1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED: MARCH 31, 2000
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER: 000-21953
ENVIRONMENTAL SAFEGUARDS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
NEVADA 87-0429198
(STATE OR OTHER JURISDICTION (IRS EMPLOYER
OF INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
2600 SOUTH LOOP WEST, SUITE 645
HOUSTON, TEXAS 77054
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES, INCLUDING ZIP CODE)
(713) 641-3838
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
CHECK WHETHER THE ISSUER (1) HAS FILED ALL REPORTS REQUIRED TO BE FILED BY
SECTION 13 or 15(d) OF THE EXCHANGE ACT DURING THE PAST 12 MONTHS (OR FOR SUCH
SHORTER PERIOD THAT THE REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND 2)
HAS BEEN SUBJECT TO SUCH FILING REQUIREMENTS FOR THE PAST 90 DAYS.
Yes [X] No [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS
AT MAY 5, 2000, APPROXIMATELY 10,112,144 SHARES OF COMMON STOCK, $.001 PAR
VALUE, WERE OUTSTANDING.
TRANSITIONAL SMALL BUSINESS DISCLOSURE FORMAT (CHECK ONE):
Yes [ ] No [X]
2
ENVIRONMENTAL SAFEGUARDS, INC.
CONTENTS
PART I -- FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Condensed Balance Sheet as of March 31, 2000
(unaudited) and December 31, 1999.
Unaudited Consolidated Condensed Statement of Operations for the
three months ended March 31, 2000 and 1999.
Unaudited Consolidated Condensed Statement of Cash Flows for the
three months ended March 31, 2000 and 1999.
Selected Notes to Unaudited Consolidated Condensed Financial
Statements.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
PART II -- OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
SIGNATURES
3
PART I -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
4
ENVIRONMENTAL SAFEGUARDS, INC.
CONSOLIDATED CONDENSED BALANCE SHEET
----------
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
MARCH 31,
2000 DECEMBER 31,
ASSETS (UNAUDITED) 1999
------------ ------------
Current assets:
Cash and cash equivalents $ 1,854 $ 1,944
Accounts receivable 2,169 3,579
Prepaid expenses 173 87
Deferred taxes 35 33
Other current assets 132 76
------------ --------
Total current assets 4,363 5,719
Property and equipment, net 10,285 10,835
Acquired engineering design and
technology, net 2,325 2,427
Other assets 12 9
------------ --------
Total assets $ 16,985 $ 18,990
============ ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 1,894 $ 2,098
Accounts payable 777 667
Accrued liabilities 471 772
Income taxes payable 483 618
------------ --------
Total current liabilities 3,625 4,155
------------ --------
Long-term debt, net of current portion 3,654 4,325
Minority interest 2,970 3,554
Commitments and contingencies
Stockholders' equity:
Preferred stock; Series B convertible; voting,
$.001 par value (aggregate liquidation
value - $2,897,700); 5,000,000 shares
authorized; 2,733,686 shares issued and
outstanding 3 3
Preferred stock; Series C non-conver-
tible, non-voting, cumulative; $.001 par
value (aggregate liquidation value -
$4,000,000); 400,000 shares authorized,
issued and outstanding 1 1
Common stock; $.001 par value; 50,000,000
shares authorized; 10,112,144 shares
issued and outstanding 10 10
Additional paid-in capital 14,767 14,329
Accumulated deficit (8,045) (7,387)
------------ --------
Total stockholders' equity 6,736 6,956
------------ --------
Total liabilities and stockholders'
equity $ 16,985 $ 18,990
============ ========
The accompanying notes are an integral part of these
unaudited consolidated condensed financial statements.
F-1
5
ENVIRONMENTAL SAFEGUARDS, INC.
UNAUDITED CONSOLIDATED CONDENSED STATEMENT OF OPERATIONS
----------
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
THREE MONTHS
ENDED MARCH 31,
------------------------
2000 1999
-------- --------
Revenue $ 3,328 $ 4,210
Cost of revenue 1,884 2,018
-------- --------
Gross margin 1,444 2,192
Selling, general and administrative
expenses 962 865
Amortization of acquired engineering design
and technology 102 102
Research and development 18 15
-------- --------
Income from operations 362 1,210
Other income (expense):
Interest income 7 51
Interest expense (273) (278)
Foreign currency translation (gains)
losses 38 (5)
-------- --------
Income before provision for income
taxes and minority interest 134 978
Provision for income taxes 379 356
-------- --------
Income (loss) before minority interest (245) 622
Minority interest (312) (293)
-------- --------
Net income (loss) $ (557) $ 329
======== ========
Net income (loss) available to common
stockholders $ (705) $ 142
======== ========
Basic earnings (loss) per common share $ (0.07) $ 0.01
======== ========
Weighted average shares outstanding 10,112 10,092
======== ========
Diluted earnings (loss) per common share $ (0.07) $ 0.01
======== ========
Weighted average number of diluted common
shares outstanding 10,112 14,934
======== ========
The accompanying notes are an integral part of these
unaudited `consolidated condensed financial statements.
F-2
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ENVIRONMENTAL SAFEGUARDS, INC.
UNAUDITED CONSOLIDATED CONDENSED STATEMENT OF CASH FLOWS
----------
(IN THOUSANDS)
THREE MONTHS
ENDED MARCH 31,
----------------------
2000 1999
------- -------
Cash flows from operating activities:
Net income (loss) $ (557) $ 329
Adjustment to reconcile net income
(loss) to net cash provided by
operating activities 1,901 1,115
------- -------
Net cash provided by operating
activities 1,344 1,444
------- -------
Cash flows from investing activities:
Purchases of property and equipment -- (1,412)
------- -------
Cash flows from financing activities:
Payments on long-term debt (437) (428)
Payments on capital lease obligation -- (369)
Distribution to minority interest (896) --
Dividends on Series C preferred stock (101) (92)
------- -------
Net cash used by financing
activities (1,434) (889)
------- -------
Net decrease in cash and cash equivalents (90) (857)
Cash and cash equivalents, beginning of
period 1,944 4,792
------- -------
Cash and cash equivalents, end of period $ 1,854 $ 3,935
======= =======
The accompanying notes are an integral part of these
unaudited consolidated condensed financial statements.
F-3
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ENVIRONMENTAL SAFEGUARDS, INC.
SELECTED NOTES TO UNAUDITED CONSOLIDATED
CONDENSED FINANCIAL STATEMENTS
----------
1. GENERAL
The unaudited consolidated condensed financial statements included herein
have been prepared without audit pursuant to the rules and regulations of
the Securities and Exchange Commission. Certain information and footnote
disclosures normally included in financial statements prepared in
accordance with accounting principles generally accepted in the United
States of America have been condensed or omitted, pursuant to such rules
and regulations. These unaudited consolidated condensed financial
statements should be read in conjunction with the audited consolidated
financial statements and notes thereto of Environmental Safeguards, Inc.
(the "Company") included in the Company's Annual Report on Form 10-K for
the year ended December 31, 1999. Certain reclassifications have been
made to prior year amounts to conform with the current year presentation.
In the opinion of management, the unaudited consolidated condensed
financial information included herein reflect all adjustments, consisting
only of normal, recurring adjustments, which are necessary for a fair
presentation of the Company's financial position, results of operations
and cash flows for the interim periods presented. The results of
operations for the interim periods presented herein are not necessarily
indicative of the results to be expected for a full year or any other
interim period.
2. INCOME TAXES
Deferred income taxes reflect the tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes. The
Company has provided deferred tax valuation allowances for cumulative net
operating tax losses to the extent that the net operating losses may not
be realized. The difference between the federal statutory income tax rate
and the Company's effective income tax rate is primarily attributed to
foreign income taxes and changes in valuation allowances for deferred tax
assets related to U.S. net operating losses.
Continued
F-4
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ENVIRONMENTAL SAFEGUARDS, INC.
SELECTED NOTES TO UNAUDITED CONSOLIDATED
CONDENSED FINANCIAL STATEMENTS
----------
3. EARNINGS (LOSS) PER SHARE
Basic earnings (loss) per common share are based on the weighted average
number of common shares outstanding in each year and after preferred
stock dividend requirements. Diluted earnings per common share assume
that any dilutive convertible debentures and convertible preferred shares
outstanding at the beginning of each year were converted at those dates,
with related interest, preferred stock dividend requirements and
outstanding common shares adjusted accordingly. It also assumes that
outstanding common shares were increased by shares issuable upon exercise
of those stock options for which market price exceeds exercise price,
less shares which could have been purchased by the Company with related
proceeds. The convertible preferred stock and outstanding stock options
and warrants, totaling 8,709,057 as of March 31, 2000, were not included
in the computation of diluted earnings per common share for 2000 since
their inclusion would have been anti-dilutive.
The following table sets forth the computation of basic and diluted
earnings per share:
THREE MONTHS ENDED
MARCH 31,
----------------------
2000 1999
------- -----
(IN THOUSANDS)
Numerator:
Net income (loss) $ (557) $ 329
Series C preferred stock dividends (101) (93)
Accretion of discount on Series C
preferred stock (47) (94)
------- -------
Numerator for basic and dilutive
earnings per share-income (loss)
available to common stockholders $ (705) $ 142
======= =======
Denominator:
Denominator for basic earnings per
share-weighted average shares 10,112 10,092
Effect of dilutive securities:
Employee stock options - 1,406
Warrants - 702
Convertible Series B preferred
stock - 2,734
------- -------
Dilutive potential common shares - 4,842
------- -------
Denominator for diluted earnings
per share-adjusted weighted
average shares and assumed con-
versions 10,112 14,934
======= =======
Continued
F-5
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ENVIRONMENTAL SAFEGUARDS, INC.
SELECTED NOTES TO UNAUDITED CONSOLIDATED
CONDENSED FINANCIAL STATEMENTS
----------
4. SUPPLEMENTAL INFORMATION FOR STATEMENT OF CASH FLOWS
THREE MONTHS ENDED
MARCH 31,
-----------------------
2000 1999
------- -----
(IN THOUSANDS)
Issuance of warrants in connec-
tion with long-term debt
agreement $ 438 $ -
Indirect Thermal Desorption Unit
value contributed by the minority
owner in Arabia - 1,150
Transferred ITD Unit cost from pro-
perty and equipment to equipment
held for sale - 545
5. SEGMENT, GEOGRAPHIC AND MAJOR CUSTOMERS INFORMATION
The Company operates in the environmental remediation and hydrocarbon
reclamation/recycling services industry. Substantially all revenue
results from the sale of services using the Company's ITD units. The
Company's reportable segments are based upon geographic area. All
intercompany revenue and expenses have been eliminated.
Following is a summary of segment information:
THREE MONTHS ENDED
MARCH 31,
-------------------------
2000 1999
------- -------
(IN THOUSANDS)
Revenue:
United States $ 116 $ 1,150
United Kingdom 44 -
Latin America 3,168 3,060
------- -------
Total revenue $ 3,328 $ 4,210
======= =======
Income (loss) from operations:
United States $ (416) $ 219
United Kingdom (110) -
Latin America 964 1,068
Corporate (86) (77)
------- -------
Total income (loss) from operations $ 352 $ 1,210
======= =======
AS OF
--------------------------
MARCH 31, DECEMBER
2000 31, 1999
--------- --------
Assets:
United States $ 7,391 $ 6,574
United Kingdom 1,172 1,840
Latin America 4,945 6,993
Middle East 3,390 3,390
Corporate 87 193
------- -------
Total assets $16,985 $18,990
======= =======
F-6
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion should be read in conjunction with our
consolidated condensed financials statements and related notes included
elsewhere in this report, and with our Annual Report on Form 10-K for the year
ended December 31, 1999.
Information Regarding and Factors Affecting Forward-Looking Statements
We are including the following cautionary statement in this Form 10-Q
to make applicable and take advantage of the safe harbor provision of the
Private Securities Litigation Reform Act of 1995 for any forward-looking
statements made by us, or on behalf of us. Forward-looking statements include
statements concerning plans, objectives, goals, strategies, future events or
performance and underlying assumptions and other statements which are other than
statements of historical fact. Certain statements in this Form 10-Q are
forward-looking statements. Words such as "expects", "anticipates", "estimates"
and similar expressions are intended to identify forward-looking statements.
Such statements are subject to risks and uncertainties that could cause actual
results to differ materially from those projected. Such risks and uncertainties
are set forth below. Our expectations, beliefs and projections are expressed in
good faith and are believed to have a reasonable basis, including without
limitation, our examination of historical operating trends, data contained in
our records and other data available from third parties. There can be no
assurance, however, that our expectations, beliefs or projections will result,
be achieved, or be accomplished.
In addition to other facts and matters discussed elsewhere herein, the
following are important factors that, in our view, could cause material adverse
affects on our financial condition and results of operations: our ability to
attain widespread market acceptance of our technology; our ability to obtain
acceptable forms and amounts of financing to fund planned expansion; the demand
for, and price level of, our services; competitive factors; the actual useful
life of our equipment; our ability to mitigate concentration of business in a
small number of customers; the evolving industry and technology standards; our
ability to protect proprietary technology; our dependence on key personnel; the
effect of business interruption due to political unrest; foreign exchange
fluctuation risk; and our ability to maintain acceptable utilization rates on
our equipment. We are not obligated to update or revise these forward-looking
statements to reflect the occurrence of future events or circumstances.
Overview
We provide environmental reclamation and recycling services to
companies engaged in land-based oil and gas exploration, waste management, and
other industrial applications. Substantially all of our technologies and
services are provided through OnSite Technology ("OnSite"), our wholly-owned
operating subsidiary that forms the cornerstone of our worldwide operations, and
we continue to devote substantially all our efforts to the development of
markets for OnSite's services.
Oil and gas exploration, refinery and other types of industrial
activities often produce significant quantities of petroleum-contaminated drill
cuttings and waste, from which our Indirect Thermal Desorption ("ITD") units
extract and recover the hydrocarbons as re-useable or re-saleable liquids, and
produce recycled soil which is compliant with environmental regulations. We have
expanded OnSite's activities to include use of our ITD technology to address
hydrocarbon contamination problems and hydrocarbon recycling and reclamation
11
opportunities at heavy industrial, refining, petrochemical and waste management
sites, as well as at Superfund, DOD and DOE sites.
We operate internationally through our 100%-owned subsidiaries in
Venezuela, Mexico and the United Kingdom, and our 50%-owned joint companies in
Colombia and the Arabian Gulf region.
Our ITD Units, which are portable equipment, utilize a rotating,
heat-jacketed trundle to vaporize hydrocarbons from contaminated soil or other
contaminated materials. Our ITD Units consist of two principal components: (i)
an indirect thermal desorption unit wherein the hydrocarbon contaminated soil is
indirectly heated, causing the hydrocarbon contamination to vaporize; and (ii) a
condensation process system, which causes the hydrocarbon vapor to condense into
a liquid for recycling.
As of March 2000, our fleet of ten ITD Units is dispersed
geographically as follows: three in Colombia, one in Venezuela, one in Mexico,
one in Scotland, two in the Arabian Gulf region, one in West Texas and one in
Houston undergoing routine maintenance. We fully-own six of the ten units, and
have a 50% joint-company ownership in four units, two in the Arabian Gulf region
and two in Colombia.
Quarterly Fluctuations
Our revenue may be affected by the timing and deployment of ITD Units
to customer sites under existing contracts, and by the timing of obtaining new
contracts. Accordingly, our quarterly results may fluctuate and the results of
one fiscal quarter should not be deemed to be indicative of the results of any
other quarter, or for the full fiscal year.
Results of Operations
COMPARISON OF OPERATING RESULTS - QUARTERS ENDED MARCH 31, 2000
AND 1999
Summary. During the first quarter of 2000, we incurred a net loss of
$557,000 as compared to 1999 first quarter net income of $329,000. Our $886,000
decline in first quarter net income was due primarily to the sale of an ITD Unit
during the first quarter of 1999, and transportation and customs duty costs
associated with the movement of ITD Units, partially offset by higher ITD Unit
utilization in the first quarter of 2000.
Revenue and Gross Margin. Revenue of $3.3 million during the first
quarter of 2000 generated a $1.4 million gross margin (43% of revenue) as
compared to revenue of $4.2 million and gross margin of $2.2 million (52% of
revenue) in the comparable 1999 quarter. The reduction in revenue was due to the
sale of an ITD Unit to a 50%-owned subsidiary in the first quarter of 1999,
partially offset by higher ITD utilization during the first quarter of 2000. On
average, we had 4.7 ITD Units in operation during the first quarter of 2000 as
compared to four units in the first quarter of 1999. The 9% lower gross margin
ratio was mainly due to transportation and customs duty expenses associated with
movements of ITD Units in and out of Latin America.
Selling, General and Administrative ("SGA") Expenses. SGA expenses
during the first quarter of 2000 were 11% higher than the year ago quarter due
to increased levels of marketing activity in our served markets, combined with
higher professional fees.
Amortization of Engineering Design and Developed Technology. This
represents the amortization of Acquired Engineering Design and Technology costs,
an intangible asset related
12
to the December 1997 acquisition of the remaining 50% interest in OnSite from
Parker Drilling. The intangible asset is being amortized over an 8-year
estimated economic life.
Interest Income. The reduction in interest income resulted from lower
average cash balances during the first quarter of 2000.
Interest Expense. During the first quarter of 2000, $273,000 of
interest expense was incurred (including amortization of debt issuance costs of
$103,000), compared to interest expense of $278,000 for the first quarter of
1999 (including amortization of debt issuance costs of $132,000, partly offset
by $45,000 of interest capitalized in connection with the first quarter 1999
construction of ITD Units).
Foreign currency translation (gains) losses. The financial statements
of our foreign subsidiaries are measured as if the functional currency were the
U.S. dollar ("USD"). The re-measurement of local currencies into USD creates
translation adjustments which are included in net income. During the first
quarter of 2000, the re-measurement process resulted in a $29,000 gain in our
Colombian subsidiary, based on a 4.5% strengthening of the USD against the
Colombian Peso during the quarter.
Income Taxes. The reported tax provision in 2000 relates to foreign
income taxes incurred by our 50%-owned subsidiary in Colombia. The 1999
provision also primarily relates to the Colombia subsidiary, and to a lesser
extent, to our wholly-owned Venezuela subsidiary. During both comparative
quarters we incurred net operating losses ("NOLs"), primarily in the U.S., which
may be used to offset taxable income reported in future periods. The NOLs and
certain foreign tax credits associated with the taxes paid in OnSite's foreign
subsidiaries have generated deferred tax assets, but due to uncertainties
regarding the future realization of these assets, a valuation allowance has been
provided for the full amount of the deferred tax assets. We are implementing tax
planning strategies, which if successful, may result in our recognizing these
deferred tax assets in future periods, which would result in significantly
reduced effective tax rates. However, presently there can be no assurances that
the NOLs and foreign tax credits will be utilized.
Minority Interest. Minority interest for 2000 and 1999 reflects our 50%
minority partner's interest in the net income of OnSite Colombia for each
respective year. The amount of minority interest increased due to higher net
income in the Colombian subsidiary.
Liquidity and Capital Resources
As of March 2000 we have no significant commitments for capital
expenditures, as our present fleet of ITD Units was essentially paid for by the
end of 1999. As the need arises for additional ITD Units in our fleet, we plan
to finance their construction through a combination of operating cash flows,
third party sale lease-back transactions or bank term financing.
We estimate that our existing cash reserves and cash flows from
operations will be sufficient to cover our cash requirements for 2000 (not
including the construction of additional ITD Units as discussed above). However,
there can be no assurance that existing sources of cash will be sufficient to
cover our 2000 cash flow requirements.
Impact of Year 2000
Our computer systems continue to function properly with respect to
dates in the year 2000. We have experienced no problems with suppliers and major
customers regarding Year
13
2000 issues during the first quarter. We continue to maintain our contingency
plans for potential Year 2000 problems.
14
PART II -- OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit No. 27 -- Financial Data Schedule.
(b) Reports on Form 8-K
None
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
ENVIRONMENTAL SAFEGUARDS, INC.
By: /s/ James S. Percell
-----------------------------------
Date: May 5, 2000 James S. Percell, President
By: /s/ Ronald L. Bianco
-----------------------------------
Date: May 5, 2000 Ronald L. Bianco, Chief Financial
Officer
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INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
27 -- Financial Data Schedule.