- --------------
Total........................................................... $121,460 $ 231,783 $ 247,859
============= =============== ==============
12. INCOME TAXES:
For financial reporting purposes, income (loss) from continuing
operations before income taxes, reflecting domestic and international sources,
is as follows:
YEARS ENDED DECEMBER 31,
-------------------------------------------------
1998 1999 2000
------------- -------------- ------------
(IN THOUSANDS)
United States......................................................... $17,805 $ 984 $ (26,078)
Canada................................................................ - 377 (249)
------------- -------------- ------------
Income (loss) before provision (benefit) for income taxes....... $17,805 $ 1,361 $ (26,327)
============= ============== ============
The components of the provision (benefit) for income taxes are as
follows:
YEARS ENDED DECEMBER 31,
-------------------------------------------------
1998 1999 2000
------------- --------------- ------------
(IN THOUSANDS)
Current-
Federal............................................................ $ 4,272 $ 2,492 $ (3,488)
State.............................................................. 286 313 460
Foreign............................................................ - 138 (125)
------------- --------------- ------------
Total.......................................................... $ 4,558 $ 2,943 $ (3,153)
============= =============== ============
Deferred-
Federal............................................................ $ 2,192 $ (296) $ 1,836
State.............................................................. 283 (44) 378
Foreign............................................................ - - (11)
------------- --------------- ------------
Total.......................................................... $ 2,475 $ (340) $ 2,203
------------- --------------- ------------
Provision (benefit) for income taxes....................... $ 7,033 $ 2,603 $ (950)
============= =============== ============
F-15
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 (loss) before provision
(benefit) for income taxes result from the following:
YEARS ENDED DECEMBER 31,
----------------------------------
1998 1999 2000
-------- -------- -------
(IN THOUSANDS)
Tax at statutory rate........................................ $ 6,232 $ 476 $(9,214)
Add-
State taxes, net of federal benefit....................... 370 175 545
Differences in foreign tax rates.......................... - 6 17
Nondeductible expenses.................................... 150 1,372 757
Increase in valuation allowance........................... - 427 6,951
Other..................................................... 281 147 (6)
-------- -------- -------
Total provision (benefit) for income taxes............ $ 7,033 $ 2,603 $ (950)
======== ======== =======
The tax effects of significant temporary differences representing
deferred income tax assets and liabilities are as follows:
DECEMBER 31,
----------------------
1999 2000
-------- --------
(IN THOUSANDS)
Deferred income tax assets-
Reserves................................................................. $ 864 $ 2,521
Accrued expenses......................................................... 3,571 2,874
Net operating losses..................................................... 693 970
Tax credits.............................................................. - 2,008
Loss on operations held for sale or closure.............................. - 11,555
Other.................................................................... 83 -
Less: Valuation allowances............................................... (657) (7,748)
-------- --------
Total deferred income tax assets...................................... $ 4,554 $ 12,180
-------- --------
Deferred income tax liabilities-
Property, plant and equipment............................................ $ (3,035) $ (4,139)
Intangible assets (principally deductible goodwill amortization)......... (3,006) (10,454)
Prepaid expenses......................................................... (158) (307)
Other.................................................................... (887) (725)
-------- --------
Total deferred income tax liabilities................................. $ (7,086) $(15,625)
-------- --------
Net deferred income tax liabilities............................... $ (2,532) $ (3,445)
======== ========
For purposes of the United States consolidated federal income tax
return, the Company has net operating loss carryforwards of $909,000 and tax
credit carryforwards of approximately $2,008,000 available to offset taxable
income and tax of the Company in the future. In connection with certain
acquisitions, ownership changes occurred resulting in various limitations on net
operating loss carryforwards. The net operating loss carryforwards will begin to
expire in 2008. The tax credit carryforwards will begin to expire in 2006. The
Company also has state net operating loss carryforwards available to offset
future state taxable income that may or may not be utilizable in future periods.
The deferred income tax asset related to loss on operations held for sale or
closure contains timing differences for property, plant and equipment and
intangible assets, as well as estimated ordinary and capital tax losses.
Valuation allowances have been established for uncertainties in
realizing the benefits of tax attribute carryforwards. While the Company expects
to realize the deferred income tax assets in excess of the valuation allowance,
changes in estimates of future taxable income and tax laws may alter this
expectation. During 2000, the valuation allowance increased approximately
$7,091,000. Of this increase, $6,951,000 is due to the uncertainty of
realization of the loss on operations held for sale or closure for financial
statement purposes due to tax capital loss limitations. The remaining $140,000
increase relates to the uncertainty of realization of certain tax attributes of
purchased operations which was recorded as an adjustment to goodwill.
F-16
U S LIQUIDS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
For purposes of the Canadian federal income tax return, the Canadian
subsidiary of the Company generated a net operating loss carryforward of
approximately $574,000 in the 2000 tax year. The net operating loss carryforward
of the Canadian subsidiary will begin to expire in 2008. The Company does not
provide for U.S. income taxes on unremitted income of foreign subsidiaries as it
is the present intention of management to reinvest the unremitted earnings of
its foreign operations. Unremitted earnings of foreign subsidiaries are
approximately $128,000 at December 31, 2000. It is not practicable to determine
the amount of U.S. income taxes that would be payable upon remittance of the
assets that represent those earnings.
Net deferred income tax assets and liabilities are comprised of the
following:
DECEMBER 31,
-------------------------
1999 2000
-------- --------
(IN THOUSANDS)
Current deferred income tax assets (liabilities)-
Gross assets.......................................................... $ 3,999 $ 8,191
Gross liabilities..................................................... (158) (873)
-------- --------
Total, net......................................................... $ 3,841 $ 7,318
Non-current deferred income tax assets (liabilities)-
Gross assets.......................................................... $ 1,084 $ 3,989
Gross liabilities..................................................... (7,457) (14,752)
-------- --------
Total, net......................................................... $ (6,373) $(10,763)
-------- --------
Net deferred income tax liabilities................................ $ (2,532) $ (3,445)
======== ========
13. EARNINGS PER SHARE:
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 is illustrated below:
YEARS ENDED DECEMBER 31,
----------------------------------------------
1998 1999 2000
----------- ----------- -----------
(IN THOUSANDS, EXCEPT SHARE DATA)
Numerator:
For basic and diluted earnings per share-
Income (loss) available to common stockholders $ 10,772 $ (1,242) $ (25,377)
=========== =========== ===========
Denominator:
For basic earnings per share-
Weighted-average shares 10,316,739 15,323,910 15,797,505
Effect of Dilutive Securities:
Weighted-average stock options and warrants 1,320,467 - -
----------- ----------- -----------
Denominator:
For diluted earnings per share-
Weighted-average shares and assumed conversions 11,637,206 15,323,910 15,797,505
=========== =========== ===========
For the year ended December 31, 1998, the Company had 625,000 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.
For the years ended December 31, 1999 and December 31, 2000, the Company had a
loss which precluded calculating the potentially dilutive effect of 1,201,000
and 516,000 stock options and warrants, respectively, because to do so would
reduce the loss per share.
F-17
U S LIQUIDS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
14. LONG-TERM OBLIGATIONS:
The Company's long-term obligations at December 31, 1999 and 2000,
consist of the following:
1999 2000
------------ -------------
(In Thousands)
Revolving credit facility.................................................................... $ 93,000 $ 104,000
Equipment credit facility.................................................................... 2,516 2,041
Notes payable to individuals, interest at 8.5%, maturing January 2008, unsecured............. 1,087 1,078
Notes payable to employees and individuals (former shareholders of acquired companies),
interest ranging from non-interest bearing (accreting at 5.91%) to 5.9%, maturing
March 2000 to July 2006, unsecured........................................................ 5,459 2,910
Notes payable to corporations, interest ranging from 8.4% to 8.6% maturing November 2000 to
May 2001, unsecured....................................................................... 101 13
Obligations under capital leases, monthly payments ranging from $117 to $23,892, interest
ranging from 5.1% to 17.1%, expiring through 2005, secured by equipment
and vehicles.............................................................................. 1,276 1,067
Insurance premium notes, interest at 8%, maturing August 2001, unsecured..................... 1,387 700
------------ -------------
Total debt............................................................................. $ 104,826 $ 111,809
Less - Current maturities of total long-term obligations..................................... (5,327) (22,993)
Less - Debt associated with operations held for sale......................................... - (290)
------------ -------------
Total long-term obligations............................................................ $ 99,499 $ 88,526
============ =============
The Company has a revolving credit facility with a group of banks
under which it may borrow to fund working capital requirements. The Company's
fourth quarter results caused it to be out of compliance with certain financial
covenants of the credit facility. Effective March 19, 2001, the terms of the
revolving credit facility were amended to, among other things, reduce the
amount of the credit facility from $150 million to $120 million, limit the
total amount of debt outstanding under the credit facility to $115 million
except with the approval of the banks, and waive the Company's non-compliance
with all such covenants for all periods ended on or prior to December 31, 2000.
The credit facility matures on February 1, 2002. As of February 2001, the
Company has reflected the outstanding debt balance under the facility as a
current liability. Prior to the expiration of the revolving credit facility,
the Company must either extend the term of the credit facility or obtain an
alternative source of financing.
Amounts outstanding under the facility are secured by a lien on
substantially all of the assets of the Company. Availability under the credit
facility is tied to the Company's cash flows and liquidity. The credit
agreement contains affirmative, negative and subjective covenants, requires
the Company to comply with certain financial covenants, obtain the lenders'
consent before making any acquisitions, and prohibits the payment of cash
dividends. The debt may be accelerated upon a change in control of the Company
or the departure of either Michael P. Lawlor or Earl J. Blackwell without a
suitable replacement. Interest on the outstanding balance is due quarterly.
Advances bear interest, at the Company's option, at the prime rate or LIBOR,
in each case, plus a margin which is calculated quarterly based upon the
Company's ratio of indebtedness to cash flow. As of December 31, 2000, amounts
outstanding under the credit facility were accruing interest at approximately
10.2% per year. The Company has agreed to pay a commitment fee varying from
0.35% to 0.55% on the unused portion of the facility. As of December 31, 2000,
the unused portion of the facility was $46 million of which $21 million was
available, including $745,000 in letters of credit outstanding. After giving
effect to the reduction of the amount of the facility in March 2001, the
unused portion of the facility was $16 million of which $11 million was
available, including $745,000 in letters of credit outstanding.
As a result of the March 2001 amendment, the amount of the credit
facility will be reduced by $5 million on each of July 31, 2001 and December
31, 2001. In addition, unless the amount of the credit facility has previously
or concurrently been reduced by at least $10 million, the amount of the credit
facility will be permanently reduced by an amount equal to the net cash
proceeds received by the Company from any sale of assets not in the ordinary
course of business (which includes the operations held for sale), any issuance
of equity (other than any equity issued under the employee stock purchase
plan), the issuance of certain debt, or any settlement of the Company's lawsuit
against National Steel Corporation. Reductions of the credit facility made as a
result of any such sale of assets, issuance of equity or debt, or settlement
with National Steel Corporation will be applied against the reductions of the
credit facility scheduled to be made on July 31, 2001 and December 31, 2001.
After such time as the amount of the credit facility has been reduced to $110
million, the amount of the credit facility will
F-18
U S LIQUIDS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
be permanently reduced by an amount equal to one hundred percent of the net
cash proceeds received from any sale of assets not in the ordinary course of
business and fifty percent of the net cash proceeds received by the Company
from any issuance of equity (other than equity issued under the employee stock
purchase plan), the issuance of certain debt, or any settlement with National
Steel Corporation. As the operations held for sale are classified as current,
per the amended credit agreement, the cash proceeds expected to be received
from the sale of assets are classified as current maturities of long-term
obligations. The terms of the March 2001 amendment to the credit facility also
reduce the amount of secured debt that the Company may owe to third parties
from $20 million to $5 million, limit the amount of capital expenditures that
the Company can make in any fiscal year, and increase the interest rates
payable under the credit facility. Concurrent with the reduction of the credit
facility in March 2001, the Company estimates that it will write-off $140,000
of deferred financing costs.
During 1999, the Company had a $10 million credit facility with Bank
Boston, N.A. under which it was able to borrow funds to purchase equipment. The
commitment for this facility expired on December 31, 1999, at which time the
Company had borrowed approximately $2.5 million. This amount is being repaid in
60 monthly installments of principal and interest at 8.2%.
Principal payments of long-term debt and capital lease obligations in
excess of one year as of December 31, 2000, are as follows:
LONG-TERM CAPITAL
DEBT LEASES
------------ ------------
(IN THOUSANDS)
YEARS ENDING DECEMBER 31,
2001................................................................. $ 22,111 $ 1,328
2002................................................................. 83,748 913
2003................................................................. 495 800
2004................................................................. 492 556
2005................................................................. 430 6
Thereafter........................................................... 1,425 -
------------- ------------
$ 108,701 $ 3,603
Less - Amount representing interest.................................. - (495)
------------- ------------
Total........................................................... $ 108,701 $ 3,108
============= ============
15. STOCK PLANS:
STOCK OPTIONS AND WARRANTS
On November 20, 1996, the Company 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. At December 31, 2000, 594,838 options were available
to be granted under the plan. 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, the Company 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. All options for employees
and directors have an exercise price based on fair market value at the date of
grant.
The Company issued 1,000,000 stock warrants in 1996 in connection with
its Campbell Wells acquisition. The remaining warrants were issued in 1997 and
1998 for the Company's initial public offering, consulting services for
acquisitions and as compensation for corporate consulting. Warrants issued in
connection with acquisitions or common stock offerings were capitalized based
on the fair market value of the warrants on the date of grant. Stock warrants
and options issued as compensation for corporate consulting activities were
expensed as incurred.
F-19
U S LIQUIDS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The following table summarizes activity under the Company's stock
option plans and warrants granted:
1998 1999 2000
---------------------- --------------------- ----------------------
OPTIONS WARRANTS OPTIONS WARRANTS OPTIONS WARRANTS
--------- --------- --------- --------- --------- ---------
Options and warrants outstanding, beginning of year 775,125 1,215,000 1,489,792 1,235,000 1,378,182 1,076,250
Granted (per share)
1998 ($.02-$21.875) 888,500 20,000
1999 ($6.688-$22.50) 845,722 -
2000 ($2.25-$8.625) 532,500 -
Exercised (per share)
1998 ($.02-$14.125) (110,583) -
1999 ($.02-$11.40) (76,000) (85,184)
2000 ($.02) (2,500) -
Forfeitures (per share)
1998 ($.02-$14.125) (63,250) -
1999 ($.02-$21.875) (881,332) (73,566)
2000 ($6.68-$21.875) (281,223) -
--------- --------- --------- --------- --------- ---------
Options and warrants outstanding, end of year 1,489,792 1,235,000 1,378,182 1,076,250 1,626,959 1,076,250
========== ========= ========= ========= ========= =========
The following table summarizes information about stock options
outstanding at December 31, 2000:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
- --------------------------------------------------------------------- ------------------------------
WTD. AVG.
NUMBER REMAINING NUMBER WTD. AVG.
RANGE OF OUTSTANDING CONTRACTUAL WTD. AVG. EXERCISABLE EXERCISE
EXERCISE PRICES AT 12/31/00 LIFE (YEARS) EXERCISE PRICE AT 12/31/00 PRICE
--------------- ----------- ----------- -------------- ----------- ----------
$ .02 183,125 6.8 $ .02 183,125 $ .02
2.25-15.38 916,333 8.4 6.94 403,169 9.52
16.00-22.50 527,501 8.0 20.33 292,687 20.40
--------------- ----------- ----------- -------------- ----------- ----------
$ .02-22.50 1,626,959 8.1 $ 10.50 878,981 $ 11.16
=============== =========== =========== ============== =========== ==========
F-20
U S LIQUIDS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
EMPLOYEE STOCK PURCHASE PLAN
In December 1999, the Company implemented an Employee Stock Purchase
Plan ("ESPP") which allows employees to purchase shares from the Company's
authorized but unissued shares of common stock, shares of common stock
reacquired by the Company or any combination thereof.
The Company's ESPP provides for maximum purchases of 500,000 shares in
aggregate. Full-time employees are eligible to purchase shares during six month
purchase periods with payroll deductions ranging from 1% to 10% of compensation.
No participant will be granted an option under the ESPP (i) if, immediately
after the grant, the participant would own stock and/or hold outstanding options
to purchase stock possessing 5% or more of the total combined voting power or
value of all classes of stock of the Company or (ii) which permits the
participant's rights to purchase stock under all employee stock purchase plans
of the Company to accrue at a rate which exceeds $25,000 of fair market value of
such stock (determined at the time such option is granted) for each calendar
year in which such option is outstanding at any time. The purchase price per
share is 85% of the lower of the market price on the first or last business day
of the purchase period.
SFAS 123 DISCLOSURES
As permitted by SFAS No. 123, "Accounting for Stock-Based
Compensation," the Company applies Accounting Principles Board ("APB") Opinion
25, "Accounting for Stock Issued to Employees," and related interpretations in
accounting for its stock-based compensation plans. APB Opinion 25 does not
require compensation costs to be recorded on options which have exercise prices
at least equal to the market price of the stock on the date of grant. APB No. 25
also provides for no compensation to be recognized for ESPP's where the discount
does not exceed 15%. Accordingly, no compensation cost has been recognized for
the Company's stock-based plans. Had compensation cost for the Company's
stock-based compensation plans been determined based on the fair value at the
grant dates for awards under those plans consistent with the optional method
prescribed by SFAS No. 123, the Company's net income (loss) and net income
(loss) per share would have been adjusted to the pro forma amounts indicated
below (in thousands, except per share data):
1998 1999 2000
------------ ------------ ------------
Net income (loss), As reported $ 10,772 $ (1,242) $ (25,377)
Pro forma 9,007 (6,987) (25,862)
Basic earnings (loss) per share, As reported $ 1.04 $ (.08) $ (1.61)
Pro forma 0.87 (.46) (1.64)
Diluted earnings (loss) per share, As reported $ 0.93 $ (.08) $ (1.61)
Pro forma 0.77 (.46) (1.64)
The effects of applying SFAS No. 123 in the disclosure may not be
indicative of future amounts. SFAS No. 123 does not apply to options
awarded prior to 1995 and additional awards in future years are anticipated.
The fair value of each employee stock option granted and purchase
rights exercised under the ESPP were estimated using the Black-Scholes pricing
model with the following assumptions:
1998 1999 2000
------------- ------------- -------------
Expected stock price volatility.............................. 34.91%-41.19% 49.16%-86.03% 70.00%-80.71%
Risk-free interest rate...................................... 5.14%-5.99% 5.20%-6.61% 5.05%-7.08%
Expected life of options..................................... 10 years 10 years .5-10 years
Expected dividend/yield...................................... - - -
During 2000, 532,500 options were granted to employees which had a
weighted average fair value of $4.13 per option and a weighted average exercise
price of $4.92 per option.
F-21
U S LIQUIDS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
16. STOCK REPURCHASES:
During September 1999, the Company repurchased and immediately
cancelled 386,114 shares of its common stock for an aggregate purchase price of
$3,000,000. During 2000, the Company repurchased and subsequently reissued
61,800 shares of common stock to employees pursuant the Company's ESPP. See Note
15.
17. EMPLOYEE BENEFITS:
The Company sponsors a 401(k) retirement plan established in 1998 under
which all employees may choose to save a portion of their salary on a pretax
basis, subject to certain IRS limits. The Company matches employee contributions
on a discretionary basis and also provides for a discretionary profit sharing
contribution. The Company recorded $303,000, $716,000 and $997,000 in
compensation expense related to this plan for the years ended December 31, 1998,
1999 and 2000, respectively.
18. RELATED PARTY TRANSACTIONS:
On December 31, 1998, the Company sold to a company owned by a then
director of the Company substantially all of the assets used in the distribution
of various by-products of the Company's grease processing facilities. These
by-products had previously been sold by the Company primarily to producers of
livestock feed and chemicals located in Mexico. The purchase price for these
assets was approximately $1.7 million, of which approximately $1.1 million was
paid to the Company in March 1999. The remainder of the purchase price is a note
receivable payable in monthly installments continuing through February 1, 2004,
and is included in other assets. As of December 31, 2000, the uncollected
balance of approximately $550,000 was fully reserved for as the balance was
deemed uncollectible. However, the Company is pursuing legal action to fully
recover the outstanding balance and in January 2001 notified the former director
that it was immediately terminating a supply agreement under which the Company
had agreed to sell to the former director's company at market value all fats,
oils and feed proteins that the Company recovers from certain waste streams and
that conform to certain specifications.
On May 15, 1999, the Company acquired the common stock of Royal
Recycling Ltd., a Canadian corporation. In connection with the acquisition, the
Company issued notes payable to the former shareholder of Royal who subsequently
became an employee of the Company. The notes payable were issued to cover
additional payments of the purchase price and to extinguish the "earn-out"
provisions of the purchase agreement. The total amount payable at December 31,
1999 was $1,914,517, with $864,155 paid in January 2000. The remaining balance
was paid in July 2000.
On July 29, 1999, the Company acquired substantially all of the assets
of EMAX, Inc. In connection with the acquisition the Company agreed to pay a
portion of the purchase price over seven years plus interest at 5.9% per annum
to the shareholders of EMAX, Inc. One of the shareholders was an employee of the
Company at December 31, 2000. The balance outstanding at December 31, 2000 was
$2.6 million, of which $1.3 million was owed to the USL employee.
On September 21, 2000, the Company acquired certain assets of Safari
Environmental Management Services LLC ("Safari"). In connection with the
acquisition, the Company issued notes payable to the three former owners of
Safari. The total amount payable at December 31, 2000 is $206,725 and is due in
four equal annual installments beginning on the first anniversary date of the
sale.
On December 2, 2000, an earn-out agreement was reached between the
Company and a former owner of Reclamation Technology Management, Inc., a
subsidiary acquired in April 1998. Per this settlement agreement, the Company
agreed to pay to the former owner $150,000 due in quarterly installments
beginning in March 2001.
19. COMMITMENTS AND CONTINGENCIES:
CLOSURE BONDS AND LETTERS OF CREDIT
At December 31, 2000, bonds and letters of credit for the ultimate
closure of facilities totaling $5.0 million were posted with the states of
Arizona, Texas, Illinois, California and Florida and with the District of
Columbia.
F-22
U S LIQUIDS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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. In addition, the
Company is partially self-insured for employee group health claims. 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.
NONCOMPETE AND OILFIELD WASTE DISPOSAL AGREEMENTS
In connection with the Campbell Wells acquisition, the Company acquired
a long-term disposal agreement with Newpark Resources, Inc. ("Newpark") for the
processing and disposal of oilfield waste generated offshore in the Gulf Coast
region. This disposal agreement obligated Newpark to deliver to the Company
specified amounts of oilfield waste for treatment and disposal at certain of the
Louisiana landfarms. However, during 1998, a dispute arose between the Company
and Newpark concerning Newpark's obligations under the disposal agreement. In
September 1998, the Company terminated the long-term disposal agreement and
entered into a new agreement with Newpark covering the remaining 33-month
period. Under the terms of this new disposal agreement, during the twelve-month
periods ending June 30, 1999, 2000 and 2001, the Company agreed to process and
dispose of up to 375,000, 500,000 and 500,000 barrels of oilfield waste,
respectively. In return, Newpark agreed to pay the Company a disposal fee of not
less than $30.0 million. Newpark paid the Company $6.0 million of the disposal
fee in 1998, $11.0 million in 1999 and $9.2 million in 2000. Due to prior
collection uncertainties, the Company has in the past, and intends in the
future, to account for these payments as revenues as they are collected. The
remainder of the disposal fee is required to be paid to the Company in monthly
installments continuing through June 2001. The contract is cancelable at the
Company's option upon Newpark's failure to make timely payments. In December
2000, Newpark exercised an option to extend the term of the disposal agreement.
Pursuant to the terms of this option, during the twelve-month period ending June
30, 2002, Newpark may deliver to the Company for processing and disposal up to
1,000,000 barrels of oilfield waste. In return, Newpark will pay the Company a
fee of not less than $8.0 million. With the Company's consent, Newpark may
deliver additional amounts of oilfield waste to the Company for processing and
disposal at a specified price per barrel. Subject to certain conditions, Newpark
may extend the term of the disposal agreement for an additional year at a cost
of approximately $8.0 million.
Provided that Newpark continues to fulfill its obligations under the
disposal agreement, the Company is prohibited, until June 30, 2002, from (i)
accepting from any customer other than Newpark any oilfield waste generated in a
marine environment or transported in a marine vessel, and (ii) engaging in the
site remediation and closure business, in each case within the states of
Louisiana, Texas, Mississippi and Alabama, and the Gulf of Mexico. The term of
these prohibitions will be extended until June 30, 2003 if Newpark exercises its
final option to extend the term of the disposal agreement for an additional
year.
LEASES
The Company leases office facilities and certain equipment under
noncancelable operating leases for periods ranging from one to 23 years. Rent
expense was approximately $4.2 million, $8.5 million and $8.6 million for the
years ended December 31, 1998, 1999 and 2000, respectively. The following table
presents future minimum rental payments under noncancelable operating leases
with terms in excess of one year:
OPERATING LEASES
----------------
(IN THOUSANDS)
YEAR ENDING DECEMBER 31,
2001............................................................ $ 3,758
2002............................................................ 2,966
2003............................................................ 2,106
2004............................................................ 1,593
2005............................................................ 1,494
Thereafter...................................................... 10,710
-------------
Total.................................................... $ 22,627
=============
F-23
U S LIQUIDS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
REGULATORY PROCEEDINGS
In May 1998, the Company acquired from Waste Management, Inc.
substantially all of the assets of City Environmental, Inc. including, without
limitation, a hazardous and nonhazardous waste treatment facility located in
Detroit, Michigan. This facility has never been granted a final Part B permit
under the Resource Conservation and Recovery Act of 1976 ("RCRA"), but has
operated under interim status, as allowed by RCRA. On August 25, 1999, the EPA
and the Federal Bureau of Investigation ("FBI") executed a search warrant at
this facility, seeking electronic data, files and other documentation relating
to the facility's receipt, processing and disposal of hazardous waste. As a
result of the execution of the search warrant, the facility temporarily ceased
operations. According to the affidavit attached to the search warrant, after
receiving a telephone call from an employee at the facility in May 1999, the EPA
and the FBI began a joint investigation of the facility. The investigation
centers around allegations that (i) the facility knowingly discharged into the
Detroit sewer system untreated hazardous liquid waste in violation of city
ordinances, the facility's permit and the Clean Water Act, and (ii) without
proper manifesting, the facility knowingly transported and disposed of hazardous
waste at an unpermitted treatment facility in violation of RCRA. According to
the affidavit, the facility has been knowingly violating the Clean Water Act and
RCRA since 1997, which was before the Company acquired the facility. The on-site
investigation of the facility by the EPA and the FBI was completed in August
1999. It is the Company's understanding that the investigation is continuing,
but as of the date of this report, no announcement regarding the investigation
has been made by the EPA or the FBI. All costs, except potential fines or
penalties, incurred or expected to be incurred in connection with the
investigation of the Detroit facility have been reflected in the Company's
consolidated financial statements at December 31, 2000. See Note 3. However, due
to the current status of the investigation, the Company is unable at this time
to project a reasonable estimate of potential fines or penalties (or range of
potential fines or penalties) that could be assessed against the facility.
Accordingly, the Company cannot project the ultimate outcome of the
investigation or its potential impact. The imposition of a substantial fine or
penalty against the facility could have a material adverse effect on results of
operations, financial condition and liquidity.
After the completion of the on-site investigation of the Detroit
facility, the Company began conducting routine tests of materials in waste
solidification vaults in preparation for the reopening of the facility. During
these tests, the Company discovered that certain waste which had been received
by the facility prior to its August 25, 1999 closing was contaminated with PCBs,
that this waste had contaminated other waste in several of the waste
solidification vaults and a liquid feed tank, and that some of the PCB
contaminated waste may have been inadvertently delivered to a Waste Management
landfill for disposal. Shortly thereafter, Waste Management asserted a claim
against the Company for damages relating to the disposal of PCB contaminated
materials at its landfill. In December 2000, the Company agreed to reimburse
Waste Management for the cost of disposing of all PCB contaminated materials
that were inadvertently delivered to its landfill. Based upon the information
available, the Company has continued to maintain a reserve to cover the costs of
disposing of any improperly delivered PCB contaminated materials. As of December
31, 2000, the balance of this reserve was $1.3 million.
Shortly after the discovery of the PCB contamination, the Company
determined that a subsidiary of National Steel Corporation generated the PCB
contaminated materials and that the materials were not properly identified as
required by law when delivered to the Detroit facility. The Company has filed
suit against National Steel seeking to recover the costs incurred and losses
suffered by the facility as a result of its subsidiary's failure to disclose
that its waste was contaminated with PCBs, including any amounts ultimately
determined to be owed by the Company to Waste Management.
In addition to filing suit against National Steel, the Company also
submitted claims under its pollution liability insurance policy and its property
damage/business interruption insurance policy for losses incurred as a result of
the temporary closing of the facility and the delivery of any PCB contaminated
waste to Waste Management's landfill. The Company's claim under the pollution
liability policy has been denied and it does not intend to pursue this claim
further. The Company is currently awaiting a response from the insurance company
on its claim under the property damage/business interruption policy.
During the fourth quarter of 1999, the EPA notified the Company that it
had determined that the Detroit facility was no longer eligible to receive waste
generated as a result of removal or remedial activities under the Comprehensive
Environmental Response Compensation and Liability Act ("CERCLA"). This
notification further advised that, in order for the facility to regain its
eligibility to receive such CERCLA waste, the facility must demonstrate that it
can again safely handle such waste. In accordance with the terms of the notice,
the Company has asked the EPA to reconsider its determination and it is
currently awaiting a response to this request. Although the Company believes
that the EPA will ultimately determine that the facility, as re-opened, can
safely handle CERCLA waste, there can
F-24
U S LIQUIDS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
be no assurances thereof. The facility's failure to regain its eligibility to
receive CERCLA waste would not have a material adverse impact upon the
operations of the facility.
In June 1999, the Company was notified that the Louisiana Department of
Environmental Quality (the "LDEQ") was seeking to terminate the discharge permit
held by the Re-Claim Louisiana facility, which allows the facility to discharge
processed wastewater into the waters of the State of Louisiana. In its notice,
the LDEQ alleged that the proposed termination was justified based upon, among
other things, the facility's failure to comply with the terms of its permit, two
releases (spills) that occurred at the facility, and the facility's acceptance
and processing of hazardous materials not covered by the terms of its permit. In
January 2000, the Company entered into a tentative settlement agreement with the
LDEQ resolving the LDEQ's allegations. A settlement agreement was prepared by
the parties and signed by the Company, and the terms of the settlement agreement
have been published in accordance with Louisiana law. Under the terms of the
settlement agreement, the Company agreed to pay a civil assessment of $525,000
to the LDEQ. In addition, the Company agreed to contribute $675,000 to certain
Supplemental Environmental Projects ("SEPs") approved by the LDEQ to benefit the
environment. In return, the LDEQ agreed to take no further action on its notice
of intent to terminate the permit held by the Company's facility. These charges,
which total $1.2 million, remain accrued as of December 31, 2000. This
settlement agreement will not become final until approved by the Louisiana
Attorney General. This approval has been delayed pending the enactment of
legislation clarifying the LDEQ's authority to use SEPs as part of its
enforcement proceedings. The Company anticipates that the settlement agreement
will become final during 2001.
In the fourth quarter of 1999, the EPA notified the Company of certain
alleged violations of RCRA by its Re-Claim Louisiana facility. Among other
things, the EPA alleged that the facility accepted waste from CERCLA sites that
it was not permitted to accept and improperly disposed of such waste. Although
the Company disputes the EPA's allegations, it is attempting to negotiate a
resolution with the EPA which may include a civil assessment, modifications to
the waste screening and waste processing procedures and/or additional capital
expenditures at the facility. The Company believes that the ultimate outcome of
this proceeding will not have a material adverse effect on its business, results
of operations or financial condition.
The EPA also notified the Company in 1999 that it believed that
approximately 3.0 million gallons of liquid waste received by the Re-Claim
Louisiana facility and stored off-site may contain hazardous constituents and,
therefore, the waste could not be processed by the Company's facility. Although
the Company believed that the waste could be handled as nonhazardous waste in
accordance with the terms of the facility's permit, the Company has delivered a
portion of the waste to a third party for disposal and is discussing with the
EPA whether the remaining waste may be processed by the facility. During 1999,
the Company established a $2.5 million reserve for costs incurred in the event
that it was ultimately determined that this waste had to be delivered to a third
party for processing and disposal. Additional adjustments were made in 2000, and
as of December 31, 2000, approximately $1.2 million of this reserve remains
accrued.
During October and November of 1999, the California Department of Toxic
Substances Control (the "DTSC") inspected the Company's processing facility in
East Palo Alto, California, and its transfer facility in Redwood City,
California. On November 29, 1999, the DTSC issued a summary of violations
identifying various alleged violations of California hazardous waste management
laws and regulations by the facilities. The DTSC has not initiated a formal
enforcement action seeking penalties against either facility. There can be no
assurance, however, that a formal enforcement action will not subsequently be
brought against one or both facilities. Although the Company disputes the
alleged violations, the Company is attempting to negotiate a resolution with the
DTSC. The Company believes that the ultimate resolution of these matters will
not have a material adverse effect on its business, results of operations, or
financial condition.
Prior to its acquisition by the Company in January 1999, Romic
Environmental Technologies Corporation ("Romic") had entered into an
administrative consent order with the EPA relating to the cleanup of soil and
groundwater contamination at its facility in East Palo Alto, California. A
remedial investigation of the facility has been completed by Romic and forwarded
to the EPA. Romic is nearing completion of a corrective measures study for
submission to the EPA. The EPA will review this study and approve a plan for
final site remediation. Prior to its acquisition by the Company, Romic had also
been notified by the EPA and the DTSC that it was a potentially responsible
party under applicable environmental legislation with respect to the Bay Area
Drum Superfund Site in San Francisco, California, the Lorentz Barrel and Drum
Superfund Site in San Jose, California and the Casmalia Resources Hazardous
Waste Management Facility located near Santa Barbara, California, each of which
was a drum reconditioning or disposal site previously used by Romic. With
respect to each of these drum reconditioning or disposal sites, Romic and a
number of other potentially responsible parties have entered into administrative
consent orders and/or agreements allocating each party's respective share of
the cost of remediating the
F-25
U S LIQUIDS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
sites. Romic's share under these consent orders and/or agreements is as follows:
Bay Area -- 6.872%; Lorentz -- 5.62% and Casmalia Resources -- 0.29%. Based upon
the information currently available, the Company has continued to maintain a
reserve to cover Romic's estimated costs to remediate the East Palo Alto
facility and the three drum reconditioning or disposal sites. As of December 31,
2000, the balance of this reserve was $4.0 million. Management believes that
this reserve is sufficient to satisfy Romic's obligations under the consent
orders and agreements; however, due to the complex, ongoing and evolving process
of investigating and remediating these sites, Romic's actual costs may exceed
the amount reserved.
In December 1999, the Company was notified by the EPA that D&H Holding
Co., Inc., a company that was acquired in the fourth quarter of 1998, is a
potentially responsible party under CERCLA with respect to the Lenz Oil Services
Superfund Site in DuPage County, Illinois. During the first quarter of 2001, the
Company and a number of other potentially responsible parties entered into a
consent decree allocating each party's respective share of the cost of
remediating this site. Based upon the information available, the Company has
continued to maintain a reserve to cover its share of the estimated costs to
remediate the Lenz Oil Services site. As of December 31, 2000, the balance of
this reserve was $150,000. The Company has made demand upon the former
stockholders of D&H Holding for indemnification against any costs that may be
incurred in connection with the remediation of this site.
The Company's non-saleable beverage operations, which operate under the
Parallel Products name, are subject to regulation by the U.S. Bureau of
Alcohol, Tobacco and Firearms (the "ATF"). In addition to regulating the
production, distribution and sale of alcohol and alcohol containing products,
the ATF is also responsible for collecting the federal excise taxes (the "FET")
that must be paid on distilled spirits, wine and beer. If alcoholic beverages on
which the FET have been paid are returned to bond at the Company's Parallel
Products' premises for destruction, the party who has paid the FET on the
destroyed product is entitled to a refund. When the Company's customers return
distilled spirits, wine or beer from commerce to one of its facilities for
destruction, the Company generally files a claim with the ATF on behalf of that
customer for refund of the FET paid on that product. The ATF periodically
inspects the Parallel Products facilities both to insure compliance with its
regulations and to substantiate claims for FET refunds. During the second
quarter of 2000, the ATF conducted an inspection at the Louisville, Kentucky
facility. At the conclusion of the inspection of the Louisville facility, the
ATF preliminarily notified the Company that it intends to deny certain refund
claims totaling approximately $1.2 million due to what the ATF alleges was
inadequate, incomplete or unsubstantiated supporting documentation. In addition,
the ATF has proposed a civil penalty of $30,000 based on the alleged defects in
the Company's documentation. During the third quarter of 2000, the ATF began an
inspection at the Company's Parallel Products facility in Rancho Cucamonga,
California. It is the Company's understanding that this investigation has been
completed, but as of the date of this report no announcement regarding the
investigation has been made by the ATF. The Company has worked closely with the
ATF throughout this inspection process and has implemented revised or upgraded
procedures at the facilities to assure that documentation for future refund
claims is in full compliance with the applicable requirements. The Company is
also engaging in discussions with the ATF concerning the potential denied claims
and believes that a satisfactory resolution can be reached. During 2000, the
Company established a reserve for any amounts that would be required to be paid
to its customers in the event any of their refund claims are ultimately denied
by the ATF and to cover the proposed civil penalty. As of December 31, 2000, the
total of this reserve was $1.1 million.
LITIGATION
During the third quarter of 1999, six purported securities class action
lawsuits were filed against the Company and certain of its officers and
directors in the United States District Court for the Southern District of
Texas, Houston Division. These lawsuits have been consolidated into a single
action styled IN RE: U S LIQUIDS SECURITIES LITIGATION, Case No. H-99-2785, and
the plaintiffs have filed a consolidated complaint. The consolidated complaint
alleges violations of Sections 11, 12(a)(2) and 15 of the Securities Act of 1933
(the "Securities Act") on behalf of purchasers of the Company's common stock in
its March 1999 public offering and Sections 10(b) and 20(a) of the Securities
Exchange Act of 1934 (the "Exchange Act") and Rule 10b-5 promulgated thereunder
on behalf of purchasers of the Company's common stock during the period
beginning on May 12, 1998 and ending on August 25, 1999. The plaintiffs
generally allege that the defendants made false and misleading statements and
failed to disclose allegedly material information regarding the operations of
the Company's Detroit facility and the Company's financial condition in the
prospectus relating to the Company's March 1999 stock offering and in certain
other public filings and announcements made by the Company. The remedies sought
by the plaintiffs include designation of the action as a class action,
unspecified damages, attorneys' and experts' fees and costs, rescission to the
extent any members of the class still hold common stock, and such other relief
as the court deems proper. During 2000, the Company filed a motion to dismiss
the plaintiffs' consolidated complaint. In January 2001, the court entered an
Order of Partial Dismissal which dismissed the claims asserted by the plaintiffs
F-26
U S LIQUIDS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
under Sections 10(b) and 20(a) and Rule 10b-5 of the Exchange Act, but granted
the plaintiffs leave to file an amended complaint. The deadline for filing an
amended complaint has passed and the plaintiffs recently advised the court that,
while preserving all of their rights regarding the claims under Sections 10(b)
and 20(a) of the Exchange Act, they will proceed on the current complaint as
affected by the Order of Partial Dismissal. Accordingly, it is the Company's
understanding that the lawsuit is proceeding with respect to the claims asserted
under Sections 11, 12(a)(2) and 15 of the Securities Act only.
In addition, one stockholder of the Company has filed a lawsuit against
certain of the officers and directors of the Company in connection with the
operation of the Company's Detroit facility and the securities class action
described above. BENN CARMICIA V. U S LIQUIDS INC., ET AL., was filed in the
United States District Court for the Southern District of Texas, Houston
Division, on September 15, 1999 and was subsequently consolidated with the
claims asserted in the securities class action described above. The plaintiff
purports to allege breaches of fiduciary duty resulting from their oversight of
the Company's affairs. The lawsuit names the Company as a nominal defendant and
seeks compensatory and punitive damages on behalf of the Company, interest,
equitable and/or injunctive relief, costs and such other relief as the court
deems proper. The Company believes that the stockholder derivative action was
not properly brought and has filed a motion to dismiss this action in order to
allow the Board of Directors to consider whether such litigation is in the best
interest of the Company and its stockholders. As of the date of this report, no
ruling has been made by the court on the motion to dismiss.
On April 21, 1998, the Company acquired substantially all of the assets
of Parallel Products, a California limited partnership ("Parallel"). In addition
to the consideration paid at closing, the Company agreed that, if the earnings
before interest, taxes, depreciation and amortization ("EBITDA") of the
businesses acquired from Parallel exceeded a specified amount in any four
consecutive quarters during the three year period after the closing of the
acquisition, the Company would pay to Parallel an additional $2.1 million in
cash and an additional $2.1 million in common stock. During the third quarter of
2000, Parallel filed suit against the Company alleging that the acquired
businesses achieved the specified EBITDA amount for the four quarters ended
December 31, 1999 and for the four quarters ended March 31, 2000. Parallel is
seeking a declaratory judgment that the EBITDA amount specified in the
acquisition agreement has been achieved and that it is entitled to receive the
contingent cash and stock payments described above. Parallel also alleges that
it is entitled to recover compensatory damages of $4.2 million, punitive
damages, interest, attorneys' fees and costs, and such other relief as the court
deems proper. The Company has denied that it has any liability to Parallel and
has filed a counterclaim against Parallel alleging that Parallel breached
certain of the representations and warranties made in the acquisition agreement.
On August 30, 2000, the former owners of Randee Corporation, a
corporation that the Company acquired in June 1999, brought an action against
the Company in the District Court of Angelina County, Texas. The plaintiffs, who
received cash and Company common stock in consideration for their stock in
Randee Corporation, allege that the Company made false and misleading statements
and failed to disclose allegedly material information regarding the Company in
connection with the acquisition. The remedies sought by the plaintiffs include
rescission of the acquisition, unspecified compensatory and punitive damages,
and interest. The Company has denied the allegations made by the plaintiffs and
intends to vigorously defend itself in this action.
The Company's American Wastewater facility in Houston, Texas is the
larger of two facilities located in the Houston area that process and dispose of
grease trap waste collected by independent waste haulers. In recent months, a
potential competitor has been attempting to obtain a permit to build and operate
another grease trap waste disposal facility in Houston that would also service
independent waste haulers. On October 23, 2000, the Company and its subsidiary,
U S Liquids of Texas, Inc., were sued in the United States District Court for
the Southern District of Texas, Houston Division, in an action entitled
DOWNSTREAM ENVIRONMENTAL, L.L.C. AND DAN NOYES V. U S LIQUIDS INC., ET AL. In
this action, the plaintiffs allege, among other things, that (i) the Company's
employees have made false statements about the plaintiffs in an attempt to
generate opposition to their permit application, and (ii) the Company's facility
restrains trade in the grease trap waste disposal business by threatening to
refuse access to the facility to certain independent waste haulers or to impose
onerous requirements on such haulers for use of the facility; all for the
purpose of creating or maintaining a monopoly in the grease trap waste disposal
business in Houston, Texas. The plaintiffs are seeking, among other things,
preliminary and permanent injunctive relief, unspecified compensatory damages,
punitive and treble damages, interest, attorneys' fees and costs, and such other
relief as the court deems proper. The Company believes that the claims asserted
by the plaintiffs are without merit and intends to vigorously defend itself in
this action.
In April 1998, the Company acquired substantially all of the assets of
Betts Pump Service, Inc. in return for cash and shares of Company common stock.
As part of the transaction, Betts Pump agreed that it would not sell one-half of
the shares of Company common
F-27
U S LIQUIDS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
stock it received in the transaction for at least one year after the closing of
the transaction, and a restrictive legend to that effect was placed on the stock
certificate representing these shares. On January 31, 2001, Keith Betts, Betts
Pump and Betts Environmental, Inc. filed suit in the District Court of Kaufman
County, Texas against their former stockbroker and the Company alleging that
their stockbroker and the Company prevented the plaintiffs from selling the
restricted shares of Company common stock. The plaintiffs have also alleged,
among other things, that the Company made false and misleading statements and
failed to disclose allegedly material information regarding the Company in
connection with the acquisition. The plaintiffs are seeking unspecified
compensatory damages, treble damages under the Texas Deceptive Trade Practices -
Consumer Protection Act, punitive damages, interest, attorneys' fees and costs.
The Company denies that it has any liability to the plaintiffs and intends to
vigorously defend against these claims.
The Company's business is subject to numerous federal, state and local
laws, regulations and policies that govern environmental protection, zoning and
other matters. During the ordinary course of business, the Company has become
involved in a variety of legal and administrative proceedings relating to land
use and environmental laws and regulations, including actions or proceedings
brought by governmental agencies, adjacent landowners, or citizens' groups. In
the majority of the situations where proceedings are commenced by governmental
agencies, the matters involved relate to alleged technical violations of
licenses or permits pursuant to which the Company operates or are seeking to
operate, or laws or regulations to which its operations are subject or are the
result of different interpretations of applicable requirements. From time to
time, the Company pays fines or penalties in governmental proceedings relating
to its operations. The Company believes that these matters will not have a
material adverse effect on its business, results of operations or financial
condition. However, the outcome of any particular proceeding cannot be predicted
with certainty, and the possibility remains that technological, regulatory or
enforcement developments, results of environmental studies, or other factors
could materially alter this expectation at any time.
It is not possible at this time to predict the impact that the above
lawsuits, proceedings, investigations and inquiries may have on the Company, nor
is it possible to predict whether any other suits or claims may arise out of
these matters in the future. However, it is reasonably possible that the outcome
of any present or future litigation, proceedings, investigations or inquiries
may have a material adverse impact on the Company's consolidated financial
position or results of operations in one or more future periods. The Company
intends to defend itself vigorously in all the above matters.
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.
20. SEGMENT INFORMATION:
Prior to June 30, 1999, the Company's subsidiaries were organized into
two divisions - the Wastewater Division and the Oilfield Waste Division.
However, as a result of the acquisition of Romic Environmental Technologies
Corporation in January 1999, effective as of July 1, 1999, the Company created a
third division known as the Industrial Wastewater Division, and changed the name
of the Wastewater Division to the Commercial Wastewater Division. The Industrial
Wastewater Division currently includes the operations of Romic Environmental
Technologies Corporation, U. S. Liquids of Detroit, Inc., U. S. Liquids of
Florida, Inc. and Waste Research and Recovery, Inc. As a result of this change
in management and reporting structure, previously reported segment information
was restated in 1999 to reflect the current composition of each Division in
accordance with SFAS No. 131, "Disclosures about Segments of an Enterprise and
Related Information."
The Commercial Wastewater Division collects, processes and disposes of
nonhazardous liquid waste and recovers saleable by-products from certain waste
streams. The Industrial Wastewater Division collects, processes and disposes of
hazardous and nonhazardous waste and recovers saleable by-products from certain
waste streams. The Oilfield Waste Division processes and disposes of waste
generated in oil and gas exploration and production.
The accounting policies of the segments are the same as those described
in the summary of significant accounting policies. For purposes of this
presentation, general corporate expenses have been allocated between operating
segments on a pro rata basis based on revenues.
F-28
U S LIQUIDS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The following is a summary of key business segment information:
1998 1999 2000
----------------- ----------------- -----------------
(IN THOUSANDS)
Revenues-
Oilfield Waste........................................... $ 17,402 $ 18,542 $ 21,721
Commercial Wastewater.................................... 85,161 152,340 169,030
Industrial Wastewater.................................... 18,897 60,901 57,108
----------------- ----------------- -----------------
Total................................................ $121,460 $231,783 $247,859
================= ================= =================
Income (loss) from operations-
Oilfield Waste........................................... $ 8,062 $ 9,298 $ 9,081
Commercial Wastewater.................................... 7,040 (1,814) (36,691)
Industrial Wastewater.................................... 6,258 551 11,562
----------------- ----------------- -----------------
Total................................................ $ 21,360 $ 8,035 $(16,048)
================= ================= =================
Identifiable assets-
Oilfield Waste........................................... $ 33,513 $ 36,163 $ 36,948
Commercial Wastewater.................................... 150,550 212,158 187,759
Industrial Wastewater.................................... 61,152 110,709 115,505
Corporate................................................ 6,950 10,053 11,965
----------------- ----------------- -----------------
Total................................................ $252,165 $369,083 $352,177
================= ================= =================
Depreciation and amortization expense-
Oilfield Waste........................................... $ 2,384 $ 2,689 $ 2,335
Commercial Wastewater.................................... 4,258 9,421 11,558
Industrial Wastewater.................................... 1,238 3,940 4,544
Corporate................................................ 266 545 797
----------------- ----------------- -----------------
Total................................................ $ 8,146 $ 16,595 $ 19,234
================= ================= =================
Capital expenditures-
Oilfield Waste........................................... $ 1,192 $ 305 $ 2,109
Commercial Wastewater.................................... 11,374 12,802 11,866
Industrial Wastewater.................................... 434 2,523 3,921
Corporate................................................ 1,347 1,593 1,296
----------------- ----------------- -----------------
Total................................................ $ 14,347 $ 17,223 $ 19,192
================= ================= =================
Interest (income) expense, net-
Oilfield Waste........................................... $ (8) $ 8 $ 5
Commercial Wastewater.................................... 138 35 (8)
Industrial Wastewater.................................... 1 129 140
Corporate................................................ 3,386 6,631 10,561
----------------- ----------------- -----------------
Total................................................ $ 3,517 $ 6,803 $ 10,698
================= ================= =================
F-29
U S LIQUIDS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
21. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED):
Quarterly financial information for the years ended December 31, 1999
and 2000 are summarized as follows (in thousands, except per share data):
YEAR ENDED DECEMBER 31, 1999
----------------------------------------------------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
--------------- --------------- ---------------- --------------
Revenues................................................ $ 55,302 $ 58,695 $ 59,002 $ 58,784
Operating income (loss)................................. $ 8,662 $ 9,744 $ (5,258) $ (5,113)
Net income (loss)....................................... $ 4,180 $ 4,922 $ (4,835) $ (5,509)
Earnings (loss) per share:
Basic.............................................. $ 0.31 $ 0.31 $ (0.30) $ (0.35)
Diluted............................................ $ 0.28 $ 0.29 $ (0.30) $ (0.35)
YEAR ENDED DECEMBER 31, 2000
----------------------------------------------------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
--------------- --------------- ---------------- --------------
Revenues............................................... $ 58,178 $ 64,473 $ 63,022 $ 62,186
Operating income (loss)................................ $ 2,643 $ 4,379 $ 4,124 $(27,194)
Net income (loss)...................................... $ 105 $ 904 $ 789 $(27,175)
Earnings (loss) per share:
Basic............................................. $ 0.01 $ 0.06 $ 0.05 $ (1.72)
Diluted........................................... $ 0.01 $ 0.06 $ 0.05 $ (1.72)
The sum of the individual quarterly earnings per share amounts may not
agree with year-to-date earnings per share as each period's computation is based
on the weighted average number of shares outstanding during the period.
F-30