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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTIONS 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
[X] ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 (No Fee Required, effective October 7, 1996)
For the Fiscal Year Ended December 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (No Fee Required)
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 Identification No.)
incorporation or organization)
c/o 111 CONGRESS AVENUE, SUITE 1400
AUSTIN, TEXAS 78701
(Address of principal executive offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
Title of each class Name of each exchange on which registered
------------------- -----------------------------------------
None None
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
CLASS A COMMON STOCK, $.01 PAR VALUE PER SHARE
(Title of Class)
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 (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes No X
----- -----
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or other information
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
The aggregate market value of the Class A Common Stock held by non-affiliates of
the registrant at March 31, 1998, based on the closing bid price as reported by
the OTC Bulletin Board as of such date, was estimated to be $1,250,155.
The number of shares outstanding of the registrant's common stock, as of May 31,
1998 was 4,259,650 shares of Class A Common Stock, $.01 par value and 4,575,643
shares of Class B Common Stock, $.01 par value.
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FORM 10-K INDEX
PART I
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Page Number
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Item 1. Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Item 2. Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Item 3. Legal Proceedings. . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Item 4. Submission of Matters to a Vote of Security Holders. . . . . . . . . . . 12
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters. . 12
Item 6. Selected Financial Data. . . . . . . . . . . . . . . . . . . . . . . . . 13
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations. . . . . . . . . . . . . . . . . . . . . . . . . 15
Item 7A. Quantitative and Qualitative Disclosures about Market Risk . . . . . . . 19
Item 8. Financial Statements and Supplementary Data. . . . . . . . . . . . . . . 19
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure . . . . . . . . . . . . . . . . . . . . . . . . . 19
PART III
Item 10. Directors and Executive Officers of the Registrant . . . . . . . . . . . 19
Item 11. Executive Compensation . . . . . . . . . . . . . . . . . . . . . . . . . 22
Item 12. Security Ownership of Certain Beneficial Owners and Management . . . . . 28
Item 13. Certain Relationships and Related Transactions . . . . . . . . . . . . . 29
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K. . . . . 29
Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
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PART I
ITEM 1. BUSINESS
GENERAL
Prior to May 29, 1997, Mobley Environmental Services, Inc. (the "Company")
provided diverse environmental and field-related services to industrial,
governmental and commercial markets, and specialized in the collection,
transportation, treatment, recycling, and management of a wide variety of
non-hazardous liquid hydrocarbons, oil filters, absorbents, and related
materials. Prior to January 20, 1997, the Company also provided oilfield
services, including transporting, marketing, storing, and disposing of
various liquid materials used or produced as waste throughout the lifecycle
of oil and gas wells.
The Company was formed in July 1991 for the purpose of combining the
businesses of Gibraltar Chemical Resources, Inc. ("Gibraltar"), Mobley Company,
Inc. ("Mobley Co."), and Mobley Group, Inc. which had been under common
management since their inception. Shareholders of the predecessor companies
received shares of the Company's Class B Common Stock in exchange for their
shares of common stock of these companies, and certain of the principal
shareholders of the Company sold to the Company for cash certain assets used in
the businesses of the predecessor companies. As a result of the foregoing
transactions, Gibraltar and Mobley Co. became wholly-owned subsidiaries of the
Company and Mobley Group, Inc. was merged into the Company.
The Company's oilfield services business was founded in 1943, primarily for
the recycling of tank bottoms, an oilfield waste material which was processed
and used to make specialty polishes and waxes. Based on the experience of
certain of the Company's principal shareholders in establishing and operating
several businesses managing chemicals and liquid and solid wastes, including the
operation of oilfield salt water disposal wells, in 1980 the Company expanded
into the hazardous waste treatment and disposal business through its Gibraltar
subsidiary with the construction of a deepwell and related facilities in Winona,
Texas. Additional facilities for waste-derived fuels blending and solvent
recycling were added at the Gibraltar site in 1986 and 1987 and a second
deepwell was completed in 1991. As discussed below and in Note 3 of Notes to
Consolidated Financial Statements set forth in Item 8 herein, the Company
completed the sale of Gibraltar on December 31, 1994. Since that time, the
Company has not been involved in the commercial management of hazardous wastes.
In 1987, the Company expanded its waste management services activities to
include the collection and treatment of non-hazardous, hydrocarbon-laden wastes
for customers outside the oil and gas industry and opened its initial oily waste
treatment facility in Kilgore, Texas. Subsequently, in 1991 and 1993,
additional treatment facilities for the processing of non-hazardous
hydrocarbon-laden fluids commenced operations in Corsicana, Texas and
Baytown, Texas, respectively. These treatment and recycling plants were
supported by a network of seven transportation terminals and transfer
facilities in Texas, Arkansas, and Louisiana. In 1995, the Company, through a
newly-formed subsidiary, Hydrocarbon Technologies, Inc., broadened its
hydrocarbon recycling and recovery activities to include the collection and
marketing of used oil and oil filters through the acquisition of the assets
of a group of three related recycling companies. Additionally, during 1996,
the Company completed construction of two new facilities for the recycling of
used motor oil and fuel mixtures into higher-value finished products for sale
and the processing and recycling of used oil filters, absorbents and related
materials. See "Business Strategy and Background of the Transaction" herein.
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On January 20, 1997, the Company completed the sale of the assets used in
its oilfield services business to Dawson Production Services, Inc. ("Dawson").
See "BUSINESS--Oilfield Services" herein, Note 2 of Notes to Consolidated
Financial Statements set forth in Item 8 herein, and "Management's Discussion
and Analysis of Financial Condition and Results of Operations" set forth in Item
7 herein.
The Company executed a definitive asset acquisition agreement with United
States Filter Corporation ("U.S. Filter") for the sale of its hydrocarbon
recycling and recovery assets (the "Transaction"). The Transaction was
consummated on May 29, 1997. See "Business Strategy and Background of
Transaction" herein, Note 2 of Notes to Consolidated Financial Statements set
forth in Item 8 herein, and "Management's Discussion and Analysis of Financial
Condition and Results of Operations" set forth in Item 7 herein.
RESTRUCTURING AND DIVESTITURE OF HAZARDOUS WASTE OPERATIONS
In late 1993, the Company's senior management and Board of Directors
determined that the divestiture of its hazardous waste business conducted by
Gibraltar was in the best interests of the Company and its shareholders. On May
10, 1994 the Company entered into a definitive agreement (the "Stock Purchase
Agreement") for the sale of all of the outstanding shares of common stock of
Gibraltar to American Ecology Corporation ("AEC"), and such sale was completed
effective December 31, 1994. See Note 3 of Notes to Consolidated Financial
Statements set forth in Item 8 herein. The Company made extensive warranties
and representations in the Stock Purchase Agreement, including the absence of
any liabilities arising prior to closing other than those disclosed to AEC. The
Company is required to indemnify AEC for all losses resulting from breaches of
warranties and representations and pending or future claims or proceedings
resulting from circumstances existing prior to closing through June 30, 1996 (or
in the case of tax, environmental and ERISA claims, through June 30, 1998).
However, the Company and AEC have executed a Tolling Agreement dated July 30,
1997, pursuant to which the statute of limitations period for certain potential
claims by either party against the other has been tolled from July 30, 1997
through July 30, 2000. The maximum liability of the Company under such indemnity
with respect to undisclosed claims is $3.0 million; there is no limit with
respect to disclosed liabilities. See Note 14 of Notes to Consolidated
Financial Statements set forth in Item 8 herein for further information
regarding certain obligations and contingent liabilities relating to Gibraltar.
The Company had also formed a joint venture called Pro Ambiente, S.A. de
C.V. ("Pro Ambiente"), with Cemex, S.A. de C.V. ("Cemex") in March of 1993 to
collect organic hazardous wastes and blend hazardous waste fuels for certain
cement kilns operated by Cemex in Mexico. After the divestiture of Gibraltar
and the Company's decision to focus on its non-hazardous hydrocarbon recycling
business, and in light of the economic uncertainties in Mexico, the Company sold
its interest in the joint venture to Cemex in July 1995. See Note 5 of Notes to
Consolidated Financial Statements set forth in Item 8 herein.
BUSINESS STRATEGY AND BACKGROUND OF THE TRANSACTION
Having exited the hazardous waste industry with the year-end 1994 sale of
Gibraltar and the mid-1995 divestiture of its interest in Pro Ambiente, the
Company focused on the continued growth and development of its non-hazardous
hydrocarbon recycling and recovery business. In anticipation of the Gibraltar
sale, the Company sought to develop a strategic business plan to enhance its
financial position in the face of changing conditions in the waste management
services industry. Through this planning process, management identified
significant market opportunities in the business of non-hazardous hydrocarbon
recycling and recovery. The Company's Board of Directors and management
believed that its core skills in managing liquid hydrocarbon wastes, combined
with its experience in processing industrial oily wastes, formed a solid
foundation for a business expansion into more advanced hydrocarbon recycling and
recovery technologies.
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The strategic plan developed by the Company contemplated growth through
process enhancement projects, as well as through the acquisition of
complementary existing business operations.
The Company developed a business plan that included (i) acquisitions of
small used oil collection operations in geographic areas where the Company was
already active in the oily waste business; (ii) installation of a distillate
fuels production facility at the Company's Baytown, Texas processing complex to
manufacture value-added products from recovered hydrocarbon waste streams; (iii)
installation of a filter recycling plant at its Baytown facility for the
recycling of used oil filters, absorbents and related materials; (iv) marketing
of the Company's new services to its existing industrial customer base; and (v)
exploration of new geographic and service markets for further expansion.
The Company pursued and eventually completed the acquisition of certain
assets of a group of three related recycling companies in July 1995. Also,
specific plans were made for the engineering and construction of a distillate
fuels production facility and oil filter recycling facility. Construction of
the filter recycling facility was completed by the end of the 1996 first quarter
and the plant began operations in April of that year. The distillate fuels
production facility began full-scale operations in August, 1996.
In October 1995, the Company engaged Cureton and Co., Incorporated
("Cureton & Co."), an investment banking and business advisory firm, to assist
it with the investigation and possible financing of other business combination
opportunities that had come to the Company's attention during the course of its
strategic planning, industry analysis, and due diligence. With the assistance
of Cureton & Co., the Company investigated possible relationships or
affiliations with a variety of entities whose operations might be a feasible
expansion of, or complementary to, the Company's existing operations or those
contemplated under its strategic plan. Of the discussions undertaken by
management, PORI International, Inc. ("PORI"), based in Baltimore, Maryland,
emerged as a candidate for serious consideration due to its longstanding
reputation in the treatment of oily wastes on customers' sites, its historic
development of oil/water separations technologies, and its established presence
as a consolidator of used oil from collectors in the Middle Atlantic region of
the United States. On March 11, 1996, the Company's discussions with PORI
culminated in a letter of intent to acquire substantially all of PORI's assets
with completion of the transaction subject to, among other things, the Company's
ability to secure the necessary financing.
Although initial inquiries indicated financial institutions to be a
potential source of financing, it also became evident that significant equity
infusions would be required to complete the PORI acquisition and to otherwise
carry out the Company's overall expansion plans. In an effort to secure equity
financing, the Company prepared a detailed business plan; in addition to the
acquisition of PORI, the plan contemplated several follow-on business
acquisitions in targeted geographic regions, the expansion of its used oil and
filter collection capabilities, and the construction of new facilities for
oil/water processing, distillate fuels production, and oil filter recycling.
Financing necessary to effectuate the entire plan was estimated to require
approximately $34.5 million in excess of internally-generated funds over a
three-year period.
The Company incurred operating losses during the 1996 first and second
quarters reflecting the impact of an extended regional drought which severely
diminished fluid volumes, revenues, and the related profitability of the
Company's oil/water separations business. In addition to the effect of the
drought conditions, this core business was also impacted by the ongoing decline
of fluids associated with underground storage tank remediation activities. While
such event-driven volumes were partially offset by an increase in
production-oriented oily wastes, the change in business mix toward more
difficult-to-treat waste streams resulted in diminished profit margins.
Additionally, competitive pressures in the Company's oilfield services
business, along with an unfavorable shift in business mix favoring a higher
proportion of lower-margin contract services revenue, reduced the profit
contribution from this segment during the fourth
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quarter of 1995 and first quarter of 1996. Further, because of the startup
nature of its used oil and filter collection and recycling activities,
compounded by delays in bringing the new processing facilities on-line, these
new business lines made virtually no contribution to operating profit during
this period. The operating losses sustained by the Company, coupled with the
capital spending program associated with the execution of its growth
strategy, significantly weakened the Company's liquidity over the first half
of 1996. By the end of the 1996 second quarter, the Company had a working
capital deficit of approximately $4.8 million, including $4.4 million in
outstanding bank indebtedness which was classified as a current liability as
a result of violations of certain restrictive covenants in its bank credit
agreement. The Company's cash resources had been reduced from $1.5 million
at year-end 1995 to $516,000 at June 30, 1996, and it had exhausted
substantially all of its available borrowing capacity.
As a result of the Company's deteriorated financial condition and
unfavorable results of operations, bank debt financing had effectively been
eliminated as a viable source of funds for the continued execution of its
strategic plan. Through Cureton & Co., the Company contacted over 30 venture
capitalists, private investors, and industry participants during the ensuing
months of the summer of 1996 to discuss the possibilities of a private
investment in the Company or other strategic alliance. Six potential investor
groups toured the Company's Baytown facility to further discuss possible
relationships or investment structures. Through these discussions, it became
evident to management that more serious negotiations with most potential
investors were thwarted by one or more issues facing the Company, including the
risks associated with the unproven nature of the Company's distillate fuels
production facility, and the perceived litigation exposure arising from the
Company's former ownership of Gibraltar (see "LEGAL PROCEEDINGS -- Claims and
Legal Proceedings Against Gibraltar" set forth in Item 3 herein and Note 14 of
Notes to Consolidated Financial Statements set forth in Item 8 herein).
Through this exhaustive process, U.S. Filter emerged as the most viable
party interested in pursuing a specific transaction with the Company. After
lengthy discussions, it became clear that U.S. Filter was not interested in
joint ownership and would only proceed with negotiations on the basis of
purchasing, with shares of U.S. Filter common stock as consideration, the
Company's entire interest in its hydrocarbon recycling and oil/water processing
business.
In light of the Company's severely weakened financial condition and U.S.
Filter's stated interest in acquiring the Company's hydrocarbon recycling and
recovery business, the Board of Directors reviewed the challenges facing the
Company and discussed in general terms the alternatives available to address
them. As part of these deliberations, management and Cureton & Co. reviewed in
detail with the Board of Directors the contacts that had been made with third
parties regarding possible investments in, or strategic alliances with, the
Company. Since such efforts had not yielded access to funds on terms acceptable
to the Company, discussions were then focused on the possible acquisition of the
Company's hydrocarbon recycling and recovery business by U.S. Filter as offering
the best prospects for the Company and its shareholders. In conjunction with
this decision, the Company abandoned its plans to acquire the assets of PORI;
such assets were subsequently acquired by U.S. Filter in February 1997.
On October 9, 1996, the Company's Board of Directors authorized the Company
to enter into a letter of intent to sell to U.S. Filter the net assets of the
Company's hydrocarbon recycling and recovery business in consideration for U.S.
Filter common stock having an aggregate exchange value of $8.0 million, plus the
right to receive additional shares of U.S. Filter common stock with an exchange
value of up to $4.0 million upon the attainment of certain financial performance
goals in the two-year period following the sale. The Company executed a letter
of intent with U.S. Filter on October 30, 1996, and thereafter, U.S. Filter
continued its due diligence business review of the Company. Senior management
of the Company, assisted by Cureton & Co. and legal counsel, and U.S. Filter
then began negotiating the terms of a definitive asset
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purchase agreement. A definitive Asset Purchase Agreement (the "Agreement")
was executed on April 25, 1997.
Additional information regarding the sale of the Company's hydrocarbon
recycling and recovery business to U.S. Filter is contained in an Information
Statement to the Company's shareholders dated May 9, 1997.
MARKET DEMAND FACTORS
In recent years, the demand for the Company's waste management services had
resulted primarily from public concern over the quality of the environment and
ensuing adoption and enforcement of increasingly stringent federal, state and
local environmental laws and regulations. Governmental regulation has also
caused a number of commercial treatment and disposal facilities to close, as
many have been unable to meet the increasingly strict siting and operating
standards imposed by RCRA and other applicable laws. Furthermore, many
generators of hazardous and non-hazardous wastes have chosen not to maintain
their own treatment and disposal facilities or to develop the technical
expertise necessary to assure regulatory compliance. Accordingly, many
generators have sought to have their waste streams managed by firms that possess
collection, recycling, treatment, transportation and disposal capabilities and
have the expertise and financial capacity necessary to comply with applicable
environmental regulations.
Additionally, concerns by generators about long-term liability has led the
industry toward waste minimization and recycle/recovery and thus have
significantly changed the market for both hazardous and non-hazardous waste
treatment and disposal in recent years, as waste generators continue to look for
ways to reduce or reuse the wastes they generate. Many generators and other
purchasers of waste management services have attempted to decrease the number of
providers of these services they utilize in response to liability concerns.
BUSINESS SEGMENTS
See Note 2 of Notes to Consolidated Financial Statements set forth in Item
8 herein for information regarding the Company's business segments.
WASTE MANAGEMENT SERVICES
Since the divestiture of Gibraltar at year-end 1994 through the May 29,
1997 disposition of the Company's remaining operating assets, the waste
management services provided by the Company consisted of the collection,
transportation, treatment, recycling, and management of non-hazardous liquid
industrial hydrocarbons, off-specification motor fuels, used oils, oil filters,
absorbents and related materials. These activities are collectively referred to
herein as "hydrocarbon recycling and recovery".
TREATMENT AND RECYCLING OF OIL-WATER AND FUEL-WATER MIXTURES - The Company
treated selected non-hazardous oily fluids through phase separation processes as
a part of its hydrocarbon recycling and recovery services. The Company operated
three hydrocarbon recycling and recovery facilities in Baytown, Kilgore, and
Corsicana, Texas. Sources of oily fluids include industrial and manufacturing
operations and transportation activities. Sources of motor fuel-water mixtures
include motor fuel distribution, transportation, and retailing activities.
Underground storage tank fluid sources include underground storage tank
corrective action, removal, and groundwater remediation activities.
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COLLECTION ACTIVITIES - The Company transported high-water oily fluids
using vacuum tank trucks and other transports dedicated to the waste management
business. The Company collected motor fuel-water mixtures, as well as waste
lubricants, machine coolants, and other hydrocarbon-laden fluids, from
industrial, manufacturing, and transportation operations. The Company also used
its collection equipment to provide in-plant support services to industrial
companies and environmental engineering firms engaged in remediating groundwater
problems, cleaning up spills, or pumping and transporting industrial liquids and
sludges within their own plant sites.
USED OIL COLLECTION AND RECOVERY SERVICES - In July 1995, the Company began
the collection and marketing of used lubricating oils from various sources,
including automobile and truck dealers, transportation fleets, automotive
garages, oil change outlets, service stations, industrial plants, and other
businesses. With the startup of its distillate fuels production facility in the
1996 second quarter, the Company began utilizing substantially all of the used
oil it collected and purchased as feedstock for the manufacture of distillate
fuel products. Such conversion of used oils into higher-value finished products
was intended to allow the Company to derive revenue from the sale of such
products it sells into relatively large commodity markets.
FILTER COLLECTION AND RECYCLING SERVICES - Similarly, in July 1995, the
Company began the collection and recycling of used oil filters. In this
business line, the Company derived revenues from the fees it charges customers
to manage used oil filters and related products, as well as from the sale of the
recovered products, as described below. Containers of used automotive and
industrial filters and absorbents were typically collected from customers using
the Company's collection fleet and aggregated at selected sites in its network
of transfer facilities. These filters were then transported to the Company's
Baytown filter recycling facility, which commenced operations in April 1996.
The filter processing plant shredded, separated and recycled used oil filters
into three reusable components--used oil, filter fluff, and metal. The
recovered used oil was utilized as feedstock for the distillate fuels production
facility described in the preceding paragraph. The filter fluff was utilized as
an alternative fuel source for approved industrial users where possible, or
otherwise properly managed. The recovered metal was marketed as feedstock for
regional "mini-mills" in the steel-producing industry.
ANALYTICAL SERVICES - The Company provided analytical services through two
laboratory facilities in Baytown and Kilgore. These captive laboratory
facilities performed tests on the waste streams of customers and potential
customers which enabled the Company to determine the optimal means of recycling
or treatment. These tests also allowed the Company to determine whether or not
it has the capability of accepting the waste stream, determine whether the
wastes conformed to the customer's pre-approved waste profile, and to estimate
the cost of managing the wastes.
OILFIELD SERVICES
Until the sale of its oilfield services assets described in the following
paragraph, the Company's strategy with respect to this business was to maintain
its operations in east Texas, but not to expand such services to other
geographic regions. This business segment consisted of the transportation,
management and disposal of various liquids which are used or produced as waste
in the drilling, completion, and production operations of oil and gas wells. In
particular, the Company had extensive capabilities in supplying fluids and the
necessary storage tanks for massive hydraulic fracture treatments prevalent in
its oilfield market in east Texas. The Company operated a fleet of specialized
trucks, some of which were also used in its hydrocarbon recycling operations,
for pumping and transporting oilfield drilling fluids and oilfield liquid waste,
including produced salt water, and it rented to customers portable tanks for
well stimulation services and temporary
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fluids storage. The Company operated three salt water disposal wells in east
Texas. In addition, the Company sold clear brine fluids which are used in
well completion, workover, and fracturing operations.
In light of its decision to sell the assets of its hydrocarbon recycling
and recovery business, the Company's Board of Directors evaluated the remainder
of the Company's assets and business activities, including its oilfield services
business. Given the relatively high administrative costs of operating a
business as small as the oilfield services business on a stand-alone basis, and
the rather limited growth opportunities available to the Company for this
business (either internally or through acquisition), the Board of Directors
concluded that a sale of the business was in the best interest of the Company.
On November 1, 1996, the Company executed a letter of intent to sell to Dawson
substantially all of its oilfield services assets and such sale was completed on
January 20, 1997 pursuant to a definitive asset purchase agreement. The Company
received approximately $4.9 million in cash and a subordinated note for
$500,000, due in January 2002, as proceeds from the sale. The cash proceeds
were used to reduce the Company's outstanding bank indebtedness by $3.3 million,
fund transaction expenses of approximately $255,000 and for working capital
purposes. See Note 2 of Notes to Consolidated Financial Statements set forth in
Item 8 herein for related information regarding this segment of the Company's
business.
CUSTOMERS AND MARKETING
During the months it operated in 1997, the Company provided its waste
management services to large and small-stream generators of recyclable
hydrocarbons engaged in the manufacturing, transportation, steel, refining,
chemical, automotive, and other industries. The Company derived a substantial
portion of its revenues from customers in Texas, Louisiana, and Arkansas. The
Company's waste management services were marketed directly by its sales force.
COMPETITION
During the months it operated in 1997, the Company competed with numerous
large and small companies in its waste management services business. Among its
primary competitors were Allwaste, Inc., Laidlaw Environmental, Inc.,
Safety-Kleen Corp., Specialty Environmental Services, Philip Environmental
and World Fuel Services, Inc. Each of these companies was able to provide
one or more of the waste management services offered by the Company or
alternative services, and many of the Company's competitors have access to
greater financial resources than did the Company. In addition, the Company
competed with other local or smaller regional companies, many of which are
privately-owned, that have hydrocarbon recycling capabilities or that collect
and market used oil.
REGULATION
As an operating entity, the Company was subject to comprehensive and
continuously evolving regulation by federal, state, and local authorities.
These authorities are empowered to regulate compliance with extensive
environmental laws, regulations, and ordinances. Various federal environmental
statutes are designed to address management of waste at active disposal
facilities, clean-up and remediation of inactive hazardous waste sites,
protection of public water supplies, control of air quality standards, and
exposure to toxic substances and other forms of pollution in the workplace.
Such laws provide significant penalties for violators, as well as continuing
liability for waste generators, owners, and operators of waste treatment
facilities and others for past disposal practices. Many states have been
authorized by the EPA to enforce regulations promulgated under various federal
environmental statutes. The state of Texas has authority to administer most of
the regulations related to the Resource Conservation and Recovery Act of 1976 as
well as regulate the management of non-hazardous industrial wastes. In
addition, there are numerous state and
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local authorities that further regulate the environment, some of which impose
standards stricter than those established in federal laws and regulations.
Penalties for violations of applicable laws or regulations include injunctive
relief, recovery of damages for injury to air, water or property, and fines
for non-compliance.
In September 1992, the United States Environmental Protection Agency
("EPA") finalized regulations that govern the management of used oils destined
for recycling. Although used oil is not classified as a hazardous waste under
federal law, certain states do regulate used oil as hazardous. The new
regulations address several areas of environmental risks that caused
environmental problems at used oil recycling facilities in the past, and contain
specific requirements for generators, transporters, and used oil processors.
The Texas Natural Resource Conservation Commission ("TNRCC") has adopted rules
that essentially implemented the EPA regulations in Texas effective March 26,
1996. In some respects, these regulations are more stringent than the EPA
rules, including provisions for more frequent and comprehensive reporting and
financial assurance requirements for used oil processors. The Company built and
operated its facilities to standards that met and, in certain instances,
exceeded current standards.
COMPLIANCE AND RISK MANAGEMENT
The Company regarded compliance with applicable environmental laws and
regulations as a critical component of its overall operations, from providing
quality service to its customers to protecting the health and safety of its
employees and neighbors and protecting the Company's facilities from damage.
The Company's compliance program had developed for each of its operational
facilities under the direction of the Company's compliance staff, which was
responsible for facilities compliance, health and safety, field safety,
compliance training, transportation compliance, and related record keeping.
As part of the Company's continuing efforts to monitor environmental
compliance, its treatment and recycling facilities were periodically inspected
by its compliance staff, and also by regulators and customers. On certain
occasions, the Company's facilities were cited for regulatory violations, and
environmental problems were found in the facilities. The extent to which such
violations and problems have affected the financial condition and results of
operations of the Company is reflected in the Consolidated Financial Statements
and Notes thereto set forth in Item 8 herein.
The Company followed a program of risk management policies and practices
designed to reduce potential liability as well as to manage customers' ongoing
regulatory responsibility. This program included employee training, laboratory
testing and environmental monitoring, and policy decisions restricting the types
of wastes handled or projects undertaken.
INSURANCE
The Company maintained insurance coverage for normal business risks,
including workers' compensation for its employees, automobile liability, general
liability, and excess liability insurance coverage. Additionally, the Company
carried pollution liability insurance providing coverage for damage to third
persons from pollution from its waste management facilities. Since the sale of
the Company's operating assets, the Company has maintained directors and
officers liability and general liability insurance policies.
As discussed in Note 14 of Notes to Consolidated Financial Statements set
forth in Item 8 herein, the Company has been notified by its pollution liability
insurance carrier that the carrier disputes the Company's interpretation of its
pollution liability insurance coverage and policy limitations applicable to
certain pending claims (see "LEGAL PROCEEDINGS--Litigation and Various Other
Claims" set forth in Item 3 herein).
8
<PAGE>
EMPLOYEES
At May 31, 1998, the Company had no employees.
INVESTMENT SECURITIES HELD BY THE COMPANY
All of the U.S. Filter common stock received at the time of the closing of
the sale of its waste management services assets has been sold. Cash from the
U.S. Filter stock sale, along with the proceeds from the sale of the oilfield
services assets, were used to pay bank indebtedness, transaction expenses, and
current liabilities. Remaining proceeds were used to purchase investment grade
fixed term securities. Such securities include U.S. Treasury and corporate
bonds. See Consolidated Financial Statements set forth in Item 8 herein.
FUTURE PLANS OF THE COMPANY
The Company has had no operating assets since the sale of its oilfield
services business and hydrocarbon recovery and recycling business in 1997.
Because of its indemnity obligations related to the sale of Gibraltar, as well
as potential indemnification responsibilities with respect to the sale of its
operating assets (see "BUSINESS--Oilfield Services" herein), and considering
ongoing litigation (see "LEGAL PROCEEDINGS" set forth in Item 3 herein and Note
14 of Notes to Consolidated Financial Statements set forth in Item 8 herein),
the Company will remain in existence for the foreseeable future.
The litigation involving the Company is in varying stages, with some cases
in the early phases of discovery, while others are awaiting trial. The claims
are unliquidated; and the Company's potential liability, even after available
insurance coverage, could exceed the amount of its assets. Accordingly, based
on consultation with legal counsel, the Company's Board of Directors believes
that they are required by applicable law to hold the Company's assets as a
fiduciary for potential creditors as well as the stockholders. No steps will be
taken to reduce the corporate corpus of the Company by paying liquidating or
other dividends to shareholders until these claims are resolved or more nearly
quantified. In light of the nature and complexity of the litigation, the
Company expects that it may take a period of up to several years to resolve
these matters.
As circumstances change or additional information with respect to the
Company's potential indemnity obligations and litigation exposure becomes
available, the Board of Directors will continue to evaluate various uses of the
Company's funds. The Company has no plans to conduct any kind of operating
business at any time in the future.
ITEM 2. PROPERTIES
The principal facilities of the Company, prior to the sales of its oilfield
services and hydrocarbon recycling and recovery businesses in 1997, are
described below. Except as otherwise indicated, the Company owned all of its
principal facilities. The Company owned three facilities for processing and
recycling certain materials managed as non-hazardous oily wastes,
off-specification motor fuels, and underground storage tank remediation
fluids which were located in Baytown, Kilgore, and Corsicana, Texas.
The Company completed construction of an oil filter recycling facility at
its site in Baytown in April 1996. Construction of a distillate fuels
production facility at the Baytown site for the manufacture of marine distillate
fuels and related products from used oils and motor fuel feedstocks was
substantially completed in June 1996, with full-scale operations commencing in
August 1996.
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<PAGE>
The Company also owned a terminal facility adjacent to its Baytown plant
consisting of approximately 6,300 square feet of office space, which also served
as an administrative corporate office. Another terminal facility near Austin,
Texas, was owned and similar facilities in or near Dallas, Kilgore and San
Antonio, Texas, Little Rock, Arkansas, and Baton Rouge, Louisiana were leased.
These facilities provided for the dispatching of trucks and equipment to
customers and providing other customer services, as well as serving as the base
for regional sales activities. In most cases, such facilities also temporarily
held non-hazardous hydrocarbon-laden fluids, used oil and oil filters collected
in the local service areas, but did not process or treat these materials. All
materials collected were shipped by truck to one of the Company's treatment and
recovery facilities discussed above.
The Company completed the relocation of its primary corporate offices and
consolidation of administrative support functions to Baytown, Texas in late
1996, utilizing the existing terminal facility referred to previously,
supplemented by an additional 3,000 square feet of modular office space. The
Company's previous corporate office in Kilgore, Texas, consisting of land and
approximately 10,000 square feet of office space, is still owned by the Company
and is currently held by it for sale or lease.
The Company's current mailing address is c/o Howard V. Rose, 111 Congress
Avenue, Suite 1400, Austin, Texas 78701.
ITEM 3. LEGAL PROCEEDINGS
LITIGATION AND VARIOUS OTHER CLAIMS. On January 26, 1996, Mobley Co. was
notified by the Texas Natural Resource Conservation Commission ("TNRCC") that it
is a potentially responsible party ("PRP") for 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. During 1997, the Company entered
into a contractual remediation plan for this site and paid the contract amount.
However, completion of the remediation and final resolution of the matter is
subject to approval by the TNRCC.
The Company previously filed a complaint against National Union Fire
Insurance Company of Pittsburgh, Pa. ("National Union") seeking declaratory
judgment that National Union is obligated to indemnify the Company under three
pollution legal liability insurance policies issued by National Union and that
certain claims previously made by the Company with respect to such policies are
not "related claims" covered by a single policy as was alleged by National
Union. Previously, National Union had issued three pollution liability policies
to the Company, each covering a different time period and each containing a
provision that all claims arising out of related or continuous acts would be
considered a single loss and be deemed first reported during the policy period
in which the initial claim was first reported. The Company sought a declaratory
judgement establishing that the foregoing provision was not applicable to claims
that might arise under various lawsuits in which the Company is a defendant (see
"Claims and Legal Proceedings Against Gibraltar" below). This case was
dismissed in 1997; however, the issues raised in this action have not yet been
resolved by the parties.
The Company was previously a defendant in litigation filed in Angelina
District Court styled NUGENT V. PILGRIM'S PRIDE CORPORATION. The Company
settled such litigation June 25, 1998 which settlement obligates the Company to
pay the defendants a total of $75,000.00. This amount was accrued by the
Company as of December 31, 1997.
Additionally, in connection with its prior ownership of Gibraltar, the
Company is a party to lawsuits styled WILLIAMS V. GIBRALTAR CHEMICAL RESOURCES,
INC., ADAMS V. GIBRALTAR CHEMICAL RESOURCES, INC. and
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<PAGE>
DANIELS V. GIBRALTAR CHEMICAL RESOURCES, INC. to which Gibraltar is also a
party. These lawsuits are described below.
CLAIMS AND LEGAL PROCEEDINGS AGAINST GIBRALTAR. In connection with the
sale of Gibraltar discussed in Note 3 of Notes to Consolidated Financial
Statements set forth in Item 8 herein, the Company is obligated to indemnify AEC
for certain claims against Gibraltar, including various legal claims and
proceedings disclosed to AEC, arising from circumstances existing on or prior to
the date of the sale of Gibraltar. The following items constitute material
legal claims and proceedings for which the Company is obligated to indemnify
AEC:
A suit was filed against Gibraltar in August 1992 styled MONCRIEF V.
GIBRALTAR CHEMICAL RESOURCES, INC. in State District Court in Smith County,
Texas by certain persons who own land in the vicinity of Gibraltar's hazardous
waste facility in Winona, Texas. The suit asserts that the value of the
plaintiffs' land has been diminished as a result of the alleged emission of
objectionable odors from Gibraltar's facility. The plaintiffs assert various
grounds for recovery of damages and seek compensatory and punitive damages. The
Company defended these claims in a jury trial which resulted in inconsequential
damages being awarded to the plaintiffs on November 7, 1996.
On October 18, 1993, a suit styled WILLIAMS V. GIBRALTAR CHEMICAL
RESOURCES, INC. was filed against the Company, Gibraltar, Mobley Co. and certain
individuals, former customers of Gibraltar and other entities. This case is
currently pending in the State District Court of Smith County, Texas. The named
plaintiffs are certain individuals residing in Smith County, and are seeking
monetary damages for themselves and on behalf of all other persons similarly
situated. The petition alleges various acts of negligence, fraudulent
concealment, nuisance, trespass, and various others resulting from operations of
Gibraltar's hazardous waste facility. On May 12, 1997, plaintiffs' claims were
dismissed with prejudice by the Court. However, the Court's decision has been
appealed to the Court of Appeals.
Also on October 18, 1993, a suit was filed against the Company, Gibraltar,
Mobley Co., and certain individuals, former customers of Gibraltar and other
entities, and is currently pending in State District Court in Smith County,
Texas styled STEICH V. GIBRALTAR CHEMICAL RESOURCES, INC. This lawsuit was
settled by all parties thereto on February 27, 1998. The Company's financial
obligations under the settlement agreement were within applicable insurance
policy limits and were paid by the Company's insurance carrier.
A suit styled DANIELS V. GIBRALTAR CHEMICAL RESOURCES, INC. was filed on
August 31, 1995 in the State District Court of Dallas County, Texas against the
Company, Mobley Co., Gibraltar, and certain individuals, former customers of
Gibraltar and other entities by certain residents of Smith County, Texas. The
plaintiffs claim that they have experienced personal injury and property damage
which are alleged to have been caused by the operation of the Company's former
subsidiary, Gibraltar. The plaintiffs demand recovery of unspecified monetary
damages based on various legal grounds, including fraudulent concealment,
negligence, and assault & battery. This case is in the early stages of
discovery. While the Company disputes the material allegations of the
plaintiffs' suit and is vigorously defending the litigation, it is unable to
determine the likelihood of an unfavorable outcome at this time.
A suit styled GLAZER V. GIBRALTAR CHEMICAL RESOURCES, INC. was filed on
September 6, 1994, in the United States District Court for the Eastern District
of Texas Tyler Division against Gibraltar by an individual and Mothers Organized
to Stop Environmental Sins ("MOSES"), under the citizens' suit provisions of the
Clean Air Act and the Resource Conservation and Recovery Act. The suit alleges
repeated and continuing violations of these federal environmental protection
statutes by Gibraltar and an imminent and substantial endangerment to public
health and the environment caused by Gibraltar's alleged improper
transportation,
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<PAGE>
storage, treatment and disposal of solid and hazardous wastes. The plaintiffs
request that Gibraltar's hazardous waste facility be permanently closed,
civil penalties be imposed, and plaintiffs' costs of litigation be awarded.
The Company has recently been granted summary judgment as to a significant
number of the claims against it as the court found that certain alleged
violations of environmental protection statutes, on which plaintiffs' claims
were based, were diligently prosecuted by the State of Texas. This case has
been suspended by the court pending closure of the plant site pursuant to
TNRCC regulations and approvals.
A suit styled ADAMS V. AMERICAN ECOLOGY ENVIRONMENTAL SERVICES CORPORATION,
F/K/A GIBRALTAR CHEMICAL RESOURCES, INC. was filed on August 7, 1996 in the
State District Court of Tarrant County, Texas against Gibraltar by certain
individuals. The plaintiffs claim that they have experienced personal injury
and property damage which are alleged to have been caused by the operation of
Gibraltar. The plaintiffs demand recovery of unspecified monetary damages and
injunctive relief based on various legal grounds including negligence, assault
and battery, and intentional infliction of emotional distress. Discovery is
ongoing in this case. The Company may be obligated to indemnify the purchaser
of Gibraltar for certain losses resulting from the claims asserted by the
plaintiffs. While the Company disputes the material allegations of the
plaintiffs suit and intends to vigorously defend the litigation, it is unable to
determine the likelihood of an unfavorable outcome at this time.
The Company is currently not able to reasonably estimate its potential
exposure with respect to the foregoing matters. The Company's future financial
condition, results of operations, and liquidity could be materially adversely
impacted as the nature and scope of the Company's ultimate liability arising
from Gibraltar's operations and sale become better defined. Notwithstanding the
sale of its oilfield services and hydrocarbon recycling and recovery businesses
to U.S. Filter, all responsibility for the foregoing matters will be retained by
the Company. To the extent the Company is held liable for these matters, it
anticipates paying for any such obligations not covered by insurance with funds
retained from the net proceeds of such sale. See Note 14 of Notes to
Consolidated Financial Statements set forth in Item 8 herein for related
information.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of security holders during the fourth
quarter of the fiscal year covered by this report.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Prior to May 23, 1996, the Company's Common Stock was traded on the
National Market System of the National Association of Securities Dealers, Inc.
Automated Quotation System National Market System ("NASDAQ") under the symbol
"MBLYA". Since that date, the Company's Common Stock has been quoted for
trading on the OTC Bulletin Board under the same symbol. The following table
presents the high and low closing prices for the Company's Common Stock for 1996
and for 1997 prior to May 23, 1996, as reported by the NASDAQ. The table also
reflects the range of reported high and low bid quotations for the Company's
Common Stock for the period from May 23, 1996 through December 31, 1997 as
reported by the OTC Bulletin Board. Such over-the-counter market quotations
reflect inter-dealer prices, without retail mark-up, mark-down or commission and
may not necessarily represent actual transactions.
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<PAGE>
<TABLE>
Quarter Ended 1996 1997
------------- ----------------- ---------------------
High Low High Low
------- ------ -------- --------
<S> <C> <C> <C> <C>
March 31 $ 1 1/4 $5.5/8 $ 0 3/16 $ 0 9/32
June 30 1 1/4 0 5/8 0 7/32 0 19/64
September 30 15.5/16 0 1/2 0 7/32 0 19/64
December 31 0 3/4 0 1/8 0 7/32 0 1/4
</TABLE>
At May 31, 1998, there were approximately 1,100 beneficial owners of the
Company's Class A Common Stock, and 36 stockholders of record of the Company's
Class B Common Stock.
The Company has not paid any cash dividends on its Common Stock since its
initial public offering in September 1991 and has no current plans to make any
distributions to its shareholders (see "BUSINESS--Future Plans of the Company"
set forth in Item 1 herein).
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth, for the periods indicated, (i) certain
historical financial information of the Company and (ii) certain pro forma
financial information of the Company after giving effect to the sales of
substantially all of the operating assets of the Company's two business
segments. This information should be read in conjunction with the Consolidated
Financial Statements and notes thereto set forth at pages F-1 to F-25. The
information presented herein is not necessarily indicative of the financial
position or operating results that would have occurred had the sales been
completed on the date as of which, or at the beginning of periods for which, the
sales are being given effect nor is it necessarily indicative of future
operating results or financial position. All dollar amounts are in thousands,
except per share data.
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<PAGE>
<TABLE>
Years Ended December 31,
--------------------------------------------
1997 1996 1995 1994
------ -------- ------- ------
<S> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Operating loss (759) (1,166) (683) (376)
Net loss from
continuing operations (4) (1,286) (993) (332)
Net income (loss) 2,393 (10,235) (1,463) (4,095)
BALANCE SHEET DATA:
- -------------------
Working capital
(deficit) (322) (7,471) (95) (2,646)
Total assets 6,217 11,983) 19,097 22,252
Long-term debt, excluding
current maturities -- -- 490 --
Total stockholders'
equity 5,076 2,467 12,606 12,373
PER SHARE DATA:
- ---------------
Net loss per share:
Continuing operations (.00) (0.15) (0.12) (0.04)
Discontinued operations .27 (1.01) (0.05) (0.48)
------ -------- ------- ------
Net income (loss) 0.27 (1.16) (0.17) (0.52)
------ -------- ------- ------
------ -------- ------- ------
Book value 0.57 0.28 1.50 1.56
</TABLE>
- - Years prior to 1995 include results of operations of Gibraltar Chemical
Resources, Inc., which was sold effective December 31, 1994.
- - Year ended December 31, 1995 includes results of acquired businesses from
date of acquisition.
- - The 1993 information has been omitted because the discounted operations
data is not readily available.
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<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
THE FOLLOWING DISCUSSION SHOULD BE READ IN CONJUNCTION WITH THE
COMPANY'S AUDITED CONSOLIDATED BALANCE SHEETS AS OF DECEMBER 31, 1997 AND
1996, AND THE RELATED CONSOLIDATED STATEMENTS OF OPERATIONS, STOCKHOLDERS'
EQUITY, AND CASH FLOWS FOR EACH OF THE YEARS IN THE THREE-YEAR PERIOD ENDED
DECEMBER 31, 1997 ("CONSOLIDATED FINANCIAL STATEMENTS") AND RELATED NOTES
THERETO SET FORTH AT PAGES F-1 TO F-25 ATTACHED HERETO.
GENERAL
Prior to the sale of its hydrocarbon recycling and recovery business
(see "BUSINESS - Background of the Transaction" set forth in Item 1 herein
and Note 2 of Notes to Consolidated Financial Statements set forth in Item 8
herein), the Company provided diverse environmental and field-related
services to industrial, governmental, and commercial markets, and specialized
in the collection, transportation, treatment, recycling and management of a
wide variety of non-hazardous liquid hydrocarbons, oil filters, absorbents
and related materials. Prior to the sale of Gibraltar at year-end 1994 (see
Note 3 of Notes to Consolidated Financial Statements set forth in Item 8
herein), the Company's waste management services activities also included the
management of hazardous wastes. Prior to the sale of its oilfield services
assets on January 20, 1997, the Company also provided oilfield services for
managing liquids used or produced during the lifecycle of oil and gas wells
(see "BUSINESS--Oilfield Services" set forth in Item 1 herein and Note 2 of
Notes to Consolidated Financial Statements set forth in Item 8 herein).
The Company's revenues have historically consisted of fees collected
from customers, principally related to waste management and oilfield services
and, to a lesser extent, from product sales and equipment rentals. As a
result of new business lines which began in 1995 and continued to grow in
1996, a larger percentage of the Company's waste management services revenues
were derived from sales of manufactured or recovered products. Revenues
derived from waste management services were closely associated with volumes
of waste collected, levels of service provided and the related pricing.
Revenues from oilfield services were derived from hourly and fixed charges
for services provided, equipment rentals and products sold. Cost of revenues
include direct costs of providing services to customers, such as labor, third
party disposal, supplies and other consumables, depreciation, utilities and
fuel, equipment maintenance, and repair. Selling, general and administrative
expenses include selling and marketing expenses, certain insurance and
administrative salary expenses, depreciation, amortization of goodwill, and
legal and consulting fees.
As more fully described in "LEGAL PROCEEDINGS" set forth in Item 3
herein and Note 14 of Notes to Consolidated Financial Statements set forth in
Item 8 herein, the Company continues to defend various claims resulting from
the operations of Gibraltar. As of May 31, 1998, four such lawsuits were
pending, seeking compensatory and punitive damages for alleged personal
injury and property damage allegedly caused by operations and emissions of
Gibraltar's hazardous waste disposal facility, and 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 the nature and amount of the Company's
liability, if any. Although the Company is a defendant in certain of these
claims, in other matters the Company's potential liability arises from
material contractual indemnifications given by the Company to the purchaser
of Gibraltar, including the potential liability of certain former Gibraltar
customers who have become defendants in litigation involving Gibraltar's
operations. 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.
Accordingly, the Company has not made an accrual for any losses
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<PAGE>
which might result from these legal matters as such amounts or a range of
amounts are not currently reasonably estimatable. The Company's future
financial condition and liquidity could be materially adversely impacted as
the nature and scope of the Company's ultimate liability arising from
Gibraltar's operations and sale become better defined.
1997 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
January 20, 1997 and May 29, 1997, the Company completed transactions
pursuant to which it sold substantially all of its operating assets in two
separate transactions (see "BUSINESS--Business Strategy and Background of
the Transaction" and "--Oilfield Services" set forth in Item 1 herein and
Note 2 of Notes to Consolidated Financial Statements set forth in Item 8
herein). Because of these 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.
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 accumulation 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 recognized a gain upon completion of the sale, after transaction
costs of approximately $261,000, amounting to approximately $2,802,000 in
January 1997.
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 ("U.S. Filter") 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 U.S. Filter 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 U.S. Filter common stock based on the
performance of the business during the two years following its sale.
Additionally, U.S. Filter assumed certain liabilities (accounts payable and
accrued expenses) as part of the transaction. The net assets which were the
subject of the definitive agreement have been removed from the consolidated
balance sheet as of June 30, 1997. Such assets had a net book value (net of
assumed liabilities) of approximately $14,965,060.
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
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<PAGE>
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 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 loss of approximately $405,000 during the period from January 1, 1997
until May 29, 1997, the date of closing on the sale, which was in excess of
the amounts previously accrued. The majority of this loss was created by
additional charges related to automobile liability insurance claims and
medical claims which were not included in the accruals established at
December 31, 1996. The Company's sale of its hydrocarbon recycling and
recovery business is further described in the Company's Information Statement
to its Shareholders dated May 9, 1997.
RESULTS OF OPERATIONS
Comparisons of the 1996 and 1997 operations are not meaningful due to
the sale of substantially all of the operating assets of the Company during
1997. Additional losses from discontinued operations occurred in the second
quarter of 1997 due to unexpected automobile liability insurance claims and
medical claims in the amount of $400,000. General and administrative costs
in the amount of $759,000 for the year ended December 31, 1997 have been
incurred that were not considered part of the cost of the discontinued
operations. In addition, a gain on the sale of U.S. Filter shares in the
amount of $555,000 has been recorded through December 31, 1997 as all of the
U.S. Filter stock has been sold.
CAPITAL RESOURCES AND LIQUIDITY
All of the $8.0 million in U.S. Filter common stock received at the time
of the closing of the sale of its waste management services assets has been
sold. Cash from the U.S. Filter stock sale, along with the proceeds from the
sale of the oilfield services assets, resulted in net proceeds totaling
approximately $8.2 million after repayment of the outstanding bank
indebtedness and transaction expenses. Such net proceeds were used to fund
the current liabilities retained by the Company following the sales, with the
remaining surplus cash deployed in investment securities. General and
administrative expenses incurred for 1997 were approximately $759,000. The
Company anticipates that ongoing general and administrative expenses will be
approximately $310,000 annually, exclusive of any litigation costs, 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 asset
purchase agreement with U.S. Filter, the Company may receive up to $4.0
million in U.S. Filter common stock during the two-year period following the
sale based on the performance of the hydrocarbon recycling business.
Additionally, in connection with the sale of the oilfield services business,
the Company received a $500,000 subordinated note receivable from Dawson,
bearing interest at 8.5%, which matures on January 4, 2002.
In connection with the sale of assets to U.S. Filter, 10% of the
proceeds of such transaction (approximately $825,000) were required to be
maintained in escrow for a period of one year from the closing of the
transaction to satisfy indemnification obligations of the Company to U.S.
Filter. On May 29, 1998, approximately $500,000 were released from escrow
and paid to the Company. The remaining funds are being held by the escrow
agent pending resolution of outstanding claims for which U.S. Filter seeks
reimbursement from escrow.
Because of its indemnification obligations related to the sale of
Gibraltar, as well as potential indemnity obligations with respect to the
asset sales of U.S. Filter and Dawson, and in light of the ongoing litigation
17
<PAGE>
(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. The Company has no plans to conduct any kind of
operating business at any time in the future.
MANAGEMENT'S RESPONSIBILITY FOR THE CONSOLIDATED FINANCIAL STATEMENTS
The Consolidated Financial Statements of the Company are the
responsibility of management. They have been prepared in accordance with
generally accepted accounting principles and include estimates and judgments
made by management. To meet the responsibility for reliable financial data,
management maintains a system of internal accounting controls which is
designed to provide reasonable assurance that transactions are executed as
authorized and are accurately recorded and that assets are properly
safeguarded. Although accounting controls are designed to achieve this
objective, it must be recognized that errors or irregularities may occur. In
addition, it is necessary to assess and balance the relative costs and the
expected benefits of the internal accounting controls.
The Company's independent auditors, KPMG Peat Marwick LLP, have audited
the Consolidated Financial Statements in accordance with generally accepted
auditing standards, which include a review of the system of internal
accounting controls only to the extent necessary to determine audit
procedures required to express their opinion.
CERTAIN TRENDS AND UNCERTAINTIES
As a cautionary note to investors, the Company and its representatives
may make oral or written statements from time to time that are
"forward-looking statements" within the meaning of the United States federal
securities laws, including information contained herein which is not
historical. There are a number of important factors which could cause actual
results and consequences to differ materially from those anticipated. Such
factors include, but are not limited to, those set forth below.
RESOLUTION OF INDEMNIFICATION OBLIGATIONS AND PENDING LITIGATION. As
more fully discussed in "LEGAL PROCEEDINGS" set forth in Item 3 herein and
Note 14 of Notes to Consolidated Financial Statements set forth in Item 8
herein, the Company has various outstanding contractual indemnification
obligations and is a defendant in various pending litigation matters. 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.
The Company, based on consultation with its legal counsel, believes that it
is probable that the Company will continue to incur expenses associated with
the foregoing matters and the Company has made an accrual for estimated
out-of-pocket costs associated with the ongoing administrative management of
existing legal 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. The Company's future financial condition, results of
operations, and liquidity could be materially adversely impacted as the
nature and scope of the Company's ultimate liability arising from Gibraltar's
operations and sale become better defined.
FUTURE PLANS OF THE COMPANY. For reasons described elsewhere in this
Form 10-K (see "BUSINESS--Future Plans of the Company" set forth in Item 1
herein), the Company does not currently anticipate making a distribution to
its shareholders in the foreseeable future. As circumstances change or
additional information with respect to the extent of the Company's potential
indemnity obligations becomes
18
<PAGE>
available, the Board of Directors will continue to evaluate various uses for
the Company's funds. The Company anticipates that its ongoing general and
administrative expenses will be approximately $310,000 annually, and expects
earnings from investments to largely offset such costs. This amount is based
on current estimates and actual amounts could differ from this estimate.
INVESTMENT SECURITIES OF THE COMPANY. As of December 31, 1997, the
Company's assets included $4,495,000 in investment securities available for
sale. Such securities are interest-bearing investment grade bonds and
similar securities. However, the future value or quality of such securities
is subject to market fluctuation and their performance is not guaranteed.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
This Item is not applicable to the Company because its market
capitalization was less than $2.5 billion on January 28, 1997.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information on pages F-1 to F-25 of this Form 10-K is incorporated
by reference in response to this item.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
Not Applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
DIRECTORS:
Set forth below is certain information regarding each of the three (3)
persons currently serving as directors of the Company.
<TABLE>
Name Age Positions With The Company Director Since
<S> <C> <C> <C>
Class A Director:
- -----------------
Stewart Cureton, Jr. 52 Director; Member of Audit Committee and Compensation Committee 1991
19
<PAGE>
Class B Directors:
- ------------------
John Mobley 67 Chairman of the Board; Member of Executive Committee, Environmental,
Health and Safety Committee and Compensation Committee 1991
T.M. Mobley 62 Vice-Chairman of the Board; Member of Executive Committee, Environmental,
Health and Safety Committee, Compensation Committee and Audit Committee 1991
</TABLE>
JOHN MOBLEY has been Chairman of the Board of the Company since its
organization. From the time of the Company's organization through November
1993, Mr. Mobley served as Chief Executive Officer. Prior to the
organization of the Company, Mr. Mobley held various senior management
positions with the Company's predecessors. Mr. Mobley was President of Tiger
Corporation, a solid-waste disposal company, from 1971 until it was sold to a
national solid-waste disposal company in 1986. Upon the sale of
substantially all of the Company's operating assets, Mr. Mobley became
President, Chief Financial Officer and Secretary of the Company.
T.M. MOBLEY has been Vice Chairman of the Board since November 1992.
Previously Mr. Mobley had served as President and Chief Operating Officer of
the Company from the time of its organization until November 1992 and had
held various senior management positions with the Company's predecessors
since 1961. Mr. Mobley joined Gibraltar Chemical Resources, Inc.
("Gibraltar") as President in 1985 and served in that capacity until 1991.
Mr. Mobley served as President of Mobley Company, Inc. ("Mobley Co.") from
1965 until 1989. Upon the sale of substantially all of the Company's
operating assets, Mr. Mobley became Vice President and Treasurer of the
Company.
STEWART CURETON, JR. became a director upon completion of the initial
public offering by the Company, which closed on October 1, 1991. Mr. Cureton
has been with Cureton & Co., Incorporated and its predecessor Curtin & Co.,
Incorporated, a private investment firm, since 1978, and its President since
1989.
John Mobley and T.M. Mobley are brothers. There are no other family
relationships among the Company's directors and executive officers.
EXECUTIVE OFFICERS:
The following persons are the Company's current executive officers.
NAME POSITION
John Mobley President, Chief Financial Officer and Secretary
T.M. Mobley Vice President and Treasurer
Officers are elected annually by the Board of Directors and serve at the
discretion of the Board. Until the sale of the Company's hydrocarbon
recycling and recovery business on May 29, 1997, Michael M. Stark served as
the Company's President and Chief Executive Officer and W. Christopher
Chisholm served as Vice President and Chief Financial Officer, Secretary and
Treasurer. Upon completion of the sale of assets to U.S.
20
<PAGE>
Filter, Mr. Stark and Mr. Chisholm became employees of U.S. Filter and,
therefore, resigned as officers of the Company. Set forth below is certain
information regarding Mr. Stark and Mr. Chisholm.
MICHAEL M. STARK was President and Chief Executive Officer of the Company
from November 3, 1993 through May 29, 1997. From November 1992 to November
1993, he served as the Company's President and Chief Operating Officer.
During the previous five years, Mr. Stark was Senior Vice President of TETRA
Technologies, Inc. in Houston, Texas, heading its waste treatment operations.
Mr. Stark served as a Director of the Company and member of the Executive
and Environmental, Health and Safety Committees prior to his resignation from
the Board on November 8, 1996.
W. CHRISTOPHER CHISHOLM was Vice President and Chief Financial Officer,
Secretary and Treasurer of the Company since 1993. Prior to that time, Mr.
Chisholm held the position of Vice President and Controller. Prior to
joining the Company in October 1991, Mr. Chisholm was a Senior Manager with
KPMG Peat Marwick LLP.
SECTION 16 REQUIREMENTS
Section 16(a) of the Securities Exchange Act of 1934, as amended (the
"1934 Act"), requires the Company's directors and officers, and persons who
own more than 10% of a registered class of the Company's equity securities,
to file initial reports of ownership and reports of changes in ownership with
the Securities and Exchange Commission (the "SEC"). Such persons are
required by SEC regulations to furnish the Company with copies of all Section
16(a) forms they file. Based solely on its review of the copies of such
forms received by it with respect to fiscal year 1997, or written
representations from certain reporting persons, the Company believes that all
filing requirements applicable to its directors, officers, and persons who
own more than 10% of a registered class of the Company's equity securities
have been complied with.
21
<PAGE>
ITEM 11. EXECUTIVE COMPENSATION
Summary Compensation Table
The following table sets forth certain information regarding
compensation paid to the two individuals who served as the Company's Chief
Executive Officer during the Company's last three fiscal years (no other
executive officer of the Company earned in excess of $100,000 during 1997).
<TABLE>
Long-Term Compensation
---------------------------------
Annual Compensation Awards Pay-outs
----------------------------------- ------------------------ --------
(a) (b) (c) (d) (e) (f) (g) (h) (i)
- -------------------------- ---- ------- ------ --------- ---------- ---------- -------- ------------
Other Securities
Annual Restricted Underlying LTIP All Other
Name and Principal Salary Bonus Compensa- Stock Options/ Pay-outs Compensation
Position Year ($) ($)(4) tion ($) Awards ($) SARs (#) ($) ($)
- -------------------------- ---- ------- ------ --------- ---------- ---------- -------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Michael M. Stark (1) 1997 110,371 50,000 -- -- -- -- 15,886(5)
PRESIDENT & CHIEF 1996 218,000 -- -- -- -- -- 7,453(6)
EXECUTIVE OFFICER 1995 219,440 5,000 -- 150,000(8) -- -- 6,500(8)
W. Christopher Chisholm (2) 1997 53,308 64,642 -- -- -- -- 9,559(9)
VICE PRESIDENT & CHIEF
FINANCIAL OFFICER
John Mobley (3) 1997 -- -- 6,000(10) -- -- -- --
PRESIDENT & CHIEF
EXECUTIVE OFFICER
</TABLE>
- ---------------
(1) Mr. Stark served as the Company's Chief Executive Officer during 1995 and
1996 and through May 29, 1997.
(2) Mr. Chisholm served as a Vice President and the Company's Chief Financial
Officer during 1997 until the sale of the Company's remaining operating
assets on May 29, 1997.
(3) Mr. Mobley has served as the Company's Chief Financial Officer since
May 29, 1997. Although Mr. Mobley is paid directors fees as set forth
herein (see "Compensation of Directors" below), he was not paid a salary
in 1997 (other than a car allowance) to serve as the Company's Chief
Executive Officer (nor has he received a salary to date in 1998).
(4) Reflects bonus earned during 1995 and amounts paid in 1997 in connection
with resignation associated with the sale of assets to U.S. Filter.
(5) Consists of term life insurance premiums of $432, car allowance of $779,
and the value of a Company vehicle conveyed to Mr. Stark of $14,675.
(6) Consists of contribution to Company's Profit Sharing Plan of $3,203, term
life insurance premiums of $864 and disability insurance premiums of
$3,386.
(7) Mr. Stark was granted 100,000 shares of restricted Class A Stock in
conjunction with the approval of the 1995 Employee Restricted Stock Plan
(the "Restricted Stock Plan") at the Company's Annual Meeting of
Shareholders on June 8, 1995. Based on the market price of such stock on
that date, as reported by the NASDAQ ($1.50 per share), the total value of
the restricted stock award was $150,000. At December 31, 1997, the total
value of such restricted shares was $25,000, based on the closing bid price
of the Class A Stock on that date, as reported by the OTC Bulletin Board
($0.25 per share). Pursuant to the modified terms of the grant of such
shares to Mr. Stark, such shares vest in proportion to the number of
shares of U.S. Filter stock earned by the Company during the two-year
period following the sale of assets to U.S. Filter based on the
performance of such assets during that period.
(8) Consists of contribution to the Company's Profit Sharing Plan of $2,250,
term life insurance premiums of $864 and disability insurance premiums of
$3,386.
(9) Consists of term life insurance premiums of $91, car allowance of $968, and
the value of a Company vehicle conveyed to Mr. Chisholm of $8,500.
(10) Consists of car allowance.
22
<PAGE>
AGGREGATED OPTION/SAR EXERCISES IN 1996 FISCAL YEAR AND DECEMBER 31, 1996
OPTION/SAR VALUES
During 1997, there was no exercise of any outstanding option to purchase
shares of stock in the Company, and as of December 31, 1997, all such stock
options previously granted to the Company's executive officers had terminated
unexercised.
REPORT OF THE COMPENSATION COMMITTEE OF THE BOARD OF DIRECTORS
During 1997, the Compensation Committee of the Board of Directors is
comprised of Stewart Cureton, Jr., John Mobley, and T.M. Mobley, all of which
are non-employee directors of the Company. The Committee reviews the
salaries, benefits and other compensation for officers of the Company and its
subsidiaries and advises the Company's Board of Directors regarding the
Company's compensation policies.
The following report submitted by the above-listed committee members in
their capacity as the Board's Compensation Committee addresses the Company's
compensation policy as it relates to its executive officers for fiscal 1997.
It has been the Committee's belief that it is in the Company's best
interest for its compensation programs to be geared toward the attraction and
retention of high-caliber executives and other key employees by rewarding
individual performance and ultimately, to the promotion of shareholder value.
To achieve these objectives, the Company's executive compensation programs
were structured to include two principal elements: (1) salary and bonuses,
and (2) longer-term incentive rewards.
ANNUAL COMPENSATION--SALARY AND BONUS
It has been the Compensation Committee's practice to review and approve
salaries, including salary increases for executive officers and bonus awards,
annually. The salary level for the Company's Chief Executive Officer is set
by the Committee based on the experience he brings to that position and his
contributions to the performance of the Company. Mr. Stark joined the
Company as President and Chief Operating Officer in November 1992 and became
Chief Executive Officer from November 1993 to November 1997. His base salary
did not change from the inception of his employment. Mr. Stark's employment
agreement entitled him to incentive compensation in an amount determined
annually by the Compensation Committee. No such incentive compensation was
awarded during the year ended December 31, 1997; however, in connection with
the sale of assets to U.S. Filter and the resulting termination of his
employment by the Company, Mr. Stark was paid $50,000 and a Company vehicle
valued at $14,675 was conveyed to him.
The Committee receives reports of recommended salary and bonus actions
for the other executive officers from the Chief Executive Officer. The
Committee reviews these recommendations, may request additional information
and analysis, and ultimately determines whether to approve, recommend
changes, or disapprove salary actions.
LONG-TERM INCENTIVE COMPENSATION
In past years, incentives designed to focus on and reward performance
over longer-term operations have been provided to executive officers and
other key employees in the form of options to acquire shares of the Company's
Class A Stock, as well as grants of restricted shares of Class A Stock.
23
<PAGE>
RESTRICTED STOCK AWARDS
To enable the Company to provide its executive and other key officers
with an additional incentive to maximize both long-term and short-term
shareholder value by giving them a proprietary interest in the Company
through the ownership of stock, thereby increasing the personal stakes of
such key employees in the future growth and success of the Company, the
Compensation Committee concluded that the grant of restricted shares of Class
A Common Stock was in the best interests of the Company and its shareholders.
Consequently, the Board of Directors adopted the 1995 Employee Restricted
Stock Plan effective January 1, 1995. In light of the sale of assets to U.S.
Filter, the individual grant agreements were amended such that the deferred
compensation costs associated with the unvested shares will be earned by the
Company's two executive officers and two other officers only in the event and
to the extent that the Company receives additional shares of U.S. Filter
Stock pursuant to an "earnout" provision in the definitive asset acquisition
agreement (see "BUSINESS--Business Strategy and Background of the
Transaction" set forth in Item 1 herein).
COMPENSATION PAID TO CERTAIN OFFICERS IN CONNECTION WITH TRANSACTION
Effective with the closing of the sale of assets to U.S. Filter, the
Company's Board of Directors approved payments totaling $165,000 to certain
of the Company's officers in recognition of their years of service and past
efforts.
DEDUCTIBILITY OF COMPENSATION
The compensation paid to the Company's executive officers during 1997 is
fully deductible by the Company in calculating the Company's Federal taxable
income notwithstanding Section 162(m) of the Internal Revenue Code of 1986,
as amended (the "Code"), which limits the deductibility of certain employee
remuneration in excess of $1,000,000 per employee.
SUMMARY
The decisions the Committee makes in approving salaries and bonuses and
granting options and other incentives to executive officers are made
subjectively by the Committee using their judgment and reflect their
evaluation and assessment of individual performance. The Committee bases its
decisions, in part, on its regular exposure to these executive officers at
Board meetings and the various information it receives about the business
during the year. Additionally, the Committee receives the Chief Executive
Officer's recommendations regarding compensation for other executive officers
and key employees. All such decisions have been made with the objective of
retaining and compensating those officers and key employees who have
demonstrated to the satisfaction of the Committee the capacity to contribute
to the performance of the Company.
COMPENSATION COMMITTEE
STEWART CURETON, JR., CHAIRMAN
JOHN MOBLEY
T.M. MOBLEY
24
<PAGE>
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Compensation Committee of the Board of Directors is comprised of
Stewart Cureton, Jr., John Mobley, and T.M. Mobley, all of which are
currently non-employee directors of the Company. From the time of the
Company's organization until November 1993, John Mobley served as the
Company's Chief Executive Officer and held various management positions with
its predecessors prior to that time. From the time of the Company's
organization until November 1992, T.M. Mobley served as the Company's
President and Chief Operating Officer, and held various senior management
positions with its predecessors prior to that time.
COMPENSATION OF DIRECTORS
During 1997, directors received annual compensation as follows:
<TABLE>
Chairman & Other Non-
Vice Chairman Employee Directors
------------- ------------------
<S> <C> <C>
Annual retainer $7,500 $7,500
Chairman/Vice Chairman
compensation 5,000 --
Committee chairman fees 2,500 2,500
Board meeting fees (1) 750 750
Committee meeting fees (2) 500 500
</TABLE>
- -------------------------
(1) Payment of fees limited to four meetings annually.
(2) Committee meeting fees are $250 for committee meetings held the same
day and location as Board meetings.
COMPANY PERFORMANCE GRAPH
The chart below compares the yearly percentage change in the cumulative
total shareholder return on the Company's Class A Stock during the period
from September 25, 1991 (the date the Company's stock began trading after its
initial public offering) to December 31, 1997, with the cumulative total
return on the S&P 500 Index, a Company-constructed peer group and the Russell
2000 Index. The comparison assumes $100 was invested on September 25, 1991
in the Company's Class A Stock and in each of the foregoing indices and
assumes reinvestment of dividends.
Companies included in the peer group are as follows: Clean Harbors,
Inc.; Laidlaw Environmental Services, Inc.; Safety Kleen Corp. and TETRA
Technologies, Inc. Horsehead Resource Development, Inc., which was included
in the peer group in prior years, has not been included in the chart below
due to a change in its corporate structure during 1996. Given the Company's
inactive operating status, a comparison to the foregoing peer group is
currently of relatively minor significance. Accordingly, the Company has
included a comparison to the Russell 2000 Index, which is comprised of
companies without applicable per group companies, but with similar market
capitalization to one another and the Company.
25
<PAGE>
SUMMARY OF COMPENSATION PLANS
Prior to the disposition of substantially all of the Company's remaining
operating assets on May 29, 1997, the Company maintained the employee
compensation plans summarized below. Effective as of May 29, 1997, the
Company had no employees participating in such plans, and the Company does
not anticipate that any employees will participate in such plans at any time
in the future (currently, the Company has no employees).
RESTATED STOCK COMPENSATION PLAN
The Company adopted the Restated Stock Compensation Plan to provide for
the grant of non-qualified options to participating employees. An aggregate
of 645,000 shares of Class A Stock were authorized and reserved for issuance
under the plan. The plan was administered by the Compensation Committee,
which had the sole authority to interpret the plan, to determine the persons
to whom options would be granted, and to determine the exercise price,
duration and other terms of options to be granted under the plan; provided
that, the exercise price of all options granted under the plan could not be
less than the fair market value of the Class A Stock at the date of grant of
the option, and no option could be exercisable more than ten years after the
date of grant. During 1997, no options were granted under this plan, no
previously granted options were exercised, and as of December 31, 1997, no
unexercised options remained outstanding (all such options having terminated
during 1997).
26
<PAGE>
PROFIT SHARING PLAN
The Company and its former subsidiaries adopted the Mobley Employees
Profit Sharing Plan, which was intended to comply with Section 401 of the
Internal Revenue Code and the provisions of the Employee Retirement Income
Security Act of 1974 ("ERISA"). All employees of the companies who had
completed six months of service and attained the age of 21 were eligible to
participate in the plan. Participating employees were allowed to make
pre-tax contributions to their accounts of up to 15% of their compensation
(up to a maximum of $9,500 in 1997). The employer, in its discretion, may
make matching contributions based on the employee's elective contribution and
may make an aggregate contribution which would be allocated among
participating employees based on relative compensation levels. Employer
contributions vested 30% after three years of service, 40% after four years
of service, and 20% per year of service thereafter. Distributions generally
were payable in a lump sum after retirement, death or disability. No
contribution was made to the Plan in 1997, based on the Company's financial
performance.
EMPLOYMENT AGREEMENT
The Company entered into an employment agreement with Michael M. Stark
effective October 23, 1992, which specified that his duties were that of
President and Chief Operating Officer of the Company, with a base annual
salary of $218,000 (Mr. Stark subsequently became Chief Executive Officer
effective November 3, 1993 and served in that capacity until his May 29, 1997
resignation). The agreement also provides that Mr. Stark is entitled to a
bonus in an amount to be determined annually by the Compensation Committee.
In 1997, Mr. Stark was not awarded bonus compensation pursuant to his
Employment Agreement, but did receive compensation in connection with the
sale of assets to U.S. Filter, as previously described. Pursuant to the
terms of the employment agreement, Mr. Stark was granted options covering
240,000 shares of the Company's Class A Stock; however, such options have
terminated.
27
<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT
The following table sets forth, as of May 31, 1998, the shares of Class
A and Class B Stock beneficially owned by (i) each person known to the
Company to be the beneficial owner of more than five percent of the issued
and outstanding shares of the Company's Class A or Class B Stock, (ii) each
director, (iii) the Company's Chief Executive Officer, and (iv) the directors
and executive officers as a group. This information is based on public
filings made with the Securities and Exchange Commission through May 1998,
and certain information supplied to the Company by the persons listed below.
<TABLE>
CLASS A STOCK(1) CLASS B STOCK(1)
Percent of Percent of
Name of Beneficial Owner (2) Shares Class(3) Shares Class
- ---------------------------- --------- ---------- ------------- -----------
<S> <C> <C> <C> <C>
John Mobley 4,600(4) * 687,004(5) 15.0%
Lois Ann Mobley -- -- 253,550(6) 5.5%
James A. Mobley(7) -- -- 647,517 14.1%
Steven M. Mobley(7) -- -- 647,517 14.1%
H. David Hughes, Trustee -- -- 365,786(8) 8.0%
T.M. Mobley -- -- 1,108,210(9) 24.2%
Jo Ann Mobley Grooms -- -- 324,671(10) 7.10%
Susan Mobley Matthews -- -- 235,471(11) 5.1%
David Mobley -- -- 515,163(12) 11.3%
Robert G. Schleier, Trustee -- -- 691,527(13) 15.1%
Stewart Cureton, Jr.(14) 10,000 * -- --
Directors and Executive Officers
as a Group (3 persons) 14,600 * 1,795,214 39.2%
</TABLE>
- -------------------
*Less than 1%
(1) Each share of Class B Stock is convertible into Class A Stock on a
share-for-share basis at any time. The information set forth for Class A
Stock does not include the shares of Class B Stock which are convertible
into Class A Stock.
(2) Addresses of beneficial owners are as follows: John Mobley and Lois Ann
Mobley, 305 Camp Craft Road, Suite 150, Austin, Texas; James A. Mobley,
919 Hillcrest Drive, Longview, Texas; Steven M. Mobley, 816 Congress
Avenue, Suite 1100, Austin, Texas; H. David Hughes, 111 Congress Avenue,
Suite 1400, Austin, Texas; T.M. Mobley, 609 Willow Bend, Kilgore, Texas;
Stuart Cureton, Jr., Cureton & Co., Inc., 1100 Louisiana, Suite 3250,
Houston, Texas; Jo Ann Mobley Grooms, 1880 Bent Tree, Tyler, Texas; Susan
Mobley Matthews, HCR 68, Box 23A, Hondo, Texas; David Mobley, 1909 N.
Longview Street, Kilgore, Texas; and Robert G. Schleier, 1100 Stone Road,
Suite 101, Kilgore, Texas.
(3) Percentages are calculated on the number of shares that would be
outstanding if all remaining stock options were exercised.
(4) Includes a pro-rata portion of the shares of Class A Stock owned by a
corporation which is owned 40% by John Mobley; Mr. Mobley shares voting and
investment power for shares owned by such corporation.
(5) Includes 253,550 shares held by a family trust for which Mr. Mobley's
spouse, Lois Ann Mobley, is co-trustee; Mr. Mobley has no pecuniary
interest in such shares.
28
<PAGE>
(6) Represents shares held as co-trustee for a trust; Mrs. Mobley shares voting
and investment power for such shares with H. David Hughes.
(7) The number of shares listed for each of James A. Mobley and Steven M.
Mobley includes 290,600 shares owned by trusts for which they serve as
trustees.
(8) Represents shares held as co-trustee for two trusts (see Footnotes (6) and
(9)). Although Mr. Hughes shares voting and investment power for such
shares, he has no pecuniary interest in the shares.
(9) Includes 112,236 shares held as co-trustee for a trust; although Mr. Mobley
shares voting and investment power with H. David Hughes for shares owned by
such trust, he has no pecuniary interest in those shares.
(10) Includes 296,671 shares owned by trusts for which Mrs. Grooms is sole
trustee. Also includes 28,000 shares owned of record by Mrs. Grooms'
spouse; Mrs. Grooms disclaims beneficial ownership for such shares.
(11) Includes 207,471 shares owned by trusts for which Mrs. Matthews is sole
trustee. Also includes 28,000 shares owned of record by Mrs. Matthews'
spouse; Mrs. Matthews disclaims beneficial ownership for such shares.
(12) Represents shares held as trustee or co-trustee for trusts. Mr. Mobley
shares voting and investment power for 512,739 of the shares.
(13) Represents shares held as trustee or co-trustee for four trusts; Mr.
Schleier shares voting and investment power with David Mobley for 511,527
of these shares. However, Mr. Schleier has no pecuniary interest in any of
the shares he beneficially owns.
(14) Represents shares which may be acquired within 60 days of May 31, 1998
under stock options granted to Mr. Cureton.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In 1996, the Company engaged Cureton & Co., an entity in which Stewart
Cureton, Jr. has an ownership and management interest, to provide certain
business consulting services to the Company, including analysis and
negotiation of potential business combination transactions to which the
Company might be a party. Mr. Cureton is a Class A director. Under the
terms of the engagement, the Company paid Cureton & Co. retainer fees of
$12,200 through December 31, 1997. Additionally, the Company paid Cureton &
Co. a total of approximately $220,000, plus out-of-pocket expenses, in
conjunction with the sale of assets to U.S. Filter, and a fee of
approximately $207,500, plus out-of-pocket expenses, in connection with U. S.
Filter's acquisition of PORI, which was completed on February 28, 1997.
Under the terms of the Agreement, U.S. Filter reimbursed the Company $250,000
for expenses associated with its due diligence investigations of PORI,
including amounts due to Cureton & Co. Additionally, in connection with the
disposition of its oilfield services business described previously, the
Company paid Cureton & Co. approximately $150,000, plus out-of-pocket
expenses. The Company believes that the terms of its arrangements with
Cureton & Co. are consistent with industry standards for similar services.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
ITEM 14 (a) 1. FINANCIAL STATEMENTS
The following consolidated financial statements of the Company and its
subsidiaries are incorporated by reference in response to this item:
29
<PAGE>
Page
----
Independent Auditor's Report F-1
Consolidated Balance Sheets
December 31, 1997 and 1996 F-2
Consolidated Statements of Operations
Years ended December 31, 1997, 1996 and 1995 F-3
Consolidated Statements of Stockholders' Equity
Years ended December 31, 1997, 1996 and 1995 F-4
Consolidated Statements of Cash Flows
Years ended December 31, 1997, 1996 and 1995 F-5
Notes to Consolidated Financial Statements F-6 to F-25
ITEM 14 (a) 2. FINANCIAL STATEMENT SCHEDULES
All schedules have been omitted because the required information is shown
in the consolidated financial statements or notes thereto or they are not
applicable.
ITEM 14 (a) 3. LIST OF EXHIBITS
<TABLE>
Exhibit
Number
- -------
<S> <C>
3.1* Certificate of Incorporation of the Company (filed as Exhibit 3.1 to
the Company's Registration Statement on Form S-1, No. 33-41722).
3.2* Bylaws of the Company (filed as Exhibit 3.2 to the Company's
Registration Statement on Form S-1, No. 33-41722).
3.3* Amendment to Bylaws of the Company (filed as Exhibit 3.2(b) to the
Company's Annual Report on Form 10-K for the year ended December 31,
1991).
4.1* Specimen Class A Common Stock Certificate (filed as Exhibit 4.1 to the
Company's Registration Statement on Form S-1, No. 33-41722).
4.2* Specimen Class B Common Stock Certificate (filed as Exhibit 4.2 to the
Company's Registration Statement on Form S-1, No. 33-41722).
10.1*+ Form of Nonqualified Stock Option Plan for Outside Directors (filed as
Exhibit 10.6 to the Company's Registration Statement on Form S-1, No.
33-41722).
10.2*+ Form of Restated Stock Compensation Plan (filed as Exhibit 4.3 to the
Company's Registration Statement on Form S-8, No. 33-92336).
30
<PAGE>
10.3* Agreement and Plan of Restructuring among the Company, Gibraltar,
Mobley Co., Mobley Group, Inc. ("Mobley Group"), Mobley Industries
Partnership ("MIP"), Mobley Properties, John Mobley, Thomas M. Mobley,
David Mobley and David Mobley Grantor Trust (filed as Exhibit 10.9 to
the Company's Registration Statement on Form S-1, No. 33-41722).
10.4*+ Mobley Employees Profit Sharing Plan, as amended and restated
effective January 1, 1994 (filed as Exhibit 10(e) to the Company's
Annual Report on Form 10-K for the year ended December 31, 1994).
10.5* Registration Rights Agreement, dated August 23, 1991 between the
Company and David Mobley Grantor Trust (filed as Exhibit 10.54 to the
Company's Registration Statement on Form S-1, No. 33-41722).
10.6*+ Employment agreement between Mobley Environmental Services, Inc. and
Michael M. Stark, dated October 23, 1992 (filed as Exhibit 10.1 to the
Company's Quarterly Report on Form 10-Q for the quarterly period ended
September 30, 1992).
10.7* Stock Purchase Agreement dated May 10, 1994 by and between American
Ecology Corporation and Mobley Environmental Services, Inc. (filed as
Exhibit 10(ii) to the Company's Annual Report on Form 10-K for the
year ended December 31, 1993).
10.8* Side Letter Agreement dated May 13, 1994 between American Ecology
Corporation and Mobley Environmental Services, Inc. regarding the
Stock Purchase Agreement set forth at Exhibit 10(ii) (filed as Exhibit
10(jj) to the Company's Annual Report on Form 10-K for the year ended
December 31, 1993).
10.9* Amendment to Stock Purchase Agreement dated September 2, 1994 between
American Ecology Corporation and Mobley Environmental Services, Inc.
regarding the Stock Purchase Agreement (filed as Exhibit 10(mm) to the
Company's Quarterly Report on Form 10-Q for the quarterly period ended
June 30, 1994).
10.10* Promissory Note in the original principal amount of $550,000 dated
December 31, 1994 executed by American Ecology Corporation payable to
Mobley Environmental Services, Inc. (filed as Exhibit 10(v) to the
Company's Annual Report on Form 10-K for the year ended December 31,
1994).
10.11* Loan Agreement dated June 2, 1995 between the Company and Bank One,
Texas, N.A. (filed as Exhibit 10(a) to the Company's Quarterly Report
on Form 10-Q for the quarterly period ended June 30, 1995).
10.12* Security Agreement dated June 2, 1995 between the Company and Bank
One, Texas, N.A. (filed as Exhibit 10(b) to the Company's Quarterly
Report on Form 10-Q for the quarterly period ended June 30, 1995).
10.13* Unlimited Guaranty between Mobley Company, Inc. and Bank One, Texas,
N.A. (filed as Exhibit 10(c) to the Company's Quarterly Report on Form
10-Q for the quarterly period ended June 30, 1995).
31
<PAGE>
10.14* Asset Purchase Agreement dated June 7, 1995 between the Company and
Romero Bros. Oil Exchange, Environmental Petroleum Products Co./EPPCO,
and Environmental Insight, Inc. (the "Romero Asset Purchase
Agreement") (filed as Exhibit 10(d) to the Company's Quarterly Report
on Form 10-Q for the quarterly period ended June 30, 1995).
10.15* Assignment by the Company of the Romero Asset Purchase Agreement to
Hydrocarbon Technologies, Inc., a wholly-owned subsidiary of the
Company (filed as Exhibit 10(e) to the Company's Quarterly Report on
Form 10-Q for the quarterly period ended June 30, 1995).
10.16* Escrow Agreement dated July 19, 1995 between the Company, Romero Bros.
Oil Exchange, Inc. and Bank One, Texas, N.A. (filed as Exhibit 10(f)
to the Company's Quarterly Report on Form 10-Q for the quarterly
period ended June 30, 1995).
10.17* Promissory Note in the amount of $75,000.00 dated July 19, 1995,
executed by the Company, payable to Romero Bros. Oil Exchange, Inc.
(filed as Exhibit 10(g) to the Company's Quarterly Report on Form 10-Q
for the quarterly period ended June 30, 1995).
10.18* Pledge Agreement between the Company and Romero Bros. Oil Exchange,
Inc. securing the Promissory Note executed by the Company payable to
Romero Bros. Oil Exchange, Inc. (filed as Exhibit 10(h) to the
Company's Quarterly Report on Form 10-Q for the quarterly period ended
June 30, 1995).
10.19* Contract dated July 12, 1995 between the Company and Promotora de
Servicios y Proyectos Ecologicos, S.A. de C.V. for the sale of the
shares of Pro Ambiente, S.A. de C.V. (filed as Exhibit 10(i) to the
Company's Quarterly Report on Form 10-Q for the quarterly period ended
June 30, 1995).
10.20* Memorandum dated August 3, 1995 regarding amendment of contract for
the sale of shares of Pro Ambiente, S.A. de C.V. to Promotora de
Servicios y Proyectos Ecologicos, S.A. de C.V. (filed as Exhibit 10(j)
to the Company's Quarterly Report on Form 10-Q for the quarterly
period ended June 30, 1995).
10.21* Modification Agreement dated August 11, 1995 between the Company and
Promotora de Servicios y Proyectos Ecologicos, S.A. de C.V., amending
the contract for the sale of the shares of Pro Ambiente, S.A. de C.V.
(filed as Exhibit 10(a) to the Company's Quarterly Report on Form 10-Q
for the quarterly period ended September 30, 1995).
10.22* Termination Agreement dated July 12, 1995 between the Company and
Promotora de Servicios y Proyectos Ecologicos, S.A. de C.V.,
terminating the Organization Agreement dated March 29, 1993 (filed as
Exhibit 10(b) to the Company's Quarterly Report on Form 10-Q for the
quarterly period ended September 30, 1995).
10.23*+ 1995 Employee Restricted Stock Plan (filed as Exhibit 4.4 to the
Company's Registration Statement on Form S-8, No. 33-92336).
10.24* Asset Purchase Agreement dated April 25, 1997 by and among Mobley
Environmental Services, Inc., Mobley Company, Inc., Hydrocarbon
Technologies, Inc., United States Filter Corporation, and U.S. Filter
Recovery Services (Southwest), Inc.
32
<PAGE>
10.25* Asset Purchase Agreement dated January 20, 1997 by and among Mobley
Company, Inc., and Dawson Production Services, Inc.
10.26* Promissory Note in the amount of $500,000 dated January 20, 1997
executed by Dawson Production Services, Inc. payable to Mobley
Company, Inc.
10.27* First Amendment to Letter Loan Agreement and Master Lease Modification
Agreement dated January 20, 1997 between the Company and Bank One,
Texas, N.A.
10.28* Deed of Trust, Security Agreement, and Financing Statement dated
January 20, 1997 executed by Mobley Company, Inc. for the benefit of
Bank One, Texas, N.A.
10.29* Unlimited Guaranty dated January 20, 1997 executed by Hydrocarbon
Technologies, Inc. to Bank One, Texas, N.A. guaranteeing indebtedness
of the Company.
10.31* Security Agreement dated January 20, 1997 executed by Hydrocarbon
Technologies, Inc. in favor of Bank One, Texas, N.A. securing
indebtedness of the Company.
10.32* Information Statement dated May 9, 1997 to the Shareholders of the
Company relating to the pending sale of the Company's hydrocarbon
recycling and recovery business, including Supplement thereto dated
May 12, 1997 (filed as Schedule 14C on May 9, 1997 and May 14, 1997).
10.33 Tolling Agreement dated July 30, 1997 between American Ecology
Corporation and Mobley Environmental Services, Inc.
11 Statement regarding computation of per share earnings (loss).
23 Independent Auditors' Consent.
27 Financial Data Schedule (submitted only in electronic format).
</TABLE>
- --------------------
* Incorporated herein by reference to the respective filing identified above.
+ Identifies management or compensatory plan or arrangement required to be
filed as an exhibit to this form pursuant to Item 14(c) of this report.
ITEM 14 (b) REPORTS ON FORM 8-K
None
33
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
Date: July 9, 1998 Mobley Environmental Services, Inc.
Registrant
/s/ John Mobley
---------------------------------------
John Mobley
President, Chief Financial Officer and
Secretary
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Signature Title Date
- --------- ----- ----
/s/ John Mobley Chairman of the Board July 9, 1998
- ---------------------------- and Director; President,
John Mobley Chief Financial Officer,
and Secretary
/s/ T.M. Mobley Vice-Chairman of the July 9, 1998
- ---------------------------- Board and Director;
T.M. Mobley Vice President and
Treasurer
/s/ Stewart Cureton, Jr. Director July 9, 1998
- ----------------------------
Stewart Cureton, Jr.
34
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Mobley Environmental Services, Inc.:
We have audited the accompanying consolidated balance sheets of Mobley
Environmental Services, Inc. and subsidiaries as of December 31, 1997 and
1996, and the related consolidated statements of operations, stockholders'
equity, and cash flows for each of the years in the three-year period ended
December 31, 1997. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Mobley
Environmental Services, Inc. and subsidiaries as of December 31, 1997 and
1996, and the results of their operations and their cash flows for each of
the years in the three-year period ended December 31, 1997, in conformity
with generally accepted accounting principles.
/s/ KPMG PEAT MARWICK LLP
KPMG PEAT MARWICK LLP
Shreveport, Louisiana
March 6, 1998
F-1
<PAGE>
MOBLEY ENVIRONMENTAL SERVICES, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
December 31, 1997 and 1996
(in thousands, except share data)
<TABLE>
Assets 1997 1996
------ ---- ----
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 353 385
Receivables 373 161
Prepaid expenses 93 207
Net assets of discontinued operations-current -- 1,144
-------- -------
Total current assets 819 1,897
Property, plant, and equipment, net 211 230
Net assets of discontinued operations-noncurrent -- 9,659
Note receivable 500 --
Investment securities available for sale 4,495 --
Other assets, net 192 197
-------- -------
$ 6,217 11,983
-------- -------
-------- -------
Liabilities and Stockholders' Equity
------------------------------------
Current liabilities:
Notes payable and current portion of long-term debt $ -- 5,014
Accounts payable 100 633
Accrued expenses 1,041 3,721
-------- -------
Total current liabilities 1,141 9,368
Deferred income taxes -- 148
-------- -------
Total liabilities 1,141 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; 4,259,650 and
4,155,097 shares issued and outstanding in 1997 and
1996, respectively 43 42
Class B, 10,000,000 shares authorized; 4,660,350 shares
issued and 4,575,643 shares outstanding in 1997,
4,764,903 shares issued and 4,680,196 shares
outstanding in 1996 47 48
Additional paid-in capital 25,159 25,159
Accumulated deficit (20,093) (22,486)
Net unrealized gain on available for sale securities 29 --
Deferred compensation costs under restricted stock
agreements (101) (288)
Treasury stock, 84,707 shares of Class B common stock,
at cost (8) (8)
-------- -------
Total stockholders' equity 5,076 2,467
Commitments and contingencies
-------- -------
$ 6,217 11,983
-------- -------
-------- -------
</TABLE>
See accompanying notes to consolidated financial statements.
(continued)
F-2
<PAGE>
MOBLEY ENVIRONMENTAL SERVICES, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
Years ended December 31, 1997, 1996, and 1995
(in thousands, except per share amounts and share data)
<TABLE>
1997 1996 1995
---------- --------- ---------
<S> <C> <C> <C>
Revenues $ -- -- --
Cost of revenues -- -- --
---------- --------- ---------
Gross profit -- -- --
Selling, general, and
administrative expenses 759 516 683
Restructuring expenses -- 650 --
---------- --------- ---------
Operating loss (759) (1,166) (683)
Gain on sale of investments 555 -- --
Other income (expense), net 200 (120) (630)
---------- --------- ---------
Loss from continuing
operations before income taxes (4) (1,286) (1,313)
Income tax benefit -- -- 320
---------- --------- ---------
Loss from continuing operations (4) (1,286) (993)
---------- --------- ---------
Discontinued operations, net of tax:
Provision for loss on disposal of waste
management services segment -- (7,621) --
Provision for losses during phase-out
period of waste management services
segment -- (331) --
Net loss from operations of waste management
services segment (405) (623) (318)
Net loss from operations of
oilfield services segment -- (374) (152)
Gain on sale of oilfield services 2,802 -- --
---------- --------- ---------
Income (loss) from discontinued
operations 2,397 (8,949) (470)
---------- --------- ---------
Net income (loss) $ 2,393 (10,235) (1,463)
---------- --------- ---------
---------- --------- ---------
Net income (loss) per share:
Basic - continuing operations $ (.00) (0.15) (0.12)
Basic - discontinued operations .27 (1.01) (0.05)
---------- --------- ---------
$ .27 (1.16) (0.17)
---------- --------- ---------
---------- --------- ---------
Assuming dilution - continuing
operations $ (.00) (0.14) (0.12)
Assuming dilution - discontinued
operations .27 (0.99) (0.05)
---------- --------- ---------
$ .27 (1.13) (0.17)
---------- --------- ---------
---------- --------- ---------
Weighted average number of common shares
outstanding 8,835,293 8,835,293 8,378,142
---------- --------- ---------
---------- --------- ---------
</TABLE>
See accompanying notes to consolidated financial statements.
(continued)
F-3
<PAGE>
MOBLEY ENVIRONMENTAL SERVICES, INC. AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity
Years ended December 31, 1997, 1996, and 1995
(in thousands, except share data)
<TABLE>
1997 1996 1995
-------- ------- -------
<S> <C> <C> <C>
Preferred stock - none issued $ -- -- --
-------- ------- -------
Class A common stock:
Balance at beginning of year 42 41 27
Issuance of 420,000 shares of restricted common stock -- -- 4
Issuance of 500,000 shares of common stock in connection
with asset acquisition -- -- 5
Conversion of Class B common stock (104,553 shares in 1997,
69,754 shares in 1996, and 500,809 shares in 1995) 1 1 5
-------- ------- -------
Balance at end of year 43 42 41
-------- ------- -------
Class B common stock:
Balance at beginning of year 48 49 54
Conversion into Class A common stock (104,553 shares in
1997, 69,754 shares in 1996, and 500,809 shares in 1995) (1) (1) (5)
-------- ------- -------
Balance at end of year 47 48 49
-------- ------- -------
Additional paid-in capital:
Balance at beginning of year 25,159 25,159 23,788
Issuance of restricted common stock -- -- 626
Issuance of common stock in connection with asset acquisition -- -- 745
-------- ------- -------
Balance at end of year 25,159 25,159 25,159
-------- ------- -------
Accumulated deficit:
Balance at beginning of year (22,486) (12,251) (10,788)
Net income (loss) 2,393 (10,235) (1,463)
-------- ------- -------
Balance at end of year (20,093) (22,486) (12,251)
-------- ------- -------
Allowance for foreign currency translation loss:
Balance at beginning of year -- -- (700)
Provision for foreign currency translation loss -- -- (155)
Reduction in allowance for foreign currency translation loss
due to sale of investment in foreign joint venture -- -- 855
-------- ------- -------
Balance at end of year -- -- --
-------- ------- -------
Net unrealized gain on available for sale securities:
Balance at beginning of year -- -- --
Unrealized gain 29 -- --
-------- ------- -------
Balance at end of year 29 -- --
Deferred compensation costs under restricted stock agreements:
Balance at beginning of year (288) (384) --
Issuance of restricted stock -- -- (630)
Amortization of deferred compensation costs 187 96 246
-------- ------- -------
Balance at end of year (101) (288) (384)
-------- ------- -------
Treasury stock (8) (8) (8)
-------- ------- -------
Total stockholders' equity $ 5,076 2,467 12,606
-------- ------- -------
-------- ------- -------
</TABLE>
See accompanying notes to consolidated financial statements.
F-4 (Continued)
<PAGE>
MOBLEY ENVIRONMENTAL SERVICES, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years ended December 31, 1997, 1996 and 1995
(in thousands)
<TABLE>
1997 1996 1995
------- ------- ------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 2,393 (10,235) (1,463)
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 --
Gain on sale of US Filter stock (556) -- --
Loss on sale of investment securities 1 -- --
Gain on sale of oilfield services segment (2,802) -- --
Gain on sale of fixed assets (37) -- --
Depreciation and amortization 538 2,594 2,361
Deferred income tax benefit (148) (698) (471)
Deferred compensation costs under restricted stock agreements 187 96 246
Bad debt expense 152 -- 200
Equity in net loss and loss on sale of joint venture -- -- 323
Write-down of assets -- -- 392
Changes in certain operating assets and liabilities:
Trade receivables (750) (698) (123)
Prepaid expenses and other assets 364 (126) 343
Accounts payable (931) 840 (1,732)
Accrued expenses (2,122) (1,279) (265)
------- ------- ------
Net cash used by operating activities,
including discontinued operations (3,711) (206) (189)
------- ------- ------
Cash flows from investing activities:
Net proceeds from sale of oilfield services segment 4,656 -- --
Net proceeds from sale of US Filter stock 8,556 -- --
Net proceeds from sale of investment securities available for sale 349 -- --
Purchase of investment securities available for sale (4,801) -- --
Proceeds from sale of assets 45 -- --
Capital expenditures (112) (5,339) (5,226)
Proceeds from sale of joint venture investment -- -- 1,324
Acquisition of assets -- -- (770)
Other investing activities, net -- -- 56
------- ------- ------
Net cash provided (used) by investing activities,
including discontinued operations 8,693 (5,339) (4,616)
------- ------- ------
Cash flows from financing activities:
Net borrowings under revolving lines of credit and
short-term notes payable -- 4,686 --
Principal payments on long-term debt (5,014) (232) (1,750)
Borrowings of long-term debt -- -- 560
------- ------- ------
Net cash provided (used) by financing activities,
including discontinued operations (5,014) 4,454 (1,190)
------- ------- ------
Net decrease in cash and cash equivalents (32) (1,091) (5,995)
Cash and cash equivalents at beginning of year 385 1,476 7,471
------- ------- ------
Cash and cash equivalents at end of year $ 353 385 1,476
------- ------- ------
------- ------- ------
</TABLE>
See accompanying notes to consolidated financial statements.
F-5 (Continued)
<PAGE>
MOBLEY ENVIRONMENTAL SERVICES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1997, 1996 and 1995
(1) DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION -- The accompanying financial statements
present the consolidated accounts of Mobley Environmental Services, Inc.
(the "Company") and its wholly-owned subsidiaries, Hydrocarbon
Technologies, Inc. ("HTI") and Mobley Company, Inc. ("Mobley"). In January
1997, the Company sold the assets of its oilfield services segment, and in
May 1997, it sold the assets of its waste management services segment
(note 2). The Company's former subsidiary, Gibraltar Chemical Resources,
Inc. ("Gibraltar") was sold on December 31, 1994 (note 3). All significant
intercompany accounts and transactions have been eliminated in
consolidation.
DESCRIPTION OF BUSINESS -- Prior to the sale of its oilfield services and
waste management services segments, the Company provided diverse
environmental and field-related services to industrial, governmental, and
commercial markets, specialized in the collection, transportation,
treatment, recycling, and management of a wide variety of non-hazardous
liquid hydrocarbons, oil filters, absorbents, and related materials and
also provided oilfield services for managing liquids used or produced
during the lifecycle of oil and gas wells. Prior to the sale of Gibraltar
in 1994, the Company's waste management services activities also included
the management of hazardous wastes. The Company operated primarily in the
states of Texas, Louisiana, and Arkansas.
As of December 31, 1997, the Company has sold all of its operating
assets. Proceeds from the sale of its segments are being invested until
pending litigation and outstanding contractual indemnification obligations
expire or are otherwise satisfied. The Company currently has no employees
and is being managed by its President. Accounting and other administrative
functions are being performed by third-parties through contractual
arrangements.
BASIS OF PRESENTATION -- The accompanying consolidated financial
statements have been prepared assuming that the Company will continue as a
going concern. As discussed in note 2, the Company's Board of Directors
determined that the divestiture of its operations was in the best interests
of the Company and its shareholders. The consolidated financial statements
do not include any adjustments that might result from the liquidation of
the Company.
CASH EQUIVALENTS -- For purposes of reporting cash flows, the Company
considers investments with original maturities of three months or less to
be cash equivalents. Cash equivalents consist of investments in money
market accounts at December 31, 1997 and 1996.
REVENUE RECOGNITION -- Waste management services revenues were recognized
when the services were performed or upon the receipt and acceptance of
waste material at the Company's transfer or processing facilities. Upon
the recognition of such revenue, appropriate incidental treatment and
residual disposal costs were accrued. In the case of product sales,
revenues were recognized upon acceptance of the related product by the
customer. Oilfield services revenues were recognized when the services
were performed.
F-6 (Continued)
<PAGE>
MOBLEY ENVIRONMENTAL SERVICES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
SECURITIES -- The Company accounts for its investment securities
under the provisions of Statement of Financial Accounting Standards No.
115 (Statement 115), ACCOUNTING FOR CERTAIN INVESTMENTS IN DEBT AND
EQUITY SECURITIES. Under Statement 115, the Company classifies its debt
and marketable equity securities in one of three categories: trading,
available-for-sale, or held-to-maturity. Trading securities are bought
and held principally for the purpose of selling them in the near term.
Held-to-maturity securities are those securities in which the Company
has the ability and intent to hold the security until maturity. All
other securities not included in trading or held-to-maturity are
classified as available-for-sale. All of the Company's investment
securities are classified as available-for-sale, which are recorded at
fair value. Unrealized holding gains and losses, net of the related tax
effect, are excluded from earnings and are reported as a separate
component of stockholders' equity until realized.
A decline in the market value of any security below cost that is deemed
other than temporary is charged to operations resulting in the
establishment of a new cost basis for the security.
Due to the overall immateriality to the consolidated financial
statements, premiums and discounts are taken to the income statement at
the time of purchase. Dividend and interest income are recognized when
earned. Realized gains and losses are included in earnings and are
derived using the specific identification method for determining the
cost of securities sold.
The carrying amount of securities at December 31, 1997, by contractual
maturity are as follows: 1998 - $551,195; 1999 - $906,965; 2000 -
$1,261,743; and 2001 - $1,774,898.
PROPERTY, PLANT, AND EQUIPMENT -- Property, plant, and equipment are
recorded at cost and depreciated using the straight-line method over their
estimated useful lives ranging from three to thirty years.
MAINTENANCE AND REPAIRS -- Major repairs to disposal well facilities were
estimated and accrued by monthly charges to expense. Periodic costs
incurred for such items were charged against the related accrued expenses.
All other maintenance and repair costs are charged to expense as incurred.
Renewals and betterments are capitalized.
IMPAIRMENT OF LONG-LIVED ASSETS AND LONG-LIVED ASSETS TO BE DISPOSED OF
-- The Company utilizes the provisions of Statement of Financial Accounting
Standards No. 121, Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to be Disposed Of ("SFAS 121"), which requires that
long-lived assets and certain identifiable intangibles be reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. Recoverability of
assets to be held and used is measured by a comparison of the carrying
amount of an asset to future net cash flows, undiscounted and without
interest charges, expected to be generated by the asset. If such assets
are considered to be impaired, the impairment to be recognized is measured
by the amount by which the carrying amount of the assets exceed the fair
value of the assets. Assets to be disposed of are reported at the lower of
the carrying amount or fair value less costs to sell.
F-7 (Continued)
<PAGE>
MOBLEY ENVIRONMENTAL SERVICES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
INVESTMENT IN JOINT VENTURE -- Investment in joint venture consisted of a
25% interest in Pro Ambiente, S.A. de C.V. ("Pro Ambiente"), a joint
venture in Mexico. On July 12, 1995, the Company sold its interest in Pro
Ambiente (note 5). This investment was accounted for by the equity method.
Assets and liabilities of Pro Ambiente were translated at the rate of
exchange in effect on the last day of each fiscal year. The related
translation adjustments were reflected in the allowance for foreign
currency translation loss in the stockholders' equity section of the
consolidated balance sheet at that date. Income and expenses were
translated at the average rates of exchange prevailing during the year.
INCOME TAXES -- Income taxes are accounted for under the asset and
liability method. Deferred tax assets and liabilities are recognized for
the future tax consequences attributable to differences between the
financial statement carrying amounts of existing assets and liabilities and
their respective tax bases and operating loss and tax credit carryforwards.
Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on
deferred tax assets and liabilities of a change in tax rates is recognized
in income in the period that includes the enactment date.
EARNINGS PER COMMON SHARE -- Earnings per share amounts presented were
calculated under the provisions of SFAS 128, EARNINGS PER SHARE. Basic
earnings per share is computed based on earnings available to common
shareholders and the weighted average number of common shares outstanding.
The earnings per share assuming dilution amounts presented are computed
based on earnings available to common shareholders and the weighted average
number of common shares outstanding, including shares assumed to be issued
under the Company's 1995 Employee Restricted Stock Plan. The
implementation of SFAS 128 had no significant impact on earnings per share.
(For a reconciliation of amounts used in per share computations, see note
13 - Earnings Per Share).
USE OF ESTIMATES -- 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 assets and liabilities to
prepare these financial statements in conformity with generally accepted
accounting principles. Actual results could differ from those estimates.
FINANCIAL INSTRUMENTS -- Statement of Financial Accounting Standards
No. 107, DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS, requires
that the Company disclose estimated fair values for its financial
instruments. Fair value estimates are set forth below for the Company's
financial instruments:
- Cash and Cash Equivalents, Receivables, Accounts Payable, and Accrued
Expenses - The carrying amounts approximate fair value because of the
short maturity of these instruments.
F-8 (Continued)
<PAGE>
MOBLEY ENVIRONMENTAL SERVICES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
- Notes Payable and Long-term Debt - The carrying amount of the notes
payable and long-term debt approximates market because of the variable
interest rate, which is based on the bank's prime rate, or the current
interest rate available to the Company for debt of similar terms
approximates the existing rate.
- Note Receivable - The carrying amount of the note receivable
approximates market because the interest rate is comparable to
current market rates.
- Investment Securities Available for Sale - The fair value of securities
available for sale is estimated based on bid prices published in
financial newspapers or bid quotations received from security dealers.
STOCK OPTION PLANS -- Prior to January 1, 1996, the Company accounted for
its stock option plans in accordance with the provisions of Accounting
Principles Board Opinion No. 25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES
("APB 25") and related interpretations. As such, compensation expense
would be recorded on the date of grant only if the current market price of
the underlying stock exceeded the exercise price. On January 1, 1996, the
Company adopted Statement of Accounting Standards Statement No. 123,
ACCOUNTING FOR STOCK-BASED COMPENSATION ("SFAS 123"), which permits
entities to recognize as expense over the vesting period the fair value of
all stock-based awards on the date of grant. Alternatively, SFAS 123 also
allows entities to continue to apply the provisions of APB 25 and provide
pro forma net income and pro forma earnings per share disclosures for
employee stock option grants made in 1995 and future years as if the fair-
value-based method defined in SFAS 123 has been applied. The Company has
elected to continue to apply the provisions of APB 25 and provide the pro
forma disclosure provisions of SFAS 123 (note 11). As a result of the
Company selling all of its operating assets during 1997, all stock option
plans, other than the 1995 Employee Restricted Stock Plan, have been
terminated and options outstanding at December 31, 1996, under these plans
have terminated (note 11).
RECLASSIFICATIONS -- Certain amounts in the prior year's financial
statements have been reclassified to conform to the current year
presentation.
(2) ASSET SALES AND DISCONTINUED OPERATIONS
During 1996, in light of the Company's severely weakened financial
condition and, in particular, concerns about its liquidity, 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 then contemplated by the Company's strategic business plan;
(iii) the
F-9 (Continued)
<PAGE>
MOBLEY ENVIRONMENTAL SERVICES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
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
interest 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.
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.
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 have been removed from the consolidated
balance sheet as of December 31, 1997. Such assets had a net book value
(net of assumed liabilities) of approximately $14,965,060.
F-10 (Continued)
<PAGE>
MOBLEY ENVIRONMENTAL SERVICES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
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 of 1996, 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 loss of
approximately $405,000 during the period from January 1, 1997 until May 29,
1997, the date of closing on the sale, which was in excess of the amounts
previously accrued. The majority of this loss was created by additional
charges related to automobile liability insurance claims and medical claims
which were not included in the accruals established at December 31, 1996.
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 were 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 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 terminated were 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 resulting from its business divestitures 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 related. The Company believes it is
probable that it will continue to incur certain costs associated with these
legal matters and accordingly 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 14).
F-11 (Continued)
<PAGE>
MOBLEY ENVIRONMENTAL SERVICES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
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 years ended December 31,
1997, 1996, and 1995, have been reclassified for amounts associated with the
discontinued segments. Due to the relative significance of the Company's
business segments to its operations 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 segments of operations. 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 and the estimated loss on disposal of the Company's
waste management services segment for the years ended December 31, 1997,
1996, and 1995 are as follows (in thousands of dollars):
<TABLE>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Revenues $ 9,489 17,207 14,233
Cost of revenues 7,697 14,006 9,923
-------- ------ ------
Gross profit 1,792 3,201 4,310
Selling, general, and administrative expenses,
including allocated amounts 2,209 3,902 4,730
-------- ------ ------
Operating loss (417) (701) (420)
Interest expense, net (136) (210) --
-------- ------ ------
Loss before income taxes (553) (911) (420)
Income tax benefit 148 -- 102
-------- ------ ------
Net loss from operations of waste
management services segment (405) (911) (318)
Reduction in reserve for losses from operations
of waste management services segment during
phase-out period -- 288 --
-------- ------ ------
$ (405) (623) (318)
-------- ------ ------
-------- ------ ------
</TABLE>
F-12 (Continued)
<PAGE>
MOBLEY ENVIRONMENTAL SERVICES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
<TABLE>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Provision for losses from operations of waste
management services segment during
phase-out period, recognized in the third
quarter of 1996 $ -- (331) --
-------- ------ -----
-------- ------ -----
Provision for loss on disposal of waste
management services segment, recognized
in the third quarter of 1996:
Asset valuation adjustment -- (5,673) --
Accrued transaction costs and capital
expenditures subsequent to measurement
date -- (1,595) --
Write-off of excess of purchase price over
fair value of net assets acquired -- 1,051) --
Deferred income tax benefit -- 698 --
-------- ------ -----
$ -- (7,621) --
-------- ------ -----
-------- ------ -----
Operating results of the Company's oilfield services segment for the
years ended December 31, 1997, 1996, and 1995 are as follows (in thousands of
dollars):
1997 1996 1995
---- ---- ----
Revenues $ 231 4,373 4,355
Cost of revenues 168 3,241 2,934
-------- ------ -----
Gross profit 63 1,132 1,421
Selling, general, and administrative expenses,
including allocated amounts 63 1,506 1,622
-------- ------ -----
Operating loss -- (374) (201)
Income tax benefit -- -- 49
-------- ------ -----
Net loss from operations of oilfield
services segment $ -- (374) (152)
-------- ------ -----
-------- ------ -----
</TABLE>
Upon completion of the sale of the waste management services segment, the
$8,000,000 of USF common stock was sold resulting in a gain of $556,000 which
is reflected in other income in continuing operations. Proceeds from this
sale were used to pay off existing long-term debt and current liabilities,
and the remaining proceeds were used to purchase investment grade fixed term
securities. These investments are accounted for as investments available for
sale. As of December 31, 1997, approximately $800,000 in investments was
held in escrow until May 29, 1998 to satisfy any indemnification obligations
of the Company to U.S. Filter.
F-13 (Continued)
<PAGE>
MOBLEY ENVIRONMENTAL SERVICES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
In 1996, the Company engaged an investment banking and financial
advisory firm in which a Class A director has an ownership and management
interest to provide certain business consulting services to the Company,
including analysis and negotiation of potential business combination
transactions to which the Company might be a party. Under the terms of the
engagement, the Company paid the investment banking firm retainer fees of
approximately $162,000 through December 31, 1996, and an additional $12,200
in 1997. Additionally, the Company paid such investment banking firm a
total of approximately $220,000, plus out-of-pocket expenses, in
conjunction with the transaction with USF and approximately $207,500, plus
out-of-pocket expenses, in connection with USF's acquisition of an
unrelated entity. However, USF reimbursed the Company $250,000 for certain
expenses, including amounts that were paid to the investment banking firm.
In connection with the disposition of the Company's oilfield services
segment, the Company paid the investment banking firm approximately
$150,000, plus out-of-pocket expenses. The Company believes that the terms
of its arrangement with the investment banking firm are consistent with
industry standards for similar services.
(3) SALE OF GIBRALTAR
After a period of continued operating losses, in light of management's
ongoing assessment of changed conditions in the hazardous waste market,
and considering the significance of Gibraltar's regulatory issues and
future capital requirements, in late 1993, the Company's senior management
and Board of Directors determined that the divestiture of Gibraltar was in
the best interests of the Company and its shareholders.
On May 10, 1994, the Company executed a definitive agreement (the
"Stock Purchase Agreement") for the sale of all of the outstanding shares
of common stock of Gibraltar to American Ecology Corporation ("AEC"). Such
agreement was subsequently amended in an agreement dated September 2, 1994.
The Company completed the sale of Gibraltar to AEC pursuant to the Stock
Purchase Agreement, as amended, on December 31, 1994, and received cash of
$5,500,000 from AEC. In addition to the cash proceeds reflected above,
AEC executed a note payable to the Company in the amount of $550,000 to be
held in escrow as a source of payment of claims, if any, for which the
Company indemnifies AEC under the Stock Purchase Agreement (note 14).
During 1993, as part of a restructuring of its hazardous waste
business, the Company recorded charges of $5,711,000 related to the
abandonment and write-down of certain of Gibraltar's assets and to reduce
the net assets of Gibraltar to their estimated net realizable value at
December 31, 1993, determined primarily based on the terms of the Stock
Purchase Agreement. During 1994, the Company recorded additional
provisions for losses on the divestiture of Gibraltar of $4,092,000 to
further reduce the carrying value of Gibraltar's net assets. The
additional charges were necessitated by: (i) the settlement of litigation
against Gibraltar by the State of Texas involving its alleged violation
of environmental laws and regulations; (ii) Gibraltar's continuing losses
prior to the closing of the sale on December 31, 1994; (iii) the
aforementioned amendment to the Stock Purchase Agreement; (iv) certain
indemnity obligations of the Company to AEC relative to existing claims
involving Gibraltar (note 14); and (v) additional expenses related to
the sale.
F-14 (Continued)
<PAGE>
MOBLEY ENVIRONMENTAL SERVICES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The change in the reserve for loss on sale of subsidiary for the years
ended December 31, 1997 and 1996, is summarized as follows (in thousands
of dollars):
<TABLE>
<S> <C>
Balance at December 31, 1995, included in accrued expenses $ 896
1996 expenditures related to Gibraltar indemnity obligations (492)
-------
Balance at December 31, 1996, included in accrued expenses 404
Allocation of additional reserves to cover Gibraltar indemnity
obligations 190
1997 expenditures related to Gibraltar indemnity obligations (331)
-------
Balance at December 31, 1997, included in accrued expenses $ 263
-------
-------
</TABLE>
(4) PREVIOUS ASSET ACQUISITION
On July 21, 1995, the Company acquired, pursuant to an asset purchase
agreement dated June 7, 1995, certain assets of a group of three affiliated
companies, including Romero Bros. Oil Exchange, Inc., Environmental
Petroleum Products Co./EPPCO, and Environmental Insight, Inc. The Texas
and Louisiana-based companies were involved in the collection and marketing
of used oils and oil filter collection and recycling. The asset purchase
was effectuated through a newly-formed, wholly-owned subsidiary of the
Company, HTI. The tangible assets acquired, consisting primarily of
transportation equipment, were recorded at their estimated fair market
value of $500,000 and depreciated over their estimated remaining useful
lives. The total acquisition cost of $1,536,000 included cash of
approximately $786,000, including acquisition-related costs, and the
issuance of 500,000 shares of the Company's Class A common stock. The
purchase method of accounting was used for this asset acquisition;
therefore, HTI's results of operations are consolidated with the Company's
since July 21, 1995. The excess of cost over fair market value of net
assets acquired amounted to $1,152,000, including $116,000 of deferred tax
liabilities for the basis difference in tangible assets. Such excess of
cost over fair market value of net assets acquired was written off in
connection with the decision to sell the Company's operating assets
(note 2).
(5) SALE OF INTEREST IN MEXICAN JOINT VENTURE
On July 12, 1995, effective June 30, 1995, the Company executed an
agreement for the sale of its 25% interest in Pro Ambiente to Promotora
de Servicios y Proyectos Ecologicos, S.A. de C.V., owner of the remaining
75% of the joint venture. Pro Ambiente was a Mexican corporation engaged
in the collection and blending of waste-derived fuels for use in cement
kilns. The payment terms of the sale were subsequently modified pursuant
to an agreement dated August 11, 1995. Under the terms of the sale
agreement, as amended, the Company received cash proceeds of $1,324,000.
As a result of the sale and other expenses associated with its Mexican
operations, the Company recorded losses totaling $547,000 in the year ended
December 31, 1995.
F-15 (Continued)
<PAGE>
MOBLEY ENVIRONMENTAL SERVICES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(6) PROPERTY, PLANT, AND EQUIPMENT
Property, plant, and equipment consisted of the following at December
31, 1997 and 1996 (in thousands of dollars):
<TABLE>
1997 1996
------- -------
<S> <C> <C>
Land $ 65 802
Buildings and improvements 253 1,862
Machinery and equipment 32 26,514
Furniture, fixtures, and other 43 704
Construction in progress -- 61
------- -------
393 29,943
Less: Accumulated depreciation 182 14,414
Valuation reserve -- 5,673
------- -------
Net property, plant, and equipment $ 211 9,856
------- -------
------- -------
</TABLE>
Included in net assets of discontinued operations at December 31,
1996, is property, plant, and equipment of $9,626,000.
Depreciation expense totaled $485,000, $2,523,000, and $2,328,000
for the years ended December 31, 1997, 1996, and 1995, respectively.
The Company recorded a pre-tax charge of $392,000 during the 1995
fourth quarter related to the write-down of an office building in Kilgore,
Texas, to its estimated net realizable value. Such amount is included in
"other expenses, net" as a component of continuing operations in the
accompanying consolidated statements of operations for the year ended
December 31, 1995. The property is currently held for sale.
(7) NOTES PAYABLE
The Company had a credit agreement (the "Credit Agreement") that
provided up to $6,500,000 in available credit for the Company. 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.
F-16 (Continued)
<PAGE>
MOBLEY ENVIRONMENTAL SERVICES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(8) ACCRUED EXPENSES
Accrued expenses consisted of the following at December 31, 1997 and
1996 (in thousands of dollars):
<TABLE>
1997 1996
-------- -------
<S> <C> <C>
Accrued transaction costs and capital expenditures to be
incurred prior to the sale of the waste management
services segment (note 2) $ -- 987
Insurance premiums and accrued claims payable 526 696
Accrued expenses for estimated legal costs relating to
Gibraltar (notes 3 and 14) 263 404
Accrued restructuring expenses (note 2) -- 402
Salaries, wages, and benefits -- 258
Current portion of Gibraltar judgment (notes 3 and 14) -- 167
Taxes other than income taxes 45 116
Accrued losses from operations of waste management
services segment during phase-out period (note 2) -- 43
Other 207 648
-------- -------
1,041 3,721
-------- -------
Salaries, wages, and benefits -- 400
Taxes other than income taxes -- 210
Other -- 491
Accrued expenses, included in net assets available for sale -- 1,101
-------- -------
$ 1,041 4,822
-------- -------
-------- -------
</TABLE>
(9) INCOME TAXES
Income tax expense (benefit) for the years ended December 31, 1997,
1996, and 1995, consisted of the following (in thousands of dollars):
<TABLE>
1997 1996 1995
------- ----- ------
<S> <C> <C> <C>
Deferred Federal income tax benefit from
continuing operations $ -- -- (320)
------- ----- ------
Deferred Federal income tax benefit from
discontinued operations (148) (698) (151)
------- ----- ------
Income tax expense benefit $ (148) (698) (471)
------- ----- ------
------- ----- ------
</TABLE>
F-17 (Continued)
<PAGE>
MOBLEY ENVIRONMENTAL SERVICES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Income tax expense (benefit) differed from the amounts computed by
applying the U.S. Federal income tax rate of 34% to income (loss) before
income taxes as a result of the following (in thousands of dollars):
<TABLE>
1997 1996 1995
------- ------ ------
<S> <C> <C> <C>
Computed "expected" tax expense (benefit) $ 763 (3,717) (658)
Change in the beginning-of-the-year balance of
the valuation allowance for deferred tax assets (911) 3,198 364
Other, net -- (179) (177)
------- ------ ------
Total income tax benefit $ (148) (698) (471)
------- ------ ------
------- ------ ------
</TABLE>
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at
December 31, 1997 and 1996, are presented below (in thousands of dollars):
<TABLE>
1997 1996
-------- -------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards $ 2,144 1,954
Property, plant and equipment - basis differences and
depreciation 89 1,985
Accrued expenses, provisions for book not yet
deductible for tax 468 896
Capital loss carryforward 194 194
Alternative minimum tax credit carryforward 134 134
US Filter contingent gain recognized for tax purposes 1,360 --
Other -- 137
-------- -------
Total gross deferred tax assets 4,389 5,300
Less valuation allowance (4,389) 5,300)
-------- -------
Net deferred tax assets $ -- --
-------- -------
-------- -------
Deferred tax liabilities:
Property, plant, and equipment - depreciation and
basis differences $ -- --
-------- -------
Other -- 148
-------- -------
Total gross deferred tax liabilities -- 148
-------- -------
Net deferred tax liability $ -- 148
-------- -------
-------- -------
</TABLE>
In assessing the realizability of deferred tax assets, management
considers whether it is more likely than not that some portion or all of
the deferred tax assets will not be realized. The ultimate realization of
deferred tax assets is dependent upon the generation of future taxable
income during the periods in which those temporary differences become
deductible. Management considers the scheduled reversal of deferred tax
liabilities and projected future
F-18 (Continued)
<PAGE>
MOBLEY ENVIRONMENTAL SERVICES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
taxable income in making this assessment. Subsequently recognized tax
benefits relating to the valuation allowance for deferred tax assets as of
December 31, 1997, will be included as an income tax benefit in the
consolidated statement of operations in future periods.
At December 31, 1997, the Company has net operating loss carryforwards
for federal income tax purposes of approximately $6,000,000. Such amounts
are available to offset future Federal taxable income, if any, through 2012
and expire in the following years: 2009 - approximately $1,700,000; 2010 -
approximately $1,200,000; 2011 - approximately $2,200,000; and 2012 -
approximately $900,000.
(10) LEASES
The Company leased certain equipment and facilities used in its
operations, all of which were assumed by USF and Dawson at closing of the
respective transactions. Total rentals approximated $303,000, $550,000 and
$330,000 for the years ended December 31, 1997, 1996, and 1995,
respectively.
(11) EMPLOYEE BENEFIT PLANS
RESTATED STOCK COMPENSATION PLAN -- The Company had adopted the
Restated Stock Compensation Plan to provide for the grant of nonqualified
options to participating employees. An aggregate of 645,000 shares of
Class A common stock had been authorized and reserved for issuance under
such plan. The plan was administered by the Compensation Committee of the
Board of Directors, which had the sole authority to interpret the plan, to
determine the persons to whom options would be granted, and to determine
the exercise price, duration, and other terms of options to be granted
under the plan, provided that options would not be granted at prices less
than fair market value on the dates of the grants and that options would
not be outstanding for a period longer than ten years from the date the
options were granted. As a result of the Company selling all its operating
assets during 1997, the Restated Stock Compensation Plan was terminated and
any options outstanding were forfeited.
The following table summarizes activity under the Company's Restated
Stock Compensation Plan for the years ended December 31, 1997 and 1996:
<TABLE>
Number of Average
options price
-------- -------
<S> <C> <C>
Balance at December 31, 1995 596,127 2.3138
Granted 3,500 1.2500
Forfeited (31,954) 1.7161
-------- -------
Balance at December 31, 1996 567,673 2.3408
Granted -- --
Forfeited (567,673) 2.3408
-------- -------
Balance at December 31, 1997 -- --
-------- -------
-------- -------
</TABLE>
F-19 (Continued)
<PAGE>
MOBLEY ENVIRONMENTAL SERVICES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The per-share weighted average fair value of stock options granted
during 1996 was not material. The Company applied APB 25 in accounting
for the plan and, accordingly, no compensation cost had been recognized for
its stock options in the consolidated financial statements. Had the
Company determined compensation cost based on the value at the grant date
for its stock options under SFAS 123, the Company's net loss and net loss
per share for 1996 and 1995 would not have been affected. The full impact
of calculating compensation costs for stock options under SFAS 123 had not
been considered because compensation cost was reflected over the options'
vesting period of five years and compensation cost for options granted
prior to January 1, 1995, was not considered.
1995 EMPLOYEE RESTRICTED STOCK PLAN -- In January 1995, the Board of
Directors adopted the 1995 Employee Restricted Stock Plan (the "Restricted
Plan"). The Restricted Plan was approved by the shareholders in June 1995,
at which time 420,000 shares of Class A common stock available for issuance
under the Restricted Plan were issued to certain executive officers and
senior managers of the Company pursuant to the terms of the Restricted
Plan. The original shares granted under the Restricted Plan were to vest
20% per year beginning in January 1995 with provisions for earlier vesting
based on increases in the Company's stock price. As a result of the
Company selling its operating assets during 1997, certain shares under the
plan were forfeited. As of December 31, 1997, four former employees are
still covered by the plan. The total number of shares remaining under the
plan is 168,000, with future vesting being dependent on the performance of
the hydrocarbon business that was sold to USF in May 1997. Under the terms
of the definitive asset purchase agreement, the Company 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. Should the business
perform as expected, the four former employees will receive shares of
Company stock in accordance with the plan.
1996 NON-EMPLOYEE DIRECTOR STOCK OPTION PLAN -- In December 1995, the
Board of Directors adopted, subject to shareholder approval, the 1996
Non-Employee Director Stock Option Plan. Such plan replaced the
Nonqualified Stock Option Plan for Outside Directors, which was adopted in
1991. Directors who were not employees of the Company were eligible to
participate in the plan. Under the terms of the plan, the exercise price
of each option granted was to be equal to the fair market value on the
date of grant. Options became fully exercisable one year from the date of
grant, provided that such vesting period would be accelerated upon the
occurrence of a change of control. Options were to expire ten years after
the date of grant. A total of 90,000 shares of Class A common stock had
been reserved for issuance under the plan. Participants were granted,
effective December 6, 1995, options to purchase 15,000 shares of Class A
common stock at an exercise price equal to the fair market value at that
date of $1.0625, of which 5,000 shares vested immediately with the
remainder vesting in equal increments on the first and second anniversary
dates of the grant. Upon the election of any new outside directors, each
such director was to be granted an option to purchase 7,500 shares of
Class A common stock. Thereafter, each participant was to be granted an
option to purchase 3,000 shares of Class A common stock each date he or
she was reelected as a director of the Company, subject to share
availability, adjustment for stock
F-20 (Continued)
<PAGE>
MOBLEY ENVIRONMENTAL SERVICES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
dividends, splits, and similar events. As a result of the Company selling
all its operating assets during 1997, the 1996 Non-Employee Director Stock
Option Plan was terminated and any options outstanding were forfeited.
MOBLEY EMPLOYEES' PROFIT SHARING PLAN -- The Company had a contributory
profit sharing plan for the benefit of substantially all employees.
Contributions to the plan were made at the discretion of the Compensation
Committee of the Board of Directors and approximated $8,000, $62,000 and
$51,000 for the years ended December 31, 1997, 1996, and 1995,
respectively. Subsequent to the sale of the Company's operating assets
during 1997, the plan was terminated.
MOBLEY ENVIRONMENTAL SERVICES, INC. EMPLOYEES' BENEFIT TRUST -- The
Company had a medical benefit plan which was funded by employer and
participant contributions and supplemented by stop-loss insurance.
Contributions were determined by the plan administrator based upon the
actual claim experience and administrative costs of the plan. As a result
of the sale of the Company's operating assets, the plan was terminated
effective July 1, 1997 and benefits were no longer available to
participants. All remaining claims incurred prior to the termination
date are being funded by the Company and paid by the plan.
(12) STOCKHOLDERS' EQUITY
The Company is authorized to issue up to 2,000,000 shares of preferred
stock (par value $.01), and the Board of Directors has the authority to fix
the rights, preferences, privileges, limitations, and restrictions of such
stock. No preferred stock has been issued as of December 31, 1997.
Each share of the Company's Class A and Class B common stock is
entitled to one vote per share and ten votes per share, respectively. Each
share of Class B common stock is convertible into one share of Class A
common stock at any time at the option of the stockholder, and certain
restrictions exist upon the transfer of Class B common shares.
(13) EARNINGS PER SHARE
In February 1997, the Financial Accounting Standards Board issued
SFAS 128, EARNINGS PER SHARE. SFAS 128 supersedes the earnings per share
calculation methods of APB 15, effective for annual and interim periods
ending after December 15, 1997. In accordance with this standard,
earnings per share ("EPS") amounts presented on the Company's Consolidated
Statements of Operations have been calculated using the measurement
provisions of SFAS 128.
F-21 (Continued)
<PAGE>
MOBLEY ENVIRONMENTAL SERVICES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The following data shows amounts used in computing earnings per share
under the provisions of SFAS 128: (In thousands, except per share amounts
and share data).
<TABLE>
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Net income (loss) $ 2,393 (10,235) (1,463)
Weighted average number of common shares
used in basic EPS 8,835,293 8,835,293 8,378,142
Effect of dilutive securities
1995 Employee Restricted Stock Plan 168,000 168,000 84,000
Weighted average number of common shares
and dilutive potential common stock used
in EPS assuming dilution 9,003,293 9,003,293 8,462,142
</TABLE>
(14) COMMITMENTS AND CONTINGENCIES
LETTERS OF CREDIT
At December 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.
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 the American
Ecology Corporation ("AEC") and the Company was responsible for payment of
the remaining $700,000. As of December 31, 1996, the Company had paid all
of its obligations except $167,000 which was accrued. During 1997 the
remaining $167,000 was paid.
LITIGATION AND VARIOUS OTHER CLAIMS
The Company continues to defend various claims resulting from the
operations of its former subsidiary, Gibraltar (the sale of which is
discussed in note 3). As of December 31, 1997, three such lawsuits were
pending. During the Company's ownership of Gibraltar, Gibraltar engaged
in the collection, transportation, analysis, treatment, management, and
disposal of
F-22 (Continued)
<PAGE>
MOBLEY ENVIRONMENTAL SERVICES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
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 international 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 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 three actions are technically pending, one
case was dismissed by the trial judge for plaintiff's failure to file
expert reports as required by a case management order. This action has
been appealed.
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 (notes 3 and 8). However, the Company is currently unable to
reasonably estimate its
F-23 (Continued)
<PAGE>
MOBLEY ENVIRONMENTAL SERVICES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
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 of 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
such 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; (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 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, the Company was notified by the TNRCC that it was 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. During 1997, the Company entered into
a contractual remediation plan for this site. Such plan did not have a
material affect on the consolidated financial statements. However,
completion of the remediation and final resolution of the matter is
subject to approval of the TNRCC.
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.
(15) SUPPLEMENTAL CASH FLOW INFORMATION
<TABLE>
1997 1996 1995
---- ---- ----
(in thousands of dollars)
<S> <C> <C> <C>
Interest paid, net of amounts capitalized $ 151 261 32
Noncash operating activities - provision
for foreign currency translation loss -- -- 155
</TABLE>
F-24 (Continued)
<PAGE>
MOBLEY ENVIRONMENTAL SERVICES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(16) QUARTERLY FINANCIAL DATA (UNAUDITED)
Summarized consolidated quarterly financial data for 1997, 1996,
and 1995 is as follows (in thousands of dollars, except per share amounts):
<TABLE>
QUARTER
-------------------------------------------
1ST(1) 2ND 3RD(2) 4TH(3)
-------- ------- ------- ------
<S> <C> <C> <C> <C>
1997
----
Revenues $ 5,995 3,725 -- --
Gross profit 1,285 570 -- --
Operating loss (158) (164) (194) (243)
Net income (loss) 2,775 (189) (46) (147)
Net income (loss) per common share .32 (.02) (.01) (.02)
1996
----
Revenues $ 4,507 4,670 5,751 6,652
Gross profit 901 1,105 1,221 1,106
Operating loss (690) (284) (1,056) (212)
Net income (loss) (672) (491) (9,117) 45
Net income (loss) per common share (0.08) (0.06) (1.03) (.01)
1995
----
Revenues $ 4,206 4,763 4,904 4,715
Gross profit 1,487 1,603 1,630 1,011
Operating income (loss) 117 142 195 (1,758)
Net income (loss) 81 (254) 233 (1,523)
Net income (loss) per common share(4) 0.01 (0.03) 0.03 (0.17)
</TABLE>
(1) First quarter 1997 results include a gain on the sale of the oilfield
services segment in the amount of $2,802,000.
(2) Third quarter 1996 results of operations include charges of $7,952,000
related to provisions for loss on disposal and provision for losses during
phase-out period of waste management services segment. In addition,
charges of $650,000 related to restructuring expenses including employee
severance obligations, costs associated with the relocation and recruitment
of personnel, and other related expenses are included in third quarter 1996
results of operations.
(3) Fourth quarter 1995 results of operations include certain nonrecurring
expenses totaling $1,162,000, including insurance accruals, severance
expenses, relocation expenses, legal and consulting expenses, and a
write-down of the carrying value of an office building to its estimated net
realizable value.
(4) The sum of the 1995 quarterly per share amounts does not equal the per
share amount for the year due to the effect of the issuance of common stock
on the weighted average number of common shares outstanding.
F-25
<PAGE>
EXHIBIT 10.33
<PAGE>
EXHIBIT 10.33
TOLLING AGREEMENT
This Tolling Agreement (the "Agreement") is made as of this 30th day of
July, 1997, by and between American Ecology Corporation ("American Ecology") (on
behalf of itself and all subsidiaries of American Ecology Corporation) and
Mobley Environmental Services, Inc. ("Mobley") (collectively, the "Parties").
WHEREAS, American Ecology and Mobley are parties to a Stock Purchase
Agreement as of May 10, 1994 by and between American Ecology Corporation and
Mobley Environmental Services, Inc., as amended by Amendment dated September 2,
1994 (the "Stock Purchase Agreement"), pursuant to which (i) Mobley agreed to
perform certain services for American Ecology and its subsidiaries for which it
was entitled to commissions ("Maquiladora Commissions") and American Ecology
purchased one hundred percent of the issued and outstanding capital stock of
Gibraltar Chemical Resources, Inc. from Mobley; and (ii) American Ecology was
entitled to certain receivables (the "Receivables"); and
WHEREAS, American Ecology and Mobley are parties to an agreement dated
December 31, 1994 (the "Maquiladora Agreement"); and
WHEREAS, American Ecology contends that certain Purchaser's Indemnified
Persons (as defined in the Stock Purchase Agreement) have incurred and continue
to incur costs and expenses giving rise to a cause of action for indemnification
or other damages against Mobley under the Stock Purchase Agreement, and
otherwise; and
WHEREAS, American Ecology and/or other Purchaser's Indemnified Persons
intend to file a claim against Mobley for indemnification or other relief under
the Stock Purchase Agreement, and otherwise, for the Receivables; and
WHEREAS, American Ecology executed and delivered to Mobley a promissory
note dated December 31, 1994 in the principal amount of $550,000 ("$550,000
Note"), pursuant to the Amended Agreement, which $550,000 Note was due and
payable on December 31, 1995; and
WHEREAS, American Ecology has not paid the $550,000 Note; and
WHEREAS, Mobley contends that it has performed services on behalf of
American Ecology under the Maquiladora Agreement and that it has earned
Maquiladora Commissions which have not been paid; and
WHEREAS, Mobley contends that it has duly made demand for payment of the
$550,000 Note and intends to file a claim against American Ecology for payment
of the $550,000 Note and the unpaid Maquiladora Commissions; and
WHEREAS, American Ecology and related entities have filed an action
entitled AMERICAN ECOLOGY ENVIRONMENTAL SERVICES CORPORATION, ET AL., V. MILDRED
KRUEGER, ET AL., No. 3-96CV2670-D (N.D. Tex.) (hereinafter, the "M.O.S.E.S.
Litigation"); and
<PAGE>
WHEREAS, American Ecology and its affiliates have been named as defendants
in various lawsuits arising in whole or in part out of the operation of
Gibraltar Chemical Resources, Inc. (hereinafter, the "Gibraltar Litigation");
and
WHEREAS, the Parties have begun negotiating in an attempt to settle,
without costly and protracted litigation, American Ecology's and Mobley's claims
against each other; and
WHEREAS, the Parties are entering into this Agreement in a desire to
eliminate the need for, or to defer, any litigation of claims by the Parties,
without thereby altering the claims or defenses available to the Parties;
NOW THEREFORE, American Ecology and Mobley hereby stipulate and agree, for
good and sufficient consideration given, as follows:
1. The period from July 30, 1997 through July 30, 2000, inclusive (the
"Tolling Period"), will not be included in computing the running of any statute
of limitations with regard to an action by American Ecology against Mobley in
connection with the Stock Purchase Agreement or the Receivables, or with regard
to an action by Mobley against American Ecology in connection with the $550,000
Note and the Maquiladora Commissions.
2. The Tolling Period will not be considered in any other defense
concerning the timeliness of such an action by American Ecology against Mobley
or such an action by Mobley against American Ecology.
3. Mobley agrees not to assert, plead, or raise in any fashion, whether
by answer, motion, or otherwise, in any action with respect to any claim by
American Ecology relating to the Stock Purchase Agreement or the Receivables,
any defense or avoidance based upon the running of any statute of limitations
during the Tolling Period, and the statute of limitations, if any, shall be
tolled during and for the Tolling Period.
4. American Ecology agrees not to assert, plead, or raise in any fashion,
whether by answer, motion, or otherwise, in any action with respect to any claim
by Mobley relating to the $550,000 Note, or the Maquiladora Commissions, any
defense or avoidance based upon the running of any statute of limitations during
the Tolling Period, and the statute of limitations, if any, shall be tolled
during and for the Tolling Period.
5. This Agreement does not constitute any admission or acknowledgment of
liability on the part of any party to this Agreement, nor does this Agreement
constitute any admission or acknowledgment on the part of either party that any
statute of limitations or any other defense concerning the timeliness of
commencing a civil action is applicable to any claim to be asserted by the other
party under the Stock Purchase Agreement or the Maquiladora Agreement.
6. Nothing in this Agreement shall be construed to prevent the Parties
from entering into an additional tolling agreement or tolling agreements to
extend the Tolling Period if the Parties so agree in writing.
2
<PAGE>
7. The Parties further agree that no pleadings, documents, discovery, or
other materials created in connection with the M.O.S.E.S. Litigation or the
Gibraltar Litigation (including any future litigation related to the M.O.S.E.S.
Litigation or the Gibraltar Litigation) may be used for any purpose in any
litigation between the Parties, except with the consent of both Parties.
Without limiting the foregoing, the Parties agree that no position taken or
statements made in connection with the M.O.S.E.S. Litigation or the Gibraltar
Litigation shall be used as an admission in any litigation between the Parties.
8. Except as provided in paragraph 9 hereof, American Ecology agrees that
as long as the M.O.S.E.S. Litigation is pending it will not pursue its claims
against Mobley under the Stock Purchase Agreement or for the Receivables until
after July 30, 2000. Nothing herein shall require American Ecology to pursue
the M.O.S.E.S. Litigation or inhibit its right to deal with the M.O.S.E.S.
Litigation in any manner it wishes. Any recovery by American Ecology in the
M.O.S.E.S. Litigation, however derived, shall be a dollar for dollar reduction
of the obligations of Mobley under the Stock Purchase Agreement.
9. Notwithstanding anything to the contrary in paragraph 8 hereof,
American Ecology reserves the right at all times to enforce section 7.5 of the
Stock Purchase Agreement.
10. This Agreement contains the entire agreement between the Parties, and
no statement, promise, or inducement made by any party to this Agreement that is
not set forth in this Agreement will be valid or binding. This Agreement may
not be modified except in writing signed by all Parties and endorsed herein.
11. The undersigned representative of each of the Parties certifies that
he or she is fully authorized to enter into the terms and conditions of this
Agreement and to legally bind such party to this Agreement.
12. This Agreement may be executed in multiple counterparts, each of which
shall be deemed an original, but all of which shall constitute one and the same
instrument and are binding between and among each signatory party.
AMERICAN ECOLOGY CORPORATION
By:
------------------------------------
Date Name:
-------------------- ----------------------------------
Title:
---------------------------------
MOBLEY ENVIRONMENTAL SERVICES, INC.
By:
------------------------------------
Date Name:
-------------------- ----------------------------------
Title:
---------------------------------
3
<PAGE>
EXHIBIT 11
<PAGE>
EXHIBIT 11
MOBLEY ENVIRONMENTAL SERVICES, INC.
Computation of Loss Per Common Share
Year Ended December 31, 1997
<TABLE>
<S> <C>
Loss from continuing operations $ (4,000)
Income from discontinued operations 2,397,000
----------
Net income $2,393,000
----------
----------
Weighted average number of
common shares outstanding
during the period 8,835,293
----------
----------
Net income (loss) per share:
Continuing operations $ (0.00)
Discontinued operations $ .27
----------
$ .27
----------
----------
</TABLE>
<PAGE>
EXHIBIT 23
<PAGE>
EXHIBIT 23
INDEPENDENT AUDITORS' CONSENT
The Board of Directors
Mobley Environmental Services, Inc.:
We consent to incorporation by reference in the Registration Statement (No.
33-92336) on Form S-8 of Mobley Environmental Services, Inc. of our report
dated March 6, 1998, relating to the consolidated balance sheets of Mobley
Environmental Services, Inc. and subsidiaries as of December 31, 1997 and
1996, and the related consolidated statements of operations, stockholders'
equity, and cash flows for each of the years in the three-year period ended
December 31, 1997, which report appears in the December 31, 1997, annual
report on Form 10-K of Mobley Environmental Services, Inc.
/s/ KPMG PEAT MARWICK LLP
KPMG PEAT MARWICK LLP
Shreveport, Louisiana
June 30, 1998
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S AUDITED FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 1997 AND
IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 353
<SECURITIES> 4,495
<RECEIVABLES> 423
<ALLOWANCES> 50
<INVENTORY> 0
<CURRENT-ASSETS> 819
<PP&E> 393
<DEPRECIATION> 182
<TOTAL-ASSETS> 6,217
<CURRENT-LIABILITIES> 1,141
<BONDS> 0
0
0
<COMMON> 90
<OTHER-SE> 4,986
<TOTAL-LIABILITY-AND-EQUITY> 6,217
<SALES> 0
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (4)
<INCOME-TAX> 0
<INCOME-CONTINUING> (4)
<DISCONTINUED> 2,397<F1>
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,393
<EPS-PRIMARY> 0.27
<EPS-DILUTED> 0.27
<FN>
<F1>BECAUSE OF THE SALES OF THE COMPANY'S TWO BUSINESS SEGMENTS DURING 1997,
SUCH SEGMENTS HAVE BEEN ACCOUNTED FOR AS DISCONTINUED OPERATIONS, AND
ACCORDINGLY, THEIR OPERATIONS HAVE BEEN SEGREGATED IN THE ACCOMPANYING
CONSOLIDATED STATEMENTS OF OPERATIONS.
</FN>
</TABLE>
