<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the Quarterly Period Ended: June 30, 1999
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number: 000-21953
ENVIRONMENTAL SAFEGUARDS, INC.
(Exact name of registrant as specified in its charter)
Nevada 87-0429198
(State or other jurisdiction (IRS Employer
of incorporation or organization) Identification No.)
2600 South Loop West, Suite 645
Houston, Texas 77054
(Address of principal executive offices, including zip code)
(713) 641-3838
(Registrant's telephone number, including area code)
Check whether the issuer (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes [X] No [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS
At August 9, 1999, 10,105,944 shares of common stock, $.001 par value, were
outstanding.
Transitional Small Business Disclosure Format (check one): Yes [ ] No [X]
<PAGE> 2
ENVIRONMENTAL SAFEGUARDS, INC.
CONTENTS
PART I -- FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of June 30, 1999
and December 31, 1998
Consolidated Statements of Operations for the three
months and six months ended June 30, 1999 and 1998
Consolidated Condensed Statements of Cash Flows for the six
months ended June 30, 1999 and 1998
Selected Notes to Consolidated Condensed Financial Statements
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
PART II -- OTHER INFORMATION
Item 2. Changes in Securities
Item 4. Submission of Matters to a Vote of Security Holders
Item 6. Exhibits and Reports on Form 8-K
SIGNATURES
<PAGE> 3
PART I -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ENVIRONMENTAL SAFEGUARDS, INC.
------------
CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
For the three months and six months ended June 30, 1999 and 1998
(Unaudited)
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ENVIRONMENTAL SAFEGUARDS, INC.
CONSOLIDATED BALANCE SHEETS
------------
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
JUNE 30,
1999 DECEMBER 31,
ASSETS (UNAUDITED) 1998
----------- ------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 2,800 $ 4,792
Accounts receivable 1,615 1,734
Equipment held for sale 1,953 1,953
Prepaid expenses 563 273
Deferred income taxes 45 51
Other current assets 131 270
------- -------
Total current assets 7,107 9,073
Property and equipment, net 9,542 8,256
Acquired engineering design and
technology, net 2,630 2,835
------- -------
Total assets $19,279 $20,164
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 1,824 $ 1,735
Current portion of capital lease
obligation - 648
Accounts payable 669 628
Accrued liabilities 708 569
Income taxes payable 75 62
------- -------
Total current liabilities 3,276 3,642
Long-term debt, net of current portion 5,406 6,636
Minority interest 3,381 2,073
Commitments and contingencies
Stockholders' equity:
Preferred stock; Series B convertible; voting,
$.001 par value (aggregate liquidation
value - $2,897,700); 5,000,000 shares
authorized; 2,733,686 shares issued and
outstanding 3 3
Preferred stock; Series C non-conver-
tible, non-voting, cumulative; $.001 par
value (aggregate liquidation value -
$4,000,000); 400,000 shares authorized,
issued and outstanding 1 1
Common stock; $.001 par value; 50,000,000
shares authorized; 10,105,944 and
10,092,444 shares issued and outstanding
at June 30, 1999 and December 31, 1998,
respectively 10 10
Additional paid-in capital 14,326 14,318
Accumulated deficit (7,124) (6,519)
------- -------
Total stockholders' equity 7,216 7,813
------- -------
Total liabilities and stockholders'
equity $19,279 $20,164
======= =======
</TABLE>
The accompanying notes are an integral part of these
consolidated condensed financial statements.
F-1
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ENVIRONMENTAL SAFEGUARDS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
------------
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
------------------ ------------------
1999 1998 1999 1998
------- ------- ------- -------
<S> <C> <C> <C> <C>
Service revenue $ 2,083 $ 2,297 $ 6,293 $ 4,866
Cost of providing services 1,101 1,122 3,119 2,303
------- ------- ------- -------
Gross margin 982 1,175 3,174 2,563
Selling, general and administrative
expenses 965 841 1,830 1,720
Amortization of acquired engineering design
and technology 102 102 204 204
Research and development 62 - 77 -
------- ------- ------- -------
Income (loss) from operations (147) 232 1,063 639
Other income (expenses):
Interest income 39 44 90 133
Interest expense (323) (293) (601) (615)
Other 16 9 11 18
------- ------- ------- -------
Income (loss) before provision for income
taxes and minority interest (415) (8) 563 175
Provision for income taxes 168 162 524 435
------- ------- ------- -------
Income (loss) before minority interest (583) (170) 39 (260)
Minority interest (165) (54) (458) (225)
------- ------- ------- -------
Net loss $ (748) $ (224) $ (419) $ (485)
======= ======= ======= =======
Net loss available to common stockholders $ (936) $ (417) $ (793) $ (871)
Basic and dilutive loss per common share $ (0.09) $ (0.04) $ (0.08) $ (0.09)
======= ======= ======= =======
Weighted average shares outstanding 10,105 9,329 10,099 9,326
</TABLE>
The accompanying notes are an integral part of these
consolidated condensed financial statements.
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ENVIRONMENTAL SAFEGUARDS, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
------------
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS
ENDED JUNE 30,
------------------
1999 1998
------- -------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (419) $ (485)
Adjustment to reconcile net loss to net
cash provided (used) by operating
activities: 2,634 383
------- -------
Net cash provided (used) by
operating activities 2,215 (102)
------- -------
Cash flows from investing activities:
Purchases of property and equipment (1,940) (2,793)
------- -------
Cash flows from financing activities:
Proceeds from long-term debt - 5,000
Payments on long-term debt (1,141) (513)
Payments on capital lease obligation (648) (302)
Net proceeds from sale of common stock 8 (124)
Dividends on Series C preferred stock (186) (195)
Dividend to minority interest partners (300) (300)
------- -------
Net cash provided (used) by
financing activities (2,267) 3,566
------- -------
Net increase (decrease) in cash and
cash equivalents (1,992) 671
Cash and cash equivalents, beginning of period 4,792 6,686
------- -------
Cash and cash equivalents, end of period $ 2,800 $ 7,357
======= =======
</TABLE>
The accompanying notes are an integral part of these
consolidated condensed financial statements.
F-3
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ENVIRONMENTAL SAFEGUARDS, INC.
SELECTED NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
1. GENERAL
The unaudited consolidated condensed financial statements included herein
have been prepared without audit pursuant to the rules and regulations of
the Securities and Exchange Commission. Certain information and footnote
disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been
condensed or omitted, pursuant to such rules and regulations. These
unaudited consolidated condensed financial statements should be read in
conjunction with the audited consolidated financial statements and notes
thereto of Environmental Safeguards, Inc. (the "Company") included in the
Company's Annual Report on Form 10-K for the year ended December 31,
1998. Certain reclassifications have been made to prior year amounts to
conform with the current year presentation.
In the opinion of management, the unaudited consolidated condensed
financial information included herein reflect all adjustments, consisting
only of normal, recurring adjustments, which are necessary for a fair
presentation of the Company's financial position, results of operations
and cash flows for the interim periods presented. The results of
operations for the interim periods presented herein are not necessarily
indicative of the results to be expected for a full year or any other
interim period.
2. COMPREHENSIVE INCOME
The Company has adopted Statement of Financial Accounting Standard No.
130, "Reporting Comprehensive Income", which establishes standards for
reporting and display of comprehensive income and its components in a
full set of financial statements. Comprehensive income includes all
changes in a company's equity, except those resulting from investments by
and distributions to owners. There was no difference between
comprehensive income (loss) and net earnings (loss) for the three months
and six months ended June 30, 1999 and 1998.
3. NON-CASH INVESTING ACTIVITIES
In two separate transactions, one in 1998 and another in 1999, the Company
contributed $1,150,000 in Indirect Thermal Descorption ("ITD") Unit value
to its 50/50 joint company in Arabia. In addition, also in two separate
transactions, one in 1998 and another in 1999, the Company transferred ITD
Unit cost of $1,090,000 from property and equipment to equipment held for
sale.
Continued
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ENVIRONMENTAL SAFEGUARDS, INC.
SELECTED NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
------------
4. INCOME TAXES
Deferred income taxes reflect the tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes. The
Company has provided deferred tax valuation allowances for cumulative net
operating tax losses to the extent that the net operating losses may not
be realized. The difference between the federal statutory income tax rate
and the Company's effective income tax rate is primarily attributed to
foreign income taxes and changes in valuation allowances for deferred tax
assets related to U.S. net operating losses.
5. EARNINGS PER SHARE
The Company computes basic earnings per share based on the weighted
average number of shares of common stock outstanding for the period, and
includes common stock equivalents outstanding for the computation of
diluted earnings per share. As a result of incurred net losses, for the
three months and six months ended June 30, 1999 and 1998 all common stock
equivalents have been excluded from the calculation of earnings per share
as their effect is anti-dilutive. In future periods, the calculation of
diluted earnings per share may require that the Company's common stock
equivalents (totaling 8,298,191 shares at June 30, 1999) be included in
the calculation of the weighted average shares outstanding for periods in
which net income is reported. Following is the reconciliation of net
loss to the net loss available to common stockholders:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
1999 1998 1999 1998
-------- -------- -------- --------
(IN THOUSANDS) (IN THOUSANDS)
<S> <C> <C> <C> <C>
Net loss $ (748) $ (224) $ (419) $ (485)
Series C preferred stock dividends (94) (99) (186) (198)
Accretion of discount on Series C
preferred stock (94) (94) (188) (188)
-------- -------- -------- --------
Net loss available to common
stockholders $ (936) $ (417) $ (793) $ (871)
======== ======== ======== ========
</TABLE>
Continued
F-5
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ENVIRONMENTAL SAFEGUARDS, INC.
SELECTED NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
------------
6. SEGMENT, GEOGRAPHIC AND MAJOR CUSTOMERS INFORMATION
The Company currently operates in the environmental remediation and
hydrocarbon reclamation/recycling services industry. Substantially all
revenues result from the sale of services using the Company's ITD units.
The Company's reportable segments are based upon geographic area. All
intercompany revenue and expenses are eliminated in computing revenue and
income (loss) from operations.
A significant portion of the Company's foreign operations were conducted
by the Company's 50% owned subsidiary in Colombia. The Company's
Colombian and Venezuelan subsidiaries utilize the U.S. dollar as their
functional currency. Accordingly, no cumulative translation adjustment
is presented in the accompanying balance sheet.
Corporate income (loss) from operations represents corporate general and
administrative expenses. Corporate assets include cash and cash
equivalents.
Following is a summary of segment information:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------- -------------------
1999 1998 1999 1998
-------- -------- -------- --------
(IN THOUSANDS) (IN THOUSANDS)
<S> <C> <C> <C> <C>
Service Revenue:
United States $ - $ 522 $ 1,150 $ 1,245
United Kingdom 65 - 65 -
Latin America 2,018 1,775 5,078 3,621
-------- -------- -------- --------
Total service revenue $ 2,083 $ 2,297 $ 6,293 $ 4,866
======== ======== ======== ========
Income (Loss) From Operations:
United States $ (417) $ 51 $ (197) $ 102
United Kingdom (43) - (56) -
Latin America 458 265 1,538 787
Corporate (145) (84) (222) (250)
-------- -------- -------- --------
Total income from
operations $ (147) $ 232 $ 1,063 $ 639
======== ======== ======== ========
</TABLE>
Continued
F-6
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ENVIRONMENTAL SAFEGUARDS, INC.
SELECTED NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
------------
6. SEGMENT, GEOGRAPHIC AND MAJOR CUSTOMERS INFORMATION, CONTINUED
<TABLE>
<CAPTION>
AS OF JUNE 30,
------------------------
1999 1998
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Assets:
United States $ 7,638 $ 8,676
United Kingdon 1,771 -
Latin America 6,061 7,408
Middle East 2,300 -
Corporate 1,509 6,653
-------- --------
Total assets $ 19,279 $ 22,737
======== ========
</TABLE>
F-7
<PAGE> 11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction
with the unaudited consolidated condensed financial statements of Environmental
Safeguards, Inc. (the "Company") as of June 30, 1999 and for the three and six
month periods ended June 30, 1999 and 1998 included elsewhere herein, and with
the Company's Annual Report on Form 10-K for the year ended December 31, 1998.
Information Regarding and Factors Affecting Forward-Looking Statements
The Company is including the following cautionary statement in this
Form 10-Q to make applicable and take advantage of the safe harbor provision of
the Private Securities Litigation Reform Act of 1995 for any forward-looking
statements made by, or on behalf of, the Company. Forward-looking statements
include statements concerning plans, objectives, goals, strategies, future
events or performance and underlying assumptions and other statements which are
other than statements of historical facts. Certain statements in this Form 10-Q
are forward-looking statements. Words such as "expects",
"anticipates","estimates" and similar expressions are intended to identify
forward-looking statements. Such statements are subject to risks and
uncertainties that could cause actual results to differ materially from those
projected. Such risks and uncertainties are set forth below. The Company's
expectations, beliefs and projections are expressed in good faith and are
believed by the Company to have a reasonable basis, including without
limitation, management's examination of historical operating trends, data
contained in the Company's records and other data available from third parties,
but there can be no assurance that management's expectation, beliefs or
projections will result, be achieved, or be accomplished. In addition to other
factors and matters discussed elsewhere herein, the following are important
factors that, in the view of the Company, could cause material adverse affects
on the Company's financial condition and results of operations: the ability of
the Company to attain widespread market acceptance of its technology; the
ability of the Company to obtain acceptable forms and amounts of financing to
fund planned expansion; the demand for, and price level of, the Company's
services; competitive factors; the actual useful life of the Company's ITD
Units; the evolving industry and technology standards; the ability to protect
proprietary technology; the dependence on key personnel; the effect of business
interruption due to political unrest; the foreign exchange fluctuation risk;
and the ability of the Company to maintain acceptable utilization rates on its
equipment. The Company has no obligation to update or revise these
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forward-looking statements to reflect the occurrence of future events or
circumstances.
Overview
The Company is engaged in the development, production and sale of
environmental reclamation and recycling technologies and services.
Substantially all of the Company's technologies and services are provided
through its subsidiary, OnSite Technology, L.L.C., ("OnSite"). Accordingly,
the Company is devoting substantially all of its efforts to the development of
markets for OnSite's services. The Company is currently providing reclamation
and recycling services to companies engaged in land-based oil and gas
exploration and other industrial applications.
Oil and gas exploration and other types of industrial activities,
often produce significant quantities of petroleum-contaminated drill cuttings
and waste, from which the Company's Indirect Thermal Desorption ("ITD") process
can extract and recover the hydrocarbons as re-useable or re-saleable liquids,
and produce recycled soil compliant with environmental regulations. The Company
has expanded the activities of OnSite to include use of ITD technology to
address hydrocarbon contamination problems and hydrocarbon recycling and
reclamation opportunities at heavy industrial, refining and petrochemical
sites, as well as at Superfund, Department of Defense and Department of Energy
sites.
In December, 1997, the Company acquired the remaining 50% interest in
OnSite from Parker Drilling Co. giving the Company complete control of the ITD
technology owned by OnSite, and providing the Company with a wholly-owned
operating subsidiary that forms the cornerstone of the Company's operations.
The Company continues to focus essentially all of its attention on its
wholly-owned business operations in OnSite. OnSite was formed as a means for
assembling the capital necessary to build and improve the ITD Units and to
generate market awareness and acceptance of ITD technology. The Company expects
that a substantial portion of its revenues will be derived from major
international oil and gas industry participants, as well as from other
industrial applications.
In November 1996, OnSite formed a 50/50 joint company, OnSite
Colombia, Inc. ("OnSite Colombia") with a group of South American investors.
OnSite Colombia was established to provide hydrocarbon contaminated soil
reclamation and recycling services to oil and gas industry participants
operating in Colombia.
In January, 1998, OnSite Venezuela, Inc. ("OnSite Venezuela"),
OnSite's wholly-owned subsidiary, commenced operations to provide hydrocarbon
contaminated soil reclamation and recycling services to oil and gas industry
participants operating in Venezuela.
In December, 1998, OnSite formed a 50/50 joint venture company, OnSite
Arabia, Inc.,
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("OnSite Arabia"), to provide hydrocarbon contaminated soil reclamation and
recycling services to oil and gas industry participants operating in the
Arabian Gulf region.
In April, 1999, OnSite formed OnSite Environmental U.K., Ltd., a
wholly-owned subsidiary, for operations in Scotland which commenced in
June, 1999.
In July, 1999, OnSite Mexico, LLC, a wholly-owned subsidiary of
OnSite, commenced operations.
Quarterly Fluctuations
The Company's revenues may be affected by the timing and deployment of
ITD Units to customer drilling sites under existing contracts and by the timing
of obtaining new service contracts. Accordingly, the Company's quarterly results
may fluctuate and the results of one fiscal quarter should not be deemed to be
indicative of the results of any other quarter, or for the full fiscal year.
Results of Operations
Comparison of Operating Results -- Quarters Ended June 30, 1999 and 1998
Summary. For the quarter ended June 30, 1999, the Company incurred a
net loss of $748,000, as compared to a loss of $224,000 during the comparative
quarter in 1998. The $524,000 increase in loss was primarily due to a
combination of lower gross margin due to contract mix, slightly lower ITD
systems in operation (see below), and startup expenses incurred in connection
with the Middle East and Scotland operations, partially offset by stronger
gross profit in the Colombia operations.
Revenue and Gross Margin. Service revenue of $2.1 million for 1999
generated a $1.0 million gross margin (47.1% of revenue) as compared to service
revenue of $2.3 million for 1998 which generated a $1.2 million gross margin
(51.2% of revenue). An average of 3.4 ITD systems were in operation during the
second quarter of 1999, with three units operating in Colombia and
fractional-months' operations in Venezuela and Scotland. During the comparable
quarter of 1998, four ITDs were in operation; three in Colombia and one in
Louisiana. The 4.1% lower gross margin percentage was mainly due to a higher
cost profile for the ITD system operating in Venezuela.
Selling, General and Administrative ("SGA") Expense. The increase in
SGA expense was primarily due to increased marketing efforts in Scotland,
Mexico, the Middle East and Venezuela.
Amortization of Acquired Engineering Design and Technology. This
expense represents the amortization of Acquired Engineering Design and
Technology costs, an intangible asset related to the December 1997 acquisition
of the remaining 50% interest in OnSite from Parker Drilling. The intangible
asset is being amortized over an 8 year estimated economic life.
Interest Income. During 1999 and 1998, the Company earned interest on
temporarily invested working capital. Reduced interest income for 1999 was
primarily due to lower average daily cash balances available to invest in short
term interest-bearing securities.
Interest Expense. Interest expense for both quarters included
amortization of debt issuance costs of $122,000 and interest related to the
Company's financing arrangements. Interest expense increased as a result of the
increase in debt outstanding compared to the quarter ended June 30, 1998.
Income taxes. The Company's reported tax provision in 1999 related to
foreign income taxes incurred by OnSite Colombia, a 50% owned consolidated
subsidiary of OnSite, and by OnSite Venezuela, a wholly owned subsidiary.
(During 1998 the tax provision was solely due to OnSite Colombia).The Company
has incurred net operating losses ("NOLs") in the U.S. in recent years, which
may be used to offset taxable income reported in future periods. The NOLs and
certain foreign tax credits associated with the taxes paid in Colombia have
generated deferred tax assets, but due to uncertainties regarding the future
realization of these assets, a valuation allowance has been provided for the
full amount of these deferred tax assets. The Company is implementing tax
planning strategies, which if successful, may result in the Company recognizing
these deferred tax assets in future periods, which could reduce the Company's
effective tax rate. There can be no assurance that the NOLs and foreign tax
credits will be realized.
Comparison of Operating Results -- Six Months Ended June 30, 1999 and 1998
Summary. For the six months ended June 30, 1999, the Company incurred
a net loss of $419,000 as compared to a loss of $485,000 for the comparative
six months in 1998. The $66,000 reduction in net loss was primarily due to
higher gross profits in the Company's Colombian and Venezuelan operations, in
addition to the gross margin realized with the sale of an ITD system to a
50%-owned subsidiary.
Revenue and Gross Margin. Service revenue of $6.3 million for 1999
produced a $3.2 million gross margin (50.4% of revenue) as compared to service
revenue of $4.9 million for 1998 which generated a $2.6 million gross margin
(52.7% of revenue). An average of 3.8 ITD systems were in operation during the
first six months of 1999; three in Colombia and fractional-months' operations
in Venezuela and Scotland, while during the comparable period of 1998, the
Company operated four ITDs; three units in Colombia and one in Louisiana. The
slight decline in number of ITDs in service was more than offset by the gross
margin realized with the 1999 sale of an ITD system to the Company's 50%-owned
subsidiary, OnSite Arabia. The 2.3% lower gross margin percentage was primarily
due to a higher cost profile for the ITD system operating in Venezuela.
Selling, General and Administrative (SGA") Expense. The 6% increase in
SGA for 1999 is largely due to increased marketing efforts in Scotland, Mexico,
the Middle East and Venezuela.
Amortization of Acquired Engineering Design and Technology. This
expense represents the amortization of Acquired Engineering Design and
Technology costs, an intangible asset related to the December 1997 acquisition
of the remaining 50% interest in OnSite from Parker Drilling. The intangible
asset is being amortized over an 8 year estimated economic life.
Interest Income. During 1999 and 1998, the Company earned interest on
temporarily invested working capital. Reduced interest income for 1999 was
primarily due to lower average daily cash balances available to invest in short
term interest-bearing securities.
Interest Expense. The slight decrease in 1999 interest expense is
primarily due to capitalization of construction period interest related to
certain ITD Units under construction. Interest expense for both six month
periods included amortization of debt issuance costs of $244,000.
Income taxes. The Company's reported tax provision in 1999 related to
foreign income taxes incurred by OnSite Colombia, a 50% owned consolidated
subsidiary of OnSite, and by OnSite Venezuela, a wholly owned subsidiary.
(During 1998 the tax provision was solely due to OnSite Colombia).The Company
has incurred net operating losses ("NOLs") in the U.S. in recent years, which
may be used to offset taxable income reported in future periods. The NOLs and
certain foreign tax credits associated with the taxes paid in Colombia have
generated deferred tax assets, but due to uncertainties regarding the future
realization of these assets, a valuation allowance has been provided for the
full amount of these deferred tax assets. The Company is implementing tax
planning strategies, which if successful, may result in the Company recognizing
these deferred tax assets in future periods, which could reduce the Company's
effective tax rate. There can be no assurance that the NOLs and foreign tax
credits will be realized.
Liquidity and Capital Resources
During 1996 and 1997, the Company raised additional debt and equity
capital to fund current operations, support the construction of ITD Units
necessary for its future growth and to acquire the remaining 50% of OnSite from
Parker Drilling Company ("Parker"). In December 1997, the Company raised $14
million in a private placement of Series B Convertible Preferred Stock, Series C
non-convertible Preferred Stock, senior secured notes and warrants to purchase
the Company's common stock. The proceeds from these private placements were
primarily used to fund the $8 million acquisition of OnSite, repay $3 million of
long-term debt owed to a subsidiary of Parker, and provide the Company with
capital resources to continue funding current operations and planned capital
expenditures. In connection with the 1997 private placements, the Company
received $6 million in proceeds from senior secured notes and a commitment by
the investors for an additional $5 million of long-term debt, contingent upon
the Company remaining in compliance with the loan covenants of the secured
notes. The Company subsequently borrowed the additional $5 million from the
investors in June 1998.
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The Company has and will continue to incur capital expenditures for ITD
Units. At June 30, 1999, the Company had commitments of approximately $50,000
to complete the one remaining ITD Unit currently under construction.
Substantially all of the Company's expenditures for property and equipment
during the quarter ended June 30, 1999 were for the construction of the ITD
Units. The Company plans to finance the construction of additional ITD Units in
the future through a combination of operating cash flows, third party sale
lease-back transactions, bank term financing and debt and equity placements.
There can be no assurances that the Company will be able to obtain this
additional financing.
The Company expects that existing cash reserves and cash flows from
operations will be sufficient to cover the Company's cash requirements for 1999
(not including the construction of additional ITD Units, which would be
financed as discussed above). However, there can be no assurance that existing
sources of cash will cover the Company's 1999 cash flow requirements.
Impact of Year 2000 Issues
The Year 2000 issue is the result of computer programs being written
using two digits rather than four to define the applicable year. Any of the
Company's computer programs that have time sensitive software may recognize a
date using"00" as the year 1900 rather than the year 2000. This could result in
a system failure or miscalculation causing disruption of business activities.
Based on ongoing assessments, the Company believes that no significant
modifications of existing computer software will be required. The Company
believes that its computer systems will function properly with respect to dates
in the year 2000 and thereafter. The Company's ITD units are not dependent on
computer software or hardware therefore the Year 2000 issue is not expected to
pose any significant operational problems. The Company also believes that costs
related to the Year 2000 issue will not be significant.
The Company has assessed its relationships with significant
suppliers and major customers to determine the extent to which the Company is
vulnerable to any third party's failure to remedy their own Year 2000 issues.
Based on these assessments, management believes that significant exposure does
not exist with respect to third parties. Management has developed a
contingency plan to address potential Year 2000 problems that could arise. This
plan includes identification of alternative supplies for critical parts and
components needed to mitigate the possibility of interruptions in business
operations.
PART II -- OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES
On April 7, 1999, Susan Roberts purchased 13,000 shares of common
stock of the Company through the exercise of options at an exercise price of
$0.60 per share. Mrs. Roberts is the daughter
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<PAGE> 15
of Robin Pate who was a director of the Company until resigning in 1998. Mrs.
Roberts had received the options as a gift from Mr. Pate. The transaction was
effectuated by the Company in reliance upon exemptions from registration under
the Securities Act of 1933 as amended (the "Act") as provided in Section 4(2)
thereof. The certificate issued for these unregistered securities contained a
legend stating that the securities have not been registered under the Act and
setting forth the restrictions on the transferability and the sale of the
securities. No underwriter participated in, nor did the Company pay any
commissions or fees to any underwriter in connection with the transaction. The
transaction did not involve a public offering. The Company believes that Mrs.
Roberts had knowledge and experience in financial and business matters which
allowed her to evaluate the merits and risk of the purchase of these securities
of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The annual meeting of stockholders of the Company was held in Houston,
Texas on April 26, 1999 for the purpose of voting on the proposals described
below. Proxies for the meeting were solicited pursuant to Regulation 14A under
the Securities Act of 1934 and there were no solicitations in opposition to
management's solicitation.
The holders of common stock approved the election of the following
three directors, each to serve for a term of one year by the following vote:
Votes For Votes Against Abstaining
James S. Percell 5,406,864 -0- 28,500
Bryan Sharp 5,406,864 -0- 28,500
Albert M. Wolford 5,406,864 -0- 28,500
The holders of Series B Convertible Stock approved the election of the
following director, to serve for a term of one year by the following vote:
<TABLE>
<CAPTION>
Votes For Votes Against Abstaining
<S> <C> <C> <C>
David Warnock 2,733,686 -0- -0-
</TABLE>
The holders of common stock approved the adoption of the Company's
1998 Stock Option Plan by the following vote:
Votes For 5,043,009
Votes Against 406,221
Abstaining 58,060
The holders of common stock ratified the appointment of Ernst & Young
LLP as the Company's independent auditor for the fiscal year ending December
31, 1999 by the following vote:
5
<PAGE> 16
Votes For 8,071,475
Votes Against 7,000
Abstaining 18,400
Ernst & Young LLP was subsequently dismissed as the Company's
independent auditor and replaced with PricewaterhouseCoopers LLP. See Item 6(b)
of this Form 10-Q.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit No. 27.1 -- Financial Data Schedule
(b) Reports on Form 8-K
On July 14, 1999, the Company filed a report on Form 8-K
reporting Item 4. -- Changes in Registrant's Certifying
Accountant
6
<PAGE> 17
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
ENVIRONMENTAL SAFEGUARDS, INC.
--------------------------------------
Date: August 9, 1999 By: /s/ James S. Percell
James S. Percell, President
--------------------------------------
Date: August 9, 1999 By: /s/ Ronald L. Bianco
Ronald L. Bianco, Chief
Financial Officer
7
<PAGE> 18
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------
27.1 -- Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> JUN-30-1999
<CASH> 2,800
<SECURITIES> 0
<RECEIVABLES> 1,615
<ALLOWANCES> 0
<INVENTORY> 1,953
<CURRENT-ASSETS> 7,107
<PP&E> 11,976
<DEPRECIATION> 2,434
<TOTAL-ASSETS> 19,279
<CURRENT-LIABILITIES> 3,276
<BONDS> 5,406
0
4
<COMMON> 10
<OTHER-SE> 7,202
<TOTAL-LIABILITY-AND-EQUITY> 19,279
<SALES> 6,293
<TOTAL-REVENUES> 6,293
<CGS> 3,119
<TOTAL-COSTS> 5,230
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 601
<INCOME-PRETAX> 105
<INCOME-TAX> (524)
<INCOME-CONTINUING> (419)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (419)
<EPS-BASIC> (.08)
<EPS-DILUTED> (.08)
</TABLE>
