-----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, BQ10kY2GRuiKZ0cDOc0gQNZ2JTweb3RDOfg+AdO+R1ehIy2L9CEvNN4hWJIQao7m 6QihfNTH3FqKRwQvJEfgaw== 0001015402-03-001519.txt : 20030501 0001015402-03-001519.hdr.sgml : 20030501 20030430211453 ACCESSION NUMBER: 0001015402-03-001519 CONFORMED SUBMISSION TYPE: SB-2 PUBLIC DOCUMENT COUNT: 13 FILED AS OF DATE: 20030501 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: SB-2 SEC ACT: 1933 Act SEC FILE NUMBER: 333-104883 FILM NUMBER: 03674703 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 SB-2 1 doc1.txt ** As Filed With The Securities And Exchange Commission On May 1, 2003 Registration No. ________________ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM SB-2 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 ENVIRONMENTAL SAFEGUARDS, INC. (Name Of Small Business Issuer In Its Charter) NEVADA 87-0429198 4953 (State Or Other Jurisdiction (Primary Standard (I.R.S. Employer Of Incorporation Industrial Classification Identification Number) Or Organization) Code Number) 2600 South Loop West, Suite 645 Houston, Texas 77054 (713) 641-3838 (Address and Telephone Number Of Principal Executive Offices Business) James S. Percell Chief Executive Officer c/o Environmental Safeguards, Inc. 2600 South Loop West, Suite 645 Houston, Texas 77054 voice: (713) 641-3838 fax: (713) 641-0756 (Name, Address, And Telephone Number, Of Agent For Service Of Process) Copy To: Robert D. Axelrod, Esq. Axelrod, Smith & Kirshbaum 5300 Memorial Drive, Suite 700 Houston, Texas 77007 voice: (713) 861-1996 ext. 116 fax: (713) 552-0202 Approximate Date Of Commencement Of Proposed Sale To The Public: As soon as practicable after the Registration Statement becomes effective. 1 If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. [X]
CALCULATION OF REGISTRATION FEE PROPOSED MAXIMUM TITLE OF EACH OFFERING MAXIMUM CLASS OF SECURITIES PROPOSED PRICE AGGREGATE REGISTRATION AMOUNT TO BE PER OFFERING TO BE REGISTERED REGISTERED SHARE(*) PRICE(*) FEE - ----------------------------------------------------------------------- Common Stock, par value $0.001, underlying Warrants 1,500,000 $ 0.22(1) $330,000.00(1) $ 26.73
- --------------- (*) Estimated solely for the purpose of calculating the registration fee. Calculated pursuant to Rule 457(g) and based on the average bid and asked price of our common stock on April 25, 2003. Estimated legal, accounting, blue sky, transfer agent and printing fees are $35,600.00. THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVENESS DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A), MAY DETERMINE. 2 PART I INFORMATION REQUIRED IN PROSPECTUS 3 INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE. Subject To Completion, Dated May 1, 2003. ENVIRONMENTAL SAFEGUARDS, INC. 1,500,000 SHARES OF COMMON STOCK This Prospectus relates to the resale of 1,500,000 shares of common stock, par value $0.001 per share that may be offered and sold from time to time by the selling security holder listed on page 43. Our common stock is traded on the Over the Counter Bulletin Board (the OTCBB) under the symbol "ELSF." On April 25, 2003, the closing bid for our common stock on the OTCBB was $0.22 per share. OUR COMMON STOCK IS SPECULATIVE AND INVOLVES A HIGH DEGREE OF RISK AND SHOULD NOT BE PURCHASED BY INVESTORS WHO CANNOT AFFORD THE LOSS OF THEIR ENTIRE INVESTMENT. YOU SHOULD CAREFULLY READ AND CONSIDER OUR RISK FACTORS SECTION ON PAGE 11 BEFORE MAKING AN INVESTMENT DECISION. NEITHER THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE ADEQUACT OR ACCURACY OF THE PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. The Date Of This Prospectus Is ____________ ___, 2003. 4 NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS IN CONNECTION WITH THIS OFFERING OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS AND, IF GIVEN OR MADE, ANY SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY US OR ANY OTHER PERSON. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCE, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY OR ITS SUBSIDIARIES SINCE THE DATE HEREOF. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY SECURITIES OTHER THAN THOSE TO WHICH IT RELATES OR AN OFFER TO ANY PERSON IN ANY STATE WHERE SUCH OFFER WOULD BE UNLAWFUL. YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS PROSPECTUS. WE HAVE NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH INFORMATION DIFFERENT FROM THAT CONTAINED IN THIS PROSPECTUS. THE SELLING SECURITY HOLDER IS OFFERING TO SELL, AND SEEKING OFFERS TO BUY, SHARES OF COMMON STOCK ONLY IN JURISDICTIONS WHERE OFFERS AND SALES ARE PERMITTED. THE INFORMATION CONTAINED IN THIS PROSPECTUS IS ACCURATE ONLY AS OF THE DATE OF THIS PROSPECTUS, REGARDLESS OF THE TIME OF DELIVERY OF THIS PROSPECTUS OR OF ANY SALE OF COMMON STOCK. 5
TABLE OF CONTENTS Page AVAILABLE INFORMATION 8 FORWARD-LOOKING STATEMENTS 8 PROSPECTUS SUMMARY 10 RISK FACTORS 11 USE OF PROCEEDS 15 PRICE RANGE OF COMMON STOCK 15 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 16 BUSINESS 25 PROPERTIES 31 MANAGEMENT 32 LIMITATION ON DIRECTORS' LIABILITY; INDEMNIFICATION 34 EXECUTIVE COMPENSATION 35 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 39 PRINCIPAL STOCKHOLDERS 41 PLAN OF DISTRIBUTION 43 SELLING STOCKHOLDER 44 DESCRIPTION OF SECURITIES 45 LEGAL MATTERS 47 LEGAL PROCEEDINGS 47 6 EXPERTS 48 CHANGES IN COMPANY'S CERTIFYING ACCOUNTANT 48 CONSOLIDATED FINANCIAL STATEMENTS F-1
7 AVAILABLE INFORMATION We are currently subject to the reporting requirements of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and we file periodic reports, proxy materials and other information with the Securities and Exchange Commission ("Commission"). In addition, we will furnish stockholders with annual reports containing audited financial statements certified by our independent accountants and interim reports containing unaudited financial information as it may be necessary or desirable. We will provide without charge to each person who receives a copy of this Prospectus, upon written or oral request, a copy of any information that is incorporated by reference in this Prospectus (not including exhibits to the information that is incorporated by reference unless the exhibits are themselves specifically incorporated by reference). Such request should be directed to Environmental Safeguards, Inc., Attn. James S. Percell, President, 2600 South Loop West, Suite 645, Houston, Texas 77054, tel. (713) 641-3838. Our web site is www.onsite2.com. We have filed with the Commission a Registration Statement under the Act with respect to the securities offered by this Prospectus. This Prospectus does not contain all of the information set forth in the Registration Statement, certain parts of which are omitted in accordance with the rules and regulations of the Commission. For further information with respect to us and this offering, reference is made to the Registration Statement, including the exhibits filed therewith, that may be inspected without charge at the public reference room maintained by the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549, tel. 1-800-SEC-0330. Copies of such material may also be obtained from the Public Reference Section of the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates. The Commission maintains a web site on the Internet that contains reports, proxy and information statements and other information regarding issuers that file electronically with the Commission. The address of the SEC web site is www.sec.gov. Visitors to the site may access such information by searching the EDGAR data base on the SEC's web site. FORWARD-LOOKING STATEMENTS This prospectus contains forward-looking statements about our future. Forward-looking statements include statements about our: - - plans - - objectives - - goals - - strategies - - expectations for the future - - future performance and events - - underlying assumptions for all of the above - - other statements that are not statements of historical facts Such forward-looking statements involve risks and uncertainties that could cause our actual results to materially differ from our forward-looking statements. Words such as "plan", "expects", "anticipates", "estimates" and 8 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. We make these forward-looking statements based on our analysis of internal and external historical trends, but there can be no assurance that we will achieve the results set forth in these forward-looking statements. Our forward-looking statements are expressed in good faith and we believe that there is a reasonable basis for us to make them. 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 in this prospectus, the following are important factors that, in our view, could cause our actual results to materially differ from our forward-looking statements, and could cause material adverse affects 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; 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; 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. 9 PROSPECTUS SUMMARY SUMMARY OF INFORMATION IN THE PROSPECTUS This prospectus summary highlights selected information contained in this prospectus. To understand this offering fully, you should read the entire prospectus carefully, including the risk factors beginning on page 11 and the financial statements beginning on page F-1. Unless otherwise indicated, this prospectus assumes that none of our outstanding options or warrants are exercised into shares of our common stock, nor any shares of our Series B Preferred Stock or Series D Preferred Stock are converted into shares of our common stock. All dollar amounts in this Prospectus are stated in U.S. dollars. THE COMPANY We were incorporated under the laws of the State of Nevada in 1985. In 1993, we changed our name to Environmental Safeguards, Inc. We are 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 our wholly-owned subsidiaries National Fuel & Energy, Inc. ("NFE") and OnSite Technology, L.L.C. ("OnSite"). References to us include our subsidiaries. During the period from 1996 until 2000, a substantial portion of our revenues were generated from major international oil and gas industry participants in Colombia, Venezuela and Mexico, as well as other domestic and foreign industrial applications. As of April 2003 we have completed our foreign contract operations, and we have taken steps to close down some of our foreign subsidiaries. We are now concentrating our marketing efforts and resources on domestic downstream plants, manufacturing facilities and waste management facilities, where our proprietary equipment and process have a competitive advantage in waste minimization, and in the recycling and reuse of waste streams. As of April 2003, OnSite operates internationally through its wholly-owned subsidiary OST Equipment Leasing L.L.C, and its 50%-owned subsidiary, OnSite Arabia, Inc. OnSite is in the process of liquidating our OnSite Colombia, Inc. and OnSite Mexico, L.L.C. subsidiaries. Onsite has completely closed down our OnSite Venezuela, Inc. and OnSite Environmental UK Ltd. subsidiaries. The environmental remediation and recycling services that we provide involve the removal of hydrocarbon contaminants from solids using indirect thermal desorption remediation and recycling technology. We provide these services on-site or at the central location to which the customer hauls the contaminated materials. Our offices are located at 2600 South Loop West, Suite 645, Houston, Texas 77054, tel. (713) 641-3838. Our web site is www.onsite2.com. 10
THE OFFERING Common stock outstanding as of April 25, 2003 10,112,144 shares of common stock Common stock to be offered by our selling stockholder 1,500,000 shares of common stock underlying warrants. The market for our common stock Our common stock trades on the Over-the Counter Bulletin Board, also called the OTCBB, under the trading symbol "ELSF". The market for our common stock is highly volatile. We can provide no assurance that there will be a market in the future for our common stock.
RISK FACTORS Any investment in shares of our common stock involves a high degree of risk. You should carefully consider the following information about these risks, together with the other information contained in this prospectus, before you decide to buy our common stock. If any of the following risks actually occur, our business would likely suffer. In such circumstances, the market price of our common stock could decline, and you may lose all or part of the money you paid to buy our common stock. NEW MARKETING FOCUS As of April 2003 we have for the most part completed our foreign contract operations that were primarily recycling and reclamation at oil drilling sites. We have taken steps to close down some of our foreign subsidiaries. We are now concentrating our marketing efforts and resources on domestic downstream plants, manufacturing facilities and waste management facilities, where our proprietary equipment and process have a competitive advantage in waste minimization, and in the recycling and reuse of waste streams. This represents a re-focusing of our marketing efforts. Our new marketing strategy may not generate sufficient revenue to sustain our operations. CONCENTRATION OF CUSTOMERS. We have a limited number of customers to whom we provide services. The loss of any particular customer could have an adverse impact on our financial position. 11 WE COULD HAVE LIABILITY UNDER ENVIRONMENTAL LAWS. We face all of the risks inherent in the hazardous and industrial waste industries because we handle chemical waste products. Although our work is done onsite at the customer's location, and although our recycling and reclamation process vaporizes the wastes, we nonetheless handle such waste products. Although we presently provide remediation services that meet applicable federal and state standards, the government can impose new standards that we might not be able to meet. IN RECENT YEARS, WE HAVE INCURRED SUBSTANTIAL NET LOSSES FROM OPERATIONS. We incurred net losses from operations of $3,683,000 in 2001 and $ 3,176,000 in 2002. In order to attain profitability, we must secure contracts at acceptable processing prices and control costs so as to produce a positive operating margin. There can be no assurance we can do so, and the failure to maintain profitability could ultimately result in our inability to pay our financial obligations as they become due. At December 31, 2002, we had a working capital deficit of $1,186,000 and positive working capital of $ 766,000 at December 31, 2001. Our presently existing capital resources may not be sufficient for us to maintain our current and planned operations through the remainder of 2003. We have historically funded operations through a combination of internally generated cash and borrowing. Until such time as our operating results improve sufficiently to fund our operations, we must obtain outside financing to fund the expansion of our business and to pay our obligations as they become due. There is no assurance that we can raise funds under terms that are acceptable to us. Any additional debt or equity financing may be dilutive to the interests of our Shareholders. LIQUIDITY REQUIREMENTS. We have experienced significant recurring losses from operations in 2002 and 2001, that have caused liquidity problems. Although we borrowed $1,500,000 in March 2003, there can be no assurance that our long-term liquidity or capital resources will be sufficient to maintain our business operations. FOREIGN POLITICAL CLIMATE. Although we have substantially exited foreign markets except for the Arabian Gulf region through OnSite Arabia, we could pursue additional foreign markets again in the future. Any adverse circumstances in the foreign political climate could have a negative impact on us. Other than our operations through OnSite Arabia, we have no plans to operate in foreign markets at this time. INTERNATIONAL TRANSACTIONS. Our operations in foreign markets expose us to foreign exchange and currency risks. We could have to losses due to foreign exchange rates. 12 CAPITAL REQUIREMENTS. Our ability to grow is directly related to our ability to be profitable or to raise funds. As of April 2003, we owned five ITD units outright, and had a 50% interest in two additional units owned by our 50%-owned subsidiary OnSite Arabia, Inc. However, we do not have the financial resources to build more ITD Units. This could limit the size of our business. There is no assurance that capital will be available in the future to build more ITD Units. The sale of equity securities could dilute our existing stockholders' interest, and borrowings from third parties could result in our assets being pledged as collateral and loan terms that would increase our debt service requirements. FABRICATION OF ITD UNITS. In the past, we have used outside fabricators to construct the ITD Units to our specifications. Deficient fabrication or financial instability of a fabricator could upset our ability to manufacture the ITD Units on a timely basis that could result in delays in fulfilling contracts for recycling and remediation. Presently, we have no plans to build more ITD Units. LIABILITY FOR TOXIC TORTS. 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 held responsible for contamination or pollution. COMPETITION. There are many companies that currently dispose of hazardous and industrial wastes and remediate or clean up sites that have been contaminated, and 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. Our competitors are well established companies with substantially greater capital resources, larger research and development staffs and facilities and substantially greater marketing capabilities than us. No assurances can be given that we will be able to successfully compete with such companies or alternative technologies. TECHNOLOGICAL OBSOLESCENCE. We use a method called indirect thermal desorption to remediate waste. There is no assurance that this technology will be marketable in the future. Other technologies could make our services obsolete. OPERATING RISKS AND POSSIBLE INSUFFICIENCY OF INSURANCE. 13 Our business exposes us to various risks, including claims for damage to property, injuries to persons, negligence and professional errors or omissions in the planning or performing of services. There is no assurance that the liability insurance that we carry is sufficient. DEPENDENCE ON MANAGEMENT. We are dependent upon the time, talent and experience of James S. Percell, our President and Chief Executive Officer. The loss of the services of Mr. Percell, for any reason, could have a material adverse effect on us. NEED FOR ADDITIONAL PERSONNEL. As a result of a recent restructuring of our operations, we will hire additional staff. Competition for such personnel is intense, and there can be no assurance that we will be successful in attracting and retaining such personnel. SHARES ELIGIBLE FOR FUTURE SALE. Possible or actual sales of a substantial number of shares of common stock by the selling stockholder in this offering could have a negative impact on the market price of our common stock. No prediction can be made as to the effect, if any, that sales of shares of common stock or the availability of such shares for sale will have on the market prices prevailing from time to time. Nevertheless, the possibility that substantial amounts of common stock may be sold in the public market would likely have a material adverse effect on prevailing market prices for the common stock and could impair our ability to raise capital through the sale of our equity securities. OUTSTANDING OPTIONS AND WARRANTS; CONVERSION OF PREFERRED STOCK; DILUTION. We presently have outstanding an aggregate of 7,801,442 options and warrants to purchase common stock. The exercise of the outstanding options and warrants would result in the dilution of interests of our other stockholders. We presently have outstanding shares of preferred stock and the deferred dividends and interest on the preferred stock that may be converted into common stock. If all of the preferred stock and the deferred dividends and interest on the preferred stock (as calculated as of March 31, 2003) were to be converted into common stock, then we would be required to issue an aggregate of 15,415,269 shares of common stock. The conversion of all of the preferred stock would result in a substantial dilution of interests of our other stockholders. NO ASSURANCE OF A PUBLIC MARKET. There is currently only a limited market for our common stock that we characterize a limited market due to the relatively limited number of shares in the public float, the relatively low trading volume and the small number of brokerage firms acting as market makers. The market for low priced securities is generally less liquid and more volatile than securities traded on national 14 stock markets. Fluctuations in market prices are not uncommon. No assurance can be given that the market for the our common stock will continue or that the stock price will be maintained. Even if the shares of common stock are registered for resale to the public under the Securities Act of 1933, as amended (the "Act") and secondary trading exemptions under state securities laws are available, there may not be an active market for the shares of common stock. NO CASH DIVIDENDS. We have never paid cash dividends on our common stock and it is unlikely that we will do so in the future. The only way you may be able to make a profit on your investment is to sell your common stock. USE OF PROCEEDS We will not receive any proceeds upon the sale of the common stock issuable upon the exercise of the warrants by the selling stockholder. We will pay for the cost of registering the shares of common stock in this offering. The warrants were issued in connection with our borrowing $1,500,000 from the selling stockholder. We are using the loan proceeds for working capital and general corporate purposes. If all of the warrants are exercised, than we will receive an aggregate $15,000 that we plan to use for working capital and general corporate purposes. The warrants are immediately exercisable and expire on April 30, 2005. The warrant holder may exercise all or some of the warrants from time to time until the warrants expire. PRICE RANGE OF COMMON STOCK Our Common Stock commenced trading on the OTC Bulletin Board under the symbol "ELSF" on October 17, 2002. Prior to that, for the periods set forth below, our common stock 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 2001 First Quarter . . . . . . . . . . . . . $ 0.43 $ 0.15 Second Quarter. . . . . . . . . . . . . $ 0.20 $ 0.05 Third Quarter . . . . . . . . . . . . . $ 0.16 $ 0.08 Fourth Quarter. . . . . . . . . . . . . $ 0.38 $ 0.06 2002 First Quarter . . . . . . . . . . . . . $ 0.40 $ 0.20 Second Quarter. . . . . . . . . . . . . $ 0.28 $ 0.12 Third Quarter . . . . . . . . . . . . . $ 0.18 $ 0.03 Fourth Quarter. . . . . . . . . . . . . $ 0.08 $ 0.02 15 2003 First Quarter . . . . . . . . . . . . . $ 0.36 $ 0.04 Second Quarter through April 25, 2003 . $ 0.28 $ 0.12
On April 25, 2003, the closing price of our common stock was $0.22 per share. On the same date, we had approximately 166 stockholders of record, including broker dealers holding shares beneficially owned by their customers.
EQUITY COMPENSATION PLAN INFORMATION NUMBER OF SECURITIES REMAINING AVAILABLE NUMBER OF SECURITIES FOR FUTURE ISSUANCE TO BE ISSUED UPON WEIGHTED-AVERAGE UNDER EQUITY EXERCISE OF EXERCISE PRICE OF COMPENSATION PLANS OUTSTANDING OPTIONS, OUTSTANDING OPTIONS, (EXCLUDING SECURITIES WARRANTS AND RIGHTS WARRANTS AND RIGHTS REFLECTED IN COLUMN (a)) PLAN CATEGORY (a) (b) (c) - ------------------- --------------------- ---------------------- ------------------------- Equity compensation plans approved by security holders 747,500 $ 1.29 52,500 Equity compensation plans not approved by security holders 4,241,162 1.34 - --------------------- ---------------------- ------------------------- Total 4,988,662 $ 1.33 52,500 ===================== ====================== =========================
For information relating to the equity compensation plans, reference is made to Financial Note 8 to our audited Financial Statements for the year ended December 31, 2002 under the subsection "Stockholders' Equity-Stock Options." These Financial statements begin on page F-1. 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, that may consider such factors as our results of operations, financial condition, capital needs and acquisition strategy, among other factors. Our Series B Preferred Stock is entitled to receive dividends at such time, if any, that we declare dividends on our common stock, in an amount equal to the number of shares of common stock that the Series B Preferred Stock could be converted into at the time a dividend is declared. 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 the related notes beginning on page F-1, and the section entitled "Forward-Looking Statements" on page 8 that discuss certain limitations inherent in such statements. 16 INFORMATION REGARDING AND FACTORS AFFECTING FORWARD-LOOKING STATEMENTS We are including the following cautionary statement in this prospectus 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 that are other than statements of historical facts. Certain statements in this prospectus 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 affects 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; 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; and our ability to maintain acceptable utilization rates on our equipment. We are not obligated to update or revise these forward-looking statements to reflect the occurrence of future events or circumstances. OVERVIEW We are engaged in the development, production and sale of environmental recycling technologies and services to waste management companies, oil and gas companies and other industrial customers through our wholly owned subsidiary, OnSite Technology, L.L.C. ("OnSite"). We are devoting substantially all of our efforts to the development of markets for OnSite's services. We are currently providing recycling services to companies engaged in waste management, refining, and other industrial applications. Refining and other types of industrial activities, often produce significant quantities of petroleum-contaminated waste, from which our Indirect Thermal Desorption ("ITD") process can extract and recover the hydrocarbons as re-useable or re-saleable liquids, and produce recycled solids compliant with environmental regulations. The activities of OnSite 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. 17 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 operations. Total purchase consideration in the OnSite acquisition was financed by us through a private placement of Convertible Preferred and Preferred Stock, combined with senior secured notes and warrants to purchase shares of our common stock. We included OnSite's operating results in our statement of operations for the year ended December 31,1997, as though the acquisition took place at the beginning of that year, and deducted as a separate line item the pre-acquisition earnings attributable to the former 50% owner of OnSite. We have focused essentially all of our attention on our now wholly-owned business operations in OnSite. OnSite was formed, as a 50%-owned joint company with Parker, as a means for assembling the capital necessary to build and improve the ITD process and to generate market awareness and acceptance of ITD technology. We expect that a substantial portion of our revenues will continue to be generated from waste management, petrochemical, and industrial applications. During the period from 1996 until 2000 a substantial portion of our revenues were generated from major international oil and gas industry participants in Latin America (Colombia, Venezuela and Mexico) as well as from other domestic and foreign industrial applications. As of April 2003 we have for the most part completed our foreign contract operations, and have in fact taken steps to close down certain of our foreign subsidiaries as outlined below. We are now concentrating our marketing efforts and resources on domestic downstream plants, manufacturing facilities and waste management facilities, where our proprietary equipment and process have a competitive advantage in waste minimization, and recycling/reuse of hazardous waste markets -- including industrial, petroleum and petro-chemical waste streams. Highlights of our foreign operations: OnSite Colombia, Inc. ("OSC"): In November 1996, we formed a 50%-owned joint company OSC to provide hydrocarbon contaminated soil recycling services to oil and gas industry participants operating in Colombia. Having completed contract operations in Colombia, we re-acquired the 50% minority ownership of OSC and subsequently initiated formal procedures to close-down OSC. As of April 2003 the close-down process was in its final stages. OnSite Venezuela, Inc. ("OSV"): In January 1998, we formed our 100% owned subsidiary OSV, and commenced operations to provide hydrocarbon contaminated soil recycling services to oil and gas industry participants operating in Venezuela. Following completion of contract operations in Venezuela, the close-down of this entity was completed. OnSite Arabia, Inc. ("OSA"): In December 1998, we formed a 50%-owned joint company OSA to provide hydrocarbon contaminated soil recycling services to oil and gas industry participants operating in the Arabian Gulf region. 18 OnSite Environmental UK, Ltd. ("OSE"): In April 1999, we formed OSE, a wholly-owned subsidiary, for operations in Scotland. Having completed contract operations in Scotland, the close-down of this entity was completed. OnSite Mexico LLC ("OSM"): In July 1999, we registered OSM, a wholly-owned subsidiary, for operations in Mexico. OSM has completed operations and its close-down procedures have commenced. OST Ambiental S de RL de CV ("SRL"): In March 2001, we registered SRL, a wholly-owned subsidiary, for operations in Mexico. SRL has recently completed all operations and its close-down procedures have been completed. CRITICAL ACCOUNTING POLICIES AND ESTIMATES Our discussion and analysis of financial condition and results of operations are based upon our consolidated financial statements, that have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue and expenses, and related disclosure of contingent assets and liabilities. On an ongoing basis, we evaluate our estimates and our estimates are based on historical experience and on various other assumptions that are believed to be reasonable under the circumstances. These estimates and assumptions provide a basis for our judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from our estimates under different assumptions or conditions, and these differences may be material. We believe that the following critical accounting policies affect our more significant judgments and estimates used in the preparation of our consolidated financial statements. We recognize revenue at the time services are performed, or in the event of the sale of an ITD unit, when the equipment is shipped. We record property and equipment at cost and compute depreciation using the straight-line method over an estimated useful live of 8 years on our ITD Units and 3 to 5 years on our office furniture and equipment and transportation and other equipment. Effective October 1, 2002, we changed the estimated useful lives of our ITD units from 5 years to 8 years to more accurately reflect our experience with the useful lives of the units and to conform to industry practices for equipment used in similar applications. Any additions or improvements that increase the value or extend the life of our assets are capitalized and 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. 19 RESULTS OF OPERATIONS COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED DECEMBER 31, 2002 AND 2001 Summary. For the year ended December 31, 2002, we had a net loss of $3,043,000 as compared to a 2001 net income of $1,507,000. The decrease in earnings was primarily the result of a non-recurring gain on sale of three ITD units and certain technical rights during the fourth quarter of 2001. Additional information follows. Revenue and Gross Margin. Revenue of $943,000 for 2002 generated a $1,025,000 negative gross margin as compared to revenue of $2,987,000 and a negative gross margin of $559,000 in 2001. The decrease in revenue and gross margin was due to a substantial drop in ITD utilization during 2002. On average we had 0.1 units in operation in 2002 as compared to 1.8 units during 2001. The decreased utilization was due to the completion of contract operations in Mexico at the end of 2001. Selling, General and Administrative ("SGA") Expense. SGA expenses during 2002 were nearly 35% below the prior year level primarily due to the winding-down of contract operations in Colombia, Mexico, and Venezuela. Additional savings were recognized by reductions in SGA expenses in the U.S Amortization of Engineering Design and Technology. This represents the amortization of Acquired Engineering Design and Technology costs, an intangible asset related to the December 1997 acquisition of the remaining 50% interest in OnSite from Parker Drilling. The intangible asset is being amortized over an 8-year estimated economic life. Research & Development Costs ("R&D") Expense. The expense for 2002 is $30,000 as compared to $71,000 for 2001. This expense reflects ongoing R&D improvements to our Series 6000 ITD system design. Interest Expense. During 2002, $43,000 of interest expense was incurred, compared to interest expense of $839,000 for 2001 (including amortization of debt issuance costs of $344,000). The decrease in interest expense for 2002 was mainly due to the retirement of all of our senior debt at the end of 2001. Other Income (Expense). The category "Other" is mainly composed of foreign currency translation gains and losses. The financial statements of our foreign subsidiaries are measured as if the functional currency was the U.S. Dollar ("USD"). The re-measurement of local currencies into USD created favorable (unfavorable) translation adjustments that were included in net income in each respective year 2002 and 2001. Income Taxes. The $79,000 tax benefit in 2002 is the result of a refund of 2001 federal income tax. Approximately half of the 2001 tax provision relates to state income tax effects, with the balance due to foreign income tax effects mainly in our Mexico subsidiaries. We incurred net operating losses ("NOLs") in the U.S. in recent years, some of which were used in 2001 to offset taxes on our 20 2001 taxable income. The balance of our NOLs may be used to offset taxable income reported in future periods. The NOLs 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. However, presently there can be no assurances that the NOLs will be utilized. Minority Interest. Minority interest for 2002 reflects our 50% minority partner's interest in the net loss of OnSite Arabia because our Colombian operations were completed and Colombian subsidiary closed down in 2001. During 2001, minority interest reflects our 50% minority partner's interest in the net loss of OnSite Colombia and OnSite Arabia. LIQUIDITY AND CAPITAL RESOURCES We currently have no significant commitments for capital expenditures. Since our inception, we have expended a significant portion of our resources to develop markets and industry awareness of our ITD 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. In December 2001 we completed the sale of three of our ITD units along with certain licensing rights, and utilized the bulk of the proceeds from the sale to retire our senior debt. With the exception of this sale, we have incurred recurring net losses and have been dependent on revenue from a limited customer base to provide cash flows. We completed our most significant service contract in December 2000 and during 2001 and 2002 have been exploring ways to replace that revenue. During 2001 and 2002 we've experienced a continued tightening of cash reserves and prior to repaying our senior debt in December 2001, we took actions to delay payments on that debt. In January 2003 we signed a contract to process various waste streams at a facility in Arkansas. We are currently seeking to obtain additional service contracts in our served markets and are considering strategic alternatives including the possible additional sale of certain of our assets. To the extent our cash reserves and cash flows from operations are insufficient to meet future cash requirements, we will need to successfully raise funds through an equity infusion, the issuance of debt securities or the sale of ITD units. Financing may not be available on terms acceptable to us, or at all. Further, the sale of additional equity or convertible debt securities may result in dilution to our stockholders. During July 2002, we obtained uncollateralized loans totaling $250,000 from Cahill Warnock Strategic Partners, L. P. and Strategic Associates, L.P. These loans bear interest at 12% per year and are due in September 2003. During March 2003, we obtained a loan of $1,500,000 from a private investor group. The loan is to be funded in three $500,000 fundings on March 20, 2003; May 15, 2003; and August 15, 2003. The initial funding of March 20, 2003 has been received. The loan is collateralized by three ITD units and bears interest 21 at 12% per year. Principal payments are due in 20 quarterly installments of $75,000 beginning in August 2003 with the final payment due in May 2008. Warrants to purchase 1,500,000 shares of our common stock at a price of $0.01 were issued in connection with this loan. We expect that our existing cash reserves, cash flows from operations, and our borrowing of $1,500,000 in March 2003 will be sufficient to cover our cash requirements for 2003. However, there can be no assurance that existing sources of cash will cover our 2003 cash flow requirements. Our previous auditor included an explanatory paragraph in their auditor's report on the Company's consolidated financial statements, as of December 31, 2001 and for the two years in the period then ended, describing the uncertainty about our ability to continue as a going concern. Our present auditors issued an unqualified opinion, without a going concern explanatory paragraph, on the Company's 2002 financial statements. The functional currency of our foreign operations is the U.S. dollar because customer invoicing, customer receivables, imported equipment and many of the operating cost factors are denominated in U.S. dollars. We plan to continue to implement the same approach to minimize our risks associated with foreign exchange fluctuation and its affect on our profitability. ACCOUNTING MATTERS AND RECENTLY ISSUED PRONOUNCEMENTS 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. 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. In July 2001, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 141, "Business Combinations," that requires all business combinations initiated after June 30, 2001 be accounted for using the purchase method. In addition, SFAS No. 141 further clarifies the criteria to recognize intangible assets separately from goodwill. Specifically, SFAS No. 141 requires that an intangible asset may be separately recognized only if such an asset meets the contractual-legal criterion or the separability criterion. The implementation of SFAS No. 141 did not have a material impact on our results of operations or financial position. In July 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible Assets," under which goodwill and intangible assets with indefinite useful lives are no longer amortized but will be reviewed for impairment annually, or more 22 frequently if certain events or changes in circumstances indicate that the carrying value may not be recoverable. The impairment test for goodwill involves a two-step process: step one consists of a comparison of the fair value of a reporting unit with its carrying amount, including the goodwill allocated to each reporting unit. If the carrying amount is in excess of the fair value, step two requires the comparison of the implied fair value of the reporting unit goodwill with the carrying amount of the reporting unit goodwill. Any excess of the carrying value of the reporting unit goodwill over the implied fair value of the reporting unit goodwill will be recorded as an impairment loss. The impairment test for intangible assets with indefinite useful lives consists of a comparison of fair value to carrying value, with any excess of carrying value over fair value being recorded as an impairment loss. Intangible assets with finite useful lives will continue to be amortized over their useful lives and will be reviewed for impairment in accordance with SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." The implementation of SFAS No. 142 at did not have a material impact on our results of operations or financial position. In August 2001, the FASB issued SFAS No. 144, that supersedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," and certain provisions of APB Opinion No. 30, "Reporting the Results of Operations - Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions." SFAS No. 144 retains the fundamental provisions of SFAS No. 121 related to: (i) the recognition and measurement of the impairment of long-lived assets to be held and used, and (ii) the measurement of long-lived assets to be disposed by sale. It provides more guidance on estimating cash flows when performing recoverability tests, requires long-lived assets to be disposed of other than by sale to be classified as held and used until disposal, and establishes more restrictive criteria to classify long-lived assets as held for sale. In addition, SFAS No. 144 supersedes the accounting and reporting provisions of APB Opinion No. 30 for the disposal of a segment of a business. However, it retains the basic provisions of APB Opinion No. 30 to report discontinued operations separately from continuing operations and extends the reporting of a discontinued operation to a component of an entity. The implementation of SFAS No. 144 did not have a material impact on our results of operations or financial position. We have evaluated the carrying value of long-lived assets, including associated intangibles. We performed an evaluation of recoverability by comparing the estimated future undiscounted cash flows associated with the asset to the asset's carrying amount to determine if a write-down to market value or discounted cash flow is required. Given the homogeneous nature and geographic deployment flexibility of our assets, and based upon a recent evaluation by us, impairment of our long-lived assets has not been deemed necessary. However, there can be no assurances that our ongoing evaluation would not result in an impairment-related write-down. In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities," that addresses financial accounting and reporting for costs associated with exit or disposal activities and supersedes Emerging Issues Task Force ("EITF") Issue No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)." SFAS No. 146 requires companies to recognize costs associated with exit or disposal 23 activities when they are incurred rather than at the date of a commitment to an exit or disposal plan. In addition, SFAS No. 146 establishes that fair value is the objective for initial measurement of the liability. SFAS No. 146 is effective for exit or disposal activities initiated after December 31, 2002, but early adoption is permitted. We do SFAS No 146 to have a significant impact on our financial position or results of operations. In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock Based Compensation", that amends SFAS No. 123 to provide alternative methods of transition for an entity that voluntarily changes to the fair value method of accounting for stock based employee compensation. It also amends the disclosure provisions of SFAS No. 123 to require prominent disclosure about the effects on reported net income of an entity's accounting policy decisions with respect to stock based employee compensation. Finally, SFAS No. 148 amends APB Opinion No. 28, "Interim Financial Reporting", to require disclosure of those effects in interim financial statements. SFAS No. 148 is effective for fiscal years ended after December 15, 2002, but early adoption is permitted. We will adopt SFAS No. 148 on January 1, 2003; however, we do not expect the adoption to have a significant impact on our financial reporting because we do not use stock based compensation extensively. RECENT EVENTS In January 2003 we signed a contract to process various waste streams for Rineco Chemical Industries, Inc., an entity related to Rineco Recycling, LLC. In March 2003 we obtained a loan of $1,500,000 from Rineco Recycling, LLC. The loan is to be funded in three $500,000 fundings (less $40,000 in origination fees per funding) on March 20, 2003 (we have already received this funding tranch); May 15, 2003; and August 15, 2003. The loan is collateralized by three of our ITD units and bears interest at a stated rate of 12% per year. Principal payments are due in 20 quarterly installments of $75,000 beginning in August 2003 with the final payment due in May 2008. We issued 1,500,000 warrants to purchase shares of our common stock at an exercise price of $0.01 per share in connection with this loan and these warrants were valued at $345,000. The loan origination fees and warrants results in an effective interest rate on the loan of approximately 35% per year. This transaction made Rineco Recycling, LLC a related party and the beneficial owner of 13% of our common stock, although none of the warrants have been exercised. Also during March 2003, we extended the maturity date of the uncollateralized notes from April 16, 2003 to September 16, 2003. ACCOUNTING ESTIMATES AND CHOICES Preparation of financial statements under generally accepted accounting principles in the United States of America requires us to make choices between acceptable methods of accounting and to make estimates of future events to determine the value we report for certain assets and liabilities at the date of our financial statements and the value we report for revenues and expenses in a period covered by our financial statements. While we try to be as precise as possible in making these estimates, many of them are subjective in nature and involve matters of judgment. We believe the most subjective and material estimates in our financial statements are the reserve, if any, that we report for accounts receivable, the amount of our deferred taxes and our accrued warranty costs. 24 Accounts Receivable. When an account receivable is considered impaired, the amount of the impairment is measured based on the present value of expected future cash flows or the fair value of collateral. Impairment losses (recoveries) are included in the allowance for doubtful accounts. Deferred Taxes. We record a valuation allowance to reduce our deferred income tax assets to an amount that we believe to be realizable under the "more-likely-than-not" recognition criteria. While we consider future taxable income and ongoing prudent and feasible tax planning strategies in assessing the need for a valuation allowance, in the future we may change our estimate of the amount of the deferred income tax assets that would "more-likely-than-not" be realized, resulting in an adjustment to the deferred income tax asset valuation allowance that would either increase or decrease, as applicable, reported net income in the period. Accrued Warranty and Other Contingent Costs. We record an accrual for product warranty and other contingencies when estimated future expenditures associated with such contingencies become probable, and the amounts can reasonably be estimated. However, new information may become available, or circumstances (such as applicable laws and regulations) may change, thereby resulting in an increase or decrease in the amount required to be accrued for such matters (and therefore a decrease or increase in reported net income in the period of such change). We believe that all of the estimates we used to prepare our financial statements were reasonable at the time we made them, but circumstances may change requiring us to revise our estimates in ways that could have a material adverse impact on our results of operations or financial position. BUSINESS INTRODUCTION We are 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 our wholly-owned subsidiaries National Fuel & Energy, Inc. ("NFE") and OnSite Technology, L.L.C. ("OnSite"). During the period from 1996 until 2000 a substantial portion of our revenues were generated from major international oil and gas industry participants in Latin America (Colombia, Venezuela and Mexico) as well as from other domestic and foreign industrial applications. As of April 2003 we have completed our foreign contract operations, and have taken steps to close down certain of our foreign subsidiaries. We are now concentrating our marketing efforts and resources on domestic downstream plants, manufacturing facilities and waste management facilities, where our proprietary equipment and process have a competitive advantage in waste minimization, and recycling/reuse of waste streams. As of April 2003, OnSite operates internationally through its wholly-owned subsidiary OST Equipment Leasing L.L.C, and its 50%-owned subsidiary, OnSite Arabia, Inc. OnSite is in the process of closing down (liquidating) the OnSite Colombia, Inc. and OnSite Mexico, L.L.C. subsidiaries. Onsite has completely closed down its OnSite Venezuela, Inc. and OnSite Environmental UK Ltd. subsidiaries. 25 The environmental remediation and recycling services that we provide involve the removal of hydrocarbon contaminants from solids 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 that 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. 26 OnSite owns the technologies included in its Indirect Thermal Desorption ("ITD") units, and the proprietary processes for on-site remediation and recycling of hydrocarbon contaminated solids. To date, the environmental remediation and recycling services we have provided have involved the removal of petroleum contaminants from waste streams using our ITD units. Our ITD units are easily transported processing systems which produce clean solids from contaminated solids while reclaiming the hydrocarbons. Our customers consist primarily of large corporations with hydrocarbon or hydrocarbon derivative contaminated waste streams and waste management companies in the business of offering waste disposal services. The primary services we offer involve the remediation and recycling of waste streams 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 solids, we utilize our ITD units consisting of (i) an indirect thermal desorption unit wherein the hydrocarbon contaminated materials are 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 solids can be remediated and recycled at the site where the contaminated waste streams are located. We do not haul or dispose of solids or contaminants away from the customer's location. As of April 2003, we owned five ITD units outright, and had a 50% interest in two additional units owned by our 50%-owned subsidiary OnSite Arabia, Inc. Customers: Our targeted customers are companies that have industrial activities or sites that produce or process quantities of hydrocarbon contaminated waste. 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 hydrocarbon contaminated industrial waste streams, (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; (iii) the remediation and recycling of soil contaminated by oil-based drilling mud, fuel spills, leakage at storage tanks, leakage from pipelines; and (iv) 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 refining and 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 solids and discharges the contaminants previously absorbed without direct contact of the solid to a flame. 27 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 solid 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 materials, are loaded into the elevated end of the trundle by a conveyor belt or a front-end loader. As the trundle revolves, the contaminated materials are agitated by internal lifts and oars as they passes through the inside of the trundle by gravity flow and are heated to temperatures from 200 to 1,000 degrees Fahrenheit. At these temperatures, the hydrocarbon contaminants in the solids transform into vapors, which are vacuumed out of the heat exchange system into the condensing system, the afterburner or the thermal oxidizer. The clean materials then drop out of the discharge door at the low end of the trundle and are passed through an enclosed conveyor for re-hydration before final discharge. Random samples are tested at the end of the process to confirm that the contaminants have been removed. 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 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 that are embodied in the condensation process system unit, one of the two principal components of our ITD units. Within this component the hydrocarbon contaminants are condensed from the vapor state created in the heat exchange 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 contaminants 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. As of April 21, 2003, we did not have any ITD units under construction, nor did we have plans to fabricate additional ITD Units. 28 RECENT EVENTS In January 2003 we signed a contract to process various waste streams for Rineco Chemical Industries, Inc., an entity related to Rineco Recycling, LLC. (The selling security holder). In March 2003 we obtained a loan of $1,500,000 from Rineco Recycling, LLC. The loan is to be funded in three $500,000 fundings (less $40,000 in origination fees per funding) on March 20, 2003 (we have already received this funding tranch); May 15, 2003; and August 15, 2003. The loan is collateralized by three of our ITD units and bears interest at a stated rate of 12% per year. Principal payments are due in 20 quarterly installments of $75,000 beginning in August 2003 with the final payment due in May 2008. We issued 1,500,000 warrants to purchase shares of our common stock at an exercise price of $0.01 per share in connection with this loan and these warrants were valued at $345,000. The loan origination fees and warrants results in an effective interest rate on the loan of approximately 35% per year. This transaction made Rineco Recycling, LLC a related party and the beneficial owner of 13% of our common stock, although none of the warrants have been exercised. Also, during March 2003, we extended the maturity date of the uncollateralized loans from April 16, 2003 to September 16, 2003. We operate with our own trained personnel through wholly or partially-owned subsidiaries as discussed above. As of April 2003, five of our ITD units are located in the United States and two in the United Arab Emirates. 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 hydrocarbon contamination. Companies utilizing the "dig and haul" method generally transport the contaminated materials to other facilities for processing. We believe that the technology we utilize is competitive because our equipment is mobile, and thus, contaminated materials 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. 29 Companies utilizing direct burn technology use direct heat sources to incinerate contaminants found in the solids. 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 materials, 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, 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 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. 30 GOVERNMENTAL REGULATIONS AND THE 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. We presently have the ability to deliver remediation and recycling services that meet applicable federal and state standards for the delivery of our 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 waste stream. 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 15 employees, five 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 transfer agent and registrar for our common stock is Colonial Stock Transfer Company, Inc., addressed at 66 Exchange Place, Salt Lake City, Utah 84111; (801) 355-5740. 31 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 2003. We believe that our offices are adequate for our present needs and that suitable space will be available to accommodate our future needs. For information relating to our properties, reference is made to Financial Note 6 to our audited Financial Statements for the year ended December 31, 2002 under the subsection "Lease Commitments." These Financial statements begin on page F-1. MANAGEMENT The following table sets forth the names and positions of each of our executive officers and directors:
Name Age Position - ------------------- --- ----------------------------------------------- James S. Percell 59 Director, Chairman, Chief Executive Officer and President Thomas R. Bray 47 Director Bryan Sharp 59 Director Albert M. Wolford 81 Director David L. Warnock 45 Director Michael D. Thompson 51 Chief Financial Officer
Directors are elected annually and hold office until the next annual meeting of our stockholders or until their successors are elected and qualified. Officers are elected annually and serve at the discretion of the Board of Directors. There is no family relationship between or among any of our directors and executive officers. Board vacancies are filled by a majority vote of the Board. James S. Percell serves as Director, Chairman, Chief Executive Officer and President and also serves as President of our subsidiaries, National Fuel & Energy, Inc. ("NFE") and OnSite Technology LLC ("OnSite"). Mr. Percell became a director and President, Chief Executive Officer and a director of NFE in November 1995. Mr. Percell became President and Chief Executive Officer 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. 32 Thomas R. Bray was appointed as Director in January 2002. Mr. Bray is a member of our compensation and audit committees. Mr. Bray has been a practicing attorney practicing in Stafford and Houston, Texas for the past nine years, specializing in business and real estate transactions, and litigation and general corporate representation, largely for businesses and individuals in the oil and gas services, banking and investment industries. Prior to that, he was vice president of New First City, Texas-Houston, N.A., having previously served as special assistant to the president and an in-house counsel of Collecting Bank, N.A., and vice-president of First City Asset Servicing Company and First City, Texas-Houston, N.A. Mr. Bray has also served as president of Associated Title Company, president of Arbor Oaks Utilities, Inc. a private water and sewer utility company, and the owner and president of Rembrandt Homes, Inc., all in Houston. Mr. Bray graduated from the University of Texas with a BBA in Finance, and received his J.D. degree from South Texas College of Law in Houston. Bryan Sharp has served as a Director since November 1995. Mr. Sharp previously served on our audit committee, and previously was a self-employed environmental consultant. Mr. Sharp previously served as Principal-in-Charge and Director of Espey, Huston & Associates, Inc. ("EH&A"), an environmental consulting company. 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 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, and previously served as 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 was appointed as Director in December 1997 in connection with the December, 1997 financing. Mr. Warnock is a member of our audit and compensation committees. 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 33 Horizons Fund. Mr. Warnock also serves on the Boards of Directors of other public and private companies. Mr. Warnock received a Bachelor of Arts Degree, History, from the University of Delaware and a Masters Degree, Finance, from the University of Wisconsin. Michael D. Thompson became our Chief Financial Officer in September 2002. Beginning in 1997, Mr. Thompson served as Chief Operating Officer of Outsourcing Services, Inc., an accounting and consulting firm where he provided financial and accounting services to clients in a variety of industries. From 1990 through 1996, Mr. Thompson was Chief Financial Officer of The Hanover Company, a fully integrated national real estate development firm. Mr. Thompson is a certified public accountant. Mr. Thompson has a B.B.A. degree with honors from the University of Texas. LIMITATION ON DIRECTORS' LIABILITY; INDEMNIFICATION Our Articles of Incorporation (the "Articles") provide, as permitted by governing Nevada law, that our directors shall not be personally liable to us or any of our stockholders for monetary damages for breach of fiduciary duty as a director, with certain exceptions. The Articles further provide that we will indemnify our directors and officers against expenses and liabilities they incur to defend, settle, or satisfy any civil litigation or criminal action brought against them on account of their being or having been our directors or officers unless, in such action, they are adjudged to have acted with gross negligence or willful misconduct. The inclusion of these provisions in the Articles may have the effect of reducing the likelihood of derivative litigation against directors, and may discourage or deter stockholders or management from bringing a lawsuit against directors for breach of their duty of care, even though such an action, if successful, might otherwise have benefited us and our stockholders. The Articles provide for the indemnification of our executive officers and directors, and the advancement to them of expenses in connection with any proceedings and claims, to the fullest extent permitted by Nevada law. The Articles include related provisions meant to facilitate the indemnities' receipt of such benefits. These provisions cover, among other things: (i) specification of the method of determining entitlement to indemnification and the selection of independent counsel that will in some cases make such determination, (ii) specification of certain time periods by which certain payments or determinations must be made and actions must be taken, and (iii) the establishment of certain presumptions in favor of an indemnitee. Insofar as indemnification for liabilities arising under the Securities Act of 1933 (the "Act") may be permitted to directors, officers and controlling persons of the small business issuer pursuant to the foregoing provisions, or otherwise, the small business issuer has been advised that in the opinion of the Commission, such indemnification is against public policy as expressed in the Act and is therefore unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by a small business issuer of expenses incurred or paid by a director, officer or controlling person of the small business issuer in the successful defense of any action, suit or proceeding) is asserted by such director, officer, or controlling person in connection with the securities being 34 registered, the small business issuer will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue. 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) that included participation in the plan by directors. 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 (upon at least thirty days written notice prior to the end of the initial term or any additional one-year term), 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. During the year ended December 31, 2002, Mr. Percell agreed to defer and accrue his compensation, beginning with the pay period ended June 15, 2002.
SUMMARY COMPENSATION TABLE LONG TERM COMPENSATION ANNUAL COMPENSATION PAYOUTS OTHER AWARDS SECURITIES ALL NAME AND ANNUAL RESTRICTED UNDERLYING OTHER PRINCIPAL COMPEN- STOCK OPTIONS/ LTIP COMPEN- POSITION YEAR SALARY BONUS SATION AWARDS SARS PAYOUTS SATION James S. Percell 2002 $180,000 -0- -0- -0- -0- -0- -0- CHIEF 2001 $180,000 -0- -0- -0- -0- -0- -0- EXECUTIVE 2000 $180,000 -0- -0- -0- ---0--- -0- -0- OFFICER
OPTION/SAR GRANTS IN LAST FISCAL YEAR NAME AND NUMBER OF PERCENT OF POTENTIAL REALIZ ABLE VALUE AT PRINCIPAL SECURITIES TOTAL ASSUMED ANN UAL RATES OF POSITION UNDERLYING OPTIONS/SARS STOCK PRICE APPRECIATION FOR OPTIONS/SARS GRANTED TO OPTION TERM: GRANTED (1) EMPLOYEES IN FISCAL EXERCISE OF EXPIRATION YEAR BASE PRICE DATE 5% 10% - --------------- (1) No Options/SAR Grants made during 2002
35
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 NAME AND SHARES OPTIONS/SARS AT OPTIONS/SARS AT PRINCIPAL ACQUIRED ON VALUE FISCAL YEAR-END FISCAL YEAR-END POSITION EXERCISE REALIZED EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE James S. Percell (*) (*) -0- / 1,303,042/0 -0- / -0- CHIEF EXECUTIVE OFFICER
- --------------- (*) Did not exercise any options. Other than our 1998 Stock Option Plan (described immediately below), we do not have any long term incentive plans or defined benefit or actuarial plans. 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 that 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"). In 1998, 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. In April 2003, our Board of Directors approved increasing the number of shares for issuance pursuant to the Plan to 1,600,000 shares. This change is subject to the approval of our Shareholders and will be voted on at our annual meeting on May 22, 2003. If our shareholders approve the increase, then the new options in the Plan will qualify as either Incentive Stock Options or Non-qualified stock options. ELIGIBILITY. The Plan is open to key employees (including officers and directors) and our consultants and affiliates ("Eligible Persons"). 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. 36 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 nonqualified 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. 37 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. 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 NUMBER OF ---------------------------- --------- --------- VALUE(1) OPTIONS --------- --------- James S. Percell, CEO $ 210,937 125,000 Executive Group(2) $ 215,137 145,000 Non-executive Director Group $ 126,450 180,000 Non-executive Officer Employee Group $ 624,320 422,500 Total $957,907 747,500 38 - --------------- (1) Dollar value was calculated based on the exercise price of $1.6875 for the options granted in December 1998 and $0.21 for the options granted in March 2003. These exercise prices were the market value per share on the date of the grants. (2) Amounts include dollar value and options granted to Mr. Percell. CERTAIN RELATIONSHIPS AND 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 January 2003 we signed a contract to process various waste streams for Rineco Chemical Industries, Inc., an entity related to Rineco Rcycling, LLC. In March 2003 we obtained a loan of $1,500,000 from Rineco Recycling, LLC. The loan is to be funded in three $500,000 fundings on March 20, 2003 (we have already received this funding tranch); May 15, 2003; and August 15, 2003. The loan is collateralized by three of our ITD units and bears interest at 12% per year. Principal payments are due in 20 quarterly installments of $75,000 beginning in August 2003 with the final payment due in May 2008. We issued 1,500,000 warrants to purchase shares of our common stock at an exercise price of $0.01 per share in connection with this loan. This transaction made Rineco Recycling, LLC the beneficial owner of 13% of our common stock, although none of the warrants have been exercised as of April 25, 2003. In July 2002, we obtained uncollateralized loans totaling $250,000 from Cahill Warnock Strategic Partners, L.P. and Strategic Associates, L.P. These loans bear interest of 12% per year and were originally due in January 2003 but have been extended to September 2003. David L. Warnock, one of our Directors, is a general partner of Cahill Warnock Strategic Partners, L.P. and a managing member of the general partner of Strategic Associates, L.P. In March 2001 and September 2000, we entered into agreements with our primary lenders and holders of our outstanding preferred stock to defer various principal and interest payments on our senior debt. The senior debt was fully repaid in December 2001. 39 During 1998, we entered into a marketing assistance agreement with the minority owners of OnSite Colombia, Inc. Under the terms of the agreement, in exchange for assisting us in our business expansion efforts, the minority owners and we each received marketing assistance fees totaling $320,000 during each of the years ended December 31, 2000 and 1999. During December 1998, we formed a joint company, OnSite Arabia, Inc. with an investor group for the purpose of providing environmental remediation in the Arabian gulf region. We 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 our proportional basis in the assets. 40 PRINCIPAL STOCKHOLDERS The following table sets forth certain information as of April 25, 2003, 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 PERCENT CLASS OF NAME SHARES OWNED(1) OF CLASS SECURITIES - --------------------------------- ------------------------ --------- ------------ James S. Percell 1,486,960 (2) 13.0% Common Stock 2600 South Loop West, Suite 645 Houston, Texas 77054 Bryan Sharp 1,147,264 (3)(9) 10.2% Common Stock 3200 Wilcrest, #200 Houston, Texas 77042 Albert M. Wolford 144,346 (4)(9) 1.4% Common Stock 2600 South Loop West, Suite 645 Houston, Texas 77054 David L. Warnock 8,600,642 (5)(6)(9)(10) 46.0% Common Stock One South Street, Suite 2150 Baltimore, Maryland 21202 Edward L. Cahill 8,565,642 (5)(6) 45.9% Common Stock One South Street, Suite 2150 Baltimore, Maryland 21202 Cahill, Warnock Strategic Partners Fund, L.P 8,565,642 (5)(6) 45.9% Common Stock One South Street, Suite 2150 Baltimore, Maryland 21202 Strategic Associates, L.P. 8,565,642 (5)(6) 45.9% Common Stock One South Street, Suite 2150 Baltimore, Maryland 21202 Cahill, Warnock & Company, L.L.C. 8,565,642 (5)(6) 45.9% Common Stock One South Street, Suite 2150 Baltimore, Maryland 21202 Cahill, Warnock Strategic Partners, L.P. 8,565,642 (5)(6) 45.9% Common Stock One South Street, Suite 2150 Baltimore, Maryland 21202 Thomas R. Bray 15,000 (10) 0.1% Common Stock 2600 South Loop West, Suite 645 Houston, Texas 77054 Newpark Resources, Inc. 7,845,156 (7)(8) 43.7% Common Stock 3850 N. Causeway, Suite 1770 Metairie, LA 70002-1756 Michael D. Thompson 10,000 (11) 0.1% Common Stock 2600 South Loop West, Suite 645 Houston, Texas 77054 Rineco Recycling, LLC 1,500,000 (12) 13% Common Stock 629 Vulcan Road Haskell, Arkansas 72015 All officers and directors as a Group (6 persons) 11,404,212 53.6% Common Stock
41 - --------------- (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. (2) Includes an option to purchase 800,000 shares of our common stock at $0.60 per share, and options to purchase 378,042 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, an option to purchase 10,997 shares of our common stock at $5.00 per share, and an option to purchase 15,000 shares of our common stock at $0.21 per share. These options are fully vested and immediately exercisable. Excludes an option to purchase 15,000 shares of our common stock at $0.21 per share which vests March 6, 2004. (4) Includes options to purchase 43,346 shares of our common stock at $1.44 per share and an option to purchase 15,000 shares of our common stock at $0.21 per share. These options are fully vested and immediately exercisable. Excludes an option to purchase 15,000 shares of our common stock at $0.21 per share which vests March 6, 2004. (5) Includes 1,722,900 shares of Series B Convertible Preferred Stock and warrants to purchase 599,717 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 33,230 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) 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. Also includes 854,625 shares of common stock issuable to Cahill Warnock Fund and 47,354 shares of common stock issuable to Strategic Associates upon conversion of deferred dividends and interest thereon related to the Series D Preferred Stock. These Preferred shares, deferred dividends and interest are immediately convertible into our common stock. (7) 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. Also includes 935,386 shares of common stock upon conversion of deferred dividends and interest thereon related to the Series D Preferred Stock. These Preferred shares, deferred dividends and interest are immediately convertible into our common stock. (8) 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 656,390 shares of our common stock at $0.01 per share. The warrant is fully vested and immediately exercisable. (9) 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. (10) Includes an option to purchase 15,000 shares of our common stock at $0.21 per share. Excludes an option to purchase 15,000 shares of our common stock at $0.21 per share which vests March 6, 2004. (11) Includes an option to purchase 10,000 shares of our common stock at $0.21 per share. Excludes an option to purchase 10,000 shares of our common stock at $0.21 per share which vests March 6, 2004. 42 (12) Includes common stock underlying 1,500,000 warrants that are immediately exercisable. We know of no arrangement or understanding which may at a subsequent date result in a change of control. PLAN OF DISTRIBUTION The selling stockholder and any of its pledgees, assignees, and successors-in-interest may, from time to time, sell any or all of their shares of common stock on any stock exchange, market, or trading facility on which the shares are traded or in private transactions. These sales may be at fixed or negotiated prices. There is no assurance that the selling stockholder will sell any or all of the common stock in this offering. The selling stockholder may use any one or more of the following methods when selling shares: - - Ordinary brokerage transactions and transactions in which the broker-dealer solicits purchasers. - - Block trades in which the broker-dealer will attempt to sell the shares as agent but may position and resell a portion of the block as principal to facilitate the transaction. - - Purchases by a broker-dealer as principal and resale by the broker-dealer for its own account. - - An exchange distribution following the rules of the applicable exchange. - - Privately negotiated transactions. - - Short sales or sales of shares not previously owned by the seller. - - Broker-dealers may agree with the selling stockholder to sell a specified number of such shares at a stipulated price per share. - - A combination of any such methods of sale. - - Any other lawful method. The selling stockholder may also engage in: - - Short selling against the box, which is making a short sale when the seller already owns the shares. - - Buying puts, which is a contract whereby the person buying the contract may sell shares at a specified price by a specified date. 43 - - Selling calls, which is a contract giving the person buying the contract the right to buy shares at a specified price by a specified date. - - Selling under Rule 144 under the Securities Act, if available, rather than under this prospectus. - - Other transactions in our securities or in derivatives of our securities and the subsequent sale or delivery of shares by the stock holder. - - Pledging shares to their brokers under the margin provisions of customer agreements. If a selling stockholder defaults on a margin loan, the broker may, from time to time, offer and sell the pledged shares. Broker-dealers engaged by the selling stockholder may arrange for other brokers-dealers to participate in sales. Broker-dealers may receive commissions or discounts from the selling stockholder in amounts to be negotiated. If any broker-dealer acts as agent for the purchaser of shares, the broker-dealer may receive commission from the purchaser in amounts to be negotiated. The selling stockholder do not expect these commissions and discounts to exceed what is customary in the types of transactions involved. The selling stockholder and any broker-dealers or agents that are involved in selling the shares may be considered to be "underwriters" within the meaning of the Securities Act for such sales. An underwriter is a person who has purchased shares from an issuer with a view towards distributing the shares to the public. In such event, any commissions received by such broker-dealers or agents and any profit on the resale of the shares purchased by them may be considered to be underwriting commissions or discounts under the Securities Act. We are required to pay all fees and expenses incident to the registration of the shares in this offering. However, we will not pay any commissions or any other fees in connection with the resale of the common stock in this offering. If we are notified by a selling stockholder that they have a material arrangement with a broker-dealer for the resale of the common stock, then we would be required to amend the registration statement of which this prospectus is a part, and file a prospectus supplement to describe the agreements between the selling stockholder and the broker-dealer. SELLING STOCKHOLDER Rineco Recycling, LLC presently owns 1,500,000 warrants to purchase our common stock at an exercise price of $0.01 per share. We issued the warrants to Rineco Recycling, LLC when they loaned us $1,500,000 in March 2003 pursuant to a promissory note that we gave to Rineco Recycling, LLC. Each warrant entitles Rineco Recycling, LLC to purchase one share of our common stock. The warrants are immediately exercisable and the warrants expire on April 30, 2005. Under the rules of the Commission, Rineco Recycling, LLC is deemed to be the beneficial owner of a similar number of shares of common stock, even though none of the warrants have been exercised as of April 25, 2003. The 1,500,000 shares of common stock being offered are issuable by us upon the exercise of the 44 warrants. Upon exercise of the warrants, Rineco Recycling, LLC will be able to resell the common stock through public secondary trading for all or a portion of the common stock from time to time. Rineco Recycling, LLC does not beneficially own any other shares of common stock. Rineco Recycling, LLC presently beneficially owns approximately 13% of our common stock. If Rineco Recycling, LLC sells all the shares of common stock in this offering, then Rineco will not own any shares of our common stock and Rineco Recycling, LLC will then own -0-% of our common stock. In January 2003 we signed a contract to process various waste streams for Rineco Chemical Industries, Inc., an entity related to Rineco Recycling, LLC. DESCRIPTION OF SECURITIES Our authorized capital stock consists of 50,000,000 shares of common stock, $0.001 par value, and 10,000,000 shares of preferred stock $0.001 par value. As of the date of this Prospectus, we have outstanding 10,112,144 shares of common stock, 2,733,686 shares of Series B Preferred Stock and 400,000 shares of Series D Preferred Stock. The following summary description of our common stock is qualified in its entirety by reference to our Articles of Incorporation ("Articles"), a copy of which is filed as an exhibit to the Registration Statement of which this Prospectus is a part. COMMON STOCK The holders of common stock are entitled to one vote per share with respect to all matters required by law to be submitted to our stockholders. The holders of common stock have the sole right to vote, except as otherwise provided by law or by the Articles, including provisions governing any Preferred Stock. The common stock does not have any cumulative voting, preemptive, subscription or conversion rights. Election of directors and other general stockholder action requires the affirmative vote of a majority of shares represented at a meeting in which a quorum is represented. The outstanding shares of common stock are, and the shares of common stock offered hereby will be, upon payment therefor as contemplated herein, validly issued, fully paid and non-assessable. Subject to the rights of any outstanding shares of Preferred Stock, the holders of common stock are entitled to receive dividends when, as and if declared by the Board of Directors out of funds legally available therefor. However, our Series B Preferred Stock is entitled to receive dividends at such time, if any, that we declare dividends on our common stock, in an amount equal to the number of shares of common stock that the Series B Preferred Stock could be converted into at the time a dividend is declared, which could hinder our ability to pay dividends on our common stock. In the event of liquidation, dissolution or winding up of our affairs, the holders of common stock are entitled to share ratably in all assets remaining available for distribution to them after payment or provision for all liabilities and any preferential liquidation rights of any Preferred Stock then outstanding. 45 PREFERRED STOCK We are authorized to issue 10,000,000 shares of Preferred Stock, par value $0.001, of which there are outstanding, 2,733,686 shares of Series B Preferred Stock and 400,000 shares of Series D Preferred Stock. The Articles provide that the Board of Directors is authorized, without action by the holders of the common stock, to provide for the issuance of the authorized but unissued shares of Preferred Stock in one or more series, to establish the number of shares to be included in each series and to fix the designations, powers, preferences and rights of the shares of each such series and the qualifications, limitations or restrictions thereof. This includes, among other things, voting rights, conversion privileges, dividend rates, redemption rights, sinking fund provisions and liquidation rights which shall be superior to the common stock. The issuance of one or more series of the Preferred Stock could adversely affect the voting power of the holders of the common stock and could have the effect of discouraging or making more difficult any attempt by a person or a group to attain control of us. Our Series B Preferred Stock is entitled to receive dividends at such time, if any, that we declare dividends on our common stock, in an amount equal to the number of shares of common stock that the Series B Preferred Stock could be converted into at the time a dividend is declared. Our Series D Preferred Stock is entitled to receive cash dividends, of which $729,881 through March 31, 2003 (including accrued interest thereon) have been deferred by the holders until October 1, 2003. The holders of Series D Convertible Preferred Stock are entitled to receive out of funds legally available therefor, dividends in an annual amount equal to the prime rate plus one and one-half percent (1.5%) as reported by The Wall Street Journal on the outstanding stated value of the Series D Convertible Preferred Stock (which presently is $4,000,000.00). The dividends are calculated as of the last day of each quarter, and are payable quarterly in arrears (the "Dividend Payment"). Dividend Payments are due five (5) days after the close of each quarter. The initial quarterly dividend began accruing on October 1, 2000, for the quarter ending December 31,2000, and was not be due until five days after the close of the quarter ending December 31, 2000. The holders of Series D Convertible Preferred Stock were entitled to receive a one time special dividend of $75,777.78 ("Special Dividend") along with the quarterly payment due for the quarter ending March 31, 2001. The Special Dividend had interest calculated on the basis of actual days elapsed and a 360-day year, at the prime rate, as reported in the Wall Street Journal five (5) business days prior to the end of each calendar month or if not reported on such date then the closest business day thereto, plus one and five-tenths percent (1.5%). This special dividend has been deferred until October 1, 2003. 46 WARRANTS AND OPTIONS We presently have outstanding an aggregate of 7,801,442 options and warrants to purchase common stock. Approximately 3,012,780 of these warrants and options are in, at or within 5% of being in the money and are immediately exercisable. LEGAL MATTERS Certain legal matters relating to the issuance and resale of shares hereby will be passed upon for us by Axelrod, Smith & Kirshbaum, an Association of Professional Corporations, Houston, Texas. Robert D. Axelrod, Esq. owns 26,759 shares of our common stock. LEGAL PROCEEDINGS In July 2002, OnSite filed a lawsuit styled OnSite Technology LLC v. Duratherm, Inc., Duratherm Group, Inc., Steven R. Heuer and Victor R. Reynolds; Civil Action No. H-02-2624; In the United States District Court for the Southern District of Texas against Duratherm, Inc. and Duratherm Group, Inc., Steven R. Heuer and Victor R. Reynolds. OnSite's lawsuit alleges that Duratherm's remediation operations at its Galveston County, Texas facility infringed on OnSite's U.S. Patent No. 5,738,031 and requested a declaratory judgment that OnSite's operation of its remediation process does not infringe either of Heuer and Reynolds' U.S. Patent Nos. 4,990,237 and 5,269,906 over which Duratherm alleges control. OnSite is seeking a declaratory judgment that it does not infringe on either the Heuer and Reynolds patents. OnSite is also seeking damages for patent infringement, injunctive relief to prevent further patent infringement, and other relief that the court finds appropriate. The Defendants have filed an answer asserting that they do not infringe on OnSite's patent and that such patent is invalid. The Defendants' denial that there is any controversy between the parties regarding the Heuer and Reynolds patents, has been rejected by the court. This case is in the early stages of discovery. In July 2002, OnSite also initiated litigation styled OnSite Technology, LLC v. Duratherm, Inc. et al.; Cause No. 02CV0801; In the 56th Judicial District Court of Galveston County, Texas, against Duratherm, Inc., Duratherm Group, Inc., Barry Hogan and Jim Hogan. This lawsuit alleges that in November 1999, OnSite and Waste Control Specialists, L.L.C. ("WCS") entered into a contract wherein OnSite would, among other things, provide the necessary services, supplies and equipment to perform recycling and remediation services utilizing an indirect thermal desorption unit as specified therein. On information and belief, in late July or early August 2000, Defendants, acting in concert through Duratherm, Inc., sent or caused to be sent a letter(s) and/or other communication(s) to WCS, which OnSite alleges contained statements that were false and intended to deceive WCS, as to OnSite and OnSite's technology and indirect thermal desorption unit. OnSite alleges that as a result of such alleged false, deceptive and malicious statements, WCS terminated its contract with OnSite. In August 2000, Duratherm, Inc. filed suit against OnSite and WCS in the United States District Court for the Southern District of Texas under Civil Action No. H-00-2727, which suit was subsequently dismissed with prejudice by the United States District Judge. OnSite alleges that such suit was malicious and 47 contained false statements and allegations about OnSite and OnSite's technology and indirect thermal desorption unit. In February 2003 OnSite amended its petition to add John C. Hilliard as a defendant and to add as a claim against the defendants, the loss of a prospective contract with ExxonMobil. OnSite has also amended its petition to include as a defendant Duratherm's counsel, Conley Rose P.C., (for purposes of injunctive relief). The causes of action alleged by OnSite against the Defendants are (i) interference with contract; (ii) unfair competition and business disparagement; (iii) unjust enrichment; and (iv) injury to OnSite's business reputation. OnSite is seeking actual, consequential, incidental and compensatory damages, including, but not limited to, disgorgement, pre- and post-judgment interest, attorney's fees and costs and exemplary and punitive damages. OnSite is also seeking to enjoin these defendants and Duratherm's counsel, Conley Rose P.C., from interfering with the current and prospective business relationships of OnSite with regard to the thermal desorption units. The Defendants in this litigation, other than John C. Hilliard, have filed an answer denying the allegations contained in OnSite's petition. This case is in the early stages of discovery. EXPERTS Our Consolidated Balance Sheet as of December 31, 2002 and the related Consolidated Statements of Operations, Stockholders' Equity and Cash Flow for the year then ended have been audited by Ham, Langston & Brezina, L.L.P., independent auditors, as set forth in their report, incorporated by reference herein, in reliance upon such report and the authority of Ham, Langston & Brezina L.L.P. as experts in accounting and auditing. The consolidated financial statements as of December 31, 2001 and for the year ended December 31, 2001 included in this Registration Statement have been so included in reliance on the report (which contains an explanatory paragraph relating to the Company's ability to continue as a going concern as described in Note 2 to the consolidated financial statements) of PricewaterhouseCoopers LLP, independent accountants, given on the authority of said firm as experts in auditing and accounting. CHANGES IN OUR CERTIFYING ACCOUNTANT There have been no disagreements with our independent accountants regarding accounting and financial disclosure matters. On April 2, 2002, we dismissed PricewaterhouseCoopers, LLP as our independent accountants. Our audit committee and board of directors participated in and approved the decision to change independent accountants. The reports of PricewaterhouseCoopers LLP on the financial statements for 2001 contained no adverse opinion or disclaimer of opinion and were not qualified as to audit scope or accounting principle, however such reports for each of the years were modified to express substantial doubt with respect to our ability to continue as a going concern. In connection with the audit for 2001 and through April 2, 2002, there were no disagreements with PricewaterhouseCoopers LLP on any matter of accounting principles or practices, financial statement disclosure or auditing scope or procedure, which disagreements if not resolved to the satisfaction of PricewaterhouseCoopers LLP would have caused them to make reference thereto in their report on the financial statements for such years. 48 During 2001 and through April 2, 2002, there were no reportable events (as defined in Regulation S-K Item 304. PricewaterhouseCoopers LLP has furnished a letter addressed to the SEC stating it agrees with the above statements. We engaged Ham, Langston & Brezina, LLP as our new independent accountants as of April 3, 2002. During 2000 and 2001 and through April 3, 2002, we had not consulted with Ham, Langston & Brezina, LLP regarding either (i) the application of accounting principles to a specified transaction, either completed or proposed; or the type of audit opinion that might be rendered on our financial statements, and neither a written report was provided to us or oral advice was provided that Ham, Langston & Brezina, LLP concluded was an important factor considered by us in reaching a decision as to the accounting, auditing or financial reporting issue; or (ii) any matter that was either the subject of a disagreement, as that term is defined in Item 304 of Regulation S-B and the related instructions to Item 304 of Regulation S-B, or a reportable event, as that term is defined in Item 304 of Regulation S-B. 49 CONSOLIDATED FINANCIAL STATEMENTS ENVIRONMENTAL SAFEGUARDS, INC. __________ CONSOLIDATED FINANCIAL STATEMENTS WITH REPORT OF INDEPENDENT ACCOUNTANTS FOR THE YEARS ENDED DECEMBER 31, 2002 AND 2001 ENVIRONMENTAL SAFEGUARDS, INC. TABLE OF CONTENTS __________ PAGE ---- Reports of Independent Accountants F-2 Audited Financial Statements Consolidated Balance Sheet as of December 31, 2002 F-4 Consolidated Statement of Operations for the years ended December 31, 2002 and 2001 F-5 Consolidated Statement of Stockholders' Equity for the years ended December 31, 2002 and 2001 F-6 Consolidated Statement of Cash Flows for the years ended December 31, 2002 and 2001 F-7 Notes to Consolidated Financial Statements F-8 F-1 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Stockholders Environmental Safeguards, Inc. We have audited the accompanying consolidated balance sheet of Environmental Safeguards, Inc. as of December 31, 2002 and the related consolidated statements of operations, stockholders' deficit and cash flows for the year then ended. 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 of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Environmental Safeguards, Inc. as of December 31, 2002, and the consolidated results of its operations and its cash flows for the year then ended, in conformity with accounting principles generally accepted in the United States of America. /s/ Ham, Langston & Brezina, L.L.P. Houston, Texas March 20, 2003 F-2 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Stockholders Environmental Safeguards, Inc. In our opinion, the accompanying consolidated statement of operations, stockholders' equity and cash flows present fairly, in all material respects, the consolidated results of operations and cash flows of Environmental Safeguards, Inc. for the year ended December 31, 2001 in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit of these statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. 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 included in the Company's Form 10-K for the year ended December 31, 2001, the Company has incurred losses from operations and has not generated sufficient business backlog. These factors 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. /s/ PricewaterhouseCoopers LLP Houston, Texas February 28, 2002 F-3
ENVIRONMENTAL SAFEGUARDS, INC. CONSOLIDATED BALANCE SHEET DECEMBER 31, 2002 __________ (IN THOUSANDS, EXCEPT SHARE AMOUNTS) ASSETS ------ Current assets: Cash and cash equivalents $ 97 Accounts receivable 97 Prepaid expenses 173 --------- Total current assets 367 Property and equipment, net 5,506 Acquired engineering design and technology, net of accumulated amortization of $1,756 1,203 Other assets 3 --------- Total assets $ 7,079 ========= LIABILITIES AND STOCKHOLDERS' EQUITY - ------------------------------------ Current liabilities: Notes payable to related parties $ 250 Accounts payable 31 Dividends payable 617 Accrued interest 63 Other accrued liabilities 592 --------- Total current liabilities 1,553 --------- Minority interest 1,943 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 Preferred stock; Series D convertible, non-voting, cumulative $.001 par value (aggregate liquidation value $4,000); 400,000 shares authorized, issued and outstanding 1 Common stock; $.001 par value; 50,000,000 shares authorized; 10,112,144 shares issued and outstanding 10 Additional paid-in capital 14,981 Accumulated deficit (11,412) --------- Total stockholders' equity 3,583 --------- Total liabilities and stockholders' equity $7,079 =========
The accompanying notes are an integral part of these consolidated financial statements. F-4
ENVIRONMENTAL SAFEGUARDS, INC. CONSOLIDATED STATEMENT OF OPERATIONS __________ (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) YEAR ENDED DECEMBER 31, ------------------ 2002 2001 -------- -------- Revenue $ 943 $ 2,987 Cost of revenue 1,968 3,546 -------- -------- Gross margin (1,025) (559) Selling, general and administrative expenses 1,713 2,645 Amortization of acquired engineering design and technology 408 408 Research and development 30 71 -------- -------- Loss from operations (3,176) (3,683) Other income (expenses): Gain on sale of equipment - 6,252 Interest income 2 32 Interest expense (43) (839) Other (2) 40 -------- -------- Income (loss) before benefit (provision) for income taxes and minority interest (3,219) 1,802 Benefit (provision) for income taxes 79 (536) -------- -------- Income (loss) before minority interest (3,140) 1,266 Minority interest 97 241 -------- -------- Net income (loss) $(3,043) $ 1,507 ======== ======== Net income (loss) applicable to common stockholders $(3,296) $ 1,169 ======== ======== Net income (loss) per share-basic $ (0.33) $ 0.12 ======== ======== Net income (loss) per share-diluted $ (0.33) $ 0.05 ======== ======== Weighted average shares outstanding-basic 10,112 10,112 ======== ======== Weighted average shares outstanding-diluted 10,112 23,142 ======== ========
The accompanying notes are an integral part of these consolidated financial statements. F-5
ENVIRONMENTAL SAFEGUARDS, INC. CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY __________ (IN THOUSANDS, EXCEPT SHARE AMOUNTS) TOTAL SERIES B SERIES C SERIES D ADDITIONAL STOCK- PREFERRED PREFERRED PREFERRED COMMON PAID-IN ACCUMULATED HOLDERS' STOCK STOCK STOCK STOCK CAPITAL DEFICIT EQUITY ---------- ---------- ---------- ------- ----------- ------------- ---------- Balance as of December 31, 2000 3 - 1 10 14,935 (9,285) 5,664 Issuance of 188,571 warrants to pur- chase common stock in connection with senior secured debt (Note 4) - - - - 46 - 46 Dividends on Series D Preferred stock - - - - - (338) (338) Net income - - - - - 1,507 1,507 ---------- ---------- ---------- ------- ----------- ------------- ---------- Balance as of December 31, 2001 3 - 1 10 14,981 (8,116) 6,879 Dividends on Series D Preferred stock - - - - - (253) (253) Net loss - - - - - (3,043) (3,043) ---------- ---------- ---------- ------- ----------- ------------- ---------- Balance as of December 31, 2002 $ 3 $ - $ 1 $ 10 $ 14,981 $ (11,412) $ 3,583 ========== ========== ========== ======= =========== ============= ========== The accompanying notes are an integral part of these consolidated financial statements.
F-6
ENVIRONMENTAL SAFEGUARDS, INC. CONSOLIDATED STATEMENT OF CASH FLOWS __________ (IN THOUSANDS) YEAR ENDED DECEMBER 31, ------------------ 2002 2001 -------- -------- Cash flows from operating activities: Net income (loss) $(3,043) $ 1,507 Adjustment to reconcile net loss to net cash used by operating activities: Minority interest (97) (241) Deferred tax expense - 30 Depreciation expense 1,218 2,080 Amortization of acquired engineering design and technology 408 408 Amortization of discount - 344 Gain on sale of equipment - (6,252) Changes in operating assets and liabilities: Accounts receivable 1,212 (286) Prepaid expenses and other assets (37) (55) Accounts payable (115) (10) Accrued liabilities (58) (195) Income taxes payable (254) 34 -------- -------- Net cash used by operating activities (766) (2,636) -------- -------- Cash flows from investing activities: Proceeds from sale of equipment - 6,900 Purchases of equipment (185) (260) -------- -------- Net cash provided (used) by investing activities (185) 6,640 -------- -------- Cash flows from financing activities: Proceeds from notes payable to stockholders 250 - Payments on long-term debt - (5,406) Dividends paid on Series C and Series D preferred stock - (199) Distribution to minority interest - (669) -------- -------- Net cash provided (used) by financing activities 250 (6,274) -------- -------- Net decrease in cash and cash equivalents (701) (2,270) Cash and cash equivalents, beginning of year 798 3,068 -------- -------- Cash and cash equivalents, end of year $ 97 $ 798 ======== ======== Supplemental disclosure of cash flow information: Cash paid for interest $ - $ 695 ======== ======== Cash paid for income taxes $ - $ 472 ======== ========
The accompanying notes are an integral part of these consolidated financial statements. F-7 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 and Latin America. Collateral is generally not required for credit granted. As of December 31, 2002 all of the Company's trade receivables were due from two customers for services performed in the United States and Mexico. The Company has in place insurance to cover certain exposure in its foreign operations and provides allowances for potential credit losses when necessary. F-8 ENVIRONMENTAL SAFEGUARDS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) __________ 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES, CONTINUED ---------------------------------------------------------------- CASH EQUIVALENTS ----------------- The Company considers all short-term investments with an original maturity of three months or less when purchased to be cash equivalents. PROPERTY AND EQUIPMENT ------------------------ Property and equipment is stated at cost. Depreciation is computed using the straight-line method over the estimated useful lives of 8 years for ITD Units and 3 to 5 years for office furniture and equipment and transportation and other equipment. Effective October 1, 2002, the Company changed the estimated useful lives of ITD units from 5 to 8 years to more accurately reflect the Company's experience with useful lives of ITD unites (See Note 3). 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 in other income/expenses in the statement of operations. 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. F-9 ENVIRONMENTAL SAFEGUARDS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) __________ 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES, CONTINUED ---------------------------------------------------------------- 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 write-down of the Company's long-lived assets was not deemed necessary. Management has evaluated the carrying value of long-lived assets, including associated intangibles. An evaluation of recoverability is performed by comparing the estimated future undiscounted cash flows associated with the asset to the asset's carrying amount to determine if a write-down to market value or discounted cash flow is required. Given the homogeneous nature and geographic deployment flexibility of such assets, and based upon this evaluation by management, impairment of the Company's long-lived assets has not been deemed necessary. TRANSLATION OF FOREIGN CURRENCIES ------------------------------------ The financial statements of foreign subsidiaries are measured as if the functional currency were the U.S. dollar. The remeasurement of local currencies into U.S. dollars creates translation adjustments which are included in net income. FAIR VALUE OF FINANCIAL INSTRUMENTS --------------------------------------- The Company includes fair value information in the notes to financial statements when the fair value of its financial instruments is different from the book value. When the book value approximates fair value, no additional disclosure is made. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS -------------------------------------------- In July 2001, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 141, "Business Combinations," which requires all business combinations initiated after June 30, 2001 be accounted for using the purchase method. In addition, SFAS No. 141 further clarifies the criteria to recognize intangible assets separately from goodwill. Specifically, SFAS No. 141 requires that an intangible asset may be separately recognized only if such an asset meets the contractual-legal criterion or the separability criterion. The implementation of SFAS No. 141 did not have a material impact on the Company's results of operations or financial position. F-10 ENVIRONMENTAL SAFEGUARDS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) __________ 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES, CONTINUED ----------------------------------------------------------- RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS, CONTINUED -------------------------------------------------------- In July 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible Assets," under which goodwill and intangible assets with indefinite useful lives are no longer amortized but will be reviewed for impairment annually, or more frequently if certain events or changes in circumstances indicate that the carrying value may not be recoverable. The impairment test for goodwill involves a two-step process: step one consists of a comparison of the fair value of a reporting unit with its carrying amount, including the goodwill allocated to each reporting unit. If the carrying amount is in excess of the fair value, step two requires the comparison of the implied fair value of the reporting unit goodwill with the carrying amount of the reporting unit goodwill. Any excess of the carrying value of the reporting unit goodwill over the implied fair value of the reporting unit goodwill will be recorded as an impairment loss. The impairment test for intangible assets with indefinite useful lives consists of a comparison of fair value to carrying value, with any excess of carrying value over fair value being recorded as an impairment loss. Intangible assets with finite useful lives will continue to be amortized over their useful lives and will be reviewed for impairment in accordance with SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." The implementation of SFAS No. 142 at did not have a material impact on the Company's results of operations or financial position. In August 2001, the FASB issued SFAS No. 144, which supercedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," and certain provisions of APB Opinion No. 30, "Reporting the Results of Operations - Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions." SFAS No. 144 retains the fundamental provisions of SFAS No. 121 related to: (i) the recognition and measurement of the impairment of long-lived assets to be held and used, and (ii) the measurement of long-lived assets to be disposed by sale. It provides more guidance on estimating cash flows when performing recoverability tests, requires long-lived assets to be disposed of other than by sale to be classified as held and used until disposal, and establishes more restrictive criteria to classify long-lived assets as held for sale. In addition, SFAS No. 144 supersedes the accounting and reporting provisions of APB Opinion No. 30 for the disposal of a segment of a business. However, it retains the basic provisions of APB Opinion No. 30 to report discontinued operations separately from continuing operations and extends the reporting of a discontinued operation to a component of an entity. The implementation of SFAS No. 144 did not have a material impact on the Company's results of operations or financial position. F-11 ENVIRONMENTAL SAFEGUARDS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) __________ 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES, CONTINUED ----------------------------------------------------------- RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS, CONTINUED -------------------------------------------------------- In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities," which addresses financial accounting and reporting for costs associated with exit or disposal activities and supersedes Emerging Issues Task Force ("EITF") Issue No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)." SFAS No. 146 requires companies to recognize costs associated with exit or disposal activities when they are incurred rather than at the date of a commitment to an exit or disposal plan. In addition, SFAS No. 146 establishes that fair value is the objective for initial measurement of the liability. SFAS No. 146 is effective for exit or disposal activities initiated after December 31, 2002, but early adoption is permitted. The Company is currently evaluating the adoption date; however the impact of its adoption is not expected to have a significant impact on the Company's financial position or results of operations. In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock Based Compensation", which amends SFAS No. 123 to provide alternative methods of transition for an entity that voluntarily changes to the fair value method of accounting for stock based employee compensation. It also amends the disclosure provisions of SFAS No. 123 to require prominent disclosure about the effects on reported net income of an entity's accounting policy decisions with respect to stock based employee compensation. Finally, SFAS No. 148 amends APB Opinion No. 28, "Interim Financial Reporting", to require disclosure of those effects in interim financial statements. SFAS No. 148 is effective for fiscal years ended after December 15, 2002, but early adoption is permitted. The Company will adopt SFAS No. 148 on January 1, 2003; however, the Company does not expect that adoption will have a significant impact on its financial reporting. 2. LIQUIDITY ISSUES ----------------- During the year ended December 31, 2002 and 2001, the Company faced significant liquidity issues that caused the Company's prior independent accountants to include an explanatory paragraph in their auditor's report on the Company's consolidated financial statements, as of December 31, 2001 and for the two years in the period then ended, describing the uncertainty about the Company's ability to continue as a going concern. Below is an analysis of the circumstances that led to a going concern explanatory paragraph in the Company's 2001 financial statements, followed by a description of changes in circumstances that resulted in the current auditors issuing an unqualified opinion, without a going concern explanatory paragraph, on the Company's 2002 financial statements. BACKGROUND AND 2001 CIRCUMSTANCES ------------------------------------ Since its inception, the Company has expended a significant portion of its resources to develop markets and industry awareness of the capabilities of its indirect thermal desorption recycling process. The Company's efforts have been focused on the development, production and sale of environmental recycling technologies and services to oil and gas industry participants, waste management companies and other industrial customers. The Company's efforts to develop markets and produce equipment have required significant amounts of capital including long-term debt secured by the Company's ITD units and related ITD F-12 ENVIRONMENTAL SAFEGUARDS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) __________ 2. LIQUIDITY ISSUES, CONTINUED ----------------------------- BACKGROUND AND 2001 CIRCUMSTANCES, CONTINUED ------------------------------------------------ technology. With the exception of the profitability impact from the Company's sale of three ITD units and certain licensing rights in late 2001 (as noted below and in Note 3), the Company has incurred recurring net losses and has been dependent on revenue from a limited customer base to provide cash flows. These factors were the basis for the Company's predecessor auditor's conclusion that at December 31, 2001, substantial doubt existed about the Company's ability to continue as a going concern. The Company is continually seeking to obtain service contracts in the markets that it serves. In December 2001, the Company completed the sale of three of its ITD units and certain licensing rights, and the proceeds were used to pay off all the Company's senior debt. At December 31, 2001, the Company's predecessor auditor believed that the Company's long-term viability as a going concern was dependent on the repositioning of its asset base and the achievement of a sustaining level of profitability. To the extent the Company's cash reserves and future cash flows from operations were insufficient to meet future cash requirements, the Company would need to raise funds through the infusion of equity, the issuance of debt securities or the sale of ITD units. Doubt existed as to whether such financing would be available on terms acceptable to the Company or at all. Further, the sale of additional equity or convertible debt securities may result in dilution to the Company's stockholders. The accompanying financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern. NEW DEVELOPMENTS SUBSEQUENT TO DECEMBER 31, 2002 ------------------------------------------------------ In January and March 2003, the Company entered into two important agreements that management believes will provide cash resources sufficient to cover the Company's 2003 cash requirements. The first agreement is a processing contract with a major waste management and disposal contractor for services at a facility in Arkansas. The second agreement is a $1,500,000 long-term financing arrangement collateralized by certain of the Company's ITD units. (See Note 14) OTHER ----- Management has evaluated the carrying value of long-lived assets, including associated intangibles. An evaluation of recoverability is performed by comparing the estimated future undiscounted cash flows associated with the assets to their carrying amount to determine if a write-down to market value or discounted cash flow is required. Given the homogeneous nature and geographic deployment flexibility of such assets, and based upon this evaluation by management, impairment of the Company's long-lived assets has not been deemed necessary. F-13 ENVIRONMENTAL SAFEGUARDS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) __________ 3. PROPERTY AND EQUIPMENT ------------------------ Property and equipment consists of the following at December 31, 2002 (in thousands): ITD Remediation/Recycling Units and auxiliary equipment $11,962 Office furniture and equipment 36 Transportation and other equipment 49 ------- 12,047 Less accumulated depreciation 6,541 ------- Property and equipment, net $ 5,506 ======= On October 1, 2002, the Company changed the depreciable lives of its ITD units from five to eight years. This change in estimate was made to more accurately reflect the Company's experience concerning the useful life of its equipment and to conform with industry practices for similar equipment. The change in estimate, which is being applied on a prospective basis, resulted in a decrease in depreciation expense and net loss of $215,000 for the year ended December 31, 2002. The change reduced basic and diluted loss per share by $0.02 and, accordingly, if the change in estimate had not been adopted by the Company, basic and diluted net loss per share for the year ended December 31, 2002 would have been $0.35 per share. On August 23, 2001, the Company entered into a contract to sell three of its used ITD units to a customer in Mexico. The total sales price for the ITD units was $6,900,000 and the Company recognized a gain on the sale of $6,252,000, which is presented in other income in the accompanying statement of operations. In connection with the sale, the Company granted its customer in Mexico an exclusive license for, and right to use, ITD technology in Mexico (subject to an existing agreement) and an option to acquire a fourth ITD unit from the Company. 4. NOTES PAYABLE TO RELATED PARTIES ------------------------------------ In July 2002, the Company obtained uncollateralized loans totaling $250,000 from Cahill Warnock Strategic Partners, L.P. and Strategic Associates, L.P. These loans bear interest of 12% per year and were originally due in January 2003 but have been extended to September 2003. David Warnock, a director of the Company, is a general partner of Cahill Warnock Strategic Partners, L.P. and a managing member of the general partner of Strategic Associates, L.P. F-14 ENVIRONMENTAL SAFEGUARDS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) __________ 5. OTHER ACCRUED LIABILITIES --------------------------- Other accrued liabilities consists of the following at December 31, 2002 (in thousands): Accrued property and franchise taxes $ 15 Accrued professional fees 40 Accrued joint-company expenses 332 Accrued capital improvements 80 Accrued executive salaries 116 Accrued operating costs 9 ---- $592 ==== 6. LEASE COMMITMENTS ------------------ The Company leases office space and a storage and maintenance area for its equipment under operating leases. The leases have a remaining term of less than one year. Management intends to replace these leases in the normal course of business. Rental expense under operating leases was $52,000 and $100,000 during the years ended December 31, 2002 and 2001, respectively. 7. 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 at December 31, 2002 were as follows (in thousands): Deferred tax liabilities: Basis of property and equipment $ 150 -------- Total deferred tax liabilities 150 -------- Deferred tax assets: Net operating loss carryforwards 2,040 All other, net 340 -------- Total deferred tax assets 2,380 -------- Valuation allowance (2,230) -------- 150 -------- Net deferred tax assets $ - ======== F-15 ENVIRONMENTAL SAFEGUARDS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) __________ 7. INCOME TAXES, CONTINUED ------------------------- For financial reporting purposes, income before provision for income taxes and minority interest includes the following components (in thousands): 2002 2001 -------- -------- United States $(2,931) $ 4,839 Foreign (288) (3,037) -------- -------- Income (loss) before provision for income taxes and minority interest $(3,219) $ 1,802 ======== ======== Significant components of the benefit (provision) for income taxes are as follows (in thousands): 2002 2001 ----- ------ Current: Federal $ 79 $(247) Foreign - (259) ----- ------ Total current 79 (506) ----- ------ Deferred: Federal - - Foreign - (30) ----- ------ Total deferred - (30) ----- ------ Benefit (provision) for income taxes $ 79 $(536) ===== ====== The differences between the statutory income tax rate and the Company's effective income tax rate are as follows: 2002 2001 ----- ----- Federal statutory rate 34% (34%) State income taxes - (9%) Foreign income taxes - (10%) Foreign tax credits and other (16%) (38%) Change in valuation allowance (18%) 61% ----- ----- Benefit (provision) for income taxes 2% (30%) ===== ===== F-16 ENVIRONMENTAL SAFEGUARDS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) __________ 7. INCOME TAXES, CONTINUED ------------------------- As of December 31, 2002, for U.S. federal income tax reporting purposes, the Company has approximately $6,000,000 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, 2003 to 2022. 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 such limitation, the Company has significant NOL carryforwards for which realization of tax benefits is uncertain. Further, the benefit from utilization of NOL carryforwards could be subject to limitations if material ownership changes occur in the Company. Based on such limitations, the Company has significant NOL's for which realization of tax benefits is uncertain. 8. 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 1 common share for each preferred share; however, the conversion rate is subject to adjustments to prevent dilution. The holders of the Series B convertible preferred stock have essentially the same voting rights as the holders of common stock. The Series B convertible preferred stock has a liquidation preference of $1.06 per share plus any unpaid dividends. 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 carried a quarterly dividend payable in arrears of prime plus 1.5% based on the stated value of the stock. The Series C preferred stock was 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 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 was deducted from the net loss to derive the net loss applicable to common stockholders in the calculation of earnings per share (See Note 9). As described below, during 2000, Series C preferred stock was exchanged for Series D convertible preferred stock. F-17 ENVIRONMENTAL SAFEGUARDS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) __________ 8. STOCKHOLDERS' EQUITY, CONTINUED --------------------------------- 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 was originally the lesser of $1.00 per share or the averaging thirty-day trailing price; however, in March 2001, the conversion price was fixed at $0.37. 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, was amortized to expense over the remaining term of the debt using the effective interest method. Other than the conversion feature of the Series D Preferred Stock, its features and preferences are the same as the Series C Preferred Stock. 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, 2002, 547,500 of the 800,000 shares of common stock reserved for the issuance under the Option Plan have been granted and remain outstanding. 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. 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. F-18 ENVIRONMENTAL SAFEGUARDS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) __________ 8. STOCKHOLDERS' EQUITY, CONTINUED --------------------------------- STOCK OPTIONS, CONTINUED -------------------------- Proforma information regarding net income and earnings per share is required by Statement 123, is 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. No options were granted in 2002 or 2001 and, accordingly, no option pricing assumptions or proforma information is 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. There were no stock options granted, exercised, expired or forfeited during the years ended December 31, 2002 or 2001. The weighted average exercise price of options outstanding at December 31, 2002 and 2001 was $1.38 per share. All outstanding stock options are exercisable at December 31, 2002 and 2001. A summary of outstanding stock options at December 31, 2002, follows: REMAINING NUMBER OF COMMON CONTRACTUAL STOCK EQUIVALENTS EXPIRATION DATE LIFE (YEARS) EXERCISE PRICE ----------------- --------------- ------------ --------------- 2,470,300 November 2005 2.9 $ 0.60 112,500 March 2007 4.2 1.44 480,000 March 2007 4.2 2.50 35,000 November 2007 4.9 1.44 356,813 December 2007 5.0 1.44 613,831 December 2007 5.0 3.00 1,053 January 2008 5.1 2.38 800 January 2008 5.1 3.12 770 January 2008 5.1 3.25 625 January 2008 5.1 4.00 47,053 April 2008 5.7 5.00 122,417 April 2008 5.7 1.44 547,500 December 2008 6.0 1.69 ----------------- 4,788,662 ================= F-19 ENVIRONMENTAL SAFEGUARDS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) __________ 8. STOCKHOLDERS' EQUITY, CONTINUED --------------------------------- STOCK WARRANTS --------------- Following is a summary of stock warrant activity: NUMBER OF EXERCISE WEIGHTED SHARES PRICE AVERAGE PRICE --------- --------- -------------- Warrants outstanding as of December 31, 2000 1,124,209 $ 0.01 $ 0.01 Issued 188,571 $ 0.01 $ 0.01 Canceled - - - Exercised - - - --------- Warrants outstanding as of December 31, 2001 1,312,780 $ 0.01 $ 0.01 Issued - - - Canceled - - - Exercised - - - --------- Warrants outstanding as of December 31, 2002 1,312,780 $ 0.01 $ 0.01 ========= All warrants outstanding were issued in connection with the funding of certain notes payable that were repaid in 2001. All warrants bear an exercise price of $0.01 per share, are currently exercisable, and expire in December 2007. 9. EARNINGS PER SHARE -------------------- Basic earnings per common share are based on the weighted average number of common shares outstanding in each year and after preferred stock dividend requirements. Diluted earnings per common share assume that any dilutive convertible debentures and convertible preferred shares outstanding at the beginning of each year were converted at those dates, with related interest, preferred stock dividend requirements and outstanding common shares adjusted accordingly. It also assumes that outstanding common shares were increased by shares issuable upon exercise of those stock options for which market price exceeds exercise price, less shares which could have been purchased by the Company with related proceeds. The convertible preferred stock and outstanding stock options and warrants were not included in the computation of diluted earnings per common share for 2002 since their effect was antidilutive. F-20 ENVIRONMENTAL SAFEGUARDS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) __________ 9. EARNINGS PER SHARE, CONTINUED -------------------------------- The following table sets forth the computation of basic and diluted earnings per share (in thousands, except per share information): 2002 2001 -------- -------- Numerator: Net income (loss) $(3,043) $ 1,507 Less: Series C and D Preferred stock dividends ($0.63 and $0.85 per share in 2002 and 2001, respectively) (253) (338) -------- -------- Net income (loss) applicable to common stockholders-numerator for basic and diluted earnings per share $(3,296) $ 1,169 ======== ======== Denominator: Denominator for basic earnings per share- weighted average shares 10,112 10,112 Effect of dilutive securities: Warrants - 1,069 Convertible Series B preferred stock - 2,734 Convertible Series D preferred stock - 9,227 -------- -------- Dilutive potential common shares - 13,030 -------- -------- Denominator for diluted earnings per share- adjusted weighted average shares and assumed conversions 10,112 23,142 ======== ======== Basic earnings per share $ (0.33) $ 0.12 ======== ======== Diluted earnings per share $ (0.33) $ 0.05 ======== ======== The following table sets forth the computation of basic and diluted earnings per share (in thousands): 2002 2001 -------- ------- Numerator: Net income (loss) $(3,043) $1,507 Less: Series C and D Preferred stock dividends ($0.63 and $0.85 per share) in 2002 and 2001, respectively (253) (338) -------- ------- Net income (loss) applicable to common stockholders-numerator for basic and diluted earnings per share $(3,296) $1,169 ======== ======= F-21 ENVIRONMENTAL SAFEGUARDS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) __________ 10. 401(K) SALARY DEFERRAL PLAN ------------------------------ The Company has a 401(k) salary deferral plan (the "Plan") which became effective on January 1, 1998, for eligible employees who have met certain service requirements. The Plan does not provide for Company matching or discretionary contributions and, accordingly, the Company recognized no expense under the Plan in 2002 or 2001. 11. LITIGATION ---------- In July 2002, OnSite filed a lawsuit styled OnSite Technology LLC v. Duratherm, Inc., Duratherm Group, Inc., Steven R. Heuer and Victor R. Reynolds; Civil Action No. H-02-2624; In the United States District Court for the Southern District of Texas against Duratherm, Inc. and Duratherm Group, Inc., Steven R. Heuer and Victor R. Reynolds. OnSite's lawsuit alleges that Duratherm's remediation operations at its Galveston County, Texas facility infringed on OnSite's U.S. Patent No. 5,738,031 and requested a declaratory judgment that OnSite's operation of its remediation process does not infringe either of Heuer and Reynolds' U.S. Patent Nos. 4,990,237 and 5,269,906 over which Duratherm alleges control. The Defendants have filed an answer asserting that they do not infringe on OnSite's patent and that such patent is invalid. The defendants' denial that any controversy exists between the parties regarding the Heuer and Reynolds' patents has been rejected by the court. This case is in the early stages of discovery. In July 2002, OnSite also initiated litigation styled OnSite Technology, LLC v. Duratherm, Inc. et al.; Cause No. 02CV0801; In the 56th Judicial District Court of Galveston County, Texas, against Duratherm, Inc., Duratherm Group, Inc., Barry Hogan and Jim Hogan. This lawsuit alleges that in November 1999, OnSite and Waste Control Specialists, L.L.C. ("WCS") entered into a contract wherein OnSite would, among other things, provide the necessary services, supplies and equipment to perform recycling and remediation services utilizing an indirect thermal desorption unit as specified therein. On information and belief, in late July or early August 2000, Defendants, acting in concert through Duratherm, Inc., sent or caused to be sent a letter(s) and/or other communication(s) to WCS, which OnSite alleges contained statements that were false and intended to deceive WCS, as to OnSite and OnSite's technology and indirect thermal desorption unit. As a result of such false, deceptive and malicious statements, WCS terminated its contract with OnSite.In August 2000, Duratherm, Inc. filed suit against OnSite and WCS in the United States District Court for the Southern District of Texas under Civil Action No. H-00-2727, which suit was subsequently dismissed with prejudice by the United States District Judge. OnSite alleges that such suit was malicious and contained false statements and allegations about OnSite and OnSite's technology and indirect thermal desorption unit. In February 2003 OnSite amended its petition to add John C. Hilliard as a defendant and to add as a claim against the defendants, the loss of a prospective contract with ExxonMobil. OnSite has also amended its petition to include as a defendant Duratherm's counsel, Conley Rose P.C., (for purposes of injunctive relief). The causes of action alleged by OnSite against the Defendants are (i) interference with contract; (ii) unfair competition and business disparagement; (iii) unjust enrichment; and (iv) injury to OnSite's business reputation. OnSite is seeking actual, consequential, incidental and compensatory damages, including, but not limited to, disgorgement, pre- and post-judgment interest, attorney's fees and costs and exemplary and punitive damages. OnSite is also seeking to enjoin these defendants and Duratherm's counsel, Conley Rose P.C., from interfering with the current and prospective business relationships of OnSite with regard to the thermal desorption units. The Defendants in this litigation, other than John C. Hilliard, F-22 ENVIRONMENTAL SAFEGUARDS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) __________ 11. LITIGATION, CONTINUED ---------------------- have filed an answer denying the allegations contained in OnSite's petition. The answers from John C. Hilliard and Conley Rose P.C. are not yet due as of March 26, 2003. This case is in the early stages of discovery. The Company is from time to time involved in 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. 12. RELATED PARTY TRANSACTIONS ---------------------------- In July 2002, the Company obtained uncollateralized loans totaling $250,000 from certain stockholders (See Note 4). In March 2001 and September 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. The senior debt was fully repaid in December 2001. 13. SEGMENT, GEOGRAPHIC AND MAJOR CUSTOMERS INFORMATION -------------------------------------------------------- The Company currently operates in the environmental remediation and hydrocarbon reclamation/recycling services. Substantially all revenues result from the sale of services using the Company's ITD units. The Company's reportable segments are based upon geographic area and all intercompany revenue and expenses are eliminated in computing revenues and operating income (loss). 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 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. Following is a summary of segment information: 2002 2001 ------ ------ Revenue (in thousands): United States $ 49 $ 140 Latin America 894 2,847 ------ ------ Total revenue $ 943 $2,987 ====== ====== F-23 ENVIRONMENTAL SAFEGUARDS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) __________ 13. SEGMENT, GEOGRAPHIC AND MAJOR CUSTOMER INFORMATION, CONTINUED ------------------------------------------------------------- 2002 2001 -------- -------- Depreciation and Amortization (in thousands): United States $ 1,624 $ 1,810 United Kingdom - 259 Latin America - 419 -------- -------- Total depreciation and amortization $ 1,624 $ 2,488 ======== ======== Income (Loss) From Operations (in thousands): United States $(2,887) $(2,930) United Kingdom - (559) Latin America (94) 93 Middle East (194) (286) Corporate (1) (1) -------- -------- Total income (loss) from operations $(3,176) $ 3,683 ======== ======== Interest Expense (in thousands): Corporate $ 42 $ 839 -------- -------- Total interest expense $ 42 $ 839 ======== ======== Benefit (Provision) For Income Taxes (in thousands): United States $ 79 $ (247) Latin America - (289) -------- -------- Total benefit (provision) for income taxes $ 79 $ (536) ======== ======== Capital Expenditures (in thousands): United States $ 185 $ 260 -------- -------- Total capital expenditures $ 185 $ 260 ======== ======== Number of Customers: United States 1 1 Latin America 1 3 -------- -------- 2 4 ======== ======== F-24 ENVIRONMENTAL SAFEGUARDS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) __________ 13. SEGMENT, GEOGRAPHIC AND MAJOR CUSTOMER INFORMATION, CONTINUED ------------------------------------------------------------- 2002 ------ Assets (in thousands): United States $3,400 Latin America 228 Middle East 3,397 Corporate 54 ------ Total assets $7,079 ====== Long Lived Assets (in thousands): United States $3,320 Latin America 2 Middle East 3,390 ------ Total long lived assets $6,712 ====== During the years ended December 31, 2002 and 2001, the Company's largest customer accounted for 95% and 93% of revenue, respectively. 14. SUBSEQUENT EVENTS ------------------ In January 2003 we signed a contract to process various waste streams for Rineco Chemical Industries, Inc., an entity related to Rineco Recycling, LLC. In March 2003 we obtained a loan of $1,500,000 from Rineco Recycling, LLC. The loan is to be funded in three $500,000 fundings (less $40,000 in origination fees per funding) on March 20, 2003 (we have already received this funding tranch); May 15, 2003; and August 15, 2003. The loan is collateralized by three of our ITD units and bears interest at a stated rate of 12% per year. Principal payments are due in 20 quarterly installments of $75,000 beginning in August 2003 with the final payment due in May 2008. We issued 1,500,000 warrants to purchase shares of our common stock at an exercise price of $0.01 per share in connection with this loan and these warrants were valued at $345,000. The loan origination fees and warrants results in an effective interest rate on the loan of approximately 35% per year. This transaction made Rineco Recycling, LLC a related party and the beneficial owner of 13% of our common stock, although none of the warrants have been exercised. Also during March 2003, the Company negotiated an extension of the maturity date of $250,000 of un-collateralized related party notes payable to September 16, 2003 (See Note 4). 15. NON-CASH INVESTING AND FINANCING ACTIVITIES ----------------------------------------------- The Company engaged in certain non-cash investing and financing activities as follows (in thousands): 2002 2001 ----- ----- Dividends declared but not yet paid. $ 253 $ 338 Stock warrants issued to extend the due date of senior secured notes payable. - 46 F-25 PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 24. LIMITATION ON DIRECTORS' LIABILITY; INDEMNIFICATION Our Articles of Incorporation ("Articles") provide, as permitted by governing Nevada law, that our Directors shall not be personally liable to us or our stockholders for monetary damages for breach of fiduciary duty as a director, with certain exceptions. These provisions may discourage stockholders from bringing suit against a director for breach of fiduciary duty and may reduce the likelihood of derivative litigation brought by stockholders on behalf of us against a director. The Articles provide that we will indemnify our directors and officers against expenses and liabilities they incur to defend, settle, or satisfy any civil litigation or criminal action brought against them on account of their being or having been our directors or officers unless, in such action, they are adjudged to have acted with gross negligence or willful misconduct. Insofar as indemnification for liabilities arising under the Securities Act of 1933 (the "Act") may be permitted to directors, officers and controlling persons of the small business issuer pursuant to the foregoing provisions, or otherwise, the small business issuer has been advised that in the opinion of the Commission, such indemnification is against public policy as expressed in the Act and is therefore unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by a small business issuer of expenses incurred or paid by a director, officer or controlling person of the small business issuer in the successful defense of any action, suit or proceeding) is asserted by such director, officer, or controlling person in connection with the securities being registered, the small business issuer will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue. The inclusion of this provision in the Articles may have the effect of reducing the likelihood of derivative litigation against directors, and may discourage or deter stockholders or management from bringing a lawsuit against directors for breach of their duty of care, even though such an action, if successful, might otherwise have benefited us and our stockholders. The Articles provide for the indemnification of our executive officers and directors, and the advancement to them of expenses in connection with any proceedings and claims, to the fullest extent permitted by the Nevada law. The Articles include related provisions meant to facilitate the indemnities' receipt of such benefits. These provisions cover, among other things: (i) specification of the method of determining entitlement to indemnification and the selection of independent counsel that will in some cases make such determination, (ii) specification of certain time periods by which certain payments or determinations must be made and actions must be taken, and (iii) the establishment of certain presumptions in favor of an indemnitee. 51 ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION The following table sets forth the estimated expenses to be incurred in connection with the distribution of the securities being registered. All of the expenses shall be paid by us, and shall not be borne by the Selling Stockholder. Reason Amount - ---------------------------------------------- SEC Registration Fee $ 26.73 Printing and Engraving Expenses $ 300.00 * Legal Fees and Expenses $25,000.00 * Accounting Fees and Expenses $10,000.00 * Transfer Agent Fees $ 300.00 * ------------- Total $35,626.73 * ============= - ----------------------- (*) Estimated. 52 ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES During the three year period ended April 21, 2003, we issued unregistered securities in transactions summarized below. The following transactions were effected on reliance upon exemptions from registration under the Securities Act of 1933 as amended (the "Act") as provided in Section 4(2) thereof or, upon exemptions from registration under the Act as provided in Regulation D thereof. Each certificate issued for unregistered securities contained a legend stating that the securities have not been registered under the Act and setting forth the restrictions on the transferability and the sale of the securities. No underwriter participated in, nor did we pay any commissions or fees to any underwriter in connection with any of these transactions. In March 2003, we issued 1,500,000 warrants to purchase our common stock to Rineco Recycling, LLC as part of the consideration for Rineco Recycling, LLC loaning us $1,500,000. We gave Rineco Recycling, LLC a promissory note for the loan proceeds. We valued this transaction at $345,000. These warrants have an exercise price of $.01 per share. We issued these securities in reliance on Section 4(2) of the Act. This transaction did not involve a public offering. The investor was knowledgeable about our operations and financial condition. We believe that the investor had knowledge and experience in financial and business matters that allowed it to evaluate the merits and risk of receipt of these securities. In 2000, we issued 400,000 shares of our Series D Convertible Preferred Stock in exchange for all outstanding shares of our Series C Non-Convertible Preferred Stock. This transaction was with our primary lenders. The newly issued shares of Series D Preferred stock are convertible into common stock at a present conversion price of $0.37 per share. We valued this transaction at $168,000. We issued these securities in reliance on Section 4(2) of the Act. These transactions did not involve a public offering. The investor was knowledgeable about our operations and financial condition. We believe that the investor had knowledge and experience in financial and business matters that allowed them to evaluate the merits and risk of receipt of these securities. In 2001, we issued an aggregate of 188,571 warrants to purchase common stock to the holders of our senior debt. We valued these transactions at $46,000. These warrants have an exercise price of $0.01 per share. We issued these securities in reliance on Section 4(2) of the Act. These transactions did not involve a public offering. The investor was knowledgeable about our operations and financial condition. We believe that the investor had knowledge and experience in financial and business In 2000, we issued an aggregate of 417,066 warrants to purchase common stock to the holders of our senior debt. We valued these transactions at $438,000. These warrants have an exercise price of $0.01 per share. We issued these securities in reliance on Section 4(2) of the Act. These transactions did not involve a public offering. The investor was knowledgeable about our operations and financial condition. We believe that the investor had knowledge and experience in financial and business matters that allowed them to evaluate the merits and risk of receipt of these securities. 53 ITEM 27. EXHIBITS The following exhibits are filed as part of this Registration Statement: Exhibit Number Description ________________________________________________________________________ Please note: The registrant has requested that portions of exhibits with the notation (J) be given confidential treatment and the registrant has filed a confidential treatment request with the Secretary of the Commission. In these exhibits, the registrant has omitted such material and the registrant has marked this exhibit with a mark " ***** "to indicate where material has been omitted.
3.1 (A) Certificate of Incorporation of the Registrant, as amended. 3.2 (A) Bylaws of the Registrant. 4.1 (A) 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 (A) Common Stock specimen. 4.3.1 (B) Certificate of Designation, Preferences, Rights and Limitations of Series B Convertible Preferred Stock. 4.3.2 (B) Certificate of Designation, Preferences, Rights and Limitations of Series C Preferred Stock. 4.3.3 (E) Certificate of Designation, Preferences, Rights and Limitations of Series D Convertible Preferred Stock. 4.4 (A) Form of Warrant Certificate dated December 17, 1997 (Included in Exhibit 4.8). 4.5 (A) Form of Registration Rights Agreement pursuant to Private Placement Memorandum dated September 18, 1996. 4.6 (A) Form of Registration Rights Agreement dated December 17, 997, between the Company and Cahill, Warnock Strategic Partners Fund, L.P., Strategic Associates, L.P., Newpark Resources, Inc. and James H. Stone. 4.7 (A) 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. 54 4.8 (C) Form of Registration Rights Agreement dated December 7, 1998. 4.9 (H) Warrant Certificate of Rineco Recycling, LLC. 4.10 (H) Registration Rights Agreement of Rineco Recycling, LLC. 4.11 (H) Waiver of recalculation of conversion price by holders of Series B Preferred Stock. 5.1 (H) Opinion of Axelrod, Smith & Kirshbaum. 10.1.1 (E) Agreement in Principal dated August 17, 2000. 10.1.2 (F) Agreement dated March 1, 2001. 10.2 (A) Loan and Security Agreement dated December 17, 1997 by and among the Company, National Fuel & Energy, and OnSite Technology, L.L.C. as Borrowers and Cahill, Warnock Strategic Partners Fund, L.P., Strategic Associates, L.P., Newpark Resources, Inc. and James H. Stone, as Lenders. 10.3 (A) Form of Registration Rights Agreement pursuant to Private Placement Memorandum dated September 18, 1996. 10.4 (A) 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 (A) 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 (A) Employment Agreement of James S. Percell. 10.7 (D) 1998 Stock Option Plan 10.8 (H) Promissory Note payable to Rineco Recycling, LLC. 10.9 (H) Security Agreement for Promissory Note payable to Rineco Recycling, LLC. 55 10.10 (H) (J) Contract to process various waste streams for Rineco Chemical Industries, Inc. 10.11 (H) (J) Amendment to contract to process various waste streams for Rineco Chemical Industries, Inc. 10.12 (H) Loan commitment letter 16.1 (G) Letter from PricewaterhouseCoopers LLP 21.1. (H) Subsidiaries 23.1 (H) Consent of Axelrod, Smith & Kirshbaum (included in Exhibit 5.1). 23.2 (H) Consent of Ham, Langston & Brezina L.L.P. 23.3 (H) Consent of PricewaterhouseCoopers LLP
- --------------- (A) 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. (B) 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. (C) Previously filed with Form S-3 as amended effective Feb 8, 1999, and incorporated herein by reference thereto. (D) 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. (E) 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. (F) 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. (G) Previously filed as an exhibit to the Company's Current Report on Form 8-K dated April 2, 2002 and filed April 9, 2002 and incorporated herein by reference thereto. 56 (H) Submitted herewith. (J) The registrant has requested that portions of exhibits with the notation (J) be given confidential treatment and the registrant has filed a confidential treatment request with the Secretary of the Commission. In these exhibits, the registrant has omitted such material and the registrant has marked this exhibit with a mark " ***** "to indicate where material has been omitted. 57 ITEM 28. UNDERTAKINGS (a) The undersigned registrant hereby undertakes: (1) To file, during any period in which offer or sales are being made, a post-effective amendment to this registration statement: i. To include any prospectus required by Section 10(a)(3) of the Securities Act of 1933; ii. To reflect in the prospectus any facts or events arising after the effective date of the registration statement (or the most recent post-effective amendment thereof) which, individually or in the aggregate, represent a fundamental change in the information set forth in the registration statement; and iii. To include any additional or changed material information with respect to the plan of distribution. (2) That, for the purpose of determining any liability under the Securities Act of 1933, each such post-effective amendment shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. (3) To remove from registration by means of a post-effective amendment any of the securities being registered which remain unsold at the termination of the offering. (4) i. That, for the purpose of determining liability under the Securities Act of 1933, the information omitted from the form of prospectus filed as part of this registration statement in reliance upon Rule 430A and contained in a form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4), or 497(h) under the Securities Act of 1933 shall be deemed to be part of this registration statement as of the time it was declared effective. ii. That, for the purpose of determining liability under the Securities Act of 1933, each post- effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. (b) Insofar as indemnification for liabilities arising under the Securities Act of 1933 (the "Act") may be permitted to directors, officers and controlling persons of the registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. 58 In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue. 59 SIGNATURES In accordance with the requirements of the Securities Act of 1933, the registrant certifies that it has reasonable grounds to believe that it meets all of the requirements for filing on Form SB-2 and authorized this registration statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Houston, County of Harris, State of Texas, on April 29, 2003. ENVIRONMENTAL SAFEGUARDS, INC. (signed) ----------------------------- By: /s/ JAMES S. PERCELL JAMES S. PERCELL Director, Chairman of the Board, Chief Executive Officer and President In accordance with the requirements of the Securities Act of 1933, this registration statement was been signed by the following persons in the capacities and on the dates indicated:
Signature Title Date - --------------------------------- ------------------------------------- -------------- (signed) --------------------- /s/ JAMES S. PERCELL Director, Chairman of the Board, April 29, 2003 JAMES S. PERCELL Chief Executive Officer and President (signed) --------------------- Director THOMAS R. BRAY (signed) --------------------- /s/ BRYAN SHARP Director April 29, 2003 BRYAN SHARP 60 (signed) --------------------- /s/ ALBERT WOLFORD Director April 29, 2003 ALBERT WOLFORD (signed) --------------------- /s/ DAVID L. WARNOCK Director April 29, 2003 DAVID L. WARNOCK (signed) --------------------- /s/ MICHAEL D. THOMPSON Chief Financial Officer April 29, 2003 MICHAEL D. THOMPSON and Secretary
61 EX-4.9 3 doc2.txt EXHIBIT 4.9 THIS WARRANT AND THE SECURITIES ISSUABLE UPON EXERCISE HEREOF HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND MAY NOT BE SOLD, OFFERED FOR SALE, ASSIGNED, TRANSFERRED OR OTHERWISE DISPOSED OF UNLESS REGISTERED PURSUANT TO THE PROVISIONS OF THAT ACT OR AN OPINION OF COUNSEL TO THE COMPANY IS OBTAINED STATING THAT SUCH DISPOSITION IS IN COMPLIANCE WITH AN AVAILABLE EXEMPTION FROM SUCH REGISTRATION. WARRANT TO PURCHASE SHARES OF COMMON STOCK OF ENVIRONMENTAL SAFEGUARDS, INC. Void after 5:00 p.m. Houston, Texas local time, on April 30, 2005 NO. W-RR,LLC-001 1,500,000 Warrants This Warrant Certificate certifies that RINECO RECYCLING, LLC (the "Holder") is the owner of 1,500,000 Warrants (subject to adjustment as provided herein), each of which represents the right to subscribe for and purchase from Environmental Safeguards, Inc., a Nevada corporation (the "Company"), one share of the common stock, par value $0.001 per share, of the Company (the common stock, including any stock into which it maybe changed, reclassified or converted, is herein referred to as the "Common Stock") at the purchase price (the "Exercise Price") of $0.01 per share (subject to adjustment as provided herein). The Warrants represented by this Warrant Certificate are subject to the following provisions, terms and conditions: 1. Exercise of Warrants Exercise of Warrants. The Warrants may be exercised by the Holder in ----------------------- whole, or in part, by surrender of this Warrant Certificate at the office of the Company (or such other office or agency of the Company as may be designated by notice in writing to the Holder at the address of such Holder appearing on the books of the Company) with the appropriate form attached hereto duly completed, at any time within the period beginning on the date hereof and expiring at 5:00 p.m. Houston, Texas, local time, on April 30, 2005 (the "Exercise Period") and by payment to the Company by certified check or bank draft of the Exercise Price for such shares. The Company agrees that the shares of Common Stock so purchased shall be and are deemed to be issued to the Holder as the record owner of such shares of Common Stock as of the close of business on the date on which the Warrant Certificate shall have been surrendered and payment made for such shares of -1- Common Stock. Certificates representing the shares of Common Stock so purchased shall be delivered to the Holder promptly, and, unless the Warrants have expired, a new Warrant Certificate representing the number of Warrants represented by the surrendered Warrant Certificate, if any, that shall not have been exercised also shall be delivered to the Holder within such time. 2. ADJUSTMENTS A. Adjustments. The Exercise Price and the number of shares of Common ------------ Stock issuable upon exercise of each Warrant shall be subject to adjustment from time to time as follows: (1) Stock Dividends; Stock Splits; Reverse Stock Splits; ---------------------------------------------------------- Reclassifications. In case the Company shall (i) pay a dividend with respect to - ----------------- its Common Stock in shares of capital stock, (ii) subdivide its outstanding shares of Common Stock, (iii) combine its outstanding shares of Common Stock into a smaller number of shares of any class of Common Stock or (iv) issue any shares of its capital stock in a reclassification of the Common Stock (including any such reclassification in connection with a consolidation or merger in which the Company is the continuing corporation), other than elimination of par value, a change in par value, or a change from par value to no par value (any one of which actions is herein referred to as an "Adjustment Event"), the number of shares of Common Stock purchasable upon exercise of each Warrant immediately prior to the record date for such Adjustment Event shall be adjusted so that the Holder shall thereafter be entitled to receive the number of shares of Common Stock or other securities of the Company (such other securities thereafter enjoying the rights of shares of Common Stock under this Warrant Certificate) that such Holder would have owned or have been entitled to receive after the happening of such Adjustment Event, had such Warrant been exercised immediately prior to the happening of such Adjustment Event or any record date with respect thereto. An adjustment made pursuant to this Section 2A(1) shall become effective immediately after the effective date of such Adjustment Event retroactive to the record date, if any, for such Adjustment Event. (2) Adjustment of Exercise Price. Whenever the number of shares of -------------------------------- Common Stock purchasable upon the exercise of each Warrant is adjusted pursuant to Section 2A(1), the Exercise Price for each share of Common Stock payable upon exercise of each Warrant shall be adjusted by multiplying such Exercise Price immediately prior to such adjustment by a fraction, the numerator of which shall be the number of shares of Common Stock purchasable upon the exercise of each Warrant immediately prior to such adjustment, and the denominator of which shall be the number of shares of Common Stock so purchasable immediately thereafter. (3) De Minimis Adjustments. No adjustment in the number of shares of ----------------------- Common Stock for which this Warrant is exercisable shall be required unless such adjustment would require an increase or decrease of at least 1% in the number of shares of Common Stock for which this Warrant is exercisable; provided, however, that any adjustments which by reason of this subsection (3) are not required to be made shall be carried forward and taken into account in any subsequent adjustment. All calculations under this Section 2 shall be made to the nearest one-hundredth of a share. -2- B. Notice of Adjustment. Whenever the number of shares of Common -------------------- Stock purchasable upon the exercise of each Warrant or the Exercise Price is adjusted, as herein provided, the Company shall promptly notify the Holder in writing (such writing referred to as an "Adjustment Notice") of such adjustment or adjustments and shall deliver to such Holder a statement setting forth the number of shares of Common Stock purchasable upon the exercise of each Warrant and the Exercise Price after such adjustment, setting forth a brief statement of the facts requiring such adjustment and setting forth the computation by which such adjustment was made. C. Statement on Warrant Certificates. The form of this Warrant ------------------------------------ Certificate need not be changed because of any change in the Exercise Price or in the number or kind of shares purchasable upon the exercise of a Warrant. However, the Company may at any time in its sole discretion make any change in the form of the Warrant Certificate that it may deem appropriate and that does not affect the substance thereof and any Warrant Certificate thereafter issued, whether in exchange or substitution for any outstanding Warrant Certificate or otherwise, maybe in the form so changed. D. Fractional Interest. The Company shall not be required to issue ------------------- fractional shares of Common Stock on the exercise of the Warrants. The number of full shares of Common Stock which shall be issuable upon such exercise shall be computed on the basis of the aggregate number of whole shares of Common Stock purchasable on the exercise of the Warrants so presented. If any fraction of a share of Common Stock would, except for the provisions of this Section 2D be issuable on the exercise of the Warrants (or specified proportion thereof), the Company shall pay an amount in cash calculated by it to be equal to the then fair value of one share of Common Stock, as determined by the Board of Directors of the Company in good faith, multiplied by such fraction computed to the nearest whole cent. 3. RESERVATION AND AUTHORIZATION OF COMMON STOCK The Company covenants and agrees (a) that all shares of Common Stock which may be issued upon the exercise of the Warrants represented by this Warrant Certificate, upon issuance and when fully paid for, will be validly issued, fully paid and nonassessable and free of all taxes, liens, charges, encumbrances and security interests other than those attaching by or through the Holder, (b) that during the Exercise Period, the Company will at all times have authorized, and reserved for the purpose of issue or transfer upon exercise of the Warrants evidenced by this Warrant Certificate, sufficient shares of Common Stock to provide for the exercise of the Warrants represented by this Warrant Certificate and (c) that the Company will take all such action as may be necessary to ensure that the shares of Common Stock issuable upon the exercise of the Warrants may be so issued without violation of any applicable law or regulation, or any requirement of any securities exchange upon which any capital stock of the Company may be listed. -3- 4. NO RIGHTS OF STOCKHOLDER The Warrant Holder shall not be entitled to vote or to receive dividends or shall otherwise be deemed to be the holder of shares of Common Stock for any purpose, nor shall anything contained herein or in any Warrant Certificate be construed to confer upon the Holder, as such, any of the rights of a stockholder of the Company or any right to vote upon or give or withhold consent to any action of the Company (whether upon any reorganization, issuance of securities, reclassification or conversion of Common Stock, consolidation, merger, sale, lease, conveyance, or otherwise), receive notice of meetings or other action affecting stockholders (except for notices expressly provided for herein) or receive dividends or subscription rights, until the Warrant Certificate shall have been surrendered for exercise accompanied by full and proper payment of the Exercise Price as provided herein and shares of Common Stock hereunder shall have become issuable and until the Holder shall have been deemed to have become a holder of record of such shares. The Holder shall not, upon the exercise of Warrants, be entitled to any dividends if the record date with respect to payment of such dividends shall be a date prior to the date such shares of Common Stock became issuable upon the exercise of such Warrants. 5. RESTRICTIONS ON TRANSFER This Warrant Certificate, the Warrants it evidences and the underlying Common Stock issued on exercise of the Warrants, may not be sold, transferred or otherwise disposed of without registration under the Securities Act of 1933, as amended (the "Act"), or any exemption therefrom and for which the Company is provided with an opinion of counsel to the Holder, reasonably satisfactory to the Company, to the effect that such transfer is not in violation of any of said securities laws. 6. CLOSING OF BOOKS The Company will at no time close its transfer books against the transfer of any Warrant or of any shares of Common Stock or other securities issuable upon the exercise of any Warrant in any manner which interferes with the timely exercise of the Warrants. 7. WARRANTS EXCHANGEABLE; LOSS, THEFT This Warrant Certificate is exchangeable, upon the surrender hereof by any Holder at the office or agency of the Company referred to in Section 1, for new Warrant Certificates of like tenor representing in the aggregate the right to subscribe for and purchase the number of shares of Common Stock which may be subscribed for and purchased hereunder, each such new Warrant to represent the right to subscribe and purchase such number of shares of Common Stock as shall be designated by said Holder hereof at the time of such surrender. Upon receipt of evidence satisfactory to the Company of the loss, theft, destruction or mutilation, or upon surrender or cancellation of this Warrant Certificate, the Company will issue to the Holder hereof a new Warrant Certificate of like -4- tenor, in lieu of this Warrant Certificate, representing the right to subscribe for and purchase the number of shares of Common Stock which maybe subscribed for and purchased hereunder. 8. MERGERS, CONSOLIDATIONS If the Company shall merge or consolidate with another corporation, the Holder of this Warrant shall thereafter have the right, upon exercise hereof and payment of the Exercise Price, to receive solely the kind and amount of shares of stock (including, if applicable, Common Stock), other securities, property or cash or any combination thereof receivable by a holder of the number of shares of Common Stock, as adjusted from time to time, for which this Warrant might have been exercised immediately prior to such merger or consolidation (assuming, if applicable, that the Holder of such Common Stock failed to exercise its rights of election, if any, as to the kind or amount of shares of stock, other securities, property or cash or combination thereof receivable upon such merger or consolidation). 9. REGISTRATION RIGHTS The Holder shall have such registration rights with respect to the shares of Common Stock underlying the Warrants as are granted in that certain Registration Rights Agreement between the Holder and the Company and dated the date of this Warrant Certificate. 10. EXPENSES The Holder shall bear the cost of all underwriting discounts, selling Commissions and stock transfer taxes applicable to the Warrant and the Common Stock underlying the Warrants. Dated this 20th day of March, 2003. ENVIRONMENTAL SAFEGUARDS, INC. By: /s/ James S. Percell --------------------------------- James S. Percell, President -5- [FORM OF ELECTION TO PURCHASE] (To be executed upon exercise of Warrant) The undersigned hereby irrevocably elects to exercise the right, represented by this Warrant Certificate, to purchase _____ shares of Common Stock and herewith tenders in payment for such shares a certified check or bank draft payable to the order of Environmental Safeguards, Inc. in the amount of $_____, all in accordance with the terms hereof. The undersigned requests that a certificate for such shares be registered in the name of _______________ whose address is _________________________________ and that such certificate (or any payment in lieu thereof) be delivered to ___________ whose address is _________________________. Dated:_________ _____________________________________ (Signature must conform in all respects to name of holder as specified on the face of the Warrant.) -6- EX-4.10 4 doc3.txt EXHIBIT 4.10 REGISTRATION RIGHTS AGREEMENT ----------------------------- This Registration Rights Agreement (the "Agreement") is made by and between RINECO RECYCLING, LLC (the "Warrant Holder") and ENVIRONMENTAL SAFEGUARDS, Inc., a Nevada corporation (the "Company"). W I T N E S S E T H: WHEREAS, the Company has issued to the Warrant Holder 1,500,000 warrants (the "Warrants"), each of which represents the right to purchase from the Company one (1) share of its common stock, $.001 par value (the "Common Stock") at an exercise price of $.01 per share expiring April 30, 2005, pursuant to that certain Warrant to Purchase Shares of Common Stock of Environmental Safeguards, Inc. of even date herewith. NOW THEREFORE, for good and valuable consideration, the receipt and sufficiency of which hereby acknowledged, the parties agree as follows: 1. The Registration. Prior to May 1, 2003, the Company will file a ----------------- Registration Statement ("Registration Statement") pursuant to the Securities Act of 1933, as amended (the "Securities Act") to register the resale of the shares of common stock underlying the Warrants (the "Registration Shares") with the Securities and Exchange Commission (the "Commission"). The Company will use reasonable efforts to cause the Registration Statement to become effective and to keep the Registration Statement current until the earlier of (i) April 30, 2006 or (ii) the sale of all of the Registration Shares held by the Warrant Holder (the "Termination Date"). The Company shall not be obligated to effect more than one registration on behalf of the Warrant Holder under this section. Notwithstanding the foregoing, if the Company is engaged in negotiations in respect of an acquisition or financing transaction and, in the good faith judgment of the Board of Directors such transaction would be adversely affected by the filing of the Registration Statement, the Company shall be entitled to postpone the filing of such registration statement until such transaction would not be adversely affected by such filing, but, in any event, for a period not to exceed 60 days. 2. Registration Procedures. ------------------------ (a) In performing its obligations under Section 1 to register the Registration Shares, the Company will, subject to the limitations provided herein, as expeditiously as possible: (i) prepare and file with the Commission the Registration Statement and use its commercially reasonable best efforts to cause such registration to become and remain effective for the term specified herein; (ii) prepare and file with the Commission such amendments and supplements to the Registration Statement and the Prospectus used in connection therewith as may be necessary to keep the Registration Statement effective in accordance with the terms if the Agreement and to comply with the provisions of the Securities Act with respect to the disposition of all shares covered by the Registration Statement; (iii) furnish to the Warrant Holder one conformed copy of the Registration Statement and of each such amendment and supplement thereto (in each case including all exhibits), one copy of the Prospectus (including each preliminary prospectus and any summary prospectus) and any other Prospectus filed under Rule 424 under the Securities Act, and such other documents, as the Warrant Holder may reasonably request; (iv) use its reasonable efforts to (a) register or qualify the Registration Shares under such other securities or blue sky laws of such jurisdictions as the Warrant Holder shall reasonably request, (b) keep such registration or qualification in effect for so long as the Registration Statement remains in effect, and (c) take any other action which may be reasonably necessary or advisable to enable the Warrant Holder to consummate the disposition of the Registration Shares in jurisdictions, except that the Company shall not for any such purpose be required to qualify generally to do business as a foreign corporation in any jurisdiction wherein it would not but for the requirements of this subdivision (iv) be obligated to be so qualified, or to take any such action which would impose unreasonable expense on the Company; (v) notify the Warrant Holder at any time when a Prospectus relating to the Registration Shares is required to be delivered under the Securities Act, upon discovery that, or upon the happening of any event as a result of which, the Prospectus included the Registration Statement, as then in effect, includes an untrue statement of a material fact or omits to state any material fact required to be stated therein or necessary to make the statements therein not misleading in the light of the circumstances under which they were made, and prepare and furnish to the Warrant Holder one copy of supplement to or an amendment of such Prospectus as may be necessary so that, as thereafter delivered to the purchasers of such securities, such Prospectus shall not include an untrue statement of a material fact or omit to state a material fact Page 2 required to be stated therein or necessary to make the statements therein not misleading in the light of circumstances under which they were made; (vi) otherwise use reasonable efforts to comply with all applicable rules and regulations of the Commission; (vii) provide and cause to be maintained a transfer agent for the Common Stock from and after a date not later than the effective date of the Registration Statement; (viii) properly notify any securities exchange on which any of the Company's Common Stock is listed of the registration of any of the Registration Shares, and use its best efforts to satisfy all prerequisites and regulations of any such exchange relating to the trading of such Registration Shares on such exchange; (ix) if requested by the Warrant Holder, promptly incorporate in a prospectus supplement or post-effective amendment such information as the Warrant Holder reasonably requests to be included therein with respect to the number of Registration Shares being sold by the Warrant Holder's plan of distribution and promptly make all required filings of such prospectus supplement or post-effective amendment; (x) as promptly as practicable after filing with the Commission of any document which is incorporated by reference in a prospectus contained in a registration statement, deliver a copy of such document to the Warrant Holder; (xi) cooperate with the Warrant Holder to facilitate the timely preparation and delivery of certificates (not bearing any restrictive legends) representing Registration Shares to be sold under the Registration Statement, in such denominations and registered in such names as the Warrant Holder may reasonably request; and (xii) make available for inspection by the Warrant Holder, and any one attorney, accountant or other agent retained by the Warrant Holder of the Registration Shares (the "Inspector"), all financial and other records, pertinent corporate documents and properties of the Company (collectively, the "Records"), as shall be reasonably necessary to enable them to exercise their due diligence responsibility, and cause the Company's officers, directors and employees to supply all information reasonably requested by any Page 3 such Inspector in connection with such Registration Statement; provided that records which the Company determines, in good faith, to be confidential and which it notifies the Inspector are confidential shall not be disclosed by the Inspector unless (i) the disclosure of such Records is necessary to avoid or correct a misstatement or omission in the Registration Statement or (ii) the release of such Records is ordered pursuant to a subpoena or other order from a court of competent jurisdiction; provided, further, the Warrant Holder agrees that it will, upon learning that disclosure of such Records is sought in a court of competent jurisdiction, give notice to the Company and allow the Company, at its expense, to undertake appropriate action and to prevent disclosure of the Records deemed confidential. (b) All expenses incident to the Company's performance of its obligations under this Agreement, including without limitation, all registration and filing fees, fees and expenses of compliance with securities and Blue Sky laws, printing expenses, fees and disbursements of the Company's counsel, independent certified public accountants, and other persons retained by the Company (all such expenses being herein called "Registration Expenses") will be borne by the Company. The Warrant Holder shall be responsible for all discounts and commissions relating to the Registration Shares and for the fees and expenses of counsel and other persons engaged by the Warrant Holder. 3. Obligations of Warrant Holder. -------------------------------- (a) The Warrant Holder agrees that it will offer and sell the Registration Shares in compliance with all applicable state and federal securities laws. Specifically, without limitation, the Warrant Holder agrees not to use any prospectus (as that term is defined under the Securities Act) for the purpose of offering or selling the Registration Shares to the public except for the Prospectus, as the same may be supplemented and amended from time to time. (b) The Warrant Holder agrees to promptly notify the Company as and when any Registration Shares are sold and when the Warrant Holder elects to terminate all further offers and sales of Registration Shares pursuant to the Registration Statement. The Warrant Holder acknowledges that any Registration Shares which have not been sold within the Termination Date or any earlier termination of the distribution of the Registration Shares will be removed from registration by means of a post-effective amendment to the Registration Statement. (c) It shall be a condition precedent to the obligations of the Company to take any action with respect to registering the Registration Shares that the Warrant Holder furnish the Company in writing such information regarding the Warrant Holder, Page 4 the Registration Shares and other securities of the Company held by Warrant Holder, and the distribution of such Registration Shares as the Company may from time to time reasonably request in writing. If the Warrant Holder refuses to provide the Company with any of such information in the Registration Statement, the Company may exclude the Warrant Holder's Registration Shares from the Registration Statement if the Company provides the Warrant Holder with an opinion of counsel to the effect that such information must be included in the Registration Statement and the Warrant Holder thereafter continues to withhold such information. (d) The Warrant Holder agrees that upon receipt of any notice from the Company of the happening of any event of the kind described in Section 2(a)(v), the Warrant Holder will forthwith discontinue the Warrant Holder's disposition of the Registration Shares pursuant to the Registration Statement until the Warrant Holder's receipt of the copies of the supplemented or amended prospectus contemplated by Section 2(a)(v) and, if so directed by the Company, will deliver to the Company (at the Company's expense) all copies, other than permanent file copies then in such Warrant Holder's possession, of the Prospectus which was current at the time of receipt of such notice. 4. Public Offering by the Company. Notwithstanding the registration ---------------------------------- rights granted to the Warrant Holder under this Agreement, in the event Company files a registration statement for an underwritten public offering of Common Stock (a "Company Offering") while the Registration Statement covering the Registration Shares is effective, then upon the request of the Company's underwriter in such Company Offering, the Warrant Holder agrees to enter into an agreement pursuant to which the Warrant Holder will be prohibited from transferring the Registration Shares for such period from time to time, not to exceed 90 days after completion of the Company Offering, as the Company's underwriter may request. The company may enter stop transfer orders with its transfer agent in order to effect this prohibition. In the event the Company makes a Company Offering and the Company's underwriter imposes transfer restrictions on the sale of Registration Shares, the period during which the Registration Statement will be kept current shall be extended for such like period of time. 5. Restrictions on Transfer. The Warrant Holder agrees that it will -------------------------- not sell, exchange, pledge or otherwise transfer any Registration Shares except in transactions (i) made pursuant to the Registration Statement or (ii) pursuant to Rule 144 of the Securities Act and all applicable state securities laws, and for which the Company is provided with an opinion of counsel of the Warrant Holder and other evidence as may be reasonably satisfactory to the Company to the effect that such transfer will not be in violation of the Securities Act and all applicable state securities laws. Page 5 6. Indemnification. --------------- (a) Indemnification by the Company. To the extent permitted by law, -------------------------------- the Company will, and hereby does, indemnify and hold harmless the Warrant Holder, its directors and officers, each other natural person, corporation, business trust, association, company, partnership, joint venture and other entity (each, a "Person") who participates as an underwriter in the offering or sale of such securities and each other Person, if any, who controls the Warrant Holder or any such underwriter within the meaning of the Securities Act or otherwise, insofar as such losses, claims, damages or liabilities (or actions or proceedings, whether commenced or threatened, in respect thereof) arise out of or are based upon any untrue statement or alleged untrue statement of any material fact contained in any registration statement under which such securities were registered under the Securities Act, any preliminary prospectus, final prospectus or summary prospectus contained therein, or any amendment or supplement thereto, or any omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, and the Company will reimburse the Warrant Holder and each such director, officer, underwriter and controlling person for any legal or any other expenses reasonably incurred by them in connection with investigating or defending any such loss, claim, liability, action or proceeding; provided that the Company -------- shall not be liable in any such case to the extent that any such loss, claim, damage, liability (or action or proceeding in respect thereof) or expense arises out of or is based upon an untrue statement or alleged untrue statement of omission or alleged omission made in such registration statement, any such preliminary prospectus, final prospectus, summary prospectus, amendment or supplement in reliance upon written information furnished to the Company by the Warrant Holder expressly for use in the preparation thereof. Such indemnity shall remain in full force and effect regardless of any investigation made by or on behalf of the Warrant Holder or any such director, officer, underwriter or controlling person and shall survive the transfer of Registration Shares by the Warrant Holder. (b) Indemnification by the Warrant Holder. To the extent permitted by ------------------------------------- law, the Warrant Holder will, and hereby does, indemnify and hold harmless (in the same manner and to the same extent as set forth in subdivision (a) of this Section 6) each underwriter, each Person who controls such underwriter within the meaning of the Securities Act, the Company, each director of the Company, each officer of the Company and each other Person, if any, who controls the Company within the meaning of the Securities Act, with respect to any statement or alleged statement in or omission or alleged omission from such registration statement, any preliminary prospectus, final prospectus or summary prospectus contained Page 6 therein, or any amendment or supplement thereto, if such statement or alleged statement or omission or alleged omission was made in reliance upon written information furnished to the Company by the Warrant Holder expressly for use in the preparation of such registration statement, preliminary prospectus, final prospectus, summary prospectus, amendment or supplement, and with respect to any violation by the Warrant Holder of the Securities Act of the Exchange Act. (c) Notices of Claims, etc. Promptly after receipt by an indemnified ----------------------- party of notice of the commencement of any action or proceeding involving a claim referred to in the preceding subdivisions of this Section 6, such indemnified party will, if a claim in respect thereof is to be made against an indemnifying party, give written notice to the latter of the commencement of such action, provided that the failure of any indemnified party to give notice as provided herein shall not relieve the indemnifying party of its obligations under the preceding subdivisions of this Section 6, except to the extent that the indemnified party is actually prejudiced by such failure to give notice. In case any such action is brought against as indemnified party, unless in such indemnified party's reasonable judgment a conflict of interest between such indemnified and indemnifying parties actually exists in respect of such claim, the indemnifying party shall be entitled to participate in and to assume the defense thereof, jointly with any other indemnifying party similarly notified to the extent that it may wish, with counsel reasonably satisfactory to such indemnified party, and after notice from the indemnifying party to such indemnified party of its election to assume the defense thereof, the indemnifying party shall not be liable to such indemnified party for any legal or other expenses subsequently incurred by the latter in connection with the defense thereof other than reasonable costs of investigation. No indemnifying party shall, without the consent of the indemnified party, consent to entry of any judgment or enter into any settlement which does not include as an unconditional term thereof the giving by the claimant or plaintiff to such indemnified party of a release from all liability in respect to such claim or litigation. (d) Other Indemnification. Indemnification similar to that specified ---------------------- in the preceding subdivisions of this Section 6 (with appropriate modifications) shall be given by the Company and the Warrant Holder with respect to any required registration or other qualification of securities under any Federal or state law or regulation of any governmental authority other than the Securities Act. (e) Indemnification Payments. The indemnification required by this ------------------------- Section 6 shall be made by periodic payments of the amount thereof during the course of the investigation or defense, as and when bills are received or expense, loss, damage or liability is incurred. Page 7 7. Reporting Requirements Under the Exchange Act. At all times when --------------------------------------------------- it is legally required to do so, the Company shall use its best efforts to keep effective its registration under Section 12 of the Exchange Act and shall use its best efforts to timely file such information, documents and reports as the Commission may require or prescribe under the Section 13 of the Exchange Act. 8. Notices. All notices required or permitted herein must be in -------- writing and shall be deemed to have been duly given the first business day following the date of service if served personally or by overnight air courier guaranteeing next day delivery, on the first business day following the date of actual receipt of delivered by telecopier, telex, or other similar communication to the party or parties to whom notice is to be given by registered or certified mail, return receipt requested, postage prepaid, to the Warrant Holder at the address set forth in the Subscription Agreement, and to the Company at the address set forth below, or to such other addresses as either party hereto may designate to the other by notice from time to time for this purpose. Environmental Safeguards, Inc. 2600 South Loop West, Ste. 645 Houston, Texas 77054 Attn: Jim Percell Telecopier No: (713) 641-3838 With a copy to: --------------- Axelrod, Smith & Kirshbaum 5300 Memorial Drive, Suite 700 Houston, TX 77007 Attn: Robert Axelrod Telecopier No: (713)552-0202 9. Entire Agreement. This agreement contains and constitutes the entire ----------------- agreement between and among the parties with respect to the matters set forth herein and supersedes all prior agreements and understandings between the parties hereto relating to the subject matter hereof. There are agreements, understandings, restrictions, warranties or representatives among the parties relating to the subject matter hereof other than those set forth or referred to herein. This instrument is not intended to have any legal effect whatsoever, or to be legally binding agreement ort any evidence thereof, until it has been signed by all parties hereto. 10. Binding Effect. This Agreement shall be binding on and enforceable --------------- by the Warrant Holder and by the Company and its successors. No transferee of Registration Shares shall acquire any rights under this Agreement except with the written consent of the Company, which may be withheld for any reason. In the event the Company is a party to a merger or consolidation in a transaction in which the Registration Shares are converted into equity securities of another entity, then the Company shall cause such other entity to assume the Company's obligations under this Agreement such that this Agreement shall apply to the equity securities received by the Warrant Page 8 Holder in exchange for the Registration Shares, unless such equity securities are, upon receipt and without further action by the Warrant Holder, readily salable without registration under the Securities Act. 11. Construction. This Agreement shall be construed, enforced and governed ------------ in accordance with the laws of the State of Texas. All pronouns and any variations thereof shall be deemed to refer to the masculine, feminine or neuter gender thereof or to the plurals of each, as the identity of the person or persons or the context may require. The descriptive headings contained in the Agreement are for reference purposes only and are not intended to describe, interpret, define or limit the scope, extent or intent of this Agreement or any provisions contained herein. 12. Invalidity. If any provision contained in this Agreement shall ---------- for any reason be held to be invalid, illegal, void or unenforceable in any respect, such provisions shall be deemed modified so as to constitute a provision conforming as nearly as possible to such invalid, illegal, void or unenforceable provisions while still remaining valid and enforceable, and the remaining terms or provisions contained herein shall not be affected thereby. 13. Counterparts. This agreement may be executed in any number of ------------ Counterparts and by the parties hereto in separate Counterparts, each of which when so executed shall be deemed to be an original and all of which taken together shall constitute one and the same Agreement. 14. Amendments and Waivers. The provisions of this Agreement may ------------------------ not be amended, modified or supplemented, and waivers or consents to or departures from the provisions hereof may not be given unless agreed to in writing by both the Company and the Warrant Holder. Page 9 IN WITNESS WHEREOF, the parties have executed this Agreement as of the dates shown below. WARRANT HOLDER: RINECO RECYCLING, LLC By: /s/ Michael R. Spinks ---------------------------------- Name: Michael R. Spinks ---------------------------------- Title: V.P. of Admin & CFO --------------------------------- Date: 3-20-03 --------------------------------- COMPANY: ENVIRONMENTAL SAFEGUARDS, INC. By: /s/ James S. Percell ------------------------------------ James S. Percell, President Date: March 20, 2003 ---------------------------------- Page 10 EX-4.11 5 doc4.txt EXHIBIT 4.11 [GRAPHIC OMITTED] ENVIRONMENTAL SAFEGUARDS, INC. - -------------------------------------------------------------------------------- March 11, 2003 Cahill, Warnock Strategic Partners Fund LP Newpark Resources, Inc. Strategic Associates LP 3850 N. Causeway, Ste. 1770 One South Street, Ste. 2150 Metairie, Louisiana 70002 Baltimore, Maryland 21202 Attn: Matt Hardey Attn: David L. Warnock James H. Stone Stone Energy 909 Poydras Street, Ste. 2650 New Orleans, Louisiana 70112 RE: Certificate of Designation Preferences, Rights and Limitations of Series B Convertible Preferred Stock of Environmental Safeguards ("Series B Preferred Stock Certificate") Gentlemen: Environmental Safeguards, Inc. (the "Company") along with National Fuel and Energy, Inc. and OnSite Technology, LLC (collectively the "Borrower" or "Borrowers") are intending to enter into a Loan Agreement (the "Loan Agreement") with Rineco Recycling, LLC, located in Haskell, Arkansas (the "Lender"). The Loan Agreement will provide for (i) a 12% Secured Promissory Note in the face amount of $1,500,000.00, with a final maturity date of May 31, 2008 ("Secured Note"), with twenty (20) quarterly installments of principal in the amount of $75,000.00, plus accrued and unpaid interest on the unpaid principal amount if the Secured Note, such equal quarterly installments of principal plus accrued and unpaid interest, to be due and payable beginning August 31, 2003, and on the last day of each November, February, May and August thereafter until maturity, and (ii) warrants to purchase 1,500,000 shares of the Company's common stock at an exercise price of $.01 per share (the "Warrants"). The Secured Note shall be secured by three (3) separate indirect thermal desorption units. The issuance by the Company of the Warrants in connection with the Loan Agreement would trigger a recalculation of the Series B Preferred Stock Certificate conversion price under the provisions of Section 2(g)(iii) of the Series B Preferred Stock Certificate entitled "Conversion of Preferred Stock into Common Stock - Issuances at Less than the Conversion Price." 2600 SOUTH LOOP WEST * SUITE 845 * HOUSTON * TEXAS * 77054 (713)641-3836 * FAX: (713) 641-0750 In order for the Company to go forward with the Loan Agreement, the Company is requesting that you waive your rights to trigger a recalculation of the conversion price under the provisions of Section 2(g)(iii) of the Series B Preferred Stock upon the issuance of the Warrants and any other subsequent issuance of common stock upon exercise of the Warrants. Please sign this letter in the space indicated below and return to me by facsimile. If you have any questions, please feel free to contact me. Very Truly Yours, ENVIRONMENTAL SAFEGUARDS, INC. /s/ James S. Percell James S. Percell, President By your signature below , the undersigned hereby agrees to waive any rights it may have to trigger a recalculation of the Series B Preferred Stock Certificate conversion price under the provisions of Section 2(g)(iii) of the Series B Preferred Stock Certificate entitled "Conversion of Preferred Stock into Common Stock - Issuances at less than the Conversion Price" upon the issuance of the Warrants and any subsequent issuance of common stock upon exercise of the Warrants in connection with the Loan Agreement. CAHILL, WARNOCK STRATEGIC PARTNERS FUND L.P. By: CAHILL, WARNOCK STRATEGIC PARTNERS L.P. /s/ David L. Warnock - ----------------------------------- David L. Warnock, A General Partner Date: 3/13/03 ----------------------------- STRATEGIC ASSOCIATES L.P. By: CAHILL, WARNOCK & COMPANY LLC /s/ David L. Warnock - ----------------------------------- David L. Warnock, Managing Member Date: 3/13/03 ----------------------------- NEWPARK RESOURCES, INC. /s/ Matthew W. Hardey - ----------------------------------- By: Matthew W. Hardey ---------------------------- Title: Vice President ---------------------------- Date: 3-14-2003 ---------------------------- JAMES H. STONE - ----------------------------------- Date: ------------------------------ [GRAPHIC OMITTED] ENVIRONMENTAL SAFEGUARDS, INC. - -------------------------------------------------------------------------------- March 11, 2003 Cahill, Warnock Strategic Partners Fund LP Newpark Resources, Inc. Strategic Associates LP 3850 N. Causeway, Ste. 1770 One South Street, Ste. 2150 Metairie, Louisiana 70002 Baltimore, Maryland 21202 Attn: Matt Hardey Attn: David L. Warnock James H. Stone Stone Energy 909 Poydras Street, Ste. 2650 New Orleans, Louisiana 70112 RE: Certificate of Designation Preferences, Rights and Limitations of Series B Convertible Preferred Stock of Environmental Safeguards ("Series B Preferred Stock Certificate") Gentlemen: Environmental Safeguards, Inc. (the "Company") along with National Fuel and Energy, Inc. and OnSite Technology, LLC (collectively the "Borrower" or "Borrowers") are intending to enter into a Loan Agreement (the "Loan Agreement") with Rineco Recycling, LLC, located in Haskell, Arkansas (the "Lender"). The Loan Agreement will provide for (i) a 12% Secured Promissory Note in the face amount of $1,500,000.00, with a final maturity date of May 31, 2008 ("Secured Note"), with twenty (20) quarterly installments of principal in the amount of $75,000.00, plus accrued and unpaid interest on the unpaid principal amount if the Secured Note, such equal quarterly installments of principal plus accrued and unpaid interest, to be due and payable beginning August 31, 2003, and on the last day of each November, February, May and August thereafter until maturity, and (ii) warrants to purchase 1,500,000 shares of the Company's common stock at an exercise price of $.01 per share (the "Warrants"). The Secured Note shall be secured by three (3) separate indirect thermal desorption units. The issuance by the Company of the Warrants in connection with the Loan Agreement would trigger a recalculation of the Series B Preferred Stock Certificate conversion price under the provisions of Section 2(g)(iii) of the Series B Preferred Stock Certificate entitled "Conversion of Preferred Stock into Common Stock - Issuances at Less than the Conversion Price." 2600 SOUTH LOOP WEST * SUITE 845 * HOUSTON * TEXAS * 77054 (713)641-3836 * FAX: (713) 641-0750 In order for the Company to go forward with the Loan Agreement, the Company is requesting that you waive your rights to trigger a recalculation of the conversion price under the provisions of Section 2(g)(iii) of the Series B Preferred Stock upon the issuance of the Warrants and any other subsequent issuance of common stock upon exercise of the Warrants. Please sign this letter in the space indicated below and return to me by facsimile. If you have any questions, please feel free to contact me. Very Truly Yours, ENVIRONMENTAL SAFEGUARDS, INC. /s/ James S. Percell James S. Percell, President By your signature below , the undersigned hereby agrees to waive any rights it may have to trigger a recalculation of the Series B Preferred Stock Certificate conversion price under the provisions of Section 2(g)(iii) of the Series B Preferred Stock Certificate entitled "Conversion of Preferred Stock into Common Stock - Issuances at less than the Conversion Price" upon the issuance of the Warrants and any subsequent issuance of common stock upon exercise of the Warrants in connection with the Loan Agreement. CAHILL, WARNOCK STRATEGIC PARTNERS FUND L.P. By: CAHILL, WARNOCK STRATEGIC PARTNERS L.P. /s/ David L. Warnock - ----------------------------------- David L. Warnock, A General Partner Date: 3/13/03 ----------------------------- STRATEGIC ASSOCIATES L.P. By: CAHILL, WARNOCK & COMPANY LLC /s/ David L. Warnock - ----------------------------------- David L. Warnock, Managing Member Date: 3/13/03 ----------------------------- NEWPARK RESOURCES, INC. - ----------------------------------- By: ---------------------------- Title: ---------------------------- Date: ---------------------------- JAMES H. STONE /s/ James H. Stone - ----------------------------------- Date: 3/14/02 ------------------------------ EX-5.1 6 doc5.txt EXHIBIT 5.1 [AXELROD, SMITH & KIRSHBAUM LETTERHEAD] April 28, 2003 James S. Percell, President Environmental Safeguards, Inc. 2600 South Loop West Suite 645 Houston, Texas 77054 Dear Mr. Percell: As counsel for Environmental Safeguards Inc., a Nevada corporation ("Company"), you have requested our firm to render this opinion in connection with the registration statement of the Company on Form SB-2 ("Registration Statement") under the Securities Act of 1933, as amended (the "Act"), filed with the Securities and Exchange Commission relating to the resale of 1,500,000 shares of common stock, par value $.001 per share (the "Common Stock") by a certain security holder of the Company. All of the shares underlie warrants owned by a certain security holder of the Company. We are familiar with the Registration Statement and the registration contemplated thereby. In giving this opinion, we have reviewed the Registration Statement and such other documents and certificates of public officials and of officers of the Company with respect to the accuracy of the factual matters contained therein as we have felt necessary or appropriate in order to render the opinions expressed herein. In making our examination, we have assumed the genuineness of all signatures, the authenticity of all documents presented to us as originals, the conformity to original documents of all documents presented to us as copies thereof, and the authenticity of the original documents from which any such copies were made, which assumptions we have not independently verified. Based upon the foregoing, we are of the opinion that: 1. The Company is a corporation duly organized, validly existing and in good standing under the laws of the State of Nevada. 2. The shares of Common Stock to be issued pursuant to the exercise of the warrants are validly authorized and, upon the exercise of the warrants in accordance with their terms, will be validly issued, fully paid and nonassessable. 62 We consent to the use in the Registration Statement of the reference to Axelrod, Smith, & Kirshbaum under the heading "Legal Matters." This opinion is conditioned upon the Registration Statement being declared effective by the Securities and Exchange Commission and upon compliance by the Company with all applicable provisions of the Act and such state securities rules, regulations and laws as may be applicable. Very truly yours, /s/ Axelrod Smith & Kirshbaum 63 EX-10.8 7 doc6.txt EXHIBIT 10.8 PROMISSORY NOTE --------------- $1,500,000.00 Houston, Texas March 20, 2003 FOR VALUE RECEIVED, ONSITE TECHNOLOGY L.L.C., an Oklahoma limited liability company, ENVIRONMENTAL SAFEGUARDS, INC., a Nevada corporation, and NATIONAL FUEL & ENERGY, INC., a Wyoming corporation, each with its principal office and chief executive office at 2600 South Loop West, Suite 645, Houston, Texas 77054 (collectively, "MAKERS" and individually, a "MAKER"), jointly and severally and unconditionally promise to pay to the order of RINECO recycling, LLC, an Arkansas limited liability company ("PAYEE"), at its office at 629 Vulcan Road, Haskell, Arkansas 72015, or such other place as the holder of this Note may from time to time designate, the principal sum of ONE MILLION, FIVE HUNDRED THOUSAND AND NO/100s DOLLARS (51,500,000.00), together with interest thereon from the date or dates of disbursement of advances hereunder at the rate of twelve percent (12.0%) per annum. After maturity, this Note shall bear interest at the maximum rate permitted by applicable law. Interest shall be computed on the basis of 360 days, but applied to the actual number of days elapsed. All payments hereunder shall be payable in lawful money of the United States which shall be legal tender for public and private debts at the time of payment. All past due principal and interest shall bear interest at the maximum rate permitted by applicable law to be charged for past due principal and interest. Said sums shall be due and payable as follows: In quarterly installments of principal in the amount of $75,000.00 each, plus accrued and unpaid interest on the unpaid principal balance hereof, such equal quarterly installments of principal, plus accrued and unpaid interest, to be due and payable beginning August 31, 2003, and on the last day of each November, February, May and August thereafter until May 31,2008, at which time the entire unpaid principal of, together with all accrued and unpaid interest on, this instrument shall be due and payable in full. This Note is executed in connection with and arises out of a Commitment Letter (herein so called) dated March 6, 2003 executed by and between Makers and Payee, and is entitled to the benefits thereof, including all collateral security provided for therein or in connection therewith, and is secured by a Security Agreement (herein so called) of even date herewith granting and giving Payee a security interest in three (3) Indirect Thermal Desorption Units more particularly described therein. In the event of default in the payment of any installment of principal or interest due hereunder, or any pan thereof, as and when same becomes due, and if such default continues uncured for a period of ten (10) days, or upon the occurrence of any other Event of Default under the Commitment Letter or Security Agreement, then in any such event the entire unpaid principal PROMISSORY NOTE ($1,500,000.00) Page 2 - ------------------- balance hereof, together with all accrued interest, shall, at the option of Payee, become at once due and payable upon notice thereof to Makers in accordance with Payee policy for notice of payment defaults. Makers shall have the privilege of prepaying this instrument, in part or in whole, at any time without premium or penalty; provided, no partial prepayment shall operate to postpone, delay or diminish the next regularly scheduled installment. If this obligation, after default, is placed in the hands of an attorney for collection, Makers and any and all .other persons now or hereafter liable hereon will be obligated to pay the holder hereof an additional sum, as a reasonable attorney's fee, not to exceed ten percent (10%) of the unpaid principal plus all accrued interest. Makers shall pay to Payee a late charge for any installment not received by the Payee when due in the amount of ONE HUNDRED AND NO/100s DOLLARS ($100.00); such late charge shall apply separately to each installment past due, but shall only be assessed once as to each late payment. Makers stipulate and agree that any such late charge(s) shall not be deemed to be additional interest, but shall be an assessment to induce timely performance of the terms of this Note. If any payment of principal or interest due under this Note shall become due on a Saturday, Sunday or public holiday under the laws of the State of Arkansas on which Payee is not open for business, such payment shall be made on the next succeeding Business Day, and such extension of time shall in such case be included in computing interest in connection with such payment. Notwithstanding any provisions to the contrary contained in this Note or in any agreement securing or relating to the debt evidenced hereby, it is expressly provided that in no case or event whatsoever shall the aggregate of (i) all interest on the unpaid balance hereof, accrued or paid from the date hereof and (ii) the aggregate of any other amounts accrued or paid pursuant hereto or to any such other agreement, which under applicable laws are or maybe deemed to constitute interest, ever exceed the maximum rate of interest which could lawfully be contracted for, charged or received on the unpaid principal balance hereof plus any other pertinent indebtedness. In this connection, it is expressly stipulated and agreed that it is the intent of Makers and Payee to contract in strict compliance with the applicable usury laws from time to time in effect. In furtherance thereof, none of the terms of this Note or any related agreement shall ever be construed to create a contract to pay, as consideration for the use, forbearance or detention of money, interest at a rate in excess of the maximum rate permitted to be contracted for, charged or received by applicable law. If under any circumstances the aggregate amounts paid hereon for any reason include amounts which by law are deemed interest which exceed or would exceed the maximum amount of interest which could lawfully have been contracted for, charged or received, Makers stipulate that such amounts will be deemed to have been paid as a result of an error on the part of both Makers and Payee, and the party PROMISSORY NOTE ($1,500,000.00) Page3 - ------------------- receiving such excess payment shall, promptly upon receiving such payment, refund the amount of such excess or, at Payee's option, if there is an unpaid principal balance of this Note, credit such excess against the unpaid principal balance hereof. In addition, all sums paid or agreed to be paid to the holder hereof for the use, forbearance or detention of money shall, to the extent permitted by applicable law, be amortized, prorated, allocated and spread throughout the full term of the indebtedness represented hereby, in the manner provided by law to the end that the actual rate of interest hereon shall never exceed the applicable maximum rate. If any term or provision of this Note or of any related agreement under any circumstances would require the payment of an amount for the use, forbearance, or detention of money which, in addition to all other amounts theretofore paid and constituting interest under the applicable law, would exceed the maximum rate of interest which could lawfully be charged under such circumstances, then the amount which Makers or any other person liable therefor is obligated to pay in such circumstances, but only in such circumstances, is hereby automatically reduced to the maximum amount which could lawfully be charged under applicable law. THE MAXIMUM LAWFUL RATE OF INTEREST APPLICABLE HERETO SHALL BE THE HIGHEST OF (i) THE MAXIMUM RATE PROVIDED BY THE LAWS OF THE STATE OF TEXAS FOR LOANS OF THE TYPE EVIDENCED HEREBY AND BY THE INSTRUMENTS SECURING THE INDEBTEDNESS EVIDENCED HEREBY, OR (ii) THE MAXIMUM RATE PROVIDED IN APPLICABLE FEDERAL LAW WHICH PREEMPTS, OR PROVIDES AN ALTERNATIVE OR ALTERNATIVES TO, OTHERWISE APPLICABLE STATE LAW, OR (iii) THE MAXIMUM RATE PROVIDED IN ANY SUBSEQUENTLY ENACTED LAW OF THE STATE OF TEXAS IN EFFECT AT THE TIME OF ANY RENEWAL, EXTENSION OR MODIFICATION HEREOF. TO THE EXTENT THAT OTHERWISE APPLICABLE STATE LAW IS PREEMPTED BY A FEDERAL LAW WHICH DOES NOT LIMIT THE RATE OF INTEREST WHICH MAY BE CHARGED, THIS PARAGRAPH SHALL BE INAPPLICABLE. The provisions of this Paragraph shall control all other provisions hereof and of all agreements, whether now or hereafter existing and whether written or oral, between Makers and Payee or between the Payee and any other person liable hereon. In connection with this Paragraph, Makers acknowledge and represent to Payee that the proceeds of the Loan evidenced hereby are and shall be used solely for a business purpose. The records of Payee or any holder of this Note shall be conclusive evidence of the amounts owing under this Note in the absence of manifest error. Whenever used herein, the words "Makers" and "Payee" shall be deemed to include their respective successors and assigns. Makers hereby waive presentment, protest, demand, diligence, notice of dishonor and of nonpayment and waive, relinquish and renounce all rights to the benefits of any statute of limitations and any moratorium, appraisement, exemption and homestead now provided or which may hereafter be provided by any federal or state statute, including, but not limited to, exemptions provided by or allowed under the United States Bankruptcy Code, 11 U.S.C. 101 et seq., as -- --- now enacted or hereafter amended, both as to themselves and as to all of their respective properties, whether real or personal, PROMISSORY NOTE ($1,500,000.00) PAGE 4 - ------------------- against the enforcement and collection of the obligations evidenced by this Note and any and all extensions, renewals, modifications, replacements and substitutions hereof. With respect to any claim arising out of this instrument, Makers irrevocably submit to the non-exclusive jurisdiction of the courts of the State of Arkansas, and the United States District Court located in the City of Little Rock, Pulaski County, Arkansas, and Makers hereby also irrevocably waive any objection which they may have at any time to the laying of venue of any suit, action or proceeding arising out of or relating to this instrument brought in any such court. Makers hereby further irrevocably waive any claim that any such suit, action or proceeding brought in any such court has been brought in an inconvenient forum, and irrevocably waive the right to object, with respect to such claim, suit, action or proceeding brought in any such court, that such court does not have jurisdiction over such party. This instrument has been executed in and shall be governed by and construed under the substantive laws of the State of Texas and by applicable federal laws. ONSITE TECHNOLOGY L.L.C., ENVIRONMENTAL SAFEGUARDS, INC., an Oklahoma limited liability company a Nevada corporation By: /s/ James S. Percell By: /s/ James S. Percell --------------------------------- -------------------------------- Name: James S. Percell Name: James S. Percell Title: President Title: President NATIONAL FUEL & ENERGY, INC., a Wyoming corporation By: /s/ James S. Percell --------------------------------- Name: James S. Percell Title: President EX-10.9 8 doc7.txt EXHIBIT 10.9 SECURITY AGREEMENT ------------------ THIS SECURITY AGREEMENT (the "AGREEMENT") is made and executed as of the 20th day of March, 2003, by ONSITE TECHNOLOGY L.L.C., an Oklahoma limited liability company, ENVIRONMENTAL SAFEGUARDS, INC., a Nevada corporation, and NATIONAL FUEL & ENERGY, INC., a Wyoming corporation, each having its principal office and chief executive office at 2600 South Loop West, Suite 645, Houston, Texas 77054 (collectively, "DEBTORS" and individually, a "DEBTOR") to and in favor of RINECO RECYCLING, LLC, an Arkansas limited liability company ("SECURED PARTY"), having its principal place of business at 629 Vulcan Road, Haskell, Arkansas 72015. W-I-T-N-E-S-S-E-T-H: WHEREAS, Debtors have made application to Secured Party for a term loan in the principal amount of $1,500,000.00; and WHEREAS, Secured Party has agreed to extend said loan to Debtors in accordance with the terms and provisions of that certain Commitment Letter (herein so called) dated March 6, 2003, executed by and between Debtors, as Borrowers, and Secured Party, as Lender, the terms of which Commitment Letter are incorporated herein by reference; NOW, THEREFORE, in consideration of the premises, and of the mutual covenants and agreements herein set forth, the parties, intending to be legally bound, hereby agree as follows: SECTION 1. DEFINITIONS. Except as otherwise defined herein, or unless the context requires otherwise, the terms used in this Agreement shall have the same meanings assigned to them in the Commitment Letter. SECTION 2. THE GRANTING CLAUSES. In order to secure the payment of the principal of and interest on that certain Promissory Note of even date herewith in the principal amount of $1,500,000.00 from Debtors, as Makers, payable to the order of Secured Party, as Payee (the "NOTE"), Debtors do hereby grant, bargain, sell, transfer, convey, mortgage, assign, pledge, hypothecate and give a security interest in all and singular the following described properties, rights, interests and privileges (the "COLLATERAL") unto Secured Party, its successors and assigns forever, for the benefit, security and protection of all present and future holders of the Note from and after the issuance of the Note; provided always, however, that these presents are upon the express condition that if Debtors shall pay or cause to be paid all the SECURITY AGREEMENT Page 2 - ------------------- principal and accrued interest thereon outstanding under the Note, and shall observe, keep and perform all the terms, conditions, covenants and agreements contained in this Agreement, the Commitment Letter and any other document pertaining to or securing the Note, then these presents and the estate hereby granted and conveyed shall cease and this Agreement shall become null and void; otherwise, this Agreement shall remain in force and effect. It is the intention of each Debtor to grant Secured Party all its respective rights, powers, privileges and options under and to the Collateral effective immediately, and continuing from and after the date of this Agreement until the Note has been fully paid and discharged; provided, however, that so long as no Event of Default shall have occurred and be continuing hereunder or under the Note or any other document pertaining to or securing the Note, Debtor shall be entitled to use the Collateral in the conduct of its business. Debtors hereby expressly consent and agree that Secured Party shall have a security interest in the following described Collateral and any and all accessions, appurtenances and additions to and substitutions for any of the foregoing Collateral and all products and proceeds (including, without limitation, insurance proceeds) and awards and rents, issues and profits (provided, unless and until an Event of Default shall have occurred hereunder or under the Note or under any document pertaining to the Note, Debtor shall be entitled to collect any such rents, issues and profits) of any of the foregoing Collateral, together with all renewals and replacements thereof or therefor, whether now owned by Debtors or existing or hereafter acquired, created or arising (provided, the inclusion of proceeds does not authorize Debtors to sell, dispose of or otherwise use the Collateral in any manner not authorized by the Commitment Letter) as security for the Note: THE COLLATERAL DESCRIBED AND DEFINED IN THE COMMITMENT LETTER, INCLUDING, WITHOUT LIMITATION, THE FOLLOWING THREE (3) INDIRECT THERMAL DESORPTION UNITS: 1. OnSite Indirect Thermal Desorption Unit #9 (Serial # 0009) with condenser and attached equipment. Location - 629 Vulcan Road; Haskell, Arkansas 72015 2. OnSite Indirect Thermal Desorption Unit #10 (Serial # 0010) with condenser and attached equipment. Location - 210 Magnolia Drive; Galena Park, Texas 77547 3. OnSite Indirect Thermal Desorption Unit #5 (Serial # 0005) with condenser and attached equipment. Location - 210 Magnolia Drive; Galena Park, Texas 77547 THE SECURED PARTY'S SECURITY INTEREST SHALL ALSO INCLUDE ANY AND ALL DOCUMENTS OF TITLE EVIDENCING ANY PART OF SAID COLLATERAL, AND ANY AND ALL CASH AND NONCASH PROCEEDS FROM ANY SALE OR OTHER DISPOSITION OF ANY COLLATERAL; PROVIDED, NOTHING CONTAINED HEREIN OR SECURITY AGREEMENT Page 3 - ------------------- IN ANY FINANCING STATEMENT SHALL BE DEEMED PERMISSION OR ASSENT TO ANY SALE OR DISPOSITION OF SUCH COLLATERAL. SECTION 3. REPRESENTATIONS AND WARRANTIES. Debtors represent and warrant to Secured Party until payment in full of the Note as follows: 3.01 REQUIREMENTS OF LAW. All of the requirements of applicable law and -------------------- regulations have been fully complied with and all other acts and things necessary to make this Agreement a valid, binding and legal instrument to secure the Note have been done and performed. 3.02 TITLE TO THE COLLATERAL. Debtor OnSite Technology L.L.C. has title ----------------------- to the Collateral free and clear of all security interests, liens, claims and encumbrances of any kind whatsoever other than those created in favor of Secured Party by this Agreement, and has the right, power and authority to grant a lien and security interest in the Collateral to Secured Party. No financing statement covering the Collateral is on file in any public office except those given to evidence, secure or perfect indebtedness which is owed to Secured Party. 3.03 REPRESENTATIONS AND WARRANTIES IN COMMITMENT LETTER. All of the ---------------------------------------------------- representations and warranties of Debtors set forth in the Commitment Letter are incorporated herein by reference and made a part of this Agreement as if set forth in full, and made again by Debtors to Secured Party and are true, complete and accurate as of the date of this Agreement and shall continue to be true, complete and accurate at all times hereafter under this Agreement. 3.04 ORGANIZATION, AUTHORITY AND QUALIFICATIONS. (a) Each Debtor is a ------------------------------------------ business organization duly organized, validly existing and in good standing under the laws of the state of its respective organization, (b) each Debtor has the power and authority to execute, deliver and perform this Agreement and the other documents to which it is a party, and has the power and authority to borrow the funds/indebtedness evidenced by the Note, and (c) each Debtor is in all respects duly qualified and licensed under all applicable laws or regulations to own its properties as now owned and to carry on its business as now conducted. 3.05 FINANCIAL STATEMENTS. Debtors have delivered to Secured Party --------------------- certain financial information of Debtors. Such statements fairly reflect the financial condition and assets and liability of Debtors at such dates and fairly reflect the results of operations of each Debtor all in conformity with GAAP. Except as specifically disclosed to Secured Party with respect to Debtor Environmental Safeguards, Inc., there has been no material adverse change in the condition, financial or otherwise, of any Debtor since the delivery thereof. 3.06 DEFAULT. No Debtor is in default in any material respect under the ------- provisions of any document or instrument evidencing any material obligation, indebtedness, or liability of such Debtor SECURITY AGREEMENT Page 4 - ------------------- or of any agreement relating thereto, or under any order, writ, injunction, or decree of any court, nor is any Debtor in default in any material respect under or in violation of any order, regulation, or demand of any governmental authority, which default or violation would have consequences which would have a material adverse effect on the business or properties of such Debtor. 3.07 AUTHORIZATION AND COMPLIANCE WITH LAWS AND MATERIAL AGREEMENTS. ----------------------------------------------------------------- The execution, delivery and performance of this Agreement, the borrowings under the Note, and the execution, delivery and performance of the loan documents by Debtors have been duly authorized by all requisite action on the part of each Debtor and will not violate the constituent documents of any Debtor, and the execution, delivery and performance of this Agreement, the Note and any other loan documents to which each Debtor is a party will not violate any provision of law, any order of any court or governmental agency, and will not conflict with, result in a breach of the provisions of, constitute a default under, or result in the imposition of any lien, charge or encumbrance upon the assets of any Debtor pursuant to the provisions of any indenture, mortgage, deed of trust, franchise, permit, license, note, or other agreement or instrument to which any Debtor is now a party. 3.08 LITIGATION AND JUDGMENTS. There is no action, suit, or proceeding, ------------------------ at law or in equity, or by or before any governmental authority, pending or, to the knowledge of any Debtor, threatened against or affecting such Debtor or involving the validity or enforceability of any of the loan documents, which, if adversely determined, would have a material adverse effect on the financial condition of such Debtor or the ability of such Debtor to perform its obligations as contemplated by this Agreement. There are no outstanding judgments against any Debtor. 3.09 CHIEF EXECUTIVE OFFICES. The chief executive offices of each ------------------------- Debtor are located at the address set out in the preamble to this Agreement, and no Debtor will, without prior written notice to Secured Party, relocate its chief executive offices. 3.10 SOLVENCY. Each Debtor is solvent, able to pay its debts generally -------- as such debts mature, and has capital sufficient to carry on its business and all businesses in which it is engaged. The saleable value of each Debtor's total assets at a fair valuation, and at a present fair saleable value, is greater than the amount of such Debtor's debt. No Debtor will be rendered insolvent by the execution or delivery of this Agreement or of any of the other financing agreements or by the transactions contemplated hereunder or thereunder. SECTION 4. COVENANTS Debtors covenant and agree for the benefit of Secured Party as follows: 4.01 COVENANTS CONTAINED IN OTHER CREDIT DOCUMENTS. All of the -------------------------------------------------- covenants of Debtors and conditions of lending set forth in any other credit documents (including, without limitation, the Commitment Letter) or security instruments pertaining to or securing the Note are SECURITY AGREEMENT Page 5 - ------------------- incorporated herein by reference and are made a part hereof as set forth in full, and are made again by Debtors herein with Secured Party and shall be performed and observed by Debtors at all times hereafter under this Agreement. 4.02 FURTHER ASSURANCES. Debtors will, at their expense, do, execute, ------------------- acknowledge and deliver all and every further acts, conveyances, transfers and assurances necessary or proper for the creation and/or perfection of the lien and security interests being herein provided for in the Collateral, whether now owned or hereafter acquired. 4.03 PRESERVATION OF COLLATERAL. Debtors will take any actions ---------------------------- necessary to preserve the Collateral in its condition as of the date hereof and will not sell, exchange, lease or pledge any of the Collateral or consent to the creation of or existence of any security interest or other lien (other than the security interests and the liens created by this Agreement upon the right, tide and interest of any Debtor in, to and under the Collateral or any pan thereof, and will, at their own expense, warrant and defend the title to the Collateral against all claims and demands of any other persons to the Collateral. 4.04 INSURANCE. Debtors will immediately, at their expense, insure --------- (continue to insure) the Collateral with a reputable insurance company acceptable to Secured Party against loss or damage by fire, hazards including within the term "extended coverage," theft and such other risk as Secured Party may designate for an amount not less than the amount of the Note, or the full insurable value of such Collateral, whichever is less, and Debtors will keep the Collateral insured continuously until the Note is paid in full and satisfied, with loss payable clause in favor of Secured Party as its interest may appear, and Debtors will deliver the policies of insurance to Secured Party, or furnish other proof of such insurance satisfactory to Secured Party. In case of loss, Secured Party shall be entitled to receipt for insurance proceeds (and the issuer of such policy or policies is hereby authorized and directed by Debtors to make all payments thereunder directly to Secured Party); provided, however, that for so long as Debtors are not in default hereunder, or under any other document pertaining to or securing the Note, Secured Party will permit the application of the insurance proceeds to the repair and replacement of the Collateral after receiving proof satisfactory to Secured Party of such repair or replacement. In case of loss, and should Debtors then be in default hereunder, or under the Commitment Letter, or under any other credit document or security instrument pertaining to or securing the Note, Secured Party may retain from such insurance proceeds an amount equal to the unpaid balance of the Note. If Debtors default in any of its obligations under this Article, Secured Party may, at its option, place and pay for such insurance and the amount paid by Secured Party, with interest thereon, shall be an additional obligation of Debtors hereunder and under the Note. 4.05 TAXES. Debtors shall pay promptly, when due, all taxes and ----- assessments upon the Collateral or for its use or operation or upon this Agreement. SECURITY AGREEMENT Page 6 - ------------------- 4.06 PLACE OF BUSINESS. Each Debtor will promptly notify Secured Party ----------------- of any change in the location of its principal place of business or chief executive office and of the establishment (and location) of any new place of business. 4.07 INSPECTION. Secured Party shall at all times have free access to ---------- and the right of inspection of any part or all of the Collateral and any records of Debtors (and the right to make extracts from such records) and Debtors shall deliver to Secured Party the originals or true copies of such papers and instruments relating to any or all of the Collateral as Secured Party may request at any time. 4.08 RECORDATION AND FILING. Debtors will cause this Agreement and all ----------------------- supplements or amendments thereto, and/or all financing and continuation statements and similar notices required by applicable law, at all times to be kept recorded and filed at its own expense in such manner and in such places as maybe requested by Secured Party in order to fully preserve and protect the rights of Secured Party hereunder, and will at their own expense furnish to Secured Party promptly after the execution and delivery of this Agreement and any supplement or amendment thereto an opinion of counsel stating that in the opinion of such counsel this Agreement or such supplement or amendment, and/or all financing and continuation statements and similar notices required by applicable law, as the case may be, have been properly recorded or filed for record so as to make effective of record, and to perfect, the lien and security interest intended to be created hereby. Without limiting the foregoing, Debtors hereby authorize Secured Party to file a financing statement and continuation statement in the office of each public official deemed necessary or appropriate by Secured Party or Secured Party's counsel to perfect or continue the security interest(s) herein granted. 4.09 OTHER INDEBTEDNESS; FUTURE ADVANCES. In addition to securing the ------------------------------------- Note, the security interest(s) granted hereby, notwithstanding anything to the contrary which may be herein otherwise contained, also secures payment of any and all extensions, renewals and modifications of the Note, and any and all other indebtedness of Debtors to Secured Party, whether now existing or hereafter incurred. 4.10 AFTER-ACQUIRED PROPERTY. Any and all property described or ------------------------ referred to in the granting clauses hereof which is hereafter acquired shall, without any further conveyance, assignment or act on the part of any Debtor or Secured Party, become and be subject to the lien and security interest herein granted as fully and completely as though specifically described herein. 4.11 FINANCIAL STATEMENTS. As soon as available, and in any event --------------------- within 90 days after the close of each fiscal year of each Debtor, each Debtor will provide Secured Party with copies of the consolidated and consolidating balance sheets of such Debtor as of the close of such fiscal year and the respective statements of income, retained earnings, cash flow and changes in financial SECURITY AGREEMENT Page 7 - ------------------- position of each Debtor for such fiscal year. In addition, as soon as available, and in any event within 20 days after the end of each fiscal year quarter, each Debtor will provide Secured Party with copies of the consolidated and consolidating balance sheets of such Debtor as of the end of such financial quarter, and statements of income and retained earnings and changes in financial position of each Debtor for such financial quarter, all in reasonable detail, and certified by the chief financial officer of each Debtor as being true and correct; provided, if the fact that any Debtor is a publicly traded company would, pursuant to applicable SEC rule or regulation or other applicable governmental authority rule or regulation, prevent it from delivering all or a portion of such financial information within the stated time period, such Debtor shall have an additional period of time within which to submit such information in order to comply with any applicable SEC or other governmental rule or regulation. 4.12 PRESERVATION OF EXISTENCE AND CONDUCT OF BUSINESS. Each Debtor will do ------------------------------------------------- or cause to be done all things necessary to preserve and keep in full force and effect all patents and all other licenses or rights necessary to comply with all laws, regulations, rules, statutes or other provisions applicable to each Debtor in the operation of its respective business. SECTION 5. POWER OF ATTORNEY. Each Debtor does hereby irrevocably constitute and appoint Secured Party its true and lawful attorney with an interest and full power of substitution, for it and in its name, place and stead to: (i) ask, collect, receive and receipt for any and all income (and other sums which are assigned under the granting clauses hereof) and to endorse the name of such Debtor on all commercial paper given in payment or in part payment thereof; and (ii) without limiting the provisions of the foregoing clause (i) hereof, to make all waivers and agreements, to give and receive duplicate copies of all notices and other instruments or communications which such Debtor is or may be entitled to under any documents constituting the Collateral, and to sue for, to settle, adjust or compromise any claim for any and all such income and other sums which were assigned under the granting clauses hereof as fully as such Debtor could itself do, and in its discretion to file any claim, and take any other action or proceedings, either in its own name, or in the name of such Debtor or otherwise, which Secured Party may deem necessary or appropriate to protect and preserve the right, title and interest of Secured Party in and to such other sums and the security intended to be afforded hereby, it being the intention and purpose of the parties hereto that the assignment and transfer to Secured Party of said rights, powers and privileges shall be effective and operative immediately and shall continue in full force and effect at all times during the period from and after the date of this Agreement until the Note has been fully paid and discharged; provided specifically, however, said rights, powers and privileges shall not be exercised by Secured Party unless an Event of Default shall have occurred under the Commitment Letter or any other credit document or security instrument. SECURITY AGREEMENT Page 8 - ------------------- SECTION 6. DEFAULTS AND REMEDIES. 6.01 EVENTS OF DEFAULT. Any of the following occurrences or acts shall ------------------ constitute an "EVENT OF DEFAULT" under this Agreement: (a) Default in the payment of any installment of principal of or interest on the Note within ten (10) days of its due date; or (b) Default on the part of Debtor in the due observance or performance of any covenant or agreement to be observed or performed by it under this Agreement or the Commitment Letter, and any such default shall continue unremedied for thirty (30) days (or such shorter period as may be specified in the Commitment Letter) after written notice (if same is required by the Commitment Letter) from Secured Party to Debtor specifying the default and demanding the same to be remedied; or (c) If any fact or warranty made in this Agreement or in any other instrument or document delivered hereunder or in connection herewith should prove to be untrue in any material respect, as of the date made, and such default continues for thirty (30) days after written notice thereof to Debtors by Secured Party; or (d) Default by Debtors in the performance or observance of any other covenant, term or agreement contained herein and such default continues for thirty (30) days after written notice thereof to Debtors by Secured Party; or (e) Occurrence of any event or condition which constitutes, or upon the lapse of time or the giving of notice, or both, would constitute, a default or event of default under the Security Agreement or any other security instrument or other instrument or document delivered by Debtors to Secured Party at any time, or any other default by Debtors in the performance or observance of any covenant, term or agreement contained in any such instrument or document and such occurrence continues beyond the period of time granted by said security instrument for curing said default; or (f) Occurrence of any event or condition which constitutes, or upon the lapse of time or the giving of notice, or both, would constitute, a default or an event of default under any other agreement or evidence of indebtedness relating to any obligation of Debtors for borrowed money, or failure by Debtors to pay under any obligation for borrowed money to which it is a party or which purports to be binding upon any of them and the occurrence continues for ten (10) days after written notice thereof to Debtors by Secured Party. Nothing herein shall prohibit any Debtor from contesting, in good faith, any third party claim of a default; or (g) Adjudication by a court of competent jurisdiction that any Debtor is bankrupt or insolvent or the appointment of a receiver for any Debtor or for all or any part of its properties; SECURITY AGREEMENT Page 9 - ------------------- (h) Filing by any Debtor or by any of its creditors of a petition under the provisions of the United States Bankruptcy Code as now enacted or hereafter amended; (i) Making by any Debtor of a general assignment for the benefit of creditors or an admission in writing by any Debtor of inability to pay indebtedness; or (j) Any merger or consolidation of Debtor OnSite Technology L.L.C. or any direct or indirect sale, transfer or disposition of the membership units of Debtor OnSite Technology L.L.C.; or (k) The dissolution or termination of the existence of any Debtor; or (1) There should occur a material adverse change in the financial condition of any Debtor; or (m) Any other Event of Default under the Commitment Letter, this Agreement or any other credit document or security instrument pertaining to or securing the Note. 6.02 SECURED PARTY'S RIGHTS. Debtors agree that when any Event of Default ------------------------ has occurred, Secured Party shall, without limitation of all other rights and remedies available at law or in equity, have the rights, options, duties and remedies of a secured party, and Debtors shall have the rights and duties of a debtor, under the Uniform Commercial Code as adopted by the State of Texas, and without limiting the foregoing, may exercise any one or more or all, and in any order, of the remedies set forth herein, it being expressly understood that no remedy or remedies shall be exclusive; but each and every remedy shall be cumulative and shall be in addition to every other remedy given herein or now or hereafter existing at law or in equity or by statute. (a) Secured Party may, by notice in writing to Debtors, declare the entire unpaid balance of the Note to be immediately due and payable and thereupon all such unpaid balance, together with all accrued interest thereon, shall be and become immediately due and payable. (b) Secured Party personally, or by agents or attorneys, shall have the right (subject to compliance with any applicable mandatory legal or regulatory requirements) to use, manage and control the Collateral and collect and receive all earnings, revenues, rents, issues, proceeds and income of the Collateral and every part thereof and may otherwise exercise any and all of the rights and powers of Debtors in respect thereof. (c) Secured Party may, if at any time such action may be lawful and always subject to compliance with any mandatory legal or regulatory requirements, either with or without taking possession and either before or after taking possession, and without instituting any legal SECURITY AGREEMENT Page 10 - ------------------- proceedings whatsoever, and having first given notice of such sale by registered mail to Debtors at least ten (10) days prior to the date of such sale, and any other notice which maybe required by law, sell and dispose of said Collateral, or any part thereof, or interest therein, at public auction to the highest bidder, either for cash or on credit and on such terms as Secured Party may determine, and at any place (whether or not it be the location of the Collateral or any part thereof) designated in the notice referred to. Any such sale or sales maybe adjourned from time to time by announcement at the time and place appointed for such sale or sales, or for any such adjourned sale or sales, without further notice, and Secured Party may bid and become the purchaser at any such sale. (d) Secured Party may proceed to protect and enforce this Agreement and/or the Note by suit or suits or proceedings in equity, at law or in bankruptcy, and whether for the specific performance of any covenant or agreement herein contained or in execution or aid of any power herein granted, or for foreclosure here under, or for the appointment of a receiver or receivers for the Collateral or any part thereof, or for the recovery of judgment for the loan evidenced by the Note or for the enforcement of any other proper, legal or equitable remedy available under applicable law. Nothing contained in this Section shall negate the arbitration provisions set out in the Commitment Letter. 6.03 ACCELERATION CLAUSE. In case of any sale or assignment of the -------------------- Collateral, or of any part thereof, by any Debtor or pursuant to any judgment or decree of any court or otherwise in connection with the enforcement of any of the terms of this Agreement, the principal of the Note, if not previously due, and the interest accrued thereon and all other sums required to be paid by Debtors pursuant to this Agreement, shall at once become and be immediately due and payable. 6.04 EFFECT OF SALE. Any sale, whether under any power of sale hereby -------------- given or by virtue of judicial proceedings, shall operate to divest all right, title, interest, claim and demand whatsoever, either at law or in equity, of Debtors in and to the property sold and shall be a perpetual bar, both at law and in equity, against Debtors, their respective successors and assigns, and against any and all persons claiming the property sold or any part thereof under, by or through Debtors, their respective successors or assigns. 6.05 APPLICATION OF SALE AND OTHER PROCEEDS. The purchase money ------------------------------------------- proceeds and/or avails of any sale of the Collateral, or any part thereof, and the proceeds and the avails of any remedy hereunder shall be paid to and applied as follows: First, to the payment of costs and expenses of foreclosure or suit, if any, and of such sale, and of all proper expenses, liabilities and advances, including legal expenses and attorneys' fees, incurred or made hereunder by Secured Party and of all taxes, assessments or liens superior to the lien of these presents, except any taxes, assessments or other superior liens subject to which said sale may have been made; SECURITY AGREEMENT Page 11 - ------------------- Second, to the payment of the whole amount then due, owing and unpaid upon the Note for principal, interest and premium, if any; Third, to the payment of any other Note that remain unpaid; and Fourth, to the payment of the surplus, if any, to Debtor OnSite Technology L.L.C., its successors and assigns, or to whomsoever may be lawfully entitled to receive the same. 6.06 DISCONTINUANCE OF REMEDIES. In case Secured Party shall have ---------------------------- proceeded to enforce any right under this Agreement by foreclosure, sale, entry or otherwise, and such proceedings shall have been discontinued or abandoned for any reason or shall have been determined adversely, then and in every such case Debtors and Secured Party shall be restored to their former positions and rights hereunder with respect to the Collateral subject to the lien and security interest created under this Agreement. 6.07 CUMULATIVE REMEDIES. No delay or omission of Secured Party to -------------------- exercise any right or power arising from any default shall exhaust or impair any such right or power or prevent its exercise during the continuance of such default. No waiver by Secured Party of any such default, whether such waiver be full or partial, shall extend to or be taken to affect any subsequent default, or to impair the rights resulting therefrom except as maybe otherwise provided therein. No remedy hereunder is intended to be exclusive of any other remedy but each and every remedy shall be cumulative and in addition to any and every other remedy given hereunder or under the Commitment Letter or otherwise existing; nor shall the giving, taking or enforcement of any other or additional security, collateral or guaranty for the payment of the Note operate to prejudice, waive or affect the security of this Agreement or any rights, powers or remedies hereunder, nor shall Secured Party be required to first look to, enforce or exhaust such other or additional security, collateral or guaranties. SECTION 7. SUPPLEMENTAL AGREEMENTS. Debtors and Secured Party from time to time and at any time, subject to the restrictions set forth in this Agreement, shall enter into an agreement or agreements supplemental hereto, as Secured Party may request, which thereafter shall form a part hereof for any one or more or all of the following purposes: (a) to execute any additional documents in connection with Secured Party's perfection and/or continuance of the security interest herein granted, including, but not limited to, any documents which Secured Party shall deem necessary for the recording of its security interest in any of the Collateral; SECURITY AGREEMENT Page 12 - ------------------- (b) to subject to the lien of this Agreement additional property hereafter acquired by Debtors and intended to be subjected to the lien of this Agreement and to correct and amplify the description of any property subject to the lien of this Agreement. (c) for any other purpose not inconsistent with the terms of this Agreement, or to cure any ambiguity or cure, correct or supplement any defect or inconsistent provisions of this Agreement or any supplement; and Debtors covenant to perform all requirements of any such supplemental agreement. No restriction or obligation imposed upon Debtor may, except as otherwise provided in this Agreement, be waived or modified by such supplemental agreements, or otherwise. SECTION 8. MISCELLANEOUS. 8.01 SUCCESSORS AND ASSIGNS. Whenever any of the parties hereto is ------------------------ referred to, such reference shall be deemed to include the successors and assigns of such party; and all of the representations, warranties, covenants and agreements in this Agreement contained by or on behalf of Debtor or by or on behalf of Secured Party shall be binding upon and inure to the benefit of the respective successors and assigns of such parties whether so expressed or not. 8.02 COMMUNICATIONS. All communications provided for herein shall be in -------------- writing. Communications to Debtors or Secured Party shall be deemed to have been given (unless otherwise required by the specific provisions hereof in respect of any matter) when addressed and delivered as follows: If to Debtors: OnSite Technology L.L.C. 2600 South Loop West, Suite 645 Houston, Texas 77054 Attention: James S. Percell Facsimile: (713) 641-0756 Environmental Safeguards, Inc. 2600 South Loop West, Suite 645 Houston, Texas 77054 Attention: James S. Percell Facsimile: (713) 641-0756 SECURITY AGREEMENT Page 13 - ------------------- National Fuel & Energy, Inc 2600 South Loop West, Suite 645 Houston, Texas 77054 Attention: James S. Percell Facsimile: (713) 641-0756 If to Secured Party: Rineco Recycling, LLC c/o Harry C. Erwin, III P.O. Box 24855 Little Rock, Arkansas 72221 Facsimile: (501) 868-7750 with a copy to: Rineco Recycling, LLC P.O. Box 2800 Benton, Arkansas 72018-2800 Attention: Steven M. Keith Facsimile: (501) 778-8897 or to Debtors or Secured Party at such other address as any Debtors or Secured Party may designate by notice duly given in accordance with this Section to the other party. 8.03 RELEASE. Secured Party shall release this Agreement and the lien ------- and security interest granted hereby by proper instrument or instruments upon presentation of satisfactory evidence that the Note has been fully paid or discharged. 8.04 COUNTERPARTS. This Agreement may be executed, acknowledged and ------------ delivered in any number of counterparts, each of such counterparts constituting an original but all together only one agreement. 8.05 GOVERNING LAW. This Agreement shall be construed in accordance -------------- with and governed by the substantive laws of the State of Texas and any applicable federal laws; provided, nothing herein shall affect the parties' designation in the Note that the laws of the State of Texas shall govern as to all matters relating to the maximum amount of interest which may be charged thereon. 8.06 JURISDICTION AND VENUE. With respect to any claim arising out of ---------------------- this Agreement, each party irrevocably submits to the non-exclusive jurisdiction of the courts of the State of Arkansas, and the United States District Court located in the City of Little Rock, Pulaski County, Arkansas, and each party hereby also irrevocably waives any objection which it may have at anytime to the laying of venue of any suit, action or proceeding arising out of or relating to this Agreement SECURITY AGREEMENT Page 14 - ------------------- brought in any such court. Each party hereby further irrevocably waives any claim that any such suit, action or proceeding brought in any such court has been brought in an inconvenient forum, and irrevocably waives the right to object, with respect to such claim, suit, action or proceeding brought in any such court, that such court does not have jurisdiction over such party. 8.07 CAPTIONS. Captions used in this Agreement are for convenience only -------- and shall not be construed in interpreting this Agreement. Whenever the context shall require, the masculine shall include the feminine and neuter, and the singular shall include the plural, and conversely. If any portion of this Agreement shall be held invalid or inoperative, then, so far as is reasonable and possible, the remainder of this Agreement shall be considered valid and operative and effect shall be given to the intent manifested by the portion, held invalid or inoperative. 8.08 INCORPORATION OF RECITALS AND EXHIBIT(S). All of the preambles and ---------------------------------------- all of the recitals set forth in this Agreement are made a part of this Agreement. In addition, any and all exhibits to this Agreement are hereby specifically made a part of and incorporated into this Agreement. 8.09 COORDINATION WITH OTHER LOAN DOCUMENTS. The benefits, rights and -------------------------------------- remedies of Secured Party contained herein or in the Commitment Letter or provided for in any of the other loan documents executed in connection herewith are, as provided in Section 6.07 above, cumulative. To the extent of any conflict between any provision of this Agreement and any provision contained in any of the other loan documents executed in connection herewith, the provisions of this Agreement shall control, except that any provision of any other document giving the greater security or additional rights and remedies to Lender shall control over this Agreement. DEBTORS: ONSITE TECHNOLOGY L.L.C., an Oklahoma limited liability company By: /s/ James S. Percell -------------------------------------- Name: James S. Percell Title: President SECURITY AGREEMENT PAGE 15 - ------------------- ENVIRONMENTAL SAFEGUARDS, INC., a Nevada corporation BY: /s/ James S. Percell ---------------------------------------- NAME: James S. Percell TITLE: President NATIONAL FUEL & ENERGY, INC., a Wyoming corporation BY: /s/ James S. Percell ---------------------------------------- Name: James S. Percell Title: President SECURED PARTY: RINECO RECYLCING, LLC, an Arkansas limited liability company By its Manager: RINECO CHEMICAL INDUSTRIES, INC., an Arkansas corporation By: /s/ Michael L. Spinks ---------------------------------------- Name: Michael L. Spinks -------------------------------------- Title: V.P. of Admin, CFO ------------------------------------- SECURITY AGREEMENT Page 16 - ------------------- ACKNOWLEDGMENTS --------------- STATE OF TEXAS ) ) ss. COUNTY OF HARRIS ) ON THIS DAY before me, the undersigned Notary Public, personally appeared the within named JAMES S. PERCELL, to me personally well known, who acknowledged himself to be the President of ONSITE TECHNOLOGY L.L.C., an Oklahoma limited liability company, and further stated that he, in such capacity, being authorized to do so, executed the foregoing instrument for the purposes therein contained, by signing the name of said limited liability company as its President. IN WITNESS WHEREOF, I have hereunto set my hand and official seal this 20th ---- day of March, 2003 [GRAPHIC OMITTED] /s/ Tanya McGinnis ---------------------------------------- TANYA McGINNIS NOTARY PUBLIC Notary Public, State of Texas My Commission Expires: 8/10/06 ---------- My Commission Expires 8/10/2006 STATE OF TEXAS ) ) ss. COUNTY OF HARRIS ) On this 20th day before me, the undersigned Notary Public, personally ---- appeared the within named JAMES S. PERCELL, to me personally well known, who acknowledged himself to be the President of ENVIRONMENTAL SAFEGUARDS, INC., a Nevada corporation, and that he was duly authorized in said capacity to execute the foregoing instrument for and in the name and behalf of said corporation, and further stated and acknowledged that he had so signed, executed and delivered said foregoing instrument for the consideration, uses and purposes therein set forth. IN WITNESS WHEREOF, I have hereunto set my hand and seal. [GRAPHIC OMITTED] /s/ Tanya McGinnis --------------------------------------- TANYA McGINNIS NOTARY PUBLIC Notary Public, State of Texas My Commission Expires: 8/10/06 ---------- My Commission Expires 8/10/2006 SECURITY AGREEMENT Page 17 - ------------------- ACKNOWLEDGMENTS --------------- STATE OF TEXAS ) ) ss. COUNTY OF HARRIS ) On this 20th day of March, 2003 before me, the undersigned Notary Public, ---- personally appeared the within named JAMES S. PERCELL, to me personally well known, who acknowledged himself to be the President of NATIONAL FUEL & ENERGY, INC., an Wyoming corporation, and that he was duly authorized in said capacity to execute the foregoing instrument for and in the name and behalf of said corporation, and further stated and acknowledged that he had so signed, executed and delivered said foregoing instrument for the consideration, uses and purposes therein set forth. IN WITNESS WHEREOF, I have hereunto set my hand and official seal. [GRAPHIC OMITTED] /s/ Tanya McGinnis -------------------------------------- TANYA McGINNIS NOTARY PUBLIC Notary Public, State of Texas My Commission Expires: 8/10/06 ---------- My Commission Expires 8/10/2006 STATE OF TEXAS ) ) ss. COUNTY OF HARRIS ) ON THIS DAY before me, the undersigned Notary Public, personally appeared the within named Michael Spinks, Jr., to me personally well known, who ---------------------- acknowledged himself to be the VP of Admin and CFO of RINECO RECYCLING, LLC, an ------------------- Arkansas corporation, and who stated that said corporation is the Manager of RINECO RECYCLING, LLC, an Arkansas limited liability company, and further stated that he, in such capacity, being authorized to do so, executed the foregoing instrument for the purposes therein contained, by signing the name of said limited liability company as such Manager. IN WITNESS WHEREOF, I have hereunto set my hand and official seal this 20th ---- day of March, 2003. [GRAPHIC OMITTED] /s/ Tanya McGinnis ------------------------------------- TANYA McGINNIS NOTARY PUBLIC Notary Public, State of Texas My Commission Expires: 8/10/06 ---------- My Commission Expires 8/10/2006 EX-10.10 9 doc8.txt Exhibit 10.10 (Environmental Safeguards, Inc.) The registrant has requested that portions of this exhibit be given confidential treatment and the registrant has filed a confidential treatment request with the Secretary of the Commission. In this exhibit, the registrant has omitted such material and the registrant has marked this exhibit with a mark " ***** "to indicate where material has been omitted. HAZARDOUS WASTE RECYCLING SERVICES CONTRACT-U.S. This Hazardous Waste Recycling Services Contract-U.S. ("Contract") is entered into on the day hereinafter set forth by and between OnSite Technology LLC, an Oklahoma limited liability company ("OnSite") with offices at 2600 South Loop West, Ste 645 Houston, Texas 77054 and Rineco Chemical Industries, Inc. ("Customer") with offices at 819 Vulcan Rd, Haskell, Arkansas 72015. THIS CONTRACT CONTAINS PROVISIONS RELATING TO INDEMNITY RELEASE OF LIABILITY AND ALLOCATION OF RISK. THIS CONTRACT CONTAINS ARBITRATION PROVISIONS. 1. THE WORK: OnSite shall provide the necessary services, supplies and equipment to perform recycling services utilizing an indirect thermal desorption unit and associated equipment ("ITD Unit" or "Unit"), as specified in Exhibit A, which is attached hereto and made a part hereof (collectively the "Work"). Customer shall provide the services and supplies as specified on Exhibit A. 2. COMPENSATION AND PAYMENT: 2.1 COMPENSATION: Customer shall pay OnSite for performance of Work as specified in Exhibit A plus any applicable sales, use or similar taxes. 2.2 PAYMENT: Charges for mobilization, demobilization, Work, and all other applicable charges shall be invoiced upon completion of mobilization, demobilization, completion of the Work, or at the end of the month in which such Work was performed or other charges incurred, whichever shall first occur. All invoices shall be mailed to Customer at P.O. Box 729, Haskell, Arkansas 72018. Customer shall pay all invoices within thirty (30) days after receipt, except that if Customer disputes an invoice or any part thereof, Customer shall, within fifteen (15) days after receipt of the invoice, notify OnSite of the item disputed, specifying the reason therefore, and payment of the disputed item may be withheld until settlement of the dispute, but timely payment shall be made of any undisputed portion. All payments shall be mailed to OnSite at 2600 South Loop West, Ste 645, Houston, Texas 77054. Any sums (including amounts ultimately paid with respect to a disputed invoice) not paid within thirty (30) days shall bear interest at the rate of twelve percent (12%) per annum or the maximum legal rate, whichever is less, from the due date until paid. 2.3 ATTORNEY'S FEES: If this Contract is placed in the hands of an attorney for collection of any sums due hereunder, or suit is brought for breach of same, or sums due hereunder are collected through bankruptcy or probate proceedings, then the parties agree that the prevailing party shall be entitled to reasonable attorney's fees and costs. 3 TITLE Title to all materials recycled hereunder (both before, during and after recycling) and including any substances recovered during such recycling shall remain with Customer at all times. At no time shall OnSite take title to any such materials or substances. 1 4 COMMENCEMENT OF WORK AND TERM; TERMINATION: 4.1 TERM FOR PILOT PROGRAM PHASE: The initial term of this Contract shall be the "Pilot Program Phase." The Pilot Program Phase shall have a term of ***** operating days from the Commencement of Pilot Program Phase. Commencement of Pilot Program Phase shall be the date on which OnSite's ITD Unit has been delivered to the Work Site and set up and OnSite is ready to begin operations, but in no event shall be later than *****. OnSite shall not deliver any Units to the Work Site prior to notification from Customer that all permits and approvals have been obtained. In the event Customer has not obtained such approvals by *****, then this Contract shall automatically terminate effective on such date without either party having any further obligations hereunder. At the end of the Pilot Program Phase the parties shall evaluate the operating results under this Contract, specifically evaluating (i) throughput of the ITD Unit, (ii) acceptability of processed solids residue for mixing with liquids (iii) salability of the recycled liquid hydrocarbons residue and (iv) ability to process *****. If the parties in good faith determine that the results of the Pilot Program are acceptable, then the Contract shall immediately, without further action on the part of either party, progress to the "Operating Phase," otherwise, the Contract shall terminate. At any time during the Pilot Program Phase at Rineco's option Rineco can elect to move into the "Operating Phase." 4.2 TERM FOR OPERATING PHASE: Unless terminated as otherwise provided in this Contract, the Operating Phase shall have a term of ***** from the Commencement of Operations. The Commencement of Operations is defined as the date on which the Operating Phase begins and will be automatically renewed on a year to year basis for a one-year renewal term, unless either party gives the other party sixty (60) days prior notice of its intent to terminate this Contract, effective at the end of the initial term or any renewal term. 4.3 EARLY TERMINATION: Notwithstanding the provisions of Paragraphs 4.1 and 4.2, Customer or OnSite may direct the stoppage of the work and the termination of this Contract even though there has been no default on the part of the other party hereunder, by giving ninety (90) days prior written notice to the other party. In the event such notice is given, this Contract will terminate on the ninetieth (90th) day after notice is given. OnSite shall be entitled to payment in accordance with Paragraph 2.2 for all work performed under the Contract until termination. 5 INGRESS, EGRESS AND WORK SITE: 5.1 INGRESS AND EGRESS: Customer hereby assigns to OnSite all necessary rights of ingress and egress with respect to the site on which the work will be performed ("Work Site"). Should OnSite be denied free access to the Work Site for any reason not reasonably under OnSite's control, any time lost by OnSite as a result of such denial shall be paid at the applicable stand-by rate in Exhibit A. 5.2 WORK SITE: Customer shall prepare a sound Work Site adequate in size and capable of properly supporting OnSite's Unit pursuant to specifications provided by OnSite which shall be subject to OnSite's reasonable approval. It is recognized that Customer has superior knowledge of the Work Site and access routes to the Work Site and must advise OnSite of any conditions or obstructions which OnSite might encounter while in route to the Work Site or during operations hereunder. In the event the Work Site is not prepared pursuant to such specifications and loss or damage to the Unit results therefrom, Customer shall, without regard to the other provisions of this Contract, including paragraph 8.2 hereof, reimburse OnSite to the extent not covered by OnSite's insurance, for all such loss or damage. 2 6 WORK METHODS AND PRACTICES: 6.1 COMPLIANCE WITH LAW: Each party hereto agrees to comply with all material laws, rules and regulations of any state, federal or local governmental authority which are now or may become applicable to that party's operations covered by or arising out of the performance of this Contract. In the event any provision of this Contract is inconsistent with or contrary to any applicable federal, state or local law, rule or regulation, said provision shall be deemed to be modified to the extent required to comply with said law, rule or regulation and as so modified said provision and this Contract shall continue in full force and effect. 6.2 PERMITS: Permits required for the Work shall be provided by the party specified in Exhibit A. 6.3 SAMPLING AND TESTING: 6.3.1 PILOT PROJECT PHASE: During the Pilot Project Phase the Work shall be sampled and tested based upon a protocol agreed to in advance by OnSite and Customer. The protocol shall be subject to change by agreement of the parties, during the Pilot Project Phase. Customer shall bear the cost of the testing agreed to in the protocol. At or before the completion of the Pilot Project Phase, OnSite and Customer shall agree to the Inlet Specifications for the metal strips which may be processed as part of the material to be remediated. Unless and until such an agreement is entered into, the Operating Phase shall not commence. OnSite shall pay for any additional testing that OnSite requires. Both parties shall have access to the results of testing performed during the Pilot Project Phase. 6.3.2 OPERATING PHASE: All materials recycled as part of the Work shall be sampled and tested by the methods and with the frequency agreed to by the parties. Customer shall directly pay for or reimburse OnSite for all costs of such sampling and testing. IF REQUESTED BY EITHER PARTY, SPLIT SAMPLES SHALL BE TAKEN FOR ALL TESTING AND ONE SAMPLE RETAINED BY THE THIRD PARTY LAB OR OTHER DESIGNATED PARTY FOR THIRTY (30) DAYS. CUSTOMER SHALL HAVE THIRTY-SIX (36) HOURS AFTER RECYCLING OF EACH BATCH OF MATERIALS IN WHICH TO PULL TEST SAMPLES FROM SUCH BATCH. (AFTER THIRTY-SIX (36) HOURS THE MATERIALS WILL BE MOVED AND TEST RESULTS COULD BE INACCURATE.) CUSTOMER SHALL FURTHER HAVE SEVEN (7) BUSINESS DAYS FROM WHEN EACH SAMPLE IS PULLED IN WHICH TO HAVE THE SAMPLES TESTED AND REPORT SUCH TEST RESULTS BACK TO ONSITE. CUSTOMER ACCEPTS AND WAIVES THE RIGHT TO REJECT ANY WORK THAT IS NOT, SAMPLED, TESTED AND/OR REPORTED BACK TO ONSITE WITHIN THE AGREED TIME PERIOD. 6.4 MEASUREMENT: All materials recycled as part of the Work shall be measured by Customer at Customer's expense prior to recycling and remediating. The method of measurement shall be as specified in Exhibit A, Section #2. 6.5 PERSONNEL TRAINING: All of OnSite's personnel that will operate its Unit will be HAZWOPER certified under 29 CFR 1910.120. If requested by the Customer, OnSite's personnel will be H2S certified. 6.6 DRUG, ALCOHOL AND FIREARM POLICY: OnSite has adopted a program to ensure a drug, alcohol and firearm free Work Site. A copy of the policy is available from OnSite. 3 6.7 HOURS OF OPERATION: Unless otherwise agreed to in writing by the parties, OnSite's ITD Unit shall operate twenty-four (24) hour per day seven (7) days per week. 7 WARRANTIES: 7.1 CUSTOMER'S WARRANTIES: Customer warrants that the materials to be recycled by OnSite as part of the Work hereunder do not exceed the maximum inlet specifications contained in Exhibit A. Customer further warrants that the materials to be recycled do not materially differ from any other specifications contained in the scope of Work in Exhibit A. 7.2 ONSITE WARRANTIES: *****. 7.3 ONSITE WARRANTY DISCLAIMER: ONSITE WILL WORK WITH CUSTOMER AND TAKE DIRECTION FROM CUSTOMER WITH REGARD TO OPERATING TEMPERATURE BUT SUCH TEMPERATURE SHALL NOT EXCEED ***** DEGREES. ONSITE THEREFORE MAKES NO WARRANTY EITHER EXPRESS OR IMPLIED IN LAW WITH REGARD TO THE OUTLET SPECIFICATIONS OF THE RECYCLED MATERIALS. 8 INSURANCE, INDEMNIFICATION, RELEASE AND RISK OF LOSS: 8.1 INSURANCE: During the term of this Contract, OnSite shall, at OnSite's expense, maintain with an insurance company or companies authorized to do business in the state where the Work is to be performed, insurance coverages of the kind and in the amounts set forth below, insuring the liabilities specifically assumed by OnSite in this Contract. OnSite shall, if requested to do so by Customer, procure from the company or companies writing said insurance a certificate or certificates that said insurance is in full force and effect and that the company or companies writing said insurance shall endeavor to give thirty (30) days prior notice to Customer of cancellation or material change to the insurance. For liabilities assumed hereunder by OnSite, its insurance shall be endorsed to provide that the underwriters waive their right of subrogation against Customer. Customer will, as well, cause its insurer to waive subrogation against OnSite for liability it assumes and shall maintain, at Customer's expense, or shall self insure, insurance coverage of the same kind and in the same amount as is required of OnSite, insuring liabilities specifically assumed by Customer under this Contract: 8.1.1 Adequate Workers' Compensation Insurance complying with applicable state laws or Employers' Liability Insurance with limits of $1,000,000. 8.1.2 Comprehensive Public Liability Property Damage Insurance or Public Liability Property Damage Insurance with a $1,000,000 combined single limit; this policy includes Pollution Liability. 8.1.3 Automobile Public Liability Insurance with a $1,000,000 combined single limit death or injury and Automobile Public Liability Property Damage Insurance with a $1,000,000 combined single limit. 4 8.2 INDEMNIFICATION 8.2.1 OnSite's Unit: OnSite shall assume liability at all times for, and shall protect, defend and indemnify Customer, its officers, directors, employees and agents from and against all claims, demands, and causes of action of every kind and character resulting from, damage to or destruction of OnSite's Unit and/or property or the equipment and/or property of any of OnSite's subcontractors, if any, regardless of when or how such damage or destruction occurs unless such damage or loss is due to the gross negligence or willful misconduct of Customer, and OnSite shall release Customer of any liability for any such loss, except loss or damage under paragraph5.2. 8.2.2 Customer's Equipment: Customer shall assume liability at all times for, and shall protect, defend and indemnify OnSite, its officers, directors, employees, members, managers and agents from and against all claims, demands, and causes of action of every kind and character resulting from, damage to or destruction of Customer's equipment and/or property or the equipment and/or property of any of Customer's contractors (other than those covered by the provisions of paragraph 8.2.1), or Customer's client, if any, regardless of when or how such damage or destruction occurs unless such damage or loss is due to the gross negligence or willful misconduct of OnSite, and Customer shall release OnSite of any liability for any such loss. 8.2.3 OnSite agrees to indemnify, save harmless and defend Customer from and against any and all liabilities, penalties, forfeitures, suits, losses, damages and costs and expenses (including costs of defense, settlement, and reasonable attorney fees ), which Customer may hereafter incur or become responsible for, as a result of death or bodily injury to any person, (including the employees of each party hereto and the employees of their subcontractors), destruction or damage to or loss of use of any property other than set forth in 8.2.1 and 8.2.2 or contamination of or adverse effects on the environment to the extent directly caused by: the negligence or intentional misconduct of OnSite, its employees, agents, representatives, or subcontractors in the performance of this Contract, provided, however, that such indemnification shall not apply to the extent such liabilities result from Customer's negligence or intentional misconduct or from a breach of this Contract by Customer. 8.2.4 Customer agrees to indemnify, save harmless and defend OnSite from and against any and all liabilities, penalties, forfeitures, suits, losses, damages and costs and expenses (including costs of defense, settlement, and reasonable attorney fees ), which OnSite may hereafter incur or become responsible for, as a result of death or bodily injury to any person, (including the employees of each party hereto and the employees of their subcontractors), destruction or damage to or loss of use of any property other than set forth in 8.2.1 and 8.2.2 or contamination of or adverse effects on the environment to the extent directly caused by: the negligence or intentional misconduct of Customer, its employees, agents, representatives, or subcontractors in the performance of this Contract provided that such indemnification shall not apply to the extent such liabilities result from OnSite's negligence or intentional misconduct or from a breach of this Contract by OnSite. 8.2.5 In the event that any claim for indemnification hereunder is contributed to the negligence or intentional misconduct of both OnSite and Customer, the parties agree that any and all liabilities, penalties, forfeitures, losses, damages and costs and expenses (including costs of defense, settlement, and reasonable attorney, ) shall be apportioned among the parties on the basis of their comparative degrees of fault which shall be determined in the absence of agreement by the parties through binding arbitration pursuant to Section 13. hereunder. 5 8.3 EXCLUDED MATERIALS: NOTWITHSTANDING ANY OTHER PROVISION OF THIS AGREEMENT CUSTOMER SHALL RELEASE ONSITE OF ANY LIABILITY FOR, AND SHALL PROTECT, DEFEND AND INDEMNIFY ONSITE, ITS OFFICERS, DIRECTORS, EMPLOYEES, MEMBERS AND MANAGERS FROM AND AGAINST ALL CLAIMS, DEMANDS, AND CAUSES OF ACTION OF EVERY KIND AND CHARACTER, WITHOUT LIMIT AND WITHOUT REGARD TO THE CAUSE OR CAUSES THEREOF OR THE NEGLIGENCE OF ANY PARTY OR PARTIES, ARISING IN CONNECTION WITH NATURALLY OCCURRING RADIOACTIVE MATERIALS ("NORM"), NARM, HIGH LEVEL RADIOACTIVE WASTE, LOW LEVEL RADIOACTIVE WASTE, MIXED WASTE, OR PCBS ("COLLECTIVELY "EXCLUDED MATERIALS"). Customer shall also provide OnSite with all pertinent information with regard to Excluded Materials at the site where the Work shall be performed. 8.4 CONSEQUENTIAL DAMAGES: Neither party shall be liable to the other for special, indirect or consequential damages resulting from or arising out of this Contract, including, without limitation, loss of profit or business interruptions including loss or delay of production, however same may be caused. 8.5 INDEMNITIES: The indemnities and releases and assumptions of liability extended by the parties hereto under the provisions of Article 8 shall inure to the benefit of the parties, their parent, holding and affiliated companies and their respective officers, directors, employees, members, managers, agents and servants. EXCEPT AS OTHERWISE EXPRESSLY LIMITED HEREIN IN 8.2.3 AND 8.2.4, IT IS THE INTENT OF PARTIES HERETO THAT ALL INDEMNITY OBLIGATIONS, RELEASES AND LIABILITIES ASSUMED BY SUCH PARTIES UNDER TERMS OF THIS CONTRACT, INCLUDING WITHOUT LIMITATION 8.2.1 and 8.2.2 HEREOF, BE WITHOUT LIMIT AND WITHOUT REGARD TO THE CAUSE OR CAUSES THEREOF (INCLUDING PREEXISTING CONDITIONS), THE UNSEAWORTHINESS OF ANY VESSEL OR VESSELS, STRICT LIABILITY, BREACH OF CONTRACT, BREACH OF WARRANTY, VIOLATION OF STATUTE OR REGULATION OR THE NEGLIGENCE OF ANY PARTY OR PARTIES, WHETHER SUCH NEGLIGENCE BE SOLE, JOINT OR CONCURRENT, ACTIVE OR PASSIVE. The terms and provisions of paragraph 8.2 shall have no application to claims or causes of action asserted against Customer or OnSite by reason of any agreement of indemnity with a person or entity not a party hereto. 8.6 *****: 8.6.1 ***** 8.6.2. ***** 6 9 WAIVER, AMENDMENTS AND ASSIGNMENT: 9.1 NO WAIVER: No waiver by any party of any default by any other party in the performance of any provision, condition or requirement herein shall be deemed to be a waiver of, or in any manner release the other party from, performance of any other provision, condition or requirement herein, nor deemed to be a waiver of, or in any manner release the other party from, future performance of the same provision, condition or requirement; nor shall any delay or omission of any party to exercise any right hereunder in any manner impair the exercise of any such right or any like right accruing to it thereafter. 9.2 AMENDMENT: No amendment to this Contract shall be effective unless in writing and signed by a duly authorized agent or representative of each party. 9.3 ASSIGNMENT: Neither party may assign this Contract without the prior written consent of the other, which consent will not be unreasonably withheld. Notwithstanding the preceding sentence, either party may assign this Contract to an affiliate (an entity which is more than 50% owned and controlled by a party) or to a third party acquirer in the event of a sale or other disposition of substantially all the assets of a party. 9.4 SURVIVAL: The rights and obligations under paragraphs 8.2 through 8.6 and paragraph 16 shall survive the termination or assignment of this Contract. 9.5 SEVERABILITY: In the event any provision of this Contract should be deemed inconsistent with or contrary to any federal, state or municipal law, rule or regulation, said provision shall be deemed modified to the least extent necessary to be valid or, if not possible, deleted and this Contract shall continue in full force and effect without affecting the enforceability of the remaining provisions, duties and liabilities set forth herein. 9.6 MERGER: This Contract contains the entire agreement between the parties hereto with respect to the transactions contemplated herein and all prior and/or contemporaneous understandings and agreements shall merge herein. There are no additional terms, whether consistent or inconsistent, oral or written, which are intended to be part of the parties' understanding except as contained in this Contract. 9.7 MULTIPLE COUNTERPARTS: This Contract may be executed in several counterparts, each of which shall be an original, and all of which, when taken together, shall constitute but one and the same agreement. 9.8 RIGHTS OF CREDITORS AND THIRD PARTIES UNDER CONTRACT: This Contract is entered into between for the exclusive benefit of the parties hereto. This Contract is expressly not intended for the benefit of any creditor of any of the parties or any other person. 9.9 FACSIMILE SIGNATURE: This Contract shall be effective and deemed executed for all purposes and with all formalities with the facsimile signature of any of the parties and shall be deemed an original for all purposes. 7 10 FORCE MAJEURE: Neither party shall be liable to the other for any delays or damage or any failure to act due, occasion or caused by reason of any laws, rules, regulations or orders promulgated by any federal, state or local governmental body or the rules, regulations or orders of any public body or official purporting to exercise authority or control respecting the operations covered hereby, including the procurement or use of tools and equipment, or due, occasioned or caused by strikes, action of the elements, water conditions, inability to obtain fuel or other critical materials, or other causes beyond the control of the party affected thereby. In the event that either party hereto is rendered unable, wholly or in part, by any of these causes to carry out its obligations under this Contract, it is agreed that such [party shall give notice and details of Force Majeure in writing to the other party as promptly as possible after its occurrence. Except as otherwise provided herein, in such cases the obligations of the party giving the notice shall be suspended during the continuance of any inability so caused. In the event the force majeure is not reasonably expected to be removed within ninety (90) days, either party may terminate this Contract at the end of said ninety (90) day period. GOVERNING LAW: THIS CONTRACT SHALL BE CONSTRUED, GOVERNED, INTERPRETED, ENFORCED AND LITIGATED, AND THE RELATIONS BETWEEN THE PARTIES DETERMINED IN ACCORDANCE WITH THE LAWS OF TEXAS. ----- 11 ARBITRATION: Any and all disputes, controversies or claims arising out of or in connection with this Contract or the breach, termination, validity thereof, or the Work performed hereunder shall be settled by final and binding arbitration in accordance with the American Arbitration Association rules as presently in force. This reference to arbitration shall be enforceable and judgment upon any award rendered in any such arbitration may be entered in any court of competent jurisdiction. Notwithstanding any provisions of local, state, federal, national, international or other applicable law, the parties agree that the arbitrators cannot award exemplary damages. The appointing authority shall the American Arbitration Association. The arbitration shall be heard and determined by one arbitrator. The arbitrator shall be named by the appointing authority. The place of arbitration shall be Houston, Texas or such other location mutually agreed upon by the parties. The English language shall be used in the arbitral proceedings. The award shall be made and payable in U.S. dollars free of any tax or other deductions. The award may include interest from the date of any breach or other violation of this Contract. The arbitrators shall fix the appropriate rate of interest from the date of the breach or other violation to the date that the award is paid in full. In no event, however, should the interest rate during such period be lower than the prime commercial lending rate for favored borrowers announced from time to time by the Wall Street Journal. A legal representative is authorized to act for and bind the party and to receive documents on behalf of the party. A legal assistant does not possess these powers held by a legal representative. The claimant is required to include the last known address versus the current address of the respondent party in the statement of claim. The claimant is required to include only those points of issue known by reasonable investigation at the time of the filing of the statement of claim. The parties may stipulate whether discovery will be limited or broad ranging. If the parties fail to so stipulate, the appointing authority will determine the method of discovery that will be used. Parties may use rebuttal witnesses upon reasonable notice to both the opposing party and the arbitration panel. Parties may also introduce expert witnesses. All notices to be given in connection with the arbitration shall be in writing. 12 SECURITY: 8 Customer shall provide, at its sole cost, adequate security to protect and secure OnSite's personnel and ITD Unit in the area where the Work is being performed. 13 INDEPENDENT CONTRACTOR In the performance of any Work by OnSite for Customer, OnSite shall be deemed to be an independent contractor, with the authority and right to direct and control all of the details of the Work, Customer being interested only in the results obtained. However, all Work contemplated shall meet the approval of Customer and shall be subjected to the general right of inspection. Customer shall have no right or authority to supervise or give instructions to the employees, agents, or representative of OnSite, but such employees, agents or representatives at all times shall be under the direct and sole supervision and control of OnSite. 14 NOTICES: All notices to be given with respect to this Contract, unless otherwise provided for, shall be given in writing to the Customer and the OnSite respectively at the addresses herein above shown. Notice may be given by fax, overnight delivery and/or registered or certified mail. Notice shall be effective upon delivery. Either party may change the address for notice by giving the other party written notice. 15 CONFIDENTIALITY: All confidential information obtained by OnSite in the conduct of its operations hereunder or supplied by Customer in connection with the Work shall be treated as confidential and shall not be divulged by OnSite to any third party during the term of this Contract and for five years thereafter and shall not be used by OnSite for any purpose other than fulfilling its obligations under this Contract. All confidential information obtained by Customer with regard to the Work hereunder or supplied by OnSite in connection with the Work, including all technical information regarding OnSite's ITD Unit, indirect thermal desorption or other process used by OnSite during the Work, shall be treated as confidential and shall not be divulged by Customer to any third party during the term of this Contract and for five years thereafter and shall not be used by Customer for any purpose other than fulfilling its obligations under this Contract. The provisions of this paragraph shall survive any termination or assignment of this Contract. OnSite and Customer shall take all reasonable efforts to insure that their respective employees, members, managers, agents, representatives and/or subcontractors shall also be bound by this paragraph. For purposes of this Contract confidential information shall be defined as plans, technical information, process diagrams or plans, equipment designs, process procedures and systems, suppliers, facilities, know-how, technique, drawings, specifications, data, financial information and other documentation or information, in oral, written or digital form which is either non public, confidential or proprietary in nature produced or communicated by either party (the "communicating party") to the other party (the "receiving party") which constitute valuable trade secrets and are considered by the communicating party to be confidential and proprietary. Confidential information shall not include: (i) information which at the time of disclosure is or thereafter becomes within the public domain other than by reason of the receiving party's breach of this Contract; (ii) information which prior to disclosure hereunder was in the receiving party's possession without violation of any secrecy obligation to the communicating party either directly or indirectly; (iii) information which subsequent to disclosure hereunder is obtained by the receiving party from a third party who is lawfully in possession of such information and which information is not subject to restrictions on disclosure or use; or (iv) the results of the testing performed under this Contract, which the parties agree shall be subject to public disclosure. This Contract is agreed to and accepted by the parties on this _____ day of _____________________, 2003. Rineco Chemical Industries, Inc. 9 ------------------------- By: Title: OnSite Technology LLC ------------------------- By: Title: 10 EXHIBIT A HAZARDOUS WASTE RECYCLING SERVICES CONTRACT - DATED ____________________________ BETWEEN ONSITE TECHNOLOGY LLC AND RINECO CHEMICAL INDUSTRIES INC. SPECIFICATIONS, COMPENSATION AND SPECIAL PROVISIONS 1. SCOPE OF WORK The operation, supervision and maintenance of one (1) OnSite Technology Indirect Thermal Desorption Series 6000 System at Customer's facility in Haskell, Arkansas, USA. PILOT PROJECT PHASE -During the ***** operating ***** period of the Pilot Project Phase, the ITD Unit will recycle various batches of ***** waste with the resulting recycled materials consisting of liquid hydrocarbons and solids. The batches of ***** waste will be recycled at varying temperatures to determine the most efficient recycling parameters but in no event shall the temperature exceed ***** degrees. OPERATING PHASE-Recycling of ***** waste with the resulting recycled materials consisting of liquid hydrocarbons, solids and metal. 2. INLET SPECIFICATIONS: Customer represents that petroleum contamination levels of the material to be remediated and recycled are less than ***** parts per million total petroleum hydrocarbons (volume). Saturation levels (other than total petroleum hydrocarbons) of material to be remediated and recycled do not exceed ***** (by ----- volume). COMBINED TOTAL LIQUID SATURATION LEVELS SHALL NOT EXCEED ***** BY ----- VOLUME. Customer represents that the materials to be recycled will consist of industrial hazardous waste, but will not contain any NORM (except exempt levels), NARM, high level radioactive waste, low level radioactive wastes, mixed wastes or PCBs. Debris contained in materials to be recycled shall be ***** by ***** inch strips of ***** or will not exceed ***** in diameter. As required by Section 6.3.1 of the Contract, the Operating Phase shall not commence until OnSite and Customer have entered into a written agreement as to the dimensions of the ***** which will be included in the materials to be recycled and such written agreement shall become part of the Inlet Specifications. The total sulfur content shall be less than ***** ppm (Wt) [or ***** by weight]. Customer will provide OnSite with a waste characterization of each batch of waste submitted to OnSite for recycling. Feed Specifications: ***** Waste Measurement: Method to be determined and agreed to between the parties. 3. OUTLET SPECIFICATIONS AND TESTING: PILOT PROJECT PHASE: There are no outlet specifications set for the Pilot Project Phase. The testing during the phase shall be based on the protocol defined by Customer and agreed upon by the parties. OPERATING PHASE: Outlet material will consist of recycled liquid hydrocarbons, recycled water and recycled solids. OnSite shall not be required to meet any specific level of total petroleum hydrocarbons in the recycled solids. 4. DISPOSITION OF TREATED MATERIALS: Recycled liquid hydrocarbons and water shall be returned to Customer. Recycled solid materials shall be disposed of by Customer. 11 5. COMPENSATION: OnSite shall be paid the following rates for the Work performed under the Contract: a. MOBILIZATION: Customer shall provide all required and necessary transportation to mobilize OnSite's equipment from their Houston, Texas location to Haskell, Arkansas and pay OnSite a mobilization fee of *****. b. DEMOBILIZATION: Customer shall provide all required and necessary transportation to demobilize OnSite's equipment from their Haskell, Arkansas location to Houston, Texas and pay OnSite a demobilization fee of *****. c. MOVING RATE: During the time, if any, that OnSite's Unit is in transit between two of Customer's Work Sites, Customer shall pay OnSite the out of pocket cost of said move plus the applicable Stand by Rate as set forth below. d. PILOT PROJECT PHASE-RATE: During the Pilot Project Phase of this Contract Customer shall pay OnSite ***** for testing. In no event shall the Pilot Project Phase exceed ***** calendar days. e. OPERATING PHASE-RATE MONTHLY RATE: During the Operating Phase of this Contract, Customer shall pay OnSite a base rate of ***** per ITD Unit per calendar month plus ***** per ton for all material processed in excess of ***** tons per month. OnSite shall guarantee to process a minimum of ***** tons per calendar month of the material described in article two (2) above (INLET SPECIFICATIONS) and discharge temperatures not to exceed ***** degrees. The base rate shall become applicable from the Commencement of Operations and continue to be applicable until termination of this Contract, including during any period in which the unit is Moving. f. FORCE MAJEURE RATE. The force majeure rate per twenty-four (24) hour day (unmanned) per ITD unit shall be *****. The force majeure rate shall be in effect when Work is unable to proceed due to force majeure as defined in the Contract. g. REIMBURSABLE RATE: Customer shall reimburse OnSite for the costs of material, equipment, Work or services which are to be furnished by Customer as provided for herein but which for convenience are actually furnished by OnSite at Customer's request, plus 20% for such cost of handling. h. OPEN SHOP LABOR: OnSite's bid is based on using open shop labor. Should conditions require the use of union labor, OnSite's price will be adjusted. 6. PERMITS OnSite shall provide the following permits: NONE Customer shall provide the following permits: ALL 12 7. EQUIPMENT, MATERIALS AND SERVICES TO BE FURNISHED BY DESIGNATED PARTY: The machinery, equipment, tools, materials, supplies, instruments, services and labor hereinafter listed, including any transportation required for such items, shall be provided at the Work Site at the expense of the party designated by an X in the appropriate column.
ITEM CUSTOMER OnSite ----------------------------------------------------------------------- -------- ------ 1. Complete Indirect Thermal Desorption Unit & Condenser X - --- ----------------------------------------------------------------------- -------- ------ 2. Machinery to load and move contaminated and recycled material (manned and maintained) X - --- ----------------------------------------------------------------------- -------- ------ 3. Furnish and maintain adequate ingress and egress to Work Site X - --- ----------------------------------------------------------------------- -------- ------ 4. Clear and grade Work Site and provide site for Unit X - --- ----------------------------------------------------------------------- -------- ------ 5. Hazwoper 29 CFR 1910.120 training X - --- ----------------------------------------------------------------------- -------- ------ 6. Petroleum Industry Safety Training Program (16 hour OSHA approved) X - --- ----------------------------------------------------------------------- -------- ------ 7. Additional customer required training & specialty safety equipment (Including H2S training) X - --- ----------------------------------------------------------------------- -------- ------ 8. Fuel-Diesel or natural gas at 5 psi X - --- ----------------------------------------------------------------------- -------- ------ 9. Fuel tanks and Fuel lines to Unit X - --- ----------------------------------------------------------------------- -------- ------ 10. Water and water lines to Unit X - --- ----------------------------------------------------------------------- -------- ------ 11. Toilet Facilities X - --- ----------------------------------------------------------------------- -------- ------ 12. Trash receptacle X - --- ----------------------------------------------------------------------- -------- ------ 13. Catering for OnSite personnel X - --- ----------------------------------------------------------------------- -------- ------ 13 ITEM CUSTOMER OnSite ----------------------------------------------------------------------- -------- ------ 14. Living Quarters for OnSite personnel X - --- ----------------------------------------------------------------------- -------- ------ 15. Phone and Fax/ Long Distance Services X - --- ----------------------------------------------------------------------- -------- ------ 16. Communications equipment for OnSite operations- phone and fax X - --- ----------------------------------------------------------------------- -------- ------ 17. Sand or soil to add to materials to be recycled, if necessary X - --- ----------------------------------------------------------------------- -------- ------ 18. Lines from condenser to recycled storage X - --- ----------------------------------------------------------------------- -------- ------ 19. Storage vessels (tanks) for and disposal of recycled liquids (oil and water) X - --- ----------------------------------------------------------------------- -------- ------ 20. Storage vessels for and disposal of recycled solids X - --- ----------------------------------------------------------------------- -------- ------ 21. Water for rehydration (including tankage and transportation if needed) X - --- ----------------------------------------------------------------------- -------- ------ 22. Electric power for OnSite Unit/ Requires. If utility power is used as main supply then a back up generator may be required for emergency shut downs. X - --- ----------------------------------------------------------------------- -------- ------ 23. Operators and assistants for operation of OnSite Unit X - --- ----------------------------------------------------------------------- -------- ------ 24. Any site specific transportation moves, if applicable X - --- ----------------------------------------------------------------------- -------- ------ 25. Site security X - --- ----------------------------------------------------------------------- -------- ------ 26. First aid and/or medical attention at site X - --- ----------------------------------------------------------------------- -------- ------ 27. Office Space (heated and air conditioned) X - --- ----------------------------------------------------------------------- -------- ------ 28. Storage and Staging area for materials to be recycled X - --- ----------------------------------------------------------------------- -------- ------ 14 ITEM CUSTOMER OnSite ----------------------------------------------------------------------- -------- ------ 29. Any additional facilities, materials or equipment required to meet governmental standards including carbon filter and/or thermal oxidizer X - --- ----------------------------------------------------------------------- -------- ------ 30. Carbon filtration System or thermal oxidizer for non-condensed VOC's from secondary off-gas of required X - --- ----------------------------------------------------------------------- -------- ------ 31. Fresh Water Tanks if Required X - --- ----------------------------------------------------------------------- -------- ------ 32. Transportation of Fresh Water if Required X - --- ----------------------------------------------------------------------- -------- ------
15 EXHIBIT B The following clauses, when required by law, are incorporated in the Contract by reference as if fully set out: 1. The Equal Opportunity Clause prescribed in 41 CFR 60-1.4. 2. The Affirmative Action Clause prescribed in 41 CFR 60-250.4 regarding veterans and veterans of the Viet Nam era. 3. The Affirmative Action Clause for handicapped workers prescribed in 41 CFR 60-741.4. 4. The Certification of Compliance with Environmental Laws prescribed in 40 CFR 15.20. 16 EX-10.11 10 doc9.txt EXHIBIT 10.11 (Environmental Safeguards, Inc.) The registrant has requested that portions of this exhibit be given confidential treatment and the registrant has filed a confidential treatment request with the Secretary of the Commission. In this exhibit, the registrant has omitted such material and the registrant has marked this exhibit with a mark " ***** "to indicate where material has been omitted. FIRST AMENDMENT TO HAZARDOUS WASTE RECYCLING SERVICES CONTRACT - U.S. This First Amendment to Hazardous Waste Recycling Services Contract - U.S. ("AMENDMENT") is entered into on the day hereinafter set forth by and between OnSite Technology L.L.C., an Oklahoma limited liability company ("ONSITE") with offices at 2600 South Loop West, Ste. 645, Houston, Texas 77054 and Rineco Chemical Industries, Inc., ("CUSTOMER") with offices at 819 Vulcan Road, Haskell, Arkansas 72015. W-I-T-N-E-S-S-E-T-H WHEREAS, OnSite and Customer have previously entered into a Hazardous Waste Recycling Services Contract - U.S. dated February 15, 2003 ("Contract"); and WHEREAS, a wholly-owned subsidiary of Customer, Rineco Recycling, LLC, an Arkansas limited liability company ("Lender"), has agreed to lend certain sums to OnSite subject and pursuant to the terms of that certain Commitment Letter (herein so called) dated March 6, 2003, executed by and between OnSite and Lender; and WHEREAS, pursuant to the Commitment Letter, and as a condition of making the Loan described therein, the parties hereto desire to amend the Contract as set forth herein; NOW, THEREFORE, in consideration of the premises and of the mutual covenants herein contained, OnSite and Customer hereby mutually agree as follows: 1. The parties hereto agree that the Contract did not terminate on ***** due to the failure of Customer to obtain any approvals as provided in Paragraph 4.1, but remains in full force and effect except as modified herein, and that Paragraph 4.1 is hereby amended in its entirety to read as follows: TERM FOR PILOT PROGRAM PHASE: The initial term of this Contract shall be the "Pilot Program Phase." The Pilot Program Phase shall have a term of ***** operating days from the Commencement of Pilot Program Phase. Commencement of Pilot Program Phase shall be the date on which OnSite's ITD Unit has been delivered to the Work Site and set up and Onsite is ready to begin operating, but in no event shall be later than *****. OnSite shall not deliver any Units to the Work Site prior to notification from Customer that all permits and approvals have been obtained. In the event Customer has not obtained such approvals by *****, then this Contract shall automatically terminate effective on such date without either party having any further obligations hereunder. At the end of the Pilot Program Phase the parties shall evaluate the operating results under this Contract, specifically evaluating (i) throughput of the ITD Unit, (ii) acceptability of processed solids residue for mixing with liquids (iii) salability of the recycled liquid hydrocarbons residue and (iv) ability to process *****. If the parties in good faith determine that the results of the Pilot Program are acceptable, then the Contract shall immediately, without further action on the part of either party, progress to the "Operating Phase," otherwise, the Contract shall terminate. At any time during the Pilot Program Phase at Rineco's option Rineco can elect to move into the "Operating Phase." 2. Paragraph 4.2 of the Contract is amended in its entirety to read as follows: TERM FOR OPERATING PHASE: Unless terminated as otherwise provided in this Contract, the Operating Phase shall have a term ending on *****. On such date and each anniversary thereof, the Contract will be automatically renewed on a year-to-year basis for a one-year renewal term, unless either party gives the other party sixty (60) days prior notice of its intent to terminate this Contract, effective on ***** or any anniversary date thereof. 3. Paragraph 4.3 of the Contract is amended in its entirety to read as follows: EARLY TERMINATION: Notwithstanding the provisions of Paragraph 4.1 and 4.2, Customer may direct the stoppage of the work and the termination of this Contract even though there has been no default on the part of OnSite hereunder by giving ninety (90) days prior written notice to OnSite. In the event such notice is given, this Contract will terminate on the ninetieth (90th) day after notice is given. OnSite shall be entitled to payment in accordance with Paragraph 2.2 for all work performed under the Contract until termination. -2- 4. Add a new Paragraph 2.4 to read as follows: OFFSET: In the event OnSite falls to pay any sums when due to Lender as provided in the Loan Documents, Customer shall be permitted to offset any such sums from payments due OnSite by Customer hereunder without the need to provide prior notice to or obtain any consent from OnSite. Customer's decision to exercise this right of offset shall in no way relieve OnSite from its obligations under the Loan Documents, including the obligation to pay any sums when due, or constitute a waiver by Lender of any rights or remedies it may have under said Loan Documents. 5. All of the terms, conditions, covenants, representations, warranties and agreements contained in the Contract, except as to the extent amended by this Amendment, including all Exhibits and Schedules thereto, shall remain in full force and effect and continue to be binding upon the parties hereto and thereto according to their respective terms. By executing and delivering this Amendment, OnSite and Customer hereby expressly ratify and reaffirm the terms and conditions of their respective obligations under the Contract. 6. This Amendment may be executed simultaneously in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. 7. This Agreement shall be binding upon and inure to the benefit of the parties, their respective heirs, successors and assigns, and personal and legal representatives. This Amendment is agreed to and accepted by the parties on this 20th day of ---- March, 2003. RINECO CHEMICAL INDUSTRIES, INC. ONSITE TECHNOLOGY L.L.C. By: /s/ Michael R. Spinks By: /s/ James S. Percell --------------------------------- -------------------------------- James S. Percell, President Name: Michael R. Spinks ------------------------------- Title: V.P. of Admin & CFO ------------------------------ -3- EX-10.12 11 doc10.txt EXHIBIT 10.12 RINECO RECYCLING, LLC 629 Vulcan Road Haskell, Arkansas 72015 Telephone: (501) 778-9089 / Facsimile: (501) 778-8505 March 6, 2003 OnSite Technology LLC Attention: James S. Percell, President 2600 South Loop West, Suite 645 Houston, TX 77054 Re: $1,500,000.00 business loan Dear James: We are pleased to advise you that Rineco Recycling, LLC ("Lender") has approved your loan request for the above-mentioned business loan upon and subject to the following terms and conditions: BORROWER(S): Environmental Safeguards, Inc., a Nevada corporation with its chief executive office in Houston, Texas, National Fuel & Energy, Inc., a Wyoming corporation with its chief executive office in Houston, Texas, and OnSite Technology LLC, an Oklahoma limited liability company with its chief executive office in Houston, Texas (collectively "BORROWERS" and individually, a "BORROWER") LIABILITY PROVISION: Joint and Several AMOUNT: $1,500,000.00 (the "Loan") to be disbursed in three (3) separate advances of $500,000.00 each on March 15, 2003, May 15, 2003 and July 15, 2003, provided no event of default or other event which, with the giving of notice or the passage of time, or both, would constitute an event of default under any Loan Document has occurred and is continuing. PURPOSE: Working capital COLLATERAL: Three (3) separate Indirect Thermal Desorption Units ("ITDS"), together with any and all substitutions, replacements, accessions, permits, licenses, proceeds and awards of whatever kind in respect of the foregoing. One ITD is now and will at all times be located in Haskell, Arkansas (unless the Contract between Borrower OnSite Technology LLC and Rineco Chemical Industries, Inc. referred to below shall have been terminated, in which event said unit may be moved, but without affecting or canceling Lender's security interest therein); the location of the remaining ITDs will at all times be disclosed to Lender, Borrowers shall identify each ITD by make and model number, serial number and any other descriptive information available to Borrowers. RATE: Twelve percent (12.0%) per annum REPAYMENT: In twenty (20) quarterly installments of principal in the amount of $75,000.00 each, plus accrued and unpaid interest on the unpaid principal balance of the Loan, such equal quarterly installments of principal, plus accrued and unpaid interest, to be due and payable beginning August 31, 2003, and on the last day of each November, February, May and August thereafter until Maturity, at which time, the entire unpaid principal of, together with all accrued and unpaid interest on, the Loan shall be due and payable in full. Borrowers shall have the right to prepay all or any part of the Loan at any time without premium or penalty; provided specifically, however, no partial prepayment shall operate to postpone, delay, cancel or diminish any regularly scheduled principal installment. ORIGINATION FEE: Eight percent (8.0%) for each $500,000.00 principal advance MATURITY: May 31, 2008 COMMITMENT ACCEPTANCE: This commitment is to be accepted and returned to Lender no later than March 7, 2003, after which Lender in its sole discretion may determine the commitment to be null and void. CLOSING DATE: The Loan is to close on or before March 20, 2003, after which this commitment may be determined null and void by the Lender. CONDITIONS: This Commitment and the consummation of the Loan transaction are conditioned upon (a) the completion by Lender and Lender's counsel of such due diligence investigations with respect to each Borrower, its principals and the Collateral security for the Loan as Lender and/or Lender's counsel shall deem appropriate, (b) the execution and delivery by each Borrower of definitive documentation relating to the Loan, (c) the absence of any development which could adversely affect the proposed Loan, and (d) Lender's receipt of assurances 2 acceptable to Lender that Lender will receive Warrants to purchase 1,500,000 shares of the common stock of Borrower Environmental Safeguards, Inc. for $0.01 each, together with assurances acceptable to Lender that the issuance of said Warrants and all stock which may be purchased pursuant thereto will not violate any federal or state securities laws. All such documents, investigations and conditions must be satisfied in a manner acceptable to Lender. Lender's due diligence investigations shall include, but not be limited to, the receipt and review of the following items, each of which will be obtained at the expense of Borrowers and submitted to Lender in sufficient time for Lender to adequately evaluate its acceptability, and each of which shall be in form and substance satisfactory to Lender. (i) a current UCC, judgment and lien search with respect to each Borrower and the ITDs and other Collateral for the Loan; (ii) operating statements, balance sheets and tax returns for each Borrower for each of their past three (3) fiscal years; (iii) copies of all organizational documents of each Borrowers and Certificates of Good Standing from applicable governmental authorities with respect to each Borrower; (iv) opinions of counsel to each Borrower with respect to each Borrower, the Collateral security for the Loan and the definitive loan documentation, all of which shall be acceptable to Lender, and which opinions shall, without limiting the foregoing state, inter alia, (a) that the interest rate ----- ---- established by the Loan Documents, together with any and all other charges due or payable thereunder which are or could be construed to be interest, do not violate the usury laws of the State of Texas and that the Texas choice of law designation herein and in the Loan documents would be given effect and upheld by a federal court located in the State of Texas or a Texas state court, and (b) that the issuance of the Warrants hereinabove provided for does not and will not violate any federal or state securities laws; (v) evidence of the absence of material (in Lender's sole discretion) litigation affecting each Borrower or the Collateral security for the Loan; (vi) certificates and affidavits of each Borrower and/or their respective principals with respect to certain of the above items and such other items as Lender may reasonably request; and 3 (vii) an Addendum to that certain Hazardous Waste Recycling Services Contract - U.S., dated February 15, 2003, between Borrower OnSite Technology LLC and Rineco Chemical Industries, Inc., pursuant to which Addendum said Contract shall have been modified by (i) canceling the 90-day withdrawal right contained therein in favor of OnSite Technology LLC (the 90-day withdrawal right therein in favor of Rineco Chemical Industries, Inc. shall remain intact), (ii) extending the term of said Contract to May 31, 2008, and (iii) giving Rineco Chemical Industries, Inc. the right to offset against any and all sums due from it under said Contract the amount(s) which Borrowers fail to pay under the Loan Documents. LOAN DOCUMENTS: The definitive documentation for the Loan shall include: (i) Promissory Note; (ii) Security Agreement pursuant to which each Borrower will grant and give Lender a first priority security interest in the ITDs and other Collateral; (iii) such UCC financing statements and other documentation as Lender and its counsel shall require for filing with the Texas Secretary of State and any other appropriate public officials deemed necessary or appropriate by Lender or Lender's counsel in order to perfect a security interest in the Collateral; and (iv) such other additional documents as Lender or its counsel shall reasonable require. BORROWERS' REPRESENTATIONS: 1. Borrowers represent to Lender that there is no action, suit or proceeding, or any governmental investigation or any arbitration, in each case pending or, to the knowledge of Borrowers, threatened against Borrowers or any of the Collateral before any governmental or administrative body, agency or official which (i) challenges the validity of this Commitment or the Loan Documents or the authority of any Borrower to enter into this Commitment or the Loan Documents or to perform the transactions contemplated hereby or thereby, or(ii) if adversely determined, would have a material adverse effect on any Borrower or its properties. 4 2. On the Closing Date, each Borrower shall certify to Lender whether and to what extent there has been any adverse change in the business, financial condition or results of operations of any Borrower or the Collateral from that shown on the financial statements and reports referred to above. Any such adverse change must be acceptable to Lender. 3. Borrowers represent and warrant that Borrowers OnSite Technology LLC is the owner of and has the right to grant and give Lender a security interest in the ITDs. 4. The Loan Documents shall contain such additional representations and warranties of each Borrower concerning such Borrower, its constituent shareholder(s) and member(s), acceptable to Lender. AFFIRMATIVE COVENANTS: The Loan Documents will provide that: 1. Upon the failure of any Borrower to perform any of its obligations hereunder or to perform any of its material obligations under any of the Loan Documents (such material obligations to include, but not be limited to, the prompt and punctual payment of principal and interest, the obligation to insure the Collateral with Lender as loss payee, and the Borrower without prior written notice to Lender), Rineco Chemical Industries, Inc. shall have the right to immediately set off against its obligations under that certain Hazardous Waste Recycling Services Contract - U.S. dated February 15, 2003, as amended, in the amount(s) which any Borrower has failed to pay Lender hereunder or under any of the Loan Documents; and 2. Each Borrower shall agree to such additional financial covenants as Lender or its counsel shall reasonably require. NEGATIVE COVENANTS: The Loan Documents will provide that no Borrower will: (i) create, assume or suffer to exist any liens on any of the Collateral for the Loan; (ii) without the express prior written covenants of Lender, which consent will not be unreasonably withheld, merge into or 5 consolidate with any other company or change the corporate structure of such Borrower; (iii) dispose of all or a substantial portion of such Borrower's assets or assets which provide a substantial part of the earnings of such Borrower; or (iv) sell, or contract to sell, all or a substantial part of the assets of such Borrower. TERMINATION: Lender may, at its option exercised by written notice to the addresses of this Commitment at its address shown above, terminate this Commitment if any of the following events occurs prior to Closing: (a) Any sale, transfer, pledge, encumbrance or assignment off any Borrower's interest in the Collateral; (b) Any sale, transfer, pledge, encumbrance or assignment of any legal, equitable or beneficial interest in Borrower OnSite Technology LLC without the express prior written consent of Lender; (c) Any Borrower breaches any provision contained in this Commitment; (d) Any Borrower has made any representation or warranty to Lender which was untrue or false when made in a material respect or which becomes untrue or false in a material respect; (e) Any petition of bankruptcy, insolvency or reorganization is filed by or against any Borrower. Delay in the exercise of Lender's right to terminate this Commitment upon the occurrence of any of the above events shall not be construed as a waiver of such right. The failure of Lender to act in any such event shall not be construed as a waiver of its right to act with respect to any subsequent event of a similar nature. Upon termination as set forth above, all of Lender's obligations pursuant to this Commitment shall cease and be of no further force and effect whatsoever. MISCELLANEOUS: 1. This Commitment shall not be effective until accepted by each Borrower in the State of Texas and shall be governed by and construed under the internal laws of the State of Texas and applicable federal laws. 6 2. Whenever this Commitment refers to any item or thing having to be satisfactory or acceptable to Lender, such item or thing must be acceptable to Lender in all respects, in its sole and absolute discretion. 3. All approvals of or waivers by Lender in respect of any of the terms, conditions or requirements of this Commitment must be in writing. 4. No waiver with respect to any condition, breach or other matter shall extend to or be taken in any manner whatsoever to affect any other condition, breach or matter or affect Lender's rights resulting therefrom. 5. Each Borrower hereby waives any right which it may have to a trial by jury in any action brought on this Commitment or in any way connected with or related to the Loan. Each Borrower hereby submits in any legal proceeding relating to this Commitment to arbitration. 6. Any controversy or claim between or among the parties hereto, including, buy not limited to, those arising out of or relating to this Commitment or any documents executed pursuant hereto, including, without limitation, any claim based on or arising from an alleged tort, shall be determined by binding arbitration (subject to any reservation or rights below) in accordance with the Federal Arbitration Act (or, if not applicable, the applicable state law), the Rules of Practice and Procedure for the Arbitration of Commercial Disputes of the American Arbitration Association ("AAA"), and any special rules set forth below. In the event of any inconsistency, any such special rules shall control. Judgment upon any arbitration award may be entered in any court having jurisdiction. Either Lender or Borrowers may bring an action, including a summary or expedited proceeding, to compel arbitration of any controversy or claim to which this Commitment Letter applies in any court having jurisdiction over such action. The arbitration shall be conducted in Little Rock, Arkansas, and administered by AAA, which will appoint an arbitrator, if AAA is unable or legally precluded from administering the arbitration, then the Judicial Arbitration and Mediation Services, Inc. will serve. All arbitration hearings will be commenced within 90 days of the demand for arbitration. The arbitrator shall, for the showing of cause only, be permitted to extend the commencement of such hearing for up to an additional 30 days. Nothing in this 7 Commitment shall be deemed to limit the right of Lender (i) to exercise self-help remedies such as, but not limited to, setoff; or (ii) to foreclose against the Collateral; or (iii) to obtain from a court provisional or ancillary remedies such as, but not limited to, injunctive relief or the appointment of a receiver. Lender may exercise such self-help rights, foreclose upon such property, or obtain such provisional or ancillary remedies before, during or after the pendency of any arbitration proceeding brought pursuant to this Agreement. Neither the exercise of self-help remedies nor the institution or maintenance of an action of foreclosure or provisional or ancillary remedies shall constitute a waiver of the right of any party, including the claimant in any such action, to arbitrate the merits of the controversy or claim occasioning resort to such remedies. 7. This Commitment may be signed in any number of counterparts and by the different parties hereto on separate counterparts, each of which shall, when so executed and delivered, be an original, but all of which shall together constitute one and the same instrument. THIS COMMITMENT AND THE OTHER LOAN DOCUMENTS REFERRED TO OR CONTEMPLATED HEREIN REPRESENT, OR WILL REPRESENT, THE FINAL AGREEMENT BETWEEN THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS OR SUBSEQUENT ORAL AGREEMENT OF THE PARTIES. THERE ARE NO UNWRITTEN ORAL AGREEMENTS OF THE PARTIES. If the above terms and conditions are acceptable to you, please sign this Commitment in the space provided below and return the same to Lender at the address which appears on this letterhead. Sincerely, RINECO RECYCLING, LLC By: Harry C. Erwin III, President ----------------------------------- 8 AGREED TO AND ACCEPTED: ENVIRONMENTAL SAFEGUARDS, INC. By: _________________________________ Name: _______________________________ Title: ______________________________ Date: _______________________________ NATIONAL FUEL & ENERGY, INC. By: _________________________________ Name: _______________________________ Title: ______________________________ Date: _______________________________ ONSITE TECHNOLOGY LLC By: _________________________________ Name: _______________________________ Title: ______________________________ Date: _______________________________ 9 EX-21.1 12 doc11.txt EXHIBIT 21.1 SUBSIDIARIES National Fuel & Energy, Inc., a Wyoming corporation (active). OnSite Technology, L.L.C., an Oklahoma limited liability company (active). OnSite Colombia, Inc., a Cayman Island corporation (in liquidation). OnSite Mexico, L.L.C., a Texas corporation (in liquidation). OnSite Arabia, Inc., a Cayman Island corporation (active). Environmental Leasing Company, a Cayman Island corporation (inactive). OST Equipment Leasing, L.L.C., a Texas corporation (inactive). Environmental Technology Services, Inc., a Cayman Island corporation (active). 64 EX-23.2 13 doc13.txt EXHIBIT 23.2 CONSENT OF HAM, LANGSTON & BREZINA L.L.P. We consent to the use in this registration statement on Form SB-2 of our report, dated March 20, 2003, relating to the financial statements of Environmental Safeguards, Inc. for the year ended December 31, 2002. We also consent to the reference to our firm under the caption "Experts" in such registration statement. /s/ Ham, Langston & Brezina L.L.P. Houston, Texas April 30, 2003 65 EX-23.3 14 doc14.txt EXHIBIT 23.3 CONSENT OF PRICEWATERHOUSECOOPERS LLP We hereby consent to the use in this registration statement on Form SB-2 of our report (which contains an explanatory paragraph relating to the Company's ability to continue as a going concern as described in Note 2 to the consolidated financial statements) dated February 28, 2002, relating to the financial statements of Environmental Safeguards, Inc. which appears in such registration statement. We also consent to the reference to our firm under the caption "Experts in such registration statement". - ----------------------------------- /s/ PricewaterhouseCoopers LLP Houston, Texas April 30, 2003 66 -----END PRIVACY-ENHANCED MESSAGE-----