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: SEPTEMBER 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 NOVEMBER 3, 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 September 30, 2000
(unaudited) and December 31, 1999.
Unaudited Consolidated Condensed Statement of Operations for the
three months and nine months ended September 30, 2000 and 1999.
Unaudited Consolidated Condensed Statement of Cash Flows for the
nine months ended September 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 1. Legal Proceedings
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)
SEPTEMBER 30,
2000 DECEMBER 31,
(UNAUDITED) 1999
------------- ------------
ASSETS
Current assets:
Cash and cash equivalents $ 2,321 $ 1,944
Accounts receivable 1,467 3,579
Prepaid expenses 110 87
Deferred taxes 30 33
Other current assets 15 76
-------- --------
Total current assets 3,943 5,719
Property and equipment, net 9,313 10,835
Acquired engineering design and technology, net 2,121 2,427
Other assets 13 9
-------- --------
Total assets $ 15,390 $ 18,990
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 2,546 $ 2,098
Accounts payable 206 667
Accrued liabilities 545 772
Income taxes payable 366 618
-------- --------
Total current liabilities 3,663 4,155
Long-term debt, net of current portion 2,675 4,325
Minority interest 2,918 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-convertible, non-voting, cumulative;
$.001 par value (aggregate liquidation value - $4,000,000);
400,000 shares authorized; 0 and 400,000 shares issued and
outstanding at September 30, 2000 and December 31, 1999,
respectively -- 1
Preferred stock; Series D convertible, non-voting, cumulative
$.001 par value (aggregate liquidation value $4,000,000);
400,000 shares authorized, issued and outstanding at
September 30, 2000 1 --
Common stock; $.001 par value; 50,000,000 shares authorized;
10,112,144 shares issued and outstanding 10 10
Additional paid-in capital 14,935 14,329
Accumulated deficit (8,815) (7,387)
-------- --------
Total stockholders' equity 6,134 6,956
-------- --------
Total liabilities and stockholders' equity $ 15,390 $ 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 NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
-------------------- --------------------
2000 1999 2000 1999
-------- -------- -------- -------
Revenue $ 2,271 $ 3,062 $ 9,283 $ 9,355
Cost of revenue 1,328 1,392 4,934 4,491
-------- -------- -------- -------
Gross margin 943 1,670 4,349 4,864
Selling, general and administrative
expenses 870 897 2,818 2,727
Amortization of acquired engineering design
and technology 102 102 306 306
Research and development 15 45 52 122
-------- -------- -------- -------
Income (loss) from operations (44) 626 1,173 1,709
Other income (expense):
Interest income 6 24 20 114
Interest expense (267) (300) (780) (901)
Other (6) 4 30 (5)
-------- -------- -------- -------
Income (loss) before provision for income
taxes and minority interest (311) 354 443 917
Provision for income taxes 180 384 1,009 908
-------- -------- -------- -------
Income (loss) before minority interest (491) (30) (566) 9
Minority interest income (expense) 30 (287) (534) (745)
-------- -------- -------- -------
Net loss $ (461) $ (317) $ (1,100) $ (736)
======== ======== ======== =======
Net loss available to common stockholders $ (575) $ (503) $ (1,475) $(1,296)
======== ======== ======== =======
Basic and dilutive loss per common share $ (0.06) $ (0.05) $ (0.15) $ (0.13)
======== ======== ======== =======
Weighted average shares outstanding 10,112 10,106 10,112 10,101
======== ======== ======== =======
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)
NINE MONTHS
ENDED SEPTEMBER 30,
------------------------
2000 1999
------- -------
Cash flows from operating activities:
Net loss $(1,100) $ (736)
Adjustment to reconcile net
loss to net cash provided by
operating activities 4,010 2,811
------- -------
Net cash provided by operating
activities 2,910 2,075
------- -------
Cash flows from investing activities:
Purchases of property and equipment (136) (2,211)
------- -------
Cash flows from financing activities:
Payments on long-term debt (899) --
(1,574)
Payments on capital lease obligation -- (648)
Distribution to minority owners (1,170) --
(300)
Proceeds from sale of common stock -- 11
Dividends on preferred stock (328) (279)
------- -------
Net cash used by financing
activities (2,397) (2,790)
Net increase (decrease) in cash and
cash equivalents 377 (2,926)
Cash and cash equivalents, beginning of
period 1,944 4,792
------- -------
Cash and cash equivalents, end of period $ 2,321 $ 1,866
======= =======
The accompanying notes are an integral part of these
unaudited consolidated condensed financial statements.
F-3
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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.
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.
Certain reclassifications have been made to prior year and prior quarter
amounts to conform with the current year and current quarter
presentation.
2. LIQUIDITY AND CAPITAL RESOURCES
The Company estimates that existing cash reserves and cash flows from
operations will be sufficient to cover cash requirements through
September 30, 2001 (not including the construction of any 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 will need to successfully 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. Further, the sale of additional equity or convertible debt
securities may result in dilution to the Company's stockholders.
As part of a plan to deal with liquidity issues, the Company obtained a
six-month deferral for payment of the quarterly installment on its
Continued
F-4
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ENVIRONMENTAL SAFEGUARDS, INC.
SELECTED NOTES TO UNAUDITED CONSOLIDATED
CONDENSED FINANCIAL STATEMENTS
----------
2. LIQUIDITY AND CAPITAL RESOURCES, CONTINUED
long-term debt, including interest, that was due September 4, 2000 in the
amount of $692,623, a six-month deferral for payment of the
principal-only portion of the quarterly installment on its long-term debt
that is due December 4, 2000 in the amount of $540,642 and a six-month
deferral for payment of the dividend on Series D preferred stock that is
due October 1, 2000 in the amount of $112,444. In order to obtain the
deferrals, the Company exchanged 400,000 newly issued shares of Series D
convertible Preferred Stock for Series C non-convertible Preferred Stock
held by the Company's primary lender. The newly issued shares of Series D
preferred stock are convertible into common stock at a conversion price
of $2.25 per share until December 31, 2002, and a conversion price of
$1.00 after December 31, 2002. In the event of a default under the loan
agreement, the conversion price shall be the lesser of $1.00 per share or
the averaging thirty-day trailing price.
The conversion feature associated with the 400,000 shares of Series D
Preferred Stock was valued at $168,000 based on independent appraisal.
The value of the conversion feature has been treated as additional
interest and is being amortized to expense over the remaining term of the
debt using the effective interest method. Other than the conversion
feature of the Series D Preferred Stock, its features and preferences are
similar to the Series C Preferred Stock.
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:
THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
------------------- -------------------
2000 1999 2000 1999
------ ------ ------ ------
Federal statutory rate (34)% 34% 34% 34%
Foreign (primarily Colombian)
income taxes 58 108 228 99
Change in valuation allowance 34 (14) (34) (14)
Other - (20) - (20)
---- ---- ---- ----
58% 108% 228% 99%
==== ==== ==== ====
Continued
F-5
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ENVIRONMENTAL SAFEGUARDS, INC.
SELECTED NOTES TO UNAUDITED CONSOLIDATED
CONDENSED FINANCIAL STATEMENTS
----------
3. INCOME TAXES, CONTINUED
At September 30, 2000, for U.S. federal income tax reporting purposes,
the Company has approximately $5,459,506 of unused net operating losses
available for carryforward to future years. Because of uncertainty of
future operating profits, the Company has fully reserved the resulting
deferred tax asset. The benefit from carryforward of such net operating
losses will expire during the years ended December 31, 2001 to 2020. At
September 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 net
operating losses and foreign tax credits will be utilized.
4. LEGAL PROCEEDINGS
In August 2000, litigation was instituted against the Company styled as
Duratherm, Inc. vs. OnSite Technology, LLC, Waste Control Specialists,
LLC and Kevin Nowlin; In the United States District Court for the
Southern District of Texas; Civil Action No. H-00-2727. This is a lawsuit
against OnSite Technology, LLC, the Company's wholly-owned subsidiary
("OnSite"), a customer of OnSite ("WCS") and a former employee of OnSite
("Nowlin") by Duratherm, Inc. alleging (i) infringement of U.S. patent
no. 5,523,060, the Company's primary revenue producing asset (ITD Unit);
(ii) misappropriation and misuse of trade secrets and breach of
confidential relationship; (iii) tortuous interference with a business
relationship; (iv) civil conspiracy to commit the acts (ii)-(iii) listed
above; and business disparagement. The plaintiff seeks damages, exemplary
damages, treble damages for infringement and a permanent injunction (as
well as attorneys fees and interest). The amount of damages has not been
specified. The Company has filed an answer in the lawsuit denying all
material allegations, pleading a number of affirmative offenses and
making a counterclaim that requests that the plaintiff's patent be found
invalid, unenforceable and not being infringed upon by the Company. The
lawsuit is in its early stages. All of the defendants have answered and
defendant Nowlin has filed for a motion to dismiss on jurisdictional
grounds. There has been no significant discovery at this point and no
settlement discussions. The Company believes it has a meritorious defense
to this action and will vigorously defend its position.
Continued
F-6
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ENVIRONMENTAL SAFEGUARDS, INC.
SELECTED NOTES TO UNAUDITED CONSOLIDATED
CONDENSED FINANCIAL STATEMENTS
----------
5. 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 nine months ended September 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 10,269,598 shares at September 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:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2000 1999 2000 1999
-------- -------- -------- --------
(IN THOUSANDS) (IN THOUSANDS)
Net loss $ (461) $ (317) $(1,100) $ (736)
Series C and D Preferred stock
dividends (114) (93) (328) (279)
Accretion of discount on
Series C preferred stock - (93) (47) (281)
------- ------- ------- -------
Net loss available to common
stockholders $ (575) $ (503) $(1,475) $(1,296)
======= ======= ======= =======
6. SUPPLEMENTAL INFORMATION FOR STATEMENT OF CASH FLOWS
NINE MONTHS ENDED
SEPTEMBER 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 - 1,968
Continued
F-7
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ENVIRONMENTAL SAFEGUARDS, INC.
SELECTED NOTES TO UNAUDITED CONSOLIDATED
CONDENSED FINANCIAL STATEMENTS
----------
6. SUPPLEMENTAL INFORMATION FOR STATEMENT OF CASH FLOWS, CONTINUED
Transferred ITD Unit cost to pro-
perty and equipment from equipment
held for sale - 3,043
Exchange of Series D convertible
Preferred stock for Series C non-
convertible Preferred stock 168 -
7. 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 NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------ -------------------
2000 1999 2000 1999
-------- -------- -------- --------
(IN THOUSANDS) (IN THOUSANDS)
Revenue:
United States $ 600 $ - $ 1,203 $ 1,150
United Kingdom - 535 52 600
Latin America 1,671 2,527 8,028 7,605
------- ------- ------- -------
Total revenue $ 2,271 $ 3,062 $ 9,283 $ 9,355
======= ======= ======= =======
Income (loss) from operations:
United States $ (47) $ (218) $ (904) $ (395)
United Kingdom (137) 271 (376) 215
Latin America 297 742 2,970 2,280
Middle East (97) - (348) -
Corporate (60) (169) (169) (391)
------- ------- ------- -------
Total income (loss)from
operations $ (44) $ 626 $ 1,173 $ 1,709
======= ======= ======= =======
Continued
F-8
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ENVIRONMENTAL SAFEGUARDS, INC.
SELECTED NOTES TO UNAUDITED CONSOLIDATED
CONDENSED FINANCIAL STATEMENTS
----------
7. SEGMENT, GEOGRAPHIC AND MAJOR CUSTOMERS INFORMATION, CONTINUED
SEPTEMBER 30, DECEMBER 31,
2000 1999
------------- ------------
(IN THOUSANDS)
Assets:
United States $ 7,390 $ 6,574
United Kingdom 901 1,840
Latin America 3,673 6,993
Middle East 3,421 3,390
Corporate 5 193
------- -------
Total assets $15,390 $18,990
======= =======
F-9
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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.
14
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 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 September 2000, our fleet of ten ITD Units is dispersed
geographically as follows: two in Colombia, one in Venezuela, two 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 SEPTEMBER 30, 2000
AND 1999
Summary. During the third quarter of 2000, we incurred a net loss
of $461,000 as compared to a 1999 third quarter net loss of $317,000. Our
$144,000 increase in net loss was primarily due to a 26% decrease in revenue due
to lower equipment utilization, a corresponding drop in gross margin, and a less
favorable contract mix.
Revenue and Gross Margin. Revenue of $2.3 million during the third
quarter of 2000 generated a $.9 million gross margin (42% of revenue) as
compared to revenue of $3.1 million and gross margin of $1.7 million (55% of
revenue) in the comparable 1999 quarter. The decrease in revenue and gross
margin was due to 26% lower ITD utilization during the third quarter of 2000,
combined with a less favorable contract mix during the 2000 third quarter. On
15
average, we had 3.7 ITD units in operation during the third quarter of 2000 as
compared to 5.0 units in the third quarter of 1999.
Selling, General and Administrative ("SGA") Expenses. SGA expenses
during the third quarter of 2000 were about even with the year ago quarter.
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 available for short-term investment during the third
quarter of 2000.
Interest Expense. During the third quarter of 2000, $267,000 of
interest expense was incurred (including amortization of debt issuance costs of
$66,000), compared to interest expense of $300,000 for the third quarter of 1999
(including amortization of debt issuance costs of $122,000).
Other Income (Expense). Other income or expense for the third
quarter of 2000 and 1999 is mainly composed of foreign currency translation
gains or 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.
Income Taxes. The reported tax provision in the third quarter of
2000 relates essentially to foreign income taxes incurred by our 50%-owned
subsidiary in Colombia and Mexico, partially offset by a foreign tax credit
applied in our Scotland subsidiary. The 1999 third quarter provision relates
mainly to the Colombia subsidiary, and also to a lesser extent to the Venezuela,
Mexico and Scotland subsidiaries. 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) Income. Minority interest income for the third
quarter of 2000 essentially reflects our 50% minority partner's interest in the
net loss of OnSite Arabia partly offset by net income in OnSite Colombia. During
the comparable quarter of 1999, the minority interest expense primarily reflects
our 50% minority partner's interest in the net income of OnSite Colombia.
16
COMPARISON OF OPERATING RESULTS - NINE MONTHS ENDED SEPTEMBER 30,
2000 AND 1999
Summary. For the nine months ended September 30, 2000, we incurred
a net loss of $1,100,000 as compared to a 1999 nine month loss of $736,000. Our
$364,000 increase in net loss for 2000 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 7% higher
equipment utilization in the first nine months of 2000.
Revenue and Gross Margin. Revenue of $9.3 million during the first
nine months of 2000 generated a $4.3 million gross margin (47% of revenue) as
compared to revenue of $9.4 million and gross margin of $4.9 million (52% of
revenue) in the comparable 1999 nine month period. The slight decrease in
revenue was due to the sale of an ITD unit to a 50%-owned subsidiary during the
first quarter of 1999 (not repeated during 2000), mostly offset by 7% higher
equipment utilization during 2000. On average, we had 4.5 ITD units in operation
during the first nine months of 2000 as compared to 4.2 units in the first nine
months of 1999. The 5% 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, combined with less favorable
contract mix during the 2000 nine month period.
Selling, General and Administrative ("SGA") Expenses. SGA expenses
during the first nine months of 2000 were 3% higher than the year ago period due
to increased levels of marketing activity in our served markets, combined with
higher professional fees. SGA expenses for the first nine months of 2000 were
about 1% of revenue higher than the comparable period 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 available for short-term investment during the first
nine months of 2000.
Interest Expense. During the first nine months of 2000, $780,000 of
interest expense was incurred (including amortization of debt issuance costs of
$217,000), compared to interest expense of $901,000 for the first nine months of
1999 (including amortization of debt issuance costs of $366,000, 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 nine months 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 nine months 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.
17
Income Taxes. The reported tax provision in the first nine months
of 2000 relates essentially to foreign income taxes incurred by our 50%-owned
subsidiary in Colombia, and our wholly-owned subsidiaries in Mexico and
Venezuela. The first nine months of 1999 provision relates mainly to the
Colombia and Mexico subsidiaries. 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 nine months of
2000 and 1999 primarily reflects our 50% minority partner's interest in the net
income of OnSite Colombia for each respective year. The amount of minority
interest decreased mainly due to lower net income in the Colombian subsidiary.
Liquidity and Capital Resources
As of September 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.
In September 2000, we reached an agreement with our primary lenders
and holders of our outstanding preferred stock that resulted in our remaining in
compliance with the covenants under our loan and stock agreements, provided us
short-term increased financial flexibility and cash flow for the pursuit of new
market opportunities. The agreement resulted in a six-month deferral of our
principal and interest payment due in September of 2000 and a six-month deferral
of our principal-only payment due in December of 2000 on our long-term debt
obligation, and a six-month deferral of preferred dividends due in October of
2000. As a result of this transaction, we recorded $168,000 of discount on the
long-term debt offset by additional paid-in capital, representing the difference
in the fair market value of the Series C preferred stock and the new Series D
preferred stock based upon an independent appraisal.
We estimate that our existing cash reserves and cash flows from
operations will be sufficient to cover our cash requirements through the nine
months ended September 30, 2001 (not including the construction of additional
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 will
need to successfully 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. Further, the sale of additional equity or
convertible debt securities may result in further dilution to our stockholders.
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PART II - OTHER INFORMATION
ITEM 1. Legal Proceedings
In August 2000, litigation was instituted against us styled as
Duratherm, Inc. vs OnSite Technology LLC, Waste Control Specialists LLC and
Kevin Nowlin; In the United States District Court for the Southern District of
Texas; Civil Action No. H-00-2727. This is a lawsuit against OnSite Technology
LLC ("OnSite"), a customer of OnSite ("WCS") and a former employee of OnSite
("Nowlin") by Duratherm, Inc. alleging (i) infringement of U.S. patent no.
5,523,060, OnSite's primary revenue-producing asset (ITD unit); (ii)
misappropriation and misuse of trade secrets and breach of confidential
relationship; (iii) tortuous interference with a business relationship; (iv)
civil conspiracy to commit the acts (ii)-(iii) listed above; and business
disparagement. The plaintiff seeks damages, exemplary damages, treble damages
for infringement and a permanent injunction (as well as attorneys fees and
interest). The amount of damages has not been specified. OnSite has filed an
answer in the lawsuit denying all material allegations, pleading a number of
affirmative offenses and making a counterclaim that requests that the
plaintiff's patent be found invalid, unenforceable and not being infringed upon
by OnSite. The lawsuit is in its early stages. All of the defendants have
answered and defendant Nowlin has filed for a motion to dismiss on
jurisdictional grounds. There has been no significant discovery at this point
and no settlement discussions. OnSite believes it has a meritorious defense to
this action and will vigorously defend its position.
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit No. 27 -- Financial Data Schedule.
(2) Reports on Form 8-K
On August 28, 2000, we filed a report dated August 17, 2000, on
Form 8-K.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.
ENVIRONMENTAL SAFEGUARDS, INC.
Date: November 3, 2000 By: /s/ James S. Percell
James S. Percell, President
Date: November 3, 2000 By: /s/ Ronald L. Bianco
Ronald L. Bianco, Chief Financial Officer
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EXHIBIT INDEX
Exhibit No. 27 -- Financial Data Schedule