SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ___________ to ________________.
Commission File Number: 001-13259
U S LIQUIDS INC.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 76-0519797
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Number)
411 N. Sam Houston Parkway East, Suite 400
Houston, TX 77060-3545
281-272-4500
(Address and telephone number of registrant's principal executive offices)
----------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. [X] Yes [ ] No
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
Common Stock, $.01 par value
12,311,870 shares as of November 13, 1998
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U S LIQUIDS INC.
FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 1998
INDEX
PART I - FINANCIAL INFORMATION
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Page
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Item 1 -Financial Statements:
-Condensed Consolidated Balance Sheets as
of December 31, 1997 and September 30, 1998 (unaudited)........................... 3
-Condensed Consolidated Statements of Income for the
three and nine month periods ended September 30, 1997 and
1998 (unaudited).................................................................. 4
-Condensed Consolidated Statements of Cash Flows for
the nine month periods ended September 30, 1997
and 1998 (unaudited).............................................................. 5
-Notes to Condensed Consolidated Financial Statements.............................. 6
Item 2 -Management's Discussion and Analysis of Financial
Condition and Results of Operations.............................................. 11
PART II - OTHER INFORMATION
Item 1 -Legal Proceedings................................................................ 17
Item 2 -Changes in Securities and Use of Proceeds........................................ 18
Item 3 -Defaults Upon Senior Securities.................................................. 18
Item 4 -Submission of Matters to a Vote of Security Holders.............................. 18
Item 5 -Other Information................................................................ 18
Item 6 -Exhibits and Reports on Form 8-K................................................. 18
Signature.................................................................................. 19
</TABLE>
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PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
U S LIQUIDS INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
ASSETS 1997 1998
------------- -------------
(UNAUDITED)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents ........................................ $ 2,203 $ 4,827
Accounts receivable, less allowances of $342 and
$1,683 (unaudited) ............................................. 5,436 28,502
Inventories ...................................................... 567 1,190
Prepaid expenses and other current assets ........................ 621 4,276
------------- -------------
Total current assets ....................................... 8,827 38,795
PROPERTY, PLANT AND EQUIPMENT, net ...................................... 39,110 78,275
INTANGIBLE ASSETS, net .................................................. 6,078 102,256
OTHER ASSETS, net ....................................................... 1,001 1,991
------------- -------------
Total assets ............................................... $ 55,016 $ 221,317
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current maturities of long-term obligations ...................... $ 792 $ 4,564
Accounts payable ................................................. 2,154 11,079
Accrued liabilities .............................................. 3,759 15,399
Current portion of contract reserve and deferred revenue ......... -- 5,298
------------- -------------
Total current liabilities .................................. $ 6,705 $ 36,340
LONG-TERM OBLIGATIONS, net of current maturities ........................ 16,644 43,910
CELL PROCESSING RESERVE ................................................. 7,330 5,765
CLOSURE AND REMEDIATION RESERVES ........................................ 3,275 6,494
CONTRACT RESERVE ........................................................ -- 8,248
DEFERRED INCOME TAXES ................................................... 156 1,695
------------- -------------
Total liabilities .......................................... $ 34,110 $ 102,452
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value, 5,000,000 shares authorized,
none issued .................................................... $ -- $ --
Common stock, $.01 par value, 30,000,000 shares authorized,
7,303,164 and 12,311,870 (unaudited) shares
issued and outstanding ......................................... 73 123
Additional paid-in capital ....................................... 17,190 108,043
Retained earnings ................................................ 3,643 10,699
------------- -------------
Total stockholders' equity ................................. $ 20,906 $ 118,865
------------- -------------
Total liabilities and stockholders' equity ............. $ 55,016 $ 221,317
============= =============
</TABLE>
The accompanying notes are an integral part of these condensed
consolidated financial statements.
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U S LIQUIDS INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------- ------------------
1997 1998 1997 1998
------- -------- ------- --------
<S> <C> <C> <C> <C>
REVENUES ................................................... $ 9,619 $ 37,547 $27,313 $ 77,860
OPERATING EXPENSES (exclusive of $612 and $2,264, and $1,832
and $4,931, respectively, of depreciation and
amortization) ........................................... 5,426 23,937 15,404 49,228
DEPRECIATION AND AMORTIZATION .............................. 662 2,628 2,007 5,698
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES (exclusive of $50 and $364, and $175 and $767,
respectively, of depreciation and amortization) ......... 1,138 4,478 3,404 8,968
MERGER AND POOLING COSTS ................................... -- -- 400 --
------- -------- ------- --------
INCOME FROM OPERATIONS ..................................... $ 2,393 $ 6,504 $ 6,048 $ 13,966
INTEREST EXPENSE, net ...................................... 499 746 1,367 2,310
OTHER (INCOME) EXPENSE, net ................................ (138) (66) 130 (235)
------- -------- ------- --------
INCOME BEFORE PROVISION FOR INCOME TAXES ................... $ 2,032 $ 5,824 $ 4,551 $ 11,891
PROVISION FOR INCOME TAXES ................................. 713 2,386 1,746 4,835
------- -------- ------- --------
NET INCOME ................................................. $ 1,319 $ 3,438 $ 2,805 $ 7,056
======= ======== ======= ========
BASIC EARNINGS PER COMMON SHARE ............................ $ 0.22 $ 0.28 $ 0.51 $ 0.73
======= ======== ======= ========
DILUTED EARNINGS PER COMMON AND COMMON
EQUIVALENT SHARE ........................................ $ 0.18 $ 0.26 $ 0.42 $ 0.64
======= ======== ======= ========
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING ................. 5,997 12,149 5,497 9,623
======= ======== ======= ========
WEIGHTED AVERAGE COMMON AND COMMON
EQUIVALENT SHARES OUTSTANDING ........................... 7,330 13,474 6,726 10,956
======= ======== ======= ========
</TABLE>
The accompanying notes are an integral part of these condensed
consolidated financial statements.
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U S LIQUIDS INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
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NINE MONTHS ENDED
SEPTEMBER 30,
------------------------------
1997 1998
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ............................................................ $ 2,805 $ 7,056
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization ....................................... 2,007 5,698
Net gain on sale of property, plant, and equipment .................. (27) (115)
Deferred income tax provision ....................................... 253 1,539
Changes in operating assets and liabilities, net of amounts acquired:
Accounts receivable, net .......................................... 507 (7,254)
Inventories ....................................................... (383) 499
Prepaid expenses and other current assets ......................... 250 (2,655)
Other assets ...................................................... (109) (966)
Accounts payable and other current liabilities .................... (1,334) 3,423
Closure, remediation and cell processing reserves ................. 417 (1,346)
------------- -------------
Net cash provided by operating activities ...................... $ 4,386 $ 5,879
------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property, plant and equipment ............................ $ (2,744) $ (7,432)
Proceeds from sale of property, plant and equipment ................... 101 268
Net cash paid for acquisitions ........................................ 0 (79,213)
------------- -------------
Net cash used in investing activities ........................ $ (2,643) $ (86,377)
------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments to stockholders and related parties .......................... $ (465) $ --
Proceeds from issuance of long-term obligations ....................... 198 81,826
Principal payments on long-term obligations ........................... (6,518) (59,558)
Interest accrued on related-party notes payable ....................... 37 --
Preferred stock dividends paid ........................................ (16) --
Payments to retire preferred stock .................................... (10) --
Issuance of common stock .............................................. 14,187 60,752
Proceeds from exercise of stock options ............................... -- 102
Distributions equal to current income taxes of the limited
liability corporation ............................................... (171) --
------------- -------------
Net cash provided by financing activities ................... $ 7,242 $ 83,122
------------- -------------
NET INCREASE IN CASH AND CASH EQUIVALENTS ................................. $ 8,985 $ 2,624
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD .......................... 5,604 2,203
------------- -------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD ................................ $ 14,589 $ 4,827
============= =============
SUPPLEMENTAL DISCLOSURES:
Cash paid for interest ................................................ $ 1,736 $ 2,266
Cash paid for income taxes ............................................ 1,825 3,050
Assets acquired under capital leases .................................. 46 --
Assets acquired with stock and warrants ............................... -- 30,058
Notes issued and liabilities assumed related to acquisitions .......... -- 8,771
</TABLE>
The accompanying notes are an integral part of these condensed
consolidated financial statements.
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U S LIQUIDS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The condensed consolidated financial statements have been prepared pursuant
to the rules and regulations of the Securities and Exchange Commission (SEC).
Certain information and footnote disclosures, normally included in annual
financial statements prepared in accordance with generally accepted accounting
principles, have been condensed or omitted pursuant to those rules and
regulations; although the Company believes that the disclosures made are
adequate to make the information presented not misleading. 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 year.
It is suggested that these condensed consolidated financial statements be
read in conjunction with the audited consolidated financial statements and notes
thereto included in the Company's Annual Report on Form 10-K for the year ended
December 31, 1997, as filed with the SEC.
2. INVENTORIES
Inventories are stated at the lower of cost or market and, at December 31,
1997 and September 30, 1998, consisted of processed by-products of $435,000 and
$837,000, respectively, and unprocessed by-products of $132,000 and $353,000,
respectively. Cost is determined using the first-in, first-out (FIFO) method.
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3. EARNINGS PER SHARE
Effective December 15, 1997, the Company adopted the provisions of Statement
of Financial Accounting Standards (SFAS) No. 128, "Earnings Per Share". Under
these provisions, earnings per share amounts are based on the weighted average
number of shares of common stock and common stock equivalents outstanding during
the period. The weighted average number of shares used to compute basic and
diluted earnings per share for the three and nine months ended September 30,
1997 and 1998, respectively, is illustrated below:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------ ------------------------
1997 1998 1997 1998
---------- ----------- ---------- -----------
(IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED)
<S> <C> <C> <C> <C>
Numerator:
For basic and diluted earnings per
share -- Income available to
common stockholders .............. $ 1,319 $ 3,438 $ 2,805 $ 7,056
========== =========== ========== ===========
Denominator:
For basic earnings per share --
Weighted-average shares .......... 5,996,830 12,149,125 5,496,736 9,622,553
---------- ----------- ---------- -----------
Effect of dilutive securities:
Stock options and warrants ....... 1,333,593 1,324,856 1,229,287 1,333,076
---------- ----------- ---------- -----------
Denominator:
For diluted earnings per share --
Weighted-average shares and
assumed conversions .............. 7,330,423 13,473,981 6,726,023 10,955,629
========== =========== ========== ===========
</TABLE>
4. NEW ACCOUNTING PRONOUNCEMENTS
In March 1998, the AICPA issued Statement of Position (SOP) 98-1,
"Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use". The SOP provides guidance with respect to accounting for the
various types of costs incurred for computer software developed or obtained for
the Company's use. The Company intends to adopt SOP 98-1 in the first quarter of
1999 and believes that adoption will not have a significant effect on its
consolidated financial statements.
In April 1998, the AICPA issued SOP 98-5, "Reporting on the Costs of
Start-Up Activities". At adoption, SOP 98-5 requires the Company to write off
any unamortized start-up costs as a cumulative change in accounting principle
and expense all future start-up costs as they are incurred. The Company intends
to adopt SOP 98-5 in the first quarter of 1999 and believes that adoption will
not have a significant effect on its consolidated financial statements.
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5. ACQUISITIONS
FOURTH QUARTER 1997 ACQUISITIONS
During the fourth quarter of 1997, the Company completed four acquisitions
that were accounted for under the purchase method of accounting. Results of
operations of companies that were acquired and subject to purchase accounting
are included in the consolidated financial statements from the dates of such
acquisitions. The total cost of acquisitions accounted for under the purchase
method was $6,819,000. The accompanying condensed consolidated balance sheet as
of September 30, 1998 includes allocations of the respective purchase prices and
is subject to final adjustment. The excess of the aggregate purchase price over
the fair value of the net assets acquired was approximately $5,726,000.
In addition, the Company has agreed in connection with certain transactions
to pay additional amounts to the sellers upon the achievement by the acquired
businesses of certain negotiated goals, such as targeted earnings levels.
Although the amount and timing of any payments of additional contingent
consideration depend on whether and when these goals are met, the maximum
aggregate amount of contingent consideration potentially payable if all targeted
goals are met is approximately $27,880,000 (payable through 2002) with the
goals, if achieved, providing approximately $31,125,000 of pre-tax income over a
five-year period. The contingent consideration is payable in cash or, in some
instances, cash and stock, at the Company's option. As of September 30, 1998,
none of these targeted goals had been achieved.
On October 1, 1997, the Company completed a merger accounted for as a
pooling-of-interests, pursuant to which the Company issued 241,410 shares of its
common stock in exchange for all outstanding shares of the acquired company.
Periods prior to consummation of this merger were not restated to include the
accounts and operations of the acquired company as combined results are not
materially different from the results as presented.
1998 ACQUISITIONS
During the nine months ended September 30, 1998, the Company acquired 25
businesses engaged in the collection, treatment and disposal of liquid wastes
for approximately $79,213,000 in cash, $3,139,000 in debt issued, 20,000 stock
warrants and 1,539,207 shares of the Company's common stock using the purchase
method of accounting. In addition, one acquisition provides for additional
payments of approximately $15,004,000 in connection with a five-year disposal
agreement entered into with the seller, which the Company has accrued for as a
contract reserve. The accompanying condensed consolidated balance sheet includes
allocations of the respective purchase prices and is subject to final
adjustment. The excess of the aggregate purchase price over the fair value of
the net assets acquired was approximately $95,118,000.
In addition, the Company has agreed in connection with certain transactions
to pay additional amounts to the sellers upon the achievement by the acquired
businesses of certain negotiated goals, such as targeted earnings levels, or the
occurrence of other specified conditions. Although the amount and timing of any
payments of additional contingent consideration depend on whether and when these
goals or other conditions are met, the maximum aggregate amount of contingent
consideration potentially payable if all targeted goals and conditions are met
is approximately $12,825,000 (payable through 2003) with the goals, if achieved,
providing approximately $25,744,000 of pre-tax income or earnings before
interest, taxes, depreciation and amortization over a three-year period. The
contingent consideration
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is generally payable in cash, however, in three of the acquisitions, the
contingent consideration involves shares of the Company's common stock. As of
September 30, 1998, none of these targeted goals had been achieved and none of
the other specified conditions had occurred.
The unaudited pro forma information set forth below presents the revenues,
net income and earnings per share of the Company, plus the 1997 and 1998
acquisitions, the Company's initial public offering in August 1997 and the
secondary public offering of the Company's common stock in June 1998, as if
these transactions were effective on January 1, 1997 and includes certain pro
forma adjustments, including the adjustment of amortization expenses to reflect
purchase price allocations, recording of interest expense to reflect debt issued
in connection with the acquisitions, and certain reductions of salaries and
benefits payable to the previous owners of the businesses acquired which were
agreed to in connection with the acquisitions and the related income tax effects
of these adjustments.
NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------
1997 1998
------------- -----------
(In thousands, except for per share data)
(Unaudited)
Revenues .............................. $ 122,945 $ 120,974
Net income ............................ 8,986 10,316
Basic earnings per common share ....... 0.73 0.84
Diluted earnings per common share ..... 0.66 0.76
The unaudited pro forma information is presented for informational purposes
only and is not necessarily indicative of the results of operations that
actually would have been achieved had the acquisitions been consummated at the
beginning of the periods presented.
6. LEGAL PROCEEDINGS
On August 7, 1998, the Company settled substantially all of the claims
asserted against it in the three previously reported lawsuits relating to its
Bourg, Louisiana landfarm and a fourth lawsuit filed against the Company in July
1998 seeking injunctive relief against certain operations of the Bourg,
Louisiana landfarm. Under the terms of the settlement, the Company agreed to
expand the buffer zone and build a berm along the western boundary of its
landfarm. The costs of these actions had previously been reserved for by the
Company and, thus, did not have any impact on earnings. This settlement does not
resolve certain claims asserted against the Company by Acadian Shipyard, Inc., a
local barge company ("Acadian"), in the Friloux et al. v. Campbell Wells
Corporation case pending in the 17th Judicial District Court for the Parish of
Lafourche, Louisiana. In the Friloux case, the Company asserted claims for
indemnity and/or contribution against Acadian. Thereafter, in July 1998, Acadian
filed various counterclaims against the Company including, without limitation,
claims for defamation of business reputation and conspiracy to damage Acadian's
business reputation. In addition, Acadian requested unspecified monetary damages
allegedly suffered as a result of alleged environmental contamination in
connection with the ongoing operations at the Bourg, Louisiana landfarm. The
Company denies that it has any liability to Acadian and intends to vigorously
defend
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itself against these claims. In addition, this settlement does not resolve the
claims asserted in the class action filed in the Civil District Court for the
Parish of Orleans, Louisiana seeking 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. The
Company has not been named as a defendant in this class action; however, there
can be no assurance that the Company will not subsequently be named as a
defendant.
On September 22, 1998, the Company settled the arbitration proceeding that
it had filed against Newpark Resources, Inc. ("Newpark") in July 1998. Under the
terms of the settlement, Newpark and the Company entered into a thirty-three
month agreement, pursuant to which Newpark will pay to the Company at least $30
million. Newpark paid $3 million of this amount to the Company in September
1998. The remaining amounts, which may be increased based upon future increases
in the consumer price index, will be paid to the Company in monthly installments
beginning in October 1998 and continuing through June 2001. These payments will
permit Newpark to deliver to the Company for processing and disposal specified
amounts of oilfield waste. At Newpark's option, the term of this agreement may
be extended for up to two additional years. This thirty-three month agreement
replaces Newpark's obligations under the Disposal Agreement, dated June 4, 1996,
that the Company acquired in connection with the acquisition of its Texas and
Louisiana landfarms in December 1996. As part of the settlement, the Company
secured the right to immediately enter into the business of cleaning tanks,
barges and other vessels and containers used in the storage and/or
transportation of oilfield waste and acquired certain assets used in the
business in exchange for a payment of $2.15 million. Prior to the settlement,
the Company was contractually prohibited from engaging in any such cleaning
business within the States of Louisiana, Texas, Mississippi and Alabama and the
Gulf of Mexico. The settlement does not substantially alter the Company's
contractual obligation not to engage, directly or indirectly, in (i) the
collection, transfer, transportation, treatment or disposal of oilfield waste
generated in a marine environment or transported in marine vessels, or (ii) the
remediation and closure of oilfield waste pits business, in each case within the
states of Louisiana, Texas, Mississippi and Alabama and the Gulf of Mexico.
However, the settlement agreements provide that these noncompete provisions will
terminate immediately if Newpark fails to make in a timely manner all payments
required to be made to the Company under the terms of the settlement. As part of
the settlement, the parties also reduced the term of the lease agreements
pursuant to which Newpark leases the dock facilities at the Company's landfarms
in Bourg, Louisiana, Mermentau, Louisiana and Bateman Island, Louisiana. These
leases will now terminate on June 30, 2001, as opposed to August 31, 2021.
The Company is, from time to time, a party to litigation arising in the
normal course of its business, most of which involves claims for personal injury
or property damage incurred in connection with its operations. The Company is
not currently involved in any litigation that it believes will have a material
adverse effect on its business, results of operations or financial condition.
7. SUBSEQUENT EVENTS
On October 30, 1998, the Company acquired one additional business, which had
1997 revenues of approximately $6.0 million, for approximately $8.6 million in
cash. This acquisition was accounted for under the purchase method of
accounting.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
THE FOLLOWING DISCUSSION SHOULD BE READ IN CONJUNCTION WITH THE COMPANY'S
UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS AND THE RELATED NOTES THERETO
INCLUDED ELSEWHERE IN THIS REPORT.
OVERVIEW
The Company is a rapidly growing provider of integrated liquid waste
management services, including collection, processing, recovery and disposal
services. Since its formation in November 1996, the Company has pursued an
aggressive acquisition program, acquiring 34 liquid waste management businesses,
including one business acquired since September 30, 1998.
The Company provides liquid waste management services through a number of
subsidiaries that are organized into two divisions. The Wastewater Division
collects, processes and disposes of liquid waste (such as industrial wastewater,
grease and grit trap waste, bulk liquids and dated beverages and certain
hazardous wastes) and whenever feasible recovers saleable by-products from the
waste streams. Typically, the Company uses a variety of physical, chemical,
thermal and biological techniques to break down the liquid waste into
constituent components. Water extracted from the liquid waste is pretreated and
then discharged into the local publicly-owned treatment works and solid
materials are dried and disposed of in a sanitary waste landfill. The Oilfield
Waste Division processes and disposes of waste generated in oil and gas
exploration and production. The Oilfield Waste Division was formed in December
1996 when the Company purchased its Louisiana and Texas landfarms from Campbell
Wells, L.P., Campbell Wells NORM, L.P. and Sanifill, Inc., each of which is
now a wholly-owned subsidiary of Waste Management, Inc.
The Wastewater Division generated $33.1 million, or 88.3%, of the Company's
revenues for the quarter ended September 30, 1998. This Division derives
revenues from two principal sources: tipping and collection fees received for
processing and disposing of waste, and revenue obtained from the sale of
by-products, including fats, oils, feed proteins, industrial and fuel grade
ethanol, solvents, aluminum, glass, plastic and cardboard recovered from waste
streams. Some of the Company's by-product sales involve the brokering of
industrial and fuel grade ethanol produced by third parties; however, the
Company plans to curtail these brokerage activities except where necessary to
meet its customers' volume and quality requirements. Tipping and collection fees
charged to customers vary per gallon by waste stream according to the
constituents of the waste, expenses associated with processing the waste and
competitive factors. By-products are commodities and their prices fluctuate
based on market conditions. The Company anticipates that revenues from tipping
and collection fees, which have higher margins than by-product sales, will
increase at a faster rate than revenues from sales of by-products and brokering
of ethanol. The Company anticipates that the Wastewater Division will represent
a growing share of the Company's business because of its projected internal
growth and future acquisitions.
The Oilfield Waste Division generated $4.4 million, or 11.7%, of the
Company's revenues for the quarter ended September 30, 1998. This Division
derives revenues from fees charged to customers for processing and disposing of
oil and gas exploration and production waste. These fees are based on the
composition of the waste and currently range from $0.40 per barrel for saltwater
to $6.75 to $10.75 per barrel for oil-based drilling fluids, depending upon the
makeup of the waste. Accordingly, the Company believes that total revenues are a
better indicator of performance than is the average
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fee charged. When waste is unloaded at a given site, the Company recognizes the
related revenue and records a reserve for the estimated amount of expenses to be
incurred to process the waste in order to match revenues with their related
costs. As processing occurs, generally over nine to twelve months, the reserve
is depleted as expenses are incurred.
The Company's operating margins in the Oilfield Waste Division are typically
higher than in the Wastewater Division.
Newpark Resources, Inc. ("Newpark") is the largest customer of the Oilfield
Waste Division. As described in Item 1 of Part II below, in September 1998, the
Company and Newpark entered into a thirty-three month agreement, pursuant to
which Newpark will pay at least $30 million to the Company. Newpark paid $3
million of this amount to the Company in September 1998. The remaining amounts,
which may be increased based upon future increases in the consumer price index,
will be paid to the Company in monthly installments beginning in October 1998
and continuing through June 2001. These payments will permit Newpark to deliver
to the Company for processing and disposal specified amounts of oilfield waste.
Due to prior uncertainties, for at least the first twelve months of this
agreement, the Company intends to account for these payments as revenues as they
are collected.
Operating expenses include compensation and overhead related to operations
workers, supplies and other raw materials, transportation charges, disposal fees
paid to third parties, real estate lease payments and energy and insurance costs
applicable to waste processing and disposal operations.
Selling, general and administrative expenses include management, clerical
and administrative compensation and overhead relating to the Company's corporate
offices and each of its operating sites, as well as professional services and
costs.
Depreciation and amortization expenses relate to the Company's landfarms and
other depreciable or amortizable assets. Landfarms, which constitute
approximately 18.0% of the Company's net property, plant and equipment, are
amortized over 25 years. Other depreciable or amortizable assets are expensed
over periods ranging from three to 40 years.
The timing and magnitude of acquisitions, assimilation costs and the
seasonal nature of the operations of the Oilfield Waste Division may materially
affect operating results. Accordingly, the operating results for any period are
not necessarily indicative of the results that may be achieved for any
subsequent period.
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 1997 AND 1998
REVENUES. Revenues for the quarter ended September 30, 1998 increased $27.9
million, or 290.3%, from $9.6 million for the quarter ended September 30, 1997
to $37.5 million for the quarter ended September 30, 1998. The Wastewater
Division contributed $4.5 million, or 46.8%, of third quarter 1997 revenues and
$33.1 million, or 88.3%, of third quarter 1998 revenues. Tipping and collection
fees generated $1.1 million, or 25.1%, and $25.3 million, or 76.4%, of the
Wastewater Division's revenues for the third quarters of 1997 and 1998,
respectively. By-product sales generated the remaining $3.4 million, or 74.9%,
and $7.8 million, or 23.6%, of the Wastewater Division's revenues for the third
quarters of 1997 and 1998, respectively. The Oilfield Waste Division
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contributed $5.1 million, or 53.2%, of third quarter 1997 revenues and $4.4
million, or 11.7%, of third quarter 1998 revenues.
The revenues of the Wastewater Division increased $28.6 million, or 635.6%,
from $4.5 million for the quarter ended September 30, 1997 to $33.1 million for
the quarter ended September 30, 1998 due primarily to acquisitions completed
during the fourth quarter of 1997 and the first nine months of 1998. The "same
store" revenues for collecting and processing of waste increased due to
increased pricing, while revenues from the sale of fats and oils decreased due
to a reduction in commodities prices. The Oilfield Waste Division's revenues
decreased $700,000, or 13.4%, from $5.1 million for the quarter ended September
30, 1997 to $4.4 million for the quarter ended September 30, 1998. The revenues
of the Oilfield Waste Division decreased due to lower receipts of oilfield waste
caused by a decline in drilling activity in the Gulf Coast Region.
OPERATING EXPENSES. Operating expenses increased $18.5 million, or 341.2%,
from $5.4 million for the quarter ended September 30, 1997 to $23.9 million for
the quarter ended September 30, 1998. As a percentage of revenues, operating
expenses increased from 56.4% in the third quarter of 1997 to 63.8% in the third
quarter of 1998. This increase was due primarily to the Company's transition
from operating primarily as an oilfield waste disposal company into an
integrated liquid waste management company providing collection, processing,
recovery and disposal services.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expenses
increased $1.9 million, or 297.0%, from $700,000 for the quarter ended September
30, 1997 to $2.6 million for the quarter ended September 30, 1998. As a
percentage of revenues, depreciation and amortization expenses increased from
6.9% in the second quarter of 1997 to 7.0% in the third quarter of 1998. This
increase was primarily due to an increase in capital expenditures and additional
amortization associated with the acquisitions completed in 1998.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased $3.4 million, or 293.5%, from $1.1 million for
the quarter ended September 30, 1997 to $4.5 million for the quarter ended
September 30, 1998. As a percentage of revenues, selling, general and
administrative expenses were 11.8% for the third quarter of 1997 and 11.9% for
the third quarter of 1998.
INTEREST AND OTHER EXPENSES. Net interest and other expenses increased
$319,000, or 88.4%, from $361,000 for the quarter ended September 30, 1997 to
$680,000 for the quarter ended September 30, 1998. This increase resulted
primarily from interest expense incurred on borrowings used to fund the purchase
price for acquisitions completed in 1998.
INCOME TAXES. The provision for income taxes increased $1.7 million, or
234.6%, from $713,000 for the quarter ended September 30, 1997 to $2.4 million
for the quarter ended September 30, 1998 as a result of increased taxable
income. The effective tax rate for the period ended September 30, 1997 was 35.1%
compared to a 41.0% rate for the period ended September 30, 1998. The increase
in the effective tax rate was a result of certain tax attributes of acquired
companies.
NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1998
REVENUES. Revenues for the nine month period ended September 30, 1998
increased $50.6 million, or 185.1%, from $27.3 million for the nine months ended
September 30, 1997 to $77.9 million for the nine months ended September 30,
1998. The Wastewater Division contributed $12.2
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million, or 44.7%, of revenues for the nine months ended September 30, 1997 and
$65.1 million, or 83.6%, of revenues for the nine months ended September 30,
1998. Tipping and collection fees generated $3.2 million, or 26.0%, and $48.0
million, or 73.7%, of the Wastewater Division's revenues for the nine month
periods ended September 30, 1997 and 1998, respectively. By-product sales
generated the remaining $9.1 million, or 74.0%, and $17.1 million, or 26.3%, of
the Wastewater Division's revenues for the 1997 and 1998 periods, respectively.
The Oilfield Waste Division contributed $15.1 million, or 55.3%, of revenues for
the nine month period ended September 30, 1997 and $12.8 million, or 16.4%, of
revenues for the nine month period ended September 30, 1998.
The revenues of the Wastewater Division increased $52.9 million, or 433.6%,
from $12.2 million for the nine months ended September 30, 1997 to $65.1 million
for the nine months ended September 30, 1998. This increase was due primarily to
acquisitions completed during the fourth quarter of 1997 and the first nine
months of 1998. The "same store" revenues for collecting and processing of waste
increased due to increased pricing, while revenues from the sale of fats and
oils decreased due to a reduction in commodities prices. The Oilfield Waste
Division's revenues decreased $2.3 million, or 15.4%, from $15.1 million for the
nine months ended September 30, 1997 to $12.8 million for the nine months ended
September 30, 1998. This decrease resulted primarily from lower receipts of
oilfield waste from customers caused by a decline in drilling activity in the
Gulf Coast Region.
OPERATING EXPENSES. Operating expenses increased $33.8 million, or 219.6%,
from $15.4 million for the nine months ended September 30, 1997 to $49.2 million
for the nine months ended September 30, 1998. As a percentage of revenues,
operating expenses increased from 56.4% for the nine month period ended
September 30, 1997 to 63.2% for the nine month period ended September 30, 1998.
This increase was due principally to the Company's transition from operating
primarily as an oilfield waste disposal company into an integrated liquid waste
management company providing collection, processing, recovery and disposal
services.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expenses
increased $3.7 million, or 183.9%, from $2.0 million for the nine months ended
September 30, 1997 to $5.7 million for the nine months ended September 30, 1998.
As a percentage of revenues, depreciation and amortization expenses remained
constant at approximately 7.3%.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased $5.5 million, or 159.6%, from $3.5 million for
the nine months ended September 30, 1997 to $9.0 million for the nine months
ended September 30, 1998. As a percentage of revenues, selling, general and
administrative expenses decreased from 12.6% for the nine month period ended
September 30, 1997 to 11.5% for the nine month period ended September 30, 1998.
This improvement resulted primarily from the Company's ability to integrate new
business acquisitions without a proportionate increase in general and
administrative expenses.
INTEREST AND OTHER EXPENSES. Net interest and other expenses increased
$578,000, or 38.6%, from $1.5 million for the nine months ended September 30,
1997 to $2.1 million for the nine months ended September 30, 1998. This increase
resulted primarily from interest expense incurred on borrowings used to fund the
purchase price for acquisitions completed in 1998.
INCOME TAXES. The provision for income taxes increased $3.1 million, or
176.9%, from $1.7 million for the nine months ended September 30, 1997 to $4.8
million for the nine months ended September 30, 1998 as a result of increased
taxable income. The effective tax rate for the nine
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months ended September 30, 1997 was 38.4%, compared to a 40.7% rate for the nine
months ended September 30, 1998.
LIQUIDITY AND CAPITAL RESOURCES
The Company had net working capital of $2.5 million at September 30, 1998,
compared to net working capital of $2.1 million at December 31, 1997.
The Company's capital requirements for its continuing operations consist of
its general working capital needs, scheduled principal payments on its debt
obligations and capital leases, and planned capital expenditures. At September
30, 1998, approximately $4.6 million of principal payments on debt obligations
were payable during the next twelve months. Capital expenditures during the
three months and the nine months ended September 30, 1998 were $3.1 million and
$7.3 million, respectively. The majority of the capital expenditures were for
plant expansions, equipment and vehicle upgrades. Capital expenditures for the
last quarter of 1998 are budgeted at approximately $5.9 million. Of this amount,
approximately $400,000 is budgeted to be invested in the Oilfield Waste Division
on equipment replacements and equipment for the recently acquired tank and barge
cleaning business. The remaining amount is budgeted to be invested in the
Wastewater Division for plant expansions, equipment and vehicle upgrades.
At September 30, 1998, the Company had established a $6.5 million reserve to
provide for the cost of future closures of facilities. The amount of this
unfunded reserve is based on the estimated total cost to 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 $14.3 million of
financial assurance in the form of letters of credit and bonds.
The Company has a $100 million credit facility (the "Credit Facility") with
a group of banks under which the Company may borrow to fund working capital
requirements and acquisitions. Amounts outstanding under the Credit Facility are
secured by, among other things, a lien on all or substantially all of the
Company's assets. The Credit Facility prohibits the payment of dividends and
requires the Company to comply with certain financial covenants. The Credit
Facility also places certain restrictions on, among other things, acquisitions
and other business combination transactions which may be consummated by the
Company. The Company does not believe that these restrictions will have a
material adverse effect on the Company's ability to fulfill its current
acquisition program. The debt outstanding under the Credit Facility may be
accelerated at the option of the lenders in the event that, among other things,
a change in control of the Company occurs or Michael P. Lawlor, W. Gregory Orr
or Earl J. Blackwell ceases to serve as an executive officer of the Company and
is not replaced within sixty days by an individual reasonably satisfactory to
the lenders. At September 30, 1998, the Company had borrowed approximately $42.0
million under the Credit Facility.
The Company's capital resources consist of cash reserves, cash generated
from operations and funds available under the Credit Facility. The Company
expects that these resources will be sufficient to fund continuing operations
for at least the next twelve months. In addition to capital required for its
ongoing operations, the Company will require additional capital to pursue its
long-term acquisition program. The Company anticipates that future acquisitions
will be made using a combination of common stock and cash, much of which is
expected to be derived from borrowings under the Credit Facility. In addition,
the Company may seek to raise additional equity capital for all or a substantial
part of the consideration to be paid for future acquisitions or to reduce its
debt. In the event that the
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<PAGE>
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.
ACQUISITIONS
During the three months ended September 30, 1998, the Company acquired eight
businesses, which collectively had 1997 revenues of approximately $23.0 million.
Each of these acquisitions has been accounted for under the purchase method of
accounting. The total consideration for these eight acquisitions involved
approximately $9.0 million in cash and 184,168 shares of the Company's common
stock. In certain transactions, the Company agreed to issue additional shares of
common stock or make additional payments of cash to the sellers upon the
achievement by the acquired businesses of certain negotiated goals, such as
targeted earnings levels, or upon the occurrence of other specified conditions.
As of September 30, 1998, none of these targeted goals had been achieved and
none of the other specified conditions had occurred.
On October 30, 1998, the Company acquired one additional business, which had
1997 revenues of approximately $6.0 million, for approximately $8.6 million in
cash. This acquisition was accounted for under the purchase method of
accounting.
YEAR 2000 COMPLIANCE
Many existing computer programs use only two digits to identify a year in
the date field. These programs were designed and developed without considering
the impact of the upcoming change in the century. If not corrected, such
computer applications could fail or create erroneous results by or at the Year
2000. The Company has analyzed its existing computer systems and applications
and believes that all such computer systems and applications are Year 2000
compliant; however, there can be no assurance that this is the case. With
respect to acquisitions, the Company reviews an acquisition candidate's Year
2000 readiness during the due diligence process. Thereafter, when the Company
completes an acquisition, it typically replaces the acquired company's system
with its own management and reporting and control systems. Accordingly, the
Company does not believe that its acquisition program will be adversely affected
by Year 2000 compliance issues. The ability of third parties with whom the
Company transacts business to address adequately their Year 2000 issues is
outside of the Company's control. There can be no assurance that the failure of
such third parties to address adequately their Year 2000 issues will not have a
material adverse effect on the Company's financial condition or results of
operations. The Company is currently reviewing the potential adverse impact
resulting from the possible failure of third party service providers and vendors
to prepare for the Year 2000.
FORWARD LOOKING STATEMENTS
Statements of the Company's or management's intentions, beliefs,
anticipations, expectations or similar statements concerning future events
contained in this report constitute "forward looking statements" as defined in
the Private Securities Litigation Reform Act of 1995. As with any future event,
there can be no assurance that the events described in forward looking
statements made in this
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<PAGE>
report will occur or that the results of future events will not vary materially
from those described herein. Important factors that could cause the Company's
actual performance and operating results to differ materially from the forward
looking statements include, among other factors, changes in the regulatory
environment in which the Company operates, changes in the level of economic
activity in markets served by the Company, the availability of capital to
support the Company's growth strategy, the ability of the Company to execute its
business plan, changes in the level of exploration and production of oil and
gas, particularly in the Gulf Coast region, changes in the level of competition
faced by the Company in each of its markets, the loss of business or inability
to collect payment from one or more significant customers and the adverse
resolution of pending litigation affecting the Company's landfarms.
PART II-OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On August 7, 1998, the Company settled substantially all of the claims
asserted against it in the three previously reported lawsuits relating to its
Bourg, Louisiana landfarm and a fourth lawsuit filed against the Company in July
1998 seeking injunctive relief against certain operations of the Bourg,
Louisiana landfarm. Under the terms of the settlement, the Company agreed to
expand the buffer zone and build a berm along the western boundary of its
landfarm. The costs of these actions had previously been reserved for by the
Company and, thus, did not have any impact on earnings. This settlement does not
resolve certain claims asserted against the Company by Acadian Shipyard, Inc., a
local barge company ("Acadian"), in the Friloux et al. v. Campbell Wells
Corporation case pending in the 17th Judicial District Court for the Parish of
Lafourche, Louisiana. In the Friloux case, the Company has asserted claims for
indemnity and/or contribution against Acadian. Thereafter, in July 1998, Acadian
filed various counterclaims against the Company including, without limitation,
claims for defamation of business reputation and conspiracy to damage Acadian's
business reputation. In addition, Acadian requested unspecified monetary damages
allegedly suffered as a result of alleged environmental contamination in
connection with the ongoing operations at the Bourg, Louisiana landfarm. The
Company denies that it has any liability to Acadian and intends to vigorously
defend itself against these claims. In addition, this settlement does not
resolve the claims asserted in the class action filed in the Civil District
Court for the Parish of Orleans, Louisiana seeking 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. The Company has not been named as a defendant in this class action;
however, there can be no assurance that the Company will not subsequently be
named as a defendant.
On September 22, 1998, the Company settled the arbitration proceeding that
it had filed against Newpark in July 1998. Under the terms of the settlement,
Newpark and the Company entered into a thirty-three month agreement, pursuant to
which Newpark will pay to the Company at least $30 million. Newpark paid $3
million of this amount to the Company in September 1998. The remaining amounts,
which may be increased based upon future increases in the consumer price index,
will be paid to the Company in monthly installments beginning in October 1998
and continuing through June 2001. These payments will permit Newpark to deliver
to the Company for processing and disposal specified amounts of oilfield waste.
At Newpark's option, the term of this agreement may be extended for up to two
additional years. This thirty-three month agreement replaces Newpark's
obligations under the Disposal Agreement, dated June 4, 1996, that the Company
acquired in connection with the acquisition of its Texas and Louisiana landfarms
in December 1996. As part of the settlement, the Company secured the right to
immediately enter into the business of cleaning
17
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tanks, barges and other vessels and containers used in the storage and/or
transportation of oilfield waste and acquired certain assets used in the
business in exchange for a payment of $2.15 million. Prior to the settlement,
the Company was contractually prohibited from engaging in any such cleaning
business within the States of Louisiana, Texas, Mississippi and Alabama and the
Gulf of Mexico. The settlement does not substantially alter the Company's
contractual obligation not to engage, directly or indirectly, in (i) the
collection, transfer, transportation, treatment or disposal of oilfield waste
generated in a marine environment or transported in marine vessels, or (ii) the
remediation and closure of oilfield waste pits business, in each case within the
states of Louisiana, Texas, Mississippi, Alabama and the Gulf of Mexico.
However, the settlement agreements provide that these noncompete provisions will
terminate immediately if Newpark fails to make in a timely manner all payments
required to be made to the Company under the terms of the settlement. As part of
the settlement, the parties also reduced the term of the lease agreements
pursuant to which Newpark leases the dock facilities at the Company's landfarms
in Bourg, Louisiana, Mermentau, Louisiana and Bateman Island, Louisiana. These
leases will now terminate on June 30, 2001, as opposed to August 31, 2021.
The Company is, from time to time, a party to litigation arising in the
normal course of its business, most of which involves claims for personal injury
or property damage incurred in connection with its operations. The Company is
not currently involved in any litigation that it believes will have a material
adverse effect on its business, results of operations or financial condition.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit
No. Description
- ----- ------------
10.73 Employment Agreement, dated September 1, 1998, between U S Liquids Inc.
and Gary J. Van Rooyan.
27.1 Financial Data Schedule
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(b) REPORTS ON FORM 8-K.
On September 25, 1998, the Company filed a report on Form 8-K with the
Securities and Exchange Commission. Under Item 5 of that report, the Company
described the settlement of its arbitration proceeding with Newpark Resources,
Inc.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
U S LIQUIDS INC.
Date: November 13, 1998 /S/ MICHAEL P. LAWLOR
Michael P. Lawlor, Chairman and CEO
Date: November 13, 1998 /S/ EARL J. BLACKWELL
Earl J. Blackwell, Senior Vice
President and Chief Financial
Officer
19
EXHIBIT 10.73
EMPLOYMENT AGREEMENT
This EMPLOYMENT AGREEMENT ("Agreement") is made effective as of the 1st
day of September, 1998 (the "Commencement Date"), by and between U S LIQUIDS
INC., a Delaware corporation (the "Corporation"), and Gary J. Van Rooyan (the
"Employee").
WITNESSETH:
WHEREAS, the Corporation desires to employ the Employee upon
the terms and conditions herein set forth; and
WHEREAS, the Employee desires to be so employed upon such
terms and conditions;
NOW, THEREFORE, in consideration of the mutual covenants herein
contained, the parties agree as follows:
1. EMPLOYMENT. The Corporation shall employ the Employee,
and the Employee shall serve, as Vice President and General Counsel
of the Corporation on the terms set forth herein.
2. DUTIES AND RESPONSIBILITIES.
2.1 AS VICE PRESIDENT AND GENERAL COUNSEL. As Vice President and
General Counsel, the Employee shall have overall responsibility for management
of the Corporation's legal affairs. The Employee shall report directly to the
Chief Executive Officer of the Corporation and shall perform such duties as are
commensurate with his positions as Vice President and General Counsel. The
Employee's place of employment shall be in the Houston, Texas metropolitan area,
subject to travel necessary for the performance of his duties hereunder. The
Corporation shall provide to the Employee adequate office facilities and staff
commensurate with his positions to enable him to perform his duties hereunder.
2.2 EXTENT OF SERVICES. The Employee shall devote such of his
time as is necessary to fully and properly carry out his duties and
responsibilities. However, this Agreement shall not prohibit the Employee from
engaging in other activities, whether for family, recreation, investment, civic,
charity, or other purposes, so long as those activities do not unduly interfere
with the ability of the Employee to carry out his duties and responsibilities
hereunder and so long as they are not inconsistent or competitive with the
interests of the Corporation.
2.3 DUTY OF LOYALTY. The Employee recognizes that he owes a duty
of loyalty and good faith to the Corporation (including any subsidiary thereof)
and agrees that during the term of this
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<PAGE>
Agreement he will not take advantage of any corporate opportunity of the
Corporation, engage in self-dealing with the Corporation, sell or disclose any
confidential or proprietary information of the Corporation, or have or obtain
any material economic interest in any entity or arrangement which is competitive
with the business of the Corporation or engage in any activities which are
competitive with the business of the Corporation, without first disclosing all
facts and details relating thereto to the Board of Directors and obtaining the
approval of the Board of Directors.
3. COMPENSATION.
3.1 BASE SALARY. The Corporation shall pay to the Employee for
the services to be rendered by the Employee hereunder a base salary (the "Base
Salary") at the rate of $145,000 per year, payable in equal installments
(subject to withholding tax) in accordance with the Corporation's regular
payroll schedule, which as of the date of this Agreement is bi-weekly on
Fridays. Such Base Salary as in effect from time to time may be increased
annually or more often as determined by the Compensation Committee of the Board
of Directors in its sole discretion. However, the Base Salary payable to the
Employee from time to time hereunder shall not be decreased.
3.2 INCENTIVE COMPENSATION. Each calendar year during the term of
this Agreement, the Corporation will adopt an incentive compensation plan for
certain of its executive employees, including the Employee. This incentive
compensation plan will provide for incentive bonus compensation ("Incentive
Compensation") to be paid to the Employee based upon the performance of the
Employee and the results of the Corporation's business and operations. The
parties agree that the Employee's potential Incentive Compensation for the 1998
calendar year shall not exceed fifty percent of the Employee's Base Salary. For
subsequent calendar years, the ceiling on the Employee's Incentive Compensation
shall be reevaluated by the Board of Directors and may be increased to reflect
the Employee's performance and his contribution to the overall success of the
Company.
3.3 CASH BONUS. A cash bonus in the amount of $25,000 will be
paid by the Company to the Employee upon the closing of the first acquisition
consummated by the Company following the Commencement Date.
4. BENEFITS.
4.1 EXECUTIVE BENEFITS GENERALLY. The Employee shall be entitled
to participate in and receive benefits from any insurance, medical, dental,
health and accident, hospitalization, disability, stock purchase, defined
benefit, defined contribution, or other employee benefit plan of the Corporation
which may be in effect at
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<PAGE>
any time during the course of his employment with the Corporation and which is
generally available to executives of the Corporation (these being referred to as
the Employee's "Executive Benefits").
4.2 AUTOMOBILE. If and at such time that it becomes the policy of
the Corporation to provide automobiles or an automobile allowance to the
Corporation's senior executives for their use in connection with the
Corporation's business, the Corporation shall provide such an automobile or an
automobile allowance to the Employee in accordance with such policy.
4.3 REIMBURSEMENT OF EXPENSES. The Corporation shall reimburse
the Employee for all reasonable and ordinary expenses incurred by him on behalf
of the Corporation in the course of his duties hereunder upon the presentation
by the Employee of appropriate documentation substantiating the amount of and
purpose for which such expenses were incurred.
4.4 VACATIONS. The Employee shall be entitled to three (3) weeks
of paid vacation in each calendar year (to be prorated for any calendar year
during which the Employee is employed by the Corporation for less than the full
calendar year), which vacation shall be taken at times consistent with the
performance by the Employee of his obligations hereunder. Any vacation time not
fully used by the Employee in any one (1) calendar year may be carried over for
one (1) additional calendar year. If any such vacation time is carried over to a
subsequent calendar year, then any vacation time taken in the subsequent
calendar year shall be applied first against the carryover vacation time from
the prior calendar year.
5. DISABILITY OR DEATH. In the event the Employee incurs a disability,
which for purposes of this Agreement shall mean any mental or physical illness,
injury, or condition which results in the Employee being unable to fulfill his
duties under this Agreement on a regular basis, then the Corporation shall
nevertheless continue to provide to the Employee during such period or periods
of disability all compensation and benefits under this Agreement, except that,
during any one (1) calendar year the Corporation shall not be required to pay
the Base Salary or Incentive Compensation of the Employee for periods of
disability in excess of 180 days in total.
6. NONCOMPETITION DURING EMPLOYMENT. During the term of his employment
by the Corporation, the Employee shall not, directly or indirectly, engage in
any business competitive with that of the Corporation; provided, however, that
the foregoing shall not be deemed to prevent the Employee from investing in
securities of any company having a class of securities which is publicly traded,
so
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<PAGE>
long as such investment holdings do not, in the aggregate, constitute more than
5% of any class of such company's securities.
7. TERM OF EMPLOYMENT AND RIGHTS UPON TERMINATION OF EMPLOYMENT.
7.1 TERM AND SCHEDULED TERMINATION DATE. The term of Employee's
employment hereunder shall begin on the Commencement Date and shall continue for
a term of three (3) years from the Commencement Date (this date of termination
of his employment being referred to as the "Scheduled Termination Date").
However, as of each anniversary date of the Commencement Date, the Scheduled
Termination Date shall automatically be extended for a successive one-year
period of time, unless more than ninety (90) days prior to the occurrence of
such anniversary date, either party gives notice to the other that such
Scheduled Termination Date shall not thereafter be so extended. If any such
notice is given, then the Scheduled Termination Date hereof shall not be
automatically extended upon the future occurrence of any such anniversary date.
Following the Scheduled Termination Date, the Employee shall not be entitled to
earn any further compensation or benefits under this Agreement.
7.2 TERMINATION BY THE CORPORATION WITHOUT CAUSE.
(a) The Corporation may terminate this Agreement at any time,
without cause and for any reason, upon notice to the Employee setting
forth the date of termination (this date of termination and any other
date of termination prior to the Scheduled Termination Date is referred
to as the "Early Termination Date"). In this event, the Employee shall
be entitled to continue to receive, for a period of one (1) year after
the Early Termination Date, the same Base Salary which the Employee was
receiving at the time of such Early Termination Date (in the manner and
as described in Section 3.1) and all Executive Benefits which the
Employee was receiving or entitled to receive as of such Early
Termination Date (in the manner and as described in Section 4.1).
Further, all outstanding stock options which shall have been granted to
the Employee shall immediately become exercisable (if not already
exercisable in full) and shall continue in full force and effect.
(b) In the event the Employee suffers from a disability (as
defined in Section 5) for a period of 180 business days out of any 360
consecutive business day period, then the Corporation may at any time no
later than thirty (30) days following the end of said 360-day period
terminate the employment of the Employee without cause, by notice to the
Employee setting forth the effective Early Termination Date. However,
the Corporation shall not have the right to terminate
-4-
<PAGE>
the employment of the Employee hereunder if, at the time the Corporation
gives notice of termination to the Employee, the Employee has then again
begun to render services for the Corporation as required hereunder.
Following an Early Termination Date because of disability, the Employee
shall be entitled to receive his Base Salary then in effect for a period
of one (1) year following his Early Termination Date and shall be
entitled to retain all of his Executive Benefits for a period of one (1)
year following his Early Termination Date. Further, the Employee's stock
options, to the extent not fully vested, would continue to vest during
the one-year period following his Early Termination Date.
(c) This Agreement shall terminate immediately upon the
Employee's death. In addition to any other compensation or benefits
payable or accrued to the benefit of the Employee as of the date of his
death, the Corporation shall pay to the Employee's executor or legal
representative an amount in cash equal to one (1) times the Employee's
Base Salary then in effect at the time of his death.
7.3 BY THE CORPORATION WITH CAUSE. The Corporation may terminate
this Agreement at any time for cause, by notice to the Employee setting forth
the Early Termination Date. The term "cause" shall mean (a) a wilful and
recurring refusal of the Employee to perform his duties, responsibilities or
obligations under this Agreement, which refusal continues for at least thirty
(30) days after notice thereof is given to the Employee by the Corporation
setting forth the facts upon which the notice is based, (b) the Employee's
conviction of a felony involving moral turpitude, or (c) the Employee's fraud
regarding any material matter with respect to the business or operations of the
Corporation. Following the occurrence of the Early Termination Date of the
Employee for cause, then the Employee shall not be entitled to earn any further
compensation or benefits under this Agreement.
7.4 BY EMPLOYEE WITHOUT CAUSE. The Employee may terminate this
Agreement at any time, without cause and for any reason, upon notice to the
Corporation setting forth the Employee's Early Termination Date. In such event,
the Employee shall not be entitled to earn any further compensation or benefits
under this Agreement.
7.5 BY EMPLOYEE WITH CAUSE. The Employee may terminate this
Agreement at any time with cause upon notice to the Corporation setting forth
the Early Termination Date. The term "cause" shall mean a breach of this
Agreement in any material way by the Corporation, which breach is not cured
within thirty (30) days after notice of such breach to the Corporation by the
Employee setting forth the facts upon which the notice is based. In the
-5-
<PAGE>
event of such Early Termination Date, then from the Early Termination Date until
the Scheduled Termination Date, the Employee shall be entitled to continue to
receive, the same Base Salary which the Employee was receiving at the time of
such Early Termination Date (in the manner and as described in Section 3.1) and
all Executive Benefits which the Employee was receiving or entitled to receive
as of such Early Termination Date (in the manner and as described in Section
4.1). Further, all outstanding stock options which shall have been granted to
the Employee shall become immediately exercisable (if not already exercisable in
full) and shall continue in full force and effect.
7.6 COMPENSATION, REIMBURSEMENTS, INDEMNIFICATION, AND BENEFITS
PAYABLE OR ACCRUED AS OF TERMINATION DATE. In the event this Agreement is
terminated, whether upon the Scheduled Termination Date or an Early Termination
Date, and regardless of the reason for termination, the Employee shall be
entitled to receive all compensation, reimbursements, and benefits hereunder
which were either payable to the Employee, or which had accrued to the benefit
of the Employee or which had been earned by the Employee as of the date of
termination (the "Termination Date"). Any such compensation, reimbursements, or
benefits shall be payable or provided to the Employee no less quickly than they
would have been payable or provided to the Employee had the Termination Date not
occurred. For these purposes, the Employee's compensation shall include a pro
rata portion of the Incentive Compensation payable to the Employee under Section
3.2. Further, the Employee shall be entitled to receive any indemnification
payments that may have accrued but have not been paid or that may thereafter
become payable to the Employee pursuant to the provisions of the Corporation's
Certificate of Incorporation, Bylaws or similar policy, plan or agreement
relating to the indemnification of directors or officers of the Corporation.
8. CHANGE OF CONTROL.
8.1 This Section 8 shall become effective, but not operative,
immediately upon the Commencement Date and shall remain in effect so long as the
Employee remains employed hereunder by the Corporation, but shall not be
operative unless and until there has been a Change in Control, as defined in
Section 8.4 hereof. Upon such a Change in Control, this Section 8 shall become
operative immediately.
8.2 If a Change in Control occurs (i) while the Employee is
employed by the Corporation hereunder, or (ii) subsequent to the Termination
Date of the Employee's employment hereunder other than by the Corporation for
cause, or death or disability, and prior to the later of the first anniversary
of such Termination Date or the second anniversary of the Commencement Date, or
(iii) within 180 days of the Scheduled Termination Date, the Employee may, in
his
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<PAGE>
sole discretion, within twelve (12) months after the date of the Change in
Control, give notice to the Corporation that he intends to elect to exercise his
rights under this Section 8 (the "Notice of Intention"). Within thirty (30) days
after the Corporation's receipt of the Notice of Intention, the Corporation
shall provide written notice to the Employee setting forth the Corporation's
computation of the amount that would be payable pursuant to Section 8.3,
accompanied by the written opinion of the Corporation's independent certified
public accountants confirming the Corporation's computation. If the Employee
takes exception to the Corporation's computation of such amount, the Employee
may (but shall not be prejudiced in this right to later contest the amount
actually paid by failure to do so) give a further written notice to the
Corporation setting forth in reasonable detail the Employee's exceptions to the
Corporation's computation, accompanied by the written opinion of the Employee's
tax advisor confirming the basis for such exceptions. Exercise by the Employee
of his rights pursuant to this Section 8 shall only be made by giving further
notice to the Corporation (the "Notice of Exercise") within six (6) months from
the date of the Notice of Intention.
8.3 If the Employee gives the Notice of Exercise described in
Section 8.2 to the Corporation, the Termination Date of his employment hereunder
shall then occur; all outstanding stock options which are not then exercisable
shall immediately become exercisable in full; and the Corporation shall pay to
the Employee a lump sum amount equal to $1.00 less than three (3) times the
Employee's "base amount" (as defined by Section 280(G), Part IX, Subchapter B,
Chapter 1 of the Internal Revenue Code of 1986, as amended). The Corporation
shall, within ten (10) business days after the date of the Notice of Exercise,
deliver to the Employee its cashier's check in the amount payable pursuant to
this Section 8.3, and payment of such amount shall terminate the Employee's
rights to receive any and all other compensation, reimbursements,
indemnification, or benefits under this Agreement, other than those which are
payable to or have accrued to the Employee as described in Section 7.6.
8.4 For the purposes of this Agreement, a Change in Control shall
mean (i) a reportable change in control under the proxy rules of the Securities
and Exchange Commission, including the acquisition of a 30% beneficial voting
interest in the Corporation (other than such acquisition by Employee or an
affiliate of Employee), or (ii) a change in any calendar year of such number of
directors as constitutes a majority of the board of directors of the
Corporation, unless the election, or the nomination for election by the
Corporation's shareholders, of each new director was approved by a vote of at
least two-thirds (2/3) of the directors then in office who were directors at the
beginning of the calendar year.
-7-
<PAGE>
9. POST-EMPLOYMENT ACTIVITIES.
9.1 For a period of two (2) years after the Employee's
Termination Date, except for a termination subsequent to a Change in Control of
the Corporation and further except for a termination by the Employee pursuant to
Section 7.5 hereof, then the Employee shall not, directly or indirectly, engage
in any business competitive with that of the Corporation and its subsidiaries;
provided, however, that the foregoing shall not be deemed to prevent the
Employee from investing in securities which are publicly traded, so long as such
investment holdings do not, in the aggregate, constitute more than 5% of any
class of such company's securities.
9.2 The Employee acknowledges that he has been employed for his
special talents and that his leaving the employ of the Corporation would
seriously and adversely affect the business of the Corporation. In addition to
all remedies permitted by law or in equity and without limiting any injunctive
or other relief to which the Corporation may be entitled in respect of any
obligation of the Employee, the Corporation shall be entitled to injunctive
relief to enforce the provisions of Section 9.1 hereof; provided, that the
Corporation shall not be entitled to injunctive relief or any other relief with
respect to Section 9.1 hereof if at the time such relief is sought the
Corporation has been in default of any of its obligations to the Employee
pursuant to any of the terms of Sections 7.2, 7.5, or 7.6 hereof.
9.3 The Employee will not, during the period of two (2) years
after his Termination Date, except for a termination subsequent to a Change in
Control of the Corporation and further except for a termination by the Employee
pursuant to Section 7.5 hereof, either in the Employee's individual capacity or
as agent for another, hire or offer to hire or entice away any person who has
been an officer, employee, or agent of the Corporation or any of its
subsidiaries at any time during the immediately preceding year or in any other
manner persuade or attempt to persuade any of such persons to discontinue their
relationship with the Corporation or any of its subsidiaries nor divert or
attempt to divert from the Corporation or any of its subsidiaries any business
whatsoever by influencing or attempting to influence any customer or supplier of
the Corporation or any of its subsidiaries to diminish or discontinue its
business with the Corporation or such subsidiary.
10. CONFIDENTIAL INFORMATION. The Employee shall not at any time during
the term of this Agreement or after the termination hereof directly or
indirectly divulge, furnish, use, publish or make accessible to any person or
entity any Confidential Information (as hereinafter defined). Any records of
Confidential Information prepared by the Employee or which come into Employee's
possession during this Agreement are and remain the property of the
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<PAGE>
Corporation, and upon termination of Employee's employment all such records and
copies thereof shall be either left with or returned to the Corporation. The
term "Confidential Information" shall mean information disclosed to the Employee
or known, learned, created or observed by him as a consequence of or through his
employment by the Corporation, not generally known in the relevant trade or
industry, about the Corporation's (and its subsidiaries') business activities,
products, customers, suppliers, services and procedures, including, but not
limited to, information concerning costs, product performance, customer
requirements, advertising, sales promotion, publicity, sales data, research,
finances, accounting, methods, procedures, trade secrets, business plans, client
or supplier lists and records, potential client or supplier lists, and client or
supplier billing. Notwithstanding the foregoing, "Confidential Information"
shall not include information publicly disclosed by the Corporation or known by
the Employee other than because of his employment with the Corporation.
11. GENERAL.
11.1 ASSIGNMENT. This Agreement shall not be assignable.
11.2 NOTICES. All notices under this Agreement shall be in
writing and shall be deemed to have been given at the time when mailed by
registered or certified mail, addressed to the address set forth below of the
party to which notice is given, or to such changed address as such party may
have fixed by notice:
TO THE CORPORATION: U S Liquids Inc.
411 N. Sam Houston Parkway East
Suite 400
Houston, Texas 77060-3545
ATTN: Michael P. Lawlor
TO THE EMPLOYEE: Gary J. Van Rooyan
20603 Ivory Creek Lane
Katy, Texas 77450
11.3 ENTIRE AGREEMENT. This instrument contains and constitutes
the entire agreement between and among the parties herein and supersedes all
prior agreements and understandings between the parties hereto relating to the
subject matter hereof.
11.4 APPLICABLE LAW. This Agreement shall be construed, enforced
and governed in accordance with the laws of the State of Texas.
-9-
<PAGE>
11.5 INVALIDITY. If any provision contained in this Agreement
shall for any reason be held to be invalid, illegal, void or unenforceable in
any respect, such provision shall be deemed modified so as to constitute a
provision conforming as nearly as possible to such invalid, illegal, void or
unenforceable provision while still remaining valid and enforceable, and the
remaining terms or provisions contained herein shall not be affected thereby.
11.6 DISPUTE RESOLUTION. Any dispute arising in any way out of
this Agreement and which cannot be resolved by good faith negotiations between
the parties within thirty (30) days after either party shall have notified the
other party in writing of its desire to arbitrate the dispute shall be submitted
to and settled through binding arbitration in accordance with the rules of the
American Arbitration Association as from time to time in effect. The arbitration
proceedings shall be conducted by a sole arbitrator who shall be an attorney
with not less than ten (10) years experience in commercial law. All disputes or
claims of the parties subject to arbitration shall be consolidated into a single
arbitration proceeding. The arbitration proceedings shall be conducted in
Houston, Texas. The award or determination of the arbitrator shall be final and
binding upon all parties and shall be subject to enforcement in any court of
competent jurisdiction. The arbitrator shall have the authority to award costs
and expenses of arbitration to either party as the arbitrator sees fit.
11.7 BINDING EFFECT. This Agreement shall be binding upon, inure
to the benefit of and be enforceable by the parties hereto and their respective
heirs, executors, personal representatives and successors.
11.8 SEVERABILITY. If any provision of this Agreement shall be
held to be void or unenforceable for any reason, said provision shall be deemed
modified so as to constitute a provision conforming as nearly as possible to
said void or unenforceable provision while still remaining valid and enforceable
and the remaining terms and provisions hereof shall not be affected thereby.
11.9 AMENDMENT AND WAIVER. This Agreement may only be amended by
a writing executed by each of the parties hereto. Any party may waive any
requirement to perform by the other party, provided that such waiver shall be in
writing and executed by the party granting the waiver. The parties agree that a
waiver by one party on one occasion shall not be deemed a waiver on any other
occasion.
11.10 OPTION TO PURCHASE STOCK. As of the Commencement Date, the
Employee shall be granted a nonqualified stock option to purchase 50,000 shares
of the Corporation's common stock, par value $.01, at a price of $20.31 per
share. Such option shall vest at a cumulative rate of 331/3% per year, on the
first and
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<PAGE>
each succeeding anniversary date of the Commencement Date. Except as set forth
herein, the terms and conditions applicable to such option shall be those
contained in the Corporation's 1996 Incentive Stock Option Plan, as amended, the
terms and conditions of which are incorporated herein by this reference.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement
effective as of the date first above written.
"CORPORATION" U S LIQUIDS INC.
By:/S/ MICHAEL P. LAWLOR
Michael P. Lawlor, Chief
Executive Officer
"EMPLOYEE" /S/ GARY J. VAN ROOYAN
Gary J. Van Rooyan
-11-
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE FINANCIAL DATA SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED
FROM U S LIQUIDS, INC. AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> SEP-30-1998
<CASH> 4,827
<SECURITIES> 0
<RECEIVABLES> 30,185
<ALLOWANCES> (1,683)
<INVENTORY> 1,190
<CURRENT-ASSETS> 38,795
<PP&E> 86,902
<DEPRECIATION> 8,626
<TOTAL-ASSETS> 221,317
<CURRENT-LIABILITIES> 36,340
<BONDS> 0
0
0
<COMMON> 123
<OTHER-SE> 118,742
<TOTAL-LIABILITY-AND-EQUITY> 221,317
<SALES> 0
<TOTAL-REVENUES> 77,860
<CGS> 0
<TOTAL-COSTS> 63,894
<OTHER-EXPENSES> (235)
<LOSS-PROVISION> 1,341
<INTEREST-EXPENSE> 2,310
<INCOME-PRETAX> 11,891
<INCOME-TAX> 4,835
<INCOME-CONTINUING> 7,056
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 7,056
<EPS-PRIMARY> .73
<EPS-DILUTED> .64
</TABLE>
