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, 2001
[ ] 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
ON MAY 8, 2001, APPROXIMATELY 10,112,144 SHARES OF COMMON STOCK, $.001 PAR
VALUE, WERE OUTSTANDING.
TRANSITIONAL SMALL BUSINESS DISCLOSURE FORMAT (CHECK ONE): Yes [ ] No [X]
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ENVIRONMENTAL SAFEGUARDS, INC.
CONTENTS
PART I -- FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Condensed Balance Sheet as of March 31, 2001 (unaudited) and
December 31, 2000.
Unaudited Consolidated Condensed Statement of Operations for the three
months ended March 31, 2001 and 2000.
Unaudited Consolidated Condensed Statement of Cash Flows for the three
months ended March 31, 2001 and 2000.
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
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PART I -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
4
ENVIRONMENTAL SAFEGUARDS, INC.
CONSOLIDATED CONDENSED BALANCE SHEET
----------
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
MARCH 31,
2001 DECEMBER 31,
ASSETS (UNAUDITED) 2000
------------ ------------
Current assets:
Cash and cash equivalents $ 2,082 $ 3,068
Accounts receivable 251
1,023
Prepaid expenses 106
66
Deferred taxes 29
30
Other current assets 10 9
------------ ------------
Total current assets 2,478 4,196
Property and equipment, net 8,367 8,929
Acquired engineering design and
technology, net 1,917 2,019
Other assets 11 9
------------ ------------
Total assets $ 12,773 $ 15,153
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 3,573 $ 2,945
Accounts payable 141 156
Accrued liabilities 489 908
Dividends payable 326 225
Income taxes payable 61 220
------------ ------------
Total current liabilities 4,590 4,454
Long-term debt, net of current portion 1,622 2,163
Minority interest 2,158 2,872
Commitments and contingencies
Stockholders' equity:
Preferred stock; Series B convertible; voting,
$.001 par value (aggregate liquidation
value - $2,898); 5,000,000 shares authorized;
2,733,686 shares issued and outstanding 3 3
Preferred stock; Series D convertible, non-
voting, cumulative $.001 par value (aggregate
liquidation value $4,000); 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 14,935 14,935
Accumulated deficit (10,546) (9,285)
------------ ------------
Total stockholders' equity 4,403 5,664
------------ ------------
Total liabilities and stockholders' equity $ 12,773 $ 15,153
============ ============
The accompanying notes are an integral part of these unaudited
consolidated condensed financial statements.
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ENVIRONMENTAL SAFEGUARDS, INC.
UNAUDITED CONSOLIDATED CONDENSED STATEMENT OF OPERATIONS
----------
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
THREE MONTHS
ENDED MARCH 31,
----------------------
2001 2000
-------- --------
Revenue $ 589 $ 3,328
Cost of revenue 878 1,884
-------- --------
Gross margin (289) 1,444
Selling, general and administrative
expenses 621 962
Amortization of acquired engineering
design and technology 102 102
Research and development 20 18
-------- --------
Income (loss) from operations (1,032) 362
Other income (expense):
Interest income 10 7
Interest expense (233) (273)
Other 11 38
-------- --------
Income (loss) before provision for
income taxes and minority interest (1,244) 134
Provision for income taxes 50 379
-------- --------
Loss before minority interest (1,294) (245)
Minority interest 134 (312)
-------- --------
Net loss $ (1,160) $ (557)
======== ========
Net loss available to common stockholders $(1,261) $ (705)
======== ========
Basic and dilutive loss per common share $ (0.12) $ (0.07)
======== ========
Weighted average shares outstanding 10,112 10,112
======== ========
The accompanying notes are an integral part of these
unaudited consolidated condensed financial statements.
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ENVIRONMENTAL SAFEGUARDS, INC.
UNAUDITED CONSOLIDATED CONDENSED STATEMENT OF CASH FLOWS
----------
(IN THOUSANDS)
THREE MONTHS
ENDED MARCH 31,
--------------------
2001 2000
------- -------
Cash flows from operating activities:
Net loss $(1,160) $ (557)
Adjustment to reconcile net
loss to net cash provided by
(used by)operating activities 754 1,901
------- -------
Net cash provided by
(used by) operating activities (406) 1,344
------- -------
Cash flows from financing activities:
Payment on long-term debt -- (437)
Distribution to minority owners (580) (896)
Dividends on preferred stock -- (101)
------- -------
Net cash used by financing
activities (580) (1,434)
------- -------
Net decrease in cash and cash equivalents (986) (90)
Cash and cash equivalents, beginning of
period 3,068 1,944
------- -------
Cash and cash equivalents, end of period $ 2,082 $ 1,854
======= =======
The accompanying notes are an integral part of these
unaudited consolidated condensed financial statements.
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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, 2000.
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 AND CAPITAL RESOURCES
Since its inception, the Company has expended a significant portion of
its resources to develop markets and industry awareness of the
capabilities of its indirect thermal desorption remediation and
recycling/reclamation process. The Company's efforts have been focused
primarily on hydrocarbon soil contamination inherent in oil and gas
exploration activities. The Company's efforts to develop markets and
produce equipment have required significant amounts of capital including
long-term debt secured by the Company's ITD units and related ITD
technology. The Company has incurred recurring net losses and has been
dependent on revenue from a limited customer base to provide cash flows.
The Company completed its most significant service contract in December
2000 and is currently exploring ways to replace the revenue. During the
year ended December 31, 2000 and the quarter ended March 31, 2001, the
Company experienced a tightening of cash reserves and took actions to
delay payments on its senior secured debt. The delay of principal and
interest payments of approximately $1,233,000 in 2000 will result in the
Company's payment of approximately $3,825,000 of principal and interest
payments on senior secured debt in 2001. The 2001 debt payments and
expected continuing losses will further strain the Company's liquidity.
In addition, as of March 31, 2001, the Company's current liabilities
exceeded its current assets by $2,112,000. These factors raise
substantial doubt about the Company's ability to continue as a going
concern.
The Company is currently seeking to obtain contracts in the markets that
it serves and is also considering strategic alternatives including a
possible sale of all or substantially all of its assets. As part of its
strategic plan, effective March 1, 2001 the Company reached an agreement
with its primary lenders and holders of its outstanding preferred stock
that resulted in the Company remaining in compliance with covenants
provided in its senior secured debt agreement and stock agreements and
provided the Company with increased financial flexibility to continue its
pursuit of new market opportunities (See Note 3).
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The Company's long-term viability as a going concern is dependent on its
ability to generate backlog, the achievement of a sustaining level of
profitability, and the continued restructuring of its obligations and/or
capital infusions. The accompanying financial statements do not include
any adjustments that might be necessary if the Company is unable to
continue as a going concern.
3. LONG-TERM DEBT
On March 1, 2001 the Company entered into an agreement (the "Agreement")
with its primary lenders and holders of its outstanding preferred stock
that provided the Company with increased financial flexibility to
continue its pursuit of new market opportunities. The Agreement provides
for a three-month deferral of all principal and interest payments (both
currently due and previously deferred) due in March on the Company's
senior secured debt. At the end of the deferral period, if the Company is
engaged in good faith negotiations for its sale, the sale of a
subsidiary, the sale of substantially all of its assets, or the sale of
substantially all assets of its subsidiaries ("Financing Transaction"),
then all deferrals will be extended to July 8, 2001 and from month to
month thereafter until the consummation of the Financing Transaction or
the termination of the good faith negotiations. Additionally, the Company
received a three-month deferral of preferred dividends due in March, with
a possible continuing deferral on the same basis as the senior secured
debt. The Agreement was designed to allow the Company to conserve working
capital while strategic plans are being considered.
In exchange for the deferral of senior secured debt and preferred stock
dividend payments, the conversion price of the Series D Preferred Stock
was set at the default rate, or $0.37 per share. This change in the
conversion price results in further dilution to the Company's
stockholders. Based on an independent appraisal, no value was attributed
to this change in conversion feature.
4. 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 for a deferred tax valuation allowance 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 the change in valuation allowance
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
ENDED MARCH 31,
---------------
2001 2000
---- ----
Federal statutory rate (34)% 34%
Foreign income taxes 4 283
Change in valuation allowance 34 (34)
----
4% 283%
==== ====
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As of March 31, 2001, for U.S. federal income tax reporting purposes, the
Company has approximately $8,272,000 of unused net operating losses
("NOLs") available for carryforward to future years. The benefit from
carryforward of such NOLs will expire during the years ended December 31,
2001 to 2020. Because the Company's 1997 private placement of preferred
stock, combined with other private placements in 1996 and 1995, resulted
in more than a 50 percent change in shareholder ownership percentages,
the provisions of Section 382 of the Internal Revenue Code limit the
Company's ability to utilize approximately $3,600,000 of its NOL
carryforwards to reduce future taxable income and tax liabilities.
Additionally, because United States tax laws limit the time during which
NOL carryforwards may be applied against future taxable income, the
Company may be unable to take full advantage of its NOL for federal
income tax purposes should the Company generate taxable income. Based on
the above limitations, the Company has significant NOL carryforwards for
which realization of tax benefits is uncertain. The benefit from
utilization of NOL carryforwards could be subject to limitations if
additional material ownership changes occur in the Company. As of March
31, 2001 the Company had approximately $884,000 of foreign tax credit
carryforwards which can be offset against taxable income. The benefit
from carryforward of such foreign tax credits will expire during the
years ended December 31, 2002 to 2006.
5. LITIGATION
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. ("Duratherm") alleging (i) infringement of
U.S. patent no. 5,523,060, by the Company's ITD Units, which are its
primary revenue producing asset; (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 sought damages, exemplary damages, treble damages for
infringement and a permanent injunction (as well as attorneys fees and
interest). The amount of damages was not specified. The Company filed a
motion to dismiss on the grounds that Duratherm was not the proper party
to file suit on the patents (or alternatively that Duratherm needed to
add additional parties as plaintiff to the suit). This motion to dismiss
was granted by the court. Due to the pendent nature of the other claims
the entire case was dismissed. The court's decision was not appealed by
Duratherm. However, Duratherm could refile the lawsuit with the addition
of other parties. It could also refile the claims, unrelated to the
patent, in state court. The Company still believes that it has a
meritorious defense on the claims alleged in the original lawsuit and
will continue to vigorously defend against such claims if they are
reasserted. It is not possible at this time to determine the probability
of refiling the suit by Duratherm. The Company's insurance carrier denied
coverage with regard to certain claims included in the original suit, but
accepted the business disparagement claim subject to a reservation of
rights.
While there is no pending litigation against the Company, it is from time
to time involved in various other litigation incidental to its business,
which at times involves claims for significant monetary amounts, some of
which would not be covered by insurance.
F-6
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6. EARNINGS (LOSS) PER SHARE
The Company computes basic earnings (loss) 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
ended March 31, 2001 and 2000 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 19,457,368 shares as of March
31, 2001) 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
MARCH 31,
--------------------
2001 2000
------- -------
(IN THOUSANDS)
Net loss $(1,160) $ (557)
Preferred stock dividends:
Series C -- (101)
Series D (101) --
Accretion of discount on
Series C preferred stock -- (47)
------- -------
Net loss available to common
stockholders $(1,261) $ (705)
======= =======
7. SUPPLEMENTAL NON-CASH TRANSACTIONS
THREE MONTHS ENDED
MARCH 31,
--------------------
2001 2000
------- -------
(IN THOUSANDS)
Issuance of warrants in connec-
tion with long-term debt
agreement -- $ 438
Dividends declared but not yet paid $ 101 --
F-7
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8. SEGMENT 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.
THREE MONTHS ENDED
MARCH 31,
--------------------
2001 2000
------- -------
(IN THOUSANDS)
Revenue:
United States $ -- $ 116
United Kingdom -- 44
Latin America 589 3,168
------- -------
Total revenue $ 589 $ 3,328
======= =======
Income (loss) from operations:
United States $ (597) $ (579)
United Kingdom (142) (110)
Latin America (172) 1,248
Middle East (74) (111)
Corporate (47) (86)
------- -------
Total income (loss) from
operations $(1,032) $ 362
======= =======
MARCH 31, DECEMBER 31,
2000 2000
---------- ------------
(IN THOUSANDS)
Assets:
United States $ 4,515 $ 5,891
United Kingdom 1,099 1,173
Latin America 2,413 4,624
Middle East 3,421 3,440
Corporate 1,325 25
------- -------
Total assets $12,773 $15,153
======= =======
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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 unaudited
consolidated condensed financial statements and related notes included elsewhere
in this report, and with our Annual Report on Form 10-K for the year ended
December 31, 2000.
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
secure contracts for our ITD units; 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. 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
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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, the United Kingdom, and Colombia, and through our 50%-owned joint
company in the Arabian Gulf region. As of April 18, 2001, the 50% interest of
OnSite Colombia owned by the minority interest partners was acquired by Onsite,
making it a wholly-owned subsidiary of OnSite. The transaction, which included
OnSite's acquiring full-ownership of the two ITD units owned by OnSite Colombia,
did not result in a gain or loss to OnSite.
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.
Our fleet of ten ITD units is presently dispersed geographically as follows:
two in Colombia, one in Venezuela, two in Mexico, one in Scotland, two in the
Arabian Gulf region and two in Houston undergoing routine maintenance. We
fully-own eight of the ten units, and have a 50% joint-company ownership in the
two units in the Arabian Gulf region. As noted above, OnSite acquired
full-ownership of the two Colombia ITDs which were previously 50%-owned by
OnSite.
We recently received a contract for remediation and recycling services in
Mexico involving two of our ITD units. The contract is expected to commence
operations early in the second quarter.
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 - QUARTER ENDED MARCH 31, 2001 AND 2000
Summary. During the first quarter of 2001, we incurred a net loss of
$1,160,000 as compared to a 2000 first quarter net loss of $557,000. Our
$603,000 increase in net loss was primarily due to an 82% decrease in revenue
due to a substantial reduction in equipment utilization, most of which
resulted from the completion of contract operations in Colombia at the end of
2000. Gross margin was negative, due to the significant reduction in revenue and
due to the fixed nature of depreciation expense which is included in cost of
revenue.
Revenue and Gross Margin. Revenue of $0.6 million during the first quarter
of 2001 generated a $0.3 million negative gross margin as compared to revenue of
$3.3 million and positive gross margin of $1.4 million (43% of revenue) in the
comparable 2000 quarter. The decrease in revenue was due to a substantial
14
drop in ITD utilization during the first quarter of 2001, where on average we
had 1.5 ITD units in operation in the first quarter of 2001 (84% of the
decreased utilization was due to the completion of contract operations in
Colombia at the end of 2000) as compared to 4.7 units in the first quarter of
2000.
Selling, General and Administrative ("SGA") Expenses. SGA expenses during
the first quarter of 2001 were 35% below the comparable quarter in 2000
primarily due to the winding-down of contract operations in Colombia.
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 its 8-year estimated economic life.
Interest Expense. During the first quarter of 2001, $233,000 of interest
expense was incurred (including amortization of debt issuance costs of $78,000),
compared to interest expense of $273,000 for the first quarter of 2000 (which
includes amortization of debt issuance costs of $103,000).
Income Taxes. The reported tax provision in the first quarter of 2001
relates mainly to foreign income taxes incurred by our Mexican subsidiary; the
Colombian operation produced essentially zero tax provision due to the
completion of contract operations at the end of 2000. The 2000 first quarter
provision relates entirely to the Colombia subsidiary which was in full
operation at that time. 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.
Minority Interest. Minority interest for the first quarter of 2001 reflects
our 50% minority partner's interest in the net loss of OnSite Colombia, and to a
lesser extent the net loss of OnSite Arabia. During the comparable quarter of
2000, minority interest reflects our 50% minority partner's interest in the net
income of OnSite Colombia.
Liquidity and Capital Resources
We currently have no significant commitments for capital expenditures.
During the past three years, we have expended a significant portion of
our resources to develop markets and industry awareness of our ITD remediation
and recycling/reclamation process technology. Our efforts have been focused
primarily on hydrocarbon soil contamination inherent in oil and gas exploration
activities. Our efforts to develop markets and produce equipment have required
significant amounts of capital, including long-term debt secured by our ITD
units and related ITD technology.
We have incurred recurring net losses and have been dependent on
revenue from a limited customer base to provide cash flows. We completed our
most significant service contract in December 2000 and are currently exploring
ways to replace the revenue. During 2000 we experienced a tightening of cash
reserves and took actions to delay payments on our senior secured debt.
15
We are currently seeking to obtain service contracts in our served
markets and are considering strategic alternatives including the possible sale
of all or substantially all of our assets. As part of our strategic plan, in
August 2000, we reached an agreement with our primary lenders and holders of our
outstanding preferred stock that resulted in a six-month deferment of certain
principal, interest and preferred stock dividends, and in March 2001, we further
reached an agreement with the same parties that resulted in our continuing to
remain in compliance with covenants provided in our senior secured debt
agreement and preferred stock agreements. These agreements provide us with
increased financial flexibility to continue our pursuit of new market
opportunities.
Our viability as a going concern is dependent on our ability to
generate backlog, our achievement of a sustaining level of profitability, and
the continued restructuring of our obligations and/or capital infusions. There
can be no assurances, however, that we will remain in compliance with our
obligations, that we will increase ITD utilization or become sufficiently
profitable in a time frame necessary to meet our obligations.
The functional currency of our foreign operations (Colombia, Venezuela,
Mexico, Scotland and the Arabian Gulf region) is the U.S. dollar because
customer invoicing, customer receivables, imported equipment and many of the
operating cost factors are denominated in U.S. dollars. We plan to continue to
implement the same approach as other foreign operations come on line so as to
minimize our risks associated with foreign exchange fluctuation and its affect
on our profitability.
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, a former
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; (ii)
misappropriation and misuse of trade secrets and breach of confidentiality
relationship; (iii) tortuous interference with a business relationship; (iv)
civil conspiracy to commit the acts (ii)-(iii) listed above; and (v) business
disparagement. Plaintiff sought damages, exemplary damages, treble damages for
infringement and a permanent injunction (as well as attorneys fees and
interest). The amount of damages was not specified. OnSite filed a motion to
dismiss on the grounds that Duratherm was not the proper party to sue on the
patents (or alternatively that Duratherm needed to add additional parties as
plaintiff's to the suit). This motion to dismiss was granted by the court. Due
to the pendant nature of the other claims the entire case was dismissed. The
court's decision was not appealed by Duratherm. Duratherm could, however,
re-file the lawsuit with the addition of other parties. It could also refile the
claims unrelated to the patent in state court. OnSite still believes that it has
a meritorious defense on the claims alleged in the original lawsuit and will
continue to vigorously defend against such claims if they are reasserted. It is
not possible at this time to determine the probability of refiling the suit by
Duratherm. OnSite's insurance carrier denied coverage with regard to claims
(i)-(iv), but accepted the business disparagement claim (v) subject to a
reservation of rights.
16
While there is no pending litigation against our company, we are from
time to time involved in various other litigation incidental to our business,
which at times involve claims for significant monetary amounts, some of which
would not be covered by insurance.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
None
(b) Reports on Form 8-K
On March 1, 2001, we filed a report on Form 8-K, which report included
information under Item 5 "Other Information".
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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.
By: /s/ James S. Percell
Date: May 8, 2001 James S. Percell, President
By: /s/ Ronald L. Bianco
Date: May 8, 2001 Ronald L. Bianco, Chief Financial Officer