<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
AMENDED 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 MAY 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 (I.R.S. Employer
incorporation or organization) Identification No.)
401 EAST FOURTH STREET, RENO, NEVADA 89512
-------------------------------------------
(Address of principal executive offices)
(Zip Code)
(702) 786-7979
---------------
(Registrant's telephone number, including area code)
- -------------------------------------------------------------------------------
(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 8,960,866 shares of the registrant's Class A Common Stock, $.001
par value, outstanding as of July 9, 1996.
<PAGE>
NEVADA ENERGY COMPANY, INC.
INDEX
PART I. FINANCIAL INFORMATION PAGE NUMBER
- ------------------------------ --------------
ITEM 1. FINANCIAL STATEMENTS
Consolidated Balance Sheets -
May 31, 1996 and February 28, 1996 3 - 4
Consolidated Statements of Operations -
for the three months ended May 31, 1996
and the three months ended May 31, 1995 5
Consolidated Statements of Shareholders' Equity -
for the year ended February 28, 1995 and the
three months ended May 31, 1996 6
Consolidated Statements of Cash Flows -
for the three months ended May 31, 1996
and the three months ended May 31, 1995 7
Notes to Consolidated Financial Statements 8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 20
PART II. OTHER INFORMATION
- ----------------------------
Item 1. Legal Proceedings. 28
Item 4. Submission of Matters to a Vote of
Security Holders. 28
Item 5. Other Information. 29
Item 6. Exhibits and Reports on Form 8-K. 38
2
<PAGE>
NEVADA ENERGY COMPANY, INC.
CONSOLIDATED BALANCE SHEETS
AT
MAY 31, 1996 and FEBRUARY 29, 1996
ASSETS
MAY 31, 1996 FEBRUARY 29
(Unaudited) 1996
------------ -----------
CURRENT ASSETS:
Cash $ 106,614 $ 132,243
Receivables 192,303 137,274
Inventory 47,512 35,375
Deposits and prepaid expenses 74,043 119,375
------------ -----------
Total Current Assets 420,472 424,267
------------ -----------
PROPERTY AND EQUIPMENT, at cost (Note 1):
Furniture, equipment and vehicles 229,580 229,580
Building 253,156 253,156
Power generation equipment 1,082,372 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
------------ -----------
6,861,171 6,866,406
Less - Accumulated depreciation
and amortization (353,221) (336,277)
------------ ------------
Net Property and Equipment 6,507,950 6,530,129
------------ ------------
OTHER ASSETS (Note 2):
Investments in partnerships 2,975 3,227
Investments in subsidiaries 511,835 24,546
Deposits (Note 4) 20,000
Power Purchase Agreements, net of Amortization 47,658 48,288
Organization Expense, net of amortization 1,043 1,102
------------ -----------
583,511 77,163
------------ -----------
TOTAL ASSETS $ 7,511,934 $ 7,031,559
------------ -----------
------------ -----------
(The accompanying notes are an integral part of these statements.)
3
<PAGE>
CONSOLIDATED BALANCE SHEETS
AT
MAY 31, 1996 and FEBRUARY 29, 1996
LIABILITIES AND SHAREHOLDERS' EQUITY
MAY 31, 1996 FEBRUARY 29
(Unaudited) 1996
------------ -----------
CURRENT LIABILITIES:
Accounts payable $ 263,122 $ 187,455
Short-term borrowings (Note 3) 29,704 42,041
Payable to related party 37,965 37,965
Accrued payroll 74,344 60,294
Other liabilities 66,923 65,047
Liabilities subject to compromise (Note 1) 24,293 43,207
------------ -----------
Total Current Liabilities 496,350 436,009
------------ -----------
NON-CURRENT LIABILITIES
Mortgage Payable (Note 3) 7,926 15,688
------------ -----------
Total Non-Current Liabilities 7,926 15,688
------------ -----------
COMMITMENTS AND CONTINGENT LIABILITIES (Note 4) - -
------------ -----------
Total Liabilities 504,276 451,697
------------ -----------
MINORITY INTEREST IN SUBSIDIARY (Note 2) 661,983 698,430
------------ -----------
SHAREHOLDERS' EQUITY (Notes 1, 4, 5, 6 and 7):
Preferred stock, $.001 Par Value,
Authorized 2,000,000 shares;
Issued and outstanding -
Series A - 1,960,745 shares at May 31, 1996,
none at February 29, 1996 1,961 -
Series B - 5 shares at May 31, 1996,
none at February 29, 1996 - -
Class A Common Stock, $.001 par value,
Authorized 25,000,000 shares;
Issued and outstanding 6,960,866 shares at
May 31, 1996 and 8,808,485 shares at
February 29,1996 8,961 8,808
Class B Common Stock, $.001 Par Value,
Authorized 25,000,000 shares;
Issued and outstanding 4,437,473 shares at
May 31, 1996 and 4,437,473 shares at
February 29, 1996 4,437 4,437
Additional paid-in capital 16,359,478 11,528,754
Series A - note receivable (4,241,170) -
Accumulated deficit (5,778,892) (5,651,466)
Treasury stock - Class A, 16,785 shares at
May 31, 1996 and 16,785 shares at
February 29, 1996 (9,101) (9,101)
------------ -----------
Total Shareholders' Equity 6,345,674 5,881,432
------------ -----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 7,511,934 $ 7,031,559
------------ -----------
------------ -----------
(The accompanying notes are an integral part of these statements.)
4
<PAGE>
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED
MAY 31, 1995 AND MAY 31, 1996
MAY 31 MAY 31
1996 1995
----------- -----------
REVENUES:
Energy Sales $ 67,946 $ 259,941
Printing and Business Supply Sales 303,083 249,418
----------- -----------
Total Revenues 371,029 509,359
----------- -----------
COSTS AND EXPENSES:
Cost of Sales 198,627 153,639
Cost of Operations 79,044 180,395
Depreciation and Amortization (Note 1) 16,724 16,414
Provision for obsolescence (Note 1) - 94,810
Professional Fees 107,844 113,335
General and Administrative 131,440 127,682
----------- -----------
Total Costs and Expenses 533,679 686,275
----------- -----------
OTHER INCOME AND (EXPENSES):
Interest Income 161 453
Other Income 996 4,135
Gain on disposition of assets (Note 2) - 585,511
Interest Expense (2,179) (3,837)
Minority Interests (Notes 1 and 2) 36,446 (15,202)
----------- -----------
Total other income and (expense) 35,424 571,060
----------- -----------
LOSS BEFORE TAXES AND EXTRAORDINARY ITEM (242,786) 394,143
PROVISION FOR INCOME TAXES (Note 3) 200 (13,867)
----------- -----------
NET INCOME (LOSS) $ (127,426) $ 408,010
----------- -----------
----------- -----------
NET INCOME (LOSS) PER SHARE (Notes 1 and 5) $ (0.01) $ 0.05
----------- -----------
----------- -----------
(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 THREE MONTHS ENDED MAY 31, 1996
<TABLE>
<CAPTION>
CLASS A COMMON CLASS B COMMON
------------------------------------- --------------------
NUMBER NUMBER
OF OF
SHARES AMOUNT SUBSCRIBED SHARES AMOUNT
--------- -------- ------------ --------- --------
<S> <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 a note (Note 6) - - -
Expenses related to issuance - - -
Cash received on note
Net (Loss) for the quarter
Ended May 31, 1996
--------- -------- ------------ --------- --------
BALANCES, May 31, 1996 8,960,866 $ 8,961 - 4,437,473 $ 4,437
--------- -------- ------------ --------- --------
--------- -------- ------------ --------- --------
PREFERRED STOCK
-------------------------------------------------------------
SERIES A SERIES B
------------------------------------- --------------------
NUMBER NUMBER
OF NOTE OF
SHARES AMOUNT RECEIVABLE SHARES AMOUNT
--------- -------- ------------ --------- --------
<S> <C> <C> <C> <C> <C>
BALANCES - FEBRUARY 28, 1995 - $ - $ - - $ -
Shares issued for Cash (Note 6) - - - - -
Shares issued for Services (Note 6) - - - - -
Stock dividends at market value (Note 6) - - - - -
Transfer of surplus for stock dividend
Net (Loss) for the Year
Ended February 28, 1995
--------- -------- ------------ --------- --------
BALANCES - FEBRUARY 29, 1996 - - - - -
Shares issued for cash (Note 6) - - 5 -
Shares issued for a note (Note 6) 1,960,745 1,961 (4,899,988)
Expenses related to issuance
Cash received on note 658,818
Net (Loss) for the quarter
Ended May 31, 1996
--------- -------- ------------ --------- --------
BALANCES, May 31, 1996 1,960,745 $ 1,961 (4,241,170) 5 -
--------- -------- ------------ --------- --------
--------- -------- ------------ --------- --------
PAID-IN ACCUMULATED TREASURY SHAREHOLDERS'
CAPITAL DEFICIT STOCK EQUITY
------------- ------------- ----------- ------------
<S> <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 - - (2,836)
Shares issued for Services (Note 6) 66,216 - - 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 (628,636) - (628,636)
------------- -------------- ------------ ------------
BALANCES - FEBRUARY 29, 1996 11,528,754 (5,651,466) (9,101) 5,861,432
Shares issued for cash (Note 6) 97,660 - - 98,013
Shares issued for a note (Note 6) 4,896,027 - - -
Expenses related to issuance (165,163) (165,163)
Cash received on note 658,818
Net (Loss) for the quarter
Ended May 31, 1996 (127,426) (127,426)
------------- -------------- ------------ --------------
BALANCES, May 31, 1996 $ 16,359,478 $(5,778,892) $ (9,101) $ 6,345,674
------------- -------------- ------------ --------------
------------- -------------- ------------ --------------
</TABLE>
(The accompanying notes are an integral part of these statements.)
6
<PAGE>
STATEMENTS OF CASH FLOWS FOR THE THREE MONTHS
ENDED MAY 31, 1996 AND MAY 31, 1995
<TABLE>
<CAPTION>
MAY 31 MAY 31
1996 1995
------------- --------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income (Loss) $ (127,426) $ 408,010
Adjustments to reconcile net income (loss)
to net cash used in operating activities -
Depreciation and Amortization (Note 1) 16,724 16,414
Provision for Obsolescence (Note 1) - 94,510
Minority Interest in Subsidiary Profit
(Loss) (36,466) 15,202
Stock issued to Directors/Officers/Employee - 68,382
Changes in assets and liabilities -
Decrease (Increase) in Receivables (55,931) (563,935)
Decrease (Increase) in Receivable from
related party - 37,500
Decrease (Increase) in Inventories (12,137) 5,339
Decrease (Increase) in Deposits and
Prepaids 38,755 45,588
Increase (Decrease) in Accounts Payable 75,667 (34,292)
Increase (Decrease) in Payable to
related party - 1,715
Increase (Decrease) in Other Liabilities 1,876 (27,909)
Increase (Decrease) in Liabilities
subject to compromise (17,885) (13,388)
------------- ------------
Net cash used in operating activities (11,826) 53,418
------------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Deposit on print equipment (20,000) -
Investment in Subsidiaries (492,290) -
(Advances) to and Repayments from Partnerships 252 (10,049)
------------- ------------
Net cash provided by investing activities (512,038) (10,049)
------------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal repayments on financing (17,128) -
Net proceeds from cash sales of common and
preferred stock 591,655 -
Repayment of Long-Term Debt (7,762) (4,095)
Minority interest 36,465 (15,202)
------------ ------------
Net cash used in financing activities 603,230 (19,297)
------------ ------------
NET INCREASE (DECREASE) IN CASH (25,631) 24,072
CASH AT BEGINNING OF PERIOD 132,245 37,885
----------- ------------
CASH AT END OF PERIOD $ 106,614 $ 61,957
------------ ------------
------------ ------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION (Note 11):
Cash expenditures during the nine months for -
Interest $ 2,179 3,837
Taxes, including taxes paid through payments
on liabilities subject to compromise of
$18,915 in 1996 and $13,386 in 1995 20,925 13,519
</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 trans-actions 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. 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.
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 8,859,279 in the three months ended May 31, 1996 and
8,277,376 in the three months ended May 31, 1995.
Shares issuable upon exercise of warrants or options are
9
<PAGE>
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 May 31, 1996 and
1995 are as follows (amounts in thousands):
ELECTRIC PRINTING
POWER AND OFFICE
($000) PRODUCTION SUPPLIES CONSOLIDATED
- ------- ----------- ---------- ------------
QUARTER ENDING MAY 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 - - -
($000)
- -------
QUARTER ENDING MAY 31, 1995
Sales * $ 260 $ 249 $ 509
Operating Income (Loss) (203) 25 (178)
Extraordinary Item 586 - 586
Identifiable assets ** 7,625 495 8,120
Depreciation/amortization 13 3 16
Provision for obsolescence 95 - 95
Capital expenditures - - -
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
10
<PAGE>
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.
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):
Three months ended
May 31, 1996
(UNAUDITED) NEC HPBS Combined
----------- ----- ------- ---------
Net revenues S 67.9 $ 303.1 $ 371.0
Net income (loss) $ (167.3) $ 39.9 $ (127.4)
11
<PAGE>
Three months ended
May 31, 1995
(UNAUDITED) NEC HPBS Combined
---------- ----- ------- ---------
Net revenues $ 260.0 $ 249.4 $ 509.4
Gain on asset sales 585.5 - $ 585.5
Net income (loss) $ 383.0 $ 25.0 $ 408.0
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 May 31, 1996. The cost of relocating
was nominal.
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"
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
12
<PAGE>
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.
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.
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.
13
<PAGE>
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.
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 May 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.
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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 May 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 May 31, 1996, the acquisition
was still pending. In December 1995, the Company transferred all of 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
May 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 May 31, 1996:
Mortgage note-current $ 29,704
--------
--------
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
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1). The current portion is $29,704 and monthly installments are $2,718
with interest at 10% per annum.
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.
On May 3, 1996 CEC entered into an agreement to purchase a high speed
printing press at a purchase price of $300,400. A cash down payment of
$20,000 was made, which is classified as long-term deposit in the financial
statements. The balance 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 equipment was delivered in May 1995, but
was not accepted until it became operational in June 1996. The financing
was not guaranteed by the Company.
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
shares. Shares are to be held in escrow until payment is received. 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
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<PAGE>
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
$1,004,433 had been received by July 9, 1996.
At May 31, 1996, there were 1,960,745 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.
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 May 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
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no options have been exercised through May 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 May 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 shares 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 May 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 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 May 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
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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 May 31, 1996, the Company's potential
deferred tax asset has increased by $85,045 and the valuation account has
been increased accordingly.
No provision for Federal income taxes was recorded during the quarter
ended May 31, 1996 or the quarter ended May 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 May 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 three 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.
(Remainder this of page intentionally left blank)
19
<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.
(4) YAC -- Yerington Acquisition Company
Nevada corporation
Wholly owned subsidiary, holds all idle Ormat/Raft River
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 partnerships 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.
LIQUIDITY
As of May 31, 1996, the Company had $420,472 in current assets. Cash of
$106,614 (including $10,058 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 $4,241,170 collectible
over an eleven month period.
Cash used by operating activities in the three months ended May 31, 1996
was $25,631 The after-tax loss from operations was $127,426 which included
$16,724 of non-cash charges for depreciation. 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 May 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 $512,038 in cash in during the period May 31, 1996,
including expenditures of $20,000 for a deposit on equipment purchases and
$492,290 advanced to a subsidiary in anticipation of the acquisition of a
telecommunications business. Cash flows from financing activities in the
quarter ended May 31, 1996 came from sales of preferred and common shares
and generated $603,230 in cash.
Cash provided by operating activities in the three months ended May 31,
1995 was $24,072. The after-tax income from operations was $408,010, which
included $16,414 of non-cash charges for depreciation and $94,810 for
obsolescence on idle equipment. Investing activities used $10,049 in cash
during the quarter ending May 31, 1995, including investments in partnerships
which were $10,049. Cash flows from financing activities in the quarter ended
May 31, 1995 used $19,297 in cash repayment of long-term debt and returns to the
minority holder in SJPC.
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 May 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.
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 $5,110,503),
unencumbered by debt, which the Company is taking all
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<PAGE>
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 $4.5 million dollars and in excess of the equipment's
net book value and its appraised fair market value of $4.38 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.
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
21
<PAGE>
forth herein. However, the Company currently believes commitments for
adequate funding over the next twelve months presently exist.
DEBT
As of May 31, 1996, the Company's total current liabilities were
$496,350. Current accounts payable were $263,122 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 $29,704 were the current
mortgage payable balance assumed in the Company's wholly owned subsidiary
Combustion Energy Company's acquisition of HPBS. Other liabilities of
$66,923 included accrued audit expenses of $51,100, and accrued payroll
including $57,500 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 $24,293.
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 equipment was delivered in May 1995, but
was not accepted until it became operational in June 1996. The financing was
not guaranteed by the Company.
RESULTS OF OPERATIONS
REVENUES
Revenues for the quarter ended May 31, 1996 totaled $371,029 and consisted
of energy sales from San Jacinto Power Company of $67,946, HPBS printing and
business supply sales of $303,083. Comparable revenues for the quarter ending
May 31, 1995 were $259,941 from energy sales and $249,418 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. Utilization increases of available turbines is expected
in the quarter ending August 31, 1996.
22
<PAGE>
Wind speeds have been higher than average and while this resulted in higher
per active turbine revenues, it has adversely affected maintenance access to
off-line turbines.
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 May 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 $207,958 and office supplies sales were $95,125 for the quarter
ended May 31, 1996. Comparable results for the quarter ended May 31, 1995 were
print revenues of $156,419 and office supplies sales of $92,999.
COSTS AND EXPENSES
Cost of Sales
Cost of sales for the three months ended May 31, 1996 were $198,627 or
65.5% of sales verses $153,639 or 61.6% of sales for the comparable quarter
ended May 31, 1995. The costs increase was a direct result of a substantial
increase in the cost of paper stock which has occurred over prior months.
Cost of Operations
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 May 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. The current combined carrying value
($5,226,063) of the idle equipment is less than the current combined fair
market appraisal value as of May 31, 1996. The provision would have been
$115,560, if prior accounting methods had continued in effect. Comparable
cost for the quarter ended May 31, 1995 were $94,810. Depreciation and
amortization for the quarter ended May 31, 1996 were $16,724. Comparable
costs for the quarter ended May 31, 1996 were $16,414.
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
23
<PAGE>
normal fluctuations in business activities.
Other Costs and Expenses
The quarter ended May 31, 1996 included $115,560 in provisions for
obsolescence of idle equipment and depreciation and amortization expenses of
$16,724. Comparable costs for the quarter ended May 31, 1995 included $94,810
in provisions for obsolescence of idle equipment and depreciation and
amortization expenses of $16,414. At February 29, 1996, the Company recorded an
incremental obsolescence charge of $83,288 in accordance with management's
determination to assert a single charge against recorded values consistent with
independent appraised values in conjunction with the Company's annual audit.
The Company has determined that fixed obsolescence charges will continue to
accrue quarterly with appropriate adjustments until such time as the idle power
generating assets of the Company are placed into service.
Professional fees for the quarter ended May 31, 1996 were $107,844,
including $27,503 in legal fees, $12,433 in audit fees and $67,908 in other
outside services. Other outside services included $45,000 in the quarter ended
May 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.
Professional fees for the quarter ended May 31, 1995 were $113,335, including
$38,126 in legal fees, $26,917 in audit fees and $48,292 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.
Administrative expenses totaling $131,440 for the three months ending May
31, 1996 were principally for salaries, wages and benefits in the amount of
$80,689, public and shareholder relations $3,246, general office expenses
$22,711, travel expense $5,867, directors fees and expenses $14,044 and other
miscellaneous expenses $4,883. Comparable amounts totaled $127,682 for the
three months ending May 31, 1995 were principally for salaries, wages and
benefits in the amount of $59,967, public and shareholder relations $4,286,
general office expenses $47,528, travel expense $3,653, directors fees and
expenses $8,072 and other miscellaneous expenses $4,173.
Interest expense of $2,179 for the quarter ending May 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. Interest in the comparable period ending May 31, 1995
related primarily to short-term borrowings, the IRS note and the mortgage note
and was $3,837.
Other Income and Expenses
Consolidated interest of $161 was earned on cash carried in money market
funds in the quarter ended May 31, 1996, compared to $453 in the same period for
1995.
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<PAGE>
Other income of $585,511 in comparable period ended May 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 $200 for the three months ended May 31, 1996 and ($13,867)
for the comparable three months ended May 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 three
months ending May 31, 1996 or 1995. As of May 31, 1996, unused net operating
losses available to offset future taxable income was 5,249,763. The Company's
investment and energy tax credit carryforwards expired in November 1995.
Net Result
In the three months ending May 31, 1996, there was a total operating loss
of $127,426 or $0.01 per share on 8,859,279 average Class A Common shares
outstanding. For the three months ending May 31, 1995, there was an operating
income of $408,010 or $0.05 per share on 8,277,376 average Class A common shares
outstanding.
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<PAGE>
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 case is currently pending as the Company is proceeding with further
discovery. 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.
On July 11, 1995, the Annual Meeting of Stockholders for the Company was
held and the matters were voted upon by a majority of vote of the stockholders,
as follows:
1. The re-election of Michael R. Kassouff as director was approved;
2. The ratification of appointment of the Company's auditors, Kafoury &
Armstrong & Company was approved;
3. The amendment of the Company's Certificate of Incorporation to
prohibit ownership of the Company's Common Stock by an electric
utility or electric utility holding company or an affiliate thereof,
was not approved;
4. The amendment of the Company's Certificate of Incorporation to reduce
authorized share capital of Class B common shares, par value $.001,
from 100,000,000 to 25,000,000 Class B common shares authorized, par
value $.001, was approved;
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<PAGE>
5. The amendment of the Company's Certificate of Incorporation to reduce
the authorized par value of preferred stock to $.001 was approved; and
6. The amendment of the Company's certificate of incorporation to
prohibit Class B common stockholders from receiving cash dividends was
approved.
ITEM 5. OTHER INFORMATION.
Effective May, 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.
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.
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 and construction company and others have now been
terminated.
27
<PAGE>
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
$5,110,503, 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. The Company delayed
closing of the Tads acquisition pending Tads receipt of surface disposal
permitting from the State of Nevada. 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 purchase during the month of August 1996 and has confirmed Tads
intent to close.
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
the Tads site for purposes of generating all
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<PAGE>
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").
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
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<PAGE>
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 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 July, 1996, with
terms of purchase to be publicly disseminated following closure.
Following completion of the acquistion 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.
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.
30
<PAGE>
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 is the owner of approximately twenty
long distance "Caseta" accounts together with Letters of Agency which provide
long distance telephone services, money transfers and other services primarily
to the Latin American community in the Western United States.
Since executing documentation for TTI's acquisition, the Company is now
investigating the lease of a 13,000 square foot office facility in California
from which to base TTI and other 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 May 31, 1996, the Company reported assets of $6,911,171, a
substantial portion of which (76%) was represented by idle power generation
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 sales 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 not 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, there 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 May 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 there is limited marketability and there 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 May 31, 1996.
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. As of July 9, 1996, the Company has received aggregate payment in
excess of $1.0 million dollars. 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.
Pursuant to the contractual obligation of the Company to Waterford, the
previous Board of Directors voluntarily resigned without objection
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<PAGE>
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.
Interim President Jeffrey Antisdel and interim Secretary, Richard Cascarilla,
have agreed to continue as at will employees until such time replacement
officers have been approved and hired by the Board of Directors. Upon the
appointment of replacement officers, Mr. Antisdel and Mr. Cascarilla will
serve as independent consultants to the Company for a period of not less than
two years.
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
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
32
<PAGE>
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 $1,000,000 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"). 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 is 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.
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,
33
<PAGE>
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
will be prepared and submitted during the current fiscal year.
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 undertaken settlement
negotiations with the subscriber(s) and legal counsel representing the
subscribers with no result to date. The Company has continued efforts to
achieve a suitable agreement for delivery of consideration in satisfaction of
the amounts owing and there remains a possibility of litigation if mutually
satisfactory settlement is not achieved.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits.
None
34
<PAGE>
(b) Reports on Form 8-K have been filed during the quarter for which this
Form 10-QSB is being filed, as follows:
May 1, 1996 - Change in Control and Resignation of Directors
June 21, 1996 - Acquisition of Telecom Technologies, Inc.
35
<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 JULY 11, 1995 /S/ JEFFREY E. ANTISDEL
------------- ------------------------
Jeffrey E. Antisdel, President
Date JULY 11, 1995 /S/ KENTON H. BOWERS
-------------- ----------------------
Kenton H. Bowers, Controller
36
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