FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
of the Securities Exchange Act of 1934
For Quarter ended January 31, 1998
Commission file number 0-8006
ENERGY RESERVE, INC.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
ARIZONA 86-0220617
- ------------------------------ -------------------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
69 McAdenville Rd., Belmont, NC 28012
Registrant's telephone number, including area code (704) 825-8146
Former name, former address and former fiscal year, if changed since last report
100 West Clarendon, Suite 450, Phoenix, AZ 85013
Indicated 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
---- ----
APPLICABLE ONLY TO ISSUERS INVOLVED
IN BANKRUPTCY PROCEEDINGS DURING
THE PRECEDING FIVE YEARS:
Indicated by check mark whether the registrant has filed all documents and
reports required to by filled by Sections 12, 13, or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.
Yes No
---- ----
APPLICABLE ONLY TO CORPORATE USERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class - Common Stock, without Par Value
19,905,188 Shares Outstanding at March 1, 1998
<PAGE>
ENERGY RESERVE, INC. AND SUBSIDIARIES
INDEX
Page
----
FACE SHEET 1
INDEX 2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS 3
Consolidated Balance Sheets at
January 31, 1998 and April 30, 1997 4
Consolidated Statements of
Operations and Accumulated Deficit
Three Months Ended January 31, 1998 and 1997 5
Nine Months Ended January 31, 1998 and 1997 6
Statement of Cash Flows
Nine Months Ended January 31, 1998 and 1997 7
Notes to Consolidated Financial Statements 8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS 9-11
PART II. OTHER INFORMATION AND SIGNATURE 12
2
<PAGE>
FINANCIAL
INFORMATION
ENERGY RESERVE INC AND SUBSIDIARIES
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Energy Reserve, Inc. and its subsidiaries, Twin Chart, Inc., its subsidiary
Transit Services, Inc., Energy Reserve Holdings, Inc. and Energy Reserve
Financial Corporation (collectively the Company), engage in the business of
acquiring, developing and selling oil, gas and mineral properties, and producing
and selling crude oil and natural gas for its own account in the United States
and in the manufacture and distribution of temperature recording instruments.
The Consolidated Financial Statements included herein have been prepared by the
Company, without audit, pursuant to the rules and regulations of the Securities
and Exchange Commission. Certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to such rules and
regulations, although the Company believes that the disclosures are adequate to
make the information presented not misleading. It is suggested that these
condensed financial statements be read in conjunction with the financial
statements and data notes thereto included in the Company's annual report on
Form 10-K for the year ended April 30, 1997.
In the opinion of the Company, all adjustments have been included which are
necessary for the preparation of the balance sheets of Energy Reserve, Inc. and
consolidated subsidiaries at January 31, 1998 and April 30, 1997 and to a fair
statement of the results of operations for the three months and the nine months
ended January 31, 1998 and January 31, 1997.
3
<PAGE>
ENERGY RESERVE. INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
January 31, April 30,
1998 1997
---- ----
ASSETS
CURRENTS ASSETS:
Cash $ 778,162 $ 1,118,019
Accounts receivable 1,131,316 1,131,873
Inventory (Note A) 801,033 757,492
Investment in securities 64,500 64,500
Notes receivable-current portion 624,535 39,579
Prepaid expenses 198,705 10,508
----------- -----------
TOTAL CURRENT ASSETS 3,606,251 3,121,971
Property and equipment (net) 3,681,191 3,748,808
Deposits 3,890 3,890
Goodwill 48,726 78,687
----------- -----------
$ 7,340,058 $ 6,953,356
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued expenses $ 382,365 $ 489,740
Income taxes payable 21,995 400
Current portion of long-term debt 520,414 585,859
----------- -----------
TOTAL CURRENT LIABILITIES 924,774 1,075,999
Long-term debt 250,725 358,686
Minority interest -- 2,674
----------- -----------
1,175,499 1,437,359
----------- -----------
COMMITMENTS AND CONTINGENCIES (Note C )
STOCKHOLDERS' EQUITY
Common stock, no par value: authorized
100,000,000 shares; issued and outstanding
19,905,188 shares at January 31, 1998
and at April 30, 1997 20,041,562 20,041,562
Contributed Capital 220,872 220,872
Retained earnings (deficit) (13,016,725) (13,665,287)
Deduct-notes receivable for common
stock issued (875,650) (875,650)
Unrealized loss on securities (205,500) (205,500)
------------ ------------
TOTAL STOCKHOLDERS' EQUITY 6,164,559 5,515,997
------------ ------------
$ 7,340,058 $ 6,953,356
============ ============
See notes to Financial Statement
4
<PAGE>
ENERGY RESERVE INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND ACCUMULATED DEFICIT
Three Months Ended January 31,
-----------------------------
1998 1997
------------ ------------
REVENUE
Sales $1,857,294 $ 1,778,555
------------ ------------
COSTS AND EXPENSES
Cost of sales 923,552 878,920
General and administrative expenses 532,321 478,351
Sales expense 309,757 260,538
Interest expense 16,615 18,955
Depredation and depletion 7,915 10,291
------------ ------------
TOTAL EXPENSE 1,790,160 1,647,055
------------ ------------
INCOME (LOSS) FROM OPERATIONS 67,134 131,500
OTHER INCOME (EXPENSE)
Other income (expense) (3,397) 7,178
------------ ------------
Earnings (loss) before income taxes 63,737 138,678
Provisions for income taxes (note B) 830 --
------------ ------------
NET EARNINGS (LOSS) 62,907 138,678
ACCUMULATED DEFICIT, beginning of period (13,079,632) (14,087,641)
------------ ------------
ACCUMULATED DEFICIT, end of period $(13,016,725) $(13,948,963)
============ ============
EARNINGS PER SHARE:
Net earnings (loss) $ 0.003 $ 0.01
============ ============
See notes to financial Statements
5
<PAGE>
ENERGY RESERVE INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND ACCUMULATED DEFICIT
Nine Months Ended January 31,
-----------------------------
1998 1997
------------- ------------
REVENUE
Sales $6,101,606 $ 5,537,763
------------ ------------
COSTS AND EXPENSES
Cost of sales 2,916,058 2,784,774
General and administrative expenses 1,492,942 1,342,327
Sales expense 934,844 773,781
Interest expense 51,521 52,728
Depredation and depletion 29,963 30,753
------------ ------------
TOTAL EXPENSE 5,425,328 4,984,363
------------ ------------
INCOME (LOSS) FROM OPERATIONS 676,278 553,400
OTHER INCOME (EXPENSE)
Other income (expense) 11,515 33,610
------------ ------------
Earnings (loss) before income taxes 687,793 587,010
Provisions for income taxes (note B) 39,231 45
------------ ------------
NET EARNINGS (LOSS) 648,562 588,965
ACCUMULATED DEFICIT, beginning of period (13,665,287) (14,535,928)
------------ ------------
ACCUMULATED DEFICIT, end of period $(13,016,725) $(13,948,963)
============ ============
EARNINGS PER SHARE:
Net earnings (loss) $ 0.03 $ 0.03
============ ============
See notes to financial Statements
6
<PAGE>
ENERGY RESERVE INC. AND SUBSIDIARIES
STATEMENT OF CASH FLOWS
Nine Months Ended January 31,
-----------------------------
1998 1997
---------- ---------
CASH FLOW FROM OPERATlNG ACTIVITIES
Net earnings (loss) $ 648,562 $ 586,965
Adjustments to reconcile net earnings
(loss) to net cash used by operating activities:
Depreciation and depletion 29,963 30,753
CHANGES IN CURRENT ASSETS AND CURRENT LIABILITIES
(Increase) decrease in current assets:
Accounts receivable (557) (314,344)
Inventory (51,541) 177,488
Prepaid expenses (188,197) (18,467)
Notes receivable and investments (584,956) 2,728
Increase (decrease) in current liabilities:
Accounts payable and accrued expenses (85,780) (238,682)
Current portion of long-term debt (65,445) (87,055)
---------- ---------
NET CASH FROM OPERATING ACTIVITIES (297,951) 139,386
---------- ---------
CASH FLOW FROM INVESTING ACTIVITIES
Decrease in goodwill 28,967
Property and equipment-net 39,762 (5,045)
Repurchase minority interest (2,764) --
---------- ---------
NET CASH FROM INVESTING ACTIVITIES 66,055 (5,045)
---------- ---------
CASH FLOW FROM FINANCING ACTIVITIES
Long-term debt (107,961) (136,610)
Deferred taxes -- 3,241
---------- ---------
NET CASH FROM FINANCING ACTIVITIES (107,961) 133,369
---------- ---------
NET INCREASE (DECREASE) IN CASH (339,857) 972
CASH, beginning of period 1,118,019 614,356
---------- ---------
CASH, end of period $ 778,162 $ 615,328
========== =========
See notes to Financial Statements
7
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Quarter Ended January 31, 1998
NOTE A - INVENTORY
Inventory at January 31, 1998 and April 30, 1997 consists of the following:
January 31, 1998 April 30, 1997
---------------- --------------
Raw materials 307,566 279,338
Work-in-progress 177,934 142,413
Finished goods 301,077 333,285
Crude all 2,456 2,456
-------- --------
$809,033 $757,492
======== ========
NOTE B - INCOME TAXES
The Company and its subsidiaries file consolidated Federal income tax returns
and separate State income tax returns.
NOTE C - COMMITMENTS AND CONTINGENCIES
There have been no changes in the disclosures of commitments, contingencies and
litigation as contained in the Company's annual report Form 10-K for the year
ended April 30,1997.
8
<PAGE>
Financial
Information
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES
At January 31, 1998 the Company had a working capital of $2,681,477. This is an
improvement of $635,505 for the nine months period May 1, 1997 to January 31,
1998. This was accomplished from the operating activities of the temperature
recording industry segment, which business is conducted through Transit
Services, Inc. under the style of Cox recorders, together with non-operating
income from the crude oil business segment.
The Company did not incur any long-term debt during this period and investment
in property and equipment was minimal, At present, cash flow from operations is
adequate to meet the cash requirements and commitments of the Company. However,
the Company plans to enter into equity, debt or other financing arrangements to
meet its future financial needs for expansion and:
(a) To resume drilling and work over activities at its
Chico Martinez oil field;
(b) To provide for general working capital needs;
(c) To repay outstanding liabilities.
COMPARISON OF OPERATIONS FOR QUARTER ENDED JANUARY 31, 1998 AND 1997
Net earnings for the third fiscal quarter ended January 31, 1998 were $62,907 as
compared to $138,678 for the same period of 1997. The consolidated income from
operations for the third quarter ended January 31, was $67,134 for 1998 as
compared to $131,500 for 1997.
9
<PAGE>
COMPARISON OF OPERATIONS FOR QUARTER ENDED - CONTINUED
The following schedule reflects the operations of the two industry segments of
the Company for the three months ended January 31, 1998 and 1997.
Three Months Ended January 31,
------------------------------
Oil Production Temperature Recorders
-------------------------------------------------
1997 1998 1997 1998
---------- --------- ---------- ---------
Sales $ -- $ -- $1,778,555 $1,857,294
Cost of sales 793 3,128 828,127 920,424
General & Administrative 19,746 35,097 458,605 512,884
Sales expense -- -- 260,538 309,757
Interest 8,119 8,258 10,836 8,357
Depreciation/Amortization 994 994 9,297 6,921
-------- -------- ---------- ----------
Income from operations (29,652) (47,477) 161,152 98,951
Other Income (loss) -- -- 7,178 12,263
-------- -------- ---------- ----------
Earnings (loss) before
income taxes (29,652) (47,477) 168,330 111,214
Income taxes -- 830 -- --
-------- -------- ---------- ----------
Net earnings (loss) $(29,652) $(48,307) $ 168,330 $ 111,214
======== ======== ========== ==========
OIL PRODUCTION
Net loss for the current period increased $18,655 over the prior year period for
the oil production segment. There were no crude oil sales during the current
quarter. Oil production at the Company's Chico-Martinez, Kern County, California
oil field was restarted in December 1996. Management anticipates increased crude
oil production activities including oil sales during the ensuing months. To this
goal, management has budgeted an initial expenditure of $150,000 over the next
few months. The increase of $15,351 in general and administrative expense is due
primarily to shareholder meeting expense in November 1997.
TEMPERATURE RECORDERS
Temperature recorder operations showed improvement in sales but not net earnings
for the three months ended January 31, 1998 as compared to the same period for
1997. Sales increased $78,739. Cost of sales increased $42,297, however the
percentage of such cost relative to sales remained constant at 49%. General and
administrative expense increased $54,279, primarily due to development expenses
on new products for this industry segment. The increase in sales expense of
$49,219 as compared to last year's quarter is due to trade shows cost and
travel together with greater sales costs related to increased sales volume.
10
<PAGE>
COMPARISON OF OPERATIONS FOR NINE MONTHS ENDED JANUARY 31, 1998 AND 1997
There was a consolidated net earnings of $648,562 for the period ended January
31, 1998, as compared to net earnings of $586,965 for the same period ended
January 31, 1997. However, to afford better analysis and comparison of the
similar periods of 1998 and 1997, the following schedule segregates the
operations by industry segments and provides a comparison of the oil production
operations and the temperature recorder operations.
Nine Months Ended January 31,
------------------------------
Oil Production Temperature Recorders
-------------------------------------------------
1997 1998 1997 1998
-------- --------- ---------- ---------
Sales $ 0 $ 17,734 $5,537,763 $6,083,872
Cost of sales 2,078 11,021 2,782,566 2,905,037
General & Administrative 52,308 97,562 1,290,019 1,395,380
Sales expense -- -- 773,781 934,844
Interest expense 24,285 24,774 28,443 26,747
Depreciation/Amortization 2,982 2,952 27,771 26,981
-------- --------- ---------- ----------
INCOME (LOSS) FROM OPERATIONS (81,783) (118,605) 635,183 794,883
OTHER INCOME (EXPENSE):
Other income (expense) 164,076 (31,919) (130,466) 43,434
-------- --------- ---------- ----------
Earnings (loss) before
income taxes 82,293 (150,524) 504,717 838,317
Income taxes-minimum 45 6,985 -0- 37,246
-------- --------- ---------- ----------
NET EARNINGS (LOSS) $ 82,248 $(152,509) $ 504,717 $ 801,071
======== ========= ========== ==========
OIL PRODUCTION
Oil production revenue increased $17,734 in the current year nine month period
as compared to the prior year. Increased cost of sales is attributable to
production expenses which were not present in the prior year because of lack of
production. The general and administrative expenses increase of $45,254 is due
to shareholder meeting expenses and administrative expenses of a check cashing
operation now discontinued.
The $31,919 of other expense is the loss on disposition of the check cashing
business operated for a short period within the oil segment operations. The
other income of $164,078 for the prior year resulted from the settlement of
certain indebtness at less than the recorded debt.
TEMPERATURE RECORDERS
Current year sales show an increase of $546,109 over the prior year which is a
10% increase. Cost of sales as a percentage to sales is 48% for 1998 as compared
to 50% for 1997. The increase of $105,361 or 1.9% in general and administative
expense resulted primarily from development expense of new product lines. The
sales expense increase of $161,063 for the current nine month period as compared
to the prior year period is attributable to trade show costs and travel, sales
promotional advertising and literature and greater sales costs related to the
increased sales volume.
Other income and expense category shows an improvement change of $173,900. In
the prior year period there was a $150,000 payment as complete and full
settlement of a claim for royalties pertaining to prior years operations whereas
for the current year there was a $43,434 earnings of interest income.
Net earnings increased $296,354 or 58.7% for the current year as compared to the
prior year.
11
<PAGE>
OTHER
INFORMATION
PART Il-OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Reference is made to the annual report Form 10-K of the Company for the year
ended April 30, 1997, relative to legal proceedings and litigation. No changes
or determinations have occurred on such proceedings during the quarter covered
by this report.
ITEM 5. OTHER INFORMATION
Subsequent to January 31, 1998, the date of this report, the Company received
payment in the amount of $3.5 million pursuant to the settlement of that certain
litigation with Pacific Gas & Electric Company which was disclosed on Form 8-K
dated July 22, 1997. The Company retained $2.274 million net of the $3.5 million
settlement after payment of costs and expenses of the eight year litigation.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) No exhibits are filed as a part of this report.
(b) There was no Form 8-K filed by the Company during the quarter ended
January 31, 1998.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ENERGY RESERVE, INC.
Date 3/18/98 /s/ James L. Cox
----------- --------------------------------------------------------
James L. Cox, President, Chief Executive Officer and Director
Date 3/14/98 /s/ Alfred P. Sprenger
----------- --------------------------------------------------------
Alfred P. Sprenger, Chairman
Date 3/14/98 /s/ Robert W. Dupree
----------- --------------------------------------------------------
Robert W. Dupree, Chief Financial Officer
12
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FORM
10-Q FINANCIAL REPORT OF ENERGY RESERVE, INC. AS SUBMITTED TO THE SECURITIES AND
EXCHANGE COMMISSION FOR THE QUARTER ENDED JANUARY 31, 1998 AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> APR-30-1998
<PERIOD-START> NOV-01-1997
<PERIOD-END> JAN-31-1998
<EXCHANGE-RATE> 1
<CASH> 778,162
<SECURITIES> 64,500
<RECEIVABLES> 1,131,316
<ALLOWANCES> 0
<INVENTORY> 801,033
<CURRENT-ASSETS> 3,606,251
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 7,340,058
<CURRENT-LIABILITIES> 924,774
<BONDS> 0
0
0
<COMMON> 20,041,562
<OTHER-SE> 13,877,003
<TOTAL-LIABILITY-AND-EQUITY> 7,340,058
<SALES> 1,857,294
<TOTAL-REVENUES> 1,857,294
<CGS> 923,552
<TOTAL-COSTS> 1,790,160
<OTHER-EXPENSES> 3,397
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 16,615
<INCOME-PRETAX> 63,737
<INCOME-TAX> 830
<INCOME-CONTINUING> 67,134
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 62,907
<EPS-PRIMARY> .003
<EPS-DILUTED> .003
</TABLE>
