U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED OCTOBER 31, 2002
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from _______________ to _______________.
COMMISSION FILE NUMBER 000-28567
SOUTHERN STATES POWER COMPANY, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 94-3350291
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
4505 ALLSTATE DR., SUITE 108
RIVERSIDE, CALIFORNIA 92501
(Address of principal executive offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (909) 367-2463
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12
months (or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days. Yes X No.
-----
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE
PRECEDING FIVE YEARS
Check whether the registrant filed all documents and reports required to be
filed by Section 12, 13 or 15(d) of the Exchange Act after the distribution of
securities under a plan confirmed by a court. Yes No
----- -----.
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date. As of December 10, 2002,
there were 100,857,580 shares of common stock issued and outstanding.
TRANSITIONAL SMALL BUSINESS DISCLOSURE FORMAT
(check one):
Yes No X
----- -----
SOUTHERN STATES POWER COMPANY, INC.
TABLE OF CONTENTS
-----------------
PART I
Item 1 Financial Statements
Item 2 Management's Discussion and Analysis or Plan of Operations
PART II
Item 1 Legal Proceedings
Item 2 Changes in Securities and Use of Proceeds
Item 3 Defaults Upon Senior Securities
Item 4 Submission of Matters to a Vote of Security Holders
Item 5 Other Information
Item 6 Exhibits and Reports on Form 8-K
2
PART I
This Quarterly Report includes forward-looking statements within the meaning of
the Securities Exchange Act of 1934 (the "Exchange Act"). These statements are
based on management's beliefs and assumptions, and on information currently
available to management. Forward-looking statements include the information
concerning possible or assumed future results of operations of the Company set
forth under the heading "Management's Discussion and Analysis of Financial
Condition or Plan of Operation." Forward-looking statements also include
statements in which words such as "expect," "anticipate," "intend," "plan,"
"believe," "estimate," "consider" or similar expressions are used.
Forward-looking statements are not guarantees of future performance. They
involve risks, uncertainties and assumptions. The Company's future results
and shareholder values may differ materially from those expressed in these
forward-looking statements. Readers are cautioned not to put undue reliance on
any forward-looking statements.
ITEM 1 FINANCIAL STATEMENTS
3
SOUTHERN STATES POWER COMPANY, INC.
BALANCE SHEET
(UNAUDITED)
ASSETS
OCTOBER 31,
2002
-------------
Current assets:
Accounts Receivable . . . . . . . . . . . . . . . . . . . . . . . 14,000
Other current assets. . . . . . . . . . . . . . . . . . . . . . . 21,000
-------------
Total Current Assets. . . . . . . . . . . . . . . . . . . 35,000
-------------
Net properties (Note 2) . . . . . . . . . . . . . . . . . . . . . 48,000
Assets held for sale (Note 2) . . . . . . . . . . . . . . . . . . 961,000
Deposits. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,000
-------------
$ 1,054,000
=============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Bank overdraft . . . . . . . . . . . . . . . . . . . . . . . . $ 4,000
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . 857,000
Accrued expenses . . . . . . . . . . . . . . . . . . . . . . . 113,000
Loans payable (Note 2) . . . . . . . . . . . . . . . . . . . . 266,000
Bank note payable (Note 2) . . . . . . . . . . . . . . . . . . 1,103,000
-------------
Total current liabilities . . . . . . . . . . . . . . . . . . 2,343,000
Convertible debentures (Note 2). . . . . . . . . . . . . . . . . 268,000
-------------
Total liabilities . . . . . . . . . . . . . . . . . . . . . . 2,611,000
Stockholders' deficit (Note 4):
Common stock - $.001 par value; 250,000,000 shares authorized,
97,457,581 shares issued and outstanding . . . . . . . . . . 97,000
Capital in excess of par value. . . . . . . . . . . . . . . . . 15,567,000
Accumulated deficit . . . . . . . . . . . . . . . . . . . . . . (17,221,000)
-------------
Total stockholders' deficit. . . . . . . . . . . . . . . . . . (1,557,000)
-------------
$ 1,054,000
=============
See accompanying notes to financial statements
4
SOUTHERN STATES POWER COMPANY, INC.
STATEMENTS OF OPERATIONS
(UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED
OCTOBER 31, OCTOBER 31,
____________________________ ____________________________
2002 2001 2002 2001
Fuel sales . . . . . . . . . . . . . . . . . . $ 12,000 $ 49,000 $ 31,000 $ 60,000
Rental fees. . . . . . . . . . . . . . . . . . -- 181,000 -- 369,000
-------------- ------------- --------------- ------------
Total sales . . . . . . . . . . . . . . . . 12,000 230,000 31,000 429,000
Cost of sales. . . . . . . . . . . . . . . . . 11,000 36,000 33,000 100,000
-------------- ------------- -------------- ------------
Gross profit (loss). . . . . . . . . . . . . . 1,000 194,000 (2,000) 329,000
General and administrative expenses. . . . . . 648,000 576,000 1,015,000 1,033,000
Impairment of plant costs. . . . . . . . . . . 618,000 -- 618,000 --
Expense of common stock issued for cash
below fair value . . . . . . . . . . . . . 89,000 -- 109,000 --
-------------- ------------- -------------- ------------
Loss from operations . . . . . . . . . . . . . (1,354,000) (382,000) (1,744,000) (704,000)
Interest expense and debt issuance costs . . . (166,000) (39,000) (242,000) (444,000)
Beneficial conversion feature of convertible
debt . . . . . . . . . . . . . . . . . . . -- -- -- (354,000)
Other income or (expense). . . . . . . . . . . ( 50,000) 2,000 ( 50,000) 2,000
-------------- ------------- -------------- ------------
Net loss . . . . . . . . . . . . . . . . . . . $ (1,570,000) $ (419,000) $ (2,036,000) $(1,500,000)
============== ============= ============== ============
Basic and dilutive net loss per share (Note 3) $ (0.02) $ (0.01) $ (0.03) $ (0.03)
============== ============== ============== ============
Weighted average number of shares outstanding. 82,787,072 51,186,273 73,750,568 45,359,570
============== ============== ============== ============
See accompanying notes to financial statements.
5
SOUTHERN STATES POWER COMPANY, INC.
STATEMENTS OF CASH FLOW
(UNAUDITED)
SIX MONTHS ENDED
OCTOBER 31,
2002 2001
------------ ------------
Cash flows from operating activities:
Net loss . . . . . . . . . . . . . . . . . . . . . $(2,036,000) $(1,500,000)
Adjustment to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization . . . . . . . . . . . 7,000 190,000
Fair value of stock options . . . . . . . . . . . . 110,000 189,000
Debt issuance costs and value of beneficial
conversion 119,000 796,000
Impairment of plant . . . . . . . . . . . . . . . . 618,000 --
Stock issued for interest expense . . . . . . . . . 90,000 --
Stock issued for services . . . . . . . . . . . . . 358,000 323,000
Loss on deposits. . . . . . . . . . . . . . . . . . 30,000 --
Expense recognized from sale of stock at less
than fair value. . . . . . . . . . . . . . . . . 109,000 --
Changes in operating assets and liabilities:
Decrease (increase) in accounts receivable . . . 6,000 (18,000)
Increase in inventories . . . . . . . . . . . . . . -- (35,000)
Decrease (increase) in other current assets . . . . 4,000 (10,000)
Increase (decrease) in accounts payable and
accrued expenses . . . . . . . . . . . . . . . . 705,000 (80,000)
------------ ------------
Net cash used in operating activities. . . . . . 120,000 (145,000)
Cash flows from investing activities:
Disposition (acquisition) of properties . . . . . . 12,000 (1,699,000)
Costs incurred to develop biofuel facility. . . . . (618,000) --
Investment in assets held for sale. . . . . . . . . (18,000) --
Loan payable, related party . . . . . . . . . . . . -- (10,000)
------------ ------------
Net cash used in investing activities . . . . . . . (624,000) (1,709,000)
Cash flows from financing activities:
Bank overdraft. . . . . . . . . . . . . . . . . . . 4,000 --
Net proceeds from issuance of debenture payable . . (44,000) 825,000
Proceeds from sale of common stock. . . . . . . . . 358,000 5,000
Proceeds from bank loan . . . . . . . . . . . . . . -- 1,450,000
Paydown on principal of bank loan . . . . . . . . . -- (49,000)
Proceeds from issuance of notes payable . . . . . . 166,000 24,000
------------ ------------
Net cash provided by financing activities . . . . . 484,000 2,255,000
------------ ------------
Net (decrease) increase in cash . . . . . . . . . . . (20,000) 401,000
Cash at beginning of period . . . . . . . . . . . . . 20,000 2,000
------------ ------------
Cash at end of period . . . . . . . . . . . . . . . . $ -- $ 403,000
============ ============
Supplement disclosure of cash flow information:
Interest paid . . . . . . . . . . . . . . . . . . . . $ 132,000 $ 18,000
Supplement disclosure of non-cash investing and
financing activities:
Cash-less exercise of stock options . . . . . . . . . $ 37,000 --
Stock issued on conversion of debenture payable . . . $ 30,000 --
See accompanying notes to financial statements
6
SOUTHERN STATES POWER COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS
OCTOBER 31, 2002
(UNAUDITED)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Business and Organization
Southern States Power Company, Inc. (hereinafter "the Company") is a business
development company that has elected to be regulated pursuant to Section 54 of
the Investment Company Act of 1940. A business development company is an
investment company designed to assist eligible portfolio companies with capital
formation. Business development companies are required to offer, and many times
do render, substantial and continuing management advice.
On July 31, 2002, the Company's Board of Directors voted to be regulated as a
business development company pursuant to Section 54 of the Investment Company
Act of 1940. The decision to become a business development company was made
primarily to better reflect the Company's anticipated future business and
developing relationships. The Company intends to focus its investments in
companies engaged in the production, sale and distribution of biodiesel fuel and
other alternative energy solutions. Biodiesel is a diesel fuel made from a
vegetable oil, rather than petrochemical oil, and is officially designated by
the EPA as an alternative fuel under the Energy Policy Act. Biodiesel is a
unique alternative fuel because it can be used in diesel engines without any
change or modifications to the engines, vehicles, or ground fueling equipment.
Since its designation as a business development company, Southern States has
made investments in the following companies: Agua Mansa Bioenergy, LLC; Biofuel
Exchange Corporation; Buckeye Biofuels, LLC; and U.S. Fuel Partners, LLC.
Prior to its election to be regulated as a business development company,
the Company utilized agricultural products and "yellow grease" reclamation
by- products to produce and distribute biodiesel fuels. The Company still
participates in these business activities on a smaller scale.
Basis of Presentation
The interim financial data as of October 31, 2002 and for the three and six
months ended October 31, 2002 and 2001 are unaudited. In the opinion of
management, the accompanying financial statements contain all adjustments
(consisting of only normal recurring adjustments) necessary to present fairly
the Company's financial position as of October 31, 2002 and the results of
operations and cash flows for the three and six-month period then ended. Results
for the six-month period ended October 31, 2002 are not necessarily indicative
of the results to be expected for the year ending April 30, 2003.
While management believes that the disclosures presented are adequate to make
the information not misleading, it is suggested that these financial statements
be read in conjunction with the financial statements and the notes included in
the Company's annual report on Form 10-KSB.
New Accounting Pronouncement
------------------------------
In October 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment
or Disposal of Long-Lived Assets." Statement 144 addresses the accounting and
reporting for the impairment or disposal of long-lived assets. The statement
provides a single accounting model for long-lived assets to be disposed of. New
criteria must be met to classify the asset as an asset held-for-sale. This
statement also focuses on reporting the effects of a disposal of a segment of a
business. This statement is effective for fiscal years beginning after December
15, 2001. The adoption of this statement did not have any material impact on
the Company's financial position or results of operations.
7
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements No.
4, 44 and 64, Amendment of FASB No. 13, and Technical Corrections", which the
Company does not believe will materially affect its financial statements.
In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities." The standard requires companies to recognize
costs associated with exit or disposal activities when they are incurred rather
than at the date of a commitment to an exit or disposal plan. Costs covered by
the standard include lease termination costs and certain employee severance
costs that are associated with a restructuring, discontinued operation, plant
closing, or other exit or disposal activity. This statement is to be applied
prospectively to exit or disposal activities initiated after December 31, 2002.
Management is currently assessing the potential impact of the adoption of the
provisions of this statement on the Company's financial statements
NOTE 2 - BALANCE SHEET ITEMS
Net properties
Net properties includes office equipment, furniture and fixtures. Balances
as of October 31, 2002 were as follows:
Office equipment . . . . $ 4,000
Furniture and fixtures . 17,000
Autos and trucks . . . . 27,000
Leasehold improvements . 6,000
Accumulated depreciation (6,000)
----------
Net properties . . . . . $ 48,000
==========
During the six months ended October 31, 2002, the Company capitalized a total of
$618,000 related to the development of the Agua Mansa Bioenergy facility in
Riverside, California. Such costs included fees for permits and entitlements,
payments made on land in escrow and engineering costs of $525,000, which are
included in accounts payable. Inasmuch as the Company has chosen not to
consummate the purchase or long-term lease of land which satisfies the project's
requirements, the Company has determined that the costs incurred for designing
and developing bio-energy facilities should be expensed. The Company forfeited
the $10,000 deposit on the land at Agua Mansa and does not anticipate
re-entering escrow on this or any other property until the requisite permits and
adequate financing are in place. No additional costs will be capitalized until
such time as land is acquired and construction commences, if ever. There are no
assurances management will be able to raise sufficient capital to acquire the
land, and if acquired, complete construction of a new biodiesel plant. The
Company charged operations for $618,000 associated with the facility being
developed for Agua Mansa as of October 31, 2002.
Assets held for sale
During the year ended April 30, 2002, the Company purchased three generators for
an aggregate purchase price of approximately $1,600,000. These generators were
then rented to a customer for power generation using biodiesel fuels. During
the year ended April 30, 2002, the customer ceased operating the generators and
terminated the rental agreement. The Company has decided to sell the equipment
and cease all power generation activities in order to focus on the sale of
biodiesel fuels. Accordingly, the generators are listed as "assets held for
sale", net of estimated costs to dispose, and did not record any revenues
associated with operating the generators during the current quarter. The
Company recorded revenues of $181,000 on the rental of these generators during
the quarter ended October 31, 2001. During the quarter ended October 31, 2002,
the Company incurred $18,000 in costs associated with relocating the generators
to a storage location.
8
Loans payable
The Company has periodically borrowed money from private sources at prevailing
market rates to meet short-term cash flow requirements. As of October 31, 2002,
the Company had received short-term operating loans totaling $266,000 from eight
individuals, of which $166,000 was received during the six months ended October
31, 2002. These loans bear interest at the rates between 10-12%, per annum. As
of October 31, 2002, these notes were due and payable and were reflected as
current liabilities in the accompanying balance sheet. The Company has not
received any demands for repayment and is working with the note holders to
satisfy the obligations.
Bank note payable
-------------------
The bank note payable in the amount of $1,103,000 at October 31, 2002, is
secured by the generators that are presently held for sale (see above). In
August 2002 the Company and lender agreed to restructure the obligation.
According to the terms of the debt restructuring, the Company is to make
interest-only payments of prime plus 0.5% on the balance due, with the principal
due in lump sum on March 15, 2003. If the Company is unable to make the
principal payment, the debt and ownership of the generators will transfer to a
shareholder of the Company who serves as a personal guarantor on the note. The
guarantor on the note has agreed to these terms and will assume the obligation
without recourse against the Company.
Convertible debentures
-----------------------
The Company issued $375,000 in convertible debentures, of which $312,500 had not
been converted as of October 31, 2002. These debentures bear interest at the
rate of 5% and are convertible into common stock at a discount of 80% of the
average market price for the common stock over the three days prior to the date
of conversion. Unless converted, these debentures mature on December 13, 2003.
The Company recorded $75,000 into additional paid-in capital associated with
issuing these debentures to account for the beneficial conversion feature of the
instruments. This amount is reflected net of the convertible debentures on the
accompanying balance sheet and is being amortized to debt issuance costs over
the life of the debenture. As of October 31, 2002, the Company had amortized
$30,000 of this amount, of which $9,000 was recorded in the current quarter.
NOTE 3 - PER SHARE INFORMATION
For all periods presented, the net earnings available to common shareholders and
the weighted average shares outstanding are the same for both basic and diluted
per share information, since the Company experienced a loss for all periods
presented.
9
NOTE 4 - STOCKHOLDER'S EQUITY
During the quarter ended July 31, 2002, the Company sold 475,000 of restricted
common stock in a private placement to several individuals for net proceeds of
$19,000. The shares were sold at $0.04 per share per share in a private
placement intended to be exempt from registration under section 4(2) and or
Regulation D of the Securities Act of 1933. Shares are restricted and generally
sold at a 50% discount to closing prices based on an average prior to the sale.
The Company records the difference between the fair value of the common stock
issued and the cash received as a charge to operations. In the event the shares
of common stock are restricted under Rule 144 of the Securities Act, management
uses the closing price, less a discount of 10%.
During the quarter ended July 31, 2002, the Company issued a total of 4,800,000
shares of restricted common stock to several officers and former employees of
the Company upon the exercise of stock options. The Company received total
proceeds of $35,000 from the exercise of these options or less than $0.01 per
share since certain of these options previously granted were issues at an
exercise price of $0.001 (par value) per share. No compensation was required to
be charged upon conversion.
During the quarter ended July 31, 2002, the Company borrowed $30,000 from a
private party and issued 660,000 shares of restricted common stock as collateral
on the note. The Company issued an additional 660,000 shares of restricted
common stock as interest on the note valued at $30,000. The note was repaid in
September 2002 and the 660,000 shares held as collateral were returned and
cancelled.
On June 12, 2002, the Company borrowed $60,000 from a private party and issued
200,000 shares of restricted common stock as interest on the note valued at
$16,000; such amount was charged to operations since the notes were due on July
26, 2002.
On August 1, 2002, the Company issued a total of 14,449,117 shares of restricted
common stock, which were issued as follows:
3,000,000 shares were issued on the redemption of 3,000,000 shares of
convertible preferred stock that had 10:1 super voting rights. Since the
value of the common stock issued was approximately equal to the value of
the preferred stock recorded on the date of issuance, no additional
consideration was recorded.
1,608,332 shares were issued on the exercise of stock options. All
remaining unvested, unexercised stock options were then cancelled. As a
result of such cancellation, the Company will not recognize the value of
such options as compensation expense in future periods.
2,700,000 shares were issued to a former officer and director of the
Company as a buyout of the remaining 18 months of his employment contract,
such amount representing the remaining cash value of the contract of
$108,000 which was recorded as compensation expense.
6,240,785 shares were issued to several third party individuals in exchange
for consulting and other services valued at approximately $250,000.
900,000 shares valued at $30,000 were issued to several third parties as
debt issuance costs associated with short-term borrowings of $30,000.
On August 16, 2002, the Company filed a Form 1-E notifying the Securities and
Exchange Commission of its intent to sell $500,000 of the Company's common stock
pursuant to a Regulation E exemption. This notification became effective on
August 30, 2002 and the Company raised approximately $339,000 through the
issuance of 13,014,400 shares of common stock. In addition, the Company
recorded approximately $89,000 in expense to reflect the issuance of these
shares at prices below fair market value. Such amount is recorded in Other
Income and Expense in the accompanying financial statements. All proceeds
raised were used to meet operating cash flow needs and to satisfy current
liabilities.
10
On September 5, 2002, the Company raised $25,000 through the issuance of a
convertible debenture. The debenture was immediately converted into 1,000,000
shares of common stock, resulting in the recognition of an additional $25,000 in
expense. These shares were issued free trading pursuant to Rule 504 of
Regulation D of the Securities Act of 1933.
In August 2002, the Company issued 1,537,500 shares of restricted common stock
valued at $59,300 which has been expensed as debt issuance costs associated with
short-term borrowings of $59,300.
NOTE 5 - SUBSEQUENT EVENTS
In November 2002, the Company raised a total of $60,000 through the issuance of
convertible debentures. The debentures mature in November 2003 and bear
interest at the rate of eight percent (8%). Of these debentures, $30,000 are
convertible into common stock of the Company at a price of $0.005, and $30,000
are convertible at a price of $0.0075. The value of the beneficial conversion
feature, approximately $30,000, will be expensed either when the debenture is
converted or over the life of the obligation.
On November 11, 2002, the Company filed a Form 1-E notifying the Securities
Exchange Commission of its intent to sell $750,000 of the Company's common stock
pursuant to a Regulation E exemption. This notification became effective on
November 22, 2002 and the Company subsequently issued 4,700,000 shares of common
stock to repay $23,500 on a convertible debenture, and 1,300,000 shares of
common stock to repay $6,500 on a second convertible debenture. As a result of
these transactions, the Company recorded approximately $15,000 in beneficial
conversion costs in the subsequent period.
11
ITEM 2 MANAGEMENTS DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
GENERAL
The following discussion should be read in conjunction with the Company's
unaudited financial statements and notes thereto including the audited financial
statements and notes thereto as contained in Form 10-KSB as filed on or about
August 14, 2002. In connection with, and because it desires to take advantage of
the "safe harbor" provisions of the Private Securities Litigation Reform Act of
1995, the Company cautions the readers regarding certain forward looking
statements in the following discussions and elsewhere in this report and in any
other statements made by, or on behalf of the Company, whether or not in future
filings with the Securities and Exchange Commission. Forward-looking statements
are statements not based on historical information and which relate to future
operations, strategies, financial results or other developments. Forward-
looking statements are necessarily based upon estimates and assumptions that
are inherently subject to significant business, economic and competitive
uncertainties and contingencies, many of which are beyond the Company's control
and many of which, with respect to future business decisions, are subject to
change. These uncertainties and contingencies can affect actual results and
could cause actual results to differ materially from those expressed in any
forward looking statements made by, or on behalf of, the Company. The Company
disclaims any obligation to update forward-looking statements.
BUSINESS DEVELOPMENT COMPANY
On July 31, 2002, the Company's Board of Directors voted to be regulated
pursuant to Section 54 of the Investment Company Act of 1940 with its
investments concentrated in companies engaged in the production, sale and
distribution of biodiesel fuel and other alternative energy solutions. On
August 8, 2002, the Company filed a form N-54A, notifying the Securities and
Exchange Commission of its intent to be regulated as a Business Development
Company pursuant to Section 54 of the Investment Company Act of 1940. Prior to
making this election, the Company was actively involved in the sale, manufacture
and distribution of biodiesel. The decision to be regulated under the
Investment Company Act of 1940 was made primarily to better reflect the
Company's anticipated future business and developing relationships. As a
business development company, the Company has invested in, and has a substantial
ownership interest in, the following companies: Agua Mansa Bioenergy, LLC;
Biofuel Exchange Corporation; Buckeye Biofuels, LLC; and U.S. Fuel Partners,
LLC. (See Part II, Item 5 "Other Information," below).
On August 16, 2002, the Company filed a Form 1-E notifying the Securities
Exchange Commission of its intent to sell $500,000 of the Company's common stock
pursuant to a Regulation E exemption at prices ranging from $0.025 to $0.06
("August Offering"). This notification became effective on August 30, 2002 and
the Company subsequently raised approximately $339,000 through the sale and
issuance of 13,014,400 shares of common stock. All proceeds raised were used to
meet operating cash flow needs and to satisfy liabilities. On November 11,
2002, the Company filed a Form 2-E notifying the Securities and Exchange
Commission that the August Offering was completed and was being closed.
On November 11, 2002, the Company filed a Form 1-E notifying the Securities
Exchange Commission of its intent to sell $750,000 of the Company's common stock
pursuant to a Regulation E exemption at prices ranging from $0.005 to $0.05
("November Offering"). This notification became effective on November 22, 2002
and the Company subsequently issued 6,000,000 shares to repay convertible
debentures of $30,000. The Company currently plans to use subsequent stock
issuances under this November Offering to repay convertible debentures, to meet
operating cash flow needs, and to satisfy current liabilities.
12
CRITICAL ACCOUNTING POLICIES
The Company's financial statements and related public financial information
are based on the application of accounting principles generally accepted in the
United States ("GAAP"). GAAP requires the use of estimates; assumptions,
judgments and subjective interpretations of accounting principles that have an
impact on the assets, liabilities, revenue and expense amounts reported. These
estimates can also affect supplemental information contained in the external
disclosures of the Company including information regarding contingencies, risk
and financial condition. We believe our use of estimates and underlying
accounting assumptions adhere to GAAP and are consistently and conservatively
applied. Valuations based on estimates are reviewed by us for reasonableness and
conservatism on a consistent basis throughout the Company. Primary areas where
financial information of the Company is subject to the use of estimates,
assumptions and the application of judgment include acquisitions, valuation of
long-lived and intangible assets, and the realizability of deferred tax assets.
We base our estimates on historical experience and on various other assumptions
that we believe to be reasonable under the circumstances. Actual results
may differ materially from these estimates under different assumptions or
conditions.
VALUATION OF LONG-LIVED AND INTANGIBLE ASSETS
--------------------------------------------------
The recoverability of long lived assets requires considerable judgment and
is evaluated on an annual basis or more frequently if events or circumstances
indicate that the assets may be impaired. As it relates to definite life
intangible assets, we apply the impairment rules as required by SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and Assets to Be Disposed
Of" as amended by SFAS No. 144, which also requires significant judgment and
assumptions related to the expected future cash flows attributable to the
intangible asset. The impact of modifying any of these assumptions can have a
significant impact on the estimate of fair value and, thus, the recoverability
of the asset.
INCOME TAXES
-------------
We recognize deferred tax assets and liabilities based on the differences
between the financial statement carrying amounts and the tax bases of assets and
liabilities. We regularly review our deferred tax assets for recoverability and
establish a valuation allowance based upon historical losses, projected future
taxable income and the expected timing of the reversals of existing temporary
differences. As of October 31, 2002, we estimated the allowance on net deferred
tax assets to be one hundred percent of the net deferred tax assets.
RESULTS OF OPERATIONS
Quarter ended October 31, 2002 compared to quarter ended October 31, 2001
REVENUES
--------
For the three months ended October 31, 2002 the company generated revenues
in the amount of $12,000 from operations as compared to $230,000 for the same
period a year earlier ending October 31, 2001. Revenues for the 2001 quarter
included $181,000 in fees from the rental of power generation equipment. During
the fiscal year ended April 30, 2002, the Company ceased operating the rental
equipment and intends to sell the equipment. Accordingly, no fees were
generated from the rental of power generation equipment in the quarter ending
October 31, 2002. Fuel sales declined in the quarter ended October 31, 2002
owing to the Company's focus on developing its business model as a business
development company.
13
GENERAL AND ADMINISTRATIVE
----------------------------
Total general and administrative expenses were $648,000 for the three
months ended October 31, 2002 compared to general and administrative expenses
for the comparable period in 2001 of $576,000. The $72,000 increase between the
two periods is primarily attributable to the Company's buyout of the employment
contract of its former President through the issuance of common stock valued at
$108,000.
OTHER EXPENSES
---------------
Impairment of plant costs in the quarter ended October 31, 2002 were
associated with the write off of $618,000 incurred in connection with designing
and developing a biofuel facility in Riverside, California. While the Company
intends to vigorously pursue construction of the facility, it has been unable to
secure land suitable for construction and deemed the value of the costs incurred
to date to be impaired.
Expense recognized from the sale of stock below fair value during the
quarter ended October 31, 2002 of $89,000 was incurred in connection with the
issuance of 13,014,400 shares of common stock pursuant to the Company's filing
under Form 1-E.
Interest expense and debt issuance costs were $166,000 for the quarter
ended October 31, 2002, compared to $39,000 for the quarter ended October 31,
2001. The increase is primarily attributed to the cost of issuing common stock
associated with securing short-term borrowings.
Other expenses of $50,000 incurred in the quarter ended October 31, 2002
included the write off of a $50,000 deposit associated with the Cardlock
facility in Phoenix, Arizona. In September 2002, the Company determined that
the acquisition of the Cardlock facility was not an economically sound
investment and failed to meet the investment criteria of the investment
committee.
NET INCOME
-----------
As a result of the above-mentioned factors, the Company incurred a loss of
$1,570,000 for the quarter ended October 31, 2002, compared to a loss of
$419,000 for the first quarter of the prior year, an increase of $1,151,000.
Six month period ended October 31, 2002 compared to six month period ended
October 31, 2001
REVENUES
--------
For the six month period ended October 31, 2002 the company generated
revenues in the amount of $31,000 from operations as compared to $429,000 for
the same period a year earlier ending October 31, 2001. Revenues for the 2001
six month period included $369,000 in fees from the rental of power generation
equipment. During the fiscal year ended April 30, 2002, the Company ceased
operating the rental equipment and intends to sell the equipment. Accordingly,
no fees were generated from the rental of power generation equipment in the
quarter ending October 31, 2002.
14
GENERAL AND ADMINISTRATIVE
----------------------------
Total general and administrative expenses were $1,015,000 for the six
months ended October 31, 2002 compared to general and administrative expenses
for the comparable period in 2001 of $1,033,000. The $18,000 decrease between
the two periods is primarily attributable to the suspension of depreciation on
assets held for sale and a reduction in goodwill amortization since goodwill
was fully amortized in 2001. This reduction was offset by an increase in
compensation expense related to the value of 2,700,000 shares of common stock
issued to buy out the employment contract of the Company's former president.
OTHER EXPENSES
---------------
Impairment of plant costs in the six months ended October 31, 2002 were
associated with the write off of $618,000 incurred in connection with designing
and developing a biofuel facility in Riverside, California. While the Company
intends to vigorously pursue construction of the facility, it has been unable to
secure land suitable for construction and deemed the value of the costs incurred
to date to be impaired.
Expense recognized from the sale of stock below fair market value during
the six months ended October 31, 2002 of $109,000 included $89,000 incurred in
connection with the issuance of 13,014,400 shares of common stock pursuant to
the Company's filing under Form 1-E, and $20,000 resulting from the issuance of
stock below fair market value to retire a note payable to a third party.
Interest expense and debt issuance costs were $242,000 for the six month
period ended October 31, 2002, compared to $444,000 for the same period of the
prior year. Also recorded in the six month period ended October 31, 2001
was $354,000 in beneficial conversion feature associated with a convertible
debenture. While the Company's overall debt burden increased from 2001 to 2002,
the Company did not incur expense in 2002 for beneficial conversion features,
and the debt issuance costs in 2002 were only $119,000.
Other expenses in the six month period ended October 31, 2002 included the
write off of a $50,000 deposit associated with the Cardlock facility in Phoenix,
Arizona. In September 2002, the Company determined that the acquisition of the
Cardlock facility was not an economically sound investment and failed to meet
the investment criteria of the investment committee.
NET INCOME
-----------
As a result of the above-mentioned factors, the Company incurred a loss of
$2,036,000 for the six month period ended October 31, 2002, compared to a loss
of $1,500,000 for the same six month period of the prior year, an increase of
$536,000.
LIQUIDITY AND CAPITAL RESOURCES
The accompanying financial statements have been prepared in conformity with
principles of accounting applicable to a going concern, which contemplates the
realization of assets and the satisfaction of liabilities in the normal course
of business. The Company has incurred operating losses from inception and
has generated an accumulated deficit of $17,221,000. The Company requires
additional capital to meet its operating requirements. These factors raise
substantial doubt regarding the Company's ability to continue as a going
concern. Management plans to increase cash flows through the sale of securities
(see following paragraph below) and, eventually, through the investment in
profitable operations. There are no assurances that such plans will be
successful. No adjustments have been made to the accompanying financial
statements as a result of this uncertainty.
15
As of October 31, 2002, the Company had a bank overdraft of $4,000 and
current liabilities exceeded current assets by $2,308,000. The Company's
primary available source for generating cash for operations is through the
issuance of common stock and notes payable. On August 16, 2002, the Company
filed a Form 1-E notifying the Securities and Exchange Commission of its intent
to sell $500,000 of the Company's common stock pursuant to a Regulation E
exemption. This notification became effective on August 30, 2002 and the
Company subsequently raised approximately $339,000 through the issuance of
13,014,400 shares of common stock. This offering was closed on November 11,
2002. The Company filed a second Form 1-E on November 11, 2002, notifying the
Securities and Exchange Commission of its intent to sell an additional $750,000
of the Company's common stock pursuant to a Regulation E exemption at prices
ranging from $0.005 to $0.05. This notification became effective on November
22, 2002 and the Company subsequently issued 4,700,000 shares to repay
convertible debentures of $23,500. The Company is limited to raising a total of
$5,000,000 through Regulation E per 12-month period. The Company's ability to
raise money through the issuance of common stock is conditional upon the market
for the Company's stock. Management has no assurance that any funds will be
available under the Form 1-E, or that any funds made available will be adequate
for the Company to continue as a going concern. If the Company is not able to
generate positive cash flow from operations, or is unable to secure adequate
funding under acceptable terms, there is doubt that the company can continue as
a going concern.
The Company is involved in the development of a biodiesel production
facility in Riverside, California, through its subsidiary, Agua Mansa, LLC, in
which it maintains a 90% ownership interest. While total costs for the
completed project are not yet fully projected, and will vary depending on the
final project size, it is anticipated that the facility will cost several
million dollars. Included in this amount is $690,000 for the land upon which
the facility will be located and preliminary engineering costs of $525,000
incurred to date. In November 2002, the Company decided not to consummate the
purchase of the land in Agua Mansa and dropped out of escrow, in part because it
was unable to obtain the necessary permitting and in part because it was unable
to obtain the financing necessary to conclude the transaction. As a result, the
Company recorded an impairment of $618,000 in the value of the capitalized costs
associated with developing the facility. While the Company remains committed
to the development and construction of the Agua Mansa facility, it is reliant
upon acquiring suitable property on which to build the facility and then
obtaining the necessary outside funding to complete construction. In the event
the Company is unable to acquire property and obtain financing for the Agua
Mansa facility, there is substantial doubt that the Company will be able to
execute its business strategy and continue as a going concern.
16
PART II
ITEM 1 LEGAL PROCEEDINGS
In the ordinary course of business, the Company is from time to time
involved in various pending or threatened legal actions. The litigation process
is inherently uncertain and it is possible that the resolution of such matters
might have a material adverse effect upon the financial condition and/or results
of operations of the Company. However, in the opinion of the Company's
management, matters currently pending or threatened against the Company are not
expected to have a material adverse effect on the financial position or results
of operations of the Company.
ITEM 2 CHANGES IN SECURITIES AND USE OF PROCEEDS
On August 1, 2002, the Company issued a total of 3,000,000 shares of
restricted common stock to Anthony K. Miller, Harrison A. McCoy, III, and
William O. Sheaffer. Mr. Miller is a former director of the Company and
received 1,000,000 shares. Mr. McCoy and Mr. Sheaffer are current directors of
the Company and received 1,000,000 shares each. All the shares were issued for
the redemption of 3,000,000 shares of convertible preferred stock that had 10:1
super voting rights. The issuances were exempt from registration pursuant to
Section 4(2) of the Securities Act of 1933.
On August 1, 2002, the Company issued a total of 1,608,332 shares of
restricted common stock to Anthony K. Miller, Lawrence W. Taggart, Harrison A.
McCoy, III, and William O. Sheaffer. Mr. Miller is a former director of the
Company and received 983,333 shares. Mr. Taggert is a former Director and
President of the Company and received 208,333 shares. Mr. McCoy and Mr.
Sheaffer are current directors of the Company and received 208,333 shares each.
These shares were issued on the exercise of stock options. All remaining
unvested, unexercised stock options were then cancelled. The issuances were
exempt from registration pursuant to Section 4(2) of the Securities Act of 1933.
On August 1, 2002, the Company issued 2,700,000 shares of restricted common
stock to Lawrence W. Taggart, a former President and director of the Company, as
a buyout of the remaining 18 months of his employment contract, such amount
representing the remaining cash value of the contract of $108,000. This
issuance was exempt from registration pursuant to Section 4(2) of the Securities
Act of 1933.
On August 1, 2002, the Company issued 6,240,785 shares of restricted common
stock to six different unrelated individuals in exchange for consulting and
other services valued at approximately $250,000. The issuances were exempt from
registration pursuant to Section 4(2) of the Securities Act of 1933.
On August 1, 2002, the Company issued 900,000 shares of restricted common
stock valued at $30,000 were issued to three different unrelated parties as debt
issuance costs associated with short-term borrowings of $30,000. The issuances
were exempt from registration pursuant to Section 4(2) of the Securities Act of
1933.
In August 2002, the Company issued 1,537,500 shares of restricted common
stock valued at $59,300 to 2 different unrelated individuals, which was
repayment of short-term borrowings of $59,300. The issuances were exempt from
registration pursuant to Section 4(2) of the Securities Act of 1933.
17
Pursuant to an exemption under Regulation E, the Company issued a total of
13,014,400 shares of common stock to three different unrelated investors in
exchange for a total of $339,000, as detailed herein. All the issuances were to
accredited investors. The breakdown of these issuances is as follows: on
September 5, 2002 the Company issued 660,000 shares of common stock for the
extinguishment of a $30,000 promissory note and 3,914,400 shares of common stock
in exchange for cash; on September 9, 2002 the Company issued 1,000,000 shares
of common stock for $25,000 in cash; on September 18, 2002 the Company issued
1,000,000 shares of common stock for $25,000 in cash; and on October 15, 2002
the Company issued 6,440,000 shares of common stock in exchange for the payment
of $161,000 in principal and interest under an outstanding debenture.
On September 5, 2002, the Company issued a convertible debenture in the
principal amount of $25,000. The debenture was immediately converted into
1,000,000 shares of common stock, resulting in the recognition of an additional
$25,000 in expense. These shares were issued free trading pursuant to Rule 504
of Regulation D of the Securities Act of 1933.
ITEM 3 DEFAULTS UPON SENIOR SECURITIES
There have been no events which are required to be reported under this
Item.
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There have been no events which are required to be reported under this
Item.
ITEM 5 OTHER INFORMATION
On July 31, 2002, the Company's Board of Directors voted to be regulated
pursuant to Section 54 of the Investment Company Act of 1940 with its
investments concentrated in companies engaged in the production, sale and
distribution of biodiesel fuel and other alternative energy solutions. On
August 8, 2002, the Company filed a form N-54A, notifying the Securities and
Exchange Commission of its intent to be regulated as a Business Development
Company pursuant to Section 54 of the Investment Company Act of 1940. Prior to
making this election, the Company was actively involved in the sale, manufacture
and distribution of biodiesel. The decision to be regulated under the
Investment Company Act of 1940 was made primarily to better reflect the
Company's anticipated future business and developing relationships. On August
2, 2002, as a result of a change in the Company's business focus, the Company
withdrew its SB-2 registration statement.
The Company's first investment was in Agua Mansa Bioenergy, LLC ("Agua
Mansa"). Over the past year the Company invested $611,808 in Agua Mansa. The
most recent investment was on October 31, 2002. The total investment was in
exchange for 100 shares of common stock, which is 90% of Agua Mansa's
outstanding stock.
Agua Mansa is in the process of designing and developing a new, state-
of-the-art biodiesel facility in Riverside, California, that will produce fuel
while also yielding high-grade by-products such as pharmaceutical-grade glycerin
and Vitamin E. In March 2002, the Company entered into a Preliminary Engineering
Agreement with Lurgi, PSI, Inc. ("Lurgi") in which Lurgi will perform the
preliminary engineering work on the Agua Mansa project. Subsequent to April 30,
2002, the Company entered into an Escrow Agreement for the purchase of 7.73
acres of land in Riverside, California where the new facility will be located.
The total purchase price of this land was to be $793,000, of which $10,000 was
paid as a deposit. However, the Company has recently chosen not to consummate
the purchase or long-term lease of land which satisfies the project's
requirements; therefore, the Company has determined that the costs incurred for
designing and developing bio-energy facilities should be expensed. The Company
forfeited the $10,000 deposit on the land at Agua Mansa and does not anticipate
re-entering escrow on this or any other property until the requisite permits and
adequate financing are in place. No additional costs will be capitalized until
such time as land is acquired and construction commences, if ever. There are no
assurances management will be able to raise sufficient capital to acquire the
land, and if acquired, complete construction of a new biodiesel plant. The
Company charged operations for $618,000 associated with the facility being
developed for Agua Mansa as of October 31, 2002.
18
The Company also invested a total of $2,384 in Biofuel Exchange Corporation
("BFX") on October 1, 2002. This investment was in exchange for 5,100 shares,
which equates to a 51% ownership interest in BFX. Parties unrelated to the
Company own the remainder of BFX.
BFX was established to create a market for the wholesale exchange of
biodiesel. There is not presently a national exchange for buying and selling
biodiesel. Customers must contract with suppliers or directly with manu-
facturers and negotiate the best rates possible. There are no quality standards
or published pricing. BFX hopes to fill this market need by contracting with
manufacturers, setting quality standards, and publishing prices for wholesalers.
The Company also invested a total of $1,550 in Buckeye Biofuels, LLC
("Buckeye") on September 30, 2002. This investment was in exchange for 100
shares of common stock, which equates to 100% of Buckeye's outstanding stock.
Buckeye was formed to build and operate a small-scale biodiesel manu-
facturing facility outside of Phoenix, Arizona. The plant being designed will
produce 5-6 million gallons of biodiesel fuel per year and will serve the local
market and Colorado.
The Company also invested a total of $12,317 in U.S. Fuel Partners, LLC
("USFP") on September 20, 2002. This investment was in exchange for 100 shares
of common stock, which equates to a 70% ownership interest in USFP. Parties
unrelated to the Company own the remainder of USFP.
USFP was formed to engage in the retail and wholesale sale of biodiesel
fuel in Colorado and the neighboring areas. USFP presently buys biodiesel fuel
directly from either suppliers or manufacturers to fill customers' orders.
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
99.1 Certification as Adopted Pursuant to Sections 302 and 906 of
the Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K
On September 13, 2002, the Company filed a Form 8-K regarding a change
in the Company's certifying accountant from Stonefield Josephson, Inc., to
McKennon, Wilson & Morgan, LLP. This change was effective August 30, 2002.
On September 23, 2002, the Company filed a Form 8-K regarding Stonefield
Josephson, Inc.'s letter in agreement with the Company's Form 8-K filed on
September 13, 2002 regarding the Company's change in certifying accountants.
On October 30, 2002, the Company filed a Form 8-K regarding the Company's
receipt and acceptance of the resignation of one of its directors, Anthony K.
Miller; and the Company's announcement of three new independent directors being
appointed to the Company's Board of Directors: Karl Gee, Roy W. Kekahuna, and
Neway Argaw.
19
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
Dated: December 16, 2002 Southern States Power Company, Inc.
/s/ Harrison A. McCoy, III
---------------------------------------------
By: Harrison A. McCoy, III
Its: Chief Executive Officer and Treasurer
20