<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON AUGUST 19, 1997
REGISTRATION NO. 333-30065
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------------
AMENDMENT NO. 3
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
--------------------------
U S LIQUIDS INC.
(Exact name of Registrant as specified in charter)
DELAWARE 8980 76-0519797
(State or other jurisdiction (Primary Standard Industrial (I.R.S. Employer
of Classification Code Number) Identification
incorporation or organization) Number)
W. GREGORY ORR
PRESIDENT
411 N. SAM HOUSTON PARKWAY EAST, SUITE 400
HOUSTON, TEXAS 77060-3545
(281) 272-4500
(Name and address, including zip code, and telephone number, including
area code, of Registrant's principal executive offices and agent for service)
--------------------------
COPIES TO:
JOHN D. ROBERTSON, ESQ. HAYDEN J. TRUBITT, ESQ.
Hartzog Conger & Cason Brobeck, Phleger & Harrison LLP
201 Robert S. Kerr, Suite 1600 550 West C Street, Suite 1300
Oklahoma City, Oklahoma 73102 San Diego, California 92101-3532
(405) 235-7000 (619) 234-1966
--------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after this Registration Statement becomes effective.
--------------------------
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. / /
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
--------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
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<PAGE>
SUBJECT TO COMPLETION: AUGUST 19, 1997
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE A SALE OF ANY OF THESE
SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE
UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY
SUCH STATE.
<PAGE>
1,500,000 Shares
[LOGO]
Common Stock
All 1,500,000 shares of common stock, par value $.01 per share ("Common
Stock"), offered hereby are being sold by U S Liquids Inc., a Delaware
corporation (the "Company"). See "Underwriting" for a discussion of the factors
considered in determining the initial public offering price. Prior to this
offering, there has been no public market for the Common Stock. It is currently
anticipated that the initial public offering price for the Common Stock will be
between $8.50 and $10.50 per share. Application has been made to list the Common
Stock on the American Stock Exchange under the symbol "USL."
THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK.
SEE "RISK FACTORS" COMMENCING ON PAGE 6 OF THIS PROSPECTUS.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR
HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE
SECURITIES COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION
TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
PRICE UNDERWRITING PROCEEDS TO
TO PUBLIC DISCOUNTS(1) COMPANY(2)
<S> <C> <C> <C>
Per Share................................ $ $ $
Total(3)................................. $ $ $
</TABLE>
(1) Excludes a non-accountable expense allowance payable by the Company to the
representatives of the Underwriters (the "Representatives") and the value of
a warrant to be issued to the Representatives to purchase up to 112,500
shares of Common Stock at a price per share equal to 120% of the Price to
Public as shown above. The Company has agreed to indemnify the Underwriters
against certain liabilities, including liabilities under the Securities Act
of 1933, as amended. See "Underwriting."
(2) Before deducting expenses of the offering payable by the Company, estimated
at $747,000.
(3) The Company has granted the Underwriters a 45-day option to purchase up to
225,000 additional shares of Common Stock solely to cover over-allotments,
if any. To the extent that the option is exercised, the Underwriters will
offer the additional shares at the Price to Public as shown above. If such
option is exercised in full, the total Price to Public, Underwriting
Discounts and Proceeds to Company will be $ , $ and
$ respectively. See "Underwriting."
The shares of Common Stock are offered by the several Underwriters, subject
to prior sale, when, as and if delivered to and accepted by them, and subject to
the right of the Underwriters to reject any order in whole or in part. It is
expected that delivery of the certificates representing such shares will be made
against payment therefor at the offices of Van Kasper & Company, in San
Francisco, California on or about August , 1997.
VAN KASPER & COMPANY SANDERS MORRIS MUNDY
AUGUST , 1997
<PAGE>
[PHOTO]
A photograph of a nonhazardous commercial waste treatment facility owned by
the Company and a waste flow chart will be inserted here.
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK.
SPECIFICALLY, THE UNDERWRITERS MAY OVER-ALLOT IN CONNECTION WITH THE OFFERING
AND MAY BID FOR AND PURCHASE SHARES OF THE COMMON STOCK IN THE OPEN MARKET.
<PAGE>
PROSPECTUS SUMMARY
UNLESS OTHERWISE INDICATED BY THE CONTEXT, (I) THE "MESA COMPANIES" MEANS
MESA PROCESSING, INC., T&T GREASE SERVICE, INC. AND PHOENIX FATS & OILS, INC.,
EACH A TEXAS CORPORATION ACQUIRED BY THE COMPANY ON JUNE 17, 1997, (II) "AWW"
MEANS AMERICAN WASTEWATER INC., A TEXAS CORPORATION ACQUIRED BY THE COMPANY ON
JUNE 17, 1997, (III) "CAMPBELL WELLS" MEANS CAMPBELL WELLS, L.P. AND CAMPBELL
WELLS NORM, L.P., COLLECTIVELY, EACH OF WHICH IS A WHOLLY-OWNED SUBSIDIARY OF
SANIFILL, INC. ("SANIFILL"), (IV) THE "CAMPBELL WELLS ACQUIRED ASSETS" MEANS THE
ASSETS AND OPERATIONS OF CAMPBELL WELLS ACQUIRED BY THE COMPANY FROM CAMPBELL
WELLS/SANIFILL ON DECEMBER 13, 1996, (V) THE "CAMPBELL WELLS ACQUISITION" MEANS
THE COMPANY'S PURCHASE OF THE CAMPBELL WELLS ACQUIRED ASSETS AND (VI) THE
"PREDECESSOR" MEANS CAMPBELL WELLS TO THE EXTENT OF THE CAMPBELL WELLS ACQUIRED
ASSETS.
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED
INFORMATION AND THE FINANCIAL STATEMENTS AND NOTES THERETO APPEARING ELSEWHERE
IN THIS PROSPECTUS. EXCEPT AS OTHERWISE NOTED HEREIN, ALL INFORMATION IN THIS
PROSPECTUS ASSUMES NO EXERCISE OF THE UNDERWRITERS' OVER-ALLOTMENT OPTION. SEE
"UNDERWRITING."
THE COMPANY
The Company was formed in November 1996 to become a leading national
provider of services for the treatment, processing, recovery and disposal of (i)
nonhazardous liquid wastes, including nonhazardous commercial waste ("NCW")
generated by restaurants, meat processors, other food processors, grocery stores
and other generators and (ii) nonhazardous oilfield waste ("NOW") generated in
the exploration for and production of oil and natural gas. NCW currently handled
by the Company includes used cooking oil and other food processing residuals,
grease trap and grit trap waste, oil-contaminated water and other industrial and
commercial wastewater. NOW treated by the Company consists primarily of oil,
grease, chlorides and heavy metals found in oil-based and water-based drilling
fluids, as well as cuttings, saltwater, workover completion fluids, production
pit sludges and soil containing these materials. The Company's current
operations are in Louisiana and Texas.
The Company acquired the Mesa Companies and AWW in June 1997 in
pooling-of-interests transactions. The Mesa Companies and AWW are engaged in the
treatment and disposal of NCW and the processing of NCW to recover finished
products, including various grades of fats, oils and feed proteins, which are
sold primarily for use as ingredients in livestock feed and chemicals. The
Company's NCW operations include five facilities located throughout Texas which
process and recover finished products, two of which also treat and dispose of
other NCW. The Company operates a fleet of vehicles to collect NCW directly from
over 6,000 restaurants and other NCW generators and also receives NCW from
independent transporters servicing thousands of additional generators. In
December 1996, the Company acquired its NOW operations from Campbell
Wells/Sanifill, including five landfarming and landfilling facilities located in
Louisiana and Texas. During 1996, these facilities treated and disposed of
approximately 3.4 million barrels of NOW. Approximately 56.8% of the Company's
pro forma 1996 revenues of $31.1 million was derived from the treatment and
disposal of NOW, approximately 36.5% was derived from the sale of finished
products processed and recovered by the Company from NCW, and approximately 6.7%
was derived from the collection, treatment and disposal of NCW. Pro forma net
income and pro forma earnings before interest, taxes, depreciation and
amortization expense for this period were $2.5 million and $8.8 million, or 8.1%
and 28.3%, of pro forma revenues, respectively.
The Company believes that the NCW market is highly fragmented and is
comprised primarily of relatively small owner-operated businesses. These smaller
entities generally have limited access to the resources required for
modernization and expansion, and as a result they may be unable to take
advantage of pending and future regulatory changes that the Company believes
will result in increased demand for NCW treatment, processing, recovery and
disposal services. The Company also believes that many NCW generators would
prefer to have a multi-city, single source provider for the collection,
treatment and disposal of all of their nonhazardous waste streams. As a result,
the Company believes there is a significant opportunity for it to provide
comprehensive services for the treatment, processing, recovery and disposal of
3
<PAGE>
NCW and that the fragmented nature of this market will provide it with
opportunities for expansion through acquisitions and internal growth.
Growth in the nonhazardous liquid waste industry is driven primarily by the
adoption and enforcement of increasingly stringent local, state and federal
regulations governing the treatment and disposal of NCW and NOW. For example,
the damage caused by grease and other liquid wastes to municipal collection and
treatment systems is causing cities and states to adopt and enforce laws and
regulations governing the disposal of such materials. Similarly, Louisiana,
Texas and certain other oil and gas producing states have enacted comprehensive
laws and regulations governing the proper handling of NOW. As a result of this
increased regulation and enforcement, generators of NCW and NOW have become
concerned about their liability for noncompliance and are increasingly looking
to independent providers such as the Company to handle their nonhazardous liquid
waste on an ongoing basis.
The Company plans to achieve its goal of becoming a leading national
provider of services for the treatment, processing, recovery and disposal of NCW
and NOW by expanding through acquisitions, emphasizing continued internal growth
and improving its existing operations. The Company has assembled a management
team with significant operating and consolidation experience in the waste
management industry. See "Management." The key elements of the Company's
strategy are:
EXPAND THROUGH ACQUISITIONS. The Company will pursue acquisitions of
companies engaged in the business of treating NCW or NOW within its existing
markets and in new geographic areas; however, the Company's ability to
expand its NOW operations in certain areas is limited by certain agreements.
See "Risk Factors--Dependence on Newpark for Offshore-Generated NOW;
Covenant Not to Compete; and Obligation to Treat NOW Received from Newpark
at Below-Market Prices." The Company may also acquire companies which
provide complementary services.
ESTABLISH REPUTATION AS SINGLE SOURCE PROVIDER. The Company intends to
market itself to restaurant chains and other NCW generators as a multi-city,
single source provider of NCW services.
EXPAND EXISTING FACILITIES AND TYPES OF NCW ACCEPTED. The Company
intends to invest in its existing NCW treatment facilities to expand
physical plant size and to increase the treatment capabilities of its
facilities, and will seek to amend its permits for certain facilities in
order to receive additional waste streams.
CAPITALIZE ON TRENDS TOWARD OUTSOURCING AND PRIVATIZATION. The Company
believes that its experience in treating and disposing of numerous types of
NCW will allow it to capitalize on opportunities presented by the increasing
number of private companies that retain third parties to handle their NCW on
an ongoing basis and municipalities that shift certain of their wastewater
treatment services to private industry.
INCREASE INLAND NOW BUSINESS. The Company is subject to certain
agreements which restrict its ability to grow its offshore-generated NOW
business. See "Risk Factors--Dependence on Newpark for Offshore-Generated
NOW; Covenant Not to Compete; and Obligation to Treat NOW Received from
Newpark at Below-Market Prices," "Business--The Nonhazardous Liquid Waste
Industry" and "Certain Transactions--Newpark Agreements." As a result, the
Company intends to focus its marketing efforts towards inland (as opposed to
offshore) generators of NOW, and by so doing, the Company believes that it
will be able to increase the total amount of NOW that is delivered to the
Company for treatment and disposal.
THE OFFERING
<TABLE>
<S> <C>
Common Stock offered.............. 1,500,000 shares
Common Stock to be outstanding
after the offering.............. 6,738,875 shares(1)
Use of proceeds................... Repayment of certain indebtedness, capital expenditures,
working capital and general corporate purposes, which
are expected to include future acquisitions.
Proposed AMEX symbol.............. USL
</TABLE>
- ------------------------
(1) Excludes 1,930,125 shares of Common Stock subject to options and warrants
previously granted or to be granted by the Company as of the effective date
of this offering, consisting of (i) 1,000,000 shares issuable pursuant to a
warrant issued to Sanifill in connection with the Campbell Wells
Acquisition, the resale of which shares is subject to certain contractual
restrictions, (ii) 405,125 shares issuable pursuant to outstanding employee
stock options, and (iii) 525,000 shares issuable pursuant to options and
warrants granted or to be granted in connection with this offering. Also
excludes 468,750 shares issuable pursuant to options, the vesting of which
are contingent upon the successful completion of certain corporate
development activities. See "Management--Stock Option Plans" and "Certain
Transactions--Campbell Wells Acquisition."
4
<PAGE>
SUMMARY PRO FORMA FINANCIAL DATA
The following unaudited pro forma financial data present certain information
for the Company as adjusted for (i) the effect of the Campbell Wells Acquisition
as if it had occurred on January 1, 1996, including certain pro forma
adjustments to the historical financial statements of the Predecessor, including
adjusting depreciation expense to reflect purchase price allocations, recording
interest expense to reflect the outstanding debt due to Sanifill, adjusting
insurance expense consistent with the expenses for the Company and the related
income tax effects of these adjustments and (ii) the consummation of this
offering at an assumed offering price of $9.50 per share and the application of
the net proceeds therefrom. See "Selected Financial Data" and the unaudited Pro
Forma Financial Statements and the notes thereto included elsewhere in this
Prospectus.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED JUNE 30,
DECEMBER 31, --------------------
1996 1996 1997
------------------- --------- ---------
<S> <C> <C> <C>
(IN THOUSANDS, EXCEPT PER SHARE DATA)
INCOME STATEMENT AND OTHER DATA
PRO FORMA
Revenues................................................................. $ 31,138 $ 14,374 $ 17,734
Gross profit............................................................. 10,534 4,340 6,372
Selling, general and administrative expenses............................. 3,964 2,025 2,716
------- --------- ---------
Income from operations................................................... 6,570 2,315 3,656
Interest and other expense, net.......................................... 2,317 1,081 1,003
------- --------- ---------
Income before income taxes............................................... 4,253 1,234 2,653
------- --------- ---------
Net income............................................................... $ 2,508 $ 728 $ 1,565
------- --------- ---------
------- --------- ---------
Net income per share..................................................... $ 0.32 $ 0.09 $ 0.20
------- --------- ---------
------- --------- ---------
Shares used in computing pro forma net income(1)......................... 7,830 7,830 7,830
EBITDA(2)................................................................ $ 8,820 $ 3,745 $ 4,940
</TABLE>
<TABLE>
<CAPTION>
JUNE 30, 1997
----------------------
AS
ACTUAL ADJUSTED(3)
--------- -----------
<S> <C> <C>
(IN THOUSANDS)
BALANCE SHEET DATA
Working capital (deficit)................................................................ $ (1,450) $ 9,835
Total assets............................................................................. 43,863 52,897
Total debt............................................................................... 25,974 23,260
Stockholders' equity..................................................................... 2,853 14,835
</TABLE>
- ------------------------------
(1) Includes (i) 3,538,875 shares issued and outstanding prior to this offering
and the acquisitions of the Mesa Companies and AWW, (ii) 1,700,000 shares
issued to the stockholders of the Mesa Companies and AWW in conjunction with
their acquisitions, (iii) 1,500,000 shares issued in connection with the
offering and (iv) 1,090,713 shares representing the effect of outstanding
warrants and options to purchase Common Stock, using the treasury stock
method. Excludes 525,000 shares of Common Stock subject to options and
warrants granted or to be granted in connection with the offering at an
exercise price equal to or exceeding the initial public offering price and
468,750 shares issuable pursuant to options, the vesting of which are
contingent upon the successful completion of certain corporate development
activities. See "Management--Stock Option Plans" and "Certain
Transactions--Campbell Wells Acquisition."
(2) EBITDA represents earnings presented above before interest, income taxes,
depreciation and amortization expense and is calculated as defined in the
Company's note agreement with Sanifill. See footnote 3 under "Selected
Financial Data." The earnings presented above do not include any interest
expense related to the Predecessor's intercompany account with Sanifill. See
the Introduction to the unaudited Pro Forma Financial Statements included
elsewhere in this Prospectus. EBITDA is not a measure of cash flow,
operating results or liquidity, as determined in accordance with generally
accepted accounting principles, and differs from net cash provided by
operating activities as determined under generally accepted accounting
principles in that EBITDA excludes interest expense and does not reflect the
effects of changes in working capital or deferred tax items. EBITDA should
not be considered in isolation or as an alternative to, or more meaningful
than, net income or cash flows provided by operations, as determined in
accordance with generally accepted accounting principles. The pro forma
EBITDA amounts shown for the Company may not be comparable to EBITDA as
reported by or for other companies because the Company's pro forma EBITDA
may not be calculated on the same basis as EBITDA as reported by or for
other companies.
(3) Adjusted for the sale of 1,500,000 shares of Common Stock offered by the
Company hereby at an assumed offering price of $9.50 per share and the
application of the estimated net proceeds therefrom. See "Use of Proceeds."
5
<PAGE>
RISK FACTORS
AN INVESTMENT IN THE SHARES OF COMMON STOCK OFFERED BY THIS PROSPECTUS
INVOLVES A HIGH DEGREE OF RISK. IN ADDITION TO THE OTHER INFORMATION CONTAINED
IN THIS PROSPECTUS, THE FOLLOWING RISK FACTORS SHOULD BE CONSIDERED CAREFULLY IN
EVALUATING AN INVESTMENT IN THE COMMON STOCK. THIS PROSPECTUS CONTAINS
FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES, SUCH AS
STATEMENTS OF THE COMPANY'S STRATEGIES, PLANS, OBJECTIVES, EXPECTATIONS AND
INTENTIONS. THE COMPANY'S ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE
ANTICIPATED IN THESE FORWARD-LOOKING STATEMENTS AS A RESULT OF ANY NUMBER OF
FACTORS, INCLUDING THE RISK FACTORS SET FORTH BELOW AND ELSEWHERE IN THIS
PROSPECTUS. THE CAUTIONARY STATEMENTS MADE IN THIS PROSPECTUS SHOULD BE READ AS
BEING APPLICABLE TO ALL RELATED FORWARD-LOOKING STATEMENTS WHEREVER THEY APPEAR
IN THIS PROSPECTUS.
ABSENCE OF COMBINED OPERATING HISTORY
The Company was organized in November 1996 and consummated the Campbell
Wells Acquisition on December 13, 1996. See "Certain Transactions." In June
1997, the Company acquired the Mesa Companies and AWW. Prior to June 1997, the
Mesa Companies and AWW had been operating as separate independent entities and
there can be no assurance that the Company will be able to integrate their
operations successfully or to institute the necessary systems and procedures,
including accounting and financial reporting systems, to manage on a profitable
basis either of the NCW operations individually, the NCW operations collectively
or the entire combined enterprise. While each of the Company's officers and
directors has substantial business experience, they have no experience in
managing all of the different business operations in which the Company is now
engaged. Accordingly, there can be no assurance that the Company's management
group will be able to effectively manage the combined entity or to effectively
implement the Company's acquisition program and internal growth strategy. The
Pro Forma Financial Statements of the Company cover periods when the Company,
the Mesa Companies and AWW were not under common control or management and may
not be indicative of the Company's future financial or operating results. The
inability of the Company to integrate the Mesa Companies and AWW successfully
would have a material adverse effect on the Company's business, results of
operations and financial condition, as well as its acquisition program. See
"Business--Strategy" and "Management."
DEPENDENCE UPON NOW EXEMPTION UNDER RCRA AND OTHER ENVIRONMENTAL REGULATIONS
NOW is currently exempt from the requirements of the Resource Conservation
and Recovery Act, as amended ("RCRA"), which is the principal federal statute
governing the handling and disposal of waste. In recent years, proposals have
been made to rescind this exemption. The repeal or modification of the exemption
covering NOW or modification of applicable regulations or interpretations
regarding the treatment and/or disposal of NOW would require the Company to
alter its method of treating and disposing of NOW, which does not comply with
the methods prescribed by the U.S. Environmental Protection Agency (the "EPA")
for treatment and/or disposal of RCRA-regulated waste. Such repeal or
modification would have a material adverse effect on the Company's business,
results of operations and financial condition. Each of the Company's operations
is also dependent to varying degrees on the existence and enforcement of local,
state and federal environmental regulations. Any repeal or relaxation of such
regulations, or a failure of governmental authorities to enforce such
regulations, could result in decreased demand for the Company's services and,
therefore, could materially adversely affect the Company's business, results of
operations and financial condition. The Company's operations may also be
adversely affected by new regulations or changes in other applicable
regulations. See "Business--Regulatory Background."
RISKS RELATED TO THE COMPANY'S ACQUISITION STRATEGY
The Company intends to grow significantly through the acquisition of
additional nonhazardous liquid waste and complementary businesses. The Company
expects to face competition for acquisition candidates, which may limit the
number of acquisition opportunities and may lead to higher acquisition prices.
6
<PAGE>
There can be no assurance that the Company will be able to identify, acquire or
manage additional businesses profitably or to integrate successfully any
acquired businesses into the Company without substantial or material
unanticipated costs, delays or other operational or financial problems. Further,
acquisitions involve a number of special risks including, without limitation,
failure of the acquired business to achieve expected results, diversion of
management's attention, failure to retain key personnel of the acquired business
and risks associated with unanticipated events or liabilities, all of which
could have a material adverse effect on the Company's business, results of
operations and financial condition. Customer dissatisfaction or performance
problems at a single acquired company could have an adverse effect on the
reputation of the Company and its sales and marketing initiatives. The Company
may consider acquiring complementary businesses to its existing operations, and
there can be no assurance that these complementary businesses could be
successfully integrated. In addition, if the Company's acquisition strategy is
not successful, the benefits expected to be derived by the Company from
consolidating certain overhead functions such as cash management, finance and
insurance will not be realized. The Company currently has no agreements or
understandings to make any acquisitions. See "Business--Strategy" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Overview."
RISKS RELATED TO ACQUISITION FINANCING
The timing, size and success of the Company's acquisition efforts and the
associated capital commitments cannot be readily predicted. The Company
currently intends to finance future acquisitions by using shares of its Common
Stock for all or a substantial portion of the consideration to be paid. If the
Common Stock does not maintain a sufficient market value, or potential
acquisition candidates are otherwise unwilling to accept Common Stock as part of
the consideration for the sale of their businesses, the Company may be required
to use more of its cash resources, if available, or incur indebtedness in order
to implement its acquisition program. Assuming an initial public offering price
of $9.50 per share, upon completion of this offering, the Company will have
approximately $7.9 million of net proceeds remaining for future acquisitions and
working capital after payment of certain indebtedness and budgeted capital
expenditures. If the Company does not have sufficient cash resources, its growth
could be limited unless it is able to obtain additional capital through debt or
equity financings. There can be no assurance that the Company will be able to
obtain such financing when required or that such financing will be available on
terms and conditions reasonably acceptable to the Company. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources."
As a result of the Campbell Wells Acquisition, the Company has a note
agreement with Sanifill which places limits on indebtedness which may be
incurred by the Company (including, without limitation, preexisting debt of
businesses subsequently acquired by the Company and any debt instrument issued
by the Company to the owners of any acquired businesses). Also, the Company has
agreed, in a noncompetition agreement with Sanifill, not to own before December
2001 any interest in any company engaged in the municipal solid waste,
construction debris or demolition debris collection, treatment and disposal
business. The Company will not be able to effect acquisitions which would
violate these conditions unless it is able to obtain Sanifill's consent. See
"Certain Transactions--Campbell Wells Acquisition."
RISKS RELATED TO OPERATING AND INTERNAL GROWTH STRATEGY
Key elements of the Company's strategy are to improve the profitability and
increase the revenues of its existing operations and any subsequently acquired
businesses. The Company intends to improve the profitability of its existing
operations and any subsequently acquired businesses by various means including,
without limitation, more efficient utilization of its NCW treatment facilities.
The Company's ability to increase the revenues of its existing operations and
any subsequently acquired businesses will be affected by various factors,
including demand for NCW and NOW treatment and disposal services and finished
products produced by the Company, and the Company's ability to expand the range
of services offered to customers, develop national and regional accounts for its
NCW treatment facilities and other marketing
7
<PAGE>
programs necessary to attract new customers and attract and retain necessary
personnel. Many of these factors are beyond the Company's control, and there can
be no assurance that the Company's operating and internal growth strategies will
be successful or that the Company will be able to generate cash flow adequate
for its operations and to support internal growth. See "Business--Strategy."
DEPENDENCE ON OIL AND GAS INDUSTRY
Demand for the Company's NOW treatment 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.
Prices for oil and gas historically 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. No assurance can be given that current levels of oil and gas
activities will be maintained or that the demand for the Company's NOW services
will reflect the level of such activities. Prices for oil and natural gas are
expected to continue to be volatile and affect demand for the Company's NOW
disposal services. A material decline in oil or natural gas prices or
exploration activities could materially adversely affect the demand for the
Company's NOW services and, therefore, the Company's business, results of
operations and financial condition.
COMPETITION
The nonhazardous liquid waste industry is competitive. With respect to NCW
operations, the Company must compete for the procurement of used cooking oil and
other food processing residuals necessary for the production and sale of the
Company's finished products. The Company's inability to procure sufficient
quantities of such materials, or an increase in the cost of procuring such
materials, would have a material adverse effect on the Company's business,
results of operations and financial condition. The market for sales of the
Company's finished products is also competitive and is served by several large
companies and a number of smaller, owner-operated companies. The Company also
competes with other NCW treatment 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 will continue to be successfully developed and marketed
by others. Furthermore, future technological change and innovation may result in
a reduction in the amount of NCW being generated or alternative methods of
treatment and/or disposal being developed. Also, there is nothing to prevent
other companies from attempting to replicate the Company's strategy of acquiring
NCW businesses to develop a national or regional presence. With respect to its
NOW disposal operations, the Company must compete with alternative methods of
off-site disposal of NOW provided by a large public company and a number of
smaller private companies. The Company also faces competition from customers who
seek to enhance and develop their own methods of disposal instead of using the
services of third parties such as the Company. Future technological change and
innovation may increase the amount of internal NOW treatment and disposal as
well as the number of competitors in this market. Increased use of internal
treatment and disposal methods and other competitive factors could have a
material adverse effect on the Company's business, results of operations and
financial condition. In addition, until August 12, 2001, the Company is
prohibited from certain activities relating to the collection, transportation or
disposal of NOW generated in the Gulf of Mexico and certain surrounding states
and other related businesses, and until December 13, 2001, the Company is
prohibited from collecting, treating and disposing of municipal solid wastes,
construction debris and demolition debris. See "Certain Transactions."
Competitors of the Company may be better capitalized, have greater name
recognition or be able to provide services or products at a lower cost. In
addition, because the treatment, processing and disposal of NCW and NOW are
relatively new businesses, competition in these markets can be expected to
increase as the markets develop. As a result of these competitive factors, there
can be no assurance that the
8
<PAGE>
Company's growth strategy will be successful or that the Company will be able to
generate cash flow adequate for its operations and to support future
acquisitions and internal growth. See "Business-- Competition."
IMPACT OF COMMODITY PRICES
The Company's finished products are commodities, the prices of which are
reported by commodity pricing services. While the Company's prices for its
finished products are generally influenced by the quoted prices, historically
the Company has generally been able to achieve above-average prices because its
sales have been made primarily to large, long-time customers based in Mexico.
There can be no assurance that prices for the Company's finished products will
not be subject to greater influence in the future by the reported commodity
prices or that, if competition for sales of finished products increases, the
Company will be able to continue generating higher prices through its sales to
customers based in Mexico. Used cooking oil and other food processing residuals
used in the production of the Company's finished products are also commodities
subject to price fluctuation. A significant increase in the prices paid for
these materials could have a material adverse effect on the Company's business,
results of operations and financial condition.
DEPENDENCE ON NEWPARK FOR OFFSHORE-GENERATED NOW; COVENANT NOT TO COMPETE; AND
OBLIGATION TO TREAT NOW RECEIVED FROM NEWPARK AT BELOW-MARKET PRICES
In the Campbell Wells Acquisition, the Company acquired an agreement (the
"Disposal Agreement") with Newpark Resources, Inc., a public company located in
New Orleans ("Newpark"), that obligates Newpark to deliver to the Company, in
each of the next 24 years, NOW for treatment and disposal at certain of the
Company's Louisiana landfarms. The Disposal Agreement was originally created as
part of Newpark's acquisition in August 1996 of the marine-based NOW business of
Campbell Wells for approximately $70.5 million. Specifically, during each of the
next 24 years, Newpark is obligated to deliver to the Company for treatment and
disposal the lesser of (i) one-third of the barrels of NOW that Newpark receives
for processing and disposal in Louisiana, Texas, Mississippi, Alabama and the
Gulf of Mexico (the "Territory") and (ii) 1,850,000 barrels of NOW, in each case
excluding saltwater. In return, the Company is obligated not to, prior to August
12, 2001, engage, directly or indirectly, in the collection, transfer,
transportation, treatment or disposal of NOW generated in a marine environment
(which is the source of a substantial portion of the NOW delivered to the
Company) or transported in marine vessels or the site remediation and closure
business in the Territory. As a result of these contractual arrangements with
Newpark, the Company's NOW operations are dependent upon Newpark's ability to
maintain its share of the NOW disposal market in the Territory. There can be no
assurance that Newpark will be able to maintain its share of the NOW disposal
market in the Territory, and a significant decline in Newpark's market share
could have a material adverse effect on the Company's business, results of
operations and financial condition. In addition, these contractual arrangements
limit the ability of the Company to expand its NOW operations in the Territory
through acquisitions or otherwise; however, the Company is free to expand its
NOW operations in areas outside of the Territory and/or acquire any business
that treats and disposes of NOW generated on land and transported from the site
where it was generated entirely by on-land transportation.
The Company's arrangements with Newpark also establish the conditions upon
and the extent to which the price per barrel paid by Newpark to the Company for
NOW treatment and disposal may be adjusted, which conditions are completely
beyond the Company's control. Currently, the price paid by Newpark to the
Company under the Disposal Agreement is $5.50 per barrel. As of July 31, 1997,
the market price for treatment and disposal of NOW consisting primarily of oil,
grease, chlorides and heavy metals found in water-based and oil-based drilling
fluids ranged from $6.75 to $10.25 per barrel, depending upon the makeup of the
NOW. A disparity between the price paid by Newpark to the Company under the
9
<PAGE>
Disposal Agreement and the open market price is expected to continue for the
duration of the Disposal Agreement.
For the year ended December 31, 1996, revenues of approximately $17.7
million, or approximately 56.8% of the Company's total pro forma revenues, were
derived from the treatment and disposal of NOW, of which amount approximately
$8.8 million, or approximately 49.7%, was derived from the treatment and
disposal of NOW generated offshore.
From August 13, 1996 to December 31, 1996, Newpark delivered approximately
1,054,000 barrels of NOW to the Company and the Predecessor for treatment and
disposal. For the six months ended June 30, 1997, Newpark delivered to the
Company approximately 820,000 barrels of NOW for treatment and disposal.
For a more thorough summary of the Disposal Agreement and related
transactions, see "Certain Transactions--Newpark Agreements."
FAILURE TO COMPLY WITH GOVERNMENTAL REGULATIONS
The Company's operations are subject to numerous and continually evolving
federal, state and local laws, regulations and policies that govern
environmental protection, zoning and other matters. If existing regulatory
requirements change, the Company may, among other things, be required to make
significant unanticipated capital and operating expenditures. Although the
Company believes that it is presently in material compliance with applicable
laws and regulations, there can be no assurance that it will be deemed to be in
compliance in the future. Governmental authorities may seek to impose fines and
penalties on the Company or to revoke or deny the issuance or renewal of
operating permits for failure to comply with applicable laws and regulations.
Under such circumstances, the Company 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 the Company's business, results of
operations and financial condition. In addition, if the Company's operations
resulted in the release of hazardous substances, the Company could incur
liability under the Comprehensive Environmental Response, Compensation and
Liability Act, as amended. See "Business--Regulatory Background."
POTENTIAL DILUTION FROM FUTURE ACQUISITIONS
The Company's strategy contemplates the acquisition of additional
nonhazardous liquid waste and complementary businesses, and that such
acquisitions may be fully or partially paid for by using Common Stock. In order
to implement its acquisition strategy, after the completion of this offering,
the Company intends to register 3,000,000 additional shares of Common Stock for
issuance in connection with future acquisitions. In the event shares of Common
Stock are issued in connection with future acquisitions, purchasers of Common
Stock in this offering may experience dilution in the net tangible book value of
their stock. See "Description of Securities--Shares Eligible for Future Sale."
CONCENTRATION OF CUSTOMERS
The Company's customers are concentrated in the oil and gas industry in
Louisiana and Texas, the NCW collection business in Texas and the livestock feed
and chemical processing industries in Mexico. Sales of finished products to one
customer in Mexico, Bachoco, S.A. De C.V. ("Bachoco"), accounted for
approximately 52%, 62% and 43% of total revenues, and approximately 18%, 26% and
20% of total pro forma revenues, for the years ended December 31, 1994, 1995 and
1996, respectively. The loss of, or a significant reduction in the amount of
sales to, this customer would have a material adverse effect on the Company's
business, results of operations and financial condition. Total sales to
customers in Mexico represented approximately 80%, 82% and 70% of total
revenues, and approximately 28%, 35% and 32% of total pro forma revenues, for
the years ended December 31, 1994, 1995 and 1996, respectively. A significant
decline in the Mexican economy could materially adversely affect demand for the
Company's
10
<PAGE>
finished products and, therefore, the Company's business, results of operations
and financial condition. Likewise, among other things, a material decline in
demand for the livestock feed and chemicals produced by purchasers of the
Company's finished products could have a material adverse effect on the
Company's business, results of operations and financial condition. With respect
to NOW operations, Newpark constituted approximately 49% of total revenues for
the six months ended June 30, 1997. See
"--Dependence on Newpark for Offshore-Generated NOW; Covenant Not to Compete;
and Obligation to Treat NOW Received from Newpark at Below-Market Prices."
CONCENTRATION OF CREDIT RISKS
At December 31, 1996, 41% and 16%, respectively, of the Company's total
accounts receivable were associated with two customers, Newpark and Chevron
Corporation. At December 31, 1995, 37% and 10%, respectively, of the Company's
total accounts receivable and 4% and 1%, respectively, of the Company's total
pro forma accounts receivable were associated with Bachoco and Oleofinos, a
Mexican corporation. In addition, at December 31, 1995, Chevron Corporation and
Texaco Inc. accounted for 17% and 11%, respectively, of the Predecessor's total
accounts receivable and 15% and 10%, respectively, of the Company's total pro
forma accounts receivable. Although the Company performs ongoing credit analyses
of its customers, the Company's inability to collect any such significant
account would have a material adverse effect on the Company's business, results
of operations and financial condition.
SIGNIFICANT AMOUNT OF OFFERING PROCEEDS PAYABLE TO OR FOR THE BENEFIT OF
AFFILIATES OF THE COMPANY
Of the net proceeds of this offering, $964,000 will be used to repay a
promissory note held by AWW's primary lender, which note is guaranteed by
William H. Wilson, Jr., a key employee of the Company. In addition,
approximately $780,000 will be used to repay certain promissory notes held by
former stockholders of AWW, of which approximately $341,000 will go to Mr.
Wilson. Approximately $1.2 million of the net proceeds will be used to repay
certain indebtedness of the Mesa Companies, all of which was incurred or
personally guaranteed by Thomas B. Blanton, an officer and director of the
Company. Approximately $214,000 of this $1.2 million will be paid to the
brother-in-law of Mr. Blanton. See "Use of Proceeds" and "Certain
Transactions--Other."
The Company has historically engaged in significant transactions with
affiliates of the Company. See "Certain Transactions--Other." Although the
Company has no current plans to enter into any additional significant
transactions with any of its affiliates, the Board of Directors of the Company
has adopted a resolution requiring all future transactions with affiliates to be
approved by the vote of a majority of the disinterested directors of the
Company.
POTENTIAL IMPACT OF LITIGATION INVOLVING THE OPERATIONS OF CERTAIN OF THE
COMPANY'S LANDFARMS
Prior to the closing of the Campbell Wells Acquisition, several lawsuits
were filed against Campbell Wells based upon the operation of certain of the
Louisiana landfarms purchased by the Company as part of the Campbell Wells
Acquisition. In one of the lawsuits filed against Campbell Wells, approximately
300 individuals residing in and around Grand Bois, Louisiana are seeking
unspecified monetary damages allegedly suffered as a result of (i) odors
allegedly emitted by NOW received from Exxon Company U.S.A. at the Company's
Bourg, Louisiana landfarm in March 1994, and (ii) alleged air, water and soil
contamination in connection with ongoing operations at the facility. A second
lawsuit, brought by one individual, seeks unspecified monetary damages allegedly
suffered as a result of odors allegedly emitted by NOW received from Exxon
Company U.S.A. at the Bourg landfarm in March 1994. A third lawsuit, filed as a
class action, seeks unspecified monetary damages allegedly suffered as a result
of alleged air, water and soil contamination in connection with ongoing
operations at the Company's Mermentau, Louisiana landfarm. In a fourth lawsuit,
six individuals are seeking injunctive relief against certain treatment
operations conducted at the Bourg landfarm which the plaintiffs contend have
resulted in and will result in adverse health effects by way of emissions of
alleged air pollutants.
11
<PAGE>
The Company has not been named as a defendant in any of these lawsuits;
however, there can be no assurance that the Company will not subsequently be
named as a defendant in one or more of these lawsuits. Sanifill has retained
responsibility for, and agreed to indemnify the Company against, the contingent
liabilities associated with these lawsuits. Sanifill's indemnification
obligation is limited to the lesser of the amount of the unpaid principal of the
promissory note (the "Sanifill Note") issued by the Company to Sanifill in
connection with the Campbell Wells Acquisition outstanding at the time of any
claim for indemnification and $10 million. As of July 31, 1997, the outstanding
principal balance of the Sanifill Note was $22.2 million. The Sanifill Note is
payable in 20 equal quarterly installments of principal plus accrued interest,
beginning on March 31, 1997 and, therefore, the principal balance of the
Sanifill Note is currently scheduled to be reduced below $10 million on June 30,
2000. In the event the Company is subsequently added as a defendant in any of
these lawsuits, a monetary judgment is entered against the Company and Sanifill
is not required or is unable to completely indemnify the Company against such
judgment, the Company's business, results of operations and financial condition
could be materially adversely affected. In addition, notwithstanding any
indemnification to be provided by Sanifill, an adverse ruling against the
Company (if it is subsequently added as a defendant) in the lawsuit seeking
injunctive relief could materially adversely affect the Company's operations at
the Bourg landfarm (which operations contributed 19.8% of the Company's pro
forma revenues for the year ended December 31, 1996 and 13.7% of the Company's
actual revenues for the first six months of 1997) and, therefore, the Company's
business, results of operations and financial condition.
For additional information regarding these lawsuits and Sanifill's
obligations, see "Business--Legal Proceedings" and "Certain
Transactions--Campbell Wells Acquisition."
POTENTIAL IMPACT OF ADVERSE MEDIA PUBLICITY REGARDING THE COMPANY'S NOW
OPERATIONS
The lawsuits involving the operations of the Company's Bourg and Mermentau
landfarms have generated considerable media coverage regarding the NOW treatment
and disposal industry in general, the operations conducted at these landfarms
and the impact of these operations upon the environment and persons living in
close proximity to the landfarms. A number of articles describing the lawsuits,
the Company's landfarms and the NOW treatment and disposal industry have
appeared in newspapers throughout Louisiana. In addition, the Company has been
advised that the CBS television network ("CBS") is investigating, among other
things, the lawsuits involving the Company's landfarms, the operations conducted
at these landfarms, the exemption that excludes NOW from regulation under RCRA
and the NOW treatment and disposal industry, and intends to broadcast a program
regarding its findings in fall 1997. Although the Company is unaware of the
complete scope or the findings of the investigation conducted by CBS or the
manner in which these findings will ultimately be presented to the public, any
television program eventually broadcast by CBS may be critical of the Company,
the operations conducted at the Company's landfarms and/or the exemption that
excludes NOW from regulation under RCRA. Adverse publicity or political
developments resulting from any such television program or other scrutiny of the
NOW treatment and disposal industry or the Company's operations could have a
material adverse effect on the Company's business, results of operations and
financial condition, as well as the market price of the Common Stock. In
addition, any such adverse publicity could spur new efforts to rescind the
exemption that excludes NOW from regulation under RCRA, which rescission would
have a material adverse effect on the Company's business, results of operations
and financial condition.
POTENTIAL IMPACT OF GOVERNMENTAL EXAMINATIONS OF THE COMPANY'S BOURG, LOUISIANA
LANDFARM
In 1997, after an unsuccessful attempt was made in the Louisiana legislature
to require the Bourg landfarm to relocate or close, the Governor of Louisiana
directed certain state agencies to examine the operations at the Bourg landfarm
and to review generally Louisiana's rules and regulations regarding the
treatment and disposal of NOW. The Company's operations could be materially
adversely affected by new regulations or changes in applicable regulations
resulting from such examinations of the Company's
12
<PAGE>
operations at the Bourg landfarm or the overall review of Louisiana's rules and
regulations regarding the treatment and disposal of NOW.
IMPACT OF INCREASE IN ENERGY PRICES
The Company operates a fleet of trucks and other equipment in its
operations. In addition, the Company uses significant amounts of energy in the
processing of NCW. Energy prices are subject to volatility. A significant
increase in energy prices could affect the Company's operations, which could
have a material adverse effect on the Company's business, results of operations
and financial condition.
FOREIGN SALES
A substantial portion of the Company's revenues is derived from the sale of
finished products to customers in Mexico. Foreign sales are subject to certain
inherent risks, including unexpected changes in regulatory and legal
requirements, tariffs and other trade barriers, greater difficulty in collecting
trade accounts and foreign exchange fluctuations. There can be no assurance that
these or similar factors will not have an adverse effect on the Company's future
results of operations and financial condition. See "Business--Operations and
Services Provided."
RELIANCE ON KEY PERSONNEL; MANAGEMENT OF GROWTH
The Company will be highly dependent on its executive officers and senior
management, and the Company likely will depend on the senior management of any
significant business it acquires in the future. The business or prospects of the
Company could be materially adversely affected if any of its current executive
officers (including Mr. Lawlor, who will become Chief Executive Officer upon
completion of this offering) or key employees or any member of senior management
of any subsequently acquired business does not continue in his management role
until the Company is able to attract and retain qualified replacements. The
Company does not maintain key man life insurance on any of its executive
officers or key employees.
The acquisitions of the Mesa Companies and AWW have placed and will continue
to place substantial burdens on the Company's management resources and financial
controls. The Company's ability to manage its growth effectively will require it
to continue to implement and improve its operational, financial and management
information systems and controls, and to train, motivate and manage its
employees. The Company intends to continually review and upgrade its management
information systems, as well as hire additional management and other personnel
in order to maintain the adequacy of its operational, financial and management
controls. The Company's failure to manage its growth effectively could have a
material adverse effect on the Company's business, results of operations and
financial condition. See "Management."
CONTROL BY EXISTING MANAGEMENT
Following the completion of this offering, the Company's executive officers
and directors will beneficially own approximately 35.9% of the outstanding
shares of Common Stock (34.7% if the Underwriters' over-allotment option is
exercised in full). These persons, if acting in concert, will have significant
voting power with respect to the election of directors and, in general, the
outcome of any other matter submitted to a vote of stockholders. See "Principal
Stockholders."
NO PRIOR PUBLIC MARKET AND DETERMINATION OF OFFERING PRICE
Prior to this offering, there has been no public market for the Common
Stock. Therefore, the initial public offering price for the Common Stock will be
determined by negotiation between the Company and the Representatives and may
bear no relation to the price at which the Common Stock will trade after the
offering. See "Underwriting" for the factors to be considered in determining the
initial public offering price. There can be no assurance that an active trading
market will develop subsequent to this offering and,
13
<PAGE>
if developed, that it will be sustained. After this offering, the market price
of the Common Stock may be subject to significant fluctuations in response to
numerous factors, including the timing of any acquisitions by the Company,
variations in the Company's annual or quarterly financial results or those of
its competitors, changes by financial research analysts in their estimates of
the Company's future earnings, if any, conditions in the economy in general or
in the Company's operations in particular, unfavorable publicity or changes in
applicable laws and regulations (or judicial or administrative interpretations
thereof) affecting the Company, the NOW treatment and disposal market or the NCW
treatment and disposal market (including the sale of finished products). From
time to time the stock market experiences significant price and volume
volatility, which may affect the market price of the Common Stock for reasons
unrelated to the Company's performance.
ADEQUACY OF LIABILITY INSURANCE
The Company's activities entail a risk of personal injury and property
damage to its employees and/or
other persons in proximity to its operations. While the Company maintains
insurance in such amounts and covering such risks as are consistent with
customary practices and standards of companies engaged in similar businesses,
there can be no assurance that such coverage will be adequate. Even a partially
uninsured claim, if successful and of significant magnitude, could have a
material adverse effect on the Company's business, results of operations and
financial condition. See "Business--Insurance."
LACK OF DIVIDENDS
The Company has not paid dividends on its Common Stock and does not
anticipate paying dividends in the foreseeable future. The Company intends to
retain future earnings, if any, to finance the expansion of its operations and
for general corporate purposes, including future acquisitions. In addition, the
Company's agreements with Sanifill restrict the Company's ability to pay
dividends on its capital stock. See "Dividend Policy" and "Certain
Transactions--Campbell Wells Acquisition."
POTENTIAL ANTI-TAKEOVER EFFECT OF CERTAIN CHARTER PROVISIONS
The Company's Certificate of Incorporation, as amended (the "Certificate of
Incorporation"), provides for a Board of Directors with staggered terms, which
may discourage or prevent certain types of transactions involving an actual or
potential change in control of the Company, including transactions in which
selling stockholders may otherwise receive a premium for their shares over then
current market prices. In addition, pursuant to the Certificate of
Incorporation, the Board of Directors has been authorized to approve the
issuance of shares of currently undesignated preferred stock, to determine the
price, powers, preferences and rights and the qualifications, limitations or
restrictions granted to or imposed on any unissued series of such preferred
stock, and to fix the number of shares constituting any such series and the
designation of such series, without any vote or future action by the
stockholders. The preferred stock could be issued with voting, liquidation,
dividend and other rights superior to the rights of the Common Stock. See
"Description of Securities--Preferred Stock."
SHARES ELIGIBLE FOR FUTURE SALE
Upon the completion of this offering, the Company will have outstanding
6,738,875 shares of Common Stock. The 1,500,000 shares sold in this offering
(other than shares that may be purchased by affiliates of the Company) will be
freely tradeable. The remaining outstanding shares ("restricted shares") may be
resold publicly only following their registration under the Securities Act of
1933, as amended (the "Securities Act"), or pursuant to an available exemption
from registration (such as provided by Rule 144, promulgated under the
Securities Act, following a one-year holding period for previously unregistered
shares). Sales of restricted shares could adversely affect the market price of
the Common Stock. The Company has agreed to register for public resale 990,000
shares of the restricted shares referred to above, including 652,800 shares
owned or controlled by executive officers of the Company. The sale of such
shares
14
<PAGE>
by holders thereof could also adversely affect the market price of the Common
Stock. See "Description of Securities--Shares Eligible for Future Sale."
Upon completion of this offering, the Company will also have outstanding
options and warrants to purchase 2,398,875 additional shares of Common Stock,
including options to purchase 715,125 shares granted under the terms of the
Company's existing stock option plans. The Company intends to file a
registration statement on Form S-8 to register all shares subject to these
plans. The Company also is obligated to and intends to register the 1,000,000
shares subject to the warrant granted to Sanifill in connection with the
Campbell Wells Acquisition. In connection with such registration, Sanifill has
agreed to restrict the number of shares sold by it annually pursuant to such
registration statement. See "Certain Transactions--Campbell Wells Acquisition."
The Company also intends to register 3,000,000 additional shares of Common Stock
under the Securities Act after completion of this offering for issuance in
connection with future acquisitions.
The executive officers and directors of the Company owning an aggregate of
3,036,000 shares (including options to purchase an aggregate of 610,000 shares)
and the beneficial owners of at least 3,785,000 additional shares (including
options and warrants to purchase an aggregate of at least 1,463,125 shares) have
agreed not to sell or transfer any shares owned by them for a period of 180 days
after the effective date of this offering without the prior written consent of
Van Kasper & Company.
15
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 1,500,000 shares of
Common Stock offered hereby are estimated to be $12.3 million ($14.3 million if
the Underwriters' over-allotment option is exercised in full), assuming a public
offering price of $9.50 per share and after deducting underwriting discounts and
estimated offering expenses. The Company intends to use approximately $964,000
of the net proceeds of the offering to repay a promissory note held by AWW's
primary lender, which note bears interest at the prime rate plus 2.75%, matures
on September 15, 1997 and is guaranteed by William H. Wilson, Jr., a key
employee of the Company, and approximately $780,000 to repay certain promissory
notes held by former stockholders of AWW, of which approximately $341,000 will
go to Mr. Wilson. Each of these notes bears interest at a rate of 10% and has a
maturity date of January 1, 1998. Approximately $1.2 million of the proceeds
will be used to repay certain indebtedness of the Mesa Companies, all of which
was incurred or personally guaranteed by Thomas B. Blanton, an officer and
director of the Company, as the former sole stockholder of the Mesa Companies.
Approximately $214,000 of this $1.2 million will be paid to the brother-in-law
of Mr. Blanton. These debts have maturity dates ranging from September 1997 to
October 2006 and bear interest at rates ranging from 0% to 25.7%. See "Risk
Factors--Significant Amount of Offering Proceeds Payable to or for the Benefit
of Affiliates of the Company" and "Certain Transactions--Other." Approximately
$1.5 million of the proceeds will be used for capital expenditures to be made by
the Company. The Company intends to use the balance of the assumed net proceeds
of the offering of approximately $7.9 million (assuming no exercise of the
Underwriter's over-allotment option) for working capital and general corporate
purposes, which are expected to include future acquisitions. The Company
currently has no agreements or understandings to make any acquisitions. See
"Business--Strategy." Pending application of the net proceeds as described
herein, the Company intends to invest the net proceeds in short-term,
interest-bearing, investment grade securities.
DILUTION
At June 30, 1997, the consolidated net tangible book value per share of the
Common Stock was $.52. Net tangible book value per share of Common Stock is
equal to the total tangible assets of the Company less total liabilities,
divided by the number of shares of Common Stock outstanding or deemed to be
outstanding. After giving effect to the issuance of shares in this offering at
an assumed initial public offering price of $9.50 per share, and after deducting
estimated offering expenses and underwriting discounts, the pro forma net
tangible book value per share of Common Stock as of June 30, 1997 would have
been approximately $2.18. This represents an immediate dilution of $7.32 per
share to new investors purchasing Common Stock in this offering. The following
table illustrates this per share dilution.
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share.................... $ 9.50
Net tangible book value per share as of June 30, 1997............ .52
Increase attributable to this offering........................... 1.66
---------
Pro forma net tangible book value per share after offering......... 2.18
---------
Dilution to new investors.......................................... $ 7.32
---------
---------
</TABLE>
The following table summarizes, on a pro forma basis as of June 30, 1997,
the differences between existing stockholders and new investors with respect to
the number of shares of Common Stock purchased from the Company, the total
consideration paid and the average price per share paid, at an assumed initial
public offering price of $9.50.
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
----------------------- -------------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
---------- ----------- ------------- ----------- ---------------
<S> <C> <C> <C> <C> <C>
Existing stockholders........................ 5,238,875 77.7% $ 2,853,000 16.7% $ .54
New investors................................ 1,500,000 22.3 14,250,000 83.3 $ 9.50
---------- ----- ------------- -----
Total...................................... 6,738,875 100.0% $ 17,103,000 100.0%
---------- ----- ------------- -----
---------- ----- ------------- -----
</TABLE>
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<PAGE>
CAPITALIZATION
The following table summarizes the capitalization of the Company as of June
30, 1997, as adjusted to reflect the sale of 1,500,000 shares of Common Stock in
this offering at an assumed initial public offering price of $9.50 per share and
application of the net proceeds thereof as described in "Use of Proceeds." This
table should be read in conjunction with "Management's Discussion and Analysis
of Financial Condition and Results of Operations" and the unaudited Pro Forma
Financial Statements and related notes appearing elsewhere in this Prospectus.
<TABLE>
<CAPTION>
JUNE 30, 1997
--------------------
AS
ACTUAL ADJUSTED
--------- ---------
<S> <C> <C>
(IN THOUSANDS)
Current portion of long-term debt(1)........................................................ $ 5,072 $ 3,082
--------- ---------
--------- ---------
Long-term debt, net of current portion...................................................... $ 20,902 $ 20,178
Stockholders' equity:
Preferred Stock, $.01 par value, 5,000,000 shares authorized; no shares issued and
outstanding; $1.00 par value, 10,000 shares authorized; 10,000 shares issued and
outstanding............................................................................. 10 10
Common Stock, $.01 par value, 30,000,000 shares authorized; 5,238,875 shares issued and
outstanding and 6,738,875 shares issued and outstanding, as adjusted(2)................. 52 67
Additional paid-in capital................................................................ 1,379 13,373
Retained earnings......................................................................... 1,412 1,385
--------- ---------
Total stockholders' equity.............................................................. 2,853 14,835
--------- ---------
Total capitalization.................................................................. $ 23,755 $ 35,013
--------- ---------
--------- ---------
</TABLE>
- ------------------------
(1) For a description of the Company's debt, see the notes to the Consolidated
Financial Statements.
(2) Excludes 1,986,375 shares issuable upon exercise of options and warrants
outstanding as of June 30, 1997.
DIVIDEND POLICY
The Company has not paid dividends on its Common Stock and does not
anticipate paying dividends in the foreseeable future. The Company intends to
retain future earnings, if any, to finance the expansion of its operations and
for general corporate purposes, including possible future acquisitions. In
addition, the Company's note agreement with Sanifill restricts the ability of
the Company to pay dividends on its capital stock. See "Certain
Transactions--Campbell Wells Acquisition."
17
<PAGE>
SELECTED FINANCIAL DATA
The historical income statement and balance sheet data below sets forth the
financial data of the Predecessor as of December 31, 1995, and for the years
ended December 31, 1994 and 1995 and for the period from January 1, 1996 through
December 13, 1996, derived from the financial statements audited by Arthur
Andersen LLP, which appear elsewhere in this Prospectus. For a description of
the Predecessor, see Note 1 of the Notes to the Consolidated Financial
Statements of the Company. The historical income statement and balance sheet
data below for the Predecessor as of December 31, 1992, 1993 and 1994 and for
the years ended December 31, 1992, and 1993, and for the six months ended June
30, 1996, have been derived from unaudited financial statements of the
Predecessor. The consolidated income statement and balance sheet data below set
forth the consolidated financial data of the Company as of December 31, 1995 and
1996, and for the years ended December 31, 1994, 1995 and 1996, derived from the
consolidated financial statements audited by Arthur Andersen LLP, which appear
elsewhere in this Prospectus. The consolidated income statement and balance
sheet data as of December 31, 1992, 1993 and 1994 and for the years ended
December 31, 1992 and 1993, and for the six months ended June 30, 1996 and 1997,
have been derived from the unaudited consolidated financial statements of the
Company. The unaudited financial statements for all periods have been prepared
on the same basis as the audited financial statements and, in the opinion of the
Company reflect all adjustments, consisting of normal recurring adjustments,
necessary for a fair presentation of such data.
INCOME STATEMENT DATA
<TABLE>
<CAPTION>
JANUARY 1,
1996
YEARS ENDED DECEMBER 31, THROUGH
------------------------------------------ DECEMBER 13,
1992 1993 1994 1995 1996
--------- --------- --------- --------- -------------
<S> <C> <C> <C> <C> <C>
(IN THOUSANDS)
PREDECESSOR
Revenues................................................................ $ 9,515 $ 12,413 $ 14,847 $ 15,119 $ 16,853
--------- --------- --------- --------- -------------
Gross profit............................................................ 4,295 5,816 7,369 6,484 7,717
Selling, general and administrative expenses............................ 2,058 2,263 2,626 2,989 2,524
--------- --------- --------- --------- -------------
Income from operations.................................................. 2,237 3,553 4,743 3,495 5,193
Interest and other expense, net......................................... -- (260) (71) 195 256
--------- --------- --------- --------- -------------
Income before income taxes.............................................. 2,237 3,813 4,814 3,300 4,937
--------- --------- --------- --------- -------------
Net income.............................................................. $ 1,232 $ 2,357 $ 2,869 $ 1,900 $ 2,893
--------- --------- --------- --------- -------------
--------- --------- --------- --------- -------------
<CAPTION>
SIX MONTHS
ENDED JUNE
30, 1996
-----------
<S> <C>
PREDECESSOR
Revenues................................................................ $ 7,617
-----------
Gross profit............................................................ 3,159
Selling, general and administrative expenses............................ 1,498
-----------
Income from operations.................................................. 1,661
Interest and other expense, net......................................... 95
-----------
Income before income taxes.............................................. 1,566
-----------
Net income.............................................................. $ 924
-----------
-----------
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------------
1992 1993 1994 1995 1996
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
(IN THOUSANDS)
CONSOLIDATED
Revenues.............................................................. $ 4,955 $ 3,799 $ 8,039 $ 11,127 $ 14,285
--------- --------- --------- --------- ---------
Gross profit.......................................................... 866 1,873 481 1,192 2,495
Selling, general and administrative expenses.......................... 1,093 1,813 643 863 1,440
--------- --------- --------- --------- ---------
Income (loss) from operations......................................... (227) 60 (162) 329 1,055
Interest and other expense, net....................................... (13) 125 109 177 309
--------- --------- --------- --------- ---------
Income (loss) before income taxes..................................... (214) (65) (271) 152 746
--------- --------- --------- --------- ---------
Net income (loss)..................................................... $ (214) $ (65) $ (182) $ 103 $ 491
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
--------------------
1996 1997
--------- ---------
<S> <C> <C>
CONSOLIDATED
Revenues.............................................................. $ 6,757 $ 17,734
--------- ---------
Gross profit.......................................................... 1,006 6,372
Selling, general and administrative expenses.......................... 527 2,716
--------- ---------
Income (loss) from operations......................................... 479 3,656
Interest and other expense, net....................................... 96 1,137
--------- ---------
Income (loss) before income taxes..................................... 383 2,519
--------- ---------
Net income (loss)..................................................... $ 251 $ 1,486
--------- ---------
--------- ---------
</TABLE>
BALANCE SHEET DATA
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------------------
1992 1993 1994 1995
--------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
(IN THOUSANDS)
PREDECESSOR
Total assets............................................................ $ 46,328 $ 54,448 $ 57,235 $ 60,541
Total debt.............................................................. $ 172 $ 91 $ 306 $ --
<CAPTION>
DECEMBER 31,
---------------------------------------------------------
1992 1993 1994 1995 1996
--------- --------- --------- --------- -------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED
Total assets............................................................ $ 1,031 $ 1,277 $ 1,410 $ 3,007 $ 46,851
Total debt.............................................................. $ 1,163 $ 1,320 $ 1,447 $ 2,010 $ 29,950
<CAPTION>
<S> <C>
PREDECESSOR
Total assets............................................................
Total debt..............................................................
JUNE 30,
1997
-----------
<S> <C>
CONSOLIDATED
Total assets............................................................ $ 43,863
Total debt.............................................................. $ 25,974
</TABLE>
------------------------------------------------------------------------
18
<PAGE>
The following unaudited pro forma financial data present certain financial
information for the Company as adjusted for (i) the effects of the Campbell
Wells Acquisition as if it had occurred on January 1, 1996 and certain Pro Forma
adjustments to the historical financial statements of the Predecessor, including
adjusting depreciation expense to reflect purchase price allocations, recording
interest expense to reflect the outstanding debt due to Sanifill, adjusting
insurance expense consistent with the expenses for the Company and the related
income tax effects of these adjustments, and (ii) the consummation of this
offering at an assumed initial public offering price of $9.50 per share and the
application of the net proceeds therefrom. See the unaudited Pro Forma Financial
Statements and the notes thereto included elsewhere in this Prospectus.
INCOME STATEMENT AND OTHER DATA
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
YEAR ENDED JUNE 30,
DECEMBER 31, -----------
1996 1996
-------------- -----------
<S> <C> <C>
(IN THOUSANDS, EXCEPT PER
SHARE DATA)
PRO FORMA
Revenues............................................................................................ $ 31,138 $ 14,374
------- -----------
Gross profit........................................................................................ 10,534 4,340
Selling, general and administrative expenses........................................................ 3,964 2,025
------- -----------
Income from operations.............................................................................. 6,570 2,315
Interest and other expense, net..................................................................... 2,317 1,081
------- -----------
Income before income taxes.......................................................................... 4,253 1,234
------- -----------
Net income.......................................................................................... $ 2,508 $ 728
------- -----------
------- -----------
Net income per share................................................................................ $ 0.32 $ 0.09
------- -----------
------- -----------
Shares used in computing pro forma net income(1).................................................... 7,830 7,830
EBITDA(2)........................................................................................... $ 8,820 $ 3,745
<CAPTION>
1997
-----------
<S> <C>
PRO FORMA
Revenues............................................................................................ $ 17,734
-----------
Gross profit........................................................................................ 6,372
Selling, general and administrative expenses........................................................ 2,716
-----------
Income from operations.............................................................................. 3,656
Interest and other expense, net..................................................................... 1,003
-----------
Income before income taxes.......................................................................... 2,653
-----------
Net income.......................................................................................... $ 1,565
-----------
-----------
Net income per share................................................................................ $ 0.20
-----------
-----------
Shares used in computing pro forma net income(1).................................................... 7,830
EBITDA(2)........................................................................................... $ 4,940
</TABLE>
BALANCE SHEET DATA
<TABLE>
<CAPTION>
JUNE 30,
1997
---------
ACTUAL
---------
<S> <C>
(IN
THOUSANDS)
Working capital (deficit)............................................................................................... $ (1,450)
Total assets............................................................................................................ 43,863
Total debt.............................................................................................................. 25,974
Stockholders' equity.................................................................................................... 2,853
<CAPTION>
AS
ADJUSTED(3
)
----------
- -
<S> <C>
Working capital (deficit)............................................................................................... $ 9,835
Total assets............................................................................................................ 52,897
Total debt.............................................................................................................. 23,260
Stockholders' equity.................................................................................................... 14,835
</TABLE>
- ------------------------------
(1) Includes (i) 3,538,875 shares issued by the Company prior to this offering
and the acquistions of the Mesa Companies and AWW, (ii) 1,700,000 shares
issued to the stockholders of the Mesa Companies and AWW in conjunction with
their acquisition, (iii) 1,500,000 shares issued in connection with the
offering, and (iv) 1,090,713 shares representing the effect of outstanding
warrants and options to purchase Common Stock, using the treasury stock
method. Excludes 525,000 shares of Common Stock subject to options and
warrants granted or to be granted in connection with the offering at an
exercise price equal to or exceeding the initial public offering price and
468,750 shares issuable pursuant to options, the vesting of which are
contingent upon the successful completion of certain corporate development
activities.
(2) Under the Note Agreement, dated December 13, 1996, between the Company and
Sanifill, the Company agreed to limit its overall indebtedness to 400% of
its annual EBITDA. See "Certain Transactions--Campbell Wells Acquisition."
EBITDA represents earnings presented above before interest, income taxes,
depreciation and amortization expense. The earnings presented above do not
include any interest expense related to the Predecessor's intercompany
account with Sanifill. See the Introduction to the unaudited Pro Forma
Financial Statements included elsewhere in this Prospectus. EBITDA is not a
measure of cash flow, operating results or liquidity, as determined in
accordance with generally accepted accounting principles, and differs from
net cash provided by operating activities as determined under generally
accepted accounting principles in that EBITDA excludes interest expense and
does not reflect the effects of changes in working capital or deferred tax
items. EBITDA should not be considered in isolation or as an alternative to,
or more meaningful than, net income or cash flows provided by operations, as
determined in accordance with generally accepted accounting principles. The
pro forma EBITDA amounts shown for the Company may not be comparable to
EBITDA as reported by or for other companies because the Company's pro forma
EBITDA may not be calculated on the same basis as EBITDA as reported by or
for other companies.
(3) Adjusted for the sale of 1,500,000 shares of Common Stock offered by the
Company hereby at an assumed offering price of $9.50 per share and the
application of the estimated net proceeds therefrom. See "Use of Proceeds."
19
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
THE FOLLOWING DISCUSSION SHOULD BE READ IN CONJUNCTION WITH THE COMPANY'S
FINANCIAL STATEMENTS AND THE RELATED NOTES THERETO AND THE OTHER FINANCIAL
INFORMATION INCLUDED ELSEWHERE IN THIS PROSPECTUS.
OVERVIEW
The Company is engaged in two areas of the industrial and commercial
wastewater segment of the nonhazardous liquid waste industry: the treatment and
disposal of NCW, including the processing of NCW to recover finished products,
and the treatment and disposal of NOW. On December 13, 1996, the Company
acquired its NOW treatment and disposal operations from Campbell Wells/Sanifill.
In June 1997, the Mesa Companies and AWW became wholly-owned subsidiaries of the
Company in mergers which were accounted for under the pooling-of-interests
method of accounting. The following discussion addresses the results of
operations and financial condition of the Company as shown in the Consolidated
Financial Statements which reflect the historical results of operations of the
Company from its inception in November 1996 through December 31, 1996 and the
six months ended June 30, 1997, and of the Mesa Companies and AWW for all
periods presented. The following discussion also addresses the pro forma
combined operating results of the Company to the extent necessary to better
analyze the Company's consolidated results of operations. Pro forma operating
results include the historical results of operations of the Predecessor for the
period from January 1, 1996 through December 13, 1996 and for the years ended
December 31, 1994 and 1995, with certain pro forma adjustments as described in
the notes to the Pro Forma Financial Statements. The Pro Forma Financial
Statements assume that the Campbell Wells Acquisition and the acquisitions of
the Mesa Companies and AWW were consummated on January 1, 1994 and are not
necessarily indicative of the results the Company would have obtained had these
events actually then occurred or of the Company's future results.
Revenues from NCW operations are derived from two principal sources: the
sale of finished products (fats, oils and feed proteins processed and recovered
from NCW) and tipping and collection fees received for treating and disposing of
NCW. Prices of finished products fluctuate approximately in proportion to the
prices of such products as reported by commodity pricing services. Finished
products are sold primarily to customers in Mexico. Because substantially all of
the Company's NCW operations are conducted in the United States and foreign
sales are denominated and paid in U.S. dollars, the Company is generally not
subject to direct foreign exchange gains and losses. Although such currency risk
is borne by the Company's customers, foreign exchange rate fluctuations could
affect the Company's business by making its products more expensive. See "Risk
Factors--Foreign Sales." The Company does not believe that fluctuations in the
Mexican peso and other foreign currencies have materially impacted its business
in the past. NCW tipping and collection fees charged to customers vary per
gallon by waste stream according to constituents of the waste, expenses
associated with treating the waste and competitive factors.
NOW revenues are derived from fees charged to customers for treating and
disposing of NOW. These fees are based on the volume in barrels of waste
delivered by a customer and the composition of the waste. Currently, such fees
range from $.40 per barrel for salt water to $10.25 per barrel for oil-based
drilling fluids; however, as of July 31, 1997, the market price for treatment
and disposal of NOW consisting primarily of oil, grease, chlorides and heavy
metals found in water-based and oil-based drilling fluids ranged from $6.75 to
$10.25 per barrel, depending upon the makeup of the NOW. Accordingly, the
Company believes that total NOW revenues are a better indicator of performance
than is the average fee charged. Newpark is the largest customer of the
Company's NOW operations, and accounted for approximately 49% of NOW revenues
for the six months ending June 30, 1997. Under the terms of the Disposal
Agreement assigned to the Company in connection with the Campbell Wells
Acquisition, Newpark is obligated to deliver to the Company the lesser of (i)
one-third of the barrels of NOW that Newpark receives for treatment and disposal
in Louisiana, Texas, Mississippi, Alabama and the Gulf of Mexico and (ii)
1,850,000 barrels of NOW, in each case excluding saltwater. The Disposal
Agreement also
20
<PAGE>
governs the price to be paid by Newpark to the Company. Currently, Newpark is
paying $5.50 for each barrel of NOW delivered to the Company for treatment and
disposal under the Disposal Agreement. On June 30, 1998 and on each subsequent
December 31st and June 30th, the per barrel price to be paid by Newpark to the
Company may be adjusted, but not to below $5.50 per barrel. See "Certain
Transactions-- Newpark Agreements" and "Business--The Nonhazardous Liquid Waste
Industry." Although the contractual price is lower than the price that the
Company could obtain in the open market, Newpark's delivery obligations under
the Disposal Agreement allow the Company to eliminate virtually all marketing
and transfer expenses on NOW delivered under the Disposal Agreement.
Accordingly, the Company's gross margin on this NOW volume generally is lower
than the gross margin on NOW volume from customers other than Newpark, but the
Company believes that operating margins on NOW volume from Newpark and other
customers are comparable. The Company expects a disparity between the contract
price and market price to continue for the duration of the Disposal Agreement.
There is no absolute floor on the variable minimum delivery requirements under
the Disposal Agreement and, therefore, a significant reduction in the volume of
NOW generated in the Territory or in Newpark's market share could materially
adversely affect the Company's results of operations and its liquidity. See
"Risk Factors--Dependence on Oil and Gas Industry," and "--Dependence on Newpark
for Offshore-Generated NOW; Covenant Not to Compete; and Obligation to Treat NOW
Received from Newpark at Below-Market Prices." Due to certain noncompete
restrictions with Newpark related to offshore-generated NOW, the Company intends
to focus its future marketing efforts toward inland generators of NOW. The
Company believes that fees charged for services to inland generators will exceed
those under the Disposal Agreement and, if its marketing efforts are successful,
could improve both gross and operating margins.
Depreciation and amortization expenses account for a substantial portion of
the Company's expenses each period. Landfarms, which constitute approximately
43% of the Company's net property, plant and equipment, are amortized over 25
years. Other depreciable assets are expensed over periods ranging from three to
39 years.
The Company anticipates that the NCW operations will represent a growing
share of the Company's business and that the internal growth of the NCW
operations will continue at a faster rate than the internal growth of NOW
operations. Internal growth from NCW operations is expected to continue because
of enactment of state-wide "full pump" regulations in Texas as well as recent
and ongoing expansions of the Company's NCW processing and treatment facilities.
See "Business--The Nonhazardous Liquid Waste Industry." In addition, the Company
expects to focus its acquisition activity primarily in NCW-related businesses.
See "Business--Strategy."
When waste is unloaded at a given site, the Company recognizes the related
revenue and records a reserve for the estimated amount of expenses to be
incurred with the treatment of the NOW in order to match revenues with their
related costs. As treatment occurs, generally over nine to twelve months, the
reserve is released as expenses are incurred.
The Company anticipates that it will benefit from the consolidation of
certain overhead functions relating to the Campbell Wells Acquired Assets, the
Mesa Companies and AWW, such as cash management, finance and insurance. In
addition, the individual operations will have access to the combined financial
resources of the Company, which are greater than the financial resources of the
individual operations. These benefits, however, cannot be accurately quantified
and, to the extent they materialize, will be offset in part or in whole by
increased corporate general and administrative expenses relating to the combined
entities.
21
<PAGE>
RESULTS OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 1997 AND 1996
REVENUES. Revenues increased to $17.7 million in the first six months of
1997 as compared to $6.8 million in the first six months of 1996. NOW operations
are not included in results of operations for the first six months of 1996. On a
pro forma basis to reflect NOW operations in both periods, revenues for the
first six months of 1997 increased by 23.4% from pro forma revenues of $14.4
million in the first six months of 1996. Of total revenues in the first six
months of 1997, NOW operations contributed 56.0%, finished product sales
contributed 32.6% and NCW tipping and collection fees contributed 11.4%. During
the first six months of 1996, pro forma revenues were derived 53.0% from NOW
operations, 40.7% from finished product sales and 6.3% from NCW treatment and
disposal (tipping and collection fees).
Revenues for the first six months of 1997 from NCW operations increased by
15.6% from the first six months of 1996. Revenues from the sale of finished
products decreased by 1.1%, while revenues from NCW treatment and disposal
increased by 123.2%. The average price per pound for finished product sales
decreased by 5.8%, which was offset by a 5.9% increase in volume. The lower
average price per pound and the increased volume in the first six months of 1997
are primarily due to the introduction of lower-priced higher-margin products
from the South Texas processing facility, which was purchased in September 1996,
and which the Company expects will generate a larger share of total finished
product output and NCW revenues for 1997. The increase in NCW treatment and
disposal revenues was attributable to a 183.4% increase in volume, most of which
occurred at the Houston facility, reflecting the expanded permitted volume and
waste capabilities of the facility and implementation of the "full pump"
regulations in Houston. The 1997 period also includes a full six months of
collection revenues from a NCW collection business acquired by the Company in
March 1996.
Revenues for the first six months of 1997 from NOW operations increased by
30.3% from pro forma revenues during the first six months of 1996. The Company
received 2,244,000 barrels of NOW for treatment in the first six months of 1997,
a 19.6% increase over the 1,877,000 barrels received on a pro forma basis during
the first six months of 1996, primarily due to a large one-time delivery of NOW
from a blown-out well and increased deliveries of inland-generated NOW. Pro
forma revenues in the 1996 and 1997 periods are not comparable because 1996
revenues from offshore-generated NOW reflect intercompany transfer prices
established by Sanifill between its transfer station operations and the
Predecessor while such revenues in 1997 reflect the price paid by Newpark under
the Disposal Agreement. Deliveries of NOW by Newpark from September 1996 through
June 1997 were ahead of its annualized contractual obligation. Newpark has
reduced monthly deliveries and is expected to be at the level of the minimum
contractual volumes by the end of 1997. For the year, the Company expects total
NOW revenues to be equal to or slightly higher than what they were in 1996 on a
pro forma basis. Overall, because of the Company's strong pro forma results for
the second half of 1996, the Company does not expect that either its total
revenues or its net income for the second half of 1997 will be significantly
greater than its total pro forma revenues and net income for the second half of
1996, respectively.
GROSS MARGINS. The Company's gross margin increased to 35.9% in the first
six months of 1997 from 14.9% in the first six months of 1996, reflecting the
higher margin contribution of the NOW operations in the 1997 period. On a pro
forma basis, gross margin in the first six months of 1996 was 30.2%. NOW
operations contributed 76.5% and 76.8% of the Company's actual and pro forma
gross profits, respectively, during the first six months of 1997 and 1996,
respectively.
Gross margin in the NCW operations increased from 14.9% in the first six
months of 1996 to 19.1% in the first six months of 1997. Improvement in the
gross margin in NCW operations reflects the increased share of higher-margin NCW
treatment and disposal operations. Gross margin on finished products improved
due to relatively lower product costs. In addition, the Company expects gross
margin on finished products to continue to improve as output of the South Texas
facility increases due to higher margins
22
<PAGE>
generated on the blends of finished products processed and recovered at that
facility. Since the first quarter of 1996, the Company also has emphasized
short-term contractual commitments to control margins in its finished products
operations. This increase in the gross margin on NCW treatment and disposal was
attributable to increased throughput at the Houston facility. Pro forma gross
margin in the NOW operations increased from 43.8% in the first six months of
1996 to 49.1% in the first six months of 1997 due primarily to increased
volumes.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased to $2,716,000 in the first six months of 1997
from $527,000 in the first six months of 1996, as a result of the addition of
the NOW operations in December 1996. Pro forma selling, general and
administrative expenses increased by $691,000, from 14.1% of pro forma revenues
in the first six months of 1996 to 15.3% of pro forma revenues in the first six
months of 1997, primarily due to $400,000 of nonrecurring expenses associated
with the acquisitions of the Mesa Companies and AWW and additional personnel at
the corporate headquarters. The Company also expects selling, general and
administrative expenses to increase in relation to revenues due to additional
expenses associated with being a public company.
INTEREST AND OTHER EXPENSES. Net interest and other expenses increased to
$1,137,000 in the first six months of 1997 from $96,000 in the first six months
of 1996, primarily as a result of interest expense on debt incurred in the
Campbell Wells Acquisition.
YEARS ENDED DECEMBER 31, 1996 AND 1995
REVENUES. Revenues in 1996 totalled $14.3 million versus $11.1 million in
1995. On a pro forma basis, revenues increased by 18.6% to $31.1 million in 1996
from $26.2 million in 1995. Of total pro forma revenues, NOW operations
contributed 56.8% in 1996 and 57.6% in 1995, finished product sales contributed
36.5% in 1996 and 37.3% in 1995, and NCW tipping and collection fees contributed
6.7% in 1996 and 5.1% in 1995.
Finished product sales increased by 16.1% from 1995 to 1996 and NCW tipping
and collection fees increased by 57.1%. This increase in revenues from the sale
of finished products was due to a 4.5% increase in volumes and an 11.2% increase
in the average price per pound. The increase in volumes, in turn, resulted from
increased production of certain blends of product in response to market demand.
The increased price per pound was attributable to product mix and generally
higher market prices. NCW treatment and disposal volumes in 1996 increased by
33.9% and the average price per gallon increased by 16.9%. The increase in NCW
volumes reflects growth of the Houston market. The increase in the average price
per gallon was primarily attributable to collection revenues obtained in the
Company's acquisition of a NCW collection business in March 1996.
Pro forma revenues from NOW operations increased by 16.9%. The number of
barrels received for treatment increased by 37.4% to 3,424,000 barrels in 1996
from 2,492,000 barrels in 1995, primarily due to increased deliveries of pit
remediation NOW. The Company expects that the volume of NOW delivered for
treatment and disposal in 1997 will be slightly lower than 1996 volume because
of the restrictions and limited contractual delivery requirements under the
Disposal Agreement. See "Certain Transactions-- Newpark Agreements."
GROSS MARGINS. The Company's gross margin increased to 17.5% in 1996 from
10.7% in 1995, reflecting improved margins in the NCW operations, as well as the
addition of the NOW operations at the end of 1996. Pro forma gross margin was
33.8% in 1996, as compared to 31.7% in 1995. During 1996 and 1995, NOW
operations contributed approximately 80.8% and 85.7%, respectively, of pro forma
gross profit.
Gross margin in the NCW operations increased to 15.1% in 1996 from 10.7% in
1995. This improvement is attributable to increased sales of finished products,
lower per unit processing costs, lower per unit costs of raw materials, and
increased revenues from treatment and disposal, offset in part by
23
<PAGE>
increased personnel expenses. The Company believes that gross margin on finished
product sales improved because of increased capacity and utilization of the
processing facilities, resulting in more efficient operations. Pro forma gross
margin in the NOW operations increased to 48.1% in 1996 from 47.2% in 1995. This
improvement is primarily the result of increased volumes in 1996.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. In 1996, selling, general and
administrative expenses increased to $1,440,000 from $863,000 in 1995. The
majority of the increase relates to the addition of the NOW operations at the
end of 1996. On a pro forma basis, selling, general and administrative expenses
increased from $3,852,000 in 1995 to $3,964,000 in 1996. However, pro forma
selling, general and administrative expenses were reduced to 12.7% of 1996 pro
forma revenues from 14.7% of 1995 pro forma revenues, primarily due to improved
economies of scale.
INTEREST AND OTHER EXPENSES. Net interest and other expenses increased to
$309,000 in 1996 from $177,000 in 1995, primarily as a result of interest
expense related to the Campbell Wells Acquisition.
YEARS ENDED DECEMBER 31, 1995 AND 1994
REVENUES. Revenues increased from $8.0 million in 1994 to $11.1 million in
1995, primarily as a result of increased finished products sales. The Company
experienced a 14.7% increase in pro forma revenues from $22.9 million in 1994 to
$26.2 million in 1995. For 1995, NOW operations contributed 57.6% to total pro
forma revenues, while finished product sales contributed 37.3% and NCW treatment
and disposal revenues contributed 5.1%. During 1994, pro forma revenues were
derived 64.9% from NOW operations, 30.7% from finished product sales and 4.5%
from NCW treatment and disposal revenues.
Revenues from the sale of finished products increased by 38.4% while
revenues from NCW treatment and disposal increased by 30.0%. The volume of
finished products sold in 1995 increased by 28.9% in 1995 due to an expansion of
the Company's processing capacity during 1995. In addition, the average price
per pound increased by 8.6% from 1994 to 1995, reflecting general market price
changes. NCW treatment and disposal volumes increased by 55.1% in 1995,
primarily from the addition of a major collection client in 1995. The average
tipping fee per gallon of NCW received for treatment and disposal fell by 12.1%
from 1994 to 1995, due to competitive pricing on volumes from a major collection
client and changes in the mix of waste delivered for treatment and disposal. Pro
forma revenues from NOW treatment increased by 1.8%.
GROSS MARGINS. The Company had a gross margin of 10.7% in 1995 versus 6.0%
in 1994. Pro forma gross margin was 31.7% in 1995 compared to 33.6% in 1994. In
1995, NOW operations accounted for 85.7% of the Company's pro forma gross
profit, as compared to 93.7% in 1994.
Gross margin in the NCW operations increased to 10.7% in 1995 from 6.0% in
1994. Improvement in the gross margin from 1994 to 1995 was due primarily to
increases in volume and associated operating efficiencies, as well as a more
favorable product mix. Pro forma gross margin in the NOW operations decreased to
47.2% in 1995 from 48.5% in 1994 due to changes in operating protocols which led
to the addition of personnel. Changes were made in 1995 to eliminate these
unnecessary personnel costs.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased to $863,000 in 1995 from $643,000 in 1994. Pro
forma selling, general and administrative expenses increased to $3,852,000 in
1995, 14.7% of 1995 pro forma revenues, from $3,269,000 in 1994, 14.3% of 1994
pro forma revenues, due to personnel additions.
INTEREST AND OTHER EXPENSE. Net interest and other expenses totalled
$177,000 in 1995 and $109,000 in 1994 because of debt financing on capital
expenditures in the NCW operations.
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LIQUIDITY AND CAPITAL RESOURCES
The Company had a net working capital deficit of $1,450,000 at June 30,
1997, compared to net working capital of $137,000 at December 31, 1996. The
Company made a total of $5.6 million in principal reductions on the $27.8
million Sanifill Note in December 1996 and January 1997. In connection with the
Company's acquisitions of the Mesa Companies and AWW, the Company agreed to pay
from the proceeds of this offering approximately $2.1 million of long-term debt
of the acquired entities, which agreement caused these amounts to be
reclassified as current liabilities and, thus, created the net working capital
deficit at June 30, 1997. On a pro forma basis to give effect to the offering
(assuming an initial public offering price of $9.50 per share) and the
application of the net proceeds thereof, pro forma working capital at June 30,
1997 was $9,835,000.
The Company's capital requirements for its continuing operations consist of
its general working capital needs, scheduled principal payments on its debt
obligations and capital leases, and planned capital expenditures. The Company
anticipates that its net working capital requirement will increase by
approximately $1 million during 1997 due to internal growth of its business.
Capital expenditures for 1997 are budgeted at approximately $3.9 million. Of
this amount, approximately $1.9 million is budgeted to be invested in the NOW
operations on heavy equipment and expenditures related to the relocation of the
Company's headquarters and other operating offices. The remaining amount is
budgeted to be invested in the Company's NCW operations to increase capacity and
comply with regulatory requirements. The Company plans to use a portion of the
net proceeds of this offering to fund budgeted capital expenditures. See "Use of
Proceeds."
At June 30, 1997, the Company had established a $2.5 million reserve to
provide for the cost of future closures of landfarms. The amount of this
unfunded reserve is based on the estimated total cost to the Company of closing
the facilities as calculated in accordance with the applicable regulations.
Applicable regulatory agencies require the Company to post financial assurance
with the agencies to assure that all waste will be treated and the facilities
closed appropriately. The Company has in place a total of $4 million of
financial assurance in the form of a letter of credit and bonds.
The Company believes that the proceeds from this offering and the cash flow
which is expected to be generated by operations will be sufficient to provide
the Company's capital requirements for continuing operations for at least the
next 12 months.
The Company also plans to pursue acquisitions of businesses in the
nonhazardous liquid waste industry, and expects to use a portion of the proceeds
of this offering for such future acquisitions. It is anticipated that additional
capital may be required to pursue the Company's acquisition strategy and,
therefore, following the completion of this offering, the Company intends to
seek a line of credit for general working capital purposes and to finance, in
whole or in part, future acquisitions. Any such line of credit must comply with
the Company's agreements with Sanifill. See "Certain Transactions--Campbell
Wells Acquisition." In addition, there can be no assurance that the Company will
be able to obtain such a line of credit on terms reasonably acceptable to the
Company.
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BUSINESS
The Company was organized in November 1996 to become a leading national
provider of services for the treatment, processing, recovery and disposal of
nonhazardous liquid wastes, including NCW and NOW. On December 13, 1996, the
Company acquired from Campbell Wells certain assets used in the treatment and
disposal of NOW and naturally occurring radioactive material ("NORM") generated
in the exploration for and production of oil and natural gas. In January 1997,
the Company ceased accepting NORM for treatment and disposal. On June 16, 1997,
the Company implemented a one for two reverse split of its Common Stock. On June
17, 1997, the Company acquired all of the issued and outstanding stock of each
of the Mesa Companies and AWW in exchange for an aggregate of 1,700,000 shares
of Common Stock. The acquisitions of each of the Mesa Companies and AWW were
accounted for under the pooling-of-interests method of accounting.
The Company's executive offices are located at 411 N. Sam Houston Parkway
East, Suite 400, Houston, Texas 77060-3545, and its telephone number is (281)
272-4500.
THE NONHAZARDOUS LIQUID WASTE INDUSTRY
GENERAL. The Company is engaged in two areas of the industrial and
commercial wastewater segment of the nonhazardous liquid waste industry: the
treatment and disposal of NCW, including the processing of NCW to recover
finished products, and the treatment and disposal of NOW generated in the
exploration for and production of oil and natural gas. Through its NCW
facilities located throughout Texas, the Company processes used cooking oil and
other food processing residuals to recover medium-grade fats and oils. In
addition, the Company receives fees to collect, process and dispose of other
NCW. The Company also manages, treats and disposes of NOW, which consists
primarily of oil, grease, chlorides and heavy metals found in oil-based and
water-based drilling fluids, as well as cuttings, saltwater, workover completion
fluids, production pit sludges and soil containing these materials.
NONHAZARDOUS COMMERCIAL WASTE ("NCW"). The Company operates five NCW
facilities which process used cooking oil and other food processing residuals
received from restaurants, meat processors, other food processors, grocery
stores and other generators to recover finished products consisting of fats,
oils and feed proteins which are sold for use as ingredients in livestock feed
and chemicals. In addition, the Company receives fees to collect and process NCW
such as grease trap waste (from which the Company also produces low-grade fats,
oils and feed proteins for sale) from restaurants and other food manufacturing
and preparation facilities, grit trap waste from car washes and other types of
industrial wastewaters. The Company operates a fleet of vehicles to collect NCW
directly from over 6,000 NCW generators and also receives NCW from independent
transporters servicing thousands of additional generators. In October 1996, the
Company began construction in Fort Worth of a sixth NCW facility which is
expected to begin production in September 1997. Two of the five existing NCW
facilities also treat and dispose of grease trap waste, and one of these two
facilities also treats and disposes of grit trap waste, oil-contaminated water
and other NCW.
The Company's NCW operations benefit from federal, state and local
regulations prohibiting the disposal of used cooking oil, grease and grit trap
waste and other NCW in municipal collection and treatment systems. Although
restaurants and other food manufacturing and preparation facilities, car washes
and other industrial operations have produced NCW for years, regulations
governing the management of NCW, and the enforcement of such regulations, have
become increasingly stringent. For example, effective as of October 1993,
Subtitle D of RCRA banned the disposal of untreated bulk liquid wastes in
landfills.
State and local regulations also have a significant impact on generators of
grease and grit trap waste and other NCW. For example, effective in March 1997,
the Texas Natural Resource Conservation Commission (the "TNRCC") implemented
state-wide "full pump" regulations requiring 100% evacuation of all grease and
grit traps and proper disposal of the full volume of each trap. The state-wide
"full pump" regulations, together with a similar "full pump" ordinance
implemented by the City of Houston in
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April 1997, have increased demand for the services provided by the Company's NCW
treatment facility in Houston and are expected to create opportunities for
receipt of NCW from markets other than the major metropolitan areas in which the
Company currently operates. Similar regulations had previously been in effect in
the Dallas/Fort Worth area. The failure of governmental authorities to enforce
such "full pump" regulations and ordinances could, however, diminish the demand
for the Company's NCW treatment and disposal services.
NONHAZARDOUS OILFIELD WASTE ("NOW"). The Company treats and disposes of NOW
at five landfarming and landfilling facilities located in Louisiana and Texas.
During 1996, these facilities treated and disposed of approximately 3.4 million
barrels of NOW. Through the processes described in "Operations and Services
Provided-NOW" below, the Company treats NOW to below prescribed regulatory
levels and then transports the resulting material to on-site stockpile areas for
storage.
The market for NOW treatment and disposal results from waste produced in the
drilling and production of oil and gas wells and governmental regulations
governing its treatment and disposal. Louisiana, Texas and certain other oil and
gas producing states have enacted comprehensive laws and regulations governing
the proper management of NOW. Under Louisiana and Texas regulations, if NOW
cannot be treated for discharge or disposed of at the well where it is
generated, it must be transported to a licensed NOW treatment or disposal
facility. There are three primary alternatives for off-site treatment and
disposal of NOW available to generators in the Gulf Coast: (i) landfarming and
landfilling services, which the Company provides; (ii) underground injection;
and (iii) processing and conversion of the NOW into a reuse product. In
addition, federal regulations restrict, and in some cases prohibit entirely, the
discharge of NOW into U.S. waters. Consequently, many operators of exploration
and production facilities, including major and independent oil companies, are
retaining third parties such as the Company to manage their NOW on an ongoing
basis. See "Risk Factors--Dependence Upon NOW Exemption Under RCRA and Other
Environmental Regulations" and "--Dependence on Oil and Gas Industry."
The Company believes that market conditions in the Gulf Coast NOW disposal
market are positive for the following reasons. First, offshore drilling, which
currently generates a substantial portion of the NOW delivered to the Company,
is strong. The Company estimates that over 95% of NOW is generated from drilling
operations. Second, the number of wells drilled to depths in excess of 15,000
feet has steadily increased in the Gulf of Mexico and inland over the past
several years. The Company believes that the drilling of deeper wells benefits
the NOW disposal market due to larger volumes and complexities of drilling
fluids used and the additional cuttings generated. Finally, the Company believes
that, as federal and state regulations governing the disposal of NOW are further
tightened, a greater percentage of NOW will be transported from well sites for
treatment and disposal, thereby increasing the overall market. For example,
effective as of January 1, 1997, federal regulations prohibit the discharge of
any NOW in the coastal zone of the Gulf of Mexico (generally including inland
waters and transition zone onshore areas). In addition, in September 1996, the
comment period expired for proposed EPA zero-discharge regulations for the
territorial seas of Louisiana and Texas (I.E., beginning at the line of ordinary
low water along the part of the coast that is in direct contact with the open
sea and extending three nautical miles). Final regulations are expected to be
promulgated in late 1997 or early 1998. See "--Regulatory Background."
Under the terms of its agreements with Newpark, the Company is contractually
prohibited from accepting from anyone other than Newpark NOW generated in the
Gulf of Mexico and certain other areas and receives for NOW delivered by Newpark
a price per barrel less than the open market price. However, each year, the
Company is contractually entitled to receive from Newpark not less than the
lesser of (i) one-third of the barrels of NOW that Newpark receives for
processing and disposal in Louisiana, Texas, Mississippi, Alabama and the Gulf
of Mexico, and (ii) 1,850,000 barrels of NOW, in each case excluding saltwater.
Because Newpark is obligated to deliver no more than 1,850,000 barrels to the
Company no matter how large the offshore NOW market (or Newpark's share of it
is), the ability of the Company to participate in any substantial growth of the
offshore NOW market may be limited. However, growth or stability in the offshore
NOW market would increase the likelihood that the Company will receive at least
1,850,000 barrels of NOW annually from Newpark. See "Certain
Transactions--Newpark Agreements."
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The Disposal Agreement does not restrict the Company's ability to receive
inland-generated NOW that is delivered to the Company's landfarms from the
generation site by land transportation. Land-based drilling activity in Texas
and Louisiana continues to be strong. In addition, inland markets are also
experiencing the trend towards deeper wells, which generate greater volumes and
complexities of NOW. Because the Company is currently receiving a higher price
per barrel (and higher profit margins) from NOW generated onshore than NOW
generated offshore and because of the contractual prohibitions in the Disposal
Agreement, the Company intends to focus its marketing efforts towards inland
generators of NOW.
The Company expects that its NOW operations will expand through growth of
existing operations and, potentially, expansion into new geographic areas. The
Company believes that other NOW treatment and disposal opportunities exist in
other regions of the United States, particularly in those states with
significant oil and gas exploration activity.
STRATEGY
The Company plans to become a leading national provider of services for the
treatment, processing, recovery and disposal of NCW and NOW by expanding through
acquisitions and continued internal growth.
ACQUISITIONS. The Company believes the NCW industry is highly fragmented.
As a result, the Company believes that it has a significant opportunity to
implement an acquisition strategy that consolidates the industry. The Company
anticipates that acquisition candidates in the NCW markets will typically have
annual revenues ranging from $1 million to $10 million. The key elements of the
Company's acquisition strategy are:
ENTER NEW GEOGRAPHIC MARKETS. In new markets, the Company intends to
target one or more leading local or regional companies providing NCW
treatment, processing, recovery and disposal services. The Company will seek
acquisition targets that have the customer base, technical skills and
infrastructure necessary to be a core business into which other NCW
operations can be consolidated.
EXPAND WITHIN MARKETS. Once the Company has entered a market, it will
seek to expand its market penetration and range of services offered through
"tuck-in" acquisitions of other local companies, whose operations can be
integrated into an existing Company operation or expanded to provide
additional NCW services.
ACQUIRE COMPLEMENTARY BUSINESSES. The Company will focus on its
traditional markets in the NCW treatment, processing, recovery and disposal
business and may acquire companies providing complementary services to the
same customer base, such as biosolids management and rendering businesses.
This will enable the Company to offer its customers comprehensive, single
source NCW treatment, processing, recovery and disposal services in certain
markets.
In addition, the Company may seek to acquire other NOW landfarms and
landfills, as well as environmental service businesses providing complementary
services to its NOW customers, such as the cleaning and rental of containers
used to store and transport NOW. The Company's ability to expand its NOW
operations is limited, however, by the Company's contractual arrangements with
Newpark. See "Risk Factors--Dependence on Newpark for Offshore-Generated NOW;
Covenant Not to Compete; and Obligation to Treat NOW Received from Newpark at
Below-Market Prices."
The Company believes it will be regarded by certain acquisition candidates
as an attractive acquiror because of: (i) the Company's strategy for creating a
national, comprehensive and professionally managed nonhazardous liquid waste
company, which capitalizes on cross-marketing and business development
opportunities; (ii) the Company's increased visibility and access to financial
resources as a public company; (iii) the potential for owners of the businesses
being acquired to participate in the Company's planned internal growth and
growth through acquisitions, while realizing liquidity; and (iv) the Company's
management team which includes individuals with successful track records
operating businesses in the waste management industry and acquiring new
businesses. See "Risk Factors--Risks Related to the Company's Acquisition
Strategy."
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After the completion of this offering, the Company intends to register
3,000,000 additional shares of Common Stock under the Securities Act for use in
connection with future acquisitions. See "Description of Securities--Shares
Eligible for Future Sale." After the completion of this offering, the Company
also intends to seek a line of credit to be used for future acquisitions and
working capital. There can be no assurance, however, that such a line of credit
can be obtained. In addition, any debt instruments issued in making acquisitions
and any borrowings made under any such line of credit (and any preacquisition
debt owed by acquired companies) must be within the limits permitted by the
Company's note agreement with Sanifill. See "Certain Transactions--Campbell
Wells Acquisition." The Company currently has no agreements or understandings to
make any acquisitions.
INTERNAL GROWTH. A key component of the Company's strategy is to continue
the internal growth of its existing operations and subsequently acquired
businesses. The elements of the Company's internal growth strategy include:
ESTABLISH REPUTATION AS SINGLE SOURCE PROVIDER. The Company believes
there are a number of restaurant chains which would prefer to have a single
source provider for the collection, treatment and disposal of grease trap
wastes and used cooking oils, but are unable to do so because the NCW
treatment industry is fragmented. Similarly, opportunities exist in the grit
trap market for multi-unit car wash owners. The Company intends to market
itself as a multi-city, single source provider for such restaurant chains
and multi-unit car wash owners.
EXPAND EXISTING FACILITIES AND TYPES OF NCW ACCEPTED. The Company
intends to invest in its existing NCW treatment facilities to expand
physical plant size and to increase the treatment capabilities of its
facilities, and will seek to amend its permits for certain facilities in
order to receive additional waste streams. The Company also plans to expand
its collection infrastructure in order to increase plant utilization.
CAPITALIZE ON TRENDS TOWARDS OUTSOURCING AND PRIVATIZATION. In response
to Subtitle D of RCRA, some municipalities began accepting certain types of
NCW at their wastewater treatment plants because local generators were no
longer allowed to dispose of their NCW at landfills. As private market
alternatives have become available, some of those municipalities are again
refusing to accept NCW for treatment and disposal at their main treatment
plants. As a result, opportunities may exist for the Company to develop
separate NCW treatment facilities in cooperation with municipalities.
Likewise, companies in the private sector are increasingly recognizing the
need to engage third parties such as the Company to handle their NCW on an
ongoing basis.
INCREASE INLAND NOW BUSINESS. Because of the Company's contractual
arrangements with Newpark which limit the Company's offshore activities as
well as the price paid to it by Newpark per barrel of NOW treated and
disposed, but which guarantee the Company a substantial volume of offshore
NOW, the Company intends to focus its marketing efforts towards inland
generators of NOW. See "Certain Transactions--Newpark Agreements." The
Company believes that focusing its marketing efforts in this manner will
increase the total amount of NOW that is delivered to the Company for
treatment and disposal.
Further, the Company believes that there is a substantial amount of NOW
stockpiled in onshore surface pits. The Company currently estimates that
less than one million barrels of such stockpiled NOW is treated each year
and that such amount would grow substantially if state regulations requiring
remediation of these onshore surface pits are further tightened and
enforced. See "Risk Factors-- Absence of Combined Operating History" and
"--Reliance on Key Personnel; Management of Growth" and
"Business--Regulatory Background--State and Local Regulations."
See "Risk Factors--Risks Related to Operating and Internal Growth Strategy."
OPERATIONS AND SERVICES PROVIDED
The Company provides a range of services for the treatment, processing,
recovery and disposal of NCW and NOW and, as part of its NCW treatment and
processing operations, the Company manufactures
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finished products which are sold primarily to producers of livestock feed and
chemicals in Mexico for use as ingredients in such products.
NCW
FINISHED PRODUCTS. The Company processes used cooking oil and other food
processing residuals received from restaurants, meat processors, other food
processors, grocery stores and other generators, as well as lower-grade
materials recovered from its treatment of grease trap waste, to produce finished
products. The Company sells these finished products almost exclusively in Mexico
to producers of livestock feed and chemicals.
The Company believes that the primary constraint in its finished product
operations is its ability to procure used cooking oil and other food processing
residuals which are used in the production of finished products. Such used
cooking oil and other food processing residuals are collected in one of the
following three manners:
- COMPANY ROUTES: Company drivers service clients on pre-established
routes. These clients are secured through the Company's sales staff and
agreements are entered into whereby the Company agrees to pick up the
materials at the clients' facilities. In most cases, clients are paid per
pound of material collected. The Company currently collects used cooking
oil from approximately 6,000 restaurants.
- THIRD PARTY TRANSPORTERS: The Company purchases used cooking oil and
other food processing residuals from third parties that acquire such
materials from clients and routes serviced by them.
- BULK PURCHASES: The Company purchases used cooking oil and other food
processing residuals in bulk as needed. Such bulk purchases are typically
made in tanker and railcar size loads and are shipped directly to the
Company's Laredo plant for mixing and/or refining.
Used cooking oil is deposited by clients into containers supplied by the
Company. The contents of these containers are then loaded by Company drivers
onto trucks. The frequency of service is determined by the volume of used
cooking oil generated by the client's establishment. After delivery to Company
facilities, the used cooking oil is processed by heating, settling and treating,
as well as by refining and mixing. The finished products are fats, oils and feed
proteins of various grades. Grease trap waste is processed in a similar manner
to produce lower-grade finished products.
The Company's finished products are commodities, the prices of which are
reported by commodities pricing services. While the Company's prices for its
finished products are generally influenced by reported prices, historically the
Company has generally been able to achieve above-average prices due to
particular supply/demand dynamics. There can be no assurance, however, that
sales of finished products in Mexico will continue to generate higher prices
than if the products were sold elsewhere. See "Risk Factors-- Impact of
Commodity Prices."
The Company's finished products are distributed by truck/tanker-trailers
from the various processing facilities to Laredo for mixing and final
preparation. The finished products are then distributed to customers by truck
and/or rail from Laredo.
CUSTOMERS. The Company's customers for its finished products are almost
exclusively producers of livestock feed and various chemicals located in Mexico.
Sales of finished products to customers in Mexico represented approximately 80%,
82% and 70% of total revenues, and approximately 28%, 35% and 32% of total pro
forma revenues, for the years ended December 31, 1994, 1995 and 1996,
respectively. Sales to Bachoco represented approximately 52%, 62% and 43% of
total revenues, and approximately 18%, 26% and 20% of total pro forma revenues,
for such years. Marketing activities are conducted through the Company's
marketing department in Fort Worth. The Company obtains payment protection for
most foreign sales by requiring letters of credit issued or guaranteed by U.S.
banks. The Company invoices in U.S. dollars in order to avoid currency exchange
losses or foreign exchange control difficulties. See "Risk Factors--Foreign
Sales," "--Concentration of Customers," and "--Concentration of Credit Risks."
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TREATMENT AND DISPOSAL OPERATIONS. At its Dallas facility and one of its
Houston facilities, the Company treats and disposes of NCW generated by various
types of businesses. Revenues are earned from tipping fees paid by customers.
Grease trap waste from restaurants and other food manufacturing and preparation
facilities, grit trap waste from car washes and other types of NCW are
transported to the Company's facilities in vacuum trucks, trailers and other
transportable containers. The Company operates a fleet of vehicles to service
grease traps in the Dallas/Fort Worth area. In this market, the Company has both
regular and call-in customers that pay for the Company to service their grease
traps. In the Houston metropolitan area, other than used cooking oil, the
Company does not collect any NCW for processing. Accordingly, its customers in
this area are typically independent transporters that collect NCW from their own
customers and deliver the NCW to the Company for treatment and disposal.
Using a variety of physical, chemical, thermal and biological techniques,
the NCW is broken down into constituent components. At the Company's facilities,
water extracted from the NCW is pretreated and then discharged into the
municipal sanitary sewer system, recyclables, such as recovered greases, are
transported to one of the Company's cooking oil processing facilities for use in
producing lower-grade fats, oils and feed proteins, and solid materials are
dried and disposed of in a solid waste landfill.
The Company's NCW treatment facilities are designed to treat and dispose of
NCW that cannot be lawfully deposited into municipal collection and treatment
systems. The Company's Dallas facility is the only grease and grit trap waste
processing facility in Texas which also has the required regulatory approvals
from the Texas Health Department for operation as a used cooking oil rendering
facility. One of the Company's Houston facilities is the only grease and grit
trap waste processing facility in the Houston area which also accepts
nonhazardous industrial waste.
NOW
At its five NOW facilities located in Louisana and Texas, the Company treats
and disposes of NOW that is generated in the exploration for and production of
oil and natural gas. NOW consists primarily of oil, grease, chlorides and heavy
metals found in oil-based and water-based drilling fluids, as well as cuttings,
saltwater, workover and completion fluids, production pit sludges and soil
containing these materials.
Landfarming involves six distinct stages. NOW is brought to the Company's
facilities in trucks and on barges and the delivered waste materials are then
tested. Materials which do not qualify as permitted NOW in accordance with
applicable state regulations are rejected. Accepted NOW is then loaded into
treatment cells at the rate of approximately 15,000 barrels per acre. This
loading process creates a layer of NOW approximately two feet thick across the
treatment cell. Next, the treatment cell is flooded with fresh water and mixed
to dissolve salts and soluble materials. Saltwater is then pumped out through a
collection system and typically disposed of at a saltwater injection well
on-site. This flooding process is typically repeated several times. The NOW is
then processed to remove organic contamination through biological degradation.
The treatment cells are periodically agitated to ensure that the microbes
receive sufficient oxygen, sunlight and water. Total treatment of a cell takes
approximately nine to twelve months. In the final stage, the remaining material
is tested to ensure compliance with regulatory requirements. Thereafter, the
material is transported to on-site stockpile areas for storage.
In connection with the Campbell Wells Acquisition, Sanifill assigned to the
Company its rights and obligations under the Disposal Agreement between Sanifill
and Newpark. Pursuant to the terms of the Disposal Agreement, through June 30,
2021, Newpark is obligated to deliver to the Company on an annual basis for
treatment and disposal at certain of its Louisiana landfarms the lesser of (i)
one-third of the barrels of NOW that Newpark receives for processing and
disposal in Louisiana, Texas, Mississippi, Alabama and the Gulf of Mexico and
(ii) 1,850,000 barrels of NOW, in each case excluding saltwater. The Disposal
Agreement also governs the price to be paid by Newpark to the Company for
delivered NOW. The contractual price is lower than the price for treatment and
disposal that the Company would obtain in the open market, and the Company
expects such price disparity to persist for an indefinite time period.
Currently, Newpark is paying to the Company $5.50 for each barrel of NOW
delivered to the Company under the Disposal Agreement. On June 30, 1998 and on
each subsequent December 31st and June 30th
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occurring during the term of the Disposal Agreement, the per barrel price to be
paid by Newpark to the Company will be adjusted. Adjustments are made based upon
changes occurring in the average prices received by Newpark from customers for
NOW treatment and disposal and other related services performed by Newpark
during the six-month period ending on the applicable adjustment date compared,
on a percentage basis, to the average prices received by Newpark from customers
for such disposal and services during the six-month period commencing 12 months
prior to such adjustment date and concluding six months prior to such adjustment
date. The adjusted price will be applied retroactively to all invoices received
by Newpark from the Company during the six-month period preceding the applicable
adjustment date. In no event, however, will the price paid by Newpark to the
Company be less than $5.50 per barrel. For a more thorough summary of the
Disposal Agreement and related transactions, see "Certain Transactions--Newpark
Agreements." See also "Risk Factors--Dependence on Newpark for Offshore-
Generated NOW; Covenant Not to Compete; and Obligation to Treat NOW Received
from Newpark at Below-Market Prices."
In addition to NOW received from Newpark (which is primarily
offshore-generated NOW), the Company receives NOW generated on land within
Louisiana and Texas. Due to its contractual arrangements with Newpark which
limit the Company's offshore activities as well as the lower price per barrel
paid to the Company by Newpark, the Company intends to concentrate its marketing
efforts towards inland generators of NOW. The Company believes that this
strategy will increase the total amount of NOW that is delivered to the Company
for treatment and disposal.
All of the Company's landfarms (except Elm Grove, Louisiana) have water
access, a key factor enabling barge transport of the NOW and reducing
transportation costs. As part of the Company's predecessor's contractual
arrangements with Newpark, however, the dock facilities at the Company's other
three Louisiana landfarms have been leased to Newpark until August 31, 2021.
The Company's Bustamonte, Texas facility generally accepts inland-generated
NOW generated within a radius of 150 miles. The Bustamonte facility uses a
combination of landfarming and landfilling, due primarily to the dry climate in
South Texas. The treatment process used is similar to Louisiana landfarming
although the NOW is dispersed and dried, rather than flushed with fresh water,
prior to stockpiling in on-site, synthetically-lined landfilled areas.
COMPETITION
NCW. In its NCW operations, the Company must compete for the procurement of
used cooking oil and other food processing residuals necessary to manufacture
its finished products. The limited availability of these higher-grade raw
materials causes competition among processors who bid for suppliers' materials.
The amount of used cooking oil and other food processing residuals processed
directly affects the amount of finished goods produced.
The Company purchases used cooking oil and other food processing residuals
utilized to process its finished products from clients on pre-established
routes, independent transporters and in bulk. A number of companies, some of
which have substantially greater resources than the Company, compete for such
materials through purchases from independent transporters and direct purchases
from restaurants. Because the Company competes with independent transporters in
some markets with respect to the collection of these materials, some independent
transporters may be reluctant to deliver collected materials to the Company for
processing.
The Company also competes in the sale of finished products with other
processors of used cooking oil, as well as with producers of other alternative
commodities. However, few competitors have established a customer base in Mexico
due to, among other things, the complexity of shipments across the border, lack
of long-term business relationships in Mexico, and the uncertainty of the
Mexican economy. In addition, there are inadequate supplies of fats and oils
available to Mexican customers from Mexican suppliers. Companies affiliated with
Thomas B. Blanton, the Company's Vice President--NCW Operations, have been
conducting business in Mexico for over 20 years and have several long-time
customers. Competition
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<PAGE>
for sales of finished products to the Company's Mexican customers can be
expected to increase. There can be no assurance, however, that the Company will
be able to continue to export most of its finished products to Mexico or
continue to receive higher prices from sales to Mexican customers than would be
available from U.S. customers. See "Risk Factors--Foreign Sales."
The Company has also developed proprietary products that have been used by
its customers as substitutes for other more expensive products previously used
as ingredients in goods produced by such customers. The Company believes that
these proprietary products provide it a competitive edge over competitors in the
sale of certain finished products.
The business of treating and disposing of NCW such as grease and grit trap
waste in the Texas market is also competitive and fragmented. Competitors in
this market compete primarily on the basis of proximity to collection
operations, tipping fees charged and quality of service. Area landfills operated
by large national waste management companies accept grease trap and grit trap
waste materials. In addition, with respect to the grease trap business, several
privately owned companies in the Houston market collect and treat grease trap
waste materials.
Competition in the grease trap business in the Dallas/Fort Worth area exists
primarily from two NCW treatment facilities, one of which is owned by a national
waste management company with established pick-up routes.
Competition for nonhazardous liquids classified by the TNRCC as Class I and
Class II nonhazardous liquids such as tank wash water is more diversified than
is the case with other waste streams. Area landfills accept both Class I and
Class II liquids for disposal. Additional competition for NCW treatment and
disposal is provided by local recycling companies and a number of injection
wells.
In addition to present competition, other companies with significantly
greater capital and other resources than the Company that do not currently
operate NCW treatment facilities may enter this area of the industry.
See "Risk Factors--Competition."
NOW. The Company estimates that over 90% of NOW generated in the Gulf Coast
region is processed or disposed of on-site by the generators of the NOW or by
independent third parties. The Company does not provide any NOW treatment or
disposal services at the well-site. Under state regulations, if NOW cannot be
treated for discharge or disposed at the well where it is generated, it must be
transported to a licensed NOW disposal or treatment facility. There are three
primary alternatives for off-site treatment and disposal of NOW available to
generators in the Gulf Coast: (i) landfarming and landfilling services, which
the Company provides; (ii) underground injection; and (iii) processing and
conversion of the NOW into a reuse product. In the geographic market served by
the Company, there are over 100 permitted commercial facilities including
landfarms, landfills and injection facilities authorized to treat and dispose of
NOW.
Since August 1996, Newpark has controlled substantially all of the market in
the Gulf Coast for offshore, off-site NOW disposal, certain of which is directed
to the Company in order for Newpark to fulfill its obligations to the Company
under the Disposal Agreement. Due to its contractual arrangements with Newpark,
the Company is prohibited from, among other things, competing with Newpark for
the collection or disposal of NOW generated in a marine environment or
transported in marine vessels within Louisiana, Texas, Mississippi, Alabama and
the Gulf of Mexico. This prohibition expires on August 12, 2001. See "Certain
Transactions--Newpark Agreements."
In addition to present competition in the Gulf Coast region, one or more
third parties could establish additional transfer stations along the Gulf Coast
to accept NOW for transport to an existing or newly constructed commercial
disposal facility. Since January 1, 1997, a third party has filed notice of its
intent to apply for the permits and licenses necessary to establish three such
transfer stations. To the extent any such
33
<PAGE>
transfer stations, individually or in the aggregate, diverted substantial
amounts of offshore generated NOW from Newpark, the amount of NOW ultimately
delivered to the Company could be reduced.
Newpark is also a competitor with respect to NOW produced inland in the Gulf
Coast region. The Company competes for inland-generated NOW with a number of
smaller companies which treat and dispose of NOW in landfarm operations,
landfills and injection wells, and with one company which de-waters NOW and
disposes of the residual sludge in a landfill. Although complete information
regarding market share for inland-generated NOW is not available, the Company
estimates that it receives a substantial percentage of all NOW generated inland
in Louisiana and Texas that is treated off-site by third parties, excluding
saltwater.
The Company believes that there are certain barriers to entry in the
off-site NOW disposal business in the Gulf Coast region. These barriers include
formalized procedures for customer acceptance, licenses, permits, and the need
for specially equipped facilities and trained personnel.
See "Risk Factors--Competition."
REGULATORY BACKGROUND
The Company's business operations are affected both directly and indirectly
by governmental regulations, including various federal and state pollution
control and health and safety programs that are administered and enforced by
regulatory agencies including, without limitation, the EPA, the U.S. Coast
Guard, the U.S. Army Corps of Engineers, the TNRCC, the Texas Department of
Health, the Texas Railroad Commission, the Louisiana Department of Environmental
Quality and the Louisiana Department of Natural Resources. These programs are
applicable or potentially applicable to one or more of the Company's existing
operations. Although the Company intends to make capital expenditures to expand
its NCW and NOW treatment capabilities, the Company believes that it is not
presently required to make material capital expenditures to remain in compliance
with federal, state and local laws and regulations relating to the protection of
the environment. See "Risk Factors--Dependence Upon NOW Exemption Under RCRA and
Other Environmental Regulations" and "--Failure To Comply with Governmental
Regulations."
RCRA. RCRA is the principal federal statute governing hazardous and solid
waste generation, treatment, storage and disposal. The Company's Louisiana and
Texas landfarms treat and dispose of NOW, 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 NOW from regulation under RCRA. The appeal or
modification of this exemption by administrative, legislative or judicial
process would require the Company to change significantly its method of doing
business and would have a material adverse effect on the Company's business,
financial condition and results of operations. There is no assurance that the
Company would have the capital resources available to do so, or that it would be
able to adapt its operations. See "Risk Factors--Failure to Comply with
Governmental Regulations."
In addition to its positive impact on the Company's NOW operations, RCRA
also indirectly affects the Company's operations at its NCW treatment facilities
by prohibiting, among other things, the disposal of certain liquid wastes in
landfills. This prohibition increases demand for the services provided by the
Company's NCW treatment facilities.
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
34
<PAGE>
disposal or treatment of hazardous substances and waste transporters who
selected such facilities for treatment or disposal of hazardous substances.
CERCLA has been interpreted to create strict, joint and several liability for
the cost of removal and remediation, other necessary response costs and damages
for injury to natural resources.
Despite the current exemption of NOW under RCRA, if the Company's operations
resulted in the release of hazardous substances, the Company could incur CERCLA
liability. Although the Company is not aware of any such event, it (or AWW, the
Mesa Companies or Campbell Wells) may have disposed or arranged for disposal of
hazardous substances that could result in the imposition of CERCLA liability on
the Company in the future. In addition, the Company would incur CERCLA liability
if any hazardous substances at the Company's facilities leached down into
groundwater.
None of the Company, Campbell Wells, AWW or any of the Mesa Companies has
ever been named by the EPA as a potentially responsible party in any CERCLA
action, and the Company does not believe that there is any basis for such a
claim. Nonetheless, the identification of one or more sites at which cleanup
action is required could subject the Company to liabilities which could have a
material adverse effect on the Company's business, financial condition and
results of operations.
THE CLEAN WATER ACT. The Company treats and discharges wastewaters at its
NCW facilities and at its NOW landfarms. These activities are subject to the
requirements of the Clean Water Act and federal and state enforcement of these
regulations. The Clean Water Act regulates the discharge of pollutants,
including NCW and NOW, into waters. 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
Company's customers for NOW services. The EPA Region 6 Outer Continental Shelf
("OCS") permit covering oil and gas operations in federal waters in the Gulf of
Mexico (seaward of the Louisiana and Texas territorial seas) was reissued in
November 1992 and modified in December 1993. This permit imposes stricter
discharge limits on oil and grease concentrations in produced waters to be
discharged. These limits are based on the Best Available Treatment Economically
Available ("BAT") requirements contained in the Oil and Gas Offshore Subcategory
national guidelines which were published March 4, 1993. Additional requirements
include toxicity testing and bioaccumulation monitoring studies of proposed
discharges.
EPA Region 6, which includes the Company's current market, continues to
issue new and amended National Pollution Discharge Elimination System ("NPDES")
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. These permits include:
- Onshore subcategory permits for Texas, Louisiana, Oklahoma and New Mexico.
These permits completely prohibit the discharge of drilling fluids, drill
cuttings, produced water or sand, and various other oilfield wastes
generated by onshore operations into waters of the U.S. This provision has
the effect of requiring that most oilfield wastes follow established state
disposal programs.
35
<PAGE>
- The OCS permit for the western Gulf of Mexico, covering oil and gas
operations in federal waters (seaward of the Louisiana and Texas
territorial seas).
During September 1996, the period for commenting on proposed EPA
zero-discharge regulations for the territorial seas subcategory of the Gulf of
Mexico expired. Final regulations are expected to be promulgated in late 1997 or
early 1998. Zero-discharge regulations in the coastal zone (generally including
inland waters and transition zone onshore areas) became effective January 1,
1997. The combined effect of all these regulations will closely approach a "zero
discharge" standard affecting all waters except those of the OCS.
STATE AND LOCAL REGULATIONS. Order 29-B of the Louisiana Department of
Natural Resources contains extensive rules regarding the generation, treatment,
storage, transportation and disposal of NOW. Under Order 29-B, on-site disposal
of NOW is limited and subject to stringent guidelines. If these guidelines
cannot be met, NOW 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 NOW) must be closed or modified to meet regulatory standards; however, full
enforcement of this portion of Order 29-B has been deferred. Rule 8 of the Texas
Railroad Commission also contains detailed requirements for the management and
disposal of NOW. Permits issued by state regulatory agencies are required for
each NOW treatment facility operating within Louisiana and Texas. The Company
must perform tests before acceptance of any NOW, as well as during and after
treatment to ensure compliance with all regulatory requirements.
The closure of any of the Company's landfarms is also regulated by state
authorities. In general, closure of a landfarm involves a multi-phase process
whereby all injection wells at the landfarm are plugged and abandoned, all
surface equipment is removed from the site, the treatment cells and perimeter
containment levees are removed and the surface of the site is contoured and
vegetated. Additional regulatory requirements include monitoring the surface
runoff water, the soil pore water and the groundwater for a period of five
years. If, after five years, the water quality meets the requirements specified
in the state regulations, the site is certified as closed.
The Company's NCW treatment facilities are subject to direct regulation by a
variety of state and local authorities. Typically, the Company is required to
obtain processing, wastewater discharge and air quality permits from state and
local authorities to operate its NCW treatment facilities and to comply with
applicable regulations concerning, among other things, the generation and
discharge of odors and wastewater.
The Company also holds hauler permits issued by the TNRCC and a rendering
hauler permit issued under the Texas Rendering License Act. All but one of the
Company's NCW treatment facilities hold permits issued under the Texas Rendering
License Act.
State and local regulations also indirectly affect the Company's operations
at its NCW treatment facilities. "Full-pump" regulations and ordinances adopted
by the TNRCC and the Cities of Dallas, Fort Worth, Houston and San Antonio each
require 100% evacuation of all grease and grit traps and proper disposal of the
full volume of each trap. These regulations are causing many of the generators
of such NCW to retain third parties such as the Company to handle their NCW on
an ongoing basis. See "--The Nonhazardous Liquid Waste Industry."
States and localities into which the Company may expand, by acquisition or
otherwise, may now or in the future have regulations with positive or negative
effects on the Company. It is possible that state or local regulations could
adversely affect the Company's execution of its acquisition strategy. See "Risk
Factors-- Dependence Upon Exemption Under RCRA and Other Environmental
Regulations" and "--Failure to Comply with Governmental Regulations."
PROPERTIES
The Company's corporate offices are located in Houston, Texas. The corporate
offices were relocated from Lafayette, Louisiana in May 1997. The current
corporate offices consist of approximately 6,800 square feet of office space
occupied under a lease which expires on June 1, 2002.
36
<PAGE>
The Company owns and operates five NCW treatment facilities in Texas. The
following table sets forth information relating to the Company's NCW treatment
facilities.
<TABLE>
<CAPTION>
APPROXIMATE
SQUARE OWNED/
LOCATION FOOTAGE PRIMARY USE LEASED
- --------------------------------- ------------- --------------------------------- ----------
<S> <C> <C> <C>
Dallas, Texas.................... 6,000 Treatment and disposal of NCW; Leased(1)
processing and recovery of
finished products
Houston, Texas................... 23,000 Treatment and disposal of NCW; Owned(2)
processing and recovery of
finished products
Houston, Texas................... 5,000 Processing and recovery of Leased(1)
finished products
Los Fresnos, Texas............... 9,000 Processing and recovery of Owned(2)
finished products
San Antonio, Texas............... 5,700 Processing and recovery of Leased(1)
finished products
</TABLE>
- --------------------------
(1) Each of these properties is owned by Thomas B. Blanton and is being leased
to the Company at no charge until it can be conveyed free of any material
encumbrances to the Company. See "Certain Transactions--Other."
(2) Each of these properties is held subject to a deed of trust.
In October 1996, the Company began construction in Fort Worth of a 14,000
square foot facility for the recovery and processing of finished products. This
new facility is expected to begin production in September 1997. The Company also
owns an administrative office in Fort Worth consisting of approximately 2,000
square feet of office space and a facility located in Laredo, Texas that is used
as a terminal.
The Company operates five NOW treatment facilities in Louisiana and Texas.
The following table sets forth information relating to the Company's NOW
treatment facilities.
<TABLE>
<CAPTION>
AREA PERMITTED
FOR NOW APPROXIMATE SQUARE
TREATMENT AND FOOTAGE OF OFFICE OWNED/
LOCATION DISPOSAL FACILITIES LEASED
- -------------------------------- --------------------- ------------------------- ----------
<S> <C> <C> <C>
Bateman Island, Louisiana....... 115 acres 5,000 Leased(1)
Bourg, Louisiana................ 140 acres 5,000 Leased(2)
Elm Grove, Louisiana............ 152 acres 500 Owned
Mermentau, Louisiana............ 277 acres 10,000 Owned
Bustamonte, Texas............... 120 acres 1,000 Owned
</TABLE>
- --------------------------
(1) Lease expires in October 1999, with seven three-year renewal options.
(2) Lease expires in January 2000, with seven three-year renewal options.
The Company also owns a facility in Lacassine, Louisiana. This facility
consists of approximately 8,000 square feet of office and equipment storage
space and approximately 130 acres of undeveloped land. A total of 100 acres of
the Lacassine facility is currently permitted for NOW/NORM landfarming; however,
the facility has been used exclusively for the treatment and disposal of NORM.
In January 1997, the Company ceased accepting NORM at the Lacassine facility.
The Company has begun taking the steps necessary to close this facility in
accordance with Louisiana law.
All of the Company's facilities satisfy its present needs; however, as part
of its internal growth strategy, the Company intends to expand the size of
certain of its NCW treatment facilities and increase the number and types of
permitted waste streams and treatment capabilities of such facilities. The
Company believes that the unutilized capacity of each of the leased landfarms is
sufficient for at least 25 years; which, in each case, exceeds the remaining
term (including options) of the lease agreement for such facility. The Company
also believes that the remaining capacity at each of the landfarms owned by the
Company is sufficient for at least 25 years.
37
<PAGE>
LEGAL PROCEEDINGS
In August 1997, one of the Company's subsidiaries was added as a defendant
in a lawsuit originally filed in 1994 against Campbell Wells and others in the
District Court of Jim Wells County, Texas. This dispute arose out of an
application filed by Waste Facilities, Inc. ("WFI"), the operator of a South
Texas NOW treatment facility, to renew its permit to treat NOW. The suit
alleges, among other things, that Campbell Wells and the other defendants
(including the Company's subsidiary) wrongfully interfered with WFI's ongoing
relations with its customers and with WFI's prospective contractual and business
relations. In addition, WFI has alleged that the defendants conspired to
wrongfully restrain trade and interfere with WFI's business. WFI's amended
petition seeks actual and punitive damages from each of the defendants.
Virtually all of the actions complained of by WFI occurred prior to the time
that the Company and the subsidiary involved were organized and, therefore, the
Company believes that the claims asserted against its subsidiary are without
merit.
With the exception of the lawsuit described above, there are no material
pending legal proceedings to which the Company or any of its subsidiaries is a
party. However, prior to the closing of the Campbell Wells Acquisition, several
lawsuits were brought against Campbell Wells based upon the operation of certain
of the Louisiana landfarms purchased by the Company as part of the Campbell
Wells Acquisition.
In one of the lawsuits filed against Campbell Wells, approximately 300
individuals residing in and around Grand Bois, Louisiana are seeking unspecified
monetary damages allegedly suffered as a result of (i) odors allegedly emitted
by NOW received from Exxon Company U.S.A. ("Exxon") at the Bourg, Louisiana
landfarm in March 1994, and (ii) alleged air, water and soil contamination in
connection with ongoing operations at the facility. Trial is set to commence in
this matter on January 20, 1998. A second lawsuit, brought by one individual,
seeks unspecified monetary damages allegedly suffered as a result of odors
allegedly emitted by NOW received from Exxon at the Bourg landfarm in March
1994. The trial date for this lawsuit is also January 20, 1998. A third lawsuit,
filed as a class action, seeks unspecified monetary damages allegedly suffered
as a result of alleged air, water and soil contamination in connection with
ongoing operations at the Mermentau, Louisiana landfarm. No trial date has been
set for this lawsuit. In a fourth lawsuit, six individuals filed suit on March
7, 1996 against Campbell Wells in Louisiana state court, seeking preliminary and
permanent injunctive relief against certain treatment operations conducted at
the Bourg, Louisiana landfarm which the plaintiffs contend have resulted and
will result in adverse health effects by way of emissions of alleged air
pollutants. The plaintiffs' request for a preliminary injunction was heard
during the summer of 1996. On December 30, 1996, the court entered an order
granting in part and denying in part the relief requested by the plaintiffs.
Specifically, the court found that there was no evidence that emissions
resulting from the treatment operations complained of equalled or exceeded any
relevant safety standard, health standard or occupational standard and,
therefore, denied the plaintiffs' request for a temporary injunction prohibiting
such treatment operations. The court did, however, preliminarily enjoin Campbell
Wells (and, thus, indirectly the Company) from treating NOW received from Exxon
Company U.S.A. in March 1994 in one particular treatment cell located within 500
feet of a building in which one of the plaintiffs resides. In connection
therewith, the court ordered that the Commissioner of the Louisiana Department
of Conservation be made a party to the litigation and substituted for the
plaintiffs on the limited issue of whether Campbell Wells has violated the
location criteria for the particular treatment cell involved. No trial date has
been set for the plaintiffs' request for permanent injunctive relief; however,
based upon the court's rulings from the preliminary injunction trial and initial
discussions with the Louisiana Department of Conservation, the Company believes
that any permanent injunctive relief that might be entered against Campbell
Wells will not have a materially adverse effect upon the Company's operations at
the Bourg landfarm.
In the Campbell Wells Acquisition Agreement, Sanifill agreed, with certain
enumerated exceptions, to retain responsibility for all liabilities of Campbell
Wells as of the closing date of the Campbell Wells Acquisition including,
without limitation, the contingent liabilities associated with each of the
above-referenced lawsuits. Sanifill also agreed in the Campbell Wells
Acquisition Agreement to indemnify the Company from and against, among other
things, the contingent liabilities associated with such lawsuits. The obligation
of Sanifill to indemnify the Company is limited to the lesser of the amount of
the unpaid principal of the Sanifill Note and $10 million. As of July 31, 1997,
the outstanding principal balance of the Sanifill Note was $22.2 million. The
38
<PAGE>
SaniFill Note is payable in 20 equal quarterly installments of principal plus
accrued interest, beginning on March 31, 1997 and, therefore, the principal
balance of the Sanifill Note is currently scheduled to be reduced below $10
million on June 30, 2000. Subject to the maximum limitation on Sanifill's
indemnification obligation, the Company is entitled to set off against the
Sanifill Note amounts for which Sanifill becomes obligated to indemnify the
Company under the Campbell Wells Acquisition Agreement. See "Certain
Transactions-- Campbell Wells Acquisition."
The Company believes that the ultimate disposition of the above-referenced
lawsuits will not have a materially adverse effect on the Company's business,
results of operations or financial condition. This belief is based upon, among
other things, the following reasons: (i) the Company is not a defendant in any
of the lawsuits, (ii) Sanifill has agreed to retain responsibility for the
contingent liabilities associated with these lawsuits, (iii) Sanifill has agreed
to indemnify the Company against such contingent liabilities up to the lesser of
the unpaid principal balance of the Sanifill Note and $10 million, (iv) the
Company has been operating the Bourg and Mermentau landfarms only since December
1996, approximately four months after the last of the three lawsuits seeking
monetary damages was originally filed, and (v) the results of air, water and
soil testing conducted in and around the Bourg landfarm by the Louisiana
Department of Health and Hospitals, the Louisiana Department of Natural
Resources and the Louisiana Department of Environmental Quality indicate that
the Company's operations at the landfarms are in compliance with all applicable
rules and regulations. There can be no assurance, however, that the Company will
not subsequently be named as a defendant in one or more of these lawsuits or
that, if named as a defendant, a judgment will not be entered against the
Company in one or more of these lawsuits. In the event the Company is
subsequently added as a defendant in any of these lawsuits, a monetary judgment
is entered against the Company and Sanifill is not required or is unable to
completely indemnify the Company against such judgment, the Company's business,
results of operations and financial condition could be materially adversely
affected. In addition, notwithstanding any indemnification to be provided by
Sanifill, an adverse ruling against the Company (if it is subsequently added as
a defendant) in the lawsuit seeking injunctive relief could materially adversely
affect the Company's operations at the Bourg landfarm (which operations
contributed 19.8% of the Company's pro forma revenues for the year ended
December 31, 1996 and 13.7% of the Company's actual revenues for the first six
months of 1997) and, therefore, the Company's business, results of operations
and financial condition.
The Company believes that the nature of the NOW business makes it
susceptible to claims such as those described above, and that its NCW business
will also be susceptible to similar claims. In addition, the Company expects to
become subject to various kinds of litigation, including claims for personal
injuries to employees and other persons in proximity to the Company's
operations, in the ordinary course of its business. See "Risk Factors--Potential
Impact of Adverse Media Publicity Regarding the Company's NOW Operations."
EMPLOYEES
At July 31, 1997, the Company employed approximately 200 persons full-time.
Neither the Company nor any of its subsidiaries is a party to any collective
bargaining agreement covering its employees. The Company believes that its
relationships with its employees are satisfactory.
INSURANCE
The Company maintains various types of insurance coverage for its operations
including, without limitation, commercial general liability, commercial
automobile liability, workers' compensation and employers' liability, pollution
legal liability, commercial marine terminal operators liability, directors and
officers liability and property and casualty insurance. In addition, the Company
maintains business interruption insurance on its NCW operations. The Company
believes that the types and amounts of insurance maintained are consistent with
customary practices and standards of companies engaged in similar businesses.
See "Risk Factors-- Adequacy of Liability Insurance."
39
<PAGE>
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth certain information concerning the directors,
executive officers and significant employees of the Company.
<TABLE>
<CAPTION>
NAME AGE POSITION
- ----------------------------------------------------- --- -----------------------------------------------------
<S> <C> <C>
Michael P. Lawlor(1)................................. 58 Chairman of the Board of Directors and Chief
Executive Officer*
W. Gregory Orr(1).................................... 42 Director, President and Chief Operating Officer
Earl J. Blackwell.................................... 55 Chief Financial Officer, Senior Vice
President--Finance and Secretary
Thomas B. Blanton(2)................................. 50 Director and Vice President--NCW Operations
Sammy L. Cooper...................................... 41 Vice President--NOW Operations
William H. Wilson, Jr................................ 38 Chief Executive Officer of AWW
Jerry L. Brazzel..................................... 51 Environmental Compliance Manager
William A. Rothrock IV(2)(4)(5)...................... 45 Director
Alfred Tyler 2nd(3)(4)(5)............................ 54 Director
</TABLE>
- ------------------------
(1) Term on Board expires in 2000.
(2) Term on Board expires in 1999.
(3) Term on Board expires in 1998.
(4) Member of Audit Committee.
(5) Member of Compensation Committee.
The following is a brief account of the principal occupation and business
experience of each director, officer and significant employee of the Company.
*MICHAEL P. LAWLOR will, simultaneous with the effective date of this
offering, assume the position of Chairman of the Board and Chief Executive
Officer of the Company. From March 1996 to present, Mr. Lawlor has been a
private investor. Mr. Lawlor has 30 years of experience in the environmental
services industry. 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. ("BFI"), a national waste services
company. Mr. Lawlor started with BFI in 1970, became a corporate officer in
1978, and from 1970 to 1988 was responsible for all of BFI's 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.
W. GREGORY ORR is a co-founder of the Company and has served as Chairman of
the Board, Chief Executive Officer and President of the Company from November
1996 to the present. Mr. Orr will continue to serve as a director and President
of the Company and will also become Chief Operating Officer following the
effective date of this offering. From 1995 until December 1996, Mr. Orr was the
President and Chief Operating Officer of Campbell Wells. From 1990 to 1991, Mr.
Orr was Regional Vice President of Sanifill's Atlantic Region, and from 1991 to
1995, Mr. Orr was a Vice President of Operations of Sanifill, during which time
Mr. Orr was responsible for reviewing and approving up to $75 million in
40
<PAGE>
annual capital spending projects, as well as reviewing and approving operating
budgets and acquisition opportunities. Mr. Orr was also responsible for the
initial development of Sanifill's marketing and development program including
assisting in the formation of the management team and systems and infrastructure
development. From 1981 to 1989, Mr. Orr served in various capacities with BFI,
including Divisional Vice President.
EARL J. BLACKWELL 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
Divisional Chief Financial Officer for Sanifill and controller for Campbell
Wells. During this time, Mr. Blackwell was responsible for organizing and
managing the financial and administrative functions of this division including
the design, installation and management of a financial reporting and management
system interfacing with Sanifill's general accounting system. In November 1987,
Mr. Blackwell filed a voluntary petition for bankruptcy under Chapter 7 of the
Bankruptcy Code. The Company does not believe that this event is material to an
evaluation of the ability or integrity of Mr. Blackwell.
THOMAS B. BLANTON has been a director and Vice President--NCW Operations of
the Company since June 1997. From 1991 to June 1997, Mr. Blanton served as the
sole director and President of each of the Mesa Companies. Mr. Blanton has owned
and operated fats and oils businesses for over 30 years. In February 1991, Mr.
Blanton and Metro Fab, Inc., a metal fabrication company of which Mr. Blanton
was the President and sole shareholder and director, filed voluntary petitions
for bankruptcy under Chapter 7 of the Bankruptcy Code. The Company does not
believe that either of these events is material to an evaluation of the ability
or integrity of Mr. Blanton.
WILLIAM H. WILSON, JR. is a co-founder of AWW and has served as Chairman and
Chief Executive Officer of AWW since its inception in 1992. During 1990 and
1991, Mr. Wilson served as the Chief Financial Officer of NoteBook Computer
Company, L.P., a private company located in Houston, Texas. From 1985 to 1989,
Mr. Wilson served in various capacities for Lehman Brothers, including Vice
President of Corporate Finance.
SAMMY L. COOPER has been Vice President--NOW Operations of the Company since
December 1996. From 1994 to December 1996, Mr. Cooper was Marketing Manager and
General Manager for Campbell Wells in which capacity he had overall
responsibility for divisional performance, as well as marketing, technical
support and business development activities. From 1990 to 1994, Mr. Cooper was
Health, Safety and Environmental Coordinator in Texas, Louisiana and Mississippi
for Conoco, Inc.
JERRY L. BRAZZEL has served as Environmental Compliance Manager for the
Company since December 1996. From 1986 to December 1996, he was Division
Environmental Engineer for Campbell Wells where he was responsible for the
automation of all of its accounting functions. He also developed an extensive
computer program, including data entry and a tracking system to track waste from
receipt until such time as it is declared reusable by state regulatory agencies.
WILLIAM A. ROTHROCK IV became a director of the Company in June 1997. Since
1990, he has been Vice President--Business Development for Sanifill and,
subsequently, USA Waste Services, Inc. From 1984 to 1990, Mr. Rothrock was
Divisional Vice President--Landfill Marketing for BFI.
ALFRED TYLER 2ND 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 late 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.
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The total number of persons comprising the Board of Directors is currently
set at five. The Board is divided into three classes. At each annual meeting of
stockholders, directors will be elected by the stockholders to succeed the
directors in the class whose terms are expiring. Directors may be removed from
office only for cause.
With the exception of Mr. Blanton, there are no arrangements or
understandings between the Company and any person pursuant to which any person
was selected as a director. See "Employment Agreements; Changes in Control;
Covenants Not to Compete" below.
During 1996, each of the Company's directors attended at least 75% of the
aggregate of (i) the total number of meetings of the Board of Directors, and
(ii) the total number of meetings held by all committees of the Board on which
he served.
EXECUTIVE COMPENSATION
The Company was incorporated in November 1996. Messrs. Orr and Blackwell
were the only executive officers of the Company to receive any compensation from
the Company in 1996. Messrs. Orr's and Blackwell's total cash compensation
received from the Company in 1996 was $2,403 and $1,923, respectively. The
Company anticipates that during 1997 the four most highly compensated executive
officers and key employees, in addition to Chief Executive Officer Lawlor, will
be Messrs. Orr, Blanton, Blackwell and Wilson. No stock options or stock
appreciation rights have been granted by the Company to any of these five named
individuals; however, upon the effective date of this offering, Mr. Lawlor will
be granted an option to purchase 300,000 shares of Common Stock at the price to
public set forth on the cover page of this Prospectus (the "IPO Price").
EMPLOYMENT AGREEMENTS; CHANGES IN CONTROL; COVENANTS NOT TO COMPETE
Mr. Lawlor has entered into an employment agreement with the Company which
will take effect upon completion of this offering. The employment agreement will
be 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. Mr.
Lawlor will receive an initial base salary of $175,000 per year, with the right
to receive incentive compensation at the discretion of the Board of Directors.
If Mr. Lawlor's employment is terminated by the Company without cause, then Mr.
Lawlor will continue to receive his base salary and employee benefits for the
remainder of the term of his employment agreement. If his employment is
terminated by the Company with cause, then Mr. Lawlor 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, Mr.
Lawlor will have the right to 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. 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 Mr. Lawlor under
the employment agreement. The employment agreement also contains a covenant by
Mr. Lawlor 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.
Each of Messrs. Orr, Blanton, Blackwell and Wilson have entered into
employment agreements with the Company providing for an annual base salary of
$125,000, $125,000, $100,000 and $95,000, respectively. Each employment
agreement is for a term of one year, and unless terminated or not renewed by the
Company or the employee, the term will continue thereafter on a year-to-year
basis on the same terms and conditions existing at the time of renewal. Each of
these agreements provides that, in the event of a termination of employment by
the Company without cause during the first two years of employment, the employee
will be entitled to receive his then current salary until the earlier of (i) the
second anniversary of
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his employment date or (ii) the first date the employee is eligible to sell all
of his shares of Common Stock in accordance with Rule 144 promulgated under the
Securities Act. Each employment agreement contains a covenant not to compete
with the Company during the term of his employment and for two years thereafter
unless the employee is terminated by the Company without cause in which event
the covenant shall continue for as long as the employee is receiving salary
payments under his employment agreement.
Messrs. Blanton and Wilson also entered into noncompetition agreements with
the Company in connection with the Company's acquisition of the Mesa Companies
and AWW. Pursuant to the terms of these agreements, Messrs. Blanton and Wilson
have each agreed not to compete against the Company in the businesses of
treating, processing and disposing of NCW until June 2002.
In connection with the acquisition of the Mesa Companies, the Company caused
Mr. Blanton to be appointed to the Board of Directors of the Company. In
addition, for as long as Mr. Blanton is the beneficial owner of at least 5% of
the outstanding Common Stock, the Company is obligated to nominate Mr. Blanton
for election to the Company's Board of Directors and Messrs. Orr, Blackwell and
William M. DeArman are obligated to vote all of the shares of Common Stock
controlled by them in favor of Mr. Blanton's election to the Board of Directors.
DIRECTORS' COMPENSATION
Directors who are also employees of the Company or one of its subsidiaries
will not receive additional compensation for serving as directors. Each director
who is not an employee of the Company or one of its subsidiaries will receive a
fee of $1,000 for attendance at each Board of Directors' meeting and $1,000 for
attendance at each committee meeting (unless held on the same day as the Board
of Directors' meeting). Directors are also reimbursed for out-of-pocket expenses
incurred in attending meetings of the Board of Directors or committees thereof.
Under the Company's 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 12 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; however, no
such initial option was granted to Mr. Rothrock. In addition, commencing with
calendar year 1998, each outside director will be automatically granted an
option to purchase 5,000 shares of Common Stock on January 1 of such calendar
year. Such 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.
AUDIT AND COMPENSATION COMMITTEES
Until June 1997, no committees of the Board of Directors existed. Messrs.
Orr and Blackwell, the only directors of the Company from November 1996 to June
1997, participated in deliberations concerning executive compensation.
In June 1997, the Board of Directors established an Audit Committee and a
Compensation Committee. The members of both the Audit Committee and the
Compensation Committee are Messrs. Tyler and Rothrock. The principal duties of
the Audit Committee are to recommend to the Board of Directors the selection of
the Company's independent accountants, discuss and review with the Company's
independent accountants the audit plan, auditor's report and management letter
and the Company's accounting policies, and review the accounting procedures and
internal control procedures recommended by the Company's independent
accountants. The principal duties of the Compensation Committee are to establish
and review the objectives, structure, cost and administration of the Company's
major compensation and benefit policies and programs, review annually officers'
and key employees' salaries, management incentives and stock options, and
administer the Company's stock option plan, management incentive plans and other
long-term incentive plans.
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STOCK OPTION PLANS
STOCK OPTION PLAN. On November 20, 1996, the Board of Directors adopted the
U S Liquids Inc. 1996 Incentive Stock Option Plan. Thereafter, in June 1997, the
Board of Directors adopted various amendments to this plan, and the amended plan
(the "Stock Option Plan") was approved by the stockholders of the Company. 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 and consultants of the Company (including directors who are
also employees) with incentives to contribute to the success of the Company. The
number of shares of Common Stock issuable under the Stock Option Plan is
automatically adjusted on the first day of each fiscal year to an amount equal
to 15% of the total number of shares of Common Stock which are outstanding on
such date, provided that the number of shares issuable under the Stock Option
Plan will not be less than 1,500,000 shares or exceed 3,000,000 shares.
The Stock Option Plan is required to be administered by a committee
designated by the Board of Directors. The committee must consist of at least two
Non-Employee Directors, as that term is defined in Rule 16b-3 under the
Securities Exchange Act of 1934, or, at the discretion of the Board of Directors
in order to comply with the requirements of Rule 16b-3, the committee may
consist of the entire Board of Directors. Currently, the committee consists of
Messrs. Rothrock and Tyler. In awarding options under the Stock Option Plan, the
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 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 shall, 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. In the case
of an incentive stock option granted to an employee who holds more than 10% of
the Common Stock of the Company, the exercise price must be at least 110% of the
fair market value of the shares subject to the option at the time it is granted.
Options for a total of 405,125 shares of Common Stock have been granted under
the Stock Option Plan at exercise prices ranging from $.02 per share to the IPO
Price. All of the outstanding options vest at the rate of 33 1/3% per year,
commencing on the first anniversary of the date upon which the option was
granted and expire at the earlier of ten years from the date of grant or three
months following termination of employment. Simultaneous with the completion of
this offering, the Company intends to grant to Mr. Lawlor an option to purchase
300,000 shares of Common Stock at an exercise price equal to the IPO Price.
DIRECTORS' STOCK OPTION PLAN. The Board of Directors adopted the U S Liquids
Inc. Directors' Stock Option Plan (the "Directors' Plan") and the stockholders
approved the Directors' Plan in June 1997. The Directors' Plan is intended to
further the interests of the Company by providing recognition and compensation
to its outside directors for their time, effort and participation in the growth
and protection of the Company's business. The Directors' Plan provides that, at
the time of his or her initial election or appointment to the Board, each
director (other than Mr. Rothrock) who is not an employee of the Company and has
not been an employee of the Company during the preceding 12 months will
automatically be granted an option to purchase 10,000 shares of Common Stock.
Accordingly, Mr. Tyler received an initial grant of an option to purchase 10,000
shares at an exercise price equal to the IPO Price. In addition, commencing with
calendar year 1998, each outside director will automatically be granted an
option to purchase 5,000 shares of Common Stock on January 1 of such calendar
year. The exercise price of all options granted under the Directors' Plan must
be equal to the fair market value of the Common Stock at the time the option is
granted.
The Directors' Plan is required to be administered by a committee consisting
of at least two members of the Board of Directors. The Compensation Committee is
required to administer the Directors' Plan in strict accordance with its terms
and does not have the discretion to vary, add to or take from the terms of the
Directors' Plan. The Board of Directors has appointed Messrs. Rothrock and Tyler
to serve on the committee administering the Directors' Plan.
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CERTAIN TRANSACTIONS
CAMPBELL WELLS ACQUISITION
On December 13, 1996, the Campbell Wells Acquisition was consummated
pursuant to an Asset Purchase Agreement, dated December 2, 1996, (the "Campbell
Wells Acquisition Agreement") among the Company, Sanifill and Campbell Wells.
The assets acquired in the Campbell Wells Acquisition included four NOW
treatment facilities in Louisiana, one NOW treatment facility in Texas, one
NOW/NORM treatment facility in Louisiana, a corporate headquarters facility in
Lafayette, Louisiana, all equipment and capital improvements related to the
treatment facilities, and approximately $8.1 million of working capital. In
consideration for these assets, the Company issued the $27.8 million Sanifill
Note to Sanifill, issued to Sanifill a transferable 10-year warrant for the
purchase of one million shares (post-reverse split) of Common Stock at an
exercise price (as adjusted for the subsequent reverse stock split) of $2.00 per
share (the "Sanifill Warrant") and assumed certain outstanding liabilities of
Sanifill including, without limitation, approximately $2.0 million of accounts
payable. Since the closing of the Campbell Wells Acquisition, the Company has
used a portion of its working capital to make two principal prepayments
totalling approximately $5.6 million on the Sanifill Note and has relocated its
corporate headquarters to Houston, Texas. In addition, the Company has ceased
accepting NORM for treatment at its facility in Lacassine, Louisiana and has
begun taking the steps necessary to close this facility in accordance with
Louisiana law.
The Sanifill Note is payable in 20 equal quarterly installments of principal
plus accrued interest, beginning on March 31, 1997. The first four quarterly
installments of the Sanifill Note were prepaid as described above. The unpaid
principal of the Sanifill Note bears interest at the rate of 7.5% per annum,
except for past due principal and interest, which bear interest at 9.5%.
However, if the volume of NOW accepted by the Company for disposal in any full
calendar year is less than two million barrels, then the Company may, at its
option, reduce its quarterly payments of principal, but not interest, for the
immediately following calendar year by up to 50%. The Company must elect each
such deferral within 30 days after any calendar year for which its volume of
accepted waste falls below two million barrels. If the Company elects one or
more such deferrals, the Sanifill Note provides that its maturity will be
extended for as many quarters as may be necessary to permit payment of the
deferred principal in quarterly payments equal to the original quarterly
principal installments.
The Sanifill Note is governed by a Note Agreement, dated December 13, 1996
(the "Note Agreement"), between the Company and Sanifill, which imposes certain
obligations and restrictions on the Company pending payment of the Sanifill
Note. The Note Agreement contains minimum net worth and earnings requirements
which must be satisfied by the Company, and places restrictions on, among other
things, dividends which may be paid, assets which may be disposed of, and other
indebtedness which may be incurred (including, without limitation, preexisting
debt of any business subsequently acquired by the Company and any promissory
note issued by the Company to the owners of any subsequently acquired business),
by the Company. The overall indebtedness limitation is 400% of the Company's
annual EBITDA. Assuming EBITDA of $10.2 million and approximately $24.8 million
owed to Sanifill and other items enumerated in the Note Agreement, the
limitation on other indebtedness would be approximately $15.9 million. The
holder of the Sanifill Note may, at its option, accelerate the debt evidenced by
the Sanifill Note in the event that, among other things, the Company fails to
perform any agreement contained in the Note Agreement.
The Company has agreed to file within 90 days after the effective date of
this offering a shelf registration statement under Rule 415 of the Securities
Act for the shares of Common Stock issuable upon exercise of the Sanifill
Warrant and to keep the shelf registration statement continuously effective
until the earlier of three years after the date of final exercise of the
Sanifill Warrant and such time as the holder of the Sanifill Warrant has sold
all of the shares issuable upon exercise thereof. However, without the
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<PAGE>
Company's prior consent, and, under certain circumstances, the prior consent of
one of the Representatives, the number of shares offered pursuant to the shelf
registration statement in any calendar year cannot exceed the following
limitations:
<TABLE>
<CAPTION>
MAXIMUM NUMBER OF
SHARES TO BE
YEAR OFFERED
- --------------------------------------------------------------- -------------------
<S> <C>
1997........................................................... 0
1998........................................................... 200,000
1999........................................................... 200,000
2000........................................................... 250,000
2001-2006...................................................... 300,000
</TABLE>
The Sanifill Warrant also grants its holder the "piggyback" registration
right to include shares of Common Stock purchased upon exercise of the Sanifill
Warrant in the coverage of any registration statement under the Securities Act
filed by the Company with respect to an offering of Common Stock by the Company
for its own account or for the account of any of its securities holders.
Sanifill has waived its right to have any shares registered for resale in
connection with this offering.
The Campbell Wells Acquisition Agreement provides that if, prior to December
31, 1999, the Company is required by the Louisiana Department of Natural
Resources or the Louisiana Department of Environmental Quality to construct or
install additional water injection wells with respect to any or all of the
Mermentau, Bourg or Bateman Island, Louisiana facilities purchased by the
Company from Sanifill, Sanifill will reimburse the Company up to $1.6 million of
expenses incurred by the Company in constructing or installing the additional
water injection wells. Sanifill is also required to reimburse the Company up to
$1.3 million of the costs incurred by the Company for closure and post-closure
requirements associated with the Lacassine, Louisiana NORM facility. Except to
the extent of the reimbursement obligations of Sanifill with respect to closure
of the Lacassine, Louisiana NORM facility and the construction or installation
of additional water injection wells at any of the three sites described above
under the Campbell Wells Acquisition Agreement, the Company assumed all
liabilities and obligations of Campbell Wells for closure, post-closure,
monitoring, maintenance, environmental remediation and clean-up of all landfarms
and treatment sites owned, occupied, leased or operated by Campbell Wells as of
the date of the Campbell Wells Acquisition.
In the Campbell Wells Acquisition Agreement, Sanifill agreed to indemnify
the Company against all liabilities of Sanifill not expressly assumed by the
Company and, subject to certain limitations, against any breach of any agreement
or covenant made by Sanifill in the Campbell Wells Acquisition Agreement. To be
eligible for indemnification by Sanifill, an individual claim or loss by the
Company based on a Sanifill breach must exceed $10,000, and all such claims and
losses must have exceeded $200,000, in which case the indemnification obligation
of Sanifill is limited to the amount of such claims and losses in excess of
$200,000. Further, the obligation of Sanifill to indemnify the Company is
limited to the lesser of the amount of unpaid principal of the Sanifill Note
outstanding at the time of any claim for indemnification and $10 million. As of
July 31, 1997, the outstanding principal balance of the Sanifill Note was $22.2
million. Subject to the $200,000 deductible and the maximum limitation on
Sanifill's indemnification obligations, the Company is entitled to set off
against the Sanifill Note amounts for which Sanifill becomes obligated to
indemnify the Company under the Campbell Wells Acquisition Agreement.
In connection with the Campbell Wells Acquisition, the Company and Sanifill
executed noncompetition agreements under which each party agreed not to compete
with the other in certain businesses for a period of five years. In its
noncompetition agreement, Sanifill agreed not to engage in the collection,
transfer, transportation, treatment or disposal of NOW during the restricted
period. In return, the Company agreed not to engage in the collection, treatment
or disposal of municipal solid wastes, construction debris or demolition debris
during the restricted period, or own any interest in any company engaged in any
such business.
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<PAGE>
NEWPARK AGREEMENTS
In August 1996, prior to the Campbell Wells Acquisition, Sanifill
transferred to Newpark certain assets of its NOW service business including,
without limitation, docks at three of the landfarm facilities later purchased by
the Company from Sanifill for a purchase price of approximately $70.5 million.
As a result of this transaction between Newpark and Campbell Wells (the "Newpark
Transaction") and the subsequent Campbell Wells Acquisition in which the Company
acquired Sanifill's rights and obligations under the Disposal Agreement, Newpark
is obligated to deliver to the Company, in each of the twenty-five years
following the closing of the Newpark Transaction, NOW for treatment and disposal
at the Company's landfarming facilities in Elm Grove, Louisiana, Bourg,
Louisiana, Bateman Island, Louisiana and Mermentau, Louisiana (the "Landfarms").
Specifically, under the terms of the Disposal Agreement, during each such year,
Newpark is obligated to deliver to the Company for disposal at the Landfarms the
lesser of (i) one-third of the barrels of NOW that Newpark receives for
processing and disposal in Louisiana, Texas, Mississippi, Alabama and the Gulf
of Mexico (the "Territory"), and (ii) 1,850,000 barrels of NOW, in each case
excluding saltwater. The number of barrels of NOW that Newpark is required to
deliver to the Company in any year is subject to reduction by a number of
barrels determined by dividing revenues that the Company receives from the
collection and disposal of oilfield waste or site remediation in the Territory
by the price per barrel that Newpark pays for disposal under the Disposal
Agreement. No reduction is made for revenues received by the Company from (i)
disposal at any of the Landfarms of NOW that is generated and collected on land
and is delivered to the Landfarms from the generation site by on-land
transportation ("Inland NOW"), (ii) disposal of NOW at the Bustamonte, Texas
facility and collection of NOW within a 200-mile radius of the Bustamonte
facility, and (iii) disposal of NOW under the Disposal Agreement.
The Disposal Agreement also governs the price to be paid by Newpark to the
Company for delivered NOW. The contractual price is lower than the price for
treatment and disposal that the Company would obtain in the open market, and the
Company expects such price disparity to persist for an indefinite time period.
Currently, Newpark is paying to the Company $5.50 for each barrel of NOW
delivered to the Company under the Disposal Agreement. On June 30, 1998 and on
each subsequent December 31st and June 30th occurring during the term of the
Disposal Agreement, the per barrel price to be paid by Newpark to the Company
will be adjusted. Adjustments are made based upon changes occurring in the
average prices received by Newpark from customers for NOW disposal and other
related services performed by Newpark during the six-month period ending on the
applicable adjustment date compared, on a percentage basis, to the average
prices received by Newpark from customers for such disposal and services during
the six-month period commencing 12 months prior to such adjustment date and
concluding six months prior to such adjustment date. The adjusted price will be
applied retroactively to all invoices received by Newpark from the Company
during the six-month period preceding the applicable adjustment date. In no
event, however, will the price paid by Newpark to the Company be less than $5.50
per barrel. The Company does not presently believe that this adjustment
mechanism will in the near future result in a material increase in the price per
barrel paid by Newpark.
Under the Disposal Agreement, the Company is obligated to indemnify Newpark
from any and all liabilities, including environmental liabilities, in connection
with the Company's ownership and operation of the Landfarms, except for
liability resulting from the delivery by Newpark or its customers of waste that
does not conform to the specifications of the Disposal Agreement, which
generally require Newpark and such customers to deliver only waste that is
legally classified as NOW.
As a result of the Campbell Wells Acquisition and the Newpark Transaction,
the Company is prohibited from engaging, directly or indirectly, in the
collection, transfer, transportation, treatment or disposal of NOW generated in
a marine environment or transported in marine vessels or the site remediation
and closure business in Louisiana, Texas, Alabama, Mississippi and the Gulf of
Mexico prior to August 12, 2001. However, the Company is not prohibited from
marketing and conducting activities related to treatment and disposal at any of
the Landfarms of Inland NOW, disposal of NOW at the
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<PAGE>
Bustamonte, Texas facility and collection of NOW within a 200-mile radius of the
Bustamonte facility, collection and disposal of NOW or other waste at the
Lacassine, Louisiana facility and treatment and disposal of NOW under the
Disposal Agreement.
OTHER
On June 17, 1997, the Company acquired all of the outstanding stock of the
Mesa Companies. Mr. Blanton, the sole stockholder of each of the Mesa Companies,
received 1,062,500 shares of Common Stock in exchange for his capital stock of
the Mesa Companies. Pursuant to the terms of the merger agreement, Mr. Blanton
became a director and Vice President of the Company. See "Management--
Employment Agreements; Changes in Control; Covenants Not to Compete" for a
description of the terms of Mr. Blanton's employment agreement with the Company.
On June 17, 1997, the Company acquired all of the outstanding stock of AWW
in exchange for 637,500 shares of Common Stock. Mr. Wilson received 245,625
shares of such Common Stock. The Company intends to use approximately $964,000
of the net proceeds of this offering to repay a promissory note held by AWW's
primary lender, which note is guaranteed by Mr. Wilson. Following this offering,
the Company will cause AWW to pay to Mr. Wilson $341,000 in repayment of
principal and interest owed on a loan made by Mr. Wilson to AWW. See
"Management--Employment Agreements; Changes in Control; Covenants Not to
Compete" for a description of the terms of Mr. Wilson's employment agreement
with the Company.
On August 1, 1991, Tommy Yount, the brother-in-law of Mr. Blanton, loaned
$200,000 to one of the Mesa Companies. This loan bears interest at a rate of 3%
per annum, has a maturity date of August 1, 2001, and is secured by certain
equipment and other intangible assets of one of the Mesa Companies. In a
separate transaction, on February 21, 1996, Mr. Yount sold to one of the Mesa
Companies certain real estate and related improvements located in Fort Worth,
Texas for $120,000. This purchase price was paid by the delivery of a promissory
note of one of the Mesa Companies in the original principal amount of $120,000.
The promissory note bears interest at a rate of 10%, has a maturity date of
March 1, 2007 and is secured by certain vehicles owned by one of the Mesa
Companies. The Company regularly purchases used cooking oil and other food
processing residuals that Mr. Yount collects from generators of such materials.
During 1996, the Company purchased approximately $537,000 of such materials from
Mr. Yount.
The Company's NCW facilities in Dallas and San Antonio, as well as one of
the Company's NCW facilities in Houston, are owned by Mr. Blanton subject to
deeds of trust. In connection with the Company's acquisition of the Mesa
Companies, the Company agreed to use approximately $171,000 of the proceeds of
this offering to pay in full the debts secured by these deeds of trust and, at
such time, Mr. Blanton will transfer each of these properties to the Company.
Pending transfer of these properties to the Company, Mr. Blanton is leasing the
properties to the Company free of charge. In addition, the Company intends to
use approximately $1.0 million of the net proceeds of this offering to repay
various debts of the Mesa Companies, all of which has been personally guaranteed
by Mr. Blanton, and of which approximately $214,000 is owed to Mr. Yount.
On July 9, 1996, Eric Warden, a principal stockholder of the Company, loaned
$250,000 to one of the Mesa Companies. This unsecured loan bears interest at a
rate of 8% and has a maturity date of January 9, 1998.
In May 1997, the Company engaged Sanders Morris Mundy Inc. ("SMM"), a
representative of the Underwriters in this offering, to advise and assist the
Company in, among other things, the development and implementation of an
acquisition program and the identification and structuring of and negotiations
with potential sources of capital for the Company. In consideration for its
services, the Company issued to SMM a warrant (the "SMM Warrant") to purchase
37,500 (post-reverse split) shares of Common Stock at the IPO Price. The SMM
Warrant has a term of five years, is fully vested and provides under certain
circumstances for weighted average anti-dilution adjustments to the exercise
price and number of shares
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<PAGE>
issuable under the SMM Warrant. The SMM Warrant also grants its holder the
"piggyback" registration right to include shares of Common Stock purchased upon
exercise of the SMM Warrant in the coverage of any registration statement under
the Securities Act for its own account or for the account of any of its
securities holders. The Company also agreed, among other things, to pay to SMM a
sliding-scale fee for acquisition and financing transactions which are
introduced to the Company by SMM or arranged by SMM during the one-year term of
the engagement. No fee under such agreement will be paid to SMM in connection
with this offering.
In connection with the organization of the Company in November 1996, Messrs.
Orr, Blackwell and DeArman, who may be deemed to be promoters of the Company,
purchased (together with members of their immediate family or entities
controlled by them) 976,000, 375,000 and 500,000 shares of Common Stock (as
adjusted for the subsequent reverse stock split) for $19,520 $7,500 and $10,000,
respectively. In December 1996, Mr. DeArman purchased an additional 50,000
(post-reverse split) shares of Common Stock for $87,500.
The Company has granted to Mr. Rothrock a nonqualified option to purchase
187,500 (post-reverse split) shares of Common Stock at a price of $.02 per
share. These options vest at the rate of 33 1/3% per year commencing in 1997,
but only if Mr. Rothrock has presented to the Company an introduction or
business opportunity pursuant to which the Company completes during such
calendar year an acquisition of the stock or substantially all of the assets of
another party. If in any calendar year 1997, 1998 or 1999, the Company does not
complete any such acquisition as a result of an introduction or business
opportunity presented by Mr. Rothrock, the option shall terminate with respect
to 33 1/3% of the total number of shares issuable under the option. Vested
options expire at the earlier of ten years from the date of grant or one year
after the death of Mr. Rothrock. Options having identical terms and conditions
exercisable for an aggregate of 281,250 shares were granted to three other
individuals in November 1996.
The Company believes that the terms of each transaction discussed above are
as favorable to the Company as could have been negotiated with an unaffiliated
third party. The Board of Directors has, however, adopted a resolution requiring
all future transactions with an affiliate of the Company to be approved by the
vote of a majority of the disinterested directors of the Company.
49
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth information regarding beneficial ownership of
the Common Stock as of the date of this Prospectus by (i) each person who is
known to the Company to beneficially own more than 5% of the outstanding shares
of Common Stock, (ii) each director of the Company, (iii) Mr. Lawlor, as the
Chief Executive Officer, and each of the four officers and key employees of the
Company expected to be most highly compensated in 1997, and (iv) all directors
and executive officers of the Company 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.
<TABLE>
<CAPTION>
PERCENT OF
SHARES OUTSTANDING
------------------------
NUMBER OF BEFORE AFTER
NAME AND ADDRESS OF BENEFICIAL OWNER SHARES OFFERING OFFERING
- --------------------------------------------------------------------------- ---------- ----------- -----------
<S> <C> <C> <C>
Michael P. Lawlor(1) ...................................................... 150,000 2.9% 2.2%
W. Gregory Orr(2) ......................................................... 751,000 14.3 11.1
Earl J. Blackwell(3) ...................................................... 375,000 7.2 5.6
Thomas B. Blanton ......................................................... 1,062,500 20.3 15.8
3820 N. Grove Street
Fort Worth, TX 76106
William H. Wilson, Jr.(4) ................................................. 286,375 5.5 4.2
250 Gellhorn
Houston, TX 77013
William A. Rothrock IV(5) ................................................. 62,500 1.2 *
Alfred Tyler 2nd(6) ....................................................... -- -- --
Sanifill, Inc.(7) ......................................................... 1,000,000 16.0 12.9
1001 Fannin Street, Suite 4000
Houston, Texas 77002
William M. DeArman(8) ..................................................... 546,500 10.4 8.1
5420 Huckleberry Lane
Houston, TX 77056
Eric Warden(9) ............................................................ 337,500 6.4 5.0
10117 Andre Drive
Irving, TX 75063
All executive officers and directors as a group (7 persons)(10)............ 2,419,750 46.2% 35.9%
</TABLE>
- ------------------------
(1) Excludes 300,000 shares exercisable pursuant to a stock option to be granted
to Mr. Lawlor on the effective date of this offering.
(2) 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, 25,000 shares held by Mr. Orr's wife,
Genene Orr, 25,000 shares held by Mr. Orr's wife as custodian for two of Mr.
Orr's children, and 12,500 shares held individually by one of Mr. Orr's
children. Mr. Orr disclaims beneficial ownership of all shares held
individually by his children.
(3) Includes 200,000 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 100,000 shares held in an
individual retirement account for the benefit of Mr. Blackwell.
50
<PAGE>
(4) Includes 20,375 shares held in an individual retirement account for the
benefit of Mr. Wilson and 20,375 shares held by Mr. Wilson's wife, Debi
Wilson.
(5) Excludes 187,500 shares which, contingent upon the occurrence of certain
events, may be exercisable pursuant to a stock option granted to Mr.
Rothrock.
(6) Excludes 10,000 shares which Mr. Tyler has the right to acquire pursuant to
the terms of a stock option granted by the Company to him.
(7) Represents shares which Sanifill has the right to acquire pursuant to the
terms of a warrant issued by the Company to Sanifill on December 13, 1996.
(8) Includes 250,000 shares held by a trust of which Mr. DeArman is the sole
beneficiary, 12,500 shares held individually by one of Mr. DeArman's
children, and 47,500 shares held by trusts for the benefit of certain of Mr.
DeArman's children. Mr. DeArman disclaims beneficial ownership of all shares
held by or for the benefit of his children.
(9) Excludes 145,000 shares owned by Carl Warden, Mr. Warden's father. Eric
Warden disclaims beneficial ownership of such shares.
(10) Excludes the 497,500 shares subject to the options granted or to be granted
to Messrs. Lawlor, Rothrock and Tyler described above.
* Constitutes less than 1% of the outstanding Common Stock.
DESCRIPTION OF SECURITIES
COMMON STOCK
The Company is authorized to issue 30,000,000 shares of Common Stock, of
which 5,238,875 shares are outstanding. After this offering, there will be
6,738,875 shares outstanding. Holders of Common Stock are entitled to one vote
for each share held on all matters submitted to a vote of stockholders. There is
no cumulative voting with respect to the election of directors. See "Risk
Factors--Concentration of Voting Control." Holders of Common Stock are entitled
to receive ratably any dividends that may be declared by the Board of Directors
of the Company out of legally available funds. Upon the liquidation, dissolution
or winding up of the Company, the holders of Common Stock are entitled to
receive ratably the net assets of the Company after payment of all debts and
liabilities and liquidation preferences of any outstanding shares of Preferred
Stock. Holders of Common Stock have no preemptive, subscription, redemption or
conversion rights. As of July 31, 1997, the Company had 158 holders of record of
Common Stock.
PREFERRED STOCK
The Company's Certificate of Incorporation authorizes the issuance of
5,000,000 shares of Preferred Stock, of which no shares are outstanding. Shares
of unissued Preferred Stock may be issued in one or more series from time to
time with such designations, rights, preferences and limitations as the Board of
Directors may determine. The rights, preferences and limitations of separate
series of Preferred Stock may differ with respect to such matters as may be
determined by the Board of Directors including without limitation, the rate of
dividends, method or nature of payment of dividends, terms of redemption,
amounts payable on liquidation, sinking fund provisions, conversion rights and
voting rights. Such undesignated shares could also be used as an anti-takeover
device by the Company. For example, they could be issued with "super-voting
rights" and placed in the control of parties friendly to the current management.
OPTIONS AND WARRANTS
The Company has outstanding options to purchase an aggregate of 883,875
shares of Common Stock. Simultaneous with the completion of this offering, the
Company intends to grant to Mr. Lawlor an option
51
<PAGE>
to purchase an additional 300,000 shares of Common Stock at an exercise price
equal to the IPO Price. The Company has (or will have immediately after the
offering) outstanding warrants to purchase an additional 1,215,000 shares of
Common Stock consisting of (i) the Sanifill Warrant for 1,000,000 at $2.00 per
share; (ii) warrants issued to the Representatives for 112,500 total shares at
120% of the IPO Price (the "Representatives' Warrants"); (iii) the SMM Warrant
for 37,500 shares at the IPO Price; (iv) a warrant issued to Bellmeade Capital
Partners for 45,000 shares at the IPO Price; and (v) a warrant issued to Mark
Liebovit for 20,000 shares at the IPO Price. See "Certain Transactions--Other"
and "Underwriting."
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this offering, the Company will have outstanding
6,738,875 shares of Common Stock. The 1,500,000 shares sold in this offering
(plus any additional shares sold upon exercise of the Underwriters'
over-allotment option) will be freely tradeable without restriction unless
acquired by affiliates of the Company. None of the remaining outstanding shares
of Common Stock have been registered under the Securities Act, which means that
they may be resold publicly only upon registration under the Securities Act or
in compliance with an exemption from the registration requirements of the
Securities Act, including the exemption provided by Rule 144 thereunder.
In general, under Rule 144, if a period of at least one year has elapsed
between the later of the date on which restricted securities were acquired from
the Company or the date on which they were acquired from an affiliate, the
holder of such restricted securities (including an affiliate) is entitled to
sell a number of shares within any three-month period that does not exceed the
greater of (i) 1% of the then outstanding shares of the Common Stock
(approximately 67,389 shares upon completion of this offering) or (ii) the
average weekly reported volume of trading of the Common Stock during the four
calendar weeks preceding such sale. Sales under Rule 144 are also subject to
certain requirements pertaining to the manner of such sales, notices of such
sales and the availability of current public information concerning the Company.
Affiliates may sell shares not constituting restricted securities in accordance
with the foregoing volume limitations and other requirements but without regard
to the one year holding period. Under Rule 144(k), if a period of at least two
years has elapsed between the later of the date on which restricted securities
were acquired from the Company and the date on which they were acquired from an
affiliate, a holder of such restricted securities who is not an affiliate at the
time of the sale and has not been an affiliate for at least three months prior
to the sale is entitled to sell the shares immediately without regard to volume
limitations and other conditions described above.
The Company and its officers, directors and certain stockholders, who
beneficially own at least 6,821,000 shares of Common Stock in the aggregate
(including options and warrants to purchase an aggregate of at least 2,073,125
shares), have agreed not to sell or otherwise dispose of any shares of Common
Stock for a period of 180 days after the effective date of this offering without
the prior written consent of Van Kasper & Company, except that the Company may
issue shares of Common Stock offered hereby, shares of Common Stock issued
pursuant to the exercise of outstanding options and warrants, shares of Common
Stock issued (subject to certain conditions) in connection with acquisitions and
options granted under the Company's stock option plans, so long as none of such
options become exercisable during said 180-day period. See "Underwriting."
After the completion of this offering, the Company intends to register
3,000,000 shares of its Common Stock under the Securities Act for use by the
Company in connection with future acquisitions. Upon such registration, these
shares will generally be freely tradeable after their issuance. In some
instances, however, the Company may contractually restrict the sale of shares
issued in connection with future acquisitions.
The Company intends to file a registration statement on Form S-8 to register
all shares subject to the Stock Option Plan and the Directors' Plan following
the date of this Prospectus. The Company has also agreed to register for resale
up to 510,000 shares issued to former stockholders of the Mesa Companies
52
<PAGE>
and AWW, up to 334,050 shares held by other members of management, up to 145,950
shares held by a principal stockholder, the 1,000,000 shares of Common Stock
issuable upon the exercise of the Sanifill Warrant and all shares of Common
Stock issuable upon the exercise of the Representatives' Warrants and the SMM
Warrant.
Prior to this offering, there has been no public market for the Common
Stock, and no prediction can be made as to the effect, if any, the sale of
shares or the availability of shares for sale will have on the market price for
the Common Stock prevailing from time to time. Nevertheless, sales, or the
availability for sale of, substantial amounts of the Common Stock in the public
market could adversely affect prevailing market prices and the future ability of
the Company to raise equity capital and complete any additional acquisitions for
Common Stock.
DELAWARE LAW AND CERTAIN CHARTER PROVISIONS
The Company's Certificate of Incorporation limits, to the fullest extent
permitted by Delaware law, the liability of a director to the Company or its
stockholders for monetary damages for a breach of such director's fiduciary duty
as a director. Delaware law presently permits such limitations of a director's
liability except where a director breaches his or her duty of loyalty to the
Company or its stockholders, fails to act in good faith or engages in
intentional misconduct or a knowing violation of law, authorizes payment of an
unlawful dividend or stock repurchase, or obtains an improper personal benefit.
This provision is intended to afford directors additional protection, and limit
their potential liability, from suits alleging a breach of the duty of care by a
director. The Company believes this provision will assist it in maintaining and
securing the services of directors who are not employees of the Company. As a
result of the inclusion of such a provision, stockholders may be unable to
recover, under Delaware law, monetary damages against directors for actions
taken by them that constitute negligence or gross negligence or that are in
violation of their fiduciary duties, although it may be possible to obtain
injunctive or other equitable relief with respect to such actions. If equitable
remedies are found not to be available to stockholders for any particular case,
stockholders may not have any effective remedy, under Delaware law, against the
challenged conduct.
The Company's Certificate of Incorporation and Bylaws also provide that
directors and officers shall be indemnified against liabilities arising from
their service as directors or officers to the fullest extent permitted by law,
which generally requires that the individual act in good faith and in a manner
he or she reasonably believes to be in or not opposed to the Company's best
interests. The Company has obtained directors and officers liability insurance
to limit its exposure under these provisions.
Under the Company's Certificate of Incorporation, the Board of Directors is
divided into three classes of directors with each class serving a staggered
three-year term. The classification system of electing directors may tend to
discourage a third party from making a tender offer or otherwise attempting to
obtain control of the Company and may maintain the incumbency of the Board of
Directors, as it generally makes it more difficult for stockholders to replace a
majority of the directors. See "Risk Factors--Potential Anti-Takeover Effect of
Charter Provisions."
TRANSFER AGENT
The Company's transfer agent for the Common Stock is ChaseMellon Shareholder
Services, L.L.C.
53
<PAGE>
UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement, the
underwriters named below (the "Underwriters"), through their representatives,
Van Kasper & Company and Sanders Morris Mundy Inc. (the "Representatives"), have
severally agreed to purchase from the Company the number of shares of Common
Stock set forth opposite their names below:
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITERS SHARES
- --------------------------------------------------------------------------------- ----------
<S> <C>
Van Kasper & Company.............................................................
Sanders Morris Mundy Inc.........................................................
----------
Total.......................................................................... 1,500,000
----------
----------
</TABLE>
The Underwriting Agreement provides that the obligations of the Underwriters
are subject to certain conditions precedent and that the Underwriters will
purchase all of the shares of Common Stock offered hereby (other than those
subject to the Underwriters' over-allotment option described below) if any are
purchased.
The Underwriters propose to offer the shares of Common Stock directly to the
public at the price to public set forth on the cover page of this Prospectus and
to certain dealers at this price less a concession not in excess of $ per
share. The Underwriters may allow and these dealers may reallow a concession not
in excess of $ per share to certain other dealers. After the initial
offering, the offering price and other selling terms may be changed by the
Representatives.
Prior to this offering, there has been no public market for the Common
Stock. Consequently, the initial public offering price will be determined
through negotiation among the Company and the Representatives. Factors to be
considered in making such determination include the prevailing market
conditions, the Company's financial and operating history and condition, its
prospects and the market prices of securities for companies in businesses
similar to that of the Company.
The Company has granted to the Underwriters an option, exercisable no later
than 45 days after the date of this Prospectus, to purchase up to 225,000
additional shares of Common Stock at the IPO Price, less the underwriting
discount set forth on the cover page of this Prospectus, solely to cover over-
allotments. To the extent that the Representatives act to exercise this option,
each of the Underwriters will have a firm commitment to purchase approximately
the same percentage thereof as the number of shares of Common Stock to be
purchased by it shown in the above table bears to the total offering, and the
Company will be obligated, pursuant to the option, to sell such shares of Common
Stock to the Underwriters.
In connection with the offering made hereby, the Company has agreed to sell
to the Representatives, for nominal consideration, the Representatives'
Warrants, which entitle the Representatives to purchase from the Company 112,500
of shares of Common Stock. The Representatives' Warrants are exercisable, in
whole or in part, at an exercise price of 120% of the IPO Price at any time
during the four-year period
54
<PAGE>
commencing one year after the effective date of the Registration Statement of
which this Prospectus is a part, and cannot be transferred for a period of one
year from the date of issuance except to the Underwriters, selling group members
and their officers or partners. The warrant agreement pursuant to which the
Representatives' Warrants will be issued will contain provisions providing for
adjustment of the exercise price and the number and type of securities issuable
upon exercise of the Representatives' Warrants should any one or more of certain
specified events occur. The Representatives' Warrants grant to the holders
thereof certain rights of registration for the securities issuable upon exercise
of the Representatives' Warrants.
At the closing of the offering, the Company will also pay to the
Representatives a non-accountable expense allowance equal to 1% of the total
price to public of the shares sold in the offering.
The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act. The Representatives
have informed the Company that the Underwriters do not intend to confirm sales
to accounts over which they exercise discretionary authority.
The Company, all of its executive officers and directors, and certain
beneficial owners of the Common Stock have agreed not to, directly or
indirectly, offer to sell, contract to sell, sell or otherwise dispose of any
shares of Common Stock or any securities convertible into or exercisable for
shares of Common Stock or any rights to purchase or acquire Common Stock for the
180-day period after the closing of this offering without the prior written
consent of Van Kasper & Company. Van Kasper & Company may, in its sole
discretion and at any time without notice, release all or any portion of the
securities subject to these lock-up agreements. In addition, the Company has
agreed that for a period of 180 days after the date of this Prospectus, it will
not, without the prior written consent of Van Kasper & Company, issue, offer,
sell, grant options to purchase or otherwise dispose of any equity securities or
securities convertible into or exchangeable for equity securities except for
shares of Common Stock offered hereby, shares of Common Stock issued pursuant to
the exercise of outstanding options and warrants, shares of Common Stock issued
in connection with acquisitions and options granted under the Company's existing
stock option plans so long as none of such options become exercisable during
said 180-day period, and (subject to certain conditions) shares issued in future
acquisitions. Sales of such shares in the future could adversely affect the
market price of the Common Stock. See "Shares Eligible for Future Sale."
In May 1997, the Company engaged SMM to assist it in, among other things,
developing and implementing an acquisition program. As consideration for its
services, the Company issued to SMM the SMM Warrant to purchase 37,500
(post-reverse split) shares of Common Stock at the IPO Price. See "Certain
Transactions--Other."
LEGAL MATTERS
The validity of the Common Stock offered hereby will be passed upon for the
Company by Hartzog Conger & Cason, Oklahoma City, Oklahoma. Certain legal
matters related to this offering will be passed on for the Underwriters by
Brobeck, Phleger & Harrison LLP, San Diego, California.
EXPERTS
The audited financial statements included elsewhere in this Prospectus and
elsewhere in the registration statement have been audited by Arthur Andersen
LLP, independent public accountants, as indicated in their reports with respect
thereto, and are included herein in reliance upon the authority of said firm as
experts in giving said reports.
ADDITIONAL INFORMATION
The Company has filed with the Commission a registration statement (which
term shall encompass any and all amendments thereto) on Form S-1 (the
"Registration Statement") under the Securities Act
55
<PAGE>
with respect to the shares of Common Stock offered by this Prospectus. This
Prospectus, which is part of the Registration Statement, does not contain all of
the information set forth in the Registration Statement and the exhibits and
schedules thereto, certain items of which are omitted in accordance with the
rules and regulations of the SEC. Statements made in this Prospectus as to the
contents of any contract, agreement or other document referred to are not
necessarily complete. With respect to each such contract, agreement or other
document filed as an exhibit to the Registration Statement, reference is hereby
made to the exhibit for a more complete description of the matter involved, and
each such statement shall be deemed qualified in its entirety by such reference.
For further information with respect to the Company, reference is hereby made to
the Registration Statement and such exhibits and schedules filed as a part
thereof, which may be inspected, without charge, at the Public Reference Section
of the SEC at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington,
D.C. 20549 and at the regional offices of the SEC located at Seven World Trade
Center, 13th Floor, New York, New York 10048 and at Northwestern Atrium Center,
500 West Madison Street, Suite 1400, Chicago, Illinois 60661. The SEC maintains
a web site that contains reports, proxy and information statements regarding
registrants that file electronically with the SEC. The address of this web site
is (http://www.sec.gov). Copies of all or any portion of the Registration
Statement may be obtained from the Public Reference Section of the SEC, upon
payment of the prescribed fees.
56
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
U S LIQUIDS INC. PRO FORMA
Introduction to Unaudited Pro Forma Financial Statements........................... F-2
Pro Forma Balance Sheet (unaudited)................................................ F-3
Notes to Pro Forma Balance Sheet (unaudited)....................................... F-4
Pro Forma Statements of Income (unaudited)......................................... F-5
Notes to Pro Forma Statements of Income (unaudited)................................ F-7
U S LIQUIDS INC. AND SUBSIDIARIES
Report of Independent Public Accountants........................................... F-8
Consolidated Balance Sheets........................................................ F-9
Consolidated Statements of Income.................................................. F-10
Consolidated Statements of Stockholders' Equity.................................... F-11
Consolidated Statements of Cash Flows.............................................. F-12
Notes to Consolidated Financial Statements......................................... F-13
U S LIQUIDS INC. PREDECESSOR
Report of Independent Public Accountants........................................... F-28
Balance Sheets..................................................................... F-29
Statements of Income............................................................... F-30
Notes to Predecessor Financial Statements.......................................... F-31
</TABLE>
F-1
<PAGE>
U S LIQUIDS INC.
INTRODUCTION TO UNAUDITED PRO FORMA FINANCIAL STATEMENTS
The following unaudited Pro Forma Financial Statements present the balance
sheet and income statement data from the consolidated financial statements of U
S Liquids Inc. ("U S Liquids" or "The Company") which include the financial
statements of Mesa Processing, Inc. and related companies ("Mesa") and American
WasteWater Inc. ("AWW") combined with the 1996 results of operations data for
Campbell Wells, L.P. and Campbell Wells NORM L.P. (collectively, "Campbell
Wells" or the "U S Liquids Inc. Predecessor") which are wholly-owned
subsidiaries of Sanifill, Inc. ("Sanifill") relating to the assets acquired and
liabilities assumed by U S Liquids (The Campbell Wells Acquisition) as if the
Campbell Wells Acquisition and the U S Liquids initial public offering (the
"Offering") had occurred on January 1, 1996.
The Company has preliminarily analyzed the savings that it expects to be
realized by consolidating certain operational and general and administrative
functions. The Company has not and cannot quantify these savings due to the
short period of time since the Campbell Wells Acquisition and the merger with
Mesa and AWW. It is anticipated that these savings will be partially offset by
the costs of being a publicly-held company and the incremental increase in costs
related to the Company's corporate management. However, these costs, like the
savings that they offset, cannot be quantified accurately. Neither the
anticipated savings nor the anticipated costs have been included in the Pro
Forma Financial Statements. The Company has estimated the additional insurance
costs that the U S Liquids Predecessor would have incurred as a stand-alone
entity by comparing the insurance cost allocations that the U S Liquids Inc.
Predecessor received from its previous parent Sanifill to the contractual
premiums paid by U S Liquids Inc.
The Pro Forma Financial Statements include certain adjustments to the
historical financial statements of the U S Liquids Inc. Predecessor, including
adjusting depreciation expense to reflect purchase price allocations, recording
interest expense to reflect the outstanding debt due to Sanifill, adjusting
insurance expense consistent with the expenses for U S Liquids Inc. and the
related income tax effects of these adjustments. As a wholly-owned subsidiary of
Sanifill, the U S Liquids Inc. Predecessor maintained a noninterest-bearing
intercompany account with Sanifill for recording intercompany charges for costs
and expenses, intercompany purchases of equipment and additions under capital
leases and intercompany transfers of cash, among other transactions. It is not
feasible to ascertain the amount of related interest expense which would have
been recorded in the historical financial statements had the U S Liquids Inc.
Predecessor been operated as a stand-alone entity. Accordingly, neither the
historical nor the pro forma financial statements include interest expenses
related to the U S Liquids Inc. Predecessor's intercompany account with
Sanifill.
The Pro Forma Adjustments are based on preliminary estimates, available
information and certain assumptions and may be revised as additional information
becomes available. The Pro Forma Financial Statements do not purport to
represent what the Company's financial position or results of operations would
actually have been if such transactions in fact had occurred on those dates or
project the Company's financial position or results of operations for any future
period. Since the Company, the U S Liquids Inc. Predecessor and Mesa and AWW
were not under common control or management for all periods, historical combined
results may not be comparable to, or indicative of, future performance. The
unaudited Pro Forma Financial Statements should be read in conjunction with the
other financial statements and notes thereto included elsewhere in this
Prospectus, as well as information included under the headings "Selected
Financial Data," "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and "Risk Factors" included elsewhere herein.
F-2
<PAGE>
U S LIQUIDS INC.
PRO FORMA BALANCE SHEET (UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
JUNE 30, 1997
---------------------------------------
ASSETS
OFFERING AS
CONSOLIDATED EFFECTS ADJUSTED
------------- ------------- ---------
<S> <C> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents................................................. $ 2,704 $ 12,327(A) $ 12,083
(2,948)(B)
Accounts receivable, net of allowance..................................... 4,196 4,196
Inventories............................................................... 446 446
Prepaid expenses and other current assets................................. 860 (318)(A) 542
------------- ------------- ---------
Total current assets.................................................... 8,206 9,061 17,267
PROPERTY, PLANT AND EQUIPMENT, net.......................................... 34,982 34,982
OTHER ASSETS, net........................................................... 675 (27)(B) 648
------------- ------------- ---------
Total assets............................................................ $ 43,863 $ 9,034 $ 52,897
------------- ------------- ---------
------------- ------------- ---------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURENT LIABILITIES:
Current maturities of long-term obligations............................... $ 4,527 $ (1,445)(B) $ 3,082
Accounts payable.......................................................... 1,966 1,966
Accrued liabilities....................................................... 2,618 (234)(B) 2,384
Advances from stockholders and current maturities of related-party notes
payable................................................................. 545 (545)(B) --
------------- ------------- ---------
Total current liabilities............................................... 9,656 (2,224) 7,432
LONG-TERM OBLIGATIONS, net of current maturities............................ 20,902 (724)(B) 20,178
CELL PROCESSING RESERVE..................................................... 7,886 7,886
CLOSURE AND REMEDIATION
RESERVES.................................................................. 2,500 2,500
Deferred income taxes..................................................... 66 66
------------- ------------- ---------
Total liabilities....................................................... 41,010 (2,948) 38,062
------------- ------------- ---------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Preferred stock........................................................... 10 10
Common stock.............................................................. 52 15(A) 67
Additional paid-in capital................................................ 1,379 11,994(A) 13,373
Retained earnings......................................................... 1,412 (27)(B) 1,385
------------- ------------- ---------
Total stockholders' equity.............................................. 2,853 11,982 14,835
------------- ------------- ---------
Total liabilities and stockholders' equity.............................. $ 43,863 $ 9,034 $ 52,897
------------- ------------- ---------
------------- ------------- ---------
</TABLE>
The accompanying notes are an integral part of this pro forma financial
statement.
F-3
<PAGE>
U S LIQUIDS INC.
NOTES TO PRO FORMA BALANCE SHEET (UNAUDITED)
(A) Reflects the proceeds from the issuance of 1,500,000 shares of Common Stock,
net of estimated offering costs (based on an initial public offering price
of $9.50 per share). Offering costs primarily consist of underwriting
discounts and commissions, accounting fees, legal fees and printing
expenses.
(B) Reflects the repayment of certain debt obligations with proceeds from the
Offering.
F-4
<PAGE>
U S LIQUIDS INC.
PRO FORMA STATEMENT OF INCOME (UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31, 1996
--------------------------------------------------------------------------------
U S LIQUIDS PRO FORMA OFFERING
CONSOLIDATED PREDECESSOR ADJUSTMENTS PRO FORMA EFFECTS AS ADJUSTED
------------- ----------- ------------ ----------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C>
REVENUES.............................. $ 14,285 $ 16,853 $ $ 31,138 $ $ 31,138
(768)(A)
COST OF GOODS SOLD.................... 11,790 9,136 446(B) 20,604 20,604
------------- ----------- ------------ ----------- ----- -----------
GROSS PROFIT........................ 2,495 7,717 322 10,534 10,534
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES............................ 1,440 2,524 3,964 3,964
------------- ----------- ------------ ----------- ----- -----------
INCOME FROM OPERATIONS.............. 1,055 5,193 322 6,570 6,570
INTEREST EXPENSE AND OTHER (INCOME),
net, excluding intercompany interest
expense............................. 309 256 1,986(C) 2,551 (234)(E) 2,317
------------- ----------- ------------ ----------- ----- -----------
INCOME (LOSS) BEFORE INCOME TAXES..... 746 4,937 (1,664) 4,019 234 4,253
PROVISION (BENEFIT) FOR INCOME
TAXES............................... 255 2,044 (650)(D) 1,649 96(D) 1,745
------------- ----------- ------------ ----------- ----- -----------
NET INCOME (LOSS)..................... $ 491 $ 2,893 $ (1,014) $ 2,370 $ 138 $ 2,508
------------- ----------- ------------ ----------- ----- -----------
------------- ----------- ------------ ----------- ----- -----------
NET INCOME PER SHARE.................. $ 0.32
-----------
-----------
SHARES USED IN COMPUTING NET INCOME
PER SHARE........................... 7,830(F)
-----------
-----------
</TABLE>
The accompanying notes are an integral part of this pro forma financial
statement.
F-5
<PAGE>
U S LIQUIDS INC.
PRO FORMA STATEMENTS OF INCOME (UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE SIX MONTHS ENDED JUNE 30, 1997
-------------------------------------------
OFFERING AS
CONSOLIDATED EFFECTS ADJUSTED
------------- ------------- -------------
<S> <C> <C> <C>
REVENUES.................................................................... $ 17,734 $ $ 17,734
COST OF GOODS SOLD.......................................................... 11,362 11,362
------------- ------------- -------------
GROSS PROFIT.............................................................. 6,372 6,372
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES................................ 2,716 2,716
------------- ------------- -------------
INCOME FROM OPERATIONS.................................................... 3,656 3,656
INTEREST EXPENSE AND OTHER (INCOME), net.................................... 1,137 (134)(E) 1,003
------------- ------------- -------------
INCOME BEFORE INCOME TAXES.................................................. 2,519 134 2,653
PROVISION FOR INCOME TAXES.................................................. 1,033 55(D) 1,088
------------- ------------- -------------
NET INCOME.................................................................. $ 1,486 $ 79 $ 1,565
------------- ------------- -------------
------------- ------------- -------------
NET INCOME PER SHARE........................................................ $ 0.20
-------------
-------------
SHARES USED IN COMPUTING NET INCOME PER SHARE............................... 7,830(F)
-------------
-------------
</TABLE>
<TABLE>
<CAPTION>
FOR THE SIX MONTHS ENDED JUNE 30, 1996
--------------------------------------------------------------------------------------
U S LIQUIDS PRO FORMA OFFERING AS
CONSOLIDATED PREDECESSOR ADJUSTMENTS PRO FORMA EFFECTS ADJUSTED
------------- ----------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
REVENUES......................... $ 6,757 $ 7,617 $ $ 14,374 $ $ 14,374
(384)(A)
COST OF GOODS SOLD............... 5,751 4,458 209(B) 10,034 10,034
------------- ----------- ------------- ------------- ------------- -------------
GROSS PROFIT................... 1,006 3,159 175 4,340 4,340
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES........ 527 1,498 2,025 2,025
------------- ----------- ------------- ------------- ------------- -------------
INCOME FROM OPERATIONS......... 479 1,661 175 2,315 2,315
INTEREST EXPENSE AND OTHER
(INCOME), net, excluding
intercompany interest
expense........................ 96 95 992(C) 1,183 (102)(E) 1,081
------------- ----------- ------------- ------------- ------------- -------------
INCOME (LOSS) BEFORE INCOME
TAXES.......................... 383 1,566 (817) 1,132 102 1,234
PROVISION (BENEFIT) FOR INCOME
TAXES.......................... 132 642 (310)(D) 464 42(D) 506
------------- ----------- ------------- ------------- ------------- -------------
NET INCOME (LOSS)................ $ 251 $ 924 $ (507) $ 668 $ 60 $ 728
------------- ----------- ------------- ------------- ------------- -------------
------------- ----------- ------------- ------------- ------------- -------------
NET INCOME PER SHARE............. $ 0.09
-------------
-------------
SHARES USED IN COMPUTING NET
INCOME PER SHARE............... 7,830(F)
-------------
-------------
</TABLE>
The accompanying notes are an integral part of these pro forma financial
statements.
F-6
<PAGE>
U S LIQUIDS INC.
NOTES TO PRO FORMA STATEMENTS OF INCOME (UNAUDITED)
(A) Adjusts depreciation expense to reflect the revaluation of property, plant
and equipment in conjunction with the Campbell Wells Acquisition purchase
price allocations.
(B) Adjusts insurance expense to reflect the differences in the contractual
insurance premiums paid by the Company versus the intercompany insurance
cost allocations received by the U S Liquids Predecessor from its previous
parent Sanifill, Inc.
(C) Records interest expense on the debt incurred to effect the Campbell Wells
Acquisition.
(D) Reflects the incremental provision (benefit) for federal and state income
taxes relating to the pro forma income statement adjustments as well as
providing federal income taxes on AWW (a limited liability company).
(E) Reflects the reduction in interest expense attributed to obligations retired
with proceeds from the Offering.
(F) Includes (i) 3,538,875 shares issued by U S Liquids prior to the offering,
(ii) 1,700,000 shares issued to the stockholders of Mesa and AWW in
conjunction with their acquisition, (iii) 1,500,000 shares issued in
connection with the Offering, and (iv) 1,090,713 shares representing the
weighted average portion of shares for the dilution attributable to
outstanding warrants and options to purchase common stock, using the
treasury stock method. Excludes 525,000 shares of Common Stock subject to
options and warrants to be granted in connection with the Offering at an
exercise price equal to or exceeding the initial public offering price and
468,750 options which are contingent upon the successful completion of
certain corporate development activities.
F-7
<PAGE>
U S LIQUIDS INC.
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, 1995 and 1996,
and the related consolidated statements of income, stockholders' equity and cash
flows for each of the three years in the period ended December 31, 1996. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
U S Liquids Inc. and subsidiaries as of December 31, 1995 and 1996, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1996, in conformity with generally accepted
accounting principles.
ARTHUR ANDERSEN LLP
Houston, Texas
June 26, 1997
F-8
<PAGE>
U S LIQUIDS INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
ASSETS
DECEMBER 31,
-------------------- JUNE 30,
1995 1996 1997
--------- --------- -----------
<S> <C> <C> <C>
(UNAUDITED)
CURRENT ASSETS:
Cash and cash equivalents..................................................... $ 39 $ 5,604 $ 2,704
Accounts receivable, less allowances of $12, $265 and $265.................... 723 4,843 4,196
Inventories................................................................... 364 339 446
Prepaid expenses and other current assets..................................... 67 764 860
--------- --------- -----------
Total current assets........................................................ 1,193 11,550 8,206
PROPERTY, PLANT AND EQUIPMENT, net.............................................. 1,680 34,582 34,982
DEFERRED INCOME TAXES........................................................... 65 186 --
OTHER ASSETS, net............................................................... 69 533 675
--------- --------- -----------
Total assets................................................................ $ 3,007 $ 46,851 $ 43,863
--------- --------- -----------
--------- --------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current maturities of long-term obligations................................... $ 214 $ 5,817 $ 4,527
Accounts payable.............................................................. 1,231 2,984 1,966
Accrued liabilities........................................................... 124 2,147 2,618
Advances from stockholders and current maturities of related-party notes
payable..................................................................... 200 465 545
--------- --------- -----------
Total current liabilities................................................... 1,769 11,413 9,656
LONG-TERM OBLIGATIONS, net of current maturities................................ 1,044 23,668 20,902
RELATED-PARTY NOTES PAYABLE..................................................... 552 -- --
CELL PROCESSING RESERVE......................................................... -- 7,732 7,886
CLOSURE AND REMEDIATION RESERVES................................................ -- 2,500 2,500
Deferred income taxes......................................................... -- -- 66
--------- --------- -----------
Total liabilities........................................................... 3,365 45,313 41,010
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value, 10,000,000 shares authorized, none issued or
outstanding
Series A 72 percent cumulative preferred stock, $1.00 par value, 10,000 shares
authorized, 10,000 shares issued and outstanding............................ 10 10 10
Common stock, $.01 par value, 50,000,000 shares authorized, 1,700,000,
5,238,875 and 5,238,875 shares issued and outstanding....................... 17 52 52
Additional paid-in capital.................................................... 2 1,379 1,379
Retained earnings (deficit)................................................... (387) 97 1,412
--------- --------- -----------
Total stockholders' equity.................................................. (358) 1,538 2,853
--------- --------- -----------
Total liabilities and stockholders' equity.................................. $ 3,007 $ 46,851 $ 43,863
--------- --------- -----------
--------- --------- -----------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-9
<PAGE>
U S LIQUIDS INC.
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
------------------------------- ------------------------
1994 1995 1996 1996 1997
--------- --------- --------- ----------- -----------
<S> <C> <C> <C> <C> <C>
(UNAUDITED) (UNAUDITED)
REVENUES............................................... $ 8,039 $ 11,127 $ 14,285 $ 6,757 $ 17,734
COST OF OPERATIONS..................................... 7,558 9,935 11,790 5,751 11,362
--------- --------- --------- ----------- -----------
Gross profit......................................... 481 1,192 2,495 1,006 6,372
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES........... 643 863 1,440 527 2,716
--------- --------- --------- ----------- -----------
INCOME (LOSS) FROM OPERATIONS.......................... (162) 329 1,055 479 3,656
INTEREST EXPENSE....................................... 110 159 397 122 1,032
OTHER (INCOME) EXPENSE, net............................ (1) 18 (88) (26) 105
--------- --------- --------- ----------- -----------
INCOME (EXPENSE) BEFORE PROVISION (BENEFIT) FOR INCOME
TAXES................................................ (271) 152 746 383 2,519
PROVISION (BENEFIT) FOR INCOME TAXES................... (89) 49 255 132 1,033
--------- --------- --------- ----------- -----------
Net income (loss).................................... $ (182) $ 103 $ 491 $ 251 $ 1,486
--------- --------- --------- ----------- -----------
--------- --------- --------- ----------- -----------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-10
<PAGE>
U S LIQUIDS INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
PREFERRED STOCK COMMON STOCK ADDITIONAL RETAINED
---------------------- ----------------------- PAID-IN EARNINGS
SHARES AMOUNT SHARES AMOUNT CAPITAL (DEFICIT)
--------- ----------- ---------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, December 31, 1993....................... 10,000 $ 10 1,700,000 $ 17 $ 2 $ (294)
Net loss....................................... -- -- -- -- -- (182)
Preferred stock dividends...................... -- -- -- -- -- (7)
--------- ----- ---------- ----- ----------- -----------
BALANCE, December 31, 1994....................... 10,000 10 1,700,000 17 2 (483)
Net income..................................... -- -- -- -- -- 103
Preferred stock dividends...................... -- -- -- -- -- (7)
--------- ----- ---------- ----- ----------- -----------
BALANCE, December 31, 1995....................... 10,000 10 1,700,000 17 2 (387)
Net income..................................... -- -- -- -- -- 491
Issuance of common stock....................... -- -- 3,538,875 35 382 --
Preferred stock dividends...................... -- -- -- -- -- (7)
Issuance of stock warrants..................... -- -- -- -- 995 --
--------- ----- ---------- ----- ----------- -----------
BALANCE, December 31, 1996....................... 10,000 10 5,238,875 52 1,379 97
Net income (unaudited)......................... -- -- -- -- -- 1,486
Distributions equal to the current
income taxes of the limited liability
corporation.................................. -- -- -- -- -- (171)
--------- ----- ---------- ----- ----------- -----------
BALANCE, June 30, 1997 (unaudited)............... 10,000 $ 10 5,238,875 $ 52 $ 1,379 $ 1,412
--------- ----- ---------- ----- ----------- -----------
--------- ----- ---------- ----- ----------- -----------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-11
<PAGE>
U S LIQUIDS INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
------------------------------- --------------------------
1994 1995 1996 1996 1997
--------- --------- --------- ------------- -----------
<S> <C> <C> <C> <C> <C>
(UNAUDITED) (UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)........................................ $ (182) $ 103 $ 491 $ 251 $ 1,486
Adjustments to reconcile net income (loss) to net cash
provided by operating activities--
Depreciation and amortization.......................... 136 159 424 152 1,285
Deferred income tax provision (benefit)................ (86) 31 (121) (43) 152
Changes in operating assets and liabilities--
Accounts receivable.................................. (6) (539) (105) (35) 647
Inventories.......................................... (5) (288) 44 (107) (107)
Prepaid expenses and other current assets............ (11) (19) (635) (52) 4
Other assets......................................... (5) (20) (113) (27) (151)
Accounts payable and accrued liabilities............. 201 946 1,567 340 (575)
Closure, remediation and cell processing reserves.... -- -- (13) -- 154
--------- --------- --------- ------ -----------
Net cash provided by operating activities.......... 42 373 1,539 479 2,895
--------- --------- --------- ------ -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property, plant and equipment............... (178) (916) (1,795) (961) (1,676)
Net cash (paid for) acquired through acquisitions........ -- -- 5,985 (25) --
--------- --------- --------- ------ -----------
Net cash provided by (used in) investing
activities....................................... (178) (916) 4,190 (986) (1,676)
--------- --------- --------- ------ -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Advances from (payments to) stockholders and related
party notes payable.................................... -- (6) (139) (61) 80
Proceeds from issuance of long-term obligations.......... 144 1,084 1,152 677 305
Principal payments on long-term obligations.............. (77) (564) (1,650) (110) (4,361)
Interest accrued on related-party notes payable.......... 47 50 56 28 28
Preferred stock dividends paid........................... (4) (7) -- -- --
Issuance of common stock................................. -- -- 417 -- --
Distributions equal to the current income taxes of the
limited liability corporation.......................... -- -- -- -- (171)
--------- --------- --------- ------ -----------
Net cash provided by (used in) financing
activities....................................... 110 557 (164) 534 (4,119)
--------- --------- --------- ------ -----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS....... (26) 14 5,565 27 (2,900)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD........... 51 25 39 38 5,604
--------- --------- --------- ------ -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD................. $ 25 $ 39 $ 5,604 $ 65 $ 2,704
--------- --------- --------- ------ -----------
--------- --------- --------- ------ -----------
SUPPLEMENTAL DISCLOSURES:
Cash paid for interest................................... $ 110 $ 102 $ 339 $ 98 $ 1,028
Cash paid for income taxes............................... -- 2 7 -- 1,030
Assets acquired under capital leases..................... -- 88 -- -- 46
Assets acquired with stock warrants...................... -- -- 995 -- --
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-12
<PAGE>
U S LIQUIDS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BUSINESS AND ORGANIZATION:
U S Liquids Inc. was founded November 18, 1996, and effective December 13,
1996 acquired certain assets and assumed certain liabilities of Campbell Wells,
L.P., and Campbell Wells NORM, L.P. (collectively, "Campbell Wells"), which are
wholly owned subsidiaries of Sanifill, Inc. ("Sanifill"). On June 17, 1997, U S
Liquids Inc. merged with Mesa Processing, Inc., and related companies ("Mesa")
and American WasteWater Inc. ("AWW") through poolings-of-interests transactions.
U S Liquids Inc. and subsidiary (collectively, "U S Liquids") treats and
disposes nonhazardous oil field waste ("NOW") generated in the exploration for
and production of oil and natural gas. U S Liquids has NOW facilities located in
Louisiana and Texas that service the Gulf Coast region of the United States.
Mesa and AWW treat and dispose non-hazardous commercial waste ("NCW"),
including the processing and recovering of marketable waste products generated
by restaurants, food processors, and other industries. Revenues are derived from
two principal sources: the sale of finished products and tipping and collection
fees received for treatment and disposal of NCW.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
BASIS OF PRESENTATION
The consolidated financial statements include the accounts of U S Liquids,
Mesa and AWW (collectively, the Company) after elimination of all significant
intercompany accounts and transactions. The consolidated financial statements
for 1994 and 1995 represent the operations of Mesa and AWW prior to their
acquisition by the Company. The combined revenues and net income of Mesa and AWW
for the preacquisition period in 1996 were $13,459,000 and $479,000,
respectively.
INTERIM FINANCIAL INFORMATION
The interim consolidated financial statements as of June 30, 1997, and for
the six months ended June 30, 1996 and 1997, are unaudited, and certain
information and footnote disclosures, normally included in financial statements
prepared in accordance with generally accepted accounting principles, have been
omitted. In the opinion of management, all adjustments, consisting only of
normal recurring adjustments, necessary to fairly present the financial
position, results of operations and cash flows with respect to the interim
consolidated financial statements, have been included. The results of operations
for the interim periods are not necessarily indicative of the results for the
entire fiscal year.
USE OF ESTIMATES
The preparation of financial statements requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities, the disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS
All highly liquid investments with an original maturity of three months or
less are classified as cash equivalents.
F-13
<PAGE>
U S LIQUIDS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
RISK FACTORS
An investment in the Company's common stock involves a high degree of risk.
Those risks include, but are not limited to, government regulation, dependence
on the oil and gas industry and foreign customers, absence of a combined
operating history, reliance on key personnel and risks related to the Company's
acquisition strategy. For a more complete description of the Company's risks,
see "Risk Factors" included elsewhere in this prospectus.
CONCENTRATIONS OF CREDIT RISK
Accounts receivable potentially subject the Company to concentrations of
credit risk. At December 31, 1995, 37 percent and 10 percent, respectively, of
total accounts receivable are associated with two customers. At December 31,
1996, 41 percent and 16 percent, respectively, of total accounts receivable are
associated with two customers. In addition, sales to one customer represented 52
percent, 62 percent and 43 percent of total revenues for the years ended
December 31, 1994, 1995 and 1996, respectively.
The Company's customers are concentrated in the oil and gas industry in
Louisiana and Texas, the grease collection business in Texas and the chemical
processing and livestock feed industries in Mexico. Total sales to customers in
Mexico represented 80 percent, 82 percent and 70 percent of total revenues for
the years ended December 31, 1994, 1995 and 1996, respectively. Accounts
receivable with customers in Mexico represented approximately 64 percent and 9
percent of total accounts receivable at December 31, 1995 and 1996,
respectively. Management performs ongoing credit analyses of the accounts of its
customers and provides allowances as deemed necessary. Additionally, sales are
dollar-denominated and the majority of international sales are secured by
letters of credit.
INVENTORIES
Inventories are stated at the lower of cost or market and, at December 31,
1995 and 1996, consisted of finished grease products of $273,000 and $265,000,
respectively, and unprocessed grease of $91,000 and $74,000, respectively. Cost
is determined using the first-in, first-out (FIFO) method.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment is recorded at cost. Improvements or
betterments which significantly extend the life of an asset are capitalized.
Expenditures for maintenance and repair costs are charged to operations as
incurred. The cost of assets retired or otherwise disposed of and the related
accumulated 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 and
double-declining balance methods.
INSURANCE
The Company maintains various types of insurance coverage for its business,
including, without limitation, commercial general liability and commercial auto
liability, workers' compensation and employer liability, pollution legal
liability and a general umbrella policy. The Company has not incurred
significant claims or losses in excess of its insurance limits during the
periods presented in the accompanying consolidated financial statements.
F-14
<PAGE>
U S LIQUIDS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
INCOME TAXES
The Company will file a consolidated return for federal income tax purposes.
Income taxes for U S Liquids and Mesa are provided under the liability method
considering the tax effects of transactions reported in the financial statements
which are different from the tax return. The deferred income tax assets and
liabilities represent the future tax consequences of those differences, which
will either be taxable or deductible when the underlying assets or liabilities
are realized or settled. Prior to June 1997, AWW was a limited liability company
(LLC), as defined by the Internal Revenue Code, whereby it was not subject to
taxation for federal income tax purposes. Under LLC status, the equity owners
reported their shares of AWW's federal taxable earnings or losses on their
personal income tax returns. In June 1997, AWW converted to a C Corporation for
federal income tax purposes and has recorded current and deferred income tax
assets and liabilities existing on the date of conversion.
CLOSURE AND REMEDIATION RESERVES
The closure and remediation reserves represent accruals for the total
estimated future costs associated with the ultimate closure of the Company's
landfarm facilities, including costs of decommissioning and statutory monitoring
costs required during the closure and subsequent postclosure periods. Management
periodically reviews the level of these reserves and adjusts them to reflect its
current estimate of the total costs necessary to complete the closure and
remediation of its landfarm facilities. In conjunction with the Company's
acquisition of certain assets and assumption of certain liabilities of Campbell
Wells, Sanifill has agreed to maintain certain landfarm facility closure bonds
and related letters of credit totalling $4 million posted with the states of
Louisiana and Texas through December 31, 1997, at which time the Company will
replace these closure bonds and letters of credit with similar instruments.
REVENUE RECOGNITION AND CELL PROCESSING RESERVE
When waste is unloaded at a given site, the Company recognizes the related
revenue and records a reserve for the estimated amount of expenses to be
incurred with the treatment of the oil field waste in order to match revenues
with their related costs. The related treatment costs are charged against the
reserve as such costs are incurred.
Mesa recognizes sales revenue when the product is shipped to the customer.
Service revenue is recognized when the material to be processed is unloaded at
Mesa's plant, if delivered by the customer, or at the time the service is
performed, if Mesa collects the materials from the customer's location.
AWW recognizes revenue from processing services when customers unload their
wastes at AWW's facilities. AWW recognizes revenue from grease sales when the
product is delivered to a rendering company.
F-15
<PAGE>
U S LIQUIDS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
The Company's revenues consist of the following:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1994 1995 1996
--------- --------- ---------
<S> <C> <C> <C>
(IN THOUSANDS)
Product sales................................................. $ 7,023 $ 9,866 $ 11,474
Processing revenues........................................... 1,002 1,231 2,779
Other revenues................................................ 14 30 32
--------- --------- ---------
Total....................................................... $ 8,039 $ 11,127 $ 14,285
--------- --------- ---------
--------- --------- ---------
</TABLE>
NEW ACCOUNTING STANDARD
Effective January 1, 1996, the Company adopted the provisions of Statement
of Financial Accounting Standards (SFAS) No. 121, "Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." Under these
provisions, the Company reviews certain long-lived assets for impairment
whenever events indicate that the carrying amount of an asset may not be
recoverable and recognizes an impairment loss under certain circumstances in the
amount by which the carrying value exceeds the fair value of the asset. The
adoption of SFAS No. 121 had no impact on the Company's financial position or
results of operations.
3. ACQUISITIONS:
THE CAMPBELL WELLS ACQUISITION
Effective December 14, 1996, U S Liquids Inc. purchased certain assets and
assumed certain liabilities of Campbell Wells by issuing a long-term promissory
note for $27,800,000 and warrants to purchase 1,000,000 shares of U S Liquids
Inc. common stock at an exercise price of $2.00 per share (the "Campbell Wells
Acquisition"). The total purchase price includes a calculation of the fair value
of the warrants at their date of issuance using the Black-Scholes pricing model
with the following assumptions:
<TABLE>
<S> <C>
Expected stock price volatility................................... 35.55%
Risk-free interest rate........................................... 6.35%
Expected life of warrants......................................... 10 years
</TABLE>
The Campbell Wells Acquisition was accounted for under the purchase method
of accounting, and the net assets and results of operations since the date of
the Campbell Wells Acquisition are included in the consolidated financial
statements. Costs were allocated to the net assets acquired based on
management's
F-16
<PAGE>
U S LIQUIDS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. ACQUISITIONS: (CONTINUED)
estimate of the fair value of the acquired assets and liabilities at the date of
the Campbell Wells Acquisition. The purchase price has been allocated as follows
(in thousands):
<TABLE>
<S> <C>
Acquired assets--
Cash and cash equivalents....................................... $ 6,001
Accounts receivable............................................. 3,980
Prepaid expenses and other current assets....................... 61
Property, plant and equipment................................... 30,693
Deferred income tax asset....................................... 1,628
Other assets.................................................... 271
Assumed liabilities--
Accounts payable and accrued liabilities........................ (1,966)
Closure, remediation and cell processing reserves............... (10,245)
Deferred income tax liability................................... (1,628)
---------
Total purchase price.......................................... $ 28,795
---------
---------
</TABLE>
The following table sets forth unaudited pro forma income statement data to
present the effect of the Campbell Wells Acquisition on the Company's results of
operations for the years ended December 31, 1995 and 1996. The income statement
data for Campbell Wells may not necessarily be indicative of the results of
operations that would have been realized had Campbell Wells been operated as a
stand-alone entity.
As a wholly-owned subsidiary of Sanifill, Campbell Wells maintained a
noninterest-bearing intercompany account with Sanifill for recording
intercompany charges for costs and expenses, intercompany purchases of equipment
and additions under capital leases and intercompany transfers of cash, among
other transactions. It is not feasible to ascertain the amount of related
interest expense which would have been recorded in the statements of income had
Campbell Wells been operated as a stand-alone entity. The following unaudited
pro forma income statement data includes the revenues and net income of the
Company, plus the acquired operations of Campbell Wells, as if the Campbell
Wells Acquisition were effective on the first day of the year being reported:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER
31,
--------------------
1995 1996
--------- ---------
<S> <C> <C>
(UNAUDITED)
(IN THOUSANDS)
Revenues................................................................ $ 26,246 $ 31,138
Net income, excluding intercompany interest expense..................... 1,251 2,370
</TABLE>
Pro forma adjustments for all periods included in the preceding table
primarily relate to (a) the recording of interest expense on the debt incurred
to effect the Campbell Wells Acquisition, (b) the adjustment to depreciation
expense to reflect the revaluation of property, plant and equipment in
conjunction with the Campbell Wells Acquisition purchase price allocation, (c)
the adjustment of insurance expense to reflect the differences in insurance
expenses recorded by U S Liquids compared to the
F-17
<PAGE>
U S LIQUIDS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. ACQUISITIONS: (CONTINUED)
intercompany insurance expenses allocated to Campbell Wells from Sanifill, and
(d) the related income tax effects of these adjustments.
The pro forma combined results presented above are not necessarily
indicative of actual results which might have occurred had the operations and
management teams of the Company and the acquired operations of Campbell Wells
been combined at the beginning of the periods presented.
ACQUISITIONS MADE BY MESA
In March 1996, Mesa acquired all of the assets of the trap and septic
division of a grease processing company through the purchase of assets. In
September 1996, Mesa acquired all of the assets and assumed all liabilities of a
feed and tallow processing company through the purchase of stock. Mesa paid
$16,000 in cash, net of cash acquired, and issued $925,000 of debt obligations
in conjunction with both of these acquisitions (collectively, the Purchased
Companies). Both acquisitions were accounted for under the purchase method of
accounting, and the net assets and results of operations of the Purchased
Companies since their respective dates of acquisition are included in the
consolidated financial statements.
4. PREPAID EXPENSES AND OTHER CURRENT ASSETS:
Prepaid expenses and other current assets at December 31, 1995 and 1996,
consist of the following:
<TABLE>
<CAPTION>
1995 1996
----- ---------
<S> <C> <C>
(IN THOUSANDS)
Prepaid insurance........................................................... $ 62 $ 668
Other....................................................................... 5 96
--- ---------
$ 67 $ 764
--- ---------
--- ---------
</TABLE>
5. PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment at December 31, 1995 and 1996, consist of the
following:
<TABLE>
<CAPTION>
DEPRECIABLE
LIFE (YEARS) 1995 1996
------------- --------- ---------
<S> <C> <C> <C>
(IN THOUSANDS)
Landfarm and treatment sites.......................................... 25 $ -- $ 14,781
Land.................................................................. -- 298 508
Buildings and improvements............................................ 5-39 859 14,496
Machinery and equipment............................................... 3-15 667 4,260
Vehicles.............................................................. 3-5 303 1,176
Furniture and fixtures................................................ 3-5 37 255
--------- ---------
2,164 35,476
Less--Accumulated depreciation........................................ (484) (894)
--------- ---------
$ 1,680 $ 34,582
--------- ---------
--------- ---------
</TABLE>
F-18
<PAGE>
U S LIQUIDS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. OTHER ASSETS:
Other assets at December 31, 1995 and 1996, consist of the following:
<TABLE>
<CAPTION>
1995 1996
--------- ---------
<S> <C> <C>
(IN THOUSANDS)
Note receivable............................................................. $ -- $ 196
Asset held for resale....................................................... -- 75
Noncompetition agreements................................................... -- 74
Organization costs.......................................................... -- 58
SBA loan costs.............................................................. 43 42
Other....................................................................... 40 116
--- ---------
83 561
Less--Accumulated amortization.............................................. (14) (28)
--- ---------
$ 69 $ 533
--- ---------
--- ---------
</TABLE>
The Company has entered into noncompetition agreements with former owners of
the Purchased Companies that are being amortized under the straight-line method
for five years over the terms of the agreements. Purchased collection routes and
contracts are amortized under the straight-line method over the life of the
applicable contracts.
7. ACCRUED LIABILITIES:
Accrued liabilities at December 31, 1995 and 1996, consist of the following:
<TABLE>
<CAPTION>
1995 1996
--------- ---------
<S> <C> <C>
(IN THOUSANDS)
Insurance premium promissory note, interest rate at 6.0%, due July 1997...... $ -- $ 589
Income taxes payable......................................................... 14 340
Accrued interest on related-party notes payable.............................. -- 204
Accrued salaries............................................................. -- 161
Engineering and testing fees................................................. -- 147
Other accrued taxes.......................................................... 64 120
Other........................................................................ 46 586
--------- ---------
$ 124 $ 2,147
--------- ---------
--------- ---------
</TABLE>
F-19
<PAGE>
U S LIQUIDS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. INCOME TAXES:
The components of the provision (benefit) for income taxes are as follows:
<TABLE>
<CAPTION>
1994 1995 1996
--------- --------- ---------
<S> <C> <C> <C>
(IN THOUSANDS)
Current--
Federal............................................................. $ (4) $ 12 $ 327
State............................................................... 1 6 49
--------- --------- ---------
(3) 18 376
Deferred--
Federal............................................................. (73) 30 (107)
State............................................................... (13) 1 (14)
--------- --------- ---------
(86) 31 (121)
--------- --------- ---------
$ (89) $ 49 $ 255
--------- --------- ---------
--------- --------- ---------
</TABLE>
The differences in income taxes provided and the amounts determined by
applying the federal statutory tax rate to income before provision (benefit) for
income taxes result from the following:
<TABLE>
<CAPTION>
1994 1995 1996
--------- --------- ---------
<S> <C> <C> <C>
(IN THOUSANDS)
Tax at statutory rate................................................. $ (94) $ 52 $ 253
Add--
State income taxes, net of federal benefit........................ (8) 6 24
Other............................................................. 13 (9) (22)
--------- --------- ---------
$ (89) $ 49 $ 255
--------- --------- ---------
--------- --------- ---------
</TABLE>
F-20
<PAGE>
U S LIQUIDS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. INCOME TAXES: (CONTINUED)
The tax effects of significant temporary differences representing deferred
income tax assets and liabilities are as follows:
<TABLE>
<CAPTION>
1995 1996
--------- ---------
<S> <C> <C>
(IN THOUSANDS)
Deferred income tax assets--
Cell processing reserve................................................... $ -- $ 1,577
Accrued expenses.......................................................... 37 184
Net operating losses...................................................... 71 135
Other..................................................................... 11 15
--------- ---------
Total................................................................... 119 1,911
Deferred income tax liabilities--
Property and equipment.................................................... -- (1,622)
Inventory................................................................. (50) (77)
Conversion from cash to accrual........................................... -- (21)
Other..................................................................... (4) (5)
--------- ---------
Total................................................................... (54) (1,725)
--------- ---------
Net deferred income tax asset........................................... $ 65 $ 186
--------- ---------
--------- ---------
</TABLE>
F-21
<PAGE>
U S LIQUIDS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. LONG-TERM OBLIGATIONS:
The Company's long-term obligations at December 31, 1995 and 1996, consist
of the following:
<TABLE>
<CAPTION>
1995 1996
--------- ---------
<S> <C> <C>
(IN THOUSANDS)
Note payable to Sanifill, interest at 7.5%, due in 19 quarterly
installments of $1,390,000, maturing December 2001, secured by
substantially all of the assets of U S Liquids......................... $ -- $ 26,410
SBA loan with a commercial bank, interest at prime rate (8.25% at
December 31, 1996) plus 2.75%, due in monthly installments, with
interest-only payments to June 1996, and principal and interest
payments of $10,816 thereafter, maturing in June 2014, secured by
substantially all of the assets of AWW................................. 559 989
Notes payable to banks and credit institutions, interest ranging from
5.9% to 13.75%, due in monthly installments ranging from $660 to
$1,859, maturing January 1997 to August 2001, secured by vehicles and
equipment.............................................................. 76 306
Notes payable to individuals, interest ranging from noninterest-bearing
to 10.0%, due in monthly installments ranging from $425 to $8,333,
maturing May 1999 to October 2006, secured by property, plant and
equipment.............................................................. 223 1,195
Notes payable to individuals, interest ranging from 3% to 18%, due in
monthly installments ranging from $295 to $2,854, maturing January 1998
to August 2001......................................................... 317 512
Obligations under capital leases, interest ranging from 8.3% to 9.5%, due
in monthly installments ranging from $396 to $822, secured by
vehicles............................................................... 63 45
Other.................................................................... 20 28
Less--Current maturities of long-term obligations........................ (214) (5,817)
--------- ---------
$ 1,044 $ 23,668
--------- ---------
--------- ---------
</TABLE>
Under the terms of the Company's note agreement with Sanifill, the Company
is required to maintain certain minimum financial ratios and is subject to
certain other restrictions and covenants.
AWW's Small Business Administration (SBA) loan requires certain restrictions
and covenants, including provisions prohibiting mergers with and acquisitions of
AWW by other entities and the payment of dividends. AWW's loan agreement with
the SBA currently provides that the SBA loan may be due and payable in full upon
AWW merging with other entities. Accordingly, the SBA loan has been included in
current maturities of long-term obligations at December 31, 1996.
F-22
<PAGE>
U S LIQUIDS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. LONG-TERM OBLIGATIONS: (CONTINUED)
Related-party notes payable at December 31, 1995 and 1996, consist of the
following:
<TABLE>
<CAPTION>
1995 1996
--------- ---------
<S> <C> <C>
(IN THOUSANDS)
Notes payable to equity owners, interest at 10%, with interest
payable yearly and principal due at maturity................... $ 552 $ 608
--------- ---------
--------- ---------
</TABLE>
The related-party notes payable are subordinated to the SBA note. Under the
subordination agreement, no principal or interest has been or will be paid on
the related-party notes payable until the entire balance of the SBA note is
repaid. Included in related-party notes payable is accrued interest of $148,000
and $204,000 at December 31, 1995 and 1996, respectively. The principal portion
of the related party notes payable has been reclassified as a current liability
at December 31, 1996 and the accrued interest on the related-party notes payable
has been included in accrued liabilities at December 31, 1996 in conjunction
with the anticipated retirement of the SBA note.
Principal payments of long-term debt obligations and minimum lease payments
under operating and capital lease obligations as of December 31, 1996, are as
follows:
<TABLE>
<CAPTION>
OPERATING CAPITAL LONG-TERM
LEASES LEASES DEBT
----------- --------- -----------
<S> <C> <C> <C>
(IN THOUSANDS)
Year ending December 31--
1997..................................................... $ 323 $ 35 $ 5,785
1998..................................................... 283 14 6,091
1999..................................................... 272 -- 5,847
2000..................................................... 283 -- 5,813
2001..................................................... 203 -- 5,722
Thereafter............................................... 6,142 -- 182
----------- --------- -----------
7,506 49 29,440
Less--Interest portion of capital leases................... -- (4) --
----------- --------- -----------
Total.................................................... $ 7,506 $ 45 $ 29,440
----------- --------- -----------
----------- --------- -----------
</TABLE>
Management estimates that the fair value of its debt obligations
approximates the historical value of $29,440,000 at December 31, 1996.
10. STOCK OPTIONS:
On November 20, 1996, U S Liquids established a stock option plan and
authorized the issuance of 1,560,000 stock options for various corporate
purposes. In accordance with this authorization, on November 20, 1996, the
Company granted 301,875 incentive stock options to employees and 468,750
nonqualified stock options to various other individuals for corporate
development purposes. Each of these options has an exercise price of $.02, vests
equally in three annual installments, commencing on the first anniversary of the
date upon which the options were granted, and expires after being outstanding
for a period of 10 years. The nonqualified stock options are further contingent
upon the successful completion of certain corporate development activities and,
accordingly, no calculation of the fair value of the nonqualified stock options
F-23
<PAGE>
U S LIQUIDS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. STOCK OPTIONS: (CONTINUED)
will be determined or recorded until the realization of such contingencies. No
stock options have been exercised or forfeited through December 31, 1996.
The Company accounts for its employee stock options under the Accounting
Principles Board Opinion No. 25, in which no compensation expense is recognized
for employee stock options if there is no intrinsic value at the date of grant.
Had compensation expense for these employee stock options been determined
consistent with SFAS No. 123, "Accounting for Stock-Based Compensation," the
Company's net income for 1996 would have been reduced to $488,000. The fair
value of each employee stock option was estimated on the date of grant using the
Black-Scholes pricing model with the following assumptions:
<TABLE>
<S> <C>
Expected stock price volatility........................... 35.55%
Risk-free interest rate................................... 6.17%
Expected life of options.................................. 10 years
</TABLE>
11. COMMITMENTS AND CONTINGENCIES:
NONCOMPETE AND NOW DISPOSAL AGREEMENTS
In conjunction with the Campbell Wells Acquisition, the Company assumed
certain rights and obligations pursuant to an earlier sales agreement entered
into during 1996 between Sanifill and Newpark Resources, Inc. ("Newpark"),
whereby Sanifill sold an unrelated portion of Campbell Wells to Newpark (the
"Newpark Transaction"). The Company has assumed Sanifill's position in a
noncompete agreement entered into between Sanifill and Newpark in conjunction
with the Newpark Transaction, in which Sanifill agreed not to compete with
Newpark in the collection of NOW from offshore sources for a period of five
years.
U S Liquids has also assumed a disposal agreement entered into between
Campbell Wells and Newpark in conjunction with the Newpark transaction, in which
Newpark agreed to deliver, and Campbell Wells agreed to accept at its Louisiana
landfarms, certain quantities of NOW each year for the next 25 years for a
specified price, subject to adjustment, and at specified annual minimum volume
levels.
CLOSURE OF LACASSINE FACILITY
As a part of the Campbell Wells Acquisition, the Company has agreed to take
full responsibility and assume all liabilities relating to the closure and
postclosure requirements of the Lacassine, Louisiana, facility, which previously
processed and treated oil field naturally occurring radioactive material.
Sanifill has agreed to reimburse the Company up to $1.3 million of costs
incurred with such closure and postclosure requirements. Management of the
Company believes the $1.3 million indemnity is adequate to cover expected
closure costs.
LEASES
The Company leases office facilities and certain equipment under
noncancelable operating leases for periods ranging from one to 27 years. Rent
expense was approximately $99,000, $98,000 and $171,000 for the years ended
December 31, 1994, 1995 and 1996, respectively.
NONCOMPETE AGREEMENTS WITH PURCHASED COMPANIES
In conjunction with the acquisition of the Purchased Companies, the Company
has agreed not to solicit certain previous customers of the Purchased Companies
for a period of 18 months.
F-24
<PAGE>
U S LIQUIDS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. COMMITMENTS AND CONTINGENCIES: (CONTINUED)
LEGAL PROCEEDINGS
The Company is involved in various 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 financial position
or results of operations.
Prior to the closing of the Campbell Wells Acquisition, several lawsuits
were brought against Campbell Wells based upon the operation of certain of the
Louisiana landfarms purchased by the Company as part of the Campbell Wells
Acquisition. In one of the lawsuits filed against Campbell Wells approximately
300 individuals residing in and around Grand Bois, Louisiana are seeking
unspecified monetary damages allegedly suffered as a result of (i) odors
allegedly emitted by NOW received from Exxon Company U.S.A. at the Bourg,
Louisiana landfarm in March 1994, and (ii) alleged air, water and soil
contamination in connection with ongoing operations at the facility. Trial is
set to commence in this matter on January 20, 1998. A second lawsuit, brought by
one individual, seeks unspecified monetary damages allegedly suffered as a
result of odors allegedly emitted by NOW received from Exxon at the Bourg
landfarm in March 1994. The trial date for this lawsuit is also January 20,
1998. A third lawsuit, filed as a class action, seeks unspecified monetary
damages allegedly suffered as a result of alleged air, water and soil
contamination in connection with ongoing operations at the Mermentau, Louisiana
landfarm. No trial date has been set for this lawsuit. In a fourth lawsuit, six
individuals filed suit on March 7, 1996 against Campbell Wells in Louisiana
state court, seeking preliminary and permanent injunctive relief against certain
treatment operations conducted at the Bourg, Louisiana landfarm which the
plaintiffs contend have resulted and will result in adverse health effects by
way of emissions of alleged air pollutants. The plaintiffs' request for a
preliminary injunction was heard during the summer of 1996. On December 30,
1996, the court entered an order granting in part and denying in part the relief
requested by the plaintiffs. Specifically, the court found that there was no
evidence that emissions resulting from the treatment operations complained of
equalled or exceeded any relevant safety standard, health standard or
occupational standard and, therefore, denied the plaintiffs' request for a
temporary injunction prohibiting such treatment operations. The court did,
however, preliminarily enjoin Campbell Wells (and, thus, indirectly the Company)
from treating NOW received from Exxon Company U.S.A. in March 1994 in one
particular treatment cell located within 500 feet of a building in which one of
the plaintiffs resides. In connection therewith, the court ordered that the
Commissioner of the Louisiana Department of Conservation be made a party to the
litigation and substituted for the plaintiffs on the limited issue of whether
Campbell Wells has violated the location criteria for the particular treatment
cell involved. No trial date has been set for the plaintiffs' request for
permanent injunctive relief; however, based upon the court's rulings from the
preliminary injunction trial and initial discussions with the Louisiana
Department of Conservation, the Company believes that any permanent injunctive
relief that might be entered against Campbell Wells will not have a material
adverse effect upon the Company's operations at the Bourg landfarm.
Under the terms of the Campbell Wells Acquisition Agreement, Sanifill agreed
to remain responsible for the contingent liabilities associated with each of the
above-referenced lawsuits. In addition, subject to certain limitations, Sanifill
has agreed to indemnify the Company from and against all liabilities associated
with such lawsuits up to a maximum of $10 million. See "Certain Transactions"
included elsewhere in this Prospectus. The Company believes that the ultimate
disposition of these proceedings will not have a material adverse effect on the
Company's financial condition or results of operations.
F-25
<PAGE>
U S LIQUIDS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. SEGMENT INFORMATION:
The Company's nonhazardous commercial waste (NCW) operations are conducted
by Mesa and AWW. The Company's NOW operations are conducted by U S Liquids. The
following is a summary of key business segment information:
<TABLE>
<CAPTION>
1994 1995 1996
--------- --------- ---------
<S> <C> <C> <C>
(IN THOUSANDS)
Revenues--
NOW.................................................................. $ -- $ -- $ 826
NCW.................................................................. 8,039 11,127 13,459
--------- --------- ---------
Total.............................................................. $ 8,039 $ 11,127 $ 14,285
--------- --------- ---------
--------- --------- ---------
Income from operations--
NOW.................................................................. $ -- $ -- $ 126
NCW.................................................................. (162) 329 929
--------- --------- ---------
Total.............................................................. $ (162) $ 329 $ 1,055
--------- --------- ---------
--------- --------- ---------
Identifiable assets--
NOW.................................................................. $ -- $ -- $ 41,152
NCW.................................................................. 1,450 3,007 5,699
--------- --------- ---------
Total.............................................................. $ 1,450 $ 3,007 $ 46,851
--------- --------- ---------
--------- --------- ---------
Depreciation, depletion and amortization expense
NOW.................................................................. $ -- $ -- $ 78
NCW.................................................................. 136 159 346
--------- --------- ---------
Total.............................................................. $ 136 $ 159 $ 424
--------- --------- ---------
--------- --------- ---------
Capital expenditures--
NOW.................................................................. $ -- $ -- $ --
NCW.................................................................. 178 916 1,795
--------- --------- ---------
Total.............................................................. $ 178 $ 916 $ 1,795
--------- --------- ---------
--------- --------- ---------
</TABLE>
13. SUBSEQUENT EVENTS:
On June 16, 1997, the Company declared a one for two reverse stock split
whereby the number of all outstanding shares of the Company's common stock and
shares pursuant to previously issued warrants and granted stock options have
been exchanged and reduced by one-half. Accordingly, the consolidated financial
statements have been restated to reflect the adjusted number of shares, warrants
and options.
On June 16, 1997, the Company amended and restated its certificate of
incorporation and bylaws to provide, among other things, for the authorization
of 10 million shares of $.01 par value preferred stock and for the amount of
authorized common stock to be increased to 50 million shares.
On June 23, 1997, the Company amended its stock option plan to allow for a
maximum authorized shares amount of 15 percent of all outstanding stock, not to
exceed a total of 3,000,000 shares. In conjunction therewith, the Company
granted an additional 432,000 stock options to employees and directors at an
exercise price equal to the initial public offering price. In addition, the
Company has granted 270,000 warrants to underwriters and other individuals at an
exercise price equal to or exceeding the initial public offering price.
On June 26, 1997, U S Liquids filed a registration statement on Form S-1 for
the sale of its common stock.
14. EVENTS SUBSEQUENT TO DATE OF REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
(UNAUDITED):
On July 31, 1997, the Company amended and restated its certificate of
incorporation and bylaws to provide, among other things, for the amount of
authorized common stock to be decreased to 30 million shares and for the amount
of authorized preferred stock to be decreased to 5 million shares.
F-26
<PAGE>
U S LIQUIDS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
14. EVENTS SUBSEQUENT TO DATE OF REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
(UNAUDITED): (CONTINUED)
In August 1997, one of the Company's subsidiaries was added as a defendant
in a lawsuit originally filed in 1994 against Campbell Wells and others in the
District Court of Jim Wells County, Texas. This dispute arose out of an
application filed by Waste Facilities, Inc. ("WFI"), the operator of a South
Texas NOW treatment facility, to renew its permit to treat NOW. The suit
alleges, among other things, that Campbell Wells and the other defendants
(including the Company's subsidiary) wrongfully interfered with WFI's ongoing
relations with its customers and with WFI's prospective contractual and business
relations. In addition, WFI has alleged that the defendants conspired to
wrongfully restrain trade and interfere with WFI's business. WFI's amended
petition seeks actual and punitive damages from each of the defendants.
Virtually all of the actions complained of by WFI occurred prior to the time
that the Company and the subsidiary involved were organized and, therefore, the
Company believes that the claims asserted against its subsidiary are without
merit.
F-27
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To U S Liquids Inc.:
We have audited the accompanying balance sheets of the U S Liquids Inc.
Predecessor, which represents certain assets acquired and liabilities assumed by
U S Liquids Inc. from Campbell Wells, L.P. and Campbell Wells NORM, L.P.
(collectively "Campbell Wells") which are wholly-owned subsidiaries of Sanifill,
Inc., as of December 31, 1995 and December 13, 1996, and the related statements
of income for the years ended December 31, 1994 and 1995 and for the period
ended December 13, 1996. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
As discussed in Note 2, the accompanying financial statements have been
prepared pursuant to the purchase agreement effective December 14, 1996, between
Sanifill, Inc. and U S Liquids Inc. and were prepared for the purpose of
complying with Rule 3-05 of Regulation S-X of the Securities and Exchange
Commission and are not intended to be a complete presentation of Campbell Wells'
assets, liabilities, operating results or cash flows on a stand-alone basis.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the balance sheet of the U S Liquids Inc. Predecessor
as of December 31, 1995 and December 13, 1996, and the results of its operations
for the years ended December 31, 1994 and 1995 and for the period ended December
13, 1996, pursuant to the purchase agreement referred to in Note 2 and in
conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Houston, Texas
June 26, 1997
F-28
<PAGE>
U S LIQUIDS INC. PREDECESSOR
BALANCE SHEETS
(IN THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 13,
1995 1996
------------ ------------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents.......................................................... $ 286 $ 6,001
Accounts receivable, less allowance of $200 and $172............................... 6,393 4,053
Prepaid expenses and other current assets.......................................... 324 61
------------ ------------
Total current assets............................................................. 7,003 10,115
PROPERTY, PLANT AND EQUIPMENT, net................................................... 53,295 49,553
OTHER ASSETS......................................................................... 243 232
------------ ------------
Total assets..................................................................... $ 60,541 $ 59,900
------------ ------------
------------ ------------
LIABILITIES AND NET INTERCOMPANY BALANCE
CURRENT LIABILITIES:
Accounts payable................................................................... $ 2,875 $ 1,621
Accrued liabilities................................................................ 115 336
------------ ------------
Total current liabilities........................................................ 2,990 1,957
CELL PROCESSING RESERVE.............................................................. 7,803 7,745
CLOSURE AND REMEDIATION RESERVES..................................................... 2,619 1,969
DEFERRED INCOME TAXES................................................................ 12,571 14,554
------------ ------------
Total liabilities................................................................ 25,983 26,225
COMMITMENTS AND CONTINGENCIES
NET INTERCOMPANY BALANCE............................................................. 34,558 33,675
------------ ------------
Total liabilities and net intercompany balance................................... $ 60,541 $ 59,900
------------ ------------
------------ ------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-29
<PAGE>
U S LIQUIDS INC. PREDECESSOR
STATEMENTS OF INCOME
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER
31, PERIOD ENDED SIX MONTHS
-------------------- DECEMBER 13, ENDED JUNE
1994 1995 1996 30, 1996
--------- --------- ------------ -----------
(UNAUDITED)
<S> <C> <C> <C> <C>
REVENUES........................................................ $ 14,847 $ 15,119 $ 16,853 $ 7,617
COST OF OPERATIONS.............................................. 7,478 8,635 9,136 4,458
--------- --------- ------------ -----------
Gross profit.................................................. 7,369 6,484 7,717 3,159
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES.................... 2,626 2,989 2,524 1,498
--------- --------- ------------ -----------
Income from operations........................................ 4,743 3,495 5,193 1,661
INTEREST EXPENSE, excluding intercompany interest expense....... 105 246 353 122
OTHER INCOME, net............................................... (176) (51) (97) (27)
--------- --------- ------------ -----------
INCOME BEFORE PROVISION FOR INCOME TAXES........................ 4,814 3,300 4,937 1,566
PROVISION FOR INCOME TAXES...................................... 1,945 1,400 2,044 642
--------- --------- ------------ -----------
NET INCOME...................................................... $ 2,869 $ 1,900 $ 2,893 $ 924
--------- --------- ------------ -----------
--------- --------- ------------ -----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-30
<PAGE>
U S LIQUIDS INC. PREDECESSOR
NOTES TO PREDECESSOR FINANCIAL STATEMENTS
1. THE ACQUISITION:
Effective December 13, 1996, U S Liquids Inc. ("U S Liquids") purchased
certain assets and assumed certain liabilities of Campbell Wells, L.P. and
Campbell Wells NORM L.P. ("Campbell Wells" the "U S Liquids Inc. Predecessor,"
or the "Company"), which are wholly-owned subsidiaries of Sanifill, Inc.
("Sanifill"), by issuing a long-term promissory note for $27.8 million and
warrants to purchase 1,000,000 shares of U S Liquids common stock at an exercise
price of $2.00 per share (the "Campbell Wells Acquisition"). Assets not
purchased and excluded from the accompanying predecessor financial statements
for all periods presented include transfer stations and other related assets of
Campbell Wells previously sold by Sanifill to Newpark Resources, Inc. (the
"Newpark Transaction").
The Company treats and disposes nonhazardous oil field waste ("NOW")
generated in the exploration for and production of oil and natural gas. The
Company has treatment facilities located in Louisiana and Texas that service the
Gulf Coast region of the United States. The Company also treats oil field
naturally occurring radioactive material at its treatment facility at Lacassine,
Louisiana.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
BASIS OF PRESENTATION
These financial statements have been prepared to present the financial
position and results of operations of Campbell Wells related to the assets
acquired and liabilities assumed by U S Liquids Inc. under the terms of the
Campbell Wells Acquisition described in Note 1 and in conformity with generally
accepted accounting principles.
The balance sheets and statements of income may not necessarily be
indicative of the financial position or results of operations that would have
been realized had Campbell Wells been operated as a stand-alone entity. The
statements of income include the amounts allocated by Sanifill to Campbell Wells
for selling, general and administrative expenses based on a percentage of
revenues and direct payroll based costs. Management believes this allocation is
reasonable.
As a wholly-owned subsidiary of Sanifill, Campbell Wells maintained a
noninterest-bearing intercompany account with Sanifill for recording
intercompany charges for costs and expenses, intercompany purchases of equipment
and additions under capital leases, and intercompany transfers of cash, among
other transactions. It is not feasible to ascertain the amount of related
interest expense which would have been recorded in the accompanying statements
of income had Campbell Wells been operated as a stand-alone entity. Sanifill did
not maintain debt balances specifically related to the operations of Campbell
Wells nor did Sanifill allocate any interest charges to Campbell Wells relating
to Sanifill's corporate debt. The interest expense reflected in the accompanying
statements of income represents the interest portion of capital lease payments
which were paid by Sanifill and directly charged to Campbell Wells.
Due to the manner in which Sanifill intercompany transactions were recorded
and also due to carve out matters relating to intercompany transactions
associated with the portion of Campbell Wells which was sold by Sanifill to
Newpark, it is not feasible to present a detailed analysis of transactions
reflected in the intercompany balance with Sanifill. The change in the
intercompany balance with Sanifill (net of income) was ($409,000), $462,000, and
$3,776,000 for the years ended December 31, 1994, 1995 and for the period ended
December 13, 1996, respectively.
F-31
<PAGE>
U S LIQUIDS INC. PREDECESSOR
NOTES TO PREDECESSOR FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
It is also not feasible to present complete statements of cash flows,
including unaudited interim cash flow data, due to the nature and manner of
recording of intercompany transactions; however, the following information
presents certain cash flow data related to the operations of Campbell Wells.
CASH FLOW INFORMATION
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31 PERIOD ENDED
-------------------- DECEMBER 13,
1994 1995 1996
--------- --------- -------------
(IN THOUSANDS)
<S> <C> <C> <C>
Cash flows from operating activities--
Net income............................................... $ 2,869 $ 1,900 $ 2,893
Adjustments to reconcile net income to net cash provided
by operating activities--
Depreciation........................................... 2,860 3,025 2,594
Deferred income tax provision (benefit)................ 1,234 (413) 1,983
Changes in operating assets and liabilities--
Accounts receivable.................................. (3,118) 706 2,340
Prepaid expenses and other current assets............ (8) (130) 263
Other assets......................................... (41) 58 11
Accounts payable and accrued liabilities............. (228) 1,812 (1,033)
Closure, remediation and cell processing reserves.... 340 (148) (708)
--------- --------- -------------
Net cash provided by operating activities................ $ 3,908 $ 6,810 $ 8,343
--------- --------- -------------
--------- --------- -------------
</TABLE>
INTERIM FINANCIAL INFORMATION
The interim financial statement for the six months ended June 30, 1996, is
unaudited, and certain information and footnote disclosures, normally included
in financial statements prepared in accordance with generally accepted
accounting principles, have been omitted. In the opinion of management, all
adjustments, consisting only of normal recurring adjustments, necessary to
fairly present the results of operations with respect to the interim financial
statement, have been included. The results of operations for the interim period
are not necessarily indicative of the results for the entire fiscal year.
USE OF ESTIMATES
The preparation of financial statements requires management to make
estimates and assumptions that affect the reported amounts of assets acquired
and liabilities assumed, the disclosure of contingent assets acquired and
liabilities assumed at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual results
could differ from those estimates.
CASH AND CASH EQUIVALENTS
All highly liquid investments with an original maturity of three months or
less are classified as cash equivalents.
F-32
<PAGE>
U S LIQUIDS INC. PREDECESSOR
NOTES TO PREDECESSOR FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
CONCENTRATIONS OF CREDIT RISK
Accounts receivable potentially subject the Company to concentrations of
credit risk. At December 31, 1995, two customers accounted for 17 percent and 11
percent, respectively, of the total accounts receivable balance. At December 13,
1996, 19 percent and 50 percent of the total accounts receivable are associated
with two customers, respectively.
In 1994, one customer accounted for 19 percent of total revenues. During
1995, two customers accounted for 33 percent and 22 percent, respectively, of
total revenues. During 1996, two customers accounted for 41 percent and 31
percent, respectively, of total revenues.
The Company's customers are concentrated in the oil and gas industry in
Louisiana and Texas.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment is recorded at cost. Improvements or
betterments which significantly extend the life of an asset are capitalized.
Expenditures for maintenance and repair costs are charged to operations as
incurred. The cost of assets retired or otherwise disposed of and the related
accumulated depreciation are eliminated from the accounts in the year of
disposal. Gains and losses resulting from property disposals are included in
other income or expense. Depreciation is computed using the straight-line
method.
CLOSURE AND REMEDIATION RESERVES
The closure and remediation reserves represent accruals for the total
estimated future costs associated with the ultimate closure of the Company's
landfarm facilities, including costs of decommissioning and statutory monitoring
costs required during the closure and subsequent postclosure periods. Management
periodically reviews the level of these reserves and adjusts them to reflect its
current estimate of the total costs necessary to complete the closure and
remediation of its landfarm facilities. In conjunction with U S Liquids'
acquisition of certain assets and assumption of certain liabilities of Campbell
Wells, Sanifill has agreed to maintain landfarm facility closure bonds and
related letters of credit totalling $4 million posted with the states of
Louisiana and Texas through December 31, 1997, at which time U S Liquids will
replace these closure bonds and letters of credit with similar instruments.
REVENUE RECOGNITION AND CELL PROCESSING RESERVE
When waste is unloaded at a given site, Campbell Wells recognizes the
related revenue and records a reserve for the estimated amount of expenses to be
incurred with the treatment of the oil field waste in order to match revenues
with their related costs. The related treatment costs are charged against the
reserve as such costs are incurred.
INCOME TAXES
The operations of Campbell Wells were included in the consolidated U.S.
federal income tax return of Sanifill, Inc., and no allocations of income taxes
were reflected in the historical statements of operations. For purposes of these
predecessor financial statements, current and deferred income taxes have been
provided on a separate return basis.
F-33
<PAGE>
U S LIQUIDS INC. PREDECESSOR
NOTES TO PREDECESSOR FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
NEW ACCOUNTING STANDARD
Effective January 1, 1996, the Company adopted the provisions of Statement
of Financial Accounting Standards (SFAS) No. 121, "Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." Under these
provisions, the Company reviews certain long-lived assets for impairment
whenever events indicate that the carrying amount of an asset may not be
recoverable and recognizes an impairment loss under certain circumstances in the
amount by which the carrying value exceeds the fair value of the asset. In
making this assessment, the Company considered the estimated future undiscounted
cash flows of the Company's long-lived assets on the basis of continuing
operations, versus the current market value of such assets on a held for sale
basis. The adoption of SFAS No. 121 had no impact on the Company's financial
position or results of operations.
3. PREPAID EXPENSES AND OTHER CURRENT ASSETS:
Prepaid expenses and other current assets at December 31, 1995, and December
13, 1996, consist of the following:
<TABLE>
<CAPTION>
1995 1996
--------- -----
(IN THOUSANDS)
<S> <C> <C>
Closure bond................................................................ $ 211 $ --
Prepaid expenses............................................................ 33 43
Notes receivable, current portion........................................... 33 16
Other....................................................................... 47 2
--------- ---
$ 324 $ 61
--------- ---
--------- ---
</TABLE>
4. PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment at December 31, 1995, and December 13, 1996,
consist of the following:
<TABLE>
<CAPTION>
1995 1996
--------- ---------
DEPRECIABLE
LIFE
-------------
(YEARS) (IN THOUSANDS)
<S> <C> <C> <C>
Landfarm and treatment facilities.......................... 25 $ 56,732 $ 56,573
Buildings and improvements................................. 10-12 532 659
Machinery and equipment.................................... 3-5 7,494 6,445
Vehicles................................................... 3-5 826 755
Furniture and fixtures..................................... 3 355 359
--------- ---------
65,939 64,791
Less--Accumulated depreciation............................. (12,644) (15,238)
--------- ---------
$ 53,295 $ 49,553
--------- ---------
--------- ---------
</TABLE>
Included in property, plant and equipment at December 31, 1995, and December
13, 1996 are approximately $3,133,000 and $3,133,000, respectively, of assets
held under capital leases.
F-34
<PAGE>
U S LIQUIDS INC. PREDECESSOR
NOTES TO PREDECESSOR FINANCIAL STATEMENTS (CONTINUED)
5. OTHER ASSETS:
Other assets at December 31, 1995, and December 13, 1996, consist of the
following:
<TABLE>
<CAPTION>
1995 1996
--------- ---------
(IN THOUSANDS)
<S> <C> <C>
Note receivable.............................................................. $ 196 $ 196
Other........................................................................ 47 36
--------- ---------
$ 243 $ 232
--------- ---------
--------- ---------
</TABLE>
6. ACCRUED LIABILITIES:
Accrued liabilities at December 31, 1995, and December 13, 1996, consist of
the following:
<TABLE>
<CAPTION>
1995 1996
--------- ---------
(IN THOUSANDS)
<S> <C> <C>
Engineering and testing fees................................................. $ 13 $ 140
Repairs and maintenance...................................................... -- 96
Accrued salaries and benefits................................................ 21 55
Escrow deposits.............................................................. 34 --
Accrued commissions.......................................................... 33 --
Other........................................................................ 14 45
--------- ---------
$ 115 $ 336
--------- ---------
--------- ---------
</TABLE>
7. INCOME TAXES:
The components of the provision (benefit) for income taxes are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER
31, PERIOD ENDED
--------------------- DECEMBER 13,
1994 1995 1996
---------- --------- -------------
<S> <C> <C> <C>
(IN THOUSANDS)
Current--
Federal................................................ $ 2,750 $ 1,622 $ 40
State.................................................. (2,039) 191 21
---------- --------- ------
711 1,813 61
Deferred--
Federal................................................ (1,211) (511) 1,580
State.................................................. 2,445 98 403
---------- --------- ------
1,234 (413) 1,983
$ 1,945 $ 1,400 $ 2,044
---------- --------- ------
---------- --------- ------
</TABLE>
F-35
<PAGE>
U S LIQUIDS INC. PREDECESSOR
NOTES TO PREDECESSOR FINANCIAL STATEMENTS (CONTINUED)
7. INCOME TAXES: (CONTINUED)
The difference in income taxes provided (benefited) and the amounts
determined by applying the federal statutory tax rate to income (loss) before
provision (benefit) for income taxes result from the following:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, PERIOD ENDED
-------------------- DECEMBER 13,
1994 1995 1996
--------- --------- -------------
<S> <C> <C> <C>
(IN THOUSANDS)
Tax at statutory rate............................................. $ 1,585 $ 1,104 $ 1,676
Add (deduct)--
State income taxes, net of federal benefit...................... 269 191 280
Nondeductible expenses.......................................... 91 105 88
--------- --------- ------
1,945 1,400 2,044
--------- --------- ------
--------- --------- ------
</TABLE>
The tax effects of significant temporary differences representing deferred
income tax assets and liabilities are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 13,
1995 1996
------------ ------------
(IN THOUSANDS)
<S> <C> <C>
Deferred income tax liabilities--
Property and equipment............................................... $ (4,511) $ (4,767)
Landfarm treatment facility.......................................... (14,287) (14,286)
Other................................................................ (1,729) (2,924)
------------ ------------
Total.............................................................. (20,527) (21,977)
------------ ------------
Deferred income tax assets--
Closure accrual...................................................... 2,015 1,967
Depletion............................................................ 2,338 2,344
Processing reserve................................................... 3,373 3,373
Other................................................................ 230 (261)
------------ ------------
Total.............................................................. 7,956 7,423
------------ ------------
Net deferred income tax liabilities................................ $ 12,571 $ 14,554
------------ ------------
------------ ------------
</TABLE>
8. COMMITMENTS AND CONTINGENCIES:
NONCOMPETE AGREEMENT
Under the terms of the Newpark Transaction, Campbell Wells and Sanifill
agreed not to compete with Newpark Resources, Inc., in the collection of NOW
from offshore sources for a period of five years. This agreement was assumed by
U S Liquids pursuant to the Campbell Wells Acquisition.
NOW DISPOSAL AGREEMENT
In connection with the Newpark Transaction, Campbell Wells signed a disposal
agreement dated June 4, 1996, in which Newpark Resources, Inc., agreed to
deliver, and Campbell Wells agreed to accept at its Louisiana landfarms, certain
quantities of NOW each year for the next 25 years for a specified price, subject
to adjustment, and at specified annual minimum volume levels. This agreement was
assumed by U S Liquids pursuant to the Campbell Wells Acquisition.
F-36
<PAGE>
U S LIQUIDS INC. PREDECESSOR
NOTES TO PREDECESSOR FINANCIAL STATEMENTS (CONTINUED)
8. COMMITMENTS AND CONTINGENCIES: (CONTINUED)
LEASES
The Company leases office facilities under noncancelable leases. Rent
expense was approximately $214,000, $202,000 and $214,000 for the years ended
December 31, 1994 and 1995, and for the period ended December 13, 1996,
respectively.
LEGAL PROCEEDINGS
As of December 31, 1996, there were no material pending legal proceedings to
which U S Liquids was a party. However, prior to the closing of the Campbell
Wells Acquisition, several lawsuits were brought against Campbell Wells based
upon the operation of certain of the Louisiana landfarms purchased by U S
Liquids as part of the Campbell Wells Acquisition.
In one of the lawsuits filed against Campbell Wells approximately 300
individuals residing in and around Grand Bois, Louisiana are seeking unspecified
monetary damages allegedly suffered as a result of (i) odors allegedly emitted
by NOW received from Exxon Company U.S.A. at the Bourg, Louisiana landfarm in
March 1994, and (ii) alleged air, water and soil contamination in connection
with ongoing operations at the facility. Trial is set to commence in this matter
on January 20, 1998. A second lawsuit, brought by one individual, seeks
unspecified monetary damages allegedly suffered as a result of odors allegedly
emitted by NOW received from Exxon at the Bourg landfarm in March 1994. The
trial date for this lawsuit is also January 20, 1998. A third lawsuit, filed as
a class action, seeks unspecified monetary damages allegedly suffered as a
result of alleged air, water and soil contamination in connection with ongoing
operations at the Mermentau, Louisiana landfarm. No trial date has been set for
this lawsuit. In a fourth lawsuit, six individuals filed suit on March 7, 1996
against Campbell Wells in Louisiana state court, seeking preliminary and
permanent injunction relief against certain treatment operations conducted at
the Bourg, Louisiana landfarm which the plaintiffs contend have resulted and
will result in adverse health effects by way of emissions of alleged air
pollutants. The plaintiffs' request for a preliminary injunction was heard
during the summer of 1996. On December 30, 1996, the court entered an order
granting in part and denying in part the relief requested by the plaintiffs.
Specifically, the court found that there was no evidence that emissions
resulting from the treatment operations complained of equalled or exceeded any
relevant safety standard, health standard or occupational standard and,
therefore, denied the plaintiffs' request for a temporary injunction prohibiting
such treatment operations. The court did, however, preliminary enjoin Campbell
Wells (and, thus, indirectly U S Liquids) from treating NOW received from Exxon
Company U.S.A. in March 1994 in one particular treatment cell located within 500
feet of a building in which one of the plaintiffs resides. In connection
therewith, the court ordered that the Commissioner of the Louisiana Department
of Conservation be made a party to the litigation and substituted for the
plaintiffs on the limited issue of whether Campbell Wells has violated the
location criteria for the particular treatment cell involved. No trial date has
been set for the plaintiffs' request for permanent injunction relief; however,
based upon the court's rulings from the preliminary injunction trial and initial
discussions with Louisiana Department of Conservation, U S Liquids believes that
any permanent injunctive relief that might be entered against Campbell Wells
will not have a material adverse effect upon U S Liquids' operations at the
Bourg landfarm.
Under the terms of the Campbell Wells Acquisition Agreement, Sanifill agreed
to remain responsible for the contingent liabilities associated with each of the
above-referenced lawsuits. In addition, subject to certain limitations, Sanifill
has agreed to indemnify U S Liquids from and against all liabilities associated
with such lawsuits, up to a maximum of $10 million. See "Certain Transactions"
included elsewhere in this Prospectus. U S Liquids believes that the ultimate
disposition of these proceedings will not have a material adverse effect on U S
Liquids' financial condition or results of operations.
F-37
<PAGE>
U S LIQUIDS INC. PREDECESSOR
NOTES TO PREDECESSOR FINANCIAL STATEMENTS (CONTINUED)
9.EVENTS SUBSEQUENT TO DATE OF REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
(UNAUDITED):
In August 1997, one of U S Liquids' subsidiaries was added as a defendant
in a lawsuit originally filed in 1994 against Campbell Wells and others in the
District Court of Jim Wells County, Texas. This dispute arose out of an
application filed by Waste Facilities, Inc. ("WFI"), the operator of a South
Texas NOW treatment facility, to renew its permit to treat NOW. The suit
alleges, among other things, that Campbell Wells and the other defendants
(including U S Liquids' subsidiary) wrongfully interfered with WFI's ongoing
relations with its customers and with WFI's prospective contractual and
business relations. In addition, WFI has alleged that the defendants conspired
to wrongfully restrain trade and interfere with WFI's business. WFI's amended
petition seeks actual and punitive damages from each of the defendants.
Virtually all of the actions complained of by WFI occurred prior to the time
that U S Liquids and the subsidiary involved were organized and, therefore, U
S Liquids believes that the claims asserted against its subsidiary are without
merit.
F-38
<PAGE>
A photograph of a NOW treatment facility and a waste flow chart will be included
here.
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NO DEALER, SALESMAN OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATION IN CONNECTION WITH THIS OFFERING OTHER
THAN THOSE CONTAINED IN THIS PROSPECTUS, AND IF GIVEN OR MADE, SUCH INFORMATION
OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE
COMPANY OR THE UNDERWRITERS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO
SELL OR A SOLICITATION OF AN OFFER TO BUY ANY OF THE SECURITIES OFFERED HEREBY
BY ANYONE IN ANY STATE IN WHICH SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED OR
IN WHICH THE PERSON MAKING SUCH OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO
OR TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION.
NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL UNDER
ANY CIRCUMSTANCES CREATE ANY IMPLICATION THAT THE INFORMATION CONTAINED HEREIN
IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE.
--------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Prospectus Summary............................. 3
Risk Factors................................... 6
Use of Proceeds................................ 16
Dilution....................................... 16
Capitalization................................. 17
Dividend Policy................................ 17
Selected Financial Data........................ 18
Management's Discussion and Analysis of
Financial Condition and Results of
Operations................................... 20
Business....................................... 26
Management..................................... 40
Certain Transactions........................... 45
Principal Stockholders......................... 50
Description of Securities...................... 51
Underwriting................................... 54
Legal Matters.................................. 55
Experts........................................ 55
Additional Information......................... 55
Index to Financial Statements.................. F-1
</TABLE>
--------------------------
UNTIL , 1997 (25 CALENDAR DAYS AFTER THE DATE OF THIS
PROSPECTUS), ALL DEALERS EFFECTING TRANSACTIONS IN SHARES OF THE COMMON STOCK,
WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A
PROSPECTUS. THIS DELIVERY REQUIREMENT IS IN ADDITION TO THE OBLIGATION OF
DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO
THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
1,500,000 SHARES
[LOGO]
COMMON STOCK
---------------------
PROSPECTUS
---------------------
VAN KASPER & COMPANY
SANDERS MORRIS MUNDY
AUGUST , 1997
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the costs and expenses, other than
underwriting discounts and commissions, payable by the Company in connection
with the sale of the securities being registered. All amounts are estimates
except for the fees payable to the SEC.
<TABLE>
<CAPTION>
AMOUNT
----------
<S> <C>
SEC registration fee.............................................................. $ 5,489
NASD filing fee................................................................... 2,311
American Stock Exchange listing fee............................................... 42,500
Printing expenses................................................................. 150,000
Accounting fees and expenses...................................................... 300,000
Legal fees and expenses........................................................... 200,000
Blue sky fees and expenses........................................................ 15,000
Transfer agent fees............................................................... 2,500
Miscellaneous..................................................................... 29,200
----------
TOTAL........................................................................... $ 747,000
----------
----------
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Company's Certificate of Incorporation contains a provision which
limits, to the fullest extent permitted by Delaware law, the liability of a
director to the Company or its stockholders from monetary damages for a breach
of such director's fiduciary duty as a director. Delaware law presently permits
such limitation of a director's liability except where a director (i) breaches
his or her duty of loyalty to the Company or its stockholders, (ii) fails to act
in good faith or engages in intentional misconduct or a knowing violation of
law, (iii) authorizes payment of an unlawful dividend or stock repurchase, or
(iv) obtains an improper personal benefit.
The Company's Certificate of Incorporation and the Bylaws of the Company
also provide that directors and officers shall be indemnified against
liabilities arising from their service as directors or officers to the fullest
extent permitted by law, which generally requires that the individual act in
good faith and in a manner he or she reasonably believes to be in or not opposed
to the Company's best interests. The Company has obtained directors and officers
liability insurance to limit its exposure under these provisions.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
In November 1996, the Company issued to members of management and other
founding stockholders a total of 6,677,750 (pre-reverse split) shares of Common
Stock at $.01 per share. These sales were exempt from registration under Section
4(2) of the Securities Act, no public offering being involved.
On December 13, 1996, in connection with its acquisition of various assets
of affiliates of Sanifill, Inc. ("Sanifill"), the Company issued to Sanifill a
warrant to purchase 2,000,000 (pre-reverse split) shares of Common Stock at
$1.00 per share. This sale was exempt from registration under Section 4(2) of
the Securities Act, no public offering being involved.
On December 31, 1996, the Company issued and sold (pre-reverse split) shares
of Common Stock to the following parties in the amounts and for the
consideration indicated. These sales were exempt from registration under Section
4(2) of the Securities Act, no public offering being involved: Eric Warden--
175,000 shares for a consideration of $153,125; William M. DeArman--100,000
shares for a consideration of $87,500; Fred M. Ferreira--25,000 shares for a
consideration of $21,875; Steven Harter--12,500 shares
II-1
<PAGE>
for a consideration of $10,938; Ronald L. Stanfa--12,500 shares for a
consideration of $10,938; and Lorne Bain--75,000 shares for a consideration of
$65,625.
On May 15, 1997, the Company issued to Sanders Morris Mundy Inc. a warrant
to purchase 75,000 (pre-reverse split) shares of Common Stock in consideration
of financial advisory services to be provided to the Company. This sale was
exempt from registration under Section 4(2) of the Securities Act, no public
offering being involved.
Effective June 16, 1997, the Company effected a one for two reverse split on
outstanding shares of Common Stock as of such date.
On June 17, 1997, the Company issued to Thomas B. Blanton, the former sole
stockholder of the Mesa Companies, 1,062,500 shares of Common Stock in
connection with its acquisition of the Mesa Companies. This sale was exempt from
registration under Section 4(2) of the Securities Act, no public offering being
involved.
On June 17, 1997, the Company issued a total of 637,500 shares of Common
Stock to the former stockholders of AWW in connection with the Company's
acquisition of AWW. These sales were exempt from registration under Section 4(2)
of the Securities Act, no public offering being involved.
On June 23, 1997, the Company issued to Bellmeade Capital Partners and Mark
Liebovit warrants to purchase a total of 65,000 shares of Common Stock in
consideration of consulting services provided and to be provided to the Company.
These sales were exempt from registration under Section 4(2) of the Securities
Act, no public offering being involved.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- --------- ---------------------------------------------------------------------------------------------
<C> <S>
+1.1 Form of Underwriting Agreement.
*2.1 Agreement and Plan of Merger, dated June 16, 1997, among U S Liquids Inc., AWW Acquisition
Corp., American WasteWater Inc., William H. Wilson, Jr. and Michael W. Minick.
*2.2 Agreement and Plan of Merger, dated June 16, 1997, among U S Liquids Inc., Mesa Acquisition
Corp., T&T GS Acquisition Corp., Phoenix F&O Acquisition Corp., Mesa Processing, Inc., T&T
Grease Service, Inc., Phoenix Fats & Oils, Inc. and Thomas B. Blanton.
*3.1 Second Amended and Restated Certificate of Incorporation of U S Liquids Inc.
*3.2 Amended and Restated Bylaws of U S Liquids Inc.
*4.1 Form of Certificate Evidencing Ownership of Common Stock of U S Liquids Inc.
*4.2 Promissory Note of U S Liquids payable to Sanifill, Inc.
*4.3 Note Agreement, dated December 13, 1996, between U S Liquids and Sanifill, Inc.
+5.1 Opinion of Hartzog Conger & Cason.
*10.1 Asset Purchase Agreement, dated December 2, 1996, among U S Liquids Inc., Sanifill, Inc. and
certain affiliates of Sanifill, Inc.
*10.2 Seller Noncompetition Agreement, dated December 13, 1996, between U S Liquids Inc. and
Sanifill, Inc.
*10.3 Buyer Noncompetition Agreement, dated December 13, 1996, between Sanifill, Inc. and U S
Liquids Inc.
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- --------- ---------------------------------------------------------------------------------------------
<C> <S>
*10.4 NOW Disposal Agreement, dated June 4, 1996, among Sanifill, Inc., NOW Disposal Operating Co.,
and Campbell Wells, Ltd.
*10.5 Noncompetition Agreement, dated August 12, 1996, between Sanifill, Inc. and Newpark
Resources, Inc.
*10.6 Assumption and Guarantee Agreement dated August 12, 1996, among Newpark Resources, Inc.,
Sanifill, Inc., and Campbell Wells, Ltd.
*10.7 Lease and Access Agreement between Campbell Wells, Ltd. and Newpark Resources, Inc.
*10.8 Sublease and Access Agreement between Campbell Wells, Ltd. and Newpark Resources, Inc. and
underlying lease agreement.
*10.9 Sublease and Access Agreement between Campbell Wells, Ltd. and Newpark Resources, Inc. and
underlying lease agreement.
*10.10 Consent to Assignment and Assumption of Contracts, dated December 13, 1996, among Sanifill,
Inc., Campbell Wells, L.P. and U S Liquids Inc.
*10.11 Form of Nonqualified Stock Option Agreement between U S Liquids Inc. and certain individuals.
*10.12 U S Liquids Inc. Amended and Restated Stock Option Plan.
*10.13 U S Liquids Inc. Directors' Stock Option Plan.
*10.14 Form of Grant of Incentive Stock Option Agreement.
*10.15 Senior Executive Employment Agreement, dated June 17, 1997, between U S Liquids Inc. and W.
Gregory Orr.
*10.16 Senior Executive Employment Agreement, dated June 17, 1997, between U S Liquids Inc. and Earl
J. Blackwell.
*10.17 Executive Employment Agreement, dated June 17, 1997, between U S Liquids Inc. and Jerry L.
Brazzel.
*10.18 Executive Employment Agreement, dated June 17, 1997, between U S Liquids Inc. and Sammy L.
Cooper.
*10.19 Senior Executive Employment Agreement, dated June 17, 1997, between U S Liquids Inc. and
Thomas B. Blanton.
*10.20 Senior Executive Employment Agreement, dated June 17, 1997, between U S Liquids Inc. and
William H. Wilson, Jr.
*10.21 Stock Distribution Agreement, dated June 16, 1997, between U S Liquids Inc. and Thomas B.
Blanton.
*10.22 Form of Stock Distribution Agreement, dated June 16, 1997, between U S Liquids Inc. and the
former stockholders of American WasteWater Inc.
*10.23 Stock Distribution Agreement, dated June 16, 1997, between U S Liquids Inc. and W. Gregory
Orr.
*10.24 Noncompetition Agreement, dated June 17, 1997, between U S Liquids Inc. and Thomas B.
Blanton.
*10.25 Noncompetition Agreement, dated June 17, 1997, between U S Liquids Inc. and William H.
Wilson, Jr.
*10.26 Agreement to Vote Stock, dated June 16, 1997, among U S Liquids Inc., Thomas B. Blanton, W.
Gregory Orr, Earl J. Blackwell, William M. DeArman and certain other parties.
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- --------- ---------------------------------------------------------------------------------------------
<C> <S>
*10.27 Estoppel, Waiver and Amendment Agreement, dated June 16, 1997, between Sanifill, Inc. and U S
Liquids Inc.
*10.28 Financial Advisory Agreement, dated May 15, 1997, between U S Liquids Inc. and Sanders Morris
Mundy Inc. and supplemental letter dated July 10, 1997.
*10.29 Service Agreement, dated June 23, 1997, between U S Liquids Inc. and Bellmeade Capital
Partners.
*10.30 Service Agreement, dated June 23, 1997, between U S Liquids Inc. and Mark Liebovit.
*10.31 Warrant, dated December 13, 1996, issued by U S Liquids Inc. to Sanifill, Inc.
+10.32 Warrant Agreement, dated May 15, 1997, between U S Liquids Inc. and Sanders Morris Mundy Inc.
+10.33 Form of Warrant Agreement among U S Liquids Inc., Van Kasper & Company and Sanders Morris
Mundy Inc.
*10.34 Warrant, dated June 23, 1997, issued by U S Liquids Inc. to Bellmeade Capital Partners.
*10.35 Warrant, dated June 23, 1997, issued by U S Liquids Inc. to Mark Liebovit.
*10.36 Stock Purchase Agreement, dated September 10, 1996, among Mesa Processing, Inc., Jack C.
Wolcott and South Texas By-Products Company, Inc.
*10.37 Non-Competition Agreement, dated September 10, 1996, between Jack C. Wolcott and Mesa
Processing, Inc.
*10.38 Stock Distribution Agreement, dated June 16, 1997, between U S Liquids Inc. and Earl J.
Blackwell.
*10.39 Stock Distribution Agreement, dated June 16, 1997, between U S Liquids Inc. and William M.
DeArman.
*10.40 Employment Agreement, dated July 2, 1997, between U S Liquids Inc. and Michael P. Lawlor.
*10.41 Form of Lock-up Agreement between Van Kasper & Company and certain holders of U S Liquids
Inc.'s Common Stock.
+10.42 Amendment No. 1 to Financial Advisory Agreement, dated August 18, 1997, between U S Liquids
Inc. and Sanders Morris Mundy Inc.
*21.1 List of subsidiaries of U S Liquids Inc.
+23.1 Consent of Arthur Andersen LLP.
+23.2 Consent of Hartzog Conger & Cason (contained in Exhibit 5.1).
*24.1 Power of attorney.
*27.1 Financial Data Schedule.
</TABLE>
- ------------------------
* Previously filed with the Securities and Exchange Commission as an exhibit
to the Company's Registration Statement on Form S-1 as filed on June 26,
1997 and amended on August 4, 1997 and August 8, 1997 and incorporated
herein by reference.
+ Filed herewith.
(b) All schedules for which provision is made in the applicable accounting
regulations of the Commission are not required under the related instructions,
are inapplicable, or the information is included in the consolidated financial
statements, and therefore have been omitted.
II-4
<PAGE>
ITEM 17. UNDERTAKINGS
(a) The undersigned registrant hereby undertakes to provide to the
underwriters at the closing specified in the underwriting agreement,
certificates in such denominations and registered in such names as
required by the underwriters to permit prompt delivery to each purchaser.
(b) Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of
the registrant pursuant to the foregoing provisions, or otherwise, the
registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as
expressed in the Securities Act and is, therefore, unenforceable. In the
event that a claim for indemnification against such liabilities (other
than the payment by the registrant of expenses incurred or paid by a
director, officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities
being registered, the registrant will, unless in the opinion of its
counsel the matter has been settled by controlling precedent, submit to a
court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such
issue.
(c) The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus filed
as part of this registration statement in reliance upon Rule 430A
and contained in a form of prospectus filed by the registrant
pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act
shall be deemed to be part of this registration statement as of the
time it was declared effective.
(2) For purposes of determining liability under the Securities Act of
1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona fide
offering thereof.
II-5
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, U S Liquids Inc.
has duly caused this Registration Statement or amendment thereto to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of
Houston, State of Texas, on August 19, 1997.
U S LIQUIDS INC.
By: /s/ W. GREGORY ORR
-----------------------------------------
W. Gregory Orr
PRESIDENT
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS
REGISTRATION STATEMENT OR AMENDMENT THERETO HAS BEEN SIGNED BELOW BY THE
FOLLOWING PERSONS IN THE INDICATED CAPACITIES ON AUGUST 19, 1997.
SIGNATURE TITLE
- ----------------------------------- ------------------------------------
/s/ W. GREGORY ORR
- ----------------------------------- President and Director
W. Gregory Orr
/s/ EARL J. BLACKWELL
- ----------------------------------- Chief Financial Officer and Senior
Earl J. Blackwell Vice President--Finance
/s/ WILLIAM A. ROTHROCK IV*
- ----------------------------------- Director
William A. Rothrock IV
/s/ THOMAS B. BLANTON*
- ----------------------------------- Director
Thomas B. Blanton
/s/ ALFRED TYLER 2ND*
- ----------------------------------- Director
Alfred Tyler 2nd
/s/ MICHAEL P. LAWLOR*
- ----------------------------------- Director
Michael P. Lawlor
- ------------------------
*By W. Gregory Orr as attorney-in-fact.
II-6
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT SEQUENTIALLY
NO. DESCRIPTION NUMBERED PAGE
- --------- -------------------------------------------------------------------------------------------- -----------------
<C> <S> <C>
1.1 Form of Underwriting Agreement
5.1 Hartzog Conger & Cason Opinion
10.32 Warrant Agreement, dated May 15, 1997, between U S Liquids and Sanders Morris Mundy Inc.
10.33 Form of Underwriting Warrant among U S Liquids Inc., Van Kasper & Company and Sanders Morris
Mundy Inc.
10.42 Amendment No. 1 to Financial Advisory Agreement, dated August 18, 1997, between U S Liquids
Inc. and Sanders Morris Mundy Inc.
23.1 Consent of Arthur Andersen LLP.
23.2 Consent of Hartzog Conger & Cason (contained in Exhibit 5.1)
</TABLE>
<PAGE>
U S LIQUIDS INC.
UNDERWRITING AGREEMENT
August 19, 1997
VAN KASPER & COMPANY
SANDERS MORRIS MUNDY INC.
As Representatives of the
Several Underwriters
c/o Van Kasper & Company
10877 Wilshire Blvd., Suite 1700
Los Angeles, California 90024
Ladies and Gentlemen:
U S Liquids Inc., a Delaware corporation (the "Company"), proposes to issue
and sell to the several Underwriters named in Schedule I hereto (the
"Underwriters") an aggregate of 1,500,000 shares (the "Firm Shares") of its
authorized but unissued Common Stock, par value $0.01 per share (the "Common
Stock"). The Company also proposes to grant to the Underwriters an option to
purchase up to 225,000 additional shares of Common Stock (the "Option Shares")
for the sole purpose of covering over-allotments, if any, in connection with the
sale of the Firm Shares. The Firm Shares and any Option Shares purchased
pursuant to this Agreement are referred to below as the "Shares." Van Kasper &
Company and Sanders Morris Mundy Inc. are acting as representatives of the
several Underwriters and in that capacity are referred to in this Agreement as
the "Representatives."
The Company hereby confirms its agreement with the several Underwriters as
follows:
1. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company hereby
represents and warrants to and agrees with each Underwriter as follows:
(a) A registration statement (Registration No. 333-30065) on Form S-1
under the Securities Act of 1933, as amended (the "Securities Act"), relating to
the Shares, including such amendments to such registration statement as may have
been required to the date of this Agreement, has been prepared by the Company
under and in conformity with the provisions of the Securities Act and the rules
and regulations (the "Rules and Regulations") of the Securities and Exchange
Commission (the "Commission") thereunder and has been filed with the Commission.
After the execution of this Agreement, the Company will file with the Commission
either (i) if such registration statement, as it may have been amended, has been
declared by the Commission to be effective under the Securities Act, either (A)
if the Company relies on Rule 434 under the Securities Act, a Term Sheet
(defined below) relating to the Shares, that identifies the Preliminary
Prospectus (defined below) that it
-1-
<PAGE>
supplements and contains such information as is required or permitted by Rules
434, 430A and 424(b) of the Rules and Regulations or (B) if the Company does not
rely on Rule 434 under the Securities Act, a prospectus in the form most
recently included in an amendment to such registration statement (or, if no such
amendment has been filed, in such registration statement), with such changes or
insertions as are required by Rule 430A of the Rules and Regulations or
permitted by Rule 424(b) of the Rules and Regulations, and in the case of either
(i)(A) or (i)(B) of this sentence, as has been provided to and approved by the
Representatives prior to the execution of this Agreement, or (ii) if such
registration statement, as it may have been amended, has not been declared by
the Commission to be effective under the Securities Act, an amendment to such
registration statement, including a form of prospectus, a copy of which
amendment has been furnished to and approved by the Representatives prior to the
execution of this Agreement. As used in this Agreement, the term "Registration
Statement" means such registration statement, as amended at the time when it was
or is declared effective, including all financial schedules and exhibits
thereto, any information omitted therefrom pursuant to Rule 430A of the Rules
and Regulations and included in the Prospectus (defined below) and further
including all filings or other documents incorporated therein, as well as any
additional registration statement filed in connection with the offering of the
Shares pursuant to Rule 462(b) under the Securities Act; the term "Preliminary
Prospectus" means each prospectus subject to completion filed with such
registration statement or any amendment thereto (including the prospectus
subject to completion, if any, included in the Registration Statement or any
amendment thereto at the time it was or is declared effective and further
including all filings or documents incorporated therein); and the term
"Prospectus" means the following, including any filings or documents
incorporated therein:
(A) if the Company relies on Rule 434 under the Securities Act, the
Term Sheet relating to the Securities that is first filed
pursuant to Rule 424(b)(7) under the Securities Act, together
with the Preliminary Prospectus identified therein that such Term
Sheet supplements;
(B) if the Company does not rely on Rule 434 under the Securities
Act, the prospectus first filed with the Commission pursuant to
Rule 424(b) under the Securities Act; or
(C) if the Company does not rely on Rule 434 under the Securities Act
and if no prospectus is required to be filed pursuant to Rule
424(b) under the Securities Act, the prospectus included in the
Registration Statement;
provided that if any revised prospectus that is provided to the Underwriters by
the Company for use in connection with the offering of the Shares differs from
the prospectus on file with the Commission at the time the Registration
Statement became or becomes, as the case may be, effective, whether or not the
revised prospectus is required to be filed with the Commission pursuant to Rule
424(b)(3) of the Rules and Regulations, the term "Prospectus"
-2-
<PAGE>
shall mean such revised prospectus (including all filings and documents
incorporated therein) from and after the time it is first provided to the
Underwriters for such use. The term "Term Sheet" as used in this Agreement
means any term sheet that satisfies the requirements of Rule 434 under the
Securities Act. Any reference in this Agreement to the "date" of a Prospectus
that includes a Term Sheet means the date of such Term Sheet.
(b) No order suspending the effectiveness of the Registration
Statement or preventing or suspending the use of any Preliminary Prospectus or
the Prospectus has been issued and no proceedings for that purpose are pending
or, to the best knowledge of the Company, threatened or contemplated by the
Commission; no stop order suspending the sale of the Shares in any jurisdiction
has been issued and no proceedings for that purpose are pending or, to the best
knowledge of the Company, threatened or contemplated, and any request of the
Commission for additional information (to be included in the Registration
Statement, any Preliminary Prospectus or the Prospectus or otherwise) has been
complied with.
(c) Each of the Company and its direct and indirect subsidiaries has
been duly incorporated and is validly existing as a corporation in good standing
under the laws of the jurisdiction of its incorporation, has full power
(corporate and other) and authority to own or lease its properties and conduct
its business as described in the Registration Statement and the Prospectus and
as is currently being conducted by it and is duly qualified as a foreign
corporation and in good standing in all jurisdictions in which the character of
the property owned or leased or the nature of the business transacted by it
makes qualification necessary (except where the failure to be so qualified would
not have a material adverse effect on the business, properties, condition
(financial or otherwise), results of operations or prospects of the Company and
its direct and indirect subsidiaries, taken as a whole (a "Consolidated Material
Adverse Effect")). The Company and each of its direct and indirect subsidiaries
is in possession of and operating in compliance with all authorizations,
licenses, certificates, consents, orders and permits from federal, state, local
and other governmental or regulatory authorities that are material to the
conduct of its or their business, all of which are valid and in full force and
effect. Except as disclosed in the Registration Statement, the Company owns
directly or indirectly all of the outstanding capital stock or other equity
interests of each of its direct or indirect subsidiaries, free and clear of any
pledge, lien, security interest, encumbrance, claim or equitable interest of any
type, kind or nature. As used in this Agreement, the word "subsidiary" means
any corporation, partnership, limited liability company or other entity of which
the Company directly or indirectly owns 50% or more of the equity or that the
Company directly or indirectly controls. So long as the Company owns directly
or indirectly no more than 49% of Grasas Alimenticias Premezclades S.A. de C.Z.,
that entity shall not be deemed a subsidiary for purposes of this Agreement.
(d) When any Preliminary Prospectus was filed with the Commission it
(i) contained all statements required to be contained therein and complied in
all respects with the requirements of the Securities Act, the Rules and
Regulations, the Securities Exchange Act of 1934, as amended (the "Exchange
Act") and the rules and regulations of the Commission
-3-
<PAGE>
thereunder (the "Exchange Act Rules and Regulations") and (ii) did not include
any untrue statement of a material fact or omit to state any material fact
necessary in order to make the statements therein, in the light of the
circumstances under which they were made, not misleading. When the Registration
Statement or any amendment thereto was or is declared effective (the "Effective
Date"), it (i) contained or will contain all statements required to be contained
therein and complied or will comply in all respects with the requirements of the
Securities Act, the Rules and Regulations, the Exchange Act and the Exchange Act
Rules and Regulations and (ii) did not or will not include any untrue statement
of a material fact or omit to state any material fact necessary to make the
statements therein not misleading. When the Prospectus or any Term Sheet that
is a part thereof or any amendment or supplement to the Prospectus is filed with
the Commission pursuant to Rule 424(b) (or, if the Prospectus or part thereof or
such amendment or supplement is not required to be so filed, when the
Registration Statement or the amendment thereto containing such amendment or
supplement to the Prospectus was or is declared effective) and on the Closing
Date (defined below) and any date on which Option Shares are to be purchased,
the Prospectus, as amended or supplemented at any such time, (i) contained or
will contain all statements required to be contained therein and complied or
will comply in all respects with the requirements of the Securities Act, the
Rules and Regulations and the Exchange Act Rules and Regulations and (ii) did
not or will not include any untrue statement of a material fact or omit to state
any material fact necessary in order to make the statements therein, in the
light of the circumstances under which they were made, not misleading. The
foregoing provisions of this paragraph (d) do not apply to statements or
omissions made in any Preliminary Prospectus, the Registration Statement or any
amendment thereto or the Prospectus or any amendment or supplement thereto in
reliance upon and in conformity with written information furnished to the
Company by any Underwriter through the Representatives specifically for use
therein.
(e) Since the respective dates as of which information is given in
the Registration Statement and the Prospectus (or, if the Prospectus is not in
existence, the most recent Preliminary Prospectus), there has not been any
material loss or interference with the business of the Company or any of its
direct or indirect subsidiaries from fire, explosion, flood or other calamity,
whether or not covered by insurance, or from any court or governmental action,
order or decree, or any changes in the capital stock or long-term debt of the
Company or any of its direct or indirect subsidiaries, or any dividend or
distribution of any kind declared, paid or made on the capital stock of the
Company, or any material change, or a development known to the Company that
might cause or result in a Consolidated Material Adverse Effect, whether or not
arising from transactions in the ordinary course of business, in each case other
than as may be set forth in the Registration Statement and the Prospectus (or,
if the Prospectus is not in existence, the most recent Preliminary Prospectus),
and since such dates, except in the ordinary course of business, neither the
Company or any of its direct or indirect subsidiaries has entered into any
material transaction not described in the Registration Statement and the
Prospectus (or, if the Prospectus is not in existence, the most recent
Preliminary Prospectus).
(f) There is no agreement, contract, license, lease or other document
required to be described in the Registration Statement or the Prospectus (or, if
the Prospectus
-4-
<PAGE>
is not in existence, the most recent Preliminary Prospectus) or to be filed as
an exhibit to the Registration Statement which is not described or filed as
required. All contracts described in the Prospectus (or, if the Prospectus is
not in existence, the most recent Preliminary Prospectus), if any, are in full
force and effect on the date hereof, and neither the Company or any of its
direct or indirect subsidiaries nor, to the best knowledge of the Company, any
other party, is in material breach of or default under any such contract.
(g) The authorized and outstanding capital stock of the Company is
set forth in the Prospectus (or, if the Prospectus is not in existence, the most
recent Preliminary Prospectus), and the description of the capital stock therein
conforms with and accurately describes the rights set forth in the instruments
defining the same. The Shares are duly authorized and will, when issued in
accordance with the terms of this Agreement and against payment therefor, be
validly issued, fully paid and non-assessable, and the issuance of the Shares is
not subject to any preemptive or similar rights.
(h) All of the outstanding shares of capital stock of the Company
have been duly authorized and validly issued and are fully paid and
nonassessable, have been issued in compliance with all applicable federal and
state securities laws and were not issued in violation of or subject to any
preemptive rights or other rights to subscribe for or purchase securities. All
of the issued shares of capital stock or other equity interests of each direct
or indirect subsidiary of the Company have been duly and validly authorized and
issued, are fully paid and non-assessable and are directly or indirectly owned
by the Company. The description of the Company's stock option, stock bonus and
other stock plans or arrangements, and the options or other rights granted or
exercised thereunder, set forth in the Prospectus (or, if the Prospectus is not
in existence, in the most recent Preliminary Prospectus), accurately and fairly
present the information required to be shown with respect to such plans,
arrangements, options and rights. Other than this Agreement, the "Warrant
Agreement" (as defined in Section 1(ab) below) and the options and warrants to
purchase Common Stock described in the Prospectus (or, if the Prospectus is not
in existence, the most recent Preliminary Prospectus), there are no options,
warrants or other rights outstanding to subscribe for or purchase any shares of
the Company's capital stock. There are no preemptive rights applicable to any
shares of capital stock of the Company. There are no restrictions upon the
voting or transfer of any of the Firm Shares or Option Shares pursuant to the
Company's certificate of incorporation, as amended to date ("Certificate of
Incorporation"), bylaws or other governing documents or any agreement to which
the Company is a party or by which it may be bound. Except as is provided in the
Warrant Agreement and for the Shares, neither the filing of the Registration
Statement nor the offering or sale of the Shares as contemplated by this
Agreement gives rise to any rights, other than those which have been waived, for
or relating to the registration of any securities (other than the Shares) of or
issued by the Company.
(i) The Company has full right, power and authority to enter into and
perform its obligations under this Agreement and the Warrant Agreement and to
issue, sell and deliver the Shares. This Agreement and the Warrant Agreement
have each been duly
-5-
<PAGE>
authorized, executed and delivered by the Company and constitute the valid and
binding agreements of the Company, and each is enforceable against the Company
in accordance with its terms except insofar as enforceability may be affected by
bankruptcy, insolvency, reorganization, moratorium or similar laws affecting
creditors' rights generally and except insofar as the indemnification and
contribution provisions of Section 7 of this Agreement and Section 3(f) of the
Warrant Agreement hereof may be affected by public policy concerns.
(j) Neither the Company or any of its direct or indirect subsidiaries
is, nor with the giving of notice or lapse of time or both would be, in
violation of or in default under, nor will the execution or delivery of this
Agreement or the Warrant Agreement or the consummation of the transactions
contemplated by this Agreement or the Warrant Agreement result in a violation of
or constitute a breach of or a default (including without limitation with the
giving of notice, the passage of time or otherwise) under the Certificate of
Incorporation, bylaws or other governing documents of the Company or any of its
direct or indirect subsidiaries or any obligation, agreement, covenant or
condition contained in any bond, debenture, note or other evidence of
indebtedness or in any contract, indenture, mortgage, deed of trust, loan
agreement, lease, license, joint venture or other agreement or instrument to
which the Company or any of its direct or indirect subsidiaries is a party or by
which any of its or their properties may be bound or affected. The Company has
not incurred any liability, direct or indirect, for any finders' or similar fees
payable on behalf of the Company or the Underwriters in connection with the
transactions contemplated by this Agreement. The performance by the Company of
its obligations under this Agreement and the Warrant Agreement will not violate
any law, ordinance, rule or regulation (provided that no representation or
warranty is made hereby with respect to the effect, if any, of public policy
concerns on the indemnification and contribution provisions of Section 7 hereof
and Section 3(f) of the Warrant Agreement), or any order, writ, injunction,
judgment or decree of any governmental agency or body or of any court having
jurisdiction over the Company or any of its direct or indirect subsidiaries or
any of its or their properties, or result in the creation or imposition of any
lien, charge, claim or encumbrance upon any property or asset of the Company or
any of its direct or indirect subsidiaries. Except for permits and similar
authorizations required under the Securities Act, the Exchange Act or under
state securities or Blue Sky laws and for such permits and authorizations that
have been obtained, no consent, approval, authorization or order of any court,
governmental agency or body, financial institution or any other person is
required in connection with the consummation of the transactions contemplated by
this Agreement or the Warrant Agreement.
(k) Each of the Company and its direct and indirect subsidiaries
owns, or has valid rights to use, all items of real and personal property which
are material to the business of the Company and its direct and indirect
subsidiaries, taken as a whole, free and clear, except as described in the
Registration Statement and the Prospectus (or, if the Prospectus is not in
existence, the most recent Preliminary Prospectus), of all liens, encumbrances
and claims that might materially interfere with the business, properties,
condition (financial or otherwise), results of operations or prospects of the
Company and its direct and indirect subsidiaries, taken as a whole.
-6-
<PAGE>
(l) Each of the Company and its direct and indirect subsidiaries,
taken as a whole, owns or possesses adequate rights to use all material patents,
patent rights, inventions, trade secrets, know-how, trademarks, service marks,
tradenames and copyrights described or referred to in the Registration Statement
and the Prospectus (or, if the Prospectus is not in existence, the most recent
Preliminary Prospectus) as owned by or used by any of them, or which are
necessary for the conduct of its or their business as described in the
Registration Statement and the Prospectus (or, if the Prospectus is not in
existence, the most recent Preliminary Prospectus); and the Company has not
received any notice of infringement of or conflict with asserted rights of
others with respect to any patents, patent rights, inventions, trade secrets,
know-how, trademarks, service marks, tradenames or copyrights which, singly or
in the aggregate, if the subject of an unfavorable decision, ruling or finding,
might have a Consolidated Material Adverse Effect.
(m) There is no litigation or governmental proceeding to which the
Company or any of its direct or indirect subsidiaries is a party or to which any
property of the Company or any of its direct or indirect subsidiaries is subject
which is pending or, to the best knowledge of the Company, is threatened or
contemplated against the Company or any of its direct or indirect subsidiaries
that might have a Consolidated Material Adverse Effect, that might prevent
consummation of the transactions contemplated by this Agreement or the Warrant
Agreement or that is required to be disclosed in the Registration Statement or
Prospectus (or, if the Prospectus is not in existence, the most recent
Preliminary Prospectus) and is not so disclosed.
(n) Neither the Company or any of its direct or indirect subsidiaries
is in violation of any law, order, ordinance, rule or regulation, or any order,
writ, injunction, judgment or decree of any governmental agency or body or of
any court, to which it or its properties (whether owned or leased) may be
subject, which violation might have a Consolidated Material Adverse Effect.
(o) The Company has not taken and shall not take, directly or
indirectly, any action designed to cause or result in, or which has constituted
or which might reasonably be expected to cause or result in, under the Exchange
Act, the Exchange Act Rules and Regulations or otherwise, the stabilization or
manipulation of the price of any security of the Company to facilitate the sale
or resale of the Shares. No bid or purchase by the Company and, to the best
knowledge of the Company, no bid or purchase that could be attributed to the
Company (as a result of bids or purchases by an "affiliated purchaser" within
the meaning of Regulation M under the Exchange Act) for or of the Common Stock,
any securities of the same class or series as the Common Stock or any securities
convertible into or exchangeable for or that represent any right to acquire the
Common Stock is now pending or in progress or will have commenced at any time
prior to the completion of the distribution of the Shares.
(p) Arthur Andersen LLP, whose report appears in the Registration
Statement and the Prospectus (or, if the Prospectus is not in existence, the
most recent
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<PAGE>
Preliminary Prospectus) is, and during the periods covered by its report in the
Registration Statement was, independent accountants as required by the
Securities Act and the Rules and Regulations. The historical and pro forma
financial statements and schedules included in the Registration Statement, each
Preliminary Prospectus and the Prospectus present fairly (or, if the Prospectus
has not been filed with the Commission, as to the Prospectus, will present
fairly) the financial condition, results of operations, cash flows and changes
in stockholders' equity of the Company and its subsidiaries at the dates and for
the periods indicated, and the historical and pro forma financial statements and
schedules included in the Registration Statement present fairly the information
required to be stated therein. Such financial statements and schedules have
been prepared in accordance with generally accepted accounting principles
applied on a consistent basis throughout the periods presented, except as may be
stated therein. The selected and summary financial and statistical data
included in the Registration Statement and the Prospectus present fairly (or, if
the Prospectus has not been filed with the Commission, as to the Prospectus,
will present fairly) the information shown therein and have been compiled on a
basis consistent with the audited financial statements presented therein. No
other financial statements or schedules are required to be included in the
Registration Statement.
(q) Any pro forma financial or other information and related notes
included in the Registration Statement, each Preliminary Prospectus and the
Prospectus comply (or, if the Prospectus has not been filed with the Commission,
as to the Prospectus, will comply) in all material respects with the
requirements of the Securities Act and the Rules and Regulations and present
fairly the pro forma information shown, as of the dates and for the periods
covered by such pro forma information. Such pro forma information, including
any related notes and schedules, has been prepared on a basis consistent with
the historical financial statements and other historical information, as
applicable, included in the Registration Statement, the Preliminary Prospectus
and the Prospectus (if filed with the Commission), except for the pro forma
adjustments specified therein, and give effect to assumptions made on a
reasonable basis to give effect to historical and, if applicable, proposed
transactions described in the Registration Statement, each Preliminary
Prospectus and the Prospectus (if filed with the Commission).
(r) The books, records and accounts of the Company and its direct and
indirect subsidiaries accurately and fairly reflect, in reasonable detail, the
transactions in and dispositions of the assets of the Company and its direct and
indirect subsidiaries. The systems of internal accounting controls maintained
by the Company and its direct and indirect subsidiaries are sufficient to
provide reasonable assurances that: (i) transactions are executed in accordance
with management's general or specific authorization; (ii) transactions are
recorded as necessary (x) to permit preparation of financial statements in
conformity with generally accepted accounting principles and (y) to maintain
accountability for assets; (iii) access to assets is permitted only in
accordance with management's general or specific authorization; and (iv) the
recorded accountability for assets is compared with the existing assets at
reasonable intervals and appropriate action is taken with respect to any
differences.
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<PAGE>
(s) The Company has delivered to Van Kasper & Company the written
agreement of each of its officers and directors and, to the knowledge of the
Company at the date of this Agreement, the beneficial owners of one percent or
more of the Common Stock (assuming for this purpose that all options and
convertible securities held by each beneficial owner, but not by any other
person, have been exercised or exchanged for or converted into Common Stock)
(collectively, "Material Holders"), and certain other persons (collectively with
the Material Holders, the "Holders") to the effect that each of the Holders will
not, for a period of 180 days following the date of this Agreement, without the
prior written consent of Van Kasper & Company, offer, sell, grant any option to
purchase, contract to sell, or otherwise dispose of any Common Stock or options
or convertible securities exercisable or exchangeable for, or convertible into,
Common Stock or any rights to purchase or acquire Common Stock, or announce any
offer to do so.
(t) No labor disturbance by the employees of the Company or any of
its direct or indirect subsidiaries exists, is imminent or, to the knowledge of
the Company, is contemplated or threatened; and the Company is not aware of an
existing, imminent or threatened labor disturbance by the employees of any
principal suppliers, manufacturers, contractors or others that might be expected
to result in any Consolidated Material Adverse Effect. No collective bargaining
agreement exists with any of the Company's employees or those of its direct or
indirect subsidiaries and, to the best knowledge of the Company, no such
agreement is imminent.
(u) Each of the Company and its direct and indirect subsidiaries has
filed all federal, state, local and foreign tax returns which are required to be
filed or has requested extensions thereof and has paid all taxes, including
withholding taxes, penalties and interest, assessments, fees and other charges
to the extent that the same have become due and payable. No tax assessment or
deficiency has been made or proposed against the Company or any of its direct or
indirect subsidiaries nor has the Company or any of its direct or indirect
subsidiaries received any notice of any proposed tax assessment or deficiency.
All tax liabilities of the Company and its direct and indirect subsidiaries are
adequately provided for on the books of the Company.
(v) Except as set forth in the Prospectus (or, if the Prospectus is
not in existence, the most recent Preliminary Prospectus), there are no
outstanding loans, advances or guaranties of indebtedness by the Company or any
of its direct or indirect subsidiaries to or for the benefit of any of (i) its
"affiliates," as such term is defined in the Rules and Regulations, (ii) except
for immaterial advances in the ordinary course of business, any of the officers
or directors of any of its direct or indirect subsidiaries, or (iii) any of the
members of the families of any of them.
(w) Neither the Company or any of its direct or indirect subsidiaries
has directly or indirectly, at any time: (i) made any contributions to any
candidate for political office, or failed to disclose fully any such
contribution, in violation of law; (ii) made any payment to any local, state,
federal or foreign governmental officer or official, or other
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<PAGE>
person charged with similar public or quasi-public duties, other than payments
required or allowed by all applicable laws; or (iii) violated any provision of
the Foreign Corrupt Practices Act of 1977, as amended.
(x) Neither the Company or any of its direct or indirect subsidiaries
has any liability, absolute or contingent, relating to: (i) public health or
safety; (ii) worker health or safety; or (iii) product defect or warranty (all
except as would not reasonably be expected to have a Consolidated Material
Adverse Effect or as are disclosed in the Registration Statement and Prospectus
(or, if the Prospectus is not in existence, the most recent Preliminary
Prospectus)).
(y) The Company has not distributed and will not distribute prior to
the Closing Date or on or prior to any date on which the Option Shares are to be
purchased, as the case may be, any prospectus or other offering material in
connection with the offering and sale of the Shares other than the Preliminary
Prospectus(es), the Prospectus, the Registration Statement and any other
material which may be permitted by the Securities Act and the Rules and
Regulations.
(z) Subject to official notice of issuance, the Shares have been
approved for listing on the American Stock Exchange ("AMEX").
(aa) The Company is not now, and intends to conduct its affairs in the
future in such a manner so that it will not become, an investment company within
the meaning of the Investment Company Act of 1940, as amended.
(ab) The "Warrants" (as defined in the Warrant Agreement, dated as of
August 25, 1997, among the Company, Van Kasper & Company and Sanders Morris
Mundy Inc. (the "Warrant Agreement")) have been duly and validly authorized by
all requisite corporate action of the Company and, when issued and delivered
against payment therefor as provided in Section 3(l) below, will be valid and
binding obligations of the Company in accordance with their terms; the "Warrant
Shares" (as defined in the Warrant Agreement) have been duly and validly
reserved and authorized for issuance upon exercise of the Warrants and when so
issued against payment therefor as provided in the Warrant Agreement will be
validly issued, fully paid and non-assessable; and no person has any preemptive
rights with respect to the Warrants or the Warrant Shares.
(ac) The Company and each of its direct and indirect subsidiaries is
in compliance in all material respects with all presently applicable provisions
of the Employee Retirement Income Security Act of 1974, as amended, including
the regulations and published interpretations thereunder ("ERISA"); no
"reportable event" (as defined in ERISA) for which the Company or any of its
direct or indirect subsidiaries would have any liability has occurred; neither
the Company nor any of its direct or indirect subsidiaries has incurred or
expects to incur liability under (1) Title IV of ERISA with respect to
termination of, or withdrawal from, any "pension plan" or (2) Sections 412 or
4971 of the Internal Revenue
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<PAGE>
Code of 1986, as amended, including the regulations and published
interpretations thereunder (the "Code"); and each "pension plan" for which the
Company or any of its direct or indirect subsidiaries would have any liability
that is intended to be qualified under Section 401(a) of the Code is so
qualified in all material respects and nothing has occurred, whether by action
or by failure to act, which would cause the loss of such qualification.
(ad) Except as set forth in the Prospectus (or if the Prospectus is
not in existence, the most recent Preliminary Prospectus), there has to the best
knowledge of the Company been no storage, disposal, generation, manufacture,
refinement, transportation, handling or treatment of toxic wastes, hazardous
wastes or hazardous substances by the Company or any of its direct or indirect
subsidiaries (or any of their predecessors in interest) at, upon or from any of
the property now or previously owned or leased by the Company or its direct or
indirect subsidiaries in violation of any applicable law, ordinance, rule,
regulation, order, judgment, decree or permit or which would require remedial
action under any applicable law, ordinance, rule, regulation, order, judgment,
decree or permit; there has to the best knowledge of the Company been no
material spill, discharge, leak, emission, injection, escape, dumping or release
of any kind onto such property or into the environment surrounding such property
of any toxic wastes, medical wastes, solid wastes, hazardous wastes or hazardous
substances due to or caused by the Company or any of its direct or indirect
subsidiaries or with respect to which the Company or any of its direct or
indirect subsidiaries have knowledge; and the terms "hazardous wastes," "toxic
wastes" and "hazardous substances" shall have the meanings specified in any
applicable local, state, federal and foreign laws or regulations with respect to
environmental protection.
(ae) The Company and each of its direct and indirect subsidiaries are
insured by insurers of recognized financial responsibility against such losses
and risks and in such amounts as are prudent and customary in the businesses in
which they are engaged; neither the Company nor any such subsidiary has been
refused any insurance coverage sought or applied for; and neither the Company
nor any such subsidiary has any reason to believe that it will not be able to
renew its existing insurance coverage as and when such coverage expires or to
obtain similar coverage from similar insurers as may be necessary to continue
its business at a cost that would not cause a Consolidated Material Adverse
Effect, except as described in or contemplated by the Prospectus (or, if the
Prospectus is not in existence, the most recent Preliminary Prospectus).
(af) Each certificate signed by any officer of the Company or any of
its direct or indirect subsidiaries and delivered to the Representatives or
Underwriters' counsel shall be deemed to be a representation and warranty by the
Company to each Underwriter as to the matters covered thereby.
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<PAGE>
2. PURCHASE, SALE AND DELIVERY OF SHARES.
(a) On the basis of the representations, warranties, covenants and
agreements of the Company contained in this Agreement and subject to the terms
and conditions set forth in this Agreement, the Company agrees to sell to the
several Underwriters, and each of the Underwriters agrees, severally and not
jointly, to purchase from the Company, at a purchase price of $___ per share
[7.25% DISCOUNT], the respective number of Firm Shares set forth opposite the
name of such Underwriter on Schedule I to this Agreement (subject to adjustment
as provided in Section 8 of this Agreement).
(b) On the basis of the several (and not joint) covenants and
agreements of the Underwriters contained in this Agreement and subject to the
terms and conditions set forth in this Agreement, the Company grants an option
to the several Underwriters to purchase from the Company, severally and not
jointly, all or any portion of the Option Shares at the same price per share as
the Underwriters are to pay for the Firm Shares. This option may be exercised
only to cover over-allotments in the sale of the Firm Shares by the Underwriters
and may be exercised in whole or in part at any time (but not more than once) on
or before the 45th day after the date of the Prospectus upon written or
telecopied notice by the Representatives (or either of them) to the Company
setting forth the aggregate number of Option Shares as to which the several
Underwriters are exercising the option and the settlement date. The Option
Shares shall be purchased severally, and not jointly, by each Underwriter, if
purchased at all, in the same proportion that the number of Firm Shares set
forth opposite the name of the Underwriter in Schedule I to this Agreement bears
to the total number of Firm Shares to be purchased by the Underwriters under
Section 2(a) above, subject to such adjustments as the Representatives in their
absolute discretion shall make to eliminate any fractional shares. Delivery of
certificates for the Option Shares, and payment therefor, shall be made as
provided in Section 2(c) and Section 2(d) below.
(c) Delivery of the Firm Shares and payment therefor, less the
nonaccountable expense allowance provided for in Section 4(a)(ii) of this
Agreement, shall be made at the office of Van Kasper & Company, 10877 Wilshire
Boulevard, Suite 1700, Los Angeles, California 90024 (or at such other location
as is agreed by the parties), at 6:30 a.m., Los Angeles time, on August 25,
1997, or at such time on such other day, not later than seven full business days
after such date, as shall be agreed upon in writing by the Company and the
Representatives, or as provided in Section 7(h) of this Agreement. The date and
hour of delivery and payment for the Firm Shares are referred to in this
Agreement as the "Closing Date." As used in this Agreement, "business day" means
a day on which AMEX is open for trading and on which banks in New York and
California are open for business and not permitted by law or executive order to
be closed.
(d) If the option granted by the Company in Section 2(b) above is
exercised, delivery of the Option Shares and payment therefor, less the
applicable portion, if any, of the nonaccountable expense allowance provided for
in Section 4(a)(ii) of this Agreement, shall be made at the office of Van Kasper
& Company, 10877 Wilshire
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<PAGE>
Boulevard, Suite 1700, Los Angeles, California 90024 (or at such other location
as is agreed by the parties), at 6:30 a.m., Los Angeles time, on the date
specified by the Representatives (which shall be three business days after the
exercise of the option, but not in excess of the period of time specified in the
Rules and Regulations).
(e) Payment of the purchase price for the Shares by the several
Underwriters shall be made by certified or official bank check or checks drawn
in next-day funds, payable to the order of the Company. Such payment shall be
made upon delivery of certificates for the Shares to the Representatives for the
respective accounts of the several Underwriters. Certificates for the Shares to
be delivered to the Representatives shall be registered in such name or names
and shall be in such denominations as the Representatives may request at least
two business days before the Closing Date, in the case of Firm Shares, and at
least one business day prior to the purchase of the Option Shares, in the case
of the Option Shares. Such certificates will be made available to the
Underwriters for inspection, checking and packaging at the offices of Alex.
Brown & Sons, New York, New York, not less than one full business day prior to
the Closing Date or, in the case of the Option Shares, by 3:00 p.m., New York
time, on the first business day preceding the date of purchase.
It is understood that the Representatives or either of them,
individually and not on behalf of the Underwriters, may (but shall not be
obligated to) make payment to the Company for Shares to be purchased by any
Underwriter whose check shall not have been received by the Representatives on
the Closing Date or any later date on which Option Shares are purchased for the
account of such Underwriter. Any such payment shall not relieve such
Underwriter from any of its obligations hereunder.
(f) It is understood that the several Underwriters propose to offer
the Shares for sale to the public as soon as the Representatives deem it
advisable to do so. The Firm Shares are to be initially offered to the public
at the public offering price set forth (or to be set forth) in the Prospectus.
The Representatives may from time to time thereafter change the public offering
price and other selling terms.
(g) The information set forth in the last paragraph on the front
cover page (insofar as such information relates to the Underwriters), the legend
respecting stabilization set forth on the inside front cover page and the
statements set forth under the caption "Underwriting" in any Preliminary
Prospectus and in the final form of Prospectus filed pursuant to Rule 424(b)
constitute the only information furnished by the Underwriters to the Company for
inclusion in any Preliminary Prospectus, the Prospectus or the Registration
Statement.
3. FURTHER AGREEMENTS OF THE COMPANY. The Company covenants and agrees
with the several Underwriters as follows:
(a) The Company will use its best efforts to cause the Registration
Statement, and any amendment thereof, if not effective at the time of execution
of this
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<PAGE>
Agreement, to become effective as promptly as possible. If the Registration
Statement has become or becomes effective pursuant to Rule 430A, or filing of
the Prospectus is otherwise required under Rule 424(b), the Company will file
the Prospectus, properly completed (and in form and substance reasonably
satisfactory to the Underwriters) pursuant to Rule 424(b) within the time period
prescribed and will provide evidence satisfactory to the Representatives of such
timely filing. The Company will not file the Prospectus, any amended
Prospectus, any amendment (including post-effective amendments) to the
Registration Statement or any supplement to the Prospectus without (i) advising
the Representatives of and, a reasonable time prior to the proposed filing of
such amendment or supplement, furnishing the Representatives with copies thereof
and (ii) obtaining the prior consent of the Representatives to such filing. The
Company will prepare and file with the Commission, promptly upon the request of
the Representatives, any amendment to the Registration Statement or supplement
to the Prospectus that may be necessary or advisable in connection with the
distribution of the Shares by the Underwriters and use its best efforts to cause
the same to become effective as promptly as possible.
(b) The Company will promptly advise the Representatives (i) when the
Registration Statement becomes effective, (ii) when any post-effective amendment
thereof becomes effective, (iii) of any request by the Commission for any
amendment of or supplement to the Registration Statement or the Prospectus or
for any additional information, (iv) of the issuance by the Commission of any
stop order suspending the effectiveness of the Registration Statement or the
institution or threatening of any proceeding for that purpose and (v) of the
receipt by the Company of any notification with respect to the suspension of the
registration, qualification or exemption from registration or qualification of
the Shares for sale in any jurisdiction or the initiation or threatening of any
proceeding for such purpose. The Company will use its best efforts to prevent
the issuance of any such stop order or suspension and, if issued, to obtain as
soon as possible the withdrawal thereof.
(c) The Company will (i) on or before the Closing Date, deliver to
each of the Representatives and to Underwriters' counsel a signed copy of the
Registration Statement as originally filed and of each amendment thereto filed
prior to the time the Registration Statement becomes effective and, promptly
upon the filing thereof, a signed copy of each post-effective amendment, if any,
to the Registration Statement (together with, in each case, all exhibits thereto
unless and to the extent previously furnished to the Representatives) and all
documents filed by the Company with the Commission under the Exchange Act and
deemed to be incorporated by reference into any Preliminary Prospectus or the
Prospectus and will also deliver to the Representatives, for distribution to the
several Underwriters, a sufficient number of additional conformed copies of each
of the foregoing (excluding exhibits) so that one copy of each may be
distributed to each Underwriter, (ii) as promptly as possible deliver to each of
the Representatives and send to the several Underwriters, at such office or
offices as the Representatives may designate, as many copies of the Prospectus
as the Representatives may reasonably request and (iii) thereafter from time to
time during the period in which a prospectus is required by law to be delivered
by an Underwriter or a dealer, likewise send to the Underwriters as many
additional copies of the Prospectus and as
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<PAGE>
many copies of any supplement to the Prospectus and of any amended Prospectus,
filed by the Company with the Commission, as the Representatives may reasonably
request for the purposes contemplated by the Securities Act.
(d) If at any time during the period in which a prospectus is
required by law to be delivered by an Underwriter or a dealer any event shall
occur as a result of which it is necessary to supplement or amend the Prospectus
in order to make the Prospectus not misleading or so that the Prospectus will
not omit to state a material fact necessary to be stated therein, in each case
at the time the Prospectus is delivered to a purchaser of the Shares, or if it
shall be necessary to amend or to supplement the Prospectus to comply with the
Securities Act or the Rules and Regulations, the Company will forthwith prepare
and file with the Commission a supplement to the Prospectus or an amended
Prospectus so that the Prospectus as so supplemented or amended will not contain
any untrue statement of a material fact or omit to state any material fact
necessary in order to make the statements therein not misleading and so that it
then will otherwise comply with the Securities Act and the Rules and
Regulations. If, after the public offering of the Shares by the Underwriters
commences and during such period, the Underwriters propose to vary the terms of
offering thereof by reason of changes in general market conditions or otherwise,
the Representatives will advise the Company in writing of the proposed variation
and if, in the opinion either of counsel for the Company or counsel for the
Underwriters, such proposed variation requires that the Prospectus be
supplemented or amended, the Company will forthwith prepare and file with the
Commission a supplement to the Prospectus or an amended Prospectus setting forth
such variation. The Company authorizes the Underwriters and all dealers to whom
any of the Shares may be sold by the Underwriters to use the Prospectus, as from
time to time so amended or supplemented, in connection with the sale of the
Shares in accordance with the applicable provisions of the Securities Act and
the Rules and Regulations for such period.
(e) The Company will cooperate with the Representatives and
Underwriters' counsel in the qualification or registration of the Shares for
offer and sale under the securities or blue sky laws of such jurisdictions as
the Representatives may designate and, if applicable, in connection with
exemptions from such qualification or registration and, during the period in
which a Prospectus is required by law to be delivered by an Underwriter or a
dealer, in keeping such qualifications, registrations and exemptions in effect;
provided, however, that the Company shall not be obligated to file any general
consent to service of process or to qualify to do business as a foreign
corporation in any jurisdiction in which it is not so qualified. The Company
will, from time to time, prepare and file such statements, reports and other
documents as are or may be required to continue such qualifications,
registrations and exemptions in effect for so long a period as the
Representatives may reasonably request for the distribution of the Shares.
(f) During a period of five years commencing with the date of this
Agreement, the Company will promptly furnish to the Representatives and to each
Underwriter who may so request in writing copies of (i) all periodic and special
reports furnished by it to shareholders of the Company, (ii) all information,
documents and reports
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<PAGE>
filed by it with the Commission, Nasdaq National Market, any securities exchange
or the NASD, (iii) all press releases and material news items or articles in
respect of the Company, its products or affairs released or prepared by the
Company (other than promotional and marketing materials disseminated solely to
customers and potential customers of the Company in the ordinary course of
business) and (iv) any additional information concerning the Company or its
business which the Representatives may reasonably request.
(g) As soon as practicable, but not later than the 45th day following
the end of the fiscal quarter first ending after the first anniversary of the
Effective Date, the Company will make generally available to its securities
holders and furnish to the Representatives an earnings statement or statements
in accordance with Section 11(a) of the Securities Act and Rule 158 thereunder.
(h) The Company agrees that, without Van Kasper & Company's prior
written consent, the Company will not, and will not allow the Holders to, in
each case directly or indirectly, issue, sell, offer, contract to sell, grant
any option to purchase or otherwise dispose of any shares of Common Stock, or
any securities convertible into, exchangeable for or exercisable for Common
Stock or any rights to purchase or acquire Common Stock, for a period of 180
days following the date of this Agreement, excluding only (i) the sale of the
Shares to be sold to the Underwriters pursuant to this Agreement, (ii) the grant
of options to purchase Common Stock (provided that none of such options are or
become exercisable during such 180-day period) or the issuance of shares of
Common Stock upon the exercise in accordance with of options previously granted
under the Company's presently authorized stock option plans as described in the
Prospectus or in documents incorporated therein, or upon the exercise in
accordance with their terms of previously granted warrants which are described
in the Prospectus or in documents incorporated therein, (iii) securities issued
in future acquisitions accounted for as a purchase (provided that each recipient
of such acquisition securities enters into and delivers to Van Kasper & Company
a lock-up agreement of the kind described in Section 1(s) of this Agreement, but
with a 180-day period beginning on the date of such acquisition), and
(iv) securities issued in future acquisitions accounted for as a pooling of
interests (provided that each recipient of such acquisition securities agrees
not to dispose of such securities in such a manner or at such a time as would
disqualify the transaction for pooling-of-interests accounting treatment).
(i) The Company will establish and maintain all financial control and
financial reporting systems customary for well-established public companies,
including but not limited to adequate management information and reporting
systems, and will employ and maintain, with adequate staffing levels at
headquarters and at each functional division, and at each level of
responsibility, an employee staff of well trained and highly qualified financial
professionals.
(j) The Company will apply the net proceeds from the offering
received by it in the manner set forth under the caption "Use of Proceeds" in
the Prospectus.
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<PAGE>
(k) The Company will, and at all times for a period of at least five
years after the date of this Agreement, unless such securities are then listed
on a national securities exchange, use its best efforts to cause the Common
Stock (including the Shares) to be included for quotation on the Nasdaq National
Market, and the Company will comply with all registration, filing, reporting and
other requirements of the Exchange Act, the national securities exchange, and
the Nasdaq National Market which may from time to time be applicable to the
Company.
(l) The Company will use its best efforts to maintain insurance of
the types and in the amounts which it deems adequate for its business consistent
with insurance coverage maintained by companies of similar size and engaged in
similar businesses including, but not limited to, general liability insurance
covering all real and personal property owned or leased by the Company against
theft, damage, destruction, acts of vandalism and all other risks customarily
insured against.
(m) In accordance with the Warrant Agreement, which the Company has
executed and delivered, the Company agrees, upon its receipt of the purchase
price therefor (as specified in the Warrant Agreement), to deliver to Van Kasper
& Company and Sanders Morris Mundy Inc. (individually and not as the
Representatives of the Underwriters) on the Closing Date and simultaneously with
completion of the purchase and sale of the Firm Shares, Warrants (in the form
attached as Exhibit A to the Warrant Agreement) representing the right to
purchase 112,500 shares of Common Stock at a price equal to 120% of the offering
price per share to the public as set forth or to be set forth on the Cover Page
of the Prospectus or in the Term Sheet.
(n) The Company will issue no press release prior to or within 70
days after the Closing Date without the Representatives' prior written consent.
(o) Within a reasonable time after the Closing Date, not to exceed
90 days, the Company shall supply to the Representatives and the Underwriters'
counsel, at the Company's cost, such number of bound volumes as may be
reasonably requested by such counsel each containing all material documents
relating to the offering of the Shares.
4. FEES AND EXPENSES.
(a) The Company agrees with each Underwriter that:
(i) The Company will pay and bear all costs and expenses in
connection with: the preparation, printing and filing of
the Registration Statement (including financial
statements, schedules and exhibits), Preliminary
Prospectuses and the Prospectus, any drafts of each of
them and any amendments or supplements to any of them;
the duplication or, if applicable, printing (including
all drafts thereof) of this Agreement, the Agreement
Among
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Underwriters, any Selected Dealer Agreements, the Warrant
Agreement, the Preliminary Blue Sky Survey and any
Supplemental Blue Sky Survey, the Underwriters'
Questionnaire and the Power of Attorney and the
duplication and printing (including of drafts thereof) of
any other underwriting documents and material (including
but not limited to marketing memoranda and other
marketing material) in connection with the offering,
purchase, sale and delivery of the Shares; the issuance
and delivery of the Shares under this Agreement to the
several Underwriters, including all expenses, taxes,
duties, fees and commissions on the purchase and sale of
the Shares and AMEX, brokerage and transaction levies
with respect to the purchase and, if applicable, the sale
of the Shares (x) incident to the sale and delivery of
the shares by the Company to the Underwriters and (y)
incident to the sale and delivery of the Shares by the
Underwriters to the initial purchasers thereof; the cost
of printing all stock certificates; the Transfer Agent's
and Registrar's fees; the fees and disbursements of
counsel for the Company; all fees and other charges of
the Company's independent public accountants and any
other experts named in the Prospectus; the cost of
furnishing to the several Underwriters copies of the
Registration Statement (including appropriate exhibits),
Preliminary Prospectus(es) and the Prospectus, the
agreements and other documents and instruments referred
to above and any amendments or supplements to any of the
foregoing; NASD filing fees; the cost of qualifying or
registering the Shares (or obtaining exemptions from
qualification or registration) under the laws of such
jurisdictions as the Representatives may designate
(including filing fees and fees and disbursements of
Underwriters' counsel in connection with such state
securities or Blue Sky qualifications, registrations and
exemptions) and preparing the preliminary and any final
Blue Sky Memorandum (which cost, filing fees, fees and
disbursements shall not exceed $15,000 without prior
approval of the Company and shall be paid on or prior to
the Closing Date); all fees and expenses in connection
with application for qualification of the Shares for
inclusion for quotation on the Nasdaq National Market;
all fees and expenses in connection with listing the
Shares on AMEX; the Company's share of roadshow expenses;
and all other expenses incurred by the Company in
connection with the performance of its obligations
hereunder.
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<PAGE>
(ii) In addition to its obligations under Section 4(a)(i)
above, the Company agrees to pay the Representatives a
non-accountable expense allowance equal to 1.0% of the
public offering price of the Shares. Such allowance
shall be paid to the Representatives as provided in
Sections 2(c) and 2(d) of this Agreement.
(iii) In addition to its obligations under Section 7(a) of this
Agreement, the Company agrees that, as an interim measure
during the pendency of any claim, action, investigation,
inquiry or other proceeding arising out of or based upon
any loss, claim, damage or liability described in Section
7(a) of this Agreement, it will reimburse or advance to
or for the benefit of the Underwriters, and each of them,
on a monthly basis (or more often, if requested) for all
legal and other expenses incurred in connection with
investigating or defending any such claim, action,
investigation, inquiry or other proceeding,
notwithstanding the absence of a judicial determination
as to the propriety and enforceability of the Company's
obligation to reimburse or advance for the benefit of the
Underwriters for such expenses or the possibility that
such payments might later be held to have been improper
by a court of competent jurisdiction. To the extent that
any portion, or all, of any such interim reimbursement
payments or advances are so held to have been improper,
the Underwriters receiving the same shall promptly return
such amounts to the Company together with interest,
compounded daily, at the prime rate (or other commercial
lending rate for borrowers of the highest credit
standing) announced from time to time by Bank of America,
NT&SA, San Francisco, California (the "Prime Rate"), but
not in excess of the maximum rate permitted by applicable
law. Any such interim reimbursement payments or advances
that are not made to or for the Underwriters within 30
days of a request for reimbursement or for an advance
shall bear interest at the Prime Rate, but not in excess
of the maximum rate permitted by applicable law, from the
date of such request until the date paid.
(b) In addition to their obligations under Section 7(b) of this
Agreement, the Underwriters severally and in proportion to their obligation to
purchase Firm Shares as set forth on Schedule I hereto, agree that, as an
interim measure during the pendency of any claim, action, investigation, inquiry
or other proceeding arising out of or based upon any loss, claim, damage or
liability described in Section 7(b) of this Agreement, they will reimburse or
advance to or for the benefit of the Company on a monthly basis (or more often,
if requested) for all legal and other expenses incurred by the Company in
connection with investigating or defending any such claim, action,
investigation, inquiry or other
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<PAGE>
proceeding, notwithstanding the absence of a judicial determination as to the
propriety or enforceability of the Underwriters' obligation to reimburse or
advance for the benefit of the Company for such expenses and the possibility
that such payments or advances might later be held to have been improper by a
court of competent jurisdiction. To the extent that any portion, or all, of any
such interim reimbursement payments or advances are so held to have been
improper, the Company shall promptly return such amounts to the Underwriters
together with interest, compounded daily, at the Prime Rate, but not in excess
of the maximum rate permitted by applicable law. Any such interim reimbursement
payments or advances that are not made to the Company within 30 days of a
request for reimbursement or for an advance shall bear interest at the Prime
Rate, but not in excess of the maximum rate permitted by applicable law, from
the date of such request until the date paid.
(c) It is agreed that any controversy arising out of the operation of
the interim reimbursement and advance arrangements set forth in Sections
4(a)(iii) and 4(b) above, including the amounts of any requested reimbursement
payments or advance, the method of determining such amounts and the basis on
which such amounts shall be apportioned among the indemnifying parties, shall be
settled by arbitration conducted under the provisions of the Constitution and
Rules of the Board of Governors of the New York Stock Exchange, Inc. or pursuant
to the Code of Arbitration Procedure of the NASD. Any such arbitration must be
commenced by service of a written demand for arbitration or a written notice of
intention to arbitrate, therein electing the arbitration tribunal. If the party
demanding arbitration does not make such designation of an arbitration tribunal
in such demand or notice, then the party responding to the demand or notice is
authorized to do so. Any such arbitration will be limited to the interpretation
and obligations of the parties under the interim reimbursement and advance
provisions contained in Sections 4(a)(iii) and 4(b) above and will not resolve
the ultimate propriety or enforceability of the obligation to indemnify for or
contribute to expenses that is created by the provisions of Section 7 of this
Agreement.
(d) If the sale of the Shares provided for herein is not consummated
because any condition to the obligations of the Underwriters set forth in
Section 5 of this Agreement is not satisfied, or because of any termination
pursuant to Section 8(b) of this Agreement, or because of any refusal, inability
or failure on the part of the Company to perform any covenant or agreement set
forth in this Agreement or to comply with any provision of this Agreement other
than by reason of a default by any of the Underwriters, the Company agrees to
reimburse the Representatives upon demand for, or pay directly, all
out-of-pocket expenses (including fees and disbursements of counsel) that shall
have been incurred by the Representatives in connection with investigating,
preparing to market or marketing the Shares or otherwise in connection with this
Agreement or the offering of the Shares; provided that such accountable expense
reimbursement shall not exceed $150,000.
5. CONDITIONS OF UNDERWRITERS' OBLIGATIONS. The several obligations of
the Underwriters to purchase and pay for the Shares shall be subject, in the
sole discretion of the Representatives, to the accuracy as of the date of
execution of this Agreement, the Closing
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<PAGE>
Date and the date on which the Option Shares are to be purchased, as the case
may be, of the representations and warranties of the Company set forth in this
Agreement, to the accuracy of the statements of the Company and its officers
made in any certificate delivered pursuant to this Agreement, to the performance
by the Company of all of its obligations to be performed under this Agreement at
or prior to the Closing Date or any later date on which Option Shares are to be
purchased, as the case may be, to the satisfaction of all conditions to be
satisfied or performed by the Company at or prior to that date and to the
following additional conditions:
(a) The Registration Statement shall have become effective (or, if a
post-effective amendment is required to be filed pursuant to Rule 430A under the
Act, such post-effective amendment shall become effective and the Company shall
have provided evidence satisfactory to the Representatives of such filing and
effectiveness) not later than 5:00 p.m., New York time, on the date of this
Agreement or at such later date and time as the Representatives may approve in
writing and, at the Closing Date or, with respect to the Option Shares, the date
on which such Option Shares are to be purchased; no stop order suspending the
effectiveness of the Registration Statement or any qualification, registration
or exemption from qualification or registration for the sale of the Shares in
any jurisdiction shall have been issued and no proceedings for that purpose
shall have been instituted or threatened; and any request for additional
information on the part of the Commission shall have been complied with to the
reasonable satisfaction of the Representatives and their counsel.
(b) The Representatives shall have received from Brobeck, Phleger &
Harrison LLP, counsel for the Underwriters, an opinion, dated the Closing Date,
with respect to the issuance and sale of the Shares and such other related
matters as the Representatives may reasonably require, and the Company shall
have furnished such counsel with all documents which they may request for the
purpose of enabling them to pass upon such matters.
(c) The Representatives shall have received on the Closing Date and
on any later date on which Option Shares are purchased, as the case may be, the
opinion of Hartzog Conger & Cason, counsel for the Company, addressed to the
Underwriters and dated the Closing Date or such later date, with reproduced
copies or signed counterparts thereof for each of the Underwriters, covering the
matters set forth in Annex A to this Agreement and in form and substance
satisfactory to the Representatives.
(d) The Representatives shall be satisfied that there has not been
any material change in the market for securities in general or in political,
financial or economic conditions as to render it impracticable in the
Representatives' sole judgment to make a public offering of the Shares, or a
material adverse change in market levels for securities in general (or those of
environmental companies in particular) or financial or economic conditions which
render it inadvisable to proceed.
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<PAGE>
(e) The Representatives shall have received on the Closing Date and
on any later date on which Option Shares are purchased a certificate, dated the
Closing Date or such later date, as the case may be, and signed by the President
and the Chief Financial Officer of the Company stating that:
(i) the representations and warranties of the Company set
forth in Section 1 of this Agreement are true and correct
with the same force and effect as if expressly made at
and as of the Closing Date or such later date, and the
Company has complied with all the agreements and
satisfied all the conditions on its part to be performed
or satisfied at or prior to the Closing Date or such
later date;
(ii) no stop order suspending the effectiveness of the
Registration Statement has been issued, and no
proceedings for that purpose have been instituted or are
pending or are threatened under the Securities Act; and
(iii) (A) the respective signers of the certificate have
carefully examined the Registration Statement in the form
in which it originally became effective and the
Prospectus and any supplements or amendments to any of
them and, as of the Effective Date, the statements made
in the Registration Statement and the Prospectus were
true and correct in all material respects and neither the
Registration Statement nor the Prospectus omitted to
state any material fact required to be stated therein or
necessary in order to make the statements therein not
misleading, (B) since the Effective Date, no event has
occurred that should have been set forth in an amendment
to the Registration Statement or a supplement or
amendment to the Prospectus that has not been set forth
in such an amendment or supplement, (C) since the
respective dates as of which information is given in the
Registration Statement in the form in which it originally
became effective and the Prospectus contained therein,
there has not been any Consolidated Material Adverse
Effect or any development involving a prospective
Consolidated Material Adverse Effect, whether or not
arising from transactions in the ordinary course of
business, and, since such dates, except in the ordinary
course of business, neither the Company or any of its
direct or indirect subsidiaries has entered into any
material transaction not referred to in the Registration
Statement in the form in which it originally became
effective and the Prospectus contained therein, (D) there
are not any pending or known threatened legal proceedings
to which the
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<PAGE>
Company or any of its direct or indirect subsidiaries is
a party or of which property of the Company or any of its
direct or indirect subsidiaries is the subject which are
material and which are not disclosed in the Registration
Statement and the Prospectus and (E) there are not any
license agreements, contracts, leases or other documents
that are required to be filed as exhibits to the
Registration Statement that have not been filed as
required.
(f) The Representatives shall have received from Arthur Andersen LLP
a letter or letters, addressed to the Underwriters and dated the Closing Date
and any later date on which Option Shares are purchased, confirming that they
are independent accountants with respect to the Company within the meaning of
the Securities Act and the applicable Rules and Regulations thereunder and,
based upon the procedures described in their letter, referred to below,
delivered to the Representatives concurrently with the execution of this
Agreement (the "Original Letter"), but carried out to a date not more than five
business days prior to the Closing Date or such later date on which Option
Shares are purchased, (i) confirming, to the extent true, that the statements
and conclusions set forth in the Original Letter are accurate as of the Closing
Date or such later date, as the case may be, and (ii) setting forth any
revisions and additions to the statements and conclusions set forth in the
Original Letter that are necessary to reflect any changes in the facts described
in the Original Letter since the date of the Original Letter or to reflect the
availability of more recent financial statements, data or information. Such
letters shall not disclose any change, or any development involving a
prospective change, in or affecting the business, properties or condition
(financial or otherwise), results of operations or prospects of the Company or
any of its direct or indirect subsidiaries which, in the Representatives' sole
judgment, makes it impractical or inadvisable to proceed with the public
offering of the Shares or the purchase of the Option Shares as contemplated by
the Prospectus (or, if the Prospectus is not in existence, the most recent
Preliminary Prospectus). In addition, the Representatives shall have received
from Arthur Andersen LLP, on or prior to the Closing Date, a letter addressed to
the Company and made available to the Representatives for the use of the
Underwriters stating that their review of the Company's system of internal
controls, to the extent they deemed necessary in establishing the scope of their
examination of the Company's consolidated financial statements as of December
31, 1996 or in delivering their Original Letter, did not disclose any weaknesses
in internal controls that they considered to be a material weaknesses.
(g) Prior to the Closing Date, the Shares shall have been listed on
AMEX subject to official notice of issuance.
(h) On or prior to the Closing Date, you shall have received from all
Material Holders executed agreements covering the matters described in
Section 1(s) of this Agreement.
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<PAGE>
(i) On or prior to the Closing Date, the Company shall have entered
into the Warrant Agreement, substantially in the form filed as Exhibit 10.33 to
the Registration Statement; and on the Closing Date, concurrently with the
purchase and sale of the Firm Shares pursuant to this Agreement, the Company
shall have issued, sold and delivered the Warrants to the Representatives.
(j) The Company shall have furnished to the Representatives such
further certificates and documents as the Representatives shall reasonably
request (including certificates of officers of the Company), as to the accuracy
of the representations and warranties of the Company set forth in this
Agreement, the performance by the Company of its obligations under this
Agreement and the other conditions concurrent and precedent to the obligations
of the Underwriters under this Agreement.
All the agreements, opinions, certificates and letters mentioned above
or elsewhere in this Agreement will be in compliance with the provisions of this
Agreement only if they are reasonably satisfactory to the Representatives. The
Company will furnish the Representatives with such number of conformed copies of
such opinions, certificates, letters and documents as the Representatives shall
reasonably request.
If any of the conditions specified in this Section 5 shall not have
been fulfilled in all material respects when and as provided in this Agreement,
time being of the essence, or if any of the opinions and certificates mentioned
above or elsewhere in this Agreement shall not be in all material respects
reasonably satisfactory in form and substance to the Representatives and
Underwriters' counsel, this Agreement and all obligations of the Underwriters
hereunder may be canceled by the Representatives at, or at any time prior to,
the Closing Date or (with respect to the Option Shares) prior to the date upon
which the Option Shares are to be purchased, as the case may be. Notice of such
cancellation shall be given to the Company in writing or by telephone or
telecopy confirmed in writing. Any such termination shall be without liability
of the Company to the Underwriters (except as provided in Section 4 or Section 7
of this Agreement) and without liability of the Underwriters to the Company
(except to the extent provided in Section 7 of this Agreement).
6. CONDITIONS OF THE OBLIGATIONS OF THE COMPANY. The obligations of the
Company to sell and deliver the Shares required to be delivered as and when
specified in this Agreement shall be subject to the condition that, at the
Closing Date or (with respect to the Option Shares) the date upon which the
Option Shares are to be purchased, no stop order suspending the effectiveness of
the Registration Statement shall be in effect and no proceedings therefor shall
be pending or threatened by the Commission.
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<PAGE>
7. INDEMNIFICATION AND CONTRIBUTION.
(a) The Company agrees to indemnify and hold harmless each
Underwriter and each person (including each partner or officer thereof) who
controls any Underwriter within the meaning of Section 15 of the Securities Act
from and against any and all losses, claims, damages or liabilities, joint or
several, to which such indemnified parties or any of them may become subject
under the Securities Act, the Exchange Act or other federal or state statute,
law or regulation, at common law or otherwise, specifically including but not
limited to losses, claims, damages or liabilities (or actions in respect
thereof) related to negligence on the part of any Underwriter, and the Company
agrees to reimburse each such Underwriter and controlling person for any legal
or other expenses (including, except as otherwise provided below, settlement
expenses and fees and disbursements of counsel) incurred by the respective
indemnified parties in connection with defending against any such losses,
claims, damages or liabilities or in connection with any investigation or
inquiry of, or other proceeding that may be brought against, the respective
indemnified parties, in each case insofar as such losses, claims, damages or
liabilities (or actions in respect thereof) arise out of or are based upon, in
whole or in part, (i) any breach of any representation, warranty, covenant or
agreement of the Company in this Agreement, (ii) any untrue statement or alleged
untrue statement of a material fact contained in the Registration Statement in
the form originally filed or in any amendment thereto (including the Prospectus
as part thereof) or any post-effective amendment thereto, or the omission or
alleged omission to state therein a material fact required to be stated therein
or necessary to make the statements therein, in light of the circumstances under
which they were made, not misleading or (iii) any untrue statement or alleged
untrue statement of a material fact contained in any Preliminary Prospectus or
the Prospectus (as amended or as supplemented if the Company shall have filed
with the Commission any amendment thereof or supplement thereto) or the omission
or alleged omission to state therein a material fact required to be stated
therein or necessary in order to make the statements therein, in the light of
the circumstances under which they were made, not misleading or (iv) any untrue
statement or alleged untrue statement of a material fact contained in any
application or other document, or any amendment or supplement thereto, executed
by the Company or based upon written information furnished by or on behalf of
the Company filed in any jurisdiction in order to qualify or register the Shares
under the securities or Blue Sky laws thereof or to obtain an exemption from
such qualification or registration or filed with the Commission or any
securities association, the Nasdaq National Market, or any securities exchange,
or the omission or alleged omission to state therein a material fact required to
be stated therein or necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading; provided, however,
that (1) the indemnity agreements of the Company contained in this Section 7(a)
shall not apply to any such losses, claims, damages, liabilities or expenses if
such statement or omission was made in reliance upon and in conformity with
information furnished in writing to the Company by or on behalf of any
Underwriter through the Representatives specifically for use in the Registration
Statement, any Preliminary Prospectus or the Prospectus or any such amendment
thereof or supplement thereto and (2) the indemnity agreement contained in this
Section 7(a) with respect to any Preliminary Prospectus shall not
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<PAGE>
inure to the benefit of any Underwriter from whom the person asserting any such
losses, claims, damages, liabilities or expenses purchased the Shares that are
the subject thereof (or to the benefit of any person controlling such
Underwriter) if the Company can demonstrate that at or prior to the written
confirmation of the sale of such Shares a copy of the Prospectus (or the
Prospectus as amended or supplemented) (excluding the documents incorporated
therein by reference) was not sent or delivered to such person and the untrue
statement or omission of a material fact contained in such Preliminary
Prospectus was corrected in the Prospectus (or the Prospectus as amended or
supplemented), unless the failure is the result of noncompliance by the Company
with Section 3 of this Agreement. The indemnity agreements of the Company
contained in this Section 7(a) and the representations and warranties of the
Company contained in Section 1 of this Agreement shall remain operative and in
full force and effect regardless of any investigation made by or on behalf of
any indemnified party and shall survive the delivery of and payment for the
Shares. This indemnity agreement shall be in addition to any liabilities which
the Company may otherwise have.
(b) Each Underwriter, severally and not jointly, agrees to indemnify
and hold harmless the Company, each of its officers who signs the Registration
Statement, each of its directors, each other Underwriter and each person
(including each partner or officer thereof) who controls the Company or any such
other Underwriter within the meaning of Section 15 of the Securities Act from
and against any and all losses, claims, damages or liabilities, joint or
several, to which such indemnified parties or any of them may become subject
under the Securities Act, the Exchange Act, or other federal or state statute,
law or regulation or at common law or otherwise and to reimburse each of them
for any legal or other expenses (including, except as otherwise hereinafter
provided, settlement expenses and fees and disbursements of counsel) incurred by
the respective indemnified parties in connection with defending against any such
losses, claims, damages or liabilities or in connection with any investigation
or inquiry of, or other proceeding that may be brought against, the respective
indemnified parties, in each case arising out of or based upon (i) any breach of
any representation, warranty, covenant or agreement of the indemnifying
Underwriter in this Agreement, (ii) any untrue statement or alleged untrue
statement of a material fact contained in the Registration Statement (including
the Prospectus as part thereof) or any post-effective amendment thereto, or the
omission or alleged omission to state therein a material fact required to be
stated therein or necessary to make the statements therein, in the light of the
circumstances under which they were made, not misleading or (iii) any untrue
statement or alleged untrue statement of a material fact contained in any
Preliminary Prospectus or the Prospectus (as amended or as supplemented if the
Company shall have filed with the Commission any amendment thereof or supplement
thereto) or the omission or alleged omission to state therein a material fact
required to be stated therein or necessary in order to make the statements
therein, in the light of the circumstances under which they were made, not
misleading, but in each case under clauses (ii) and (iii) above, as the case may
be, only if such statement or omission was made in reliance upon and in
conformity with information furnished in writing to the Company by or on behalf
of such indemnifying Underwriter through the Representatives specifically for
use in the Registration
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<PAGE>
Statement, in any Preliminary Prospectus or the Prospectus or any such amendment
thereof or supplement thereto. The Company acknowledges and agrees that the
matters described in Section 2(g) of this Agreement constitute the only
information furnished in writing by or on behalf of the several Underwriters for
inclusion in the Registration Statement, any Preliminary Prospectus or the
Prospectus. The indemnity agreement of each Underwriter contained in this
Section 7(b) shall remain operative and in full force and effect regardless of
any investigation made by or on behalf of any indemnified party and shall
survive the delivery of and payment for the Shares. This indemnity agreement
shall be in addition to any liabilities which each Underwriter may otherwise
have.
(c) Each person or entity indemnified under the provisions of
Sections 7(a) and 7(b) above agrees that, upon the service of a summons or other
initial legal process upon it in any action or suit instituted against it or
upon its receipt of written notification of the commencement of any
investigation or inquiry of, or proceeding against, it in respect of which
indemnity may be sought on account of any indemnity agreement contained in such
Sections, it will, if a claim in respect thereunder is to be made against the
indemnifying party or parties under this Section 7, promptly give written notice
(the "Notice") of such service or notification to the party or parties from whom
indemnification may be sought hereunder. No indemnification provided for in
Sections 7(a) or 7(b) above shall be available to any person who fails to so
give the Notice if the party to whom such Notice was not given was unaware of
the action, suit, investigation, inquiry or proceeding to which the Notice would
have related, but only to the extent such party was materially prejudiced by the
failure to receive the Notice, and the omission so to notify such indemnifying
party or parties shall not relieve such indemnifying party or parties from any
liability which it or they may have to the indemnified party for contribution or
otherwise than on account of Sections 7(a) and 7(b). Any indemnifying party
shall be entitled at its own expense to participate in the defense of any
action, suit or proceeding against, or investigation or inquiry of, an
indemnified party. Any indemnifying party shall be entitled, if it so elects
within a reasonable time after receipt of the Notice by giving written notice
(the "Notice of Defense") to the indemnified party, to assume (alone or in
conjunction with any other indemnifying party or parties) the entire defense of
such action, suit, investigation, inquiry or proceeding, in which event such
defense shall be conducted, at the expense of the indemnifying party or parties,
by counsel chosen by such indemnifying party or parties and reasonably
satisfactory to the indemnified party or parties; provided, however, that (i) if
the indemnified party or parties reasonably determine that there may be a
conflict between the positions of the indemnifying party or parties and of the
indemnified party or parties in conducting the defense of such action, suit,
investigation, inquiry or proceeding or that there may be legal defenses or
rights available to such indemnified party or parties different from or in
addition to those available to the indemnifying party or parties, then separate
counsel for and selected by the indemnified party or parties shall be entitled
to conduct, at the expense of the indemnifying parties, the defense of the
indemnified parties to the extent determined by such counsel to be necessary to
protect the interests of the indemnified party or parties, and (ii) provided,
further, that the indemnifying party shall not be liable for the fees and
expenses of more than one separate counsel, reasonably approved by the
indemnifying party, for all of the indemnified parties,
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<PAGE>
plus, if applicable, local counsel in each jurisdiction. In addition, in any
event, the indemnified party or parties shall be entitled to have counsel
selected by such indemnified party or parties participate in, but not conduct,
the defense. If, within a reasonable time after receipt of the Notice, an
indemnifying party gives a Notice of Defense and, unless separate counsel is to
be chosen by the indemnified party or parties as provided above, the counsel
chosen by the indemnifying party or parties is reasonably satisfactory to the
indemnified party or parties, the indemnifying party or parties will not be
liable under Sections 7(a) through 7(c) for any legal or other expenses
subsequently incurred by the indemnified party or parties in connection with the
defense of the action, suit, investigation, inquiry or proceeding, except that
(A) the indemnifying party or parties shall bear and pay the legal and other
expenses incurred in connection with the conduct of the defense as referred to
in clause (i) of the proviso to the preceding sentence and (B) the indemnifying
party or parties shall bear and pay such other expenses as it or they have
authorized to be incurred by the indemnified party or parties. If, within a
reasonable time after receipt of the Notice, no Notice of Defense has been
given, the indemnifying party or parties shall be responsible for any legal or
other expenses incurred by the indemnified party or parties in connection with
the defense of the action, suit, investigation, inquiry or proceeding.
(d) In order to provide for just and equitable contribution in any
action in which a claim for indemnification is made pursuant to this Section 7
but is judicially determined (by the entry of a final judgment or decree by a
court of competent jurisdiction and the expiration of time to appeal or the
denial of the last right to appeal) that such indemnification may not be
enforced in such case notwithstanding the fact that this Section 7 provides for
indemnification in such case, each indemnifying party shall contribute to the
amount paid or payable by such indemnified party as a result of the losses,
claims, damages, liabilities and expenses referred to in Section 7(a) or 7(b)
above (i) in such proportion as is appropriate to reflect the relative benefits
received by each indemnifying party from the offering of the Shares or (ii) if
the allocation provided by clause (i) above is not permitted by applicable law,
in such proportion as is appropriate to reflect not only the relative benefits
referred to in clause (i) above but also the relative fault of each party in
connection with the statements or omissions that resulted in such losses,
claims, damages or liabilities, or actions in respect thereof, as well as any
other relevant equitable considerations. The relative benefits received by the
Company and the Underwriters shall be deemed to be in the same respective
proportions as the total proceeds from the offering of the Shares, net of the
underwriting discounts, received by the Company and the total underwriting
discount retained by the Underwriters bear to the aggregate public offering
price of the Shares. Relative fault shall be determined by reference to, among
other things, whether the untrue or alleged untrue statement of a material fact
or the omission or alleged omission to state a material fact relates to
information supplied by a party and the party's relative intent, knowledge,
access to information and opportunity to correct or prevent such untrue
statement or omission.
The parties agree that it would not be just and equitable if
contribution pursuant to this Section 7(d) were to be determined by pro rata
allocation (even if the Underwriters were treated as one entity for such
purpose) or by any other method of
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allocation which does not take into account the equitable considerations
referred to in the first sentence of this Section 7(d) and to the considerations
referred to in the third sentence of the first paragraph of this Section 7(d).
The amount paid by an indemnified party as a result of the losses, claims,
damages or liabilities, or actions in respect thereof, referred to in the first
sentence of this Section 7(d) shall be deemed to include any legal or other
expenses reasonably incurred by such indemnified party in connection with
investigating, preparing to defend or defending against any action or claim
which is the subject of this Section 7(d). Notwithstanding the provisions of
this Section 7(d), no Underwriter shall be required to contribute any amount in
excess of the underwriting discount applicable to the Shares purchased by that
Underwriter. For purposes of this Section 7(d), each person who controls an
Underwriter within the meaning of the Securities Act shall have the same rights
to contribution as such Underwriter, and each person who controls the Company
within the meaning of the Securities Act, each officer of the Company who signed
the Registration Statement and each director of the Company shall have the same
rights to contribution as the Company, subject in each case to the immediately
preceding and immediately following sentences. No person guilty of fraudulent
misrepresentation (within the meaning of Section 11(f) of the Securities Act)
shall be entitled to contribution from any person who was not guilty of such
fraudulent misrepresentation. The Underwriters' obligations to contribute in
this Section 7(d) are several in proportion to their respective underwriting
obligations and not joint.
Each party or other entity entitled to contribution agrees that upon
the service of a summons or other initial legal process upon it in any action
instituted against it in respect of which contribution may be sought, it will
promptly give written notice of such service to the party or parties from whom
contribution may be sought, but the omission so to notify such party or parties
of any such service shall not relieve the party from whom contribution may be
sought from any obligation it may have hereunder or otherwise (except as
specifically provided in Section 7(c) above). This Section 7(d) shall not be
operative as to any Underwriter to the extent that the Company is entitled to
receive or has received indemnity under this Section 7.
(e) The Company shall not, without the prior written consent of each
Underwriter, settle or compromise or consent to the entry of any judgment in any
pending or threatened claim, action, suit or proceeding in respect of which
indemnification or contribution may be sought hereunder (whether or not such
Underwriter or any person who controls such Underwriter within the meaning of
Section 15 of the Securities Act is a party to such claim, action, suit or
proceeding) unless such settlement, compromise or consent includes an
unconditional release of each such Underwriter and each such controlling person
from all liability arising out of such claim, action, suit or proceeding.
(f) No Underwriter shall, without the consent of the Company, settle
or compromise or consent to the entry of any judgment in any pending or
threatened claim, action, suit or proceeding in respect of which indemnification
or contribution may be sought hereunder (whether or not the Company is a party
to such claim, action, suit or proceeding),
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<PAGE>
which consent shall not be unreasonably withheld, unless such settlement,
compromise or consent includes an unconditional release of the Company, each of
its officers who signed the Registration Statement, each of its directors and
each person who controls the Company within the meaning of Section 15 of the
Securities Act, from all liability arising out of such claim, action, suit or
proceeding.
(g) The parties to this Agreement hereby acknowledge that they are
sophisticated business persons who were represented by counsel during the
negotiations regarding the provisions of this Agreement, including, without
limitation, the provisions of Sections 4(a)(iii), 4(b) and 4(c) and this Section
7 of this Agreement and that they are fully informed regarding all such
provisions. They further acknowledge that the provisions of Sections 4(a)(iii),
4(b) and 4(c) and this Section 7 of this Agreement fairly allocate the risks in
light of the ability of the parties to investigate the Company and its business
in order to assure that adequate disclosure is made in the Registration
Statement, each Preliminary Prospectus and the Prospectus as required by the
Securities Act, the Rules and Regulations, the Exchange Act and the rules and
regulations of the Commission under the Exchange Act. The parties are advised
that federal or state policy, as interpreted by the courts in certain
jurisdictions, may be contrary to certain provisions of Sections 4(a)(iii), 4(b)
and 4(c) and this Section 7 of this Agreement and, to the extent permitted by
law, the parties hereto hereby expressly waive and relinquish any right or
ability to assert such public policy as a defense to a claim under Sections
4(a)(iii), 4(b) or 4(c) or this Section 7 of this Agreement and further agree
not to attempt to assert any such defense.
(h) SUBSTITUTION OF UNDERWRITERS. If for any reason one or more of
the Underwriters fails or refuses (otherwise than for a reason sufficient to
justify the termination of this Agreement under the provisions of Section 5 or
Section 9 of this Agreement) to purchase and pay for the number of Firm Shares
agreed to be purchased by such Underwriter or Underwriters, the Company shall
immediately give notice thereof to the Representatives and the non-defaulting
Underwriters shall have the right within 24 hours after the receipt by the
Representatives of such notice to purchase, or procure one or more other
Underwriters to purchase, in such proportions as may be agreed upon among the
Representatives and such purchasing Underwriter or Underwriters and upon the
terms set forth herein, all or any part of the Firm Shares that such defaulting
Underwriter or Underwriters agreed to purchase. If the non-defaulting
Underwriters fail to make such arrangements with respect to all such Shares, the
number of Firm Shares that each non-defaulting Underwriter is otherwise
obligated to purchase under this Agreement shall be automatically increased on a
pro rata basis to absorb the remaining Shares that the defaulting Underwriter or
Underwriters agreed to purchase; provided, however, that the non-defaulting
Underwriters shall not be obligated to purchase the Shares that the defaulting
Underwriter or Underwriters agreed to purchase if the aggregate number of such
Shares exceeds 10% of the total number of Firm Shares that all Underwriters
agreed to purchase under this Agreement. If the total number of Firm Shares
that the defaulting Underwriter or Underwriters agreed to purchase shall not be
purchased or absorbed in accordance with the two preceding sentences, the
Company shall have the right, within 24 hours next succeeding the first 24-hour
period above referred to, to
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<PAGE>
make arrangements with other underwriters or purchasers satisfactory to the
Representatives for purchase of such Shares on the terms set forth in this
Agreement. In any such case, either the Representatives or the Company shall
have the right to postpone the Closing Date determined as provided in Section
2(c) of this Agreement for not more than seven business days after the date
originally fixed as the Closing Date pursuant to said Section 2(c) in order that
any necessary changes in the Registration Statement, the Prospectus or any other
documents or arrangements may be made.
If neither the non-defaulting Underwriters nor the Company makes
arrangements within the time periods provided in the first three sentences of
the first paragraph of this Section 7(h) for the purchase of all the Firm Shares
that the defaulting Underwriter or Underwriters agreed to purchase hereunder,
this Agreement shall be terminated without further act or deed and without any
liability on the part of the Company to any non-defaulting Underwriter (except
as provided in Section 4 or Section 7 of this Agreement) and without any
liability on the part of any non-defaulting Underwriter to the Company (except
to the extent provided in Section 7 of this Agreement). Nothing in this Section
7(h), and no action taken hereunder, shall relieve any defaulting Underwriter
from liability, if any, to the Company or any non-defaulting Underwriter for
damages occasioned by its default under this Agreement. The term "Underwriter"
in this Agreement shall include any persons substituted for an Underwriter under
this Section 7(h).
8. EFFECTIVE DATE OF AGREEMENT AND TERMINATION.
(a) If the Registration Statement has not been declared effective
prior to the date of this Agreement, this Agreement shall become effective at
such time, after notification of the effectiveness of the Registration Statement
has been released by the Commission, as the Representatives and the Company
shall agree upon the public offering price and the purchase price of the Shares.
If the public offering price and the purchase price of the Shares shall not have
been determined prior to 5:00 p.m., New York time, on the fifth full business
day after the Registration Statement has become effective, this Agreement shall
thereupon terminate without liability on the part of the Company to the
Underwriters (except as provided in Section 4 or Section 7 of this Agreement) or
the Underwriters to the Company (except as set forth in Section 7 of this
Agreement). By giving notice before the time this Agreement becomes effective,
the Representatives may prevent this Agreement from becoming effective without
liability of any party to the other party, except that the Company shall remain
obligated to pay costs and expenses to the extent provided in Section 4 and
Section 7 of this Agreement. If the Registration Statement has been declared
effective prior to the date of this Agreement, this Agreement shall become
effective upon execution and delivery by the Representatives and the Company.
(b) This Agreement may be terminated by the Representatives in their
absolute discretion by giving written notice to the Company at any time on or
prior to the Closing Date or, with respect to the purchase of the Option Shares,
on or prior to any later date on which the Option Shares are to be purchased, as
the case may be, if prior to such
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<PAGE>
time any of the following has occurred or, in the Representatives' opinion, is
likely to occur: (i) after the respective dates as of which information is given
in the Registration Statement and the Prospectus, any material adverse change or
development involving a prospective adverse change in or affecting particularly
the business, properties, condition (financial or otherwise), results of
operations or prospects of the Company and its direct and indirect subsidiaries,
taken as a whole, whether or not arising in the ordinary course of business,
occurs which would, in the Representatives' sole judgment, make the offering or
the delivery of the Shares impracticable or inadvisable; or (ii) if there shall
have been the engagement in hostilities or an escalation of major hostilities by
the United States or the declaration of war or a national emergency by the
United States on or after the date hereof, or any outbreak of hostilities or
other national or international calamity or crisis or change in economic or
political conditions, if the effect of such outbreak, calamity, crisis or change
in economic or political conditions on the financial markets of the United
States would, in the Representatives' sole judgment, make the offering or
delivery of the Shares impracticable or inadvisable; or (iii) if there shall
have been suspension of trading in securities generally or a material adverse
decline in value of securities generally on the New York Stock Exchange, the
American Stock Exchange, the Nasdaq National Market, or limitations on prices
(other than limitations on hours or numbers of days of trading) for securities
on either such exchange or system; or (iv) if there shall have been the
enactment, publication, decree or other promulgation of any federal or state
statute, regulation, rule or order of, or commencement of any proceeding or
investigation by, any court, legislative body, agency or other governmental
authority which in the Representatives' sole judgment has or may have a
Consolidated Material Adverse Effect; or (v) if there shall have been the
declaration of a banking moratorium by federal, New York, California or Texas
state authorities; or (vi) if there shall have been the taking of any action by
any federal, state or local government or agency in respect of its monetary or
fiscal affairs which in the Representatives' sole judgment has a material
adverse effect on the securities markets in the United States; or (vii) existing
international monetary conditions shall have undergone a material change which,
in your sole judgment, makes the offering or delivery of the Shares
impracticable or inadvisable. If this Agreement shall be terminated pursuant to
this Section 8, there shall be no liability of the Company to the Underwriters
(except pursuant to Section 4 and Section 7 of this Agreement) and no liability
of the Underwriters to the Company (except to the extent provided
in Section 7 of this Agreement).
9. NOTICES. Except as otherwise provided herein, all communications
hereunder shall be in writing and, if to the Underwriters, shall be mailed,
telecopied or delivered to Van Kasper & Company, 600 California Street, Suite
1700, San Francisco, California 90024, Attention: Syndicate Manager
(telecopier: (415) 397-2744); and if to the Company, shall be mailed,
telecopied or delivered to it at its office at U S Liquids Inc., 411 N. Sam
Houston Parkway East, Ste. 400, Houston, Texas 77060-3545 (telecopier: (281)
272-4545) Attention: President. All notices given by telecopy shall be
promptly confirmed by letter.
10. PERSONS ENTITLED TO THE BENEFIT OF THIS AGREEMENT. This Agreement
shall inure to the benefit of the Company and the several Underwriters and, with
respect to the
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<PAGE>
provisions of Section 4 and Section 7 of this Agreement, the several parties (in
addition to the Company and the several Underwriters) indemnified under the
provisions of Section 4 and Section 7, and their respective personal
representatives, successors and assigns. Nothing in this Agreement is intended
or shall be construed to give to any other person, firm or corporation any legal
or equitable remedy or claim under or in respect of this Agreement or any
provision contained herein. The term "successors and assigns" as herein used
shall not include any purchaser, as such purchaser, of any of the Shares from
the several Underwriters.
11. GENERAL. Notwithstanding any provision of this Agreement to the
contrary, the reimbursement, indemnification and contribution agreements
contained in this Agreement and the representations, warranties, covenants and
agreements in this Agreement shall remain in full force and effect regardless of
(a) any termination of this Agreement, (b) any investigation made by or on
behalf of any Underwriter or controlling person thereof or by or on behalf of
the Company or their respective directors or officers and (c) delivery and
payment for the Shares under this Agreement; provided, however, that if this
Agreement is terminated prior to the Closing Date, the provisions of
Sections 3(f)-3(n) of this Agreement shall be of no further force or effect.
This Agreement may be executed in two or more counterparts, each of which
shall constitute an original, but all of which together shall constitute one and
the same instrument, and may be delivered by facsimile transmission.
THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE
INTERNAL LAWS, AND NOT THE LAWS PERTAINING TO CHOICE OR CONFLICT OF LAWS, OF THE
STATE OF CALIFORNIA.
12. AUTHORITY OF THE REPRESENTATIVES. In connection with this Agreement,
the Representatives will act for and on behalf of the several Underwriters, and
any action taken under this Agreement by the Representatives, as representatives
of the several Underwriters, will be binding on all the Underwriters.
If the foregoing correctly sets forth your understanding, please so
indicate by signing in the space provided below for that purpose, whereupon this
letter shall constitute a binding agreement among the Company and the several
Underwriters.
Very truly yours,
U S LIQUIDS INC.
By:
-----------------------------------------
Its:
----------------------------------------
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<PAGE>
The foregoing Agreement is hereby confirmed and accepted as of the date first
above written.
On their own behalf and on behalf of each of
the several Underwriters named in Schedule I
hereto
VAN KASPER & COMPANY
By:
--------------------------------
Authorized Signatory
SANDERS MORRIS MUNDY INC.
By:
--------------------------------
Authorized Signatory
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<PAGE>
SCHEDULE I
UNDERWRITERS
Number of Firm
Underwriters Shares to be Purchased
- ------------ ----------------------
Van Kasper & Company. . . . . . . . . . . . . .
Sanders Morris Mundy Inc. . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . 1,500,000
---------
---------
I-1
<PAGE>
ANNEX A
MATTERS TO BE COVERED IN THE OPINION OF COUNSEL FOR THE COMPANY
(i) Each of the Company, MBO Inc. and US Liquids LP Holding Co.
has been duly organized and is validly existing as a
corporation in good standing under the laws of Delaware; each
of American WasteWater Inc., Mesa Processing, Inc., T&T
Grease Service, Inc., Phoenix Fats & Oils, Inc., South Texas
By-Products, Inc., Imperial Services, Inc., and National
Enviro Waste Company, Inc. has been duly organized and is
validly existing as a corporation in good standing under the
laws of Texas; and US Liquids of La., L.P. has been duly
organized and is validly existing as a limited partnership
under the laws of Delaware;
(ii) Each of the Company and each of its direct and indirect
subsidiaries has the corporate power or partnership power, as
the case may be, to own, lease and operate its properties and
to conduct its business as described in the Prospectus;
(iii) Each of the Company and each of its direct and indirect
subsidiaries is duly qualified to do business as a foreign
corporation (or, in the case of US Liquids of Louisiana,
L.P., as a foreign limited partnership) and is in good
standing in all jurisdictions in the United States, if any,
in which the ownership or leasing of its properties or the
conduct of its business requires such qualification, except
where the failure so to qualify would not have a material
adverse effect on the business, properties, condition
(financial or otherwise), results of operations or prospects
of such entity;
(iv) The authorized, issued and outstanding capital stock of the
Company is as set forth in the Prospectus under the caption
"Capitalization" as of the dates stated therein; the issued
and outstanding shares of capital stock (or other equity
interests) of the Company and each of its direct and indirect
subsidiaries have been duly and validly authorized and
issued, are fully paid and nonassessable and, to the best
knowledge of such counsel, have not been issued in violation
of any preemptive right or other rights to subscribe for or
purchase securities or in violation of any applicable federal
or state securities laws; and the Company directly or
indirectly owns all of the issued and outstanding equity
securities of each of its direct and indirect subsidiaries
and, to such counsel's best knowledge, there are no
outstanding options, warrants or other rights to acquire any
equity securities of any such subsidiary;
A-1
<PAGE>
(v) The Shares will, upon issuance and delivery against payment
therefor in accordance with the terms of the Agreement, be
duly authorized, validly issued, fully paid and nonassessable
and, to the best knowledge of such counsel, will not have
been issued in violation of any preemptive right or other
rights to subscribe for or purchase securities;
(vi) The Company has corporate power and authority to enter into
the Agreement and to issue, sell and deliver the Shares to
the Underwriters and carry out all the other terms and
provisions thereof;
(vii) The Agreement has been duly authorized by all necessary
corporate action on the part of the Company and has been duly
executed and delivered by the Company and, assuming its due
authorization, execution and delivery by the Representatives,
is the valid and binding agreement of the Company,
enforceable against the Company in accordance with its terms,
except insofar as the indemnification and contribution
provisions of the Agreement may be limited by public policy
concerns and except as enforceability may be limited by
bankruptcy, insolvency, reorganization, moratorium or similar
laws affecting creditors' rights generally or by general
equitable principles;
(viii) The Registration Statement has become effective under the
Securities Act and, to the best knowledge of such counsel, no
stop order suspending the effectiveness of the Registration
Statement has been issued and no proceedings for that purpose
have been instituted or are pending or threatened under the
Securities Act;
(ix) The Registration Statement and the Prospectus, and each
amendment or supplement thereto (other than the financial
statements, financial data and supporting schedules included
therein, as to which such counsel need express no opinion),
as of the effective date of the Registration Statement,
complied as to form in all material respects with the
requirements of the Securities Act and the applicable Rules
and Regulations;
(x) The terms and provisions of the capital stock of the Company
conform in all material respects to the description thereof
contained in the Registration Statement and Prospectus, and
the forms of certificates evidencing the Common Stock comply
with Delaware law;
(xi) The information in the Prospectus under the caption "Risk
Factors -- NOW Business Dependent Upon Exemption Under RCRA
and Other Environmental Regulations," "Risk
Factors--Potential Anti-Takeover Effect of Certain Charter
Provisions," "Business--The Nonhazardous
A-2
<PAGE>
Liquid Waste Industry--NCW," "Business--The Nonhazardous
Liquid Waste Industry--NOW," "Business--Regulatory
Background," "Management--Amended and Restated 1996 Stock
Option Plan" and "Description of Securities," to the extent
it constitutes matters of law or legal conclusions, has been
reviewed by such counsel and is correct in all material
respects;
(xii) The description in the Registration Statement and the
Prospectus of the Certificate of Incorporation and bylaws of
the Company and of statutes and contracts are accurate in all
material respects and fairly present in all material respects
the information required to be presented by the Securities
Act and the Rules and Regulations;
(xiii) To the best knowledge of such counsel, there are no
agreements, contracts, licenses, leases or documents of a
character required to be described or referred to in the
Registration Statement or Prospectus or to be filed as an
exhibit to the Registration Statement that are not described
or referred to therein and filed as required;
(xiv) The execution and delivery of the Agreement and the Warrant
Agreement do not, and the Company's performance of the
Agreement and the Warrant Agreement and the consummation of
the transactions contemplated by each of them will not,
conflict with, violate or result in the breach of or a
default (including without limitation with the giving of
notice, the passage of time or otherwise) under any of the
terms and provisions of the Company's Certificate of
Incorporation or Bylaws or any contract, indenture, mortgage,
deed of trust, loan agreement, lease, license, joint venture
or, without limitation, other agreement or instrument known
to such counsel to which the Company or any of its direct or
indirect subsidiaries is a party or by which any of its or
their properties are bound or any law, ordinance, rule or
regulation or, to the best knowledge of such counsel, any
order, writ, injunction, judgment or decree of any
governmental agency or body or of any court or arbitration
tribunal having jurisdiction over the Company or any of its
direct or indirect subsidiaries or over any of its or their
properties; provided, however, that no opinion need be
rendered concerning state securities or Blue Sky laws;
(xv) No authorization, approval or consent or other order of any
governmental authority or agency is necessary in connection
with the consummation of the transactions contemplated by the
Agreement or the Warrant Agreement, except such as have been
obtained under the Securities Act, are necessary under the
Securities Act in connection with the registration for resale
of the Warrant Shares or as may be
A-3
<PAGE>
required under state securities or Blue Sky laws in
connection with the purchase and the distribution of the
Shares by the Underwriters or the registration and sale of
the Warrant Shares;
(xvi) To the best knowledge of such counsel, there are no legal or
governmental proceedings pending or threatened against the
Company or any of its direct or indirect subsidiaries of a
character which are required to be disclosed in the
Registration Statement or the Prospectus by the Securities
Act or the applicable Rules and Regulations, other than those
described therein;
(xvii) To the best knowledge of such counsel, neither the Company or
any of its direct or indirect subsidiaries is presently in
breach of, or in default under, any bond, debenture, note or
other evidence of indebtedness or any contract, indenture,
mortgage, deed of trust, loan agreement, lease, license or,
without limitation, other agreement or instrument to which
the Company or any of its direct or indirect subsidiaries is
a party or by which any of its or their properties are bound
which is material to the business, properties, condition
(financial or otherwise), prospects or results of operations
or prospects of such entity;
(xviii) To the best knowledge of such counsel, except as set forth in
the Registration Statement and Prospectus, no holders of
Common Stock or, except as is provided in the Warrant
Agreement, other securities of the Company have unexercised
registration rights with respect to any securities of the
Company;
(xix) The Warrant Agreement has been duly authorized by all
necessary corporate action on the part of the Company and has
been duly executed and delivered by the Company and, assuming
due authorization, execution and delivery by the
Representatives, is the valid and binding agreement of the
Company, enforceable against the Company in accordance with
its terms, except insofar as the indemnification and
contribution provisions of the Warrant Agreement may be
limited by public policy concerns and except as
enforceability may be limited by bankruptcy, insolvency,
reorganization, moratorium or similar laws affecting
creditors' rights generally or by general equitable
principles;
(xx) The Warrants have been duly and validly authorized and
constitute valid and binding obligations of the Company
enforceable in accordance with their terms (except as
enforceability may be limited by bankruptcy, insolvency,
reorganization, moratorium or similar laws affecting
creditors' rights generally or by general equitable
principles);
A-4
<PAGE>
the Warrant Shares have been duly and validly reserved and
authorized for issuance upon exercise of the Warrants against
payment therefor as provided in the Warrant Agreement
(including, as provided in the Warrant Agreement, by
surrender of Warrants) and, when so issued, will be validly
issued, fully paid and nonassessable; and to the best
knowledge of such counsel no stockholder has any preemptive
rights or other rights to subscribe for or purchase with
respect to the Warrants or the Warrant Shares;
In addition, such counsel shall state that such counsel has participated in
conferences with officers and other representatives of the Company, the
independent public accountants of the Company, the Representatives and counsel
to the Underwriters, at which conferences the contents of the Registration
Statement and the Prospectus and related matters were discussed and, although
they have not independently verified the accuracy, completeness or fairness of
the statements contained in the Registration Statement or the Prospectus,
nothing has come to the attention of such counsel that caused them to believe
that, at the time the Registration Statement became effective, the Registration
Statement (except as to financial statements, financial data and supporting
schedules contained therein, as to which such counsel need express no opinion)
contained any untrue statement of a material fact or omitted to state a material
fact required to be stated therein or necessary to make the statements therein
not misleading, or at the Closing Date or any later date on which the Option
Shares are to be purchased, as the case may be, the Prospectus contained any
untrue statement of a material fact or omitted to state a material fact required
to be stated therein or necessary to make the statements therein, in light of
the circumstances under which they were made, not misleading.
A-5
<PAGE>
August 19, 1997
U S Liquids Inc.
411 N. Sam Houston Parkway East, Suite 400
Houston, Texas 77060-3545
Gentlemen:
We have acted as counsel to U S Liquids Inc., a Delaware corporation
(the "Company"), in connection with the registration by the Company under the
Securities Act of 1933, as amended (the "Securities Act"), of the sale of up
to 1,725,000 shares of Common Stock, par value $.01 per share (the "Shares"),
of the Company pursuant to Registration Statement No. 333-30065 on Form S-1
(as amended or supplemented, the "Registration Statement") filed with the
Securities and Exchange Commission (the "Commission") on June 26, 1997. All
terms used and not defined herein shall have the meanings set forth in the
Registration Statement.
We have examined such documents, records and matters of law as we have
deemed necessary for the purposes of this opinion, and based thereon, we are
of the opinion that the Shares to be issued and sold by the Company have been
duly and validly authorized for issuance and, upon issuance pursuant to the
terms of the Underwriting Agreement, will be validly issued, fully paid and
nonassessable.
We hereby consent to the filing of the foregoing opinion as an exhibit
to the Registration Statement and the reference to our Firm under the caption
"Legal Matters" in the prospectus constituting a part of the Registration
Statement.
Sincerely,
HARTZOG CONGER & CASON
/s/ Hartzog Conger & Cason
<PAGE>
WARRANT AGREEMENT
Sanders Morris Mundy Inc.
3100 Texas Commerce Tower
Houston, TX 77002
Ladies and Gentlemen:
U S Liquids Inc., a Delaware corporation (the "Company"), hereby agrees, on
the terms and subject to the conditions of this Warrant Agreement (the
"Agreement"), to sell and deliver to Sanders Morris Mundy Inc. ("SMM") warrants
to purchase 37,500 shares of the "Common Stock" (defined below) of the Company.
SMM agrees, on the terms and subject to the conditions of this Agreement, to
purchase such warrants from the Company.
Each of the warrants will be exercisable by the "Holder" thereof (defined
below), as to all or any lesser number of shares of the Common Stock covered by
the Holder's warrants, at the "Exercise Price" per share (defined below), at any
time and from time to time beginning at 9:00 a.m., Los Angeles time, on the day
that begins one year after the Effective Date (defined below) and ending at 5:00
p.m., Los Angeles time, on the day that is five years after the Effective Date.
The warrants shall be evidenced by instruments in the form of Exhibit A hereto
(those instruments and all instruments issued after the date hereof in
replacement thereof are referred to below as the "Warrants").
The purchase price of the Warrants shall be $0.01 (one cent) for each share
of Common Stock purchasable as of the Closing Date on exercise of the Warrants.
The delivery of the Warrants and payment of the purchase price of the Warrants
are to be made on or about May 15, 1997 to you at the address shown hereinabove,
or such other time and place as may be agreed upon among the Company and SMM
(the date(s) of such purchase of the Warrants is referred to in this Agreement
as the "Closing Time").
1. DEFINITIONS. As used in this Agreement, the following terms, unless
the context otherwise clearly requires, shall have for all purposes the
following respective meanings:
(a) The term "Common Stock" refers to the Common Stock, par value $.01 per
share, of the Company, and all other shares of any class or classes (however
designated) of the common equity of the Company, now or hereafter authorized,
the holders of which by operation of law shall have the right, without
limitation as to amount, either to all or to a part of the balance of current
dividends and liquidating dividends and distributions after the payment of
dividends and distributions on any shares entitled to preference and the holders
of which ordinarily, in the absence of contingency, shall be entitled to vote
for the election of the directors of the Company (even though the right so to
vote has been suspended by the occurrence of such a contingency), other than
those directors of the Company (constituting a portion of the Board of
Directors) who, pursuant to the Certificate of Incorporation or other charter
documents of the Company, are then to be elected by a designated class or series
of the
<PAGE>
capital stock of the Company.
(b) "Convertible Securities" shall mean any indebtedness, shares of stock
or other rights granted by the Company (other than Options) convertible into or
exchangeable for Common Stock.
(c) "Effective Date" shall mean the date on which the Securities and
Exchange Commission shall have declared the Company's Registration Statement on
Form S-1 (File No. 333-30065) effective.
(d) The term "Exercise Price" refers to the per share purchase price of
the Warrant Shares subject to this Warrant Agreement. The Exercise Price shall
initially be $10.50 per share, and, upon the completion of an initial public
offering of the Common Stock, shall be equal to the initial per share price to
the public of the shares of Common Stock sold pursuant to such initial public
offering, subject to adjustment as provided in Section 6 below.
(e) The term "Holder", when used with respect to the Warrants or the
Warrant Shares, means the person registered on the books and records of the
Company as being the holder of record of the Warrants or the Warrant Shares, as
the case may be, and, so long as SMM holds of record any Warrants or Warrant
Shares, it shall be included in the definition of "Holder," and any action to be
taken or approval to be given by the Holders shall, unless otherwise provided in
this Agreement, require the action by, or approval of, the Holder or Holders of
at least that number of Warrants and Warrant Shares which in the aggregate shall
constitute a majority of all Warrant Shares issued or issuable under this
Agreement.
(f) "Options" shall mean any warrants, options or, without limitation,
other rights granted by the Company to purchase Common Stock or Convertible
Securities.
(g) The term "Other Securities" refers to any stock (other than Common
Stock) and other securities of the Company or any other person (corporate or
otherwise) which the Holders of the Warrants at any time shall be entitled to
receive, or shall have received, upon the exercise of the Warrants, in lieu of
or in addition to Common Stock, or which at any time shall be issuable or shall
have been issued in exchange for or in replacement of Common Stock or Other
Securities, whether pursuant to Section 6 below or otherwise.
(h) The term "Warrant Shares" refers to the shares of Common Stock (or
Other Securities) issued or issuable upon the exercise, in whole or in part, of
any of the Warrants.
2.1 REPRESENTATIONS AND WARRANTIES. The Company represents and warrants
to SMM as follows:
(a) CORPORATE ACTION. The Company has all requisite power and authority,
and has taken all necessary action, to enter into and perform all of its
obligations under this Agreement, to issue and deliver the Warrants and to
authorize and reserve for issuance, and upon payment
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from time to time of the Exercise Price in accordance with the terms of this
Agreement, to issue and deliver the Warrant Shares; and this Agreement has been
duly authorized, executed and delivered by the Company and constitutes the
legal, valid and binding agreement of the Company, enforceable against the
Company in accordance with its terms, except (i) as such enforceability may be
subject to or limited by bankruptcy, insolvency, reorganization, moratorium and
other similar laws or equitable principles now or hereafter in effect relating
to or affecting creditors' rights generally (collectively, the "Recognized
Defenses") and (ii) insofar as the indemnification and contribution provisions
hereof may be limited under federal and state securities laws and the public
policies underlying such laws.
(b) OUTSTANDING COMMON STOCK. The outstanding shares of Common Stock have
been duly and validly authorized and issued and are fully paid and
non-assessable and free of preemptive rights. The Warrant Shares (i) are duly
authorized by the Company's Certificate of Incorporation, (ii) have been duly
and validly authorized to be issued and adequately reserved by the Board of
Directors of the Company, (iii) will, when issued and delivered to the Holders
pursuant to this Agreement, be duly and validly issued, fully paid and
non-assessable and free and clear of all liens, charges, encumbrances or rights
of others except for those which may be created by the Holder, and (iv) and have
been approved for listing, upon office notice of issuance, on the American Stock
Exchange. The holders of outstanding shares of capital stock of the Company are
not entitled to any preemptive or similar rights to subscribe for or purchase
Warrant Shares or other shares of capital stock of the Company and, except as
otherwise disclosed to SMM, there are no outstanding rights, warrants or options
to acquire, or instruments convertible into or exchangeable for, or agreements
or understandings with respect to the sale or issuance of, any shares of capital
stock of the Company.
(c) NO VIOLATION. None of the execution or delivery of this Agreement,
the consummation of the transactions contemplated by this Agreement or
compliance with the terms and provisions of this Agreement will (i) conflict
with or constitute a breach of, or a default (or default with notice, the
passage of time or otherwise) under any bond, debenture, note or other evidence
of indebtedness or any indenture, mortgage, deed of trust or any other agreement
or instrument to which the Company or any of its subsidiaries is a party or by
which any of them is bound or to which any of their respective property or
assets is subject, (ii) result in the imposition of a lien on any properties of
the Company or any of its subsidiaries or an acceleration of indebtedness of the
Company or any of its subsidiaries or (iii) result in a violation of any law,
administrative regulation or order of any court or governmental agency or
authority applicable to the Company or any of its subsidiaries or to any of
their respective properties or assets. No consent, approval, authorization or
other order of any regulatory body, administrative agency or other governmental
body is required for the valid issuance and sale of the Warrant Shares to SMM or
the other transactions contemplated by this Agreement, except for registration
under the federal securities laws and for permits and similar authorizations
required under state blue sky laws or similar laws.
2.2 REPRESENTATIONS AND WARRANTIES OF SMM. SMM represents and warrants
to the
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Company that it has all requisite corporate power and corporate authority, and
has taken all necessary corporate action, to enter into and perform all of its
obligations under this Agreement and that this Agreement has been duly
authorized, executed and delivered by it and constitutes its legal, valid and
binding agreement, enforceable against it in accordance with its terms, except
(i) as such enforceability may be subject to or limited by
the Recognized Defenses and (ii) insofar as the indemnification and contribution
provisions hereof may be limited under federal and state securities laws and the
public policies underlying such laws.
3. COMPLIANCE WITH THE ACT.
(a) TRANSFERABILITY OF WARRANTS. Until August 24, 1998, SMM agrees that
the Warrants may not be transferred, sold, assigned or hypothecated except: (i)
to its successors in a merger or consolidation or other business combination;
(ii) to purchasers of all or substantially all of its assets; (iii) to any
officers or partners of SMM, as the case may be; (iv) by operation of law; or
(v) as permitted below in this Section 3. SMM further agrees that the Company
shall have no obligation to effect any transfer of the Warrants during the time
period referred to above, unless the transferee, purchaser, assignee or pledgee,
as the case may be, has executed an agreement obligating the transferee to
comply with all terms and conditions of this Warrant Agreement applicable to the
transferor.
(b) TRANSFERABILITY OF WARRANT SHARES.
(i) Except as otherwise provided in this Section 3(b), each
certificate for Warrant Shares initially issued upon the exercise of any
Warrants shall be stamped or otherwise imprinted with a legend in
substantially the following form:
"The Shares represented by this certificate are
subject to the conditions specified in a Warrant Agreement,
dated May 15, 1997, among the Company and Sanders Morris
Mundy Inc. Except to the extent permitted by the Warrant
Agreement, no transfer, sale, pledge, hypothecation,
encumbrance or other disposition of the shares represented
by this certificate shall be valid or effective until
registered under the Securities Act of 1933, as amended (or,
if applicable, a successor law thereto) or the Company has
been presented with satisfactory evidence that such shares
will be transferred in a transaction exempt from such
registration and until any applicable conditions contained
in the Warrant Agreement have been fulfilled. A copy of the
Warrant Agreement is on file at the offices of U S Liquids
Inc. The holder of this certificate, by acceptance of this
certificate, agrees to be bound by the provisions of the
Warrant Agreement."
(ii) Each certificate evidencing Warrant Shares issued upon any
transfer, sale,
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<PAGE>
pledge, assignment, hypothecation or other disposition of any Warrant
Shares shall bear the restrictive legend set forth in Section 3(b)(i),
unless in the opinion of counsel to such Holder reasonably satisfactory to
the Company such legend is not required in order to ensure compliance with
the Act.
(iii) Notwithstanding the foregoing provisions of this Section 3(b),
the restrictions imposed by subsections (i) and (ii) of this Section upon
the transferability of the Warrant Shares and the legend requirements of
Section 3(b)(i) shall terminate as to any particular Warrant Shares (A)
when and so long as the transfer, sale, pledge, hypothecation, encumbrance
or other disposition thereof, shall have been registered under the Act or
(B) when the Holder or Holders of any Warrants or Warrant Shares has
delivered to the Company the written opinion of counsel to such Holder or
Holders, which shall be reasonably satisfactory to the Company, stating
that such legend is not required in order to ensure compliance with the
Act. Whenever the restrictions imposed by this Section shall terminate as
to any Warrant Shares, as provided above, the Holder thereof shall be
entitled to receive from the Company, at the Company's expense, a new
certificate representing such Warrant Shares not bearing the restrictive
legend set forth in Section 3(b)(i).
(c) DEMAND REGISTRATION. At any time after the day that begins one year
after the Effective Date and on or before the end of the day that is five years
after the Effective Date, upon written, or telegraphic or telephonic notice
followed as soon as practicable by written confirmation thereof, from any Holder
or Holders (the "Requesting Holders") of that number of Warrants and/or Warrant
Shares which in the aggregate shall constitute a majority of all Warrant Shares
issued or issuable under this Agreement (excluding Warrant Shares which have
been previously sold, transferred or otherwise disposed of in a registered
public offering, pursuant to Rule 144 under the Act, as such rule may be amended
from time to time, or pursuant to Regulation S under the Act, as such Regulation
may be amended from time to time, or which in the opinion of both counsel to the
Company and counsel to the Requesting Holders may otherwise then be publicly
sold without registration under the Act), that such Holder or Holders request
the registration under the Act of any of the Warrant Shares, the Company shall
(i) immediately give notice to the other Holders and afford them the opportunity
to participate in the registration statement and (ii) as promptly as possible
after the receipt of such notice from the Requesting Holders, but in any event
within 60 days of the receipt of such notice, and solely at its cost and
expense, file a registration statement with respect to the offering and sale or
other disposition of the Warrant Shares with respect to which it shall have
received such notice. Such registration statement may, if the Company satisfies
the applicable requirements, be made on Form S-3. If a registration requested
pursuant to this Section 3(c) is an underwritten registration, the Company and
other holders of securities of the Company may include securities in such
registration without the written consent of the Holders of the Warrant Shares
for which registration has been requested pursuant to this Section 3(c) if, but
only if, the managing underwriters of such registration advise the participating
Holders of Warrant Shares in writing that in their opinion such inclusion will
not materially affect the successful marketing of the Warrant Shares. The
Holders shall not be deemed to have effected a demand registration
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<PAGE>
pursuant to this Section 3(c) unless and until the registration statement is
declared effective. The Company shall be obligated to file only one
registration statement pursuant to this Section 3(c) which becomes effective,
whether or not the registration statement at the time it becomes effective
covers all or a portion of the Warrant Shares.
(d) PIGGYBACK REGISTRATION. If, at any time during the period commencing
on the day that begins one year from the Effective Date and ending at the end of
the day that is six years after the Effective Date, the Company shall propose to
register any shares of Common Stock or Other Securities (but excluding any
shares or securities being registered pursuant to Form S-8 or Form S-4 or any
successor form to either of them), the Company shall (i) give each Holder
written notice, or telecopy and telephonic notice followed as soon as
practicable by written confirmation thereof, of such proposed registration at
least 20 business days prior to the filing of such registration statement and
(ii) upon written notice, or telecopy or telephonic notice followed as soon as
practicable by written confirmation thereof, given to the Company by any Holder
within 15 days after the giving of such written confirmation or written notice
by the Company, the Company shall include or cause to be included in any such
registration statement all or such portion of the Warrant Shares as such Holder
may request; provided, however, that the Company may at any time withdraw or
cease proceeding with any such registration if it shall at the same time
withdraw or cease proceeding with the registration of the Common Stock or Other
Securities originally proposed to be registered; and provided, further, that in
connection with any registered public offering involving an underwriting, the
managing underwriter may (if in its reasonable opinion marketing factors so
require) limit the number of securities (including any Warrants or Warrant
Shares) included in such offering (other than securities of the Company). In
the event of any such limitation, the total number of Warrant Shares to be
offered for the account of the Holders participating in the registration shall
be reduced pro rata in proportion to the respective number of shares requested
to be included therein to the extent necessary to reduce the total number of
shares proposed to be registered to the number of shares recommended by the
managing underwriter; provided, however, that if the amount or kind of
securities to be offered for the accounts of Holders shall be reduced in
accordance with this sentence, the Company shall not be permitted to include
securities of any persons (other than the Company) unless the Holders are
permitted to participate on a pro rata basis with other selling securityholders.
Notwithstanding the foregoing, the Company shall not be obligated to include
Warrant Shares in more than two registration statements pursuant to this
Agreement.
(e) COMPANY'S OBLIGATIONS IN REGISTRATION. If any Holder timely elects to
participate in an offering by including Warrant Shares in a registration
statement pursuant to Section 3(c) or (d) above, the Company shall use its best
efforts to effect such registration to permit the sale of Warrant Shares in
accordance with the intended method or methods of disposition thereof and,
without limitation, pursuant thereto the Company shall:
(i) notify the Holders as to the filing of the registration
statement and of all amendments or supplements thereto filed prior to the
effective date thereof;
(ii) use its best efforts to cause any registration statement filed
under the Act pursuant to Section 3(c) or (d) above to become effective at
the earliest possible date after the filing thereof and to comply with all
applicable rules and regulations of the
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<PAGE>
Commission in connection therewith; provided, that before filing a
registration statement or prospectus or any amendments or supplements
thereto, including documents which would be incorporated or deemed to be
incorporated by reference in the registration statement after the initial
filing of any registration statement, the Company will furnish to the
Holders, their respective counsel and the underwriters, if any, to be
engaged in connection with the offering and sale by the Company (for
purposes of this Section 3(e) and Section 3(f), the "Underwriters"), copies
of all such documents proposed to be filed, which documents will be subject
to the review of the Holders, their respective counsel and the
Underwriters, and the Company will not file any registration statement, or
amendment thereto, or any prospectus or any supplement thereto relating in
whole or in part to the Holders' Warrant Shares (including such documents
incorporated or deemed to be incorporated by reference) to which the
Holders or the Underwriters, if any, shall reasonably object;
(iii) notify the Holders immediately, and confirm the notice in
writing, (1) when the registration statement or any post-effective
amendment thereto becomes effective, (2) when a prospectus or prospectus
supplement or post-effective amendment has been filed, (3) of any request
by the Commission for amendments, supplements or additional information
related to a registration statement or prospectus or otherwise, (4) of the
issuance by the Commission of any stop order or of the initiation, or the
threatening, of any proceedings for that purpose known to the Company, (5)
of the receipt by the Company of any notification with respect to the
suspension of qualification of the Warrant Shares for sale in any
jurisdiction or of the initiation, or the threatening, of any proceedings
for that purpose known to the Company, (6) of the receipt of any comments
from the Commission or any state regulatory authority, (7) of the happening
of any event which requires the making of any changes in a registration
statement or the related prospectus or any prospectus supplement so that
such documents will not contain any untrue statement of a material fact or
omit to state any material fact required to be stated therein or necessary
to make the statements therein not misleading and (8) of the determination
of the Company that a post-effective amendment to a registration statement
would be necessary or appropriate; (iv) make every
reasonable effort to obtain the withdrawal of any order suspending the
effectiveness of a registration statement, or the lifting of any suspension
of the qualification (or exemption from qualification) of any of the
Warrant Shares for sale in any jurisdiction, at the earliest possible
moment;
(v) if reasonably requested by the Underwriters, if any, or the
Holders, immediately incorporate in a prospectus supplement or
post-effective amendment such information as the Holders and the
Underwriters, if any, agree should be included therein relating to the sale
and distribution of the Warrant Shares, including, without limitation,
information with respect to the number of Warrant Shares being sold to such
Underwriters, the purchase price being paid therefor by such Underwriters
and with respect to any other terms of the underwritten offering of the
Warrant Shares to be sold in such offering; make all required filings of
such prospectus supplement or post-effective amendment as soon as notified
of the matters to be incorporated in such prospectus
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<PAGE>
supplement or post-effective amendment; and supplement or amend any
registration statement if reasonably requested by the Holders or any
Underwriter of Warrant Shares covered by such Warrant Shares;
(vi) furnish to each of the Holders whose Warrant Shares have been
included therein, their respective counsel and each Underwriter, if any,
without charge, at least one manually executed copy of any registration
statement (including all amendments thereto) and any post-effective
amendment thereto, including financial statements and schedules, all
documents incorporated therein by reference and all exhibits (including
those incorporated by reference);
(vii) during the time when a prospectus is required to be delivered
under the Act in connection with the distribution of the Warrant Shares,
comply so far as it is able with all requirements imposed upon it by the
Act, as now and hereafter amended, and by the Rules and Regulations
promulgated by the Commission thereunder, as from time to time in force, so
far as necessary to permit the continuance of sales of or dealings in the
Warrant Shares. If at any time when a prospectus relating to the Warrant
Shares is required to be delivered under the Act any event shall have
occurred as a result of which, in the opinion of counsel for the Company or
counsel for the Holders, the prospectus relating to the Warrant Shares as
then amended or supplemented includes an untrue statement of a material
fact or omits to state any material fact required to be stated therein or
necessary to make the statements therein not misleading, or if it is
necessary at any time to amend such prospectus to comply with the Act, the
Company will use its best efforts promptly to prepare and file with the
Commission an appropriate amendment or supplement in form and substance
reasonably satisfactory to the Holders;
(viii) make generally available to its security holders as soon as
practicable, but not later than 15 months following the effective date (and
each other deemed effective date) of such registration statement, an
earnings statement or statements of the Company and any subsidiaries it may
then have covering a period of at least 12 months beginning after the
effective date of the registration statement (but in no event commencing
later than 90 days after such date), which shall satisfy the provisions of
Section 11(a) of the Act and Rule 158 promulgated thereunder;
(ix) prepare and promptly file with the Commission such amendments
and post-effective amendments to each registration statement as may be
necessary to keep such registration statement continuously effective for a
period of nine months; cause the related prospectus to be supplemented by
any required prospectus supplement, and as so supplemented to be timely
filed pursuant to Rule 424 under the Act; and comply with the provisions of
the Act with respect to the disposition of all Warrant Shares covered by
such registration statement during the applicable period in accordance with
the intended methods of disposition as set forth in such registration
statement or supplement to such prospectus; and in these regards the
Company shall not be deemed to have used its best efforts to keep a
registration statement effective during the applicable period if it
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<PAGE>
unreasonably takes any action that would result in any Holder whose Warrant
Shares have been included therein not being able to sell such Warrant
Shares at any time during such period or for more than 30 days, whether or
not consecutive, in such period;
(x) deliver to each of the Holders, their respective counsel and
the Underwriters, if any, without charge, as many copies of the prospectus
or prospectuses (including each preliminary prospectus) and any amendment
or supplement thereto as such persons may reasonably request; and the
Company consents to the use of any such prospectus or any amendment or
supplement thereto by the Holders and each of the Underwriters, if any, in
connection with the offering and sale of the Warrant Shares covered by such
prospectus or any amendment or supplement thereto;
(xi) prior to any public offering of Warrant Shares, register or
qualify or cooperate with the Holders, the Underwriters, if any, and their
respective counsel in connection with the registration or qualification (or
exemption from such registration or qualification) of such Warrant Shares
for offer and sale under the securities or blue sky laws of such
jurisdictions as the Holders or any Underwriter reasonably requests in
writing; keep each such registration or qualification (or exemption
therefrom) effective during the period the applicable registration
statement is required to be kept effective and do any and all other acts or
things necessary or advisable to enable the disposition in such
jurisdictions of the Warrant Shares covered by the applicable registration
statement; provided, that the Company will not be required to qualify
generally to do business in any jurisdiction where it is not then so
qualified or to take any action which would subject it to general service
of process in any such jurisdiction where it is not then so subject;
(xii) cooperate with the Holders and the Underwriters, if any, to
facilitate the timely preparation and delivery of certificates representing
Warrant Shares to be sold, which certificates shall not bear any
restrictive legends; and enable such Warrant Shares to be in such
denominations and registered in such names as the Underwriters may request
at least two business days prior to any sale of Warrant Shares to the
Underwriters;
(xiii) use its best efforts to cause the Warrant Shares covered by
the applicable registration statement to be registered with or approved by
such other governmental agencies or authorities as may be necessary to
enable the Holders and the Underwriters, if any, to consummate the
disposition of such Warrant Shares;
(xiv) enter into such agreements in form and substance reasonably
acceptable to the Company and its counsel (including an underwriting
agreement) and take all such other actions in connection therewith as may
be necessary to expedite or facilitate the disposition of such Warrant
Shares and, in such connection, whether or not an underwriting agreement is
entered into and whether or not the registration is an underwritten
registration: (1) make such representations and warranties to the Holders
with respect to the business of the Company and any subsidiaries it may
then have, the
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registration statement, the prospectus (and, if applicable, prospectus
supplement) and documents, if any, incorporated or deemed to be
incorporated by reference in the registration statement (and, if
applicable, prospectus supplement), in each case in such form, substance
and scope as are reasonably requested by the Holders and confirm the same
if and when requested; (2) obtain opinions of counsel to the Company and
updates thereof addressed to the Holders with respect to the matters
referred to in the preceding clause (1) in such form, scope and substance
as are reasonably requested by the Holders; (3) in the case of an
underwritten offering, enter into an underwriting agreement in form, scope
and substance as is customary in underwritten offerings and obtain (a)
opinions of counsel to the Company and updates thereof (which counsel and
opinions (in form, scope and substance) shall be reasonably satisfactory to
the Underwriters) addressed to the Underwriters covering the matters
customarily covered in opinions requested by underwriters in underwritten
offerings and such other matters as may be reasonably requested by the
Underwriters and (b) obtain opinions of counsel to the Company and updates
thereof (which counsel and opinions (in form, scope and substance) shall be
reasonably satisfactory to the Holders) addressed to the Holders covering
matters reasonably requested by the Holders (whether or not such matters
are different from, or in addition to, the matters described in subclause
(a) of this subsection (xiv)(3); (4) obtain "comfort" letters and updates
thereof from the independent certified public accountants of the Company
(and, if necessary, any other independent certified public accountants of
any subsidiary of the Company or of any business acquired by the Company
for which financial statements and financial data is or is required to be
included in the registration statement), addressed to the Holders and each
of the Underwriters, if any, such letters to be in customary form and
covering matters of the type customarily covered in "comfort" letters to
underwriters in connection with underwritten offerings; (5) if an
underwriting agreement is entered into, the same shall set forth in full
the indemnification and contribution provisions and procedures of Section
3(f) hereof (or such other indemnification and contribution provisions as
shall be acceptable to the Holders and the Underwriters of such
underwritten offering) with respect to all parties to be indemnified
pursuant to said section; and (6) the Company shall deliver such documents
and certificates as may be requested by the Holders and the Underwriters,
if any, to evidence the continued validity of the representations and
warranties made pursuant to clause (1) above and to evidence compliance
with any customary conditions contained in the underwriting agreement or
other agreement entered into by the Company. Each of the above shall be
done at each closing under such underwriting or similar agreement or as and
to the extent required thereunder;
(xv) make available for inspection by a representative of the
Holders or any Underwriter participating in any disposition pursuant to
such registration statement and any attorney or accountant retained by the
Holders or such Underwriter, all financial and other records, pertinent
corporate documents and properties of the Company and its subsidiaries and
cause the officers, directors and employees of and independent accountants
and attorneys for the Company and its subsidiaries personally to meet with
and to supply all information reasonably requested by any such
representative,
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Underwriter, attorney or accountant in connection with any registration of
Warrant Shares; provided, that any records, information or documents that
are designated by the Company in writing as confidential shall be kept
confidential by such persons unless (i) disclosure of such records,
information or documents is required by court or administrative order, (ii)
disclosure of such records, information or document is, in the opinion of
counsel to the Holders or to any Underwriter, required pursuant to the
requirements of the Act or (iii) such records, information or documents are
otherwise publicly available;
(xvi) pay all costs and expenses incident to the performance of the
Company's obligations under Sections 3(c) and (d) above and under this
Section 3(e) (collectively "Registration Expenses"), including without
limitation the fees and disbursements of the Company's auditors, legal
counsel, any special legal counsel (including one legal counsel for the
Holders) and legal counsel (including, if applicable, legal counsel to the
Underwriters) responsible for qualifying the Warrant Shares under state
securities or blue sky laws, all filing fees and printing expenses, all
expenses in connection with the transfer and delivery of the Warrant
Shares, all expenses in connection with the qualification or registration
of the Warrant Shares under applicable state securities or blue sky laws of
such states as are designated by the Holders (or obtaining exemptions from
such qualification or registration under state securities or blue sky laws)
and, if applicable, the fee of the National Association of Securities
Dealers, Inc. in connection with its review; provided, that in no event
shall Registration Expenses include any underwriting discounts, commissions
or fees or the fees of more than one counsel retained by the Holders or the
fees, except with respect to such state securities blue sky matters, of
legal counsel retained by the Underwriters in connection with the sale of
Warrant Shares pursuant to Section 3(c) or 3(d) above; and
(xvii) in connection with the filing of a registration statement
pursuant to Section 3(c) or (d) above, use its best efforts to obtain
indemnification of the Holders by the Underwriter to the same extent said
Underwriter provides indemnification to the Company. As used in this
Section 3(e), the term "Holders" refers only to those Holders who have
timely elected to sell Warrants Shares in an offering.
(f) INDEMNIFICATION.
(i) The Company shall indemnify and hold harmless SMM, the Holders
and any underwriter (as defined in the Act) for SMM and/or the Holders, and
each person, if any, who respectively controls (within the meaning of
Section 15 of the Act) SMM, or any of the Holders or such underwriter
against any losses, claims, damages, liabilities (or actions in respect
thereof) and expenses whatsoever (including, but not limited to, any and
all expense whatsoever reasonably incurred in investigating, preparing or
defending against any litigation, commenced or threatened, or any claim
whatsoever), joint or several, to which SMM, the Holders or such
underwriter or such controlling person becomes subject, under the Act, the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), or other
federal or state statute, law or regulation, at common law or otherwise,
specifically
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including but not limited to losses, claims, damages or liabilities (or
actions in respect thereof) or expenses related to negligence on the part
of any such indemnified party, insofar as any such loss, claim, damage,
liability or expense (or actions in respect thereof) (1) arises out of or
is based upon any breach of any representation, warranty or covenant of the
Company in this Agreement or upon any untrue statement or alleged untrue
statement of any material fact contained in (A) Section 2 of this
Agreement, (B) any registration statement covering the Warrant Shares as
originally filed or in any amendment thereof, in the prospectus contained
therein or in an amendment or supplement thereto or (C) in any application
or other document, or any amendment or supplement thereto (in this Section
collectively called "application") executed by or on behalf of the Company
or based upon written information furnished by or on behalf of the Company
filed in any jurisdiction in order to qualify or register the Warrant
Shares under the securities or blue sky laws thereof (or to obtain
exemptions from such qualifications or registration requirements) or filed
with the Commission or any securities association or securities exchange,
or (2) arises out of or is based upon the omission or alleged omission to
state in any of the documents described in subclauses (1)(A), (B) or (C)
above, a material fact required to be stated therein or necessary to make
the statements therein not misleading, and agrees to reimburse each such
indemnified person, as incurred, for any legal or other expenses reasonably
incurred by them in connection with investigation or defending any such
loss, claim, damage, liability or action; provided, however, that the
Company shall not be obligated to indemnify in any such case to the extent
that any such loss, claim, damage, liability or expense arises out of or is
based upon any untrue statement or alleged untrue statement or omission or
alleged omission made therein in reliance upon, and in conformity with,
written information furnished to the Company by the indemnified person
specifically for use therein. The Company will not, without the prior
written consent of SMM, settle or compromise or consent to the entry of any
judgment in any pending or threatened claim, action, suit or proceeding in
respect of which indemnification may be sought hereunder (whether or not
SMM is a party to such claim, action, suit or proceeding), unless such
settlement, compromise or consent includes, without payment by SMM, an
unconditional release of all indemnified parties from all liability arising
out of such claim, action, suit or proceeding, satisfactory in form and
substance to SMM.
(ii) Any Holder that includes all or a part of such Holder's
Warrant Shares in a registration statement pursuant to Sections 3(c) or (d)
above agrees to indemnify and hold harmless the Company and each of its
directors and officers who have signed any such registration statement, any
other Holder of Warrant Shares included in such registration statement and
any underwriter (as defined in the Act) for the Company or the Holders of
Warrant Shares, and each person, if any, who controls (within the meaning
of Section 15 of the Act) the Company or such underwriter to the same
extent as the indemnity by the Company in Section 3(f)(i), but only with
respect to any untrue statement or alleged untrue statement or omission or
alleged omission, if any, made in such registration statement, or any
amendment or supplement thereto, or in any application in reliance upon,
and in conformity with, written information furnished by the indemnifying
Holder
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<PAGE>
to the Company or such controlling person expressly for use in the
registration statement, or any amendment or supplement thereto, or any such
application, as the case may be. If any action shall be brought in respect
of which indemnity may be sought against any of the Holders, such Holder(s)
shall have the rights and duties given to the indemnifying party, and the
persons so indemnified shall have the rights and duties given to the
indemnified party, by the provisions of Section 3(f)(iii) below;
(iii) If any action is brought against a person in respect of which
indemnity may be sought hereunder against an indemnifying party, such
person shall promptly notify the indemnifying party in writing of the
institution of such action (but the failure to so notify shall not affect
the indemnification and other rights provided for herein except to the
extent, if any, that the indemnifying party is prejudiced by the failure to
so give or timely give such notice) and the indemnifying party shall assume
the defense of the action, including the employment of counsel satisfactory
to the indemnified person and payment as incurred of all fees and expenses
related thereto. The indemnified person shall have the right to employ its
own counsel in any such case, but the fees and expenses of such counsel
shall be at the expense of such indemnified person unless (1) the
employment of such counsel and the payment of fees and expenses thereof
shall have been authorized in writing by the indemnifying party in
connection with the defense of the action, (2) the indemnifying party shall
have failed promptly after notice by such indemnified person to assume the
defense of such action or proceeding and to employ counsel satisfactory to
the indemnified person in any such action or proceeding or (3) the named
parties to any such action or proceeding (including any impleaded parties)
include both such indemnified person and the indemnifying party, and such
indemnified person shall have been advised by counsel that there may be
legal defenses or rights available to such indemnified person which are
different from or additional to those available to the indemnifying party
(in which case, if such indemnified person notifies the indemnifying party
in writing that it elects to employ separate counsel at the expense of the
indemnifying party, the indemnifying party shall not have the right to
assume the defense of such action, it being understood, however, that the
indemnifying party shall not, in connection with any one such action or
proceeding or separate but substantially similar or related actions or
proceedings in the same jurisdiction arising out of the same general
allegations or circumstances, be liable for the reasonable fees and
expenses of more than one separate firm of attorneys (together with
appropriate local counsel) at any time for such indemnified person.
Anything in this paragraph to the contrary notwithstanding, the
indemnifying party shall not be liable for any settlement of any claim or
action effected without its written consent. The indemnity agreements
contained in this Section shall remain in full force and effect regardless
of any investigation made by or on behalf of any indemnified person and
shall survive any termination of this Agreement. The indemnifying party
agrees promptly to notify the indemnified party of the commencement of any
litigation or proceedings against the indemnifying party or any of its
officers or directors in connection with any registration statement
referred to in Section 3(c) or (d) above.
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<PAGE>
(iv) If the indemnification provided for in items (i), (ii) and
(iii) of this Section 3(f) from the indemnifying party is unavailable to an
indemnified party hereunder in respect of any losses, claims, damages,
liabilities or expenses referred to therein, then the indemnifying party,
in lieu of indemnifying such indemnified party, shall contribute to the
amount paid or payable by such indemnified party as a result of such
losses, claims, damages, liabilities or expenses in such proportion as is
appropriate to reflect not only the relative benefits received by the
indemnified party and the indemnifying party, but also the relative fault
of the indemnifying party and indemnified parties in connection with the
actions which resulted in such losses, claims, damages, liabilities or
expenses, as well as any other relevant equitable considerations. The
relative fault of the indemnifying party and indemnified parties shall be
determined by reference to, among other things, whether any action in
question, including any untrue or alleged untrue statement of a material
fact or omission or alleged omission to state a material fact, has been
made by, or relates to information supplied by, the indemnifying party or
indemnified parties, and the parties' relative intent, knowledge, access to
information and opportunity to correct or prevent such action. The amount
paid or payable by a party as a result of the losses, claims, damages,
liabilities and expenses referred to above shall be deemed to include,
subject to the limitations set forth in subparagraph (iii) of this Section
3(f), any legal or other fees or expenses incurred by such party in
connection with any investigation or proceeding. The parties hereto agree
that it would not be just and equitable if contribution pursuant to this
subparagraph (iv) of this Section 3(f) were determined by pro rata
allocation or by any other method of allocation which does not take account
of the equitable and other considerations referred to in this paragraph.
If the full amount of the contribution specified in this subparagraph (iv)
of this Section 3(f) is not permitted by law, then such indemnified person
shall be entitled to contribution from the indemnifying party to the full
extent permitted by law. Notwithstanding the provisions of this Section
3(f)(iv), no Holder shall be required to contribute any amount in excess of
the amount by which the total price at which the Warrant Shares of such
Holder were sold to the public exceeds the amount of any damages which such
Holder has otherwise been required to pay by reason of such untrue
statement or omission. No party found guilty of fraudulent
misrepresentation (within the meaning of Section 11(f) of the Act) shall be
entitled to contribution from any party who was not found guilty of such
fraudulent misrepresentation.
(v) Whenever any indemnifying or contributing party is requested
by the indemnified party or the party entitled to contribution to make a
payment pursuant to the forgoing provisions of this Section 3(f), such
payment will be made within five business days after the request and, if
not so paid, the amount due will thereafter bear interest at ten percent
per annum, compounded annually (but not in excess of the maximum amount
permitted by law).
4. EXERCISE OF WARRANTS.
(a) EXERCISE OF WARRANTS. The Warrants may be exercised from time to time
and in
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full or in part by the Holder thereof by surrender of the Warrants, with the
Election to Purchase attached thereto duly executed by such Holder, to the
Company at its offices at 411 North Sam Houston Parkway E., Ste. 400, Houston,
TX 77060-3545, or at such other office or agency as the Company may from time to
time designate in writing to each Holder, accompanied by payment, in cash or by
cashier's check payable to the order of the Company or as provided in Section
4(c), in the amount obtained by multiplying the number of Warrant Shares
designated by the Holder in the Election to Purchase by the Exercise Price per
share. Exercise of any Warrant shall constitute an acknowledgment by the
purchasing Holder that it will not dispose of the Warrant Shares acquired upon
such exercise except in compliance with Section 3(b) hereof and the Act. Upon
any partial exercise of the Warrants, the Company at its expense will forthwith
issue and deliver to the purchasing Holder a new Warrant, in the name of such
Holder and for the number of Warrant Shares equal to the number of shares called
for by the surrendered Warrant (after giving effect to any adjustment therein as
provided in Section 6 below) minus the number of such Warrant Shares (after
giving effect to such adjustment) purchased by the Holder pursuant to such
exercise.
(b) COMPANY TO REAFFIRM OBLIGATIONS. On the date of any exercise of any
Warrants (except that if, on that date, the stock transfer books of the Company
are closed, in which case on the next succeeding date on which such stock
transfer books are open) the Holder exercising the same shall be deemed to have
become, and thereafter shall be considered, a holder of record of the shares of
Common Stock purchased upon such exercise for all purposes. Holders of Warrants
shall have no rights of share ownership until they exercise their Warrants. The
Company will, at the time of any exercise of any Warrant, upon the request of
the Holder thereof, acknowledge in writing its continuing obligation to afford
to that Holder any rights (including without limitation any right to
registration of the Warrant Shares issued upon such exercise) to which the
Holder shall continue to be entitled after such exercise in accordance with the
provisions of this Agreement; provided, however, that if the Holder of a Warrant
shall fail to make any such request, such failure shall not affect the
continuing obligation of the Company to afford those rights to the Holder.
(c) NET EXERCISE OF WARRANTS. Notwithstanding anything to the contrary
contained in this Section 4, any Holder may elect to exercise any Warrant in
whole or in part by receiving shares of Common Stock equal to the value
(determined below) of the Warrant (or any part hereof), upon surrender of the
Warrant (or any part thereof) at the office or agency described in Section 4(a)
above, together with notice of such election, specifying the part of the Warrant
so surrendered, in which event the Company shall issue and deliver to the Holder
a number of shares of Common Stock determined using the following formula:
X = (Y) (A-B)
--------
A
where
X = the number of shares of Common Stock to be issued to
the Holder;
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<PAGE>
Y = the number of shares of Common Stock purchasable under
the Warrant, or portion of the Warrant, surrendered;
A = the Current Market Price per share of the Common Stock,
determined pursuant to Section 6(d) of this Agreement;
and
B = the then current Exercise Price per share of Common
Stock.
5. DELIVERY OF STOCK CERTIFICATES, ETC., ON EXERCISE: NO FRACTIONAL
SHARES.
(a) STOCK CERTIFICATES, ETC. As soon as practicable after the exercise of
any Warrants and in any event within five business days thereafter, the Company,
at its expense (including the payment by it of any applicable issue taxes), will
cause to be issued in the name of and delivered to the purchasing Holder a
certificate or certificates for the number of fully paid and nonassessable
Warrant Shares to which such Holder shall be entitled upon such exercise,
together with any Other Securities and property (including cash, where
applicable) to which such Holder is entitled upon such exercise pursuant to
Section 6 of this Agreement or otherwise.
(b) NO FRACTIONAL SHARES. The Company will not issue a fractional share of
Common Stock upon exercise of a Warrant. Rather, if a fractional share would
otherwise be issued, the Company will instead issue a number of whole shares
equal to the next lowest number of whole shares and shall pay to the exercising
Holder an amount in cash equal to amount obtained by multiplying (x) the
fractional shares not issued by (y) the Current Market Price (as defined in
Section 6(d)) per share of the Common Stock on the last trading day prior to the
exercise date.
6. ANTI-DILUTION PROVISIONS. The Warrants are subject to the following
additional terms and conditions:
(a) ADJUSTMENT FOR CHANGE IN CAPITAL STOCK. If, after the date of this
Agreement, the Company:
(1) pays a dividend or makes a distribution on its Common Stock in
shares of its capital stock (including Common Stock);
(2) subdivides its outstanding shares of Common Stock into a
greater number of shares;
(3) combines its outstanding shares of Common Stock into smaller
number of shares; or
(4) issues by reclassification of its Common Stock any shares of
its capital stock or Other Securities (including without
limitation any such reclassification in connection with a
consolidation or merger in which the Company is the continuing
entity);
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<PAGE>
then the Exercise Price in effect at the time of the record date of such
dividend, distribution, subdivision, combination or reclassification shall be
adjusted so that the Exercise Price shall be equal to the price determined by
multiplying the Exercise Price in effect immediately prior to such event by a
fraction, the numerator of which shall be (x) the total number of outstanding
shares of Common Stock of the Company immediately prior to such event and the
denominator of which shall be (y) the total number of outstanding shares of
Common Stock of the Company immediately after such event and, as so adjusted or
readjusted, the Exercise Price shall remain in effect until a further adjustment
or readjustment is required by this Section 6(b). Whenever the Exercise Price
payable upon exercise of each Warrant is adjusted pursuant to this Section 6(a),
the Warrant Shares shall simultaneously be adjusted by multiplying the number of
Warrant Shares issuable upon exercise of each Warrant immediately prior to such
event by the Exercise Price in effect on the date thereof and dividing the
product so obtained by the Exercise Price as adjusted. These adjustments
referred to in the preceding paragraph shall become effective on (x) in the case
of a dividend or distribution, the earlier of the record date thereof or the
distribution date thereof and (y) in the case of a subdivision, combination or
reclassification, the earlier of the record date thereof or the effective date
thereof.
(b) ADJUSTMENTS FOR OTHER DISTRIBUTIONS. If, after the date of this
Agreement, the holders of Common Stock generally shall have received or, on or
after the record date fixed for the determination of eligible stockholders,
shall have become entitled to receive (i) securities other than capital stock,
(ii) evidences of its indebtedness, (iii) assets (other than cash dividends or
distributions), (iv) rights, options, warrants or convertible or exchangeable
securities (other than Convertible Securities or Options) containing the right
to subscribe for or purchase securities of the Company, then and in each such
case the Holder of each Warrant, upon the exercise thereof as provided in
Section 4 above, shall be entitled to receive, in addition to the Warrant Shares
otherwise receivable on such exercise, the amount of securities, indebtedness,
assets (other than cash in the case referred to in subdivision (iii) of this
Section 6(b)) and such rights, options, warrants or convertible or exchangeable
securities which such Holder would hold on the date of such exercise if on the
date of this Agreement such Holder had been the holder of record of the number
of shares of Common Stock called for by the Warrants held by such Holder and had
thereafter, during the period from the date of this Agreement to and including
the date of such exercise, retained such shares, giving effect to all
adjustments called for during such period by this Section 6.
(c) ADJUSTMENTS FOR SALE OR OTHER ISSUANCE OF COMMON STOCK.
(i) If at any time prior to the exercise of the Warrants in full, the
Company shall issue or sell any Common Stock without consideration or for
consideration per share less than the Current Market Price per share (as
defined in Section 6(d)) on the date of such issuance or sale (which shall
be deemed for all purposes of this Section 6(c), in the case of Common
Stock issued as all or part of the consideration for an acquisition, to be
the same as the date the definitive agreement for such acquisition is
entered into), the Exercise Price shall be adjusted so that the Exercise
Price shall equal the price determined by multiplying the Exercise Price in
effect immediately prior to the date of such sale or
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<PAGE>
issuance (which date in the event of distribution to shareholders shall be
deemed to be the record date set by the Company to determine shareholders
entitled to participate in such distribution) by a fraction, the numerator
of which shall be (i) the number of shares of Common Stock outstanding on
the date of such sale or issuance, plus (ii) the number of additional
shares of Common Stock which the aggregate consideration received by the
Company upon such issuance or sale would purchase at such Current Market
Price per share of the Common Stock and the denominator of which shall be
(i) the number of shares of Common Stock outstanding on the date of such
issuance or sale, plus (ii) the number of additional shares of Common Stock
offered for purchase. Any adjustments required by this Section 6(c) shall
be made immediately after such issuance or sale or record date, as the case
may be. Such adjustments shall be made successively whenever the event
shall occur.
(ii) For the purpose of making any adjustment in the Exercise
Price, or number of shares of Common Stock purchasable upon exercise of the
Warrants, as provided above and in Section 6(c)(vii) below, the
consideration received by the Company for any issue or sale of securities
shall: (A) To the extent it consists of cash, be computed as the gross
amount of cash received by the Company before deduction of any underwriting
or similar commissions, compensation, discounts or concessions paid or
allowed by the Company in connection with such issue or sale and before
deduction of any other expenses payable in connection therewith. (B) In
case of the issuance (otherwise than upon conversion or exchange of
Convertible Securities) or sale of additional Common Stock, Options or
Convertible Securities for a consideration other than cash or a
consideration a part of which is other than cash, then for purposes of this
Section 6(c) the fair value of such consideration as determined by the
Board of Directors of the Company in the good faith exercise of its
business judgment, regardless of the accounting treatment thereof, shall be
deemed to be the value of the consideration other than cash received by the
Company for such securities.
(iii) OPTIONS AND CONVERTIBLE SECURITIES. If the Company in any
manner issues or grants any Options or any Convertible Securities -- but
only to the extent (i) such Options are exercisable at less than the
Current Market Price at the date of issue of such Options or (ii) the
amount paid for such Convertible Securities per share plus any additional
amount payable per share upon conversion thereof is less than the Current
Market Price per share at the date of issue of the Convertible Securities
-- the total maximum number of shares of Common Stock issuable upon the
exercise of such Options or upon conversion or exchange of the total
maximum amount of such Convertible Securities at the time such Convertible
Securities first become convertible or exchangeable shall (as of the date
of issue or grant of such Options or, in the case of the issue or sale of
Convertible Securities other than where the same are issuable upon the
exercise of Options, as of the date of such issue or sale) be deemed to be
issued and to be outstanding for the purpose of this Section 6(c) and to
have been issued for the sum of the amount (if any) paid for such Options
or Convertible Securities and the amount (if any) payable upon the exercise
of such Options or upon conversion or exchange of such Convertible
Securities at the time
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<PAGE>
such Convertible Securities first become convertible or exchangeable;
provided that, subject to the other provisions of this Section 6(c), no
further adjustment of the Exercise Price shall be made upon the actual
issuance of any such Common Stock or Convertible Securities or upon the
conversion or exchange of any such Convertible Securities.
(iv) CHANGE IN OPTION PRICE OR CONVERSION RATE. If the purchase
price provided for in any Option referred to in Section 6(c)(iii), or the
rate or price at which any Convertible Securities referred to in Section
6(c)(iii) are convertible into or exchangeable for shares of Common Stock,
shall change at any time (other than under or by reason of conventional
provisions designed to protect against dilution), the Exercise Price in
effect at the time of such event shall forthwith be readjusted -- but only
to the extent such change does not result in either the per share Option
exercise price or the amount per share payable for such Convertible
Securities plus the amount payable per share on the conversion of such
Convertible Securities to be greater than the lesser of the Current Market
Price per share at the time such Options or Convertible Securities were
issued, as referred to in Section 6(c)(iii), or the Current Market Price at
the effective date of such change -- to the Exercise Price that would have
been in effect at such time had such Options or Convertible Securities then
still outstanding provided for such changed purchase price, additional
consideration or conversion rate, as the case may be, at the time initially
granted, issued or sold. If the purchase price provided for in any such
Option, or the additional consideration (if any) payable upon the
conversion or exchange of any such Convertible Securities, or the rate or
price at which any such Convertible Securities are convertible into or
exchangeable for shares of Common Stock shall be changed at any time under
or by reason of conventional provisions designed to protect against
dilution, then in case of, but only to the extent of, the delivery of
shares of Common Stock upon the exercise of any such Option or upon
conversion or exchange of any such Convertible Security, the Exercise Price
then in effect hereunder shall, upon issuance of such shares of Common
Stock, be adjusted -- but only to the extent such change does not result in
either the per share Option exercise price or the amount per share payable
for such Convertible Securities plus the amount payable per share on the
conversion of such Convertible Securities to be greater than the Current
Market Price per share at the time such Options or Convertible Securities
were issued, as referred to in Section 6(c)(iii) -- to such amount as would
have obtained had such Option or Convertible Security never been issued and
had adjustments been made based only upon the issuance of the shares of
Common Stock for the consideration actually received for such Option or
Convertible Security and such Common Stock.
(v) EXPIRATION OF OPTION OR CONVERSION RIGHTS. In the event of
the termination or expiration of any right to purchase Common Stock under
any Option or of any right to convert or exchange Convertible Securities,
the Exercise Price shall, upon such termination, be changed to the Exercise
Price that would have been in effect at the time of such expiration had
such Option or Convertible Security, to the extent outstanding immediately
prior to such expiration, never been issued. As used in this Section
6(c)(v), the word "expiration" includes a termination, without payment of
consideration by the
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<PAGE>
Company, of a right to purchase, convert or exchange.
(vi) EXCLUDED EVENTS. Notwithstanding anything in this Section 6
to the contrary, the Exercise Price shall not be adjusted by virtue of (i)
the Warrants or the existence or exercise of any Options of the Company
outstanding on the date hereof and disclosed in the Prospectus or (ii) the
issuance or sale of, or the grant of Options to purchase, Common Stock to
employees, directors, or officers of the Company or its subsidiaries, or to
other persons who do not beneficially own more than one percent of the
Common Stock (assuming for this purpose that all Options then held by the
person, including new options then being granted, but no other Option or
Convertible Securities, have then been exercised in full) and are not the
children of such a one percent or greater shareholder or the spouses of
such children, pursuant to stock option plans currently existing or
hereafter approved by the Board of Directors of the Company, provided that
the exercise price is no less than the lower of fair market value at the
time of grant (as determined in accordance with the applicable stock option
plan) or the Current Market Price at the time of grant (all as determined
in accordance with this Section 6(c)).
(vii) ADJUSTMENT IN NUMBER OF WARRANT SHARES. Whenever the Exercise
Price payable upon exercise of a Warrant is adjusted pursuant to this
Section 6(c), the Warrant Shares issuable on exercise of the Warrant shall
simultaneously be adjusted by multiplying the number of the Warrant Shares
issuable upon exercise of the Warrant immediately prior to such event by
the Exercise Price in effect on the date thereof and dividing the product
so obtained by the Exercise Price, as adjusted.
(d) CURRENT MARKET PRICE. For the purpose of any computation under Section
6, the "Current Market Price" per share of Common Stock at any date shall be the
average of the daily closing prices for the 15 consecutive trading days
commencing 20 trading days before such date. The closing price for each day
shall be the last reported sale price, regular way or, in case no such reported
sale takes place on such day, the average of the closing bid and asked prices,
regular way, for such day, in either case on the principal national securities
exchange on which the shares are listed or admitted to trading, or if they are
not listed or admitted to trading on any national securities exchange, but are
traded in the Nasdaq National Market ("NNM"), or if the shares are otherwise
securities for which transaction reports are required to be made on a real-time
basis pursuant to an effective transaction reporting plan under Rule 11a3-1 of
the Rules of the Commission under the Exchange Act, the last reported sales
price or, if they are not listed or admitted to trade, and if last sale data is
not then available from NNM, but are traded in the over-the-counter market, the
average of the representative closing bid and asked quotations for the Common
Stock on NNM or any comparable system, or if the Common Stock is not listed on
NNM or a comparable system, the average of the closing bid and asked prices as
furnished by two members of the National Association of Securities Dealers, Inc.
selected from time to time by the independent members of the Board of Directors
of the Company for that purpose.
(e) MINIMUM ADJUSTMENT. No adjustment in the number of Warrant Shares
purchasable hereunder shall be required unless such adjustment would require an
increase or decrease of at
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least one percent in the number of Warrant Shares purchasable upon the exercise
of each Warrant. No adjustment in the Exercise Price payable hereunder shall be
required unless such adjustment would require an increase or decrease in the
Exercise Price of at least $.01 per share. Any adjustments that by reason of
this Section 6(e) are not required to be made shall be carried forward and taken
into account in any subsequent adjustment and, notwithstanding the foregoing,
all adjustments so carried forward shall be made at the time of, and in
connection with, each exercise of any of the Warrants. All calculations shall
be made to the nearest one-thousandth of a share, or cent, as the case may be.
(f) OTHER SECURITIES. If at any time, as a result of an adjustment made
pursuant to this Section 6, the Holders shall become entitled to purchase any
shares of capital stock or Other Securities of the Company other than shares of
Common Stock, thereafter the number of such Other Securities so purchasable upon
exercise of each Warrant and the Exercise Price for such securities shall be
subject to adjustment from time to time in a manner and on terms as nearly
equivalent as practicable to the provisions with respect to the Warrant Shares
contained in this Section 6; and the provisions of Sections 3, 4, 5 and 7,
inclusive, with respect to the Warrant Shares, shall apply on like terms to any
such Other Securities.
(g) CONSOLIDATIONS, MERGERS AND OTHER TRANSACTIONS. In case of any
consolidation of the Company with or merger of the Company into another
corporation or entity or in case of any sale or conveyance to another
corporation or entity of the property of the Company as an entirety or
substantially as an entirety, the Company or such successor or purchasing
corporation or entity, as the case may be, shall execute a binding agreement
agreeing that each Holder shall have the right thereafter upon payment of the
Exercise Price in effect immediately prior to such action to purchase upon
exercise of each Warrant the kind and amount of shares and other securities and
property which the Holder would have owned or have been entitled to receive
after the happening of such consolidation, merger, sale or conveyance had such
Warrant been exercised immediately prior to such action. The Company shall not
complete any such consolidation, merger, sale or conveyance unless the agreement
referred to in the foregoing sentence is executed and delivered, is binding and
the mailing thereof provided for in the next sentence is done at the time of
such completion. The Company shall mail by first class mail, postage prepaid,
to each Holder, notice of the execution of and a copy of such agreement. Such
agreement shall provide for adjustments, which shall be as nearly equivalent as
may be practicable to the adjustments provided for in this Section 6 and for
other protections and rights (including without limitation registration rights)
for the Holders as are as nearly equivalent as may be practical to those they
have under this Warrant Agreement. The provisions of this Section 6 shall
similarly apply to successive consolidations, mergers, sales or conveyances.
Each Holder of Warrants shall be under no duty or responsibility to determine
the correctness of any provisions contained in any such agreement relating
either to the kind or amount of shares of stock or Other Securities or property
receivable upon exercise of Warrants or with respect to the method employed and
provided therein for any adjustments.
(h) NOTICE OF ADJUSTMENTS. Whenever the Exercise Price or the kind or
amount of securities purchasable under the Warrants shall be adjusted pursuant
to any of the provisions of
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this Warrant Agreement, the Company shall forthwith thereafter cause to be sent
to SMM and all other Holders a certificate setting forth the adjustments in the
Exercise Price and the number of shares and, in addition, setting forth in
detail the facts requiring such adjustments. In addition, the Company at its
expense shall within 90 days following the end of each of its fiscal years
during the term of this Agreement and promptly upon the reasonable request of
the Holders of at least ten percent of the Warrants in connection with the
exercise from time to time of all or any portion of any Warrants, cause
independent public accountants of nationally recognized standing selected by the
Company to compute any such adjustment in accordance with the terms of the
Warrants and prepare and deliver to the Holders a certificate setting forth such
adjustment and showing in detail the facts upon which the adjustment is based.
(i) NOTICE OF CERTAIN EVENTS. In the event of (i) any taking by the
Company of a record of the holders of any class of securities for the purpose of
determining the holders thereof who are entitled to receive any dividend or
other distribution, or any right to subscribe for, purchase or otherwise acquire
any shares of stock of any class or any Other Securities or property, or to
receive any other right or (ii) any capital reorganization of the Company, any
reclassification or recapitalization of the capital stock of the Company or any
transfer of all or substantially all of the assets of the Company to, or
consolidation or merger of the Company with or into, any other corporation or
other entity or (iii) any voluntary or involuntary dissolution or liquidation of
the Company, then and in each such event the Company will mail or cause to be
mailed to each Holder and, in addition, on the same date as the earliest such
mailing, telecopied and mailed to SMM, a notice specifying the date upon which
any such record date is to be taken for the purpose of such dividend,
distribution or right, stating the amount and character of such dividend,
distribution or right and the date on which any such reorganization,
reclassification, recapitalization, transfer, consolidation, merger,
dissolution, liquidation or winding-up is to take place and the time, if any, as
of which the holders of record of Common Stock (or Other Securities) shall be
entitled to exchange their shares of Common Stock (or Other Securities) for
securities or other property deliverable upon such reorganization,
reclassification, recapitalization, transfer, consolidation, merger,
dissolution, liquidation or winding-up. Such notice shall be mailed at least 15
business days prior to the proposed record date therefor.
(j) OTHER EVENTS ALTERING EXERCISE PRICE. Upon the occurrence of any
event not specifically denominated in this Section 6 as altering the Exercise
Price and the amount of Common Stock purchasable upon the exercise of the
Warrants, if the reasonable exercise of the business judgment of the independent
members of the Board of Directors of the Company (or, if none, the Board of
Directors or the Company) requires, on equitable principles, the alteration of
the Exercise Price favorable to Holders and/or corresponding adjustment
favorable to Holders to the number of shares for which the Warrants are
exercisable, the Exercise Price and such number of shares shall be equitably
altered.
7. FURTHER COVENANTS OF THE COMPANY. The Company hereby agrees as
follows:
(a) RESERVATION OF STOCK. The Company shall at all times reserve and keep
available, solely for issuance and delivery upon the exercise of the Warrants,
all Warrant Shares from time
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<PAGE>
to time issuable upon the exercise of the Warrants.
(b) TITLE TO STOCK. All of the Warrant Shares delivered upon the exercise
of the Warrants and payment of the Exercise Price (including for the purpose by
a net exercise of Warrants as permitted by Section 4(c)) shall be validly
issued, fully paid and nonassessable; each Holder of a Warrant shall receive
good and marketable title to the Warrant Shares, free and clear of all voting
and other trust arrangements, liens, encumbrances, equities, preemptive rights
and, without limitation, claims of any type whatsoever; and the Company shall
have paid all taxes, if any, in respect of the issuance thereof.
(c) EXCHANGE OF WARRANTS. Subject to Section 3(a) hereof, upon surrender
for exchange of any Warrant to the Company, the Company at its expense will
promptly issue and deliver to the Holder thereof a new Warrant or Warrants of
like tenor, in the name of such Holder, calling in the aggregate for the number
of Warrant Shares called by the Warrants so surrendered.
(d) REPLACEMENT OF WARRANTS. Upon receipt of evidence reasonably
satisfactory to the Company of the loss, theft, destruction or mutilation of
Warrants and, in the case of any such loss, theft or destruction, upon delivery
of an indemnity agreement by the Warrant Holder reasonably satisfactory in form
and amount to the Company or, in the case of any such mutilation, upon surrender
by the Holder and cancellation of such Warrants, the Company at its expense will
execute and deliver, in lieu thereof, new Warrants of like tenor.
(e) REPORTING BY THE COMPANY. The Company agrees that, during the term of
the Warrants, it will use its best efforts to keep current in the filing of all
forms and other materials which it may be required to file with the appropriate
regulatory authority pursuant to the Exchange Act and all other forms and
reports required to be filed with any regulatory authority having jurisdiction
over the Company. The Company will take such further action as any Holder may
reasonably request, all to the extent required from time to time to enable such
Holder to sell Warrant Shares without registration under the Act within the
limitation of the exemptions provided by (a) Rule 144 under the Act, as such
Rule may be amended from time to time, or (b) any similar rule or regulation
hereafter adopted by the Commission.
8. OTHER HOLDERS. The Warrants are issued upon the following terms, to
all of which each Holder or owner thereof by the taking thereof consents and
agrees: (a) any person who shall become a transferee, within the limitations on
transfer imposed by Section 3(a) hereof, of a Warrant properly endorsed, shall
take such Warrant subject to the provisions of Sections 3(a) and 3(b) hereof and
thereupon shall be authorized to represent that such transferee is the absolute
owner thereof and, subject to the restrictions contained in this Warrant
Agreement, shall be empowered to transfer absolute title by endorsement and
delivery thereof to a permitted bona fide purchaser for value; and (b) each
prior taker or owner waives and renounces all equities or rights in such Warrant
in favor of each such permitted bona fide purchaser, and each such permitted
bona fide purchaser shall acquire absolute title thereto and to all rights
presented thereby; and (c) until such time as the respective Warrant is
transferred on the books of the Company, the Company may treat the registered
Holder thereof as the absolute owner thereof for
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<PAGE>
all purposes, notwithstanding any notice to the contrary.
9. GENERAL PROVISIONS. All notices, certificates and other communications
from or at the request of the Company to the Holder of any Warrant or Warrant
Share as such shall be mailed by first class, registered or certified mail,
postage prepaid to the Holder, with a copy to Sanders Morris Mundy Inc., 3100
Texas Commerce Tower, Houston, Texas 77002, Attn.: President, or to such other
address for itself as shall have furnished to the Company in writing. This
Warrant Agreement and any of the terms hereof may be changed, waived, discharged
or terminated only by an instrument in writing signed by the party against which
enforcement of such change, waiver, discharge or termination is sought. In
addition and notwithstanding the foregoing, the provisions of Section 3(c) and
(d) and Section 6 hereof cannot be changed, waived, discharged or terminated in
a manner adverse to the Holders without the written consent of one or more
Holder or Holders who collectively own, of record, that number of Warrants
and/or Warrant Shares which in the aggregate shall constitute two-thirds of all
Warrant Shares issued or issuable under this Agreement (excluding Warrant Shares
which have been previously sold, transferred or otherwise disposed of in a
registered public offering, pursuant to Rule 144 under the Act, as such Rule may
be amended from time to time, or pursuant to Regulation S, as such regulation
may be amended from time to time). The headings in this Warrant Agreement are
for purposes of reference only and shall not limit or otherwise affect any of
the terms hereof. This Warrant Agreement, together with the forms of
instruments annexed hereto, supersedes all prior negotiations and all prior
written and prior and contemporaneous oral agreements, representations,
warranties and inducements and constitutes the full and complete agreement of
the parties hereto with respect to the subject matter hereof.
10. GOVERNING LAW. THIS WARRANT AGREEMENT SHALL BE GOVERNED BY, AND
CONSTRUED IN ACCORDANCE WITH, THE INTERNAL LAWS, AND NOT THE LAW PERTAINING TO
CHOICE OR CONFLICT OF LAWS, OF THE STATE OF TEXAS.
U S LIQUIDS INC.
By:
--------------------------------------------------------
Name:
Title:
The foregoing Agreement is hereby confirmed and accepted as of the date first
above written.
SANDERS MORRIS MUNDY INC.
By:
--------------------------------------------------------
Name:
-24-
<PAGE>
Title:
-25-
<PAGE>
FORM OF WARRANT
THE WARRANTS REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO THE CONDITIONS
SPECIFIED IN A WARRANT AGREEMENT, DATED MAY 15, 1997, AMONG THE COMPANY, AND
SANDERS MORRIS MUNDY INC. EXCEPT TO THE EXTENT PERMITTED BY THE WARRANT
AGREEMENT, NO TRANSFER, SALE, PLEDGE, HYPOTHECATION, ENCUMBRANCE OR OTHER
DISPOSITION OF THESE WARRANTS OR THE SHARES OF COMMON STOCK OF THE COMPANY
ACQUIRED ON EXERCISE OF THESE WARRANTS SHALL BE VALID OR EFFECTIVE UNTIL
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (OR, IF APPLICABLE, A
SUCCESSOR LAW THERETO) OR THE COMPANY HAS BEEN PRESENTED WITH SATISFACTORY
EVIDENCE THAT THESE WARRANTS OR SUCH SHARES OF COMMON STOCK WILL BE TRANSFERRED
IN A TRANSACTION EXEMPT FROM SUCH REGISTRATION AND UNTIL ANY APPLICABLE
CONDITIONS CONTAINED IN THE WARRANT AGREEMENT HAVE BEEN FULFILLED. A COPY OF
THE WARRANT AGREEMENT IS ON FILE AT THE OFFICES OF THE COMPANY. THE HOLDER OF
THIS CERTIFICATE, BY ACCEPTANCE OF THIS CERTIFICATE, AGREES TO BE BOUND BY THE
PROVISIONS OF THE WARRANT AGREEMENT.
No. ______________
Warrant to Purchase up to ______ Shares of Common Stock
EXERCISABLE COMMENCING 9:00 A.M., LOS ANGELES TIME, ON THE DAY THAT BEGINS ONE
YEAR AFTER THE EFFECTIVE DATE (AS DEFINED IN THE WARRANT AGREEMENT) BELOW) AND
ENDING AT 5:00 P.M., LOS ANGELES TIME, ON THE DAY THAT IS FIVE YEARS AFTER THE
EFFECTIVE DATE.
U S LIQUIDS INC.
COMMON STOCK PURCHASE WARRANT
This certifies that ___________________________, or registered assigns, is
the holder (the "Holder") of this Warrant to purchase, subject to adjustment,
the number of fully paid and nonassessable shares set forth above (the "Warrant
Shares") of Common Stock, par value $.01 per share (the "Common Stock"), of U S
Liquids Inc., a Delaware corporation (the "Company"), at the per share exercise
price, subject to adjustment (the "Exercise Price"), set forth in the Warrant
Agreement, dated August __, 1997 (the "Warrant Agreement"), among the Company
and Sanders Morris Mundy Inc., at any time prior to the Expiration Date (defined
below), by surrendering this Warrant, with the form of subscription set forth
hereon duly executed, to the Company at the Company's offices at 411 N. Sam
Houston Parkway East, Ste. 400, Houston, TX 77060-3545 or at such other office
or agency as the Company may designate and by paying in full, in the manner
provided in Section 4 of the Warrant Agreement, the Exercise Price for the
Warrant Shares then purchased. Payment of the Exercise Price may be made in cash
or by cashier's check payable to the order of the Company, or by surrender of a
portion of this Warrant
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<PAGE>
as provided in Section 4(c) of the Warrant Agreement.
This Warrant may be exercised at any time and from time to time, in whole
or in part, at the option of the Holder, commencing 9:00 a.m., Los Angeles time,
on the day that begins one year after the Effective Date until 5:00 p.m., Los
Angeles time, on the day that is five years after the Effective Date (the
"Expiration Date"). Upon the purchase of fewer than all of the Warrant Shares,
there shall be issued to the Holder a new Warrant exercisable for the number of
Warrant Shares for which this Warrant has not been exercised or surrendered as
payment. Prior to the Expiration Date, the Holder shall be entitled to exchange
this Warrant, without charge, for another Warrant or Warrants exercisable for
the same aggregate number of Warrant Shares.
Prior to the Expiration Date, subject to any applicable laws restricting
transferability and to any restriction on transferability that may appear on
this Warrant or in the Warrant Agreement, the Holder shall be entitled to
transfer this Warrant upon delivery thereof, duly endorsed by the Holder or by
his, her or its duly authorized attorney or representative, or accompanied by
proper evidence of succession, assignment or authority to transfer, with the
form of assignment set forth hereon duly executed. Upon any such transfer, a
new Warrant or Warrants exercisable for the same aggregate number of Warrant
Shares will be issued by the Company, without charge, in accordance with
instructions in the form of assignment.
This Warrant is issued under and in accordance with the Warrant Agreement
and, except as otherwise provided in this Warrant, is subject to the terms and
provisions contained therein. Upon certain events provided for in the Warrant
Agreement, the Exercise Price and the number of shares of Common Stock issuable
upon the exercise of this Warrant are subject to adjustment. No fractional
shares will be issued upon the exercise of a Warrant. Instead, the Company
shall pay the value of such fractional share to the Holder in cash, as provided
in the Warrant Agreement.
THIS WARRANT SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE
INTERNAL LAWS AND NOT THE LAW PERTAINING TO CHOICE OR CONFLICT OF LAWS, OF THE
STATE OF TEXAS.
In witness whereof, the Company has caused this Warrant to be duly
executed.
U S LIQUIDS INC.
By:
----------------------------------------------
Name:
Title:
Attest:
-27-
<PAGE>
-------------------------------------------------
Name:
Title:
-28-
<PAGE>
ELECTION TO PURCHASE
The undersigned hereby irrevocably elects to exercise this Warrant to
purchase ______________ shares of Common Stock, acknowledges that it will not
dispose of such shares except in compliance with Section 3(b) of the Warrant
Agreement and the Securities Act of 1933, as amended, and requests that
Certificates for such shares be issued and delivered as follows:
Issue to:
-------------------------------------------------------------
(Name)
-------------------------------------------------------------
(Address, including Zip Code)
-------------------------------------------------------------
(Social Security or Tax Identification Number)
Deliver to:
-------------------------------------------------------------
(Name)
-------------------------------------------------------------
(Address, including Zip Code)
In full payment of the aggregate purchase price with respect to the number
of shares being purchased upon exercise of this Warrant, the undersigned hereby
(check applicable payment method): (i) / / tenders payment of $_________ by
cashier's check payable to the order of U S Liquids Inc. or (ii) / / hereby
surrenders to the Company, Warrants to purchase ________ shares of Common Stock.
If the Warrant is exercised hereby (and, if applicable, surrendered to purchase
shares of Common Stock) so as to purchase fewer than all the shares of Common
Stock that may be purchased pursuant to this Warrant, the undersigned requests
that a new Warrant representing the number of full shares for which the Warrant
has not been exercised or surrendered be issued and delivered as set forth
below.
Name of Warrant holder or Assignee:
-------------------------------------------------
(Please Print)
-29-
<PAGE>
Address:
- -----------------------------------
- -----------------------------------
Signature Dated:
(Signature must conform in all respects to name of holder as specified on
the face of the Warrant)
-30-
<PAGE>
ASSIGNMENT
For value received, the undersigned hereby sells, assigns and transfers
unto the Assignee named below all of the rights of the undersigned represented
by the within Warrant, with respect to the number of shares of Common Stock set
forth below:
No. of Shares of
Common Stock Taxpayer
----- I.D.
Name of Assignee Address Number
- ---------------- ------- ------
and does hereby irrevocably authorize the Company to make such transfer on the
Warrant Register maintained at the principal office of the Company and, if
applicable, to issue to the undersigned a Warrant for the portion of such
Warrant not so sold, assigned or transferred.
Dated:
---------------------- -------------------------
Signature
(Signature must conform in all respects to name of holder as specified on the
face of the Warrant).
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<PAGE>
WARRANT AGREEMENT
August 25, 1997
Van Kasper & Company
Sanders Morris Mundy Inc.
c/o Van Kasper & Company
10877 Wilshire Blvd., Ste. 1700
Los Angeles, CA 90024
Ladies and Gentlemen:
U S Liquids Inc., a Delaware corporation (the "Company"), hereby agrees, on
the terms and subject to the conditions of this Warrant Agreement (the
"Agreement"), to sell and deliver to Van Kasper & Company ("VKCO") and Sanders
Morris Mundy Inc. ("SMM"), individually and not as Representatives of the
underwriters referred to in the "Underwriting Agreement" (defined below),
warrants to purchase a number of shares of the "Common Stock" (defined below)
equal to 7.5% (seven and one-half percent) of the aggregate number of shares
(not including "Option Shares" (defined in the Underwriting Agreement)) of the
Common Stock sold to the underwriters pursuant to the Underwriting Agreement.
VKCO and SMM agree, on the terms and subject to the conditions of this
Agreement, to purchase such warrants from the Company.
Each of the warrants will be exercisable by the "Holder" thereof (defined
below), as to all or any lesser number of shares of the Common Stock covered by
the Holder's warrants, at the "Exercise Price" per share (defined below), at any
time and from time to time beginning at 9:00 a.m., Los Angeles time, on the day
that begins one year after the Effective Date (defined below) and ending at 5:00
p.m., Los Angeles time, on the day that is five years after the Effective Date.
The warrants shall be evidenced by instruments in the form of Exhibit A hereto
(those instruments and all instruments issued after the date hereof in
replacement thereof are referred to below as the "Warrants").
The purchase price of the Warrants shall be $0.01 (one cent) for each share
of Common Stock purchasable as of the Closing Time on exercise of the Warrants.
The delivery of the Warrants and payment of the purchase price of the Warrants
are to be made on the "Closing Date" (defined in the Underwriting Agreement), at
the offices of VKCO at 10877 Wilshire Boulevard, Suite 1700, Los Angeles,
California, or such other time and place as may be agreed upon among the
Company, VKCO and SMM (the date(s) of such purchase of the Warrants is referred
to in this Agreement as the "Closing Time").
1. DEFINITIONS. As used in this Agreement, the following terms, unless the
context otherwise clearly requires, shall have for all purposes the following
respective
<PAGE>
meanings, and capitalized terms used herein without definition shall have the
meanings ascribed to them in the Underwriting Agreement:
(a) The term "Common Stock" refers to the Common Stock, par value $.01 per
share, of the Company, and all other shares of any class or classes (however
designated) of the common equity of the Company, now or hereafter authorized,
the holders of which by operation of law shall have the right, without
limitation as to amount, either to all or to a part of the balance of current
dividends and liquidating dividends and distributions after the payment of
dividends and distributions on any shares entitled to preference and the holders
of which ordinarily, in the absence of contingency, shall be entitled to vote
for the election of the directors of the Company (even though the right so to
vote has been suspended by the occurrence of such a contingency), other than
those directors of the Company (constituting a portion of the Board of
Directors) who, pursuant to the Certificate of Incorporation or other charter
documents of the Company, are then to be elected by a designated class or series
of the capital stock of the Company.
(b) "Convertible Securities" shall mean any indebtedness, shares of stock
or other rights granted by the Company (other than Options) convertible into or
exchangeable for Common Stock.
(c) "Effective Date" shall mean the date on which the Securities and
Exchange Commission shall have declared the Registration Statement effective.
(d) The term "Exercise Price" refers to the per share purchase price of
the Warrant Shares subject to this Warrant Agreement. The Exercise Price shall
initially be $______ per share (120% of the initial per share price to the
public of the shares of Common Stock sold pursuant to the Underwriting
Agreement), subject to adjustment as provided in Section 6 below.
(e) The term "Holder", when used with respect to the Warrants or the
Warrant Shares, means the person registered on the books and records of the
Company as being the holder of record of the Warrants or the Warrant Shares, as
the case may be, and, so long as VKCO or SMM holds of record any Warrants or
Warrant Shares, it shall be included in the definition of "Holder," and any
action to be taken or approval to be given by the Holders shall, unless
otherwise provided in this Agreement, require the action by, or approval of, the
Holder or Holders of at least that number of Warrants and Warrant Shares which
in the aggregate shall constitute a majority of all Warrant Shares issued or
issuable under this Agreement.
(f) "Options" shall mean any warrants, options or, without limitation,
other rights granted by the Company to purchase Common Stock or Convertible
Securities.
-2-
<PAGE>
(g) The term "Other Securities" refers to any stock (other than Common
Stock) and other securities of the Company or any other person (corporate or
otherwise) which the Holders of the Warrants at any time shall be entitled to
receive, or shall have received, upon the exercise of the Warrants, in lieu of
or in addition to Common Stock, or which at any time shall be issuable or shall
have been issued in exchange for or in replacement of Common Stock or Other
Securities, whether pursuant to Section 6 below or otherwise.
(h) The term "Prospectus" refers to the prospectus which is part of the
Company's Registration Statement on Form S-1 in the form first filed with the
Securities and Exchange Commission (the "Commission") pursuant to Rule 424(b) of
the applicable rules and regulations (the "Rules and Regulations") of the
Commission under the Securities Act of 1933, as amended (the "Act").
(i) The term "Registration Statement" refers to the Company's Registration
Statement on Form S-1 (No. 333-30065), as amended, when it first became
effective under the Act.
(j) The term "Warrant Shares" refers to the shares of Common Stock (or
Other Securities) issued or issuable upon the exercise, in whole or in part, of
any of the Warrants.
2.1 REPRESENTATIONS AND WARRANTIES. The Company represents and warrants
to VKCO and SMM as follows:
(a) CORPORATE ACTION. The Company has all requisite power and authority,
and has taken all necessary action, to enter into and perform all of its
obligations under this Agreement, to issue and deliver the Warrants and to
authorize and reserve for issuance, and upon payment from time to time of the
Exercise Price in accordance with the terms of this Agreement, to issue and
deliver the Warrant Shares; and this Agreement has been duly authorized,
executed and delivered by the Company and constitutes the legal, valid and
binding agreement of the Company, enforceable against the Company in accordance
with its terms, except (i) as such enforceability may be subject to or limited
by bankruptcy, insolvency, reorganization, moratorium and other similar laws or
equitable principles now or hereafter in effect relating to or affecting
creditors' rights generally (collectively, the "Recognized Defenses") and (ii)
insofar as the indemnification and contribution provisions hereof may be limited
under federal and state securities laws and the public policies underlying such
laws.
(b) OUTSTANDING COMMON STOCK. The outstanding shares of Common Stock have
been duly and validly authorized and issued and are fully paid and
non-assessable and free of preemptive rights. The Warrant Shares (i) are duly
authorized by the Company's Certificate of Incorporation, (ii) have been duly
and validly authorized to be
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<PAGE>
issued and adequately reserved by the Board of Directors of the Company, (iii)
will, when issued and delivered to the Holders pursuant to this Agreement, be
duly and validly issued, fully paid and non-assessable and free and clear of all
liens, charges, encumbrances or rights of others except for those which may be
created by the Holder, and (iv) and have been approved for listing, upon
official notice of issuance, on the American Stock Exchange. The holders of
outstanding shares of capital stock of the Company are not entitled to any
preemptive or similar rights to subscribe for or purchase Warrant Shares or
other shares of capital stock of the Company and, except as otherwise set forth
or incorporated by reference in the Prospectus, there are no outstanding rights,
warrants or options to acquire, or instruments convertible into or exchangeable
for, or agreements or understandings with respect to the sale or issuance of,
any shares of capital stock of the Company.
(c) NO VIOLATION. None of the execution or delivery of this Agreement,
the consummation of the transactions contemplated by this Agreement or
compliance with the terms and provisions of this Agreement will (i) conflict
with or constitute a breach of, or a default (or default with notice, the
passage of time or otherwise) under any bond, debenture, note or other evidence
of indebtedness or any indenture, mortgage, deed of trust or any other agreement
or instrument to which the Company or any of its subsidiaries is a party or by
which any of them is bound or to which any of their respective property or
assets is subject, (ii) result in the imposition of a lien on any properties of
the Company or any of its subsidiaries or an acceleration of indebtedness of the
Company or any of its subsidiaries or (iii) result in a violation of any law,
administrative regulation or order of any court or governmental agency or
authority applicable to the Company or any of its subsidiaries or to any of
their respective properties or assets. No consent, approval, authorization or
other order of any regulatory body, administrative agency or other governmental
body is required for the valid issuance and sale of the Warrant Shares to VKCO
and SMM or the other transactions contemplated by this Agreement, except for
registration under the federal securities laws and for permits and similar
authorizations required under state blue sky laws or similar laws.
(d) UNDERWRITING AGREEMENT. All representations and warranties made by
the Company in Section 1 of the Underwriting Agreement, dated August __, 1997,
by and among the Company and VKCO and SMM, as Representatives of the several
underwriters named therein (the "Underwriting Agreement"), are and will be at
and as of the Closing Time true and correct and are hereby incorporated by
reference into this Agreement as if such representations and warranties were set
forth in full herein.
2.2 REPRESENTATIONS AND WARRANTIES OF VKCO AND SMM. VKCO and SMM
severally represents and warrants to the Company that it has all requisite
corporate power and corporate authority, and has taken all necessary corporate
action, to enter into and perform all of its obligations under this Agreement
and that this Agreement has
-4-
<PAGE>
been duly authorized, executed and delivered by it and constitutes its legal,
valid and binding agreement, enforceable against it in accordance with its
terms, except (i) as such enforceability may be subject to or limited by the
Recognized Defenses and (ii) insofar as the indemnification and contribution
provisions hereof may be limited under federal and state securities laws and the
public policies underlying such laws.
3. COMPLIANCE WITH THE ACT.
(a) TRANSFERABILITY OF WARRANTS. Until August 24, 1998, each of VKCO and
SMM severally agrees that the Warrants may not be transferred, sold, assigned or
hypothecated except: (i) to its successors in a merger or consolidation or other
business combination; (ii) to purchasers of all or substantially all of its
assets; (iii) to any officers or partners of VKCO or SMM, as the case may be;
(iv) by operation of law; or (v) as permitted below in this Section 3. Each of
VKCO and SMM further severally agrees that the Company shall have no obligation
to effect any transfer of the Warrants during the time period referred to above,
unless the transferee, purchaser, assignee or pledgee, as the case may be, has
executed an agreement obligating the transferee to comply with all terms and
conditions of this Warrant Agreement applicable to the transferor.
(b) TRANSFERABILITY OF WARRANT SHARES.
(i) Except as otherwise provided in this Section 3(b), each
certificate for Warrant Shares initially issued upon the exercise of any
Warrants shall be stamped or otherwise imprinted with a legend in substantially
the following form:
"The Shares represented by this certificate are
subject to the conditions specified in a Warrant Agreement,
dated August __, 1997, among the Company, Van Kasper &
Company, and Sanders Morris Mundy Inc. Except to the extent
permitted by the Warrant Agreement, no transfer, sale,
pledge, hypothecation, encumbrance or other disposition of
the shares represented by this certificate shall be valid or
effective until registered under the Securities Act of 1933,
as amended (or, if applicable, a successor law thereto) or
the Company has been presented with satisfactory evidence
that such shares will be transferred in a transaction exempt
from such registration and until any applicable conditions
contained in the Warrant Agreement have been fulfilled. A
copy of the Warrant Agreement is on file at the offices of
U S Liquids Inc. The holder of this certificate, by
acceptance of this certificate, agrees to be bound by the
provisions of the Warrant Agreement."
-5-
<PAGE>
(ii) Each certificate evidencing Warrant Shares issued upon any
transfer, sale, pledge, assignment, hypothecation or other disposition of any
Warrant Shares shall bear the restrictive legend set forth in Section 3(b)(i),
unless in the opinion of counsel to such Holder reasonably satisfactory to the
Company such legend is not required in order to ensure compliance with the Act.
(iii) Notwithstanding the foregoing provisions of this Section 3(b),
the restrictions imposed by subsections (i) and (ii) of this Section upon the
transferability of the Warrant Shares and the legend requirements of Section
3(b)(i) shall terminate as to any particular Warrant Shares (A) when and so long
as the transfer, sale, pledge, hypothecation, encumbrance or other disposition
thereof, shall have been registered under the Act or (B) when the Holder or
Holders of any Warrants or Warrant Shares has delivered to the Company the
written opinion of counsel to such Holder or Holders, which shall be reasonably
satisfactory to the Company, stating that such legend is not required in order
to ensure compliance with the Act. Whenever the restrictions imposed by this
Section shall terminate as to any Warrant Shares, as provided above, the Holder
thereof shall be entitled to receive from the Company, at the Company's expense,
a new certificate representing such Warrant Shares not bearing the restrictive
legend set forth in Section 3(b)(i).
(c) DEMAND REGISTRATION. At any time after the day that begins one year
after the Effective Date and on or before the end of the day that is five years
after the Effective Date, upon written, or telegraphic or telephonic notice
followed as soon as practicable by written confirmation thereof, from any Holder
or Holders (the "Requesting Holders") of that number of Warrants and/or Warrant
Shares which in the aggregate shall constitute a majority of all Warrant Shares
issued or issuable under this Agreement (excluding Warrant Shares which have
been previously sold, transferred or otherwise disposed of in a registered
public offering, pursuant to Rule 144 under the Act, as such rule may be amended
from time to time, or pursuant to Regulation S under the Act, as such Regulation
may be amended from time to time, or which in the opinion of both counsel to the
Company and counsel to the Requesting Holders may otherwise then be publicly
sold without registration under the Act), that such Holder or Holders request
the registration under the Act of any of the Warrant Shares, the Company shall
(i) immediately give notice to the other Holders and afford them the opportunity
to participate in the registration statement and (ii) as promptly as possible
after the receipt of such notice from the Requesting Holders, but in any event
within 60 days of the receipt of such notice, and solely at its cost and
expense, file a registration statement with respect to the offering and sale or
other disposition of the Warrant Shares with respect to which it shall have
received such notice. Such registration statement may, if the Company satisfies
the applicable requirements, be made on Form S-3. If a registration requested
pursuant to this Section 3(c) is an underwritten registration, the Company and
other holders of securities of the Company may include securities in such
registration without the written consent of the Holders of the Warrant Shares
for which
-6-
<PAGE>
registration has been requested pursuant to this Section 3(c) if, but only if,
the managing underwriters of such registration advise the participating Holders
of Warrant Shares in writing that in their opinion such inclusion will not
materially affect the successful marketing of the Warrant Shares. The Holders
shall not be deemed to have effected a demand registration pursuant to this
Section 3(c) unless and until the registration statement is declared effective.
The Company shall be obligated to file only one registration statement pursuant
to this Section 3(c) which becomes effective, whether or not the registration
statement at the time it becomes effective covers all or a portion of the
Warrant Shares.
(d) PIGGYBACK REGISTRATION. If, at any time during the period commencing
on the day that begins one year from the Effective Date and ending at the end of
the day that is six years after the Effective Date, the Company shall propose to
register any shares of Common Stock or Other Securities (but excluding any
shares or securities being registered pursuant to Form S-8 or Form S-4 or any
successor form to either of them), the Company shall (i) give each Holder
written notice, or telecopy and telephonic notice followed as soon as
practicable by written confirmation thereof, of such proposed registration at
least 20 business days prior to the filing of such registration statement and
(ii) upon written notice, or telecopy or telephonic notice followed as soon as
practicable by written confirmation thereof, given to the Company by any Holder
within 15 days after the giving of such written confirmation or written notice
by the Company, the Company shall include or cause to be included in any such
registration statement all or such portion of the Warrant Shares as such Holder
may request; provided, however, that the Company may at any time withdraw or
cease proceeding with any such registration if it shall at the same time
withdraw or cease proceeding with the registration of the Common Stock or Other
Securities originally proposed to be registered; and provided, further, that in
connection with any registered public offering involving an underwriting, the
managing underwriter may (if in its reasonable opinion marketing factors so
require) limit the number of securities (including any Warrants or Warrant
Shares) included in such offering (other than securities of the Company). In
the event of any such limitation, the total number of Warrant Shares to be
offered for the account of the Holders participating in the registration shall
be reduced pro rata in proportion to the respective number of shares requested
to be included therein to the extent necessary to reduce the total number of
shares proposed to be registered to the number of shares recommended by the
managing underwriter; provided, however, that if the amount or kind of
securities to be offered for the accounts of Holders shall be reduced in
accordance with this sentence, the Company shall not be permitted to include
securities of any persons (other than the Company) unless the Holders are
permitted to participate on a pro rata basis with other selling securityholders.
Notwithstanding the foregoing, the Company shall not be obligated to include
Warrant Shares in more than two registration statements pursuant to this
Agreement.
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<PAGE>
(e) COMPANY'S OBLIGATIONS IN REGISTRATION. If any Holder timely elects to
participate in an offering by including Warrant Shares in a registration
statement pursuant to Section 3(c) or (d) above, the Company shall use its best
efforts to effect such registration to permit the sale of Warrant Shares in
accordance with the intended method or methods of disposition thereof and,
without limitation, pursuant thereto the Company shall:
(i) notify the Holders as to the filing of the registration
statement and of all amendments or supplements thereto filed prior to the
effective date thereof;
(ii) use its best efforts to cause any registration statement filed
under the Act pursuant to Section 3(c) or (d) above to become effective at the
earliest possible date after the filing thereof and to comply with all
applicable rules and regulations of the Commission in connection therewith;
provided, that before filing a registration statement or prospectus or any
amendments or supplements thereto, including documents which would be
incorporated or deemed to be incorporated by reference in the registration
statement after the initial filing of any registration statement, the Company
will furnish to the Holders, their respective counsel and the underwriters, if
any, to be engaged in connection with the offering and sale by the Company (for
purposes of this Section 3(e) and Section 3(f), the "Underwriters"), copies of
all such documents proposed to be filed, which documents will be subject to the
review of the Holders, their respective counsel and the Underwriters, and the
Company will not file any registration statement, or amendment thereto, or any
prospectus or any supplement thereto relating in whole or in part to the
Holders' Warrant Shares (including such documents incorporated or deemed to be
incorporated by reference) to which the Holders or the Underwriters, if any,
shall reasonably object;
(iii) notify the Holders immediately, and confirm the notice in
writing, (1) when the registration statement or any post-effective amendment
thereto becomes effective, (2) when a prospectus or prospectus supplement or
post-effective amendment has been filed, (3) of any request by the Commission
for amendments, supplements or additional information related to a registration
statement or prospectus or otherwise, (4) of the issuance by the Commission of
any stop order or of the initiation, or the threatening, of any proceedings for
that purpose known to the Company, (5) of the receipt by the Company of any
notification with respect to the suspension of qualification of the Warrant
Shares for sale in any jurisdiction or of the initiation, or the threatening, of
any proceedings for that purpose known to the Company, (6) of the receipt of any
comments from the Commission or any state regulatory authority, (7) of the
happening of any event which requires the making of any changes in a
registration statement or the related prospectus or any prospectus supplement so
that such documents will not contain any untrue statement of a material fact or
omit to state any material fact required to be stated therein or necessary to
make the statements therein not misleading and (8) of the
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<PAGE>
determination of the Company that a post-effective amendment to a registration
statement would be necessary or appropriate;
(iv) make every reasonable effort to obtain the withdrawal of any
order suspending the effectiveness of a registration statement, or the lifting
of any suspension of the qualification (or exemption from qualification) of any
of the Warrant Shares for sale in any jurisdiction, at the earliest possible
moment;
(v) if reasonably requested by the Underwriters, if any, or the
Holders, immediately incorporate in a prospectus supplement or post-effective
amendment such information as the Holders and the Underwriters, if any, agree
should be included therein relating to the sale and distribution of the Warrant
Shares, including, without limitation, information with respect to the number of
Warrant Shares being sold to such Underwriters, the purchase price being paid
therefor by such Underwriters and with respect to any other terms of the
underwritten offering of the Warrant Shares to be sold in such offering; make
all required filings of such prospectus supplement or post-effective amendment
as soon as notified of the matters to be incorporated in such prospectus
supplement or post-effective amendment; and supplement or amend any registration
statement if reasonably requested by the Holders or any Underwriter of Warrant
Shares covered by such Warrant Shares;
(vi) furnish to each of the Holders whose Warrant Shares have been
included therein, their respective counsel and each Underwriter, if any, without
charge, at least one manually executed copy of any registration statement
(including all amendments thereto) and any post-effective amendment thereto,
including financial statements and schedules, all documents incorporated therein
by reference and all exhibits (including those incorporated by reference);
(vii) during the time when a prospectus is required to be delivered
under the Act in connection with the distribution of the Warrant Shares, comply
so far as it is able with all requirements imposed upon it by the Act, as now
and hereafter amended, and by the Rules and Regulations promulgated by the
Commission thereunder, as from time to time in force, so far as necessary to
permit the continuance of sales of or dealings in the Warrant Shares. If at any
time when a prospectus relating to the Warrant Shares is required to be
delivered under the Act any event shall have occurred as a result of which, in
the opinion of counsel for the Company or counsel for the Holders, the
prospectus relating to the Warrant Shares as then amended or supplemented
includes an untrue statement of a material fact or omits to state any material
fact required to be stated therein or necessary to make the statements therein
not misleading, or if it is necessary at any time to amend such prospectus to
comply with the Act, the Company will use its best efforts promptly to prepare
and file with the Commission an appropriate amendment or supplement in form and
substance reasonably satisfactory to the Holders;
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<PAGE>
(viii) make generally available to its security holders as soon as
practicable, but not later than 15 months following the effective date (and each
other deemed effective date) of such registration statement, an earnings
statement or statements of the Company and any subsidiaries it may then have
covering a period of at least 12 months beginning after the effective date of
the registration statement (but in no event commencing later than 90 days after
such date), which shall satisfy the provisions of Section 11(a) of the Act and
Rule 158 promulgated thereunder;
(ix) prepare and promptly file with the Commission such amendments
and post-effective amendments to each registration statement as may be necessary
to keep such registration statement continuously effective for a period of nine
months; cause the related prospectus to be supplemented by any required
prospectus supplement, and as so supplemented to be timely filed pursuant to
Rule 424 under the Act; and comply with the provisions of the Act with respect
to the disposition of all Warrant Shares covered by such registration statement
during the applicable period in accordance with the intended methods of
disposition as set forth in such registration statement or supplement to such
prospectus; and in these regards the Company shall not be deemed to have used
its best efforts to keep a registration statement effective during the
applicable period if it unreasonably takes any action that would result in any
Holder whose Warrant Shares have been included therein not being able to sell
such Warrant Shares at any time during such period or for more than 30 days,
whether or not consecutive, in such period;
(x) deliver to each of the Holders, their respective counsel and
the Underwriters, if any, without charge, as many copies of the prospectus or
prospectuses (including each preliminary prospectus) and any amendment or
supplement thereto as such persons may reasonably request; and the Company
consents to the use of any such prospectus or any amendment or supplement
thereto by the Holders and each of the Underwriters, if any, in connection with
the offering and sale of the Warrant Shares covered by such prospectus or any
amendment or supplement thereto;
(xi) prior to any public offering of Warrant Shares, register or
qualify or cooperate with the Holders, the Underwriters, if any, and their
respective counsel in connection with the registration or qualification (or
exemption from such registration or qualification) of such Warrant Shares for
offer and sale under the securities or blue sky laws of such jurisdictions as
the Holders or any Underwriter reasonably requests in writing; keep each such
registration or qualification (or exemption therefrom) effective during the
period the applicable registration statement is required to be kept effective
and do any and all other acts or things necessary or advisable to enable the
disposition in such jurisdictions of the Warrant Shares covered by the
applicable registration statement; provided, that the Company will not be
required to qualify generally to do business in any jurisdiction where it is not
then so qualified or to take any action which would
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<PAGE>
subject it to general service of process in any such jurisdiction where it is
not then so subject;
(xii) cooperate with the Holders and the Underwriters, if any, to
facilitate the timely preparation and delivery of certificates representing
Warrant Shares to be sold, which certificates shall not bear any restrictive
legends; and enable such Warrant Shares to be in such denominations and
registered in such names as the Underwriters may request at least two business
days prior to any sale of Warrant Shares to the Underwriters;
(xiii) use its best efforts to cause the Warrant Shares covered by the
applicable registration statement to be registered with or approved by such
other governmental agencies or authorities as may be necessary to enable the
Holders and the Underwriters, if any, to consummate the disposition of such
Warrant Shares;
(xiv) enter into such agreements in form and substance reasonably
acceptable to the Company and its counsel (including an underwriting agreement)
and take all such other actions in connection therewith as may be necessary to
expedite or facilitate the disposition of such Warrant Shares and, in such
connection, whether or not an underwriting agreement is entered into and whether
or not the registration is an underwritten registration: (1) make such
representations and warranties to the Holders with respect to the business of
the Company and any subsidiaries it may then have, the registration statement,
the prospectus (and, if applicable, prospectus supplement) and documents, if
any, incorporated or deemed to be incorporated by reference in the registration
statement (and, if applicable, prospectus supplement), in each case in such
form, substance and scope as are reasonably requested by the Holders and confirm
the same if and when requested; (2) obtain opinions of counsel to the Company
and updates thereof addressed to the Holders with respect to the matters
referred to in the preceding clause (1) in such form, scope and substance as are
reasonably requested by the Holders; (3) in the case of an underwritten
offering, enter into an underwriting agreement in form, scope and substance as
is customary in underwritten offerings and obtain (a) opinions of counsel to the
Company and updates thereof (which counsel and opinions (in form, scope and
substance) shall be reasonably satisfactory to the Underwriters) addressed to
the Underwriters covering the matters customarily covered in opinions requested
by underwriters in underwritten offerings and such other matters as may be
reasonably requested by the Underwriters and (b) obtain opinions of counsel to
the Company and updates thereof (which counsel and opinions (in form, scope and
substance) shall be reasonably satisfactory to the Holders) addressed to the
Holders covering matters reasonably requested by the Holders (whether or not
such matters are different from, or in addition to, the matters described in
subclause (a) of this subsection (xiv)(3); (4) obtain "comfort" letters and
updates thereof from the independent certified public accountants of the Company
(and, if necessary, any other independent certified public accountants of any
subsidiary of the Company or of any business acquired by the
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<PAGE>
Company for which financial statements and financial data is or is required to
be included in the registration statement), addressed to the Holders and each of
the Underwriters, if any, such letters to be in customary form and covering
matters of the type customarily covered in "comfort" letters to underwriters in
connection with underwritten offerings; (5) if an underwriting agreement is
entered into, the same shall set forth in full the indemnification and
contribution provisions and procedures of Section 3(f) hereof (or such other
indemnification and contribution provisions as shall be acceptable to the
Holders and the Underwriters of such underwritten offering) with respect to all
parties to be indemnified pursuant to said section; and (6) the Company shall
deliver such documents and certificates as may be requested by the Holders and
the Underwriters, if any, to evidence the continued validity of the
representations and warranties made pursuant to clause (1) above and to evidence
compliance with any customary conditions contained in the underwriting agreement
or other agreement entered into by the Company. Each of the above shall be done
at each closing under such underwriting or similar agreement or as and to the
extent required thereunder;
(xv) make available for inspection by a representative of the
Holders or any Underwriter participating in any disposition pursuant to such
registration statement and any attorney or accountant retained by the Holders or
such Underwriter, all financial and other records, pertinent corporate documents
and properties of the Company and its subsidiaries and cause the officers,
directors and employees of and independent accountants and attorneys for the
Company and its subsidiaries personally to meet with and to supply all
information reasonably requested by any such representative, Underwriter,
attorney or accountant in connection with any registration of Warrant Shares;
provided, that any records, information or documents that are designated by the
Company in writing as confidential shall be kept confidential by such persons
unless (i) disclosure of such records, information or documents is required by
court or administrative order, (ii) disclosure of such records, information or
document is, in the opinion of counsel to the Holders or to any Underwriter,
required pursuant to the requirements of the Act or (iii) such records,
information or documents are otherwise publicly available;
(xvi) pay all costs and expenses incident to the performance of the
Company's obligations under Sections 3(c) and (d) above and under this Section
3(e) (collectively "Registration Expenses"), including without limitation the
fees and disbursements of the Company's auditors, legal counsel, any special
legal counsel (including one legal counsel for the Holders) and legal counsel
(including, if applicable, legal counsel to the Underwriters) responsible for
qualifying the Warrant Shares under state securities or blue sky laws, all
filing fees and printing expenses, all expenses in connection with the transfer
and delivery of the Warrant Shares, all expenses in connection with the
qualification or registration of the Warrant Shares under applicable state
securities or blue sky laws of such states as are designated by the Holders (or
obtaining exemptions from such qualification or registration under state
securities or
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<PAGE>
blue sky laws) and, if applicable, the fee of the National Association of
Securities Dealers, Inc. in connection with its review; provided, that in no
event shall Registration Expenses include any underwriting discounts,
commissions or fees or the fees of more than one counsel retained by the Holders
or the fees, except with respect to such state securities blue sky matters, of
legal counsel retained by the Underwriters in connection with the sale of
Warrant Shares pursuant to Section 3(c) or 3(d) above; and
(xvii) in connection with the filing of a registration statement
pursuant to Section 3(c) or (d) above, use its best efforts to obtain
indemnification of the Holders by the Underwriter to the same extent said
Underwriter provides indemnification to the Company.
As used in this Section 3(e), the term "Holders" refers only to those
Holders who have timely elected to sell Warrants Shares in an offering.
(f) INDEMNIFICATION.
(i) The Company shall indemnify and hold harmless VKCO, SMM, the
Holders and any underwriter (as defined in the Act) for VKCO, SMM and/or the
Holders, and each person, if any, who respectively controls (within the meaning
of Section 15 of the Act) VKCO, SMM, or any of the Holders or such underwriter
against any losses, claims, damages, liabilities (or actions in respect thereof)
and expenses whatsoever (including, but not limited to, any and all expense
whatsoever reasonably incurred in investigating, preparing or defending against
any litigation, commenced or threatened, or any claim whatsoever), joint or
several, to which VKCO, SMM, the Holders or such underwriter or such controlling
person becomes subject, under the Act, the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), or other federal or state statute, law or
regulation, at common law or otherwise, specifically including but not limited
to losses, claims, damages or liabilities (or actions in respect thereof) or
expenses related to negligence on the part of any such indemnified party,
insofar as any such loss, claim, damage, liability or expense (or actions in
respect thereof) (1) arises out of or is based upon any breach of any
representation, warranty or covenant of the Company in this Agreement or upon
any untrue statement or alleged untrue statement of any material fact contained
in (A) Section 2 of this Agreement, (B) any registration statement covering the
Warrant Shares as originally filed or in any amendment thereof, in the
prospectus contained therein or in an amendment or supplement thereto or (C) in
any application or other document, or any amendment or supplement thereto (in
this Section collectively called "application") executed by or on behalf of the
Company or based upon written information furnished by or on behalf of the
Company filed in any jurisdiction in order to qualify or register the Warrant
Shares under the securities or blue sky laws thereof (or to obtain exemptions
from such qualifications or registration requirements) or filed with the
Commission or any securities association or securities exchange, or (2) arises
out of or is based upon the omission or alleged omission to state
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<PAGE>
in any of the documents described in subclauses (1)(A), (B) or (C) above, a
material fact required to be stated therein or necessary to make the statements
therein not misleading, and agrees to reimburse each such indemnified person, as
incurred, for any legal or other expenses reasonably incurred by them in
connection with investigation or defending any such loss, claim, damage,
liability or action; provided, however, that the Company shall not be obligated
to indemnify in any such case to the extent that any such loss, claim, damage,
liability or expense arises out of or is based upon any untrue statement or
alleged untrue statement or omission or alleged omission made therein in
reliance upon, and in conformity with, written information furnished to the
Company by the indemnified person specifically for use therein. The Company
will not, without the prior written consent of VKCO and SMM, settle or
compromise or consent to the entry of any judgment in any pending or threatened
claim, action, suit or proceeding in respect of which indemnification may be
sought hereunder (whether or not VKCO or SMM is a party to such claim, action,
suit or proceeding), unless such settlement, compromise or consent includes,
without payment by VKCO or SMM, an unconditional release of all indemnified
parties from all liability arising out of such claim, action, suit or
proceeding, satisfactory in form and substance to VKCO and SMM.
(ii) Any Holder that includes all or a part of such Holder's Warrant
Shares in a registration statement pursuant to Sections 3(c) or (d) above agrees
to indemnify and hold harmless the Company and each of its directors and
officers who have signed any such registration statement, any other Holder of
Warrant Shares included in such registration statement and any underwriter (as
defined in the Act) for the Company or the Holders of Warrant Shares, and each
person, if any, who controls (within the meaning of Section 15 of the Act) the
Company or such underwriter to the same extent as the indemnity by the Company
in Section 3(f)(i), but only with respect to any untrue statement or alleged
untrue statement or omission or alleged omission, if any, made in such
registration statement, or any amendment or supplement thereto, or in any
application in reliance upon, and in conformity with, written information
furnished by the indemnifying Holder to the Company or such controlling person
expressly for use in the registration statement, or any amendment or supplement
thereto, or any such application, as the case may be. If any action shall be
brought in respect of which indemnity may be sought against any of the Holders,
such Holder(s) shall have the rights and duties given to the indemnifying party,
and the persons so indemnified shall have the rights and duties given to the
indemnified party, by the provisions of Section 3(f)(iii) below;
(iii) If any action is brought against a person in respect of which
indemnity may be sought hereunder against an indemnifying party, such person
shall promptly notify the indemnifying party in writing of the institution of
such action (but the failure to so notify shall not affect the indemnification
and other rights provided for herein except to the extent, if any, that the
indemnifying party is prejudiced by the failure to so give or timely give such
notice) and the indemnifying party shall assume the
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defense of the action, including the employment of counsel satisfactory to the
indemnified person and payment as incurred of all fees and expenses related
thereto. The indemnified person shall have the right to employ its own counsel
in any such case, but the fees and expenses of such counsel shall be at the
expense of such indemnified person unless (1) the employment of such counsel and
the payment of fees and expenses thereof shall have been authorized in writing
by the indemnifying party in connection with the defense of the action, (2) the
indemnifying party shall have failed promptly after notice by such indemnified
person to assume the defense of such action or proceeding and to employ counsel
satisfactory to the indemnified person in any such action or proceeding or (3)
the named parties to any such action or proceeding (including any impleaded
parties) include both such indemnified person and the indemnifying party, and
such indemnified person shall have been advised by counsel that there may be
legal defenses or rights available to such indemnified person which are
different from or additional to those available to the indemnifying party (in
which case, if such indemnified person notifies the indemnifying party in
writing that it elects to employ separate counsel at the expense of the
indemnifying party, the indemnifying party shall not have the right to assume
the defense of such action, it being understood, however, that the indemnifying
party shall not, in connection with any one such action or proceeding or
separate but substantially similar or related actions or proceedings in the same
jurisdiction arising out of the same general allegations or circumstances, be
liable for the reasonable fees and expenses of more than one separate firm of
attorneys (together with appropriate local counsel) at any time for such
indemnified person. Anything in this paragraph to the contrary notwithstanding,
the indemnifying party shall not be liable for any settlement of any claim or
action effected without its written consent. The indemnity agreements contained
in this Section shall remain in full force and effect regardless of any
investigation made by or on behalf of any indemnified person and shall survive
any termination of this Agreement. The indemnifying party agrees promptly to
notify the indemnified party of the commencement of any litigation or
proceedings against the indemnifying party or any of its officers or directors
in connection with any registration statement referred to in Section 3(c) or (d)
above.
(iv) If the indemnification provided for in items (i), (ii) and
(iii) of this Section 3(f) from the indemnifying party is unavailable to an
indemnified party hereunder in respect of any losses, claims, damages,
liabilities or expenses referred to therein, then the indemnifying party, in
lieu of indemnifying such indemnified party, shall contribute to the amount paid
or payable by such indemnified party as a result of such losses, claims,
damages, liabilities or expenses in such proportion as is appropriate to reflect
not only the relative benefits received by the indemnified party and the
indemnifying party, but also the relative fault of the indemnifying party and
indemnified parties in connection with the actions which resulted in such
losses, claims, damages, liabilities or expenses, as well as any other relevant
equitable considerations. The relative fault of the indemnifying party and
indemnified parties shall be determined by reference to, among other things,
whether any action in question, including any untrue or
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alleged untrue statement of a material fact or omission or alleged omission to
state a material fact, has been made by, or relates to information supplied by,
the indemnifying party or indemnified parties, and the parties' relative intent,
knowledge, access to information and opportunity to correct or prevent such
action. The amount paid or payable by a party as a result of the losses,
claims, damages, liabilities and expenses referred to above shall be deemed to
include, subject to the limitations set forth in subparagraph (iii) of this
Section 3(f), any legal or other fees or expenses incurred by such party in
connection with any investigation or proceeding. The parties hereto agree that
it would not be just and equitable if contribution pursuant to this subparagraph
(iv) of this Section 3(f) were determined by pro rata allocation or by any other
method of allocation which does not take account of the equitable and other
considerations referred to in this paragraph. If the full amount of the
contribution specified in this subparagraph (iv) of this Section 3(f) is not
permitted by law, then such indemnified person shall be entitled to contribution
from the indemnifying party to the full extent permitted by law.
Notwithstanding the provisions of this Section 3(f)(iv), no Holder shall be
required to contribute any amount in excess of the amount by which the total
price at which the Warrant Shares of such Holder were sold to the public exceeds
the amount of any damages which such Holder has otherwise been required to pay
by reason of such untrue statement or omission. No party found guilty of
fraudulent misrepresentation (within the meaning of Section 11(f) of the Act)
shall be entitled to contribution from any party who was not found guilty of
such fraudulent misrepresentation.
(v) Whenever any indemnifying or contributing party is requested by
the indemnified party or the party entitled to contribution to make a payment
pursuant to the forgoing provisions of this Section 3(f), such payment will be
made within five business days after the request and, if not so paid, the amount
due will thereafter bear interest at ten percent per annum, compounded annually
(but not in excess of the maximum amount permitted by law).
4. EXERCISE OF WARRANTS.
(a) EXERCISE OF WARRANTS. The Warrants may be exercised from time to time
and in full or in part by the Holder thereof by surrender of the Warrants, with
the Election to Purchase attached thereto duly executed by such Holder, to the
Company at its offices at 411 North Sam Houston Parkway E., Ste. 400, Houston,
TX 77060-3545, or at such other office or agency as the Company may from time to
time designate in writing to each Holder, accompanied by payment, in cash or by
cashier's check payable to the order of the Company or as provided in Section
4(c), in the amount obtained by multiplying the number of Warrant Shares
designated by the Holder in the Election to Purchase by the Exercise Price per
share. Exercise of any Warrant shall constitute an acknowledgment by the
purchasing Holder that it will not dispose of the Warrant Shares acquired upon
such exercise except in compliance with Section 3(b) hereof and the Act. Upon
any partial exercise of the Warrants, the Company at its expense will forthwith
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issue and deliver to the purchasing Holder a new Warrant, in the name of such
Holder and for the number of Warrant Shares equal to the number of shares called
for by the surrendered Warrant (after giving effect to any adjustment therein as
provided in Section 6 below) minus the number of such Warrant Shares (after
giving effect to such adjustment) purchased by the Holder pursuant to such
exercise.
(b) COMPANY TO REAFFIRM OBLIGATIONS. On the date of any exercise of any
Warrants (except that if, on that date, the stock transfer books of the Company
are closed, in which case on the next succeeding date on which such stock
transfer books are open) the Holder exercising the same shall be deemed to have
become, and thereafter shall be considered, a holder of record of the shares of
Common Stock purchased upon such exercise for all purposes. Holders of Warrants
shall have no rights of share ownership until they exercise their Warrants. The
Company will, at the time of any exercise of any Warrant, upon the request of
the Holder thereof, acknowledge in writing its continuing obligation to afford
to that Holder any rights (including without limitation any right to
registration of the Warrant Shares issued upon such exercise) to which the
Holder shall continue to be entitled after such exercise in accordance with the
provisions of this Agreement; provided, however, that if the Holder of a Warrant
shall fail to make any such request, such failure shall not affect the
continuing obligation of the Company to afford those rights to the Holder.
(c) NET EXERCISE OF WARRANTS. Notwithstanding anything to the contrary
contained in this Section 4, any Holder may elect to exercise any Warrant in
whole or in part by receiving shares of Common Stock equal to the value
(determined below) of the Warrant (or any part hereof), upon surrender of the
Warrant (or any part thereof) at the office or agency described in Section 4(a)
above, together with notice of such election, specifying the part of the Warrant
so surrendered, in which event the Company shall issue and deliver to the Holder
a number of shares of Common Stock determined using the following formula:
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X = (Y) (A-B)
---------
A
where
X = the number of shares of Common Stock to be issued to the
Holder;
Y = the number of shares of Common Stock purchasable under the
Warrant, or portion of the Warrant, surrendered;
A = the Current Market Price per share of the Common Stock,
determined pursuant to Section 6(d) of this Agreement; and
B = the then current Exercise Price per share of Common Stock.
5. DELIVERY OF STOCK CERTIFICATES, ETC., ON EXERCISE: NO FRACTIONAL
SHARES.
(a) STOCK CERTIFICATES, ETC. As soon as practicable after the exercise of
any Warrants and in any event within five business days thereafter, the Company,
at its expense (including the payment by it of any applicable issue taxes), will
cause to be issued in the name of and delivered to the purchasing Holder a
certificate or certificates for the number of fully paid and nonassessable
Warrant Shares to which such Holder shall be entitled upon such exercise,
together with any Other Securities and property (including cash, where
applicable) to which such Holder is entitled upon such exercise pursuant to
Section 6 of this Agreement or otherwise.
(b) NO FRACTIONAL SHARES. The Company will not issue a fractional share
of Common Stock upon exercise of a Warrant. Rather, if a fractional share would
otherwise be issued, the Company will instead issue a number of whole shares
equal to the next lowest number of whole shares and shall pay to the exercising
Holder an amount in cash equal to amount obtained by multiplying (x) the
fractional shares not issued by (y) the Current Market Price (as defined in
Section 6(d)) per share of the Common Stock on the last trading day prior to the
exercise date.
6. ANTI-DILUTION PROVISIONS. The Warrants are subject to the following
additional terms and conditions:
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(a) ADJUSTMENT FOR CHANGE IN CAPITAL STOCK. If, after the date of this
Agreement, the Company:
(1) pays a dividend or makes a distribution on its Common Stock in
shares of its capital stock (including Common Stock);
(2) subdivides its outstanding shares of Common Stock into a
greater number of shares;
(3) combines its outstanding shares of Common Stock into a smaller
number of shares; or
(4) issues by reclassification of its Common Stock any shares of
its capital stock or Other Securities (including without
limitation any such reclassification in connection with a
consolidation or merger in which the Company is the continuing
entity);
then the Exercise Price in effect at the time of the record date of such
dividend, distribution, subdivision, combination or reclassification shall be
adjusted so that the Exercise Price shall be equal to the price determined by
multiplying the Exercise Price in effect immediately prior to such event by a
fraction, the numerator of which shall be (x) the total number of outstanding
shares of Common Stock of the Company immediately prior to such event and the
denominator of which shall be (y) the total number of outstanding shares of
Common Stock of the Company immediately after such event and, as so adjusted or
readjusted, the Exercise Price shall remain in effect until a further adjustment
or readjustment is required by this Section 6(b).
Whenever the Exercise Price payable upon exercise of each Warrant is
adjusted pursuant to this Section 6(a), the Warrant Shares shall simultaneously
be adjusted by multiplying the number of Warrant Shares issuable upon exercise
of each Warrant immediately prior to such event by the Exercise Price in effect
on the date thereof and dividing the product so obtained by the Exercise Price
as adjusted.
These adjustments referred to in the preceding paragraph shall become
effective on (x) in the case of a dividend or distribution, the earlier of the
record date thereof or the distribution date thereof and (y) in the case of a
subdivision, combination or reclassification, the earlier of the record date
thereof or the effective date thereof.
(b) ADJUSTMENTS FOR OTHER DISTRIBUTIONS. If, after the date of this
Agreement, the holders of Common Stock generally shall have received or, on or
after the record date fixed for the determination of eligible stockholders,
shall have become entitled to receive (i) securities other than capital stock,
(ii) evidences of its indebtedness, (iii) assets (other than cash dividends or
distributions), (iv) rights, options, warrants or
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convertible or exchangeable securities (other than Convertible Securities or
Options) containing the right to subscribe for or purchase securities of the
Company, then and in each such case the Holder of each Warrant, upon the
exercise thereof as provided in Section 4 above, shall be entitled to receive,
in addition to the Warrant Shares otherwise receivable on such exercise, the
amount of securities, indebtedness, assets (other than cash in the case referred
to in subdivision (iii) of this Section 6(b)) and such rights, options, warrants
or convertible or exchangeable securities which such Holder would hold on the
date of such exercise if on the date of this Agreement such Holder had been the
holder of record of the number of shares of Common Stock called for by the
Warrants held by such Holder and had thereafter, during the period from the date
of this Agreement to and including the date of such exercise, retained such
shares, giving effect to all adjustments called for during such period by this
Section 6.
(c) ADJUSTMENTS FOR SALE OR OTHER ISSUANCE OF COMMON STOCK.
(i) If at any time prior to the exercise of the Warrants in full,
the Company shall issue or sell any Common Stock without consideration or for
consideration per share less than the Current Market Price per share (as defined
in Section 6(d)) on the date of such issuance or sale (which shall be deemed for
all purposes of this Section 6(c), in the case of Common Stock issued as all or
part of the consideration for an acquisition, to be the same as the date the
definitive agreement for such acquisition is entered into), the Exercise Price
shall be adjusted so that the Exercise Price shall equal the price determined by
multiplying the Exercise Price in effect immediately prior to the date of such
sale or issuance (which date in the event of distribution to shareholders shall
be deemed to be the record date set by the Company to determine shareholders
entitled to participate in such distribution) by a fraction, the numerator of
which shall be (i) the number of shares of Common Stock outstanding on the date
of such sale or issuance, plus (ii) the number of additional shares of Common
Stock which the aggregate consideration received by the Company upon such
issuance or sale would purchase at such Current Market Price per share of the
Common Stock and the denominator of which shall be (i) the number of shares of
Common Stock outstanding on the date of such issuance or sale, plus (ii) the
number of additional shares of Common Stock offered for purchase. Any
adjustments required by this Section 6(c) shall be made immediately after such
issuance or sale or record date, as the case may be. Such adjustments shall be
made successively whenever the event shall occur.
(ii) For the purpose of making any adjustment in the Exercise Price,
or number of shares of Common Stock purchasable upon exercise of the Warrants,
as provided above and in Section 6(c)(vii) below, the consideration received by
the Company for any issue or sale of securities shall:
(A) To the extent it consists of cash, be computed as the
gross amount of cash received by the Company before deduction of any
underwriting or
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similar commissions, compensation, discounts or concessions paid or allowed by
the Company in connection with such issue or sale and before deduction of any
other expenses payable in connection therewith.
(B) In case of the issuance (otherwise than upon conversion
or exchange of Convertible Securities) or sale of additional Common Stock,
Options or Convertible Securities for a consideration other than cash or a
consideration a part of which is other than cash, then for purposes of this
Section 6(c) the fair value of such consideration as determined by the Board of
Directors of the Company in the good faith exercise of its business judgment,
regardless of the accounting treatment thereof, shall be deemed to be the value
of the consideration other than cash received by the Company for such
securities.
(iii) OPTIONS AND CONVERTIBLE SECURITIES. If the Company in any
manner issues or grants any Options or any Convertible Securities -- but only to
the extent (i) such Options are exercisable at less than the Current Market
Price at the date of issue of such Options or (ii) the amount paid for such
Convertible Securities per share plus any additional amount payable per share
upon conversion thereof is less than the Current Market Price per share at the
date of issue of the Convertible Securities -- the total maximum number of
shares of Common Stock issuable upon the exercise of such Options or upon
conversion or exchange of the total maximum amount of such Convertible
Securities at the time such Convertible Securities first become convertible or
exchangeable shall (as of the date of issue or grant of such Options or, in the
case of the issue or sale of Convertible Securities other than where the same
are issuable upon the exercise of Options, as of the date of such issue or sale)
be deemed to be issued and to be outstanding for the purpose of this Section
6(c) and to have been issued for the sum of the amount (if any) paid for such
Options or Convertible Securities and the amount (if any) payable upon the
exercise of such Options or upon conversion or exchange of such Convertible
Securities at the time such Convertible Securities first become convertible or
exchangeable; provided that, subject to the other provisions of this Section
6(c), no further adjustment of the Exercise Price shall be made upon the actual
issuance of any such Common Stock or Convertible Securities or upon the
conversion or exchange of any such Convertible Securities.
(iv) CHANGE IN OPTION PRICE OR CONVERSION RATE. If the purchase
price provided for in any Option referred to in Section 6(c)(iii), or the rate
or price at which any Convertible Securities referred to in Section 6(c)(iii)
are convertible into or exchangeable for shares of Common Stock, shall change at
any time (other than under or by reason of conventional provisions designed to
protect against dilution), the Exercise Price in effect at the time of such
event shall forthwith be readjusted -- but only to the extent such change does
not result in either the per share Option exercise price or the amount per share
payable for such Convertible Securities plus the amount payable per share on the
conversion of such Convertible Securities to be greater than the lesser of
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the Current Market Price per share at the time such Options or Convertible
Securities were issued, as referred to in Section 6(c)(iii), or the Current
Market Price at the effective date of such change -- to the Exercise Price
that would have been in effect at such time had such Options or Convertible
Securities then still outstanding provided for such changed purchase price,
additional consideration or conversion rate, as the case may be, at the time
initially granted, issued or sold. If the purchase price provided for in any
such Option, or the additional consideration (if any) payable upon the
conversion or exchange of any such Convertible Securities, or the rate or
price at which any such Convertible Securities are convertible into or
exchangeable for shares of Common Stock shall be changed at any time under or
by reason of conventional provisions designed to protect against dilution,
then in case of, but only to the extent of, the delivery of shares of Common
Stock upon the exercise of any such Option or upon conversion or exchange of
any such Convertible Security, the Exercise Price then in effect hereunder
shall, upon issuance of such shares of Common Stock, be adjusted -- but only
to the extent such change does not result in either the per share Option
exercise price or the amount per share payable for such Convertible
Securities plus the amount payable per share on the conversion of such
Convertible Securities to be greater than the Current Market Price per share
at the time such Options or Convertible Securities were issued, as referred
to in Section 6(c)(iii) -- to such amount as would have obtained had such
Option or Convertible Security never been issued and had adjustments been
made based only upon the issuance of the shares of Common Stock for the
consideration actually received for such Option or Convertible Security and
such Common Stock.
(v) EXPIRATION OF OPTION OR CONVERSION RIGHTS. In the event of the
termination or expiration of any right to purchase Common Stock under any Option
or of any right to convert or exchange Convertible Securities, the Exercise
Price shall, upon such termination, be changed to the Exercise Price that would
have been in effect at the time of such expiration had such Option or
Convertible Security, to the extent outstanding immediately prior to such
expiration, never been issued. As used in this Section 6(c)(v), the word
"expiration" includes a termination, without payment of consideration by the
Company, of a right to purchase, convert or exchange.
(vi) EXCLUDED EVENTS. Notwithstanding anything in this Section 6 to
the contrary, the Exercise Price shall not be adjusted by virtue of (i) the
Warrants or the existence or exercise of any Options of the Company outstanding
on the date hereof and disclosed in the Prospectus or (ii) the issuance or sale
of, or the grant of Options to purchase, Common Stock to employees, directors,
or officers of the Company or its subsidiaries, or to other persons who do not
beneficially own more than one percent of the Common Stock (assuming for this
purpose that all Options then held by the person, including new options then
being granted, but no other Option or Convertible Securities, have then been
exercised in full) and are not the children of such a one percent or greater
shareholder or the spouses of such children, pursuant to stock option plans
currently existing or hereafter approved by the Board of Directors of the
Company,
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provided that the exercise price is no less than the lower of fair market value
at the time of grant (as determined in accordance with the applicable stock
option plan) or the Current Market Price at the time of grant (all as determined
in accordance with this Section 6(c)).
(vii) ADJUSTMENT IN NUMBER OF WARRANT SHARES. Whenever the Exercise
Price payable upon exercise of a Warrant is adjusted pursuant to this Section
6(c), the Warrant Shares issuable on exercise of the Warrant shall
simultaneously be adjusted by multiplying the number of the Warrant Shares
issuable upon exercise of the Warrant immediately prior to such event by the
Exercise Price in effect on the date thereof and dividing the product so
obtained by the Exercise Price, as adjusted.
(d) CURRENT MARKET PRICE. For the purpose of any computation under
Section 6, the "Current Market Price" per share of Common Stock at any date
shall be the average of the daily closing prices for the 15 consecutive trading
days commencing 20 trading days before such date. The closing price for each
day shall be the last reported sale price, regular way or, in case no such
reported sale takes place on such day, the average of the closing bid and asked
prices, regular way, for such day, in either case on the principal national
securities exchange on which the shares are listed or admitted to trading, or if
they are not listed or admitted to trading on any national securities exchange,
but are traded in the Nasdaq National Market ("NNM"), or if the shares are
otherwise securities for which transaction reports are required to be made on a
real-time basis pursuant to an effective transaction reporting plan under Rule
11a3-1 of the Rules of the Commission under the Exchange Act, the last reported
sales price or, if they are not listed or admitted to trade, and if last sale
data is not then available from NNM, but are traded in the over-the-counter
market, the average of the representative closing bid and asked quotations for
the Common Stock on NNM or any comparable system, or if the Common Stock is not
listed on NNM or a comparable system, the average of the closing bid and asked
prices as furnished by two members of the National Association of Securities
Dealers, Inc. selected from time to time by the independent members of the Board
of Directors of the Company for that purpose.
(e) MINIMUM ADJUSTMENT. No adjustment in the number of Warrant Shares
purchasable hereunder shall be required unless such adjustment would require an
increase or decrease of at least one percent in the number of Warrant Shares
purchasable upon the exercise of each Warrant. No adjustment in the Exercise
Price payable hereunder shall be required unless such adjustment would require
an increase or decrease in the Exercise Price of at least $.01 per share. Any
adjustments that by reason of this Section 6(e) are not required to be made
shall be carried forward and taken into account in any subsequent adjustment
and, notwithstanding the foregoing, all adjustments so carried forward shall be
made at the time of, and in connection with, each exercise of any of the
Warrants. All calculations shall be made to the nearest one-thousandth of a
share, or cent, as the case may be.
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(f) OTHER SECURITIES. If at any time, as a result of an adjustment made
pursuant to this Section 6, the Holders shall become entitled to purchase any
shares of capital stock or Other Securities of the Company other than shares of
Common Stock, thereafter the number of such Other Securities so purchasable upon
exercise of each Warrant and the Exercise Price for such securities shall be
subject to adjustment from time to time in a manner and on terms as nearly
equivalent as practicable to the provisions with respect to the Warrant Shares
contained in this Section 6; and the provisions of Sections 3, 4, 5 and 7,
inclusive, with respect to the Warrant Shares, shall apply on like terms to any
such Other Securities.
(g) CONSOLIDATIONS, MERGERS AND OTHER TRANSACTIONS. In case of any
consolidation of the Company with or merger of the Company into another
corporation or entity or in case of any sale or conveyance to another
corporation or entity of the property of the Company as an entirety or
substantially as an entirety, the Company or such successor or purchasing
corporation or entity, as the case may be, shall execute a binding agreement
agreeing that each Holder shall have the right thereafter upon payment of the
Exercise Price in effect immediately prior to such action to purchase upon
exercise of each Warrant the kind and amount of shares and other securities and
property which the Holder would have owned or have been entitled to receive
after the happening of such consolidation, merger, sale or conveyance had such
Warrant been exercised immediately prior to such action. The Company shall not
complete any such consolidation, merger, sale or conveyance unless the agreement
referred to in the foregoing sentence is executed and delivered, is binding and
the mailing thereof provided for in the next sentence is done at the time of
such completion. The Company shall mail by first class mail, postage prepaid,
to each Holder, notice of the execution of and a copy of such agreement. Such
agreement shall provide for adjustments, which shall be as nearly equivalent as
may be practicable to the adjustments provided for in this Section 6 and for
other protections and rights (including without limitation registration rights)
for the Holders as are as nearly equivalent as may be practical to those they
have under this Warrant Agreement. The provisions of this Section 6 shall
similarly apply to successive consolidations, mergers, sales or conveyances.
Each Holder of Warrants shall be under no duty or responsibility to determine
the correctness of any provisions contained in any such agreement relating
either to the kind or amount of shares of stock or Other Securities or property
receivable upon exercise of Warrants or with respect to the method employed and
provided therein for any adjustments.
(h) NOTICE OF ADJUSTMENTS. Whenever the Exercise Price or the kind or
amount of securities purchasable under the Warrants shall be adjusted pursuant
to any of the provisions of this Warrant Agreement, the Company shall forthwith
thereafter cause to be sent to VKCO and SMM and all other Holders a certificate
setting forth the adjustments in the Exercise Price and the number of shares
and, in addition, setting forth in detail the facts requiring such adjustments.
In addition, the Company at its expense shall within 90 days following the end
of each of its fiscal years during the term of this
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Agreement and promptly upon the reasonable request of the Holders of at least
ten percent of the Warrants in connection with the exercise from time to time of
all or any portion of any Warrants, cause independent public accountants of
nationally recognized standing selected by the Company to compute any such
adjustment in accordance with the terms of the Warrants and prepare and deliver
to the Holders a certificate setting forth such adjustment and showing in detail
the facts upon which the adjustment is based.
(i) NOTICE OF CERTAIN EVENTS. In the event of (i) any taking by the
Company of a record of the holders of any class of securities for the purpose of
determining the holders thereof who are entitled to receive any dividend or
other distribution, or any right to subscribe for, purchase or otherwise acquire
any shares of stock of any class or any Other Securities or property, or to
receive any other right or (ii) any capital reorganization of the Company, any
reclassification or recapitalization of the capital stock of the Company or any
transfer of all or substantially all of the assets of the Company to, or
consolidation or merger of the Company with or into, any other corporation or
other entity or (iii) any voluntary or involuntary dissolution or liquidation of
the Company, then and in each such event the Company will mail or cause to be
mailed to each Holder and, in addition, on the same date as the earliest such
mailing, telecopied and mailed to VKCO and SMM, a notice specifying the date
upon which any such record date is to be taken for the purpose of such dividend,
distribution or right, stating the amount and character of such dividend,
distribution or right and the date on which any such reorganization,
reclassification, recapitalization, transfer, consolidation, merger,
dissolution, liquidation or winding-up is to take place and the time, if any, as
of which the holders of record of Common Stock (or Other Securities) shall be
entitled to exchange their shares of Common Stock (or Other Securities) for
securities or other property deliverable upon such reorganization,
reclassification, recapitalization, transfer, consolidation, merger,
dissolution, liquidation or winding-up. Such notice shall be mailed at least 15
business days prior to the proposed record date therefor.
(j) OTHER EVENTS ALTERING EXERCISE PRICE. Upon the occurrence of any
event not specifically denominated in this Section 6 as altering the Exercise
Price and the amount of Common Stock purchasable upon the exercise of the
Warrants, if the reasonable exercise of the business judgment of the independent
members of the Board of Directors of the Company (or, if none, the Board of
Directors or the Company) requires, on equitable principles, the alteration of
the Exercise Price favorable to Holders and/or corresponding adjustment
favorable to Holders to the number of shares for which the Warrants are
exercisable, the Exercise Price and such number of shares shall be equitably
altered.
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7. FURTHER COVENANTS OF THE COMPANY. The Company hereby agrees as
follows:
(a) RESERVATION OF STOCK. The Company shall at all times reserve and keep
available, solely for issuance and delivery upon the exercise of the Warrants,
all Warrant Shares from time to time issuable upon the exercise of the Warrants.
(b) TITLE TO STOCK. All of the Warrant Shares delivered upon the exercise
of the Warrants and payment of the Exercise Price (including for the purpose by
a net exercise of Warrants as permitted by Section 4(c)) shall be validly
issued, fully paid and nonassessable; each Holder of a Warrant shall receive
good and marketable title to the Warrant Shares, free and clear of all voting
and other trust arrangements, liens, encumbrances, equities, preemptive rights
and, without limitation, claims of any type whatsoever; and the Company shall
have paid all taxes, if any, in respect of the issuance thereof.
(c) EXCHANGE OF WARRANTS. Subject to Section 3(a) hereof, upon surrender
for exchange of any Warrant to the Company, the Company at its expense will
promptly issue and deliver to the Holder thereof a new Warrant or Warrants of
like tenor, in the name of such Holder, calling in the aggregate for the number
of Warrant Shares called by the Warrants so surrendered.
(d) REPLACEMENT OF WARRANTS. Upon receipt of evidence reasonably
satisfactory to the Company of the loss, theft, destruction or mutilation of
Warrants and, in the case of any such loss, theft or destruction, upon delivery
of an indemnity agreement by the Warrant Holder reasonably satisfactory in form
and amount to the Company or, in the case of any such mutilation, upon surrender
by the Holder and cancellation of such Warrants, the Company at its expense will
execute and deliver, in lieu thereof, new Warrants of like tenor.
(e) REPORTING BY THE COMPANY. The Company agrees that, during the term of
the Warrants, it will use its best efforts to keep current in the filing of all
forms and other materials which it may be required to file with the appropriate
regulatory authority pursuant to the Exchange Act and all other forms and
reports required to be filed with any regulatory authority having jurisdiction
over the Company. The Company will take such further action as any Holder may
reasonably request, all to the extent required from time to time to enable such
Holder to sell Warrant Shares without registration under the Act within the
limitation of the exemptions provided by (a) Rule 144 under the Act, as such
Rule may be amended from time to time, or (b) any similar rule or regulation
hereafter adopted by the Commission.
8. OTHER HOLDERS. The Warrants are issued upon the following terms, to
all of which each Holder or owner thereof by the taking thereof consents and
agrees: (a)
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any person who shall become a transferee, within the limitations on transfer
imposed by Section 3(a) hereof, of a Warrant properly endorsed, shall take such
Warrant subject to the provisions of Sections 3(a) and 3(b) hereof and thereupon
shall be authorized to represent that such transferee is the absolute owner
thereof and, subject to the restrictions contained in this Warrant Agreement,
shall be empowered to transfer absolute title by endorsement and delivery
thereof to a permitted bona fide purchaser for value; and (b) each prior taker
or owner waives and renounces all equities or rights in such Warrant in favor of
each such permitted bona fide purchaser, and each such permitted bona fide
purchaser shall acquire absolute title thereto and to all rights presented
thereby; and (c) until such time as the respective Warrant is transferred on the
books of the Company, the Company may treat the registered Holder thereof as the
absolute owner thereof for all purposes, notwithstanding any notice to the
contrary.
9. GENERAL PROVISIONS. All notices, certificates and other
communications from or at the request of the Company to the Holder of any
Warrant or Warrant Share as such shall be mailed by first class, registered or
certified mail, postage prepaid to the Holder, with a copy to each of Van Kasper
& Company, 10877 Wilshire Boulevard, Suite 1700, Los Angeles, California 90024,
Attn.: President, or to such other address for itself as VKCO shall have
furnished to the Company in writing. This Warrant Agreement and any of the
terms hereof may be changed, waived, discharged or terminated only by an
instrument in writing signed by the party against which enforcement of such
change, waiver, discharge or termination is sought. In addition and
notwithstanding the foregoing, the provisions of Section 3(c) and (d) and
Section 6 hereof cannot be changed, waived, discharged or terminated in a manner
adverse to the Holders without the written consent of one or more Holder or
Holders who collectively own, of record, that number of Warrants and/or Warrant
Shares which in the aggregate shall constitute two-thirds of all Warrant Shares
issued or issuable under this Agreement (excluding Warrant Shares which have
been previously sold, transferred or otherwise disposed of in a registered
public offering, pursuant to Rule 144 under the Act, as such Rule may be amended
from time to time, or pursuant to Regulation S, as such regulation may be
amended from time to time). The headings in this Warrant Agreement are for
purposes of reference only and shall not limit or otherwise affect any of the
terms hereof. This Warrant Agreement, together with the forms of instruments
annexed hereto, supersedes all prior negotiations and all prior written and
prior and contemporaneous oral agreements, representations, warranties and
inducements and constitutes the full and complete agreement of the parties
hereto with respect to the subject matter hereof.
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10. GOVERNING LAW. THIS WARRANT AGREEMENT SHALL BE GOVERNED BY, AND
CONSTRUED IN ACCORDANCE WITH, THE INTERNAL LAWS, AND NOT THE LAW PERTAINING TO
CHOICE OR CONFLICT OF LAWS, OF THE STATE OF CALIFORNIA.
U S LIQUIDS INC.
By:
----------------------------------------------
Name:
Title:
The foregoing Agreement is hereby confirmed and accepted as of the date first
above written.
VAN KASPER & COMPANY
By:
---------------------------
Name:
Title:
SANDERS MORRIS MUNDY INC.
By:
---------------------------
Name:
Title:
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Exhibit A
FORM OF WARRANT
THE WARRANTS REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO THE CONDITIONS
SPECIFIED IN A WARRANT AGREEMENT, DATED AUGUST_, 1997, AMONG THE COMPANY, VAN
KASPER & COMPANY AND SANDERS MORRIS MUNDY INC. EXCEPT TO THE EXTENT PERMITTED
BY THE WARRANT AGREEMENT, NO TRANSFER, SALE, PLEDGE, HYPOTHECATION, ENCUMBRANCE
OR OTHER DISPOSITION OF THESE WARRANTS OR THE SHARES OF COMMON STOCK OF THE
COMPANY ACQUIRED ON EXERCISE OF THESE WARRANTS SHALL BE VALID OR EFFECTIVE UNTIL
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (OR, IF APPLICABLE, A
SUCCESSOR LAW THERETO) OR THE COMPANY HAS BEEN PRESENTED WITH SATISFACTORY
EVIDENCE THAT THESE WARRANTS OR SUCH SHARES OF COMMON STOCK WILL BE TRANSFERRED
IN A TRANSACTION EXEMPT FROM SUCH REGISTRATION AND UNTIL ANY APPLICABLE
CONDITIONS CONTAINED IN THE WARRANT AGREEMENT HAVE BEEN FULFILLED. A COPY OF
THE WARRANT AGREEMENT IS ON FILE AT THE OFFICES OF THE COMPANY. THE HOLDER OF
THIS CERTIFICATE, BY ACCEPTANCE OF THIS CERTIFICATE, AGREES TO BE BOUND BY THE
PROVISIONS OF THE WARRANT AGREEMENT.
No. ______________
Warrant to Purchase up to ______ Shares of Common Stock
EXERCISABLE COMMENCING 9:00 A.M., LOS ANGELES TIME, ON
AUGUST __, 1998 AND ENDING 5:00 P.M., LOS ANGELES TIME,
ON AUGUST __, 2002
U S LIQUIDS INC.
COMMON STOCK PURCHASE WARRANT
This certifies that ___________________________, or registered assigns, is
the holder (the "Holder") of this Warrant to purchase, subject to adjustment,
the number of fully paid and nonassessable shares set forth above (the "Warrant
Shares") of Common Stock, par value $.01 per share (the "Common Stock"), of
U S Liquids Inc., a Delaware corporation (the "Company"), at the per share
exercise price, subject to adjustment (the "Exercise Price"), set forth in the
Warrant Agreement, dated August __, 1997 (the "Warrant Agreement"), among the
Company, Van Kasper & Company and Sanders Morris Mundy Inc., at any time prior
to the Expiration Date (defined below), by surrendering this Warrant, with the
form of subscription set forth hereon duly executed,
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to the Company at the Company's offices at 411 N. Sam Houston Parkway East, Ste.
400, Houston, TX 77060-3545 or at such other office or agency as the Company may
designate and by paying in full, in the manner provided in Section 4 of the
Warrant Agreement, the Exercise Price for the Warrant Shares then purchased.
Payment of the Exercise Price may be made in cash or by cashier's check payable
to the order of the Company, or by surrender of a portion of this Warrant as
provided in Section 4(c) of the Warrant Agreement.
This Warrant may be exercised at any time and from time to time, in whole
or in part, at the option of the Holder, commencing 9:00 a.m., Los Angeles time,
on August __, 1998 until 5:00 p.m., Los Angeles time, on August __, 2002 (the
"Expiration Date"). Upon the purchase of fewer than all of the Warrant Shares,
there shall be issued to the Holder a new Warrant exercisable for the number of
Warrant Shares for which this Warrant has not been exercised or surrendered as
payment. Prior to the Expiration Date, the Holder shall be entitled to exchange
this Warrant, without charge, for another Warrant or Warrants exercisable for
the same aggregate number of Warrant Shares.
Prior to the Expiration Date, subject to any applicable laws restricting
transferability and to any restriction on transferability that may appear on
this Warrant or in the Warrant Agreement, the Holder shall be entitled to
transfer this Warrant upon delivery thereof, duly endorsed by the Holder or by
his, her or its duly authorized attorney or representative, or accompanied by
proper evidence of succession, assignment or authority to transfer, with the
form of assignment set forth hereon duly executed. Upon any such transfer, a
new Warrant or Warrants exercisable for the same aggregate number of Warrant
Shares will be issued by the Company, without charge, in accordance with
instructions in the form of assignment.
This Warrant is issued under and in accordance with the Warrant Agreement
and, except as otherwise provided in this Warrant, is subject to the terms and
provisions contained therein. Upon certain events provided for in the Warrant
Agreement, the Exercise Price and the number of shares of Common Stock issuable
upon the exercise of this Warrant are subject to adjustment. No fractional
shares will be issued upon the exercise of a Warrant. Instead, the Company
shall pay the value of such fractional share to the Holder in cash, as provided
in the Warrant Agreement.
THIS WARRANT SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE
INTERNAL LAWS AND NOT THE LAW PERTAINING TO CHOICE OR CONFLICT OF LAWS, OF THE
STATE OF CALIFORNIA.
-30-
<PAGE>
In witness whereof, the Company has caused this Warrant to be duly
executed.
U S LIQUIDS INC.
By:
----------------------------------------------
Name:
Title:
Attest:
-------------------------------------------------
Name:
Title:
-31-
<PAGE>
ELECTION TO PURCHASE
The undersigned hereby irrevocably elects to exercise this Warrant to
purchase ______________ shares of Common Stock, acknowledges that it will not
dispose of such shares except in compliance with Section 3(b) of the Warrant
Agreement and the Securities Act of 1933, as amended, and requests that
Certificates for such shares be issued and delivered as follows:
Issue to: --------------------------------------------------------------
(Name)
--------------------------------------------------------------
(Address, including Zip Code)
--------------------------------------------------------------
(Social Security or Tax Identification Number)
Deliver to: --------------------------------------------------------------
(Name)
--------------------------------------------------------------
(Address, including Zip Code)
In full payment of the aggregate purchase price with respect to the number
of shares being purchased upon exercise of this Warrant, the undersigned hereby
(check applicable payment method): (i) / / tenders payment of $_________ by
cashier's check payable to the order of U S Liquids Inc. or (ii) / / hereby
surrenders to the Company, Warrants to purchase ________ shares of Common Stock.
If the Warrant is exercised hereby (and, if applicable, surrendered to purchase
shares of Common Stock) so as to purchase fewer than all the shares of Common
Stock that may be purchased pursuant to this Warrant, the undersigned requests
that a new Warrant representing the number of
-32-
<PAGE>
full shares for which the Warrant has not been exercised or surrendered be
issued and delivered as set forth below.
Name of Warrant holder or Assignee:
-------------------------------------------------
(Please Print)
Address:
- -----------------------------------
- -----------------------------------
Signature Dated:
(Signature must conform in all respects to name of holder as specified
on the face of the Warrant)
-33-
<PAGE>
ASSIGNMENT
For value received, the undersigned hereby sells, assigns and transfers
unto the Assignee named below all of the rights of the undersigned represented
by the within Warrant, with respect to the number of shares of Common Stock set
forth below:
Taxpayer
Number of Shares Identification
Name of Assignee Address of Common Stock Number
- ---------------- ------- ---------------- ------
and does hereby irrevocably authorize the Company to make such transfer on the
Warrant Register maintained at the principal office of the Company and, if
applicable, to issue to the undersigned a Warrant for the portion of such
Warrant not so sold, assigned or transferred.
Dated:
---------------------- -------------------------
Signature
(Signature must conform in all respects to name of holder as specified on the
face of the Warrant).
-34-
<PAGE>
AMENDMENT NO. 1 TO FINANCIAL ADVISORY AGREEMENT
This Amendment No. 1 to Financial Advisory Agreement is made and entered
into this 18th day of August, 1997 by and between U S Liquids Inc., a Delaware
corporation (the "Company"), and Sanders Morris Mundy Inc. (the "Advisor").
WHEREAS, the parties hereto are parties to that certain Financial Advisory
Agreement, dated as of May 15, 1997 (the "Financial Advisory Agreement"); and
WHEREAS, the parties hereto desire to amend the Financial Advisory
Agreement.
NOW, THEREFORE, the parties hereto agree as follows:
1. Capitalized terms used herein and not otherwise defined herein shall
have their respective meanings as set forth in the Financial Advisory Agreement.
2. Section 2.1 of the Financial Advisory Agreement is hereby amended to
read in its entirety as follows:
"2.1 In consideration of this Agreement, the Company shall issue to
the Advisor an assignable warrant representing the right of the holder
to purchase 37,500 (post-reverse split) shares of the common stock of
the Company an exercise price equal to the price at which shares are
offered to the public in the Company's initial public offering (the
"Advisor's Warrant"). Such Advisor's warrant shall have a term of
five years, shall be fully vested to the Advisor at the date of
issuance, shall provide for customary weighted average anti-dilution
adjustments to the exercise price and number of shares issuable under
the warrant, and shall include such other terms as are agreed to by the
parties hereto. In addition, the Company shall grant to the Advisor
piggyback registration rights (not including the registration of the
initial public offering) with respect to the common stock issuable
upon exercise of the Advisor's Warrant."
3. Except as specifically provided herein and in that certain letter
agreement between the parties dated July 10, 1997, the terms and provisions
of the Financial Advisory Agreement shall remain unchanged and in full force
and effect. This Amendment No. 1 may be executed in any number of
counterparts, all of which taken together shall constitute one and the same
amendatory instrument, and any of the parties hereto may execute this
Amendment No. 1 by signing any such counterpart. This Amendment No. 1 shall
be
<PAGE>
governed by, and construed in accordance with, the laws of the State of Texas
without regard to principles of conflicts of law.
U S Liquids Inc.
By: /s/ W. Gregory Orr
------------------------
W. Gregory Orr, President
SANDERS MORRIS MUNDY INC.
By: /s/ Bruce R. McMaken
------------------------
Bruce R. McMaken, Vice President
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our
reports (and to all references to our firm) included in or made a part of this
registration statement.
ARTHUR ANDERSEN LLP
Houston, Texas
August 19, 1997
