Document/Exhibit Description Pages Size
1: 10-K Annual Report 71 407K
2: EX-10.26 Asset Purchase Agreement 49 204K
3: EX-10.27 Dawson Asset Purchase Agreement 39 161K
4: EX-10.28 Promissory Note 4 19K
5: EX-10.29 1st Amend to Letter Loan Agreement 12 45K
6: EX-10.30 Deed of Trust 14 52K
7: EX-10.31 Unlimited Guaranty 9 40K
8: EX-10.32 Security Agreement 22 73K
9: EX-11 Computation of Loss Per Share 1 7K
10: EX-21 Subsidiaries 1 5K
11: EX-23 Independent Auditors' Consent 1 8K
12: EX-27 Exhibit 27 Financial Data Schedule 2 11K
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTIONS 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
/ X / ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (No Fee Required, effective October 7, 1996)
For the Fiscal Year Ended December 31, 1996
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 or 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (No Fee Required)
For the transition period from __________ to __________
COMMISSION FILE NUMBER 0-19497
MOBLEY ENVIRONMENTAL SERVICES, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 75-2242963
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
4415 E. GREENWOOD
BAYTOWN, TEXAS 77520
(Address of principal executive offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (281) 383-7033
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
Title of Each Class Name of Each Exchange on Which Registered
------------------- -----------------------------------------
None None
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
CLASS A COMMON STOCK, $.01 PAR VALUE PER SHARE
(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes / X / No / /
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or other information
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. / /
The aggregate market value of the Class A Common Stock held by non-affiliates of
the registrant at May 1, 1997, based on the closing price as reported by the OTC
Bulletin Board as of such date, was estimated to be $1,041,788.
The number of shares outstanding of the registrant's common stock, as of May 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.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of an Information Statement filed by Registrant with the Commission,
and mailed to shareholders, on May 9, 1997 are incorporated by reference into
Part I.
THIS ENTIRE FORM 10-K IS SUBJECT TO FORM 12B-25 FILED APRIL 1, 1997.
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
FORM 10-K INDEX
PART I
Page Number
-----------
Item 1. Business. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Item 2. Properties. . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Item 3. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . 14
Item 4. Submission of Matters to a Vote of Security Holders . . . . . . . 16
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters . . . . . . . . . . . . . . . . . . . . . . 16
Item 6. Selected Financial Data . . . . . . . . . . . . . . . . . . . . . 17
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations . . . . . . . . . . . . . . . . . . . . . 18
Item 8. Financial Statements and Supplementary Data . . . . . . . . . . . 26
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure. . . . . . . . . . . . . . . . . . . . . . 26
PART III
Item 10. Directors and Executive Officers of the Registrant. . . . . . . . 26
Item 11. Executive Compensation. . . . . . . . . . . . . . . . . . . . . . 29
Item 12. Security Ownership of Certain Beneficial Owners and Management. . 35
Item 13. Certain Relationships and Related Transactions. . . . . . . . . . 36
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K . 37
Signatures. . . . . . . . . . . . . . . . . . . . . . . . . . . . 42
PART I
ITEM 1. BUSINESS
GENERAL
Mobley Environmental Services, Inc. (the "Company") provides diverse
environmental and field-related services to industrial, governmental and
commercial markets, and specializes in the collection, transportation,
treatment, recycling, and management of a wide variety of non-hazardous liquid
hydrocarbons, oil filters, absorbents, and related materials. Prior to January
20, 1997, as discussed below, the Company also provided oilfield services,
including transporting, marketing, storing, and disposing of various liquid
materials used or produced as waste throughout the lifecycle of oil and gas
wells.
The Company was formed in July 1991 for the purpose of combining the
businesses of Gibraltar Chemical Resources, Inc. ("Gibraltar"), Mobley Company,
Inc. ("Mobley Co."), and Mobley Group, Inc. which had been under common
management since their inception. Shareholders of the predecessor companies
received shares of the Company's Class B Common Stock in exchange for their
shares of common stock of these companies, and certain of the principal
shareholders of the Company sold to the Company for cash certain assets used in
the business of the predecessor companies. As a result of the foregoing
transactions, Gibraltar and Mobley Co. became wholly-owned subsidiaries of the
Company and Mobley Group, Inc. was merged into the Company.
The Company's oilfield services business was founded in 1943, primarily for
the recycling of tank bottoms, an oilfield waste material which was processed
and used to make specialty polishes and waxes. Based on the experience of
certain of the Company's principal shareholders in establishing and operating
several businesses managing chemicals and liquid and solid wastes, including the
operation of oilfield salt water disposal wells, in 1980 the Company expanded
into the hazardous waste treatment and disposal business through its Gibraltar
subsidiary with the construction of a deepwell and related facilities in Winona,
Texas. Additional facilities for waste-derived fuels blending and solvent
recycling were added at the Gibraltar site in 1986 and 1987 and a second
deepwell was completed in 1991. As discussed below and in Note 3 of Notes to
Consolidated Financial Statements set forth in Item 8 herein, the Company
completed the sale of Gibraltar on December 31, 1994. Since that time, the
Company has not been involved in the commercial management of hazardous wastes.
In 1987, the Company expanded its waste management services activities to
include the collection and treatment of non-hazardous, hydrocarbon-laden
wastes for customers outside the oil and gas industry and opened its initial
oily waste treatment facility in Kilgore, Texas. Subsequently, in 1991 and
1993, additional treatment facilities for the processing of non-hazardous
hydrocarbon-laden fluids commenced operations in Corsicana, Texas and
Baytown, Texas, respectively. These treatment and recycling plants are
supported by a network of seven transportation terminals and transfer
facilities in Texas, Arkansas, and Louisiana. In 1995, the Company, through a
newly-formed subsidiary, Hydrocarbon Technologies, Inc., broadened its
hydrocarbon recycling and recovery activities to include the collection and
marketing of used oil and oil filter collection and recycling through the
acquisition of the assets of a group of three related recycling companies.
Additionally, as part of a strategic business plan, construction of two new
facilities for the recycling of used motor oil and fuel mixtures into
higher-value finished products for sale and the processing and recycling of
used oil filters, absorbents and related materials was completed during 1996.
See "Business Strategy and Background of the Transaction" herein.
On October 30, 1996 and April 25, 1997, respectively, the Company
executed a letter of intent and definitive asset acquisition agreement (filed
as Exhibit 10.26 to this Form 10-K) with United States Filter Corporation
("U.S. Filter") for the sale of its
1
hydrocarbon recycling and recovery assets (the "Transaction"). The Transaction
is expected to be consummated by May 31, 1997. See "Business Strategy and
Background of Transaction" herein, Note 2 of Notes to Consolidated Financial
Statements set forth in Item 8 herein, and "Management's Discussion and Analysis
of Financial Condition and Results of Operations" set forth in Item 7 herein.
On January 20, 1997, the Company completed the sale of the assets used in
its oilfield services business to Dawson Production Services, Inc. ("Dawson").
See "BUSINESS--Oilfield Services" herein, Note 2 of Notes to Consolidated
Financial Statements set forth in Item 8 herein, and "Management's Discussion
and Analysis of Financial Condition and Results of Operations" set forth in Item
7 herein.
RESTRUCTURING AND DIVESTITURE OF HAZARDOUS WASTE OPERATIONS
In late 1993, management developed and began implementation of a
restructuring plan for Gibraltar. Such restructuring was precipitated by a
general decline in the hazardous waste services industry during 1992 and 1993 as
a result of an increasingly competitive and changing market, trends toward
recycling/recovery and waste minimization by industrial waste generators, as
well as the effects of a recessionary economy. In addition, Gibraltar was
negatively impacted by a series of regulatory and legal issues. After a period
of continued operating losses, in light of management's ongoing assessment of
changed conditions in the hazardous waste market, and considering the
significance of Gibraltar's regulatory issues and future capital requirements,
in late 1993, the Company's senior management and Board of Directors determined
that the divestiture of its hazardous waste business was in the best interests
of the Company and its shareholders. On May 10, 1994 the Company entered into a
definitive agreement (the "Stock Purchase Agreement") for the sale of all of the
outstanding shares of common stock of Gibraltar to American Ecology Corporation
("AEC"). The sale of Gibraltar was completed effective December 31, 1994. See
Note 3 of Notes to Consolidated Financial Statements set forth in Item 8 herein.
The Company made extensive warranties and representations in the Stock
Purchase Agreement, including the absence of any liabilities arising prior to
closing other than those disclosed to AEC. The Company is required to indemnify
AEC for all losses resulting from breaches of warranties and representations and
pending or future claims or proceedings resulting from circumstances existing
prior to closing through June 30, 1996 (or in the case of tax, environmental and
ERISA claims, through June 30, 1998). The maximum liability of the Company
under such indemnity with respect to undisclosed claims is $3.0 million; there
is no limit with respect to disclosed liabilities. See Note 13 of Notes to
Consolidated Financial Statements set forth in Item 8 herein for further
information regarding certain obligations and contingent liabilities relating to
Gibraltar.
The Company had also formed a joint venture called Pro Ambiente, S.A. de
C.V. ("Pro Ambiente"), with Cemex, S.A. de C.V. ("Cemex") in March of 1993 to
collect organic hazardous wastes and blend hazardous waste fuels for certain
cement kilns operated by Cemex in Mexico. After the divestiture of Gibraltar
and the Company's decision to focus on its non-hazardous hydrocarbon recycling
business, and in light of the economic uncertainties in Mexico, the Company sold
its interest in the joint venture to Cemex in July 1995. See Note 5 of Notes to
Consolidated Financial Statements set forth in Item 8 herein.
BUSINESS STRATEGY AND BACKGROUND OF THE TRANSACTION
Having exited the hazardous waste industry with the year-end 1994 sale of
Gibraltar and the mid-1995 divestiture of its interest in Pro Ambiente, the
Company's focus has been on the continued growth and development of its
non-hazardous hydrocarbon recycling and recovery business. In anticipation
of the Gibraltar sale, the Company sought to develop a strategic business
plan to maintain and enhance its financial position upon the divestiture of
Gibraltar, and to achieve long-term profitability for the Company in the face
2
of changing conditions in the waste management services industry. Through this
planning process, management identified significant market opportunities in the
business of non-hazardous hydrocarbon recycling and recovery. The Company's
Board of Directors and management believed that its core skills in managing
liquid hydrocarbon wastes, combined with its experience in processing industrial
oily wastes, formed a solid foundation for a business expansion into more
advanced hydrocarbon recycling and recovery technologies. The strategic plan
developed by the Company contemplated growth through process enhancement
projects, as well as through the acquisition of complementary existing business
operations.
In particular, through its strategic review process, the Company developed
a business plan that included (i) acquisitions of small used oil collection
operations in geographic areas where the Company was already active in the oily
waste business; (ii) installation of a distillate fuels production facility at
the Company's Baytown, Texas processing complex to manufacture value-added
products from recovered hydrocarbon waste streams; (iii) installation of a
filter recycling plant at its Baytown facility for the recycling of used oil
filters, absorbents and related materials; (iv) aggressive marketing of the
Company's new services to its existing industrial customer base; and (v)
exploration of new geographic and service markets for further expansion.
Management also believed that it would become increasingly important for the
Company to develop the skills and capabilities necessary to provide on-site
treatment services to its larger industrial clients in light of industry trends
toward waste minimization and recycle/recovery.
As an initial step in the implementation of this plan, the Company
identified the used motor and industrial oils, filter, and antifreeze
collection and recycling businesses as a promising expansion opportunity for
its existing non-hazardous high water-content hydrocarbon recycling and
recovery business, by providing used oil and oil filter feedstock for the
manufacture of value-added finished products at facilities to be constructed
in Baytown, Texas. Based on the studies and analysis conducted by management,
it determined that much of the used oil and oil filter collection was
currently performed by small operators characterized by limited capital
resources who lacked the enhanced processing capabilities to add value to the
products collected. Accordingly, the Company pursued and eventually completed
the acquisition of certain assets of a group of three related recycling
companies in July 1995. Simultaneously, the Company continued its due
diligence on the industry in general, its targeted business markets, and the
specific distillate fuels production and filter recycling facilities most
feasible for accomplishment of the Company's objectives. To assist in this
process, the Company engaged several consultants to provide needed
information regarding capital costs, relevant industry data, price
relationships, and general project economics. Management's market research
and industry analysis culminated in specific plans for the engineering and
construction of a distillate fuels production facility and oil filter
recycling facility.
Engineering of the two new processing facilities began in April 1995;
however, permitting issues and contractor delays pushed commencement of
construction to the third quarter of that year. Construction of the filter
recycling facility was completed by the end of the 1996 first quarter and the
plant began operations in April of that year. The distillate fuels production
facility began its mechanical checkout and startup process during the 1996
second quarter; however, as a result of various technical and operational
issues, an extended testing and evaluation period delayed full-scale operation
of the plant until August, 1996.
In October 1995, the Company engaged Cureton and Co., Incorporated
("Cureton & Co."), an investment banking and business advisory firm, to assist
it with the investigation and possible financing of other business combination
opportunities that had come to the Company's attention during the course of its
strategic planning, industry analysis, and due diligence. With the assistance
of Cureton & Co., the Company investigated possible relationships or
affiliations with a variety of entities whose operations might be a feasible
expansion of, or complementary to, the Company's existing operations or those
contemplated under its strategic plan. Of the discussions undertaken by
management, PORI International, Inc. ("PORI"), based in Baltimore, Maryland,
emerged as a candidate for serious consideration due to its longstanding
reputation
3
in the treatment of oily wastes on customers' sites, its historic development of
oil/water separations technologies, and its established presence as a
consolidator of used oil from collectors in the Middle Atlantic region of the
United States. On March 11, 1996, the Company's discussions with PORI
culminated in a letter of intent to acquire substantially all of PORI's assets
and assume certain of its liabilities with completion of the transaction subject
to, among other things, the Company's ability to secure the necessary financing.
Although initial inquiries indicated financial institutions to be a
potential source of financing, it also became evident that significant equity
infusions would be required to complete the PORI acquisition and to otherwise
carry out the Company's overall expansion plans. In an effort to secure equity
financing, the Company prepared a detailed business plan that described the
opportunities for growth and the plan for the development of the business,
including financial projections. In addition to the acquisition of PORI, the
plan contemplated several follow-on business acquisitions in targeted geographic
regions, the expansion of its used oil and filter collection capabilities, and
the construction of new facilities for oil/water processing, distillate fuels
production, and oil filter recycling. Financing necessary to effectuate the
entire plan was estimated to require approximately $34.5 million in excess of
internally-generated funds over a three-year period.
The Company incurred operating losses during the 1996 first and second
quarters of $672,000, or $0.08 per share, and $492,000, or $0.06 per share,
respectively. Such disappointing financial results reflected the impact of an
extended regional drought which severely impaired fluid volumes, revenues, and
the related profitability of the Company's oil/water separations business. In
addition to the effect of the drought conditions, this core business was also
impacted by the ongoing decline of fluids associated with underground storage
tank remediation activities. While such event-driven volumes were partially
offset by an increase in production-oriented oily wastes, the change in business
mix toward more difficult-to-treat waste streams resulted in diminished profit
margins. Additionally, competitive pressures in the Company's oilfield services
business, along with an unfavorable shift in business mix favoring a higher
proportion of lower-margin contract services revenue, reduced the profit
contribution from this segment during the fourth quarter of 1995 and first
quarter of 1996. Further, because of the startup nature of its used oil and
filter collection and recycling activities, compounded by delays in bringing the
new processing facilities on-line, these new business lines made virtually no
contribution to operating profit during this period. The operating losses
sustained by the Company, coupled with the aggressive capital spending program
associated with the execution of its growth strategy, significantly weakened the
Company's liquidity over the first half of 1996. By the end of the 1996 second
quarter, the Company had a working capital deficit of approximately $4.8
million, including $4.4 million in outstanding bank indebtedness which was
classified as a current liability as a result of violations of certain
restrictive covenants in its bank credit agreement. The Company's cash
resources had been reduced from $1.5 million at year-end 1995 to $516,000 at
June 30, 1996, and it had exhausted substantially all of its available
borrowing capacity.
As a result of the Company's deteriorated financial condition and
unfavorable results of operations, bank debt financing had effectively been
eliminated as a viable source of funds for the continued execution of its
strategic plan. Through Cureton & Co., the Company contacted over 30 venture
capitalists, private investors, and industry participants during the ensuing
months of the summer of 1996 to discuss the possibilities of a private
investment in the Company or other strategic alliance. Of those contacted,
approximately 27 asked to review the Company's business plan, many of whom
indicated interest in further investigation. Senior management was interviewed
by several potential investors, and six potential investor groups toured the
Company's Baytown facility to further discuss possible relationships or
investment structures. Through these discussions, it became evident to
management that more serious negotiations with most potential investors were
thwarted by one or more issues facing the Company, including the risks
associated with the unproven nature of the Company's distillate fuels production
facility, and the perceived litigation exposure arising from the Company's
former ownership of Gibraltar (see "LEGAL PROCEEDINGS--Claims and Legal
4
Proceedings Against Gibraltar" set forth in Item 3 herein and Note 13 of Notes
to Consolidated Financial Statements set forth in Item 8 herein).
Through this exhaustive process, U.S. Filter emerged as the most viable
party interested in pursuing a specific transaction with the Company. After
lengthy discussions, it became clear that U.S. Filter was not interested in
joint ownership and would only proceed with negotiations on the basis of
purchasing, with registered shares of U.S. Filter common stock as consideration,
the Company's entire interest in its hydrocarbon recycling and oil/water
processing business.
In light of the Company's severely weakened financial condition and given
U.S. Filter's stated interest in acquiring the Company's hydrocarbon recycling
and recovery business, the Board of Directors reviewed the challenges facing the
Company and discussed in general terms the alternatives available to address
them. The Board and management noted that the hydrocarbon recycling and recovery
industry is currently highly fragmented, but characterized by increasing
consolidation, intensifying competition, and continued growth through
acquisition by larger entities with greater access to financial resources than
that of the Company. Among other things, the Board of Directors discussed (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; (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 Cureton & Co. reviewed in detail with the Board of
Directors the contacts that had been made with third parties regarding possible
investments in, or strategic alliances with, the Company. Since such efforts had
not yielded access to funds on terms acceptable to the Company, discussions were
then focused on the possible acquisition of the Company's hydrocarbon recycling
and recovery business by U.S. Filter as offering the best prospects for the
Company and its shareholders. In conjunction with this decision, the Company
abandoned its plans to acquire the assets of PORI; such assets were subsequently
acquired by U.S. Filter in February 1997.
Discussions and negotiations with U.S. Filter continued through September
1996 and during this period management and Cureton & Co. continued to respond to
inquiries from other parties who had expressed an initial interest in a possible
investment in the Company; however, none of these inquiries resulted in a formal
offer. On October 9, 1996, the Company's Board of Directors met and reviewed
with management and Cureton & Co. the status of such negotiations. Based on the
progress of those discussions, and the terms of the outstanding offer from U.S.
Filter, the Company's Board authorized the Company to enter into a letter of
intent pursuant to which the Company would sell to U.S. Filter the net assets of
the Company's hydrocarbon recycling and recovery business in consideration for
U.S. Filter common stock having an aggregate exchange value of $8.0 million,
plus the right to receive additional shares of U.S. Filter common stock with an
exchange value of up to $4.0 million upon the attainment of certain financial
performance goals in the two-year period following the sale. The Company
executed a letter of intent with U.S. Filter on October 30, 1996, and
thereafter, U.S. Filter continued its due diligence business review of the
Company. Senior management of the Company, assisted by Cureton & Co. and legal
counsel, and U.S. Filter then began negotiating the terms of a definitive asset
purchase agreement. Matters negotiated during this time included the terms of
the consideration to be received by the Company, including among others,
finalization of the formula pursuant to which the number of shares of U.S.
Filter common stock issuable to the Company would be determined, the specific
terms regarding the contingent U.S. Filter common stock that may be earned by
the Company, the nature and scope of representations and warranties to be given
by the Company to U.S. Filter, the extent of indemnifications to be given by
each party to the other party, and specific conditions precedent to closing of
the Transaction. The negotiations between the Company and U.S. Filter continued
5
through April 16, 1997 and resulted in approval by the Company's Board of
Directors of a definitive Asset Purchase Agreement (the "Agreement") (filed
as Exhibit 10.26 to this Form 10-K) on that date, subject to subsequent
modifications as may be deemed appropriate by the Company's executive
officers, financial advisors, and legal counsel. Such Agreement was executed
on April 25, 1997.
Additional information regarding the sale of the Company's hydrocarbon
recycling and recovery business to U.S. Filter is contained in an Information
Statement to the Company's shareholders dated May 9, 1997. A definitive filing
of such Information Statement with the Securities and Exchange Commission was
made on that date.
MARKET DEMAND FACTORS
In recent years, the demand for the Company's waste management services
has resulted primarily from public concern over the quality of the
environment and ensuing adoption and enforcement of increasingly stringent
federal, state and local environmental laws and regulations. These laws and
regulations have increased the costs and potential liabilities associated
with handling of wastes, including used oil. Governmental regulation has also
caused a number of commercial treatment and disposal facilities to close, as
many have been unable to meet the increasingly strict siting and operating
standards imposed by RCRA and other applicable laws. Furthermore, many
generators of hazardous and non-hazardous wastes have chosen not to maintain
their own treatment and disposal facilities or to develop the technical
expertise necessary to assure regulatory compliance. Accordingly, many
generators have sought to have their waste streams managed by firms that
possess collection, recycling, treatment, transportation and disposal
capabilities and have the expertise and financial capacity necessary to
comply with applicable environmental regulations.
Additionally, concerns by generators about long-term liability has led the
industry toward waste minimization and recycle/recovery and thus have
significantly changed the market for both hazardous and non-hazardous waste
treatment and disposal in recent years, as waste generators continue to look for
ways to reduce or reuse the wastes they generate. Many generators and other
purchasers of waste management services have attempted to decrease the number of
providers of these services they utilize in response to liability concerns. The
Company believes that these trends will continually force waste management
services firms to focus on technological innovation, sound waste-tracking
capabilities and a heightened commitment to customer service and responsiveness.
It has been the Company's intention to be responsive to these needs in the
expansion of its hydrocarbon recycling business.
The hydrocarbon recycling and recovery industry--particularly the oil and
filter recycling markets--is undergoing fundamental change. Currently, these
markets are highly fragmented, consisting primarily of many small companies and
relatively few major firms. The Company believes that continued regulatory
scrutiny and a growing awareness of the benefits of proper recycling practices
will continue to stimulate industry-wide consolidation, and it sees a growing
need for waste minimization and on-site services. These factors are expected to
reinforce the demand for hydrocarbon recycling and recovery firms with multiple
capabilities.
BUSINESS SEGMENTS
See Note 2 of Notes to Consolidated Financial Statements set forth in Item
8 herein for information regarding the Company's business segments.
6
WASTE MANAGEMENT SERVICES
Since the divestiture of Gibraltar at year-end 1994, the waste management
services provided by the Company have consisted of the collection,
transportation, treatment, recycling, and management of non-hazardous liquid
industrial hydrocarbons, off-specification motor fuels, used oils, oil filters,
absorbents and related materials. These activities are collectively referred to
herein as "hydrocarbon recycling and recovery".
TREATMENT AND RECYCLING OF OIL-WATER AND FUEL-WATER MIXTURES
The Company treats selected non-hazardous oily fluids through phase
separation processes as a part of its hydrocarbon recycling and recovery
services. These oily fluids consist primarily of three types: industrial
oily fluids, off-specification motor fuels, and underground storage tank
remediation fluids. Oily fluids are broken into separate phases through the
addition of chemicals, heat, agitation, and mechanically-enhanced gravity
separation. Off-specification motor fuels and underground storage tank
remediation fluids are similarly processed at segregated facilities. The
water recovered from the above mixtures is treated and discharged to a local
sewer system, and reclaimed oil is marketed as industrial fuel. Recycled
motor fuel is marketed as refinery feedstock. The Company currently operates
three hydrocarbon recycling and recovery facilities in Baytown, Kilgore, and
Corsicana, Texas. Sources of oily fluids managed as used oils include
industrial and manufacturing operations and transportation activities.
Sources of motor fuel-water mixtures managed as off-specification motor fuels
include motor fuel distribution, transportation, and retailing activities.
Underground storage tank fluid sources include underground storage tank
corrective action, removal, and groundwater remediation activities.
COLLECTION ACTIVITIES
The Company transports high-water oily fluids using vacuum tank trucks and
other transports dedicated to the waste management business. The Company
collects motor fuel-water mixtures, as well as waste lubricants, machine
coolants, and other hydrocarbon-laden fluids, from industrial, manufacturing,
and transportation operations. Prior to treatment, these materials may be held
temporarily at one of the Company's transfer facilities. The Company also uses
its collection equipment to provide in-plant support services to industrial
companies and environmental engineering firms engaged in remediating groundwater
problems, cleaning up spills, or pumping and transporting industrial liquids and
sludges within their own plant sites.
USED OIL COLLECTION AND RECOVERY SERVICES
As a result of the asset acquisition in July 1995 described in Note 4 of
Notes to Consolidated Financial Statements set forth in Item 8 herein, the
Company began the collection and marketing of used lubricating oils from various
sources, including automobile and truck dealers, transportation fleets,
automotive garages, oil change outlets, service stations, industrial plants, and
other businesses. Currently, the majority of this used oil is acquired with no
fee payments to or from the generator. Additionally, the Company currently
acquires certain quantities of used oil from other collectors, and typically
pays the collectors for this material based on the quantities and quality of the
used oil acquired. This purchased oil was formerly aggregated with the oil from
the Company's own collection activities and sold unprocessed to fuels blenders
for use as a fuel in certain industrial applications for which such oil is
suitable. With the startup of its distillate fuels production facility in the
1996 second quarter, the Company began utilizing substantially all of the used
oil it collects and purchases as feedstock for the manufacture of distillate
fuel products, including marine diesel oil blendstock, light distillates, and
asphalt flux. Such conversion of used oils into higher-value finished products
allows the Company to derive revenue from the sale of such products it sells
into relatively large commodity markets. The new plant is designed to process
nominally 19.0 million gallons of feedstock annually, including both used oils
and mixed motor fuels. Although the plant initially achieved such production
rates for short periods of time, technical problems and operational issues
associated with startup of the used oil processing
7
operations prevented it from sustaining these throughput levels. As a
result, the plant's monthly production averaged 800,000 gallons during the
period from August 1996 to December, 1996 compared to its used oil processing
capacity of 1.2 million gallons per month. This production shortfall, as
well as a later-than-expected plant completion, materially impacted the
decline in the Company's liquidity during 1996. Management believes that
certain capital improvements to the plant, which are currently underway and
scheduled to be completed in the 1997 second quarter, will enable the plant
to approach or achieve its design and operating cost expectations.
FILTER COLLECTION AND RECYCLING SERVICES
Similarly, with the aforementioned asset acquisition, the Company began the
collection and recycling of used oil filters. In this business line, the
Company derives revenues from the fees it charges customers to manage used oil
filters and related products, as well as from the sale of the recovered
products, as described below. Containers (generally 55-gallon drums) of used
automotive and industrial filters and absorbents are typically collected from
customers using the Company's collection fleet and aggregated at selected sites
in its network of transfer facilities. These filters are then transported to
the Company's Baytown filter recycling facility, which commenced operations in
April 1996. Prior to the completion of its recycling plant, the Company
utilized a third-party processor to recycle the spent filters. The new filter
processing plant shreds, separates and recycles used oil filters into three
reusable components--used oil, filter fluff, and metal. The recovered used oil
is utilized as feedstock for the distillate fuels production facility described
in the preceding paragraph. The filter fluff is utilized as an alternative fuel
source for approved industrial users where possible, or otherwise properly
managed. The recovered metal is marketed as feedstock for regional "mini-
mills" in the steel-producing industry. The new facility is estimated to have a
single-shift processing capacity of approximately 97,000 drum equivalents of
filters annually.
ANALYTICAL SERVICES
The Company provides analytical services through two laboratory facilities
in Baytown and Kilgore that are integral to its ability to manage recyclable
hydrocarbons and used oil properly. These captive laboratory facilities
perform tests on the waste streams of customers and potential customers which
enable the Company to determine the optimal means of recycling or treatment.
These tests also allow the Company to determine whether or not it has the
capability of accepting the waste stream, determine whether the wastes conform
to the customer's pre-approved waste profile, and to estimate the cost of
managing the wastes. The Company's internal analytical capabilities are
supplemented through the use of outside commercial laboratories as needed.
OILFIELD SERVICES
Until the recent sale of its oilfield services assets described in the
following paragraph, the Company's strategy with respect to this business was to
maintain its operations in east Texas, but not to expand such services to other
geographic regions. This business segment consisted of the transportation,
management and disposal of various liquids which are used or produced as waste
in the drilling, completion, and production operations of oil and gas wells. In
particular, the Company had extensive capabilities in supplying fluids and the
necessary storage tanks for massive hydraulic fracture treatments prevalent in
its oilfield market in east Texas. The Company operated a fleet of specialized
trucks, some of which were also used in its hydrocarbon recycling operations,
for pumping and transporting oilfield drilling fluids and oilfield liquid waste,
including produced salt water, and it rented to customers portable tanks for
well stimulation services and temporary fluids storage. The Company operated
three salt water disposal wells in east Texas. In addition, the Company sold
clear brine fluids which are used in well completion, workover, and fracturing
operations.
In light of its decision to sell the assets of its hydrocarbon recycling
and recovery business, the Company's Board of Directors evaluated the remainder
of the Company's assets and business activities,
8
including its oilfield services business. Given the relatively high
administrative costs of operating a business as small as the oilfield services
business on a stand-alone basis, and the rather limited growth opportunities
available to the Company for this business (either internally or through
acquisition), the Board of Directors concluded that a sale of the business was
in the best interest of the Company. The Company, with the assistance of
Cureton & Co., prepared a memorandum describing this segment of the Company's
business, including its assets, key personnel and historical and anticipated pro
forma operating results. The memorandum was distributed to numerous potentially
interested parties, and an offer by Dawson to acquire the oilfield services
business was deemed to be superior to the expressions of interest by other
parties. Dawson's offer was deemed superior to the other expressions of interest
received given its recent experience in completing similar acquisitions, its
industry reputation and base of operations in the Company's general market area,
as well as its financial capabilities. On November 1, 1996, the Company
executed a letter of intent to sell to Dawson substantially all of its oilfield
services assets and such sale was completed on January 20, 1997 pursuant to a
definitive asset purchase agreement (filed as Exhibit 10.27 to this Form 10-K).
The Company received approximately $4.9 million in cash and a subordinated note
for $500,000 (filed as Exhibit 10.28 to this Form 10-K), due in January 2002, as
proceeds from the sale. The cash proceeds were used to reduce the Company's
outstanding bank indebtedness by $3.3 million, fund transaction expenses of
approximately $255,000 and for working capital purposes. See Note 2 of Notes to
Consolidated Financial Statements set forth in Item 8 herein for related
information regarding this segment of the Company's business.
CUSTOMERS AND MARKETING
The Company provides its waste management services to large and
small-stream generators of recyclable hydrocarbons engaged in the manufacturing,
transportation, steel, refining, chemical, automotive, and other industries.
The Company derives a substantial portion of its revenues from customers in
Texas, Louisiana, and Arkansas. A substantial portion of the Company's
customers have used its services on an ongoing basis, although no single
customer accounted for more than 10% of the Company's consolidated revenues in
1996.
Waste streams are generally received by the Company pursuant to
continuing contracts which are terminable upon 30 days notice of either party
and which do not obligate either the customer to deliver, or the Company to
accept, any specific quantities of waste. The Company's waste management
services are marketed directly by its sales force. In addition to targeting
small-stream generators who require more value-added service, the sales force
targets medium-to-large companies who have large volumes of waste, and seeks
to increase the quantities of material managed on behalf of each existing
customer by serving more of the customer's locations and managing additional
types of waste streams.
COMPETITION
The Company competes with numerous large and small companies in its waste
management services business. Among its primary competitors are Allwaste, Inc.,
Laidlaw Environmental, Inc., Safety-Kleen Corp., Specialty Environmental
Services, Philip Environmental and World Fuel Services, Inc. Each of these
companies is able to provide one or more of the waste management services
offered by the Company or alternative services, and many of the Company's
competitors have access to greater financial resources than does the Company.
In addition, the Company competes with other local or smaller regional
companies, many of which are privately-owned, that have hydrocarbon recycling
capabilities or that collect and market used oil. The Company believes that the
principal competitive factors in its markets for the waste management services
it offers are customers' ability to audit and approve competing waste treatment
and recycling facilities, comprehensiveness and quality of services, the degree
of sophistication of the treatment and recycling services offered (including the
number and types of materials capable of being processed), the availability of
alternative technologies, the physical proximity of facilities to customers, and
price.
9
REGULATION
The Company is subject to comprehensive and continuously evolving
regulation by federal, state, and local authorities. These authorities are
empowered to regulate compliance with extensive environmental laws, regulations,
and ordinances. Federal environmental statutes affecting the business of the
Company include, but are not limited to, the Resource Conservation and Recovery
Act of 1976 ("RCRA"), the Comprehensive Environmental Response, Compensation and
Liability Act of 1980 ("CERCLA"), Superfund Amendments and Reauthorization Act
of 1986 ("SARA"), the Safe Drinking Water Act, as amended (the "SDW Act"), the
Clean Air Acts of 1970 and 1972, as amended (the "Clean Air Acts"), the Clean
Water Act of 1972, as amended (the "Clean Water Act"), and the Occupational
Safety and Health Administration Act ("OSHA"). Such statutes are designed to
address management of waste at active disposal facilities, clean-up and
remediation of inactive hazardous waste sites, protection of public water
supplies, control of air quality standards, and exposure to toxic substances and
other forms of pollution in the workplace. These laws provide significant
penalties for violators, as well as continuing liability for waste generators,
owners, and operators of waste treatment facilities and others for past disposal
practices. Many states have been authorized by the EPA to enforce regulations
promulgated under various federal environmental statutes. The state of Texas
has authority to administer most of the regulations related to RCRA as well as
regulate the management of non-hazardous industrial wastes. In addition, there
are numerous state and local authorities that further regulate the environment,
some of which impose standards stricter than those established in federal laws
and regulations. Penalties for violations of applicable laws or regulations
include injunctive relief, recovery of damages for injury to air, water or
property, and fines for non-compliance.
In September 1992, the United States Environmental Protection Agency
("EPA") finalized regulations that govern the management of used oils destined
for recycling. Although used oil is not classified as a hazardous waste under
federal law, certain states do regulate used oil as hazardous. The new
regulations address several areas of environmental risks that caused
environmental problems at used oil recycling facilities in the past, and contain
specific requirements for generators, transporters, and used oil processors. The
Texas Natural Resource Conservation Commission ("TNRCC") has adopted rules that
essentially implemented the EPA regulations in Texas effective March 26, 1996.
In some respects, these regulations are more stringent than the EPA rules,
including provisions for more frequent and comprehensive reporting and financial
assurance requirements for used oil processors. The Company has built and
operates its facilities to standards that meet and, in certain instances, exceed
current standards.
The Company believes that it has obtained all material permits, approvals,
and authorizations required of it to operate its current hydrocarbon recycling
business. However, the Company may be required to obtain additional permits,
approvals, or authorizations or take substantial corrective action to retain
existing permits, approvals, and authorizations at its facilities to continue
current operations if new legislation or regulations are enacted or existing
laws and regulations are either amended or enforced differently. The Company
may in the future be required under these regulatory requirements to increase
capital and operating expenditures in order to maintain current operations or
initiate new operations. Under certain circumstances, the Company might be
required to curtail operations until a particular problem is remedied. Although
the Company cannot predict the extent to which any new legislation or regulation
may affect its operations, it is possible that changes in the current
environmental laws and regulations, or changes in the enforcement thereof, could
have a material adverse effect on the Company's operations, earnings and
competitive position.
The waste generators serviced by the Company segregate hazardous waste from
non-hazardous waste and are aware of the penalties for misrepresenting wastes.
The Company requires generators of non-hazardous wastes to certify that the
wastes, for which they are seeking management and recycling services, are not
"hazardous" pursuant to federal regulations. The Company requires generators to
submit
10
a characterization sample, along with pertinent analytical data, prior to
approval of the waste stream for collection.
The Company is subject to enforcement actions for violations of any of
its permits. Citizens are entitled to file civil actions if certain
regulatory agencies fail to act on alleged violations of permits. The
Company must comply with all applicable regulations including those mandated
by RCRA, OSHA, CERCLA, the Clean Air Acts, the Clean Water Act, the SDW Act,
and other applicable regulations. The Company must exercise care to assure
that it accepts only wastes that it is authorized to manage at its various
facilities. Evaluation of the source generating waste materials, written
representations required of the generator, and analytical determinations
(performed on samples of waste to be received) are necessary to prevent the
receipt of unauthorized wastes. In addition to possible regulatory sanctions
or fines associated with the receipt of unauthorized materials, the Company
must be concerned with possible risks to its employees, equipment, and the
environment that might result from receipt and management of unauthorized
wastes. When transporting wastes, the Company is liable for any damages
related to the accidental release of waste materials. Such liability extends
to injuries caused to individuals, costs related to emergency response
activities, and remediation of spill sites. Once wastes arrive at one of the
Company's facilities, the Company must assure that there is no release of
waste from tanks and containers used for interim storage. Clean-up of such
releases is mandated by state regulation in the case of non-hazardous waste
releases.
Generators and transporters of hazardous substances, as well as past and
present owners and operators of hazardous release sites, are made strictly,
jointly and severally liable for the clean-up costs resulting from releases
and threatened releases of CERCLA-regulated hazardous substances. A large
portion of the materials collected by the Company are recycled or converted
into materials which may be used for another purpose. The amount of material
that the Company deposits at waste disposal sites is, therefore, small in
relation to the volume of materials collected by the Company, and the Company
has sought new treatment and processing technologies to reduce this amount
even further. Additionally, the Company periodically sends some of the
materials it collects to selected third party facilities for treatment and/or
disposal. The Company audits third-party treatment and disposal facilities
prior to shipping any materials to attempt to minimize its potential CERCLA
liability at these sites. At the present time, the Company is aware of only
one proceeding in which the Company may be a potentially responsible party
(see "LEGAL PROCEEDINGS--Litigation and Various Other Claims" set forth in
Item 3 herein).
COMPLIANCE AND RISK MANAGEMENT
The Company regards compliance with applicable environmental laws and
regulations as a critical component of its overall operations, from providing
quality service to its customers to protecting the health and safety of its
employees and neighbors and protecting the Company's facilities from damage.
The Company strives to maintain the highest professional standards in its
compliance activities; its internal operating requirements are in many instances
more stringent than those imposed by regulation. The Company's compliance
program has been developed for each of its operational facilities under the
direction of the Company's compliance staff, which is responsible for facilities
compliance, health and safety, field safety, compliance training, transportation
compliance, and related record keeping.
As part of the Company's continuing efforts to monitor environmental
compliance, its treatment and recycling facilities are periodically inspected by
its compliance staff, and also by regulators and customers. The Company
believes that its facilities are in substantial compliance with all applicable
requirements. Future legislation, regulatory interpretation, or administrative
procedures are likely to require capital expenditures to maintain compliance,
the amount of which cannot be anticipated. On certain occasions, the Company's
facilities have been cited for regulatory violations, and environmental problems
have been found in the facilities. The extent to which such violations and
problems have affected the financial condition and results
11
of operations of the Company is reflected in the Consolidated Financial
Statements and Notes thereto set forth in Item 8 herein. The Company has
compliance and health and safety representatives to oversee the implementation
of the Company's compliance program at its facilities. The Company also
performs periodic inspections of treatment, recycling, and disposal facilities
of other firms utilized by the Company.
The Company follows a program of risk management policies and practices
designed to reduce potential liability as well as to manage customers' ongoing
regulatory responsibility. This program includes employee training, laboratory
testing and environmental monitoring, and policy decisions restricting the types
of wastes handled or projects undertaken. The Company evaluates all revenue
opportunities and declines those which it believes involve unacceptable risks.
Typically, the Company applies established technologies to the treatment,
recycling, and disposal of wastes. The Company believes its operations are
conducted in a safe and prudent manner and in substantial compliance with
applicable laws and regulations. There can be no assurance, however, that the
Company is, in fact, in substantial compliance with such laws and regulations or
that it will not be subject to fines, damages, loss of permits, or other similar
consequences resulting from past, present or future violations.
INSURANCE
The Company maintains insurance coverage for normal business risks,
including workers' compensation for its employees, automobile liability, general
liability, and excess liability insurance coverage. Additionally, the Company
carries pollution liability insurance providing coverage for damage to third
persons from pollution from its waste management facilities. Because this
coverage is on a claims-made basis, the Company will be covered only if the
policy is in place on the date the claim is asserted even if the Company carried
insurance on the date of the event giving rise to the claim.
As discussed in Note 13 of Notes to Consolidated Financial Statements set
forth in Item 8 herein, the Company has been notified by its pollution liability
insurance carrier that the carrier disputes the Company's interpretation of its
pollution liability insurance coverage and policy limitations applicable to
certain pending claims (see "LEGAL PROCEEDINGS--Litigation and Various Other
Claims" set forth in Item 3 herein).
EMPLOYEES
At April 30, 1997, the Company employed approximately 181 persons. Of this
number, 17 were involved in corporate administrative and support functions and
164 were employed in its waste management services activities. The Company is
currently not a party to any collective bargaining agreements covering its
employees, has not experienced any work stoppages, and believes that relations
with its employees are good.
FUTURE PLANS OF THE COMPANY
Because of its indemnity obligations related to the sale of Gibraltar, as
well as potential indemnification responsibilities with respect to the
Transaction and the recent asset sale of the Company's oilfield services
business (see "BUSINESS--Oilfield Services" herein), and considering the extent
of ongoing litigation (see "LEGAL PROCEEDINGS" set forth in Item 3 herein and
Note 13 of Notes to Consolidated Financial Statements set forth in Item 8
herein), the Company will remain in existence for the foreseeable future, but
will have no operating assets after the Transaction.
The extensive litigation involving the Company is in varying stages, with
some cases in the early phases of discovery, while others are awaiting trial.
The claims are unliquidated; and the Company's potential
12
liability, even after considering potential recoveries from available insurance
coverage, could exceed the amount of its assets. Accordingly, based on
consultation with legal counsel (including the firms of Brown McCarroll & Oaks
Hartline and Bracewell & Patterson, L.L.P.), the Company's Board of Directors
believes that they are required by applicable law to hold the Company's assets
as a fiduciary for potential creditors as well as the stockholders. No steps
will be taken to reduce the corporate corpus of the Company by paying
liquidating or other dividends to shareholders until these claims are resolved
or more nearly quantified. In light of the nature and complexity of the
litigation, the Company expects that it may take a period of up to several years
to resolve these matters.
As circumstances change or additional information with respect to the
Company's potential indemnity obligations and litigation exposure becomes
available, the Board of Directors will continue to evaluate various uses of the
Company's funds. While the Company may investigate new business opportunities
that arise, the nature and probability of any investments which might result
from such investigations cannot be determined.
ITEM 2. PROPERTIES
The principal facilities of the Company are described below. Except as
otherwise indicated, the Company owns all of its principal facilities. The
Company has three facilities for processing and recycling certain materials
managed as non-hazardous oily wastes, off-specification motor fuels, and
underground storage tank remediation fluids. One of these facilities is
located in Kilgore, Texas at a site which is a short distance from where the
Company maintains operations offices for its local hydrocarbon recycling
terminal. This facility's processing and storage area is located on a 25-acre
site with an off-loading bay, tanks and other facilities for the testing and
phase separation of hydrocarbon-laden fluids and storing the recovered oil
for shipment by truck to the Company's distillate fuels processing facility,
described below, or to approved outlets. The Company has a facility for the
recycling of off-specification motor fuels and underground storage tank
remediation fluids in Corsicana, Texas. This facility's processing and
storage area is located on an 11-acre site with an off-loading bay, tanks and
other facilities for the phase separation of motor fuels and storage of the
recovered product for shipment by truck to the Company's distillate fuels
plant. The construction of a separations plant near Baytown, Texas was
completed in late 1993 for the recycling of oil-water mixtures,
off-specification motor fuels and underground storage tank remediation fluids
in separate processing units in a manner similar to that described above for
the two other facilities. This operation's analytical testing, off-loading,
processing and storage facilities are located on a 28-acre site that is
shared with various other facilities described below.
The Company completed construction of an oil filter recycling facility at
its site in Baytown in April 1996, with an estimated single-shift processing
capacity of 97,000 drum equivalents of filters annually. The oil filter and
absorbent processing unit recovers high-grade scrap metal for use as steel
manufacturing feedstock and filter fluff with a targeted primary outlet for use
as supplemental fuel for approved industrial users. Construction of a
distillate fuels production facility at the Baytown site for the manufacture of
marine distillate fuels and related products from used oils and motor fuel
feedstocks was substantially completed in June 1996 and various operational
issues associated with startup have, until recently, hindered its ability to
produce at its design throughput objective of 1,300 barrels of feedstock per
day.
The Company also owns a terminal facility adjacent to its Baytown plant
consisting of approximately 6,300 square feet of office space, which also serves
as an administrative corporate office. Another terminal facility near Austin,
Texas, is owned and similar facilities in or near Dallas, Kilgore and San
Antonio, Texas, Little Rock, Arkansas, and Baton Rouge, Louisiana are leased.
These facilities provide for the dispatching of trucks and equipment to
customers and providing other customer services, as well as serving as the base
for regional sales activities. In most cases, such facilities also temporarily
hold non-hazardous hydrocarbon-
13
laden fluids, used oil and oil filters collected in the local service areas, but
do not process or treat these materials. All materials collected are shipped by
truck to one of the Company's treatment and recovery facilities discussed in the
previous paragraphs.
The Company completed the relocation of its primary corporate offices and
consolidation of administrative support functions to Baytown, Texas in late
1996, utilizing the existing terminal facility referred to previously,
supplemented by an additional 3,000 square feet of modular office space. The
Company's previous corporate office in Kilgore, Texas, consisting of land and
approximately 10,000 square feet of office space, is currently held for sale or
lease.
The Company's current mailing address is 4415 E. Greenwood, Baytown, Texas
77520. Following completion of the Transaction, the Company's mailing address
will be P.O. Box 1640, Kilgore, Texas 75662.
ITEM 3. LEGAL PROCEEDINGS
LITIGATION AND VARIOUS OTHER CLAIMS. On January 26, 1996, Mobley Co. was
notified by the Texas Natural Resource Conservation Commission that it is a
potentially responsible party ("PRP") for the alleged release, during the early
or mid-1980s, of hazardous substances at the McBay Oil and Gas State Superfund
Site located near Grapeland, Texas. The Company has recorded an accrual for its
estimated exposure in connection with this matter, the amount of which is not
material to its consolidated financial statements.
On May 3, 1996, the Company filed a complaint against National Union Fire
Insurance Company of Pittsburgh, Pa. ("National Union") in the United States
District Court for the Eastern District of Texas seeking declaratory judgment
that National Union is obligated to indemnify the Company under three pollution
legal liability insurance policies issued by National Union and that certain
claims previously made by the Company with respect to such policies are not
"related claims" covered by a single policy as is alleged by National Union.
Subsequently, the suit in the Texas Court was dismissed and a similar petition
was filed in the United States District Court, Southern District of New York.
Previously, National Union had issued three pollution liability policies to the
Company, each covering a different time period and each containing a provision
that all claims arising out of related or continuous acts would be considered a
single loss and be deemed first reported during the policy period in which the
initial claim was first reported. The Company sought a declaratory judgement
establishing that the foregoing provision was not applicable to claims that
might arise under various lawsuits in which the Company is a defendant (see
"Claims and Legal Proceedings Against Gibraltar" below).
Additionally, in connection with its prior ownership of Gibraltar, the
Company is a party to lawsuits styled WILLIAMS V. GIBRALTAR CHEMICAL RESOURCES,
INC., STEICH V. GIBRALTAR CHEMICAL RESOURCES, INC. and DANIELS V. GIBRALTAR
CHEMICAL RESOURCES, INC. to which Gibraltar is also a party. These lawsuits are
described below.
CLAIMS AND LEGAL PROCEEDINGS AGAINST GIBRALTAR. In connection with the
sale of Gibraltar discussed in Note 3 of Notes to Consolidated Financial
Statements set forth in Item 8 herein, the Company is obligated to indemnify AEC
for certain claims against Gibraltar, including various legal claims and
proceedings disclosed to AEC, arising from circumstances existing on or prior to
the date of the sale of Gibraltar. The following items constitute material
legal claims and proceedings for which the Company is obligated to indemnify
AEC:
A suit was filed against Gibraltar in August 1992 styled MONCRIEF V.
GIBRALTAR CHEMICAL RESOURCES, INC. in State District Court in Smith County,
Texas by certain persons who own land in the vicinity of Gibraltar's hazardous
waste facility in Winona, Texas. The suit asserts that the value of the
plaintiffs' land has been
14
diminished as a result of the alleged emission of objectionable odors from
Gibraltar's facility. The plaintiffs assert various grounds for recovery of
damages and seek compensatory and punitive damages. The Company defended these
claims in a jury trial which resulted in inconsequential damages being awarded
to the plaintiffs on November 7, 1996.
On October 18, 1993, a suit styled WILLIAMS V. GIBRALTAR CHEMICAL
RESOURCES, INC. was filed against the Company, Gibraltar, Mobley Co. and certain
individuals, former customers of Gibraltar and other entities. This case is
currently pending in the State District Court of Smith County, Texas. The named
plaintiffs, who have requested class certification, are certain individuals
residing in Smith County, and are seeking monetary damages for themselves and on
behalf of all other persons similarly situated. The petition alleges various
acts of negligence, fraudulent concealment, nuisance, trespass, and various
others resulting from operations of Gibraltar's hazardous waste facility. On
May 12, 1997, plaintiffs' claims were dismissed with prejudice by the Court.
However, the Court's decision is subject to appeal in accordance with applicable
rules of civil procedure.
Also on October 18, 1993, a suit was filed against the Company, Gibraltar,
Mobley Co., and certain individuals, former customers of Gibraltar and other
entities, and is currently pending in State District Court in Smith County,
Texas styled STEICH V. GIBRALTAR CHEMICAL RESOURCES, INC. The three named
plaintiffs have allegedly lived in the vicinity of Gibraltar's hazardous waste
facility. The plaintiffs' seek compensation for damages allegedly resulting
from various acts of negligence, nuisance, trespass, and fraudulent concealment
committed by Gibraltar through its operations. Discovery is ongoing in this
case. While the Company disputes the material allegations of the plaintiffs'
suit and is vigorously defending the case, it is unable to determine the
likelihood of an unfavorable outcome at this time.
A suit styled DANIELS V. GIBRALTAR CHEMICAL RESOURCES, INC. was filed on
August 31, 1995 in the State District Court of Dallas County, Texas against the
Company, Mobley Co., Gibraltar, and certain individuals, former customers of
Gibraltar and other entities by certain residents of Smith County, Texas. The
plaintiffs claim that they have experienced personal injury and property damage
which are alleged to have been caused by the operation of the Company's former
subsidiary, Gibraltar. The plaintiffs demand recovery of unspecified monetary
damages based on various legal grounds, including fraudulent concealment,
negligence, and assault & battery. This case is in the early stages of
discovery. While the Company disputes the material allegations of the
plaintiffs' suit and is vigorously defending the litigation, it is unable to
determine the likelihood of an unfavorable outcome at this time.
A suit styled GLAZER V. GIBRALTAR CHEMICAL RESOURCES, INC. was filed on
September 6, 1994, in the United States District Court for the Eastern District
of Texas Tyler Division against Gibraltar by an individual and Mothers Organized
to Stop Environmental Sins ("MOSES"), under the citizens' suit provisions of the
Clean Air Act and the Resource Conservation and Recovery Act. The suit alleges
repeated and continuing violations of these federal environmental protection
statutes by Gibraltar and an imminent and substantial endangerment to public
health and the environment caused by Gibraltar's alleged improper
transportation, storage, treatment and disposal of solid and hazardous wastes.
The plaintiffs request that Gibraltar's hazardous waste facility be permanently
closed, civil penalties be imposed, and plaintiffs' costs of litigation be
awarded. The Company has recently been granted summary judgment as to a
significant number of the claims against it as the court found that certain
alleged violations of environmental protection statutes, on which plaintiffs'
claims were based, were diligently prosecuted by the State of Texas. The
Company continues to vigorously defend remaining claims in this litigation;
however, it is unable to determine the likelihood of an unfavorable outcome as
to remaining claims.
15
A suit styled ADAMS V. AMERICAN ECOLOGY ENVIRONMENTAL SERVICES CORPORATION,
F/K/A GIBRALTAR CHEMICAL RESOURCES, INC. was filed on August 7, 1996 in the
State District Court of Tarrant County, Texas against Gibraltar by certain
individuals. The plaintiffs claim that they have experienced personal injury
and property damage which are alleged to have been caused by the operation of
Gibraltar. The plaintiffs demand recovery of unspecified monetary damages and
injunctive relief based on various legal grounds including negligence, assault
and battery, and intentional infliction of emotional distress. Discovery is
ongoing in this case. The Company may be obligated to indemnify the purchaser
of Gibraltar for certain losses resulting from the claims asserted by the
plaintiffs. While the Company disputes the material allegations of the
plaintiffs suit and intends to vigorously defend the litigation, it is unable to
determine the likelihood of an unfavorable outcome at this time.
The Company is currently not able to reasonably estimate its potential
exposure with respect to the foregoing matters. The Company's future financial
condition, results of operations, and liquidity could be materially adversely
impacted as the nature and scope of the Company's ultimate liability arising
from Gibraltar's operations and sale become better defined. Notwithstanding the
pending sale of its hydrocarbon recycling and recovery business to U.S. Filter,
all responsibility for the foregoing matters will be retained by the Company.
To the extent the Company is held liable for these matters, it anticipates
paying for any such obligations not covered by insurance with funds retained
from the net proceeds of such sale. See Note 13 of Notes to Consolidated
Financial Statements set forth in Item 8 herein for related information.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of security holders during the fourth
quarter of the fiscal year covered by this report.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS
Prior to May 23, 1996, the Company's Common Stock was traded on the
National Market System of the National Association of Securities Dealers, Inc.
Automated Quotation System National Market System ("NASDAQ") under the symbol
"MBLYA". Since that date, the Company's Common Stock has been quoted for
trading on the OTC Bulletin Board under the same symbol. The following table
presents the high and low closing prices for the Company's Common Stock for 1995
and for 1996 prior to its de-listing, as reported by the NASDAQ. The table also
reflects the range of reported high and low bid quotations for the Company's
Common Stock for the period from May 23, 1996 through December 31, 1996 as
reported by the OTC Bulletin Board. Such over-the-counter market quotations
reflect inter-dealer prices, without retail mark-up, mark-down or commission and
may not necessarily represent actual transactions.
QUARTER ENDED 1996 1995
------------- ----------------------- -----------------
HIGH LOW HIGH LOW
---------- --------- ------- ------
March 31 $ 1 1/4 $ 5.5/8 $ 1 3/4 $1 3/8
June 30 1 1/4 5/8 2 1 3/8
September 30 15.5/16 1/2 2 15/16
December 31 3/4 1/8 1 3/8 1/2
At April 4, 1997, there were approximately 1,100 beneficial owners of the
Company's Class A Common Stock, and 39 stockholders of record of the Company's
Class B Common Stock.
16
The Company has not paid any cash dividends on its Common Stock since its
initial public offering in September 1991 and has no current plans to make any
distributions to its shareholders (see "BUSINESS--Future Plans of the Company"
set forth in Item 1 herein).
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth, for the periods indicated, (i) certain
historical financial information of the Company and (ii) certain pro forma
financial information of the Company after giving effect to the sales of
substantially all of the operating assets of the Company's two business
segments. This information should be read in conjunction with the Consolidated
Financial Statements and notes thereto set forth at pages F-1 to F-26. The
information presented herein is not necessarily indicative of the financial
position or operating results that would have occurred had the sales been
completed on the date as of which, or at the beginning of periods for which, the
sales are being given effect nor is it necessarily indicative of future
operating results or financial position. All dollar amounts are in thousands,
except per share data.
[Enlarge/Download Table]
HISTORICAL PRO FORMA
-------------------------------------------------------- ------------
YEAR ENDED
YEARS ENDED DECEMBER 31, DECEMBER 31,
--------------------------------------------------------- ------------
1996 1995 1994 1993 1992 1996
----------- ---- ---- ---- ---- ------------
INCOME STATEMENT DATA:
Revenues $21,580 18,588 29,510 35,618 43,130 $ --
Operating income (loss) (1,166) (1,304) (3,389) (12,129) 3,829 (1,166)
Net income (loss) from
continuing operations (1,286) (1,463) (4,095) (10,111) 2,530 (1,286)
Net income (loss) (10,235) (1,463) (4,095) (10,111) 2,530 (1,286)
BALANCE SHEET DATA:
Working capital
(deficit) (7,471) (95) (2,646) 6,162 7,435 4,472
Total assets 11,983 19,097 22,252 22,081 35,346 11,042
Long-term debt,
excluding current
maturities -- 490 -- 853 473 --
Total stockholders'
equity 2,467 12,606 12,373 17,156 27,023 5,251
PER SHARE DATA:
Net income (loss) (1.16) (0.17) (0.52) (1.28) .32 (0.15)
Book value 0.28 1.50 1.56 2.17 3.40 0.59
17
- Years prior to 1995 include results of operations of Gibraltar Chemical
Resources, Inc., which was sold effective December 31, 1994.
- Year ended December 31, 1995 includes results of acquired businesses from
date of acquisition.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
THE FOLLOWING DISCUSSION SHOULD BE READ IN CONJUNCTION WITH THE COMPANY'S
AUDITED CONSOLIDATED BALANCE SHEETS AS OF DECEMBER 31, 1996 AND 1995, AND THE
RELATED CONSOLIDATED STATEMENTS OF OPERATIONS, STOCKHOLDERS' EQUITY, AND CASH
FLOWS FOR EACH OF THE YEARS IN THE THREE-YEAR PERIOD ENDED DECEMBER 31, 1996
("CONSOLIDATED FINANCIAL STATEMENTS") AND RELATED NOTES THERETO SET FORTH AT
PAGES F-1 TO F-26 ATTACHED HERETO.
GENERAL
The Company provides diverse environmental and field-related services to
industrial, governmental, and commercial markets, and specializes in the
collection, transportation, treatment, recycling and management of a wide
variety of non-hazardous liquid hydrocarbons, oil filters, absorbents and
related materials. Prior to the sale of Gibraltar at year-end 1994 (see Note 3
of Notes to Consolidated Financial Statements set forth in Item 8 herein), the
Company's waste management services activities also included the management of
hazardous wastes. Prior to the sale of its oilfield services assets on January
20, 1997, the Company also provided oilfield services for managing liquids used
or produced during the lifecycle of oil and gas wells (see "BUSINESS--Oilfield
Services" set forth in Item 1 herein and Note 2 of Notes to Consolidated
Financial Statements set forth in Item 8 herein).
The Company's revenues have historically consisted of fees collected from
customers, principally related to waste management and oilfield services and, to
a lesser extent, from product sales and equipment rentals. As a result of new
business lines which began in 1995 and continued to grow in 1996, a larger
percentage of the Company's waste management services revenues have been derived
from sales of manufactured or recovered products. Revenues derived from waste
management services are closely associated with volumes of waste collected,
levels of service provided and the related pricing. Revenues from oilfield
services were derived from hourly and fixed charges for services provided,
equipment rentals and products sold. Cost of revenues include direct costs of
providing services to customers, such as labor, third party disposal, supplies
and other consumables, depreciation, utilities and fuel, equipment maintenance,
and repair. Selling, general and administrative expenses include selling and
marketing expenses, certain insurance and administrative salary expenses,
depreciation, amortization of goodwill, and legal and consulting fees.
As more fully described in "LEGAL PROCEEDINGS" set forth in Item 3 herein
and Note 13 of Notes to Consolidated Financial Statements set forth in Item 8
herein, the Company continues to defend various claims resulting from the
operations of Gibraltar. As of May 1, 1997, six such lawsuits were pending,
seeking compensatory and punitive damages for alleged personal injury and
property damage allegedly caused by operations and emissions of Gibraltar's
hazardous waste disposal facility, and permanent closure of the facility and
civil penalties as the remedy for alleged violations by Gibraltar of
environmental protection statutes and endangerment to public health and the
environment. These matters raise difficult and complex factual and legal
issues, including the nature and amount of the Company's liability, if any.
Although the Company is a defendant in certain of these claims, in other matters
the Company's potential liability arises from material contractual
indemnifications given by the Company to the purchaser of Gibraltar, including
the potential liability of certain former Gibraltar customers who have become
defendants in litigation
18
involving Gibraltar's operations. The Company is currently unable to reasonably
estimate its potential exposure for defending such matters, any indemnity
obligations resulting therefrom, and any corresponding insurance reimbursement.
Accordingly, the Company has not made an accrual for any losses which might
result from these legal matters as such amounts nor a range of amounts are not
currently reasonably estimatable. The Company's future financial condition,
results of operations, and liquidity could be materially adversely impacted as
the nature and scope of the Company's ultimate liability arising from
Gibraltar's operations and sale become better defined.
RECENT AND PENDING ASSET SALES, DISCONTINUED OPERATIONS AND RESTRUCTURING
CHARGES
Due to the Company's inability to secure, on acceptable terms, the capital
resources necessary to continue the implementation of its strategic plans to
expand its hydrocarbon recycling and recovery business, and after considering
the attendant risks of continuing to pursue such strategy in light of its
severely strained liquidity, in September 1996, the Company's Board of Directors
determined that the divestiture of its operations was in the best interests of
the Company and its shareholders. Subsequently, on October 30, 1996 and
November 1, 1996, the Company executed letters of intent to sell substantially
all of its operating assets in two separate transactions (see
"BUSINESS--Business Strategy and Background of the Transaction" and "--Oilfield
Services" set forth in Item 1 herein and Note 2 of Notes to Consolidated
Financial Statements set forth in Item 8 herein). Because of the sales pending
at December 31, 1996, 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 WASTE MANAGEMENT SERVICES ASSETS & DISCONTINUANCE OF BUSINESS
SEGMENT. As described herein, on October 30, 1996, the Company signed a letter
of intent with U.S. Filter to sell substantially all of the assets related to
its waste management services activities (see "BUSINESS--Business Strategy and
Background of the Transaction"). The assets of the Business which are the
subject of the letter of intent, and the subsequently executed Agreement, are
shown in the December 31, 1996 consolidated balance sheet as "net assets of
discontinued operations" at their estimated net realizable value as determined
by the terms of the Agreement, less anticipated transaction costs of
approximately $450,000. Such Assets had a net book value at December 31, 1996
(net of assumed liabilities) of approximately $15,149,000. As a result of the
pending Transaction, the Company recorded a charge of $7,621,000 (net of a
deferred income tax benefit of $698,000) during the 1996 third quarter,
representing the estimated loss on the disposal of the business segment,
including certain required capital expenditures prior to the Transaction. In
determining the estimated loss on disposal, only the $8.0 million fixed portion
of the Purchase Price was considered (I.E., that portion which is contingent on
the future performance of the Business was ignored). The Company estimates that
it will 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 through the expected
closing date of the sale. A provision for such estimated net losses was
recorded in the year ended December 31, 1996. The Company's waste management
services segment incurred a net loss of approximately $288,000 during the period
October 1, 1996 through December 31, 1996.
SALE OF OILFIELD SERVICES ASSETS AND DISCONTINUANCE OF BUSINESS SEGMENT.
On November 1, 1996, the Company signed a letter of intent with Dawson
Production Services, Inc. ("Dawson") to sell substantially all of the assets
related to its oilfield services business. Such sale was completed on January
20, 1997 pursuant to a definitive asset purchase agreement. Under the terms of
the definitive agreement, the Company received $4,917,000 and a subordinated
note in the amount of $500,000, due in January 2002, in exchange for such
assets. The assets which are the subject of the sale had a net book value, based
on historical cost adjusted for accumulated depreciation and amortization, of
approximately $2,378,000 at December 31, 1996, and are shown in the December 31,
1996 consolidated balance sheet as "net assets of discontinued operations" at
that
19
carrying amount. The results of operations of the discontinued segment through
the disposal date, after allocation of certain overhead and interest costs, did
not result in a loss and consequently, no additional losses have been reflected
in the statements of operations for the year ended December 31, 1996. The
Company's oilfield services segment generated net income of approximately
$120,000 during the period October 1, 1996 to December 31, 1996. The Company
recognized a gain upon completion of the sale, after transaction costs of
$255,000, amounting to approximately $2,800,000 in January 1997.
In anticipation of the planned divestitures and after consideration of its
ongoing operational needs, the Company recorded certain restructuring expenses
during the 1996 third quarter. Such expenses, totaling $650,000, included
employee severance obligations, costs associated with the relocation and
recruitment of personnel, and other related expenses.
The net effect of the transactions and related charges described in the
preceding paragraphs on the results of operations for the year ended December
31, 1996 approximated $8.6 million, and is summarized as follows (in thousands
of dollars):
Provision for loss on disposal of waste management $ 8,319
services segment
Provision for losses during phase-out period of waste 331
management services segment
Deferred income tax benefit (698)
----------
7,952
Restructuring expenses 650
----------
Total $ 8,602
----------
----------
RESULTS OF OPERATIONS -- 1996 COMPARED TO 1995
Revenues for the year ended December 31, 1996 amounted to $21,580,000
compared to $18,588,000 in 1995, an increase of $2,992,000, or 16.1%. All of
the increase was attributable to the waste management services segment, as
revenues from oilfield services during 1996 were virtually unchanged from the
prior year.
The growth in segment revenues stemmed largely from the continued expansion
of the Company's used oil and filter recycling activities, which contributed
$5,186,000 in 1996 vs. $960,000 in 1995. These new business lines commenced
operations in the 1995 third quarter with the Company's acquisition of an
existing business and their development has continued since that time through
enhancements of the Company's collection capabilities and the construction of
two new processing facilities in Baytown, Texas. The new facilities commenced
operation during 1996.
Revenues from the Company's hydrocarbon/water separations business fell
from approximately $13,300,000 during 1995 to $12,021,000 in 1996, reflecting
the effect of a severe regional drought which greatly reduced fluid volumes
received for recycling in the first half of 1996. Such volumes, particularly
those fluids associated with the remediation of underground storage tanks, are
generated from groundwater and/or rainwater associated with construction
activities and thus are directly impacted by the amount of rainfall received.
Gross profit (revenues less operating expenses) for the year ended December
31, 1996 totaled $4,333,000 compared to $5,731,000 in 1995. In the waste
management services segment, gross profit amounted to $3,201,000, or 18.6% of
revenues, in 1996, compared to $4,310,000, or 30.3% of segment revenues, in the
20
year-ago period. The marked degradation in gross margin was primarily
attributable to inordinately high costs associated with the startup of the new
used oil and filter recycling facilities. As discussed previously, such startup
began in the 1996 second quarter and while the new distillate fuels plant
initially achieved its design production rates, technical and operational
problems prevented the facility from sustaining these throughput levels. In
addition to the negative effect of the production shortfall on product yields,
higher maintenance costs also contributed to the reduced gross profit.
Ultimately, in order to achieve its design throughput and product yield
specifications, certain modifications to the facility, as originally designed
and constructed, were determined to be required. These capital improvements are
currently underway and scheduled to be completed in the 1997 second quarter.
Additionally, the diminished volumes referred to in the previous paragraph and
the relatively fixed nature of plant operating costs negatively impacted
profitability in its hydrocarbon/water separations business.
Segment gross profit from oilfield services declined from $1,421,000 (32.6%
of revenues) in 1995 to $1,132,000 (25.9% of revenues) in 1996 largely the
result of an unfavorable business mix including reduced trucking and mobile
storage tank rental income and a higher proportion of lower-margin contract
services revenue. Segment profitability was further weakened by higher
operating costs, particularly those related to transportation services provided.
Selling, general and administrative ("SG&A") expenses during 1996 were
$5,925,000 compared to $7,035,000 in 1995. Such costs in 1995 included certain
non-recurring expenses, including adjustments to insurance accruals, severance
expenses related to the retirement of an executive officer, relocation costs,
and legal and consulting fees. Excluding the effect of such costs, SG&A
expenses declined slightly during 1996 from their 1995 levels. As a percentage
of revenues, SG&A expenses amounted to 27.5% and 37.8% in 1996 and 1995,
respectively, reflecting, in part, the increased leverage of the Company's
overhead costs resulting from its new business lines.
Other expense, net in 1996 amounted to $329,000 and consisted principally
of interest expense on bank indebtedness and other miscellaneous expenses,
partially offset by interest income on invested funds and other miscellaneous
receipts. In 1995, other expense, net amounted to $630,000, including losses
associated with the Company's Mexican operations, which were sold in the 1995
second quarter, and the writedown of a building held for sale to its estimated
net realizable value.
In connection with the planned asset divestitures discussed previously, the
Company recorded a deferred income tax benefit of $698,000 during 1996,
representing a reduction in previously established deferred tax liabilities. No
other income tax expense or benefit was recognized during the year.
RESULTS OF OPERATIONS--1995 COMPARED TO 1994
Total revenues fell from $29,510,000 in 1994 to $18,588,000 in 1995, an
overall decline of 37.0%. The decline was attributable to a 44.8% decline in
waste management services revenue, partially offset by a 17.4% increase in
oilfield services revenue. On a pro forma basis (excluding Gibraltar in 1994),
revenues from waste management services grew 3.2% in 1995.
Increased waste management services revenues in 1995 compared to pro forma
revenues in the prior year were attributable to the revenue contribution of the
used oil and filter businesses acquired in July 1995, which approximated
$960,000 for the partial-year period. 1995 revenues from the Company's
hydrocarbon recycling activities involving the separation of relatively low
hydrocarbon/high water mixtures declined 3.8% compared to those of 1994, despite
an expansion into Baton Rouge, Louisiana in early 1995, while such revenues from
collection terminals open twelve months or longer decreased by approximately
6.0% during the year. This decline was largely a result of diminished volumes
of fluids collected in 1995, partially
21
mitigated by improved pricing. A significant special project in the 1994
first quarter, accounting for nearly 5% of the year's total volume, as well
as unusually heavy rainfall in the Texas Gulf Coast region during the 1994
fourth quarter, were also key factors in the 1995 relative volume shortfall.
Fluid volumes associated with underground storage tank remediation activities
fell precipitously in 1995 compared to 1994 levels, partly the result of an
extended regional drought in the latter part of the year which continued into
1996. Volumes of industrial oily wastes, which are more production-oriented
as opposed to event-driven, increased approximately 15.4% during the same
period. This pronounced shift in business mix, which began in 1994,
continued throughout 1995 and has been largely driven by market changes and
regulatory influences. Revenues from transportation and plant-related
services increased modestly in 1995 compared to the prior year, largely on
the strength of a significant one-time project in the Dallas, Texas area, but
the overall revenue contribution from large nonrecurring sources declined
somewhat during the year.
Revenues in the Company's oilfield services business in 1995 surpassed 1994
levels by 17.4% due to renewed marketing efforts, including a focus on new
revenue sources, and weaker activity from this sector during the second and
third quarters of 1994.
Total gross profit for the year ended December 31, 1995 fell 6.0% to
$5,731,000 from $6,094,000 in the prior year. On a segment basis, gross
profit from waste management services fell 9.1% during 1995, while gross
profit from oilfield services increased 5.1%. Stated as a percentage of
revenues, waste management services gross profit increased to 30.3% in 1995
from 18.4% in the prior year, which included the impact of Gibraltar's
significantly diminished revenues and relatively high operating costs in
1994. Excluding the effects of Gibraltar, the 1994 segment gross profit
margin was 36.0%. The relative decline in 1995 profitability was influenced
by higher analytical and plant operating expenses throughout the year,
particularly at the Company's Baytown, Texas oil-fuel-water separations
facility. These escalated operating expenses were attributable, in part, to
the ongoing shift in business mix toward more difficult-to-treat oily waste
streams, as noted previously, and reflect the startup of a new terminal
operation in Baton Rouge, Louisiana in the 1995 first quarter. Throughout
1995, management devoted substantive attention to the enhancement of its
Baytown operations and made significant capital improvements at the facility.
1995 gross profit was further weakened by higher labor and maintenance
costs, as well as equipment utilization issues, relating to the
transportation services provided by the Company.
Segment gross profit from oilfield services declined as a percentage of
revenue in 1995 to 32.6% from 36.5% a year ago, largely as a result of
competitive pricing pressures and a less profitable mix of business, despite the
increased activity and revenues referred to previously.
SG&A expenses totaled $7,035,000 in 1995 vs. $9,483,000 in 1994, a 25.8%
decrease. Excluding the effects of Gibraltar on 1994 overhead expenses, such
costs increased 12.5% in 1995 primarily as a result of certain nonrecurring
expenses in the fourth quarter amounting to approximately $770,000. These
expenses included the following approximate amounts: insurance costs of
$235,000, severance expenses of $300,000 related to the retirement of an
executive officer, costs associated with the relocation of certain executive
officers totaling $100,000, consulting fees of $50,000 related to the Company's
strategic review of its opportunities for possible business combinations, and
certain legal expense accruals amounting to $70,000. Additionally, 1995 SG&A
spending was impacted by the incremental overhead costs associated with the
acquisition and new business lines discussed in Note 3 of Notes to Consolidated
Financial Statements, which amounted to approximately $375,000. Excluding the
impact of the significant one-time charges referred to previously, 1995 SG&A
expenses were relatively flat with pro forma 1994 expenses, despite the added
SG&A costs of the acquired businesses. Management continued its cost
containment efforts throughout 1995 in light of the Company's smaller revenue
base following the sale of Gibraltar at year-end 1994. As a percentage of
revenues, 1995 SG&A expenses amounted to 37.8% (33.7% excluding the special
charges) vs. 32.1% in 1994 (35.7% on a pro forma basis).
22
Other expense, net of $276,000 in 1995 resulted from a $392,000 write-down
of the carrying value of a Kilgore, Texas office building to its estimated net
realizable value in the 1995 fourth quarter, partially offset by other income.
The building, previously used by the Company as a corporate office, has been
held for sale since the Company relocated its corporate offices and consolidated
its administrative support functions. Other income, net of $50,000 in 1994
included a net loss on asset dispositions, offset by lease income and
miscellaneous other net receipts.
Interest income, net of $193,000 for the year ended December 31, 1995
compares to net interest expense of $154,000 in 1994. The Company had virtually
no indebtedness outstanding during 1995, prior to borrowings on its term loan
facility in December to fund certain capital expenditures. Strained liquidity
during 1994, leading up to the completion of the sale of Gibraltar at year-end,
resulted in higher levels of outstanding indebtedness throughout the year.
Losses associated with the Company's Mexican operations in 1995 totaled
$547,000, including a second quarter loss on the sale of the Company's 25%
interest in Pro Ambiente, S.A. de C.V., a Mexican joint venture (see Note 4 of
Notes to Consolidated Financial Statements). During 1994, the Company's equity
in losses of the joint venture amounted to $55,000. Additionally, at year-end
1994, the Company recorded, as a reduction of stockholders equity, a $700,000
write-down of its joint venture investment through establishment of a valuation
allowance for foreign currency translation losses. Such write-down was
necessitated by the devaluation of the Mexican peso late in 1994.
The 1995 income tax benefit was $471,000, and consisted of a refund of
previously-paid Federal income taxes and net deferred income tax benefits
resulting principally from differences in depreciation expense for financial
accounting and income tax reporting purposes. Income tax expense for 1994 was
$547,000, and was impacted by the establishment of valuation allowances for
deferred tax assets resulting from an assessment of their likely realizability.
LIQUIDITY AND CAPITAL RESOURCES
During the year ended December 31, 1996, the Company used net cash of
approximately $206,000 in its operating activities, including its discontinued
waste management services and oilfield services operations. The substantial net
loss posted by the Company during the year of $10,235,000 included significant
net non- cash charges amounting to $8,602,000 for anticipated losses in
connection with the pending disposal of its waste management services assets and
related restructuring expenses.
Capital expenditures in 1996 amounted to approximately $5,339,000 compared
to $5,226,000 in 1995 and $3,042,000 in 1994. Capital spending during 1995 and
1996 included approximately $6,188,000 associated with the construction of two
new recycling plants at the Company's Baytown, Texas facility as part of a major
expansion initiative.
The substantial losses sustained by the Company in 1995 and 1996, coupled
with the significant capital requirements necessary to support its facilities
expansion, have severely weakened the Company's liquidity, substantially
consuming its cash resources and exhausting its existing borrowing capacity. The
sizeable capital investment referred to in the previous paragraph was funded
largely through bank borrowings, resulting in outstanding indebtedness of
$5,014,000 at year-end 1996. On January 20, 1997, the Company utilized
$3,300,000 of the cash proceeds realized from the sale of its oilfield services
assets to reduce such outstanding bank indebtedness, and the maturity date of
its credit agreement with Bank One, Texas, N.A. was amended to be March 31,
1997. The Company and the bank subsequently extended the maturity date of the
credit agreement to May 31, 1997 to accommodate the expected completion of the
Transaction and the Company intends to retire the remaining outstanding
indebtedness with the proceeds from such sale. The
23
Company has been in violation of certain covenant requirements of its credit
agreement since June 30, 1996, placing it in technical default, and no
additional borrowings are available under such agreement.
Presently, it is contemplated that all or substantially all of the $8.0
million in U.S. Filter Stock received at the closing of the Transaction will be
sold as soon as possible thereafter, resulting in net proceeds totaling
approximately $5.8 million after repayment of the aforementioned outstanding
bank indebtedness (approximately $1.75 million) and transaction expenses
estimated at $450,000. Such net proceeds will be used to fund the liabilities
retained by the Company following the sale, and the remaining surplus cash is
expected to be invested in relatively low-risk, liquid short-term investments.
The Company anticipates that ongoing general and administrative expenses will be
reduced to approximately $300,000 annually upon completion of the sale, and
expects earnings from investments to largely offset such costs. The amounts
described herein are approximate and based on the Company's current estimates.
Furthermore, there can be no assurance that such amounts will actually be
realized.
In addition to the aforementioned proceeds, under the terms of the
Agreement, the Company may receive up to $4.0 million in U.S. Filter Stock
during the two-year period following the sale based on the financial performance
of the Business. Additionally, the Company received a $500,000 subordinated
note receivable from Dawson, bearing interest at 8.5%, which matures in January
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 U.S. Filter and Dawson, and in light of the ongoing litigation (see
"Legal Proceedings" set forth in Item 3 herein), the Company, based on
consultation with legal counsel, does not currently anticipate making a
distribution to its shareholders in the foreseeable future. As circumstances
change or additional information with respect to the extent of the Company's
potential indemnity obligations becomes available, the Board of Directors will
continue to evaluate various uses of the Company's funds. While the Company may
investigate new business opportunities that arise, the nature and probability of
any investments which might result from such investigations cannot be
determined.
In the event that the sale to U.S. Filter is not consummated, the Company's
Board of Directors may seek to sell some or all of the Company's assets to
another purchaser or purchasers. The Company's inability to consummate the sale
to U.S. Filter as planned in a timely manner could have a material adverse
effect on the Company's consolidated financial position and liquidity.
ENVIRONMENTAL MATTERS
The Company is subject to extensive and evolving regulation by federal,
state, and local authorities. This body of law provides for significant
penalties for violators, as well as continuing liability for waste generators,
owners, and operators of waste disposal facilities and others for past disposal
practices. The Company regards environmental compliance as a critical component
of its overall operations, from providing quality service to its customers to
protecting the health and safety of its employees and protecting human health
and the environment. This environmental compliance effort is the shared
responsibility of all operating personnel and is under the direction of a staff
of employees who are responsible for its facilities' compliance, health and
safety, field safety, compliance training, and related recordkeeping. The
Company has taken, and is routinely taking, measures to correct all known
existing problems and to safeguard against potential problems. The Company
believes that its facilities are in substantial compliance with all applicable
requirements. Future legislation, regulatory interpretation, or administrative
procedures are likely to require capital expenditures to maintain compliance,
the amount of which cannot be anticipated.
24
MANAGEMENT'S RESPONSIBILITY FOR THE CONSOLIDATED FINANCIAL STATEMENTS
The Consolidated Financial Statements of the Company are the responsibility
of management. They have been prepared in accordance with generally accepted
accounting principles and include estimates and judgments made by management.
To meet the responsibility for reliable financial data, management
maintains a system of internal accounting controls which is designed to provide
reasonable assurance that transactions are executed as authorized and are
accurately recorded and that assets are properly safeguarded. Although
accounting controls are designed to achieve this objective, it must be
recognized that errors or irregularities may occur. In addition, it is necessary
to assess and balance the relative costs and the expected benefits of the
internal accounting controls.
The Company's independent auditors, KPMG Peat Marwick LLP, have audited the
Consolidated Financial Statements in accordance with generally accepted auditing
standards, which include a review of the system of internal accounting controls
only to the extent necessary to determine audit procedures required to express
their opinion.
CERTAIN TRENDS AND UNCERTAINTIES
As a cautionary note to investors, the Company and its representatives may
make oral or written statements from time to time that are "forward-looking
statements" within the meaning of the United States federal securities laws,
including information contained herein which is not historical. There are a
number of important factors which could cause actual results and consequences to
differ materially from those anticipated. Such factors include, but are not
limited to, those set forth below.
COMPLETION OF THE TRANSACTION. Closing of the Transaction described herein
is subject to various conditions set forth in the Agreement, many of which are
beyond the control of the Company. The Company's inability to consummate the
sale of the Assets to U.S. Filter or another prospective purchaser in a timely
manner could have a material adverse effect on the Company's consolidated
financial position and liquidity.
INABILITY TO LIQUIDATE SHARES OF U.S. FILTER STOCK. It is currently
contemplated that all or substantially all of the U.S. Filter stock to be
received at the time of the closing of the Transaction will be sold by the
Company as soon as possible following such closing. There can be no assurances
that the Company will, in fact, will be able to sell such shares, nor can there
be any assurance of the amounts that will actually be realized from such sales,
if any.
RESOLUTION OF INDEMNIFICATION OBLIGATIONS AND PENDING LITIGATION. As more
fully discussed in "LEGAL PROCEEDINGS" set forth in Item 3 herein and Note 13 of
Notes to Consolidated Financial Statements set forth in Item 8 herein, the
Company has various outstanding contractual indemnification obligations and is a
defendant in various pending litigation matters. These matters raise difficult
and complex factual and legal issues, including but not limited to, the nature
and amount of the Company's liability, if any. The Company, based on
consultation with its legal counsel, believes that it is probable that the
Company will continue to incur expenses associated with the foregoing matters
and the Company has made an accrual for estimated out- of-pocket costs
associated with the ongoing administrative management of existing legal matters.
However, the Company is currently unable to reasonably estimate its potential
exposure for defending such matters, any indemnity obligations resulting
therefrom, and any corresponding insurance reimbursement. The Company's future
financial condition, results of operations, and liquidity could be materially
adversely impacted as the
25
nature and scope of the Company's ultimate liability arising from Gibraltar's
operations and sale become better defined.
FUTURE PLANS OF THE COMPANY. For reasons described elsewhere in this Form
10-K (see "BUSINESS--Future Plans of the Company" set forth in Item 1 herein),
the Company does not currently anticipate making a distribution to its
shareholders in the foreseeable future. As circumstances change or additional
information with respect to the extent of the Company's potential indemnity
obligations becomes available, the Board of Directors will continue to evaluate
various uses for the Company's funds. While the Company may investigate new
business opportunities that arise, the nature and probability of any investments
which might result from such investigations cannot be determined. The Company
anticipates that its ongoing general and administrative expenses will be reduced
to approximately $300,000 annually upon completion of the Transaction, and
expects earnings from investments to largely offset such costs. This amount is
based on current estimates and actual amounts could differ from this estimate.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information on pages F-1 to F-26 of this Form 10-K is incorporated by
reference in response to this item.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not Applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
DIRECTORS:
Set forth below is certain information regarding each of the three (3)
persons currently serving as directors of the Company.
DIRECTOR
NAME AGE POSITIONS WITH THE COMPANY SINCE
CLASS A DIRECTOR:
Stewart Cureton, Jr. 51 Director; Member of Audit Committee and 1991
Compensation Committee
26
CLASS B DIRECTORS:
John Mobley 66 Chairman of the Board; Member of 1991
Executive Committee, Environmental,
Health and Safety Committee and
Compensation Committee
T.M. Mobley 61 Vice-Chairman of the Board; Member 1991
of Executive Committee, Environmental,
Health and Safety Committee,
Compensation Committee and Audit Committee
JOHN MOBLEY has been Chairman of the Board of the Company since its
organization. From the time of the Company's organization through November
1993, Mr. Mobley served as Chief Executive Officer. Prior to the organization
of the Company, Mr. Mobley held various senior management positions with the
Company's predecessors. Mr. Mobley was President of Tiger Corporation, a
solid-waste disposal company, from 1971 until it was sold to a national
solid-waste disposal company in 1986.
T.M. MOBLEY has been Vice Chairman of the Board since November 1992.
Previously Mr. Mobley had served as President and Chief Operating Officer of the
Company from the time of its organization until November 1992 and had held
various senior management positions with the Company's predecessors since 1961.
Mr. Mobley joined Gibraltar Chemical Resources, Inc. ("Gibraltar") as President
in 1985 and served in that capacity until 1991. Mr. Mobley served as President
of Mobley Company, Inc. ("Mobley Co.") from 1965 until 1989.
STEWART CURETON, JR. became a director upon completion of the initial
public offering by the Company, which closed on October 1, 1991. Mr. Cureton
has been with Cureton & Co., Incorporated and its predecessor Curtin & Co.,
Incorporated, a private investment firm, since 1978, and its President since
1989.
Jim A. Smith served as a Class A director until May 21, 1996; however, he
declined to be nominated for reelection at the Company's Annual Meeting of
Shareholders held on that date because of other responsibilities. John Mobley
and T.M. Mobley are brothers. There are no other family relationships among the
Company's directors and executive officers.
EXECUTIVE OFFICERS:
Set forth below is certain information regarding the Company's executive
officers serving during 1996.
NAME AGE POSITION
Michael M. Stark 53 President and Chief Executive
Officer
W. Christopher Chisholm 38 Vice President and Chief Financial
Officer, Secretary and Treasurer
Officers are elected annually by the Board of Directors and serve at the
discretion of the Board.
27
MICHAEL M. STARK has been President and Chief Executive Officer of the
Company since November 3, 1993. From November 1992 to November 1993, he served
as the Company's President and Chief Operating Officer. During the previous
five years, Mr. Stark was Senior Vice President of TETRA Technologies, Inc. in
Houston, Texas, heading its waste treatment operations. Mr. Stark served as a
director of the Company and member of the Executive and Environmental, Health
and Safety Committees prior to his resignation from the Board on November 8,
1996 (see "CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS" set forth in Item 13
herein).
W. CHRISTOPHER CHISHOLM has been Vice President and Chief Financial
Officer, Secretary and Treasurer of the Company since December 1993. Prior to
that time, Mr. Chisholm held the position of Vice President and Controller.
Prior to joining the Company in October 1991, Mr. Chisholm was a Senior Manager
with KPMG Peat Marwick LLP.
Donald L. Barkman was an Executive Vice President of the Company and
President of Mobley Co. until his retirement effective January 31, 1996.
SECTION 16 REQUIREMENTS
Section 16(a) of the Securities Exchange Act of 1934, as amended (the "1934
Act"), requires the Company's directors and officers, and persons who own more
than 10% of a registered class of the Company's equity securities, to file
initial reports of ownership and reports of changes in ownership with the
Securities and Exchange Commission (the "SEC"). Such persons are required by
SEC regulations to furnish the Company with copies of all Section 16(a) forms
they file. Based solely on its review of the copies of such forms received by
it with respect to fiscal year 1996, or written representations from certain
reporting persons, the Company believes that all filing requirements applicable
to its directors, officers, and persons who own more than 10% of a registered
class of the Company's equity securities have been complied with except as
follows: Michael M. Stark was late in filing a Form 4 to report one transaction
involving shares of the Company's Class A common stock.
28
ITEM 11. EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table sets forth certain information regarding compensation
paid to the Company's Chief Executive Officer during the Company's last three
fiscal years (no other executive officer of the Company earned in excess of
$100,000 during 1996).
[Enlarge/Download Table]
Long-Term Compensation
----------------------------------
Annual Compensation Awards Pay-outs
------------------------------------- ------------------------- --------
(a) (b) (c) (d) (e) (f) (g) (h) (i)
------------------- ---- -------- ------ --------- ---------- ----------- -------- ------------
Other Securities
Annual Restricted Underlying LTIP All Other
Name and Principal Salary Bonus Compensa- Stock Options/ Pay-outs Compensation
Position Year ($) ($)(1) tion ($) Awards ($) SARs (#)(2) ($) ($)
------------------- ---- -------- ------ --------- ---------- ----------- -------- ------------
Michael M. Stark 1996 218,000 -- -- -- -- -- 7,453(3)
PRESIDENT & CHIEF 1995 219,440 5,000 -- 150,000(4) 6,000 -- 6,500(5)
EXECUTIVE OFFICER 1994 220,340 -- -- -- 240,000 -- 6,500(5)
--------------------------------
(1) Reflects bonus earned during the fiscal year. In some instances all or a
portion of the bonus was paid during the next fiscal year.
(2) Reflects shares of Class A Stock underlying options to acquire same.
(3) Consists of contribution to Company's Profit Sharing Plan of $3,203, term
life insurance premiums of $864 and disability insurance premiums of
$3,386.
(4) Mr. Stark was granted 100,000 shares of restricted Class A Stock in
conjunction with the approval of the 1995 Employee Restricted Stock Plan
(the "Restricted Stock Plan") at the Company's Annual Meeting of
Shareholders on June 8, 1995. Based on the market price of such stock on
that date, as reported by the NASDAQ ($1.50 per share), the total value of
the restricted stock award was $150,000. At December 31, 1995, the total
value of such restricted shares was $56,250, based on the market price of
the Class A Stock on that date, as reported by the NASDAQ ($0.5625 per
share). Pursuant to the terms of the Restricted Stock Plan and a related
Restricted Stock Agreement (under which the grant was made), vesting is to
occur with respect to 20% of the total shares granted on each January 1,
1996, 1997, 1998, 1999 and 2000, so that the shares are fully vested on
January 1, 2000. The Restricted Stock Plan also provides that the employee
has the right to receive and retain all cash dividends and distributions
thereon.
(5) Consists of contribution to the Company's Profit Sharing Plan of $2,250,
term life insurance premiums of $864 and disability insurance premiums of
$3,386.
AGGREGATED OPTION/SAR EXERCISES IN 1996 FISCAL YEAR AND DECEMBER 31, 1996
OPTION/SAR VALUES
The following table sets forth, with respect to the named executives,
information concerning exercise of options during the last fiscal year and
unexercised options and SARs held as of the end of the fiscal year.
29
[Enlarge/Download Table]
Number of
Securities Value of
Underlying Unexercised
Unexercised In-the-Money
Options/SARs at Options/SARs
December 31, at December 31,
1996 (#) 1996 ($)
--------------- ---------------
Number of
Shares Acquired Value Exercisable/ Exercisable/
Name on Exercise (#) Realized ($) Unexercisable Unexercisable
------------------- --------------- -------------- ---------------- ---------------
Michael M. Stark -- -- 190,200 / 90,800 --/--
REPORT OF THE COMPENSATION COMMITTEE OF THE BOARD OF DIRECTORS
The Compensation Committee of the Board of Directors is comprised of
Stewart Cureton, Jr., John Mobley, and T.M. Mobley, all of which are
non-employee directors of the Company. The Committee reviews the salaries,
benefits and other compensation for officers of the Company and its
subsidiaries and advises the Company's Board of Directors regarding the
Company's compensation policies. The Compensation Committee also administers
the Company's stock incentive plan and restricted stock award plan.
The following report submitted by the above-listed committee members in
their capacity as the Board's Compensation Committee addresses the Company's
compensation policy as it relates to its executive officers for fiscal 1996.
It has been the Committee's belief that in order for the Company to succeed
and grow, its compensation programs must be geared toward the attraction and
retention of high-caliber executives and other key employees by rewarding
individual performance and ultimately, to the promotion of enhanced value for
its shareholders. To achieve these objectives, the Company's executive
compensation programs have been structured to include two principal elements:
(1) salary and bonuses, and (2) longer-term incentive rewards.
ANNUAL COMPENSATION--SALARY AND BONUS
It has been the Compensation Committee's practice to review and approve
salaries, including salary increases for executive officers and bonus awards,
annually. The salary level for the Company's Chief Executive Officer is set by
the Committee based on the experience he brings to that position and his
contributions to the performance of the Company. Mr. Stark joined the Company
as President and Chief Operating Officer in November 1992 and became Chief
Executive Officer in November 1993. His base salary has not been changed since
the inception of his employment. Mr. Stark's employment agreement entitles him
to incentive compensation in an amount to be determined annually by the
Compensation Committee. No such bonus was awarded during the year ended
December 31, 1996.
The Committee receives reports of recommended salary and bonus actions for
the other executive officers from the Chief Executive Officer. The Committee
reviews these recommendations, may request additional information and analysis,
and ultimately determines whether to approve, recommend changes, or disapprove
salary actions.
30
LONG-TERM INCENTIVE COMPENSATION
In past years, incentives designed to focus on and reward performance over
longer-term operations have been provided to executive officers and other key
employees in the form of options to acquire shares of the Company's Class A
Stock, as well as grants of restricted shares of Class A Stock.
STOCK OPTIONS
The plan provides for the grant of options priced at not less than the
market price on the date of the grant. Such options become exercisable in
increments of 20% of the shares granted on each anniversary date following the
date of the grant. Structuring the reward in this manner requires continued
performance in order to realize the full benefit of the options, thus fostering
employee loyalty and retaining a continuing incentive to achieve results
beneficial to shareholders in terms of higher stock value. Additionally, the
option agreements include provisions for termination if employment ceases.
Consequently, substantially all of the options granted under the plan will lapse
following the closing of the Transaction referred to in Item 1 herein.
RESTRICTED STOCK AWARDS
To enable the Company to provide its executive and other key officers with
an additional incentive to maximize both long-term and short-term shareholder
value by giving them a proprietary interest in the Company through the ownership
of stock, thereby increasing the personal stakes of such key employees in the
future growth and success of the Company, the Compensation Committee concluded
that the grant of restricted shares of Class A Common Stock was in the best
interests of the Company and its shareholders. Consequently, the Board of
Directors adopted the 1995 Employee Restricted Stock Plan effective January 1,
1995. In light of the pending Transaction referred to in Item 1 herein, it is
contemplated that the individual grant agreements will be amended such that the
deferred compensation costs associated with the unvested shares will be earned
by the Company's two executive officers and three other officers only in the
event and to the extent that the Company receives additional shares of U.S.
Filter Stock pursuant to an "earnout" provision in the definitive asset
acquisition agreement (see "BUSINESS--Business Strategy and Background of the
Transaction" set forth in Item 1 herein).
COMPENSATION TO BE PAID TO CERTAIN OFFICERS IN CONNECTION WITH TRANSACTION
Effective with the closing of the Transaction referred to in Item 1 herein,
the Company's Board of Directors has approved payments totaling $165,000 to
certain of the Company's officers in recognition of their years of service and
past efforts.
DEDUCTIBILITY OF COMPENSATION
The compensation paid to the Company's executive officers during 1996, and
the level of compensation the Company anticipates paying to its executive
officers for the foreseeable future, is fully deductible by the Company in
calculating the Company's Federal taxable income notwithstanding Section 162(m)
of the Internal Revenue Code of 1986, as amended (the "Code"), which limits the
deductibility of certain employee remuneration in excess of $1,000,000 per
employee. The Committee is aware of the provisions of Code Section 162(m) and
will take into account its potential application with respect to compensation
decisions.
31
SUMMARY
The decisions the Committee makes in approving salaries and bonuses and
granting options and other incentives to executive officers are made
subjectively by the Committee using their judgment and reflect their evaluation
and assessment of individual performance. The Committee bases its decisions, in
part, on its regular exposure to these executive officers at Board meetings and
the various information it receives about the business during the year.
Additionally, the Committee receives the Chief Executive Officer's
recommendations regarding compensation for other executive officers and key
employees. All such decisions have been made with the objective of retaining
and compensating those officers and key employees who have demonstrated to the
satisfaction of the Committee the capacity to contribute to the performance of
the Company.
COMPENSATION COMMITTEE
----------------------
STEWART CURETON, JR., CHAIRMAN
JOHN MOBLEY
T.M. MOBLEY
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Compensation Committee of the Board of Directors is comprised of
Stewart Cureton, Jr., John Mobley, and T.M. Mobley, all of which are currently
non-employee directors of the Company. From the time of the Company's
organization until November 1993, John Mobley served as the Company's Chief
Executive Officer and held various management positions with its predecessors
prior to that time. From the time of the Company's organization until November
1992, T.M. Mobley served as the Company's President and Chief Operating Officer,
and held various senior management positions with its predecessors prior to that
time. The Company is currently a party to a consulting contract with Cureton &
Co., Incorporated, an entity in which Stewart Cureton, Jr. has an ownership and
management interest. See "Certain Relationships and Related Transactions" set
forth in Item 13 herein.
COMPENSATION OF DIRECTORS
During 1996, directors received annual compensation as follows:
Chairman & Other Non-
Vice Chairman Employee Directors
------------- ------------------
Annual retainer $7,500 $7,500
Chairman/Vice Chairman
compensation 5,000 --
Committee chairman fees 2,500 2,500
Board meeting fees (1) 750 750
Committee meeting fees (2) 500 500
-------------------------------------
(1) Payment of fees limited to four meetings annually.
(2) Committee meeting fees are $250 for committee meetings held the same
day and location as Board meetings.
32
Mr. Stark did not receive separation compensation for his services as a
director prior to his resignation on November 8, 1996. In addition to the fees
noted above, directors of the Company are reimbursed for expenses incurred in
attending meetings.
In addition to the aforementioned cash compensation, certain non-employee
directors also participated in the Company's 1996 Non-Employee Director Stock
Option Plan. Mr. Cureton was granted an option to purchase 15,000 shares of the
Company's Class A common stock pursuant to such plan upon its approval by the
Company's shareholders on May 21, 1996.
COMPANY PERFORMANCE GRAPH
The chart below compares the yearly percentage change in the cumulative
total shareholder return on the Company's Class A Stock during the period from
September 25, 1991 (the date the Company's stock began trading after its initial
public offering) to December 31, 1996, with the cumulative total return on the
S&P 500 Index and a Company-constructed peer group. The comparison assumes
$100 was invested on September 25, 1991 in the Company's Class A Stock and in
each of the foregoing indices and assumes reinvestment of dividends.
Companies included in the peer group are as follows: Clean Harbors, Inc.;
Rollins Environmental Services, Inc.; Safety Kleen Corp. and TETRA Technologies,
Inc. Horsehead Resource Development, Inc., which was included in the peer group
in prior years, has not been included in the chart below due to a change in its
corporate structure during 1996.
Cumulative Total Return
------------------------------------------------
12/91 12/92 12/93 12/94 12/95 12/96
Mobley Environmental Svcs 100 61 24 16 6 2
PEER GROUP 100 100 62 59 58 63
S&P 500 100 108 118 120 165 203
33
SUMMARY OF COMPENSATION PLANS
RESTATED STOCK COMPENSATION PLAN
The Company has adopted the Restated Stock Compensation Plan to provide for
the grant of non-qualified options to participating employees. An aggregate of
645,000 shares of Class A Stock have been authorized and reserved for issuance
under the plan, subject to adjustment to reflect changes in the Company's
capitalization in the case of a stock split or similar event. The plan is
administered by the Compensation Committee, which consists of non-employee
members of the Board of Directors. The Compensation Committee has the sole
authority to interpret the plan, to determine the persons to whom options will
be granted, and to determine the exercise price, duration and other terms of
options to be granted under the plan; provided that, the exercise price of all
options granted under the plan may not be less than the fair market value of the
Class A Stock at the date of grant of the option, and no option may be
exercisable more than ten years after the date of grant. Except in connection
with the replacement of existing options, options generally vest 20% per year
from the date of grant and expire no later than the tenth anniversary of the
date the options are granted. Options covering 3,500 shares were granted under
this plan during 1996.
PROFIT SHARING PLAN
The Company and its subsidiaries have adopted the Mobley Employees Profit
Sharing Plan, which is intended to comply with Section 401 of the Internal
Revenue Code and the provisions of the Employee Retirement Income Security Act
of 1974 ("ERISA"). All employees of the companies who have completed six months
of service and attained the age of 21 are eligible to participate in the plan.
Participating employees may make pre-tax contributions to their accounts of up
to 15% of their compensation (up to a maximum of $9,240 in 1995). The employer,
in its discretion, may make matching contributions based on the employee's
elective contribution and may make an aggregate contribution which would be
allocated among participating employees based on relative compensation levels.
Employer contributions vest 30% after three years of service, 40% after four
years of service, and 20% per year of service thereafter. Distributions
generally are payable in a lump sum after retirement, death or disability.
During 1996, the Company made matching contributions to the Plan totaling
approximately $62,000, based on one-half of the employees' contributions, up to
a maximum of 1.5% of an employee's annual salary, subject to certain
limitations. No aggregate contribution was made to the Plan in 1996, based on
the Company's financial performance.
EMPLOYMENT AGREEMENT
The Company entered into an employment agreement with Michael M. Stark
effective October 23, 1992, which specified that his duties were that of
President and Chief Operating Officer of the Company, with a base annual salary
of $218,000 (Mr. Stark subsequently became Chief Executive Officer effective
November 3, 1993). The agreement also provides that Mr. Stark is entitled to a
bonus in an amount to be determined annually by the Compensation Committee. Mr.
Stark was not awarded bonus compensation in 1996, but is expected to receive
compensation in connection with the Transaction, as previously described. The
agreement also provides that in the event of termination without cause, Mr.
Stark is entitled to have 100% of his base salary continued for twelve months.
Pursuant to the terms of the employment agreement, Mr. Stark was granted options
covering 240,000 shares of the Company's Class A Stock, which as a result of
subsequent repricings, currently have exercise prices as follows: 80,000 shares
at $2.00 per share, 80,000 shares at $2.50 per share, and 80,000 shares at $2.75
per share. Such options are exercisable according to the following schedule:
currently exercisable--168,000 shares; and 1997--72,000 shares.
34
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT
The following table sets forth, as of April 15, 1997, the shares of Class A
and Class B Stock beneficially owned by (i) each person known to the Company to
be the beneficial owner of more than five percent of the issued and outstanding
shares of the Company's Class A or Class B Stock, (ii) each director, (iii) the
Company's Chief Executive Officer and the Company's other executive officer who
earned over $100,000 in salary and bonus during the year ended December 31,
1995, and (iv) the directors and executive officers as a group. This
information is based on public filings made with the Securities and Exchange
Commission through March 1997, and certain information supplied to the Company
by the persons listed below.
[Enlarge/Download Table]
CLASS A STOCK(1) CLASS B STOCK(1)
Percent of Percent of
Name of Beneficial Owner (2) Shares(3)(4) Class(5) Shares Class
------------------------------------------ ---------------- ---------- ---------- --------------
John Mobley 38,600(6) * 864,780(7) 18.5%
Lois Ann Mobley -- -- 253,550(8) 5.4%
James A. Mobley(9) -- -- 558,629 11.9%
Steven M. Mobley(9) -- -- 558,629 11.9%
H. David Hughes, Trustee -- -- 365,786(10) 7.8%
T.M. Mobley -- -- 1,108,210(11) 23.7%
Jo Ann Mobley Grooms -- -- 324,671(12) 6.9%
Susan Mobley Matthews -- -- 235,471(13) 5.0%
David Mobley -- -- 515,163(14) 11.0%
Robert G. Schleier, Trustee -- -- 691,527(15) 14.8%
Michael M. Stark(16) 296,200 6.80% -- --
Stewart Cureton, Jr. 10,000 * -- --
Antar & Co.(17) 470,809 10.8% -- --
Directors and Executive Officers
as a Group (5 persons) 464,564 10.6% 1,972,990
----------------------------
*Less than 1%
(1) Each share of Class B Stock is convertible into Class A Stock on a
share-for-share basis at any time. The information set forth for Class A
Stock does not include the shares of Class B Stock which are convertible
into Class A Stock.
(2) Addresses of beneficial owners are as follows: John Mobley and Lois Ann
Mobley, Stillhouse Canyon Office Park, Building One, 4807 Spicewood Springs
Road, Suite 1245, Austin, Texas; James A. Mobley, 919 Hillcrest Drive,
Longview, Texas; Steven M. Mobley, 816 Congress Avenue, Suite 1100, Austin,
Texas; H. David Hughes, 111 Congress Avenue, Suite 1400, Austin, Texas;
T.M. Mobley, Michael M. Stark, Stewart Cureton, Jr., 4415 E. Greenwood,
Baytown, Texas; Jo Ann Mobley Grooms, 1880 Bent Tree, Tyler, Texas; Susan
Mobley Matthews, HCR 68, Box 23A, Hondo, Texas; David Mobley, 1909 N.
Longview Street, Kilgore, Texas; Robert G. Schleier, 1100 Stone Road, Suite
101, Kilgore, Texas; and Antar & Co., 600 Jefferson #850, Houston, Texas.
(3) Includes 190,200 shares for Mr. Stark; 10,000 shares for Mr. Cureton; and
219,964 shares for Directors and Executive Officers as a Group which may be
acquired within 60 days of April 15, 1997, pursuant to options granted to
such persons by the Company.
(4) Includes 100,000 shares for Mr. Stark and 200,000 shares for Directors and
Executive Officers as a Group which were granted pursuant to the 1995
Employee Restricted Stock Plan. Such shares vest over a five year period
beginning January 1, 1995, and vesting may be accelerated upon the
attainment of certain specified increases in the market price of the Class
A Stock.
35
(5) Percentages are calculated on 4,375,061 shares, the number of shares that
would be outstanding if the stock options described in Footnote (3) were
exercised.
(6) Includes a pro-rata portion of the shares of Class A Stock owned by a
corporation which is owned 40% by John Mobley; Mr. Mobley shares voting and
investment power for shares owned by such corporation.
(7) Includes 253,550 shares held by a family trust for which Mr. Mobley's
spouse, Lois Ann Mobley, is co-trustee; Mr. Mobley has no pecuniary
interest in such shares.
(8) Represents shares held as co-trustee for a trust; Mrs. Mobley shares voting
and investment power for such shares with H. David Hughes.
(9) The number of shares listed for each of James A. Mobley and Steven M.
Mobley includes 290,600 shares owned by trusts for which they serve as
trustees.
(10)Represents shares held as co-trustee for two trusts (see Footnotes (8) and
(11)). Although Mr. Hughes shares voting and investment power for such
shares, he has no pecuniary interest in the shares.
(11)Includes 112,236 shares held as co-trustee for a trust; although Mr. Mobley
shares voting and investment power with H. David Hughes for shares owned by
such trust, he has no pecuniary interest in those shares.
(12)Includes 296,671 shares owned by trusts for which Mrs. Grooms is sole
trustee. Also includes 28,000 shares owned of record by Mrs. Grooms'
spouse; Mrs. Grooms disclaims beneficial ownership for such shares.
(13)Includes 207,471 shares owned by trusts for which Mrs. Matthews is sole
trustee. Also includes 28,000 shares owned of record by Mrs. Matthews'
spouse; Mrs. Matthews disclaims beneficial ownership for such shares.
(14)Represents shares held as trustee or co-trustee for trusts. Mr. Mobley
shares voting and investment power for 512,739 of the shares.
(15)Represents shares held as trustee or co-trustee for four trusts; Mr.
Schleier shares voting and investment power with David Mobley for 511,527
of these shares. However, Mr. Schleier has no pecuniary interest in any of
the shares he beneficially owns.
(16)It is anticipated that Mr. Stark will become an officer and employee of
U.S. Filter upon completion of the Transaction. In order to avoid any
possible conflict of interest which might result from such situation, Mr.
Stark resigned his position as director with the Company effective November
8, 1996; he continues to serve as the Company's President and Chief
Executive Officer.
(17)Neither Antar & Co. nor any person claiming through Antar & Co. has filed a
Schedule 13D with the Securities and Exchange Commission. Based on the
absence of such filing, the Company has assumed that no beneficial owner of
the shares registered in the name of Antar & Co. owns 5% or more of the
Company's Class A Stock.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Company has engaged Cureton & Co., an entity in which Stewart Cureton,
Jr. has an ownership and management interest, to provide certain business
consulting services to the Company, including analysis and negotiation of
potential business combination transactions to which the Company might be a
party. Mr. Cureton is a Class A director. Under the terms of the engagement,
the Company has paid Cureton & Co. retainer fees of $162,000 through December
31, 1996, and would be obligated to pay additional fees in the event a
transaction is consummated by the Company. Based on the terms of the
Agreement, the Company will be obligated to pay Cureton & Co. a total of
approximately $220,000, plus out-of-pocket expenses, in conjunction with the
Transaction. In addition, the Company paid Cureton & Co. a fee of approximately
$207,500, plus out-of-pocket expenses, in connection with U. S. Filter's
acquisition of PORI, which was completed on February 28, 1997. Under the terms
of the Agreement, U.S. Filter reimbursed the Company $250,000 for expenses
associated with its due diligence investigations of PORI, including amounts due
to Cureton & Co. Additionally, in connection with the disposition of its
oilfield services business described
36
previously, the Company paid Cureton & Co. approximately $150,000, plus
out-of-pocket expenses. A portion of the retainer fees referred to
previously are partially creditable toward the various transaction fees. The
Company believes that the terms of its arrangements with Cureton & Co. are
consistent with industry standards for similar services.
It is anticipated that Michael M. Stark, the Company's President and Chief
Executive Officer, and W. Christopher Chisholm, the Company's Chief Financial
Officer and a Vice President, will become employees of U.S. Filter upon
completion of the Transaction. Prior to November 8, 1996, Mr. Stark was also a
director of the Company; however, to avoid any possible conflict of interest
which might have resulted from his potential future employment with U.S. Filter,
he resigned his director position with the Company effective that date.
Additionally, although certain directors of the Company may also be
substantial shareholders of the Company, their interests in the Transaction are
no different than that of any other shareholder of the Company. No member of
U.S. Filter's Board of Directors is a director or officer of the Company or an
associate of any officer or director of the Company. Neither the Company nor
any of its affiliates has any relationships with U.S. Filter.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
ITEM 14 (a) 1. FINANCIAL STATEMENTS
The following consolidated financial statements of the Company and its
subsidiaries are incorporated by reference in response to this item:
PAGE
----
Independent Auditor's Report F-1
Consolidated Balance Sheets
December 31, 1996 and 1995 F-2
Consolidated Statements of Operations
Years ended December 31, 1996, 1995 and 1994 F-3
Consolidated Statements of Stockholders' Equity
Years ended December 31, 1996, 1995 and 1994 F-4
Consolidated Statements of Cash Flows
Years ended December 31, 1996, 1995 and 1994 F-5
Notes to Consolidated Financial Statements F-6 to F-26
37
ITEM 14 (a) 2. FINANCIAL STATEMENT SCHEDULES
-----------------------------
All schedules have been omitted because the required information is shown
in the consolidated financial statements or notes thereto or they are not
applicable.
ITEM 14 (a) 3. LIST OF EXHIBITS
----------------
Exhibit
NUMBER
------
3.1* Certificate of Incorporation of the Company (filed as Exhibit 3.1 to
the Company's Registration Statement on Form S-1, No. 33-41722).
3.2* Bylaws of the Company (filed as Exhibit 3.2 to the Company's
Registration Statement on Form S-1, No. 33-41722).
3.3* Amendment to Bylaws of the Company (filed as Exhibit 3.2(b) to the
Company's Annual Report on Form 10-K for the year ended December 31,
1991).
4.1* Specimen Class A Common Stock Certificate (filed as Exhibit 4.1 to the
Company's Registration Statement on Form S-1, No. 33-41722).
4.2* Specimen Class B Common Stock Certificate (filed as Exhibit 4.2 to the
Company's Registration Statement on Form S-1, No. 33-41722).
10.1*+ Form of Nonqualified Stock Option Plan for Outside Directors (filed as
Exhibit 10.6 to the Company's Registration Statement on Form S-1, No.
33-41722).
10.2*+ Form of Restated Stock Compensation Plan (filed as Exhibit 4.3 to the
Company's Registration Statement on Form S-8, No. 33-92336).
10.3* Agreement and Plan of Restructuring among the Company, Gibraltar,
Mobley Co., Mobley Group, Inc. ("Mobley Group"), Mobley Industries
Partnership ("MIP"), Mobley Properties, John Mobley, Thomas M. Mobley,
David Mobley and David Mobley Grantor Trust (filed as Exhibit 10.9 to
the Company's Registration Statement on Form S-1, No. 33-41722).
10.4*+ Mobley Employees Profit Sharing Plan, as amended and restated
effective January 1, 1994 (filed as Exhibit 10(e) to the Company's
Annual Report on Form 10-K for the year ended December 31, 1994).
10.5* Registration Rights Agreement, dated August 23, 1991 between the
Company and David Mobley Grantor Trust (filed as Exhibit 10.54 to the
Company's Registration Statement on Form S-1, No. 33-41722).
10.6*+ Employment agreement between Mobley Environmental Services, Inc. and
Michael M. Stark, dated October 23, 1992 (filed as Exhibit 10.1 to the
Company's Quarterly Report on Form 10-Q for the quarterly period ended
September 30, 1992).
38
10.7* Stock Purchase Agreement dated May 10, 1994 by and between American
Ecology Corporation and Mobley Environmental Services, Inc. (filed as
Exhibit 10(ii) to the Company's Annual Report on Form 10-K for the
year ended December 31, 1993).
10.8* Side Letter Agreement dated May 13, 1994 between American Ecology
Corporation and Mobley Environmental Services, Inc. regarding the
Stock Purchase Agreement set forth at Exhibit 10(ii) (filed as Exhibit
10(jj) to the Company's Annual Report on Form 10-K for the year ended
December 31, 1993).
10.9* Amendment to Stock Purchase Agreement dated September 2, 1994 between
American Ecology Corporation and Mobley Environmental Services, Inc.
regarding the Stock Purchase Agreement (filed as Exhibit 10(mm) to the
Company's Quarterly Report on Form 10-Q for the quarterly period ended
June 30, 1994).
10.10* Promissory Note in the original principal amount of $550,000 dated
December 31, 1994 executed by American Ecology Corporation payable to
Mobley Environmental Services, Inc. (filed as Exhibit 10(v) to the
Company's Annual Report on Form 10-K for the year ended December 31,
1994).
10.11* Loan Agreement dated June 2, 1995 between the Company and Bank One,
Texas, N.A. (filed as Exhibit 10(a) to the Company's Quarterly Report
on Form 10-Q for the quarterly period ended June 30, 1995).
10.12* Security Agreement dated June 2, 1995 between the Company and Bank
One, Texas, N.A. (filed as Exhibit 10(b) to the Company's Quarterly
Report on Form 10-Q for the quarterly period ended June 30, 1995).
10.13* Unlimited Guaranty between Mobley Company, Inc. and Bank One, Texas,
N.A. (filed as Exhibit 10(c) to the Company's Quarterly Report on Form
10-Q for the quarterly period ended June 30, 1995).
10.14* Asset Purchase Agreement dated June 7, 1995 between the Company and
Romero Bros. Oil Exchange, Environmental Petroleum Products Co./EPPCO,
and Environmental Insight, Inc. (filed as Exhibit 10(d) to the
Company's Quarterly Report on Form 10-Q for the quarterly period ended
June 30, 1995).
10.15* Assignment by the Company of the Asset Purchase Agreement to
Hydrocarbon Technologies, Inc., a wholly-owned subsidiary of the
Company (filed as Exhibit 10(e) to the Company's Quarterly Report on
Form 10-Q for the quarterly period ended June 30, 1995).
10.16* Escrow Agreement dated July 19, 1995 between the Company, Romero Bros.
Oil Exchange, Inc. and Bank One, Texas, N.A. (filed as Exhibit 10(f)
to the Company's Quarterly Report on Form 10- Q for the quarterly
period ended June 30, 1995).
10.17* Promissory Note in the amount of $75,000.00 dated July 19, 1995,
executed by the Company, payable to Romero Bros. Oil Exchange, Inc.
(filed as Exhibit 10(g) to the Company's Quarterly Report on Form 10-Q
for the quarterly period ended June 30, 1995).
10.18* Pledge Agreement between the Company and Romero Bros. Oil Exchange,
Inc. securing the Promissory Note executed by the Company payable to
Romero Bros. Oil Exchange, Inc. (filed as
39
Exhibit 10(h) to the Company's Quarterly Report on Form 10-Q for the
quarterly period ended June 30, 1995).
10.19* Contract dated July 12, 1995 between the Company and Promotora de
Servicios y Proyectos Ecologicos, S.A. de C.V. for the sale of the
shares of Pro Ambiente, S.A. de C.V. (filed as Exhibit 10(i) to the
Company's Quarterly Report on Form 10-Q for the quarterly period ended
June 30, 1995).
10.20* Memorandum dated August 3, 1995 regarding amendment of contract for
the sale of shares of Pro Ambiente, S.A. de C.V. to Promotora de
Servicios y Proyectos Ecologicos, S.A. de C.V. (filed as Exhibit 10(j)
to the Company's Quarterly Report on Form 10-Q for the quarterly
period ended June 30, 1995).
10.21* Design and Construction Agreement dated April 26, 1995 between the
Company and Engineering, Procurement & Construction, Inc. (filed as
Exhibit 10(k) to the Company's Quarterly Report on Form 10-Q for the
quarterly period ended June 30, 1995).
10.22* Sales and Design Contract dated April 28, 1995 between the Company and
Lecorp for construction of oil filter recycling facility (filed as
Exhibit 10(l) to the Company's Quarterly Report on Form 10-Q for the
quarterly period ended June 30, 1995).
10.23* Modification Agreement dated August 11, 1995 between the Company and
Promotora de Servicios y Proyectos Ecologicos, S.A. de C.V., amending
the contract for the sale of the shares of Pro Ambiente, S.A. de C.V.
(filed as Exhibit 10(a) to the Company's Quarterly Report on Form 10-Q
for the quarterly period ended September 30, 1995).
10.24* Termination Agreement dated July 12, 1995 between the Company and
Promotora de Servicios y Proyectos Ecologicos, S.A. de C.V.,
terminating the Organization Agreement dated March 29, 1993 (filed as
Exhibit 10(b) to the Company's Quarterly Report on Form 10-Q for the
quarterly period ended September 30, 1995).
10.25*+ 1995 Employee Restricted Stock Plan (filed as Exhibit 4.4 to the
Company's Registration Statement on Form S-8, No. 33-92336).
10.26 Asset Purchase Agreement dated April 25, 1997 by and among Mobley
Environmental Services, Inc., Mobley Company, Inc., Hydrocarbon
Technologies, Inc., United States Filter Corporation, and U.S. Filter
Recovery Services (Southwest), Inc.
10.27 Asset Purchase Agreement dated January 20, 1997 by and among Mobley
Company, Inc., and Dawson Production Services, Inc.
10.28 Promissory Note in the amount of $500,000 dated January 20, 1997
executed by Dawson Production Services, Inc. payable to Mobley
Company, Inc.
10.29 First Amendment to Letter Loan Agreement and Master Lease Modification
Agreement dated January 20, 1997 between the Company and Bank One,
Texas, N.A.
10.30 Deed of Trust, Security Agreement, and Financing Statement dated
January 20, 1997 executed by Mobley Company, Inc. for the benefit of
Bank One, Texas, N.A.
40
10.31 Unlimited Guaranty dated January 20, 1997 executed by Hydrocarbon
Technologies, Inc. to Bank One, Texas, N.A. guaranteeing indebtedness
of the Company.
10.32 Security Agreement dated January 20, 1997 executed by Hydrocarbon
Technologies, Inc. in favor of Bank One, Texas, N.A. securing
indebtedness of the Company.
10.33* Information Statement dated May 9, 1997 to the Shareholders of the
Company relating to the pending sale of the Company's hydrocarbon
recycling and recovery business, including Supplement thereto dated
May 12, 1997 (filed as Schedule 14C on May 9, 1997 and May 14, 1997).
11 Statement regarding computation of per share earnings (loss).
21 Subsidiaries of the Company.
23 Independent Auditors' Consent.
27 Financial Data Schedule (submitted only in electronic format)
--------------------------------
* Incorporated herein by reference to the respective filing identified
above.
+ Identifies management or compensatory plan or arrangement required to
be filed as an exhibit to this form pursuant to Item 14(c) of this
report.
ITEM 14 (b) REPORTS ON FORM 8-K
-------------------
On January 28, 1997, the Company filed a Form 8-K Current Report in
connection with the completion of the sale of its oilfield services assets to
Dawson Production Services, Inc.
On May 5, 1997, the Company filed a Form 8-K Current Report in connection
with the April 25, 1997 signing of a definitive Asset Purchase Agreement with
United States Filter Corporation for the sale of substantially all of the
remaining operating assets of its subsidiaries.
41
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Date: May 19, 1997 Mobley Environmental Services, Inc.
Registrant
/s/ Michael M. Stark
---------------------
Michael M. Stark
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ John Mobley Chairman of the Board May 19, 1997
----------------------------- and Director
John Mobley
/s/ T.M. Mobley Vice-Chairman of the May 19, 1997
----------------------------- Board and Director
T.M. Mobley
/s/ Stewart Cureton, Jr. Director May 19, 1997
-----------------------------
Stewart Cureton, Jr.
/s/ Michael M. Stark President and Chief May 19, 1997
----------------------------- Executive Officer
Michael M. Stark
/s/ W. Christopher Chisholm Vice President and May 19, 1997
----------------------------- Chief Financial Officer,
W. Christopher Chisholm Secretary and Treasurer
(Principal Accounting
Officer)
42
SUPPLEMENTAL INFORMATION
As of the date of filing this Annual Report on Form 10-K, no Annual Report
to Shareholders for the year ended December 31, 1996 has been sent to the
Company's shareholders. Likewise, no proxy statement or form of proxy has been
sent to shareholders with respect to any annual or other meeting of security
holders. At such time as Annual Reports to Shareholders and proxy statements are
distributed to the Company's shareholders, copies of such material will also be
furnished to the Securities and Exchange Commission.
43
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Mobley Environmental Services, Inc.:
We have audited the accompanying consolidated balance sheets of Mobley
Environmental Services, Inc. and subsidiaries as of December 31, 1996 and 1995,
and the related consolidated statements of operations, stockholders' equity, and
cash flows for each of the years in the three-year period ended December 31,
1996. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Mobley
Environmental Services, Inc. and subsidiaries as of December 31, 1996 and 1995,
and the results of their operations and their cash flows for each of the years
in the three-year period ended December 31, 1996, in conformity with generally
accepted accounting principles.
/s/ KPMG Peat Marwick LLP
KPMG PEAT MARWICK LLP
Shreveport, Louisiana
February 28, 1997, except for the second sentence
of the last paragraph of note 7 which is as of
March 31, 1997
F-1
MOBLEY ENVIRONMENTAL SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1996 AND 1995
(IN THOUSANDS, EXCEPT SHARE DATA)
ASSETS
[Enlarge/Download Table]
1996 1995
--------- ---------
Current assets:
Cash and cash equivalents................................................................ $ 385 $ 1,476
Trade receivables, less allowance for doubtful accounts of $50 in 1996 and $257 in
1995................................................................................... 161 2,836
Prepaid expenses and other current assets................................................ 207 582
Net assets of discontinued operations--current........................................... 1,144 --
--------- ---------
Total current assets................................................................. 1,897 4,894
Property, plant, and equipment, net...................................................... 230 12,837
Excess of purchase price over fair value of net assets acquired, net..................... -- 1,122
Net assets of discontinued operations--non-current....................................... 9,659 --
Other assets, net........................................................................ 197 244
--------- ---------
$ 11,983 19,097
--------- ---------
--------- ---------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable and current portion of long-term debt...................................... $ 5,014 70
Accounts payable......................................................................... 633 1,306
Accrued expenses......................................................................... 3,721 3,613
--------- ---------
Total current liabilities............................................................ 9,368 4,989
Long-term debt, less current portion....................................................... -- 490
Other long-term liabilities................................................................ -- 166
Deferred income taxes...................................................................... 148 846
--------- ---------
Total liabilities.................................................................... 9,516 6,491
--------- ---------
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 in 1996 and 1995, respectively........................................... 42 41
Class B, 10,000,000 shares authorized; 4,764,903 shares issued and 4,680,196 shares
outstanding in 1996, 4,834,657 shares issued and 4,749,950 shares outstanding in
1995................................................................................. 48 49
Additional paid-in capital............................................................... 25,159 25,159
Accumulated deficit...................................................................... (22,486) (12,251)
Deferred compensation costs under restricted stock agreements............................ (288) (384)
Treasury stock, 84,707 shares of Class B common stock, at cost........................... (8) (8)
--------- ---------
Total stockholders' equity........................................................... 2,467 12,606
Commitments and contingencies
--------- ---------
$ 11,983 $ 19,097
--------- ---------
--------- ---------
See accompanying notes to consolidated financial statements.
F-2
MOBLEY ENVIRONMENTAL SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1996, 1995, AND 1994
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS AND SHARE DATA)
[Enlarge/Download Table]
1996 1995 1994
---------- ---------- ----------
Revenues................................................................... $ -- $ -- $ --
Cost of revenues........................................................... -- -- --
---------- ---------- ----------
Gross profit........................................................... -- -- --
Selling, general, and administrative expenses.............................. 516 683 376
Restructuring expenses..................................................... 650 -- --
---------- ---------- ----------
Operating loss......................................................... (1,166) (683) (376)
Other expense, net......................................................... (120) (630) (5)
---------- ---------- ----------
Loss from continuing operations before income taxes.................... (1,286) (1,313) (381)
Income tax benefit......................................................... -- 320 49
---------- ---------- ----------
Loss from continuing operations........................................ (1,286) (993) (332)
---------- ---------- ----------
Discontinued operations, net of tax:
Provision for loss on disposal of waste management services segment...... (7,621) -- --
Provision for losses during phase-out period of waste management services
segment................................................................ (331) -- --
Net loss from operations of waste management services segment............ (623) (318) (3,727)
Net loss from operations of oilfield services segment.................... (374) (152) (36)
---------- ---------- ----------
Loss from discontinued operations...................................... (8,949) (470) (3,763)
---------- ---------- ----------
Net loss............................................................... $ (10,235) $ (1,463) $ (4,095)
---------- ---------- ----------
---------- ---------- ----------
Net loss per share:
Continuing operations.................................................... $ (0.15) $ (0.12) $ (0.04)
Discontinued operations.................................................. (1.01) (0.05) (0.48)
---------- ---------- ----------
$ (1.16) $ (0.17) $ (0.52)
---------- ---------- ----------
---------- ---------- ----------
Weighted average number of common shares outstanding....................... 8,835,293 8,378,142 7,915,293
---------- ---------- ----------
---------- ---------- ----------
See accompanying notes to consolidated financial statements.
F-3
MOBLEY ENVIRONMENTAL SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1996, 1995, AND 1994
(IN THOUSANDS, EXCEPT SHARE DATA)
[Enlarge/Download Table]
1996 1995 1994
---------- ---------- ----------
Preferred stock--none issued.................................................. $ -- $ -- $ --
---------- ---------- ----------
Class A common stock:
Balance at beginning of year................................................ 41 27 26
Issuance of 420,000 shares of restricted common stock....................... -- 4 --
Issuance of 500,000 shares of common stock in connection with asset
acquisition............................................................... -- 5 --
Conversion of Class B common stock (69,754 shares in 1996, 500,809 shares in
1995, and 30,263 shares in 1994).......................................... 1 5 1
---------- ---------- ----------
Balance at end of year.................................................... 42 41 27
---------- ---------- ----------
Class B common stock:
Balance at beginning of year................................................ 49 54 55
Conversion into Class A common stock (69,754 shares in 1996, 500,809 shares
in 1995, and 30,263 shares in 1994)....................................... (1) (5) (1)
---------- ---------- ----------
Balance at end of year.................................................... 48 49 54
---------- ---------- ----------
Additional paid-in capital:
Balance at beginning of year................................................ 25,159 23,788 23,788
Issuance of restricted common stock......................................... -- 626 --
Issuance of common stock in connection with asset acquisition............... -- 745 --
---------- ---------- ----------
Balance at end of year.................................................... 25,159 25,159 23,788
---------- ---------- ----------
Accumulated deficit:
Balance at beginning of year................................................ (12,251) (10,788) (6,693)
Net loss.................................................................... (10,235) (1,463) (4,095)
---------- ---------- ----------
Balance at end of year.................................................... (22,486) (12,251) (10,788)
---------- ---------- ----------
Allowance for foreign currency translation loss:
Balance at beginning of year................................................ -- (700) --
Provision for foreign currency translation loss............................. -- (155) (700)
Reduction in allowance for foreign currency translation loss due to sale of
investment in foreign joint venture....................................... -- 855 --
---------- ---------- ----------
Balance at end of year.................................................... -- -- (700)
---------- ---------- ----------
Deferred compensation costs under restricted stock agreements:
Balance at beginning of year................................................ (384) -- (12)
Issuance of restricted stock................................................ -- (630) --
Amortization of deferred compensation costs................................. 96 246 12
---------- ---------- ----------
Balance at end of year.................................................... (288) (384) --
---------- ---------- ----------
Treasury stock................................................................ (8) (8) (8)
---------- ---------- ----------
Total stockholders' equity.............................................. $ 2,467 $ 12,606 $ 12,373
---------- ---------- ----------
---------- ---------- ----------
See accompanying notes to consolidated financial statements.
F-4
MOBLEY ENVIRONMENTAL SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(IN THOUSANDS)
[Enlarge/Download Table]
1996 1995 1994
---------- --------- ---------
Cash flows from operating activities:
Net loss....................................................................... $ (10,235) $ (1,463) $ (4,095)
Adjustments to reconcile net loss to net cash provided by (used in) 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................................................ 2,594 2,361 3,431
Deferred income tax expense (benefit)........................................ (698) (471) 547
Deferred compensation costs under restricted stock agreements................ 96 246 12
Provision for losses on accounts receivable.................................. -- 200 271
Equity in net loss and loss on sale of joint venture......................... -- 323 55
Write-down of assets......................................................... -- 392 --
Changes in certain operating assets and liabilities:
Trade receivables.......................................................... (698) (123) (612)
Other assets............................................................... (126) 343 1,150
Accounts payable........................................................... 840 (1,732) 2,161
Accrued expenses and other liabilities..................................... (1,279) (265) (2,409)
---------- --------- ---------
Net cash provided by (used in) operating activities, including
discontinued operations................................................ (206) (189) 511
---------- --------- ---------
Cash flows from investing activities:
Capital expenditures........................................................... (5,339) (5,226) (3,042)
Proceeds from sale of joint venture investment................................. -- 1,324 --
Acquisition of assets.......................................................... -- (770) --
Proceeds from sale of subsidiary, net of $229 cash balance at date of sale..... -- -- 5,500
Other investing activities, net................................................ -- 56 135
---------- --------- ---------
Net cash provided by (used in) investing activities, including
discontinued operations................................................ (5,339) (4,616) 2,593
---------- --------- ---------
Cash flows from financing activities:
Net borrowings on revolving lines of credit.................................... 4,686 -- 135
Principal payments on long-term debt........................................... (232) (1,750) (651)
Borrowings of long-term debt................................................... -- 560 250
Net advances from purchaser prior to sale of subsidiary........................ -- -- 3,355
---------- --------- ---------
Net cash provided by (used in) financing activities, including
discontinued operations................................................ 4,454 (1,190) 3,089
---------- --------- ---------
Net increase (decrease) in cash and cash equivalents..................... (1,091) (5,995) 6,193
Cash and cash equivalents at beginning of year................................... 1,476 7,471 1,278
---------- --------- ---------
Cash and cash equivalents at end of year......................................... $ 385 $ 1,476 $ 7,471
---------- --------- ---------
---------- --------- ---------
See accompanying notes to consolidated financial statements.
F-5
MOBLEY ENVIRONMENTAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995, AND 1994
(1) DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION--The accompanying financial statements present
the consolidated accounts of Mobley Environmental Services, Inc. (the "Company")
and its wholly-owned subsidiaries, Hydrocarbon Technologies, Inc. ("HTI"),
Gibraltar Chemical Resources, Inc. ("Gibraltar"), and Mobley Company, Inc.
("Mobley"). In the fourth quarter of 1996, the Company announced its plans to
sell substantially all of its operating assets and completed the sale of the
assets of its oilfield services segment in January 1997 (note 2). On December
31, 1994, the Company sold Gibraltar (note 3). All significant intercompany
accounts and transactions have been eliminated in consolidation.
DESCRIPTION OF BUSINESS--The Company provides diverse environmental and
field-related services to industrial, governmental, and commercial markets, and
specializes in the collection, transportation, treatment, recycling, and
management of a wide variety of non-hazardous liquid hydrocarbons, oil filters,
absorbents, and related materials. Prior to the sale of Gibraltar in 1994, the
Company's waste management services activities also included the management of
hazardous wastes. Prior to sale of the Company's oilfield services segment in
January 1997, the Company also provided oilfield services for managing liquids
used or produced during the lifecycle of oil and gas wells. The Company operates
primarily in the states of Texas, Louisiana, and Arkansas.
BASIS OF PRESENTATION--The accompanying consolidated financial statements
have been prepared assuming that the Company will continue as a going concern.
As discussed in note 2, the Company's Board of Directors determined that the
divestiture of its operations was in the best interests of the Company and its
shareholders. The consolidated financial statements do not include any
adjustments that might result from the liquidation of the Company.
CASH EQUIVALENTS--For purposes of reporting cash flows, the Company
considers investments with original maturities of three months or less to be
cash equivalents. Cash equivalents consist of investments in money market
accounts at December 31, 1996 and 1995.
REVENUE RECOGNITION--Waste management services revenues are recognized when
the services are performed or upon the receipt and acceptance of waste material
at the Company's transfer or processing facilities. Upon the recognition of such
revenue, appropriate incidental treatment and residual disposal costs are
accrued. In the case of product sales, revenues are recognized upon acceptance
of the related product by the customer. Oilfield services revenues are
recognized when the services are performed.
PROPERTY, PLANT, AND EQUIPMENT--Property, plant, and equipment are recorded
at cost and depreciated using the straight-line method over their estimated
useful lives ranging from three to thirty years.
MAINTENANCE AND REPAIRS--Major repairs to disposal well facilities are
estimated and accrued by monthly charges to expense. Periodic costs incurred for
such items are charged against the related accrued expenses. All other
maintenance and repair costs are charged to expense as incurred. Renewals and
betterments are capitalized.
IMPAIRMENT OF LONG-LIVED ASSETS AND LONG-LIVED ASSETS TO BE DISPOSED OF--The
Company adopted the provisions of Statement of Financial Accounting Standards
No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of ("SFAS 121"), on January 1, 1996. SFAS 121 requires
that long-lived assets and certain identifiable intangibles be reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. Recoverability of assets to
be held and used is measured by a comparison of the carrying
F-6
MOBLEY ENVIRONMENTAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(1) DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
amount of an asset to future net cash flows, undiscounted and without interest
charges, expected to be generated by the asset. If such assets are considered to
be impaired, the impairment to be recognized is measured by the amount by which
the carrying amount of the assets exceed the fair value of the assets. Assets to
be disposed of are reported at the lower of the carrying amount or fair value
less costs to sell.
In its review of possible asset impairment, management considered the
following factors: (i) the limited operating history of the Company's new
business endeavors prior to and as of January 1, 1996; (ii) the fact that a
substantial part of its capital assets were under construction prior to and as
of January 1, 1996; and (iii) the anticipated continued operations of the
Company, and the expected future net cash flows to be generated by such
operations. Based on these facts and circumstances, and considering its
analyses, management of the Company concluded that there was no indicated
impairment of the Company's assets consequently, the adoption of SFAS 121 did
not have a material impact on its financial position or results of operations.
Subsequent to the adoption of SFAS 121, the Company announced its plans to sell
substantially all of its operating assets which required material adjustments to
the carrying values of the Company's assets in the third quarter of 1996 (note
2).
INVESTMENT IN JOINT VENTURE--Investment in joint venture consisted of a 25%
interest in Pro Ambiente, S.A. de C.V. ("Pro Ambiente"), a joint venture in
Mexico. On July 12, 1995, the Company sold its interest in Pro Ambiente (note
5). This investment was accounted for by the equity method.
Assets and liabilities of Pro Ambiente were translated at the rate of
exchange in effect on the last day of each fiscal year. The related translation
adjustments are reflected in the allowance for foreign currency translation loss
in the stockholders' equity section of the consolidated balance sheet at that
date. Income and expenses have been translated at the average rates of exchange
prevailing during the year.
INTANGIBLE ASSETS--Intangible assets are stated at unamortized cost and
consist primarily of excess of purchase price over fair value of net assets
acquired (goodwill). Historically, the carrying value of intangible assets has
been periodically reviewed by the Company based on the expected future
undiscounted operating cash flows of the related business segment. Goodwill was
being amortized over a fifteen-year life on a straight-line basis prior to the
decision to sell substantially all operating assets (note 2).
INCOME TAXES--Income taxes are accounted for under the asset and liability
method. Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and operating loss and tax credit carryforwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date.
EARNINGS PER SHARE--Earnings per share computations are based on the
weighted average number of common and dilutive common equivalent shares
outstanding.
USE OF ESTIMATES--Management of the Company has made a number of estimates
and assumptions relating to the reporting of assets and liabilities and the
disclosure of contingent assets and liabilities to prepare these financial
statements in conformity with generally accepted accounting principles. Actual
results could differ from those estimates which could have a material adverse
effect on the Company's future financial condition, results of operations and
liquidity as disclosed in note 13.
F-7
MOBLEY ENVIRONMENTAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(1) DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
FINANCIAL INSTRUMENTS AND CREDIT RISK CONCENTRATIONS--Financial instruments
which potentially subject the Company to concentrations of credit risk consist
principally of cash equivalents and trade receivables. The Company places its
cash equivalents with high credit quality financial institutions; however, such
amounts are generally in excess of federally insured limits. Although the
Company does not require collateral for trade receivables, the credit risk is
limited due to the large number of customers. For the years ended December 31,
1996, 1995, and 1994 no customer accounted for more than 10% of revenues. At
December 31, 1996 and 1995, no receivable, that is going to be retained by the
Company after completion of the proposed transactions to sell its operating
assets, from any customer exceeded 5% of stockholders' equity.
Statement of Financial Accounting Standards No. 107, DISCLOSURES ABOUT FAIR
VALUE OF FINANCIAL INSTRUMENTS, requires that the Company disclose estimated
fair values for its financial instruments. Fair value estimates are set forth
below for the Company's financial instruments:
- Cash, Cash Equivalents, Trade Receivables, Accounts Payable, and Accrued
Expenses--The carrying amounts approximate fair value because of the short
maturity of these instruments.
- Notes Payable and Long-term Debt--The carrying amount of the notes payable
and long-term debt approximates market because of the variable interest
rate, which is based on the bank's prime rate, or the current interest
rate available to the Company for debt of similar terms approximates the
existing rate.
The fair value estimates are made at a specific point in time, based on
relevant market information and information about the financial instruments.
These estimates are subjective in nature and involve uncertainties and matters
of significant judgment and therefore cannot be determined with precision.
Changes in assumptions could significantly affect the estimates.
STOCK OPTION PLANS--Prior to January 1, 1996, the Company accounted for its
stock option plans in accordance with the provisions of Accounting Principles
Board Opinion No. 25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES ("APB 25") and
related interpretations. As such, compensation expense would be recorded on the
date of grant only if the current market price of the underlying stock exceeded
the exercise price. On January 1, 1996, the Company adopted Statement of
Accounting Standards Statement No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION
("SFAS 123"), which permits entities to recognize as expense over the vesting
period the fair value of all stock-based awards on the date of grant.
Alternatively, SFAS 123 also allows entities to continue to apply the provisions
of APB 25 and provide pro forma net income and pro forma earnings per share
disclosures for employee stock option grants made in 1995 and future years as if
the fair-value-based method defined in SFAS 123 has been applied. The Company
has elected to continue to apply the provisions of APB 25 and provide the pro
forma disclosure provisions of SFAS 123 (note 11).
RECLASSIFICATIONS--Certain amounts in the prior year's financial statements
have been reclassified to conform to the current year presentation.
(2) RECENT AND PENDING ASSET SALES AND DISCONTINUED OPERATIONS
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
F-8
MOBLEY ENVIRONMENTAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(2) RECENT AND PENDING ASSET SALES AND DISCONTINUED OPERATIONS (CONTINUED)
(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 interests of
the Company and its shareholders. These circumstances required the Company to
re-evaluate the basis used to assess the carrying values of assets pursuant to
the provisions of SFAS 121. 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. The Company's waste management services segment consists
of the operations of HTI and certain operations of Mobley. The Company's
oilfield services segment consists of certain operations of Mobley.
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. Under the terms of the
letter of intent, the Company will receive $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, currently anticipated to be completed in the 1997 second quarter.
Additionally, USF will assume certain liabilities (accounts payable and accrued
expenses) as part of the transaction. The letter of intent further specifies
that the sales price of the assets will be adjusted upward or downward based on
the level of net assets, as defined, at the time of closing. Completion of the
transaction is subject to final negotiation and signing of a definitive
acquisition agreement, which is expected to contain standard conditions to
closing, including board and shareholder approval and due diligence, and the
distribution of an Information Statement describing the proposed transaction to
the Company's shareholders.
The net assets which are the subject of the letter of intent are shown in
the accompanying December 31, 1996, consolidated balance sheet as "net assets of
discontinued operations" at their estimated net realizable value as determined
by the aforementioned terms, less anticipated transaction costs of approximately
$450,000. Such assets have a net book value at December 31, 1996, (net of
assumed liabilities) of approximately $15,149,000. As a result of the pending
sale, the Company recorded a charge of $7,621,000 (net of a deferred income tax
benefit of $698,000) during the year ended December 31, 1996, representing the
estimated loss on the disposal of the business segment, including certain
required capital expenditures prior to the sale amounting to approximately
$900,000. In determining the estimated loss on disposal, only the $8,000,000
fixed portion of the sales price was considered (i.e., that portion which is
contingent on the future performance of the business was ignored). Such loss was
recognized in the third quarter, when it was determined that a sale of the
assets was necessary given the Company's inability to secure acceptable
financing and concerns about its liquidity. Prior to that time, the evaluation
of potential
F-9
MOBLEY ENVIRONMENTAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(2) RECENT AND PENDING ASSET SALES AND DISCONTINUED OPERATIONS (CONTINUED)
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 estimates that it will 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 the expected closing date of the transaction. A provision for such
estimated net losses has been made in the accompanying consolidated statements
of operations for the year ended December 31, 1996. The Company's waste
management services segment incurred a net loss of approximately $288,000 during
the period October 1, 1996 to December 31, 1996.
SALE OF OILFIELD SERVICES ASSETS AND DISCONTINUANCE OF BUSINESS SEGMENT. On
November 1, 1996, the Company signed a letter of intent with Dawson Production
Services, Inc. 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 $2,378,000, and are shown in the accompanying December 31, 1996,
consolidated balance sheet as "net assets of discontinued operations" at that
carrying amount. The results of operations associated with the discontinued
segment through the anticipated disposal date, after allocation of certain
overhead and interest costs, did not result in a loss and consequently, no
additional losses have been reflected in the accompanying statements of
operations for the year ended December 31, 1996. The Company's oilfield services
segment generated net income of approximately $120,000 during the period October
1, 1996, to December 31, 1996. The Company recognized a gain upon completion of
the sale, after transaction costs of approximately $255,000, amounting to
approximately $2,800,000 in January 1997.
In anticipation of the planned divestitures and the significant reduction in
personnel necessary to support the administration of the Company's remaining
assets, the Company recorded certain restructuring expenses, none of which are
expected to benefit its future activities, during the 1996 third quarter. Such
expenses, totaling $650,000, included employee severance obligations of
approximately $285,000, costs associated with the relocation and recruitment of
personnel of approximately $155,000, and other related expenses of approximately
$210,000. Substantially all of such costs were subsequently incurred during the
1996 fourth quarter and 1997 first quarter. The twelve employees to be
terminated are primarily involved in providing certain corporate support
functions, including accounting, information systems, and environmental, health
and safety.
Because of the outstanding contractual indemnification obligations of the
Company and in light of pending litigation to which the Company is a party, the
Company will remain in existence and incur certain general and administrative
expenses for the foreseeable future but will have no operating assets after the
sale of its waste management services segment to USF. Therefore, certain general
and administrative expenses and nonoperating income and expense have been
accounted for as continuing operations. Future costs incurred in connection with
these indemnification obligations and litigation responsibilities will be
reported as part of the discontinued operations in which they originated or to
which they relate. The Company believes it is probable that it will continue to
incur certain costs associated with these legal matters and accordingly, in
connection with the divestiture of 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
F-10
MOBLEY ENVIRONMENTAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(2) RECENT AND PENDING ASSET SALES AND DISCONTINUED OPERATIONS (CONTINUED)
such matters, any indemnity obligations resulting therefrom, and any
corresponding insurance reimbursement (note 13).
The Company's two business segments, waste management services and oilfield
services, have been accounted for as discontinued operations, and accordingly,
their operations have been segregated in the accompanying consolidated
statements of operations. The revenues, operating costs and expenses, interest
expense, and income taxes for the years ended December 31, 1996, 1995, and 1994,
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 to divest itself
of substantially all of its operating assets in the 1996 third quarter, the
Company has allocated certain general and administrative expenses to the
business segments in the accompanying consolidated statements of operations and
note 2. Historically, such costs had been treated as "corporate overhead" and
thus not allocated. The Company believes that such allocation provides financial
information that is more indicative of the actual operating results of the
business segments. However, such allocation method differs from that used in
presenting certain information about the Company's business segments in its
annual report on Form 10-K for the years ended December 31, 1995, 1994 and 1993.
General and administrative expenses attributable to continuing operations have
been determined based upon an allocation of such costs betweeen the business
segments and continuing operations. Restructuring charges, other income and
expense, and equity in losses and loss from sale of joint venture have been
recorded as continuing operations as such amounts are not specifically
attributable to either of the Company's business segments which are being
disposed of. Interest expense has been allocated to the segments based on the
outstanding indebtedness attributable to each of the business segments. Income
taxes have been allocated based on the effective tax rate, after a specific
charge to the waste management services segment for the change in the
beginning-of-the-year balance of the valuation allowance for deferred tax assets
of Gibraltar.
F-11
MOBLEY ENVIRONMENTAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(2) RECENT AND PENDING ASSET SALES AND DISCONTINUED OPERATIONS (CONTINUED)
Operating results and the estimated loss on disposal of the Company's waste
management services segment for the years ended December 31, 1996, 1995, and
1994 are as follows (in thousands of dollars):
[Enlarge/Download Table]
1996 1995 1994
--------- --------- ---------
Revenues..................................................... $ 17,207 $ 14,233 $ 25,801
Cost of revenues............................................. 14,006 9,923 21,059
--------- --------- ---------
Gross profit............................................... 3,201 4,310 4,742
Selling, general, and administrative expenses, including
allocated amounts.......................................... 3,902 4,730 7,714
--------- --------- ---------
Operating loss............................................. (701) (420) (2,972)
Interest expense, net........................................ (210) -- (154)
--------- --------- ---------
Loss before income taxes................................... (911) (420) (3,126)
Income tax expense (benefit)................................. -- (102) 601
--------- --------- ---------
Net loss from operations of waste management services
segment.................................................. (911) (318) (3,727)
Reduction in reserve for losses from operations of waste
management services segment during phase-out period........ 288 -- --
--------- --------- ---------
$ (623) $ (318) $ (3,727)
--------- --------- ---------
--------- --------- ---------
Provision for losses from operations of waste management
services segment during phase-out period, recognized in the
third quarter of 1996...................................... $ (331) $ -- $ --
--------- --------- ---------
--------- --------- ---------
Provision for loss on disposal of waste management services
segment, recognized in the third quarter of 1996:
Asset valuation adjustment................................. (5,673) -- --
Accrued transaction costs and capital expenditures
subsequent to measurement date........................... (1,595) -- --
Write-off of excess of purchase price over fair value of
net assets acquired...................................... (1,051) -- --
Deferred income tax benefit................................ 698 -- --
--------- --------- ---------
$ (7,621) $ -- $ --
--------- --------- ---------
--------- --------- ---------
F-12
MOBLEY ENVIRONMENTAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(2) RECENT AND PENDING ASSET SALES AND DISCONTINUED OPERATIONS (CONTINUED)
Operating results of the Company's oilfield services segment for the years
ended December 31, 1996, 1995, and 1994 are as follows (in thousands of
dollars):
[Enlarge/Download Table]
1996 1995 1994
--------- --------- ---------
Revenues......................................................... $ 4,373 $ 4,355 $ 3,709
Cost of revenues................................................. 3,241 2,934 2,357
--------- --------- ---------
Gross profit................................................... 1,132 1,421 1,352
Selling, general, and administrative expenses, including
allocated amounts.............................................. 1,506 1,622 1,393
--------- --------- ---------
Operating loss................................................. (374) (201) (41)
Income tax benefit............................................... -- (49) (5)
--------- --------- ---------
Net loss from operations of oilfield services segment.......... $ (374) $ (152) $ (36)
--------- --------- ---------
--------- --------- ---------
At December 31, 1996, the net assets of the Company's waste management
services segment are recorded at their estimated net realizable value and the
net assets of its oilfield services segment are recorded at their net book
value, and are included in the accompanying consolidated balance sheet as "net
assets of discontinued operations." Such assets are summarized as follows (in
thousands of dollars):
[Enlarge/Download Table]
WASTE
MANAGEMENT OILFIELD
SERVICES SERVICES TOTAL
------------ ----------- ---------
Trade receivables.......................................... $ 2,873 $ 500 $ 3,373
Other current assets....................................... 519 32 551
Property, plant and equipment, net of accumulated
depreciation of $14,087 and valuation reserve of
$5,673................................................... 7,780 1,846 9,626
Excess of purchase price over fair value of net assets
acquired, net of accumulated amortization of $101 and
valuation reserve of $1,051.............................. -- -- --
Other assets, net.......................................... 33 -- 33
Current liabilities........................................ (2,780) -- (2,780)
------------ ----------- ---------
Net assets of discontinued operations.................... $ 8,425 $ 2,378 $ 10,803
------------ ----------- ---------
------------ ----------- ---------
Presently, it is contemplated that all or substantially all of the USF
common stock received at the time of closing will be immediately sold. Such
proceeds will be used to fund the current liabilities retained by the Company,
with the remaining surplus cash expected to initially be deployed in short-term
investments. The Company anticipates that ongoing general and administrative
expenses will be reduced to approximately $300,000 annually, and expects
earnings from investments to largely offset such costs. The amounts described
herein are approximate and based on the Company's current estimates.
Furthermore, there can be no assurance that such amounts will actually be
realized.
In the event that the sale to USF is not consummated, the Company's Board of
Directors may seek to sell some or all of the Company's assets to another
purchaser or purchasers. The Company's inability to
F-13
MOBLEY ENVIRONMENTAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(2) RECENT AND PENDING ASSET SALES AND DISCONTINUED OPERATIONS (CONTINUED)
consummate the sale to USF as planned in a timely manner could have a material
adverse effect on the Company's consolidated financial position and liquidity.
In 1996, the Company engaged an investment banking and financial advisory
firm in which a Class A director has an ownership and management interest to
provide certain business consulting services to the Company, including analysis
and negotiation of potential business combination transactions to which the
Company might be a party. Under the terms of the engagement, the Company has
paid the investment banking firm retainer fees of approximately $162,000 through
December 31, 1996, and is obligated to pay additional fees in the event a
transaction is consummated by the Company. Additionally, the Company will be
obligated to pay such investment banking firm a total of approximately $220,000,
plus out-of-pocket expenses, in conjunction with the transaction with USF.
Further, the Company paid such investment banking firm approximately $207,500,
plus out-of-pocket expenses, in connection with USF's acquisition of an
unrelated entity, which was completed in February 1997. USF reimbursed the
Company $250,000 for certain expenses, including amounts that were paid to the
investment banking firm. Finally, in connection with the disposition of the
Company's oilfield services segment, the Company paid the investment banking
firm approximately $150,000, plus out-of-pocket expenses. The Company believes
that the terms of its arrangement with the investment banking firm are
consistent with industry standards for similar services.
(3) SALE OF GIBRALTAR
After a period of continued operating losses, in light of management's
ongoing assessment of changed conditions in the hazardous waste market, and
considering the significance of Gibraltar's regulatory issues and future capital
requirements, in late 1993, the Company's senior management and Board of
Directors determined that the divestiture of Gibraltar was in the best interests
of the Company and its shareholders.
On May 10, 1994, the Company executed a definitive agreement (the "Stock
Purchase Agreement") for the sale of all of the outstanding shares of common
stock of Gibraltar to American Ecology Corporation ("AEC"). Such agreement was
subsequently amended in an agreement dated September 2, 1994. The Company
completed the sale of Gibraltar to AEC pursuant to the Stock Purchase Agreement,
as amended, on December 31, 1994, and received cash of $5,500,000 from AEC. In
addition to the cash proceeds reflected above, AEC executed a note payable to
the Company in the amount of $550,000 to be held in escrow as a source of
payment of claims, if any, for which the Company indemnifies AEC under the Stock
Purchase Agreement (note 13).
During 1993, as part of a restructuring of its hazardous waste business, the
Company recorded charges of $5,711,000 related to the abandonment and write-down
of certain of Gibraltar's assets and to reduce the net assets of Gibraltar to
their estimated net realizable value at December 31, 1993, determined primarily
based on the terms of the Stock Purchase Agreement. During 1994, the Company
recorded additional provisions for losses on the divestiture of Gibraltar of
$4,092,000 to further reduce the carrying value of Gibraltar's net assets. The
additional charges were necessitated by: (i) the settlement of litigation
against Gibraltar by the State of Texas involving its alleged violation of
environmental laws and regulations; (ii) Gibraltar's continuing losses prior to
the closing of the sale on December 31, 1994; (iii) the aforementioned amendment
to the Stock Purchase Agreement; (iv) certain indemnity obligations of the
Company to AEC relative to existing claims involving Gibraltar (note 13); and
(v) additional expenses related to the sale.
F-14
MOBLEY ENVIRONMENTAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(3) SALE OF GIBRALTAR (CONTINUED)
The change in the reserve for loss on sale of subsidiary for the years ended
December 31, 1996 and 1995, is summarized as follows (in thousands of dollars):
[Download Table]
Balance at December 31, 1994, included in accrued expenses......... $ 1,430
1995 expenditures related to Gibraltar indemnity obligations....... (534)
---------
Balance at December 31, 1995, included in accrued expenses......... 896
1996 expenditures related to Gibraltar indemnity obligations....... (492)
---------
Balance at December 31, 1996, included in accrued expenses......... $ 404
---------
---------
A summary of Gibraltar's results of operations for the year ended December
31, 1994, follows (in thousands of dollars):
[Download Table]
Revenues........................................................... $ 12,017
---------
---------
Gross profit (loss)................................................ $ (432)
---------
---------
Operating loss..................................................... $ (3,664)
---------
---------
Net loss........................................................... $ (4,012)
---------
---------
Included in the net loss of Gibraltar for the year ended December 31, 1994,
was $166,000, of intercompany overhead and interest charges assessed Gibraltar
by the Company.
(4) ASSET ACQUISITION AND BUSINESS EXPANSION
On July 21, 1995, the Company acquired, pursuant to an asset purchase
agreement dated June 7, 1995, certain assets of a group of three affiliated
companies, including Romero Bros. Oil Exchange, Inc., Environmental Petroleum
Products Co./EPPCO, and Environmental Insight, Inc. The Texas and
Louisiana-based companies were involved in the collection and marketing of used
oils and oil filter collection and recycling. The asset purchase was effectuated
through a newly-formed, wholly-owned subsidiary of the Company, HTI. The
tangible assets acquired, consisting primarily of transportation equipment, were
recorded at their estimated fair market value of $500,000 and will be
depreciated over their estimated remaining useful lives. The total acquisition
cost of $1,536,000 included cash of approximately $786,000, including
acquisition-related costs, and the issuance of 500,000 shares of the Company's
Class A common stock. The purchase method of accounting has been used for this
asset acquisition; therefore, HTI's results of operations are consolidated with
the Company's since July 21, 1995. The excess of cost over fair market value of
net assets acquired amounted to $1,152,000, including $116,000 of deferred tax
liabilities for the basis difference in tangible assets. Such excess of cost
over fair market value of net assets acquired was written off in connection with
the decision to sell substantially all operating assets (note 2). Of the 500,000
shares of common stock issued, 300,000 of such shares are being held in escrow
pending the attainment of certain performance goals by HTI, including objectives
relating to operating profit and collected volumes of used oil and oil filters.
An additional 100,000 shares are being held by the Company as security for the
repayment of a $75,000 loan to the sellers.
F-15
MOBLEY ENVIRONMENTAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(5) SALE OF INTEREST IN MEXICAN JOINT VENTURE
On July 12, 1995, effective June 30, 1995, the Company executed an agreement
for the sale of its 25% interest in Pro Ambiente to Promotora de Servicios y
Proyectos Ecologicos, S.A. de C.V., owner of the remaining 75% of the joint
venture. Pro Ambiente is a Mexican corporation engaged in the collection and
blending of waste-derived fuels for use in cement kilns. The payment terms of
the sale were subsequently modified pursuant to an agreement dated August 11,
1995. Under the terms of the sale agreement, as amended, the Company received
cash proceeds of $1,324,000. As a result of the sale and other expenses
associated with its Mexican operations, the Company recorded losses totaling
$547,000 in the year ended December 31, 1995.
(6) PROPERTY, PLANT, AND EQUIPMENT
Property, plant, and equipment, including $9,626,000 of property, plant, and
equipment, net, included in net assets of discontinued operations, consisted of
the following at December 31, 1996 and 1995 (in thousands of dollars):
[Enlarge/Download Table]
1996 1995
--------- ---------
Land.............................................................................. $ 802 $ 802
Buildings and improvements........................................................ 1,862 1,588
Machinery and equipment........................................................... 26,514 19,168
Furniture, fixtures, and other.................................................... 704 673
Construction in progress.......................................................... 61 3,037
--------- ---------
29,943 25,268
Less: Accumulated depreciation.................................................... 14,414 12,431
Valuation reserve............................................................. 5,673 --
--------- ---------
Net property, plant, and equipment................................................ $ 9,856 $ 12,837
--------- ---------
--------- ---------
Depreciation expense totaled $2,523,000, $2,328,000, and $3,366,000 for the
years ended December 31, 1996, 1995, and 1994, respectively.
The Company recorded a pre-tax charge of $392,000 during the 1995 fourth
quarter related to the write-down of an office building in Kilgore, Texas, to
its estimated net realizable value. Such amount is included in "other expense,
net" as a component of continuing operations in the accompanying consolidated
statements of operations for the year ended December 31, 1995. The property is
currently held for sale.
(7) NOTES PAYABLE
The Company has a credit agreement, as amended, (the "Credit Agreement")
with Bank One, Texas, N.A. (the "Bank") that matures on March 31, 1997, that
provides up to $6,500,000 in available credit for the Company. Under the terms
of the Credit Agreement, the Company may borrow, subject to a defined borrowing
base, up to $4,000,000 under a revolving line of credit (including up to
$1,800,000 in letters of credit) for working capital and general corporate
purposes, and up to $2,500,000 under a term loan facility for purposes of
acquiring certain eligible equipment. The Credit Agreement is secured primarily
by accounts receivable and equipment.
F-16
MOBLEY ENVIRONMENTAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(7) NOTES PAYABLE (CONTINUED)
At December 31, 1996, the Company had borrowings of approximately $2,738,000
outstanding under the revolving line of credit and had approximately $1,179,000
in letters of credit outstanding. Interest on the revolving line of credit is
payable quarterly at the Bank's prime rate (8.875% at December 31, 1996). At
December 31, 1996, the Company had borrowed the full $2,500,000 available under
the term loan portion of the Credit Agreement, consisting of two notes in the
original amounts of $700,000 (payable quarterly over five years) and $1,800,000
(payable quarterly over seven years). Both notes bear interest at 8.25%. The
outstanding balance at December 31, 1996 was approximately $2,276,000 under the
term loan portion of the Credit Agreement.
The Credit Agreement contains restrictive covenants which include the
maintenance of minimum tangible net worth, as defined, and certain financial
ratios. The Company has not been in compliance with certain covenant
requirements since June 30, 1996, placing the Company in technical default.
Consequently, the Company has classified the entire outstanding balance as a
current liability.
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. On March 31, 1997, the Bank extended
the maturity date of the Credit Agreement to May 31, 1997, to accommodate the
anticipated closing date of the sale of the Company's waste management services
assets to USF. The Company's inability to consummate the sale to USF as planned
in a timely manner could have a material adverse effect on the Company's
consolidated financial position and liquidity.
(8) ACCRUED EXPENSES
Accrued expenses consisted of the following at December 31, 1996 and 1995
(in thousands of dollars):
[Enlarge/Download Table]
1996 1995
--------- ---------
Accrued transaction costs and capital expenditures to be incurred prior to the sale
of the waste management services segment (note 2).................................. $ 987 $ --
Insurance premiums and accrued claims payable........................................ 696 742
Accrued expenses for estimated legal costs relating to Gibraltar
(notes 3 and 13)................................................................... 404 896
Accrued restructuring expenses (note 2).............................................. 402 --
Salaries, wages, and benefits........................................................ 258 591
Current portion of Gibraltar judgment (notes 3 and 13)............................... 167 167
Taxes other than income taxes........................................................ 116 265
Accrued losses from operations of waste management services segment during phase-out
period (note 2).................................................................... 43 --
Other................................................................................ 648 952
--------- ---------
3,721 3,613
--------- ---------
Salaries, wages, and benefits........................................................ 400 --
Taxes other than income taxes........................................................ 210 --
Other................................................................................ 491 --
--------- ---------
Accrued expenses, included in net assets available for sale.......................... 1,101 --
--------- ---------
$ 4,822 3,613
--------- ---------
--------- ---------
F-17
MOBLEY ENVIRONMENTAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(9) INCOME TAXES
Income tax expense (benefit) for the years ended December 31, 1996, 1995,
and 1994, consisted of the following (in thousands of dollars):
[Enlarge/Download Table]
1996 1995 1994
--------- --------- ---------
Deferred Federal income tax benefit from continuing operations................ $ -- (320) (49)
--------- --------- ---------
Deferred Federal income tax expense (benefit)................................. (698) (151) 603
Deferred state income tax benefit............................................. -- -- (7)
--------- --------- ---------
Income tax expense (benefit) from discontinued operations................... (698) (151) 596
--------- --------- ---------
Income tax expense (benefit)................................................ $ (698) (471) 547
--------- --------- ---------
--------- --------- ---------
Income tax expense (benefit) differed from the amounts computed by applying
the U.S. Federal income tax rate of 34% to loss before income taxes as a result
of the following (in thousands of dollars):
[Enlarge/Download Table]
1996 1995 1994
--------- --------- ---------
Computed "expected" tax benefit.......................................... $ (3,717) (658) (1,206)
Change in the beginning-of-the-year balance of the valuation allowance
for deferred tax assets................................................ 3,198 364 608
Change in the beginning-of-the-year balance of the valuation allowance
for deferred tax assets of Gibraltar................................... -- -- 1,007
Other, net............................................................... (179) (177) 138
--------- --------- ---------
Total income tax expense (benefit)..................................... $ (698) (471) 547
--------- --------- ---------
--------- --------- ---------
F-18
MOBLEY ENVIRONMENTAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(9) INCOME TAXES (CONTINUED)
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at December 31,
1996 and 1995, are presented below (in thousands of dollars):
[Enlarge/Download Table]
1996 1995
--------- ---------
Deferred tax assets:
Net operating loss carryforwards................................................ $ 1,954 1,157
Property, plant and equipment--basis differences and depreciation............... 1,985 --
Accrued expenses, provisions for book not yet deductible for tax................ 896 483
Capital loss carryforward....................................................... 194 220
Alternative minimum tax credit carryforward..................................... 134 134
Other........................................................................... 137 108
--------- ---------
Total gross deferred tax assets............................................... 5,300 2,102
Less valuation allowance...................................................... (5,300) (2,102)
--------- ---------
Net deferred tax assets....................................................... $ -- --
--------- ---------
Deferred tax liabilities:
Property, plant, and equipment--depreciation and basis differences.............. $ -- 698
Other........................................................................... 148 148
--------- ---------
Total gross deferred tax liabilities.......................................... 148 846
--------- ---------
Net deferred tax liability.................................................... $ 148 846
--------- ---------
--------- ---------
In assessing the realizability of deferred tax assets, management considers
whether it is more likely than not that some portion or all of the deferred tax
assets will not be realized. The ultimate realization of deferred tax assets is
dependent upon the generation of future taxable income during the periods in
which those temporary differences become deductible. Management considers the
scheduled reversal of deferred tax liabilities and projected future taxable
income in making this assessment. Subsequently recognized tax benefits relating
to the valuation allowance for deferred tax assets as of December 31, 1996, will
be included as an income tax benefit in the consolidated statement of operations
in future periods.
At December 31, 1996, the Company has net operating loss carryforwards for
federal income tax purposes of approximately $5,100,000. Such amounts are
available to offset future Federal taxable income, if any, through 2011 and
expire in the following years: 2009--approximately $1,700,000;
2010--approximately $1,200,000; and 2011--approximately $2,200,000.
(10) LEASES
The Company leases certain equipment and facilities used in its operations,
all of which have or will be assumed by Dawson and USF in connection with the
respective asset sales. Total rentals approximated $550,000, $330,000, and
$863,000 for the years ended December 31, 1996, 1995, and 1994, respectively.
Included in the total expense for the years ended December 31, 1994, are
$663,000, related to Gibraltar.
(11) EMPLOYEE BENEFIT PLANS
RESTATED STOCK COMPENSATION PLAN--The Company has adopted the Restated Stock
Compensation Plan to provide for the grant of nonqualified options to
participating employees. An aggregate of 645,000
F-19
MOBLEY ENVIRONMENTAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(11) EMPLOYEE BENEFIT PLANS (CONTINUED)
shares of Class A common stock has been authorized and reserved for issuance
under such plan. The plan is administered by the Compensation Committee of the
Board of Directors, which has the sole authority to interpret the plan, to
determine the persons to whom options will be granted, and to determine the
exercise price, duration, and other terms of options to be granted under the
plan, provided that options may not be granted at prices less than fair market
value on the dates of the grants and that options may not be outstanding for a
period longer than ten years from the date the options are granted.
The following table summarizes activity under the Company's Restated Stock
Compensation Plan for the years ended December 31, 1996 and 1995:
[Enlarge/Download Table]
NUMBER OF AVERAGE
OPTIONS PRICE
----------- ---------
Balance at December 31, 1994..................................................... 542,127 $ 2.5861
Granted........................................................................ 84,000 0.5625
Forfeited...................................................................... (30,000) 2.3319
-----------
Balance at December 31, 1995..................................................... 596,127 2.3138
Granted........................................................................ 3,500 1.2500
Forfeited...................................................................... (31,954) 1.7161
-----------
Balance at December 31, 1996..................................................... 567,673 2.3408
-----------
-----------
Exercisable at December 31, 1996................................................. 345,140 2.5504
-----------
-----------
Exercisable at December 31, 1995................................................. 226,478 2.6545
-----------
-----------
The following table summarizes the Company's outstanding stock options at
December 31, 1996:
[Download Table]
WEIGHTED
AVERAGE WEIGHTED
NUMBER OF REMAINING AVERAGE
RANGE OF EXERCISE OPTIONS CONTRACTUAL EXERCISE
PRICES OUTSTANDING LIFE PRICE
----------------- ----------- --------------- ---------
$0.5625 73,500 9 years $ 0.5625
$1.25 - $2.75 227,244 7 years 2.5470
$2.00 - $2.75 240,000 6 years 2.4167
$2.75 - $4.75 14,091 6 years 3.6667
$6.00 12,838 6 years 6.0000
-----------
$0.5625 - $6.00 567,673 7 years $ 2.3408
-----------
-----------
F-20
MOBLEY ENVIRONMENTAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(11) EMPLOYEE BENEFIT PLANS (CONTINUED)
The following table summarizes the Company's exercisable stock options at
December 31, 1996:
[Download Table]
NUMBER OF
RANGE OF EXERCISE OPTIONS WEIGHTED AVERAGE
PRICES OUTSTANDING EXERCISE PRICE
----------------- ----------- ----------------
$0.5625 14,700 $ 0.5625
$1.25 - $2.75 140,896 2.5765
$2.00 - $2.75 168,000 2.4167
$2.75 - $4.75 11,272 3.6667
$6.00 10,272 6.0000
-----------
$0.5625 - $6.00 345,140 $ 2.5504
-----------
-----------
The per-share weighted average fair value of stock options granted during
1996 and 1995 was not material. The Company applies APB 25 in accounting for the
plan and, accordingly, no compensation cost has been recognized for its stock
options in the consolidated financial statements. Had the Company determined
compensation cost based on the value at the grant date for its stock options
under SFAS 123, the Company's net loss and net loss per share for 1996 and 1995
would not have been affected. The full impact of calculating compensation costs
for stock options under SFAS 123 has not been considered because compensation
cost is reflected over the options' vesting period of five years and
compensation cost for options granted prior to January 1, 1995, is not
considered.
1995 EMPLOYEE RESTRICTED STOCK PLAN--In January 1995, the Board of Directors
adopted the 1995 Employee Restricted Stock Plan (the "Restricted Plan"). The
Restricted Plan was approved by the shareholders in June 1995, at which time the
420,000 shares of Class A common stock available for issuance under the
Restricted Plan were issued to certain executive officers and senior managers of
the Company pursuant to the terms of the Restricted Plan. The shares granted
under the Restricted Plan vest 20% per year beginning in January 1995 with
provisions for earlier vesting based on increases in the Company's stock price.
1996 NON-EMPLOYEE DIRECTOR STOCK OPTION PLAN--In December 1995, the Board of
Directors adopted, subject to shareholder approval, the 1996 Non-Employee
Director Stock Option Plan. Such plan replaced the Nonqualified Stock Option
Plan for Outside Directors, which as adopted in 1991. Directors who are not
employees of the Company are eligible to participate in the plan. Under the
terms of the plan, the exercise price of each option granted shall be equal to
the fair market value on the date of grant. Options become fully exercisable one
year from the date of grant, provided that such vesting period will be
accelerated upon the occurrence of a change of control. Options expire ten years
after the date of grant. A total of 90,000 shares of Class A common stock have
been reserved for issuance under the plan. Participants were granted, effective
December 6, 1995, options to purchase 15,000 shares of Class A common stock at
an exercise price equal to the fair market value at that date of $1.0625, of
which 5,000 shares vested immediately with the remainder vesting in equal
increments on the first and second anniversary dates of the grant. Upon the
election of any new outside directors, each such director shall be granted an
option to purchase 7,500 shares of Class A common stock. Thereafter, each
participant is to be granted an option to purchase 3,000 shares of Class A
common stock each date he or she is reelected as a director of the Company,
subject to share availability, adjustment for stock dividends, splits, and
similar events.
F-21
MOBLEY ENVIRONMENTAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(11) EMPLOYEE BENEFIT PLANS (CONTINUED)
MOBLEY EMPLOYEES' PROFIT SHARING PLAN--The Company has a contributory profit
sharing plan for the benefit of substantially all employees. Contributions to
the plan are made at the discretion of the Compensation Committee of the Board
of Directors and approximated $62,000, $51,000, and $96,000 for the years ended
December 31, 1996, 1995, and 1994, respectively. Included in the total
contributions for the year ended December 31, 1994, are approximately $39,000,
related to Gibraltar.
MOBLEY ENVIRONMENTAL SERVICES, INC. EMPLOYEES' BENEFIT TRUST--The Company
has a medical benefit plan which is funded by employer and participant
contributions and is supplemented by stop-loss insurance. Contributions are
determined by the plan administrator based upon the actual claim experience and
administrative costs of the plan.
(12) STOCKHOLDERS' EQUITY
The Company is authorized to issue up to 2,000,000 shares of preferred stock
(par value $.01), and the Board of Directors has the authority to fix the
rights, preferences, privileges, limitations, and restrictions of such stock. No
preferred stock has been issued as of December 31, 1996.
Each share of the Company's Class A and Class B common stock is entitled to
one vote per share and ten votes per share, respectively. Each share of Class B
common stock is convertible into one share of Class A common stock at any time
at the option of the stockholder, and certain restrictions exist upon the
transfer of Class B common shares.
In May 1996, the shareholders of the Company approved a one-for-two reverse
stock split of the Company's Class A and Class B common stock through approval
of an amendment to the Certificate of Incorporation of the Company, pursuant to
which each authorized and outstanding share of Class A common stock would have
been reclassified into one-half of a new share of Class A common stock and each
authorized and outstanding share of Class B common stock would have been
reclassified into one-half of a new share of Class B common stock (the "Reverse
Stock Split"). Subsequent to approval by the shareholders, the Board of
Directors determined that such action was not in the best interests of the
Company and its shareholders and elected not to effectuate the Reverse Stock
Split.
(13) COMMITMENTS AND CONTINGENCIES
LETTERS OF CREDIT
At December 31, 1996, letters of credit totaling approximately $1,012,000
had been provided by the Company to its insurance carrier in connection with its
workers' compensation, general liability, and auto liability insurance policies.
Additionally, the Company has provided a letter of credit to the Texas Natural
Resource Conservation Commission ("TNRCC") in the amount of approximately
$167,000 to secure the payment of fines assessed Gibraltar by the TNRCC in
connection with the December 1994 settlement of certain litigation.
REGULATORY ENFORCEMENT ACTION AND LAWSUIT
In November 1993, the State of Texas filed a lawsuit against Gibraltar
stemming from an enforcement action by the TNRCC alleging certain regulatory
violations. The lawsuit was subsequently amended to include certain notices of
violation issued by the TNRCC and allegations of noncompliance associated with
certain regulatory orders. In July 1994, this litigation was tentatively settled
through mediation and an
F-22
MOBLEY ENVIRONMENTAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(13) COMMITMENTS AND CONTINGENCIES (CONTINUED)
Agreed Final Judgment was subsequently entered in December 1994. Under the terms
of the judgment, Gibraltar was obligated for $1,150,000 in assessed fines and
attorneys fees. Of such amount, $450,000 was paid by AEC and the Company is
responsible for payment of the remaining $700,000. As of December 31, 1996, the
Company had paid all but $167,000 of such amount, which is due in June 1997 and
included in "accrued expenses" in the December 31, 1996 consolidated balance
sheet (note 8).
LITIGATION AND VARIOUS OTHER CLAIMS
The Company continues to defend various claims resulting from the operations
of its former subsidiary, Gibraltar (the sale of which is discussed in note 3).
As of February 28, 1997, six such lawsuits were pending, one of which is
asserted as a class action. During the Company's ownership of Gibraltar,
Gibraltar engaged in the collection, transportation, analysis, treatment,
management, and disposal of various types of hazardous wastes. In the actions
pending against the Company and/or Gibraltar, the plaintiffs complain of a
variety of acts by Gibraltar which allegedly occurred in the course of its
operations, including improper air emissions, nuisance odors, contamination of
water supplies, and repeated and continuing violations of environmental laws. In
the various pending actions, plaintiffs assert similar theories as the alleged
basis for recovery, including negligence, nuisance, trespass, fraudulent
concealment, assault and battery, and international infliction of emotional
distress. Likewise, such plaintiffs seek similar types of damages, including
loss of property value and compensatory and punitive damages for personal injury
and property damage for nuisance odors, physical discomfort and impairment,
interference with use and enjoyment of property, medical expenses, mental
anguish, and loss of earning capacity. An additional claimant seeks permanent
closure of the facility and civil penalties as the remedy for alleged violations
by Gibraltar of environmental protection statutes and endangerment to public
health and the environment. While all of the six actions are technically
pending, in one such action, the Company has defended the subject claims in a
jury trial which resulted in inconsequential damages being awarded to the
plaintiffs on November 7, 1996. However, the verdict is subject to appeal in
accordance with the applicable rules of civil procedure.
These matters raise difficult and complex factual and legal issues,
including but not limited to, the nature and amount of the Company's liability,
if any. Although the Company is a defendant in some litigation, in other matters
the Company's potential liability arises from material contractual
indemnifications given by the Company to the purchaser of Gibraltar. In
particular, in connection with the sale of Gibraltar, the Company made extensive
representations and warranties regarding Gibraltar and agreed to indemnify the
purchaser, AEC, for any breaches of such representations and warranties.
Additionally, the Company is obligated to indemnify AEC for certain claims
against Gibraltar arising from circumstances existing on or prior to the closing
of the sale, including various claims and proceedings disclosed to AEC. The
Company's indemnification obligations to AEC expired June 30, 1996, except in
the case of tax, environmental and ERISA claims, for which any claims for
indemnification must be asserted prior to June 30, 1998. These indemnifications
may include the potential liability of former customers of Gibraltar,
approximately 50 of which have also become defendants in litigation involving
Gibraltar's operations. The Company's contractual indemnity obligations to AEC
also encompass various pending regulatory and permit renewal proceedings. The
failure of Gibraltar to prevail in these matters could result in significant
liabilities to the Company.
The Company has been notified by its insurance carrier that it disputes the
Company's interpretation of its pollution liability insurance coverage and
policy limitations applicable to the foregoing claims. While
F-23
MOBLEY ENVIRONMENTAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(13) COMMITMENTS AND CONTINGENCIES (CONTINUED)
the Company is vigorously pursuing a favorable resolution of this dispute, it is
unable to determine the likelihood of an unfavorable outcome at this time.
The Company, based on consultation with its legal counsel, believes that it
is probable that the Company will continue to incur certain costs associated
with the foregoing matters and accordingly, in connection with the divestiture
of Gibraltar in 1994, established an accrual for estimated out-of-pocket
expenses related to the ongoing administrative management of such matters (notes
3 and 8). However, the Company is currently unable to reasonably estimate its
potential exposure for defending such matters, any indemnity obligations
resulting therefrom, and any corresponding insurance reimbursement. As noted
above, the litigation matters to which the Company is a party raise several
difficult and complex factual and legal issues. More specifically: (i) while
certain of the plaintiffs exhibit apparent physical injury and a variety of
health problems, the requisite causal connection to Gibraltar's facilities or
operations has not been established; (ii) certain of the cases involve literally
hundreds of plaintiffs whose physical condition and medical history have not yet
begun to be investigated; (iii) although the Company has experienced some degree
of success recently in two separate jury trials, there is inherent uncertainty
associated with jury trials in cases such as these which tend to have a strong
emotional appeal; (iv) the extent of pollution liability insurance coverage
available to the Company for potential indemnity exposure and defense costs is
currently in dispute and is itself the subject of pending litigation as noted
previously; (v) the Company's potential liability relating to defense cost
claims of approximately 50 of Gibraltar's former customers who have also been
named in the litigation (and who are represented by over 20 different law firms)
is currently not determinable; and (vi) the indemnifications given to AEC in
connection with the Gibraltar sale are comprehensive and subject to broad
interpretation. Accordingly, the Company has not made an accrual for losses, if
any, which might result from these legal matters as such amounts or a range of
amounts are not currently reasonably estimatable. The Company's future financial
condition, results of operations, and liquidity could be materially adversely
affected as the nature and scope of the Company's ultimate liability arising
from Gibraltar's operations and sale become better defined.
In January 1996, Mobley was notified by the TNRCC that it is a potentially
responsible party of the alleged release, during the early or mid-1980s, of
hazardous substances at the McBay Oil and Gas State Superfund Site located near
Grapeland, Texas. The Company has recorded an accrual for its estimated exposure
in connection with this matter, the amount of which is not material to the
consolidated financial statements.
There are various other routine claims and legal actions pending and
threatened against the Company which are incidental to the Company's business
and have arisen in the ordinary course of its business related to services,
contracts, employment, and other matters. Where applicable, the Company has
recorded accruals for estimated potential damages and expenses associated with
such matters. While the final outcome of these matters cannot be predicted with
certainty, management, upon consultation with legal counsel, and considering the
Company's limited continuing activities, believes that financial obligations of
the Company arising from such claims could have a material adverse effect on its
consolidated financial condition, results of operations, or liquidity.
F-24
MOBLEY ENVIRONMENTAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(14) SUPPLEMENTAL CASH FLOW INFORMATION
[Enlarge/Download Table]
1996 1995 1994
--------- --------- ---------
(IN THOUSANDS OF DOLLARS)
Interest paid, net of amounts capitalized............................. $ 261 $ 32 $ 199
Noncash operating activities--provision for foreign currency
translation loss.................................................... -- 155 700
Included in the total interest paid for the year ended December 31, 1994, is
$12,000, related to Gibraltar.
(15) QUARTERLY FINANCIAL DATA (UNAUDITED)
Summarized consolidated quarterly financial data for 1996, 1995, and 1994 is
as follows (in thousands of dollars, except per share amounts):
[Enlarge/Download Table]
QUARTER
------------------------------------------
1ST 2ND(1) 3RD(2) 4TH(3)
--------- --------- --------- ---------
1996
Revenues............................................ $ 4,507 $ 4,670 $ 5,751 $ 6,652
Gross profit........................................ 901 1,105 1,221 1,106
Operating loss...................................... (690) (284) (1,056) (212)
Net income (loss)................................... (672) (491) (9,117) 45
Net income (loss) per common share.................. (0.08) (0.06) (1.03) 0.01
1995
Revenues............................................ $ 4,206 $ 4,763 $ 4,904 $ 4,715
Gross profit........................................ 1,487 1,603 1,630 1,011
Operating income (loss)............................. 117 142 195 (1,758)
Net income (loss)................................... 81 (254) 233 (1,523)
Net income (loss) per common share(4)............... 0.01 (0.03) 0.03 (0.17)
1994
Revenues............................................ $ 6,955 $ 7,273 $ 7,100 $ 8,182
Gross profit........................................ 1,460 1,616 1,288 1,730
Operating income (loss)............................. 63 (2,394) 159 (1,217)
Net income (loss)................................... 98 (2,452) 79 (1,820)
Net income (loss) per common share.................. 0.01 (0.31) 0.01 (0.23)
------------------------
(1) Second quarter 1994 results of operations include a charge of $2,470,000
related to an additional provision for loss on the divestiture of Gibraltar.
(2) Third quarter 1996 results of operations include charges of $7,952,000
related to provisions for loss on disposal and provision for losses during
phase-out period of waste management services segment. In addition, charges
of $650,000 related to restructuring expenses including employee severance
obligations, costs associated with the relocation and recruitment of
personnel, and other related expenses are included in third quarter 1996
results of operations.
F-25
MOBLEY ENVIRONMENTAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(15) QUARTERLY FINANCIAL DATA (UNAUDITED) (CONTINUED)
(3) Fourth quarter 1995 results of operations include certain nonrecurring
expenses totaling $1,162,000, including insurance accruals, severance
expenses, relocation expenses, legal and consulting expenses, and a
write-down of the carrying value of an office building to its estimated net
realizable value.
Fourth quarter 1994 results of operations include a charge of $1,622,000 for
certain estimated liabilities in connection with the Company's indemnity
obligations related to the sale of Gibraltar.
(4) The sum of the 1995 quarterly per share amounts does not equal the per share
amount for the year due to the effect of the issuance of common stock on the
weighted average number of common shares outstanding.
F-26
Dates Referenced Herein and Documents Incorporated by Reference
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