U.S. Securities and Exchange Commission Washington, D.C. 20549 FORM 10-QSB (X) QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended: June 30, 1997 ( ) TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES ACT OF 1934 For the transition period ended: Commission File Number: 0-25006 Name of Small Business Issuer in Charter: UNITED PETROLEUM CORPORATION State or Other Jurisdiction of Incorporation or Organization: DELAWARE I.R.S. Employer I.D. Number: 13-3103494 Address of Principal Executive Offices: Suite N-425 1111 Northshore Drive Knoxville, Tennessee 37919 Issuer's Telephone Number: (423) 909-0890 Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Sections 13 or 15(d) of the Securities 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. (1) Yes (X) No ( ) (2) Yes (X) No ( ) APPLICABLE ONLY TO CORPORATE ISSUERS Indicate the numbers of shares outstanding of each of the Registrant's classes of common stock, as of the latest practicable date: Common Voting Stock: 19,430,639 Date: August 13, 1997 Transitional Small Business Disclosure Format (Check One): Yes ( ) No (X) Page 1 of 20 UNITED PETROLEUM CORPORATION AND SUBSIDIARIES INDEX Part I. Financial Information Item 1. Condensed Financial Statements ( Unaudited ) Condensed consolidated balance sheets - June 30, 1997 and December 31, 1996 Condensed consolidated statements of operations - Three months ended June 30, 1997 and 1996; six months ended June 30, 1997 and 1996 Condensed consolidated statement of stockholders' equity Condensed consolidated statements of cash flows - Six months ended June 30, 1997 and 1996 Notes to condensed consolidated financial statements - June 30, 1997 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Part II. Other Information Signatures Page 2 of 20 PART I. - Financial Information Item 1. Financial Statements United Petroleum Corporation and Subsidiaries Consolidated Balance Sheets At June 30, 1997 and December 31, 1996 June 30, 1997 Dec. 31, 1996 Current Assets Cash $ 54,055 $ 19,759 Marketable Securities $ 0 $ 122,373 Accounts and Notes Receivable $ 313,192 $ 472,123 Inventories $ 379,530 $ 634,265 Other Current Assets $ 69,822 $ 71,081 ------------ ------------ $ 816,599 $ 1,319,601 Property and Equipment Gas and Oil properties $ 8,288,546 $ 8,236,094 Premises and Equipment ( Net ) $ 10,511,289 $ 12,875,902 Deferred Tax Assets $ 2,972,100 $ 2,972,100 Intangibles and Other Assets $ 1,601,050 $ 1,663,553 ------------ ------------ Total Assets $ 24,189,584 $ 27,067,250 ============ ============ Liabilities and Stockholders' Equity Current Liabilities Accounts Payable $ 683,389 $ 636,966 Accrued Expenses $ 600,941 $ 678,533 Accrued Interest $ 131,693 $ 0 Accrued and Deferred Taxes $ 0 $ 0 Unamortized Discount $ 1,246,400 $ 0 Accrued Dividend Payable $ 298,175 $ 0 Bank Line Of Credit $ 227,000 $ 250,000 Current Maturities-Long Term Debt $ 976,114 $ 1,669,836 ------------ ------------ $ 4,163,712 $ 3,235,335 Long Term Liabilities Long Term Debt-Less Current Maturities $ 12,661,843 $ 22,229,143 Unearned Revenue $ 200,000 $ 200,000 Deferred Income Taxes $ 87,100 $ 87,100 ------------ ------------ Total Liabilities $ 17,112,655 $ 25,751,578 Stockholders' Equity Common Stock, $.01 Par Value $ 172,252 $ 118,281 (50,000,000 shares authorized, 17,225,270 and 11,828,156 issued) Additional Paid-In Capital(Common) $ 11,854,120 $ 13,696,878 Preferred Stock, $.01 Par Value $ 99 $ 0 (10,000,000 shares authorized, 9,912 and 0 issued) Additional Paid-In Capital(Preferred) $ 9,911,901 $ 0 Retained Earnings ($13,648,516) ($11,262,484) ------------ ------------ $ 8,289,856 $ 2,552,675 Less: Stockholder note receivable ($ 1,212,927) ($ 1,237,003) ------------ ------------ Total Stockholders' Equity $ 7,076,929 $ 1,315,672 ------------ ------------ Total Stockholders' Equity & Liabilities $ 24,189,584 $ 27,067,250 ============ ============ The accompanying notes are an integral part of these financial statements. Page 3 of 20 United Petroleum Corporation and Subsidiaries Consolidated Statement of Operations For The Three Month Periods Ended June 30, 1997 and 1996 June 30, 1997 June 30, 1996 Revenues $ 2,531,617 $ 3,253,888 Cost of Sales $ 1,702,926 $ 2,209,676 ------------ ------------ Gross Profit $ 828,691 $ 1,044,212 Operating Expenses: Salaries and Wages $ 223,335 $ 295,529 Payroll Taxes $ 63,760 $ 75,056 Other General and Administrative $ 938,546 $ 623,646 Interest Expense $ 387,811 $ 198,298 Depreciation and Amortization $ 284,625 $ 201,452 ------------ ------------ $ 1,898,077 $ 1,393,981 Other Income ( Expense ) $ 28,646 $ 30,060 ------------ ------------ Net Income Before Income Taxes ($ 1,040,740) ($ 319,709) Provision For Income Taxes $ 0 $ 32,493 ------------ ------------ Net Income After Taxes ($ 1,040,740) ($ 287,216) ============ ============ Primary Earnings Per Share ($ 0.060) ($ 0.06) ============ ============ Weighted Average Shares Outstanding 17,225,270 4,623,313 ============ ============ Fully Diluted Earnings Per Share ($ 0.060) ($ 0.06) ============ ============ Fully Diluted Weighted Average Shares 17,225,270 4,623,313 Outstanding ============ ============ The accompanying notes are an integral part of these financial statements. Page 4 of 20 United Petroleum Corporation and Subsidiaries Condensed Consolidated Statements of Operations For the Six Month Periods Ended June 30, 1997 and 1996 June 30, 1997 June 30, 1996 Revenues $ 6,230,264 $ 6,598,717 Cost of Sales $ 4,319,259 $ 4,426,945 ------------ ------------ Gross profit $ 1,911,005 $ 2,171,772 Operating Expenses: Salaries and Wages $ 524,122 $ 549,002 Payroll Taxes $ 135,825 $ 164,658 Other General and Administrative $ 1,528,179 $ 1,193,607 Interest Expense $ 1,474,536 $ 305,305 Depreciation and Amortization $ 676,906 $ 320,588 ------------ ------------ $ 4,339,568 $ 2,533,160 Other Income (Expense) $ 42,531 $ 43,897 ------------ ------------ Net Income Before Taxes ($ 2,386,032) ($ 317,491) Provision For Income Taxes $ 0 $ 32,160 ------------ ------------ Net Income After Taxes ($ 2,386,032) ($ 285,331) ============ ============ Primary Earnings Per Share ($ 0.14) ($ 0.06) ============ ============ Weighted Average Shares Outstanding 17,225,270 4,623,313 ============ ============ Fully Diluted earnings Per Share ($ 0.14) ($ 0.06) ============ ============ Fully Diluted Weighted Average Shares 17,225,270 4,623,313 Outstanding The accompanying notes are an integral part of these statements. Page 5 of 20 United Petroleum Corporation and Subsidiaries Consolidated Statement of Stockholders' Equity Additional Common Stock Paid-In Shares Amount Capital (Common) ------------ ------ --------- Balance, January 1, 1997 11,828,156 $118,281 $13,696,878 Shares issued for services 749,540 $7,495 $199,861 Shares issued to effect 1,445,948 $14,459 $342,945 conversion of debentures(net) Shares issued in payment of 95,066 $950 $45,597 interest on debentures Net Income ---------- -------- ----------- Balance, March 31, 1997 14,118,710 $141,185 $14,285,281 Shares issued in payment of 1,108,270 $11,083 $542,842 interest on debentures Shares issued for services 1,544,868 $15,449 $427,564 Shares issued to effect 453,422 $4,535 $211,065 conversion of debentures(net) Charge related to unamortized ($3,314,457) discounts resulting from conversion of debentures Issuance of preferred stock Preferred Stock Dividend ($298,175) Payments received on stock- holder note receivable Net Income ---------- -------- ----------- Balance, June 30, 1997 17,225,270 $172,252 $11,854,120 Additional Retained Stockholder Preferred Stock Paid-In Earnings Note Shares Amount Capital Total Receivable (Preferred) ----------- ----------- ------ ------ ----------- ---------- Balance, January 1, 1997 ($11,262,484) ($1,237,003) $1,315,672 Shares issued for services $207,356 Shares issued to effect $357,404 conversion of debentures(net) Shares issued in payment of $46,547 interest on debentures Net Income ($1,345,292) ($1,345,292) ------------ ----------- ------ ------ ----------- ---------- Balance, March 31, 1997 ($12,607,776) ($1,237,003) $0 $0 $0 $581,687 Shares issued in payment of $553,925 interest on debentures Shares issued for services $443,013 Shares issued to effect $215,600 conversion of debentures(net) Charge related to unamortized ($3,314,457) discounts resulting from conversion of debentures Issuance of preferred stock 9,912 $99.00 $9,911,901 $9,912,000 Preferred Stock Dividend ($298,175) Payments received on stock- $24,076 $24,076 holder note receivable Net Income ($1,040,740) ($1,040,740) ------------ ----------- ------ ------ ------------- ----------- Balance, June 30, 1997 ($13,648,516) ($1,212,927) 9,912 $99 $9,911,901 $7,076,929 Page 6 of 20 United Petroleum Corporation and Subsidiaries Consolidated Statements of Cash Flows For The Six Month Periods Ended June 30, 1997 and 1996 June 30, 1997 June 30, 1996 ------------- ------------- Operating Activities Net Income ($ 2,386,032) ($ 285,331) Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and Amortization $ 676,906 $ 320,588 Shares issued for services $ 650,369 $ 51,515 Changes in operating assets and liabilities: Decrease ( increase ) in- Accounts notes receivable $ 158,593 ($ 62,026) Inventories $ 254,735 $ 20,230 Other Current Assets $ 1,259 $ 247,004 Proceeds from unearned purchase discounts $ 0 $ 0 Increase ( decrease ) in - Accounts Payable and Accrued Liabilities ($ 1,346,924) ($ 130,712) ------------ ------------ ($ 1,991,094) $ 161,268 Investing Activities: Property and Equipment Additions $ 2,364,613 ($ 1,170,880) Acquisition of gas and oil properties ($ 52,454) ($ 429,391) Decrease ( increase ) in other assets $ 62,503 ($ 818,756) ----------- ------------ $ 2,374,662 ($ 2,419,027) Financing Activities: Principal payments on debt ($ 2,422,156) ($ 512,413) Proceeds from short term borrowings $ 203,000 $ 0 Payments on short term borrowings ($ 23,000) ($ 250,000) Net proceeds from bank financing $ 435,008 $ 1,368,161 Net proceeds from issuance of debentures $ 500,000 $ 4,822,917 Proceeds from issuance of common stock $ 957,876 $ 0 ----------- ----------- ($ 349,272) $ 5,428,665 ----------- ----------- Increase(Decrease) in Cash and Cash Equivalents $ 34,296 $ 3,170,906 Cash and Cash Equivalents, Beginning of Period $ 19,759 $ 37,941 ----------- ----------- Cash and Cash Equivalents, End of Period $ 54,055 $ 3,208,847 =========== =========== The accompanying notes are an integral part of these financial statements. Page 7 of 20 United Petroleum Corporation and Subsidiaries Notes to Condensed Consolidated Financial Statements (Unaudited) Note 1 - Summary of Significant Accounting Policies Basis of Presentation - The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-QSB of Regulation S-B. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Certain reclassifications have been made to the 1996 financial statements in order for them to conform with classifications used in 1997. Operating results for the three month and six month periods ended June 30, 1997 are not necessarily indicative of the results that may be expected for the year ended December 31, 1997. For further information, refer to the consolidated financial statements and footnotes thereto included in the Registrant and Subsidiaries' annual report on Form 10-KSB for the year ended December 31, 1996. Principles of Consolidation - The consolidated financial statements include the accounts of United Petroleum Corporation (the "Company") and its wholly owned subsidiaries, Calibur Systems, Inc. and Jackson-United Petroleum Corporation. All significant intercompany accounts and transactions have been eliminated in consolidation. Business Activities - The Company's business activities are conducted through its subsidiaries and are contained within two primary industry segments. Calibur Systems, Inc. operates convenience stores, express lube centers, and car washes providing a variety of car wash and detail services, gasoline, automotive, food and beverage and related products throughout middle and eastern Tennessee and northern Georgia. Jackson-United Petroleum Corporation is a newly formed corporation for the purpose of developing gas and oil properties and marketing of gas and oil production. Currently all of the Company's gas and oil properties are located within the United States in central and eastern Kentucky, Pennsylvania and Missouri. Cash and Cash Equivalents - The Company considers cash on hand, deposits in banks, certificates of deposit and investments with original maturity of three months or less to be cash or cash equivalents. Inventories - Inventories are stated at the lower of cost or market. Cost of gasoline sales is determined using the first-in first-out method. Cost of convenience store sales is determined using the average retail cost method. Page 8 of 20 United Petroleum Corporation and Subsidiaries Notes to Condensed Consolidated Financial Statements - Continued (Unaudited) Gas and Oil Properties - The Company follows the full cost method of accounting for gas and oil properties. Accordingly, all costs associated with acquisition, exploration and development of gas and oil reserves, including directly related overhead costs, are capitalized. All capitalized costs of gas and oil 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 10 percent interest rate of future net reserves from proved reserves, based on current economic and operating conditions, plus lower of cost or fair market value of unproved properties. Retail Operations - Property and equipment of the retail operations is stated at cost. Routine repairs and maintenance are charged to expense as incurred. Upon disposition, the cost and related accumulated depreciation are removed from the accounts and resulting gain or loss is reflected in operations of the period. The Company generally depreciates property and equipment on a straight-line basis over the useful lives of the related assets estimated to be 15 to 20 years for buildings and improvements, 6 to 10 years for equipment, and 3 to 4 years for vehicles. Capitalized Interest - The Company capitalizes interest on construction in progress and expenditures made in connection with exploration and development projects that are not subject to current amortization. Interest is capitalized only for the period that activities are in progress to bring these projects to their intended use. Income Taxes - Deferred Taxes are provided in accordance with Statement and Financial Accounting Standards Number 109, Accounting For Income Taxes. Deferred taxes are provided to account for accumulated temporary differences for assets and liabilities for financial reporting and income tax purposes, including alternative minimum taxes. The Company's temporary differences are primarily due to different financial reporting and tax methods of accounting for depreciation and intangible drilling costs. Non-Cash Equity Transactions - Goods and services acquired through the issuance of the Company's common stock are valued at the fair market value of the stock on the date of Page 9 of 20 United Petroleum Corporation and Subsidiaries Notes to Condensed Consolidated Financial Statements - Continued (Unaudited) acquisition. When restricted shares are issued, the value of the shares given in exchange is discounted approximately 50 % from the fair market value of freely traded common stock. It is the intent of management to reduce the discount related to the issuance of restricted shares if and when the market for the Company's common stock becomes less volatile and the average daily trading volume increases significantly. Equity Transactions During the quarter the Company issued 1,344,868 common shares as payment for services with an aggregate value of $ 405,513 pursuant to the Company's S-8 registration. These shares were issued at market value as of the date of issuance. Said S-8 shares were issued at prices ranging from $ 0.25 to $ 0.4375. The majority of these shares were issued in payment of legal fees, public relations expenses and investment banking services related to mergers and acquisitions. The Company issued 200,000 restricted shares issued as payment for services in the aggregate amount of $ 37,500. The shares were valued at fifty percent (50%) of market value as of the date of issuance. Said restricted shares were issued at $ 0.1875 per share. These shares were issued to Michael F. Thomas, President and CEO of the Company, as a bonus related to the debenture restructuring effective April 30, 1997. During the quarter the Company issued 1,108,270 common shares as payment for interest due on debentures in the aggregate amount of $ 553,925.48. The Company also issued 453,422 common shares to effect conversion of debentures with an approximate face value of $ 215,600.00 at prices between $ 0.45 and $ 0.50 per share. During the quarter, effective April 30, 1997, the Company entered into an agreement with holders of $ 16,822,400.00 of debentures. The agreement provided, among other things, for the exchange of $ 9,912,000.00 worth of debentures into 9,912 shares of Series "A" Preferred Stock, after a reduction of ten percent (10%) in the face amount of the debentures. The preferred stock will pay a cumulative dividend of eighteen percent (18%) for a period of one year. Thereafter, at the option of the preferred shareholder, the dividend shall either be reduced to seven percent (7%) for the second year or, a preferred shareholder, at his option, may surrender to the Company ten percent (10%) of the preferred stock and continue to receive a dividend of eighteen percent (18%). At the option of the Company, dividends may be paid in cash or in the Company's common stock. Preferred shareholders shall have voting rights equal to those which they would have if they converted their preferred shares to common stock at the then conversion price, provided, however, that no preferred shareholder or group of affiliated preferred shareholders may, at any time, vote more than 4.99% of the total of the stock entitled to vote. Page 10 of 20 United Petroleum Corporation and Subsidiaries Notes to Consolidated Financial Statements-Continued (Unaudited) Commencing July 1, 1997, one-thirteenth of the preferred stock may be converted each month on a cumulative basis. The conversion price shall be the lesser of $ 3.00 or the average closing bid price for the five trading days prior to the conversion. Notwithstanding the forgoing, the minimum conversion price for the first three months commencing July 1, 1997 shall be the greater of $ 2.50 per share or two-thirds of the average of the closing bid prices for the prior month. For the next three months, the minimum conversion price shall be the greater of $ 2.00 per share or two-thirds of the average closing bid prices for the prior month. For the next three months, the minimum conversion price shall be the greater of $ 1.50 per share or two-thirds of the average closing bid prices for the prior month. Thereafter, the minimum conversion price shall be the greater of $ 1.00 or two-thirds of the average closing bid prices for the prior month. The preferred shares may be automatically converted by the Company by notice given between October 1, 1999 and October 10, 1999 at a price equal to the average of the closing bid prices for the five trading days prior to giving of the notice. Each preferred share shall have liquidation rights equal to $ 1,000.00 and shall have a preference over common shareholders and junior preferred shareholders. The Company may redeem the preferred shares at any time upon payment of the liquidation price together with any accrued dividends. The agreement provides that the preferred shareholders shall vote their shares for the continuation of current management and shall not participate in any proxy contests so long as the Company is not in default with respect to any of the provisions of the agreement, the preferred shares or the debentures. The agreement provides that the holders of approximately $ 3,943,466 of the debentures shall receive in their place amended convertible debentures in the amount of approximately $ 3,549,120 in face value after a reduction the face value of the old debentures equal to ten percent (10%). The maturity date of the amended debentures is September 1, 1999. The interest rate on the amended debentures is eighteen percent (18%) for one year and seven percent (7%) thereafter, provided, however, that the amended debenture holders shall have the option at the end of one year to surrender to the Company, for no consideration, ten percent (10%) of their amended debentures and to receive interest of eighteen percent (18%) on the remaining amended debentures. At the option of the Company, interest may be paid in cash or common stock. As a part of this agreement, debentures with a face value of approximately $ 623,200, together with shares issued in payment of interest accrued through April 30, 1997 were converted to common stock at a price of $ 0.50 per share. Page 11 of 20 United Petroleum Corporation and Subsidiaries Notes to Consolidated Financial Statements-Continued (Unaudited) The above referenced transactions, effective April 30, 1997, will reduce the liabilities of the Company and increase the equity of the Company for the following reasons: (1.) the conversion of debentures into common stock, (2.) the conversion of debentures into preferred stock and (3.) the forgiveness of debenture balances with a face value equal to approximately $ 1,495,680. The forgiveness of debt is typically treated as an other income item for statement purposes. However, in the case of the debenture restructure agreement the debenture holders received an increased yield in return for the forgiveness. In an effort to prevent phantom income related to the debenture forgiveness from appearing on the Company's income statement, the Company has elected to classify the amount forgiven as "unamortized discount" for statement purposes and will amortize the amount over a twelve month period. This will represent a reduction in interest expense of approximately $ 124,640 per month beginning May 1, 1997. During the quarter the Company declared a preferred stock dividend in the amount of $ 298,175 which is payable in common stock of the Company. As of June 30, 1997, the dividend is shown as a payable on the books of the Company and has been deducted from equity. The Company made a charge against capital during the quarter in the amount of $ 3,314,457 resulting from the write off of unamortized discounts and fees associated with the conversion and forgiveness of debentures. Page 12 of 20 Item 2. - Management's Discussion and Analysis of Operations The Company realized net loss of ($ 1,040,740) for the three month period ended June 30, 1997, compared to a net loss of ($ 287,216) for the same period last year. A summary of comparative results between the second quarter of 1997 and the second quarter of 1996 is as follows: Revenues were realized as follows: Quarter Ended Quarter Ended June 30, 1996 June 30, 1996 Retail Subsidiary: Gasoline $ 756,408 $1,158,391 Car Wash 1,145,851 1,457,380 Oil & Lube 397,412 295,434 Grocery 93,651 173,354 Other Sales 85,450 169,329 Energy Subsidiary: Natural Gas 28,957 0 Oil 23,888 0 ---------- ---------- Total Revenue For Quarter $2,531,617 $3,253,888 ========== ========== Retail Subsidiary (Calibur Systems, Inc.) The Company experienced a decreased gross profit margin on gasoline sales from 14.1 % in the second quarter of 1996 to 6.5 % in the second quarter of 1997. Volume decreased from 1,181,177 gallons in the second quarter of 1996 to 747,147 gallons in the second quarter of 1997 for a decrease of 434,030 gallons or approximately 36.7 %. The decreased gross profit margin can mainly be attributed to unfavorable wholesale gasoline prices and increased competition. The decrease in volume is mainly attributed to the decrease in the number of Company locations selling gasoline. During the first quarter the Company sold a location in Cookeville, Tennessee and a location in Farragut, Tennessee to Michael F. Thomas, the President and CEO of the Company. For further information refer to the quarterly statement on Form 10-KSB for the period ended March 31, 1997. The Company also ceased operations of a Solway, Tennessee location which sold gasoline due to repeated poor performance at the location. Car wash revenue decreased by $ 311,529 for the quarter as compared to the same quarter last year. Same store car wash revenues decreased by $ 204,990 and the balance of the decrease is Page 13 of 20 Management's Discussion and Analysis of Operations - Continued attributed to the sale of a car wash location in Farragut, Tennessee as referenced above. It is the belief of management that excessive rainfall during the second quarter caused the decrease in same store revenue. Oil and lube revenue was $101,978 higher for the quarter as compared to the same quarter last year which represents an increase of 34.5%. Of this amount $108,954 is attributed to the following new locations: (1.) Newport, Tennessee, (2.) Morristown, Tennessee, (3.) Oak Ridge, Tennessee and (4.) Merchants Road in Knoxville, Tennessee. Same store decreases of $ 6,976 accounted for the balance of the difference. The poor performance in same store revenues is attributed to the excessive level of rainfall during the second quarter in the opinion of management. As of the end of the second quarter of this year the Company had ten oil and lube centers in operation as compared to six oil and lube centers open at the end of second quarter in 1996. Grocery revenue was $ 93,651 for the quarter as compared to $ 173,354 for the same quarter last year. Other revenues were $ 85,450 for the quarter as compared to $ 169,329 for the previous year. Both decreases are mainly attributed to the decrease in the number of Company locations. The Calibur Systems, Inc. subsidiary had a net loss of ($234,723) for the quarter as compared to an income of $ 42,338 for the same quarter last year. Energy Subsidiary (Jackson-United Petroleum Corporation) Natural gas revenues increased to $ 28,957 for the quarter as compared to $0 for the same period last year. The majority of these revenues were from the sixteen Pennsylvania wells drilled in 1996 under a joint venture agreement with Kastle Resources Enterprises, Inc. ("Kastle") of Edinboro, Pennsylvania. Natural gas production and revenues in both Pennsylvania and Kentucky were below anticipated levels due to the fact that several wells require additional work which decreased the number of producing days during the quarter as well as lowered the daily volumes of the wells requiring additional work. Rework costs decreased the net revenues to the Company during the quarter. Oil revenue for the quarter was $ 23,888 for the quarter as compared to $ 0 for the same period last year. These revenues were produced from several of the Pennsylvania wells drilled under a joint venture agreement with Kastle as mentioned above. As of the date of this report the Company has one well in Kentucky that requires additional work and two additional wells in Kentucky that are shut-in awaiting pipeline. Oil revenues are expected to increase in the third Page 14 of 20 Management's Discussion and Analysis of Operations - Continued quarter of this year as revenues from the "pilot" phase of a water-flood project are scheduled to begin. The water-flood is a joint venture with Western Engineering, Inc. ("Western") of Evansville, Indiana. The cost of the Company's participation was approximately $ 275,000. The Company and Western drilled three horizontal production wells to enhance the recovery of oil from Western's Belton Unit in Cass County, Missouri. The producing formation is the Squirrel Sandstone. Production commenced on April 10, 1997 with approximately 20 barrels produced per day and as of the date of this report is approaching 80 barrels per day. Western receives the first 40 barrels of daily production and the Company receives the next 55 barrels. Above 95 barrels per day, production is shared equally between the two companies. The Jackson-United Petroleum Corporation subsidiary had a net income of $18,632 for the quarter as compared to a loss of ($ 4,901) for the same period last year. Depreciation and depletion were $ 15,000 for the quarter as compared to $ 0 for the same period last year. Consolidated Operations Operating expenses were $1,898,077 for the second quarter of 1997 as compared to $1,393,981 for the same period last year. This increase is mainly attributed to increases in legal fees, professional fees, public relations expense, investment banking services, accounting expenses and increased shareholder relations expenses. Interest expense was also higher for the quarter as compared to last year as a result of the interest paid on debentures, via the issuance of common stock, which was partially off-set by the amortization of unearned discounts in the amount of $ 249,280 related to the face value of debentures forgiven by debenture holders pursuant to the restructure agreement completed by the Company effective April 30, 1997. In the agreement, as mentioned earlier in this report, debenture holders forgave debentures with a face value of $ 1,495,680. The Company has elected to amortize this discount over a period of twelve months which corresponds with the term associated with the debenture forgiveness in the agreement. Financial Condition - The working capital deficit of approximately ($2,492,797) as of March 31, 1997 has increased to a deficit of approximately ($3,347,113) as of the end of June 30, 1997. The increase of the working capital deficit was not anticipated by management. This increase is the result of the accounting method used to account for the forgiveness of debenture balance by debenture holders in the amount of $ 1,495,680 as referenced earlier in this report. The unamortized portion of this debenture forgiveness is included in the current liabilities section of the balance sheet in the amount of $ 1,246,400. Approximately $ 373,920 of this amount will be amortized per quarter over the next year which will represent a reduction in interest expense and remove the item from the balance sheet. Excluding this extraordinary item the working capital position of the Company actually improved by approximately $ 392,084. The net worth of the Company increased from $ 581,687 as of March 31, 1997 to $ 7,076,929 as of June 30, 1997. This increase is primarily associated with the conversion of debentures Page 15 of 20 Management's Discussion and Analysis of Operations - Continued into both common and preferred stock as well as the forgiveness of debentures with a face value of approximately $ 1,495,680. The debt to worth ratio of the Company has greatly improved from 40 to 1 as of March 31, 1997 to approximately 2.4 to 1 as of June 30, 1997. The majority of the changes in the capital structure for the quarter are the result of an agreement effective April 30, 1997 between the Company and convertible debenture holders. For further information regarding this agreement please refer to the description of the agreement contained earlier in this report. During 1997, the Company will continue to seek additional sources of capital for the following reasons: (1.) To increase the overall balance sheet liquidity of the Company. Without the necessary liquidity to be able to act quickly the Company is deprived of the opportunity to make acquisitions that could prove beneficial. No assurance can be given that the Company will be able to obtain the desired capital. (2.) To further expand the Company's drilling programs and to acquire producing oil and gas properties. Management is presently negotiating with several firms in the asset based lending segment of the oil and gas industry. Firms of this type are willing to finance oil and gas properties based on the value of each individual acquisition as opposed to requiring a fixed amount of equity. By means of this type of financing the Company may have the opportunity to acquire oil and gas properties without the issuance of additional equity securities. Lenders of this type are also accustomed to production payments as opposed to fixed payments as required by more traditional lenders. This would allow the Company to be assured of a positive cashflow associated with the properties being acquired via this means of financing. There can be no assurance that the Company will locate any attractive oil and gas acquisition candidates nor is there any assurance that the appropriate capital and/or debt financing will be available to the Company. (3.) Although the focus of the Company will be on the growth of the oil and gas subsidiary, the Company will continue to look for attractive acquisitions in the retail automotive subsidiary or any other business industry that the Board deems appropriate. In the event such an opportunity should arise, capital would be required. There can be no assurance that the Company will locate any attractive acquisition candidates nor is there any assurance that the appropriate capital and/or debt financing will be available to the Company. Expansion and Capital Improvements As of June 30, 1997, the Company is committed to certain expansion projects and they are as follows: (1.) The company has recently completed the construction of a new Ten Minute Lube Center Page 16 of 20 Management's Discussion and Analysis of Operations - Continued in Ft. Oglethorpe, Georgia which opened during the second quarter of 1997. Cost overruns associated with this project totaled approximately $ 48,000. The Company does not presently have the funds necessary to satisfy these payables. (2.) The Company has recently completed the construction of a new Pennzoil Ten Minute Lube Center in Morristown, Tennessee which opened during the second quarter of 1997. Cost overruns associated with this project totaled approximately $ 32,000. The Company does not presently have the funds necessary to satisfy these payables. (3.) The Company presently has a new Pennzoil Ten Minute Lube Center at 8016 Kingston Pike in Knoxville, Tennessee under construction. Cost overruns to date at this location are approximately $ 15,000. The Company does not presently have the funds necessary to satisfy these payables. (4.) The Company has recently completed the construction of a new Pennzoil Ten Minute Lube Center in Newport, Tennessee which opened earlier this year. Cost overruns associated with this project are approximately $ 17,000. The Company does not presently have the funds necessary to satisfy these payables. On June 17, 1997 the Board of Directors of the Company approved the sale of a full service car wash located at 8817 Kingston Pike in Knoxville, Tennessee to Michael F. Thomas, the Company's President & CEO for $ 300,000 in cash.. There is no debt on the location. The proposed sale was deemed necessary by the Board such that the proceeds of the sale may be used to satisfy all of the above referenced cost overruns in the Calibur Systems, Inc. subsidiary. To date, Mr. Thomas, does not have a loan commitment to obtain the necessary funds to purchase the location from the Company. No assurance can be given that Mr. Thomas will be able to acquire the financing necessary to purchase the location from the Company. (5.) As of the date of this report, the Company has accounts payable in the energy subsidiary of approximately $ 369,500 related to the drilling of wells in eastern Kentucky. The Company intends to leverage the producing wells in the energy subsidiary to enable the Company to pay the payables. No assurance can be given that appropriate financing will be made available to the Company. The Company has recently reviewed several potential acquisitions to its retail and energy subsidiaries. As of the date of this report none of these potential acquisitions have become commitments of the Company. In the event the Company should desire to make such an acquisition or acquisitions substantial capital may be required. No assurance can be given that the Company will be able to acquire the necessary capital to make such acquisitions. Page 17 of 20 Management's Discussion and Analysis of Operations - Continued During the quarter the Board of Directors of the Company approved the cancellation of a lease between the Company and Michael F. Thomas, Company President & CEO. Said lease is related to two properties that have been leased by Mr. Thomas to the Company. The properties are located at 4867 N. Broadway in Knoxville, Tennessee and at 5907 Lee Highway in Chattanooga, Tennessee. The exact terms of the lease cancellation are to be completed during the third quarter of 1997. During the second quarter the Company transferred the Exxon distributorship contract to, Michael F. Thomas, the Company's President & CEO. Mr. Thomas was the designated "key person" in the original distributorship contract between the Company and Exxon. The transfer became necessary due to the fact that the letter of credit posted by the Company in favor of Exxon matured. Exxon required the letter of credit to be extended and increased from $ 100,000 to $ 200,000. In order to extend and increase the letter of credit the issuer required the personal guarantee of Mr. Thomas which is no longer available to the Company. Page 18 of 20 Part II - Other Information Item 1 Legal Proceedings None, not applicable Item 2 Changes In Securities None, not applicable Item 3 Defaults Upon Senior Securities None, not applicable Item 4 Submission of Matters to a Vote of Security Holder None, not applicable Item 5 Other Information Subsequent to the end of the quarter the Company entered into an agreement in principle to acquire a U.S. Coast Guard approved barge terminal in Celina, Tennessee from Southern Kentucky Enterprises, Inc. for $ 2,000,000 payable in the common stock of the Company. The facility includes storage capacity for approximately 50,000 barrels of product and a loading/unloading rack. Due diligence on the acquisition has began as of the date of this report. Item 6 Exhibits and Reports on Form 8-K (a.) Exhibits - None (b.) Reports on Form 8-K - None Page 19 of 20 Signatures Pursuant to the requirement 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. United Petroleum Corporation August 18, 1997 /S/ Michael F. Thomas Date: ____________________ By: ____________________________ Michael F. Thomas President & CEO August 18, 1997 /S/ Charles B. Lobetti Date: _____________________ By: ____________________________ Charles B. Lobetti Chief Financial Officer Page 20 of 20