U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For Quarterly period ended September 30, 2004
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
EXCHANGE ACT
For the transition period from to
Commission File No. 0-3802
WESTERN STANDARD CORPORATION
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(Exact Name of Registrant as Specified in its Charter)
WYOMING 83-0184378
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(State or other jurisdiction (IRS Employer
of incorporation or organization) Identification No.)
400 East Snow King Avenue, Box 1846, Jackson, WY 83001
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(Address of principal executive offices) (Zip Code)
307-733-5200 ------------ (Issuer's telephone number) Check whether the issuer
(1) filed all reports required to be filed by Section 13 or 15(d) of the
Exchange Act during the past 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
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date: 9,963,015 common shares, $.05 par
value, at September 30, 2004.
PART 1, ITEM 1
WESTERN STANDARD CORPORATION
Consolidated Balance Sheet
Unaudited
September 30, 2004
Assets
Current assets
Cash ................................................................. $ 226,280
Accounts receivable .................................................. 949,930
Allowance for doubtful accounts ...................................... (18,080)
Inventory - at cost .................................................. 43,390
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Total current assets ........................................... 1,201,520
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Property and equipment, net of accumulated depreciation, amortization and
depletion ............................................................. 9,001,879
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Other assets
Accounts receivable - Snow King Resort Center, Inc. .................. 1,677,640
Allowance for collectability ......................................... (1,573,000)
Investment in JH Spring Water ........................................ 5,710
Prepaid expense ...................................................... 14,458
Prepaid loan fees and leases ......................................... 40,288
Leasehold interest ................................................... 26,483
Patronage capital .................................................... 296,751
Other ................................................................ 15,953
Restricted cash ...................................................... --
Prepaid development costs and construction in progress ............... 837,375
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Total other assets ............................................. 1,341,658
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Total assets ............................................................ $ 11,545,057
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Liabilities and Capital
Liabilities
Accounts payable ..................................................... $ 456,488
Portion of long-term debt payable within one year .................... 45,200
First Interstate Bank Mortgage Payable ............................... 246,295
Advance deposits ..................................................... 143,740
Accrued expenses ..................................................... 501,543
Love Ridge Development notes ......................................... 695,000
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2,088,266
Long-term debt
FIB-mortgage payable ................................................. 5,683,769
JSB-mortgage payable ................................................. 3,241,697
Fee payable - officer ................................................ 90,000
Vehicle loan ......................................................... 28,788
Snowcat loan ......................................................... 8,605
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Total liabilities .............................................. 11,141,125
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Minority interest in subsidiary
2,150 shares of Class A stock in SKRI ................................ 2,100,367
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Stockholders' investment
Common stock, $0.05 par value, 10,000,000 shares authorized,
9,963,015 issued and outstanding at September 30, 2004 .............. 401,201
Capital in excess of par value ....................................... 3,334,701
Accumulated deficit .................................................. (5,432,337)
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Net stockholders' investment ................................... (1,696,435)
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Total liabilities and capital ........................................... $ 11,545,057
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WESTERN STANDARD CORPORATION
Consolidated Statement of Operations
Unaudited
Profit and Loss Information
Third Quarter Ended For the Nine Months Ended
September 30, September 30,
------------------------------- --------------------------------
2004 2003 2004 2003
------------ ------------ ------------ ------------
1. Gross sales less discounts,
returns and allowances $ 4,779,214 $ 4,589,204 $ 8,938,611 $ 8,762,208
2. Non-operating revenues - gain on
sale - - - -
3. Total of Captions 1 and 2 4,779,214 4,589,204 8,938,611 8,762,208
4. Costs and expenses
(a) Operating expenses 3,375,511 2,968,644 8,042,434 7,444,855
(b) Interest expense 96,149 129,542 356,492 333,678
(c) Depreciation 141,359 137,739 418,044 421,457
Total costs and expenses 3,613,019 3,235,925 8,816,970 8,199,990
5. Income before taxes on income
and extraordinary items 1,166,195 1,353,279 121,641 562,218
6. Discontinued operations - - - -
7. Provisions for taxes on income 396,506 460,115 30,690 191,154
8. Income 769,689 893,164 90,951 371,064
9. Minority interest in profit of
subsidiary 284,351 320,609 38,930 137,787
10. Income before extraordinary items 485,338 572,555 52,021 233,277
11. Income tax, benefit of net
operating loss carryover and
minority share of tax 396,506 460,115 30,690 191,154
12. Net income 881,844 1,032,670 82,711 424,431
13. Earnings per share: 9,963,015 4 6
shares 0.085 0.103 0.0083 0.042
14. Dividends per share - - - -
WESTERN STANDARD CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
Unaudited
Third Quarter Ended
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For the Nine Months
September 30, Ended September 30,
2004 2003 2004 2003
----------- ----------- ----------- -----------
Increase (decrease) in cash
Cash flows from operating activities
Cash received from customers ........... $ 4,470,989 $ 3,861,173 $ 8,139,484 $ 7,898,096
Cash paid to suppliers and employees ... (3,613,193) (3,164,374) (7,798,680) (7,110,669)
Interest paid .......................... (96,149) (129,542) (356,492) (333,678)
Interest received ...................... 1,004 20 1,037 303
----------- ----------- ----------- -----------
Net cash provided by operations .. 762,651 567,277 (14,651) 454,052
----------- ----------- ----------- -----------
Cash flows from investing activities
Acquisition of resort association shares -- -- -- (10,810)
Construction costs ..................... (837,375) -- (837,375) --
Increase in other assets ............... (100) -- (2,893) --
Increase in prepaid loan fees .......... 708 -- (35,000) --
Distribution to retiring officer ....... -- -- 13,843 --
Capital expenditures ................... (234,483) (78,327) (406,197) (510,606)
(Increase) decrease in restricted cash . -- (80,239) 55,537 (58,965)
(Increase) reduction in JH Spring Water (100) -- (100) (100)
(Increase) reduction in Snow King
Center loan ........................... (3,093) 35,578 (39,206) 40,260
Love Ridge receivable .................. (39,843) -- (21,378) 395,000
----------- ----------- ----------- -----------
Net cash provided (used) by
investing activities ............ (1,114,286) (122,988) (1,272,769) (145,221)
----------- ----------- ----------- -----------
Cash flows from financing activities
New loans .............................. 41,697 (5,360) 3,691,697 352,458
Principal payments to banks ............ (277,243) (145,881) (2,419,205) (464,343)
----------- ----------- ----------- -----------
Net cash provided (used) by
financing activities ............ (235,546) (151,241) 1,272,492 (111,885)
----------- ----------- ----------- -----------
Net increase (decrease) in cash ........... (587,182) 293,048 (14,928) 196,946
Cash at beginning of period ............... 813,462 211,169 241,208 307,271
----------- ----------- ----------- -----------
Cash at end of quarter .................... $ 226,280 $ 504,217 $ 226,280 $ 504,217
=========== =========== =========== ===========
Reconciliation of Net Income to Net Cash Used by Operating Activities
For the Nine Months
Ended September 30,
2004 2003
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Net income (loss) ............................................... $ 82,711 $ 424,431
Adjustments
Depreciation and amortization ................................ 418,044 421,457
(Decrease) increase in advance deposits ...................... (169,866) (250,356)
Decrease (increase) in accounts receivable ................... (628,224) (613,453)
Decrease in prepaid expenses ................................. 324,074 271,090
Decrease (increase) in inventories ........................... 9,113 7,516
(Decrease) increase in accounts payable and accrued expenses . (89,433) 54,236
Decrease (increase) in Love Ridge receivable ................. -- 1,344
Allocation of minority interest in profit (loss) of subsidiary 38,930 137,787
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Net cash provided (used) by operations .......................... $ (14,651) $ 454,052
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Controls and Procedures
Under the supervision and with the participation of management, including our
Chief Executive Officer/Chief Financial Officer, we conducted an evaluation of
our disclosure controls and procedures, as such term is defined under Rule
13a-14(c) promulgated under the Securities Exchange Act of 1934, as amended
within 90 days of the filing date of this report. Based on the evaluation, our
Chief Executive Officer/Chief Financial Officer concluded that our disclosure
controls and procedures are effective.
There have been no significant changes (including corrective actions with regard
to significant deficiencies or material weaknesses) in our internal controls or
in other factors that could significantly affect these controls subsequent to
the date of the evaluation referenced above.
PART II
FORM 10QSB
WESTERN STANDARD CORPORATION
Other Information
1. Legal Proceedings.
As of September 30, 2004 we are aware of only one pending lawsuit. It
involves a woman who slipped and fell in a parking lot sustaining a left knee
fracture. This allegedly took place on November 23, 2002. Our exposure is
limited to the deductible on our insurance. We and our insurance company are
actively contesting this claim.
2. Change in Securities
None
3. Defaults upon senior securities.
None
4. Submission of matters to a vote of security holders.
None
5. Other information.
None
6. Exhibits and reports on Form 8-K.
(a) Exhibit 31.1 and Exhibit 32.1
(b) Reports on Form 8-K
None
Management's Discussion and Analysis of Financial Condition and Results of
Operations
Introduction.
The following discussion should be read in conjunction with our Consolidated
Financial Statements included in this Form 10-QSB and other cautionary
statements contained herein. This discussion contains statements that are not of
a historical nature and that may be forward-looking statements, which involve
risks and uncertainties. Additionally, this discussion utilizes percentages and
dollar amounts in approximate terms.
Since almost all of our operating revenues and our assets arise from our
interest in Snow King Resort, Inc (SKRI), this discussion will primarily cover
our hotel and resort operations. These operations are highly seasonal. This
third quarter is historically our best quarter of the year. Although we show a
small profit for this third quarter, we anticipate that the end of the year will
show a net operating loss. The fourth quarter results are normally a loss. For
instance, the fourth quarter of 2003 resulted in an operating loss exceeding
$810,000. The results for interim periods are not necessarily indicative of
results to be expected for the year. The portion of this discussion (below)
comparing 2004 year-to-date results up to September 30, with the same period in
2003 includes other quarters that are more representative of the resort's
seasonality.
Results of Operations for the three months ended September 30, 2004 compared to
the three months ended September 30, 2003.
For the quarter, Total Gross Sales increased approximately 4%, while Operating
Expenses increased approximately 13%. Operating Income (Gross Sales less
Operating Expenses) decreased from approximately $1,620,000 to $1,404,000. More
detailed operating results follow, broken down by departments.
Room Department.
Room department revenues consist of hotel room rentals. Expenses
attributable to this department include the labor costs (including benefits),
travel agency commissions, courtesy vans, cable TV and supplies associated with
housekeeping and front desk operations.
In 2004 our hotel's average occupancy rate for the third quarter was 81.6%
as compared with 82.7% in the third quarter of 2003. The average daily rate
decreased from $142 in 2003 to $139 in 2004. Room department revenues decreased
approximately 4% to approximately $2,122,000. Room department expenses increased
approximately 2.7%. The departmental profit decreased from $1,773,000 to
$1,673,000. We continue to experience a very competitive market, with increased
room supply locally coupled with flat visitation to the Jackson area over recent
years.
Food and Beverage Department.
The food and beverage department revenues include those derived from operating
the restaurant, room service, banquet, lounge and conference services
departments. Departmental costs include the cost of purchasing food and
beverages, labor and associated benefits, entertainment, advertising for food
and beverage outlets and other miscellaneous supplies and expenses associated
with the department.
This department's revenue for the third quarter of 2004 decreased approximately
11% compared to the third quarter of 2003. This decrease is mainly attributable
to lower banquet revenues due to more competitive conditions. Banquets are
normally the most profitable portion of the department. The departmental profit
decreased from $85,000 in 2003 to $20,000 in 2004.
Mountain Operations.
Mountain Operations revenues include ski lift tickets, season passes,
commissions, tubing park, scenic chairlift rides and alpine slide revenues. For
the third quarter 2004 departmental revenues increased 19% to $600,000 over the
third quarter 2003, and departmental profit increased 20% to $242,000. The
summer season, with the Alpine Slide in operation, is historically the best
quarter for this department. More of the increased revenues would have carried
to the bottom line in 2004 were it not for necessary asbestos mitigation
performed early in the quarter. This mitigation included replacement of some
track sections, their disposal and the training necessary to comply with EPA and
OSHA requirements. These mitigation costs were approximately $27,000. The work,
however, is not complete. More sections, and perhaps the entire course, will be
replaced over time. Some asbestos-containing components that had been stored on
the site have been removed and transported to a disposal site. In the future we
estimate that the cost of removing, disposing of, and replacing all
asbestos-containing tracks will exceed $650,000.
Snow King Center.
Snow King Center operations are accounted for separately since Snow King Resort
Center, Inc. (SKRCI) holds the lease of this facility. Revenues are derived from
ice floor rentals, dry floor rentals, food, beverage and resort surcharge sales.
Labor, food and beverage costs, utilities, insurance, supplies, lease payments
and other costs attributable to the Center constitute the operating expenses.
The Snow King Center revenues for third quarter 2004 decreased approximately 21%
from 2003 while the expenses also decreased almost 20%. Departmental profit for
the current quarter was down $17,000 to $56,800. Lower banquet revenues also
affected this department.
Condominium Rentals.
We manage, under annual renewable contracts, rental operations for individual
condominium owners. Additionally, we manage the day-to-day affairs of 3
homeowners associations. For all these activities we earn fees. The departmental
expenses include direct housekeeping and maintenance labor, as well as a
pro-rata portion of the front desk and other sub-departments. Total departmental
revenues, including gross rentals, increased approximately 26% from third
quarter 2003 to third quarter 2004, reaching approximately $1,396,000. A large
portion of the department's increased revenues is due to additional units
entering the rental program. Profitability increased from $244,500 to $342,000.
Other Departments.
Income and expenses for this category consist of telecommunications, shop
rentals, guest services, laundry machines, activity/concierge desk and other
miscellaneous income. Departmental profit for this quarter decreased from
$55,700 in 2003 to $32,600 in 2004. Reduced telephone and guest services
revenues were responsible for lower sales and profitability.
Administration and General.
This cost category includes labor and expenses that are not directly
attributable to any operating departments. Labor includes the manager's office,
accounting, personnel and safety. Operating expenses include credit card
discounts, dues, subscriptions, data processing, supplies and other overhead
items. Expenses for this quarter were practically the same as last year:
$268,000. With higher sales, the ratio of A&G expenses to total sales was
slightly (0.1%) lower.
Marketing.
We continue to increase our marketing efforts. Personnel, advertising and other
marketing costs for this third quarter were $51,400 more than for the same
period in 2003, reaching $144,000. Internet marketing expenses are becoming a
larger share of the total marketing costs. The present competitive marketplace
requires constant monitoring of the various Internet wholesaler websites.
Maintenance.
Maintenance labor and other expenses for this third quarter increased $51,000
from the same period in 2003 to approximately $158,500. This summer we increased
our efforts to improve the hotel's appearance and its mechanical systems.
Energy.
Electricity, gas and utilities were higher (about 4.6%) this quarter than for
the same quarter in 2003 mostly due to natural gas price increases.
Property Taxes, Management Fees and Insurance.
Property taxes have remained basically the same for this quarter as for the same
quarter in the prior year. Management fees of $57,693 for this third quarter
were higher since fees of $23,000 that were not paid or accrued for the second
quarter flowed into the third quarter. Nonetheless, year to date for 2004,
management fees remained approximately the same as those paid for the same
period in 2003. Insurance costs increased due mostly to increased health
insurance rates. Total costs for this third quarter for this category increased
from 2003 to 2004 by approximately $46,600 to a total of $220,000.
Interest and Lease Expense.
Total interest and lease expense for the third quarter of 2004 decreased 22%
compared to the same quarter in 2003. The year-to-date section below is more
representative of the actual results since interest expense accrued during prior
2004 quarters have had the effect of reducing the third quarter expenses in
2004. Year-to-date, interest and lease expense for 2004 is approximately 1%
higher than for the same period in 2003.
Depreciation and Amortization.
Depreciation and amortization expenses for the third quarter increased
approximately $3,600 from 2003 to 2004 to $141,400.
Profit and Loss.
Our Net Income for this quarter was approximately $881,884. This compares with a
Net Income of $1,032,670 for the same period in 2003. We have instituted further
cuts in operational expenses and continue to expand our marketing efforts. Due
to the seasonality of our business, a more representative period is the nine
month period discussed below.
Results of Operations for the nine months ended September 30, 2004 compared to
the nine months ended September 30, 2003.
The following discusses the results of our operations for the first nine months
of 2004 compared to the results for the first nine months of 2003. Descriptions
and definitions of the departments are contained in the previous section (third
quarter comparisons) and are not included below in order to avoid redundancy.
Room Department.
For the first nine months of 2004, our resort's occupancy rate was 62.2%
compared to 64.3% for the same period in 2003. The average daily rate decreased
slightly from $112 in 2003 to $111 in 2004. Total departmental sales decreased
approximately 4% to approximately $3,859,000. Room department expenses decreased
1% to approximately $1,212,000.
Food and Beverage Department.
This department's revenue for the year-to-date 2004 decreased approximately 9%
compared to the same period in 2003. Lower banquet revenues were responsible for
this decline and substantially impacted the department's profitability. For the
first 9 months of 2004, this department lost approximately $72,000 while it
showed a $71,000 profit for the same period in 2003. As previously mentioned,
banquets are the most profitable section of this department, and competitive
market conditions have negatively impacted its sales.
Mountain Operations.
This department's revenues increased 8% to $1,078,000. Departmental profit
increased approximately 81% to $128,000. Although asbestos mitigation costs
negatively affected the department's performance (see third quarter's discussion
above), we were successful in increasing the department's net operating profit
mostly through increased sales.
Snow King Center.
For the 2004 period, the Snow King Center revenues decreased approximately 2%
from 2003 to $484,000. The department's profit decreased approximately 10% to
$139,000. Natural gas, and other utility price increases were mostly responsible
for this variance from the 2003 levels.
Condominium Rentals.
Total departmental revenues, including gross rentals, increased approximately
22% from 2003 to 2004. The largest portion of this department's revenue increase
is due to additional units entering the rental program. Profitability also
increased substantially (60%) from 2003 to 2004 reaching approximately $437,000
for the first 9 months of 2004.
Other Departments.
Departmental profit for this department, year-to-date, decreased 21% from 2003
to 2004 to approximately $63,000. Lower sales (24% lower than 2003) were
responsible for this decrease. Declining telephone sales represent the majority
of the sales decreases.
Administration and General.
Year to date 2004 expenses for this category were approximately $758,000. During
the same period in 2003 these expenses were $643,000. We have embarked in new
training and quality programs that have increased our costs this year. We
believe that these programs will help us remain more competitive in the future.
Marketing.
In the face of increased competition, our marketing efforts have resulted in
higher marketing costs. Personnel, advertising and other marketing expenses year
to date for 2004 were 36% higher than in the same 2003 period, reaching
approximately $405,000.
Maintenance.
Maintenance labor and other expenses increased 25% for the first nine months of
2004 compared to the same period in 2003. We continue to increase our efforts to
maintain the resort's condition and its aging mechanical systems.
Energy.
Electricity, gas and utilities expenses increased slightly (2%) for 2004
compared to 2003. Most of this increase was due to higher natural gas prices.
Property Taxes, Management Fees and Insurance.
Property taxes have remained basically the same for this nine month period in
2004 as for the same period in 2003. Management fees were $12,000 higher in 2004
due to some 2003 fees being paid in 2004. Otherwise the amounts would have been
approximately the same for both years. Insurance costs increased due mostly to
some extraordinary health insurance costs. Total costs for this combined
category for this nine month period in 2004 increased from the same period of
2003 by approximately $44,000 to a total of $465,000, with the majority of this
increase due to higher insurance costs.
Interest and Lease Expense.
Total interest and lease expenses were approximately 1% higher for the first
nine months of 2004 than the same period in 2003. This increase is due to
slightly higher interest rates.
Depreciation and Amortization.
Depreciation and amortization expenses were approximately 1% lower for this nine
month period this year compared to 2003.
Profit and Loss.
Our Net Income for the first nine months of 2004 $82,711. This compares with a
Net Income of $424,431 for the first nine months of 2003. The above discussion
details the variances for each department and category, and is qualified by the
cautionary statement that our Net Income for our third quarter and first nine
months of each year are usually substantially reduced or eliminated by our
fourth quarter results, our historically worst quarter.
Liquidity and Capital Resources.
Liquidity has been a problem for SKRI for the past several years. Our bank debt
is higher than the operating business can support. During the 2004 winter and
spring we had drawn our lines of credit to the maximum and have had to borrow
additional amounts from affiliated entities, such as Love Ridge Development,
from officers and directors and from bank borrowings guaranteed by officers and
directors. In order to refinance this debt, new loans were obtained that had to
be personally guaranteed by officers, directors and other individuals that are
part owners of Snow King Resort, Inc.
For the future we have decided to evolve the company from an operating entity
into an enterprise that incorporates operations as well as real estate
development, thereby unlocking our largest asset, the parcels of undeveloped
land under our control. We started this process over 4 years ago by preparing
and obtaining regulatory approval for a Master Development Plan for the entire
Snow King Resort. This Masterplan had an expiration date of December 2003,
unless a specific proposal for construction of a portion of the plan was
presented for approval. We accomplished that task on time and in April 2004
obtained final development plan approval for the construction of five buildings
containing approximately 40,000 square feet of condominiums. We applied and
obtained foundation permits for 2 of these buildings as well as for related
infrastructure construction. We obtained construction financing for these 2
condominium buildings and for the related infrastructure and have started
construction. Construction financing had to be personally guaranteed by
officers, directors and other Snow King owners. Total personal guarantees
presently exceed $13,000,000 and additional personal guarantees are to be
expected in the future. See our Annual Report on Form 10-KSB which describes
many of the risks and challenges facing our company and our business.
Sale of Oil Properties.
In September 2004 our Board of Directors concluded that it was beneficial to the
Company to sell its oil and gas interests. Western Standard was not the operator
of any of the producing wells or properties. On November 4, 2004 we concluded
the sale of all our oil and gas interests for $65,000. The net results for this
transaction will be included in the 2004 fourth quarter.
WESTERN STANDARD CORPORATION
SIGNATURE
In accordance with the requirements of the Exchange Act, the Registrant caused
this report to be signed on its behalf by the undersigned thereunto duly
authorized.
WESTERN STANDARD CORPORATION
----------------------------
(Registrant)
Dated: November 15, 2004 /s/ Manuel B. Lopez
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Manuel B. Lopez, President
