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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------
FORM 10-Q
{X} Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the quarter period ended June 30, 1996
OR
{ } Transition Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the transition period from ___ to ___
Commission File Number 0-19497
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MOBLEY ENVIRONMENTAL SERVICES, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 75-2242963
(State or other jurisdiction of I.R.S. Employer
Incorporation or organization) Identification No.)
4415 E. GREENWOOD
BAYTOWN, TEXAS 77520
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (713) 383-7033
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months and (2) has been subject to such filing
requirements for the past 90 days. Yes X No .
---- ----
The number of shares outstanding of the registrant's common stock, as of
August 1, 1996 was 4,085,343 shares of Class A Common Stock, $.01 par value and
4,749,950 shares of Class B Common Stock, $.01 par value.
THIS ENTIRE FORM 10-Q IS SUBJECT TO FORM 12b-25 FILED AUGUST 15, 1996.
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MOBLEY ENVIRONMENTAL SERVICES, INC.
FORM 10-Q
INDEX
Part I - FINANCIAL INFORMATION PAGE
Item 1. Financial Statements (Unaudited)
- Consolidated Balance Sheets - June 30,
1996 and December 31, 1995 3
- Consolidated Statements of Operations - Three
Months and Six Months Ended June 30, 1996
and 1995 4
- Consolidated Statement of Stockholders' Equity -
Six Months Ended June 30, 1996 5
- Consolidated Statements of Cash Flows - Six
Months Ended June 30, 1996 and 1995 6
- Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 9
Part II - OTHER INFORMATION
Item 1. Legal Proceedings 12
Item 2. Changes in Securities 12
Item 3. Defaults Upon Senior Securities 12
Item 4. Submission of Matters to
a Vote of Security Holders 12
Item 5. Other Information 13
Item 6. Exhibits and Reports on Form 8-K 13
Signatures 14
2
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
MOBLEY ENVIRONMENTAL SERVICES, INC.
Consolidated Balance Sheets
(dollars in thousands)
(unaudited)
<TABLE>
<CAPTION>
June 30, December 31,
ASSETS 1996 1995
---------- ----------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 516 $ 1,476
Trade receivables, less allowance for doubtful accounts of $223 and
$257 at June 30, 1996 and December 31, 1995, respectively 3,189 2,836
Prepaid expenses and other current assets 880 582
---------- ----------
Total current assets 4,585 4,894
Property, plant and equipment, net 15,737 12,837
Excess of purchase price over fair value of net assets acquired 1,083 1,122
Other assets, net 306 244
---------- ----------
$ 21,711 $ 19,097
---------- ----------
---------- ----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable and current portion of long-term debt $ 4,435 $ 70
Accounts payable 1,887 1,296
Accrued expenses 3,054 3,623
---------- ----------
Total current liabilities 9,376 4,989
Long-term debt, excluding current portion -- 490
Other long-term liabilities -- 166
Deferred income taxes 846 846
---------- ----------
Total liabilities 10,222 6,491
---------- ----------
Stockholders' equity:
Preferred stock; $.01 par value; 2,000,000 shares authorized;
none issued -- --
Common stock; $.01 par value:
Class A; 15,000,000 shares authorized, 4,085,343 shares issued
and outstanding at June 30, 1996 and December 31, 1995 41 41
Class B; 10,000,000 shares authorized, 4,834,657 shares issued
and 4,749,950 shares outstanding at June 30, 1996 and
December 31, 1995 49 49
Additional paid-in capital 25,159 25,159
Accumulated deficit (13,415) (12,251)
Deferred compensation costs under restricted stock agreements (337) (384)
Treasury stock, 84,707 shares of Class B common stock, at cost (8) (8)
---------- ----------
Total stockholders' equity 11,489 12,606
Commitments and contingencies
---------- ----------
$ 21,711 $ 19,097
---------- ----------
---------- ----------
</TABLE>
See accompanying notes to consolidated financial statements.
3
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MOBLEY ENVIRONMENTAL SERVICES, INC.
Consolidated Statements of Operations
(dollars in thousands, except per share amounts)
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
-------------------------- ------------------------
1996 1995 1996 1995
---- ----- ---- ----
<S> <C> <C> <C> <C>
Revenues:
Waste management services $ 3,566 $ 3,729 $ 7,096 $ 6,852
Oilfield services 1,103 1,034 2,080 2,117
--------- ----------- ---------- ----------
Total revenues 4,669 4,763 9,176 8,969
Cost of revenues:
Waste management services 2,775 2,488 5,565 4,541
Oilfield services 789 672 1,605 1,338
--------- ---------- ---------- ----------
Total cost of revenues 3,564 3,160 7,170 5,879
Gross profit:
Waste management services 791 1,241 1,531 2,311
Oilfield services 314 362 475 779
--------- ---------- ---------- ----------
Total gross profit 1,105 1,603 2,006 3,090
Selling, general and administrative expenses 1,596 1,461 3,187 2,831
--------- ---------- ---------- ----------
Operating income (loss) (491) 142 (1,181) 259
Other expense, net -- (426) -- (502)
Interest income (expense), net (1) 49 17 100
--------- ---------- ---------- ----------
Loss before income taxes (492) (235) (1,164) (143)
Income tax expense -- 19 -- 30
--------- ---------- ---------- ----------
Net loss $ (492) $ (254) $ (1,164) $ (173)
--------- ---------- ---------- ----------
--------- ---------- ---------- ----------
Net loss per share $ (0.06) $ (0.03) $ (0.13) $ (0.02)
--------- ---------- ---------- ----------
--------- ---------- ---------- ----------
Weighted average number of common
shares outstanding 8,835,293 8,021,447 8,835,293 7,968,663
--------- ---------- ---------- ----------
--------- ---------- ---------- ----------
</TABLE>
See accompanying notes to consolidated financial statements.
4
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MOBLEY ENVIRONMENTAL SERVICES, INC.
Consolidated Statement of Stockholders' Equity
Six Months Ended June 30, 1996
(dollars in thousands)
(unaudited)
<TABLE>
<CAPTION>
<S> <C>
Preferred Stock - none issued $ --
---------
Class A Common Stock - Balance at December 31, 1995 and June 30, 1996 41
---------
Class B Common Stock - Balance at December 31, 1995 and June 30, 1996 49
---------
Additional Paid-In Capital - Balance at December 31, 1995 and June 30, 1996 25,159
---------
Accumulated Deficit:
Balance at December 31, 1995 (12,251)
Net loss (1,164)
---------
Balance at June 30, 1996 (13,415)
---------
Deferred Compensation Costs Under Restricted Stock Agreements:
Balance at December 31, 1995 (384)
Amortization of unearned compensation 47
---------
Balance at June 30, 1996 (337)
---------
Treasury Stock - Balance at December 31, 1995 and June 30, 1996 (8)
---------
Total stockholders' equity at June 30, 1996 $ 11,489
---------
---------
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE>
MOBLEY ENVIRONMENTAL SERVICES, INC.
Consolidated Statements of Cash Flows
(dollars in thousands)
(unaudited)
<TABLE>
<CAPTION>
Six Months Ended June 30,
-------------------------
1996 1995
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (1,164) $ (173)
Adjustments to reconcile net loss to net cash
used by operating activities:
Depreciation and amortization 1,287 1,121
Equity in loss and loss on sale of joint venture -- 421
Deferred compensation costs under restricted stock agreements 47 63
Gain on disposal of assets (10) (39)
Increase in trade receivables (353) (224)
Decrease (increase) in prepaid expenses and other current assets (298) 403
Decrease in other assets -- 8
Increase (decrease) in accounts payable 591 (1,799)
Decrease in accrued expenses and other liabilities (735) (866)
Decrease in income taxes payable -- (11)
---------- ----------
Net cash used by operating activities (635) (1,096)
Cash flows from investing activities:
Capital expenditures (4,173) (1,427)
Proceeds from sale of joint venture investment and other assets 35 396
Other investing activities, net (62) (114)
---------- ----------
Net cash used by investing activities (4,200) (1,145)
Cash flows from financing activities:
Net borrowings under revolving lines of credit and short-term notes payable 2,000 62
Proceeds from long-term borrowings 1,940 --
Principal payments on long-term debt (65) (1,759)
---------- ----------
Net cash provided (used) by financing activities 3,875 (1,697)
---------- ----------
Net decrease in cash and cash equivalents (960) (3,938)
Cash and cash equivalents at beginning of period 1,476 7,471
---------- ----------
Cash and cash equivalents at end of period $ 516 $ 3,533
---------- ----------
---------- ----------
</TABLE>
See accompanying notes to consolidated financial statements.
6
<PAGE>
MOBLEY ENVIRONMENTAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1996
(unaudited)
(1) BASIS OF PRESENTATION
The accompanying financial statements present the consolidated accounts
of Mobley Environmental Services, Inc. (the "Company") and its subsidiaries.
All significant intercompany accounts and transactions have been eliminated.
The unaudited consolidated financial statements reflect all adjustments
which are, in the opinion of management, of a normal and recurring nature and
necessary for a fair presentation of the consolidated financial position of
the Company as of June 30, 1996, and the consolidated results of operations
and cash flows for the periods presented herein. Interim results are not
necessarily indicative of results for a full year. The unaudited consolidated
financial statements should be read in conjunction with the consolidated
financial statements and notes thereto presented in the Company's Annual
Report on Form 10-K for the year ended December 31, 1995.
Management of the Company has made a number of estimates and assumptions
relating to the reporting of assets and liabilities and the disclosure of
contingent liabilities to prepare these financial statements in accordance with
generally accepted accounting principles. Actual results could differ from
those estimates.
(2) NOTES PAYABLE
The Company has a credit agreement (the "Credit Agreement") with Bank
One, Texas, N.A. (the "Bank") that provides up to $6,500,000 in available
credit for the Company through June 1997. Under the terms of the Credit
Agreement, the Company may borrow, subject to a defined borrowing base, up to
$4,000,000 under a revolving line of credit (including up to $1,800,000 in
letters of credit) for working capital and general corporate purposes, and up
to $2,500,000 under a term loan facility for purposes of acquiring certain
eligible equipment.
At June 30, 1996, the Company had borrowed the full $2,500,000 available
under the term loan portion of the Credit Agreement, consisting of two notes
in the original amounts of $700,000 (payable quarterly over five years) and
$1,800,000 (payable quarterly over seven years). Both notes bear interest at
8.25%. The outstanding balance of these notes at June 30, 1996 was
$2,435,000.
At June 30, 1996, $2,000,000 in borrowings were outstanding
under the revolving credit agreement and $1,467,000 in letters of credit had
been issued under such line of credit. Subsequently, the Company borrowed the
remaining amount available under the revolving line of credit, bringing the
total amount outstanding to $2,550,000 at August 1, 1996. Such amount has a
maturity date of June 2, 1997 and bears interest, payable quarterly, at the
Bank's prime rate (8.62% at June 30, 1996).
The Credit Agreement contains restrictive covenants which include the
maintenance of minimum tangible net worth, as defined, and certain financial
ratios. At June 30, 1996, the Company failed to meet one of the covenant
requirements which has placed the Company in technical default. Consequently,
the Company has classified the entire outstanding balance as a current
liability.
(3) ACCOUNTING PRONOUNCEMENTS
The Company adopted Statement of Financial Accounting Standards No. 123
("SFAS 123"), "Accounting for Stock-Based Compensation", in the first quarter
of 1996. SFAS 123 establishes financial accounting and reporting standards
for stock-based employee compensation plans. As allowed by SFAS 123, the
Company plans to continue to measure compensation cost for employee stock
compensation plans using the intrinsic value method prescribed by Accounting
Principles Board No. 25, "Accounting for Stock Issued to Employees", and will
provide pro forma disclosures in the notes to the consolidated financial
statements as required by SFAS 123 at December 3 l, 1996.
The Company adopted Statement of Financial Accounting Standards No. 121
("SFAS 121"), Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets To Be Disposed Of" in the first quarter of 1996. SFAS 121
establishes guidance for recognizing and measuring impairment losses and
requires that the carrying amount of an impaired asset be reduced to fair
value when events or circumstances indicate that the carrying value may not
be recoverable.
7
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Recoverability would generally be determined by estimating future cash
flows resulting from use and eventual disposition of the asset. The effect of
adopting SFAS 121 did not have a material effect on the Company's
consolidated financial statements.
(4) COMMITMENTS AND CONTINGENCIES
LETTERS OF CREDIT. At June 30, 1996, letters of credit totaling
approximately $1,300,000 had been provided by the Company to its insurance
carrier in connection with its workers' compensation, general liability and
auto liability insurance policies. Additionally, the Company has provided a
letter of credit to the Texas Natural Resource Conservation Commission
("TNRCC") in the amount of $167,000 to secure the payment of fines assessed
Gibraltar Chemical Resources, Inc. ("Gibraltar"), the Company's former
subsidiary, by the TNRCC in connection with the December 1994 settlement of
certain litigation.
COMMITMENTS. In connection with its current business
expansion activities, the Company has commitments under contracts for the
engineering and construction of two new processing and recycling facilities.
Portions of such contracts not completed at June 30, 1996 are not reflected
in the accompanying consolidated financial statements. These unrecorded
commitments were approximately $380,000 at June 30, 1996.
LITIGATION AND VARIOUS OTHER CLAIMS. The Company continues to defend
various claims resulting from the operations of its former subsidiary,
Gibraltar, which was sold effective December 31, 1994. As of August 9, 1996,
six such lawsuits were pending, one of which is asserted as a class action.
Certain of the claimants seek compensatory and punitive damages for alleged
personal injury and property damage caused by operations and emissions of
Gibraltar's hazardous waste disposal facility. An additional claimant seeks
permanent closure of the facility and civil penalties as the remedy for
alleged violations by Gibraltar of environmental protection statutes and
endangerment to public health and the environment.
These matters raise difficult and complex factual and legal issues,
including but not limited to, the nature and amount of the Company's
liability, if any. Although the Company is a defendant in some litigation, in
other matters the Company's potential liability arises from material
contractual indemnifications given by the Company to the purchaser of
Gibraltar. These indemnifications may include the potential liability of
former customers of Gibraltar, approximately 50 of which have also become
defendants in litigation involving Gibraltar's operations. Accordingly, the
Company is not able to estimate the nature and precise amount of future
liabilities with respect to such matters.
The Company, based on consultation with its legal counsel, believes that
its liability insurance coverage, combined with presently established
accruals, adequately address its potential exposure for the foregoing
matters. However, the Company has been notified by its insurance carrier that
it disputes the Company's interpretation of its pollution legal liability
insurance coverage and policy limitations applicable to the foregoing claims.
While the Company is vigorously pursuing a favorable resolution of this
dispute through a declaratory judgment action against its insurance carrier,
it is unable to determine the likelihood of an unfavorable outcome at this
time.
The Company's contractual indemnity obligations to the purchaser of
Gibraltar also encompass various pending regulatory and permit renewal
proceedings. The failure of Gibraltar to prevail in these matters could
result in significant liabilities to the Company. In addition to the
foregoing matters, the Company is obligated to indemnify the purchaser of
Gibraltar for breaches of representations and warranties made by the Company
to such purchaser and for future claims against Gibraltar arising from
circumstances existing on or prior to the date of the sale of Gibraltar.
The Company's obligations to indemnify the purchaser of Gibraltar for
claims other than tax, environmental, and ERISA claims expired June 30, 1996.
However, the Company remains obligated to indemnify the purchaser for tax,
environmental, and ERISA claims, including those discussed above. As the
nature and scope of the Company's ultimate liability arising from Gibraltar's
operations and its sale become better defined, there will be changes in
estimates of the future costs relating thereto which could have a material
adverse effect on the Company's future financial condition, results of
operations, or liquidity.
The Company has been named as a potentially responsible party with respect
to a State of Texas superfund site. Due to the preliminary nature of this
matter, the Company is unable to estimate its potential exposure in this
regard.
There are various other claims and legal actions pending and threatened
against the Company which have arisen in the ordinary course of its business.
Where applicable, the Company has recorded accruals for estimated potential
damages and expenses associated with such matters. While the final outcome of
these matters cannot be predicted with certainty,
8
<PAGE>
management, upon consultation with legal counsel and considering existing
insurance coverage, believes that any financial obligations of the Company
arising from such claims would not be material to its consolidated financial
condition or results of operations.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
GENERAL
The Company provides diverse environmental and field-related services to
industrial, governmental, and commercial markets, specializing in the
collection, transportation, treatment, recycling and management of a wide
variety of non-hazardous liquid hydrocarbons, oil filters, absorbents and
related materials. The Company also provides oilfield services for managing
liquids used or produced during the lifecycle of oil and gas wells.
The Company's revenues have historically consisted of fees collected from
customers, principally related to waste management and oilfield services and,
to a lesser extent, from product sales and equipment rentals. As a result of
the addition of new business lines associated with a July 1995 acquisition, a
larger percentage of the Company's future waste management services revenues
will be derived from sales of manufactured or recovered products. Revenues
derived from waste management services are closely associated with volumes of
waste collected, levels of service provided and the related pricing. Revenues
from oilfield services are derived from hourly and fixed charges for services
provided, equipment rentals and products sold. Cost of revenues include
direct costs of providing services to customers, such as labor, third party
disposal, supplies and other consumables, depreciation, utilities and fuel,
equipment maintenance, and repair. Selling, general and administrative
expenses include selling and marketing expenses, certain insurance and
administrative salary expenses, depreciation, amortization of goodwill, and
legal and consulting fees.
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 1996 AND 1995
The net loss for the quarter ended June 30, 1996 was $492,000, or $0.06
per share, compared to a net loss of $254,000, or $0.03 per share, in the
corresponding quarter of 1995.
Revenues for the 1996 quarter totaled $4,669,000 compared to $4,763,000
in the same quarter a year ago, a decline of 2.0%. On a segment basis, waste
management services revenues decreased 4.4% in 1996 from the 1995 quarter,
while oilfield services revenues grew 6.7% during this period.
Waste management services revenues for the 1996 second quarter included
$781,000 related to the collection and sale of used oil and the recycling of
oil filters and absorbents. These two business lines commenced in July 1995
with the acquisition of certain assets of three existing businesses.
Exclusive of the impact of these new businesses on the 1996 quarter's results
of operations, segment revenues declined $944,000, or 25.3% during this
period compared with the 1995 quarter. Fluid volumes managed in the Company's
hydrocarbon/water separations business declined precipitously during the
quarter ended June 30, 1996, as a severe regional drought continued to
adversely impact business activity in much of the Company's market area.
Rainfall levels in the Company's four key Texas markets during the first six
months of 1996 were 54% less than those in the comparable period of 1995. The
most acute volume loss was in fluids related to petroleum storage tank
remediation and maintenance activities, accounting for the majority of the
20% volume reduction from the same quarter a year ago. Oily waste volumes,
which tend to be more closely associated with industrial activity and not as
susceptible to climatic conditions, were impacted to a lesser extent.
Revenues were also negatively affected by significantly lower special project
activity in the 1996 second quarter compared to that of 1995.
Since their inception, the new business lines referred to in the previous
paragraph have continued to develop, and additional growth is expected over the
balance of the year as a result of the new distillate fuels production and oil
filter recycling facilities which have recently been completed at the Company's
Baytown, Texas hydrocarbon recycling center.
Revenues from oilfield services were generally consistent in the 1996 and
1995 second quarters, increasing slightly during the 1996 quarter to
$1,103,000, despite intense competition and pricing pressure.
Gross profit (revenues less direct operating expenses) during the 1996
second quarter totaled $1,105,000 versus $1,603,000 in the corresponding
prior-year quarter. Gross profit from waste management services amounted to
$791,000 during the 1996 three-month period (including $152,000 derived from
the recent business line additions referred to
9
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previously) compared to $1,241,000 in 1995. Stated as a percentage of
revenues, segment gross profit amounted to 22.2% and 33.3% in 1996 and 1995,
respectively. On a pro forma basis (i.e., exclusive of the impact of the new
business lines), the 1996 quarter's gross profit margin was 22.9%. The marked
decline in managed fluid volumes referred to previously, coupled with the
largely fixed operating costs of the Company's three hydrocarbon/water
separations plants, resulted in notably higher per-gallon costs in the 1996
quarter, despite certain cost improvements achieved as a result of
operational enhancements at the Company's Baytown, Texas processing facility.
Continuing trends in the mix of the types of fluids managed further
exacerbated the decline in gross profit, with lower volumes of relatively
easy-to-treat motor fuel/water mixtures and a higher proportion of more
difficult-to-treat oily waste streams.
Gross profit from oilfield services declined to $314,000 (28.5% of
segment revenue) in the 1996 second quarter from $362,000 (35.0% of related
revenue) in the same 1995 period. The 1996 quarter's gross profit margin was
impacted by the lingering effects of an unfavorable business mix which, along
with increased operating costs, have hampered profitability in this segment
in recent quarters and resulted in profit margins that are well below
historical levels.
Selling, general and administrative ("SG&A") expenses amounted to
$1,596,000 for the three months ended June 30, 1996 compared to $1,461,000 in
the same period of 1995. As a percentage of revenues, SG&A costs were 34.2%
in the 1996 second quarter compared to 30.7% in the same 1995 period.
Incremental overhead costs associated with the aforementioned new business
lines accounted for substantially all of the increase in quarter-over-quarter
SG&A expenses.
Other expense, net of $426,000 in the second quarter of 1995 was directly
attributable to losses associated with the Company's former Mexican
operations, including a loss on the sale of the Company's investment in Pro
Ambiente, S.A. de C.V., a joint venture, in June 1995. Interest income
declined from $49,000 in the 1995 second quarter as a result of reduced cash
balances during 1996. Interest expense incurred by the Company during the
1996 second quarter totaling $59,000 was capitalized as part of the plant
construction projects at its Baytown, Texas facility.
As a result of the operating loss incurred in the 1996 three-month
period, no income taxes were recorded during the quarter. Income taxes in
1995 consisted of state franchise taxes. Future effective income tax rates
may be significantly impacted by the Company's ability to utilize available
net operating loss carryforwards and thus could vary greatly from quarter to
quarter.
SIX MONTHS ENDED JUNE 30, 1996 AND 1995
The net loss for the year-to-date period ended June 30, 1996 was
$1,164,000, or $0.13 per share, compared to a net loss of $173,000, or $0.02
per share, in the corresponding 1995 period.
Revenues in the 1996 six-month period increased nominally to $9,176,000
compared to $8,969,000 in the same period a year ago. On a segment basis,
waste management services revenues increased 3.6% in 1996 from 1995, while
oilfield services revenues were virtually flat during the comparative periods.
Waste management services revenues for the six months ended June 30, 1996
included $1,540,000 from the used oil and filter recycling business lines.
Excluding the impact of these new businesses, 1996 segment revenues declined
18.9% to $5,556,000 from $6,852,000 in 1995. Consistent with the quarterly
trends discussed in the preceding paragraphs, the Company's hydrocarbon/water
separations business was harshly impacted during the first half of 1996 by
the effects of the drought referred to in the quarterly discussion, which
contributed to an overall 18% volume decline during the period from that of
the corresponding prior-year period. Volumes of fluids from petroleum
storage tank remediation and maintenance activities fell by nearly one-third
in the 1996 period from prior year levels, with less consequential declines
in production-driven oily waste volumes. The decline in special project
revenues referred to in the quarterly discussion was also a noteworthy factor
in the six-month revenue shortfall.
Gross profit during the 1996 six-month period totaled $2,006,000, down
from $3,090,000 in the corresponding period of 1995. Gross profit from waste
management services amounted to $1,531,000 during 1996 and included a
$274,000 contribution from the new business lines discussed previously.
Excluding the effects of these businesses, segment gross profit totaled
$1,257,000, compared to $2,311,000 in 1995. Expressed as a percentage of
related revenues, the pro forma gross profit declined to 22.6% in the 1996
period from its 1995 level of 33.7%. The same factors cited in the quarterly
discussion, particularly the significant decline in fluid volumes managed,
adversely affected the profitability of this core business during the period.
Additionally, the ongoing transition of the business mix toward more
concentrated and processing-intensive waste streams further eroded gross
profit margins in this business segment.
10
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Consistent with the quarterly discussion of trends in the oilfield
services business and factors influencing its profitability, gross profit in
this segment fell to $475,000 during the first half of 1996, compared to
$779,000 in the year-ago period. Stated as a percentage of segment revenue,
gross profit amounted to 22.8% in 1996 versus 36.8% in 1995.
SG&A expenses totaled $3,187,000 (34.7% of total revenues) in the six
months ended June 30, 1996 compared to $2,831,000 (31.6% of total revenues)
in the same 1995 period. Excluding the incremental overhead costs associated
with the new business lines, 1996 year-to-date SG&A expenses were virtually
unchanged from the comparative prior-year period.
Other expense, net amounted to $502,000 in the first two quarters of 1995
principally as a result of losses from the Company's Mexican joint venture,
as described previously in the quarter-over-quarter discussion. Consistent
with the quarterly trends, interest income, net fell to $17,000 in the 1996
year-to-date period from $100,000 in the comparable 1995 period due to the
diminished levels of investable funds during the current year. Interest
expense incurred by the Company during the six months ended June 30, 1996
totaling $84,000 was capitalized as part of the plant construction projects
at its Baytown, Texas facility.
CAPITAL RESOURCES AND LIQUIDITY
Losses sustained by the Company during the past three quarters, coupled
with the aggressive capital spending program undertaken in 1995 in
conjunction with the execution of its growth strategy, have severely weakened
the Company's liquidity. At June 30, 1996, the Company had a working capital
deficit of $4,791,000, including $4,435,000 in outstanding bank indebtedness
which is included as a component of current liabilities as discussed in the
following paragraphs.
During the six months ended June 30, 1996, the Company used net cash of
$635,000 in its operating activities. While the net loss for the period of
$1,164,000 was more than offset by depreciation, amortization and other
non-cash expenses, cash consumed to satisfy working capital requirements
during the six-month period amounted to $795,000, including approximately
$314,000 for the funding of expenses accrued in prior periods for the
expected costs of ongoing litigation and claims related to a former
subsidiary, Gibraltar Chemical Resources, Inc. ("Gibraltar").
Through June 30, 1996, year-to-date capital expenditures totaled
$4,173,000, including $3,119,000 related to the construction of two new
process facilities as part of the Company's ongoing expansion efforts. These
include plants for the production of distillate fuels from spent motor oil
and motor fuel feedstocks, and for the recycling of used oil filters and
absorbents. The distillate fuels plant began its mechanical check-out and
start-up process during the 1996 second quarter and testing and evaluation
continued through July, with full-scale operation of the plant commencing in
August. The filter recycling plant became operational in April 1996. The
Company anticipates additional capital spending of approximately $550,000
will be required during the 1996 third and fourth quarters in connection with
the completion of these facilities. Certain other capital expenditures
previously planned for 1996 have been deferred or suspended to conserve cash
resources in light of the Company's strained liquidity position.
Funding for the Company's operating and investing activities during the
six months ended June 30, 1996 came from borrowings under its bank credit
facility. During this period, the Company borrowed the remaining $1,940,000
available under its bank term loan facility to fund certain capital
expenditures, resulting in total outstanding term debt at June 30, 1996 of
$2,435,000. Such amount consists of two notes with an original aggregate
amount of $2,500,000 payable quarterly, including interest, over periods of
five and seven years. In addition, the Company has a revolving credit
facility with the Bank which provides a line of credit of up to $4,000,000
(including letters of credit), subject to a borrowing base as defined, for
working capital and general corporate purposes. At June 30, 1996, the Company
had outstanding borrowings of $2,000,000 and letters of credit of $1,467,000
under the revolving line of credit. Subsequent to June 30, 1996, outstanding
borrowings under the revolving credit facility increased to $2,550,000;
consequently, no additional borrowings are available to the Company under its
existing bank credit facilities.
As discussed in Note 2 of Notes to Consolidated Financial Statements, as
of June 30, 1996, the Company was in violation of one of the restrictive
covenants contained in its credit agreement with Bank One, Texas, N.A.
Consequently, the entire outstanding balance has been classified as a current
liability. If the Company is unable to obtain forebearance from the bank and
the maturity of amounts due under the credit agreement is accelerated, the
Company does not have adequate financial resources to retire the debt. As a
result, the Company's operations may be negatively impacted.
The Company's operating results improved somewhat during the 1996 second
quarter from the previous quarter, and management expects further
improvements over the remainder of the year as a result of the new distillate
fuels production
11
<PAGE>
facility and continued growth and enhanced operating efficiencies of its used
oil collection and filter recycling businesses. However, no assurances can be
given that such improvements will occur or that they will resolve the
Company's liquidity problem in a timely fashion.
The Company has previously announced its intention to acquire
substantially all of the assets and assume certain liabilities of PORI
International, Inc. ("PORI") and is continuing to negotiate the specific
terms of that proposed transaction. Additionally, management, assisted by
the Company's investment bankers and financial consultants, has been pursuing
debt and private placement equity financing of its acquisition/expansion
strategy and such efforts are ongoing; however, to date the necessary
financing has not been obtained. There can be no assurance that such
financing will be secured or that the PORI acquisition will ultimately be
consummated.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Except as set forth below, there have been no material developments in
the legal proceedings described in the Company's Annual Report on Form 10-K
for the year ended December 31, 1995 and its Quarterly Report on Form 10-Q
for the period ended March 31, 1996.
On August 31, 1995 in the State District Court of Jefferson County,
Texas, a suit styled ALLEN V. HARVEY INDUSTRIES, INC., was filed against
Gibraltar, the Company's former subsidiary, and approximately 28 other
defendants by approximately 700 plaintiffs. During discovery, the plaintiffs
determined that the nature of the services provided by Gibraltar at the
subject manufacturing facility could not support the allegations made against
it. Accordingly, pursuant to plaintiffs' instruction, on June 4, 1996, an
order was entered by the Court dismissing Gibraltar from this litigation.
A suit styled ADAMS V. AMERICAN ECOLOGY ENVIRONMENTAL SERVICES
CORPORATION, F/K/A GIBRALTAR CHEMICAL RESOURCES, INC. was filed on August 7,
1996 in the State District Court of Tarrant County, Texas against Gibraltar
by certain individuals. The plaintiffs claim that they have experienced
personal injury and property damage which are alleged to have been caused by
the operation of Gibraltar. The plaintiffs demand recovery of unspecified
monetary damages and injunctive relief based on various legal grounds
including negligence, assault and battery, and intentional infliction of
emotional distress. Discovery has not yet begun in this case. The Company
may be obligated to indemnify the purchaser of Gibraltar for certain losses
resulting from the claims asserted by the plaintiffs. While the Company
disputes the material allegations of the plaintiffs suit and intends to
vigorously defend the litigation, it is unable to determine the likelihood of
an unfavorable outcome at this time.
ITEM 2. CHANGES IN SECURITIES
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
As discussed in Note 2 of Notes to Consolidated Financial Statements and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Capital Resources and Liquidity," the Company was not in
compliance with one of the restrictive covenants required under the terms of
its bank credit agreement at June 30, 1996, placing the Company in technical
default. The Company was not in default on its scheduled payments of
principal and interest with respect to its outstanding bank indebtedness.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On May 21, 1996, the Company held its Annual Meeting of Shareholders
("Annual Meeting") for which the Company solicited proxies on behalf of the
Board of Directors of the Company. At the Annual Meeting, four proposals
were submitted to a vote of the shareholders: (i) election of four members of
the Board of Directors, (ii) ratification of the appointment of KPMG Peat
Marwick LLP as the Company's independent auditor for the year ending December
31, 1996, (iii) approval of the Company's 1996 Non-Employee Director Stock
Option Plan, and (iv) approval of a one-for-two reverse stock split.
The number of votes cast for, against or withheld, as well as the number
of abstentions and broker nonvotes, as to each of the matters voted on at the
Annual Meeting are as follows:
12
<PAGE>
<TABLE>
<CAPTION>
Results of Voting
-----------------
For Against Withheld Abstained Nonvotes
--- ------- -------- --------- --------
<S> <C> <C> <C> <C> <C>
Election of Directors
CLASS A DIRECTOR
Stewart Cureton, Jr. 3,153,491 39,800 -- -- --
CLASS B DIRECTORS
John Mobley 4,623,652 -- -- -- --
T.M. Mobley 4,623,652 -- -- -- --
Michael M. Stark 4,623,652 -- -- -- --
Ratification of Auditor 49,396,811 26,500 -- 6,500 --
Approval of 1996
Non-Employee Director
Stock Option Plan 48,904,846 499,310 -- 15,350 10,305
Approval of One-for-Two
Reverse Stock Split* 49,312,681 47,425 -- 59,400 10,305
</TABLE>
*As previously announced, the Company did not proceed with its proposed one-
for-two reverse stock split.
ITEM 5. OTHER INFORMATION
In the Proxy Statement for its 1996 Annual Meeting of Shareholders, the
Company proposed a one-for-two reverse stock split ("Reverse Split") of the
Company's Class A and Class B Common Stock. However, on May 23, 1996 the
Company announced that it would not proceed with the proposed action. After
considering the Company's circumstances and the potential consequences of the
Reverse Split, the board of directors believed that the interests of the
shareholders would be best served by not proceeding with the proposed action
as authorized at the annual shareholders' meeting. As a result, the Company's
Class A Common Stock is no longer traded on the NASDAQ National Market
System, but is now quoted on the OTC Bulletin Board.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
EXHIBITS
Exhibit
Number Description
- ------ -----------
27 Financial Data Schedule (submitted only in electronic format)
REPORTS ON FORM 8-K
None.
13
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MOBLEY ENVIRONMENTAL SERVICES, INC.
(Registrant)
/s/ Michael M. Stark
--------------------------------------
Michael M. Stark
President and Chief Executive Officer
/s/ W. Christopher Chisholm
--------------------------------------
W. Christopher Chisholm
Vice President and Chief Financial Officer
(Principal Accounting Officer)
Date: August 19, 1996
14
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S UNAUDITED FINANCIAL STATEMENTS FOR THE SIX MONTH PERIOD ENDED
JUNE 30, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> JUN-30-1996
<CASH> 516
<SECURITIES> 0
<RECEIVABLES> 3,412
<ALLOWANCES> 223
<INVENTORY> 210
<CURRENT-ASSETS> 4,585
<PP&E> 29,352
<DEPRECIATION> 13,615
<TOTAL-ASSETS> 21,711
<CURRENT-LIABILITIES> 9,376
<BONDS> 0
0
0
<COMMON> 90
<OTHER-SE> 11,399
<TOTAL-LIABILITY-AND-EQUITY> 21,711
<SALES> 0
<TOTAL-REVENUES> 9,176
<CGS> 0
<TOTAL-COSTS> 7,170
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (1,164)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,164)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,164)
<EPS-PRIMARY> (0.13)
<EPS-DILUTED> (0.13)
</TABLE>
