SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended August 31, 1996
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ........ to .............
Commission file number: 0-14873
NEVADA ENERGY COMPANY, INC.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 84-0897771
- ---------------------------------------------- -------------------
(State or other jurisdiction of incorporation (I.R.S. Employer
or organization) Identification No.)
510 Castillo street, Santa Barbara, CA 93101
- --------------------------------------------------------------------------------
(Address of principal executive offices)
(Zip Code)
(805) 884-8350
- --------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
401 East Fourth Street, Reno, Nevada 89512
- --------------------------------------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
Check whether the issuer (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 CORPORATE ISSUERS:
There were 12,603,247shares of the registrant's Class A Common Stock,
$.001 par value, outstanding as of October 18, 1996.
<PAGE>
NEVADA ENERGY COMPANY, INC.
INDEX
Part I. Financial Information Page Number
- ----------------------------- -----------
Item 1. Financial Statements
Consolidated Balance Sheets -
August 31, 1996 and February 28, 1996 3 - 4
Consolidated Statements of Operations
for the three months ended August 31, 1996
the six months ended August 31, 1995
and for the three months ended August 31, 1996
and the six months ended August 31, 1995 5
Consolidated Statements of Shareholders' Equity -
for the year ended February 28, 1995 and the
six months ended August 31, 1996 6
Consolidated Statements of Cash Flows -
for the six months ended August 31, 1996
and the six months ended August 31, 1995 7
Notes to Consolidated Financial Statements 8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 22
Part II. Other Information
- --------------------------
Item 1. Legal Proceedings. 31
Item 4. Submission of Matters to a Vote of
Security Holders. 31
Item 5. Other Information. 32
Item 6. Exhibits and Reports on Form 8-K . 43
2
<PAGE>
NEVADA ENERGY COMPANY, INC.
CONSOLIDATED BALANCE SHEETS
AT
AUGUST 31, 1996 and FEBRUARY 29, 1996
A S S E T S
- - - - - -
AUG. 31, 1996 FEBRUARY 29
(Unaudited) 1996
----------- -----------
CURRENT ASSETS:
Cash $ 75,192 $ 132,243
Receivables 529,519 137,274
Inventory 52,026 35,375
Deposits and prepaid expenses 45,761 119,375
----------- -----------
Total Current Assets 702,498 424,267
----------- -----------
PROPERTY AND EQUIPMENT, at cost (Note 1):
Furniture, equipment and vehicles 525,905 229,580
Building 253,156 253,156
Power generation equipment 1,052,823 1,087,607
Idle power generation equipment
(Net of obsolescence of $2,532,472) 5,226,063 5,226,063
Land 70,000 70,000
----------- -----------
7,127,947 6,866,406
Less - Accumulated depreciation and amortization (335,964) (336,277)
----------- -----------
Net Property and Equipment 6,791,983 6,530,129
----------- -----------
OTHER ASSETS (Note 2):
Investments in partnerships 2,975 3,227
Investments in subsidiaries 1,639,969 24,546
Deposits (Note 4) 0
Power Purchase Agreements, net of Amortization 47,027 48,288
Organization Expense, net of amortization 962 1,102
----------- -----------
1,690,933 77,163
----------- -----------
TOTAL ASSETS $ 9,185,414 $ 7,031,559
=========== ===========
(The accompanying notes are an integral part of these statements.)
3
<PAGE>
NEVADA ENERGY COMPANY, INC.
CONSOLIDATED BALANCE SHEETS
AT
AUGUST 31, 1996 and FEBRUARY 29, 1996
<TABLE>
<CAPTION>
L I A B I L I T I E S A N D S H A R E H O L D E R S' E Q U I T Y
- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -
AUG. 31, 1996 FEBRUARY 29
(Unaudited) 1996
------------ ------------
<S> <C> <C>
CURRENT LIABILITIES:
Accounts payable $ 553,533 $ 187,455
Short-term borrowings (Note 3) 55,475 42,041
Payable to related party 37,965 37,965
Accrued payroll 109,730 60,294
Other liabilities 79,604 65,047
Liabilities subject to compromise (Note 1) 26,891 43,207
------------ ------------
Total Current Liabilities 863,197 436,009
------------ ------------
NON-CURRENT LIABILITIES
Mortgage Payable (Note 3) 249,592 15,688
------------ ------------
Total Non-Current Liabilities 249,592 15,688
------------ ------------
COMMITMENTS AND CONTINGENT LIABILITIES (Note 4) -- --
------------ ------------
Total Liabilities 1,112,789 451,697
------------ ------------
MINORITY INTEREST IN SUBSIDIARY (Note 2) 658,038 698,430
------------ ------------
SHAREHOLDERS' EQUITY (Notes 1, 4, 5, 6 and 7):
Preferred stock, $.001 Par Value, Authorized 2,000,000 shares;
Issued and outstanding -
Series A - 1,463,793 shares at August 31, 1996, none at
February 29, 1996 1,464 --
Series B - 5 shares at August 31, 1996, none at February 29, 1996 -- --
Class A Common Stock, $.001 par value, Authorized 25,000,000 shares;
Issued and outstanding 12,203,247 shares at August 31, 1996
and 8,808,485 shares at February 29, 1996 12,203 8,808
Class B Common Stock, $.001 Par Value, Authorized 25,000,000 shares;
Issued and outstanding 4,437,473 shares at August 31, 1996
and 4,437,473 shares at February 29, 1996 4,437 4,437
Additional paid-in capital 17,488,957 11,528,754
Series A - note receivable (3,655,586) --
Accumulated deficit (6,427,788) (5,651,466)
Treasury stock - Class A, 16,785 shares at August 31, 1996 and
16,785 shares at February 29, 1996 (9,101) (9,101)
------------ ------------
Total Shareholders' Equity 7,414,586 5,881,432
------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 9,185,414 $ 7,031,559
============ ============
</TABLE>
(The accompanying notes are an integral part of these statements.)
4
<PAGE>
NEVADA ENERGY COMPANY, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS SIX MONTHS THREE MONTHS SIX MONTHS
ENDED ENDED ENDED ENDED
AUGUST 31 AUGUST 31 AUGUST 31 AUGUST 31
1996 1996 1995 1995
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
REVENUES:
Energy Sales $ 133,284 $ 201,230 $ 284,292 $ 544,233
Printing and Business Supply Sales 350,698 653,781 253,722 503,140
----------- ----------- ----------- -----------
Total Revenues 483,982 855,011 538,014 1,047,373
----------- ----------- ----------- -----------
COSTS AND EXPENSES:
Cost of Sales 270,579 469,206 199,081 352,720
Cost of Operations 72,989 152,033 140,909 321,304
Depreciation and Amortization (Note 1) 30,859 47,583 14,047 30,461
Provision for obsolescence (Note 1) 0 (0) 94,810 189,620
Professional Fees 293,928 401,772 151,544 246,354
General and Administrative 467,042 598,482 187,728 315,410
----------- ----------- ----------- -----------
Total Costs and Expenses 1,135,397 1,669,076 788,119 1,455,869
----------- ----------- ----------- -----------
OTHER INCOME AND (EXPENSES):
Interest Income 117 278 2,810 3,263
Other Income 2,238 3,234 2,140 6,275
Gain on sale of project interest (Note 2) 0 -- 359,523 945,034
Loss from Partnership interests 2,179 (20,000) (20,000)
Interest Expense (49,207) (12,761) (9,251) (13,087)
Minority Interests (Notes 1 and 2) 47,392 47,392 (213,816) (229,018)
----------- ----------- ----------- -----------
Total other income and (expense) 2,719 38,143 121,407 692,467
----------- ----------- ----------- -----------
LOSS BEFORE TAXES (648,696) (775,922) (128,699) 283,971
PROVISION FOR INCOME TAXES (Note 8) 200 400 200 (13,667)
----------- ----------- ----------- -----------
NET INCOME (LOSS) $ (648,896) $ (776,322) $ (128,899) $ 297,638
=========== =========== =========== ===========
NET INCOME (LOSS) PER SHARE (Notes 1 and 6) $ (0.06) $ (0.08) $ (0.01) $ 0.03
=========== =========== =========== ===========
</TABLE>
(The accompanying notes are an integral part of these statements.)
5
<PAGE>
NEVADA ENERGY COMPANY, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEAR ENDED FEBRUARY 29, 1996 AND SIX MONTHS ENDED AUGUST 31, 1996
<TABLE>
<CAPTION>
CLASS A COMMON CLASS B COMMON PREFERRED STOCK
----------------------------------- ----------------- ---------------------------------
SERIES A
---------------------------------
NUMBER NUMBER NUMBER
OF OF OF NOTE
SHARES AMOUNT SUBSCRIBED SHARES AMOUNT SHARES AMOUNT RECEIVABLE
----------- --------- ----------- ----------- ------ --------- -------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCES - FEBRUARY 28, 1995, 7,509,481 $ 7,509 $ 250,000 4,024,918 $4,025 - $ - $ -
Shares Issued for Cash (Note 6) 333,333 333 (250,000) - - - - -
Shares Issued for Services (Note 6) 145,842 146 - - - - - -
Stock dividends at market value (Note 6) 819,829 820 - 412,555 412 - - -
Transfer of surplus for stock dividend
Net (Loss) for the Year
Ended February 28, 1995
----------- --------- ----------- ----------- ------ --------- -------- -------------
BALANCES - FEBRUARY 29, 1996 8,808,485 8,808 - 4,437,473 4,437 - - -
Shares issued for cash (Note 6) 152,381 153 - - - - -
Shares issued for assets (Note 6) 2,000,000 2,000
Shares issued/retired in conversion 1,242,381 1,242 (496,952) (497)
Shares issued for a note (Note 6) - - - 1,960,745 1,961 (4,899,988)
Expenses related to issuance
Cash received on note 1,244,402
Net (Loss) for the six months
Ended August 31, 1996
----------- --------- ----------- ----------- ------ --------- -------- -------------
BALANCES, August 31, 1996 12,203,247 $ 12,203 $ - 4,437,473 $4,437 1,463,793 $ 1,464 $(3,655,586)
=========== ========= =========== =========== ====== ========= ======== =============
PREFERRED STOCK
-------------------
SERIES B
-------------------
NUMBER
OF PAID-IN ACCUMULATED TREASURY SHAREHOLDERS'
SHARES AMOUNT CAPITAL DEFICIT STOCK EQUITY
------- -------- ----------- --------------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C>
BALANCES - FEBRUARY 28, 1995, - $ - $ 11,214,439 $ (5,022,828) (8,853) $ 6,444,292
Shares Issued for Cash (Note 6) - - 247,331 - - (2,336)
Shares Issued for Services (Note 6) - - 68,216 - - 68,362
Stock dividends at market value (Note 6) - - 802,321 (803,553) (248) (248)
Transfer of surplus for stock dividend (803,553) 803,553 - -
Net (Loss) for the Year
Ended February 28, 1995 (628,638) - (628,638)
------- -------- ----------- --------------- ---------- ------------
BALANCES - FEBRUARY 29, 1996 - - 11,528,754 (5,651,466) (9,101) 5,881,432
Shares issued for cash (Note 6) 5 - 97,860 - - 98,013
Shares issued for assets (Note 6) 1,154,250 1,156,250
Shares issued/retired in conversion (745) -
Shares issued for a note (Note 6) 4,898,027 - - -
Expenses related to issuance (189,189) (189,189)
Cash received on note 1,244,402
Net (Loss) for the six months
Ended August 31, 1996 (776,322) (776,322)
------- -------- ----------- --------------- ---------- ------------
BALANCES, August 31, 1996 5 $ - $17,488,957 $ (6,427,788) (9,101) $ 7,414,586
====== ======== =========== =============== ========== ============
(The accompanying notes are an integral part of these statements.)
</TABLE>
6
<PAGE>
NEVADA ENERGY COMPANY, INC.
STATEMENTS OF CASH FLOWS FOR THE SIX MONTHS
ENDED AUGUST 31, 1996 AND AUGUST 31, 1995
<TABLE>
<CAPTION>
AUGUST AUGUST
1996 1995
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income (Loss) $ (776,322) $ 297,637
Adjustments to reconcile net income (loss)
to net cash used in operating activities -
Depreciation and Amortization (Note 1) 47,583 30,461
Provision for Obsolescence (Note 1) -- 189,620
Amortization of Goodwill 110,028 --
(Gain) Loss on Disposition of Assets -- (359,523)
Minority Interest in Subsidiary Profit (Loss) 47,392 229,018
Equity in Loss from Partnership Interests -- 20,000
Stock issued to Directors/Officers/Employee -- 68,362
Changes in assets and liabilities -
Decrease (Increase) in Receivables (392,245) (747,545)
Decrease (Increase) in Stock Subscription Receivable -- 150,000
Decrease (Increase) in Receivable from related party -- 37,500
Decrease (Increase) in Inventories (16,681) 3,530
Decrease (Increase) in Deposits and Prepaids 73,614 (8,603)
Increase (Decrease) in Accounts Payable 366,078 (34,541)
Increase (Decrease) in Payable to related party -- (8,117)
Increase (Decrease) in Other Liabilities 63,993 (51,126)
Increase (Decrease) in Liabilities subject to compromise (16,316) (23,294)
----------- -----------
Net cash used in operating activities (492,876) (206,621)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquistion of Property and Equipment (300,400) (48,401)
Proceeds from Sale of Assets 650,000
Investment in Subsidiaries (708,125) --
(Advances) to and Repayments from Partnerships -- (35,472)
----------- -----------
Net cash provided by investing activities (1,008,525) 566,127
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Principal repayments on financing (33,062) (10,113)
Net proceeds from cash sales of common and preferred stock 1,244,402 250,000
Borrowing 280,400 --
Minority interest (47,392) (229,018)
----------- -----------
Net cash used in financing activities 1,444,348 10,868
----------- -----------
NET INCREASE (DECREASE) IN CASH (57,053) 370,374
CASH AT BEGINNING OF PERIOD 132,245 37,885
----------- -----------
CASH AT END OF PERIOD $ 75,192 $ 408,259
=========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION (Note 11):
Cash expenditures during the nine months for -
Interest $ 9,316 19,716
Taxes, including taxes paid through payments on liabilities
subject to compromise of $18,915 in 1996 and $13,386 in 1995 200 27,158
</TABLE>
(The accompanying notes are an integral part of these statements.)
7
<PAGE>
NEVADA ENERGY COMPANY, INC.
Notes to Consolidated Financial Statements
Note 1 - Organization and Summary of Significant Accounting Policies:
Principles of Consolidation:
----------------------------
The accompanying consolidated financial statements include the
accounts of the Company and its wholly-owned subsidiaries Combustion
Energy Company, Inc. ("CEC"), a Nevada corporation and Yerington
Acquisition Company, Inc. a Nevada corporation and its majority
owned subsidiary San Jacinto Power Company, a Nevada corporation
(See Note 2). On November 30, 1994, the Company's wholly owned
subsidiary CEC completed a merger with Herth Printing and Business
Supplies, Inc. ("HPBS" - see notes 2 and 5). This acquisition has
been treated as a pooling of interests and the financial statements
presented herein reflect the combined results of the pooled
businesses. All significant intercompany accounts and transactions
have been eliminated in consolidation.
Organization and Operations:
----------------------------
Nevada Energy Company, Inc. ("the Company") was organized on
December 2, 1982, and incorporated under the laws of Delaware on
December 20, 1982, under the name Munson Geothermal, Inc. Pursuant
to an action of the Board of Directors, the Company's name was
changed to Nevada Energy Company, Inc. on December 3, 1990. The
Company is primarily engaged in the development, financing,
construction and operation of geothermal, wind and biomass energy
resources which are used primarily to generate electric power. The
Company also operates a custom printing and catalogue based retail
office supply business.
Power Generation Equipment:
---------------------------
Power generation equipment is carried at cost and consists of
64 wind turbine generators operated in California by San Jacinto
Power.
Idle Power Generation Equipment:
--------------------------------
Idle power generation equipment includes ten Ormat power
plants capable of producing up to an estimated maximum 3,700 KW
average output valued at $2,526,063 and the relocated Raft River
Power Plant valued at of $2,700,000 and estimated to be capable of
up to 7,200 KW of output. Total net book value of these assets is
$5,226,063. A recent appraisal (May 1996) of these assets determined
the fair market value to be $5.7 million.
8
<PAGE>
Land and Buildings
------------------
Included in the assets of HPBS (see above) was a ten thousand
eight hundred (10,800) square foot building containing office space,
print shop and warehouse space with a historical cost of $253,156
and approximately 0.77 acres of fee land with a book value of
$70,000.
Depreciation and Amortization:
------------------------------
The Company provides for depreciation of buildings, furniture
and field equipment utilizing straight-line and accelerated methods
over the useful lives of three to twenty-one years beginning when
assets are placed in service. Costs of power generation equipment
represents 64 wind turbines together with related infrastructure, in
use by the Company's majority owned subsidiary San Jacinto Power,
which have been recorded at acquisition cost and are being
depreciated over the remaining 21 year life of the related Power
Purchase Agreement acquired in the same transaction. The HPBS
vehicles, equipment and building are recorded at acquired book value
and are being depreciated over their remaining useful lives. The
Power Purchase Agreement was valued at $52,500, its estimated value
when acquired, and it is being amortized on a straight line basis
over the then remaining 21 years of contract life.
Provisions for obsolescence:
----------------------------
Idle geothermal power generation equipment as at February 29,
1992 was adjusted to the lower of cost or appraisal value.
Thereafter, through February 29, 1996, provisions for obsolescence
were provided based on the remaining economic life, which was
estimated in 1992 to be eighteen years. Based on a May 1996
appraisal, an additional $83,288 of obsolescence was provided on the
Raft River power plant asset, reducing its net book value at
February 29, 1996 to the fair market, appraised value of $2.7
million. Beginning with the fiscal year ended February 28, 1997, the
Company is subject to the provisions of FAS 121 concerning the
accounting for the impairment of long-lived assets. Based on the
provisions of FAS 121, the Company has adopted an accounting policy
in which it will review its long-lived assets for impairment
whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. The Company will
continue to obtain annual independent appraisals to determine
current fair market value of its long-lived, currently idle, assets.
In the interim there will be no provisions for obsolescence. The
current combined carrying value ($5,226,063) of the idle equipment
is less than the current combined fair market appraisal value. The
Company will apply FAS 121 each quarter, as required. No adjustment
has been made in the quarter ending August 31, 1996.
9
<PAGE>
Goodwill
--------
The acquisition of Telecomm Technologies, Inc. resulted in
approximately $1,700,000 in goodwill. This is currenlty being
amortized over a three year period.
Net Income (Loss) per Common Share:
-----------------------------------
The net income (loss) per common share is computed based upon
the weighted average number of shares of Class A Common Stock
outstanding during each period. Class A shares issued in conjunction
with the merger of HPBS and CEC (See Notes 1 and 5) have been
treated as issued at February 28, 1993. Weighted average shares of
Class A Common Stock outstanding were 9,990,866 in the six months
ending August 31, 1996, 11,122,453 in the three months ended August
31, 1996, 8,752,930 in the six months ending August 31, 1995 and
8,808,485 in the three months ended August 31, 1995.
Shares issuable upon exercise of warrants or options are
excluded from the computation since the effect of their inclusion
would be antidilutive as the exercise price is in excess of the
average market price during the applicable periods. Shares of Class
B Common Stock are excluded from the computation since Class B
shareholders do not participate in the earnings of the Company.
Shares issued in the Smith acquisition, but held in escrow between
the date issued, December 15, 1993 and the date of completion of the
acquisition, June 24, 1994, were not included in the computation of
loss per share during the period they were held in escrow.
Business Segment Information
----------------------------
The Company currently classifies its business activities in
two segments: (1) electric power production and development and (2)
printing and business supply sales. Information concerning the
Company's business segments in the quarters ending August 31, 1996
and 1995 are as follows (amounts in thousands):.
ELECTRIC PRINTING
POWER AND OFFICE
($000) PRODUCTION SUPPLIES CONSOLIDATED
- ------ ---------- ---------- ------------
QUARTER ENDING
AUGUST 31, 1996
- ---------------
Sales * $ 68 $ 303 $ 371
Operating Income (Loss) (167) 40 (127)
Gain on disposition of assets 586 - 586
Identifiable assets ** 6,967 429 7,396
Depreciation/amortization 13 4 17
Provision for obsolescence - - -
Capital expenditures - - -
10
<PAGE>
ELECTRIC PRINTING
POWER AND OFFICE
PRODUCTION SUPPLIES CONSOLIDATED
---------- ---------- ------------
($000)
- ------
SIX MONTHS ENDING
AUGUST 31, 1996
- ---------------
Sales * $ 201 $ 654 $ 855
Operating Income (Loss) (845) 69 (776)
Identifiable assets ** 8,350 835 9,185
Depreciation/amortization 27 21 48
Capital expenditures - 307 307
($000)
- ------
Quarter ENDING
AUGUST 31, 1995
- ---------------
Sales * $ 133 $ 351 $ 484
Operating Income (Loss) (678) 29 (649)
Identifiable assets ** 8,350 835 9,185
Depreciation/amortization 16 18 34
Capital expenditures - 306 306
($000)
- ------
Six MoNTHS ENDING
AUGUST 31, 1995
- ---------------
Sales $ 544 $ 503 $ 1,047
Operating Income (Loss) (285) 3 (288)
Extraordinary Item 586 - 586
Identifiable assets ** 7,679 475 8,154
Depreciation/amortization 24 6 30
Provision for obsolescence 190 - 190
Capital expenditures - 1 1
Intra-segment transactions, which are not material, have been eliminated.
* Substantially all revenues from the electric power production were
generated from sales to Southern California Edison Company (SCE)
under a Power Purchase Agreement, which will expire in 2015.
Pursuant to the agreement, SCE will purchase all electricity
generated by the Company's wind system at the price computed based
on the forecast of annual as-available capacity and a standard rate
approved by the Public Commission of the State of California. The
Company's 1996 revenue from SCE of approximately $68,000 represented
18% of the total revenue of the Company in 1996. In 1995 the revenue
from SCE of approximately $260,000 represented 51% of total revenue
of the Company in 1995.
** Includes $5,110,503 of net idle power generation equipment in 1996
and $5,593,780 of net idle power generation equipment in 1995.
11
<PAGE>
Telecommunications results were adversely affected by a change in
long-distance carriers which resulted in the Company's customers
being direct billed by the long-distance carrier from approximately
April 1, 1996 through August 16, 1996. (The asset acquisition
occurred as of June 15, 1996). Effective approximately August 16,
1996, the Company's telecommuniations subsidiary (TTI) resumed
direct billing of its customers. Revenues of $21,282 for the quarter
ending August 31, 1996 are included in the energy segment. The
results of operations was a loss of approximately $140,196 which is
also included in the energy category.
NOTE 2 - Investments in Partnerships and Consolidated Subsidiaries:
Combustion Energy Company, Inc.
-------------------------------
Combustion Energy Company, Inc., a Nevada corporation, ("CEC")
was formed on February 12, 1993 for the purpose of being a general
partner of Oreana Power Partners (see below). CEC's assets consist
of its one percent (1%) partnership interest in Oreana Power
Partners, currently valued at $925 based on its initial cash
investment less accumulated losses, and its ownership of the assets
of HPBS (See notes 1 and 5).
Combustion Energy Company merger with Herth Printing
----------------------------------------------------
On November 30, 1994 the Board of Directors of the Company and
the shareholders of Herth Printing and Business Supplies, Inc.
approved the merger of NEC's subsidiary CEC with HPBS which resulted
in HPBS becoming a wholly-owned subsidiary of NEC. Under the terms
of the agreement, HPBS share holders received 641,784 shares if the
Company's class A common stock in exchange for all of the
outstanding shares of HPBS. HPBS was established in 1983 as a sole
proprietorship in the printing and retail catalogue office supply
business. The proprietors incorporated the business on November 1,
1994.
The merger qualifies as a tax-free reorganization and was
accounted for as a pooling of interests. Accordingly, the Company's
financial statements have been restated to include the results of
HPBS for all period presented. Separate and combined results of NEC
and HPBS during the periods presented were as follows (in
thousands):
12
<PAGE>
Three months ended
August 31, 1996 NEC HPBS Combined
(Unaudited)
-------------------------------------------------------------------------
Net revenues $ 68.0 $ 303.0 $ 371.0
Net income (loss) $ (167.0) $ 40.0 $ (127.0)
-------------------------------------------------------------------------
Six months ended
August 31, 1996 NEC HPBS Combined
(Unaudited)
-------------------------------------------------------------------------
Net revenues $ 201.0 $ 654.0 $ 855.0
Net income (loss) $ (845.0) $ 69.0 $ (776.0)
-------------------------------------------------------------------------
Three months ended
August 31, 1995 NEC HPBS Combined
(Unaudited)
-------------------------------------------------------------------------
Net revenues $ 284.3 $ 253.7 $ 538.0
Extraordinary income - - $ -
Net income (loss) $ (107.1) $ (21.6) $ (128.7)
-------------------------------------------------------------------------
Six months ended
August 31, 1995 NEC HPBS Combined
(Unaudited)
-------------------------------------------------------------------------
Net revenues $ 544.2 $ 503.1 $ 1,047.3
Extraordinary income $ 585.5 - $ 585.5
Net income (loss) $ 294.2 $ 3.4 $ 297.6
-------------------------------------------------------------------------
The combined financial results presented above include adjustments
made to conform accounting policies of the two companies. There were no
adjustments which impacted net income. Intercompany transactions between
the two companies, which were not material, have been eliminated.
There have been no significant costs of combing the operations of
the two companies. The Company relocated its headquarters to the building
owned by HPBS in the quarter ending August 31, 1996.
The cost of relocating was nominal.
On August 16, 1996, the Company entered into an agreement to
transfer the assets of HPBS to the then president of the Company. The
transaction is pending review of the Company's legal counsel.
San Jacinto Power Company
-------------------------
San Jacinto Power Corporation, a Nevada Corporation, ("SJPC") was
formed on December 15, 1993. Under the terms of an "Escrow Agreement"
13
<PAGE>
dated December 15, 1993, the Company contributed 222,267 shares of its
Class A Common Stock, valued at $222,267, based on 50% of market price at
the time of issue due to resale restrictions imposed pursuant to Rule 144,
and total cash of $275,055 in exchange for its 50.01% ownership interest
in SJPC.
Also under the terms of the Escrow Agreement, on December 15, 1993,
the New World Power Corporation ("New World") contributed 48,000 shares of
its Common Stock, with market value of $500,000 at time of issue, to SJPC.
On February 10, 1994, New World contributed cash of $149,970 to SJPC and
delivered a balance of cash of $124,975 on March 8, 1994. New World's
contribution of Common Stock and cash of $274,945 to SJPC are in exchange
for its 49.99% ownership interest in SJPC. The shares of Class A Common
Stock contributed to SJPC by the Company and the Common Stock of New World
are collectively referred to herein as the "Shares". The number of shares
to be issued by the Company and New World were established in an Asset
Purchase Agreement dated July 1, 1993 with no adjustment required due to
stock price variations to date of issue. The Escrow Agreement provides for
the shares of the Company and New World to be held for a two year period
from December 15, 1993, prior to distribution to the sellers. During the
two year period, certain costs arising in connection with the purchase
transaction could result in the number of shares finally transferred to
the seller being reduced. Such costs include unassessed claims for
property taxes, prior environmental infractions, prior BLM assessments,
limited partner claims and other contingent costs to be assessed against
the sellers. Distribution of the shares was completed by July 9, 1996 with
no increase or adjustment to the number of shares.
The Company and New World subsequently engaged in negotiations to
acquire the operating assets of Smith Wind Energy Company ("Smith") and
six affiliated limited partnerships operated by Smith which are known as
Triad A, Triad B, Triad C, Triad D, Triad E, and Triad F Limited
Partnerships (collectively "Triad"). Smith and Triad were operating a wind
turbine energy park in North Palm Springs, California. Energy sales were
pursuant to a long-term contract with Southern California Edison Company.
A total of 77 wind turbines were available for operations, together with
associated infrastructure, additional turbine sites, turbine towers, parts
and service equipment and a long-term land lease with the BLM
(collectively, the "Assets").
SJPC was formed for the purpose of acquiring, holding and operating
the Assets to be acquired from Smith and Triad. The acquisition of the
Smith/Triad assets by SJPC was completed and effective on June 24, 1994.
The purchase price was equal to the agreed value of the shares plus
assumed liabilities totalling approximately $293,957 for long-term secured
debt and certain delinquent property taxes and totaled $1,038,029.
14
<PAGE>
The total cost was allocated based on managements estimate of fair
market value of assets acquired, except for prepaid BLM rent which was
valued at cost, as follows:
Field Equipment $ 21,177
Prepaid BLM Rent 46,892
Power Sales Contract 52,500
Power Generation Equipment 917,460
------------
Total $ 1,038,029
============
SJPC also entered into a non-competition agreement with the former
owner/general partner of Smith which provided for payment of $15,000 month
for two years and a non-competition period of two years to begin at the
closing date of June 24, 1994. All payments under this agreement had been
made as of July 9, 1996.
The Company has entered into negotiations to acquire the minority
holders interest in SJPC.
Mt. Apo Corporation
-------------------
Mount Apo Corporation, a Nevada corporation ("MAC") was formed on
May 9, 1994. MAC is a joint venture of NEC and Geothermal Development
Associates and was formed for the purpose of submitting a competitive bid
on a 40 MWe geothermal project in the Philippines. The bid was
unsuccessful. The Company's investment in MAC is carried at cost of $633.
MAC is inactive at this time.
Brady Geo Park Power Project, 1986, Ltd.
----------------------------------------
The Company's investment in Brady Geo Park Power Project, 1986,
Ltd., including note and related interest receivable and advances for
property taxes were written down to a combined book value substantially
equal to the appraised value of the Ormat energy converter interests held
by the partnership. The Company has classified this asset as Power
Generation Equipment in the accompanying balance sheets.
Nevada Energy Partners - 1
--------------------------
In February 1991, the Company received a 60% interest as a limited
partner in Nevada Energy Partners 1, a Nevada limited partnership
(NEP-1LP), which holds a 31.66% interest in the equity of Nevada
Geothermal Power Partners ("NGPP"). NGPP is a Nevada limited partnership
whose general partners are Hot Springs Power Company and NEP-1LP. The
Company issued a total of 3,476,875 shares of Class B common shares for
this interest. An additional 749,289 shares have been issued to NEP-1LP in
conjunction with the Company's 5% stock dividends made in July and October
1994 and January and April 1995. Class B common shares have full voting
rights, but have no cash dividend participation.
15
<PAGE>
The Company's interest in NEP-1LP is valued at $3,080 based on the
par value of the shares issued, less amounts recorded as treasury stock
due to the Company's effective ownership of 60% of the Class B shares held
by NEP-1LP, plus subsequent cash investments, less estimated partnership
losses.
As a general partner of NGPP, NEP-1LP will be entitled to a share in
NGPP's distributable cash flow. As a general partner in Brady Power
Partners ("BPP"), NGPP held a fifty percent (50%) ownership interest in
the completed Brady project and was also entitled to receive project
development fees. BPP is a Nevada general partnership whose general
partners are NGPP and ESIBH Limited Partnership, a Delaware limited
partnership. The Company is entitled to receive sixty percent (60%) of
NEP-1LP's distributable cash flow. There has been no cash from operations
available for distribution through August 31, 1996.
On May 8, 1995, NGPP sold its 50% interest in the Brady Power
Project for approximately $5.5 million dollars in full settlement of
litigation between NGPP and ESIBH. The Company expected to receive
approximately $585,511 as its share of the distribution of the sale
proceeds and this amount was included in gain on disposition of assets in
the quarter ended May 31, 1995. Actual proceeds received were $508,018
with the balance of $77,493 being determined to be uncollectible and
written off as a bad debt in the year ended February 29, 1996.
Oreana Power Partners
---------------------
Oreana Power Partner ("OPP") is a limited partnership which was
formed in February 1993 for the purpose of developing and financing gas
turbine electricity generating facilities to provide power to Sierra
Pacific Power Company ("Sierra") pursuant to power sales contracts to be
obtained. The Company is a limited partner and its interest is valued at
$292 based on its initial cash investment, less expenses and returned
capital. The general partners of OPP are Energy Development Associates
("EDA", a Nevada corporation and a wholly-owned subsidiary of Geothermal
Development Associates) and CEC, a wholly-owned subsidiary of the Company.
EDA is the Managing General Partner and CEC is the Financial General
Partner. Geothermal Development Associates is a privately owned Nevada
company, not related to the Company. There was no activity with respect to
development in the quarter ending August 31, 1996.
Yerington Acquisition Company, Inc.
-----------------------------------
Yerington Acquisition Company, Inc., a Nevada corporation ("YAC"),
was formed on December 8, 1994 for the purpose of acquiring the assets of
Tad's Geothermal, a non-related owner/operator of a geothermal power
generating facility located near Yerington, Nevada. At August 31, 1996,
the acquisition was still pending. In December 1995, the Company
transferred all of
16
<PAGE>
its right title and interest in 10 Ormat power generating units
(classified as idle power generating equipment in the financial
statements) to YAC.
Central Communications Corporation:
- -----------------------------------
Central Communications Corporation, a Nevada corporation ("CCC"),
was formed for the purpose of acquiring interests in the
telecommunications business. On May 21, 1996, the Company announced that
it had signed a binding letter of intent to acquire, through CCC, all of
the outstanding shares of Telecom Technologies, Inc. an Oregon corporation
("TTI"), and certain other related assets. The terms of the acquisition
provide for the payment of $500,000 in cash and issuance of 2,000,000
Class A common shares. The Company advanced to CCC $492,000 in cash in the
quarter ended August 31, 1996 in anticipation of the completion of the
acquisition. The acquisition was completed on June 21, 1996.
NOTE 3 - Short-Term Borrowings:
The following summarizes short-term borrowings at August 31, 1996:
Mortgage note-current $ 29,704
Current portion of
equipment note 25,771
--------
$ 55,475
========
There is a mortgage in the amount of $35,630 secured by the land and
building acquired by CEC in its merger with HPBS (See Note 1). The current
portion is $29,704 and monthly installments are $2,718 with interest at
10% per annum.
The Company's subsidiary, CEC purchased a high-speed printing press
which is subject to a 8 year note payable at $4,218 per month and bears
interest at 9.75% (adjustable in accord with changes in the prime lending
rate). The financing was not guaranteed by the Company.
NOTE 4 - Commitments and Contingencies
The Company's wholly owned subsidiary CEC, has entered into a two
year employment agreement with the former owner commencing November 30,
1994 which provides for annual compensation of $35,468 plus commissions.
The Company's wholly owned subsidiary SJPC leases its wind turbine
generator sites under a long-term lease with the United States Bureau of
Land Management ("BLM"). Pursuant to the agreement, SJPC has the right of
usage of the land for windmill operations until March 2014 and for an
approximate annual fee of $89,000. The annual payments on the land lease
17
<PAGE>
was $89,610 for the year ended February 29, 1996. Such expense is included
in the cost of operations in the accompanying financial statements.
Pursuant to the lease agreement, the Company's estimated payments to the
BLM as of August 31, 1996 are as follows:
1997 $ 89,000
1998 89,000
1999 89,000
2000 89,000
2001 89,000
Thereafter 1,157,000
----------
Total $1,602,000
==========
The Company's wholly owned subsidiary, CCC, entered into a five year
lease of office space in Santa Barbara, California on July 19, 1996.
Except for the first two months, commencing on August 1, 1996, the monthly
rental is $19,034. Pursuant to the lease agreement, the Company's
estimated payments as of August 31, 1996 are as follows:
1997 $ 121,638
1998 228,410
1999 228,410
2000 228,410
2001 228,410
Thereafter 95,170
----------
Total $1,130,448
==========
NOTE 5 - Preferred Stock:
On December 14, 1985, the stockholders of the Company authorized the
creation of 2,000,000 shares of $1.00 par value preferred stock. The board
of directors has the authority to issue the stock in series and to
determine all terms and preferences for each individual series. At the
annual meeting, the Company's shareholders approved an amendment of the
Company's certificate of incorporation reducing the par value of the
preferred stock to $.001 per share.
On May 1, 1996, the Company entered into an agreement providing for
the issuance of 1,960,745 Series A preferred shares at $2.50 per share to
Golden Chance Limited ("Golden Chance"), an Isle of Man private company
limited by shares. The terms of the Series A preferred shares provide that
no dividends of any kind or nature shall be paid or declared. Series A
preferred shares have a right to convert to the Company's Class A common
shares. Liquidation preference rights of Series A preferred shares are
limited to the par value of $.001 per outstanding share. Voting rights for
each Series A preferred share are equal to all classes of common stock.
The Company accepted a note in the amount of $4,899,988 payable over a one
year period as consideration for issuance of the Series A preferred
18
<PAGE>
shares. The present value of this note has been offset against paid-in
equity in the accompanying finacial statements. The Series A preferred
shares are to be held in escrow until payment is received. Golden Chance
retains the right to vote the escrowed shares. On May 1, 1996, the Company
also entered into an agreement providing for the issuance of 5 Series B
preferred shares at $2.50 per share to directors of the Company. Terms of
the Series B preferred shares provide that no dividends of any kind or
nature shall be paid or declared. Series B preferred shares have a right
to convert to the Company's class A common shares. Liquidation preference
rights of Series B preferred shares are limited to the par value of $.001
per outstanding share. Holders of Series B preferred shares have the right
to appoint a temporary director in the event that Golden Chance defaults
in the payment of the first $500,000 on its purchase of Series A preferred
shares. Payments for a total of $658,818 (included is the $500,000 which
extinguishes the Series B right described above) for the Series A
preferred shares had been received as of May 31, 1996 and $1,244,402 had
been received by August 31, 1996.
On July 23, 1996, 496,952 shares of Series A preferred were
converted to 1,242,381 shares of Class A common stock.
At August 31, 1996, there were 1,1,463,793 Series A and 5 Series B
preferred shares issued and outstanding.
NOTE 6 - Class A and Class B Common Stock:
.
In the year ended February 29, 1996, 333,333 shares of Class A
common stock were issued for cash in the amount of $250,000 and 145,842
hares of Class A common stock were issued for services valued at $68,216,
including 106,670 shares issued to directors in lieu of cash for annual
fees and 39,172 shares issued to officers and an employee as bonuses.
In the year ended February 29, 1996, stock dividends of 5% on Class
A and Class B common stock were declared for shareholders of record as of
April 20, 1995 and July 31, 1995. The aggregate shares issued were 819,829
Class A and 412,555 Class B.
In the quarter ended May 31, 1996, 152,381 shares of Class A common
stock were issued for cash in the amount of $98,000.
Each share of Class B common stock is entitled to all of the rights
and privileges pertaining to Class A common stock without any limitations,
prohibitions, restrictions or qualifications except that each share of
such Class B common stock shall not be entitled to receive any cash
dividends declared and paid by the corporation and shall be entitled to
share in the distribution of assets of the corporation upon liquidation or
dissolution, either partial or final.
19
<PAGE>
NOTE 7 - Stock Option Plans:
On December 29, 1993, the Company adopted the 1993 Directors' Stock
Option Plan for the Company's directors. Under the terms of this stock
option plan, each of the five directors of the Company was granted an
option to purchase 25,000 shares of the Company's Class A Common Stock or
a total of 125,000 shares at a price of $2 per share, equal to the market
price of the stock at the date of grant. The option is exercisable until
December 31, 2001, and no options have been exercised through August 31,
1996.
On June 27, 1994, the Company adopted the 1994 Directors' Stock
Option Plan for the Company's directors. Under the terms of this stock
option plan, each of the five directors of the Company was granted an
option to purchase 12,500 shares of the Company's Class A Common Stock or
a total of 62,500 shares at a price of $1.625 per share, equal to the
market price of the stock at the date of grant. The option is exercisable
until May 31, 2002, and no options have been exercised through August 31,
1996.
On January 14, 1995, the Company adopted an additional 1994
Directors' Stock Option Plan for the Company's directors. Under the terms
of this stock option plan, each of the five directors of the Company was
granted an option to purchase 17,500 shares of the Company's Class A
Common Stock or a total of 87,500 shares at a price of $0.9375 per share,
equal to the market price of the stock at the date of grant. The option is
exercisable until December 31, 2002, and no options have been exercised
through August 31, 1996.
On December 31, 1995, the Company adopted an additional 1994
Directors' Stock Option Plan for the Company's directors. under the terms
of this stock option plan, each of the five directors of the Company was
granted an option to purchase 30,000 hares of the Company's Class A common
stock or a total of 150,000 shares at a price of $0.3125 per share, equal
to the market price of the stock at the date of grant. The option is
exercisable until December 31, 2003, and no options have been exercised
through August 31, 1996.
On June 28, 1994, the Company's Board of Directors adopted an
Employee and Consultant Stock Option Plan (the "Plan") and registered the
shares available under the Plan on Form S-8 in accordance with the
Securities Act of 1933 filed August 2, 1994, having Registration No.
33-82318 . The purpose of the Plan is to provide compensation for services
rendered to the Company and to promote the success of the Company by
providing "Eligible Participants" (employees and consultants) with
incentives for performance on behalf of the Company. The Plan is
accomplished by providing for the granting of options to purchase Class A
Common Stock to eligible participants. The Board of Directors may suspend
or terminate the Plan at any time but no such action shall adversely
affect the rights of any person granted an option under the Plan prior to
that date of suspension or termination. The maximum number of shares
available for option under the Plan are 1,125,000 Class A Common, subject
to adjustment by reason of reorganization, merger, consolidation,
recapitalization, dividends, stock split, changes in par value and the
20
<PAGE>
like occurring or effective while any such shares of Class A Common Stock
are subject to the options under the Plan. During 1995, 500,000 shares
were exercised at a price of $1.75 per share and there were no options
outstanding as of August 31, 1996 under this Plan.
NOTE 8 - Income Taxes:
The Company adopted FASB 109 in the fiscal year 1994. Due to
uncertainty of realization in light of the Company's continuing operating
losses, no deferred tax asset or liability has been recorded in the
financial statements because the Company has assessed a valuation account
to the full extent of its potential deferred tax asset. The following is a
summary of the potential deferred tax asset and the valuation allowance:
Property and equipment due to differences in
depreciation and reserve for obsolescence $ 809,795
Net operating loss carry forward 1,746,946
------------
Total deferred tax asset 2,556,741
Valuation allowance (2,556,741)
------------
Net deferred tax asset $ -
===========
During the quarter ending August 31, 1996, the Company's potential
deferred tax asset remained unchanged.
No provision for Federal income taxes was recorded during the
quarter ended August 31, 1996 or the quarter ended August 31, 1995 due to
the accumulated net losses of the Company. Income taxes included in the
financial statements represent California state income taxes on the net
income of San Jacinto Power Company, the Company's majority owned
consolidated subsidiary.
As of August 31, 1996 the Company had federal income tax loss
carryforwards available to offset future taxable income for financial
reporting and tax purposes of $5,249,763 which expire in 2006 through
2010.
NOTE 9 - Supplemental Noncash Investing and Financing Activities:
During the six months ended May 31, 1995, 145,842 shares of Class A
Common Stock were issued for compensation of $68,362 to certain officers,
directors and an employee earned in fiscal 1995.
During the six months ending August 31, 1996, 2,000,000 shares of
Class A common stock valued at $1,156,250 were issued for the acquisition
of the assets of Telecomm Technologies, Inc.
(Remainder this of page intentionally left blank)
21
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.
The Company recently announced the formation of two new wholly owned
subsidiaries with the objective of organizing the Company strategically for
planned growth through acquisitions. Newly formed San Jacinto Energy Corporation
("SJEC") was formed to control all applicable shareholdings, debt instruments,
partnership interests and renewable power generating assets of the Company, as
well as interests in a non-related printing and business supply company also
known as Herth Printing and Business Supplies, Inc.. Central Communications
Corporation ("CCC") was formed to pursue mergers and acquisitions of
telecommunications companies and businesses operating in related sectors.
The resulting organizational structure of the Company is set forth below,
with the Company ("NEC") holding substantially all subsidiary interests through
SJEC, with the exception of telecommunications based business, Telecom
Technologies, Inc. ("TTI") held by CCC, as follows:
NEC (1)
|
-------------------------------------
| |
-- SJEC (2) |
| CCC (10)
| |
-- SJPC (3) |
| TTI (11)
|
-- YAC (4)
|
-- CEC (5)
| |
| -- HPBS (6)
| |
| -- OPP (7)
|
-- NEP I, LP (8)
|
-- NGPP, LP (9)
LEGEND:
(1) NEC - Nevada Energy Company, Inc. (Parent company)
Delaware corporation, publicly owned, NASDAQ listed
(2) SJEC - San Jacinto Energy Corporation
Nevada corporation, wholly owned by NEC
(3) SJPC - San Jacinto Power Company, Inc.
Nevada corporation
Majority owned subsidiary, 50.01% by NEC
Minority owner or 49.99% is NASDAQ listed The New World
Power Company, company currently in process of acquiring
minority interest.
22
<PAGE>
(4) YAC - Yerington Acquisition Company
Nevada corporation
Wholly owned subsidiary, holds all idle Ormat
power generating equipment, pending acquisition of TADS
Geothermal's Nevada geothermal power plants and
long-term power sales agreement with Sierra Pacific
Power.
(5) CEC - Combustion Energy Company, Inc.
Nevada corporation
Wholly owned subsidiary
(6) HPBS - Herth Printing and Business Supply, Inc.
Nevada corporation
Wholly owned subsidiary printing and business
supplies operates from current Company headquarters
building in Reno, NV
(7) OPP - Oreana Power Partners, Limited Partnership
Nevada limited partnership
Owned 49% CEC as general partner, 1% NEC as limited
partner, 49% Energy Development Associates (non-
affiliated Nevada corporation) as general partner
and 1% Geothermal Development Associates (non-
affiliated private Nevada corporation) limited
partner. Formed to propose a gas fired power
project, currently inactive.
(8) NEP I,LP - Nevada Energy Partners, I, Limited Partnership
Nevada limited partnership owned 60% by the Company
and 40% by Nevada Electric Power Company (a Nevada
Sub-S corporation 100% owned by Jeffrey Antisdel,
company president). NEP owns 100% of NEC Class B
common shares and 31.66% of NGPP.
(9) NGPP - Nevada Geothermal Power Partners, Limited
Nevada limited partnership, owned 31.66% by NEP,
and the balance of ownership by Hot Springs Power
Company and various limited partners. In
dissolution as a result of sale of primary asset,
50% interest in Brady Power Project in May 1995.
(10) CCC - Central Communications Corporation
Nevada corporation, wholly owned by the Company
(11) TTI - Telecom Technologies, Inc.
Oregon corporation, wholly owned by CCC
Operates long distance resale business servicing 20
retail long distance communications centers known
as "Casetas Telefonicas" providing long-distance
service to primarily Latin American communities.
23
<PAGE>
LIQUIDITY
As of August 31, 1996, the Company had $702,498 in current assets. Cash of
$75,192 (including $32,793 held by its majority owned subsidiary) was available
for on-going operations. The Company also held a note for the purchase of Series
A preferred shares with a remaining balance of $3,655,586 collectible over an
eight month period.
Cash used by operating activities in the six months ended August 31, 1996
was $492,876. The after-tax loss from operations was $776,322 which included
$47,583 of non-cash charges for depreciation and $110,028 in non-cash charges
for amortization of goodwill. As a result of the Company's adoption of FAS 121
to account for impairment of long-term assets, there was no provision for
obsolescence in the quarter ended August 31, 1996 as the assets were then valued
in excess of fair market appraisal value based on and independent appraisal
completed in May 1996. Had the Company followed its previous policy of providing
for obsolescence on a prospective basis, the estimated obsolescence charges for
the quarter would have been $115,560. Investing activities used $1,106,385 in
cash in during the period ending August 31, 1996, including expenditures of
$300,400 for the acquisition of high-speed print equipment and $805,985 advanced
to a subsidiary for the acquisition of a telecommunications business. Cash flows
from financing activities in the six months ended August 31, 1996 came from
sales of preferred and common shares and generated $1,342,262 in cash.
Cash used in operating activities in the six months ended August 31, 1995
was $206,621. The after-tax loss from operations was $287,874 which included
$30,461 of non-cash charges for depreciation and $189,620 for obsolescence on
idle equipment. Investing activities provided $566,127 in cash in during the
period ending August 31, 1995, principally from the sale of wind turbines by
SJPC and including expenditures of $35,472 for investments in partnerships. Cash
flows from financing activities in the six months ended August 31, 1995 provided
$10,868 in net cash in-flow, primarily from proceeds from sales of Class A
common shares.
To date, the Company has enjoyed liquidity from receipt of management
fees, dividend income (from the Company's majority owned subsidiary San Jacinto
Power Company), litigation recoveries and through the sale of shares of
Preferred stock and Class A Common Stock. Most recently, the completion of
financing obtained through the sale of 1,960,745 Series A Preferred shares and
152,381 Class A Common shares has provided the Company with commitments for
financing believed to be adequate for continuing operations.
In the quarter ending August 31, 1995 the disposition of the Brady Power
Project asset, which had not generated any of the long-term cash flow expected,
provided the Company with needed operating funds.
The majority of ongoing expenses for the Company have been incurred in
initiating acquisitions, development of future business, professional fees and
operating overhead.
24
<PAGE>
CAPITAL RESOURCES
The Company has an asset base which includes idle electric power
generating units (currently not in service and with a net book value of
$5,226,063, unencumbered by debt, which the Company is taking all requisite
action to deploy into operational service in the near term through acquisition
and deployment in one or more projects, (See Plan of Operations, Deployment of
Idle Equipment).
The Company has obtained independent appraisal of its idle power
generating equipment by qualified engineering firms and valuation by independent
utility appraisal specialists which confirm that the Company's idle power
generating assets remain unimpaired and suitable for deployment and/or sale.
To that end, the Company had previously attempted to consummate sale
through the execution of a non-binding letter of intent for the sale of all
Ormat power generating turbines, together with associated equipment and right to
purchase a geothermal power facility to Pollution Control International ("PCI").
The PCI agreement then provided for the Company to receive cash and securities
in excess of the equipment's net book value in excess of $4.5 million dollars.
However, due to the complexities of attempting to assign rights to acquire a
geothermal power facility in conjunction with the proposed sale of the Ormat
units, the transaction was terminated.
Based upon the foregoing, the incumbent Board of Directors have now
adopted a strategy whereupon the Company will seek to deploy the idle power
generating assets into existing power plant operations and operate the
facilities thereafter utilizing Company owned power plant assets. Alternatively,
the Company will seek the sale, merger or public offering "spin-off" of these
assets once made operational in order to fully maximize shareholder values. This
determination was made after reviewing past difficulties of management in
capitalizing on business opportunities developed by management under the
direction of the prior Board of Directors. These opportunities include
geothermal power facilities known as Tads Geothermal, Inc., and certain other
facilities under review (governed under confidentiality agreements) executed by
the Company, (See Plan of Operations, Deployment of Idle Equipment).
Historically, the Company has conducted its business affairs as a
development stage enterprise which has been subject to all of the risks inherent
to establishing new lines of business. To date, all such development has been
financed through the sales of assets, equity financing, litigation recoveries,
non-recurring development fees received from partnership interests and
management fees. The Company has limited operations through its interests in
operating subsidiaries.
The Company will require substantial amounts of capital to meet its goal
of acquiring, developing, constructing and operating a portfolio of power
plant(s). There are presently commitments for any such financing. Further, the
Company may seek to raise additional funds through the sales of debt and/or
equity, asset sales, bank borrowings or other collaborative arrangements with
corporate partner(s) or other sources.
25
<PAGE>
In the event insufficient funding does occur as a result of the Company's
planned growth through acquisition, insufficient funding may require the Company
to delay, scale back or eliminate its planned expansion, acquisition,
development and corporate activities as set forth herein. However, the Company
currently believes commitments for adequate funding over the next twelve months
presently exist.
DEBT
As of August 31, 1996, the Company's total current liabilities were
$863,197. Current accounts payable were $553,533 and $37,965 was payable to New
World Grid Power ("NWGP") for maintenance and refurbishment of wind turbines
owned by the Company's consolidated subsidiary San Jacinto Power, (NWGP is a
subsidiary of the 49.99% minority owner of San Jacinto, the New World Power
Corporation). Short- term borrowings of $55,475 were the current mortgage
payable balance assumed in the Company's wholly owned subsidiary Combustion
Energy Company's acquisition of HPBS and the current portion of the note payable
on the newly acquired high-speed printing press. Other liabilities of $79,604
included accrued audit expenses of $61,600. Accrued payroll includes $50,000
payable to directors for annual fees for services.
Remaining liabilities subject to compromise represent the long-term
settlement amount for withholding taxes and related penalties and interest due
to the IRS associated with prior bankruptcy proceedings. Under the terms of a
settlement proposed by the Company, this amount is being repaid over a term of 3
years, in monthly installments of $4,940, accruing interest at the rate of 7%
per annum. Pending final settlement, the entire amount is classified as a
current liability. The Company has remained substantially current on its payment
schedule since this proposal was made in October 1993 to the IRS and remaining
payments necessary for payoff are $26,891, including accrued interest, which was
paid in full October 4, 1996.
On May 3, 1996 CEC entered into an agreement to purchase a high speed
printing press at a purchase price of $300,400. The purchase balance, after a
$20,000 down payment made in May 1996, is to be financed over an eight (8) year
period at 9.75% (adjustable in accord with changes in the prime lending rate)
with monthly payments of $4,218. The financing was not guaranteed by the Company
and CEC remains current on its debt obligations.
On August 16, 1996, the Board of Directors executed and approved the
exchange 4,436,464 restricted class A common shares, the assignment of the
Company's 60% limited partnership interest in Nevada Energy Partners I, Limited
Partnership, ("NEP"), and delivery of all common stock of CEC owned by the
Company in consideration of NEP's delivery of (i) all presently issued and
outstanding class B common shares owned by NEP, (ii) a release of all right,
title and interest accrued to date to additional Class B Common share issuance,
(iii) a release of all right title and intrest to all future Class B Common
shares to be issued pursuant to the terms of the Company's certificate of
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Incorporation, (iv) the indemnification by NEP of the Company against any and
all claims or causes of action associated with Nevada Energy Partners vs. Hot
Springs Power Company Case and the assumption of all debt of CEC in the amount
of approximately $375,000. Execution of this agreement, which has not yet been
consummated, is pending review of counsel.
RESULTS OF OPERATIONS
Revenues
Revenues for the quarter ended August 31, 1996 totaled $483,982 and
consisted of energy sales from San Jacinto Power Company of $112,001,
telecommunications revenue of $21,283 and HPBS printing and business supply
sales of $350,698. Comparable revenues for the quarter ending August 31, 1995
were $284,292 from energy sales and $253,722 from printing and business supply
sales. Revenue from energy sales declined primarily as a result of contractually
reduced purchased prices received from the purchasing utility company, Southern
California Edison. Current prices are expected to continue in effect, subject to
seasonal upward adjustment during summer periods and overall adjustment in
accord with Consumer Price Index changes. The number of turbines available for
service were slightly lower as a result of the change-over in maintenance
services. Wind speeds have been lower than average for the majority of the
current quarter.
Higher revenues for HPBS printing and business and supplies sales were a
result of the decision to emphasis the higher margin custom print business
versus catalogue sales of business supplies. A full time outside sales person
was on staff for the entire quarter ended August 31, 1996. A new high speed
printing press has been placed in service in June 1996 due to delays and
mechanical problems encountered with existing equipment (See DEBT). Print
revenues were $269,523 and office supplies sales were $81,175 for the quarter
ended August 31, 1996. Comparable results for the quarter ended August 31, 1995
were print revenues of $153,919 and office supplies sales of $99,803. Print
revenues were $477,481 and office supplies sales were $176,300 for the six
months ended August 31, 1996. Comparable results for the six months ended August
31, 1995 were print revenues of $617,142 and office supplies sales of $185,998.
Costs and Expenses
Cost of Sales
Cost of sales for the six months ended August 31, 1996 were $469,206 or
71.8% of sales verses $352,720 or 70.1% of sales for the comparable quarter
ended August 31, 1995. The costs increase was primarily a result of increases in
the cost of paper stock which has occurred over prior months. Improved margins
on custom print work have mitigated some of the impact of the paper cost
increase. Cost of sales were $270,579 or 77.2% for the three months ended August
31, 1996 versus $199,081 or 78.5% for the comparable period ending August 31,
1995.
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Cost of Operations
Costs of operations for the six months ended August 31, 1996 were
$152,033, of which $147,983 represented the cost of operations of the San
Jacinto Power Company wind turbine site, including $88,711 in repairs and
maintenance cost, $45,252 in BLM land lease cost, $7,420 in property taxes and
$6,600 in other site expenses. Comparable costs in 1995 totaled $321,304, of
which $321,304 represented the cost of operations of the SJPC wind turbine site,
including $214,528 in repairs and maintenance costs, $45,198 in BLM land rent,
$6,597 in property taxes and $54,981 in other site costs, primarily BLM related
fees for services.
Repairs and maintenance costs were substantially reduced by the change in
maintenance service providers which was effected in January 1996. In addition, a
substantial refurbishment program had been completed in 1995.
SJPC originally acquired the assets and began actual operations on June
24, 1994. Maintenance services had been provided on a fixed fee plus cost basis
by New World Grid Power ("NWGP"). NWGP was notified October 8, 1995 of
termination of its service agreement. SJPC has executed an agreement with a new
service provider, Desertron Electric, effective January 1996. NWGP no longer
provides operation and maintenance services. Desertron Electric is a sole
proprietorship formed by a former employee of NWGP. SJPC's minority interest
holder has approved this agreement. The Company anticipates significant savings
in the area of SJPC operation and maintenance costs as a result of this new
agreement with Desertron Electric.
With regard to changes in HPBS operating expenses from that of prior HPBS
periods, changes in HPBS operating expenses were a result of normal fluctuations
in business activities.
Other Costs and Expenses
As a result of the Company's adoption of FAS 121 for the fiscal year ended
February 28, 1997, there was no provision for obsolescence in the quarter ended
August 31, 1996. Under the provisions of FAS 121, the Company will review the
valuation of its long-lived assets on a quarterly basis or whenever events or
changes in circumstances indicate that the carrying amount of an asset may not
be recoverable. The Company will continue to obtain annual independent
appraisals to determine current fair market value of its long-lived, currently
idle, assets. In the interim there will be no provisions for obsolescence. The
current combined carrying value ($5,226,063) of the idle equipment is less than
the current combined fair market appraisal value as of August 31, 1996. The
provision would have been $115,560, if prior accounting methods had continued in
effect. Comparable cost for the quarter ended August 31, 1995 was $94,810.
Depreciation and amortization for the quarter ended August 31, 1996 were
$30,859. Comparable costs for the quarter ended August 31, 1995 were $14,047.
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The increase was primarily related to the acquisition by HPBS of a new
high-speed printing press. Comparable amounts for the six months ended August
31, 1996 and August 31, 1995 were $47,583 and $30,461 respectively.
Professional fees for the quarter ended August 31, 1996 were $293,928,
including $166,887 in legal fees, $10,175 in audit fees and $116,866 in other
outside services. Other outside services included $41,500 in the quarter ended
August 31, 1996 paid to the former owner/general partner of Smith/Triad under a
two year $15,000 per month agreement, which was paid in full on July 8, 1996 and
$50,000 paid or accrued in relation to a contract for public relations services.
Professional fees for the quarter ended August 31, 1995 were $151,544,
including $70,944 in legal fees, $20,628 in audit fees and $59,922 in other
outside services. Other outside services included $45,000 in the quarter ended
May 31, 1995 paid to the former owner/general partner of Smith/Triad under a two
year agreement referred to above.
Professional fees for the six months ended August 31, 1996 were $401,772,
including $194,390 in legal fees, $22,608 in audit fees and $179,775 in other
outside services. Other outside services included $90,000 in the quarter ended
August 31, 1996 paid to the former owner/general partner of Smith/Triad under a
two year $15,000 per month agreement, which was paid in full on July 8, 1996 and
$135,000 paid or accrued in relation to a contract for public relations
services.
Professional fees for the six months ended August 31, 1995 were $246,354,
including $75,593 in legal fees, $38,545 in audit fees and $132,215 in other
outside services. Other outside services included $90,000 paid to the former
owner/general partner of Smith/Triad under a two year agreement referred to
above.
Administrative expenses totaling $467,042 for the quarter ending August
31, 1996 were principally for salaries, wages and benefits in the amount of
$113,440, public and shareholder relations $111,203, general office expenses
$153,064 (which includes $110,028 in amortization of goodwill relating to TTI),
travel expense $75,659, directors fees and expenses $8,853 and other
miscellaneous expenses $4,822.
Comparable amounts totaled $187,728 for the quarter ending August 31, 1995
were principally for salaries, wages and benefits in the amount of $94,903,
public and shareholder relations $8,328, general office expenses $48,011, travel
expense $3,977, directors fees and expenses $28,250 and other miscellaneous
expenses $4,258.
Administrative expenses totaling $598,482 for the six months ending August
31, 1996 were principally for salaries, wages and benefits in the amount of
$194,128, public and shareholder relations $114,150, general office expenses
$175,775 (which includes $110,028 in amortization of goodwill relating to TTI),
travel expense $81,526, directors fees and expenses $22,898 and other
miscellaneous expenses $9,705.
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Comparable amounts totaled $315,410 for the six months ending August 31,
1995 were principally for salaries, wages and benefits in the amount of
$184,591, public and shareholder relations $12,615, general office expenses
$65,928, travel expense $7,631, directors fees and expenses $36,323 and other
miscellaneous expenses $8,431.
Interest expense of $49,207 for the quarter ending August 31, 1996 was
related to interest accrued at statutory rates on the remaining liability to the
IRS on prior payroll tax withholding and short-term borrowings related to
insurance premium financing and the mortgage note on the building owned by Herth
Printing and Business Supply and the financing of the high-speed printing press.
Interest in the comparable period ending August 31, 1995 related primarily to
short-term borrowings, the IRS note and the mortgage note and was $9,251.
Other Income and Expenses
Consolidated interest of $117 was earned on cash carried in money market
funds in the quarter ended August 31, 1996, compared to $2,810 in the same
period for 1995.
Other income of $945,034 in the period ended August 31, 1995 was a result
of the Company's sale of its interests in the Brady Power Project. Constructed
in 1991 and 1992, the Brady plant became operational in 1992 as result of
development efforts by ESI-BH ("ESI"), a subsidiary of ESI Energy and Nevada
Geothermal Power Partners Limited Partnership ("NGPP") As a result of the high
total cost to complete the project, (approximately $74 million as compared to
the original cost of $46 million) the Brady Project had not generated cumulative
cash flows from operations that had been expected. Related to the high costs of
the Brady project, NGPP filed suit against ESI and ultimately agreed to sell all
of NGPP's interest in BPP and settle all outstanding litigation consideration of
payment of $1.00. From the sale of the Brady Power Project interest, the Company
was expected to receive $585,511 of the proceeds from NGPP's sale of 50%
interest in the Brady project partnership ($508,138 having been received to date
and the balance having been subsequently determined to be uncollectible). The
Company had no cost basis in the Brady investment. Other than funds received in
prior years as a result of non-recurring developer fees, the Company has
received no recurring income or cash flow from the Brady Project through Nevada
Energy Partners I, Limited Partnership ("NEP"). There are no obligations
remaining by the Company under the litigation settlement due to the Company's
limited partnership ownership interests in NEP and there are no anticipated
effects of the sale of Brady interests on future operations.
Income Taxes
Income taxes of $400 for the six months ended August 31, 1996 and $13,867
for the comparable six months ended August 31, 1995 were for taxes payable to
the state of California on income earned by San Jacinto Power Company on its
California operations. There were no Federal income taxes payable for the six
months ending August 31, 1996 or 1995.
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As of August 31, 1996, unused net operating losses available to offset
future taxable income was $5,789,000. The Company's investment and energy tax
credit carryforwards expired in November 1995.
Net Result
In the six months ending August 31, 1996, there was a total operating loss
of $776,322 or $0.08 per share on 9,990,866 average Class A Common shares
outstanding. For the quarter ending August 31, 1996 there was a total loss of
$648,696 or $0.06 per share on 11,122,453 average Class A Common shares
outstanding. For the six months ending August 31, 1995, there was an operating
income of $297,638 or $0.03 per share on 8,752,930 average Class A common shares
outstanding. For the quarter ending August 31, 1995 there was a total loss of
$128,899 or $0.01 per share on 8,808,485 average Class A Common shares
outstanding.
PART II--OTHER INFORMATION
Item 1. Legal Proceedings.
MUNSON LAWSUIT
On October 5, 1992, the Company, as plaintiff, initiated litigation in the
Chancery Court of New Castle County, Delaware, (the "Munson Lawsuit"), against
former officers and directors of the Company. The Defendants are Stephen Munson,
Leland Mink, Walter Mackenzie, Frank Carigula and Donald Selfridge, (the
"Defendants"). The allegations against the Defendants include numerous breaches
of fiduciary loyalty to the Company, invalid issuance of Company shares,
breaches of fiduciary duty arising out of improper issuance of Company stock,
and breaches of fiduciary duty arising out of failure to value the services for
which stock was awarded.
On October 13, 1992, a sequestrator was appointed and the shares of the
Company standing in the names of Leland Mink, Walter MacKenzie, Donald Selfridge
and Frank Carigula were seized to hold and preserve the shares of the Company
until further order of the Court. As of June 9, 1994, The Delaware Court imposed
sanctions against Stephen Munson related to non-compliance in matters of
deposition. A default judgement against Frank Carigula has since been obtained
in the amount of approximately $59,000 and the Company is seeking garnishments
and attachments sufficient to satisfy the full amount of judgement. The
judgement is beyond appeal.
The trial of the case against defendants Munson, Selfridge and MacKenzie
was completed in September and final post-trial briefs are to be submitted to
the Court by the Company pending a ruling of the Court. The Company does not
believe this litigation will have an adverse material effect on its operations.
Item 4. Submission of Matters to a Vote of Security Holders.
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On August 16, 1996, the Annual Meeting of Stockholders for the Company was
held and the matters were voted upon by a quorum, as follows:
1. The election of Peter J. Cannell to the Board of Directors;
2. The amendment to the Company's Certificate of Incorporation to
change the Company's name to PowerTel USA, Inc., and to change the
Company's NASDAQ trading symbol to "PTUSA";
3. The amendment to the Company's Certificate of Incorporation to
increase authorized Preferred share capital from 2,000,000 to
50,000,000 shares;
4. The amendment to the Company's Certificate of Incorporation to
increase authorized Class A Common share capital from 25,000,000 to
50,000,000 shares;
5. The amendment to the Company's Certificate of Incorporation to
increase authorized Class B Common share capital from 25,000,000 to
50,000,000 shares;
6. The amendment to the Company's Certificate of Incorporation to
provide for a one (1) for six (6) reverse stock split of all
classes of outstanding Preferred or Common;
7. The approval of authority for the Board of Directors to seek
Class A Common stock listing on NASDAQ National Market System;
8. The amendment to the Company's Certificate of Incorporation to
provide for the creation of a new class of common stock, Class C
Common stock, 50,000,000 shares authorized; and
9. Ratification of the Board of Directors appointment of Kafoury Armstrong
and Company as the Company's auditors for the fiscal ending February 29,
1996.
Item 5. Other Information.
Effective May 1, 1996, the Company initiated an organizational, financial
and general business restructuring which included a change in control of the
Board of Directors, provision of financing commitments exceeding $5,000,000 and
implementation of a revised business plan.
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During the implementation of the foregoing, the Board of Directors and its
advisors conducted an extensive review of the assets, management, business
prospects and opportunities developed in its core lines of energy businesses.
Following this review, the Board and its advisors determined it advantageous to
continue with and support management's plan for growth to be implemented through
the acquisition of additional energy facilities and the deployment of energy
assets owned by Company subsidiaries.
As a non-regulated utility holding company, the Board of Directors and its
advisors also immediately recognized that the Company had the requisite
management skills and professional support to allow the Company to readily
participate in secondary lines of non-regulated telecommunications related
utility businesses.
In so doing, the Board of Directors also determined that while the
Company's energy business plan was fundamentally sound, the growth opportunities
available in telecommunications related businesses provide operating synergies
which have the potential to improve the long term financial performance of the
Company. The Board thereby determined it appropriate to restructure the
Company's business operations.
Restructuring of Business Operations
As set forth in the preceding paragraphs, the Company plans to narrow its
focus solely to acquisition and development of energy and telecommunications
related businesses, concurrent with the Board of Directors determination that
the company's prior pursuits in non-related businesses have not provided the
Company financial results commensurate with operational risks assumed.
In addition, The Board of Directors has terminated the Company's prior
investigations and discussions related to acquisitions of a heavy equipment
company, engineering/construction company and others have now been terminated.
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Plan of Operations
Energy Sector
The Company has an asset base which includes several electric power
generating units (currently not in service and with a net book value of
$5,226,063, unencumbered by debt, from which the Company plans to increase
revenues and earnings. The utilization of these generating units is likely to
have a significant impact in determining the future of the Company and its
underlying share value.
The Company plans to deploy all of its idle power generating assets in one
or more projects currently under review (as set forth below) and has obtained
third party evaluations of the idle equipment which clearly indicate that its
idle power generating assets of a condition acceptable for immediate deployment
without impairment, (See Pending Acquisitions and Deployment of Idle Power
Generating Assets).
Pending Acquisitions and Deployment of Idle Power Generating Assets
On April 10, 1995 the Company executed an agreement for the acquisition of
Tad's Geothermal, Inc., ("Tads"), located in Yerington, Nevada, in consideration
of the delivery of restricted Class A Common stock with a market value of
$875,000 and the assumption of a promissory note in the amount of $125,000.
Tad's owns Ormat binary cycle power generating facilities which sells electric
power to Sierra pursuant to the terms of two (2) power sales agreements. Tads
has sufficient geothermal lands, geothermal production wells, permits,
buildings, transmission infrastructure and cooling spray ponds to operate two
Ormat power generating units substantially similar to the idle Ormat units owned
by the Company.
The closing of the Tads acquisition is subject to the fulfillment of
certain conditions precedent, including approval by Sierra Pacific Power Company
("Sierra") of the assignment of its power purchase agreements with Tads to the
Company, approval of the Public Service Commission of Nevada ("PSCN") and
receipt of certain environmental permitting which includes permits for surface
disposal of geothermal fluids. As of July 1, 1996, the Company had received
evidence of the approval of the power purchase agreement assignments by Sierra,
approval by the PSCN and receipt of appropriate surface disposal permitting
required to closing.
On July 1, 1996, the Company confirmed revised terms requisite to complete
the purchase of Tads in consideration of the delivery of restricted Class A
Common shares with a market value of $575,000 and the assumption of a promissory
note in the amount of $125,000. The Company's management anticipates closure of
the facility during the month of July, 1996.
Following closure of the Tads acquisition, and largely due to recent
termination by and between Sierra and Washington Water & Power, the Company
plans to deploy one or more of its wholly owned Ormat power generating plants at
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the Tads site for purposes of generating all parasitic electrical loads which
operate the Tads power facility's pumps, control modules, lighting, and
substantially reduce load demand charges currently being paid to Sierra. In
addition, the Company plans to offer Sierra additional generating capacity from
the Tads facility utilizing the Tads geothermal energy reserves as fuel and
Company owned Ormat power generating units which currently are idle. The
potential offer would be possible due to the availability of geothermal resource
presently believed to exist, the expected increase of demand for energy
indigenous to the Yerington area, and the lack of generating capacity presently
available to meet such increased demand.
Also included in the Tads acquisition, the Company is acquiring a
non-operational ethanol production facility which the Company is currently
evaluating for purposes of possible relocation, retrofit and start-up. This
facility will require further electrical energy and thus require the deployment
of two or more of the Company's wholly owned Ormat's for power production to
service ethanol plant parasitic loads. The Company has identified a potential
site with two existing geothermal energy wells from which to relocate and
operate the ethanol plant and Ormat power plants. Also favorable to the
relocation, are proximity to lower cost feedstock for the ethanol plant to
operate. Such relocation will likely be scheduled during calendar 1997,
following the retrofit of the Tads facility, with the ethanol plant site
acquisition plan assuming delivery of restricted Class A Common stock and such
cash consideration necessary to initiate closure during the calendar year.
In addition to the equipment deployment plans associated with the Tads
acquisition, a second substantially completed geothermal power facility
acquisition has been the subject of significant due diligence investigation over
the course of the prior and current fiscal year by the Company. The Company has
executed confidentiality agreements and is conducting investigations with the
intent of submitting an offer of purchase for the acquisition of this geothermal
power facility during the current fiscal year. The Company plans to submit a
purchase offer which will likely include the issuance of restricted Class A
Common stock as a substantial portion of the purchase price and include
provisions for deployment of remaining idle power generating equipment by the
Company. This acquisition, if consummated, may require an equity offering by the
Company in order to fund the purchase. The extent of any required potential
equity offering is currently unknown. Such an equity offering may cause a
dilution of shareholder ownership, with the extent of the dilution is currently
unknown. Other means of financing, such as non-recourse project financing, may
also be considered by the Company.
The deployment, sale or joint venture utilization of the Company's idle
power generating assets is clearly a significant business issue for the Company.
However, if deployment, sale or utilization if for any reason does not occur,
the Company may be adversely effected (See "Risk Factors").
To date, the Company has had to delay consummation of the Tads closing due
to the delayed receipt of financing from Golden Chance Limited in accordance
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with its financing payment schedule. It is believed that the closing will
continue once the waiver of Series B Preferred holders has been received, (see
Change in Corporate Control).
Other potential developments which the Company is continuing evaluation of
include: (i) discussions and evaluation with Geothermal Development Associates
("GDA") regarding possible resubmission of a prior proposal to Sierra Pacific
Power Company (Sierra) for the development, financing, construction and
operation of energy generating facility known as the Oreana Power Project which
was previously a finalist in Sierra's previous "Request For Proposals", (which
was subsequently withdrawn prior to the announcement of intended merger with
Washington Water & Power). The Company has recently initiated discussions
largely as a result of the recent termination of Sierra Pacific Power Company's
merger with Washington Water & Power and also because the Company's belief that
the future needs for capacity additions in the Sierra Pacific Power service
territory for power marketing opportunities to other Western States are
significant. There can be no assurance of submission of the proposal to Sierra
or that Sierra's acceptance of the revised proposal will be obtained if so
submitted; and, (ii) discussions, evaluation and negotiations associated with an
offshore development stage energy company in which the Company has expressed
interest in acquiring a majority ownership interest for purposes of completing
the development, financing, construction, operation and management of an energy
facility which includes, but is not limited to, installation of electrical
generating capacity of approximately 25 megawatts. There can be no assurance of
acquisition, development, financing, construction, operation or management of
this facility at this time.
Pending Acquisition of 49% Interest in Wind Energy Subsidiary
On June 27, 1996, the Company received preliminary acceptance of its offer
to purchase New World Power Corporation's ("New World") 49.99% equity ownership
interest in the Company's majority owned subsidiary San Jacinto Power Company
which has been accepted in principal subject to purchase documentation prepared
by the Company acceptable in form and in substance to New World's Board of
Directors. Closing is expected to occur during the month of November, 1996, with
terms of purchase to be publicly disseminated following closure.
Following completion of the acquisition of New World's 49.99% interest,
the Company intends to continue San Jacinto Power Company's planned retrofit,
rehabilitation and expansion activities and plans increased future participation
in the wind power energy industry on a foreign and domestic basis.
The planned closing for the purchase of New World's 49.99% interest has
been delayed due to the delayed payment of Golden Chance Limited to the Company.
It is anticipated that the planned closing will be completed following receipt
of the waiver of default from the Company's Series B Preferred shareholders.
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Telecommunications Sector
Although the Company continues its plans for growth through acquisition in
the energy business, the Company has begun to seek business opportunities in the
telecommunications and related businesses.
As previously set forth, the Board of Directors has determined that it is
presently feasible to dramatically accelerate Company growth through the
completion of non-regulated telecommunications business acquisitions. This
determination is primarily based upon the extensive deregulation which has taken
place in the telecommunications industry which began in the late 1970's.
Clearly, the telecommunications business is a competitive and very dynamic
line of business which has demonstrated increasingly reduced barriers to entry
which are largely due to the present deregulated nature of the
telecommunications business today. From a market perspective, growth prospects
are numerous, with opportunities available in the acquisition of long distance
carriers, long distance switchers, specialized "niche" marketing, telephone
systems sales and services, debit card marketing, proprietary billing software
systems integrator, voice recognition systems, name but a few of the
opportunities available which the Company is presently evaluating for potential
acquisitions.
The Company, by and through its wholly owned subsidiary Central
Communications Corporation ("CCC"), has recently executed documentation
precedent to the acquisition of Telecom Technologies, Inc, ("TTI") an Oregon
corporation, from Telecom AE. TTI's provides, with Letters of Agency, for long
distance telephone services, money transfers and other services primarily to the
Latin American community in the Western United States to approximately twenty
long distance "Caseta" accounts. The Company believes the "Caseta" concept can
be successfully franchised or developed as an internal expansion of its current
services.
Since executing documentation for TTI's acquisition, the CCC has executed
the lease of a 13,000 square foot office facility in California from which to
base the Company's corporate headquarter and domicile pending telecommunication
based acquisitions. The TTI acquisition is the first of several planned
acquisitions to be made by the Company through CCC. Through this first
acquisition, the Company anticipates acquiring further proprietary agreements,
knowledge and trade contacts from which to develop a developmental platform for
growth in the telecommunication industry.
The Company is presently evaluating numerous telecommunications related
acquisitions.
Risk Factors
Idle power generation equipment
As at August 31, 1996, the Company reported assets of $9,185,414, a
substantial portion of which 56.9% was represented by idle power generation
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equipment ($5,226,063). There is no assurance or guaranty that either (a) there
is a market for such equipment, or (b) the Company would generate, upon sale,
proceeds in an amount equal to the value of this equipment as reflected on its
balance sheet.
This equipment, which was acquired by the Company in a series of purchase
transactions between 1984-1986, has never been placed in service, with the
exception of one generating plant which was utilized for a six month period and
four plants which generated power at December 31, 1986 in order to qualify for
investment tax credits. Subsequent to its acquisition, all of the equipment has
been placed in storage. Although the Company has monitored this equipment and
periodically reviews its operating status, there is no assurance or guaranty
that this equipment will function as designed when and if placed in operation.
During the period 1991-1996, the Company has endeavored to identify
various projects in which the generation plants may be utilized. In addition,
from time to time the Company has explored the potential sale of one or more
generating units to third parties as set forth in management's discussion and
analysis herein. To date, the Company has not been successful in the development
of a project for utilization of such equipment or the sale of such equipment,
and there is no assurance or guaranty that the Company will be successful in the
future.
Although the Company continues to identify projects in which the idle
power generating equipment could be utilized, there is no assurance or guaranty
that the Company will be successful in either (a) identifying such projects, (b)
securing funding for any such project, or (c) developing the projects.
To the extent that the Company is not successful in its attempt to utilize
these assets in its operations, the Company will be compelled to offer and sell
these assets in the open market. in such event, these is no assurance or
guaranty that the Company will generate sale proceeds in an amount equal to or
greater than the value of these assets as reflected in its financial statements
as at August 31, 1996. The market value of these assets is dependent upon
numerous factors, the majority of which are beyond the control of the Company,
including, but not limited to, the mechanical condition of the equipment, the
state of technology, the availability of equipment of a similar nature, the
demand for such equipment in the marketplace, the economic conditions
surrounding the unregulated utility marketplace, the availability tax credits
and deductions related to the use of such equipment and other factors that are
beyond the Company's control.
Accordingly, current and prospective shareholders are advised that the
idle power generating equipment constitutes assets of a "special" use category,
for which these is limited marketability and these is no assurance or guaranty
that the assets will generate proceeds to the Company in an amount equal to or
greater than the value as reflected in the financial statements as at August 31,
1996."
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Change in Corporate Control
On February 29, 1996, the Company executed a binding Letter of Intent
("LOI") with Waterford Trust Company Limited ("Waterford"), an Irish
corporation, with terms which substantially required a change of control of the
Company. By and through the LOI, on May 3, 1996, a change in control occurred at
the Board of Directors, as the prior Board of Directors resigned and were
replaced. Pursuant to the terms of the LOI, a Waterford nominee, Golden Chance
Limited, an Isle of Man company Limited by Shares, executed documentation
precedent to the purchase of 1,960,745 Series A Preferred shares of the Company
in consideration of financing commitments in the aggregate amount of $5,000,000,
together with a corporate guarantee assuring the payments owing provided by
Waterford.
Pursuant to the contractual obligation of the Company to Waterford, the
previous Board of Directors voluntarily resigned without objection or
qualification related to the operation of the Company. The resignations of the
prior Board of Directors was implemented in furtherance of the Company's
contractual obligations as set forth in the binding letter of intent with
Waterford. Since the change in control occurred, the restructuring of business
operations, acquisitions, regulatory filings, finances, accounting practices,
have been subject to the control, direction and discretion of the incumbent
Board of Directors, by and through Board appointed advisors, consultants,
attorneys and representatives who are not officers of the Company, pending the
appointment of replacement officers.
On September 26, 1996, interim President Jeffrey Antisdel and interim
Secretary, Richard Cascarilla, were replaced as officers of the Company.
Replacement officers Stefan Tevis, President and Kenton Bowers, Corporate
Secretary, have been approved and hired by the Board of Directors. Upon the
appointment of replacement officers, Mr. Antisdel and Mr. Cascarilla are serving
as independent consultants to the Company for a period of not less than two
years. In addition, on September 26, 1996, a member of the Board of Directors,
John Goold resigned and was replaced by Stefan Tevis, the current President of
the Company.
39
<PAGE>
On August 28, 1996, Golden Chance Limited was late in making its monthly
scheduled payment of $500,000 and had delivered a partial payment of
approximately 25% of the $500,000 amount. The officers of the Company provided
Notice to corporate guarantor, Waterford Trust Company Limited and payor Golden
Chance limited of default of its contractual obligations. Thereafter, additional
sums were received by the Company to satisfy the $500,000 payment requirement
and legal counsel representing the Series B Preferred shareholders notified the
Company's Board of Directors and Officers, as well as Waterford Trust Company
Limited and Golden Chance Limited that a waiver of default requires the consent
of the Company's Series B Preferred shareholders. To date, the Series B holders
have not delivered the waiver of default required and the $500,000 payment due
on September 28, 1996 has not yet been received. The Company has therefore
provided notice to Waterford Trust Company Limited and Golden Chance Limited
pursuant to the terms of the note and anticipates additional payments by Golden
Chance upon delivery of the August, 1996 waiver of default by the Company's
Series B Preferred shareholders.
As of August 31, 1996, the Company has received aggregate payment of
$1,244,402 dollars from Golden Chance Limited.
If for any reason the Company should not continue to obtain financing to
support the operation and growth of the Company there could be a material
adverse effect on the Company's operations.
Acquisitions and Deployment of Power Plants
Associated with the Company's proposed acquisitions, the Company plans to
deploy its idle power plant assets in power projects to be acquired. However, If
the Company for any reason is unable to deploy idle generating units, a material
adverse financial effect on the Company may result. Risks attendant to such
deployment include, but are not limited to, governmental permitting risks,
construction risks in completing installation, cost overrun risks and
operational risks. A lack of success in completing the deployment of Company
owned power plants may, in the opinion of the Company's auditors, require
provision for a reserve related to the carrying value of the Company's power
generating assets. Further, a risk attendant to completing this expansion
includes closing equity financing sufficient to achieve the Company's
construction and working capital needs. If such financing should not be
completed, for any reason, there would be a material adverse effect on the
future operations of the Company.
Similar risks exist in the proposed expansion of the wind farm owned by
the Company's majority owned subsidiary San Jacinto Power and a lack of adequate
40
<PAGE>
financing would have a material negative effect on the proposed purchase of San
Jacinto Power Company's minority ownership interest of 49.99% from New World
Power Corporation, San Jacinto Power Company's planned expansion to its rated
contract capacity of 18.9 Megawatts and future returns received from San Jacinto
Power.
Presently, it is planned that the proposed expansion of the San Jacinto
Power project will be initiated at the subsidiary level with no direct purchases
of plant and equipment at the parent company level, thereby reducing risks to
the Company.
Further, since the Company maintains a holding company structure, the
Company does not intend to enter into direct purchases of capital equipment at
the parent company level in order to complete the deployment of its idle power
equipment in any proposed project. However, any capital expenditures required
for project development and deployment of Company owned idle equipment will be
completed at the subsidiary level and will most likely require equity, debt or
project financing for which the Company will need to seek additional funding.
Significant acquisitions of telecommunications companies and related
businesses include risks related the Company's limited experience, need to
retain additional staffing with sufficient expertise due to the Company's
limited experience in this industry group. Telecommunications based acquisitions
outside the Company's primary energy business may also have the effect of
reducing or eliminating certain tax benefits associated with prior net operating
losses.
Historically, the Company has been unable to finance operations from
revenues and cash flow. Thus, the Company has been financing operations from the
sale of its Class A common stock, management fees, subsidiary distributions of
cash dividends, asset sales, and litigation recoveries. The Company has entered
into agreements for equity financing in the amount of $5,000,000 in the
aggregate and has received in excess of $1,244,000 to date. While the Company
presently believes that adequate financing arrangements sufficient for the
Company's asset deployment and working capital needs have been secured, there
could be a material negative financial effect upon the Company should the
Company's current financing commitments for any reason not be met.
Presently, there are no plans for product research and development at the
parent company level over the coming twelve (12) months.
Client Service Agreement
Effective June 28, 1996, the Company entered into a Client Service
Agreement with Continental Capital & Equity Corporation ("CCEC"), for services
which include, but are not limited to, CCEC providing public relations, direct
marketing advertising services, radio advertising, establishment of a Internet
"website" on behalf of the Company, for broker relations, and dissemination of
Company news releases on national wire services, and services as agent for the
Company ("CCEC Services").
41
<PAGE>
In consideration of CCEC Services, the Company paid CCEC $25,000 upon
contract execution, and agreed to provide to CCEC or a CCEC affiliate, a second
payment on or before July 28, 1996 in the amount of $25,000, and on or before
August 28, 1996, delivery of 150,000 Class A Common shares valued in the
aggregate on June 28, 1996, at the then prevailing closing market price for the
Company's Class A Common stock as quoted on NASDAQ and an option to purchase
150,000 Class A Common shares for a period of twelve months from the time of
delivery at a strike price as set forth at the closing market price on the date
of delivery of Class A Common stock and stock options. It was the Company's
intent to issue the 150,000 Class A Common shares and option to purchase 150,000
Class A Common shares simultaneously to CCEC.
The Company has received a verbal offer from CCC to terminate the Client
Service Agreement upon the Company's payment of a $25,000 fee in satisfaction
thereof. It is currently the Company's intent to proceed with the payment of the
$25,000 in full satisfaction thereof.
Securities Registration Statements
On June 28, 1994, the Company's Board of Directors adopted an Employee and
Consultant Stock Option Plan (the "Plan") registered on Form S-8 in accordance
with the Securities Act of 1933. This S-8 was filed with the Securities and
Exchange Commission on August 2, 1994, Registration No. 33-82318. The purpose of
the Plan was for the express purpose of providing compensation for services
rendered to the Company and to promote the success of the Company by providing
Eligible Participants (employees and consultants) with incentives for
performance on behalf of the Company. The Plan was accomplished by providing for
the granting of options to purchase certain numbers of Class A Common Stock to
Eligible Participants. The Board of Directors may suspend or terminate the Plan
at any time but no such action shall adversely affect the rights of any person
granted an option under the Plan prior to that date of suspension or
termination. The maximum number of shares available for option under the Plan
were 1,125,000 Class A Common shares, subject to adjustment by reason of
reorganization, merger, consolidation, recapitalization, dividends, stock split,
changes in par value and the like occurring or effective while any such shares
of Class A Common Stock are subject to the options under the Plan. The terms and
conditions of each option will specify the number of shares optioned, the period
during which each option is exercisable and the exercise price per share. The
Plan has been terminated and it is presently contemplated that a revised S-8
plan may be prepared and submitted during the current fiscal year.
On August 19, 1996, the Company filed a Form S-3 Registration Statement
with the Securities and Exchange Commission covering the potential future sale
of 5,436,663 shares of Class A Common stock on behalf of approximately 50
holders of record, including Golden Chance Limited. The S-3 Registration
Statement is current and it is presently contemplated that additional
registration statements may be prepared and submitted during the current fiscal
year.
42
<PAGE>
The Company also plans to file additional registration statements in
satisfaction of certain contractual obligations to purchases of restricted
securities made by accredited investors.
Subscription Agreement Dispute
Two irrevocable subscription agreements for the purchase of Class A common
stock have been entered into by two parties in an amount totaling $1,000,000.
The original funding dates on the above subscriptions were in February 1995. Due
to conditions in the Company's securities market, subsequent extensions were
granted to May 1995 and then September 1995. These amounts were therefore
initially reported as subscriptions receivable in releases of unaudited
financial data.
Based on the initial extension period provided to the subscribers the
Company believed the amounts would be paid prior to completion of then current
financial reports. However, the Company has not received the payments required
under the terms of the subscription agreements due to the failure of the
subscribers to deliver payment. The Company has discontinued settlement
negotiations with the subscriber(s) and legal counsel representing the
subscribers.
The Company's efforts to achieve a suitable agreement for delivery of
consideration in satisfaction of the amounts owing have not yet been successful
and the Company is evaluating its legal options.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
Exhibit 27.1 - Financial Data Schedule (Electronic filing only)
(b) Reports on Form 8-K have been filed during the quarter for which
this Form 10-QSB is being filed, as follows:
August 2, 1996 - Formation of subsidiaries, Cental Communication
Company and San Jacinto Energy Company.
August 5, 1996 - Acquisition of Telecom Technologies, Inc
August 30, 1996 - Disposition of assets
September 27, 1996 - Change of officers
September 30, 1996 - Corporate change of address.
43
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
NEVADA ENERGY COMPANY, INC.
Date: August 31, 1996 /s/ Stefan Tevis
--------------- ---------------------------
Stefan Tevis, President
Date: August 31, 1996 /s/ Kenton H. Bowers
--------------- ---------------------------
Kenton H. Bowers
Controller
44
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THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF NEVADA ENERGY COMPANY, INC. FOR THE SIX MONTHS ENDED
AUGUST 31, 1996 , AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
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