<PAGE>
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 March 31, 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
15,785,868 shares as of May 9, 2000
<PAGE>
U S LIQUIDS INC.
FORM 10-Q FOR THE QUARTER ENDED MARCH 31, 2000
INDEX
<TABLE>
<CAPTION>
Page
<S> <C>
PART I - FINANCIAL INFORMATION.............................................................................1
ITEM 1. Financial Statements.....................................................................1
- Condensed Consolidated Balance Sheets as of
December 31, 1999 and March 31, 2000 (unaudited) ................................................1
- Condensed Consolidated Statements of Income for the
three month periods ended March 31, 1999 and 2000 (unaudited) ..................................2
- Condensed Consolidated Statements of Cash Flows for the
three month periods ended March 31, 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...11
ITEM 3. Quantitative and Qualitative Disclosures about Market Risk..............................15
PART II-OTHER INFORMATION.................................................................................15
ITEM 1. Legal Proceedings.......................................................................15
ITEM 2. Changes in Securities and Use of Proceeds...............................................18
ITEM 3. Defaults upon Senior Securities.........................................................18
ITEM 4. Submission of Matters to a Vote of Security Holders.....................................18
ITEM 5. Other Information.......................................................................18
ITEM 6. Exhibits and Reports on Form 8-K........................................................18
Signatures................................................................................................19
</TABLE>
i
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
U S LIQUIDS INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
ASSETS DECEMBER 31, MARCH 31,
1999 2000
--------- ---------
(UNAUDITED)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents ................................... $ 3,398 $ 4,363
Accounts receivable, less allowances of $3,063 and
$3,042 (unaudited), respectively ............................ 40,098 40,730
Inventories ................................................. 2,029 2,118
Prepaid expenses and other current assets ................... 12,653 12,628
--------- ---------
Total current assets ................................. $ 58,178 $ 59,839
PROPERTY, PLANT AND EQUIPMENT, net .................................. $ 115,625 $ 115,821
INTANGIBLE ASSETS, net .............................................. 193,033 192,547
OTHER ASSETS, net ................................................... 2,247 2,249
--------- ---------
Total assets ......................................... $ 369,083 $ 370,456
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current maturities of long-term obligations ................. $ 5,327 $ 3,627
Accounts payable ............................................ 15,239 20,603
Accrued liabilities ......................................... 22,923 17,154
Current portion of contract reserve ......................... 4,500 4,500
--------- ---------
Total current liabilities ............................ $ 47,989 $ 45,884
LONG-TERM OBLIGATIONS, net of current maturities .................... 99,499 103,061
CELL PROCESSING RESERVE ............................................. 4,630 4,576
CLOSURE AND REMEDIATION RESERVES .................................... 8,878 8,731
CONTRACT RESERVE, net of current portion ............................ 11,566 11,566
DEFERRED INCOME TAXES ............................................... 6,373 6,373
--------- ---------
Total liabilities .................................... $ 178,935 $ 180,191
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 15,785,868 (unaudited) shares
issued and outstanding, respectively ..................... 158 158
Additional paid-in capital .................................. 176,859 176,859
Retained earnings ........................................... 13,173 13,278
Accumulated Other Comprehensive Loss
Foreign currency translation adjustment .................. (42) (30)
--------- ---------
Total stockholders' equity ............................... $ 190,148 $ 190,265
--------- ---------
Total liabilities and stockholders' equity ........... $ 369,083 $ 370,456
========= =========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
<PAGE>
U S LIQUIDS INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
-----------------------
1999 2000
-------- --------
<S> <C> <C>
REVENUES ................................. $ 55,302 $ 58,178
OPERATING EXPENSES ....................... 37,605 43,667
DEPRECIATION AND AMORTIZATION ............ 3,560 4,670
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES .............................. 5,475 7,198
-------- --------
INCOME FROM OPERATIONS ................... $ 8,662 $ 2,643
INTEREST EXPENSE, net .................... 1,613 2,339
OTHER (INCOME) EXPENSE, net .............. (96) 121
-------- --------
INCOME BEFORE PROVISION FOR INCOME TAXES $ 7,145 $ 183
PROVISION FOR INCOME TAXES ............... 2,965 78
-------- --------
NET INCOME ............................... $ 4,180 $ 105
======== ========
BASIC EARNINGS PER COMMON SHARE .......... $ 0.31 $ 0.01
======== ========
DILUTED EARNINGS PER COMMON AND
COMMON EQUIVALENT SHARE .................. $ 0.28 $ 0.01
======== ========
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 13,553 15,785
======== ========
WEIGHTED AVERAGE COMMON AND COMMON
EQUIVALENT SHARES OUTSTANDING ......... 14,900 16,543
======== ========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
2
<PAGE>
U S LIQUIDS INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS
ENDED MARCH 31,
-----------------------
1999 2000
-------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ............................................................... $ 4,180 $ 105
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Depreciation and amortization ....................................... 3,560 4,670
Net loss on sale of property, plant, and equipment .................. 41 188
Deferred income tax provision ....................................... 1,427 --
Changes in operating assets and liabilities, net of amounts acquired:
Accounts receivable, net ....................................... (5,177) (394)
Inventories .................................................... (192) (89)
Prepaid expenses and other current assets ...................... 523 (352)
Intangible assets, net ......................................... (115) (106)
Other assets ................................................... (799) (2)
Accounts payable and accrued liabilities ....................... (5,134) (472)
Closure, remediation and processing reserves ................... (1,595) (326)
-------- --------
Net cash provided by (used in) operating activities ....... $ (3,281) $ 3,222
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property, plant and equipment .......................... $ (4,160) $ (3,801)
Proceeds from sale of property, plant and equipment ................. 520 160
Net cash paid for acquisitions ...................................... (35,698) (489)
-------- --------
Net cash used in investing activities ..................... $(39,338) $ (4,130)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of long-term obligations ..................... $ 45,500 $ 7,000
Principal payments on long-term obligations ......................... (58,287) (5,139)
Proceeds from additional public offering of common stock,
net of offering costs .......................................... 56,659 --
Proceeds from exercise of stock options ............................. 32 --
-------- --------
Net cash provided by financing activities ................. $ 43,904 $ 1,861
-------- --------
EFFECT OF FOREIGN CURRENCY TRANSLATION ON CASH ........................... $ -- $ 12
AND CASH EQUIVALENTS
NET INCREASE IN CASH AND CASH EQUIVALENTS ................................ $ 1,285 $ 965
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD ......................... 3,285 3,398
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD ............................... $ 4,570 $ 4,363
======== ========
SUPPLEMENTAL DISCLOSURES:
Cash paid for interest .............................................. $ 1,723 $ 2,514
Cash paid for income taxes .......................................... 226 140
Liabilities issued and assumed related to acquisitions .............. 3,058 --
Common stock, warrants and options issued for acquisitions .......... 9,008 --
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
3
<PAGE>
U S LIQUIDS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The condensed consolidated financial statements have been prepared pursuant to
the rules and regulations of the Securities and Exchange Commission (SEC).
Certain information and footnote disclosures, normally included in annual
financial statements prepared in accordance with generally accepted accounting
principles, have been condensed or omitted pursuant to those rules and
regulations; although we believe that the disclosures made are adequate to make
the information presented not misleading. In the opinion of management, all
adjustments, consisting only of normal recurring adjustments, necessary to
fairly present the financial position, results of operations and cash flows with
respect to the interim consolidated financial statements, have been included.
The results of operations for the interim periods are not necessarily indicative
of the results for the entire year.
It is suggested that these condensed consolidated financial statements be read
in conjunction with the audited consolidated financial statements and notes
thereto included in our Annual Report on Form 10-K for the year ended December
31, 1999, as filed with the SEC.
2. INVENTORIES
Inventories are stated at the lower of cost or market and, at December 31, 1999
and March 31, 2000, consisted of processed by-products of $ 1,490,000 and
$1,297,000, respectively, and unprocessed by-products of $539,000 and $821,000,
respectively. Cost is determined using the first-in, first-out (FIFO) method.
3. DEPRECIATION AND AMORTIZATION EXPENSES
Depreciation and amortization expenses excluded from operating expenses and
selling, general and administrative expenses in the condensed consolidated
statements of income are presented as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
------------------
1999 2000
------ ------
(IN THOUSANDS)
(UNAUDITED)
<S> <C> <C>
Operating expenses ................................ $3,354 $4,405
Selling, general and administrative expenses ...... 206 265
------ ------
Total depreciation and amortization expenses $3,560 $4,670
====== ======
</TABLE>
4
<PAGE>
4. EARNINGS PER SHARE
The weighted average number of shares used to compute basic and diluted earnings
per share for the three month periods ended March 31, 1999 and 2000,
respectively, is illustrated below:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
----------------------------
1999 2000
----------- -----------
(IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED)
<S> <C> <C>
Numerator:
For basic and diluted earnings per share -
Income available to common stockholders ....... $ 4,180 $ 105
=========== ===========
Denominator:
For basic earnings per share -
Weighted-average shares ....................... 13,553,052 15,785,375
----------- -----------
Effect of dilutive securities:
Stock options and warrants .................... 1,347,133 757,365
----------- -----------
Denominator:
For diluted earnings per share -
Weighted-average shares and assumed conversions 14,900,185 16,542,740
=========== ===========
</TABLE>
For the quarters ended March 31, 1999 and 2000, we had 82,500 and 1,120,670
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. COMPREHENSIVE INCOME
The Company's comprehensive income, which encompasses net income and currency
translation adjustments, is as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
-----------------------
1999 2000
------ ------
(IN THOUSANDS)
(UNAUDITED)
<S> <C> <C>
Net Income ................................... $4,180 $ 105
Currency translation adjustments ............. -- 12
------ ------
Comprehensive income ......................... $4,180 $ 117
====== ======
</TABLE>
6. 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.
5
<PAGE>
7. ACQUISITIONS
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.
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
MARCH 31, 1999
--------------
(In thousands, except for per share data)
(Unaudited)
<S> <C>
Revenues.......................................... $64,809
Net income........................................ 4,415
Basic earnings per common share................... 0.28
Diluted earnings per common share................. 0.26
</TABLE>
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. No pro forma information is presented for 2000
as no acquisitions were completed during the first quarter of 2000.
8. 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 U.S. Environmental
Protection Agency (the "EPA") and the Federal Bureau of Investigation ("FBI")
executed a search warrant at this facility seeking electronic data, files and
other documentation relating to the facility's receipt, processing and disposal
of hazardous waste. As a result of the execution of the search warrant, the
facility temporarily ceased operations. According to the affidavit attached to
the search warrant, after receiving a phone call from an employee at the
facility in May 1999, the EPA and the FBI began a joint investigation of the
facility. The investigation centers around allegations 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 March 31, 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.
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
6
<PAGE>
received by the facility prior to its August 25, 1999 closing was contaminated
with PCBs and that this waste had contaminated other waste in several of the
waste solidification vaults and a liquid feed tank. We immediately made all
notifications required by law including notifications to the Michigan Department
of Environmental Quality (the "MDEQ") and the EPA. We also notified Waste
Management, Inc. that some of the PCB contaminated wastes may have been
inadvertently delivered to a Waste Management landfill for disposal. We
subsequently submitted to the EPA a workplan for disposal of the PCB
contaminated materials and decontamination of the affected equipment. We later
entered into a consent order with the EPA that approved this workplan and
established enhanced procedures for screening of materials delivered to the
facility to detect PCB contamination. Under the terms of the consent order, we
paid $123,888 to the EPA in full settlement of the EPA's claims for certain
civil fines. Our contractors completed the clean-up and decontamination of the
facility in accordance with the workplan and the facility was reopened for
business on February 1, 2000. 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 made demand upon and are attempting to negotiate a
resolution with National Steel regarding the damages suffered by our facility as
a result of its subsidiary's failure to disclose that its waste was contaminated
with PCBs. We have also submitted claims under our pollution liability and
business interruption insurance policies for losses incurred as a result of the
temporary closing of the facility. We have recorded all of the liabilities
incurred or expected to be incurred in connection with the cleanup of the PCB
contamination, without offset for any anticipated recovery from National Steel
or our insurers. At March 31, 2000, $225,000 remained accrued of the original
$4.2 million reserve.
Waste Management has asserted a claim against us for damages relating to our
Detroit facility's alleged disposal of PCB contaminated waste at one of its
landfills. 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 made demand upon National Steel for indemnification against any
amounts ultimately determined to be owing by us to Waste Management as a result
of our Detroit facility's delivery of PCB contaminated waste to Waste
Management's landfill. We have also submitted a claim under our pollution
liability insurance for losses incurred as a result of any such delivery. We
have established a $1.3 million reserve, recorded as an accrued liability, 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 waste,
without offset for any anticipated recovery from National Steel or our insurers.
During the fourth quarter of 1999, the EPA notified us that, as a result of the
allegations giving rise to the investigation of our Detroit facility, it had
determined that the 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 have an 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, but this settlement agreement will not
become final until signed by the LDEQ and the Louisiana Attorney General. The
terms of the settlement agreement have been published in accordance with
Louisiana law and we anticipate that the settlement agreement will become final
during the second 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 projects 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 March 31, 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
7
<PAGE>
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 has also notified us that it believes that approximately 3.0 million
gallons of liquid waste received by our Re-Claim facility in Shreveport,
Louisiana and stored off-site may contain hazardous constituents and, therefore,
the waste cannot be processed by our facility. We believe that the waste may be
handled as nonhazardous waste in accordance with the terms of the facility's
permit. We are in the process of preparing a plan for disposal of this waste. We
have established a $2.5 million reserve, recorded as an accrued liability, for
costs to be incurred in the event that it is ultimately determined that this
waste must be delivered to a third party for processing and disposal. As of
March 31, 2000, $1.2 million of this reserve remains accrued. Management
believes that this reserve is sufficient to cover all costs associated with a
third party's disposal of the waste, if necessary.
During October and November of 1999, the California Department of Toxic
Substances Control ("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.
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 maintained a reserve, recorded as an accrued liability as of March
31, 2000, of $4.3 million to cover Romic's estimated costs to remediate the
East Palo Alto facility and the three drum reconditioning or disposal sites.
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. We have established a $125,000 reserve, recorded as an
accrued liability at March 31, 2000, to cover any such costs, without offset for
any anticipated recovery from the former stockholders of D&H Holding.
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
8
<PAGE>
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.
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.
9. 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 Statement of Financial Accounting Standards No. 131,
effective as of July 1, 1999, we created a third division known as the
Industrial Wastewater Division, and changed the name of the Wastewater Division
to the Commercial Wastewater Division. The Industrial Wastewater Division
includes the operations of Romic Environmental Technologies Corporation and
three other subsidiaries (USL City Environmental, Inc., USL City Environmental
Services of Florida, Inc., and Waste Research and Recovery, Inc.) that were
acquired during 1998 and 1999 and were previously included as part of the
Wastewater Division.
The Commercial Wastewater Division collects, processes and disposes of
nonhazardous liquid waste and recovers saleable by-products from certain waste
streams. The Industrial Wastewater Division collects, processes and disposes of
hazardous and nonhazardous waste 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.
9
<PAGE>
The following is a summary of key business segment information:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
1999 2000
----- ----
(IN THOUSANDS)
(UNAUDITED)
<S> <C> <C>
Revenue --
Commercial Wastewater ............................................. $ 32,759 $ 40,376
Industrial Wastewater ............................................. 17,718 12,484
Oilfield Waste .................................................... 4,825 5,318
-------- --------
Total .......................................................... 55,302 $ 58,178
======== ========
Income from operations --
Commercial Wastewater ............................................. $ 1,838 $ 610
Industrial Wastewater ............................................. 4,352 (719)
Oilfield Waste .................................................... 2,472 2,752
-------- --------
Total ......................................................... $ 8,662 $ 2,643
======== ========
Depreciation and amortization expense --
Commercial Wastewater ............................................. $ 1,847 $ 2,770
Industrial Wastewater ............................................. 953 1,119
Oilfield Waste .................................................... 648 596
Corporate ......................................................... 112 185
-------- --------
Total ......................................................... $ 3,560 $ 4,670
======== ========
Capital expenditures --
Commercial Wastewater ............................................. $ 3,316 $ 2,412
Industrial Wastewater ............................................. 722 1,032
Oilfield Waste .................................................... 73 23
Corporate ......................................................... 49 334
-------- --------
Total ......................................................... $ 4,160 $ 3,801
======== ========
<CAPTION>
DECEMBER 31, MARCH 31,
1999 2000
---- ----
(IN THOUSANDS)
(UNAUDITED)
<S> <C> <C>
Identifiable assets -
Commercial Wastewater ............................................. $217,021 $ 82,436
Industrial Wastewater ............................................. 105,846 57,022
Oilfield Waste .................................................... 36,163 39,237
Corporate ......................................................... 10,053 191,761
-------- --------
Total .......................................................... $369,083 $370,456
======== ========
</TABLE>
10
<PAGE>
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. As a result
of the PCB contamination occurring at our Detroit facility, a question arose
whether we were in compliance with certain covenants under the credit facility.
In October 1999, the banks granted us a waiver until January 14, 2000 of any
such non-compliance arising out of the PCB contamination. On January 14, 2000,
the terms of the revolving credit facility were amended to, among other things,
limit the total amount of debt outstanding under the credit facility, increase
certain interest rates payable under the credit facility and require bank
approval of a broader scope of acquisition transactions. Currently, the
aggregate principal amount of all debt outstanding under the credit facility may
not exceed $125 million. This cap will increase to $150 million and to $175
million at such time as the earnings before interest, taxes, depreciation and
amortization ("EBITDA") for our Detroit facility and the Company and its
subsidiaries on a consolidated basis (excluding any portion thereof attributable
to acquisitions completed after December 31, 1999) equals or exceeds the
projected EBITDA set forth in the Company's budgets on a year-to-date basis as
of the end of any month ending on or after June 30, 2000 and October 31, 2000,
respectively. The amount of the credit facility will be reinstated to $225
million when the environmental issues relating to our Detroit facility
(including the PCB contamination and the investigation of the facility by the
FBI and the EPA) have been resolved in a manner reasonably satisfactory to the
banks. 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. At such time as
the amount that can be borrowed under the credit facility is increased to $150
million, the banks' consent for an acquisition will be required only 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 $5.0
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 March 31, 2000,
we had borrowed approximately $97.0 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 March 31,
2000, amounts outstanding under the credit facility were accruing interest at
approximately 10.1% 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.
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 Statement of Financial Accounting Standards No. 131,
effective as of July 1, 1999, we created a third division known as the
Industrial Wastewater Division and changed the name of the Wastewater Division
to the Commercial Wastewater Division. The Industrial Wastewater Division
includes the operations of Romic Environmental Technologies Corporation and
three other subsidiaries (USL City Environmental, Inc., USL City Environmental
Services of Florida, Inc., and Waste Research and Recovery, Inc.) that were
acquired during 1998 and 1999 and were previously included as part of the
Wastewater Division.
The Commercial Wastewater Division collects, processes and disposes of
nonhazardous liquid waste and recovers saleable by-products from certain waste
streams. The Industrial Wastewater Division collects, processes and disposes of
hazardous and nonhazardous waste
11
<PAGE>
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 $40.4 million, or 69.4%, of our
revenues for the quarter ended March 31, 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 $12.5 million, or 21.5%, of our
revenues for the quarter ended March 31, 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 $5.3 million, or 9.1%, of our revenues for
the quarter ended March 31, 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.
Depreciation and amortization expenses relate to our landfarms and other
depreciable or amortizable assets. Landfarms, which constitute approximately
11.3% of our net property, plant and equipment, are amortized over 25 years.
Other depreciable or amortizable assets are expensed over periods ranging from
three to 40 years. Amortization expenses relating to acquisitions have increased
over time as a result of amortization of goodwill recorded in connection with
our acquisitions.
In connection with potential acquisitions, we incur and capitalize certain
transaction costs which include stock registration, legal, accounting,
consulting, engineering and other direct costs to complete the acquisitions.
Additionally, we incur charges for integration costs which include 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.
12
<PAGE>
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1999 AND 2000
REVENUES. Revenues for the quarter ended March 31, 2000 increased $2.9 million,
or 5.2%, from $55.3 million for the quarter ended March 31, 1999 to $58.2
million for the quarter ended March 31, 2000. The Commercial Wastewater Division
contributed $32.8 million, or 59.2%, of first quarter 1999 revenues and $40.4
million, or 69.4%, of first quarter 2000 revenues. Collection and processing
fees generated $24.6 million, or 75.1%, and $31.8 million, or 78.8%, of the
Commercial Wastewater Division's revenues for the first quarters of 1999 and
2000, respectively. This increase was due primarily to the acquisition of
additional commercial waste businesses in the intervening quarters. By-product
sales generated the remaining $8.2 million, or 24.9%, and $8.6 million, or 21.2
%, of the Commercial Wastewater Division's revenues for the first quarters of
1999 and 2000, respectively.
The Industrial Wastewater Division contributed $17.7 million, or 32.0%, of first
quarter 1999 revenues and $12.5 million, or 21.5%, of first quarter 2000
revenues. The Industrial Wastewater Division's revenues decreased $5.2 million,
or 29.5%, due primarily to the temporary closure of the Detroit facility, which
did not become fully operational until late in the first quarter of 2000.
Collection and processing fees generated $16.4 million, or 92.3%, and $11.2
million, or 89.9%, of the Industrial Wastewater Division's revenues for the
first quarters of 1999 and 2000, respectively. By-products sales generated the
remaining $1.4 million, or 7.7% and $1.3 million, or 10.1% of the Industrial
Wastewater Division's revenues for the first quarters of 1999 and 2000,
respectively.
The Oilfield Waste Division contributed $4.8 million, or 8.7%, of first quarter
1999 revenues and $5.3 million, or 9.1%, of first quarter 2000 revenues. The
Oilfield Waste Division's revenues increased approximately $500,000, or 10.2%,
due primarily to increased volumes from customers.
OPERATING EXPENSES. Operating expenses increased $6.1 million, or 16.1%, from
$37.6 million for the quarter ended March 31, 1999 to $43.7 million for the
quarter ended March 31, 2000. As a percentage of revenues, operating expenses
increased from 68.0% in the first quarter of 1999 to 75.1% in the first quarter
of 2000. This increase was due primarily to the growth in the Commercial
Wastewater and Industrial Wastewater Divisions, which have higher operating
expenses than the Oilfield Waste Division, and the decrease in revenues without
a proportionate decrease in operating expenses at our Detroit facility.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expenses increased
$1.1 million, or 31.2%, from $3.6 million for the quarter ended March 31, 1999
to $4.7 million for the quarter ended March 31, 2000. As a percentage of
revenues, depreciation and amortization expenses increased from 6.4% in the
first quarter of 1999 to 8.1% in the first quarter of 2000. This increase was
attributable primarily to the decrease in revenues from our Detroit facility
with no corresponding decrease in depreciation and amortization expenses.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased $1.7 million, or 31.5%, from $5.5 million for
the quarter ended March 31, 1999 to $7.2 million for the quarter ended March 31,
2000. As a percentage of revenues, selling, general and administrative expenses
were 9.9% for the first quarter of 1999 and 12.4% for the first quarter of 2000.
This increase resulted primarily from increased costs in the Company's
environmental compliance department, and expensing rather than capitalizing
business development costs because no acquisitions were completed during the
first quarter of 2000.
INTEREST AND OTHER EXPENSES. Net interest and other expenses increased
approximately $900,000, or 62.2%, from $1.6 million for the quarter ended March
31, 1999 to $2.3 million for the quarter ended March 31, 2000. This increase
resulted from interest expense incurred on borrowings used to fund the purchase
price for acquisitions completed in 1999, as well as higher interest rates.
INCOME TAXES. The provision for income taxes decreased $2.9 million, or 97.4%,
from $3.0 million for the quarter ended March 31, 1999 to approximately $78,000
for the quarter ended March 31, 2000 as a result of decreased taxable income.
The effective tax rate for the period ended March 31, 1999 was 41.5% compared to
42.6% for the period ended March 31, 2000. Our effective tax rates are
estimates of our expected annual effective federal and state income tax rates.
13
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
We had net working capital of $14.0 million at March 31, 2000, compared to net
working capital of $10.2 million at December 31, 1999. Improvement in the
working capital position was attributable primarily to the payment of current
portions of notes payable facilitated by borrowings from our revolving credit
facility.
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 March 31, 2000,
approximately $3.6 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 March 31, 2000 were $3.8 million. The
majority of the capital expenditures were for plant expansions, equipment and
vehicle upgrades. Capital expenditures for our continuing operations for the
last three quarters of 2000 are estimated at approximately $17.3 million.
Approximately $10.7 million of this amount is scheduled to be invested in the
Commercial Wastewater Division for vehicles and plant expansions. Approximately
$5.4 million is scheduled to be invested in the Industrial Wastewater Division
for plant improvements and expansion and equipment. Approximately $900,000 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. As a result
of the PCB contamination occurring at our Detroit facility, a question arose
whether we were in compliance with certain covenants under the credit facility.
In October 1999, the banks granted us a waiver until January 14, 2000 of any
such non-compliance arising out of the PCB contamination. On January 14, 2000,
the terms of the revolving credit facility were amended to, among other things,
limit the total amount of debt outstanding under the credit facility, increase
certain interest rates payable under the credit facility and require bank
approval of a broader scope of acquisition transactions. Currently, the
aggregate principal amount of all debt outstanding under the credit facility may
not exceed $125 million. This cap will increase to $150 million and to $175
million at such time as the EBITDA for our Detroit facility and the Company and
its subsidiaries on a consolidated basis (excluding any portion thereof
attributable to acquisitions completed after December 31, 1999) equals or
exceeds the projected EBITDA set forth in the Company's budgets on a
year-to-date basis as of the end of any month ending on or after June 30, 2000
and October 31, 2000, respectively. The amount of the credit facility will be
reinstated to $225 million when the environmental issues relating to our Detroit
facility (including the PCB contamination and the investigation of the facility
by the FBI and the EPA) have been resolved in a manner reasonably satisfactory
to the banks. 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. At such time as
the amount that can be borrowed from the credit facility is increased to $150
million, the banks' consent for an acquisition will be required only 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 $5.0
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 March 31, 2000,
we had borrowed approximately $97.0 million under the credit facility.
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. 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 second quarter of 2000.
In certain of our acquisitions, we agreed to pay additional consideration to the
owners of the acquired business if the future pre-tax earnings of the acquired
business exceed certain negotiated levels or other specified events occur. To
the extent that any contingent consideration is required to be paid in
connection with an acquisition, we anticipate that the cash flows of the
acquired business will be sufficient to pay the cash component of the contingent
consideration.
14
<PAGE>
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 March
31, 2000, $97.0 million and $2.4 million had been borrowed under the revolving
credit facility and the equipment credit facility, respectively. As of March 31,
2000, amounts outstanding under the revolving credit facility were accruing
interest at approximately 10.1% 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 first quarter would approximate 61 basis points.
Such an increase in interest rates would increase our quarterly interest expense
by approximately $150,000 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 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, but
this settlement agreement will not become final until signed by the LDEQ and the
Louisiana Attorney General. The terms of the settlement agreement have been
published in accordance with Louisiana law and we anticipate that the settlement
agreement will become final during the second 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 projects
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.
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 has also notified us that it believes that approximately 3.0 million
gallons of liquid waste received by our Re-Claim facility in Shreveport,
Louisiana and stored off-site may contain hazardous constituents and, therefore,
the waste cannot be processed by our facility. We believe that the waste may be
handled as nonhazardous waste in accordance with the terms of the facility's
permit. We are in the
15
<PAGE>
process of preparing a plan for disposal of this waste. We have established a
$2.5 million reserve, recorded as an accrued liability, for costs to be incurred
in the event that it is ultimately determined that this waste must be delivered
to a third party for processing and disposal. As of March 31, 2000, $1.2 million
of this reserve remains accrued. Management believes that this reserve is
sufficient to cover all costs associated with a third party's disposal of the
waste, if necessary.
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 phone call from an employee at the
facility in May 1999, the EPA and the FBI began a joint investigation of the
facility. The investigation centers around allegations that (i) the facility
knowingly discharged into the Detroit sewer system untreated hazardous liquid
waste in violation of city ordinances, the facility's permit and the Clean Water
Act, and (ii) without proper manifesting, the facility knowingly transported and
disposed of hazardous waste at an unpermitted treatment facility in violation of
RCRA. According to the affidavit, the facility has been knowingly violating the
Clean Water Act and RCRA since before we acquired the facility. The on-site
investigation of our facility by the EPA and the FBI was completed in August
1999. It is our understanding that the investigation is continuing, but as of
the date of this report no announcement regarding the investigation has been
made by the EPA or the FBI.
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 March 31, 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.
After the completion of the on-site investigation of our Detroit facility, we
began conducting routine tests of materials in waste solidification vaults in
preparation for the reopening of the facility. During these tests, we discovered
that certain waste which had been received by the facility prior to its August
25, 1999 closing was contaminated with PCBs and that this waste had contaminated
other waste in several of the waste solidification vaults and a liquid feed
tank. We immediately made all notifications required by law including
notifications to the MDEQ and the EPA. We also notified Waste Management, Inc.
that some of the PCB contaminated wastes may have been inadvertently delivered
to a Waste Management landfill for disposal. We subsequently submitted to the
EPA a workplan for disposal of the PCB contaminated materials and
decontamination of the affected equipment. We later entered into a consent order
with the EPA that approved this workplan and established enhanced procedures for
screening of materials delivered to the facility to detect PCB contamination.
Under the terms of the consent order, we paid $123,888 to the EPA in full
settlement of the EPA's claims for certain civil fines. Our contractors
completed the clean-up and decontamination of the facility in accordance with
the workplan and the facility was reopened for business on February 1, 2000. 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 made demand
upon and are attempting to negotiate a resolution with National Steel regarding
the damages suffered by our facility as a result of its subsidiary's failure to
disclose that its waste was contaminated with PCBs. We have also submitted
claims under our pollution liability and business interruption insurance
policies for losses incurred as a result of the temporary closing of the
facility. We have recorded all of the liabilities incurred or expected to be
incurred in connection with the cleanup of the PCB contamination, without offset
for any anticipated recovery from National Steel or our insurers.
Waste Management has asserted a claim against us for damages relating to our
Detroit facility's alleged disposal of PCB contaminated waste at one of its
landfills. 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 made demand upon National Steel for indemnification against any
amounts ultimately determined to be owing by us to Waste Management as a result
of our Detroit facility's delivery of PCB contaminated waste to Waste
Management's landfill. We have also submitted a claim under our pollution
liability insurance for losses incurred as a result of any such delivery. We
have established a $1.3 million reserve, recorded as an accrued liability, 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 waste,
without offset for any anticipated recovery from National Steel or our insurers.
16
<PAGE>
During the fourth quarter of 1999, the EPA notified us that, as a result of the
allegations giving rise to the investigation of our Detroit facility, it had
determined that the 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 have an adverse impact upon the operations of the
facility.
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. We have established a $125,000 reserve, recorded as an
accrued liability, to cover any such costs, without offset for any anticipated
recovery from the former stockholders of D&H Holding.
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 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.
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.
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
17
<PAGE>
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.
18
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
U S LIQUIDS INC.
Date: May 10, 2000 /s/ MICHAEL P. LAWLOR
----------------------------------------
Michael P. Lawlor, Chairman and CEO
Date: May 10, 2000 /s/ EARL J. BLACKWELL
----------------------------------------
Earl J. Blackwell, Senior Vice President
and Chief Financial Officer
19
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM US LIQUIDS,
INC. AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<CASH> 4,363
<SECURITIES> 0
<RECEIVABLES> 43,772
<ALLOWANCES> 3,042
<INVENTORY> 2,118
<CURRENT-ASSETS> 59,839
<PP&E> 139,166
<DEPRECIATION> 23,345
<TOTAL-ASSETS> 370,456
<CURRENT-LIABILITIES> 45,884
<BONDS> 103,061
0
0
<COMMON> 158
<OTHER-SE> 190,107
<TOTAL-LIABILITY-AND-EQUITY> 370,456
<SALES> 58,178
<TOTAL-REVENUES> 58,178
<CGS> 43,667
<TOTAL-COSTS> 55,535
<OTHER-EXPENSES> 121
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,339
<INCOME-PRETAX> 183
<INCOME-TAX> 78
<INCOME-CONTINUING> 105
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 105
<EPS-BASIC> 0.01
<EPS-DILUTED> 0.01
</TABLE>
