<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 3, 1997
REGISTRATION NO. 333-_________
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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U S LIQUIDS INC.
(Exact name of Registrant as specified in charter)
DELAWARE 8980 76-0519797
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification
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)
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COPIES TO:
JOHN D. ROBERTSON, ESQ.
Hartzog Conger & Cason
201 Robert S. Kerr, Suite 1600
Oklahoma City, Oklahoma 73102
(405) 235-7000
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
From time to time after this Registration Statement becomes effective.
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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. /x/
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. / /
<PAGE>
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
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Title of Each Proposed Proposed
Class of Securities Amount to be Maximum Offering Maximum Offering Amount of
to be Registered Registered Price Per Unit(1) Price(1) Registration Fee
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<S> <C> <C> <C> <C>
Common Stock, $.01 4,990,000 $15.1875 $75,785,625 $22,966
par value
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</TABLE>
(1) The registration fee was calculated in accordance with Rule 457(c) based on
the average of the high and low price per share of the Common Stock as reported
by the American Stock Exchange on August 29, 1997.
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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 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, may
determine.
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<PAGE>
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.
SUBJECT TO COMPLETION: September 3, 1997
4,990,000 Shares
U S LIQUIDS INC.
Common Stock
This Prospectus relates to the offering of up to 3,000,000 shares of common
stock, par value $.01 per share ("Common Stock"), of U S Liquids Inc., a
Delaware corporation (the "Company"), that may be issued from time to time by
the Company in acquisitions of other businesses, properties and/or assets in
business combination transactions. Shares may be issued directly in exchange
for assets or securities of other issuers or for cash to be used in business
combination transactions. It is expected that the terms of transactions in
which Common Stock is issued will be determined by direct negotiation with the
owners, controlling persons or management of the businesses, properties and/or
assets to be acquired. Shares of Common Stock issued in exchange for assets or
securities in business combination transactions are expected to be valued at
prices reasonably related to the market price of the Common Stock at the time
the terms of the transaction are agreed upon or at the time the shares are
issued, and shares issued for cash in connection with business combination
transactions are expected to be issued at the market price when the shares are
sold. The Company does not intend to pay any underwriting or selling
commissions in connection with the sale of the shares being offered by this
Prospectus. See "Plan of Distribution."
This Prospectus also relates to the offering of up to 1,990,000 shares of
Common Stock by the holders thereof (the "Selling Stockholders"). Shares
offered by the Selling Stockholders pursuant to this Prospectus may be offered
from time to time in transactions on the American Stock Exchange ("AMEX"), in
negotiated transactions and other methods of sale, at prevailing market prices
and at negotiated prices. The Selling Stockholders may sell their shares
directly and through agents, dealers and underwriters. The Company will not
receive any proceeds from the sale of shares by the Selling Stockholders. See
"Selling Stockholders" and "Plan of Distribution".
The Common Stock is listed on the AMEX. On August 29, 1997, the last sale
price of the Common Stock as reported by the AMEX was $15.125 per share. See
"Market Price and Dividend Policy."
FOR A DISCUSSION OF CERTAIN MATTERS THAT SHOULD BE
CONSIDERED IN EVALUATING THE PURCHASE OF ANY
SHARES OFFERED HEREBY, 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.
THE DATE OF THIS PROSPECTUS IS SEPTEMBER 3, 1997
<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.
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.
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<PAGE>
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
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.
3
<PAGE>
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
This Prospectus relates to 3,000,000 shares of Common Stock to be issued by
the Company from time to time in connection with the acquisition of other
businesses, properties and/or assets in business combination transactions. The
Company currently has no agreements or understandings to make any acquisitions.
See "Plan of Distribution." This Prospectus also relates to the offering of up
to 1,990,000 shares of Common Stock by the Selling Stockholders. See "Selling
Stockholders" and "Plan of Distribution."
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 sale of 1,725,000
shares of Common Stock in the Company's initial public offering 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
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(In thousands, except per share data)
<S> <C> <C> <C>
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
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Income from operations . . . . . . . . . . . . . . . . 6,570 2,315 3,656
Interest and other expense, net. . . . . . . . . . . . 2,317 1,081 1,003
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Income before income taxes . . . . . . . . . . . . . . 4,253 1,234 2,653
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Net income . . . . . . . . . . . . . . . . . . . . . . $2,508 $728 $1,565
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Net income per share . . . . . . . . . . . . . . . . . $0.31 $0.09 $0.19
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Shares used in computing pro forma net income(1) . . . 8,055 8,055 8,055
</TABLE>
JUNE 30, 1997
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AS
--
ACTUAL ADJUSTED(2)
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(IN THOUSANDS)
BALANCE SHEET DATA
Working capital (deficit). . . . . . . . . . . $ (1,450) $ 11,796
Total assets . . . . . . . . . . . . . . . . . 43,863 54,858
Total debt . . . . . . . . . . . . . . . . . . 25,974 23,260
Stockholders' equity . . . . . . . . . . . . . 2,853 16,796
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(1) Includes (i) 5,238,875 shares issued and outstanding prior to the Company's
initial public offering completed on August 20, 1997 (the "Initial Public
Offering" or "IPO"), (ii) 1,725,000 shares issued in the IPO, and (iii)
1,090,713 shares representing the effect of outstanding warrants and
options to purchase Common Stock, using the treasury stock method.
(2) Adjusted for the sale of 1,725,000 shares of Common Stock in the IPO at an
offering price of $9.50 per share and the application of the net proceeds
therefrom.
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
6
<PAGE>
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.
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. The Company will have approximately
$9.8 million of net proceeds remaining from the Initial Public Offering 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,
7
<PAGE>
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 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.
8
<PAGE>
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 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.
9
<PAGE>
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 a disposal
agreement (the "Disposal Agreement") and certain related agreements with Newpark
Resources, Inc., a public company located in New Orleans ("Newpark"), that
obligate 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
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
10
<PAGE>
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 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 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
11
<PAGE>
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.
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.
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
12
<PAGE>
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
13
<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 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 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
As of August 25, 1997, the Company's executive officers and directors
beneficially owned approximately 34.7% of the outstanding shares of Common
Stock. 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."
14
<PAGE>
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
Future sales of substantial amounts of Common Stock in the public market
could adversely affect the market price of the Common Stock. The shares offered
pursuant to this Prospectus, when issued, will be freely tradeable unless
acquired by affiliates of the Company or, in the case of shares issued in a
business combination transaction, by affiliates of an acquired business. In
addition, the Company is obligated to register the 150,000 shares subject to the
warrants granted to Van Kasper & Company and Sanders Morris Mundy. See "Certain
Transactions." The Company also has outstanding under its Stock Option Plan
options to purchase an aggregate of 705,125 shares of Common Stock, of which
options to purchase 10,000 shares are immediately exercisable. Shares issuable
upon exercise of these options have been registered under the Securities Act
and, therefore, will be freely tradeable unless acquired by affiliates of the
Company. See "Description of Securities-Shares Eligible for Future Sale."
15
<PAGE>
Executive officers, directors and certain stockholders of the Company
beneficially owning at least 4,747,875 shares of Common Stock in the aggregate
(excluding options and warrants to purchase an aggregate of at least 2,073,125
shares) have agreed not to sell or transfer any shares of Common Stock owned by
them until February 16, 1998 without the prior written consent of Van Kasper &
Company.
USE OF PROCEEDS
The shares being offered by the Company herein may be issued from time to
time in connection with business combination transactions, including the
issuance of shares for cash to be used in business combination transactions.
Any cash proceeds from the sale of shares by the Company may be used to pay all
or part of the purchase price for or to pay indebtedness or fund the working
capital requirements of an acquired company. The Company will not receive any
proceeds from the sale of shares in this offering by the Selling Stockholders.
See "Plan of Distribution."
16
<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 SIX MONTHS
YEAR ENDED DECEMBER 31, THROUGH ENDED
------------------------------------- DECEMBER 13, JUNE 30,
1992 1993 1994 1995 1996 1996
---- ---- ---- ---- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
PREDECESSOR
Revenues . . . . . . . . . . . . . . $9,515 $12,413 $14,847 $15,119 $16,853 $7,617
-------- -------- -------- -------- ------------ --------
Gross profit . . . . . . . . . . . . 4,295 5,816 7,369 6,484 7,717 3,159
Selling, general and administrative
expenses . . . . . . . . . . . . . 2,058 2,263 2,626 2,989 2,524 1,498
-------- -------- -------- -------- ------------ --------
Income from operations . . . . . . . 2,237 3,553 4,743 3,495 5,193 1,661
Interest and other expense, net. . . - (260) (71) 195 256 95
-------- -------- -------- -------- ------------ --------
Income before income taxes . . . . . 2,237 3,813 4,814 3,300 4,937 1,566
-------- -------- -------- -------- ------------ --------
Net income . . . . . . . . . . . . . $1,232 $2,357 $2,869 $1,900 $2,893 $924
-------- -------- -------- -------- ------------ --------
-------- -------- -------- -------- ------------ --------
</TABLE>
17
<PAGE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
------------------------------------------------------ ----------------
1992 1993 1994 1995 1996 1996 1997
---- ---- ---- ---- ---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED
Revenue. . . . . . . . . . . . . . . $4,955 $3,799 $8,039 $11,127 $14,285 $6,757 $17,734
-------- -------- -------- -------- -------- -------- --------
Gross profit . . . . . . . . . . . . 866 1,873 481 1,192 2,495 1,006 6,372
Selling, general and administrative
expenses. . . . . . . . . . . . . . 1,093 1,813 643 863 1,440 527 2,716
-------- -------- -------- -------- -------- -------- --------
Income (loss) from operations. . . . (227) 60 (162) 329 1,055 479 3,656
Interest and other expense, net. . . (13) 125 109 177 309 96 1,137
-------- -------- -------- -------- -------- -------- --------
Income (loss) before income taxes. . (214) (65) (271) 152 746 383 2,519
-------- -------- -------- -------- -------- -------- --------
Net income (loss). . . . . . . . . . $(214) $(65) $(182) $103 $491 $251 $1,486
-------- -------- -------- -------- -------- -------- --------
-------- -------- -------- -------- -------- -------- --------
</TABLE>
BALANCE SHEET DATA
DECEMBER 31,
-------------------------------------------
1992 1993 1994 1995
---- ---- ---- ----
(IN THOUSANDS)
PREDECESSOR
Total assets . . . . . . . $46,328 $54,448 $57,235 $60,541
Total debt . . . . . . . . $172 $91 $306 $-
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
-------------------------------------------- ---------------------
1992 1993 1994 1995 1996 1997
---- ---- ---- ---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
CONSOLIDATED
Total assets . . . . . . . $1,031 $1,277 $1,410 $3,007 $46,851 $43,863
Total debt . . . . . . . . $1,163 $1,320 $1,447 $2,010 $29,950 $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 sale of 1,725,000 shares
of Common Stock in the IPO and the application of the net proceeds therefrom.
See the unaudited Pro Forma Financial Statements and the notes thereto included
elsewhere in this Prospectus.
<TABLE>
<CAPTION>
INCOME STATEMENT AND OTHER DATA
SIX MONTHS ENDED
JUNE 30,
YEAR ENDED ------------------------
DECEMBER 31, 1996 1996 1997
----------------- ---- ----
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
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 . . . . . . . . . . . . . $0.31 $0.09 $0.19
---------- ---------- ----------
---------- ---------- ----------
Shares used in computing pro forma net income(1) 8,055 8,055 8,055
</TABLE>
BALANCE SHEET DATA
JUNE 30, 1997
---------------------
ACTUAL AS ADJUSTED(2)
------ --------------
(IN THOUSANDS)
Working capital (deficit). . . . . . . . . . . . . . $(1,450) $ 11,796
Total assets . . . . . . . . . . . . . . . . . . . . 43,863 54,858
Total debt . . . . . . . . . . . . . . . . . . . . . 25,974 23,260
Stockholders' equity . . . . . . . . . . . . . . . . 2,853 16,796
- -----------
(1) Includes (i) 5,238,875 shares issued and outstanding prior to the IPO,
(ii) 1,725,000 shares issued in the IPO and (iii) 1,090,713 shares
representing the effect of outstanding warrants and options to purchase
Common Stock, using the treasury stock method. Excludes 468,750 shares
issuable pursuant to options, the vesting of which are contingent upon the
successful completion of certain corporate development activities.
(2) Adjusted for the sale of 1,725,000 shares of Common Stock in the IPO at an
offering price of $9.50 per share and the application of the net proceeds
therefrom.
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
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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 the Territory 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. 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."
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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.
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
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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 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.
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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 56.4%. 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 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.
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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 the IPO 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 IPO
and the application of the net proceeds thereof, pro forma working capital at
June 30, 1997 was $11,796,000.
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.
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.
In August 1997, the Company completed the IPO. The net proceeds to the
Company from the sale of the 1,725,000 shares of Common Stock in the IPO were
approximately $14.3 million. After the payment of certain indebtedness and
budgeted capital expenditures, the Company will have approximately $9.8 million
of net proceeds remaining from the IPO. The Company expects that these remaining
net proceeds from the IPO, together with 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 plans to pursue acquisitions of businesses in the nonhazardous
liquid waste industry, and it is anticipated that additional capital will be
required to pursue the Company's acquisition strategy. The Company anticipates
using shares of its Common Stock for all or a substantial part of the
consideration to be paid for future acquisitions. In addition, the Company may
seek to raise additional capital through public or private debt or equity
financing. In particular, the Company intends to seek a line of credit for
general working capital purposes and to finance, in whole or in part, future
acquisitions. The availability of these capital sources will depend upon
prevailing market conditions, interest rates and
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the then existing financial position of the Company. Any such public or private
debt must comply with the Company's agreements with Sanifill. See "Certain
Transactions-Campbell Wells Acquisition." In the event that the Common Stock
does not maintain a sufficient market value or potential acquisition candidates
are unwilling to accept Common Stock as part of the consideration for the sale
of their businesses, the Company would be required to utilize more of its cash
resources in order to continue its acquisition program. At the same time, the
Company may be unable to raise additional capital due to market conditions. As
a result, the timing of acquisitions over the longer term can be expected to be
affected by prevailing market conditions. In addition, if the Company were
unable to secure the capital necessary to carry out its acquisition program, the
implementation of the Company's growth strategy would be adversely affected.
MARKET PRICE AND DIVIDEND POLICY
The Common Stock has been listed on the AMEX since August 20, 1997. The
trading symbol for the Common Stock is "USL." From August 20, 1997 to August 29,
1997, the high and low closing prices for the Common Stock as reported by AMEX
were $16 and $13.625, respectively.
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."
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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. On
August 20, 1997, the Company issued 1,725,000 shares of Common Stock in the
Initial Public Offering.
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.
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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 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
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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."
The Company's agreements with Newpark do 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 its agreements
with Newpark, 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.
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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."
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:
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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."
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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."
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 Louisiana 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,
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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 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
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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 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."
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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,
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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 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
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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 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
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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.
- 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;
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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.
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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.
APPROXIMATE
SQUARE
LOCATION FOOTAGE PRIMARY USE OWNED/LEASED
- -------- ----------- ----------- ------------
Dallas, Texas. . . . . .6,000 Treatment and disposal of Leased(1)
NCW; processing and
recovery of finished
products
Houston, Texas . . . . .23,000 Treatment and disposal of Owned(2)
NCW; processing and
recovery of finished
products
Houston, Texas . . . . .5,000 Processing and recovery of
finished products Leased(1)
Los Fresnos, Texas . . .9,000 Processing and recovery of
finished products Owned(2)
San Antonio, Texas . . .5,700 Processing and recovery of
finished products Leased(1)
- -----------
(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.
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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.
AREA PERMITTED APPROXIMATE SQUARE
FOR NOW FOOTAGE OF
LOCATION TREATMENT AND DISPOSAL OFFICE FACILITIES OWNED/LEASED
-------- ---------------------- ------------------ ------------
Bateman Island,
Louisiana . . . . . 115 acres 5,000 Leased(1)
Bourg,
Louisiana . . . . . 140 acres 5,000 Leased(2)
Elm Grove,
Louisiana . . . . . 152 acres 500 Owned
Mermentau,
Louisiana . . . . . 277 acres 10,000 Owned
Bustamonte,
Texas . . . . . . . 120 acres 1,000 Owned
- -----------
(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.
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
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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.
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<PAGE>
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
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."
45
<PAGE>
EMPLOYEES
At August 25, 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."
46
<PAGE>
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth certain information concerning the
directors, executive officers and significant employees of the Company.
NAME AGE POSITION
- ---- --- --------
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
- ----------
(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 has served as a director of the Company since June 1997.
In August 1997, simultaneous with the effective date of the IPO, Mr. Lawlor
assumed the positions of Chairman of the Board and Chief Executive Officer of
the Company. From March 1996 to August 1997, Mr. Lawlor was a private investor.
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
47
<PAGE>
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 served as Chairman of the
Board, Chief Executive Officer and President of the Company from November 1996
to August 1997. Mr. Orr currently serves as a director and the Chief Operating
Officer and President of the Company. 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
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.
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<PAGE>
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.
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
49
<PAGE>
officers and key employees, in addition to Chief Executive Officer Lawlor, will
be Messrs. Orr, Blanton, Blackwell and Wilson. On August 19, 1997, Mr. Lawlor
was granted an option to purchase 300,000 shares of Common Stock at $9.50 per
share. None of the other named individuals has been granted any stock options
or stock appreciation rights.
EMPLOYMENT AGREEMENTS; CHANGES IN CONTROL; COVENANTS NOT TO COMPETE
Mr. Lawlor has entered into an employment agreement with the Company
providing for annual base salary of $175,000, with the right to receive
incentive compensation at the discretion of the Board of Directors. The
employment agreement is for a term of five years with the term to be extended an
additional one year on each anniversary date of the employment agreement, unless
either party gives notice that the term of the employment agreement should not
be so extended. If 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 has 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 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.
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<PAGE>
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. 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 705,125 shares of Common Stock have been granted under
the Stock Option Plan at exercise prices ranging from $.02 per share to $9.50.
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 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. 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. Options for a total of 10,000 shares of Common Stock at an
exercise price of $9.50 per share have been granted under the Directors' Plan.
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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.
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
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<PAGE>
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 keep this 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
Company's prior consent, and, under certain circumstances, the prior consent of
one of the lead underwriters of the Initial Public Offering, the number of
shares offered by Sanifill pursuant to this registration statement in any
calendar year cannot exceed the following limitations:
MAXIMUM NUMBER OF
YEAR SHARES TO BE OFFERED
---- --------------------
1997. . . . . . . . . . . . . . . . . . . . 0
1998. . . . . . . . . . . . . . . . . . . . 200,000
1999. . . . . . . . . . . . . . . . . . . . 200,000
2000. . . . . . . . . . . . . . . . . . . . 250,000
2001-2006 . . . . . . . . . . . . . . . . . 300,000
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.
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.
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<PAGE>
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.
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.
55
<PAGE>
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 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.
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<PAGE>
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 the IPO to repay a promissory note held by AWW's primary
lender, which note was guaranteed by Mr. Wilson. Following the IPO, the Company
caused 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 accrued interest at a rate of
3% per annum, had a maturity date of August 1, 2001, and was 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 accrued interest at a rate of 10%, had a maturity date of
March 1, 2007 and was 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
the IPO to pay in full the debt secured by these trusts 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 the IPO to repay various debts of the Mesa
Companies, all of which have been personally guaranteed by Mr. Blanton, and of
which approximately $214,000 is owed to Mr. Yount.
On July 9, 1996, Eric Warden, a 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") 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 a
price of $9.50 per share. The SMM Warrant is exercisable at any time during the
four-year period beginning August 25, 1998 and ending August 25, 2002 and
provides under certain circumstances for weighted average anti-dilution
adjustments to the exercise price and number of shares issuable under the SMM
Warrant. The SMM Warrant also grants its holder certain rights of registration
for the shares of Common Stock issuable upon exercise of the SMM Warrant.
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<PAGE>
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.
In connection with the IPO, the Company issued to Van Kasper & Company and
SMM warrants (the "Representatives' Warrants") to purchase a total of 112,500
shares of Common Stock at a price of $11.40 per share. The Representatives'
Warrants are each exercisable at any time during the four-year period beginning
August 25, 1998 and ending August 25, 2002 and provide under certain
circumstances for weighted average anti-dilution adjustments to the exercise
price and number of shares issuable under the Representatives' Warrants. The
Representatives' Warrants also grant their holders certain rights of
registration for the shares of Common Stock issuable upon exercise of the
Representatives' Warrants.
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.
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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.
AMOUNT OF BENEFICIAL
OWNERSHIP
--------------------
NUMBER OF
NAME AND ADDRESS OF BENEFICIAL OWNER SHARES PERCENTAGE
- ------------------------------------ --------- ----------
Michael P. Lawlor(1) 150,000 2.2%
W. Gregory Orr(2) 751,000 10.8
Earl J. Blackwell(3) 375,000 5.4
Thomas B. Blanton 1,062,500 15.3
3820 N. Grove Street
Fort Worth, TX 76106
William H. Wilson, Jr.(4) 286,375 4.1
250 Gellhorn
Houston, TX 77013
William A. Rothrock IV(5) 62,500 *
Alfred Tyler 2nd(6) -- --
Sanifill, Inc.(7) 1,000,000 12.6
1001 Fannin Street, Suite 4000
Houston, Texas 77002
William M. DeArman(8) 546,500 7.8
5420 Huckleberry Lane
Houston, TX 77056
All executive officers and directors
as a group (7 persons)(9). . . . . . . . . . 2,419,750 34.7%
- ----------
(1) Excludes 300,000 shares which Mr. Lawlor has the right to acquire pursuant
to the terms of a stock option granted to Mr. Lawlor.
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(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.
(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 497,500 total shares subject to options 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 6,963,875 shares are 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
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no preemptive, subscription, redemption or conversion rights. As of August 25,
1997, the Company had 162 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 1,183,875
shares of Common Stock. The Company has 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) the Representatives' Warrants for
112,500 total shares at $11.40 per share; (iii) the SMM Warrant for 37,500
shares at $9.50 per share; (iv) a warrant issued to Bellmeade Capital Partners
for 45,000 shares at $9.50 per share; and (v) a warrant issued to Mark Liebovit
for 20,000 shares at $9.50 per share. See "Certain Transactions-Other".
SHARES ELIGIBLE FOR FUTURE SALE
Completion of the Initial Public Offering resulted in 6,963,875 shares of
Common Stock of the Company outstanding. Of these shares, 1,725,000 are
registered and available for unrestricted trading in the public market. 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 69,639 shares) 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
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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 4,747,875 shares of Common Stock in the aggregate
(excluding 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 until February 16, 1998 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 such period.
The Company has filed a registration statement on Form S-8 to register all
shares subject to the Stock Option Plan and the Directors' Plan. The Company has
also agreed to register for resale all shares of Common Stock issuable upon the
exercise of the Representatives' Warrants and the SMM Warrant.
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.
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The Company's Certificate of Incorporation also provides 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.
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SELLING STOCKHOLDERS
The following table sets forth the name of each Selling Stockholder and,
for each Selling Stockholder, the number of shares of Common Stock owned, the
number of such shares offered for sale in this offering and the number of shares
and percentage of the outstanding Common Stock to be owned after this offering.
<TABLE>
<CAPTION>
Shares Beneficially Shares Beneficially
Owned Prior to Offering(1) Number of Owned After Offering(1)
----------------------- Shares Being --------------------
Selling Stockholder Number Percent Offered Number Percent
- ------------------- ------ ------- ------------ ------ -------
<S> <C> <C> <C> <C> <C>
W. Gregory Orr 751,000(2) 10.8% 221,550 529,450 7.6%
Earl J. Blackwell 375,000(3) 5.4 112,500 262,500 3.8
William M. DeArman 546,500(4) 7.8 145,950 400,550 5.8
Thomas B. Blanton 1,062,500 15.3 318,750 743,750 10.7
William H. Wilson, Jr. 286,375(5) 4.1 73,688 212,687 3.1
Sanifill, Inc. 1,000,000(6) 12.6 1,000,000 -- --
Michael K. Clann 31,862 * 9,559 22,303 *
Carlos Guerra 25,347 * 7,604 17,743 *
R. Dale Johnson 97,531 1.4 29,259 68,272 *
Michael W. Minick 79,931 1.1 23,979 55,952 *
Holden H. Wallace 102,458 2.8 30,737 71,721 1.0
Hilton Wilson 8,006 * 2,402 5,604 *
William H. Wilson 46,740 * 14,022 32,718 *
</TABLE>
(1) Applicable percentage ownership is based on 6,963,875 shares of Common
Stock issued and outstanding as of August 25, 1997.
(2) 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 trust 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.
(3) 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.
(4) 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
64
<PAGE>
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.
(5) 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.
(6) 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.
* Constitutes less than 1% of the outstanding Common Stock.
Mr. Orr is a co-founder of the Company and served as Chairman of the Board,
Chief Executive Officer and President of the Company from November 1996 to
August 1997. Mr. Orr currently serves as a director and the Chief Operating
Officer and President of the Company.
Mr. 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.
Mr. DeArman is a co-founder of the Company and served as an unpaid consultant to
the Company prior to the IPO. See "Certain Transactions-Other."
Mr. Blanton is a director and Vice President of the Company, positions he has
held since June 1997. On June 17, 1997, the Company acquired all of the
outstanding stock of the Mesa Companies, of which Mr. Blanton was the sole
stockholder and an officer and director. In connection with the IPO, the
Company intends to pay certain indebtedness owed or guaranteed by Mr. Blanton,
including certain debts owed by the Mesa Companies to Mr. Blanton's
brother-in-law. See "Management" and "Certain Transactions-Other."
Mr. Wilson is the Chief Executive Officer of AWW, a position he has held since
1992. On June 17, 1997, the Company acquired all of the outstanding stock of
AWW in exchange for 637,500 shares of Common Stock, of which Mr. Wilson received
245,625 shares. In connection with the IPO, the Company has paid or will pay
certain indebtedness of AWW owed to or guaranteed by Mr. Wilson. See
"Management" and "Certain Transactions-Other."
On December 13, 1996, the Company acquired the Campbell Wells Acquired Assets
from Sanifill and Campbell Wells. See "Certain Transactions-Campbell Wells
Acquisition."
Messrs. Clann, Guerra, Johnson, Minick, Wallace, Hilton Wilson and William H.
Wilson are former stockholders of AWW. On June 17, 1997, the Company acquired
all of the outstanding stock of AWW in exchange for 637,500 shares of Common
Stock, of which Messrs. Clann, Guerra, Johnson, Minick, Wallace, Hilton Wilson
and William H. Wilson received 31,862, 25,347, 97,531, 79,931, 102,458, 8,006
and
65
<PAGE>
46,740 shares, respectively. Mr. Hilton Wilson and Mr. William H. Wilson are
the brother and the father, respectively, of William H. Wilson, Jr., the Chief
Executive Officer of AWW.
PLAN OF DISTRIBUTION
DISTRIBUTION BY THE COMPANY
This Prospectus may be used by the Company for the offer and sale of up to
3,000,000 shares of Common Stock from time to time in connection with the
acquisition of businesses, properties and/or assets in business combination
transactions. The consideration offered by the Company in such acquisitions, in
addition to any shares of Common Stock offered by this Prospectus, may include
cash, debt or other securities (which may be convertible into shares of Common
Stock of the Company covered by this Prospectus), or assumption by the Company
of liabilities of the business being acquired, or a combination thereof. The
Company may offer and sell shares pursuant to this Prospectus for cash to be
used in connection with acquisitions, including the payment of all or part of
the purchase price for or the indebtedness of an acquired business or the
funding of working capital requirements of an acquired business. It is expected
that the terms of acquisitions in which Common Stock is issued will be
determined by negotiations between the Company and the owners, controlling
persons or management of the businesses, properties and/or assets to be
acquired, with the Company taking into account the quality of management, the
past and potential earning power and growth of the businesses, properties and/or
assets to be acquired, and other relevant factors. Shares of Common Stock
issued to the owners, controlling persons or management of the businesses,
properties and/or assets to be acquired are expected to be valued at prices
reasonably related to the market price of the Common Stock at the time the terms
of the acquisition are agreed upon or at the time the shares are issued, and
shares issued for cash in connection with business combination transactions are
expected to be issued at the market price when the shares are sold. Securities
issued under this Prospectus will be freely transferable under the Securities
Act, except for securities issued to persons who may be deemed to be an
"affiliate" of an acquired business within the meaning of Rule 145 of the
Securities Act. Securities issued in connection with such transactions to
persons who constitute "affiliates" within the meaning of Rule 145 may not be
publicly reoffered or resold by such person except pursuant to an effective
registration statement under the Securities Act covering such shares or pursuant
to Rule 145(d) or any other applicable exemption under the Securities Act.
DISTRIBUTION BY THE SELLING STOCKHOLDERS
This Prospectus may be used by the Selling Stockholders for the offer and
sale of up to 1,990,000 shares of Common Stock owned or to be owned by them.
Such shares may be offered and sold by them from time to time on the AMEX, in
negotiated transactions or otherwise, at market prices prevailing at the time of
sale or at negotiated prices. Selling Stockholders may sell shares through
broker-dealers, who may act solely as an agent for the seller or who may acquire
shares as a principal. Broker-dealers participating in such transactions as an
agent may receive commissions from both the seller and the buyer. The Selling
Stockholders may sell shares through broker-dealers in special offerings,
exchange distributions and secondary distributions, and in connection therewith
the Selling Stockholders may agree to pay commissions or allow discounts or
concessions in excess of customary commissions, discounts or concessions
prescribed by applicable rules. Broker-dealers who acquire shares as a
principal may resell such shares
66
<PAGE>
on the AMEX, in negotiated transactions or otherwise, at market prices
prevailing at the time of sale or at negotiated prices.
The Selling Stockholders and any broker-dealers or agents who participate
in a distribution of the shares may be "underwriters" within the meaning of the
Securities Act, and any commissions, discounts or concessions received by them
may be underwriting discounts and commissions under the Securities Act.
Accordingly, any person engaged in a distribution of shares will be prohibited
from engaging in certain market making activities with respect to the Common
Stock under applicable rules under the Exchange Act. In addition, the Selling
Stockholders will be subject to certain other rules under the Exchange Act while
they are engaged in a distribution of the shares, including Rules 10-b and
10b-7, which may limit the timing of their purchases and sales of Common Stock
and limit marketability of their shares.
The costs of this offering, other than underwriting discounts and
commissions and legal and other personal expenses, are being borne by the
Company in accordance with the terms of separate agreements between the Company
and each of the Selling Stockholders.
The Common Stock may be sold in certain states only through brokers or
dealers licensed in those states. In addition, the Common Stock may not be sold
in certain states unless it is registered or qualified for sale in such states
or its exempt from the registration or qualification requirements of such
states.
LEGAL MATTERS
The validity of the issuance of the shares of Common Stock offered hereby
by the Company will be passed upon for the Company by Hartzog Conger & Cason,
Oklahoma City, Oklahoma.
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 Securities and Exchange Commission (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 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 Commission. 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
67
<PAGE>
such reference. Any person to whom this Prospectus is delivered may obtain a
copy of the Registration Statement, including the exhibits thereto, without
charge upon written or oral request to the Secretary of the Company at 411 N.
Sam Houston Parkway East, Suite 400, Houston, Texas 77060, (281) 272-4500.
The Company is subject to the information requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith files reports, proxy statements and other information with the
Commission. Such reports, proxy statements and other information may be
inspected, without charge, at the Public Reference Section of the Commission at
Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549 and
at the regional offices of the Commission 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. Copies of such materials
can be obtained from the Public Reference Section of the Commission at Room
1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, upon
payment of the prescribed fees. The Commission maintains a web site that
contains reports, proxy and information statements regarding registrants that
file electronically with the Commission. The address of this web site is
(http://www.sec.gov).
The Common Stock is listed on AMEX. Reports, proxy statements and other
information concerning the Company can be inspected at the offices of AMEX
located at 86 Trinity Place, New York, New York 10006-1881.
68
<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 $ 14,288(A) $ 14,044
(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 11,022 19,228
PROPERTY, PLANT AND EQUIPMENT, net.......................................... 34,982 34,982
OTHER ASSETS, net........................................................... 675 (27)(B) 648
------------- ------------- ---------
Total assets............................................................ $ 43,863 $ 10,995 $ 54,858
------------- ------------- ---------
------------- ------------- ---------
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 17(A) 69
Additional paid-in capital................................................ 1,379 13,953(A) 15,332
Retained earnings......................................................... 1,412 (27)(B) 1,385
------------- ------------- ---------
Total stockholders' equity.............................................. 2,853 13,943 16,796
------------- ------------- ---------
Total liabilities and stockholders' equity.............................. $ 43,863 $ 10,995 $ 54,858
------------- ------------- ---------
------------- ------------- ---------
</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 1,725,000 shares of Common Stock,
net of estimated offering costs. 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
IPO.
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.................. $ .31
-----------
-----------
SHARES USED IN COMPUTING NET INCOME
PER SHARE........................... 8,055(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........................................................ $ .19
-------------
-------------
SHARES USED IN COMPUTING NET INCOME PER SHARE............................... 8,055(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............. $ .09
-------------
-------------
SHARES USED IN COMPUTING NET
INCOME PER SHARE............... 8,055(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) 5,238,875 shares issued and outstanding prior to the Company's
IPO completed on August 20, 1997, (ii) 1,725,000 shares issued in the IPO,
and (iii) 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.
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 through an initial public offering (the Offering).
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):
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.
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.
On August 20, 1997, the Company completed its initial public offering
through the sale of 1,725,000 shares of the Company's common stock at a price of
$9.50 per share. The proceeds from the transaction, net of underwriting
discounts and commissions and after deducting estimated expenses of the
Offering, were approximately $14.3 million. Of this amount, $3.0 million will be
used to repay debt. In addition, $1.5 million of the proceeds will be used for
capital expenditures to be made by the Company. The approximately $9.8 million
of remaining net proceeds will be used for working capital and for general
corporate purposes, which are expected to include future acquisitions.
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>
No 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. 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
PAGE
----
Prospectus Summary . . . . . . . . . . . . . . . . . . . . . . . . . 2
Risk Factors . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Use of Proceeds. . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Selected Financial Data. . . . . . . . . . . . . . . . . . . . . . . 17
Management's Discussion and Analysis of Financial Condition
and Results of Operations. . . . . . . . . . . . . . . . . . . . . 20
Market Price and Dividend Policy . . . . . . . . . . . . . . . . . . 27
Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
Management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47
Certain Transactions . . . . . . . . . . . . . . . . . . . . . . . . 53
Principal Stockholders . . . . . . . . . . . . . . . . . . . . . . . 59
Description of Securities. . . . . . . . . . . . . . . . . . . . . . 60
Selling Stockholders . . . . . . . . . . . . . . . . . . . . . . . . 64
Plan of Distribution . . . . . . . . . . . . . . . . . . . . . . . . 66
Legal Matters. . . . . . . . . . . . . . . . . . . . . . . . . . . . 67
Experts. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 67
Additional Information . . . . . . . . . . . . . . . . . . . . . . . 67
Index to Financial Statements. . . . . . . . . . . . . . . . . . . . F-1
-----------
US LIQUIDS INC.
4,990,000 Shares of Common Stock
-----------
PROSPECTUS
-----------
SEPTEMBER 3, 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 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.
AMOUNT
------
SEC registration fee. . . . . . . . . . . . . . . . . . . . . . $22,966
Printing expenses . . . . . . . . . . . . . . . . . . . . . . . 5,000*
Accounting fees and expenses. . . . . . . . . . . . . . . . . . 10,000*
Legal fees and expenses . . . . . . . . . . . . . . . . . . . . 15,000*
Blue sky fees and expenses. . . . . . . . . . . . . . . . . . . 1,000*
Transfer agent fees . . . . . . . . . . . . . . . . . . . . . . 1,000*
Miscellaneous . . . . . . . . . . . . . . . . . . . . . . . . . 1,000*
--------
TOTAL. . . . . . . . . . . . . . . . . . . . . . . . . . . $55,966*
--------
--------
- --------------------
* Estimated
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 also provides 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
II-1
<PAGE>
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 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.
On August 25, 1997 in connection with the Company's initial public
offering, the Company issued to Van Kasper & Company and Sanders Morris Mundy
Inc. warrants to purchase a total of 112,500 shares of Common Stock for an
aggregate purchase price of $1,125. These sales were exempt from registration
under Section 4(2) of the Securities Act, no public offering being involved.
II-2
<PAGE>
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits
EXHIBIT
NO. DESCRIPTION
--- -----------
3.1 Second Amended and Restated Certificate of Incorporation of
U S Liquids Inc. (Exhibit 3.1 of the U S Liquids Inc. Registration
Statement on Form S-1 (File No. 333-30065), effective August 19, 1997,
is hereby incorporated by reference).
3.2 Amended and Restated Bylaws of U S Liquids Inc. (Exhibit 3.2 of the
U S Liquids Inc. Registration Statement on Form S-1 (File No.
333-30065), effective August 19, 1997, is hereby incorporated by
reference).
4.1 Form of Certificate Evidencing Ownership of Common Stock of
U S Liquids Inc. (Exhibit 4.1 of the U S Liquids Inc. Registration
Statement on Form S-1 (File No. 333-30065), effective August 19, 1997,
is hereby incorporated by reference).
4.2 Promissory Note of U S Liquids payable to Sanifill, Inc. (Exhibit 4.2
of the U S Liquids Inc. Registration Statement on Form S-1 (File No.
333-30065), effective August 19, 1997, is hereby incorporated by
reference).
4.3 Note Agreement, dated December 13, 1996, between U S Liquids and
Sanifill, Inc. (Exhibit 4.3 of the U S Liquids Inc. Registration
Statement on Form S-1 (File No. 333-30065), effective August 19, 1997,
is hereby incorporated by reference).
*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. (Exhibit
10.1 of the U S Liquids Inc. Registration Statement on Form S-1 (File
No. 333-30065), effective August 19, 1997, is hereby incorporated by
reference).
10.2 Seller Noncompetition Agreement, dated December 13, 1996, between
U S Liquids Inc. and Sanifill, Inc. (Exhibit 10.2 of the U S Liquids
Inc. Registration Statement on Form S-1 (File No. 333-30065),
effective August 19, 1997, is hereby incorporated by reference).
10.3 Buyer Noncompetition Agreement, dated December 13, 1996, between
Sanifill, Inc. and U S Liquids Inc. (Exhibit 10.3 of the U S Liquids
Inc. Registration Statement on Form S-1 (File No. 333-30065),
effective August 19, 1997, is hereby incorporated by reference).
10.4 NOW Disposal Agreement, dated June 4, 1996, among Sanifill, Inc., NOW
Disposal Operating Co., and Campbell Wells, Ltd. (Exhibit 10.4 of the
U S Liquids Inc. Registration Statement on Form S-1 (File No.
333-30065), effective August 19, 1997, is hereby incorporated by
reference).
10.5 Noncompetition Agreement, dated August 12, 1996, between Sanifill,
Inc. and Newpark Resources, Inc. (Exhibit 10.5 of the U S Liquids Inc.
Registration Statement on Form S-1 (File No. 333-30065), effective
August 19, 1997, is hereby incorporated by reference).
10.6 Assumption and Guarantee Agreement dated August 12, 1996, among
Newpark Resources, Inc., Sanifill, Inc., and Campbell Wells, Ltd.
(Exhibit 10.6 of the U S Liquids Inc. Registration Statement on Form
S-1 (File No. 333-30065), effective August 19, 1997, is hereby
incorporated by reference).
II-3
<PAGE>
10.7 Lease and Access Agreement between Campbell Wells, Ltd. and Newpark
Resources, Inc. (Exhibit 10.7 of the U S Liquids Inc. Registration
Statement on Form S-1 (File No. 333-30065), effective August 19, 1997,
is hereby incorporated by reference).
10.8 Sublease and Access Agreement between Campbell Wells, Ltd. and Newpark
Resources, Inc. and underlying lease agreement (Exhibit 10.8 of the
U S Liquids Inc. Registration Statement on Form S-1 (File No.
333-30065), effective August 19, 1997, is hereby incorporated by
reference).
10.9 Sublease and Access Agreement between Campbell Wells, Ltd. and Newpark
Resources, Inc. and underlying lease agreement (Exhibit 10.9 of the
U S Liquids Inc. Registration Statement on Form S-1 (File No.
333-30065), effective August 19, 1997, is hereby incorporated by
reference).
10.10 Consent to Assignment and Assumption of Contracts, dated December 13,
1996, among Sanifill, Inc., Campbell Wells, L.P. and U S Liquids Inc.
(Exhibit 10.10 of the U S Liquids Inc. Registration Statement on Form
S-1 (File No. 333-30065), effective August 19, 1997, is hereby
incorporated by reference).
10.11 Form of Nonqualified Stock Option Agreement between U S Liquids Inc.
and certain individuals (Exhibit 10.11 of the U S Liquids Inc.
Registration Statement on Form S-1 (File No. 333-30065), effective
August 19, 1997, is hereby incorporated by reference).
10.12 U S Liquids Inc. Amended and Restated Stock Option Plan (Exhibit 10.12
of the U S Liquids Inc. Registration Statement on Form S-1 (File No.
333-30065), effective August 19, 1997, is hereby incorporated by
reference).
10.13 U S Liquids Inc. Directors' Stock Option Plan (Exhibit 10.13 of the
U S Liquids Inc. Registration Statement on Form S-1 (File No.
333-30065), effective August 19, 1997, is hereby incorporated by
reference).
10.14 Form of Grant of Incentive Stock Option Agreement (Exhibit 10.14 of
the U S Liquids Inc. Registration Statement on Form S-1 (File No.
333-30065), effective August 19, 1997, is hereby incorporated by
reference).
10.15 Senior Executive Employment Agreement, dated June 17, 1997, between
U S Liquids Inc. and W. Gregory Orr (Exhibit 10.15 of the U S Liquids
Inc. Registration Statement on Form S-1 (File No. 333-30065),
effective August 19, 1997, is hereby incorporated by reference).
10.16 Senior Executive Employment Agreement, dated June 17, 1997, between
U S Liquids Inc. and Earl J. Blackwell (Exhibit 10.16 of the U S
Liquids Inc. Registration Statement on Form S-1 (File No. 333-30065),
effective August 19, 1997, is hereby incorporated by reference).
10.17 Executive Employment Agreement, dated June 17, 1997, between
U S Liquids Inc. and Jerry L. Brazzel (Exhibit 10.17 of the U S
Liquids Inc. Registration Statement on Form S-1 (File No. 333-30065),
effective August 19, 1997, is hereby incorporated by reference).
10.18 Executive Employment Agreement, dated June 17, 1997, between
U S Liquids Inc. and Sammy L. Cooper (Exhibit 10.18 of the U S Liquids
Inc. Registration Statement on Form S-1 (File No. 333-30065),
effective August 19, 1997, is hereby incorporated by reference).
10.19 Senior Executive Employment Agreement, dated June 17, 1997, between
U S Liquids Inc. and Thomas B. Blanton (Exhibit 10.19 of the U S
Liquids Inc. Registration Statement on Form S-1 (File No. 333-30065),
effective August 19, 1997, is hereby incorporated by reference).
II-4
<PAGE>
10.20 Senior Executive Employment Agreement, dated June 17, 1997, between
U S Liquids Inc. and William H. Wilson, Jr. (Exhibit 10.20 of the U S
Liquids Inc. Registration Statement on Form S-1 (File No. 333-30065),
effective August 19, 1997, is hereby incorporated by reference).
10.21 Stock Distribution Agreement, dated June 16, 1997, between U S Liquids
Inc. and Thomas B. Blanton (Exhibit 10.21 of the U S Liquids Inc.
Registration Statement on Form S-1 (File No. 333-30065), effective
August 19, 1997, is hereby incorporated by reference).
10.22 Form of Stock Distribution Agreement, dated June 16, 1997, between
U S Liquids Inc. and the former stockholders of American WasteWater
Inc. (Exhibit 10.22 of the U S Liquids Inc. Registration Statement on
Form S-1 (File No. 333-30065), effective August 19, 1997, is hereby
incorporated by reference).
10.23 Stock Distribution Agreement, dated June 16, 1997, between U S Liquids
Inc. and W. Gregory Orr (Exhibit 10.23 of the U S Liquids Inc.
Registration Statement on Form S-1 (File No. 333-30065), effective
August 19, 1997, is hereby incorporated by reference).
10.24 Noncompetition Agreement, dated June 17, 1997, between U S Liquids
Inc. and Thomas B. Blanton (Exhibit 10.24 of the U S Liquids Inc.
Registration Statement on Form S-1 (File No. 333-30065), effective
August 19, 1997, is hereby incorporated by reference).
10.25 Noncompetition Agreement, dated June 17, 1997, between U S Liquids
Inc. and William H. Wilson, Jr. (Exhibit 10.25 of the U S Liquids Inc.
Registration Statement on Form S-1 (File No. 333-30065), effective
August 19, 1997, is hereby incorporated by reference).
10.26 Agreement to Vote Stock, dated June 16, 1997, among U S Liquids Inc.,
Thomas B. Blanton, W. Gregory Orr, Earl J. Blackwell, William M.
DeArman and certain other parties (Exhibit 10.26 of the U S Liquids
Inc. Registration Statement on Form S-1 (File No. 333-30065),
effective August 19, 1997, is hereby incorporated by reference).
10.27 Estoppel, Waiver and Amendment Agreement, dated June 16, 1997, between
Sanifill, Inc. and U S Liquids Inc. (Exhibit 10.27 of the U S Liquids
Inc. Registration Statement on Form S-1 (File No. 333-30065),
effective August 19, 1997, is hereby incorporated by reference).
10.28 Financial Advisory Agreement, dated May 15, 1997, between U S Liquids
Inc. and Sanders Morris Mundy Inc. and supplemental letter dated
July 10, 1997 (Exhibit 10.28 of the U S Liquids Inc. Registration
Statement on Form S-1 (File No. 333-30065), effective August 19, 1997,
is hereby incorporated by reference).
10.29 Service Agreement, dated June 23, 1997, between U S Liquids Inc. and
Bellmeade Capital Partners (Exhibit 10.29 of the U S Liquids Inc.
Registration Statement on Form S-1 (File No. 333-30065), effective
August 19, 1997, is hereby incorporated by reference).
10.30 Service Agreement, dated June 23, 1997, between U S Liquids Inc. and
Mark Liebovit (Exhibit 10.30 of the U S Liquids Inc. Registration
Statement on Form S-1 (File No. 333-30065), effective August 19, 1997,
is hereby incorporated by reference).
10.31 Warrant, dated December 13, 1996, issued by U S Liquids Inc. to
Sanifill, Inc. (Exhibit 10.31 of the U S Liquids Inc. Registration
Statement on Form S-1 (File No. 333-30065), effective August 19, 1997,
is hereby incorporated by reference).
10.32 Warrant Agreement, dated May 15, 1997, between U S Liquids Inc. and
Sanders Morris Mundy Inc. (Exhibit 10.32 of the U S Liquids Inc.
Registration Statement on Form S-1 (File No. 333-30065), effective
August 19, 1997, is hereby incorporated by reference).
II-5
<PAGE>
+10.33 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 (Exhibit 10.34 of the U S Liquids Inc. Registration
Statement on Form S-1 (File No. 333-30065), effective August 19, 1997,
is hereby incorporated by reference).
10.35 Warrant, dated June 23, 1997, issued by U S Liquids Inc. to Mark
Liebovit (Exhibit 10.35 of the U S Liquids Inc. Registration Statement
on Form S-1 (File No. 333-30065), effective August 19, 1997, is hereby
incorporated by reference).
10.36 Stock Purchase Agreement, dated September 10, 1996, among Mesa
Processing, Inc., Jack C. Wolcott and South Texas By-Products Company,
Inc. (Exhibit 10.36 of the U S Liquids Inc. Registration Statement on
Form S-1 (File No. 333-30065), effective August 19, 1997, is hereby
incorporated by reference).
10.37 Non-Competition Agreement, dated September 10, 1996, between Jack C.
Wolcott and Mesa Processing, Inc. (Exhibit 10.37 of the U S Liquids
Inc. Registration Statement on Form S-1 (File No. 333-30065),
effective August 19, 1997, is hereby incorporated by reference).
10.38 Stock Distribution Agreement, dated June 16, 1997, between U S Liquids
Inc. and Earl J. Blackwell (Exhibit 10.38 of the U S Liquids Inc.
Registration Statement on Form S-1 (File No. 333-30065), effective
August 19, 1997, is hereby incorporated by reference).
10.39 Stock Distribution Agreement, dated June 16, 1997, between U S Liquids
Inc. and William M. DeArman (Exhibit 10.39 of the U S Liquids Inc.
Registration Statement on Form S-1 (File No. 333-30065), effective
August 19, 1997, is hereby incorporated by reference).
10.40 Employment Agreement, dated July 2, 1997, between U S Liquids Inc. and
Michael P. Lawlor (Exhibit 10.40 of the U S Liquids Inc. Registration
Statement on Form S-1 (File No. 333-30065), effective August 19, 1997,
is hereby incorporated by reference).
10.41 Form of Lock-up Agreement between Van Kasper & Company and certain
holders of U S Liquids Inc.'s Common Stock (Exhibit 10.41 of the U S
Liquids Inc. Registration Statement on Form S-1 (File No. 333-30065),
effective August 19, 1997, is hereby incorporated by reference).
10.42 Amendment No. 1 to Financial Advisory Agreement, dated August 18,
1997, between U S Liquids Inc. and Sanders Morris Mundy Inc. (Exhibit
10.42 of the U S Liquids Inc. Registration Statement on Form S-1 (File
No. 333-30065), effective August 19, 1997, is hereby incorporated by
reference).
10.43 Agreement and Plan of Merger, dated June 16, 1997, among U S Liquids
Inc., AWW Acquisition Corp., American WasteWater Inc., William H.
Wilson, Jr. and Michael W. Minick. (Exhibit 2.1 of the U S Liquids
Inc. Registration Statement on Form S-1 (File No. 333-30065),
effective August 19, 1997, is hereby incorporated by reference).
10.44 Agreement and Plan of Merger, dated June 16, 1997, among U S Liquids
Inc., Mesa Acquisition Corp., T&T GS Acquisition Corp., Phoenix F&O
Acquisition Corp., Mesa Processing, Inc., T&T Grease Service, Inc.,
Phoenix Fats & Oils, Inc. and Thomas B. Blanton. (Exhibit 2.2 of the
U S Liquids Inc. Registration Statement on Form S-1 (File No.
333-30065), effective August 19, 1997, is hereby incorporated by
reference).
+10.45 Warrant, dated August 25, 1997, issued by U S Liquids Inc. to Van
Kasper & Company.
+10.46 Warrant, dated August 25, 1997, issued by U S Liquids Inc. to Sanders
Morris Mundy Inc.
II-6
<PAGE>
+10.47 Warrant issued by U S Liquids Inc. to Sanders Morris Mundy Inc.
21.1 List of subsidiaries of U S Liquids Inc. (Exhibit 21.1 of the
Registration Statement on Form S-1 (File No. 333-30065), effective
August 19, 1997, is hereby incorporated by reference).
+23.1 Consent of Arthur Andersen LLP.
*23.2 Consent of Hartzog Conger & Cason (contained in Exhibit 5.1).
+24.1 Power of attorney (included on signature page).
+27.1 Financial Data Schedule.
- -----------
+ Filed herewith.
* To be filed by amendment.
(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.
ITEM 17. UNDERTAKINGS
(a) The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are made, a
post-effective amendment to this registration statement:
(i) to include any prospectus required by Section 10(a)(3)
of the Securities Act of 1933;
(ii) to reflect in the prospectus any facts or events
arising after the effective date of the registration
statement (or the most recent post-effective amendment
thereof) which, individually or in the aggregate,
represent a fundamental change in the information set
forth in the registration statement;
(iii) to include any material information with respect to the
plan of distribution not previously disclosed in the
registration statement or any material change to such
information in the registration statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment 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-7
<PAGE>
(3) To remove from registration by means of a post-effective
amendment any of the securities being registered which remain
unsold at the termination of the offering.
(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.
II-8
<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 September 2, 1997.
U S LIQUIDS INC.
By: /s/ Michael P. Lawlor
-----------------------------------
Michael P. Lawlor
CHIEF EXECUTIVE OFFICER
POWER OF ATTORNEY
Each person whose signature appears below hereby constitutes and appoints
each of Michael P. Lawlor and Earl J. Blackwell with full power to act without
the other, his true and lawful attorney-in-fact and agent, with full power of
substitution and resubstitution, for him and in his name, place and stead, in
any and all capacities (until revoked in writing) to sign any and all amendments
(including post-effective amendments) to this Registration Statement, to file
the same, together with all exhibits thereto and other documents in connection
therewith, with the SEC, to sign any and all applications, registration
statements, notices and other documents necessary or advisable to comply with
the applicable state securities laws, and to file the same, together with all
other documents in connection therewith, with the appropriate state securities
authorities, granting unto said attorneys-in-fact and agents or any of them or
their or his substitutes or substitute, full power and authority to perform and
do each and every act and thing necessary and advisable as fully to all intents
and purposes as he might or could perform and do in person, thereby ratifying
and confirming all that said attorneys-in-fact and agents or any of them, or
their or his substitutes or substitute, may lawfully do or cause to be done by
virtue hereof.
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 SEPTEMBER 2, 1997.
SIGNATURE TITLE
--------- -----
/s/ Michael P. Lawlor
- ------------------------------
Michael P. Lawlor Chief Executive Officer and Director
/s/ W. Gregory Orr
- ------------------------------
W. Gregory Orr Chief Operating Officer, President and
Director
/s/ Earl J. Blackwell
- ------------------------------
Earl J. Blackwell Chief Financial Officer and Senior Vice
President-Finance
/s/ William A. Rothrock IV
- ------------------------------
William A. Rothrock IV Director
/s/ Thomas B. Blanton
- ------------------------------
Thomas B. Blanton Director
/s/ Alfred Tyler 2nd
- ------------------------------
Alfred Tyler 2nd Director
II-9
<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 meanings, and capitalized terms used herein without
definition shall have the meanings ascribed to them in the Underwriting
Agreement:
<PAGE>
(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 $11.40 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.
(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
-2-
<PAGE>
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 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
-3-
<PAGE>
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 19,
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 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.
-4-
<PAGE>
(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 25, 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."
(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
-5-
<PAGE>
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 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
-6-
<PAGE>
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 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
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<PAGE>
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 supplement or post-effective
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<PAGE>
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 unreasonably takes any action
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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 registration statement, the prospectus (and, if
applicable,
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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,
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
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<PAGE>
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 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
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<PAGE>
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 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
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<PAGE>
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.
(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
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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 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
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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:
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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
convertible or exchangeable
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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 similar commissions, compensation, discounts or concessions
paid or allowed by the Company in
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<PAGE>
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 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
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<PAGE>
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, 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)).
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<PAGE>
(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.
(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
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<PAGE>
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 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.
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<PAGE>
(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.
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.
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<PAGE>
(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 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
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<PAGE>
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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<PAGE>
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: /s/ W. Gregory Orr
-----------------------------------------------
Name: W. Gregory Orr
Title: President and Chief Operating Officer
The foregoing Agreement is hereby confirmed and accepted as of the date first
above written.
VAN KASPER & COMPANY
By: /s/ David H. Horwich
--------------------------------
Name: David H. Horwich
Title: Senior Vice President
SANDERS MORRIS MUNDY INC.
By: /s/ Bruce R. McMaken
--------------------------------
Name: Bruce R. McMaken
Title: Vice President
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<PAGE>
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, 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
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<PAGE>
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.
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<PAGE>
In witness whereof, the Company has caused this Warrant to be duly
executed.
U S LIQUIDS INC.
By:
-----------------------------------------
Name:
Title:
Attest:
--------------------------------------------
Name:
Title:
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<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
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<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)
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<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).
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<PAGE>
WARRANT
THE WARRANTS REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO THE CONDITIONS
SPECIFIED IN A WARRANT AGREEMENT, DATED AUGUST 25, 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. 1
Warrant to Purchase up to 56,250 Shares of Common Stock
EXERCISABLE COMMENCING 9:00 A.M., LOS ANGELES TIME, ON
AUGUST 25, 1998 AND ENDING 5:00 P.M., LOS ANGELES TIME,
ON AUGUST 25, 2002
U S LIQUIDS INC.
COMMON STOCK PURCHASE WARRANT
This certifies that Van Kasper & Company 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 25, 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, 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
<PAGE>
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 25, 1998 until 5:00 p.m., Los Angeles time, on August
25, 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
-2-
<PAGE>
PERTAINING TO CHOICE OR CONFLICT OF LAWS, OF THE STATE OF CALIFORNIA.
In witness whereof, the Company has caused this Warrant to be duly
executed.
U S LIQUIDS INC.
By: /s/ W. Gregory Orr
------------------------------------------
Name: W. Gregory Orr
Title: President and Chief Operating Officer
Attest:
/s/ Earl J. Blackwell
---------------------------------------------
Name: Earl J. Blackwell
Title: Senior Vice President and Chief
Financial Officer
-3-
<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
-4-
<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)
-5-
<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).
-6-
<PAGE>
WARRANT
THE WARRANTS REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO THE CONDITIONS
SPECIFIED IN A WARRANT AGREEMENT, DATED AUGUST 25, 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. 2
Warrant to Purchase up to 56,250 Shares of Common Stock
EXERCISABLE COMMENCING 9:00 A.M., LOS ANGELES TIME, ON
AUGUST 25, 1998 AND ENDING 5:00 P.M., LOS ANGELES TIME,
ON AUGUST 25, 2002
U S LIQUIDS INC.
COMMON STOCK PURCHASE WARRANT
This certifies that Sanders Morris Mundy Inc. 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 25, 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, 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
<PAGE>
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 25, 1998 until 5:00 p.m., Los Angeles time, on August
25, 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
-2-
<PAGE>
PERTAINING TO CHOICE OR CONFLICT OF LAWS, OF THE STATE OF CALIFORNIA.
In witness whereof, the Company has caused this Warrant to be duly
executed.
U S LIQUIDS INC.
By: /s/ W. Gregory Orr
------------------------------------------
Name: W. Gregory Orr
Title: President and Chief Operating Officer
Attest:
/s/ Earl J. Blackwell
---------------------------------------------
Name: Earl J. Blackwell
Title: Senior Vice President and Chief
Financial Officer
-3-
<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
-4-
<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)
-5-
<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).
-6-
<PAGE>
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 37,500 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 Sanders Morris Mundy, Inc., 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 May 15, 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
<PAGE>
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 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: /s/ W. GREGORY ORR
---------------------------------
Name: W. Gregory Orr
Title: President & Chief
Executive Officer
<PAGE>
Attest:
/s/ EARL BLACKWELL
------------------------------------
Name: Earl Blackwell
Title: Senior Vice President and
Chief Financial Officer
<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)
<PAGE>
Address:
- ------------------------------------
- ------------------------------------
Signature Dated:
(Signature must conform in all respects to name of holder as specified
on the face of the Warrant)
<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 Taxpayer
Name of Assignee Address Common Stock ID 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).
<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
September 3, 1997
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> JUN-30-1997
<CASH> 2,704
<SECURITIES> 0
<RECEIVABLES> 4,461
<ALLOWANCES> 285
<INVENTORY> 446
<CURRENT-ASSETS> 8,205
<PP&E> 37,152
<DEPRECIATION> 2,170
<TOTAL-ASSETS> 43,863
<CURRENT-LIABILITIES> 9,656
<BONDS> 20,902
0
10
<COMMON> 52
<OTHER-SE> 2,791
<TOTAL-LIABILITY-AND-EQUITY> 43,863
<SALES> 0
<TOTAL-REVENUES> 17,734
<CGS> 11,362
<TOTAL-COSTS> 14,078
<OTHER-EXPENSES> 105
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,032
<INCOME-PRETAX> 2,518
<INCOME-TAX> 1,033
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,486
<EPS-PRIMARY> 0.00
<EPS-DILUTED> 0.00
</TABLE>
