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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 September 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: (281) 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
December 15, 1996 was 4,155,097 shares of Class A Common Stock, $.01 par value
and 4,680,196 shares of Class B Common Stock, $.01 par value.
THIS ENTIRE FORM 10-Q IS SUBJECT TO FORM 12B-25 FILED NOVEMBER 14, 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 - September 30,
1996 and December 31, 1995 3
- Consolidated Statements of Operations - Three
Months and Nine Months Ended September 30, 1996
and 1995 4
- Consolidated Statement of Stockholders' Equity -
Nine Months Ended September 30, 1996 5
- Consolidated Statements of Cash Flows - Nine
Months Ended September 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 12
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 15
Item 2. Changes in Securities 15
Item 3. Defaults Upon Senior Securities 15
Item 4. Submission of Matters to
a Vote of Security Holders 15
Item 5. Other Information 15
Item 6. Exhibits and Reports on Form 8-K 16
Signatures 17
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>
September 30, December 31,
ASSETS 1996 1995
------------ -----------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 750 $ 1,476
Trade receivables, less allowance for doubtful accounts of
$257 at December 31, 1995 190 2,836
Prepaid expenses and other current assets 440 582
Net assets available for sale 9,140 --
-------- --------
Total current assets 10,520 4,894
Property, plant and equipment, net 256 12,837
Excess of purchase price over fair value of net assets acquired, net -- 1,122
Other assets, net 274 244
-------- --------
$ 11,050 $ 19,097
-------- --------
-------- --------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 4,906 $ 70
Accounts payable 794 1,306
Accrued expenses 2,804 3,613
-------- --------
Total current liabilities 8,504 4,989
Long-term debt, excluding current portion -- 490
Other long-term liabilities -- 166
Deferred income taxes 148 846
-------- --------
Total liabilities 8,652 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, 4,155,097 and 4,085,343
shares issued and outstanding at September 30, 1996 and
December 31, 1995, respectively 42 41
Class B; 10,000,000 shares authorized, 4,764,903 shares issued
and 4,680,196 shares outstanding at September 30, 1996;
4,834,657 shares issued and 4,749,950 shares outstanding
at December 31, 1995 48 49
Additional paid-in capital 25,159 25,159
Accumulated deficit (22,531) (12,251)
Deferred compensation costs under restricted stock agreements (312) (384)
Treasury stock; 84,707 shares of Class B common stock, at cost (8) (8)
-------- --------
Total stockholders' equity 2,398 12,606
Commitments and contingencies
-------- --------
$ 11,050 $ 19,097
-------- --------
-------- --------
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE>
MOBLEY ENVIRONMENTAL SERVICES, INC.
Consolidated Statements of Operations
(dollars in thousands, except per share amounts)
(unaudited)
<TABLE>
Three Months Ended September 30, Nine Months Ended September 30,
-------------------------------- -------------------------------
1996 1995 1996 1995
----------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Revenues $ -- -- -- --
Cost of revenues -- -- -- --
----------- ---------- ---------- ----------
Gross profit -- -- -- --
General and administrative
expenses 75 75 225 225
----------- ---------- ---------- ----------
Operating loss (75) (75) (225) (225)
Other income (expense) -- -- -- --
----------- ---------- ---------- ----------
Loss from continuing operations
before income taxes (75) (75) (225) (225)
Income taxes -- -- -- --
----------- ---------- ---------- ----------
Loss from continuing operations (75) (75) (225) (225)
----------- ---------- ---------- ----------
Discontinued operations:
Provision for loss on disposal of
waste management services
segment, net of income tax
benefit of $698 in the three-
month and nine-month periods
ended September 30, 1996 (7,621) -- (7,621) --
Provision for losses during phase-out
period of waste management
services segment (331) -- (331) --
Net income (loss) from operations of
waste management services seg-
ment, net of income tax expense
of $14 and $19 in the three-month
and nine-month periods ended
September 30, 1995 (960) 244 (1,768) 195
Net income (loss) from operations
of oilfield services segment, net
of income tax expense of $4
and $29 in the three-month
and nine-month periods ended
September 30, 1995 (130) 64 (335) 90
----------- ---------- ---------- ----------
Income (loss) from
discontinued operations (9,042) 308 (10,055) 285
----------- ---------- ---------- ----------
Net income (loss) $ (9,117) 233 (10,280) 60
----------- ---------- ---------- ----------
----------- ---------- ---------- ----------
Net income (loss) per share:
Continuing operations $ (0.01) (0.01) (0.02) (0.03)
Discontinued operations (1.02) 0.04 (1.14) 0.04
----------- ---------- ---------- ----------
$ (1.03) 0.03 (1.16) 0.01
----------- ---------- ---------- ----------
----------- ---------- ---------- ----------
Weighted average number of
common shares outstanding 8,835,293 8,726,597 8,835,293 8,224,084
----------- ---------- ---------- ----------
----------- ---------- ---------- ----------
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE>
MOBLEY ENVIRONMENTAL SERVICES, INC.
Consolidated Statement of Stockholders' Equity
Nine Months Ended September 30, 1996
(dollars in thousands)
(unaudited)
Preferred Stock - none issued $ --
---------
Class A Common Stock:
Balance at December 31, 1995 41
Conversion of Class A Common Stock (69,754 shares) 1
---------
Balance at September 30, 1996 42
---------
Class B Common Stock:
Balance at December 31, 1995 49
Conversion into Class B Common Stock (69,754 shares) (1)
---------
Balance at September 30, 1996 48
---------
Additional Paid-In Capital - Balance at
December 31, 1995 and September 30, 1996 25,159
---------
Accumulated Deficit:
Balance at December 31, 1995 (12,251)
Net loss (10,280)
---------
Balance at September 30, 1996 (22,531)
---------
Deferred Compensation Costs Under Restricted Stock Agreements:
Balance at December 31, 1995 (384)
Amortization of unearned compensation 72
---------
Balance at September 30, 1996 (312)
---------
Treasury Stock - Balance at December 31, 1995 and September 30, 1996 (8)
---------
Total stockholders' equity at September 30, 1996 $ 2,398
---------
---------
See accompanying notes to consolidated financial statements.
5
<PAGE>
MOBLEY ENVIRONMENTAL SERVICES, INC.
Consolidated Statements of Cash Flows
(dollars in thousands)
(unaudited)
<TABLE>
<CAPTION>
Nine Months Ended September 30,
-------------------------------
1996 1995
------------ ----------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (10,280) $ 60
Adjustments to reconcile net income (loss) to net cash
used by operating activities:
Provision for loss on disposal and losses during phase-out period
of waste management services segment 8,650 --
Provision for restructuring charges 650 --
Depreciation and amortization 2,016 1,720
Deferred income tax benefit (698) --
Equity in loss and loss on sale of joint venture -- 323
Deferred compensation costs under restricted stock agreements 72 95
Gain on disposal of assets -- (41)
Changes in certain operating assets and liabilities:
Trade receivables (400) (141)
Prepaid expenses and other current assets (101) 333
Other assets (30) 33
Accounts payable 577 (1,972)
Accrued expenses (736) (944)
------------ ----------
Net cash used by operating activities,
including discontinued operations (280) (534)
------------ ----------
Cash flows from investing activities:
Capital expenditures (4,792) (2,329)
Asset acquisition -- (786)
Proceeds from sale of joint venture investment and other assets -- 1,378
Other investing activities, net -- (75)
------------ ----------
Net cash used by investing activities,
including discontinued operations (4,792) (1,812)
------------ ----------
Cash flows from financing activities:
Net borrowings under revolving line of credit 2,550 --
Proceeds from term debt borrowings 1,940 --
Principal payments on long-term debt (144) (1,764)
------------ ----------
Net cash provided (used) by financing activities,
including discontinued operations 4,346 (1,764)
------------ ----------
Net decrease in cash and cash equivalents (726) (4,110)
Cash and cash equivalents at beginning of period 1,476 7,471
------------ ----------
Cash and cash equivalents at end of period $ 750 $ 3,361
------------ ----------
------------ ----------
</TABLE>
See accompanying notes to consolidated financial statements.
6
<PAGE>
MOBLEY ENVIRONMENTAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 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 September 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) PENDING ASSET SALES AND DISCONTINUED OPERATIONS
Due to the Company's inability to secure, on acceptable terms, the capital
resources necessary to continue the implementation of its strategic plans to
expand its hydrocarbon recycling business, and after considering the attendant
risks of continuing to pursue such strategy in light of its severely strained
liquidity, in September 1996, the Company's Board of Directors determined that
the divestiture of its operations was in the best interests of the Company and
its shareholders. Subsequently, on October 30, 1996 and November 1, 1996, the
Company executed letters of intent to sell substantially all of its operating
assets in two separate transactions. The proposed transactions and their impact
on the Company's consolidated financial statements are described in the
following paragraphs.
SALE OF WASTE MANAGEMENT SERVICES ASSETS & DISCONTINUANCE OF BUSINESS
SEGMENT. On October 30, 1996, the Company signed a letter of intent with United
States Filter Corporation ("USF") to sell substantially all of the assets
related to its waste management services activities. Under the terms of the
letter of intent, the Company will receive $8.0 million in shares of USF common
stock (registered with the Securities and Exchange Commission) in exchange for
such assets, and can earn up to an additional $4.0 million in USF common stock
based on the performance of the business during the two years following its
sale, currently anticipated to be completed by March 31, 1997. Additionally,
USF will assume certain liabilities (accounts payable and accrued expenses) as
part of the transaction. The letter of intent further specifies that the sales
price of the assets will be adjusted upward or downward based on the level of
net assets, as defined, at the time of closing. Completion of the transaction
is subject to final negotiation and signing of a definitive acquisition
agreement, which is expected to contain standard conditions to closing,
including board and shareholder approval and due diligence, and the distribution
of an Information Statement describing the proposed transaction to the Company's
shareholders. The net assets which are the subject of the letter of intent are
shown in the accompanying September 30, 1996 consolidated balance sheet as "net
assets available for sale" at their estimated net realizable value as determined
by the aforementioned terms, less anticipated transaction costs of approximately
$450,000. Such assets had a net book value at September 30, 1996 (net of
assumed liabilities) of approximately $14,965,000. As a result of the pending
sale, the Company recorded a charge of $7,621,000 (net of a deferred income tax
benefit of $698,000) during the three-month and nine-month periods ended
September 30, 1996, representing the estimated loss on the disposal of the
business segment, including certain required capital expenditures prior to the
sale amounting to approximately $900,000. In determining the estimated loss on
disposal, only the $8.0 million guaranteed portion of the sales price was
considered (i.e., that portion which is contingent on the future performance of
the business was ignored). The Company estimates that it will incur additional
operating losses in this business segment, after the allocation of certain
overhead and interest costs, amounting to approximately $331,000 during the
phase-out period from October 1, 1996 to March 31, 1997. A provision for such
estimated net losses has been made in the accompanying consolidated
statements of operations for the three-month and nine-month periods ended
September 30, 1996.
7
<PAGE>
SALE OF OILFIELD SERVICES ASSETS AND DISCONTINUANCE OF BUSINESS SEGMENT.
On November 1, 1996, the Company signed a letter of intent with Dawson
Production Services, Inc. ("Dawson") to sell substantially all of the assets
related to its oilfield services business. Under the terms of the letter of
intent, the Company will receive $5,000,000 and a subordinated note in the
amount of $500,000, due two years after the closing date, in exchange for such
assets. Completion of the sale, expected in January 1997, is subject to final
negotiation and signing of a definitive acquisition agreement, which is expected
to contain standard conditions to closing, including board approval and due
diligence. The assets which are the subject of the letter of intent have a net
book value, based on historical cost adjusted for accumulated depreciation and
amortization, of approximately $2,494,000, and are shown in the accompanying
September 30, 1996 consolidated balance sheet as "net assets available for sale"
at that carrying amount. The results of operations associated with the
discontinued segment through the anticipated disposal date, after allocation of
certain overhead and interest costs, are not expected to result in a loss and
consequently, no additional losses have been reflected in the accompanying
statements of operations for the three months and nine months ended September
30, 1996. The Company expects to record a gain upon completion of the sale,
after estimated transaction costs of $250,000, amounting to approximately
$2,750,000.
In anticipation of the planned divestitures and after consideration of the
Company's ongoing operational needs, the Company recorded certain restructuring
charges during the 1996 third quarter. Such charges, totaling $650,000,
included employee severance obligations, costs associated with the relocation
and recruitment of personnel, and other related expenses.
The Company's two business segments, waste management services and oilfield
services, have been accounted for as discontinued operations, and accordingly,
their operations have been segregated in the accompanying consolidated
statements of operations. The revenues, operating costs and expenses, other
income and expense, and income taxes for the three-month and nine-month periods
ended September 30, 1996 and 1995, have been reclassified for amounts associated
with the discontinued segments. General and administrative expenses allocated
to continuing operations have been estimated based upon anticipated ongoing
costs following completion of the proposed asset divestitures. In light of the
pending asset divestitures and related business reorganization, management has
elected to allocate selling, general, and administrative expenses, other income
and expense and restructuring expenses between the discontinued business
segments based on the ratio of segment revenues to total revenues. Such
allocation method differs from that used in presenting certain information about
the Company's business segments in its annual report on Form 10-K for the years
ended December 31, 1995, 1994 and 1993. Income taxes have been allocated based
on the effective tax rate.
Operating results and the estimated loss on disposal of the Company's waste
management services segment for the three-month and nine-month periods ended
September 30, 1996 and 1995 are as follows (in thousands of dollars):
8
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<TABLE>
<CAPTION>
Three Months Nine Months
Ended September 30, Ended September 30,
------------------- -------------------
1996 1995 1996 1995
---------- -------- --------- ---------
<S> <C> <C> <C> <C>
Revenues $ 4,619 $ 3,723 $ 11,716 $ 10,575
Cost of revenues 3,734 2,476 9,300 7,017
---------- -------- --------- ---------
Gross profit 885 1,247 2,416 3,558
Selling, general, and administrative
expenses, including allocated
amounts 1,247 1,032 3,602 3,080
Restructuring expenses, including
allocated amounts 510 -- 510 --
---------- -------- --------- ---------
Operating income (loss) (872) 215 (1,696) 478
Other income (expense), including
allocated amounts (88) 43 (72) (264)
---------- -------- --------- ---------
Income (loss) before
income taxes (960) 258 (1,768) 214
Income tax expense (benefit) -- 14 -- 19
---------- -------- --------- ---------
Net income (loss) from operations
of waste management services
segment $ (960) $ 244 $ (1,768) $ 195
---------- -------- --------- ---------
---------- -------- --------- ---------
Provision for losses from operations
of waste management services
segment during phase-out period,
recognized in the third quarter
of 1996 $ (331) $ -- $ (331) $ --
---------- -------- --------- ---------
---------- -------- --------- ---------
Provision for loss on disposal of waste
management services segment,
recognized in the third quarter of
1996:
Asset valuation adjustment $ (7,268) -- (7,268) --
Write-off of excess of purchase
price over fair value of net
assets acquired (1,051) -- (1,051) --
Deferred income tax benefit 698 -- 698 --
---------- -------- --------- ---------
$ (7,621) -- $ (7,621) --
---------- -------- --------- ---------
---------- -------- --------- ---------
</TABLE>
9
<PAGE>
Operating results of the Company's oilfield services segment for the three-
month and nine-month periods ended September 30, 1996 and 1995 are as follows
(in thousands of dollars):
Three Months Nine Months
Ended September 30, Ended September 30,
------------------- -------------------
1996 1995 1996 1995
------ ------ ------ ------
Revenues $1,132 $1,181 $3,212 $3,298
Cost of revenues 796 798 2,401 2,136
------ ------ ------ ------
Gross profit 336 383 811 1,162
Selling, general, and administrative
expenses, including allocated
amounts 305 328 987 961
Restructuring expenses, including
allocated amounts 140 -- 140 --
------ ------ ------ ------
Operating income (loss) (109) 55 (316) 201
Other income (expense), including
allocated amounts (21) 13 (19) (82)
------ ------ ------ ------
Income (loss) before
income taxes (130) 68 (335) 119
Income tax expense (benefit) -- 4 -- 29
------ ------ ------ ------
Net income (loss) from operations
of oilfield services segment $ (130) $ 64 $ (335) $ 90
------ ------ ------ ------
------ ------ ------ ------
At September 30, 1996, the net assets of the Company's waste management
services segment are recorded at their estimated net realizable value and the
net assets of its oilfield services segment are recorded at their net book
value, and are included in the accompanying consolidated balance sheet as "net
assets available for sale". Such assets are summarized as follows (in thousands
of dollars):
Waste
Management Oilfield
Services Services Total
-------- --------- ------
Trade receivables 2,546 500 3,046
Other current assets 220 23 243
Property, plant and equipment, net 13,427 1,971 15,398
Excess of purchase price over fair
value of net assets acquired, net 1,051 -- 1,051
Other assets, net 31 -- 31
Provision for loss on disposal of waste
management services segment (8,319) -- (8,319)
Current liabilities (2,310) -- (2,310)
------ ------ ------
Net assets available for sale $6,646 $2,494 $9,140
------ ------ ------
------ ------ ------
10
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(3) NOTES PAYABLE
The Company has a credit agreement (the "Credit Agreement") dated
June 2, 1995 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 September 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 September 30,
1996 was $2,356,000.
At September 30, 1996, $2,550,000 was outstanding under the revolving
credit agreement and $1,448,000 in letters of credit had been issued under
such line of credit. Such amount has a maturity date of June 2, 1997 and
bears interest, payable quarterly, at the Bank's prime rate (8.25% at
September 30, 1996).
The Credit Agreement contains restrictive covenants which include the
maintenance of minimum tangible net worth, as defined, and certain financial
ratios. The Company has not been in compliance with certain covenant
requirements since June 30, 1996, placing it in technical default. Consequently,
the Company has classified the entire outstanding balance as a current
liability.
(4) COMMITMENTS AND CONTINGENCIES
LETTERS OF CREDIT. At September 30, 1996, a letter of credit in the
amount of $1,281,000 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.
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 December 23,
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. Additionally, one
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 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
11
<PAGE>
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. The Company has recorded an accrual for
its estimated exposure in connection with this matter, the amount of which is
not material to the consolidated financial statements.
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, 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's business involves providing 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. Additionally, through its oilfield services
segment, the Company provides services for managing liquids used or produced
during the lifecycle of oil and gas wells.
The following discussion is designed to assist in the understanding of the
Company's financial condition as of September 30, 1996, as well as the Company's
operating results for the three-month and nine-month periods ended September 30,
1996. Certain material events affecting the business of the Company are
discussed in Item 1 of this report. The Notes to Consolidated Financial
Statements contained detailed information that should be read in conjunction
with this discussion.
PENDING ASSET SALES, DISCONTINUED OPERATIONS AND RESTRUCTURING CHARGES
Due to the Company's inability to secure, on acceptable terms, the capital
resources necessary to continue the implementation of its strategic plans to
expand its hydrocarbon recycling business, and after considering the attendant
risks of continuing to pursue such strategy in light of its severely strained
liquidity, in September 1996, the Company's Board of Directors determined that
the divestiture of its operations was in the best interests of the Company and
its shareholders. Subsequently, on October 30, 1996 and November 1, 1996, the
Company executed letters of intent to sell substantially all of its operating
assets in two separate transactions. Because of the pending sales, results of
operations of the Company's two business segments have been accounted for as
discontinued operations in the accompanying consolidated financial statements.
The proposed transactions and their impact on the Company's consolidated
financial statements are described in the following paragraphs.
SALE OF WASTE MANAGEMENT SERVICES ASSETS & DISCONTINUANCE OF BUSINESS
SEGMENT. On October 30, 1996, the Company signed a letter of intent with United
States Filter Corporation ("USF") to sell substantially all of the assets
related to its waste management services activities. Under the terms of the
letter of intent, the Company will receive $8.0 million in shares of USF common
stock (registered with the Securities and Exchange Commission) in exchange for
such assets, and can earn up to an additional $4.0 million in USF common stock
based on the performance of the business during the two years following its
sale, currently anticipated to be completed by March 31, 1997. Additionally,
USF will assume certain liabilities (accounts payable and accrued expenses) as
part of the transaction. The letter of intent further specifies that the sales
price of the assets will be adjusted upward or downward based on the level of
net assets, as defined, at the time of
12
<PAGE>
closing. Completion of the transaction is subject to final negotiation and
signing of a definitive acquisition agreement, which is expected to contain
standard conditions to closing, including board and shareholder approval and
due diligence, and the distribution of an Information Statement describing
the proposed transaction to the Company's shareholders. The net assets which
are the subject of the letter of intent are shown in the accompanying
September 30, 1996 consolidated balance sheet as "net assets available for
sale" at their estimated net realizable value as determined by the
aforementioned terms, less anticipated transaction costs of approximately
$450,000. Such assets had a net book value at September 30, 1996 (net of
assumed liabilities) of approximately $14,965,000. As a result of the
pending sale, the Company recorded a charge of $7,621,000 (net of a deferred
income tax benefit of $698,000) during the three-month and nine-month periods
ended September 30, 1996, representing the estimated loss on the disposal of
the business segment, including certain required capital expenditures prior
to the sale. In determining the estimated loss on disposal, only the $8.0
million guaranteed portion of the sales price was considered (i.e., that
portion which is contingent on the future performance of the business was
ignored). The Company estimates that it will incur additional operating
losses in this business segment, after the allocation of certain overhead and
interest costs, amounting to approximately $331,000 during the phase-out
period from October 1, 1996 to March 31, 1997. A provision for such
estimated net losses has been made in the accompanying consolidated
statements of operations for the three-month and nine-month periods ended
September 30, 1996.
SALE OF OILFIELD SERVICES ASSETS AND DISCONTINUANCE OF BUSINESS SEGMENT.
On November 1, 1996, the Company signed a letter of intent with Dawson
Production Services, Inc. ("Dawson") to sell substantially all of the assets
related to its oilfield services business. Under the terms of the letter of
intent, the Company will receive $5,000,000 and a subordinated note in the
amount of $500,000, due two years after the closing date, in exchange for
such assets. Completion of the sale, expected in January 1997, is subject to
final negotiation and signing of a definitive acquisition agreement, which is
expected to contain standard conditions to closing, including board approval
and due diligence. The assets which are the subject of the letter of intent
have a net book value, based on historical cost adjusted for accumulated
depreciation and amortization, of approximately $2,494,000, and are shown in
the accompanying September 30, 1996 consolidated balance sheet as "net assets
available for sale" at that carrying amount. The results of operations
associated with the discontinued segment through the anticipated disposal
date, after allocation of certain overhead and interest costs, are not
expected to be material and consequently, such amounts have not been
reflected in the accompanying statements of operations for the three months
and nine months ended September 30, 1996. The Company expects to record a
gain upon completion of the sale, after estimated transaction costs of
$250,000, amounting to approximately $2,750,000.
In light of the planned divestitures and after consideration of its ongoing
operational needs, the Company recorded certain restructuring charges during the
1996 third quarter. Such charges, totaling $650,000, included employee
severance obligations, costs associated with the relocation and recruitment of
personnel, and other related expenses.
The net effect of the proposed transactions and related charges described
in the preceding paragraphs on the results of operations for the three-month
and nine-month periods ended September 30, 1996 approximated $8.6 million,
and is summarized as follows (in thousands of dollars):
Provision for loss on disposal of waste management
services segment $ 8,319
Provision for losses during phase-out period of
waste management services segment 331
Deferred income tax benefit (698)
---------
7,952
Restructuring charges 650
---------
Total $ 8,602
---------
---------
13
<PAGE>
RESULTS OF OPERATIONS
Revenues for the three months ended September 30, 1996 amounted to
$5,751,000, compared to $4,904,000 in the comparable period of 1995, an increase
of 17.3%. On a segment basis, revenues from waste management services increased
24.1% during the 1996 three-month period, primarily the result of the continued
growth of its used oil and filter recycling business lines, which commenced
operations during the 1995 third quarter. Revenues in the oilfield services
segment of the Company's business declined nominally in the 1996 third quarter
compared to the same period a year ago. During the nine months ended September
30, 1996, total revenues amounted to $14,928,000, compared to $13,873,000 in the
corresponding 1995 period, an increase of 7.6%. During this same period, waste
management services revenues increased 10.8%, while revenues from oilfield
services remained relatively flat. The net increase in waste management
services revenue in the year-to-date period was largely impacted by the
aforementioned start-up of two new business lines, partly offset by a decline in
revenues from hydrocarbon/water separations services caused by a severe regional
drought which greatly diminished fluid volumes during the first half of 1996.
Gross profit for the quarter ended September 30, 1996 amounted to
$1,221,000 compared to $1,630,000 in the same 1995 period. The gross profit
margin in the waste management services segment amounted to roughly 19.2% in
the 1996 third quarter, compared to 33.5% in 1995. Similarly, on a
year-to-date basis, gross profit for the 1996 nine-month period totaled
$3,227,000, versus $4,720,000 in the corresponding period of 1995. Waste
management services gross profit as a percentage of segment revenue fell to
20.6% from 33.6% in the year-ago period. The marked decline in margin was
primarily attributable to unusually high costs associated with various
operational issues surrounding the recently constructed used oil and filter
recycling facilities and, to a lesser extent, reduced profitability in the
hydrocarbon/water separations business as a result of the volume shortfall
referred to in the preceding paragraph. During the quarter ended September
30, 1996, the gross profit margin from oilfield services activities fell
slightly from that of the 1995 quarter, while on a year-to-date basis, such
decline was more pronounced. Gross profit margins in this segment were
negatively impacted by an unfavorable business mix and increased operating
costs during the first half of 1996.
Comparatively higher selling, general and administrative expenses during
the 1996 quarter and year-to-date periods were primarily the result of
incremental overhead costs associated with the start-up and development of
the aforementioned new business lines.
In connection with the pending sales discussed previously, the Company
recorded a deferred income tax benefit of $698,000 during the three-month and
nine-month periods ended September 30, 1996, representing a reduction in
deferred income tax liabilities. No other income tax expense or benefit was
recognized during these periods.
CAPITAL RESOURCES AND LIQUIDITY
The substantial losses sustained by the Company, coupled with the
significant capital requirements necessary to support its expansion
strategy, have severely weakened the Company's liquidity, substantially
consuming its cash resources and exhausting its borrowing capacity. Capital
spending during the 1996 nine-month period amounted to approximately $4.8
million, primarily relating to the construction of two new processing facilities
as part of the continued development of the Company's used oil and filter
recycling business lines. Such expenditures were funded largely through bank
borrowings. At September 30, 1996, outstanding bank indebtedness totaled
$4.9 million and no additional borrowings were available under the Company's
existing bank credit facilities. The Company has been in violation of certain
covenant requirements of its bank credit agreement since June 30, 1996,
placing it in technical default. The Company plans to retire the outstanding
indebtedness with the proceeds from the asset sales discussed previously.
Presently, it is contemplated that all or substantially all of the $8.0
million in USF common stock received at the time of the closing of the sale of
its waste management services assets will be immediately sold. Cash from the
USF stock sale, along with the proceeds from the sale of the oilfield services
assets, are expected to result in net proceeds totaling approximately $7.4
million after repayment of the outstanding bank indebtedness and transaction
expenses. Such net proceeds will be used to fund the current liabilities
retained by the Company following the sales, with the remaining surplus cash
expected to initially be deployed in short-term investments. The Company
anticipates that ongoing general and administrative expenses will be reduced to
approximately $300,000 annually upon completion of the sale, and expects
earnings from investments to largely offset such costs. The amounts described
herein are approximate and based on the Company's current estimates.
Furthermore, there can be no assurance that such amounts will actually be
realized.
14
<PAGE>
In addition to the aforementioned proceeds, under the terms of the
letters of intent for the proposed asset sales, the Company may receive up to
$4.0 million in USF common stock during the two-year period following the
sale based on the performance of the hydrocarbon recycling business and will
receive a $500,000 subordinated note receivable from Dawson related to the
sale of the oilfield services assets with a maturity two years following the
closing date.
Because of its indemnification obligations related to the sale of
Gibraltar, as well as potential indemnity obligations with respect to the
asset sales to USF and Dawson, and in light of the ongoing litigation
(described in the Company's Annual Report on Form 10-K for the year ended
December 31, 1995 and subsequent 1996 Quarterly Reports on Form 10-Q), the
Company, based on consultation with legal counsel, does not currently
anticipate making a distribution to stockholders in the foreseeable future.
While the Company may investigate new business opportunities that arise, the
nature and probability of any investments which might result from such
investigations cannot be determined.
In the event that either or both of the sales transactions described
previously are not consummated, the Company's Board of Directors may seek to
sell some or all of the Company's assets to another purchaser or purchasers.
The Company's inability to consummate the contemplated sales as planned in a
timely manner could have a material adverse effect on the Company's
consolidated financial position and liquidity.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Except as set forth in the following paragraph, 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 Reports on Form 10-Q for the periods ended March 31 and June 30,
1996.
In a suit filed against the Company in August, 1992 styled MONCRIEF V.
GIBRALTAR CHEMICAL RESOURCES, INC. in State District Court in Smith County,
Texas, plaintiffs owning property in the vicinity of Gibraltar's hazardous
waste facility in Winona, Texas asserted that the value of their land had
been diminished as a result of the alleged emission of objectionable odors
from Gibraltar's facility. The Company defended the claim in a jury trial
which resulted in inconsequential damages being awarded to the plaintiffs on
November 7, 1996. However, the verdict is subject to appeal in accordance
with applicable rules of civil procedure.
ITEM 2. CHANGES IN SECURITIES
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
As discussed in Note 3 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 has not been in
compliance with certain restrictive covenants required under the terms of its
bank credit agreement since June 30, 1996, placing it in technical default.
The Company is 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
None.
ITEM 5. OTHER INFORMATION
None.
15
<PAGE>
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
A Form 8-K Current Report dated November 13, 1996 was filed by the Company
to announce the signing of letters of intent for the sale of substantially all
of its operating assets in two separate proposed transactions.
16
<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: January 6, 1997
17
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S UNAUDITED FINANCIAL STATEMENTS FOR THE THREE-MONTH AND NINE-MONTH
PERIODS ENDED SEPTEMBER 30, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> SEP-30-1996
<CASH> 750
<SECURITIES> 0
<RECEIVABLES> 190
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 10,520<F1>
<PP&E> 849
<DEPRECIATION> 593
<TOTAL-ASSETS> 11,050
<CURRENT-LIABILITIES> 8,504<F2>
<BONDS> 0
0
0
<COMMON> 90
<OTHER-SE> 2,308
<TOTAL-LIABILITY-AND-EQUITY> 11,050
<SALES> 0
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (225)
<INCOME-TAX> 0
<INCOME-CONTINUING> (225)
<DISCONTINUED> (10,055)<F3>
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (10,280)
<EPS-PRIMARY> (1.16)
<EPS-DILUTED> (1.16)
<FN>
<F1>Includes net assets available for sale of $9,140.
<F2>Includes current portion of long-term debt of $4,906.
<F3>On October 30, 1996, the Company signed a letter of intent to sell
substantially all of the assets related to its waste management services
activities. On November 1, 1996, the Company signed a letter of intent to sell
substantially all of the assets related to its oilfield services business. The
Company's two business segments have been accounted for as discontinued
operations, and accordingly, their operations have been segregated in the
accompanying consolidated statements of operations.
</FN>
</TABLE>
