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SECURITIES EXCHANGE COMMISSION
Washington D.C 20549
(Mark One)
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended July 31, 1996
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from_____ to______
Commission file number 0-9923
IMPERIAL PETROLEUM, INC.
(Exact name of registrant as specified in its charter)
Nevada 95-3386019
(State or other jurisdiction of (IRS Employer
incorporation or organization) identification No.)
100 NW Second Street
Suite 312
Evansville, Indiana 47708
(Zip Code)
Registrant's telephone number,
including area code (812) 424-7948
Securities registered pursuant to Section 17(b) of the Act: None.
Securities registered pursuant to Section 13(g) of the Act:
Common Stock. $0.001 par value per share
------ ----------------- ----- ---------
(Title of class)
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 No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of the Regulation K is not contained herein, and will not be contained
to the best of the Registrant's knowledge in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. _____.
On July 3l, l996, there were 31,426,841 shares of the
Registrant's common stock issued and outstanding.
The aggregate market value of the Registrant's voting stock held by
non-affiliates is unknown See Item 5. Market for Registrant's Common Stock and
Related Stockholder Matters.
Documents Incorporated by Reference
NONE
IMPERIAL PETROLEUM, INC.
FORM 10-K
FISCAL YEAR ENDED JULY 3l, 1996
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TABLE OF CONTENTS
PART I
Page
----
Item 1. Business 1.
Item 2. Properties 1.
Item 3. Legal Proceedings 17.
Item 4. Submission of Matters to a Vote of Security Holders 17.
PART II
Item 5. Market for Registrant's Common Stock and Related
Stockholder Matters 18.
Item 6. Selected Financial Data 18.
Item 7. Management's Discussion and Analysis of Financial Condition
And Results of Operations 18.
Item 8. Financial Statements and Supplementary Data 23.
Item 9. Changes In and Disagreements with Accountants on Accounting
and Financial Disclosure 23.
PART III
Item 10. Directors and Executive Officers of the Registrant 24.
Item 11. Executive Compensation 25.
Item 12. Security Ownership of Certain Beneficial Owners and
Management. 25.
Item 13. Certain Relationships and Related Transactions 26.
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports
On Form 8-K 27.
Signature 28.
2
PART I
ITEM 1. BUSINESS AND ITEM 2. PROPERTIES
- ---------------------------------------
Definitions
As used in this Form 10-K
"Mcf" means thousand cubic feet, "MMcf' means million cubic feet and "Bcf"'
means billion cubic feet "Mcfe" means thousand cubic feet equivalent, "Mmcfe"
means million cubic feet equivalent and "Bcfe" means billion cubic feet
equivalent. "Bbl" means barrel, "MBbls" means thousand barrels and "MMBbls"
means million barrels. "BOE" means equivalent barrels of oil and "MBOE" means
thousands equivalent barrels of oil. Unless otherwise indicated herein. natural
gas volumes are stated at the legal pressure base of the state or area in which
the reserves are located and at 60 degrees Fahrenheit. Natural gas equivalents
are determined using the ratio of six Mcf of natural gas to one Bbl of crude oil
The term "gross" refers to the total leasehold acres or wells in which the
Company has a working interest. The term "net" refers to gross leasehold acres
or wells multiplied by the percentage working interest owned by the Company.
"Net production" means production that is owned by the Company less royalties
and production due others.
"Proved reserves" are estimated quantities of crude oil, natural gas and
natural gas liquids, which geological and engineering data demonstrate with
reasonable certainty to be recoverable in future years from known reservoirs
under existing economic and operating conditions "Proved developed reserves" are
those reserves which are expected to be recovered through existing wells with
existing equipment and operating methods. "Proved undeveloped reserves" are
those reserves which are expected to be recovered from new wells on undrilled
acreage or from existing wells where a relatively major expenditure is required
for recompletion.
The term "oil" includes crude oil, condensate and natural gas liquids.
"Base Metals" refers to a family of metallic elements, including copper, lead
and zinc.
"Grade" refers to the metal or mineral content of rock, ore or drill or other
samples. With respect to precious metals, grade is generally expressed as troy
ounces per ton of rock.
"Mineable" refers to that portion of a mineral deposit from which it is
economically feasible to extract ore.
"Net Smelter Royalty" is a royalty based on the actual sale price received for
the subject metal less the cost of smelting and/or refining the material at an
offsite refinery or smelter along with off-site transportation costs.
"Patented Mining Claim" is a mining claim, usually comprising about 20 acres,
to which the US Government has conveyed title to the owner.
"Unpatented Mining Claim" is a mining claim which has been staked or marked
out in accordance with federal and state mining laws to acquire the exclusive
rights to explore for and exploit the minerals which may occur on such lands.
The title to the property has not been conveyed to the holder of an unpatented
mining claim.
Unless the context requires otherwise, all references herein to the Company
include Imperial Petroleum, Inc., and its consolidated subsidiaries. Ridgepointe
Mining Company, a Delaware corporation ("Ridgepointe"), I.B. Energy, Inc., an
Oklahoma corporation ("I.B. Energy"), and Premier Operating Company, a Texas
corporation ("Premier").
3
THE COMPANY
Imperial Petroleum, Inc., a Nevada corporation ("the Company"), is a
diversified energy, and mineral mining company headquartered in Evansville,
Indiana. The Company has historically been engaged in the production and
exploration of crude oil and natural gas in Oklahoma and Texas and has
diversified its business activities to include mineral mining, with a particular
emphasis on gold mining. The Company intends to utilize its oil and natural gas
assets to support and enhance its mining activities. The Company expects that
its mining activities will ultimately become its primary business.
At July 31,1996, the Company owned interests in approximately 145 wells in
Oklahoma, Texas and Louisiana. Daily production from 3 operated wells (2
producers, 1 shut-in) is approximated 110 thousand cubic feet per day. The
Company also owns an interest in 20 wells operated by others. Total gross
production is 5 barrels of oil per day and 90 Mcf per day net to the Company's
interest. See "Oil and Gas Reserves."
HISTORICAL BACKGROUND
The Company was incorporated on January 16,1981 and is the surviving member
of a merger between itself, Imperial Petroleum, Inc., a Utah corporation
incorporated on June 4, 1979 (" Imperial-Utah"), and Calico Exploration Corp., a
Utah corporation incorporated on September 27, 1979 ("Calico").
On August 11, 1982, Petro Minerals Technology, Inc. ("Petro"), a 94% -owned
subsidiary of Commercial Technology Inc. ("Comtec") acquired 58% of the
Company's common stock. Petro assigned to the Company its interests in two
producing oil and gas properties in consideration for 5,000,000 shares of
previously authorized but unissued shares of common stock of the Company and for
a $500,000 line of credit to develop these properties. Petro has since undergone
a corporate reorganization and is now known as Petro Imperial Corporation. On
August 1,1988 in an assumption of assets and liabilities agreement, 58% of the
Company's common stock was acquired from Petro by Glauber Management Co., a 100%
owned subsidiary of Glauber Valve Co., Inc.
Change of Control. Pursuant to an Agreement to Exchange Stock and Plan of
--------- -------
Reorganization dated August 27, 1993 (the "Stock Exchange Agreement"), as
amended by that certain First Amendment to Agreement to Exchange Stock and Plan
of Reorganization dated as of August 27, 1993, (the "First Amendment"), between
Imperial Petroleum, Inc. (the "Company"), Glauber Management Company, a Texas
corporation, ("Glauber Management"), Glauber Valve Co Inc., a Nebraska
corporation, ("Glauber Valve"), Jeffrey T. Wilson ("Wilson"), James G. Borem
("Borem") and those persons listed on Exhibit A attached to the Stock Exchange
Agreement and First Amendment (the "Ridgepointe Stockholders"); the Ridgepointe
Stockholders agreed to exchange (the "Ridgepointe Exchange Transaction") a total
of 12,560,730 shares of the common stock of Ridgepointe Mining Company, a
Delaware corporation ("Ridgepointe"), representing 100% of the issued and
outstanding common stock of Ridgepointe, for a total of 12,560,730 newly issued
shares of the Company's common stock, representing 59.59% of the Company's
resulting issued and outstanding common stock. Under the terms of the Stock
Exchange Agreement, (i) Wilson exchanged 5,200,000 shares of Ridgepointe common
stock for 5,200,000 shares of the Company's common stock representing 24.67% of
the Company's issued and outstanding common stock, (ii) Borem exchanged
1,500,000 shares of Ridgepointe common stock for 1,500,000 shares of the
Company's common stock representing 7.12% of the Company's issued and
outstanding common stock, and (iii) the remaining Ridgepointe Stockholders in
the aggregate exchanged 5,860,730 shares of Ridgepointe common stock for
5,860,730 of the Company's issued and outstanding common stock, representing, in
the aggregate, 27.81% of the Company's issued and outstanding common stock. The
one for-one ratio of the number of shares of the Company's common stock
exchanged for each share of Ridgepointe common stock was determined through arms
length negotiations between the Company, Wilson and Borem.
The Ridgepointe Exchange Transaction was closed on August 27, 1993. As a result,
Ridgepointe is now a wholly, owned subsidiary of the Company. At the time of
acquisition, Ridgepointe was engaged in the development of a copper ore mining
operation in Yavapai County, Arizona and, through its wholly owned subsidiary,
I.B. Energy, Inc., an Oklahoma corporation ("I.B Energy"), in the exploration
for and production of oil and gas in the Mid-continent and Gulf Coast regions
of the United States.
4
In connection with the closing of the Ridgepointe Exchange Transaction, each
member of the Board of Directors of the Company resigned and Wilson, Borem and
Dewitt C. Shreve ("Shreve") were elected Directors of the Company. In addition,
each officer of the Company resigned and the Company's new Board of Directors
elected Wilson as Chairman of the Board, President and Chief Executive Officer,
Borem as Vice President and Cynthia A. Helms as Secretary of the Company. Ms.
Helms subsequently resigned and Kathryn H. Shepherd was elected Secretary. Mr.
Borem, Mr. Shreve and Ms. Shepherd subsequently resigned and Mr. Malcolm W.
Henley and Mrs. Stacey D. Smethers were elected to the Board. The Board of
Directors further authorized the move of the Company's principal executive
offices from Dallas, Texas to its current offices in Evansville, Indiana.
As a condition to closing the Ridgepointe Exchange Transaction, the Company
received and canceled 7,232,500 shares of the Company's common stock from the
Company's former partner, Glauber Management, and 100,000 shares of the common
stock of Tech-Electro Technologies, Inc from an affiliate of Glauber Management
and Glauber Valve. In addition, pursuant to the terms of the First Amendment,
Glauber Management or Glauber Valve, or their affiliates, were to transfer to
the Company 75,000 shares of common stock of Wexford Technology, Inc. (formerly
Chelsea Street Financial Holding Corp.) no later than October 31, 1993, such
transfer subsequently occurred.
Acquisition of Premier. Pursuant to a Stock Exchange Agreement dated
-------------- ----------
October 4, 1993 (the "Premier Stock Exchange Agreement"), between the Company
and the holders of the issued and outstanding common stock of Premier Operating
Company, a Texas corporation ("Premier") (such persons are sometimes referred to
herein as the ("Premier Stockholders") The Premier Stockholders agreed to
exchange (the "Premier Exchange Transaction") an aggregate of 749,000 shares of
the common stock of Premier, consisting of 252,000 shares of Class A voting
common stock and 497,000 shares of non-voting Class B common stock, representing
100% of the issued and outstanding common stock of Premier, for a total of
749,000 shares of newly issued shares of the Company's common stock representing
3.62% of the Company's resulting issued and outstanding common stock. The one-
for-one ratio of the number of shares of the Company's common stock exchanged
for each share of Premier common stock was determined through arms length
negotiations between the Company and the Premier Stockholders.
The Premier Exchange Transaction was closed on October 4, 1993. As a result,
Premier became a wholly owned subsidiary of the Company. Premier is an oil and
gas company whose principal assets consist of oil and gas properties located in
the Mid-continent and Gulf Coast regions of the United States.
In connection with the closing of the Premier Exchange Transaction, each
member of the Board of Directors of Premier resigned and Wilson and Borem were
elected Directors of Premier. In addition, each officer of Premier resigned and
Premier's new Board of Directors elected Wilson as Chairman of the Board,
President and Chief Executive Officer, Borem as Vice President and Kathryn H.
Shepherd as Secretary of the Company. Mr. Borem and Ms. Shepherd subsequently
resigned.
In December 1993, Ridgepointe had agreed to acquire a 50% interest in two
gold mining claims located in the Sierra Madre mountains of Mexico.. Under the
terms of the transaction, at closing Ridgepointe agreed to pay $50,000 and the
Company agreed to issue 500,000 shares of newly-issued shares of the Company's
restricted common stock and agreed to provide $200,000 in working capital to
develop these mining claims. The Company has funded the working capital
requirements under the terms of the letter agreement to construct roads and
install equipment to develop the claims. As a result of its efforts, the
Company is entitled to acquire an additional 5% interest in the project.
Testing of the mining claims has been completed with very favorable results, and
significant expenditures have been made to construct roads and a test facility
for the mining project. Due to the magnitude of the remaining capital
requirements, the Company has delayed any further efforts in developing the
mining properties until such time as sufficient capital is available to allow
continuous operations.
In August 1994 the Company acquired certain gold mining claims "'Gold Nugget
Mine" in the Quartzite area of Arizona comprising some 1200 acres from Kenneth
Shephard et al. In connection with the transaction the Company issued to Mr.
Shephard et al. shares of its restricted common stock, a one year note payable
of $750,000 and assumed an equipment leasing agreement with Darr Equipment Co.
concerning the associated mining equipment for approximately $440,000. During
the period from September 1994 through April 1995, the Company constructed
additional processing equipment and completed a water well on the property to
initiate placer mining operations. After initiating operations in several areas
of the property, the Company determined the quantity of gold varied too
5
greatly across the property to establish permanent facilities commensurate with
its long range corporate objections. As a result the Company unwound the
acquisition in August 1995.
In February 1995 the Company agreed to participate with Financial Surety
International Ltd. ("FSI") and Merrion Reinsurance Corp. ("Merrion") of London,
England in a program to provide a financial instrument to be utilized for
collateral enhancement in certain financial transactions. The basis for the
collateral enhancement is the Company's in-ground gold reserves and a promissory
note (certificate of deposit) for the delivery by the Company of specified
volumes of refined gold at the end of five years subject to payment to the
Company (by the holder) for the gold to be delivered based upon the then current
price of gold. The note is delivered into escrow to be held during its term and
is insured against default by Merrion. The note is subject to annual renewal
during the term by the payment of rental fees in advance on an annual basis to
the insurance carrier and to the Company. The fees paid are non-refundable to
the holder. Under its agreement with FSI, the Company has the right to terminate
its participation at any time by providing written notice to FSI. Furthermore,
the Company has the right to reject any requests for the issuance of
certificates.
In June 1996, Ridgepointe acquired five separate mining projects, four of
which were located in Arizona and one in Montana, comprising some 4,400 acres
of claims. In connection with the acquisition of these projects, the Company
paid a total of $10,000 in cash and issued a total of 1,800,000 shares of the
Company's restricted common stock. None of the mining projects are presently
active, although significant sampling and testing has been conducted by the
prior owners. Reserve reports have been prepared by third party engineers and
geologists on each of the properties and indicate significant reserve potential.
In July 1996, Ridgepointe acquired mining claims comprising 900 acres and
referred to as the Duke Mine, in San Juan county, Utah from Paradox Basins Inc.
for payment of $100,000 and the issuance of 600,000 shares of the Company's
restricted common stock as well as the reservation of a 4.5% net smelter royalty
in favor of the sellers. The Company conducted an extensive sampling and testing
program in connection with the acquisition to quantify the economic viability of
the placer mining project and to determine the optimal recovery process to be
employed. Because of the nature of the placer gold, i.e. microscopic, the
determination of the recovery process is paramount to a successful mining
operation. The Company has conducted its tests utilizing the Cosmos Concentrator
which is designed to improve recoveries over conventional equipment in
operations where the recovery of microscopic free gold is important, such as the
Duke Mine. A third party reserve report has confirmed the significant gold
values associated with the Duke Mine claims. The Company is preparing to
initiate mining operations of a pilot plant during April and May, 1997.
SUBSEQUENT EVENTS
Subsequent to year-end, the Company agreed to purchase Cosmos Systems Inc.
("Cosmos"), the manufacturer and patent holder of the Cosmos Concentrator which
the company plans to utilize in its Duke Mine placer operation. The terms of the
acquisition, which is expected to close before July 31, 1997, provide that the
company will issue to the shareholders of Cosmos a total of 2,000,000 shares of
the Company's restricted common stock, pay $150,000 in cash at closing, issue a
two-year warrant to the shareholders of Cosmos to purchase an additional
1,000,000 shares of the Company's common stock at an exercise price of $0.10 per
share and reserve a 1% net smelter royally in favor of the Cosmos shareholders
from the Duke Mine in Utah. The Cosmos Concentrator has been in operation in
several gravel pit gold recovery operations in Arizona and California for
several years. The company plans to utilize Cosmos to construct equipment for
its Duke Mine placer operation. The present owners of Cosmos have extensive
experience in the mining industry. The current agreement to acquire Cosmos has
been extended several times due to delays in establishing pilot operations in
Utah. The Company expects that the closing of the Cosmos acquisition will be
contingent upon the successful application of its equipment in Utah.
On September 30, 1996 the Company agreed to acquire certain assets
from LaTex Resources, Inc., ("LaTex") an affiliate of the Company in exchange
for 100,000 shares of LaTex stock. In connection with the acquisition, the
Company issued 5,000,000 shares of its restricted common stock to its
President, Jeffrey T. Wilson, in exchange for 100,000 shares of LaTex stock to
be used in the acquisition. The assets to be acquired from LaTex are 5,000,000
shares of Wexford Technology, Inc. common stock owned by LaTex and representing
approximately 32.3% of the
6
issued and outstanding stock and a note payable to LaTex totaling $1,372,799;
3,798,730 shares of Imperial common stock owned by LaTex and a note payable to
LaTex totaling $677,705; 5,000 shares of LaTex Resources International, Inc.
common stock representing 100% of the issued and outstanding stock and a note
payable to LaTex totaling $3,363,000; and 30,000 shares of common stock of
Phoenix Metals, Inc. representing 100% of the issued and outstanding stock.
Closing of the acquisition is scheduled to occur upon the consummation of
LaTex's merger with Alliance Resources Plc.
On October 31, 1996 the Company entered into a letter of intent to
sell its Premier Operating Company subsidiary for $175,000. The Company
completed the sale of Premier and utilized the proceeds to retire its bank debt
with Bank of Oklahoma and for working capital purposes. The sale of Premier
included all of the Company's oil and gas properties and interests.
On November 21, 1996 the Company's shareholders agreed to a one for
six reverse split of the Company's common stock . As a result the Company's
issued and outstanding common shares were reduced to 5,237,807 as of that date.
BUSINESS STRATEGY
The Company's business strategy has changed since the acquisition of
Ridgepointe in August 1993, The Company has used its oil and gas assets to
provide the working capital necessary to expand and develop its mineral mining
activities. The Company's emphasis on mining ventures reflects its belief that
quality opportunities still exist in many areas of mineral mining for small
mining companies. The Company anticipates using partnership or joint venture
arrangements to avoid the large capital expenditures that can accompany certain
mining ventures. By seeking out small high quality claims and operations in
areas either by-passed or not yet occupied by major mining concerns, the Company
expects to position itself to take advantage of future upswings in the demand
for certain minerals such as gold, copper and platinum. The Company intends to
seek out opportunities in other commodities which the Company believes may have
the opportunity for a cyclical improvement in demand and price.
OIL AND GAS PRODUCTION, UNIT PRICES AND COSTS
The following table sets forth information with respect to production and
average unit prices and costs for the periods indicated:
Year Ended July 31
---- -------------
Production:
1994 1995 1996
----- ----- -----
Gas (MMcf) 124 45 44
Oil (Bbls) 8,900 2.210 1,900
Average Sales Prices:
Gas (per Mcf) 2.03 1.51 1.75
Oil (per Bbl) 12.60 16.68 15.26
Average Production Costs
per BOE(l): l3.58 5.62 4.87
7
(1) The components of production costs may vary substantially among wells
depending on the methods of recovery employed and other factors, but
generally include production taxes, lease overhead, maintenance and
repair, labor and utilities.
MARKETING
OIL AND GAS
The availability of a market for oil and gas produced or marketed by the
Company is dependent upon a number of factors beyond its control which at times
cannot be accurately predicted. These factors include the proximity of wells to,
and the available capacity of natural gas pipelines, the extent of competitive
domestic production and imports of oil and gas, the availability of other
sources of energy, fluctuations in seasonal supply and demand, and governmental
regulation. In addition, there is always the possibility that new legislation
may be enacted which would impose price controls or additional excise taxes upon
crude oil or natural gas, or both. In the event a productive gas well is
completed in an area that is distant from existing gas pipelines, the Company
may allow the well to remain shut-in until a pipeline is extended to the well
or until additional wells are drilled to establish the existence of sufficient
producing reserves to justify the cost of extending existing pipelines to the
area. It appears that the United States is just beginning to emerge from a
period of oversupply of natural gas which has, and may still cause delays,
restrictions or reductions of natural gas production and which has adversely
affected prices therefor. In addition, increased imports of natural gas from
Canada and Mexico have occurred and are expected to continue. Oversupplies of
natural gas can be expected to recur from time to time and may result in the gas
producing wells of the Company being shut-in.
Since the early 1970's the supply and market price for crude oil has been
significantly affected by policies adopted by the member nations of OPEC.
Members of OPEC establish among themselves prices and production quotas for
petroleum products from time-to-time with the intent of manipulating the global
supply and price levels for crude oil. In addition, Canada recently revised its
laws affecting the exportation of natural gas to the United States. Mexico also
continues to fine-tune its import-export policies. The oil and gas policies of
the United States, Canada and Mexico will be substantially impacted by the
Canadian/U.S. . Free Trade Agreement, the General Agreement on Tariffs and
Trade, and the North American Free Trade Agreement. These factors are expected
to increase competition and may adversely affect the price of natural gas in
certain areas of the United States. The Company is unable to predict the effect,
if any, which OPEC. Canadian and Mexican policies, and emerging international
trade doctrines will have on the amount of, or the prices received for oil and
natural gas produced and sold by the Company.
Changes in oil and natural gas prices significantly affect the revenues and
cash flow of the Company and the value of its oil and gas properties.
Significant declines in the prices of oil and natural gas could have a material
adverse effect on the business and financial condition of the Company. The
Company is unable to predict accurately whether the price of oil and natural gas
will rise, stabilize or decline in the future. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Results of
Operations."
Substantially all of the Company's crude oil and condensate production is
sold at posted prices under short term contracts, as is customary in the
industry The most significant purchasers of the Company's oil and gas production
during fiscal 1996 were Parker & Parsley (33%), Transcontinental (25%) and
Sonat (10%).
MINING
The availability of a market for the Company's mineral and metal
production will be influenced by the proximity of the Company's operations to
refiners and smelting plants. In general the Company will sell its mined product
to local refineries and smelters. The price received for such products will be
dependent upon the Company's ability to provide primary separation to ensure
fineness or quality. The price of gold has been relatively stable in recent
years reflecting a period of relatively low inflation. Copper prices have
generally been more volatile, in part due to increased demand of developing
economies for electrical wire and other copper related products.
8
Changes in the price of gold and copper will significantly affect the
Company's future cash flows and the value of its mineral properties. The Company
is unable to predict whether prices for these commodities will increase,
decrease or remain constant in future periods.
RESERVES
OIL AND GAS
-----------
The Company has made estimates of its proved reserves as of July 31, 1996
and includes estimates of the present value of future net cash flow before
income taxes (discounted at 10%) attributable to the Company's proved reserves
and the estimated future cash flow therefrom.
The quantities of the Company's proved reserves of oil and natural gas
presented below include only those amounts which the Company reasonably expects
to recover in the future from known oil and gas reservoirs under existing
economic and operating conditions. Proved developed reserves are limited to
those quantities which are recoverable commercially at current prices and costs,
under existing regulatory practices and with existing technology. Accordingly,
any changes in prices, operating and development costs, regulations, technology
or other factors could significantly increase or decrease estimates of the
Company's proved developed reserves. The Company's proved undeveloped reserves
include only those quantities which the Company reasonably expects to recover
from the drilling of new wells based on geological evidence from offsetting
wells. The risks of recovering these reserves are higher from both geological
and mechanical perspectives than the risks of recovering proved developed
reserves.
Set forth below are estimates of the Company's net proved reserves and
proved developed reserves and the estimated future net revenues from such
reserves and the present value thereof based upon the standardized measure of
discounted future net cash flows relating to proved oil and gas reserves in
accordance with the provisions of the Statement of Financial Accounting
Standards No.69. "Disclosures about Oil and Gas Producing Activities". Estimated
future net cash flows from proved reserves are determined by using estimated
quantities of proved reserves and the periods in which they are expected to be
developed and produced based on economic conditions at the date of the report.
The estimated future production is priced at current prices at the date of the
report. The resulting estimated future cash inflows are then reduced by
estimated future costs to develop and produce reserves based on cost levels at
the date of the report. No deduction has been made for depletion, depreciation
or income taxes or for indirect costs, such as general corporate overhead.
Present values were computed by discounting future net revenues at 10% per
annum.
9
The following table sets forth estimates of the proven oil and natural gas
reserves of the Company at July 31, 1996, as evaluated by the Company.
Oil (Bbls) Gas (MMcf)
- ---------------------------------------------------- -------------------------------------
State Developed Undeveloped Total Developed Undeveloped Total
- ------- --------- ---------- ----- --------- ----------- -----
Louisiana 0.2 - 0.2 - - -
Oklahoma 15.1 - 15.1 - - -
Texas 4.3 - 4.3 301 - 301
---- - ---- --- - ---
Total 19.6 - 19.6 301 - 301
The following table sets forth amounts as of July 31,1996, determined in
accordance with the requirements of the applicable accounting standards, with
respect to the estimated future net cash flows from production and sale of the
proved reserves attributable to the Company's oil and gas properties before
income taxes and the present value thereof Average prices used in determining
the future net cash flow estimates at July 31, 1996 , were $19.74 per barrel for
oil and $2.66 per MMBtu for gas.
At July 31, 1996
-----------------------
Proved Proved Proved
Developed Developed Developed
Reserves Reserves Reserves
--------- --------- ---------
Estimated future net cash flows from $791,935 -- $791,935
proved reserves before income taxes
Present value of estimated future net $406,806 -- $406,806
cash flows from proved reserves before
income taxes (discounted at 10%)
The estimation and gas reserves is a complex and subjective process which is
subject to continued revision as additional information becomes available.
Reserve estimates prepared by different engineers from the same data can vary
widely. Therefore, the reserve data presented herein should not be construed as
being exact. Any reserve estimate depends in part on the quality of available
data, engineering and geologic interpretation, and thus represents only an
informed professional estimate. Subsequent reservoir performance may justify
upward or downward revisions of such estimates.
Estimates of the Company's proved reserves have never been filed or included
in reports to any federal authority or agency, other than the Securities and
Exchange Commission
For further information on reserves, costs relating to oil and gas
activities, and results of operations from producing activities, see Note 11 to
the Company's Consolidated Financial Statement-Supplementary Financial
Information for Oil and Gas Producing Activities incorporated by reference
herein.
MINING
------
The following table sets forth estimates as of July 31, 1996 of the mineral
reserves net to the Company's interest in each of the Company's claim groups as
prepared by independent engineers and geologists and by the
Company. These estimates are based upon extensive sampling and testing on the
Company's properties and are based on assumptions the Company believes are
reasonable regarding production costs, metallurgical recoveries and
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mineral prices. There are numerous uncertainties inherent in the preparation of
estimates of reserves, including many factors beyond the Company's control. The
accuracy of any such estimates is a function of the quality of available data
and of engineering and geological interpretation and judgement. It can be
expected as the Company conducts additional evaluation, drilling and testing
with respect to its properties that these estimates will be adjusted and that
plans for mining could be revised.
Based on its analysis of the mineral deposits detailed in the table below,
it is the Company's present determination that these properties can be mined on
an economic basis by the Company and that these estimates constitute reserves as
that term is typically used in the mining industry. Although permitting required
to initiate mining operations in the United States has become extremely complex
and cannot be considered a certainty, the company believes that, in the normal
course of property development, it should be able to obtain the necessary
permits to commence or expand mining operations on these properties.
The estimates provided in the table below utilize in place grades and do not
reflect losses that will be incurred in the recovery process. The mineral grades
utilized in the preparation of reserves for each property are generally based
upon results of sampling and testing programs conducted on each property and
analyzed by qualified assayers or engineers.
As of July 31, 1996
---------------------
Net Mineable Reserves
---------------------
Claim Group Location Acres Gold Grade (oz/ton) Gold (oz) Silver (oz) Copper (lbs)
- --------------- -------- ----- ------------------- --------- ----------- ------------
UFO Mine (l) Arizona 400 0 0 0 12,000,000
Endless Glory(2) Arizona 160 0.24 67,400 1,626,000 17,660,000
Bear 1 & 2 Arizona 320 0.06 31,250 0 0
Pa I & 2 Arizona 320 0.09 34,320 0 0
Santa 1-22 Arizona 3,280 0.05 255,000 0 0
Cal l & 2 (3) Montana 320 0.07 85,000 0 0
Duke Mine Utah 900 0.18 3,532,000 0 0
----- ---------- --------- ----------
Total 5,700 4,004,970 1,626,000 29,660,000
(1) Copper reserves are based upon 400 million pounds at an average grade of 3%.
(2) Silver grade is 5.81 oz./ton; copper reserves are based on 17.6 million
pounds at an average grade of 3.1 %.
(3) Also contains significant amounts of industrial grade garnet.
PRINCIPAL EXPLORATION AND DEVELOPMENT PROJECTS: MINING VENTURES:
UNITED STATES
UFO Mine - The Company operates the UFO Mine and Rumico Millsite located in
--------
Yavapai County, Arizona comprising some 400 acres of unpatented mining claims.
The principal resource discovered to date is copper. Strip mining operations
were initiated under a small miner's exemption July 1992 to verity the quality
of the ore body and evaluate the economics of the mine. A limited core-drilling
program was completed in March 1993 and a pilot operation was conducted using
the millsite facilities to determine actual recoveries of copper. As a result
11
the Company has estimated its copper reserves at 12,000, 000 lbs.
based upon an average grade of 3%. Working capital limitations have limited the
Company's development of the mining property, in favor of other projects. The
property, is subject to an acquisition note with the former owners requiring the
payment of $1,000,000. The note has been extended several times by the holder
and the mining claims serve as collateral for the note The Company presently
intends to attempt to renegotiate the note and/ or seek an additional extension.
The current extension expires July 31, 1997. There is no assurance that the
holder will extend the note and consequently ownership of the property, may be
relinquished to extinguish the note.
Endless Glory - The Endless Glory property consists of 160 acres of
-------------
unpatented mining claims located in Santa Cruz county; Arizona and part of the
Coronado national Forest, approximately 15 miles south of Patagonia. Arizona.
Access to the property is through several National Forest roads and jeep trails.
The claims are situated in a mountainous area made up of limestones and
rhyolites which are intersected by veins of quartz and barite. The quartz veins
are up to 7 feet in width and contain high amounts of base metals in the
sulfides. Mining has been conducted on the property previously, primarily for
base metals. Significant areas of placer deposits also exist in washes on the
property. Testing and sampling of placer material and dump tailings indicate a
total mineable volume of approximately 265.000 tons of material with mineral
grades averaging 0.25 ounces/ton of gold; 6.13 ounces/ton of silver 3 .33 %
copper and 1.6 % zinc.
The Company expects to conduct additional tests on the placer and tailings
material during fiscal 1997 to determine if the material can be suitably
recovered using the Cosmos concentrator equipment. The Company presently expects
to utilize gravity separation methods to recover the precious metals, however
additional testing may assist in defining the recovery method. The Company
currently expects to spend approximately $25,000 on additional testing during
the fourth quarter of fiscal 1997. Feasibility studies and engineering design of
recovery systems will be conducted pending the outcome of tests using the
Cosmos Concentrator.
Bear 1 & 2 - The property comprises some 320 acres of unpatented mining
----------
claims located in western Cochise County, Arizona in the Huachuca mountains
approximately 30 miles from Sierra Vista, Arizona. The area has been mined
previously through lode workings in the Wakefield Mine and the Van Horn Mine,
primarily for silver and tungsten. While the potential exists to evaluate and
further quantify the potential values of the lode deposits on the property, the
Company's primary focus is in the placer areas which make up part of Bear
Creek. It is likely that the placer mineralization is connected with the
various lode areas on the property.
An extensive sampling and testing program indicates a total of approximately
505,000 tons of mineable placer material exists on the claims with an average
grade of 0.06 ounces/ton of gold The Company expects to conduct a pilot
operation using a portable Cosmos Concentrator unit during the first quarter of
1998. It is estimated that the total cost of the pilot operation will not exceed
$75,000 Feasibility and engineering design and the timing of installation of a
full scale plant will be determined based on the results of the pilot operation.
PN 1 & 2 - The PN 1 & 2 property consists of 320 acres of unpatented
--------
mining claims located 20 miles northwest of Patagonia, Arizona in the Coronado
National Forest of Santa Cruz County, Arizona. Access to the area is limited to
four-wheel drive vehicles. Prior mining activity has occurred on the property in
the Little Joker, St. Louis, Philadelphia, Armada, Lead King and Dragon Z mines
all of which were productive of copper, lead, silver and gold. The Company
presently anticipates reentering these old shafts and drifts to reestablish
production. Sampling and testing at these sites yields mineable ore totaling
369,000 tons with an average grade of 0.09 ounces/ton of gold. In order to
properly develop the property; the Company plans to initiate a core-drilling
program to better define the mineralization at each site. It is expected that
the core drilling program will cost approximately $300,000 and will be deferred
until fiscal 1998.
Santa 1-22 - The claims comprising the Santa 1 through Santa 22 are
----------
located in the Patagonia area of Santa Cruz County; Arizona and encompass some
3,300 acres of unpatented mining claims. Mining activity in the past has
occurred at the Dixie, Joplin, Last Chance, Happy Jack and Mohawk mines which
produced lead, copper, silver and gold. Mining in this area dates to 1879.
Numerous tailings piles exist at these sites which can be processed for gold
recovery. In addition the Company anticipates conducting a core drilling program
to further define the mineralization on the lode mines. Because of the
significant placer area available on these claims, the Company expects to
conduct an extensive testing and sampling program during fiscal 1997 to
determine the suitability of the Cosmos Concentrator to recovering gold in these
areas. The sampling and testing which has been conducted to date at the various
sites, including the tailings piles indicates a total of 4,320,000 tons of
mineable ore with an average grade of 0.06 ounces/ton of gold. The Company
expects to conduct its analysis of the placer material during the
12
fourth quarter of fiscal 1997 and anticipates the cost of the test program to be
about $75,000. Core drilling to further define the lode mineralization will be
delayed until fiscal 1998 due to capital and manpower limitations.
Cal 1 & 2 - The Cal 1 & 2 property consists of 320 acres of unpatented
---------
mining claims located near the city of Butte, Montana. The property contains
significant amounts of industrial quality garnet and sapphire as well as gold.
The claims consist of placer material deposited by the California Creek and
most, if not all of the previous mining in this area has been placer mining
Based upon the sampling and testing program which has been conducted to date,
the total mineable tonnage available is 2,555,000 tons with an average yield of
0.033 ounces/ton of gold, 5.5 lbs/ton of garnet and 0.12 lbs./ton of sapphire.
The Company plans to conduct recovery tests utilizing the Cosmos concentrator
during the fourth quarter of fiscal 1998 to determine the suitability of this
equipment for recovering gold from these placers. The estimated cost for the
test is $55,000. The results of the test will determine the timing and cost of
the recovery system installed to initiate full-scale operations.
Duke Mine - The primary focus of the Company during fiscal 1997 will be
---- ----
the initiation of operations on the Duke Mine located in San Juan County, Utah.
The property comprises some 900 acres of unpatented mining claims in the Dry
Valley Gold Claim area. Access to the property is excellent via blacktop roads
adjacent to the claims. The property is located some 20 miles south of Moab,
Utah. The primary mineralization at the Duke Mine occurs as microscopic g6ld
located in very fine grain placer material. Sieve analysis of the sand indicates
that about 71 % of the material is larger than 200 mesh. Recovery tests have
been conducted on a grid sampling pattern throughout the claim area utilizing
the Cosmos Concentrator and indicate an average recovery of 0.14 ounces/ton of
free gold. Because of the nature of the placer material and in particular its
size, mining and process recovery operations will be significantly simplified,
thereby reducing costs. The company has, subsequent to its reserve report,
conducted additional recovery tests utilizing other equipment in addition to the
Cosmos Concentrator with similar results. Water is readily available, however,
drilling will be required.
The Company plans to initiate production at the Duke Mine during the third
quarter of fiscal 1997 on a pilot operation. A portable Cosmos Concentrator is
being purchased and will be moved on site. The facility should be capable of
processing about 100 tons of placer material per day. The Company anticipates it
will spend approximately $185,000 to begin operations at this level and will
operate under a small miner's permit exemption. A full scale modular facility is
planned during the second quarter of fiscal 1998, subject to permitting and
construction schedules, at a cost of $5.0 million and with a capacity of 10,000
tons per day. The present claims owned by the Company contain approximately
25,550,000 tons of placer material. The company anticipates obtaining additional
claims in the vicinity of the Duke Mine during fiscal 1997 to further enhance
its mineral resource in this area.
MEXICO
Lance and Trega Mines - During 1993 the company entered into a joint
--------------- -----
venture to exploit gold reserves located in the Sierra Madre mountains of Mexico
in and around the town of Uruachi, Mexico. Under the terms of the agreement the
Company would own 55 % of the mines for paying $50,000 and 500,000 shares of the
Company's restricted common stock and for providing working capital loans of up
to $200,000 to be used to complete infrastructure and facilities necessary to
develop continuos mining operations. Although the quality of the ore bodies in
the Lance and Trega mines tested at very high contents of gold, 4 ounces/ton and
2 ounces/ton, respectively, the Company and its partner were unable to complete
the necessary infrastructure due to capital limitations. The project has been
essentially mothballed by both parties until such time as sufficient capital is
available to complete the construction of roads and facilities. The company has
expended approximately $265,000 in the development of this project to date.
PRODUCTIVE WELLS AND ACREAGE
The following table sets forth the Company's producing wells and developed
acreage assignable thereto at July 31, 1996.
13
Productive Wells
-------------------
Developed Acreage Oil Gas Total
- ----------------- --- --- -----
Gross Net Gross Net Gross Net Gross Net
- ----- ----- ----- ----- ----- ---- ----- ----
8,883 2,005 139 3.83 6 2.06 145 5.89
Productive wells consist of producing wells and wells capable of production,
including gas wells awaiting pipeline connections to commence deliveries and oil
wells awaiting connection to production facilities. Wells which are completed in
more than one producing horizon are counted as one well. Of the gross wells
reported above on a historical none had multiple completions.
At July 31, 1996, all of the Company leases were held by production.
DRILLING ACTIVITY
During each of the years ended July 31 1994,1995 and 1996, the Company did
not drill or participate in the drilling of any exploratory or developmental oil
and gas wells At July 31, 1996, the Company was not participating in the
drilling or completion of any oil and gas wells.
COMPETITION
Competition in the exploration and production business is intense In seeking
to obtain desirable producing properties, new leases and exploration prospects,
the Company faces competition from both major and independent oil and gas
companies as well as from numerous individuals Many of these competitors have
financial and other resources substantially in excess of those available to the
Company
Increases in worldwide energy production capability and decreases in energy
consumption as a result of conservation efforts have brought about substantial
surpluses in energy supplies in recent years. This, in turn, has resulted in
substantial competition for markets historically served by domestic natural gas
resources both with alternate sources of energy, such as residual fuel oil, and
among domestic gas suppliers. As a result, there have been reductions in oil and
gas prices, widespread curtailment of gas production and delays in producing and
marketing gas alter it is discovered Changes in government regulations relating
to the production, transportation and marketing of natural gas have also
resulted in significant changes in the historical marketing patterns of the
industry. Generally, these changes have resulted in the abandonment by many
pipelines of long term contracts for the purchase of natural gas, the
development by gas producers of their own marketing programs to take advantage
of new regulations requiring pipelines to transport gas for regulated fees, and
the emergence of various types of gas marketing companies and other aggregators
of gas supplies. See "Regulation." As a consequence, gas prices, which were once
effectively determined by government regulation, are now largely established by
market competition. Competitors of the Company in this market include other
producers, gas pipelines and their affiliated marketing companies, independent
marketers, and providers of alternate energy supplies, such as residual fuel
oil.
The acquisition of mining claims prospective for precious metals or other
minerals is subject to intense competition from a large number of companies and
individuals The ability of Company to acquire additional leases or additional
mining claims could be curtailed severely as a result of this competition.
The principal methods of competition in the industry for the acquisition of
mineral leases is the payment of bonus payments at the time of acquisition of
leases, delay rentals, advance royalties, the use of differential royalty rates,
the amount of annual rental payments and stipulations requiring exploration and
production commitments by the lessee. Companies with far greater financial
resources, existing staff and labor forces, equipment for exploration and
mining, and vast experience will be in a better position than the Company to
compete for such leases.
14
GOVERNMENT CONTRACTS
No portion of the Company's business is subject to re-negotiation of profits
or termination of contracts or subcontracts at the election of the Government.
REGULATION
The oil and gas and mining industries are extensively regulated by federal,
state and local authorities. Legislation affecting the oil and gas and mining
industry is under constant review for amendment or expansion. Numerous
departments and agencies, both federal and state, have issued rules and
regulations binding on the oil and gas and mining industries and their
individual members some of which carry substantial penalties for the failure to
comply. The regulatory burden on the oil and gas and mining industries increases
their cost of doing business and consequently, affects their profitability.
Inasmuch as such laws and regulations are frequently amended or reinterpreted,
the Company is unable to predict the future cost or impact of complying with
such regulations.
Exploration and Production. Exploration and production operations of the
--------------- ----------
Company are subject to various types of regulation at the federal, state and
local levels Such regulation includes requiring permits for the drilling of
wells, maintaining bonding requirements in order to drill or operate wells, and
regulating the location of wells, the method of drilling and casing wells, the
surface use and restoration of properties upon which wells are drilling arid the
plugging and abandoning of wells. The Company's operations are also subject to
various conservation matters. These include the regulation of the size of
drilling and spacing units or proration units and the density of wells which may
be drilled and the unitization or pooling of oil and gas properties or
interests. in this regards some states allow the forced pooling or integration
of tracts to facilitate exploration while other states rely on voluntary pooling
of lands and leases In addition, state conservation laws establish maximum rates
of production from oil arid gas wells and generally prohibit the venting or
flaring of gas and impose certain requirements regarding the rate of production.
The effect of these regulations is to limit the amounts of oil and gas the
Company can produce from its wells, and to limit the number of wells or the
locations at which the Company can drill.
The states of Oklahoma, Texas and Louisiana have adopted revisions to their
production allowable rules under which they regulate the quantities of natural
gas which may be produced within their borders. The state of Kansas is
considering similar revisions to its allowable rules. The stated rationale
behind such prorationing legislation and rulemaking is the conservation of
natural resources, prevention of waste and protection of the correlative rights
of oil and gas interest owners by limiting production to the available market.
Legislation has recently been introduced in the United States Congress to
restrict the ability of states to regulate the production of natural gas. It is
impossible at this time to determine the effect, if any, these developments may
have on the natural gas industry as a whole. The Company does not believe the
developments will materially affect its operations.
The Company's operations are subject to extensive federal, state and local
laws and regulations relating to the generation, storage, handling, emission,
transportation and discharge of materials into the environment. Permits are
required for various of the Company operations, and these permits are subject to
revocation, modification and renewal by issuing authorities. Governmental
authorities have the power to enforce compliance with their regulations and
violations are subject to fines, injunctions or both. It is possible that
increasingly strict requirements will be imposed by environmental laws and
enforcement policies thereunder. The Company is also subject to laws and
regulations concerning occupational safety and health. It is not anticipated
that the Company will be required in the near future to expend amounts that are
material in the aggregate to the Company's overall operations by reason of
environmental or occupational safety and health laws and regulations but
inasmuch as such laws and regulations are frequently changed, the Company is
unable to predict the ultimate cost of compliance.
Natural Gas Sales and Transportation. Federal legislation and regulatory
------------------------------------
controls have historically affected the price of the gas produced by the Company
and the manner in which such production is marketed. The transportation arid
sale for resale of gas in interstate commerce are regulated pursuant to the
Natural Gas
15
Act of 1938 (the NGA") and the Natural Gas Policy Act of l978 (the "NGPA") and
Federal Energy Regulatory Commission (FERC) regulations promulgated thereunder.
Since 1978, maximum selling prices of certain categories of gas, whether sold in
interstate or intrastate commerce, have been regulated pursuant to the NOPA The
NGPA established various categories of gas and provided for graduated
deregulation of price controls of several categories of gas and the deregulation
of sales of certain categories of gas. All price deregulation contemplated under
the NOPA has already taken place.
With respect to certain gas committed or dedicated to interstate commerce
prior to the enactment of the NGPA, producers who sell gas for resale in
interstate commerce must obtain a certificate of public convenience and
necessity from the FERC under the NGA before commencing such sales, make certain
filings with respect to the prices at which such sales are made, and secure
approval prior to abandonment of service once it is commenced. The NGPA exempts
certain gas not dedicated to interstate commerce prior to she date of enactment
of the NGPA from NGA regulations including those provisions that require that
certification and abandonment be approved by the FERC.
On July 26, 1989, the Natural Gas Wellhead Decontrol Act of 1989 (the
"Decontrol Act") was enacted. The Decontrol Act amends the NGPA to remove as of
July 27, 1989, both price and non-price controls from gas not subject to a
contract in effect on July 26, 1989. Gas under contract on July 26, 1989. is
decontrolled on the earlier of the termination of the contract or January 1,
1993. The Decontrol Act further provides that parties to an existing contract
may agree to decontrol as of any date on or after July 26, 1989. Finally, gas
from wells spudded after July 26, 1989 is decontrolled on May 15, 1991, even if
those wells are still covered by an existing contract.
The cumulative impact on the Company of the deregulation provisions of the
NGPA and the Decontrol Act has been to reduce the amount of the Company's gas
production which is subject to price regulation. As a result, none of the
Company's gas production is subject to price regulation. Gas which has been
removed from price regulation is subject only to that price contractually agreed
upon between the producer and purchaser. Under current market conditions
deregulated gas prices under new contract tend to be substantially lower than
most regulated price ceilings prescribed by the NGPA.
Several major regulatory changes have been implemented by the FERC from 1985
to the present that affect the economies of natural gas production,
transportation and sales. In addition the FERC continued to promulgate revisions
to various aspects of the rules and regulations affecting those segments of the
natural gas industry which remain subject to the FERC's jurisdiction. The stated
purpose of many of these regulatory changes is to promote competition among the
various sectors of the gas industry. The ultimate impact of the complex and
overlapping rules and regulations issued by the F'ERC since 1985 cannot be
predicted. In addition, many aspects of these regulatory developments have not
become final but are still pending judicial and FERC final decisions.
TITLE TO PROPERTIES
Oil and Gas . As is customary in the oil and gas industry, the Company
-----------
performs a minimal title investigation before acquiring undeveloped properties,
which generally consists of obtaining a title report from legal counsel covering
title to the major properties (for example, properties comprising at least 80%
by value of the acquired properties) and due diligence reviews by independent
landmen of the remaining properties. The Company believes that it has
satisfactory title to such properties in accordance with standards generally
accepted in the oil and gas industry. A title opinion is obtained prior to the
commencement of any drilling operations on such properties. The Company's
properties are subject to customary royalty interests, liens incident to
operating agreements, liens for current taxes and other burdens which the
Company believes do not materially interfere with the use of or affect the value
of such properties. Substantially all of the Company's oil and gas properties
are and will continue to be mortgaged to secure borrowings under the Company's
credit facilities. See Item 7, "Management's Discussion and Analysis of
Financial Condition and Results of Operations-Liquidity and Capital Resources.
Mining. The Company does not have title opinions on its mining claims or
------
leases and, therefore, has not identified potential adverse claimants nor has it
quantified the risk that any adverse claims may successfully contest all or a
portion of its title to the claims. Furthermore, the validity of all unpatented
mining claims is dependent upon
16
inherent uncertainties such as the sufficiency of the discovery of minerals,
proper posting and marking of boundaries, and possible conflicts with other
claims not determinable from descriptions of record. In the absence of a
discovery of valuable minerals, a mining claim is open to location by others
unless the claimant is in actual possession of and diligently working the claim
(pedis possessio) No assurance can be given with respect to unpatented mining
claims in the exploratory stage that a discovery of a valuable mineral deposit
will be made.
To maintain ownership of the possessory title created by an unpatented
mining claim against subsequent locators, the locator or his successor in
interest must pay an annual fee of $200 per claim.
OPERATIONAL HAZARDS AND INSURANCE
The operations of the Company are subject to all risks inherent in the
exploration for and production of oil and gas and the exploration for and
operation of mines and mining equipment, including such natural hazards as
blowouts, cratering and fires, which could result in damage or injury to, or
destruction of, drilling rigs and equipment, formations, producing facilities or
other property or could result in personal injury, loss of life or pollution of
the environment. Any such event could result in substantial expense to the
Company which could have a material adverse effect upon the financial condition
of the Company to the extent it is not fully insured against such risk The
Company carries insurance against certain of these risks but, in accordance with
standard industry practices, the Company is not fully insured for all risks
either because such insurance is unavailable or because the Company elects not
to obtain insurance coverage because of cost Although such operational risks and
hazards may to some extent be minimized. no combination of experience, knowledge
and scientific evaluation can eliminate the risk of investment or assure a
profit to any company engaged in oil and gas operations, or mining operations
EMPLOYEES
The Company employs one person in its Evansville, Indiana office whose
functions are associated with management, operations and accounting. The Company
uses independent contractors to supervise its oil and gas and mining businesses.
ITEM 3. LEGAL PROCEEDINGS.
-----------------
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
------------- ------- ---- ---- -------------------
For the year ended July 31, 1996, there were no matters submitted to a
vote of the Company's stockholders.
17
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK; AND RELATED STOCKHOLDER MATTERS.
The Company's common stock is traded in the over-the-counter market. Since
1984 trading has been so limited and sporadic that it is not possible to obtain
a continuing quarterly history of high and low bid quotations. Stock information
is received from registered securities dealers and reflects inter~dealer prices,
without retail mark-up, mark-down or commission and may not necessarily
represent actual transactions. The Company has been advised that shares are not
presently trading and have not traded significantly during the past three years.
The last available quotation was a high asked quotation of $0.20 per share as of
June 1996, however only a limited number of shares have traded during the year.
No dividends have ever been paid by the Company on its common stock and
it is not anticipated that dividends will be paid in the foreseeable future.
At July 31, 1996, there are approximately 557 holders of record of the
Company's common stock.
ITEM 6. SELECTED FINANCIAL DATA
1996 1995 1994 1993 1992 1991
------------ ----------- ----------- ----------- --------- ---------
Operating Revenue $ 105,630 114,667 296,641 433,213 196,703 274,373
Income (loss) from continuing operations $ (388,089) (461,186) (306,397) (124,914) 10,025 12,630
Net Income (loss) $ (276,424) (702,195) (307,397) (124,914) 10,025 0
Net Income (loss) per share $(0.01) (0.03) (0.01) (0.01) 0 0
Total Assets $ 3,552,369 4,887,842 3,907,113 2,394,010 793,712 176,342
Stockholder's Equity $ 1,163,278 1,462,035 1,119,930 1,531,431 17,317 124,001
Cash Dividends Paid per Common Share $ 0 0 0 0 0 0
Number of Outstanding Shares 31,426,841 24,026,841 21,180,958 10,920,184 7,000,000 7,000,000
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
RESULTS OF OPERATIONS
The factors which most significantly affect the Company's results of
operations are (i) the sale prices of crude oil and natural gas, (ii) the level
of oil and gas sales, (iii) the level of lease operating expenses, (iv) the
level of and interest rates on borrowings and the ability of FSI to market its
financial product to generate non-refundable fees to the Company. Since the
Company has limited control over the success of FSI's program, the Company will
need to
18
rely on the initiation operations on its mining ventures to generatecash flow
and future profits. As the Company successfully completes its strategy of
becoming a mining company, the same factors listed above will apply to the sale
of minerals and metals mined by the Company. Total sales volumes and the level
of borrowings are significantly impacted by the degree of success the Company
experiences in its efforts to acquire oil and gas properties and its ability to
maintain or increase production from existing oil and gas properties through its
development and production enhancement activities. As the Company initiates
production on its mining properties, results of operations will be affected by:
(i) commodity prices for copper and gold. (ii) the quantity and quality of the
ores recovered and processed and (iii) the level of operating expenses
associated with the mining operations.
Relatively modest changes in either oil or gas prices significantly impact the
Company's results of operations and cash flow and could significantly impact the
Company's borrowing capacity. Prices received by the Company for sales of oil
and natural gas have fluctuated significantly from period to period. The
Company's ability to maintain current borrowing capacity and to obtain
additional capital on attractive terms is substantially dependent on oil and gas
prices. Domestic spot oil prices have ranged from a low of approximately $ 10
per barrel in July 1986 to a high of approximately $40.00 per barrel in October
1982 to a current price of about $19.50 per barrel. The fluctuations in oil
prices during these periods reflect market uncertainty regarding OPEC's ability
to control the production of its member countries, as well as concerns related
to the global supply and demand for crude oil. Since the end of the Gulf War in
early 1991, crude oil prices have experienced continued volatility, primarily as
a result of OPEC's inability to maintain disciplined production quotas by member
countries and the uncertainty associated with Iraq's return to the crude oil
export market. These factors continue to overhang the market and will create
significant price volatility for the foreseeable future.
Natural gas prices received by the Company fluctuate generally with changes in
the spot market price for gas. Spot market gas prices have generally declined in
recent years because of lower worldwide energy prices as well as excess
deliverability of natural gas in the United Stases. However, natural gas prices
have rebounded recently and appear to be poised for further strengthening.
Domestic spot natural gas prices have ranged from a low of approximately $0.90
per Mcf in January 1992 to a high of approximately $2.70 per Mcf in April 1996
to a current level of about $2.00 per Mcf. Environmental concerns coupled with
recent increases in the use of natural gas to produce electricity have combined
to improve prices. Under FERC Order 636, U.S. pipelines have been made more
accessible to both buyers and sellers of natural gas and. as a result, natural
gas will be able to more effectively compete for market share with other end-use
energy forms. All of this suggests a continued improvement in the demand for
natural gas over the long term.
Prices for gold have remained relatively stable during the past several years
and generally reflect the relatively low inflation rates predominate in the
economies of the industrialized nations. Current spot prices for gold are
$359.00 per ounce and are expected to continue to remain at or near those levels
with only modest adjustments for inflation.
Copper prices have fluctuated dramatically since the Company's acquisition of
its copper property with prices ranging from a low of about $0.65 per pound in
August 1993 to a high of $1.20 per pound in 1995 to current levels of about
$1.00 per pound. Wide variations in copper prices have resulted from the
increased demand for electrical wire and copper related products as a result of
the continued high growth rate of the economies of the industrialized nations
and as a result of periodic reductions in the availability of scrap copper for
recycling. Continued fluctuations in the spot price for copper are expected to
result from variations in the availability of scrap copper and the continued
strong demand from emerging nations.
Within the oil and gas business, it appears that the substantial restructuring
of the major and large independent companies is slowing. The merger frenzy of
the 1980's has waned and despite the continued exodus by U.S. companies to
international ventures, it appears that the next few years will be a "settling
in" time for most companies. Nevertheless, there remains a large inventory of
properties available for acquisition within the United States. However, it is
anticipated that as crude oil prices stabilize and strengthen, fewer companies
will be inclined to sell their properties in the future.
The Company's principal source of cash flow is the production and sale of its
crude oil and natural gas reserves, which are depleting assess. Cash flow from
oil and gas sales depends upon the quantity of production and the price
19
obtained for such production. An increase in prices permits the Company to
finance its operations to a greater extent with internally generated funds. A
decline in of oil and gas prices reduces the cash flow generated by the
Company's operations, which in turn reduces the funds available for servicing
debt, acquiring additional oil and gas properties and for developing its mining
operations.
In addition to the foregoing, the results of the Company's operations vary due
to seasonal fluctuations in the sales prices and volumes of natural gas In
recent years. Natural gas prices have been generally higher in the fall and
winter. Due to these seasonal fluctuations. results of operations for individual
quarterly periods may not be indicative of results which may be realized on an
annual basis.
YEAR ENDED JULY 31, 1996 COMPARED TO YEAR ENDED JULY 31, 1995. Total revenues
- -------------------------------------------------------------
for the Company for the year ended July 31, 1996 were $105,630 compared to
$114,667 for the year ended July 31, 1995. The decrease in revenues reflect
lower produced volumes of oil and natural gas and is offset somewhat by slightly
higher product prices received. In addition to revenues from operations, the
Company generated net revenue of $268,532 during the year from its participation
in the financial program offered by FSI. Since the ability of FSI to continue
its 1996 levels of placements of its financial product cannot be assured, the
Company expects its revenues will decrease during fiscal 1997 and reflect
revenue levels commensurate with its current oil and gas operations. The Company
sold its oil and gas operations in October, 1996 and as a result will have only
minimal revenues until its mining operations begin. Since the Company is,
subject to available capital, planning the start-up of operations on its Duke
Mine during fiscal 1997 operating revenues may increase if operations are
achieved on a significant level.
Operating expenses for the year ended July 31,1996 were $386,619 compared to
$389,940 for the year ended July 31, 1995. The level of expenses is expected to
remain about the same for fiscal 1997 unless significant mining activity is
achieved. General and administrative expenses increased to $312,453 for the year
ended July 31, 1996 compared to $234,012 for the prior year end and reflect the
present acquisition activity in the mining business and the costs associated
therewith. General and administrative expenses are expected to increase
dramatically as mining operations are initiated and the Company hires employees
to manage its operations.
The Company incurred an after tax loss of $276,424 ($0.01 per share) for the
year ended July 31, 1996 compared to a loss of $702,895 ($0.03 per share) for
the year ending July 31, 1995 The improvement in the after tax loss reflects the
increase in non-refundable fees received by the Company in conjunction with its
participation with FSI and the reduction in write-offs incurred in prior years.
Until the Company initiates significant mining operations on a continuous basis,
it is anticipated that the Company's operations will continue to be
unprofitable.
YEAR ENDED JULY 31, 1995 COMPARED TO YEAR ENDED JULY 31, 1994. Total revenues
- ---------- --------------------------------------------------
from the Company's operations and activities were $114,667 for the year ending
July 31,1995 compared to $296,641 for the prior year end. The decrease in
revenue of $181,9?4 (61%) reflects the sale of the oil and gas assets of I.B.
Energy, Inc. and a reduction of oil and gas prices during 1995. The present
level of revenues are indicative of the Company's current oil and gas operations
in its Premier Operating Company subsidiary.
Operating expenses declined slightly to $389,940 for the year ended July 31,
1995 compared to $524,525 for the prior year ending July 31, 1994, as a result
of she sale of the I.B. Energy, Inc. oil and gas assets and the suspension of
certain mining activities. General and administrative expenses remained constant
in fiscal 1995 compared to fiscal 1994 as a result of the start-up of certain
mining operations within Ridgepointe which were subsequently suspended due to a
lack of working capital. The mining company accounted for $105,322 of general
and administrative expenses.
The Company incurred an aftertax net loss of $702,895 ($0.03 per share) for the
year ending July' 31, 1995 compared to a loss of $265,869 ($0.01 per share) for
the year ending July 31, 1994. Until the Company initiates its mining operations
on a continuous basis, the Company expects its present level of operations to
continue to be unprofitable.
YEAR ENDED JULY 31, 1994 COMPARED TO YEAR ENDED JULY 31, 1993. Total revenues
- -------------------------------------------------------------
from the Company's oil and gas operations for the year ended July 31, 1994 were
$296,641 as compared to $433,283 for the year ended July 31, 1993. The decrease
in revenues is primarily due to the sale of substantially all of the oil and gas
assets of I.B.
20
Energy, Inc. to generate capital for mining operations.
Total operating expenses decreased from $558,267 for the year ended July 31,
1993 to $524,525 for the year ended July 31, 1994. The decrease is primarily due
to the sale of the I.B. Energy subsidiary and is offset by higher general and
administrative costs associated with the Company's acquisition of mining claims
which increased by $98,389 from period to period, by increased interest expenses
of $38,947 and by actual mining expenses of $49,000 associated with the
company's properties.
The Company incurred an after-tax net loss for the year ended July 31, 1994 of
$265,869 ($0.01 per share) compared to an after-tax net loss of $18,268 ($0.00
per share) for the year ended July 31. 1993.
CAPITAL RESOURCES AND LIQUIDITY.
The Company's capital requirements relate primarily to its mining activities and
the development of its oil and gas properties. Prior to the change in control,
the Company funded its very limited activities from cash flow. The Company,
through its subsidiaries, has established credit facilities with a bank to
facilitate the funding of its operations. However, today, because of certain
defaults which exist in relation to the Company's primary credit facility,
additional borrowings are not available to the Company. As a result of the sale
of its Premier Operating subsidiary in October, 1996, the Company retired its
principal bank debt and no longer has access to financing from that source.
Presently the Company is active in several mining activities which will require
significant capital expenditures. The Company has a wide degree of discretion in
the level of capital expenditures it must devote to each project on an annual
basis and the timing of the development of each project. The Company has
primarily been engaged, in its recent past, in the acquisition and testing of
mineral properties to be inventoried for future development. Because of the
relative magnitude of the capital expenditures that my ultimately be required
for any single mining venture as operations are achieved, management has pursued
a strategy of acquiring properties with significant mineral potential in an
effort to create a mineral property base sufficient to allow the Company to
access capital from external sources, either through debt or equity placements.
In order to develop its properties in a continuos manner in the future,
management believes the Company will need to raise capital from outside sources
during fiscal 1997. In the event that additional capital is not obtained, it
may become necessary to alter development plans or otherwise abandon certain
ventures.
In order to meet the immediate capital requirements of the mining activities
described above, the Company has obtained loans secured by its oil and gas
assets in the principal amount of $139,817 at July 31, 1996. As discussed
previously, the Company subsequently sold all of its oil and gas properties
which resulted the retirement of this debt and in additional working capital
available to funding the mining activities. Although the timing of expenditures
for the Company's mining activities are distributed over several months, the
Company anticipates its current working capital will be insufficient to meet its
capital expenditures. Furthermore, since the fees generated from the Company's
participation in the program with FSI are unpredictable in both timing and
magnitude and because there can be no assurance that FSI will continue to be
able to market its product, the Company believes it will be required to access
outside capital either through debt or equity placements or through joint
venture operations with other mining companies. There can be no assurance that
the Company will be successful in its efforts to locate outside capital and as a
result the level of the Company's planned mining activities may need to be
curtailed, deferred or abandoned entirely.
The level of the Company's capital expenditures will vary in the future
depending on energy and commodity market conditions and upon the level of and
mining activity achieved by the Company. The Company anticipates that its cash
flow will be insufficient to fund its operations at their current levels and
that additional funds will be required.
The Company's basic credit facility consists of a revolving credit facility
under which the Company has available to it a revolving line of credit in the
principal amount of $216,000 As a result of certain defaults by the Company in
its credit facility with the bank, the bank has advised the Company that it can
no longer utilize the revolving features of the facility. In addition the bank
has notified the company that it is in default of its credit facility and is
subject to foreclosure.
21
The Company is required to make interest payments monthly with interest accruing
at a varying rate based on the sum of the bank's prime lending rate (10.25 % at
July 31, 1996). The revolving line of credit is secured by substantially all of
Premier's oil and gas properties Principal payments of $4,500 plus accrued
monthly interest began on June 1, 1994 with a final payment of all unpaid
principal and interest due at October 31, 1995. The Company has been unable to
extend the due date of its loan with its lender, although the lender has
notified the Company of its willingness to provide the Company with additional
time to payoff the loan balance. As a result of the Company's default under its
loan agreement and because there is presently no agreement in place regarding
any specific period of time over which the bank will forego further actions, the
lender may liquidate the Company's oil and gas properties in satisfaction of the
debt. Subsequent to year end the Company sold its oil and gas properties and its
Premier Operating subsidiary and paid off the debt. At July 31, 1996 the
outstanding balance under the Company's credit facilities with its Bank totaled
$139,817.
The Company's existing debt agreements with the bank contain covenants which
limit the amount of additional indebtedness the Company may incur, restrict
certain acquisitions and sales of oil and gas properties, and prohibit
dividends. The Company has obtained certain unsecured loans, in compliance with
its bank covenants, from its Chairman, Jeffrey T. Wilson which total $177,639 as
of July 31, 1996. These funds are being used to initiate the Company's mining
activities. Management believes that the Company will not have sufficient
borrowing capacity to fund its anticipated needs and will need to access outside
capital.
At July 31, 1996, the Company had current assets of $25,864 and current
liabilities of $2,389,091 which resulted in negative working capital of
$2,363,227. The negative working capital position is comprised of senior bank
debt, notes payable to shareholders and related parties and acquisition notes.
As discussed earlier, if the Company is unsuccessful in obtaining outside
capital or extensions to its acquisition note with UFO Limited Partnership
regarding the UFO Mine, certain mining activities of the Company may be
curtailed, postponed or abandoned. The Company believes that its cash flow from
operations of its oil and gas properties will be insufficient to meet its credit
repayment obligations and fund the ongoing operating needs of the Company. As a
result the Company plans to seek additional capital from outside sources through
the placement of additional debt or equity during fiscal 1997 Because the
availability of debt and equity financing are subject to a number of variables,
there can be no assurance that the Company will be successful in attracting
adequate financing and as a result may be required to curtail, postpone or
abandon certain of its planned capital expenditures. If the Company is unable to
attract adequate financing, management believes the Company may be compelled to
sell certain of its assets to meet its obligations.
SEASONALITY
The results of operations of the Company are somewhat seasonal due to seasonal
fluctuations in the price for crude oil and natural gas. Recently, crude oil and
natural gas prices have increased to their highest level in several years. Due
to these seasonal fluctuations results of operations for individual quarterly
periods may not be indicative of results which may be realized on an annual
basis.
INFLATION AND PRICES
The Company's revenues and the value of its oil and gas and mining properties
have been and will be affected by changes in oil and gas and precious metals
prices. The Company's ability to maintain current borrowing capacity and to
obtain additional capital on attractive terms is also substantially dependent on
oil and gas and precious metals prices. Prices for these commodities are subject
to significant fluctuations that are beyond the Company's ability to control or
predict.
22
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
AUDITED FINANCIAL STATEMENTS OF IMPERIAL PETROLEUM, INC.
Independent Auditor's Report................................................ F-1
Consolidated Balance Sheets as of July 31, 1996 and 1995.................... F-2
Consolidated Statements of Operations for the years ended
July 31, 1996, 1995 and 1994.................................................F-3
Consolidated Statements of Stockholder's Equity for the years
Ended July 31, 1996, 1995 and 1994.......................................... F-4
Consolidated Statements of Cash flows for the years ended
July 31, 1996, 1995 and 1994.................................................F-5
Notes to Consolidated Financial Statements................................. F-7
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE.
Not applicable.
23
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT.
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth certain information regarding the
directors, executive officers and key employees of the Company.
NAME AGE POSITION
---- --- --------
Jeffrey T. Wilson 43 Director, Chairman of the Board, President and Chief
Executive Officer
Malcolm W. Henley 45 Director, Vice President
Stacey D. Smethers 28 Director, Secretary
Jeffrey T. Wilson has been Director, Chairman of the Board, President and Chief
Executive Officer of the Company since August 1993. Mr. Wilson is a Director,
Chairman and President of LaTex Resources, Inc., an affiliate of the Company,
and was the founder of its principal operating subsidiary, LaTex Petroleum
Corporation. Prior to his efforts with LaTex, Mr. Wilson was Director and
Executive Vice President of Vintage Petroleum, Inc. and was employed by Vintage
in various engineering and acquisition assignments from 1983 to 1991. From
August 1980 to May 1983 Mr. Wilson was employed by Netherland, Sewell &
Associates Inc., a petroleum consulting firm. Mr. Wilson began his career in the
oil and gas business in June 1975 with Exxon Company USA in various assignments
in the Louisiana and South Texas areas. Mr. Wilson holds a Bachelor of Science
Degree in Mechanical Engineering from Rose-Hulman Institute of Technology.
Malcolm W. Henley has been a Director and Vice President of the Company since
May 1996. Mr. Henley is a Director and Vice President of LaTex Resources, Inc.,
an affiliate of the Company and was founder of Enpro, Inc. a crude oil and
natural gas marketing subsidiary of LaTex. Mr. Henley's prior experience
includes Manager of Operations for Champlin Pipeline Company from 1976 to 1979
and Continental Oil Company from 1975-1976. Mr. Henley has a Bachelor of Arts
Degree in Business Administration from Oklahoma State University and an
Associate Degree in Petroleum Land Technology from Tulsa Junior College.
Stacey D. Smethers has been a Director of the Company and Director since July
1995. Mrs. Smethers is Executive Assistant to the President of Enpro, Inc. and
Marketing Representative for LaTex Resources, Inc., an affiliate of the Company.
Mrs. Smethers has seven years of varied experience in the oil and gas industry
including assignments in marketing, administration and petroleum land
management.
SECTION 16(a) REPORTING DEFICIENCIES
Section 16(a) of the Securities and Exchange Act of 1934 ("Exchange Act")
requires the Company's directors and officers and persons who own more than 10%
of a registered class of the Company's equity securities, to file initiak
reports of ownership on Form 3 and reports of changes in ownership on Forms 4
and 5 with the Securities and Exchange Commission (the "SEC") and the National
Association of Securities Dealers ("NASD"). Such persons are required by SEC
regulation to furnish the company with copies of all Section 16(a) forms they
file.
Based upon a review of From 3, 4 and 5 filings made by the Company's officers
and directors during the past fiscal year ended July 31, 1996 under Section
16(a) of the Exchange Act, the Company believes that all requisite filings have
been made timely.
ITEM 11. EXECUTIVE COMPENSATION.
24
The table below sets forth, in summary form, (1) compensation paid to Jeffrey T.
Wilson, the Company's Chairman of the Board, President and Chief Executive
Officer and (2) other compensation paid to officers and directors of the
Company. During the tree fiscal years ended July 31, 1996, 1995 and 1994 (I) no
restricted stock awards were granted, (ii) no stock appreciation or stock
options were granted, (iii) no options, stock appreciation rights or restricted
stock awards were exercised, and (iv) except as provided below, no awards under
any long term incentive plan were made to any officer or director of the
Company.
The Company began accruing salary due to Jeffrey T. Wilson in January 1994. To
date no actual salary payments have been made to Mr. Wilson.
SUMMARY COMPENSATION TABLE
----------------------------
LONG TERM AWARDS
----------------
ANNUAL COMPENSATION WARRANTS
------------------- ---------
NAME AND PRINCIPAL
- ------------------
POSITION YEAR SALARY BONUS # SHARES
- -------- ---- ------ ----- ---------
Jeffrey T. Wilson 1996 $100,000 -- ----
1995 $ 79,167 -- ----
1994 ---- -- ----
Malcolm W. Henley 1996 ---- -- 2,000,000(1)
1995 ---- -- ----
1994 ---- -- ----
Stacey D. Smethers 1996 ---- -- 500,000(1)
1995 ---- -- ----
1994 ---- -- ----
None of the executive officers listed received perquisites or other personal
benefits that exceeded the lesser of $50,000 or 10% of the salary and bonus for
such officers.
(1) The exercise price of the warrants is $0.03 per share with a term of three
years from July 10, 1996.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
As of July 31, 1996, the Company has 31,426,841 issued and
outstanding shares of common stock. The following table sets forth, as of July
31, 1996, the number and percentage of shares of common stock of the Company
owned beneficially by (I) each director of the Company, (ii) each executive
officer of the Company, (iii) all directors and officers as a group, and (iv)
each person known to the Company to own of record or beneficially own more than
5% of the Company's common stock. Except as otherwise listed, the stockholders
listed in the table have sole voting and investment power with respect to the
shares listed. As of July 31, 1996, the Company had approximately 500 holders of
common stock of record.
Number of Shares
Name of Beneficial Owner Beneficially Owned Percent of Class
- ------------------------ ------------------ -----------------
Jeffrey T. Wilson (1) 11,345,128 36.1%
Malcolm W. Henley (2) 293,567 0.9%
Stacey D.Smethers (2) 10,000 ----
LaTex Resources, Inc.(3) 3,598,730 11.5%
All officers and directors
as a Group (3 people) 11,648,695 37.0%
25
(1) The mailing address of Mr. Wilson is 100 NW Second Street, Suite 312,
Evansville, Indiana 47708. Includes 770,128 shares owned by LaTex Resources,
Inc. by virtue of Mr. Wilson's 21.4% ownership of LaTex.
(2) The mailing address of Mr. Henley and Mrs. Smethers is 4200 East Skelly
Drive, Suite 1000, Tulsa, Oklahoma 74135. Includes 93,567 shares owned by
LaTex Resources, Inc. in Mr. Henley's total by virtue of his 2.6% ownership of
LaTex.
(3) The mailing address of LaTex Resources, Inc. is 4200 East Skelly Drive,
Suite 1000, Tulsa, Oklahoma 74135.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
As of July 31, 1996, the Company has notes payable to Latex Resources, Inc.
totaling $747,870 which are secured by certain mining claims.
Jeffrey T. Wilson, Chairman, President and Chief Executive Officer of the
Company has made unsecured loans to the Company which total $177,639 as of July
31, 1996. In addition, Mr. Wilson has personally guaranteed the indebtedness of
Premier Operating Company with its principal lender.
The Company has made unsecured loans to Wexford Technology, Inc., an affiliate
of the Company, of $138,489 as of July 31, 1996.
The officers and directors of the Company are also officers and directors of
LaTex Resources, Inc. which is also engaged in the oil and gas business. As a
result there may exist conflicts of interest between the operations of the
companies.
26
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
---------------------------------------------------------------
(a) Financial Statements (See Item 8. Financial Statements and
Supplementary Data):
Financial Statements of Imperial Petroleum, Inc.
Reports of Independent Public Accountants;
Consolidated Balance Sheets as of July 31, 1996 and 1995;
Consolidated Statements of Operations for the years ended
July 31, 1996, 1995, and 1994;
Consolidated Statements of Stockholder Equity for the
years ended July31, 1996, 1995, and 1994;
Consolidated Statements of Cash Flows for the years ended
July 31, 1996, 1995, and 1994;
Notes to Consolidated Financial Statements.
Supplemental Financial Information
Schedule II - Amounts Receivable from Related Parties. Other
Schedules are omitted as they are not required.
(b) Reports on Form 8-K.
No reports on Form 8-K were filed with the Securities and Exchange Commission
during the fiscal year ended July 31, 1996.
(c) Exhibits.
2.1 Reorganization Agreement and Plan incorporated herein by reference
to Exhibit E to the Registrant's General Form for Registration of Securities on
Form 10 filed with the Securities and Exchange Commission on August31, 1981 (the
"Form 10").
2.2 Article of Merger incorporated herein by reference to Exhibit F of
the Form 10.
2.3 Agreement to Exchange Stock and Plan of Reorganization dated August
27, 1993 by and between Imperial Petroleum, Inc., Glauber Management Company,
Glauber Valve Co., Inc., Jeffrey T. Wilson, James G. Borem, and those persons
listed on exhibit A thereto, and exhibits and schedules attached thereto,
incorporated herein by reference to Exhibit 2.1 to the Registrant's Current
Report on Form 8-K filed with the Securities and Exchange Commission on
September 17, 1993.
2.4 First Amendment to Agreement to Exchange Stock and Plan of
Reorganization dated August 27, 1993 by and between Imperial Petroleum, Inc.,
Glauber Management Company, Glauber Valve Co., Inc., Jeffrey T. Wilson, James G.
Borem, and those persons listed on Exhibit A thereto, and exhibits and schedules
attached thereto, incorporated herein by reference to Exhibit 2.1 to the
Registrant's Current Report on Form 8-K filed with the Securities and Exchange
Commission on September 17, 1993.
2.5 Stock Exchange Agreement dated October 4, 1993 by and between
Imperial Petroleum, Inc., Frederic D. Sewell, and the remaining parties
identified in Schedules "A-1" and "A-2" thereto, and exhibits and schedules
attached thereto, incorporated herein by reference to Exhibit 2.1 to the
Registrant's Current Report on Form 8-K filed with the Securities and Exchange
Commission on October 29, 1993.
3.1 Certificate of Incorporation of the Registrant incorporated herein
by reference to Exhibit -~ of the Form 10.
27
3.2 Bylaws of the Registrant incorporated herein by reference to
Exhibit B of the Form 10.
4 Instruments defining the rights of security holders, including
indentures. Not applicable.
9 Voting Trust Agreement. Not applicable.
10.1 Letter Agreement between I.B. Energy, Inc. and Bank of Oklahoma,
N.A. dated July 9, 1992.
10.2 Promissory Note in the principal sum of $395,000 by and between lB.
Energy, Inc. and Sank of Oklahoma, N.A. dated July 9, 1992.
10.3 Mortgage, Deed of Trust, Security Agreement, Financing Statement
and Assignment between I.B. Energy, Inc. and Bank of Oklahoma, N.A. dated July
9, 1992.
10.4 Guaranty Agreement by and between James G. Borem, Patricia Borem
and Bank of Oklahoma, N.A. dated July 9, 1992.
10.5 Guaranty Agreement by and between Jeffrey T. Wilson, Annalee C.
Wilson and Bank of Oklahoma, N.A. dated July 9, 1992.
10.6 Letter Agreement between I.B. Energy, Inc. and Bank of Oklahoma,
N.A. dated July 9,1992.
10.7 Security Agreement and Assignment [Louisiana] between IB. Energy,
Inc. and Bank of Oklahoma, NA. dated July 9, 1992.
10.8 Act of Pledge and Security Agreement between I.B. Energy, Inc. and
Bank of Oklahoma, NA. dated July 9, 1992.
10.9 Letter Agreement between I.B. Energy, Inc., Bank of Oklahoma, N.A.,
Jeffrey T. Wilson, Annalee C. Wilson, James G. Borem and Patricia Borem dated
May 7, 1993.
10.10 Promissory Note in the principal sum of $350,000 by and between
I.B. Energy, Inc., and Bank of Oklahoma, N.A. dated May 7, 1993.
10.11 Guaranty Agreement by and between Ridgepointe Mining Company and
Bank of Oklahoma N.A. dated May 7, 1993.
10.12 Guaranty Agreement by and between Jeffrey T. Wilson. Annalee C.
Wilson, and Bank of Oklahoma, NA. dated May 7, 1993.
10.13 Guaranty Agreement by and between James G. Borem, Patricia Borem,
and Bank of Oklahoma, NA. dated May 7, 1993.
10.14 Promissory Note in the principal sum of $216,000 by and between
Premier Operating Company and Bank of Oklahoma, N.A. dated October 18, 1993.
10.15 Mortgage, Deed of Trust, Security Agreement. Financing Statement
and Assignment (Midland County, Texas) by and between Premier Operating Company
and Bank of Oklahoma, NA. dated October 18, 1993.
10.16 Financing Statement by and between Premier Operating Company and
Bank of Oklahoma. N.A. dated October 18, 1993.
10.17 Letter Agreement by and between Premier Operating Company and Bank
of Oklahoma, N.A. dated October 18, 1993.
28
10.18 Negative Pledge Agreement by and between Premier Operating Company
and Bank of Oklahoma, N.A. dated October 18, 1993.
10.19 Guaranty Agreement by and between Ridgepointe Mining Company and
Bank of Oklahoma, N.A. dated October 18, 1993.
10.20 Guaranty Agreement by and between the Registrant and Bank of
Oklahoma, N.A. dated October 18, 1993.
10.21 Guaranty Agreement by and between Jeffrey T. Wilson, Annalee C.
Wilson, and Bank of Oklahoma, N.A. dated October 18, 1993.
11 Statement re: computation of per share earnings. Not applicable.
12 Statement re: computation of ratios. Not applicable.
13 Annual Report to security holders, Form 10-Q, or quarterly report
to security holders. Not applicable.
16 Letter re change in certifying accountant. Not applicable.
18 Letter re: change in accounting principles. Not applicable.
21 Subsidiaries of the Registrant.
22 Published report regarding matters submitted to vote of security
holders. Not applicable.
23 Consents of experts and counsel. Not applicable.
24 Power of Attorney. Not applicable.
27 Financial Data Schedule. Not applicable.
28 Information from reports furnished to state insurance regulatory
authorities. Not applicable;
99 Additional Exhibits; Not applicable.
29
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Imperial Petroleum, Inc.
Date: August 25, 1997 /S/ Jeffrey T. Wilson
----------------------
Jeffrey T. Wilson, President
and Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1934, this report has
been signed below by the following persons on behalf of the Registrant and in
the capacities and on the dates indicated:
Signature Title Date
- ------------- ------------ ----
/s/ Jeffrey T. Wilson President and Chief Executive August 25, 1997
- ---------------------- Officer (Principal Executive
Jeffery T. Wilson Officer) and Director
30
[LETTERHEAD OF BRISCOE & BURKE APPEARS HERE]
INDEPENDENT AUDITOR'S REPORT
----------------------------
Board of Directors
Imperial Petroleum, Inc.
Evansville, Indiana
We have audited the accompanying consolidated balance sheets of Imperial
Petroleum, Inc. (A Development Stage Company) as of July 31, 1996 and 1995 and
the consolidated statements of operations, stockholders' equity, and cash flows
for the years ended July 31, 1996, 1995 and 1994 and for the period from August
1, 1992 (inception) to July 31, 1996. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Imperial Petroleum, Inc. (A
Development Stage Company) as of July 31, 1996 and 1995 and the results of its
operations and its cash flows for the years ended July 31, 1996, 1995 and 1994
and for the period from August 1, 1992 (inception) to July 31, 1996, in
conformity with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1 to the
financial statements, the Company has suffered recurring losses, substantial
working capital deficiencies, and has not completed the necessary reserve
studies to determine the metal content of the reserves and the related future
production costs which affect the recoverability of capitalized costs.
Additionally, as described in Note 6 to the financial statements, the Company is
in default on a portion of its notes payable relating to a mining claim option.
These factors raise substantial doubt about its ability to continue as a going
concern. Further, there can be no assurance, assuming the Company successfully
raises additional funds, that it will be able to economically recover the value
of its mining claims or achieve profitability. Management's plans in regard to
these matters are also described in Note 1 to the financial statements. The
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
/s/ BRISCOE & BURKE
BRISCOE & BURKE
Certified Public Accountants
January 15, 1997
Tulsa, Oklahoma
IMPERIAL PETROLEUM, INC.
(A Development Stage Company)
Consolidated Balance Sheets
July 31, 1996 and 1995
ASSETS 1996 1995
----------- ----------
Current assets:
Cash $ 9,041 $ 3,279
Accounts receivable - oil and gas 15,673 11,744
Other current assets 1,150 432
----------- ----------
Total current assets 25,864 15,455
----------- ----------
Property, plant and
equipment at cost, using successful
efforts method for oil and gas properties
(Note 2)
Oil and gas properties:
Equipment and leasehold costs 393,878 433,441
Other depreciable assets 2,335 10,679
----------- ----------
396,213 444,120
Less: accumulated depreciation
and depletion 276,491 278,103
----------- ----------
Oil and gas properties and other, net 119,722 166,017
----------- ----------
Mining properties under development
(Notes 1, 2, and 4):
Mining claims, options
and development costs 2,570,171 3,347,918
Mining and milling equipment 735,236 1,298,689
Acquisition in progress 28,000 -
----------- ----------
3,333,407 4,646,607
----------- ----------
Net property, plant and equipment 3,453,129 4,812,624
----------- ----------
Other assets:
Accounts receivable - related party
(Note 3) 9,876 -
Deferred organization cost - 24,688
Investments-other 2,445 -
Investments-securities (Notes 2 and 12) 60,980 35,000
Deposits and other assets 75 75
----------- ----------
Total other assets 73,376 59,763
----------- ----------
TOTAL ASSETS $ 3,552,369 $4,887,842
=========== ==========
LIABILITIES and 1996 1995
STOCKHOLDERS' EQUITY ----------- ----------
Current liabilities:
Accounts payable $ 49,262 $ 67,370
Accounts payable - related parties - 10,951
Accounts payable - other 18,718 16,918
Accrued expenses 252,235 174,435
Unearned revenue 3,550 -
Notes payable (Note 6) 1,139,817 2,302,473
Notes payable - related parties
(Note 7) 925,509 853,660
---------- ----------
Total current liabilities 2,389,091 3,425,807
---------- ----------
Noncurrent liabilities:
Deferred income taxes (Note 5) - -
Notes payable, less current
portion (Note 6) - -
---------- ----------
Total noncurrent liabilities - -
---------- ----------
Stockholders' equity:
Preferred stock - par value $.01;
issued and outstanding -0- in
1996 and 1995 - -
Common stock - par value $.001;
issued and outstanding 31,426,841
on July 31, 1996 and 24,026,841
on July 31, 1995 31,427 24,027
Additional paid-in capital 2,472,959 2,366,171
Treasury stock 715,000 and -0-
shares, respectively (120,313) -
Accumulated deficit (1,204,587) (928,163)
Unrealized loss on marketable
securities (Notes 2 and 12) (16,208) -
---------- ----------
Total stockholders' equity 1,163,278 1,462,035
---------- ----------
Commitments and contingencies
(Note 9)
TOTAL LIABILITIES and
STOCKHOLDERS' EQUITY $3,552,369 $4,887,842
========== ==========
The accompanying notes are an integral part of these financial statements.
-2-
IMPERIAL PETROLEUM, INC.
(A Development Stage Company)
Consolidated Statements of Operations
For the Years Ended July 31, 1996, 1995 and 1994
1996 1995 1994
------------ ------------ ------------
Operating income:
Oil and gas revenue $ 104,740 $ 103,836 $ 279,616
Oil and gas lease operations and management fees 890 10,831 17,025
----------- ----------- -----------
Total operating income 105,630 114,667 296,641
----------- ----------- -----------
Operating expenses:
Oil and gas lease operating expense 44,980 61,287 147,625
Dry hole costs - 48,285 14,940
Mining lease expense 1,760 - 49,000
General and administrative expenses 312,453 234,012 234,424
Depreciation and depletion (Note 2) 27,426 46,356 78,536
----------- ----------- -----------
Total operating expenses 386,619 389,940 524,525
----------- ----------- -----------
Loss from operations (280,989) (275,273) (227,884)
Other income and expense:
Interest expense (107,100) (185,913) (78,513)
Interest income - - 377
Gold certificate income - net (Note 15) 268,532 - -
Unrealized loss on marketable securities - (233,750) -
Provision for loss (Note 4) - (163,860) -
Loss on write-down of mining equipment (Note 14) (121,953) - -
Gain (loss) on sale of assets (34,914) - 18,994
----------- ----------- -----------
Net loss before income taxes (276,424) (858,796) (287,026)
----------- ----------- -----------
Provision for income taxes: (Note 5)
Current - 7,100 (67,956)
Deferred - (163,001) 46,799
----------- ----------- -----------
Total benefit from income taxes - (155,901) (21,157)
----------- ----------- -----------
Net loss $ (276,424) $ (702,895) $ (265,869)
=========== =========== ===========
Loss per share (Note 2) $(.01) $(.03) $(.01)
=========== =========== ===========
Weighted average shares outstanding 24,927,938 23,892,869 21,180,958
=========== =========== ===========
The accompanying notes are an integral part of these financial statements.
-3-
IMPERIAL PETROLEUM, INC.
(A Development Stage Company)
Consolidated Statements of Stockholders' Equity
For the Years Ended July 31, 1996, 1995, and 1994
Common Stock
------------------------ Additional Unrealized Total
Par Paid-In Treasury Retained Loss on Stockholders'
Shares Value Capital Stock Earnings Equity Equity
----------- --------- ---------- ------------ ----------- ------------- ------------
Balances at July 31, 1993 12,560,730 $ 125,607 $1,365,230 $ - $ 40,601 $ - $1,531,438
Restatement to Imperial,
par value - (113,046) 113,046 - - - -
Reverse acquisition of
Imperial Petroleum, Inc.
(Note 1) 8,117,111 8,117 251,081 - - - 259,198
Acquisition of Premier
Operating Company
(Note 1) 749,000 749 275,671 - - - 276,420
Stock issued for mining
properties 1,000,000 1,000 87,743 - - - 88,743
Net loss for the period - - - - (265,869) - (265,869)
---------- --------- ---------- ------------ ----------- ------------- ----------
Balances at July 31, 1994 22,426,841 22,427 2,092,771 - (225,268) - 1,889,930
Stock issued for services 100,000 100 17,088 - - - 17,188
Stock issued for mining
properties
and equipment 1,500,000 1,500 256,312 - - - 257,812
Net loss for the period - - - - (702,895) - (702,895)
---------- --------- ---------- ------------ ----------- ------------- ----------
Balances at July 31, 1995 24,026,841 24,027 2,366,171 - (928,163) - 1,462,035
Receipt of Treasury stock - - - (120,313) - - (120,313)
Stock issued for services 500,000 500 14,500 - - - 15,000
Stock issued for mining
properties
and equipment 1,900,000 1,900 55,100 - - - 57,000
Stock issued for investment 5,000,000 5,000 37,188 - - - 42,188
Net loss for the period - - - - (276,424) (16,208) (292,632)
---------- --------- ---------- ------------ ----------- ------------- ----------
Balances at July 31, 1996 31,426,841 $ 31,427 $2,472,959 $ (120,313) $(1,204,587) $ (16,208) $1,163,278
========== ========= ========== ============ =========== ============= ==========
The accompanying notes are an integral part of these financial statements.
-4-
IMPERIAL PETROLEUM, INC.
(A Development Stage Company)
Consolidated Statements of Cash Flows
For the Years Ended July 31, 1996, 1995 and 1994
1996 1995 1994
--------- --------- ---------
Cash flows from operating activities:
Historical net loss $(276,424) $(702,895) $(265,869)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation and depletion 27,426 46,356 78,536
Unrealized loss on marketable securities - 233,750 -
Provision for loss (Note 4) - 163,860 -
(Increase) Decrease in refundable income tax - 56,500 (56,500)
(Increase) Decrease in accounts receivable - oil and gas production (3,929) 24,859 440
(Increase) Decrease in accounts receivable - other - 4,910 (4,910)
(Increase) Decrease in other current assets (718) 54,356 (43,338)
(Increase) Decrease in other assets 14,812 9,331 33,069
Increase (Decrease) in accounts payable (18,108) 5,769 14,902
Increase (Decrease) in accounts payable - related parties (10,951) (19,323) -
Increase (Decrease) in accounts payable - other 1,800 (41,487) 43,465
Increase (Decrease) in accrued expenses 77,800 107,710 66,725
Increase (Decrease) in unearned revenue 3,550 - -
Increase (Decrease) in income taxes payable - (39,128) (56,872)
Increase (Decrease) in deferred income taxes - (170,518) 54,805
--------- --------- ---------
Net cash used for operating activities (184,742) (265,950) (135,547)
--------- --------- ---------
Cash flows from investing activities:
Mining options, properties and equipment purchased (20,000) (173,634) (381,325)
Oil and gas properties and equipment - 800 153,850
Write-down of oil and gas equipment 18,869 - -
Write-off of mining claims and equipment 134,824 - -
(Increase) Decrease in investment - other (2,445) 48,285 (48,285)
Investment in restricted stock through acquisition - - (268,750)
--------- --------- ---------
Net cash used for investing activities $ 131,248 $(124,549) $(544,510)
--------- --------- ---------
The accompanying notes are an integral part of these financial statements.
-5-
IMPERIAL PETROLEUM, INC.
(A Development Stage Company)
Consolidated Statements of Cash Flows
For the Years Ended July 31, 1996, 1995 and 1994
1996 1995 1994
----------- -------- ----------
Cash flows from financing activities:
Increase (Decrease) in notes payable $ (12,593) $(71,360) $ (71,093)
Increase (Decrease) in notes payable - related parties 71,849 496,950 233,357
Increase (Decrease) in long-term debt - (36,482) (130,608)
Increase (Decrease) in equity through acquisition - - 624,361
----------- -------- ----------
Net cash provided by financing activities 59,256 389,108 656,017
----------- -------- ----------
Net increase (decrease) in cash and cash equivalents 5,762 (1,391) (24,040)
Cash and cash equivalents at beginning of year 3,279 4,670 28,710
----------- -------- ----------
Cash and cash equivalents at end of year $ 9,041 $ 3,279 $ 4,670
=========== ======== ==========
Supplemental disclosures of cash flow information:
Cash paid during the period for
Interest $ 63,270 $100,414 $ 33,203
Income taxes - - 56,500
Supplemental schedule of noncash investing and financing activities:
Stock issued for mining equipment and mining claim options $ (57,000) $257,812 $ 88,743
Stock issued for reverse acquisition of Imperial Petroleum, Inc. - - 259,197
Stock issued for acquisition of Premier Operating Company - - 276,421
Assumption of note payable for mining property - - 1,000,000
Stock issued for services (15,000) 17,188 -
Stock issued for investment (42,188) - -
Rescind agreement on mining claims and equipment 1,270,376 - -
Rescind agreement on notes payable (1,150,063) - -
Rescind agreement on common stock issued (120,313) - -
Unrealized loss on equity securities 16,208 - -
Write-down of oil and gas assets 18,869 - -
Write-down of mining claims 134,824 163,860 -
----------- -------- ----------
Total $ 55,713 $438,860 $1,624,361
============ ======== ==========
Disclosure of accounting policy:
For purposes of the statement of cash flows, the Company considers all highly
liquid debt instruments purchased with a maturity of three months or less to
be cash equivalents.
The accompanying notes are an integral part of these financial statements.
-6-
IMPERIAL PETROLEUM, INC.
(A Development Stage Company)
Notes to Consolidated Financial Statements
1. ORGANIZATION AND BUSINESS COMBINATION
ORGANIZATION
------------
Imperial Petroleum, Inc. (the "Company") is engaged in oil and gas
production through its wholly owned subsidiary, Premier Operating Company.
The Company's oil and gas operations are conducted in Oklahoma, Texas, and
Louisiana (See Note 16).
The Company is also engaged, through its wholly owned subsidiary,
Ridgepointe Mining Company, in testing, defining and developing mineral
reserves on mining claims it owns or operates in Utah, Montana, Arizona,
and New Mexico.
FINANCIAL CONDITION
-------------------
The Company's financial statements for the year ended July 31, 1996 have
been prepared on a going concern basis which contemplates the realization
of assets and the settlement of liabilities in the normal course of
business. The Company incurred a net loss of $276,424 for the year ended
July 31, 1996 and as of July 31, 1996 has an accumulated deficit of
$1,204,587 and a deficit working capital of $2,363,227.
The Company's management plans to raise capital to fund continuing
operations by utilization of one or a combination of the following:
1. The continuation of its efforts in the issuance of Gold Dore
Certificates (See Note 15).
2. The private placement of equity securities through negotiations
with potential market makers in the Company's securities.
3. The joint venture of the Company's Utah property with another
mining company to provide the capital resources to develop all of
the Company's properties.
-7-
IMPERIAL PETROLEUM, INC.
(A Development Stage Company)
Notes to Consolidated Financial Statements
1. ORGANIZATION AND BUSINESS COMBINATION (CONTINUED)
ACQUISITION OF IMPERIAL PETROLEUM, INC.
---------------------------------------
Pursuant to an Agreement to Exchange Stock and Plan of Reorganization dated
August 27, 1993 (the "Stock Exchange Agreement"), between Imperial
Petroleum, Inc. ("Imperial"), Glauber Management Company, ("Glauber
Management"), Glauber Valve Co., Inc., ("Glauber Valve"), and the
Ridgepointe Stockholders, the Ridgepointe Stockholders agreed to exchange
(the "Ridgepointe Exchange Transaction") a total of 12,560,730 shares of
the common stock of Ridgepointe Mining Company, representing 100% of the
issued and outstanding common stock of Ridgepointe, for a total of
12,560,730 shares of newly issued shares of Imperial's common stock
representing 59.59% of Imperial's resulting issued and outstanding common
stock. The one-for-one ratio of the number of shares of Imperial's common
stock exchanged for each share of Ridgepointe common stock was determined
through arms length negotiations between Imperial and the majority
stockholders of Ridgepointe. As a result, Ridgepointe became a wholly
owned subsidiary of Imperial.
As a condition to the Ridgepointe Exchange Transaction, Imperial received
and cancelled 7,232,500 shares of its Common Stock from Glauber Management
and received 100,000 shares of the common stock of Tech-Electro
Technologies, Inc. from an affiliate of Glauber Management and Glauber
Valve. In addition, Glauber Management or Glauber Valve, or their
affiliates, transferred to Imperial 75,000 shares of common stock of
Chelsea Street Holding Company, Inc.
ACQUISITION OF PREMIER OPERATING COMPANY
----------------------------------------
Pursuant to a Stock Exchange Agreement dated October 4, 1993 (the "Stock
Exchange Agreement") between Imperial Petroleum, Inc. and the Premier
Stockholders, the Premier Stockholders agreed to exchange (the "Premier
Exchange Transaction") an aggregate of 749,000 shares of the common stock
of Premier Operating Company ("Premier"), consisting of 252,000 shares of
Class A voting common stock and 497,000 shares of non-voting Class B common
stock, representing 100% of the issued and outstanding common stock of
Premier, for a total of 749,000 shares of newly issued shares of the
Company's common stock representing 3.62% of the Company's resulting issued
and outstanding common stock. The one-for-one ratio of the number of
shares of the Company's common stock exchanged for each share of Premier
common stock was determined through arms length negotiations between the
Company and a major shareholder of Premier, on behalf of the Premier
Stockholders. The business combination was accounted for using the
purchase method of accounting. As a result, Premier became a wholly owned
subsidiary of the Company.
-8-
IMPERIAL PETROLEUM, INC.
(A Development Stage Company)
Notes to Consolidated Financial Statements
1. ORGANIZATION AND BUSINESS COMBINATION (CONTINUED)
DEVELOPMENT STAGE COMPANY
-------------------------
A summary of the financial information of Ridgepointe Mining Company (A
Development Stage Company), excluding its wholly owned subsidiary I. B.
Energy, Inc., is as follows:
1996 1995
---------- ----------
Current assets $ 25 $ 167
Net property and equipment 3,333,407 4,646,607
Other assets 2,445 7,500
---------- ----------
Total assets $3,335,877 $4,654,274
========== ==========
1996 1995
---------- ----------
Current liabilities $2,544,487 $3,640,328
Long-term liabilities - -
Common stock 125,107 125,107
Paid-in capital 1,343,886 1,343,886
Deficit accumulated during
development stage (677,603) (455,047)
---------- ----------
Total liabilities and
stockholders' deficit $3,335,877 $4,654,274
========== ==========
-9-
IMPERIAL PETROLEUM, INC.
(A Development Stage Company)
Notes to Consolidated Financial Statements
1. ORGANIZATION AND BUSINESS COMBINATION (CONTINUED)
Cumulative
1996 1995 From Inception
----------- ----------- ---------------
Operating revenues $ - $ - $ -
Miscellaneous income - 6,500 96,579
---------- ---------- ----------
Total income - 6,500 96,579
Lease operating expenses 1,760 - 70,760
General and
administrative 54,121 108,036 328,308
---------- ---------- ----------
Total expenses 55,881 108,036 399,068
Net operating loss (55,881) (101,536) (302,489)
Interest (28,677) (142,877) (243,026)
Loss on sale/write-down
of assets (137,998) (163,860) (179,905)
---------- ---------- ----------
Net loss before
income taxes (222,556) (408,273) (725,420)
Income tax benefit - (159,700) (169,770)
---------- ---------- ----------
Net loss $ (222,556) $(248,573) $(555,650)
========== ========== =========
-10-
IMPERIAL PETROLEUM, INC.
(A Development Stage Company)
Notes to Consolidated Financial Statements
1. ORGANIZATION AND BUSINESS COMBINATION (CONTINUED)
Cumulative
From Inception
--------------
Cash flows from operating activities:
Historical net loss $ (677,603)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation and depletion -
(Increase) in other assets (2,445)
Increase in current liabilities 1,435,895
-----------
Net cash used for operating activities 755,847
-----------
Cash flows from investing activities:
Mining options, properties and equipment
purchased - net (1,864,414)
-----------
Net cash used for investing activities (1,864,414)
-----------
Cash flows from financing activities:
Increase in notes payable 1,000,000
Increase in notes payable - related parties 108,592
-----------
Net cash provided by financing activities 1,108,592
-----------
Net increase in cash and cash equivalents 25
Cash and cash equivalents at inception -
-----------
Cash and cash equivalents at July 31, 1996 $ 25
===========
Supplemental disclosures of cash flow information:
Cash paid during the period for
Interest $ -
Income taxes -
Disclosure of accounting policy:
For purposes of the statement of cash flows,
the Company considers all highly liquid debt
instruments purchased with a maturity of three
months or less to be cash equivalents.
-11-
IMPERIAL PETROLEUM, INC.
(A Development Stage Company)
Notes to Consolidated Financial Statements
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
---------------------------
The July 31, 1996, 1995 and 1994 financial statements include the accounts
of the Company and its wholly owned subsidiaries, Ridgepointe Mining
Company, Premier Operating Company, and I. B. Energy, Inc. All significant
intercompany accounts have been eliminated.
ACCOUNTING ESTIMATES
--------------------
The presentation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
FINANCIAL INSTRUMENTS
---------------------
The fair value of current assets and current liabilities are assumed to be
equal to their reported carrying amounts due to the short maturities of
these financial instruments.
The carrying value of all other financial instruments approximates fair
value.
MARKETABLE SECURITIES
---------------------
The Company determines the appropriate classification of debt and equity
securities at the time of purchase and re-evaluates such designation as of
each balance sheet date. Securities are classified as held-to-maturity
when the Company has the intent and ability to hold the securities to
maturity. Held-to-maturity securities are stated at cost and investment
income is included in earnings. The Company classifies certain highly
liquid securities as trading securities. Trading securities are stated at
fair value and unrealized holding gains and losses are included in income.
Securities that are not classified as held-to-maturity or trading are
classified as available-for-sale. Available-for-sale securities are
carried at fair value, with the unrealized holding gains and losses, net of
tax, reported as a separate component of stockholders' equity.
-12-
IMPERIAL PETROLEUM, INC.
(A Development Stage Company)
Notes to Consolidated Financial Statements
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
CONCENTRATIONS OF CREDIT RISK
-----------------------------
Financial instruments that potentially subject the Company to significant
concentrations of credit risk consist principally of cash investments and
accounts receivable. The Company places its cash investments with high
quality financial institutions and limits the amount of exposure to any one
institution. In the case of default of any one financial institution, no
cash investments exist that are not covered by the FDIC. The Company's
revenues are derived principally from uncollateralized sales to customers
in the oil and gas industry. The concentration of credit risk in a single
industry affects the Company's overall exposure to credit risk because
customers may be similarly affected by changes in economic and other
conditions. The Company has not experienced significant credit losses on
such receivables. The Company performs periodic evaluations of its
customers' financial condition and generally does not require collateral.
DEVELOPMENT STAGE SUBSIDIARY
----------------------------
Ridgepointe Mining Company, a wholly owned subsidiary, is in the process of
defining mineral reserves and raising capital for operations. As such,
Ridgepointe Mining Company is considered a development stage enterprise.
REVENUE RECOGNITION
-------------------
The Company recognizes oil and gas revenue in the month of sale. Mining
revenues will be recognized in the month of sale. Uncollected revenue is
accrued based on known facts and trends of the relevant oil and gas
properties on a monthly basis.
-13-
IMPERIAL PETROLEUM, INC.
(A Development Stage Company)
Notes to Consolidated Financial Statements
2. SUMMARY OF ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
PROPERTY, EQUIPMENT, DEPRECIATION AND DEPLETION
-----------------------------------------------
The Company uses the successful efforts method to account for costs in the
acquisition and exploration of oil and natural gas reserves. Costs to
acquire mineral interests in proved reserves, and to drill and equip
development wells are capitalized. Geological and geophysical costs and
costs to drill exploratory wells which do not find proved reserves are
expensed. Undeveloped oil and gas properties which are individually
significant are periodically assessed for impairment of value and a loss is
recognized at the time of impairment by providing an impairment allowance.
The remaining unproved oil and gas properties are aggregated and an overall
impairment allowance is provided based on Company experience. Depletion
and depreciation are calculated on the units of production method based
upon current estimates of oil and gas reserves provided by management.
Non oil and gas property and equipment are stated at cost. Depreciation is
computed by the straight-line method over the estimated useful lives of non
oil and gas assets. Expenditures which significantly increase values or
extend useful lives are capitalized. Expenditures for maintenance and
repairs are charged to expenses as incurred. Upon sale or retirement of
property and equipment, the cost and related accumulated depreciation and
depletion are eliminated from the respective accounts and the resulting
gain or loss is included in current earnings.
Mining exploration costs are expensed as incurred. Development costs are
capitalized. Depletion of capitalized mining costs will be calculated on
the units of production method based upon current production and reserve
estimates when placed in service.
INCOME TAXES
------------
Deferred tax assets and liabilities are recognized for the estimated future
tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases. Deferred tax assets and liabilities are measured
using enacted tax rates in effect for the year in which those temporary
differences are expected to be recovered or settled. The effect on
deferred tax assets and liabilities of a change in tax rates is recognized
in income in the period that includes the enactment date.
-14-
IMPERIAL PETROLEUM, INC.
(A Development Stage Company)
Notes to Consolidated Financial Statements
2. SUMMARY OF ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
GAS BALANCING
-------------
The Company follows the sales method of accounting for gas imbalances. A
liability is recorded only if the Company's excess takes of natural gas
volumes exceed its estimated remaining recoverable reserves. No
receivables are recorded for those wells when the Company has taken less
than its ownership share of gas production.
LOSS PER COMMON SHARE
---------------------
Loss per common share is computed based upon the weighted average common
shares outstanding. Outstanding warrants are excluded from the weighted
average shares outstanding since their effect on the earnings per share
calculation is antidilutive.
FASB ACCOUNTING STANDARDS
-------------------------
The Financial Accounting Standards Board has issued Statement of Financial
Accounting Standards No. 119 (SFAS 119), Disclosure about Derivative
Financial Instruments and Fair Value of Financial Instruments. This
Statement generally requires disclosures about amounts, nature, and terms
of derivative financial instruments. The Company has adopted SFAS 119 for
the fiscal year ended July 31, 1996.
The Financial Accounting Standards Board has issued Statement of Financial
Accounting Standards No. 121 (SFAS 121), Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed of. This
Statement requires that long-lived assets and certain identifiable
intangibles to be held and used by an entity be reviewed for impairment
whenever events or changes in circumstances indicate that the carrying
amount of an asset may not be recoverable. If the sum of the undiscounted
future cash flows is less than the carrying amount of the asset, an
impairment loss is recognized. This Statement is effective for financial
statements for fiscal years beginning after December 15, 1995. The Company
intends to adopt SFAS 121 for the fiscal year ending July 31, 1997. The
Company expects the adoption of SFAS 121 will not have a material effect on
its financial statements.
RECLASSIFICATION
----------------
Certain amounts in the 1995 and 1994 consolidated financial statements have
been reclassified to conform with the 1996 presentation.
-15-
IMPERIAL PETROLEUM, INC.
(A Development Stage Company)
Notes to Consolidated Financial Statements
3. ACCOUNTS RECEIVABLE - RELATED PARTIES
Accounts receivable - related parties was comprised of the following:
1996 1995
---------- -----
Shareholder $ 9,876 $
-
Wexford Technology, Inc. 138,489 -
Allowance for bad debts (138,489) -
--------- -----
Total $ 9,876 $ -
========= =====
4. MINING PROPERTIES UNDER DEVELOPMENT
MINING CLAIM OPTIONS
--------------------
The Company entered into an agreement with a third party on November 6,
1992, giving the Company the option to purchase certain mining claims known
as the "UFO Mining Claims" from UFO Mining Limited Partnership ("UFO"), on
or before July 31, 1993. The purchase price was $2,000,000 in cash or an
equal value in restricted common stock of a publicly traded company
controlled by the Purchaser or its Assignees. Prior to July 15, 1993, UFO
was to provide to the Purchaser, in writing, its intention to accept all
cash or all stock or a combination of cash and stock as payment of the
purchase price.
On September 21, 1993 the parties agreed by letter to modify, amend and
extend the existing letter agreement to cause to be issued 1,000,000 shares
of Imperial Petroleum, Inc. restricted common stock to UFO in exchange for
an extension of the agreement until March 31, 1994 and a reduction in the
total consideration to be paid UFO to $1,000,000 cash at March 31, 1994.
(See Note 6)
During the fiscal year ending July 31, 1994, the Company advanced $111,500
pursuant to the purchase of the Lance and Trega mines in northern Mexico.
-16-
IMPERIAL PETROLEUM, INC.
(A Development Stage Company)
Notes to Consolidated Financial Statements
4. MINING PROPERTIES UNDER DEVELOPMENT (CONTINUED)
During August of 1995, the Company signed an agreement to rescind its
acquisition of the Gold Nugget Mining Claims. As a result, mining claims
were reduced $1,270,376, notes payable to Darr Equipment Company and
Kenneth R. Shepherd totaling $1,150,063 were reduced to $0 (See Note 6),
and Treasury stock was increased $120,313. A provision for loss of
$163,860 was charged to expense for the year ended July 31, 1995 for
payments on equipment returned.
MINING EQUIPMENT
----------------
During the fiscal years ending July 31, 1996 and 1995, the Company acquired
mining claims and equipment through a combination of the issuance of stock,
assumption of liabilities and assumption of a note payable.
MINE DEVELOPMENT
----------------
The costs incurred for mine evaluation and development are capitalized.
Upon the commencement of production, the capitalized costs will be
amortized utilizing the units of production method. The Company has
incurred $349,105 and $349,105 in development costs through July 31, 1996
and 1995, respectively.
The Company's mining fixed assets consist of the following:
July 31, July 31,
1996 1995
----------- -----------
Mining claim option (See Note 6) $2,045,565 $2,045,565
Mining claims 175,501 953,248
Mining equipment 735,236 1,298,689
Mine development costs 349,105 349,105
Acquisition in progress 28,000 -
---------- ----------
Total $3,333,407 $4,646,607
========== ==========
-17-
IMPERIAL PETROLEUM, INC.
(A Development Stage Company)
Notes to Consolidated Financial Statements
4. MINING PROPERTIES UNDER DEVELOPMENT (CONTINUED)
The Company has not completed the necessary reserve studies to determine
the metal content of the reserves and the related future production costs
which affect the recoverability of the capitalized costs. Additionally, as
described in Note 6, the Company is in default on a portion of its notes
payable relating to a mining claim option. The amount of impairment, if
any, cannot be estimated. Accordingly, the financial statements do not
include any adjustments that might result from the outcome of this
uncertainty.
5. INCOME TAXES
Provisions for income taxes are as follows:
1996 1995 1994
----- ------- ------
(in thousands)
Current:
Federal $ - $ 7 $ (68)
State - - -
----- ----- -----
$ - $ 7 $ (68)
===== ===== =====
Deferred:
Federal $ - $(163) $ 47
State - - -
----- ----- -----
$ - $(163) $ 47
===== ===== =====
-18-
IMPERIAL PETROLEUM, INC.
Notes to Consolidated Financial Statements
July 31, 1996, 1995, and 1994
5. INCOME TAXES (CONTINUED)
Income taxes differed from the amounts computed by applying the U.S.
federal tax rate of 34% as a result of the following:
1996 1995 1994
------ ------- ------
(in thousands)
Computed "expected" tax benefit $ (53) $(292) $ (98)
State income taxes net of federal
benefit - - -
Increase in valuation allowance
for deferred tax assets 53 285 30
Other - - -
----- ----- -----
Actual income tax expense $ - $ 7 $ (68)
===== ===== =====
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and liabilities are presented below:
1996 1995
------- ------
(in thousands)
Deferred tax liabilities:
Property, plant and equipment $ 300 $ 255
Other - 2
----- -----
Total deferred tax liabilities 300 257
----- -----
Deferred tax assets:
Net operating losses 479 429
Other 1 -
----- -----
Total deferred tax assets 480 429
----- -----
Valuation allowance (180) (172)
----- -----
Net deferred tax assets 300 257
----- -----
Net deferred tax asset (liability) $ - $ -
====== =====
-19-
IMPERIAL PETROLEUM, INC.
Notes to Consolidated Financial Statements
July 31, 1996, 1995, and 1994
5. INCOME TAXES (CONTINUED)
A valuation allowance is required when it is more likely than not that all
or a portion of the deferred tax assets will not be realized. The ultimate
realization of the deferred tax assets is dependent upon future
profitability. Accordingly, a valuation allowance has been established to
reduce the deferred tax assets to a level which, more likely than not, will
be realized.
The Company has net operating loss (NOL) carryforward to offset its
earnings of approximately $1,400,000. If not previously utilized, the net
operating losses will expire in varying amounts from 2009 to 2011.
6. NOTES PAYABLE
1996 1995
---------- ----------
Bank of Oklahoma N.A., promissory note,
dated October 18, 1993, principal
payment monthly of $4,500 plus
interest at bank prime $ 139,817 $ 152,410
U.F.O. Mining, Ltd. Partnership,
promissory note, originally dated
January 31, 1994, principal due
February 28, 1996 plus interest
at 6% 1,000,000 1,000,000
Darr Equipment Company, mortgage note
dated August 31, 1994 (See Note 4) - 400,063
Kenneth R. Shepherd, promissory note,
dated August 31, 1994 (See Note 4) - 750,000
---------- ----------
Total 1,139,817 2,302,473
Less: current portion 1,139,817 2,302,473
---------- ----------
Long-term notes payable $ - $ -
========== ==========
-20-
IMPERIAL PETROLEUM, INC.
(A Development Stage Company)
Notes to Consolidated Financial Statements
6. NOTES PAYABLE (CONTINUED)
The Company was in default on its note due to Bank of Oklahoma, N. A. at
July 31, 1996. The note is secured by the fixed assets of the Company's
wholly owned subsidiary, Premier Operating Company (See Note 16).
The Company is also in default on its promissory note to U.F.O. Mining,
Ltd. Partnership. The Company is in the process of negotiating an
extension or modification of the terms of the agreement. Because the
Company can return the mining claims with no obligation, the Company has
not accrued any interest on the note. However, if the Company returns the
claims to the seller, the following assets would be significantly impaired:
Mining claim option $ 2,045,565
Capitalized development costs 349,105
Milling facility 554,395
------------
$ 2,949,065
============
7. NOTES PAYABLE - RELATED PARTY
1996 1995
--------- ---------
Officer - 10% demand note $ 64,295 $ 67,295
Officer - 7.5% demand note 113,344 206,215
LaTex Resources, Inc., demand note,
plus interest at bank prime 747,870 580,150
-------- --------
$925,509 $853,660
======== ========
-21-
IMPERIAL PETROLEUM, INC.
(A Development Stage Company)
Notes to Consolidated Financial Statements
8. RELATED PARTY TRANSACTIONS
During 1994, Jeffrey T. Wilson, the Chairman and a stockholder of the
Company, advanced monies to the Company in the amount of $641,936.
During 1994, LaTex Resources, Inc. and LaTex Petroleum Corporation, both
affiliates, paid for general and administrative expenses of the Company,
totaling $17,908 and $12,360, respectively.
During 1995, the Company issued notes to LaTex Resources, Inc. (a
shareholder) in exchange for $580,150.
The Company conducts various oil and gas transactions with an affiliate,
LaTex Petroleum Corporation, in the ordinary course of business.
The Company, from time to time, has entered into loans with certain
officers, directors, stockholders and related companies (See Notes 3
and 7).
9. LITIGATION, COMMITMENTS AND CONTINGENCIES
CONTINGENCIES - The Company is a named defendant in lawsuits, is a party
-------------
in governmental proceedings, and is subject to claims of third parties from
time to time arising in the ordinary course of business. While the outcome
of lawsuits or other proceedings and claims against the Company cannot be
predicted with certainty, management does not expect these matters to have
a material adverse effect on the financial position of the Company.
-22-
IMPERIAL PETROLEUM, INC.
(A Development Stage Company)
Notes to Consolidated Financial Statements
10. BUSINESS SEGMENTS
The Company's operations involve oil and gas production and mining
operations. The following table sets forth information with respect to the
industry segments of the Company.
1996 1995 1994
------------ ------------ ------------
Revenues: (in thousands)
Oil and gas
production and
lease operations $ 106 $ 115 $ 297
Mining - - -
------------ ------------ ------------
Total revenues $ 106 $ 115 $ 297
============ ============ ============
Identifiable assets:
Oil and gas production $ 142 $ 182 $ -
Mining 3,336 4,654 -
Other 74 52 -
------------ ------------ ------------
$ 3,552 $ 4,888 $ -
============ ============ ============
Depreciation and depletion:
Oil and gas production $ 27 $ 46 $ 79
Mining - - -
------------ ------------ ------------
$ 27 $ 46 $ 79
============ ============ ============
-23-
IMPERIAL PETROLEUM, INC.
(A Development Stage Company)
Notes to Consolidated Financial Statements
11. SUPPLEMENTARY FINANCIAL INFORMATION FOR OIL AND GAS PRODUCING ACTIVITIES
RESULTS OF OPERATIONS FROM OIL AND GAS PRODUCING ACTIVITIES
-----------------------------------------------------------
The following sets forth certain information with respect to the Company's
results of operations from oil and gas producing activities for the years
ended July 31, 1996, 1995 and 1994. All of the Company's oil and gas
producing activities are located within the United States.
1996 1995 1994
----- ------ -----
(In thousands)
Revenues $ 105 $ 104 $ 280
Production costs 38 54 148
Gross production taxes 7 7 15
Depreciation, depletion and amortization 27 46 79
----- ----- -----
Results of operations before income taxes 33 (3) 38
Income tax expense - (1) 14
----- ----- -----
Results of operations (excluding corporate
overhead and interest costs) $ 33 $ (2) $ 24
===== ===== =====
ESTIMATED QUANTITIES OF PROVED OIL AND GAS RESERVES (UNAUDITED)
---------------------------------------------------------------
The Company chose not to have estimates of proved oil and gas reserves
prepared by independent petroleum engineers. The reserve estimates
provided were prepared by management. The Company's reserves are located
onshore in the United States.
The Company emphasizes that reserve estimates are inherently imprecise.
Accordingly, the estimates are expected to change as more current
information becomes available.
Proved reserves are estimated quantities of crude oil, natural gas, and
natural gas liquids which geological and engineering data demonstrate with
reasonable certainty to be recoverable in future years from known
reservoirs under existing economic and operating conditions. Proved
developed reserves are those which are expected to be recovered through
existing wells with existing equipment and operating methods. The
following is an analysis of the Company's proved oil and gas reserves.
-24-
IMPERIAL PETROLEUM, INC.
(A Development Stage Company)
Notes to Consolidated Financial Statements
11. SUPPLEMENTARY FINANCIAL INFORMATION FOR OIL AND GAS PRODUCING ACTIVITIES
(CONTINUED)
Oil (MBbls) Gas (MMcf)
----------- ----------
Proved reserves at July 31, 1993 29.6 930.7
Revisions of previous estimates - -
Extensions, discoveries and other additions - -
Production (8.9) (124.2)
Purchases of reserves-in-place 7.6 479.3
Sales of reserves-in-place (23.6) (840.8)
----- ------
Proved reserves at July 31, 1994 4.7 445.0
Revisions of previous estimates 8.6 (160.5)
Extensions, discoveries and other additions - -
Production (1.9) (47.6)
Purchases of reserves-in-place - -
Sales of reserves-in-place - -
----- ------
Proved reserves at July 31, 1995 11.4 236.9
Revisions of previous estimates - -
Extensions, discoveries and other additions - -
Production (1.9) (44.1)
Purchases of reserves-in-place - -
Sales of reserves-in-place - -
----- ------
Developed reserves at July 31, 1996 9.5 192.8
===== ======
Proved developed reserves at:
July 31, 1993 29.6 930.7
July 31, 1994 4.7 445.0
July 31, 1995 11.4 236.9
July 31, 1996 9.5 192.8
-25-
IMPERIAL PETROLEUM, INC.
(A Development Stage Company)
Notes to Consolidated Financial Statements
11. SUPPLEMENTARY FINANCIAL INFORMATION FOR OIL AND GAS PRODUCING ACTIVITIES
(CONTINUED)
Standardized Measure of Discounted Future Net Cash Flows Relating to Proved
---------------------------------------------------------------------------
Oil and Gas Reserves (Unaudited)
--------------------------------
The "Standardized Measure of Discounted Future Net Cash Flows Relating to
Proved Oil and Gas Reserves" (Standardized Measure) is a disclosure
requirement under SFAS No. 69. The Standardized Measure does not purport
to present the fair market value of proved oil and gas reserves. This
would require consideration of expected future economic and operating
conditions, which are not taken into account in calculating the
Standardized Measure.
Under the Standardized Measure, future cash inflows were estimated by
applying year-end prices, adjusted for fixed and determinable escalations,
to the estimated future production of year-end proved reserves. Future
cash inflows were reduced by the estimated future production and
development costs based on year-end costs to determine pre-tax cash
inflows. Future income taxes were computed by applying the statutory tax
rate to the excess of pre-tax cash inflows over the Company's tax basis in
the associated proved oil and gas properties. Tax credits and permanent
differences were also considered in the future income tax calculation.
Future net cash inflows after income taxes were discounted using a 10%
annual discount rate to arrive at the Standardized Measure.
1994 1995 1996
--------- ------- -------
(In thousands)
Future cash inflows $1,233.9 $565.7 $460.7
Future costs - future production and
development costs 502.1 231.7 186.7
-------- ------ ------
Future net cash inflows before income tax
expense 731.8 334.0 274.0
Future income tax expense 182.9 83.5 68.5
-------- ------ ------
Future net cash flows 548.9 250.5 205.5
10% annual discount for estimated
timing of cash flows 276.3 126.1 103.4
-------- ------ ------
Standardarized Measure of discounted
future net cash flows $ 272.6 $124.4 $102.1
======== ====== ======
-26-
IMPERIAL PETROLEUM, INC.
(A Development Stage Company)
Notes to Consolidated Financial Statements
11. SUPPLEMENTARY FINANCIAL INFORMATION FOR OIL AND GAS PRODUCING ACTIVITIES
(CONTINUED)
CHANGES IN STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS
-------------------------------------------------------------------
RELATING TO PROVED OIL AND GAS RESERVES (UNAUDITED)
---------------------------------------------------
The following is an analysis of the changes in the Standardized Measure for
the periods presented:
1994 1995 1996
------ ------ ------
(In thousands)
Standardized Measure - beginning of year $ 836 $ 273 $ 124
Increases (Decreases)
Sales, net of production costs (158) (149) (60)
Net change in sales prices, net of
production costs - - 8
Discoveries and extensions, net
of related future development
production costs - - -
Changes in estimated future
development costs - - -
Development costs incurred - - -
Revisions of previous quantity
estimates - - -
Accretion of discount - - 30
Net change in income taxes - -
Purchases of reserves-in-place 390 - -
Sales of reserves-in-place (795) - -
Timing of production of reserves
and other - - -
----- ----- -----
Standardized Measure - end of year $ 273 $ 124 $ 102
===== ===== =====
-27-
IMPERIAL PETROLEUM, INC.
(A Development Stage Company)
Notes to Consolidated Financial Statements
12. INVESTMENTS
Unrealized Unrealized Carrying
Cost Gains Losses Value
---------- ---------- ---------- ---------
Investment in
equity securities:
July 31, 1996:
Available for sale
(marked to market) $ 77,188 $ - $ 16,208 $ 60,980
July 31, 1995:
Available for sale
(marked to market) 35,000 - - 35,000
13. WARRANTS
On July 10, 1996, the Company issued warrants to employees of an affiliate
for services provided to the Company. The warrants give the holder the
right to purchase 2,500,000 shares of the Company's common stock for $.03
per share. The warrants expire on July 10, 1999.
14. WRITE-DOWN OF MINING EQUIPMENT
During the year ended July 31, 1996, the Company ceased its limited core
drilling and testing of its Arizona mining claims. The Company has
indefinitely ceased its Arizona milling operations. Additionally, the
Company wrote off $121,953 of book value in equipment that could not be
located.
-28-
IMPERIAL PETROLEUM, INC.
(A Development Stage Company)
Notes to Consolidated Financial Statements
15. GOLD CERTIFICATE INCOME
During the year, the Company entered into an agreement with Financial
Surety International LTD whereby the Company would issue Gold Dore
Certificates to third parties in exchange for a leasing fee of 1.25% of the
certificate face value. The third party lessee uses the certificates as
collateral in order to obtain venture capital financing. These Gold Dore
Certificates specify the delivery of a specified amount of gold at a future
date, usually 5 years, for sale to the holder at the market price on that
date. Performance is insured by contract with Merrion Reinsurance
Corporation LTD. Upon expiration of the lease period, the certificates are
returned to the Company and are cancelled.
The Company pays a 10% finders fee to a consultant in connection with each
certificate issued. During the year the Company had $291,342 of Gold
Certificate Income, less finders fees of $22,810 for net Gold Certificate
Income of $ 268,532.
16. SUBSEQUENT EVENTS
SALE OF SUBSIDIARY
------------------
Subsequent to year end, the Company consummated the sale of its wholly
owned subsidiary, Premier Operating Company. The sales price of $175,000
enabled the Company to satisfy its debt to Bank of Oklahoma. As a result
of the sale, the Company will recognize an approximate pre-tax gain of
$40,000 in 1997. Premier's operations included all of the Company's oil
and gas producing activities.
REVERSE STOCK SPLIT
-------------------
At its November 21, 1996 annual meeting the Company approved a 1 for 6
reverse stock split.
-29-