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SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarter period ended June 30, 2003 Commission file number 1-467
WILSHIRE ENTERPRISES, INC.
-------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 84-0513668
- ------------------------------- --------------------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
921 Bergen Avenue - Jersey City, New Jersey 07306-4204
- -------------------------------------------- ---------------
(Address of principal executive offices) (Zip Code)
(201) 420-2796
--------------
Wilshire Oil Company of Texas
---------------------------------------------------------------------------
Former name, former address and former fiscal year, if changed since last
report.
Indicate by check mark whether the registrant (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 |_|
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act).
Yes |_| No |X|
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of August 12, 2003.
Common Stock $1 Par Value -----7,809,833
WILSHIRE ENTERPRISES, INC
INDEX
Page No.
--------
Part I 1. Financial Information
Financial Information: 1
Condensed Consolidated Balance Sheets -
June 30, 2003 (Unaudited) and December 31, 2002
Unaudited Condensed Consolidated Statements of Income - 2
Three months ended June 30, 2003 and 2002
Unaudited Condensed Consolidated Statements of Income - 3
Six months ended June 30, 2003 and 2002
Unaudited Condensed Consolidated Statement of Cash Flows - 4
Six months ended June 30, 2003 and 2002
Notes to Unaudited Condensed Consolidated Financial Statements 5
2. Management's Discussion and Analysis 12 of Financial
Condition and Results of Operations
3. Quantitative and Qualitative Disclosure About Market Risk
4. Controls and Procedures
Part II Other Information 19
4. Submission of Matters to a Vote of Security Holders
6. Exhibits and Reports on Form 8-K
WILSHIRE ENTERPRISES, INC.
CONSOLIDATED BALANCE SHEETS
June 30, December 31,
2003 2002
(Unaudited)
------------- -------------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 2,518,000 $ 4,164,000
Marketable securities, available-for-sale, at fair value 10,756,000 9,860,000
Accounts receivable net of allowance of $59,000 and $77,000 in 2003
and 2002, respectively 1,558,000 1,094,000
Income taxes receivable 1,516,000 626,000
Prepaid expenses and other current assets 2,748,000 1,677,000
------------- -------------
Total current assets 19,096,000 17,421,000
------------- -------------
NONCURRENT ASSETS
Mortgage notes receivable 2,762,000 3,035,000
Other noncurrent 333,000 375,000
PROPERTY AND EQUIPMENT
Oil and gas properties, using the full cost method of accounting 148,203,000 141,243,000
Real estate properties 72,638,000 71,355,000
Other property and equipment 366,000 366,000
------------- -------------
221,207,000 212,964,000
Less-Accumulated depreciation, depletion and amortization 130,693,000 125,875,000
------------- -------------
90,514,000 87,089,000
------------- -------------
TOTAL ASSETS $ 112,705,000 $ 107,920,000
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Current portion of long-term debt $ 6,368,000 $ 7,314,000
Loan payable to shareholder - 500,000
Accounts payable 2,259,000 3,033,000
Income taxes payable - 35,000
Deferred income taxes 1,171,000 535,000
Accrued liabilities 16,000 119,000
------------- -------------
Total current liabilities 9,814,000 11,536,000
NONCURRENT LIABILITIES
Long-term debt, less current portion 59,872,000 58,392,000
Deferred income taxes 13,458,000 12,051,000
Deferred income 1,521,000 1,627,000
Other Long-term liabilities - 75,000
------------- -------------
Total liabilities 84,665,000 83,681,000
------------- -------------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY
Preferred stock, $1 par value, 1,000,000 shares authorized; none issued and
outstanding in 2003 and 2002 - -
Common stock, $1 par value, 15,000,000 shares authorized; issued
10,013,544 shares in 2003 and 2002 10,014,000 10,014,000
Capital in excess of par value 9,029,000 9,029,000
Treasury stock 2,203,711 and 2,203,710 shares at June 30, 2003 and
December 31,2002, respectively, at cost (10,355,000) (10,355,000)
Retained earnings 19,961,000 18,640,000
Accumulated other comprehensive loss (609,000) (3,089,000)
------------- -------------
Total shareholders' equity 28,040,000 24,239,000
------------- -------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 112,705,000 $ 107,920,000
============= =============
The accompanying notes to consolidated financial statements are an integral part
of these financial statements.
1
WILSHIRE ENTERPRISES, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF INCOME
For the three months ended June 30, 2003, and 2002
June 30, June 30,
2003 2002
----------- -----------
REVENUES
Oil and gas $ 2,792,000 $ 1,319,000
Real estate 3,718,000 3,525,000
----------- -----------
Total revenues 6,510,000 4,844,000
----------- -----------
COST AND EXPENSES
Oil and gas production expenses 597,000 695,000
Real estate operating expenses 2,210,000 2,117,000
Depreciation and amortization 671,000 612,000
Depreciation, depletion and amortization of oil and gas properties 918,000 508,000
General and administrative 694,000 488,000
Other 168,000 -
----------- -----------
Total costs and expenses 5,258,000 4,420,000
----------- -----------
INCOME FROM OPERATIONS 1,252,000 424,000
OTHER INCOME
Dividend and interest income 124,000 226,000
Gain on sale of securities - 102,000
Other Income 127,000 503,000
Gain on sale of real estate assets - 168,000
INTEREST EXPENSE (959,000) (1,183,000)
----------- -----------
Income before provision for income taxes 544,000 240,000
PROVISION FOR INCOME TAXES 267,000 33,000
----------- -----------
NET INCOME $ 277,000 $ 207,000
=========== ===========
Basic earnings per share $ 0.04 $ 0.03
=========== ===========
Diluted earnings per share $ 0.04 $ 0.03
=========== ===========
The accompanying notes to consolidated financial statements are an integral part
of these financial statements.
2
WILSHIRE ENTERPRISES, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF INCOME
For the six months ended June 30, 2003, and 2002
June 30, June 30,
2003 2002
------------ ------------
REVENUES
Oil and gas $ 5,305,000 $ 2,567,000
Real estate 7,355,000 7,294,000
------------ ------------
Total revenues 12,660,000 9,861,000
------------ ------------
COST AND EXPENSES
Oil and gas production expenses 1,284,000 1,152,000
Real estate operating expenses 4,496,000 4,224,000
Depreciation and amortization 1,570,000 1,175,000
Depreciation, depletion and amortization of oil and gas properties 1,563,000 932,000
General and administrative 1,373,000 948,000
Other 168,000 -
------------ ------------
10,454,000 8,431,000
------------ ------------
INCOME FROM OPERATIONS 2,206,000 1,430,000
OTHER INCOME
Dividend and interest income 369,000 392,000
Gain on sale of securities 261,000 717,000
Insurance proceeds 1,000,000 -
Other Income 253,000 503,000
Gain on sale of real estate assets - 168,000
INTEREST EXPENSE (2,586,000) (2,318,000)
------------ ------------
Income before provision for income taxes 1,503,000 892,000
PROVISION FOR INCOME TAXES 182,000 235,000
------------ ------------
NET INCOME $ 1,321,000 $ 657,000
============ ============
Basic earnings per share $ 0.17 $ 0.08
============ ============
Diluted earnings per share $ 0.17 $ 0.08
============ ============
Net income for the six months in 2002 as previously reported has been adjusted
to record the corrected book loss on the sale of a marketable security. This
correction resulted in an adjustment to net income for the six month from
$497,000 or $0.06 per share as originally reported, to $657,000 or $0.08 per
share, as reflected above.
Net income for the first quarter of 2003 as previously reported has been reduced
by $78,000 or $0.01 per share to record the under accrual of certain General and
Administrative expenses.
The accompanying notes to consolidated financial statements are an integral part
of these financial statements.
3
WILSHIRE ENTERPRISES, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Six Months Ended
-----------------------------
June 30, June 30,
2003 2002
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 1,321,000 $ 657,000
Adjustments to reconcile net income to net cash
provided by operating activities -
Depreciation, depletion and amortization 3,133,000 2,107,000
Deferred income tax (benefits) provision 1,407,000 635,000
Deferred income (106,000) -
Gain on sales of real estate assets - (168,000)
Gain on sales of marketable securities (261,000) (717,000)
Changes in operating assets and liabilities -
Increase in accounts receivable (464,000) (786,000)
Increase in income taxes receivable (890,000) -
Increase in prepaid expenses and other current assets (538,000) (307,000)
Increase in other liabilities (75,000) -
Decrease in accounts payable, accrued
liabilities and taxes payable (913,000) (551,000)
------------ ------------
Net cash provided by operating activities 2,614,000 870,000
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (8,243,000) (2,483,000)
Purchases of marketable securities - (1,343,000)
Proceeds from sales and redemptions of marketable securities 781,000 2,316,000
Proceeds from sales of real estate properties - 345,000
Proceeds on mortgage notes receivable 273,000 3,880,000
------------ ------------
Net cash provided by (used in) investing activities (7,189,000) 2,715,000
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of debt 35,625,000 4,080,000
Principal payments of long-term debt (35,091,000) (10,068,000)
Purchase of treasury stock - (85,000)
Loan payable to shareholder (500,000) (200,000)
Financing Costs (533,000) -
------------ ------------
Net cash provided by (used in) financing activities (499,000) (6,273,000)
------------ ------------
EFFECT OF EXCHANGE RATE CHANGES ON CASH 3,428,000 395,000
------------ ------------
Net increase (decrease) in cash and cash equivalents (1,646,000) (2,293,000)
CASH AND CASH EQUIVALENTS, beginning of year 4,164,000 4,984,000
------------ ------------
CASH AND CASH EQUIVALENTS, end of period $ 2,518,000 $ 2,691,000
============ ============
SUPPLEMENTAL DISCLOSURES TO THE STATEMENTS
OF CASH FLOWS:
Cash paid during the year for -
Interest $ 2,739,000 $ 2,319,000
============ ============
Income taxes, net $ 160,000 $ 159,000
============ ============
The accompanying notes to consolidated financial statements are an integral
part of these financial statements
4
WILSHIRE ENTERPRISES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2003
1. FINANCIAL STATEMENTS
The unaudited condensed consolidated financial statements included
herein have been prepared by the Registrant, without audit, pursuant to
the rules and regulations of the Securities and Exchange Commission.
Certain information and footnote disclosures normally included in
financial statements prepared in accordance with accounting principles
generally accepted in the United States have been condensed or omitted
pursuant to such rules and regulations, although the Registrant
believes that the disclosures are adequate to make the information
presented not misleading. It is suggested that these unaudited
condensed consolidated financial statements be read in conjunction with
the financial statements and the notes thereto included in the
Company's latest annual report on Form 10-K. This condensed financial
information reflects, in the opinion of management, all adjustments
necessary to present fairly the results for the interim periods. In
connection with the preparation of the interim financial statements,
the Company estimates oil and gas operations for the month of June
based on prior months actual results and specific significant
transactions which may have occurred during the month. In the opinion
of management these estimated results approximate actual. The results
of operations for such interim periods are not necessarily indicative
of the results for the full year.
Net income for the first quarter in 2002 as previously reported has
been adjusted to record the corrected book loss on the sale of a
marketable security. This correction, which was made on Form 10-K when
filed for 2002, resulted in an adjustment to net income for the first
quarter from $290,000 or $0.04 per share as originally reported, to
$450,000 or $0.06 per share. Income for the six months in 2002 was
adjusted from $497,000 or $0.06 per share as originally reported, to
$657,000 or $0.08 per share.
Net income for the first quarter in 2003 as previously reported has
been reduced by $78,000 or $0.01 per share to record the under accrual
of certain General and Administrative expenses.
Accounting for Stock-Based Compensation
In December 2002, the Financial Accounting Standards Board issued
Statement No. 148 to amend alternative methods of transition for a
voluntary change to the fair value based method of accounting for
stock-based employee compensation. In addition, Statement No. 148
amends the disclosures in both annual and interim financial statements
about the method of accounting for stock-based employee compensation
and the effect of the method used on reported results. However, the
Company has continued to account for options in accordance with the
provision of APB Opinion No. 25, "Accounting for Stock Issues to
Employees" and related interpretations. Accordingly, no compensation
expense has been recognized for stock option plans.
5
The following tables sets forth the Company's pro forma information for its
common stockholders for the quarters ended June 30, 2003 and 2002 (in thousands
except earnings per share data):
For Three Months Ended June 30,
2003 2002
------ -------
Net income as reported .......................................................... $ 277 $ 207
Add: Stock option expense included in net income (loss) ......................... $ - $ -
Less: Stock option expense determined under fair value recognition
method for all awards ........................................................ $ (15) $ -
------ -------
Pro forma net income ............................................................ $ 262 $ 207
====== =======
Net income per share as reported:
Basic ........................................................................ $ 0.04 $ 0.03
====== =======
Diluted ...................................................................... $ 0.04 $ 0.03
====== =======
Pro forma net income per share
Basic ........................................................................ $ 0.03 $ 0.03
====== =======
Diluted ...................................................................... $ 0.03 $ 0.03
====== =======
For Six Months Ended June 30,
2003 2002
------- -------
Net income as reported ......................................................... $ 1,321 $ 657
Add: Stock option expense included in net income (loss) ........................ $ - $ -
Less: Stock option expense determined under fair value recognition
method for all awards ....................................................... $ (31) $ -
------- -------
Pro forma net income ........................................................... $ 1,290 $ 657
======= =======
Net income per share as reported:
Basic ....................................................................... $ 0.17 $ 0.08
======= =======
Diluted ..................................................................... $ 0.17 $ 0.08
======= =======
Pro forma net income per share
Basic ...................................................................... $ 0.17 $ 0.08
======= =======
Diluted .................................................................... $ 0.17 $ 0.08
======= =======
The fair value was estimated using the Black-Scholes option-pricing model based
on the weighted average market price at grant date of $3.94 per share in 1999,
$3.32 in 2002 and $3.60 in 2003 and the following weighted average assumptions;
risk-free interest rate of 6.19% for 1999, 3.87% for 2002 and 3.00% for 2003,
volatility of 25.94% for 1999 and 33.1% for 2002 and 2003, no dividend yield for
1999, 2002 or 2003, and an expected option life of 5 years.
Oil and Gas Properties
The Company follows the accounting policy, generally known in the oil
and gas industry as "full cost accounting". Under full cost accounting, the
Company capitalizes all costs, including interest costs, relating to the
exploration for and development of its mineral resources. Under this method, all
costs incurred in the United States and Canada are accumulated in separate cost
centers and are amortized using the gross revenue method based on total future
estimated recoverable oil and gas reserves.
6
The determination of oil and gas reserves is a complex and interpretive
process, which is subject to continued revisions as additional information
becomes available. Reserve estimates prepared by different engineers from the
same data can vary. Therefore, the reserve data used herein should not be
construed as being exact. Any reserve estimate, especially when based upon
volume-metric calculations, depends in part on the quality of available data,
engineering and geologic interpretation and judgment, and thus, represents only
an informed professional judgment. Subsequent reservoir performance may justify
upward or downward revision of the estimate.
While it has not been the Company's practice to obtain mid-year reserve
valuations, in connection with the previously announced marketing for sale of
its oil and gas operations, the Company engaged Ryder Scott Company to perform
an engineering reserve study of the Company's entire reserves as of June 1,
2003. In addition, the Company engaged Ryder Scott to roll forward this analysis
to June 30, 2003. The Company has used the reserve valuations in this analysis
for purposes of preparing the financial statements presented herein. For the
year ended December 31, 2002, Ryder Scott was engaged to evaluate all the
Company's reserves other than the Hilda field in Canada, which was separately
evaluated by Citadel Engineering, Ltd.
The following table sets forth summary information with respect to the
estimates of the Company's Proved and Proved Developed Reserves at June 30,
2003:
United States Canada Total
----------------------- ----------------------- -----------------------
Proved Proved Proved
Proved Developed Proved Developed Proved Developed
---------- ---------- ---------- ---------- ---------- ----------
(000's Omitted) (000's Omitted)
Oil (Bbls) 571 427 211 211 782 638
Gas (Mcl) 8,849 8,596 10,167 10,167 19,016 18,763
Net present value @ 10% $21,745 $19,948 $24,083 $24,083 $45,828 $44,031
Capitalized costs are subject to a "ceiling" test that limits such
costs to the aggregate of the estimated present value, using a discount rate of
10% of the future net revenues of proved reserves and the lower of cost or fair
value of unproved properties. Management is of the opinion that, based on
reserve reports of petroleum engineers and geologists, the fair value of the
estimated recoverable oil and gas reserves exceeds the unamortized cost of oil
and gas properties at June 30, 2003 and 2002.
The Company currently operates 3.6% of the total wells it participates
in.
Recently Issued Pronouncements
In May 2002, the FASB issued SFAS No. 145, "Reporting Gains and Losses from
Extinguishment of Debt", which rescinded SFAS No. 4, No. 44 and No. 64 and
amended SFAS No. 13. The new standard addresses the income statement
classification of gains or losses from the extinguishments of debt and criteria
for classification as extraordinary items. The adoption of this pronouncement
did not have a material impact on the Company's results of operations or
financial position.
In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities" (effective January 1, 2003). SFAS No. 146
replaces current accounting literature and requires the recognition of 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. The adoption of this
statement did not have any impact on the Company's results of operations or
financial position.
In November of 2002, the FASB issued Interpretation No. 45, "Guarantors'
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others." The Interpretation elaborates on the
disclosures to be made by a guarantor in its financial statements about its
obligations under certain guarantees that it has issued. It also clarifies that
a guarantor is required to recognize, at the inception of a guarantee, a
liability for the fair value of the obligation undertaken in issuing the
guarantee. This Interpretation does not prescribe a specific approach for
subsequently measuring the guarantor's recognized liability over the term of the
related guarantee.
The disclosure provisions of this Interpretation were effective for the
Company's December 31, 2002 financial statements. The initial recognition and
initial measurement provisions of this Interpretation are applicable on a
prospective basis to guarantees issued or modified after December 31, 2002. The
adoption of this statement did not have any impact on the Company's results of
operations or financial position.
7
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation Transition and Disclosure," which provides guidance on how to
transition from the intrinsic method of accounting for stock-based employee
compensation under APB No. 25 to SFAS No. 123 for the fair value method of
accounting, if a company so elects. The Company does not plan to adopt the
fair-value method of accounting for stock based employee compensation.
In January of 2003, the FASB issued Interpretation No. 46, Consolidation of
Variable Interest Entities. This Interpretation clarifies the application of
existing accounting pronouncements to certain entities in which equity investors
do not have the characteristics of a controlling financial interest or do not
have sufficient equity at risk for the entity to finance its activities without
additional subordinated financial support from other parties. The provisions of
the Interpretation will be immediately effective for all variable interests in
variable interest entities created after January 31, 2003, and the Company will
need to apply this provision to any existing variable interests in variable
interest entities by no later than September 30, 2003. The Company does not
believe that this Interpretation will have a significant impact on the Company's
financial statements.
2. SEGMENT INFORMATION
The Company is engaged in the exploration and development of oil and gas, both
in its own name and through several wholly-owned subsidiaries, on the North
American continent. The Company also conducts real estate operations throughout
the United States.
Oil and Gas
The Company conducts its oil and gas operations in the United States and Canada.
Oil and gas operations in the United States are located in Arkansas, California,
Kansas, Nebraska, New Mexico, Ohio, Oklahoma, Pennsylvania, Texas and Wyoming.
In Canada, the Company conducts oil and gas operations in the Provinces of
Alberta, British Columbia and Saskatchewan.
Real Estate
The Company's real estate operations are conducted in the states of Arizona,
Texas, Florida, Georgia and New Jersey. The Company's properties consist of
apartment complexes as well as commercial and retail properties.
Corporate
The Company holds investments in certain marketable securities, which are
classified as held for sale. From time to time, the Company buys and sells
securities in the open market. Over the years, the Company has decreased its
holding in marketable securities and focused its resources in the oil and gas
and real estate divisions.
8
The following segment data is presented based on the Company's internal
management reporting system-
FOR THE SIX MONTHS ENDED JUNE 30,
---------------------------------
2003 2002
(Unaudited) (Unaudited)
------------- -------------
Revenues
Oil and gas - United States ............................................. $ 2,570,000 $ 1,631,000
Oil and gas - Canada .................................................... 2,735,000 936,000
Real estate ............................................................. 7,355,000 7,294,000
------------- -------------
$ 12,660,000 $ 9,861,000
------------- -------------
Income (loss) from operations and reconciliation
to income before provision for income taxes
Oil and gas - United States (a) ......................................... $ 296,000 $ (382,000)
Oil and gas - Canada (a) ................................................ 983,000 448,000
Real estate (a) ......................................................... 1,289,000 1,895,000
Corporate ............................................................... (362,000) (531,000)
------------- -------------
Income from operations .............................................. 2,206,000 1,430,000
Other income .............................................................. 1,883,000 1,780,000
Interest expense .......................................................... (2,586,000) (2,318,000)
------------- -------------
Income before provision for income taxes .................................. $ 1,503,000 $ 892,000
------------- -------------
Identifiable assets
Oil and gas - United States ............................................. $ 15,617,000 $ 14,622,000
Oil and gas - Canada .................................................... 20,384,000 13,998,000
Real estate ............................................................ 59,491,000 58,534,000
Corporate .............................................................. 17,213,000 14,787,000
------------- -------------
$ 112,705,000 $ 101,941,000
------------- -------------
(a) Represents revenues less all operating costs, including depreciation,
depletion and amortization.
FOR THE THREE MONTHS ENDED JUNE 30,
-----------------------------------
2003 2002
(Unaudited) (Unaudited)
----------- -----------
Revenues
Oil and gas - United States ............................................. $ 1,317,000 $ 903,000
Oil and gas - Canada .................................................... 1,475,000 416,000
Real estate ............................................................. 3,718,000 3,525,000
----------- -----------
$ 6,510,000 $ 4,844,000
----------- -----------
Income (loss) from operations and reconciliation
to income before provision for income taxes
Oil and gas - United States (a) ......................................... $ 275,000 $ 31,000
Oil and gas - Canada (a) ................................................ 428,000 131,000
Real estate (a) ......................................................... 837,000 795,000
Corporate ............................................................... (288,000) (533,000)
----------- -----------
Income from operations .............................................. 1,252,000 424,000
Other income .............................................................. 251,000 999,000
Interest expense .......................................................... (959,000) (1,183,000)
----------- -----------
Income before provision for income taxes .................................. $ 544,000 $ 240,000
----------- -----------
(a) Represents revenues less all operating costs, including depreciation,
depletion and amortization.
9
3. COMPREHENSIVE INCOME
Comprehensive income for the six months ended June 30, 2003 and 2002 is
as follows:
2003 2002
(Unaudited) (Unaudited)
---------- -----------
Net income $1,321,000 $ 657,000
---------- ----------
Other comprehensive income net of taxes
Foreign currency translation adjustments 1,701,000 395,000
Change in unrealized (loss) gain on marketable securities 779,000 (177,000)
---------- ----------
Other comprehensive income 2,480,000 218,000
---------- ----------
Comprehensive income $3,801,000 $ 875,000
========== ==========
Changes in the components of Accumulated Other Comprehensive Income (Loss) for
the year 2002 and for the six months ended June 30, 2003 are as follows-
Unrealized Gains Cumulative Accumulated
(Losses) on Foreign Currency Other
Available-for-Sale Translation Comprehensive
Securities Adjustment Income (Loss)
------------------ ----------------- ----------------
BALANCE, December 31, 2001 $(1,095,000) $(3,830,000) $(2,735,000)
Change for the year 2002 (442,000) 88,000 (354,000)
----------- ----------- -----------
BALANCE, December 31, 2002 653,000 (3,742,000) (3,089,000)
Change for the six months 779,000 1,701,000 2,480,000
----------- ----------- -----------
BALANCE, June 30, 2003 (unaudited) $ 1,432,000 $(2,041,000) $ (609,000)
=========== =========== ===========
4. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted
earnings per share-
Six Months Ended June 30, Three Months Ended June 30
----------------------------- -----------------------------
2003 2002 2003 2002
---- ---- ---- ----
Numerator-
Net income $1,321,000 $ 657,000 $ 277,000 $ 207,000
========== ========== ========== ==========
Denominator-
Weighted average common
shares outstanding - Basic 7,809,834 7,870,228 7,809,834 7,859,905
Incremental shares from assumed
conversions of stock options 61,420 - 82,328 -
---------- ---------- ---------- ----------
Weighted average common shares
outstanding - Diluted 7,871,254 7,870,228 7,892,162 7,859,905
========== ========== ========== ==========
Basic earnings per share $ 0.17 $ 0.08 $ 0.04 $ 0.03
Diluted earnings per share $ 0.17 $ 0.08 $ 0.04 $ 0.03
5. OTHER INCOME
Other income for 2003 includes $1,000,000 received as the beneficiary of life
insurance policies on the life of the Company's former Chairman and President
who had been serving as its Senior Consultant up to his death on January 7,
2003. The receipt of these funds are nontaxable to the Company.
10
6. INTEREST EXPENSE
Interest expense increased to $2,586,000 in 2003 from $2,318,000 in 2002. As of
June 30, 2003 the Company was able to refinance and modify the majority of its
mortgage notes payable reducing its overall effective interest rate from 7.36%
to 6.22% and extending its maturity and terms. During the next ten years, the
Company's interest expense related to its current debt should decrease
approximately $600,000 annually.
The current year's interest expense includes a one time prepayment penalty of
$469,000 to secure the new financing arrangements.
7. COMMITMENTS AND CONTINGENCIES
In June 1996 the Company's Board of Directors adopted the Stockholder Protection
Rights Plan (the Rights Plan). The Rights Plan provides for issuance of one
Right for each share of common stock outstanding as of July 6, 1996. The Rights
are separable from and exercisable upon the occurrence of certain triggering
events involving the acquisition of at least 15% (or, in the case of certain
existing stockholders, 25%) of the Company's common stock by an individual or
group, as defined in the Rights Plan (an Acquiring Person) and may be redeemed
by the Board of Directors at a redemption price of $0.01 per Right at any time
prior to the announcement by the Company that a person or group has become an
Acquiring Person.
On and after the tenth day following such triggering events, each Right would
entitle the holder (other than the Acquiring Person) to purchase $50 in market
value of the Company's Common Stock for $25. In addition, if there is a business
combination between the Company and an Acquiring Person, or in certain other
circumstances, each Right (if not previously exercised) would entitle the holder
(other than the Acquiring Person) to purchase $50 in market value of the common
stock of the Acquiring Person for $25.
As of June 30, 2003 and 2002, 7,809,833 and 7,855,781, respectively, of Rights
were outstanding. Each Right entitles the holder to purchase, for an exercise
price of $25, one one-hundredth of a share of Series A Participating Preferred
Stock. Each one one-hundredth share of Series A Participating Preferred Stock is
designed to have economic terms similar to those of one share of common stock
but will have one one-hundredth of a vote. Because the Rights are only
exercisable under certain conditions, none of which were in effect as of June
30, 2003 and 2002, the outstanding Rights are not considered in the computation
of basic and diluted earnings per share.
The Company does not have significant lease commitments or post retirement
benefits.
8. INCOME TAXES
The Company received a benefit as a result of receiving $1,000,000 in life
insurance proceeds in the first quarter of 2003 that is not taxable income.
9. SUBSEQUENT EVENT
During the third quarter of 2003 the Company sold marketable securities
generating net proceeds of approximately $3.3 million for a net pre tax gain of
approximately $724,000. All the proceeds were utilized to reduce the Company's
current and long-term debt.
11
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of Operations
Three Months Ended June 30
Revenues increased to $6,510,000 in 2003 from $4,844,000 in 2002 or 34%
mainly due to the increased natural gas production from the Medicine Hat-Hilda
drilling program in Canada completed at the end of 2002 and from increased
prices for oil and gas in 2003 versus 2002. Real estate income improved by over
5% in 2003 over the comparable period in 2002.
Operating expenses increased to $5,258,000 in 2003 from $4,420,000 in
2002 or 19% mainly due to the increase in depletion expense between the periods
of $410,000 resulting from increased production as well as a revision to the
Company's December 31, 2002 reserves. A new reserve study for Canada and the
United States was performed as of June 30, 2003. In addition legal, accounting,
salary and insurance expenses are higher in 2003 compared to 2002.
Income from operations increased to $1,252,000 in 2003 from $424,000 in
2002 based on the above noted revenue increases exceeding the operating expense
increases.
Other income decreased to $251,000 in 2003 from $999,000 in 2002. This
decrease is mainly attributable to a reduction in the deferred income recognized
in 2003 compared to 2002 relating to the collection of the Company's Mortgage
Note Receivable. Also, there were no sales of securities or real estate assets
in 2003 as there was in 2002.
Net income increased to $277,000 or $0.04 per share in 2003 from
$207,000 or $0.03 per share in 2002.
Six Months Ended June 30
Revenues increased to $12,660,000 in 2003 from $9,861,000 in 2002 or
28% mainly due to the increased natural gas production from the Medicine
Hat-Hilda drilling program in Canada completed at the end of 2002 and from
increased prices for oil and gas in 2003 versus 2002. Gas production increased
by approximately 31% in 2003 over 2002. The average price per barrel of oil
received in the first six months of 2003 was $27.61 compared to $19.10 in 2002.
Average gas prices for the six months were $4.41 per MCF in 2003 compared to
$2.25 per MCF for the same period in 2002.
Operating expenses increased to $10,454,000 in 2003 from $8,431,000 in
2002 or 24%. Depletion expense increased between the periods by $631,000
resulting from increased production as well as a revision to the Company's
December 31, 2002 reserves as a result of a new reserve study for Canada and the
United States as of June 30, 2003. Depreciation and amortization expense
increased by $395,000, mainly as the result of the write-off of $241,000 of
unamortized mortgage costs due to the refinancing of the Company's mortgage
notes payable portfolio. In addition, legal, accounting, salary and insurance
expenses are higher in 2003 compared to 2002.
Income from operations increased to $2,206,000 in 2003 from $1,430,000
in 2002 or 295% based on the above noted revenue increases exceeding operating
expense increases.
Other income in 2003 includes $1,000,000 received by the Company as a
beneficiary of life insurance policies on the life of the Company's former
Chairman and President who had been serving as its Senior Consultant up to his
death on January 7, 2003. The receipt of these funds are not taxable to the
Company.
Other income for 2002 exceeds 2003 by $874,000 related to gains from
the sale of securities and of real estate assets and a greater amount of
deferred income recognized from the collection of the Company's mortgage note
receivable.
Interest expense for the first six months of 2003 was $2,586,000
compared to $2,318,000 for the same period in 2002. Interest expense in 2003
includes a one time prepayment penalty of $469,000 to secure the refinancing of
our real estate properties. This refinancing of the mortgage notes payable
reduced the effective interest rate paid by the Company from 7.36% to 6.22% and
extended its maturity and terms. During the next ten years, the Company's
interest expense related to its current debt should decrease approximately
$600,000 annually.
Net income for the six months was $1,321,000 in 2003 compared to
$657,000 in 2002. Earnings per share increased to $0.17 in 2003 from $0.08 in
2002.
12
Liquidity and Capital Resources
At June 30, 2003 the Company had approximately $10.8 million in
marketable securities at market value, up from $9.9 million at December 31,
2002. The Company had $6.4 million in short-term debt on June 30, 2003 compared
to $7.3 million on December 31, 2002. The current ratio was 1.9 to 1 at June 30,
2003 compared to 1.5 to 1 at December 31, 2002. The Company's working capital
was approximately $9.3 million at June 30, 2003, an increase of $3.4 million
from $5.9 million on December 31, 2002. Management considers these amounts
adequate for the Company's current business.
On May 6, 2003 the Company announced that it plans to pursue the sale
of its oil and gas business and to either reinvest the net proceeds in its
ongoing real estate business or otherwise utilize the proceeds in a manner
designed to maximize shareholder value. As previously stated, the Company's
focus remains on maximizing shareholder value whether by selling one or more
portions of the Company to acquirers willing to pay fair value or remaining
independent. The decision the Company is now embarking on will help to determine
in fact whether shareholder value is best served in Wilshire stock, stock of a
potential acquirer or cash for Wilshire shareholders to invest elsewhere.
In the meantime, the Company continues to participate in oil and gas
prospects and to explore real estate acquisitions as they arise. The timing of
any such acquisitions will depend on, among other things, economic conditions
and the favorable evaluation of specific opportunities presented to the Company.
The Company is currently negotiating or has under contract the sale of certain
real estate investment properties that will generate $6.6 million in net
proceeds during the third and fourth quarters of this year. However, while the
Company anticipates that these sales will occur and that it will actively
explore other real estate acquisition opportunities, no assurance can be given
that any of the sales or potential acquisitions will occur.
Net cash provided by operating activities was $2,614,000 in 2003
compared to $870,000 in 2002. The increase of $1,744,000 is mainly due to an
increase in net income, depreciation, depletion and amortization expense and an
increase in deferred income taxes, offset by an increase in income taxes
receivable.
Net cash (used in) provided by investing activities was ($7,189,000) in
2003 and $2,715,000 in 2002. The variations principally relate to property and
equipment additions in the Medicine Hat drilling program in Canada, the
redemption of mortgage notes receivable in 2003 and the sale of marketable
securities in 2002.
Net cash used in financing activities was $499,000 in 2003 compared to
$6,273,000 in 2002. The variation principally relates to the issuance of
long-term debt and the related costs associated with the overall refinancing
during the first quarter of 2003. The loan payable to shareholder was also fully
repaid in 2003.
The Company believes it has adequate capital resources to fund
operations for the foreseeable future.
Critical Accounting Policies
The Company's discussion and analysis of its financial condition and
results of operations are based upon unaudited consolidated financial statements
prepared in conformity with accounting principles generally accepted in the
United States of America. The preparation of these financial statements requires
the Company to make estimates and judgments that affect the reported amounts of
assets, liabilities, revenues and expenses. The Company bases its estimates on
historical experience and on various other assumptions that are believed to be
reasonable under the circumstances, the results of which form the basis for
making judgments about the carrying values of assets and liabilities that are
not readily apparent from other sources. Actual results may differ from these
estimates under different assumptions or conditions.
13
Oil and Gas Properties
The Company follows the accounting policy, generally known in the oil
and gas industry as "full cost accounting". Under full cost accounting, the
Company capitalizes all costs, including interest costs, relating to the
exploration for and development of its mineral resources. Under this method, all
costs incurred in the United States and Canada are accumulated in separate cost
centers and are amortized using the gross revenue method based on total future
estimated recoverable oil and gas reserves.
The determination of oil and gas reserves is a complex and interpretive
process, which is subject to continued revisions as additional information
becomes available. Reserve estimates prepared by different engineers from the
same data can vary. Therefore, the reserve data used herein should not be
construed as being exact. Any reserve estimate, especially when based upon
volume-metric calculations, depends in part on the quality of available data,
engineering and geologic interpretation and judgment, and thus, represents only
an informed professional judgment. Subsequent reservoir performance may justify
upward or downward revision of the estimate.
While it has not been the Company's practice to obtain mid-year reserve
valuations, in connection with the previously announced marketing for sale of
its oil and gas operations, the Company engaged Ryder Scott Company to perform
an engineering reserve study of the Company's entire reserves as of June 1,
2003. In addition, the Company engaged Ryder Scott to roll forward this analysis
to June 30, 2003. The Company has used the reserve valuations in this analysis
for purposes of preparing the financial statements presented herein. For the
year ended December 31, 2002, Ryder Scott was engaged to evaluate all the
Company's reserves other than the Hilda field in Canada, which was separately
evaluated by Citadel Engineering, Ltd.
The following table sets forth summary information with respect to the
estimates of the Company's Proved and Proved Developed Reserves at June 30,
2003:
United States Canada Total
----------------------- ----------------------- -----------------------
Proved Proved Proved
Proved Developed Proved Developed Proved Developed
---------- ---------- ---------- ---------- ---------- ----------
(000's Omitted) (000's Omitted)
Oil (Bbls) 571 427 211 211 782 638
Gas (Mcl) 8,849 8,596 10,167 10,167 19,016 18,763
Net present value @ 10% $21,745 $19,948 $24,083 $24,083 $45,828 $44,031
Capitalized costs are subject to a "ceiling" test that limits such
costs to the aggregate of the estimated present value, using a discount rate of
10% of the future net revenues of proved reserves and the lower of cost or fair
value of unproved properties. Management is of the opinion that, based on
reserve reports of petroleum engineers and geologists, the fair value of the
estimated recoverable oil and gas reserves exceeds the unamortized cost of oil
and gas properties at June 30, 2003 and 2002.
The Company currently operates 3.6% of the total wells it participates
in.
Net acreage under leases totaled 3,875 as of June 30, 2003. During the
remainder of 2003 and the next three calendar years, leases representing the
following net acreage will expire:
Balance of 2003 0
2004 1047
2005 151
2006 0
Impairment of Property and Equipment
In October 2001, the FASB issued Statement of Financial Accounting
Standard No. 144, "Accounting for the Impairment or Disposal of Long-Lived
Assets", which addresses financial accounting and reporting for the impairment
or disposal of long-lived assets. This standard harmonizes the accounting for
impaired assets and resolves some of the implementation issues as originally
described in SFAS 121. SFAS 144, among other things, will require the Company to
classify the operations and cash flow of properties to be disposed of as
discontinued operations. The Company adopted this pronouncement on January 1,
2002. This adoption had no impact on the Company's results of operations or
financial position as of June 30, 2003 and 2002.
14
On a periodic basis, management assesses whether there are any
indicators that the value of the real estate properties may be impaired. A
property's value is considered impaired if management's estimate of the
aggregate future cash flows (undiscounted and without interest charges) to be
generated by the property are less than the carrying value of the property. To
the extent impairment has occurred, the loss shall be measured as the excess of
the carrying amount of the property over the fair value of the property.
Management does not believe at June 30, 2003 and 2002 that the value of any of
its rental properties is impaired.
Revenue Recognition
Revenue from oil and gas properties is recognized at the time these
products are delivered to third party purchasers. Revenue from real estate
properties is recognized during the period in which the premises are occupied
and rent is due from tenant. Rental revenue is recognized on a straight-line
basis over the term of the lease. The excess of rents recognized over amounts
contractually due pursuant to the underlying leases are included in accounts
receivable. An allowance for uncollectible accounts is maintained based on the
Company's estimate of the inability of its joint interest partners in the oil
and gas division and its tenants in the real estate division to make required
payments.
Foreign Operations
The assets and liabilities of the Company's Canadian subsidiary have
been translated at quarter-end exchange rates. The related revenues and expenses
have been translated at average annual exchange rates. The aggregate effect of
translation gains and losses are reflected as a component of accumulated other
comprehensive income (loss) until the sale or liquidation of the underlying
foreign investment.
Unremitted earnings of the Canadian subsidiary are intended to be
permanently invested in Canada and are subject to foreign taxes substantially
equivalent to United States Federal income taxes. The unremitted earnings on
which the Company has not been required to provide Federal income taxes amounted
to approximately $8,734,000 and $8,187,000 at June 30, 2003 and December 31,
2002, respectively.
Accounting for Stock-Based Compensation
The Company has adopted the disclosure-only provisions of Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" (SFAS 123).
15
Forward-Looking Statements
This Report on Form 10-Q for the quarter ended June 30, 2003 contains
forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995. All statements included herein other than
statements of historical fact are forward-looking statements. Although the
Company believes that the underlying assumptions and expectations reflected in
such forward-looking statements are reasonable, it can give no assurance that
such expectations will prove to be correct. The Company's business and prospects
are subject to a number of risks which could cause actual results to differ
materially from those reflected in such forward-looking statements, including
uncertainties inherent in any attempt to sell a portion of the business at an
acceptable price, volatility of oil and gas prices, the need to develop and
replace reserves, risks involved in exploration and drilling, uncertainties
about estimates of reserves, environmental risks relating to the Company's oil
and gas and real estate properties, competition, the substantial capital
expenditures required to fund the Company's oil and gas and real estate
operations, market and economic changes in areas where the Company holds real
estate properties, interest rate fluctuations, government regulation, and the
ability of the Company to implement its business strategy.
Item 3 - Qualitative and Quantative Disclosure About Market Risk
The Company has investments in domestic equity securities for which the
Company has exposure to the risk of market loss.
The Company is exposed to changes in interest rates from its floating
rate debt arrangements. At June 30, 2003, the Company had $66,240,000 of debt
outstanding of which $56,912,000 bears interest at fixed rates. The interest
rate on the Company's revolving credit lines, under which $9,328,000 was
outstanding at June 30, 2003, is at prime for US borrowings and prime plus .25%
for its Canadian revolving demand loan. A hypothetical 100 basis point adverse
move (increase) on short-term interest rates on the floating rate debt
outstanding at June 30, 2003 would adversely affect the Company's annual
interest cost by approximately $93,000 assuming borrowed amounts under the
revolving credit lines remained at $9,328,000.
SUMMARY OF INDEBTNESS
Long-term debt as of June 30, 2003 and December 31, 2002 consists of
the following -
2003 2002
(Unaudited)
----------- -----------
Mortgage notes payable $56,912,000 $55,236,000
Note payable 1,975,000 5,475,000
Revolving line of credit 3,754,000 4,100,000
Revolving demand loan 3,599,000 895,000
------------ ------------
Total 66,240,000 65,706,000
Less-Current portion 6,368,000 7,314,000
------------ ------------
Long term portion $59,872,000 $58,392,000
============ ============
The aggregate maturities of the long-term debt in each of the five
years subsequent to June 30, 2003 and thereafter are -
2003 $ 6,121,000
2004 5,841,000
2005 849,000
2006 903,000
2007 961,000
Thereafter 51,565,000
-----------
$66,240,000
===========
16
Item 4- Controls and Procedures
(a) Disclosure controls and procedures. As of the end of the
Company's most recently completed fiscal quarter (the
registrant's fourth fiscal quarter in the case of an annual
report) covered by this report, the Company carried out an
evaluation, with the participation of the Company's
management, including the Company's Chief Executive Officer
and Chief Financial Officer, of the effectiveness of the
Company's disclosure controls and procedures pursuant to
Securities Exchange Act Rule 13a-15. Based upon that
evaluation, the Company's Chief Executive Officer and Chief
Financial Officer concluded that the Company's disclosure
controls and procedures are effective in ensuring that
information required to be disclosed by the Company in the
reports that it files or submits under the Securities Exchange
Act is recorded, processed, summarized and reported, within
the time periods specified in the SEC's rules and forms.
(b) Changes in internal controls over financial reporting. There
have been no changes in the Company's internal control over
financial reporting that occurred during the Company's last
fiscal quarter to which this report relates that have
materially affected, or are reasonably likely to materially
affect, the Company's internal control over financial
reporting.
17
PART II - OTHER INFORMATION
Item 4- Submission of Matters to a Vote of Security Holders
The following matters were submitted to a vote of the Company's stockholders at
its 2003 Annual Meeting held on June 30, 2003 and the votes cast were as set
forth:
(i) The election of Milton Donnenberg and S. Wilzig Izak to serve as
directors of the Company for three year terms expiring in 2006. The
votes cast were as follows:
For Withheld
Milton Donnenberg 5,913,580 858,558
S. Wilzig Izak 5,927,150 844,988
(ii) A change of the Company's name to "Wilshire Enterprises, Inc." The
votes cast were as follows:
For Against Abstain
6,658,124 78,451 35,563
(iii) Advisory Vote on selection of Ernst & Young LLP as independent
auditors. The votes cast were as follows:
For Against Abstain
6,629,610 103,235 39,293
(iv) Shareholder proposal on shareholder rights plan. The votes cast
were as follows:
For Against Abstain Not Voted
1,253,300 3,810,476 97,448 1,610,914
(v) Shareholder proposal to elect Directors annually. The votes cast
were as follows:
For Against Abstain Not Voted
1,208,401 3,862,274 90,549 1,610,914
Item 6 - Exhibits and Reports on Form 8-K
The Company has filed the following Form 8-K for the quarter ended June
30, 2003.
Date of Report
(Date of Earliest Event) Filing Dates Subject
- ------------------------ ------------ -------
May 6, 2003 May 6, 2003 Item 9 - Plans to Pursue Sale of Oil and Gas Business
May 14, 2003 May 15, 2003 Item 9- 2003 First Quarter Financial Results and Confirmation
of Plans to Explore Various Transaction Alternatives
June 30, 2003 July 1, 2003 Item 5 - Results of the Annual Meeting of Shareholders
18
S I G N A T U R E S
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
WILSHIRE ENTERPRISES, INC.
------------------------------------------
(Registrant)
Date: August 14, 2003 /s/ S. Wilzig Izak
-------------------- ------------------------------------------
By: S. Wilzig Izak
Chairman of the Board and Chief Executive
Officer
/s/ Philip G. Kupperman
------------------------------------------
By: Philip G. Kupperman
President and Chief Financial Officer