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: September 30, 1995.
Commission File No. 0-14131
OMNIPower, 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
Western Energy Resources, Inc.
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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 $.15 per share, outstanding as of September 30, 1995:
5,863,295 shares.
Transitional Small Business Disclosure Format (check one):
YES [ ] NO [X]
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2
OMNIPower, Inc.
INDEX
Page
Number
Part I FINANCIAL INFORMATION................................3
Item 1. Financial Statements:
Consolidated Balance Sheets at
September 30, 1995 and December 31, 1994...........3
Consolidated Statements of Operations
for the Nine Months and Three Months ended
September 30, 1995 and September 30, 1994..........5
Consolidated Statement of Changes in
Stockholders' Equity (Deficit)for the
Nine Months ended September 30, 1995...............6
Consolidated Statements of Cash Flows for the
Nine Months ended September 30, 1995...............7
Notes to Consolidated Financial Statements
at September 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
OMNIPower, Inc. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
September 30, December 31,
1995 1994
------------- ------------
ASSETS:
Current Assets:
Cash............................... $ 1,759 $ 1,651
Trade accounts receivable,
net of allowance for doubtful
accounts of $8,805 at 9/30/95
and 12/31/94...................... 176,023 211,254
Inventory........................... 48,707 69,534
Prepaid expenses.................... 43,479 11,789
Other............................... 40,285 3,407
---------------- --------
Total Current Assets............... 310,253 297,635
--------------- ----------
Property and Equipment at cost....... 68,723 65,400
Less accumulated depreciation........ (62,327) (56,370)
------------ ---------
Net Property and Equipment........... 6,396 9,030
-------------- -----------
Producing Oil and Gas Properties,
accounted for under the successful
efforts method, net................ 1,314,195 1,397,936
Deferred offering costs.............. 80,000 -
Other assets......................... 7,822 8,120
-------------- ----------
1,402,017 1,406,056
------------- -----------
Total Assets......................... $ 1,718,666 $ 1,712,721
============ =============
See accompanying Notes to Consolidated Financial Statements.
4
OMNIPower, Inc. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (continued)
September 30, December 31,
1995 1994
------------ -----------
LIABILITIES AND
STOCKHOLDERS' EQUITY (DEFICIT):
Current Liabilities:
Accounts payable................... $ 494,955 $ 255,479
Accounts payable, related party.... 70,207 28,815
Accrued liabilities................ 209,162 36,220
Note payable....................... 77,000 5,000
Debt due supplier.................. 94,420 94,420
Current portion of long-term debt,
related parties.................. 1,436,441 24,025
------------- ------------
Total Current Liabilities............ 2,382,185 443,959
------------- -------------
Long-Term Debt....................... -- 350,000
Long-Term Debt, related parties...... 478,674 1,498,076
------------- -------------
Total Long-Term Debt................. 478,674 1,848,076
------------- -------------
Total Current Liabilities
and Long-Term Debt................. 2,860,859 2,292,035
------------- -------------
Commitments and Contingencies
(Notes C, H and I)
Stockholders' Equity (Deficit):
Common stock, $.15 par value,
20,000,000 shares authorized,
5,867,604 shares issued at
9/30/95; 5,834,270 at 12/31/94
5,829,961 shares outstanding
at 9/30/95; 5,834,270 shares
outstanding at 9/31/94 880,139 875,139
Additional paid-in capital......... 5,728,013 5,713,014
Treasury stock, at cost,
4,309 shares.................. (33,090) (33,090)
Accumulated (deficit)............. (7,717,256) (7,134,377)
-------------- ------------
Total Stockholders' Equity (Deficit). (1,142,193) (579,314)
-------------- ------------
Total Liabilities and
Stockholders' Equity (Deficit).... $1,718,666 $1,712,721
============ ============
See accompanying Notes to Consolidated Financial Statements.
5
OMNIPower, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Nine Months ended Three Months ended
September 30, September 30,
------------------- --------------------
1995 1994 1995 1994
--------- --------- --------- ---------
REVENUES:
Oil and gas......... $ 264,367 $ 66,382 $ 74,827 $ 16,635
Solar energy devices 203,504 - 73,819 -
Other............... 15,905 - 120 -
----------- -------- ---------- ------
Total Revenues........ 483,776 66,382 148,766 16,635
--------- ------- -------- ------
COSTS AND EXPENSES:
Oil and gas
production costs.. 223,904 33,627 122,310 7,227
Cost of sales....... 132,082 - 45,272 -
Sales and marketing. 54,725 - 19,884 -
General and
administrative.... 431,991 37,609 123,900 12,760
Depreciation,
depletion and
amortization...... 74,028 24,476 24,016 7,185
Interest expense.... 111,500 2,720 38,594 1,003
Other:
Financial expense.. 34,289 - 26,691 -
Loss on sale of
interest in wells 4,134 - - -
---------- --------- ---------- ---------
Total costs & Expenses 1,066,653 98,432 400,667 28,175
---------- --------- ---------- ---------
NET (LOSS)............ $(582,877) $(32,050) $(251,901) $(11,540)
========== ========= ========== =========
NET (LOSS)
PER COMMON SHARE.... $(.10) $(.06) $(.04) $(.02)
========== ========= ========== =========
Weighted Average
Number of Common
Shares Outstanding. 5,841,073 555,996 5,863,295 555,996
========== ========= ========== =========
See accompanying Notes to Consolidated Financial Statements.
6
OMNIPOWER, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES
IN STOCKHOLDERS' EQUITY (DEFICIT)
FOR THE NINE MONTHS ENDED SEPTEBER 30, 1995
Common Stock Additional
------------- Paid-in Treasury Accumulated
Shares Amount Capital Stock (Deficit) Total
------------------- -------- -------- ----------- -----
Balance at
12/31/94....5,829,961 $875,139 $5,713,013 $(33,090) $(7,134,379) ($579,317)
Net loss 9-
Months end
9/30/95 33,334 5,000 15,000 -- (582,877) (562,877)
-------- --------- -------- --------- -------- ---------
Balance at
9/30/95.....5,863,395 $880,139 $5,728,013 $(33,090) $(7,717,256) (1,142,194)
========== ======== ========== ========= =========== ===========
See accompanying Notes to Consolidated Financial Statements.
7
OMNIPOWER, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months ended September 30,
1995 1994
------------ ----------
CASH FLOWS TO (FROM) OPERATING ACTIVITIES:
Net (loss)................................ $ (582,877) $ (32,050)
Adjustment to reconcile net (loss) to net
cash provided by operating activities:
Depreciation, depletion
and amortization.................... 74,028 24,476
Loss on sale of interest in wells..... 4,134 -
Changes in:
Trade accounts receivable........... 34,660 15,645
Inventory........................... 20,827 -
Prepaid expenses.................... (31,690) -
Other current assets. ............ (36,281) -
Accounts payable.................... 239,474 (25,294)
Accounts payable, related parties... 6,393 -
Accrued liabilities................. 172,941 -
Net Cash Provided (Used) by............... ---------- --------
Operating Activities................. ( 98,391) (19,067)
CASH FLOWS TO (FROM) INVESTING ACTIVITIES: --------- --------
(Additions) to property and equipment..... (3,114) -
Sale of interests in wells................ 11,600 -
------------ ----------
Net Cash Provided (Used) by Invest. Act... 8,486 -0-
------------ ------
CASH FLOWS TO (FROM) FINANCING ACTIVITIES:
Issuance of common stock for service.... 20,000 -
Notes payable........................... 72,000 -
Notes payable, related parties.......... 78,013 -
Deferred offering costs................. (80,000) -
------------ ----------
Net Cash Provided by Fin. Activities...... 90,013 -0-
-------------- -----------
Net increase (decrease) in cash........... 108 (19,067)
CASH, beginning of period................. 1,651 3,311
--------------- ---------
CASH, end of period.................... $ 1,759 $ 2,222
============ ============
Supplemental disclosures
of cash flow information:
Cash paid during the period for:
Interest.............................. $ 10,377 2,720
Income taxes.......................... $ -
See accompanying Notes to Consolidated Financial Statements.
8
OMNIPOWER, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1995
A. THE COMPANY. OMNIPower, Inc. (the "Company") was formerly
known as Western Energy Resources, Inc. At a recent meeting of
shareholders held on August 18, 1995, shareholders approved the change
of the Company's name to OMNIPower, Inc. It was the Company's first
annual shareholder's meeting since its reorganization in October of
1994.
OMNIPower, Inc. 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 wells,
primarily in the Southeast and Southwest regions of 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 Louisiana, Texas 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 well in Texas and Kansas which generated less than
$4,000 in revenue 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 inter-
company accounts and transactions have been eliminated in consolidation.
B. CHANGE IN CAPITALIZATION OF OMNIPower, Inc. At the recent
Annual Meeting of Shareholders, held in the offices of the Company at
2:00 P.M. local California time on August 18, 1995, the shareholders
approved three amendments to the Company's certificate of incorporation
by voting in favor of Proposals 3, 4, and 5 of the Proxy Statement . In
Proposal 3, shareholders voted in favor of effecting a 1 for 15 stock
split with respect to its issued and outstanding Common Stock. This
reduced the number of outstanding shares of the Company from 87,449,410
to 5,829,961. In Proposal 4, shareholders approved an increase in the
number of authorized shares from 10 million to 20 million at a par value
of $0.15 per share. In Proposal 5 the shareholders approved an
amendment to the Company's certificate of incorporation for the purpose
of creating a new class of authorized capital stock to be designated
Preferred Stock in an amount of 3 million shares.
9
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
SEPTEMBER 30, 1995 (unaudited)
C. UNAUDITED INTERIM STATEMENTS. The accompanying unaudited
Consolidated Financial Statements at September 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 September 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.
D. 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
September 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
$29,000 before production costs for the Nine Months ended September 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
10
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
SEPTEMBER 30, 1995 (unaudited)
at September 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 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 December
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.
At September 30, 1995, the Company' current assets were $310,000
and its current liabilities were $2,333,000, resulting in a negative
working capital of $2,023,000. Current liabilities at September 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 H below. Excluding the obligations to Suffolk and
Miramar, the Company would have had a pro forma negative working capital
position at September 30, 1995 of $673,000.
Management believes that the Company's existing revenue base 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 H 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.
See the Consolidated Financial Statements at September 30, 1995
and Management's Discussion and Analysis of Financial Condition and
11
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
SEPTEMBER 30, 1995 (unaudited)
Results of Operations included elsewhere in this Report.
E. INTERIM PERIODS NOT NECESSARILY REPRESENTATIVE OF
FULL YEAR. The unaudited consolidated statements of operations
for the Three Months and Nine Months ended September 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.
F. 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 September 30, 1995 are fully collectible.
G. 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)
SEPTEMBER 30, 1995 (unaudited)
H. LONG-TERM DEBT AND CURRENT PORTION. The Company's
long-term debt and current portion thereof at September 30, 1995
included the following:
September 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.............................. 393,953
Notes payable to stockholders, with interest
at 8.5%, principal and interest due in
monthly installments of $2,465 to
November 1, 1997; uncollateralized........... 58,343
Less: current portion......................... (25,601)
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...... $ 478,674
13
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
SEPTEMBER 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 137,709 new 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 September 30,
1995. The Company does anticipate as a result of the Shinn 1-D workover
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 463,621 new 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 canceled, the oil and
14
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
SEPTEMBER 30, 1995 (unaudited)
gas interests will be reassigned to Suffolk, and Suffolk will be
entitled to retain the 463,621 new shares of the Company's common stock.
I. 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 did not meet these minimum purchase
requirements as of September 30, 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 September 30, 1995, SUN owed, in addition to its trade accounts
payable, $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 H 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. 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.
Reference is also made to Note 13 of the Notes to Consolidated
15
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
SEPTEMBER 30, 1995 (unaudited)
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.
J. 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.
In June of 1995, the Company attempted to re-enter the Shinn #1
well in St. Martin Parish, Louisiana. The well was "kicked-off" and
began flowing at the rate of approximately 40 barrels of oil per hour at
+/- 2,000 pounds of flowing, tubing pressure. After two days of
operation a surface leak was noticed and was initially controllable.
However, after several days it became evident that in order to repair
the leak the well would have to be killed. Prior to the well being shut-
in, approximately 100 barrels of oil had seeped into the bayou and booms
were put in place to stop the spread of oil and vacuum equipment was
brought to the site to clean all oil from the water surface. The well
was shut-in and the site cleaned to the satisfaction of local and state
authorities.
The well control and clean-up effort caused the Company to
experience an extraordinary operating expense during the Third Quarter
of approximately $78,212 which adversely impacted the Company's
operating results for the quarter.
16
OMNIPOWER, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
INTRODUCTION
The following discussion and analysis should be read inconjunction
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 D of
the Notes to Consolidated Financial Statements at September 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
September 30, 1995, the Company has an accumulated deficit from
operations of $7,717,000, 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 evacuated 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
17
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.
The Company was only capable of funding the re-working of a few
wells during the second quarter due, in large part, to the extraordinary
cost incurred in attempting to place the Shinn #1 well in St. Martin
Parish, LA back into production. Those costs combined with the
inability to acquire additional working capital during the period
resulted in the delay in bringing additional wells into production. For
additional information as to the status of re-working wells, reference
is made to Note D of the Notes to Consolidated Financial Statements at
September 30, 1995 elsewhere herein.
The financing commitment of $350,000, referred to in the Company's
Form 10QSB for the second quarter of 1995 was not entered into by the
Company due to the fact that management believed the cost of the
financing was unacceptable in lieu of other possible financing methods
that might be available. Since the rejection of that financing, the
Company has sought new financing for the re-working of +/- 14 wells and
combined this financing requirement with a new financing arrangement
that includes the purchase of producing oil and gas properties owned by
Robertson Oil & Gas in Tickfaw, Louisiana. The new financing, if
successful, will provide the Company with approximately $7.30 million to
complete the purchase, re-work the shut-in wells and reduce current
outstanding debt. Several institutional lenders are currently reviewing
the loan package and the accompanying oil and gas reserves reports and a
decision on the viability of the loan should be known on or before
December 1, 1995.
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 D and I of the Notes to Consolidated
Financial Statements at September 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 Nine
Months ended September 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.
18
The Company's long-range plan of operation is to expand its
activities to develop a diversified energy business. To this end, SUN
Utility Network, Inc. is preparing a Pre-Incorporation Agreement to
incorporate a new leasing company in Hawaii with two individuals
investors. The investors will own 20% of the new company and OMNIPower,
Inc. will own 80% of the company. The new company will be called
OMNIPower Energy Services, Inc. and will lease solar arrays consisting
of the solar evacuated tube manufactured by Nippon Electric Glass to
furnish home owners with home hot water heating systems thereby saving
the average home owner as high as 80% of their monthly water heating
costs.
A separate Pre-Incorporation and Consulting Agreement is being
negotiated with Contino + Partners, a White Plains, New York lease
consulting firm to cover its incorporation of a leasing company to be
headquartered in Florida to lease solar arrays for solar energy systems
in Florida, Georgia and Alabama. Contino + Partners will also be
engaged by the Company as consultants to advise the Company on all
aspects of equipment leasing. The new company to service the above
southeastern states will be called Southeast Energy Services, Inc.
OMNIPower, Inc. will initially own 80% of the new company and Contino +
Partners will own 20% and will operate the company.
Management believes the concept of leasing will make energy
savings offered by arrays of solar evacuated tubes more attractive to
home owners and owners of commercial enterprises by eliminating high
initial capital costs. If these companies are successful OMNIPower will
most likely establish similar companies in more locations throughout the
country as well as at selected international locations.
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
NINE MONTHS ENDED SEPTEMBER 30, 1995 COMPARED TO THE NINE MONTHS
ENDED SEPTEMBER 30, 1994; AND THREE MONTHS ENDED SEPTEMBER 30, 1995
("1995 Third Quarter") COMPARED TO THE IMMEDIATELY PRIOR QUARTER
ENDED JUNE 30, 1995 ("1995 SECOND Quarter")
19
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 for 9-months do not include results of operations of
SUN and Superior insofar as that period was prior to their acquisition
by the Company.
Consolidated revenues for the 1995 9-months of $484,000 increased
by $417,000 compared to $66,000 in the prior year's 1994 9-months.
Increases in revenues for the 1995 9-months compared to the 1994 9-
months are attributable to the operations of SUN and Superior acquired
on October 1, 1994.
The Company's consolidated revenues for the 1995 Third Quarter
were $149,000, consisting of approximately $74,000 from revenues of SUN
and $75,000 from oil and gas operations. Consolidated revenues
increased by $20,000 compared to consolidated revenues of $129,000 for
the immediately preceding 1995 Second Quarter which included $40,000 in
revenues of SUN and $88,000 in oil and gas revenues.
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 first half of 1996 in solar energy products compared to
the 1995 Second Half.
Oil and gas revenues for the 1995 Third Quarter decreased
by $13,000 to $75,000, compared to 1995 Second Quarter oil and gas
revenues of $88,000. The Company plans to re-work additional shut-in
oil and gas wells starting in December 1995. See Note D of the Notes to
Consolidated Financial Statements at September 30, 1995 for additional
information concerning the re-work of shut-in wells.
The Company's consolidated cost of revenues in the 1995 9-months
was $356,000, or 74% of consolidated net sales, of which $132,000 in
cost of goods sold was attributable to SUN and $224,000 was attributable
to oil and gas production costs, including remedial costs from an oil
spill of $78,000 previously noted.
SUN's gross profit margin of $29,000, or approximately 39%
of net sales, for the 1995 Third Quarter increased from $18,000,
or 46% of revenues, in the 1995 Second Quarter. The dollar increase in
SUN's gross profit margin and decrease in gross profit percentage for
the 1995 Third Quarter was due to sales returning to a more normal
pattern as compared to the interruptions of the Second Quarter.
Oil and gas production costs of $122,000 for the 1995 Third
20
Quarter tripled compared to $44,000 in production costs for the
immediately preceding 1995 Second Quarter. The Company suffered a gross
profit loss from oil and gas operations (revenues less costs of
production) of ($47,000) for the Third Quarter 1995. Production costs
for the Quarter included $78,000 of cost to kill and clean-up the Shinn
#1-D well in St. Martin Parish, Louisiana resulting from an oil spill.
Without these extraordinary costs production costs for the Quarter would
have been $44,000 and gross would have been $31,000 as compared to
$45,000 in the Second Quarter.
Consolidated selling, general and administrative expenses
for the 1995 9-Months total $487,000, compared to $38,000 in the 1994 9-
Months before the acquisitions of SUN and Superior. Selling, general
and administrative costs of $144,000 for the 1995 Third Quarter
decreased by approximately ($49,000) compared to $193,000 in the 1995
Second Quarter, primarily as a result of increased legal and accounting
professional fees recorded in the Second Quarter incurred to update the
Company's SEC reporting to a current status.
Depreciation, depletion and amortization in the 1995 9-months was
$74,000 compared to $24,000 in the 1994 9-Months. This increase was
attributable to the oil and gas interests of Superior acquired on
October 1, 1994. Depreciation, depletion and amortization remained
constant at $24,000 in the 1995 Third Quarter compared the 1995 Second
Quarter.
During the 1995 9-Months, the Company incurred interest expense of
$111,000, of which $39,000 was incurred in the 1995 Third 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 September 30, 1995, the Company's cash accounts were $2,000, and
the Company had current assets of $310,000 and current liabilities of
$2,333,000, resulting in a negative working capital
21
of ($2,023,000). Current liabilities at September 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 September 30, 1995
of ($673,000).
During the Nine Months ended September 30, 1995, the Company's net
loss from operations of ($583,000) and approximately $80,000 in deferred
offering costs for anticipated new financing were financed primarily by
increases in accounts and notes payable and accrued liabilities
aggregating approximately $412,000, additional borrowings of
approximately $113,000 (including increased borrowings of approximately
$41,000 from related parties) and approximately $74,000 in depreciation,
depletion and amortization as well as $56,000 from reduction of trade
receivables and inventories.
The management of the Company continues to work on securing
additional financing. Such financing will be utilized to re-work shut-
in oil wells. 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 $66,000 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 $54,000 of average monthly revenues during
the Nine Months ended September 30, 1995 was approximately $14,000 per
month, or approximately 26% of revenues.
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 additional financing to be used to increase revenues from
re-work of oil and gas wells will
22
enable the Company to satisfy its working capital requirements
and sustain its operations for the interim.
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 $155,000 in oil and gas revenues during the Nine
Months ended September 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 next six months. 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.
Until additional financing is obtained, the Company has no
material obligations or plans for additional capital expenditures
during the remainder of 1995.
The Company will be required to pay $100,000 by April 25,
1996 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. It is not presently anticipated
that the Company can finance this transaction from internal
cash flow, and the Company's interest in this recently
negotiated oil and gas prospect will be dependent upon obtaining
adequate additional financing or negotiating suitable farm-out
arrangements, neither of which can be predicted at the present
time.
At December 31, 1994, the Company had approximately $217,000 of
federal net operating loss carryforwards which expires from 2001 to
2009. The pre-organization federal net operating loss carry-forward is
subject to certain limitations caused by the greater than 50% change in
ownership of the Company. The carry-forward to 1994 is limited to
approximately $5,300 each year up to approximately $80,000 due to these
limitations.
23
PART II -- OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
Exhibit
No. Description
- ------ ------------
27 Financial Data Schedule at September 30, 1995
(b) Reports on Form 8-K. No reports on Form 8-K were filed
during the quarter ended September 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: November 14, 1995
OMNIPOWER, 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