-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, RtoNghh6e3Hyh96FGB8d1VNSKl0F+ASVKa4C1M7MHOlb11VJnG8ZXYowfgg8lwCf oy3XxTJtvHief7qeznBoeg== 0000949459-97-000064.txt : 19970122 0000949459-97-000064.hdr.sgml : 19970122 ACCESSION NUMBER: 0000949459-97-000064 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19961130 FILED AS OF DATE: 19970121 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: NEVADA ENERGY COMPANY INC CENTRAL INDEX KEY: 0000712803 STANDARD INDUSTRIAL CLASSIFICATION: STEAM & AIR CONDITIONING SUPPLY [4961] IRS NUMBER: 840897771 STATE OF INCORPORATION: DE FISCAL YEAR END: 0228 FILING VALUES: FORM TYPE: 10QSB SEC ACT: 1934 Act SEC FILE NUMBER: 000-14873 FILM NUMBER: 97508434 BUSINESS ADDRESS: STREET 1: 1187 COAST VILLAGE ROAD #1-381 CITY: SANTA BARBARA STATE: CA ZIP: 93108 BUSINESS PHONE: 7027867979 MAIL ADDRESS: ZIP: ***** 10QSB 1 POWERTEL USA, INC. FORM 10-QSB SECURITIES AND EXCHANGE COMMISSION Washington, D. C. 20549 FORM 10-QSB (Mark One) [X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended November 30, 1996 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ........ to ............. Commission file number: 0-14873 POWERTEL USA, INC. - -------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) Delaware 84-0897771 - ---------------------------------------------- ------------------- (State or other jurisdiction of incorporation (I.R.S. Employer or organization) Identification No.) 1187 Coast Village Road #1-381, Santa Barbara, CA 93108 - -------------------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) (805) 884-8350 - -------------------------------------------------------------------------------- (Registrant's telephone number, including area code) 510 Castillo St., Santa Barbara, CA 93101 - -------------------------------------------------------------------------------- (Former name, former address and former fiscal year, if changed since last report) Check whether the issuer (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- ---- APPLICABLE ONLY TO CORPORATE ISSUERS: There were 15,808,710 shares of the registrant's Class A Common Stock, $.001 par value, outstanding as of January 20, 1997. POWERTEL USA, INC. INDEX Part I. Financial Information Page Number - ----------------------------- ----------- Item 1. Financial Statements Consolidated Balance Sheets - November 30, 1996 and February 28, 1996 3 - 4 Consolidated Statements of Operations - for the three months ended November 30, 1996 the nine months ended November 30, 1996 and for the three months ended November 30, 1995 and the nine months ended November 30, 1995 5 Consolidated Statements of Shareholders' Equity - for the year ended February 28, 1995 and the nine months ended November 30, 1996 6 Consolidated Statements of Cash Flows - for the nine months ended November 30, 1996 and the nine months ended November 30, 1995 7 Notes to Consolidated Financial Statements 8 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 20 Part II. Other Information - -------------------------- Item 1. Legal Proceedings. 28 Item 4. Submission of Matters to a Vote of Security Holders. 28 Item 5. Other Information. 29 Item 6. Exhibits and Reports on Form 8-K. 38 2 POWERTEL USA, INC. CONSOLIDATED BALANCE SHEETS AT NOVEMBER 30, 1996 and FEBRUARY 29, 1996
A S S E T S - - - - - - NOV. 30, 1996 FEBRUARY 29 (Unaudited) 1996 ----------- ----------- CURRENT ASSETS: Cash $ 136,735 $ 132,243 Receivables 533,768 137,274 Inventory 48,032 35,375 Deposits and prepaid expenses 19,088 119,375 ----------- ----------- Total Current Assets 737,622 424,267 ----------- ----------- PROPERTY AND EQUIPMENT, at cost (Note 1): Furniture, equipment and vehicles 542,305 229,580 Building 253,156 253,156 Power generation equipment 1,051,792 1,087,607 Idle power generation equipment (Net of obsolescence of $2,532,472) 5,226,063 5,226,063 Land 70,000 70,000 ----------- ----------- 7,143,317 6,866,406 Less - Accumulated depreciation and amortization (367,854) (336,277) ----------- ----------- Net Property and Equipment 6,775,463 6,530,129 ----------- ----------- OTHER ASSETS (Note 2): Investments in partnerships 2,975 3,227 Investments in subsidiaries 26,601 24,546 Power Purchase Agreements, net of Amortization 46,404 48,288 Organization Expense, net of amortization 928 1,102 ----------- ----------- 76,908 77,163 ----------- ----------- TOTAL ASSETS $ 7,589,993 $ 7,031,559 =========== ===========
(The accompanying notes are an integral part of these statements.) 3 POWERTEL USA, INC. CONSOLIDATED BALANCE SHEETS AT NOVEMBER 30, 1996 and FEBRUARY 29, 1996 L I A B I L I T I E S A N D S H A R E H O L D E R S' E Q U I T Y - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -
NOV. 30, 1996 FEBRUARY 29 (Unaudited) 1996 ------------ ------------ CURRENT LIABILITIES: Accounts payable $ 805,784 $ 187,455 Short-term borrowings (Note 3) 48,776 42,041 Payable to related party 37,965 37,965 Accrued payroll 66,723 60,294 Other liabilities 79,657 65,047 Liabilities subject to compromise (Note 1) 26,891 43,207 ------------ ------------ Total Current Liabilities 1,065,795 436,009 ------------ ------------ NON-CURRENT LIABILITIES Mortgage Payable (Note 3) 242,969 15,688 ------------ ------------ Total Non-Current Liabilities 242,969 15,688 ------------ ------------ COMMITMENTS AND CONTINGENT LIABILITIES (Note 4) -- -- ------------ ------------ Total Liabilities 1,308,764 451,697 ------------ ------------ MINORITY INTEREST IN SUBSIDIARY (Note 2) 632,720 698,430 ------------ ------------ SHAREHOLDERS' EQUITY (Notes 1, 4, 5, 6 and 7): Preferred stock, $.001 Par Value, Authorized 2,000,000 shares; Issued and outstanding - Series A - 1,198,281 shares at November 30, 1996, none at February 29, 1996 1,198 -- Series B - 5 shares at November 30, 1996, none at February 29, 1996 -- -- Class A Common Stock, $.001 par value, Authorized 25,000,000 shares; Issued and outstanding 15,808,710 shares at November 30, 1996 and 8,808,485 shares at February 29, 1996 15,809 8,808 Class B Common Stock, $.001 Par Value, Authorized 25,000,000 shares; Issued and outstanding 4,437,473 shares at August 31, 1996 and 4,437,473 shares at February 29, 1996 4,437 4,437 Additional paid-in capital 17,403,617 11,528,754 Series A - note receivable (2,995,608) -- Accumulated deficit (8,771,844) (5,651,466) Treasury stock - Class A, 16,785 shares at November 30, 1996 and 16,785 shares at February 29, 1996 (9,101) (9,101) ------------ ------------ Total Shareholders' Equity 5,648,508 5,881,432 ------------ ------------ TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 7,589,993 $ 7,031,559 ============ ============
(The accompanying notes are an integral part of these statements.) 4 POWERTEL USA, INC. CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS NINE MONTHS THREE MONTHS NINE MONTHS ENDED ENDED ENDED ENDED NOVEMBER 30 NOVEMBER 30 NOVEMBER 30 NOVEMBER 30 1996 1996 1995 1995 ----------- ----------- ----------- ----------- REVENUES: Energy Sales $ 16,424 $ 217,654 $ 105,666 $ 649,899 Printing and Business Supply Sales 264,867 918,648 250,078 753,218 ----------- ----------- ----------- ----------- Total Revenues 281,291 1,136,302 355,744 1,403,117 ----------- ----------- ----------- ----------- COSTS AND EXPENSES: Cost of Sales 155,067 624,273 170,879 523,599 Cost of Operations 77,600 229,633 166,128 502,432 Depreciation and Amortization (Note 1) 32,271 79,854 15,330 49,363 Provision for obsolescence (Note 1) 0 0 94,810 284,429 Professional Fees 527,922 929,694 95,688 327,042 General and Administrative 82,330 680,812 153,419 468,829 ----------- ----------- ----------- ----------- Total Costs and Expenses 875,191 2,544,267 696,255 2,155,695 ----------- ----------- ----------- ----------- OTHER INCOME AND (EXPENSES): Interest Income 311 589 3,387 6,649 Other Income 753 3,987 80,298 9,080 Gain on sale of project interest (Note 2) 0 0 0 508,018 Loss from Partnership/Investment interests (Note 2) (1,768,395) (1,768,395) (18,418) (38,418) Interest Expense (7,942) (20,703) (3,972) (17,059) Minority Interests (Notes 1 and 2) 25,318 72,710 60,522 13,014 ----------- ----------- ----------- ----------- Total other income and (expense) (1,749,955) (1,711,813) 121,817 481,285 ----------- ----------- ----------- ----------- LOSS BEFORE TAXES (2,343,855) (3,119,778) (218,694) (271,293) PROVISION FOR INCOME TAXES (Note 8) 200 600 200 (13,467) ----------- ----------- ----------- ----------- NET INCOME (LOSS) $(2,344,055) $(3,120,378) $ (218,894) $ (257,826) =========== =========== =========== =========== NET INCOME (LOSS) PER SHARE (Notes 1 and 6) $ (0.17) $ (0.28) $ (0.02) $ (0.03) =========== =========== =========== =========== (The accompanying notes are an integral part of these statements.)
5 NEVADA ENERGY COMPANY, INC. CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY FOR THE YEAR ENDED FEBRUARY 29, 1996 AND NINE MONTHS ENDED NOVEMBER 30, 1996
CLASS A COMMON CLASS B COMMON PREFERRED STOCK ----------------------------------- ----------------- --------------------------------- SERIES A --------------------------------- NUMBER NUMBER NUMBER OF OF OF NOTE SHARES AMOUNT SUBSCRIBED SHARES AMOUNT SHARES AMOUNT RECEIVABLE ----------- --------- ----------- ----------- ------ --------- -------- ------------- BALANCES - FEBRUARY 28, 1995, 7,509,481 $ 7,509 $ 250,000 4,024,918 $4,025 - $ - $ - Shares Issued for Cash (Note 6) 333,333 333 (250,000) - - - - - Shares Issued for Services (Note 6) 145,842 146 - - - - - - Stock dividends at market value (Note 6) 819,829 820 - 412,555 412 - - - Transfer of surplus for stock dividend Net (Loss) for the Year Ended February 28, 1995 ----------- --------- ----------- ----------- ------ --------- -------- ------------- BALANCES - FEBRUARY 29, 1996 8,808,485 8,808 - 4,437,473 4,437 - - - Shares issued for cash (Note 6) 152,381 153 - - - - - Shares issued for assets (Note 6) 2,000,000 2,000 Shares issued/retired in conversion 4,847,844 4,848 (762,464) (762) Shares issued for a note (Note 6) - - - 1,960,745 1,961 (4,899,988) Expenses related to issuance Cash received on note 1,904,380 Net (Loss) for the nine months Ended November 30, 1996 ----------- --------- ----------- ----------- ------ --------- -------- ------------- BALANCES, November 30, 1996 15,808,710 $ 15,809 $ - 4,437,473 $4,437 1,198,281 $ 1,198 $(2,995,608) =========== ========= =========== =========== ====== ========= ======== ============= PREFERRED STOCK ------------------- SERIES B ------------------- NUMBER OF PAID-IN ACCUMULATED TREASURY SHAREHOLDERS' SHARES AMOUNT CAPITAL DEFICIT STOCK EQUITY ------- -------- ----------- --------------- ---------- ------------ BALANCES - FEBRUARY 28, 1995, - $ - $ 11,214,439 $ (5,022,828) (8,853) $ 6,444,292 Shares Issued for Cash (Note 6) - - 247,331 - - (2,336) Shares Issued for Services (Note 6) - - 68,216 - - 68,362 Stock dividends at market value (Note 6) - - 802,321 (803,553) (248) (248) Transfer of surplus for stock dividend (803,553) 803,553 - - Net (Loss) for the Year Ended February 28, 1995 (628,638) - (628,638) ------- -------- ----------- --------------- ---------- ------------ BALANCES - FEBRUARY 29, 1996 - - 11,528,754 (5,651,466) (9,101) 5,881,432 Shares issued for cash (Note 6) 5 - 97,860 - - 98,013 Shares issued for assets (Note 6) 1,154,250 1,156,250 Shares issued/retired in conversion (745) 3,340 Shares issued for a note (Note 6) 4,898,027 - - - Expenses related to issuance (274,529) (274,529) Cash received on note 1,904,380 Net (Loss) for the nine months Ended November 30, 1996 (3,120,378) (3,120,378) ------- -------- ----------- --------------- ---------- ------------ BALANCES, November 30, 1996 5 $ - $17,403,617 $ (6,427,788) (9,101) $ 5,648,508 ====== ======== =========== =============== ========== ============ (The accompanying notes are an integral part of these statements.)
6 POWERTEL USA, INC. STATEMENTS OF CASH FLOWS FOR THE NINE MONTHS ENDED NOVEMBER 30, 1996 AND NOVEMBER 30, 1995
NOVEMBER NOVEMBER 1996 1995 ----------- ----------- CASH FLOWS FROM OPERATING ACTIVITIES: Net Income (Loss) $(3,120,378) $ (257,826) Adjustments to reconcile net income (loss) to net cash used in operating activities - Depreciation and Amortization (Note 1) 79,854 49,363 Provision for Obsolescence (Note 1) -- 284,429 Amortization of Goodwill (110,028) -- (Gain) Loss on Disposition of Assets 1,768,395 -- Minority Interest in Subsidiary Profit (Loss) (72,710) (13,014) Equity in Loss from Partnership Interests -- 38,418 Stock issued to Directors/Officers/Employee -- 68,362 Changes in assets and liabilities - -- Decrease (Increase) in Receivables (396,494) 60,155 Decrease (Increase) in Stock Subscription Receivable -- 150,000 Decrease (Increase) in Receivable from related party -- -- Decrease (Increase) in Inventories (12,657) 828 Decrease (Increase) in Deposits and Prepaids 100,287 62,388 Increase (Decrease) in Accounts Payable 618,329 (29,912) Increase (Decrease) in Payable to related party -- (34,029) Increase (Decrease) in Other Liabilities 21,039 (17) Increase (Decrease) in Liabilities subject to compromise (16,316) (37,108) ----------- ---------- Net cash used in operating activities (1,140,678) 342,037 ----------- ---------- CASH FLOWS FROM INVESTING ACTIVITIES: Acquistion of Property and Equipment (300,400) (50,955) Proceeds from Sale of Assets -- Non-refundable deposit on proposed sale of assets -- 25,000 Investment in Subsidiaries (765,538) -- (Advances) to and Repayments from Partnerships -- (45,626) ----------- ---------- Net cash provided by investing activities (1,065,938) (71,581) ----------- ---------- CASH FLOWS FROM FINANCING ACTIVITIES: Principal repayments on financing (46,384) (49,211) Net proceeds from cash sales of common and preferred stock 1,904,380 -- Borrowing 280,400 45,467 Minority interest 72,710 -- ----------- ---------- Net cash used in financing activities 2,211,106 (3,744) ----------- ---------- NET INCREASE (DECREASE) IN CASH 4,490 266,712 CASH AT BEGINNING OF PERIOD 132,245 37,885 ----------- ----------- CASH AT END OF PERIOD $ 136,735 $ 304,597 =========== =========== SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION (Note 11): Cash expenditures during the nine months for - Interest $ 16,793 22,720 Taxes, including taxes paid through payments on liabilities subject to compromise of $18,915 in 1996 and $13,386 in 1995 600 41,372 (The accompanying notes are an integral part of these statements.)
7 POWERTEL USA, INC.. Notes to Consolidated Financial Statements Note 1 - Organization and Summary of Significant Accounting Policies: Principles of Consolidation: ---------------------------- The accompanying consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries Combustion Energy Company, Inc. ("CEC"), a Nevada corporation and Yerington Acquisition Company, Inc. a Nevada corporation and its majority owned subsidiary San Jacinto Power Company, a Nevada corporation (See Note 2). On November 30, 1994, the Company's wholly owned subsidiary CEC completed a merger with Herth Printing and Business Supplies, Inc. ("HPBS" - see notes 2 and 5). This acquisition has been treated as a pooling of interests and the financial statements presented herein reflect the combined results of the pooled businesses. All significant intercompany accounts and transactions have been eliminated in consolidation. Organization and Operations: ---------------------------- POWERTEL USA, INC.. ("the Company") was organized on December 2, 1982, and incorporated under the laws of Delaware on December 20, 1982, under the name Munson Geothermal, Inc. Pursuant to an action of the Board of Directors, the Company's name was changed to NEVADA ENERGY COMPANY, INC. on December 3, 1990. The Company's filing with the secretary of state in Delaware was acknowledged as effect on January 2, 1997 for the name change to POWERTEL USA, INC. as approved by shareholders at the Company's annual meeting held on August 16, 1996. The Company is primarily engaged in the development, financing, construction and operation of geothermal, wind and biomass energy resources which are used primarily to generate electric power. The Company also operates a custom printing and catalogue based retail office supply business. The Company has endeavored to gain entry into the telecommunications industry without success to date. Power Generation Equipment: --------------------------- Power generation equipment is carried at cost and consists of 64 wind turbine generators operated in California by San Jacinto Power. Idle Power Generation Equipment: -------------------------------- Idle power generation equipment includes ten Ormat power plants capable of producing up to an estimated maximum 3,700 KW average output valued at $2,526,063 and the relocated Raft River 8 Power Plant valued at of $2,700,000 and estimated to be capable of up to 7,200 KW of output. Total net book value of these assets is $5,226,063. A recent appraisal (May 1996) of these assets determined the fair market value to be $5.7 million. Land and Buildings ------------------ Included in the assets of HPBS (see above) was a ten thousand eight hundred (10,800) square foot building containing office space, print shop and warehouse space with a historical cost of $253,156 and approximately 0.77 acres of fee land with a book value of $70,000. Depreciation and Amortization: ------------------------------ The Company provides for depreciation of buildings, furniture and field equipment utilizing straight-line and accelerated methods over the useful lives of three to twenty-one years beginning when assets are placed in service. Costs of power generation equipment represents 64 wind turbines together with related infrastructure, in use by the Company's majority owned subsidiary San Jacinto Power, which have been recorded at acquisition cost and are being depreciated over the remaining 21 year life of the related Power Purchase Agreement acquired in the same transaction. The HPBS vehicles, equipment and building are recorded at acquired book value and are being depreciated over their remaining useful lives. The Power Purchase Agreement was valued at $52,500, its estimated value when acquired, and it is being amortized on a straight line basis over the then remaining 21 years of contract life. Provisions for obsolescence: ---------------------------- Idle geothermal power generation equipment as at February 29, 1992 was adjusted to the lower of cost or appraisal value. Thereafter, through February 29, 1996, provisions for obsolescence were provided based on the remaining economic life, which was estimated in 1992 to be eighteen years. Based on a May 1996 appraisal, an additional $83,288 of obsolescence was provided on the Raft River power plant asset, reducing its net book value at February 29, 1996 to the fair market, appraised value of $2.7 million. Beginning with the fiscal year ended February 28, 1997, the Company is subject to the provisions of FAS 121 concerning the accounting for the impairment of long-lived assets. Based on the provisions of FAS 121, the Company has adopted an accounting policy in which it will review its long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The Company will continue to obtain annual independent appraisals to determine 9 current fair market value of its long-lived, currently idle, assets. In the interim there will be no provisions for obsolescence. The current combined carrying value ($5,226,063) of the idle equipment is less than the current combined fair market appraisal value. The Company will apply FAS 121 each quarter, as required. No adjustment has been made in the quarter ending November 30, 1996. Goodwill -------- The acquisition of Telecomm Technologies, Inc. resulted in approximately $1,700,000 in goodwill. This was written off in its entirety in the current quarter due to the failure of the business to develop as anticipated. Certain shareholders have filed suit in Delaware in an attempt to recover some or all of the consideration which was given in this transaction. Goodwill expense recorded in the prior quarter has been reversed in the quarter ended November 20, 1996. Net Income (Loss) per Common Share: ----------------------------------- The net income (loss) per common share is computed based upon the weighted average number of shares of Class A Common Stock outstanding during each period. Class A shares issued in conjunction with the merger of HPBS and CEC (See Notes 1 and 5) have been treated as issued at February 28, 1993. Weighted average shares of Class A Common Stock outstanding were 11,246,903 in the nine months ending November 30, 1996, 13,758,978 in the three months ended November 30, 1996, 9,990,866 in the nine months ending November 30, 1995 and 11,122,453 in the three months ended November 30, 1995. Shares issuable upon exercise of warrants or options are excluded from the computation since the effect of their inclusion would be antidilutive as the exercise price is in excess of the average market price during the applicable periods. Shares of Class B Common Stock are excluded from the computation since Class B shareholders do not participate in the earnings of the Company. Shares issued in the Smith acquisition, but held in escrow between the date issued, December 15, 1993 and the date of completion of the acquisition, June 24, 1994, were not included in the computation of loss per share during the period they were held in escrow. Business Segment Information ---------------------------- The Company currently classifies its business activities in two segments: (1) electric power production and development and (2) printing and business supply sales. Information concerning the Company's business segments in the quarters ending November 30, 1996 and 1995 are as follows (amounts in thousands): 10 ELECTRIC PRINTING POWER AND OFFICE ($000) PRODUCTION SUPPLIES CONSOLIDATED - ------ ---------- ---------- ------------ Quarter Ending November 30, 1996 - ----------------- Sales * $ 16 $ 265 $ 281 Operating Income (Loss) (626) 32 (594) (Loss) on disposition of assets 1,768 - 1,768 Identifiable assets ** 6,789 801 7,590 Depreciation/amortization 4 28 32 Provision for obsolescence - - - Capital expenditures 16 - 16 ($000) - ------ Nine months Ending November 30, 1996 - ----------------- Sales * $ 218 $ 918 $ 1,136 Operating Income (Loss) (1,480) 72 (1,408) Identifiable assets ** 6,789 801 7,590 Depreciation/amortization 42 38 80 Capital expenditures 16 323 323 ($000) - ------ Quarter Ending November 30, 1995 - ----------------- Sales * $ 106 $ 250 $ 356 Operating Income (Loss) (310) 15 (295) Identifiable assets ** 7,291 478 7,769 Depreciation/amortization 10 3 13 Provision for obsolescence 95 - 95 Capital expenditures 3 - 3 ($000) - ------ Nine months Ending November 30, 1995 - ----------------- Sales $ 650 $ 753 $ 1,403 Operating Income (Loss) (602) 19 (583) Identifiable assets ** 7,291 478 7,769 Depreciation/amortization 34 9 43 Provision for obsolescence 284 - 284 Capital expenditures 50 1 51 Intra-segment transactions, which are not material, have been eliminated. * Substantially all revenues from the electric power production were generated from sales to Southern California Edison Company (SCE) under a Power Purchase Agreement, which will expire in 2015. Pursuant to the agreement, SCE will purchase all electricity 11 generated by the Company's wind system at the price computed based on the forecast of annual as-available capacity and a standard rate approved by the Public Commission of the State of California. The Company's 1996 revenue from SCE of approximately $218,000 represented 19% of the total revenue of the Company in 1996. In 1995 the revenue from SCE of approximately $650,000 represented 46% of total revenue of the Company in 1995. ** Includes $5,110,503 of net idle power generation equipment in 1996 and $5,593,780 of net idle power generation equipment in 1995. Telecommunications results were removed for the current quarter and year to date as a result of termination of the acquisitions as referenced above. NOTE 2 - Investments in Partnerships and Consolidated Subsidiaries: Combustion Energy Company, Inc. ------------------------------- Combustion Energy Company, Inc., a Nevada corporation, ("CEC") was formed on February 12, 1993 for the purpose of being a general partner of Oreana Power Partners (see below). CEC's assets consist of its one percent (1%) partnership interest in Oreana Power Partners, currently valued at $925 based on its initial cash investment less accumulated losses, and its ownership of the assets of HPBS (See notes 1 and 5). Combustion Energy Company merger with Herth Printing ---------------------------------------------------- On November 30, 1994 the Board of Directors of the Company and the shareholders of Herth Printing and Business Supplies, Inc. approved the merger of NEC's subsidiary CEC with HPBS which resulted in HPBS becoming a wholly-owned subsidiary of NEC. Under the terms of the agreement, HPBS share holders received 641,784 shares if the Company's class A common stock in exchange for all of the outstanding shares of HPBS. HPBS was established in 1983 as a sole proprietorship in the printing and retail catalogue office supply business. The proprietors incorporated the business on November 1, 1994. The merger qualifies as a tax-free reorganization and was accounted for as a pooling of interests. Accordingly, the Company's financial statements have been restated to include the results of HPBS for all period presented. Separate and combined results of NEC and HPBS during the periods presented were as follows (in thousands): 12 Three months ended November 30, 1996 NEC HPBS Combined (Unaudited) -------------------------------------------------------------------- Net revenues $ 16.4 $ 264.9 $ 281.3 Net income (loss) $ (625.9) $ 32.0 $ (593.9) -------------------------------------------------------------------- Nine months ended November 30, 1996 NEC HPBS Combined (Unaudited) -------------------------------------------------------------------- Net revenues $ 217.7 $ 918.6 $ 1,136.3 Net income (loss) $(2,106.2) $ 72.3 $ (2,033.9) -------------------------------------------------------------------- Three months ended November 30, 1995 NEC HPBS Combined (Unaudited) -------------------------------------------------------------------- Net revenues $ 105.6 $ 250.1 $ 355.7 Extraordinary income - - $ - Net income (loss) $ (310.6) $ 15.4 $ (295.2) -------------------------------------------------------------------- Nine months ended November 30, 1995 NEC HPBS Combined (Unaudited) -------------------------------------------------------------------- Net revenues $ 649.9 $ 753.2 $ 1,403.1 Extraordinary income $ 585.5 - $ 585.5 Net income (loss) $ ( 16.4) $ 18.8 $ 2.4 -------------------------------------------------------------------- The combined financial results presented above include adjustments made to conform accounting policies of the two companies. There were no adjustments which impacted net income. Intercompany transactions between the two companies, which were not material, have been eliminated. There have been no significant costs of combing the operations of the two companies. The Company relocated its headquarters to the building owned by HPBS in the quarter ending November 30, 1996. The cost of relocating was nominal. The Company has subsequently relocated to separate offices. On August 16, 1996, the Company entered into an agreement to transfer the assets of HPBS to the then president of the Company. The transaction is pending subject to litigation filed by the Company and in a separate action by the former president. 13 San Jacinto Power Company ------------------------- San Jacinto Power Corporation, a Nevada Corporation, ("SJPC") was formed on December 15, 1993. Under the terms of an "Escrow Agreement" dated December 15, 1993, the Company contributed 222,267 shares of its Class A Common Stock, valued at $222,267, based on 50% of market price at the time of issue due to resale restrictions imposed pursuant to Rule 144, and total cash of $275,055 in exchange for its 50.01% ownership interest in SJPC. Also under the terms of the Escrow Agreement, on December 15, 1993, the New World Power Corporation ("New World") contributed 48,000 shares of its Common Stock, with market value of $500,000 at time of issue, to SJPC. On February 10, 1994, New World contributed cash of $149,970 to SJPC and delivered a balance of cash of $124,975 on March 8, 1994. New World's contribution of Common Stock and cash of $274,945 to SJPC are in exchange for its 49.99% ownership interest in SJPC. The shares of Class A Common Stock contributed to SJPC by the Company and the Common Stock of New World are collectively referred to herein as the "Shares". The number of shares to be issued by the Company and New World were established in an Asset Purchase Agreement dated July 1, 1993 with no adjustment required due to stock price variations to date of issue. The Escrow Agreement provides for the shares of the Company and New World to be held for a two year period from December 15, 1993, prior to distribution to the sellers. During the two year period, certain costs arising in connection with the purchase transaction could result in the number of shares finally transferred to the seller being reduced. Such costs include unassessed claims for property taxes, prior environmental infractions, prior BLM assessments, limited partner claims and other contingent costs to be assessed against the sellers. Distribution of the shares was completed by July 9, 1996 with no increase or adjustment to the number of shares. The Company and New World subsequently engaged in negotiations to acquire the operating assets of Smith Wind Energy Company ("Smith") and six affiliated limited partnerships operated by Smith which are known as Triad A, Triad B, Triad C, Triad D, Triad E, and Triad F Limited Partnerships (collectively "Triad"). Smith and Triad were operating a wind turbine energy park in North Palm Springs, California. Energy sales were pursuant to a long-term contract with Southern California Edison Company. A total of 77 wind turbines were available for operations, together with associated infrastructure, additional turbine sites, turbine towers, parts and service equipment and a long-term land lease with the BLM (collectively, the "Assets"). SJPC was formed for the purpose of acquiring, holding and operating the Assets to be acquired from Smith and Triad. The acquisition of the Smith/Triad assets by SJPC was completed and effective on June 24, 1994. The purchase price was equal to the agreed value of the shares plus assumed liabilities totalling approximately $293,957 for long-term secured debt and certain delinquent property taxes and totaled $1,038,029. 14 The total cost was allocated based on managements estimate of fair market value of assets acquired, except for prepaid BLM rent which was valued at cost, as follows: Field Equipment $ 21,177 Prepaid BLM Rent 46,892 Power Sales Contract 52,500 Power Generation Equipment 917,460 ------------ Total $ 1,038,029 ============ SJPC also entered into a non-competition agreement with the former owner/general partner of Smith which provided for payment of $15,000 month for two years and a non-competition period of two years to begin at the closing date of June 24, 1994. All payments under this agreement had been made as of July 9, 1996. The Company has reached agreement in principle to acquire the minority holders interest in SJPC, pending payment of the agreemed purchase price. Mt. Apo Corporation ------------------- Mount Apo Corporation, a Nevada corporation ("MAC") was formed on May 9, 1994. MAC is a joint venture of NEC and Geothermal Development Associates and was formed for the purpose of submitting a competitive bid on a 40 MWe geothermal project in the Philippines. The bid was unsuccessful. The Company's investment in MAC is carried at cost of $633. MAC is inactive at this time. Brady Geo Park Power Project, 1986, Ltd. ---------------------------------------- The Company's investment in Brady Geo Park Power Project, 1986, Ltd., including note and related interest receivable and advances for property taxes were written down to a combined book value substantially equal to the appraised value of the Ormat energy converter interests held by the partnership. The Company has classified this asset as Power Generation Equipment in the accompanying balance sheets. Nevada Energy Partners - 1 -------------------------- In February 1991, the Company received a 60% interest as a limited partner in Nevada Energy Partners 1, a Nevada limited partnership (NEP-1LP), which holds a 31.66% interest in the equity of Nevada Geothermal Power Partners ("NGPP"). NGPP is a Nevada limited partnership whose general partners are Hot Springs Power Company and NEP-1LP. The Company issued a total of 3,476,875 shares of Class B common shares for this interest. An additional 749,289 shares have been issued to NEP-1LP in conjunction with the Company's 5% stock dividends made in July and October 1994 and 15 January and April 1995. Class B common shares have full voting rights, but have no cash dividend participation. The Company's interest in NEP-1LP is valued at $3,080 based on the par value of the shares issued, less amounts recorded as treasury stock due to the Company's effective ownership of 60% of the Class B shares held by NEP-1LP, plus subsequent cash investments, less estimated partnership losses. The August 16, 1996 agreement referenced above, also purported to transfer all of the Company's right title and interest in NEP- 1LP to the former president and is subject of the same litigation now in process. Oreana Power Partners --------------------- Oreana Power Partner ("OPP") is a limited partnership which was formed in February 1993 for the purpose of developing and financing gas turbine electricity generating facilities to provide power to Sierra Pacific Power Company ("Sierra") pursuant to power sales contracts to be obtained. The Company is a limited partner and its interest is valued at $292 based on its initial cash investment, less expenses and returned capital. The general partners of OPP are Energy Development Associates ("EDA", a Nevada corporation and a wholly-owned subsidiary of Geothermal Development Associates) and CEC, a wholly-owned subsidiary of the Company. EDA is the Managing General Partner and CEC is the Financial General Partner. Geothermal Development Associates is a privately owned Nevada company, not related to the Company. There was no activity with respect to development in the quarter ending November 30, 1996. Yerington Acquisition Company, Inc.: - ------------------------------------ Yerington Acquisition Company, Inc., a Nevada corporation ("YAC"), was formed on December 8, 1994 for the purpose of acquiring the assets of Tad's Geothermal, a non-related owner/operator of a geothermal power generating facility located near Yerington, Nevada. At November 30, 1996, the proposed acquisition had been terminated. In December 1995, the Company transferred all of its right title and interest in 10 Ormat power generating units (classified as idle power generating equipment in the financial statements) to YAC. The equipment is currently subject to liens totaling approximately $415,000, including $34,000 in mechanics liens for storage charges. The balance is a result of suits filed by former officers in respect to unpaid consulting agreements. The Company has responded to, or is in the process of responding to these claims. 16 Central Communications Corporation: - ----------------------------------- Central Communications Corporation, a Nevada corporation ("CCC"), was formed for the purpose of acquiring interests in the telecommunications business. On May 21, 1996, the Company announced that it had signed a binding letter of intent to acquire, through CCC, all of the outstanding shares of Telecom Technologies, Inc. an Oregon corporation ("TTI"), and certain other related assets. The terms of the acquisition provide for the payment of $500,000 in cash and issuance of 2,000,000 Class A common shares. The Company advanced to CCC $492,000 in cash in the quarter ended August 31, 1996 in anticipation of the completion of the acquisition. The acquisition was completed on June 21, 1996, however, it was subsequently reversed. Certain shareholders have filed an action in Delaware in an attempt to recover some or all of the Company's investment. There is no assurance that such recovery will occur. NOTE 3 - Short-Term Borrowings: The following summarizes short-term borrowings at November 30, 1996: Mortgage note-current $ 23,221 Current portion of equipment note 25,555 -------- $ 48,776 ======== There is a mortgage in the amount of $28,130 secured by the land and building acquired by CEC in its merger with HPBS (See Note 1). The current portion is $23,221 and monthly installments are $2,718 with interest at 10% per annum. The Company's subsidiary, CEC purchased a high-speed printing press which is subject to a 8 year note payable at $4,218 per month and bears interest at 9.75% (adjustable in accord with changes in the prime lending rate). The financing was not guaranteed by the Company. NOTE 4 - Commitments and Contingencies The Company's wholly owned subsidiary CEC, entered into a two year employment agreement with the former owner commencing November 30, 1994 which provided for annual compensation of $35,468 plus commissions. The agreement has not been renew, however, the employee is still engaged on similar terms. The Company's wholly owned subsidiary SJPC leases its wind turbine generator sites under a long-term lease with the United States Bureau of Land Management ("BLM"). Pursuant to the agreement, SJPC has the right of usage of the land for windmill operations until March 2014 and for an approximate annual fee of $89,000. The annual payments on the land lease was $89,610 for the year ended February 29, 1996. Such expense is included in the cost of operations in the accompanying financial statements. 17 Pursuant to the lease agreement, the Company's estimated payments to the BLM as of November 30, 1996 are as follows: 1997 $ 22,250 1998 89,000 1999 89,000 2000 89,000 2001 89,000 Thereafter 1,157,000 ---------- Total $1,535,250 ========== The Company's wholly owned subsidiary, CCC, entered into a five year lease of office space in Santa Barbara, California on July 19, 1996. Except for the first two months, commencing on August 1, 1996, the monthly rental is $19,034. Pursuant to the lease agreement, the Company's estimated payments as of November 30, 1996 were as follows: 1997 $ 121,638 1998 228,410 1999 228,410 2000 228,410 2001 228,410 Thereafter 95,170 ---------- Total $1,130,448 ========== The Company has subsequently vacated the premesis as the planned expansion in telecommunications has been unsuccessful. The lease agreement is the subject of a suit by the former landlord. The Company hopes to settle the litigation for a lump sum or negotiate the sub-letting of the facility. NOTE 5 - Preferred Stock: On December 14, 1985, the stockholders of the Company authorized the creation of 2,000,000 shares of $1.00 par value preferred stock. The board of directors has the authority to issue the stock in series and to determine all terms and preferences for each individual series. At the annual meeting, the Company's shareholders approved an amendment of the Company's certificate of incorporation reducing the par value of the preferred stock to $.001 per share. On May 1, 1996, the Company entered into an agreement providing for the issuance of 1,960,745 Series A preferred shares at $2.50 per share to Golden Chance Limited ("Golden Chance"), an Isle of Man private company limited by shares. The terms of the Series A preferred shares provide that no dividends of any kind or nature shall be paid or declared. Series A preferred shares have a right to convert to the Company's Class A common shares. Liquidation preference rights of Series A preferred shares are 18 limited to the par value of $.001 per outstanding share. Voting rights for each Series A preferred share are equal to all classes of common stock. The Company accepted a note in the amount of $4,899,988 payable over a one year period as consideration for issuance of the Series A preferred shares. The present value of this note has been offset against paid-in equity in the accompanying financial statements. The Series A preferred shares are to be held in escrow until payment is received. Golden Chance retains the right to vote the escrowed shares. On May 1, 1996, the Company also entered into an agreement providing for the issuance of 5 Series B preferred shares at $2.50 per share to directors of the Company. Terms of the Series B preferred shares provide that no dividends of any kind or nature shall be paid or declared. Series B preferred shares have a right to convert to the Company's class A common shares. Liquidation preference rights of Series B preferred shares are limited to the par value of $.001 per outstanding share. Holders of Series B preferred shares have the right to appoint a temporary director in the event that Golden Chance defaults in the payment of the first $500,000 on its purchase of Series A preferred shares. Payments for a total of $1,960,745, net of related expenses (included is the $500,000 which extinguishes the Series B right described above) for the Series A preferred shares had been received as of November 30, 1996 and under the terms of the agreement 762,464 preferred shares had been converted to 4,847,844 Class A common shares. At November 30, 1996, there were 1,198,281 Series A and 5 Series B preferred shares issued and outstanding. NOTE 6 - Class A and Class B Common Stock: . In the year ended February 29, 1996, 333,333 shares of Class A common stock were issued for cash in the amount of $250,000 and 145,842 hares of Class A common stock were issued for services valued at $68,216, including 106,670 shares issued to directors in lieu of cash for annual fees and 39,172 shares issued to officers and an employee as bonuses. In the year ended February 29, 1996, stock dividends of 5% on Class A and Class B common stock were declared for shareholders of record as of April 20, 1995 and July 31, 1995. The aggregate shares issued were 819,829 Class A and 412,555 Class B. In the quarter ended May 31, 1996, 152,381 shares of Class A common stock were issued for cash in the amount of $98,000. Each share of Class B common stock is entitled to all of the rights and privileges pertaining to Class A common stock without any limitations, prohibitions, restrictions or qualifications except that each share of such Class B common stock shall not be entitled to receive any cash dividends declared and paid by the corporation and shall be entitled to share in the distribution of assets of the corporation upon liquidation or dissolution, either partial or final. 19 The Company had entered into an agreement for the issuance of 20,000,000 shares of Class B common shares in consideration of cash and preferred shares of the purchaser. The agreement had not been concluded as of November 30, 1996. NOTE 7 - Stock Option Plans: On December 29, 1993, the Company adopted the 1993 Directors' Stock Option Plan for the Company's directors. Under the terms of this stock option plan, each of the five directors of the Company was granted an option to purchase 25,000 shares of the Company's Class A Common Stock or a total of 125,000 shares at a price of $2 per share, equal to the market price of the stock at the date of grant. The option is exercisable until December 31, 2001, and no options have been exercised through November 30, 1996. On June 27, 1994, the Company adopted the 1994 Directors' Stock Option Plan for the Company's directors. Under the terms of this stock option plan, each of the five directors of the Company was granted an option to purchase 12,500 shares of the Company's Class A Common Stock or a total of 62,500 shares at a price of $1.625 per share, equal to the market price of the stock at the date of grant. The option is exercisable until May 31, 2002, and no options have been exercised through November 30, 1996. On January 14, 1995, the Company adopted an additional 1994 Directors' Stock Option Plan for the Company's directors. Under the terms of this stock option plan, each of the five directors of the Company was granted an option to purchase 17,500 shares of the Company's Class A Common Stock or a total of 87,500 shares at a price of $0.9375 per share, equal to the market price of the stock at the date of grant. The option is exercisable until December 31, 2002, and no options have been exercised through November 30, 1996. On December 31, 1995, the Company adopted an additional 1994 Directors' Stock Option Plan for the Company's directors. under the terms of this stock option plan, each of the five directors of the Company was granted an option to purchase 30,000 hares of the Company's Class A common stock or a total of 150,000 shares at a price of $0.3125 per share, equal to the market price of the stock at the date of grant. The option is exercisable until December 31, 2003, and no options have been exercised through November 30, 1996. On June 28, 1994, the Company's Board of Directors adopted an Employee and Consultant Stock Option Plan (the "Plan") and registered the shares available under the Plan on Form S-8 in accordance with the Securities Act of 1933 filed August 2, 1994, having Registration No. 33-82318 . The purpose of the Plan is to provide compensation for services rendered to the Company and to promote the success of the Company by providing "Eligible Participants" (employees and consultants) with incentives for performance on behalf of the Company. The Plan is accomplished by providing for the granting of options to purchase Class A Common Stock to eligible participants. The Board of Directors may suspend 20 or terminate the Plan at any time but no such action shall adversely affect the rights of any person granted an option under the Plan prior to that date of suspension or termination. The maximum number of shares available for option under the Plan are 1,125,000 Class A Common, subject to adjustment by reason of reorganization, merger, consolidation, recapitalization, dividends, stock split, changes in par value and the like occurring or effective while any such shares of Class A Common Stock are subject to the options under the Plan. During 1995, 500,000 shares were exercised at a price of $1.75 per share and there were no options outstanding as of November 30, 1996 under this Plan. The Company filed an S-8 registration (Number 333-18621) with the Securities and Exchange Commission on December 23, 1996 which provides for the issuance of up to 2,500,000 shares of Class A common pursuant to the Company's informal consulting/compensation plan. NOTE 8 - Income Taxes: The Company adopted FASB 109 in the fiscal year 1994. Due to uncertainty of realization in light of the Company's continuing operating losses, no deferred tax asset or liability has been recorded in the financial statements because the Company has assessed a valuation account to the full extent of its potential deferred tax asset. The following is a summary of the potential deferred tax asset and the valuation allowance: Property and equipment due to differences in depreciation and reserve for obsolescence $ 809,795 Net operating loss carry forward 2,637,611 ------------ Total deferred tax asset 3,443,406 Valuation allowance (3,443,406) ------------ Net deferred tax asset $ - =========== During the quarter ending November 30, 1996, the Company's potential deferred tax asset increased by $890,665. No provision for Federal income taxes was recorded during the quarter ended November 30, 1996 or the quarter ended November 30, 1995 due to the accumulated net losses of the Company. Income taxes included in the financial statements represent California state income taxes on the net income of San Jacinto Power Company, the Company's majority owned consolidated subsidiary. As of November 30, 1996 the Company had federal income tax loss carryforwards available to offset future taxable income for financial reporting and tax purposes of $6,140,428 which expire in 2006 through 2010. 21 NOTE 9 - Supplemental Noncash Investing and Financing Activities: During the nine months ended May 31, 1995, 145,842 shares of Class A Common Stock were issued for compensation of $68,362 to certain officers, directors and an employee earned in fiscal 1995. Note 10 - Possible amended filing required: Certain of the Company's financial records were unavailable due to an independent review being performed by outside consults at the request of a Board directed representative. Estimates have been made as relates to the subject transactions and an amended filing will be made, if the estimates prove to be in error by more than a reasonable margin. (Remainder this of page intentionally left blank) 22 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. The Company has formed two new wholly owned subsidiaries with the objective of organizing the Company strategically for planned growth through acquisitions. San Jacinto Energy Corporation ("SJEC") was formed to control all applicable shareholdings, debt instruments, partnership interests and renewable power generating assets of the Company, as well as interests in a non-related printing and business supply company also known as Herth Printing and Business Supplies, Inc.. Central Communications Corporation ("CCC") was formed to pursue mergers and acquisitions of telecommunications companies and businesses operating in related sectors. The resulting organizational structure of the Company is set forth below, with the Company ("NEC") holding substantially all subsidiary interests through SJEC, with the exception of proposed telecommunications based businesses to be held by CCC, as follows: NEC (1) | ------------------------------------- | | -- SJEC (2) | | CCC (10) | | -- SJPC (3) | | TTI (11) | -- YAC (4) | -- CEC (5) | | | -- HPBS (6) | | | -- OPP (7) | -- NEP I, LP (8) | -- NGPP, LP (9) LEGEND: (1) NEC - Nevada Energy Company, Inc. (Parent company) Delaware corporation, publicly owned, NASDAQ listed (2) SJEC - San Jacinto Energy Corporation Nevada corporation, wholly owned by NEC (3) SJPC - San Jacinto Power Company, Inc. Nevada corporation Majority owned subsidiary, 50.01% by NEC Minority owner or 49.99% is NASDAQ listed The New World Power Company, company currently in process of acquiring minority interest. 23 (4) YAC - Yerington Acquisition Company Nevada corporation Wholly owned subsidiary, holds all idle Ormat/Raft River power generating equipment, pending acquisition of TADS Geothermal's Nevada geothermal power plants and long-term power sales agreement with Sierra Pacific Power. (5) CEC - Combustion Energy Company, Inc. Nevada corporation Wholly owned subsidiary (6) HPBS - Herth Printing and Business Supply, Inc. Nevada corporation Wholly owned subsidiary printing and business supplies operates from current Company headquarters building in Reno, NV (7) OPP - Oreana Power Partners, Limited Partnership Nevada limited partnership Owned 49% CEC as general partner, 1% NEC as limited partner, 49% Energy Development Associates (non-affiliated Nevada corporation) as general partner and 1% Geothermal Development Associates (non-affiliated private Nevada corporation) limited partner. Formed to propose a gas fired power project, currently inactive. (8) NEP I,LP - Nevada Energy Partners, I, Limited Partnership Nevada limited partnership owned 60% by the Company and 40% by Nevada Electric Power Company (a Nevada Sub-S corporation 100% owned by Jeffrey Antisdel, company president). NEP owns 100% of NEC Class B common shares and 31.66% of NGPP. In an agreement dated August 16, 1996 purported to transfer all of its right title and interest in NEP-1LP to the former president. This purported agreement is the subject of litigation by both parties as described in Part II., Item 1., Legal Proceedings. The Company's position is that there is no agreement. (9) NGPP - Nevada Geothermal Power Partners, Limited Nevada limited partnership, owned 31.66% by NEP, and the balance of ownership by Hot Springs Power Company and various limited partners. In dissolution as a result of sale of primary asset, 50% interest in Brady Power Project in May 1995. (10) CCC - Central Communications Corporation Nevada corporation, wholly owned by the Company 24 LIQUIDITY As of November 30, 1996, the Company had $737,622 in current assets. Cash of $136,735 (including $60,344 held by its majority owned subsidiary) was available for on-going operations. The Company also held a note for the purchase of Series A preferred shares with a remaining balance of $2,995,608 collectible over a five month period. Under the terms of the original agreement, the note should have been reduced to $2,000,000 at this date. The Board of Directors has agreed to amended terms. Cash used by operating activities in the nine months ended November 30, 1996 was $1,140,678. The after-tax loss from operations was $1,407,965 which included $79,854 of non-cash charges for depreciation. As a result of the Company's adoption of FAS 121 to account for impairment of long-term assets, there was no provision for obsolescence in the quarter ended November 30, 1996 as the assets were then valued in excess of fair market appraisal value based on and independent appraisal completed in May 1996. Had the Company followed its previous policy of providing for obsolescence on a prospective basis, the estimated obsolescence charges for the quarter would have been $115,560. Investing activities used $1,065,938 in cash in during the period ending November 30, 1996, including expenditures of $300,400 for the acquisition of high-speed print equipment and $765,538 advanced to a subsidiary for the acquisition of a telecommunications business. A total of approximately $1,768,395 was expended in connection with the acquisition, which failed as was written off in its entirety (See Part II., Item 1., Legal Proceedings). Cash flows from financing activities in the nine months ended November 30, 1996 came from sales of preferred and common shares and generated $1,904,380 in cash. Cash provided from operating activities in the nine months ended November 30, 1995 was $324,037. The after-tax loss from operations was ($257,826 which included $49,363 of non-cash charges for depreciation and $284,429 for obsolescence on idle equipment. Investing activities used $71,581 during the period ending November 30, 1995, after expenditures for refurbishing wind power equipment of $50,955, advances to, and investments in, partnerships were $45,626. A non-refundable deposit on the proposed sale of assets generated $25,000 in cash. Cash flows from financing activities in the quarter ended November 30, 1995 used $3,744 in cash. Net short-term borrowings were $44,467, with repayments of $29,396 on short-term borrowings and $19,815 on long-term debt. 25 To date, the Company has received liquidity from receipt of management fees, dividend income (from the Company's majority owned subsidiary San Jacinto Power Company), litigation recoveries and through the sale of shares of Preferred stock and Class A Common Stock. Most recently, the completion of financing obtained through the sale of 1,960,745 Series A Preferred shares and 152,381 Class A Common shares has provided the Company with commitments for financing, which, if completed, is believed to be adequate for continuing operations. In the quarter ending August 31, 1995 the disposition of the Brady Power Project asset, which had not generated any of the long-term cash flow expected, provided the Company with needed operating funds. The majority of ongoing expenses for the Company have been incurred in initiating acquisitions, development of future business, professional fees and operating overhead. Currently the Company is involved in several litigations, which are a drain on its resources. CAPITAL RESOURCES The Company has an asset base which includes idle electric power generating units (currently not in service and with a net book value of $5,226,063, unencumbered by debt, which the Company is taking all requisite action to deploy into operational service in the near term through acquisition and deployment in one or more projects, (See Plan of Operations, Deployment of Idle Equipment). The Company has obtained independent appraisal of its idle power generating equipment by qualified engineering firms and valuation by independent utility appraisal specialists which confirm that the Company's idle power generating assets remain unimpaired and suitable for deployment and/or sale. To that end, the Company had previously attempted to consummate sale through the execution of a non-binding letter of intent for the sale of all Ormat power generating turbines, together with associated equipment and right to purchase a geothermal power facility to Pollution Control International ("PCI"). The PCI agreement then provided for the Company to receive cash and securities in excess of the equipment's net book value in excess of $4.5 million dollars. However, due to the complexities of attempting to assign rights to acquire a geothermal power facility in conjunction with the proposed sale of the Ormat units, the transaction was terminated. Based upon the foregoing, the incumbent Board of Directors have now adopted a strategy whereupon the Company will seek to deploy the idle power generating assets into existing power plant operations and operate the facilities thereafter utilizing Company owned power plant assets. Alternatively, the Company will seek the sale, merger or public offering "spin-off" of these assets once made operational in order to fully maximize shareholder values. This 26 determination was made after reviewing past difficulties of management in capitalizing on business opportunities developed by management under the direction of the prior Board of Directors. These opportunities include geothermal power facilities known as Tads Geothermal, Inc., and certain other facilities under review (governed under confidentiality agreements) executed by the Company, (See Plan of Operations, Deployment of Idle Equipment). Historically, the Company has conducted its business affairs as a development stage enterprise which has been subject to all of the risks inherent to establishing new lines of business. To date, all such development has been financed through the sales of assets, equity financing, litigation recoveries, non-recurring development fees received from partnership interests and management fees. The Company has limited operations through its interests in operating subsidiaries. The Company will require substantial amounts of capital to meet its goal of expanding into the area of telecommunications and related industries. To date the Company's initial efforts have been unsuccessful and costly. There are presently no firm commitments for any such financing. The Company may seek to raise additional funds through the sales of debt and/or equity, asset sales, bank borrowings or other collaborative arrangements with corporate partner(s) or other sources. In the event sufficient funding is unavailable to fund the Company's planned growth through acquisition, the Company may be required to delay, scale back or eliminate its planned expansion, acquisition, development and corporate activities as set forth herein. DEBT As of November 30, 1996, the Company's total current liabilities were $1,065,795. Current accounts payable were $805,784 and $37,965 was payable to New World Grid Power ("NWGP") for maintenance and refurbishment of wind turbines owned by the Company's consolidated subsidiary San Jacinto Power, (NWGP is a subsidiary of the 49.99% minority owner of San Jacinto, the New World Power Corporation). Short-term borrowings of $48,776 were the current mortgage payable balance assumed in the Company's wholly owned subsidiary Combustion Energy Company's acquisition of HPBS and the current portion of the note payable on the newly acquired high-speed printing press. Other liabilities of $79,657 included accrued audit expenses of $54,100. Accrued payroll includes $30,000 payable to directors for annual fees for services. Remaining liabilities subject to compromise represent the long-term settlement amount for withholding taxes and related penalties and interest due to the IRS associated with prior bankruptcy proceedings. Under the terms of a settlement proposed by the Company, this amount is being repaid over a term of 3 years, in monthly installments of $4,940, accruing interest at the rate of 7% 27 per annum. Pending final settlement, the entire amount is classified as a current liability. The Company was substantially current on its payment schedule through early 1996 since this proposal was made in October 1993 to the IRS and the remaining payments necessary for payoff are $26,891 plus current accrued interest and which is past due at November 30, 1996. On May 3, 1996 CEC entered into an agreement to purchase a high speed printing press at a purchase price of $300,400. The purchase balance, after a $20,000 down payment made in May 1996, is to be financed over an eight (8) year period at 9.75% (adjustable in accord with changes in the prime lending rate) with monthly payments of $4,218. The financing was not guaranteed by the Company and CEC remains current on its debt obligations. On August 16, 1996, the Board of Directors purportedly executed an agreement which provided for the exchange of 4,436,464 restricted class A common shares, the assignment of the Company's 60% limited partnership interest in Nevada Energy Partners I, Limited Partnership, ("NEP"), and delivery of all common stock of CEC owned by the Company in consideration of NEP's delivery of (i) all presently issued and outstanding class B common shares owned by NEP, (ii) a release of all right, title and interest accrued to date to additional Class B Common share issuance, (iii) a release of all right title and interest to all future Class B Common shares to be issued pursuant to the terms of the Company's certificate of Incorporation, (iv) the indemnification by NEP of the Company against any and all claims or causes of action associated with Nevada Energy Partners vs. Hot Springs Power Company Case and the assumption of all debt of CEC in the amount of approximately $375,000. The Company has taken the position that the agreement is void and has filed suit in Santa Barbara, California. The other party has also filed suit to enforce the agreement. RESULTS OF OPERATIONS Revenues Revenues for the quarter ended November 30, 1996 totaled $281,291 and consisted of energy sales from San Jacinto Power Company of $16,424 and HPBS printing and business supply sales of $264,867. Comparable revenues for the quarter ending November 30, 1995 were $105,666 from energy sales and $250,078 from printing and business supply sales. Revenue from energy sales declined as a result of contractually reduced purchased prices received from the purchasing utility company, Southern California Edison and lower than expected seasonal wind speeds. The Company also suffered al loss of key switch gear resulting from a theft, not covered by insurance, which resulted in some high capacity equipment having to go off-line. Current prices are expected to continue in effect, subject to seasonal upward adjustment during summer periods and overall adjustment in accord with Consumer Price Index changes. The number of turbines available for service stabilized subsequent to the change-over in maintenance services. Wind speeds have continued at lower than average velocities for the majority of the current quarter. 28 Higher revenues for HPBS printing and business and supplies sales were a result of the decision to emphasis the higher margin custom print business versus catalogue sales of business supplies. A full time outside sales person was on staff for the entire quarter ended November 30, 1996. A new high speed printing press has been placed in service in June 1996 due to delays and mechanical problems encountered with existing equipment (See DEBT). Print revenues were $211,457 and office supplies sales were $53,410 for the quarter ended November 30, 1996. Comparable results for the quarter ended November 30, 1995 were print revenues of $151,708 and office supplies sales of $98,370. Print revenues were $686,354 and office supplies sales were $232,294 for the nine months ended November 30, 1996. Comparable results for the nine months ended November 30, 1995 were print revenues of $547,938 and office supplies sales of $205,280. PART II--OTHER INFORMATION Item 1. Legal Proceedings. The Company is involved in the following litigation: MUNSON LAWSUIT On October 5, 1992, the Company, as plaintiff, initiated litigation in the Chancery Court of New Castle County, Delaware, (the "Munson Lawsuit"), against former officers and directors of the Company. The Defendants are Stephen Munson, Leland Mink, Walter Mackenzie, Frank Carigula and Donald Selfridge, (the "Defendants"). The allegations against the Defendants include numerous breaches of fiduciary loyalty to the Company, invalid issuance of Company shares, breaches of fiduciary duty arising out of improper issuance of Company stock, and breaches of fiduciary duty arising out of failure to value the services for which stock was awarded. On October 13, 1992, a sequestrator was appointed and the shares of the Company standing in the names of Leland Mink, Walter MacKenzie, Donald Selfridge and Frank Carigula were seized to hold and preserve the shares of the Company until further order of the Court. As of June 9, 1994, The Delaware Court imposed sanctions against Stephen Munson related to non-compliance in matters of deposition. A default judgement against Frank Carigula has since been obtained in the amount of approximately $59,000 and the Company is seeking garnishments and attachments sufficient to satisfy the full amount of judgement. The judgement is beyond appeal. The trial of the case against defendants Munson, Selfridge and MacKenzie was completed in September and final post-trial briefs were to be submitted to the Court by the Company pending a ruling of the Court. The Company has subsequently re-entered negotiation for settlement with the defendants. The Company does not believe this litigation will have an adverse material effect on its operations. 29 ANTISDEL LITIGATION On October 28, 1996, Jeffrey E. Antisdel, former president of Nevada Energy Company, filed suit in Washoe County, Nevada. The suit relates to various matters of compensation, including the Company's alleged default on a two year employment agreement which was to take effect upon Mr. Antisdel's termination on September 26, 1996. The plaintiff obtained a default judgement which the Company has moved to set aside. The Company has accrued approximately $240,000 to provide for the plaintiffs claim, if successful. The plaintiff has filed a lien on the Company's idle geothermal assets. CASCARILLA LITIGATION On October 23, 1996, Richard A. Cascarilla, former secretary and general counsel of Nevada Energy Company, filed suit in Ingham County, Michigan. The suit relates to various matters of compensation, including the Company's alleged default on a two year employment agreement which was to take effect upon Mr. Cascarilla's termination on September 26, 1996. The plaintiff has obtained a default judgement. The Company is attempting to obtain counsel to represent it in this matter and will seek to have the default judgement set aside. The Company has accrued approximately $142,000 to provide for the plaintiffs claim, if successful. The plaintiff has filed a lien on the Company's idle geothermal assets. SMITH, KATZENSTEIN LITIGATION On December 2, 1996, Smith, Katzenstein & Furlow, the Company's former counsel in Delaware filed a suit in New Castle County, Delaware alleging non-payment of fees in the approximate amount of $70,000, breach of contract, fraud and tortious interference with contractual relationship. The plaintiff has obtained a default judgement. The Company has engaged counsel and is seeking to have the default judgement set aside. The Company has accrued approximately $70,000 to provide for the plaintiffs claim, if successful. 30 HARTMAN, KASSOUFF, MODESITT LITIGATION On November 15, 1996 Messers. Jeffrey L. Hartman, Michael R. Kassouff and Jeffrey E. Modesitt filed suit in Washoe County, Nevada alleging non-payment of directors fees and accrued interest under notes in the amount of $10,000 each dated May 1, 1996. The notes bear interest at the rate of 18% per annum. The Company has engaged counsel to respond to this suit. The amount of $30,000 has been provided for in the accounts in the event the plaintiffs are successful. NEVADA ENERGY PARTNERS 1-LP LITIGATION On November 19, 1996, Nevada Energy Partners 1-LP ("NEP")filed suit against the Company to seek enforcement of an alleged agreement entered into on August 16, 1996. The agreement would, among other things, if enforced, cause the Company to surrender all its right title and interest in the NEP partnership in which the Company holds a 60% interest and which holds 100% of the Company's Class B common shares. In addition, the Company would surrender all of its right title and interest in Herth Printing and Business supplies which would devolve to Mr. Jeffrey Antisdel, former president of the Company. The Company has engaged counsel to vigorously defend its position that there is no agreement. Preliminary briefs and discovery are underway. In the above reference matter, the Company filed suit against NEP and NEPC, the general partner of NEP on December 6, 1996 in Santa Barbara County and seeks declaratory relief and rescission of the subject alleged agreement. An action in this matter has also been filed in the State of Delaware. SHAREHOLDER DERIVATIVE SUITS The Company has been nominally named it two shareholder derivative actions filed in December 1996 in Delaware. The actions seek, among other things, to compel certain action by the Board of Directors as well as seeking to recover assets expended by the Company in its aborted acquisition of Telecom. SANTA BARBARA OFFICE SPACE The Company's wholly owned subsidiary, Central Communications Company entered into a five year lease for an office space in Santa Barbara, CA which provided for nominal monthly payments of $19,034 plus taxes. The Company was compelled to vacate the property when its initial entry into telecommunications became unsuccessful. The landlord has filed suit in Santa Barbara County, CA seeking compliance with the agreement. The Company believes the property 31 can be sublet, which will substantially mitigate any losses. No provision has been made in the accounts. The Company does not believe that there is a potential material impact from this litigation. Item 4. Submission of Matters to a Vote of Security Holders. On August 16, 1996, the Annual Meeting of Stockholders for the Company was held and the matters were voted upon by a majority of vote of the stockholders, as follows: 1. The election of Peter J. Cannell to the Board of Directors; 2. The amendment to the Company's Certificate of Incorporation to change the Company's name to PowerTel USA, Inc., and to change the Company's NASDAQ trading symbol to "PTUSA"; 3. The amendment to the Company's Certificate of Incorporation to increase authorized Preferred share capital from 2,000,000 to 50,000,000 shares; 4. The amendment to the Company's Certificate of Incorporation to increase authorized Class A Common share capital from 25,000,000 to 50,000,000 shares; 5. The amendment to the Company's Certificate of Incorporation to increase authorized Class B Common share capital from 25,000,000 to 50,000,000 shares; 6. The amendment to the Company's Certificate of Incorporation to provide for a one (1) for six (6) reverse stock split of all classes of outstanding Preferred or Common; 7. The approval of authority for the Board of Directors to seek Class A Common stock listing on NASDAQ National Market System; 8. The amendment to the Company's Certificate of Incorporation to provide for the creation of a new class of common stock, Class C Common stock, 50,000,000 shares authorized; and 9. Ratification of the Board of Directors appointment of Kafoury Armstrong and Company as the Company's auditors for the fiscal ending February 29, 1996. A majority in interest voted affirmatively on all issues. However, subsequent review of the Company's bylaws and certificate of incorporation revealed that an 80% super majority vote would be required to implement amendment to the Company's certificate of incorporation. Therefore, issues #1, 32 #7 and #9 were the only issues carried as these issues did not require a super majority vote. The Company has taken action seeking to remove the amendment of the super majority voting provision and thereupon ratifying the items set forth above at a future Special Meeting of Stockholders. Item 5. Other Information. Effective May 1, 1996, the Company initiated an organizational, financial and general business restructuring which included a change in control of the Board of Directors, provision of financing commitments exceeding $5,000,000 and implementation of a revised business plan. During the implementation of the foregoing, the Board of Directors and its advisors conducted an extensive review of the assets, management, business prospects and opportunities developed in its core lines of energy businesses. Following this review, the Board and its advisors determined it advantageous to continue with and support management's plan for growth to be implemented through the acquisition of additional energy facilities and the deployment of energy assets owned by Company subsidiaries. As a non-regulated utility holding company, the Board of Directors and its advisors also immediately recognized that the Company had the requisite management skills and professional support to allow the Company to readily participate in secondary lines of non-regulated telecommunications related utility businesses. In so doing, the Board of Directors also determined that while the Company's energy business plan was fundamentally sound, the growth opportunities available in telecommunications related businesses provide operating synergies which have the potential to improve the long term financial performance of the Company. The Board thereby determined it appropriate to restructure the Company's business operations. Restructuring of Business Operations As set forth in the preceding paragraphs, the Company plans to narrow its focus solely to acquisition and development of energy and telecommunications related businesses, concurrent with the Board of Directors determination that the company's prior pursuits in non-related businesses have not provided the Company financial results commensurate with operational risks assumed. In addition, The Board of Directors has terminated the Company's prior investigations and discussions related to acquisitions of a heavy equipment company, engineering/construction company and others have now been terminated. 33 Plan of Operations Energy Sector The Company has an asset base which includes several electric power generating units (currently not in service and with a net book value of $5,226,063, unencumbered by debt, from which the Company plans to increase revenues and earnings. The utilization of these generating units is likely to have a significant impact in determining the future of the Company and its underlying share value. The Company plans to deploy all of its idle power generating assets in one or more projects currently under review (as set forth below) and has obtained third party evaluations of the idle equipment which clearly indicate that its idle power generating assets of a condition acceptable for immediate deployment without impairment, (See Pending Acquisitions and Deployment of Idle Power Generating Assets). The deployment, sale or joint venture utilization of the Company's idle power generating assets is clearly a significant business issue for the Company. However, if deployment, sale or utilization if for any reason does not occur, the Company may be adversely effected (See "Risk Factors"). Pending Acquisition of 49% Interest in Wind Energy Subsidiary On June 27, 1996, the Company received preliminary acceptance of its offer to purchase New World Power Corporation's ("New World") 49.99% equity ownership interest in the Company's majority owned subsidiary San Jacinto Power Company which has been accepted in principal subject to purchase documentation prepared by the Company acceptable in form and in substance to New World's Board of Directors. Closing is expected to occur during the month of July, 1996, with terms of purchase to be publicly disseminated following closure. Following completion of the acquisition of New World's 49.99% interest, the Company intends to continue San Jacinto Power Company's planned retrofit, rehabilitation and expansion activities and plans increased future participation in the wind power energy industry on a foreign and domestic basis. The planned closing for the purchase of New World's 49.99% interest has been delayed due to lack of available funds. The Company anticipates closing by February 28, 1997 Telecommunications Sector Although the Company continues its plans for growth through acquisition in the energy business, the Company has begun to seek business opportunities in the telecommunications and related businesses. 34 As previously set forth, the Board of Directors has determined that it is presently feasible to dramatically accelerate Company growth through the completion of non-regulated telecommunications business acquisitions. This determination is primarily based upon the extensive deregulation which has taken place in the telecommunications industry which began in the late 1970's. Clearly, the telecommunications business is a competitive and very dynamic line of business which has demonstrated increasingly reduced barriers to entry which are largely due to the present deregulated nature of the telecommunications business today. From a market perspective, growth prospects are numerous, with opportunities available in the acquisition of long distance carriers, long distance switchers, specialized "niche" marketing, telephone systems sales and services, debit card marketing, proprietary billing software systems integrator, voice recognition systems, name but a few of the opportunities available which the Company is presently evaluating for potential acquisitions. The Company is presently evaluating numerous telecommunications related acquisitions. Risk Factors Idle power generation equipment As at November 30, 1996, the Company reported assets of $9,185,414, a substantial portion of which 56.9% was represented by idle power generation equipment ($5,226,063). There is no assurance or guaranty that either (a) there is a market for such equipment, or (b) the Company would generate, upon sale, proceeds in an amount equal to the value of this equipment as reflected on its balance sheet. This equipment, which was acquired by the Company in a series of purchase transactions between 1984-1986, has never been placed in service, with the exception of one generating plant which was utilized for a six month period and four plants which generated power at December 31, 1986 in order to qualify for investment tax credits. Subsequent to its acquisition, all of the equipment has been placed in storage. Although the Company has monitored this equipment and periodically reviews its operating status, there is no assurance or guaranty that this equipment will function as designed when and if placed in operation. During the period 1991-1996, the Company has endeavored to identify various projects in which the generation plants may be utilized. In addition, from time to time the Company has explored the potential sale of one or more generating units to third parties as set forth in management's discussion and analysis herein. To date, the Company has not been successful in the development of a project for utilization of such equipment or the sale of such equipment, and there is no assurance or guaranty that the Company will be successful in the future. 35 Although the Company continues to identify projects in which the idle power generating equipment could be utilized, there is no assurance or guaranty that the Company will be successful in either (a) identifying such projects, (b) securing funding for any such project, or (c) developing the projects. To the extent that the Company is not successful in its attempt to utilize these assets in its operations, the Company will be compelled to offer and sell these assets in the open market. in such event, these is no assurance or guaranty that the Company will generate sale proceeds in an amount equal to or greater than the value of these assets as reflected in its financial statements as at November 30, 1996. The market value of these assets is dependent upon numerous factors, the majority of which are beyond the control of the Company, including, but not limited to, the mechanical condition of the equipment, the state of technology, the availability of equipment of a similar nature, the demand for such equipment in the marketplace, the economic conditions surrounding the unregulated utility marketplace, the availability tax credits and deductions related to the use of such equipment and other factors that are beyond the Company's control. Accordingly, current and prospective shareholders are advised that the idle power generating equipment constitutes assets of a "special" use category, for which these is limited marketability and these is no assurance or guaranty that the assets will generate proceeds to the Company in an amount equal to or greater than the value as reflected in the financial statements as at November 30, 1996." 36 Change in Corporate Control On February 29, 1996, the Company executed a binding Letter of Intent ("LOI") with Waterford Trust Company Limited ("Waterford"), an Irish corporation, with terms which substantially required a change of control of the Company. By and through the LOI, on May 3, 1996, a change in control occurred at the Board of Directors, as the prior Board of Directors resigned and were replaced. Pursuant to the terms of the LOI, a Waterford nominee, Golden Chance Limited, an Isle of Man company Limited by Shares, executed documentation precedent to the purchase of 1,960,745 Series A Preferred shares of the Company in consideration of financing commitments in the aggregate amount of $5,000,000, together with a corporate guarantee assuring the payments owing provided by Waterford. Pursuant to the contractual obligation of the Company to Waterford, the previous Board of Directors voluntarily resigned without objection or qualification related to the operation of the Company. The resignations of the prior Board of Directors was implemented in furtherance of the Company's contractual obligations as set forth in the binding letter of intent with Waterford. Since the change in control occurred, the restructuring of business operations, acquisitions, regulatory filings, finances, accounting practices, have been subject to the control, direction and discretion of the incumbent Board of Directors, by and through Board appointed advisors, consultants, attorneys and representatives who are not officers of the Company, pending the appointment of replacement officers. On August 17, 1996, at an executive committee meeting of the Board of Directors, interim President Jeffrey Antisdel and interim Secretary Richard Cascarilla expressed concerns over certain unresolved conflicts in interest between the Board of Directors, its advisors, attorneys, consultants, representatives and raised issues related to the Board of Directors decision to direct certain of the Company's financial affairs by and through Board appointed advisors, consultants, attorneys and representatives who were not officers of the Company. After due discussion and deliberation over the interim officers concerns, a verbal indemnity was accepted, pending the execution of a written indemnity agreement, from certain representatives of the Board of Directors related to the finances of the Company. To date, the final indemnity agreement has not yet been received in executed form by the Company. On September 12, 1996, interim President Jeffrey Antisdel engaged the Company's auditors to undertake financial auditing of certain Bank accounts and financial records of the Company under the control of the Board of Directors, by and through its advisors, consultants, attorneys and representatives. 37 On September 26, 1996, interim President Jeffrey Antisdel and interim Secretary, Richard Cascarilla, were dismissed as officers of the Company. Replacement officers Stefan Tevis, President and Kenton Bowers, Corporate Secretary, have been approved and hired by the Board of Directors. Upon the appointment of replacement officers, Mr. Antisdel and Mr. Cascarilla are serving as independent consultants to the Company for a period of not less than two years. In addition, on September 26, 1996, a member of the Board of Directors, John Goold resigned and was replaced by Stefan Tevis, the current President of the Company. On August 28, 1996, Golden Chance Limited was late in making its monthly scheduled payment of $500,000 and had delivered a partial payment of approximately 25% of the $500,000 amount. The officers of the Company provided Notice to corporate guarantor, Waterford Trust Company Limited and payor Golden Chance limited of default of its contractual obligations. Thereafter, additional sums were received by the Company to satisfy the $500,000 payment requirement and legal counsel representing the Series B Preferred shareholders notified the Company's Board of Directors and Officers, as well as Waterford Trust Company Limited and Golden Chance Limited that a waiver of default requires the consent of the Company's Series B Preferred shareholders. To date, the Series B holders have not delivered the waiver of default required and the $500,000 payment due on September 28, 1996 has not yet been received. The Company has therefore provided notice to Waterford Trust Company Limited and Golden Chance Limited pursuant to the terms of the note and anticipates additional payments by Golden Chance upon delivery of the August, 1996 waiver of default by the Company's Series B Preferred shareholders. As of November 30, 1996, the Company has received aggregate payment of $1,960,745 dollars from Golden Chance Limited. If for any reason the Company should not continue to obtain financing to support the operation and growth of the Company there could be a material adverse effect on the Company's operations. Acquisitions and Deployment of Power Plants Associated with the Company's proposed acquisitions, the Company plans to deploy its idle power plant assets in power projects to be acquired. However, If the Company for any reason is unable to deploy idle generating units, a material adverse financial effect on the Company may result. Risks attendant to such deployment include, but are not limited to, governmental permitting risks, construction risks in completing installation, cost overrun risks and operational risks. A lack of success in completing the deployment of Company owned power plants may, in the opinion of the Company's auditors, require provision for a reserve related to the carrying value of the Company's power generating assets. Further, a risk attendant to completing this expansion includes closing equity financing sufficient to achieve the Company's construction and working capital needs. If such financing should not be completed, for any reason, there would be a material adverse effect on the future operations of the Company. 38 Similar risks exist in the proposed expansion of the wind farm owned by the Company's majority owned subsidiary San Jacinto Power and a lack of adequate financing would have a material negative effect on the proposed purchase of San Jacinto Power Company's minority ownership interest of 49.99% from New World Power Corporation, San Jacinto Power Company's planned expansion to its rated contract capacity of 18.9 Megawatts and future returns received from San Jacinto Power. Presently, it is planned that the proposed expansion of the San Jacinto Power project will be initiated at the subsidiary level with no direct purchases of plant and equipment at the parent company level, thereby reducing risks to the Company. Further, since the Company maintains a holding company structure, the Company does not intend to enter into direct purchases of capital equipment at the parent company level in order to complete the deployment of its idle power equipment in any proposed project. However, any capital expenditures required for project development and deployment of Company owned idle equipment will be completed at the subsidiary level and will most likely require equity, debt or project financing for which the Company will need to seek additional funding. Significant acquisitions of telecommunications companies and related businesses include risks related the Company's limited experience, need to retain additional staffing with sufficient expertise due to the Company's limited experience in this industry group. Telecommunications based acquisitions outside the Company's primary energy business may also have the effect of reducing or eliminating certain tax benefits associated with prior net operating losses. Historically, the Company has been unable to finance operations from revenues and cash flow. Thus, the Company has been financing operations from the sale of its Class A common stock, management fees, subsidiary distributions of cash dividends, asset sales, and litigation recoveries. The Company has entered into agreements for equity financing in the amount of $5,000,000 in the aggregate and has received in excess of $1,960,745 to date. While the Company presently believes that adequate financing arrangements sufficient for the Company's asset deployment and working capital needs have been secured, there could be a material negative financial effect upon the Company should the Company's current financing commitments for any reason not be met. Presently, there are no plans for product research and development at the parent company level over the coming twelve (12) months. 39 Client Service Agreement Effective June 28, 1996, the Company entered into a Client Service Agreement with Continental Capital & Equity Corporation ("CCEC"), for services which include, but are not limited to, CCEC providing public relations, direct marketing advertising services, radio advertising, establishment of a Internet "website" on behalf of the Company, for broker relations, and dissemination of Company news releases on national wire services, and services as agent for the Company ("CCEC Services"). In consideration of CCEC Services, the Company paid CCEC $25,000 upon contract execution, and agreed to provide to CCEC or a CCEC affiliate, a second payment on or before July 28, 1996 in the amount of $25,000, and on or before August 28, 1996, delivery of 150,000 Class A Common shares valued in the aggregate on June 28, 1996, at the then prevailing closing market price for the Company's Class A Common stock as quoted on NASDAQ and an option to purchase 150,000 Class A Common shares for a period of twelve months from the time of delivery at a strike price as set forth at the closing market price on the date of delivery of Class A Common stock and stock options. It was the Company's intent to issue the 150,000 Class A Common shares and option to purchase 150,000 Class A Common shares simultaneously to CCEC. The Company has received a verbal offer from CCC to terminate the Client Service Agreement upon the Company's payment of a $25,000 fee in satisfaction thereof. It is currently the Company's intent to proceed with the payment of the $25,000 in full satisfaction thereof. Securities Registration Statements On June 28, 1994, the Company's Board of Directors adopted an Employee and Consultant Stock Option Plan (the "Plan") registered on Form S-8 in accordance with the Securities Act of 1933. This S- 8 was filed with the Securities and Exchange Commission on August 2, 1994, Registration No. 33-82318. The purpose of the Plan was for the express purpose of providing compensation for services rendered to the Company and to promote the success of the Company by providing Eligible Participants (employees and consultants) with incentives for performance on behalf of the Company. The Plan was accomplished by providing for the granting of options to purchase certain numbers of Class A Common Stock to Eligible Participants. The Board of Directors may suspend or terminate the Plan at any time but no such action shall adversely affect the rights of any person granted an option under the Plan prior to that date of suspension or termination. The maximum number of shares available for option under the Plan were 1,125,000 Class A Common shares, subject to adjustment by reason of reorganization, merger, consolidation, recapitalization, dividends, stock split, changes in par value and the like occurring or effective while any such shares of Class A Common Stock are subject to the options under the Plan. The terms and 40 conditions of each option will specify the number of shares optioned, the period during which each option is exercisable and the exercise price per share. The Plan has been terminated and it is presently contemplated that a revised S-8 plan may be prepared and submitted during the current fiscal year. On August 19, 1996, the Company filed a Form S-3 Registration Statement with the Securities and Exchange Commission covering the potential future sale of 5,436,663 shares of Class A Common stock on behalf of approximately 50 holders of record, including Golden Chance Limited. The S-3 Registration Statement is current and it is presently contemplated that additional registration statements may be prepared and submitted during the current fiscal year. Related to the default of Golden Chance Limited, former Secretary and General Counsel of the Company, Richard Cascarilla has delivered a written request for the removal of his legal opinion as it relates to Golden Chance Limited, (see change in Corporate Control above), pending further notification. The Company also plans to file additional registration statements in satisfaction of certain contractual obligations to purchases of restricted securities made by accredited investors. Subscription Agreement Dispute Two irrevocable subscription agreements for the purchase of Class A common stock have been entered into by two parties in an amount totaling $1,000,000. The original funding dates on the above subscriptions were in February 1995. Due to conditions in the Company's securities market, subsequent extensions were granted to May 1995 and then September 1995. These amounts were therefore initially reported as subscriptions receivable in releases of unaudited financial data. Based on the initial extension period provided to the subscribers the Company believed the amounts would be paid prior to completion of then current financial reports. However, the Company has not received the payments required under the terms of the subscription agreements due to the failure of the subscribers to deliver payment. The Company has discontinued settlement negotiations with the subscriber(s) and legal counsel representing the subscribers. The Company's efforts to achieve a suitable agreement for delivery of consideration in satisfaction of the amounts owing have not yet been successful and the Company is evaluating its legal options. Item 6. Exhibits and Reports on Form 8-K. (a) Exhibits. Exhibit 27 - Financial Data Schedule (Electronic filing only) 41 (b) Reports on Form 8-K have been filed during the quarter for which this Form 10-QSB is being filed, as follows: August 2, 1996 - Formation of subsidiaries, Cental Communication Company and San Jacinto Energy Company. August 5, 1996 - Acquisition of Telecom Technologies, Inc August 30, 1996 - Disposition of assets September 30, 1996 - Corporate change of address. December 2, 1996 - Notice of name change and reverse split. 42 SIGNATURES Pursuant to the requirements of the Securities and Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. POWERTEL USA, INC. Date January 21, 1997 /s/ Stefan Tevis ----------------------- -------------------------------------- Stefan Tevis, President Date January 21, 1997 /s/ Kenton H. Bowers ------------------------ -------------------------------------- Kenton H. Bowers Controller 43 EX-27 2 EXHIBIT 27.1 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FINANCIAL STATEMENTS OF POWERTEL USA, INC. FOR THE NINE MONTHS ENDED NOVEMBER 30, 1996 , AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 9-MOS FEB-28-1997 MAR-01-1996 NOV-30-1996 137 0 534 0 48 738 7,143 368 7,590 1,066 0 0 1 16 5,631 7,590 1,136 1,136 624 2,544 1,712 0 21 (3,120) 0 (3,120) 0 0 0 (3,120) (.28) (.28)
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