SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10K
ANNUAL REPORT PURSUANT TO SECTION 113 OF 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended April 30, 1997, Commission File #0-8006
ENERGY RESERVE, INC.
(Exact name of registrant as specified in its charter)
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Arizona 86-0220617
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(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification #)
100 West Clarendon, Suite 450, Phoenix, Arizona 85013
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(Address of Principal Executive Offices)
Registrant's telephone number, including area code: (602) 264-1897
Securities registered pursuant to Section 12 (b) of the Act: (None)
Securities registered pursuant to Section 12 (g) of the Act: (None)
Common stock, without par value
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(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 [X]
State the aggregate market value of the voting stock held by non-affiliates for
the registrant's (the aggregate market value shall be computed by reference to
the price at which the stock was sold, or the average bid and asked prices at
which the stock was sold, or the average bid and asked prices of such stock, as
of a specified date within 60 days prior to the date of filing.)
$2,687,188 at July 1, 1997
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Indicate the number of shares outstanding of each of the registrant's classes of
common stock, as of the latest practicable date (applicable only to corporate
registrants.)
19,905,188 as of July 1, 1997
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Documents incorporated by reference: List the following documents if
incorporated by reference and the part of the Form 10-K into which the document
is incorporated: (1) any annual report to security holders; (2) any proxy or
information statement; and (3) any prospectus filed pursuant to Rule 4249B) or
(C) under the Securities Act of 1933. (The listed documents should be clearly
described for identification purposes.)
<PAGE>
ENERGY RESERVE, INC.
PART I
ITEM 1. DESCRIPTION OF BUSINESS
(a) GENERAL DEVELOPMENT OF BUSINESS
Energy Reserve, Inc. (the Company) has been primarily engaged in the
business of acquiring, developing, and selling oil properties, and of producing
and selling crude oil for its own account in the United States. As such the
Company has not and does not engage in refining or retail marketing operations.
As of November 1, 1994 the Company acquired 100 percent ownership of Transit
Services, Inc., a manufacturer and distributor of temperature recording
instruments.
The Company was incorporated as Mericle Oil Company in July 1968, under
the laws of the Sate of Arizona. The name was changed to Energy Reserve, Inc. in
August, 1975. Its executive offices are located at 100 West Clarendon, Suite
450, Phoenix, Arizona 85013, and its telephone number is (602) 264-1897. Except
where the context otherwise indicates, all references to the "Company" are to
Energy Reserve, Inc. and its wholly owned subsidiaries, Twin-Chart, Inc. its
wholly owned subsidiary Transit Services, Inc., ERES Cogenics, Inc., Energy
Reserve Financial Corporation, Energy Reserve Holdings, Inc. and National
On-Site Check Cashing Inc. Of Arizona, a 75% owned subsidiary.
(b) FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS
The Company has two industry segments: (1) crude oil production and
development; and (2) production and distribution of temperature recording
devices. The following table summarizes the assets, revenues and operating
results attributable to the Company's operations by industry segments for the
date and periods indicated.
1997 1996 1995*
---- ---- ----
Revenues
(1) Oil production-Y/E 4/30 $ 9,647 $ -0- $ -0-
(2) Temperature recorders-Y/E-4/30* $7,444,170 $6,864,519 $ 3,010,282
Operating profit or loss:
(1) Oil production-Y-E 4/30 $1,013,248 $ 116,138 $ (288,037)
(2) Temperature recorders-Y/E-4/30* $(142,607) $ 51,883 $ 373,525
Identifiable assets
(1) Oil production-Y/E 4/30 $3,811,149 $3,756,947 $3,775,452
2) Temperature recorders-4/30 $3,142,207 $2,798,723 $2,186,470
* The temperature recorder industry segment was not a part of Company operations
until 11/1/94 (6 months period).
(c) NARRATIVE DESCRIPTION OF BUSINESS
OIL PRODUCTION OPERATIONS
The Company's oil activities include the drilling of development wells and
the development and operation of such properties for production of oil. Since
1980, the Company has principally financed these activities by borrowings, sales
of non-operating assets, issuances of its common stock and from operations.
During the three years covered by this report the Company has only had crude oil
production or sales in March 1997, when production sales were reactivated..
In 1986, as a means to maximize production through steam enhancement of
its significant heavy crude (130 API) reserves, the Company undertook a project
to construct a Cogeneration (COGEN) and Thermal Enhanced Oil Recovery (TEOR) at
its oil leases in the Chico-Martinez field, Kern County, California. The
COGEN/TEROR facility as contracted with Pacific Gas & Electric Company(PG&E), a
California public utility, was a 45 MW project consisting of two phases; Phase
One being 20.5 MW and Phase Two being 24.5 MW. Problems arose with PG&E,
principally dealing with the power transmission routing and inter-connection,
which prevented the Company from meeting the contract deadline.
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The present status, including a complaint filed with the California Public
Utilities Commission against PG&E, and the future plans of the Company
pertaining to it oil production and the COGEN/TEOR operation are discussed under
the respective properties captions elsewhere in this report under Item 2.,
Description of Properties - Mitchel and Bacon Hills leases. The Company's plans
to augment it's oil operations in California include by late 1997, a 10 to 14
well enhanced oil recovery project at the Chico-Martinez Field. The project will
be a "Qualified Enhanced Oil Recovery Project" as defined by the Omnibus Budget
Reconciliation Act of 1990 with resultant entitlements of substantial federal
income tax benefits. The organizational structure of the enhanced oil project
will be such as to enable investor financing of the project.
Actual drilling operations are not undertaken by the Company, but are
conducted by third-party drilling contractors. The Company, however, may act as
operator of such projects, thereby supervising exploration, drilling, and
production activities. Since 1980, virtually all of the Company's development
activities have been on its Kern County Leases which the Company acquired by
cash and/or issuance of shares of its common stock to be held for investment(
investment shares) .
The source and availability of raw materials are not critical or
significant factors in the oil production operations of the Company.
The operations of the Company are non seasonal
The Company does not and is not required to carry significant amounts of
inventory for its oil operations and neither Company nor industry practices
provide extended payment terms to customer.
The oil operations of the Company are not dependent upon a single or a few
customers, nor would the loss of any one customer have a materially adverse
effect upon the earnings or financial position of the Company.
Backlog of orders is not a factor in the crude oil operations of the
Company.
The oil and gas industry is extremely competitive and involves risk. The
Company is a minor factor in the petroleum and natural gas industry as regards
its development and production activities. The ability of the Company to market
oil and gas produced from its propitious or from those which may be subsequently
acquired depends on numerous factors beyond the control of the Company,
including the extent of production and imports of oil and gas into the United
States, the proximity and capacity of oil and gas pipelines, the availability of
other transportation facilities, the marketing of competitive fuels, the effect
of governmental regulations on the production of oil and gas and other matters
affecting the availability of a ready market, such as fluctuation supply and
demand.
Governmental agencies of the United States maintain a close watch on the
ecological impact of development activities and the possibility of ecological
disturbances. Such measures may substantially increase the cost of developing
and producing oil and gas and may prevent or delay the commencement or
continuance of a given operation. In the opinion management of the Company, its
operations comply with applicable legislation and regulations. the existence of
such regulation has had no material effect on the Company's operations and the
cost of such compliance has not been material to date. The cost and effect on
operations of compliance with future environmental laws and regulations cannot
be predicted, and such measures may have an effect on the capital investment or
the net revenues resulting from the Company's activities.
TEMPERATURE RECORDER OPERATIONS
The Company's temperature recorder activities include production and
distribution of transit temperature recording instruments. These instruments,
known as temperature recorders, are self contained battery powered and designed
to created a graphical "time vs. temperature" record.
The recorders are marketed under the trade name Cox Recorders and produce
a record which is documentary proof of temperature conditions useful for
compliance with governmental regulations, the monitoring performance of
refrigerated carriers, and for claims in the transport of valuable perishables
such as produce, meat, pharmaceuticals, chemicals, live plants and animal
material.
The Company produces two separate graphic recorders. The COX1 and COBRA
are single-channel recorders which record the air temperature in the truck or
container. The COBRA is a new low-cost recorder with a transparent case which
allows viewing of the temperature record without opening the case itself. Both
are used primarily in transit monitoring of temperature variations.
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In addition to these graphic temperature recorders, the Company
manufactures an electronic temperature recorder, or "data logger", named the
LYNX. The LYNX delivers its data via a cable link to a PC computer using
specialized software. LYNX is used in quality control and safety applications in
the foods industries and also in shipping. The shipping configuration is a new
design with an integral mailer pack that has patents pending.
The source and availability of raw materials are not critical or
significant factors in the temperature recorder operations of the Company.
The temperature recorder operations of the Company are non seasonal.
The Company does and is required to carry significant amounts of inventory
for its temperature recorder operations and neither Company nor industry
practices provide extended payment terms to customers.
The temperature recorder operations of the Company are not dependent upon
a single or a few customers, nor would the loss of any one customer have a
materially adverse effect upon earnings or the financial position of the
Company.
Backlog of orders is not a major factor in the temperature recorder
operations of the Company.
The Company is a major competitor in the temperature recording industry as
regards its production and distribution activities.
The Company does not maintain company owned distribution entities. All
distributors are on contract and major distributors are located in Copenhagen,
Singapore and Melbourne. All other distribution and sales operations are through
individual sales persons operating on a sales commission basis or a salary plus
incentive basis.
The product lines include a portable penetration probe thermometer which
is retailed but not manufactured by the Company. The Company also performs
contract manufacturing.
The COX1 product accounts for 90% of the Company's business. The balance
is due to probes and retail sales of other temperature monitoring products which
are not manufactured. The COBRA and LYNX products are new and no substantial
volume has yet been achieved.
ITEM 2. DESCRIPTION OF PROPERTIES
The Company owns working interests in certain developed oil and gas
properties in the United States. Developed acreage consists of properties on
which oil and gas wells have been drilled which are capable of producing crude
oil or natural gas.
The Company's principal oil and gas properties are the Mitchel and Bacon
Hills leases previously referred to in this report. Following is a description
of each of these principal oil and gas properties:
MITCHEL LEASES
These subleases, located in the Chico-Martinez field, Kern County,
California, were acquired in 1969 and consist of 380 acres in which the Company
has interests to a depth of 2,000 feet on 320 acres and to a depth of 2,500 feet
on 60 acres. The Company owns a 78.33 percent working interest in these
subleases, with 52 completed oil wells which were unitized in 1976 and which
produce from the 500 to 1,600 foot levels. Production interest of others in
these wells was 1.1 percent at April 30, 1995, 1996 and 1997. The oil produced
is heavy crude of approximately 12.7 API gravity. The Company has no drilling
requirements under the subleases, which are held by production. There was no
crude oil production on these leases during the three years ended April 30, 1997
until March 1997.
BACON HILLS LEASE
In March 1990, the sublessor declared this sublease terminated and
requested return of the underlined portion of the sublease. The Company does not
acknowledge the declaration of termination and has not complied with the
sublessor's request. To date, no litigation, action or further request has been
undertaken by the sublessor in a connection with this matter. The Company
retains and holds five acre well tract and the oil and gas rights to each of
fourteen wells drilled on this sublease.
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This sublease, located in the Chico-Martinez field, Kern County,
California, was acquired in December, 1980 and consists of approximately 260
acres, 1 which the Company has interests to the depth of 5,000 feet. The
landowners' and overriding royalty interest holders are identical with the
Mitchel leases which total 21.67 percent and the Company owns the remaining
78.33 percent working interest in this lease. The acquisition of this sublease,
in conjunction with the Mitchell subleases, provided the Company with an entire
leasehold interest in a full section of land.
Under the terms of this sub-lease, the Company committed to the drilling
of an initial six wells on or before March 31, 1982, and at least six additional
wells each 12-month period thereafter, until at least 52 wells have been drilled
without regard to whether they are producing or abandoned. The Company has
drilled a total of 14 wells under its commitment. No wells have been drilled on
this lease since 1984.
COGENERATION SYSTEM AND THERMALLY ENHANCED OIL RECOVERY OPERATION
As previously mentioned in 1(a) and (c), the major activity of the Company
during the past ten years has been directed toward the implementation of the
COGEN/TEOR Project on the Mitchel leases which would be capable of serving the
combined Mitchel and Bacon Hills leases with a steam flood enhanced oil recovery
operations and provide for the sale of power to a California public utility
company. ERES Cognacs, Inc., a wholly owned subsidiary was formed in August 1987
to be the builder/owner/operator of the COGEN/TEROR facilities. The Company
signed a power purchase agreement with Pacific Gas and Electric Company for the
delivery to the utility of 20.5 megawatts of electricity by a date no earlier
than June 1, 1989 and no later than December 24, 1991. The agreement further
provided for delivery and purchase of up to 45 megawatts of power in later
years. Contracts were signed for negotiated with responsible and experienced
suppliers, supervision, natural gas delivery, maintenance and operation and the
TEOR installation, including the laying of steam lines for the steam flood
operations.
As stated earlier in 1(c) under oil operations, certain problems arose
with the public utility which rendered the Company unable to satisfy the power
purchase contract requirements by the December 24, 1991 deadline. The public
utility denied a request for deferral of the deadline date.
The Company filed a complaint with the California Public Utility
Commission (CPUC) requesting continuation of the power purchase agreement. The
matter was heard by the CPUC in October 1993 and a decision in this litigation
is still pending as of the date of this report Refer to Note M, "Commitments,
litigation and contingencies" of the Notes to Consolidated Financial Statements
incorporated herein by reference.
The Company intends to continue operations and development of the
Chico-Martinez oil field regardless of the outcome of the complaint filed with
the CPUC and as previously stated, the Company proposes to accomplish this with
a "Qualified Enhanced Oil Recovery Project" presently being structured by the
Company.
The tables below set forth by State the gross and net developed acreage
and the gross, net, and revenue net productive wells of all oil and gas
properties of the Company at April 30, 1997.
(a) "Gross Acreage" represents all acres in respect to which the Company
has a working interest, "Net Acreage" represents the aggregate of the working
interest of the Company in the gross acreage.
Acreage (a)
--------------------
Gross
Location Held By Expires Developed Net
-------- ------- ------- --------- ---
California
Mitchel Production Indefinite 380.00 297.65
*Bacon Hills Production * 70.00 54.83
------ ------
450.00 352.48
* Reference is made to the descriptions of the Mitchel and Bacon Hills leases
previously discussed in this Item 2 concerning the status of the leases and
certain drilling commitments required of the Compnay pertaining to the
California leases.
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(b) "Gross Wells" represents the total number of wells which the Company
has a working interest; "Net Wells" represents the number of gross wells
multiplied by the percentages of the working interests therein owned by the
Company. "Revenue Net Wells" represents the number of gross wells multiplied by
the percentages of the participating production interests therein retained by
the Company.
OIL WELLS
Revenue
Location Gross Net Net
-------- ----- --- ---
California 62.0 48.6 48.6
During the past five fiscal years, the Company has not drilled any oil or
gas wells.
The Company is not obligated under any existing contracts or agreements to
provide a fixed and determinable quantity of oil and gas in the future.
The latest independent petroleum studies and reports for the Kern County,
California leases were by Douglass Petroleum Management Co., Bakersfield,
California as follows: (1) Comprehensive Reservoir Engineering Study dated
February 1986 which estimated the recoverable oil reserves at 21,103,341
barrels, and (2) a Steam Flood Development Plan, dated June 1987 which sets
forth a plan including drilling and production costs for recovery of the oil
reserves. The Company has not filed any reports concerning oil and gas reserve
estimates with any regulatory authorities or agency other than the Securities
and Exchange Commission.
The net production of oil and gas for each of the last five years is shown
below. Net production represents the gross production after deduction for
royalties of other parties.
OIL/BBDS
--------
1997 500
1996 - 0 -
1995 - 0 -
1994 - 0 -
1993 - 0 -
None of the net production during each of these years is applicable to
long-term supply or similar agreements with foreign governments or authorities
in which the Company acts as producer.
ITEM 3. LEGAL PROCEEDINGS
Disclosure of legal proceedings is contained in Note M, "Commitments,
litigation and contingencies," of the Notes to Consolidated Financial Statements
incorporated herein by reference.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS
Not applicable.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
(a) MARKET INFORMATION FOR COMMON STOCK
The Company's common stock is traded in the nationwide over-the-counter
market and is listed in the pink sheets provided by the National Quotation
Bureau, Inc.
The range of high and low bid quotations for each quarterly period during
the past four years ended April 30, based upon information provided to the
Company by the National Association of Securities Dealers or market makers in
the Company's stock, was as follows:
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1997 1996 1995 1994
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HIGH LOW HIGH LOW HIGH LOW HIGH LOW
---- --- ---- --- ---- --- ---- ---
First Quarter 1/4 1/4 5/8 3/8 3/16 7/64 3/16 7/8
Second Quarter 1 1/4 1/8 5/8 5/16 3/16 1/8 3/16 1/8
Third Quarter 13/16 3/8 5/8 5/16 7/16 3/16 3/16 1/8
Fourth Quarter 3/4 3/8 1/2 5/16 5/8 3/8 3/16 7/64
(b) APPROXIMATE NUMBER OF EQUITY SECURITY HOLDERS
As of April 30, 1997 the approximate number of holders of record of each
class of equity securities of the Company was as follows:
Common Stock, no par value 3,000 (1)
(1) Included in the number of stockholders of record are shares held as
"nominee" or "street name.
(c) DIVIDENDS
The Company has not declared any dividends during the past three years
ended April 30, 1995 through 1997.
ITEM 6. SELECTED FINANCIAL DATA
Following is a summary of selected financial data for each of the last
three fiscal years ended April 30:
1997 1996 1995
---- ---- ----
Operating Revenues $7,453,817 $6,864,519 $3,010,282
Profit (loss) from
continuing operations 1,004,333 207,638 196,381
Profit (loss) from
continuing operations
per common stock 0.05 0.01 0.01
Total assets 6,953,356 6,555,670 5,961,922
Long-term obligation 358,686 465,895 165,242
Cash dividends declared
per common share -0- -0- -0-
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES
Based upon its Twin-Chart subsidiary's operations and the proven developed
and the undeveloped reserves of the Mitchel and Bacon Hills leases, the Company
anticipates cash from operations, equity investment, production participation
sales, and borrowing from long-term lending sources adequate to meet cash
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requirements. At present, cash flow from operations is adequate to meet cash
requirements and commitments of the Company. However, the Company intends to
enter into equity, debt of other financing arrangements to meet its further
financial needs for expansion and:
(a) To resume and continue drilling and work over activities at its
Chico Martinez oil field.
(b) To repay outstanding current liabilities;
(c) To provide for general working capital needs;
COMPARISON OF OPERATIONS FOR 1997 AND 1996
Operations for the years ended April 30, 1997 resulted in a net profit of
$870,641. This is a $702,618 or 418% improvement over the prior year ended April
30, 1996.
This gain was primarily the result of increased income from operations of
$499,714 and a $296,981 improvement in other income sources.
The following schedule reflects the two company segments for the years
ended April 30, 1997 and 1996:
Y/E 1997 Y/E 1996
------------------------ ------------------------
Oil Temperature Oil Temperature
Production Recorders Production Recorders
---------- --------- ---------- ---------
Previous Sales $ 9,647 $ -0- $6,864,519
Management fees 1,117,291 480,000 -0-
Cost of sales 3,649 3,472,256 6,715 3,525,156
General & Admin 88,915 2,862,982 62,076 2,129,384
Sales Expense -0- 1,052,164 -0- 1,004,953
Interest 24,249 40,851 45,709 42,028
Depreciation 3,977 39,946 3,977 39,116
Income(loss) opens 1,006,148 (21,029) 361,523 123,882
Other income (expense) 140,792 (121,578) (245,387) (32,380)
Income taxes 133,692 -0- -0- 39,617
Net earnings (loss) $1,013,248 $ (142,607) $ 116,138 $ 51,885
OIL PRODUCTION
The oil production segment reflects a net earnings for the year ended
April 30, 1997 of $1,013,248 as compared to a net earnings of $116,138 for the
prior year. This $839,110 improvement is due to the management fee income to the
parent corporation from its subsidiary temperature recorder corporation.
Th only oil production sales for either of the past two years was
approximately 500 bonds sold in March 1997. As disclosed elsewhere in this
report, the oil field operations have been inactive for several years due to
litigation involving the Company's cogeneration project. Production operations
have been reactivated in the last quarter of the 1996-1997 fiscal year.
General and administrative expenses increased $26,839 or 43% due primarily
to legal costs of $8,000 and increases in salaries, rentals and insurance
expenses of approximatley $19,000.
Interest expense declined due to debt reduction. Other income in 1997 of
$140,792 was the result of the settlement of liabilities at less than the
recorded liability.
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TEMPERATURE RECORDERS
Sales were up approximately 8.5% for the current year over the prior year.
There was a slight decrease in cost of sales.. These two factors resulted in an
improvement in gross margin on sales by $632,551 for 1997. The gross margin on
sales in 1997 was $3,971,914 as compared to $3,339,363 for 1996.
All categories of operating expenses, except general and administrative
expense, remained relatively constant between the two years. The increase in
general and administrative expense was due primarily to the increase in
management fees to the parent corporation
Reference is made to Note 1 - Acquisition of Twin Chart, Inc., of notes to
Consolidated Financial Statements which sets forth comparative operations and
financial statements which sets forth comparative operations and financial
statements of that corporation for the year ended April 30, 1997 and 1996.
COMPARISON OF OPERATIONS FOR 1996 AND 1995.
Operations for the years ended April 30, 1996 resulted in a net profit of
$168,021. This is an $82,533 or 96.5% improvement over the prior year ended
April 30, 1995.
This gain was primarily the result of a twelve-month operations of the
temperature recorder subsidiary for the 1995-1996 year as compared to only a
six-month period of operations for the 1994-1995 year.
The following schedule reflects the two company segments for the years
ended April 30, 1996 and 1995.
Y/E 1996 Y/E 1995
------------------------ ------------------------
Oil Temperature Oil Temperature
Production Recorders Production Recorders
---------- --------- ---------- ---------
Previous Sales $ -0- $6,864,519 $ -0- $3,010,282
Management fees 480,000 -0- -0- -0-
Cost of sales 6,715 3,525,156 33,812 1,210,920
General & Admin 62,076 2,129,384 224,329 768,872
Sales Expense -0- 1,004,953 -0- 470,291
Interest 45,709 42,028 39,344 14,317
Depreciation 3,977 39,116 3,195 24,021
Income(loss) opens 361,523 123,882 (300,680) 521,861
Other income (expense) (245,387) (32,380) 13,443 (38,243)
Income taxes -0- 39,617 800 110,093
Net earnings (loss) $ 116,138 $ 51,885 $(288,037) $ 373,525
The oil production segment reflects a net earnings for the year ended
April 30, 1996 of $116,138 as compared to a net loss of $288,037 for the prior
year. This $404,175 improvement is due to the management fee income to the
parent corporation from its subsidiary temperature recorder corporation.
There were no oil production sales for either of the past two years and,
as disclosed elsewhere in this report, the oil field operations have been
inactive for several years due to litigation involving the Company's
cogeneration project.
All categories of operating expense except interest and depreciation
expense declined for the current year as compared to the prior year. There was
reduced maintenance costs at the field and the executive salaries, legal and
accounting expense reductions accounted for the decrease in general and
administrative expense.
Other expense of $245,387 for the year ended in 1996 was the result of the
sale of securities at a realized loss of $275,732. The company had previously
provided a charge to equity of $287,850 as an unrealized loss on these
securities as of April 30, 1995.
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The temperature recorder operations of the Company for the two years ended
April 30, 1996 and 1995 do not contain comparative periods of operations. The
year ended in 1995 contains only seven months, while the year ended in 1996
contained twelve months. Reference is made to Note H-Acquisition of Twin-Chart,
Inc., of Notes to Financial Statements which sets forth comparative Statements
of Income and Retained Earnings of that corporation for the years ended April
30, 1996 and 1995. As disclosed by Note H, there is an annual increase in sales
which is due to expanding markets and an increased market share by the Cox
recorders. The increase in general and administrative expenses of $480,795 for
1996 over 1995 was attributable to the management fee to the parent corporation.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See Part IV
ITEM 9. DISAGREEMENT OF ACCOUNTING AND FINANCIAL DISCLOSURE
None
TEM 10. DIRECTORS AND EXECUTIVE OFFICERS
(a) IDENTIFICATION OF DIRECTORS
The following table lists certain information concerning the directors of
the Company:
Name, Positions and Director Term Certain Other
Offices With Registrant Age Since Expires Corporations
- ----------------------- --- ----- ------- ------------
Alfred P. Sprenger,
Chairman of the Board
and Chief Executive Officer 69 1968 (1) (2)
James L. Cox,
President and Chief
Operating Officer 52 1995 (1) (3)
(1) Serve until next meeting of the Company's stockholders.
(2) Serves as the sole trustee of the Liquidating Trusts for Progressive
Investment Corporation (PIC) and PIC Research & Development Corp.
(3) Serves as President and Chief Executive Officer of the Company's subsidiary,
Twin-Charts, Inc.
(b) IDENTIFICATION OF EXECUTIVE OFFICERS
Executive
Name, Positions and Director Term Certain Other
Offices With Registrant Age Since Expires Corporations
- ----------------------- --- ----- ------- ------------
Alfred P. Sprenger,
Chairman of the Board
and Chief Executive Officer 69 1969 (1) (2)
James L. Cox,
President and Chief
Operating Officer 51 1995 (1) (3)
David Caskey
Secretary-Treasurer 35 1997 (1) (4)
(1) Serves until replaced by the Board of Directors.
(2) Serves as the sole trustee of the Liquidating Trusts for Progressive
Investment Corporation (PIC) and PIC Research and Development (PIC & R&D).
(3) Serves as President and Chief Executive Officer of Company's subsidiary,
Twin-Chart, Inc. and Transit Services, Inc.
(4) Served as Secretary-Treasurer of Company's subsidiaries, Twin-Chrt, Inc.,
and Transit Services, Inc.
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(c) BUSINESS EXPERIENCE
Mr. Alfred Sprenger has been a director of the Company since its
incorporation. He served in the capacity as President and Chief Operating
Officer from 1969 to August 1, 1995. He served in identical capacities in the
two affiliated corporations, Progressive Investment Corporation (PIC) and PIC
Research and Development (PIC R&D) until December 1983 and now serves as the
trustee of the Liquidating Trusts for PIC and PIC and R&D.
Mr. James Cox has been an officer and director of the Company since August
1, 1995. He has served in the capacity of President and Chief Operating Officer
from that date to the present. He has served in identical capacities in the two
subsidiary corporations, Twin-Chart, Inc., and Transit Services, Inc., since
1986 and from 1977 to 1986, he served as Sales Manager and Executive
Vice-President of Transit Services, Inc. He holds a Ph.D. from Stanford
University and has held various teaching and research positions with Duke
University, Stanford Research Institute and University of California, Santa
Barbara.
In September 1996, Mr. David Caskey was elected Secretary/Treasurer of the
Company to replace Roger Sherer, who died in August 1996. Mr. Caskey has served
as Secretary/Treasurer in the two subsidiary corporations, Twin-Chart, Inc., and
Transit Services, Inc., since 1990. He holds a B.A. degree from Long Beach State
University and has been with the subsidiary corporations since 1987.
(d) INVOLVEMENT IN CERTAIN LEGAL PROCEEDINGS
Disclosure of legal proceedings is contained in Note M "Commitments,
Litigation and Contingencies," of the Notes to Consolidated Financial Statements
incorporated herein by reference.
ITEM II. MANAGEMENT REMUNERATION AND TRANSACTIONS
(a) Remuneration, on an accrual basis, paid to the executive
officers and directors of the Company during the year ended April 30, 1997, was
as follows:
(C)
Cash and Cash Equivalents
Forms of Remuneration
(C-2)
Securities
Or Property
(C-1) Insurance Aggregate
(A) Salaries, Fees Benefits Or Of
Name Of Individual (B) Director's Fees Reimbursement Contingent
Or Number Of Capacities In Commissions, Personal Forms Of
Persons In Group Which Served And Bonuses Benefits Remuneration
- ---------------- ------------ ----------- -------- ------------
Alfred P. Sprenger Chairman of -0- None None
the Board &
CEO
James L. Cox Director, $114,725 None None
President &
COO
David Caskey Director & $65,000 None None
Sec.-Treas.
Three All officers $179,725 None None
& Directors
(b) The Company does not have future plans to pay remuneration, directly
or indirectly, to any of the above officers or directors other that direct
salaries and bonuses as authorized by the Board of Directors.
11
<PAGE>
(c) The directors of the Company do not receive compensation for serving
in their capacity other than reimbursement of expenses incurred related to
company business.
(d) Transactions with management are disclosed in Note L of the Notes to
Consolidated Financial Statements incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table show as of April 30, 1997 the effective number of
shares of common stock of the Company owned by every person owning of record or
known by the Company as owning beneficially more than 5 percent of the
outstanding common stock.
(a) SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS (CONTINUED)
The number of shares and percentage ownership represents effective
ownership in the Company, including ownership through the affiliated
corporations liquidating trusts, Progressive Investment Corporation (PIC) and
PIC research and Development (PIC R&D).
(1) (4)
Title (2) (3) Percent
of Name and Address Amount and Nature of of
Class Beneficial Owner Beneficial Ownership Class
- ----- ---------------- -------------------- -----
Common Alfred P. Sprenger 895,800 shares 4.5%
stock, Energy Reserve, Inc. Record
no par 100 W. Clarendon
Suite 450
Phoenix, AZ
Common PIC Liquidating Trust 256,885 shares 1.9%
stock, 100 W. Clarendon Record and Beneficial
no par Suite 450
Phoenix, AZ
Common PIC R&D Liq. Trust 88,015 shares 1.2%
stock, 100 W. Clarendon Record
no par Suite 450
Phoenix, AZ
Common James L. Cox 4,587,000 shares 23.3%
stock, 100 W. Clarendon Record
no par Suite 450
Phoenix, AZ
Common Other Related Parties* 5,226,304 shares 28.8%
stock, Record and Beneficial
no par
* Comprised of individuals being certain Company employees and relatives,
friends and business associates of Mr. Sprenger.
For further information concerning ownership interests, see Note L,
"Related-party Matters, Ownership Interests," of the Notes to Consolidated
Financial Statements, incorporated herein by reference.
12
<PAGE>
(b) SECURITY OWNERSHIP OF MANAGEMENT
The following table shows as of April 30, 1997, all shares of the Company
stock and that of the affiliated corporations liquidating trusts, PICLT and PIC
R&DLT, beneficially owned by the three officers and directors of the Company as
a group:
(1) (4)
Title (2) (3) Percent
of Name and Address Amount and Nature of of
Class Beneficial Owner Beneficial Ownership Class
- ----- ---------------- -------------------- -----
Common Energy Reserve, Inc. 5,482,800 27.8%
stock,
no par
Common PIC Liquidating Trust -0-
stock,
no par
Common PIC R&D Liq. Trust -0-
stock,
no par
PART IV
ITEM 13. FINANCIAL STATEMENTS, FINANCIAL STATEMENT SCHEDULES, EXHIBITS AND
REPORTS ON FORM 8-K
(a) DOCUMENTS FILED AS PART OF THIS REPORT
LIST OF FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
Consolidated Financial Statements:
Balance sheets--April 30, 1997 and April 30, 1996
Statement of operations and accumulated deficit for the years ended
April 30, 1997, 1996 and 1995
Statement of shareholders' investment for the years ended April 30,
1997, 1996 and 1995
Statement of cash flows for the years ended April 30, 1997, 1996 and
1995
(b) REPORTS ON FORM 8-K
The following Forms 8-K have been filed by the Company for the year
covered by this report ended April 30, 1997:
None
13
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 of the Securities Exchange Act
of 1934, the Company has caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Dated:
ENERGY RESERVE, INC.,
an Arizona Corporation
7-19-97 By /s/ ALFRED P. SPRENGER
----------------------------------
Alfred p. Sprenger, Chairman of
the Board & Chief Executive Officer
7-19-97 By /s/ JAMES L. COX
----------------------------------
James L. Cox, President and
Chief Operating Officer
7-19-97 By /s/ ROBERT W. DUPREE
----------------------------------
R.W. Dupree, Controller and
Chief Financial 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 Company
and in the capacities and on the dated indicated:
Dated: Signature
7-19-97 /s/ ALFRED P. SPRENGER
----------------------------------
Alfred p. Sprenger,
Chairman
7-19-97 /s/ JAMES L. COX
----------------------------------
James L. Cox,
President and Director
14
<PAGE>
ENERGY RESERVE, INC. AND SUBSIDIARIES
REPORT ON AUDIT OF CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED APRIL 30, 1997 AND APRIL 30, 1996
<PAGE>
CONTENTS
PAGE
----
Independent Auditors' Report .......................................... 1
FINANCIAL STATEMENTS
Consolidated Balance Sheets........................................ 2
Consolidated Statements of Income and Accumulated Deficit.......... 3
Consolidated Statements of Stockholders' Equity.................... 4
Consolidated Statements of Cash Flows.............................. 5-6
Supplemental Schedule of Non-Cash Investing and
Financing Activities............................................. 7
Notes to Consolidated Financial Statements ........................ 8-34
<PAGE>
[LETTERHEAD OF BEDINGER & COMPANY]
INDEPENDENT AUDITORS' REPORT
June 19, 1997
Board of Directors
ENERGY RESERVE, INC.
Phoenix, Arizona
We have audited the accompanying consolidated balance sheets of Energy Reserve,
Inc., as of April 30, 1997 and 1996, and the related consolidated statements of
income and accumulated deficit and of cash flows for the years ended April 30,
1997, 1996 and 1995. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. These standards require that we plan and perform the audits 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 Energy Reserve,
Inc., at April 30, 1997 and 1996, and the results of its operations and cash
flows for the years ended April 30, 1997, 1996 and 1995, in conformity with
generally accepted accounting principles.
by /s/ Bedinger & Company
----------------------------
Certified Public Accountants
<PAGE>
ENERGY RESERVE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
APRIL 30, 1997 AND 1996
- --------------------------------------------------------------------------------
April 30
----------------------------
ASSETS 1997 1996
------------ ------------
CURRENT ASSETS:
Cash and cash equivalents $ 1,118,019 $ 614,356
Accounts receivable, less allowance for doubtful
accounts of $30,000 and $25,000 at April 30,
1997 and 1996, respectively 1,131,873 896,681
Inventory (Note B) 757,492 744,724
Investment in securities (Note C) 64,500 270,000
Notes receivable - current portion (Note D) 39,579 65,174
Prepaid expenses 10,508 8,811
------------ ------------
TOTAL CURRENT ASSETS 3,121,971 2,599,746
Property and equipment (Net) (Note E) 3,748,808 3,728,938
Deferred taxes (Notes A and F) 0 167,411
Deposits 3,890 3,890
Goodwill (Notes A, I and J) 78,687 55,685
------------ ------------
TOTAL ASSETS $ 6,953,356 $ 6,555,670
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued expenses (Note G) $ 489,740 $ 696,285
Income taxes payable (Note F) 400 400
Current portion of long-term debt (Note H) 585,859 577,234
------------ ------------
1,075,999 1,273,919
Long-term debt (Note H) 358,686 465,895
Minority interest (Note J) 2,674
------------ ------------
1,437,359 1,739,814
COMMITMENTS AND CONTINGENCIES (Note M)
STOCKHOLDERS' EQUITY
Common stock, no par value; authorized-
100,000,000 shares; issued and outstanding;
19,905,188 shares at April 30, 1997 and
19,555,188 shares at April 30, 1996 20,041,562 20,006,562
Contributed Capital 220,872 220,872
Accumulated deficit (13,665,287) (14,535,928)
Unrealized loss on available-for-sale
securities (Note C) (205,500)
Less - Notes receivable for common
stock issued (Notes K and L) (875,650) (875,650)
------------ ------------
TOTAL STOCKHOLDERS' EQUITY 5,515,997 4,815,856
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 6,953,356 $ 6,555,670
============ ============
See Notes to Financial Statements
2
<PAGE>
ENERGY RESERVE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED APRIL 30, 1997, 1996 AND 1995
- --------------------------------------------------------------------------------
Year Ended April 30
---------------------------------------
1997 1996 1995
---- ---- ----
REVENUE:
Sales $7,453,817 $6,864,519 $3,010,282
---------- ---------- ----------
TOTAL REVENUE 7,453,817 6,864,519 3,010,282
---------- ---------- ----------
COSTS AND EXPENSES
Cost of sales 3,475,905 3,531,871 1,244,732
General and administrative expenses 1,834,606 1,711,460 993,201
Sales expense 1,052,164 1,004,953 470,291
Interest expense 65,100 87,737 53,661
Depreciation and amortization 40,923 43,093 27,216
---------- ---------- ----------
TOTAL EXPENSES 6,468,698 6,379,114 2,789,101
---------- ---------- ----------
INCOME FROM OPERATIONS 985,119 485,405 221,181
---------- ---------- ----------
OTHER INCOME (EXPENSE):
Other income (expense) (Note I) 19,214 (266,575) 13,443
Minority interest in income of
consolidated subsidiary (Note I) (11,192) (38,243)
---------- ---------- ----------
TOTAL OTHER INCOME (EXPENSE) 19,214 (277,767) (24,800)
---------- ---------- ----------
Earnings before income taxes 1,004,333 207,638 196,381
Provisions for income taxes (Note F) 133,692 39,617 110,893
---------- ---------- ----------
NET EARNINGS $ 870,641 $ 168,021 $ 85,488
========== ========== ==========
See Notes to Financial Statements
3
<PAGE>
ENERGY RESERVE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED APRIL 30, 1997, 1996 AND 1995
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended April 30
---------------------------------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
ACCUMULATED DEFICIT, beginning of year $(14,535,928) $(14,703,949) $(14,789,437)
NET EARNINGS 870,641 168,021 85,488
------------ ------------ ------------
ACCUMULATED DEFICIT, end of year $(13,665,287) $(14,535,928) $(14,703,949)
============ ============ ============
EARNINGS PER SHARE:
Net earnings per share (Note A) $ 0.05 $ 0.01 $ 0.01
============ ============ ============
Common Stock
----------------------------
Number of Contributed
Shares Amount Capital
------------ ------------ ------------
BALANCES:
April 30, 1994 13,728,879 18,567,561 220,872
Shares issued:
Acquisition of subsidiary 4,587,000 1,000,000
Settlement of liabilities 1,210,495 442,294
BALANCES:
------------ ------------ ------------
April 30, 1995 19,526,374 20,009,855 220,872
Shares issued:
Settlement of liabilities 36,607 4,500
Shares reacquired and cancelled (7,793) (7,793)
BALANCES:
------------ ------------ ------------
April 30, 1996 19,555,188 20,006,562 220,872
Shares issued:
Acquisition of subsidiary 350,000 35,000
BALANCES:
============ ============ ============
April 30, 1997 19,905,188 20,041,562 220,872
============ ============ ============
</TABLE>
See Notes to Financial Statements
4
<PAGE>
ENERGY RESERVE, INC. AND SUBSIDIARIES
STATEMENT OF CASH FLOWS
YEARS ENDED APRIL 30, 1997, 1996 AND 1995
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended April 30
-----------------------------------
1997 1996 1995
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C> <C>
Net earnings $ 870,641 $ 168,021 $ 85,488
Adjustments to reconcile net earnings
to net cash used by
operating activities:
Depreciation and depletion 36,946 39,116 27,681
Minority interest 2,674 11,192 13,494
Allowance for doubtful accounts 5,000 25,000
Amortization of goodwill 3,977 3,977
Deferred taxes 167,411 39,600 29,725
Acquisition of Goodwill (26,979)
CHANGES IN CURRENT ASSETS AND CURRENT
LIABILITIES: Net of effect from purchase
of Twin-Chart, Inc.:
(Increase) decrease in current assets:
Accounts receivable (240,192) 49,237 (166,828)
Inventory (12,768) 22,756 (421,436)
Prepaid expenses (1,697) (2,436) 11,216
(Increase) decrease in non-current
assets:
Deposits 0 2,931 4,574
Increase (decrease) in current liabilities:
Accounts payable and accrued expenses (206,545) (50,907) 87,100
Income taxes payable 0 0 (3,000)
--------- --------- ---------
NET CASH PROVIDED (USED) BY OPERATING
ACTIVITIES: 598,468 308,487 (331,986)
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Issuance of securities 35,000
Disposition of securities 25,650
Investment in securities (75,000)
Purchase of property and equipment (56,816) (308,426) (17,024)
Disposition of equipment 38,629
Loss realized on sale of securities 287,850
Purchase of minority interest in subsidiary (167,750)
--------- --------- ---------
NET CASH (USED) BY INVESTING ACTIVITIES: (21,816) (124,047) (92,024)
--------- --------- ---------
</TABLE>
See Notes to Financial Statements
5
<PAGE>
ENERGY RESERVE, INC. AND SUBSIDIARIES
STATEMENT OF CASH FLOWS (CONTINUED)
YEARS ENDED APRIL 30, 1997, 1996 AND 1995
- --------------------------------------------------------------------------------
Year Ended April 30
--------------------------------
1997 1996 1995
---- ---- ----
CASH FLOWS FROM FINANCING ACTIVITIES:
Amounts loaned on notes receivable (6,702) (26,426)
Amounts repaid on note receivable 25,595 40,612
Amounts borrowed under notes payable 640,179 8,969
Amounts repaid on notes payable (98,584) (291,795) (23,360)
Repayment of subscriptions receivable
through elimination of accounts payable
and accrued expenses 0 250 327,071
Reacquisition of common stock (net) 0 (3,293)
---------- --------- ---------
NET CASH PROVIDED (USED) BY
FINANCING ACTIVITIES: (72,989) 379,251 286,254
---------- --------- ---------
NET INCREASE (DECREASE) IN CASH 503,663 563,691 (137,756)
CASH AND CASH EQUIVALENTS, beginning of year 614,356 50,665 229
CASH AND CASH EQUIVALENTS, acquired 188,192
---------- --------- ---------
CASH AND CASH EQUIVALENTS, end of year $1,118,019 $ 614,356 $ 50,665
========== ========= =========
SUPPLEMENTAL DISCLOSURE:
Interest paid $ 40,851 $ 58,091 $ 44,093
Income taxes paid $ 46,016 $ 94,082
See Notes to Financial Statements
6
<PAGE>
ENERGY RESERVE, INC. AND SUBSIDIARIES
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES
YEARS ENDED APRIL 30, 1997, 1996 AND 1995
- --------------------------------------------------------------------------------
OTHER NON-CASH INVESTING AND FINANCING ACTIVITIES
Year Ended April 30
------------------------------
1997 1996 1995
---- ---- ----
Payment of accounts payable and
accrued expenses in exchange
for common stock $ 250 $442,294
Write-down for unrealized loss on
available for sale securities $205,500 ($287,850)
Purchase of minority interest in subsidiary ($167,750)
See Notes to Financial Statements
7
<PAGE>
ENERGY RESERVE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED APRIL 30, 1997 AND 1996
- --------------------------------------------------------------------------------
NOTE A - ORGANIZATION, OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization
The Company was organized in July 1968 for the purpose of acquiring oil and gas
leases and for the exploration and development of oil and gas properties.
On October 30, 1994, the Company acquired Twin-Chart, Inc. a Nevada Corporation,
and its subsidiary (collectively Twin). Twin was privately owned and operated
and is a producer and distributor of transit temperature recording instruments.
Twin was acquired by the issuance of 4,587,000 restricted shares of common stock
and 5,000,000 warrants to purchase restricted common stock of the Company with
an agreed aggregate value of approximately $1,050,000.
Twin conducts its operations primarily through a 100 percent owned subsidiary
Transit Services, Inc., under the trade name and style of Cox Recorders.
In March, 1997 a transaction was consummated wherein the Company acquired 75% of
the issued and outstanding shares of National On-Site Check Cashing, Inc.
Mr. Alfred P. Sprenger has been the President, one of two directors and a
shareholder of the Company, since before 1970. Mr. Roger Sherer who was the
Secretary-Treasurer, one of two directors and a shareholder of the Company,
since before 1970, passed away in 1997. His replacement, as director, has not
been elected.
Effective August 1, 1995, by agreement, the Company organization was
restructured with Mr. James Cox becoming an officer and director of the Company.
Mr. Sprenger became the Chairman of the Board of Directors and Chief Executive
Officer, Mr. Cox became President and Chief Operating Officer. Mr. Sprenger
remained on the Board.
Summary of Significant Accounting Principles
a. Principles of consolidation
The consolidated financial statements include the accounts of the Company
and its wholly owned subsidiaries, Energy Reserve Financial Corp., Energy
Reserve Holdings, Inc., ERES Cogenics, Inc. and Twin-Chart, Inc. It also
includes the 75% acquisition of National On-Site Check Cashing, Inc. All
significant intercompany accounts and transactions have been eliminated.
b. Accounting estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
c. Capitalization of oil and gas properties
The following types of costs relating to the Company's oil and gas
properties are capitalized under the successful efforts method of
accounting:
8
<PAGE>
ENERGY RESERVE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED APRIL 30, 1997 AND 1996
- --------------------------------------------------------------------------------
NOTE A - ORGANIZATION, OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)
Summary of Significant Accounting Principles (Continued)
c. Capitalization of oil and gas properties (Continued)
i. Costs of purchase to acquire properties.
ii. Costs to obtain access to proved reserves and to provide facilities
for extracting, treating, gathering and storing oil and gas whether
or not a specific well is successful.
d. Depreciation, depletion and amortization of capitalized cost of oil and
gas properties
Depreciation, depletion and amortization of the capitalized cost of oil
and gas properties are provided (on each property) on the
unit-of-production method, at rates which are based on the ratio of oil
and gas produced for the year to independent estimates of the total
proved developed recoverable reserves and to total proved recoverable
reserves from the property. These rates are applied to the unamortized
costs for each property. Adjustments to the rates applied, required as
the result of revisions of independent engineers' estimates of proved
reserves, affect the year of such change and future years.
Depreciation of all other property and equipment is provided on the
straight-line method over the respective estimated lives ranging from
five to twenty years.
e. Operating costs
Costs of oil production (lifting costs), geological and geophysical
costs and the costs of carrying and retaining undeveloped properties are
charged to operations as incurred.
f. Research and development costs
Costs of research and development activities are charged to operations
as incurred.
g. Cash and cash equivalents
Cash and cash equivalents represent highly liquid investments, generally
with a remaining maturity of three months or less.
h. Inventory
Inventory at April 30, 1997 and 1996 consists primarily of raw material,
work-in-progress and finished goods related to transit temperature
recording instruments; manufactured by Transit Services. Inventories are
stated at the lower of cost (first-in, first-out method) or market.
i. Income taxes
The Company accounts for income taxes under Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes". Income
taxes are provided based on earnings reported for financial statements
purposes. Deferred taxes are provided on the temporary differences
between income for financial statement and tax purposes.
9
<PAGE>
ENERGY RESERVE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED APRIL 30, 1997 AND 1996
- --------------------------------------------------------------------------------
NOTE A - ORGANIZATION, OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)
Summary of Significant Accounting Principles (Continued)
i. Income taxes (Continued)
The Company deducts certain exploration and development costs in its
income tax returns, which are capitalized and amortized for financial
reporting purposes. Accordingly, the tax basis of certain of the
Company's oil and gas assets is less than its basis for financial
reporting purposes. Deferred taxes for these differences have not been
provided in the accompanying consolidated financial statements due to
the existence of net operating loss carry-forwards.
j. Concentration of credit risk
Financial instruments, which potentially subject the Company to
concentrations of credit risk, consist principally of temporary cash
investments and trade receivables. The Company places its temporary cash
investments in two money market accounts (totaling $898,997 and $406,559
at April 30, 1997 and 1996 respectively) with a high quality financial
institution. At April 30, 1997 and 1996, substantially all cash and cash
equivalents were on deposit with one financial institution.
Concentrations of credit risk with respect to trade receivables are
limited due to the large number of customers comprising the Company's
customer base and their dispersion across many different geographic
areas. Accounts receivable from approximately ten customers amounted to
approximately 38% of the total accounts receivable at April 30, 1997 and
1996. Generally, the Company does not require collateral or other
security to support customer receivables. The Company established an
allowance for doubtful accounts during the year ended April 30, 1996 in
the amount of $25,000. At April 30, 1997 the allowance was $30,000.
k. Fair value of financial instruments
Based on borrowing rates currently available to the Company for bank
loans with similar terms and maturities, the fair value of the Company's
long-term debt approximates the carrying value. Furthermore, the
carrying value of all other financial instruments potentially subject to
valuation risk (principally consisting of cash and cash equivalents,
accounts receivable, bank borrowings, and accounts payable) also
approximates fair value.
l. Issuance of common stock
The issuance of common stock for other than cash is recorded by the
Company at management's estimate of the fair value of the assets
acquired or services rendered. The shares of common stock used
(investment shares) can be sold only in accordance with issued rules
promulgated by the Securities and Exchange Commission (SEC).
m. Goodwill
Goodwill created in the acquisition of the consolidated subsidiaries is
being amortized over 15 years. Accumulated amortization amounted to
$3,977 and $7,954 at April 30, 1997 and 1996, respectively.
n. Net income per share
The net income per common share is based on the weighted average number
of common shares outstanding during each year (1997 - 19,584,355; 1996 -
19,540,781; 1995 - 16,619,877). The exercise of outstanding options
would have an antidilutive effect on earnings per share.
10
<PAGE>
ENERGY RESERVE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED APRIL 30, 1997 AND 1996
- --------------------------------------------------------------------------------
NOTE A - ORGANIZATION, OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)
Summary of Significant Accounting Principles (Continued)
o. Long-lived assets
The Company has implemented the requirements of Statement of Financial
Accounting Standards No. 121, Accounting for the Impairment of
Long-lived assets and for Long-Lived asset for the Disposal of. In
evaluating the recoverabilty of the Company's Long-lived assets,
management evaluated the current fair market value and expected future
cash flows of its assets and concluded that no impairment of value has
occurred as of April 30, 1997.
NOTE B - INVENTORY
Inventory at April 30, 1997 and 1996 consists of the following:
1997 1996
---- ----
Raw Materials $279,338 $250,437
Work-in-process 142,413 116,461
Finished goods 333,285 375,370
Crude Oil 2,456 2,456
-------- --------
$757,492 $744,724
======== ========
NOTE C - INVESTMENT IN SECURITIES
Investments in real estate
In 1976, the Company acquired 45 undeveloped lots in California in consideration
for 47,500 investment shares of its common stock and the reassignment of
production interests in certain West Virginia leases valued by management at
$210,000. Through 1991, due to changes in zoning regulations and other factors,
the Company had provided reserves of $180,000 by charges to operations. The
Company's investment in the lots was reduced to $30,000, net of the valuation
reserve. In March 1992, as part of a February 1992 agreement to acquire
securities of Pan American Energy, Inc., (PAEC) a public corporation, the
Company traded the California lots in exchange for 4,000,000 Series "A" common
stock warrants and the right to purchase 2,000,000 additional such warrants at
ten cents ($.10) per warrant. The Company did not recognize gain on the exchange
and has recorded the cost of the warrants at the $30,000 recorded cost of the
lots.
Investments in securities
Pan American Energy Corporation
In February 1992, the Company entered into an agreement with Pan American Energy
Corporation (PAEC) for the acquisition of certain securities of that
corporation. As set forth earlier in these notes, the Company acquired 4,000,000
Series "A" common stock warrants of PAEC and the right to purchase an additional
2,000,000 such warrants which were recorded at a cost of $30,000.
Additionally, under the agreement with PAEC, the Company acquired 300,000 shares
of PAEC common stock in exchange for 225,000 restricted shares of Energy
Reserve, Inc. common stock. The exchange was consummated on the basis of $1.00
per share for Company stock and $0.75 per share of PAEC stock. At the date of
11
<PAGE>
ENERGY RESERVE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED APRIL 30, 1997 AND 1996
- --------------------------------------------------------------------------------
NOTE C - INVESTMENT IN SECURITIES (CONTINUED)
Investments in securities
the exchange the Company stock was traded at 1/4 to 5/8 and PAEC stock was
traded at 1/4 to 1/2, both in the over-the-counter market.
In April 1993, the Company issued and exchanged 200,000 shares of its common
stock for 400,000 investment shares of Pan American Energy Corporation common
stock. The exchange was valued at $1.00 for Company stock and $0.50 for Pan
American Energy Corporation stock.
At April 30, 1995, the Pan American Energy Corporation stock was valued at
approximately $0.10 per share. The Company reduced all Pan American Energy
Corporation shares to that value as of that date. The loss on these available
for sale securities was realized in 1996.
O.T.S. Holdings, Inc.
In February 1992, the Company entered into an agreement with O.T.S. Holdings,
Inc. (OTS) a public company to sell certain mining equipment and 50,000 shares
of Company stock in exchange for $10,000 cash and 190,000 shares of 10%
Cumulative Convertible Income Preferred stock of OTS. The transaction was valued
at $200,000 comprised of $50,000 for the Company stock at $1.00 per share and
$150,000 for the mining equipment.
In conversations with a market-maker for these securities, it was concluded that
recent litigation has reduced the value of this stock to $.05 bid; $.09 asked.
Accordingly, a valuation allowance was established reducing the carrying amount
to $.05 per share. Because the core business of the company was still considered
sound, the loss is considered unrealized and reflected in the stockholders'
equity section of the financial statements.
Perfection Foods International
In December 1992, the Company agreed in principal to use 50,000 shares of its
common stock to acquire 1,500,000 common stock shares and 5,000,000 warrants of
Perfection Foods, International (PFI) a company formed in 1992 to engage in the
fish processing business. In March 1993, subsequent to the fiscal year ended
December 31, 1992, the transaction was completed and the Company issued the
agreed shares and received the PFI shares. Mr. Sprenger, the chairman of the
Board of Directors of the Company, is an officer and director of PFI. At the
date of the transaction, March 1993, the Company's holding represented 33% of
the outstanding shares of PFI, and the Company recorded the transaction of $1.00
per share issued on 50,000 shares. Because the short-term growth of PFI has been
slower than anticipated, the Company has reduced the carrying amount of PFI's
shares by 50%. The Company still believes in the long-term growth of PFI and has
classified the unrealized loss in the stockholders equity section of the
financial statements.
Shares held at April 30, 1997 and 1996 were comprised as follows:
1997
-----------------------------
Current Unrealized
Cost Value Loss
---- ----- ----
Pan American Energy Corporation Warrants $30,000 $30,000 $
Perfection Food International Stock 50,000 25,000 25,000
12
<PAGE>
ENERGY RESERVE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED APRIL 30, 1997 AND 1996
- --------------------------------------------------------------------------------
NOTE C - INVESTMENT IN SECURITIES (CONTINUED)
Investments in securities (Continued)
1997
-----------------------------
Current Unrealized
Cost Value Loss
---- ----- ----
O.T.S. Holdings, Inc. Stock 190,000 9,500 180,500
-------- ------- --------
$270,000 $64,500 $205,500
======== ======= ========
1996
--------------------
Current
Cost Value
---- -----
Pan American Energy Corporation Warrants $ 30,000 $ 30,000
Perfection Food International Stock 50,000 50,000
O.T.S. Holdings, Inc. Stock 190,000 190,000
-------- --------
$270,000 $270,000
======== ========
NOTE D - NOTES RECEIVABLE
Notes receivable at April 30, 1997 and 1996 consists of:
1997 1996
---- ----
Amount due from estate of subsidiaries
former president plus accrued interest
at 7%. Note due April 15, 1997. $ 0 $15,381
Note due from officer in monthly installments
of $300, including interest at 8%. The note
was paid in full after April 30, 1996. 0 12,693
Unsecured note receivable, due October 6, 1997
plus accrued interest at 13%. 23,183 20,000
Unsecured note receivable, due on or before
April 15, 1997 plus accrued interest at 8%. 0 8,000
Other 16,396 9,100
------- -------
39,579 65,174
Less: current portion 39,579 65,174
------- -------
$ 0 $ 0
======= =======
13
<PAGE>
ENERGY RESERVE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED APRIL 30, 1997 AND 1996
- --------------------------------------------------------------------------------
NOTE E - PROPERTY AND EQUIPMENT
At April 30, 1997 and 1996, property and equipment are summarized by major
classification as follows:
Oil and Gas Properties and Equipment 1997 1996
---- ----
Intangible drilling costs $ 883,023 $ 883,023
Lease and well equipment 1,828,881 1,828,881
Leasehold improvements 715,891 715,891
Undeveloped leases 72,167 72,167
Repurchased participating interests 2,608,640 2,608,640
Other 121,418 67,127
---------- ----------
6,230,020 6,175,729
Less: accumulated depreciation and depletion 2,767,078 2,767,078
---------- ----------
3,462,942 3,408,651
---------- ----------
Manufacturing Property and Equipment 1997 1996
---- ----
Tooling 112,727 110,202
Machinery and equipment 34,640 34,640
Office furniture and equipment 6,129 6,129
Leasehold improvements 232,918 232,918
---------- ----------
386,414 383,889
Less: accumulated depreciation and depletion 100,548 63,602
---------- ----------
285,866 320,287
---------- ----------
$3,748,808 $3,728,938
========== ==========
Oil and Gas Properties
Mitchel leases
The Mitchel leases located in Kern County, California consist of 380 acres, on
which 52 oil wells have been drilled and completed.
During 1997, 1996 and 1995 the Company did not drill any wells on this lease as
to which all drilling requirements have been satisfied.
Landowner and overriding royalty interests in the property total 21.66 percent.
14
<PAGE>
ENERGY RESERVE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED APRIL 30, 1997 AND 1996
- --------------------------------------------------------------------------------
NOTE E - PROPERTY AND EQUIPMENT (CONTINUED)
Mitchel leases (Continued)
The Company has obtained a report from an independent petroleum engineer which
combines the estimated proved reserves and revenues as of March 1990 of the
Mitchel leases and the contiguous Bacon Hills leases. These combined leases
comprise an entire section of the Chico-Martinez field (see below, "Bacon Hills
lease"). Reference is also made to the supplemental information on Standardized
measure of Discounted Future Net Cash Flows elsewhere in this Form 10-K.
During 1997, the Company produced approximately 500 gross barrels of oil, on the
combined Mitchel and Bacon Hills leases. No oil was produced on these leases in
1996 and 1995. During 1997, 1996 and 1995, the Company had no steaming
operations.
Bacon Hills lease
This sublease, located in the Chico-Martinez field, Kern County, California, was
acquired in December 1980, and consists of approximately 260 acres, in which the
Company has interests to the depth of 5,000 feet. The landowners and overriding
royalty interest holders are identical with the Mitchel leases, which total
21.67 percent, and the Company owns the remaining 78.33 percent working interest
in this lease. The acquisition of this sublease, in conjunction with the
Mitchell subleases, provided the Company with an entire leasehold interest in a
full section of land. Under the terms of this sublease, the Company committed to
the drilling of an initial six wells on or before March 31, 1982, and at least
six additional wells each 12-month period thereafter, until at least 52 wells
have been drilled without regard to whether they are producing or abandoned. The
Company has drilled a total of 14 wells - under its Commitment. No wells have
been drilled on this lease since 1984.
In March 1990, the sublessor declared the sublease terminated and requested
return of the undrilled portion of the sublease. The Company does not
acknowledge the declaration of termination, and has not complied with the
sublessor's request. To date, no litigation, action or further request has been
undertaken by the sublessor in connection with this matter. The Company believes
that this breach can be cured, but irrespective of the breach, the Company holds
a five acre well tract and the oil and gas rights to each of the aforementioned
fourteen wells on this sublease.
Cogeneration System and Thermally Enhanced Oil Recovery Operation
The major activity of the Company concerning the properties during the past ten
years was directed toward the implementation of a proposed COGEN/TEOR Project to
be located on the Mitchel leases, with the capability of serving the combined
Mitchel and Bacon Hills leases with a steam flood enhanced oil recovery
operation and provide for the sale of power to a California Public Utility. ERES
Cogenics, Inc., a wholly owned subsidiary, was formed in August 1987 to be the
builder/owner/operator of the COGEN/TEOR facilities. The Company signed a power
purchase agreement with the Pacific Gas and Electric Company (PG&E) for the
delivery by the Company of 20.5 megawatts of electricity no earlier than June 1,
1989 and no later than December 1991. The agreement further provided for
delivery and the purchase of up to 45 megawatts of power in later years.
Contracts were signed or negotiated with responsible and experienced suppliers
and contractors for the Cogen construction, engineering, supervision, natural
gas delivery, maintenance and operation and the TEOR installation including the
laying of steam lines for the steam flood operations. The estimated cost of the
20.5 megawatt COGEN/TEOR facility was between $45,000,000 and $50,000,000 by
independent engineers.
The power purchase agreement with PG&E terminated on December 24, 1991 after a
decision by the utility not to defer the deadline date. In 1992, the Company
filed a complaint with the California Public Utility Commission (CPUC) alleging
bad faith conduct by PG&E and requesting a reinstatement of a new power purchase
15
<PAGE>
ENERGY RESERVE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED APRIL 30, 1997 AND 1996
- --------------------------------------------------------------------------------
NOTE E - PROPERTY AND EQUIPMENT (CONTINUED)
contract. In October 1993, the CPUC hearing on the complaint was concluded. The
CPUC has not rendered a decision on the complaint as of the date of this report,
however in June, 1997, the Company and PG&E reached a settlement agreement of
the complaint, which settlement is subject to approval by the CPUC.
Other matters
Geological and geophysical costs for the years ended April 30, 1997 and 1996
were not significant.
To continue to operate and further develop its oil and gas properties, the
Company will require significant amount of additional capital in 1997 and future
years from the sale of debt and/or equity securities, or through other financial
arrangements.
NOTE F - INCOME TAXES
The provisions for income taxes consists of:
April 30
----------------------------------
1997 1996 1995
---- ---- ----
Current payable:
Federal - charge equivalent
to provision for taxes on income $ 32,000 $ 6,772
State $ 800 1,017 5,023
-------- -------- --------
800 33,017 11,795
-------- -------- --------
Deferred:
Federal 98,933 29,304 69,704
State 33,959 10,296 29,394
-------- -------- --------
132,892 39,600 99,098
-------- -------- --------
133,692 72,617 110,893
-------- -------- --------
Less: utilization of net operating
loss carryforward 0 (33,000) 0
-------- -------- --------
$133,692 $ 39,617 $110,893
======== ======== ========
The Company and its subsidiaries file consolidated Federal income tax returns.
There is an aggregate Federal net operating loss carryover of approximately
$11,900,000 available to reduce future federal taxable income of the parent
company. These net operating loss carryovers will expire in various amounts
between 2001 and 2010.
The Company also have available unused investment tax credits of $184,000 which
will expire in various amounts between 1997 and 2001.
In 1997 and 1996 the minimum state taxes only were paid.
The reconciliation of income tax computed at U.S. Federal and State statutory
rates to the income tax provision for the years ended April 30, 1997 and 1996
are as follows:
16
<PAGE>
ENERGY RESERVE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED APRIL 30, 1997 AND 1996
- --------------------------------------------------------------------------------
NOTE F - INCOME TAXES (CONTINUED)
1997
--------------------------------------------------
Currently Payable
--------------------------------------------------
ERI Twin-Chart (ii)Consolidated Deferred
--- ---------- ---------------- --------
Pre-tax accounting income $ 282,725 $ 736,608 $1,019,333 $
Abandonment of property (594,000) (594,000) 594,000
--------- --------- ---------- --------
Taxable income $ 282,725 $ 142,608 $ 425,333 $594,000
========= ========= ========== ========
Tax at statutory rates:
Federal $ 98,900 $ 49,900 $ 148,800 $ 98,933
State 800 7,100 7,900 33,959
Utilization of net operating
loss carry forward (98,900) (57,000) (155,900)
--------- --------- ---------- --------
$ 800 $ 0 $ 800 $132,892
========= ========= ========== ========
1996
--------------------------------------------------
Currently Payable
--------------------------------------------------
ERI Twin-Chart (ii)Consolidated Deferred
--- ---------- ---------------- --------
Pre-tax accounting income $116,137 $91,501 $207,638 $
Abandonment of property (91,501) 91,501 91,501
-------- ------- -------- -------
Taxable income $116,137 0 $116,137 $91,501
======== ======= ======== =======
Tax at statutory rates:
Federal $ $ $ 33,000 $22,000
State 10,000 7,617
Utilization of net
Operating loss carryforward (33,000)
-------- ------- -------- -------
$ 0 $ 0 $ 10,000 $29,617
======== ======= ======== =======
Substantially all of the Company's deferred tax asset at April 30, 1996 was
attributable to property that has been written-off for financial accounting, but
not income tax purposes, amounting to approximately $600,000. The remainder of
that property was written off in 1997.
17
<PAGE>
ENERGY RESERVE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED APRIL 30, 1997 AND 1996
- --------------------------------------------------------------------------------
NOTE G - ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
Accounts payable and accrued liabilities at April 30, 1997 and 1996 consist of
the following:
1997 1996
-------- --------
Trade accounts payable $211,961 $404,481
Accrued vacation payable 67,443 65,105
Accrued salaries and wages payable 134,623 128,333
Other accounts payable and accrued
liabilities 75,713 98,366
-------- --------
$489,740 $696,285
======== ========
NOTE H - NOTES AND CONTRACTS PAYABLE
The following is a summary of notes and contracts payable at April 30, 1997 and
1996:
1997 1996
---- ----
Unsecured notes payable to individuals due
in monthly installments of $2,955, including
interest at 8%, through December 2001
(see Note I) $103,875 $137,736
Note payable secured by equipment, payable in
monthly installments of $462, including interest
at approximately 12.7% 0 7,353
Stipulated judgement for settlement of litigation
and dispute involving Company's co-generation project 0 112,855
Stipulated judgement for $201,875 for settlement of
litigation involving a well drilling contractor at
the Company's Mitchell and Bacon Hills lease
Interest at accruing 10% per annum 358,429 326,097
Note payable to individual at 10%, due on demand 7,057 7,057
Judgement of $68,852 for prior years accrued rentals 0 32,645
18
<PAGE>
ENERGY RESERVE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED APRIL 30, 1997 AND 1996
- --------------------------------------------------------------------------------
NOTE H - NOTES AND CONTRACTS PAYABLE (CONTINUED)
Note payable to individual due in monthly installments
of $3,500, including interest at 9%. 0 6,353
Unsecured notes payable to individuals, due on demand,
including interest at 8%. 125,000 0
Unsecured note payable at 10%, due on demand. 4,500 4,500
Note payable to bank, secured under general security
agreement, due in monthly installments of $7,560,
including interest at 8.5%, through January 2002. 345,684 408,533
-------- ----------
TOTAL 944,545 1,043,129
Less: current portion 585,859 577,234
-------- ----------
$358,686 $ 465,895
======== ==========
Aggregate maturities of long-term borrowings over the next five fiscal years are
as follows:
Year ended April 30 Amount
------------------- ------
1998 $585,859
1999 $ 98,584
2000 $102,464
2001 $101,236
2002 $ 56,402
NOTE I - ACQUISITION OF TWIN-CHART, INC.
In April 1993, the Company exchanged 50,000 shares of its common stock for a
combination of 1,000,000 shares and 5,000,000 warrants of Twin-Chart, Inc.'s
(TCI) common stock, which represented approximately 20% of the outstanding
shares. In October 1994, the Company acquired the remaining issued and
outstanding shares of TCI which amounted to 4,098,000 shares for 4,587,000
shares of the Company's common stock and 5,000,000 warrants for the purchase of
the Company's stock at an initial price of $5.00 per share. The price per share
increases at a rate of $.50 per share per year for five years following the
initial year, then at a rate of $1.00 per share per year for the second five
years and finally at a rate of $2.00 per share per year for the final three year
period. The acquisition has been accounted for as a purchase. The results of
operations of TCI have been included in the accompanying consolidated financial
statements since the date of acquisition, which was October 31, 1994. The total
cost of the acquisition was approximately $1,050,000, which approximated the
fair value of the net assets of TCI acquired as of that date.
In January, 1996, TCI acquired all of the minority interest (13.7%) in its
subsidiary Transit Services, Inc. The purchase price was $110 per share on five
year installment notes, due in monthly installments of $2,955, including
interest at 8% (see Note H). The total cost was $167,750.
19
<PAGE>
ENERGY RESERVE, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED APRIL 30, 1997, 1996 AND 1995
- --------------------------------------------------------------------------------
NOTE I - ACQUISITION OF TWIN-CHART, INC. (Continued)
The separate financial statements of TCI are as follows:
April 30
-----------------------
1997 1996
---- ----
Cash $1,020,550 $ 614,458
Accounts receivable 1,032,161 883,671
Inventories 755,036 742,268
Notes receivable-current 39,579 63,309
Prepaid expenses 5,918 4,222
---------- ----------
2,853,244 2,307,928
Property and equipment (Net) 285,866 320,287
Deferred income taxes 0 167,411
Deposits 3,097 3,097
---------- ----------
$3,142,207 $2,798,723
========== ==========
Accounts payable and accrued expenses $ 228,340 $ 477,494
Income taxes payable 400 400
Current portion of long-term debt 90,873 94,080
Due to a related party 1,301,661 456,000
---------- ----------
1,621,274 1,027,974
Long-term debt 358,686 465,895
---------- ----------
1,979,960 1,493,869
---------- ----------
Common stock 986,987 986,987
Retained earnings 175,260 317,867
---------- ----------
1,162,247 1,304,854
---------- ----------
$3,142,207 $2,798,723
========== ==========
See Notes to Financial Statements
20
<PAGE>
ENERGY RESERVE, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED APRIL 30, 1997, 1996 AND 1995
- --------------------------------------------------------------------------------
NOTE I - ACQUISITION OF TWIN-CHART, INC. (Continued)
STATEMENTS OF INCOME AND RETAINED EARNINGS
YEAR ENDED APRIL 30
1997 1996 1995
---- ---- ----
Revenue:
Sales $7,444,170 $6,864,519 $6,110,557
Costs and Expenses:
Cost of sales 3,472,256 3,525,156 3,218,037
General and administrative expense 2,862,982 2,129,386 1,648,589
Sales expense 1,052,164 1,004,953 1,010,045
Interest expense 40,851 42,028 27,146
Depreciation 36,946 39,116 50,242
---------- ---------- ----------
Total costs and expenses 7,465,199 6,740,639 5,954,059
INCOME (LOSS) FROM OPERATIONS (21,029) 123,880 156,498
Other income (expense):
Minority interest in income (loss) of
consolidated subsidiary 0 (11,192) (8,736)
Other (121,578) (21,188)
---------- ---------- ----------
Earnings (loss) before income taxes (142,607) 91,500 147,762
Provision for taxes 0 39,617 40,276
---------- ---------- ----------
Net Earnings (loss) (142,607) 51,883 107,486
Retained Earnings, beginning of year 317,867 265,984 158,498
---------- ---------- ----------
Retained Earnings, (deficit) end of year $ 175,260 $ 317,867 $ 265,984
========== ========== ==========
See Notes to Financial Statements
21
<PAGE>
ENERGY RESERVE, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED APRIL 30, 1997, 1996 AND 1995
- --------------------------------------------------------------------------------
NOTE I - ACQUISITION OF TWIN-CHART, INC. (Continued)
STATEMENTS OF CASH FLOWS
YEAR ENDED APRIL 30
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C> <C>
Net earnings (loss) $ (142,607) $ 51,883 $ 107,486
Adjustments to reconcile net earnings
(loss) to net cash (used) provided
by operating activities:
Depreciation 36,946 39,116 50,242
Minority interest 0 11,192 8,736
CHANGES IN CURRENT ASSETS AND
CURRENT LIABILITIES:
(Increase) decrease in current assets:
Accounts receivable (145,803) 87,247 (205,321)
Inventories (12,768) 22,756 (119,782)
Prepaid expenses (3,355) (1,140) 47,915
(Increase) decrease in non-current assets:
Deferred taxes 167,411 39,601 29,724
Deposits 0 0 5,363
Increase (decrease) in current liabilities:
Accounts payable and accrued expense (249,154) (40,029) 229,064
Income taxes payable 0 0 (3,000)
Due to a related entity 847,319 456,000 0
---------- --------- ---------
NET CASH (USED) PROVIDED BY OPERATING ACTIVITIES 497,989 666,626 150,427
---------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of minority interest (Note H) 0 (167,750) 0
Purchase of property and equipment (2,525) (308,634) (32,734)
Abandonment of property and equipment 0 38,837 0
---------- --------- ---------
NET CASH PROVIDED (USED) BY INVESTING ACTIVITIES (2,525) (437,547) (32,734)
---------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Amounts repaid on notes receivable 21,044 40,612 0
Amounts loaned on notes receivable 0 (4,838) (27,188)
Amounts borrowed on notes payable 0 592,750 33,146
Amounts repaid on notes payable (110,416) (291,794) (97,554)
---------- --------- ---------
NET CASH (USED) PROVIDED BY FINANCING ACTIVITIES (89,372) 336,730 (91,596)
---------- --------- ---------
NET INCREASE (DECREASE) IN CASH 406,092 565,809 26,097
CASH, beginning of year 614,458 48,649 82,108
---------- --------- ---------
CASH, end of year $1,020,550 $ 614,458 $ 108,205
========== ========= =========
</TABLE>
See Notes to Financial Statements
22
<PAGE>
ENERGY RESERVE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED APRIL 30, 1997 AND 1996
- --------------------------------------------------------------------------------
NOTE J - AQUISITON OF NATIONAL ON-SITE CHECK CASHING, INC. OF NEVADA
In March, 1997, the Company issued 350,000 shares of common stock in exchange
for 75% of the issued and outstanding stock of "National On-Site Check Cashing,
Inc. of Nevada" (NOCC). NOCC cashes payroll checks for a fee using mobile
armored trucks for facilitating the transactions. The Company recorded the
transaction using the purchase method of accounting and valued the shares issued
at $.10 per share.
NOTE K - COMMON STOCK
Shares issued in exchange for interest-bearing notes
The Company has issued shares of its common stock in exchange for notes
receivable. The financial statements show the outstanding shares and the related
notes receivable as an offset against stockholders' equity.
NOTE L - RELATED-PARTY MATTERS
As discussed below, certain transactions have been consummated with parties
related to the Company and its management.
Ownership interests
As discussed in Note A, Mr. Sprenger, the Chairman of the Board, and Mr. Cox,
the President constitute the management and are the only members of the Board of
Directors of the Company. Mr. Sprenger is the trustee of two liquidating trusts
for two formerly affiliated corporations in which he was an officer and
director. These trusts, Progressive Investment Corporation Liquidating Trust
(PICLT) and PIC Research and Development Liquidating Trust (PICR&DLT) are
shareholders of Company common stock.
The ownership of the Company's common stock by Mr. Sprenger, Mr. Cox, PICLT,
PICR&DLT, Company employees and other related parties (relatives, friends and
business associates of Mr. Sprenger) is summarized as follows at April 30, 1997:
Percentage
----------
Mr. Sprenger * 4.5
Mr. Cox 23.3
PICLT 1.9
PICR&DLT 1.2
Company employees 2.5
Other related parties * 24.3
* Includes stock issued under subscription rights (Refer to discussion in this
Note L).
Mr. Sprenger, Mr. Sherer's Estate and other related parties own the following
beneficial percentages in the two liquidating trusts at April 30, 1997.
PICLT PICR&DLT
----- --------
Mr. Sprenger 0 0
Mr. Sherer (Estate) 7.0 1.1
PICLT - 44.1
Other related parties 31.0 6.0
23
<PAGE>
ENERGY RESERVE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED APRIL 30, 1997 AND 1996
- --------------------------------------------------------------------------------
NOTE L - RELATED-PARTY MATTER (CONTINUED)
Transactions involving Mr. Sprenger and other related parties
A. In October 1984, the Company and the then President, Alfred P.
Sprenger, and his wife Dorothy V. Sprenger (Sprengers), entered into
an agreement (the agreement) for the issuance to the Sprengers of
2,000,000 investment shares of Company stock at a price of $1.00 per
share. The price quoted by NASDAQ as of the date of agreement was
$.875 to $1.00 per share. The agreement was mutually extended to
December 31, 1991 for payment of the $2,000,000 which evidenced by a
promissory note secured by the issued shares.
In December 1991, the Company reviewed the status of the arrangement
with issuances for employee options and settlement of liabilities.
Accordingly, the stock price for this agreement was adjusted to $0.625
per share. This action resulted in a decrease of $750,000 in the
amount of the original agreement. The maturity date of the promissory
note has been extended to December 31, 2000.
In December 1992, Mr. Sprenger assigned his interest in 1,950,000 of
those investment shares to a non profit organization. From December
1991 to April 30, 1995, a total of $728,321 has been credited to the
common stock promissory note by application of $598,000 in accrued
salary compensation from 1988 to date and a $130,321 debt due Mr.
Sprenger. At April 30, 1997 and 1996, the unpaid balance of the
promissory note is $521,929 and $521,679, respectively, which is
secured by 1) 870,800 shares of the issued common stock and 2) further
collateralized by mortgages on real estate. At April 30, 1997, a total
of 1,079,200 shares of the 1,950,000 shares of Company stock assigned
by Mr. Sprenger had been transferred to the non profit organization.
B. In December 1985, the Company issued 1,300,000 investment shares of
common stock to certain parties in exchange for promissory notes
secured by the issued shares at a price of $0.625 per share. The
quoted market price according to the National Market Quotation Bureau
was $0.62 to $0.875 per share at the date of issuance of the shares.
The aggregate dollar amount of the promissory notes was $812,500. A
total of $458,779 has been paid on the promissory notes to date by the
various parties. The $353,721 balance due at April 30, 1997 is
reflected in the consolidated Balance Sheet as a deduction from
shareholders' equity. This balance due is secured by 508,394 of the
issued shares. None of the promissory notes are due from officers,
directors or employees of the company.
NOTE M - COMMITMENTS AND CONTINGENCIES
General
The Company's operations are subject to various governmental and regulatory
controls (particularly those of the Department of Energy and the Environmental
Protection Agency), the effect of which on the nature of the Company's future
operations, if any, is not known.
Commitments
A. The Company leases its offices and manufacturing plant facilities
under noncancellable operating leases which expire in 2005. The total
minimum commitments under these leases are as follows:
24
<PAGE>
ENERGY RESERVE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED APRIL 30, 1997 AND 1996
- --------------------------------------------------------------------------------
NOTE M - COMMITMENTS AND CONTINGENCIES (Continued)
Year ending April 30
1998 $ 67,642
1999 $ 67,642
2000 $ 67,642
2001 $ 67,642
Through 2005 $248,043
Rent expense for the years ended April 30, 1997, 1996 and 1995 is
$134,852, $125,380 and $71,332, respectively.
B. Two Executive Officers of the Company's Transit Services, Inc.
subsidiary company have employment agreements which extend to December
1, 1997. The agreements may be terminated upon mutual consent by the
Company and the employee by the execution of an agreement against the
employee taking employment with any existing company or firm which
conducts business in the sale or lease of temperature records
equipment. In the event of termination by the Company without cause,
the Company would be required to pay the Officers their respective
salaries for the term of the agreement, which would amount to
approximately $115,000 and $53,000, respectively, on an annualized
basis.
Litigation
A. In March 1992, the Company filed a complaint with the California
Public Utilities Commission (CPUC) against Pacific Gas & Electric
Company for bad faith in certain matters pertaining to the termination
of a Power Purchase Agreement between the parties and seeking
continuation of the Agreement. The complaint was heard in October 1993
by the CPUC. No decision has been entered by the CPUC as of this date,
however, in June, 1997, the Company and PG&E reached a settlement
agreement of the complaint, which settlement is subject to approval by
the CPUL.
B. In October 1995, a complaint for infringement of patent was filed in
the United States District Court for the Eastern District of
California. Management is of the opinion that they would prevail at
trial on this matter, however, a settlement may be reached prior to a
trial date.
Although the ultimate outcome of these suits cannot be ascertained at this time
and liabilities of indeterminate amounts may be imposed upon the Company, it is
the opinion of management, based on information currently available, that the
allegations are without merit and that the resolution of this suit will not have
a material adverse effect on the consolidated financial position, results of
operations or cash flows of the Company.
25
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED APRIL 30, 1997 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> APR-30-1997
<PERIOD-START> MAY-01-1996
<PERIOD-END> APR-30-1997
<EXCHANGE-RATE> 1
<CASH> 1,118,019
<SECURITIES> 64,500
<RECEIVABLES> 1,161,873
<ALLOWANCES> 30,000
<INVENTORY> 757,492
<CURRENT-ASSETS> 3,121,971
<PP&E> 6,616,434
<DEPRECIATION> 2,867,626
<TOTAL-ASSETS> 6,953,356
<CURRENT-LIABILITIES> 1,075,999
<BONDS> 358,686
0
0
<COMMON> 19,181,284
<OTHER-SE> (13,665,287)
<TOTAL-LIABILITY-AND-EQUITY> 6,953,356
<SALES> 7,453,817
<TOTAL-REVENUES> 7,453,817
<CGS> 3,475,905
<TOTAL-COSTS> 4,558,992
<OTHER-EXPENSES> 1,880,492
<LOSS-PROVISION> 5,000
<INTEREST-EXPENSE> 65,100
<INCOME-PRETAX> 1,004,333
<INCOME-TAX> 133,692
<INCOME-CONTINUING> 985,119
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 870,641
<EPS-PRIMARY> .05
<EPS-DILUTED> 0
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