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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, 2000
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM _______ TO _______.
Commission File Number: 001-13259
U S LIQUIDS INC.
(Exact name of registrant as specified in its charter)
DELAWARE 76-0519797
(State or other jurisdiction (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
15,796,911 shares as of November 10, 2000
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U S LIQUIDS INC.
FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 2000
INDEX
Page
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PART I - FINANCIAL INFORMATION............................................................................. 1
ITEM 1. Financial Statements......................................................................... 1
- Condensed Consolidated Balance Sheets as of
December 31, 1999 and September 30, 2000 (unaudited)................................................ 1
- Condensed Consolidated Statements of Income for the
three and nine month periods ended September 30, 1999 and 2000 (unaudited)......................... 2
- Condensed Consolidated Statements of Cash Flows for the
nine month periods ended September 30, 1999 and 2000 (unaudited).................................... 3
- Notes to Condensed Consolidated Financial Statements................................................ 4
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations...... 13
ITEM 3. Quantitative and Qualitative Disclosures about Market Risk................................. 17
PART II- OTHER INFORMATION................................................................................. 17
ITEM 1. Legal Proceedings............................................................................ 17
ITEM 2. Changes in Securities and Use of Proceeds.................................................... 21
ITEM 3. Defaults upon Senior Securities.............................................................. 21
ITEM 4. Submission of Matters to a Vote of Security Holders.......................................... 21
ITEM 5. Other Information............................................................................ 21
ITEM 6. Exhibits and Reports on Form 8-K............................................................. 21
Signatures................................................................................................. 22
i
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
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U S LIQUIDS INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
ASSETS DECEMBER 31, SEPTEMBER 30,
1999 2000
-------- --------
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CURRENT ASSETS:
Cash and cash equivalents....................................... $ 3,398 $ 3,599
Accounts receivable, less allowances of $3,063 and
$1,527 (unaudited), respectively............................... 40,098 40,550
Inventories..................................................... 2,029 2,796
Prepaid expenses and other current assets....................... 12,653 8,953
-------- --------
Total current assets........................................ $ 58,178 $ 55,898
PROPERTY, PLANT AND EQUIPMENT, net................................. 115,625 120,829
INTANGIBLE ASSETS, net............................................. 193,033 197,498
OTHER ASSETS, net.................................................. 2,247 1,645
-------- --------
Total assets................................................ $369,083 $375,870
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current maturities of long-term obligations..................... $ 5,327 $ 1,830
Accounts payable................................................ 15,239 18,792
Accrued liabilities............................................. 22,923 17,120
Current portion of contract reserve............................. 4,500 4,500
-------- --------
Total current liabilities................................... $ 47,989 $ 42,242
LONG-TERM OBLIGATIONS, net of current maturities................... 99,499 106,704
CELL PROCESSING RESERVE............................................ 4,630 5,210
CLOSURE AND REMEDIATION RESERVES................................... 8,878 8,573
CONTRACT RESERVE, net of current portion........................... 11,566 12,357
DEFERRED INCOME TAXES.............................................. 6,373 8,792
-------- --------
Total liabilities........................................... $178,935 $183,878
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value, 5,000,000 shares authorized,
none outstanding............................................. $ - $ -
Common stock, $.01 par value, 30,000,000 shares authorized,
15,780,868 and 15,796,911 (unaudited) shares
issued and outstanding, respectively......................... 158 158
Additional paid-in capital...................................... 176,859 176,864
Retained earnings............................................... 13,173 14,971
Accumulated other comprehensive loss
Foreign currency translation adjustment...................... (42) (1)
-------- --------
Total stockholders' equity................................... $190,148 $191,992
-------- --------
Total liabilities and stockholders' equity.................. $369,083 $375,870
======== ========
The accompanying notes are an integral part of these condensed consolidated financial statements.
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U S LIQUIDS INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
THREE MONTHS NINE MONTHS
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------- --------------
1999 2000 1999 2000
------- ------- -------- --------
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REVENUES............................... $59,002 $63,022 $172,999 $185,673
OPERATING EXPENSES..................... 43,069 48,287 119,899 140,781
DEPRECIATION AND AMORTIZATION.......... 4,419 4,862 11,971 14,272
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES................ 6,518 5,749 17,725 19,474
SPECIAL CHARGES........................ 10,254 -- 10,254 --
------- ------- -------- --------
INCOME (LOSS) FROM OPERATIONS.......... $(5,258) $ 4,124 $ 13,150 $ 11,146
INTEREST EXPENSE, net.................. 1,673 2,665 4,730 7,953
OTHER (INCOME) EXPENSE, net............ (105) (103) (316) (366)
------- ------- -------- --------
INCOME (LOSS) BEFORE PROVISION $(6,826) $ 1,562 $ 8,736 $ 3,559
(BENEFIT) FOR INCOME TAXES............
PROVISION (BENEFIT) FOR INCOME TAXES... (1,991) 773 4,468 1,762
------- ------- -------- --------
NET INCOME (LOSS)...................... $(4,835) $ 789 $ 4,268 $ 1,797
======= ======= ======== ========
BASIC EARNINGS (LOSS) PER COMMON
SHARE................................. $(0.30) $0.05 $0.28 $0.11
======= ======= ======== ========
DILUTED EARNINGS (LOSS) PER COMMON
AND COMMON EQUIVALENT SHARE........... $(0.30) $0.05 $0.26 $0.11
======= ======= ======== ========
WEIGHTED AVERAGE COMMON 16,027 15,797 15,178 15,797
SHARES OUTSTANDING..................... ======= ======= ======== ========
WEIGHTED AVERAGE COMMON AND 16,027 16,202 16,435 16,389
COMMON EQUIVALENT SHARES ======= ======= ======== ========
OUTSTANDING...........................
The accompanying notes are an integral part of these condensed consolidated financial statements.
</TABLE>
2
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U S LIQUIDS INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
NINE MONTHS
ENDED SEPTEMBER 30,
---------------------------------------------
1999 2000
---- ----
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net income................................................................... $ 4,268 $ 1,797
Adjustments to reconcile net income to net cash provided by operating
activities: 11,971 14,272
Depreciation and amortization........................................... (137) 42
Net loss (gain) on sale of property, plant, and equipment............... 1,645 3,013
Deferred income tax provision...........................................
Changes in operating assets and liabilities, net of amounts acquired:
Accounts receivable, net........................................... (8,336) (1,849)
Inventories........................................................ (360) (682)
Prepaid expenses and other current assets.......................... (1,627) 2,718
Intangible assets, net............................................. (399) (817)
Other assets....................................................... (1,297) 603
Accounts payable and accrued liabilities........................... (1,148) (1,965)
Closure, remediation and processing reserves....................... (2,683) (3,409)
----------- -----------
Net cash provided by operating activities..................... $ 1,897 $ 13,723
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property, plant and equipment.............................. $ (13,140) $ (15,385)
Proceeds from sale of property, plant and equipment..................... 994 484
Net cash paid for acquisitions.......................................... (68,495) (2,374)
----------- -----------
Net cash used in investing activities......................... $ (80,641) $ (17,275)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of long-term obligations......................... $ 88,020 $ 29,332
Principal payments on long-term obligations............................. (65,859) (25,625)
Repurchase and cancellation of common stock............................. (3,000) --
Proceeds from additional public offering of common stock,
net of offering costs.............................................. 56,659 --
Proceeds from exercise of stock options................................. 105 5
----------- -----------
Net cash provided by financing activities..................... $ 75,925 $ 3,712
----------- -----------
EFFECT OF FOREIGN CURRENCY TRANSLATION ON CASH
AND CASH EQUIVALENTS......................................................... $ 4 $ 41
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS......................... $ (2,815) $ 201
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD............................. 3,285 3,398
----------- -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD................................... $ 470 $ 3,599
=========== ===========
SUPPLEMENTAL DISCLOSURES:
Cash paid for interest.................................................. $ 4,696 $ 7,511
Cash paid (received) for income taxes................................... 5,441 (3,202)
Assets acquired under capital leases.................................... 1,385 426
Liabilities issued and assumed related to acquisitions.................. 6,229 207
Common stock, warrants and options issued for acquisitions.............. 12,852 --
The accompanying notes are an integral part of these condensed consolidated financial statements.
</TABLE>
3
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U S LIQUIDS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The condensed consolidated financial statements have been prepared pursuant to
the rules and regulations of the Securities and Exchange Commission (the "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, 1999, as filed with the SEC.
2. SPECIAL CHARGES
In conjunction with the environmental investigation conducted by regulatory
authorities at our Detroit facility during the third quarter of 1999, 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 has been the subject of a
dispute between the Company and the U.S. Environmental Protection Agency (the
"EPA") as to the proper method of disposal, (iii) $1.7 million for legal and
professional fees we had incurred or expected 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 9, (iv) $1.0 million for the clean-up 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, our agreement to limit the amount which we would borrow under 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. As of September 30, 2000, approximately
$4.1 million of this charge remains accrued. This amount represents management's
best estimate of the costs and expenses to be incurred in the future with
respect to these matters.
3. INVENTORIES
Inventories are stated at the lower of cost or market and, at December 31, 1999
and September 30, 2000, consisted of processed by-products of $1,490,000 and
$1,515,000, respectively, and unprocessed by-products of $539,000 and
$1,281,000, respectively. Cost is determined using the first-in, first-out
(FIFO) method.
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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:
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THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------- --------------------
1999 2000 1999 2000
------ ------ ------- ------
(IN THOUSANDS)
(UNAUDITED)
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Operating expenses................................... $4,151 $4,553 $11,284 $13,423
Selling, general and administrative expenses......... 268 309 687 849
------ ------ ------- -------
Total depreciation and amortization expense... $4,419 $4,862 $11,971 $14,272
====== ====== ======= =======
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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, 1999 and
2000, respectively, is illustrated below:
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THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------------------- -------------------------------
1999 2000 1999 2000
----------- ---------- -------- ---------
(IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED)
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Numerator:
For basic and diluted earnings per share -
Income (Loss) available to
common stockholders.......................... $ (4,835) $ 789 $ 4,268 $ 1,797
=========== =========== =========== ===========
Denominator:
For basic earnings per share -
Weighted-average shares...................... 16,027,318 15,796,673 15,178,158 15,796,508
----------- ----------- ----------- -----------
Effect of dilutive securities:
Stock options and warrants................... --- 405,120 1,256,452 592,446
----------- ----------- ----------- -----------
Denominator:
For diluted earnings per share -
Weighted-average shares and
assumed conversions.......................... 16,027,318 16,201,793 16,434,610 16,388,954
=========== =========== =========== ===========
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For the quarters ended September 30, 1999 and 2000, we had 1,926,419 and
1,278,172 employee stock options, respectively, which were not included in the
computation of diluted earnings per share because to do so would have been
antidilutive for the periods presented.
5
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6. COMPREHENSIVE INCOME (LOSS)
The Company's comprehensive income (loss), which encompasses net income and
currency translation adjustments, is as follows:
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THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------- ---------------------
1999 2000 1999 2000
--------- --------- --------- ---------
(IN THOUSANDS)
(UNAUDITED)
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Net income (loss).................. $(4,835) $789 $4,268 $1,797
Currency translation adjustments... 4 9 4 41
------- ---- ------ ------
Comprehensive income (loss)........ $(4,831) $798 $4,272 $1,838
======= ==== ====== ======
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7. NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("SFAS") No. 133 - "Accounting for Derivative
Instruments and Hedging Activities." In June 1999, the FASB issued SFAS No.
137, which amended the effective adoption date of SFAS No. 133. This statement
establishes accounting and reporting standards for derivative instruments,
including derivative instruments embedded in other contracts, and for hedging
activities. The statement, as amended and which is to be applied prospectively,
is effective for the Company's quarter ending March 31, 2001. We are currently
evaluating the impact of SFAS No. 133 on our future results of operations and
financial position.
On December 3, 1999, the SEC released Staff Accounting Bulletin ("SAB") No. 101,
Revenue Recognition, to provide guidance on the recognition, presentation and
disclosure of revenue in financial statements. We have reviewed our revenue
recognition procedures for each of our business segments and we are satisfied
that we are in compliance with the requirements of SAB No. 101.
8. ACQUISITIONS
During the nine months ended September 30, 2000, we acquired two businesses
engaged in the collection, processing and disposal of liquid wastes for
approximately $513,000 in cash. Both of these acquisitions were accounted for
under the purchase method of accounting. The excess of the aggregate purchase
price over the fair value of the net assets acquired was approximately $380,000.
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.
The unaudited pro forma information set forth below presents our revenues, net
income and earnings per share plus the 1999 acquisitions, and the public
offering of our common stock in March 1999, as if these transactions were each
effective on January 1, 1999 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 offering of common stock, and certain
reductions of salaries and benefits payable to the previous owners of the
businesses acquired which were agreed to in connection with the acquisitions,
and the related income tax effects of these adjustments. No pro forma
information is presented for 2000 as no material acquisitions were completed
during the first three quarters of 2000.
6
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NINE MONTHS ENDED
SEPTEMBER 30, 1999
-------------------------
(IN THOUSANDS, EXCEPT
FOR PER SHARE DATA)
(UNAUDITED)
Revenues....................................... $ 190,565
Net income..................................... 3,808
Basic earnings per common share................ .24
Diluted earnings per common share.............. .22
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 offering been consummated
effective as of January 1, 1999.
9. COMMITMENTS AND CONTINGENCIES
Regulatory Proceedings
In May 1998, we acquired from Waste Management, Inc. substantially all of the
assets of City Environmental, Inc. including, without limitation, a hazardous
and nonhazardous waste treatment facility located in Detroit, Michigan. This
facility has never been granted a final Part B permit under the Resource
Conservation and Recovery Act of 1976 ("RCRA"), but has operated under interim
status, as allowed by RCRA. On August 25, 1999, the EPA and the Federal Bureau
of Investigation (the "FBI") executed a search warrant at this facility seeking
electronic data, files and other documentation relating to the facility's
receipt, processing and disposal of hazardous waste. As a result of the
execution of the search warrant, the facility temporarily ceased operations.
According to the affidavit attached to the search warrant, after receiving a
telephone call from an employee at the facility in May 1999, the EPA and the FBI
began a joint investigation of the facility. The investigation centers around
allegations that (i) the facility knowingly discharged into the Detroit sewer
system untreated hazardous liquid waste in violation of city ordinances, the
facility's permit and the Clean Water Act, and (ii) without proper manifesting,
the facility knowingly transported and disposed of hazardous waste at an
unpermitted treatment facility in violation of RCRA. According to the affidavit,
the facility has been knowingly violating the Clean Water Act and RCRA since
1997, which was before we acquired the facility. The on-site investigation of
our facility by the EPA and the FBI was completed in August 1999. It is our
understanding that the investigation is continuing, but as of the date of this
report no announcement regarding the investigation has been made by the EPA or
the FBI. All costs, except potential fines or penalties, incurred or expected to
be incurred in connection with the investigation of our Detroit facility have
been reflected in our consolidated financial statements at September 30, 2000.
However, due to the current status of the investigation, we are unable at this
time to project a reasonable estimate of potential fines or penalties (or range
of potential fines or penalties) that could be assessed against the facility.
Accordingly, we cannot project the ultimate outcome of the investigation or its
potential impact on us. The imposition of a substantial fine or penalty against
the facility could have a material adverse effect on our business, results of
operations, financial condition and liquidity.
As previously reported, after the completion of the on-site investigation of our
Detroit facility, we began conducting routine tests of materials in waste
solidification vaults in preparation for the reopening of the facility. During
these tests, we discovered that certain waste which had been received by the
facility prior to its August 25, 1999 closing was contaminated with PCBs, that
this waste had contaminated other waste in several of the waste solidification
vaults and a liquid feed tank, and that some of the PCB contaminated waste may
have been inadvertently delivered to a Waste Management landfill for disposal.
Waste Management has asserted a claim against us for damages relating to the
alleged disposal of PCB contaminated materials at its landfill. Waste
Management has submitted to the Michigan Department of Environmental Quality
(the "MDEQ") and the EPA a workplan for the disposal of any such improperly
delivered PCB contaminated waste, and Waste Management and the Company are
currently awaiting a response from the MDEQ and the EPA. 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 have filed suit against National
Steel seeking to recover the costs incurred and losses suffered by our facility
as a result of its subsidiary's failure to disclose that its waste was
contaminated with PCBs, including any amounts ultimately determined to be owing
by us to Waste Management. We have also submitted claims under our pollution
liability and business interruption insurance policies for losses incurred as a
result of the temporary closing of the facility and the delivery
7
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of any PCB contaminated waste to Waste Management's landfill. We established a
$1.3 million reserve during 1999, which still is recorded as an accrued
liability at September 30, 2000, for costs to be incurred in the event that it
is ultimately determined that we are responsible for disposing of any improperly
delivered PCB contaminated materials, without offset for any anticipated
recovery from National Steel or our insurers.
During the fourth quarter of 1999, the EPA notified us that it had determined
that our Detroit facility was no longer eligible to receive waste generated as a
result of removal or remedial activities under the Comprehensive Environmental
Response, Compensation and Liability Act, as amended ("CERCLA"). This
notification further advised that, in order for the facility to regain its
eligibility to receive such CERCLA waste, the facility must demonstrate that it
can again safely handle such waste. In accordance with the terms of the notice,
we have asked the EPA to reconsider its determination and we are currently
awaiting a response to this request. Although we believe that the EPA will
ultimately determine that the facility, as re-opened, can safely handle CERCLA
waste, there can be no assurances thereof. The facility's failure to regain its
eligibility to receive CERCLA waste would not have a material adverse impact
upon the operations of the facility.
In June 1999, we were notified that the Louisiana Department of Environmental
Quality (the "LDEQ") was seeking to terminate the discharge permit held by our
Re-Claim facility in Shreveport, Louisiana, which permit allows the facility to
discharge processed wastewater into the waters of the State of Louisiana. In
its notice, the LDEQ alleged that the proposed termination was justified based
upon, among other things, the facility's failure to comply with the terms of its
permit, two releases (spills) that occurred at the facility and the facility's
acceptance and processing of hazardous materials not covered by the terms of its
permit. In January 2000, we entered into a tentative settlement agreement with
the LDEQ resolving the LDEQ's allegations. A settlement agreement was prepared
by the parties and signed by the Company, and the terms of the settlement
agreement have been published in accordance with Louisiana law. However, this
settlement agreement will not become final until approved by the Louisiana
Attorney General. This approval has been delayed pending the enactment of
legislation clarifying the LDEQ's authority to use Supplemental Environmental
Projects ("SEPs") as part of its enforcement proceedings. We anticipate that the
settlement agreement will become final during the fourth quarter of 2000. Under
the terms of the settlement agreement, we agreed to pay a civil assessment of
$525,000 to the LDEQ. In addition, we agreed to contribute $675,000 to certain
SEPs approved by the LDEQ to benefit the environment. In return, the LDEQ
agreed to take no further action on its notice of intent to terminate the permit
held by our facility. These charges, which total $1.2 million, remain accrued
as of September 30, 2000.
In the fourth quarter of 1999, the EPA notified us of certain alleged violations
of RCRA by our Re-Claim facility in Shreveport, Louisiana. Among other things,
the EPA alleged that the facility accepted waste from CERCLA sites that it was
not permitted to accept and improperly disposed of such waste. Although we
dispute the EPA's allegations, we are attempting to negotiate a resolution with
the EPA which may include a civil assessment, modifications to our waste
screening and waste processing procedures and/or additional capital expenditures
at the facility. We believe that the ultimate outcome of this proceeding will
not have a material adverse effect on our business, results of operations or
financial condition.
The EPA also notified us in 1999 that it believed that approximately 3.0 million
gallons of liquid waste received by our Re-Claim facility in Shreveport,
Louisiana and stored off-site contained hazardous constituents and, therefore,
the waste could not be processed by our facility. Although we believed that the
waste could be handled as nonhazardous waste in accordance with the terms of the
facility's permit, we have delivered a portion of the waste to a third party for
disposal and are discussing with the EPA whether the remaining waste may be
processed by our facility. During 1999, we established a $2.5 million reserve
for costs to be incurred in the event that it was ultimately determined that
this waste had to be delivered to a third party for processing and disposal. As
of September 30, 2000, approximately $800,000 of this reserve remains accrued.
During October and November of 1999, the California Department of Toxic
Substances Control (the "DTSC") inspected our processing facility in East Palo
Alto, California, and our transfer facility in Redwood City, California. On
November 29, 1999, the DTSC issued a summary of violations identifying various
alleged violations of California hazardous waste management laws and regulations
by the facilities. The DTSC has not initiated a formal enforcement action
seeking penalties against either facility. There can be no assurance, however,
that a formal enforcement action will not subsequently be brought against one or
both facilities. Although we dispute the alleged violations, we are attempting
to negotiate a resolution with the DTSC. We believe that the ultimate
resolution of these matters will not have a material adverse effect on our
business, results of operations, or financial condition.
8
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Prior to its acquisition by the Company in January 1999, Romic Environmental
Technologies Corporation had entered into an administrative consent order with
the EPA relating to the cleanup of soil and groundwater contamination at its
facility in East Palo Alto, California. A remedial investigation of the
facility has been completed by Romic and forwarded to the EPA. Romic is nearing
completion of a corrective measures study for submission to the EPA. The EPA
will review this study and approve a plan for final site remediation. Prior to
its acquisition by the Company, Romic had also been notified by the EPA and the
DTSC that it was a potentially responsible party under applicable environmental
legislation with respect to the Bay Area Drum Superfund Site in San Francisco,
California, the Lorentz Barrel and Drum Superfund Site in San Jose, California
and the Casmalia Resources Hazardous Waste Management Facility located near
Santa Barbara, California, each of which was a drum reconditioning or disposal
site previously used by Romic. With respect to each of these drum
reconditioning or disposal sites, Romic and a number of other potentially
responsible parties have entered into administrative consent orders and/or
agreements allocating each party's respective share of the cost of remediating
the sites. Romic's share under these consent orders and/or agreements is as
follows: Bay Area -- 6.872%; Lorentz -- 5.62% and Casmalia Resources -- 0.29%.
Based upon the information currently available, we have continued to maintain a
reserve to cover Romic's estimated costs to remediate the East Palo Alto
facility and the three drum reconditioning or disposal sites. As of September
30, 2000, the balance of this reserve was $4.2 million. Management believes that
this reserve is sufficient to satisfy Romic's obligations under the consent
orders and agreements; however, due to the complex, ongoing and evolving process
of investigating and remediating these sites, Romic's actual costs may exceed
the amount reserved.
In December 1999, we were notified by the EPA that D&H Holding Co., Inc., a
company that we acquired in the fourth quarter of 1998, is a potentially
responsible party under CERCLA with respect to the Lenz Oil Services Superfund
Site in DuPage County, Illinois. Based upon the information available to us at
this time, we do not believe that the ultimate outcome of this matter will have
a material adverse effect on our business, results of operations or financial
condition. We have made demand upon the former stockholders of D&H Holding for
indemnification against any costs that we may incur in connection with the
remediation of this site. At December 31, 1999, we established a $125,000
reserve to cover any such costs, without offset for any anticipated recovery
from the former stockholders of D&H Holding. As of September 30, 2000, $90,000
of this reserve remains accrued.
The Company's non-saleable beverage operations, which operate under the Parallel
Products name, are subject to regulation by the U. S. Bureau of Alcohol, Tobacco
and Firearms (the "ATF"). In addition to regulating the production,
distribution and sale of alcohol and alcohol containing products, the ATF is
also responsible for collecting the federal excise taxes ("FET") that must be
paid on distilled spirits, wine and beer. If alcoholic beverages on which the
FET have been paid are returned to bond at our Parallel Products' premises for
destruction, the party who has paid the FET on the destroyed product is entitled
to a refund. When our customers return distilled spirits, wine or beer from
commerce to one of our facilities for destruction, we generally file a claim
with the ATF on behalf of that customer for refund of the FET paid on that
product. The ATF periodically inspects the Parallel Products facilities both to
insure compliance with its regulations and to substantiate claims for FET
refunds. During the second quarter of 2000, the ATF conducted an inspection at
our Louisville, Kentucky facility. At the conclusion of the inspection of our
Louisville, Kentucky facility, the ATF preliminarily notified us that it intends
to deny certain refund claims totaling approximately $1.2 million due to what
the ATF alleges was inadequate, incomplete or unsubstantiated supporting
documentation. In addition, the ATF has proposed a civil penalty of $30,000
based on the alleged defects in our documentation. During the third quarter of
2000, the ATF began an inspection at our Parallel Products facility in Rancho
Cucamonga, California. It is our understanding that this investigation is
continuing, but as of the date of this report no announcement regarding the
investigation has been made by the ATF. We have worked closely with the ATF
throughout this inspection process and have implemented revised or upgraded
procedures at the facilities to assure that documentation for future refund
claims is in full compliance with the applicable requirements. We are also
engaging in discussions with the ATF concerning the potential denied claims and
believe that a satisfactory resolution can be reached. We have established a
reserve in the amount of $530,000, recorded as an accrued liability at September
30, 2000, for any amounts we would be required to pay to our customers in the
event any of their refund claims are ultimately denied by the ATF and to cover
the proposed civil penalty.
Litigation
During the third quarter of 1999, six purported securities class action lawsuits
were filed against the Company and certain of its officers and directors in the
United States District Court for the Southern District of Texas, Houston
Division. These lawsuits have been consolidated into a single action styled IN
RE: U S LIQUIDS SECURITIES LITIGATION, Case No. H-99-2785, and the plaintiffs
have filed a consolidated complaint. The consolidated complaint alleges
violations of Sections 11, 12(a)(2) and 15 of the Securities Act of 1933 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 the Company's common stock
during the period beginning on May 12, 1998 and ending on August 25, 1999,
including purchasers of common stock in the Company's March 1999 offering. The
plaintiffs generally allege that the defendants made false and misleading
statements and failed to disclose allegedly material information regarding the
operations of the Company's Detroit facility and the Company's financial
condition in the prospectus relating to the Company's March 1999 stock offering
and in certain other public filings and announcements
9
<PAGE>
made by the Company. The remedies sought by the plaintiffs include designation
of the action as a class action, unspecified damages, attorneys' and experts'
fees and costs, rescission to the extent any members of the class still hold
common stock, and such other relief as the court deems proper.
In addition, one stockholder of the Company has filed a lawsuit against certain
of the officers and directors of the Company in connection with the operation of
the Company's Detroit facility and the securities class action described above.
BENN CARMICIA V. U S LIQUIDS INC., ET AL., was filed in the United States
District Court for the Southern District of Texas, Houston Division, on
September 15, 1999 and was subsequently consolidated with the claims asserted in
the securities class action described above. The plaintiff purports to allege
derivative claims on behalf of the Company against the officers and directors
for alleged breaches of fiduciary duty resulting from their oversight of the
Company's affairs. The lawsuit names the Company as a nominal defendant and
seeks compensatory and punitive damages on behalf of the Company, interest,
equitable and/or injunctive relief, costs and such other relief as the court
deems proper.
The outcome of these consolidated actions and the costs of defending them cannot
be predicted with certainty at this time. However, we believe that the claims
asserted in the purported securities class action are without merit and we have
filed a motion to dismiss the consolidated complaint filed by the plaintiffs.
Moreover, we believe that the stockholder derivative action was not properly
brought and we have filed a motion to dismiss this action in order to allow the
Board of Directors to consider whether such litigation is in the best interest
of the Company and our stockholders. As of the date of this report, no ruling
has been made by the court on either of our motions to dismiss.
On April 21, 1998, we acquired substantially all of the assets of Parallel
Products, a California limited partnership ("Parallel"). In addition to the
consideration paid at closing, we agreed that, if the earnings before interest,
taxes, depreciation and amortization ("EBITDA") of the businesses acquired from
Parallel exceeded a specified amount in any four consecutive quarters during the
three year period after the closing of the acquisition, we would pay to Parallel
an additional $2.1 million in cash and an additional $2.1 million in common
stock. During the third quarter of 2000, Parallel filed suit against the Company
alleging that the acquired businesses achieved the specified EBITDA amount for
the four quarters ended December 31, 1999 and for the four quarters ended March
31, 2000. Parallel is seeking a declaratory judgment that the EBITDA amount
specified in the acquisition agreement has been achieved and that it is entitled
to receive the contingent cash and stock payments described above. Parallel
also alleges that it is entitled to recover compensatory damages of $4.2
million, punitive damages, interest, attorneys' fees and costs, and such other
relief as the court deems proper. We have denied that we have any liability to
Parallel and intend to vigorously defend against these claims.
On August 30, 2000, the former owners of Randee Corporation, a corporation that
we acquired in June 1999, brought an action against the Company in the District
Court of Angelina County, Texas. The plaintiffs, who received cash and Company
common stock in consideration for their stock in Randee Corporation, allege that
we made false and misleading statements and failed to disclose allegedly
material information regarding the Company in connection with the acquisition.
The remedies sought by the plaintiffs include rescission of the acquisition,
unspecified compensatory and punitive damages, and interest. We have denied the
allegations made by the plaintiffs and intend to vigorously defend ourself in
this action.
Our American WasteWater facility in Houston, Texas is the largest of two
facilities located in the Houston area that process and dispose of grease trap
waste collected by independent waste haulers. In recent months, a potential
competitor has been attempting to obtain a permit to build and operate another
grease trap waste disposal facility in Houston that would also service
independent waste haulers. On October 23, 2000, the Company and its subsidiary,
U S Liquids of Texas, Inc., were sued in the United States District Court for
the Southern District of Texas, Houston Division, in an action entitled
DOWNSTREAM ENVIRONMENTAL, L.L.C. AND DAN NOYES V. U S LIQUIDS INC., ET AL. In
this action, the plaintiffs allege, among other things, that (i) our employees
have made false statements about the plaintiffs in an attempt to generate
opposition to their permit application, and (ii) our facility restrains trade in
the grease trap waste disposal business by threatening to refuse access to the
facility to certain independent waste haulers or to impose onerous requirements
on such haulers for use of the facility; all for the purpose of creating or
maintaining a monopoly in the grease trap waste disposal business in Houston,
Texas. The plaintiffs are seeking, among other things, preliminary and
permanent injunctive relief, unspecified compensatory damages, punitive and
treble damages, interest, attorneys' fees and costs, and such other relief as
the court deems proper. We believe that the claims asserted by the plaintiffs
are without merit and we intend to vigorously defend ourself in this action.
We are involved in various other legal actions arising in the ordinary course of
business. Management does not believe that the outcome of such legal actions
will have a material adverse effect on the Company's consolidated financial
position or results of operations.
10
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10. CREDIT FACILITIES
We have a revolving credit facility with a group of banks under which we may
borrow to fund working capital requirements and acquisitions. 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. On August
11, 2000, the terms of the revolving credit facility were amended to, among
other things, reduce the amount of the credit facility from $225 million to $150
million, limit the total amount of debt outstanding under the credit facility,
increase certain interest rates payable under the credit facility and modify
certain of our financial covenants. As a result of the reduction in the amount
of the credit facility, at June 30, 2000, we expensed approximately $428,000 of
capitalized financing costs. Currently, the aggregate principal amount of all
debt outstanding under the credit facility may not exceed $125 million. The
August 11, 2000 amendment to our revolving credit facility included a provision
that would have increased this cap from $125 million to $135 million shortly
after the commencement of the fourth quarter; however, we failed to satisfy the
conditions required for this increase. Consequently, the amount of the credit
facility will be increased to $150 million only if (i) our consolidated EBITDA
for the third and the fourth quarters of 2000 (excluding any portion thereof
attributable to acquisitions completed after December 31, 1999) equals or
exceeds the projected EBITDA set forth in the Company's revised budget, and (ii)
we are in compliance with all financial covenants as of December 31, 2000. Under
the terms of the amended credit facility, the banks' consent is required to
consummate any future acquisition if the aggregate cash consideration to be paid
by the Company (including any debt assumed or issued) in connection with the
acquisition is greater than $1.0 million.
The debt outstanding under the revolving credit facility may be accelerated at
the option of the lenders if, 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,
2000, we had borrowed approximately $101.0 million under the credit facility.
Advances under the credit facility bear interest, at our option, at the prime
rate or London Interbank Offered Rate, in each case plus a margin which is
calculated quarterly based upon our ratio of indebtedness to cash flow. As of
September 30, 2000, amounts outstanding under the credit facility were accruing
interest at approximately 10.6% per year.
During 1999, we had a $10.0 million credit facility with BankBoston, N.A. under
which we were able to borrow funds to purchase equipment. The commitment for
this facility expired on December 31, 1999, at which time we had borrowed
approximately $2.5 million. This amount is to be repaid in 60 monthly
installments of principal and interest. At September 30, 2000, approximately
$2.2 million remains outstanding and is accruing interest at approximately 8.2%
per year.
11. SEGMENT INFORMATION
Prior to June 30, 1999, our subsidiaries were organized into two divisions - the
Wastewater Division and the Oilfield Waste Division. However, as the result of
our acquisition of Romic Environmental Technologies Corporation in January 1999
and in accordance with SFAS 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 currently includes the operations of Romic
Environmental Technologies Corporation, USL City Environmental, Inc., USL City
Environmental Services of Florida, Inc., and Waste Research and Recovery, Inc.
From July 1, 1999 to September 30, 1999, the operations of Re-Claim
Environmental of Louisiana, LLC were included as part of the Industrial
Wastewater Division. Effective as of October 1, 1999, Re-Claim Environmental of
Louisiana, LLC was included as part of the Commercial Wastewater Division.
Previously reported segment information has been restated to reflect the move of
this subsidiary to the Commercial 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 and recovers saleable by-products from certain
waste streams. The Oilfield Waste Division processes and disposes of waste
generated in oil and gas exploration and production.
The accounting policies of the segments are the same as those 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, 1999, 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.
11
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The following is a summary of key business segment information:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------------------ -------------------------------------
1999 2000 1999 2000
------------ ------------ -------------- -------------
(IN THOUSANDS)
(UNAUDITED)
Revenue --
<S> <C> <C> <C> <C>
Commercial Wastewater.............. $40,880 $43,332 $110,615 $128,481
Industrial Wastewater.............. 13,873 14,793 48,153 41,150
Oilfield Waste..................... 4,249 4,897 14,231 16,042
------- ------- -------- --------
Total........................... $59,002 $63,022 $172,999 $185,673
======= ======= ======== ========
Income (loss) from operations --
Commercial Wastewater.............. $ 818 $ 1,754 $ 5,609 $ 2,772
Industrial Wastewater.............. (8,181) 655 47 930
Oilfield Waste..................... 2,105 1,715 7,494 7,444
------- ------- -------- --------
Total.......................... $(5,258) $ 4,124 $ 13,150 $ 11,146
======= ======= ======== ========
Depreciation and amortization expense --
Commercial Wastewater.............. $ 2,603 $ 2,953 $ 6,678 $ 8,534
Industrial Wastewater.............. 1,001 1,130 2,926 3,395
Oilfield Waste..................... 674 574 1,995 1,754
Corporate.......................... 141 205 372 589
------- ------- -------- --------
Total.......................... $ 4,419 $ 4,862 $ 11,971 $ 14,272
======= ======= ======== ========
Capital expenditures --
Commercial Wastewater.............. $ 3,892 $ 3,796 $ 9,820 $ 9,797
Industrial Wastewater.............. 636 1,069 2,111 2,799
Oilfield Waste..................... 110 1,033 198 1,728
Corporate.......................... 574 369 1,011 1,061
------- ------- -------- --------
Total.......................... $ 5,212 $ 6,267 $ 13,140 $ 15,385
======= ======= ======== ========
</TABLE>
DECEMBER 31, SEPTEMBER 30,
1999 2000
----------------- ------------------
(IN THOUSANDS)
(UNAUDITED)
Identifiable assets -
Commercial Wastewater... $ 217,021 $ 219,032
Industrial Wastewater... 105,846 114,276
Oilfield Waste.......... 36,163 36,700
Corporate............... 10,053 5,862
---------- ----------
Total................ $ 369,083 $ 375,870
========== ==========
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
THE FOLLOWING DISCUSSION SHOULD BE READ IN CONJUNCTION WITH OUR UNAUDITED
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS AND THE RELATED NOTES THERETO
INCLUDED ELSEWHERE IN THIS REPORT.
OVERVIEW
Prior to June 30, 1999, our subsidiaries were organized into two divisions --
the Wastewater Division and the Oilfield Waste Division. However, as the result
of our acquisition of Romic Environmental Technologies Corporation in January
1999 and in accordance with SFAS 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 currently includes the operations of Romic
Environmental Technologies Corporation, USL City Environmental, Inc., USL City
Environmental Services of Florida, Inc., and Waste Research and Recovery, Inc.
From July 1, 1999 to September 30, 1999, the operations of Re-Claim
Environmental of Louisiana, LLC were included as part of the Industrial
Wastewater Division. Effective as of October 1, 1999, Re-Claim Environmental of
Louisiana, LLC was included as part of the Commercial Wastewater Division.
Previously reported segment information has been restated to reflect the move of
this subsidiary to the Commercial 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 and recovers saleable by-products from certain
waste streams. The Oilfield Waste Division processes and disposes of waste
generated in oil and gas exploration and production.
The Commercial Wastewater Division generated $43.3 million, or 68.7%, of our
revenues for the quarter ended September 30, 2000. This Division derives
revenues from two principal sources: fees received for collecting, processing
and disposing of nonhazardous liquid waste (such as industrial wastewater,
grease and grit trap waste, bulk liquids and dated beverages) and revenue
obtained from the sale of by-products, including fats, oils, feed proteins,
industrial and fuel grade ethanol, solvents, aluminum, glass, plastic and
cardboard, recovered from certain waste streams. Some of our by-product sales
involve the brokering of industrial and fuel grade ethanol produced by third
parties. Collection and processing fees charged to customers vary per gallon by
waste stream according to the constituents of the waste, expenses associated
with processing the waste and competitive factors. By-products are commodities
and their prices fluctuate based on market conditions.
The Industrial Wastewater Division generated $14.8 million, or 23.5%, of our
revenues for the quarter ended September 30, 2000. This Division derives
revenues from fees charged to customers for collecting, processing and disposing
of hazardous and nonhazardous liquid waste such as household hazardous wastes,
plating solutions, acids, flammable and reactive wastes, and industrial
wastewater. Certain sludges and solid hazardous wastes are also processed. The
Industrial Wastewater Division also generates revenues from the sale of by-
products recovered from certain waste streams, including industrial chemicals
and recycled antifreeze products. The fees charged for processing and disposing
of hazardous waste vary significantly depending upon the constituents of the
waste. Collection and processing fees charged with respect to nonhazardous
liquid waste vary per gallon by waste stream according to the constituents of
the waste, expenses associated with processing the waste and competitive
factors.
The Oilfield Waste Division generated $4.9 million, or 7.8%, of our revenues for
the quarter ended September 30, 2000. This Division derives revenues from fees
charged to customers for processing and disposing of oil and gas exploration and
production waste, and cleaning tanks, barges and other vessels and containers
used in the storage and transportation of oilfield waste. In order to match
revenues with their related costs, when waste is unloaded at one of our sites,
we recognize the related revenue and record a reserve for the estimated amount
of expenses to be incurred to process and dispose of the waste. As processing
occurs, generally over nine to twelve months, the reserve is depleted as
expenses are incurred. Our operating margins in the Oilfield Waste Division are
typically higher than in the Commercial Wastewater Division and in the
Industrial Wastewater Division.
Operating expenses include compensation and overhead related to operations
workers, supplies and other raw materials, transportation charges, disposal fees
paid to third parties, real estate lease payments and energy and insurance costs
applicable to waste processing and disposal operations.
Selling, general and administrative expenses include management, clerical and
administrative compensation and overhead relating to our corporate offices and
each of our operating sites, as well as professional services and costs.
13
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Depreciation and amortization expenses relate to our landfarms and other
depreciable or amortizable assets. These assets are expensed over periods
ranging from three to 40 years. Amortization expenses relating to acquisitions
have increased over time as a result of amortization of goodwill recorded in
connection with our acquisitions.
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 uncollectible
accounts receivable write-offs, 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, 1999 AND 2000
REVENUES. Revenues for the quarter ended September 30, 2000 increased $4.0
million, or 6.8%, from $59.0 million for the quarter ended September 30, 1999 to
$63.0 million for the quarter ended September 30, 2000. The Commercial
Wastewater Division contributed $40.9 million, or 69.3%, of third quarter 1999
revenues and $43.3 million, or 68.7%, of third quarter 2000 revenues.
Collection and processing fees generated $33.5 million, or 81.9%, and $31.6
million, or 73.0%, of the Commercial Wastewater Division's revenues for the
third quarters of 1999 and 2000, respectively. This decrease was due in large
part to decreased pricing and our decision not to continue accepting certain low
margin business. In addition, the 1999 period benefitted from a major project
involving the processing and disposal of beverages recalled by one of our
customers. By-product sales generated the remaining $7.4 million, or 18.1%, and
$11.7 million, or 27.0%, of the Commercial Wastewater Division's revenues for
the third quarters of 1999 and 2000, respectively. By-product sales increased
due to significantly higher brokered ethanol sales.
The Industrial Wastewater Division contributed $13.9 million, or 23.6%, of third
quarter 1999 revenues and $14.8 million, or 23.5%, of third quarter 2000
revenues. The Industrial Wastewater Division's revenues increased $920,000, or
6.6%, due to increased volumes and increased pricing at our Romic facilities and
to acquisitions completed during the third quarter of 1999. This increase was
partially offset by a slower than expected ramp-up of our Detroit facility.
Collection and processing fees generated $12.7 million, or 91.4%, and $13.6
million, or 91.9%, of the Industrial Wastewater Division's revenues for the
third quarters of 1999 and 2000, respectively. By-product sales generated the
remaining $1.2 million, or 8.6%, and $1.2 million, or 8.1%, of the Industrial
Wastewater Division's revenues for the third quarters of 1999 and 2000,
respectively.
The Oilfield Waste Division contributed $4.2 million, or 7.1%, of third quarter
1999 revenues and $4.9 million, or 7.8%, of third quarter 2000 revenues. The
Oilfield Waste Division's revenues increased approximately $648,000, or 15.3%,
due primarily to increased on-shore drilling activity.
OPERATING EXPENSES. Operating expenses increased $5.2 million, or 12.1%, from
$43.1 million for the quarter ended September 30, 1999 to $48.3 million for the
quarter ended September 30, 2000. As a percentage of revenues, operating
expenses increased from 73.1% in the third quarter of 1999 to 76.6% in the third
quarter of 2000. This increase was due primarily to a slower than expected ramp-
up of our Detroit facility and lower than expected performance of the non-
saleable beverage sector of our business related to certain event projects. In
addition, a larger than expected portion of the non-saleable beverage business
was attributable to the brokerage of ethanol, which is a very low margin
producer.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expenses increased
approximately $443,000, or 10.0%, from $4.4 million for the quarter ended
September 30, 1999 to $4.9 million for the quarter ended September 30, 2000. As
a percentage of revenues, depreciation and amortization expenses increased from
7.5% in the third quarter of 1999 to 7.7% in the third quarter of 2000.
14
<PAGE>
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses decreased approximately $769,000, or 11.8%, from $6.5
million for the quarter ended September 30, 1999 to $5.7 million for the quarter
ended September 30, 2000. As a percentage of revenues, selling, general and
administrative expenses were 11.0% for the third quarter of 1999 and 9.1% for
the third quarter of 2000. This improvement resulted primarily from a decrease
in bad debt expense within our Texas locations due to improved collection
procedures implemented earlier this year.
INTEREST AND OTHER EXPENSES. Net interest and other expenses increased
approximately $1.0 million, or 63.4%, from $1.6 million for the quarter ended
September 30, 1999 to $2.6 million for the quarter ended September 30, 2000.
This increase resulted from higher interest rates and interest expense incurred
on increased borrowings used to fund our working capital needs.
INCOME TAXES. The provision for income taxes increased $2.8 million, or 138.8%,
from a ($2.0) million benefit for the quarter ended September 30, 1999 to an
approximate $773,000 provision for the quarter ended September 30, 2000. The
effective tax rate for the period ended September 30, 2000 was 49.5% compared to
a (29.2%) benefit rate for the period ended September 30, 1999. The tax rate
difference is due to the impact of nondeductible expenses on taxable income.
Our effective tax rates are estimates of our expected annual effective federal
and state income tax rates.
NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 2000
REVENUES. Revenues for the nine month period ended September 30, 2000 increased
$12.7 million, or 7.3%, from $173.0 million for the nine month period ended
September 30, 1999 to $185.7 million for the nine month period ended September
30, 2000. The Commercial Wastewater Division contributed $110.6 million, or
63.9%, of revenues for the nine months ended September 30, 1999 and $128.5
million, or 69.2%, of revenues for the nine months ended September 30, 2000.
Collection and processing fees generated $88.5 million, or 80.0%, and $98.6
million, or 76.7%, of the Commercial Wastewater Division's revenues for the nine
month periods ended September 30, 1999 and 2000, respectively. This increase was
due primarily to additional revenues generated from a major oil spill project.
By-product sales generated the remaining $22.1 million, or 20.0%, and $29.9
million, or 23.3%, of the Commercial Wastewater Division's revenues for the 1999
and 2000 periods, respectively. By-product sales increased due to significantly
higher brokered ethanol sales.
The Industrial Wastewater Division contributed $48.2 million, or 27.8%, of
revenues for the nine months ended September 30, 1999 and $41.2 million, or
22.2%, of revenues for the nine months ended September 30, 2000. The Industrial
Wastewater Division's revenues decreased $7.0 million, or 14.5%, due primarily
to the temporary closing and slower than expected ramp-up of our Detroit
facility. Collection and processing fees generated $44.3 million, or 91.9%, and
$37.5 million, or 91.0%, of the Industrial Wastewater Division's revenues for
the nine month periods ended September 30, 1999 and 2000, respectively. By-
product sales generated the remaining $3.9 million, or 8.1%, and $3.7 million,
or 9.0%, of the Industrial Wastewater Division's revenues for the nine month
periods ended September 30, 1999 and 2000, respectively.
The Oilfield Waste Division contributed $14.2 million, or 8.2%, of revenues for
the nine months ended September 30, 1999 and $16.0 million, or 8.6%, of revenues
for the nine months ended September 30, 2000. The Oilfield Waste Division's
revenues increased approximately $1.8 million, or 12.7%, due primarily to
increased on-shore drilling activity.
OPERATING EXPENSES. Operating expenses increased $20.9 million, or 17.4%, from
$119.9 million for the nine months ended September 30, 1999 to $140.8 million
for the nine months ended September 30, 2000. As a percentage of revenues,
operating expenses increased from 69.3% for the nine month period ended
September 30, 1999 to 75.8% for the nine month period ended September 30, 2000.
This increase was due primarily to a slower than expected ramp-up of our Detroit
facility and lower than expected performance of the non-saleable beverage
sector of our business related to certain event projects. In addition, a larger
than expected portion of the non-saleable beverage business was attributable to
the brokerage of ethanol, which is a very low margin producer. This increase
also reflects 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
$2.3 million or 19.2%, from $12.0 million for the nine months ended September
30, 1999 to $14.3 million for the nine months ended September 30, 2000. As a
percentage of revenues, depreciation and amortization expenses increased from
6.9% for the nine month period ended September 30, 1999 to 7.7% for the nine
month period ended September 30, 2000. This increase was attributable primarily
to the decrease in revenues without a proportionate decrease in depreciation and
amortization expenses for the Detroit and Re-Claim facilities and the
amortization of goodwill for acquisitions completed during 1999.
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SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased $1.7 million, or 9.9%, from $17.7 million for
the nine months ended September 30, 1999 to $19.5 million for the nine months
ended September 30, 2000. As a percentage of revenues, selling, general and
administrative expenses were 10.2% for the nine month period ended September 30,
1999 and 10.5% for the nine month period ended September 30, 2000. This increase
resulted primarily from increased costs in the Company's environmental
compliance department, expensing rather than capitalizing business development
costs because no material acquisitions were completed during the current period,
and increased legal fees.
INTEREST AND OTHER EXPENSES. Net interest and other expenses increased
approximately $3.2 million, or 71.9%, from $4.4 million for the nine month
period ended September 30, 1999 to $7.6 million for the nine month period ended
September 30, 2000. This increase resulted from higher interest rates and
interest expense incurred on increased borrowings used to fund our working
capital needs.
INCOME TAXES. The provision for income taxes decreased $2.7 million, or 60.6%,
from $4.5 million for the nine month period ended September 30, 1999 to
approximately $1.8 million for the nine month period ended September 30, 2000 as
a result of decreased taxable income. The effective tax rate for the nine
months ended September 30, 1999 was 51.1% compared to 49.5% for the nine months
ended September 30, 2000. The tax rate difference is due to the impact of
nondeductible expenses on taxable income. Our effective tax rates are estimates
of our expected annual effective federal and state income tax rates.
LIQUIDITY AND CAPITAL RESOURCES
We had net working capital of $13.7 million at September 30, 2000, compared to
net working capital of $10.2 million at December 31, 1999. The increase in
working capital was due primarily to payments made against the special charges
accrual.
Our capital requirements for continuing operations consist of our general
working capital needs, scheduled principal payments on our debt obligations and
capital leases, and planned capital expenditures. At September 30, 2000,
approximately $1.8 million of principal payments on debt obligations were
payable during the next twelve months. Capital expenditures for our continuing
operations during the three months ended September 30, 2000 were $6.3 million.
The majority of the capital expenditures were for plant expansions and equipment
and vehicle upgrades. Capital expenditures for our continuing operations for
the last quarter of 2000 are estimated at approximately $2.0 million.
Approximately $1.1 million of this amount is scheduled to be invested in the
Commercial Wastewater Division for vehicles and plant expansions. Approximately
$500,000 is scheduled to be invested in the Industrial Wastewater Division for
plant improvements and expansion and equipment. Approximately $100,000 is
budgeted for equipment and injection wells for the Oilfield Waste Division. The
remaining $300,000 is to be used for software and computer upgrades at our
corporate headquarters.
We have a revolving credit facility with a group of banks under which we may
borrow to fund working capital requirements and acquisitions. 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. On August
11, 2000, the terms of the revolving credit facility were amended to, among
other things, reduce the amount of the credit facility from $225 million to $150
million, limit the total amount of debt outstanding under the credit facility,
increase certain interest rates payable under the credit facility and modify
certain of our financial covenants. As a result of the reduction in the amount
of the credit facility, at June 30, 2000, we expensed approximately $428,000 of
capitalized financing costs. Currently, the aggregate principal amount of all
debt outstanding under the credit facility may not exceed $125 million. The
August 11, 2000 amendment to our revolving credit facility included a provision
that would have increased this cap from $125 million to $135 million shortly
after the commencement of the fourth quarter; however, we failed to satisfy the
conditions required for this increase. Consequently, the amount of the credit
facility will be increased to $150 million only if (i) our consolidated EBITDA
for the third and the fourth quarters of 2000 (excluding any portion thereof
attributable to acquisitions completed after December 31, 1999) equals or
exceeds the projected EBITDA set forth in the Company's revised budget, and (ii)
we are in compliance with all financial covenants as of December 31, 2000. Under
the terms of the amended credit facility, the banks' consent is required to
consummate any future acquisition if the aggregate cash consideration to be paid
by the Company (including any debt assumed or issued) in connection with the
acquisition is greater than $1.0 million.
The debt outstanding under the revolving credit facility may be accelerated at
the option of the lenders if, 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,
2000, we had borrowed approximately $101.0 million under the credit facility.
As of the date of this report, we had borrowed approximately $100.5 million
under the credit facility.
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Our capital resources consist of cash reserves, cash generated from operations
and funds available under our revolving credit facility. We expect that these
resources will be sufficient to fund continuing operations for at least the next
twelve months; however, there can be no assurance that additional capital will
not be required sooner for our ongoing operations.
In addition to capital required for our ongoing operations, we will require
additional capital to pursue our long-term acquisition program. As described
above, the terms of our revolving credit facility currently impose significant
limitations on our ability to use borrowed funds to pay for acquisitions. In
addition, the current price level of our common stock makes raising additional
equity capital for acquisitions or debt repayment unattractive. Consequently,
we anticipate consummating very few, if any, acquisitions during the remainder
of 2000 and the first quarter of 2001.
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.
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, 1999.
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 revolving credit facility. As of
September 30, 2000, $101.0 million and $2.2 million had been borrowed under the
revolving credit facility and the equipment credit facility, respectively. As of
September 30, 2000, amounts outstanding under the revolving credit facility were
accruing interest at approximately 10.6% per year and amounts outstanding under
the equipment credit facility were accruing interest at approximately 8.2% per
year. A ten percent increase in short-term interest rates on the variable rate
debts outstanding at the end of the third quarter would approximate 67 basis
points. Such an increase in interest rates would increase our quarterly
interest expense by approximately $171,000 assuming the amount of debt
outstanding remains constant.
The above sensitivity analysis for interest rate risk excludes accounts
receivable, accounts payable and accrued liabilities because of the short-term
maturity of such instruments. The analysis does not consider the effect this
movement may have on other variables including changes in revenue volumes that
could be indirectly attributed to changes in interest rates. The actions that
management would take in response to such a change are also not considered. If
it were possible to quantify this impact, the results could well be different
than the sensitivity effects shown above.
PART II-OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In May 1998, we acquired from Waste Management, Inc. substantially all of the
assets of City Environmental, Inc. including, without limitation, a hazardous
and nonhazardous waste treatment facility located in Detroit, Michigan. This
facility has never been granted a final Part B permit under RCRA, but has
operated under interim status, as allowed by RCRA. On August 25, 1999, the EPA
and the FBI executed a search warrant at this facility seeking electronic data,
files and other documentation relating to the facility's receipt, processing and
disposal of hazardous waste. As a result of the execution of the search
warrant, the facility temporarily ceased operations. According to the affidavit
attached to the search warrant, after receiving a telephone call from an
employee at the facility in May 1999, the EPA and the FBI began a joint
investigation of the facility. The investigation centers around allegations
that (i) the facility knowingly discharged into the Detroit sewer system
untreated hazardous liquid waste in violation of city ordinances, the facility's
permit and the Clean Water
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Act, and (ii) without proper manifesting, the facility knowingly transported and
disposed of hazardous waste at an unpermitted treatment facility in violation of
RCRA. According to the affidavit, the facility has been knowingly violating the
Clean Water Act and RCRA since 1997, which was before we acquired the facility.
The on-site investigation of our facility by the EPA and the FBI was completed
in August 1999. It is our understanding that the investigation is continuing,
but as of the date of this report no announcement regarding the investigation
has been made by the EPA or the FBI. All costs, except potential fines or
penalties, incurred or expected to be incurred in connection with the
investigation of our Detroit facility have been reflected in our consolidated
financial statements at September 30, 2000. However, due to the current status
of the investigation, we are unable at this time to project a reasonable
estimate of potential fines or penalties (or range of potential fines or
penalties) that could be assessed against the facility. Accordingly, we cannot
project the ultimate outcome of the investigation or its potential impact on us.
The imposition of a substantial fine or penalty against the facility could have
a material adverse effect on our business, results of operations, financial
condition and liquidity.
As previously reported, after the completion of the on-site investigation of our
Detroit facility, we began conducting routine tests of materials in waste
solidification vaults in preparation for the reopening of the facility. During
these tests, we discovered that certain waste which had been received by the
facility prior to its August 25, 1999 closing was contaminated with PCBs, that
this waste had contaminated other waste in several of the waste solidification
vaults and a liquid feed tank, and that some of the PCB contaminated waste may
have been inadvertently delivered to a Waste Management landfill for disposal.
Waste Management has asserted a claim against us for damages relating to the
alleged disposal of PCB contaminated materials at its landfill. Waste
Management has submitted to the MDEQ and the EPA a workplan for the disposal of
any such improperly delivered PCB contaminated waste, and Waste Management and
the Company are currently awaiting a response from the MDEQ and the EPA. 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 have filed suit
against National Steel seeking to recover the costs incurred and losses suffered
by our facility as a result of its subsidiary's failure to disclose that its
waste was contaminated with PCBs, including any amounts ultimately determined to
be owing by us to Waste Management. We have also submitted claims under our
pollution liability and business interruption insurance policies for losses
incurred as a result of the temporary closing of the facility and the delivery
of any PCB contaminated waste to Waste Management's landfill. We established a
$1.3 million reserve during 1999, which still is recorded as an accrued
liability at September 30, 2000, for costs to be incurred in the event that it
is ultimately determined that we are responsible for disposing of any improperly
delivered PCB contaminated materials, without offset for any anticipated
recovery from National Steel or our insurers.
During the fourth quarter of 1999, the EPA notified us that it had determined
that our Detroit facility was no longer eligible to receive waste generated as a
result of removal or remedial activities under CERCLA. This notification
further advised that, in order for the facility to regain its eligibility to
receive such CERCLA waste, the facility must demonstrate that it can again
safely handle such waste. In accordance with the terms of the notice, we have
asked the EPA to reconsider its determination and we are currently awaiting a
response to this request. Although we believe that the EPA will ultimately
determine that the facility, as re-opened, can safely handle CERCLA waste, there
can be no assurances thereof. The facility's failure to regain its eligibility
to receive CERCLA waste would not have a material adverse impact upon the
operations of the facility.
In June 1999, we were notified that the LDEQ was seeking to terminate the
discharge permit held by our Re-Claim facility in Shreveport, Louisiana, which
permit allows the facility to discharge processed wastewater into the waters of
the State of Louisiana. In its notice, the LDEQ alleged that the proposed
termination was justified based upon, among other things, the facility's failure
to comply with the terms of its permit, two releases (spills) that occurred at
the facility and the facility's acceptance and processing of hazardous materials
not covered by the terms of its permit. In January 2000, we entered into a
tentative settlement agreement with the LDEQ resolving the LDEQ's allegations.
A settlement agreement was prepared by the parties and signed by the Company,
and the terms of the settlement agreement have been published in accordance with
Louisiana law. However, this settlement agreement will not become final until
approved by the Louisiana Attorney General. This approval has been delayed
pending the enactment of legislation clarifying the LDEQ's authority to use SEPs
as part of its enforcement proceedings. We anticipate that the settlement
agreement will become final during the fourth quarter of 2000. Under the terms
of the settlement agreement, we agreed to pay a civil assessment of $525,000 to
the LDEQ. In addition, we agreed to contribute $675,000 to certain SEPs
approved by the LDEQ to benefit the environment. In return, the LDEQ agreed to
take no further action on its notice of intent to terminate the permit held by
our facility. These charges, which total $1.2 million, remain accrued as of
September 30, 2000.
In the fourth quarter of 1999, the EPA notified us of certain alleged violations
of RCRA by our Re-Claim facility in Shreveport, Louisiana. Among other things,
the EPA alleged that the facility accepted waste from CERCLA sites that it was
not permitted to accept and improperly disposed of such waste. Although we
dispute the EPA's allegations, we are attempting to negotiate a resolution with
the EPA which may
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include a civil assessment, modifications to our waste screening and waste
processing procedures and/or additional capital expenditures at the facility. We
believe that the ultimate outcome of this proceeding will not have a material
adverse effect on our business, results of operations or financial condition.
The EPA also notified us in 1999 that it believed that approximately 3.0 million
gallons of liquid waste received by our Re-Claim facility in Shreveport,
Louisiana and stored off-site contained hazardous constituents and, therefore,
the waste could not be processed by our facility. Although we believed that the
waste could be handled as nonhazardous waste in accordance with the terms of the
facility's permit, we have delivered a portion of the waste to a third party for
disposal and are discussing with the EPA whether the remaining waste may be
processed by our facility. During 1999, we established a $2.5 million reserve
for costs to be incurred in the event that it was ultimately determined that
this waste had to be delivered to a third party for processing and disposal. As
of September 30, 2000, approximately $800,000 of this reserve remains accrued.
During October and November of 1999, the DTSC inspected our processing facility
in East Palo Alto, California, and our transfer facility in Redwood City,
California. On November 29, 1999, the DTSC issued a summary of violations
identifying various alleged violations of California hazardous waste management
laws and regulations by the facilities. The DTSC has not initiated a formal
enforcement action seeking penalties against either facility. There can be no
assurance, however, that a formal enforcement action will not subsequently be
brought against one or both facilities. Although we dispute the alleged
violations, we are attempting to negotiate a resolution with the DTSC. We
believe that the ultimate resolution of these matters will not have a material
adverse effect on our business, results of operations, or financial condition.
In December 1999, we were notified by the EPA that D&H Holding Co., Inc., a
company that we acquired in the fourth quarter of 1998, is a potentially
responsible party under CERCLA with respect to the Lenz Oil Services Superfund
Site in DuPage County, Illinois. Based upon the information available to us at
this time, we do not believe that the ultimate outcome of this matter will have
a material adverse effect on our business, results of operations or financial
condition. We have made demand upon the former stockholders of D&H Holding for
indemnification against any costs that we may incur in connection with the
remediation of this site. At December 31, 1999, we established a $125,000
reserve to cover any such costs, without offset for any anticipated recovery
from the former stockholders of D&H Holding. As of September 30, 2000, $90,000
of this reserve remains accrued.
The Company's non-saleable beverage operations, which operate under the Parallel
Products name, are subject to regulation by the ATF. In addition to regulating
the production, distribution and sale of alcohol and alcohol containing
products, the ATF is also responsible for collecting the FET that must be paid
on distilled spirits, wine and beer. If alcoholic beverages on which the FET
have been paid are returned to bond at our Parallel Products' premises for
destruction, the party who has paid the FET on the destroyed product is entitled
to a refund. When our customers return distilled spirits, wine or beer from
commerce to one of our facilities for destruction, we generally file a claim
with the ATF on behalf of that customer for refund of the FET paid on that
product. The ATF periodically inspects the Parallel Products facilities both to
insure compliance with its regulations and to substantiate claims for FET
refunds. During the second quarter of 2000, the ATF conducted an inspection at
our Louisville, Kentucky facility. At the conclusion of the inspection of our
Louisville, Kentucky facility, the ATF preliminarily notified us that it intends
to deny certain refund claims totaling approximately $1.2 million due to what
the ATF alleges was inadequate, incomplete or unsubstantiated supporting
documentation. In addition, the ATF has proposed a civil penalty of $30,000
based on the alleged defects in our documentation. During the third quarter of
2000, the ATF began an inspection at our Parallel Products facility in Rancho
Cucamonga, California. It is our understanding that this investigation is
continuing, but as of the date of this report no announcement regarding the
investigation has been made by the ATF. We have worked closely with the ATF
throughout this inspection process and have implemented revised or upgraded
procedures at the facilities to assure that documentation for future refund
claims is in full compliance with the applicable requirements. We are also
engaging in discussions with the ATF concerning the potential denied claims and
believe that a satisfactory resolution can be reached. We have established a
reserve in the amount of $530,000, recorded as an accrued liability at September
30, 2000, for any amounts we would be required to pay to our customers in the
event any of their refund claims are ultimately denied by the ATF and to cover
the proposed civil penalty.
During the third quarter of 1999, six purported securities class action lawsuits
were filed against the Company and certain of its officers and directors in the
United States District Court for the Southern District of Texas, Houston
Division. These lawsuits have been consolidated into a single action styled IN
RE: U S LIQUIDS SECURITIES LITIGATION, Case No. H-99-2785, and the plaintiffs
have filed a consolidated complaint. The consolidated complaint alleges
violations of Sections 11, 12(a)(2) and 15 of the Securities Act of 1933 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 the Company's common stock
during the period beginning on May 12, 1998 and ending on August 25, 1999,
including purchasers of common
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stock in the Company's March 1999 offering. The plaintiffs generally allege that
the defendants made false and misleading statements and failed to disclose
allegedly material information regarding the operations of the Company's Detroit
facility and the Company's financial condition in the prospectus relating to the
Company's March 1999 stock offering and in certain other public filings and
announcements made by the Company. The remedies sought by the plaintiffs include
designation of the action as a class action, unspecified damages, attorneys' and
experts' fees and costs, rescission to the extent any members of the class still
hold common stock, and such other relief as the court deems proper.
In addition, one stockholder of the Company has filed a lawsuit against certain
of the officers and directors of the Company in connection with the operation of
the Company's Detroit facility and the securities class action described above.
BENN CARMICIA V. U S LIQUIDS INC., ET AL., was filed in the United States
District Court for the Southern District of Texas, Houston Division, on
September 15, 1999 and was subsequently consolidated with the claims asserted in
the securities class action described above. The plaintiff purports to allege
derivative claims on behalf of the Company against the officers and directors
for alleged breaches of fiduciary duty resulting from their oversight of the
Company's affairs. The lawsuit names the Company as a nominal defendant and
seeks compensatory and punitive damages on behalf of the Company, interest,
equitable and/or injunctive relief, costs and such other relief as the court
deems proper.
The outcome of these consolidated actions and the costs of defending them cannot
be predicted with certainty at this time. However, we believe that the claims
asserted in the purported securities class action are without merit and we have
filed a motion to dismiss the consolidated complaint filed by the plaintiffs.
Moreover, we believe that the stockholder derivative action was not properly
brought and we have filed a motion to dismiss this action in order to allow the
Board of Directors to consider whether such litigation is in the best interest
of the Company and our stockholders. As of the date of this report, no ruling
has been made by the court on either of our motions to dismiss.
On April 21, 1998, we acquired substantially all of the assets of Parallel
Products, a California limited partnership ("Parallel"). In addition to the
consideration paid at closing, we agreed that, if the earnings before interest,
taxes, depreciation and amortization ("EBITDA") of the businesses acquired from
Parallel exceeded a specified amount in any four consecutive quarters during the
three year period after the closing of the acquisition, we would pay to Parallel
an additional $2.1 million in cash and an additional $2.1 million in common
stock. During the third quarter of 2000, Parallel filed suit against the Company
alleging that the acquired businesses achieved the specified EBITDA amount for
the four quarters ended December 31, 1999 and for the four quarters ended March
31, 2000. Parallel is seeking a declaratory judgment that the EBITDA amount
specified in the acquisition agreement has been achieved and that it is entitled
to receive the contingent cash and stock payments described above. Parallel
also alleges that it is entitled to recover compensatory damages of $4.2
million, punitive damages, interest, attorneys' fees and costs, and such other
relief as the court deems proper. We have denied that we have any liability to
Parallel and intend to vigorously defend against these claims.
On August 30, 2000, the former owners of Randee Corporation, a corporation that
we acquired in June 1999, brought an action against the Company in the District
Court of Angelina County, Texas. The plaintiffs, who received cash and Company
common stock in consideration for their stock in Randee Corporation, allege that
we made false and misleading statements and failed to disclose allegedly
material information regarding the Company in connection with the acquisition.
The remedies sought by the plaintiffs include rescission of the acquisition,
unspecified compensatory and punitive damages, and interest. We have denied the
allegations made by the plaintiffs and intend to vigorously defend ourself in
this action.
Our American WasteWater facility in Houston, Texas is the largest of two
facilities located in the Houston area that process and dispose of grease trap
waste collected by independent waste haulers. In recent months, a potential
competitor has been attempting to obtain a permit to build and operate another
grease trap waste disposal facility in Houston that would also service
independent waste haulers. On October 23, 2000, the Company and its subsidiary,
U S Liquids of Texas, Inc., were sued in the United States District Court for
the Southern District of Texas, Houston Division, in an action entitled
DOWNSTREAM ENVIRONMENTAL, L.L.C. AND DAN NOYES V. U S LIQUIDS INC., ET AL. In
this action, the plaintiffs allege, among other things, that (i) our employees
have made false statements about the plaintiffs in an attempt to generate
opposition to their permit application, and (ii) our facility restrains trade in
the grease trap waste disposal business by threatening to refuse access to the
facility to certain independent waste haulers or to impose onerous requirements
on such haulers for use of the facility; all for the purpose of creating or
maintaining a monopoly in the grease trap waste disposal business in Houston,
Texas. The plaintiffs are seeking, among other things, preliminary and
permanent injunctive relief, unspecified compensatory damages, punitive and
treble damages, interest, attorneys' fees and costs, and such other relief as
the court deems proper. We believe that the claims asserted by the plaintiffs
are without merit and we intend to vigorously defend ourself in this action.
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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, 1999, 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
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit
No. Description
--- -----------
27.1 Financial Data Schedule
(b) REPORTS ON FORM 8-K.
None.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
U S LIQUIDS INC.
Date: November 13, 2000 /s/ Michael P. Lawlor
------------------------------------------
Michael P. Lawlor, Chairman and CEO
Date: November 13, 2000 /s/ Earl J. Blackwell
------------------------------------------
Earl J. Blackwell, Senior Vice President
and Chief Financial Officer
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