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: JUNE 30, 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 87-042919
(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 AUGUST 7, 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 June 30, 2000
(unaudited) and December 31, 1999.
Unaudited Consolidated Condensed Statement of Operations for the
three months and six months ended June 30, 2000 and 1999.
Unaudited Consolidated Condensed Statement of Cash Flows for the
six months ended June 30, 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 4. Submission of Matters to a Vote of Security Holders
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)
JUNE 30,
2000 DECEMBER 31,
(UNAUDITED) 1999
----------- ------------
ASSETS
Current assets:
Cash and cash equivalents $ 1,687 $ 1,944
Accounts receivable 2,470 3,579
Prepaid expenses 124 87
Deferred taxes 33 33
Other current assets 95 76
-------- --------
Total current assets 4,409 5,719
Property and equipment, net 9,817 10,835
Acquired engineering design and
technology, net 2,223 2,427
Other assets 16 9
-------- --------
Total assets $ 16,465 $ 18,990
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 1,922 $ 2,098
Accounts payable 530 667
Accrued liabilities 657 772
Income taxes payable 629 618
-------- --------
Total current liabilities 3,738 4,155
Long-term debt, net of current portion 3,164 4,325
Minority interest 3,023 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 (8,241) (7,387)
-------- --------
Total stockholders' equity 6,540 6,956
-------- --------
Total liabilities and stockholders'
equity $ 16,465 $ 18,990
======== ========
The accompanying notes are an integral part of these
unaudited consolidated condensed financial statements.
F-1
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ENVIRONMENTAL SAFEGUARDS, INC.
UNAUDITED CONSOLIDATED CONDENSED STATEMENT OF OPERATIONS
----------
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
THREE MONTHS SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
------------------------- -------------------------
2000 1999 2000 1999
-------- -------- -------- --------
Revenue $ 3,684 $ 2,083 $ 7,012 $ 6,293
Cost of revenue 1,742 1,101 3,626 3,119
-------- -------- -------- --------
Gross margin 1,942 982 3,386 3,174
Selling, general and administrative
expenses 986 965 1,948 1,830
Amortization of acquired engineering design
and technology 102 102 204 204
Research and development 19 62 37 77
-------- -------- -------- --------
Income (loss) from operations 835 (147) 1,197 1,063
Other income (expense):
Interest income 7 39 14 90
Interest expense (240) (323) (513) (601)
Other 18 16 56 11
-------- -------- -------- --------
Income (loss) before provision for income
taxes and minority interest 620 (415) 754 563
Provision for income taxes 450 168 829 524
-------- -------- -------- --------
Income (loss) before minority interest 170 (583) (75) 39
Minority interest (253) (165) (565) (458)
-------- -------- -------- --------
Net loss $ (83) $ (748) $ (640) $ (419)
======== ======== ======== ========
Net loss available to common stockholders $ (196) $ (936) $ (901) $ (793)
======== ======== ======== ========
Basic and dilutive loss per common share $ (0.02) $ (0.09) $ (0.09) $ (0.08)
======== ======== ======== ========
Weighted average shares outstanding 10,112 10,105 10,112 10,099
======== ======== ======== ========
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)
SIX MONTHS
ENDED JUNE 30,
-------------------------
2000 1999
-------- --------
Cash flows from operating activities:
Net loss $ (640) $ (419)
Adjustment to reconcile net
loss to net cash provided by
operating activities 2,677 2,634
-------- --------
Net cash provided by operating
activities 2,037 2,215
-------- --------
Cash flows from investing activities:
Purchases of property and equipment (85) (1,940)
-------- --------
Cash flows from financing activities:
Payments on long-term debt (899) (1,141)
Payments on capital lease obligation -- (648)
Distribution to minority owners (1,096) (300)
Proceeds from sale of common stock -- 8
Dividends on Series C preferred stock (214) (186)
-------- --------
Net cash used by financing
activities (2,209) (2,267)
-------- --------
Net decrease in cash and cash equivalents (257) (1,992)
Cash and cash equivalents, beginning of
period 1,944 4,792
-------- --------
Cash and cash equivalents, end of period $ 1,687 $ 2,800
======== ========
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. LIQUIDITY
The Company estimates that existing cash reserves and cash flows from
operations will be sufficient to cover cash requirements for the next
twelve months (not including the construction of additional ITD units).
However, the Company has no credit facility or other committed
sources of capital. To the extent the Company's cash reserves and
cash flows from operations are insufficient to meet future cash
requirements, the Company may need to raise additional capital through
the sale of additional equity or the issuance of debt securities. Such
financing may not be available on terms acceptable to the Company or
at all. The sale of additional equity or convertible debt securities
may result in dilution to stockholders.
3. 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.
The differences between the Federal statutory income tax rates and the
Company's effective income tax rates were as follows:
Continued
F-4
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ENVIRONMENTAL SAFEGUARDS, INC.
SELECTED NOTES TO UNAUDITED CONSOLIDATED
CONDENSED FINANCIAL STATEMENTS
----------
3. INCOME TAXES, CONTINUED
THREE MONTHS SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
-------------------------- -------------------------
2000 1999 2000 1999
-------- -------- -------- --------
Federal statutory rate 34% (34%) 34% 34%
Foreign (primarily Colombian)
income taxes 73% 80% 110% 65%
Change in valuation allowance (34%) 14% (34%) 14%
Other -- (20%) -- (20%)
-------- -------- -------- --------
73% 40% 110% 93%
======== ======== ======== ========
At June 30, 2000, for U.S. federal income tax reporting purposes, the
Company has approximately $4,813,000 of unused net operating losses
available for carryforward to future years. The benefit from
carryforward of such net operating losses will expire during the years
ended December 31, 2001 to 2020. At June 30, 2000 the Company had
approximately $2,188,000 of foreign tax credit carryforwards which can
be offset against taxable income in Colombia. The benefit from
carryforward of such foreign tax credits will expire during the years
ended December 31, 2002 to 2004. The benefit from utilization of net
operating loss carryforwards could be subject to limitations if
significant ownership changes occur in the Company.
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. The Company is implementing tax planning
strategies, which if successful, may result in their 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.
4. EARNINGS (LOSS) PER SHARE
The Company computes basic earnings per share based on the weighted
average number of shares of common stock outstanding for the period,
and includes common stock equivalents outstanding for the computation
of diluted earnings per share. As a result of incurred net losses, for
the three months and six months ended June 30, 2000 and 1999 all common
stock equivalents have been excluded from the calculation of earnings
per share as their effect is anti-dilutive. In future periods, the
calculation of diluted earnings per share may require that the
Company's common stock equivalents (totaling 8,709,057 shares at June
30, 2000) be included in the calculation of the weighted average shares
outstanding for periods in which net income is reported. Following is
the reconciliation of net loss to the net loss available to common
stockholders:
Continued
F-5
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ENVIRONMENTAL SAFEGUARDS, INC.
SELECTED NOTES TO UNAUDITED CONSOLIDATED
CONDENSED FINANCIAL STATEMENTS
----------
4. EARNINGS (LOSS) PER SHARE, CONTINUED
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
2000 1999 2000 1999
------ ------ ------ ------
(IN THOUSANDS) (IN THOUSANDS)
Net loss $ (83) $ (748) $ (640) $ (419)
Series C preferred stock
dividends (113) (94) (214) (186)
Accretion of discount on
Series C preferred stock -- (94) (47) (188)
------ ------ ------ ------
Net loss available to common
stockholders $ (196) $ (936) $ (901) $ (793)
====== ====== ====== ======
5. SUPPLEMENTAL INFORMATION FOR STATEMENT OF CASH FLOWS
SIX MONTHS ENDED
JUNE 30,
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
Continued
F-6
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ENVIRONMENTAL SAFEGUARDS, INC.
SELECTED NOTES TO UNAUDITED CONSOLIDATED
CONDENSED FINANCIAL STATEMENTS
----------
6. SEGMENT, GEOGRAPHIC AND MAJOR CUSTOMERS INFORMATION, CONTINUED
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 SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------- -------------------------
2000 1999 2000 1999
-------- -------- -------- --------
(IN THOUSANDS) (IN THOUSANDS)
Revenue:
United States $ 487 $ -- $ 603 $ 1,150
United Kingdom 8 65 52 65
Latin America 3,189 2,018 6,357 5,078
-------- -------- -------- --------
Total revenue $ 3,684 $ 2,083 $ 7,012 $ 6,293
======== ======== ======== ========
Income (loss) from operations:
United States $ (288) $ (417) $ (877) $ (197)
United Kingdom (129) (43) (239) (56)
Latin America 1,425 458 2,673 1,538
Middle East (140) -- (251) --
Corporate (33) (145) (109) (222)
-------- -------- -------- --------
Total income (loss)from
operations $ 835 $ (147) $ 1,197 $ 1,063
======== ======== ======== ========
JUNE 30, DECEMBER 31,
2000 1999
-------- ------------
(IN THOUSANDS)
Assets:
United States $ 7,272 $ 6,574
United Kingdom 1,030 1,840
Latin America 4,759 6,993
Middle East 3,404 3,390
Corporate -- 193
-------- --------
Total assets $ 16,465 $ 18,990
======== ========
F-7
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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; the ability of
our existing cash reserves and cash flows from operations to cover our ongoing
cash requirements; 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.
OnSite's activities include use of our ITD technology to address hydrocarbon
contamination problems and hydrocarbon recycling and reclamation opportunities
at heavy
12
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 June 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 (the two in the Arabian Gulf
region and the 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 JUNE 30, 2000 AND
1999
Summary. During the second quarter of 2000, we incurred a net loss
of $83,000 as compared to a 1999 second quarter net loss of $748,000. Our
$665,000 reduction in net loss was primarily attributable to a 57% increase in
equipment utilization and a more favorable contract mix resulting in a 76%
increase in revenue during the second quarter of 2000.
Revenue and Gross Margin. Revenue of $3.7 million during the second
quarter of 2000 generated a $1.9 million gross margin (52% of revenue) as
compared to revenue of $2.1 million and gross margin of $1.0 million (47% of
revenue) in the comparable 1999 quarter. The 76% increase in revenue was due to
57% higher ITD utilization during the second quarter of 2000, combined with a
more favorable contract mix during the second quarter. On average, we had 5.5
ITD Units in operation during the second quarter of 2000 as compared to 3.5
units in the second quarter of 1999.
Selling, General and Administrative ("SGA") Expenses. SGA expenses
during the second quarter of 2000 were 2% higher than the year ago quarter, a
much lower increase than the increase in revenue as noted above, consistent with
our efforts to contain expenses.
Amortization of Engineering Design and Developed Technology. This
represents the amortization of Acquired Engineering Design and Technology costs,
an intangible asset related 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.
13
Interest Income. The reduction in interest income resulted from
lower average cash balances during the second quarter of 2000.
Interest Expense. During the second quarter of 2000, $240,000 of
interest expense was incurred (including amortization of debt issuance costs of
$60,000), compared to interest expense of $323,000 for the second quarter of
1999 (including amortization of debt issuance costs of $122,000).
Other Income (Expense). Other income for the second quarter of 2000
is mainly composed of foreign currency translation gains. 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 second quarter of 2000, the re-measurement process resulted in
moderate USD gains in our Colombian and Mexican subsidiaries based on
strengthening of the USD against those currencies during the quarter.
Income Taxes. The reported tax provision in the second quarter of
2000 relates essentially to foreign income taxes incurred by our 50%-owned
subsidiary in Colombia. The 1999 second quarter provision also relates
essentially to the Colombia 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 the second quarter of 2000
and 1999 essentially 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.
COMPARISON OF OPERATING RESULTS - SIX MONTHS ENDED JUNE 30, 2000 AND
1999
Summary. During the first half of 2000, we incurred a net loss of
$640,000 as compared to 1999 first half net loss of $419,000. Our $221,000
decline in first half net income was due primarily to the cost of equipment
relocations during the first quarter of 2000 and the sale of an ITD unit during
the first quarter of 1999, only partially offset by 34% higher equipment
utilization in the first half of 2000.
Revenue and Gross Margin. Revenue of $7.0 million during the first
half of 2000 generated a $3.4 million gross margin (48% of revenue) as compared
to revenue of $6.3 million and gross margin of $3.2 million (50% of revenue) in
the comparable 1999 six month period. The increase in revenue was due to 34%
higher equipment utilization versus last year, partially offset by the sale of
an ITD Unit to a 50%-owned subsidiary in the first quarter of 1999. On average,
we had 5.1 ITD Units in operation during the first half of 2000 as compared to
3.8 units in the first half of 1999. The 2% 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 during the first quarter of 2000.
14
Selling, General and Administrative ("SGA") Expenses. SGA expenses
during the first half of 2000 were 6% higher than the year ago period due to
increased levels of marketing activity in our served markets, combined with
higher professional fees, however, as a percent of revenue, SGA expenses for the
first half of 2000 were about 1% lower than the first half of 1999.
Amortization of Engineering Design and Developed Technology. This
represents the amortization of Acquired Engineering Design and Technology costs,
an intangible asset related 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 half of 2000.
Interest Expense. During the first half of 2000, $513,000 of
interest expense was incurred (including amortization of debt issuance costs of
$151,000), compared to interest expense of $601,000 for the first half of 1999
(including amortization of debt issuance costs of $244,000, partly offset by
$45,000 of interest capitalized in connection with the first quarter 1999
construction of ITD Units).
Other Income (Expense). Other income for the first half of 2000 is
mainly composed of foreign exchange currency translation gains. 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 half of 2000, the re-measurement process resulted USD gains
mainly in our Latin American subsidiaries based on a strengthening of the USD
against those currencies, with the largest gain of $33,000 in our Colombian
subsidiary.
Income Taxes. The reported tax provision in the first half of 2000
relates entirely to foreign income taxes incurred by our 50%-owned subsidiary in
Colombia. The first half of 1999 provision also relates mainly to the Colombia
subsidiary. During both comparative periods 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 the first half of 2000 and
1999 essentially 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 June 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 and bank term financing.
We estimate that our existing cash reserves and cash flows from
operations will be sufficient to cover our cash requirements for the next twelve
months (not including the construction of additional
15
ITD units as discussed above). However, we have no credit facility or other
committed sources of capital. To the extent our existing cash reserves and cash
flows from operations are insufficient to meet future cash requirements, we may
need to raise additional capital through the sale of additional equity or the
issuance of debt securities. Such financing may not be available on terms
acceptable to us or at all. The sale of additional equity or convertible debt
securities may result in dilution to our stockholders.
16
PART II -- OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Our annual meeting of stockholders was held in Houston, Texas on
April 24, 2000 for the purpose of voting on the proposals described below.
Proxies for the meeting were solicited pursuant to Regulation 14A under the
Securities Exchange Act of 1934 and there were no solicitations in opposition to
our solicitation.
The holders of common stock approved the election of the following
three directors, each to serve for a term of one year by the following vote:
Votes For Votes Against Abstaining
James S. Percell 6,861,577 -0- 64,910
Bryan Sharp 6,861,577 -0- 64,910
Albert M. Wolford 6,861,577 -0- 64,910
The holders of Series B Convertible Stock approved the election of
the following director, to serve for a term of one year by the following vote:
Votes For Votes Against Abstaining
David L. Warnock 2,733,686 -0- -0-
The holders of common stock ratified the appointment of
PricewaterhouseCoopers LLP as our independent accountants for the fiscal
year ending December 31, 2000 by the following vote:
Votes For 6,886,327
Votes Against 28,000
Abstaining 13,100
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit No. 27 -- Financial Data Schedule.
(b) Reports on Form 8-K
None
17
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.
ENVIRONMENTAL SAFEGUARDS, INC.
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Date: August 7, 2000 By: /s/ James S. Percell
James S. Percell, President
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Date: August 7, 2000 By: /s/ Ronald L. Bianco
Ronald L. Bianco, Chief Financial Officer