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, 1999
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)
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
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
15,730,868 shares as of November 11, 1999
<PAGE>
U S LIQUIDS INC.
FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 1999
INDEX
PART I - FINANCIAL INFORMATION
Page
Item 1- Financial Statements:
- Condensed Consolidated Balance Sheets as
of December 31, 1998 and September 30, 1999 (unaudited)........ 3
- Condensed Consolidated Statements of Income for the
three and nine month periods ended September 30, 1998 and
1999 (unaudited)............................................... 4
- Condensed Consolidated Statement of Stockholders' Equity....... 5
- Condensed Consolidated Statements of Cash Flows for
the nine month periods ended September 30, 1998
and 1999 (unaudited)........................................... 6
- Notes to Condensed Consolidated Financial Statements........... 7
Item 2- Management's Discussion and Analysis of Financial
Condition and Results of Operations............................ 14
Item 3- Quantitative and Qualitative Disclosures About Market Risk..... 21
PART II - OTHER INFORMATION
Item 1- Legal Proceedings.............................................. 21
Item 2- Changes in Securities and Use of Proceeds...................... 23
Item 3- Defaults Upon Senior Securities................................ 24
Item 4- Submission of Matters to a Vote of Security Holders............ 24
Item 5- Other Information.............................................. 24
Item 6- Exhibits and Reports on Form 8-K............................... 24
Signatures............................................................... 25
2
<PAGE>
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 1998 1999
-------- ---------
(UNAUDITED)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents ........................ $ 3,285 $ 470
Accounts receivable, less allowances of $1,677 and
$2,843 (unaudited), respectively ............... 29,123 44,702
Inventories ...................................... 672 1,828
Prepaid expenses and other current assets ........ 5,416 7,993
-------- --------
Total current assets ........................ 38,496 54,993
PROPERTY, PLANT AND EQUIPMENT, net ..................... 85,958 114,743
INTANGIBLE ASSETS, net ................................. 125,871 188,291
OTHER ASSETS, net ...................................... 1,840 3,257
-------- --------
Total assets ................................ $252,165 $361,284
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current maturities of long-term obligations ...... $ 4,004 $ 4,140
Accounts payable ................................. 11,611 16,657
Accrued liabilities .............................. 15,445 19,861
Current portion of contract reserve .............. 4,500 4,492
-------- --------
Total current liabilities ................... $ 35,560 $ 45,150
LONG-TERM OBLIGATIONS, net of current maturities ....... 64,390 92,643
PROCESSING RESERVE ..................................... 5,747 4,385
CLOSURE AND REMEDIATION RESERVES ....................... 4,952 7,899
CONTRACT RESERVE ....................................... 14,421 11,597
DEFERRED INCOME TAXES .................................. 2,151 3,778
-------- --------
Total liabilities ........................... $127,221 $165,452
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, 12,497,946 and 15,730,868
(unaudited) shares issued and outstanding,
respectively .................................... 125 157
Additional paid-in capital ....................... 110,404 176,988
Foreign currency translation adjustment .......... -- 4
Retained earnings ................................ 14,415 18,683
-------- --------
Total stockholders' equity ....................... $124,944 $195,832
-------- --------
Total liabilities and
stockholders' equity ...................... $252,165 $361,284
======== ========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
3
<PAGE>
U S LIQUIDS INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------------- -----------------------
1998 1999 1998 1999
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
REVENUES .................................... $ 37,547 $ 59,002 $ 77,860 $ 172,999
OPERATING EXPENSES .......................... 23,937 43,069 49,228 119,899
DEPRECIATION AND AMORTIZATION ............... 2,628 4,419 5,698 11,971
SPECIAL CHARGE (NOTE 2) ..................... -- 10,254 -- 10,254
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES ................................. 4,478 6,518 8,968 17,725
--------- --------- --------- ---------
INCOME/(LOSS) FROM OPERATIONS .............. $ 6,504 $ (5,258) $ 13,966 $ 13,150
INTEREST EXPENSE, net ....................... 746 1,673 2,310 4,730
OTHER INCOME, net ........................... (66) (105) (235) (316)
--------- --------- --------- ---------
INCOME/(LOSS) BEFORE PROVISION/(BENEFIT) FOR
INCOME TAXES ............................ $ 5,824 $ (6,826) $ 11,891 $ 8,736
PROVISION/(BENEFIT) FOR INCOME TAXES ........ 2,386 (1,991) 4,835 4,468
--------- --------- --------- ---------
NET INCOME/(LOSS) ........................... $ 3,438 $ (4,835) $ 7,056 $ 4,268
========= ========= ========= =========
BASIC EARNINGS/(LOSS) PER COMMON SHARE ...... $ 0.28 $ (0.30) $ 0.73 $ 0.28
========= ========= ========= =========
DILUTED EARNINGS/(LOSS) PER COMMON AND
COMMON EQUIVALENT SHARE ..................... $ 0.26 $ (0.30) $ 0.64 $ 0.26
========= ========= ========= =========
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING .. 12,149 16,027 9,623 15,178
========= ========= ========= =========
WEIGHTED AVERAGE COMMON AND COMMON
EQUIVALENT SHARES OUTSTANDING ............ 13,474 16,027 10,956 16,435
========= ========= ========= =========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
4
<PAGE>
U S LIQUIDS INC.
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
CUMULATIVE
ADDITIONAL OTHER TOTAL
COMPREHENSIVE COMMON STOCK PAID-IN COMPREHENSIVE RETAINED STOCKHOLDERS'
INCOME SHARES AMOUNT CAPITAL INCOME EARNINGS EQUITY
------------- ------ ------ ---------- ------------- -------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1998 12,497 $125 $110,404 $ -- $14,415 $124,944
Issuance of common stock
Proceeds from sale of common stock.. 2,875 29 56,630 56,659
Common stock issued for acquisitions 636 6 12,846 12,852
Exercise of stock options and
warrants.......................... 109 1 104 105
Cancellation of common stock.......... (386) (4) (2,996) (3,000)
Comprehensive income:
Foreign currency translation
adjustments....................... $ 4 4 4
Net income.......................... 4,268 4,268 4,268
------
$4,272 -- -- -- -- -- --
====== ------ ---- -------- ----- ------- --------
BALANCE AT SEPTEMBER 30, 1999 (UNAUDITED) 15,731 $157 $176,988 $ 4 $18,683 $195,832
====== ==== ======== ===== ======= ========
</TABLE>
The accompanying notes are an integral part of these
condensed consolidated financial statements.
5
<PAGE>
U S LIQUIDS INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
SEPTEMBER 30,
---------------------
1998 1999
-------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income .......................................................... $ 7,056 $ 4,268
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization ...................................... 5,698 11,971
Net gain on sale of property, plant, and equipment ................. (115) (137)
Deferred income tax provision ...................................... 1,539 1,645
Changes in operating assets and liabilities, net of effects of
acquisitions:
Accounts receivable, net ........................................... (7,254) (8,336)
Inventories ........................................................ 499 (360)
Prepaid expenses and other current assets .......................... (2,655) (1,627)
Intangible assets, net ............................................. -- (399)
Other assets ....................................................... (966) (1,297)
Accounts payable and accrued liabilities ........................... 3,423 (1,148)
Closure, remediation and processing reserves ....................... (1,346) (2,683)
-------- --------
Net cash provided by operating activities ...................... $ 5,879 $ 1,897
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property, plant and equipment .......................... $ (7,432) $(13,140)
Proceeds from sale of property, plant and equipment ................. 268 994
Net cash paid for acquisitions ...................................... (79,213) (68,495)
-------- --------
Net cash used in investing activities ......................... $(86,377) $(80,641)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of long-term obligations ..................... 81,826 88,020
Principal payments on long-term obligations ......................... (59,558) (65,859)
Repurchase and cancellation of common stock ......................... -- (3,000)
Proceeds from additional public offering of common stock, net of
offering costs ..................................................... 60,752 56,659
Proceeds from exercise of stock options ............................. 102 105
-------- --------
Net cash provided by financing activities ................... $ 83,122 $ 75,925
-------- --------
EFFECT OF FOREIGN CURRENCY TRANSLATION ON CASH AND CASH EQUIVALENTS..... -- 4
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS ................... $ 2,624 $ (2,815)
--------
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD ....................... 2,203 3,285
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD ............................. $ 4,827 $ 470
======== ========
SUPPLEMENTAL DISCLOSURES:
Cash paid for interest .............................................. $ 2,266 $ 4,696
Cash paid for income taxes .......................................... 3,050 5,441
Assets acquired under capital leases ................................ -- 1,385
Assets acquired with stock and warrants ............................. 30,058 12,852
Notes issued or assumed related to acquisitions ..................... 8,771 6,229
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
6
<PAGE>
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 we believe 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 our Annual Report on Form 10-K for the year ended December
31, 1998, as filed with the SEC.
2. SPECIAL CHARGE
In conjunction with an environmental investigation conducted by regulatory
authorities at our Detroit facility, we undertook a comprehensive environmental
review of all of our operations. As a result of this review, at September 30,
1999, we recorded a one-time special charge in the amount of $10.3 million. The
components of this special charge consisted of: (i) $3.2 million for disposal of
PCB contaminated materials improperly delivered to our Detroit facility, the
decontamination of certain of our equipment exposed to the PCB contaminated
materials and fines imposed by regulatory authorities, (ii) $3.0 million for
disposal of liquid waste received by our Shreveport, Louisiana facility, which
waste is the subject of a dispute between the Company and the EPA as to the
proper method of disposal, (iii) $1.7 million for legal and professional fees we
have incurred or expect to incur for matters arising in connection with the
governmental proceedings relating to our Detroit and Shreveport facilities and
the purported securities class actions and shareholder derivative action
described in note 8, (iv) $1.0 million for the cleanup of a spill at our
Shreveport facility caused by an act of vandalism, (v) $813,000 for severance
and contract termination costs related to certain personnel and acquisition
consultants as a result of the environmental issues at the Detroit facility, the
temporary cap on our revolving credit facility described in note 10 and its
related effects on our acquisition program, (vi) $434,000 for write-offs of
capitalized acquisition costs related to acquisitions not reasonably likely to
occur, and (vii) $139,000 for other costs related to the operations of our
Detroit and Shreveport facilities. This special charge reduced net income by
$6.7 million (net of tax), or $0.42 per share, for the quarter ended September
30,1999.
3. INVENTORIES
Inventories are stated at the lower of cost or market and, at December 31, 1998
and September 30, 1999, consisted of processed by-products of $378,000 and
$1,295,000, respectively, and unprocessed by-products of $294,000 and $533,000,
respectively. Cost is determined using the first-in, first-out (FIFO) method.
4. DEPRECIATION AND AMORTIZATION EXPENSES
Depreciation and amortization expenses excluded from operating expenses and
selling, general and administrative expenses in the condensed consolidated
statements of income are presented as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------ ------------------
1998 1999 1998 1999
------- ------- ------- -------
(IN THOUSANDS)
(UNAUDITED)
<S> <C> <C> <C> <C>
Operating expenses ................................ $ 2,264 $ 4,151 $ 4,931 $11,284
Selling, general and administrative expenses ...... 364 268 767 687
------- ------- ------- -------
Total depreciation and amortization expenses $ 2,628 $ 4,419 $ 5,698 $11,971
======= ======= ======= =======
</TABLE>
7
<PAGE>
5. EARNINGS PER SHARE
The weighted average number of shares used to compute basic and diluted earnings
per share for the three and nine month periods ended September 30, 1998 and
1999, respectively, is illustrated below:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------------- --------------------------
1998 1999 1998 1999
----------- ----------- ----------- -----------
(IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED)
<S> <C> <C> <C> <C>
Numerator:
For basic and diluted earnings
per share -- Income/(loss)
available to common stockholders $ 3,438 (4,835) $ 7,056 $ 4,268
=========== =========== =========== ===========
Denominator:
For basic earnings per share --
Weighted-average shares ......... 12,149,125 16,027,318 9,622,553 15,178,158
----------- ----------- ----------- -----------
Effect of dilutive securities:
Stock options and warrants ...... 1,324,856 -- 1,333,076 1,256,452
----------- ----------- ----------- -----------
Denominator:
For diluted earnings per share --
Weighted-average shares and
assumed conversions ............. 13,473,981 16,027,318 10,955,629 16,434,610
=========== =========== =========== ===========
</TABLE>
The effect of employee stock options and warrants has been excluded from the
calculation of diluted earnings per share for the three months ended September
30, 1999 because such effect would be antidilutive.
6. NEW ACCOUNTING PRONOUNCEMENTS
SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities,"
was issued in June 1998 and requires companies to recognize all derivative
instruments as assets or liabilities in the balance sheet and to measure those
instruments at fair value. SFAS No. 133 must be adopted by the Company no later
than January 1, 2001, although earlier application is permitted. We are
currently evaluating the potential impact of implementing SFAS No. 133.
7. ACQUISITIONS
1999 ACQUISITIONS
During the nine months ended September 30, 1999, we acquired twenty businesses
engaged in the collection, processing and disposal of liquid wastes for
approximately $64.3 million in cash, $2.9 million in assumed debt, 635,354
shares of our common stock and $3.3 million of seller financing. Each of these
acquisitions was accounted for under the purchase method of accounting. The
excess of the aggregate purchase price over the fair value of the net assets
acquired was approximately $63.9 million.
In certain of our acquisitions, we agreed to pay additional consideration to the
owners of the acquired business if the future pre-tax earnings of the acquired
business exceed certain negotiated levels or other specified events occur.
The unaudited pro forma information set forth below presents our revenues, net
income and earnings per share plus the 1998 and 1999 acquisitions, and the
public offerings of our common stock in June 1998 and March 1999, as if these
transactions were each effective on
8
<PAGE>
January 1, 1998 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, net of a reduction in interest expense on debt repaid in
connection with the Company's public offerings of common stock, and certain
reductions of salaries and benefits payable to the previous owners of the
businesses acquired which were agreed to in connection with the acquisitions,
and the related income tax effects of these adjustments.
NINE MONTHS ENDED SEPTEMBER 30,
----------------------------------
1998 1999
----------- -----------
(IN THOUSANDS, EXCEPT FOR PER SHARE DATA)
(UNAUDITED)
Revenues ........................ $ 198,738 $ 190,565
Net income ...................... 12,221 3,882
Basic earnings per common share . 0.78 0.25
Diluted earnings per common share 0.72 0.23
The unaudited pro forma information is presented for informational purposes only
and is not necessarily indicative of the results of operations that actually
would have been achieved had the acquisitions and offerings been consummated at
the beginning of the periods presented.
8. LEGAL PROCEEDINGS
In September 1999, we settled the claims asserted by Pocono Grow Fertilizer
Corporation against the Company and our subsidiary, Waste Stream Environmental,
Inc. Under the terms of the settlement, we acquired substantially all of the
assets of Ecke Enterprises, Inc., a nonhazardous liquid waste collection company
controlled by the principals of Pocono Grow, for $1.5 million. In addition, we
agreed to enter into a five-year supply agreement under which we will be
required to deliver to Pocono Grow specified amounts of septage and sludge for
processing and disposal. We anticipate that the definitive supply agreement will
be executed during the fourth quarter of 1999.
In June 1999, we were notified that the Louisiana Department of Environmental
Quality ("LDEQ") was seeking to terminate the discharge permit held by our
Shreveport, Louisiana facility, which permit allows the facility to discharge
processed wastewater into the waters of the State of Louisiana. A termination of
this permit would require the facility to find other means of disposing of
processed wastewater or cease operations. In its notice, the LDEQ alleged that
the proposed termination was justified based upon, among other things, the
facility's failure to comply with the terms of its permit, two releases (spills)
that occurred at the facility and the facility's acceptance and processing of
hazardous materials not covered by the terms of its permit. In addition, in
September 1999, the U.S. Environmental Protection Agency ("EPA") notified us of
certain alleged violations of the Resource Conservation and Recovery Act
("RCRA") by the facility. Although we vigorously dispute the LDEQ's and the
EPA's allegations, we are attempting to negotiate a resolution with these
regulatory agencies which may include fines, modifications to our waste
screening and waste processing procedures and/or additional capital expenditures
at the facility. We believe that the ultimate outcome of these proceedings will
not have a material adverse effect on our business, results of operations or
financial condition.
The EPA has also notified us that it believes that approximately 3.0 million
gallons of liquid waste received by our Shreveport facility and stored off-site
may contain hazardous constituents and, therefore, the waste cannot be processed
by our Shreveport facility. We believe that the waste may be handled as
nonhazardous waste in accordance with the terms of the facility's permit. We are
in the process of preparing a plan for disposal of this waste and intend to
submit the plan to the EPA for its consideration. We have established a $3.0
million reserve, recorded as an accrued liability, for costs to be incurred in
the event that it is ultimately determined that this waste must be delivered to
a third party for processing and disposal. Management believes that this reserve
is sufficient to cover all costs associated with a third party's disposal of the
waste, if necessary.
9
<PAGE>
As previously reported, in May 1998, we acquired from Waste Management, Inc.
substantially all of the assets of City Environmental, Inc. including, without
limitation, a hazardous and nonhazardous waste treatment facility located in
Detroit, Michigan. This facility has never been granted a TSD permit under RCRA,
but has operated under interim status, as allowed by RCRA. On August 25, 1999,
the EPA and the Federal Bureau of Investigation ("FBI") executed a search
warrant at this facility seeking electronic data, files and other documentation
relating to the facility's receipt, processing and disposal of hazardous waste.
As a result of the execution of the search warrant, the facility temporarily
ceased operations. According to the affidavit attached to the search warrant,
after receiving a phone call from an employee at the facility in May 1999, the
EPA and the FBI began a joint investigation of the facility. The investigation
centers around allegations made by five current and former employees at the
facility that (i) the facility knowingly discharged into the Detroit sewer
system untreated hazardous liquid waste in violation of city ordinances, the
facility's permit and the Clean Water Act, and (ii) without proper manifesting,
the facility knowingly transported and disposed of hazardous waste at an
unpermitted treatment facility in violation of RCRA. According to the affidavit,
the facility has been knowingly violating the Clean Water Act and RCRA since
before we acquired the facility. The on-site investigation of our facility by
the EPA and the FBI was completed in August 1999. It is our understanding that
the investigation is continuing, but as of the date of this report no
announcement regarding the investigation has been made by the EPA or the FBI.
After the completion of the on-site investigation of our Detroit facility, we
began conducting routine tests of materials in waste solidification vaults in
preparation for the reopening of the facility. During these tests, we discovered
that certain waste which had been received by the facility prior to its August
25, 1999 closing was contaminated with PCBs and that this waste had contaminated
other waste in several of the waste solidification vaults and a liquid feed
tank. We immediately made all notifications required by law including
notifications to the Michigan Department of Environmental Quality ("MDEQ") and
the EPA. We subsequently submitted to the EPA a workplan for disposal of the PCB
contaminated materials and decontamination of the affected equipment. We have
entered into a consent order with the EPA that approves this workplan and
establishes enhanced procedures for screening of materials delivered to the
facility to detect PCB contamination. Under the terms of the consent order, we
also agreed to pay $123,888 to the EPA in full settlement of the EPA's claims
for certain civil fines. We have determined that a subsidiary of National Steel
Corporation generated the PCB contaminated materials and that these materials
were not properly identified as required by law when delivered to our Detroit
facility. We are attempting to negotiate a resolution with National Steel
regarding the damages suffered by our facility as a result of its subsidiary's
failure to disclose that its waste was contaminated with PCBs. We have also
submitted a claim under our business interruption insurance coverage for losses
incurred as a result of the closing of the facility. We have established a $3.2
million reserve, recorded as an accrued liability, for the disposal of the
contaminated materials, the decontamination of the affected equipment and fines
imposed by regulatory authorities. Management believes that this reserve is
sufficient to cover all costs associated with the cleanup and all such fines.
As previously mentioned, our Detroit facility has been operating under interim
status, as allowed by RCRA. Since we acquired the facility, we have been working
with the MDEQ to obtain our final TSD permit. By letter dated September 17,
1999, the MDEQ notified us that it had determined that the facility's
application for a TSD permit was not administratively complete and, therefore,
the facility had lost its authority to process and dispose of hazardous waste.
Shortly thereafter, the MDEQ issued two letters of warning ("LOWs") and a notice
of violation ("NOV") to the facility identifying various alleged deficiencies in
the facility's application for a TSD permit. We promptly notified the MDEQ that
we disputed the allegations contained in the September 17, 1999 letter, the LOWs
and the NOV. On October 7, 1999, we entered into a consent order with the MDEQ
resolving the allegations set forth in the September 17, 1999 letter, the LOWs
and the NOV. Under the terms of the consent order, the facility is required,
among other things, to (i) submit to the MDEQ by November 22, 1999 additional
drawings and workplans regarding the maintenance and operation of the facility
and any revisions to the facility's TSD permit application necessitated by the
consent order, and (ii) submit to the MDEQ within certain specified time frames
documentation establishing that certain cleanup work at the facility has been
completed, and certain procedures have been implemented at the facility. We also
agreed to pay $37,500 to the MDEQ in full settlement of the MDEQ's claims for
certain civil fines and costs of surveillance and enforcement, and reimburse the
MDEQ for all future costs incurred by the MDEQ in overseeing the facility's
compliance with the terms of the consent order. Subject to various conditions
specified in the consent order, once the necessary documentation and other
information relating to the facility's application for a TSD permit has been
submitted to the MDEQ, the facility will be authorized to reopen and operate
under interim status, as allowed by RCRA. We will not reopen the facility,
however, until we have removed the contaminated materials, decontaminated the
affected equipment and otherwise complied with all of the terms of the consent
order with the EPA described in the preceding paragraph. We currently anticipate
that these actions can be completed within four to six weeks from the date of
this report.
10
<PAGE>
Since August 31, 1999, a number of purported securities class action lawsuits
have been filed in the United States District Court for the Southern District of
Texas against the Company and certain of our officers and directors. The
purported class actions are GERARD ANDERSON V. U S LIQUIDS INC., MICHAEL P.
LAWLOR, W. GREGORY ORR AND EARL J. BLACKWELL, Case No. H-99-3036 (filed
September 14, 1999); MARK W. COLLMER V. U S LIQUIDS INC., MICHAEL P. LAWLOR, W.
GREGORY ORR AND EARL J. BLACKWELL, Case No. H-99-2785 (filed August 31, 1999);
JERRY A. MERCURE V. U S LIQUIDS INC., MICHAEL P. LAWLOR, W. GREGORY ORR AND EARL
J. BLACKWELL, Case No. H-99-3015 (filed September 13, 1999); and ESTHER SUTCH
AND MILO SPRUNGER V. U S LIQUIDS INC., MICHAEL P. LAWLOR, W. GREGORY ORR AND
EARL J. BLACKWELL, Case No. H-99-2831 (filed September 3, 1999). The complaints
allege violations of Sections 10(b) and 20(a) of the Securities Exchange Act of
1934 and Rule 10b-5 promulgated thereunder on behalf of purchasers of our common
stock during the period beginning on May 12, 1998 and ending on August 25, 1999.
The plaintiffs generally allege that the defendants made false and misleading
statements and failed to disclose allegedly material information regarding the
operations of our Detroit facility and our financial condition in certain of our
public filings and announcements. The remedies sought by the plaintiffs include
designation of the actions as class actions, unspecified damages, attorneys' and
experts' fees and costs, rescission to the extent any members of the class still
hold our common stock, and such other relief as the court deems proper.
Another purported securities class action lawsuit has been filed against the
Company and certain of our officers and directors. MICHAEL MILLER V. U S LIQUIDS
INC., MICHAEL P. LAWLOR, W. GREGORY ORR AND EARL J. BLACKWELL was filed in the
United States District Court for the Southern District of Texas on September 22,
1999. The complaint in this lawsuit alleges violation of Sections 11, 12(a)(2)
and 15 of the Securities Act of 1933 and Sections 10(b) and 20(a) of the
Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder on behalf
of purchasers of our common stock during the period beginning on May 12, 1998
and ending on August 25, 1999, including purchasers of common stock in our March
1999 offering. The plaintiff generally alleges that the defendants made false
and misleading statements and failed to disclose allegedly material information
regarding the operations of our Detroit facility and our financial condition in
the prospectus relating to our March 1999 offering and in certain of our other
public filings and announcements. The remedies sought by the plaintiff include
designation of the action as a class action, unspecified damages, attorneys' and
experts' fees and costs, rescission to the extent any members of the class still
hold our common stock, and such other relief as the court deems proper.
In addition, one of our shareholders has filed a lawsuit against certain of our
officers and directors in connection with the operation of our Detroit facility
and the securities class action lawsuits pending in federal court in the
Southern District of Texas. BENN CARMICIA V. U S LIQUIDS INC., MICHAEL P.
LAWLOR, W. GREGORY ORR, EARL J. BLACKWELL, GARY J. VAN ROOYAN, WILLIAM A.
ROTHROCK IV, ALFRED TYLER 2ND, JAMES F. MCENEANEY, JR., JOHN N. HATSOPOULOS AND
ROGER A. RAMSEY was filed in the United States District Court for the Southern
District of Texas on September 15, 1999. The plaintiff purports to allege
derivative claims on behalf of the Company against the officers and directors
for alleged breaches of fiduciary duty resulting from their oversight of the
Company's affairs. The lawsuit names the Company as a nominal defendant and
seeks compensatory and punitive damages on behalf of the Company, interest,
equitable and/or injunctive relief, costs and such other relief as the court
deems proper.
We have filed a motion seeking to consolidate these purported securities class
actions and the shareholder derivative action. The outcome of these actions and
the cost of defending them cannot be predicted with certainty at this time.
However, we believe that the claims asserted in the purported securities class
actions are without merit and we intend to vigorously defend ourself and our
officers and directors against these claims. Moreover, we believe that the
shareholder derivative action was not properly brought and we have filed a
motion to dismiss this action in order to allow the Board of Directors to
consider whether such litigation is in the best interests of the Company and our
shareholders.
Our business is subject to numerous federal, state and local laws, regulations
and policies that govern environmental protection, zoning and other matters.
During the ordinary course of our business, we become involved in a variety of
legal and administrative proceedings relating to land use and environmental laws
and regulations, including actions or proceedings brought by governmental
agencies, adjacent landowners, or citizens groups. In the majority of the
situations where proceedings are commenced by governmental agencies, the matters
involved relate to alleged technical violations of licenses or permits pursuant
to which we operate or are seeking to operate or laws or regulations to which
our operations are subject or are the result of different interpretations of
applicable requirements. From time to time, we pay fines or penalties in
governmental proceedings relating to our operations. We believe that these
matters will not have a material adverse effect on our business, results of
operations or financial condition. However, the outcome of any particular
proceeding cannot
11
<PAGE>
be predicted with certainty, and the possibility remains that technological,
regulatory or enforcement developments, results of environmental studies or
other factors could materially alter this expectation at any time.
The Company and certain of our subsidiaries are also currently involved in other
civil litigation and governmental proceedings relating to the conduct of their
businesses, some of which are addressed in our Annual Report on Form 10-K for
the year ended December 31, 1998, as filed with the SEC. While the outcome of
any particular lawsuit or governmental investigation cannot be predicted with
certainty, we believe that these matters will not have a material adverse effect
on our business, results of operations or financial condition.
9. SEGMENT INFORMATION
We operate with three business segments -- Commercial Wastewater, Industrial
Wastewater and Oilfield Waste.
The Commercial Wastewater segment receives fees to collect, process and dispose
of nonhazardous liquid waste such as commercial wastewater, grease and grit trap
waste, and bulk liquids and dated beverages. In addition, the Commercial
Wastewater segment generates revenues from the sale of by-products recovered
from certain waste streams (including fats, oils, feed proteins, industrial and
fuel grade ethanol, solvents, aluminum, glass, plastic and cardboard).
The Industrial Wastewater segment receives fees to collect, process and dispose
of hazardous and nonhazardous liquid waste such as household hazardous wastes,
plating solutions, acids, flammable and reactive wastes, and commercial
wastewater. Certain sludges and solid hazardous wastes are also processed. The
Industrial Wastewater segment also generates revenues from the sale of
by-products recovered from certain waste streams (including industrial chemicals
and recycled anti-freeze products).
The Oilfield Waste segment treats and disposes of waste that is generated in the
exploration for and production of oil and natural gas. In addition, the Oilfield
Waste segment cleans tanks, barges and other vessels used in the storage and
transportation of oilfield waste. Oilfield waste is currently exempt from the
requirements of RCRA, the principal federal statute governing hazardous and
solid waste generation, treatment, storage and disposal.
The accounting policies of the segments are the same as those for the Company
described in the summary of significant accounting policies set forth in our
Annual Report on Form 10-K for the year ended December 31, 1998, as filed with
the SEC. For purposes of this presentation, general corporate expenses have been
allocated between operating segments on a pro rata basis based on revenues.
The following is a summary of key business segment information:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------- ----------------------
1998 1999 1998 1999
--------- --------- --------- ---------
(IN THOUSANDS)
(UNAUDITED)
<S> <C> <C> <C> <C>
Revenue --
Commercial Wastewater ............... $ 24,367 $ 40,559 $ 50,285 $ 108,134
Industrial Wastewater ............... 8,745 14,194 14,753 50,634
Oilfield Waste ...................... 4,435 4,249 12,822 14,231
--------- --------- --------- ---------
Total ............................ $ 37,547 $ 59,002 $ 77,860 $ 172,999
========= ========= ========= =========
</TABLE>
12
<PAGE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------- ----------------------
1998 1999 1998 1999
--------- --------- --------- ---------
(IN THOUSANDS)
(UNAUDITED)
<S> <C> <C> <C> <C>
Income/(loss) from operations --
Commercial Wastewater ............... $ 1,111 $ 1,145 $ 2,978 $ 5,712
Industrial Wastewater ............... 2,602 (8,508) 4,431 (56)
Oilfield Waste ...................... 2,791 2,105 6,557 7,494
--------- --------- --------- ---------
Total ........................... $ 6,504 $ (5,258) $ 13,966 $ 13,150
========= ========= ========= =========
Depreciation and amortization expense --
Commercial Wastewater ............... $ 1,376 $ 2,438 $ 2,623 $ 6,420
Industrial Wastewater ............... 599 1,166 1,140 3,184
Oilfield Waste ...................... 582 674 1,775 1,995
Corporate ........................... 71 141 160 372
--------- --------- --------- ---------
Total ........................... $ 2,628 $ 4,419 $ 5,698 $ 11,971
========= ========= ========= =========
Capital expenditures --
Commercial Wastewater ............... $ 1,556 $ 3,752 $ 4,534 $ 8,891
Industrial Wastewater ............... 307 776 1,090 3,040
Oilfield Waste ...................... 131 110 895 198
Corporate ........................... 464 574 913 1,011
--------- --------- --------- ---------
Total ........................... $ 2,458 $ 5,212 $ 7,432 $ 13,140
========= ========= ========= =========
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1998 1999
-------- --------
(IN THOUSANDS)
Identifiable assets -- (UNAUDITED)
<S> <C> <C>
Commercial Wastewater ................................................ $148,590 $207,906
Industrial Wastewater ................................................ 63,112 108,341
Oilfield Waste ....................................................... 33,513 36,118
Corporate ............................................................ 6,950 8,919
-------- --------
Total ............................................................ $252,165 $361,284
======== ========
</TABLE>
10. CREDIT FACILITIES
We have a $225.0 million credit facility with a group of banks under which we
may borrow to fund working capital requirements and acquisitions. The amount of
this credit facility was increased in February 1999 from $100.0 million to
$225.0 million. Amounts outstanding under the credit facility are secured by a
lien on all or substantially all of our assets. The credit facility prohibits
the payment of dividends and requires us to comply with certain financial
covenants. The credit facility also places certain restrictions on, among other
13
<PAGE>
things, acquisitions and other business combination transactions which we may
consummate. As a result of the PCB contamination occurring at our Detroit
facility, we may not be in compliance with certain covenants under the credit
facility. The banks have granted us a waiver of any such noncompliance arising
out of the PCB contamination through January 14, 2000. This waiver is
conditioned upon our ability to manage the costs associated with the cleanup of
the facility and our agreement not to borrow in excess of $110.0 million under
the credit facility. This waiver also increased certain interest rates payable
under the credit facility and requires bank approval of a broader scope of
acquisition transactions.
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,
1999, we had borrowed approximately $87.0 million under the credit facility.
We also have a $10.0 million credit facility with BankBoston, N.A. under which
we may borrow to purchase equipment. As of September 30, 1999, $1.3 million was
outstanding under this equipment credit facility.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
THE FOLLOWING DISCUSSION SHOULD BE READ IN CONJUNCTION WITH OUR UNAUDITED
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS AND THE RELATED NOTES THERETO
INCLUDED ELSEWHERE IN THIS REPORT.
OVERVIEW
We collect, process, recover and dispose of liquid waste through a number of
subsidiaries that are organized into divisions. Prior to June 30, 1999, our
subsidiaries were organized into two divisions -- the Wastewater Division and
the Oilfield Waste Division. However, as the result of our acquisition of Romic
Environmental Technologies Corporation earlier this year and in accordance with
Statement of Financial Accounting Standards No. 131, effective as of July 1,
1999, we created a third division known as the Industrial Wastewater Division
and changed the name of the Wastewater Division to the Commercial Wastewater
Division. The Industrial Wastewater Division includes the operations of Romic
Environmental Technologies Corporation and three other subsidiaries (USL City
Environmental, Inc., USL City Environmental Services of Florida, Inc. and
Re-Claim Environmental Louisiana, LLC) that were acquired during 1997 and 1998
and were previously included as part of the Wastewater Division.
The Commercial Wastewater Division collects, processes and disposes of
nonhazardous liquid waste and recovers saleable by-products from certain waste
streams. The Industrial Wastewater Division collects, processes and disposes of
hazardous and nonhazardous waste. The Oilfield Waste Division processes and
disposes of waste generated in oil and gas exploration and production.
The Commercial Wastewater Division generated $40.6 million, or 68.8%, of our
revenues for the quarter ended September 30, 1999. This Division derives
revenues from two principal sources: fees received for collecting, processing
and disposing of nonhazardous liquid waste (such as commercial wastewater,
grease and grit trap waste, bulk liquids and dated beverages) and revenue
obtained from the sale of by-products, including fats, oils, feed proteins,
industrial and fuel grade ethanol, solvents, aluminum, glass, plastic and
cardboard, recovered from certain waste streams. Some of our by-product sales
involve the brokering of industrial and fuel grade ethanol produced by third
parties. Collection and processing fees charged to customers vary per gallon by
waste stream according to the constituents of the waste, expenses associated
with processing the waste and competitive factors. By-products are commodities
and their prices fluctuate based on market conditions.
The Industrial Wastewater Division generated $14.2 million, or 24.1%, of our
revenues for the quarter ended September 30, 1999. This Division derives
revenues from fees charged to customers for collecting, processing and disposing
of hazardous and nonhazardous liquid
14
<PAGE>
wastes (such as household hazardous wastes, plating solutions, acids, flammable
and reactive wastes, and commercial wastewater). Certain sludges and solid
hazardous wastes are also processed. The Industrial Wastewater Division also
generates revenues from the sale of by-products recovered from certain waste
streams, including industrial chemicals and recycled anti-freeze products. The
fees charged for processing and disposing of hazardous waste vary significantly
depending upon the constituents of the waste. Collection and processing fees
charged with respect to nonhazardous liquid waste vary per gallon by waste
stream according to the constituents of the waste, expenses associated with
processing the waste and competitive factors.
The Oilfield Waste Division generated $4.2 million, or 7.1%, of our revenues for
the quarter ended September 30, 1999. This Division derives revenues from fees
charged to customers for processing and disposing of oil and gas exploration and
production waste, and cleaning tanks, barges and other vessels and containers
used in the storage and transportation of oilfield waste. In order to match
revenues with their related costs, when waste is unloaded at one of our sites,
we recognize the related revenue and record a reserve for the estimated amount
of expenses to be incurred to process and dispose of the waste. As processing
occurs, generally over nine to twelve months, the reserve is depleted as
expenses are incurred. Our operating margins in the Oilfield Waste Division are
typically higher than in the Commercial Wastewater Division and in the
Industrial Wastewater Division.
In conjunction with the investigation of our Detroit facility by the EPA and the
FBI, we undertook a comprehensive environmental review of all of our operations.
As a result of this review, at September 30, 1999, we recorded a one-time
special charge in the amount of $10.3 million. The components of this special
charge consisted of: (i) $3.2 million for disposal of PCB contaminated materials
improperly delivered to our Detroit facility, the decontamination of certain of
our equipment exposed to the PCB contaminated materials and fines imposed by
regulatory authorities, (ii) $3.0 million for disposal of liquid waste received
by our Shreveport, Louisiana facility, which waste is the subject of a dispute
between the Company and the EPA as to the proper method of disposal, (iii) $1.7
million for legal and professional fees we have incurred or expect to incur for
matters arising in connection with the governmental proceedings relating to our
Detroit and Shreveport facilities and the purported securities class actions and
shareholder derivative action arising therefrom, (iv) $1.0 million for the
cleanup of a spill at our Shreveport facility caused by an act of vandalism, (v)
$813,000 for severance and contract termination costs related to certain
personnel and acquisition consultants as a result of the environmental issues at
the Detroit facility, the temporary cap on our revolving credit facility and its
related effects on our acquisition program, (vi) $434,000 for write-offs of
capitalized acquisition costs related to acquisitions not reasonably likely to
occur, and (vii) $139,000 for other costs related to the operations of our
Detroit and Shreveport facilities. This special charge reduced net income by
$6.7 million (net of tax), or $0.42 per share, for the quarter ended September
30, 1999.
Operating expenses include compensation and overhead related to operations
workers, supplies and other raw materials, transportation charges, disposal fees
paid to third parties, real estate lease payments and energy and insurance costs
applicable to waste processing and disposal operations.
Selling, general and administrative expenses include management, clerical and
administrative compensation and overhead relating to our corporate offices and
each of our operating sites, as well as professional services and costs.
Depreciation and amortization expenses relate to our landfarms and other
depreciable or amortizable assets. Landfarms, which constitute approximately
11.8% of our net property, plant and equipment, are amortized over 25 years.
Other depreciable or amortizable assets are expensed over periods ranging from
three to 40 years. Amortization expenses relating to acquisitions have increased
over time as a result of amortization of goodwill recorded in connection with
our acquisitions.
In connection with potential acquisitions, we incur and capitalize certain
transaction costs which include stock registration, legal, accounting,
consulting, engineering and other direct costs to complete the acquisitions.
Additionally, we incur charges for integration costs which include employee
termination, severance and relocation, lease termination and other one-time
charges related to the acquisitions, and these charges are capitalized using the
purchase method for business combinations when appropriate. We routinely
evaluate capitalized transaction and integration costs and expense those costs
related to acquisitions not likely to occur. Indirect acquisition costs, such as
executive salaries, general corporate overhead and other corporate services, are
expensed as incurred.
The timing and magnitude of acquisitions, assimilation costs and the seasonal
nature of certain of our operations may materially affect operating results.
Accordingly, the operating results for any period are not necessarily indicative
of the results that may be achieved for any subsequent period.
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 1998 AND 1999
REVENUES. Revenues for the quarter ended September 30, 1999 increased $21.5
million, or 57.3%, from $37.5 million for the quarter ended September 30, 1998
to $59.0 million for the quarter ended September 30, 1999. The Commercial
Wastewater Division contributed $24.4 million, or 65.1%, of third quarter 1998
revenues and $40.6 million, or 68.8%, of third quarter 1999 revenues. Collection
and processing fees generated $16.6 million, or 68.0%, and $33.2 million, or
81.8%, of the Commercial Wastewater Division's revenues for
15
<PAGE>
the third quarters of 1998 and 1999, respectively. This increase was due
primarily to acquisitions completed during the second half of 1998 and
throughout 1999. By-product sales generated the remaining $7.8 million, or
32.0%, and $7.4 million, or 18.2%, of the Commercial Wastewater Division's
revenues for the third quarters of 1998 and 1999, respectively. Revenues from
the sale of by-products decreased $500,000, or 6.4%, as a result of a reduction
in commodities prices and the sale of the fats and oils distribution business in
December 1998.
The Industrial Wastewater Division contributed $8.7 million, or 23.2%, of third
quarter 1998 revenues and $14.2 million, or 24.1%, of third quarter 1999
revenues. The Industrial Wastewater Division's revenues increased $5.5 million,
or 63.2%, due primarily to the acquisition of Romic Environmental Technologies
Corporation in January 1999. Collection and processing fees generated $8.7
million, or 100%, and $13.0 million, or 91.5%, of the Industrial Wastewater
Division's revenues for the third quarters of 1998 and 1999, respectively.
By-products sales generated the remaining $1.2 million, or 8.5%, of the
Industrial Wastewater Division's revenues for the third quarter of 1999. The
Industrial Wastewater Division had no by-product sales in the third quarter of
1998. Our Detroit facility generated $6.9 million, or 79.3%, of the Industrial
Wastewater Division's revenues for the third quarter of 1998; however, due to
the closing of the facility on August 25, 1999, the facility generated only $3.7
million, or 26.1%, of the Industrial Wastewater Division's revenues for the
third quarter of 1999.
The Oilfield Waste Division contributed $4.4 million, or 11.7%, of third quarter
1998 revenues and $4.2 million, or 7.1%, of third quarter 1999 revenues. The
Oilfield Waste Division's revenues decreased $200,000, or 4.5%, due to a
contractual decrease in the monthly fees paid by Newpark Resources, Inc. that
became effective on July 1, 1999.
OPERATING EXPENSES. Operating expenses increased $19.2 million, or 80.3%, from
$23.9 million for the quarter ended September 30, 1998 to $43.1 million for the
quarter ended September 30, 1999. As a percentage of revenues, operating
expenses increased from 63.7% in the third quarter of 1998 to 73.1% in the third
quarter of 1999. This increase was due primarily to the continued growth of the
Commercial Wastewater and the Industrial Wastewater Divisions, which have higher
operating expenses than the Oilfield Waste Division.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expenses increased
$1.8 million, or 69.2%, from $2.6 million for the quarter ended September 30,
1998 to $4.4 million for the quarter ended September 30, 1999. As a percentage
of revenues, depreciation and amortization expenses increased from 6.9% in the
third quarter of 1998 to 7.5% in the third quarter of 1999. This increase was
attributable primarily to capital improvements and asset purchases made in the
last quarter of 1998 and the first quarter of 1999.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased $2.0 million, or 44.4%, from $4.5 million for
the quarter ended September 30, 1998 to $6.5 million for the quarter ended
September 30, 1999. As a percentage of revenues, selling, general and
administrative expenses were 12.0% for the third quarter of 1998 and 11.0% for
the third quarter of 1999.
INTEREST AND OTHER EXPENSES. Net interest and other expenses increased
approximately $900,000, or 128.6%, from $680,000 for the quarter ended September
30, 1998 to $1.6 million for the quarter ended September 30, 1999. This increase
resulted from interest expense incurred on borrowings used to fund the purchase
price for acquisitions completed in the second half of 1998 and the first nine
months of 1999, as well as higher interest rates.
INCOME TAXES. Income taxes decreased $4.4 million from a $2.4 million provision
for the quarter ended September 30, 1998 to a $2.0 million benefit for the
quarter ended September 30, 1999. The effective tax rate for the period ended
September 30, 1998 was a 41.0% provision rate compared to a 29.2% benefit rate
for the period ended September 30, 1999. The tax rate increase is due to the
increased proportion of nondeductible expenses relative to pretax book income,
as well as the recording of a valuation reserve on state tax losses generated in
the third quarter at our Shreveport facility.
16
<PAGE>
NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1999
REVENUES. Revenues for the nine month period ended September 30, 1999 increased
$95.0 million, or 122.0%, from $77.9 million for the nine months ended September
30, 1998 to $173.0 million for the nine months ended September 30, 1999. The
Commercial Wastewater Division contributed $50.3 million, or 64.6%, of revenues
for the nine months ended September 30, 1998 and $108.1 million, or 62.5%, of
revenues for the nine months ended September 30, 1999. Collection and processing
fees generated $33.2 million, or 66.0%, and $86.0 million, or 79.6%, of the
Commercial Wastewater Division's revenues for the nine month periods ended
September 30, 1998 and 1999, respectively. By-product sales generated the
remaining $17.1 million, or 34.0%, and $22.1 million, or 20.4%, of the
Commercial Wastewater Division's revenues for the 1998 and 1999 periods,
respectively. The Industrial Wastewater Division contributed $14.8 million, or
19.0%, of revenues for the nine month period ended September 30, 1998 and $50.6
million, or 29.3%, of revenues for the nine month period ended September 30,
1999. The Oilfield Waste Division contributed $12.8 million, or 16.4%, of
revenues for the nine months ended September 30, 1998 and $14.2 million, or
8.2%, of revenues for the nine months ended September 30, 1999.
The revenues of the Commercial Wastewater Division increased $57.8 million, or
114.9%, from $50.3 million for the nine months ended September 30, 1998 to
$108.1 million for the nine months ended September 30, 1999. This increase was
due primarily to acquisitions completed during 1999 as well as in the last
quarter of 1998. The Industrial Wastewater Division's revenues increased $35.8
million, or 241.9%, from $14.8 million for the nine months ended September 30,
1998 to $50.6 million for the nine months ended September 30, 1999. This
increase resulted primarily from the acquisition of Romic Environmental
Technologies Corporation in January 1999.
The Oilfield Waste Division's revenues increased $1.4 million, or 10.9%, from
$12.8 million for the nine months ended September 30, 1998 to $14.2 million for
the nine months ended September 30, 1999 due primarily to the restructuring of
our agreement with Newpark Resources, Inc. in September 1998.
OPERATING EXPENSES. Operating expenses increased $70.7 million, or 143.7%, from
$49.2 million for the nine months ended September 30, 1998 to $119.9 million for
the nine months ended September 30, 1999. As a percentage of revenues, operating
expenses increased from 63.2% for the nine month period ended September 30, 1998
to 69.3% for the nine month period ended September 30, 1999. This increase was
due primarily to the continued growth of the Commercial Wastewater and
Industrial Wastewater Divisions, which have higher operating expenses than the
Oilfield Waste Division.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expenses increased
$6.3 million, or 110.5%, from $5.7 million for the nine months ended September
30, 1998 to $12.0 million for the nine months ended September 30, 1999. As a
percentage of revenues, depreciation and amortization expenses decreased from
7.3% for the nine month period ended September 30, 1998 to 6.9% for the nine
month period ended September 30, 1999.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased $8.7 million, or 96.7%, from $9.0 million for
the nine months ended September 30, 1998 to $17.7 million for the nine months
ended September 30, 1999. As a percentage of revenues, selling, general and
administrative expenses decreased from 11.6% for the nine month period ended
September 30, 1998 to 10.2% for the nine month period ended September 30, 1999.
This improvement was attributable to our ability to integrate acquisitions
without a proportionate increase in general and administrative expenses.
INTEREST AND OTHER EXPENSES. Net interest and other expenses increased $2.3
million, or 109.5%, from $2.1 million for the nine months ended September 30,
1998 to $4.4 million for the nine months ended September 30, 1999. This increase
resulted primarily from interest expense incurred on borrowings used to fund the
purchase price for acquisitions completed in the second half of 1998 and the
first nine months of 1999, as well as higher interest rates.
INCOME TAXES. The provision for income taxes decreased approximately $300,000,
or 6.3%, from $4.8 million for the nine months ended September 30, 1998 to $4.5
million for the nine months ended September 30, 1999 as a result of the decrease
in taxable income. The effective tax rate for the nine months ended September
30, 1998 was 40.7%, compared to a 51.1% rate for the nine months ended
17
<PAGE>
September 30, 1999. The tax rate increase is due to the increased proportion of
nondeductible expenses relative to pretax book income, as well as the recording
of a valuation reserve on state tax losses generated in the third quarter at our
Shreveport facility.
LIQUIDITY AND CAPITAL RESOURCES
We had net working capital of $9.8 million at September 30, 1999, compared to
net working capital of $2.9 million at December 31, 1998. Improvement in the
working capital position was attributable primarily to the growth in revenues
which resulted in increased accounts receivable. Cash flows from operations were
$5.9 million and $1.9 million for the nine months ended September 30, 1998 and
1999, respectively.
In September 1999, we repurchased and immediately cancelled 386,114 shares of
our common stock in the open market for an aggregate purchase price of $3.0
million.
Our capital requirements for our continuing operations consist of our general
working capital needs, scheduled principal payments on our debt obligations and
capital leases, and planned capital expenditures. At September 30, 1999,
approximately $4.1 million of principal payments on debt obligations were
payable during the next twelve months. Capital expenditures for our continuing
operations during the three months and the nine months ended September 30, 1999
were $5.2 million and $13.1 million, respectively. The majority of the capital
expenditures were for plant expansions, equipment and vehicle upgrades. Capital
expenditures for our continuing operations for the last quarter of 1999 are
estimated at approximately $9.1 million. Approximately $4.8 million of this
amount is scheduled to be invested in the Commercial Wastewater Division for
plant expansions, equipment and vehicle upgrades. Approximately $1.6 million is
scheduled to be invested in the Industrial Wastewater Division for plant and
equipment upgrades. The remaining $2.7 million is to be used to drill a
saltwater disposal well and cell construction for the Oilfield Waste Division.
As of September 30, 1999, we had a $4.9 million reserve to provide for the cost
of future closures of facilities. The amount of this unfunded reserve is based
on our estimated total cost to close the facilities as calculated in accordance
with the applicable regulations. Regulatory agencies require us to post
financial assurance to assure that all waste will be treated and the facilities
closed appropriately. We have in place a total of $15.3 million of financial
assurance in the form of letters of credit and bonds to provide for the cost of
future closures of facilities. As of September 30, 1999, we also had a $3.0
million reserve to provide for the cost to remediate soil and groundwater
contamination at our facility in East Palo Alto, California, and our share
of the costs to remediate drum reconditioning or disposal sites previously used
by our subsidiaries.
During the third quarter of 1999, we established the following reserves:
(i) a $3.2 million reserve for the costs associated with the decontamination of
equipment at our Detroit facility, the disposal of the PCB contaminated
materials improperly delivered to the facility by a subsidiary of National Steel
Corporation and fines imposed by regulatory agencies, (ii) a $3.0 million
reserve to dispose of liquid waste received by our Shreveport facility, which
waste is the subject of a dispute between the Company and the EPA as to the
proper method of disposal, (iii) a $1.7 million reserve for legal and
professional fees for matters arising in connection with the governmental
proceedings relating to our Detroit and Shreveport facilities and the purported
securities class actions and shareholder derivative action arising therefrom,
(iv) a $1.0 million reserve for the cleanup of a spill at our Shreveport
facility caused by an act of vandalism, and (v) a $813,000 reserve for severance
and contract termination costs related to certain personnel and acquisition
consultants as a result of environmental issues at the Detroit facility, the
temporary cap on our revolving credit facility and its related effects on our
acquisition program. We are attempting to negotiate a resolution with National
Steel Corporation regarding the damages suffered by our facility as a result of
its subsidiary's failure to disclose that its waste was contaminated with PCBs.
In addition, we have submitted a claim under our business interruption insurance
coverage for losses incurred as a result of the closing of our Detroit facility.
We have also filed a claim with our insurer seeking to recover the costs
incurred to cleanup the spill at the Shreveport facility.
We have a $225.0 million credit facility with a group of banks under which we
may borrow to fund working capital requirements and acquisitions. The amount of
this credit facility was increased in February 1999 from $100.0 million to
$225.0 million. Amounts outstanding under the credit facility are secured by a
lien on all or substantially all of our assets. The credit facility prohibits
the payment of dividends and requires us to comply with certain financial
covenants. The credit facility also places certain restrictions on, among other
things, acquisitions and other business combination transactions which we may
consummate. As a result of the PCB contamination occurring at our Detroit
facility, we may not be in compliance with certain covenants under the credit
facility. The banks have granted us a waiver of any such noncompliance arising
out of the PCB contamination through January 14, 2000. This waiver is
conditioned upon our ability to manage the costs associated with the cleanup of
the facility and our agreement not to borrow in excess of $110.0 million under
the credit facility. This waiver also increased certain interest rates payable
under the credit facility and requires bank approval of
18
<PAGE>
a broader scope of acquisition transactions. So long as this waiver remains in
effect, our ability to pursue our acquisition program will be limited.
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,
1999, we had borrowed approximately $87.0 million under the credit facility.
Between October 1, 1999 and November 9, 1999, we had net borrowing activity of
$2.7 million under the credit facility, the vast majority of which was used to
fund the working capital requirements of the Company.
We also have a $10.0 million credit facility with BankBoston, N.A. under which
we may borrow to purchase equipment. As of September 30, 1999, we had borrowed
approximately $1.3 million under this equipment credit facility, and as of the
date of this report, approximately $2.3 million was outstanding under this
equipment credit facility.
Our capital resources consist of cash reserves, cash generated from operations
and funds available under our $225.0 million credit facility and the equipment
credit facility. We expect that these resources will be sufficient to fund
continuing operations for at least the next twelve months. In addition to
capital required for our ongoing operations, we will require additional capital
to pursue our long-term acquisition program. As a result of the PCB
contamination at our Detroit facility, we may not be in compliance with certain
covenants under our $225.0 million credit facility. Our banks have granted us a
waiver of any such noncompliance through January 14, 2000 in return for, among
other things, our agreement not to borrow in excess of $110.0 million under the
credit facility. In addition, the current price level of our common stock makes
raising additional equity capital for acquisitions or debt repayment
unattractive. Consequently, we anticipate a reduction in the number of
acquisitions that will be consummated in the fourth quarter of 1999 and the
first six months of 2000.
In certain of our acquisitions, we agreed to pay additional consideration to the
owners of the acquired business if the future pre-tax earnings of the acquired
business exceed certain negotiated levels or other specified events occur. To
the extent that any contingent consideration is required to be paid in
connection with an acquisition, we anticipate that the cash flows of the
acquired business will be sufficient to pay the cash component of the contingent
consideration.
ACQUISITIONS
During the three months ended September 30, 1999, we acquired five businesses,
which collectively had 1998 revenues of approximately $12.7 million. Each of
these acquisitions has been accounted for under the purchase method of
accounting. The total consideration for these five acquisitions involved
approximately $6.3 million in cash and assumed debt, 20,833 shares of our common
stock and $3.0 million of seller financing. The excess of the aggregate purchase
price over the fair market value of the net assets acquired was approximately
$6.8 million.
YEAR 2000
GENERAL. The Year 2000 issue exists because many computer programs use
only two digits to identify a year in the date field rather than four digits.
Because of this, computer equipment and software (sometimes referred to as
"information technology" or "IT") and devices with embedded technology
(sometimes referred to as "non-information technology" or "non-IT") that are
time sensitive may recognize a date using "00" as the year 1900 rather than the
year 2000. This could result in a system failure or miscalculations causing
disruptions of operations including, among other things, production delays or
breakdowns, or a temporary inability to process transactions, send invoices or
engage in other normal business activities.
Our Year 2000 compliance program has consisted of three phases:
identification and assessment; remediation; and testing. For any given system
the phases occur in sequential order, from identification and assessment of Year
2000 problems, to remediation and, finally, to testing our solutions. However,
as we acquire additional businesses, each information technology and
non-information technology system of the acquired business must be independently
identified and assessed.
19
<PAGE>
STATE OF READINESS. We have completed the identification and assessment of
all of our information technology systems (excepting those of two businesses
acquired in September 1999), and those systems address or have been modified to
address Year 2000 issues. With the exception of the two businesses acquired in
September 1999, we have also completed the identification and assessment of all
of the non-information technology systems of currently-owned businesses, and we
believe that we have made all modifications necessary to address Year 2000
issues.
With respect to third party activities, we have made inquiries of our
significant customers, suppliers and service providers and, at the present time,
are not aware of any problems that will materially impact our operations.
However, we have no means of insuring that these customers, suppliers and
service providers (and in turn their customers, suppliers and service providers)
will be Year 2000 compliant in a timely manner. The inability of these parties
to successfully resolve their Year 2000 issues could have a material adverse
effect on our business or results of operations.
As we acquire additional businesses, we attempt to assess Year 2000 issues
relating to their information technology and non- information technology
systems. Since our acquisition program is ongoing, our assessment of potential
Year 2000 problems is not complete and, likely, will not be complete prior to
the end of the year. As such, there can be no assurance that the systems of
newly acquired businesses will be made Year 2000 compliant in a timely manner or
that any such failure to be Year 2000 compliant will not have a material adverse
effect on our business or results of operations.
COSTS TO ADDRESS YEAR 2000 ISSUES. Our costs to date for our Year 2000
compliance program have not been material. Although we have not completed our
assessment of the information technology systems and non-information technology
systems of two recently acquired businesses, we do not currently believe that
the future costs associated with our Year 2000 compliance program will be
material.
RISKS OF THE COMPANY'S YEAR 2000 ISSUE. Our worst case scenarios
resulting from the Year 2000 issue include:
o Interruptions in our customers' operations which could prevent them
from using our services or paying for services rendered.
o Disruptions to our utilities and other service providers (including,
without limitation, rail service to and from certain of our
facilities) which could prevent our waste processing facilities from
operating in the normal course of business.
o Failure to convert all of the information technology systems of the
businesses we acquire during 1999 to our system prior to the Year 2000
which could prevent these locations from being integrated into the
rest of our operations.
CONTINGENCY PLANS. We do not anticipate that the Year 2000 will have a
significant impact on our operations; however, contingency plans for Year 2000
related interruptions have been developed and include emergency backup and
recovery procedures for lost data, manual invoicing, billing and collection
procedures and identification of alternate transportation providers. These
activities are intended to provide a means of managing risks, but cannot
eliminate the potential for disruption due to third-party failure.
FORWARD LOOKING STATEMENTS
Statements of our intentions, beliefs, anticipations, expectations or similar
statements concerning future events contained in this report constitute "forward
looking statements" as defined in the Private Securities Litigation Reform Act
of 1995. As with any future event, there can be no assurance that the events
described in forward looking statements made in this report will occur or that
the results of future events will not vary materially from those described
herein. Certain of these factors are discussed under "Factors Influencing Future
Results and Accuracy of Forward-Looking Statements" included in Part I, Item 1
of our Annual Report on Form 10-K for the year ended December 31, 1998.
20
<PAGE>
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We do not utilize financial instruments for trading purposes and we do not hold
any derivative financial instruments that could expose us to significant market
risks. Our exposure to market risk for changes in interest rates relates
primarily to our obligations under our $225.0 million credit facility and our
$10.0 million equipment credit facility. As of September 30, 1999, $87.0 million
and $1.3 million had been borrowed under the $225.0 million credit facility and
the equipment credit facility, respectively. As of September 30, 1999, amounts
outstanding under the $225.0 million credit facility were accruing interest at
approximately 7.8% per year and amounts outstanding under the equipment credit
facility were accruing interest at approximately 8.0% per year.
PART II-OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In September 1999, we settled the claims asserted by Pocono Grow Fertilizer
Corporation against the Company and our subsidiary, Waste Stream Environmental,
Inc. Under the terms of the settlement, we acquired substantially all of the
assets of Ecke Enterprises, Inc., a nonhazardous liquid waste collection company
controlled by the principals of Pocono Grow, for $1.5 million. In addition, we
agreed to enter into a five-year supply agreement under which we will be
required to deliver to Pocono Grow specified amounts of septage and sludge for
processing and disposal. We anticipate that the definitive supply agreement will
be executed during the fourth quarter of 1999.
In June 1999, we were notified that the Louisiana Department of Environmental
Quality ("LDEQ") was seeking to terminate the discharge permit held by our
Shreveport, Louisiana facility, which permit allows the facility to discharge
processed wastewater into the waters of the State of Louisiana. A termination of
this permit would require the facility to find other means of disposing of
processed wastewater or cease operations. In its notice, the LDEQ alleged that
the proposed termination was justified based upon, among other things, the
facility's failure to comply with the terms of its permit, two releases (spills)
that occurred at the facility and the facility's acceptance and processing of
hazardous materials not covered by the terms of its permit. In addition, in
September 1999, the U.S. Environmental Protection Agency ("EPA") notified us
of certain alleged violations of the Resource Conservation and Recovery Act
("RCRA") by the facility. Although we vigorously dispute the LDEQ's and the
EPA's allegations, we are attempting to negotiate a resolution with these
regulatory agencies which may include fines, modifications to our waste
screening and waste processing procedures and/or additional capital expenditures
at the facility. We believe that the ultimate outcome of these proceedings will
not have a material adverse effect on our business, results of operations or
financial condition.
The EPA has also notified us that it believes that approximately 3.0 million
gallons of liquid waste received by our Shreveport facility and stored off-site
may contain hazardous constituents and, therefore, the waste cannot be processed
by our Shreveport facility. We believe that the waste may be handled as
nonhazardous waste in accordance with the terms of the facility's permit. We are
in the process of preparing a plan for disposal of this waste and intend to
submit the plan to the EPA for its consideration. We have established a $3.0
million reserve, recorded as an accrued liability, for costs to be incurred in
the event that it is ultimately determined that this waste must be delivered to
a third party for processing and disposal. Management believes that this reserve
is sufficient to cover all costs associated with a third party's disposal of the
waste, if necessary.
As previously reported, in May 1998, we acquired from Waste Management, Inc.
substantially all of the assets of City Environmental, Inc. including, without
limitation, a hazardous and nonhazardous waste treatment facility located in
Detroit, Michigan. This facility has never been granted a TSD permit under RCRA,
but has operated under interim status, as allowed by RCRA. On August 25, 1999,
the EPA and the Federal Bureau of Investigation ("FBI") executed a search
warrant at this facility seeking electronic data, files and other documentation
relating to the facility's receipt, processing and disposal of hazardous waste.
As a result of the execution of the search warrant, the facility temporarily
ceased operations. According to the affidavit attached to the search warrant,
after receiving a phone call from an employee at the facility in May 1999, the
EPA and the FBI began a joint investigation of the facility. The investigation
centers around allegations made by five current and former employees at the
facility that (i) the facility knowingly discharged into the Detroit sewer
system untreated hazardous liquid waste in violation of city ordinances, the
facility's permit and the Clean Water Act, and (ii) without proper manifesting,
the facility knowingly transported and disposed of hazardous waste at an
unpermitted treatment facility in
21
<PAGE>
violation of RCRA. According to the affidavit, the facility has been knowingly
violating the Clean Water Act and RCRA since before we acquired the facility.
The on-site investigation of our facility by the EPA and the FBI was completed
in August 1999. It is our understanding that the investigation is continuing,
but as of the date of this report no announcement regarding the investigation
has been made by the EPA or the FBI.
After the completion of the on-site investigation of our Detroit facility, we
began conducting routine tests of materials in waste solidification vaults in
preparation for the reopening of the facility. During these tests, we discovered
that certain waste which had been received by the facility prior to its August
25, 1999 closing was contaminated with PCBs and that this waste had contaminated
other waste in several of the waste solidification vaults and a liquid feed
tank. We immediately made all notifications required by law including
notifications to the Michigan Department of Environmental Quality ("MDEQ") and
the EPA. We subsequently submitted to the EPA a workplan for disposal of the PCB
contaminated materials and decontamination of the affected equipment. We have
entered into a consent order with the EPA that approves this workplan and
establishes enhanced procedures for screening of materials delivered to the
facility to detect PCB contamination. Under the terms of the consent order, we
also agreed to pay $123,888 to the EPA in full settlement of the EPA's claims
for certain civil fines. We have determined that a subsidiary of National Steel
Corporation generated the PCB contaminated materials and that these materials
were not properly identified as required by law when delivered to our Detroit
facility. We are attempting to negotiate a resolution with National Steel
regarding the damages suffered by our facility as a result of its subsidiary's
failure to disclose that its waste was contaminated with PCBs. We have also
submitted a claim under our business interruption insurance coverage for losses
incurred as a result of the closing of the facility. We have established a $3.2
million reserve, recorded as an accrued liability, for the disposal of the
contaminated materials, the decontamination of the affected equipment and fines
imposed by regulatory authorities. Management believes that this reserve is
sufficient to cover all costs associated with the cleanup and all such fines.
As previously mentioned, our Detroit facility has been operating under interim
status, as allowed by RCRA. Since we acquired the facility, we have been working
with the MDEQ to obtain our final TSD permit. By letter dated September 17,
1999, the MDEQ notified us that it had determined that the facility's
application for a TSD permit was not administratively complete and, therefore,
the facility had lost its authority to process and dispose of hazardous waste.
Shortly thereafter, the MDEQ issued two letters of warning ("LOWs") and a notice
of violation ("NOV") to the facility identifying various alleged deficiencies in
the facility's application for a TSD permit. We promptly notified the MDEQ that
we disputed the allegations contained in the September 17, 1999 letter, the LOWs
and the NOV. On October 7, 1999, we entered into a consent order with the MDEQ
resolving the allegations set forth in the September 17, 1999 letter, the LOWs
and the NOV. Under the terms of the consent order, the facility is required,
among other things, to (i) submit to the MDEQ by November 22, 1999 additional
drawings and workplans regarding the maintenance and operation of the facility
and any revisions to the facility's TSD permit application necessitated by the
consent order, and (ii) submit to the MDEQ within certain specified time frames
documentation establishing that certain cleanup work at the facility has been
completed, and certain procedures have been implemented at the facility. We also
agreed to pay $37,500 to the MDEQ in full settlement of the MDEQ's claims for
certain civil fines and costs of surveillance and enforcement, and reimburse the
MDEQ for all future costs incurred by the MDEQ in overseeing the facility's
compliance with the terms of the consent order. Subject to various conditions
specified in the consent order, once the necessary documentation and other
information relating to the facility's application for a TSD permit has been
submitted to the MDEQ, the facility will be authorized to reopen and operate
under interim status, as allowed by RCRA. We will not reopen the facility,
however, until we have removed the contaminated materials, decontaminated the
affected equipment and otherwise complied with all of the terms of the consent
order with the EPA described in the preceding paragraph. We currently anticipate
that these actions can be completed within four to six weeks from the date of
this report.
Since August 31, 1999, a number of purported securities class action lawsuits
have been filed in the United States District Court for the Southern District of
Texas against the Company and certain of our officers and directors. The
purported class actions are GERARD ANDERSON V. U S LIQUIDS INC., MICHAEL P.
LAWLOR, W. GREGORY ORR AND EARL J. BLACKWELL, Case No. H-99-3036 (filed
September 14, 1999); MARK W. COLLMER V. U S LIQUIDS INC., MICHAEL P. LAWLOR, W.
GREGORY ORR AND EARL J. BLACKWELL, Case No. H-99-2785 (filed August 31, 1999);
JERRY A. MERCURE V. U S LIQUIDS INC., MICHAEL P. LAWLOR, W. GREGORY ORR AND EARL
J. BLACKWELL, Case No. H-99-3015 (filed September 13, 1999); and ESTHER SUTCH
AND MILO SPRUNGER V. U S LIQUIDS INC., MICHAEL P. LAWLOR, W. GREGORY ORR AND
EARL J. BLACKWELL, Case No. H-99-2831 (filed September 3, 1999). The complaints
allege violations of Sections 10(b) and 20(a) of the Securities Exchange Act of
1934 and Rule 10b-5 promulgated thereunder on behalf of purchasers of our common
stock during the period beginning on May 12, 1998 and ending on August 25, 1999.
The plaintiffs generally allege that the defendants made false and misleading
statements and failed to disclose allegedly material information regarding the
operations of our Detroit facility and our financial condition in certain of our
public filings and announcements. The remedies sought by the plaintiffs include
designation of the actions as class actions, unspecified damages,
22
<PAGE>
attorneys' and experts' fees and costs, rescission to the extent any members of
the class still hold our common stock, and such other relief as the court deems
proper.
Another purported securities class action lawsuit has been filed against the
Company and certain of our officers and directors. MICHAEL MILLER V. U S LIQUIDS
INC., MICHAEL P. LAWLOR, W. GREGORY ORR AND EARL J. BLACKWELL was filed in the
United States District Court for the Southern District of Texas on September 22,
1999. The complaint in this lawsuit alleges violation of Sections 11, 12(a)(2)
and 15 of the Securities Act of 1933 and Sections 10(b) and 20(a) of the
Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder on behalf
of purchasers of our common stock during the period beginning on May 12, 1998
and ending on August 25, 1999, including purchasers of common stock in our March
1999 offering. The plaintiff generally alleges that the defendants made false
and misleading statements and failed to disclose allegedly material information
regarding the operations of our Detroit facility and our financial condition in
the prospectus relating to our March 1999 offering and in certain of our other
public filings and announcements. The remedies sought by the plaintiff include
designation of the action as a class action, unspecified damages, attorneys' and
experts' fees and costs, rescission to the extent any members of the class still
hold our common stock, and such other relief as the court deems proper.
In addition, one of our shareholders has filed a lawsuit against certain of our
officers and directors in connection with the operation of our Detroit facility
and the securities class action lawsuits pending in federal court in the
Southern District of Texas. BENN CARMICIA V. U S LIQUIDS INC., MICHAEL P.
LAWLOR, W. GREGORY ORR, EARL J. BLACKWELL, GARY J. VAN ROOYAN, WILLIAM A.
ROTHROCK IV, ALFRED TYLER 2ND, JAMES F. MCENEANEY, JR., JOHN N. HATSOPOULOS AND
ROGER A. RAMSEY was filed in the United States District Court for the Southern
District of Texas on September 15, 1999. The plaintiff purports to allege
derivative claims on behalf of the Company against the officers and directors
for alleged breaches of fiduciary duty resulting from their oversight of the
Company's affairs. The lawsuit names the Company as a nominal defendant and
seeks compensatory and punitive damages on behalf of the Company, interest,
equitable and/or injunctive relief, costs and such other relief as the court
deems proper.
We have filed a motion seeking to consolidate these purported securities class
actions and the shareholder derivative action. The outcome of these actions and
the cost of defending them cannot be predicted with certainty at this time.
However, we believe that the claims asserted in the purported securities class
actions are without merit and we intend to vigorously defend ourself and our
officers and directors against these claims. Moreover, we believe that the
shareholder derivative action was not properly brought and we have filed a
motion to dismiss this action in order to allow the Board of Directors to
consider whether such litigation is in the best interests of the Company and our
shareholders.
Our business is subject to numerous federal, state and local laws, regulations
and policies that govern environmental protection, zoning and other matters.
During the ordinary course of our business, we become involved in a variety of
legal and administrative proceedings relating to land use and environmental laws
and regulations, including actions or proceedings brought by governmental
agencies, adjacent landowners, or citizens groups. In the majority of the
situations where proceedings are commenced by governmental agencies, the matters
involved relate to alleged technical violations of licenses or permits pursuant
to which we operate or are seeking to operate or laws or regulations to which
our operations are subject or are the result of different interpretations of
applicable requirements. From time to time, we pay fines or penalties in
governmental proceedings relating to our operations. We believe that these
matters will not have a material adverse effect on our business, results of
operations or financial condition. However, the outcome of any particular
proceeding cannot be predicted with certainty, and the possibility remains that
technological, regulatory or enforcement developments, results of environmental
studies or other factors could materially alter this expectation at any time.
The Company and certain of our subsidiaries are also currently involved in other
civil litigation and governmental proceedings relating to the conduct of their
businesses, some of which are addressed in our Annual Report on Form 10-K for
the year ended December 31, 1998, as filed with the SEC. While the outcome of
any particular lawsuit or governmental investigation cannot be predicted with
certainty, we believe that these matters will not have a material adverse effect
on our business, results of operations or financial condition.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
During the third quarter, we issued 22,887 shares of our common stock to
Bellmeade Capital Partners, L.L.C. These shares were issued in accordance with
the terms of a warrant that we issued to Bellmeade Capital in June 1997 as
consideration for certain consulting services provided by Bellmeade Capital.
Bellmeade Capital exercised this warrant through a "cashless exercise" by
surrendering its right to purchase an additional 22,113 shares under the warrant
and, therefore, we did not receive any cash proceeds in connection with the
23
<PAGE>
issuance of the shares. These sales were exempt from registration under Section
4(2) of the Securities Act of 1933, no public offering being involved.
In August 1999, we issued 9,295 shares of our common stock to Mark Leibovit.
These shares were issued in accordance with the terms of a warrant that we
issued to Mr. Leibovit in June 1997 as consideration for certain consulting
services provided by Mr. Leibovit. Mr. Leibovit exercised this warrant through a
"cashless exercise" by surrendering his right to purchase an additional 10,705
shares under the warrant and, therefore, we did not receive any cash proceeds in
connection with the issuance of the shares. This sale was exempt from
registration under Section 4(2) of the Securities Act of 1933, no public
offering being involved.
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
- ------- -----------------------
27.1 Financial Data Schedule
(b) REPORTS ON FORM 8-K.
None.
24
<PAGE>
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 12, 1999 /s/ MICHAEL P. LAWLOR
--------------------------------------
Michael P. Lawlor, Chairman and CEO
Date: November 12, 1999 /s/ EARL J. BLACKWELL
--------------------------------------
Earl J. Blackwell, Senior Vice
President and Chief Financial Officer
25
<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-31-1999
<PERIOD-END> SEP-30-1999
<CASH> 470
<SECURITIES> 0
<RECEIVABLES> 47,545
<ALLOWANCES> 2,843
<INVENTORY> 1,828
<CURRENT-ASSETS> 54,993
<PP&E> 114,743
<DEPRECIATION> 8,406
<TOTAL-ASSETS> 361,284
<CURRENT-LIABILITIES> 45,150
<BONDS> 0
0
0
<COMMON> 157
<OTHER-SE> 195,675
<TOTAL-LIABILITY-AND-EQUITY> 361,284
<SALES> 0
<TOTAL-REVENUES> 172,999
<CGS> 131,183
<TOTAL-COSTS> 159,849
<OTHER-EXPENSES> (316)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 4,730
<INCOME-PRETAX> 8,736
<INCOME-TAX> 4,468
<INCOME-CONTINUING> 4,268
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,268
<EPS-BASIC> .28
<EPS-DILUTED> .26
</TABLE>
