SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-QSB/A
AMENDMENT NUMBER 2
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended November 30, 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
POWERTEL USA, INC.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 84-0897771
- ---------------------------------------------- -------------------
(State or other jurisdiction of incorporation (I.R.S. Employer
or organization) Identification No.)
1187 Coast Village Road #1-381, Santa Barbara, CA 93108
- --------------------------------------------------------------------------------
(Address of principal executive offices)
(Zip Code)
(805) 884-8350
- --------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
510 Castillo St., Santa Barbara, CA 93101
- --------------------------------------------------------------------------------
(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 15,808,710 shares of the registrant's Class A Common Stock,
$.001 par value, outstanding as of January 20, 1997.
<PAGE>
POWERTEL USA, INC.
INDEX
Part I. Financial Information Page Number
- ----------------------------- -----------
Item 1. Financial Statements
Consolidated Balance Sheets -
November 30, 1996 and February 28, 1996 3 - 4
Consolidated Statements of Operations -
for the three months ended November 30,
1996 the nine months ended November 30, 1996
and for the three months ended November 30, 1995
and the nine months ended November 30, 1995 5
Consolidated Statements of Shareholders' Equity -
for the year ended February 28, 1995 and the
nine months ended November 30, 1996 6
Consolidated Statements of Cash Flows -
for the nine months ended November 30, 1996
and the nine months ended November 30, 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>
POWERTEL USA, INC.
CONSOLIDATED BALANCE SHEETS
AT
NOVEMBER 30, 1996 and FEBRUARY 29, 1996
<TABLE>
<CAPTION>
A S S E T S
- - - - - -
NOV. 30, 1996 FEBRUARY 29
(Unaudited) 1996
----------- -----------
<S> <C> <C>
CURRENT ASSETS:
Cash $ 136,735 $ 132,243
Receivables 533,768 137,274
Inventory 48,032 35,375
Deposits and prepaid expenses 19,088 119,375
----------- -----------
Total Current Assets 737,622 424,267
----------- -----------
PROPERTY AND EQUIPMENT, at cost (Note 1):
Furniture, equipment and vehicles 542,305 229,580
Building 253,156 253,156
Power generation equipment 1,051,792 1,087,607
Idle power generation equipment
(Net of obsolescence of $2,532,472) 5,226,063 5,226,063
Land 70,000 70,000
----------- -----------
7,143,317 6,866,406
Less - Accumulated depreciation and amortization (367,854) (336,277)
----------- -----------
Net Property and Equipment 6,775,463 6,530,129
----------- -----------
OTHER ASSETS (Note 2):
Investments in partnerships 2,975 3,227
Investments in subsidiaries 26,601 24,546
Power Purchase Agreements, net of Amortization 46,404 48,288
Organization Expense, net of amortization 928 1,102
----------- -----------
76,908 77,163
----------- -----------
TOTAL ASSETS $ 7,589,993 $ 7,031,559
=========== ===========
</TABLE>
(The accompanying notes are an integral part of these statements.)
3
<PAGE>
POWERTEL USA, INC.
CONSOLIDATED BALANCE SHEETS
AT
NOVEMBER 30, 1996 and FEBRUARY 29, 1996
L I A B I L I T I E S A N D S H A R E H O L D E R S' E Q U I T Y
- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -
<TABLE>
<CAPTION>
NOV. 30, 1996 FEBRUARY 29
(Unaudited) 1996
------------ ------------
<S> <C> <C>
CURRENT LIABILITIES:
Accounts payable $ 805,784 $ 187,455
Short-term borrowings (Note 3) 48,776 42,041
Payable to related party 37,965 37,965
Accrued payroll 66,723 60,294
Other liabilities 79,657 65,047
Liabilities subject to compromise (Note 1) 26,891 43,207
------------ ------------
Total Current Liabilities 1,065,795 436,009
------------ ------------
NON-CURRENT LIABILITIES
Mortgage Payable (Note 3) 242,969 15,688
------------ ------------
Total Non-Current Liabilities 242,969 15,688
------------ ------------
COMMITMENTS AND CONTINGENT LIABILITIES (Note 4) -- --
------------ ------------
Total Liabilities 1,308,764 451,697
------------ ------------
MINORITY INTEREST IN SUBSIDIARY (Note 2) 632,720 698,430
------------ ------------
SHAREHOLDERS' EQUITY (Notes 1, 4, 5, 6 and 7):
Preferred stock, $.001 Par Value, Authorized 2,000,000 shares;
Issued and outstanding -
Series A - 1,198,281 shares at November 30, 1996, none at
February 29, 1996 1,198 --
Series B - 5 shares at November 30, 1996, none at February 29, 1996 -- --
Class A Common Stock, $.001 par value, Authorized 25,000,000 shares;
Issued and outstanding 15,808,710 shares at November 30, 1996
and 8,808,485 shares at February 29, 1996 15,809 8,808
Class B Common Stock, $.001 Par Value, Authorized 25,000,000 shares;
Issued and outstanding 4,437,473 shares at August 31, 1996
and 4,437,473 shares at February 29, 1996 4,437 4,437
Additional paid-in capital 17,403,617 11,528,754
Series A - note receivable (2,995,608) --
Accumulated deficit (8,771,844) (5,651,466)
Treasury stock - Class A, 16,785 shares at November 30, 1996 and
16,785 shares at February 29, 1996 (9,101) (9,101)
------------ ------------
Total Shareholders' Equity 5,648,508 5,881,432
------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 7,589,993 $ 7,031,559
============ ============
</TABLE>
(The accompanying notes are an integral part of these statements.)
4
<PAGE>
POWERTEL USA, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS THREE MONTHS NINE MONTHS
ENDED ENDED ENDED ENDED
NOVEMBER 30 NOVEMBER 30 NOVEMBER 30 NOVEMBER 30
1996 1996 1995 1995
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
REVENUES:
Energy Sales $ 16,424 $ 217,654 $ 105,666 $ 649,899
Printing and Business Supply Sales 264,867 918,648 250,078 753,218
----------- ----------- ----------- -----------
Total Revenues 281,291 1,136,302 355,744 1,403,117
----------- ----------- ----------- -----------
COSTS AND EXPENSES:
Cost of Sales 155,067 624,273 170,879 523,599
Cost of Operations 77,600 229,633 166,128 502,432
Depreciation and Amortization (Note 1) 32,271 79,854 15,330 49,363
Provision for obsolescence (Note 1) 0 0 94,810 284,429
Professional Fees 527,922 929,694 95,688 327,042
General and Administrative 82,330 680,812 153,419 468,829
----------- ----------- ----------- -----------
Total Costs and Expenses 875,191 2,544,267 696,255 2,155,695
----------- ----------- ----------- -----------
OTHER INCOME AND (EXPENSES):
Interest Income 311 589 3,387 6,649
Other Income 753 3,987 80,298 9,080
Gain on sale of project interest (Note 2) 0 0 0 508,018
Loss from Partnership/Investment interests (Note 2) (1,768,395) (1,768,395) (18,418) (38,418)
Interest Expense (7,942) (20,703) (3,972) (17,059)
Minority Interests (Notes 1 and 2) 25,318 72,710 60,522 13,014
----------- ----------- ----------- -----------
Total other income and (expense) (1,749,955) (1,711,813) 121,817 481,285
----------- ----------- ----------- -----------
LOSS BEFORE TAXES (2,343,855) (3,119,778) (218,694) (271,293)
PROVISION FOR INCOME TAXES (Note 8) 200 600 200 (13,467)
----------- ----------- ----------- -----------
NET INCOME (LOSS) $(2,344,055) $(3,120,378) $ (218,894) $ (257,826)
=========== =========== =========== ===========
NET INCOME (LOSS) PER SHARE (Notes 1 and 6) $ (0.17) $ (0.28) $ (0.02) $ (0.03)
=========== =========== =========== ===========
(The accompanying notes are an integral part of these statements.)
</TABLE>
5
<PAGE>
NEVADA ENERGY COMPANY, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEAR ENDED FEBRUARY 29, 1996 AND NINE MONTHS ENDED NOVEMBER 30, 1996
<TABLE>
<CAPTION>
CLASS A COMMON CLASS B COMMON PREFERRED STOCK
----------------------------------- ----------------- ---------------------------------
SERIES A
---------------------------------
NUMBER NUMBER NUMBER
OF OF OF NOTE
SHARES AMOUNT SUBSCRIBED SHARES AMOUNT SHARES AMOUNT RECEIVABLE
----------- --------- ----------- ----------- ------ --------- -------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCES - FEBRUARY 28, 1995, 7,509,481 $ 7,509 $ 250,000 4,024,918 $4,025 - $ - $ -
Shares Issued for Cash (Note 6) 333,333 333 (250,000) - - - - -
Shares Issued for Services (Note 6) 145,842 146 - - - - - -
Stock dividends at market value (Note 6) 819,829 820 - 412,555 412 - - -
Transfer of surplus for stock dividend
Net (Loss) for the Year
Ended February 28, 1995
----------- --------- ----------- ----------- ------ --------- -------- -------------
BALANCES - FEBRUARY 29, 1996 8,808,485 8,808 - 4,437,473 4,437 - - -
Shares issued for cash (Note 6) 152,381 153 - - - - -
Shares issued for assets (Note 6) 2,000,000 2,000
Shares issued/retired in conversion 4,847,844 4,848 (762,464) (762)
Shares issued for a note (Note 6) - - - 1,960,745 1,961 (4,899,988)
Expenses related to issuance
Cash received on note 1,904,380
Net (Loss) for the nine months
Ended November 30, 1996
----------- --------- ----------- ----------- ------ --------- -------- -------------
BALANCES, November 30, 1996 15,808,710 $ 15,809 $ - 4,437,473 $4,437 1,198,281 $ 1,198 $(2,995,608)
=========== ========= =========== =========== ====== ========= ======== =============
PREFERRED STOCK
-------------------
SERIES B
-------------------
NUMBER
OF PAID-IN ACCUMULATED TREASURY SHAREHOLDERS'
SHARES AMOUNT CAPITAL DEFICIT STOCK EQUITY
------- -------- ----------- --------------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C>
BALANCES - FEBRUARY 28, 1995, - $ - $ 11,214,439 $ (5,022,828) (8,853) $ 6,444,292
Shares Issued for Cash (Note 6) - - 247,331 - - (2,336)
Shares Issued for Services (Note 6) - - 68,216 - - 68,362
Stock dividends at market value (Note 6) - - 802,321 (803,553) (248) (248)
Transfer of surplus for stock dividend (803,553) 803,553 - -
Net (Loss) for the Year
Ended February 28, 1995 (628,638) - (628,638)
------- -------- ----------- --------------- ---------- ------------
BALANCES - FEBRUARY 29, 1996 - - 11,528,754 (5,651,466) (9,101) 5,881,432
Shares issued for cash (Note 6) 5 - 97,860 - - 98,013
Shares issued for assets (Note 6) 1,154,250 1,156,250
Shares issued/retired in conversion (745) 3,340
Shares issued for a note (Note 6) 4,898,027 - - -
Expenses related to issuance (274,529) (274,529)
Cash received on note 1,904,380
Net (Loss) for the nine months
Ended November 30, 1996 (3,120,378) (3,120,378)
------- -------- ----------- --------------- ---------- ------------
BALANCES, November 30, 1996 5 $ - $17,403,617 $ (6,427,788) (9,101) $ 5,648,508
====== ======== =========== =============== ========== ============
(The accompanying notes are an integral part of these statements.)
</TABLE>
6
<PAGE>
POWERTEL USA, INC.
STATEMENTS OF CASH FLOWS FOR THE NINE MONTHS
ENDED NOVEMBER 30, 1996 AND NOVEMBER 30, 1995
<TABLE>
<CAPTION>
NOVEMBER NOVEMBER
1996 1995
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income (Loss) $(3,120,378) $ (257,826)
Adjustments to reconcile net income (loss)
to net cash used in operating activities -
Depreciation and Amortization (Note 1) 79,854 49,363
Provision for Obsolescence (Note 1) -- 284,429
Amortization of Goodwill (110,028) --
(Gain) Loss on Disposition of Assets 1,768,395 --
Minority Interest in Subsidiary Profit (Loss) (72,710) (13,014)
Equity in Loss from Partnership Interests -- 38,418
Stock issued to Directors/Officers/Employee -- 68,362
Changes in assets and liabilities - --
Decrease (Increase) in Receivables (396,494) 60,155
Decrease (Increase) in Stock Subscription Receivable -- 150,000
Decrease (Increase) in Receivable from related party -- --
Decrease (Increase) in Inventories (12,657) 828
Decrease (Increase) in Deposits and Prepaids 100,287 62,388
Increase (Decrease) in Accounts Payable 618,329 (29,912)
Increase (Decrease) in Payable to related party -- (34,029)
Increase (Decrease) in Other Liabilities 21,039 (17)
Increase (Decrease) in Liabilities subject to compromise (16,316) (37,108)
----------- ----------
Net cash used in operating activities (1,140,678) 342,037
----------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquistion of Property and Equipment (300,400) (50,955)
Proceeds from Sale of Assets --
Non-refundable deposit on proposed sale of assets -- 25,000
Investment in Subsidiaries (765,538) --
(Advances) to and Repayments from Partnerships -- (45,626)
----------- ----------
Net cash provided by investing activities (1,065,938) (71,581)
----------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal repayments on financing (46,384) (49,211)
Net proceeds from cash sales of common and preferred stock 1,904,380 --
Borrowing 280,400 45,467
Minority interest 72,710 --
----------- ----------
Net cash used in financing activities 2,211,106 (3,744)
----------- ----------
NET INCREASE (DECREASE) IN CASH 4,490 266,712
CASH AT BEGINNING OF PERIOD 132,245 37,885
----------- -----------
CASH AT END OF PERIOD $ 136,735 $ 304,597
=========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION (Note 11):
Cash expenditures during the nine months for -
Interest $ 16,793 22,720
Taxes, including taxes paid through payments on liabilities
subject to compromise of $18,915 in 1996 and $13,386 in 1995 600 41,372
(The accompanying notes are an integral part of these statements.)
</TABLE>
7
<PAGE>
POWERTEL USA, INC..
Notes to Consolidated Financial Statements
Note 1 - Organization and Summary of Significant Accounting Policies:
Principles of Consolidation:
----------------------------
The accompanying consolidated financial statements include the
accounts of the Company and its wholly-owned subsidiaries Combustion
Energy Company, Inc. ("CEC"), a Nevada corporation and Yerington
Acquisition Company, Inc. a Nevada corporation and its majority
owned subsidiary San Jacinto Power Company, a Nevada corporation
(See Note 2). On November 30, 1994, the Company's wholly owned
subsidiary CEC completed a merger with Herth Printing and Business
Supplies, Inc. ("HPBS" - see notes 2 and 5). This acquisition has
been treated as a pooling of interests and the financial statements
presented herein reflect the combined results of the pooled
businesses. All significant intercompany accounts and transactions
have been eliminated in consolidation.
Organization and Operations:
----------------------------
POWERTEL USA, 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's filing with
the secretary of state in Delaware was acknowledged as effect on
January 2, 1997 for the name change to POWERTEL USA, INC. as
approved by shareholders at the Company's annual meeting held on
August 16, 1996. 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. The Company has
endeavored to gain entry into the telecommunications industry
without success to date.
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
8
<PAGE>
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.
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
9
<PAGE>
current fair market value of its long-lived, currently idle, assets.
In the interim there will be no provisions for obsolescence. The
current combined carrying value ($5,226,063) of the idle equipment
is less than the current combined fair market appraisal value. The
Company will apply FAS 121 each quarter, as required. No adjustment
has been made in the quarter ending November 30, 1996.
Goodwill
--------
The acquisition of Telecomm Technologies, Inc. resulted in
approximately $1,700,000 in goodwill. This was written off in its
entirety in the current quarter due to the failure of the business
to develop as anticipated. Certain shareholders have filed suit in
Delaware in an attempt to recover some or all of the consideration
which was given in this transaction. Goodwill expense recorded in
the prior quarter has been reversed in the quarter ended November
20, 1996.
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 11,246,903 in the nine months
ending November 30, 1996, 13,758,978 in the three months ended
November 30, 1996, 9,990,866 in the nine months ending November 30,
1995 and 11,122,453 in the three months ended November 30, 1995.
Shares issuable upon exercise of warrants or options are
excluded from the computation since the effect of their inclusion
would be antidilutive as the exercise price is in excess of the
average market price during the applicable periods. Shares of Class
B Common Stock are excluded from the computation since Class B
shareholders do not participate in the earnings of the Company.
Shares issued in the Smith acquisition, but held in escrow between
the date issued, December 15, 1993 and the date of completion of the
acquisition, June 24, 1994, were not included in the computation of
loss per share during the period they were held in escrow.
Business Segment Information
----------------------------
The Company currently classifies its business activities in
two segments: (1) electric power production and development and (2)
printing and business supply sales. Information concerning the
Company's business segments in the quarters ending November 30, 1996
and 1995 are as follows (amounts in thousands):
10
<PAGE>
ELECTRIC PRINTING
POWER AND OFFICE
($000) PRODUCTION SUPPLIES CONSOLIDATED
- ------ ---------- ---------- ------------
Quarter Ending
November 30, 1996
- -----------------
Sales * $ 16 $ 265 $ 281
Operating Income (Loss) (626) 32 (594)
(Loss) on disposition of assets 1,768 - 1,768
Identifiable assets ** 6,789 801 7,590
Depreciation/amortization 4 28 32
Provision for obsolescence - - -
Capital expenditures 16 - 16
($000)
- ------
Nine months Ending
November 30, 1996
- -----------------
Sales * $ 218 $ 918 $ 1,136
Operating Income (Loss) (1,480) 72 (1,408)
Identifiable assets ** 6,789 801 7,590
Depreciation/amortization 42 38 80
Capital expenditures 16 323 323
($000)
- ------
Quarter Ending
November 30, 1995
- -----------------
Sales * $ 106 $ 250 $ 356
Operating Income (Loss) (310) 15 (295)
Identifiable assets ** 7,291 478 7,769
Depreciation/amortization 10 3 13
Provision for obsolescence 95 - 95
Capital expenditures 3 - 3
($000)
- ------
Nine months Ending
November 30, 1995
- -----------------
Sales $ 650 $ 753 $ 1,403
Operating Income (Loss) (602) 19 (583)
Identifiable assets ** 7,291 478 7,769
Depreciation/amortization 34 9 43
Provision for obsolescence 284 - 284
Capital expenditures 50 1 51
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
11
<PAGE>
generated by the Company's wind system at the price computed based
on the forecast of annual as-available capacity and a standard rate
approved by the Public Commission of the State of California. The
Company's 1996 revenue from SCE of approximately $218,000
represented 19% of the total revenue of the Company in 1996. In 1995
the revenue from SCE of approximately $650,000 represented 46% 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.
Telecommunications results were removed for the current quarter and
year to date as a result of termination of the acquisitions as
referenced above.
NOTE 2 - Investments in Partnerships and Consolidated Subsidiaries:
Combustion Energy Company, Inc.
-------------------------------
Combustion Energy Company, Inc., a Nevada corporation, ("CEC")
was formed on February 12, 1993 for the purpose of being a general
partner of Oreana Power Partners (see below). CEC's assets consist
of its one percent (1%) partnership interest in Oreana Power
Partners, currently valued at $925 based on its initial cash
investment less accumulated losses, and its ownership of the assets
of HPBS (See notes 1 and 5).
Combustion Energy Company merger with Herth Printing
----------------------------------------------------
On November 30, 1994 the Board of Directors of the Company and
the shareholders of Herth Printing and Business Supplies, Inc.
approved the merger of NEC's subsidiary CEC with HPBS which resulted
in HPBS becoming a wholly-owned subsidiary of NEC. Under the terms
of the agreement, HPBS share holders received 641,784 shares if the
Company's class A common stock in exchange for all of the
outstanding shares of HPBS. HPBS was established in 1983 as a sole
proprietorship in the printing and retail catalogue office supply
business. The proprietors incorporated the business on November 1,
1994.
The merger qualifies as a tax-free reorganization and was
accounted for as a pooling of interests. Accordingly, the Company's
financial statements have been restated to include the results of
HPBS for all period presented. Separate and combined results of NEC
and HPBS during the periods presented were as follows (in
thousands):
12
<PAGE>
Three months ended
November 30, 1996 NEC HPBS Combined
(Unaudited)
--------------------------------------------------------------------
Net revenues $ 16.4 $ 264.9 $ 281.3
Net income (loss) $ (625.9) $ 32.0 $ (593.9)
--------------------------------------------------------------------
Nine months ended
November 30, 1996 NEC HPBS Combined
(Unaudited)
--------------------------------------------------------------------
Net revenues $ 217.7 $ 918.6 $ 1,136.3
Net income (loss) $(2,106.2) $ 72.3 $ (2,033.9)
--------------------------------------------------------------------
Three months ended
November 30, 1995 NEC HPBS Combined
(Unaudited)
--------------------------------------------------------------------
Net revenues $ 105.6 $ 250.1 $ 355.7
Extraordinary income - - $ -
Net income (loss) $ (310.6) $ 15.4 $ (295.2)
--------------------------------------------------------------------
Nine months ended
November 30, 1995 NEC HPBS Combined
(Unaudited)
--------------------------------------------------------------------
Net revenues $ 649.9 $ 753.2 $ 1,403.1
Extraordinary income $ 585.5 - $ 585.5
Net income (loss) $ ( 16.4) $ 18.8 $ 2.4
--------------------------------------------------------------------
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 November 30, 1996. The cost of
relocating was nominal. The Company has subsequently relocated to separate
offices.
On August 16, 1996, the Company entered into an agreement to
transfer the assets of HPBS to the then president of the Company. The
transaction is pending subject to litigation filed by the Company and in a
separate action by the former president.
13
<PAGE>
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 increase or adjustment to the number of shares.
The Company and New World subsequently engaged in negotiations to
acquire the operating assets of Smith Wind Energy Company ("Smith") and
six affiliated limited partnerships operated by Smith which are known as
Triad A, Triad B, Triad C, Triad D, Triad E, and Triad F Limited
Partnerships (collectively "Triad"). Smith and Triad were operating a wind
turbine energy park in North Palm Springs, California. Energy sales were
pursuant to a long-term contract with Southern California Edison Company.
A total of 77 wind turbines were available for operations, together with
associated infrastructure, additional turbine sites, turbine towers, parts
and service equipment and a long-term land lease with the BLM
(collectively, the "Assets").
SJPC was formed for the purpose of acquiring, holding and operating
the Assets to be acquired from Smith and Triad. The acquisition of the
Smith/Triad assets by SJPC was completed and effective on June 24, 1994.
The purchase price was equal to the agreed value of the shares plus
assumed liabilities totalling approximately $293,957 for long-term secured
debt and certain delinquent property taxes and totaled $1,038,029.
14
<PAGE>
The total cost was allocated based on managements estimate of fair
market value of assets acquired, except for prepaid BLM rent which was
valued at cost, as follows:
Field Equipment $ 21,177
Prepaid BLM Rent 46,892
Power Sales Contract 52,500
Power Generation Equipment 917,460
------------
Total $ 1,038,029
============
SJPC also entered into a non-competition agreement with the former
owner/general partner of Smith which provided for payment of $15,000 month
for two years and a non-competition period of two years to begin at the
closing date of June 24, 1994. All payments under this agreement had been
made as of July 9, 1996.
The Company has reached agreement in principle to acquire the
minority holders interest in SJPC, pending payment of the agreemed
purchase price.
Mt. Apo Corporation
-------------------
Mount Apo Corporation, a Nevada corporation ("MAC") was formed on
May 9, 1994. MAC is a joint venture of NEC and Geothermal Development
Associates and was formed for the purpose of submitting a competitive bid
on a 40 MWe geothermal project in the Philippines. The bid was
unsuccessful. The Company's investment in MAC is carried at cost of $633.
MAC is inactive at this time.
Brady Geo Park Power Project, 1986, Ltd.
----------------------------------------
The Company's investment in Brady Geo Park Power Project, 1986,
Ltd., including note and related interest receivable and advances for
property taxes were written down to a combined book value substantially
equal to the appraised value of the Ormat energy converter interests held
by the partnership. The Company has classified this asset as Power
Generation Equipment in the accompanying balance sheets.
Nevada Energy Partners - 1
--------------------------
In February 1991, the Company received a 60% interest as a limited
partner in Nevada Energy Partners 1, a Nevada limited partnership
(NEP-1LP), which holds a 31.66% interest in the equity of Nevada
Geothermal Power Partners ("NGPP"). NGPP is a Nevada limited partnership
whose general partners are Hot Springs Power Company and NEP-1LP. The
Company issued a total of 3,476,875 shares of Class B common shares for
this interest. An additional 749,289 shares have been issued to NEP-1LP in
conjunction with the Company's 5% stock dividends made in July and October
1994 and
15
<PAGE>
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.
The August 16, 1996 agreement referenced above, also purported to
transfer all of the Company's right title and interest in NEP- 1LP to the
former president and is subject of the same litigation now in process.
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 November 30, 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 November 30, 1996,
the proposed acquisition had been terminated. 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. The equipment is currently subject to liens
totaling approximately $415,000, including $34,000 in mechanics liens for
storage charges. The balance is a result of suits filed by former officers
in respect to unpaid consulting agreements. The Company has responded to,
or is in the process of responding to these claims.
16
<PAGE>
Central Communications Corporation:
- -----------------------------------
Central Communications Corporation, a Nevada corporation ("CCC"),
was formed for the purpose of acquiring interests in the
telecommunications business. On May 21, 1996, the Company announced that
it had signed a binding letter of intent to acquire, through CCC, all of
the outstanding shares of Telecom Technologies, Inc. an Oregon corporation
("TTI"), and certain other related assets. The terms of the acquisition
provide for the payment of $500,000 in cash and issuance of 2,000,000
Class A common shares. The Company advanced to CCC $492,000 in cash in the
quarter ended August 31, 1996 in anticipation of the completion of the
acquisition. The acquisition was completed on June 21, 1996, however, it
was subsequently reversed. Certain shareholders have filed an action in
Delaware in an attempt to recover some or all of the Company's investment.
There is no assurance that such recovery will occur.
NOTE 3 - Short-Term Borrowings:
The following summarizes short-term borrowings at November 30, 1996:
Mortgage note-current $ 23,221
Current portion of
equipment note 25,555
--------
$ 48,776
========
There is a mortgage in the amount of $28,130 secured by the land and
building acquired by CEC in its merger with HPBS (See Note 1). The current
portion is $23,221 and monthly installments are $2,718 with interest at
10% per annum.
The Company's subsidiary, CEC purchased a high-speed printing press
which is subject to a 8 year note payable at $4,218 per month and bears
interest at 9.75% (adjustable in accord with changes in the prime lending
rate). The financing was not guaranteed by the Company.
NOTE 4 - Commitments and Contingencies
The Company's wholly owned subsidiary CEC, entered into a two year
employment agreement with the former owner commencing November 30, 1994
which provided for annual compensation of $35,468 plus commissions. The
agreement has not been renew, however, the employee is still engaged on
similar terms.
The Company's wholly owned subsidiary SJPC leases its wind turbine
generator sites under a long-term lease with the United States Bureau of
Land Management ("BLM"). Pursuant to the agreement, SJPC has the right of
usage of the land for windmill operations until March 2014 and for an
approximate annual fee of $89,000. The annual payments on the land lease
was $89,610 for the year ended February 29, 1996. Such expense is included
in the cost of operations in the accompanying financial statements.
17
<PAGE>
Pursuant to the lease agreement, the Company's estimated payments to the
BLM as of November 30, 1996 are as follows:
1997 $ 22,250
1998 89,000
1999 89,000
2000 89,000
2001 89,000
Thereafter 1,157,000
----------
Total $1,535,250
==========
The Company's wholly owned subsidiary, CCC, entered into a five year
lease of office space in Santa Barbara, California on July 19, 1996.
Except for the first two months, commencing on August 1, 1996, the monthly
rental is $19,034. Pursuant to the lease agreement, the Company's
estimated payments as of November 30, 1996 were as follows:
1997 $ 121,638
1998 228,410
1999 228,410
2000 228,410
2001 228,410
Thereafter 95,170
----------
Total $1,130,448
==========
The Company has subsequently vacated the premesis as the planned
expansion in telecommunications has been unsuccessful. The lease agreement
is the subject of a suit by the former landlord. The Company hopes to
settle the litigation for a lump sum or negotiate the sub-letting of the
facility.
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
18
<PAGE>
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. The present value of this note has been offset against paid-in
equity in the accompanying financial statements. The Series A preferred
shares are to be held in escrow until payment is received. Golden Chance
retains the right to vote the escrowed shares. On May 1, 1996, the Company
also entered into an agreement providing for the issuance of 5 Series B
preferred shares at $2.50 per share to directors of the Company. Terms of
the Series B preferred shares provide that no dividends of any kind or
nature shall be paid or declared. Series B preferred shares have a right
to convert to the Company's class A common shares. Liquidation preference
rights of Series B preferred shares are limited to the par value of $.001
per outstanding share. Holders of Series B preferred shares have the right
to appoint a temporary director in the event that Golden Chance defaults
in the payment of the first $500,000 on its purchase of Series A preferred
shares. Payments for a total of $1,960,745, net of related expenses
(included is the $500,000 which extinguishes the Series B right described
above) for the Series A preferred shares had been received as of November
30, 1996 and under the terms of the agreement 762,464 preferred shares had
been converted to 4,847,844 Class A common shares.
At November 30, 1996, there were 1,198,281 Series A and 5 Series B
preferred shares issued and outstanding.
NOTE 6 - Class A and Class B Common Stock:
.
In the year ended February 29, 1996, 333,333 shares of Class A
common stock were issued for cash in the amount of $250,000 and 145,842
hares of Class A common stock were issued for services valued at $68,216,
including 106,670 shares issued to directors in lieu of cash for annual
fees and 39,172 shares issued to officers and an employee as bonuses.
In the year ended February 29, 1996, stock dividends of 5% on Class
A and Class B common stock were declared for shareholders of record as of
April 20, 1995 and July 31, 1995. The aggregate shares issued were 819,829
Class A and 412,555 Class B.
In the quarter ended May 31, 1996, 152,381 shares of Class A common
stock were issued for cash in the amount of $98,000.
Each share of Class B common stock is entitled to all of the rights
and privileges pertaining to Class A common stock without any limitations,
prohibitions, restrictions or qualifications except that each share of
such Class B common stock shall not be entitled to receive any cash
dividends declared and paid by the corporation and shall be entitled to
share in the distribution of assets of the corporation upon liquidation or
dissolution, either partial or final.
19
<PAGE>
The Company had entered into an agreement for the issuance of
20,000,000 shares of Class B common shares in consideration of cash and
preferred shares of the purchaser. The agreement had not been concluded as
of November 30, 1996.
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 November 30,
1996.
On June 27, 1994, the Company adopted the 1994 Directors' Stock
Option Plan for the Company's directors. Under the terms of this stock
option plan, each of the five directors of the Company was granted an
option to purchase 12,500 shares of the Company's Class A Common Stock or
a total of 62,500 shares at a price of $1.625 per share, equal to the
market price of the stock at the date of grant. The option is exercisable
until May 31, 2002, and no options have been exercised through November
30, 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 November 30, 1996.
On December 31, 1995, the Company adopted an additional 1994
Directors' Stock Option Plan for the Company's directors. under the terms
of this stock option plan, each of the five directors of the Company was
granted an option to purchase 30,000 hares of the Company's Class A common
stock or a total of 150,000 shares at a price of $0.3125 per share, equal
to the market price of the stock at the date of grant. The option is
exercisable until December 31, 2003, and no options have been exercised
through November 30, 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
20
<PAGE>
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 November 30, 1996 under this Plan.
The Company filed an S-8 registration (Number 333-18621) with the
Securities and Exchange Commission on December 23, 1996 which provides for
the issuance of up to 2,500,000 shares of Class A common pursuant to the
Company's informal consulting/compensation plan.
NOTE 8 - Income Taxes:
The Company adopted FASB 109 in the fiscal year 1994. Due to
uncertainty of realization in light of the Company's continuing operating
losses, no deferred tax asset or liability has been recorded in the
financial statements because the Company has assessed a valuation account
to the full extent of its potential deferred tax asset. The following is a
summary of the potential deferred tax asset and the valuation allowance:
Property and equipment due to differences in
depreciation and reserve for obsolescence $ 809,795
Net operating loss carry forward 2,637,611
------------
Total deferred tax asset 3,443,406
Valuation allowance (3,443,406)
------------
Net deferred tax asset $ -
===========
During the quarter ending November 30, 1996, the Company's potential
deferred tax asset increased by $890,665.
No provision for Federal income taxes was recorded during the
quarter ended November 30, 1996 or the quarter ended November 30, 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 November 30, 1996 the Company had federal income tax loss
carryforwards available to offset future taxable income for financial
reporting and tax purposes of $6,140,428 which expire in 2006 through
2010.
21
<PAGE>
NOTE 9 - Supplemental Noncash Investing and Financing Activities:
During the nine 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.
Note 10 - Possible amended filing required:
Certain of the Company's financial records were unavailable due to
an independent review being performed by outside consults at the request
of a Board directed representative. Estimates have been made as relates to
the subject transactions and an amended filing will be made, if the
estimates prove to be in error by more than a reasonable margin.
(Remainder this of page intentionally left blank)
22
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
The Company has formed two new wholly owned subsidiaries with the
objective of organizing the Company strategically for planned growth through
acquisitions. 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 proposed telecommunications based businesses to be
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.
23
<PAGE>
(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 partnership owned 60% by the
Company and 40% by Nevada Electric Power
Company (a Nevada Sub-S corporation 100% owned
by Jeffrey Antisdel, company president). NEP
owns 100% of NEC Class B common shares and
31.66% of NGPP. In an agreement dated August
16, 1996 purported to transfer all of its
right title and interest in NEP-1LP to the
former president. This purported agreement is
the subject of litigation by both parties as
described in Part II., Item 1., Legal
Proceedings. The Company's position is that
there is no agreement.
(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
24
<PAGE>
LIQUIDITY
As of November 30, 1996, the Company had $737,622 in current assets. Cash
of $136,735 (including $60,344 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 $2,995,608 collectible
over a five month period. Under the terms of the original agreement, the note
should have been reduced to $2,000,000 at this date. The Board of Directors has
agreed to amended terms.
Cash used by operating activities in the nine months ended November 30,
1996 was $1,140,678. The after-tax loss from operations was $1,407,965 which
included $79,854 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 November 30, 1996
as the assets were then valued in excess of fair market appraisal value based on
and independent appraisal completed in May 1996. Had the Company followed its
previous policy of providing for obsolescence on a prospective basis, the
estimated obsolescence charges for the quarter would have been $115,560.
Investing activities used $1,065,938 in cash in during the period ending
November 30, 1996, including expenditures of $300,400 for the acquisition of
high-speed print equipment and $765,538 advanced to a subsidiary for the
acquisition of a telecommunications business. A total of approximately
$1,768,395 was expended in connection with the acquisition, which failed as was
written off in its entirety (See Part II., Item 1., Legal Proceedings). Cash
flows from financing activities in the nine months ended November 30, 1996 came
from sales of preferred and common shares and generated $1,904,380 in cash.
Cash provided from operating activities in the nine months ended November
30, 1995 was $324,037. The after-tax loss from operations was ($257,826 which
included $49,363 of non-cash charges for depreciation and $284,429 for
obsolescence on idle equipment. Investing activities used $71,581 during the
period ending November 30, 1995, after expenditures for refurbishing wind power
equipment of $50,955, advances to, and investments in, partnerships were
$45,626. A non-refundable deposit on the proposed sale of assets generated
$25,000 in cash. Cash flows from financing activities in the quarter ended
November 30, 1995 used $3,744 in cash. Net short-term borrowings were $44,467,
with repayments of $29,396 on short-term borrowings and $19,815 on long-term
debt.
25
<PAGE>
To date, the Company has received 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, which, if completed, is believed to be adequate for continuing
operations.
In the quarter ending August 31, 1995 the disposition of the Brady Power
Project asset, which had not generated any of the long-term cash flow expected,
provided the Company with needed operating funds.
The majority of ongoing expenses for the Company have been incurred in
initiating acquisitions, development of future business, professional fees and
operating overhead. Currently the Company is involved in several litigations,
which are a drain on its resources.
CAPITAL RESOURCES
The Company has an asset base which includes idle electric power
generating units (currently not in service and with a net book value of
$5,226,063, unencumbered by debt, which the Company is taking all requisite
action to deploy into operational service in the near term through acquisition
and deployment in one or more projects, (See Plan of Operations, Deployment of
Idle Equipment).
The Company has obtained independent appraisal of its idle power
generating equipment by qualified engineering firms and valuation by independent
utility appraisal specialists which confirm that the Company's idle power
generating assets remain unimpaired and suitable for deployment and/or sale.
To that end, the Company had previously attempted to consummate sale
through the execution of a non-binding letter of intent for the sale of all
Ormat power generating turbines, together with associated equipment and right to
purchase a geothermal power facility to Pollution Control International ("PCI").
The PCI agreement then provided for the Company to receive cash and securities
in excess of the equipment's net book value in excess of $4.5 million dollars.
However, due to the complexities of attempting to assign rights to acquire a
geothermal power facility in conjunction with the proposed sale of the Ormat
units, the transaction was terminated.
Based upon the foregoing, the incumbent Board of Directors have now
adopted a strategy whereupon the Company will seek to deploy the idle power
generating assets into existing power plant operations and operate the
facilities thereafter utilizing Company owned power plant assets. Alternatively,
the Company will seek the sale, merger or public offering "spin-off" of these
assets once made operational in order to fully maximize shareholder values. This
26
<PAGE>
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 expanding into the area of telecommunications and related industries. To date
the Company's initial efforts have been unsuccessful and costly. There are
presently no firm commitments for any such financing. 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 sufficient funding is unavailable to fund the Company's
planned growth through acquisition, the Company may be required to delay, scale
back or eliminate its planned expansion, acquisition, development and corporate
activities as set forth herein.
DEBT
As of November 30, 1996, the Company's total current liabilities were
$1,065,795. Current accounts payable were $805,784 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 $48,776 were the current mortgage payable
balance assumed in the Company's wholly owned subsidiary Combustion Energy
Company's acquisition of HPBS and the current portion of the note payable on the
newly acquired high-speed printing press. Other liabilities of $79,657 included
accrued audit expenses of $54,100. Accrued payroll includes $30,000 payable to
directors for annual fees for services.
Remaining liabilities subject to compromise represent the long-term
settlement amount for withholding taxes and related penalties and interest due
to the IRS associated with prior bankruptcy proceedings. Under the terms of a
settlement proposed by the Company, this amount is being repaid over a term of 3
years, in monthly installments of $4,940, accruing interest at the rate of 7%
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per annum. Pending final settlement, the entire amount is classified as a
current liability. The Company was substantially current on its payment schedule
through early 1996 since this proposal was made in October 1993 to the IRS and
the remaining payments necessary for payoff are $26,891 plus current accrued
interest and which is past due at November 30, 1996.
On May 3, 1996 CEC entered into an agreement to purchase a high speed
printing press at a purchase price of $300,400. The purchase balance, after a
$20,000 down payment made in May 1996, is to be financed over an eight (8) year
period at 9.75% (adjustable in accord with changes in the prime lending rate)
with monthly payments of $4,218. The financing was not guaranteed by the Company
and CEC remains current on its debt obligations.
On August 16, 1996, the Board of Directors purportedly executed an
agreement which provided for the exchange of 4,436,464 restricted class A common
shares, the assignment of the Company's 60% limited partnership interest in
Nevada Energy Partners I, Limited Partnership, ("NEP"), and delivery of all
common stock of CEC owned by the Company in consideration of NEP's delivery of
(i) all presently issued and outstanding class B common shares owned by NEP,
(ii) a release of all right, title and interest accrued to date to additional
Class B Common share issuance, (iii) a release of all right title and interest
to all future Class B Common shares to be issued pursuant to the terms of the
Company's certificate of Incorporation, (iv) the indemnification by NEP of the
Company against any and all claims or causes of action associated with Nevada
Energy Partners vs. Hot Springs Power Company Case and the assumption of all
debt of CEC in the amount of approximately $375,000. The Company has taken the
position that the agreement is void and has filed suit in Santa Barbara,
California. The other party has also filed suit to enforce the agreement.
RESULTS OF OPERATIONS
Revenues
- --------
Revenues for the quarter ended November 30, 1996 totaled $281,291 and
consisted of energy sales from San Jacinto Power Company of $16,424 and HPBS
printing and business supply sales of $264,867. Comparable revenues for the
quarter ending November 30, 1995 were $105,666 from energy sales and $250,078
from printing and business supply sales. Revenue from energy sales declined as a
result of contractually reduced purchased prices received from the purchasing
utility company, Southern California Edison and lower than expected seasonal
wind speeds. The Company also suffered al loss of key switch gear resulting from
a theft, not covered by insurance, which resulted in some high capacity
equipment having to go off-line. 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 stabilized subsequent to the change-over in maintenance
services. Wind speeds have continued at lower than average velocities for the
majority of the current quarter.
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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 November 30, 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 $211,457 and office supplies sales were $53,410 for the quarter
ended November 30, 1996. Comparable results for the quarter ended November 30,
1995 were print revenues of $151,708 and office supplies sales of $98,370. Print
revenues were $686,354 and office supplies sales were $232,294 for the nine
months ended November 30, 1996. Comparable results for the nine months ended
November 30, 1995 were print revenues of $547,938 and office supplies sales of
$205,280.
Costs and Expenses
- ------------------
Cost of Sales
Cost of sales for the nine months ended November 30, 1996 were $624,273 or
68.0% of sales verses $523,559 or 64.9% of sales for the comparable quarter
ended November 30, 1995. The costs increase was primarily a result of increases
in the cost of paper stock which had occurred earlier in the year. Improved
margins on custom print work have mitigated some of the impact of the paper cost
increase. This is reflected in the cost of sales for the current quarter which
were $155,067 or 58.5% for the three months ended November 30, 1996 versus
$170,879 or 68.3% for the comparable period ending November 30, 1995.
Cost of Operations
Costs of operations for the nine months ended November 30, 1996 were
$229,633, of which $217,892 represented the cost of operations of the San
Jacinto Power Company wind turbine site, including $130,329 in repairs and
maintenance cost, $67,411 in BLM land lease cost, $9,852 in property taxes and
$10,300 in other site expenses. Comparable costs in 1995 totaled $502,432, of
which $463,832 represented the cost of operations of the SJPC wind turbine site,
including $316,397 in repairs and maintenance costs, $67,551 in BLM land rent,
$10,968 in property taxes and $68,916 in other site costs, primarily BLM related
fees for services but also including approximately $30,000 in flood related
damage.
Repairs and maintenance costs were substantially reduced by the change in
maintenance service providers which was effected in January 1996. In addition, a
substantial refurbishment program had been completed in 1995.
SJPC originally acquired the assets and began actual operations on June
24, 1994. Maintenance services had been provided on a fixed fee plus cost basis
by New World Grid Power ("NWGP"). NWGP was notified October 8, 1995 of
termination of its service agreement. SJPC has executed an agreement with a new
service provider, Desertron Electric, effective January 1996. NWGP no longer
provides operation and maintenance services. Desertron Electric is a sole
proprietorship formed by a former employee of NWGP. SJPC's minority interest
holder has approved this agreement. The Company anticipates significant savings
in the area of SJPC operation and maintenance costs as a result of this new
agreement with Desertron Electric.
With regard to changes in HPBS operating expenses from that of prior HPBS
periods, changes in HPBS operating expenses were a result of normal fluctuations
in business activities.
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Other Costs and Expenses
As a result of the Company's adoption of FAS 121 for the fiscal year ended
February 28, 1997, there was no provision for obsolescence in the quarter ended
November 30, 1996. Under the provisions of FAS 121, the Company will review the
valuation of its long-lived assets on a quarterly basis or whenever events or
changes in circumstances indicate that the carrying amount of an asset may not
be recoverable. The Company will continue to obtain annual independent
appraisals to determine current fair market value of its long-lived, currently
idle, assets. In the interim there will be no provisions for obsolescence. The
current combined carrying value ($5,226,063) of the idle equipment is less than
the current combined fair market appraisal value as of November 30, 1996. The
provision would have been $115,560, if prior accounting methods had continued in
effect. Comparable cost for the quarter ended November 30, 1995 was $94,810.
Depreciation and amortization for the quarter ended November 30, 1996 were
$32,271. Comparable costs for the quarter ended November 30, 1995 were $15,330.
The increase was primarily related to the acquisition by HPBS of a new
high-speed printing press. Comparable amounts for the nine months ended November
30, 1996 and November 30, 1995 were $79,854 and $49,363 respectively.
Professional fees for the quarter ended November 30, 1996 were $527,922,
including $212,173 in legal fees (which included $142,320 related to the accrued
agreement with the former secretary and general counsel), $12,020 in audit fees
, $239,472 in finance consulting fees resulting from the accrual of the
agreement with the former president and $64,247 in other outside services which
included $30,000 for a telecommunications consultant and $30,000 in costs
related to the unsuccessful attempt to acquire Teleplex.
Professional fees for the quarter ended November 30, 1995 were $95,688,
including $28,998 in legal fees, $13,875 in audit fees and $52,815 in other
outside services. Other outside services included $45,000 in the quarter ended
November 30, 1995 paid to the former owner/general partner of Smith/Triad under
a two year $15,000 per month agreement.
Professional fees for the nine months ended November 30, 1996 were
$929,694, including $406,562 in legal fees, $34,628 in audit fees, $244,472 in
finance consulting fees and $244,031 in other outside services. Other outside
services included $86,500 in the nine months ended November 30, 1996 paid to the
former owner/general partner of Smith/Triad under a two year $15,000 per month
agreement, which was paid in full on July 8, 1996 and $135,000 paid or accrued
in relation to a contract for public relations services.
Professional fees for the nine months ended November 30, 1995 were $327,042,
including $145,864 in legal fees, $52,420 in accounting and audit fees and
$185,030 in other outside services including $135,000 for services under an
agreement with the former owner/general partner of Smith/Triad.
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Administrative expenses totaling $82,330 for the quarter ending November
30, 1996 were principally for salaries, wages and benefits in the amount of
$112,122, public and shareholder relations were nil, general office expenses of
$53,966 (were offset by the reversal of $110,028 in amortization of goodwill
relating to TTI), travel expense $13,356, directors fees and expenses $7,856 and
other miscellaneous expenses $5,080.
Administrative expenses totaling $145,864 for the three months ending
November 30, 1995 were principally for salaries, wages and benefits of $88,990,
public and shareholder relations $7,246, general office expenses $20,481,
directors' fees and expenses $24,675 and other miscellaneous expenses $12,027.
Administrative expenses totaling $680,812 for the nine months ending
November 30, 1996 were principally for salaries, wages and benefits in the
amount of $306,250, public and shareholder relations $114,427, general office
expenses $119,712 (with no net amortization of goodwill relating to TTI), travel
expense $94,8826, directors fees and expenses $30,754 and other miscellaneous
expenses $14,785.
Administrative expenses totaled $468,829 for the nine months ending
November 30, 1995 were principally for salaries, wages and benefits of $273,581,
public and shareholder relations $19,861, general office expenses $86,409,
directors' fees and expenses $60,999 and other miscellaneous expenses $132,337.
Interest expense of $7,942 for the quarter ending November 30, 1996 was
related to interest accrued at statutory rates on the remaining liability to the
IRS on prior payroll tax withholding and short-term borrowings related to
insurance premium financing and the mortgage note on the building owned by Herth
Printing and Business Supply and the financing of the high-speed printing press.
Interest in the comparable period ending November 30, 1995 related primarily to
short-term borrowings, the IRS note and the mortgage note and was $3,972. Year
to date interest expenses of $20,703 for 1996 and $17,059 for 1995 related to
substantially the same indebtedness, except for the printing press borrowing in
1996.
Other Income and Expenses
Consolidated interest of $311 was earned on cash carried in money market
funds in the quarter ended November 30, 1996, compared to $3,387 in the same
period for 1995. Comparable year to date numbers were $589 for 1996 and $6,649
for 1995.
Loss from partnership interest and other investment interests were
$1,768,395 which were related to the abortive acquisition of Telecom
Technologies, Inc. Losses in 1995 resulted from expense advances to Nevada
Energy Partners 1, LP ("NEP"), primarily for litigation expense involving the
general partner of NGPP, in which
NEP held an approximate 33% interest.
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Income Taxes
Income taxes of $600 for the nine months ended November 30, 1996 and
$(13,867) for the comparable nine months ended November 30, 1995 were for taxes
payable in 1996 (over accrued in the prior period for 1995) 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 nine months
ending November 30, 1996 or 1995.
As of November 30, 1996, unused net operating losses available to offset
future taxable income was $6,140,428. The Company's investment and energy tax
credit carry-forwards expired in November 1995.
Net Result
In the nine months ending November 30, 1996, there was a total net loss of
$3,120,378 or $0.28 per share on 11,246,903 average Class A Common shares
outstanding. For the quarter ending November 30, 1996 there was a total loss of
$2,344,055 or $0.17 per share on 13,758,978 average Class A Common shares
outstanding. For the nine months ending November 30, 1995, there was an
operating loss of $257,826 or $0.03 per share on 9,990,866 average Class A
common shares outstanding. For the quarter ending November 30, 1995 there was a
total loss of $218,894 or $0.02 per share on 11,122,453 average Class A Common
shares outstanding.
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PART II--OTHER INFORMATION
Item 1. Legal Proceedings.
The Company is involved in the following litigation:
MUNSON LAWSUIT
On October 5, 1992, the Company, as plaintiff, initiated litigation in the
Chancery Court of New Castle County, Delaware, (the "Munson Lawsuit"), against
former officers and directors of the Company. The Defendants are Stephen Munson,
Leland Mink, Walter Mackenzie, Frank Carigula and Donald Selfridge, (the
"Defendants"). The allegations against the Defendants include numerous breaches
of fiduciary loyalty to the Company, invalid issuance of Company shares,
breaches of fiduciary duty arising out of improper issuance of Company stock,
and breaches of fiduciary duty arising out of failure to value the services for
which stock was awarded.
On October 13, 1992, a sequestrator was appointed and the shares of the
Company standing in the names of Leland Mink, Walter MacKenzie, Donald Selfridge
and Frank Carigula were seized to hold and preserve the shares of the Company
until further order of the Court. As of June 9, 1994, The Delaware Court imposed
sanctions against Stephen Munson related to non-compliance in matters of
deposition. A default judgement against Frank Carigula has since been obtained
in the amount of approximately $59,000 and the Company is seeking garnishments
and attachments sufficient to satisfy the full amount of judgement. The
judgement is beyond appeal.
The trial of the case against defendants Munson, Selfridge and MacKenzie
was completed in September and final post-trial briefs were to be submitted to
the Court by the Company pending a ruling of the Court. The Company has
subsequently re-entered negotiation for settlement with the defendants. The
Company does not believe this litigation will have an adverse material effect on
its operations.
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ANTISDEL LITIGATION
On October 28, 1996, Jeffrey E. Antisdel, former president of Nevada
Energy Company, filed suit in Washoe County, Nevada. The suit relates to various
matters of compensation, including the Company's alleged default on a two year
employment agreement which was to take effect upon Mr. Antisdel's termination on
September 26, 1996. The plaintiff obtained a default judgement which the Company
has moved to set aside. The Company has accrued approximately $240,000 to
provide for the plaintiffs claim, if successful. The plaintiff has filed a lien
on the Company's idle geothermal assets.
CASCARILLA LITIGATION
On October 23, 1996, Richard A. Cascarilla, former secretary and general
counsel of Nevada Energy Company, filed suit in Ingham County, Michigan. The
suit relates to various matters of compensation, including the Company's alleged
default on a two year employment agreement which was to take effect upon Mr.
Cascarilla's termination on September 26, 1996. The plaintiff has obtained a
default judgement. The Company is attempting to obtain counsel to represent it
in this matter and will seek to have the default judgement set aside. The
Company has accrued approximately $142,000 to provide for the plaintiffs claim,
if successful. The plaintiff has filed a lien on the Company's idle geothermal
assets.
SMITH, KATZENSTEIN LITIGATION
On December 2, 1996, Smith, Katzenstein & Furlow, the Company's former
counsel in Delaware filed a suit in New Castle County, Delaware alleging
non-payment of fees in the approximate amount of $70,000, breach of contract,
fraud and tortious interference with contractual relationship. The plaintiff has
obtained a default judgement. The Company has engaged counsel and is seeking to
have the default judgement set aside. The Company has accrued approximately
$70,000 to provide for the plaintiffs claim, if successful.
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HARTMAN, KASSOUFF, MODESITT LITIGATION
On November 15, 1996 Messers. Jeffrey L. Hartman, Michael R. Kassouff and
Jeffrey E. Modesitt filed suit in Washoe County, Nevada alleging non-payment of
directors fees and accrued interest under notes in the amount of $10,000 each
dated May 1, 1996. The notes bear interest at the rate of 18% per annum. The
Company has engaged counsel to respond to this suit. The amount of $30,000 has
been provided for in the accounts in the event the plaintiffs are successful.
NEVADA ENERGY PARTNERS 1-LP LITIGATION
On November 19, 1996, Nevada Energy Partners 1-LP ("NEP")filed suit
against the Company to seek enforcement of an alleged agreement entered into on
August 16, 1996. The agreement would, among other things, if enforced, cause the
Company to surrender all its right title and interest in the NEP partnership in
which the Company holds a 60% interest and which holds 100% of the Company's
Class B common shares. In addition, the Company would surrender all of its right
title and interest in Herth Printing and Business supplies which would devolve
to Mr. Jeffrey Antisdel, former president of the Company.
The Company has engaged counsel to vigorously defend its position that
there is no agreement. Preliminary briefs and discovery are underway.
In the above reference matter, the Company filed suit against NEP and
NEPC, the general partner of NEP on December 6, 1996 in Santa Barbara County and
seeks declaratory relief and rescission of the subject alleged agreement.
An action in this matter has also been filed in the State of Delaware.
SHAREHOLDER DERIVATIVE SUITS
The Company has been nominally named it two shareholder derivative actions
filed in December 1996 in Delaware. The actions seek, among other things, to
compel certain action by the Board of Directors as well as seeking to recover
assets expended by the Company in its aborted acquisition of Telecom.
SANTA BARBARA OFFICE SPACE
The Company's wholly owned subsidiary, Central Communications Company
entered into a five year lease for an office space in Santa Barbara, CA which
provided for nominal monthly payments of $19,034 plus taxes. The Company was
compelled to vacate the property when its initial entry into telecommunications
became unsuccessful. The landlord has filed suit in Santa Barbara County, CA
seeking compliance with the agreement. The Company believes the property
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can be sublet, which will substantially mitigate any losses. No provision has
been made in the accounts. The Company does not believe that there is a
potential material impact from this litigation.
Item 4. Submission of Matters to a Vote of Security Holders.
On August 16, 1996, 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 election of Peter J. Cannell to the Board of Directors;
2. The amendment to the Company's Certificate of Incorporation to
change the Company's name to PowerTel USA, Inc., and to change the
Company's NASDAQ trading symbol to "PTUSA";
3. The amendment to the Company's Certificate of Incorporation to
increase authorized Preferred share capital from 2,000,000 to
50,000,000 shares;
4. The amendment to the Company's Certificate of Incorporation to
increase authorized Class A Common share capital from 25,000,000 to
50,000,000 shares;
5. The amendment to the Company's Certificate of Incorporation to
increase authorized Class B Common share capital from 25,000,000 to
50,000,000 shares;
6. The amendment to the Company's Certificate of Incorporation to
provide for a one (1) for six (6) reverse stock split of all classes
of outstanding Preferred or Common;
7. The approval of authority for the Board of Directors to seek Class A
Common stock listing on NASDAQ National Market System;
8. The amendment to the Company's Certificate of Incorporation to
provide for the creation of a new class of common stock, Class C
Common stock, 50,000,000 shares authorized; and
9. Ratification of the Board of Directors appointment of Kafoury
Armstrong and Company as the Company's auditors for the fiscal
ending February 29, 1996.
A majority in interest voted affirmatively on all issues. However,
subsequent review of the Company's bylaws and certificate of incorporation
revealed that an 80% super majority vote would be required to implement
amendment to the Company's certificate of incorporation. Therefore, issues #1,
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#7 and #9 were the only issues carried as these issues did not require a super
majority vote. The Company has taken action seeking to remove the amendment of
the super majority voting provision and thereupon ratifying the items set forth
above at a future Special Meeting of Stockholders.
Item 5. Other Information.
Effective May 1, 1996, the Company initiated an organizational, financial
and general business restructuring which included a change in control of the
Board of Directors, provision of financing commitments exceeding $5,000,000 and
implementation of a revised business plan.
During the implementation of the foregoing, the Board of Directors and its
advisors conducted an extensive review of the assets, management, business
prospects and opportunities developed in its core lines of energy businesses.
Following this review, the Board and its advisors determined it advantageous to
continue with and support management's plan for growth to be implemented through
the acquisition of additional energy facilities and the deployment of energy
assets owned by Company subsidiaries.
As a non-regulated utility holding company, the Board of Directors and its
advisors also immediately recognized that the Company had the requisite
management skills and professional support to allow the Company to readily
participate in secondary lines of non-regulated telecommunications related
utility businesses.
In so doing, the Board of Directors also determined that while the
Company's energy business plan was fundamentally sound, the growth opportunities
available in telecommunications related businesses provide operating synergies
which have the potential to improve the long term financial performance of the
Company. The Board thereby determined it appropriate to restructure the
Company's business operations.
Restructuring of Business Operations
As set forth in the preceding paragraphs, the Company plans to narrow its
focus solely to acquisition and development of energy and telecommunications
related businesses, concurrent with the Board of Directors determination that
the company's prior pursuits in non-related businesses have not provided the
Company financial results commensurate with operational risks assumed.
In addition, The Board of Directors has terminated the Company's prior
investigations and discussions related to acquisitions of a heavy equipment
company, engineering/construction company and others have now been terminated.
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Plan of Operations
Energy Sector
The Company has an asset base which includes several electric power
generating units (currently not in service and with a net book value of
$5,226,063, unencumbered by debt, from which the Company plans to increase
revenues and earnings. The utilization of these generating units is likely to
have a significant impact in determining the future of the Company and its
underlying share value.
The Company plans to deploy all of its idle power generating assets in one
or more projects currently under review (as set forth below) and has obtained
third party evaluations of the idle equipment which clearly indicate that its
idle power generating assets of a condition acceptable for immediate deployment
without impairment, (See Pending Acquisitions and Deployment of Idle Power
Generating Assets).
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").
Pending Acquisition of 49% Interest in Wind Energy Subsidiary
On June 27, 1996, the Company received preliminary acceptance of its offer
to purchase New World Power Corporation's ("New World") 49.99% equity ownership
interest in the Company's majority owned subsidiary San Jacinto Power Company
which has been accepted in principal subject to purchase documentation prepared
by the Company acceptable in form and in substance to New World's Board of
Directors. Closing is expected to occur during the month of July, 1996, with
terms of purchase to be publicly disseminated following closure.
Following completion of the acquisition of New World's 49.99% interest,
the Company intends to continue San Jacinto Power Company's planned retrofit,
rehabilitation and expansion activities and plans increased future participation
in the wind power energy industry on a foreign and domestic basis.
The planned closing for the purchase of New World's 49.99% interest has
been delayed due to lack of available funds. The Company anticipates closing by
February 28, 1997
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.
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As previously set forth, the Board of Directors has determined that it is
presently feasible to dramatically accelerate Company growth through the
completion of non-regulated telecommunications business acquisitions. This
determination is primarily based upon the extensive deregulation which has taken
place in the telecommunications industry which began in the late 1970's.
Clearly, the telecommunications business is a competitive and very dynamic
line of business which has demonstrated increasingly reduced barriers to entry
which are largely due to the present deregulated nature of the
telecommunications business today. From a market perspective, growth prospects
are numerous, with opportunities available in the acquisition of long distance
carriers, long distance switchers, specialized "niche" marketing, telephone
systems sales and services, debit card marketing, proprietary billing software
systems integrator, voice recognition systems, name but a few of the
opportunities available which the Company is presently evaluating for potential
acquisitions.
The Company is presently evaluating numerous telecommunications related
acquisitions.
Risk Factors
Idle power generation equipment
As at November 30, 1996, the Company reported assets of $9,185,414, a
substantial portion of which 56.9% 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 sale of one or more
generating units to third parties as set forth in management's discussion and
analysis herein. To date, the Company has not been successful in the development
of a project for utilization of such equipment or the sale of such equipment,
and there is no assurance or guaranty that the Company will be successful in the
future.
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Although the Company continues to identify projects in which the idle
power generating equipment could be utilized, there is no assurance or guaranty
that the Company will be successful in either (a) identifying such projects, (b)
securing funding for any such project, or (c) developing the projects.
To the extent that the Company is not successful in its attempt to utilize
these assets in its operations, the Company will be compelled to offer and sell
these assets in the open market. in such event, these is no assurance or
guaranty that the Company will generate sale proceeds in an amount equal to or
greater than the value of these assets as reflected in its financial statements
as at November 30, 1996. The market value of these assets is dependent upon
numerous factors, the majority of which are beyond the control of the Company,
including, but not limited to, the mechanical condition of the equipment, the
state of technology, the availability of equipment of a similar nature, the
demand for such equipment in the marketplace, the economic conditions
surrounding the unregulated utility marketplace, the availability tax credits
and deductions related to the use of such equipment and other factors that are
beyond the Company's control.
Accordingly, current and prospective shareholders are advised that the
idle power generating equipment constitutes assets of a "special" use category,
for which these is limited marketability and these is no assurance or guaranty
that the assets will generate proceeds to the Company in an amount equal to or
greater than the value as reflected in the financial statements as at November
30, 1996."
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Change in Corporate Control
On February 29, 1996, the Company executed a binding Letter of Intent
("LOI") with Waterford Trust Company Limited ("Waterford"), an Irish
corporation, with terms which substantially required a change of control of the
Company. By and through the LOI, on May 3, 1996, a change in control occurred at
the Board of Directors, as the prior Board of Directors resigned and were
replaced. Pursuant to the terms of the LOI, a Waterford nominee, Golden Chance
Limited, an Isle of Man company Limited by Shares, executed documentation
precedent to the purchase of 1,960,745 Series A Preferred shares of the Company
in consideration of financing commitments in the aggregate amount of $5,000,000,
together with a corporate guarantee assuring the payments owing provided by
Waterford.
Pursuant to the contractual obligation of the Company to Waterford, the
previous Board of Directors voluntarily resigned without objection or
qualification related to the operation of the Company. The resignations of the
prior Board of Directors was implemented in furtherance of the Company's
contractual obligations as set forth in the binding letter of intent with
Waterford. Since the change in control occurred, the restructuring of business
operations, acquisitions, regulatory filings, finances, accounting practices,
have been subject to the control, direction and discretion of the incumbent
Board of Directors, by and through Board appointed advisors, consultants,
attorneys and representatives who are not officers of the Company, pending the
appointment of replacement officers.
On August 17, 1996, at an executive committee meeting of the Board of
Directors, interim President Jeffrey Antisdel and interim Secretary Richard
Cascarilla expressed concerns over certain unresolved conflicts in interest
between the Board of Directors, its advisors, attorneys, consultants,
representatives and raised issues related to the Board of Directors decision to
direct certain of the Company's financial affairs by and through Board appointed
advisors, consultants, attorneys and representatives who were not officers of
the Company. After due discussion and deliberation over the interim officers
concerns, a verbal indemnity was accepted, pending the execution of a written
indemnity agreement, from certain representatives of the Board of Directors
related to the finances of the Company. To date, the final indemnity agreement
has not yet been received in executed form by the Company.
On September 12, 1996, interim President Jeffrey Antisdel engaged the
Company's auditors to undertake financial auditing of certain Bank accounts and
financial records of the Company under the control of the Board of Directors, by
and through its advisors, consultants, attorneys and representatives.
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On September 26, 1996, interim President Jeffrey Antisdel and interim
Secretary, Richard Cascarilla, were dismissed as officers of the Company.
Replacement officers Stefan Tevis, President and Kenton Bowers, Corporate
Secretary, have been approved and hired by the Board of Directors. Upon the
appointment of replacement officers, Mr. Antisdel and Mr. Cascarilla are serving
as independent consultants to the Company for a period of not less than two
years. In addition, on September 26, 1996, a member of the Board of Directors,
John Goold resigned and was replaced by Stefan Tevis, the current President of
the Company.
On August 28, 1996, Golden Chance Limited was late in making its monthly
scheduled payment of $500,000 and had delivered a partial payment of
approximately 25% of the $500,000 amount. The officers of the Company provided
Notice to corporate guarantor, Waterford Trust Company Limited and payor Golden
Chance limited of default of its contractual obligations. Thereafter, additional
sums were received by the Company to satisfy the $500,000 payment requirement
and legal counsel representing the Series B Preferred shareholders notified the
Company's Board of Directors and Officers, as well as Waterford Trust Company
Limited and Golden Chance Limited that a waiver of default requires the consent
of the Company's Series B Preferred shareholders. To date, the Series B holders
have not delivered the waiver of default required and the $500,000 payment due
on September 28, 1996 has not yet been received. The Company has therefore
provided notice to Waterford Trust Company Limited and Golden Chance Limited
pursuant to the terms of the note and anticipates additional payments by Golden
Chance upon delivery of the August, 1996 waiver of default by the Company's
Series B Preferred shareholders.
As of November 30, 1996, the Company has received aggregate payment of
$1,960,745 dollars from Golden Chance Limited.
If for any reason the Company should not continue to obtain financing to
support the operation and growth of the Company there could be a material
adverse effect on the Company's operations.
Acquisitions and Deployment of Power Plants
Associated with the Company's proposed acquisitions, the Company plans to
deploy its idle power plant assets in power projects to be acquired. However, If
the Company for any reason is unable to deploy idle generating units, a material
adverse financial effect on the Company may result. Risks attendant to such
deployment include, but are not limited to, governmental permitting risks,
construction risks in completing installation, cost overrun risks and
operational risks. A lack of success in completing the deployment of Company
owned power plants may, in the opinion of the Company's auditors, require
provision for a reserve related to the carrying value of the Company's power
generating assets. Further, a risk attendant to completing this expansion
includes closing equity financing sufficient to achieve the Company's
construction and working capital needs. If such financing should not be
completed, for any reason, there would be a material adverse effect on the
future operations of the Company.
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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 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 $1,960,745 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.
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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 was the Company's
intent to issue the 150,000 Class A Common shares and option to purchase 150,000
Class A Common shares simultaneously to CCEC.
The Company has received a verbal offer from CCC to terminate the Client
Service Agreement upon the Company's payment of a $25,000 fee in satisfaction
thereof. It is currently the Company's intent to proceed with the payment of the
$25,000 in full satisfaction thereof.
Securities Registration Statements
On June 28, 1994, the Company's Board of Directors adopted an Employee and
Consultant Stock Option Plan (the "Plan") registered on Form S-8 in accordance
with the Securities Act of 1933. This S- 8 was filed with the Securities and
Exchange Commission on August 2, 1994, Registration No. 33-82318. The purpose of
the Plan was for the express purpose of providing compensation for services
rendered to the Company and to promote the success of the Company by providing
Eligible Participants (employees and consultants) with incentives for
performance on behalf of the Company. The Plan was accomplished by providing for
the granting of options to purchase certain numbers of Class A Common Stock to
Eligible Participants. The Board of Directors may suspend or terminate the Plan
at any time but no such action shall adversely affect the rights of any person
granted an option under the Plan prior to that date of suspension or
termination. The maximum number of shares available for option under the Plan
were 1,125,000 Class A Common shares, subject to adjustment by reason of
reorganization, merger, consolidation, recapitalization, dividends, stock split,
changes in par value and the like occurring or effective while any such shares
of Class A Common Stock are subject to the options under the Plan. The terms and
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conditions of each option will specify the number of shares optioned, the period
during which each option is exercisable and the exercise price per share. The
Plan has been terminated and it is presently contemplated that a revised S-8
plan may be prepared and submitted during the current fiscal year.
On August 19, 1996, the Company filed a Form S-3 Registration Statement
with the Securities and Exchange Commission covering the potential future sale
of 5,436,663 shares of Class A Common stock on behalf of approximately 50
holders of record, including Golden Chance Limited. The S-3 Registration
Statement is current and it is presently contemplated that additional
registration statements may be prepared and submitted during the current fiscal
year.
Related to the default of Golden Chance Limited, former Secretary and
General Counsel of the Company, Richard Cascarilla has delivered a written
request for the removal of his legal opinion as it relates to Golden Chance
Limited, (see change in Corporate Control above), pending further notification.
The Company also plans to file additional registration statements in
satisfaction of certain contractual obligations to purchases of restricted
securities made by accredited investors.
Subscription Agreement Dispute
Two irrevocable subscription agreements for the purchase of Class A common
stock have been entered into by two parties in an amount totaling $1,000,000.
The original funding dates on the above subscriptions were in February 1995. Due
to conditions in the Company's securities market, subsequent extensions were
granted to May 1995 and then September 1995. These amounts were therefore
initially reported as subscriptions receivable in releases of unaudited
financial data.
Based on the initial extension period provided to the subscribers the
Company believed the amounts would be paid prior to completion of then current
financial reports. However, the Company has not received the payments required
under the terms of the subscription agreements due to the failure of the
subscribers to deliver payment. The Company has discontinued settlement
negotiations with the subscriber(s) and legal counsel representing the
subscribers.
The Company's efforts to achieve a suitable agreement for delivery of
consideration in satisfaction of the amounts owing have not yet been successful
and the Company is evaluating its legal options.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
Exhibit 27 - Financial Data Schedule (Electronic filing only)
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(b) Reports on Form 8-K have been filed during the quarter for which
this Form 10-QSB is being filed, as follows:
August 2, 1996 - Formation of subsidiaries, Cental Communication
Company and San Jacinto Energy Company.
August 5, 1996 - Acquisition of Telecom Technologies, Inc
August 30, 1996 - Disposition of assets
September 27, 1996 - Termination of officers.
September 30, 1996 - Corporate change of address.
December 2, 1996 - Notice of name change and reverse split.
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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.
POWERTEL USA, INC.
Date January 21, 1997 /s/ Stefan Tevis
----------------------- --------------------------------------
Stefan Tevis, President
Date January 21, 1997 /s/ Kenton H. Bowers
------------------------ --------------------------------------
Kenton H. Bowers
Controller
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