SECURITIES EXCHANGE COMMISSION
Washington D.C 20549
FORM 10-K/A
XX ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended July 31, 2003
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 incorporation or organization) | (IRS Employer identification No.) | |
| 11600 German Pines Evansville, IN | 47725 | |
| (Zip Code) | ||
Registrant’s telephone number, including area code (812) 867-1433
Securities registered pursuant to Section 12(b) of the Act: None.
Securities registered pursuant to Section 13(g) of the Act:
Common Stock. $0.006 par value per share
(Title of class)
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ¨ No x
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. Yes ¨ No x
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or Section 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 Regulation S-K is not contained herein, and will not be contained, to the best of 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. x
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.
Large accelerated ¨ Accelerated filer ¨ Non-accelerated filer x
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x
On July 3l, 2003, there were 30,948,103 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 $2,028,698. See Item 5. Market for Registrant’s Common Stock and Related Stockholder Matters.
Documents Incorporated by Reference NONE
FORM 10-K
FISCAL YEAR ENDED JULY 31, 2003
TABLE OF CONTENTS
| Page | |||||
| PART I | |||||
Item 1. | 1. | ||||
Item 2. | 1. | ||||
Item 3. | 15. | ||||
Item 4. | 15. | ||||
| PART II | |||||
Item 5. | Market for Registrant’s Common Stock and Related Stockholder Matters | 15. | |||
Item 6. | 16. | ||||
Item 7. | Management’s Discussion and Analysis of Financial Condition And Results of Operations | 16. | |||
Item 8. | Financial Statements and Supplementary Data Auditor’s Report | (F-1 thru F-34 | ) | ||
Item 9. | Changes In and Disagreements with Accountants on Accounting and Financial Disclosure | 23. | |||
| PART III | |||||
Item 10. | 24. | ||||
Item 11. | 25. | ||||
Item 12. | Security Ownership of Certain Beneficial Owners and Management | 26. | |||
Item 13. | 27. | ||||
| PART IV | |||||
Item 14. | Exhibits, Financial Statement Schedules, and Reports On Form 8-K | 28. | |||
| 29. | |||||
Cautionary Statement Regarding Forward Looking Statements
In the interest of providing the Company’s stockholders and potential investors with certain information regarding the Company’s future plans and operations, certain statements set forth in this Business Plan relate to management’s future plans and objectives. Such statements are “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Act of 1934, as amended. Although any forward looking statements contained in this Business Plan or otherwise expressed on behalf of the Company are, to the knowledge and in the judgement of the officers and directors of the Company, expected to prove to come true and to come to pass, management is not able to predict the future with absolute certainty. Forward looking statements involve known and unknown risks and uncertainties which may cause the Company’s actual performance and financial results in future periods to differ materially from any projection, estimate or forecasted result. These risks and uncertainties include, among other things, volatility of commodity prices, changes in interest rates and capital market conditions, competition, risks inherent in the Company’s operations, the inexact nature of interpretation of seismic and other geological, geophysical, petro-physical and geo-chemical data, the imprecise nature of estimating reserves and such other risks and uncertainties as described from time to time in the Company’s periodic reports and filings with the Securities and Exchange Commission. Accordingly stockholders and potential investors are cautioned that certain events or circumstances could cause actual results to differ materially from those projected, estimated or predicted.
This Business Plan or its dissemination to prospective investors does not constitute an offer to sell to, or a solicitation of an offer to buy from, nor shall any of the securities be offered or sold to, any person in any state or other jurisdiction in which such offer, purchase or sale is unlawful or unauthorized under the laws of such jurisdiction. The information contained herein has been prepared to assist interested parties in making their own evaluation of the Company and does not contain all of the information that a prospective investor may desire. The Company encourages any prospective investor to obtain copies of its reports as filed with the Securities & Exchange Commission through its EDGAR database. The Company does not make any representation or warranty as to the accuracy or completeness of the information in this Business Plan and shall have no liability for any representations (express or implied) contained herein, or for any omissions from this Business Plan, or any other written or oral communication transmitted to the recipient in the course of the recipient’s evaluation of the Company.
Item 1. Business andItem 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.
1.
“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”), Phoenix Metals, Inc., a Texas corporation (“Phoenix”), and Powder River Basin Gas Corp (“Powder River”), a Colorado corporation. Premier and IB Energy, Inc. were sold effective July 31, 1996. LRI and Phoenix were acquired effective April 30, 1997. The operations of LRI ceased in 1997 with the expiration of its remaining foreign activities. Phoenix has conducted limited activities since 1997 as Imperial Environmental Company, although it has not officially changed its name. Eighty- percent control of SilaQuartz was acquired effective November 23, 1998 as an investment. The Company acquired 90% control of Oil City Petroleum, Inc. (“Oil City”), an Oklahoma corporation effective August 31, 1998 as an investment and sold its interest effective November 28, 2000. The Company owns approximately 36% of the commons stock of Warrior Resources, Inc., (“Warrior”) an Oklahoma corporation, and carries its ownership under the equity method.
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 had diversified its business activities to include mineral mining, with a particular emphasis on gold mining. The Company intends to re-focus its efforts in the oil and natural gas business and to seek to sell or develop through partnerships or joint ventures, its mining assets
At July 31,2003, the Company does not operate any active oil and natural gas properties directly, although it owns 36% control of and manages the operations of Warrior Resources Inc. (formerly Comanche Energy Inc.) which does operate in the oil and natural gas business. Warrior,. through its wholly-owned subsidiary, Double Eagle Petroleum Corporation, owns crude oil and natural gas properties located in the states of Texas and Mississippi. Warrior presently owns an interest in approximately 63 producing natural gas wells and 4 producing oil wells with daily net production to Warrior’s interest of 1,010 MMCFPD and 10 BOPD. Reserve estimates to Warrior’s interest by third party engineers of net proven oil and natural gas reserves as of July 31, 2003 are approximately 341.5 MBbls and 23,551 MMcf.
The Company is the operator of the Duke Gold Mine in Utah, although no significant operations occurred during the prior fiscal year.
2.
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”). The Company was reorganized under a Reorganization Agreement and Plan and Article of Merger dated August 31, 1981 resulting in the Company being domiciled in Nevada.
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.
3.
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 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.
On August 15, 2001, Mr. Malcolm W. Henley and Mrs. Stacey D. Smethers resigned their positions as directors of the Company to pursue other interests. Their vacancies have been filled with Mrs. Annalee C. Wilson and Mr. Aaron M. Wilson, both family members of the Company’s President and Chairman, until new directors are elected at the next shareholder’s meeting.
On October 31, 2001, Imperial and Rx Power, a California corporation signed a non-binding letter of intent wherein the two companies would form a Special Purpose Vehicle (“SPV”) for the purpose of obtaining financing for the installation of Rx Power’s proprietary electric generator units. Imperial was to contribute stock, cash or financing up to the amount of $2,000,000 in five phases for a 45% interest in the cash flow from the SPV and Rx Power was to contribute its existing contracts and future marketing efforts to the SPV for a 45% interest in the SPV. The project was to be managed by a third party, subject to certain limitations imposed by both companies. The parties signed a definitive agreement in February 2002 for the consummation of the transaction. The electricity generator units being developed by Rx Power offer cost savings to customers up to 25% from their present electricity source based upon the use of proprietary electronic components and technological advances in the generation of electricity using natural gas. The primary target market for these units, initially, is California. Rx Power is still completing the testing and development of its initial commercial unit. As a result no activity occurred in the SPV during this fiscal year. As a result of the continued inability of Rx Power to provide a suitable unit for demonstration, the Company does not expect the venture to proceed.
4.
The Company entered into and closed the acquisition of 29,484,572 shares of the common stock of Warrior Resources, Inc. (formerly Comanche Energy, Inc.), representing approximately 30.8% of the issued and outstanding shares of Warrior on February 13, 2002 in connection with an Exchange Agreement (See “Exchange Agreement” included herein) between the Company and the management of Warrior, Messers. Luther Henderson and John Bailey. In connection with the Exchange Agreement, the Company issued 2,266,457 shares of its restricted common stock to Mr. Henderson, representing 12.9% of the issued and outstanding shares of Registrant in exchange for 22,664,572 shares of the common stock of Warrior and 682,000 shares of its restricted common stock to Mr. John Bailey, representing 3.9 % of the issued and outstanding shares of the Company in exchange for 6,820,000 shares of the common stock of Warrior. Mr. Bailey and Mr. Henderson resigned as officers and directors of Warrior and Mr. Jeffrey Wilson, president of the Company, was appointed president and sole director of Warrior. Simultaneously with the closing of the Exchange Agreement with Messrs. Henderson and Bailey and the change of control of Warrior, the Company entered into an Agreement and Plan of Merger (See “Agreement and Plan of Merger” included herein), subject to certain conditions, to offer to acquire the remaining issued and outstanding capital stock of Warrior through a subsequent offering to be registered with the Securities & Exchange Commission. The terms of the proposed exchange of shares with the remaining shareholders of Warrior was on the basis of one share of Imperial common stock in exchange for ten shares of Warrior common stock.
Completion of the Agreement and Plan of Merger was subject to a number of conditions, including the completion of audited financials for Warrior, approval of the Warrior stockholders, the filing and effectiveness of a registration statement by Registrant for the shares to be offered, the satisfactory completion of due diligence and other customary closing conditions. Due to breaches of the agreements by the former management of Warrior, the Company terminated the proposed merger in August 2002. As a result of the termination of the merger agreement, the Company has the right to receive $200,000 or an equivalent value in shares of Warrior valued at $0.02 per share. The obligation by Warrior is presently carried on the books of the Company as a note receivable.
The Company assisted Warrior in completing a refinancing of its principal bank debt and in retiring certain of its trade, notes and accounts payable in November 2002 and as a result, the note payable to the Company from Warrior has increased by approximately $1.4 million. As a result of the refinancing of its principal debt with the bank, Warrior began a work program on its wells, with the direction of the Company, to increase cash flow. On July 15, 2003, the Company and Warrior signed an Agreement wherein the Company would acquire the assets and certain liabilities of Warrior and its subsidiaries in exchange for payment or assumption of the Warrior senior bank debt in the approximate amount of $3.65 million; (2) extinguishments of the note payable from Warrior to the Company in the amount of $1.7 million; (3) assumption of certain trade vendor liabilities in the approximate amount of $0.58 million and the issuance to Warrior of 2 million shares of the Company’s common stock. Closing of the transaction was subject to, among other things, approval of Warrior’s shareholders, which was received on August 29,2003. The Company expects to close the Warrior asset acquisition in December 2003.
5.
In November 2002 the Company acquired certain direct interests in the Bovina filed of Mississippi from working interest owners. The Bovina field is operated by Double Eagle Petroleum Corp and affiliate of the Company. Under the terms of the various agreements the Company paid a total of $26,364, assumed approximately $11,600 in accounts payable and issued a total of 479,242 shares of its restricted common stock.
In April 2003, the Company agreed to acquire certain oil and natural gas interests owned by Renovared Resources, Inc. (“Renovared”) located in Kentucky for $30,000. The properties comprise interests in approximately 44 wells and a pipeline and gathering system located in the New Albany Shale Gas play. Closing is expect in December 2003.
In May 2003, the Company acquired approximately 54% control of the stock of Powder River Basin Gas Corp in an Exchange Agreement with the former management and control shareholders of Powder River. (See Form 8-K dated May 2003). The Company issued a total of 2.65 million shares of its restricted common stock and a note payable in the amount of $200,000 in the transaction. As a result of the Exchange Transaction, Powder River became a subsidiary of the Company. Powder River owns some 7,000 net acres of leases in the Powder River Basin coalbed methane gas play in Wyoming. The Company is presently seeking a partner to develop Powder River’s acreage.
On July 7, 2003 the Company agreed to acquire the assets of Hillside Oil & Gas LLC. Under the terms of the agreement and amendments thereto, the Company will acquire the oil and gas properties of Hillside for (1) the payment of its senior debt of approximately $4.6 million; (2) the assumption of an equipment note payable of $0.3 million; (3) the payment of certain obligations of Hillside at closing of $168,000; (4) the assumption of approximately $348,000 in accounts payable of Hillside and (5) issuance of a note payable to Hillside in the amount of $324,000 and secured by 1 million shares of the Company’s common stock. Hillside operates some 200 wells in Texas, New Mexico and Louisiana and has estimated net proven reserves based upon third party estimates of approximately 954.6 MBbbls and 2,544 MMcf.
Subsequent Events
In October 2003 the Company sold 2,000,000 shares of restricted common stock for $200,000 and a common stock purchase warrant in the amount of 2,000,000 shares exercisable at $0.12 per share. Demand rights were granted in connection with the issuance. The term of the warrant is one year. The proceeds of the sale were used to fund the ongoing expense of the acquisition effort of the Company and for working capital purposes.
6.
In October 2003 the Company retired the note payable of $200,000 which had resulted from the acquisition of Powder River Basin Gas Corp with the issuance of 2,000,000 shares of restricted common stock and a common stock purchase warrant in the amount of 2,000,000 shares at an exercise price of $0.14 per share. Demand rights were granted with the issuance. The term of the warrant is one year.
In October 2003 the Company entered into a letter of understanding and a subsequent stock sale agreement to sell 23,885,000 shares of the common stock of Powder River Basin Gas Corp of the 25,385,000 shares it presently owns. Under the terms of the agreement, if completed, the Company would receive $175,000 in cash (less broker’s fees of 10%); a secured note in the amount of $47,884.47; and a 12.5% carried working interest in the development of the leases owned by Powder River. The purchaser is required to purchase the convertible notes of Powder River in the approximate amount of $315,000 and to commit a minimum of $750,000 to the development of the leases owned by Powder River. Closing is scheduled for December 2003.
The Company has received an offer to purchase substantially all of its mining claims, however no agreements have been completed and there is no guarantee that negotiations between the Company and the potential purchaser will be successful and result in a closing.
Business Strategy
The Company’s business strategy changed with the acquisition of Ridgepointe in August 1993 and the change of management to its current management. The Company had used its limited oil and gas assets to provide the working capital necessary to expand and develop its mineral mining activities. The Company’s initial emphasis on mining ventures reflected its belief that quality opportunities still existed in many areas of mineral mining for small mining companies. As a result, the Company acquired and tested a significant mineral property sufficient in size to provide a unique development opportunity for the Company’s future growth, when fully operational. With the acquisition of control of Warrior Resources, Inc., management has renewed its focus on oil and natural gas opportunities and in particular the acquisition of small public energy companies that are having difficulty achieving liquidity for their investors in today’s markets. The Company believes that significant opportunities are available through strategic mergers and acquisitions in the energy industry in the small capitalization sector. 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.
7.
Reserves
Oil and Natural Gas
The following table is a summary, as of July 31, 2003, of the proved reserves of oil and natural gas net to the Company’s interest in the Bovina field based upon estimates prepared by the Company. These estimates are based on assumptions the Company believes are reasonable regarding production costs, future production rates and declines. These estimates are based upon constant prices and costs as of July 31, 2003. 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 judgment. 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 could be revised. No estimates have been filed with or included in reports to any Federal Authority or agency other than the Securities and Exchange Commission (“SEC”). The Company has no reserves outside the United States.
| As of July 31, 2003 | ||||||||
Category | Oil (MBO) | Natural Gas (MMCF) | Future Net Revenue (M$) | Present Value Discounted @ 10% (M$) | ||||
Producing | — | 30 | 113.5 | 86.9 | ||||
Non-Producing | 13.1 | 126 | 1,041.0 | 425.0 | ||||
Undeveloped | — | 324 | 982.8 | 451.7 | ||||
Total Proved | 13.1 | 480 | 2,137.3 | 963.6 | ||||
Acreage - The following table shows the developed and undeveloped leasehold acreage held by the Company as of July 31, 2003:
| Developed Acreage | Undeveloped Acreage | |||||||
| (1) Gross | (2) Net | (1) Gross | (2) Net | |||||
Mississippi | 960 | 88.3 | 0 | 0 | ||||
Total | 960 | 88.3 | 0 | 0 | ||||
Productive Wells - The following table summarizes the productive oil and gas wells in which the Company had an interest at July 31, 2003:
| Oil Wells | Gas Wells | Total | ||||||||||
| (1)Gross | (2)Net | (1)Gross | (2)Net | (1)Gross | (2)Net | |||||||
Mississippi | 1 | 0.15 | 2 | 0.12 | 3 | 0.27 | ||||||
Total | 1 | 0.15 | 2 | 0.12 | 3 | 0.27 | ||||||
| (1) | A “gross acre’ or a “gross well” is an acre or well in which a working interest is owned by the Company and the number of gross acres or gross wells is the total number of acres or wells in which a working interest is owned by the Company. |
8.
| (2) | A “net acre” or a “net well” exists when the sum of the Company’s fractional ownership interests in gross acres or gross wells equals one. The number of net acres or net wells is the sum of the fractional interests owned in gross acres or gross wells, and does not include any royalty, overriding royalty or reversionary interests. |
Production, Price and Cost Data - The following table summarizes certain information relating to the production, price and cost data for the Company for the fiscal years ended, July 31, 2003, 2003, 2001.
| Year Ended July 31 | |||||||
| 2003 | 2002 | 2001 | |||||
Oil: | |||||||
Production (Bbls) | 74 | 0 | 0 | ||||
Revenue | $ | 1,901 | 0 | 0 | |||
Average barrels per day | 0 | 0 | 0 | ||||
Average sales price per barrel | $ | 25.69 | 0 | 0 | |||
Natural Gas: | |||||||
Production (Mcf) | 2,158 | 0 | 0 | ||||
Revenue | $ | 10,766 | 0 | 0 | |||
Average Mcf per day | 6 | 0 | 0 | ||||
Average sales price per Mcf | $ | 4.99 | 0 | 0 | |||
Production costs(1) | $ | 38,367 | 0 | 0 | |||
Equivalent (Bbls) (2) | 433 | 0 | 0 | ||||
Production costs per equivalent bbl equivalent bbl | $ | 88.61 | 0 | 0 | |||
Total oil and gas revenues | $ | 12,667 | 0 | 0 | |||
| (1) | Includes workover expenses |
| (2) | Gas production is converted to barrel equivalents at the rate of six Mcf per barrel representing the estimated relative energy content of natural gas to oil. |
9.
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.
Reserves
Mining
The following table sets forth estimates as of July 31, 2003 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 judgment. 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, 2003 Net Mineable Reserves | ||||||||||
Claim Group | Location | Acres | Gold Grade | Gold | Copper | |||||
UFO Mine (1) | Arizona | 400 | 0 | 0 | 600,000 | |||||
Duke Mine | Utah | 1,920 | 0.10 | 4,883,750 | 0 | |||||
Total | 1,920 | 0.10 | 4,883,750 | 600,000 | ||||||
Gold Grade (oz/ton) ;Gold(oz); Copper(lbs)
| (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. |
Principal Exploration and Development Projects: Mining Ventures:
United States
UFO Mine - Until the formation of the Joint Venture, subsequent to year end 1998, 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 began initial operations in 1998. The results of initial recovery tests for platinum group metals was disappointing and the Joint Venture Manager suspended operations to seek an industry partner or other financing for the development of the copper and gold reserves known to exist on the claims. The Company does not expect any activity during the current fiscal year.
10.
Duke Mine - The primary focus of the Company during fiscal 2000 has been the financing 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
11.
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. Upon completion of its pilot tests, the Company suspended any further operations until construction of a full-scale modular facility can be completed. Subject to capital availability, permitting and construction schedules, the Company plans to construct a full scale facility at a cost of $8.0 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. Presently there are 5 other companies active in the development of claims in the vicinity of the Duke Mine. At the present, the company is negotiating with a potential partner to provide the capital to begin full scale development. Recently the company has entered into discussions with a mining company to provide the capital and manage the development of the mine. No assurances can be given that an agreement can be reached at this time.
Competition
There are many companies and individuals engaged in the oil and gas business. Some are very large and well established with substantial capabilities and long earnings records. The Company is at a competitive disadvantage with some other firms and individuals in acquiring and disposing of oil and gas properties, since they have greater financial resources and larger technical staffs than the Company. In addition, in recent years a number of new small companies have been formed which have objectives similar to those of the Company and which present substantial competition to the Company.
A number of factors, beyond the Company’s control and the effect of which cannot be accurately predicted, affect the production and marketing of oil and gas and the profitability of the Company. These factors include crude oil imports, actions by foreign oil producing nations, the availability of adequate pipeline and other transportation facilities, the marketing of competitive fuels and other matters affecting the availability of ready market, such as fluctuating supply and demand.
The Company currently sells a substantial portion of its oil production to EOTT and its gas production to Texas Energy Marketing. The Company has no written contracts with any purchasers. The Company does not believe that the loss of either of these purchasers would significantly impair its operation.
The acquisition of mining claims prospective for precious metals or other minerals or oil and natural gas leases 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.
12.
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 oil and natural gas and mining industry. Legislation affecting these industries is under constant review for amendment or expansion. Numerous departments and agencies, both federal and state, have issued rules and regulations binding on the oil and natural gas and mining industry and their individual members some of which carry substantial penalties for the failure to comply. The regulatory burden on these industries increases their cost of doing business and consequently, affects their profitability. Inasmuch as such laws and regulations are frequently amended or reinterpreted, the Company is unable to predict the future cost or impact of complying with such regulations.
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.
13.
It is possible that increasingly strict requirements will be imposed by environmental laws and enforcement policies hereunder. 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.
Title to Properties
Oil & Natural Gas. The Company at present owns 36% of the common stock and provides management for Warrior Resources. In general, limited or only old title opinions exist on the leases, however, title surveys have been conducted in the normal course of the Company’s financing efforts. The Company has reviewed the validity and recording of the leases at the county courthouses in which the properties are located and believes that it holds valid title to its 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 oil and natural gas properties, wells and facilities and 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.
14.
The Company employs one person in its Evansville, Indiana office whose functions are associated with management, operations and accounting. The Company uses independent contractors to supervise its oil, gas and mining business.
Imperial Petroleum, Inc. versus Ravello Capital LLC: The Company filed suit in Federal District Court in Tulsa County, Oklahoma against Ravello Capital LLC on November 20, 2000. The suit alleged breach of contract and sought to have the contract declared partially performed in the amount of $74,800 and sought relief in the amount of $488,390 for the unpaid consideration and punitive damages and attorneys fees. The Company received a judgment award against Ravello in the amount of $488,390 and subsequently collected and credited the judgment in the amount of $85,638.02 as a result of the re-issuance of certain of its shares in Warrior, held by Ravello in escrow and not released. The Company is pursuing the balance of the judgment against Ravello.
Item 4. Submission of Matters to a Vote of Security Holders.
None.
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. From 1984 to 1997 trading had been so limited and sporadic that it was 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 was advised that trading in its shares resumed in September 1997 and the Company’s stock was quoted at approximately $0.25 per share in sporadic trading. At July 31, 2003, the approximate bid price for the Company’s common stock was $0. 085 per share and the approximate asked price was $0.10 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.
There are approximately 626 holders of record of the Company’s common stock.
15.
Item 6. Selected Financial Data
| 2003 | 2002 | 2001 | 2000 | 1999 | |||||||||||
Operating Revenue | 0 | 0 | 0 | 0 | 53,744 | ||||||||||
Income (loss) from continuing opns | (1,342,321 | ) | (855,719 | ) | (1,282,523 | ) | (952,854 | ) | (1,006,421 | ) | |||||
Net Income (loss) | (1,312,597 | ) | (820,242 | ) | (1,373,443 | ) | (1,013,299 | ) | (1,006,421 | ) | |||||
Net Income (loss) Per share | (0.05 | ) | (0.05 | ) | (0.10 | ) | (0.08 | ) | (0.10 | ) | |||||
Total Assets | 2,535,734 | 495,090 | 644,323 | 1,426,813 | 1,947,939 | ||||||||||
Stockholder’s Equity | 67,934 | (1,830,357 | ) | (1,677,054 | ) | (673,594 | ) | 166,463 | |||||||
Cash Dividends Paid per Common Share | 0 | 0 | 0 | 0 | 0 | ||||||||||
Number of Outstanding Shares (weighted) | 24,777,057 | 16,598,593 | 13,144,969 | 12,560,958 | 9,627,006 |
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 and (iv) the level of and interest rates on borrowings. The Company will need to rely on the initiation operations on its mining ventures and its oil and natural gas operations to generate cash flow and future profits. The same factors listed above will apply to the sale of minerals and metals mined by the Company as well as oil and natural gas produced by the Company. As the Company initiates production on its mining properties, results of operations will be affected by: (i) commodity prices for copper and gold. (ii) the quantity and quality of the ores recovered and processed and (iii) the level of operating expenses associated with the mining operations.
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 $400.00 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.
16.
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 $0.80 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.
Upon 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.
Development of its oil and natural gas leases will subject the Company’s revenues to the fluctuations inherent in the energy business for the last several years. Crude oil and natural gas prices have reached record highs during the last several months and expectations are that prices for these commodities will remain above prior levels in the future. Current crude oil prices as posted on the New York Mercantile Exchange (NYMEX) are in the $28.00 to $33.00 per barrel range while natural gas prices reached highs of $9.00 per MMBTU during the winter months of 2000, but have settled into the $4.00-$5.00 range and are currently at or near $7.00 per MMBTU. The Company expects energy prices to continue to be volatile in the future.
Year ended July 31, 2003 compared to year ended July 31, 2002. Total revenues for the Company for the year ended July 31, 2003 were $94,000 compared to $0 for the year ended July 31, 2002 and reflects management fees as a result of the Company’s acquisition and management of the business of Warrior Resources, Inc. The Company expects its revenues to remain marginal until it closes the purchase of the presently pending acquisitions or begins continuous operations on the Duke Mine.
Operating expenses for the year ended July 31, 2003 were $38,367 compared to $0 for the same period a year earlier and reflect the acquisition of a direct interest in the Bovina field. The Company does not expect to incur substantial operating expenses until it completes its oil and gas acquisitions or one of its mining operations is in continuous operation. General and administrative expenses increased dramatically from $466,875 for the year ended July 31, 2002 to $900,560 for the year ended July 31, 2003 and reflects the consolidation of the Powder River Basin Gas Corp subsidiary and the increased level of activity due to the Company’s acquisition efforts. The Company expects the level of its general and administrative expenses to remain high as it completes the oil and gas acquisitions planned and begins operation on the Duke Gold Mine.
17.
The Company incurred an after tax net loss of $312,212 ($0.01 per share) for the year ended July 31, 2003 compared to an after tax net loss of $820,242 ($0.05 per share) for the prior year. The decrease in the loss is a result of the extraordinary items extinguished by the Company with Merrion Reinsurance company in regards to its silica contract and due to the exchange of warrants for the retirement of accrued salaries due the Company’s President. The Company does not expect to generate a profit until it either completes its acquisitions of oil and gas properties or until its mining operations are in continuous operations.
Year ended July 31, 2002 compared to year ended July 31, 2001. The Company generated no revenues during the year ended July 31, 2002 or the year ended July 2001. The Company expects its revenues to remain marginal until it begins continuous operations on the Duke Mine planned for 2003.
Operating expenses for the year ended July 31, 2002 and for the year ended July 31, 2001 were both $0 the lack of any significant operations during the most recent fiscal year. The Company does not expect to incur substantial operating expenses until its mining or oil and natural gas operations are in continuous operation. General and administrative expenses increased to $466,875 for the year ended July 31, 2002 from $285,281 for the year ended July 31, 2001 and reflects the expenses associated with the purchase of control of Warrior, the development of the Rx Power business, the environmental business and funding of engineering and other overhead costs from the prior year. The Company expects the level of its general and administrative expenses to remain high during the period of high acquisition activity and until the Duke mine is in continuous operation.
The Company incurred an after tax net loss of $820,242 ($0.05 per share) for the year ended July 31, 2001 compared to an after tax net loss of $1,373,443 ($0.10 per share) for the prior year. The net loss is comprised of impairment losses as a result of the Warrior acquisition of $388,844 and $997,242 as of July 31, 2002 and July 31, 2001 respectively. The balance of the net loss is a result of general and administrative costs incurred. The Company does not expect to generate a profit until its mining operations are in continuous production or until it develops significant oil and gas operations.
Year ended July 31, 2001 compared to year ended July 31, 2000. The Company generated no revenues during the year ended July 31, 2001 or the year ended July 2000. The Company expects its revenues to remain marginal until it begins continuous operations on the Duke Mine planned for 2002.
Operating expenses for the year ended July 31, 2001 were $0 compared to $7,407 for the same period a year earlier and reflect the startup of operations in the environmental business during the prior year in contrast to the lack of any operations during the most recent fiscal year. The Company does not expect to incur substantial operating expenses until its mining or oil and natural gas operations are in continuous operation. General and administrative expenses decreased to $285,281 for the year ended July 31, 2001 from $570,012 for the year ended July 31, 2001 and reflects the reduced expenses associated with the environmental business, the Duke Gold Mine pilot plant operation and funding of engineering and other overhead costs from the prior year. The Company expects the level of its general and administrative expenses to remain high until advance studies and other planning is completed and the mine is in continuous operation.
18.
The Company incurred an after tax net loss of $376,201 ($0.03 per share) for the year ended July 31, 2001 compared to an after tax net loss of $638,602 ($0.05 per share) for the prior year. The decrease in the loss is a result of the decrease in general and administrative expenses from the prior year. The Company does not expect to generate a profit until its mining operations are in continuous production.
Capital Resources and Liquidity.
The Company’s capital requirements relate primarily to its mining activities and the expansion of those activities and the development of its oil and natural gas business. 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.
Because of the inability of the Company to raise capital, Management decided to terminate all of the Company’s mining lease commitments except the Duke Gold Mine in Utah during fiscal 2000. As a result, the Company is active in only one mine that will require significant capital expenditures .Recent increases in gold prices has sparked renewed interest in the gold mining business and the Company is presently negotiating with another mining company to develop the Duke Mine with limited capital exposure to the Company. There is no assurance that a suitable agreement can be reached. In 2000, management determined that the Company should position itself in high-profile natural gas projects in an effort to attract capital and as a result of increasing demand for natural. The Company completed the acquisition of control of Warrior Resources, Inc. on February 13, 2002. Warrior had experienced a considerable degree of decline in its operations and financial condition as a result of management and director disagreements that had led to lawsuits and disrupted the continuity of management of Warrior. The Company acquired approximately a 36% overall stock position in Warrior and assumed management control. In assuming management control and consolidating Warrior’s operations, the Company eliminated approximately $65,000 per month in Warrior���s overhead and was able to complete a refinancing of Warrior’s principal bank debt. In addition, the Company assisted Warrior in eliminating approximately $1.7 million in third party trade and note payables and settled its remaining outstanding lawsuits. Warrior has begun a work program on its properties to increase cash flow, which was successful in stabilizing the Warrior. Due to the termination of the merger agreement with Warrior, the Company is entitled to receive compensation in the amount of $200,000 or an equivalent value of Warrior common stock issued at $0.02 per share. As a result of the refinancing of Warrior’s debt, the Company has begun to invoice Warrior for use of its facilities and office space and for management time spent on Warrior at the rate of $10,000 per month. Under the terms of Warrior’s refinancing which expires on December 31, 2003, the Bank has the right to foreclose on the oil and gas assets if not paid in full at that time. Warrior entered into an agreement with the Company, with the approval of a majority of its shareholders, to sell all of its assets and liabilities to the Company in exchange for the payoff of the bank debt, retirement of the notes payable to the Company and 2 million shares of the Company’s common stock. Closing is expected on or before December 31, 2003.
19.
The Company has a wide degree of discretion in the level of capital expenditures it must devote to the mining project on an annual basis and the timing of its development. 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 in the future, Management believes the Company will need to raise capital from outside sources during fiscal 2003. The Company retained Jefferies & Company to assist in the financing of certain acquisitions in the oil and gas sector, including the acquisition of the Warrior properties. Through that effort the Company has received an indicative term sheet from Hybridge/Zwirn Capital Management LLC to provide reserve-based financing up to $18.0 million for the acquisitions discussed above and to develop the Company’s reserve base. The Company has been providing the due diligence materials required by the lender to proceed to a closing.
As a result of the acquisition of control of Oil City and the subsequent sale of Oil City’s assets to Comanche, the Company owned 5,481,901 shares of the restricted common stock of Comanche. The Company entered into a transaction with Ravello Capital LLC in order to raise cash to pay off a judgment creditor, its private, non-affiliate noteholders and to raise capital for its New Albany Shale Project. As discussed previously, Ravello paid the judgment creditor, however, it failed to complete the balance of the transaction and the Company filed suit against Ravello for breach of contract, among other things. The Company was awarded a monetary judgment in the amount of $448,390 against Ravello and subsequently received the reissued shares of common stock in Comanche (now Warrior) and credited the judgment in the amount of $85,638.02. The balance of the judgment remains unsatisfied.
The Company intends to continue to pursue each of the above transactions in an effort to finance its operations, however, in the event that additional capital is not obtained from other sources, it may become necessary to alter development plans or otherwise abandon certain ventures.
20.
Although the timing of expenditures for the Company’s mining and oil and natural gas activities are distributed over several months, the Company anticipates its current working capital will be insufficient to meet its capital expenditures. 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 or oil and natural gas 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 and oil and natural gas 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.
The Company sold its oil and gas properties in October 1996 and its Premier Operating subsidiary and paid off its then existing credit facility with Bank of Oklahoma. As a result the Company presently has no credit facility available to fund its mining or oil and natural gas activities and will be required to rely on private debt placements or equity sales to fund any remaining capital expenditures. As discussed above the Company is presently providing due diligence materials to a potential new lender for the Company’s activities.
The Company has obtained certain unsecured loans from its Chairman and President, Jeffrey T. Wilson, and entities controlled by Mr. Wilson which total in principal $741,517 as of July 31, 2003. These funds have been used to initiate the Company’s oil and gas and mining activities and fund its overhead requirements. 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, 2003, the Company had current assets of $84,392 and current liabilities of $2,114,280, which resulted in negative working capital of $2,029,888. The negative working capital position is comprised of accounts payable of $179,974, notes payable to shareholders and related parties totaling $741,517, accrued salaries and expenses totaling $501,389 and third party notes payable of $691,400. As discussed earlier, if the Company is unsuccessful in obtaining outside capital certain mining or oil and natural gas 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 2003. The previously discussed transactions regarding equity infusions, if successful, will provide the Company with sufficient funds to pursue its mining and oil and natural gas ventures on the timely basis as discussed herein. 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 or abandon certain of its assets to meet its obligations.
21.
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 and due to fluctuations in energy prices due to seasonal variations. To date these variations have been minimal. 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. As operations commence and production is realized on its mining and oil and natural gas properties, these influences will become more significant.
Inflation and Prices
The Company’s revenues and the value of its mining and oil and natural gas properties have been and will be affected by changes in copper and gold prices and the prices for crude oil and natural gas. The Company’s ability to obtain additional capital on attractive terms is also substantially dependent on the price of these commodities. Prices for these commodities are subject to significant fluctuations that are beyond the Company’s ability to control or predict.
Item 8. Financial Statements and Supplementary Data.
Audited Financial Statements of Imperial Petroleum, Inc.
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Item 9. Changes in and Disagreements with Accountants on Accounting And Financial Disclosure.
Not applicable.
Item 9a. Controls and Procedures.
In connection with the preparation of this annual report on Form 10-K, our President and Chief Executive Officer, evaluated the effectiveness of the disclosure controls and procedures as of the end of the period covered by this report, and concluded that disclosure controls and procedures were effective to ensure that information the Company is required to disclose in the reports that it files or submits with the Securities and Exchange Commission under the Securities Exchange Act of 1934 (the “Exchange Act”) is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission’s rules and forms, and to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the Company’s management, including its Board of Directors, President and Chief Executive Officer, as appropriate to allow timely decisions regarding required disclosure.
There have been no changes to the Company’s system of internal control over financial reporting during the year that has materially affected, or is reasonably likely to materially affect, the Company’s system of controls over financial reporting.
23.
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. (Mr. Malcolm W. Henley and Mrs. Stacey D. Smethers, former directors of the Company resigned their director positions effective August 15, 2001 to pursue other interests. As a result, Annalee C. Wilson and Aaron M. Wilson were appointed as directors of the Company until independent directors are elected at the next shareholder’s meeting.)
Name | Age | Position | ||
Jeffrey T. Wilson | 50 | Director, Chairman of the Board, President and Chief Executive Officer | ||
Annalee C. Wilson | 46 | Director | ||
Aaron M. Wilson | 24 | Director |
Jeffrey T. Wilson has been Director, Chairman of the Board, President and Chief Executive Officer of the Company since August 1993. Mr. Wilson was 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.
Annalee C. Wilson has been a Director of the Company since August 2001. Mrs. Wilson is the President of HN Corporation, an affiliate of the Company engaged in the operation of retail franchise outlets in malls selling motivation and inspiration material developed by Successories, Inc. and others and in the operation of a Christian restaurant and gift shop. Mrs. Wilson has an Associate Degree in Nursing from the University of Evansville.
Aaron M. Wilson has been a Director of the Company since August 2001. Mr. Wilson is a Vice president of HN Corporation and is the Manager of the Successories franchise store located at Castleton Square Mall owned by HN Corporation. Mr. Wilson received a dual degree in Business Economics and Political Science from the University of Kentucky in 2002.
24.
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.
Based upon a review of From 3, 4 and 5 filings made by the Company’s officers and directors during the past fiscal year ended July 31, 2002 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. Except as provided in the table below, during the three fiscal years ended July 31, 2003, 2002 and 2001 (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 although during 2003, Mr. Wilson agreed to accept 1.0 million warrants exercisable at $0.25 per share in exchange for the retirement of $808,508 in accrued salaries.
25.
SUMMARY COMPENSATION TABLE
| Annual Compensation | Long Term Awards Warrants | ||||||||
Name and Principal Position | Year | Salary | Bonus | # shares | |||||
Jeffrey T. Wilson | 2003 | $ | 125,000 | — | — | ||||
| 2002 | $ | 125,000 | — | 200,000 | |||||
| 2001 | $ | 125,000 | — | — | |||||
Annalee C. Wilson | 2002 | — | — | — | |||||
| 2001 | — | — | — | ||||||
| 2000 | — | — | — | ||||||
Aaron M. Wilson | 2002 | — | — | — | |||||
| 2001 | — | — | — | ||||||
| 2000 | — | — | — | ||||||
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. Annalee C. Wilson Aaron M. Wilson were not directors of the Company during fiscal 2003, and neither received any compensation from the Company during that period.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
As of July 31, 2003, the Company has 30,948,103 issued and outstanding shares of common stock. The following table sets forth, as of July 31, 2003, 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 31,2003, the Company had approximately 636 holders of common stock of record.
Name of Beneficial Owner of Class | Number of Shares Beneficially Owned | Percent | |||
Jeffrey T. Wilson (1) | 5,591,766 | 18.1 | % | ||
Annalee C. Wilson(2) | 1,437,711 | 4.6 | % | ||
Aaron M. Wilson (3) | 119,834 | 0.3 | % | ||
All officers and directors as a Group (3 people) at 7/31/2002 | 7,149,311 | 23.1 | % | ||
HN Corporation(4) | 1,271,555 | 4.1 | % | ||
James M. Clements(5) | 1,600,000 | 5.1 | % | ||
Estate of Luther Henderson(6) | 2,266,457 | 11.7 | % | ||
Taghmen Ventures Ltd | 2,650,000 | 8.5 | % | ||
Total officers, directors and 5% shareholders | 13,665,768 | 44.2 | % | ||
| (1) | The mailing address of Mr. Wilson is 11600 German Pines, Evansville, IN 47725. Includes 589,584 shares held jointly with Mrs. Wilson; includes 423,428 shares owned by HN Corporation in which Mr. Wilson owns 33.3%. Does not include 50,000 shares held in Trust by Old National Bank for Mr. Wilson’s children. |
| (2) | The mailing address of Mrs. Wilson is 800 N. Green River Road, Evansville, IN 47715. Includes 589,584 shares held jointly with Mr. Wilson; includes 848,127 shares owned by HN Corporation in which Mrs. Wilson owns 66.7%. Does not include 50,000 shares held in Trust by Old national Bank for Mrs. Wilson’s children. |
| (3) | The mailing address for Mr. Wilson is 11600 German Pines Drive, Evansville, IN 47725. Includes 16,500 shares held in Trust by Old National Bank. |
| (4) | The mailing address of HN Corporation is 800 N. Green River Rd., Evansville, IN 47715. Mrs. Annalee Wilson is the President of HN Corporation, Jeffrey T. Wilson is the Vice President of HN Corporation and Aaron M. Wilson is a Vice President of HN Corporation. |
| (5) | Mr. Clements’ mailing address is 5972 Arboles St, San Diego, CA 92120 |
| (6) | The Executor of Mr. Henderson’s Estate is Mr. Ajit Jhangiani. The address is 5608 Malvey, Suite 104, Fort Worth, TX 76107. |
| (7) | The address of Taghmen Ventures Ltd. is EFG House, St Julian’s Avenue, St Peter Port Guernsey |
26.
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 $631,044 in principal as of July 31, 2003.
HN Corporation, a private retail company owned by Mr. Wilson and his wife, has made unsecured loans to the Company which total $110,473 in principal as of July 31, 2003. Annalee Wilson serves as the President of HN Corporation and owns 66.7% of its common stock, Jeffrey T. Wilson serves as the Vice President and Secretary of HN Corporation and owns 33.3% of its stock and Aaron M. Wilson serves as a Vice President of HN Corporation.
27.
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, 2003 and 2002; Consolidated Statements of Operations for the years ended July 31, 2003, 2002, and 2001; Consolidated Statements of Stockholder Equity for the years ended July 31, 2003, 2002, and 2001; Consolidated Statements of Cash Flows for the years ended July 31, 2003, 2002, and 2001;
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.
Report on Form 8-K filed February 13, 2002 with the Securities and Exchange Commission.
(c) Exhibits. None.
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.
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.
28.
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;
31.1 Certification
32 Certification Pursuant to 18 U.S.C. Section 1350
99 Additional Exhibits; Not applicable.
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: June 23, 2006 | /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 | |||
| Jeffrey T. Wilson | Officer (Principal Executive Officer) and Director | June 23, 2006 |
29.
IMPERIAL PETROLEUM, INC.
and
SUBSIDIARIES
CONSOLIDATED
FINANCIAL STATEMENTS
AS OF JULY 31, 2003 and 2002
and
FOR THE YEARS ENDED
July 31, 2003 and 2002
INDEPENDENT AUDITOR’S REPORT
and
SUPPLEMENTAL INFORMATION
(UNAUDITED)
July 31, 2003 and 2002
TABLE OF CONTENTS
| Page | ||
| F-1 | ||
Consolidated Financial Statements: | ||
| F-3 | ||
| F-4 | ||
| F-5 | ||
| F-6 - F-7 | ||
| F-8 - F-31 | ||
| F-32 - F-34 | ||
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, 2003 and 2002 and the consolidated statements of operations, stockholders’ equity, and cash flows for the years ended July 31, 2003 and 2002. 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 auditing standards generally accepted in the United States of America. 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, 2003 and 2002 and the results of its operations and its cash flows for the years ended July 31, 2003 and 2002, in conformity with accounting principles generally accepted in the United States of America.
F-1
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 and substantial working capital deficiencies. 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 accompanying supplementary information on pages 31-33 is not a required part of the basis financial statements but is supplementary information required by accounting principles generally accepted in the United States of America. We have applied certain limited procedures, which consisted principally of inquiries of management regarding the methods of measurement and presentation of the supplementary information. However, we did not audit the information and express no opinion on it.
BRISCOE, BURKE & GRIGSBY LLP
Certified Public Accountants
December 13, 2003, except for Note 13, as to which the date is June 8, 2005. 3
Tulsa, Oklahoma
F-2
Consolidated Balance Sheets
July 31, 2003 and 2002
| 2003 | 2002 | |||||||
ASSETS | ||||||||
Current assets: | ||||||||
Cash | $ | — | $ | 2,869 | ||||
Accrued interest receivable | — | 45,755 | ||||||
Prepaids | 84,392 | — | ||||||
Total current assets | 84,392 | 48,624 | ||||||
Property, plant and equipment (Notes 1, 2, and 4): | ||||||||
Mining claims, options and development costs less impairment | 41,760 | 41,760 | ||||||
Oil and gas properties (full cost method) | 1,389,067 | |||||||
Equipment | — | 1,107 | ||||||
Acquisition in progress (Note 13) | 980,211 | 4,000 | ||||||
| 2,411,038 | 46,867 | |||||||
Less: accumulated depr | — | 1,107 | ||||||
Net property, plant and equipment | 2,411,038 | 45,760 | ||||||
Other assets: | ||||||||
(2,243,304) | ||||||||
Notes receivable - related parties (Note 3) | — | 192,408 | ||||||
Investments - Warrior Resources (Notes 2 and 11) | 40,304 | 208,298 | ||||||
Total other assets | 40,304 | 400,706 | ||||||
TOTAL ASSETS | $ | 2,535,734 | $ | 495,090 | ||||
LIABILITIES and STOCKHOLDERS’ EQUITY | ||||||||
Current liabilities: | ||||||||
Accounts payable | 179,974 | 92,263 | ||||||
Accrued expenses (Note 17) | 501,389 | 1,083,008 | ||||||
Notes payable (Note 6) | 691,400 | 80,000 | ||||||
Notes payable - related parties (Note 7) | 741,517 | 765,817 | ||||||
Total current liabilities | 2,114,280 | 2,021,088 | ||||||
Noncurrent liabilities: | ||||||||
Unearned revenue – noncurrent (Note 16) | — | 304,359 | ||||||
Deferred income taxes (Note 5) | — | — | ||||||
Total noncurrent liabilities | — | 304,359 | ||||||
Minority interest (Note 1) | 353,520 | — | ||||||
Stockholders’ equity | ||||||||
Common stock of $.006 par value, authorized 50,000,000 shares; 30,948,103 issued in 2003 and 39,363,946 shares in 2002 | 185,689 | 236,184 | ||||||
Paid-in capital | 7,981,966 | 6,247,583 | ||||||
Deficit accumulated before the development stage | (89,525 | ) | (89,525 | ) | ||||
Deficit accumulated during the development stage | (7,302,892 | ) | (5,981,295 | ) | ||||
Treasury stock, at cost (1,368,957 shares in 2003 and 21,368,957 shares in 2002) | (707,304 | ) | (2,243,304 | ) | ||||
Total stockholders’ equity (deficit) | 67,934 | (1,830,357 | ) | |||||
Commitments and contingencies (Note 9) | — | — | ||||||
TOTAL LIABILITIES and STOCKHOLDERS’ EQUITY (DEFICIT) | $ | 2,535,734 | $ | 495,090 | ||||
The accompanying notes are an integral part of these consolidated financial statements.
F-3
(A Development Stage Company)
Consolidated Statements of Operations
For the Years Ended July 31, 2003 and 2002
| 2003 | 2002 | Cumulative from Inception | ||||||||||
Operating Income: | ||||||||||||
Oil and gas and mining | $ | — | $ | — | $ | 924,687 | ||||||
Management fee and other | 0 | — | 216,733 | |||||||||
Total operating income | 94,000 | — | 1,235,420 | |||||||||
Operating expenses: | ||||||||||||
Cost of goods sold | — | — | 110,529 | |||||||||
Lease operating expense | — | — | 765,092 | |||||||||
Research and development | — | — | 7,407 | |||||||||
Impairment loss (Note 11) | 168,367 | 388,844 | 4,178,363 | |||||||||
General and administrative expenses | 942,927 | 466,875 | 4,676,111 | |||||||||
Merger expenses | 231,027 | — | 231,027 | |||||||||
Depreciation, depletion and amortization (Note 2) | — | — | 265,310 | |||||||||
Total operating expenses | 1,342,321 | 855,719 | 10,233,839 | |||||||||
Loss from operations | (1,342,321 | ) | (855,719 | ) | (9,092,419 | ) | ||||||
Other income and (expense): | ||||||||||||
Interest expense | (80,292 | ) | (78,788 | ) | �� | (956,168 | ) | |||||
Interest income | — | 25,433 | 101,220 | |||||||||
Other income | 7,016 | 88,832 | 693,714 | |||||||||
Gain (loss) on sale of assets | 94,000 | 94,000 | ||||||||||
(Note 15) | — | — | 878,048 | |||||||||
Net loss before income taxes | (1,321,597 | ) | (820,242 | ) | (8,281,605 | ) | ||||||
Provision for income taxes: (Note 5) | ||||||||||||
Current | — | — | — | |||||||||
Deferred | — | — | 203,502 | |||||||||
Total benefit from income taxes | — | — | — | |||||||||
Net loss before extraordinary item | (1,321,597 | ) | (820,242 | ) | (8,078,103 | ) | ||||||
Extraordinary item (Note 15) | — | — | — | |||||||||
Net loss | $ | (1,312,212 | ) | $ | (820,242 | ) | $ | (8,078,103 | ) | |||
Loss per share (Note 2) | $ | (.05 | ) | $ | (.05 | ) | ||||||
Weighted average shares outstanding | 24,777,057 | 16,598,593 | ||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
F-4
(A Development Stage Company)
Consolidated Statements of Stockholders’ Equity
For the Years Ended July 31, 2003 and 2002
| Common Stock | |||||||||||||||||||||||
| Shares | Par Value | Paid-In Capital | Additional Retained Deficit | Treasury Stock | Total Stockholders Equity (Deficit) | ||||||||||||||||||
Balances restated, at July 31, 2001 | 13,925,276 | 83,552 | 4,069,776 | (5,250,578 | ) | (579,804 | ) | (1,677,054 | ) | ||||||||||||||
Investments in Warrior Resources | 2,948,457 | 17,691 | 359,712 | — | — | 377,403 | |||||||||||||||||
Stock issued for payment of fees | 1,436,722 | 8,620 | 233,933 | — | — | 242,553 | |||||||||||||||||
Stock issued to pay off interest and debt (Note 6) | 1,053,491 | 6,321 | 97,175 | — | — | 103,496 | |||||||||||||||||
Stock held pending financing | 20,000,000 | 120,000 | 1,416,000 | — | (1,536,000 | ) | — | ||||||||||||||||
Default on subscribed stock | — | — | 70,987 | (127,500 | ) | (56,513 | ) | — | |||||||||||||||
Net loss for the period | — | — | — | (820,242 | ) | — | (820,242 | ) | |||||||||||||||
Balances at July 31, 2002 | 39,363,946 | 236,184 | 6,247,583 | (6,070,820 | ) | (2,243,304 | ) | (1,830,357 | ) | ||||||||||||||
Stock issued in acquisitions | 6,567,130 | 39,401 | 1,297,280 | — | — | 1,336,681 | |||||||||||||||||
Stock issued for payment of fees | 3,172,000 | 19,032 | 575,458 | — | — | 594,490 | |||||||||||||||||
Stock issued to pay off interest and debt (Note 6) | 1,845,027 | 11,072 | 268,260 | — | — | 279,332 | |||||||||||||||||
Stock returned from failed financing | (20,000,000 | ) | (120,000 | ) | (1,416,000 | ) | — | 1,536,000 | — | ||||||||||||||
Net loss for the period | — | — | — | — | (312,212 | ) | (312,212 | ) | |||||||||||||||
Balances at July 31, 2003 | 30,948,103 | $ | 185,689 | $ | 7,981,966 | $ | (7,392,417 | ) | $ | (707,304 | ) | $ | 67,934 | ||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
F-5
(A Development Stage Company)
Consolidated Statements of Cash Flows
For the Years Ended July 31, 2003 and 2002
| 2003 | 2002 | Cumulative from Inception | ||||||||||
Cash flows from operating activities: | ||||||||||||
Net loss | (1,312,212 | ) | $ | (820,242 | ) | |||||||
Adjustments to reconcile net loss to net cash provided by operating activities: | ||||||||||||
Depreciation, depletion and amortization | — | — | 265,310 | |||||||||
Expenses paid with common stock | 764,696 | 242,554 | 2,928,248 | |||||||||
Loss (Gain) on sale and disposal of assets | — | — | (878,048 | ) | ||||||||
Gains on extinguishment of debt | 0 | (775,211 | )) | |||||||||
Write-offs and impairments | 200,561 | 329,417 | 4,206,557 | |||||||||
(Increase) Decrease in accounts receivable - other | ||||||||||||
(Increase) Decrease in accrued interest receivable | — | (25,435 | ) | — | ||||||||
(Increase) Decrease in notes receivable - related party | 28,194 | — | — | |||||||||
(Increase) Decrease in notes receivable -other | — | 10,353 | — | |||||||||
(Increase) Decrease in other assets | ||||||||||||
Increase (Decrease) in accounts payable | 30,000 | (9,542 | ) | — | ||||||||
Increase (Decrease) in a accrued expenses | 189,791 | 195,190 | 978,369 | |||||||||
Increase (Decrease) in unearned revenue | — | — | — | |||||||||
Net cash used for operating activities | (136,549 | ) | (77,705 | ) | (605,816 | ) | ||||||
Cash flows from investing activities: | ||||||||||||
(Purchases) Sales of assets | (42,020 | ) | — | 605,861 | ||||||||
Net cash used for investing activities | $ | (42,020 | ) | $ | — | $ | 605,861 | |||||
The accompanying notes are an integral part of these consolidated financial statements.
F-6
IMPERIAL PETROLEUM, INC.
(A Development Stage Company)
Consolidated Statements of Cash Flows
For the Years Ended July 31, 2003 and 2002
| 2003 | 2002 | Cumulative from Inception | ||||||||
Cash flows from financing activities: | ||||||||||
Increase (Decrease) in notes payable | $ | 200,000 | $ | — | $ | — | ||||
Increase (Decrease) in notes payable related parties | (24,300 | ) | 79,500 | — | ||||||
Net cash provided by financing activities | 175,700 | 79,500 | — | |||||||
Net increase (decrease) in cash and cash equivalents | (2,869 | ) | 1,795 | — | ||||||
Cash and cash equivalents at beginning of year | 2,869 | 1,074 | — | |||||||
Cash and cash equivalents at end of year | $ | — | $ | 2,869 | $ | — | ||||
Supplemental disclosures of cash flow information: | ||||||||||
Cash paid during the period for | ||||||||||
Interest | $ | — | $ | — | $ | — | ||||
Income taxes | — | — | — | |||||||
Supplemental schedule of non cash investing and financing activities: | ||||||||||
Stock issued for fixed assets | $ | 1,287,790 | — | See Footnote 1 | ||||||
Stock issued for services and interest | 764,696 | 242,554 | ||||||||
Stock issued for investment | — | 377,403 | ||||||||
Impairments and write-offs | 172,367 | 329,417 | ||||||||
Stock issued to extinguish debt | 1,009.385 | 103,496 | ||||||||
Total | $ | 3,234,238 | $ | 1,052,870 | ||||||
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 consolidated financial statements.
F-7
(A Development Stage Company)
Notes to Consolidated Financial Statements
1. ORGANIZATION AND BUSINESS COMBINATION
Organization
The Company is attempting to obtain capital, through its wholly owned subsidiary, Ridgepointe Mining Company, to continue testing, defining and developing mineral reserves on mining claims it owns or operates in the southwestern and western United States.
The Company is engaged, through its wholly owned subsidiary Imperial Environmental Company, in developing and marketing water filtration systems to municipalities.
The Company is involved in acquisitions with several entities to acquire oil and gas properties through its parent company Imperial Petroleum, Inc.
During 2003, the Company acquired a 55% interest in Powder River Basin Gas Corp. The Powder River Basin Gas Corp. was incorporated under the laws of Colorado on August 27, 1999 as Celebrity Sports Network, Inc. The principal activities since inception have been organizational matters and obtaining financing. The Company was formed in an effort to broaden the scope of public appearances available to current and former professional athletes. The Company, however, changed their operations in 2001 through a reverse acquisition with Powder River Basin Gas Corp., an oil and gas company.
Powder River Basin Gas Corp. (PRBG) was incorporated in the state of Colorado on June 13, 2001. The Company is engaged in the business of assembling and managing a portfolio of undeveloped acreage in the Powder River basin coal bed methane (CBM) play in Sheridan County, Wyoming. This acreage is located in a proven geological setting and near operators such as Western Gas Resources, Barrett Resources, Phillips Petroleum, J.M. Huber and others. The Company has leasehold interests in 8,096.83 net acres. Two wells have been drilled on one lease and eleven additional wells have been spudded.
Pursuant to a reverse acquisition and reorganization agreement, PRBG was acquired by Celebrity Sports on September 5, 2001. At the time of the acquisition, the Company changed its name to Powder River Basin Gas Corp. The Company issued 9,000,000 shares of common stock for all the issued and outstanding stock of PRBG; thus, making PRBG a wholly-owned subsidiary of the Company.
The Company issued 9,000,000 shares of common stock for the receipt of 9,000,000 shares of PRBG, therefore, an adjustment to the shares outstanding was necessary to reflect the other shareholders of the Company at the time of acquisition. No goodwill was recorded in the acquisition, and the purchase method of accounting was used in recording the business combination.
F-8
IMPERIAL PETROLEUM, INC.
(A Development Stage Company)
Notes to Consolidated Financial Statements
1. ORGANIZATION AND BUSINESS COMBINATION (continued)
Financial Condition
The Company’s financial statements for the year ended July 31, 2003 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 $312,212 and $820,242 for the years ended July 31, 2003 and 2002, respectively, and as of July 31, 2003 has an accumulated deficit of $6,383,032.
Management Plans to Continue As A Going Concern
The Company believes that it will require outside capital to continue as a going concern. In that regard, the Company retained Jeffries & Company, an investment banking firm with expertise in oil and natural gas transactions, to assist the Company in securing financing for its acquisition of the assets and liabilities of Warrior Resources, Inc.; Hillside Oil & Gas LLC and certain assets of Renovared Energy Resources, Inc. As a result, the Company has received an indicative term sheet from Hybridge/Zwirn Capital Management LLC to provide a reserve-based lending facility to the Company of up to $18.0 million to complete these acquisitions and to provide development capital for the assets acquired. The Company is continuing to provide Hybridge with its requested due diligence in an effort to close the transaction.
The Company controls the operations of Warrior Resources, Inc. and acquired control of Powder River Basin Gas Corp in May 2003. As a result of each of these acquisitions, the Company receives management fees in an amount of $15,000 per month which, if continued to be available, will adequately pay for the Company’s current overhead expense. The Company expects to complete a transaction involving the change of control of Powder River in which the Company will receive an interest in the Powder River Basin properties located in Wyoming.
Management continues to pursue other acquisitions and merger opportunities.
F-9
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 canceled 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 Powder River Basin Gas Corporation
Pursuant to a Stock Exchange Agreement dated May 5, 2003 (the “Stock Exchange Agreement”) between Imperial Petroleum, Inc. and the Powder River Basin Gas Corporation (“Powder River”), the Powder River stockholders agreed to exchange (the “Powder River Exchange Transaction”) an aggregate of 25,385,000 shares of the common stock of Powder River, representing 55% of the issued and outstanding common stock of Powder River, for a total of 2,400,000 restricted and 250,000 un-restricted free trading shares of the Company’s common stock representing approximately 10% of the Company’s resulting issued and outstanding common stock. The business combination was accounted for using the purchase method of accounting. As a result, Powder River has become a consolidated subsidiary of the Company. The results of Powder River’s operations have been included in the consolidated financial statements since that date.
F-10
IMPERIAL PETROLEUM, INC.
(A Development Stage Company)
Notes to Consolidated Financial Statements
1. ORGANIZATION AND BUSINESS COMBINATION (continued)
Powder River Basin Gas Corp is an oil and gas exploration company that is engaged in the evaluation and development of coal bed methane reserves as well as shallow oil reserves within the Powder River Basin in the State of Wyoming. The Company hoped to develop these properties but subsequently changed its objective with respect to these holdings. Subsequent to year-end the Company reached an agreement to sell most of its interest in Powder River.
The purchase was valued at $540,000 based on the average trading value of Imperial Petroleum’s issuance of 2,650,000 shares of common stock at acquisition which resulted in its 55% stake in Powder River Basin Gas Corp.
The following table summarizes the estimated fair values of the assets acquired and liabilities assumed at the date of acquisition.
| At May 16, 2003 | |||
Current assets | $ | 2,555 | |
Property, plant and equipment | 1,284,251 | ||
Total assets acquired | 1,286,806 | ||
Current liabilities | 499,518 | ||
Long-term debt | — | ||
Total liabilities assumed | 499,518 | ||
Net assets acquired | $ | 787,288 | |
F-11
IMPERIAL PETROLEUM, INC.
(A Development Stage Company)
Notes to Consolidated Financial Statements
1. ORGANIZATION AND BUSINESS COMBINATION (continued)
Proforma Information
The following financial information is presented as if the companies had been combined for the periods presented:
| 12 Months July 31, 2003 | ||||
Revenues | $ | 109,000 | ||
Operating expenses: | ||||
Impairments | 536,490 | |||
General and administrative | 1,681,206 | |||
Merger expenses | 231,027 | |||
Total operating expenses | 2,448,723 | |||
Other income (expense): | ||||
Interest expense | (105,424 | ) | ||
Other income | 7,016 | |||
Total other income (expense) | (98,408 | ) | ||
Provision for income taxes | — | |||
Extraordinary gains on extinguishment | 1,009,385 | |||
Net loss | $ | (1,428,746 | ) | |
F-12
IMPERIAL PETROLEUM, INC.
(A Development Stage Company)
Notes to Consolidated Financial Statements
1. ORGANIZATION AND BUSINESS COMBINATION (continued)
Development Stage Companies
The Company became a development stage company when in 1993 it acquired Ridgepointe Mining Company and focused its efforts toward mining, eventually divesting its oil and gas properties. Currently the company is pursuing its re-entry into the oil and gas industry and thus remains a development stage company until it completes its acquisitions and major activities commence.
A summary of stock changes in the stockholders’ equity from inception to July 31, 2001 (see statement of stockholder’s equity for subsequent activity) is as follows:
| Common Stock | |||||
| Shares | Amount | ||||
Balances at July 31, 1993 | 12,560,730 | $ | 1,531,438 | ||
Reverse acquisition of Imperial Petroleum, Inc. | 8,117,111 | 259,198 | |||
Acquisition of Premier Operating Company | 749,000 | 276,420 | |||
Stock issued for mining properties | 1,000,000 | 88,743 | |||
Balances at July 31, 1994 | 22,426,841 | 2,155,799 | |||
Stock issued for services | 100,000 | 17,188 | |||
Stock issued for mining properties and equipment | 1,500,000 | 257,812 | |||
Balances at July 31, 1995 | 24,026,841 | 2,430,799 | |||
Stock issued for services | 500,000 | 15,000 | |||
Stock issued for mining properties and equipment | 1,900,000 | 57,000 | |||
Stock issued for investment | 5,000,000 | 42,188 | |||
Balances at July 31, 1996 | 31,426,841 | $ | 2,544,987 | ||
F-13
IMPERIAL PETROLEUM, INC.
(A Development Stage Company)
Notes to Consolidated Financial Statements
1. ORGANIZATION AND BUSINESS COMBINATION (continued)
| Common Stock | ||||||
| Shares | Amount | |||||
Balances at July 31, 1996 | 31,426,841 | $ | 2,544,987 | |||
Reverse split | (26,188,677 | ) | — | |||
Stock issued for mining properties and equipment | 45,000 | 15,270 | ||||
Balances at July 31, 1997 | 5,283,164 | 2,560,257 | ||||
Stock issued for services | 173,575 | 88,090 | ||||
Stock issued for mining properties and equipment | 860,000 | 787,500 | ||||
Stock issued to pay off debt | 153,062 | 101,992 | ||||
Balances at July 31, 1998 | 6,469,801 | 3,537,839 | ||||
Treasury stock issued in contemplation | 1,500,000 | — | ||||
Stock issued for services | 1,036,163 | 169,154 | ||||
Stock issued for equity securities | 1,972,266 | 394,454 | ||||
Stock issued to pay off debt | 550,000 | 106,800 | ||||
Balances at July 31, 1999 | 11,528,230 | $ | 4,208,247 | |||
F-14
IMPERIAL PETROLEUM, INC.
(A Development Stage Company)
Notes to Consolidated Financial Statements
1. ORGANIZATION AND BUSINESS COMBINATION (continued)
| Common Stock | ||||||
| Shares | Amount | |||||
Balances at July 31, 1999 | 11,528,230 | $ | 4,208,247 | |||
Stock cancelled | (650,000 | ) | — | |||
Stock subscribed | 716,666 | 127,500 | ||||
Stock issued to pay off interest and debt | 909,269 | 90,926 | ||||
Balances at July 31, 2000 | 12,504,165 | 4,426,673 | ||||
Stock issued for payment of fees | 500,000 | 40,000 | ||||
Stock issued to pay off interest and debt | 921,111 | 74,284 | ||||
Balances at July 31, 2001 | 13,925,276 | $ | 4,540,957 | |||
F-15
IMPERIAL PETROLEUM, INC.
(A Development Stage Company)
Notes to Consolidated Financial Statements
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The July 31, 2003 and 2002 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 Imperial Environmental Company (formerly Phoenix Metals, Inc.) and its proportionate share of the assets, liabilities, revenues and expenses of Powder River Basin Gas Corporation, for which the company is the majority owner. All significant intercompany accounts and transactions have been eliminated in consolidation.
Use of 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.
Bad Debts
Bad debts on receivables are charged to expense in the year the receivable is determined uncollectible, therefore, no allowance for doubtful accounts is included in the financial statements. Amounts determined as uncollectible are not significant to the overall presentation of the financial statements. During 2003 and 2002 the Company charged off $120,364 and $27,167, respectively.
Financial Instruments
The Company values its financial instruments as required by FASB Statement No. 107, Disclosures about Fair Values of Financial Instruments. The fair value of current assets and current liabilities approximate their reported carrying amounts as of July 31, 2003.
F-16
IMPERIAL PETROLEUM, INC.
(A Development Stage Company)
Notes to Consolidated Financial Statements
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Investments
The equity method of accounting is used for all investments in associated companies in which the Company’s interest is 20% or more. Under the equity method, the Company recognizes its share in the net earnings or losses of these associated companies as they occur rather than as dividends are received. Dividends received are accounted for as a reduction of the investment rather than as dividend income.
The investments are reviewed for impairment whenever events or changes in circumstances indicate the carrying amount of the investment may not be recoverable.
Management Fees
The Company receives a $10,000 per month management fee from Warrior Resources, Inc. Warrior Resources, Inc. is under common control and the Company is involved in an as yet to close acquisition of Warrior’s oil & gas properties as of July 31, 2003. During 2003, the Company has earned $94,000 in management fees.
Concentrations of Credit Risk
Financial instruments that potentially subject the Company to significant concentrations of credit risk consist principally of cash and accounts receivable. The Company places its cash 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 exists that is not covered by the FDIC. The Company currently operates in the mining and environmental technologies industries. 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 is dependent on the continued financial support of its Chief Executive Officer through loans to the Company and salary deferral.
F-17
IMPERIAL PETROLEUM, INC.
(A Development Stage Company)
Notes to Consolidated Financial Statements
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Revenue Recognition
The Company’s consolidated financial statements are prepared using the accrual method of accounting.
Property, Equipment, Depreciation and Depletion
Property and equipment are stated at cost. Depreciation is computed by the straight-line method over the estimated useful lives of 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.
Oil and Gas Properties
The Company follows the full cost method of accounting for oil and gas properties. Accordingly, all costs associated with acquisition, exploration, and development of oil and gas reserves, including directly related overhead costs, are capitalized.
All capitalized costs of oil and gas properties, including the estimated future costs to develop proved reserves, are amortized on the unit-of-production method using estimates of proved reserves. Investments in unproved properties and major development projects are not amortized until proved reserves associated with the projects can be determined or until impairment occurs. If the results of an assessment indicate that the properties are impaired, the amount of the impairment is added to the capitalized costs to be amortized.
In addition, the capitalized costs are subject to a “ceiling test,” which basically limits such costs to the aggregate of the “estimated present value,” discounted at a 10-percent interest rate of future net revenues from proved reserves, based on current economic and operating conditions, plus the lower of cost or fair market value of unproved properties.
F-18
IMPERIAL PETROLEUM, INC.
(A Development Stage Company)
Notes to Consolidated Financial Statements
2. SUMMARY OF ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (continued)
Oil and Gas Properties (continued)
Sales of proved and unproved properties are accounted for as adjustments of capitalized costs with no gain or loss recognized, unless such adjustments would significantly alter the relationship between capitalized costs and proved reserves of oil and gas, in which case the gain or loss is recognized in income.
Long-Lived Assets
Long-lived assets to be held and used or disposed of other than by sale are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. When required, impairment losses on assets to be held and used or disposed of other than by sale are recognized based on the fair value of the asset. Long-lived assets to be disposed of by sale are reported at the lower of its carrying amount of fair value less cost to sell.
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.
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.
Reclassification
Certain amounts in the 2002 consolidated financial statements have been reclassified to conform to the 2003 presentation.
F-19
IMPERIAL PETROLEUM, INC.
(A Development Stage Company)
Notes to Consolidated Financial Statements
2. SUMMARY OF ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (continued)
Newly Issued Pronouncements
In July 2001, the Financial Accounting Standards Board issued two statements - Statement 141, Business Combinations, and Statement 142, Goodwill and Other Intangible Assets.
| Statement 141: | Eliminates the pooling method for accounting for business combinations. | |
| Requires that intangible assets that meet certain criteria be reported separately from goodwill. | ||
| Requires negative goodwill arising from a business combination to be recorded as an extraordinary gain. | ||
Statement 142: Eliminates the amortization of goodwill and other intangibles that are determined to have an indefinite life.
Requires, at a minimum, annual impairment tests for goodwill and other intangible assets that are determined to have an indefinite life.
Upon adoption of these Statements, the Company is required to:
Re-evaluate goodwill and other intangible assets that arose from business combinations entered into before July 1, 2001. If the recorded other intangibles assets do not meet the criteria for recognition, they should be reclassified to goodwill. Similarly, if there are other intangible assets that meet the criteria for recognition but were not separately recorded from goodwill, they should be reclassified from goodwill.
Reassess the useful lives of intangible assets and adjust the remaining amortization periods accordingly.
Write-off any remaining negative goodwill.
The Company completed its assessment of the effects of these new pronouncements on its financial statements and believes the effects to be immaterial. The standards were implemented by the Company in its July 31, 2003 consolidated financial statements.
F-20
IMPERIAL PETROLEUM, INC.
(A Development Stage Company)
Notes to Consolidated Financial Statements
3. NOTES RECEIVABLE - RELATED PARTIES
Notes receivable from related parties was comprised of the following:
| 2003 | 2002 | |||||
Warrior Resources (formerly Comanche Energy) - 9% demand note | $ | — | $ | 110,795 | ||
AQ Technologies - 9% demand note | — | 81,613 | ||||
Total | $ | — | $ | 192,408 | ||
The Company owns 33% of Warrior Resources and has control with Jeffrey Wilson as its CEO. During 2003 the monies advanced to Warrior have been combined into its acquisition in progress of Warrior’s oil and gas properties. The Company’s CEO has guaranteed the note receivable from AQ Technologies (See Note 9) and during 2003 the Company wrote-off the funds advanced under this guarantee.
4. PROPERTY, PLANT and EQUIPMENT
The Company’s mining fixed assets consist of the following:
| 2003 | 2002 | |||||||
Oil and gas properties | $ | 1,389,067 | $ | — | ||||
Mining claims | 74,800 | 74,800 | ||||||
Equipment | — | 1,107 | ||||||
Mine development costs | 32,634 | 32,634 | ||||||
Acquisitions in progress | 980,211 | 4,000 | ||||||
Impairment reserve | (65,674 | ) | (65,674 | ) | ||||
Total | $ | 2,411,038 | $ | 46,867 | ||||
The Company has not completed or updated the necessary reserve studies of its mining claims to determine the metal content of the reserves and the related future production costs which affect the recoverability of the capitalized costs. In addition, the Company’s going concern problem, lack of capital and other factors led management to recognize an impairment reserve to reduce the carrying value to management’s estimate of the amount recoverable upon ultimate disposition. The Company intends to continue to hold and use the impaired assets.
F-21
IMPERIAL PETROLEUM, INC.
(A Development Stage Company)
Notes to Consolidated Financial Statements
4. PROPERTY, PLANT and EQUIPMENT (continued)
The Company accounts for its oil and gas properties under the full cost method. The companies capitalized costs for oil and gas properties result from its 2003 acquisitions of Powder River Basin Gas Corp. and an interest in the Bovina field in Warren County, Mississippi. Due to the stage of development of the Powder River Basin Gas Corp. properties the Company does not have current reserve studies. Subsequent to year-end the Company has entered into an agreement to sell its controlling interest in Powder River Valley Basin to another party.
The Company has $1,284,251 and $104,816 in acquisition costs related to the Powder River Basin Gas Corp. and Bovina field acquisitions respectively at July 31, 2003. See the supplemental information for information relating to oil and gas producing activities.
5. INCOME TAXES
Provisions for income taxes are as follows:
| 2003 | 2002 | |||||
| (in thousands) | ||||||
Current: | ||||||
Federal | $ | — | $ | — | ||
State | — | — | ||||
| $ | — | $ | — | |||
Deferred: | ||||||
Federal | $ | — | $ | — | ||
State | — | — | ||||
| $ | — | $ | — | |||
Income taxes differed from the amounts computed by applying the U.S. federal tax rate as a result of the following:
| 2003 | 2002 | |||||||
| (in thousands) | ||||||||
Computed “expected” tax expense (benefit) | $ | (106 | ) | $ | (279 | ) | ||
State income taxes net of federal benefit | — | — | ||||||
Increase (Decrease) in valuation allowance for deferred tax assets | 106 | 279 | ||||||
Other | — | — | ||||||
Actual income tax expense | $ | — | $ | — | ||||
F-22
IMPERIAL PETROLEUM, INC.
(A Development Stage Company)
Notes to Consolidated Financial Statements
5. INCOME TAXES (continued)
The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and liabilities are presented below:
| 2003 | 2002 | |||||||
| (in thousands) | ||||||||
Deferred tax liabilities: | ||||||||
Property, plant and equipment | $ | — | $ | — | ||||
Other | — | — | ||||||
Total deferred tax liabilities | — | — | ||||||
Deferred tax assets: | ||||||||
Property, plant and equipment | — | — | ||||||
Unrealized loss on securities | 707 | 649 | ||||||
Net operating losses | 1,463 | 1,415 | ||||||
Other | — | — | ||||||
Total deferred tax assets | 2,170 | 2,064 | ||||||
Valuation allowance | (2,170 | ) | (2,064 | ) | ||||
Net deferred tax assets | — | — | ||||||
Net deferred tax asset (liability) | $ | — | $ | — | ||||
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) carryforwards to offset its earnings of approximately $3,144,000. If not previously utilized, the net operating losses will expire in varying amounts from 2014 to 2023.
Due to recurring losses and a lack of funding the Company has not been filing its tax returns. Provisions for current and deferred taxes are estimated using known facts. Any differences from actual are outside of the scope of our examination.
F-23
IMPERIAL PETROLEUM, INC.
(A Development Stage Company)
Notes to Consolidated Financial Statements
6. NOTES PAYABLE
| 2003 | 2002 | |||||
Gary S. Williky, promissory note, dated November 24, 1997, principal due on demand plus interest at 9.0% | $ | 40,000 | $ | 40,000 | ||
Thomas J. Patrick, promissory note, dated December 18, 1997, principal due on demand plus interest at 9.0% | 40,000 | 40,000 | ||||
Note payable to individuals, currently due, including interest at 8% | 200,000 | — | ||||
Note payable to a company, due in total January 2002, including interest at 10% | 86,400 | — | ||||
Note payable to an individual, due in total January 2003, including interest at 12% | 25,000 | — | ||||
Note payable to an individual, due in total in May 2003 | 40,000 | — | ||||
Convertible debenture to a company, due in total by conversion of stock, including interest at 6% | 260,000 | — | ||||
Total | 691,400 | 80,000 | ||||
Less: current portion | 691,400 | 80,000 | ||||
Long-term notes payable | $ | — | $ | — | ||
During the year, the Company issued its restricted common stock to extend due dates and partially satisfy principal and accrued interest. However, the notes payable are currently in default. The Company is currently negotiating with the parties to extend or renew notes payable.
F-24
IMPERIAL PETROLEUM, INC.
(A Development Stage Company)
Notes to Consolidated Financial Statements
7. NOTES PAYABLE - RELATED PARTY
| 2003 | 2002 | |||||
H. N. Corporation - 9.0% demand note | $ | 110,473 | $ | 124,723 | ||
Officer - 10.0% demand note | 111,845 | 111,845 | ||||
Officer - 7.5% demand note | 72,850 | 82,900 | ||||
Officer - 9.0% demand note | 446,349 | 446,349 | ||||
| $ | 741,517 | $ | 765,817 | |||
During the year, the Company issued 1,236,309 shares of its common stock to extend due dates of related party notes.
8. RELATED PARTY TRANSACTIONS
The Company has entered into transactions with its chief executive officer, Jeffrey T. Wilson and a Company owned and controlled by Mr. Wilson, H.N. Corporation. For 2003 and 2002 the Company has accrued an annual salary of $109,500 and $118,500, respectively, for Mr. Wilson. The Company, from time to time, has also entered into loans with its directors, stockholders and related companies (See Notes 3 and 7).
During 2003, the Company issued stock valued at $683,745 and advanced $14,000 in payments of obligations of Warrior Resources, Inc., an affiliate, pursuant to an acquisition of its oil and gas properties.
These transactions were consummated on terms equivalent to those that prevail in arm’s length transactions.
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.
F-25
IMPERIAL PETROLEUM, INC.
(A Development Stage Company)
Notes to Consolidated Financial Statements
9. LITIGATION, COMMITMENTS AND CONTINGENCIES (continued)
Commitments (See Note 16)
The Company’s Chief Executive Officer is a guarantor of a note payable of AQ Technologies. The approximate amount of this guarantee at July 31, 2003 is $65,000. The Company has been servicing the note due to AQ Technoligies’ inability to do so. Monthly payments, including principal and interest, under this note are $2,521. During 2003 it was determined that the amounts previously paid under the guarantee would not be collectible and a $120,364 charge off resulted (See Note 3).
The Company’s subsidiary, Powder River Basin Gas Corp., has entered into various oil and gas leases from several land owners. Associated with the agreements, the Company is committed to various royalty agreements ranging from 15% to 25% of gross revenue production. Some of the leases also provide for a minimum royalty. As of July 31, 2003, no royalties were due.
10. BUSINESS SEGMENTS
The Company’s operations involve mining and environmental operations. The following table sets forth information with respect to the industry segments of the Company.
| 2003 | 2002 | |||||
| (in thousands) | ||||||
Revenues: | ||||||
Oil and gas | $ | — | $ | — | ||
Mining | — | — | ||||
Environmental | — | — | ||||
Other | 94 | — | ||||
Total revenues | $ | 94 | $ | — | ||
F-26
IMPERIAL PETROLEUM, INC.
(A Development Stage Company)
Notes to Consolidated Financial Statements
10. BUSINESS SEGMENTS (continued)
| 2003 | 2002 | |||||
| (in thousands) | ||||||
Identifiable assets: | ||||||
Oil and gas | $ | 2,701 | $ | — | ||
Mining | 42 | 42 | ||||
Environmental | — | 1 | ||||
Other | 130 | 452 | ||||
| $ | 2,873 | $ | 495 | |||
Depreciation and depletion: | ||||||
Oil and gas | $ | — | $ | — | ||
Mining | — | — | ||||
Environmental | — | — | ||||
| $ | — | $ | — | |||
11. INVESTMENTS IN WARRIOR RESOURCES, INC.
During 1999 the Company acquired a stake in Warrior Resources, Inc. which was recorded as an investment under the cost method. Through an exchange transaction in 2002 the Company now has a 32% interest (33,586,473 shares with an undiscounted trading value of $69,805), exceeded the 20% ownership threshold and has the ability to significantly influence the investee, requiring a change to the equity method of accounting.
A change to the equity method of accounting from the cost method of accounting for an investment requires a retroactive adjustment by the investor to its investment, results of operations, and retained earnings in a manner consistent with the step-by-step acquisition of a subsidiary.
F-27
IMPERIAL PETROLEUM, INC.
(A Development Stage Company)
Notes to Consolidated Financial Statements
11. INVESTMENTS IN WARRIOR RESOURCES, INC. (continued)
Warrior Resources common stock is traded publicly on over-the-counter markets. Recurring losses and management representations of the investee provide evidence of impairment of this equity investment. Therefore, the impairment allowance required for equity investments under APB Opinion 18 yields a result which reduces the carrying amount of the equity investment to the lower market value as per quoted market prices (currently $.002) discounted for large block and lack of marketability discounts as applicable. Thus the carrying value is unchanged from that when carried using the cost method of accounting for the investment but the results of operations are restated to reflect the change in the carrying value of the investment. The investment presentation has been changed to reflect the change from the cost method to the equity method. An impairment loss of $168,367 and $388,844 were recognized in 2003 and 2002, respectively. The carrying amount of the investment is as follows:
July 31, 2003 | July 31, 2002 | |||||
Equity in investee net assets | $ | 2,118,951 | $ | 2,118,579 | ||
Impairment allowance | 2,078,647 | 1,910,280 | ||||
Net carrying amount | $ | 40,304 | $ | 208,299 | ||
Condensed selected financial data of Warrior Resources (unaudited) is as follows:
July 31, 2003 | July 31, 2002 | |||||||
Assets | $ | 28,982,195 | $ | 34,404,629 | ||||
Liabilities | 5,150,616 | 5,258,950 | ||||||
Net assets | $ | 23,831,579 | $ | 29,145,679 | ||||
Net income (loss) | $ | (5,314,100 | ) | $ | (5,048,842 | ) | ||
F-28
IMPERIAL PETROLEUM, INC.
(A Development Stage Company)
Notes to Consolidated Financial Statements
12. WARRANTS
The Company has the following warrants outstanding:
200,000 @ $.25, expiring 11/03/04 1,000,000 @ $.25, expiring 6/26/08
During 2003, the Company issued 1,000,000 warrants to its CEO, Jeffrey T. Wilson, in settlement of accrued but unpaid compensation through July, 31, 2002 in the amount of $808,508. This transaction resulted in a gain on extinguishment of debt of $808,508.
13. Net income for 2003 has been adjusted to correct an error, The Company had recognized a gain on extinguishment of $808,508 as a result of its settlement of accrued officers salaries in exchange for warrants with its principal
This adjustment resulted in a decrease in net income for 2003 of $808,508 and an increase to additional paid in capital of $808,508.
Net income for 2003 has been adjusted to correct an error. The Company had recognized a gain of extinguishment of $200,877 as a result of its settlement of a contract to deliver silica ore. This adjustment resulted in a decrease in net income for 2003 of $200,877 and an increase to additional paid in capital of $200,877.
14. ACQUISITIONS IN PROGRESS
The Company is currently involved in the acquisition of oil and gas properties from Warrior Resources, Inc., Hillside Oil and Gas LLC, and Renovared Energy Resources, Inc. The Company has properly executed agreements to acquire oil and gas properties in the United States. Costs incurred pursuant to those acquisitions are $790,211, $160,000 and $30,000 respectively.
The Company is currently in the process in working with its lender to consolidate, finance and close these acquisitions pursuant to the agreements in place.
14. LEASE OBLIGATIONS
During 2002 the Company had a noncancelable operating lease agreement for office space. Total rental expense was $0 and $7,953 in 2003 and 2002, respectively. Currently, the Company offices in Mr. Wilson’s home.
F-29
IMPERIAL PETROLEUM, INC.
(A Development Stage Company)
Notes to Consolidated Financial Statements
| 15. | GAIN ON EXTINGUISHMENT OF DEBT |
During 2003, the Company issued 608,718 shares of its common stock as settlement of the Company’s default on delivery of its silica ore contracts. This transaction resulted in an extraordinary gain of $200,877.
During 2003, the Company issued 1,000,000 warrants, exercisable at $.25, in exchange for $808,508 in accrued officer salary. This transaction resulted in an extraordinary gain of $808,508.
| 16. | UNEARNED REVENUE |
During 2003, the Company reached a settlement agreement to exchange 608,718 shares of its common stock in settlement of this obligation (See Note 15).
| 17. | ACCRUED EXPENSES |
The Company has accrued expenses as of July 31 as follows:
| 2003 | 2002 | |||||
Accrued officer salary - CEO | $ | 109,500 | $ | 808,508 | ||
Accrued interest on notes | 391,889 | 274,500 | ||||
| $ | 501,389 | $ | 1,083,008 | |||
During the years ended July 31, 2003 and 2002 the Company issued 1,236,309 and 1,053,491 shares, respectively, of its restricted common stock to pay accrued interest, pay for services, and extend maturities of notes payable.
F-30
IMPERIAL PETROLEUM, INC.
(A Development Stage Company)
Notes to Consolidated Financial Statements
| 18. | SUBSEQUENT EVENTS |
On October 20, 2003 the Company entered into a letter of understanding to sell 23,885,000 of its 25,385,000 shares of Powder River Basin Gas Corporation for $175,000. If completed, the sale would result in a loss of $365,000 and leave the Company with 3% ownership of the common stock of Powder River Basin Gas Corporation.
In October of 2003, the company raised $200,000 in cash through the sale of 2,000,000 shares of its restricted common stock and the issuance of a one year warrant for 2,000,000 shares exercisable at $.12 per share.
The Company also extinguished its $200,000 note payable related to its acquisition of Powder River Basin through the issuance of 2,000,000 shares of common stock and a one year warrant for 2,000,000 shares exercisable at $.14 per share.
The Company has also entered into a letter of intent to sell its mining claims. The impact on final terms and resulting gain or loss are uncertain at this time.
F-31
F-32
IMPERIAL PETROLEUM, INC.
(A Development Stage Company)
Supplemental Information
(Unaudited)
Year Ended July 31, 2003
| Full Cost | |||
Capitalized Costs Relating to Oil and Gas Producing Activities at July 31, 2003: | |||
Unproved oil and gas properties | $ | — | |
Proved oil and gas properties | 104,816 | ||
Support equipment and facilities | — | ||
| 104,816 | |||
Less accumulated depreciation, depletion, amortization, and impairment | — | ||
Net Capitalized Costs | $ | 104,816 | |
Costs Incurred in Oil and Gas Producing Activities for Year Ended July 31, 2003: | |||
Property acquisition costs | |||
Proved | $ | 104,816 | |
Unproved | — | ||
Exploration costs | — | ||
Development costs | — | ||
Amortization rate per equivalent barrel of production | — | ||
| $ | 104,816 | ||
Results of Operations for Oil and Gas Producing Activities for the Year Ended July 31, 2003 | |||
Oil and gas sales | $ | — | |
Production costs | — | ||
Depreciation, depletion and amortization | — | ||
| — | |||
Income tax expense | — | ||
Results of operations for oil and gas activities (excluding corporate overhead and financing costs) | $ | — | |
Acquisition costs of $1,284,251 are excluded from amortization at July 31, 2003.
F-33
IMPERIAL PETROLEUM, INC.
(A Development Stage Company)
Supplemental Information
(Unaudited)
Year Ended July 31, 2003
The following estimates of proved and proved developed reserve quantities and related standardized measure of discounted net cash flow are estimates only, and do not purport to reflect realizable values or fair market values of the Company’s reserves. The Company emphasizes that reserve estimates are inherently imprecise and that estimates of new discoveries are more imprecise than those of producing oil and gas properties. Accordingly, these estimates are expected to change as future information becomes available. All of the Company’s reserves are located in the United States.
Proved reserves are estimated reserves of cured oil (including condensate and natural gas liquids) and natural gas that 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 expected to be recovered through existing wells, equipment and operating methods.
The standardized measure of discounted future net cash flows is computed by applying year-end prices of oil and gas (with consideration of price changes only to the extent provided by contractual arrangements) to the estimated future production of proved oil and gas reserves, less estimated future expenditures (based on year-end costs) to be incurred in developing and producing the proved reserves, less estimated future income tax expense (based on the year-end statutory tax rates, with consideration of future tax rates already legislated) to be incurred on pretax net cash flows less tax basis of the properties and available credits, and assuming continuation of existing economic conditions. The estimated future net cash flows are then discounted using a rate of 10 percent a year to reflect the estimated timing of the future cash flows.
F-34
