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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 March 31, 1997
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
----------
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.)
STILLHOUSE CANYON OFFICE PARK,
BLDG. ONE
4807 SPICEWOOD SPRINGS ROAD,
SUITE 1245
AUSTIN, TEXAS 78759
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (512) 345-5591
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 / / No /X/.
The number of shares outstanding of the registrant's common stock, as of
June 1, 1997 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 FORM 10-Q IS SUBJECT TO FORM 12b-25 FILED MAY 16, 1997.
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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 - March 31, 1997
and December 31, 1996 3
- Consolidated Statements of Operations - Three
Months Ended March 31, 1997 and 1996 4
- Consolidated Statement of Stockholders' Equity -
Three Months Ended March 31, 1997 5
- Consolidated Statements of Cash Flows - Three 6
Months Ended March 31, 1997 and 1996
- Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 13
Part II - OTHER INFORMATION
- ---------------------------
Item 1. Legal Proceedings 15
Item 2. Changes in Securities 16
Item 3. Defaults Upon Senior Securities 16
Item 4. Submission of Matters to
a Vote of Security Holders 16
Item 5. Other Information 16
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)
March 31, December 31,
Assets 1997 1996
------ --------- -------------
Current assets:
Cash and cash equivalents $ 896 $ 385
Trade receivables 241 161
Prepaid expenses and other current assets 194 207
Net assets of discontinued operations--current 8,241 1,144
-------- --------
Total current assets 9,572 1,897
Property, plant and equipment, net 270 230
Net assets of discontinued operations--non-current -- 9,659
Note receivable 500 --
Other assets, net 230 197
-------- --------
$ 10,572 $ 11,983
-------- --------
-------- --------
Liabilities and Stockholders' Equity
------------------------------------
Current liabilities:
Notes payable and current portion of long-term
debt $ 1,714 $ 5,014
Accounts payable 672 633
Accrued expenses 2,772 3,721
-------- --------
Total current liabilities 5,158 9,368
Deferred income taxes 148 148
-------- --------
Total liabilities 5,306 9,516
-------- --------
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 March 31, 1997 and December 31, 1996,
respectively 42 42
Class B; 10,000,000 shares authorized, 4,764,903
shares issued and 4,680,196 shares outstanding
at March 31, 1997; 4,834,657 shares issued and
4,749,950 shares outstanding at December 31,
1996 48 48
Additional paid-in capital 25,159 25,159
Accumulated deficit (19,711) (22,486)
Deferred compensation costs under restricted stock
agreements (264) (288)
Treasury stock; 84,707 shares of Class B common stock,
at cost (8) (8)
-------- --------
Total stockholders' equity 5,266 2,467
Commitments and contingencies
-------- --------
$ 10,572 $ 11,983
-------- --------
-------- --------
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)
Three Months Ended March 31,
----------------------------
1997 1996
------ ------
Revenues -- --
Cost of revenues -- --
--------- ---------
Gross profit -- --
General and administrative expenses 158 139
--------- ---------
Operating loss (158) (139)
Other income (expense) (10) 18
--------- ---------
Loss from continuing operations before
income taxes (168) (121)
Income taxes -- --
--------- ---------
Loss from continuing operations (168) (121)
--------- ---------
Discontinued operations:
Gain on sale of oilfield services segment 2,802 --
Net income (loss) from operations of waste
management services segment 141 (234)
Net loss from operations of oilfield
services segment -- (317)
--------- ---------
Income (loss) from discontinued operations 2,943 (551)
--------- ---------
Net income (loss) $ 2,775 (672)
--------- ---------
--------- ---------
Net income (loss) per share:
Continuing operations (0.02) (0.02)
Discontinued operations 0.33 (0.06)
--------- ---------
$ 0.31 (0.08)
--------- ---------
--------- ---------
Weighted average number of
common shares outstanding 8,835,293 8,835,293
--------- ---------
--------- ---------
See accompanying notes to consolidated financial statements.
4
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MOBLEY ENVIRONMENTAL SERVICES, INC.
Consolidated Statement of Stockholders' Equity
Three Months Ended March 31, 1997
(dollars in thousands)
(unaudited)
Preferred Stock - none issued $ --
---------
Class A Common Stock:
Balance at December 31, 1996 and March 31, 1997 42
---------
Class B Common Stock:
Balance at December 31, 1996 and March 31, 1997 48
---------
Additional Paid-In Capital:
Balance at December 31, 1996 and March 31, 1997 25,159
---------
Accumulated Deficit:
Balance at December 31, 1996 (22,486)
Net income 2,775
---------
Balance at March 31, 1997 (19,711)
---------
Deferred Compensation Costs Under Restricted Stock Agreements:
Balance at December 31, 1996 (288)
Amortization of unearned compensation 24
---------
Balance at March 31, 1997 (264)
---------
Treasury Stock:
Balance at December 31, 1996 and March 31, 1997 (8)
---------
Total stockholders' equity at March 31, 1997 $ 5,266
---------
---------
See accompanying notes to consolidated financial statements.
5
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MOBLEY ENVIRONMENTAL SERVICES, INC.
Consolidated Statements of Cash Flows
(dollars in thousands)
(unaudited)
Three Months Ended March 31,
----------------------------
1997 1996
--------- --------
Cash flows from operating activities:
Net income (loss) $ 2,775 $ (672)
Adjustments to reconcile net income (loss) to
net cash used by operating activities:
Gain on sale of oilfield services segment (2,802) --
Depreciation and amortization 453 636
Deferred compensation costs under restricted stock
agreements 24 24
Changes in certain operating assets and liabilities:
Trade receivables (466) (111)
Prepaid expenses and other current assets 222 (274)
Accounts payable (368) 357
Accrued expenses (605) (252)
------- -------
Net cash used by operating activities,
including discontinued operations (767) (70)
------- -------
Cash flows from investing activities:
Capital expenditures (78) (2,366)
Net proceeds from sale of oilfield services segment 4,656 --
Other investing activities, net -- (20)
------- -------
Net cash provided by (used in) investing
activities, including discontinued
operations 4,578 (2,386)
------- -------
Cash flows from financing activities:
Proceeds from long-term debt borrowings -- 1,940
Payments on long-term debt and notes payable (3,300) --
------- -------
Net cash provided by (used in) financing
activities, including discontinued
operations (3,300) 1,940
------- -------
Net increase (decrease) in cash and cash equivalents 511 (516)
Cash and cash equivalents at beginning of period 385 1,476
------- -------
Cash and cash equivalents at end of period $ 896 $ 960
------- -------
------- -------
See accompanying notes to consolidated financial statements.
6
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MOBLEY ENVIRONMENTAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1997
(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 March 31, 1997, 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, 1996.
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) RECENT ASSET SALES AND DISCONTINUED OPERATIONS
In light of the Company's severely weakened financial condition and, in
particular, concerns about its liquidity, during 1996, the Board of Directors
reviewed the challenges facing the Company and discussed in general terms the
alternatives available to address them. Among other things, the Board of
Directors considered (i) the Company's relatively small size and the
resultant constraints on its ability to make significant investments in
additional processing or collection businesses without an infusion of equity
in an industry characterized by increasing consolidation, intensifying
competition, and continued growth through acquisition by larger entities with
greater access to financial resources than has the Company; (ii) the
Company's inability to obtain bank financing and the unfavorable results of
efforts to attract equity investors to fund activities contemplated by the
Company's strategic business plan; (iii) the Company's default under its bank
credit agreement due to its inability to maintain compliance with certain
covenants contained in such agreement; and (iv) the Company's severely
strained liquidity and immediate need for working capital to continue its
current operations. As part of these deliberations, management and the
Company's financial advisors reviewed in detail with the Board of Directors
their efforts with third parties to attract possible investments in, or
strategic alliances with, the Company. Since such efforts had not yielded
access to funds on terms acceptable to the Company, the Board of Directors
determined that the divestiture of its operations was in the best interests
of the Company and its shareholders. These circumstances required the Company
to re-evaluate the basis used to assess the carrying values of assets.
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 transactions and their impact on the Company's
consolidated financial statements are described in the following paragraphs.
7
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SALE OF WASTE MANAGEMENT SERVICES ASSETS AND 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. Such sale was
completed on May 29, 1997, pursuant to a definitive asset purchase agreement.
Under the terms of the definitive agreement, the Company received $8,000,000
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
$4,000,000 in USF common stock based on the performance of the business
during the two years following its sale. Additionally, USF assumed certain
liabilities (accounts payable and accrued expenses) as part of the
transaction.
The net assets which were the subject of the definitive agreement are
shown in the accompanying March 31, 1997, consolidated balance sheet as "net
assets of discontinued operations" at their estimated net realizable value,
less anticipated transaction costs of approximately $450,000. Such assets
have a net book value at March 31, 1997, (net of assumed liabilities) of
approximately $14,965,000. During the year ended December 31, 1996, the
Company recorded a charge of $7,621,000 (net of a deferred income tax benefit
of $698,000), 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 $8,000,000 fixed portion of the sales price was considered
(I.E., that portion which is contingent on the future performance of the
business was ignored). Such loss was recognized in the third quarter, when it
was determined that a sale of the assets was necessary given the Company's
inability to secure acceptable financing and concerns about its liquidity.
Prior to that time, the evaluation of potential asset impairment had been
made on a "going-concern" basis and cash flow projections for the segment
supported the carrying values of the related assets. The Company estimated
that it would 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
May 29, 1997. A provision for such estimated net losses was made during the
year ended December 31, 1996. The Company's waste management services segment
incurred a net income of approximately $147,000 during the period October 1,
1996 to March 31, 1997.
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. to sell substantially all of the assets related to
its oilfield services business. Such sale was completed on January 20, 1997,
pursuant to a definitive asset purchase agreement. Under the terms of the
definitive agreement, the Company received approximately $4,917,000 and a
subordinated note in the amount of $500,000, due in January 2002, in exchange
for such assets. The assets which were the subject of the sale had a net book
value, based on historical cost adjusted for accumulated depreciation and
amortization, of approximately $2,354,000. The results of operations
associated with the discontinued segment through the disposal date, after
allocation of certain overhead and interest costs, did not result in a loss.
The Company's oilfield services segment generated net income of approximately
$120,000 during the period October 1, 1996, to January 20, 1997. The Company
recognized a gain upon completion of the sale, after transaction costs of
approximately $261,000, amounting to approximately $2,802,000 in January 1997.
In anticipation of the planned divestitures and the significant
reduction in personnel necessary to support the administration of the
Company's remaining assets, the Company recorded certain restructuring
expenses, none of which are expected to benefit its future activities, during
the 1996 third quarter. Such expenses, totaling $650,000 included employee
severance obligations of approximately $285,000, costs associated with the
relocation and recruitment of personnel of approximately $155,000, and other
related expenses of approximately $210,000. Substantially all of such costs
were subsequently incurred during the 1996 fourth
8
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quarter and 1997 first quarter. The twelve employees to be terminated are
primarily involved in providing certain corporate support functions,
including accounting, information systems, and environmental, health and
safety.
Because of the outstanding contractual indemnification obligations of
the Company and in light of pending litigation to which the Company is a
party, the Company will remain in existence and incur certain general and
administrative expenses for the foreseeable future but will have no operating
assets. Therefore, certain general and administrative expenses and
nonoperating income and expense have been accounted for as continuing
operations. Future costs incurred in connection with these indemnification
obligations and litigation responsibilities will be reported as part of the
discontinued operations in which they originated or to which they relate. The
Company believes it is probable that it will continue to incur certain costs
associated with these legal matters and accordingly in connection with the
divestiture of the Company's former subsidiary, Gibraltar Chemical Resources,
Inc. in 1994, established an accrual for estimated out-of-pocket expenses
related to the ongoing administrative management of such matters. However,
the Company is currently unable to reasonably estimate its potential exposure
for defending such matters, any indemnity obligations resulting therefrom,
and any corresponding insurance reimbursement (note 4).
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, interest expense, and income taxes for the periods ended March 31,
1997 and 1996, have been reclassified for amounts associated with the
discontinued segments. Due to the relative significance of the Company's
business segments to its operating assets as a whole, and in light of the
Company's decision in 1996 to divest itself of all of its operating assets,
the Company has allocated certain general and administrative expenses to the
business segments in the accompanying consolidated statements of operations
and note 2. General and administrative expenses attributable to continuing
operations have been determined based upon an allocation of such costs
between the business segments and continuing operations. Other income and
expense have been recorded as continuing operations as such amounts are not
specifically attributable to either of the Company's business segments which
are being disposed of. Interest expense has been allocated to the segments
based on the outstanding indebtedness attributable to each of the business
segments.
Operating results of the Company's waste management services segment for
the periods ended March 31, 1997 and 1996, are as follows (in thousands of
dollars):
1997 1996
------ ------
Revenues $5,764 $3.530
Cost of revenues 4,542 2,790
------ ------
Gross profit 1,222 740
Selling, general, and administrative expenses,
including allocated amounts 964 974
------ ------
Operating income (loss) 258 (234)
Interest expense, net (117) --
------ ------
Net income (loss) from operations of waste
management services segment $ 141 $ (234)
------ ------
------ ------
9
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Operating results of the Company's oilfield services segment for the
periods ended March 31, 1997 and 1996, are as follows (in thousands of
dollars):
1997 1996
------ ------
Revenues $ 231 $ 977
Cost of revenues 168 816
------ ------
Gross profit 63 161
Selling, general and administration expenses,
including allocated amounts 63 478
------ ------
Net loss from operations of oilfield
services segment $ -- $(317)
------ ------
------ ------
At March 31, 1997, the net assets of the Company's waste management
services segment are recorded at their estimated net realizable value, and
are included in the accompanying consolidated balance sheet as "net assets of
discontinued operations." Such assets are summarized as follows (in
thousands of dollars):
Trade receivables $ 3,259
Other current assets 260
Property, plant and equipment, net of accumulated
depreciation of $8,697 and valuation reserve
of $5,673 7,645
Excess of purchase price over fair value of net assets
acquired, net of accumulated amortization of $101
and valuation reserve of $1,051 --
Other assets, net 78
Current liabilities (3,001)
-------
Net assets of discontinued operations $ 8,241
-------
-------
Substantially all of the USF common stock received as the time of
closing was immediately sold. Such proceeds will be used to fund the current
liabilities retained by the Company, with the remaining surplus cash
initially deployed in short-term investments. The Company anticipates that
ongoing general and administrative expenses will be reduced to approximately
$300,000 annually, 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.
10
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(3) NOTES PAYABLE
The Company had a credit agreement (the "Credit Agreement") that
provided up to $6,500,000 in available credit for the Company. At March 31,
1997, the Company had outstanding $1,714,000 under the Credit Agreement. In
connection with the closing of the sale of the Company's oilfield services
segment in January 1997, the Company repaid $3,300,000 of outstanding
indebtedness under the Credit Agreement. In connection with the closing of
the sale of the Company's waste management services segment in May 1997, the
Company repaid the remaining balance of $1,714,000 of outstanding
indebtedness under the Credit Agreement.
The Credit Agreement contained restrictive covenants which included the
maintenance of minimum tangible net worth, as defined, and certain financial
ratios. The Company had not been in compliance with certain covenant
requirements since June 30, 1996.
(4) COMMITMENTS AND CONTINGENCIES
LETTERS OF CREDIT. At March 31, 1997, letters of credit totaling
approximately $1,012,000 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 approximately $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.
REGULATORY ENFORCEMENT ACTION AND LAWSUIT. In November 1993, the State
of Texas filed a lawsuit against Gibraltar stemming from an enforcement
action by the TNRCC alleging certain regulatory violations. The lawsuit was
subsequently amended to include certain notices of violation issued by the
TNRCC and allegations of noncompliance associated with certain regulatory
orders. In July 1994, this litigation was tentatively settled through
mediation and an Agreed Final Judgment was subsequently entered in December
1994. Under the terms of the judgment, Gibraltar was obligated for
$1,150,000 in assessed fines and attorneys fees. Of such amount, $450,000
was paid by AEC and the Company is responsible for payment of the remaining
$700,000. As of March 31, 1997, the Company had paid all but $167,000 of
such amount, which is due in June 1997 and included in "accrued expenses" in
the March 31, 1997 consolidated balance sheet.
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 1, 1997,
six such lawsuits were pending, one of which is asserted as a class action.
During the Company's ownership of Gibraltar, Gibraltar engaged in the
collection, transportation, analysis, treatment, management, and disposal of
various types of hazardous wastes. In the actions pending against the Company
and/or Gibraltar, the plaintiffs complain of a variety of acts by Gibraltar
which allegedly occurred in the course of its operations, including improper
air emissions, nuisance odors, contamination of water supplies, and repeated
and continuing violations of environmental laws. In the various pending
actions, plaintiffs assert similar theories as the alleged basis for
recovery, including negligence, nuisance, trespass, fraudulent concealment,
assault and battery, and intentional infliction of emotional distress.
Likewise, such plaintiffs seek similar types of damages, including loss of
property value and compensatory and punitive damages for personal injury and
property damage for nuisance odors, physical discomfort and impairment,
interference with use and enjoyment of property, medical expenses, mental
anguish, and loss of earning capacity. An
11
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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.
While all of the six actions are technically pending, in one such action, the
Company has defended the subject claims 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 the applicable
rules of civil procedure.
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. In particular, in connection with the sale of Gibraltar, the
Company made extensive representations and warranties regarding Gibraltar and
agreed to indemnify the purchaser, AEC, for any breaches of such
representations and warranties. Additionally, the Company is obligated to
indemnify AEC for certain claims against Gibraltar arising from circumstances
existing on or prior to the closing of the sale, including various claims and
proceedings disclosed to AEC. The Company's indemnification obligations to
AEC expired June 30, 1996, except in the case of tax, environmental and ERISA
claims, for which any claims for indemnification must be asserted prior to
June 30, 1998. 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. The Company's
contractual indemnity obligations to AEC 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.
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, it is unable
to determine the likelihood of an unfavorable outcome at this time.
The Company, based on consultation with its legal counsel, believes that
it is probable that the Company will continue to incur certain costs
associated with the foregoing matters and accordingly, in connection with the
divestiture of Gibraltar in 1994, established an accrual for estimated
out-of-pocket expenses related to the ongoing administrative management of
such matters. However, the Company is currently unable to reasonably estimate
its potential exposure for defending such matters, any indemnity obligations
resulting therefrom, and any corresponding insurance reimbursement. As noted
above, the litigation matters to which the Company is a party raise several
difficult and complex factual and legal issues. More specifically: (i) while
certain of the plaintiffs exhibit apparent physical injury and a variety of
health problems, the requisite causal connection to Gibraltar's facilities or
operations has not been established; (ii) certain of the cases involve
literally hundreds of plaintiffs whose physical condition and medical history
have not yet begun to be investigated; (iii) although the Company has
experienced some degree of success recently in two separate jury trials,
there is inherent uncertainty associated with jury trials in cases such as
these which tend to have a strong emotional appeal; (iv) the extent of
pollution liability insurance coverage available to the Company for potential
indemnity exposure and defense costs is currently in dispute and is itself
the subject of pending litigation as noted previously; (v) the Company's
potential liability relating to defense cost claims of approximately 50 of
Gibraltar's former customers who have also been named in the litigation (and
who are represented by over 20 different law firms) is currently not
determinable; and (vi) the indemnifications given to AEC in connection with
the Gibraltar sale are comprehensive and subject to broad interpretation.
Accordingly, the Company has not made an accrual for losses, if any, which
might result from these legal matters as such amounts or a range of amounts
are not currently reasonably estimatable. The Company's
12
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future financial condition, results of operations, and liquidity could be
materially adversely affected as the nature and scope of the Company's
ultimate liability arising from Gibraltar's operations and sale become better
defined.
In January 1996, Mobley was notified by the TNRCC that it is a
potentially responsible party of the alleged release, during the early or
mid-1980s, of hazardous substances at the McBay Oil and Gas State Superfund
Site located near Grapeland, Texas. 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 routine claims and legal actions pending and
threatened against the Company which are incidental to the Company's business
and have arisen in the ordinary course of its business related to services,
contracts, employment, and other matters. 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 the Company's limited continuing activities, believes that
financial obligations of the Company arising from such claims could have a
material adverse effect on its consolidated financial condition, results of
operations, or liquidity.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
GENERAL
The Company's business involved 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 provided services for managing liquids
used or produced during the life cycle of oil and gas wells.
The following discussion is designed to assist in the understanding of
the Company's financial condition as of March 31, 1997, as well as the
Company's operating results for the three-month period ended March 31, 1997.
Certain material events affecting the business of the Company are discussed
in Item 1 of this report. The Notes to Consolidated Financial Statements
contain additional information that should be read in conjunction with this
discussion.
RECENT 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 and recovery 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 (see Note 2 of Notes to Consolidated Financial Statements).
Because of the recent 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 transactions and their
impact on the consolidated financial statements are described in the
following paragraphs.
13
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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. Such sale was
completed on May 29, 1997, pursuant to a definitive asset purchase agreement.
Under the terms of the definitive agreement, the Company received $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. Additionally, USF assumed
certain liabilities (accounts payable and accrued expenses) as part of the
transaction. The net assets which were the subject of the definitive
agreement are shown in the accompanying March 31, 1997, consolidated balance
sheet as "net assets available for sale" at their estimated net realizable
value, less anticipated transaction costs of approximately $450,000. Such
assets had a net book value at March 31, 1997 (net of assumed liabilities) of
approximately $14,965,000. During the year ended December 31, 1996, the
Company recorded a charge of $7,621,000 (net of a deferred income tax benefit
of $698,000), 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 estimated that it would 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 May 29, 1997. A provision for such estimated net losses
was made during the year ended December 31, 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. Such sale was completed on
January 20, 1997, pursuant to a definitive asset purchase agreement. Under
the terms of the definitive agreement, the Company received $4,917,000 and a
subordinated note in the amount of $500,000 due in January 2002 in exchange
for such assets. The assets which were the subject of the sale had a net book
value, based on historical cost adjusted for accumulated depreciation and
amortization, of approximately $2,378,000. The results of operations
associated with the discontinued segment through the disposal date, after
allocation of certain overhead and interest costs, did not result in a loss.
The Company recognized again upon completion of the sale, after transaction
costs of approximately $255,000, amounting to approximately $,802,000 in
January 1997.
In anticipation of the planned divestitures and the significant
reduction in personnel necessary to support the administration of the
Company's remaining assets, the Company recorded certain restructuring
expenses, none of which are expected to benefit its future activities, during
the 1996 third quarter. Such expenses, totaling $650,000 included employee
severance obligations of approximately $285,000, costs associated with the
relocation and recruitment of personnel of approximately $155,000, and other
related expenses of approximately $210,000. Substantially all of such costs
were subsequently incurred during the 1996 fourth quarter and 1997 first
quarter. The twelve employees to be terminated are primarily involved in
providing certain corporate support functions, including accounting,
information systems, and environmental, health and safety.
RESULTS OF OPERATIONS
Revenues for the three months ended March 31, 1997 amounted to $5,995,000,
compared to $4,507,000 in the comparable period of 1996, an increase of 33%. On
a segment basis, revenues from waste management services increased 63% during
the 1997 three-month period, primarily the result of the
14
<PAGE>
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 in the 1997 first quarter
compared to the same period a year ago, primarily due to sale of such
segment's assets in January 1997.
Gross profit for the quarter ended March 31, 1997, amounted to
$1,285,000 compared to $901,000 in the same 1996 period. The gross profit
margin amounted to 20% in 1997 and 1996.
Comparatively lower selling, general and administrative expenses during
the 1997 quarter were primarily the result of reduced overhead costs
associated with the sale of the oilfield services segment and general
reductions due to the discontinuance of operations.
CAPITAL RESOURCES AND LIQUIDITY
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
was immediately sold. Cash from the USF stock sale, along with the proceeds
from the sale of the oilfield services assets, resulted in net proceeds
totaling approximately $11.1 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 initially 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.
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.
Additionally, the Company received a $500,000 subordinated note receivable
from Dawson, bearing interest at 8.5%, which matures on January 4, 2002.
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, 1996), the Company, based on consultation with legal counsel,
does not currently anticipate making a distribution to its stockholders in
the foreseeable future. As circumstances change or additional information
with respect to the extent of the Company's potential indemnity obligations
becomes available, the Board of Directors will continue to evaluate various
uses of the Company's funds. 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.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
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, 1996.
15
<PAGE>
ITEM 2. CHANGES IN SECURITIES
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
As discussed in Note 3 of Notes to Consolidated Financial Statements,
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 as of March 31, 1997. The Company repaid all
outstanding balances under its bank credit agreement in connection with the
closing of its waste management services and oilfield services segments.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
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 January 28, 1997 was filed by the
Company to announce the completion of the sale of the Company's oilfield
services business.
A Form 8-K Current Report dated May 5, 1997 was filed by the
Company to announce the signing of a definitive asset purchase agreement for
the sale of the Company's hydrocarbon recycling and recovery business.
A Form 8-K Current Report dated June 13, 1997 was filed by the
Company to announce the completion of the sale of the Company's hydrocarbon
recycling and recovery business.
16
<PAGE>
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/ John Mobley
---------------------------------------
John Mobley
Chairman of the Board, President
and Chief Financial Officer
Date: September 19, 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 PERIOD ENDED
MARCH 31, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<CASH> 896
<SECURITIES> 0
<RECEIVABLES> 741
<ALLOWANCES> 500
<INVENTORY> 0
<CURRENT-ASSETS> 9,572
<PP&E> 747
<DEPRECIATION> 477
<TOTAL-ASSETS> 10,572
<CURRENT-LIABILITIES> 5,158
<BONDS> 0
0
0
<COMMON> 90
<OTHER-SE> 5,176
<TOTAL-LIABILITY-AND-EQUITY> 10,572
<SALES> 0
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (168)
<INCOME-TAX> 0
<INCOME-CONTINUING> (168)
<DISCONTINUED> 2,943<F1>
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,775
<EPS-PRIMARY> 0.31
<EPS-DILUTED> 0.31
<FN>
<F1>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>
