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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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Amendment No. 1
FORM 10-KSB
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[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934; For the Fiscal Year Ended: December 31, 1996.
OR
[ ] 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 445
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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Securities registered under Section 12(b) of the Exchange Act:
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Name of Each Exchange
Title of Each Class on which Registered
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N/A N/A
Securities registered pursuant to 12(g) of the Exchange Act:
Title of Each Class
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Common Stock, $.001 par value
</TABLE>
Indicate by check mark whether the registrant (i) 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 (ii) has been subject to such filing requirements
for the past 90 days. Yes [ ] No [X]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. [ ]
Issuer's revenues for the year ended December 31, 1996 were $-0-.
The aggregate market value of Common Stock held by non-affiliates of the
registrant at December 31, 1996, based upon the last reported sales prices on
OTC Bulletin Board, was $20,168,484. As of December 31, 1996, there were
6,854,828 shares of Common Stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
The Registrant's Prospectus filed with the Commission as part of a Registration
on Form SB-2 and effective as of February 11, 1997 is incorporated by reference
herein into Form 10-KSB Parts I, II, and III.
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TABLE OF CONTENTS
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PART I
Item 1. Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Item 2. Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Item 3. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Item 4. Submission of Matters to a Vote of Security Holders . . . . . . . . . . . . . . . . . . . . . . . 10
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters . . . . . . . . . . . . . . 10
Item 6. Management's Discussion and Analysis of Financial Condition
and Results of Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Item 7. Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Item 8. Changes in and Disagreements With Accountants on Accounting
and Financial Disclosure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons; Compliance
with Section 16(a) of The Exchange Act . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Item 10. Executive Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
Item 11. Security Ownership of Certain Beneficial Owners and Management . . . . . . . . . . . . . . . . . . 20
Item 12. Certain Relationships and Related Transactions . . . . . . . . . . . . . . . . . . . . . . . . . . 21
Item 13. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
</TABLE>
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PART I
ITEM 1. BUSINESS
Environmental Safeguards, Inc. (the "Company"), is engaged in the
development, production and sale of environmental remediation technologies and
services through its wholly owned subsidiary National Fuel & Energy, Inc.
("NFE") and its 50% owned joint venture OnSite Technologies, L.L.C.
("OnSite"). The environmental remediation services provided by the Company
have involved the removal of hydrocarbon contaminants from soil using indirect
thermal desorption remediation technology.
HISTORY
The Company was incorporated under the laws of the State of Nevada in
December 1985, under the name of Cape Cod Investment Company. In December 1986,
the name of the Company was changed to Cape Cod Ventures, Inc. In August 1987,
the Company completed an initial public offering of 4,148,000 shares of common
stock, par value $.001 ("Common Stock") at a price of $.001 per share pursuant
to the exemption from the registration requirements of the Securities Act of
1933, as amended (the "Act") provided by Regulation A. In May 1993, the Company
entered into an Agreement and Plan of Reorganization with NFE providing for the
acquisition of NFE by the Company in exchange for shares of the Company's
common stock. Pursuant to the terms of the Reorganization Agreement, the
Company effected a 1-for-100 reverse split in its issued and outstanding shares
reducing the number of outstanding shares from 50,000,000 to 500,000. Following
effectiveness of the reverse split, the Company acquired NFE by issuing
3,374,000 shares of the Company's post-split common stock to the NFE
shareholders in exchange for all issued and outstanding shares of NFE. In
connection with the acquisition, the name of the Company was changed from Cape
Cod Ventures, Inc. to Environmental Safeguards, Inc. and NFE became a
wholly-owned subsidiary of the Company.
In January 1995, the Company entered into an agreement with Parker
Drilling Company ("Parker"), a Delaware corporation, granting Parker, among
other things, exclusive marketing rights to the Company's proprietary processes
for on-site remediation services in connection with drill cuttings at oil and
gas drilling sites throughout the United States and in certain foreign
countries. In August 1995, the Company expanded its agreement with Parker by
forming OnSite. OnSite is a joint venture between NFE and Parker in which NFE
and Parker each own 50%. In December 1996 Parker loaned the Company $3,000,000.
The loan is to be repaid out of 40% of the Company's cash received from OnSite
until the loan is repaid in full. Accordingly, the Company will only receive
30% of the profit distributions from OnSite until the loan is repaid. Pursuant
to the Operating Agreement for OnSite, NFE granted to OnSite certain exclusive
licenses to use the technologies included in the Company's Indirect Thermal
Desorption Units (the "ITD Units") for on-site remediation of hydrocarbon
contaminated soil worldwide. Each ITD Unit is an easily transportable,
state-of-the-art processing system which produces clean soil from contaminated
soil while reclaiming the hydrocarbons. ITD Units are transported by truck from
one clean-up site to another. Parker agreed to actively market and promote the
services of OnSite including the preparation of brochures and the preparation
and delivery of certain presentations at one or more professional society
meetings in the energy industry and one or more energy
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industry trade shows. All expenses associated with such promotional activity
and presentations were paid by Parker until July 31, 1996, and after July 31,
1996, certain expenses associated with such marketing and promotional
activities are paid by OnSite. The Company presently intends to conduct
substantially all of its business operations through OnSite.
In June 1995, the Company effected a 1-for-10 reverse stock split in
order to improve the market price of the Company's Common Stock. In January
1996, the Company effected a 10-for-1 stock split in order to return the
Company to its prior level of authorized and outstanding shares of Common
Stock.
BUSINESS ACTIVITIES
Indirect Thermal Soil Remediation. The primary services offered by the
Company involve remediation of soil contaminated by oil-based drilling mud,
fuel spills, leakage at storage tanks, leakage from pipelines, and the
remediation of hydrocarbon contamination at settling ponds, oil and gas
exploration sites, refineries, petrochemical facilities, abandoned production
fields, Department of Defense installations, etc. To date the Company has
employed its ITD Units to provide remediation services to tank farms,
compressor sites and at the sites of oil drilling operations where the
contracts performed by the Company involve the processing of contaminated soil
through the Company's indirect thermal remediation equipment. This process is
known as "indirect thermal desorption" because it reverses the contamination
process and causes the soil to discharge the contaminants previously absorbed
without direct contact of the soil to a flame.
The ITD Units are portable pieces of equipment which utilize a
rotating, heat-jacketed trundle to vaporize hydrocarbons from contaminated
soil. An ITD Unit consists of two principal components: (i) an indirect thermal
desorption unit wherein the hydrocarbon contaminated soil is indirectly heated,
thereby causing the hydrocarbon contamination to vaporize; and (ii) a
condensation process system, which causes the hydrocarbon vapor to condense to
a liquid for client recycling. As an alternative to the condensing system, the
vapor can be passed through an afterburner or thermal oxidizer which
incinerates the hydrocarbon vapors.
The heat exchange system is comprised of a large fabricated steel
shell which houses a rotating trundle. Hot gases pass through the shell and
around the outside surface of the trundle. Hydrocarbon contaminated soil is
loaded into the elevated end of the trundle by a conveyor belt or a front end
loader. As the trundle revolves, the soil is agitated by internal lifts and
oars as it passes through the inside of the trundle by gravity flow and is
heated to temperatures of from 300 degrees to 1200 degrees Fahrenheit. At these
temperatures, the hydrocarbon contaminants in the soil transform into vapors
which are vacuumed out of the heat exchange system into the condensing system,
the afterburner or the thermal oxidizer. The clean soil then drops out of the
discharge door at the low end of the trundle and is passed through an enclosed
conveyor for rehydration before final discharge. Random soil samples are tested
at the end of the process to confirm that the contaminants have been removed
and the soil condition is within the permitted range. The soil is then
returned to its original location or such other location specified by the
customer.
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The hydrocarbon vapors removed from the heat exchange system by vacuum
are passed through a fan-cooled condensing system. The vapors are condensed
into liquids and collected in storage tanks and can then be recycled or
disposed, depending on the nature of the contaminant, the needs of the customer
and the specifications required for reuse.
OnSite fabricated its second ITD Unit in August 1996, and has entered
into contracts for the fabrication of four additional ITD Units for delivery by
May 1997. OnSite will own, manage and operate all of the ITD Units. The
Company's share of the cost of acquiring the four ITD Units is estimated at
$2,000,000. To meet this obligation, the Company in December 1996, obtained a
$3,000,000 loan from a subsidiary of Parker in order to fund its share of the
contribution to OnSite.
OnSite has successfully completed eight remediation contracts. On all
jobs the ITD Unit successfully removed the contaminants from the soil. To date,
the ITD Units have processed up to 192 tons of contaminated soil in a 24-hour
period with a 30% hydrocarbon saturation. However, the processing capacity
varies significantly depending on the moisture content, degree of
contamination, soil type, contamination type and remediation required. There
can be no assurance that the ITD Units will continue to perform at this level,
or that this performance will continue to be competitive with other technology
available in the market.
Recycling of Hydrocarbon Contaminants. The Company has developed
proprietary processes which are embodied in the condensation process system
trailer, one of the two principal components of the ITD Unit. Within this
component the hydrocarbon contaminant(s) are condensed from the vapor state
created in the dryer unit back into a liquid state via the proprietary
processes and placed into storage for recycling back to the client. This allows
the client to realize actual savings from its ability to re-utilize the
hydrocarbons. This ability to recycle the hydrocarbon contaminant(s) is an
important competitive advantage which the Company believes it possesses as
compared to the bioremediation, direct burn and "dig and haul" remediation
technologies.
Manufacturing. OnSite currently has two operational ITD Units and has
ordered fabrication of four additional ITD Units. One ITD Unit is currently
operating in Lysite, Wyoming. This ITD Unit was manufactured by Parker
Technology, Inc. ("Partech"), which is a wholly-owned subsidiary of Parker.
The Company is aware there are a number of manufacturing and fabricating
facilities, in addition to Partech, capable of manufacturing ITD Units. The
primary contractors on the second ITD Unit, completed in August 1996, and now
operating in Colombia, were Roberds-Johnson Industries, located in Galena Park,
Texas and Stelcon, Inc., located in Pasadena, Texas. OnSite recently awarded
contracts to Roberds-Johnson Industries and Cobrans Corporation as primary
contractors for the four additional ITD Units based on cost, delivery date,
quality of work and other business considerations. The four additional ITD
Units are expected to be delivered by May 1997. Additional ITD Units may be
ordered in the future subject to the demand for OnSite's remediation services
and contract terms with customers.
Prior to November 1996, the Company and OnSite contracted with Double
Eagle Operations, Inc. ("Double Eagle"), of Evanston, Wyoming, to provide the
labor necessary to complete the Company's contracts. The Company, through
OnSite, typically submits a bid for a project based on the costs of
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moving the equipment to the location, the estimated charges for labor and fuel,
the nature and extent of the contamination, the type and moisture content of
the soil, the estimated processing time and the desired profit margin. Once a
contract has been awarded, OnSite moves its equipment on location and Double
Eagle supplied the crew necessary to operate the equipment and complete the
contract. OnSite compensated Double Eagle on an hourly basis for the labor
supplied. Subsequent to November 1996, OnSite stopped using the services of
Double Eagle and began using the services of Business Staffing, Inc. to provide
labor to fulfill OnSite's contracts.
EXISTING CONTRACTS FOR OPERATIONS
OnSite's two ITD Units are currently under contract for operations.
One of the ITD Units is currently operating in Lysite, Wyoming. The Company
presently anticipates that this contract will conclude during the second
quarter of 1997. Subsequent thereto, this ITD Unit will be upgraded to match
the capabilities and performance level of the Company's second ITD Unit which
was completed in August 1996. The second ITD Unit was placed in service in
November 1996 and is located in Colombia and is expected to remain in
operations in Colombia for approximately two years.
ONSITE TECHNOLOGY, L.L.C.
Effective August 1, 1995, the Company and Parker formed OnSite. OnSite
is the successor to a previous marketing agreement between the Company and
Parker under which Parker was granted the exclusive marketing rights to the
Company's proprietary processes for on-site remediation services in connection
with drill cuttings at oil and gas drilling sites throughout the United States
and in certain foreign countries. Pursuant to the Operating Agreement for
OnSite, the Company granted to OnSite certain exclusive licenses to use the
technologies included in the Company's ITD Units, and the proprietary processes
for on-site remediation of hydrocarbon contaminated soil worldwide. The
Company, through NFE, and Parker each own 50% of the interest in OnSite.
OnSite has entered into a 50%-50% joint venture with unaffiliated
third parties for operations in the Colombian market ("OnSite Colombia"). As
part of the joint venture agreement, OnSite sold one ITD Unit to the joint
venture for $950,000, resulting in no gain or loss to OnSite.
The nature and extent of the Company's control over OnSite are set
forth in OnSite's Operating Agreement ("Operating Agreement"), which provides
that each Member is entitled to one vote on matters submitted to a vote.
The OnSite Operating Agreement presently allocates the sharing of
profits and losses of OnSite equally between the Company and Parker. The
Operating Agreement provides that members may be required to make additional
capital contributions from time to time upon the majority vote of its members.
If a member does not make the additional capital contribution, then the member
who does contribute may (i) initiate litigation against the delinquent member
to require the payment of the capital contribution, (ii) make such additional
capital contribution and treat it as a loan to the delinquent member, or (iii)
adjust OnSite's sharing ratios to reflect the additional amount paid by the
contributing member. If the
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contributing member elects to make the loan, then the contributing member shall
be entitled to all of the distributions to which the delinquent member would
otherwise have been entitled until such time as the loan is paid in full. If
the contributing member elects to have an adjustment made the delinquent
member's sharing ratio would be decreased and the contributing member's sharing
ratio would be increased.
Accordingly, if the Company becomes a delinquent member then its share
of profits and losses in OnSite could be adversely impacted. Such an event
could be repeated over the life of OnSite and might result in a material
decrease in the Company's sharing ratio, which could result in a material
decrease in profits to the Company from OnSite's operations.
The Operating Agreement provides for admission of new members upon a
unanimous vote of current members. No admission of new members is contemplated
at this time by either the Company or Parker.
COMPETITION
There are many companies which currently dispose of hazardous and
industrial wastes and remediate or clean up sites which have been contaminated,
and such companies are continually attempting to develop new and improved
products and services. Other companies utilize competing technologies and
techniques in an attempt to provide more economical or superior remediation
services. Many of the Company's competitors are well established companies with
substantially greater capital resources, larger research and development staffs
and facilities and substantially greater marketing capabilities than the
Company. Therefore, there can be no assurance that the Company will be able to
achieve and maintain a competitive position in the soil remediation industry.
The Company obtains its contracts through competitive bidding and is
in direct competition with firms providing alternative means of, and utilizing
alternative technologies for, resolving environmental problems. The most
significant competition comes from firms utilizing "dig and haul," direct burn,
and bioremediation technology to remediate soil contamination.
Companies utilizing the dig and haul method generally transport the
contaminated soil to other facilities for processing. The Company believes that
the technology utilized by the Company is competitive with dig and haul methods
because the Company's equipment is mobile, and thus, contaminated soil can be
remediated on location. The waste processing and remediation business is, to a
large extent, dependent upon and constrained by the costs and regulations
associated with transporting such wastes. The Company believes the dig and haul
method will, as a result, become less competitive over time due to such
transportation costs, the costs of replacing the contaminated soil and the
dumping charges at sites approved for the storage of hazardous materials. More
importantly, the Company's remediation process addresses the latent liability
associated with the contamination at the site. The Company is currently
investigating techniques and technologies capable of evaporation of non-needed
liquids and membrane applications, but there can be no assurance that the
Company will be able to develop or acquire such technology and skill or that,
if obtained, the Company will be competitive with other alternatives available
in the market.
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Companies utilizing direct burn technology use direct heat sources to
incinerate contaminants found in the soil. Because of the closed nature of the
heat transfer system, the ITD Unit can safely handle much higher concentrations
of contaminants than conventional direct burn methods. Conventional direct burn
methods process material with maximum contamination levels of 3% to 4% while
the ITD Unit has processed materials with contamination levels as high as 30%.
In addition, the portable nature of the ITD Unit permits it to be located at
the contamination site to process and replace the soil on location, thus
eliminating the need to package, haul and safely dispose of contaminated soil.
ITD Units also permit the customer to recapture certain valuable liquids which
are otherwise incinerated in the direct burn method.
GOVERNMENTAL REGULATIONS-COST OF COMPLIANCE
The Company renders services in connection with the remediation and
disposal of various wastes. Federal, state and local laws and regulations have
been enacted regulating the handling and disposal of wastes and creating
liability for certain environmental contamination caused by such waste.
Accordingly, the Company is subject to potential liability for environmental
damage its ITD Units or its operations may cause, particularly as a result of
contamination of water or soil. Environmental laws regulate, among other
things, the transportation, storage, handling and disposal of waste.
Governmental regulations govern matters such as the disposal of residual
chemical wastes, operating procedures, waste water discharges, fire protection,
worker and community right-to-know, and emergency response plans. Governmental
regulations also apply to the operation of vehicles used by the Company to
transport the ITD Units, including licensing requirements for the vehicles and
the drivers, vehicle safety requirements, vehicle weight limitations, and
shipment manifesting. Moreover, so-called "toxic tort" litigation has increased
markedly in recent years as persons allegedly injured by chemical contamination
seek recovery for personal injuries or property damage. These legal
developments present a risk of liability should the Company be deemed to be
responsible for contamination or pollution caused or increased by any
evaluation, remediation or cleanup effort conducted by it, or for an accident
which occurs in the course of such remediation or cleanup effort. There can be
no assurance that the Company's policy of establishing and implementing proper
procedures for complying with environmental regulations will be effective at
preventing the Company from incurring a substantial environmental liability. If
the Company were to incur a substantial uninsured liability for environmental
damage, its financial condition could be materially adversely affected.
The Company presently has the ability to deliver soil remediation
services that meet applicable federal and state standards for the delivery of
its services, and for the level of contaminant removal. The government can,
however, impose new standards. If new regulations were to be imposed, the
Company may not be able to comply in either the delivery of its services, or in
the level of contaminant removal from the soil.
Operating permits are generally required by federal and state
environmental agencies for the operation of the Company's ITD Units. Most of
these permits must be renewed periodically and the governmental authorities
involved have the power, under various circumstances, to revoke, modify, or
deny issuance or renewal of these permits.
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EMPLOYEES
The Company has 12 full-time employees, six of whom are in management
positions, including corporate and administrative operations and six of whom
are involved in field operations. None of the Company's employees are
represented by a union and the Company considers its employee relations to be
good.
RECENT DEVELOPMENTS
In December, 1996, a subsidiary of Parker lent the Company $3,000,000
under the terms of a Credit Agreement (the "Credit Agreement"). The Credit
Agreement provides that the loan, which will mature on December 31, 2000, will
bear interest at the rate of 6.3% per annum. The Company shall repay this
loan, in arrears, commencing February 28, 1997 out of 40% of the Company's cash
received from OnSite during each preceding month, if any, applying any payment,
first to interest and thereafter to pay principal. Any remaining outstanding
balance on the loan plus any outstanding accrued interest shall be due and
payable on December 31, 2000. The Company will use the loan proceeds to fund
the Company's contribution to OnSite, approximately $2,000,000, in connection
with the fabrication of the four ITD Units which OnSite will own, manage and
operate, and the balance of the loan proceeds will be used for working capital
purposes by the Company. In connection with the Credit Agreement, the Company
entered into a Warrant Agreement with Parker pursuant to which it issued to
Parker 250,000 warrants to purchase shares of its Common Stock at an exercise
price of $2.50 per share, expiring on December 31, 1998. The Warrant Agreement
contains provisions for the issuance of additional warrants if the loan is
outstanding beyond certain dates. If the loan is not paid in full by June 30,
1997, then the Company will issue to Parker warrants to purchase 50,000 shares
of its Common Stock at an exercise price of $2.50 per share. Further, if the
loan is not paid in full by December 31, 1997 then the Company will issue to
Parker warrants to purchase an additional 50,000 shares of its Common Stock at
an exercise price of $2.50 per share. All the warrants expire on December 31,
1998. The Warrant Agreement contains certain registration rights for the
shares issuable upon exercise of the warrants by Parker.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Common Stock is Colonial
Stock Transfer Company. Its address is 455 East 400 South, Suite 100, Salt Lake
City, Utah 84111; (801) 355-5740.
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ITEM 2. PROPERTIES
The Company's principal executive offices are located in leased
facilities in Houston, Texas, consisting of a total of approximately 1,850
square feet. The current monthly rental for these executive offices is $1,178 .
The lease for the executive offices will expire in December, 1997. The Company
believes that its offices are adequate for its present needs and that suitable
space will be available to accommodate its future needs.
ITEM 3. LEGAL PROCEEDINGS
The Company was named as a defendant in 1993 by Goldfield Engineering
and Machine Works ("Goldfield"), styled as Huron, Inc dba Goldfield Engineering
& Machine vs Don Cox, et.al. Cause No. 930400525 in the fourth District Court
of Utah County, Utah. The litigation originally involved claims by Goldfield
that the Company owed additional compensation of approximately $150,000 for ITD
Units constructed which the Company believes did not meet required performance
criteria. The Company filed a counterclaim for $200,000 to obtain damages from
Goldfield. The Company has been advised that Goldfield filed a petition seeking
Chapter 11 Bankruptcy protection in 1994. A Notice of Automatic Stay was filed
in August, 1994, based on the Chapter 11 Petition in In Re Huron , et al filed
in the US Bankruptcy Court for the Central Division of Utah, Case No.
94A-20001. In January, 1995, a Plan of Reorganization was confirmed by the
Bankruptcy Court whereby the Company received nothing and no adversary
pleadings were filed against the Company by Goldfield. The Company believes,
after consultation with counsel, that the risk of material financial exposure
to the Company is remote.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
NOT APPLICABLE
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
PRICE RANGE OF COMMON STOCK
The Company's Common Stock is traded in the over-the-counter
securities market, and is quoted on the OTC Bulletin Board of the National
Association of Securities Dealers, Inc. under the symbol "EVSF". The following
table sets forth, for the periods indicated, the high and low closing bid
prices for the Common Stock of the Company as reported on the OTC Bulletin
Board taking into account and
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restated for all stock splits. The bid prices reflect inter-dealer quotations,
do not include retail markups, markdowns or commissions and do not necessarily
reflect actual transactions.
<TABLE>
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COMMON STOCK PRICE RANGE
HIGH BID LOW BID
<S> <C> <C>
1995
First Quarter $ 1.375 $ .4375
Second Quarter $ 2.1875 $ .875
Third Quarter $ 1.25 $ 0.30
Fourth Quarter $ 1.09 $ 0.525
1996
First Quarter $ 5.00 $ 0.699
Second Quarter $ 3.25 $ 2.25
Third Quarter $ 4.75 $ 2.75
Fourth Quarter $ 4.00 $ 2.75
1997
First Quarter (through March 21, 1997) $ 3.875 $ 2.4375
</TABLE>
On March 21, 1997 , the last bid price for the Common Stock of the
Company as reported on the OTC Bulletin Board was $ 2.43 per share. On March
21, 1997, there were approximately 215 stockholders of record of the Common
Stock, including broker-dealers holding shares beneficially owned by their
customers.
DIVIDEND POLICY
The Company has not paid, and the Company does not currently intend to
pay cash dividends on its common stock in the foreseeable future. The current
policy of the Company's Board of Directors is to retain all earnings, if any,
to provide funds for operation and expansion of the Company's business. The
declaration of dividends, if any, will be subject to the discretion of the
Board of Directors, which may consider such factors as the Company's results of
operations, financial condition, capital needs and acquisition strategy, among
others.
ITEM 6. 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 Consolidated Financial Statements.
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RESULTS OF OPERATIONS
GENERAL
In May 1993, the Company merged with NFE to provide the Company with an
acceptable technology with immediate commercial applications. Subsequent to the
merger the Company began to experience significant growth in revenues during
the remainder of the calendar year 1993 and 1994 based primarily on contracts
with major U.S. companies to provide on- site remediation of hydrocarbon
contaminated soil. The Company utilizes indirect thermal desorption technology
("ITD") in its remediation process and, accordingly, remediation units which
were developed by the Company are referred to as ITD Units.
In late 1994, the Company began to experience a decline in new service
contracts. To address this decline, in January 1995, the Company signed a
marketing agreement (the "Marketing Agreement") with Parker which granted
Parker exclusive marketing rights to the Company's proprietary process for
on-site remediation of drill cuttings at oil and gas drilling sites in the U.S.
and certain foreign countries. The Company believed that Parker, a publicly
held oil and gas drilling company, would provide good exposure for the
Company's technology because Parker's customer base includes many of the
independent and major oil companies throughout the world. The Company also
believed that Parker's financial stability would be a further benefit for its
marketing efforts. Parker is a financially sound company and has shown positive
earnings and cash flows from operations in each of the last two years.
In August 1995, the Marketing Agreement was expanded through the formation
of OnSite, a 50%-50% joint venture between the Company, through NFE, and
Parker. The Company's anticipated results regarding the Marketing Agreement had
not been completely realized, but the Company believed that Parker's
involvement in OnSite would add needed support to the venture's efforts to
expand the market for the Company's ITD technology. Accordingly, OnSite was
created to expand the commercial application of the Company's ITD technology
and proprietary processes at a more ambitious pace than the Marketing Agreement
encompassed. Presently all commercial applications of the Company's technology
are delivered through OnSite, making the Company's financial success primarily
dependent on the success of OnSite.
Under the Marketing Agreement, Parker agreed to actively market and promote
the Company's services including the preparation of brochures and the delivery
of certain presentations to specific groups involved in the energy industry.
All expenses associated with such promotional activities were paid by Parker
until July 31, 1996 and totaled approximately $50,000. Accordingly, the
expiration of the Marketing Agreement is not expected to have a significant
effect on the future operating results of OnSite.
LIQUIDITY AND CAPITAL RESOURCES
Historically, the Company has operated with limited financial resources and
the Company believes that a lack of such resources has slowed the
commercialization of its ITD technology. The Company has
12
<PAGE> 13
relied almost exclusively on private offerings of debt and equity securities
for its financial needs and such financial needs have increased dramatically
since the formation of OnSite.
OnSite is a capital intensive venture built on the performance of ITD Units
which cost between $800,000 and $1,000,000 each. In late 1995, OnSite took
delivery of its first ITD Unit. This ITD Unit, engineered and built by a
subsidiary of Parker, has experienced greater processing speed and less
operating downtime than earlier units built by the Company. In a continuing
effort to improve the efficiency of its equipment, OnSite made significant
engineering changes to the specifications used in its first ITD Unit and in
August 1996 took delivery of a second unit. The Company believes this most
recent ITD Unit will again produce improvements in both performance and
efficiency over previous units.
Based upon the positive results of tests of its newest ITD Unit, in
September 1996, OnSite awarded contracts for construction of four additional
ITD Units at a total price of approximately $4,000,000 for the four ITD Units.
The Company will be required, under its joint venture agreement with Parker, to
fund 50% of the obligation arising from the purchase of these units. The
Company has raised the necessary capital to meet its obligations to OnSite
through a variety of means including the following:
o In December 1995 through February 1996, the Company raised $700,000 through
a private offering of its common stock. The proceeds from this offering
were used to settle old trade debts, repay certain loans from stockholders
and/or officers of the Company and to pay a portion its share of the cost
of OnSite's first ITD Unit.
o In June 1996 the Company received net proceeds of approximately $1,055,000
from the sale of its 10% convertible debentures. The proceeds from this
sale have been used to fund the Company's share of the cost of OnSite's
second ITD Unit and to support continuing operations of the Company.
o In July 1996 the Company raised $202,785 when Parker made a capital
contribution to OnSite on behalf of the Company in exchange for the
Company's granting a non-royalty bearing exclusive world-wide license for
manufacture and use of the Company's indirect thermal desorption soil
remediation and hydrocarbon reclamation system. The proceeds from the sale
of such license were used to partially fund the balance due of the
Company's share of OnSite's first ITD Unit.
o In December 1996 the Company entered into a credit agreement with a
subsidiary of Parker under which Parker provided the Company with
$3,000,000 of long-term debt to allow the Company to fund its approximate
$2,000,000 share of current purchase obligations by OnSite and to provide
the Company with adequate working capital to meet its own debt service and
operating requirements. The debt under the credit agreement will be repaid
through a change in the Company's profit sharing percentage in OnSite from
50%-50% to 30%-70% until the debt is fully repaid or December 31, 2000, at
which date the entire unpaid balance of the long-term debt becomes due.
o In February 1997 the Company closed a private offering of its common stock
at $2.50 per share through which the Company raised $833,500 before
offering costs involving the issuance of 333,400 shares. These funds have
been placed into the general working capital account of the Company.
13
<PAGE> 14
The Company is currently primarily dependent on the operations of OnSite
for its future growth and success. During the fiscal year 1996, the Company
contributed approximately $1.9 million to OnSite. The Company considers its
most important function to be commercializing new environmental technologies,
expanding the market for OnSite's technology and raising capital to meet its
obligations for new equipment in OnSite. OnSite has received a one year
contract from a major international petroleum industry participant who will
employ OnSite's second ITD Unit, in Colombia through a new 50%-50% joint
venture between OnSite and a group of South American investors. The joint
venture, OnSite Colombia, is discussed below in Operations of OnSite. The
client of OnSite Colombia has indicated that, subject to the ITD Unit's
performance, they will need additional ITD Units in the very near future to
address other soil remediation needs. As demand grows for OnSite's services,
the Company may again be faced with the need to raise additional funds for its
share of the cost of more units. Inability to obtain financing for its share of
capital requirements of OnSite could have extreme adverse affects on the
Company, including loss of its investment in OnSite and loss of rights to use
certain of its technologies. Such losses could ultimately threaten the
continued existence of the Company.
YEAR ENDED DECEMBER 31, 1996 COMPARED TO THE YEAR ENDED DECEMBER 31, 1995
In 1996, the Company experienced a $53,345 decrease in its environmental
service revenue due to the fact that the Company made a conscious decision to
market its ITD technology for reclamation/remediation of hydrocarbon
contaminated soil strictly through the operations of OnSite. All costs of
directly providing remediation services have been eliminated from the Company's
financial results for 1996 as compared to the similar period of 1995 because
such costs are now reflected in OnSite's operating results. Essentially the
only expenses that remain in the Company are the costs of marketing the
Company's technology, interest costs for capital to meets its obligations to
OnSite; and managing the Company's investment in OnSite, including a small
management group, administrative personnel and professional services providers.
Officers of the Company also participate in the management of OnSite and their
salaries are allocated between the Company and OnSite. The Company expects that
operational and general expenses will rise from their 1996 levels due to
increase in business activity. During 1996, OnSite generated a net loss of
$185,060 on revenues of $541,950 as compared to a $126,104 profit on $272,700
revenues in 1995. The 1996 loss included a $69,361 loss from OnSite's
investment in OnSite Colombia. Accordingly, the Company's 50% interest in
OnSite resulted in a 1996 loss to the Company's account of $92,530. In 1996,
the Company incurred a net loss of $646,871 compared to a net loss of
$1,215,613 in 1995.
Operational and general expenses decreased by $368,970 in 1996 due to
further reductions in general and administrative expenses as operations were
performed in OnSite. Depreciation and amortization decreased by $51,238 in
1996 due to the Company's recognition of a $737,217 provision for reduction in
carrying value of its existing ITD Units and other remediation equipment which
occurred in 1995. This provision, which eliminated substantially all of the
depreciable asset base, was necessary to reduce obsolete ITD Units and other
remediation equipment to their estimated net realizable value.
14
<PAGE> 15
During 1996, the Company recorded a $74,035 extraordinary gain from
restructuring and/or eliminating certain aged trade accounts payable and
awarded stock compensation to a former contractor totaling $312,500.
The net loss of $646,871, which includes those non-recurring items as
mentioned directly above, during the twelve months of 1996 represents a
$568,742 improvement over the same period of 1995.
OPERATIONS OF ONSITE
OnSite began operations in late November of 1995 and has had a significant
impact on the composition of revenue, costs and expenses of the Company.
Management does not expect OnSite to be consistently profitable until at least
3 - 4 ITD units are operational. As of December 31, 1996 OnSite has only had
one ITD unit in operation as does OnSite Colombia which began operations in
late November of 1996. The following reflects the results of operations of
OnSite, including its investment in OnSite Colombia:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Service Revenues $ 541,950 $ 272,700
Costs and Expenses:
Operating and general expenses 508,309 131,655
Loss from investment in OnSite Colombia 69,361 -
Depreciation expense 149,340 14,941
--------- ---------
Total costs and expenses (727,010) (146,596)
Net (loss) income $(185,060) $126,104
=========== ==========
</TABLE>
As shown by the results of OnSite's operations, in the twelve months ended
December 31, 1996 OnSite experienced an operating loss as a job was nearing
completion due to a decline in the hydrocarbon contaminated soil available for
processing. Furthermore, the additional expenses incurred managing the growth
of OnSite added pressure to profitability. Finally, the loss from the
investment in OnSite Colombia also detracted from profitability in 1996 as
OnSite Colombia was just beginning operations and was not yet profitable.
OnSite expects to stabilize profitability through the addition of more units
that will moderate the variation in earnings associated with the operation of a
single unit. The Company must help OnSite maintain favorable utilization rates
on all ITD Units in order for the Company to be profitable.
As previously mentioned, in November 1996, OnSite entered into a joint
venture, OnSite Colombia, with a group of South American investors. OnSite
Colombia was established to provide hydrocarbon
15
<PAGE> 16
contaminated soil reclamation services to energy companies operating in
Colombia. OnSite owns a 50% interest in the assets, liabilities, capital and
profits of OnSite Colombia and, accordingly, the Company ultimately
participates on a 25% basis in the operations of OnSite Colombia. In December
1996, OnSite sold its newest and most technologically advanced soil reclamation
unit to OnSite Colombia for $950,000 in a transaction that resulted in no gain
or loss to OnSite. In order to improve cash flow, OnSite Colombia is currently
negotiating a sales leaseback transaction for the unit.
TRENDS AND UNCERTAINTIES
OnSite is receiving a marked increase of inquiries for its remediation
services. The Company believes there is a trend by major petroleum industry
participants to address past hydrocarbon contamination problems and to prevent
current contamination caused during exploration for, and the production,
refining, transportation, storage and distribution of hydrocarbons. The Company
believes that these environmental concerns, related industry trends and
governmental regulations will increase demand for the Company's soil
remediation technology. However, the Company is aware of competing technologies
and other companies that offer similar services. Some of the competitors are
well established companies with greater capital resources, larger research and
development staffs and greater marketing capabilities. Also, the Company is
aware of the inherent risks which it faces concerning conducting operations in
a foreign country and the possibility that its technology may become obsolete.
Furthermore, as OnSite continues to grow it will be necessary to acquire
additional ITD Units. This expansion of the capital equipment will necessitate
further funding obligations on the Company. Management is aware that the
inability to raise the Company's share of the necessary funding for OnSite's
growth could adversely effect it.
The Company believes that OnSite's contract with a major independent
domestic petroleum industry participant in Wyoming will terminate during the
second quarter of 1997. Subsequent to the completion of that contract, the ITD
Unit will be upgraded to match the capabilities of the second ITD Unit to
address remediation needs with a specific Gulf Coast refinery. In November
1996, OnSite received a one year contract for its second ITD Unit from a major
international energy industry participant to provide reclamation/remediation
services in Colombia. Due to the performance of the ITD Unit in Colombia, the
client ordered an additional ITD Unit on a two year contract and replaced the
contract for the initial ITD Unit also with a two year contract during the
first quarter of 1997. The company believes that in the near future a third
ITD Unit will be contracted for service in Colombia. Furthermore, as the
number of operating ITD Units continues to increase the industry will accept
the Company's technology as proven. Management believes that environmental
concerns by major petroleum companies and pressures by the government(s) will
continue to create opportunities for the Company's technology, particularly as
they relate to land based and offshore drilling discharge.
ITEM 7. FINANCIAL STATEMENTS
The information required hereunder is included in this report as set forth
in the "Index to Financial Statements" on page F-1.
16
<PAGE> 17
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
There have been no changes in accountants during the Company's two most
recent fiscal years, nor have there been any disagreements with accountants on
any matter of accounting principals or practices, financial statement
disclosure, or auditing scope or procedure.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
Directors are elected annually and hold office until the next annual
meeting of the stockholders of the Company or until their successors are
elected and qualified. Officers are elected annually and serve at the
discretion of the Board of Directors. There is no family relationship between
or among any of the directors and executive officers of the Company.
JAMES S. PERCELL, age 54, serves as Chairman, President and CEO of the
Company and also serves as President of the Company's subsidiary, NFE. Mr.
Percell became a director of the Company and President, Chief Executive Officer
and a director of NFE in November, 1995. Mr. Percell became President and CEO
of the Company in January, 1996. Mr. Percell also serves as President of
Percell & Associates, a project developer of facilities in the hydrocarbon
industry. From 1985-1993, Mr. Percell served as Vice-President of Belmont
Constructors, Inc., a heavy industrial contractor with annual sales of $263
million in 1992 up from $2 million in 1984. From 1982-1984, he served as
President of Capital Services Unlimited, an international supply company for
refining, petrochemical and oil field compressor stations, modular refineries
and modular oilfield components. From 1977-1980, Mr. Percell served as
President of Percell & Lowder, Inc., an oilfield fabricator of onshore and
offshore facilities, and from 1960-1977, he served as project manager for
various onshore and offshore projects. He received his education at Amarillo
College in Amarillo, Texas.
ROBIN M. PATE, age 70, has been a director of the Company since November,
1995. Mr. Pate recently retired from the position of Executive Vice-President
of Enterprise Products Company. Mr. Pate joined Enterprise as Senior
Vice-President of operations in 1980. Before joining Enterprise, Mr. Pate
served as President of American Borate Company for three years, Vice-President
of Tenneco Oil for 12 years, and Executive Vice-President of Houston Reinforced
Plastics. Mr. Pate is a registered professional engineer and is a member of the
Texas Professional Engineering Association, Texas Bar Association and American
Bar Association, Gas Processors Association and the National Petroleum Refiners
Association of America. He formerly served on the Board of Directors of the
Gas Processors Association and National Petroleum Refiners Association of
America. Mr. Pate is an active member of St. Christopher's Episcopal Church as
well as a member of the 100 Club and the Museum of Fine Arts. Mr. Pate has a
degree in Chemical
17
<PAGE> 18
Engineering from the University of Texas in addition to a Doctor of
Jurisprudence in Law from the University of Houston.
BRYAN SHARP, age 53, has served as a director of the Company since
November, 1995. Mr. Sharp currently serves as Principal-in-Charge and Director
of Espey, Huston & Associates, Inc., an environmental consulting company, and
from 1990-1993, he served as President of EH&A. As President, Mr. Sharp was
responsible to the Board of Directors for the day-to-day operations and
profitability at all EH&A operations. As Principal-in-Charge and Director, Mr.
Sharp continues to be involved in all aspects of EH&A's environmental
consulting practice. Prior to joining EH&A, Mr. Sharp worked as an assistant
and consultant in projects for the Lower Colorado River Authority and Tracor,
Inc., both concerned with ecological surveys preceding major industrial
development (power plants and new town projects). Mr. Sharp has also worked for
North Texas State University, the Department of the Interior, and the
University of Texas.
Mr. Sharp also has extensive teaching and research experience principally
in the fields of genetics and environmental biology. He has taught courses in
embryology, genetics, natural history, ecology and aquatic biology. His early
research was concerned with genetics of alcohol addiction and of blood serum
proteins in vertebrates. In 1968, he began ecological research in conjunction
with the Bureau of Reclamation which was concerned with the effect of
evaporation control upon the ecology of reservoirs. More recently, Mr. Sharp
has conducted research concerning the influence of temperature in fish
development and of fish ecology. Mr. Sharp has produced many publications and
technical reports, including a nationally acclaimed study, "Effects of
Evaporation Suppression on Reservoir Ecology" published by the Journal of
American Water Works Association. Mr. Sharp has a B.S. degree in Education from
North Texas State University, a M.S. degree in Biology from North Texas State
University and studied for his Ph.D. in Zoology from the University of Texas at
Austin.
MICHAEL M. DUNSON, age 49, joined the Company in March, 1996, and serves as
its Chief Financial Officer and as Secretary-Treasurer. Mr. Dunson became a
director of the Company in July, 1996. In 1983, Mr. Dunson opened the Houston
office of the New York-based investment banking firm of Copeland, Wickersham,
Wiley & Co., Inc. Mr. Dunson was the managing partner in the Houston office and
concentrated his efforts serving clients, both institutional and corporate, in
the oil field services industry. From 1983 to 1992, Mr. Dunson owned Bay
Industrial Sales, a stocking wholesale distributor of selected welding supplies
to the refining, petrochemical and fabrication industries. In 1989, Mr. Dunson
began his own investment banking/consulting firm based in Houston and continues
to serve his original client base. Mr. Dunson has both his M.B.A. in Finance
and B.A. in Math from The University of Texas at Austin, Austin, Texas.
CERTAIN SECURITIES FILINGS
The Company believes that timely reports have been filed by all persons
required to make reports pursuant to Section 16(a) of the Exchange Act.
18
<PAGE> 19
ITEM 10. EXECUTIVE COMPENSATION
Mr. James Percell, became President and Chief Executive Officer of the
Company in January, 1996. During the current fiscal year, Mr. Percell did not
receive any compensation for the services he rendered to the Company. The
Company presently intends to negotiate an employment contract with Mr. Percell
which will provide for compensation to him. Mr. Percell's employment contract
will not provide payment for any prior services to the Company performed by Mr.
Percell. Mr. Kevin Baadsgaard served as President and Chief Executive Officer
of the Company during 1994 and until he resigned in October, 1995. In November
1995, Mr. Burl Jacks became President and Chief Executive Officer of the
Company. Mr. Jacks did not receive any compensation for the services he
rendered to the Company during 1995 or 1996. Mr. Jacks was not employed by the
Company during 1994. No executive officer of the Company received compensation
which exceeded $100,000 during 1996.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Name and Annual Compensation Long Term Compensation All
Principal Stock Options Other
Position Year Salary Bonus Other All Restricted Awards (Shares) Compensation
<S> <C> <C> <C> <C> <C> <C> <C>
James S. Percell
Chief Executive
Officer 1996 -0- -0- -0- -0- -0- -0-
Kevin Baadsgaard
Chief Executive
Officer 1995 $ 35,750(1) -0- -0- -0- -0- -0-
1994 $ 36,914(2) -0- -0- -0- -0- -0-
</TABLE>
(1) Of this amount, $9,250, $9,942 and $9,942 was earned and accrued
during 1995, 1994, and 1993, respectively. In April, 1996, the Company issued
20,810 shares at $1.40 per share as payment for this earned and accrued
employment compensation.
(2) As additional employee compensation, Mr. Baadsgaard received 239,000
restricted shares of Common Stock of the Company in September, 1994. The
estimated fair market value of the Common Stock was $0.38 per share.
DIRECTOR COMPENSATION
The Company does not currently pay any cash director's fees, but it pays
the expenses, if any, of its directors in attending board meetings. In
November, 1995, the Company issued to each of Messrs. Percell, Pate and Sharp
800,000 options to purchase shares of Common Stock of the Company at $0.60 per
share. The options are fully vested and may be exercised at any time until the
termination of the option which is as of November 2, 2005.
EMPLOYEE STOCK OPTION PLAN
While the Company has been successful in attracting and retaining qualified
personnel, the Company believes that its future success will depend in part on
its continued ability to attract and retain highly qualified personnel. The
Company pays wages and salaries which it believes are competitive. The
19
<PAGE> 20
Company also believes that equity ownership is an important factor in its
ability to attract and retain skilled personnel, and the Board of Directors of
the Company is presently evaluating the adoption of an employee stock option
program. While no decision has been made as to the type of stock option program
which may be adopted, it is the intention of the Board of Directors that a
stock option program will be established.
The purpose of the stock option program will be to further the interest of
the Company, its subsidiaries and its stockholders by providing incentives in
the form of stock options to key employees and directors who contribute
materially to the success and profitability of the Company. The grants will
recognize and reward outstanding individual performances and contributions and
will give such persons a proprietary interest in the Company, thus enhancing
their personal interest in the Company's continued success and progress. This
program will also assist the Company and its subsidiaries in attracting and
retaining key employees and directors.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information as of March 21, 1997
with respect to the beneficial ownership of shares of Common Stock by (i) each
person who owns beneficially more than 5% of the outstanding shares of Common
Stock, (ii) each director of the Company, (iii) each executive officer of the
Company and (iv) all executive officers and directors of the Company as a
group. Each stockholder has sole voting and investment power with respect to
the shares shown.
20
<PAGE> 21
<TABLE>
<CAPTION>
NUMBER OF PERCENT
NAME SHARES OWNED OF CLASS
<S> <C> <C>
James S. Percell 992,861(1) 10.0%
2600 South Loop West, #445
Houston, Texas 77054
Robin M. Pate 817,759(1) 8.2%
9723 Truscan
Houston, Texas 77080
Bryan Sharp 800,000(1) 8.0%
3200 Wilcrest, #200
Houston, Texas 77042
Michael M. Dunson -0- 0.00%
2600 South Loop West, #445
Houston, Texas 77054
Burl Jacks 500,000(1)(2) 5.4%
8202 Devlin Pt.
San Antonio, Texas 78240
Kelly Trimble 559,467 6.1%
175 South Main, #1430
Salt Lake City, Utah 84111
All officers and directors
as a Group (4 persons) 2,610,620 22.6%
- ----------------------
</TABLE>
(1) On November 3, 1995, the Company issued to each of Messrs. Percell,
Pate and Sharp 800,000 options to purchase shares of Common Stock of the
Company at $0.60 per share. In addition, the Company issued Mr.Jacks 500,000
options to purchase shares of Common Stock of the Company at $0.60 per share.
All of the options are fully vested and may be exercised at any time until
November 2, 2005 and, therefore are deemed outstanding. Mr. Jacks has
exercised 40,000 options.
(2) Mr. Jacks is a former director of the Company.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The current Board of Directors of the Company has adopted a policy that
Company affairs will be conducted in all respects by standards applicable to
publicly-held corporations and that the Company will not enter into any
transactions and/or loans between the Company and its officers, directors and
5% stockholders unless the terms are no less favorable than could be obtained
from independent, third parties and will be approved by a majority of the
independent, disinterested directors of the Company.
21
<PAGE> 22
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(A) EXHIBITS
<TABLE>
<CAPTION>
Exhibit No. Identification of Exhibit
- ----------- -------------------------
<S> <C>
3.1(1) Certificate of Incorporation of the Registrant
3.2(1) Bylaws of the Registrant
4.1(1) See Exhibits 3.1 and 3.2. for provisions of the Articles of Incorporation and Bylaws of the Registrant
defining rights of holders of common stock of the Registrant
4.2(1) Common Stock specimen
4.5(1) Form of Warrant Certificate of Parker Drilling Company
10.1(1) Operating Agreement of OnSite Technology, LLC
10.2(1) Purchase Order for ITD Units with Roberds-Johnson Industries, Inc.
10.3(1) Credit Agreement between Environmental Safeguards, Inc. and Casuarina, Ltd.
10.4(1) Term Note of Environmental Safeguards Inc., borrower.
10.5(1) Warrant Agreement between Environmental Safeguards, Inc. and Parker Drilling
Company
21.1(1) Subsidiaries of Registrant
27.1 Financial Data Schedule
</TABLE>
- --------------------
(1) Previously filed as an exhibit to the Company's Registration Statement on
Form SB-2 (No. 333-15025), as amended, effective with the Commission on
February 11, 1997, and incorporated herein by reference thereto.
(B) REPORTS ON FORM 8-K.
No reports on Form 8-K were filed during the three months ended December
31, 1996.
22
<PAGE> 23
ENVIRONMENTAL SAFEGUARDS, INC. AND SUBSIDIARY
CONSOLIDATED FINANCIAL STATEMENTS
WITH REPORT OF INDEPENDENT ACCOUNTANTS
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
<PAGE> 24
ENVIRONMENTAL SAFEGUARDS, INC. AND SUBSIDIARY
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE(S)
-------
<S> <C>
Report of Independent Accountants F-2
Financial Statements
Consolidated Balance Sheet as of December 31,
1996 and 1995 F-3
Consolidated Statements of Operations for the
years ended December 31, 1996 and 1995 F-4
Consolidated Statements of Stockholders' Equity
(Deficit) for the years ended December 31,
1996 and 1995 F-5-6
Consolidated Statements of Cash Flows for the
years ended December 31, 1996 and 1995 F-7
Notes to Consolidated Financial Statements F-8-25
</TABLE>
F-1
<PAGE> 25
[HAM, LANGSTON & BREZINA, LLP LETTERHEAD]
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders
Environmental Safeguards, Inc.
We have audited the accompanying consolidated balance sheet of Environmental
Safeguards, Inc. and Subsidiary as of December 31, 1996 and 1995, and the
related consolidated statements of operations, changes in stockholders' equity
(deficit) and cash flows for the years then ended. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Environmental Safeguards, Inc. and Subsidiary as of December 31, 1996 and 1995,
and the consolidated results of their operations and their cash flows for the
years then ended in conformity with generally accepted accounting principles.
Houston, Texas
March 18, 1997
F-2
<PAGE> 26
ENVIRONMENTAL SAFEGUARDS, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1996 AND 1995
<TABLE>
<CAPTION>
1996 1995
---------- ----------
<S> <C> <C>
ASSETS
------
Current assets:
Cash and cash equivalents $3,363,300 $ 194,388
Accounts receivable from the Investee 57,306 -
---------- ----------
Total current assets 3,420,606 194,388
Property and equipment, net 4,422 18,240
Investment in the Joint Venture 1,935,899 105,462
Other assets 120,060 -
---------- ----------
Total assets $5,480,987 $ 318,090
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
- ----------------------------------------------
Current liabilities:
Notes payable and current maturities of
long-term debt $ - $ 233,517
Accounts payable 10,405 215,116
Accounts payable to the Joint Venture 13,258 9,362
Accrued liabilities 48,678 165,937
---------- ----------
Total current liabilities 72,341 623,932
Convertible debentures 1,154,000 -
Long-term debt 3,000,000 -
Deferred gain 199,666 -
---------- ----------
Total liabilities 4,426,007 623,932
---------- ----------
Commitments and contingencies (Notes 1, 4,
10 and 12)
Stockholders' equity (deficit):
Common stock; $.001 par value, 50,000,000
shares authorized; 6,854,828 and 5,551,450
shares issued and outstanding at
December 31, 1996 and 1995, respectively 6,855 5,551
Unissued common stock 812,585 50,000
Additional paid-in capital 3,692,548 2,448,744
Accumulated deficit (3,457,008) (2,810,137)
---------- ----------
Total stockholders' equity (deficit) 1,054,980 (305,842)
---------- ----------
Total liabilities and stockholders'
equity (deficit) $5,480,987 $ 318,090
========== ==========
</TABLE>
The accompanying notes are an integral
part of these financial statements.
F-3
<PAGE> 27
ENVIRONMENTAL SAFEGUARDS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
<TABLE>
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
Income:
Service revenue $ - $ 53,345
Interest income 17,599 -
Other income 3,519 -
----------- -----------
Total income 21,118 53,345
Costs and expenses:
Loss (income) from investment in
the Joint Venture 92,530 (63,052)
Operational and general 153,863 522,833
Depreciation 7,325 58,563
Stock compensation 350,419 -
Provision for reduction in carrying
value of certain assets - 737,217
Interest 137,887 13,397
----------- -----------
Total costs and expenses 742,024 1,268,958
----------- -----------
Loss before extraordinary gain on
elimination of debt (720,906) (1,215,613)
Extraordinary gain on elimination of
debt, net 74,035 -
----------- -----------
Net loss $ (646,871) $(1,215,613)
=========== ===========
Weighted average shares
outstanding 6,375,296 4,709,520
=========== ===========
Net loss per common share before
extraordinary gain on elimination
of debt $ (0.11) $ (0.26)
Extraordinary gain .01 -
----------- -----------
Net loss per common share $ (0.10) $ (0.26)
=========== ===========
</TABLE>
The accompanying notes are an integral
part of these financial statements.
F-4
<PAGE> 28
ENVIRONMENTAL SAFEGUARDS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
<TABLE>
<CAPTION>
PREFERRED STOCK COMMON STOCK
------------------------- -------------------------
SHARES AMOUNT SHARES AMOUNT
----------- ------ ----------- ------
<S> <C> <C> <C> <C>
Balances at January 1, 1995 296,170 $ 296 4,052,003 $4,052
Common stock issued for cash - - 600,000 600
Common stock issued in exchange for
services - - 10,820 11
Preferred stock converted to common
stock on a three for one basis (296,170) (296) 888,627 888
Common stock for which cash was re-
ceived but shares were not issued
at year end - - - -
Net loss for the year ended
December 31, 1995 - - - -
----------- ----- ----------- ------
Balances at December 31, 1995 - - 5,551,450 5,551
Issuance of shares that were unissued
at December 31, 1995 - - 62,500 63
Common stock issued for cash - - 512,500 513
Common stock issued for cash upon
exercise of options and warrants - - 410,000 410
Common stock issued in exchange for
settlement of accrued compensation and
notes payable - - 157,258 157
Common stock issued in exchange for
services - - 149,120 149
Common stock issued in exchange for
increased investment in the Joint
Venture - - 12,000 12
Common stock issuance declared effective
December 1, 1996 in payment of accrued
interest on convertible debentures. - - - -
Common stock for which cash was received
but for which shares were not issued
at year end - - - -
Common stock to be issued in January
1998 under note settlement agreement - - - -
Net income for the year ended
December 31, 1996 - - - -
----------- ------ ----------- ------
Balances at December 31, 1996 - $ - 6,854,828 $6,855
=========== ====== =========== ======
</TABLE>
The accompanying notes are an integral
part of these financial statements.
F-5
<PAGE> 29
ENVIRONMENTAL SAFEGUARDS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
<TABLE>
<CAPTION>
RETAINED
UNISSUED ADDITIONAL EARNINGS
COMMON PAID-IN (ACCUMULATED
STOCK CAPITAL DEFICIT) TOTAL
-------- ---------- ------------ -----------
<S> <C> <C> <C> <C>
Balances at January 1, 1995 $ - $1,899,127 $(1,594,524) $ 308,951
Common stock issued for cash - 539,400 - 540,000
Common stock issued in exchange for
services - 10,809 - 10,820
Preferred stock converted to common
stock on a three for one basis - (592) - -
Common stock for which cash was re-
ceived but shares were not issued
at year end 50,000 - - 50,000
Net loss for the year ended
December 31, 1995 - - (1,215,613) (1,215,613)
-------- ---------- ----------- ----------
Balances at December 31, 1995 50,000 2,448,744 (2,810,137) (305,842)
Issuance of shares that were unissued
at December 31, 1995 (50,000) 49,937 - -
Common stock issued for cash - 409,487 - 410,000
Common stock issued for cash upon
exercise of options and warrants - 190,090 - 190,500
Common stock issued in exchange for
settlement of accrued compensation and
notes payable - 220,032 - 220,189
Common stock issued in exchange for
services - 350,270 - 350,419
Common stock issued in exchange for
increased investment in the Joint
Venture - 23,988 - 24,000
Common stock issuance declared effective
December 1, 1996 in payment of accrued
interest on convertible debentures 67,833 - - 67,833
Common stock for which cash was received
but for which shares were not issued
at year end 688,500 - - 688,500
Common stock to be issued in January
1998 under note settlement agreement 56,252 - - 56,252
Net income for the year ended
December 31, 1996 - - (646,871) (646,871)
-------- ---------- ----------- ----------
Balances at December 31, 1996 $812,585 $3,692,548 $(3,457,008) $1,054,980
======== ========== =========== ==========
</TABLE>
The accompanying notes are an integral
part of these financial statements.
F-6
<PAGE> 30
ENVIRONMENTAL SAFEGUARDS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
<TABLE>
<CAPTION>
1996 1995
----------- ----------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (646,871) $(1,215,613)
Adjustment to reconcile net loss to net cash
used in operating activities:
Extraordinary gain on elimination of debt (74,035) -
Common stock exchanged for services and
accrued interest expense 418,252 10,820
Loss (income) from investment in the Joint
Venture 92,530 (63,052)
Provision for reduction in carrying value
of certain assets - 737,217
Amortization of deferred gain (3,119) -
Amortization of debt issuance costs 6,968 -
Amortization of debt discount 44,000 -
Depreciation expense 7,325 58,563
Changes in operating assets and liabilities:
Decrease in accounts receivable, trade - 41,329
Increase in accounts receivable from
the Investee (57,306) -
Increase in other assets (925) -
Decrease in accounts payable (130,676) (3,859)
Increase in accrued liabilities 46,616 66,132
----------- ----------
Net cash used in operating activities (297,241) (368,463)
----------- -----------
Cash flows from investing activities:
Capital expenditures - (46,067)
Investment in the Joint Venture (1,692,224) (33,048)
Proceeds from sale of equipment 6,493 -
----------- -----------
Net cash used in investing activities (1,685,731) (79,115)
----------- -----------
Cash flows from financing activities:
Proceeds from short-term notes payable - 180,004
Repayment of short-term notes payable (95,000) (137,649)
Proceeds from long-term debt 3,000,000 -
Repayment of long-term debt (26,013) (69,437)
Proceeds from sale of convertible debentures 1,110,000 -
Payment of debt issuance costs (54,749) -
Proceeds from sale of common stock 1,289,000 590,000
Payment of deferred stock issuance costs (71,354) -
----------- -----------
Net cash provided by financing activities 5,151,884 562,918
----------- -----------
Net increase in cash and cash equivalents 3,168,912 115,340
Cash and cash equivalents, beginning of year 194,388 79,048
----------- -----------
Cash and cash equivalents, end of year $ 3,363,300 $ 194,388
=========== ===========
Supplemental disclosure of cash flow information:
Cash paid for interest expense $ 4,989 $ 9,335
=========== ===========
</TABLE>
The accompanying notes are an integral
part of these financial statements.
F-7
<PAGE> 31
ENVIRONMENTAL SAFEGUARDS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Environmental Safeguards, Inc. ("ESI") was incorporated under the laws of
the state of Nevada on December 30, 1985 as Cape Cod Investment Company.
The Company adopted its present name on May 17, 1993 concurrently with
its reverse acquisition of National Fuel and Energy, Inc. ("NFE"), a
Wyoming corporation. In these financial statements, the Company and its
wholly owned subsidiary, NFE, are collectively referred to as the
"Company".
The Company is engaged in the business of developing, marketing and
providing environmental reclamation/remediation technologies and
services. To date, the primary service offered by the Company has been
the reclamation/remediation of soil contaminated by oil based drilling
mud, fuel spills, leaking underground storage tanks and other sources of
hydrocarbon contamination. The Company's primary customers have been
energy companies operating in the Western United States; however, the
Company is making efforts to broaden the geographical scope of its
operations and is now targeting South America as a key area for its
future growth.
The Company, operating through the Joint Venture, utilizes indirect
thermal desorption technology in its reclamation/remediation process.
Accordingly, the units developed by the Company for providing these
services are referred to as ITD Units.
Following is a summary of the Company's significant accounting policies:
PRINCIPLES OF CONSOLIDATION
These consolidated financial statements include the accounts of ESI and
its wholly-owned subsidiary, NFE. All significant intercompany
transactions have been eliminated.
CASH AND CASH EQUIVALENTS
For purposes of reporting cash flows, the Company considers all
short-term investments with an original maturity of three months or less
to be cash equivalents.
Continued
F-8
<PAGE> 32
ENVIRONMENTAL SAFEGUARDS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
CONCENTRATIONS OF CREDIT RISK
Financial instruments which subject the Company to concentrations of
credit risk include cash and accounts receivable. The Company maintains
its cash in banks selected based upon management's assessment of the
banks' financial stability. Balances periodically exceed the $100,000
federal depository insurance limit; however, the Company has not
experienced any losses on deposits. Accounts receivable generally arise
from sales of services to multinational energy companies operating in the
United States and South America. Such accounts receivable are reflected
on the balance sheet of the Joint Venture and the Investee (See Note 4).
Collateral is generally not required for credit granted.
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost and are depreciated over
their estimated useful lives using the straight-line method for financial
reporting purposes and accelerated methods for tax reporting purposes.
The cost and related accumulated depreciation of property and equipment
retired or otherwise disposed of are removed from the accounts and any
gain or loss is currently recognized in the statement of operations.
Maintenance, repairs and minor renewals necessary to maintain property
and equipment in normal operating condition are expensed as incurred.
Renewals and improvements that extend the useful life or increase the
value of an asset are capitalized.
The Company has adopted Statement of Financial Accounting Standards
("SFAS") No. 121, Accounting for the Impairment of Long Lived Assets and
for Long Lived Assets to be Disposed Of. SFAS No. 121 requires that
long- lived assets to be held and used by an entity be reviewed for
impairment whenever events or changes indicate that the net book value of
the asset may not be recoverable. An impairment loss is recognized if
the sum of expected future cash flows from the use of the asset is less
than the net book value of the asset.
INVESTMENT IN JOINT VENTURE
The Company's investment in a joint venture is accounted for using the
equity method.
ISSUANCE COSTS
Debt issuance costs are deferred and recognized over the term of the
related debt.
Stock issuance costs are deferred and offset against proceeds from sale
of common stock upon closing.
Continued
F-9
<PAGE> 33
ENVIRONMENTAL SAFEGUARDS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
INCOME TAX
The Company uses the liability method of accounting for income taxes.
Under the liability method, deferred income taxes are recorded to reflect
the tax consequences on future years of temporary differences between the
tax basis of assets and liabilities and their financial amounts at
year-end. The Company provides a valuation allowance to reduce deferred
tax assets to their net realizable value. The Company and NFE file a
consolidated corporation federal income tax return.
LOSS PER SHARE
Loss per share is computed on the basis of the weighted average number of
shares of common stock and common stock equivalents outstanding during
each period. During the noted periods, all common stock equivalents were
anti- dilutive.
ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities at
the date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ
from those estimates.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company includes fair value information in the notes to financial
statements when the fair value of its financial instruments is different
from the book value. When the book value approximates fair value, no
additional disclosure is made.
RECLASSIFICATIONS
Certain amounts presented in the financial statements as of December 31,
1995 have been reclassified to conform to the presentation used in 1996.
Continued
F-10
<PAGE> 34
ENVIRONMENTAL SAFEGUARDS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
RECENTLY ISSUED PRONOUNCEMENTS
The Financial Accounting Standards Board has issued Financial Accounting
Standards No. 123, "Accounting for Stock- Based Compensation" ("SFAS No.
123"). SFAS No. 123, which is effective for fiscal years beginning after
December 15, 1995, encourages but does not require companies to recognize
compensation expense for grants of stock, stock options and other equity
instruments to employees based on new fair value accounting rules. The
Company has not yet decided if it will adopt this new fair value based
method of accounting.
2. NON-CASH INVESTING AND FINANCING ACTIVITIES
During 1996, the Company engaged in non-cash investing and financing
activities as follows:
<TABLE>
<S> <C>
Increased investment in the Joint Venture in
exchange for an all-inclusive license for ITD
technology (See Note 7) $202,785
Repaid short-term notes payable through issuance
of common stock 112,504
Decrease in accrued liabilities through issuance
of common stock 163,875
Increased investment in the Joint Venture through
issuance of common stock to vendors providing
services to the Joint Venture 24,000
</TABLE>
The Company did not engage in any significant non-cash investing and
financing activities in 1995.
3. PROPERTY AND EQUIPMENT
Property and equipment at December 31, 1996 and 1995 consists of the
following:
<TABLE>
<CAPTION>
1996 1995
-------- --------
<S> <C> <C>
Office furniture and office equipment $ 8,866 $ 6,000
Remediation equipment held for
resale - 30,502
-------- --------
8,866 36,502
Accumulated depreciation (4,444) (18,262)
-------- --------
$ 4,422 $ 18,240
======== ========
</TABLE>
Continued
F-11
<PAGE> 35
ENVIRONMENTAL SAFEGUARDS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
3. PROPERTY AND EQUIPMENT, CONTINUED
During 1995, management reviewed all equipment for impairment of value
and made the decision to write down and sell for scrap existing units
used in soil remediation. Management's decision was based upon the
development of new units with greater capacity and efficiency which are
being used in the Company's joint venture with Parker Drilling Company
(See Note 4). The $737,217 provision for reduction in carrying value of
certain assets in the accompanying consolidated statement of operations
reflects the impact of management's decision on both property and
equipment and certain other assets.
4. INVESTMENT IN JOINT VENTURE
Effective January 1, 1995, the Company entered into an exclusive
marketing agreement with Parker Drilling Company ("PDC") under which PDC
was appointed as the Company's sole marketing representative for the
Company's ITD services as they relate to reclamation of hydrocarbons from
drill cuttings. The geographical scope of the exclusive marketing
agreement extended to the continental United States and Alaska and many
countries which have significant energy-related industries.
Effective August 1, 1995, the Company and PDC entered into a joint
venture agreement (the "Agreement") to provide services previously
provided under the exclusive marketing agreement described in the
previous paragraph. Accordingly, Onsite Technology, L.L.C. (the "Joint
Venture") was formed under the Oklahoma Limited Liability Company Act.
Pursuant to the Agreement, as amended, the Company granted to the Joint
Venture certain exclusive licenses to use the technologies included in
the reclamation/remediation units and the proprietary processes for on
location soil reclamation/remediation in the United States and in certain
foreign countries. PDC has agreed to actively market and promote the
services of the Joint Venture through specific actions described in the
Agreement. Expenses associated with certain promotional activities will
be borne by PDC until July 31, 1996 and included in the operational and
general expenses of the Joint Venture. The Company intends to conduct
all of its future business operations, related to its ITD technology
through the Joint Venture.
Continued
F-12
<PAGE> 36
ENVIRONMENTAL SAFEGUARDS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
4. INVESTMENT IN JOINT VENTURE, CONTINUED
Under the terms of the Agreement the Company and PDC each own a 50%
interest in the assets, liabilities, capital and profits of the Joint
Venture. Each member initially made capital contributions of $1,000 to
the Joint Venture and may be required to make additional capital
contributions, if funds are needed to enable the Joint Venture to conduct
its business. The Joint Venture will continue to operate until January
1, 2025, unless such date is changed as provided for in the Agreement.
Following is summarized financial information of the Joint Venture as of
December 31, 1996 and 1995 and for the years then ended:
BALANCE SHEET
<TABLE>
<CAPTION>
1996 1995
---------- ----------
<S> <C> <C>
ASSETS
------
Cash $ 58,013 $ 16,190
Accounts receivable, trade 25,200 259,200
Accounts receivable from the Company 13,258 14,548
Accounts receivable from the Investee 78,062 -
Other current assets 12,850 500
---------- ----------
Total current assets 187,383 290,438
Due from the Investee 950,000 -
Property and equipment, net 3,754,435 692,783
Investment in the Investee 80,639 -
---------- ----------
Total assets $4,972,457 $ 983,221
========== ==========
LIABILITIES AND VENTURERS' CAPITAL
----------------------------------
Accounts payable $1,100,659 $ 64,573
Accounts payable to a related party - 707,724
---------- ----------
Total current liabilities 1,100,659 772,297
Venturers' capital 3,871,798 210,924
---------- ----------
Total liabilities and venturers'
capital $4,972,457 $ 983,221
========== ==========
The Company's 50% share of the
capital of the Joint Venture $1,935,899 $ 105,462
========== ==========
</TABLE>
Continued
F-13
<PAGE> 37
ENVIRONMENTAL SAFEGUARDS, INC. AND
SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS, CONTINUED
4. INVESTMENT IN JOINT VENTURE, CONTINUED
<TABLE>
<S> <C> <C>
STATEMENT OF OPERATIONS
-----------------------
Service revenue $ 541,950 $ 272,700
---------- -----------
Costs and expenses:
Operating and general expenses 508,309 131,655
Loss from investment in OnSite
Colombia 69,361 -
Depreciation expense 149,340 14,941
---------- -----------
Total costs and expenses (727,010) (146,596)
Net (loss) income $ (185,060) $ 126,104
========== ===========
The Company's 50% equity in (loss)
earnings of the Joint Venture $ (92,530) $ 63,052
========== ===========
</TABLE>
The accounts payable to a related party at December 31, 1995 represents
amounts due to a subsidiary of PDC that constructed the Joint Venture's
first ITD unit. During 1996, the Company was required to make capital
contributions totaling $355,570 to pay its share of the first ITD unit's
cost (See Note 7).
In July 1996 the Joint Venture took delivery of an additional ITD unit at
an approximate manufactured cost of $950,000. In September 1996 the
Joint Venture awarded contracts for four additional units at a total cost
of approximately $4,000,000. Following is an analysis of the Joint
Venture's commitment at December 31, 1996:
<TABLE>
<S> <C>
Approximate amount of original commitment $4,000,000
Approximate amount paid to date 2,045,000
Approximate amount included in accounts
payable at December 31, 1996 1,090,000
----------
Remaining commitment at December 31, 1996 $ 860,000
==========
</TABLE>
The Company must bear its share of liabilities entered into by the Joint
Venture and is subject to any liabilities that result from the operations
of the Joint Venture. Failure to meet such liabilities would have a
significant negative impact on the operations of the Company.
Continued
F-14
<PAGE> 38
ENVIRONMENTAL SAFEGUARDS, INC. AND
SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS, CONTINUED
4. INVESTMENT IN JOINT VENTURE, CONTINUED
In November 1996, the Joint Venture entered into a joint venture, OnSite
Colombia, Inc., (the "Investee") with a group of South American
investors. The Investee was established to provide hydrocarbon
contaminated soil reclamation/remediation services in Colombia. The
Joint Venture owns a 50% interest in the assets, liabilities, capital and
profits of the Investee and, accordingly, the Company ultimately
participates on a 25% basis in the operations of the Investee. In
December 1996, the Joint Venture sold an ITD unit to the Investee for
$950,000 in a transaction that resulted in no gain or loss to the Joint
Venture.
Following is summarized information of the Investee as of December 31,
1996 and for the period from inception, November 25, 1996, to December
31, 1996:
BALANCE SHEET
<TABLE>
<S> <C>
ASSETS
------
Cash $ 162,961
Accounts receivable 184,734
Other current assets 35,615
----------
Total current assets 383,310
Property and equipment, net 910,417
----------
Total assets $1,293,727
==========
LIABILITIES AND VENTURERS' CAPITAL
----------------------------------
Accounts payable $ 9,954
Accrued liabilities 37,127
Accounts payable to the Joint Venture 78,062
Accounts payable to the Company 57,306
----------
Total current liabilities 182,449
Due to the Joint Venture 950,000
Venturers' capital 161,278
----------
Total liabilities and venturers'
capital $1,293,727
==========
The Joint Venture's 50% share of the
capital of the Investee $ 80,639
==========
</TABLE>
Continued
F-15
<PAGE> 39
ENVIRONMENTAL SAFEGUARDS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
4. INVESTMENT IN JOINT VENTURE, CONTINUED
STATEMENT OF OPERATIONS
<TABLE>
<S> <C>
Service revenue $ 189,424
----------
Costs and expenses:
Operating and general expenses 264,514
Depreciation expense 39,583
Interest expense 24,049
----------
Total costs and expenses 328,146
----------
Net loss $ (138,722)
==========
The Joint Venture's 50% equity in loss
of the Investee $ (69,361)
==========
</TABLE>
5. NOTES PAYABLE AND LONG-TERM DEBT
Notes payable and long-term debt at December 31, 1996 and 1995 consists
of the following:
<TABLE>
<CAPTION>
1996 1995
---------- ----------
<S> <C> <C>
Note payable to PDC, bearing interest at
6.3% per year and repayable based upon
40% of the Company's cash distributions
from the Joint Venture, until December 31,
2000, at which date the entire unpaid
balance is due. This note is uncollat-
eralized. $3,000,000 $ -
Note payable to a director/stockholder of
the Company, with a stated interest rate
of 9% per year and originally due on
demand. This note was repaid through the
issuance of common stock during 1996. - 50,004
Note payable to a former owner of a distri-
butorship bearing interest at 9% per year
with principal and interest payable in
monthly installments of $6,353 through
April, 1996. This note was collateralized
by certain equipment and was repaid
during 1996. - 26,013
</TABLE>
Continued
F-16
<PAGE> 40
ENVIRONMENTAL SAFEGUARDS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
5. NOTES PAYABLE AND LONG-TERM DEBT, CONTINUED
<TABLE>
<S> <C> <C>
Note payable to a director/stockholder,
with a stated interest rate of 9% per year
and originally payable based upon a per-
centage of equity capital raised
subsequent to August 1994. This note
was repaid through the issuance of
common stock during 1996. - 62,500
Notes payable to director/stockholders
bearing interest at 8.75% per year and
due in January 1996. These notes were
uncollateralized and were repaid during
1996. - 95,000
---------- ----------
Total notes payable and long-term debt 3,000,000 233,517
Less current maturities - 233,517
---------- ----------
Long-term debt $3,000,000 $ -
========== ==========
</TABLE>
In December 1996, the Company entered into a credit agreement (the
"Credit Agreement") with PDC under which PDC provided the Company with
$3,000,000 of long-term debt. The Credit Agreement provides for a change
in the Company's cash distribution percentage in the Joint Venture from
50%-50% to 30%-70% until the loan is fully repaid. Such difference in
the cash distribution percentage will be applied to reduce debt under the
Credit Agreement.
In connection with the Credit Agreement, the Company agreed to issue to
PDC warrants to acquire 250,000 shares of the Company's common stock at
$2.50 per share. The Credit Agreement encourages early repayment of the
underlying debt and accordingly, if the note is not fully repaid by
certain target dates the Company must issue to PDC warrants to acquire
50,000 additional shares of the Company's common stock at $2.50 per share
on each target date. These target dates are June 30, 1997 and December
31, 1997. All warrants issued under the Credit Agreement expire on
December 31, 1998.
No interest expense was accrued or paid on the $50,004 and $62,500 notes
shown above at December 31, 1995. These notes were repaid through
issuance of common stock during 1996 and represented debt to related
parties who elected to waive payment of accrued interest which would have
otherwise totaled approximately $10,000 at December 31, 1995.
Continued
F-17
<PAGE> 41
ENVIRONMENTAL SAFEGUARDS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
6. CONVERTIBLE DEBENTURES
In June 1996, the Company completed an offering of convertible debentures
(the "Debentures") which resulted in gross proceeds to the Company
(before issuance cost of $54,749) of $1,110,000. The Debentures bear
interest at 10% per year and are due in semi-annual payments of interest
only through December 31, 2000, at which date the entire principal
balance is due. The holders of the Debentures may convert them to shares
of the Company's common stock at a conversion rate of $0.60 per share at
any time prior to maturity. The Debentures allow for early redemption by
the Company and are subject to mandatory conversion upon the occurrence
of certain events. The conversion rate is subject to adjustment as
described in the Debenture agreement. At the date the Debentures were
approved, the Company's common stock had a fair market value of
approximately $0.80 per share and, accordingly, the debt was issued at a
discount of approximately $370,000. Such discount was to be amortized
over the term of the Debentures; however, the Debentures were converted
to common stock in February 1997. (See Note 13)
7. DEFERRED GAIN
In July 1996, the Company entered into an amendment to the Agreement
under which the Company granted the Joint Venture a non-royalty bearing,
exclusive, world wide license (the "License") for manufacture and use of
the Company's indirect thermal desorption soil remediation and
hydrocarbon reclamation/remediation system. In exchange for the granting
of the License, Parker Drilling Investment Company made a $202,785
capital contribution to the Joint Venture on behalf of the Company and
the Company recorded a $202,785 gain. Such gain has been deferred and
will be recognized using the straight-line method over the twenty-eight
and one-half year term of the License.
8. INCOME TAX
The composition of deferred tax assets and the related tax effects at
December 31, 1996 and 1995 are as follows:
<TABLE>
<CAPTION>
1996 1995
---------- ----------
<S> <C> <C>
Benefit from carryforward of net
operating losses $ 946,900 $ 733,764
Less valuation allowance (946,900) (733,764)
---------- ----------
Net deferred tax asset $ - $ -
========== ==========
</TABLE>
Continued
F-18
<PAGE> 42
ENVIRONMENTAL SAFEGUARDS, INC. AND
SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS, CONTINUED
8. INCOME TAX, CONTINUED
The difference between the income tax benefit in the accompanying
statement of operations and the amount that would result if the U.S.
Federal statutory rate of 34% were applied to pre-tax loss is as follows:
<TABLE>
<CAPTION>
1996 1995
-------------------- ---------------------
PERCENTAGE PERCENTAGE
OF PRE-TAX OF PRE-TAX
AMOUNT LOSS AMOUNT LOSS
-------- ---------- -------- ----------
<S> <C> <C> <C> <C>
Benefit for income tax at
federal statutory rate $219,936 34% $413,308 34%
Non-deductible expenses (6,800) (1%) - -
Increase in valuation
allowance (213,136) (33%) (413,308) (34%)
-------- ------- -------- ------
Total $ - - $ - -
======== ======= ======== ======
</TABLE>
At December 31, 1996 and 1995, for federal income tax and alternative
minimum tax reporting purposes, the Company has approximately $2,884,000
of unused net operating losses available for carryforward to future
years. The benefit from carryforward of such net operating losses will
expire in various years between 2001 and 2012. The benefit from
utilization of net operating loss carryforwards could be subject to
limitations if significant ownership changes occur in the Company.
9. CAPITAL STOCK
Following is a summary of activity in the Company's capital stock
accounts during the years ended December 31, 1996 and 1995:
SERIES A CONVERTIBLE PREFERRED STOCK
The Company has authorized 500,000 shares of serial preferred stock and
during the year ended December 31, 1993 the Company issued 296,170 shares
of Series A Convertible Preferred stock. The 296,170 shares of preferred
stock which were issued during 1993 included 147,400 shares issued for
cash of $2.50 per share, 100,000 shares issued to cancel certain
unsuccessful operating agreements and 48,770 shares issued in payment of
certain expenses and stockholder loans. All preferred stock issued in
1993 was valued at $2.50 per share. The cancellation of the operating
agreement, described above, also included the issuance of 150,000 shares
of common stock valued at $1.50 per share.
Continued
F-19
<PAGE> 43
ENVIRONMENTAL SAFEGUARDS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
9. CAPITAL STOCK, CONTINUED
Series A Preferred Stock is noncumulative, has voting rights of one vote
per share, and is convertible to common stock on a share for share basis.
All outstanding shares of Series A preferred stock originally contained a
provision by which they were automatically converted to common stock on
December 31, 1995. However, on June 26, 1995, when the Company's common
stock had a value of approximately $1.00 per share, the Company's board
of directors adopted a three for one conversion of all outstanding Series
A preferred stock to common stock and pursuant to this board resolution,
all shares of preferred stock were converted.
COMMON STOCK
In January and June 1995, the Company issued a total of 10,820 shares of
common stock in payment for services. The stock was issued at a value of
$1.00 per share based upon the estimated fair value of the stock at the
date of issue.
In May 1995, the Company received $300,000 for the sale of 12%
convertible debentures due in May 1996. The holders converted these
debentures into 300,000 shares of common stock of the Company during
1995.
In February 1996, the Company closed an exempt offering under Regulation
D of the Securities Act of 1933. The Company collected cash proceeds of
$700,000 for issuance of 875,000 shares of common stock ($390,000
collected in 1995 and $410,000 in 1996).
In April 1996, the Company issued 138,690 shares of common stock as
payment of $194,191 of compensation to eight former key employees and
certain former directors of the Company ($163,937 of the compensation was
recognized and accrued in 1995 and $30,254 was recognized in 1996). The
Company also issued 40,178 shares of common stock in repayment of certain
outstanding debt totaling $112,504. In connection with the debt
repayment, the Company will issue an additional 40,178 shares in January
1998 and the value of such shares is included in unissued common stock at
December 31, 1996. The common stock issued in these transactions was
recorded at a price of $1.40 per share based upon the estimated fair
value of the stock at the date the settlement agreements were reached.
Continued
F-20
<PAGE> 44
ENVIRONMENTAL SAFEGUARDS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
9. CAPITAL STOCK, CONTINUED
In July and August 1996, the Company issued 139,510 shares of common
stock in payment for services provided by certain vendors, directors and
a former contractor of the Company. The common stock was issued at
prices ranging from $2.00 to $2.50 per share based upon the estimated
fair value of the common stock at the date of issuance or the estimated
fair value of the services.
In February 1997, the Company closed an exempt offering under Regulation
D of the Securities Act of 1933. The Company collected cash proceeds of
$833,500 for the issuance of 333,400 shares of common stock ($688,500
collected in 1996 and $145,000 in 1997).
In June 1995, the Company effected a one for ten reverse stock split
because management believed that such a split would improve the market
price of the Company's common stock. In January 1996 the Company
effected a ten for one stock split to return the Company to its position
prior to the reverse split. All share and per share amounts included in
the financial statements provide retroactive effect to the stock splits.
UNISSUED COMMON STOCK
Unissued common stock at December 31, 1996 and 1995 represents shares for
which cash proceeds or other consideration had been received but shares
had not been issued at year end. The shares were subsequently issued in
March 1997 and February 1996, respectively.
STOCK OPTIONS
In November 1995, the Company granted a total of 2,900,000 stock options
to certain officers/directors and a former officer/director of the
Company at an option price of $0.60 per share. An option for 40,000 of
such shares was exercised in August 1996.
Continued
F-21
<PAGE> 45
ENVIRONMENTAL SAFEGUARDS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
9. CAPITAL STOCK, CONTINUED
Following is a summary of stock option activity:
<TABLE>
<CAPTION>
Number of Exercise
Shares Price
---------- --------
<S> <C> <C>
Options outstanding at
January 1, 1995 563,542 $5.00
Granted 2,900,000 $0.60
---------
Options outstanding at
December 31, 1995 3,463,542
Exercised (40,000) $0.60
---------
Options outstanding at
December 31, 1996 3,423,542
=========
</TABLE>
Following is a summary of outstanding stock options at December 31, 1996:
<TABLE>
<CAPTION>
Number of Shares Expiration Date Exercise Price
---------------- --------------- --------------
<S> <C> <C>
563,542 November 1998 $5.00
2,860,000 November 2005 $0.60
</TABLE>
STOCK WARRANTS
In September 1995, in connection with certain short term loans from an
individual, the Company issued warrants to purchase 370,000 shares of the
Company's common stock at a price of $0.45 per share. These warrants
were exercised in September 1996.
In December 1996, in connection with the Credit Agreement, the Company
issued PDC warrants to acquire 250,000 shares of the Company's common
stock at $2.50 per share. (See Note 5)
Continued
F-22
<PAGE> 46
ENVIRONMENTAL SAFEGUARDS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
10. MAJOR CUSTOMERS
During the years ended December 31, 1996 and 1995, all of the Company's
revenue came from three customers, each of which accounted for more than
10% of the Company's revenue. One such customer contracted for services
directly with the Company and the other two customers contracted for
services through the Joint Venture or the Investee.
11. EXTRAORDINARY GAIN ON ELIMINATION OF DEBT
During the year ended December 31, 1996, the Company negotiated with many
of its vendors concerning old outstanding balances. These negotiations
resulted in the vendors forgiving $74,035 of old balances. The gain on
forgiveness of accounts payable is presented as a extraordinary item in
the accompanying statement of operations and accumulated deficit.
12. LITIGATION
The Company is involved as a defendant in certain litigation filed by an
engineering company (the "Engineering Company") that constructed certain
soil reclamation/remediation units for the Company. The litigation
originally involved claims by the Engineering Company that the Company
owed additional compensation of approximately $150,000 for units
constructed which the Company believes did not meet required performance
criteria. The Company filed a counter claim for $200,000 to obtain
damages from the Engineering Company. The Company has been advised that
in 1994, the Engineering Company filed a petition seeking Chapter 11
Bankruptcy Protection. A Notice of Automatic Stay was filed in August
1994. In January 1995, the Engineering Company filed a Plan of
Reorganization with the Bankruptcy Court whereby the Company received
nothing and no adversary pleadings were filed against the Company.
Continued
F-23
<PAGE> 47
ENVIRONMENTAL SAFEGUARDS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
13. SUBSEQUENT EVENTS
In February 1997, the Company completed a public registration of
2,304,792 shares of its common stock. The Company's 10% convertible
debentures provide that they would be automatically converted into shares
of the Company's common stock upon the effective registration by the
Company of its common stock under the Securities Exchange Act of 1934 as
amended. Of the 2,304,792 shares offered in the registration, 370,000
shares were outstanding at December 31, 1996 and the balance of 1,934,792
were issued in March 1997 pursuant to the conversion of the 10%
debentures and payment of related accrued interest. To facilitate
analysis, the following proforma condensed balance sheet gives effect to
the following transactions as though the transactions had occurred at
December 31, 1996:
1. Conversion of the Company's 10% convertible debentures and
related accrued interest to common stock in February 1997.
2. Closing of the Company's most recent Regulation D offering in
February 1997 (See Note 9).
3. Issuance of 100,000 shares of common stock for $60,000 in cash
pursuant to existing stock options that were exercised in
February 1997.
PROFORMA CONDENSED BALANCE SHEET AT DECEMBER 31, 1996
<TABLE>
<CAPTION>
AS PROFORMA PROFORMA
REPORTED ADJUSTMENTS (UNAUDITED)
---------- ----------- -----------
<S> <C> <C> <C>
ASSETS
------
Current assets $3,420,606 $ 205,000 $3,625,606
Property and equipment, net 4,422 - 4,422
Investment in the Joint Venture 1,935,899 - 1,935,899
Other assets 120,060 (119,135) 925
---------- ---------- ----------
Total assets $5,480,987 $ 85,865 $5,566,852
========== ========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current liabilities $ 72,341 $ (9,427) $ 62,914
Convertible debentures 1,154,000 (1,154,000) -
Long-term debt 3,000,000 - 3,000,000
Deferred gain 199,666 - 199,666
Stockholders' equity 1,054,980 1,249,292 2,304,272
---------- ---------- ----------
Total liabilities and
stockholders' equity $5,480,987 $ 85,865 $5,566,852
========== ========== ==========
</TABLE>
Continued
F-24
<PAGE> 48
ENVIRONMENTAL SAFEGUARDS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
13. SUBSEQUENT EVENTS, CONTINUED
The pro-forma condensed balance sheet does not include conversion of
interest earned on the debentures during the period from December 31,
1996 to the date of conversion. If the common stock issued upon
conversion of the Company's 10% convertible debentures had been
outstanding since the date the debentures were issued, loss per share for
1996 would have been $(0.09).
F-25
<PAGE> 49
SIGNATURES
In accordance with the requirements of Section 13 of 15(d) of the
Exchange Act, the Registrant has caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized, on the 31st day of March, 1997.
Environmental Safeguards, Inc..
By: /s/ James S. Percell
------------------------------------
James S. Percell, Chairman of the
Board and Chief Executive Officer
Pursuant to the requirements of the Exchange Act, this report has been signed
below by the following persons in the capacities and on the dates indicated:
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C> <C>
/s/ James S. Percell Chairman of the Board, March 31, 1997
- -------------------------------------- Chief Executive Officer,
James S. Percell and Director
/s/ Michael M. Dunson Director and Chief March 31, 1997
- --------------------------------------- Financial Officer
Michael M. Dunson
/s/ Bryan Sharp Director March 31, 1997
- ---------------------------------------
Bryan Sharp
/s/ Robin Pate Director March 31, 1997
- ---------------------------------------
Robin Pate
</TABLE>
<PAGE> 50
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit No. Identification of Exhibit
- ----------- -------------------------
<S> <C>
3.1(1) Certificate of Incorporation of the Registrant
3.2(1) Bylaws of the Registrant
4.1(1) See Exhibits 3.1 and 3.2. for provisions of the Articles of Incorporation and Bylaws of the Registrant
defining rights of holders of common stock of the Registrant
4.2(1) Common Stock specimen
4.5(1) Form of Warrant Certificate of Parker Drilling Company
10.1(1) Operating Agreement of OnSite Technology, LLC
10.2(1) Purchase Order for ITD Units with Roberds-Johnson Industries, Inc.
10.3(1) Credit Agreement between Environmental Safeguards, Inc. and Casuarina, Ltd.
10.4(1) Term Note of Environmental Safeguards Inc., borrower.
10.5(1) Warrant Agreement between Environmental Safeguards, Inc. and Parker Drilling
Company
21.1(1) Subsidiaries of Registrant
27.1 Financial Data Schedule
</TABLE>
- --------------------
(1) Previously filed as an exhibit to the Company's Registration Statement on
Form SB-2 (No. 333-15025), as amended, effective with the Commission on
February 11, 1997, and incorporated herein by reference thereto.
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 3,363,300
<SECURITIES> 0
<RECEIVABLES> 57,306
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 3,420,606
<PP&E> 8,866
<DEPRECIATION> (4,444)
<TOTAL-ASSETS> 5,480,987
<CURRENT-LIABILITIES> 72,341
<BONDS> 4,154,000
0
0
<COMMON> 6,855
<OTHER-SE> 1,048,125
<TOTAL-LIABILITY-AND-EQUITY> 5,480,987
<SALES> 0
<TOTAL-REVENUES> 21,118
<CGS> 0
<TOTAL-COSTS> 604,137
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 137,887
<INCOME-PRETAX> (720,906)
<INCOME-TAX> 0
<INCOME-CONTINUING> (720,906)
<DISCONTINUED> 0
<EXTRAORDINARY> 74,035
<CHANGES> 0
<NET-INCOME> (646,871)
<EPS-PRIMARY> 0.10
<EPS-DILUTED> 0.10
</TABLE>
