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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
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[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934.
For the Quarterly Period Ended: March 31, 1998
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
Commission File Number: 000-21953
ENVIRONMENTAL SAFEGUARDS, INC.
(Exact name of registrant as specified in its charter)
Nevada 87-0429198
(State or other jurisdiction (IRS Employer
of incorporation or organization) Identification No.)
2600 West Loop South, Suite 645
Houston, Texas 77054
(Address of principal executive offices, including zip code)
(713) 641-3838
(Registrant's telephone number, including area code)
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Indicate by check mark whether the registrant(1) has filed all reports
required to be filed by Section 13 or 15(d) of the Exchange Act of 1934 during
the preceding 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 ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS
Check whether the registrant filed all documents and reports required
to be filed by Section 12, 13 or 15(d) of the Exchange Act after the
distribution of securities under a plan confirmed by court. Yes [ ] No [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS
At May 12, 1998, there were 9,322,444 shares of common stock, $.001 par
value, outstanding.
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ENVIRONMENTAL SAFEGUARDS, INC.
CONTENTS
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PART I
FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of March 31, 1998 and
December 31, 1997
Consolidated Condensed Statements of Operations for the
three months ended March 31, 1998 and 1997
Consolidated Condensed Statements of Cash Flows for the three
months ended March 31, 1998 and 1997
Selected Notes to Consolidated Condensed Financial Statements
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Part II
OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
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Item 1. FINANCIAL STATEMENTS
The information required by this Item 1 is included in this
report as set forth in the "contents" page.
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ENVIRONMENTAL SAFEGUARDS, INC.
CONSOLIDATED BALANCE SHEETS
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(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
MARCH 31, DECEMBER 31,
1998 1997
ASSETS (UNAUDITED) (NOTE)
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Current assets:
Cash and cash equivalents $ 4,939 $ 6,686
Accounts receivable 2,149 1,554
Prepaid expenses 420 206
ITD Units and equipment held for sale 908 --
Deferred taxes 85 85
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Total current assets 8,501 8,531
Property and equipment, net 6,788 6,286
Acquired engineering design and
technology, net 3,140 3,242
Other assets 239 239
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Total assets $ 18,668 $ 18,298
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LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 847 $ 844
Current portion of capital lease
obligation 1,127 1,039
Accounts payable 1,315 480
Accrued liabilities 913 366
Income taxes payable 470 525
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Total current liabilities 4,672 3,254
Long-term debt 3,874 4,117
Capital lease obligation 775 1,093
Minority interest 499 628
Commitments and contingencies
Stockholders' equity:
Preferred stock; Series B convertible; voting,
$.001 par value (aggregate liquidation
value - $3,998,000); 5,000,000 shares
authorized; 3,771,422 shares issued and
outstanding 4 4
Preferred stock; Series C non-conver-
tible, non-voting, cumulative; $.001 par
value (aggregate liquidation value -
$4,000,000); 400,000 shares authorized,
issued and outstanding 1 1
Common stock; $.001 par value; 50,000,000
shares authorized; 9,322,444 and
9,282,265 shares issued and outstanding
at March 31, 1998 and December 31, 1997,
respectively 9 9
Unissued common stock -- 56
Additional paid-in capital 14,515 14,459
Accumulated deficit (5,681) (5,323)
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Total stockholders' equity 8,848 9,206
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Total liabilities and stockholders'
equity $ 18,668 $ 18,298
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Note: The consolidated balance sheet at December 31, 1997 has been derived from
the audited financial statements at that date but does not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. See accompanying notes.
F-1
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ENVIRONMENTAL SAFEGUARDS, INC.
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
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(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
THREE MONTHS
ENDED MARCH 31,
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1998 1997
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Service revenue $ 2,569 $ 705
Cost of providing services 1,181 324
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Gross margin 1,388 381
Selling, general and administrative
expenses (879) (339)
Amortization of acquired engineering design
and technology (102) --
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Income from operations 407 42
Other income (expenses):
Interest income 89 40
Interest expense (322) (80)
Foreign currency transaction losses -- (6)
Other 9 2
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Income (loss) before provision for income
taxes, minority interest and elimination
of pre-acquisition earnings of subsidiary 183 (2)
Provision for income taxes 273 80
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Loss before minority interest and elimination
of pre-acquisition earnings of subsidiary (90) (82)
Minority interest and elimination of
pre-acquisition earnings of subsidiary (171) (77)
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Net loss $ (261) $ (159)
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Net loss available to common stockholders $ (454) $ (159)
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Basic and dilutive net loss per common share $ (0.05) $ (0.02)
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Weighted average shares outstanding 9,322 8,191
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See accompanying notes.
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ENVIRONMENTAL SAFEGUARDS, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
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(IN THOUSANDS)
THREE MONTHS
ENDED MARCH 31,
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1998 1997
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Cash flows from operating activities:
Net loss $ (261) $ (159)
Adjustment to reconcile net loss to net cash
provided by operating activities: 309 566
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Net cash provided by operating
activities 48 407
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Cash flows from investing activities:
Purchase of property and equipment (1,325) (925)
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Cash flows from financing activities:
Payments on long-term debt (240) --
Net proceeds from sale of common stock -- 195
Payments on capital leases (230) --
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Net cash provided by financing activities (470) 195
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Net decrease in cash and cash equivalents (1,747) (323)
Cash and cash equivalents, beginning of period 6,686 3,584
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Cash and cash equivalents, end of period $ 4,939 $ 3,261
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Supplemental disclosure of cash flow information:
Cash paid for interest $ 277 $ --
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Cash paid for income taxes $ 328 $ --
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See accompanying notes.
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ENVIRONMENTAL SAFEGUARDS, INC.
SELECTED NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
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1. INTERIM FINANCIAL STATEMENTS:
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-Q and
Article 10 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of
management, all adjustments (consisting of normal recurring accruals)
considered necessary for a fair presentation have been included.
Operating results for the three-month period ended March 31, 1998 are not
necessarily indicative of the results that may be expected for the year
ended December 31, 1998. For further information, refer to the
consolidated financial statements and footnotes thereto included in the
Company's annual report on Form 10-KSB for the year ended December 31,
1997.
2. IMPACT OF THE ACQUISITION OF ONSITE TECHNOLOGY, L.L.C. ON THE
FINANCIAL STATEMENTS:
On December 17, 1997, the Company acquired Parker Drilling Company's 50%
interest in OnSite Technology, L.L.C. ("OnSite") and, accordingly, OnSite
became a wholly-owned consolidated subsidiary of the Company. Prior to
this transaction, the Company accounted for its 50% ownership interest in
OnSite on the equity method. This acquisition has been accounted for
using the purchase method of accounting and the results of operations and
cash flows of OnSite for the three months ended March 31, 1997 have been
presented on a consolidated basis with a deduction in the consolidated
statement of operations for preacquisition earnings attributable to
Parker's interest prior to December 17, 1997.
3. ITD UNITS AND EQUIPMENT HELD FOR SALE:
ITD Units and equipment held for sale at March 31, 1998 consisting of
finished goods (one refurbished ITD Unit and two new pumps) are stated at
the lower of cost or market value. Cost is determined using the specific
identification method.
Continued
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ENVIRONMENTAL SAFEGUARDS, INC.
SELECTED NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
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4. INCOME TAXES:
The Company consolidates its 50% owned subsidiary, OnSite Colombia, Inc.,
a Cayman Island company that conducts operations in Colombia. The Cayman
Island imposes no income tax on such operations. However, the operations
in Colombia are subject to Colombian federal and local taxes.
Accordingly, the Company has included in its financial statements the
Colombian income tax expense related to such operations. The difference
between the Federal statutory income tax rate and the Company's effective
income tax rate is primarily attributable to Colombian income taxes and
increases in valuation allowances for deferred tax assets relating to
U.S. net operating losses.
5. EARNINGS PER SHARE:
For the quarters ended March 31, 1998 and 1997, due to the fact that the
Company incurred net losses, all common stock equivalents have been
excluded from the calculation of earnings per share because their effect
is anti-dilutive. In future periods, the calculation of diluted earnings
per share may require that the common stock equivalents (totaling
9,300,251 shares at March 31, 1998) be included in the calculation of the
weighted average shares outstanding for periods in which net income is
reported, using the treasury stock method. Following is the
reconciliation of net loss to the net loss available to common
stockholders.
1998 1997
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(IN THOUSANDS)
Net loss $ (261) $ (159)
Less: Series C Preferred stock
dividends (99) --
Accretion of discount on
Class C preferred stock (94) --
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Net loss available to common
stockholders $ (454) $ (159)
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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 the
Company's unaudited consolidated financial statements and related notes thereto
included in this quarterly report and in the audited consolidated Financial
Statements and Managements Discussion and Analysis of Financial Condition and
Results of Operations ("MD&A") contained in the Company's 10-KSB for the year
ended December 31, 1997. Certain statements in the following MD&A 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 and under "Information Regarding and Factors Affecting
Forward Looking Statements".
OVERVIEW
The Company is engaged in the development, production and sale of
environmental reclamation and recycling technologies and services. The Company
is currently providing reclamation and recycling services to companies engaged
in land-based oil and gas exploration, and to offshore applications where drill
cuttings are barged to an accessible land based facility for recycling. Oil and
gas exploration often produces significant quantities of petroleum-contaminated
drill cuttings, from which the Company's Indirect Thermal Desorption ("ITD")
process can extract and recover the hydrocarbons as re-useable liquids, and
produce recycled soil compliant with environmental regulations.
The Company currently generates a substantial portion of its revenues
from major oil and gas industry participants operating in the U.S.A and in the
Republic of Colombia. The Company anticipates that its most likely future
geographic markets will be Venezuela, Mexico, Canada and other Western
Hemisphere countries. In December 1997, the Company reached an agreement with
Newpark Resources, Inc. to provide reclamation and recycling services in support
of offshore drilling activity in the Gulf of Mexico. In addition, the Company
intends to expand the activities of OnSite to include use of ITD technology to
address hydrocarbon contamination problems and hydrocarbon recycling and
reclamation opportunities at heavy industrial, refining and petrochemical sites,
as well as at Superfund, DoD and DoE sites.
The Company's present fleet of six ITD Units consists of four units
owned directly by the Company, plus two units owned by an affiliate of the
Company, OnSite Colombia, in which the Company holds a 50% interest. Additional
details on the six units are as follows:
o three units are operating in Colombia for a major oil and gas
participant under a two-year contract,
o one unit is in Venezuela, with a contract pending,
o one unit is under a one-year contract for services at a dock
in Louisiana where offshore drill cuttings are recycled, and
o one unit is being refurbished after completing contract
operations in Wyoming, and is held in inventory for sale to
potential third-party buyers in non-core geographic areas.
The Company has placed orders for four additional units for expected
delivery in the May-September 1998 timeframe, which would bring the fleet to 10
units at that time. There can be no assurance, however, that these units will be
delivered in the timeframe indicated.
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QUARTERLY FLUCTUATIONS
The Company's revenues may be affected by the timing and deployment of
ITD Units to customer drilling sites under existing contracts, and by the timing
of obtaining new contracts. Accordingly, the Company's 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
The Company's consolidated operating results have been significantly
affected by the acquisition of the remaining 50% interest in OnSite. In order to
provide a more meaningful period-to-period comparison of the Company's
operations, the results for the comparative first quarter of 1997 have been
presented on a consolidated basis, with a deduction in the consolidated
statement of operations for pre-acquisition earnings attributed to Parker
Drilling Company's interest prior to December 17, 1997. This change from the
equity method to the consolidated method of accounting for the Company's
investment in OnSite did not have an effect on net income.
For the quarter ended March 31, 1998, the Company reported a loss of
$261,000 as compared to a loss of $159,000 for the corresponding quarter in
1997. The net loss increase was primarily due to higher interest expense of
$242,000 and additional amortization and depreciation expense of $122,000 and
$102,000 respectively associated with the acquisition of Onsite. These factors
were partially offset by increased operating income due to two more ITD Units in
service as compared to 1997, and $49,000 additional interest income earned.
Additional line-by-line analysis follows:
Revenues and Gross Margin. The increase in service revenue and gross
margin in the first quarter of 1998 is essentially the result of placing two
additional ITD Units in service over the same period in 1997. Service revenue of
$2.6 million for the first quarter of 1998 was generated by four ITD Units in
service (three in Colombia and one in Louisiana), and produced gross margin of
$1.4 million, or 54% of revenue. In the first quarter of 1997, the Company
produced service revenue of $.7 million based on two units in service (one in
Colombia and one in Wyoming), which resulted in $.4 million gross margin, also
54% of revenue.
Selling, General and Administrative ("SG&A") Expense. SG&A expense
increased during 1998 in line with higher service revenues, increased regulatory
compliance, startup fees on entering the American Stock Exchange, and increased
business activity in general. The 1998 SG&A expense also included additions
and/or recruitment of more experienced personnel at the Corporate level in such
key areas as international operations, accounting/finance, engineering design
and procurement, regulatory matters and contract law. The number of management
employees increased, on a quarter ending basis, from six in 1997 to nine in
1998.
Amortization of Engineering Design and Developed Technology. Reflects
the amortization of Engineering Design and Developed 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. In 1998 the Company earned interest income of $89,000
primarily from investment of the proceeds from the $6 million of senior issued
debt secured in December 1997. During 1997 the Company earned interest of
$40,000 from investing the proceeds of $3 million in long term debt, which was
retired in December 1997.
Interest Expense. In 1998, the Company incurred interest expense of
$322,000 (which included the
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amortization of debt issuance costs of $122,000), compared to interest expense
of $80,000 in the comparable quarter in 1997 which related to the $3 million in
debt retired in December 1997. Interest expense increased as a result of
increased borrowings to fund the purchase of Parker's 50% interest in OnSite.
(See Note 2 to the Consolidated Condensed Financial Statements).
Income Taxes. The Company's reported tax provision in 1998 and 1997
related to foreign income tax incurred by OnSite Colombia, a 50% owned
consolidated subsidiary of OnSite. The Company has incurred net operating losses
("NOLs") in the U.S. in recent years, 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 Colombia 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. The
Company is implementing tax planning strategies, which if successful, may result
in the Company recognizing these deferred tax assets in future periods, which
could significantly reduce the Company's effective tax rate. There can be no
assurances that the NOL and foreign tax credits will be utilizable.
Elimination of Minority Interest. The minority interest for 1998 and
1997 reflects the 50% minority ownership's interest in the net income of OnSite
Colombia. In addition, in 1997, the pre-acquisition earnings representing 50% of
the results of OnSite operations are eliminated. (See Note 2 to the Consolidated
Condensed Financial Statements).
LIQUIDITY AND CAPITAL RESOURCES
During 1997, the Company raised additional debt and equity capital to
fund current operations, support the construction of ITD Units necessary for its
future growth, and acquire the remaining 50% of OnSite from Parker. In December
1997, the Company raised $14 million in a private placement of Series B
Convertible Preferred Stock, non-convertible Series C Preferred Stock, senior
secured notes and warrants to purchase the Company's Common Stock. The proceeds
from this private placement were primarily used to fund the $8 million
acquisition of the remaining 50% of OnSite, repay $3 million of long-term debt
to a Parker subsidiary, and provide the company with capital resources to
continue funding current operations and planned capital expenditures.
The Company received $6 million in proceeds from senior secured notes
(as part of the $14 million in funding described above) and a commitment by the
investors for an additional $5 million of long-term debt, provided that the
Company remains in compliance with certain loan covenants of the secured notes.
The most restrictive covenant requires the Company to maintain positive working
capital of at least $2 million, and precludes the Company from paying common
dividends. Management believes the Company is in compliance with all debt
covenants at March 31, 1998, but there can be no assurance that the Company will
continue to be in compliance with these covenants as of any subsequent date.
Prior to the $14 million in funding described above, in the first
quarter of 1997, the Company converted debt and related accrued interest
totaling $1,262,000 to equity and completed a Regulation D offering of its
Common stock. The proceeds from these transactions, along with the $3 million
long-term debt proceeds raised by the Company in December 1996, were used to
support operations throughout most of 1997.
During 1997 the Company entered into two sale-leaseback transactions
with third party lenders for two ITD Units operating in OnSite Colombia in order
to improve cash flows. The Company has and will continue to make capital
expenditures for ITD Units, and at December 31, 1997, had placed orders for four
additional units at an aggregate cost of approximately $4.6 million (of which
the Company incurred construction costs of approximately $1.2 million during the
first quarter of 1998). The Company plans to finance these additional ITD Units
through a combination of surplus operating cash flows, additional third party
sale-leaseback transactions, bank term financing, the outright sale of equipment
to third parties in non-
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core geographic areas and/or additional sales of equity. There can be no
assurances that the Company will be able to obtain this additional financing.
The functional currency of OnSite Colombia 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. The Company plans to
continue to implement the same approach as other foreign operations come on
stream in the course of conducting business abroad in an effort to minimize
risks associated with foreign exchange fluctuation and its affect on Company
profitability. However, there can be no assurance that the Company will be
successful in averting foreign exchange losses and associated risks in future
periods .
INFORMATION REGARDING AND FACTORS AFFECTING FORWARD LOOKING STATEMENTS
The Company is including the following cautionary statement in this
Quarterly Report on 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, or on behalf of the Company. 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 facts. Certain statements
contained herein are forward-looking statements and, accordingly, involve risks
and uncertainties which could cause actual results or outcomes to differ
materially from those expressed in the forward-looking statements. The Company's
expectations, beliefs and projections are expressed in good faith and are
believed by the Company to have a reasonable basis, including without
limitations, management's examination of historical operating trends, data
contained in the Company's records and other data available from third parties,
but there can be no assurance that management's expectation, beliefs or
projections will result, or be achieved, or be accomplished.
In addition to other factors and matters discussed elsewhere herein,
the following are important factors that, in the view of the Company, could
cause material adverse affects on the Company's financial condition and results
of operations: the ability of the Company to attain widespread market acceptance
of its technology; the ability of the Company to obtain acceptable forms and
amounts of financing to fund planned expansion efforts; demand for, and price
level of, the Company's services; competitive factors; the actual useful life of
ITD Units; evolving industry and technological standards; ability to protect
proprietary technology; dependence on key personnel; potential business
interruption due to political unrest; foreign exchange fluctuation risk; and the
ability of the Company to maintain acceptable utilization rates on its
equipment. The company disclaims any obligation to update any forward-looking
statements to reflect events or circumstances after the date hereof.
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Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits required by Item 601 of Regulation S-K
(i) Exhibit 27. Financial Data Schedule
(b) Reports on Form 8-K
The Company filed a report on Form 8-K dated December 17, 1997
reporting the acquisition or disposition of Assets.
Subsequently, on March 2, 1998, the Company filed Amendment
No. 1 to the Form 8-K reporting the financial statements of
OnSite Technology, L.L.C. and pro forma financial information
pursuant to Article II of Regulation S-X.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
ENVIRONMENTAL SAFEGUARDS, INC.
Date: May 11, 1998 By: /s/ James S. Percell
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James S. Percell, President
Date: May 11, 1998 By: /s/ Ronald L. Bianco
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Ronald L. Bianco,
Chief Financial Officer
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EXHIBIT INDEX
27 -- Financial Data Schedule