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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, 1999
[ ] 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 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)
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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 7, 1999, there were 10,105,944 shares of common stock, $.001 par
value, outstanding.
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ENVIRONMENTAL SAFEGUARDS, INC.
CONTENTS
PART I
FINANCIAL INFORMATION
ITEM 1. Financial Statements
Consolidated Balance Sheets as of March 31, 1999 and December 31, 1998
Consolidated Statements of Operations for the
three months ended March 31, 1999 and 1998
Consolidated Condensed Statements of Cash Flows for the three
months ended March 31, 1999 and 1998
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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PART I
ITEM 1. Financial Statements
The information required by this Item 1 is included in this
report as set forth in the "Index to Financial Statements" on
page F-1.
4
ENVIRONMENTAL SAFEGUARDS, INC.
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CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
For the three months ended March 31, 1999 and 1998
(Unaudited)
5
ENVIRONMENTAL SAFEGUARDS, INC.
CONSOLIDATED BALANCE SHEETS
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(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
MARCH 31, DECEMBER 31,
1999 1998
ASSETS (UNAUDITED) (NOTE)
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Current assets:
Cash and cash equivalents $ 3,935 $ 4,792
Accounts receivable 3,955 1,734
Equipment held for sale 1,953 1,953
Prepaid expenses 301 273
Deferred taxes 50 51
Other assets 35 270
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Total current assets 10,229 9,073
Property and equipment, net 9,352 8,256
Acquired engineering design and
technology, net 2,732 2,835
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Total assets $22,313 $20,164
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LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 2,077 $ 1,735
Current portion of capital lease
obligation 279 648
Accounts payable 1,475 628
Accrued liabilities 1,050 569
Income taxes payable - 62
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Total current liabilities 4,881 3,642
Long-term debt 5,866 6,636
Minority interest 3,516 2,073
Commitments and contingencies
Stockholders' equity:
Preferred stock; Series B convertible;
voting, $.001 par value (aggregate
liquidation value - $2,897,700);
5,000,000 shares authorized; 2,733,686
shares issued and outstanding 3 3
Preferred stock; Series C non-conver-
tible, non-voting, cumulative; $.001 par
value (aggregate liquidation value -
$4,000,000); 400,000 shares authorized,
issued and outstanding 1 1
Common stock; $.001 par value; 50,000,000
shares authorized; 10,092,944 and
10,092,444 shares issued and outstanding
at March 31, 1999 and December 31, 1998,
respectively
10 10
Additional paid-in capital 14,318 14,318
Accumulated deficit (6,282) (6,519)
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Total stockholders' equity 8,050 7,813
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Total liabilities and stockholders'
equity $22,313 $20,164
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Note: The consolidated balance sheet at December 31, 1998 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 STATEMENTS OF OPERATIONS
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(In thousands, except share amounts)
Three Months
Ended March 31,
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1999 1998
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Service revenue $ 4,210 $ 2,569
Cost of providing services 2,018 1,181
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Gross margin 2,192 1,388
Selling, general and administrative
expenses 865 879
Amortization of acquired engineering design
and technology 102 102
Research and development 15 -
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Income from operations 1,210 407
Other income (expenses):
Interest income 51 89
Interest expense (278) (322)
Foreign currency transaction losses (5) -
Other - 9
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Income before provision for income taxes
and minority interest 978 183
Provision for income taxes 356 273
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Income (loss) before minority interest 622 (90)
Minority interest (293) (171)
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Net income (loss) $ 329 $ (261)
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Net income (loss) available to common
stockholders $ 142 $ (454)
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Basic earnings (loss) per common share $ 0.01 $ (0.05)
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Weighted average number of basic common
shares outstanding 10,092 9,322
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Diluted earnings (loss) per common share $ 0.01 $ (0.05)
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Weighted average number of diluted common
shares outstanding 14,934 9,322
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See accompanying notes.
F-2
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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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1999 1998
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Cash flows from operating activities:
Net income (loss) $ 329 $ (261)
Adjustment to reconcile net income (loss)
to net cash provided (required) by
operating activities: 570 (502)
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Net cash provided (required) by
operating activities 899 (763)
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Cash flows from investing activities:
Purchase of property and equipment (867) (417)
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Cash flows from financing activities:
Payments on long-term debt (428) (240)
Payments on capital leases (369) (230)
Dividends on Series C preferred stock (92) (97)
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Net cash required by financing activities (889) (567)
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Net decrease in cash and cash equivalents (857) (1,747)
Cash and cash equivalents, beginning of period 4,792 6,686
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Cash and cash equivalents, end of period $ 3,935 $ 4,939
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Supplemental disclosure of cash flow information:
Cash paid for interest $ 283 $ 277
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Cash paid for income taxes $ 421 $ 328
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See accompanying notes.
F-3
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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, 1999 are not
necessarily indicative of the results that may be expected for the year
ended December 31, 1999. For further information, refer to the
consolidated financial statements and footnotes thereto included in the
Company's annual report on Form 10-K for the year ended December 31,
1998.
2. Comprehensive Income
Effective January 1, 1998, the Company adopted Statement of Financial
Accounting Standard ("SFAS") No. 130, "Reporting Comprehensive Income".
Comprehensive income includes such items as unrealized gains or losses on
certain investment securities and certain foreign currency translation
adjustments. The Company's financial statements include none of the
additional elements that affect comprehensive income. Accordingly,
comprehensive income and net income are identical.
3. Non-Cash Investing and Financing Activities
During the quarter ended March 31, 1999 the Company engaged in certain
non-cash investing and financing activities and other non-cash
transactions. In one transaction, the Company received an interest in an
ITD Unit valued at $1,150,000 in exchange for increased minority interest
in a subsidiary. In a second transaction, the Company transferred
$545,000 net ITD Unit costs from property and equipment to equipment held
for sale.
Continued
F-4
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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 foreign subsidiaries which have produced
taxable income in the jurisdictions in which they operate (primarily in
Colombia and Venezuela in 1999 and Colombia in 1998). The Company has
provided deferred tax valuation allowances for cumulative net operating
tax losses in all jurisdictions, including the United States, in which
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.
5. Earnings Per Share
Basic earnings per common share are based on the weighted average number
of common shares outstanding in each year and after preferred stock
dividend requirements. Diluted earnings per common share assume that any
dilutive convertible debentures and convertible preferred shares
outstanding at the beginning of each year were converted at those dates,
with related interest, preferred stock dividend requirements and
outstanding common shares adjusted accordingly. It also assumes that
outstanding common shares were increased by shares issuable upon exercise
of those stock options for which market price exceeds exercise price,
less shares which could have been purchased by the Company with related
proceeds. The convertible preferred stock and outstanding stock options
and warrants were not included in the computation of diluted earnings per
common share for 1998 since it would have resulted in an antidilutive
effect.
The following table sets forth the computation of basic and diluted
earnings per share:
March 31,
1999 1998
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(In thousands)
Numerator:
Net income (loss) $ 329 $ (261)
Series C preferred stock dividends (93) (99)
Accretion of discount on Series C
preferred stock (94) (94)
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Numerator for basic earnings per
share-income available to common
stockholders 142 (454)
Numerator for diluted earnings per
share-income available to common
stockholders after assumed conversions 142 (454)
Continued
F-5
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ENVIRONMENTAL SAFEGUARDS, INC.
SELECTED NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
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5. Earnings Per Share, continued
Denominator:
Denominator for basic earnings per
share-weighted average shares 10,092 9,322
Effect of dilutive securities:
Employee stock options 1,406 -
Warrants 702 -
Convertible Series B preferred stock 2,734 -
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Dilutive potential common shares 4,842 -
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Denominator for diluted earnings per
share-adjusted weighted average
shares and assumed conversions $ 14,934 $ 9,322
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Basic earnings per share $ 0.01 $ (0.05)
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Diluted earnings per share $ 0.01 $ (0.05)
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6. Segment, Geographic and Major Customers Information
The Company currently operates in the environmental remediation and
hydrocarbon reclamation/recycling services. Substantially all revenues
result from the sale of services using the Company's ITD units. The
Company's reportable segments under FAS No. 131 are based upon geographic
area and all intercompany revenue and expenses are eliminated in
computing revenues and operating income (loss).
A significant portion of the Company's foreign operations were conducted
by the Company's 50% owned subsidiary in Colombia. The Company's
Colombian and Venezuelan subsidiaries operate with the U.S. dollar as
their functional currency and, accordingly, no cumulative translation
adjustment is presented in the accompanying balance sheet.
The corporate component of operating income (loss) represents corporate
general and administrative expenses. Corporate assets include cash and
cash equivalents, and restricted cash investments.
Following is a summary of segment information:
Continued
F-6
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ENVIRONMENTAL SAFEGUARDS, INC.
SELECTED NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
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6. Segment, Geographic and Major Customers Information, continued
1999 1998
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(In thousands)
Service Revenue:
United States $ 1,150 $ 723
Latin America 3,060 1,846
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Total service revenue $ 4,210 $ 2,569
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Income From Operations:
United States $ 219 $ 51
Latin America 1,068 440
Corporate (77) (84)
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Total income from operations $ 1,210 $ 407
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Assets:
United States $ 9,725 $ 7,947
Latin America 7,789 8,499
Middle East 2,300 -
Corporate 2,499 3,718
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Total assets $ 22,313 $ 20,164
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F-7
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ITEM 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
The following discussion should be read in conjunction with the
Company's consolidated financial statements and related notes included elsewhere
in this Report. See, Financial Statements.
Information Regarding and Factors Affecting Forward-looking Statements
The Company is 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, 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 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. 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
limitation, 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, 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; the demand for, and price level of, the Company's
services; competitive factors; the actual useful life of the Company's ITD
Units; the evolving industry and technology standards; the ability to protect
proprietary technology; the dependence on key personnel; the effect of business
interruption due to political unrest; the foreign exchange fluctuation risk; and
the ability of the Company to maintain acceptable utilization rates on its
equipment. The Company has no obligation to update or revise these
forward-looking statements to reflect the occurrence of future events or
circumstances.
Overview
The Company is engaged in the development, production and sale of
environmental reclamation and recycling technologies and services. Substantially
all of the Company's technologies and services are provided through its
subsidiary, OnSite Technology, L.L.C., ("OnSite") and the Company is devoting
substantially all of its efforts to the development of markets for OnSite's
services. The Company is currently providing reclamation and recycling services
to companies engaged in land-based oil and gas exploration, and
other industrial applications.
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.
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Oil and gas exploration and other types of industrial activities, often
produce significant quantities of petroleum-contaminated drill cuttings and
waste, from which the Company's Indirect Thermal Desorption ("ITD") process can
extract and recover the hydrocarbons as re-useable or re-saleable liquids, and
produce recycled soil compliant with environmental regulations. The Company has
expanded 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.
On December 17, 1997, the Company acquired the remaining 50% interest
in OnSite from Parker Drilling Co. giving the Company complete control of the
ITD technology owned by OnSite, and providing the Company with a wholly-owned
operating subsidiary that forms the cornerstone of the Company's future
operations.
The Company has focused essentially all of its attention on its now
wholly owned business operations in OnSite. OnSite was formed as a means for
assembling the capital necessary to build and improve the ITD Units and to
generate market awareness and acceptance of ITD technology. The Company expects
that a substantial portion of its revenues will continue to be generated from
international major oil and gas industry participants, as well as from other
industrial applications.
In November 1996, OnSite formed a 50/50 joint company, OnSite Colombia,
Inc. ("OnSite Colombia") with a group of South American investors. OnSite
Colombia was established to provide hydrocarbon contaminated soil reclamation
and recycling services to oil and gas industry participants operating in
Colombia.
In January, 1998, OnSite Venezuela, Inc. ("OnSite Venezuela"), OnSite's
100% owned subsidiary, commenced operations to provide hydrocarbon contaminated
soil reclamation and recycling services to oil and gas industry participants
operating in Venezuela.
In December, 1998, OnSite formed a 50/50 joint venture company, OnSite
Arabia, Inc., ("OnSite Arabia"), to provide hydrocarbon contaminated soil
reclamation and recycling services to oil and gas industry participants
operating in the Arabian Gulf region.
In April, 1999, OnSite formed OnSite Environmental U.K., Ltd., a 100%
owned subsidiary, for operations in the Aberdeen, Scotland area.
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RESULTS OF OPERATIONS
COMPARISON OF OPERATING RESULTS -- QUARTERS ENDED MARCH 31, 1999 AND 1998
Summary. For the quarter ended March 31, 1999, the Company generated a net
income of $329,000, as compared to a loss of $(261,000) during the comparative
quarter in 1998. The $590,000 increase in profitability was primarily due to
higher gross profits in Colombia and Venezuela, and the gross margin realized
with the sale of an ITD system to the Company's 50%-owned subsidiary, OnSite
Arabia, Inc.
Revenues and Gross Margin. Service revenue of $4.2 million for 1999
generated a $2.2 million gross margin (52% of revenue) as compared to service
revenue of $2.6 million for 1998 which generated a $1.4 million gross margin
(54% of revenue). Four ITD systems were in operation during each comparative
quarter: three in Colombia and one in Venezuela in 1999, and three in Colombia
and one in Louisiana in 1998. The $1.6 million increase in 1999 service revenue
was due to increased revenue per unit in Colombia, combined with the sale of an
ITD system to a 50%-owned subsidiary. The 2% lower gross margin percentage was
primarily due to a slightly higher cost profile for the ITD system operating in
Venezuela as compared to the unit that operated in Louisiana during 1998.
Selling, General and Administrative (SGA") Expense. SGA expense for each
comparative quarter remained consistent at approximately $865,000 which is
indicative of a leveling off of SGA expense at the Company's present level of
service revenue.
Amortization of Engineering Design and Developed Technology. This expense
represents 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. During 1999 and 1998, the Company earned interest income
from temporarily invested working capital which was obtained from the long-term
debt issued in December 1997 and June 1998. Reduced interest income for 1999
was primarily due to lower average daily cash balances available to invest in
short term interest-bearing securities.
Interest Expense. The decrease in 1999 interest expense is primarily due
to capitalization of construction period interest related to certain ITD Units
under construction. Interest expense for both quarters related to the debt
incurred to fund the Company's December 1997 purchase of Parker's 50% interest
in OnSite. Interest expense for both quarters included amortization of debt
issuance costs of $122,000.
Income taxes. The Company's reported tax provision in 1999 related to
foreign income taxes incurred by OnSite Colombia, a 50% owned consolidated
subsidiary of OnSite, and by OnSite Venezuela, a wholly owned subsidiary.
(During 1998 the tax provision was solely due to OnSite Colombia).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 these 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 reduce the Company's
effective tax rate. There can be no assurance that the NOLs and foreign tax
credits will be realized.
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LIQUIDITY AND CAPITAL RESOURCES
During 1997 and 1996, 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 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. In the 1997
private placement, the Company received $6 million in proceeds from senior
secured notes and a commitment by the investors for an additional $5 million of
long-term debt, provided that the Company remains in compliance with the loan
covenants of the secured notes. The Company subsequently borrowed the
additional $5 million in June 1998.
The Company has and will continue to make capital expenditures for ITD
Units, and at March 31, 1999, had commitments of approximately $190,000
remaining to complete the remaining two ITD Units currently under construction.
Substantially all of the Company's expenditures for property and equipment
during the quarter ended March 31, 1999 were for the construction of ITD Units.
The Company plans to finance additional future ITD Units through a combination
of surplus operating cash flows, additional third party sale leaseback
transactions, bank term financing, and potentially an additional sale of
equity. There can be no assurances that the Company will be able to obtain this
additional financing.
The Company expects that existing cash reserves, cash flows from
operations and potentially available financing for additional ITD Units will be
sufficient to cover the Company's cash requirements for 1999. However, there
can be no assurance that existing sources of cash will cover the Company's 1999
cash flow requirements.
Impact of Year 2000
The Year 2000 issue is the result of computer programs being written
using two digits rather than four to define the applicable year. Any of the
Company's computer programs that have time sensitive software
may recognize a date using"00" as the year 1900 rather than the year 2000. This
could result in a system failure or miscalculation causing disruption of
business activities.
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Based on ongoing assessments, the Company believes that no significant
modifications of existing computer software will be required. The Company
believes that its computer systems will function properly with respect to dates
in the year 2000 and thereafter. The Company's ITD units are not dependent on
computer software or hardware, and therefore the Year 2000 issue is not expected
to pose material operational problems. The Company also believes that costs
related to the Year 2000 issue have not and will not be significant and will not
exceed $10,000.
The Company has assessed its relationships with significant suppliers
and major customers to determine the extent to which the Company is vulnerable
to any third party's failure to remedy their own Year 2000 issues. Based on
these assessments, management believes that significant exposure does not exist
with respect to third parties. Management has developed a contingency plan to
address potential Year 2000 problems that could arise. This plan includes
identification of alternative supplies for critical parts and components needed
to mitigate the possibility of interruptions in business operations.
PART II
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
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 hereunto duly authorized.
ENVIRONMENTAL SAFEGUARDS, INC.
Date: May 11, 1999 By: /s/ James S. Percell
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James S. Percell, President
Date: May 11, 1999 By: /s/ Ronald L. Bianco
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Ronald L. Bianco,
Chief Financial Officer
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INDEX TO EXHIBITS
EX-27 -- Financial Data Schedule