1 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: September 30, 1998 [ ] 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 A 2620 Mineral Springs Road Knoxville, Tennessee 37917 Issuer's Telephone Number: (423) 688-6204 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: 30,565,352 Date: November 12, 1998 Transitional Small Business Disclosure Format (Check One): Yes [ ] No [X] Page 1 of 18 2 UNITED PETROLEUM CORPORATION AND SUBSIDIARIES INDEX Part I. Financial Information Item 1. Condensed Financial Statements ( Unaudited ) Condensed consolidated balance sheets - Sept. 30, 1998 and December 31, 1997 Condensed consolidated statements of operations - Three months ended Sept. 30, 1998 and 1997; nine months ended Sept. 30, 1998 and 1997 Condensed consolidated statement of stockholders' equity Condensed consolidated statements of cash flows - Nine months ended Sept. 30, 1998 and 1997 Notes to condensed consolidated financial statements - Sept. 30, 1998 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Part II. Other Information Signatures Page 2 of 18 3 PART I. - Financial Information Item 1. Financial Statements United Petroleum Corporation and Subsidiaries Consolidated Balance Sheets At September 30, 1998 and December 31, 1997 Sept. 30, 1998 Dec. 31, 1997 Current Assets Cash $ 43,894 $ 166,180 Accounts and Notes Receivable $ 114,145 $ 112,377 Inventories $ 231,189 $ 321,948 Other Current Assets $ 51,389 $ 373,413 ------------ ------------ $ 440,617 $ 973,918 Property and Equipment Gas and Oil properties $ 4,430,672 $ 4,798,795 Premises and Equipment ( Net ) $ 8,279,789 $ 8,519,499 Intangibles and Other Assets $ 1,035,001 $ 408,772 ------------ ------------ Total Assets $ 14,186,080 $ 14,700,980 ============ ============ Liabilities and Stockholders' Equity Current Liabilities Accounts Payable $ 519,406 $ 534,867 Accrued Expenses $ 3,207,347 $ 1,368,097 Bank Line Of Credit $ 0 $ 247,829 Current Maturities $ 12,822,040 $ 9,241,801 ------------ ------------ $ 16,548,790 $ 11,392,590 Long Term Liabilities Long Term Debt-Less Current Maturities $ 922,284 $ 2,601,686 Deferred Income Taxes $ 0 $ 0 ------------ ------------ Total Liabilities $ 17,471,080 $ 13,994,280 Minority Interest In Consolidated Subsidiary $ 50,000 $ 200,000 Stockholders' Equity Preferred Stock, $.01 Par Value Series A $ 99 $ 99 Series B $ 18 $ 18 Common Stock, $.01 Par Value $ 305,653 $ 292,795 (50,000,000 shares authorized, 30,565,352 and 29,279,515 issued) Additional Paid-In Capital $ 24,863,515 $ 26,036,310 Accumulated Deficit $(28,504,280) $(24,635,080) ------------ ------------ $ (3,334,997) $ 1,694,136 Less: Stockholder note receivable $ (1,187,432) ------------ ------------ Total Stockholders' Equity $ (3,334,997) $ 506,704 ------------ ------------ Total Stockholders' Equity & Liabilities $ 14,186,080 $ 14,700,980 ============ ============ The accompanying notes are an integral part of these financial statements. Page 3 of 18 4 United Petroleum Corporation and Subsidiaries Consolidated Statement of Operations For the Three Month Periods Ended Sept. 30, 1998 and 1997 Sept. 30, 1998 Sept. 30, 1997 Revenues $ 1,577,577 $ 1,914,109 Cost of Sales $ 1,115,293 $ 1,182,351 ----------- ----------- Gross Profit $ 462,284 $ 731,758 Operating Expenses: Salaries and Wages $ 197,858 $ 326,580 Payroll Taxes $ 54,006 $ 58,340 Other General and Administrative $ 395,494 $ 576,411 Interest Expense $ 440,095 $ 324,421 Depreciation and Amortization $ 176,817 $ 286,839 ----------- ----------- $ 1,264,270 $ 1,572,591 Other Income ( Expense ) $ 57,626 $ 37,558 ----------- ----------- Net Income Before Income Taxes $ (744,360) $ (803,275) Provision For Income Taxes $ 0 $ 0 ----------- ----------- Net Income After Taxes $ (744,360) $ (803,275) Primary Earnings Per Share $ 0.2 $ 0.3 =========== =========== Weighted Average Shares Outstanding 30,565,350 23,131,260 =========== =========== Fully Diluted Earnings Per Share $ 0.2 $ 0.3 =========== =========== Fully Diluted Weighted Average Shares Outstanding 30,565,350 23,131,260 =========== =========== The accompanying notes are an integral part of these financial statements. Page 4 of 18 5 United Petroleum Corporation and Subsidiaries Condensed Consolidated Statements of Operations For the Nine Month Periods Ended Sept. 30, 1998 and 1997 Sept. 30, 1998 Sept. 30, 1997 Revenues $ 4,847,336 $ 8,144,372 Cost of Sales $ 3,248,493 $ 5495,089 ----------- ----------- Gross Profit $ 1,598,843 $ 2,649,283 Operating Expenses: Salaries and Wages $ 786,213 $ 969,327 Payroll Taxes $ 152,792 $ 194,167 Other General and Administrative $ 1,466,109 $ 1,977,450 Interest Expense $ 974,509 $ 1,797,864 Depreciation and Amortization $ 759,877 $ 963,745 ----------- ----------- $ 4,139,500 $ 5,902,553 Other Income (Expense) $ 115,608 $ 61,087 ----------- ----------- Net Income Before Taxes $(2,425,049) $(3,192,183) Provision For Income Taxes $ 0 $ 0 ----------- ----------- Net Income After Taxes $(2,425,049) $(3,192,183) =========== =========== Primary Earnings Per Share $ (0.079) $ (0.138) =========== =========== Weighted Average Shares Outstanding 30,565,350 23,131,260 =========== =========== Fully Diluted earnings Per Share $ (0.079) $ (0.138) Fully Diluted Weighted Average 30,565,350 23,131,260 Shares Outstanding The accompanying notes are an integral part of these statements. Page 5 of 18 6 United Petroleum Corporation and Subsidiaries Consolidated Statements of Changes in Stockholders' Equity Series A Series B Common Stock Additional Accumulated Stockholder Total Preferred Preferred Shares Dollars Paid-In Deficit Note Capital Receivable Balance, January 1, 1998 $ 99 $ 18 29,279,515 $ 292,795 $26,036,305 $(24,635,081) $(1,187,432) $ 506,704 Shares issued for services 600,000 $ 6,000 $ 9,000 Dividends Declared- Class A $ (439,930) Class B $ (36,164) Net Loss $ (535,152) ----------- ---------- ---------- ---------- ----------- ------------ ----------- ----------- Balance, March 31, 1998 $ 99 $ 18 29,879,515 $ 298,795 $26,045,305 $(25,646,327) $(1,187,432) $ (489,542) Shares issued for services 685,837 $ 6,858 $ 5,642 Dividends Declared- Class A $ (444,818) Class B $ (36,566) Net Loss $ (1,145,537) ----------- ---------- ---------- ---------- ----------- ------------ ----------- ----------- Balance, June 30, 1998 $ 99 $ 18 30,565,352 $ 305,653 $26,050,947 $(27,273,248) $(1,187,432) $(2,103,963) Dividends Declared- Class A $ (449,706) Class B $ (36,968) Write-off, Stockholder Note $(1,187,432) $ 1,187,432 Net Loss $ (744,360) ----------- ---------- ---------- ---------- ----------- ------------ ----------- ----------- Balance, September 30, 1998 $ 99 $ 18 30,565,352 $ 305,653 $24,863,515 $(28,504,282) $ 0 $(3,334,997) Page 6 of 18 7 United Petroleum Corporation and Subsidiaries Consolidated Statements of Cash Flows For the Nine Month Periods Ended Sept. 30, 1998 and 1997 Sept. 30, 1998 Sept. 30, 1997 --------------------------------- Operating Activities Net Income $(2,425,049) $(3,192,183) Adjustments to reconcile net income to net cash provided by operating activities Depreciation and Amortization $ 759,877 $ 963,745 Shares issued for services $ 12,500 $ 986,514 Changes in operating assets and liabilities Decrease ( increase ) in- Accounts notes receivable $ (1,768) $ (19,497) Inventories $ 90,759 $ 278,294 Other Current Assets $ 322,024 $ (199,897) Proceeds from unearned purchase discounts Increase ( decrease ) in - Accounts Payable and Accrued Liabilities $ 1,823,789 $(1,361,772) ----------- ----------- $ 582,132 $(2,544,796) Investing Activities: Property & Equipment(Additions)Dispositions $ 239,710 $ 5,197,884 Gas & Oil Properties(Additions)Dispositions $ 368,123 $ (7,452) Decrease ( increase ) in other assets $ (626,229) $ 20,970 ----------- ----------- $ (18,396) $ 5,211,402 Financing Activities: Principal payments on debt $(6,811,416) $(5,582,009) Proceeds from short term borrowings $ 7,123,223 $ 203,000 Payments on short term borrowings $ (997,829) $ (23,000) Net proceeds from bank financing $ 0 $ 435,008 Net proceeds from issuance of debentures $ 0 $ 1,725,000 Proceeds from issuance of common stock $ 0 $ 957,876 ----------- ----------- $ (686,022) $(2,284,125) ----------- ----------- Increase(Decrease) in Cash and Cash Equivalents $ (122,286) $ 382,481 Cash and Cash Equivalents, Beginning of Period $ 166,180 $ 19,759 ----------- ----------- Cash and Cash Equivalents, End of Period $ 43,894 $ 402,240 =========== =========== The accompanying notes are an integral part of these financial statements. Page 7 of 18 8 United Petroleum Corporation and Subsidiaries Notes to Condensed Consolidated Financial Statements Periods Ended September 30, 1998 and 1997 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-X, and has been presented on the basis that the Company is a going concern which contemplates the realization of assets and satisfaction of liabilities in the normal course of business (see Note 18 of the notes to the Company's consolidated financial statements included in the Registrant's annual report on Form 10-KSB for the year ended December 31, 1997). 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 1997 financial statements in order for them to conform with classifications used in 1998. Operating results for the three month and nine month periods ended September 30, 1998 are not necessarily indicative of the results that may be expected for the year ending December 31, 1998. 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, 1997. The year end condensed balance sheet was derived from audited financial statements, but does not include all disclosures required by generally accepted accounting principles. Principles of Consolidation - The consolidated financial statements include the accounts of United Petroleum Corporation (the "Company") and its wholly owned subsidiaries, Calibur Systems, Inc., Jackson-United Petroleum Corporation and CTV Studios, Inc.. 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 corporation formed 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 Kentucky, Pennsylvania and Missouri. CTV Studios, Inc. was formed to conduct activities in the broadcasting industry and had not commenced operations as of September 30, 1998. Page 8 of 18 9 United Petroleum Corporation and Subsidiaries Notes to Condensed Consolidated Financial Statements - Continued Periods Ended September 30, 1998 and 1997 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. 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. Page 9 of 18 10 United Petroleum Corporation and Subsidiaries Notes to Condensed Consolidated Financial Statements - Continued Periods Ended September 30, 1998 and 1997 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 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 third quarter of 1998 the Company did not issue any common or preferred shares. In the third quarter of 1998, management determined to write off the remaining balance of $1,187,432 related to a promissory note from one of the Company's former public relations firms. The note had an original principal balance of $1,359,376 and was delivered in connection with the exercise of options held by the firm. Management believes that it has exhausted all reasonable efforts to collect on the note and has sold the collateral securing the note for proceeds of $171,944. As a result, management determined to write off the remaining balance of the note in the third quarter as uncollectible. The balance has been written off through the equity account because the note was given in connection with the exercise of options and the services were never rendered by the firm. The amount of the write off was reserved in the financial statements under stockholders' equity during 1995, and therefore the write off did not cause a further reduction in the net worth of the Company. Page 10 of 18 11 Item 2. - Management's Discussion and Analysis of Operations The Company realized a net loss of ($744,360) for the three month period ended September 30, 1998, compared to a net loss of ($803,275) for the same period last year. A summary of comparative results between the third quarter of 1998 and the third quarter of 1997 is as follows: Revenues were realized as follows: Quarter Ended Quarter Ended Sept. 30, 1998 Sept. 30, 1997 Retail Subsidiary: Gasoline $ 517,630 $ 396,828 Car Wash 696,398 996,049 Oil & Lube 293,172 321,224 Grocery 42,232 56,483 Other Sales 15,550 36,309 Energy Subsidiary: Natural Gas 7,243 78,268 Crude Oil 5,352 28,948 --------------- --------------- Total Revenue For Quarter $ 1,577,577 $ 1,914,109 =============== =============== Retail Subsidiary (Calibur Systems, Inc.) The Company experienced an increased gross profit margin on gasoline sales from 3.8 % in the third quarter of 1997 to 4.8% in the third quarter of 1998. Volume increased from 357,089 gallons in the third quarter of 1997 to 584,854 gallons in the third quarter of 1998 for an increase of approximately 61.8 %. The increase in volume is attributed to the Company's decision to be more price competitive at its gasoline locations. Car wash revenue was $299,651 lower for the quarter as compared to the same quarter last year. Same store car wash revenue decreased from $802,121 in the third quarter of 1997 to $695,453 in the third quarter of 1998 which represents a decline of $106,668 or approximately 13.3%. The remaining decrease is attributed to the decrease in the number of full service car wash locations which went from 11 locations during the third quarter of 1997 to 8 locations at present. For further information related to the decrease in the number of the Company's full service car wash locations refer to the "Expansion, Capital Requirements and Divestitures" section of this report located in the Management's Discussion and Analysis of Operations section. Page 11 of 18 12 Item 2 - Management's Discussion and Analysis of Operations - Continued Oil and lube revenue was $28,052 lower for the quarter as compared to the same quarter last year which represents a decrease of approximately 8.7 %. Revenues from new locations was $37,545 for the quarter. Same store revenue declined $11,499. The balance of the decrease is attributed to the decrease in the number of Company locations offering oil and lube services. As of the end of the third quarter of this year the Company had eight oil and lube centers in operation as compared to nine oil and lube centers open at the end of the third quarter in 1997. For further information related to the decrease in the number of Company locations offering oil and lube services refer to the "Expansion, Capital Requirements and Divestitures" section of this report located in the Management's Discussion and Analysis of Operations section. Grocery revenue was $42,232 for the quarter as compared to $56,483 for the same period last year. Other revenues were $15,550 for the quarter as compared to $36,309 for the same period last year. The decrease in both cases is mainly attributed to the decrease in the number of locations carrying such products. For further information related to the decrease in the number of the Company's locations selling grocery and other items refer to the "Expansion, Capital Requirements and Divestitures" section of this report located in the Management's Discussion and Analysis of Operations section. The Calibur Systems, Inc. subsidiary had a net loss of ($240,796) for the quarter as compared to a net loss of ($164,268) for the same period last year. Energy Subsidiary (Jackson-United Petroleum Corporation) Natural gas revenues decreased to $27,243 for the quarter as compared to $78,268 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. Natural gas revenues for the quarter were further reduced by $20,000 due to an adjustment in accounts receivable. Oil revenue for the quarter was $5,352 for the quarter as compared to $28,948 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. No revenues were realized from the "pilot" phase of a water-flood project which is a joint venture with Western Engineering, Inc. ("Western") of Evansville, Indiana. Page 12 of 18 13 Item 2 - Management's Discussion and Analysis of Operations - Continued The Jackson-United Petroleum Corporation subsidiary had a net loss of ($31,059) for the quarter as compared to a net income of $41,338 for the same period last year. Depreciation and depletion were $5,668 for the quarter as compared to $45,000 last year for the same period. Consolidated Operations The decrease in revenues and cost of sales, as reported for the quarter and year to date, are attributed to the decrease in the number of Calibur locations operated by the Company. For further information related to the number of Company locations operated in the Calibur subsidiary refer to the "Expansion, Capital Improvements and Divestitures" section of this report located in the Management's Discussion and Analysis of Operations section. Operating expenses were $1,264,270 for the third quarter of 1998 as compared to $1,572,591 for the same period last year. The decrease is attributed to the reduction in the size of the Company. Management expected a loss for the quarter. However, the loss for the third quarter exceeded the expectations of management. The primary factors associated with the losses were: (1.) lower than expected car wash revenue, (2.) lower than expected lube center revenues and (3.) several non-recurring expenses which occurred during the quarter. Financial Condition - The working capital deficit of the Company as of September 30, 1998 is approximately ($16,108,175) as compared to a deficit of approximately ($10,418,676) as of December 31, 1997. The majority of this increase is attributed to the following factors: (1.) increases in accrued interest on debentures - the Company ceased payment of interest on all debentures effective December 31, 1997, (2.) increases in accrued dividends on preferred stock - the Company ceased payment of dividends on all preferred stock effective December 31, 1997, (3.) the fact that the majority of the Company's real estate debt has a maturity of less than one year and (4.) all of the Company's outstanding debentures are now in default due to the fact that the Company ceased paying interest on the debentures effective December 31, 1997. The net worth of the Company decreased from ($2,103,963) as of June 30, 1998 to ($3,334,997) as of September 30, 1998. The decrease is attributed to the operating loss of ($801,986) sustained by the Company and partially off-set by non-operating income of $57,626. The net worth was further reduced by the amount of the accrued preferred stock dividend of $486,674 for the quarter. Page 13 of 18 14 Item 2 - Management's Discussion and Analysis of Operations - Continued In the third quarter of 1998, management determined to write off the remaining balance of $1,187,432 related to a promissory note from one of the Company's former public relations firms. The note had an original principal balance of $1,359,376 and was delivered in connection with the exercise of options held by the firm. Management believes that it has exhausted all reasonable efforts to collect on the note and has sold the collateral securing the note for proceeds of $171,944. As a result, management determined to write off the remaining balance of the note in the third quarter as uncollectible. The balance has been written off through the equity account because the note was given in connection with the exercise of options and the services were never rendered by the firm. The amount of the write off was reserved in the financial statements under stockholders' equity during 1995, and therefore the write off did not cause a further reduction in the net worth of the Company. During the quarter, the Company defaulted under the terms of an agreement with Infinity Investors, Ltd. ("Infinity") regarding certain loans made to the Company by Infinity. On August 5, 1998, approximately $5,000,000 in mortgage notes held by Infinity and a short term loan of $750,000 held by Infinity were refinanced and Infinity provided the Company approximately $1,300,000 in additional financing. The refinancing is divided into two notes, designated as the A-Note and the B-Note, and both notes are secured by the stock of the subsidiaries of the Company and substantially all of the assets of the Company and each subsidiary. The A-Note is in the amount of $4,200,000 at an interest rate of twelve percent (12%) per annum and will mature on January 1, 1999. The interest on this note is to be paid monthly. As of the date of this report no interest payments on this note have been made by the Company. This note is guaranteed by the President of the Company. The B-Note is in the amount of $2,800,000 at an interest rate of twelve percent (12%) per annum and will mature on January 1, 1999. The interest on this note is to be paid at maturity. There can be no assurance that the Company will be able to access the total amount of funds under the B-Note. The balance of the B-Note as of September 30, 1998 was $2,173,223. Subsequent to the end of the quarter, an additional advance was made in the amount of $277,397 to pay payroll taxes owed by the Company. Under the terms of the refinancing, the remaining funds of approximately $349,380 are to be available to the Company if the Company is not in default under the terms of the agreement. The Company is presently in default under the terms of the agreement and has been unable to draw the remaining funds as of the date of this report. The primary reasons for the default are as follows: (1.) failure to provide monthly financial information on a timely basis and (2.) the failure to pay the accrued interest on the A-Note. As a condition precedent to the refinancing, the Company agreed to work with Infinity towards an amicable recapitalization of the Company and its subsidiaries. Plans for the recapitalization are incomplete at this time. During 1998 and 1999, the Company will continue to seek additional sources of capital to continue as a going concern. No assurance can be given that the Company will be able to obtain the desired capital. Expansion, Capital Improvements and Divestitures As of September 30, 1998, the Company is not committed to any expansion projects in the retail subsidiary or the oil and gas subsidiary. During the quarter the Company did not cease operations at any Calibur Systems, Inc. locations. However, during the past year several divestitures did occur which have had a Page 14 of 18 15 Management's Discussion and Analysis of Operations - Continued significant effect on the quarter to quarter comparison of financial information contained in this report. The divestitures are summarized as follows: (1.) In September, 1997, a car wash and gasoline facility at 795 South Jefferson Avenue in Cookeville, Tennessee was sold to, Dwight Thomas, the Company's Secretary and a member of the Company's Board of Directors. The location was sold for $516,000 and there was an M.A.I. appraised value of $536,000 on this location. The price was deemed acceptable due to the fact that the location was in need of capital improvements, including environmental updates of underground petroleum storage tanks necessary to meet 1998 standards, in excess of approximately $80,000 as of the date of the sale. (2.) In May, 1998, an oil and lube facility located on Merchants Road in Knoxville, Tennessee was closed. The location was operated by the Company under a short term lease. The location was unprofitable during the time it was operated by the Company and in 1998 had a loss of ($14,198) before taxes and insurance. The Company was successful in finding a non-affiliated third party operator willing to take over the long term lease and acquire the Company's inventory at the location. A one time charge in the amount of approximately ($56,608) was taken in the second quarter of 1998 as a result of ceased operations. (3.) In June, 1998, a car wash and gasoline facility located on Canton Highway in Marietta, Georgia was closed. The location is now being leased from the Company by a non-affiliated third party under a one year lease agreement with the Company which grants the tenant the option to purchase the location from the Company for an amount equal to the debt on the location of approximately $922,000. The location has been unprofitable for the past couple of years and the 1998 year to date loss was ($27,704) as of the date of closing. The lease is triple net and the lease payments are equal to the existing debt service of the Company for the location. The tenant has already applied to the Company's lender, the Small Business Administration, to assume the debt and exercise their right to purchase the location from the Company. No assurance can be given that the tenant will be able to assume the existing debt or be able to find appropriate financing to acquire the location. (4.) In June, 1998, a car wash, gasoline and oil and lube facility located on Memorial Drive in Atlanta, Georgia was closed. The location is now being leased from the Company by a non-affiliated third party under a five year triple net lease with payments of $6,000 per month for the first six months and then $7,500 per month for the remaining term of the lease. Said lease also has a purchase option for the tenant which allows the tenant to purchase the location for $900,000 if acquired on or before January 1, 1999 and said purchase price increases $50,000 per year on each January 1st during the term of the lease. The location has been unprofitable for the past couple of years and the year to date loss as of the date closed was ($33,961). Although the tenant is expected to purchase the location during the term of the lease, no assurance can be given that such sale will take place. Page 15 of 18 16 Part II - Other Information Item 1 Legal Proceedings On May 18, 1998, an involuntary bankruptcy petition, styled In re United Petroleum Corporation and Calibur Systems, Inc. was filed in the United States Bankruptcy Court in the Eastern District of Tennessee by three preferred stockholders of the Company. On July 28, 1998, the Company filed a motion to dismiss the petition. On September 10, 1998, the plaintiff requested that the court dismiss the petition. On September 10, 1998, the court entered an order dismissing the case. Subsequent to the end of the quarter, on October 6, 1998, the Company was sued by Strategic Holdings Corporation of Miami, Florida. The suit, styled Strategic Holdings Corporation v. United Petroleum Corporation, was filed in the Circuit Court of the 11th Judicial Circuit in and for Dade County, Florida. The action is a request for damages of approximately $550,000 related to allegations that the Company breached an agreement. The Company believes it has significant valid defenses to this suit. On November 23, 1998, the Company filed a Motion For Enlargement of Time To Respond to The Complaint. Item 2 Changes In Securities None, not applicable Item 3 Defaults Upon Senior Securities The Company is presently in default regarding both the Company's outstanding debentures and preferred stock. The Company ceased paying interest on the debentures and ceased paying dividends on the outstanding preferred stock effective December 31, 1997. Prior to this date the Company had been paying interest on the debentures via the issuance of common stock in the Company and had been paying the dividend on preferred stock via the issuance of common stock of the Company. Accrued interest on debentures presently totals $942,106. Accrued dividends on preferred stock presently totals $1,930,827. In addition, the Company is presently in default under its mortgage notes to Infinity. The primary reasons for the default are as follows: (1.) failure to provide monthly financial information on a timely basis and (2.) the failure to pay interest on the Infinity A-Note as referenced earlier in this report. Item 4 Submission of Matters to a Vote of Security Holder None, not applicable Page 16 of 18 17 Part II - Other Information - Continued Item 5 Other Information Item 6 Exhibits and Reports on Form 8-K (a.) Exhibit 27.1 Financial Data Schedule. (b.) Reports on Form 8-K - None Page 17 of 18 18 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 Date: November 23, 1998 By: /s/ Michael F. Thomas ------------------ ---------------------------- Michael F. Thomas President & CEO Date: November 23, 1998 By: /s/ L. Douglas Keane, Jr. ------------------ ---------------------------- L. Douglas Keane, Jr. Executive Vice President Page 18 of 18 19 EXHIBIT INDEX EXHIBIT NUMBER DESCRIPTION - ------ ----------- 27.1 Financial Data Schedule