UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED: SEPTEMBER 30, 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 87-0429198
(STATE OR OTHER JURISDICTION (IRS EMPLOYER OF
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
2600 SOUTH LOOP WEST, SUITE 645
HOUSTON, TEXAS 77054
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES, INCLUDING ZIP CODE)
(713) 641-3838
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
CHECK WHETHER THE ISSUER (1) HAS FILED ALL REPORTS REQUIRED TO BE FILED BY
SECTION 13 or 15(d) OF THE EXCHANGE ACT DURING THE PAST 12 MONTHS (OR FOR SUCH
SHORTER PERIOD THAT THE REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND 2)
HAS BEEN SUBJECT TO SUCH FILING REQUIREMENTS FOR THE PAST 90 DAYS.
Yes [X] No [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS
AT 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 September 30, 2002
(unaudited) and December 31, 2001.
Unaudited Consolidated Condensed Statement of Operations for the
three months and nine months ended September 30, 2002 and 2001.
Unaudited Consolidated Condensed Statement of Cash Flows for the
nine months ended September 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
Item 4. Controls and Procedures
PART II -- OTHER INFORMATION
Item 1. Legal Proceedings
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)
SEPTEMBER 30,
2002 December 31
ASSETS (UNAUDITED) 2001
--------------- ---------------
Current assets:
Cash and cash equivalents $ 434 $ 798
Accounts receivable 45 1,309
Prepaid expenses 56 128
Other assets - 8
--------------- ---------------
Total current assets 535 2,243
Property and equipment, net 5,546 6,539
Acquired engineering design and technology, net 1,306 1,611
Other assets 3 3
--------------- ---------------
Total assets $ 7,390 $ 10,396
=============== ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable to related parties $ 250 $ -
Accounts payable 55 146
Dividends payable 554 364
Accrued interest 48 20
Other accrued liabilities 453 693
Income taxes payable - 254
--------------- ---------------
Total current liabilities 1,360 1,477
Minority interest 1,952 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 (10,917) (8,116)
--------------- ---------------
Total stockholders' equity 4,078 6,879
--------------- ---------------
Total liabilities and stockholders' equity $ 7,390 $ 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 ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------ -----------------------
2002 2001 2002 2001
----------- ----------- ---------- -----------
Revenue $ 69 $ 837 $ 808 $ 2,233
Cost of revenue 352 933 1,741 2,692
----------- ----------- ---------- -----------
Gross margin (283) (96) (933) (459)
Selling, general and administrative
expenses 305 613 1,486 1,953
Amortization of acquired engineering
design and technology 102 102 306 306
Research and development 5 19 25 54
----------- ----------- ---------- -----------
Loss from operations (695) (830) (2,750) (2,772)
Other income (expense):
Interest income - 4 2 28
Interest expense (16) (220) (28) (700)
Other - 10 (3) 33
----------- ----------- ---------- -----------
Loss before provision for income
taxes and minority interest (711) (1,036) (2,779) (3,411)
Benefit (provision) for income taxes - (102) 79 (222)
----------- ----------- ---------- -----------
Loss before minority interest (711) (1,138) (2,700) (3,633)
Minority interest 19 32 88 209
----------- ----------- ---------- -----------
Net loss $ (692) $ (1,106) $ (2,612) $ (3,424)
=========== =========== ========== ===========
Net loss applicable to common
stockholders $ (757) $ (1,187) $ (2,802) $ (3,694)
=========== =========== ========== ===========
Net loss per share-basic and diluted $ (0.07) $ (0.12) $ (0.28) $ (0.37)
=========== =========== ========== ===========
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)
NINE MONTHS ENDED
SEPTEMBER 30,
---------------------
2002 2001
----------- --------
Cash flows from operating activities:
Net loss $ (2,612) $(3,424)
Adjustment to reconcile net loss to net cash provided
by operating activities 2,102 2,366
----------- --------
Net cash provided by operating activities (510) (1,058)
----------- --------
Cash flows from investing activities:
Purchases of equipment (104) (181)
----------- --------
Net cash used by investing activities (104) (181)
----------- --------
Cash flows from financing activities:
Proceeds from notes payable to a related party 250 -
Distribution to minority interest - (669)
Dividends on preferred stock - (199)
----------- --------
Net cash used by financing activities 250 (868)
----------- --------
Net decrease in cash and cash equivalents (364) (2,107)
Cash and cash equivalents, beginning of period 798 3,068
----------- --------
Cash and cash equivalents, end of period $ 434 $ 961
=========== ========
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.
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. NOTES PAYABLE TO RELATED PARTIES
------------------------------------
In July 2002, the Company obtained uncollateralized loans totaling $250,000
from Cahil 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 Cahil
Warnock Strategic Partners, L.P. and a managing member of the general
partner of Strategic Associates, L.P.
4. INCOME TAXES
-------------
Deferred income taxes reflect the tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes. The
Company has provided 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 ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------- --------------------
2002 2001 2002 2001
---------- --------- --------- ---------
Federal statutory rate 34% 34% 34% 34%
Foreign income taxes - (10) - (7)
Change in valuation allowance (34) (34) (31) (34)
---------- --------- --------- ---------
-% (10)% 3% (7)%
========== ========= ========= =========
As of September 30, 2002, for U.S. federal income tax reporting purposes, the
Company has approximately $6.0 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.
Continued
F-5
ENVIRONMENTAL SAFEGUARDS, INC.
SELECTED NOTES TO UNAUDITED CONSOLIDATED
CONDENSED FINANCIAL STATEMENTS
__________
4. INCOME TAXES, CONTINUED
-------------------------
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.
5. 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 nine months ended September 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 September 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 NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------ -----------------------
2002 2001 2002 2001
----------- ----------- ---------- -----------
(IN THOUSANDS) (IN THOUSANDS)
Net loss $ (692) $ (1,106) $ (2,612) $ (3,424)
Series D preferred stock dividends (65) (81) (190) (270)
----------- ----------- ---------- -----------
Net loss available to common
stockholders $ (757) $ (1,187) $ (2,802) $ (3,694)
=========== =========== ========== ===========
6. 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:
Continued
F-6
ENVIRONMENTAL SAFEGUARDS, INC.
SELECTED NOTES TO UNAUDITED CONSOLIDATED
CONDENSED FINANCIAL STATEMENTS
__________
6. SEGMENT INFORMATION, CONTINUED
--------------------------------
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------ -----------------------
2002 2001 2002 2001
----------- ----------- ---------- -----------
(IN THOUSANDS) (IN THOUSANDS)
Revenue:
United States - 140 - 140
Latin America $ 66 $ 697 $ 805 $ 2,093
----------- ----------- ---------- -----------
Total revenue $ 66 $ 837 $ 805 $ 2,233
=========== =========== ========== ===========
Loss from operations:
United States $ (600) $ (686) $ (2,276) $ (2,037)
United Kingdom - (132) - (418)
Latin America 12 140 (124) 151
Middle East (37) (63) (176) (222)
Corporate (70) (89) (174) (246)
----------- ----------- ---------- -----------
Total loss from operations $ (695) $ (830) $ (2,750) $ (2,772)
=========== =========== ========== ===========
SEPTEMBER DECEMBER
30, 2002 31, 2001
---------- ----------
(IN THOUSANDS)
Assets:
United States $ 3,487 $ 4,515
United Kingdom - 826
Latin America 116 1,226
Middle East 3,399 3,419
Corporate 388 410
---------- ----------
Total assets $ 7,390 $ 10,396
========== ==========
7. REVENUE
-------
During the three months and nine months ended September 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 nine months ended September 30, 2001, service
revenue was derived from full-service contract utilization of ITD units
owned by the Company.
8. SUPPLEMENTAL NON-CASH TRANSACTIONS
------------------------------------
NINE MONTHS ENDED
SEPTEMBER 30,
-----------------
2002 2001
----- -----
(IN THOUSANDS)
Dividends declared but not yet paid $ 190 $ 189
Continued
F-7
ENVIRONMENTAL SAFEGUARDS, INC.
SELECTED NOTES TO UNAUDITED CONSOLIDATED
CONDENSED FINANCIAL STATEMENTS
__________
9. 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.
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 be achieved.
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; changes
in laws and regulations; 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 refining, waste
management, land-based oil and gas exploration and production, and other
industrial applications.
Our targeted customers are industrial activities or sites that produce
significant quantities of hydrocarbon contaminated 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 solids
or soil which meet environmental regulations. Examples of these types of
customers are the refining, heavy industrial, petrochemical, or oil and gas
exploration industries as well as waste management, Superfund, DOD and DOE
sites.
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 and 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 30% hydrocarbon saturation.
The processing capacity varies significantly depending on the moisture content,
degree of contamination, soil type, contamination type and the recycling
required.
Within the patented condensation process system 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.
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 October 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
October 2002 the close-down process was in its final stages.
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 October 2002 the close-down was completed.
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 October 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 SEPTEMBER 30, 2002 AND 2001
Summary. During the three months ended September 30, 2002, we incurred a
net loss of $692,000 as compared to a 2001 third quarter net loss of $1,106,000.
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 $69,000 during the third quarter of
2002 generated a negative gross margin of $283,000 as compared to revenue of
$837,000 and negative gross margin of $96,000 in the comparable 2001 quarter.
The decrease in revenue and gross margin was mainly due to the fact that in the
third 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 2.0 units under full-service
contract operations in the third quarter of 2001.
Selling, General and Administrative ("SGA") Expenses. SGA expenses during
the third quarter of 2002 were significantly lower than the comparable quarter
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 third quarter of 2002, interest expense of
$16,000 relating to short term loans and deferred preferred stock dividends
compares to interest expense primarily on senior debt of $220,000 for the third
quarter of 2001 (which includes amortization of debt issuance costs of
$107,000). All senior debt was fully retired in December 2001.
Income Taxes. We have reported no tax provision in the third quarter of
2002. The reported tax provision in the third 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 third 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 Arabia.
COMPARISON OF OPERATING RESULTS - NINE MONTHS ENDED SEPTEMBER 30, 2002 AND 2001
Summary. During the nine months ended September 30, 2002, we incurred a net
loss of $2,612,000 as compared to a 2001 net loss of $3,424,000. 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 $808,000 during the first nine months
of 2002 generated $933,000 of negative gross margin as compared to revenue of
$2,233,000 and negative gross margin of $459,000 in the comparable 2001 period.
The decrease in revenue and gross margin was mainly due to the fact that in the
first nine 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 1.8 units under full-service
contract operations in the first nine months of 2001.
Selling, General and Administrative ("SGA") Expenses. SGA expenses during
the first nine months of 2002 were significantly lower than the comparable nine
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 nine months of 2002, interest expense of
$28,000 relating to short term loans and deferred preferred stock dividends
compares to interest expense primarily on senior debt of $700,000 for the first
nine months of 2001 (which includes amortization of debt issuance costs of
$262,000). All senior debt was fully retired in December 2001.
Income Taxes. We have reported a tax benefit in the first nine months of
2002 related to the recovery of alternative minimum taxes provided at December
31, 2001. The reported tax provision in the first nine months of 2001 relates to
foreign income taxes incurred mainly by our Mexican subsidiary. During both
comparative nine 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 nine months of 2002
relates to our 50% minority partner's interest in the net loss of OnSite Arabia.
During the comparable nine months of 2001, the minority interest reflects our
50% minority partner's interest in the net loss of OnSite Arabia, and OnSite
Columbia.
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.
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 Cahill Warnock Strategic
Partners, L. P. and Strategic Associates, L.P. 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.
ITEM 4. CONTROLS AND PROCEDURES
James S. Percell, our Chief Executive Officer and Michael D. Thompson , our
Chief Financial Officer, have concluded that that our disclosure controls and
procedures are appropriate and effective. They have evaluated these controls
and procedures as of a date within 90 days of the filing date of this report on
Form 10-Q. There were no significant changes in the our internal controls or in
other factors that could significantly affect these controls subsequent to the
date of their evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
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 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 July 2, 2002 we filed a report on Form 8-K , which report included
information under Item 5 "Other Events".
On August 22, 2002 we filed a report on Form 8-K , which report included
information under Item 5 "Other Events".
On September 4, 2002 we filed a report on Form 8-K , which report included
information under Item 5 "Other Events".
On September 23, 2002 we filed a report on Form 8-K , which report included
information under Item 5 "Other Events".
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: November 13, 2002 By: /s/ James S. Percell
James S. Percell, President
Date: November 13, 2002 By: /s/ Michael D. Thompson
Michael D. Thompson, Chief
Financial Officer
CERTIFICATIONS
I, James S. Percell, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Environmental
Sageguards, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: November 13, 2002 By: /s/ James S. Percell
James S. Percell
Chief Executive Officer
I, Michael D. Thompson, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Environmental
Safeguards, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: November 13, 2002 By: /s/ Michael D. Thompson
Michael D. Thompson
Chief Financial Officer
Certification of Chief Executive Officer of Environmental Safeguards, Inc.
- --------------------------------------------------------------------------------
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and Section 1350 of 18
- --------------------------------------------------------------------------------
U.S.C. 63.
- ----------
I, James S. Percell, the Chief Executive Officer of Environmental Safeguards,
Inc. hereby certify that Environmental Safeguards, Inc.'s periodic report on
Form 10-Q and the financial statements contained therein fully complies with the
requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934
(15 U.S.C. 78m or 78o(d) and that information contained in the periodic report
on Form 10-Q and the financial statements contained therein fairly represents,
in all material respects, the financial condition and results of the operations
of Environmental Safeguards, Inc.
Date: November 13, 2002 By: /s/ James S. Percell
James S. Percell
Chief Executive Officer
Certification of Chief Financial Officer of Environmental Safeguards, Inc.
- --------------------------------------------------------------------------------
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and Section 1350 of 18
- --------------------------------------------------------------------------------
U.S.C. 63.
- ----------
I, Michael D. Thompson, the Chief Financial Officer of Environmental Safeguards,
Inc. hereby certify that Environmental Safeguards, Inc.'s periodic report on
Form 10-Q and the financial statements contained therein fully complies with the
requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934
(15 U.S.C. 78m or 78o(d) and that information contained in the periodic report
on Form 10-Q and the financial statements contained therein fairly represents,
in all material respects, the financial condition and results of the operations
of Environmental Safeguards, Inc.
Date: November 13, 2002 By: /s/ Michael D. Thompson
Michael D. Thompson
Chief Financial Officer