ENVIRONMENTAL SAFEGUARDS INC/TX, 10-K405, 2000-03-15

ENVIRONMENTAL SAFEGUARDS INC/TX
10-K405, 2000-03-15
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K

[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED: DECEMBER 31, 1999.

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER: 000-21953

ENVIRONMENTAL SAFEGUARDS, INC.
(Exact name of registrant as specified in its charter)

<TABLE>
<S> <C>
NEVADA 87-0429198
(State or other jurisdiction (IRS Employer
of incorporation or organization) Identification No.)
</TABLE>

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)

Securities registered under Section 12(b) of the Exchange Act:

<TABLE>
<CAPTION>
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
------------------- ---------------------
<S> <C>
Common Stock, $.001 par value American Stock Exchange
</TABLE>

Securities registered pursuant to 12(g) of the Exchange Act: NONE

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 [X] No [ ]

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-K or any amendment to this
Form 10-K. [X]

The aggregate market value of Common Stock held by non-affiliates of the
registrant at March 8, 2000, based upon the last closing price on the American
Stock Exchange, was $1.00. As of March 8, 2000, there were 10,112,144 shares of
Common Stock outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Company's definitive proxy statement for the Annual Meeting
of Shareholders to be held in April 2000 are incorporated by reference into Part
III of this report.

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TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
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<S> <C> <C>
PART I
Item 1. Business.................................................... 1
Item 2. Properties.................................................. 5
Item 3. Legal Proceedings........................................... 5
Item 4. Submission of Matters to a Vote of Security Holders......... 5

PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters....................................... 7
Item 6. Selected Financial Information.............................. 8
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 8
Item 7A. Quantitative and Qualitative Disclosures About Market
Risk...................................................... 13
Item 8. Financial Statements and Supplementary Data................. 13
Item 9. Changes in and Disagreements With Accountants on Accounting
and Financial Disclosure.................................. 13

PART III
Item 10. Directors and Executive Officers of the Registrant.......... 14
Item 11. Executive Compensation...................................... 14
Item 12. Security Ownership of Certain Beneficial Owners and
Management................................................ 14
Item 13. Certain Relationships and Related Transactions.............. 14

PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form
8-K....................................................... 15
</TABLE>
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PART I

ITEM 1. BUSINESS

INTRODUCTION

Environmental Safeguards, Inc. is engaged in the development, production
and sale of environmental remediation and recycling technologies and services to
oil and gas industry participants, waste management companies and other
industrial customers, through its wholly-owned subsidiaries National Fuel &
Energy, Inc. ("NFE") and OnSite Technology, L.L.C. ("OnSite"). OnSite has three
wholly-owned subsidiaries, OnSite Environmental UK Ltd., OnSite Venezuela, Inc.
and OnSite Mexico, L.L.C., and two 50%-owned subsidiaries, OnSite Colombia, Inc.
and OnSite Arabia, Inc., through which it operates in foreign locations. The
environmental remediation and recycling services that we provide involve the
removal of hydrocarbon contaminants and valuable drilling fluids from soil using
indirect thermal desorption remediation and recycling technology. We provide
these services on-site or at the central location to which the customer hauls
the contaminated materials.

Our Common Stock is traded on the American Stock Exchange under the symbol
"EVV".

HISTORY

We were incorporated under the laws of the State of Nevada in December
1985, under the name of Cape Cod Investment Company. In December 1986, our name
was changed to Cape Cod Ventures, Inc. In August 1987, an initial public
offering was completed for 4,148,000 shares of Common Stock at a price of $0.001
per share pursuant to the exemption from the registration requirements of the
Securities Act of 1933 provided by Regulation A. In May 1993, an Agreement and
Plan of Reorganization was executed with National Fuel & Energy, Inc., a Wyoming
corporation, providing for the acquisition of NFE in exchange for shares of our
Common Stock. In connection with the reorganization, our name was changed to
Environmental Safeguards, Inc., and NFE became our wholly-owned subsidiary.

In January 1995, we entered into an agreement with Parker Drilling Company
("Parker"), a Delaware corporation, granting Parker exclusive marketing rights
to our proprietary processes for on-site remediation and recycling services in
connection with drill cuttings at oil and gas drilling sites throughout the
United States and in certain foreign countries. In August 1995, we expanded our
agreement with Parker by forming OnSite, a joint company between NFE and Parker,
in which NFE and Parker each owned 50%. In December 1997, we entered into a
Purchase Agreement (the"Purchase Agreement") with Parker which provided for our
acquisition, through NFE, of Parker's 50% equity interest in OnSite resulting in
NFE becoming the owner of 100% of the equity interest in OnSite. Pursuant to the
terms of the Purchase Agreement, we paid $8,000,000 for the 50% equity interest
and repaid a $3,000,000 loan that had been made to us by an affiliate of Parker.
As part of the transaction, Parker returned to us unexercised warrants to
purchase 300,000 shares of our Common Stock.

Our sources of funds to effect the acquisition included the sale of
$8,000,000 of new Series B Convertible Preferred Stock and Series C Preferred
Stock to an investor group consisting of Cahill, Warnock Strategic Partners
Fund, L.P., Strategic Associates, L.P., Newpark Resources, Inc. and James H.
Stone, who is the Chairman of Stone Energy Corporation and a secured loan of
$6,000,000 from the same investor group ("Loan Agreement"). Pursuant to the
financing, David L. Warnock, a member of Cahill, Warnock & Co., L.L.C. and
general partner of Cahill, Warnock Strategic Partners Fund, L.P., was appointed
as one of our Directors.

BUSINESS ACTIVITIES

General. Substantially all of our activities are conducted through OnSite,
which is engaged in the development and production of remediation and recycling
technology and the sale of environmental remediation and recycling services.
OnSite owns the technologies included in its Internal Thermal Desorption Units
("ITD Units"), and the proprietary processes for on-site remediation and
recycling of hydrocarbon

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contaminated soil. To date, the environmental remediation and recycling services
which we have provided have involved the removal of petroleum contaminants from
soil using our ITD Units. Our ITD Units are easily transported processing
systems which produce clean soil from contaminated soil while reclaiming the
hydrocarbons. Our customers consist primarily of large corporations in the oil
and gas drilling industry that have responded to the changing regulatory climate
with respect to soil and other environmental contamination and waste management
companies in the business of offering waste disposal services.

The primary services which we offer involve remediation and recycling of
soil contaminated by oil-based drilling fluids, fuel spills, leakage at storage
tanks, refinery wastes, ship sludges and other sources of hydrocarbon
contamination, as well as the remediation of industrial waste. To remediate and
recycle the contaminated soil, we utilize our ITD Units consisting of (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, or an afterburner or thermal oxidizer, which incinerates
the hydrocarbon vapor resulting in a safe and clean process. Our ITD Units are
mobile, and thus, contaminated soil can be remediated and recycled at the site
where the contaminated soil is located. We do not haul or dispose of soil or
contaminants away from the customer's location.

As of March, 2000, we owned six ITD Units outright, and had a 50% interest
in four additional units which are owned by our 50%-owned subsidiaries OnSite
Arabia, Inc. (two units) and OnSite Colombia (two units). Our two OnSite
Colombia units are presently leased-back from third party financing
organizations.

Customers. Our customers consist primarily of large oil and gas industry
participants, waste management companies and other industrial companies. Through
OnSite, we typically submit a bid for a project based on the costs of 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 and
the estimated processing time. Once a contract has been awarded, equipment is
moved to the client's desired location.

Indirect Thermal Remediation and Recycling. The primary services we offer
involve: (i) the remediation and recycling of soil contaminated by oil-based
drilling mud, fuel spills, leakage at storage tanks, leakage from pipelines;
(ii) the remediation and recycling of hydrocarbon contamination at settling
ponds, oil and gas exploration sites, refineries, petrochemical facilities,
abandoned production fields, Department of Defense installations, ships and dock
facilities and other similar sites; and (iii) the remediation and recycling of
valuable drilling fluids which have been captured in soil and drilling muds
during the drilling process. To date we have employed our ITD Units to provide
remediation and recycling services to oil and gas industry drilling operations,
tank farms and compressor sites. This process is known as "indirect thermal
desorption" because it reverses the contamination process and removes the
hydrocarbons from the soil and discharges the contaminants previously absorbed
without direct contact of the soil to a flame.

Our ITD Units, which are portable equipment, utilize a rotating,
heat-jacketed trundle to vaporize hydrocarbons from contaminated soil or other
contaminated materials. Our ITD Units consist 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 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, or other
contaminated materials, are 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 from 200 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
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confirm that the contaminants have been removed and the soil condition is within
an acceptable range. The soil is then returned to its original location or such
other location specified by the customer.

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. To date, our ITD Units have demonstrated
their ability to process 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 the remediation and recycling required. There can
be no assurance that our ITD Units will continue to perform at this level, or
that this performance will continue to be competitive with other technologies
available in the market.

Recycling of Hydrocarbon Contaminants. We have developed proprietary
processes which are embodied in the condensation process system unit, one of the
two principal components of our ITD Units. 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. We believe that this ability to
recycle the hydrocarbon contaminant(s) is an important competitive advantage, as
compared to the bioremediation, direct burn or "dig and haul" remediation
technologies.

Manufacturing of ITD Units. We contract with outside fabricators to
manufacture our ITD Units. The primary contractors we have used are
Roberds-Johnson Industries and Houston ProFAB. Currently, we have no ITD Units
under construction by fabricators.

EXISTING CONTRACTS FOR OPERATIONS

As of March, 2000, our fleet of ten ITD Units are operating geographically
as follows: three in Colombia, one in Venezuela, one in Mexico, one in the
Arabian Gulf region and one in West Texas. Of our remaining three ITD Units, one
is undergoing routine maintenance, one has a contract in negotiation for work in
the Arabian Gulf region and one is located in Scotland.

COMPETITION

There are many companies that currently dispose of hazardous and industrial
wastes and remediate or clean contaminated sites. 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 our competitors are
established companies with substantially greater capital resources, larger
research and development staffs and facilities and greater marketing
capabilities than us. There can be no assurance that we will be competitive in
the remediation and recycling industry in the future.

We obtain our contracts through competitive bidding and are in direct
competition with companies providing alternative means of, and utilizing
alternative technologies for, remediating environmental problems. The most
significant competition comes from companies 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. We believe that the
technology we utilize is competitive because our equipment is mobile, and thus,
contaminated soil can be remediated on location. The waste processing,
remediation and recycling businesses are, to a large extent, dependent upon and
constrained by the costs and regulations associated with transporting such
wastes. More importantly, our remediation and recycling process addresses the
latent liability associated with the contamination at the site. We are currently
investigating techniques and technologies capable of evaporation of non-needed
liquids and micro-filtration applications. There can be no assurance that we
will be able to develop or acquire such technology and skill or that, if
obtained, 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. Due to the closed nature of the heat
transfer systems of our ITD Units, we 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 our ITD Units have processed materials with
contamination levels as high as 40%. In addition, the portable nature of our ITD
Units permit them to be located at the contamination site. Our ITD Units also
permit the customer to recapture certain valuable liquids which are otherwise
destroyed.

We differentiate ourselves from our competitors by providing significantly
higher operational service and a significantly higher value-added result for our
clients for the remediation of hydrocarbons from soils and other mediums, and
the subsequent reclaiming of the hydrocarbons into liquids for customer
recycling or resale. For example, some of the design features of our ITD Unit,
which we believe provide service-level advantages, include:

Remediation: Our ITD Units remove 99.9% of hydrocarbon contaminants from
the waste-stream soil, effectively eliminating the client's latent liability.
Conversely, some competitive technologies such as incineration, solidification
and bio-remediation result in continuing latent liability.

Recycling: Our ITD Units transform waste streams into value for our clients
by reclaiming valuable hydrocarbons for client recycling or resale. For example,
our equipment has reclaimed approximately 11 million gallons of diesel oil while
processing drill cuttings for major oil and gas participants.

Tonnage: Our ITD Units have proven processing capability of 1 to 10 tons
per hour with up to 30% hydrocarbon-saturation in the soil. Some competitors are
capable of similar processing speeds, but at lower hydrocarbon-saturation
levels, resulting in throughput advantages for us.

Portability: Our ITD Units are built on two 44 foot trailer beds for easier
transport to our client's location, avoiding costly hauling expenses of
contaminated materials to a central location. In addition, the design of our ITD
Units permit rig-down and/or rig-up in less than a day. Some competitive units
are much less transportable, or not transportable at all.

Wide Range of Hydrocarbons Treated: Our ITD Units operate at low
temperatures (200 degrees Fahrenheit), high temperatures (1,000 to 1,200 degrees
Fahrenheit), and anywhere in between, thereby enabling the remediation of wide
ranges of hydrocarbon contaminants encountered at a client's site including both
oil and gas and industrial waste. We believe that competition in the industry is
concentrated in remediation services, whereas our ITD technology not only
provides remediation services, but also is capable of reclaiming and recycling
valuable drilling fluids and hydrocarbons. Further, we believe that our pricing
policies are competitive. No assurance, however, can be given that we will be
able to successfully compete with other companies or alternative technologies.

GOVERNMENTAL REGULATIONS -- COST OF COMPLIANCE

We render services in connection with the remediation, recycling 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.
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, air emissions, fire protection, worker and community right-to-know,
and emergency response plans. 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 we be deemed to be
responsible for contamination or pollution caused or increased by any
evaluation, remediation or cleanup effort conducted by us, or for an accident
which occurs in the course of such remediation or cleanup effort. There can be
no assurance that our policy of establishing and implementing proper procedures
for complying with environmental regulations will be effective at preventing us
from incurring a substantial environmental liability. If we were to incur a
substantial uninsured liability for environmental damage, our financial
condition could be materially adversely affected.

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We presently have the ability to deliver soil remediation and recycling
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, we may not
be able to comply in either the delivery of our 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 our 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. Site-related permits, however, are generally the responsibility
of the client.

EMPLOYEES

We currently have 24 full-time employees, 8 of whom are in domestic and
international management or supervisory positions, including corporate and
administrative functions. None of our employees are represented by a union. We
consider our employee relations to be good.

TRANSFER AGENT AND REGISTRAR

The co-transfer agents and registrars for our Common Stock are Colonial
Stock Transfer Company, Inc. ("Colonial Transfer") and Registrar and Transfer
Company. Colonial Transfer's address is 455 East 400 South, Suite 100, Salt Lake
City, Utah 84111; (801) 355-5740.

ITEM 2. PROPERTIES

Our principal executive offices are located in leased facilities at 2600
South Loop West, Suite 645, Houston, Texas 77054, which consist of 3,852 square
feet. The lease for the executive offices will expire in May, 2001. We believe
that our offices are adequate for our present needs and that suitable space will
be available to accommodate our future needs.

ITEM 3. LEGAL PROCEEDINGS

We are routinely involved in litigation incidental to our business, which
can involve claims for monetary amounts; some of which might not be covered by
insurance. In the opinion of management, none of the existing litigation will
have a material adverse effect on our financial position or results of
operations.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

There were no matters submitted to a vote of security holders during the
fourth quarter of 1999.

EXECUTIVE OFFICERS OF THE REGISTRANT

We have presented below information about our executive officers as of
March 1, 2000. Officers are elected annually by the Board of Directors and serve
until their successors are chosen or until their resignation or removal.

<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
James S. Percell...................... 57 Director, Chairman, CEO and President
Albert M. Wolford..................... 78 Director and Secretary
Ronald L. Bianco...................... 53 Chief Financial Officer, Treasurer and
Vice-Secretary
</TABLE>

James S. Percell serves as our Director, Chairman, CEO and President and
also serves as President of our subsidiaries, NFE and OnSite. Mr. Percell became
a director and President, Chief Executive Officer and a director of NFE in
November, 1995. Mr. Percell became President and CEO 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

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contractor. 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 attended
Amarillo College in Amarillo, Texas.

Albert M. Wolford has served as director since August 5, 1997. Mr. Wolford
is a member of our compensation and audit committees. Mr. Wolford is also our
Secretary. Mr. Wolford has been an independent business consultant since 1988.
From 1970 to 1988, Mr. Wolford served with Texas United Corporation as a
director, a member of the executive committee, senior vice-president, and as the
chairman of the executive development and compensation committees. As a senior
vice-president of Texas United Corporation, Mr. Wolford served its subsidiaries
as president and CEO of Texas United Chemical Corporation, as the chairman,
president and CEO of United Salt Corporation, and as the president of American
Borate Corporation. He has also served the Texas Chemical Council, an industry
trade group, as a director, a member of its executive committee, and as
secretary-treasurer. Mr. Wolford served as a member of the executive committee
of the Salt Institute, an industry trade group. Mr. Wolford is a graduate of The
University of Texas.

Ronald L. Bianco joined us in April 1997 as Chief Financial Officer. Mr.
Bianco is presently the C.F.O., Treasurer and Vice-Secretary. From 1975 through
1991, Mr. Bianco was with Dresser Industries where he served as controller of
Dresser Rand Power in Norway, as the controller for North America Operations of
Dresser Masonelian Valve and in other headquarters and division assignments.
From 1992 through 1993, Mr. Bianco was an independent business consultant. From
1994 through 1996, Mr. Bianco served as Chief Financial Officer of Sweco
Oilfield Services. Mr. Bianco received his B.B.A. in accounting in 1970 from St.
Bonaventure University in Olean, New York, and his M.B.A. in 1983 from Southern
Methodist University in Dallas, Texas.

CERTAIN SECURITIES FILINGS

The Company believes that the reports required by Section 16(a) of the
Exchange Act have been filed timely.

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PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

PRICE RANGE OF COMMON STOCK

Our Common Stock is currently traded on the American Stock Exchange under
the symbol "EVV". Prior to February 12, 1998, our Common Stock was traded in the
over-the-counter securities market on the OTC Bulletin Board. The following
table sets forth the range of high and low closing sales prices of our Common
Stock for the periods shown:

COMMON STOCK PRICE RANGE

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HIGH LOW
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<S> <C> <C>
1998
First Quarter............................................. $ 7 7/8 $3 1/8
Second Quarter............................................ $ 6.00 $4 1/16
Third Quarter............................................. $ 6 1/4 $2 1/16
Fourth Quarter............................................ $ 2 1/2 $1 3/16
1999
First Quarter............................................. $ 2.00 $1 1/8
Second Quarter............................................ $ 1 1/2 $ 15/
Third Quarter............................................. $ 1 11/16 $ 7/8
Fourth Quarter............................................ $ 1 3/8 $ 3/4
</TABLE>

On March 8, 2000, the closing price of our Common Stock was $1.00 per
share. On the same date, we had approximately 1,000 stockholders of record,
including broker-dealers holding shares beneficially owned by their customers.

DIVIDEND POLICY

We have not paid, and do not currently intend to pay cash dividends on our
Common Stock in the foreseeable future. The current policy of our Board of
Directors is to retain all earnings, if any, to provide funds for the operation
and expansion of our business. The declaration of dividends, if any, will be
subject to the discretion of our Board of Directors, which may consider such
factors as our results of operations, financial condition, capital needs and
acquisition strategy, among other factors. We may not, except for dividends
payable in connection with its Series C Preferred Stock, authorize or pay any
dividends at any time if any amount is unpaid with respect to our $6,000,000
Loan Agreement.

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ITEM 6. SELECTED FINANCIAL INFORMATION

We have derived the following selected consolidated financial information
as of December 31, 1999 and 1998, and for each of the years in the three-year
period ended December 31, 1999, from our audited consolidated financial
statements included in this report. You should read this information in
conjunction with those consolidated financial statements and the notes thereto.
We have derived the selected consolidated financial information as of December
31, 1997, 1996 and 1995, and for each of the years in the two-year period ended
December 31, 1996, from our audited consolidated financial statements of the
Company, that are not included herein. Please read "Management's Discussion and
Analysis of Financial Condition and Results of Operations".

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------------
1999 1998 1997 1996 1995
------- ------- ------- ------ -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA(1):
Revenue................................... $13,514 $10,672 $ 6,678 $ -- $ 53
Income (loss) from operations............. 3,098 1,404 590 (511) (1,265)
Net loss(2)............................... (483) (799) (1,849) (647) (1,216)
Basic and dilutive net loss per share:
Before extraordinary item............... (0.12) (0.17) (0.61) (0.11) (0.26)
Extraordinary item...................... -- -- (0.04) 0.01 --
------- ------- ------- ------ -------
Net loss per share...................... $ (0.12) $ (0.17) $ (0.65) $(0.10) $ (0.26)
======= ======= ======= ====== =======
BALANCE SHEET DATA(1):
Working capital........................... $ 1,564 $ 5,431 $ 5,277 $3,304 $ (430)
Property and equipment, net............... 10,835 8,256 6,286 5 18
Total assets.............................. 18,990 20,164 18,298 5,468 318
Long-term debt (including capital lease
obligations)............................ 4,325 6,636 5,210 3,694 --
Shareholders' equity...................... 6,956 7,813 9,206 1,515 (306)
</TABLE>

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(1) For the years ended December 31, 1996 and 1995, our investment in OnSite was
accounted for using the equity method, because our 50% ownership interest
did not provide effective control of OnSite. However, on December 17, 1997,
we acquired the remaining 50% of OnSite from our former Joint Venture
partner. Accordingly, we consolidated OnSite for the years ended December
31, 1999, 1998 and 1997. This transaction affects the comparability of the
selected financial information for periods prior to the year ended December
31, 1997.

(2) Included in net loss for the year ended December 31, 1997 is a $786,000
charge for acquired research and development in connection with the
acquisition of OnSite. Net loss for year ended December 31, 1995 includes a
$737,000 charge to reduce certain long-lived assets to their estimated net
realizable value.

ITEM 7.MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

The following discussion should be read in conjunction with our
consolidated financial statements and related notes included elsewhere in this
report.

INFORMATION REGARDING AND FACTORS AFFECTING FORWARD-LOOKING STATEMENTS

We are including the following cautionary statement in this Form 10-K 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 us, or on behalf of us. 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-K 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

8
<PAGE> 11

could cause actual results to differ materially from those projected. Such risks
and uncertainties are set forth below. Our expectations, beliefs and projections
are expressed in good faith and are believed to have a reasonable basis,
including without limitation, our examination of historical operating trends,
data contained in our records and other data available from third parties. There
can be no assurance, however, that our expectations, 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 our view, could cause material adverse
affects on our financial condition and results of operations: our ability to
attain widespread market acceptance of our technology; our ability to obtain
acceptable forms and amounts of financing to fund planned expansion; the demand
for, and price level of, our services; competitive factors; the actual useful
life of our ITD Units; ability to mitigate concentration of business in a small
number of customers; 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 our ability to maintain acceptable utilization rates on
our equipment. We are not obligated to update or revise these forward-looking
statements to reflect the occurrence of future events or circumstances.

OVERVIEW

We are engaged in the development, production and sale of environmental
reclamation and recycling technologies and services. Substantially all of our
technologies and services are provided through OnSite and we are devoting
substantially all of our efforts to the development of markets for OnSite's
services. We are currently providing reclamation and recycling services to
companies engaged in land-based oil and gas exploration, waste management, and
other industrial applications.

Oil and gas exploration, refinery and other types of industrial activities,
often produce significant quantities of petroleum-contaminated drill cuttings
and waste, from which our 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. We have 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, petrochemical and waste management sites, as well
as at Superfund, DOD and DOE sites.

On December 17, 1997, we acquired the remaining 50% interest in OnSite from
Parker Drilling Co. ("Parker"), giving us complete control of the ITD technology
owned by OnSite, and providing us with a wholly-owned operating subsidiary that
forms the cornerstone of our future operations. Total purchase consideration in
the OnSite acquisition was financed by us through a private placement of
Convertible Preferred and Preferred Stock, combined with senior secured notes
and warrants to purchase shares of our Common Stock. We included OnSite's
operating results in our statement of operations for the year ended December
31,1997, as though the acquisition took place at the beginning of that year, and
deducted as a separate line item the pre-acquisition earnings attributable to
the former 50% owner of OnSite.

We have focused essentially all of our attention on our now wholly-owned
business operations in OnSite. OnSite was formed, as a 50%-owned joint company
with Parker, as a means for assembling the capital necessary to build and
improve the ITD process and to generate market awareness and acceptance of ITD
technology. We expect that a substantial portion of our revenues will continue
to be generated from major international oil and gas industry participants, as
well as from other industrial applications.

In November 1996, we formed a 50%-owned joint company, OnSite Colombia,
Inc., to provide hydrocarbon contaminated soil reclamation and recycling
services to oil and gas industry participants operating in Colombia.

In January, 1998, OnSite Venezuela, Inc., our 100% owned subsidiary,
commenced operations to provide hydrocarbon contaminated soil reclamation and
recycling services to oil and gas industry participants operating in Venezuela.

9
<PAGE> 12

In December, 1998, we formed a 50%-owned joint company, OnSite Arabia,
Inc., to provide hydrocarbon contaminated soil reclamation and recycling
services to oil and gas industry participants operating in the Arabian Gulf
region.

In April, 1999, we formed OnSite Environmental UK, Ltd., a wholly-owned
subsidiary, for operations in Scotland.

In July, 1999, we registered OnSite Mexico LLC, a wholly-owned subsidiary,
for operations in Mexico.

RESULTS OF OPERATIONS

Comparison of Operating Results -- Years Ended December 31, 1999 and 1998

Summary. For the year ended December 31, 1999, a net loss of $483,000 was
incurred as compared to a 1998 net loss of $799,000. The $316,000 reduction in
net loss was primarily due to higher revenue and improved gross margins from a
greater average number of ITD Units in service, partially offset by higher
interest expense. Additional information follows.

Revenue and Gross Margin. Revenue of $13.5 million for 1999 generated $7.3
million (54% of revenue) gross margin in 1999 as compared to revenue of $10.7
million and gross margin of $5.3 million (50% of revenue) in 1998. The majority
of the 1999 increase in revenue was due to operating an average of 4.6 ITD Units
during 1999 as compared to an average of 3.6 in 1998, an increase of 28%. The 4%
increase in gross margin ratio was largely due to lower startup expenses as
compared to 1998, improved processing efficiency in foreign operations and an
overall more favorable project mix during the year just ended.

Selling, General and Administrative ("SGA") Expense. SGA expense increased
9% during 1999 due to increased business activity in general (revenue increased
27%). Overall, the average number of management employees remained the same in
1999 as with the prior year.

Research & Development Costs ("R&D") Expense. The 1997 R&D expense is
primarily the writeoff of acquired research and development based on a valuation
of in-process technology that resulted from the acquisition of Parker Drilling
Company's 50% interest in OnSite.

Amortization of Engineering Design and Developed Technology. Reflects the
amortization of Engineering Design and Developed Technology costs, an intangible
asset related to the December 1997 acquisition of the remaining 50% interest in
OnSite from Parker Drilling. The intangible asset is being amortized over an 8
year estimated economic life.

Interest Income. In 1999, we earned interest income from the investment of
proceeds from long-term debt obtained in December 1997 and June 1998. The
reduction in interest income resulted from a lower average cash balance during
1999.

Interest Expense. During 1999, $1,455,000 of interest expense was incurred
(including amortization of debt issuance costs of $522,000), compared to
interest expense of $1,159,000 for 1998 (including amortization of debt issuance
costs of $453,000). The $296,000 overall increase in interest expense for 1999
was due to lower interest expense capitalization caused by less ITD Unit
construction activity during 1999 as compared to 1998, increased interest
expense on two international leases in Colombia, and higher amortization of debt
issuance costs as noted above.

Income Taxes. The tax provision in 1999 and 1998 primarily relates to
foreign income taxes incurred by our wholly-owned subsidiaries in Venezuela,
Mexico and Scotland and in our 50%-owned subsidiary in Colombia. We have
incurred net operating losses ("NOLs") in the U.S. in recent years, which may be
used to offset taxable income reported in future periods. The NOLs and certain
foreign tax credits associated with the taxes paid in Colombia have generated
deferred tax assets, but due to uncertainties regarding the future realization
of these assets, a valuation allowance has been provided for the full amount of
the deferred tax assets. We are implementing tax planning strategies, which if
successful, may result in our recognizing these

10
<PAGE> 13

deferred tax assets in future periods, which would result in significantly
reduced effective tax rates. However, presently there can be no assurances that
the NOLs and foreign tax credits will be utilized.

Elimination of Minority Interest. Minority interest for 1999 and 1998
reflects our 50% minority partner's interest in the net income of OnSite
Colombia for each respective year.

Comparison of Operating Results -- Years Ended December 31, 1998 and 1997

Summary. For the year ended December 31, 1998, we incurred a net loss of
$799,000 as compared to a 1997 net loss of $1,849,000. The $1,050,000 reduction
in net loss was primarily due to higher revenue and associated gross margins
from a greater average number of our ITD Units in service, and the sale of an
ITD system to a newly formed 50%-owned joint company. Also contributing to the
reduction in net loss were favorable income tax provisions in foreign operations
and the absence of the prior year's extraordinary charge from debt retirement.
These factors were partially offset by the effect of slightly lower gross
margins, and increased selling, general and administrative expenses, reflecting
increased staffing, expanded marketing efforts, start-up expenses for Venezuela,
and higher interest expense due to higher debt. Additional information follows.

Revenue and Gross Margin. Revenue of $10.7 million for 1998 generated $5.3
million (50% of revenue) gross margin in 1998 as compared to revenue of $6.7
million and gross margin of $3.5 million (52% of revenue) in 1997. The majority
of the 1998 increase in revenue was due to operating an average of 3.6 ITD Units
during 1998 as compared to an average of 2.5 in 1997, an increase of 44%. The 2%
decline in gross margin ratio was largely due to startup expenses in Venezuela
and Mexico, and site relocation in Colombia.

Selling, General and Administrative ("SGA") Expense. SGA expense increased
during 1998 due to increased business activity in general, combined with startup
expenses in OnSite Venezuela, increased efforts to market our technology, and
corporate-level personnel additions and/or upgraded skills in such key areas as
contract law, regulatory matters and international operations. Overall, the
average number of management employees increased 33% in 1998, resulting in a
total of 9 domestic and international management and supervisory personnel at
the end of 1998, including corporate and administrative functions.

Interest Income. In 1998, we earned interest income from investment of
proceeds from long-term debt obtained in December 1997 and June 1998. During
1997, we earned interest income mainly from long-term debt received in the
fourth quarter of 1996, which was paid back to Parker Drilling in December 1997.
See Interest Expense below for additional details on long-term debt.

Interest Expense. The 1998 increase in interest expense was due to
increased borrowing to both fund our December 1997 purchase of Parker's 50%
interest in OnSite, and to fund current operations and planned capital
expenditures. During 1998, we incurred $1,159,000 interest expense (including
amortization of debt issuance costs of $453,000). That compared to interest
expense of $466,000 for 1997 which primarily related to the $3 million in debt
retired in December 1997.

Income Taxes. Our reported tax provision in 1998 and 1997 primarily relates
to foreign income taxes incurred by our 50%-owned consolidated subsidiary OnSite
Colombia. We have 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

11
<PAGE> 14

been provided for the full amount of the deferred tax assets. We are
implementing tax planning strategies, which if successful, may result in our
recognizing these deferred tax assets in future periods, which would result in
significantly reduced effective tax rates. However, presently there can be no
assurances that the NOLs and foreign tax credits will be utilized.

Elimination of Minority Interest. Minority interest for 1998 and 1997
reflects our 50% minority partner's interest in the net income of OnSite
Colombia for each respective year.

Extraordinary Item. The extraordinary loss of $352,000 for 1997 resulted
from the writeoff of deferred financing costs from the early repayment of the $3
million long-term debt due to Parker. This debt was repaid in connection with
our acquisition of OnSite.

LIQUIDITY AND CAPITAL RESOURCES

During 1997 and 1996, we raised additional debt and equity capital to fund
current operations, support the construction of our ITD Units, necessary for our
future growth, and acquire the remaining 50% of OnSite from Parker. In December
1997, we raised $14 million in a private placement of Series B Convertible
Preferred Stock, non-convertible Series C Preferred Stock, senior secured notes
and warrants to purchase our Common Stock. The proceeds from this private
placement were primarily used to fund the $8 million acquisition of OnSite,
repay $3 million of long-term debt to a Parker subsidiary, and provide us with
capital resources to continue funding current operations and planned capital
expenditures. In the 1997 private placement, we received $6 million in proceeds
from senior secured notes and a commitment by the investors for an additional $5
million of long-term debt, provided that we remain in compliance with the loan
covenants of the secured notes. We subsequently borrowed the additional $5
million in June 1998.

Prior to the $14 million in funding described above, in the first quarter
of 1997, we converted debt and related accrued interest totaling $1,262,000 to
equity and completed a Regulation D Common Stock offering. The proceeds from
these transactions, along with the $3 million long-term debt proceeds raised by
us in December 1996 were used to support our operations throughout most of 1997.

During 1997, we arranged capital leasing with third party lenders for two
of our ITD Units operated in OnSite Colombia in order to improve cash flows. We
have made and will continue to make capital expenditures for ITD Units, and at
December 31, 1997, had placed orders for four additional units. Those four units
were built and paid for by December 31, 1999. As the need for additional ITD
Units increases, we plan to finance additional ITD Units through a combination
of surplus operating cash flows, bank term financing, and potentially an
additional sale of our equity. There can be no assurances that we will be able
to obtain this additional financing.

In December, 1998, we and an investor formed OnSite Arabia, Inc. ("OnSite
Arabia"), a Cayman Islands company for the purpose of providing environmental
remediation, reclamation and recycling services in Saudi Arabia, Qatar, Yemen,
the United Arab Emirates, Bahrain, Kuwait and Oman. We own 50% of OnSite Arabia.
Concurrent with the formation of OnSite Arabia, we sold 500,000 shares of our
Common Stock in a private placement to an investor at a purchase price of $1.50
per share for total cash consideration of $750,000.

In December 1998, we redeemed 1,037,736 shares of our Series B Convertible
Preferred stock from a related party, Newpark Resources, Inc. ("Newpark"), in
consideration for certain receivables due to us from Newpark. This transaction
had the combined effect of reducing our working capital and stockholders' equity
by approximately $1,100,000, and a reduction in common stock equivalents of
1,037,736 shares on a fully diluted basis. After the 1,037,736 share redemption,
Newpark continues to hold 847,975 shares of our Series B Convertible Preferred
stock.

The functional currency of our foreign operations (Colombia, Venezuela,
Mexico, Scotland and the Arabian Gulf region) is the U.S. dollar because
customer invoicing, customer receivables, imported equipment and many of the
operating cost factors are denominated in U.S. dollars. We plan to continue to
implement the same approach as other foreign operations come on line so as to
minimize our risks associated with foreign exchange fluctuation and its affect
on our profitability.
12
<PAGE> 15

We estimate that our existing cash reserves and cash flows from operations
will be sufficient to cover our cash requirements for 2000.

IMPACT OF YEAR 2000

Our computer systems functioned properly with respect to dates in the year
2000, and we did not experience problems with significant suppliers or major
customers regarding Year 2000 issues. We continue to maintain our contingency
plans for potential Year 2000 problems.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We are subject to market risk exposure related to changes in interest rates
on our long-term debt facility. These instruments carry interest at a
pre-agreed-upon percentage point spread from the prime interest rate. At
December 31, 1999, we had $6.4 million outstanding under this facility. Based on
this balance, an immediate change of one percent in the interest rate would
cause a change in interest expense of approximately $64,000 on an annual basis.

We are subject to market risk related to fluctuations in the value of the
U.S. dollar compared to certain foreign currencies. We have subsidiaries which
operate in Colombia, Venezuela, Mexico, Scotland and the Arabian Gulf region.
However, the functional currency used by each of these operating units is the
U.S. dollar. Substantial portions of these operating units' invoicing, customer
receivables, imported equipment and many operating cost factors are denominated
in dollars. We attempt to maintain a balance between assets and liabilities
denominated in foreign currencies, however, such currency levels are generally
not significant. These factors serve to mitigate the impact on our financial
statements associated with foreign exchange fluctuations.

A hypothetical 10% fluctuation of the U.S. dollar relative to the
currencies of Colombia, Venezuela, Mexico and Scotland would not materially
adversely affect our expected 2000 earnings or cash flows regardless of the
direction of the change in relation to the U.S. dollar. Our sensitivity analysis
of the effects of changes in foreign currency exchange rates does not factor in
a potential change in sales levels.

While we are not a purchaser or producer of crude oil or related products,
our customers to date have generally been large multinational oil and gas
producing companies which are directly impacted by the fluctuations in the price
of crude oil. Decreases in the price of crude oil directly affect our current
customers' cash flows and may therefore affect our ability to collect
receivables and our ability to generate repeat and new business.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The information required hereunder is included in this report as set forth
in the "Table of Contents" on page F-1.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

Ernst & Young LLP ("Ernst & Young") audited the financial statements for
the years ended December 31, 1998 and 1997, and were dismissed on July 7, 1999.
We engaged PricewaterhouseCoopers LLP ("PricewaterhouseCoopers") as our new
independent auditor on July 13, 1999.

There were no disagreements between us and Ernst & Young, whether resolved
or not resolved, on any matter of accounting principles or practices, financial
statement disclosure or auditing scope or procedure, which, if not resolved,
would have caused them to make reference to the subject matter of the
disagreement in connection with their report. Since January 1, 1997, and through
the present, there were no reportable events requiring disclosure. We have
authorized Ernst & Young to respond fully to inquiries from Pricewaterhouse
regarding the disclosure in this Form 8-K.

The report of Ernst & Young for the two most recent fiscal years did not
contain any adverse opinion or disclaimer of opinion and was not qualified or
modified as to uncertainty, audit scope or accounting principles.

13
<PAGE> 16

The decision to change principal accountants was recommended and approved
by our Audit Committee and Board of Directors and made at their request.

During our two most recent fiscal years, and since then, Ernst & Young has
not advised us that any of the following exist or are applicable:

(1) That the internal controls necessary to develop reliable financial
statements do not exist, that information has come to their attention that
has lead them to no longer be able to rely on management's representations,
or that has made them unwilling to be associated with the financial
statements prepared by management;

(2) That we need to expand significantly the scope of its audit, or
that information has come to their attention that if further investigated
may materially impact the fairness or reliability of a previously issued
audit report or the underlying financial statements or any other financial
presentation, or cause them to be unwilling to rely on management's
representations or be associated with our financial statements for the
foregoing reasons or any other reason; or

(3) That they have advised us that information has come to their
attention that they have concluded materially impacts the fairness or
reliability of either a previously issued audit report or the underlying
financial statements for the foregoing reasons or any other reason.

Prior to the engagement of Pricewaterhouse as independent auditors, we had
not consulted Pricewaterhouse regarding the application of accounting principles
to a specified transaction, either completed or proposed; or the type of audit
opinion that might be rendered on our financial statements or any other
financial presentation whatsoever.

Ernst & Young has provided a letter addressed to the Securities and
Exchange Commission pursuant to Regulation S-K Item 304 as to whether Ernst &
Young agrees with the disclosure in this Form 8-K.

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

The information required by this item is incorporated by reference to our
definitive proxy statement, which is to be filed with the Securities and
Exchange Commission (the "Commission") pursuant to the Securities Exchange Act
of 1934 (the "Exchange Act") within 120 days at the end of our fiscal year on
December 31, 1999.

Information with respect to our executive officers is set forth under the
caption "Executive Officers of the Registrant" in Part I of the report.

ITEM 11. EXECUTIVE COMPENSATION

The information required by this item is incorporated by reference to our
definitive proxy statement, which is to be filed with the Commission pursuant to
the Exchange Act within 120 days of the end of our fiscal year on December 31,
1999.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The information required by this item is incorporated by reference in our
definitive proxy statement, which is to be filed with the Commission pursuant to
the Exchange Act within 120 days of the end of our fiscal year on December 31,
1999.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

14
<PAGE> 17

ITEM 14.EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K

(A)(1) FINANCIAL STATEMENTS

Reports of Independent Accountants/Auditors

Consolidated Balance Sheet as of December 31, 1999 and 1998.

Consolidated Statement of Operations for the years ended December 31, 1999,
1998 and 1997.

Consolidated Statement of Stockholders' Equity for the years ended December
31, 1999, 1998 and 1997.

Consolidated Statement of Cash Flows for the years ended December 31, 1999,
1998 and 1997.

Notes to Consolidated Financial Statements.

(A)(2) FINANCIAL STATEMENT SCHEDULES

Financial statement schedules are not included in this Form 10-K Annual
Report because they are not applicable or the required information is shown
in the financial statements or notes thereto.

(B) EXHIBITS

<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
3.1* -- Certificate of Incorporation of the Registrant, as
amended.
3.2* -- Bylaws of the Registrant.
4.1* -- 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* -- Common Stock specimen.
4.3.1** -- Certificate of Designation, Preferences, Rights and
Limitations of Series B Convertible Preferred Stock.
4.3.2** -- Certificate of Designation, Preferences, Rights and
Limitations of Series C Preferred Stock.
4.4* -- Form of Warrant Certificate dated December 17, 1997
(Included in Exhibit 4.8).
4.5* -- Form of Registration Rights Agreement pursuant to Private
Placement Memorandum dated September 18, 1996.
4.6* -- Form of Registration Rights Agreement dated December 17,
1997, between the Company and Cahill, Warnock Strategic
Partners Fund, L.P., Strategic Associates, L.P., Newpark
Resources, Inc. and James H. Stone.
4.7* -- Form of Warrant Agreement dated December 17, 1997,
between the Company and Cahill, Warnock Strategic
Partners Fund, L.P., Strategic Associates, L.P., Newpark
Resources, Inc. and James H. Stone.
4.8*** -- Form of Registration Rights Agreement dated December 7,
1998.
10.2* -- Loan and Security Agreement dated December 17, 1997 by
and among the Company, National Fuel & Energy, and OnSite
Technology, L.L.C. as Borrowers and Cahill, Warnock
Strategic Partners Fund, L.P., Strategic Associates,
L.P., Newpark Resources, Inc. and James H. Stone, as
Lenders.
10.3* -- Form of Registration Rights Agreement pursuant to Private
Placement Memorandum dated September 18, 1996.
</TABLE>

15
<PAGE> 18

<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
10.4* -- Form of Registration Rights Agreement dated December 17,
1997, between the Company and Cahill, Warnock Strategic
Partners Fund, L.P., Strategic Associates, L.P., Newpark
Resources, Inc. and James H. Stone.
10.5* -- Form of Warrant Agreement dated December 17, 1997,
between the Company and Cahill, Warnock Strategic
Partners Fund, L.P., Strategic Associates, L.P., Newpark
Resources, Inc. and James H. Stone.
10.6* -- Employment Agreement of James S. Percell.
10.7**** -- 1998 Stock Option Plan
21.1* -- Subsidiaries
27.1***** -- Financial Data Schedule
</TABLE>

- ---------------

* Previously filed as an exhibit to the Company's Annual Report on Form
10-KSB as amended for the fiscal year ended December 31, 1997, and
incorporated by reference thereto.

** Previously filed as an exhibit to the Company's Current Report on Form 8-K
dated December 17, 1997 and filed December 30, 1997, and incorporated
herein by reference thereto.

*** Previously filed with Form S-3 as amended effective Feb 8, 1999.

**** Previously filed as an exhibit to the Company's Annual Report on Form
10-KSB as amended for the fiscal year ended December 31, 1998, and
incorporated by reference thereto.

***** Filed herewith.

There were no reports filed on Form 8-K during the fourth quarter of 1999.

16
<PAGE> 19

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 March 13, 2000.

ENVIRONMENTAL SAFEGUARDS, INC.

By: /s/ JAMES S. PERCELL
----------------------------------
James S. Percell
Director, Chairman of the Board,
Chief Executive Officer and
President

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
--------- ----- ----
<C> <S> <C>

/s/ JAMES S. PERCELL Director, Chairman of the March 13, 2000
- ----------------------------------------------------- Board, Chief Executive
James S. Percell Officer and President

/s/ BRYAN SHARP Director March 13, 2000
- -----------------------------------------------------
Bryan Sharp

/s/ ALBERT WOLFORD Director and Secretary March 13, 2000
- -----------------------------------------------------
Albert Wolford

/s/ DAVID L. WARNOCK Director March 13, 2000
- -----------------------------------------------------
David L. Warnock

/s/ RONALD L. BIANCO Chief Financial Officer, March 13, 2000
- ----------------------------------------------------- Treasurer and Vice-Secretary
Ronald L. Bianco
</TABLE>

17
<PAGE> 20

ENVIRONMENTAL SAFEGUARDS, INC.

---------------------

CONSOLIDATED FINANCIAL STATEMENTS
WITH REPORTS OF INDEPENDENT ACCOUNTANTS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
<PAGE> 21

ENVIRONMENTAL SAFEGUARDS, INC.

TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Reports of Independent Accountants.......................... F-2
Audited Financial Statements
Consolidated Balance Sheet as of December 31, 1999 and
1998................................................... F-4
Consolidated Statement of Operations for the years ended
December 31, 1999, 1998 and 1997....................... F-5
Consolidated Statement of Stockholders' Equity for the
years ended December 31, 1999, 1998 and 1997........... F-6
Consolidated Statement of Cash Flows for the years ended
December 31, 1999, 1998 and 1997....................... F-8
Notes to Consolidated Financial Statements.................. F-9
</TABLE>

F-1
<PAGE> 22

REPORT OF INDEPENDENT ACCOUNTANTS

To the Stockholders and Board of Directors of
Environmental Safeguards, Inc.:

In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of operations, stockholders' equity and cash flows
present fairly, in all material respects, the financial position of
Environmental Safeguards, Inc. as of December 31, 1999, and the consolidated
results of their operations and cash flows for the year then ended in conformity
with accounting principles generally accepted in the United States of America.
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 of these statements in accordance with
auditing standards generally accepted in the United States of America, which
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, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for the opinion expressed above.

PRICEWATERHOUSECOOPERS LLP

Houston, Texas
March 10, 2000

F-2
<PAGE> 23

REPORT OF INDEPENDENT AUDITORS

Board of Directors and Stockholders
Environmental Safeguards, Inc.

We have audited the accompanying consolidated balance sheet of
Environmental Safeguards, Inc. (the "Company") as of December 31, 1998, and the
related statements of operations, stockholders' equity and cash flows for each
of the two years in the period ended December 31, 1998. 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 auditing standards generally
accepted in the United States. 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 financial position of
Environmental Safeguards, Inc. as of December 31, 1999, and the results of its
operations and its cash flows for each of the two years in the period ended
December 31, 1998 in conformity with accounting principles generally accepted in
the United States.

ERNST & YOUNG LLP

Houston, Texas
March 5, 1999

F-3
<PAGE> 24

ENVIRONMENTAL SAFEGUARDS, INC.

CONSOLIDATED BALANCE SHEET
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)

ASSETS

<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1999 1998
------- -------
<S> <C> <C>
Current assets:
Cash and cash equivalents................................. $ 1,944 $ 4,792
Accounts receivable....................................... 3,579 1,734
Equipment held for sale................................... -- 1,953
Prepaid expenses.......................................... 87 273
Deferred taxes............................................ 33 51
Other current assets...................................... 76 270
------- -------
Total current assets.............................. 5,719 9,073
Property and equipment, net............................... 10,835 8,256
Acquired engineering design and technology, net........... 2,427 2,835
Other assets.............................................. 9 --
------- -------
Total assets...................................... $18,990 $20,164
======= =======

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt......................... $ 2,098 $ 1,735
Current portion of capital lease obligation............... -- 648
Accounts payable.......................................... 667 628
Accrued liabilities....................................... 772 569
Income taxes payable...................................... 618 62
------- -------
Total current liabilities......................... 4,155 3,642
------- -------
Long-term debt.............................................. 4,325 6,636
Minority interest........................................... 3,554 2,073
Commitments and contingencies
Stockholders' equity:
Preferred stock; Series B convertible; voting, $.001 par
value (aggregate liquidation value -- $2,897,700)
5,000,000 shares authorized; 2,733,686 shares issued
and outstanding........................................ 3 3
Preferred stock; Series C non-convertible, non-voting,
cumulative; $.001 par value (aggregate liquidation
value -- $4,000,000); 400,000 shares authorized, issued
and outstanding........................................ 1 1
Common stock; $.001 par value; 50,000,000 shares
authorized; 10,112,144 and 10,092,444 shares issued and
outstanding at December 31, 1999 and 1998,
respectively........................................... 10 10
Additional paid-in capital................................ 14,329 14,318
Accumulated deficit....................................... (7,387) (6,519)
------- -------
Total stockholders' equity........................ 6,956 7,813
------- -------
Total liabilities and stockholders' equity........ $18,990 $20,164
======= =======
</TABLE>

The accompanying notes are an integral part
of these consolidated financial statements.

F-4
<PAGE> 25

ENVIRONMENTAL SAFEGUARDS, INC.

CONSOLIDATED STATEMENT OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------
1999 1998 1997
------- ------- -------
<S> <C> <C> <C>
Revenue..................................................... $13,514 $10,672 $ 6,678
Cost of revenue............................................. 6,197 5,378 3,226
------- ------- -------
Gross margin.............................................. 7,317 5,294 3,452
Selling, general and administrative expenses................ 3,741 3,435 2,059
Amortization of acquired engineering design and
technology................................................ 408 407 17
Research and development.................................... 70 48 786
------- ------- -------
Income from operations.................................... 3,098 1,404 590
Other income (expenses):
Interest income........................................... 130 290 192
Interest expense.......................................... (1,455) (1,159) (466)
Foreign currency translation gains (losses)............... 21 (23) (31)
Other..................................................... 40 40 4
------- ------- -------
Income before provision for income taxes, minority interest,
elimination of pre-acquisition earnings of subsidiary and
extraordinary item........................................ 1,834 552 289
Provision for income taxes.................................. 1,396 756 1,205
------- ------- -------
Income (loss) before minority interest, elimination of
pre-acquisition earnings of subsidiary and extraordinary
item...................................................... 438 (204) (916)
Minority interest........................................... (921) (595) (547)
Elimination of pre-acquisition earnings of subsidiary....... -- -- (34)
------- ------- -------
Loss before extraordinary item.............................. (483) (799) (1,497)
Extraordinary loss on extinguishment of debt................ -- -- (352)
------- ------- -------
Net loss.................................................... $ (483) $ (799) $(1,849)
======= ======= =======
Net loss applicable to common stockholders.................. $(1,244) $(1,572) $(5,880)
======= ======= =======
Basic and dilutive loss per share:
Before extraordinary item................................. $ (0.12) $ (0.17) $ (0.61)
Extraordinary item........................................ -- -- (0.04)
------- ------- -------
Net loss per share........................................ $ (0.12) $ (0.17) $ (0.65)
======= ======= =======
Weighted average shares outstanding (basic and dilutive).... 10,102 9,495 9,075
======= ======= =======
</TABLE>

The accompanying notes are an integral part
of these consolidated financial statements.

F-5
<PAGE> 26

ENVIRONMENTAL SAFEGUARDS, INC.

CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)

<TABLE>
<CAPTION>
SERIES B SERIES C UNISSUED ADDITIONAL
PREFERRED PREFERRED COMMON COMMON PAID-IN ACCUMULATED
STOCK STOCK STOCK STOCK CAPITAL DEFICIT TOTAL
--------- --------- ------ -------- ---------- ----------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1997....... $-- $-- $ 7 $ 813 $ 4,152 $(3,457) $ 1,515
Issuance of common stock
including shares for which the
proceeds were received in 1996
(333,400 shares)............... -- -- -- (689) 833 -- 144
Exercise of stock options
(100,000 shares)............... -- -- -- -- 60 -- 60
Issuance in conversion of
debentures and related accrued
interest (1,994,037 shares).... -- -- 2 (68) 1,125 -- 1,059
Repurchase and cancellation of
stock warrants originally
issued in connection with the
funding of long-term debt in
1996........................... -- -- -- -- (170) -- (170)
Issuance of 3,771,422 shares of
Series B preferred stock....... 4 -- -- -- 3,998 -- 4,002
Issuance of 400,000 shares of
Series C preferred stock....... -- 1 -- -- 3,191 -- 3,192
Issuance of 707,142 warrants to
purchase common stock.......... -- -- -- -- 1,270 -- 1,270
Dividends on Series C preferred
stock.......................... -- -- -- -- -- (17) (17)
Net loss......................... -- -- -- -- -- (1,849) (1,849)
--- --- --- ----- ------- ------- -------
Balance at December 31, 1997..... $ 4 $ 1 $ 9 $ 56 $14,459 $(5,323) $ 9,206
=== === === ===== ======= ======= =======
</TABLE>

The accompanying notes are an integral part
of these consolidated financial statements.

F-6
<PAGE> 27

ENVIRONMENTAL SAFEGUARDS, INC.

CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)

<TABLE>
<CAPTION>
SERIES B SERIES C UNISSUED ADDITIONAL
PREFERRED PREFERRED COMMON COMMON PAID-IN ACCUMULATED
STOCK STOCK STOCK STOCK CAPITAL DEFICIT TOTAL
--------- --------- ------ -------- ---------- ----------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1997..... $ 4 $ 1 $ 9 $ 56 $14,459 $(5,323) $ 9,206
Issuance of common stock for
agreements reached in 1995
(40,179 shares)................ -- -- -- (56) 56 -- --
Exercise of stock options
(270,000 shares)............... -- -- -- -- 162 -- 162
Cancellation of Series B
Preferred stock in exchange for
accounts receivable from an
affiliate (1,037,736 shares)
(Note 13)...................... (1) -- -- -- (1,099) -- (1,100)
Issuance of common stock for cash
(500,000 shares)............... -- -- 1 -- 740 -- 741
Dividends on Series C preferred
stock.......................... -- -- -- -- -- (397) (397)
Net loss......................... -- -- -- -- -- (799) (799)
--- --- --- ---- ------- ------- -------
Balance at December 31, 1998..... 3 1 10 -- 14,318 (6,519) 7,813
Exercise of stock options (19,700
shares)........................ -- -- -- -- 11 -- 11
Dividends on series C preferred
stock.......................... -- -- -- -- -- (385) (385)
Net loss......................... -- -- -- -- -- (483) (483)
--- --- --- ---- ------- ------- -------
Balance at December 31, 1999..... $ 3 $ 1 $10 $ -- $14,329 $(7,387) $ 6,956
=== === === ==== ======= ======= =======
</TABLE>

The accompanying notes are an integral part
of these consolidated financial statements.

F-7
<PAGE> 28

ENVIRONMENTAL SAFEGUARDS, INC.

CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS)

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------
1999 1998 1997
------- ------- -------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss.................................................. $ (483) $ (799) $(1,849)
Adjustment to reconcile net loss to net cash provided by
(used in) operating activities:
Extraordinary loss..................................... -- -- 352
Minority interest...................................... 921 595 --
Elimination of pre-acquisition earnings of
subsidiary........................................... -- -- 34
Write-off of acquired research and development......... -- -- 762
Common stock exchanged for services and interest
expense.............................................. -- -- 30
Deferred tax expense................................... 18 34 --
Depreciation expense................................... 1,814 1,208 45
Amortization expense................................... 408 407 119
Changes in operating assets and liabilities, net of
effects of acquisition:
Accounts receivable.................................. (1,845) (1,280) (116)
Equipment held for sale.............................. 545 (1,546) --
Prepaid expenses and other assets.................... 371 (98) (344)
Accounts payable..................................... 39 148 163
Accrued liabilities.................................. 203 203 19
Income taxes payable................................. 556 (463) 118
------- ------- -------
Net cash provided by (used in) operating
activities...................................... 2,547 (1,591) (667)
------- ------- -------
Cash flows from investing activities:
Acquisition of remaining 50% interest in OnSite, net of
cash acquired.......................................... -- -- (6,609)
Purchase of property and equipment........................ (1,835) (2,435) (40)
Investment in OnSite...................................... -- -- (1,050)
------- ------- -------
Net cash used in investing activities............. (1,835) (2,435) (7,699)
------- ------- -------
Cash flows from financing activities:
Net proceeds from long-term debt and convertible
debentures............................................. -- 5,000 6,191
Payments on long-term debt................................ (1,948) (1,590) (3,000)
Payments on capital lease obligations..................... (648) (1,484) --
Repurchase of stock warrants.............................. -- -- (170)
Net proceeds from sale of common stock, preferred stock,
stock warrants and stock options....................... 11 903 8,668
Dividends paid on Series C preferred stock................ (385) (397) --
Distribution to minority interest......................... (590) (300) --
------- ------- -------
Net cash provided by (used in) financing
activities...................................... (3,560) 2,132 11,689
------- ------- -------
Net increase (decrease) in cash and cash equivalents........ (2,848) (1,894) 3,323
Cash and cash equivalents, beginning of year................ 4,792 6,686 3,363
------- ------- -------
Cash and cash equivalents, end of year...................... $ 1,944 $ 4,792 $ 6,686
======= ======= =======
Supplemental disclosure of cash flow information:
Cash paid for interest.................................... $ 1,469 $ 1,120 $ 421
======= ======= =======
Cash paid for income taxes................................ $ 840 $ 1,185 $ 859
======= ======= =======
</TABLE>

The accompanying notes are an integral part
of these consolidated financial statements.

F-8
<PAGE> 29

ENVIRONMENTAL SAFEGUARDS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES

Environmental Safeguards, Inc. (the "Company") provides environmental
remediation and hydrocarbon reclamation/recycling services principally to oil
and gas companies, using proprietary Indirect Thermal Desorption ("ITD")
technology. To date the primary service offered by the Company has been the
remediation of soil contaminated by oil-based drill cuttings and the subsequent
recovery of diesel and synthetic oils which were in the drill cuttings.

Principles of Consolidation

The consolidated financial statements include the accounts of the Company
and its majority owned or controlled subsidiaries after elimination of all
significant intercompany accounts and transactions.

Management Estimates

The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America 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. These estimates mainly involve the useful
lives of property and equipment, the valuation of deferred tax assets and the
realizability of accounts receivable.

Research and Development

Research and development activities are expensed as incurred, including
costs relating to patents or rights which may result from such expenditures.

Revenue Recognition

Revenue is recognized at the time services are performed or when products
are shipped.

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 with
major financial institutions selected based upon management's assessment of the
banks' financial stability and international capability. 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, the United Kingdom and Latin America. Collateral is generally not
required for credit granted. At December 31, 1999, essentially all of the
Company's trade receivables were due from three multinational energy companies
for services performed in Latin America (Mexico, Colombia and Venezuela) and
from a private company operating and headquartered in the United Kingdom. The
Company has in place insurance to cover certain exposure in its foreign
operations and provides allowances for potential credit losses when necessary.

Cash Equivalents

For purposes of reporting cash flows, the Company considers all short-term
investments with an original maturity of three months or less when purchased to
be cash equivalents.

F-9
<PAGE> 30
ENVIRONMENTAL SAFEGUARDS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Equipment Held for Sale

Equipment held for sale represents ITD Units awaiting shipment or held for
sale to third parties. Such units are stated at the lower of cost or market and
cost is determined based upon specific identification.

Property and Equipment

Property and equipment is stated at cost. Depreciation is computed using
the straight-line method over the estimated useful lives of 5 years for ITD
Units and 3 to 5 years for office furniture and equipment, and transportation
and other equipment. Additions or improvements that increase the value or extend
the life of an asset are capitalized. Expenditures for normal maintenance and
repairs are expensed as incurred. Disposals are removed from the accounts at
cost less accumulated depreciation, and any gain or loss from disposition is
reflected in operations currently.

Income Taxes

The Company uses the liability method in accounting for income taxes. Under
this method, deferred tax assets and liabilities are determined based on
differences between financial reporting and income tax carrying amounts of
assets and liabilities and are measured using the enacted tax rates and laws
that will be in effect when the differences are expected to reverse. A valuation
allowance, if necessary, is provided against deferred tax assets, based upon
management's assessment as to their realization.

Stock-Based Compensation

Financial Accounting Standard No. 123, "Accounting for Stock-Based
Compensation" ("SFAS No. 123") established financial accounting and reporting
standards for stock-based employee compensation plans. It defined a fair value
based method of accounting for an employee stock option or similar equity
instrument and encouraged all entities to adopt that method of accounting for
all of their employee stock compensation plans and include the cost in the
income statement as compensation expense. However, it also allows an entity to
continue to measure compensation cost for those plans using the intrinsic value
based method of accounting prescribed by Accounting Principles Board ("APB")
Opinion No. 25, "Accounting for Stock Issued to Employees". The Company accounts
for compensation cost for stock option plans in accordance with APB Opinion No.
25.

Acquired Engineering Design and Technology

Acquired engineering design and technology represents the intangible value
associated with certain proprietary equipment and process designs acquired by
the Company in the acquisition of OnSite (See Note 2). This intangible asset is
being amortized over an estimated useful life of 8 years using the straight-line
method. As of December 31, 1999 and 1998, the accumulated amortization was
$832,000 and $424,000, respectively.

Impairment of Long-Lived Assets

In the event facts and circumstances indicate the carrying value of a
long-lived asset, including associated intangibles, may be impaired, an
evaluation of recoverability is performed by comparing the estimated future
undiscounted cash flows associated with the asset to the asset's carrying amount
to determine if a write-down to market value or discounted cash flow is
required.

F-10
<PAGE> 31
ENVIRONMENTAL SAFEGUARDS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Translation of Foreign Currencies

The financial statements of foreign subsidiaries are measured as if the
functional currency were the U.S. dollar. The remeasurement of local currencies
into U.S. dollars creates translation adjustments which are included in net
income.

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.

2. ACQUISITION OF ONSITE TECHNOLOGY, L.L.C.

Prior to December 17, 1997, the Company held a 50% non-controlling interest
in OnSite Technology, L.L.C. ("OnSite"). On December 17, 1997, the Company
acquired Parker Drilling Company's 50% interest in OnSite and, accordingly,
OnSite became a wholly-owned consolidated subsidiary of the Company. Prior to
this transaction, the Company accounted for the investment in OnSite on the
equity method. The $8 million purchase price and the required repayment of $3
million of long-term debt due to a Parker subsidiary was financed through a
private placement of Series B convertible preferred stock, Series C preferred
stock, senior secured notes, and warrants for shares of the Company's common
stock to a third party investor group. This acquisition was accounted for using
the purchase method of accounting and the results of operations of OnSite were
consolidated with the Company's for the year ended December 31, 1997 with a
deduction in the consolidated statement of operations for preacquisition
earnings attributable to Parker's interest prior to December 17, 1997.

The $8 million purchase price was allocated to the assets acquired and
liabilities assumed based on independent valuation. Approximately $762,000 of
the purchase price was allocated to research and development activities which
had not yet reached technological feasibility. This amount has been included in
the Company's 1997 consolidated statement of operations as acquired research and
development. Following is a summary of assets acquired and liabilities assumed
in the purchase.

<TABLE>
<CAPTION>
(IN THOUSANDS)
<S> <C>
Assets acquired:
Fair value of tangible assets acquired.................... $5,072
Engineering design and technology......................... 3,259
Acquired research and development......................... 762
------
9,093
Liabilities assumed......................................... 2,484
------
Cash paid to Parker, net of cash in OnSite.................. $6,609
======
</TABLE>

Acquired research and development consisted of specific projects targeted
at improving the processing characteristics of the Company's ITD units. These
research and development projects were successfully completed in 1998 and the
results were incorporated in the Company's ITD units produced in 1998 and 1999.

The following unaudited summary proforma information presents the
consolidated results of operations as if the effective date of the acquisition
occurred at the beginning of 1997 after giving effect to certain

F-11
<PAGE> 32
ENVIRONMENTAL SAFEGUARDS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

adjustments which include increased depreciation of ITD units, the expensing of
acquired research and development and the additional interest expense associated
with the financing of the transaction:

<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
1997
--------------
(IN THOUSANDS)
<S> <C>
Revenue..................................................... $ 6,678
Loss before extraordinary item.............................. $(2,028)
Net loss.................................................... $(2,028)
Net loss available to common stockholders................... $(2,696)
Basic and dilutive net loss per share....................... $ (0.30)
</TABLE>

3. PROPERTY AND EQUIPMENT

Property and equipment consists of the following:

<TABLE>
<CAPTION>
1999 1998
------- ------
(IN THOUSANDS)
<S> <C> <C>
ITD Remediation/Recycling Units............................. $13,879 $9,369
Office furniture and equipment.............................. 259 258
Transportation and other equipment.......................... 581 349
------- ------
14,719 9,976
Less accumulated depreciation and amortization.............. 3,884 1,720
------- ------
$10,835 $8,256
======= ======
</TABLE>

Included in ITD Remediation/Recycling Units are units currently under
construction of $1,638,000 at December 31, 1998. At December 31, 1999, all units
were complete.

4. LONG-TERM DEBT

Long-term debt consists of the following:

<TABLE>
<CAPTION>
1999 1998
------ ------
(IN THOUSANDS)
<S> <C> <C>
Senior secured notes payable to certain corporate and
individual investors (the "Investor Notes") funded in
connection with the Company's acquisition of OnSite and
subsequent exercise of an option for $5 million of
additional debt under similar terms. (See Note 2) The
notes have a original face value of $11 million and are
carried net of an unamortized discount of approximately
$64,000 and $586,000 at December 31, 1999 and 1998,
respectively. Payments are due in quarterly principal
installments of $541,000 plus accrued interest at a stated
rate of prime plus 1.5% per year through December 2002.
After considering the amortization of the discount, the
notes bear an effective interest rate that approximates
prime plus 9.9% per year. These notes are collateralized
by all assets of the Company. ............................ $6,423 $8,371
Less current maturities..................................... 2,098 1,735
------ ------
Long-term debt.............................................. $4,325 $6,636
====== ======
</TABLE>

The Investor Notes contain certain covenants, the most restrictive of which
requires the Company to maintain positive working capital of at least $2 million
and precludes the Company from paying common

F-12
<PAGE> 33
ENVIRONMENTAL SAFEGUARDS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

dividends until the Investor Notes are repaid. During 1999, the Company
requested and received a waiver of the working capital requirement for the
duration of the Investor Notes. Management believes the Company is in compliance
with all debt covenants.

The Investor Notes included a commitment by the lenders to provide an
additional $5 million supplemental loan under provisions similar to the initial
loan provided that the Company remains in compliance with the terms of the
initial loan. The Company exercised its option to obtain the $5 million
supplemental loan in June 1998.

The Investor Notes include a provision for the Company to issue to the
lenders warrants to acquire up to a total of 707,142 shares of Common Stock of
the Company upon the earlier of an event of default under the terms of the
Investor Notes or February 17, 2000, provided, however, that if the Investor
Notes are repaid in full prior to February 17, 2000, then no additional warrants
would be issued, and further provided that if a portion of the Investor Notes
are repaid prior to February 17, 2000, then warrants for a number of shares of
Common Stock of the Company would be issued on a pro rata basis. Based on this
provision in the Investor Notes, on February 17, 2000, the Company issued the
lenders warrants to acquire 417,066 shares of the Company's common stock at
$0.01 per share. These warrants have an approximate value of $438,000 which will
be amortized as a discount over twenty-two months.

The Investor Notes also include a further provision for the Company to
issue the lenders warrants to acquire additional 188,571 shares of the Company's
common stock at $0.01 per share if the Investor Notes are not prepaid in full by
December 2001.

Following is an analysis of future annual maturities of long-term debt:

<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
- ------------ (IN THOUSANDS)
<S> <C>
2000........................................................ $2,098
2001........................................................ 2,163
2002........................................................ 2,162
------
$6,423
======
</TABLE>

During the years ended December 31, 1999, 1998 and 1997, the Company
incurred interest charges as follows:

<TABLE>
<CAPTION>
1999 1998 1997
------ ------ ----
(IN THOUSANDS)
<S> <C> <C> <C>
Interest charged to expense................................. $1,455 $1,159 $466
Interest capitalized as construction period interest........ 45 228 --
------ ------ ----
Total interest.................................... $1,500 $1,387 $466
====== ====== ====
</TABLE>

5. LEASE COMMITMENTS

During 1997, OnSite Colombia sold and leased back two indirect thermal
desorption units. No gain or loss resulted from the sale of the first ITD Unit
and a gain of $172,000 resulted from the sale of the second ITD Unit. The gain
on the sale of the second unit was deferred and is being recognized as a
reduction in depreciation expense over the remaining life of the ITD Unit. The
related leases are being accounted for as capital leases. Amortization of leased
assets is included in depreciation and amortization expense.

F-13
<PAGE> 34
ENVIRONMENTAL SAFEGUARDS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Included in property and equipment in the accompanying consolidated balance
sheet at December 31, 1999 and 1998 are the following assets held under capital
leases:

<TABLE>
<CAPTION>
1999 1998
------- ------
(IN THOUSANDS)
<S> <C> <C>
Indirect thermal desorption units........................... $ 2,028 $2,028
Accumulated amortization.................................... (1,202) (797)
------- ------
Assets under capital leases, net............................ $ 826 $1,231
======= ======
</TABLE>

OnSite Colombia also leases certain equipment and facilities under
operating leases. Certain of the leases provide for renewal options; however,
only one such lease has an original term of greater than one year. Rental
expense for operating leases was $57,000, $69,000 and $52,000 during the years
ended December 31, 1999, 1998 and 1997, respectively.

Minimum lease payments due under operating leases with original lease terms
of greater than one year and expiration dates subsequent to December 31, 1999
are summarized as follows:

<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, (IN THOUSANDS)
------------ --------------
<S> <C>
2000........................................................ $ 63
2001........................................................ 31
2002........................................................ 9
----
Total minimum lease payments...................... $103
====
</TABLE>

Included in other current assets at December 31, 1998, is $237,500 of
restricted cash deposits that secure a letter of credit. Such letter of credit
serves as a payment bond on one existing capital lease. During 1999, the letter
of credit expired and the restriction on cash was released.

F-14
<PAGE> 35
ENVIRONMENTAL SAFEGUARDS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

6. INCOME TAXES

Deferred income taxes reflect the net 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. Significant components of
the Company's deferred tax assets and liabilities were as follows:

<TABLE>
<CAPTION>
1999 1998
------- -------
(IN THOUSANDS)
<S> <C> <C>
Deferred tax liabilities:
Tax on undistributed foreign income....................... $ 422 $ 176
Basis of property and equipment........................... 341 --
------- -------
Total deferred tax liabilities.................... 763 176
------- -------
Deferred tax assets:
Net operating loss carryforwards.......................... 1,911 1,244
Foreign tax credit carryforwards.......................... 744 636
Purchased in-process research and development............. 225 259
Basis of acquired engineering design and technology....... 132 --
Deferred gain on sale of licensing agreement.............. 31 66
Deferred foreign municipal tax............................ 23 26
Other..................................................... 10 25
------- -------
Total deferred tax assets......................... 3,076 2,256
------- -------
Valuation allowance....................................... (2,280) (2,029)
------- -------
796 227
------- -------
Net deferred tax assets........................... $ 33 $ 51
======= =======
</TABLE>

For financial reporting purposes, income before income taxes, minority
interest, eliminations of pre-acquisition earnings of subsidiary and
extraordinary item includes the following components:

<TABLE>
<CAPTION>
1999 1998 1997
------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Pretax income (loss):
United States......................................... $(1,521) $(1,027) $(2,011)
Foreign............................................... 3,355 1,579 2,300
------- ------- -------
$ 1,834 $ 552 $ 289
======= ======= =======
</TABLE>

F-15
<PAGE> 36
ENVIRONMENTAL SAFEGUARDS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Significant components of the provision for income taxes attributable to
continuing operations are as follows:

<TABLE>
<CAPTION>
1999 1998 1997
------ ---- ------
(IN THOUSANDS)
<S> <C> <C> <C>
Current:
Federal................................................... $ -- $ -- $ --
Foreign................................................... 1,378 722 1,290
------ ---- ------
Total current..................................... 1,378 722 1,290
------ ---- ------
Deferred:
Federal................................................... -- -- --
Foreign................................................... 18 34 (85)
------ ---- ------
Total deferred.................................... 18 34 (85)
------ ---- ------
$1,396 $756 $1,205
====== ==== ======
</TABLE>

The Company consolidates its 50% owned subsidiary, OnSite Colombia, Inc., a
Cayman Island company that conducts operations in Colombia. The Cayman Island
imposes no income tax on such operations. However, the operations in Colombia
are subject to Colombian federal and local taxes.

The differences between the Federal statutory income tax rates and the
Company's effective income tax rates were as follows:

<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Federal statutory rate...................................... 34% 34% 34%
Foreign (primarily Colombian) income taxes.................. 76% 137% 417%
Increase in valuation allowance............................. (14%) (34%) (34%)
Other....................................................... (20%) --% --%
--- --- ---
76% 137% 417%
=== === ===
</TABLE>

At December 31, 1999, for U.S. federal income tax reporting purposes, the
Company has approximately $5,621,000 of unused net operating losses available
for carryforward to future years. The benefit from carryforward of such net
operating losses will expire during the years ended December 31, 2001 to 2019.
At December 31, 1999 the Company had approximately $2,188,000 of foreign tax
credit carryforwards which can be offset against taxable income in Colombia. The
benefit from carryforward of such foreign tax credits will expire during the
years ended December 31, 2002 to 2004. The benefit from utilization of net
operating loss carryforwards could be subject to limitations if significant
ownership changes occur in the Company.

7. STOCKHOLDERS' EQUITY

The Company's articles of incorporation authorize the issuance of up to
10,000,000 shares of preferred stock with characteristics determined by the
Company's board of directors. Effective December 17, 1997, in connection with
the Company's acquisition of OnSite (See Note 2), the board of directors
authorized the issuance and sale of up to 5,000,000 shares of Series B
convertible preferred stock and up to 400,000 shares of Series C preferred
stock.

F-16
<PAGE> 37
ENVIRONMENTAL SAFEGUARDS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Series B Convertible Preferred Stock

In 1997, the Company issued 3,771,422 shares of $0.001 par value Series B
convertible preferred stock for $4,000,000, or $1.05 per share. Dividends are
paid at the same rate as common stock based upon the conversion rate. The Series
B convertible preferred stock can be converted to common stock at any time at
the option of the holder. The initial rate is 1 common share for each preferred
share; however, the conversion rate is subject to adjustments to prevent
dilution. The holders of the Series B convertible preferred stock have
essentially the same voting rights as the holders of common stock. The Series B
convertible preferred stock has a liquidation preference of $1.06 per share plus
any unpaid dividends. As discussed in Note 12, the Company canceled 1,037,736
shares of Series B convertible preferred stock in exchange for accounts
receivable.

Series C Preferred Stock

In 1997, the Company issued 400,000 shares of Series C non-voting preferred
stock with a $0.001 per share par value and a $10 per share stated value. The
Series C preferred stock carries a quarterly dividend payable in arrears of
prime (8.50% at December 31, 1999) plus 1.5% based on the stated value of the
stock. The Series C preferred stock is redeemable at the option of the Company
at a price of $10 per share plus any unpaid dividends. Proceeds of $4,000,000
from the Series C preferred stock were recorded net of a discount of $809,000,
which included related offering costs incurred and the allocation of a portion
of the proceeds to the warrants issued to the same investors. The allocation of
proceeds between the Series C preferred stock, Investor Notes (See Note 4) and
the warrants (see stock warrants below) was based upon relative fair values of
the underlying securities. The Series C preferred stock is accreted to its
liquidation value over a period of 26 months. The accretion of the Series C
preferred stock is deducted from the net loss to derive the net loss applicable
to common stockholders in the calculation of earnings per share (See Note 8).

Common Stock

In February 1997, the Company completed a public registration of 2,304,792
shares of its common stock. The Company's 10% convertible debentures provided
for automatic conversion 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 registered, 1,934,792
were newly issued shares for conversion of the 10% debentures and payment of
related accrued interest.

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).

Unissued Common Stock

Unissued common stock at December 31, 1997 represents shares for which cash
proceeds or other consideration had been received but shares had not been
issued.

Stock Options

The Company periodically issues incentive stock options to key employees,
officers, and directors to provide additional incentives to promote the success
of the Company's business and to enhance the ability to attract and retain the
services of qualified persons. The issuance of such options are approved by the
Board of Directors. The exercise price of an option granted is determined by the
fair market value of the stock on the date of grant.

The Company has elected to follow Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees" (APB 25) and related
Interpretations in accounting for its employee stock options
F-17
<PAGE> 38
ENVIRONMENTAL SAFEGUARDS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

because, as discussed below, the alternative fair value accounting provided for
under FASB Statement No. 123, "Accounting for Stock-Based Compensation",
requires use of option valuation models that were not developed for use in
valuing employee stock options. Under APB 25, because the exercise price of the
Company's employee stock options is greater than or equals the market price of
the underlying stock on the date of grant, no compensation expense has been
recognized.

Proforma information regarding net income and earnings per share is
required by Statement 123, and has been determined as if the Company had
accounted for its employee stock options under the fair value method of that
Statement. The fair value for these options was estimated at the date of grant
using a Black-Scholes option pricing model with the following weighted-average
assumptions for 1998 and 1997: risk-free interest rate of 7% for 1998 and 6% for
1997; no dividend yield; weighted average volatility factor of the expected
market price of the Company's common stock of 0.873 for 1998 and 0.698 for 1997;
and a weighted-average expected life of the options of 5 years. No options were
granted in 1999 and, accordingly, no option pricing assumptions are presented.

The Black-Scholes option valuation model was developed for use in
estimating fair value of traded options which have no vesting restrictions and
are fully transferable. In addition, option valuation models require the input
of highly subjective assumptions including the expected stock price volatility.
Because the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.

Stock Option Plan

The Company has adopted the 1998 Stock Option Plan (the "Option Plan")
under which stock options for up to 800,000 shares of the Company's common stock
may be awarded to officers, directors and key employees. The Option Plan is
designed to attract and reward key executive personnel. At December 31, 1999,
the Company had granted options for 610,000 of a total of 800,000 shares of
common stock reserved for issuance under the Option Plan.

Stock options granted pursuant to the Option Plan expire not more than ten
years from the date of grant and typically vest over two years, with 50% vesting
after one year and 50% vesting in the succeeding year. All of the options
granted by the Company were granted at an option price equal to the fair market
value of the common stock at the date of grant.

Proforma Disclosures

For purposes of proforma disclosures, the estimated fair value of the
options is included in expense over the option's vesting period or expected
life.

During the year ended December 31, 1999, 626,730 of the Company's stock
options were repriced from original exercise prices ranging from $2.50 to $5.00
per share to a new exercise price of $1.44 per share. The new exercise price was
based on the quoted market value of the Company's common stock at the date of
repricing. The repricing of options significantly impacted proforma financial
information in 1999. The Company's proforma information follows:

<TABLE>
<CAPTION>
1999 1998 1997
--------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE
AMOUNTS)
<S> <C> <C> <C>
Proforma net loss....................................... $(1,197) $(1,457) $(4,676)
Proforma net loss available to common stockholders...... $(1,958) $(2,230) $(8,707)
Proforma basic and dilutive loss per share.............. $ (0.19) $ (0.23) $ (0.96)
</TABLE>

F-18
<PAGE> 39
ENVIRONMENTAL SAFEGUARDS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

A summary of the Company's stock option activity and related information
for the years ended December 31, 1999, 1998 and 1997 follows:

<TABLE>
<CAPTION>
NUMBER OF
SHARES WEIGHTED-AVERAGE
UNDER OPTIONS EXERCISE PRICE
------------- ----------------
<S> <C> <C>
Outstanding -- December 31, 1996........................ 3,323,542 1.21
Granted............................................... 1,598,144 2.82
Exercised............................................. (100,000) 0.60
Forfeited............................................. -- --
---------
Outstanding -- December 31, 1997........................ 4,821,686 1.76
Granted............................................... 782,718 2.41
Exercised............................................. (270,000) 0.60
Forfeited............................................. (463,542) 5.00
---------
Outstanding -- December 31, 1998........................ 4,870,862 1.62
Granted............................................... -- --
Exercised............................................. (19,700) 0.60
Forfeited............................................. -- --
---------
Outstanding -- December 31, 1999........................ 4,851,162 1.38
=========
Exercisable -- December 31,
1997.................................................. 4,821,686 1.76
1998.................................................. 4,260,862 1.61
1999.................................................. 4,546,162 1.36
</TABLE>

The weighted-average fair value of options granted during the years ended
December 31, 1998 and 1997 was $1.74 and $1.77, respectively. No options were
granted during the year ended December 31, 1999; however the repricing of
certain options reduced the weighted average exercise price by $0.25.

F-19
<PAGE> 40
ENVIRONMENTAL SAFEGUARDS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

A summary of outstanding stock options at December 31, 1999, follows:

<TABLE>
<CAPTION>
REMAINING
NUMBER OF COMMON CONTRACTUAL
STOCK EQUIVALENTS EXPIRATION DATE LIFE (YEARS) EXERCISE PRICE
- ----------------- --------------- ------------ --------------
<C> <S> <C> <C>
Exercisable at December 31, 1999:
2,470,300 November 2005 5.9 $0.60
112,500 March 2007 7.2 1.44
480,000 March 2007 7.2 2.50
35,000 November 2007 7.9 1.44
356,813 December 2007 8.0 1.44
613,831 December 2007 8.0 3.00
1,053 January 2008 8.1 2.38
800 January 2008 8.1 3.12
770 January 2008 8.1 3.25
625 January 2008 8.1 4.00
47,053 April 2008 8.7 5.00
122,417 April 2008 8.7 1.44
305,000 December 2008 9.0 1.69
Non-exercisable at December 31, 1999:
305,000 December 2008 9.0 1.69
---------
4,851,162
=========
</TABLE>

STOCK WARRANTS

Following is a summary of stock warrant activity:

<TABLE>
<CAPTION>
NUMBER OF EXERCISE WEIGHTED
SHARES PRICE AVERAGE PRICE
--------- ------------- -------------
<S> <C> <C> <C>
Warrants outstanding at January 1, 1997......... 250,000 $ 2.50 $2.50
Issued........................................ 757,143 $0.01 - $2.50 $0.17
Canceled...................................... (300,000) $ 2.50 --
Exercised..................................... -- -- --
--------
Warrants outstanding at December 31, 1997....... 707,143 $ 0.01 $0.01
Issued........................................ -- -- --
Canceled...................................... -- -- --
Exercised..................................... -- -- --
--------
Warrants outstanding at December 31, 1998....... 707,143 $ 0.01 $0.01
Issued........................................ -- -- --
Canceled...................................... -- -- --
Exercised..................................... -- -- --
--------
Warrants outstanding at December 31, 1999....... 707,143 $ 0.01 $0.01
========
</TABLE>

All warrants outstanding at December 31, 1999 and 1998 were issued in
connection with the sale of the Company's Series B and Series C preferred stock
and the funding of the Investor Notes (See Note 4). The warrants bear an
exercise price of $0.01 per share, are currently exercisable, and expire in
December 2007. On February 17, 2000, the Company issued 417,066 warrants related
to notes payable (See Note 4).

F-20
<PAGE> 41
ENVIRONMENTAL SAFEGUARDS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

8. EARNINGS PER SHARE

For the years ended December 31, 1999, 1998 and 1997, due to the fact that
the Company incurred net losses, all common stock equivalents have been excluded
from the calculation of earnings per share because their effect is
anti-dilutive. In future periods, the calculation of diluted earnings per share
may require that the common stock equivalents (totaling 8,291,991 at December
31, 1999) disclosed in Note 7 be included in the calculation of the weighted
average shares outstanding for periods in which net income is reported, using
the treasury stock method.

The Series B convertible preferred stock was deemed to be issued with a
beneficial conversion feature because on issuance date, the securities could be
converted into shares of the Company's common stock at a substantial discount to
the then fair value of the Company's common stock. The beneficial conversion
feature was calculated as the difference between the conversion price and the
fair value of the common stock on the date of issue, multiplied by the number of
shares into which the security is convertible. The beneficial conversion feature
is analogous to a dividend to the holders of the Series B convertible preferred
shares and is deducted from the net loss available to common stockholders in the
calculation of earnings per share.

Following is the reconciliation of net loss to the net loss applicable to
common stockholders:

<TABLE>
<CAPTION>
1999 1998 1997
------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Net loss................................................ $ (483) $ (799) $(1,849)
Less:
Beneficial conversion feature Series B preferred
stock.............................................. -- -- (3,998)
Series C Preferred stock dividends ($0.9275, $0.9925
and $0.0425 per share) in 1999, 1998 and 1997,
respectively....................................... (385) (397) (17)
Accretion of discount on Series C preferred stock
(Note 7)........................................... (376) (376) (16)
------- ------- -------
Net loss applicable to common stockholders.............. $(1,244) $(1,572) $(5,880)
======= ======= =======
</TABLE>

9. RESEARCH AND DEVELOPMENT

During the year ended December 31, 1999, 1998 and 1997, expenditures for
research and development were $71,000, $48,000 and $786,000, respectively.
Expenditures for the year ended December 31, 1997 included approximately
$762,000 of acquired research and development (See Note 2).

10. 401(k) SALARY DEFERRAL PLAN

The Company has a 401(k) salary deferral plan (the "Plan") which became
effective on January 1, 1998, for eligible employees who have met certain
service requirements. The Plan does not provide for Company matching or
discretionary contributions and, accordingly, the Company recognized no expense
under the Plan in 1999 or 1998.

11. LITIGATION

The Company is from time to time involved in litigation incidental to its
business, which at times involves claims for significant monetary amounts, some
of which would not be covered by insurance. In the opinion of management, none
of the Company's existing litigation should have any material adverse effect on
the Company's financial position or results of operations.

F-21
<PAGE> 42
ENVIRONMENTAL SAFEGUARDS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

12. RELATED PARTY TRANSACTIONS

Effective January 1, 1998, the Company entered into a one year, $240,000
per month, remediation and recycling contract (the "Contract") with a
corporation that is a significant preferred stockholder (the "Stockholder") and
a member of the investment group that funded the Investor Notes (See Note 4).
After the Contract was signed, the Stockholder was unable to fully utilize the
Company's services and subsequently requested a release. The Company granted the
release under the condition that the Stockholder compensate the Company for the
six and one-half months of service. To fulfill its obligation, the Stockholder
agreed that in addition to $460,000 of payments that had been made, the
Stockholder would surrender 1,037,736 shares of Series B preferred stock in
satisfaction of the remaining $1,100,000 receivable on the Company's books. The
total revenue recognized under this contract during 1998 was $1,560,000.

During 1998, the Company entered into a marketing assistance agreement (the
"Marketing Agreement") with the minority owners of OnSite Colombia, Inc. Under
the terms of the Marketing Agreement, in exchange for assisting the Company in
its business expansion efforts, the minority owners received marketing
assistance fees totaling $320,000 during each of the years ended December 31,
1999 and 1998.

During December 1998, the Company formed a joint company, OnSite Arabia,
Inc., with an investor group for the purpose of providing environmental
remediation in the Arabian Gulf region. The Company sold two ITD Units to the
newly formed joint company (one in 1999 and one in 1998) and recognized gains to
the extent proceeds received exceeded the Company's proportional basis in the
assets.

During 1999 the Company incurred approximately $726,000 of marketing and
administrative costs associated with the operations of OnSite Arabia and 50% of
those costs were invoiced to the minority owners. At December 31, 1999 $67,000
of such costs remain uncollected from the minority owners and are in other
current assets.

13. SEGMENT, GEOGRAPHIC AND MAJOR CUSTOMERS INFORMATION

The Company currently operates in the environmental remediation and
hydrocarbon reclamation/recycling services. Substantially all revenues result
from the sale of services using the Company's ITD units. The Company's
reportable segments are based upon geographic area and all intercompany revenue
and expenses are eliminated in computing revenues and operating income (loss).

A significant portion of the Company's foreign operations were conducted by
the Company's 50% owned joint company in Colombia. The Company's Colombian and
Venezuelan subsidiaries operate with the U.S. dollar as their functional
currency and, accordingly, no cumulative translation adjustment is presented in
the accompanying balance sheet.

The Company and OnSite share office facilities and certain employees.
Shared costs are generally specifically identified by company; however, certain
costs must be allocated based upon management's estimates.

The corporate component of operating income (loss) represents corporate
general and administrative expenses. Corporate assets include cash and cash
equivalents, and restricted cash investments.

F-22
<PAGE> 43
ENVIRONMENTAL SAFEGUARDS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Following is a summary of segment information:

<TABLE>
<CAPTION>
1999 1998 1997
------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Revenue:
United States......................................... $ 1,150 $ 2,708 $ 246
United Kingdom........................................ 993 -- --
Latin America......................................... 11,371 7,964 6,432
------- ------- -------
Total service revenue......................... $13,514 $10,672 $ 6,678
======= ======= =======
Depreciation and Amortization:
United States......................................... $ 1,029 $ 851 $ 139
United Kingdom........................................ 153 -- --
Latin America......................................... 1,040 764 25
------- ------- -------
Total depreciation and amortization........... $ 2,222 $ 1,615 $ 164
======= ======= =======
Income From Operations:
United States......................................... $ (230) $ 140 $(1,418)
United Kingdom........................................ 342 -- --
Latin America......................................... 3,399 1,814 2,496
Corporate............................................. (413) (550) (488)
------- ------- -------
Total income from operations.................. $ 3,098 $ 1,404 $ 590
======= ======= =======
Assets:
United States......................................... $ 6,574 $ 7,929 $ 8,041
United Kingdom........................................ 1,840 -- --
Latin America......................................... 6,993 6,221 5,751
Middle East........................................... 3,390 1,695 --
Corporate............................................. 193 4,319 4,506
------- ------- -------
Total assets.................................. $18,990 $20,164 $18,298
======= ======= =======
Capital Expenditures:
United States......................................... $ 28 $ 959 $ 40
United Kingdom........................................ 112 -- --
Latin America......................................... -- 326 --
Middle East........................................... 1,695 1,695 --
------- ------- -------
Total capital expenditures.................... $ 1,835 $ 2,980 $ 40
======= ======= =======
Number of Customers:
United States......................................... 1 2 1
United Kingdom........................................ 1 -- --
Latin America......................................... 4 2 1
------- ------- -------
6 4 2
======= ======= =======
</TABLE>

Prior to December 17, 1997, OnSite Colombia was treated for financial
reporting as an equity investment (See Note 2). During the years ended December
31, 1999 and 1998, the Company's largest customer accounted for 58% and 71% of
service revenue, respectively.

F-23
<PAGE> 44
ENVIRONMENTAL SAFEGUARDS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

14. NON-CASH INVESTING AND FINANCING ACTIVITIES

The Company engaged in certain non-cash investing and financing activities
as follows:

<TABLE>
<CAPTION>
1999 1998 1997
------ ------ ------
(IN THOUSANDS)
<S> <C> <C> <C>
Indirect Thermal Desorption Unit value contributed by the
minority owner in Arabia................................. $1,150 $1,150 $ --
Transferred ITD Unit cost to property and equipment
(to)/from equipment held for sale, net of accumulated
depreciation of $350 in 1999 and 1998.................... 1,408 (407) --
Series B preferred stock repurchased in exchange for
accounts receivable...................................... -- 1,100 --
Conversion of debentures to common stock, net of deferred
offering costs........................................... -- -- 889
Assumption of liabilities upon acquisition of OnSite
Technology, L.L.C. (Includes $607 minority interest in
OnSite Colombia, Inc.)................................... -- -- 2,484
Deferred gain offset in acquisition of OnSite.............. -- -- 193
</TABLE>

F-24
<PAGE> 45

EXHIBIT INDEX

- ---------------

* Previously filed as an exhibit to the Company's Annual Report on Form
10-KSB as amended for the fiscal year ended December 31, 1997, and
incorporated by reference thereto.

** Previously filed as an exhibit to the Company's Current Report on Form 8-K
dated December 17, 1997 and filed December 30, 1997, and incorporated
herein by reference thereto.

*** Previously filed with Form S-3 as amended effective Feb 8, 1999.

**** Previously filed as an exhibit to the Company's Annual Report on Form
10-KSB as amended for the fiscal year ended December 31, 1998, and
incorporated by reference thereto.

***** Filed herewith.

<ARTICLE> 5
<MULTIPLIER> 1,000

<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> DEC-31-1999
<CASH> 1,944
<SECURITIES> 0
<RECEIVABLES> 3,579
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 5,719
<PP&E> 14,719
<DEPRECIATION> 3,884
<TOTAL-ASSETS> 18,990
<CURRENT-LIABILITIES> 4,155
<BONDS> 4,325
0
4
<COMMON> 10
<OTHER-SE> 6,942
<TOTAL-LIABILITY-AND-EQUITY> 18,990
<SALES> 13,514
<TOTAL-REVENUES> 13,514
<CGS> 6,197
<TOTAL-COSTS> 10,416
<OTHER-EXPENSES> (191)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,455
<INCOME-PRETAX> 913
<INCOME-TAX> 1,396
<INCOME-CONTINUING> (483)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (483)
<EPS-BASIC> (.12)
<EPS-DILUTED> (.12)

</TABLE>