UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED: JUNE 30, 2002
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER: 001-13869
ENVIRONMENTAL SAFEGUARDS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
NEVADA 87-042919
(STATE OR OTHER JURISDICTION (IRS EMPLOYER OF
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
2600 SOUTH LOOP WEST, SUITE 645
HOUSTON, TEXAS 77054
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES, INCLUDING ZIP CODE)
(713) 641-3838
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
CHECK WHETHER THE ISSUER (1) HAS FILED ALL REPORTS REQUIRED TO BE FILED BY
SECTION 13 or 15(d) OF THE EXCHANGE ACT DURING THE PAST 12 MONTHS (OR FOR SUCH
SHORTER PERIOD THAT THE REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND 2)
HAS BEEN SUBJECT TO SUCH FILING REQUIREMENTS FOR THE PAST 90 DAYS.
Yes [X] No [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS
AT JUNE 30, 2002, 10,112,144 SHARES OF COMMON STOCK, $.001 PAR VALUE, WERE
OUTSTANDING.
TRANSITIONAL SMALL BUSINESS DISCLOSURE FORMAT (CHECK ONE):
Yes [ ] No [X]
ENVIRONMENTAL SAFEGUARDS, INC.
CONTENTS
PART I -- FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Condensed Balance Sheet as of June 30, 2002 (unaudited)
and December 31, 2001.
Unaudited Consolidated Condensed Statement of Operations for the
three months and six months ended June 30, 2002 and 2001.
Unaudited Consolidated Condensed Statement of Cash Flows for the six
months ended June 30, 2002 and 2001.
Selected Notes to Unaudited Consolidated Condensed Financial
Statements.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
PART II -- OTHER INFORMATION
Item 1. Legal Proceedings
Item 4. Submission of Matters to a Vote of Security Holders
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
SIGNATURES
PART I -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ENVIRONMENTAL SAFEGUARDS, INC.
CONSOLIDATED CONDENSED BALANCE SHEET
---------------
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
JUNE 30,
2002 DECEMBER 31,
ASSETS (UNAUDITED) 2001
------------ --------------
Current assets:
Cash and cash equivalents $ 334 $ 798
Accounts receivable 114 1,309
Income tax refund receivable 79 -
Prepaid expenses 87 128
Other assets - 8
------------ --------------
Total current assets 614 2,243
Property and equipment, net 5,856 6,539
Acquired engineering design and technology, net 1,409 1,611
Other assets 2 3
------------ --------------
Total assets $ 7,881 $ 10,396
============ ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 48 $ 146
Dividends payable 490 364
Accrued interest 32 20
Other accrued liabilities 507 693
Income taxes payable - 254
------------ --------------
Total current liabilities 1,077 1,477
Minority interest 1,970 2,040
Commitments and contingencies
Stockholders' equity:
Preferred stock; Series B convertible; voting, $.001
par value (aggregate liquidation value - $2,898);
5,000,000 shares authorized; 2,733,686 shares issued
and outstanding 3 3
Preferred stock; Series D convertible, non-voting,
cumulative $.001 par value (aggregate liquidation
value $4,000); 400,000 shares authorized, issued and
outstanding 1 1
Common stock; $.001 par value; 50,000,000 shares
authorized; 10,112,144 shares issued and outstanding 10 10
Additional paid-in capital 14,981 14,981
Accumulated deficit (10,161) (8,116)
------------ --------------
Total stockholders' equity 4,834 6,879
------------ --------------
Total liabilities and stockholders' equity $ 7,881 $ 10,396
============ ==============
The accompanying notes are an integral part of these
unaudited consolidated condensed financial statements.
F-1
ENVIRONMENTAL SAFEGUARDS, INC.
UNAUDITED CONSOLIDATED CONDENSED STATEMENT OF OPERATIONS
---------------
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
THREE MONTHS SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
-------------------- --------------------
2002 2001 2002 2001
-------- ---------- -------- ----------
Revenue $ 237 $ 807 $ 739 $ 1,396
Cost of revenue 454 881 1,389 1,759
-------- ---------- -------- ----------
Gross margin (217) (74) (650) (363)
Selling, general and administrative
expenses 521 719 1,181 1,340
Amortization of acquired engineering
design and technology 102 102 204 204
Research and development 5 15 20 35
-------- ---------- -------- ----------
Loss from operations (845) (910) (2,055) (1,942)
Other income (expense):
Interest income 1 14 2 24
Interest expense (6) (247) (12) (480)
Other (2) 12 (3) 23
-------- ---------- -------- ----------
Loss before provision for income
taxes and minority interest (852) (1,131) (2,068) (2,375)
Benefit (provision) for income taxes 79 (70) 79 (120)
-------- ---------- -------- ----------
Loss before minority interest (773) (1,201) (1,989) (2,495)
Minority interest 31 43 69 177
-------- ---------- -------- ----------
Net loss $ (742) $ (1,158) $(1,920) $ (2,318)
======== ========== ======== ==========
Net loss applicable to common
stockholders $ (805) $ (1,246) $(2,045) $ 2,507
======== ========== ======== ==========
Net loss per share-basic and diluted $ (0.08) $ (0.12) $ (0.20) $ (0.25)
======== ========== ======== ==========
Weighted average shares outstanding-
basic and diluted 10,112 10,112 10,112 10,112
======== ========== ======== ==========
The accompanying notes are an integral part of these
unaudited consolidated condensed financial statements.
F-2
ENVIRONMENTAL SAFEGUARDS, INC.
UNAUDITED CONSOLIDATED CONDENSED STATEMENT OF CASH FLOWS
---------------
(IN THOUSANDS)
SIX MONTHS
ENDED JUNE 30,
--------------------
2002 2001
---------- --------
Cash flows from operating activities:
Net loss $ (1,920) $(2,318)
Adjustment to reconcile net loss to net cash provided
by operating activities 1,557 1,198
---------- --------
Net cash provided by operating activities (363) (1,120)
---------- --------
Cash flows from investing activities:
Purchases of equipment (101) (6)
---------- --------
Net cash used by investing activities (101) (6)
---------- --------
Cash flows from financing activities:
Distribution to minority interest - (669)
Dividends on preferred stock - (112)
---------- --------
Net cash used by financing activities - (781)
---------- --------
Net decrease in cash and cash equivalents (464) (1,907)
Cash and cash equivalents, beginning of period 798 3,068
---------- --------
Cash and cash equivalents, end of period $ 334 $ 1,161
========== ========
The accompanying notes are an integral part of these
unaudited consolidated condensed financial statements.
F-3
ENVIRONMENTAL SAFEGUARDS, INC.
SELECTED NOTES TO UNAUDITED CONSOLIDATED
CONDENSED FINANCIAL STATEMENTS
---------------
1. GENERAL
-------
The unaudited consolidated condensed financial statements included herein
have been prepared without audit pursuant to the rules and regulations of
the Securities and Exchange Commission. Certain information and footnote
disclosures normally included in financial statements prepared in
accordance with accounting principles generally accepted in the United
States of America have been condensed or omitted, pursuant to such rules
and regulations. These unaudited consolidated condensed financial
statements should be read in conjunction with the audited consolidated
financial statements and notes thereto of Environmental Safeguards, Inc.
(the "Company") included in the Company's Annual Report on Form 10-K for
the year ended December 31, 2001.
In the opinion of management, the unaudited consolidated condensed
financial information included herein reflect all adjustments, consisting
only of normal, recurring adjustments, which are necessary for a fair
presentation of the Company's financial position, results of operations and
cash flows for the interim periods presented. The results of operations for
the interim periods presented herein are not necessarily indicative of the
results to be expected for a full year or any other interim period.
2. LIQUIDITY AND CAPITAL RESOURCES
----------------------------------
Since its inception, the Company has expended a significant portion of its
resources to develop markets and industry awareness of the capabilities of
its indirect thermal desorption recycling process. The Company's efforts
have been focused on the development, production and sale of environmental
recycling technologies and services to oil and gas industry participants,
waste management companies and other industrial customers. The Company's
efforts to develop markets and produce equipment have required significant
amounts of capital including long-term debt secured by the Company's ITD
units and related ITD technology. With the exception of the profitability
impact from the Company's sale of three ITD units and certain licensing
rights in late 2001, the Company has incurred recurring net losses and has
been dependent on revenue from a limited customer base to provide cash
flows. These factors raise substantial doubt about the Company's ability to
continue as a going concern. The Company's long-term viability as a going
concern is dependent on ability to raise short-term cash funds, as noted
below, increased utilization of its ITD units and the achievement of a
sustaining level of profitability.
The Company is currently seeking to obtain service contracts in the markets
that it serves and is also considering strategic alternatives including a
possible additional sale of certain of its assets. Three of the Company's
ITD units and certain licensing rights were sold in December 2001, and the
proceeds were used to pay off all the Company's senior debt.
As of August 2002, the Company's existing cash reserves are projected to
meet cash requirements only through the end of September 2002. To the
extent the Company's cash reserves and cash flows from operations are
insufficient to meet future cash requirements, the Company will need to
raise funds through the sale of equity, the issuance of debt securities or
the sale of ITD units. Such financing may not be available on terms
acceptable to the Company or at all. Further, the sale of additional equity
or convertible debt securities may result in dilution to the Company's
stockholders. The accompanying financial statements do not include any
adjustments that might be necessary if the company is unable to continue as
a going concern.
Continued
F-4
ENVIRONMENTAL SAFEGUARDS, INC.
SELECTED NOTES TO UNAUDITED CONSOLIDATED
CONDENSED FINANCIAL STATEMENTS
---------------
2. LIQUIDITY AND CAPITAL RESOURCES, CONTINUED
----------------------------------------------
Management has evaluated the carrying value of long-lived assets, including
associated intangibles. 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. Given the homogeneous nature and
geographic deployment flexibility of such assets, and based upon this
evaluation by management, impairment of the Company's long-lived assets has
not been deemed necessary.
3. INCOME TAXES
-------------
Deferred income taxes reflect the tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes. The
Company has provided for a deferred tax valuation allowance for cumulative
net operating tax losses to the extent that the net operating losses may
not be realized. The difference between the federal statutory income tax
rate and the Company's effective income tax rate is primarily attributed to
foreign income taxes and changes in valuation allowances for deferred tax
assets related to U.S. net operating losses.
The differences between the Federal statutory income tax rates and the
Company's effective income tax rates were as follows:
THREE MONTHS SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
----------------- -----------------
2002 2001 2002 2001
------ --------- ------ ---------
Federal statutory rate 34% 34% 34% (34)%
Foreign income taxes - 6 - (5)
Change in valuation allowance (25) (34) (30) 34
------ --------- ------ ---------
9% (6)% 4% (5)%
====== ========= ====== =========
As of June 30, 2002, for U.S. federal income tax reporting purposes, the
Company has approximately $5.3 million of unused net operating losses
("NOLs") to future years. The Company's NOLs do not include the
undistributed losses from certain controlled foreign corporations. The
benefit from such NOLs will expire during the years ending December 31,
2017 to 2020. Because United States of America tax laws limit the time
during which NOLs may be applied against future taxable income, the Company
may be unable to take full advantage of its NOLs for federal income tax
purposes should the Company generate taxable income. Based on such
limitation, the Company has significant NOLs for which realization of tax
benefits is uncertain. The benefit from utilization of NOLs could be
subject to limitations if material ownership changes occur in the Company.
Continued
F-5
ENVIRONMENTAL SAFEGUARDS, INC.
SELECTED NOTES TO UNAUDITED CONSOLIDATED
CONDENSED FINANCIAL STATEMENTS
---------------
4. LOSS PER SHARE
----------------
The Company computes basic earnings per share based on the weighted average
number of shares of common stock outstanding for the period, and includes
common stock equivalents outstanding for the computation of diluted
earnings per share. As a result of incurred net losses, for the three
months and six months ended June 30, 2002 and 2001 all common stock
equivalents have been excluded from the calculation of earnings per share
as their effect is anti-dilutive. In future periods, the calculation of
diluted earnings per share may require that the Company's common stock
equivalents (totaling 19,645,939 shares at June 30, 2002) be included in
the calculation of the weighted average shares outstanding for periods in
which net income is reported. Following is the reconciliation of net loss
to the net loss available to common stockholders:
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------ -----------------------
2002 2001 2002 2001
----------- ----------- ---------- -----------
(IN THOUSANDS) (IN THOUSANDS)
Net loss $ (742) $ (1,158) $ (1,920) $ (2,318)
Series D preferred stock dividends (63) (88) (125) (189)
----------- ----------- ---------- -----------
Net loss available to common
stockholders $ (805) $ (1,246) $ (2,045) $ (2,507)
=========== =========== ========== ===========
5. SEGMENT INFORMATION
--------------------
The Company operates in the environmental remediation and hydrocarbon
reclamation/recycling services industry. Substantially all revenue results
from the sale of services using the Company's ITD units. The Company's
reportable segments are based upon geographic area. All intercompany
revenue and expenses have been eliminated.
Following is a summary of segment information:
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------ ----------------------
2002 2001 2002 2001
----------- ----------- ---------- ----------
(IN THOUSANDS) (IN THOUSANDS)
Revenue:
Latin America $ 237 $ 807 $ 739 $ 1,396
----------- ----------- ---------- ----------
Total revenue $ 237 $ 807 $ 739 $ 1,396
=========== =========== ========== ==========
Loss from operations:
United States $ (716) $ (482) $ (1,676) $ (1,117)
United Kingdom - (144) - (286)
Latin America (7) (90) (136) (223)
Middle East (63) (85) (139) (159)
Corporate (59) (109) (104) (157)
----------- ----------- ---------- ----------
Total loss from operations $ (845) $ (910) $ (2,055) $ (1,942)
=========== =========== ========== ==========
Continued
F-6
ENVIRONMENTAL SAFEGUARDS, INC.
SELECTED NOTES TO UNAUDITED CONSOLIDATED
CONDENSED FINANCIAL STATEMENTS
---------------
5. SEGMENT INFORMATION, CONTINUED
--------------------------------
JUNE 30, DECEMBER
2002 31, 2001
--------- ----------
(IN THOUSANDS)
Assets:
United States $ 4,209 $ 4,515
United Kingdom - 826
Latin America 132 1,226
Middle East 3,410 3,419
Corporate 130 410
--------- ----------
Total assets $ 7,881 $ 10,396
========= ==========
6. REVENUE
-------
During the three months and six months ended June 30, 2002, revenue was
derived from an operations and maintenance contract covering the three ITD
units sold to a customer in Mexico in the fourth quarter of 2001. During
the three months and six months ended June 30, 2001, service revenue was
derived from full-service contract utilization of ITD units owned by the
Company.
7. SUPPLEMENTAL NON-CASH TRANSACTIONS
------------------------------------
SIX MONTHS ENDED
JUNE 30,
---------------------
2002 2001
--------- ----------
(IN THOUSANDS)
Dividends declared but not yet paid $ 125 $ 189
Continued
F-7
ENVIRONMENTAL SAFEGUARDS, INC.
SELECTED NOTES TO UNAUDITED CONSOLIDATED
CONDENSED FINANCIAL STATEMENTS
---------------
8. LITIGATION
----------
In July 2002, OnSite filed a lawsuit styled OnSite Technology LLC v.
Duratherm, Inc., Duratherm Group, Inc., Steven R. Heuer and Victor R.
Reynolds; Civil Action No. H-02-2624; In the United States District Court
for the Southern District of Texas against Duratherm, Inc. and Duratherm
Group, Inc., Steven R. Heuer and Victor R. Reynolds. OnSite's lawsuit
alleges that Duratherm's remediation operations at its Galveston County,
Texas facility infringed on OnSite's U.S. Patent No. 5,738,031 and
requested a declaratory judgment that OnSite's operation of its remediation
process does not infringe either of Heuer and Reynolds' U.S. Patent Nos.
4,990,237 and 5,269,906 over which Duratherm alleges control. The
Defendants have filed an answer asserting that they do not infringe on
OnSite's patent and that such patent is invalid. Defendants also deny there
is any controversy between the parties regarding the Heuer and Reynolds'
patents.
In July 2002, OnSite also initiated litigation styled OnSite Technology,
LLC v. Duratherm, Inc. et al.; Cause No. 02CV0801; In the 56th Judicial
District Court of Galveston County, Texas, against Duratherm, Inc.,
Duratherm Group, Inc., Barry Hogan and Jim Hogan. This lawsuit alleges that
in November 1999, OnSite and Waste Control Specialists, L.L.C. ("WCS")
entered into a contract wherein OnSite would, among other things, provide
the necessary services, supplies and equipment to perform recycling and
remediation services utilizing an indirect thermal desorption unit as
specified therein. On information and belief, in late July or early August
2000, Defendants, acting in concert through Duratherm, Inc., sent or caused
to be sent a letter(s) and/or other communication(s) to WCS, which OnSite
alleges contained statements that were false and intended to deceive WCS,
as to OnSite and OnSite's technology and indirect thermal desorption unit.
As a result of such false, deceptive and malicious statements, WCS
terminated its contract with OnSite. In August 2000, Duratherm, Inc. filed
suit against OnSite and WCS in the United States District Court for the
Southern District of Texas under Civil Action No. H-00-2727 which suit was
subsequently dismissed with prejudice by the United States District Judge.
OnSite alleges that such suit was malicious and contained false statements
and allegations about OnSite and OnSite's technology and indirect thermal
desorption unit. The causes of action alleged by OnSite against the
Defendants are (i) interference with contract; (ii) unfair competition and
business disparagement; (iii) unjust enrichment; and (iv) injury to
OnSite's business reputation. OnSite is seeking actual, consequential,
incidental and compensatory damages, including, but not limited to,
disgorgement, pre- and post-judgment interest, attorney's fees and costs
and exemplary and punitive damages. The Defendants in this litigation have
filed an answer denying the allegations contained in OnSite's petition.
9. SUBSEQUENT EVENT
-----------------
In July 2002, the Company obtained uncollateralized loans totaling $250,000
from Cahill Warnock Strategic Partners, L.P. and Strategic Associates, L.P.
These loans bear interest of 12% per year and are due in January 2003.
David Warnock, a director of the Company, is a general partner of Cahill
Warnock Strategic Partners, L.P. and a managing member of the general
partner of Strategic Associates, L.P.
F-8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with our
consolidated condensed financial statements and related notes included elsewhere
in this report, and with our Annual Report on Form 10-K for the year ended
December 31, 2001.
Information Regarding and Factors Affecting Forward-Looking Statements
We are including the following cautionary statement in this Form 10-Q
to make applicable and take advantage of the safe harbor provision of the
Private Securities Litigation Reform Act of 1995 for any forward-looking
statements made by 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 fact. Certain statements in this Form 10-Q are
forward-looking statements. Words such as "expects", "anticipates", "estimates"
and similar expressions are intended to identify forward-looking statements.
Such statements are subject to risks and uncertainties that could cause actual
results to differ materially from those projected. Such risks and uncertainties
are set forth below. 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 facts 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
secure short-term cash funds to the extent our cash reserves are unable to meet
our cash requirements; our ability to secure contracts for our ITD units; our
ability to attain widespread market acceptance of our technology; the ability of
our existing cash reserves and cash flows from operations to cover our ongoing
cash requirements; 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 equipment; our
ability to mitigate concentration of business in a small number of customers;
the evolving industry and technology standards; our ability to protect
proprietary technology; our dependence on key personnel; the effect of business
interruption due to political unrest; 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
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 marketing recycling services to companies engaged in land-based oil
and gas exploration and production, refining, 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.
In December 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.
During the period 1996-2000 a substantial portion of our revenues were
generated from major international oil and gas industry participants in Latin
America (Colombia, Venezuela and Mexico) as well as from other domestic and
foreign industrial applications. As of July 2002 we have completed our foreign
contract operations, except for an operations and maintenance contract in
Mexico, and have in fact taken steps to close down certain of our foreign
subsidiaries as outlined below. We are now concentrating our marketing efforts
and resources on domestic downstream plants, manufacturing facilities and waste
management facilities, where our proprietary equipment and process have a
competitive advantage in waste minimization, and recycling/reuse of hazardous
waste markets - including industrial, petroleum and petro-chemical waste
streams.
Highlights of our foreign operations follow:
OnSite Colombia, Inc. ("OSC"): In November 1996, we formed a 50%-owned
joint company OSC to provide hydrocarbon contaminated soil recycling services to
oil and gas industry participants operating in Colombia. Having completed
contract operations in Colombia, we re-acquired the 50% minority ownership of
OSC and subsequently initiated formal procedures to close-down OSC. As of July
2002 the close-down process was in its final stages.
OnSite Venezuela, Inc. ("OSV"): In January 1998, we formed our 100% owned
subsidiary OSV, and commenced operations to provide hydrocarbon contaminated
soil recycling services to oil and gas industry participants operating in
Venezuela. Following completion of contract operations in Venezuela, we closed
down OSV in the first quarter of 2002.
OnSite Arabia, Inc. ("OSA"): In December 1998, we formed a 50%-owned joint
company OSA to provide hydrocarbon contaminated soil recycling services to oil
and gas industry participants operating in the Arabian Gulf region.
OnSite Environmental UK, Ltd ("OSE"): In April 1999, we formed OSE, a
wholly-owned subsidiary, for operations in Scotland. Having completed contract
operations in Scotland, we initiated formal procedures to close-down OSE and as
of July 2002 the close-down was in its final phases.
OnSite Mexico LLC ("OSM"): In July 1999, we registered OSM, a wholly-owned
subsidiary, for operations in Mexico.
OST Ambiental S de RL de CV ("SRL"): In March 2001, we registered SRL, a
wholly-owned subsidiary, for operations in Mexico. SRL completed all operations
and its close-down procedures have been initiated.
As of July 2002, we own five ITD units outright, and have a 50% interest in
two additional units in our 50%-owned subsidiary Onsite Arabia, Inc. The five
fully-owned units are in the USA undergoing routine maintenance or awaiting
contract operations. The two 50%-owned units are awaiting contract operations in
the Arabian Gulf region.
Quarterly Fluctuations
Our revenue may be affected by the timing and deployment of ITD Units
to customer sites under existing contracts, and by the timing of obtaining new
contracts. Accordingly, our quarterly results may fluctuate and the results of
one fiscal quarter should not be deemed to be indicative of the results of any
other quarter, or for the full fiscal year.
Results of Operations
COMPARISON OF OPERATING RESULTS - THREE MONTHS ENDED JUNE 30, 2002 AND 2001
Summary. During the three months ended June 30, 2002, we incurred a
net loss of $742,000 as compared to a 2001 second quarter net loss of
$1,158,000. The loss for both periods was principally due to insufficient
equipment utilization, along with operating expenses as noted below.
Revenue and Gross Margin. Revenue of $237,000 during the second
quarter of 2002 generated a negative gross margin of $217,000 as compared to
revenue of $807,000 and negative gross margin of $74,000 in the comparable 2001
quarter. The decrease in revenue and gross margin was mainly due to the fact
that in the second quarter of 2002 all our revenue was derived from an
operations and maintenance contract (covering the three units sold in the latter
part of 2001 to a Mexican client) compared with an average of 1.5 units under
full-service contract operations in the second quarter of 2001.
Selling, General and Administrative ("SGA") Expenses. SGA expenses
during the second quarter of 2002 were lower than the comparable quarter in 2001
primarily due foreign operation close-down and a general reduction in SGA
expenses.
Amortization of Engineering Design and Technology. This represents the
amortization of Acquired Engineering Design and Technology costs, an intangible
asset related to the December 1997 acquisition of the remaining 50% interest in
OnSite from Parker Drilling. The intangible asset is being amortized over an
8-year estimated economic life.
Interest Expense. During the second quarter of 2002, interest expense
of $6,000 relating to deferred preferred stock dividend compares to interest
expense primarily on senior debt of $247,000 for the second quarter of 2001
(which includes amortization of debt issuance costs of $103,000). All senior
debt was fully retired in December 2001.
Income Taxes. We have reported a tax benefit in the second quarter of
2002 related to the recovery of alternative minimum taxes provided at December
31, 2001. The reported tax provision in the second quarter of 2001 relates to
foreign income taxes incurred mainly by our Mexican subsidiary. During both
comparative quarters we incurred net operating losses ("NOLs") primarily in the
U.S., which may be used to offset taxable income reported in future periods. The
NOLs associated with the taxes paid in OnSite's foreign subsidiaries 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.
Minority Interest. Minority interest for the second quarter of 2002
relates to our 50% minority partner's interest in the net loss of OnSite Arabia.
During the comparable quarter of 2001, the minority interest reflects our 50%
minority partner's interest in the net loss of OnSite Colombia, and to a lesser
extent the net loss of OnSite Arabia.
COMPARISON OF OPERATING RESULTS - SIX MONTHS ENDED JUNE 30, 2002 AND 2001
Summary. During the six months ended June 30, 2002, we incurred a net
loss of $1,920,000 as compared to a 2001 net loss of $2,318,000. The loss for
both periods was principally due to insufficient equipment utilization, along
with operating expenses as noted below.
Revenue and Gross Margin. Revenue of $739,000 during the first six
months of 2002 generated $650,000 of negative gross margin as compared to
revenue of $1,396,000 and negative gross margin of $363,000 in the comparable
2001 period. The decrease in revenue and gross margin was mainly due to the fact
that in the first six months of 2002 all of our revenue was derived from an
operations and maintenance contract (covering the three units sold in the latter
part of 2001 to a Mexican client) compared with an average of 1.5 units under
full-service contract operations in the first six months of 2001.
Selling, General and Administrative ("SGA") Expenses. SGA expenses
during the first six months of 2002 were lower than the comparable six months in
2001 primarily due to foreign operation close-down and a general reduction in
SGA expenses.
Amortization of Engineering Design and Technology. This represents the
amortization of Acquired Engineering Design and Technology costs, an intangible
asset related to the December 1997 acquisition of the remaining 50% interest in
OnSite from Parker Drilling. The intangible asset is being amortized over an
8-year estimated economic life.
Interest Expense. During the first six months of 2002, interest
expense of $12,000 relating to deferred preferred stock dividend compares to
interest expense primarily on senior debt of $480,000 for the first six months
of 2001 (which includes amortization of debt issuance costs of $206,000). All
senior debt was fully retired in December 2001.
Income Taxes. We have reported a tax benefit in the first six months
of 2002 related to the recovery of alternative minimum taxes provided at
December 31, 2001. The reported tax provision in the first six months of 2001
relates to foreign income taxes incurred mainly by our Mexican subsidiary.
During both comparative six month periods we incurred net operating losses
("NOLs") primarily in the U.S., which may be used to offset taxable income
reported in future periods. The NOLs associated with the taxes paid in OnSite's
foreign subsidiaries 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.
Minority Interest. Minority interest for the first six months of 2002
relates to our 50% minority partner's interest in the net loss of OnSite Arabia.
During the comparable six months of 2001, the minority interest reflects our 50%
minority partner's interest in the net loss of OnSite Colombia, and to a lesser
extent the net loss of OnSite Arabia.
Liquidity and Capital Resources
We currently have no significant commitments for capital expenditures.
Since our inception, we have expended a significant portion of our
resources to develop markets and industry awareness of our ITD recycling process
technology. Our efforts have been focused primarily on hydrocarbon soil
contamination inherent in oil and gas exploration and downstream activities. Our
efforts to develop markets and produce equipment have required significant
amounts of capital.
In December 2001 we completed the sale of three of our ITD units along with
certain licensing rights, and utilized the bulk of the proceeds from the sale to
retire our senior debt. With the exception of this sale, we have incurred
recurring net losses and have been dependent on revenue from a limited customer
base to provide cash flows. We completed our most significant service contract
in December 2000 and during 2001 and 2002 have been exploring ways to replace
that revenue. During 2001 and 2002 we've experienced a continued tightening of
cash reserves and prior to repaying our senior debt in December 2001, we took
actions to delay payments on that debt. We are currently seeking to obtain
service contracts in our served markets and are considering strategic
alternatives including the possible additional sale of certain of our assets.
As of August 2002, our existing cash reserves are projected to meet our
cash requirements only through the end of September 2002. To the extent our cash
reserves and cash flows from operations are insufficient to meet future cash
requirements, we will need to successfully raise funds through an equity
infusion, the issuance of debt securities or the sale of ITD units. Financing
may not be available on terms acceptable to us, or at all. Further, the sale of
additional equity or convertible debt securities may result in dilution to our
stockholders. During July 2002, the Company obtained uncollateralized loans
totaling $250,000 from two major stockholders. These loans bear interest at 12%
per year and are due in January 2003.
Our independent accountants have provided us their report for the two years
ended December 31, 2001 and 2000, which sets forth factors that raise
substantial doubt about our ability to continue as a going concern. Our
viability as a going concern remains dependent on our ability to raise
short-term cash funds as noted above, increased utilization of our ITD units and
the achievement of a sustaining level of profitability. There can be no
assurances, however, that we will successfully increase ITD utilization or
become sufficiently profitable.
We have evaluated the carrying value of long-lived assets, including
associated intangibles. We performed an evaluation of recoverability 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. Given the homogeneous nature and geographic
deployment flexibility of our assets, and based upon a recent evaluation by us,
impairment of our long-lived assets has not been deemed necessary. However,
there can be no assurances that our ongoing evaluation would not result in an
impairment-related write-down.
The functional currency of our foreign operations 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 to minimize our risks associated with foreign
exchange fluctuation and its affect on our profitability.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In July 2002, OnSite filed a lawsuit styled OnSite Technology LLC v.
Duratherm, Inc., Duratherm Group, Inc., Steven R. Heuer and Victor R.
Reynolds; Civil Action No. H-02-2624; In the United States District Court
for the Southern District of Texas against Duratherm, Inc. and Duratherm
Group, Inc., Steven R. Heuer and Victor R. Reynolds. OnSite's lawsuit
alleges that Duratherm's remediation operations at its Galveston County,
Texas facility infringed on OnSite's U.S. Patent No. 5,738,031 and
requested a declaratory judgment that OnSite's operation of its remediation
process does not infringe either of Heuer and Reynolds' U.S. Patent Nos.
4,990,237 and 5,269,906 over which Duratherm alleges control. The
Defendants have filed an answer asserting that they do not infringe on
OnSite's patent and that such patent is invalid. Defendants also deny there
is any controversy between the parties regarding the Heuer and Reynolds'
patents.
In July 2002, OnSite also initiated litigation styled OnSite
Technology, LLC v. Duratherm, Inc. et al.; Cause No. 02CV0801; In the 56th
Judicial District Court of Galveston County, Texas, against Duratherm,
Inc., Duratherm Group, Inc., Barry Hogan and Jim Hogan. This lawsuit
alleges that in November 1999, OnSite and Waste Control Specialists, L.L.C.
("WCS") entered into a contract wherein OnSite would, among other things,
provide the necessary services, supplies and equipment to perform recycling
and remediation services utilizing an indirect thermal desorption unit as
specified therein. On information and belief, in late July or early August
2000, Defendants, acting in concert through Duratherm, Inc., sent or caused
to be sent a letter(s) and/or other communication(s) to WCS, which OnSite
alleges contained statements that were false and intended to deceive WCS,
as to OnSite and OnSite's technology and indirect thermal desorption unit.
As a result of such false, deceptive and malicious statements, WCS
terminated its contract with OnSite. In August 2000, Duratherm, Inc. filed
suit against OnSite and WCS in the United States District Court for the
Southern District of Texas under Civil Action No. H-00-2727 which suit was
subsequently dismissed with prejudice by the United States District Judge.
OnSite alleges that such suit was malicious and contained false statements
and allegations about OnSite and OnSite's technology and indirect thermal
desorption unit. The causes of action alleged by OnSite against the
Defendants are (i) interference with contract; (ii) unfair competition and
business disparagement; (iii) unjust enrichment; and (iv) injury to
OnSite's business reputation. OnSite is seeking actual, consequential,
incidental and compensatory damages, including, but not limited to,
disgorgement, pre- and post-judgment interest, attorney's fees and costs
and exemplary and punitive damages. The Defendants in this litigation have
filed an answer denying the allegations contained in OnSite's petition.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Our annual meeting of stockholders was held in Houston, Texas on May
20, 2002 for the purpose of voting on the proposals described below. Proxies for
the meeting were solicited pursuant to Regulation 14A under the Securities
Exchange Act of 1934 and there were no solicitations in opposition to our
solicitation.
The holders of common stock approved the election of the following
four directors, each to serve for a term of one year by the following vote:
Votes For Votes Against Abstaining
James S. Percell 7,788,834 0 212,457
Bryan Sharp 7,820,919 0 180,372
Albert M. Wolford 7,811,719 0 189,572
Thomas R. Bray 7,820,919 0 180,372
The holders of Series B Convertible Stock approved the election of the
following director, to serve for a term of one year by the following vote:
Votes For Votes Against Abstaining
David L. Warnock 2,733,686 0 0
The holders of common stock ratified the appointment of Ham, Langston &
Brezina, LLP as our independent accountants for the fiscal year ending December
31, 2002 by the following vote:
Votes For 10,495,640
Votes Against 64,800
Abstaining 174,537
ITEM 5. OTHER INFORMATION
In July 2002, the Company obtained uncollateralized loans totaling
$250,000 from Cahill Warnock Strategic Partners, L.P. and Strategic
Associates, L.P. These loans bear interest of 12% per year and are due in
January 2003. David Warnock, a director of the Company, is a general
partner of Cahill Warnock Strategic Partners, L.P. and a managing member of
the general partner of Strategic Associates, L.P.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) Reports on Form 8-K
On April 4, 2002 we filed a report on Form 8-K (and amended such
report on April 9, 2002), which report included information under Item 4
"Changes in Registrant's Certifying Accountant".
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ENVIRONMENTAL SAFEGUARDS, INC.
Date: August 12, 2002 By: /s/ James S. Percell
James S. Percell, President
Date: August 12, 2002 By: /s/ Michael D. Thompson
Michael D. Thompson, Chief
Financial Officer