<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 September 30, 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
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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.)
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 _X_ No __ .
The number of shares outstanding of the registrant's common stock, as of
July 31, 1997 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>
<CAPTION>
Part I - FINANCIAL INFORMATION Page
------
<S> <C> <C>
Item 1. Financial Statements (Unaudited)
- Consolidated Balance Sheets - September 30, 1998
and December 31, 1997 2
- Consolidated Statements of Operations - Three
Months and Nine Months Ended September 30, 1998 and 1997 3
- Consolidated Statement of Stockholders' Equity -
Nine Months Ended September 30, 1998 4
- Consolidated Statements of Cash Flows - Nine Months
Ended September 30, 1998 and 1997 5
- Notes to Consolidated Financial Statements 6-13
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 14-17
Part II - OTHER INFORMATION
Item 1. Legal Proceedings 17
Item 2. Changes in Securities 17
Item 3. Defaults Upon Senior Securities 17
Item 4. Submission of Matters to a Vote of Security Holders 17
Item 5. Other Information 17
Item 6. Exhibits and Reports on Form 8-K 17
Signatures 18
</TABLE>
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
MOBLEY ENVIRONMENTAL SERVICES, INC.
Consolidated Balance Sheets
(dollars in thousands)
(unaudited)
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
------------- ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 373 353
Receivables 173 373
Prepaid expenses and other current assets -- 93
------- -------
Total current assets 546 819
Property, plant and equipment, net 194 211
Note receivable 500 500
Investment securities available for sale 4,462 4,495
Other assets, net 187 192
------- -------
$ 5,889 6,217
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable 112 100
Accrued expenses 476 1,041
------- -------
Total liabilities 588 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 September 30, 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 September 30, 1998 and
December 31, 1997, respectively 47 47
Additional paid-in capital 25,159 25,159
Accumulated deficit (19,761) (20,093)
Accumulated other comprehensive income (150) 29
Deferred compensation costs under restricted stock agreements (29) (101)
Treasury stock; 84,707 shares of Class B common stock, at cost (8) (8)
----- -------
Total stockholders' equity 5,301 5,076
----- -------
Commitments and contingencies
$ 5,889 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 Nine Months
Ended September 30, Ended September 30,
--------------------------- -------------------------
1998 1997 1998 1997
---------- ---------- ----------- ---------
<S> <C> <C> <C> <C>
Revenues $ -- -- -- --
Cost of revenues -- -- -- --
---------- ---------- ----------- ---------
Gross profit -- -- -- --
General and administrative expenses 182 194 547 516
---------- ---------- ----------- ---------
Operating loss (182) (194) (547) (516)
Interest income 77 79 257 69
Gain on sale of US Filter stock -- 25 -- 556
Gain on sale of assets -- 37 -- 37
Other income (expense) 16 7 15 (4)
---------- ---------- ----------- ---------
Income (loss) from continuing
operations before income taxes (89) (46) (275) 142
Income taxes -- -- -- --
---------- ---------- ----------- ---------
Income (loss) from continuing operations (89) (46) (275) 142
---------- ---------- -------- ---------
Discontinued operations, net of tax:
Gain on sale of oilfield services segment -- -- -- 2,802
Net loss from operations of waste
management services segment -- -- -- (405)
Net gain from the earnout period of waste
management services segment -- -- 607 --
---------- ---------- -------- ---------
Income from discontinued operations -- -- 607 2,397
---------- ---------- ----------- ---------
Net income (loss) (89) (46) 332 2,539
Other comprehensive income, net of tax:
Net unrealized gains (losses) on
securities (187) 23 (179) 23
---------- ---------- ----------- ---------
Comprehensive income (loss) $ (276) (23) 153 2,562
========== ========== =========== =========
Net income (loss) per share -
basic and assuming dilution:
Continuing operations $ (0.01) (0.01) (0.03) 0.02
Discontinued operations 0.00 0.00 0.07 0.27
---------- ---------- ----------- ---------
$ (0.01) (0.01) 0.04 0.29
========== ========== =========== =========
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, 1998
(dollars in thousands)
(unaudited)
<TABLE>
<S> <C>
Preferred Stock - none issued $ --
------------
Class A Common Stock:
Balance at December 31, 1997 and September 30, 1998 43
------------
Class B Common Stock:
Balance at December 31, 1997 and September 30, 1998 47
------------
Additional Paid-In Capital:
Balance at December 31, 1997 and September 30, 1998 25,159
------------
Accumulated Deficit:
Balance at December 31, 1997 (20,093)
Net income 332
------------
Balance at September 30, 1998 (19,761)
------------
Accumulated Other Comprehensive Income:
Balance at December 31, 1997 29
Unrealized loss (179)
------------
Balance at September 30, 1998 (150)
------------
Deferred Compensation Costs Under Restricted Stock Agreements:
Balance at December 31, 1997 (101)
Amortization of unearned compensation 72
------------
Balance at September 30, 1998 (29)
------------
Treasury Stock:
Balance at December 31, 1997 and September 30, 1998 (8)
------------
Total stockholders' equity at September 30, 1998 $ 5,301
============
</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>
Nine Months Ended September 30,
-------------------------------
1998 1997
----- ------
<S> <C> <C>
Cash flows from operating activities:
Net income $332 2,539
Adjustments to reconcile net income to net
cash provided (used) by operating activities:
Depreciation and amortization 17 535
Deferred income tax benefit -- (148)
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 investment securities and fixed assets (2) (35)
Changes in certain operating assets and liabilities:
Trade receivables 200 (883)
Prepaid expenses and other current assets 93 301
Other assets, net 5 --
Accounts payable 12 (671)
Accrued expenses and other liabilities (475) (1,789)
----- ------
Net cash provided (used) by operating activities,
including discontinued operations 254 (3,285)
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 and maturity of investment securities 809 248
Purchase of investment securities (250) (4,801)
US Filter stock received from earnout of waste management
services segment (794) --
Net proceeds from sale of fixed assets 1 45
Capital expenditures -- (112)
----- ------
Net cash provided (used) by investing activities,
including discontinued operations (234) 8,592
Cash flows from financing activities - principal payments on
long-term debt -- (5,014)
----- ------
Net cash used by financing activities,
including discontinued operations -- (5,014)
Net increase in cash and cash equivalents 20 293
Cash and cash equivalents at beginning of period 353 385
----- ------
Cash and cash equivalents at end of period $373 678
===== ======
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE>
MOBLEY ENVIRONMENTAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 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 September 30, 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. 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.
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. The fair value of the 28,294 shares at June 30,
1998 was approximately $794,000, which was reported as a gain from discontinued
operations during the period ended June 30, 1998. As of September 30, 1998, the
fair value of the stock had declined to approximately $453,000 resulting in a
recorded unrealized loss of approximately $341,000.
During the year ended December 31, 1996, the Company recorded a charge
of $7,621,000 (net of a deferred income tax benefit of $698,000), representing
the estimated loss on the disposal of the business segment, including certain
required capital expenditures prior to the sale amounting to approximately
$900,000. In determining the estimated loss on disposal, only the $8,000,000
fixed
6
<PAGE>
MOBLEY ENVIRONMENTAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1998
(unaudited)
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 reported 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 the 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.
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 Brothers Oil Exchange, Inc., Environmental Petroleum
Products Co./EPPCO, and Environmental Insight, Inc. The asset purchase was
effectuated through a newly-formed, wholly-owned subsidiary of the Company, HTI
(Waste Management Services Segment). The Romero brothers had the right to earn
shares in the Company based on the profitability of the acquired companies. This
right was suspended due to the sale of the waste management services segment. In
order to settle this obligation and to offer the Romero brothers an incentive to
remain with the business to maximize the Company's earnout, the Company paid the
Romero brothers approximately $115,000 in June 1998. This payment had not been
accrued and was recorded as a loss from discontinued operations. In addition,
the Romero brothers are to receive a percentage of the Company's earnout with US
Filter. Approximately $72,500 was paid to the Romero brothers during the third
quarter of 1998 resulting from the earnout with US Filter that was achieved as
of May 29, 1998 for the first year of operations subsequent to closing the sale
of the waste management services segment. The payment has been reported as a
loss from discontinued operations.
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. This note was paid in full during the fourth
quarter of 1998. 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.
7
<PAGE>
MOBLEY ENVIRONMENTAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1998
(unaudited)
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
1998, and accordingly, their operations for the nine months ended September 30,
1997 and 1998 have been segregated in the accompanying consolidated statements
of operations. The revenues and operating costs and expenses for the period
ended September 30, 1997, 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
allocated certain general and administrative expenses to the business segments
for the nine months ended September 30, 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 September 30, 1997, were as follows (in thousands of
dollars):
<TABLE>
<CAPTION>
1997
-------
<S> <C>
Revenues $9,489
Cost of revenues 7,697
-------
Gross profit 1,792
Selling, general and administrative expenses,
including allocated amounts 2,208
-------
Operating loss (416)
Income tax benefit 147
Interest expense, net (136)
-------
Net loss from operations of waste
management services segment $(405)
=======
</TABLE>
8
<PAGE>
MOBLEY ENVIRONMENTAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1998
(unaudited)
Operating results of the Company's oilfield services segment for the
period ended September 30, 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 September 30, 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 resulting in a gain of $556,000
which is reflected 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 $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. In an
agreement dated September 25, 1998 with U.S. Filter, an additional $55,000 was
released from escrow, with all other funds being remitted to U.S. Filter.
(3) ACCRUED EXPENSES
At September 30, 1998 accrued expenses were comprised of the following:
<TABLE>
<CAPTION>
<S> <C>
$ 50,000 medical claims
255,000 automobile, worker's compensation and general
liability claims
248,000 miscellaneous accruals for legal and divestiture costs
(77,000) deferred taxes on unrealized loss on available for
sale securities
--------
$476,000
========
</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
9
<PAGE>
MOBLEY ENVIRONMENTAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1998
(unaudited)
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 impact on
earnings per share.
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>
Nine Months Ended
September 30,
------------------------
1998 1997
---------- ---------
<S> <C> <C>
Net income $ 332 2,539
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 168,000 168,000
Weighted average number of common shares
and dilutive potential common stock used
in EPS assuming dilution 9,003,293 9,003,293
</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 until the third quarter of 1998. The Standards in SFAS 130
were adopted in the third quarter of 1998.
Prior year comparative amounts have been reported.
10
<PAGE>
MOBLEY ENVIRONMENTAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1998
(unaudited)
(7) COMMITMENTS AND CONTINGENCIES
LETTERS OF CREDIT. At September 30, 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 November 6, 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 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.
11
<PAGE>
MOBLEY ENVIRONMENTAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1998
(unaudited)
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 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>
MOBLEY ENVIRONMENTAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1998
(unaudited)
YEAR 2000 COMPLIANCE
The Company has made an assessment of the potential risk associated
with the Year 2000 issue. The Company has no operations subsequent to the sale
of its operating assets as previously discussed. The risk related to internal
systems is minimal due to the limited accounting functions that are currently
required. The Company does rely upon third parties such as its investment
advisors and custodians. There can be no assurance that these third parties will
be compliant but due to the limited activity, these functions could be performed
by the Company.
The Company is not aware of any additional cost required to become Year
2000 compliant nor is it aware of any contingency plans that would require
additional funding.
13
<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 September 30, 1998, as well as the
Company's operating results for the nine-month period ended September 30, 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 nine months ended September 30, 1997 and 1998, 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. 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.
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. The fair value of the 28,294 shares at June 30,
1998 was approximately $794,000, which was reported as a gain from discontinued
operations during the period ended June 30, 1998. As of September 30, 1998, the
fair value of the stock had declined to approximately $453,000 resulting in a
recorded unrealized loss of approximately $341,000.
During the year ended December 31, 1996, the Company recorded a charge
of $7,621,000 (net of a deferred income tax benefit of $698,000), representing
the estimated loss on the disposal of the business segment including certain
required capital expenditures prior to the sale. In determining the estimated
loss on disposal, only the $8.0 million guaranteed portion of the sales price
was considered (i.e., that portion which is contingent on the future performance
of the business was ignored). The Company estimated that it would incur
additional operating losses in this business segment after the allocation of
certain overhead and interest costs, amounting to approximately $331,000 during
the phase-out period from October 1, 1996 to May 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 a net loss of approximately
$405,000 during the period from January 1, 1997 until May 29,
14
<PAGE>
1997, the date of closing on the sale, which was in excess of the amounts
previously accrued. The majority of the 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.
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 Brothers Oil Exchange, Inc., Environmental Petroleum
Products Co./EPPCO, and Environmental Insight, Inc. The asset purchase was
effectuated through a newly-formed, wholly-owned subsidiary of the Company, HTI
(Waste Management Services Segment). The Romero brothers had the right to earn
shares in the Company based on the profitability of the acquired companies. This
right was suspended due to the sale of the waste management services segment. In
order to settle this obligation and to offer the Romero brothers an incentive to
remain with the business to maximize the Company's earnout, the Company paid the
Romero brothers approximately $115,000 in June 1998. This payment had not been
accrued and was recorded as a loss from discontinued operations. In addition,
the Romero brothers are to receive a percentage of the Company's earnout with US
Filter. Approximately $72,500 was paid to the Romero brothers during the third
quarter of 1998 resulting from the earnout with US Filter that was achieved as
of May 29, 1998 for the first year of operations subsequent to closing the sale
of the waste management services segment. The payment has been reported as a
loss from discontinued operations.
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. This note was paid in full during the fourth
quarter of 1998. 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 $182,000 and $194,000 for
the three months ended September 30, 1998 and 1997, respectively, and $547,000
and $516,000 for the nine months ended September 30, 1998 and 1997,
respectively. These costs represent the ongoing administrative costs of the
Company after disposing of all of its operating assets. Interest income of
$257,000 and $69,000 was earned in the nine months ended September 30, 1998 and
1997, respectively, on the investments available for sale and note receivable.
The increase resulted because the investment securities were not received until
May 29, 1997 as a result of the sale of the waste management services business
segment. In addition, a gain on the sale of US Filter shares in the amount of
$556,000 was recorded during the nine month period ended September 30, 1997 as
substantially all of the US Filter stock was sold.
Income from discontinued operations amounted to $2,397,000 for the nine
month period ended September 30, 1997. The $607,000 in income from discontinued
operations for the nine month period ended September 30, 1998 is comprised of
the $794,000 in US Filter stock received and approximately $187,500 cash paid to
the Romero brothers resulting from the sale of the waste management services
segment.
15
<PAGE>
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 nine
month period ended September 30, 1998 were $547,000. 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 partially 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. The fair value of the 28,294 shares at June 30, 1998 was approximately
$794,000, which was reported as a gain from discontinued operations during the
period ended June 30, 1998. As of September 30, 1998, the fair value of the
stock had declined to approximately $453,000 resulting in a recorded unrealized
loss of approximately $341,000. 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. This note was paid in full during the fourth quarter of 1998.
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. In an agreement dated September 25, 1998 with U.S. Filter,
an additional $55,000 was released from escrow and paid to the Company with all
other funds being remitted to U.S. Filter.
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.
YEAR 2000 COMPLIANCE
The Company has made an assessment of the potential risk associated
with the Year 2000 issue. The Company has no operations subsequent to the sale
of its operating assets as previously discussed. The risk related to internal
systems is minimal due to the limited accounting functions that are currently
required. The Company does rely upon third parties such as its investment
advisors and custodians. There can be no assurance that these third parties will
be compliant but due to the limited activity, these functions could be performed
by the Company.
16
<PAGE>
The Company is not aware of any additional cost required to become Year
2000 compliant nor is it aware of any contingency plans that would require
additional funding.
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 April 1999. 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
Exhibit
Number Description
- ------- -----------
27 Financial Data Schedule (submitted only in electronic format)
REPORTS ON FORM 8-K
None.
17
<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: November 6, 1998
18
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<PAGE>
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THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S UNAUDITED FINANCIAL STATEMENTS FOR THE PERIOD ENDED SEPTEMBER 30, 1998
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
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