1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES
EXCHANGE ACT OF 1934.
FOR THE QUARTERLY PERIOD ENDED: SEPTEMBER 30, 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)
CHECK WHETHER THE ISSUER (1) HAS FILED ALL REPORTS REQUIRED
TO BE FILED BY SECTION 13 OR 15(d) OF THE EXCHANGE ACT DURING
THE PAST 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE
REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2)
HAS BEEN SUBJECT TO SUCH FILING REQUIREMENTS FOR THE PAST 90 DAYS.
YES [X] NO [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS
AT NOVEMBER 5, 1999, APPROXIMATELY 10,110,944 SHARES OF COMMON STOCK, $.001 PAR
VALUE, WERE OUTSTANDING.
TRANSITIONAL SMALL BUSINESS DISCLOSURE FORMAT (CHECK ONE): YES [ ] NO [X]
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ENVIRONMENTAL SAFEGUARDS, INC.
CONTENTS
PART I -- FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Condensed Balance Sheets as of September 30, 1999
and December 31, 1998
Consolidated Condensed Statements of Operations for the three
months and nine months ended September 30, 1999 and 1998
Consolidated Condensed Statements of Cash Flows for the nine
months ended September 30, 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 2. Changes in Securities
Item 6. Exhibits and Reports on Form 8-K
SIGNATURES
3
PART I -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
FOR THE THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
(UNAUDITED)
4
ENVIRONMENTAL SAFEGUARDS, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
----------
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
SEPTEMBER 30,
1999 DECEMBER 31,
(UNAUDITED) 1998
------------- ------------
ASSETS
Current assets:
Cash and cash equivalents $ 1,866 $ 4,792
Accounts receivable 3,070 1,734
Equipment held for sale 878 1,953
Prepaid expenses 104 273
Deferred income taxes 39 51
Other current assets 165 270
---------- ----------
Total current assets 6,122 9,073
Property and equipment, net 10,297 8,256
Acquired engineering design and
technology, net 2,529 2,835
---------- ----------
Total assets $ 18,948 $ 20,164
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 1,931 $ 1,735
Current portion of capital lease
obligations -- 648
Accounts payable 635 628
Accrued liabilities 810 569
Income taxes payable 229 62
---------- ----------
Total current liabilities 3,605 3,642
Long-term debt, net of current portion 4,866 6,636
Minority interest 3,668 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-convertible,
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; 10,110,944 and
10,092,444 shares issued and outstanding
at September 30, 1999 and December 31,
1998, respectively 10 10
Additional paid-in capital 14,329 14,318
Accumulated deficit (7,534) (6,519)
---------- ----------
Total stockholders' equity 6,809 7,813
---------- ----------
Total liabilities and stockholders'
equity $ 18,948 $ 20,164
========== ==========
The accompanying notes are an integral part of these
consolidated condensed financial statements.
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ENVIRONMENTAL SAFEGUARDS, INC.
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
----------
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
------------------------ ------------------------
1999 1998 1999 1998
-------- -------- -------- --------
Service revenue $ 3,062 $ 2,281 $ 9,355 $ 7,147
Cost of services 1,402 1,147 4,521 3,450
-------- -------- -------- --------
Gross margin 1,660 1,134 4,834 3,697
Selling, general and administrative
expenses 897 1,038 2,727 2,758
Amortization of acquired engineering design
and technology 102 102 306 306
Research and development 45 -- 122 --
-------- -------- -------- --------
Income (loss) from operations 616 (6) 1,679 633
Other income (expense):
Interest income 24 89 114 222
Interest expense (300) (415) (901) (1,030)
Other 14 9 25 27
-------- -------- -------- --------
Income (loss) before provision for income
taxes and minority interest 354 (323) 917 (148)
Provision for income taxes 384 482 908 917
-------- -------- -------- --------
Income (loss) before minority interest (30) (805) 9 (1,065)
Minority interest (287) (126) (745) (351)
-------- -------- -------- --------
Net loss $ (317) $ (931) $ (736) $ (1,416)
======== ======== ======== ========
Net loss available to common stockholders $ (503) $ (1,128) $ (1,296) $ (1,999)
======== ======== ======== ========
Basic and dilutive loss per common share $ (0.05) $ (0.12) $ (0.13) $ (0.21)
======== ======== ======== ========
Weighted average shares outstanding 10,106 9,545 10,101 9,400
======== ======== ======== ========
The accompanying notes are an integral part of these
consolidated condensed financial statements.
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ENVIRONMENTAL SAFEGUARDS, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
----------
(IN THOUSANDS)
NINE MONTHS
ENDED SEPTEMBER 30,
------------------------
1999 1998
-------- --------
Cash flows from operating activities:
Net loss $ (736) $ (1,416)
Adjustment to reconcile net loss to net
cash provided (used) by operating
activities 2,811 571
-------- --------
Net cash provided (used) by
operating activities 2,075 (845)
-------- --------
Cash flows from investing activities:
Purchases of property and equipment (2,211) (3,756)
-------- --------
Cash flows from financing activities:
Proceeds from long-term debt -- 5,000
Payments on long-term debt (1,574) (811)
Payments on capital lease obligation (648) (984)
Net proceeds from sale of common stock 11 152
Dividends on Series C preferred stock (279) (301)
Dividend to minority interest partners (300) (300)
-------- --------
Net cash provided (used) by
financing activities (2,790) 2,756
-------- --------
Net increase (decrease) in cash and
cash equivalents (2,926) (1,845)
Cash and cash equivalents, beginning of period 4,792 6,686
-------- --------
Cash and cash equivalents, end of period $ 1,866 $ 4,841
======== ========
The accompanying notes are an integral part of these
consolidated condensed financial statements.
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ENVIRONMENTAL SAFEGUARDS, INC.
SELECTED NOTES TO 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 generally accepted accounting principles 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, 1998.
Certain reclassifications have been made to prior year amounts to conform
with the current year presentation.
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. COMPREHENSIVE INCOME
The Company has adopted Statement of Financial Accounting Standard No. 130,
"Reporting Comprehensive Income", which establishes standards for reporting
and display of comprehensive income and its components in a full set of
financial statements. Comprehensive income includes all changes in a
company's equity, except those resulting from investments by and
distributions to owners. There was no difference between comprehensive
income (loss) and net earnings (loss) for the three months and nine months
ended September 30, 1999 and 1998.
3. NON-CASH INVESTING ACTIVITIES
During the nine months ended September 30, 1999 and 1998, the Company
engaged in certain non-cash investing activities as follows:
Continued
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ENVIRONMENTAL SAFEGUARDS, INC.
SELECTED NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
----------
3. NON-CASH INVESTING ACTIVITIES, CONTINUED
NINE MONTHS ENDED
SEPTEMBER 30,
---------------------------
1999 1998
---------- ----------
Indirect Thermal Desorption ("ITD")
Unit value contributed to 50/50
joint company in Arabia $1,150,000 $ --
Transferred ITD unit cost to property
and equipment from equipment held
for sale $3,043,000 $ --
Transferred net ITD unit cost from
property and equipment to equipment
held for sale $1,968,000 $2,058,000
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 deferred tax valuation allowances for cumulative net
operating tax losses to the extent that the net operating losses may not be
realized. The difference between the federal statutory income tax rate and
the Company's effective income tax rate is primarily attributed to foreign
income taxes and changes in valuation allowances for deferred tax assets
related to U.S. net operating losses.
5. EARNINGS PER SHARE
The Company computes basic earnings per share based on the weighted average
number of shares of common stock outstanding for the period, and includes
common stock equivalents outstanding for the computation of diluted
earnings per share. As a result of incurred net losses, for the three
months and nine months ended September 30, 1999 and 1998 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 8,293,191 shares at September 30, 1999) 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:
Continued
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ENVIRONMENTAL SAFEGUARDS, INC.
SELECTED NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
----------
5. EARNINGS PER SHARE, CONTINUED
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------ ------------------------
1999 1998 1999 1998
-------- -------- -------- --------
(IN THOUSANDS) (IN THOUSANDS)
Net loss $ (317) $ (931) $ (736) $ (1,416)
Series C preferred stock dividends (93) (103) (279) (301)
Accretion of discount on Series C
preferred stock (93) (94) (281) (282)
-------- -------- -------- --------
Net loss available to common
stockholders $ (503) $ (1,128) $ (1,296) $ (1,999)
======== ======== ======== ========
6. SEGMENT, GEOGRAPHIC AND MAJOR CUSTOMERS INFORMATION
The Company currently operates in the environmental remediation and
hydrocarbon reclamation/recycling services industry. Substantially all
revenues result 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 are eliminated in computing revenue and
income (loss) from operations.
A significant portion of the Company's foreign operations were conducted by
the Company's 50% owned subsidiary in Colombia. The Company's foreign
subsidiaries utilize the U.S. dollar as their functional currency.
Accordingly, no cumulative translation adjustment is presented in the
accompanying consolidated condensed balance sheet.
Corporate income (loss) from operations consists primarily of corporate
general and administrative expenses. Corporate assets consist primarily of
cash and cash equivalents.
Continued
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ENVIRONMENTAL SAFEGUARDS, INC.
SELECTED NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
----------
Following is a summary of segment information:
6. SEGMENT, GEOGRAPHIC AND MAJOR CUSTOMERS INFORMATION, CONTINUED
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------ ------------------------
1999 1998 1999 1998
-------- -------- -------- --------
(IN THOUSANDS) (IN THOUSANDS)
Service revenue:
United States $ -- $ 120 $ 1,150 $ 1,365
United Kingdom 535 -- 600 --
Latin America 2,527 2,161 7,605 5,782
-------- -------- -------- --------
Total service revenue $ 3,062 $ 2,281 $ 9,355 $ 7,147
======== ======== ======== ========
Income (loss) from operations:
United States $ (228) $ (432) $ (425) $ (330)
United Kingdom 271 -- 215 --
Latin America 742 634 2,280 1,421
Corporate (169) (208) (391) (458)
-------- -------- -------- --------
Total income (loss)
from operations $ 616 $ (6) $ 1,679 $ 633
======== ======== ======== ========
AS OF SEPTEMBER 30,
-----------------------
1999 1998
-------- --------
(IN THOUSANDS)
Assets:
United States $ 7,594 $ 9,655
United Kingdom 1,959 --
Latin America 6,643 6,178
Middle East 2,300 --
Corporate 452 4,666
-------- --------
Total assets $ 18,948 $ 20,499
======== ========
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction
with the unaudited consolidated condensed financial statements of Environmental
Safeguards, Inc. (the "Company") as of September 30, 1999 and for the three and
nine month periods ended September 30, 1999 and 1998 included elsewhere herein,
and with the Company's Annual Report on Form 10-K for the year ended December
31, 1998.
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.
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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"). Accordingly, 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.
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, Department of Defense and Department of Energy sites.
In December, 1997, the Company acquired the remaining 50% interest in
OnSite from Parker Drilling Company ("Parker") 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
operations.
The Company continues to focus essentially all of its attention on its
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 be derived from major
international 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
wholly-owned subsidiary, commenced operations to provide hydrocarbon
contaminated soil reclamation and recycling services to oil and gas industry
participants operating in Venezuela.
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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
wholly-owned subsidiary, for operations in Scotland which commenced in June,
1999.
In July, 1999, OnSite Mexico, LLC, a wholly-owned subsidiary of OnSite,
commenced operations.
The Company has engaged Simmons & Company International to advise the
Company in exploring strategic options to enhance shareholder value. There is no
assurance that any transaction will result from this exploration process. The
Company continues to look for beneficial strategic alliances that could improve
market access and exposure, and facilitate domestic and international expansion
of the Company's technology.
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 service 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
COMPARISON OF OPERATING RESULTS -- QUARTERS ENDED SEPTEMBER 30, 1999 AND 1998
Summary. For the quarter ended September 30, 1999, the Company incurred
a net loss of $317,000, as compared to a loss of $931,000 during the comparative
quarter in 1998. The $614,000 improvement in loss was primarily due to the
deployment of two additional ITD units to Mexico and Scotland.
Revenue and Gross Margin. Service revenue of $3.1 million for 1999
generated a $1.7 million gross margin (54.2% of revenue) as compared to service
revenue of $2.3 million for 1998 which generated a $1.1 million gross margin
(49.7% of revenue). An average of 5.0 ITD units were in operation during the
third quarter of 1999, with three units operating in Colombia and one unit each
in Mexico and Scotland. During the comparable quarter of 1998, 3.2 ITDs were in
operation; three in Colombia and a fractional-months' operations in Louisiana.
The 4.5% higher gross margin percentage was mainly due to a lower cost profile
during the third quarter of 1999 for the ITD units operating in Scotland, Mexico
and Colombia.
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Selling, General and Administrative ("SGA") Expense. The decrease in
SGA expense was primarily due to reduced levels of professional fees in 1999.
Amortization of Acquired Engineering Design and Technology. This
expense 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. During 1999 and 1998, the Company earned interest on
temporarily invested working capital. 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. Interest expense for both quarters included
amortization of debt issuance costs of $122,000 and interest related to the
Company's financing arrangements. Interest expense decreased as a result of the
decrease in debt outstanding compared to the comparative quarter in 1998.
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, OnSite Mexico and OnSite
Environmental UK Ltd, each of which is 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.
COMPARISON OF OPERATING RESULTS -- NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
Summary. For the nine months ended September 30, 1999, the Company
incurred a net loss of $736,000 as compared to a loss of $1,416,000 for the
comparative nine months in 1998. The $680,000 reduction in net loss was
primarily due to higher gross profits in the Company's Colombian, Venezuelan and
Mexican operations, in addition to the gross margin realized with the sale of an
ITD unit to a 50%-owned subsidiary.
Revenue and Gross Margin. Service revenue of $9.4 million for 1999
produced a $4.8 million gross margin (51.7% of revenue) as compared to service
revenue of $7.1 million for 1998 which generated a $3.7 million gross margin
(also 51.7% of revenue). An average of 4.2 ITD units were in operation during
the first nine months of 1999; three in Colombia and fractional-months'
operations in Venezuela, Scotland and Mexico. During the comparable period of
1998 the Company operated 3.7 ITDs; with three units in Colombia and a
fractional-month's operations in Louisiana. The slight increase in the number of
ITDs in service and the gross margin realized with the 1999 sale of an ITD unit
to the Company's 50%-owned subsidiary, OnSite Arabia, combined to produce the
increase in revenue and gross margin.
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Selling, General and Administrative ("SGA") Expense. SGA expenses were
substantially at the same level for 1999 and 1998, despite higher revenue.
Amortization of Acquired Engineering Design and Technology. This
expense 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. During 1999 and 1998, the Company earned interest on
temporarily invested working capital. 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 slight decrease in 1999 interest expense is
primarily due to the capitalization of construction period interest during the
first quarter of 1999 related to certain ITD units under construction, combined
with a decreasing unpaid balance in long-term debt. Interest expense for both
nine month periods included amortization of debt issuance costs of $366,000.
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, OnSite Mexico and OnSite
Environmental UK Ltd, each of which is 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.
Liquidity and Capital Resources
During 1996 and 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 to 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, Series C non-convertible Preferred
Stock, senior secured notes and warrants to purchase the Company's common stock.
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The proceeds from these private placements were primarily used to fund the $8
million acquisition of OnSite, repay $3 million of long-term debt owed to a
subsidiary of Parker, and provide the Company with capital resources to continue
funding current operations and planned capital expenditures. In connection with
the 1997 private placements, 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, contingent upon the Company remaining in compliance
with the loan covenants of the secured notes. The Company subsequently borrowed
the additional $5 million from the investors in June 1998.
At September 30, 1999, the Company had no significant commitments for
capital expenditures. Substantially all of the Company's expenditures for
property and equipment during the quarter ended September 30, 1999 were for the
construction of the ITD units. The Company plans to finance the construction of
additional ITD units in the future through a combination of operating cash
flows, third party sale lease-back transactions, bank term financing and debt
and equity placements. There can be no assurances that the Company will be able
to obtain this additional financing.
The Company expects that existing cash reserves and cash flows from
operations will be sufficient to cover the Company's remaining cash requirements
for 1999 (not including the construction of additional ITD units, which would be
financed as discussed above). However, there can be no assurance that existing
sources of cash will cover the Company's 1999 cash flow requirements.
Impact of Year 2000 Issues
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.
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 therefore the Year 2000 issue is not expected to
pose any significant operational problems. The Company also believes that costs
related to the Year 2000 issue will not be significant.
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.
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PART II -- OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES
In September 1999, Sharon Leigh Caylor purchased 5,000 shares of common
stock of the Company through the exercise of options at an exercise price of
$0.60 per share. Mrs. Caylor is the daughter of Robin Pate who was a director of
the Company until resigning in 1998. Mrs. Caylor had received the options as a
gift from Mr. Pate. The transaction was effectuated by the Company in reliance
upon exemptions from registration under the Securities Act of 1933 as amended
(the "Act") as provided in Section 4(2) thereof. The certificate issued for
these unregistered securities contained a legend stating that the securities
have not been registered under the Act and setting forth the restrictions on the
transferability and the sale of the securities. No underwriter participated in,
nor did the Company pay any commissions or fees to any underwriter in connection
with the transaction. The transaction did not involve a public offering. The
Company believes that Mrs. Caylor had knowledge and experience in financial and
business matters which allowed her to evaluate the merits and risk of the
purchase of these securities of the Company.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit No. 27.1 -- Financial Data Schedule.
(b) Reports on Form 8-K
On July 14, 1999, the Company filed a Report dated July 7,
1999 on Form 8-K reporting Item 4. Changes in Registrant's
Certifying Accountant.
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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.
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Date: November 5, 1999 By: /s/ James S. Percell
James S. Percell, President
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Date: November 5, 1999 By: /s/ Ronald L. Bianco
Ronald L. Bianco, Chief
Financial Officer
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INDEX TO EXHIBITS
EXHIBIT NO. DESCRIPTION
- ----------- -----------
27.1 Financial Data Schedule