-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, KuuqVycMil6fskwPHB+4YWqQoC9E4iA3ZDbd1JJr1k/F9OyeOs+FhJrQxNiRtvHI N0TZZhPSpnLVaRrxJ416gg== 0000950129-01-001722.txt : 20010330 0000950129-01-001722.hdr.sgml : 20010330 ACCESSION NUMBER: 0000950129-01-001722 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20001231 FILED AS OF DATE: 20010329 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ENVIRONMENTAL SAFEGUARDS INC/TX CENTRAL INDEX KEY: 0001017616 STANDARD INDUSTRIAL CLASSIFICATION: REFUSE SYSTEMS [4953] IRS NUMBER: 870429198 STATE OF INCORPORATION: NV FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 001-13869 FILM NUMBER: 1583007 BUSINESS ADDRESS: STREET 1: 2600 SOUTH LOOP WEST STREET 2: 645 CITY: HOUSTON STATE: TX ZIP: 77054 BUSINESS PHONE: 7136413838 MAIL ADDRESS: STREET 1: 2600 SOUTH LOOP WEST STREET 2: SUITE 445 CITY: HOUSTON STATE: TX ZIP: 77054 10-K405 1 h85485e10-k405.txt ENVIRONMENTAL SAFEGUARDS INC - YEAR ENDED 12/31/00 1 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 --------------------- FORM 10-K [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 2000 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 COMMISSION FILE NUMBER 000-21953 ENVIRONMENTAL SAFEGUARDS, INC. (Exact name of registrant as specified in its charter) NEVADA 87-0429198 (State or other jurisdiction (IRS Employer of incorporation or organization) Identification No.)
2600 SOUTH LOOP WEST, SUITE 645, HOUSTON, TEXAS 77054 (Address of principal executive offices, including zip code) (713) 641-3838 (Registrant's telephone number, including area code) Securities registered under Section 12(b) of the Exchange Act:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED ------------------- ----------------------------------------- Common Stock, $.001 par value American Stock Exchange
Securities registered pursuant to 12(g) of the Exchange Act: NONE Indicate by check mark whether the registrant (i) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (ii) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] The aggregate market value of Common Stock held by non-affiliates of the registrant at March 27, 2001, based upon the last closing price of $0.26 on the American Stock Exchange, was $2,570,000. As of March 27, 2001, there were 10,112,144 shares of Common Stock outstanding. DOCUMENTS INCORPORATED BY REFERENCE Not applicable - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 2 TABLE OF CONTENTS
PAGE ---- PART I Item 1 Business.................................................... 1 Item 2. Properties.................................................. 5 Item 3. Legal Proceedings........................................... 5 Item 4. Submission of Matters to a Vote of Security Holders......... 6 PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters....................................... 6 Item 6. Selected Financial Data..................................... 6 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations................................. 8 Item 7A. Quantitative and Qualitative Disclosures About Market Risk...................................................... 12 Item 8. Financial Statements and Supplementary Data................. 13 Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure.................................. 13 PART III Item 10. Directors and Executive Officers of the Registrant.......... 13 Item 11. Executive Compensation...................................... 14 Item 12. Security Ownership of Certain Beneficial Owners and Management................................................ 19 Item 13. Certain Relationships and Related Transactions.............. 21 PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K....................................................... 22
i 3 PART I ITEM 1. BUSINESS INTRODUCTION Environmental Safeguards, Inc. is engaged in the development, production and sale of environmental remediation and recycling technologies and services to oil and gas industry participants, waste management companies and other industrial customers, through its wholly-owned subsidiaries National Fuel & Energy, Inc. ("NFE") and OnSite Technology, L.L.C. ("OnSite"). OnSite has four wholly-owned subsidiaries, OnSite Environmental UK Ltd., OnSite Venezuela, Inc., OST Equipment Leasing L.L.C. and OnSite Mexico, L.L.C., and two 50%-owned subsidiaries, OnSite Colombia, Inc. and OnSite Arabia, Inc., through which it operates in foreign locations. The environmental remediation and recycling services that we provide involve the removal of hydrocarbon contaminants and valuable drilling fluids from soil using indirect thermal desorption remediation and recycling technology. We provide these services on-site or at the central location to which the customer hauls the contaminated materials. HISTORY We were incorporated under the laws of the State of Nevada in December 1985, under the name of Cape Cod Investment Company. In December 1986, our name was changed to Cape Cod Ventures, Inc. In August 1987, an initial public offering was completed for 4,148,000 shares of Common Stock at a price of $0.001 per share pursuant to the exemption from the registration requirements of the Securities Act of 1933 provided by Regulation A. In May 1993, an Agreement and Plan of Reorganization was executed with National Fuel & Energy, Inc., a Wyoming corporation, providing for the acquisition of NFE in exchange for shares of our Common Stock. In connection with the reorganization, our name was changed to Environmental Safeguards, Inc., and NFE became our wholly-owned subsidiary. In January 1995, we entered into an agreement with Parker Drilling Company ("Parker"), a Delaware corporation, granting Parker exclusive marketing rights to our proprietary processes for on-site remediation and recycling services in connection with drill cuttings at oil and gas drilling sites throughout the United States and in certain foreign countries. In August 1995, we expanded our agreement with Parker by forming OnSite, a joint company between NFE and Parker, in which NFE and Parker each owned 50%. In December 1997, we entered into a Purchase Agreement (the "Purchase Agreement") with Parker which provided for our acquisition, through NFE, of Parker's 50% equity interest in OnSite resulting in NFE becoming the owner of 100% of the equity interest in OnSite. Pursuant to the terms of the Purchase Agreement, we paid $8,000,000 for the 50% equity interest and repaid a $3,000,000 loan that had been made to us by an affiliate of Parker. As part of the transaction, Parker returned to us unexercised warrants to purchase 300,000 shares of our Common Stock. Our sources of funds to effect the acquisition included the sale of $8,000,000 of new Series B Convertible Preferred Stock and Series C Preferred Stock to an investor group consisting of Cahill, Warnock Strategic Partners Fund, L.P., Strategic Associates, L.P., Newpark Resources, Inc. and James H. Stone, who is the Chairman of Stone Energy Corporation and a secured loan of $6,000,000 from the same investor group ("Loan Agreement"). Pursuant to the financing, David L. Warnock, a member of Cahill, Warnock & Co., L.L.C. and general partner of Cahill, Warnock Strategic Partners Fund, L.P., was appointed as one of our Directors. BUSINESS ACTIVITIES General: Substantially all of our activities are conducted through OnSite, which is engaged in the development and production of remediation and recycling technology and the sale of environmental remediation and recycling services. OnSite owns the technologies included in its Internal Thermal Desorption ("ITD") units, and the proprietary processes for on-site remediation and recycling of hydrocarbon contaminated soil. To date, the environmental remediation and recycling services which we have provided have involved the removal of petroleum contaminants from soil using our ITD units. Our ITD units are easily 1 4 transported processing systems which produce clean soil from contaminated soil while reclaiming the hydrocarbons. Our customers consist primarily of large corporations in the oil and gas drilling industry that have responded to the changing regulatory climate with respect to soil and other environmental contamination and waste management companies in the business of offering waste disposal services. The primary services which we offer involve remediation and recycling of soil contaminated by oil-based drilling fluids, fuel spills, leakage at storage tanks, refinery wastes, ship sludges and other sources of hydrocarbon contamination, as well as the remediation of industrial waste. To remediate and recycle the contaminated soil, we utilize our ITD units consisting of (i) an indirect thermal desorption unit wherein the hydrocarbon contaminated soil is indirectly heated, thereby causing the hydrocarbon contamination to vaporize; and (ii) a condensation process system, which causes the hydrocarbon vapor to condense to a liquid, or an afterburner or thermal oxidizer, which incinerates the hydrocarbon vapor resulting in a safe and clean process. Our ITD units are mobile, and thus, contaminated soil can be remediated and recycled at the site where the contaminated soil is located. We do not haul or dispose of soil or contaminants away from the customer's location. As of March 28, 2001, we owned six ITD units outright, and had a 50% interest in four additional units which are owned by our 50%-owned subsidiaries OnSite Arabia, Inc. (two units) and OnSite Colombia, Inc. (two units). Customers: Our customers consist primarily of large oil and gas industry participants, waste management companies and other industrial companies. Through OnSite, we typically submit a bid for a project based on the costs of moving the equipment to the location, the estimated charges for labor and fuel, the nature and extent of the contamination, the type and moisture content of the soil and the estimated processing time. Once a contract has been awarded, equipment is moved to the client's desired location. Indirect Thermal Remediation and Recycling: The primary services we offer involve: (i) the remediation and recycling of soil contaminated by oil-based drilling mud, fuel spills, leakage at storage tanks, leakage from pipelines; (ii) the remediation and recycling of hydrocarbon contamination at settling ponds, oil and gas exploration sites, refineries, petrochemical facilities, abandoned production fields, Department of Defense installations, ships and dock facilities and other similar sites; and (iii) the remediation and recycling of valuable drilling fluids which have been captured in soil and drilling muds during the drilling process. To date we have employed our ITD units to provide remediation and recycling services to oil and gas industry drilling operations, tank farms and compressor sites, industrial waste disposal facilities and oilfield waste disposal facilities. This process is known as "indirect thermal desorption" because it reverses the contamination process and removes the hydrocarbons from the soil and discharges the contaminants previously absorbed without direct contact of the soil to a flame. Our ITD units, which are portable equipment, utilize a rotating, heat-jacketed trundle to vaporize hydrocarbons from contaminated soil or other contaminated materials. Our ITD units consist of two principal components: (i) an indirect thermal desorption unit wherein the hydrocarbon contaminated soil is indirectly heated, thereby causing the hydrocarbon contamination to vaporize; and (ii) a condensation process system, which causes the hydrocarbon vapor to condense to a liquid for recycling. As an alternative to the condensing system, the vapor can be passed through an afterburner or thermal oxidizer which incinerates the hydrocarbon vapors. The heat exchange system is comprised of a large fabricated steel shell which houses a rotating trundle. Hot gases pass through the shell and around the outside surface of the trundle. Hydrocarbon contaminated soil, or other contaminated materials, are loaded into the elevated end of the trundle by a conveyor belt or a front end loader. As the trundle revolves, the soil is agitated by internal lifts and oars as it passes through the inside of the trundle by gravity flow and is heated to temperatures from 200 to 1,000 degrees Fahrenheit. At these temperatures, the hydrocarbon contaminants in the soil transform into vapors which are vacuumed out of the heat exchange system into the condensing system, the afterburner or the thermal oxidizer. The clean soil then drops out of the discharge door at the low end of the trundle and is passed through an enclosed conveyor for rehydration before final discharge. Random soil samples are tested at the end of the process to 2 5 confirm that the contaminants have been removed and the soil condition is within an acceptable range. The soil is then returned to its original location or such other location specified by the customer. The hydrocarbon vapors removed from the heat exchange system by vacuum are passed through a fan-cooled condensing system. The vapors are condensed into liquids and collected in storage tanks and can then be recycled or disposed, depending on the nature of the contaminant, the needs of the customer and the specifications required for reuse. To date, our ITD units have demonstrated their ability to process up to 192 tons of contaminated soil in a 24-hour period with a 30% hydrocarbon saturation. However, the processing capacity varies significantly depending on the moisture content, degree of contamination, soil type, contamination type and the remediation and recycling required. There can be no assurance that our ITD units will continue to perform at this level, or that this performance will continue to be competitive with other technologies available in the market. Recycling of Hydrocarbon Contaminants: We have developed proprietary processes which are embodied in the condensation process system unit, one of the two principal components of our ITD units. Within this component the hydrocarbon contaminant(s) are condensed from the vapor state created in the dryer unit back into a liquid state via the proprietary processes and placed into storage for recycling back to the client. This allows the client to realize actual savings from its ability to re-utilize the hydrocarbons. We believe that this ability to recycle the hydrocarbon contaminant(s) is an important competitive advantage, as compared to the bioremediation, direct burn or "dig and haul" remediation technologies. Manufacturing of ITD Units: We have historically contracted with outside fabricators to manufacture our ITD units. The primary contractors we have used are National Oilwell and Houston ProFab. Currently, we have no ITD units under construction by fabricators. EXISTING CONTRACTS FOR OPERATIONS We operate with our own trained personnel through wholly or partially-owned subsidiaries as discussed above, and as of March, 2001, our ITD units are located in Colombia, Venezuela, Mexico, Scotland, the United Arab Emirates and the United States. COMPETITION There are many companies that currently dispose of hazardous and industrial wastes and remediate or clean contaminated sites. Such companies are continually attempting to develop new and improved products and services. Other companies utilize competing technologies and techniques in an attempt to provide more economical or superior remediation services. Many of our competitors are established companies with substantially greater capital resources, larger research and development staffs and facilities and greater marketing capabilities than us. There can be no assurance that we will be competitive in the remediation and recycling industry in the future. We obtain our contracts through competitive bidding and are in direct competition with companies providing alternative means of, and utilizing alternative technologies for, remediating environmental problems. The most significant competition comes from companies utilizing "dig and haul," direct burn, and bioremediation technology to remediate soil contamination. Companies utilizing the "dig and haul" method generally transport the contaminated soil to other facilities for processing. We believe that the technology we utilize is competitive because our equipment is mobile, and thus, contaminated soil can be remediated on location. The waste processing, remediation and recycling businesses are, to a large extent, dependent upon and constrained by the costs and regulations associated with transporting such wastes. More importantly, our remediation and recycling process addresses the latent liability associated with the contamination at the site. We are currently investigating techniques and technologies capable of evaporation of non-needed liquids and micro-filtration applications. There can be no assurance that we will be able to develop or acquire such technology and skill or that, if obtained, will be competitive with other alternatives available in the market. 3 6 Companies utilizing direct burn technology use direct heat sources to incinerate contaminants found in the soil. Due to the closed nature of the heat transfer systems of our ITD units, we can safely handle much higher concentrations of contaminants than conventional direct burn methods. Conventional direct burn methods process material with maximum contamination levels of 3% to 4% while our ITD units have processed materials with contamination levels as high as 40%. In addition, the portable nature of our ITD units permit them to be located at the contamination site. Our ITD units also permit the customer to recapture certain valuable liquids which are otherwise destroyed. We differentiate ourselves from our competitors by providing significantly higher operational service and a significantly higher value-added result for our clients for the remediation of hydrocarbons from soils and other mediums, and the subsequent reclaiming of the hydrocarbons into liquids for customer recycling or resale. For example, some of the design features of our ITD unit, which we believe provide service-level advantages, include: Remediation: Our ITD units remove 99.9% of hydrocarbon contaminants from the waste-stream soil, effectively eliminating the client's latent liability. Recycling: Our ITD units transform waste streams into value for our clients by reclaiming valuable hydrocarbons for client recycling or resale. For example, our equipment has reclaimed millions of gallons of diesel oil while processing drill cuttings for major oil and gas participants. Tonnage: Our ITD units have proven processing capability of 1 to 10 tons per hour with up to 30% hydrocarbon-saturation in the soil. Some competitors are capable of similar processing speeds, but at lower hydrocarbon-saturation levels, resulting in throughput advantages for us. Portability: Our ITD units are built on two 44 foot trailer beds for easier transport to our client's location, avoiding costly hauling expenses of contaminated materials to a central location. In addition, the design of our ITD units permit rig-down and/or rig-up in less than a day. Some competitive units are much less transportable, or not transportable at all. Wide Range of Hydrocarbons Treated: Our ITD units operate at low temperatures (200 degrees Fahrenheit), high temperatures (1,000 degrees Fahrenheit), and anywhere in between, thereby enabling the remediation of wide ranges of hydrocarbon contaminants encountered at a client's site including both oil and gas and industrial waste. We believe that competition in the industry is concentrated in remediation services, whereas our ITD technology not only provides remediation services, but also is capable of reclaiming and recycling valuable drilling fluids and hydrocarbons. Further, we believe that our pricing policies are competitive. No assurance, however, can be given that we will be able to successfully compete with other companies or alternative technologies. GOVERNMENTAL REGULATIONS -- COST OF COMPLIANCE We render services in connection with the remediation, recycling and disposal of various wastes. Federal, state and local laws and regulations have been enacted regulating the handling and disposal of wastes and creating liability for certain environmental contamination caused by such waste. Environmental laws regulate, among other things, the transportation, storage, handling and disposal of waste. Governmental regulations govern matters such as the disposal of residual chemical wastes, operating procedures, waste water discharges, air emissions, fire protection, worker and community right-to-know, and emergency response plans. Moreover, so-called "toxic tort" litigation has increased markedly in recent years as persons allegedly injured by chemical contamination seek recovery for personal injuries or property damage. These legal developments present a risk of liability should we be deemed to be responsible for contamination or pollution caused or increased by any evaluation, remediation or cleanup effort conducted by us, or for an accident which occurs in the course of such remediation or cleanup effort. There can be no assurance that our policy of establishing and implementing proper procedures for complying with environmental regulations will be effective at preventing us from incurring a substantial environmental liability. If we were to incur a substantial uninsured liability for environmental damage, our financial condition could be materially adversely affected. 4 7 We presently have the ability to deliver soil remediation and recycling services that meet applicable federal and state standards for the delivery of its services, and for the level of contaminant removal. The government can, however, impose new standards. If new regulations were to be imposed, we may not be able to comply in either the delivery of our services, or in the level of contaminant removal from the soil. Operating permits are generally required by federal and state environmental agencies for the operation of our ITD units. Most of these permits must be renewed periodically and the governmental authorities involved have the power, under various circumstances, to revoke, modify, or deny issuance or renewal of these permits. Site-related permits, however, are generally the responsibility of the client. EMPLOYEES We currently have 27 employees, 8 of whom are in domestic and international management or supervisory positions, including corporate and administrative functions. None of our employees are represented by a union. We consider our employee relations to be good. TRANSFER AGENT AND REGISTRAR The co-transfer agents and registrars for our Common Stock are Colonial Stock Transfer Company, Inc. ("Colonial Transfer") and Registrar and Transfer Company. Colonial Transfer's address is 455 East 400 South, Suite 100, Salt Lake City, Utah 84111; (801) 355-5740. ITEM 2. PROPERTIES Our principal executive offices are located in leased facilities at 2600 South Loop West, Suite 645, Houston, Texas 77054, which consist of 3,852 square feet. The lease for the executive offices will expire in May, 2001. We believe that our offices are adequate for our present needs and that suitable space will be available to accommodate our future needs. We incorporate by reference in response to this item the information set forth in item 1 of this annual report and the information set forth in Note 5 of the Notes to Consolidated Financial Statements included in item 8 of this annual report. ITEM 3. LEGAL PROCEEDINGS In August 2000, litigation was instituted against us styled as Duratherm, Inc. vs OnSite Technology LLC, Waste Control Specialists LLC and Kevin Nowlin; In the United States District Court for the Southern District of Texas; Civil Action No. H-00-2727. This is a lawsuit against OnSite, a former customer of OnSite ("WCS") and a former employee of OnSite ("Nowlin") by Duratherm, Inc. alleging (i) infringement of U.S. patent no. 5,523,060; (ii) misappropriation and misuse of trade secrets and breach of confidentiality relationship; (iii) tortuous interference with a business relationship; (iv) civil conspiracy to commit the acts (ii)-(iii) listed above; and (v) business disparagement. Plaintiff sought damages, exemplary damages, treble damages for infringement and a permanent injunction (as well as attorneys fees and interest). The amount of damages was not specified. OnSite filed a motion to dismiss on the grounds that Duratherm was not the proper party to sue on the patents (or alternatively that Duratherm needed to add additional parties as plaintiff's to the suit). This motion to dismiss was granted by the court. Due to the pendant nature of the other claims the entire case was dismissed. The decision was not appealed. Duratherm could, however, re-file the lawsuit with the addition of other parties. It could also refile the claims unrelated to the patent in state court. OnSite still believes that it has a meritorious defense on the claims alleged in the original lawsuit and will continue to vigorously defend against such claims if they are reasserted. It is not possible at this time to determine the probability of refiling the suit. OnSite's insurance carrier denied coverage with regard to claims (i)-(iv), but accepted the (v) business disparagement claim subject to a reservation of rights. While there is no pending litigation against our company, we are from time to time involved in various other litigation incidental to our business, which at times involve claims for significant monetary amounts, some of which would not be covered by insurance. 5 8 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS There were no matters submitted to a vote of security holders during the fourth quarter of 2000. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS PRICE RANGE OF COMMON STOCK Our Common Stock is currently traded on the American Stock Exchange under the symbol "EVV." The following table sets forth the range of high and low closing sales prices of our Common Stock for the periods shown: COMMON STOCK PRICE RANGE
HIGH LOW ----- ----- 1999 First Quarter............................................. $2.00 $1 1/8 Second Quarter............................................ $1 1/2 $ 15/16 Third Quarter............................................. $1 11/16 $ 7/8 Fourth Quarter............................................ $1 3/8 $ 3/4 2000 First Quarter............................................. $1 11/16 $ 13/16 Second Quarter............................................ $1 1/16 $ 9/16 Third Quarter............................................. $ 11/16 $ 5/16 Fourth Quarter............................................ $ 3/8 $ 3/16
On March 27, 2001, the closing price of our Common Stock was $0.26 per share. On the same date, we had approximately 1,000 stockholders of record, including broker-dealers holding shares beneficially owned by their customers. DIVIDEND POLICY We have not paid, and do not currently intend to pay cash dividends on our Common Stock in the foreseeable future. The current policy of our Board of Directors is to retain all earnings, if any, to provide funds for the operation and expansion of our business. The declaration of dividends, if any, will be subject to the discretion of our Board of Directors, which may consider such factors as our results of operations, financial condition, capital needs and acquisition strategy, among other factors. We may not, except for dividends payable in connection with our Series D Preferred Stock, authorize or pay any dividends at any time if any amount is unpaid with respect to our current Loan Agreement. ITEM 6. SELECTED FINANCIAL DATA We have derived the following selected consolidated financial information as of December 31, 2000 and 1999, and for each of the years in the three-year period ended December 31, 2000, from our audited consolidated financial statements included in item 8 of this annual report. You should read this information in conjunction with those consolidated financial statements and the notes thereto. We have derived the selected consolidated financial information as of December 31, 1998, 1997 and 1996, and for each of the years in the two-year period ended December 31, 1997, from our audited consolidated financial statements of the 6 9 Company, that are not included herein. Please read "Management's Discussion and Analysis of Financial Condition and Results of Operations" in item 7 of this annual report.
YEAR ENDED DECEMBER 31, ---------------------------------------------- 2000 1999 1998 1997 1996 ------- ------- ------- ------- ------ (IN THOUSANDS, EXCEPT PER SHARE DATA) STATEMENT OF OPERATIONS DATA(1): Revenue....................................... $11,250 $13,514 $10,672 $ 6,678 $ -- Income (loss) from operations................. 1,029 3,098 1,404 590 (511) Net loss(2)................................... (1,462) (483) (799) (1,849) (647) Basic and dilutive net loss per share: Before extraordinary item................... (0.19) (0.12) (0.17) (0.61) (0.11) Extraordinary item............................ -- -- -- (0.04) 0.01 ------- ------- ------- ------- ------ Net loss per share.................. $ (0.19) $ (0.12) $ (0.17) $ (0.65) $(0.10) ======= ======= ======= ======= ======
YEAR ENDED DECEMBER 31, ---------------------------------------------- 2000 1999 1998 1997 1996 ------- ------- ------- ------- ------ (IN THOUSANDS, EXCEPT PER SHARE DATA) BALANCE SHEET DATA(1): Working capital surplus (deficit)............. $ (258) $ 1,564 $ 5,431 $ 5,277 $3,304 Property and equipment, net................... 8,929 10,835 8,256 6,286 5 Total assets.................................. 15,153 18,990 20,164 18,298 5,468 Long-term debt (including capital lease obligations), net of current portion........ 2,163 4,325 6,636 5,210 3,694 Shareholders' equity.......................... 5,664 6,956 7,813 9,206 1,515
- --------------- (1) For the year ended December 31, 1996, our investment in OnSite was accounted for using the equity method, because our 50% ownership interest did not provide effective control of OnSite. However, on December 17, 1997, we acquired the remaining 50% of OnSite from our former Joint Venture partner. Accordingly, we consolidated OnSite for the years ended December 31, 2000, 1999, 1998 and 1997. This transaction affects the comparability of the selected financial information for periods prior to the year ended December 31, 1997. (2) Included in net loss for the year ended December 31, 1997 is a $786,000 charge for acquired research and development in connection with the acquisition of OnSite. 7 10 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion should be read in conjunction with our consolidated financial statements and related notes included in item 8 of this annual report, and our "Forward-Looking Statements" which discusses certain limitations inherent in such statements. INFORMATION REGARDING AND FACTORS AFFECTING FORWARD-LOOKING STATEMENTS We are including the following cautionary statement in this Form 10-K to make applicable and take advantage of the safe harbor provision of the Private Securities Litigation Reform Act of 1995 for any forward-looking statements made by us, or on behalf of us. Forward-looking statements include statements concerning plans, objectives, goals, strategies, future events or performance and underlying assumptions and other statements which are other than statements of historical facts. Certain statements in this Form 10-K are forward-looking statements. Words such as "expects," "anticipates," "estimates" and similar expressions are intended to identify forward-looking statements. Such statements are subject to risks and uncertainties that could cause actual results to differ materially from those projected. Such risks and uncertainties are set forth below. Our expectations, beliefs and projections are expressed in good faith and are believed to have a reasonable basis, including without limitation, our examination of historical operating trends, data contained in our records and other data available from third parties. There can be no assurance, however, that our expectations, beliefs or projections will result, be achieved, or be accomplished. In addition to other factors and matters discussed elsewhere herein, the following are important factors that, in our view, could cause material adverse effects on our financial condition and results of operations: our ability to secure contracts for our ITD units; our ability to attain widespread market acceptance of our technology; our ability to obtain acceptable forms and amounts of financing to fund continuing operations; the demand for, and price level of, our services; competitive factors; the actual useful life of our ITD Units; ability to mitigate concentration of business in a small number of customers; the evolving industry and technology standards; the ability to protect proprietary technology; the dependence on key personnel; the effect of business interruption due to political unrest; the foreign exchange fluctuation risk; and our ability to maintain acceptable utilization rates on our equipment. We are not obligated to update or revise these forward-looking statements to reflect the occurrence of future events or circumstances. OVERVIEW We are engaged in the development, production and sale of environmental reclamation and recycling technologies and services. Substantially all of our technologies and services are provided through OnSite and we are devoting substantially all of our efforts to the development of markets for OnSite's services. We are currently providing reclamation and recycling services to companies engaged in land-based oil and gas exploration, waste management, and other industrial applications. Oil and gas exploration, refinery and other types of industrial activities, often produce significant quantities of petroleum-contaminated drill cuttings and waste, from which our Indirect Thermal Desorption ("ITD") process can extract and recover the hydrocarbons as re-useable or re-saleable liquids, and produce recycled soil compliant with environmental regulations. We have expanded the activities of OnSite to include use of ITD technology to address hydrocarbon contamination problems and hydrocarbon recycling and reclamation opportunities at heavy industrial, refining, petrochemical and waste management sites, as well as at Superfund, DOD and DOE sites. On December 17, 1997, we acquired the remaining 50% interest in OnSite from Parker Drilling Co. ("Parker"), giving us complete control of the ITD technology owned by OnSite, and providing us with a wholly-owned operating subsidiary that forms the cornerstone of our future operations. Total purchase consideration in the OnSite acquisition was financed by us through a private placement of Convertible Preferred and Preferred Stock, combined with senior secured notes and warrants to purchase shares of our Common Stock. We included OnSite's operating results in our statement of operations for the year ended December 31,1997, as though the acquisition took place at the beginning of that year, and deducted as a separate line item the pre-acquisition earnings attributable to the former 50% owner of OnSite. 8 11 We have focused essentially all of our attention on our now wholly-owned business operations in OnSite. OnSite was formed, as a 50%-owned joint company with Parker, as a means for assembling the capital necessary to build and improve the ITD process and to generate market awareness and acceptance of ITD technology. We expect that a substantial portion of our revenues will continue to be generated from major international oil and gas industry participants, as well as from other industrial applications. In November 1996, we formed a 50%-owned joint company, OnSite Colombia, Inc., to provide hydrocarbon contaminated soil reclamation and recycling services to oil and gas industry participants operating in Colombia. In January, 1998, OnSite Venezuela, Inc., our 100% owned subsidiary, commenced operations to provide hydrocarbon contaminated soil reclamation and recycling services to oil and gas industry participants operating in Venezuela. In December, 1998, we formed a 50%-owned joint company, OnSite Arabia, Inc., to provide hydrocarbon contaminated soil reclamation and recycling services to oil and gas industry participants operating in the Arabian Gulf region. In April, 1999, we formed OnSite Environmental UK, Ltd., a wholly-owned subsidiary, for operations in Scotland. In July, 1999, we registered OnSite Mexico LLC, a wholly-owned subsidiary, for operations in Mexico. RESULTS OF OPERATIONS Comparison of Operating Results -- Years Ended December 31, 2000 and 1999 Summary. For the year ended December 31, 2000, we incurred a net loss of $1,462,000 as compared to a 1999 net loss of $483,000. The $979,000 increase in net loss was primarily due to the sale of an ITD unit during the first quarter of 1999 (not repeated during 2000), 10% lower equipment utilization during 2000 and the cost of equipment relocations during the first quarter of 2000. Additional information follows. Revenue and Gross Margin. Revenue of $11.3 million for 2000 generated $5.2 million (46% of revenue) gross margin as compared to revenue of $13.5 million and gross margin of $7.3 million (54% of revenue) in 1999. The majority of the 2000 decrease in revenue was due to operating an average of 4.2 ITD units during 2000 as compared to an average of 4.6 in 1999, a reduction of 10%, combined with the sale of an ITD unit to a 50%-owned subsidiary during the first quarter of 1999 (not repeated during 2000). The 8% decrease in gross margin ratio was mainly due to the combination of increased ITD depreciation expense in 2000 (two additional ITDs compared with 1999) and transportation and customs duty expenses associated with movements of ITD units in and out of Latin America in the first quarter of 2000. Selling, General and Administrative ("SGA") Expense. SGA expenses were at about the same level as 1999, both in amount and by type of expense. The average number of management employees classified as SGA remained essentially the same in 2000 as with 1999. Research & Development Costs ("R&D") Expense. The expense for 2000, essentially unchanged from 1999, reflects ongoing R&D improvements to our Series 6000 ITD system design. Amortization of Engineering Design and Developed Technology. Reflects the amortization of Engineering Design and Developed Technology costs, an intangible asset related to the December 1997 acquisition of the remaining 50% interest in OnSite from Parker Drilling. The intangible asset is being amortized over an 8 year estimated economic life. Interest Income. The reduction in interest income resulted from a lower average cash balance available for short term investment income during 2000. Interest Expense. During 2000, $1,018,000 of interest expense was incurred (including amortization of debt issuance costs of $294,000), compared to interest expense of $1,455,000 for 1999 (including amortization of debt issuance costs of $489,000, partly offset by $45,000 of interest capitalized in connection with the first 9 12 quarter 1999 construction of ITD units). The $437,000 overall decrease in interest expense for 2000 was due to lower interest expense on two international leases in Colombia, lower amortization of debt issuance costs as noted above, partially offset by no interest capitalization in 2000, as compared to $45,000 in 1999. Other Income (Expense). Other income is mainly composed of foreign currency translation gains. The financial statements of our foreign subsidiaries are measured as if the functional currency were the U.S. Dollar ("USD"). The re-measurement of local currencies into USD created favorable translation adjustments which were included in net income in each year 2000 and 1999. Income Taxes. The tax provision primarily relates to foreign income tax effects in our Colombia, Venezuela, Mexico and Scotland subsidiaries in 2000, and in our Colombia, Scotland and Mexico subsidiaries in 1999. We have incurred net operating losses ("NOLs") in the U.S. in recent years, which may be used to offset taxable income reported in future periods. The NOLs and certain foreign tax credits associated with the taxes paid primarily in Colombia have generated deferred tax assets, but due to uncertainties regarding the future realization of these assets, a valuation allowance has been provided for the full amount of the deferred tax assets. We are implementing tax planning strategies, which if successful, may result in our recognizing these deferred tax assets in future periods, which would result in significantly reduced effective tax rates. However, presently there can be no assurances that the NOLs and foreign tax credits will be utilized. Minority (Interest) Income. Minority interest expense for 2000 reflects our 50% minority partner's interest in the net income of OnSite Colombia, partly offset by net loss of OnSite Arabia. During 1999, the minority interest expense reflects our 50% minority partner's interest in the net income of OnSite Colombia. Comparison of Operating Results -- Years Ended December 31, 1999 and 1998 Summary. For the year ended December 31, 1999, a net loss of $483,000 was incurred as compared to a 1998 net loss of $799,000. The $316,000 reduction in net loss was primarily due to higher revenue and improved gross margins from a greater average number of ITD units in service, partially offset by higher interest expense. Additional information follows. Revenue and Gross Margin. Revenue of $13.5 million for 1999 generated $7.3 million (54% of revenue) gross margin in 1999 as compared to revenue of $10.7 million and gross margin of $5.3 million (50% of revenue) in 1998. The majority of the 1999 increase in revenue was due to operating an average of 4.6 ITD units during 1999 as compared to an average of 3.6 in 1998, an increase of 28%. The 4% increase in gross margin ratio was largely due to lower startup expenses as compared to 1998, improved processing efficiency in foreign operations and an overall more favorable project mix during 1999. Selling, General and Administrative ("SGA") Expense. SGA expense increased 9% during 1999 due to increased business activity in general (revenue increased 27%). Overall, the average number of management employees remained the same in 1999 as in the prior year. Research & Development Costs ("R&D") Expense. The 1997 R&D expense is primarily the writeoff of acquired research and development based on a valuation of in-process technology that resulted from the acquisition of Parker Drilling Company's 50% interest in OnSite. Amortization of Engineering Design and Developed Technology. Reflects the amortization of Engineering Design and Developed Technology costs, an intangible asset related to the December 1997 acquisition of the remaining 50% interest in OnSite from Parker Drilling. The intangible asset is being amortized over an 8 year estimated economic life. Interest Income. In 1999, we earned interest income from cash surpluses. The reduction in interest income resulted from a lower average cash balance during 1999. Interest Expense. During 1999, $1,455,000 of interest expense was incurred (including amortization of debt issuance costs of $489,000, partly offset by $45,000 of interest capitalized in connection with the first quarter 1999 construction of ITD units), compared to interest expense of $1,159,000 for 1998 (including amortization of debt issuance costs of $489,000, partly offset by $228,000 interest capitalized in connection with the 1998 construction of ITD units). The $296,000 overall increase in interest expense for 1999 was due 10 13 to less interest capitalization in 1999 due to reduced ITD unit construction activity during 1999 as compared to 1998, increased interest expense on two international leases in Colombia, and higher amortization of debt issuance costs as noted above. Income Taxes. The tax provision in 1999 and 1998 primarily relates to foreign income taxes incurred by our wholly-owned subsidiaries in Venezuela, Mexico and Scotland and in our 50%-owned subsidiary in Colombia. We have incurred net operating losses ("NOLs") in the U.S. in recent years, which may be used to offset taxable income reported in future periods. The NOLs and certain foreign tax credits associated with the taxes paid in Colombia have generated deferred tax assets, but due to uncertainties regarding the future realization of these assets, a valuation allowance has been provided for the full amount of the deferred tax assets. We are implementing tax planning strategies, which if successful, may result in our recognizing these deferred tax assets in future periods, which would result in significantly reduced effective tax rates. However, presently there can be no assurances that the NOLs and foreign tax credits will be utilized. Minority (Interest) Income. Minority interest for 1999 and 1998 reflects our 50% minority partner's interest in the net income of OnSite Colombia for each respective year. LIQUIDITY AND CAPITAL RESOURCES We currently have no significant commitments for capital expenditures. During the past three years, we have expended a significant portion of our resources to develop markets and industry awareness of our ITD remediation and recycling/reclamation process technology. Our efforts have been focused primarily on hydrocarbon soil contamination inherent in oil and gas exploration activities. Our efforts to develop markets and produce equipment have required significant amounts of capital, including long-term debt secured by our ITD units and related ITD technology. 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 are currently exploring ways to replace the revenue. During 2000 we experienced a tightening of cash reserves and took actions to delay payments on our senior secured debt. Details of amounts deferred are covered in Note 2 of the Notes to Consolidated Financial Statements included in item 8 of this annual report, and as discussed below. We are currently seeking to obtain service contracts in our served markets and are considering strategic alternatives including the possible sale of all or substantially all of our assets. As part of our strategic plan, in August 2000, we reached an agreement with our primary lenders and holders of our outstanding preferred stock that resulted in a six-month deferment of certain principal, interest and preferred stock dividends, and in March 2001, we negotiated an additional agreement with the same parties that resulted in our continued compliance with covenants provided in our senior secured debt and preferred stock agreements. These agreements provide us with increased financial flexibility to continue our pursuit of new market opportunities. See also Note 14 of the Notes to Consolidated Financial Statements included in item 8 of this annual report, and Subsequent Events below. Our independent accountants PricewaterhouseCoopers LLP have provided us their report which sets forth factors that raise substantial doubt about our ability to continue as a going concern. Our viability as a going concern is dependent on the continued restructuring of our obligations and/or capital infusions, increased utilization of our ITD units, and the achievement of a sustaining level of profitability. There can be no assurances, however, that we will remain in compliance with our obligations, that we will increase ITD utilization or become sufficiently profitable in a time frame necessary to meet our obligations. The functional currency of our foreign operations (Colombia, Venezuela, Mexico, Scotland and the Arabian Gulf region) is the U.S. dollar because customer invoicing, customer receivables, imported equipment and many of the operating cost factors are denominated in U.S. dollars. We plan to continue to implement the same approach as other foreign operations come on line so as to minimize our risks associated with foreign exchange fluctuation and its affect on our profitability. 11 14 ACCOUNTING MATTERS In June 1998 and June 2000, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities" and SFAS No. 138, "Accounting for Certain Derivative Instruments and Certain Hedging Activities," respectively. These statements establish accounting and reporting standards requiring that every derivative instrument be recorded on the balance sheet as either an asset or liability measured at its fair value. SFAS Nos. 133 and 138 also require that changes in the derivative's fair value be recognized currently in earnings unless specific hedge accounting criteria are met. SFAS No.s 133 and 138 are effective for fiscal years beginning after June 15, 2000. We do not currently hold derivative instruments or engage in hedging activities and, accordingly, the adoption of these new standards is not expected to have a material impact on our results of operations or financial position. SUBSEQUENT EVENTS Effective March 1, 2001, we entered into an agreement with our primary lenders and holders of our outstanding preferred stock that resulted in our continued compliance with covenants provided in the senior secured debt and preferred stock agreements and with increased financial flexibility to pursue new market opportunities for our ITD technology. The agreement provides for a three-month deferral of all principal and interest payments (both currently due and previously deferred) due in March on our senior secured debt. At the end of the deferral period, if we are engaged in good faith negotiations for our sale, the sale of a subsidiary, the sale of substantially all of our assets, or the sale of substantially all assets of our subsidiaries, then all deferrals will be extended to July 8, 2001, and from month to month thereafter until the consummation of the financing transaction or the termination of good faith negotiations. Also, we received a three-month deferral on preferred dividends due in March, with a possible continuing deferral on the same basis as the senior secured debt. The agreement was designed to allow us to conserve working capital while strategic plans are being considered and pursued. In exchange for the deferral of senior secured debt and preferred stock dividend payments, the conversion price of the Series D Preferred Stock was reset at the default rate of $0.37 per share (see Notes 4 and 14 of the Notes to Consolidated Financial Statements included in item 8 of this annual report). This change in the conversion price would result in further dilution to our stockholders in the event that the Series D Preferred Stock is converted into our Common Stock. We believe the value attributable to the change in conversion feature should not have a material effect on our financial position, results of operations and cash flows. ITEM 7A.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK We are subject to market risk exposure related to changes in interest rates on our long-term debt facility. These instruments carry interest at a pre-agreed-upon percentage point spread from the prime interest rate. As of December 31, 2000, we had $5.4 million (contractual balance) outstanding under this facility. Based on this balance, an immediate change of one percent in the interest rate would cause a change in interest expense of approximately $54,000 on an annual basis. We are subject to market risk related to fluctuations in the value of the U.S. dollar compared to certain foreign currencies. We have subsidiaries which operate in Colombia, Venezuela, Mexico, Scotland and the Arabian Gulf region. However, the functional currency used by each of these operating units is the U.S. dollar. Substantial portions of these operating units' invoices, customer receivables, imported equipment and operating cost factors are denominated in dollars. We attempt to maintain a balance between assets and liabilities denominated in foreign currencies, however, such foreign currency denominated balances are generally not significant. These factors serve to mitigate the impact on our financial statements associated with foreign exchange fluctuations. A hypothetical 10% fluctuation of the U.S. dollar relative to the currencies of Colombia, Venezuela, Mexico and Scotland would not have materially adversely affected our fiscal year ended December 31, 2000 financial position, results of operations, or cash flows, regardless of the direction of the change in relation to 12 15 the U.S. dollar. Our sensitivity analysis of the effects of changes in foreign currency exchange rates does not factor in a potential change in revenue levels. While we are not a purchaser or producer of crude oil or related products, our customers to date have generally been large multinational oil and gas producing companies which are directly impacted by the fluctuations in the price of crude oil. Decreases in the price of crude oil directly affect our current customers' cash flows and may therefore affect our ability to collect receivables and our ability to generate repeat and new business. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The information required hereunder is included in this report as set forth in the "Table of Contents" on page F-1. ITEM 9.CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE There have been no changes in or disagreements with our independent accountants regarding accounting and financial disclosure matters. PART III ITEM 10.DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT The following table sets forth our directors and executive officers.
NAME AGE POSITION - ---- --- -------- James S. Percell............... 58 Director, Chairman, CEO and President Bryan Sharp.................... 57 Director Albert M. Wolford.............. 79 Director and Secretary David L. Warnock............... 43 Director Ronald L. Bianco............... 54 Chief Financial Officer, Treasurer and Vice-Secretary
Directors are elected annually and hold office until the next annual stockholders meeting or until their successors are elected and qualified. Officers serve at the discretion of our board. There are no family relationships between or among any of our directors and executive officers. BIOGRAPHIES James S. Percell serves as Director, Chairman, CEO and President also serves as President of the our subsidiaries, NFE and OnSite. Mr. Percell became a director and President, CEO and a director of NFE in November, 1995. Mr. Percell became President and CEO of our consolidated company in January, 1996. Mr. Percell also serves as President of Percell & Associates, a project developer of facilities in the hydrocarbon industry. From 1985-1993, Mr. Percell served as Vice-President of Belmont Constructors, Inc., a heavy industrial contractor. From 1982-1984, he served as President of Capital Services Unlimited, an international supply company for refining, petrochemical and oil field compressor stations, modular refineries and modular oilfield components. From 1977-1980, Mr. Percell served as President of Percell & Lowder, Inc., an oilfield fabricator of onshore and offshore facilities, and from 1960-1977, he served as project manager for various onshore and offshore projects. He attended Amarillo College in Amarillo, Texas. Bryan Sharp has served as Director since November, 1995. Mr. Sharp is also a member of our audit committee. Mr. Sharp currently serves as Principal-in-Charge and Director of Espey, Huston & Associates, Inc. ("EH&A"), an environmental consulting company, and from 1990-1993, he served as President of EH&A. Mr. Sharp has also been employed by North Texas State University, the Department of the Interior, and the University of Texas. Mr. Sharp has a B.S. degree in Education from North Texas State University, a 13 16 M.S. degree in Biology from North Texas State University and studied for his Ph.D. in Zoology from The University of Texas at Austin. Albert M. Wolford has served as Director since August 5, 1997. Mr. Wolford is a member of our compensation and audit committees. Mr. Wolford is also our Secretary. Mr. Wolford has been an independent business consultant since 1988. From 1970 to 1988, Mr. Wolford served with Texas United Corporation as a director, a member of the executive committee, senior vice-president, and as the chairman of the executive development and compensation committees. As a senior vice-president of Texas United Corporation, Mr. Wolford served its subsidiaries as president and CEO of Texas United Chemical Corporation, as the chairman, president and CEO of United Salt Corporation, and as the president of American Borate Corporation. He has also served the Texas Chemical Council, an industry trade group, as a director, a member of its executive committee, and as secretary-treasurer. Mr. Wolford served as a member of the executive committee of the Salt Institute, an industry trade group. Mr. Wolford is a graduate of The University of Texas. David L. Warnock has served as Director since December, 1997 in connection with our December, 1997 financing. Mr. Warnock also heads our audit committee, and is a member of our compensation committee. Mr. Warnock is a founding partner of Cahill, Warnock & Company, L.L.C., an asset management firm established in 1995 to invest in small public companies. From 1983 to 1995, Mr. Warnock was with T. Rowe Price Associates in senior management positions including President of the corporate general partner of T. Rowe Price Strategic Partners I and T. Rowe Price Strategic Partners II, and as the Executive Vice-president of T. Rowe Price New Horizons Fund. Mr. Warnock also serves on the Boards of Directors of other companies including Children's Comprehensive Services, Inc., SRB Corporation, and ALLIANCE National Incorporated. Mr. Warnock received a Bachelor of Arts Degree, History, from the University of Delaware and a Masters Degree, Finance, from the University of Wisconsin. Ronald L. Bianco joined us in April 1997 as Chief Financial Officer. Mr. Bianco is presently our CFO, Treasurer and Vice-Secretary. From 1975 through 1991, Mr. Bianco was with Dresser Industries where he served as Controller of Dresser Rand Power in Norway, as Controller for the North America Operations of Dresser Masonelian Valve and in other division and headquarter assignments. From 1992 through 1993, Mr. Bianco was an independent business consultant. From 1994 through 1996, Mr. Bianco served as Chief Financial Officer of SWECO Oilfield Services. Mr. Bianco received his BBA in accounting in 1970 from St. Bonaventure University in Olean, New York, and his MBA in 1983 from Southern Methodist University in Dallas, Texas. CERTAIN SECURITIES FILINGS The Company believes that the reports required by Section 16(a) of the Exchange Act have been filed timely. INFORMATION CONCERNING THE BOARD OF DIRECTORS AND ITS COMMITTEES James S. Percell and Albert M. Wolford are the only directors who also serve as officers. In 1997, our the board established an independent compensation committee whose members are David L. Warnock and Albert Wolford. Also in 1997, our board established an independent audit committee whose present members are David L. Warnock, Bryan Sharp and Albert M. Wolford. We held six meetings of the board during the period covered by the fiscal year ended December 31, 2000. All four Directors were present for at least 75% of the meetings. ITEM 11. EXECUTIVE COMPENSATION DIRECTOR COMPENSATION We do not currently pay any cash director's fees. However, we pay the expenses, if any, of our directors in attending board meetings. In 1998, our board adopted a stock option plan (as detailed below) which included participation in the plan by directors. 14 17 EXECUTIVE COMPENSATION Mr. James Percell became Chief Executive Officer in January, 1996. Our employment contract with Mr. Percell (the "Employment Agreement"), which commenced in April 1997, has a term of three years. The Employment Agreement automatically extends, unless terminated by us or Mr. Percell, for additional successive one year periods after the initial three year term. Mr. Percell's employment contract provides that he receive annual compensation in the amount of $125,000. In November, 1997, the Board of Directors increased Mr. Percell's annual compensation to $250,000, however, during 1998 Mr. Percell agreed to reduce his annual compensation to $180,000. SUMMARY COMPENSATION TABLE
LONG TERM COMPENSATION ------------------------- AWARDS PAYOUTS ---------- ------------ ANNUAL COMPENSATION SECURITIES ------------------------------- RESTRICTED UNDERLYING NAME AND OTHER ANNUAL STOCK OPTIONS/ LTIP ALL OTHER PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION AWARDS SARS PAYOUTS COMPENSATION - ------------------ ---- -------- ----- ------------ ---------- ------------ ------- ------------ James S. Percell....... 2000 $180,000 -0- -0- -0- -0- -0- -0- Chief Executive Officer 1999 $180,000 -0- -0- -0- -0- -0- -0- 1998 $209,167 -0- -0- -0- 201,775 -0- -0-
OPTION/SAR GRANTS IN LAST FISCAL YEAR
POTENTIAL REALIZABLE PERCENT OF TOTAL OPTIONS/ VALUE AT ASSUMED ANNUAL SARS GRANTED TO EMPLOYEES RATES OF STOCK PRICE NUMBER OF -------------------------- APPRECIATION FOR SECURITIES OPTION TERM: NAME AND UNDERLYING GRANTED IN EXERCISE OF ----------------------- PRINCIPAL POSITION OPTIONS/SARS FISCAL YEAR BASE PRICE EXPIRATION DATE 5% 10% - ------------------ ------------ ----------- ------------ --------------- ---------- ---------- "No Options/SAR Grants made during 2000"
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FY-END OPTION SAR VALUES
NUMBER OF SECURITIES VALUE OF UNEXERCISED UNDERLYING UNEXERCISED IN-THE-MONEY SHARES OPTIONS/SARS AT OPTIONS/SARS AT NAME AND ACQUIRED ON VALUE FISCAL YEAR-END FISCAL YEAR-END PRINCIPAL POSITION EXERCISE REALIZED EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE - ------------------ ----------- -------- ------------------------- ------------------------- James S. Percell.............. (*) (*) 1,303,042/0 0/0 Chief Executive Officer
- --------------- (*) Did not exercise any options. 1998 STOCK OPTION PLAN While we have been successful in attracting and retaining qualified personnel, we believe that our future success will depend in part on its continued ability to attract and retain highly qualified personnel. We pay wages and salaries which we believe are competitive. We also believe that equity ownership is an important factor in our ability to attract and retain skilled personnel, and on December 9, 1998, the Board of Directors approved the 1998 Stock Option Plan (the "Plan") which was approved by the Stockholders at our 1999 annual meeting of stockholders. The Plan will allow Incentive Stock Options as determined by the Compensation Committee, or the Board of Directors if there is no compensation committee (the "Committee"). The Board of Directors has reserved 800,000 shares of Common Stock for issuance pursuant to the Plan. The purpose of the Plan is to foster and promote our financial success and increase stockholder value by enabling eligible key employees, directors and consultants to participate in our long-term growth and financial success of the Company. Eligibility. The Plan is open to key employees (including officers and directors) and our consultants and affiliates ("Eligible Persons"). 15 18 Transferability. The grants are not transferrable. Changes in Capital Structure. The Plan will not effect our right to authorize adjustments, recapitalizations, reorganizations or other changes in our capital structure. In the event of an adjustment, recapitalization or reorganization the award shall be adjusted accordingly. In the event of a merger, consolidation, or liquidation, the Eligible Person will be eligible to receive a like number of shares of stock in the new entity. The board may waive any limitations imposed under the Plan so that all options are immediately exercisable. Options. The Plan provides for both Incentive and Nonqualified Stock Options. Option price. Incentive options shall be not less than the greater of (i) 100% of fair market value on the date of grant, or (ii) the aggregate par value of the shares of stock on the date of grant. The Compensation Committee, at its option, may provide for a price greater than 100% of fair market value. The price for Incentive Stock Options for Stockholders owning 10% or more of our shares ("10% Stockholders") shall be not less than 110% of fair market value. Amount exercisable-incentive options. In the event an Eligible Person exercises incentive options during the calendar year whose aggregate fair market value exceeds $100,000, the exercise of options over $100,000 will be considered non qualified stock options. Duration. No option may be exercisable after the expiration date as set forth in the option agreement. Exercise of Options. Options may be exercised by written notice to our President with: (i) cash, certified check, bank draft, or postal or express money order payable to Environmental Safeguards, Inc. for an amount equal to the option price of the shares; (ii) stock at its fair market value on the date of exercise; (iii) an election to make a cashless exercise through a registered broker-dealer (if approved in advance by the Compensation Committee); (iv) an election to have shares of stock, which otherwise would be issued on exercise, withheld in payment of the exercise price (if approved in advance by the Compensation Committee); and/or (v) any other form of payment which is acceptable to the Compensation Committee, including without limitation, payment in the form of a promissory note, and specifying the address to which the certificates for the shares are to be mailed. Termination of Options. Termination of Employment. Any Option which has not vested at the time the Optionee ceases continuous employment for any reason other than death, disability or retirement shall terminate upon the last day that the Optionee is employed by us. Incentive Stock Options must be exercised within three months of cessation of Continuous Service for reasons other than death, disability or retirement in order to qualify for Incentive Stock Option tax treatment. Nonqualified Options may be exercised any time during the Option Period regardless of employment status. Death. Unless the Option expires sooner, the Option will expire one year after the death of the Eligible Person. Disability. Unless the Option expires sooner, the Option will expire one year after the disability of the Eligible Person. Retirement. Any Option which has not vested at the time the Optionee ceases continuous employment due to retirement shall terminate upon the last day that the Optionee is employed by us. Upon retirement Incentive Stock Options must be exercised within three months of cessation of Continuous Service in order to qualify for Incentive Stock Option tax treatment. Nonqualified Options may be exercised any time during the Option Period regardless of employment status. 16 19 Amendment or Termination of the Plan. The Committee may amend, terminate or suspend the Plan at any time, in its sole and absolute discretion; provided, however, that to the extent required to qualify the Plan under Rule 16b-3 promulgated under Section 16 of the Exchange Act, no amendment that would (a) materially increase the number of shares of stock that may be issued under the Plan, (b) materially modify the requirements as to eligibility for participation in the Plan, or (c) otherwise materially increase the benefits accruing to participants under the Plan, shall be made without the approval of our Stockholders; provided further, however, that to the extent required to maintain the status of any incentive option under the Code, no amendment that would (a) change the aggregate number of shares of stock which may be issued under incentive options, (b) change the class of employees eligible to receive incentive options, or (c) decrease the option price for incentive options below the fair market value of the stock at the time it is granted, shall be made without the approval of the Stockholders. Subject to the preceding sentence, the Board shall have the power to make any changes in the Plan and in the regulations and administrative provisions under it or in any outstanding incentive option as in the opinion of our counsel may be necessary or appropriate from time to time to enable any incentive option granted under this Plan to continue to qualify as an incentive stock option or such other stock option as may be defined under the Code so as to receive preferential federal income tax treatment. No amendment, suspension or termination of the Plan shall act to impair or extinguish rights in Options already granted at the date of such amendment, suspension or termination. OPTIONS GRANTED UNDER 1998 STOCK OPTION PLAN The following sets forth the options granted under our 1998 Stock Option Plan:
NAME AND POSITION DOLLAR VALUE(1) NUMBER OF OPTIONS - ----------------- --------------- ----------------- James S. Percell, CEO................................. $210,937 125,000 Executive Group....................................... $210,937 125,000 Non-executive Director Group.......................... $101,250 60,000 Non-executive Officer Employee Group.................. $611,720 362,500
- --------------- (1) Dollar value was calculated based on the exercise price of $1.6875, which was also the market value per share on the date of the grants. 17 20 STOCK PRICE PERFORMANCE GRAPH The performance graph as set forth below compares the cumulative total stockholder return of our Common Stock from December 31, 1995 through December 31, 2000, with Standard & Poors 500 Index (our Broad Market Index) and with Standard & Poors Oil Composite Index (our Peer Group Index). The graph assumes that the value of the investment in our Common Stock and each index was $100 on December 31, 1995, and that all dividends, if any, were reinvested. The comparisons in this table are not intended to forecast or be indicative of possible future price performance. COMPARISON OF FIVE YEAR CUMULATIVE TOTAL RETURN OF ENVIRONMENTAL SAFEGUARDS, INC., THE S&P 500 INDEX (BROAD MARKET INDEX), AND THE S&P OIL COMPOSITE INDEX (PEER GROUP INDEX) [PERFORMANCE GRAPH]
- -------------------------------------------------------------------------------- 1995 1996 1997 1998 1999 2000 - -------------------------------------------------------------------------------- Environmental Safeguards, Inc 100 364 379 152 98 23 Broad Market Index 100 120 157 200 238 214 Peer Group Index 100 120 143 152 174 184
18 21 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The following table sets forth certain information as of March 28, 2001, with respect to the beneficial ownership of shares of Common Stock by (i) each person who is known by us to beneficially own more than 5% of the outstanding shares of Common Stock, (ii) each of our directors, (iii) each of our executive officers, and (iv) all executive officers and directors as a group. Unless otherwise indicated, each stockholder has sole voting and investment power with respect to the shares shown.
NUMBER OF SHARES PERCENT OF NAME OWNED(1) CLASS CLASS SECURITIES - ---- --------- ---------- ---------------- James S. Percell...................................... 1,486,960(2) 13.0% Common Stock 2600 South Loop West, Ste #645 Houston, Texas 77054 Bryan Sharp........................................... 1,132,264(3)(11) 10.1% Common Stock 3200 Wilcrest, #200 Houston, Texas 77042 Albert M. Wolford..................................... 109,346(4)(11) 1.1% Common Stock 2600 South Loop West, Ste #645 Houston, Texas 77054 David L. Warnock...................................... 7,592,745(5)(6)(7)(11) 42.9% Common Stock One South Street, Ste #2150 Baltimore, Maryland 21202 Edward L. Cahill...................................... 7,572,745(5)(6)(7) 42.8% Common Stock One South Street, Ste #2150 Baltimore, Maryland 21202 Cahill, Warnock Strategic Partners Fund, L.P.......... 7,572,745(5)(6)(7) 42.8% Common Stock One South Street, Ste #2150 Baltimore, Maryland 21202 Strategic Associates, L.P............................. 7,572,745(5)(6)(7) 42.8% Common Stock One South Street, Ste #2150 Baltimore, Maryland 21202 Cahill, Warnock & Company, L.L.C. .................... 7,572,745(5)(6)(7) 42.8% Common Stock One South Street, Ste #2150 Baltimore, Maryland 21202 Cahill, Warnock Strategic Partners, L.P............... 7,572,745(5)(6)(7) 42.8% Common Stock One South Street, Ste #2150 Baltimore, Maryland 21202 Ronald L. Bianco...................................... 119,516(9) 1.2% Common Stock 2600 South Loop West, Ste #645 Houston, Texas 77054 Newpark Resources, Inc. .............................. 6,815,484(6)(8)(10) 40.3% Common Stock 3850 N. Causeway, Ste #1770 Metairie, LA 70002-1756 Nadia, L.L.C. ........................................ 593,500 5.9% Common Stock Grosvenot Trust Co. 33 Church Street Hamilton, Bermuda All officers and directors as a Group (5 persons)..... 10,440,831 51.4% Common Stock
- --------------- (1) Under the rules of the Securities and Exchange Commission (the "Commission"), a person who directly or indirectly has or shares voting power or investment power with respect to a security is considered a beneficial owner of the security. Voting power is the power to vote or direct the voting of shares, and investment power is the power to dispose of or direct the disposition of shares. Shares as to which voting power or investment power may be acquired within 60 days are also considered as beneficially owned under the Commission's rules and are, accordingly, included as shares beneficially owned. 19 22 (2) Includes an option to purchase 800,000 shares of our Common Stock at $0.60 per share, and options to purchase 378,022 shares of our Common Stock at $1.44 per share. Also includes an option to purchase 125,000 shares of our Common Stock at $1.69 per share. These options are fully vested and immediately exercisable. (3) Includes an option to purchase 800,000 shares of our Common Stock at $0.60 per share, an option to purchase 301,267 shares of our Common Stock at $3.00 per share, and an option to purchase 10,997 shares of our Common Stock at $5.00 per share. These options are fully vested and immediately exercisable. (4) Includes options to purchase 43,346 shares of our Common Stock at $1.44 per share. These options are fully vested and immediately exercisable. (5) Includes 1,722,900 shares of Series B Convertible Preferred Stock and warrants to purchase 513,572 shares of our Common Stock at $0.01 per share issued to Cahill, Warnock Strategic Partners Fund, L.P. ("Cahill Warnock Fund"), whose sole general partner is Cahill, Warnock Strategic Partners, L.P. ("Cahill Warnock Partners"). In addition, includes 95,464 shares of Series B Convertible Preferred Stock and warrants to purchase 28,457 shares of our Common Stock at $0.01 per share issued to Strategic Associates, L.P. ("Strategic Associates"), whose sole general partner is Cahill, Warnock & Company, L.L.C. ("Cahill Warnock"). Each share of Series B Convertible Preferred Stock is immediately convertible into one share of our Common Stock, subject to adjustment under certain conditions. The warrant is fully vested and immediately exercisable. David L. Warnock and Edward L. Cahill are the sole general partners of Cahill Warnock Partners and the sole members of Cahill Warnock. David L. Warnock and Edward L. Cahill are control persons of Cahill Warnock Fund, Cahill Warnock Partners, Strategic Associates, and Cahill Warnock. David L. Warnock, Edward L. Cahill, Cahill Warnock Fund, Cahill Warnock Partners, Strategic Associates and Cahill Warnock have shared voting power and shared dispositive power of these shares and each disclaim beneficial ownership of the shares and warrants, except with respect to their pecuniary interest therein, if any. (6) Not included herein are warrants for up to a total of 188,571 shares of our Common Stock which are issuable if loans made pursuant to the Loan Agreement are not repaid in full by December 17, 2001. (7) Includes 4,938,703 shares of our Common Stock which would arise upon the conversion of 182,732 shares of our Series D Convertible Preferred Stock, issued to the Cahill Warnock Fund, whose sole general partner is Cahill Warnock Partners. Also includes 273,649 shares of our Common Stock which would arise upon the conversion of 10,125 shares of our Series D Convertible Preferred Stock, issued to Strategic Associates, whose sole general partners is Cahill Warnock. These Preferred shares are immediately convertible into our Common Stock. (8) Includes 5,405,405 shares of our Common Stock which would arise upon the conversion of 200,000 shares of our Series D Convertible Preferred Stock, issued to Newpark Resources, Inc.. These Preferred shares are immediately convertible into our Common Stock. (9) Includes an option to purchase 69,516 shares of our Common Stock at $1.44 per share. Also includes an option to purchase 50,000 shares of our Common Stock at $1.69 per share. These options are fully vested and immediately exercisable. (10) Includes 847,975 shares of Series B Convertible Preferred Stock which are immediately convertible into shares of Common Stock. The number of shares of Common Stock into which each share of Preferred Stock may be converted is presently one share of Common Stock for each share of Series B Convertible Preferred Stock, subject to adjustment under certain conditions. Also includes warrants to purchase 562,104 shares of our Common Stock at $0.01 per share. The warrant is fully vested and immediately exercisable. (11) Also includes an option to purchase 20,000 shares of our Common Stock at $1.69 per share. These options are fully vested and immediately exercisable. We know of no arrangement or understanding which may at a subsequent date result in a change of control. 20 23 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS RELATED TRANSACTIONS Our Board of Directors has adopted a policy that our affairs will be conducted in all respects by standards applicable to publicly-held corporations and that we will not enter into any transactions and/or loans between us and our officers, directors and 5% stockholders unless the terms are no less favorable than could be obtained from independent, third parties and will be approved by a majority of our independent, disinterested directors. In December, 1997, we sold $8,000,000 of new Series B Convertible Preferred Stock and Series C Preferred Stock to an investor group ("Investor Group") consisting of Cahill, Warnock Strategic Partners Fund, L.P., Strategic Associates, L.P., Newpark Resources, Inc. and James H. Stone, who is the Chairman of Stone Energy Corporation, and we obtained a loan of $6,000,000 from the same investor group. Pursuant to this financing, David L. Warnock, a member of Cahill, Warnock & Co., which is the general partner of Cahill, Warnock Strategic Partners Fund, L.P., was appointed a Director. Subsequently, in June, 1998, we obtained an additional loan of $5,000,000 from the same investor group. In December, 1998, we and an investor formed OnSite Arabia, Inc. ("OnSite Arabia"), a Cayman Island company for the purpose of providing environmental remediation, reclamation and recycling services in Saudi Arabia, Qatar, Yemen, the United Arab Emirates, Bahrain, Kuwait and Oman. We own 50% of OnSite Arabia. Concurrent with the formation of OnSite Arabia, we sold 500,000 shares of our Common Stock in a private placement to an investor who is an affiliate of an investor in OnSite-Arabia, Inc. at a purchase price of $1.50 per share for total cash consideration of $750,000. In December 1998, we redeemed 1,037,736 shares of our Series B Convertible Preferred stock from a related party, Newpark Resources, Inc. ("Newpark"), a New York Stock Exchange listed company, in consideration for certain receivables due to us from Newpark. This transaction had the combined effect of reducing our working capital and stockholders' equity by approximately $1,100,000, and a reduction in common stock equivalents of 1,037,736 shares on a fully diluted basis. After the 1,037,736 share redemption, Newpark continues to hold 847,975 shares of our Series B Convertible Preferred stock. In August 2000, as part of a plan to deal with liquidity issues, we obtained a six-month deferral for payment of the quarterly installment on our long-term debt of $692,623 including interest, that was due September 4, 2000, a six-month deferral for payment of the principal-only portion of the quarterly installment on our long-term debt that was due December 4, 2000 in the amount of $540,642 and a six-month deferral for payment of the dividend on Series D preferred stock that was due October 1, 2000 in the amount of $112,444. In order to obtain the deferrals, we exchanged 400,000 newly issued shares of Series D convertible Preferred Stock for all issued shares of Series C non-convertible Preferred Stock held by our primary lender. The conversion feature associated with the 400,000 shares of Series D Preferred Stock was valued at $168,000 based on an independent appraisal. The value of the conversion feature, representing unaccreted discount, is being amortized to expense over the remaining fifteen-month term of the debt using the effective interest method. Effective March 5, 2001, we entered into an agreement (the "Agreement") with our primary lenders and holders of our outstanding preferred stock that provided us with increased financial flexibility to continue our pursuit of new market opportunities. The Agreement provides for a three-month deferral of all principal and interest payments (both currently due and previously deferred) due in March on our senior secured debt. At the end of the deferral period, if we are engaged in good faith negotiations for our sale, the sale of one of our subsidiaries, the sale of substantially all of one of our subsidiary's assets, or the sale of substantially all assets of our subsidiaries ("Financing Transaction"), then all deferrals will be extended to July 8, 2001 and from month to month thereafter until the consummation of the Financing Transaction or the termination of good faith negotiations. Also, we received a three-month deferral of preferred dividends due in March, with a possible continuing deferral on the same basis as the senior secured debt. The Agreement was designed to allow us to conserve working capital while strategic plans are being considered. In exchange for the deferral of senior secured debt and preferred stock dividend payments, the conversion price of the Series D Preferred Stock was reset at the default rate or $0.37 per share. This change in the 21 24 conversion price results in further dilution to our stockholders. We believe the value attributable to the change in conversion feature should not have a material effect on our financial position, results of operations or cash flows. ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (A) Financial Statements Reports of Independent Accountants/Auditors Consolidated Balance Sheet as of December 31, 2000 and 1999. Consolidated Statement of Operations for the years ended December 31, 2000, 1999 and 1998. Consolidated Statement of Stockholders' Equity for the years ended December 31, 2000, 1999 and 1998. Consolidated Statement of Cash Flows for the years ended December 31, 2000, 1999 and 1998. Notes to Consolidated Financial Statements. (B) Exhibits
EXHIBIT NUMBER DESCRIPTION ------- ----------- 3.1* -- Certificate of Incorporation of the Registrant, as amended. 3.2* -- Bylaws of the Registrant. 4.1* -- See Exhibits 3.1 and 3.2. for provisions of the Articles of Incorporation and Bylaws of the Registrant defining rights of holders of common stock of the Registrant. 4.2* -- Common Stock specimen. 4.3.1** -- Certificate of Designation, Preferences, Rights and Limitations of Series B Convertible Preferred Stock. 4.3.2** -- Certificate of Designation, Preferences, Rights and Limitations of Series C Preferred Stock. 4.3.3***** -- Certificate of Designation, Preferences, Rights and Limitations of Series D Convertible Preferred Stock. 4.4* -- Form of Warrant Certificate dated December 17, 1997 (Included in Exhibit 4.8). 4.5* -- Form of Registration Rights Agreement pursuant to Private Placement Memorandum dated September 18, 1996. 4.6* -- Form of Registration Rights Agreement dated December 17, 1997, between the Company and Cahill, Warnock Strategic Partners Fund, L.P., Strategic Associates, L.P., Newpark Resources, Inc. and James H. Stone. 4.7* -- Form of Warrant Agreement dated December 17, 1997, between the Company and Cahill, Warnock Strategic Partners Fund, L.P., Strategic Associates, L.P., Newpark Resources, Inc. and James H. Stone. 4.8*** -- Form of Registration Rights Agreement dated December 7, 1998. 10.1.1***** -- Agreement in Principal dated August 17, 2000. 10.1.2****** -- Agreement dated March 1, 2001. 10.2* -- Loan and Security Agreement dated December 17, 1997 by and among the Company, National Fuel & Energy, and OnSite Technology, L.L.C. as Borrowers and Cahill, Warnock Strategic Partners Fund, L.P., Strategic Associates, L.P., Newpark Resources, Inc. and James H. Stone, as Lenders.
22 25
EXHIBIT NUMBER DESCRIPTION ------- ----------- 10.3* -- Form of Registration Rights Agreement pursuant to Private Placement Memorandum dated September 18, 1996. 10.4* -- Form of Registration Rights Agreement dated December 17, 1997, between the Company and Cahill, Warnock Strategic Partners Fund, L.P., Strategic Associates, L.P., Newpark Resources, Inc. and James H. Stone. 10.5* -- Form of Warrant Agreement dated December 17, 1997, between the Company and Cahill, Warnock Strategic Partners Fund, L.P., Strategic Associates, L.P., Newpark Resources, Inc. and James H. Stone. 10.6* -- Employment Agreement of James S. Percell. 10.7**** -- 1998 Stock Option Plan 21.1* -- Subsidiaries
- --------------- * Previously filed as an exhibit to the Company's Annual Report on Form 10-KSB as amended for the fiscal year ended December 31, 1997, and incorporated by reference thereto. ** Previously filed as an exhibit to the Company's Current Report on Form 8-K dated December 17, 1997 and filed December 30, 1997, and incorporated herein by reference thereto. *** Previously filed with Form S-3 as amended effective Feb. 8, 1999. **** Previously filed as an exhibit to the Company's Annual Report on Form 10-KSB as amended for the fiscal year ended December 31, 1998, and incorporated by reference thereto. ***** Previously filed as an exhibit to the Company's Current Report on Form 8-K dated August 17, 2000, and filed August 28, 2000, and incorporated herein by reference thereto. ****** Previously filed as an exhibit to the Company's Current Report on Form 8-K dated March 1, 2001, and filed March 6, 2001, and incorporated herein by reference thereto. (C) Reports on Form 8-K None 23 26 SIGNATURES In accordance with the requirements of Section 13 of 15(d) of the Exchange Act, the Registrant has caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on March 28, 2001. ENVIRONMENTAL SAFEGUARDS, INC. By: /s/ JAMES S. PERCELL ---------------------------------- James S. Percell Director, Chairman of the Board, Chief Executive Officer and President Pursuant to the requirements of the Exchange Act, this report has been signed below by the following persons in the capacities and on the dates indicated:
SIGNATURE TITLE DATE --------- ----- ---- /s/ JAMES S. PERCELL Director, Chairman of the March 28, 2001 - ----------------------------------------------------- Board, Chief Executive James S. Percell Officer and President /s/ BRYAN SHARP Director March 28, 2001 - ----------------------------------------------------- Bryan Sharp /s/ ALBERT WOLFORD Director and Secretary March 28, 2001 - ----------------------------------------------------- Albert Wolford /s/ DAVID L. WARNOCK Director March 28, 2001 - ----------------------------------------------------- David L. Warnock /s/ RONALD L. BIANCO Chief Financial Officer, March 28,2001 - ----------------------------------------------------- Treasurer and Vice- Ronald L. Bianco Secretary
24 27 ENVIRONMENTAL SAFEGUARDS, INC. --------------------- CONSOLIDATED FINANCIAL STATEMENTS WITH REPORTS OF INDEPENDENT ACCOUNTANTS FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998 28 ENVIRONMENTAL SAFEGUARDS, INC. TABLE OF CONTENTS
PAGE ---- Reports of Independent Accountants.......................... F-2 Audited Financial Statements Consolidated Balance Sheet as of December 31, 2000 and 1999................................................... F-4 Consolidated Statement of Operations for the years ended December 31, 2000, 1999 and 1998....................... F-5 Consolidated Statement of Stockholders' Equity for the years ended December 31, 2000, 1999 and 1998........... F-6 Consolidated Statement of Cash Flows for the years ended December 31, 2000, 1999 and 1998....................... F-7 Notes to Consolidated Financial Statements.................. F-8
F-1 29 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Stockholders Environmental Safeguards, Inc. In our opinion, the accompanying consolidated balance sheet and the related consolidated statement of operations, stockholders' equity and cash flows present fairly, in all material respects, the financial position of Environmental Safeguards, Inc. as of December 31, 2000 and 1999, and the consolidated results of their operations and their cash flows for each of the two years in the period ended December 31, 2000 in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 2 to the consolidated financial statements, the Company has incurred recurring losses from operations, has a net working capital deficiency and has modified the terms of its long-term debt obligations and obligations to its preferred shareholders. In addition, the Company has not generated significant business backlog to supplement expiring contracts in 2000. These factors, and the Company's ability to honor its long-term obligations and Preferred Stock agreements, raise substantial doubt about the Company's ability to continue as a going concern. Management's plans in regard to these matters are also described in Note 2. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty. PRICEWATERHOUSECOOPERS LLP Houston, Texas March 19, 2001 F-2 30 REPORT OF INDEPENDENT AUDITORS Board of Directors and Stockholders Environmental Safeguards, Inc. We have audited the accompanying consolidated statements of operations, stockholders' equity and cash flows of Environmental Safeguards, Inc. for the year ended December 31, 1998. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated results of operations and cash flows of Environmental Safeguards, Inc. for the year ended December 31, 1998 in conformity with accounting principles generally accepted in the United States. ERNST & YOUNG, LLP Houston, Texas March 24, 1999 F-3 31 ENVIRONMENTAL SAFEGUARDS, INC. CONSOLIDATED BALANCE SHEET (IN THOUSANDS, EXCEPT SHARE AMOUNTS)
DECEMBER 31, ----------------- 2000 1999 ------- ------- ASSETS Current assets: Cash and cash equivalents................................. $ 3,068 $ 1,944 Accounts receivable....................................... 1,023 3,579 Prepaid expenses.......................................... 66 87 Deferred taxes............................................ 30 33 Other assets.............................................. 9 76 ------- ------- Total current assets.............................. 4,196 5,719 Property and equipment, net................................. 8,929 10,835 Acquired engineering design and technology, net of accumulated amortization of $1,240 and $832 as of December 31, 2000 and 1999, respectively........................... 2,019 2,427 Other assets................................................ 9 9 ------- ------- Total assets...................................... $15,153 $18,990 ======= ======= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Current portion of long-term debt......................... $ 2,945 $ 2,098 Accounts payable.......................................... 156 667 Dividends payable......................................... 225 101 Accrued interest.......................................... 220 50 Other accrued liabilities................................. 688 621 Income taxes payable...................................... 220 618 ------- ------- Total current liabilities......................... 4,454 4,155 Long-term debt.............................................. 2,163 4,325 Minority interest........................................... 2,872 3,554 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 C non-convertible, non-voting, cumulative; $.001 par value (aggregate liquidation value -- $4,000); 400,000 shares authorized, issued and outstanding as of December 31, 1999.................... -- 1 Preferred stock; Series D convertible, non-voting, cumulative $.001 par value (aggregate liquidation value $4,000); 400,000 shares authorized, issued and outstanding as of December 31, 2000.................... 1 -- Common stock; $.001 par value; 50,000,000 shares authorized; 10,112,144 shares issued and outstanding... 10 10 Additional paid-in capital................................ 14,935 14,329 Accumulated deficit....................................... (9,285) (7,387) ------- ------- Total stockholders' equity........................ 5,664 6,956 ------- ------- Total liabilities and stockholders' equity........ $15,153 $18,990 ======= =======
The accompanying notes are an integral part of these consolidated financial statements. F-4 32 ENVIRONMENTAL SAFEGUARDS, INC. CONSOLIDATED STATEMENT OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
YEAR ENDED DECEMBER 31, --------------------------- 2000 1999 1998 ------- ------- ------- Revenue..................................................... $11,250 $13,514 $10,672 Cost of revenue............................................. 6,031 6,197 5,378 ------- ------- ------- Gross margin.............................................. 5,219 7,317 5,294 Selling, general and administrative expenses................ 3,711 3,741 3,435 Amortization of acquired engineering design and technology................................................ 408 408 407 Research and development.................................... 71 70 48 ------- ------- ------- Income from operations............................ 1,029 3,098 1,404 Other income (expenses): Interest income........................................... 28 130 290 Interest expense.......................................... (1,018) (1,455) (1,159) Other..................................................... 105 61 17 ------- ------- ------- Income before provision for income taxes and minority interest.................................................. 144 1,834 552 Provision for income taxes.................................. 1,117 1,396 756 ------- ------- ------- Income (loss) before minority interest...................... (973) 438 (204) Minority interest........................................... (489) (921) (595) ------- ------- ------- Net loss.................................................... $(1,462) $ (483) $ (799) ======= ======= ======= Net loss applicable to common stockholders.................. $(1,945) $(1,244) $(1,572) ======= ======= ======= Basic and dilutive net loss per share....................... $ (0.19) $ (0.12) $ (0.17) ======= ======= ======= Weighted average shares outstanding (basic and dilutive).... 10,112 10,102 9,495 ======= ======= =======
The accompanying notes are an integral part of these consolidated financial statements. F-5 33 ENVIRONMENTAL SAFEGUARDS, INC. CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (IN THOUSANDS, EXCEPT SHARE AMOUNTS)
TOTAL SERIES B SERIES C SERIES D UNISSUED ADDITIONAL STOCK- PREFERRED PREFERRED PREFERRED COMMON COMMON PAID-IN ACCUMULATED HOLDERS' STOCK STOCK STOCK STOCK STOCK CAPITAL DEFICIT EQUITY --------- --------- --------- ------ -------- ---------- ----------- -------- BALANCE AS OF JANUARY 1, 1998.... $ 4 $ 1 $-- $ 9 $ 56 $14,459 $(5,323) $ 9,206 Issuance of common stock for agreements reached in 1995 (40,179 shares)................ -- -- -- -- (56) 56 -- -- Exercise of stock options (270,000 shares)............... -- -- -- -- -- 162 -- 162 Cancellation of Series B Preferred stock in exchange for accounts receivable from an affiliate (1,037,736 shares) (Note 11)...................... (1) -- -- -- -- (1,099) -- (1,100) Issuance of common stock for cash (500,000 shares)............... -- -- -- 1 -- 740 -- 741 Dividends on Series C preferred stock.......................... -- -- -- -- -- -- (397) (397) Net loss......................... -- -- -- -- -- -- (799) (799) --- --- --- --- ---- ------- ------- ------- BALANCE AS OF DECEMBER 31, 1998........................... 3 1 -- 10 -- 14,318 (6,519) 7,813 Exercise of stock options (19,700 shares)........................ -- -- -- -- -- 11 -- 11 Dividends on Series C preferred stock.......................... -- -- -- -- -- -- (385) (385) Net loss......................... -- -- -- -- -- -- (483) (483) --- --- --- --- ---- ------- ------- ------- BALANCE AS OF DECEMBER 31, 1999........................... $ 3 $ 1 $-- $10 $ -- $14,329 $(7,387) $ 6,956 Issuance of 417,066 warrants to purchase common stock in connection with senior secured notes payable (Note 4)......... -- -- -- -- -- 438 -- 438 Issuance of Series D Preferred Stock in exchange for Series C Preferred Stock (Note 7)....... -- (1) 1 -- -- 168 -- 168 Dividends of $287 and $149 on Series C and Series D Preferred Stock, respectively............ -- -- -- -- -- -- (436) (436) Net loss......................... -- -- -- -- -- -- (1,462) (1,462) --- --- --- --- ---- ------- ------- ------- BALANCE AS OF DECEMBER 31, 2000........................... $ 3 $-- $ 1 $10 $ -- $14,935 $(9,285) $ 5,664 === === === === ==== ======= ======= =======
The accompanying notes are an integral part of these consolidated financial statements. F-6 34 ENVIRONMENTAL SAFEGUARDS, INC. CONSOLIDATED STATEMENT OF CASH FLOWS (IN THOUSANDS)
YEAR ENDED DECEMBER 31, --------------------------- 2000 1999 1998 ------- ------- ------- Cash flows from operating activities: Net loss.................................................. $(1,462) $ (483) $ (799) Adjustment to reconcile net loss to net cash provided by (used in) operating activities: Minority interest...................................... 489 921 595 Deferred tax expense................................... 3 18 34 Depreciation expense................................... 2,245 1,814 1,208 Amortization of acquired engineering design and technology........................................... 408 408 407 Amortization of discount............................... 372 522 0 Changes in operating assets and liabilities: Accounts receivable.................................. 2,491 (1,845) (1,280) Equipment held for sale.............................. -- 545 (1,546) Prepaid expenses and other assets.................... 88 371 (98) Accounts payable..................................... (511) 39 148 Accrued liabilities.................................. 237 203 203 Income taxes payable................................. (398) 556 (463) ------- ------- ------- Net cash provided by (used in) operating activities...................................... 3,962 3,069 (1,591) ------- ------- ------- Cash flows from investing activities: Purchases of property and equipment....................... (274) (1,835) (2,435) ------- ------- ------- Net cash used in investing activities............. (274) (1,835) (2,435) ------- ------- ------- Cash flows from financing activities: Net proceeds from long-term debt and convertible debentures............................................. -- -- 5,000 Payments on long-term debt................................ (1,081) (2,470) (1,590) Payments on capital lease obligations..................... -- (648) (1,484) Net proceeds from sale of common stock, preferred stock, stock warrants and stock options....................... -- 11 903 Dividends paid on Series C and Series D preferred stock... (312) (385) (397) Distribution to minority interest......................... (1,171) (590) (300) ------- ------- ------- Net cash provided by (used in) financing activities...................................... (2,564) (4,082) 2,132 ------- ------- ------- Net increase (decrease) in cash and cash equivalents........ 1,124 (2,848) (1,894) Cash and cash equivalents, beginning of year................ 1,944 4,792 6,686 ------- ------- ------- Cash and cash equivalents, end of year...................... $ 3,068 $ 1,944 $ 4,792 ======= ======= ======= Supplemental disclosure of cash flow information: Cash paid for interest.................................... $ 476 $ 1,469 $ 1,120 ======= ======= ======= Cash paid for income taxes................................ $ 1,515 $ 840 $ 1,185 ======= ======= =======
The accompanying notes are an integral part of these consolidated financial statements. F-7 35 ENVIRONMENTAL SAFEGUARDS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES Environmental Safeguards, Inc. (the "Company") provides environmental remediation and hydrocarbon reclamation/recycling services principally to oil and gas companies, using proprietary Indirect Thermal Desorption ("ITD") technology. To date the primary service offered by the Company has been the remediation of soil contaminated by oil-based drill cuttings and the subsequent recovery of diesel and synthetic oils. Principles of Consolidation The consolidated financial statements include the accounts of the Company and its majority owned or controlled subsidiaries after elimination of all significant intercompany accounts and transactions. Management Estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. These estimates mainly involve the useful lives of property and equipment, the valuation of deferred tax assets and the realizability of accounts receivable. Research and Development Research and development activities are expensed as incurred, including costs relating to patents or rights which may result from such expenditures. Revenue Recognition Revenue is recognized at the time services are performed, or in the event of the sale of an ITD unit, when the equipment is shipped. Concentrations of Credit Risk Financial instruments which subject the Company to concentrations of credit risk include cash and cash equivalents and accounts receivable. The Company maintains its cash and cash equivalents with major financial institutions selected based upon management's assessment of the banks' financial stability. Balances periodically exceed the $100,000 federal depository insurance limit. The Company has not experienced any losses on deposits. Accounts receivable generally arise from sales of services to customers operating in the United States, the United Kingdom and Latin America. Security and/or a parent company guarantee is often required for credit granted. As of December 31, 2000, all of the Company's trade receivables were due from two customers for services performed in Latin America (Mexico and Colombia). As of December 31, 1999, essentially all of the Company's trade receivables were due from three customers for services performed in Latin America (Mexico, Colombia and Venezuela) and from a private company operating and headquartered in the United Kingdom. The Company has in place insurance to cover certain exposure in its foreign operations and provides allowances for potential credit losses if necessary. Cash Equivalents The Company considers all short-term investments with an original maturity of three months or less when purchased to be cash equivalents. F-8 36 ENVIRONMENTAL SAFEGUARDS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) On Site Colombia, Inc., a 50% owned joint Company has dividend restriction that would preclude the Company from receiving 50% of cash and cash equivalents. As of December 31, 2000 and 1999, the Company's financial statements include $1,631,000 and $1,328,000 of cash and cash equivalents attributable to OnSite Colombia, Inc. Property and Equipment Property and equipment is stated at cost. Depreciation is computed using the straight-line method over estimated useful lives of 5 years for ITD units and 3 to 5 years for office furniture and equipment and transportation and other equipment. Additions or improvements that increase the value or extend the life of an asset are capitalized. Expenditures for normal maintenance and repairs are expensed as incurred. Disposals are removed from the accounts at cost less accumulated depreciation and any gain or loss from disposition is reflected in operations currently. Income Taxes The Company uses the liability method in accounting for income taxes. Under this method, deferred tax assets and liabilities are determined based on differences between financial reporting and income tax carrying amounts of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. A valuation allowance, if necessary, is provided against deferred tax assets, based upon management's assessment as to their realization. Stock-Based Compensation Financial Accounting Standard No. 123, "Accounting for Stock-Based Compensation" ("SFAS No. 123") established financial accounting and reporting standards for stock-based employee compensation plans. It defined a fair value based method of accounting for an employee stock option or similar equity instrument and encouraged all entities to adopt that method of accounting for all of their employee stock compensation plans and include the cost in the income statement as compensation expense. However, it also allows an entity to continue to measure compensation cost for those plans using the intrinsic value based method of accounting prescribed by Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees." The Company accounts for compensation cost for stock option plans in accordance with APB Opinion No. 25. Acquired Engineering Design and Technology Acquired engineering design and technology represents the intangible value associated with certain proprietary equipment and process designs acquired by the Company in the acquisition of OnSite Technology, L.L.C. ("OnSite") in 1997. In the acquisition of OnSite, the purchase price was allocated to the assets acquired and liabilities assumed based on independent appraisal. This intangible asset is being amortized over an estimated useful life of 8 years using the straight-line method. Impairment of Long-Lived Assets In the event facts and circumstances indicate the carrying value of a long-lived asset, including associated intangibles, may be impaired, an evaluation of recoverability is performed by comparing the estimated future undiscounted cash flows associated with the asset to the asset's carrying amount to determine if a write-down to market value or discounted cash flow is required. Given the homogeneous nature and geographic deployment flexibility of such assets, and based upon a recent evaluation by management, an impairment of the Company's long-lived assets was not deemed necessary. F-9 37 ENVIRONMENTAL SAFEGUARDS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Translation of Foreign Currencies All foreign subsidiaries of the Company operate with the U.S. dollar as their functional currency and, accordingly, no cumulative translation adjustment is presented in the accompanying balance sheet. The remeasurement of local currencies into U.S. dollars creates translation adjustments which are included in net income. Fair Value of Financial Instruments The Company includes fair value information in the notes to financial statements when the fair value of its financial instruments is different from the book value. When the book value approximates fair value, no additional disclosure is made. Accounting Pronouncements In June 1998 and June 2000, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities" and SFAS No. 138, "Accounting for Certain Derivative Instruments and Certain Hedging Activities," respectively. These statements establish accounting and reporting standards requiring that every derivative instrument be recorded on the balance sheet as either an asset or liability measured at its fair value. SFAS Nos. 133 and 138 also require that changes in the derivative's fair value be recognized currently in earnings unless specific hedge accounting criteria are met. SFAS Nos. 133 and 138 are effective for fiscal years beginning after June 15, 2000. The Company does not currently hold derivative instruments or engage in hedging activities and, accordingly, the adoption of these new standards is not expected to have a material impact on the Company's results of operations or financial position. In December 1999, the Securities and Exchange Commission ("SEC") issued Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements" ("SAB 101"), which clarifies certain existing accounting principles for the timing of revenue recognition and its classification in the financial statements. In June 2000, the SEC delayed the required implementation date of SAB 101. As a result, SAB 101 will not be effective for the Company until the quarter ended September 30, 2001. In October 2000, the SEC issued further guidance on the interpretations included in SAB 101. The implementation of SAB 101 is not expected to have a material impact on the Company's results of operations or financial position. Reclassification Certain amounts in the 1998 and 1999 financial statements have been reclassified to conform with the current year presentation. 2. LIQUIDITY ISSUES 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 remediation and recycling/ reclamation process. The Company's efforts have been focused primarily on hydrocarbon soil contamination inherent in oil and gas exploration activities. 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. The Company has incurred recurring net losses and has been dependent on revenue from a limited customer base to provide cash flows. The Company completed its most significant service contract in December 2000 and is currently exploring ways to replace the revenue. During the year ended December 31, 2000 the Company experienced a tightening of cash reserves and took actions to delay payments on its senior secured debt. The delay of principal and interest payments of approximately $1,233,000 in 2000 will result in the Company's payment of approximately $3,825,000 of principal and interest F-10 38 ENVIRONMENTAL SAFEGUARDS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) payments on senior secured debt in 2001. These 2001 debt payments and expected continuing losses will further strain the Company's liquidity. In addition, as of December 31, 2000, the Company's current liabilities exceeded its current assets by $258,000. These factors raise substantial doubt about the Company's ability to continue as a going concern. The Company is currently seeking to obtain service contracts in the markets that it serves and is also considering strategic alternatives including a possible sale of all or substantially all of its assets. As part of its strategic plan, effective March 1, 2001 the Company reached an agreement with its primary lenders and holders of its outstanding preferred stock that resulted in the Company remaining in compliance with covenants provided in its senior secured debt agreement and stock agreements and provided the Company with increased financial flexibility to continue its pursuit of new market opportunities (See Note 14). The Company's long-term viability as a going concern is dependent on the continued restructuring of its obligations and/or capital infusions, the repositioning of its asset base and the achievement of a sustaining level of profitability. The accompanying financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern. 3. PROPERTY AND EQUIPMENT Property and equipment consists of the following:
2000 1999 ------- ------- (IN THOUSANDS) ITD Remediation/Recycling Units and auxiliary equipment..... $14,973 $14,636 Office furniture and equipment.............................. 36 34 Transportation and other equipment.......................... 49 49 ------- ------- 15,058 14,719 Less accumulated depreciation............................... 6,129 3,884 ------- ------- Property and equipment, net....................... $ 8,929 $10,835 ======= =======
4. LONG-TERM DEBT Senior secured notes payable to certain corporate and individual investors (the "Investor Notes") funded in connection with the Company's acquisition of OnSite and subsequent exercise of an option for $5 million of additional debt under similar terms. The Investor Notes have an original face value of $11 million and are carried net of unamortized discounts of approximately $298,000 and $64,000 as of December 31, 2000 and 1999, respectively. Payments are due in quarterly principal installments of $541,000 plus accrued interest at a stated rate of prime plus 1.5% (11% as of December 31, 2000) per year through December 2002. After considering the amortization of the discount, the notes bear an effective interest rate that approximates prime plus 11.1% (20.6% and 18.4% as of December 31, 2000 and 1999 respectively) per year. These notes are collateralized by all assets of the Company. Long-term debt consists of the following:
2000 1999 ------ ------ (IN THOUSANDS) Contractual balance......................................... $5,406 $6,487 Less unaccreted discount.................................... (298) (64) ------ ------ Long-term debt.................................... 5,108 6,423 Less current maturities..................................... 2,945 2,098 ------ ------ Long-term debt, net of current portion............ $2,163 $4,325 ====== ======
F-11 39 ENVIRONMENTAL SAFEGUARDS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The Investor Notes contain certain covenants, the most restrictive of which require the Company to maintain positive working capital of at least $2 million and precludes the Company from paying common dividends until the Investor Notes are repaid. During 1999, the Company requested and received a waiver of the working capital requirement for the duration of the Investor Notes. The Investor Notes included a commitment by the lenders to provide an additional $5 million supplemental loan under provisions similar to the initial loan provided that the Company remains in compliance with the terms of the initial loan. The Company exercised its option to obtain the $5 million supplemental loan in June 1998. As part of a plan to deal with liquidity issues, in August 2000 the Company obtained a six-month deferral for payment of the quarterly installment on its long-term debt of $692,623 including interest, that was due September 4, 2000, a six-month deferral for payment of the principal-only portion of the quarterly installment on its long-term debt that was due December 4, 2000 in the amount of $540,642 and a six-month deferral for payment of the dividend on Series D preferred stock that was due October 1, 2000 in the amount of $112,444. In order to obtain the deferrals, the Company exchanged 400,000 newly issued shares of Series D convertible Preferred Stock for all issued shares of Series C non-convertible Preferred Stock held by the Company's primary lender. The conversion feature associated with the 400,000 shares of Series D Preferred Stock was valued at $168,000 based on an independent appraisal. The value of the conversion feature, representing unaccreted discount, is being amortized to expense over the remaining fifteen-month term of the debt using the effective interest method. The Investor Notes also included a provision for the Company to issue to the lenders warrants to acquire up to 707,142 shares of the Company's Common Stock upon the earlier of an event of default under the terms of the Investor Notes or February 17, 2000, provided, however, that if the Investor Notes were repaid in full prior to February 17, 2000, then no additional warrants would be issued. The Investor Notes further provided that if a portion of the notes were repaid prior to February 17, 2000, then warrants for a number of shares of Common Stock of the Company would be issued on a pro rata basis. Based on this provision, on February 17, 2000, the Company issued the lenders warrants to acquire 417,066 shares of the Company's common stock at $0.01 per share. These warrants had an approximate value of $438,000 at the date of issue and such value has been treated as additional interest and is being amortized to expense over the remaining twenty-two month term of the debt using the effective interest method. The Investor Notes include a further provision for the Company to issue the lenders warrants to acquire an additional 188,571 shares of the Company's common stock at $0.01 per share if the Investor Notes are not prepaid in full by December 2001. Following is an analysis of future annual scheduled maturities of long-term debt:
UNACCRETED YEAR ENDED DECEMBER 31, CONTRACTUAL DISCOUNT TOTAL - ----------------------- ----------- ---------- ------ (IN THOUSANDS) 2001.................................................. $3,243 $298 $2,945 2002.................................................. $2,163 -- 2,163 ------ ---- ------ Long-term debt...................................... $5,406 $298 $5,108 ====== ==== ======
F-12 40 ENVIRONMENTAL SAFEGUARDS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) During the years ended December 31, 2000, 1999 and 1998, the Company incurred interest charges as follows:
2000 1999 1998 ------ ------ ------ (IN THOUSANDS) Interest charged to expense................................ $1,018 $1,455 $1,159 Interest capitalized as construction period interest....... -- 45 228 ------ ------ ------ Total interest................................... $1,018 $1,500 $1,387 ====== ====== ======
5. LEASE COMMITMENTS The Company leases certain equipment and facilities (mainly offices and vehicles) under operating leases. Certain of the leases provide for renewal options; however, only one such lease has an original term of greater than one year. Rental expense for operating leases was $100,000, $115,000 and $69,000 during the years ended December 31, 2000, 1999 and 1998, respectively. Minimum lease payments due under operating leases with original lease terms of greater than one year and expiration dates subsequent to December 31, 2000 are summarized as follows:
YEAR ENDED DECEMBER 31, - ----------------------- (IN THOUSANDS) 2001.................................................. $37 2002.................................................. 1 --- Total minimum lease payments................ $38 ===
6. INCOME TAXES Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company's deferred tax assets and liabilities were as follows:
2000 1999 ------- ------- (IN THOUSANDS) Deferred tax liabilities: Tax on undistributed foreign income....................... $ 232 $ 533 Basis of property and equipment........................... 656 341 ------- ------- Total deferred tax liabilities.................... 888 874 ------- ------- Deferred tax assets: Net operating loss carryforwards.......................... 2,389 2,007 Foreign tax credit carryforwards.......................... 834 517 Purchased in-process research and development............. 208 225 Basis of acquired engineering design and technology....... 197 132 Deferred gain on sale of licensing agreement.............. 17 31 Deferred foreign taxes.................................... 30 23 Other..................................................... -- 680 ------- ------- Total deferred tax assets......................... 3,675 3,615 Valuation allowance......................................... (2,757) (2,708) ------- ------- 918 907 ------- ------- Net deferred tax assets........................... $ 30 $ 33 ======= =======
F-13 41 ENVIRONMENTAL SAFEGUARDS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) For financial reporting purposes, income before provision for income taxes and minority interest includes the following components:
2000 1999 1998 ------- ------- ------- (IN THOUSANDS) United States........................................... $(1,066) $(1,521) $(1,027) Foreign................................................. 1,210 3,355 1,579 ------- ------- ------- Income before provision for income taxes and minority interest........................... $ 144 $ 1,834 $ 552 ======= ======= =======
Significant components of the provision for income taxes are as follows:
2000 1999 1998 ------ ------ ---- (IN THOUSANDS) Current: Federal................................................... $ -- $ -- $ -- Foreign................................................... 1,110 1,378 722 ------ ------ ---- Total current..................................... 1,110 1,378 722 ------ ------ ---- Deferred: Federal................................................... -- -- -- Foreign................................................... 7 18 34 ------ ------ ---- Total deferred.................................... 7 18 34 ------ ------ ---- Provision for income taxes........................ $1,117 $1,396 $756 ====== ====== ====
The differences between the statutory income tax rate and the Company's effective income tax rate are as follows:
2000 1999 1998 ---- ---- ---- Federal statutory rate...................................... 34% 34% 34% Foreign income taxes........................................ 776% 76% 137% Increase in valuation allowance............................. (34)% (34)% (34)% --- --- --- 776% 76% 137% === === ===
As of December 31, 2000, for U.S. federal income tax reporting purposes, the Company has approximately $7,028,000 of unused net operating losses ("NOLs") available for carryforward to future years. The benefit from carryforward of such NOLs will expire during the years ended December 31, 2001 to 2019. Because the Company's 1997 private placement of preferred stock, combined with other private placements in 1996 and 1995, resulted in more than a 50 percent change in shareholder ownership percentages, the provisions of Section 382 of the Internal Revenue Code limit the Company's ability to utilize approximately $3,600,000 of its NOL carryforwards to reduce future taxable income and tax liabilities. Additionally, because United States tax laws limit the time during which NOL carryforwards may be applied against future taxable income, the Company may be unable to take full advantage of its NOL for federal income tax purposes should the Company generate taxable income. Based on the above limitations, the Company has significant NOL carryforwards for which realization of tax benefits is uncertain. The benefit from utilization of NOL carryforwards could be subject to limitations if additional material ownership changes occur in the Company. As of December 31, 2000 the Company had approximately $834,000 of foreign tax credit carryforwards which can be offset against taxable income in Colombia. The benefit from carryforward of such foreign tax credits will expire during the years ended December 31, 2002 to 2005. F-14 42 ENVIRONMENTAL SAFEGUARDS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 7. STOCKHOLDERS' EQUITY The Company's articles of incorporation authorize the issuance of up to 10,000,000 shares of preferred stock with characteristics determined by the Company's board of directors. Effective December 17, 1997, the board of directors authorized the issuance and sale of up to 5,000,000 shares of Series B convertible preferred stock and up to 400,000 shares of Series C non-voting non-convertible preferred stock. During the year ended December 31, 2000, the board of directors authorized the issuance of up to 400,000 shares of Series D convertible preferred stock. Series B Convertible Preferred Stock In 1997, the Company issued 3,771,422 shares of $0.001 par value Series B convertible preferred stock for $4,000,000, or $1.06 per share. Dividends are paid at the same rate as common stock based upon the conversion rate. The Series B convertible preferred stock can be converted to common stock at any time at the option of the holder. The initial rate is one common share for each preferred share; however, the conversion rate is subject to adjustments to prevent dilution. The holders of the Series B convertible preferred stock have essentially the same voting rights as the holders of common stock except for the election of Directors, upon which the Series B Convertible Preferred shareholders are not entitled to vote. Series B Convertible Preferred shareholders, however have the right to vote separately, as a class, for the election of one Director. The Series B convertible preferred stock has a liquidation preference of $1.06 per share plus any unpaid dividends. As discussed in Note 11, the Company canceled 1,037,736 shares of Series B convertible preferred stock in exchange for accounts receivable. Series C Preferred Stock In 1997, the Company issued 400,000 shares of Series C non-voting preferred stock with a $0.001 per share par value and a $10 per share stated value. The Series C preferred stock carries a quarterly dividend payable in arrears of prime (8.50% as of December 31, 1999) plus 1.5% based on the stated value of the stock. The Series C preferred stock is redeemable at the option of the Company at a price of $10 per share plus any unpaid dividends. Proceeds of $4,000,000 from the Series C preferred stock were recorded net of a discount of $809,000, which included related offering costs incurred and the allocation of a portion of the proceeds to the warrants issued to the same investors. The allocation of proceeds between the Series C preferred stock, Investor Notes (See Note 4) and the warrants (See stock warrants below) was based upon relative fair values of the underlying securities. The Series C preferred stock was accreted to its liquidation value over a period of 26 months to February 17, 2000. The accretion of the Series C preferred stock is deducted from the net loss to derive the net loss applicable to common stockholders in the calculation of earnings per share (See Note 8). Series D Preferred Stock During 2000, the Company exchanged 400,000 newly issued shares of Series D convertible Preferred Stock for Series C non-convertible Preferred Stock held by the Company's primary lender. The newly issued shares of Series D Preferred stock are convertible into common stock at a conversion price of $2.25 per share until December 31, 2002, and a conversion price of $1.00 after December 31, 2002. In the event of a default under the loan agreement, the conversion price shall be the lesser of $1.00 per share or the averaging thirty-day trailing price. The conversion feature associated with the 400,000 shares of Series D Preferred Stock was valued at $168,000 based on an independent appraisal. The value of the conversion feature, representing unaccreted discount, is being amortized to expense over the remaining term of the debt using the effective interest method (See Note 4). Other than the conversion feature of the Series D Preferred Stock, its features and preferences are the same as the Series C Preferred Stock. F-15 43 ENVIRONMENTAL SAFEGUARDS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Unissued Common Stock Unissued common stock at January 1, 1998 represents shares for which cash proceeds or other consideration had been received but shares had not been issued. Stock Options The Company periodically issues incentive stock options to key employees, officers, and directors to provide additional incentives to promote the success of the Company's business and to enhance the ability to attract and retain the services of qualified persons. The issuance of such options are approved by the Board of Directors. The exercise price of an option granted is determined by the fair market value of the stock on the date of grant. The Company has elected to follow Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" (APB 25) and related Interpretations in accounting for its employee stock options because, as discussed below, the alternative fair value accounting provided for under FASB Statement No. 123, "Accounting for Stock-Based Compensation," requires use of option valuation models that were not developed for use in valuing employee stock options. Under APB 25, because the exercise price of the Company's employee stock options is greater than or equals the market price of the underlying stock on the date of grant, no compensation expense has been recognized. Stock Option Plan The Company has adopted the 1998 Stock Option Plan (the "Option Plan") under which incentive stock options for up to 800,000 shares of the Company's common stock may be awarded to officers, directors and key employees. The Option Plan is designed to attract and reward key executive personnel. At December 31, 1999, the Company had granted options for 610,000 of a total of 800,000 shares of common stock reserved for issuance under the Option Plan. During 2000, 62,500 options were forfeited resulting in a 547,500 of a total of 800,000 shares of common stock reserved for issuance under the Option Plan. Stock options granted pursuant to the Option Plan expire not more than ten years from the date of grant and typically vest over two years, with 50% vesting after one year and 50% vesting in the succeeding year. All of the options granted by the Company were granted at an option price equal to the fair market value of the common stock at the date of grant. Proforma Disclosures For purposes of proforma disclosures, the estimated fair value of the options is included in expense over the option's vesting period or expected life. During the year ended December 31, 1999, 626,730 of the Company's stock options were repriced from original exercise prices ranging from $2.50 to $5.00 per share to a new exercise price of $1.44 per share. The new exercise price was based on the quoted market value of the Company's common stock at the date of repricing. The repricing of options significantly impacted proforma financial information in 1999. The Company's proforma information follows:
2000 1999 1998 ------- ------- ------- (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) Proforma net loss....................................... $(1,637) $(1,197) $(1,457) Proforma net loss available to common stockholders...... $(2,120) $(1,958) $(2,230) Proforma basic and dilutive loss per share.............. $ (0.21) $ (0.19) $ (0.23)
F-16 44 ENVIRONMENTAL SAFEGUARDS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) A summary of the Company's stock option activity and related information for the years ended December 31, 2000, 1999 and 1998 follows:
NUMBER OF SHARES UNDER WEIGHTED-AVERAGE OPTIONS EXERCISE PRICE --------- ---------------- Outstanding -- January 1, 1998............................ 4,821,686 $1.76 Granted................................................. 782,718 2.41 Exercised............................................... (270,000) 0.60 Forfeited............................................... (463,542) 5.00 --------- ----- Outstanding -- December 31, 1998.......................... 4,870,862 1.62 Granted................................................. -- -- Exercised............................................... (19,700) 0.60 Forfeited............................................... -- -- Repricing............................................... -- (0.24) --------- ----- Outstanding -- December 31, 1999.......................... 4,851,162 1.38 Granted................................................. -- -- Exercised............................................... -- -- Forfeited............................................... (62,500) 1.69 --------- ----- Outstanding -- December 31, 2000.......................... 4,788,662 $1.38 ========= ===== Exercisable -- December 31, 1998.................................................... 4,260,862 $1.61 1999.................................................... 4,546,162 $1.36 2000.................................................... 4,788,662 $1.38
Proforma information regarding net income and earnings per share is required by Statement 123, and has been determined as if the Company had accounted for its employee stock options under the fair value method of that Statement. The fair value for these options was estimated at the date of grant using a Black-Scholes option pricing model with the following weighted-average assumptions for 1998: risk-free interest rate of 7%; no dividend yield; weighted average volatility factor of the expected market price of the Company's common stock of 0.873; and a weighted-average expected life of the options of 5 years. No options were granted in 2000 or 1999 and, accordingly, no option pricing assumptions are presented. The Black-Scholes option valuation model was developed for use in estimating fair value of traded options which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because the Company's employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options. The weighted-average fair value of options granted during the year ended December 31, 1998 was $1.74. No options were granted during the years ended December 31, 2000 and 1999; however the repricing of certain options reduced the weighted average exercise price by $0.24 in 1999. F-17 45 ENVIRONMENTAL SAFEGUARDS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) As shown above, all outstanding stock options are exercisable at December 31, 2000. A summary of outstanding stock options at December 31, 2000, follows:
REMAINING NUMBER OF COMMON CONTRACTUAL STOCK EQUIVALENTS EXPIRATION DATE LIFE (YEARS) EXERCISE PRICE - ----------------- --------------- ------------ -------------- Exercisable as of December 31, 2000: 2,470,300 .................................... November 2005 4.9 $0.60 112,500 .................................... March 2007 6.2 1.44 480,000 .................................... March 2007 6.2 2.50 35,000 .................................... November 2007 6.9 1.44 356,813 .................................... December 2007 7.0 1.44 613,831 .................................... December 2007 7.0 3.00 1,053 .................................... January 2008 7.1 2.38 800 .................................... January 2008 7.1 3.12 770 .................................... January 2008 7.1 3.25 625 .................................... January 2008 7.1 4.00 47,053 .................................... April 2008 7.3 5.00 122,417 .................................... April 2008 7.3 1.44 547,500 .................................... December 2008 8.0 1.69 - --------- 4,788,662 =========
Stock Warrants Following is a summary of stock warrant activity:
NUMBER OF EXERCISE WEIGHTED SHARES PRICE AVERAGE PRICE --------- -------- ------------- Warrants outstanding as of January 1, 1998........... 707,143 $0.01 $0.01 Issued............................................. -- -- -- Canceled........................................... -- -- -- Exercised.......................................... -- -- -- --------- Warrants outstanding as of December 31, 1998......... 707,143 $0.01 $0.01 Issued............................................. -- -- -- Canceled........................................... -- -- -- Exercised.......................................... -- -- -- --------- Warrants outstanding as of December 31, 1999......... 707,143 $0.01 $0.01 Issued............................................. 417,066 $0.01 $0.01 Canceled........................................... -- -- -- Exercised.......................................... -- -- -- --------- Warrants outstanding as of December 31, 2000......... 1,124,209 $0.01 $0.01 =========
All warrants outstanding were issued in connection with the funding of the Investor Notes (See Note 4). All warrants bear an exercise price of $0.01 per share, are currently exercisable, and expire in December 2007. 8. EARNINGS PER SHARE For the years ended December 31, 2000, 1999 and 1998, due to the fact that the Company incurred net losses, all common stock equivalents have been excluded from the calculation of earnings per share because their effect is anti-dilutive. In future periods, the calculation of diluted earnings per share may require that the F-18 46 ENVIRONMENTAL SAFEGUARDS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) common stock equivalents (totaling 10,424,335 as of December 31, 2000) disclosed in Note 7 be included in the calculation of the weighted average shares outstanding for periods in which net income is reported, using the treasury stock method. Following is the reconciliation of net loss to the net loss applicable to common stockholders:
2000 1999 1998 ------- ------- ------- (IN THOUSANDS) Net loss................................................ $(1,462) $ (483) $ (799) Less: Series C and D Preferred stock dividends ($1.0914, $0.9627 and $0.9925 per share) in 2000, 1999 and 1998, respectively................................ (436) (385) (397) Accretion of discount on Series C preferred stock (Note 7).......................................... (47) (376) (376) ------- ------- ------- Net loss applicable to common stockholders.............. $(1,945) $(1,244) $(1,572) ======= ======= =======
9. 401(K) SALARY DEFERRAL PLAN The Company has a 401(k) salary deferral plan (the "Plan") which became effective on January 1, 1998, for eligible employees who have met certain service requirements. The Plan does not provide for Company matching or discretionary contributions and, accordingly, the Company recognized no expense under the Plan in 2000, 1999 or 1998. 10. LITIGATION In August 2000, litigation was instituted against the Company styled as Duratherm, Inc. vs. OnSite Technology, LLC, Waste Control Specialists, LLC and Kevin Nowlin; In the United States District Court for the Southern District of Texas; Civil Action No. H-00-2727. This is a lawsuit against OnSite Technology, LLC, the Company's wholly-owned subsidiary ("OnSite"), a customer of OnSite ("WCS") and a former employee of OnSite ("Nowlin") by Duratherm, Inc. alleging (i) infringement of U.S. patent no. 5,523,060, by the Company's ITD Units, which are its primary revenue producing asset; (ii) misappropriation and misuse of trade secrets and breach of confidential relationship; (iii) tortuous interference with a business relationship; (iv) civil conspiracy to commit the acts (ii)-(iii) listed above; and business disparagement. The plaintiff sought damages, exemplary damages, treble damages for infringement and a permanent injunction (as well as attorneys fees and interest). The amount of damages was not specified. The Company filed a motion to dismiss on the grounds that Duratherm, Inc. was not the proper party to file suit on the patents (or alternatively that Duratherm, Inc. needed to add additional parties as plaintiff's to the suit). This motion to dismiss was granted by the court and was not appealed. Duratherm Inc. could, however, refile the lawsuit with the addition of other parties. It could also refile the claims, unrelated to the patent, in state court. The Company still believes that it has a meritorious defense on the claims alleged in the original lawsuit and will continue to vigorously defend against such claims if they are reasserted. It is not possible at this time to determine the probability of refiling the suit by Duratherm, Inc. The Company's insurance carrier denied coverage with regard to certain claims included in the original suit, but accepted the business disparagement claim subject to a reservation of rights. The Company is from time to time involved in various other litigation incidental to its business, which at times involves claims for significant monetary amounts, some of which would not be covered by insurance. Presently the Company has no existing litigation. F-19 47 ENVIRONMENTAL SAFEGUARDS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 11. RELATED PARTY TRANSACTIONS Effective March, 2001 and August, 2000, the Company entered into agreements with its primary lenders and holders of its outstanding preferred stock to defer various principal and interest payments on its senior debt. See Notes 4 and 14. Effective January 1, 1998, the Company entered into a one year, $240,000 per month, remediation and recycling contract (the "Contract") with a corporation that is a significant preferred stockholder (the "Stockholder") and a member of the investment group that funded the Investor Notes (See Note 4). After the Contract was signed, the Stockholder was unable to fully utilize the Company's services and subsequently requested a release. The Company granted the release under the condition that the Stockholder compensate the Company for the six and one-half months of service. To fulfill its obligation, the Stockholder agreed that in addition to $460,000 of payments that had been made, the Stockholder would surrender 1,037,736 shares of Series B preferred stock in satisfaction of the remaining $1,100,000 receivable on the Company's books. The total revenue recognized under this contract during 1998 was $1,560,000. During 1998, the Company entered into a marketing assistance agreement (the "Marketing Agreement") with the minority owners of OnSite Colombia, Inc. Under the terms of the Marketing Agreement, in exchange for assisting the Company in its business expansion efforts, the minority owners and the Company each received marketing assistance fees totaling $320,000 during each of the years ended December 31, 2000, 1999 and 1998. During December 1998, the Company formed a joint company, OnSite Arabia, Inc., with an investor group for the purpose of providing environmental remediation in the Arabian Gulf region. The Company sold two ITD Units to the newly formed joint company (one in 1999 and one in 1998) and recognized gains to the extent proceeds received exceeded the Company's proportional basis in the assets. During 1999 the Company incurred approximately $726,000 of marketing and administrative costs associated with the operations of OnSite Arabia and 50% of those costs were invoiced to the minority owners. At December 31, 1999 $67,000 of such costs remain uncollected from the minority owners and are in other current assets. 12. SEGMENT, GEOGRAPHIC AND MAJOR CUSTOMERS INFORMATION The Company currently operates in the environmental remediation and hydrocarbon reclamation/recycling services. Substantially all revenues result from the sale of services using the Company's ITD units. The Company's reportable segments are based upon geographic area and all intercompany revenue and expenses are eliminated in computing revenues and operating income (loss). The Company and OnSite share office facilities and certain employees. Shared costs are generally specifically identified by company; however, certain costs must be allocated based upon management's estimates. The corporate component of operating income (loss) represents corporate general and administrative expenses. Corporate assets include cash and cash equivalents, and restricted cash investments. F-20 48 ENVIRONMENTAL SAFEGUARDS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Following is a summary of segment information:
2000 1999 1998 ------- ------- ------- (IN THOUSANDS) Revenue: United States......................................... $ 1,464 $ 1,150 $ 2,708 United Kingdom........................................ 52 993 -- Latin America......................................... 9,734 11,371 7,964 ------- ------- ------- Total revenue................................. $11,250 $13,514 $10,672 ======= ======= ======= Depreciation and Amortization: United States......................................... $ 1,566 $ 1,034 $ 856 United Kingdom........................................ 253 154 -- Latin America......................................... 834 1,034 759 ------- ------- ------- Total depreciation and amortization........... $ 2,653 $ 2,222 $ 1,615 ======= ======= ======= Income (Loss) From Operations: United States......................................... $(1,245) $ (230) $ 140 United Kingdom........................................ (513) 342 -- Latin America......................................... 3,561 3,399 1,814 Middle East........................................... (452) -- -- Corporate............................................. (322) (413) (550) ------- ------- ------- Total income from operations.................. $ 1,029 $ 3,098 $ 1,404 ======= ======= ======= Interest Expense: Latin America......................................... $ 15 $ 270 $ 139 Corporate............................................. 1,003 1,185 1,020 ------- ------- ------- Total interest expense........................ $ 1,018 $ 1,455 $ 1,159 ======= ======= ======= Provision (Benefit) For Income Taxes: United Kingdom........................................ $ (70) $ 76 $ -- Latin America......................................... 1,187 1,320 756 ------- ------- ------- Total provision for income taxes.............. $ 1,117 $ 1,396 $ 756 ======= ======= ======= Number of Customers: United States......................................... 1 1 1 United Kingdom........................................ 1 1 -- Latin America......................................... 4 4 2 ------- ------- ------- 6 6 3 ======= ======= =======
2000 1999 ------- ------- Assets: United States............................................. $ 5,891 $ 6,423 United Kingdom............................................ 1,173 1,991 Latin America............................................. 4,624 6,993 Middle East............................................... 3,440 3,390 Corporate................................................. 25 193 ------- ------- Total assets...................................... $15,153 $18,990 ======= =======
F-21 49 ENVIRONMENTAL SAFEGUARDS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
2000 1999 ------- ------- Long Lived Assets: United States............................................. $ 5,021 $ 6,049 United Kingdom............................................ 1,009 1,263 Latin America............................................. 1,537 2,569 Middle East............................................... 3,390 3,390 ------- ------- Total long lived assets........................... $10,957 $13,271 ======= ======= Capital Expenditures: United States............................................. $ 267 $ 28 United Kingdom............................................ -- 112 Latin America............................................. 72 -- Middle East............................................... -- 1,695 ------- ------- Total capital expenditures........................ $ 339 $ 1,835 ======= =======
During the years ended December 31, 2000, 1999 and 1998, the Company's largest customer accounted for 50%, 58% and 71% of revenue, respectively. On January 2, 2001, the contract with this customer expired without renewal. 13. NON-CASH INVESTING AND FINANCING ACTIVITIES The Company engaged in certain non-cash investing and financing activities as follows:
2000 1999 1998 ---- ------ ------ (IN THOUSANDS) Stock warrants issued to extend the due date of senior secured notes payable..................................... $438 $ -- $ -- Series D convertible preferred stock exchanged for Series C non-convertible preferred stock........................... 168 -- -- Property and equipment for settlement of accounts receivable................................................ 65 -- -- Indirect Thermal Desorption Unit value contributed to 50/50 joint company in Arabia................................... -- 1,150 1,150 Net ITD Unit cost transferred between property and equipment from equipment held for sale, net of accumulated depreciation of $350 in 1999 and 1998..................... -- 1,408 407 Series B preferred stock re-purchased in exchange for accounts receivable....................................... -- -- 1,100
14. SUBSEQUENT EVENTS Effective March 5, 2001 the Company entered into an agreement (the "Agreement") with its primary lenders and holders of its outstanding preferred stock that provided the Company with increased financial flexibility to continue its pursuit of new market opportunities. The Agreement provides for a three-month deferral of all principal and interest payments (both currently due and previously deferred) due in March on the Company's senior secured debt. At the end of the deferral period, if the Company is engaged in good faith negotiations for its sale, the sale of a subsidiary, the sale of substantially all of its assets, or the sale of substantially all assets of its subsidiaries ("Financing Transaction"), then all deferrals will be extended to July 8, 2001 and from month to month thereafter until the consummation of the Financing Transaction or the termination of the good faith negotiations. Additionally, the Company received a three-month deferral of F-22 50 ENVIRONMENTAL SAFEGUARDS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) preferred dividends due in March, with a possible continuing deferral on the same basis as the senior secured debt. The Agreement was designed to allow the Company to conserve working capital while strategic plans are being considered. In exchange for the deferral of senior secured debt and preferred stock dividend payments, the conversion price of the Series D Preferred Stock was reset at the default rate or $0.37 per share (See Note 4). This change in the conversion price results in further dilution to the Company's stockholders. Management believes the value attributable to the change in conversion feature should not have a material effect on the Company's financial position, results of operations or cash flows. F-23 -----END PRIVACY-ENHANCED MESSAGE-----