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, 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
AT AUGUST 13, 2001, 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 3
Item 1. Financial Statements 3
Consolidated Condensed Balance Sheet as of June 30, 2001 4
(unaudited) and December 31, 2000.
Unaudited Consolidated Condensed Statement of Operations for the 5
three months and six months ended June 30, 2001 and 2000.
Unaudited Consolidated Condensed Statement of Cash Flows for the 6
six months ended June 30, 2001 and 2000.
Selected Notes to Unaudited Consolidated Condensed Financial 7
Statements.
Item 2. Management's Discussion and Analysis of Financial Condition and 11
Results of Operations
PART II -- OTHER INFORMATION 14
Item 4. Submission of Matters to a Vote of Securities Holders 14
Item 6. Exhibits and Reports on Form 8-K 15
SIGNATURES
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3
PART I -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
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4
ENVIRONMENTAL SAFEGUARDS, INC.
CONSOLIDATED CONDENSED BALANCE SHEET
---------------
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<Table>
<Caption>
JUNE 30,
2001 DECEMBER 31,
(UNAUDITED) 2000
----------- ------------
ASSETS
Current assets:
Cash and cash equivalents $ 1,161 $ 3,068
Accounts receivable 906 1,023
Other current assets 148 105
------- --------
Total current assets 2,215 4,196
Property and equipment, net 7,844 8,929
Acquired engineering design and technology, net 1,815 2,019
Other assets 22 9
------- --------
Total assets $11,896 $ 15,153
======= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 5,311 $ 2,945
Accounts payable 109 156
Dividends payable 303 225
Accrued interest 497 220
Other accrued liabilities 415 688
Income taxes payable -- 220
------- --------
Total current liabilities 6,635 4,454
Long-term debt, net of current portion 0 2,163
Minority interest 2,104 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 (11,792) (9,285)
------- --------
Total stockholders' equity 3,157 5,664
------- --------
Total liabilities and stockholders' equity $11,896 $ 15,153
======= ========
</Table>
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)
<Table>
<Caption>
THREE MONTHS SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
----------------------------- ----------------------------
2001 2000 2001 2000
-------------- -------------- -------------- ------------
Revenue $ 807 $ 3,684 $ 1,396 $ 7,012
Cost of revenue 881 1,742 1,759 3,626
-------- -------- -------- --------
Gross margin (74) 1,942 (363) 3,386
Selling, general and administrative
expenses 719 986 1,340 1,948
Amortization of acquired engineering
design
and technology 102 102 204 204
Research and development 15 19 35 37
-------- -------- -------- --------
Income (loss) from operations (910) 835 (1,942) 1,197
Other income (expense):
Interest income 14 7 24 14
Interest expense (247) (240) (480) (513)
Other 12 18 23 56
-------- -------- -------- --------
Income (loss) before provision for income
taxes and minority interest (1,131) 620 (2,375) 754
Provision for income taxes 70 450 120 829
-------- -------- -------- --------
Income (loss) before minority interest (1,201) 170 (2,495) (75)
Minority interest 43 (253) 177 (565)
-------- -------- -------- --------
Net loss $ (1,158) $ (83) $ (2,318) $ (640)
======== ======== ======== ========
Net loss available to common stockholders $ (1,246) $ (196) $ (2,507) $ (901)
======== ======== ======== ========
Basic and dilutive loss per common share $ (0.12) $ (0.02) $ (0.25) $ (0.09)
======== ======== ======== ========
Weighted average shares outstanding 10,112 10,112 10,112 10,112
======== ======== ======== ========
</Table>
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)
<Table>
<Caption>
SIX MONTHS
ENDED JUNE 30,
----------------------------------
2001 2000
--------------- --------------
Cash flows from operating activities:
Net loss $ (2,318) $ (640)
Adjustment to reconcile net
loss to net cash provided (used) by
Operating activities 1,198 2,677
-------- -------
Net cash provided (used) by operating
Activities (1,120) 2,037
-------- -------
Cash flows from investing activities:
Purchases of property and equipment (6) (85)
-------- -------
Cash flows from financing activities:
Payments on long-term debt -- (899)
Distribution to minority owners (669) (1,096)
Dividends on preferred stock (112) (214)
--------- -------
Net cash used by financing
Activities (781) (2,209)
-------- -------
Net decrease in cash and cash equivalents (1,907) (257)
Cash and cash equivalents, beginning of
Period 3,068 1,944
-------- -------
Cash and cash equivalents, end of period $ 1,161 $ 1,687
======== =======
</Table>
The accompanying notes are an integral part of these
unaudited consolidated condensed financial statements.
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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 six months ended June
30, 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 $3,857,000 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 June 30, 2001, the
Company's current liabilities exceeded its current assets by
$4,420,000. These factors raise substantial doubt about the Company's
ability to continue as a going concern.
The Company is currently seeking to obtain service 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). However, to the extent the Company does not achieve sustaining
profitability and cash flow, the Company may be required to seek
deferral of all remaining obligations amounting to $3,263,000, of which
$610,000 is due in September 2001.
The Company's viability as a going concern is dependent on the
continued restructuring of its obligations and/or capital infusions,
the repositioning of its asset base and the achievement of a sustaining
level of profitability. The accompanying financial statements do not
include any adjustments that might be necessary if the Company is
unable to continue as a going concern.
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.
Management has evaluated the carrying value of long-lived assets,
including associated intangibles. An evaluation of recoverability is
performed by comparing the estimated future undiscounted cash flows
associated with the asset to the asset's carrying amount to determine
if a write-down to market value or discounted cash flow is required.
Given the
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homogeneous nature and geographic deployment flexibility of such
assets, and based upon a recent evaluation by management, an impairment
of the Company's long-lived assets was not deemed necessary.
3. LONG-TERM DEBT
On March 5, 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 provided for an initial 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, based on the Company's involvement 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"), all deferrals
were extended to July 8, 2001 and are now being extended from month to
month until the consummation of a Financing Transaction or the
termination of good faith negotiations. Additionally, the Company
received a three-month deferral of preferred dividends due in March,
with a 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.
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 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:
<Table>
<Caption>
THREE MONTHS SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
--------------------------------- -------------------------------
2001 2000 2001 2000
----------------- -------------- --------------- --------------
Federal statutory rate (34)% 34% (34)% 34%
Foreign income taxes 6 73 5 110
Change in valuation allowance 34 (34) 34 (34)
-- -- --- ---
Effective income tax rate 6% 73% 5% 110%
== === === ===
</Table>
As of June 30, 2001, for U.S. federal income tax reporting purposes,
the Company has approximately $9,403,000 of unused net operating
losses ("NOL's") available for carryforward to future years. The
benefit from carryforward of such NOLs will expire during the years
ended December 31, 2001 to 2020. The benefit from utilization of NOL
carryforwards could be subject to significant limitations if
additional material ownership changes occur in the Company. As of June
30, 2001, the Company had approximately $834,000 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 2005.
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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 six months ended June 30, 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 at June
30, 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:
<Table>
<Caption>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30 JUNE 30,
---------------------------------- ---------------------------------
2001 2000 2001 2000
---------------- -------------- --------------- --------------
(IN THOUSANDS) (IN THOUSANDS)
Net loss $(1,158) $ (83) $(2,318) $ (640)
Preferred stock dividends:
Series C -- (113) -- (214)
Series D (88) -- (189) --
Accretion of discount on
Series C preferred stock -- -- -- (47)
------- ----- ------- -------
Net loss available to common
stockholders $(1,246) $(196) $(2,507) $ (901)
======= ===== ======= =======
</Table>
6. 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.
Following is a summary of segment information:
<Table>
<Caption>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
---------------------------------- -------------------------------
2001 2000 2001 2000
---------------- ---------------- ---------------- -------------
(IN THOUSANDS) (IN THOUSANDS)
Revenue:
United States $ -- $ 487 $ -- $ 603
United Kingdom -- 8 -- 52
Latin America 807 3,189 1,396 6,357
------- ------- ------- -------
Revenue $ 807 $ 3,684 $ 1,396 $ 7,012
======= ======= ======= =======
Income (loss) from operations:
United States $ (482) $ (288) $(1,117) $ (877)
United Kingdom (144) (129) (286) (239)
Latin America (90) 1,425 (223) 2,673
Middle East (85) (140) (159) (251)
Corporate (109) (33) (157) (109)
------- ------- ------- -------
Income (loss) from
operations $ (910) $ 835 $(1,942) $ 1,197
======= ======= ======== =======
</Table>
<Table>
<Caption>
JUNE 30, DECEMBER 31,
2001 2000
------------------------------- -----------------------------
(IN THOUSANDS)
Assets:
United States $ 4,124 $ 5,891
United Kingdom 1,004 1,173
Latin America 2,379 4,624
Middle East 3,451 3,440
Corporate 938 25
-------- --------
Total assets $ 11,896 $ 15,153
======== ========
</Table>
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7. SUPPLEMENTAL NON-CASH TRANSACTIONS
<Table>
<Caption>
SIX MONTHS ENDED
JUNE 30,
2001 2000
--------------- ------------
(IN THOUSANDS)
Issuance of warrants in connection
with long-term debt agreement $ -- $ 438
Dividends declared but not yet
paid $ 189 $ --
</Table>
8. NEW ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board issued Financial
Accounting Standard ("SFAS") No. 142, "Goodwill and Other Intangible
Assets." SFAS No. 142 eliminates the amortization of goodwill and
requires that goodwill be reviewed annually for impairment. SFAS No.
142 also requires that the useful lives of previously recognized
intangible assets be reassessed and the remaining amortization periods
be adjusted accordingly. SFAS No. 142 is effective for fiscal years
beginning after December 15, 2001 and affects all goodwill and other
intangible assets recognized on the Company's balance sheet at that
date, regardless of when the assets were initially recognized. The
Company has not yet determined the effect of SFAS No. 142 on its
financial statements.
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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, 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 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.
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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.
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 August 13, 2001, our fleet of ten ITD Units is dispersed
geographically as follows: one in Venezuela, two in Mexico, one in Scotland, two
in the Arabian Gulf region and four in the USA. Two of the ITD units are
currently operating in Mexico, all remaining ITD units are either undergoing
routine maintenance or awaiting contract operations. We fully-own eight of the
ten units, and have a 50% joint-company ownership in the two Arabian Gulf region
units.
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, 2001 AND 2000
Summary. During the second quarter of 2001, we incurred a net
loss of $1,158,000 as compared to a 2000 second quarter net loss of $83,000. Our
$1,075,000 increase in net loss was primarily 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 decreased due to
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 $0.8 million during the
second quarter of 2001 generated a $0.1 million negative gross margin as
compared to revenue of $3.7 million and gross margin of $1.9 million in the
comparable 2000 quarter. The decrease in revenue and gross margin was due to a
substantial drop in ITD utilization during the second quarter of 2001, where on
average we had 2.0 units in operation in the second quarter of 2001 as compared
to 5.2 units in the second quarter of 2000 (more than 80% of the decreased
utilization was due to the completion of contract operations in Colombia at the
end of 2000).
Selling, General and Administrative ("SGA") Expenses. SGA
expenses during the second quarter of 2001 were 27% 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 an 8-year estimated economic life.
Interest Income. The increase in interest income resulted from
higher average cash balances available for short-term investment during the
second quarter of 2001.
Interest Expense. During the second quarter of 2001, $247,000 of
interest expense was incurred (including amortization of debt issuance costs of
$78,000), compared to interest expense of $240,000 for the second quarter of
2000 (including amortization of debt issuance costs of $60,000).
Income Taxes. The reported tax provision in the second quarter of
2001 relates essentially to foreign income taxes incurred by our Mexican
subsidiary. The 2000 second quarter provision relates to our 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.
Minority Interest. Minority interest for the second quarter of
2001 reflects our 50% minority partner's interest in the net
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loss of OnSite Arabia. During the comparable quarter of 2000, the minority
interest primarily reflects our 50% minority partner's interest in the net
income of OnSite Colombia.
COMPARISON OF OPERATING RESULTS - SIX MONTHS ENDED JUNE 30, 2001 AND 2000
Summary. For the six months ended June 30, 2001, we incurred a
net loss of $2,318,000 as compared to a 2000 six-month loss of $640,000. Our
$1,678,000 increase in net loss for 2001 was due primarily 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 decreased
due to a 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 $1.4 million during the
first six months of 2001 generated a $0.4 million negative gross margin as
compared to revenue of $7.0 million and gross margin of $3.4 million in the
comparable 2000 six-month period. The decrease in revenue was due to a
substantial drop in ITD utilization during the first six months of 2001, where
on average we had 1.8 ITD units in operation in the first six months of 2001 as
compared to 5.0 units in the first six months of 2000 (nearly 90% of the
decreased utilization was due to the completion of contract operations in
Colombia at the end of 2000).
Selling, General and Administrative ("SGA") Expenses. SGA
expenses during the first six months of 2001 were 31% below the comparable six
months 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 an 8-year estimated economic life.
Interest Income. The increase in interest income resulted from
higher average cash balances available for short-term investment during the
first six months of 2001.
Interest Expense. During the first six months of 2001, $480,000
of interest expense was incurred (including amortization of debt issuance costs
of $155,000), compared to interest expense of $513,000 for the first six months
of 2000 (including amortization of debt issuance costs of $151,000).
Other Income (Expense). Other income for the first six months of
2001 and 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 six months of 2001 and 2000, the re-measurement process
resulted in USD gains mainly in our Latin American subsidiaries based on a
strengthening of the USD against those currencies.
Income Taxes. The reported tax provision in the first six months
of 2001 relates essentially to foreign income taxes incurred by our Mexican
subsidiary. The first six-month provision during 2000 relates to our Colombian
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.
Minority Interest. Minority interest for the first six months of
2001 reflects our 50% minority partner's interest in the net loss of OnSite
Colombia and OnSite Arabia. Minority interest for the first half of 2000
reflects our 50% minority partner's interest in the net income of OnSite
Colombia, partially offset by the net loss of OnSite Arabia.
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.
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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 and throughout 2001, we have
experienced a tightening of cash reserves and took actions to delay payments on
our senior secured debt.
We are currently seeking 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. However, to the
extent we do not achieve sustaining profitability and cash flow, we may be
required to seek deferral of all remaining obligations amounting to $3,263,000,
of which $610,000 is due in September 2001.
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.
To the extent our cash reserves and cash flows from operations
are insufficient to meet our 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.
We have evaluated the carrying value of our long-lived assets,
including associated intangibles. An evaluation of recoverability is performed
by comparing the estimated future undiscounted cash flows associated with the
asset to the asset's carrying amounts to determine if a write-down to market
value or discounted cash flow is required. Given the homogeneous nature and
geographic deployment flexibility of such assets, and based upon our recent
evaluation, an impairment of our long-lived assets was not deemed necessary.
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 in order
to minimize our risks associated with foreign exchange fluctuation and its
affect on our profitability.
Accounting Pronouncements
In June 2001, the Financial Accounting Standards Board issued
Financial Accounting Standard ("SFAS") No. 142, "Goodwill and Other Intangible
Assets." SFAS No. 142 eliminates the amortization of goodwill, and requires that
goodwill be reviewed annually for impairment. SFAS No. 142 also requires that
the useful lives of previously recognized intangible assets be reassessed and
the remaining amortization periods be adjusted accordingly. SFAS No. 142 is
effective for fiscal years beginning after December 15, 2001 and affects all
goodwill and other intangible assets recognized on our balance sheet at that
date, regardless of when the assets were initially recognized. We have not yet
determined the effect of SFAS No. 142 in our financial statements.
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 June
22, 2001 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:
<Table>
<Caption>
- ---------------------------------------------------------------------------------------------------------------------------------
Votes For Votes Against Abstaining
- ---------------------------------------------------------------------------------------------------------------------------------
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- ---------------------------------------------------------------------------------------------------------------------------------
James S. Percell 6,819,332 0 318,801
- ---------------------------------------------------------------------------------------------------------------------------------
Bryan Sharp 6,819,332 0 318,801
- ---------------------------------------------------------------------------------------------------------------------------------
Albert M. Wolford 6,819,332 0 318,801
- ---------------------------------------------------------------------------------------------------------------------------------
</Table>
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:
<Table>
<Caption>
- ---------------------------------------------------------------------------------------------------------------------------------
Votes For Votes Against Abstaining
- ---------------------------------------------------------------------------------------------------------------------------------
David L. Warnock 2,733,686 0 0
- ---------------------------------------------------------------------------------------------------------------------------------
</Table>
The holders of common stock ratified the appointment of
PricewaterhouseCoopers LLP as our independent accountants for the fiscal year
ending December 31, 2001 by the following vote:
<Table>
-----------------------------------------------------------
Votes For 7,071,933
-----------------------------------------------------------
Votes Against 47,300
-----------------------------------------------------------
Abstaining 18,900
-----------------------------------------------------------
</Table>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) Exhibits
None
(B) Reports on Form 8-K
None
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.
ENVIRONMENTAL SAFEGUARDS, INC.
Date: August 13, 2001 By: /s/ James S. Percell
James S. Percell, President
Date: August 13, 2001 By: /s/ Ronald L. Bianco
Ronald L. Bianco, Chief Financial Officer
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