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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
[X] Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the quarter period ended September 30, 1997
OR
[ ] Transition Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the transition period from _________ to ________
Commission File Number 0-19497
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MOBLEY ENVIRONMENTAL SERVICES, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 75-2242963
(State or other jurisdiction of (I.R.S. Employer
Incorporation or organization) Identification No.)
STILLHOUSE CANYON OFFICE PARK, BLDG. ONE
4807 SPICEWOOD SPRINGS ROAD, SUITE 1245
AUSTIN, TEXAS 78759
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (512) 346-5591
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months and (2) has been subject to such filing
requirements for the past 90 days. Yes No X .
--- ---
The number of shares outstanding of the registrant's common stock, as of
June 1, 1997 was 4,155,097 shares of Class A Common Stock, $.01 par value and
4,680,196 shares of Class B Common Stock, $.01 par value.
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MOBLEY ENVIRONMENTAL SERVICES, INC.
FORM 10-Q
INDEX
Part I - FINANCIAL INFORMATION Page
----
Item 1. Financial Statements (Unaudited)
- Consolidated Balance Sheets - September 30, 1997
and December 31, 1996 2
- Consolidated Statements of Operations - Three
Months and Nine Months ended September 30, 1997 and 1996 3
- Consolidated Statement of Stockholders' Equity -
Nine Months Ended September 30, 1997 4
- Consolidated Statements of Cash Flows - Nine Months
Ended September 30, 1997 and 1996 5
- Notes to Consolidated Financial Statements 6-10
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 11-12
Part II - OTHER INFORMATION
Item 1. Legal Proceedings 13
Item 2. Changes in Securities 13
Item 3. Defaults Upon Senior Securities 13
Item 4. Submission of Matters to a Vote of Security Holders 13
Item 5. Other Information 13
Item 6. Exhibits and Reports on Form 8-K 13
Signatures 14
<PAGE>
Part I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
MOBLEY ENVIRONMENTAL SERVICES, INC.
Consolidated Balance Sheets
(dollars in thousands)
(unaudited)
<TABLE>
September 30, December 31,
1997 1996
---- ----
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 678 385
Trade receivables 506 161
Prepaid expenses and other current assets 153 207
Net assets of discontinued operations - current -- 1,144
-------- -------
Total current assets 1,337 1,897
Property, plant and equipment, net 214 230
Net assets of discontinued operations - non-current -- 9,659
Note receivable 500 --
Investment securities 4,586 --
Other assets, net 192 197
-------- -------
$ 6,829 11,983
-------- -------
-------- -------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable and current portion of long-term debt $ -- 5,014
Accounts payable 369 633
Accrued expenses 1,359 3,721
-------- -------
Total current liabilities 1,728 9,368
Deferred income taxes -- 148
-------- -------
Total liabilities 1,728 9,516
-------- -------
Stockholders' equity:
Preferred stock; $.01 par value; 2,000,000 shares
authorized; none issued -- --
Common stock; $.01 par value:
Class A; 15,000,000 shares authorized, 4,155,097 and
4,085,343 shares issued and outstanding at
September 30, 1997 and December 31, 1996,
respectively 42 42
Class B; 10,000,000 shares authorized, 4,764,903
shares issued and 4,680,196 shares outstanding at
September 30, 1997; 4,834,657 shares issued and
4,749,950 shares outstanding at December 31, 1996 48 48
Additional paid-in capital 25,159 25,159
Accumulated deficit (19,947) (22,486)
Net unrealized gain on investment securities 23 --
Deferred compensation costs under restricted stock
agreements (216) (288)
Treasury stock; 84,707 shares of Class B common stock,
at cost (8) (8)
-------- -------
Total stockholders' equity 5,101 2,467
Commitments and contingencies
-------- -------
$ 6,829 11,983
-------- -------
-------- -------
</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>
Three Months Ended September 30, Nine Months Ended September 30,
-------------------------------- -------------------------------
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues $ -- -- -- --
Cost of revenues -- -- -- --
---------- --------- --------- ---------
Gross profit -- -- -- --
General and administrative expenses 194 75 516 225
Restructuring charges -- 650 -- 650
---------- --------- --------- ---------
Operating loss (194) (725) (516) (875)
Interest income 79 -- 69 --
Gain on sale of US Filter stock 25 -- 556 --
Gain on sale of assets 37 -- 37 --
Other income (expense) 7 -- (4) --
---------- --------- --------- ---------
Income (loss) from continuing
operations before income taxes (46) (725) 142 (875)
Income taxes -- -- -- --
---------- --------- --------- ---------
Income (loss) from continuing
operations (46) (725) 142 (875)
---------- --------- --------- ---------
Discontinued operations, net of tax:
Provision for loss on disposal of
waste management services segment -- (7,621) -- (7,621)
Provision for losses during phase-out
period of waste management services
segment -- (331) -- (331)
Net loss from operations
of waste management services
segment -- (450) (405) (1,258)
Net income (loss) from operations of
oilfield services segment -- 10 -- (195)
Gain on sale of oilfield services
segment -- -- 2,802 --
---------- --------- --------- ---------
Income (loss) from discontinued
operations -- (8,392) 2,397 (9,405)
---------- --------- --------- ---------
Net income (loss) $ (46) (9,117) 2,539 (10,280)
---------- --------- --------- ---------
---------- --------- --------- ---------
Net income (loss) per share:
Continuing operations $ (0.01) (0.08) 0.02 (0.02)
Discontinued operations 0.00 (0.95) 0.27 (1.14)
---------- --------- --------- ---------
$ (0.01) (1.03) 0.29 (1.16)
---------- --------- --------- ---------
---------- --------- --------- ---------
Weighted average number of
common shares outstanding 8,835,293 8,835,293 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
Nine Months Ended September 30, 1997
(dollars in thousands, except per share amounts)
(unaudited)
<TABLE>
<S> <C>
Preferred Stock - none issued $ --
--------
Class A Common Stock:
Balance at December 31, 1996 and September 30, 1997 42
--------
Class B Common Stock:
Balance at December 31, 1996 and September 30, 1997 48
--------
Additional Paid-In Capital:
Balance at December 31, 1996 and September 30, 1997 25,159
--------
Accumulated Deficit:
Balance at December 31, 1996 (22,486)
Net income 2,539
--------
Balance at September 30, 1997 (19,947)
--------
Unrealized Gain on Investment Securities:
Balance at December 31, 1996 --
Unrealized gain 23
--------
Balance at September 30, 1997 23
--------
Deferred Compensation Costs Under Restricted Stock Agreements:
Balance at December 31, 1996 (288)
Amortization of unearned compensation 72
--------
Balance at September 30, 1997 (216)
--------
Treasury Stock:
Balance at December 31, 1996 and September 30, 1997 (8)
--------
Total stockholders' equity at September 30, 1997 $ 5,101
--------
--------
</TABLE>
See accompanying notes to consolidated financial statements
4
<PAGE>
MOBLEY ENVIRONMENTAL SERVICES, INC.
Consolidated Statements of Cash Flows
(dollars in thousands)
(unaudited)
<TABLE>
Nine Months Ended September 30,
-------------------------------
1997 1996
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 2,539 (10,280)
Adjustments to reconcile net income (loss) to net
cash used by operating activities:
Provision for loss on disposal and losses during
phase-out period of waste management services segment -- 8,650
Provision for restructuring charges -- 650
Depreciation and amortization 535 2,016
Deferred income tax benefit (148) (698)
Bad debt expense 152 --
Deferred compensation costs under restricted stock
agreements 72 72
Gain on sale of US Filter stock (556) --
Gain on sale of oilfield services segment (2,802) --
Gain on sale of assets (37) --
Loss on sale of investment securities 2 --
Changes in certain operating assets and liabilities:
Trade receivables (883) (400)
Prepaid expenses and other current assets 301 (101)
Other assets -- (30)
Accounts payable (671) 577
Accrued expenses and other liabilities (1,789) (736)
-------- -------
Net cash used by operating activities, including
discontinued operations (3,285) (280)
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 248 --
Purchase of investment securities (4,801) --
Capital expenditures (112) (4,792)
Proceeds from sale of assets 45 --
-------- -------
Net cash provided (used) by investing activities,
including discontinued operations 8,592 (4,792)
Cash flows from financing activities:
Net borrowings under revolving lines of credit and
short-term notes payable -- 2,550
Proceeds from long-term borrowings -- 1,940
Principal payments on long-term debt (5,014) (144)
-------- -------
Net cash provided (used) by financing activities,
including discontinued operations (5,014) 4,346
-------- -------
Net increase (decrease) in cash and cash equivalents 293 (726)
Cash and cash equivalents at beginning of period 385 1,476
-------- -------
Cash and cash equivalents at end of period $ 678 750
-------- -------
-------- -------
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE>
(1) BASIS OF PRESENTATION
The accompanying financial statements present the consolidated accounts
of Mobley Environmental Services, Inc. (the "Company") and its subsidiaries.
All significant intercompany accounts and transactions have been eliminated.
The unaudited consolidated financial statements reflect all adjustments
which are, in the opinion of management, of a normal and recurring nature and
necessary for a fair presentation of the consolidated financial position of
the Company as of September 30, 1997, and the consolidated results of
operations and cash flows for the periods presented herein. Interim results
are not necessarily indicative of results for a full year. The unaudited
consolidated financial statements should be read in conjunction with the
consolidated financial statements and notes thereto presented in the
Company's Annual Report on Form 10-K for the year ended December 31, 1996.
Management of the Company has made a number of estimates and assumptions
relating to the reporting of assets and liabilities and the disclosure of
contingent liabilities to prepare these financial statements in accordance
with generally accepted accounting principles. Actual results could differ
from those estimates.
(2) RECENT ASSET SALES AND DISCONTINUED OPERATIONS
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
recent efforts to attract equity investors to fund activities contemplated by
the Company's strategic business plan; (iii) the Company's default under its
bank credit agreement due to its inability to maintain compliance with
certain covenants contained in such agreement; and (iv) the Company's
severely strained liquidity and immediate need for working capital to
continue its current operations. As part of these deliberations, management
and the Company's financial advisors reviewed in detail with the Board of
Directors their efforts with third parties to attract possible investments
in, or strategic alliances with, the Company. Since such efforts had not
yielded access to funds on terms acceptable to the Company, the Board of
Directors determined that the divestiture of its operations was in the best
interest of the Company and its shareholders. These circumstances required
the Company to reevaluate 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. ("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 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.
6
<PAGE>
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
September 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 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.
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 5).
The Company's two business segments, waste management services and
oilfield services, have been accounted for as discontinued operations, and
accordingly, their operations have been segregated in the accompanying
consolidated statements of operations. The revenues, operating costs and
expenses, interest expense, and income taxes for the periods ended September
30, 1997 and 1996, have been reclassified for amounts associated with the
discontinued segments. Due to the relative significance of the Company's
business segments to its operating assets as a whole, and in light of the
Company's decision in 1996 to divest itself of all of its operating assets,
the Company has allocated certain general and administrative expenses to the
business segments in the accompanying consolidated 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
7
<PAGE>
not specifically attributable to either of the Company's business segments
which are being disposed of. Interest expense has been allocated to the
segments based on the outstanding indebtedness attributable to each of the
business segments.
Operating results of the Company's waste management services segment for
the nine-month periods ended September 30, 1997 and 1996, are as follows (in
thousands of dollars):
1997 1996
---- ----
Revenues $9,489 11,716
Cost of revenues 7,697 9,300
------ ------
Gross profit 1,792 2,416
Selling, general and administrative expenses,
including allocated amounts 2,208 3,602
------ ------
Operating loss (416) (1,186)
Income tax benefit 147 --
Interest expense, net (136) (72)
------ ------
Net loss from operations of waste
management services segment $ (405) (1,258)
------ ------
------ ------
Operating results of the Company's oilfield services segment for the
nine-month periods ended September 30, 1997 and 1996, are as follows (in
thousands of dollars):
1997 1996
---- ----
Revenues $ 231 3,212
Cost of revenues 168 2,401
------ ------
Gross profit 63 811
Selling, general and administrative expenses,
including allocated amounts 63 987
Other expenses -- 19
------ ------
Net loss from operations of oilfield services segment $ (195)
------ ------
------ ------
At September 30, 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.
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.
(3) ACCRUED EXPENSES
At September 30, 1997 accrued expenses were comprised of the following:
$ 200,000 medical claims
301,000 automobile, worker's compensation and general liability
claims
858,000 miscellaneous accruals for legal and divestiture costs
----------
$1,359,000
----------
----------
8
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(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) COMMITMENTS AND CONTINGENCIES
LETTERS OF CREDIT. At September 30, 1997, letters of credit totaling
approximately $1,000,000 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 l993, 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. The Company paid all
remaining amounts due during the quarter ended September 30, 1997.
LITIGATION AND VARIOUS OTHER CLAIMS. The Company continues to defend
various claims resulting from the operations of its former subsidiary,
Gibraltar, which was sold effective December 31, 1994. As of December 19,
1997, five such lawsuits were pending, one of which is asserted as a class
action. During the Company's ownership of Gibraltar, Gibraltar engaged in
the collection, transportation, analysis, treatment management and disposal
of various types of hazardous wastes. In the actions pending against the
Company and/or Gibraltar, the plaintiffs complain of a variety of acts by
Gibraltar which allegedly occurred in the course of its operations, including
improper air emissions, nuisance odors, contamination of water supplies, and
repeated and continuing violations of environmental laws. In the various
pending actions, plaintiffs assert similar theories as the alleged basis for
recovery, including negligence, nuisance, trespass, fraudulent concealment,
assault and battery, and intentional infliction of emotional distress.
Likewise, such plaintiffs seek similar types of damages, including loss of
property value and compensatory and punitive damages for personal injury and
property damage for nuisance odors, physical discomfort and impairment,
interference with use and enjoyment of property, medical expenses, mental
anguish, and loss of earning capacity. An 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 five
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.
9
<PAGE>
Additionally, the Company is obligated to indemnify AEC for certain claims
against Gibraltar arising from circumstances existing on or prior to the
closing of the sale, including various claims and proceedings disclosed to
AEC. The Company's indemnification obligations to AEC expired June 30, 1996,
except in the case of tax, environmental and ERISA claims, for which any
claims for indemnification must be asserted prior to June 30, 1998. These
indemnifications may include the potential liability of former customers of
Gibraltar, approximately 50 of which have also become defendants in
litigation involving Gibraltar's operations. The Company's contractual
indemnity obligations to AEC also encompass various pending regulatory and
permit renewal proceedings. The failure of Gibraltar to prevail in these
matters could result in significant liabilities to the Company.
The Company has been notified by its insurance carrier that it disputes
the Company's interpretation of its pollution liability insurance coverage
and policy limitations applicable to the foregoing claims. While the Company
is vigorously pursuing a favorable resolution of this dispute, it is unable
to determine the likelihood of an unfavorable outcome at this time.
The Company, based on consultation with its legal counsel, believes that
it is probable that the Company will continue to incur certain costs
associated with the foregoing matters and accordingly, in connection with the
divestiture of Gibraltar in 1994, established an accrual for estimated
out-of-pocket expenses related to the ongoing administrative management of
such matters. However, the Company is currently unable to reasonably estimate
its potential exposure for defending such matters, any indemnity obligations
resulting therefrom, and any corresponding insurance reimbursement. As noted
above, the litigation matters to which the Company is a party raise several
difficult and complex factual and legal issues. More specifically: (i) while
certain of the plaintiffs exhibit apparent physical injury and a variety of
health problems, the requisite causal connection to Gibraltar's facilities or
operations has not been established; (ii) certain of the cases involve
literally hundreds of plaintiffs whose physical condition and medical history
have not yet begun to be investigated; (iii) although the Company has
experienced some degree of success recently in two separate jury trials,
there is inherent uncertainty associated with jury trials in cases such as
these which tend to have a strong emotional appeal; (iv) the extent of
pollution liability insurance coverage available to the Company for potential
indemnity exposure and defense costs is currently in dispute; (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 is a
potentially responsible party of the alleged release, during the early or
mid-1980s, of hazardous substances at the McBay Oil and Gas State Superfund
Site located near Grapeland, Texas. The Company has recorded an accrual for
its estimated exposure in connection with this matter, the amount of which is
not material to the consolidated financial statements.
There are various other routine claims and legal actions pending and
threatened against the Company which are incidental to the Company's business
and have arisen in the ordinary course of its business related to services,
contracts, employment, and other matters. Where applicable, the Company has
recorded accruals for estimated potential damages and expenses associated
with such matters. While the final outcome of these matters cannot be
predicted with certainty, management upon consultation with legal counsel,
and considering the Company's limited continuing activities, believes that
financial obligations of the Company arising from such claims could have a
material adverse effect on its consolidated financial condition, results of
operations, or liquidity.
10
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
GENERAL
The Company's business involved providing diverse environmental and
field-related services to industrial, governmental, and commercial markets,
specializing in the collection, transportation, treatment, recycling and
management of a wide variety of non-hazardous liquid hydrocarbons, oil
filters, absorbents and related materials. Additionally, through its
oilfield services segment, the Company provided services for managing liquids
used or produced during the life cycle of oil and gas wells.
The following discussion is designed to assist in the understanding of
the Company's financial condition as of September 30, 1997, as well as the
Company's operating results for the three-month and nine month periods ended
September 30, 1997. Certain material events affecting the business of the
Company are discussed in Item 1 of this report. The Notes to Consolidated
Financial Statements contain additional information that should be read in
conjunction with this discussion.
RECENT ASSET SALES, DISCONTINUED OPERATIONS AND RESTRUCTURING CHARGES
Due to the Company's inability to secure, on acceptable terms, the
capital resources necessary to continue the implementation of its strategic
plans to expand its hydrocarbon recycling and recovery business, and after
considering the attendant risks of continuing to pursue such strategy in
light of its severely strained liquidity, in September 1996, the Company's
Board of Directors determined that the divestiture of its operations was in
the best interests of the Company and its shareholders. Subsequently, on
October 30, 1996 and November 1, 1996, the Company executed letters of intent
to sell substantially all of its operating assets in two separate
transactions which have now been completed (see Note 2 of Notes to
Consolidated Financial Statements). Because of the 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 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.
SALE OF WASTE MANAGEMENT SERVICES ASSETS & DISCONTINUANCE OF BUSINESS
SEGMENT. On October 30, 1996, the Company signed a letter of intent with
United States Filter Corporation ("USF") to sell substantially all of the
assets related to its waste management services activities. Such sale was
completed on May 29, 1997, pursuant to a definitive asset purchase agreement.
Under the terms of the definitive agreement, the Company received $8.0
million in shares of USF common stock (registered with the Securities and
Exchange Commission) in exchange for such assets, and can earn up to an
additional $4.0 million in USF common stock based on the performance of the
business during the two years following its sale. Additionally, USF assumed
certain liabilities (accounts payable and accrued expenses) as part of the
transaction. The net assets which were the subject of the definitive
agreement 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.
11
<PAGE>
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 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 $516,000 for the nine months ended September 30, 1997 have
been incurred that were not considered part of the cost of the discontinued
operations. In addition, a gain on the sale of USF shares in the amount of
$556,000 has been recorded through September 30, 1997 as all of the USF stock
has been sold.
CAPITAL RESOURCES AND LIQUIDITY
All of the $8.0 million in USF common stock received at the time of the
closing of the sale of its waste management services assets 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 initially deployed in short-term investments. General and
administrative expenses incurred for the nine month period ended September
30, 1997 were $516,000. The Company anticipates that ongoing general and
administrative expenses will be approximately $309,000 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 USF, the Company may receive up to $4.0 million in
USF common stock during the two-year period following the sale based on the
performance of the hydrocarbon recycling business. Additionally, 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.
Because of its indemnification obligations related to the sale of
Gibraltar, as well as potential indemnity obligations with respect to the
asset sales to USF and Dawson, and in light of the ongoing litigation
(described in the Company's Annual Report on Form 10-K for the year ended
December 31, 1996), the Company, based on consultation with legal counsel,
does not currently anticipate making a distribution to its stockholders in
the foreseeable future. As circumstances change or additional information
with respect to the extent of the Company's potential indemnity obligations
becomes available, the Board of Directors will continue to evaluate various
uses of the Company's funds. The Company has no plans to conduct any kind of
operating business at any time in the future.
12
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
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, 1996 and quarterly reports on form 10Q for the periods ended
March 31, 1997 and June 30, 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
Exhibit
Number Description
------ -----------
27 Financial Data Schedule (submitted only in electronic format)
REPORTS ON FORM 8-K
None.
13
<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: January 16, 1998
14
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THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S UNAUDITED FINANCIAL STATEMENTS FOR THE PERIOD ENDED
SEPTEMBER 30, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
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