1
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
[X] Quarterly Report pursuant to section 13 or 15(d) of the
Securities Exchange Act of 1934
[ ] Transition Report pursuant to section 13 or 15(d) of the
Securities Exchange Act of 1934
For the Quarterly Period Ended: June 30, 1995.
Commission File No. 0-14131
WESTERN ENERGY RESOURCES, INC.
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(Exact name of small business issuer as specified in its charter)
Delaware 33-0089423
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
34192 Violet Lantern, Suite 3, Dana Point, California 92629
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (714)582-2250
(Not applicable)
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Former name, former address and former fiscal year, if changed
since last report
Check whether the issuer (1) filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 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 [ ]
State the number of shares outstanding of each of the issuer's
classes of common equity, as of the latest practicable date:
Common Stock, par value $.01 per share, outstanding as of June
30, 1995: 87,449,410 shares.
Transitional Small Business Disclosure Format (check one):
YES [ ] NO [X]
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2
WESTERN ENERGY RESOURCES, INC.
INDEX
Page
Number
Part I - FINANCIAL INFORMATION........................... 3
Item 1. Financial Statements:
Consolidated Balance Sheets at
June 30, 1995 and December 31, 1994........... 3
Consolidated Statements of Operations
for the Six Months and Three Months ended
June 30, 1995 and June 30, 1994............... 5
Consolidated Statement of Changes in
Stockholders' Equity (Deficit)for the
Six Months ended June 30, 1995................ 6
Consolidated Statements of Cash Flows for the
Six Months ended June 30, 1995................ 7
Notes to Consolidated Financial Statements
at June 30, 1995.............................. 8
Item 2. Management's Discussion and Analysis or
Plan of Operation:
Management's Discussion and Analysis of
Financial Condition and Results of Operations. 16
Part II - Other Information:
Item 6. Exhibits and Reports on Form 8-K....... 23
Signatures ................................................ 24
3
PART I. FINANCIAL INFORMATION
WESTERN ENERGY RESOURCES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
June 30, December 31,
1995 1994
------------ ------------
ASSETS:
Current Assets:
Cash............................... $ 7,496 $ 1,651
Trade accounts receivable,
net of allowance for doubtful
accounts of $8,805 at June 30,
1995 and December 31, 1994....... 216,094 211,254
Inventory.......................... 56,447 69,534
Prepaid expenses................... 43,729 11,789
Other.............................. 40,385 3,407
------------ ------------
Total Current Assets............... 364,151 297,635
------------ ------------
Property and Equipment at cost....... 68,724 65,400
Less accumulated depreciation........ (61,502) (56,370)
------------ ------------
Net Property and Equipment........... 7,222 9,030
------------ ------------
Producing Oil and Gas Properties,
accounted for under the successful
efforts method, net................ 1,334,181 1,397,936
Deferred offering costs.............. 40,000 -
Other assets......................... 7,912 8,120
------------ ------------
1,382,093 1,406,056
------------ ------------
Total Assets......................... $ 1,753,466 $ 1,712,721
============ ============
See accompanying Notes to Consolidated Financial Statements.
4
WESTERN ENERGY RESOURCES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (continued)
June 30, December 31,
1995 1994
------------ ------------
LIABILITIES AND
STOCKHOLDERS' EQUITY (DEFICIT):
Current Liabilities:
Accounts payable................... $ 348,237 $ 255,479
Accounts payable, related party.... 42,234 28,815
Accrued liabilities................ 191,521 36,220
Note payable....................... 77,000 5,000
Debt due supplier.................. 94,420 94,420
Current portion of long-term debt,
related parties.................. 1,375,065 24,025
------------ ------------
Total Current Liabilities............ 2,128,477 443,959
------------ ------------
Long-Term Debt....................... -- 350,000
Long-Term Debt, related parties...... 535,279 1,498,076
------------ ------------
Total Long-Term Debt................. 535,279 1,848,076
------------ ------------
Total Current Liabilities
and Long-Term Debt................. 2,663,756 2,292,035
------------ ------------
Commitments and Contingencies
(Notes C, H and I)
Stockholders' Equity (Deficit):
Common stock, $.01 par value,
150,000,000 shares authorized,
87,514,042 shares issued;
87,449,410 shares outstanding
at June 30, 1995 and
December 31, 1994............. 875,139 875,139
Additional paid-in capital......... 5,713,014 5,713,014
Treasury stock, at cost,
64,632 shares................... (33,090) (33,090)
Accumulated (deficit).............. (7,465,353) (7,134,377)
------------ ------------
Total Stockholders' Equity (Deficit). (910,290) (579,314)
------------ ------------
Total Liabilities and
Stockholders' Equity (Deficit)..... $ 1,753,466 $ 1,712,721
============ ============
See accompanying Notes to Consolidated Financial Statements.
5
WESTERN ENERGY RESOURCES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Six Months ended Three Months ended
June 30, June 30,
------------------- --------------------
1995 1994 1995 1994
--------- --------- --------- ---------
REVENUES:
Oil and gas......... $ 189,540 $ 39,979 $ 88,418 $ 16,635
Solar energy devices 129,685 - 39,976 -
Other............... 15,785 - 193 -
---------- --------- ---------- ---------
Total Revenues........ 335,010 39,979 128,587 16,635
---------- --------- ---------- ---------
COSTS AND EXPENSES:
Oil and gas
production costs.. 101,594 19,190 43,796 7,227
Cost of sales....... 86,810 - 21,623 -
Sales and marketing. 34,841 - 17,678 -
General and
administrative.... 308,091 23,034 175,135 12,760
Depreciation,
depletion and
amortization...... 50,012 14,373 24,007 7,185
Interest expense.... 72,906 1,597 37,925 1,003
Other:
Financial expense.. 7,598 - 7,598 -
Loss on sale of
interest in wells 4,134 - 4,134 -
---------- --------- ---------- ---------
Total Costs & Expenses 665,986 58,193 331,896 28,175
---------- --------- ---------- ---------
NET (LOSS)............ $(330,976) $(18,213) $(203,309) $(11,540)
========== ========= ========== =========
NET (LOSS)
PER COMMON SHARE.... $(.004) $(.00) $(.002) $(.00)
========== ========= ========== =========
Weighted Average
Number of Common
Shares Outstanding. 87,449,410 8,339,941 87,449,410 8,339,941
========== ========= ========== =========
See accompanying Notes to Consolidated Financial Statements.
6
WESTERN ENERGY RESOURCES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES
IN STOCKHOLDERS' EQUITY (DEFICIT)
FOR THE SIX MONTHS ENDED JUNE 30, 1995
Common Stock Additional
------------------- Paid-in Treasury
Accumulated
Shares Amount Capital Stock
(Deficit) Total
---------- -------- ---------- ---------
------------ ----------
Balance at
December 31,
31, 1994.... 87,449,410 $875,139 $5,713,014 $(33,090)
$(7,134,377) $(579,314)
Net loss,
six months
ended
June 30,
1995........ -- -- -- --
(330,976) (330,976)
---------- -------- ---------- ---------
------------ ----------
Balance at
June 30,
1995........ 87,449,410 $875,139 $5,713,014 $(33,090)
$(7,465,353) $(910,290)
========== ======== ========== =========
============ ==========
See accompanying Notes to Consolidated Financial Statements.
7
WESTERN ENERGY RESOURCES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Six Months ended June
30,
--------------------------
1995
1994
------------
------------
CASH FLOWS TO (FROM) OPERATING ACTIVITIES:
Net (loss)................................ $ (330,976) $
(18,213)
Adjustment to reconcile net (loss) to net
cash provided by operating activities:
Depreciation, depletion
and amortization.................... 50,012
14,373
Loss on sale of interest in wells..... 4,134
-
Changes in:
Trade accounts receivable........... (4,840)
1,926
Inventory........................... 13,087
-
Prepaid expenses.................... (31,940)
-
Other current assets................ (36,978)
-
Accounts payable.................... 92,758
(3,279)
Accounts payable, related parties... 13,419
-
Accrued liabilities................. 155,301
-
Other............................... 3,349
(1,952)
------------
------------
Net Cash Provided (Used) by
Operating Activities................. (72,674)
(7,145)
------------
------------
CASH FLOWS TO (FROM) INVESTING ACTIVITIES:
(Additions) to property and equipment..... (3,324)
-
Sale of interests in wells................ 11,600
-
------------
------------
Net Cash Provided (Used) by
Investing Activities................ 8,276
-0-
------------
------------
CASH FLOWS TO (FROM) FINANCING ACTIVITIES:
Notes payable........................... 72,000
-
Notes payable, related parties.......... 38,243
-
Deferred offering costs................. (40,000)
-
------------
------------
Net Cash Provided by
Financing Activities................ 70,243
-0-
------------
------------
Net increase (decrease) in cash........... 5,845
(7,145)
CASH, beginning of period................. 1,651
7,421
------------
------------
CASH, end of period....................... $ 7,496 $
276
============
============
Supplemental disclosures
of cash flow information:
Cash paid during the period for:
Interest.............................. $ 8,880
Income taxes.......................... $ -
============
============
See accompanying Notes to Consolidated Financial Statements.
8
WESTERN ENERGY RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1995
A. THE COMPANY. Western Energy Resources, Inc. (the
"Company") is a diversified energy company engaged in development
and distribution of products utilizing renewable energy
technology as well as the operation and production of oil and gas
resources. Through its wholly-owned subsidiaries, SUN Utility
Network, Inc. ("SUN") and Superior Energy Corporation
("Superior"), the Company has sold than 800 solar collector
arrays throughout the Western Hemisphere and owns interests in
approximately 40 producing oil and gas wells in the United
States. SUN is the exclusive distributor in the United States
for solar evacuated tubes manufactured by Nippon Electric Glass
Co., Ltd. ("NEG") of Japan and Superior owns fractional oil and
gas interests primarily located in Texas and Louisiana with other
interests in Kansas and New Mexico.
SUN and Superior were acquired by the Company on October 1,
1994 pursuant to an agreement and plan of reorganization. Prior
to October 1, 1994, the Company's only business consisted of
fractional interests in 15 oil and gas wells in Texas and Kansas
which generated less than $4,000 in revenues per month net of
production costs. The Company's interests in 12 of those wells
were sold in May 1995 for $17,000 after payment of related
liabilities. The accompanying consolidated financial statements
include the accounts of the Company and its subsidiaries, SUN and
Superior, from their date of acquisition. All significant
intercompany accounts and transactions have been eliminated in
consolidation.
B. UNAUDITED INTERIM STATEMENTS. The accompanying
unaudited Consolidated Financial Statements at June 30, 1995 have
been prepared by the Company pursuant to the rules of the
Securities and Exchange Commission ("SEC") and, in the opinion of
the Company's management, include all adjustments necessary for a
fair presentation of financial position, results of operations
and cash flows for the interim periods covered by such
statements. Certain information and footnote disclosures
normally included in financial statements prepared in accordance
with generally accepted accounting principles have been condensed
or omitted pursuant to the SEC's rules. Reference is made to
Note 1 of the Notes to Consolidated Financial Statements
contained in the Company's Annual Report on Form 10-KSB for the
fiscal year ended December 31, 1994 for a summary of significant
accounting policies utilized by the Company. It is suggested
that the Consolidated Financial Statements at June 30, 1995 be
read in conjunction with the audited consolidated financial
statements and notes thereto included in the Company's latest
Annual Report on Form 10-KSB.
An aggregate of $94,420 in trade debt due a supplier has
been reclassified on the Company's balance sheet as of December
31, 1994 from long-term debt to short-term debt since that
obligation has no stated maturity date. See Note H below.
9
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
JUNE 30, 1995 (unaudited)
C. GOING CONCERN; AUDITOR'S QUALIFICATION AND
MANAGEMENT'S PLAN. The accompanying financial statements have
been prepared assuming that the Company will continue as a
going-concern. The Company has suffered recurring losses, has
negative stockholders' equity and substantial long-term debt
nearing maturity, and cash flows from operations to date have
been insufficient to fund future development. The independent
auditors' report of A J. Robbins PC on the financial statements
of the Company at December 31, 1994 contains a paragraph
expressing substantial doubt concerning the ability of the
Company to continue as a going concern. The Consolidated
Financial Statements at June 30, 1995 do not include any
adjustments that might result from the outcome of this
uncertainty.
Management's strategy in acquiring SUN and Superior in
October 1994 was to use cash flow from Superior's oil and gas
operations to finance the Company's selling, general and
administrative expenses and working capital requirements
to support continued development of SUN's solar energy tube
business and expansion of Superior's oil and gas activities.
Included in Superior's oil and gas interests are fractional
interests in approximately 40 gross producing wells and 19 gross
shut-in wells which had ceased production for mechanical or other
reasons, but which management believes offer potential for
renewed production if the wells are re-worked. If wells having
potential for restored production are re-worked successfully,
monthly revenues and cash flow from operations are expected to
increase. Before re-work of these wells, the Company's monthly
revenues from producing oil and gas wells was approximately
$32,000 before production costs for the six months ended June 30,
1995.
Re-work of the Caudill-State #1 well in Lea County, New
Mexico, was completed in the second quarter of 1995; the well
remained shut-in at June 30, 1995, and the well test indicates
production rates of approximately $8,000 per month net to the
Company's interest before production costs. Re-work of the Shinn
#1 well in St. Martin's Parish, Louisiana was initiated in June
1995, and initial production rates obtained during work-over
indicate production rates of approximately $14,000 per month net
to the Company's interest before production costs. Management
plans to commence re-work of additional wells in August 1995.
The aggregate cost of re-working approximately 17 other wells, in
addition to the Caudill-State #1 and Shinn #1 wells, is estimated
by management at approximately $616,000, of which approximately
$143,000 would be allocable to net interests of the Company and
the balance would be allocable to third parties. However, to
re-work certain wells in instances where other owners do not
have, or are unwilling to provide, additional capital, the
Company may elect to finance the entire cost of re-working one or
more wells in exchange for a preferred return on its investment
or an assignment of the interests of other co-owners.
10
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
JUNE 30, 1995 (unaudited)
In order to obtain funds to satisfy short-term working
capital requirements and additional re-work of non-producing oil
and gas wells, in June 1995 the Company obtained a financing
commitment for up to $350,000 with interest at 12% per
annum payable over a period not to exceed 36 months. The
financing source will also receive an overriding royalty or net
profit interest in oil and gas production that will increase the
Company's aggregate financial cost of this financing commitment
to approximately 19% per annum. Subject to completion of
definitive loan documentation, the Company will be able to draw
$150,000 against this commitment with additional funds to become
available based upon formulas relating to increased production
from the re-work of oil and gas wells. Debt service payments are
estimated to require approximately $15,000 per month and will be
collateralized by substantially all of Superior's oil and gas
interests. The Company will select wells for re-work in an order
of priority that takes various factors into account, such as
management's estimate of potential for increased production, the
cost of re-work and whether or not the Company will be obligated
to finance all or only its net share of re-working the well.
At June 30, 1995, the Company' current assets were $364,000
and its current liabilities were $2,128,000, resulting in a
negative working capital of $1,764,000. Current liabilities at
June 30, 1995 includes $1,000,000 of debt due Suffolk Energy
Partners ("Suffolk") due on January 1, 1996, and $350,000 of debt
due Miramar Energy Partners-I, L.P. ("Miramar") which will not be
due until April 1, 1996 except for a portion that may become
payable to Miramar during 1995 from a percentage of oil and gas
revenues of certain wells after they have been re-worked. See
Note G below. Excluding the obligations to Suffolk and Miramar,
the Company would have had a pro forma negative working capital
position at June 30, 1995 of $414,000.
Management believes that the Company's existing revenue
base, proceeds from the recent financing commitment described
above and increased revenues from re-work of oil and gas wells
discussed above will enable the Company to satisfy its working
capital requirements and sustain its operations for the balance
of 1995. In order to service long-term debt obligations to
Suffolk and Miramar due in early 1996, however, the Company will
require additional debt or equity financing. If the debt to
Suffolk cannot be paid, the Company may forfeit its interests in
certain oil and gas properties purchased from Suffolk that
currently generate approximately 59% of Superior's revenues and
gross profits (see Note G below.) The Company has filed a
registration statement with the SEC covering a proposed sale of
equity securities and will also seek private placement financing
during the second half of 1995. There can be no assurance,
however, that additional financing will be obtained or that any
such financing would be on reasonable terms to the Company.
Accordingly, the ultimate outcome of management's plan is
uncertain.
11
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
JUNE 30, 1995 (unaudited)
See the Consolidated Financial Statements at June 30, 1995
and Management's Discussion and Analysis of Financial Condition
and Results of Operations included elsewhere in this Report.
D. INTERIM PERIODS NOT NECESSARILY REPRESENTATIVE OF
FULL YEAR. The unaudited consolidated statements of operations
for the three months and six months ended June 30, 1995 and 1994
are not necessarily indicative of the results to be expected for
the full year. See also Notes A and C above and Management's
Discussion and Analysis of Financial Condition and Results of
Operation included elsewhere in this Report.
E. ACCOUNTS RECEIVABLE. Concentrations of credit
risk with respect to trade receivables of Superior's oil and gas
interests exist due to large balances with two companies that
purchase oil and gas production from wells in which Superior has
an interest. Ongoing credit evaluations of the operators'
financial condition are performed and no collateral is required.
Management believes that substantially all accounts receivable as
of June 30, 1995 are fully collectible.
F. ACCOUNTING FOR OIL AND GAS INVESTMENTS AND
PROPERTIES. The Company uses the "successful efforts" method of
accounting for oil and gas producing activities. Under
successful efforts, costs to acquire mineral interests in oil and
gas properties, to drill and equip exploratory wells that find
proved reserves, and to drill and equip development wells are
capitalized. Costs to drill exploratory wells that do not find
proved reserves, geological and geophysical costs, and costs of
carrying and retaining unproved properties are expensed.
Capitalized costs of proved oil and gas properties are amortized
by the unit-of-production method based on proved oil and gas
reserves.
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and revenues
and expenses during the reporting periods. Actual results could
differ from those estimates and assumptions.
12
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
JUNE 30, 1995 (unaudited)
G. LONG-TERM DEBT AND CURRENT PORTION. The Company's
long-term debt and current portion thereof at June 30, 1995
included the following:
June 30,
1995
-------------
Note payable, due April 1, 1996, with interest
at 10% per annum due monthly commencing
December 1, 1995 (except interest to
October 31, 1995 accrued and payable
April 1, 1996); acceleration of principal
payments commences upon full repayment of
expenses incurred in re-work of specified wells,
due within 10 days after receipt of net income
from wells, in an amount equal to 25% of the
net income received; collateralized by
specific oil and gas interests.................. $ 350,000
Less: current portion......................... (350,000)
Long-Term Debt to Related Parties:
Note payable to related party, principal due
January 1, 1996, with interest at 10% per
annum due quarterly (except interest to
December 31, 1995 accrued and payable
January 1, 1996); collateralized by specific
oil and gas interests......................... 1,000,000
Less: current portion......................... (1,000,000)
Notes payable to stockholders, with interest
at 7%, principal due December 31, 1999;
uncollateralized.............................. 443,953
Notes payable to stockholders, with interest
at 8.5%, principal and interest due in
monthly installments of $2,465 to
November 1, 1997; uncollateralized........... 64,412
Less: current portion......................... (25,065)
Note payable to affiliate of stockholder, with
interest at 6%, principal due
December 31, 1996; uncollateralized........... 51,979
-------------
Total Long-Term Debt, net of current portion...... $ 535,279
-------------
13
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
JUNE 30, 1995 (unaudited)
On October 1, 1994, the Company's Superior subsidiary
entered into an agreement to purchase certain oil and gas
interests from Miramar. In consideration for its purchase of
these interests, Superior issued shares of its capital stock to
Miramar which were subsequently exchanged for 2,065,635 shares of
the Company's common stock under a reorganization agreement and
plan between the Company and Superior effected as of October 1,
1994. Superior also issued its promissory note for the payment
to Miramar of $350,000 with interest at 10% per annum. The
amount of this obligation is subject to certain upward or
downward adjustments for certain items to be prorated as provided
in the agreement between Superior and Miramar, and provides the
principal of the note may be increased to an amount equal to 35%
of 90% of the 10% discounted proved oil and gas reserves of the
purchased interests as determined by a reserve appraisal report
after the wells have been re-worked. Re-work of the wells had
not been completed at June 30, 1995. The Company does not
anticipate any material adjustments to the $350,000 principal
amount of the note as a result of these provisions.
On October 1, 1994, Superior entered into a purchase
agreement for the purchase of certain oil and gas interests from
Suffolk. In consideration for its purchase of these interests,
Superior issued shares of its capital stock to Suffolk which were
subsequently exchanged for 6,954,305 shares of the Company's
common stock under a reorganization agreement and plan between
the Company and Superior effected as of October 1, 1994. In
addition, Superior issued its promissory note for the payment to
Suffolk of $1,000,000 with interest at 10% per annum. Under
Superior's agreement for the purchase of certain oil and gas
interests from Suffolk, should 90% of the discounted proved oil
and gas reserves (using a discount factor of 10% per annum) of
the purchased interests, as determined by a reserve appraisal
based upon prices of $15.00 per barrel of oil and $2.00 per Mcf
for gas, exceed the principal amount of the $1,000,000 note, the
principal amount of Superior's note will be increased to the 90%
discounted figure. The Company does not anticipate any material
adjustments to the $1,000,000 principal amount of the note as a
result of these provisions.
As part of the purchase agreement, Superior entered into an
escrow agreement with Suffolk whereby the assignment of oil and
gas interests purchased from Suffolk have been deposited into
escrow. If Superior defaults on the payment of its note
obligations, or if a registration statement covering the
Company's securities had not been filed with the SEC by June 30,
1995, then Suffolk and Superior agreed to terminate the purchase
and sale of the purchased interests. The Company filed a
registration statement with the SEC on June 30, 1995 to satisfy
the latter condition. In the event the purchase and sale is
terminated, Superior's promissory note will be cancelled, the oil
and gas interests will be reassigned to Suffolk, and Suffolk will
be entitled to retain the 6,954,305 shares of the Company's
common stock.
14
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
JUNE 30, 1995 (unaudited)
H. CERTAIN COMMITMENTS AND CONTINGENCIES.
All of SUN's primary products are purchased from its
exclusive supplier, Nippon Electric Glass Co., Ltd. ("NEG") of
Japan. As such, SUN's ability to achieve and maintain successful
operations depends in substantial part on SUN's ability to retain
its distribution rights to NEG products and on NEG's ability and
willingness to meet SUN's product requirements.
SUN has an exclusive distributorship agreement with NEG.
This agreement stipulates that SUN has exclusive rights to
distribute certain defined glass solar energy products of NEG in
the United States. As a condition to maintain exclusive rights,
SUN is required to purchase within the 12 month period ending on
September 20, 1995 a minimum quantity of 5,000 solar energy tubes
from NEG. The value of these minimum purchases is approximately
$435,000. The consequence to SUN for not purchasing the stated
minimum quantity is possible termination of the agreement or
conversion of its exclusive distribution rights to a nonexclusive
status. SUN has not met these minimum purchase requirements as
of June 30, 1995, and does not believe it will do so by September
20, 1995. Although SUN's distributorship agreement has been
renewed in prior years without meeting minimum purchase
requirements, there can be no assurance SUN will be able to
obtain further renewals of its exclusive rights without attaining
minimum performance levels.
At June 30, 1995, SUN owed $94,420 to NEG, its distributor
and sole supplier of solar energy devices. The debt was
originally incurred as accounts payable in the normal course of
SUN's business. The supplier has agreed to postpone collection
of this amount until cash flow of the Company has improved.
Accordingly, the payable has been classified as short-term debt,
is non-interest bearing and has no stated maturity date.
As discussed in Note G above, the principal amount of the
Company's $350,000 promissory note to Miramar is subject to
certain upward or downward adjustments for certain items which
have yet to be determined, and certain oil and gas interests
purchased by Superior from Suffolk are collateralized by an
escrow arrangement. If Superior defaults on the payment of
its $1,000,000 note obligations to Suffolk, the Company faces a
risk that its interests in certain properties may be forfeited.
15
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
JUNE 30, 1995 (unaudited)
Reference is also made to Note 13 of the Notes to
Consolidated Financial Statements at December 31, 1994 included
in the Company's Annual Report on Form 10-KSB for the fiscal year
then ended for a summary of lease obligations and other
commitments and contingencies.
I. ENVIRONMENTAL MATTERS.
Operation of the Company's oil and gas properties
inherently involves certain risks that its Superior subsidiary
may be responsible for environmental cleanup costs associated
with drilling, operation and/or shut-down of oil and gas wells.
The risks of incurring such costs related to environmental
matters are highly uncertain due to such factors as the unknown
magnitude of possible pollution and cleanup costs, the complexity
and evolving nature of governmental laws and regulations and
their interpretations, and the extent, if any, to which costs are
recoverable from insurance or other parties. The Company is not
aware of any adverse claims or material liabilities relating to
environmental cleanup costs as of June 30, 1995, and accordingly
no provision has been made for the risk of environmental cleanup
costs in the Consolidated Financial Statements at June 30, 1995.
16
WESTERN ENERGY RESOURCES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
INTRODUCTION
The following discussion and analysis should be read in
conjunction with the Consolidated Financial Statements and Notes
thereto appearing elsewhere in this Report. The independent
auditors' report of A J. Robbins P.C. on the financial statements
of the Company at December 31, 1994 contains a paragraph
expressing substantial doubt concerning the ability of the
Company to continue as a going concern. See Note C of the Notes
to Consolidated Financial Statements at June 30, 1995 included
elsewhere in this Report for a discussion of management's plans
regarding these matters.
Prior to 1994, the Company primarily owned fractional
interests in oil and gas wells in Texas and Kansas. Through an
exchange of shares effective as of October 1, 1994, the Company
acquired SUN Utility Network, Inc. ("SUN"), a distributor of
solar evacuated tubes, and Superior Energy Company, Inc.
("Superior"), an owner of fractional oil and gas interests
located primarily in Texas and Louisiana. As of June 30, 1995,
the Company has an accumulated deficit from operations of
$7,465,000, of which $5,726,000 was attributable to oil and gas
operations of the Company through September 30, 1994 incurred
prior to the acquisitions of SUN and Superior.
The oil and gas industry is a highly capital intensive
business, especially in the initial stages of exploration and
development of properties. Oil and gas operations typically
require capital principally to fund (i) purchase of leases or
working interests in oil and gas producing properties; (ii)
capital expenditures under certain agreements for geological,
geophysical and seismic costs and drilling and completion costs
of wells; and (iii) general and administrative expenses.
Similarly, the operations of SUN in the initial development, sale
and marketing of its solar evacuation tube distribution business
is capital intensive. SUN's primary working capital requirements
are to finance growth in inventories and account receivable and
for selling, general and administrative expenses.
Management's strategy in acquiring SUN and Superior in
October 1994 was to use cash flow from Superior's oil and gas
operations to finance the Company's selling, general and
administrative expenses and working capital requirements
necessary to support continued development of SUN's solar energy
tube business and possible expansion of Superior's oil and gas
operations. Included in Superior's oil and gas interests as of
October 1994 are interests in approximately 19 shut-in wells
which had ceased production prior to October 1994 for mechanical
or other reasons, but offer potential for renewed production if
the wells are re-worked. To increase available cash flow,
Superior planned capital expenditures in 1995 to rework these oil
and gas wells.
17
Re-work of wells was not initiated until the second quarter
of 1995, and the Company's results of operations for the six
months ended June 30, 1995 accordingly do not reflect any
increases in revenues projected as a result of oil and gas well
re-work. For additional information as to the status of
re-working wells, reference is made to Note C of the Notes to
Consolidated Financial Statements at June 30, 1995 included
elsewhere herein.
Management's opinion is that the existing revenue base of
SUN and Superior, proceeds from a recent financing commitment
for up to $350,000 and increased revenues from re-work of oil and
gas wells will enable the Company to satisfy its working capital
requirements and sustain its operations for the balance of 1995.
See Note C of the Notes to Consolidated Financial Statements
at June 30, 1995 elsewhere herein.
In order to service long-term debt obligations to Suffolk
and Miramar due in early 1996, the Company will require
additional debt or equity financing. See Notes C and G of the
Notes to Consolidated Financial Statements at June 30, 1995. If
the debt to Suffolk cannot be paid, the Company may forfeit its
interests in certain oil and gas properties purchased from
Suffolk which accounted for approximately 59% of the Company's
revenues and gross profit from oil and gas operations (or
approximately 33% of consolidated revenues) for the six months
ended June 30, 1995. The Company has filed a registration
statement covering a proposed sale of equity securities with the
Securities and Exchange Commission and will also seek private
placement financing during the second half of 1995. There can
be no assurance, however, that additional financing will be
obtained or that any such financing would be on reasonable terms
to the Company. Accordingly, the ultimate outcome of
management's plan is uncertain.
The Company's long-range plan of operation is to expand its
activities to develop a diversified energy business. These plans
include increasing sales and marketing of solar tubes, expanding
SUN's product applications to include energy cogeneration and
other solar energy applications, and increasing Superior's oil
and gas interests through additional drilling and/or acquisitions
of working interests. SUN also plans to rely increasing on long-
term leasing programs for hot water, space heating and other
solar tube applications to facilitate the sale and marketing of
its products and, subject to obtaining additional capital,
Superior plans to commence marketing and operation of vapor
recovery systems in addition to its existing oil and gas
business.
18
There can be no assurance the Company will attain
profitable operations in the foreseeable future. Management
anticipates the Company will seek to sell debt or equity
securities to finance expansion of its operations, but there can
be no assurance that efforts to raise additional capital will be
successful. Even if the Company obtains additional capital to
finance expansion of its business, there can be no assurance that
its operations will be profitable or that the Company will have
sufficient cash from internal operations or from financing
transactions to maintain its business operations.
RESULTS OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 1995 ("1995 First Half") COMPARED
TO THE SIX MONTHS ENDED JUNE 30, 1994 ("1994 First Half");
AND THREE MONTHS ENDED JUNE 30, 1995 ("1995 Second Quarter")
COMPARED TO THE IMMEDIATELY PRIOR QUARTER ENDED MARCH 31,
1995 ("1995 First Quarter")
As discussed above, the Company acquired SUN and Superior
through an exchange of shares effective as of October 1, 1994.
The acquired assets and liabilities have been recorded in the
Company's consolidated financial statements at their estimated
fair values at the date of acquisition. The Company's
consolidated results of operations for the prior year's 1994
First Half do not include results of operations of SUN and
Superior insofar that period was prior to their acquisition by
the Company.
Consolidated revenues for the 1995 First Half of $335,000
increased by $295,000 compared to $40,000 in the prior year's
1994 First Half. Increases in revenues for the 1995 First Half
compared to the 1994 First Half are attributable to the
operations of SUN and Superior acquired on October 1, 1994.
The Company's consolidated revenues for the 1995 Second
Quarter were $129,000, consisting of approximately $40,000 in
revenues of SUN and $88,000 from oil and gas operations.
Consolidated revenues decreased by $78,000 compared to
consolidated revenues of $206,000 for the immediately preceding
1995 First Quarter which included $90,000 in revenues of SUN and
$101,000 in oil and gas revenues.
19
SUN's revenues of $40,000 in the 1995 Second Quarter
declined by $50,000 compared to $90,000 in the preceding 1995
First Quarter. The decline in revenues was due primarily to an
interruption in supply of solar tubes from SUN's supplier in
Japan because of the Kobe earthquake and secondarily to a sales
reduction associated with repossession of merchandise arising
from a defaulted dealer obligation. Merchandise repossessed
from the defaulting dealer was resold by the Company in the
second quarter of 1995, but such sales were largely offset by
deductions for prior sales to the defaulting dealer. SUN
recently has changed its marketing strategy to rely increasing
upon third-party lease financing for future sales in lieu of
depending primarily on dealer credit. As a result, management
anticipates sales growth for the second half of 1995 in solar
energy products compared to the 1995 First Half.
Oil and gas revenues for the 1995 Second Quarter decreased
by $13,000 to $88,000, compared to 1995 First Quarter oil and gas
revenues of $101,000. This decrease was due to $4,000 in
decreased production and a decrease of $9,000 from the sale of 12
wells owned by the Company before its acquisition of Superior.
Previously shut-in oil and gas wells successfully re-worked by
Superior during the 1995 Second Quarter included the
Caudill-State #1 well in Lea County, New Mexico during May 1995
and the Shinn #1 well in St. Martin's Parish, Louisiana at the
end of June. These additions, however, will not contribute to
oil and gas revenue increases before the third quarter of 1995.
The Company plans to re-work additional shut-in oil and gas wells
starting in August 1995. See Note C of the Notes to Consolidated
Financial Statements at June 30, 1995 for additional information
concerning the re-work of shut-in wells.
The Company's consolidated cost of revenues in the 1995
First Half was $188,000, or 59% of consolidated net sales, of
which $87,000 in cost of goods sold was attributable to SUN and
$102,000 was attributable to oil and gas production costs.
SUN's gross profit margin of $18,000, or approximately 46%
of net sales, for the 1995 Second Quarter decreased from $25,000,
or 27% of revenues, in the 1995 First Quarter. The dollar
decline in SUN's gross profit margin and increase in gross profit
percentage for the 1995 Second Quarter was due to lower sales
volume resulting from an interruption of inventory supply and
repossession of certain merchandise discussed above.
Oil and gas production costs of $44,000 for the 1995 Second
Quarter decreased compared to $58,000 in production costs for the
immediately preceding 1995 First Quarter, primarily as a result
of the sale of 12 oil and gas wells and a reduction in net work-
over costs. Gross profit from oil and gas operations (revenues
less costs of production) increased to $45,000, or 50% of oil and
gas revenues, in the 1995 Second Quarter compared to gross profit
of $43,000, or 43% of oil and gas revenues in the 1995 First
Quarter. This increase in gross profit margins for oil and gas
operations was attributable to the sale of 12 marginal oil and
gas wells owned by the Company before it acquired Superior.
20
Consolidated selling, general and administrative expenses
for the 1995 First Half totalled $343,000, compared to $23,000 in
the 1994 First Half before the acquisitions of SUN and Superior.
Selling, general and administrative costs of $193,000 for the
1995 Second Quarter increased by approximately $43,000 compared
to $150,000 in the 1995 First Quarter, primarily as a result of
increased legal and accounting professional fees incurred to
update the Company's SEC reporting to a current status.
Depreciation, depletion and amortization in the 1995
First Half was $50,000 compared to $14,000 in the 1994 First
Half. This increase was attributable to the oil and gas
interests of Superior acquired on October 1, 1994. Depreciation,
depletion and amortization declined to $24,000 in the 1995 Second
Quarter compared to $26,000 in the 1995 First Quarter as a result
of the sale of 12 oil and gas wells.
During the 1995 First Half, the Company incurred interest
expense of $73,000, of which $38,000 was incurred in the 1995
Second Quarter and $35,000 in the 1995 First Quarter. Interest
expense is attributable to indebtedness assumed in connection
with the operations of SUN and Superior acquired as of October 1,
1994. The Company anticipates that interest expense will
increase for the balance of 1995 as the Company expects to
increase debt obligations from various sources.
LIQUIDITY AND CAPITAL RESOURCES:
The Company's principal capital requirements include
working capital for the purchase of inventories and financing of
accounts receivable relating to its solar tube distribution
business, costs for re-working oil and gas wells and for selling,
general and administrative expenses. Subject to the availability
of additional capital, management anticipates that working
capital will also be required in the future for new product
development and associated capital expenditures, expanded sales
and marketing programs for solar energy systems and acquisition
and drilling of additional oil and gas interests.
At June 30, 1995, the Company's cash accounts were $7,000,
and the Company had current assets of $364,000 and current
liabilities of $2,128,000, resulting in a negative working
capital of $1,764,000. Current liabilities at June 30, 1995
includes $1,000,000 of debt due Suffolk Energy Partners
("Suffolk") due on January 1, 1996, and $350,000 of debt due
Miramar Energy Partners-I, L.P. ("Miramar") which will not be due
until April 1, 1996 except for a portion that may become payable
to Miramar during 1995 from a percentage of oil and gas revenues
of certain wells after they have been re-worked. Excluding the
obligations to Suffolk and Miramar, the Company would have had a
pro forma negative working capital position at June 30, 1995 of
$414,000.
21
During the six months ended June 30, 1994, the Company's net
loss from operations of $331,000 and approximately $40,000 in
deferred offering costs for anticipated new financings were
financed primarily by increases in accounts payable and accrued
liabilities aggregating approximately $261,000, additional
borrowings of approximately $110,000 (including increased
borrowings of approximately $38,000 from related parties) and
approximately $50,000 in depreciation, depletion and
amortization.
In order to obtain funds to satisfy future short-term
working capital requirements, additional re-work of non-producing
oil and gas wells and reductions in accrued liabilities, the
Company obtained a secured financing commitment in June 1995 for
up to $350,000 with interest at 12% per annum payable over a
period not to exceed 36 months. The financing is subject to
completion of definitive documentation, which is currently in
process, and no funds were advanced under this commitment prior
to June 30, 1995. This financing source will also receive an
overriding royalty or net profit interest in oil and gas
production that will increase the Company's aggregate financial
cost of this financing commitment to approximately 19% per annum.
Subject to completion of definitive loan documentation, the
Company will be able to draw $150,000 against this commitment
with additional funds to become available based upon formulas
relating to increased production from the re-work of oil and gas
wells. Debt service payments for this financing are estimated to
require approximately $15,000 per month and will be
collateralized by substantially all of Superior's oil and gas
interests.
Upon obtaining proceeds from this recent financing
commitment, and in an effort to increase revenues and cash flows,
the Company will select shut-in wells for re-work in an order of
priority that takes various factors into account, such as
management's estimate of potential for increased production, the
cost of re-work and whether or not the Company will be obligated
to finance all or only its net share of re-working the well.
The Company estimates its normal current operating expense
requirements (before costs of revenues, capital expenditures and
depreciation, depletion and amortization) at approximately
$62,000 per month for sales and marketing, general and
administrative expenses and interest expense. Before re-working
oil and gas wells, the Company's gross profit on approximately
$56,000 of average monthly revenues during the six months ended
June 30, 1995 was approximately $24,000 per month, or
approximately 44% of revenues. The Company recently completed
re-work of two previously shut-in oil and gas wells that should
increase its monthly gross profit by approximately $10,000.
Subject to completion of definitive documentation, the financing
commitment obtained in June 1995 described above will provide
additional working capital and allow re-work of additional wells
starting in August 1995 that, if successful, will increase the
Company's oil and gas revenues and cash flows.
22
The Company's management anticipates that it will incur
losses from operations for the foreseeable future due to its
current level of fixed expenses for selling, general and
administrative overhead and interest expense. Losses from
operations are expected to continue until such time as sales
increase to a level necessary to absorb fixed costs. Revenue
increases will be dependent in part upon expanded sales and
marketing of SUN's solar tube energy systems and the results of
re-work at certain oil and gas wells discussed above. Management
believes that the existing revenue base of SUN and Superior,
proceeds from the financing commitment described above
and increased revenues from re-work of oil and gas wells will
enable the Company to satisfy its working capital requirements
and sustain its operations for the balance of 1995.
In order to service long-term debt obligations to Suffolk
($1,000,000) and Miramar ($350,000) due in early 1996, the
Company will require additional debt or equity financing prior to
January 1, 1996. If the debt to Suffolk cannot be paid, the
Company may forfeit its interests in certain oil and gas
properties purchased from Suffolk that generated approximately
$112,000 in oil and gas revenues during the six months ended June
30, 1995. The expansion of SUN's sales and marketing activities,
and further expansion of the businesses of both SUN and Superior,
are also expected to require additional financing. The Company
has filed a registration statement covering a proposed sale of
its equity securities and will also seek private placement
financing during the second half of 1995. There can be no
assurance, however, that additional financing will be obtained or
that any such financing would be available on reasonable terms to
the Company. If the Company is unable to obtain additional
financing adequate to service its debt obligations to Suffolk and
Miramar, management will seek to renegotiate those obligations,
but there can be no assurance that such efforts would be
successful.
The Company's debt obligations also include $94,420 due its
supplier of solar energy tubes which has no stated maturity and
is expected to be repaid when and if SUN's cash flow improves.
This obligation is classified as a short-term debt obligation on
the Company's consolidated balance sheet.
Unless additional financing is obtained, the Company has no
material obligations or plans for additional capital expenditures
during the second half of 1995 except that an undetermined
portion of proceeds from its recently negotiated financing
commitment will be applied to re-work of certain oil and gas
wells.
23
The Company will be required to pay $100,000 by October 25,
1995 under the terms of a recent letter of intent to purchase a
1% interest in oil and gas license rights to the Buzi-Divinhe
Block, Mozambique, and $225,000 by December 31, 1995 under an
agreement in negotiation to drill an exploratory well as partial
consideration for earning a 25% working interest in prospecting
license ATP 594 located in the Eromanga Basin, Queensland,
Australia. The Company has retained a right to farm-out its
interest in license ATP 594. It is not presently anticipated
that the Company can finance these transactions from internal
cash flow, and the Company's interests in these recently
negotiated oil and gas prospects will be dependent upon obtaining
adequate additional financing or negotiating suitable farm-out
arrangements, neither of which can be predicted at the present
time.
The Company had approximately $217,000 of net operating loss
carryforwards available as of December 31, 1994 to offset future
taxable income for federal income tax purposes. Federal
operating loss carryforwards expire during the years from 2001 to
2009. The federal net operating loss carryforward is subject to
certain limitations caused by the greater than 50% change in
ownership of the Company. The carryforward to 1994 is limited to
approximately $5,300 each year up to approximately $80,000 due to
these limitations.
PART II -- OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
Exhibit
No. Description
------ ------------
10.1 Amendment dated August 2, 1995 to letter agreement
dated September 19, 1994 between Superior Energy
Company, Inc. (a subsidiary of the Registrant) and
Miramar Energy Partner-I, L.P. as to certain note terms
27 Financial Data Schedule at June 30, 1995
(b) Reports on Form 8-K. No reports on Form 8-K were filed
during the quarter ended June 30, 1995.
24
SIGNATURES
Pursuant to the requirements of Section 13 of 15(d) of the
Securities Exchange Act of 1934, the Registrant has duly caused
this report to be signed on its behalf by the undersigned
thereunto duly authorized.
Date: August 14, 1995
WESTERN ENERGY RESOURCES, INC.
(Registrant)
By: /s/ Leslie T. Hamasaki
-----------------------------
Leslie T. Hamasaki,
Chairman of the Board and
Chief Executive Officer
By: /s/ Richard E. Carncross
-----------------------------
Richard E. Carncross,
Treasurer and
Chief Financial Officer