** **

**FORM 10-K**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C.20549**

** **

| **ý** | **ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE  SECURITIES EXCHANGE ACT****OF 1934** |
|------------|----------------------------------------------------------------------------------------------|

** **

**For the fiscal year ended December 31, 2001**

 

**OR**

 

| **o** | **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 of                                            |   | (I.R.S. Employer    |
| incorporation or organization)                                             |   | Identification No.) |
|                                                                       |   |                |
| **411 N. Sam Houston Parkway East, Suite 400,  Houston, Texas 77060-3545** |
| (Address of principal executive offices)                                   |
|                                                                       |   |                |
| **(281) 272-4500**                                                         |
| (Registrant’s telephone number including area code)                   |

 

**Securities registered pursuant to Section 12(b) of theAct:**

 

| **Title  of Securities**      |   | **Exchange  on which Registered** |
|-------------------------------|--------|-----------------------------------|
| Common Stock, par value $0.01 |   | American Stock Exchange           |

 

**Securities registered pursuant to Section 12(g) of theAct:**

None

 

Indicate by check mark whether the registrant (1) has filed all reportsrequired to be filed by Section 13 or 15(d) of the Securities Exchange Act of1934 during the preceding 12 months (or for such shorter period that theregistrant was required to file such reports), and (2) has been subject to suchfiling requirements for the past 90 days.  Yes ý   No o

 

Indicate by check mark if disclosure of delinquent filers pursuant toItem 405 of Regulation S-K is not contained herein, and will not be contained,to the best of registrant’s knowledge, in definitive proxy or informationstatements incorporated by reference in Part III of this Form 10-K or anyamendment to this Form 10-K.           ý

 

The aggregate market value of the voting stock held by non-affiliatesof the registrant at March 15, 2002, was approximately $58,263,959.  The aggregate market value was computed byusing the closing price of the common stock as of that date on the AmericanStock Exchange.  (For purposes ofcalculating this amount only, all the directors and executive officers of theregistrant have been treated as affiliates.)

 

The number of shares of common stock, $0.01 par value, of theregistrant outstanding at March 15, 2002 was 16,078,258.

 

**DOCUMENTS INCORPORATED BY REFERENCE**

 

| **Document**                                               |   | **Incorporated As To** |
|------------------------------------------------------------|--------|------------------------|
| Proxy Statement for the2002 Annual Meeting of Stockholders |   | Part III               |

 

 

 

**TABLE OF CONTENTS**

 
| PART I    |
|-----------|
|      |
| Item  1.  | Business |
| Item  2.  | Properties |
| Item 3.   | Legal Proceedings |
| Item  4.  | Submission  of Matters to a Vote of Security Holders |
|      |   |
| PART II   |
|      |
| Item  5.  | Market  for Registrant’s Common Equity and Related Stockholder Matters |
| Item 6.   | Selected Financial  Data |
| Item  7.  | Management’s  Discussion and Analysis of Financial Condition and Results of Operations |
| Item  7A. | Quantitative  and Qualitative Disclosures About Market Risk |
| Item  8.  | Financial  Statements and Supplementary Data |
| Item  9.  | Changes  in and Disagreements With Accountants on Accounting and Financial Disclosure |
|      |   |
| PART III  |
|      |
| Item  10. | Directors  and Executive Officers of the Registrant |
| Item 11.  | Executive Compensation |
| Item  12. | Security  Ownership of Certain Beneficial Owners and Management |
| Item  13. | Certain  Relationships and Related Transactions |
|      |   |
| PART IV   |
|      |
| Item  14. | Exhibits,  Financial Statement Schedules, and Reports on Form 8-K |

 

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**PART I**

 

**Item 1.**  **Business**

 

***General***

 

We are a leading national provider of liquid waste management services,including collection, processing, recovery and disposal services.  Our primary focus of operations isindustrial and commercial wastewater treatment, although we also collect, processand dispose of oilfield waste.  We operate45 processing facilities located in 13 states and Canada and serve over  31,000 customers. At March 1, 2002, weemployed approximately 1,200 persons full-time.

 

The Company was organized in November 1996.  On December 13, 1996, we acquired our Oilfield Waste Division,which treats and disposes of oilfield waste generated in oil and gasexploration and production.  In June1997, we formed the basis of our Wastewater Division by acquiring additionalcompanies.  The Wastewater Divisioncollects, processes and disposes of nonhazardous liquid waste and recoverssaleable by-products from certain waste streams.  During 1998 and 1999, we continued acquiring companies,principally for the Wastewater Division. On July 1, 1999, we created a third division, known as the IndustrialWastewater Division, and changed the name of the Wastewater Division to theCommercial Wastewater Division.  TheIndustrial Wastewater Division collects, processes and disposes of hazardousand nonhazardous waste and recovers saleable by-products from certain wastestreams.

 

Our executive offices are located at 411 N. Sam Houston Parkway East,Suite 400, Houston, Texas 77060-3545, and our telephone number is (281)272-4500.  Our common stock is listed onthe American Stock Exchange under the trading symbol “USL.”

 

***Industry Background***

 

The wastewater treatment market is generally divided into two segments:industrial and commercial wastewater treatment, which may include the treatmentof some hazardous wastes, and municipal wastewater treatment. Industrial andcommercial companies produce various types of wastewater (including hydrocarboncontaminated water, landfill leachate, dated beverages and grease and grit trapwaste) that must be processed prior to disposal in local publicly-operated treatmentworks (“POTWs”) or for which municipalities charge higher rates.  Industrial and commercial companies alsoproduce various types of hazardous waste that must be disposed of in accordancewith federal and state regulations. Similarly, oil and gas exploration and production companies produceliquid waste that must be disposed of in accordance with federal and stateregulations. Municipalities utilize or contract with third parties for theutilization of water treatment technology to treat municipal wastewater.

 

In the United States, the growth in demand for wastewater treatmentservices has been driven by many factors, including:

 

•                                          Municipalities refusing to accept certainindustrial wastewaters due to limited treatment capabilities and a lack of theresources needed to expand or to modernize their POTWs;

 

•                                          Industrial and commercial businesses avoidingPOTW surcharges by using others to process and dispose of their wastewater;

 

•                                          Industrial and commercial businessesoutsourcing their wastewater treatment needs;

 

•                                          Continued industrial and commercialexpansion; and

 

•                                          Increasingly strict regulations governing thedisposal of wastewater, as well as more stringent enforcement of theseregulations.

 

*Rejection of Certain Wastewaters by POTWs*.  InNorth America, governmental regulation and enforcement have established strictstandards for potable water and the discharge of pollutants in wastewater.Municipalities have spent billions of dollars building water purification andwastewater treatment facilities. However, many of these municipalities arefacing increasing budgetary constraints and

 

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damage to their wastewater treatment facilities caused by grease andother liquid wastes and refuse to accept certain liquid waste streams, therebyincreasing the demand for wastewater treatment services provided by the privatesector. For example, the Dallas, Houston and San Antonio POTWs do not acceptgrease or grit trap waste. Similarly, many POTWs in the Northeast do not acceptcommingled septage and grease trap waste. In addition, in late 1997, the Houston POTWs ceased accepting septagegenerated outside the Houston city limits.

 

*Economic Benefit of Pretreating Certain Wastewaters*.  Foryears, generators of industrial wastewater and other nonhazardous liquid wastehave discharged the waste directly into POTWs. However, the difficultiesencountered by POTWs in collecting and treating certain wastewaters have causedmany municipalities to increase the rates charged for accepting thesewastewaters. With respect to certain wastewaters, it is more economical for thegenerator to deliver the waste to liquid waste management service providerssuch as the Company than to discharge the waste directly into the POTW. For example,it is currently more economical for many soft drink manufacturers to delivertheir dated beverages to us for processing and disposal than to discharge thebeverages directly into the POTW.

 

*Outsourcing by Industrial and Commercial Businesses*. Industrial and commercial businesses prefer to focus on their primarybusiness activities and to downsize and outsource secondary business activitiesin which they may not have much expertise. By outsourcing their wastewatertreatment needs, they can free-up capital for investment in their primaryproducts and business activities, eliminate a significant portion of theiroverhead and transfer risk to experts in the field.

 

*Economic Expansion*. Many industrial companies have significantly expanded their manufacturingand processing facilities. This industrial expansion has increased the amountof wastewater generated. In addition, continued commercial expansion throughoutNorth America has generated additional grease and grit trap waste and otherliquid waste that must be processed by the waste generators, POTWs or liquidwaste management service providers such as the Company.

 

*Increasingly Strict Regulations*. Heightened public concern about water quality has caused federal, stateand local governments to adopt increasingly strict regulations governing theprocessing and disposal of industrial wastewater and other liquid wastes. Forexample, effective as of October 1993, Subtitle D of the Resource Conservationand Recovery Act of 1976 (“RCRA”) banned the disposal of untreated bulk liquidwaste in landfills. In addition, effective in March 1997, the Texas NaturalResource Conservation Commission implemented state-wide “full pump” regulationsrequiring 100% evacuation of all grease and grit traps and proper disposal ofthe full volume of each trap. Furthermore, effective in January 2001, theUnited States Environmental Protection Agency (“EPA”) implemented regulationsthat further restrict the discharge of pollutants into U.S. waters and intoPOTWs by existing and new facilities that treat or recover any hazardous ornonhazardous industrial waste, wastewater or used material from off-site.  Louisiana, Texas and certain other oil andgas producing states have enacted comprehensive laws and regulations governingthe proper management of oilfield waste. Under Louisiana and Texas regulations,if oilfield waste cannot be processed for discharge or disposed of at the wellwhere it is generated, it must be transported to a licensed oilfield wasteprocessing or disposal facility. In addition, federal regulations alsorestrict, and in some cases prohibit entirely, the discharge of oilfield wasteinto U.S. waters.

 

***Strategy***

 

Our objective is to be the largest and most profitable liquid wastemanagement company in each of the markets in which we operate. As a nationalprovider of liquid waste management services, we believe that we benefit fromnumerous competitive advantages relative to smaller operators, includingservicing multiple customer locations, processing a wide variety of liquidwaste streams, achieving operating efficiencies and increased economies ofscale and adapting to changing regulations. Our strategy for achieving thisobjective includes (i) generating internal growth; (ii) enhancing existingoperations; and (iii) operating our businesses on a decentralized basis. Weintend to implement this strategy as follows:

 

•                                          *Internal Growth*.  Togenerate internal growth, we have spent a significant amount of time reviewingour operations to isolate profitable and unprofitable business lines.  As a result of this review, we have focusedon refining our pricing and services to attract a more profitable salesmix.  In addition, we have conducted adetailed market analysis of our customer base. This analysis has assisted us in focusing current and future capitalinvestments on strategic growth initiatives.

 

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•                                          *Operational Enhancements*. Operations have been strengthened through the addition of a number ofexperienced executives and mid-level managers. We have also updated and enhanced the environmental compliance programsat our facilities and provided additional training to our employees.   In addition, we have invested a substantialamount of capital in process improvement, our collection fleet and managementinformation systems.

 

•                                          *Decentralized Management*.  Wemanage our various businesses on a decentralized basis, with local managementmaintaining responsibility for the day-to-day operations, profitability andgrowth of the business, while our executive officers exercise strong strategicand financial oversight. We believe that this structure allows us to capitalizeon the considerable local and regional market knowledge and customerrelationships possessed by local management.

 

***Operations and Services Provided***

 

Industrial and commercial businesses produce various types ofwastewater (including hydrocarbon contaminated water, landfill leachate, datedbeverages, grease and grit trap waste and certain hazardous wastes) that mustbe disposed of in accordance with federal, state and local regulations.  Similarly, oil and gas exploration andproduction companies produce liquid waste that must be disposed of inaccordance with federal and state regulations. We accept liquid waste from generators and independent collectioncompanies, process the liquid waste to remove contaminants and then dispose ofthe liquid waste in accordance with applicable regulations.  In addition, in certain instances, ourprocessing operations generate saleable by-products.  Our services permit generators of liquid waste to focus on theirprimary business activities, while we perform the secondary operations ofprocessing and disposing of their waste.

 

We collect, process, recover and dispose of liquid waste through anumber of subsidiaries that are organized into three divisions — the CommercialWastewater Division, the Industrial Wastewater Division and the Oilfield WasteDivision.  The operations of these threedivisions are summarized below.  SeeNote 19 to our consolidated financial statements for certain financialdata of these three divisions.  See alsoNote 10 to our consolidated financial statements for certain informationabout our foreign operations.

 

***Commercial Wastewater Division***

 

Our Commercial Wastewater Division contributed approximately 65.7%,68.2% and 60.3% of our 1999, 2000 and 2001 revenues, respectively.  This Division receives fees to collect,process and dispose of nonhazardous liquid waste such as industrial wastewater,grease and grit trap waste, bulk liquids, dated beverages, biosolids andseptage.  In addition, the CommercialWastewater Division generates revenues from the sale of  by-products, including fats, oils, feedproteins, industrial and fuel grade ethanol, solvents, aluminum, glass, plasticand cardboard, recovered from waste streams. It operates a fleet of vehicles to collect waste directly fromcustomers, receives waste from independent transporters servicing thousands ofadditional generators and also receives waste shipped directly by thegenerators via rail and truck. *** ***Briefdescriptions of the types of liquid waste most commonly managed by theCommercial Wastewater Division are set forth below:

 

*Industrial Wastewaters*.  Nonhazardous industrial wastewaters such as hydrocarbon contaminatedwater, landfill leachate and printing solvents are transported to ourfacilities in vacuum trucks, trailers and other transportable containers. Usinga variety of physical, chemical, thermal and biological techniques, the liquidwaste is broken down into constituent components. Water extracted from theliquid waste is pretreated and then discharged into the POTW and the remainingmaterials are solidified and disposed of in an independent solid wastelandfill. In some instances, such as printing solvents, the contaminatedmaterials are processed and returned to the generator for reuse.

 

*Grease and Grit Trap Waste*. Grease trap waste from restaurants and other food manufacturing andpreparation facilities and grit trap waste from car washes are collected by ourvehicles or independent parties and transported to our facilities. Grease andgrit trap waste are processed using a variety of physical, chemical, thermaland biological techniques. Water extracted from the liquid waste is pretreatedand then discharged into the POTW and the remaining materials are solidifiedand disposed of in an independent solid waste landfill. By-products recoveredfrom grease trap waste are sold for use in producing various grades of fats,oils and feed proteins.

 

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*Bulk Liquids and Dated Beverages*.  Weaccept both liquid residuals and dated packaged beverages from breweries, softdrink manufacturers and food processors. Water extracted from the liquid wasteis pretreated and then discharged into the POTW. The remaining liquid waste isfermented and distilled into both industrial and fuel grade ethanol, which issold primarily to major oil and chemical companies. Packaging of the datedbeverages, whether aluminum, glass, plastic or cardboard, is removed, separatedand sold to recycling firms.

 

*Biosolids*.  We accept and process liquidand dry cake biosolids, or sludge, from municipal wastewater treatmentfacilities and private businesses and process these biosolids into a productthat is sold for use as a fertilizer and landfill cover.

 

*Septage*.  Septage is pumped from septictanks by our vehicles or independent parties and transported to our facilities.The septage is then processed using a variety of physical, chemical, thermaland biological techniques. Water extracted from the liquid waste is pretreatedand then discharged into the POTW and solid materials are dried and disposed ofin an independent solid waste landfill.

 

***Industrial Wastewater Division***

 

The Industrial Wastewater Division contributed approximately 26.3%,23.0% and 28.0% of our 1999, 2000 and 2001 revenues, respectively.  This Division derives revenues from feescharged to customers for collecting, processing and disposing of hazardous andnonhazardous liquid waste such as household hazardous wastes, platingsolutions, acids, flammable and reactive wastes, industrial wastewater,petroleum fuels and antifreeze.  Certainsludges and solid hazardous wastes are also processed.  The Industrial Wastewater Division alsogenerates revenues from the sale of by-products recovered from certain wastestreams, including industrial chemicals and recycled antifreeze products.  The Industrial Wastewater Division collectswaste directly from customers, receives waste from independent transporters andalso receives waste shipped directly by the generators via rail and truck.  Brief descriptions of the types of liquidwaste most commonly managed by the Industrial Wastewater Division are set forthbelow:

 

*Hazardous Wastes*. Hazardous wastes such as household hazardous wastes, plating solutions,acids, and flammable and reactive wastes are transported to certain of ourfacilities in trucks and other transportable containers and by rail.Wastewaters suitable for treatment under the Clean Water Act are directed intoan appropriate process such as chemical precipitation or filtration. Sludge andsolid hazardous wastes are directed to our chemical fixation facility to bepre-treated using chemical oxidation or reduction followed by fixation. Aftertesting, solid and semi-solid residues are shipped to an audited and approvedindependent Subtitle D landfill and treated listed waste residues are sent toan audited and approved independent Subtitle C landfill. Organic wastes thathave recoverable heat or solvent values are recycled using distillationtechniques. Solvents are sold back to the paint industry as thinners. Otherorganic wastes are blended into fuels sold primarily to operators of cement orlime kiln facilities.

 

*Industrial Wastewaters*.  Hazardous and nonhazardous industrial wastewaters such as hydrocarboncontaminated water, landfill leachate, inks and dated chemicals are transportedto our facilities in vacuum trucks, trailers and other transportablecontainers. Using a variety of physical, chemical, thermal and biologicaltechniques, the liquid waste is broken down into constituent components. Waterextracted from the liquid waste is pretreated and then discharged into the POTWand the remaining materials are solidified and disposed of in an independentsolid waste landfill.

 

*Petroleum Fuels*. Contaminated and off-specification petroleum fuels and used oil aretransported to our facilities in vacuum trucks, trailers and othertransportable oil containers. Using mechanical and gravity separationtechniques, these materials are processed to produce a fuel sold primarily tooperators of industrial furnaces. Resulting wastewater is transported toanother of our facilities for processing and disposal. Solid materials andsludges are sent to one of our oilfield waste processing facilities.

 

*Antifreeze*.  Spent antifreeze fromautomobile dealers, service centers and a wide variety of automotive and heavyequipment industries is collected by our vehicles and transported to ourfacilities. The spent antifreeze is then processed using a variety of physical,chemical and thermal processes to recover and purify ethylene glycol, theactive ingredient in antifreeze. The end result is an antifreeze productmeeting stringent ASTM specifications that is sold into the wholesale coolantmarket.

 

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***Oilfield Waste Division***

 

The Oilfield Waste Division contributed approximately 8.0%, 8.8% and11.7% of our 1999, 2000 and 2001 revenues, respectively.   Atour six oilfield waste facilities located in Louisiana and Texas, the OilfieldWaste Division treats and disposes of waste that is generated in theexploration for and production of oil and natural gas. Oilfield waste consistsprimarily of oil-based and water-based drilling fluids (which contain oil,grease, chlorides and heavy metals), as well as cuttings, saltwater, workoverand completion fluids, production pit sludges and soil containing thesematerials. In addition, at two Louisiana locations, the Oilfield Waste Divisioncleans tanks, barges and other vessels used in the storage and transportationof oilfield waste.

 

Landfarming, the treatment process utilized at our four Louisianaoilfield waste facilities, involves several distinct stages. Oilfield waste isbrought to our facilities in trucks and on barges and the delivered wastematerials are then tested. Materials which do not qualify as permitted oilfieldwaste under applicable regulations are rejected. Accepted waste is then loadedinto treatment cells, which are flooded with fresh water and mixed to dissolvesalts and soluble materials. Saltwater is then pumped out through a collectionsystem and typically disposed of at a saltwater injection well on-site. Thisflooding process is typically repeated several times. The remaining waste isthen processed to remove organic contamination through biological degradation.Total treatment of a cell takes approximately nine to twelve months. In thefinal stage, the remaining material is tested to ensure compliance withregulatory requirements. Thereafter, the material is transported to on-sitestockpile areas.

 

Newpark Resources, Inc. is the largest customer of the Oilfield WasteDivision.  In September 1998, we enteredinto a disposal agreement with Newpark. Under the terms of this disposal agreement, during the twelve-monthperiods ending June 30, 1999, 2000 and 2001, we agreed to process and disposeof up to 375,000, 500,000, and 500,000 barrels of oilfield waste, respectively.  In return, Newpark agreed to pay us adisposal fee of not less than $30.0 million. Newpark paid us $6.0 million of the disposal fee in 1998, $11.0 millionin 1999, $9.2 million in 2000 and $4.1 million in 2001.  In December 2000, Newpark exercised anoption to extend the term of the disposal agreement for an additional twelvemonths.  Pursuant to the terms of thisoption, during the twelve-month period ending June 30, 2002, Newpark maydeliver to us for processing and disposal up to 1,000,000 barrels of oilfieldwaste.  In return, Newpark agreed to payus a fee of not less than $8.0 million. Newpark paid us $4.4 million of this fee in 2001 and the remainderof the fee is required to be paid to us in monthly installments continuingthrough June 2002.  Under the termsof the disposal agreement, Newpark had the option to extend the term of thedisposal agreement for an additional twelve months expiring June 30, 2003;however, Newpark did not exercise this option.   Under the terms of the disposal agreement, we are prohibiteduntil June 30, 2002 from (i) accepting from any customer other than Newpark anyoilfield waste generated in a marine environment or transported in a marinevessel, and (ii) engaging in the site remediation and closure business, in eachcase within the states of Louisiana, Texas, Mississippi and Alabama and theGulf of Mexico.

 

Despite Newpark’s decision not to extend the term of the disposalagreement for an additional twelve months, we are currently engaging indiscussions with Newpark regarding an alternative arrangement under whichNewpark would countinue to deliver oilfield waste to us for processing anddisposal after June 30, 2002.  If we areunable to reach a satisfactory arrangement with Newpark, we intend to begincompeting with Newpark for oilfield waste generated offshore or in inlandwaters in the Gulf Coast region.  Withthe exception of our Bateman Island, Louisiana landfarm, which couldimmediately begin receiving oilfield waste generated offshore or in inlandwaters, and our Bourg, Louisiana and Mermentau, Louisiana landfarms, whichcould immediately begin receiving oilfield waste generated in inland waters,our Louisiana landfarms would be required, among other things, to establish andobtain permits for one or more transfer facilities to receive oilfield wastegenerated offshore or in inland waters and lease or purchase the equipmentnecessary to receive such waste. Management estimates that it will take approximately 180 days to permitand equip any such transfer facility that the Company should elect to establish;however, there can be no assurance that we will be successful in obtaining thepermits necessary for any such transfer facility or that the establishment,permitting and equipping of any such facility can be accomplished in anyparticular time period. The cost of establishing such transfer facilities isnot expected to have a material adverse effect upon our business, results ofoperations or financial condition.

 

***Seasonality***

 

We expect that the operations of the Oilfield Waste Division willexperience certain seasonal patterns consistent with the oil and gasexploration and production activity in the Gulf Coast.  Generally, the volume of oilfield wastedelivered to the Oilfield Waste Division has been lowest in the first quarterof each calendar year.  Prices for oiland natural gas are expected to continue to be volatile and affect demand forour oilfield waste services.  Certain ofthe Commercial Wastewater Division’s processing facilities in the Northeast andMidwest may be affected by adverse weather conditions.

 

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***Competition***

 

The liquid waste industry is highly fragmented and verycompetitive.  Competition is primarilyon the basis of proximity to collection operations, collection and processingfees charged and quality of service. With respect to certain waste streams (such as oilfield waste, bulkliquids and dated beverages), we must compete with the generators of thesewaste streams, who continually evaluate the decision whether to use internaldisposal methods or to utilize a liquid waste management company such asus.  We must also compete with arealandfills for certain waste streams.  Wecompete with Newpark Resources, Inc. and a number of smaller companies foroilfield waste produced on land in the Gulf Coast region.    In addition, unless we enter into a newagreement with Newpark, commencing in July 2002, we will compete withNewpark and other smaller companies for oilfield waste generated offshore or ininland waters in the Gulf Coast region.

 

We believe that there are certain barriers to entry in the liquid wasteindustry.  These barriers include theneed for specially equipped facilities; licenses, permits and trained personnelnecessary to operate these facilities; and formalized procedures for customeracceptance.

 

***Regulation***

 

***General***

 

Our business operations are affected both directly and indirectly bygovernmental regulations, including various federal, state and local pollutioncontrol and health and safety programs that are administered and enforced byregulatory agencies. These programs are applicable or potentially applicable toone or more of our existing operations.

 

***Federal Regulation***

 

The primary U.S. federal statutes affecting our business are summarizedbelow:

 

*The Clean Water Act*.  Wetreat and discharge wastewaters at our liquid waste facilities and at ouroilfield waste landfarms. These activities are subject to the requirements ofthe Clean Water Act and comparable state statutes and federal and stateenforcement of these regulations. The Clean Water Act regulates the dischargeof pollutants into waters of the United States. The Clean Water Act establishesa system of standards, permits and enforcement procedures for the discharge ofpollutants from industrial and municipal wastewater sources. The law setstreatment standards for industries and wastewater treatment plants and providesfederal grants to assist municipalities in complying with the new standards. Inaddition to requiring permits for industrial and municipal discharges directlyinto the waters of the United States, the Clean Water Act also requirespretreatment of industrial wastewater before discharge into municipal systems.

 

The Clean Water Act gives the EPA the authority to set pretreatmentlimits for direct and indirect industrial discharges.  In 2001, the EPA adopted new technology-based effluentlimitations guidelines for waste treatment facilities that treat or recoverhazardous or nonhazardous industrial waste or wastewater received from off-siteand then discharge pollutants into U.S. waters or POTWs.  Although the guidelines are based onparticular technologies, the new guidelines do not require a facility to usethese technologies.  Individualfacilities may meet the requirements using whatever types of technologies andprocess changes they choose.  Existingindirect discharge facilities such as ours must comply with the new guidelinesno later than December 22, 2003.  Weare currently comparing our existing operations against the new guidelines todetermine the modifications necessary to bring our facilities into compliancewith the new guidelines.  We anticipatethat all of our facilities that are subject to these new guidelines will be incompliance therewith by December 2003.

 

The Clean Water Act also prohibits certain discharges of oil orhazardous substances and authorizes the federal government to remove or arrangefor removal of such oil or hazardous substances. In addition, the Clean WaterAct requires the adoption of the National Contingency Plan to cover removal ofsuch materials. Under the Clean Water Act, the owner or operator of a vessel orfacility may be liable for penalties and costs incurred by the federalgovernment in responding to a discharge of oil or hazardous substances.

 

The Clean Water Act also has a significant impact on the operations ofthe Oilfield Waste Division’s customers. EPA Region 6, which includes theOilfield Waste Division’s current market, continues to issue new and amendedNational Pollution Discharge Elimination System general permits furtherlimiting or restricting substantially all discharges of produced water from theOil and Gas

 

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Extraction Point Source Category into waters of the United States. Thecombined effect of all of these permits closely approaches a “zero discharge”standard affecting all waters except those of the Outer Continental Shelf. Weand many industry participants believe that these permits and the requirementsof the Clean Water Act may ultimately lead to a total prohibition of overboarddischarge in the Gulf of Mexico.

 

With the exception of the matters described in Item 3. LegalProceedings, below, we believe that each of our operating facilities iscurrently in substantial compliance with the applicable requirementspromulgated pursuant to the Clean Water Act.

 

*RCRA*.  RCRA is the principal federalstatute governing hazardous and solid waste generation, treatment, storage anddisposal. RCRA and state hazardous waste management programs govern thehandling and disposal of hazardous waste. The EPA has issued regulationspursuant to RCRA, and states have promulgated regulations under comparablestate statutes, that govern hazardous waste generators, transporters and ownersand operators of hazardous waste treatment, storage or disposal facilities.These regulations impose detailed operating, inspection, training and emergencypreparedness and response standards and requirements for closure, financialresponsibility, manifesting of wastes, record-keeping and reporting, as well astreatment standards for any hazardous wastes intended for land disposal.RCRA-regulated hazardous waste is accepted for processing at our Detroit,Michigan, Tampa, Florida, East Palo Alto, California and Chandler, Arizona facilitiesand, therefore, each of these facilities is subject to the requirements ofSubtitle C of RCRA.  Our East Palo Altoand Tampa facilities have each been issued RCRA Part B permits.  Our East Palo Alto facility is operatingunder a California Department of Toxic Substances Control permit that expiredin 1991, but that allows for on-going operations.  Our Chandler and Detroit facilities have operated under interimstatus, as allowed by RCRA, since 1994 and 1991, respectively.  Applications for final Part B permits forthese facilities have been submitted to the appropriate regulatory authoritiesand we are currently working with the authorities to obtain these finalpermits.

 

The Oilfield Waste Division’s facilities treat and dispose of oilfieldwaste, which is exempt from classification as a RCRA-regulated waste. Atvarious times in the past, proposals have been made to rescind the exemptionthat excludes oilfield waste from regulation under RCRA. The repeal ormodification of this exemption by administrative, legislative or judicialprocess would require us to change our method of doing business and could havea material adverse effect on our business, results of operations and financialcondition. There is no assurance that we would be able to adapt our operationsor that we would have the capital resources available to do so.

 

RCRA also indirectly affects our operations by restricting the disposalof certain liquid wastes and sludges in landfills. This restriction increasesdemand for the services provided by the Commercial Wastewater and theIndustrial Wastewater Divisions.

 

RCRA regulations also require us to provide financial assurance thatfunds will be available when needed for closure and post-closure care at ourRCRA-regulated facilities, the cost of which could be substantial.  Such regulations allow the financialassurance requirements to be satisfied by various means, including letters ofcredit, surety bonds, trust funds, a financial (net worth) test, and aguarantee by a parent corporation.  UnderRCRA regulations, a company must pay the closure costs for a facility owned byit upon the closure of the facility and thereafter pay post-closure care costs.

 

With the exception of the matters described in Item 3. LegalProceedings, below, we believe that each of our operating facilities iscurrently in substantial compliance with the applicable requirementspromulgated pursuant to RCRA.

 

*CERCLA*.  The ComprehensiveEnvironmental Response, Compensation and Liability Act, as amended in 1986(“CERCLA”), provides for immediate response and removal actions coordinated bythe EPA for releases of hazardous substances into the environment andauthorizes the government, or private parties, to respond to the release orthreatened release of hazardous substances. The government may also orderpersons responsible for the release to perform any necessary cleanup. Liabilityextends to the present owners and operators of waste disposal facilities fromwhich a release occurs, persons who owned or operated such facilities at thetime the hazardous substances were released, persons who arranged for disposalor treatment of hazardous substances and waste transporters who selected suchfacilities for treatment or disposal of hazardous substances. CERCLA has beeninterpreted to create strict, joint and several liability for the cost ofremoval and remediation, other necessary response costs and damages for injuryto natural resources.

 

If our operations or facilities are responsible for the release orimproper disposal of hazardous substances, we could incur CERCLA liability. Wemay also incur CERCLA liability as a result of environmental contaminationcaused by hazardous substances, the transportation, treatment or disposal ofwhich we arranged or which was arranged by the owners of a business that wehave acquired.

 

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With the exception of the matters described in Item 3. LegalProceedings, below, we are not aware of any material claims against us or anyof our subsidiaries that are based on CERCLA.  Nonetheless, the identification of any sites at which cleanup action isrequired could subject us to liabilities which could have a material adverseeffect on our business, results of operations and financial condition.

 

*The Clean Air Act*.  TheClean Air Act provides for federal, state and local regulation of emissions ofair pollutants into the atmosphere. Any modification or construction of afacility with regulated air emissions must be a permitted or authorizedactivity. The Clean Air Act provides for administrative and judicialenforcement against owners and operators of regulated facilities, includingsubstantial penalties. In 1990, the Clean Air Act was reauthorized and amended,substantially increasing the scope and stringency of the Clean Air Act’sregulations. Compliance with the Clean Air Act is not expected to have amaterial adverse effect on our business, results of operations or financialcondition.

 

***State and Local Regulations***

 

Our waste processing facilities are subject to direct regulation by avariety of state and local authorities. Typically, we are required to obtainprocessing, wastewater discharge and air quality permits from state and localauthorities to operate these facilities and to comply with applicable regulationsconcerning, among other things, the generation and discharge of odors andwastewater.   In addition, state lawsand regulations typically govern the manner in which a waste processingfacility may be closed and require us to post financial assurance to assurethat all waste will be treated and a facility closed appropriately.

 

Order 29-B of the Louisiana Department of Natural Resources containsextensive rules regarding the generation, processing, storage, transportationand disposal of oilfield waste. Under Order 29-B, on-site disposal of oilfieldwaste is limited and subject to stringent guidelines. If these guidelinescannot be met, oilfield waste must be transported and disposed of off-site inaccordance with the provisions of Order 29-B. Moreover, under Order 29-B, most,if not all, active waste pits (a typical on-site disposal method used by inlandgenerators of oilfield waste) must be closed or modified to meet regulatorystandards; however, full enforcement of this portion of Order 29-B has beendeferred. A number of amendments to Order 29-B were adopted effective as ofNovember 20, 2001.  Compliance withthese amendments is not expected to have a material adverse effect on ourbusiness, results of operations or financial condition.  The Texas Railroad Commission has alsoadopted detailed requirements for the management and disposal of oilfieldwaste. Permits issued by state regulatory agencies are required for eachoilfield waste treatment facility operating within Louisiana and Texas. We mustperform tests before acceptance of any oilfield waste, as well as during andafter treatment to ensure compliance with all regulatory requirements.

 

The states in which we operate have their own laws and regulations thatmay be more strict than comparable federal laws and regulations governinghazardous and nonhazardous waste disposal, water and air pollution, releasesand cleanup of hazardous substances and liabilities for such matters. Ourfacilities and operations are likely to be subject to many, if not all, ofthese laws and regulations. In addition, states and localities into which wemay expand, by acquisition or otherwise, may now or in the future haveregulations with positive or negative effects on us.

 

***Factors Influencing Future Resultsand Accuracy of Forward-Looking Statements***

 

In the normal course of our business, in an effort to help keep ourstockholders and the public informed about our operations, we may from time totime issue or make certain statements, either in writing or orally, that are orcontain forward-looking statements, as that term is defined in the U.S. federalsecurities laws.  Generally, thesestatements relate to business plans or strategies, projected or anticipatedbenefits or other consequences of such plans or strategies, projected oranticipated benefits from acquisitions made by or to be made by us, orprojections involving anticipated revenues, earnings or other aspects ofoperating results.  The words “may,”“will,” “expect,” “anticipate,” “believe,” “estimate,” “continue” and similarexpressions are intended to identify forward-looking statements.  We caution readers that such statements arenot guarantees of future performance or events and are subject to a number offactors that may tend to influence the accuracy of the statements and theprojections upon which the statements are based, including but not limited tothose discussed below.  As notedelsewhere in this report, all phases of our operations are subject to a numberof uncertainties, risks and other influences, many of which are outside of ourcontrol, and any one of which, or a combination of which, could materiallyaffect the results of our operations and whether forward-looking statementsmade by us ultimately prove to be accurate.

 

The following discussion outlines certain factors that could affect ourconsolidated results of operations for 2002 and beyond and cause them to differmaterially from those that may be set forth in forward-looking statements madeby us or on our behalf.

 

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***Risks Related to Operating andInternal Growth Strategy***

 

Key elements of our strategy are to improve the profitability andincrease the revenues of our existing operations and any subsequently acquiredbusinesses. We intend to improve the profitability of our existing operationsand any subsequently acquired businesses by various means, including achievingoperating efficiencies and economies of scale. Our ability to increase therevenues of our existing operations will be affected by various factors,including:

 

•                                          The demand for liquid waste collection,processing and disposal services;

 

•                                          Our ability to expand the range of servicesoffered to customers;

 

•                                          Our ability to develop national and regionalaccounts for our liquid waste management services and other marketing programs;

 

•                                          The demand for by-products we recover fromcertain liquid waste streams; and

 

•                                          The results of the on-going investigation ofour Detroit facility.

 

Many of these factors are beyond our control, and there can be noassurance that our operating and internal growth strategies will be successfulor that we will be able to generate cash flows adequate for our operations andto support internal growth.

 

***Management of Growth***

 

To manage our growth effectively, we must implement and improve ouroperational, financial and management information systems and controls, andtrain, motivate and manage our employees. We periodically review and upgradeour management information systems, as well as hire additional management andother personnel in order to maintain the adequacy of our operational, financialand management controls. If we fail to manage our growth effectively, ourbusiness, results of operations and financial condition could be materially andadversely affected.

 

***Competition***

 

The liquid waste management industry is highly fragmented and verycompetitive. We compete with other liquid waste processing facilities andalternative methods of disposal of certain waste streams provided by arealandfills and injection wells, as well as the alternative of illegal disposal.In addition, competitive products and services have been and are likely tocontinue to be developed and marketed by others. Furthermore, futuretechnological change and innovation may result in a reduction in the amount ofliquid waste being generated or alternative methods of processing and disposalbeing developed. The markets for the various by-products that we sell are alsovery competitive. With respect to our oilfield waste operations, we mustcompete with alternative methods of off-site disposal of oilfield waste. Wealso face competition from customers who develop or enhance their own methodsof disposal instead of using the services of liquid waste management companies.Future technological change and innovation may increase the amount of internaloilfield waste processing and disposal as well as the number of competitors inthis market. Increased use of internal processing and disposal methods andother competitive factors could have a material adverse effect on our business,results of operations and financial condition.

 

As previously mentioned, Newpark Resources, Inc. has always been thelargest customer of our Oilfield Waste Division.  Our disposal agreement with Newpark is currently scheduled toexpire on June 30, 2002. Consequently, unless we enter into a new agreement with Newpark,commencing in July 2003, Newpark will have no obligation or incentive todeliver any oilfield waste to any of our landfarms and we will begin competingwith Newpark and others for oilfield waste generated offshore or in inlandwaters in the Gulf Coast region.

 

Our competitors may be better capitalized, have greater namerecognition or be able to provide services or products at a lower cost. Inaddition, as the liquid waste market matures, competition can be expected toincrease. As a result of these and other competitive factors, our strategy maynot be successful and we may not be able to generate adequate cash flows tofund our operations.

 

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***Failure to Comply With GovernmentalRegulations***

 

Our business is subject to numerous federal, state and local laws,regulations and policies that govern environmental protection, zoning and othermatters. These laws and regulations have changed frequently in the past and, asdemonstrated by the new treatment guidelines implemented under the Clean WaterAct, it is reasonable to expect additional changes in the future. We may berequired to make significant capital and operating expenditures to bring ourfacilities into compliance with these new guidelines or in the event that otherexisting regulatory requirements change. Although we believe that we arepresently in material compliance with applicable laws and regulations, ouroperations may not continue to comply with future laws and regulations.Governmental authorities may seek to impose fines and penalties on us or seekto revoke or deny the issuance or renewal of operating permits for failure tocomply with applicable laws and regulations. Under these circumstances, wemight be required to curtail or cease operations or conduct site remediationuntil a particular problem is remedied, which could have a material adverseeffect on our business, results of operations and financial condition.

 

***Potential Impact of GovernmentalInvestigation of our Detroit Facility***

 

Our Detroit, Michigan facility is under investigation by the EPA andthe  Federal Bureau of Investigation(“FBI”) for possible violations of the Clean Water Act, RCRA, and federal wireand mail fraud statutes.  Thisinvestigation was initiated in 1999 as a result of allegations that(i) the facility knowingly discharged into the Detroit sewer systemuntreated hazardous liquid waste in violation of city ordinances, thefacility’s permit and the Clean Water Act, and (ii) without proper manifesting,the facility knowingly transported and disposed of hazardous solid waste at anunpermitted treatment facility in violation of RCRA.  We have cooperated with the governmental agencies involved inthis investigation and are currently engaging in discussions with the U.S.Attorney’s office in Detroit concerning a possible settlement of thismatter.  There can be no assurance thatwe will be successful in negotiating a settlement with the U.S. Attorney orthat the $5.0 million reserve that we recorded during the fourth quarterof 2001 to cover amounts expected to be paid in connection with any suchsettlement will be sufficient.  Our failureto negotiate a settlement of this matter could result in the commencement ofcivil and/or criminal actions against the Company, either of which could have amaterial adverse effect on our business, results of operations and financialcondition.  In addition, theannouncement of a settlement of this matter could cause customers of thefacility to deliver their waste to competing facilities and such customerlosses could have a material adverse effect on our business, results ofoperations and financial condition.

 

***Risks Related to Our Long-Term Debt***

 

We have a revolving credit facility with a group of banks under whichwe may borrow to fund our working capital requirements.  The credit agreement contains affirmative,negative, subjective and financial covenants.  Our fourth quarter 2001 results caused us to be out of compliance withcertain of the financial covenants of the credit facility.  During the first quarter of 2002, the termsof the credit facility were amended to, among other things, extend the maturitydate to June 15, 2002, reduce the amount of the credit facility from $111.25million to $99.7 million, increase the interest rates payable under thecredit facility,  and waive ournoncompliance with and modify the terms of certain of our financialcovenants.  In addition, on March 28, 2002,the terms of the credit facility were amended to, among other things, extendthe maturity date to April 15, 2003 and increase the interest ratespayable under the credit facility. There can be no assurance that we will be successful in complying with allof the financial covenants contained in the amended credit agreement.  Any such failure would constitute an eventof default under the amended credit agreement, allowing the banks to call theloan and exercise their rights under the amended credit agreement and otherloan documents.

 

As described above, our lenders have agreed to extend the maturity dateof the credit facility to April 15, 2003. Consequently, by such date, we must either extend the term of the creditfacility or obtain an alternative source of financing.  Our failure to obtain such an extension oran alternative source of financing would have a material adverse effect on ourbusiness, results of operations, financial condition and liquidity.

 

***Impact of Failure to Obtain orMaintain Necessary Governmental Approvals***

 

We operate in a highly regulated environment and are required to havepermits and approvals from federal, state and local governments. Any of thesepermits or approvals or applications could be denied, revoked or modified undervarious circumstances. In addition, if new environmental legislation orregulations are enacted or existing legislation or regulations are amended orare enforced differently, we might be required to obtain additional operatingpermits or approvals. The process of obtaining or renewing a required permit orapproval can be lengthy and expensive and our efforts to obtain permits,renewals or approvals may be opposed by citizens

 

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groups, adjacent landowners or others. Our facilities in Chandler,Arizona and Detroit, Michigan have never been granted Part B permits under RCRAand are continuing to operate under interim status, as allowed by RCRA.  In addition, our facility in East Palo Alto,California is operating under a California Department of  Toxic Substances Control permit that expiredin 1991, but that allows for ongoing operations. Although applicableregulations allow these facilities to continue to operate, we may not besuccessful in obtaining or maintaining these and other required permits andapprovals and that failure could have a material adverse effect on ourbusiness, results of operations and financial condition.

 

***Potential Environmental Liability***

 

We may be subject to liability for environmental damage that ourprocessing facilities and collection operations may have caused or may causenearby landowners, particularly as a result of the contamination of drinkingwater sources or soil, including damage resulting from conditions existing priorto our acquisition of the facilities or operations. Liability may also arisefrom any off-site environmental contamination caused by hazardous substances,the transportation, treatment or disposal of which we arranged or which wasarranged by the owners of businesses that we have acquired. Any substantialliabilities for environmental damage could have a material adverse effect onour business, results of operations and financial condition.  During the ordinary course of our business,we may become involved in a variety of legal and administrative proceedingsrelating to land use and environmental laws and regulations, including actionsor proceedings:

 

•                                          By governmental agencies seeking to imposecivil or criminal penalties on us;

 

•                                          By governmental agencies seeking to revoke ordeny renewal of one or more of our permits;

 

•                                          By citizens groups, adjacent landowners orgovernmental agencies opposing the issuance of a permit or approval to us oralleging violations of the permits under which we operate; or

 

•                                          By citizens groups and adjacent landownersseeking to impose liability on us for environmental damage at any of ourfacilities (or facilities formerly owned by us or any acquired business) ordamage that those facilities or other properties may have caused.

 

The adverse outcome of one or more of these proceedings could have amaterial adverse effect on our business, results of operations and financialcondition.

 

During the ordinary course of our operations, we have from time to timereceived, and expect that we may in the future receive, citations or noticesfrom governmental authorities that our operations are not in compliance withour permits or certain applicable environmental or land use laws andregulations. We generally seek to work with the authorities to resolve theissues raised by these citations or notices. However, we may not always besuccessful in this regard and future citations or notices could have a materialadverse effect on our business, results of operations and financial condition.

 

***Insufficiency of Insurance***

 

While we maintain liability insurance, it is subject to coverage limitsand certain policies exclude coverage for damages resulting from environmentalcontamination. Although there are currently numerous sources from which suchcoverage may be obtained, it may not continue to be available to us oncommercially reasonable terms or the possible types of liabilities that may beincurred by us may not be covered by our insurance. In addition, our insurancecarriers may not be able to meet their obligations under the policies or thedollar amount of the liabilities may exceed our policy limits. Even a partiallyuninsured claim, if successful and of significant magnitude, could have amaterial adverse effect on our business, results of operations, financialcondition and liquidity.  We also retaina risk for our self insured employee group health claims resulting fromuninsured deductibles per accident or occurrence which are subject to an annualaggregate stop loss limit on a claim basis and on an aggregate basis.

 

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***Potential Impact of Insolvency ofReliance Insurance Company***

 

In October 2001, Reliance Insurance Company, one of our primaryinsurance carriers, was declared insolvent by the Insurance Commissioner of theState of Pennsylvania and placed into liquidation.  As a result, insurance coverage may not be available for anyclaims asserted against us for which insurance coverage was to be provided byReliance and that were not resolved prior to Reliance being placed intoliquidation.  To the extent thatinsurance coverage is not available to cover settlement of any such claimasserted against us or a judgment entered against us, the settlement orjudgment would have to be paid by the Company. There can be no assurance that the $3.5 million reserve that werecorded during the fourth quarter of 2001 to cover amounts expected to be paidin connection with such claims will be sufficient.  Any such claim, if successful and of significant magnitude, couldhave a material adverse effect on our business, results of operations,financial condition and liquidity.

 

***Dependence Upon Oilfield WasteExemption Under RCRA and Other Environmental Regulations***

 

Oilfield waste is currently exempt from therequirements of RCRA, which is the principal federal statute governing thehandling and disposal of waste. In recent years, proposals have been made torescind or modify this exemption. The repeal or modification of the exemptioncovering oilfield waste or modification of applicable regulations orinterpretations regarding the processing and disposal of oilfield waste wouldrequire us to alter our method of processing and disposing of oilfield waste.This could have a material adverse effect on our business, results ofoperations and financial condition. Each of our operations is also dependent to varying degrees on theexistence and enforcement of local, state and federal environmentalregulations. Any repeal or relaxation of those regulations, or a failure ofgovernmental authorities to enforce the regulations, could result in decreaseddemand for our services and, therefore, could have a material adverse effect onour business, results of operations and financial condition. Our operations mayalso be adversely affected by new regulations or changes in other applicableregulations.

 

***Dependence on Oil and Gas Industry***

 

Demand for our oilfield waste processing anddisposal services depends in large part upon the level of exploration for andproduction of oil and gas, particularly in the Gulf Coast region. This demand,in turn, depends on, among other things, oil and gas prices, expectations aboutfuture prices, the cost of exploring for, producing and delivering oil and gas,the discovery rate of new oil and gas reserves and the ability of oil and gascompanies to raise capital. Historically, prices for oil and gas have beenextremely volatile and have reacted to changes in the supply of and demand foroil and natural gas, domestic and worldwide economic conditions and politicalinstability in oil-producing countries. Current levels of oil and gasexploration and production activities may not be maintained. Prices for oil andnatural gas are expected to continue to be volatile and affect demand for ouroilfield waste services. A material decline in oil or natural gas prices orexploration activities could materially affect the demand for our oilfieldwaste services and, therefore, our business, results of operations andfinancial condition.

 

***Reliance on Key Personnel***

 

We are highly dependent on our executiveofficers and senior management, and we likely will depend on the seniormanagement of any significant business we acquire in the future. The loss ofthe services of any of our current executive officers or key employees or anymember of senior management of any acquired business could have a materialadverse effect on our business, results of operations and financial condition.In addition, debt outstanding under our credit facility may be accelerated bythe lenders if, among other things, Michael P. Lawlor or Earl J. Blackwellceases to serve as an executive officer of the Company and is not replacedwithin 60 days by an individual reasonably satisfactory to the lenders. We havetried to reduce some of this risk by maintaining key man life insurance in theamount of $5.0 million on both Mr. Lawlor and Mr. Blackwell.

 

***Volatility of Our Stock Price***

 

Our common stock was first publicly traded onAugust 20, 1997 and has traded from a low of $1.75 per share to a high of$26.38 per share. The market price of our common stock could continue tofluctuate substantially due to a variety of factors, including:

 

•                                          Quarterly fluctuations in results ofoperations;

 

•                                          Announcement of the results of thegovernmental investigation of our Detroit facility;

 

•                                          Further changes to our revolving creditfacility;

 

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•                                          Changes in the regulatory environment ormarket conditions affecting the liquid waste management industry;

 

•                                          Changes in earnings estimates by analysts;

 

•                                          Loss of key personnel;

 

•                                          Changes in accounting principles or policies;

 

•                                          Sales of common stock by existingstockholders;

 

•                                          Announcements of key developments bycompetitors; and

 

•                                          Economic and political conditions.

 

The market price for our common stock may also be affected by ourability to meet analysts’ expectations. Any failure to meet such expectations,even slightly, could have an adverse effect on the market price of our commonstock.

 

**Item2.  Properties**

 

Our corporate offices are located in Houston, Texas. The corporateoffices consist of approximately 20,000 square feet of office space occupiedunder a lease which expires on June 30, 2007.

 

The Commercial Wastewater Division operates 23 liquid waste processingfacilities. We believe that the specialized equipment, licenses and permitsnecessary to operate these liquid waste processing facilities create asignificant barrier to entry into this industry. The following table sets forthcertain information relating to each such facility, including the types ofliquid waste most commonly managed:

 
| **Facility**            |   | **Location**                  |   | **Liquid Wastes Managed**                                     |   | **Owned/Leased** |
|-------------------------|--------|-------------------------------|--------|---------------------------------------------------------------|--------|------------------|
| Parallel  CA            |   | Rancho  Cucamonga, California |   | Bulk  Liquids and Dated Beverages                             |   | Owned            |
| Parallel  FL            |   | Bartow,  Florida              |   | Bulk  Liquids and Dated Beverages                             |   | Leased           |
| National  Solvent       |   | Atlanta,  Georgia             |   | Industrial  Wastewaters                                       |   | Leased           |
| D&H  Holding        |   | Hammond,  Indiana             |   | Industrial  Wastewaters; Grease and  Grit Trap Waste; Septage |   | Leased           |
| Parallel  KY            |   | Louisville,  Kentucky         |   | Bulk  Liquids and Dated Beverages                             |   | Owned            |
| Bio-Vac                 |   | Shreveport,  Louisiana        |   | Grease  and Grit Trap Waste                                   |   | Owned            |
| A&A  Environmental  |   | Linthicum  Heights, Maryland  |   | Industrial  Wastewaters                                       |   | Owned            |
| Northern  A-1           |   | Kalkaska,  Michigan           |   | Industrial  Wastewaters                                       |   | Owned            |
| Royal  Recycling        |   | Hamilton,  Ontario, Canada    |   | Dated  Beverages                                              |   | Leased           |
| Gateway  Terminal       |   | Carteret,  New Jersey         |   | Industrial  Wastewaters                                       |   | Leased           |
| Waste  Stream           |   | Weedsport,  New York          |   | Biosolids                                                     |   | Leased           |
| E-Max  Elwood           |   | Elwood  City, Pennsylvania    |   | Industrial  Wastewaters                                       |   | Leased           |
| E-Max  Allegheny        |   | Pittsburgh,  Pennsylvania     |   | Industrial  Wastewaters                                       |   | Leased           |
| Austin  Liquid Disposal |   | Austin,  Texas                |   | Grease  and Grit Trap Waste                                   |   | Leased           |
| Environment  Management |   | Austin,  Texas                |   | Grease  and Grit Trap Waste                                   |   | Leased           |
| Mesa                    |   | Dallas,  Texas                |   | Grease  and Grit Trap Waste                                   |   | Owned            |
| Amigo  North            |   | Giddings,  Texas              |   | Petroleum  Fuels                                              |   | Owned            |
| Reclamation  Technology |   | Haltom  City, Texas           |   | Industrial  Wastewaters                                       |   | Leased           |
| American  Wastewater    |   | Houston,  Texas               |   | Industrial  Wastewaters; Grease and  Grit Trap Waste; Septage |   | Owned            |
| Re-Claim  TX            |   | Houston,  Texas               |   | Industrial  Wastewaters                                       |   | Owned            |
| Waste  Technologies     |   | San  Antonio, Texas           |   | Grease  and Grit Trap Waste                                   |   | Owned            |
| Imperial  (Mesa)        |   | San  Antonio, Texas           |   | Grease  and Grit Trap Waste                                   |   | Owned            |
| Amigo  South            |   | San  Antonio, Texas           |   | Petroleum  Fuels                                              |   | Owned            |

 

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The Industrial Wastewater Division operates six waste processingfacilities.  The following table setsforth certain information relating to each such facility, including the typesof waste most commonly managed:

 
| **Facility**            |   | **Location**                |   | **Liquid Wastes Managed**                 |   | **Owned/Leased** |
|-------------------------|--------|-----------------------------|--------|-------------------------------------------|--------|------------------|
| Romic  AZ               |   | Chandler,  Arizona          |   | Hazardous  Wastes; Industrial Wastewaters |   | Leased           |
| Romic  CA               |   | East  Palo Alto, California |   | Hazardous  Wastes; Industrial Wastewaters |   | Owned            |
| USL  Florida            |   | Tampa,  Florida             |   | Household  Hazardous Wastes               |   | Owned            |
| Waste  Research Augusta |   | Augusta,  Georgia           |   | Industrial  Wastewaters                   |   | Owned            |
| Waste  Research Macon   |   | Macon,  Georgia             |   | Industrial  Wastewaters                   |   | Owned            |
| USL  Detroit            |   | Detroit,  Michigan          |   | Hazardous  Wastes; Industrial Wastewaters |   | Owned            |

 

The Oilfield Waste Division operates six oilfield waste processingfacilities and ten commercial saltwater injection wells. The following tablesets forth certain information relating to each processing facility:

 
| **Location**               |   | **Area Permitted  for Oilfield  Waste Processing  and Disposal** |   | **Approximate  Square Footage  of Office  Facilities** |   | **Owned/Leased** |   |
|----------------------------|--------|------------------------------------------------------------------|--------|--------------------------------------------------------|--------|------------------|--------|
| Bateman Island,  Louisiana |   | 115 acres                                                        |   | 5,000                                                  |   | Leased           |   |
| Bourg, Louisiana           |   | 140 acres                                                        |   | 5,000                                                  |   | Leased           |   |
| Elm Grove,  Louisiana      |   | 152 acres                                                        |   | 500                                                    |   | Owned            |   |
| Mermentau,  Louisiana      |   | 277 acres                                                        |   | 10,000                                                 |   | Owned            |   |
| Bustamonte, Texas          |   | 120 acres                                                        |   | 1,000                                                  |   | Owned            |   |
| San Isidro, Texas          |   | 80 acres                                                         |   | 1,000                                                  |   | Leased           |   |

 

In addition to the facilities described above, we also own a facilityin Lacassine, Louisiana consisting of approximately 8,000 square feet of officeand equipment storage space and approximately 130 acres of undeveloped landthat was previously used for landfarming of oilfield waste and naturallyoccurring radioactive material.  Thisfacility has been closed in accordance with Louisiana law.  We also own a facility in Kansas City,Missouri that was previously used for storage and bulking of various hazardouswastes and a facility in Roseville, Michigan that was previously used for fuelblending and solvent recycling. The Kansas City and Roseville facilities havenot been operational since 1992 and we have no plans to resume operations ateither of these facilities.  We alsolease the Re-Claim facility located in Shreveport, Louisiana.  We ceased on-going operations at thisfacility in early 2001; however, the lease on the facility will not expireuntil September 2007.

 

We own other real estate, buildings and physical properties that we usein our liquid waste collection operations. We also lease certain of our collection and transportation facilitiesand administrative offices.

 

All of our facilities satisfy our present needs; however, as part ofour internal growth strategy, we intend to expand the capacity and processingcapabilities of certain of our liquid waste processing facilities and increasethe number and types of permitted waste streams of such facilities.  We believe that the remaining capacity ofeach of the landfarms that we lease is sufficient for at least 25 years; which,in each case, exceeds the remaining term (including options) of the leaseagreement for such facility. We also believe that the remaining capacity ateach of the landfarms that we own is sufficient for at least 25 years.

 

**Item3.  Legal Proceedings**

 

***Regulatory Proceedings***

 

In May 1998, we acquired from Waste Management, Inc. substantially allof the assets of City Environmental, Inc., including a hazardous andnonhazardous waste treatment facility located in Detroit, Michigan.   On August 25, 1999, the EPA and theFBI jointly executed a search warrant at this facility, seeking documentationrelating to the facility’s receipt, processing and disposal of hazardouswaste.  According to the affidavitattached to the search warrant, the investigation was triggered by allegationsthat (i) the facility

 

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knowingly discharged untreated hazardous liquid waste into the Detroitsewer system in violation of city ordinances, the facility’s permit and theClean Water Act, and (ii) without proper manifesting, the facility knowinglytransported and disposed of hazardous solid waste at an unpermitted treatmentfacility in violation of RCRA.  Theaffidavit alleged that these activities had been taking place since 1997, whichwas before we acquired the facility. The investigation is now under the direction of the U.S. Attorney’soffice in Detroit.  We have cooperatedwith the EPA, the FBI and the U.S. Attorney throughout this investigation and,to date, no civil action or criminal indictment has been initiated against theCompany or any individual.   We arecurrently engaging in discussions with the U.S. Attorney concerning a possiblesettlement of this matter.  Based uponour discussions with the U.S. Attorney and other available information, duringthe fourth quarter of 2001 we recorded a $5.0 million reserve to coveramounts expected to be paid in connection with any such settlement.  Management believes that this reserve issufficient; however, there can be no assurance that we will be successful innegotiating a settlement with the U.S. Attorney or that the amounts to be paidin connection with any such settlement will not exceed $5.0 million.  Our failure to negotiate a settlement ofthis matter could result in the commencement of civil and/or criminal actionsagainst the Company, either of which could have a material adverse effect onour business, results of operations and financial condition.

 

The EPA notified us in 1999 that liquid waste received by our Re-ClaimLouisiana facility and stored off-site contained hazardous constituents and,therefore, the waste could not be processed by the facility.  We believed that the waste could be handledas nonhazardous waste.  A reserve wasestablished for costs incurred in the event that this waste had to be deliveredto a third party for processing and disposal. As of December 31, 2001, approximately $0.9 million of this reserveremained accrued to process and dispose of the remaining waste.  As previously reported, our Re-ClaimLouisiana facility ceased on-going operations in early 2001.

 

Prior to its acquisition by the Company in January 1999, RomicEnvironmental Technologies Corporation had entered into an administrativeconsent order with the EPA relating to the cleanup of soil and groundwatercontamination at its facility in East Palo Alto, California.  A remedial investigation of the facility hasbeen completed by Romic and forwarded to the EPA.  The EPA has authorized Romic to conduct a pilot study utilizingin-situ enhanced bio-remediation to determine whether that method will be aneffective corrective measure.  Thisstudy began during the first quarter of 2001 and will continue forapproximately one year, at which time, if successful, the EPA may approve thismethod for final site remediation. Prior to its acquisition by the Company, Romic had also been notified bythe EPA and the California Department of Toxic Substances Control that it was apotentially responsible party under applicable environmental legislation withrespect to the Bay Area Drum Superfund Site in San Francisco, California, theLorentz Barrel and Drum Superfund Site in San Jose, California and the CasmaliaResources Hazardous Waste Management Facility located near Santa Barbara,California, each of which was a drum reconditioning or disposal site previouslyused by Romic.  With respect to each ofthese drum reconditioning or disposal sites, Romic and a number of otherpotentially responsible parties have entered into administrative consent ordersand/or agreements allocating each party’s respective share of the cost ofremediating the sites.  Romic’s shareunder 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 available, we have continued tomaintain a reserve to cover Romic’s estimated costs to remediate the East PaloAlto facility and the three drum reconditioning or disposal sites.  As of December 31, 2001, the balance ofthis reserve was $3.4 million, of which $0.5 million is expected tobe paid in 2002.  Management believesthat this reserve is sufficient to satisfy Romic’s obligations under theconsent orders and agreements; however, due to the complex, ongoing andevolving process of investigating and remediating these sites, Romic’s actualcosts 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 apotentially responsible party under CERCLA with respect to the Lenz OilServices Superfund Site in DuPage County, Illinois.  During the first quarter of 2001, the Company and a number ofother potentially responsible parties entered into a consent decree allocatingeach party’s respective share of the cost of remediating this site.  Based upon the information available, wehave continued to maintain a reserve to cover our share of the estimated coststo remediate the Lenz Oil Services site. As of December 31, 2001, the balance of this reserve was $145,000.  We have made demand upon the formerstockholders of D&H Holding for indemnification against any costs that wemay incur in connection with the remediation of this site.

 

The Company’s non-saleable beverage operations, which operate under theParallel Products name, are subject to regulation by the U. S. Bureau ofAlcohol, Tobacco and Firearms (“ATF”). In addition to regulating the production, distribution and sale ofalcohol and alcohol containing products, the ATF is also responsible forcollecting the federal excise taxes (“FET”) that must be paid on distilledspirits, wine and beer.  If alcoholicbeverages on which the FET have been paid are returned to bond at our ParallelProducts’ premises for destruction, the party who has paid the FET on thedestroyed product is entitled to a refund. When our customers return distilled spirits, wine or beer from commerceto one of our facilities for destruction, we generally file a claim with theATF on behalf of that customer for refund of the FET paid on that product.  The ATF periodically inspects the ParallelProducts facilities both to insure

 

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compliance with its regulations and to substantiate claims for FETrefunds.  During 2000, the ATF conductedinspections at our Louisville, Kentucky and Rancho Cucamonga, Californiafacilities.  At the conclusion of theseinspections, the ATF preliminarily notified us that it intended to deny certainrefund claims, some of which had already been paid by the ATF to our customers,due to what the ATF alleges was inadequate, incomplete or unsubstantiatedsupporting documentation.  In addition,the ATF proposed a civil penalty of $30,000 based on the alleged defects in ourdocumentation.  During the third quarterof 2001, the ATF notified us that, in order to recoup refund claims previouslypaid to our customers, the ATF was assessing taxes of $1.175 millionagainst the facilities.  During thefourth quarter of 2001, we offered to pay $450,000 to the ATF to resolve all ofthe ATF’s claims against the facilities and delivered a check for such amountto the ATF.  Based upon our discussionswith the ATF, we believe that our offer will be accepted by the ATF.  The proposed assessment by the ATF does notaddress approximately $525,000 of refund claims that we submitted on behalf ofour customers that either have already been denied or are likely to be deniedas a result of the alleged defects in our documentation.  We are currently engaging in discussionswith the affected customers concerning the refund claims in question.  Settlements have been reached with certaincustomers and we believe that satisfactory settlements can be reached with allof the other affected customers.   Aftergiving effect to the proposed settlement with the ATF and the on-goingdiscussions with our customers, management reassessed the reserve that wasestablished for this matter in December 2000. As of December 31, 2001, the total reserve remaining was$0.3 million.  Management believesthat this reserve is sufficient.

 

***Litigation***

 

During the third quarter of 1999, six purported securities class actionlawsuits were filed against the Company and certain of its officers anddirectors in the United States District Court for the Southern District ofTexas, Houston Division.  These lawsuitshave been consolidated into a single action styled In re: U S LiquidsSecurities Litigation, Case No. H-99-2785, and the plaintiffs have filed aconsolidated complaint alleging violations of Sections 11, 12(a)(2) and 15 ofthe Securities Act of 1933 (“Securities Act”) on behalf of purchasers of theCompany’s common stock in our March 1999 public offering  and violations of Sections 10(b) and 20(a) of the Securities Exchange Act of1934 (“Exchange Act”) and Rule 10b-5 promulgated thereunder on behalf ofpurchasers of the Company’s  commonstock during the period beginning on May 12, 1998 and ending on August 25,1999.  The plaintiffs generally allegethat the defendants made false and misleading statements and failed to discloseallegedly material information regarding the operations of our Detroit facilityand the Company’s financial condition in the prospectus relating to our March1999 stock offering and in certain other public filings and announcements madeby the Company.   The remedies sought bythe plaintiffs include designation of the action as a class action, unspecifieddamages, attorneys’ and experts’ fees and costs, rescission to the extent anymembers of the class still hold common stock, and such other relief as thecourt deems proper.  During 2000, wefiled a motion to dismiss the plaintiffs’ consolidated complaint.  In January 2001, the court entered an Orderof Partial Dismissal which dismissed the claims asserted by the plaintiffsunder Sections 10(b) and 20(a) and Rule 10b-5 of the Exchange Act, but grantedthe plaintiffs leave to file an amended complaint.  The deadline for filing an amended complaint has passed and theplaintiffs have advised the court that, while preserving all of their rightsregarding the claims under Sections 10(b) and 20(a) of the Exchange Act, theywill proceed on the current complaint as affected by the Order of PartialDismissal.  Accordingly, the lawsuit isproceeding only with respect to the claims asserted under Sections 11, 12(a)(2)and 15 of the Securities Act.  Thislawsuit is currently set for trial on November 25, 2002.

 

In addition, one stockholder of the Company has filed a lawsuit againstcertain of the officers and directors of the Company in connection with theoperation of the Company’s Detroit facility and the securities class actiondescribed above.  Benn Carmicia v.U S Liquids Inc., et al., was filed in the United States DistrictCourt for the Southern District of Texas, Houston Division, on September 15,1999 and was subsequently consolidated with the claims asserted in thesecurities class action described above. The plaintiff purports to allege derivative claims on behalf of theCompany against the officers and directors for alleged breaches of fiduciaryduty resulting from their oversight of the Company’s affairs.  The lawsuit names the Company as a nominaldefendant and seeks compensatory and punitive damages on behalf of the Company,interest, equitable and/or injunctive relief, costs and such other relief asthe court deems proper.  We believe thatthe stockholder  derivative action wasnot properly brought and we have filed a motion to dismiss this action in orderto allow the Board of Directors to consider whether such litigation is in thebest interest of the Company and our stockholders.   As of the date of this report, no ruling has been made by thecourt on our motion to dismiss.  Thislawsuit is currently set for trial in February 2003.

 

On April 21, 1998, we acquiredsubstantially all of the assets of Parallel Products, a California limitedpartnership (“Parallel”).  In additionto the consideration paid at closing, we agreed that, if the earnings beforeinterest, taxes, depreciation and amortization (“EBITDA”) of the businessesacquired from Parallel exceeded a specified amount in any four consecutivequarters during the three year period after the closing of the acquisition, wewould pay to Parallel an additional $2.1 million in cash and an additional $2.1million in common stock.  During thethird quarter of 2000, Parallel filed suit against the Company alleging thatthe acquired businesses achieved

 

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the specified EBITDA amount for thefour quarters ended December 31, 1999 and for the four quarters ended March 31,2000.  Parallel is seeking a declaratoryjudgment that the EBITDA amount specified in the acquisition agreement has beenachieved and that it is entitled to receive the contingent cash and stockpayments described above.  Parallel alsoalleges that it is entitled to recover compensatory damages of $4.2 million,punitive damages, interest, attorneys’ fees and costs, and such other relief asthe court deems proper.  We have deniedthat we have any liability to Parallel and we have filed a counterclaim againstParallel alleging that Parallel breached certain of the representations andwarranties made to us in the acquisition agreement.  This lawsuit is still in the discovery stage and no trial datehas been set.

 

In January 2002, we settled the claimsasserted by Downstream Environmental, L.L.C. and Dan Noyes against the Companyand our subsidiary, U S Liquids of Texas, Inc. The settlement did not have a material impact on our results ofoperations or financial condition or on the operations of our American Wastewaterfacility.

 

In April 1998, we acquired substantially all of the assets of BettsPump Service, Inc. in return for cash and shares of Company common stock.  As part of the transaction, Betts Pumpagreed that it would not sell one-half of the shares of Company common stock itreceived in the transaction for at least one year after the closing of thetransaction, and a restrictive legend to that effect was placed on the stockcertificate representing these shares.  OnJanuary 31, 2001, Keith Betts, Betts Pump and Betts Environmental, Inc. filedsuit in the District Court of Kaufman County, Texas against their formerstockbroker and the Company alleging that their stockbroker and the Companyprevented the plaintiffs from selling the restricted shares of Company commonstock.  The plaintiffs have alsoalleged, among other things, that we made false and misleading statements andfailed to disclose allegedly material information regarding the Company inconnection with the acquisition.  Theplaintiffs are seeking unspecified compensatory damages, treble damages underthe Texas Deceptive Trade Practices — Consumer Protection Act, punitivedamages, interest, attorneys’ fees and costs. We deny that we have any liability to the plaintiffs.  This action has been delayed as theresult of a related arbitration proceeding between the plaintiffs and theirformer stockbroker, which was completed in March 2002.

 

From September 4, 1998 throughSeptember 3, 2000, Reliance Insurance Company or one of its affiliatedcompanies (“Reliance”) provided casualty insurance coverage for the Company andour subsidiaries.  In addition, Relianceprovided similar coverage, for pre-acquisition periods, for several companiesthat we acquired between 1997 and 2000. During the Reliance coverage periods, various incidents occurred thatresulted in claims being made against the Company for which insurance coveragewas to be provided by Reliance.  In somecases, the claim resulted in a lawsuit being filed against the Company.  Reliance had been adjusting and/or defendingthese claims; however, in October 2001, Reliance was declared insolvent by theInsurance Commissioner of the State of Pennsylvania and placed intoliquidation.  As a result, insurancecoverage may not be available for any claims or lawsuits that were not resolvedprior to Reliance being placed into liquidation.  To the extent that insurance coverage is not available to coversettlement of a claim asserted against the Company or a judgment enteredagainst the Company, the settlement or judgment would have to be paid by theCompany.  Many states have establishedinsurance guarantee funds to pay claims insured by insolvent insurancecompanies; however, the amount available from such funds for a single claim isgenerally limited to the lesser of the amount of the insured’s coverage and adollar amount specified by statute. During the fourth quarter of 2001, we established a $3.5 millionreserve to cover the estimated costs to satisfy our obligations with respect toall such claims that were not resolved prior to Reliance being placed intoliquidation, net of the amounts expected to be received by the Company fromstate insurance guarantee funds. Management believes that this reserve is sufficient to satisfy theCompany’s obligations with respect to all such remaining claims for whichinsurance coverage was to be provided by Reliance; however, there can be noassurance that the Company’s actual costs will not exceed the amount reserved.

 

Our business is subject to numerous federal, state and local laws,regulations and policies that govern environmental protection, zoning and othermatters.  During the ordinary course ofour business, we have become involved in a variety of legal and administrativeproceedings relating to land use and environmental laws and regulations,including actions or proceedings brought by governmental agencies, adjacentlandowners, or citizens’ groups.  In themajority of the situations where proceedings are commenced by governmentalagencies, the matters involved relate to alleged technical violations oflicenses or permits pursuant to which we operate or are seeking to operate, orlaws or regulations to which our operations are subject or are the result ofdifferent interpretations of applicable requirements.  From time to time, we pay fines or penalties in governmentalproceedings relating to our operations. We believe that these matters will not have a material adverse effect onour business, results of operations or financial condition.  However, the outcome of any particularproceeding cannot be predicted with certainty, and the possibility remains thattechnological, regulatory or enforcement developments, results of environmentalstudies, or other factors could materially alter this expectation at any time.

 

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It is not possible at this time to predict the impact the abovelawsuits, proceedings, investigations and inquiries may have on us, nor is itpossible to predict whether any other suits or claims may arise out of thesematters in the future.  However, it isreasonably possible that the outcome of any present or future litigation,proceedings, investigations or inquiries may have a material adverse impact onour consolidated financial position or results of operations in one or morefuture periods.   We intend to defendourself vigorously in all of the above matters.

 

We are involved in various other legal actions arising in the ordinarycourse of business.  Management does notbelieve that the outcome of such legal actions will have a material adverseeffect on the Company’s consolidated financial position or results ofoperations.

 

**Item 4.**  **Submission of Matters to a Vote of Security Holders**

 

No matters were submitted during the fourth quarter of the fiscal yearcovered by this report to a vote of security holders, through the solicitationof proxies or otherwise.

 

**PART II**

 

**Item 5.**  **Market for Registrant’s Common Equity and Related Stockholder Matters**

 

Our common stock is traded on the American Stock Exchange under thesymbol “USL.” The following table sets forth, for the periods indicated, therange of the high and low sales prices for the common stock as reported on theAmerican Stock Exchange.

 
|                          |   | **Price Range of  Common Stock** |   |
|-------------------------------|--------|----------------------------------|--------|
|                          |   | **High**                         |   | **Low** |   |
| Year Ended December 31, 2000: |   |                             |   |   |   |
| First Quarter                 |   | $                                | 10.25  |   | $ | 5.19 |   |
| Second Quarter                |   | 6.63                             |   | 4.25 |   |
| Third Quarter                 |   | 6.00                             |   | 3.38 |   |
| Fourth Quarter                |   | 4.63                             |   | 1.75 |   |
|                          |   |                             |   |   |   |
| Year Ended December 31, 2001: |   |                             |   |   |   |
| First Quarter                 |   | $                                | 4.10   |   | $ | 2.19 |   |
| Second Quarter                |   | 5.12                             |   | 3.05 |   |
| Third Quarter                 |   | 6.00                             |   | 4.40 |   |
| Fourth Quarter                |   | 5.68                             |   | 4.95 |   |

 

The number of holders of record of common stock at March 15, 2002 was186.

 

We have not paid dividends on our common stock and do not anticipatepaying dividends in the foreseeable future. We intend to retain futureearnings, if any, to finance the expansion of our operations and for generalcorporate purposes. We are also prohibited from declaring or paying cashdividends on our capital stock under the terms of our revolving credit facility.

 

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**Item6.  Selected Financial Data**

 

The consolidated balance sheet and income statement data below setforth our consolidated financial data as of December 31, 2000 and 2001, and for the years ended December 31, 1999,2000 and 2001, derived from the audited financial statements which appearelsewhere in this report. The consolidated balance sheet and income statementdata as of December 31, 1997, 1998 and 1999 and for the years endedDecember 31, 1997 and 1998 have been derived from audited financial statementswhich do not appear in this report.

 

**Statements of Operations Data:**

 
|                                                       |   | **Years Ended December 31,**              |   |
|------------------------------------------------------------|--------|-------------------------------------------|--------|
|                                                       |   | **1997**                                  |   | **1998** |   | **1999** |   | **2000** |   | **2001** |   |
|                                                       |   | **(In thousands, except per share data)** |   |
| Revenues                                                   |   | $                                         | 38,159 |   | $ | 121,460 |   | $ | 231,783 |   | $ | 247,859 |   | $ | 230,312 |   |
| Operating expenses                                         |   | 21,353                                    |   | 79,027 |   | 165,773 |   | 193,724 |   | 168,673 |   |
| Depreciation and amortization                              |   | 2,990                                     |   | 8,146 |   | 16,595 |   | 19,234 |   | 17,513 |   |
| Selling, general and administrative  expenses              |   | 5,350                                     |   | 12,927 |   | 26,242 |   | 33,162 |   | 26,440 |   |
| Pooling costs                                              |   | 400                                       |   | — |   | — |   | — |   | — |   |
| Special charges, net                                       |   | —                                    |   | — |   | 15,138 |   | 17,787 |   | 5,771 |   |
| Income (loss) from operations                              |   | $                                         | 8,066  |   | $ | 21,360 |   | $ | 8,035 |   | $ |  (16,048 | ) | $ | 11,915 |   |
| Interest and other expense, net                            |   | 1,775                                     |   | 3,555 |   | 6,674 |   | 10,279 |   | 9,136 |   |
| Income (loss) before provision (benefit)  for income taxes |   | $                                         | 6,291  |   | $ | 17,805 |   | $ | 1,361 |   | $ |  (26,327 | ) | $ | 2,779 |   |
| Provision (benefit) for income taxes                       |   | 2,416                                     |   | 7,033 |   | 2,603 |   | (950 | ) | (607 | ) |
| Net income (loss)                                          |   | $                                         | 3,875  |   | $ | 10,772 |   | $ |   (1,242 | ) | $ |  (25,377 | ) | $ | 3,386 |   |
| Basic earnings (loss) per share                            |   | $                                         | 0.65   |   | $ | 1.04 |   | $ | (0.08 | ) | $ | (1.61 | ) | $ | 0.21 |   |
| Diluted earnings (loss) per share                          |   | $                                         | 0.55   |   | $ | 0.93 |   | $ | (0.08 | ) | $ | (1.61 | ) | $ | 0.20 |   |
| Weighted average shares outstanding                        |   | 5,937                                     |   | 10,317 |   | 15,324 |   | 15,798 |   | 15,988 |   |
| Diluted weighted average shares outstanding                |   | 7,078                                     |   | 11,637 |   | 15,324 |   | 15,798 |   | 16,728 |   |

 

**Balance Sheet Data:**

 
|                                                 |   | **As of  December 31,** |   |
|------------------------------------------------------|--------|-------------------------|--------|
|                                                 |   | **1997**                |   | **1998** |   | **1999** |   | **2000** |   | **2001** |   |
|                                                 |   | **(In  thousands)**     |   |
| Working capital                                      |   | $                       | 2,122  |   | $ | 2,936 |   | $ | 10,189 |   | $ | 11,093 |   | $ | 6,642 |   |
| Total assets                                         |   | 55,016                  |   | 252,165 |   | 369,083 |   | 352,177 |   | 320,876 |   |
| Long-term obligations, including  current maturities |   | 17,436                  |   | 68,394 |   | 104,826 |   | 111,519 |   | 92,028 |   |
| Stockholders’ equity                            |   | 20,906                  |   | 124,944 |   | 190,148 |   | 164,870 |   | 168,453 |   |
|                                                      |        |                         |        |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

**Item7.  Management’s Discussion and Analysisof Financial Condition and Results of Operations**

 

*The following discussion reviews our operations forthe three years ended December 31, 2001 and should be read in conjunction withour consolidated financial statements and related notes and the other financialinformation appearing elsewhere in this report.  The information in this “Management’s Discussion and Analysis ofFinancial Condition and Results of Operations” contains forward-lookingstatements that involve substantial risks and uncertainties.  You can identify these statements byforward-looking words such as “may,” “will,” “expect,” “anticipate,” “believe,”“estimate,” and “continue” or similar words. Our actual results, performance orachievements could differ materially from these forward-looking statements.Factors that could cause or contribute to such differences include thosediscussed in “Business-Factors Influencing Future Results and Accuracy ofForward-Looking Statements” in Item 1 of this report.*

 

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***Overview***

 

Our subsidiaries are organized into three divisions — the CommercialWastewater Division, the Industrial Wastewater Division and the Oilfield WasteDivision.  The Commercial WastewaterDivision collects, processes and disposes of nonhazardous liquid waste andrecovers saleable by-products from certain waste streams.  The Industrial Wastewater Division collects,processes and disposes of hazardous and nonhazardous waste and recoverssaleable by-products from certain waste streams.  The Oilfield Waste Division processes and disposes of wastegenerated in oil and gas exploration and production.

 

The Commercial Wastewater Division generated $138.8 million, or60.3%, of our revenues for the year ended December 31, 2001.  This Division derives revenues from twoprincipal sources: fees received for collecting, processing and disposing ofnonhazardous liquid waste (such as industrial wastewater, grease and grit trapwaste, bulk liquids and dated beverages) and revenue obtained from the sale ofby-products, including fats, oils, feed proteins, industrial and fuel gradeethanol, solvents, aluminum, glass, plastic and cardboard, recovered fromcertain waste streams. Some of our by-product sales involved the brokering ofindustrial and fuel grade ethanol produced by third parties; however, as ofDecember 31, 2001, we have essentially exited the ethanol brokeragebusiness.  Collection and processingfees charged to customers vary per gallon by waste stream according to theconstituents of the waste, expenses associated with processing the waste andcompetitive factors. By-products are commodities and their prices fluctuatebased on market conditions.

 

The Industrial Wastewater Division generated $64.4 million, or28.0%, of our revenues for the year ended December 31, 2001.  This Division derives revenues from feescharged to customers for collecting, processing and disposing of hazardous andnonhazardous liquid waste such as household hazardous wastes, platingsolutions, acids, flammable and reactive wastes, and industrialwastewater.  Certain sludges and solidhazardous wastes are also processed. The Industrial Wastewater Division alsogenerates revenues from the sale of by-products recovered from certain wastestreams, including industrial chemicals and recycled antifreeze products.  The fees charged for processing and disposingof hazardous waste vary significantly depending upon the constituents of thewaste.  Collection and processing feescharged with respect to nonhazardous liquid waste vary per gallon by wastestream according to the constituents of the waste, expenses associated withprocessing the waste and competitive factors.

 

The Oilfield Waste Division generated $27.1 million, or11.7%,  of our revenues for the yearended December 31, 2001. This Division derives revenues from fees charged tocustomers for processing and disposing of oil and gas exploration andproduction waste, and cleaning tanks, barges and other vessels and containersused in the storage and transportation of oilfield waste.  In order to match revenues with theirrelated costs, when waste is unloaded at one of our sites, we recognize therelated revenue and record a reserve for the estimated amount of expenses to beincurred to process and dispose of the waste. As processing occurs, generallyover nine to twelve months, the reserve is depleted as expenses are incurred.Our operating margins in the Oilfield Waste Division are typically higher thanin the Commercial Wastewater Division and in the Industrial WastewaterDivision.

 

Operating expenses include compensation and overhead related tooperations workers, supplies and other raw materials, transportation charges,disposal fees paid to third parties, real estate lease payments and energy andinsurance costs applicable to waste processing and disposal operations.

 

Selling, general and administrative expenses include management,clerical and administrative compensation and overhead relating to our corporateoffices and each of our operating sites, as well as professional services andcosts.

 

Depreciation and amortization expenses relate to our landfarms andother depreciable or amortizable assets. These assets are expensed over periodsranging from three to 40 years.  Foroperations previously classified as held for sale, we suspended depreciationand adjusted amortization after giving effect to the write-downs of theunderlying assets.

 

The seasonal nature of certain of our operations may materially affectoperating results.  Accordingly, theoperating results for any period are not necessarily indicative of the resultsthat may be achieved for any subsequent period.

 

***Critical Accounting Policies***

 

In response to the SEC’s Release No. 33-8040, “Cautionary AdviceRegarding Disclosure About Critical Accounting Policies,” we have identifiedthe accounting principles which we believe are most critical to our reportedfinancial status by considering accounting

 

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policies that involve the most complex or subjective decisions orassessments.  We identified our mostcritical accounting policies to be those related to revenue recognition,processing expenses, and closure and remediation reserves.

 

*Revenue Recognition*.  Inaccordance with Staff Accounting Bulletin No. 101, “Revenue Recognition,” werecognize revenue from processing services when material is unloaded at one ofour facilities, if delivered by the customer, or at the time the service isperformed, if we collect the materials from the customer’s location.  We recognize revenue at the time ourfacility accepts the waste because the customer has passed the legal andregulatory responsibility and associated risk of disposing the waste tous.  By-product sales are recognizedwhen the by-product is shipped to the buyer.

 

*Processing Expenses*. Expenses associated with the waste processing cycle can be broken downinto two major components: those incurred within the same accounting period aswhen the associated revenue is recognized and those incurred after theaccounting period in which the associated revenue was recognized.

 

The majority of the expenses associated with the waste processing cycleare incurred within the same accounting period as when the associated revenueis recognized.  These expenses includereceiving personnel labor costs, lab testing costs, compliance costs, and themajority of the labor and equipment variable costs associated with the wastetreatment.  The majority of the laborand equipment variable costs associated with the treatment process are incurredwithin the first 30 days of treatment.

 

Since revenue has been recognized at the time the service to thecustomer was completed, we accrue the associated future expenses into aprocessing reserve to establish a proper matching of revenues and allassociated expenses.  Since thefacilities have been operated the same way for several years, we know what thetreatment process costs us on a per unit basis.  Thus, for every unit of waste that is offloaded into thefacility, we accrue an amount to reflect the processing costs to be incurredsubsequent to the initial processing associated with that unit.  As the treatment process concludes, we willapply those actual costs incurred against the processing reserve.

 

*Closure and Remediation Reserves*.  Ourclosure and remediation reserves represent accruals for the total estimatedcosts associated with the ultimate closure of our landfarm facilities andcertain other facilities, including costs of decommissioning, statutorymonitoring costs and incremental direct administrative costs required duringthe closure and subsequent postclosure periods.  The closure and remediation reserves include both our open andclosed facilities, as well as all third party sites for which we have beendetermined to be a potentially responsible party and which requireremediation.  Our closure andremediation reserves have remained fairly constant as the methodology has beenconsistent, and there has been no significant change in assumptions other thanchanges in estimates due to annual changes in inflation indices, an update incost estimates associated with closure, or a change in regulations.

 

Other critical accounting policies affecting judgments and estimatesinclude:

 

*Allowance for Doubtful Accounts*.   Weextend credit to customers and other parties in the normal course ofbusiness.  Management regularly reviewsoutstanding accounts receivables, and provides for estimated losses through anallowance for doubtful accounts.  Inevaluating the level of established reserves, management makes judgmentsregarding the parties’ ability to make required payments, economic events andother factors.  As the financial conditionof these parties change, circumstances develop or additional informationbecomes available, adjustments to the allowance for doubtful accounts may berequired.

 

*Deferred Income Taxes*. Deferred income tax assets and liabilities are recognized for differencesbetween the book basis and the tax basis of the net assets of the Company.  In providing for deferred income taxes,  management considers current taxregulations, estimates of future taxable income and available tax planningstrategies.  In certain cases,management has established reserves to reduce deferred income tax assets toestimated realizable value.  If taxregulations, operating results or the ability to implement tax planningstrategies vary, adjustments to the carrying value of deferred income taxassets and liabilities may be required.

 

*Insurance*.  We maintain insurancecoverage for various aspects of our business and operations.  We retain a portion of losses that occurthrough the use of deductibles and retentions under self-insuranceprograms.  Management regularly reviewsestimates of reported and unreported claims and provides for losses throughinsurance reserves.  As claims developand additional information becomes available, adjustments to loss reserves maybe required.

 

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***Special Charges***

 

During each of the years ended December 31, 1999, 2000 and 2001, werecorded special charges that reduced net income.  Set forth below is a description of these special charges.

 

*1999 Business Interruptions and Remediations*

 
| **Description** |   | **1999  Special  Charges**      |   | **Remaining  Accrual  at 12/31/01** |   |
|-----------------|--------|---------------------------------|--------|-------------------------------------|--------|
|            |   |                            |   | **(In thousands)**                  |   |
| (i)             |   | PCB Costs at Detroit            |   | $                                   | 5,494  |   | $ | — |   |
| (ii)            |   | Disposal  at Re-Claim           |   | 2,535                               |   | — |   |
| (iii)           |   | Re-Claim  Fines                 |   | 2,000                               |   | — |   |
| (iv)            |   | Legal  Fees                     |   | 1,700                               |   | — |   |
| (v)             |   | Write-off  of Capitalized Costs |   | 1,316                               |   | — |   |
| (vi)            |   | Re-Claim  Spill                 |   | 1,000                               |   | — |   |
| (vii)           |   | Severance                       |   | 954                                 |   | 108 | (A) |
| (viii)          |   | Other  Costs                    |   | 139                                 |   | — |   |
|            |   | Total  Special Charge 12/31/99  |   | $                                   | 15,138 |   | $ | 108 |   |

 

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(A)       Included in special chargeaccrual

 

During the third and fourth quarters of 1999, we recorded specialcharges in the amount of $15.1 million. The components of these special charges consisted of (i) $5.5 millionfor disposal of PCB contaminated material improperly delivered to our Detroitfacility, the decontamination of certain equipment exposed to the PCBcontaminated materials and fines imposed by regulatory authorities relating tothe facility’s acceptance of the PCB contaminated materials, (ii) $2.5 millionfor disposal of liquid waste received by our Re-Claim Louisiana facility, whichwaste is the subject of a dispute between the Company and the EPA as to theproper method of disposal, net of $443,000 received from our insurance carrierfor submitted claims, (iii) $2.0 million for fines imposed by regulatoryauthorities relating to the operations of the Re-Claim facility, (iv) $1.7million for legal and professional fees incurred for matters arising inconnection with the governmental proceedings relating to the Detroit and Re-Claimfacilities and the securities class action and shareholder derivative actionarising therefrom, (v) $1.3 million for write-offs of capitalized acquisitioncosts related to acquisitions not reasonably likely to occur, (vi) $1.0 millionfor the cleanup of a spill at the Re-Claim facility caused by an act ofvandalism, (vii) $954,000 for severance and contract termination costs relatedto certain personnel and acquisition consultants as a result of theenvironmental issues at the Detroit and Re-Claim facilities, and (viii)$139,000 for other costs related to the operations of the Detroit and Re-Claimfacilities.  These special chargesreduced net income by $10.4 million (net of taxes), or $0.68 per share, for theyear ended December 31, 1999.  As of December31, 2001, $0.1 million of these special charges remained in accruedliabilities.  See Notes 5 and 9 to ourconsolidated financial statements.  SeeNote 18 to our consolidated financial statements for a further discussion ofincidents giving rise to certain of the special charges.

 

*2000 Operations Held for Sale or Closure*

 
| **Description** |   | **2000  Special  Charges**            |   | **Remaining  Accrual  at 12/31/01** |   |
|-----------------|--------|---------------------------------------|--------|-------------------------------------|--------|
|            |   |                                  |   | **(In thousands)**                  |   |
| (i)             |   | Estimate of Losses on Sales           |   | $                                   | 19,701 |   | $ | — |   |
| (ii)            |   | Re-Claim  Shutdown                    |   | 10,221                              |   | 2,659  | (A)-(C) |
| (iii)           |   | Legal  Fees (related to (i-ii) above) |   | 208                                 |   | 33 | (D) |
| (iv)            |   | PCB  Costs at Detroit                 |   | 471                                 |   | — |   |
| (v)             |   | Disposal  Agreement Termination       |   | (12,814                             | )      | — |   |
|            |   | Total  Special Charge, net 12/31/00   |   | $                                   | 17,787 |   | $ | 2,692 |   |

 

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(A)                             $1.3 million included in accrued processing costs, which includes $0.9million to process waste stored off-site (see Note 18 to our consolidatedfinancial statements)

(B)                               $0.2 million included in accrued liabilities — represents currentportion of Re-Claim lease liability

(C)                               $1.1 million included in long-term liabilities — represents long-termportion of Re-Claim lease liability

(D)                              Included in accrued legal fees

22

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During the fourth quarter of 2000, we recordedspecial charges relating primarily to decisions to dispose of or suspendcertain operations offset by the favorable effect of the settlement of adispute.  These special charges amountedto a net expense of $17.8 million.  Thespecial charges included (i) $19.7 million for estimated losses from the saleof certain operations in the Commercial Wastewater Division, (ii) $10.2 millionfor the closure of the Re–Claim Louisiana facility, which includedapproximately $1.6 million for processing costs and approximately $1.6 millionfor the remaining lease liability, (iii) legal fees associated with the abovefor $208,000, and (iv) additional charges of $471,000 for the disposal ofPCB contaminated materials at our Detroit facility (relating to 1999 specialcharges discussed above).  During thisperiod, we also recognized net pre–tax income of $12.8 million relatingto the termination of a disposal agreement with Waste Management, Inc. that wasentered into in May 1998 in connection with the acquisition of the Detroitfacility.  These special charges reducednet income by $17.8 million (net of taxes, due to valuation allowances), or$1.13 per share.  As of December 31,2001, $2.7 million of these special charges remained in accrued liabilities.  See Notes 5 and 9 to our consolidated financialstatements.

 

*2001 Regulatory and Legal Resolutions and OperationsHeld for Sale*

 
| **Description** |   | **2001********Special********Charges** |   | **Remaining  Accrual  at 12/31/01** |   |
|-----------------|--------|----------------------------------------|--------|-------------------------------------|--------|
|            |   |                                   |   | **(In thousands)**                  |   |
| (i)             |   | National Steel Settlement              |   | $                                   | (7,500 | ) | $ | — |   |
| (ii)            |   | Insurance  Claim Refund                |   | (3,750                              | )      | — |   |
| (iii)           |   | Detroit  Fine                          |   | 5,000                               |   | 5,000 | (A) |
| (iv)            |   | Reliance  Bankruptcy                   |   | 3,500                               |   | 3,500 | (A) |
| (v)             |   | Additional  Losses on Sales            |   | 1,713                               |   | — |   |
| (vi)            |   | Goodwill  Write-down                   |   | 6,302                               |   | — |   |
| (vii)           |   | San  Antonio Write-down                |   | 491                                 |   | — |   |
| (viii)          |   | Other  Costs                           |   | 15                                  |   | — |   |
|            |   | Total  Special Charge, net 12/31/01    |   | $                                   | 5,771  |   | $ | 8,500 |   |
|                 |        |                                        |        |                                     |        |  |  |  |  |  |

 

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(A)  Includedin special charge accrual

 

During 2000, we filed suit against National SteelCorporation for not properly identifying PCB contaminated materials as requiredby law when delivered to our Detroit facility. In filing the suit, we were seeking to recover the costs incurred andthe losses suffered by the facility as a result of National Steel’snon-disclosure.  In April 2001, weentered into a settlement agreement with National Steel.  As part of the settlement agreement, inApril 2001, National Steel paid $7.5 million to us.

 

In addition to filing suit against National Steel,we also submitted a claim under our property damage policy for losses incurredas a result of the temporary closing of the facility in August 1999 and thedelivery of PCB contaminated waste to a landfill owned by Waste Management,Inc.  During the third quarter of 2001,we agreed to accept  $3.75 million incomplete satisfaction of our claim under the policy.  The funds were paid to us in August 2001.

 

As further discussed in Item 3. Legal Proceedings,the EPA and the FBI executed a search warrant at the Detroit facility seekingdocumentation relating to the facility’s operations.  During the fourth quarter of 2001, we established a reserve of$5.0 million for amounts expected to be paid in connection with a possiblesettlement of this matter.

 

Reliance Insurance Company provided casualtyinsurance coverage for the Company.  InOctober 2001, Reliance was declared insolvent by the Insurance Commissioner ofthe State of Pennsylvania.  As a result,insurance coverage may not be available for any claims or lawsuits that werenot resolved prior to Reliance being placed into bankruptcy.  During the fourth quarter of 2001, $3.5million was reserved for any claims or lawsuits that were not resolved prior toReliance being placed into liquidation. See Item 3. Legal Proceedings.

 

During the fourth quarter of 2000, we approved thedivestiture of several of our non-core operations and recorded special chargesof $19.7 million related thereto. During 2001, certain operations were sold and additional losses of $1.7million were recognized as a result of these sales.  During the fourth quarter of 2001, the remaining assetsclassified as held for sale were further adjusted to fair value resulting in awrite-down of goodwill of approximately $6.3 million.  In December 2001, senior management made the decision toassimilate the remaining operations back into our core business.

 

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During the fourth quarter of 2001, certain fixedassets were written down at our San Antonio location for approximately$0.5 million in accordance with Statement of Financial AccountingStandards ("SFAS") No. 121 “Accounting for the Impairment ofLong-Lived Assets and for Long-Lived Assets to be Disposed Of.”

 

These special charges reduced net income by $5.5million (net of taxes), or $0.33 per share. In addition, a tax benefit was realized on a prior year special chargedue to the release of the valuation allowance on prior year losses on theoperations held for sale or closure that are no longer held for sale.  This benefit increased net income by $5.2million, or $0.31 per share.  As ofDecember 31, 2001, $8.5 million of these special charges remained in accruedliabilities.  See Notes 5 and 9 to ourconsolidated financial statements.

 

***Results of Operations***

 

***Years Ended December 31, 2001 and 2000***

 

*Revenues*. Revenues for the year ended December 31, 2001 decreased $17.5 million,or 7.1%, from $247.8 million for the year ended December 31, 2000 to$230.3 million for the year ended December 31, 2001. The CommercialWastewater Division contributed $169.0 million, or 68.2%, of 2000 revenuesand $138.8 million, or 60.3%, of 2001 revenues.  Collection and processing fees generated $128.0 million, or75.7%, and $113.6 million, or 81.8%, of the Commercial WastewaterDivision’s revenues for 2000 and 2001, respectively.  Revenues from collection and processing of waste decreased$14.4 million, or 11.3%, due primarily to the sales of the Allisonfacility and part of the Northeast operations, and a decline in our biosolidsbusiness in New York and our emergency response business in San Antonio.  In addition, fiscal year 2000 benefitted fromrevenues generated from a major oil spill project.  By-product sales generated the remaining $41.0  million, or24.3%, and $25.2 million, or 18.2%, of the Commercial WastewaterDivision’s revenues for 2000 and 2001, respectively.  Revenues from the sale of by-products decreased$15.8 million, or 35.8%, primarily due to lower brokered ethanolsales.  As of December 31, 2001, wehave essentially exited the business of brokering ethanol produced by third parties.

 

The Industrial Wastewater Division contributed $57.1million, or  23.0%,  of 2000 revenues and $64.4 million, or28.0%, of 2001 revenues.  Collection andprocessing fees generated $52.2 million, or 91.4%, and $58.4 million, or90.7%, of the Industrial Wastewater Division’s revenues for 2000 and 2001,respectively.  Revenues from thecollection and processing of waste increased $6.2 million, or 11.9%, due primarily to improved performance atour Detroit facility.  By-product salesgenerated the remaining $4.9 million, or 8.6%, and $6.0 million, or 9.3%,of the Industrial Wastewater Division’s revenues for 2000 and 2001,respectively.

 

The Oilfield Waste Division contributed $21.7million, or 8.8%, of 2000 revenues and $27.1 million, or 11.7%, of 2001revenues.  The Oilfield Waste Division’srevenues increased $5.4 million, or 24.9%, due primarily to increasedon-shore drilling activity.  Drillingactivity in the Gulf Coast region has decreased during the past twelve monthsand our disposal agreement with Newpark Resources is currently scheduled to terminateon June 30, 2002.  Consequently, wecurrently estimate that the Oilfield Waste Division’s revenues for 2002 willdecrease by approximately $5.7 million, or 21.0%.

 

*Operating Expenses.* Operating expenses decreased $25.0 million, or 12.9%, from $193.7million for the year ended December 31, 2000 to $168.7 million forthe year ended December 31, 2001. As a percentage of revenues, operating expenses decreased from 78.2% in2000 to 73.2% in 2001.  This decreaseresulted from lower brokered ethanol sales, which produced margins in the rangeof -2.0% to 2%.  Operating improvementsimplemented at our Detroit and Texas facilities also contributed to thisdecrease, as well as our Oilfield Division, which maintained its cost base witha significant revenue increase.  Costsalso improved due to an insurance accrual adjustment for $1.4 million madeat the end of the annual insurance year in August 2001.  The year-end accrual exceeded our premiums,claims filed and the balance reserved for claims incurred but not reported.  In addition, during the fourth quarter of2001, we agreed to accept $1.1 million from one of our insurance carriersin settlement of property damage and business interruption claims made withrespect to losses suffered as a result of an incident at our Canadian facilityin March 2000.  This settlementconstitutes a direct operating expense reduction.    We received $265,000 of the settlement amount during the thirdquarter of 2001.  The remainder of thesettlement amount was received during the first quarter of 2002.

 

*Depreciation andAmortization*.   Depreciation and amortization expensesdecreased $1.7 million, or 8.9%, from $19.2 million for the yearended December 31, 2000 to $17.5 million for the year ended December 31,2001.  This decrease was attributableprimarily to the discontinued recognition of depreciation and adjustedamortization expenses related to our operations held for sale.  Had we not classified any operations as heldfor sale, depreciation and amortization expenses for the year endedDecember 31, 2001 would have been 

 

24

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greaterby $2.0 million.  As a percentageof revenues, depreciation and amortization expenses decreased from 7.7% in 2000to 7.6% in 2001.

 

*Selling, General andAdministrative Expenses*.   Selling, general and administrativeexpenses decreased $6.7 million, or 20.2%, from $33.2 million for the yearended December 31, 2000 to $26.4 million for the year ended December 31,2001.   As a percentage of revenues,selling, general and administrative expenses decreased from 13.4% in 2000 to11.5% in 2001.  This improvementresulted primarily from decreased legal fees and decreased bad debtexpense.  In addition, the 2000 fiscalyear included significant severance expenses associated with the resignation ofa senior executive officer and the elimination of our market developmentdepartment.

 

*Interest and Other Expenses*.   Net interest and other expenses decreased $1.2 million, or 11.7%,from $10.3 million for the year ended December 31, 2000 to$9.1 million for the year ended December 31, 2001.  This decrease resulted from lower interestrates and reduced borrowings.

 

*Income Taxes*.  The benefit for income taxes decreased approximately $0.4 million,or 40%, from a benefit of  $1.0 millionin 2000 to a benefit of $0.6 million in 2001.  This decrease was attributable to increased pretax bookincome.  The effective benefit tax ratefor 2001 was 21.8%, compared to a benefit tax rate of 3.6% for 2000.  The tax rate difference was due to theimpact of the release of valuation allowances on prior year book losses due tothe realization of taxable income in 2001.

 

***Years Ended December 31, 2000 and 1999***

 

*Revenues*. Revenues for the year ended December 31, 2000 increased $16.0 million, or6.9%, from $231.8 million for the year ended December 31, 1999 to$247.8 million for the year ended December 31, 2000. The CommercialWastewater Division contributed $152.4 million, or 65.7%, of 1999 revenuesand $169.0 million, or 68.2%, of 2000 revenues.  Collection and processing fees generated $122.3 million, or80.2%, and $128.0 million, or 75.7%, of the Commercial Wastewater Division’srevenues for 1999 and 2000, respectively. Revenues from collection and processing of waste increased $5.7 million,or 4.7%, due primarily to additional revenues generated from a major oil spillproject.  By-product sales generated theremaining $30.1 million, or 19.8%, and $41.0 million, or 24.3%, of theCommercial Wastewater Division’s revenues for 1999 and 2000, respectively.  Revenues from the sale of by-productsincreased $10.9 million, or 36.2%, primarily  due to higher brokered ethanol sales.

 

The Industrial Wastewater Division contributed $60.9million, or  26.3%,  of 1999 revenues and $57.1 million, or23.0%, of 2000 revenues.  Collection andprocessing fees generated $55.9 million, or 91.8%, and $52.2 million, or 91.4%,of the Industrial Wastewater Division’s revenues for 1999 and 2000,respectively.  Revenues from collectionand processing of waste decreased  $3.7million, or 6.6%, due primarily to the temporary closing and subsequentrecovery period at our Detroit facility. By-product sales generated the remaining $5.0 million, or 8.2%, and $4.9million, or 8.6%, of the Industrial Wastewater Division’s revenues for 1999 and2000, respectively.

 

The Oilfield Waste Division contributed $18.5million, or 8.0%, of 1999 revenues and $21.7 million, or 8.8%, of 2000revenues.  The Oilfield Waste Division’srevenues increased $3.2 million, or 17.3%, due primarily to increased on-shoredrilling activity.

 

*Operating Expenses.* Operating expenses increased $27.9 million, or 16.8%, from $165.8million for the year ended December 31, 1999 to $193.7 million for theyear ended December 31, 2000.  As apercentage of revenues, operating expenses increased from 71.5% in 1999 to78.2% in 2000.  This increase was dueprimarily to normal fixed costs at our Detroit facility with a significant dropin revenues due to the 1999 shut-down, and reduced margins on a major projectin the Innovative Services Group of the Commercial Wastewater Division comparedto a similar project in 1999.   Inaddition, a larger than expected portion of the Innovative Services businesswas attributable to the brokerage of ethanol, which is a very low margin producer.  This increase in operating expenses alsoreflects the continued growth of the Commercial Wastewater Division, which haslower margins than the Oilfield Waste Division.

 

*Depreciation andAmortization*.   Depreciation and amortization expenses increased$2.6 million, or 15.7%, from $16.6 million for the year ended December 31,1999 to $19.2 million for the year ended December 31, 2000.  As a percentage of revenues, depreciationand amortization expenses increased from 7.2% in 1999 to 7.7% in 2000.  This increase was attributable primarily tothe decrease in revenues at our Detroit and Re-Claim Louisiana facilitieswithout a proportionate decrease in depreciation and amortization expenses.

 

*Selling, General andAdministrative Expenses*.   Selling, general and administrativeexpenses increased $7.0 million, or 26.7%, from $26.2 million for the yearended December 31, 1999 to $33.2 million for the year ended December 31,2000.   As a percentage of 

 

25

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revenues, selling, general and administrative expenses increased from11.3% in 1999 to 13.4% in 2000.  Thisincrease resulted primarily from increased legal fees, severance expensesassociated with the resignation of a senior executive officer and the eliminationof our market development department. In addition, bad debt expense increased primarily at our Texas locationslargely as a result of a single customer who was the primary purchaser ofgrease from our Texas grease processing locations.

 

*Interest and Other Expenses*.   Net interest and other expenses increased $3.6 million, or 53.7%, from$6.7 million for the year ended December 31, 1999 to $10.3 million for the yearended December 31, 2000.  This increaseresulted primarily from higher interest rates and, to a lesser extent,increased borrowings used to fund our working capital needs.

 

*Income Taxes*.  The provision for income taxes decreased approximately $3.6 million, or136.5%, from $2.6 million in 1999 to a benefit of  $1.0 million in 2000 as a result ofdecreased taxable income.  The effectivetax rate for 1999 was 191.3%, compared to a benefit rate of 3.6% for 2000.  The tax rate difference was due to theimpact of nondeductible expenses on taxable income.

 

***Liquidity and Capital Resources***

 

Our capital requirements for continuing operationsconsist of our general working capital needs, scheduled principal payments onour debt obligations and capital leases, and planned capital expenditures.   Our capital resources consist of cashreserves, cash generated from operations and funds available under ourrevolving credit facility. We expect that these resources will be sufficient tofund continuing operations through March 2003; however, there can be noassurance that additional capital will not be required sooner for our ongoingoperations.

 

During the first quarter of 2002, our revolvingcredit facility was amended to, among other things, extend the maturity date toJune 15, 2002.  In addition, onMarch 28, 2002, the terms of the credit facility were amended to, among otherthings, extend the maturity date to April 15, 2003 and increase theinterest rates payable under the credit facility.  By April 15, 2003, we must either once again extend the term ofour existing credit facility or obtain an alternative source of financing.  There can be no assurance that we will beable to obtain such an extension or alternative financing when required.

 

***Operating Cash Flows***

 

Cash flows from operations were $10.0 million and$24.4 million for the years ended December 31, 2000 and 2001, respectively.  This increase in operating cash flows wasdue in part to increased net income, collections on accounts receivable anddecreased prepaid expenses and other current assets.  This increase was partially offset by decreased accountspayable.  We had net working capital of$6.6 million at December 31, 2001, compared to net working capital of$11.1 million at December 31, 2000. This decrease resulted primarily from the reclassification of operationsheld for sale.  At December 31, 2000,all asset and liability accounts for the operations classified as held for salewere recorded as a current asset or liability in a separate line item,respectively.  However, at December 31,2001, because the remaining assets previously held for sale have beenassimilated back into our business, the asset and liability accounts wererecorded in their original respective account categories.  The significant fluctuation was dueprimarily to property, plant and equipment and goodwill classified as currentassets at December 31, 2000 and as long-term assets at December 31,2001.  This decrease was partiallyoffset by the classification of all of the debt under our revolving creditfacility as long-term.  In the prioryear, $20.7 million of our credit facility was classified as short-term asit represented payments of our expected proceeds from operations held for sale,the receipt of which required concurrent payments on the credit facility.

 

Our allowance for bad debts increased $23,000, or 2.1%,from $1.07 million for the year ended December 31, 2000 to$1.09 million for the year ended December 31, 2001.

 

At December 31, 2001, we had a $6.9 millionreserve to provide for the cost of future closures of facilities. The amount ofthis unfunded reserve is based on the estimated total cost to close thefacilities as calculated in accordance with the applicable regulations.Regulatory agencies require us to post financial assurance to assure that allwaste will be treated and the facilities closed appropriately. We have in placea total of $11.0 million of financial assurance in the form of letters ofcredit and bonds to provide for the cost of future closings of facilities.  As of December 31, 2001, we also had a$3.4 million unfunded reserve to provide for the costs to remediate soiland groundwater contamination at our facility in East Palo Alto, California,and our share of the costs to remediate drum reconditioning or disposal sitespreviously used by our subsidiaries.  In2002, we expect to pay approximately $0.5 million of remediation reserves.

 

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Many of our customers require us to post performancebonds or letters of credit to secure performance.  Those bonds and letters of credit guarantee the customer that wewill perform under the terms of a contract and that we will pay subcontractorsand vendors.  In the event that we failto perform under a contract or pay subcontractors and vendors, the customer maydemand the surety or bank to pay or perform under our bond or letter ofcredit.  Our relationship with oursureties is such that we will indemnify a surety for any expenses it incurs inconnection with any of the bonds it issues on our behalf.  To date, we have not incurred significantexpenses to indemnify a surety for expenses it incurred on our behalf.  As described above, we are also required toprovide financial assurance for the final closure and post-closure obligationswith respect to our permitted facilities. We establish financial assurance indifferent ways, depending on the jurisdiction, including letters of credit fromthird parties, surety bonds, trust agreements and traditional insurance.  To date, we have not experienced unusualdifficulty in obtaining financial assurance for our operations. However,continued availability of letters of credit, surety bonds and insurancepolicies in sufficient amounts at acceptable rates is a vital aspect of ourongoing operations. Financial assurance is generally a requirement forobtaining or retaining operating permits. Additionally, our continued access to casualty and pollution legalliability insurance with sufficient limits at acceptable terms is an importantaspect of obtaining revenue-producing waste service contracts.  We also maintain a collateral bond to secureour obligation to reimburse our insurance carrier for uninsured deductibles itpays under our employee group health plan.

 

2002 operating cash flows from continuing operationsare anticipated to be approximately $11.3 million.  This amount is net of all projected interestcosts and expected payments on special charge reserves. Operating cash flowwill be a primary source of funding our capital budget in 2002. Any remainingamounts will be used to reduce outstanding debts.  Projected interest costs have been calculated using the higherinterest rates agreed to in connection with the March 28, 2002 amendment of ourrevolving credit facility.  In addition,our projected interest costs assume a two percent increase in the prime rate andthe London Interbank Offered Rate (“LIBOR”) over the course of the year.  Projected payments on special chargereserves assume that all amounts reserved for amounts expected to be paid inconnection with a possible settlement of the investigation of our Detroitfacility and estimated losses resulting from the insolvency of one of ourprimary insurers will be paid in 2002, although the exact amounts and paymentdates for these liabilities is unknown at this time.

 

***Investing Activities***

 

Capital expenditures made during 2001 for ourcontinuing operations were $10.5 million. The majority of the capital expenditures were for plant expansions,equipment and vehicle upgrades.  Capitalexpenditures for our continuing operations for 2002 are estimated at approximately$11.4 million.  Approximately$6.3 million of this amount is scheduled to be invested in the CommercialWastewater Division for vehicles and plant expansions.  Approximately $3.0 million is scheduledto be invested in the Industrial Wastewater Division for plant improvements andexpansion and equipment. Approximately $1.4 million is budgeted forequipment and injection wells for the Oilfield Waste Division.  The remaining $0.7 million will be usedfor software and computer upgrades at our corporate headquarters.  In the event that all special chargereserves are required to be paid in 2002, as projected in “— OperatingCash Flows,” we would anticipate reducing capital expenditures below the levelsdescribed above.

 

In certain of our acquisitions, we agreed to payadditional consideration to the owners of the acquired business if the futurepre-tax earnings of the acquired business exceed certain negotiated levels orother specified events occur. To the extent that any contingent considerationis required to be paid in connection with an acquisition, we anticipate thatthe related incremental cash flows of the acquired business will be sufficientto pay the cash component of the contingent consideration.  There were no such payments made  in 2001. During 2002, the former owners of a business that we acquired in 1998are entitled to receive additional consideration totaling $2.7 million ifthe acquired business satisfies certain targeted performance levels.  Management does not expect the acquiredbusiness to meet these targets and, therefore, we do not anticipate paying anysuch amounts in 2002.

 

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***Financing Activities***

 

At December 31, 2001, approximately$2.9 million of principal payments on debt obligations were payable duringthe next twelve months.  These paymentsare expected to be funded from operating cash flows and from borrowings againstour revolving credit facility.

 

Our future contractual obligations include:

 
|                               |   | **Payments  Due by Period**              |   |
|------------------------------------|--------|------------------------------------------|--------|
| **Contractual Obligations**        |   | **Less than**

** ****1 year** |   | **2003** |   | **2004** |   | **2005** |   | **2006** |   | **Thereafter** |   | **Total** |   |
|                               |   | **(In  thousands)**                      |   |
| Debt and Capital Lease Obligations |   | $                                        | 2,891  |   | $ | 86,315 |   | $ | 968 |   | $ | 430 |   | $ | 424 |   | $ | 1,000 |   | $ | 92,028 |   |
| Operating Lease Obligations        |   | $                                        | 3,726  |   | $ | 3,036 |   | $ | 2,518 |   | $ | 2,168 |   | $ | 1,911 |   | $ | 9,267 |   | $ | 22,626 |   |
| Closure and Remediation Reserves   |   | $                                        | 465    |   | $ | 349 |   | $ | 455 |   | $ | 305 |   | $ | 204 |   | $ | 8,535 |   | $ | 10,313 |   |

 

Our other commercial commitments expire as follows:

 
|                                    |   | **Amount of  Commitment Expiration Per Period** | ** ** |
|-----------------------------------------|--------|-------------------------------------------------|------------|
| **Other Commercial********Commitments** |   | **Less than**

** ****1 year**             |       | **2003** |   | **2004** |   | **2005** |   | **2006** |   | **Thereafter** |   | **Total** | ** ** |
|                                    |   | **(In  thousands)**                             |       |
| Standby Letters of Credit               |   | $                                               | 3,750      |   | $ | — |   | $ | — |   | $ | — |   | $ | — |   | $ | 250 |   | $ | 4,000 |   |
| Performance Bonds                       |   | $                                               | 13,275     |   | $ | 743 |   | $ | 10 |   | $ | — |   | $ | — |   | $ | — |   | $ | 14,028 |   |
| Collateral Bond                         |   | $                                               | 2,450      |   | $ | — |   | $ | — |   | $ | — |   | $ | — |   | $ | — |   | $ | 2,450 |   |

 

 

We have a revolving credit facility with agroup of banks under which we may borrow to fund working capitalrequirements.  Amounts outstanding underthe credit facility are secured by a lien on substantially all of ourassets.  The credit facility containsaffirmative, negative and subjective covenants, prohibits the payment ofdividends and requires us to comply with certain financial covenants.

 

Our 2001 fourth quarter results caused us tobe out of compliance with certain of the financial covenants of the creditfacility. During the first quarter of 2002, the terms of the credit facilitywere amended to, among other things, extend the maturity date to June 15, 2002,reduce the amount of the credit facility from $111.25 million to$99.7 million, increase the interest rates payable under the creditfacility, and waive our noncompliance with and modify the terms of certain ofour financial covenants.  In addition,on March 28, 2002, the terms of the credit facility were amended to, amongother things, extend the maturity date to April 15, 2003 and increase theinterest rates payable under the credit facility.  In connection with the March 28, 2002 amendment, we also agreedthat the amount of the credit facility will be permanently reduced by $250,000on each of June 30, 2002 and September 30, 2002 and will be further reduced by$4.6 million on December 31, 2002 and $2.1 million on March 31,2003.  Furthermore, the amount of thecredit facility will be permanently reduced by an amount equal to one hundredpercent of the net cash proceeds received from any sale of assets not in theordinary course of business, any issuance of equity (other than any equityissued under the employee stock purchase plan) or the issuance of certain debt.The terms of our credit facility significantly limit our ability to enter intoleases or new debts outside the facility. The capital expenditures budgeted for 2002 are less than the capitalexpenditures permitted by the credit facility.

 

As a result of our lenders’ agreement toextend the maturity date of our credit facility to April 15, 2003, theoutstanding balance under the credit facility has been classified as long-termas of December 31, 2001.  Prior to thematurity of the credit facility, we must either extend the term of the creditfacility or obtain an alternative source of financing.

 

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The debt outstanding under the revolvingcredit facility may be accelerated by the lenders if, among other things, achange in control of the Company occurs or Michael P. Lawlor or Earl J.Blackwell ceases to serve as an executive officer of the Company and is notreplaced within sixty days by an individual reasonably satisfactory to thelenders.  At March 15, 2002, we hadborrowed approximately $88.0 million under the credit facility.  Advances under the credit facility bearinterest, at our option, at the prime rate or LIBOR, in each case, plus amargin which is calculated quarterly based upon our ratio of indebtedness tocash flows.  As of March 15, 2002,amounts outstanding under the credit facility were accruing interest atapproximately 7.6% per year.  This rateis expected to increase to 10.3%  inApril 2002 as a result of the March 28, 2002 amendment to the credit facility.

 

During 1999, we had a $10.0 million creditfacility with BankBoston, N.A. under which we were able to borrow funds topurchase equipment.  The commitment forthis facility expired on December 31, 1999, at which time we had borrowedapproximately $2.5 million.  This amountis being repaid in 60 monthly installments of principal and interest at 8.4%.

 

***Operations Held for Sale***

 

During the fourth quarter of 2000, our Boardof Directors voted to sell certain non-core operations of the CommercialWastewater Division.  The types ofliquid waste managed at these facilities included industrial wastewaters,biosolids and grease and grit trap waste. As of December 31, 2000 and during 2001, the carrying value of theseassets was written down to the fair value thereof less estimated costs tosell.  In determining fair value, weconsidered, among other things, the range of preliminary purchase pricesdiscussed with potential buyers.  InDecember 2001, senior management made the decision to assimilate the remainingoperations back into our core business.  See Note 5 to our consolidated financial statements.

 

***New Accounting Pronouncements***

 

In June 1998, the Financial AccountingStandards Board (“FASB”) issued SFAS No. 133, “Accounting for DerivativeInstruments and Hedging Activities.”  InJune 1999, the FASB issued SFAS No. 137, which amended the effective adoptiondate of SFAS No. 133.  This statementestablishes accounting and reporting standards for derivative instruments,including derivative instruments embedded in other contracts, and for hedgingactivities.  We adopted SFAS No. 133 asamended on January 1, 2001.  Adoption ofthis statement did not have a material impact on our financial position orresults of operations as we have not engaged or entered into any arrangementsusually associated with derivative instruments historically or during the yearended December 31, 2001.

 

In July 2001, the FASB issued SFAS No. 141,“Business Combinations,” and No. 142, “Goodwill and Other Intangible Assets.”The statements eliminate the pooling-of-interests method of accounting forbusiness combinations and require that goodwill and certain intangible assetsnot be amortized.  Instead, these assetswill be reviewed for impairment annually and when there is reason to suspectthat their value has been diminished or impaired.  Any related losses will be recognized in earnings whenincurred.  The statements will beeffective for the Company as of January 1, 2002 for existing goodwill andintangible assets and for business combinations completed after June 30,2001.  The adoption of SFAS No. 142will eliminate annual amortization expense related to goodwill by approximately$4.9 million in future periods.  Inconnection with the adoption of SFAS No. 142, on January 1, 2002, we haveestimated an impairment of $91.0 million.

 

In June 2001, the FASB issued SFAS No. 143,“Accounting for Asset Retirement Obligations,” that addresses the financialaccounting and reporting for obligations associated with the retirement oftangible long-lived assets and associated costs.  SFAS No. 143 requires that the fair value of a liability foran asset retirement obligation be recognized in the period in which it isincurred if a reasonable estimate of the fair value can be made.  The associated asset retirement costs arecapitalized as part of the carrying amount of the long-lived asset.  The provisions of SFAS No. 143 areeffective for fiscal years beginning after June 15, 2002.  We are considering the provisions of SFASNo. 143 and at present have not determined the impact of adopting SFASNo. 143.

 

In August 2001, the FASB issued SFAS No. 144,“Accounting for the Impairment of Disposal of Long-Lived Assets,” thataddresses financial accounting and reporting for the impairment of disposal oflong-lived assets.  SFAS No. 144requires that one accounting model be used for long-lived assets to be disposedof by sale and broadens the presentation of discontinued operations to includemore disposal transactions.  We adoptedSFAS No. 144 on January 1, 2002. Adoption of this statement did not have a material impact on ourfinancial position or results of operations.

 

29

----

 

**Item 7A.  Quantitativeand Qualitative Disclosures About Market Risk**

 

Our financial instruments include cash andcash equivalents, accounts receivable, accounts payable, notes and capitalleases payable, and debt obligations. The book value of cash and cash equivalents, accounts receivable, accountspayable and short-term notes payable are considered to be representative offair value because of the short maturity of these instruments.  We estimate that the fair value of all ofour debt obligations approximates $92.0 million as of December 31,2001.

 

We do not utilize financial instruments fortrading purposes and we do not hold any derivative financial instruments thatcould expose us to significant market risk. Our exposure to market risk for changes in interest rates relatesprimarily to our obligations under our revolving credit facility.  As of December 31, 2001 and March 15,2002, $85.0 million and $88.0 million had been borrowed under therevolving credit facility, respectively. As of December 31, 2001 and March 15, 2002, $1.5 million and $1.4 millionhad been borrowed under the equipment credit facility, respectively.  As of March 15, 2002, amountsoutstanding under the revolving credit facility were accruing interest atapproximately 7.6% per year and amounts outstanding under the equipment creditfacility were accruing interest at approximately 8.4% per year.  A ten percent increase in short-terminterest rates on the variable rate debts outstanding as of March 15, 2002would approximate 19 basis points. Such an increase in interest rates would increase our annualinterest  expense by approximately$165,000 assuming the amount of debt outstanding remains constant.

 

The above sensitivity analysis for interestrate risk excludes accounts receivable, accounts payable and accruedliabilities because of the short-term maturity of such instruments.  The analysis does not consider the effectthis movement may have on other variables including changes in revenue volumesthat could be indirectly attributed to changes in interest rates.  The actions that management would take inresponse to such a change are also not considered.  If it were possible to quantify this impact, the results couldwell be different than the sensitivity effects shown above.

 

**Item 8.  FinancialStatements and Supplementary Data**

 

The financial statements and supplementarydata required by this item are included in this report beginning on page F-1.

 

**Item 9.  Changes inand Disagreements With Accountants on Accounting and Financial Disclosure**

 

None.

 

**PART III**

 

**Item 10.  Directorsand Executive Officers of the Registrant**

 

Incorporated by reference from the ProxyStatement for the Annual Meeting of Stockholders to be held on May 14,2002.

 

**Item 11.  ExecutiveCompensation**

 

Incorporated by reference from the ProxyStatement for the Annual Meeting of Stockholders to be held on May 14,2002.

 

**Item 12.  SecurityOwnership of Certain Beneficial Owners and Management**

 

Incorporated by reference from the ProxyStatement for the Annual Meeting of Stockholders to be held on May 14,2002.

 

**Item 13.  CertainRelationships and Related Transactions**

 

Incorporated by reference from the Proxy Statement for the AnnualMeeting of Stockholders to be held on May 14, 2002.

 

30

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**PART IV**

 

**Item 14.  Exhibits, FinancialStatement Schedules, and Reports on Form 8-K**

 
| (a)    | Financial  Statements are filed as part of this report:                                                                                                                                                                                                                               |   |
|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|
|   |                                                                                                                                                                                                                                                                                  |   |
|   | See  Index to Financial Statements on Page F-1 of this Report.                                                                                                                                                                                                                        |   |
|   |                                                                                                                                                                                                                                                                                  |   |
|   | All  schedules for which provision is made in the applicable accounting  regulations of the Commission are not required under the related  instructions, are inapplicable, or the information is included in the  consolidated financial statements, and therefore have been omitted. |
|   |                                                                                                                                                                                                                                                                                  |   |
| (b)    | Reports  on Form 8-K                                                                                                                                                                                                                                                                  |   |
|   |                                                                                                                                                                                                                                                                                  |   |
|   | No  reports on Form 8-K were filed during the fourth quarter of 2001.                                                                                                                                                                                                                 |   |
|   |                                                                                                                                                                                                                                                                                  |   |
| (c)    | Exhibits:                                                                                                                                                                                                                                                                             |   |

 
| **Exhibit  No.** |   |   |   | **Description**                                                                                                                                                                                                                                                                                                                                                       |
|------------------|--------|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 3.1              |   | — |   | Second  Amended and Restated Certificate of Incorporation of U S Liquids Inc.  (Exhibit 3.1 of the U S Liquids Inc. Registration Statement on Form S-1  (File No. 333-30065), effective August 19, 1997, is hereby incorporated by  reference).                                                                                                                  |
|             |   |   |   |                                                                                                                                                                                                                                                                                                                                                                  |
| 3.2              |   | — |   | Second  Amended and Restated Bylaws of U S Liquids Inc. (Exhibit 99.1 to the Form 8-K  filed on March 2, 2001 is hereby incorporated by reference).                                                                                                                                                                                                                   |
|             |   |   |   |                                                                                                                                                                                                                                                                                                                                                                  |
| 4.1              |   | — |   | Form  of Certificate Evidencing Ownership of Common Stock of U S Liquids Inc.  (Exhibit 4.1 of the U S Liquids Inc. Registration Statement on Form S-1 (File  No. 333-30065), effective August 19, 1997, is hereby incorporated by  reference).                                                                                                                       |
|             |   |   |   |                                                                                                                                                                                                                                                                                                                                                                  |
| 4.2              |   | — |   | Second  Amended and Restated Credit Agreement, dated February 3, 1999, among U S  Liquids Inc., various financial institutions and Bank of America National  Trust and Savings Association, as Agent. (Exhibit 4.2 of the U S Liquids Inc.  Registration Statement on Form S-3 (File No. 333-72403), effective March 11,  1999, is hereby incorporated by reference). |
|             |   |   |   |                                                                                                                                                                                                                                                                                                                                                                  |
| 4.3              |   | — |   | First  Amendment to Second Amended and Restated Credit Agreement among U S Liquids  Inc., various financial institutions and Bank of America National Trust and  Savings Association, as Agent.   (Exhibit 4.3 of the Form 10-K for the year ended December 31, 1999 is  hereby incorporated by reference).                                                      |
|             |   |   |   |                                                                                                                                                                                                                                                                                                                                                                  |
| 4.4              |   | — |   | Second  Amendment to Second Amended and Restated Credit Agreement among U S Liquids  Inc., various financial institutions and Bank of America National Trust and  Savings Association, as Agent. (Exhibit 4.4 of the Form 10-K for the year  ended December 31, 1999 is hereby incorporated by reference).                                                            |
|             |   |   |   |                                                                                                                                                                                                                                                                                                                                                                  |
| 4.5              |   | — |   | Third  Amendment to Second Amended and Restated Credit Agreement among U S Liquids  Inc., various financial institutions and Bank of America National Trust and  Savings Association, as Agent. (Exhibit 4.7 of the Form 10-Q for the quarter  ended June 30, 2000 is hereby incorporated by reference).                                                              |
|             |   |   |   |                                                                                                                                                                                                                                                                                                                                                                  |
| 4.6              |   | — |   | Fourth  Amendment to Second Amended and Restated Credit Agreement among U S Liquids  Inc., various financial institutions and Bank of America National Trust and  Savings Association, as Agent. (Exhibit 4.6 of the Form 10-K for the year  ended December 31, 2000 is hereby incorporated by reference).                                                  |

 

 

31

----

 
|   |   |   |   |                                                                                                                                                                                                                                                                                                               |
|--------|--------|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 4.7    |   | — |   | Fifth  Amendment to Second Amended and Restated Credit Agreement among U S Liquids  Inc., various financial institutions and Bank of America National Trust and  Savings Association, as Agent. (Exhibit 4.9 of the Form 10-Q for the quarter  ended September 30, 2001 is hereby incorporated by reference). |
|   |   |   |   |                                                                                                                                                                                                                                                                                                               |
| +4.8   |   | — |   | Sixth  Amendment to Second Amended and Restated Credit Agreement among U S Liquids  Inc., various financial institutions and Bank of America National Trust and  Savings Association, as Agent.                                                                                                                    |
|   |   |   |   |                                                                                                                                                                                                                                                                                                               |
| +4.9   |   | — |   | Seventh  Amendment to Second Amended and Restated Credit Agreement among U S Liquids  Inc., various financial institutions and Bank of America National Trust and  Savings Association, as Agent.                                                                                                                  |
|   |   |   |   |                                                                                                                                                                                                                                                                                                               |
| +4.10  |   | — |   | Eighth Amendment to Second Amended and Restated Credit Agreement  among U S Liquids Inc., various financial institutions and Bank of America  National Trust and Savings Association, as Agent.                                                                                                                    |
|   |   |   |   |                                                                                                                                                                                                                                                                                                               |
| 4.11   |   | — |   | Security  Agreement, dated December 17, 1997, executed by U S Liquids Inc. and its  subsidiaries in favor of Bank of America National Trust and Savings  Association.  (Exhibit 4.6 of the Form  10-K for the year ended December 31, 1997 is hereby incorporated by  reference).                             |
|   |   |   |   |                                                                                                                                                                                                                                                                                                               |
| 4.12   |   | — |   | Company  Pledge Agreement, dated December 17, 1997, executed by U S Liquids Inc. in  favor of Bank of America National Trust and Savings Association.  (Exhibit 4.7 of the Form 10-K for the year  ended December 31, 1997 is hereby incorporated by reference).                                              |
|   |   |   |   |                                                                                                                                                                                                                                                                                                               |
| **10.1 |   | — |   | Asset  Purchase Agreement, dated December 2, 1996, among U S Liquids Inc., Sanifill,  Inc. and certain affiliates of Sanifill, Inc. (Exhibit 10.1 of the U S  Liquids Inc. Registration Statement on Form S-1 (File No. 333-30065),  effective August 19, 1997, is hereby incorporated by reference).              |
|   |   |   |   |                                                                                                                                                                                                                                                                                                               |
| 10.2   |   | — |   | Seller  Noncompetition Agreement, dated December 13, 1996, between U S Liquids Inc.  and Sanifill, Inc. (Exhibit 10.2 of the U S Liquids Inc. Registration  Statement on Form S-1 (File No. 333-30065), effective August 19, 1997, is  hereby incorporated by reference).                                          |
|   |   |   |   |                                                                                                                                                                                                                                                                                                               |
| 10.3   |   | — |   | Buyer  Noncompetition Agreement, dated December 13, 1996, between Sanifill, Inc. and  U S Liquids Inc. (Exhibit 10.3 of the U S Liquids Inc. Registration Statement  on Form S-1 (File No. 333-30065), effective August 19, 1997, is hereby  incorporated by reference).                                           |
|   |   |   |   |                                                                                                                                                                                                                                                                                                               |
| 10.4   |   | — |   | Estoppel  and Waiver Agreement, dated April 10, 1998, between U S Liquids Inc. and  Sanifill, Inc. (Exhibit 10.59 of U S Liquids Inc. Registration Statement on  Form S-1 (File No. 333-52121), effective June 4, 1998, is hereby incorporated  by reference).                                                     |
|   |   |   |   |                                                                                                                                                                                                                                                                                                               |
| 10.5   |   | — |   | Settlement  of Arbitration and Release between U S Liquids Inc. and Newpark Resources,  Inc. (Exhibit 99.1 to the Form 8-K filed on September 25, 1998 is hereby  incorporated by reference).                                                                                                                      |
|   |   |   |   |                                                                                                                                                                                                                                                                                                               |
| 10.6   |   | — |   | Payment  Agreement, dated December 31, 1998, among U S Liquids Inc., Newpark  Resources, Inc., and Newpark Environmental Services, Inc.  (Exhibit 10.4 of U S Liquids Inc.  Registration Statement on Form S-3 (File No. 333-72403), effective March 11,  1999, is hereby incorporated by reference).         |
|   |   |   |   |                                                                                                                                                                                                                                                                                                               |
| 10.7   |   | — |   | Option  Agreement, dated December 31, 1998, among U S Liquids Inc., Newpark  Resources, Inc. and Newpark Environmental Services, Inc.  (Exhibit 10.5 of U S Liquids Inc.  Registration Statement on Form S-3 (File No. 333-72403), effective March 11,  1999, is hereby incorporated by reference).           |
|   |   |   |   |                                                                                                                                                                                                                                                                                                               |
| 10.8   |   | — |   | Amendment  to Option Agreement, dated January 10, 2000, among U S Liquids Inc., Newpark  Resources, Inc. and Newpark Environmental Services, Inc.  (Exhibit 10.8 of the Form 10-K for the  year ended December 31, 1999 is hereby incorporated by reference).                                                 |

 

 

32

----

 
|    |   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                           |
|---------|--------|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.9    |   | — |   | Miscellaneous  Agreement, dated September 16, 1998, between Newpark Resources, Inc. and U S  Liquids Inc.  (Exhibit 99.4 to the  Form 8-K filed on September 25, 1998 is hereby incorporated by reference).                                                                                                                                                                                                                               |
|    |   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| *10.10  |   | — |   | Employment  Agreement, dated September 1, 1999, between U S Liquids Inc. and Steven  J.  Read, as amended.  (Exhibit 10.10 of the Form 10-K for the  year ended December 31, 2000 is hereby incorporated by reference).                                                                                                                                                                                                              |
|    |   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| 10.11   |   | — |   | Form  of Nonqualified Stock Option Agreement between U S Liquids Inc. and certain  individuals (Exhibit 10.11 of the U S Liquids Inc. Registration Statement on  Form S-1 (File No. 333-30065), effective August 19, 1997, is hereby  incorporated by reference).                                                                                                                                                                              |
|    |   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| 10.12   |   | — |   | U  S Liquids Inc. Amended and Restated Stock Option Plan (Exhibit 10.12 of the U  S Liquids Inc. Registration Statement on Form S-1 (File No. 333-30065),  effective August 19, 1997, is hereby incorporated by reference).                                                                                                                                                                                                                    |
|    |   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| 10.13   |   | — |   | U  S Liquids Inc. Directors’ Stock Option Plan (Exhibit 10.13 of the U S Liquids  Inc. Registration Statement on Form S-1   (File No. 333-30065), effective August 19, 1997, is hereby  incorporated by reference).                                                                                                                                                                                                                  |
|    |   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| 10.14   |   | — |   | Form  of Grant of Incentive Stock Option Agreement (Exhibit 10.14 of the U S  Liquids Inc. Registration Statement on Form S-1 (File No. 333-30065),  effective August 19, 1997, is hereby incorporated by reference).                                                                                                                                                                                                                          |
|    |   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| 10.15   |   | — |   | Agreement,  dated November 15, 2000, between U S Liquids Inc. and W. Gregory Orr.  (Exhibit 99.2 to the Form 8-K filed on  November 21, 2000, is hereby incorporated by reference).                                                                                                                                                                                                                                                       |
|    |   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| *10.16  |   | — |   | Employment  Agreement, dated February 13, 1998, between U S Liquids Inc. and Earl J.  Blackwell.  (Exhibit 10.16 of the Form  10-K for the year ended December 31, 1997 is hereby incorporated by  reference).                                                                                                                                                                                                                            |
|    |   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| *10.17  |   | — |   | Employment  Agreement, dated September 1, 1999, between U S Liquids Inc. and Harry O.  Nicodemus IV, as amended. (Exhibit 10.17 of the Form 10-K for the year ended  December 31, 2000 is hereby incorporated by reference).                                                                                                                                                                                                              |
|    |   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| *10.18  |   | — |   | Stock  Distribution Agreement, dated June 16, 1997, between U S Liquids Inc. and  Earl J. Blackwell (Exhibit 10.38 of the U S Liquids Inc. Registration  Statement on Form S-1 (File No. 333-30065), effective August 19, 1997, is  hereby incorporated by reference).                                                                                                                                                                         |
|    |   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| **10.19 |   | — |   | Agreement  for Purchase and Sale of Assets, dated April 21, 1998, among US Parallel  Products of California, Parallel Products of Kentucky, Inc., Parallel  Products of Florida, Inc., Parallel Products, DWA of Belvedere Company, The  Estate of David W. Allen, David W. Allen Trust No. 1, Peter Allen, Neal  Koehler and Richard Eastman.  (Exhibit  2.1 to the Form 8-K filed on May 6, 1998 is hereby incorporated by  reference). |
|    |   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| *10.20  |   | — |   | Employment  Agreement, dated July 2, 1997, between U S Liquids Inc. and Michael P. Lawlor  (Exhibit 10.40 of the U S Liquids Inc. Registration Statement on Form S-1  (File No. 333-30065), effective August 19, 1997, is hereby incorporated by  reference).                                                                                                                                                                                  |
|    |   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| 10.21   |   | — |   | Noncompetition  Agreement of September 16, 1998 between U S Liquids Inc. and Newpark  Resources, Inc.  (Exhibit 99.3 to the  Form 8-K filed on September 25, 1998 is hereby incorporated by reference).                                                                                                                                                                                                                                   |
|    |   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| 10.22   |   | — |   | Warrant  Agreement among U S Liquids Inc., Van Kasper & Company and Sanders Morris  Mundy Inc. (Exhibit 10.33 of the U S Liquids Inc. Registration Statement on  Form S-1 (File No. 333-34875), effective September 18, 1997, is hereby  incorporated by reference).                                                                                                                                                                       |

 

 

33

----

 
|    |   |   |   |                                                                                                                                                                                                                                                                                                     |
|---------|--------|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.23   |   | — |   | Amendment  No. 1 to Warrant Agreement, dated April 20, 1998, among U S Liquids Inc., Van  Kasper & Company and Sanders Morris Mundy Inc. (Exhibit 10.61 of U S  Liquids Inc. Registration Statement on Form S-1 (File No. 333-52121),  effective June 4, 1998, is hereby incorporated by reference). |
|    |   |   |   |                                                                                                                                                                                                                                                                                                     |
| 10.24   |   | — |   | Estoppel,  Waiver and Amendment Agreement, dated June 16, 1997, between Sanifill, Inc.  and U S Liquids Inc. (Exhibit 10.27 of the U S Liquids Inc. Registration  Statement on Form S-1 (File No. 333-30065), effective August 19, 1997, is  hereby incorporated by reference).                          |
|    |   |   |   |                                                                                                                                                                                                                                                                                                     |
| 10.25   |   | — |   | Warrant,  dated December 13, 1996, issued by U S Liquids Inc. to Sanifill, Inc.  (Exhibit 10.31 of the U S Liquids Inc. Registration Statement on Form S-1  (File No. 333-30065), effective August 19, 1997, is hereby incorporated by  reference).                                                      |
|    |   |   |   |                                                                                                                                                                                                                                                                                                     |
| *10.26  |   | — |   | Employment  Agreement, dated September 1, 1998, between U S Liquids Inc. and Gary J. Van  Rooyan, as amended.  (Exhibit 10.26 of  the Form 10-K for the year ended December 31, 2000 is hereby  incorporated by reference).                                                                    |
|    |   |   |   |                                                                                                                                                                                                                                                                                                     |
| +*10.27 |   | — |   | Employment  Agreement, dated July 15, 2001, between U S Liquids Inc. and John P. Miklich.                                                                                                                                                                                                                |
|    |   |   |   |                                                                                                                                                                                                                                                                                                     |
| +21.1   |   | — |   | List  of subsidiaries of U S Liquids Inc.                                                                                                                                                                                                                                                                |
|    |   |   |   |                                                                                                                                                                                                                                                                                                     |
| +23.1   |   | — |   | Consent  of Arthur Andersen LLP.                                                                                                                                                                                                                                                                         |
|    |   |   |   |                                                                                                                                                                                                                                                                                                     |
| +99.1   |   | — |   | Letter  regarding representations from Arthur Andersen LLP.                                                                                                                                                                                                                                              |

 

----

+    Filed herewith

*    Management Contract

**  Schedules to this agreementwill be furnished supplementally to the Commission upon request.

 

34

----

 

**SIGNATURES**

 

Pursuant to the requirements of Section 13 or 15(d)of the Securities Exchange Act of 1934, the registrant has duly caused thisreport to be signed on its behalf by the undersigned, thereunto dulyauthorized.

 
|   |            |   | U  S Liquids Inc.           |
|--------|-----------------|--------|-----------------------------|
|   |            |   |                        |
| Date:  | March  28, 2002 | By:    | /s/  Michael P. Lawlor      |   |
|   |            |   |                        | Michael  P. Lawlor |
|   |            |   |                        | Chairman  of the Board and |
|   |            |   |                        | Chief  Executive Officer |
|   |            |   |                        |   |
| Date:  | March  28, 2002 | By:    | /s/  Earl J. Blackwell      |   |
|   |            |   |                        | Earl  J. Blackwell |
|   |            |   |                        | Chief  Financial Officer, |
|   |            |   |                        | Senior  Vice President and |
|   |            |   |                        | Secretary |
|   |            |   |                        |   |
| Date:  | March  28, 2002 | By:    | /s/  Harry O. Nicodemus, IV |   |
|   |            |   |                        | Harry  O. Nicodemus, IV |
|   |            |   |                        | Vice  President and |
|   |            |   |                        | Chief  Accounting Officer |
|        |                 |        |                             |  |  |  |

 

Pursuant to the requirements of theSecurities Exchange Act of 1934, this report has been signed below by thefollowing persons on behalf of the registrant and in the capacities and on thedates indicated.

 
| Date:  | March  28, 2002 | By:    | /s/  Michael P. Lawlor       |                      |
|--------|-----------------|--------|------------------------------|---------------------------|
|   |            |   |                         | Michael  P. Lawlor        |
|   |            |   |                         | Chairman  of the Board of |
|   |            |   |                         | Directors                 |
|   |            |   |                         |                      |
| Date:  | March  28, 2002 | By:    | /s/  William M. DeArman      |                      |
|   |            |   |                         | William  M. DeArman       |
|   |            |   |                         | Director                  |
|   |            |   |                         |                      |
| Date:  | March  28, 2002 | By:    | /s/  James F. McEneaney, Jr. |                      |
|   |            |   |                         | James  F. McEneaney, Jr.  |
|   |            |   |                         | Director                  |
|   |            |   |                         |                      |
| Date:  | March  28, 2002 | By:    | /s/  John N. Hatsopoulos     |                      |
|   |            |   |                         | John  N. Hatsopoulos      |
|   |            |   |                         | Director                  |
|   |            |   |                         |                      |
| Date:  | March  28, 2002 | By:    | /s/  Clayton K. Trier        |                      |
|   |            |   |                         | Clayton  K. Trier         |
|   |            |   |                         | Director                  |
|   |            |   |                         |                      |
| Date:  | March  28, 2002 | By:    | /s/  Alfred Tyler 2nd        |                      |
|   |            |   |                         | Alfred  Tyler 2nd         |
|   |            |   |                         | Director                  |
|   |            |   |                         |                      |
|   |            |   |                         |                      |
| Date:  | March  28, 2002 | By:    | /s/  John P. Miklich         |                      |
|   |            |   |                         | John  P. Miklich          |
|   |            |   |                         | Director                  |
|        |                 |        |                              |                           |  |

 

----

 

**INDEX TO FINANCIALSTATEMENTS**

 
| **U S  LIQUIDS INC.**                            |   |
|-------------------------------------------------------|--------|
| Report of Independent Public Accountants              |   |
| Consolidated Balance Sheets                           |   |
| Consolidated Statements of Operations                 |   |
| Consolidated Statements of Stockholders’  Equity |   |
| Consolidated Statements of Cash Flows                 |   |
| Notes to Consolidated Financial Statements            |   |

 

F-1

----

 

**REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS**

 

To U S LiquidsInc.:

 

We have audited the accompanying consolidatedbalance sheets of U S Liquids Inc. (a Delaware corporation) and subsidiaries asof December 31, 2000 and 2001, and the related consolidated statements ofoperations, stockholders’ equity and cash flows for each of the three years inthe period ended December 31, 2001. These consolidated financial statements are the responsibility of theCompany’s management. Our responsibility is to express an opinion on theseconsolidated financial statements based on our audits.

 

We conducted our audits in accordance withauditing standards generally accepted in the United States.  Those standards require that we plan andperform the audit to obtain reasonable assurance about whether the financialstatements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting theamounts and disclosures in the financial statements.  An audit also includes assessing the accounting principles usedand significant estimates made by management, as well as evaluating the overallfinancial statement presentation. We believe that our audits provide areasonable basis for our opinion.

 

Inour opinion, the consolidated financial statements referred to above presentfairly, in all material respects, the consolidated financial position of U SLiquids Inc. and subsidiaries as of December 31, 2000 and 2001, and theconsolidated results of their operations and their cash flows for each of thethree years in the period ended December 31, 2001, in conformity withaccounting principles generally accepted in the United States.

 

Arthur Andersen LLP

 

Houston, Texas

February 25,2002,

except for Note21,

as to which thedate is

March 28, 2002

 

 

F-2

----

 

**US  LIQUIDS INC.**

** **

**CONSOLIDATEDBALANCE SHEETS**

**(In thousands, exceptper share data)**

 
|                                                                                                                                 |   | **2000** |       | **2001** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------|--------|----------|------------|----------|------------|
| **ASSETS**                                                                                                                           |   |     |       |     |       |
| CURRENT ASSETS:                                                                                                                      |   |     |       |     |       |
| Cash and cash  equivalents                                                                                                           |   | $        | 2,176      |     | $          | 1,498 |   |
| Accounts  receivable, less allowances of  $1,070  and $1,092, respectively                                                      |   | 37,139   |       | 38,139   |       |
| Inventories                                                                                                                          |   | 2,254    |       | 2,485    |       |
| Prepaid  expenses and other current assets                                                                                           |   | 14,941   |       | 8,648    |       |
| Operations held  for sale                                                                                                            |   | 23,745   |       | —   |       |
| Total current  assets                                                                                                                |   | $        | 80,255     |     | $          | 50,770 |   |
|                                                                                                                                 |   |     |       |     |       |
| PROPERTY,  PLANT, AND EQUIPMENT, net                                                                                                 |   | 108,246  |       | 109,838  |       |
| INTANGIBLE  ASSETS, net                                                                                                              |   | 162,809  |       | 159,325  |       |
| OTHER ASSETS,  net                                                                                                                   |   | 867      |       | 943      |       |
| Total assets                                                                                                                         |   | $        | 352,177    |     | $          | 320,876 |   |
|                                                                                                                                 |   |     |       |     |       |
| **LIABILITIES  AND STOCKHOLDERS’ EQUITY**                                                                                       |   |     | ** ** |     | ** ** |
|                                                                                                                                 |   |     |       |     |       |
| CURRENT  LIABILITIES:                                                                                                                |   |     |       |     |       |
| Current  maturities of long-term obligations                                                                                         |   | $        | 22,993     |     | $          | 2,891 |   |
| Accounts  payable                                                                                                                    |   | 17,579   |       | 14,253   |       |
| Accrued  expenses and other current liabilities                                                                                      |   | 25,594   |       | 26,984   |       |
| Operations held  for sale                                                                                                            |   | 2,996    |       | —   |       |
| Total current  liabilities                                                                                                           |   | $        | 69,162     |     | $          | 44,128 |   |
|                                                                                                                                 |   |     |       |     |       |
| LONG-TERM  OBLIGATIONS, net of current maturities                                                                                    |   | 88,526   |       | 89,137   |       |
| PROCESSING  RESERVE, net of current portion                                                                                          |   | 5,445    |       | 4,702    |       |
| CLOSURE AND  REMEDIATION RESERVES, net of current portion                                                                            |   | 10,834   |       | 9,848    |       |
| OTHER LONG-TERM  LIABILITIES                                                                                                         |   | 2,577    |       | 1,094    |       |
| DEFERRED INCOME  TAXES                                                                                                               |   | 10,763   |       | 3,514    |       |
| Total  liabilities                                                                                                                   |   | $        | 187,307    |     | $          | 152,423 |   |
|                                                                                                                                 |   |     |       |     |       |
| COMMITMENTS AND  CONTINGENCIES                                                                                                       |   |     |       |     |       |
|                                                                                                                                 |   |     |       |     |       |
| STOCKHOLDERS’  EQUITY:                                                                                                          |   |     |       |     |       |
| Preferred  stock, $0.01 par value, 5,000,000 shares authorized, none issued or  outstanding                                          |   | $        | —     |     | $          | — |   |
| Common stock,  $0.01 par value, 30,000,000 shares authorized, 15,818,729 and 16,031,815  shares issued and outstanding, respectively |   | 158      |       | 160      |       |
| Additional  paid-in capital                                                                                                          |   | 176,939  |       | 177,134  |       |
| Retained  deficit                                                                                                                    |   | (12,204  | )          | (8,818   | )          |
| Accumulated  other comprehensive loss — foreign currency  translation adjustment                                                |   | (23      | )          | (23      | )          |
| Total  stockholders’ equity                                                                                                     |   | $        | 164,870    |     | $          | 168,453 |   |
| Total  liabilities and stockholders’ equity                                                                                     |   | $        | 352,177    |     | $          | 320,876 |   |

 

The accompanying notes are an integral partof these consolidated financial statements.

 

F-3

----

 

**US  LIQUIDS INC.**

** **

**CONSOLIDATEDSTATEMENTS OF OPERATIONS**

**(In thousands, exceptper share data)**

 
|                                                              |   | **Years  Ended December 31,** |    |
|-------------------------------------------------------------------|--------|-------------------------------|---------|
|                                                              |   | **1999**                      |    | **2000** |   | **2001** |   |
| REVENUES                                                          |   | $                             | 231,783 |   | $ | 247,859 |   | $ | 230,312 |   |
| OPERATING  EXPENSES                                               |   | 165,773                       |    | 193,724 |   | 168,673 |   |
| DEPRECIATION  & AMORTIZATION                                  |   | 16,595                        |    | 19,234 |   | 17,513 |   |
| SELLING,  GENERAL, AND ADMINISTRATIVE EXPENSES                    |   | 26,242                        |    | 33,162 |   | 26,440 |   |
| SPECIAL  CHARGES, net                                             |   | 15,138                        |    | 17,787 |   | 5,771 |   |
| INCOME (LOSS)  FROM OPERATIONS                                    |   | $                             | 8,035   |   | $ | (16,048 | ) | $ | 11,915 |   |
| INTEREST  EXPENSE, net                                            |   | 6,803                         |    | 10,698 |   | 9,440 |   |
| OTHER INCOME,  net                                                |   | (129                          | )       | (419 | ) | (304 | ) |
| INCOME (LOSS) BEFORE PROVISION (BENEFIT) FOR INCOME TAXES         |   | $                             | 1,361   |   | $ | (26,327 | ) | $ | 2,779 |   |
| PROVISION  (BENEFIT) FOR INCOME TAXES                             |   | 2,603                         |    | (950 | ) | (607 | ) |
| NET INCOME  (LOSS)                                                |   | $                             | (1,242  | ) | $ | (25,377 | ) | $ | 3,386 |   |
|                                                              |   |                          |    |   |   |   |   |
| Basic Earnings  (Loss) per Common Share                           |   | $                             | (0.08   | ) | $ | (1.61 | ) | $ | 0.21 |   |
| Diluted  Earnings (Loss) per Common Share                         |   | $                             | (0.08   | ) | $ | (1.61 | ) | $ | 0.20 |   |
| Weighted  Average Common Shares Outstanding                       |   | 15,324                        |    | 15,798 |   | 15,988 |   |
| Weighted Average Common and  Common Equivalent Shares Outstanding |   | 15,324                        |    | 15,798 |   | 16,728 |   |

 

The accompanying notes are an integral partof these consolidated financial statements.

 

F-4

----

 

**US  LIQUIDS INC.**

** **

**CONSOLIDATEDSTATEMENTS OF STOCKHOLDERS’ EQUITY**

**(In thousands)**

 
|                                                                     | **Accumulated** |              |              |
|--------------------------------------------------------------------------|-----------------|-------------------|-------------------|
|                                                                     | **Additional**  |              | **Comprehensive** |   | **Total** |   |
|                                                                     |            | **Comprehensive** |              | **Common Stock** |   | **Paid-In** |   | **Other** |   | **Retained** |   | **Stockholders’** |   |
|                                                                     |            | **Income (Loss)** |              | **Shares** |   | **Amount** |   | **Capital** |   | **Loss** |   | **Earnings** |   | **Equity** |   |
| BALANCE,  December 31, 1998                                              |            |              |              | 12,498 |   | $ | 125 |   | $ | 110,404 |   | $ | — |   | $ | 14,415 |   | $ | 124,944 |   |
| Common stock  issued in secondary public offering, net of offering costs |            | —            |              | 2,875 |   | 29 |   | 56,463 |   | — |   | — |   | 56,492 |   |
| Common stock  issued in acquisitions                                     |            | —            |              | 636 |   | 6 |   | 12,846 |   | — |   | — |   | 12,852 |   |
| Common stock  options and warrants exercised                             |            | —            |              | 158 |   | 2 |   | 142 |   | — |   | — |   | 144 |   |
| Repurchase and  cancellation of common stock                             |            | —            |              | (386 | ) | (4 | ) | (2,996 | ) | — |   | — |   | (3,000 | ) |
| Comprehensive  Loss:                                                     |            |              |              |   |   |   |   |   |   |   |   |   |   |   |   |
| Foreign  currency translation adjustment                                 |            | (42               | )                 | — |   | — |   | — |   | (42 | ) | — |   | (42 | ) |
| Net loss                                                                 |            | (1,242            | )                 | — |   | — |   | — |   | — |   | (1,242 | ) | (1,242 | ) |
| Total                                                                    |            | $                 | (1,284            | ) |   |   |   |   |   |   |   |   |   |   |   |   |
| BALANCE,  December 31, 1999                                              |            |              |              | 15,781 |   | $ | 158 |   | $ | 176,859 |   | $ | (42 | ) | $ | 13,173 |   | $ | 190,148 |   |
| Common stock  issued in acquisitions                                     |            | —            |              | 22 |   | — |   | 75 |   | — |   | — |   | 75 |   |
| Common stock  options exercised and employee stock purchases             |            | —            |              | 16 |   | — |   | 5 |   | — |   | — |   | 5 |   |
| Comprehensive  Loss:                                                     |            |              |              |   |   |   |   |   |   |   |   |   |   |   |   |
| Foreign  currency translation adjustment                                 |            | 19                |              | — |   | — |   | — |   | 19 |   | — |   | 19 |   |
| Net loss                                                                 |            | (25,377           | )                 | — |   | — |   | — |   | — |   | (25,377 | ) | (25,377 | ) |
| Total                                                                    |            | $                 | (25,358           | ) |   |   |   |   |   |   |   |   |   |   |   |   |
| BALANCE,  December 31, 2000                                              |            |              |              | 15,819 |   | $ | 158 |   | $ | 176,939 |   | $ | (23 | ) | $ | (12,204 | ) | $ | 164,870 |   |
| Common stock  options exercised and employee stock purchases             |            | —            |              | 213 |   | 2 |   | 195 |   | — |   | — |   | 197 |   |
| Comprehensive  Income:                                                   |            |              |              |   |   |   |   |   |   |   |   |   |   |   |   |
| Net income                                                               |            | 3,386             |              | — |   | — |   | — |   | — |   | 3,386 |   | 3,386 |   |
| Total                                                                    |            | $                 | 3,386             |   |   |   |   |   |   |   |   |   |   |   |   |   |
| BALANCE,  December 31, 2001                                              |            |              |              | 16,032 |   | $ | 160 |   | $ | 177,134 |   | $ | (23 | ) | $ | (8,818 | ) | $ | 168,453 |   |

 

Theaccompanying notes are an integral part of these consolidated financialstatements.

 

F-5

----

 

**U S LIQUIDS INC.**

** **

**CONSOLIDATEDSTATEMENTS OF CASH FLOWS**

**(In thousands)**

** **

** **
|                                                                                      |   | **Years Ended December 31,** |    |
|-------------------------------------------------------------------------------------------|--------|------------------------------|---------|
|                                                                                      |   | **1999**                     |    | **2000** |   | **2001** |   |
| CASH FLOWS FROM  OPERATING ACTIVITIES:                                                    |   |                         |    |   |   |   |   |
| Net income  (loss)                                                                        |   | $                            | (1,242  | ) | $ | (25,377 | ) | $ | 3,386 |   |
| Adjustments to reconcile net income (loss)  to net cash provided by operating activities: |   |                         |    |   |   |   |   |
| Depreciation  and amortization                                                            |   | 16,595                       |    | 19,234 |   | 17,513 |   |
| Asset write  downs and impairments                                                        |   | —                       |    | — |   | 6,793 |   |
| Net (gain) loss  on sale of property, plant, and equipment                                |   | 122                          |    | 8 |   | (129 | ) |
| Deferred income  tax provision (benefit)                                                  |   | (340                         | )       | 2,203 |   | (1,451 | ) |
| Changes in  operating assets and liabilities, net of amounts acquired:                    |   |                         |    |   |   |   |   |
| Accounts  receivable, net                                                                 |   | (4,196                       | )       | (3,939 | ) | 2,229 |   |
| Inventories                                                                               |   | (745                         | )       | (224 | ) | (65 | ) |
| Prepaid  expenses and other current assets                                                |   | (2,426                       | )       | (1,045 | ) | 2,003 |   |
| Intangible  assets                                                                        |   | (785                         | )       | (1,248 | ) | (1,134 | ) |
| Other assets                                                                              |   | (778                         | )       | 1,365 |   | (178 | ) |
| Accounts  payable, accrued liabilities, and other current liabilities                     |   | (1                           | )       | 353 |   | (3,106 | ) |
| Closure, remediation  and processing reserves                                             |   | (3,193                       | )       | (915 | ) | (1,724 | ) |
| Contract  reserve and other long-term liabilities                                         |   | —                       |    | (10,314 | ) | (1,519 | ) |
| Operations held  for sale, net                                                            |   | —                       |    | 29,876 |   | 1,814 |   |
| Net cash  provided by operating activities                                                |   | $                            | 3,011   |   | $ | 9,977 |   | $ | 24,432 |   |
|                                                                                      |   |                         |    |   |   |   |   |
| CASH FLOWS FROM  INVESTING ACTIVITIES:                                                    |   |                         |    |   |   |   |   |
| Purchases of  property, plant, and equipment                                              |   | $                            | (17,223 | ) | $ | (19,192 | ) | $ | (10,510 | ) |
| Proceeds from  sale of property, plant, and equipment                                     |   | 1,688                        |    | 973 |   | 1,072 |   |
| Proceeds from  sale of businesses                                                         |   | —                       |    | — |   | 3,947 |   |
| Cash paid for  acquisitions and subsequent purchase adjustments, net                      |   | (69,177                      | )       | 14 |   | (64 | ) |
| Net cash used  in investing activities                                                    |   | $                            | (84,712 | ) | $ | (18,205 | ) | $ | (5,555 | ) |
|                                                                                      |   |                         |    |   |   |   |   |
| CASH FLOWS FROM  FINANCING ACTIVITIES:                                                    |   |                         |    |   |   |   |   |
| Proceeds from issuance  of long-term obligations                                          |   | $                            | 96,270  |   | $ | 36,975 |   | $ | 8,860 |   |
| Principal  payments on long-term obligations                                              |   | (68,050                      | )       | (29,993 | ) | (28,612 | ) |
| Repurchase and  cancellation of common stock                                              |   | (3,000                       | )       | — |   | — |   |
| Proceeds from  additional public offering of common stock, net of offering costs          |   | 56,492                       |    | — |   | — |   |
| Proceeds from  exercise of stock options and employee stock purchase plan                 |   | 144                          |    | 5 |   | 197 |   |
| Net cash  provided by (used in) financing activities                                      |   | $                            | 81,856  |   | $ | 6,987 |   | $ | (19,555 | ) |
|                                                                                      |   |                         |    |   |   |   |   |
| EFFECT OF FOREIGN CURRENCY TRANSLATION ON  CASH AND CASH EQUIVALENTS                      |   | $                            | (42     | ) | $ | 19 |   | $ | — |   |
|                                                                                      |   |                         |    |   |   |   |   |
| NET INCREASE  (DECREASE) IN CASH AND CASH EQUIVALENTS                                     |   | $                            | 113     |   | $ | (1,222 | ) | $ | (678 | ) |
| CASH AND CASH  EQUIVALENTS AT BEGINNING OF PERIOD                                         |   | 3,285                        |    | 3,398 |   | 2,176 |   |
| CASH AND CASH  EQUIVALENTS AT END OF PERIOD                                               |   | $                            | 3,398   |   | $ | 2,176 |   | $ | 1,498 |   |
|                                                                                      |   |                         |    |   |   |   |   |
| SUPPLEMENTAL  DISCLOSURES:                                                                |   |                         |    |   |   |   |   |
| Cash paid for  interest                                                                   |   | $                            | 6,870   |   | $ | 10,639 |   | $ | 8,747 |   |
| Cash paid  (received) for income taxes                                                    |   | 5,786                        |    | (3,884 | ) | (4,098 | ) |
| Assets acquired  under capital leases                                                     |   | 2,723                        |    | 426 |   | — |   |
| Liabilities  issued and assumed related to acquisitions                                   |   | 12,852                       |    | 257 |   | — |   |
| Common stock,  warrants, and options issued for acquisitions                              |   | 8,293                        |    | 75 |   | — |   |

 

The accompanying notes are an integral part of these consolidatedfinancial statements.

 

F-6

----

 

**U S LIQUIDS INC.**

** **

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

** **

** **

**1.     BUSINESSAND ORGANIZATION:**

 

U S  Liquids Inc. and subsidiaries (collectively “U S  Liquids” or the “Company”) was foundedNovember 18, 1996, and is a leading provider of services for the collection,processing, recovery and disposal of liquid waste in North America.  On December 13, 1996, the Company acquiredits Oilfield Waste Division from Sanifill, Inc. through a transaction accountedfor as a purchase.  The Oilfield WasteDivision treats and disposes of oilfield waste generated in oil and gasexploration and production.  In June1997, the Company formed the basis of its Wastewater Division by acquiringadditional companies.  Theseacquisitions were accounted for under the pooling-of-interests method ofaccounting.  The Wastewater Divisioncollects, processes and disposes of liquid waste and recovers by-products fromthese waste streams.  During 1998 and1999, the Company continued acquiring companies, principally for the WastewaterDivision.  On July 1, 1999, the Companycreated a third division, known as the Industrial Wastewater Division, andchanged the name of the Wastewater Division to the Commercial WastewaterDivision.  The Industrial WastewaterDivision derives revenues from fees charged for the collection, processing anddisposal of hazardous and nonhazardous liquid wastes, while the CommercialWastewater Division handles only nonhazardous liquid wastes.

 

**2.****              SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:**

 

*Basis of Presentation*

 

The consolidated financialstatements include the accounts of the Company after elimination of allsignificant intercompany accounts and transactions.

 

*Use of Estimates*

 

The preparation of financialstatements requires management to make estimates and assumptions that affectthe reported amounts of assets and liabilities, the disclosure of contingentassets and liabilities at the date of the financial statements and the reportedamounts of revenues and expenses during the reporting period.  Actual results could differ materially fromthose estimates.  Significant estimatesmade by management include operations held for sale, the allowance for doubtfulaccounts, the valuation allowance against deferred income tax assets,self-insurance, processing reserves and reserves for the closure andremediation of facilities.

 

*Risk Factors*

 

Risk factors of the Company include, but arenot limited to, compliance with governmental and environmental regulations, potentialenvironmental liability and capital and financing availability.

 

*Cash and Cash Equivalents*

 

All highly liquid investmentswith an original maturity of three months or less are classified as cashequivalents.

 

*Concentrations of Credit Risk*

 

Financial instruments thatpotentially subject the Company to concentrations of credit risk consistprimarily of cash and cash equivalents and accounts receivable.  The Company places its cash and cashequivalents with high quality financial institutions and limits the amount ofcredit exposure with any one institution. Concentrations of credit risk with respect to accounts receivable arelimited because a large number of geographically diverse customers comprise theCompany’s customer base, thus spreading the trade credit risk.  At December 31, 2000 and 2001, no singlegroup or customer represented greater than 10% of total accountsreceivable.  The Company controls creditrisk through credit evaluations, credit limits, and monitoring procedures.

 

*Allowance for Doubtful Accounts*

 

The Company extends credit tocustomers and other parties in the normal course of business.  Management regularly reviews outstandingaccounts receivables, and provides for estimated losses through an allowancefor doubtful accounts.  In evaluatingthe level of established reserves, management makes judgements regarding theparties’ ability to make required payments, economic events, and other 

 

F-7

----

 

factors. As the financial condition of these parties change, circumstancesdevelop or additional information becomes available, adjustments to theallowance for doubtful accounts may be required.  Management performs ongoing credit analyses of the accounts ofits customers and provides allowances as deemed necessary.  The activity in the allowance for doubtfulaccounts is as follows (in thousands):

 
|                          |   | **Balance at Beginning of Period** |   | **Beginning Balance of Purchased Companies** |   | **Operations Held for Sale** |   | **Charged to Expense** |   | **Write-Offs, net of Recoveries** |   | **Balance at End of Period** |   |
|-------------------------------|--------|------------------------------------|--------|----------------------------------------------|--------|------------------------------|--------|------------------------|--------|-----------------------------------|--------|------------------------------|--------|
| Year ended  December 31, 1999 |   | $                                  | 1,677  |                                         | 742    |                         | — |                   | 2,923  |                              | (2,279 | )                            | $      | 3,063 |   |
| Year ended  December 31, 2000 |   | $                                  | 3,063  |                                         | — |                         | (71    | )                      | 3,130  |                              | (5,052 | )                            | $      | 1,070 |   |
| Year ended  December 31, 2001 |   | $                                  | 1,070  |                                         | — |                         | 71     |                   | 1,631  |                              | (1,680 | )                            | $      | 1,092 |   |

 

*Inventories*

 

Inventories are stated at thelower of cost or market and, at December 31, 2000 and 2001, consisted ofprocessed by-products of $1,589,000 and $1,069,000, respectively, andunprocessed by-products of $665,000 and $1,416,000, respectively.  Cost is determined using the first-in,first-out (FIFO) method.

 

*Operations Held for Sale*

 

In December 2000, the Company approved thedivestiture of several of its non-core operations.  The businesses that the Company was marketing for sale and the portfolioof real estate that the Company determined were surplus and was marketing forsale, were classified as operations held for sale.  The carrying values of these assets were written down toestimated fair value, less costs to sell. These charges were based on estimates and certain contingencies thatcould materially differ from actual results and resolution of any suchcontingencies.  In December 2001, seniormanagement made the decision to assimilate the remaining unsold operations backinto the Company’s core business. See further discussion in Notes 3 and 5.

 

*Property, Plant, and Equipment*

 

Property, plant and equipment are recorded atcost.  Improvements or betterments whichsignificantly extend the life of an asset are capitalized.  Expenditures for maintenance and repaircosts are charged to expense as incurred. The cost of assets retired or otherwise disposed of and the relatedaccumulated depreciation are eliminated from the accounts in the year of disposal.  Gains and losses resulting from propertydisposals are included in other income or expense.  Depreciation is computed using the straight-line method.  The Company periodically reviews itsproperty, plant and equipment for possible impairment, which is calculatedbased on the undiscounted cash flows to be generated from the applicable asset,whenever events or changes in circumstances might indicate that the carryingamount of an asset may not be recoverable. See Note 3 for discussions relating to the write-down of property, plantand equipment in December 2000 as a result of the closure of the Re-ClaimLouisiana facility and for the write-down of fixed assets at the Company’s SanAntonio location in December 2001.

 

*Intangible Assets*

 

Intangible assets consistprimarily of the excess of cost over net assets of acquired businesses(goodwill), permits and noncompete agreements. The Company evaluates the useful life of goodwill for each acquisition,which is amortized on a straight-line basis over forty years.  Management periodically evaluates recordedgoodwill balances, net of accumulated amortization, for impairment by comparingthe projected future undiscounted cash flows generated by the operationsassociated with the goodwill to the carrying amount of the goodwill.  See Note 3 for discussion relating to thewrite-down of intangible and other assets in December 2000 as a result of theclosure of the Re-Claim Louisiana facility and the reclassification in December2001 of assets held for sale back to held for use.  Management believes that there have been no events orcircumstances that warrant revision to the remaining useful life or affect therecoverability of goodwill in any of its other business units.

 

F-8

----

 

*Depreciation and Amortization Expenses*

 

Depreciation and amortization expenses areexcluded from operating expenses and selling, general and administrativeexpenses in the consolidated Statements of Operations.  These expenses are as follows:

** **
|                                          |   | **Years  Ended December 31,** |       |
|-----------------------------------------------|--------|-------------------------------|------------|
|                                          |   | **1999**                      |       | **2000** |   | **2001** |   |
|                                          |   |                          | ** ** | **(In thousands)** | ** ** |   | ** ** |
| Operating  expenses                           |   | $                             | 10,751     |   | $ | 12,517 |   | $ | 11,499 |   |
| Selling,  general and administrative expenses |   | 931                           |       | 1,120 |   | 1,118 |   |
| Goodwill  amortization                        |   | 4,913                         |       | 5,597 |   | 4,896 |   |
| Total  depreciation and amortization expenses |   | $                             | 16,595     |   | $ | 19,234 |   | $ | 17,513 |   |

 

*Income Taxes*

 

The Company files a consolidated return forfederal income tax purposes. Income taxes for the Company are provided underthe liability method considering the income tax effects of transactionsreported in the consolidated financial statements which are different from theincome tax return.  The deferred incometax assets and liabilities represent the future income tax consequences ofthose differences, which will either be taxable or deductible when theunderlying assets or liabilities are realized or settled and are measured usingenacted tax rates and laws.  Inproviding for deferred income taxes, management considers current taxregulations, estimates of future taxable income, and available tax planningstrategies.  In certain cases,management has established reserves to reduce deferred income tax assets toestimated realizable value.  If taxregulations, operating results or the ability to implement tax planningstrategies vary, adjustments to the carrying value of deferred income taxassets and liabilities may be required.

 

*Self-Insurance*

 

The Company retains the risk for employeegroup health claims, resulting from uninsured deductibles per accident oroccurrence which are subject to annual aggregate limits.  Losses up to the deductible amount are basedupon the Company’s known claims incurred and an estimate of claims incurred butnot reported.  The accruals are basedupon known facts and historical trends and management believes such accruals tobe adequate.  The Company has providedfinancial assurance in the form of letters of credit and surety bonds to itsinsurance carrier.  As claims developand additional information becomes available, adjustments to loss reserves andthe amount of such financial assurance may be required.

 

*Processing Reserve*

 

The Company records a processing reserve forthe estimated amount of expenses to be incurred with the treatment of waste inorder to match revenues with their related costs.  The related treatment costs are charged against the reserve assuch costs are incurred, which generally cover a period of nine to twelvemonths for the Oilfield Waste Division. At year end, the processing reserve represents the estimated costs toprocess the volumes of waste on hand for which revenue has already beenrecognized.

 

*Closure andRemediation Reserves*

 

As of December 31, 2000 and 2001, the closureand remediation reserves represent accruals for the total estimated costsassociated with the ultimate closure of the Company’s landfarm facilities andcertain other facilities, including costs of decommissioning, statutorymonitoring costs and incremental direct administrative costs required duringthe closure and subsequent postclosure periods.  The closure and remediation reserves include both open and closedfacilities, as well as all third party sites for which the Company has beendetermined to be a potentially responsible party and which requireremediation.  The Company’s closure andremediation reserves have remained fairly constant as the methodology has beenconsistent, and there has been no significant change in assumptions other thanchanges in estimates due to annual changes in inflation indices, an update incost estimates associated with closure, or a change in regulations.

 

F-9

----

 

*Revenue Recognition*

 

The Company recognizes revenue fromprocessing services when material is unloaded at the Company’s facilities, ifdelivered by the customer, or at the time the service is performed, if theCompany collects the materials from the customer’s location.  The Company recognizes revenue at the timethe Company’s facilities accept the waste because the customer has passed thelegal and regulatory responsibility and associated risk of disposing the wasteto the Company.  By-product sales arerecognized when the by-product is shipped to the buyer.

 

*Fair Value ofFinancial Instruments*

 

The Company’s financialinstruments include cash and cash equivalents, accounts receivable, accountspayable, notes and capital leases payable, and debt obligations.  The book value of cash and cash equivalents,accounts receivable, accounts payable and short-term notes payable areconsidered to be representative of fair value because of the short maturity ofthese instruments.  The Company believesthat the carrying value of its borrowings under the credit agreementapproximate their fair value as they bear interest at rates indexed to theLondon Interbank Offered Rate (“LIBOR”). The Company estimates that the fair value of all of its debt obligationsapproximates $92.0 million at December 31, 2001.

 

*Translation ofForeign Currency*

 

The U.S. dollar is the functional currencyfor all of the Company’s consolidated operations.  In prior years, the Canadian dollar was used as the functionalcurrency for the Company’s one foreign (Canadian) entity.  In 2001, the operations of the Canadianentity were formally placed under the management team of the InnovativeServices Group of the Commercial Wastewater Division in the U.S.  This change in management structure was inrecognition of the continuing inter-relationships between the Canadian and U.S.operations.  The Canadian operations aresubstantially funded by the parent company and a substantial portion of itsrevenues are received in U.S. dollars from U.S. customers.  The effect of this change in functionalcurrency on the financial statements was not significant.  The accumulated translation effects of usingforeign currencies other than the U.S. dollar prior to this change are includedin the foreign currency translation adjustment in stockholders’ equity.  Prior to 1999, the Company had no foreigninvestments.

 

*New AccountingPronouncements*

 

In June 1998,the Financial Accounting Standards Board (“FASB”) issued Statement of FinancialAccounting Standards (“SFAS”) No. 133, “Accounting for Derivative Instrumentsand Hedging Activities.”  In June 1999,the FASB issued SFAS No. 137, which amended the effective adoption date of SFASNo. 133.  This statement establishesaccounting and reporting standards for derivative instruments, includingderivative instruments embedded in other contracts, and for hedgingactivities.  The Company adopted SFASNo. 133 as amended on January 1, 2001. Adoption of this statement did not have a material impact on thefinancial position or results of operations of the Company as it has notengaged or entered into any arrangements usually associated with derivativeinstruments historically or during the year ended December 31, 2001.

 

In July 2001,the FASB issued SFAS No. 141, “Business Combinations,” and No. 142, “Goodwilland Other Intangible Assets.” The statements eliminate the pooling-of-interestsmethod of accounting for business combinations and require that goodwill andcertain intangible assets not be amortized. Instead, these assets will be reviewed for impairment annually and whenthere is reason to suspect that their value has been diminished orimpaired.  Any related losses will berecognized in earnings when incurred. The statements will be effective for the Company as of January 1, 2002for existing goodwill and intangible assets and for business combinationscompleted after June 30, 2001.  Theadoption of SFAS No. 142 will eliminate annual amortization expense related togoodwill by approximately $4.9 million in future periods.  In connection with the adoption of SFAS No.142 on January 1, 2002, the Company has estimated an impairment of $91.0million.

 

In June 2001,the FASB issued SFAS No. 143, “Accounting for Asset Retirement Obligations,”that addresses the financial accounting and reporting for obligationsassociated with the retirement of tangible long-lived assets and associatedcosts.  SFAS No. 143 requires that thediscounted fair value of a liability for an asset retirement obligation berecognized in the period in which it is incurred if a reasonable estimate ofthe fair value can be made.  Theassociated asset retirement costs are capitalized as part of the carryingamount of

 

F-10

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the long-lived asset.  The provisions of SFAS No. 143 are effectivefor fiscal years beginning after June 15, 2002.  The Company is considering the provisions of SFAS No. 143 and atpresent has not determined the impact of adopting SFAS No. 143.

 

In August2001, the FASB issued SFAS No. 144, “Accounting for the Impairment of Disposalof Long-Lived Assets,” that addresses financial accounting and reporting forthe impairment of disposal of long-lived assets.  SFAS No. 144 requires that one accounting model be used forlong-lived assets to be disposed of by sale and broadens the presentation ofdiscontinued operations to include more disposal transactions.  The Company adopted SFAS No. 144 on January1, 2002.  Adoption of this statement didnot have a material impact on the financial position or results of operationsof the Company.

 

*Reclassifications*

 

Certain prior year amounts havebeen reclassified to conform with the current year presentation.

 

**3.****              SPECIAL CHARGES:**

 

*1999 BusinessInterruptions and Remediations*

 
| **Description** |                           | **1999  Special  Charges** |                | **Remaining  Accrual  at 12/31/01** |   |   |   |
|-----------------|--------------------------------|----------------------------|---------------------|-------------------------------------|--------|--------|--------|
|            |                           |                       | **(In  thousands)** |                                |   |   |
| (i)             | PCB Costs at Detroit           |                       | $                   | 5,494                               |   | $      | — |   |   |   |
| (ii)            | Disposal at Re-Claim           |                       | 2,535               |                                | — |   |   |   |
| (iii)           | Re-Claim Fines                 |                       | 2,000               |                                | — |   |   |   |
| (iv)            | Legal Fees                     |                       | 1,700               |                                | — |   |   |   |
| (v)             | Write-off of Capitalized Costs |                       | 1,316               |                                | — |   |   |   |
| (vi)            | Re-Claim Spill                 |                       | 1,000               |                                | — |   |   |   |
| (vii)           | Severance                      |                       | 954                 |                                | 108    |   | (A     | ) |
| (viii)          | Other Costs                    |                       | 139                 |                                | — |   |   |   |
|            | Total Special Charge 12/31/99  |                       | $                   | 15,138                              |   | $      | 108    |   |   |   |
|                 |                                |                            |                     |                                     |        |        |        |  |  |  |  |

 

----

| (A) | Included in special charge accrual |   |   |   |   |   |   |   |
|-----|------------------------------------|--------|--------|--------|--------|--------|--------|--------|

 

During the third and fourthquarters of 1999, the Company recorded special charges in the amount of $15.1million.  The components of thesespecial charges consisted of (i) $5.5 million for disposal of PCB contaminatedmaterial improperly delivered to the Company’s Detroit facility, thedecontamination of certain equipment exposed to the PCB contaminated materialsand fines imposed by regulatory authorities relating to the facility’sacceptance of the PCB contaminated materials, (ii) $2.5 million for disposal ofliquid waste received by the Company’s Re-Claim Louisiana facility, which wasteis the subject of a dispute between the Company and the EPA as to the propermethod of disposal, net of $443,000 received from the Company’s insurancecarrier for submitted claims, (iii) $2.0 million for fines imposed byregulatory authorities relating to the operations of the Re-Claim facility,(iv) $1.7 million for legal and professional fees incurred for matters arisingin connection with the governmental proceedings relating to the Detroit andRe-Claim facilities and the securities class action and shareholder derivativeaction arising therefrom, (v) $1.3 million for write-offs of capitalizedacquisition costs related to acquisitions not reasonably likely to occur, (vi)$1.0 million for the cleanup of a spill at the Re-Claim facility caused by anact of vandalism, (vii) $954,000 for severance and contract termination costsrelated to certain personnel and acquisition consultants as a result of theenvironmental issues at the Detroit and Re-Claim facilities, and (viii)$139,000 for other costs related to the operations of the Detroit and Re-Claimfacilities.  These special chargesreduced net income by $10.4 million (net of taxes), or $0.68 per share, for theyear ended December 31, 1999.  As ofDecember 31, 2001, $0.1 million of these special charges remained in accruedliabilities.  See Notes 5 and 9. SeeNote 18 for further discussion of incidents giving rise to certain of thespecial charges.

 

F-11

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*2000 Operations Held for Sale or Closure*

 
| **Description** |   | **2000  Special  Charges**           |   | **Remaining****Accrual  at 12/31/01** |         |   |   |
|-----------------|--------|--------------------------------------|--------|---------------------------------------|--------------|--------|--------|
|            |   | **(In thousands)**                   |   |                                  |         |
| (i)             |   | Estimate of Losses on Sales          |   | $                                     | 19,701       |   | $      | — |   |   |   |
| (ii)            |   | Re-Claim Shutdown                    |   | 10,221                                |         | 2,659  |   | (A)-(C) |   |
| (iii)           |   | Legal Fees (related to (i-ii) above) |   | 208                                   |         | 33     |   | (D) |   |
| (iv)            |   | PCB Costs at Detroit                 |   | 471                                   |         | — |   |   |   |
| (v)             |   | Disposal Agreement Termination       |   | (12,814                               | )            | — |   |   |   |
|            |   | Total Special Charge, net 12/31/00   |   | $                                     |  17,787 |   | $      |  2,692 |   |   |   |

 

----

| (A) |   |  $1.3 million included in  accrued processing costs, which includes $0.9 million to process waste stored  off-site (see Note 18) |
|-----|--------|---------------------------------------------------------------------------------------------------------------------------------------|
| (B) |   | $0.2 million included in accrued liabilities — represents current  portion of Re-Claim lease liability                           |
| (C) |   | $1.1 million included in long-term liabilities — represents long-term  portion of Re-Claim lease liability                       |
| (D) |   | Included in accrued legal fees                                                                                                        |

 

Duringthe fourth quarter of 2000, the Company recorded special charges relatingprimarily to decisions to dispose of or suspend certain operations offset bythe favorable effect of the settlement of a dispute.  These special charges amounted to a net expense of $17.8million.  The special charges included(i) $19.7 million for estimated losses from the sale of certain operations inthe Commercial Wastewater Division, (ii) $10.2 million for the closure of theRe-Claim Louisiana facility, which included approximately $1.6 million forprocessing costs and approximately $1.6 million for the remaining leaseliability, (iii) legal fees associated with the above for $208,000, and (iv)additional charges of $471,000 for the disposal of PCB contaminated materialsat the Company’s Detroit facility (relating to 1999 special charges discussedabove).  During this period, the Companyalso recognized (v) net pre-tax income of $12.8 million relating to thetermination of a disposal agreement with Waste Management, Inc. that wasentered into in May 1998 in connection with the acquisition of its Detroitfacility. These special charges reduced net income by $17.8 million (net oftaxes, due to valuation allowances), or $1.13 per share.  As of December 31, 2001, $2.7 million ofthese special charges remained in accrued liabilities.  See Notes 5 and 9.

 

*2001 Regulatory andLegal Resolutions and Operations Held for Sale*

** **
| **Description** |   | **2001  Special  Charges**         |   | **Remaining****Accrualat 12/31/01** |   |
|-----------------|--------|------------------------------------|--------|-------------------------------------|--------|
|            |   | **(In thousands)**                 |   |
| (i)             |   | National Steel Settlement          |   | $                                   | (7,500 | ) | $ | — |   |
| (ii)            |   | Insurance Claim Refund             |   | (3,750                              | )      | — |   |
| (iii)           |   | Detroit Fine                       |   | 5,000                               |   | 5,000 | (A) |
| (iv)            |   | Reliance Bankruptcy                |   | 3,500                               |   | 3,500 | (A) |
| (v)             |   | Additional Losses on Sales         |   | 1,713                               |   | — |   |
| (vi)            |   | Goodwill Write-down                |   | 6,302                               |   | — |   |
| (vii)           |   | San Antonio Write-down             |   | 491                                 |   | — |   |
| (viii)          |   | Other Costs                        |   | 15                                  |   | — |   |
|            |   | Total Special Charge, net 12/31/01 |   | $                                   | 5,771  |   | $ | 8,500 |   |

 

----

(A) Included in special charge accrual

 

F-12

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During 2000, theCompany filed suit against National Steel Corporation for not properlyidentifying PCB contaminated materials as required by law when delivered to theDetroit facility.  In filing the suit,the Company was seeking to recover the costs incurred and the losses sufferedby the facility as a result of National Steel’s non-disclosure.  In April 2001, the Company entered into asettlement agreement with National Steel. As part of the settlement agreement, in April 2001, National Steel paid(i) $7.5 million to the Company.

 

In addition tofiling suit against National Steel, the Company also submitted a claim underits property damage policy for losses incurred as a result of the temporaryclosing of the facility in August 1999 and the delivery of PCB contaminatedwaste to a landfill owned by Waste Management, Inc.  During the third quarter of 2001, the Company agreed to accept(ii) $3.75 million in complete satisfaction of its claim under the policy.  The funds were paid to the Company in August2001.

 

Asfurther discussed in Note 18, the Environmental Protection Agency (“EPA”) andthe Federal Bureau of Investigation (“FBI”) executed a search warrant at theDetroit facility seeking documentation relating to the facility’soperations.  During the fourth quarterof 2001, the Company established a reserve of (iii) $5.0 million for amountsexpected to be paid in connection with a possible settlement of this matter.

 

Reliance InsuranceCompany (“Reliance”) provided casualty insurance coverage for the Company.  In October 2001, Reliance was declaredinsolvent by the Insurance Commissioner of the State of Pennsylvania.  As a result, insurance coverage may not beavailable for any claims or lawsuits that were not resolved prior to Reliancebeing placed into bankruptcy.  Duringthe fourth quarter of 2001, (iv) $3.5 million was reserved for any claims orlawsuits that were not resolved prior to Reliance being placed intoliquidation.  See Note 18.

 

As previouslyreported, during the fourth quarter of 2000, the Company approved thedivestiture of several of its non-core operations and recorded special chargesof $19.7 million related thereto. During 2001, certain operations were sold and additional losses of (v)$1.7 million were recognized as a result of these sales.  During the fourth quarter of 2001, theremaining assets classified as held for sale were further adjusted to fairvalue resulting in a write-down of goodwill of approximately (vi) $6.3million.  In December 2001, seniormanagement made the decision to assimilate the remaining operations back intothe Company’s core business.

 

During the fourthquarter 2001, certain fixed assets were written down at the Company’s SanAntonio location for approximately (vii) $0.5 million in accordance with SFAS121 “Accounting for the Impairment of Long-Lived Assets and for Long-LivedAssets to be Disposed Of.”

 

These special charges reduced net income by $5.5 million (net oftaxes), or $0.33 per share.  Inaddition, a tax benefit was realized on a prior year special charge due to therelease of the valuation allowance on prior year losses on the operations heldfor sale or closure that are no longer held for sale.  This benefit increased net income by $5.2 million, or $0.31 pershare.  As of December 31, 2001, $8.5million of these special charges remained in accrued liabilities.  See Notes 5 and 9.

 

**4.****              ACQUISITIONS:**

 

*1999Acquisitions*

 

During 1999, the Company completed 22 acquisitions.  The acquisitions were accounted for underthe purchase method of accounting. Results of operations of companies that wereacquired were included in the consolidated financial statements from the datesof such acquisitions.  The costs ofacquisitions were $73.6 million in cash and debt assumed and 635,354 shares ofstock.  The excess of the aggregatepurchase price over the fair value of the net assets acquired was approximately$71.1 million.

 

*2000 Acquisitions*

 

During 2000,the Company acquired two businesses engaged in the collection, processing anddisposal of liquid wastes for approximately $532,000 in cash and debtassumed.  Both of these acquisitionswere accounted for under the purchase method of accounting. The excess of the aggregatepurchase price over the fair value of the net assets acquired was approximately$417,000.

 

F-13

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The unaudited pro forma information set forth below represents therevenues, net loss and loss per share of the Company, the 1999 acquisitions andthe Company’s secondary public offerings of common stock in March 1999, as ifthe 1999 acquisitions were all effective on January 1, 1999, and includescertain pro forma adjustments, including the adjustment of amortizationexpenses to reflect purchase price allocations, interest expense to reflectdebt issued in connection with the acquisitions, net of a reduction in interestexpense on debt repaid in connection with the Company’s public offering ofcommon stock, and certain reductions of salaries and benefits payable to theprevious owners of the businesses acquired which were agreed to in connectionwith the acquisitions, and the related income tax effects of these adjustments.  No pro forma information is presented for2000 acquisitions as no material acquisitions were completed in 2000.

 
|                           |   | **Year Ended  December 31, 1999** |    |
|--------------------------------|--------|-----------------------------------|---------|
| **Pro Forma Amounts**          |   | **(In  thousands)**               |    |
| Revenue                        |   | $                                 | 249,349 |   |
| Net loss                       |   | $                                 | (1,238  | ) |
| Basic loss per  common share   |   | $                                 | (0.08   | ) |
| Diluted loss  per common share |   | $                                 | (0.08   | ) |

 

The unaudited proforma information is presented for informational purposes only and is notnecessarily indicative of the results of operations that actually would havebeen achieved had the acquisitions and offerings been consummated effective asof January 1, 1999.

 

The Companyagreed in connection with certain transactions to pay additional amounts to thesellers upon the achievement by the acquired businesses of certain negotiatedgoals, such as targeted earnings levels. Although the amount and timing of any payments of additional contingentconsideration depend on whether and when these goals are met, the maximumaggregate amount of contingent consideration potentially payable if all paymentgoals are met is $2.7 million.  The goalsrequired to earn these payments would represent approximately $6.4 million ofincremental pre-tax income.  Thecontingent consideration is payable in cash in the amount of $1.1 million andin stock with a total value of $1.6 million (representing approximately 0.3million shares at December 31, 2001, with the stock closing price on that dayof $5.68).  No such amounts were paid in2001 and none are anticipated in 2002.

 

**5.****              OPERATIONSHELD FOR SALE:**

 

During the fourth quarter of 2000, the Company’s Board of Directorsvoted to sell certain non-core operations in the Commercial WastewaterDivision.  The types of liquid wastemanaged at these facilities held for sale included industrial wastewaters,biosolids and grease and grit trap waste. As discussed in Notes 2 and 3, the Company recorded charges on December31, 2000, and during 2001 to write down the carrying value of certain assets tofair value, less costs to sell.  Indetermining fair value, the Company considered, among other things, the rangeof preliminary purchase prices discussed with potential buyers.  For operations that were classified as heldfor sale, the Company suspended depreciation on property, plant, andequipment.  In addition, the Companyrevalued goodwill and, therefore, adjusted the related amortization.  Had the Company not classified anyoperations as held for sale, depreciation and amortization expenses for theyear ended December 31, 2001 would have been greater by $2.0 million.  During 2001, certain operations were soldand additional losses were recognized. During the fourth quarter of 2001, the remaining assets classified asheld for sale were further adjusted to fair value.  Subsequently, as a result of senior management’s decision toassimilate the remaining operations back into the Company’s core business, theadjusted carrying value of the assets, after giving effect to the write-downs,were reclassified to held for use. The results of operations of thesebusinesses are fully included in revenues and expenses in the accompanyingStatements of Operations.

 

Operational informationincluded in the Statements of Operations regarding the businesses classified asoperations held for sale at December 31, 2000, is as follows:

 
|                                                        |   | **Years  Ended December 31,** |       |
|-------------------------------------------------------------|--------|-------------------------------|------------|
|                                                        |   | **1999**                      |       | **2000** |   | **2001** |   |
|                                                        |   | **(In thousands)**            | ** ** |
| Operating  revenues                                         |   | $                             | 41,839     |   | $ | 40,321 |   | $ | 26,759 |   |
| Earnings (loss)  before interest and taxes (EBIT)  (a) |   | $                             | 1,210      |   | $ | (198 | ) | $ | 100 |   |

 

----

(a)          For those items included in the determinationof EBIT (the earnings measurement used by management to evaluate operatingperformance), the accounting policies of the operations held for sale are thesame as those described in the summary of significant accounting policies (seeNote 2).  EBIT is defined as income (loss)from operations excluding asset impairments, interest and taxes.

 

F-14

----

 

Informationregarding the businesses classified as operations held for sale at December 31,2000, is as follows (in thousands):

 
|                                                      |   |   |   |
|-----------------------------------------------------------|--------|--------|--------|
| Cash and cash equivalents                                 |   | $      | 253    |   |
| Receivables,  net                                         |   | 5,501  |   |
| Other current  assets                                     |   | 625    |   |
| Property and  equipment and other non-current assets, net |   | 17,366 |   |
| Current  maturities of long-term obligations              |   | (268   | )      |
| Other current  liabilities                                |   | (2,706 | )      |
| Long-term  obligations, less current maturities           |   | (22    | )      |
| Net operations  held for sale                             |   | $      | 20,749 |   |
|                                                      |   |   |   |
| Current assets:                                           |   |   |   |
| Operations held  for sale                                 |   | $      | 23,745 |   |
| Current  liabilities:                                     |   |   |   |
| Operations held  for sale                                 |   | (2,996 | )      |
| Net operations  held for sale                             |   | $      | 20,749 |   |

 

**6.****              PREPAID EXPENSES ANDOTHER CURRENT ASSETS:**

 

Prepaid expenses and other current assets at December 31, 2000 and2001, consist of the following:

 
|                               |   | **2000**           |       | **2001** |   |
|------------------------------------|--------|--------------------|------------|----------|--------|
|                               |   | **(In thousands)** | ** ** |
| Prepaid  insurance                 |   | $                  | 1,031      |     | $      | 2,115 |   |
| Current  deferred income tax asset |   | 7,318              |       | 2,541    |   |
| Income taxes receivable            |   | 3,562              |       | 212      |   |
| Other                              |   | 3,030              |       | 3,780    |   |
| Total                              |   | $                  | 14,941     |     | $      | 8,648 |   |

 

**7.****              PROPERTY, PLANT ANDEQUIPMENT:**

 

Property, plant and equipment at December 31, 2000 and 2001, consist ofthe following:

 
|                               |   | **Depreciable  Life (Years)** |   | **2000** |    | **2001** |   |
|------------------------------------|--------|-------------------------------|--------|----------|---------|----------|--------|
|                               |   | **(In thousands)**            |   |
| Land                               |   | —                        |   | $        | 12,698  |     | $      | 12,979 |   |
| Landfarm and  processing sites     |   | 25                            |   | 15,824   |    | 17,070   |   |
| Buildings and  improvements        |   | 5-39                          |   | 42,695   |    | 47,485   |   |
| Machinery and  equipment           |   | 3-15                          |   | 40,449   |    | 46,020   |   |
| Vehicles                           |   | 3-5                           |   | 12,148   |    | 14,800   |   |
| Furniture and  fixtures            |   | 3-5                           |   | 5,727    |    | 8,752    |   |
| Construction in  progress          |   | —                        |   | 6,967    |    | 5,342    |   |
| Total                              |   |                          |   | $        | 136,508 |     | $      | 152,448 |   |
| Less-Accumulated  depreciation     |   |                          |   | (28,262  | )       | (42,610  | )      |
| Net property,  plant and equipment |   |                          |   | $        | 108,246 |     | $      | 109,838 |   |
|                                    |        |                               |        |          |         |          |        |  |  |  |  |

 

F-15

----

 

In December 2000, net property,plant, and equipment totaling $8.9 million was reclassified to operations heldfor sale.  In December 2001, $4.0million of net fixed assets was subsequently reclassified back from operationsheld for sale to property, plant, and equipment.

 

**8.****              INTANGIBLE ASSETS:**

 

Intangible assets at December 31, 2000 and 2001, consist of thefollowing:

 
|                           |   | **2000**           |    | **2001** |   |
|--------------------------------|--------|--------------------|---------|----------|--------|
|                           |   | **(In thousands)** |    |
| Goodwill                       |   | $                  | 169,762 |     | $      | 169,906 |   |
| Noncompete  agreements         |   | 922                |    | 957      |   |
| Permits                        |   | 2,688              |    | 3,561    |   |
| Total                          |   | $                  | 173,372 |     | $      | 174,424 |   |
| Less-Accumulated  amortization |   | (10,563            | )       | (15,099  | )      |
| Net intangible  assets         |   | $                  | 162,809 |     | $      | 159,325 |   |
|                                |        |                    |         |          |        |  |  |  |

 

Goodwill represents the excess of cost over net assets of acquiredbusinesses and is amortized on a straight-line basis over forty years.  The remaining intangible assets are recordedat cost and are being amortized on a straight-line basis over one to seventeenyears. Amortization expense of intangible assets for the years 1999, 2000, and2001 was $5.0 million, $5.7 million and $4.9 million, respectively.

 

**9.****              ACCRUED LIABILITIES:**

 

Accrued liabilities at December 31, 2000 and 2001, consist of thefollowing:

 
|                                                         |   | **2000**           |   | **2001** |   |
|--------------------------------------------------------------|--------|--------------------|--------|----------|--------|
|                                                         |   | **(In thousands)** |   |
| Accrued  salaries                                            |   | $                  | 5,576  |     | $      | 5,564 |   |
| Income and  other taxes payable                              |   | 603                |   | 1,948    |   |
| Accrued  professional fees and legal reserves                |   | 3,551              |   | 1,430    |   |
| Accrued special  charges                                     |   | 3,858              |   | 8,608    |   |
| Current portion  of accrued processing costs                 |   | 3,840              |   | 2,594    |   |
| Current portion  of accrued closure and remediation reserves |   | 520                |   | 465      |   |
| Accrued  insurance                                           |   | 2,473              |   | 2,523    |   |
| Other                                                        |   | 5,173              |   | 3,852    |   |
| Total accrued  liabilities                                   |   | $                  | 25,594 |     | $      | 26,984 |   |

 

**10.****       REVENUES:**

 

The components of domestic and foreign revenue are asfollows:

 
|          |   | **Years  Ended December 31,** |    |
|---------------|--------|-------------------------------|---------|
|          |   | **1999**                      |    | **2000** |   | **2001** |   |
|          |   | **(In  thousands)**           |    |
| United States |   | $                             | 226,566 |   | $ | 237,985 |   | $ | 218,407 |   |
| Canada        |   | 5,217                         |    | 9,874 |   | 11,905 |   |
| Total         |   | $                             | 231,783 |   | $ | 247,859 |   | $ | 230,312 |   |

 

F-16

----

 

The sales and service revenue components are as follows:

 

|                                                  |   | **Years Ended  December 31,** |    |
|-------------------------------------------------------|--------|-------------------------------|---------|
|                                                  |   | **1999**                      |    | **2000** |   | **2001** |   |
|                                                  |   | **(In thousands)**            |    |
| Collection,  processing and disposal service revenues |   | $                             | 196,579 |   | $ | 201,861 |   | $ | 199,115 |   |
| By-product  sales                                     |   | 35,204                        |    | 45,998 |   | 31,197 |   |
| Total                                                 |   | $                             | 231,783 |   | $ | 247,859 |   | $ | 230,312 |   |

 

**11.****       INCOME TAXES:**

 

For financial reporting purposes, income (loss) from continuingoperations before income taxes, reflecting domestic and international sources,is as follows:

 
|                                                       |   | **Years  Ended December 31,** |   |
|------------------------------------------------------------|--------|-------------------------------|--------|
|                                                       |   | **1999**                      |   | **2000** |   | **2001** |   |
|                                                       |   | **(In thousands)**            |   |
| United States                                              |   | $                             | 984    |   | $ | (26,078 | ) | $ | 1,650 |   |
| Canada                                                     |   | 377                           |   | (249 | ) | 1,129 |   |
| Income (loss)  before provision (benefit) for income taxes |   | $                             | 1,361  |   | $ | (26,327 | ) | $ | 2,779 |   |
|                                                            |        |                               |        |  |  |  |  |  |  |  |  |

 

The components of the provision (benefit) for income taxes are asfollows:

 
|                                  |   | **Years Ended December 31,** |   |
|---------------------------------------|--------|------------------------------|--------|
|                                  |   | **1999**                     |   | **2000** |   | **2001** |   |
|                                  |   | **(In thousands)**           |   |
| Current-                              |   |                         |   |   |   |   |   |
| Federal                               |   | $                            | 2,492  |   | $ | (3,488 | ) | $ | 99 |   |
| State                                 |   | 313                          |   | 460 |   | 635 |   |
| Foreign                               |   | 138                          |   | (125 | ) | 110 |   |
| Total                                 |   | $                            | 2,943  |   | $ | (3,153 | ) | $ | 844 |   |
| Deferred-                             |   |                         |   |   |   |   |   |
| Federal                               |   | $                            | (296   | ) | $ | 1,836 |   | $ | (1,825 | ) |
| State                                 |   | (44                          | )      | 378 |   | 34 |   |
| Foreign                               |   | —                       |   | (11 | ) | 340 |   |
| Total                                 |   | $                            | (340   | ) | $ | 2,203 |   | $ | (1,451 | ) |
| Provision  (benefit) for income taxes |   | $                            | 2,603  |   | $ | (950 | ) | $ | (607 | ) |

 

F-17

----

 

 

The differences in income taxes provided andthe amounts determined by applying the federal statutory tax rate of 35% toincome (loss) before provision (benefit) for income taxes result from thefollowing:

** **
|                                        |   | **Years  Ended December 31,** |       |
|---------------------------------------------|--------|-------------------------------|------------|
|                                        |   | **1999**                      | ** ** | **2000** | ** ** | **2001** | ** ** |
|                                        |   |                          | ** ** | **(In thousands)** | ** ** |   | ** ** |
| Tax at  statutory rate                      |   | $                             | 476        |   | $ | (9,214 | ) | $ | 973 |   |
| Add—                                   |   |                          |       |   |   |   |   |
| State taxes,  net of federal benefit        |   | 175                           |       | 545 |   | 837 |   |
| Differences in  foreign tax rates           |   | 6                             |       | 17 |   | 55 |   |
| Nondeductible  expenses                     |   | 1,372                         |       | 757 |   | 2,348 |   |
| Change in  valuation allowance              |   | 427                           |       | 6,951 |   | (4,971 | ) |
| Other                                       |   | 147                           |       | (6 | ) | 151 |   |
| Total provision  (benefit) for income taxes |   | $                             | 2,603      |   | $ | (950 | ) | $ | (607 | ) |

 

The tax effects of significant temporarydifferences representing deferred income tax assets and liabilities are asfollows:

 
|                                                              |   | **December  31,**  |    |
|-------------------------------------------------------------------|--------|--------------------|---------|
|                                                              |   | **2000**           |    | **2001** |   |
|                                                              |   | **(In thousands)** |    |
| Deferred income  tax assets—                                 |   |               |    |   |   |
| Reserves                                                          |   | $                  | 2,521   |   | $ | 4,074 |   |
| Accrued  expenses                                                 |   | 2,874              |    | 972 |   |
| Net operating  losses                                             |   | 970                |    | 2,553 |   |
| Tax credits                                                       |   | 2,008              |    | 2,656 |   |
| Loss on  operations held for sale or closure                      |   | 11,555             |    | — |   |
| Capital loss carryforwards                                        |   | —             |    | 1,847 |   |
| Other                                                             |   | —             |    | 25 |   |
| Less: Valuation  allowances                                       |   | (7,748             | )       | (2,725 | ) |
| Total deferred  income tax assets                                 |   | $                  | 12,180  |   | $ | 9,402 |   |
| Deferred income  tax liabilities—                            |   |               |    |   |   |
| Property, plant  and equipment                                    |   | $                  | (4,139  | ) | $ | (4,594 | ) |
| Intangible assets  (principally deductible goodwill amortization) |   | (10,454            | )       | (4,614 | ) |
| Prepaid  expenses                                                 |   | (307               | )       | (565 | ) |
| Other                                                             |   | (725               | )       | (602 | ) |
| Total deferred  income tax liabilities                            |   | $                  | (15,625 | ) | $ | (10,375 | ) |
| Net deferred  income tax liabilities                              |   | $                  | (3,445  | ) | $ | (973 | ) |

 

 

F-18

----

 

Net deferred income taxassets and liabilities are classified as follows:

 
|                                                        |   | **December  31,**  |    |
|-------------------------------------------------------------|--------|--------------------|---------|
|                                                        |   | **2000**           |    | **2001** |   |
|                                                        |   | **(In thousands)** |    |
| Current  deferred income tax assets (liabilities)—     |   |               |    |   |   |
| Gross assets                                                |   | $                  | 8,191   |   | $ | 3,684 |   |
| Gross  liabilities                                          |   | (873               | )       | (1,143 | ) |
| Total, net                                                  |   | $                  | 7,318   |   | $ | 2,541 |   |
| Non-current  deferred income tax assets (liabilities)— |   |               |    |   |   |
| Gross assets,  net of valuation allowance                   |   | $                  | 3,989   |   | $ | 5,718 |   |
| Gross  liabilities                                          |   | (14,752            | )       | (9,232 | ) |
| Total, net                                                  |   | $                  | (10,763 | ) | $ | (3,514 | ) |
| Net deferred  income tax liabilities                        |   | $                  | (3,445  | ) | $ | (973 | ) |

 

For purposes of the United Statesconsolidated federal income tax return, as of December 31, 2001, the Companyhas net operating loss carryforwards of $6,071,000, tax credit carryforwards ofapproximately $2,656,000, and unused capital loss carryforwards ofapproximately $4,817,000 available to offset taxable income and tax of theCompany in the future.  In connectionwith certain acquisitions, ownership changes occurred resulting in variouslimitations on net operating loss carryforwards.  The net operating loss carryforwards will begin to expire in2008. The tax credit carryforwards will begin to expire in 2006 and the capitalloss carryforwards will begin to expire in 2005.  The Company also has state net operating loss carryforwardsavailable to offset future state taxable income that may or may not beutilizable in future periods.

 

Valuation allowances havebeen established for uncertainties in realizing the benefits of tax attributecarryforwards.  While the Companyexpects to realize the deferred income tax assets in excess of the valuationallowance, changes in estimates of future taxable income and tax laws may alterthis expectation.  During 2001, thevaluation allowance decreased approximately $5,023,000.  Of this decrease, $5,152,000 is due to therelease of the valuation allowance on prior year losses on operations held forsale or closure that are no longer held for sale.  Of the original valuation allowance on prior year losses onoperations held for sale or closure of $6,951,000, the remaining $1,799,000 wasreclassed to valuation allowance on capital loss carryforwards resulting fromoperations sold in 2001.  The resultingincrease of approximately $129,000 relates primarily to the uncertainty of theCompany’s realization of foreign tax credit carryforwards.  The activity in the valuation allowance isas follows (in thousands):

 
|                          |   | **Balance at Beginning of Period** |   | **Uncertainty of Realization of Tax Loss Carryforwards** |   | **Uncertainty of Realization of Tax Credit Carryforwards** |   | **Uncertainty of Realization of Capital Loss Carryforwards** |   | **Valuation Allowance on Operations Held for Sale** |   | **Balance at End of Period** |   |
|-------------------------------|--------|------------------------------------|--------|----------------------------------------------------------|--------|------------------------------------------------------------|--------|--------------------------------------------------------------|--------|-----------------------------------------------------|--------|------------------------------|--------|
| Year ended  December 31, 1999 |   | $                                  | (229   | )                                                        | (428   | )                                                          | — |                                                         | — |                                                | — |                         | $      | (657 | ) |
| Year ended  December 31, 2000 |   | $                                  | (657   | )                                                        | (140   | )                                                          | — |                                                         | — |                                                | (6,951 | )                            | $      | (7,748 | ) |
| Year ended  December 31, 2001 |   | $                                  | (7,748 | )                                                        | 51     |                                                       | (132   | )                                                            | (1,847 | )                                                   | 6,951  |                         | $      | (2,725 | ) |

 

For purposes of the Canadian federal incometax return, the Canadian subsidiary of the Company generated net taxable incomeof approximately $745,000 in the 2001 tax year.  A net operating loss carryforward of the Canadian subsidiary fromthe 2000 tax year in the amount of $529,000 is expected to offset a portion of2001 net taxable income.  The Companydoes not provide for U.S. income taxes on unremitted income of foreignsubsidiaries as it is the present intention of management to reinvest theunremitted earnings of its foreign operations. Unremitted earnings of foreign subsidiaries are approximately $1,257,000at December 31, 2001.

 

F-19

----

 

**12.****       EARNINGS PER SHARE:**

 

Earnings per share amounts arebased on the weighted average number of shares of common stock and common stockequivalents outstanding during the period. The weighted average number of shares used to compute basic and dilutedearnings per share is illustrated below:

 
|                                             |   | **Years  Ended December 31,**         |   |
|--------------------------------------------------|--------|---------------------------------------|--------|
|                                             |   | **1999**                              |   | **2000** |   | **2001** |   |
|                                             |   | **(In thousands, except share data)** |   |
| Numerator:                                       |   |                                  |   |   |   |   |   |
| For basic and  diluted earnings per share—  |   |                                  |   |   |   |   |   |
| Income (loss)  available to common stockholders  |   | $                                     | (1,242 | ) | $ | (25,377 | ) | $ | 3,386 |   |
|                                             |   |                                  |   |   |   |   |   |
| Denominator:                                     |   |                                  |   |   |   |   |   |
| For basic  earnings per share—              |   |                                  |   |   |   |   |   |
| Weighted-average  shares                         |   | 15,323,910                            |   | 15,797,505 |   | 15,988,272 |   |
|                                             |   |                                  |   |   |   |   |   |
| Effect of  Dilutive Securities:                  |   |                                  |   |   |   |   |   |
| Weighted-average  stock options and warrants     |   | —                                |   | — |   | 740,043 |   |
|                                             |   |                                  |   |   |   |   |   |
| Denominator:                                     |   |                                  |   |   |   |   |   |
| For diluted  earnings per share—            |   |                                  |   |   |   |   |   |
| Weighted-average  shares and assumed conversions |   | 15,323,910                            |   | 15,797,505 |   | 16,728,315 |   |
|                                                  |        |                                       |        |  |  |  |  |  |  |  |

 

For the years ended December 31, 1999 and2000, the Company had net losses which precluded recognizing the effect ofdilutive securities of 1,201,000 and 516,000 shares, respectively, related tooutstanding stock options and warrants, because to do so would beanti-dilutive.  For the year endedDecember 31, 2001, there were 1,048,284 employee stock options and warrantswhich were not included in the computation of earnings per share because to doso would have been anti-dilutive for the period presented.

 

**13.****       LONG-TERMOBLIGATIONS:**

 

The Company’slong-term obligations at December 31, 2000 and 2001, consist of the following:

 
|                                                                                                                                                                                                                |   | **2000**           |       | **2001** |   |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------------------|------------|----------|--------|
|                                                                                                                                                                                                                |   | **(In thousands)** | ** ** |
| Revolving  credit facility                                                                                                                                                                                          |   | $104,000           |       | $85,000  |   |
| Equipment  credit facility                                                                                                                                                                                          |   | 2,041              |       | 1,508    |   |
| Notes payable  to individuals, interest at 8.5%, maturing January 2008, secured                                                                                                                                     |   | 1,078              |       | 1,067    |   |
| Notes payable  to employees and individuals (former shareholders of acquired companies),  interest ranging from non-interest bearing (accreting at 6.25%) to 5.9%,  maturing September 2004 to July 2006, unsecured |   | 2,910              |       | 2,271    |   |
| Note payable to  corporation, matured May 2001                                                                                                                                                                      |   | 13                 |       | —   |   |
| Obligations  under capital leases, monthly payments ranging from $141 to $9,554, interest  ranging from 5.1% to 10.0%, expiring through 2005, secured by equipment and  vehicles                                    |   | 1,067              |       | 508      |   |
| Insurance premium notes,  interest at 5.8% to 6.25%, maturing June 2002 to February 2003, unsecured                                                                                                                 |   | 700                |       | 1,674    |   |
| Total debt                                                                                                                                                                                                          |   | $111,809           |       | $92,028  |   |
| Less — Current  maturities of total long-term obligations                                                                                                                                                      |   | (22,993            | )          | (2,891   | )      |
| Less — Debt  associated with operations held for sale                                                                                                                                                          |   | (290               | )          | —   |   |
| Total long-term  obligations                                                                                                                                                                                        |   | $88,526            |       | $89,137  |   |

 

F-20

----

 

The Company has a revolving credit facilitywith a group of banks under which it may borrow to fund working capitalrequirements. Amounts outstanding under the facility are secured by a lien onsubstantially all of the assets of the Company. The credit agreement containsaffirmative, negative and subjective covenants, requires the Company to complywith certain financial covenants, obtain the lenders’ consent before making anyacquisitions, and prohibits the payment of cash dividends.

 

The Company’sfourth quarter results caused it to be out of compliance with certain financialcovenants of the credit facility. During the first quarter of 2002, the termsof the revolving credit facility were amended to, among other things, extendthe maturity date to June 15, 2002, reduce the amount of the credit facilityfrom $111.25 million to $99.7 million, increase interest rates payable underthe credit facility, waive the Company’s non-compliance with all such covenantsfor all periods ended on or prior to December 31, 2001 and modify the terms ofcertain of its financial covenants. In addition, on March 28, 2002, the termsof the credit facility were amended to, among other things, extend the maturitydate to April 15, 2003.  As a result ofthe Company’s lenders’ agreement to extend the maturity date of the creditfacility to April 15, 2003, the outstanding balance under the credit facilityhas been classified as long-term at December 31, 2001.  Prior to the maturity of the creditfacility, the Company must either extend the term of the credit facility orobtain an alternative source of financing. See further discussion in Note 21.

 

Availabilityunder the credit facility is tied to the Company’s cash flows and liquidity.The debt may be accelerated upon a change in control of the Company or thedeparture of either Michael P. Lawlor or Earl J. Blackwell without a suitablereplacement. Interest on the outstanding balance is due monthly. Advances bearinterest, at the Company’s option, at the prime rate or LIBOR, in each case,plus a margin which is calculated quarterly based upon the Company’s ratio ofindebtedness to cash flow. As of December 31, 2001, amounts outstanding underthe credit facility were accruing interest at approximately 7.5% per year.  The Company has agreed to pay a commitmentfee varying from 0.50% to 0.55% on the unused portion of the facility.  As of December 31, 2001, the unused portionof the facility was $26.25 million of which $21.25 million was available,including $3.75 million in letters of credit outstanding.  After giving effect to the reductions of theamount of the facility in January and March 2002, the unused portion of thefacility was $11.7 million, all of which was available, including $3.75 millionin letters of credit outstanding.

 

During 1999, the Company had a $10 millioncredit facility with Bank Boston, N.A. under which it was able to borrow fundsto purchase equipment.  The commitmentfor this facility expired on December 31, 1999, at which time the Company hadborrowed approximately $2.5 million. This amount is being repaid in 60 monthly installments of principal andinterest at 8.4%.

 

Principal payments of long-termdebt and capital lease obligations in excess of one year as of December 31,2001, are as follows:

 
|                                      |   | **Long-Term  Debt** |       | **Capital  Leases** |   |
|-------------------------------------------|--------|---------------------|------------|---------------------|--------|
|                                      |   | **(In  thousands)** | ** ** |
| **Years Ending December 31,**             |   |                |       |                |   |
| 2002                                      |   | $                   | 2,054      |                | $      | 939 |   |
| 2003                                      |   | 85,612              |       | 761                 |   |
| 2004                                      |   | 492                 |       | 490                 |   |
| 2005                                      |   | 430                 |       | —              |   |
| 2006                                      |   | 424                 |       | —              |   |
| Thereafter                                |   | 1,000               |       | —              |   |
|                                      |   | 90,012              |       | 2,190               |   |
| Less — Amount  representing interest |   | —              |       | (174                | )      |
| Total                                     |   | $                   | 90,012     |                | $      | 2,016 |   |
|                                           |        |                     |            |                     |        |  |  |  |

 

**14.****      ****STOCK PLANS:**

 

*Stock Options and Warrants*

 

On November 20, 1996, the Company established a stockoption plan which provides, as amended, for a maximum authorized number ofshares equal to 15% of all outstanding common stock at the end of each year,not to exceed a total of3,000,000 shares.  At 

 

F-21

----

 

December 31, 2001, 812,674 options were available to begranted under the plan.  Options vestequally in three annual installments, commencing on the first anniversary ofthe date upon which the options were granted, and expire after beingoutstanding for a period of 10 years. During June 1997, the Company establisheda directors’ stock option plan which provides for granting 10,000 options toeach director upon their initial election and 5,000 options each yearthereafter.  As of December 31, 2001,165,000 options were available to be granted under this plan.  The directors’ stock options vest on thedate of grant and expire after 10 years. All options for employees and directors have an exercise price based onfair market value at the date of grant.

 

The Company issued 1,000,000 stockwarrants in 1996 in connection with its acquisition of the Oilfield WasteDivision from Sanifill.  The remainingwarrants were issued in 1997 and 1998 for the Company’s initial publicoffering, consulting services for acquisitions and as compensation forcorporate consulting.  Warrants issuedin connection with acquisitions or common stock offerings were capitalizedbased on the fair market value of the warrants on the date of grant.  Stock warrants and options issued ascompensation for corporate consulting activities were expensed as incurred.

 

The following table summarizes activity related to stockoptions and warrants:

 
|                                                 |   | **1999**    |   | **2000**     |   | **2001**    |   |
|------------------------------------------------------|--------|-------------|--------|--------------|--------|-------------|--------|
|                                                 |   | **Options** |   | **Warrants** |   | **Options** |   | **Warrants** |   | **Options** |   | **Warrants** |   |
| Options and  warrants outstanding, beginning of year |   | 1,489,792   |   | 1,235,000    |   | 1,378,182   |   | 1,076,250 |   | 1,626,959 |   | 1,076,250 |   |
| Granted (per  share)                                 |   |        |   |         |   |        |   |   |   |   |   |   |   |
| 1999  ($6.69-$22.50)                                 |   | 845,722     |   | —       |   |        |   |   |   |   |   |   |   |
| 2000  ($2.25-$8.63)                                  |   |        |   |         |   | 532,500     |   | — |   |   |   |   |   |
| 2001  ($2.19-$6.50)                                  |   |        |   |         |   |        |   |   |   | 130,500 |   | — |   |
| Exercised (per  share)                               |   |        |   |         |   |        |   |   |   |   |   |   |   |
| 1999  ($0.02-$11.40)                                 |   | (76,000     | )      | (85,184      | )      |        |   |   |   |   |   |   |   |
| 2000 ($0.02)                                         |   |        |   |         |   | (2,500      | )      | — |   |   |   |   |   |
| 2001  ($0.02-$2.25)                                  |   |        |   |         |   |        |   |   |   | (70,959 | ) | — |   |
| Forfeitures  (per share)                             |   |        |   |         |   |        |   |   |   |   |   |   |   |
| 1999  ($0.02-$21.88)                                 |   | (881,332    | )      | (73,566      | )      |        |   |   |   |   |   |   |   |
| 2000  ($6.69-$21.88)                                 |   |        |   |         |   | (281,223    | )      | — |   |   |   |   |   |
| 2001  ($2.25-$21.88)                                 |   |        |   |         |   |        |   |   |   | (307,657 | ) | — |   |
| Options and  warrants outstanding, end of year       |   | 1,378,182   |   | 1,076,250    |   | 1,626,959   |   | 1,076,250 |   | 1,378,843 |   | 1,076,250 |   |

 

F-22

----

 

The following tablesummarizes information about stock options outstanding at December 31, 2001:

 
| **Options  Outstanding**      |       | **Options  Exercisable**             |      |
|-------------------------------|------------|--------------------------------------|-----------|
| **Range of  Exercise Prices** |       | **Number  Outstanding  at 12/31/01** |      | **Wtd. Avg.  Remaining  Contractual  Life (Years)** |   | **Wtd. Avg  Exercise Price** |   | **Number  Exercisable at  12/31/01** |   | **Wtd. Avg.  Exercise Price** |   |
| $                             | 0.02       |                                 | 117,500   |   | 6.4 |   | $ | 0.02 |   | 117,500 |   | $ | 0.02 |   |
| 2.19-5.90                     |       | 304,309                              |      | 9.1 |   | 2.98 |   | 100,203 |   | 2.58 |   |
| 6.00-9.50                     |       | 614,701                              |      | 6.8 |   | 8.48 |   | 485,594 |   | 8.83 |   |
| 14.13-22.50                   |       | 342,333                              |      | 6.9 |   | 19.98 |   | 292,003 |   | 19.87 |   |
| $                             | 0.02-22.50 |                                 | 1,378,843 |   | 7.3 |   | $ | 9.40 |   | 995,300 |   | $ | 10.40 |   |

 

*Employee Stock Purchase Plan*

 

In December 1999, the Company implemented anEmployee Stock Purchase Plan (“ESPP”) which allows employees to purchase sharesfrom the Company’s authorized but unissued shares of common stock, shares ofcommon stock reacquired by the Company or any combination thereof.  The ESPP is intended to qualify as an“Employee Stock Purchase Plan” under section 423 of the Internal Revenue Codeof 1986, as amended (“Code”).  Theprovisions of the ESPP are construed in a manner consistent with therequirements of that section of the Code.

 

The Company’s ESPP provides formaximum purchases of 500,000 shares in aggregate.  Full-time employees are eligible to purchase shares during sixmonth purchase periods with payroll deductions ranging from 1% to 10% ofcompensation.  No participant will begranted an option under the ESPP (i) if, immediately after the grant, theparticipant would own stock and/or hold outstanding options to purchase stockpossessing 5% or more of the total combined voting power or value of allclasses of stock of the Company or (ii) which permits the participant’s rightsto purchase stock under all employee stock purchase plans of the Company toaccrue at a rate which exceeds $25,000 of fair market value of such stock(determined at the time such option is granted) for each calendar year in whichsuch option is outstanding at any time. The purchase price per share is 85% of the lower of the market price onthe first or last business day of the purchase period.

 

*SFAS 123 Disclosures*

 

As permittedby SFAS No. 123, “Accounting for Stock-Based Compensation,” the Company appliesAccounting Principles Board (“APB”) Opinion 25, “Accounting for Stock Issued toEmployees,” and related interpretations in accounting for its stock-basedcompensation plans. APB Opinion 25 does not require compensation costs to berecorded on options which have exercise prices at least equal to the marketprice of the stock on the date of grant. APB Opinion 25 also provides for no compensation to be recognized forESPP’s where the discount does not exceed 15%. Accordingly, no compensation cost has been recognized for the Company’sstock-based plans. Had compensation cost for the Company’s stock-basedcompensation plans been determined based on the fair value at the grant datesfor awards under those plans consistent with the optional method prescribed bySFAS No. 123, the Company’s net income (loss) and net income (loss) per sharewould have been adjusted to the pro forma amounts indicated below (inthousands, except per share data):

 
|                                |   |        |   | **1999** |   | **2000** |   | **2001** |   |
|-------------------------------------|--------|-------------|--------|----------|--------|----------|--------|----------|--------|
| Net income  (loss),                 |   | As reported |   | $        | (1,242 | )        | $      | (25,377  | )      | $ | 3,386 |   |
|                                |   | Pro forma   |   | (6,987   | )      | (25,862  | )      | 2,733    |   |
| Basic earnings  (loss) per share,   |   | As reported |   | $        | (.08   | )        | $      | (1.61    | )      | $ | 0.21 |   |
|                                |   | Pro forma   |   | (.46     | )      | (1.64    | )      | 0.17     |   |
| Diluted  earnings (loss) per share, |   | As reported |   | $        | (.08   | )        | $      | (1.61    | )      | $ | 0.20 |   |
|                                |   | Pro forma   |   | (.46     | )      | (1.64    | )      | 0.16     |   |

 

The effects of applying SFAS No.123 in the disclosure may not be indicative of future amounts as additionalawards in future years are anticipated.

 

F-23

----

 

The fair value of each employeestock option granted and purchase rights exercised under the ESPP wereestimated using the Black-Scholes pricing model with the following assumptions:

 
|                             |   | **1999**     |   | **2000**     |   | **2001**     |   |
|----------------------------------|--------|--------------|--------|--------------|--------|--------------|--------|
| Expected stock  price volatility |   | 49.16%-86.03 | %      | 70.00%-80.71 | %      | 73.85%-79.30 | %      |
| Risk-free  interest rate         |   | 5.20%-6.61   | %      | 5.05%-7.08   | %      | 3.49%-6.70   | %      |
| Expected life  of options        |   | 10 years     |   | .5-10 years  |   | .5-10 years  |   |
| Expected  dividend/yield         |   | —       |   | —       |   | —       |   |

 

During 1999, 2000 and 2001,845,722, 532,500 and 130,500 options were granted to employees which had aweighted average fair value of $12.89, $4.13 and $3.56 per option and aweighted average exercise price of $18.42, $4.92 and $4.37 per option,respectively.

 

**15.****       STOCKREPURCHASES:**

 

During September 1999, theCompany repurchased and immediately cancelled 386,114 shares of its commonstock for an aggregate purchase price of $3,000,000.  During 2000 and 2001, the Company repurchased and subsequentlyreissued 61,800 and 28,000 shares of common stock to employees pursuant to theCompany’s ESPP, respectively.  See Note14.

 

**16.****       EMPLOYEEBENEFITS:**

 

The Company sponsors a 401(k) retirement planestablished in 1998 under which all employees may choose to save a portion oftheir salary on a pretax basis, subject to certain IRS limits.  The Company matches employee contributionson a discretionary basis and also provides for a discretionary profit sharing contribution.  The Company recorded $716,000, $997,000 and$939,000 in compensation expense related to this plan for the years endedDecember 31, 1999, 2000 and 2001, respectively.

 

**17.****       RELATEDPARTY TRANSACTIONS:**

 

On December 31, 1998, the Company sold to a companyowned by a then director of the Company substantially all of the assets used inthe distribution of various by-products of the Company’s grease processingfacilities.  This individual was nolonger a director of the Company as of December 31, 1999.  These by-products had previously been soldby the Company primarily to producers of livestock feed and chemicals locatedin Mexico.  The purchase price for theseassets was approximately $1.7 million, of which approximately $1.1 million waspaid to the Company in March 1999.  Theremainder of the purchase price was a note receivable payable in monthlyinstallments continuing through February 1, 2004, and was included in otherassets.  As of December 31, 2000, theuncollected balance of approximately $550,000 was fully reserved for as thebalance was deemed uncollectible. However, the Company is pursuing legal action to fully recover theoutstanding balance and in January 2001 notified the former director that it wasimmediately terminating a supply agreement under which the Company had agreedto sell to the former director’s company at market value all fats, oils andfeed proteins that the Company recovers from certain waste streams and thatconform to certain specifications.

 

On July 29, 1999, the Company acquiredsubstantially all of the assets of EMAX, Inc. In connection with theacquisition, the Company agreed to pay a portion of the purchase price overseven years plus interest at 5.9% per annum to the shareholders of EMAX, Inc.  The balance outstanding at December 31, 2001was $2.1 million.

 

On September 21, 2000, the Company acquiredcertain assets of Safari Environmental Management Services LLC.  In connection with the acquisition, theCompany issued notes payable to the three former owners of Safari.  The total amount payable at December 31,2001 was $160,000 and is due in three remaining equal annual installments onthe anniversary date of the sale.

 

On December 2, 2000, anearn-out agreement was reached between the Company and a former owner of Reclamation

 

F-24

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Technology Management, Inc., a subsidiary acquired inApril 1998.  Pursuant  to this settlement  agreement, the Company agreed to pay to the former owner $150,000due in three quarterly installments beginning in March 2001. The liability wassettled in full by December 31, 2001.

 

**18.****       COMMITMENTSAND CONTINGENCIES:**

 

*Closure Bonds, Performance Bonds, CollateralBonds and Letters of Credit*

 

AtDecember 31, 2001, closure bonds and letters of credit totaling $11.0 millionfor the ultimate closure of the Company’s facilities were posted with thestates of Pennsylvania, Texas, Michigan, Louisiana, Georgia, Missouri,California and Florida.

 

TheCompany’s customers require it to post performance and payment bonds issued bya surety.  At December 31, 2001, theCompany had performance and payment bonds totaling $14.0 million.  Those bonds guarantee the customer that theCompany will perform under the terms of a contract and that it will paysubcontractors and vendors.  In theevent that the Company fails to perform under a contract or pay subcontractorsand vendors, the customer may demand the surety to pay or perform under theCompany’s bond. The Company’s relationship with its surety is such that it willindemnify that surety for any expenses it incurs in connection with any of thebonds it issues on the Company’s behalf. To date, the Company has not incurred significant expenses to indemnifyits surety for expenses it incurred on its behalf.

 

TheCompany also maintains a collateral bond totaling $2.5 million to secure theCompany’s obligation to reimburse its insurance carrier for uninsureddeductibles the insurance carrier pays under the Company’s employee grouphealth plan.

 

*Insurance*

 

The Company maintains various types ofinsurance coverage for its business including, without limitation, commercialgeneral liability and commercial auto liability, workers’ compensation andemployer liability, pollution legal liability and a general umbrella policy.  In addition, the Company is partiallyself-insured for employee group health claims. During the fourth quarter of 2001, the Company agreed to accept $1.1million from one of its insurance carriers in settlement of property damage andbusiness interruption claims made with respect to losses suffered as a resultof an incident at its Canadian facility in March 2000.  The Company has not incurred significantclaims or losses in excess of its insurance limits during the periods presentedin the accompanying consolidated financial statements.  See “Litigation” below for furtherdiscussion relating to the bankruptcy of one of the Company’s insurancecarriers.

 

*Noncompete and Oilfield Waste DisposalAgreements*

 

NewparkResources, Inc. is the largest customer of the Oilfield Waste Division.  In September 1998, the Company entered intoa disposal agreement with Newpark. Under the terms of this disposal agreement, during the twelve-monthperiods ending June 30, 1999, 2000 and 2001, the Company agreed to process and disposeof up to 375,000, 500,000, and 500,000 barrels of oilfield waste, respectively.In return, Newpark agreed to pay the Company a disposal fee of not less than$30.0 million.  Newpark paid the Company$6.0 million of the disposal fee in 1998, $11.0 million in 1999, $9.2 millionin 2000 and $4.1 million in 2001.  InDecember 2000, Newpark exercised an option to extend the term of the disposalagreement for an additional twelve months. Pursuant to the terms of this option, during the twelve-month periodending June 30, 2002, Newpark may deliver to the Company for processing anddisposal up to 1,000,000 barrels of oilfield waste.  In return, Newpark agreed to pay the Company a fee of not lessthan $8.0 million.  Newpark paid theCompany $4.4 million of this fee in 2001 and the remainder of the fee isrequired to be paid in monthly installments continuing through June 2002. Underthe terms of the disposal agreement, Newpark had the option to extend the termof the disposal agreement for an additional twelve months expiring June 30,2003; however, Newpark did not exercise this option.   Under the terms of the disposal agreement, the Company isprohibited until June 30, 2002, from (i) accepting from any customer other thanNewpark any oilfield waste generated in a marine environment or transported ina marine vessel, and (ii) engaging in the site remediation and closurebusiness, in each case within the states of Louisiana, Texas, Mississippi andAlabama and the Gulf of Mexico.

 

Despite Newpark’s decision not to extend theterm of the disposal agreement for an additional twelve months, the Company iscurrently engaging in discussions with Newpark regarding an alternativearrangement under which Newpark would continue to deliver oilfield waste

 

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tothe Company for processing and disposal after June 30, 2002. If the Company isunable to reach a satisfactory arrangement with Newpark, it intends to begincompeting with Newpark for oilfield waste generated offshore or in inlandwaters in the Gulf Coast region.  Withthe exception of the Company’s Bateman Island, Louisiana landfarm, which couldimmediately begin receiving oilfield waste generated offshore or in inlandwaters, and its Bourg, Louisiana and Mermentau, Louisiana landfarms, whichcould immediately begin receiving oilfield waste generated in inland waters,the Company’s Louisiana landfarms would be required, among other things, toestablish and obtain permits for one or more transfer facilities to receive oilfieldwaste generated offshore or in inland waters and lease or purchase theequipment necessary to receive such waste. Management estimates that it will take approximately 180 days to permitand equip any such transfer facility that the Company should elect toestablish; however, there can be no assurance that it will be successful inobtaining the permits necessary for any such transfer facility or that theestablishment, permitting and equipping of any such facility can beaccomplished in any particular time period. Management expects the cost ofestablishing such transfer facilities will not have a material adverse effectupon the Company’s business, results of operations or financial condition.

 

*Waste Management,Inc. Leachate Agreement*

 

In connection with theacquistion of the Company’s Detroit facility from Waste Management, Inc.(“WMI”) in May 1998, the Company and WMI entered into an agreement to which WMIagreed for a period of 20 years to deliver to the Company for processing anddisposal all landfill leachate (up to a maximum of 35 million gallons per year)from certain landfills operated by WMI. The processing fee paid by WMI for delivered landfill leachate is to beadjusted to reflect any increase in the Consumer Price Index.  This agreement generated revenues of $0.3million, $0.3 million and $0.6 million for the years ended December 31, 1999,2000 and 2001, respectively.

 

*Leases*

 

The Company leases office facilities andcertain equipment under noncancelable operating leases for periods ranging fromone to 22 years. Rent expense was approximately $8.5 million, $8.6 million and$9.6 million for the years ended December 31, 1999, 2000 and 2001,respectively. The following table presents future minimum rental payments undernoncancelable operating leases with terms in excess of one year:

 

|                         |   | **Operating  Leases** |       |
|------------------------------|--------|-----------------------|------------|
|                         |   | **(In  thousands)**   | ** ** |
| **Year Ending December 31,** |   |                  |       |
| 2002                         |   | $                     | 3,726      |   |
| 2003                         |   | 3,036                 |       |
| 2004                         |   | 2,518                 |       |
| 2005                         |   | 2,168                 |       |
| 2006                         |   | 1,911                 |       |
| Thereafter                   |   | 9,267                 |       |
| Total                        |   | $                     | 22,626     |   |
|                              |        |                       |            |  |  |

*Regulatory Proceedings*

 

In May 1998, the Company acquired from WasteManagement, Inc. substantially all of the assets of City Environmental, Inc.including, without limitation, a hazardous and nonhazardous waste treatmentfacility located in Detroit, Michigan. On August 25, 1999, the EPA and the FBI jointly executed a searchwarrant at this facility, seeking documentation relating to the facility’sreceipt, processing and disposal of hazardous waste. According to the affidavitattached to the search warrant, the investigation was triggered by allegationsthat (i) the facility knowingly discharged untreated hazardous liquid wasteinto the Detroit sewer system in violation of city ordinances, the facility’spermit and the Clean Water Act, and (ii) without proper manifesting, the facilityknowingly transported and disposed of hazardous solid waste at an unpermittedtreatment facility in violation of RCRA. The affidavit alleged that these activities had been taking place since1997, which was before the Company acquired the facility.  The investigation is now under the directionof the U.S. Attorney’s office in Detroit. The Company has cooperated with the EPA, the FBI and the U.S. Attorneythroughout this investigation and, to date, no civil action or criminalindictment has been initiated against the Company or any individual.  The Company is currently engaging indiscussions with the U.S. Attorney concerning a possible settlement of thismatter.  Based upon discussions with theU.S. Attorney and other available information, during the fourth quarter of2001, the Company recorded a $5.0 million reserve to cover amounts expected tobe paid in connection with any

 

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such settlement.  Managementbelieves that this reserve is sufficient; however, there can be no assurancethat the Company will be successful in negotiating a settlement with the U.S.Attorney or that the amounts to be paid in connection with any such settlementwill not exceed $5.0 million.  Failureto negotiate a settlement of this matter could result in the commencement ofcivil and/or criminal actions against the Company, either of which could have amaterial adverse effect on its business, results of operations and financialcondition.

 

The EPA notified theCompany in 1999 that liquid waste received by its Re-Claim Louisiana facilityand stored off-site contained hazardous constituents and, therefore, the wastecould not be processed by the facility. The Company believed that the waste could be handled as nonhazardous waste.  A reserve was established for costs incurredin the event that this waste had to be delivered to a third party forprocessing and disposal.  As of December31, 2001, approximately $0.9 million of this reserve remained accrued toprocess and dispose of the remaining waste. As previously reported, the Re-Claim Louisiana facility ceased on-goingoperations in early 2001.

 

Prior to its acquisition by the Company inJanuary 1999, Romic Environmental Technologies Corporation had entered into anadministrative consent order with the EPA relating to the cleanup of soil andgroundwater contamination at its facility in East Palo Alto, California.  A remedial investigation of the facility hasbeen completed by Romic and forwarded to the EPA.  The EPA has authorized Romic to conduct a pilot study utilizingin-situ enhanced bio-remediation to determine whether that method will be aneffective corrective measure.  Thisstudy began during the first quarter of 2001 and will continue forapproximately one year, at which time, if successful, the EPA may approve thismethod for final site remediation. Prior to its acquisition by the Company, Romic had also been notified bythe EPA and the California Department of Toxic Substances Control that it was apotentially responsible party under applicable environmental legislation withrespect to the Bay Area Drum Superfund Site in San Francisco, California, theLorentz Barrel and Drum Superfund Site in San Jose, California and CasmaliaResources Hazardous Waste Management Facility located near Santa Barbara,California, each of which was a drum reconditioning or disposal site previouslyused by Romic.  With respect to each ofthese drum reconditioning or disposal sites, Romic and a number of otherpotentially responsible parties have entered into administrative consent ordersand/or agreements allocating each party’s respective share of the cost ofremediating the sites.  Romic’s shareunder these consent orders and/or agreements is as follows: Bay Area — 6.872%; Lorentz — 5.62% and Casmalia Resources —0.29%.  Based upon the informationavailable, the Company has continued to maintain a reserve to cover Romic’sestimated costs to remediate the East Palo Alto facility and the three drumreconditioning or disposal sites.  As ofDecember 31, 2001, the balance of this reserve was $3.4 million, of which $0.5million is expected to be paid in 2002. Management believes that this reserveis sufficient to satisfy Romic’s obligations under the consent orders andagreements; however, due to the complex, ongoing and evolving process ofinvestigating and remediating these sites, Romic’s actual costs may exceed theamount reserved.

 

In December 1999, the Company was notified bythe EPA that D&H Holding Co., Inc., a company that was acquired in thefourth quarter of 1998, is a potentially responsible party under theComprehensive Environmental Response, Compensation and Liability Act withrespect to the Lenz Oil Services Superfund Site in DuPage County,Illinois.  During the first quarter of2001, the Company and a number of other potentially responsible parties enteredinto a consent decree allocating each party’s respective share of the cost ofremediating this site.  Based upon theinformation available, the Company has continued to maintain a reserve to coverits share of the estimated costs to remediate the Lenz Oil Services site.  As of December 31, 2001, the balance of thisreserve was $145,000.  The Company hasmade demand upon the former stockholders of D&H Holding for indemnificationagainst any costs that it may incur in connection with the remediation of thissite.

 

The Company’s non-saleable beverageoperations, which operate under the Parallel Products name, are subject toregulation by the U. S. Bureau of Alcohol, Tobacco and Firearms (“ATF”).  In addition to regulating the production,distribution and sale of alcohol and alcohol containing products, the ATF isalso responsible for collecting the federal excise taxes (“FET”) that must bepaid on distilled spirits, wine and beer. If alcoholic beverages on which the FET have been paid are returned tobond at the Company’s Parallel Products’ premises for destruction, the partywho has paid the FET on the destroyed product is entitled to a refund.  When customers return distilled spirits, wineor beer from commerce to one of the Company’s facilities for destruction, itgenerally files a claim with the ATF on behalf of that customer for refund ofthe FET paid on that product.  The ATFperiodically inspects the Parallel Products facilities both to insurecompliance with its regulations and to substantiate claims for FETrefunds.  During 2000, the ATF conductedinspections at the Company’s Louisville, Kentucky and Rancho Cucamonga,California facilities.  At theconclusion of these inspections, the ATF preliminarily notified the Companythat it intended to deny certain refund claims, some of which had already beenpaid by the ATF to its customers, due to what the ATF alleges was inadequate,incomplete or unsubstantiated supporting documentation.  In addition, the ATF proposed a civilpenalty of $30,000 based on the alleged defects in its documentation.  During the third quarter of 2001, the ATFnotified

 

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the Company that, in order to recoup refund claims previously paid toits customers, the ATF was assessing taxes of $1.175 million against thefacilities.  During the fourth quarterof 2001, the Company offered to pay $450,000 to the ATF to resolve all of theATF’s claims against the facilities and delivered a check for such amount tothe ATF.  Based upon discussions withthe ATF, the Company believes that the offer will be accepted by the ATF.  The proposed assessment by the ATF does notaddress approximately $525,000 of refund claims that were submitted on behalfof the Company’s customers that either have already been denied or are likelyto be denied as a result of the alleged defects in the documentation.  The Company is currently engaging indiscussions with the affected customers concerning the refund claims inquestion.  Settlements have been reachedwith certain customers and the Company believes that satisfactory settlementscan be reached with all of the other affected customers.  After giving effect to the proposedsettlement with the ATF and on-going discussions with the Company’s customers,management reassessed the reserve that was established in December 2000 and asof December 31, 2001, the total reserve remaining was $0.3 million.  Management believes that this reserve issufficient.

 

*Litigation*

 

During the third quarter of 1999, sixpurported securities class action lawsuits were filed against the Company andcertain of its officers and directors in the United States District Court forthe Southern District of Texas, Houston Division.  These lawsuits have been consolidated into a single action styledIn re: U S Liquids Securities Litigation, Case No. H-99-2785, and theplaintiffs have filed a consolidated complaint alleging violations of Sections11, 12(a)(2) and 15 of the Securities Act of 1933 (“Securities Act”) on behalfof purchasers of the Company’s common stock in its March 1999 public offeringand violations of Sections 10(b) and 20(a) of the Securities Exchange Act of1934 (“Exchange Act”) and Rule 10b-5 promulgated thereunder on behalf ofpurchasers of the Company’s common stock during the period beginning on May 12,1998 and ending on August 25, 1999.  Theplaintiffs generally allege that the defendants made false and misleading statementsand failed to disclose allegedly material information regarding the operationsof the Company’s Detroit facility and the Company’s financial condition in theprospectus relating to the March 1999 stock offering and in certain otherpublic filings and announcements made by the Company.   The remedies sought by the plaintiffs include designation of theaction as a class action, unspecified damages, attorneys’ and experts’ fees andcosts, rescission to the extent any members of the class still hold commonstock, and such other relief as the court deems proper.  During 2000, the Company filed a motion todismiss the plaintiffs’ consolidated complaint.  In January 2001, the court entered an Order of Partial Dismissalwhich dismissed the claims asserted by the plaintiffs under Sections 10(b) and20(a) and Rule 10b-5 of the Exchange Act, but granted the plaintiffs leave tofile an amended complaint.  The deadlinefor filing an amended complaint has passed and the plaintiffs have advised thecourt that, while preserving all of their rights regarding the claims underSections 10(b) and 20(a) of the Exchange Act, they will proceed on the currentcomplaint as affected by the Order of Partial Dismissal.  Accordingly, the lawsuit is proceeding onlywith respect to the claims asserted under Sections 11, 12(a)(2) and 15 of theSecurities Act.  The lawsuit iscurrently set for trial on November 25, 2002.

 

In addition, one stockholder of the Companyhas filed a lawsuit against certain of the officers and directors of theCompany in connection with the operation of the Company’s Detroit facility andthe securities class action described above. Benn Carmicia v. U SLiquids Inc., et al., was filed inthe United States District Court for the Southern District of Texas, HoustonDivision, on September 15, 1999 and was subsequently consolidated with theclaims asserted in the securities class action described above.  The plaintiff purports to allege derivativeclaims on behalf of the Company against the officers and directors for allegedbreaches of fiduciary duty resulting from their oversight of the Company’saffairs.  The lawsuit names the Companyas a nominal defendant and seeks compensatory and punitive damages on behalf ofthe Company, interest, equitable and/or injunctive relief, costs and such otherrelief as the court deems proper.  TheCompany believes that the stockholder derivative action was not properlybrought and has filed a motion to dismiss this action in order to allow theBoard of Directors to consider whether such litigation is in the best interestof the Company and its stockholders.  As of the date of this report, no ruling has been made by the court onthe Company’s motion to dismiss.  Thislawsuit is currently set for trial in February 2003.

 

On April 21, 1998, the Companyacquired substantially all of the assets of Parallel Products, a Californialimited partnership (“Parallel”).  Inaddition to the consideration paid at closing, the Company agreed that, if theearnings before interest, taxes, depreciation and amortization (“EBITDA”) ofthe businesses acquired from Parallel exceeded a specified amount in any fourconsecutive quarters during the three year period after the closing of theacquisition, the Company would pay to Parallel an additional $2.1 million incash and an additional $2.1 million in common stock.  During the third quarter of 2000, Parallel filed suit against theCompany alleging that the acquired businesses achieved the specified EBITDAamount for the four quarters ended December 31, 1999 and for the four quartersended March 31, 2000.  Parallel isseeking a declaratory judgment that the EBITDA amount specified in theacquisition agreement has

 

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been achieved and that it is entitledto receive the contingent cash and stock payments described above.  Parallel also alleges that it is entitled torecover compensatory damages of $4.2 million, punitive damages, interest,attorneys’ fees and costs, and such other relief as the court deems proper.  The Company denies that it has any liabilityto Parallel and has filed a counterclaim against Parallel alleging thatParallel breached certain of the representations and warranties made to theCompany in the acquisition agreement. This lawsuit is still in the discovery stage and no trial date has beenset.

 

In January 2002, the Company settled theclaims asserted by Downstream Environmental, L.L.C. and Don Noyes against theCompany and its subsidiary, U S Liquids of Texas, Inc.  The settlement did not have a material impacton the Company’s results of operations or financial condition or on theoperations of its American Wastewater facility.

 

In April 1998, the Company acquiredsubstantially all of the assets of Betts Pump Service, Inc. in return for cashand shares of Company common stock.  As partof the transaction, Betts Pump agreed that it would not sell one-half of theshares of Company common stock it received in the transaction for at least oneyear after the closing of the transaction, and a restrictive legend to thateffect was placed on the stock certificate representing these shares.  On January 31, 2001, Keith Betts, Betts Pumpand Betts Environmental, Inc. filed suit in the District Court of KaufmanCounty, Texas against their former stockbroker and the Company alleging thattheir stockbroker and the Company prevented the plaintiffs from selling therestricted shares of Company common stock. The plaintiffs have also alleged, among other things, that the Companymade false and misleading statements and failed to disclose allegedly materialinformation regarding the Company in connection with the acquisition.  The plaintiffs are seeking unspecifiedcompensatory damages, treble damages under the Texas Deceptive Trade Practices- Consumer Protection Act, punitive damages, interest, attorneys’ fees andcosts.  The Company denies that it hasany liability to the plaintiffs.  Thisaction has been delayed as the result of a related arbitration proceedingbetween the plaintiffs and their former stockbroker, which was completed inMarch 2002.

 

From September 4, 1998, through September 3, 2000,Reliance Insurance Company or one of its affiliated companies (“Reliance”)provided casualty insurance coverage for the Company and its subsidiaries.  In addition, Reliance provided similarcoverage, for pre-acquisition periods, for several companies that the Companyacquired between 1997 and 2000.  Duringthe Reliance coverage periods, various incidents occurred that resulted inclaims being made against the Company for which insurance coverage was to be providedby Reliance.  In some cases, the claimresulted in a lawsuit being filed against the Company.  Reliance had been adjusting and/or defendingthese claims; however, in October 2001, Reliance was declared insolvent by theInsurance Commissioner of the State of Pennsylvania and placed intoliquidation.  As a result, insurancecoverage may not be available for any claims or lawsuits that were not resolvedprior to Reliance beingplaced into liquidation.  To the extentthat insurance coverage is not available to cover settlement of a claimasserted against the Company or a judgment entered against the Company, thesettlement or judgment would have to be paid by the Company.  Many states have established insurance guaranteefunds to pay claims insured by insolvent insurance companies; however, theamount available from such funds for a single claim is generally limited to thelesser of the amount of the insured’s coverage and a dollar amount specified bystatute. During the fourth quarter of 2001, the Company established a $3.5million reserve to cover the Company’s estimated costs to satisfy itsobligations with respect to all such claims that were not resolved prior toReliance being placed into liquidation, net of the amounts expected to bereceived by the Company from state insurance guarantee funds.  Management believes that this reserve issufficient to satisfy the Company’s obligations with respect to all suchremaining claims for which insurance coverage was to be provided by Reliance;however, there can be no assurance that the Company’s actual costs will notexceed the amount reserved.

 

The Company’s business is subject to numerous federal,state and local laws, regulations and policies that govern environmentalprotection, zoning and other matters.  Duringthe ordinary course of business, the Company has become involved in a varietyof legal and administrative proceedings relating to land use and environmentallaws and regulations, including actions or proceedings brought by governmentalagencies, adjacent landowners, or citizens’ groups.  In the majority of the situations where proceedings are commencedby governmental agencies, the matters involved relate to alleged technicalviolations of licenses or permits pursuant to which the Company operates or isseeking to operate or laws or regulations to which its operations are subjector are the result of different interpretations of applicable requirements.  Fromtime to time, the Company pays fines or penalties in governmental proceedingsrelating to its operations. The Company believes that these matters will nothave a material adverse effect on its business, results of operations orfinancial condition.  However, theoutcome of any particular proceeding cannot be predicted with certainty, andthe possibility remains that technological, regulatory or enforcementdevelopments, results of environmental studies, or other factors couldmaterially alter this expectation at any time.

 

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It is not possible at this time to predictthe impact the above lawsuits, proceedings, investigations and inquiries mayhave on the Company, nor is it possible to predict whether any other suits orclaims may arise out of these matters in the future.  However, it is reasonably possible that the outcome of anypresent or future litigation, proceedings, investigations or inquiries may havea material adverse impact on the Company’s consolidated financial position orresults of operations in one or more future periods.   The Company intends to defend itself vigorously in all of theabove matters.

 

The Company is involved in various otherlegal actions arising in the ordinary course of business.  Management does not believe that the outcomeof such legal actions will have a material adverse effect on the Company’sconsolidated financial position or results of operations.

 

**19.****       SEGMENTINFORMATION:**

 

The Company’s subsidiaries are organized intothree divisions — the CommercialWastewater Division, the Industrial Wastewater Division and the Oilfield WasteDivision.  The Commercial WastewaterDivision collects, processes and disposes of nonhazardous liquid waste andrecovers saleable by-products from certain waste streams.  The Industrial Wastewater Division collects,processes and disposes of hazardous and nonhazardous waste and recoverssaleable by-products from certain waste streams.  The Oilfield Waste Division processes and disposes of wastegenerated in oil and gas exploration and production.

 

The accounting policies of the segments arethe same as those described in Note 2, “Summary Of Significant AccountingPolicies.”  For purposes of thispresentation, general corporate expenses have been allocated between operatingsegments on a pro rata basis based on revenues.

 

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The following is asummary of key business segment information:

 
|                                         |   | **1999**           |    | **2000** |   | **2001** |   |
|----------------------------------------------|--------|--------------------|---------|----------|--------|----------|--------|
|                                         |   | **(In thousands)** |    |
| Revenues—                               |   |               |    |     |   |     |   |
| Oilfield Waste                               |   | $                  | 18,542  |     | $      | 21,721   |   | $ | 27,089 |   |
| Commercial Wastewater                        |   | 152,340            |    | 169,030  |   | 138,802  |   |
| Industrial Wastewater                        |   | 60,901             |    | 57,108   |   | 64,421   |   |
| Total                                        |   | $                  | 231,783 |     | $      | 247,859  |   | $ | 230,312 |   |
| Income (loss) from operations-               |   |               |    |     |   |     |   |
| Oilfield Waste                               |   | $                  | 9,298   |     | $      | 9,081    |   | $ | 13,367 |   |
| Commercial  Wastewater                       |   | (1,814             | )       | (36,691  | )      | (7,603   | )      |
| Industrial Wastewater                        |   | 551                |    | 11,562   |   | 6,151    |   |
| Total                                        |   | $                  | 8,035   |     | $      | (16,048  | )      | $ | 11,915 |   |
| Identifiable assets—                    |   |               |    |     |   |     |   |
| Oilfield Waste                               |   | $                  | 36,163  |     | $      | 36,948   |   | $ | 36,999 |   |
| Commercial Wastewater                        |   | 212,158            |    | 187,759  |   | 170,336  |   |
| Industrial Wastewater                        |   | 110,709            |    | 115,505  |   | 113,023  |   |
| Corporate                                    |   | 10,053             |    | 11,965   |   | 518      |   |
| Total                                        |   | $                  | 369,083 |     | $      | 352,177  |   | $ | 320,876 |   |
| Depreciation and amortization  expense— |   |               |    |     |   |     |   |
| Oilfield Waste                               |   | $                  | 2,689   |     | $      | 2,335    |   | $ | 2,558 |   |
| Commercial  Wastewater                       |   | 9,421              |    | 11,558   |   | 9,370    |   |
| Industrial Wastewater                        |   | 3,940              |    | 4,544    |   | 4,742    |   |
| Corporate                                    |   | 545                |    | 797      |   | 843      |   |
| Total                                        |   | $                  | 16,595  |     | $      | 19,234   |   | $ | 17,513 |   |
| Capital expenditures—                   |   |               |    |     |   |     |   |
| Oilfield Waste                               |   | $                  | 305     |     | $      | 2,109    |   | $ | 2,167 |   |
| Commercial  Wastewater                       |   | 12,802             |    | 11,866   |   | 5,107    |   |
| Industrial Wastewater                        |   | 2,523              |    | 3,921    |   | 1,493    |   |
| Corporate                                    |   | 1,593              |    | 1,296    |   | 1,743    |   |
| Total                                        |   | $                  | 17,223  |     | $      | 19,192   |   | $ | 10,510 |   |
| Interest (income) expense,  net—        |   |               |    |     |   |     |   |
| Oilfield Waste                               |   | $                  | 8       |     | $      | 5        |   | $ | 2 |   |
| Commercial  Wastewater                       |   | 35                 |    | (8       | )      | (15      | )      |
| Industrial Wastewater                        |   | 129                |    | 140      |   | 126      |   |
| Corporate                                    |   | 6,631              |    | 10,561   |   | 9,327    |   |
| Total                                        |   | $                  | 6,803   |     | $      | 10,698   |   | $ | 9,440 |   |

 

 

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**20.****       QUARTERLYRESULTS OF OPERATIONS (UNAUDITED):**

 

Quarterlyfinancial information for the years ended December 31, 2000 and 2001, aresummarized as follows (in thousands, except per share data):

** **
|                        |   | **Year Ended  December 31, 2000** |   |
|-----------------------------|--------|-----------------------------------|--------|
|                        |   | **First  Quarter**                |   | **Second  Quarter** |   | **Third  Quarter** |   | **Fourth  Quarter** |   |
| Revenues                    |   | $                                 | 58,178 |   | $ | 64,473 |   | $ | 63,022 |   | $ | 62,186 |   |
| Operating  income (loss)    |   | $                                 | 2,643  |   | $ | 4,379 |   | $ | 4,124 |   | $ | (27,194 | ) |
| Net income  (loss)          |   | $                                 | 105    |   | $ | 904 |   | $ | 789 |   | $ | (27,175 | ) |
| Earnings (loss)  per share: |   |                              |   |   |   |   |   |   |   |
| Basic                       |   | $                                 | 0.01   |   | $ | 0.06 |   | $ | 0.05 |   | $ | (1.72 | ) |
| Diluted                     |   | $                                 | 0.01   |   | $ | 0.06 |   | $ | 0.05 |   | $ | (1.72 | ) |

 
|                        |   | **Year Ended  December 31, 2001** |   |
|-----------------------------|--------|-----------------------------------|--------|
|                        |   | **First  Quarter**                |   | **Second  Quarter** |   | **Third  Quarter** |   | **Fourth  Quarter** |   |
| Revenues                    |   | $                                 | 58,050 |   | $ | 62,058 |   | $ | 58,438 |   | $ | 51,766 |   |
| Operating  income (loss)    |   | $                                 | 3,525  |   | $ | 12,264 |   | $ | 8,404 |   | $ | (12,278 | ) |
| Net income  (loss)          |   | $                                 | 428    |   | $ | 5,033 |   | $ | 3,439 |   | $ | (5,514 | ) |
| Earnings (loss)  per share: |   |                              |   |   |   |   |   |   |   |
| Basic                       |   | $                                 | 0.03   |   | $ | 0.32 |   | $ | 0.21 |   | $ | (0.34 | ) |
| Diluted                     |   | $                                 | 0.03   |   | $ | 0.30 |   | $ | 0.20 |   | $ | (0.34 | ) |

 

The sum of theindividual quarterly earnings per share amounts may not agree with year-to-dateearnings per share as each period’s computation is based on the weightedaverage number of shares outstanding during the period.

 

**21.****       SUBSEQUENTEVENT:**

 

Subsequent toDecember 31, 2001 and prior to the issuance of these financial statements, theCompany refinanced its revolving credit facility into a long-term obligation.During the first quarter of 2002, the terms of the revolving credit facilitywere amended to, among other things, extend the maturity date to June 15, 2002,reduce the amount of the credit facility from $111.25 million to $99.7 million,increase interest rates payable under the credit facility, waive the Company’snon-compliance with certain covenants for all periods ended on or prior toDecember 31, 2001 and modify the terms of certain of its financial covenants.In addition, on March 28, 2002, the terms of the credit facility were amendedto, among other things, extend the maturity date to April 15, 2003 and increasethe interest rates payable under the credit facility. In connection with theMarch 28, 2002 amendment, the Company has agreed that the amount of the creditfacility will be permanently reduced by $250,000 on each of June 30, 2002 andSeptember 30, 2002 and will be further reduced by $4.6 million on December 31,2002 and $2.1 million on March 31, 2003. Furthermore, the amount of the creditfacility will be permanently reduced by an amount equal to one hundred percentof the net cash proceeds received from any sale of assets not in the ordinarycourse of business, any issuance of equity (other than equity issued under theemployee stock purchase plan) or the issuance of certain debt.  The terms of the credit facilitysignificantly limit the Company’s ability to enter into new leases or new debtsoutside the facility.  The capitalexpenditures budgeted for 2002 are less than the capital expenditures permittedby the credit facility.

 

As a result ofthe March 28, 2002 extension of the maturity date of the credit facility toApril 15, 2003, the outstanding balance under the credit facility has beenclassified as long-term at December 31, 2001. Prior to the maturity of the credit facility, the Company must eitherextend the term of the credit facility or obtain an alternative source offinancing.

 

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