Back to GetFilings.com
SECURITIES EXCHANGE COMMISSION
Washington D.C 20549
(Mark One)
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended July 31, 1997
[ ] 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 X 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, l997, there were 5,283,164 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 3 l, 1997
--------------------------------
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"), Premier Operating
Company, a Texas corporation ("Premier"), LaTex Resources International, a
Delaware corporation ("LRI") and Phoenix Metals, Inc., a Texas corporation
("Phoenix"). Premier was sold effective July 31, 1996. LRI and Phoenix were
acquired effective April 30, 1997.
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, 1997, the Company had sold its remaining domestic oil and gas
interests in the sale of Premier Operating Company and had completed its
transition to a minerals and metals mining company. (See "Mining 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.
In connection with the closing of the Ridgepointe Exchange Transaction,
each member of the Board of
4
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 greatly across the property to establish permanent facilities
commensurate with its long range corporate objections.
5
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 320 acres and
referred to as the Duke Mine, in San Juan county, Utah from Paradox Basins Inc.
for payment of $45,000 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
that 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 acquired an additional 1,900
acres of claims contiguous to the original claim area and began operations of a
pilot plant during September, 1997.
The Company sold the stock of Premier Operating Company for $175,000 on
November 1, 1996 (effective July 31, 1996) and retired its entire outstanding
bank balance at Bank of Oklahoma with the proceeds. As a result of the sale, the
company has substantially sold its oil and gas operations and properties.
The Company entered into an agreement to purchase certain assets and
liabilities from LaTex Resources, Inc. dated September 30, 1996 in connection
with its merger with Alliance Resources Plc.. Included in the assets purchased
are 5,000,000 shares of common stock of Wexford Technology, Inc. representing
32.3% of the issued and outstanding shares and a note payable to LaTex totaling
$1,372,799; 3,798,730 shares (pre-split) of common stock of Imperial Petroleum,
Inc. 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 Phoenix Metals, Inc. common stock representing 100% of the issued and
outstanding stock. The consideration paid to LaTex was 100,000 shares of LaTex
stock, the assumption of liabilities associated with the various entities and an
option under certain conditions for Alliance to reacquire the 50% of the sold
assets and liabilities during an 18-month period. Closing occurred at the time
of the LaTex/Alliance merger, on April 30, 1997.
On November 21, 1996 the Company's shareholders approved 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.
6
SUBSEQUENT EVENTS
In September 1997 the Company began operation of its pilot facility
located at the Duke Mine in Utah. The facility is designed to recover
microscopic gold using a Cosmos Concentrator system at a rate of 100 tons of ore
processed daily.
The Company completed the acquisition of an 80% interest in SilaQuartz
Mining Company Ltd., a company owning mining rights to high-grade silica claims
in Idaho. As one of only two commercial deposits of high grade silica in the
United States, the Company believes SilaQuartz will be able to secure a
significant portion of the market for this material very rapidly. Under the
terms of the SilaQuartz transaction, the Company issued 750,000 shares of its
restricted common stock and 750,000 shares of the stock it owns in Wexford
Technology, Inc. in exchange for the 80% interest. In addition the Company is
obligated to provide $250,000 in loans to SilaQuartz to begin mining operations.
The Company unwound its acquisition of the UFO Mining Limited Partnership
interest in the Lone Star Mine in November 1997 and retired a note payable to
UFO Mining Limited Partnership of $1,000,000 and secured the return of 1,000,000
shares (pre-split) of its common stock from UFO Mining Limited Partnership in
exchange for the Company's contribution of its Congress Mill Site Facility
interests and equipment and its interests in the Lone Star Mine to a Mining
Partnership managed by Zane Pasma. The Company retained a 5% carried interest in
the partnership through the expenditure by the Partnership of the first $6.0
million towards the development of the Lone Star Mine. The Partnership expects
to initiate continuous mining on the Lone Star claims during 1998.
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 that the Company believes may have
the opportunity for a cyclical improvement in demand and price.
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.
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.
7
RESERVES
MINING
------
The following table sets forth estimates as of July 31, 1997 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 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, 1997
----------------------
Net Mineable Reserves
----------------------
Claim Group Location Acres Gold Grade (oz/ton) Gold (oz) Silver (oz) Copper (lbs)
- ----------------------- -------- --------- ------------------- ---------------------- ----------- ------------
UFO Mine (l) Arizona 400 0 0 0 600,000
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 2,240 0.10 4,883,750 0 0
--------- --------- --------- ----------
Total 7,040 5,356,720 1,626,000 18,260,000
(1) Copper reserves are based upon 400 million pounds at an average grade
of 3% and adjusted for the Company's interest in the Joint Venture.
(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.
8
PRINCIPAL EXPLORATION AND DEVELOPMENT PROJECTS: MINING VENTURES:
UNITED STATES
UFO Mine - Until the formation of the Joint Venture, subsequent to year end,
the Company operated 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 the Company has
estimated the property's copper reserves at 12,000, 000 lbs. based upon an
average grade of 3%. Working capital limitations had limited the Company's
development of the mining property, in favor of other projects. And as a result,
the Company entered into a Mining Joint Venture in November 1997, subsequent to
year end. The property, was subject to an acquisition note with the former
owners requiring the payment of $1,000,000. The note had been extended several
times by the holder and the mining claims served as collateral for the note The
Company negotiated a Mining Joint Venture with Mr. Zane Pasma in November 1997
that retired the note payable and secured the return of 1,000,000 shares of the
Company's common stock (pre-split) for the assignment of the Company's interest
in the Lone Star claims and a contribution of the Company's interest in the
Congress Mill Site facility. The Company retained a 5% carried interest in the
Mining Joint Venture through the initial $6.0 million spent by the Joint Venture
to develop the property. Mr. Pasma manages the Mining Joint Venture and
anticipates initial operations to commence during 1998.
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 1998 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 1998. 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 fourth 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
9
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 1999.
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 that 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 1998 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 fourth quarter of fiscal 1998 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 1999 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 1999 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 has been the
initiation of operations on the Duke Mine located in San Juan County, Utah. The
property comprises some 2,240 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 gold
located in very fine grain placer material. Sieve analysis of the sand indicates
that about 71% of the material are 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 0.10 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 initial reserve
report, conducted additional recovery tests utilizing other equipment in
addition to the Cosmos Concentrator with similar results. Water is readily
available, however, drilling is required.
The Company began production at the Duke Mine during the first quarter of
fiscal 1998 on a pilot operation. A portable Cosmos Concentrator was purchased
and was moved on site. The facility should be capable of processing about 100
tons of placer material per day, however initial operations have been conducted
at rates of 20 tons per day. The Company spent approximately $185,000 to begin
operations at this level and is operating under a small miner's permit
exemption. Pilot plant results have been encouraging despite mechanical start-up
problems. Subject to completing construction of a building over the pilot
facility, the Company hopes to continue to operate throughout the winter months.
Additional testing will be conducted during the winter to further improve
overall system efficiency and optimize recoveries. A full-scale modular facility
is planned during the first and second quarters of fiscal 1999, subject to
capital availability, 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 48,837,500 tons of placer material. The
company anticipates obtaining additional claims in the vicinity of the Duke Mine
during fiscal 1998 to further enhance its mineral resource in this area.
Presently there are 5 other companies active in the development of claims in the
vicinity of the Duke Mine.
10
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. Both parties have
essentially mothballed the project 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.
COMPETITION
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.
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
Federal, state and local authorities extensively regulate the mining
industry. Legislation affecting the 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 mining industry and
their individual members some of which carry substantial penalties for the
failure to comply. The regulatory burden on the mining industry 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.
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.
11
TITLE TO PROPERTIES
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 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 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, mines, 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 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 mining business.
ITEM 3. LEGAL PROCEEDINGS.
-----------------
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
---------------------------------------------------
For the year ended July 31, 1997, the Company submitted certain matters to
its shareholders at its Annual Meeting held on November 21, 1997 in Evansville,
Indiana. The Proxy Statement mailed to shareholders in advance of the November
21, 1997 Annual Meeting is included herein by reference.
12
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 trading in its shares resumed, subsequent to year-end. The approximate
present bid price for the Company's common stock is $0.06 per share and the
approximate asked price is $0.56 per share.
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, 1997, there are approximately 557 holders of record of the
Company's common stock.
ITEM 6. SELECTED FINANCIAL DATA
1997 1996 1995 1994 1993 1992
----------- ------------ ----------- ----------- ----------- ---------
Operating Revenue $ 15,955 $ 105,630 114,667 296,641 433,213 196,703
Income (loss) from continuing operations $ (6,726) $ (388,089) (461,186) (306,397) (124,914) 10,025
Net Income (loss) $ (6,726) $ (276,424) (702,195) (307,397) (124,914) 10,025
Net Income (loss) per share $ (0.0) $ (.0.01) (0.03) (0.01) (0.01) 0
Total Assets $ 722, 530 $ 3,552,369 4,887,842 3,907,113 2,394,010 793,712
Stockholder's Equity $ 91,666 $ 1,163,278 1,462,035 1,119,930 1,531,431 17,317
Cash Dividends Paid per Common Share $ 0 0 0 0 0 0
Number of Outstanding Shares 5,283,164 31,426,841 24,026,841 21,180,958 10,920,184 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 rely on the initiation operations on its mining ventures to generate
cash 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. As the Company initiates
production on its mining properties,
13
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.
Prices for gold had remained relatively stable during the past several years and
had generally reflected the relatively low inflation rates predominate in the
economies of the industrialized nations. Recently, gold prices began a
significant downward price adjustment, which may reflect a shift from the
traditional dependence upon gold as a financial hedge against inflation.
Current spot prices for gold are $309.00 per ounce and are expected to continue
to remain at or near those levels. The Company does not expect to realize any
substantial increase in the price of gold in the future.
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
$0.85 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. Concerns regarding the economies of the
Pacific Rim nations, and in particular Japan, have recently dampened demand for
copper and will likely impact its price until such time as stability is achieved
in those economies.
With the initiation of production from the Duke Gold Mine in Utah, the Company's
principal source of cash flow will be the production and sale of gold. Cash flow
from gold sales depends upon the quantity of production and the price 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
gold prices reduces the cash flow generated by the Company's operations, which
in turn reduces the funds available for servicing debt, acquiring additional
mining properties and for developing and expanding its mining operations.
YEAR ENDED JULY 31, 1997 COMPARED TO YEAR ENDED JULY 31, 1996. Total revenues
for the Company for the year ended July 31, 1997 were $15,955 compared to
$105,630 for the year ended July 31, 1996. The decrease in revenues reflect the
sale of Premier Operating Company during the first quarter of 1997. The Company
expects to begin reporting revenues from its operation of the Duke Gold Mine
during the spring of 1998.
Operating expenses for the year ended July 31,1997 were $132,189 compared to
$386,619 for the year ended July 31, 1996. The level of expenses is expected to
remain about the same for fiscal 1998 until significant mining activity is
achieved during the third and fourth quarters. General and administrative
expenses decreased to $93,433 for the year ended July 31,1997 compared to
$312,453 for the prior year end and reflect the reduced activity of the Company
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 $6,726 ($0.00 per share) for the year
ended July 31, 1997 compared to a loss of $276,424 ($0.01 per share) for the
year ending July 31, 1996. The improvement in the after tax loss reflects the
gain on the extinguishment of the debt ($775,211) owed by the company to Latex
Resources, Inc. in connection with the Company's purchase of certain assets and
liabilities from LaTex. The Company received $91,521 during the year in
non-refundable fees in conjunction with its participation with FSI compared to
$268,532 the prior year. 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, 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
14
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 is 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 the 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 after tax 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.
CAPITAL RESOURCES AND LIQUIDITY.
The Company's capital requirements relate primarily to its mining activities and
the expansion of those activities. Prior to the change in control, the Company
funded its very limited activities from cash flow. The Company, through its
subsidiaries, had established credit facilities with a bank to facilitate the
funding of its operations. 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 may 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 continuous manner
15
in the future, management believes the Company will need to raise capital from
outside sources during fiscal 1998. In the event that additional capital is not
obtained, it may become necessary to alter development plans or otherwise
abandon certain ventures.
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 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.
Subsequent to year-end the Company sold its oil and gas properties and its
Premier Operating subsidiary and paid off its existing credit facility with Bank
of Oklahoma. As a result the Company presently has no credit facility available
to fund its mining activities and will be required to rely on private debt
placements or equity sales to fund any remaining capital expenditures. The
Company has obtained certain unsecured loans from its Chairman and President,
Jeffrey T. Wilson, which total $254,537 as of July 31, 1997. 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, 1997, the Company had current assets of $15,103 and current
liabilities of $630,864, which resulted in negative working capital of $615,761.
The negative working capital position is comprised primarily of notes payable to
shareholders and related parties. As discussed earlier, if the Company is
unsuccessful in obtaining outside capital certain mining activities of the
Company may be curtailed, postponed or abandoned. The Company believes that its
cash flow from operations will continue to be insufficient to meet its ongoing
capital requirements and short-term operating needs. As a result the Company
plans to seek additional capital from outside sources through the placement of
additional debt or equity during fiscal 1998 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 ability to conduct mining operations in certain areas,
resulting in lower production volumes. 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 mining properties have been and will
be affected by changes in copper and gold prices. The Company's ability to
maintain current borrowing capacity and to obtain additional capital on
attractive terms is also substantially dependent on copper and gold prices.
Prices for these commodities are subject to significant fluctuations that are
beyond the Company's ability to control or predict.
16
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, 1997 and 1996.............. F-2
Consolidated Statements of Operations for the years ended
July 31, 1997, 1996 and 1995.......................................... F-3
Consolidated Statements of Stockholder's Equity for the years
Ended July 31, 1997, 1996 and 1995.................................... F-4
Consolidated Statements of Cash flows for the years ended
July 31, 1997, 1996 and 1995.......................................... F-5
Notes to Consolidated Financial Statements............................ F-7
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE.
Not applicable.
17
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 44 Director, Chairman of the Board, President and Chief
Executive Officer
Malcolm W. Henley 46 Director, Vice President
Stacey D. Smethers 29 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 initial
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.
18
Based upon a review of Form 3, 4 and 5 filings made by the Company's officers
and directors during the past fiscal year ended July 31, 1997 under Section
16(a) of the Exchange Act, the Company believes that all requisite filings have
been made timely.
ITEM 11. EXECUTIVE COMPENSATION.
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 three fiscal years ended July 31, 1997, 1996 and 1995 (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 1997 $100,000 -- 250,000(1)
1995 $100,000 -- --
1995 $ 79,167 -- --
Malcolm W. Henley 1997 -- -- 250,000(1)
1996 -- -- 333,333(2)
1995 -- -- --
Stacey D. Smethers 1997 -- -- 50,000(1)
1996 -- -- 8,333(2)
1995 -- -- --
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 $0.25 per share with a term of three
years from October 9, 1997.
(2) The exercise price of the warrants is $0.18 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, 1997, the Company has 5,283,164 issued and outstanding shares
of common stock. The following table sets forth, as of July 31, 1997, 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, 1997, the Company had approximately 557 holders of common stock of
record.
19
Number of Shares
Name of Beneficial Owner Beneficially Owned Percent of Class
- -------------------------- ------------------ -----------------
Jeffrey T. Wilson (1) 1,695,835 32.1%
Malcolm W. Henley (2) 33,334 0.6%
Stacey D. Smethers (3) 1,667 0.03%
All officers and directors as a
Group (3 people) 1,730,836 32.73%
(1) The mailing address of Mr. Wilson is 100 NW Second Street, Suite 312,
Evansville, Indiana 47708.
(2) The mailing address of Mr. Henley is 4200 East Skelly Drive, Suite 1000,
Tulsa, Oklahoma 74135.
(3) The mailing address of Stacey D. Smethers is 4813 Rustic Road, Sand Springs,
Oklahoma 74063.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Jeffrey T. Wilson, Chairman, President and Chief Executive Officer of the
Company has made unsecured loans to the Company which total $254,537 as of July
31, 1997.
The Company has made unsecured loans to Wexford Technology, Inc., an affiliate
of the Company, of $184,794 as of July 31, 1997.
20
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, 1997 and 1996;
Consolidated Statements of Operations for the years ended
July 31, 1997, 1996, and 1995;
Consolidated Statements of Stockholder Equity for the years ended
July 31, 1997, 1996, and 1995;
Consolidated Statements of Cash Flows for the years ended
July 31, 1997, 1996, and 1995;
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, 1997.
(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 August 31, 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.
21
3.1 Certificate of Incorporation of the Registrant incorporated herein by
reference to Exhibit - of the Form 10.
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 I.B.
Energy, Inc. and Bank 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 I.B. Energy,
Inc. and Bank of Oklahoma, N.A. dated July 9, 1992.
10.8 Act of Pledge and Security Agreement between I.B. Energy, Inc. and Bank
of Oklahoma, N.A. 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, N.A. dated May 7, 1993.
10.13 Guaranty Agreement by and between James G. Borem, Patricia Borem, and
Bank of Oklahoma, N.A. 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, N.A. 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
22
18, 1993.
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.
10.22 Agreement to Acquire SilaQuartz Mining Company dated November 3, 1997
Including Subsequent Amendments.
10.23 Compromise and Settlement Agreement by and Between Ridgepointe Mining
Company and UFO Limited Partnership dated November 28, 1997.
10.24 Joint Venture Agreement for the Recovery of Precious Metals by and
between Zane Pasma and Ridgepointe Mining Company dated December 1, 1997.
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. Included by reference.
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.
23
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: May ____, 1998 /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 May __, 1998
- ------------------------ Officer (Principal Executive
Jeffrey T. Wilson Officer) and Director
24
IMPERIAL PETROLEUM, INC.
AND
SUBSIDIARIES
CONSOLIDATED
FINANCIAL STATEMENTS
AS OF JULY 31, 1997 and 1996
and
FOR THE YEARS ENDED
JULY 31, 1997, 1996 and 1995
and
INDEPENDENT AUDITOR'S REPORT
IMPERIAL PETROLEUM, INC.
July 31, 1997, 1996, and 1995
T A B L E O F C O N T E N T S
-------------------------------
Page
----
Independent Auditor's Report
Consolidated Financial Statements:
Consolidated Balance Sheets 2
Consolidated Statements of Operations 3
Consolidated Statements of Stockholders' Equity 4
Consolidated Statements of Cash Flows 5-6
Notes to Consolidated Financial Statements 7-29
[LETTERHEAD OF BRISCOE, BURKE & GRIGSBY LLP 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, 1997 and 1996 and
the consolidated statements of operations, stockholders' equity, and cash flows
for the years ended July 31, 1997, 1996 and 1995. 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, 1997 and 1996 and the results of its
operations and its cash flows for the years ended July 31, 1997, 1996 and 1995,
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. 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 & GRIGSBY LLP
BRISCOE, BURKE & GRIGSBY LLP
Certified Public Accountants
March 7, 1998
Tulsa, Oklahoma
IMPERIAL PETROLEUM, INC.
(A Development Stage Company)
Consolidated Balance Sheets
July 31, 1997 and 1996
ASSETS 1997 1996
---------- ----------
Current assets:
Cash $ 1,103 $ 9,041
Accounts receivable - oil and gas -- 15,673
Other current assets 14,000 1,150
---------- ----------
Total current assets 15,103 25,864
---------- ----------
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
Other depreciable assets -- 2,335
---------- ----------
-- 396,213
Less: accumulated depreciation
and depletion -- 276,491
---------- ----------
Oil and gas properties and other, net -- 119,722
---------- ----------
Mining properties under development
(Notes 1, 2, and 4):
Mining claims, options and
development costs 282,934 2,570,171
Mining and milling equipment -- 735,236
Acquisition in progress (Note 18) 300,000 28,000
---------- ----------
582,934 3,333,407
---------- ----------
Net property, plant and equipment 582,934 3,453,129
---------- ----------
Other assets:
Accounts receivable - related party
(Note 3) 47,305 9,876
Investments-other -- 2,445
Investments-securities (Notes 2 and 12) 77,188 60,980
Deposits and other assets -- 75
---------- ----------
Total other assets 124,493 73,376
---------- ----------
TOTAL ASSETS $ 722,530 $3,552,369
========== ==========
LIABILITIES and STOCKHOLDERS' EQUITY 1997 1996
---------- ----------
Current liabilities:
Accounts payable $ 60,755 $ 49,262
Accounts payable - other 85,218 18,718
Accrued expenses 230,354 252,235
Unearned revenue -- 3,550
Notes payable (Note 6) -- 1,139,817
Notes payable - related parties
(Note 7) 254,537 925,509
---------- ----------
Total current liabilities 630,864 2,389,091
---------- ----------
Noncurrent liabilities:
Deferred income taxes (Note 5) -- --
Notes payable, less current
portion (Note 6) -- --
---------- ----------
Total noncurrent liabilities -- --
---------- ----------
Stockholders' equity:
Common stock - par value $.001;
50,000,000 authorized; issued
and outstanding 5,283,164
on July 31, 1997 and
31,426,841 on July 31, 1996 5,283 31,427
Additional paid-in capital 2,514,373 2,472,959
Treasury stock 715,000 and -0-
shares, respectively (1,216,677) (120,313)
Accumulated deficit (1,211,313) (1,204,587)
Unrealized loss on marketable
securities (Notes 2 and 12) -- (16,208)
---------- ----------
Total stockholders' equity 91,666 1,163,278
---------- ----------
Commitments and contingencies
(Note 9)
TOTAL LIABILITIES and
STOCKHOLDERS' EQUITY $ 722,530 $3,552,369
========== ==========
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, 1997, 1996 AND 1995
1997 1996 1995
------------ ------------ ------------
Operating income:
Oil and gas revenue $ 15,955 $ 104,740 $ 103,836
Oil and gas lease operations and management fees -- 890 10,831
------------ ------------ ------------
Total operating income 15,955 105,630 114,667
------------ ------------ ------------
Operating expenses:
Oil and gas lease operating expense 7,389 44,980 61,287
Dry hole costs -- -- 48,285
Mining lease expense 24,510 1,760 --
General and administrative expenses 93,433 312,453 234,012
Depreciation and depletion (Note 2) 6,857 27,426 46,356
------------ ------------ ------------
Total operating expenses 132,189 386,619 389,940
------------ ------------ ------------
Loss from operations (116,234) (280,989) (275,273)
Other income and expense:
Interest expense (19,478) (107,100) (185,913)
Interest income -- --
Gold certificate income - net (Note 15) 91,521 268,532 --
Unrealized loss on marketable securities -- -- (233,750)
Provision for loss (Note 4) -- -- (163,860)
Loss on write-down of mining equipment (Note 14) (797,786) (121,953) --
Gain on extinguishment of debt 775,211 -- --
Gain (loss) on sale of assets 60,040 (34,914) --
------------ ------------ ------------
Net loss before income taxes (6,726) (276,424) (858,796)
------------ ------------ ------------
Provision for income taxes: (Note 5)
Current -- -- 7,100
Deferred -- -- (163,001)
------------ ------------ ------------
Total benefit from income taxes -- -- (155,901)
------------ ------------ ------------
Net loss $ (6,726) $ (276,424) $ (702,895)
============ ============ ============
Loss per share (Note 2) $ -- $ (.01) $ (.03)
============ ============ ============
Weighted average shares outstanding 13,357,111 24,927,938 23,892,869
============ ============ ============
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, 1997, 1996, and 1995
Common Stock
------------------------- Additional
Par Paid-In
Shares Value Capital
----------- ----------- -----------
Balances at July 31, 1994 22,426,841 $ 22,427 $ 2,092,771
Stock issued for services 100,000 100 17,088
Stock issued for mining properties
and equipment 1,500,000 1,500 256,312
Net loss for the period -- -- --
----------- ----------- -----------
Balances at July 31, 1995 24,026,841 24,027 2,366,171
Receipt of Treasury stock -- -- --
Stock issued for services 500,000 500 14,500
Stock issued for mining properties
and equipment 1,900,000 1,900 55,100
Stock issued for investment 5,000,000 5,000 37,188
Net loss for the period -- -- --
----------- ----------- -----------
Balances at July 31, 1996 31,426,841 31,427 2,472,959
Reverse split (Note 17) (26,188,677) (26,189) 26,189
Receipt of Treasury stock (Notes 16 and 18) -- -- --
Stock issued for mining properties
and equipment 45,000 45 15,225
Net loss for the period -- -- --
----------- ----------- -----------
Balances at July 31, 1997 5,283,164 $ 5,283 $ 2,514,373
=========== =========== ===========
Unrealized Total
Treasury Retained Loss on Stockholders'
Stock Deficit Equity Equity
----------- ----------- ----------- -----------
Balances at July 31, 1994 $ -- $ (225,268) $ -- $ 1,889,930
Stock issued for services -- -- -- 17,188
Stock issued for mining properties
and equipment -- -- -- 257,812
Net loss for the period -- (702,895) -- (702,895)
----------- ----------- ----------- -----------
Balances at July 31, 1995 -- (928,163) -- 1,462,035
Receipt of Treasury stock (120,313) -- -- (120,313)
Stock issued for services -- -- -- 15,000
Stock issued for mining properties
and equipment -- -- -- 57,000
Stock issued for investment -- -- -- 42,188
Net loss for the period -- (276,424) (16,208) (292,632)
----------- ----------- ----------- -----------
Balances at July 31, 1996 (120,313) (1,204,587) (16,208) 1,163,278
Reverse split (Note 17) -- -- -- --
Receipt of Treasury stock (Notes 16 and 18) (1,096,364) -- 16,208 (1,080,156)
Stock issued for mining properties
and equipment -- -- -- 15,270
Net loss for the period -- (6,726) -- (6,726)
----------- ----------- ----------- -----------
Balances at July 31, 1997 $(1,216,677) $(1,211,313) $ -- $ 91,666
=========== =========== =========== ===========
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, 1997, 1996 and 1995
1997 1996 1995
---------- ----------- -----------
Cash flows from operating activities:
Historical net loss $ (6,726) $(276,424) $(702,895)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation and depletion 6,857 27,426 46,356
Unrealized loss on marketable securities - - 233,750
Provision for loss (Note 4) - - 163,860
(Increase) Decrease in refundable income tax - - 56,500
(Increase) Decrease in accounts receivable - oil and gas 15,673 (3,929) 24,859
(Increase) Decrease in accounts receivable - other (37,429) - 4,910
(Increase) Decrease in other current assets (12,850) (718) 54,356
(Increase) Decrease in other assets 75 14,812 9,331
Increase (Decrease) in accounts payable 11,493 (18,108) 5,769
Increase (Decrease) in accounts payable - related parties - (10,951) (19,323)
Increase (Decrease) in accounts payable - other 66,500 1,800 (41,487)
Increase (Decrease) in accrued expenses (21,881) 77,800 107,710
Increase (Decrease) in unearned revenue (3,550) 3,550 -
Increase (Decrease) in income taxes payable - - (39,128)
Increase (Decrease) in deferred income taxes - - (170,518)
--------- --------- ---------
Net cash used for operating activities 18,162 (184,742) (265,950)
--------- --------- ---------
Cash flows from investing activities:
Mining options, properties and equipment - net (105,832) (20,000) (173,634)
Oil and gas properties and equipment sold 112,865 - 800
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 (2,445) 48,285
--------- --------- ---------
Net cash used for investing activities $ 9,478 $ 131,248 $(124,549)
--------- --------- ---------
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, 1997, 1996 and 1995
1997 1996 1995
------------ ------------ ----------
Cash flows from financing activities:
Increase (Decrease) in notes payable $ (139,817) $ (12,593) $(71,360)
Increase (Decrease) in notes payable - related parties 104,239 71,849 496,950
Increase (Decrease) in long-term debt - - (36,482)
Increase (Decrease) in equity through acquisition - - -
----------- ----------- --------
Net cash provided by financing activities (35,578) 59,256 389,108
----------- ----------- --------
Net increase (decrease) in cash and cash equivalents (7,938) 5,762 (1,391)
Cash and cash equivalents at beginning of year 9,041 3,279 4,670
----------- ----------- --------
Cash and cash equivalents at end of year $ 1,103 $ 9,041 $ 3,279
=========== =========== ========
Supplemental disclosures of cash flow information:
Cash paid during the period for
Interest $ 6,896 $ 63,270 $100,414
Income taxes - -
Supplemental schedule of noncash investing and financing activities:
Stock issued for mining equipment and mining claim options $ 15,270 $ (57,000) $257,812
Stock issued for services - (15,000) 17,188
Stock issued for investment - (42,188) -
Rescind agreement on mining claims and equipment 2,045,565 1,270,376 -
Rescind agreement on notes payable (1,089,753) (1,150,063) -
Rescind agreement on common stock issued (955,812) (120,313) -
Unrealized loss on equity securities (16,208) 16,208 -
Write-down of oil and gas assets - 18,869 -
Write-down of mining claims 797,786 134,824 163,860
Extinguishment of debt (775,211) - -
----------- ----------- --------
Total $ 21,637 $ 55,713 $ 438,860
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
------------
The Company is 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, 1997 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 $6,726 for the year ended
July 31, 1997 and as of July 31, 1997 has an accumulated deficit of
$1,211,313 and a deficit working capital of $615,761.
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)
DISPOSITION OF OIL AND GAS PROPERTIES
-------------------------------------
During the year, the Company sold all of its oil and gas properties owned
by Premier Operating Company for $175,000 in cash. This resulted in a gain
of $60,040. The Company used $139,817 of the proceeds to satisfy its
obligation to Bank of Oklahoma.
ACQUISITION OF LATEX RESOURCES INTERNATIONAL, INC.
--------------------------------------------------
See Note 16.
ACQUISITION OF PHOENIX METALS, INC.
-----------------------------------
See Note 16.
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 1997
------------ ------------
Current assets $ 25 $
-
Net property and equipment 3,333,407 582,934
Other assets 2,445 -
---------- -----------
Total assets $3,335,877 $ 582,934
========== ===========
1996 1997
---------- -----------
Current liabilities $2,544,487 $ 640,474
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) (1,526,533)
---------- -----------
Total liabilities and
stockholders' deficit $3,335,877 $ 582,934
========== ===========
-9-
IMPERIAL PETROLEUM, INC.
(A Development Stage Company)
Notes to Consolidated Financial Statements
1. ORGANIZATION AND BUSINESS COMBINATION (CONTINUED)
Cumulative
1996 1997 From Inception
----------- ----------- ---------------
Operating revenues $ - $ - $ -
Miscellaneous income - - 96,579
--------- --------- -----------
Total income - - 96,579
Lease operating expenses 1,760 24,510 95,270
General and
administrative 54,121 16,689 344,997
--------- --------- -----------
Total expenses 55,881 41,199 440,267
Net operating loss (55,881) (41,199) (343,688)
Interest (28,677) (9,945) (252,971)
Loss on sale/write-down
of assets (137,998) (797,786) (977,691)
--------- --------- -----------
Net loss before
income taxes (222,556) (848,930) (1,574,350)
Income tax benefit - - (169,770)
--------- --------- -----------
Net loss $(222,556) $(848,930) $(1,404,580)
========= ========= ===========
-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 $ (1,526,533)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation and depletion -
(Increase) in other assets -
Increase in current liabilities 640,474
------------
Net cash used for operating activities (886,059)
------------
Cash flows from investing activities:
Mining options, properties and equipment purchased - net (582,934)
------------
Net cash used for investing activities (582,934)
------------
Cash flows from financing activities:
Increase in notes payable -
Increase in notes payable funding - related parties 1,468,993
------------
Net cash provided by financing activities 1,468,993
------------
Net increase in cash and cash equivalents -
Cash and cash equivalents at inception -
------------
Cash and cash equivalents at July 31, 1997 $ -
============
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, 1997, 1996 and 1995 financial statements include the accounts
of the Company and its wholly owned subsidiaries, Ridgepointe Mining
Company, Premier Operating Company, I. B. Energy, Inc., LaTex Resources
International, Inc., and Phoenix Metals, 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 were, until 1997, 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 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
adopted SFAS 121 for the fiscal year ending July 31, 1997.
RECLASSIFICATION
----------------
Certain amounts in the 1996 consolidated financial statements have been
reclassified to conform with the 1997 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:
1997 1996
---------- ----------
Shareholder $ 1,000 $ 9,876
Wexford Technology, Inc. 184,794 138,489
Allowance for bad debts (138,489) (138,489)
--------- ---------
Total $ 47,305 $ 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 Notes 6 and 18)
-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.
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 $32,634 and $349,105 in development costs through July 31, 1997
and 1996, respectively. (See Note 18.)
The Company's mining fixed assets consist of the following:
July 31, July 31,
1997 1996
--------- -----------
Mining claim option (See Note 6) $ - $2,045,565
Mining claims 250,300 175,501
Mining equipment - 735,236
Mine development costs 32,634 349,105
Acquisition in progress 300,000 28,000
-------- ----------
Total $582,934 $3,333,407
======== ==========
-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. 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:
1997 1996 1995
------------ ------------ ------------
(in thousands)
Current:
Federal $ - $ - $ 7
State - - -
------------ ------------ ------------
$ - $ - $ 7
============ ============ ============
Deferred:
Federal $ - $ - $ (163)
State - - -
------------ ------------ ------------
$ - $ - $ (163)
============ ============ ============
-18-
IMPERIAL PETROLEUM, INC.
(A Development Stage Company)
Notes to Consolidated Financial Statements
5. INCOME TAXES (CONTINUED)
Income taxes differed from the amounts computed by applying the U.S.
federal tax rate as a result of the following:
1997 1996 1995
-------- -------- --------
(in thousands)
Computed "expected" tax benefit $ (1) $ (53) $ (292)
State income taxes net of federal
benefit - - -
Increase in valuation allowance
for deferred tax assets 1 53 285
Other - - -
-------- -------- --------
Actual income tax expense $ - $ - $ (7)
======== ======== ========
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and liabilities are presented below:
1997 1996
-------- --------
(in thousands)
Deferred tax liabilities:
Property, plant and equipment $ 300 $ 300
Other - -
-------- --------
Total deferred tax liabilities 300 300
-------- --------
Deferred tax assets:
Net operating losses 480 479
Other 1 1
-------- --------
Total deferred tax assets 481 480
-------- --------
Valuation allowance (181) (180)
-------- --------
Net deferred tax assets 300 300
-------- --------
Net deferred tax asset (liability) $ - $ -
======== ========
-19-
IMPERIAL PETROLEUM, INC.
(A Development Stage Company)
Notes to Consolidated Financial Statements
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
1997 1996
---------- ----------
Bank of Oklahoma N.A., promissory note,
dated October 18, 1993, principal
payment monthly of $4,500 plus
interest at bank prime $ - $ 139,817
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
---------- ----------
Total - 1,139,817
Less: current portion - 1,139,817
---------- ----------
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 (See Note 1). The note is secured by the fixed assets of the
Company's wholly owned subsidiary, Premier Operating Company (See Note 16).
7. NOTES PAYABLE - RELATED PARTY
1997 1996
--------- ---------
Officer - 10% demand note $ 64,295 $ 64,295
Officer - 7.5% demand note 190,242 113,344
LaTex Resources, Inc., demand note,
plus interest at bank prime - 747,870
-------- --------
$254,537 $925,509
======== ========
8. RELATED PARTY TRANSACTIONS
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.
-21-
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.
1997 1996 1995
------------ ------------ ------------
Revenues: (in thousands)
Oil and gas
production and
lease operations $ 16 $ 106 $ 115
Mining - - -
------------ ------------ ------------
Total revenues $ 16 $ 106 $ 115
============ ============ ============
Identifiable assets:
Oil and gas production $ - $ 142 $ 182
Mining 583 3,336 4,654
Other 140 74 52
------------ ------------ ------------
$ 723 $ 3,552 $ 4,888
============ ============ ============
Depreciation and depletion:
Oil and gas production $ 7 $ 27 $ 46
Mining - - -
------------ ------------ ------------
$ 7 $ 27 $ 46
============ ============ ============
-22-
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, 1997, 1996 and 1995. All of the Company's oil and gas
producing activities are located within the United States. During the year
the Company disposed of its oil and gas assets (See Note 1).
1997 1996 1995
---------- ---------- ----------
(In thousands)
Revenues $ 16 $ 105 $ 104
Production costs 7 38 54
Gross production taxes 1 7 7
Depreciation, depletion and amortization 7 27 46
---------- ---------- ----------
Results of operations before income taxes 1 33 (3)
Income tax expense - - (1)
---------- ---------- ----------
Results of operations (excluding corporate
overhead and interest costs) $ 1 $ 33 $ (2)
========== ========== ==========
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.
-23-
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, 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
Revisions of previous estimates - -
Extensions, discoveries and other additions - -
Production (.3) (6.7)
Purchases of reserves-in-place
Sales of reserves-in-place (9.2) (186.1)
----------- ----------
Developed reserves at July 31, 1997 - -
=========== ==========
Proved developed reserves at:
July 31, 1994 4.7 445.0
July 31, 1995 11.4 236.9
July 31, 1996 9.5 192.8
July 31, 1997 - -
-24-
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.
1995 1996 1997
------------ ------------ ------------
(In thousands)
Future cash inflows $ 565.7 $ 460.7 $ -
Future costs - future production and
development costs 231.7 186.7 -
------------ ------------ ------------
Future net cash inflows before income tax
expense 334.0 274.0 -
Future income tax expense 83.5 68.5 -
------------ ------------ ------------
Future net cash flows 250.5 205.5 -
10% annual discount for estimated
timing of cash flows 126.1 103.4 -
------------ ------------ ------------
Standardarized Measure of discounted
future net cash flows $ 124.4 $ 102.1 $ -
============ ============ ============
-25-
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:
1995 1996 1997
------------ ------------ ------------
(In thousands)
Standardized Measure - beginning of year $ 273 $ 124 $ 102
Increases (Decreases)
Sales, net of production costs (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 - - -
Sales of reserves-in-place - - (102)
Timing of production of reserves
and other - - -
------------ ------------ ------------
Standardized Measure - end of year $ 124 $ 102 $ -
============ ============ ============
-26-
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, 1997:
Available for sale
(marked to market) $ 77,188 $ - $ - $ 77,188
July 31, 1996:
Available for sale
(marked to market) $ 77,188 $ - $ 16,208 $ 60,980
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.
Also, during the year ended July 31, 1997, the Company wrote-down, by
$784,341, its book value of equipment and development costs in its Arizona
operations related to its participation in a joint venture as discussed in
Note 18.
-27-
IMPERIAL PETROLEUM, INC.
(A Development Stage Company)
Notes to Consolidated Financial Statements
15. GOLD CERTIFICATE INCOME
During 1996, 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 $99,013 of Gold
Certificate Income, less finders fees of $7,492 for net Gold Certificate
Income of $91,521.
16. ACQUISITION AND EXTINGUISHMENT OF DEBT
AGREEMENT WITH LATEX RESOURCES, INC.
------------------------------------
During 1997, the Company reached an agreement with LaTex Resources, Inc.
whereby the Company gave 100,000 shares of LaTex common stock (or 85,500
equivalent Alliance Resources Plc post-merger shares), loaned to the
Company by CEO Jeffrey T. Wilson, in exchange for 5,000,000 shares of
Wexford Technology, Inc. common stock (representing a 32.3% interest),
3,798,730 shares of the Company's common stock, 5,000 shares of LaTex
Resources International, Inc. common stock (100%), 30,000 shares of Phoenix
Metals, Inc. common stock (100%) and extinguishment of the debt of the
aforementioned companies as well as that of the Company.
This extinguishment resulted in a gain of $786,162, the receipt of Treasury
stock valued at $140,553 and the recording of an investment in Wexford
Technology, Inc. of $77,188. No value was recorded for the receipt of
LaTex Resources International, Inc. or Phoenix Metals, Inc.
-28-
IMPERIAL PETROLEUM, INC.
(A Development Stage Company)
Notes to Consolidated Financial Statements
17. STOCK SPLIT
On November 21, 1996 the Company effected a one for six reverse split of
its common stock, resulting in 5,237,807 shares being outstanding on that
date.
18. SUBSEQUENT EVENTS
SETTLEMENT AGREEMENT ON UFO CLAIMS
----------------------------------
Subsequent to year end, the Company reached a settlement agreement with UFO
Mining Limited Partnership whereby the Company would return its interest in
the UFO mining claims in exchange for a release from the $1,000,000 note
and the return of 166,667 (post-split) shares of the Company's common
stock. In conjunction with this agreement, the Company entered into a
joint venture with another party whereby the Company will contribute its
remaining interest in the UFO claims, infrastructure and onsite equipment
to the joint venture in exchange for a 5% carried interest. Under the
joint venture agreement, the Company would be responsible for contributing
up to 167,000 shares of its restricted common stock if the joint venture
were to contribute $6,000,000 in capital. Also, the Company has chosen to
write-down the value of the assets to be contributed to the joint venture
by $784,341 to more accurately reflect the market value of those assets and
hence the value of the Company's interest in the joint venture. The
Company has reflected the assets to be contributed to the joint venture as
$300,000 in acquisitions in progress.
As a result, the Company has reduced mining claims by $2,045,565, reduced
notes payable by $1,000,000, reduced accrued interest payable by $89,753
and recorded Treasury stock of $955,812.
-29-