<PAGE>
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------
FORM 10-Q
/X/ Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the quarter period ended March 31, 1998
OR
/ / Transition Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the transition period from ___________ to ___________
Commission File Number 0-19497
---------
MOBLEY ENVIRONMENTAL SERVICES, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 75-2242963
(State or other jurisdiction of (I.R.S. Employer
Incorporation or organization) Identification No.)
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
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months and (2) has been subject to such filing
requirements for the past 90 days. Yes _____ No __X__.
The number of shares outstanding of the registrant's common stock, as of
July 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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<PAGE>
MOBLEY ENVIRONMENTAL SERVICES, INC.
FORM 10-Q
INDEX
<TABLE>
Part I - FINANCIAL INFORMATION Page
- ------------------------------ ----
<S> <C> <C>
Item 1. Financial Statements (Unaudited)
- Consolidated Balance Sheets - March 31, 1998
and December 31, 1997 2
- Consolidated Statements of Operations - Three
Months Ended March 31, 1998 and 1997 3
- Consolidated Statement of Stockholders' Equity -
Three Months Ended March 31, 1998 4
- Consolidated Statements of Cash Flows - Three Months
Ended March 31, 1998 and 1997 5
- Notes to Consolidated Financial Statements 6-12
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 13-15
Part II - OTHER INFORMATION
- ---------------------------
Item 1. Legal Proceedings 15
Item 2. Changes in Securities 15
Item 3. Defaults Upon Senior Securities 15
Item 4. Submission of Matters to a Vote of Security Holders 15
Item 5. Other Information 15
Item 6. Exhibits and Reports on Form 8-K 15
Signatures 16
</TABLE>
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
MOBLEY ENVIRONMENTAL SERVICES, INC.
Consolidated Balance Sheets
(dollars in thousands)
(unaudited)
<TABLE>
<CAPTION>
March 31, December 31,
1998 1997
----------- ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 370 353
Receivables 369 373
Prepaid expenses and other current assets 58 93
----------- ----------
Total current assets 797 819
Property, plant and equipment, net 205 211
Note receivable 500 500
Investment securities available for sale 4,442 4,495
Other assets, net 192 192
----------- ----------
$ 6,136 6,217
----------- ----------
----------- ----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable 76 100
Accrued expenses 1,036 1,041
----------- ----------
Total liabilities 1,112 1,141
----------- ----------
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 at March 31, 1998
and December 31, 1997, respectively 43 43
Class B; 10,000,000 shares authorized, 4,660,350 shares issued
and 4,575,643 shares outstanding at March 31, 1998 and
December 31, 1997, respectively 47 47
Additional paid-in capital 25,159 25,159
Accumulated deficit (20,170) (20,093)
Net unrealized gain on available for sale securities 30 29
Deferred compensation costs under restricted stock agreements (77) (101)
Treasury stock; 84,707 shares of Class B common stock, at cost (8) (8)
----------- ----------
Total stockholders' equity 5,024 5,076
Commitments and contingencies
----------- ----------
$ 6,136 6,217
----------- ----------
----------- ----------
</TABLE>
See accompanying notes to consolidated financial statements.
2
<PAGE>
MOBLEY ENVIRONMENTAL SERVICES, INC.
Consolidated Statements of Operations
(dollars in thousands, except per share amounts)
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended March 31,
----------------------------
1998 1997
---- ----
<S> <C> <C>
Revenues $ -- --
Cost of revenues -- --
---------- ----------
Gross profit -- --
General and administrative expenses 159 158
---------- ----------
Operating loss (159) (158)
Interest income 77 --
Other income (expense) 5 (10)
---------- ----------
Loss from continuing operations before
income taxes (77) (168)
Income taxes -- --
---------- ----------
Loss from continuing operations (77) (168)
---------- ----------
Discontinued operations:
Gain on sale of oilfield services segment -- 2,802
Net income from operations of waste
management services segment -- 141
---------- ----------
Income from discontinued operations -- 2,943
---------- ----------
Net income (loss) $ (77) 2,775
---------- ----------
---------- ----------
Net income (loss) per share:
Basic - continuing operations (0.01) (0.02)
Basic - discontinued operations -- 0.33
---------- ----------
$ (0.01) 0.31
---------- ----------
---------- ----------
Asuming dilution - continuing operations (0.01) (0.02)
Assuming dilution - discontinued operations -- 0.30
---------- ----------
$ (0.01) 0.28
---------- ----------
---------- ----------
Weighted average number of
common shares outstanding 8,835,293 8,835,293
---------- ----------
---------- ----------
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE>
MOBLEY ENVIRONMENTAL SERVICES, INC.
Consolidated Statement of Stockholders' Equity
Three Months Ended March 31, 1998
(dollars in thousands)
(unaudited)
<TABLE>
<S> <C>
Preferred Stock - none issued $ --
---------
Class A Common Stock:
Balance at December 31, 1997 and March 31, 1998 43
---------
Class B Common Stock:
Balance at December 31, 1997 and March 31, 1998 47
---------
Additional Paid-In Capital:
Balance at December 31, 1997 and March 31, 1998 25,159
---------
Accumulated Deficit:
Balance at December 31, 1997 (20,093)
Net loss (77)
---------
Balance at March 31, 1998 (20,170)
---------
Unrealized Gain on Investment Securities:
Balance at December 31, 1997 29
Unrealized gain 1
---------
Balance at March 31, 1998 30
---------
Deferred Compensation Costs Under Restricted Stock Agreements:
Balance at December 31, 1997 (101)
Amortization of unearned compensation 24
---------
Balance at March 31, 1998 (77)
---------
Treasury Stock:
Balance at December 31, 1997 and March 31, 1998 (8)
---------
Total stockholders' equity at March 31, 1998 $ 5,024
---------
---------
</TABLE>
See accompanying notes to consolidated financial statements
4
<PAGE>
MOBLEY ENVIRONMENTAL SERVICES, INC.
Consolidated Statements of Cash Flows
(dollars in thousands)
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended March 31,
----------------------------
1998 1997
--------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (77) 2,775
Adjustments to reconcile net income (loss) to net
cash used by operating activities:
Gain on sale of oilfield services segment -- (2,802)
Depreciation and amortization 6 453
Deferred compensation costs under restricted
stock agreements 24 24
Changes in certain operating assets and liabilities:
Receivables 4 (466)
Prepaid expenses and other current assets 35 222
Accounts payable (24) (368)
Accrued expenses (7) (605)
----- ------
Net cash used by operating activities,
including discontinued operations (39) (767)
----- ------
Cash flows from investing activities:
Capital expenditures -- (78)
Net proceeds from sale of oilfield services segment -- 4,656
Net proceeds from sale of investment securities 56 --
----- ------
Net cash provided by investing activities,
including discontinued operations 56 4,578
----- ------
Cash flows from financing activities, including
discontinued operations -
Payments on long-term debt and notes payable -- (3,300)
----- ------
Net increase in cash and cash equivalents 17 511
Cash and cash equivalents at beginning of period 353 385
----- ------
Cash and cash equivalents at end of period $ 370 896
----- ------
----- ------
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE>
MOBLEY ENVIRONMENTAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1998
(unaudited)
(1) BASIS OF PRESENTATION
The accompanying financial statements present the consolidated accounts
of Mobley Environmental Services, Inc. (the "Company") and its subsidiaries.
All significant intercompany accounts and transactions have been eliminated.
The unaudited consolidated financial statements reflect all adjustments
which are, in the opinion of management, of a normal and recurring nature and
necessary for a fair presentation of the consolidated financial position of
the Company as of March 31, 1998, and the consolidated results of operations
and cash flows for the periods presented herein. Interim results are not
necessarily indicative of results for a full year. The unaudited consolidated
financial statements should be read in conjunction with the consolidated
financial statements and notes thereto presented in the Company's Annual
Report on Form 10-K for the year ended December 31, 1997.
Management of the Company has made a number of estimates and assumptions
relating to the reporting of assets and liabilities and the disclosure of
contingent liabilities to prepare these financial statements in accordance
with generally accepted accounting principles. Actual results could differ
from those estimates.
(2) 1997 ASSET SALES AND DISCONTINUED OPERATIONS
During 1997, the Company sold 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 WASTE MANAGEMENT SERVICES ASSETS AND DISCONTINUANCE OF BUSINESS
SEGMENT. On May 29, 1997, the Company sold substantially all of the assets
related to its waste management services activities to United States Filter
Corporation ("USF"). As a result of that transaction, 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. As of May 29, 1998,
approximately 20% of the earnout was achieved and 28,294 shares of U.S.
Filter stock was received for the first year of operations subsequent to
closing the sale. Additionally, USF assumed certain liabilities (accounts
payable and accrued expenses) as part of the transaction. The net assets
which were the subject of this transaction 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.
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
6
<PAGE>
MOBLEY ENVIRONMENTAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1998
(unaudited)
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
reported net income of approximately $141,000 during the three month period
ended March 31, 1997.
SALE OF OILFIELD SERVICES ASSETS AND DISCONTINUANCE OF BUSINESS SEGMENT.
On January 20, 1997, the Company sold substantially all of the assets related
to its oilfield services business to Dawson Production Services, Inc.
("Dawson"). As a result of this transaction, 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.
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 7).
The Company's two business segments, waste management services and
oilfield services, were accounted for as discontinued operations during 1997,
and accordingly, their operations for the three months ended March 31, 1997
have been segregated in the accompanying consolidated statements of
operations. The revenues, operating costs and expenses, and income taxes for
the period ended March 31, 1997, has 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 allocated certain general and administrative expenses to the
business segments for the three months ended
7
<PAGE>
MOBLEY ENVIRONMENTAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1998
(unaudited)
March 31, 1997 in the accompanying consolidated segments of operations.
General and administrative expenses attributable to continuing operations
were determined based upon an allocation of such costs between the business
segments and continuing operations. Other income and expense were recorded as
continuing operations as such amounts are not specifically attributable to
either of the Company's business segments which were disposed of. Interest
expense was allocated to the segments based on the outstanding indebtedness
attributable to each of the business segments.
Operating results of the Company's waste management services segment for
the period ended March 31, 1997, were as follows (in thousands of dollars):
<TABLE>
<CAPTION>
1997
------
<S> <C>
Revenues $5,764
Cost of revenues 4,542
------
Gross profit 1,222
Selling, general and administrative expenses,
including allocated amounts 964
------
Operating income 258
Interest expense, net (117)
------
Net income from operations of waste
management services segment $ 141
------
------
</TABLE>
Operating results of the Company's oilfield services segment for the
period ended March 31, 1997, were as follows (in thousands of dollars):
<TABLE>
<CAPTION>
1997
------
<S> <C>
Revenues $ 231
Cost of revenues 168
------
Gross profit 63
Selling, general and administrative expenses,
including allocated amounts 63
------
Net loss from operations of oilfield services segment $ --
------
------
</TABLE>
At March 31, 1998, 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.
Upon completion of the sale of the waste management services segment,
the $8,000,000 of USF common stock was sold. 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,
8
<PAGE>
MOBLEY ENVIRONMENTAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1998
(unaudited)
1997 and March 31, 1998, approximately $825,000 in investments was held in
escrow until May 29, 1998 to satisfy any indemnification obligations of the
Company to U.S. Filter. As of May 29, 1998, approximately $500,000 were
released from escrow. The remaining funds are being held by the escrow agent
pending resolution of outstanding claims for which U.S. Filter seeks
reimbursement from escrow.
(3) ACCRUED EXPENSES
At March 31, 1998 accrued expenses were comprised of the following:
<TABLE>
<S> <C>
$ 200,000 medical claims
322,000 automobile, worker's compensation and general liability claims
514,000 miscellaneous accruals for legal and divestiture costs
----------
$1,036,000
----------
----------
</TABLE>
(4) 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.
(5) 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. 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.
9
<PAGE>
MOBLEY ENVIRONMENTAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1998
(unaudited)
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>
<CAPTION>
Three Months Ended
March 31,
-----------------------------
1998 1997
---------- ---------
<S> <C> <C>
Net income (loss) $ (77) 2,775
Weighted average number of common shares
used in basic EPS 8,835,293 8,835,293
Effect of dilutive securities
1995 Employee Restricted Stock Plan 168,000 340,000
Weighted average number of common shares
and dilutive potential common stock used
in EPS assuming dilution 9,003,293 9,175,293
</TABLE>
(6) COMPREHENSIVE INCOME
In June 1997, the Financial Accounting Standards Board issued SFAS 130,
REPORTING COMPREHENSIVE INCOME. SFAS 130 establishes standards for reporting
and display of comprehensive income and its components and is effective for
fiscal years beginning after December 15, 1997. The impact of SFAS 130 on the
Company was not significant.
(7) COMMITMENTS AND CONTINGENCIES
LETTERS OF CREDIT. At March 31, 1998, 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.
LITIGATION AND VARIOUS OTHER CLAIMS. The Company continues to defend
various claims resulting from the operations of its former subsidiary,
Gibraltar, which was sold effective December 31, 1994. As of August 21, 1998,
four such lawsuits were pending. During the Company's ownership of Gibraltar,
Gibraltar engaged in the collection, transportation, analysis, treatment
management and disposal of various types of hazardous wastes. In the actions
pending against the Company and/or Gibraltar, the plaintiffs complain of a
variety of acts by Gibraltar which allegedly occurred in the course of its
operations, including improper air emissions, nuisance odors, contamination
of water supplies, and repeated and continuing violations of environmental
laws. In the various pending actions, plaintiffs assert similar theories as
the alleged basis for recovery, including negligence, nuisance, trespass,
fraudulent concealment, assault and battery, and intentional infliction of
10
<PAGE>
MOBLEY ENVIRONMENTAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1998
(unaudited)
emotional distress. Likewise, the various plaintiffs in pending actions 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 four 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.
The Company is required to indemnify AEC for all losses resulting from
breaches of representations and warranties and pending or future claims or
proceedings resulting from circumstances existing prior to closing. The terms
of the stock purchase agreement between AEC and the Company provided that
such indemnification obligations would extend 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. 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 has been notified by its insurance carrier that it disputes
the Company's interpretation of its pollution liability insurance coverage
and policy limitations applicable to the foregoing claims. While the Company
is vigorously pursuing a favorable resolution of this dispute, it is unable
to determine the likelihood of an unfavorable outcome at this time.
The Company, based on consultation with its legal counsel, believes that
it is probable that the Company will continue to incur certain costs
associated with the foregoing matters and accordingly, in connection with the
divestiture of Gibraltar in 1994, established an accrual for estimated
out-of-pocket expenses related to the ongoing administrative management of
such matters. However, the Company is currently unable to reasonably estimate
its potential exposure for defending such matters, any indemnity obligations
resulting therefrom, and any corresponding insurance reimbursement. As noted
above, the litigation matters to which the Company is a party raise several
difficult and complex factual and legal issues. More specifically: (i) while
certain of the plaintiffs exhibit apparent physical injury and a variety of
health problems, the requisite causal connection to Gibraltar's facilities or
operations has not been established; (ii) certain of the cases involve
literally hundreds of plaintiffs whose physical condition and medical history
have not yet begun to be investigated; (iii) although the Company has
experienced some degree of success recently in two separate jury trials,
there is inherent uncertainty
11
<PAGE>
MOBLEY ENVIRONMENTAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1998
(unaudited)
associated with jury trials in cases such as these which tend to have a
strong emotional appeal; (iv) the extent of pollution liability insurance
coverage available to the Company for potential indemnity exposure and
defense costs is currently in dispute; (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 estimable. 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 and paid the contract amount. 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.
12
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
GENERAL
Prior to May 29, 1997, the Company's business involved providing diverse
environmental and field-related services to industrial, governmental, and
commercial markets, specializing in the collection, transportation,
treatment, recycling and management of a wide variety of non-hazardous liquid
hydrocarbons, oil filters, absorbents and related materials. Additionally,
prior to January 20, 1997, through its oilfield services segment, the Company
provided services for managing liquids used or produced during the life cycle
of oil and gas wells.
The following discussion is designed to assist in the understanding of
the Company's financial condition as of March 31, 1998, as well as the
Company's operating results for the three-month period ended March 31, 1998.
Certain material events affecting the business of the Company are discussed
in Item 1 of this report. The Notes to Consolidated Financial Statements
contain additional information that should be read in conjunction with this
discussion.
1997 ASSET SALES, DISCONTINUED OPERATIONS AND RESTRUCTURING CHARGES
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 Note 2 of Notes to Consolidated Financial
Statements). Because of these sales, results of operations of the Company's
two business segments for the three months ended March 31, 1997, 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 WASTE MANAGEMENT SERVICES ASSETS & DISCONTINUANCE OF BUSINESS
SEGMENT. On May 29, 1997, the Company sold substantially all of the assets
related to its waste management services activities to United States Filter
Corporation ("USF"). As a result of that transaction, the Company received
$8.0 million in shares of USF common stock (registered with the Securities
and Exchange Commission) in exchange for such assets, and can earn up to an
additional $4.0 million in USF common stock based on the performance of the
business during the two years following its sale. As of May 29, 1998,
approximately 20% of the earnout was achieved and 28,294 shares of U.S.
Filter stock was received for the first year of operations subsequent to
closing the sale. Additionally, USF assumed certain liabilities (accounts
payable and accrued expenses) as part of the transaction. The net assets
which were the subject of this transaction 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.
During the year ended December 31, 1996, the Company recorded a charge
of $7,621,000 (net of a deferred income tax benefit of $698,000),
representing the estimated loss on the disposal of the business segment
including certain required capital expenditures prior to the sale. In
determining the estimated loss on disposal, only the $8.0 million guaranteed
portion of the sales price was considered (i.e., that portion which is
contingent on the future performance of the business was ignored). The
Company estimated that it would incur additional operating losses in this
business segment after the allocation of certain overhead and interest costs,
amounting to approximately $331,000 during the phase-out period from October
1, 1996 to May 1997. A provision for such estimated net losses was made
during the year ended December 31, 1996. The Company's waste management
services segment reported net income of approximately $141,000 during the
three month period ended March 31, 1997.
13
<PAGE>
SALE OF OILFIELD SERVICES ASSETS AND DISCONTINUANCE OF BUSINESS SEGMENT.
On January 20, 1997, the Company sold substantially all of the assets related
to its oilfield services business to Dawson Production Services, Inc.
("Dawson"). As a result of that transaction, 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 recognized a gain upon completion of
the sale, after transaction costs of approximately $261,000, amounting to
approximately $2,802,000 in January 1997.
RESULTS OF OPERATIONS
General and administrative expenses amounted to $159,000 and $158,000
for the three months ended March 31, 1998 and 1997, respectively. These costs
represent the ongoing administrative costs of the Company after disposing all
of its operating assets. Interest income of $77,000 was earned in the three
month period ended March 31, 1998 on the investments available for sale and
note receivable. There was no interest income earned for the three month
period ended March 31, 1997 because the investment securities were not
received until May 29, 1997 as a result of the sale of the waste management
services business segment.
Income from discontinued operations amounted to $2,943,000 for the three
month period ended March 31, 1997. There was no income from discontinued
operations for the 1998 period as all operating assets were disposed of in
1997.
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 USF 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 the three month period ended March 31, 1998 were
$159,000. The Company anticipates that ongoing general and administrative
expenses will be approximately $540,000 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 USF common stock during the two-year period following the sale
based on the performance of the hydrocarbon recycling business. As of May 29,
1998, approximately 20% of the earnout was achieved and 28,294 shares of U.S.
Filter stock was received for the first year of operations subsequent to
closing the sale. 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.
14
<PAGE>
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 to USF and Dawson, and in light of the ongoing litigation
(described in the Company's Annual Report on Form 10-K for the year ended
December 31, 1997), 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.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The cause of action styled DANIELS V. GIBRALTAR CHEMICAL RESOURCES, INC.
has been set for trial in November 1998. There have been no other material
developments in the legal proceedings described in the Company's Annual
Report on Form 10-K for the year ended December 31, 1997.
ITEM 2. CHANGES IN SECURITIES
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
EXHIBITS
<TABLE>
<CAPTION>
Exhibit
Number Description
- ------- -----------
<S> <C>
27 Financial Data Schedule (submitted only in electronic format)
</TABLE>
REPORTS ON FORM 8-K
None.
15
<PAGE>
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MOBLEY ENVIRONMENTAL SERVICES, INC.
(Registrant)
/s/ John Mobley
-------------------------------------------------
John Mobley
Chairman of the Board and Chief Financial Officer
Date: August ___, 1998
16
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S UNAUDITED FINANCIAL STATEMENTS FOR THE QUARTER ENDED MARCH 31,
1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 370
<SECURITIES> 4,442
<RECEIVABLES> 419
<ALLOWANCES> 50
<INVENTORY> 0
<CURRENT-ASSETS> 797
<PP&E> 393
<DEPRECIATION> 188
<TOTAL-ASSETS> 6,136
<CURRENT-LIABILITIES> 1,112
<BONDS> 0
0
0
<COMMON> 90
<OTHER-SE> 4,934
<TOTAL-LIABILITY-AND-EQUITY> 6,136
<SALES> 0
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (77)
<INCOME-TAX> 0
<INCOME-CONTINUING> (77)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (77)
<EPS-PRIMARY> (0.01)
<EPS-DILUTED> (0.01)
</TABLE>
