SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-KSB
ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
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<S> <C>
For the fiscal year ended October 31, 1998 Commission File No. 0-21169
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IMPERIAL PETROLEUM RECOVERY CORPORATION
(Name of Issuer as Specified in its Charter)
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<S> <C>
Nevada 76-0529110
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
15311 Vantage Parkway West
Suite 160
Houston, Texas 77032
(Address of Principal Executive Offices) (Zip Code)
</TABLE>
(281) 987-2828
(Issuer's Telephone Number, Including Area Code)
Securities Registered under Section 12(b) of the Exchange Act:
None
Securities Registered under Section 12(g) of the Exchange Act:
Common Stock, par value $0.001 per share
(Title of Class)
Check if the issuer (1) filed all reports required to be filed by Section 13 or
15(d) of the Exchange Act during the past 12 months (or for such shorter period
as the issuer was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes |X| No |_|
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this report and no such disclosure will be
contained, to the best of the issuer's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. |X|
The issuer's revenues for its most recent fiscal year were approximately
$26,000.
The aggregate market value of shares of Common Stock held by non-affiliates
(based on the January 29, 1999 last sale price) was approximately $17,516,765.
As of January 29, 1999, 14,988,722 shares of the issuer's Common Stock were
outstanding.
Transitional small business disclosure format: |_| Yes |X| No
<PAGE>
PART I
ITEM 1. DESCRIPTION OF BUSINESS
General
Imperial Petroleum Recovery Corporation (the "Company" or "IPRC") is a
development stage company committed to developing and marketing a proprietary
oil sludge remediation process and equipment that uses high energy microwaves to
separate water, oil and solids. The Company calls the process "Microwave Sludge
Treatment" ("MST"), and believes it can provide an effective, ecologically sound
and economical method of processing crude oil sludge and emulsions. Management
believes the use of microwave energy for sludge remediation and oil recovery
reduces usage of energy, chemical pollutants, reagents and solvents, and will
minimize the generation of by-products or waste streams. Processing time should
be reduced. Laboratory work has shown that the microwave system is 30 times
faster and takes up 90% less space than conventional emulsion cracking systems.
Management believes the MST system offers one of the first truly effective,
economical, and safe methods to address this global problem. The MST process
recovers usable hydrocarbon compounds from material that otherwise would be of
little value or require disposal. Based on prototype testing and demonstrations,
management believes that approximately 50% to 90% of the crude oil recovered
through the MST process can be reclaimed for sale.
The Company is concentrating its marketing efforts on North America.
Several potential domestic customers are reviewing the results of IPRC's field
test trials before determining whether to enter into contracts to acquire the
Company's products. Internationally, the Company has had what management regards
as serious discussions with entities in Kuwait, the Netherlands and Venezuela
about using the MST process to clean up stored sludge or emulsions. No
assurances can be given that any of these activities will result in sales
revenues for the Company.
Current Product Offerings
The Company currently offers three product lines, each meeting a
specific need within the hydrocarbon reclamation process:
o Microwave Sludge Technology System (MST-4000, MST-2000, MST-1000)
o Sludge Tank/Pit Heating Unit (SMU-60)
o Truck Melting System (TMS-60)
The MST system is the Company's principal product line. An MST unit
includes a computer-controlled microwave sludge remediation system consisting of
all the elements needed to reclaim oil from oil sludge and "rag layer" water
located in tank storage and waste pits. MST systems are modular and can be
conjoined to handle larger capacity requirements as required by the customer.
The core of an MST unit consists of a microwave generator, a series of
waveguides, tuners, a computer and computer control instrumentation plus the
actual applicator, where the sludge/emulsion is subjected to microwave energy.
The Company introduced its first MST system in 1996 for remediating oil sludge
to water, marketable oil and solids.
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The sludge tank/pit heating unit (SMU-60) is a low-cost sludge
liquefaction and pumping platform. It is mobile, either trailer or track
mounted, and provides an extended reach capability of up to 60 feet. Requiring
no open flame, this unit employs the Company's MST technology and can turn
sludge into a soluble product for ease of removal.
The truck melting system (TMS-60) is the third line of products
currently offered by IPRC. This unit complements the Company's other product
lines by providing the customer with the means to preheat oil sludge within a
tanker truck to facilitate unloading into an MST system unit or an SMU-60.
All products currently are available for order and have a delivery
schedule of approximately 120 days. Complete parts support and training programs
are available for all products.
The Company assembles its products in its Houston, Texas facility,
using components procured primarily from outside subcontractors and vendors. The
Company manufactures certain items itself and builds product units to individual
customers' specifications. Each unit using the MST process will vary in size and
sophistication in the software modules.
The Company offers its products for lease directly to end users. In
certain overseas markets, the Company offers its products to existing oil sludge
processors through geographically-specific marketing partnerships. After
leasing, the products are to be operated by the customer's or partner's
personnel, after receiving technical training from the Company. IPRC intends to
have technicians available worldwide to service the Company's products and to
monitor and periodically check products in the field. Each MST system is to be
protected by a security device to assure that the Company and its partners
maintain control of the system and that any usage payments are calculated
accurately.
Research and Development
Principals of the Company began developing the MST process in 1995.
Testing of a prototype unit began in September 1996. The Company has refined the
MST process based on its extensive testing and feedback from potential customers
and technical experts. Modifications have greatly reduced maintenance costs of
MST units.
The Company receives sludge and emulsion samples for testing at its new
laboratory in Houston. The lab serves as a bench scale testing facility, capable
of processing five to eight samples per day and duplicating the commercial MST
system's process. The laboratory is also used for the development of new
processes and specialized equipment. This lab is adjacent to the Company's
manufacturing facility.
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<PAGE>
Marketing
The Company markets its products primarily for remediation of crude oil
sludge and emulsions produced in connection with oil production and refining.
There are approximately 700 oil refineries worldwide, all of which are potential
customers of the Company. The United States has approximately 111 operable
petroleum refineries. The Company is focusing its marketing efforts on
refineries located in the United States and Canada.
Another potential market for the Company's products is oil field waste
management. The Company has developed a marketing plan through which it intends
to attempt to penetrate this market.
The Company intends to form strategic alliances with foreign partners
in order to penetrate international markets. The Company already has formed
alliances with the following:
o DuraTherm, Inc., an environmental services and technology firm that
provides thermal desorption, resource recovery, recycling, and waste
minimization for hydrocarbon contaminated materials, primarily for
the petroleum and petrochemical industries; and
o Golden Shahin for General Trading and Contracting Co., a Kuwaiti
company that provides logistical support for the successful
completion of the Kuwait Oil Lakes Remediation Project.
The Company believes that the MST process also can be deployed in
shipping lanes and ports to treat sludge from crude oil tankers as they off-load
ballast and clean their tanks before loading. The Company intends to increase
efforts to market the system for this application in the future.
Competition
The Company's competitors are firms that use a variety of processes to
dispose of solid and oily non-hazardous oil field wastes. The following table
provides information on these processes:
<TABLE>
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Estimated costs
(provided by disposal
companies between
Processes June 1996 and March 1997)
- ------------------------------------------------------------------------------------------------
|X| Recycling $40-$45 / hour (tank bottoms)
|X| Chemical treatment/reuse $12-$25 / ton
|X| Biological treatment/reuse $12-$28 / cubic yard
|X| Landfill $30-$60 / ton (liquids may be solidified @
$150 / ton and landfilled)
|X| Landspread $95 / ton; $38 / barrel
|X| Thermal treatment $40-$50 / ton; $10.50 / barrel
|X| Reuse $52-$77 / barrel (tank bottoms)
|X| Incinerator $26-$30 / ton (tank bottoms)
|X| Treat / injection $8.50-$11 / barrel (depends on oil &
gas content)
|X| Cavern $1.95-$2.85 / barrel (discounts for high
oil content)
|X| Chemical treat / pit $9-$12 / barrel
</TABLE>
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Management believes that the MST process offers significant competitive
advantages over competing oil sludge remediation processes, in that the MST
process is more effective and more economical than competing systems. In
addition, fewer environmental problems appear to be associated with the MST
process. Heat, pressure, chemical, and centrifuge processes can achieve partial
remediation. But these methods have drawbacks. They are expensive, pose
additional environmental risks of their own, often leave volumes of untreated
hydrocarbons, and usually require the transportation of sludge to special
remediation sites. Use of a centrifuge/chemical recovery system requires high
heat and creates vapor problems. Fires and explosions are possible, posing a
danger to personnel as well as to the environment. Complete recovery of oil
seldom is achieved and requires the use of chemicals, at additional cost.
Moreover, the chemicals are difficult to eliminate from the sludge, and
eventually travel back to the refinery or into the wastewater system.
Incineration, which is still prevalent in developing nations, is easy, low in
cost and does not require sophisticated technology if the process is not subject
to environmental rules and procedures. If done under environmental rules and
regulations, however, incineration is costly. In addition, most incineration
systems destroy the sludge in a way that does not produce usable hydrocarbon
byproducts.
Oil sludge remediation services are being provided at over 80 sites
within the 10-state area encompassed by Arizona, California, Colorado,
Louisiana, Mississippi, New Mexico, Nevada, Texas, Utah, and Wyoming. Each
company providing these services is using a technology which has been effective.
Management believes, however, that each of these technologies can be greatly
enhanced by the introduction of IPRC's remediation systems. The Railroad
Commission of Texas has identified 38 permitted reclamation plants within the
state of Texas. Each of these locations represents both a competitor and a
potential customer for IPRC.
The Company's largest competitors are:
o Waste Management, Inc., which handles bio-remediation, liquid
solidification, and waste transportation, is a nationwide company
with 25 operating units in the Texas, Oklahoma, and Louisiana
regions.
o DuraTherm, Inc., which is the nation's leader in hazardous solid
waste handling, processing and recovery, has a $20 million facility
in Houston, Texas that receives products from all over North
America.
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<PAGE>
o Alfa Laval, a manufacturer of remediation equipment, has a worldwide
coverage of centrifuges and other separation equipment, plus a
service company in most oil producing regions.
Many of the companies with which the Company competes are substantially
larger and have substantially greater resources and market recognition and
broader capabilities than the Company. It is also likely that other competitors
will emerge in the future. As a consequence, there is no assurance that the
Company will be able successfully to compete in the marketplace.
Protection of Intellectual Property
The technology used in the MST process is proprietary. The Company does
not currently own patents to protect its design. The Company has filed a patent
application relating to its design and may seek additional patents in the future
covering patentable results of research. There can be no assurance that any
patent applications filed by the Company will result in patents being issued or
that any patents that may be owned or licensed by the Company in the future will
afford protection against competitors with similar technology, will not be
infringed upon or designed around by others or will not be challenged and held
to be invalid or unenforceable. Proprietary rights relating to the Company's
products and processes generally will be protected from unauthorized use by
third parties only to the extent that they are covered by valid and enforceable
patents or are maintained in confidence as trade secrets. In the absence of
patent protection, the business of the Company may be adversely affected by
competitors who independently develop substantially equivalent technology.
Third-party patents relating to technology utilized by the Company may
now exist or be issued in the future. The Company may need to acquire licenses
to, or to contest the validity of, any such patents. Significant funds may be
required to defend any claim that the Company infringes a third-party patent,
and any such claim could adversely affect the Company until the claim is
resolved. Furthermore, any such dispute could result in a rejection of any
patent applications of the Company or the invalidation of any patents the
Company may own in the future. There can be no assurance that any license
required under any such patent would be made available or, if available, would
be available on acceptable terms or that the Company would prevail in any
litigation involving such patent. Any of the foregoing adverse results could
have a material adverse effect on the Company and its results of operations.
The Company seeks to protect the technology used in the MST process in
part by confidentiality agreements with its advisors, employees, consultants,
suppliers and vendors. The Company also protects its technology by building
interlocking security measures into its products. There can be no assurance,
however, that these agreements and security measures will not be breached, that
the Company will have adequate remedies for any breach or that the Company's
trade secrets will not otherwise be disclosed to, or discovered by, competitors.
In addition, there can be no assurance that persons or institutions providing
research to the Company will not assert rights to intellectual property arising
out of such research.
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<PAGE>
Suppliers
The Company primarily uses standard parts and components from a variety
of suppliers to produce the hardware for its products. Certain components are
currently available only from a few limited sources. To date, the Company has
not had difficulty obtaining parts and components in sufficient quantity in a
timely manner. The Company does not expect to have such difficulty if and when
sales of MST systems accelerate.
Government Regulation
The Company's products are subject to government regulation by the
United States Environmental Protection Agency, local and state environmental
agencies, and local health departments. The Company believes that its products
meet or exceed all applicable safety and environmental regulations.
Employees
As of January 29, 1999, the Company had eight full-time employees, four
engaged in testing and manufacturing and four involved in sales and
administration.
ITEM 2. DESCRIPTION OF PROPERTY
The Company leases 4,519 square feet of office space and 7,500 square
feet of manufacturing and laboratory space in Houston, Texas under leases that
expire through the year 2000. The total lease payment for the leased space is
approximately $6,300 per month.
ITEM 3. LEGAL PROCEEDINGS
A lawsuit involving the Company was filed on February 9, 1995. The
defendant, Thermal Wave International Inc. (TWI), filed third-party claims
against third-party defendants, including the Company, on August 20, 1996. TWI
alleged that the Company:
(1) is misrepresenting itself as the exclusive source of a
technology designed to perform oil sludge remediation through
treatment by microwave radiation, but that such technology was
actually acquired and developed by TWI;
(2) has disclosed and/or made commercial use of TWI's trade secrets;
(3) has violated ss. 43(a) of the Lanham Act;
(4) has violated ss.16.29 of the Texas Business and Commerce Code;
(5) has engaged in unfair competition, false advertising and
misappropriation of proprietary information under the common
law of Texas; and
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<PAGE>
(6) has engaged in a conspiracy to misappropriate, misrepresent
and wrongfully exploit technology of TWI.
TWI sought the following remedies, inter alia, against the Company: (1)
actual damages of an unspecified amount; (2) disgorgement of profits; (3)
punitive damages of an unspecified amount; (4) an order enjoining the Company
from (a) using trade secrets or other proprietary information belonging to TWI;
(b) acts of unfair competition, and (c) false advertising, and (5) requirements
that the Company (a) make appropriate disclosures to correct alleged false or
misleading statements, and (b) disclose to TWI all details of alleged false or
misleading statements.
Management believes that TWI's claims are without merit and is
vigorously defending the Company. The Company denies that it has utilized or
misappropriated any trade secrets of TWI. Due to the uncertainties of the
litigation, no outcome can be predicted at this stage.
As of September 1997, the Company was in dispute with Continental
Electronics Corporation over a contract for software development. In September
of 1998, the Company negotiated a settlement of claims with Continental
Electronics Corporation by signing a 5-year, unsecured, non-interest bearing
note in the amount of $121,500.
The Company is subject to other litigation from time to time arising
from its operations and receives occasional letters alleging infringement of
patents owned by third parties. Management does not believe that any such
litigation and claims that have arisen have merit or that they will have a
material effect on the Company's financial position or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the Company's security holders
during the fiscal year covered by this report.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's common stock is traded on the OTC Bulletin Board market
under the symbol "IREC."
The following table sets forth the range of high and low bid quotations
for the Company's Common Stock for each of the quarters within the last two
fiscal years:
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<PAGE>
High and Low Bid Prices
-----------------------
Fiscal Year 1997 Low Bid High Bid
---------------- ------- --------
First Quarter (11/1/96-1/31/97) $ 1.180 $ 4.000
Second Quarter (2/1/97-4/30/97) $ 0.687 $ 3.000
Third Quarter (5/1/97-7/31/97) $ 0.375 $ 0.687
Fourth Quarter (8/1/97-10/31/97) $ 0.312 $ 0.875
Fiscal Year 1998 Low Bid High Bid
---------------- ------- --------
First Quarter (11/1/97-1/31/98) $ 0.500 $ 0.938
Second Quarter (2/1/98-4/30/98) $ 0.562 $ 0.875
Third Quarter (5/1/98-7/31/98) $ 0.343 $ 0.718
Fourth Quarter (8/1/98-10/31/98) $ 0.343 $ 0.969
The quotations in the table above reflect inter-dealer prices, without
retail mark-up, mark-down or commissions, and may not represent actual
transactions.
Holders
As of January 29, 1999, there were 666 registered holders of the
Company's Common Stock.
Dividends
The Company has not paid cash dividends to date, and does not expect to
pay any cash dividends in the foreseeable future. The Company intends to retain
any earnings to finance its future growth.
Recent Sales of Unregistered Securities
In fiscal year 1998, the Company issued securities without registration
under the Securities Act of 1933, as follows:
On December 11, 1997, Maya LLC acquired beneficial ownership from the
Company of 500,000 shares of the Company's Common Stock, and a Warrant to
purchase an additional 3,500,000 shares of its Common Stock in exchange for
$400,000 cash. The Warrant is exercisable for $1.00 per share and expires
December 11, 2001.
On March 11, 1998, Maya LLC acquired beneficial ownership from the
Company of 500,000 shares of the Company's Common Stock, and a Warrant to
purchase an additional 3,500,000 shares of its Common Stock in exchange for
$100,000 cash and a 90-day promissory note of $295,068. The Warrant is
exercisable for $1.00 per share and expires March 11, 2002.
On June 11, 1998, Maya LLC acquired beneficial ownership from the
Company of 500,000 shares of the Company's Common Stock, to be issued on July
11, 1998, and a Warrant to purchase an additional 3,500,000 shares of its Common
Stock, which bears an effective date of July 11, 1998, in exchange of $100,000
cash and a 90-day promissory note of $295,069. The Warrant is exercisable for
$1.00 per share and expires July 11, 2002.
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On the dates set forth in the table below, the Company issued the
number of shares of its Common Stock indicated in the table without registration
under the Securities Act of 1933:
<TABLE>
<CAPTION>
Person to Purpose of Previous
Issuance Date No. of Shares Whom Issued Issuance Closing Price
- ------------- ------------- ----------- -------- -------------
<S> <C> <C> <C> <C>
Nov. 19, 1997 4,000 Investor Cash investment $0.843
of $2,200
June 3, 1998 17,000 Investor Discharge debt $0.718
of $7,500
</TABLE>
On December 8, 1998, in fiscal year 1999, Maya LLC acquired beneficial
ownership from the Company of 125,000 shares of the Company's Common Stock, and
a Warrant to purchase an additional 875,000 shares of its Common Stock in
exchange for $100,000 cash. The Warrant is exercisable for $1.00 per share and
expires December 8, 2002.
In addition, the Company has issued the following shares of its Common
Stock without registration under the Securities Act of 1933 in the first
calendar quarter of 1999:
<TABLE>
<CAPTION>
Person to Purpose of Previous
Issuance Date No. of Shares Whom Issued Issuance Closing Price
- ------------- ------------- ----------- -------- -------------
<S> <C> <C> <C> <C>
Jan. 4, 1999 10,000 Employee 1 Bonus for fiscal $0.625
year 1999
Jan. 4, 1999 10,000 Employee 2 Bonus for fiscal $0.625
year 1999
Jan. 4, 1999 10,000 Employee 3 Bonus for fiscal $0.625
year 1999
Jan. 19, 1999 2,490 Consultant Discharge account $0.75
payable of $1,494
Jan. 25, 1999 100,000 Investor Cash investment $0.90
of $50,000
</TABLE>
The Company also issued shares of its Common Stock without registration
under the Securities Act of 1933 during fiscal year 1997. On April 1, 1997, the
Company issued a stock certificate evidencing 50,000 shares sold for $40,000
cash to an individual investor at $0.80 per share. On July 3, 1997, September 1,
1997 and September 15, 1997, the Company sold 300,000 shares, 350,000 shares and
1,350,000 shares, respectively, for cash to an individual investor at an average
price of $0.38 per share, with total gross proceeds of $760,000. On September
15, 1997, the Company issued a stock certificate evidencing 5,000 shares sold
for $2,500 cash to an investor at $0.50 per share. The Company also issued
shares to various consultants for services performed for the Company, as shown
in the following table:
<TABLE>
<CAPTION>
Date of No. of Co. Debt Price Per
Stock Certificate Identifier Shares Issued Forgiven Share
- ----------------- ---------- ------------- -------- -----
<S> <C> <C> <C> <C>
5/15/97 Consultant 1 200,000 $130,000 $0.65
6/15/97 Consultant 2 5,400 2,700 0.50
7/8/97 Consultant 3 10,000 5,000 0.50
7/14/97 Consultant 2 5,400 2,700 0.50
8/11/97 Consultant 2 5,400 2,700 0.50
8/11/97 Consultant 4 10,000 5,000 0.50
8/11/97 Consultant 5 10,000 5,000 0.50
8/26/97 Consultant 2 3,600 1,800 0.50
9/12/97 Consultant 2 5,400 2,700 0.50
10/28/97 Consultant 6 200,088 62,027.28 0.31
</TABLE>
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In addition, the Company issued shares of its Common Stock to
certain employees in lieu of cash, as shown in the following table:
<TABLE>
<CAPTION>
Date of No. of Co. Debt Price Per
Stock Certificate Identifier Shares Issued Forgiven Share
- ----------------- ---------- ------------- -------- -----
<S> <C> <C> <C> <C>
6/18/97 Employee 1 34,000 $17,000.00 0.50
6/18/97 Employee 2 5,000 2,500.00 0.50
6/18/97 Employee 3 8,700 4,350.00 0.50
6/18/97 Employee 4 5,833 2,916.50 0.50
6/18/97 Employee 5 500 300.00 0.50
8/11/97 Employee 1 11,667 5,833.50 0.50
8/11/97 Employee 3 8,700 4,350.00 0.50
8/11/97 Employee 4 5,833 2,916.50 0.50
8/11/97 Employee 2 5,000 2,500.00 0.50
8/11/97 Employee 1 22,366 11,183.00 0.50
</TABLE>
In all instances except the 22,366 shares issued to an employee, the debt
forgiven was a debt for salary or wages. In the case of the 22,366 shares, the
debt represented reimbursement for relocation expenses.
Also in fiscal year 1997, the Company issued shares of its Common Stock
without registration under the Securities Act of 1933 to certain parties for the
purposes shown in the following table.
<TABLE>
<CAPTION>
Date of No. of Purpose of
Stock Certificate Shares Issued Issuance Financial Terms
- ----------------- ------------- -------- ---------------
<S> <C> <C> <C>
12/9/96 450,139 Loan repayment Debt of $1,884,004 cancelled
($4.185 per share)
4/9/97 109,939 Loan repayment Debt of $450,000 cancelled
($4.09 per share)
6/3/97 10,000 Loan repayment Debt of $10,000 cancelled
($0.30 per share)
6/18/97 3,000 Loan repayment Debt of $1,000 cancelled
($0.30 per share)
7/21/97 147,200 Reimbursement for Debt of $73,600 cancelled
expenses advanced ($0.50 per share)
7/24/97 100,000 Settlement of claim Settlement amount of
for abandonment of $63,500 ($0.635 per share)
leased premises
7/24/97 3,000 Loan repayment Debt of $1,000 cancelled
($0.30 per share)
7/29/97 326,425 Reimbursement for Debt of $163,212.33 cancelled
expenses advanced ($0.50 per share)
8/11/97 56,070 Debt settlement Settlement amount of
$28,035 ($0.50 per share)
9/25/97 100,000 Settlement of claims of Settlement amount of
Phonon Technologies $62,500 ($0.625 per share)
</TABLE>
The Company relied upon the exemption provided in Section 4(2) of the
Securities Act, which covers "transactions by an issuer not involving any public
offering," to issue the securities discussed above without registration under
the Securities Act of 1933 in fiscal years 1997 through 1999. The Company made a
determination in each case that the person to whom the securities were issued
did not need the protections that registration would afford. The certificates
representing the securities issued were marked with a legend indicating that
transfer of the securities was restricted because they had not been sold in a
registered offering.
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<PAGE>
During the fiscal year ended October 31, 1996, the Company
sold shares of its Common Stock for cash without registration under the
Securities Act of 1933 on 16 different dates, as detailed in the following
table:
<TABLE>
<CAPTION>
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No. of Aggregate Price per Share* No. of
Date Purchasers Purchase Price Shares Sold*
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
11/01/95 1 $ 8,000 $2.00 4,000
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11/15/95 1 2,000 2.00 1,000
- -----------------------------------------------------------------------------------------------------------
12/13/95 14 51,200 2.00 25,600
- -----------------------------------------------------------------------------------------------------------
12/23/95 1 12,000 2.00 6,000
- -----------------------------------------------------------------------------------------------------------
01/07/96 9 22,400 2.00 11,200
- -----------------------------------------------------------------------------------------------------------
01/07/96 1 500 4.00 125
- -----------------------------------------------------------------------------------------------------------
01/07/96 1 1,500 3.00 500
- -----------------------------------------------------------------------------------------------------------
01/11/96 2 65,000 4.00 16,250
- -----------------------------------------------------------------------------------------------------------
01/23/96 9 204,305 2.00 102,150.5
- -----------------------------------------------------------------------------------------------------------
01/24/96 4 92,000 2.00 46,000
- -----------------------------------------------------------------------------------------------------------
01/26/96 1 50,000 2.00 25,000
- -----------------------------------------------------------------------------------------------------------
01/31/96 1 8,000 2.00 4,000
- -----------------------------------------------------------------------------------------------------------
01/31/96 6 21,200 2.50 8,480
- -----------------------------------------------------------------------------------------------------------
02/05/96 2 3,000 3.00 1,000
- -----------------------------------------------------------------------------------------------------------
02/14/96 2 9,000 3.00 3,000
- -----------------------------------------------------------------------------------------------------------
02/16/96 1 3,000 3.00 1,000
- -----------------------------------------------------------------------------------------------------------
04/18/96 1 12,000 3.00 4,000
- -----------------------------------------------------------------------------------------------------------
05/10/96 1 40,000 2.00 20,000
- -----------------------------------------------------------------------------------------------------------
05/10/96 3 40,000 2.50 16,000
- -----------------------------------------------------------------------------------------------------------
05/10/96 4 102,000 3.00 34,000
- -----------------------------------------------------------------------------------------------------------
08/15/96 1 5,000.00 6.00 833
- -----------------------------------------------------------------------------------------------------------
TOTAL 66** $ 752,105 330,138.5
- -----------------------------------------------------------------------------------------------------------
</TABLE>
* Numbers have not been adjusted to reflect .03 for 1 stock dividend of
November 22, 1996.
** Total is not sum of column because some purchasers purchased more than once.
In addition to the sales reflected in the table above, the Company
issued 10,345 shares of Common Stock to 15 individuals on September 4, 1996 and
4,938 shares of Common Stock to four individuals on October 30, 1996. All of
these individuals were employees of either the Company, NSA, Inc., which was
providing administrative support services to the Company at the time, or Food
Development Corporation, which was also providing services to the Company at the
time. See "Item 12. Certain Relationships and Related Transactions." Shares of
Common Stock were issued to these individuals in lieu of other compensation. The
Company also issued 25,000 shares of Common Stock to a lawyer providing services
to the Company in lieu of other compensation on January 24, 1996.
-12-
<PAGE>
Current management believes that prior management relied upon the
exemption provided in Section 4(2) of the Securities Act, which covers
"transactions by an issuer not involving any public offering," to issue in
fiscal year 1996 the shares discussed and identified in the table above without
registration under the federal Securities Act of 1933. Except in the case of the
issuance to the lawyer and to employees, purchasers of the shares were business
associates, family members and friends of officers and directors of the Company.
The certificates representing the shares sold were marked with a legend
indicating that transfer of the shares was restricted because they had not been
sold in a registered offering.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
Overview
The Company took substantial steps in fiscal year 1998 to transform
itself into a profit-generating entity. The Company has sustained substantial
losses since inception, primarily due to research and development expenses
related to its MST System.
The year began with an agreement between the Company and an oil
processing plant in Eastern Texas. An MST System demonstration unit was placed
in the plant and operated for a period of six months. Several teams of petroleum
industry engineers and executives toured the facility during the operation, and
sampling was done to prove the effectiveness of the technology. The research and
development was extremely valuable to the Company and provided testing of some
of the most difficult emulsions with very satisfactory results. The research
supported the Company's belief that the MST System is capable of recovering the
hydrocarbon with a basic solids and water content of less than 4% while reducing
processing costs. With these results, the Company was able to move into a
refinery setting with increased confidence.
In June, the MST System demonstration unit was transported to
Bakersfield, California, where it was upgraded and brought into compliance with
California licensing requirements. It was then moved to the Shell Oil Refinery
in Martinez, California. Shell agreed to defray the expenses of the
demonstration and paid the cost of mobilization and demobilization of the
System. The unit was placed at the Shell refinery to treat the waste stream,
earning approximately $26,000 within 30 days. This revenue was used to further
upgrade the MST System for the next scheduled demonstration in the Los Angeles
basin.
-13-
<PAGE>
An agreement was reached with Mobil Oil Corporation in July, 1998 and
the Company was accepted to the approved contractors list at Mobil's Torrance
Refinery. An MST System was fully incorporated into Mobil's Crude Oil Unit and
began processing emulsions from the desalter waste stream. Testing began on July
21, 1998 with an agreement to process 10,000 barrels of emulsions. Although the
Company earned no revenue from the initial test, the acceptance, research
results and credibility gained from the exposure of IPRC'S technology proved to
be invaluable.
During the duration of the initial Mobil agreement, constant testing
was done by Mobil engineers as well as by Company personnel. Members of the
management team of Mobil's Technology Company were very supportive of the
technology and its cost-cutting capabilities. In October, Mobil suggested an
extension of the agreement and the MST System demonstration unit was then used
to process waste oil from the Tank Cleaning Unit of the refinery. This portion
of the agreement yielded revenue of approximately $29,000 for the Company in
fiscal year 1999. It also verified another important application of the MST's
technology on some of the most difficult emulsions at the refinery, slop oil.
The MST System continued to operate at this site until December 23, 1998.
Management expects to reach agreement with at least one major petroleum
company on a long-term contract for the MST System in the second quarter of
fiscal year 1999. In addition, management expects to continue to deploy the
demonstration unit throughout the United States and Canada to publicize the MST
System's oil recovering capabilities and potential cost savings.
Because of the present economic climate in the energy sector, the major
emphasis of the Company is on cost cutting and process savings for its customers
and potential customers. The MST System has proven to generate significant cost
savings. Management believes that these cost savings will encourage petroleum
companies to accept the MST technology to help them create savings.
The foregoing discussion contains certain forward-looking statements
which involve risks and uncertainties. The Company's results could differ
materially from the results anticipated in such statements.
Fiscal Year Ended October 31, 1998 Compared to Fiscal Year Ended
October 31, 1997
Operating expenses in fiscal 1998 were $1,472,187 as compared to
$2,818,599 in fiscal 1997, a decrease of 47.8%. The decrease is partially
attributable to management's aggressiveness in restructuring the Company's
liabilities to reduce near-term cash requirements and to completion of the
development and demonstration of a prototype MST System. Research and
development expenses in fiscal 1998 were $499,655 as compared to $1,001,398 in
fiscal 1997, a decrease of 50.1%. The Company's research and development staff
continued to make improvements in the MST-4000 model of its MST system and to
create an MST-1000 model. By the end of fiscal 1998, the MST-1000 was completed
and a majority of the improvements had been completed.
-14-
<PAGE>
General and administrative expenses in fiscal 1998 totaled $972,532 as
compared to $1,817,201 in fiscal 1997, a decrease of 46.5%. The decrease is
attributable to management's aggressive implementation of significant cost
cutting measures.
The Company recognized gains from the settlement of liabilities during
fiscal year 1998 of $123,778 compared to $207,086 in fiscal 1997.
Liquidity and Capital Resources
IPRC's operations have been capital intensive. The Company has funded
operations principally from the private placement of equity securities,
primarily common stock, and warrants exercisable for common stock. On October
31, 1998, IPRC's aggregate liabilities were approximately $1,108,000 and the
Company had negative working capital of approximately $830,000.
During the first quarter of 1999, the Company raised approximately
$150,000 from the sale of 225,000 shares of its Common Stock. These funds are
expected to satisfy immediate and near-term cash flow requirements. Additional
funding and/or cash flow from the sale of the Company's products will be needed
in 1999, however, to sustain the operations of the Company.
Management feels that it has identified sufficient funds to manufacture
the required MST Systems and has devised arrangements to introduce new, related
products which is expected to increase revenues. The Company anticipates steady
growth, a strong fiscal first quarter and a more satisfactory year.
The foregoing discussion contains certain forward looking statements
which involve risks and uncertainties. IPRC's actual results could differ
materially from the results anticipated in such statements.
Year 2000 Compliance
The Company has undertaken a program to address the Year 2000 issue
with respect to the Company's information and operating systems, including
billing, accounting and financial reporting systems. Since the Company is
relatively new and small its only computer-related functions are office
functions which have been tested at a cost less than $5,000 and found to be in
compliance.
Since the Company has not yet begun production of the MST, it is
difficult to assess the compliance of major suppliers and material service
providers. However, in the future measures will be taken to assure said
compliance.
The Company intends to develop contingency plans to handle its most
reasonably likely worst case Year 2000 scenarios, which it has not yet fully
identified. The Company currently estimates that it will incur additional costs
which are not expected to exceed approximately $5,000 to complete its Year 2000
compliance work. Although the Company's Year 2000 efforts are intended to
minimize the adverse effects of the Year 2000 issue on the Company's business
and operations, the actual effects of the issue and the success or failure of
the Company's efforts described above cannot be known until the Year 2000 or
later. Failure by the Company and its major suppliers, other material service
providers and major distributors to address adequately their respective Year
2000 issues in a timely manner (insofar as such issues relate to the Company's
business) could have a material adverse effect on the Company's business,
results of operations and financial condition.
-15-
<PAGE>
ITEM 7. FINANCIAL STATEMENTS
Please see attached.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not required.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
Directors and Executive Officers
The current directors and executive officers of the Company are Henry
H. Kartchner, 74, and C. Brent Kartchner, 52.
Henry H. Kartchner has served as a director and Chairman of the Board
of the Company since December 1995 and as Chief Executive Officer since December
1996. Mr. Kartchner also is Chief Executive Officer of Food Development
Corporation, an international agribusiness, which he founded in 1975. Under his
leadership, FDC grew to annual revenues of $75 million. In 1970, he founded
Desert Magic, Inc., an agribusiness that included 10,000 acres of irrigated
land, processing plants and a nationwide marketing system. During the 1960's,
Mr. Kartchner was an executive with the H.J. Heinz company and responsible for
the fastest growing food sector of the Company. Henry H. Kartchner is the father
of C. Brent Kartchner.
C. Brent Kartchner has been President of the Company since January
1998, Vice President of Operations since September 1995, and a director of the
Company since September 1995. From 1992 to 1994, Mr. Kartchner was General
Manager and co-owner of Pacific Northwest Farming--Oregon Potato Processing
Center, a 12,000 acre agribusiness that included production and marketing and a
transportation division, plus the nation's largest potato dehydrating factories.
From 1987 to 1992, Mr. Kartchner was Vice President of Marketing of Sunkyong
Limited, one of the largest grain/foodstuff importers into South Korea. Mr.
Kartchner received a Bachelor of Science degree in agronomy and business
management from Brigham Young University in 1971. C. Brent Kartchner is the son
of Henry H. Kartchner.
-16-
<PAGE>
Scott Jensen, 27, was elected Secretary and Treasurer of the Company in
January 1998. He had served as Controller of the Company since December 1996,
and had worked for the Company since 1995. Mr. Jensen has been involved in many
aspects of the Company's business, including manufacturing, accounting, finance,
and operations. He aided in the manufacture of the Company's first MST unit. Mr.
Jensen received a bachelor's degree in business management from Brigham Young
University, Hawaii, in 1995.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934 (the "Act")
requires the Company's executive officers and directors and any persons who own
beneficially more than 10% of the Company's Common Stock to file initial reports
of ownership and changes in ownership with the Securities and Exchange
Commission ("SEC") as well as to furnish the Company with a copy of each such
report. Additionally, SEC regulations require the Company to identify in its
proxy statement and Annual Report on Form 10-KSB those individuals for whom one
or more of these reports required under Section 16 was not filed on a timely
basis during the most recent fiscal year or prior fiscal years. To management's
knowledge, all executive officers, directors and 10% stockholders met the
requirements of Section 16(a) during the 1998 fiscal year.
ITEM 10. EXECUTIVE COMPENSATION
Summary Compensation Table
The following table sets forth certain information concerning the
compensation paid or accrued by IPRC to or on behalf of the Company's Chief
Executive Officer and other executive officers for services provided in the
fiscal years indicated.
<TABLE>
<CAPTION>
Long Term Compensation
-----------------------------------------
Annual Compensation Awards Payouts
------------------------ ------------------ -------------------
(a) (b) (c) (d) (e) (f) (g) (h) (i)
Other Rest- Secur-
Name Annual ricted ities All other
and Compen- Stock Underlying LTIP Compensa-
Principal Salary Bonus sation Award(s) Options/ Payouts tion
Position Year ($) ($) ($) ($) SARs(#) ($) ($)
- -------- ---- -------- ------- --------- --------- ------- ------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Henry H. Kartchner 1998 0 0 0 0 0 0 0
Chairman & CEO 1997 0 0 0 0 0 0 0
1996 12,000 0 0 0 0 0 0
C. Brent Kartchner 1998 120,000 0 0 0 0 0 0
President 1997 120,000 0 0 0 0 0 0
1996 17,500 0 0 0 0 0 0
</TABLE>
-17-
<PAGE>
Compensation of Directors
Directors receive no compensation or fees for their services rendered
in such capacity.
Employment Contracts
There were no written employment contracts for any IPRC executive
officers in the fiscal year ended October 31, 1998 and none since.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Security Ownership of Certain Beneficial Owners and Management
As of January 29, 1999, the persons (including any "group") named in
the table below were believed by the management of the Company to be beneficial
owners of more than five percent of the Common Stock of the Company under SEC
Rule 13d-3. Under that Rule, beneficial ownership of a security consists of sole
or shared voting power (including the power to vote or direct the voting) and/or
sole or shared investment power (including the power to dispose or direct the
disposition) with respect to a security whether through a contract, arrangement,
understanding, relationship or otherwise. Unless otherwise indicated, management
believes that each person named in the table below has sole power to vote, or
dispose or direct the disposition, of all shares beneficially owned, subject to
applicable community property laws.
<TABLE>
<CAPTION>
Five-Percent Owners and Management Holdings(1)
------------------------------------------------------------
Name and Amount and
Address of Nature of
Beneficial Beneficial
Owner Ownership(2) Percent of Class(5)
---------------------------------------------------------------------------------
<S> <C> <C>
C. Brent Kartchner 1,068,041 7.1%
57 Quail Run Rd.
Henderson, NV 89014
Henry H. Kartchner 2,530,452 16.9%
3216 S. Everett Place
Kennewick, WA 99336
Rex H. Lewis 15,000,000 56.9%
2325-A Renaissance Dr.
Las Vegas, NV 89119
All Executive Officers 3,598,493 24.0%(4)
& Directors as a Group(3)
</TABLE>
-18-
<PAGE>
----------------
1. Another person or person may own beneficially 5% or more of the
Company's Common Stock without management's having sufficient
evidence to conclude that such an ownership position currently
exists.
2. All shares are held directly except that (i) Mr. Henry H.
Kartchner's beneficial holdings include 1,087,646 shares held
directly by Food Development Corporation, which he controls, and
(ii) Mr. Lewis' beneficial holdings are held by Maya LLC, an entity
he controls, and includes warrants to acquire 11,375,000 shares of
the Company's Common Stock for $1.00 per share until December 8,
2002.
3. Includes two individuals, Mr. Henry H. Kartchner and Mr. C. Brent
Kartchner.
4. May not equal the sum of individual holdings percentages because,
under SEC rules, different denominators may be used to calculate
certain individual percentages.
5. The percentage ownership for the options held by the indicated
individuals is based on an adjusted total of issued and outstanding
shares giving effect only to the exercise of each individual's
options.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
On November 1, 1998, the Company entered into a Management Agreement
with Maya LLC for a period of five years. Maya LLC is controlled by Rex H.
Lewis, who is named as a major shareholder of the Company under Item 11. Under
the Management Agreement, Maya LLC agreed to give consultation and advice on
selection and retention of management employees, planning and development,
budgeting, accounting, and general business in exchange for a management fee
equal to five percent of the gross revenue of the Company.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
Financial Statements
The following financial statements are included in this report:
Report of Independent Certified Public Accountants
Balance Sheets as of October 31, 1998 and 1997
Statements of Operations for the years ended October 31, 1998 and
1997 and cumulative amounts since inception
Statements of Stockholders' Deficit for the years ended October
31, 1998 and 1997 and cumulative amounts since inception
Statements of Cash Flows for the years ended October 31, 1998 and
1997 and cumulative amounts since inception
Notes to Financial Statements
-19-
<PAGE>
Exhibits
The exhibits to this report are identified in the Exhibit Index,
which appears immediately after the signature page and is incorporated in this
Item 13 by this reference.
Reports on Form 8-K
No reports on Form 8-K were filed by the Company during the last
quarter of the fiscal year ended October 31, 1998.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, the registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized, on
February 16, 1999.
IMPERIAL PETROLEUM RECOVERY CORPORATION
By /s/ Henry H. Kartchner
-----------------------------
Henry H. Kartchner
Chairman and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, this report has been signed below by the following persons in the
capacities and on the dates indicated.
/s/ Henry H. Kartchner February 16, 1999
- ------------------------------------
Henry H. Kartchner
Chairman and Chief Executive Officer
(Principal Executive Officer)
/s/ C. Brent Kartchner February 16, 1999
- ------------------------------------
C. Brent Kartchner
President and Director
(Principal Financial Officer)
-20-
<PAGE>
Imperial Petroleum Recovery Corporation
Exhibit Index to Form 10-KSB
Exhibit No. Identification of Exhibit
- ----------- -------------------------
3.1 Articles of Incorporation of the Company (incorporated by
reference to Exhibits 2 and 2.1 to the Company's Registration
Statement on Form 10-KSB filed with the Commission with a filing
date of August 8, 1996, Commission File No. 0-21169).
3.2 Bylaws of the Company (incorporated by reference to Exhibit 3.2
to the Company's Annual Report on Form 10-KSB for the fiscal
year ended October 31, 1996, filed with the Commission with a
filing date of November 26, 1997, Commission File No. 0-21169).
10.1 Convertible Promissory Note of the Company, bearing interest
from August 25, 1997, to Food Development Corporation
(incorporated by reference to Exhibit 1 to the Schedule 13D
filed by Henry H. Kartchner with the Commission with a filing
date of January 20, 1998, CIK No. 0001047620).
10.2* Management Agreement between the Company and Maya LLC dated
November 1, 1998.
27* Financial data schedule.
- ------------------
* Filed herewith.
<PAGE>
Imperial Petroleum Recovery Corporation
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
<S> <C>
FINANCIAL STATEMENTS
Report of independent certified public accountants F-2
Balance Sheets as of October 31, 1998 and 1997 F-3
Statements of Operations for the years ended October 31, 1998
and 1997 and cumulative amounts since inception F-4
Statements of Stockholders' Deficit for the years ended October 31, 1998
and 1997 and cumulative amounts since inception F-5
Statements of Cash Flows for the years ended October 31, 1998
and 1997 and cumulative amounts since inception F-8
Notes to Financial Statements F-10
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT
CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors and Stockholders
Imperial Petroleum Recovery Corporation
We have audited the accompanying balance sheets of Imperial Petroleum Recovery
Corporation (a development stage Company) as of October 31, 1998 and 1997, and
the related statements of operations, stockholders' deficit and cash flows for
the years then ended and cumulative amounts since inception. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits 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 Recovery
Corporation (a development stage company) as of October 31, 1998 and 1997, and
the results of its operations and its cash flows for the years then ended and
cumulative amounts since inception, in conformity with generally accepted
accounting principles.
The accompanying financial statements have been prepared assuming the Company
will continue as a going concern. As shown in the financial statements, the
Company has incurred cumulative net losses of $8,754,346 since inception of
operations and as of October 31, 1998, the Company's current liabilities
exceeded its current assets by $830,278 and its total liabilities exceeded its
total assets by $891,653. These factors, among others, as discussed in Note B to
the financial statements, raise substantial doubt about the Company's ability to
continue as a going concern. Management's plans in regard to these matters are
also described in Note B. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
/s/ Grant Thornton LLP
----------------------
GRANT THORNTON LLP
Salt Lake City, Utah
January 8, 1999
F-2
<PAGE>
Imperial Petroleum Recovery Corporation
(a development stage company)
BALANCE SHEETS
October 31,
ASSETS
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents 49,342 30,498
Inventory, net of reserve -- --
Prepaid expenses 7,221 32,266
----------- -----------
Total current assets 56,563 62,764
PROPERTY AND EQUIPMENT, AT COST, NET 144,712 137,614
other assets 15,413 10,032
----------- -----------
216,688 210,410
=========== ===========
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES
Trade accounts payable 175,471 525,667
Payables to related parties 252,605 --
Accrued liabilities 94,990 80,149
Current maturities of long-term obligations 363,775 116,559
----------- -----------
Total current liabilities 886,841 722,375
LONG-TERM OBLIGATIONS - less current maturities 221,500 288,780
COMMITMENTS AND CONTINGENCIES -- --
STOCKHOLDERS' DEFICIT
Common stock, par value $0.001; authorized 100,000,000 shares; reserved
10,700,000; issued and outstanding 13,731,421 and 12,567,421
shares at 1998 and 1997 13,732 12,568
Additional paid-in capital 7,855,470 6,622,614
Common stock subscriptions receivable (6,509) (6,909)
Deficit accumulated during the development stage (8,754,346) (7,429,018)
----------- -----------
Total stockholders' deficit (891,653) (800,745)
----------- -----------
216,688 210,410
=========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
F-3
<PAGE>
Imperial Petroleum Recovery Corporation
(a development stage company)
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Cumulative
amounts Year ended October 31,
since ---------------------------
inception 1998 1997
-------------- ------------ ------------
<S> <C> <C> <C>
Revenues 26,289 26,289 --
----------- ----------- -----------
Operating expenses
General and administrative expenses
Internal administration, selling and marketing
expense 3,766,653 754,637 1,503,954
Administrative and operating support costs -
related parties 1,522,770 217,895 313,247
Research and development expenses - prototype 3,296,377 499,655 1,001,398
Acquired research and development - Phonon
Technologies 349,500 -- --
Loss on abandonment of leased facility 161,918 -- --
----------- ----------- -----------
9,097,218 1,472,187 2,818,599
----------- ----------- -----------
Loss from operations (9,070,929) (1,445,898) (2,818,599)
Other income (expense), including interest, net (14,281) (3,208) (12,759)
----------- ----------- -----------
Loss before extraordinary item (9,085,210) (1,449,106) (2,831,358)
Extraordinary item - gain on extinguishment of debt 330,864 123,778 207,086
----------- ----------- -----------
NET LOSS (8,754,346) (1,325,328) (2,624,272)
=========== =========== ===========
Net loss per common share - basic
Loss before extraordinary item (0.10) (0.29)
Extraordinary item 0.01 0.02
----------- -----------
Net loss (0.09) (0.27)
=========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
F-4
<PAGE>
Imperial Petroleum Recovery Corporation
(a development stage company)
STATEMENTS OF STOCKHOLDERS' DEFICIT
<TABLE>
<CAPTION>
Years ended October 31, 1998, 1997, 1996 and period from inception to October 31, 1995
Price Common stock
per ------------------------------- Subscriptions
Date share Shares Par value receivable
-------------------- ------------- ---------------- ------------ ---------------
<S> <C> <C> <C> <C> <C>
Balances as of November 1, 1994 $ -- 7,729,702 $ 7,730 $ (7,730)
Issuance of common stock for cash Sept - Oct 1995 1.94 89,812 90 --
Sept - Oct 1995 3.85 62,858 62 --
Net loss -- -- -- --
------------- --------------- ------------ ------------
Balances as of October 31, 1995 -- 7,882,372 7,882 (7,730)
Issuance of common stock for cash Nov 1995 - Apr 1996 1.94 158,734 159 --
Nov 1995 - Apr 1996 2.41 13,794 14 --
Nov 1995 - Apr 1996 3.17 21,626 22 --
Nov 1995 - Apr 1996 3.88 60,044 60 --
Nov 1995 - Apr 1996 4.86 11,890 12 --
Nov 1995 - Apr 1996 5.07 7,366 7 --
July 1996 3.00 83,333 83 --
Sept 1996 4.34 11,513 12 --
Issuance of common stock to vendors
for services rendered Aug 1996 5.94 25,750 26 --
Issuance of common stock to employees
for services rendered Oct 1996 4.84 38,658 38 --
Net loss -- -- --
---------------- ------------ -------------
Balances as of October 31, 1996 8,315,080 8,315 (7,730)
Issuance of common stock for cash Apr 1997 0.80 50,000 50 --
July 1997 0.40 300,000 300 --
Aug 1997 0.34 350,000 350 --
Sept 1997 0.40 1,000,000 1,000 --
Sept 1997 0.34 350,000 350 --
<CAPTION>
Deficit
accumulated
Additional during the
paid-in development
capital stage
------------ ---------------
Balances as of November 1, 1994 $ -- $ --
Issuance of common stock for cash 174,310 --
242,038 --
Net loss -- (700,240)
------------ -------------
Balances as of October 31, 1995 416,348 (700,240)
Issuance of common stock for cash 308,067 --
33,351 --
68,478 --
233,120 --
57,822 --
37,393 --
249,917 --
49,989 --
Issuance of common stock to vendors
for services rendered 152,974 --
Issuance of common stock to employees
for services rendered 187,167 --
Net loss -- (4,104,506)
------------ ------------
Balances as of October 31, 1996 1,794,626 (4,804,746)
Issuance of common stock for cash 39,950 --
119,700 --
119,650 --
399,000 --
119,650 --
</TABLE>
(continued)
F-5
<PAGE>
Imperial Petroleum Recovery Corporation
(a development stage company)
STATEMENTS OF STOCKHOLDERS' DEFICIT - CONTINUED
<TABLE>
<CAPTION>
Years ended October 31, 1998, 1997, 1996 and period from inception to October 31, 1995
Price Common stock
per ------------------------------- Subscriptions
Date share Shares Par value receivable
-------------------- ------------- ---------------- ------------ ---------------
<S> <C> <C> <C> <C> <C>
Contribution of capital by stockholders -- 821
Issuance of common stock to affiliated
entities in satisfaction of loans and
accounts payable Dec 1996 3.19 766,659 767 --
Apr 1997 2.26 100,000 100 --
July 1997 0.50 473,625 474 --
Issuance of common stock to employees
in satisfaction of loans payable June 1997 0.30 33,000 33 --
July 1997 0.30 3,000 3 --
Aug 1997 0.50 22,366 22 --
Issuance of common stock to vendor in satisfaction
of accounts payable Aug 1997 0.50 58,070 58 --
Sept 1997 0.50 5,000 5 --
Issuance of common stock in satisfaction
of lease obligation July 1997 0.59 100,000 100 --
Issuance of common stock in satisfaction
of acquisition liability Sept 1997 0.63 100,000 100 --
Issuance of common stock to vendors
for services rendered Apr 1997 0.65 200,000 200 --
July 1997 0.50 20,800 21 --
Aug 1997 0.50 29,000 29 --
Sept 1997 0.50 5,400 5 --
Oct 1997 0.31 200,088 200 --
<CAPTION>
Deficit
accumulated
Additional during the
paid-in development
capital stage
------------ ---------------
<S> <C> <C>
Contribution of capital by stockholders 678,738 --
Issuance of common stock to affiliated
entities in satisfaction of loans and
accounts payable 2,448,544 --
225,962 --
236,338 --
Issuance of common stock to employees
in satisfaction of loans payable 10,967 --
997 --
11,161 --
Issuance of common stock to vendor in satisfaction
of accounts payable 28,978 --
4,995 --
Issuance of common stock in satisfaction
of lease obligation 59,200 --
Issuance of common stock in satisfaction
of acquisition liability 62,400 --
Issuance of common stock to vendors
for services rendered 129,800 --
10,379 --
14,471 --
2,695 --
61,827 --
</TABLE>
(continued)
F-6
<PAGE>
Imperial Petroleum Recovery Corporation
(a development stage company)
STATEMENTS OF STOCKHOLDERS' DEFICIT - CONTINUED
<TABLE>
<CAPTION>
Years ended October 31, 1998, 1997, 1996 and period from inception to October 31, 1995
Price Common stock
per ------------------------------- Subscriptions
Date share Shares Par value receivable
-------------------- ------------- ---------------- ------------ ---------------
<S> <C> <C> <C> <C> <C>
Issuance of common stock to employees for
services rendered June 1997 0.50 54,133 55 --
Aug 1997 0.50 31,200 31 --
Net loss -- -- --
---------- ------- ---------
Balances as of October 31, 1997 12,567,421 12,568 (6,909)
Issuance of common stock for cash
Nov 1997 0.55 4,000 4 --
Dec 1997 0.68 500,000 500 --
Mar 1998 0.66 500,000 500 --
June 1998 0.66 500,000 500 --
Issuance of warrants for cash
Dec 1997 0.12 -- -- --
Mar 1998 0.14 -- -- --
June 1998 0.14 -- -- --
Issuance of common stock to vendor in
satisfaction of accounts payable Sept 1998 0.78 43,000 43 --
Issuance of common stock to employees for
services rendered June 1998 0.50 17,000 17 --
Cancellation of stock subscriptions Oct 1998 0.78 (400,000) (400) 400
Net loss -- -- --
---------- ------- ---------
Balances as of October 31, 1998 13,731,421 $13,732 $ (6,509)
========== ======= =========
<CAPTION>
Deficit
accumulated
Additional during the
paid-in development
capital stage
------------ ---------------
<S> <C> <C>
Issuance of common stock to employees for
services rendered 27,018 --
15,568 --
Net loss -- (2,624,272)
------------ -------------
Balances as of October 31, 1997 6,622,614 (7,429,018)
Issuance of common stock for cash
2,196 --
339,500 --
324,568 --
324,569 --
Issuance of warrants for cash
60,000 --
70,000 --
70,000 --
Issuance of common stock to vendor in
satisfaction of accounts payable 33,540 --
Issuance of common stock to employees for
services rendered 8,483 --
Cancellation of stock subscriptions -- --
Net loss -- (1,325,328)
------------ ------------
Balances as of October 31, 1998 $ 7,855,470 $ (8,754,346)
============ =============
</TABLE>
The accompanying notes are an integral part of these statements.
F-7
<PAGE>
Imperial Petroleum Recovery Corporation
(a development stage company)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Cumulative
amounts Year ended October 31,
since ---------------------------
inception 1998 1997
------------- ----------- ------------
<S> <C> <C> <C>
Increase (decrease) in cash and cash equivalents
Cash flows from operating activities
Net loss $(8,754,346) $(1,325,328) $(2,624,272)
Adjustments to reconcile net loss
to net cash used in operating activities
Gain on extinguishment of debt (330,864) (123,778) (207,086)
Depreciation 51,213 20,133 27,720
Noncash charge associated with
acquisition 349,500 -- --
Accrued loss on abandonment of
leased facility 161,918 -- --
Charges associated with stock issuances
to employees and vendors 457,382 42,083 262,299
Noncash expenses incurred by affiliate 661,677 -- --
Loss on disposal of property and equipment 13,177 -- 13,177
Changes in assets and liabilities
Inventory -- -- 132,000
Other assets (22,634) 19,664 (42,298)
Officer and employee advances -- -- 146,884
Payables 1,067,931 206,234 382,327
Accrued liabilities 95,965 14,841 (44,393)
Accrued lease obligations (2,618) -- (2,618)
----------- ----------- -----------
Total adjustments 2,502,647 179,177 668,012
----------- ----------- -----------
Net cash used in
operating activities (6,251,699) (1,146,151) (1,956,260)
----------- ----------- -----------
Cash flows from investing activities
Cash paid for acquisition (94,000) -- --
Additions to property and equipment (209,104) (27,231) (20,010)
----------- ----------- -----------
Net cash used in
investing activities (303,104) (27,231) (20,010)
----------- ----------- -----------
</TABLE>
(Continued)
F-8
<PAGE>
Imperial Petroleum Recovery Corporation
(a development stage company)
STATEMENTS OF CASH FLOWS - CONTINUED
<TABLE>
<CAPTION>
Cumulative
amounts Year ended October 31,
since --------------------------
inception 1998 1997
------------- ----------- -----------
<S> <C> <C> <C>
Cash flows from financing activities
Proceeds from issuance of common stock
and warrants 4,673,495 1,192,337 1,838,945
Proceeds from loans 2,521,569 5,000 632,565
Payments on notes payable (590,919) (5,111) (412,808)
Proceeds from bank overdraft -- -- (51,934)
----------- ----------- -----------
Net cash provided by
financing activities 6,604,145 1,192,226 2,006,768
----------- ----------- -----------
Net increase in cash 49,342 18,844 30,498
Cash and cash equivalents at beginning of period -- 30,498 --
----------- ----------- -----------
Cash and cash equivalents at end of period 49,342 49,342 30,498
=========== =========== ===========
Supplemental disclosure of cash flow information
- ------------------------------------------------
Cash paid during the period for
Interest 64,852 39,287 25,565
</TABLE>
Noncash activities
- ------------------
The following noncash activities occurred in 1998:
The Company cancelled a stock subscription receivable for 400,000 shares of
common stock in the amount of $400.
Accounts payables were restructured to notes payable in the amount of
approximately $196,500. An extraordinary gain of approximately $43,800 was
realized on the restructuring.
The Company issued 60,000 shares of common stock to an employee and a vendor for
services received. The fair value of the services was approximately $42,100.
An extraordinary gain was realized on the forgiveness of accounts payable to
vendors in the amount of approximately $63,500.
An extraordinary gain was realized on the forgiveness of a note payable to a
financing company in the amount of approximately $16,400.
The accompanying notes are an integral part of these statements.
F-9
<PAGE>
Imperial Petroleum Recovery Corporation
(a development stage company)
NOTES TO FINANCIAL STATEMENTS
October 31, 1998 and 1997
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
1. Organization and business activity
Imperial Petroleum Recovery Corporation (a development stage company
incorporated in Nevada) (the Company) has been in the development stage
since commencement of operations in fiscal year 1995 and is committed to
developing and marketing a proprietary oil sludge remediation process and
equipment that uses high energy microwaves to separate water, oil and
solids. Company operations take place in Texas. The Company's corporate
offices are in Nevada.
2. Use of estimates
In preparing financial statements in conformity with generally accepted
accounting principles, management is required to make estimates and
assumptions that affect the reported amounts of assets and liabilities
and the disclosure of contingent assets and liabilities at the date of
the financial statements and revenue and expenses during the reporting
period. Actual results could differ from those estimates.
3. Cash and cash equivalents
The Company considers all highly liquid investments, with original
maturity dates of three months or less when purchased, to be cash
equivalents.
4. Inventory
Inventory consists of components to be integrated into the Company's
products to be sold to customers. Inventory is valued at lower of cost or
market. Cost is determined using the first-in, first-out method. Orders
for inventory have not commenced as of October 1998. As such, management
has recorded a reserve of $260,000 against the value of inventory on
hand. The recoverability of inventory is dependent upon the Company
generating sales of such products. Management anticipates product sales
commencing in 1999.
5. Property and equipment
Depreciation is provided for in amounts sufficient to relate the cost of
depreciable assets to operations over their estimated service lives. The
straight-line method of depreciation is followed for substantially all
assets for financial reporting purposes.
F-10
<PAGE>
Imperial Petroleum Recovery Corporation
(a development stage company)
NOTES TO FINANCIAL STATEMENTS
October 31, 1998 and 1997
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
6. Other assets
Other assets (long-term) consist of long-term deposits and patents. The
cost of patents are capitalized and amortized to operations over their
estimated useful lives or statutory lives whichever is shorter.
Amortization is computed on the straight-line method. As of October 31,
1998, amortization had not commenced.
7. Research and development expenses
Costs incurred in connection with developing a prototype and a
demonstration model of a system designed for crude oil sludge, recovery
process technology have been expensed as incurred.
8. Advertising costs
Advertising costs are expensed in the period incurred.
9. Revenue recognition
Revenue on contracts from crude oil sludge recovery services is accounted
for principally by the percentage-of-completion method whereby revenue is
recognized based on the estimated stage of completion of individual
contracts.
Revenue in 1998 in the amount of $26,289 is the result of the Company
leasing its crude oil sludge recovery equipment under contract. There
were no product sales, contract or otherwise, during 1998 or 1997.
10. Fair value of financial instruments
Cash and cash equivalents, accounts payable and accrued liabilities are
reflected in the financial statements at fair value because of the
short-term maturity of these instruments. Notes payable to third parties
and related parties as reflected in the financial statements approximate
their fair value.
11. Certain reclassifications
Certain reclassifications have been made to the 1997 financial statements
to conform with the 1998 presentation.
F-11
<PAGE>
Imperial Petroleum Recovery Corporation
(a development stage company)
NOTES TO FINANCIAL STATEMENTS
October 31, 1998 and 1997
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
12. Income taxes
The Company utilizes the liability method of accounting for income taxes.
Under the liability method, deferred tax assets and liabilities are
determined based on the difference between the financial statement and
tax bases of assets and liabilities using enacted tax rates in effect
during the years in which the differences are expected to reverse. An
allowance against deferred tax assets is recorded in whole or in part
when it is more likely than not that such tax benefits will not be
realized.
13. Loss per common share
During 1998, the Company adopted Statement of Financial Accounting
Standards No. 128, "Earnings per Share". SFAS 128 requires the disclosure
of Basic and Diluted Earnings per Share (EPS). Basic EPS is calculated
using income available to common stockholders divided by the
weighted-average number of common shares outstanding during the year.
Diluted EPS is similar to Basic EPS except that the weighted-average of
common shares outstanding is increased to include the number of
additional common shares that would have been outstanding if the dilutive
potential common shares had been issued. Such potentially dilutive common
shares include stock warrants granted or sold and convertible debt.
Shares having an antidilutive effect on periods presented are not
included in the computation of dilutive EPS (Note J). All prior year
losses per common share have been restated to comply with the provisions
of SFAS 128.
14. Accounting standards not yet adopted
Reporting comprehensive income
In September 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 130 (SFAS 130), Reporting
Comprehensive Income, effective for years beginning after December 15,
1997. This Statement establishes standards for reporting and display of
comprehensive income and its components (revenues, expenses, gains and
losses) in a full set of general-purpose financial statements. This
Statement requires that all items that are required to be recognized
under accounting standards as components of comprehensive income be
reported in a financial statement that is displayed with the same
prominence as other financial statements. SFAS 130 does not require a
specific format for that financial statement but requires that an
enterprise display an amount representing total comprehensive income for
the period in that financial statement. The Statement requires that an
enterprise classify items of other comprehensive income by their nature
in the financial statement and display the accumulated balance of other
comprehensive income separately from retained earnings and additional
paid-in-capital in the equity section of a statement of financial
position. Reclassification of financial statements for earlier periods
provided for comparative purposes is required. The Company does not have
components of comprehensive income in 1998 or 1997. No significant impact
to the Company's financial statements is expected upon adoption of SFAS
130.
F-12
<PAGE>
Imperial Petroleum Recovery Corporation
(a development stage company)
NOTES TO FINANCIAL STATEMENTS
October 31, 1998 and 1997
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
14. Accounting standards not yet adopted - continued
Disclosures about segments of an enterprise and related information
Also, in September 1997 the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 131 (SFAS 131),
Disclosures about Segments of an Enterprise and Related Information,
effective for years beginning after December 15, 1997. This Statement
establishes standards for the way that public business enterprises report
information about operating segments in annual financial statements and
requires that those enterprises report information about operating
segments in interim financial reports issued to shareholders. It also
establishes standards for related disclosures about products and
services, geographic areas and major customers. This Statement requires
that a public business enterprise report financial and descriptive
information about its reportable operating segments. Operating segments
are components of an enterprise about which separate financial
information is available that is evaluated regularly by the chief
operating decision maker in deciding how to allocate resources and in
assessing performance. Generally, financial information is required to be
reported on the basis that it is used internally for evaluating segment
performance and deciding how to allocate resources to segments. This
Statement requires that a public business enterprise report a measure of
segment profit or loss, certain specific revenue and expense items, and
segment assets. Since the Company is still considered a development stage
company and no segments have been identified by management, no
significant impact to the Company's financial statements is expected.
NOTE B - REALIZATION OF ASSETS
The accompanying financial statements have been prepared in conformity
with generally accepted accounting principles, which contemplate
continuation of the Company as a going concern. However, the Company is a
development stage company and has sustained substantial losses from
operations since inception. Such losses have continued through the year
ended October 31, 1998. In addition, the Company has used cash in, rather
than provided cash from, its operations.
In view of the matters described in the preceding paragraph,
recoverability of a major portion of the recorded asset amounts shown in
the accompanying balance sheet is dependent upon continued operations of
the Company, which in turn is dependent upon the Company's ability to
meet its financing requirements on a continuing basis, to maintain
present financing and to succeed in its future operations. The financial
statements do not include any adjustments relating to the recoverability
and classification of recorded asset amounts or amounts and
classification of liabilities that might be necessary should the Company
be unable to continue in existence.
F-13
<PAGE>
Imperial Petroleum Recovery Corporation
(a development stage company)
NOTES TO FINANCIAL STATEMENTS
October 31, 1998 and 1997
NOTE B - REALIZATION OF ASSETS - CONTINUED
The Company has taken the following steps to revise its operating and
financial requirements which it believes are sufficient to provide the
Company with the ability to continue in existence.
During December 1998, the Company reached agreements with certain related
party creditors to settle debt in exchange for common stock (Note L).
In early fiscal 1999, the Company extended an agreement with a major
petroleum company for the utilization of its technology.
During January 1999, management has conducted discussions with a
petroleum company concerning a long-term contract for the use of the
Company's technology
NOTE C - PROPERTY AND EQUIPMENT
Property and equipment and estimated useful lives consist of the
following:
Years 1998 1997
--------- --------- ---------
Furniture and fixtures 5-7 43,644 16,413
Machinery and equipment 10 54,174 54,174
Automobiles 7 96,236 96,236
--------- ---------
194,054 166,823
Less accumulated depreciation (49,342) (29,209)
--------- ---------
144,712 137,614
========= =========
NOTE D - LONG-TERM OBLIGATIONS
Long-term obligations consist of the following:
1998 1997
--------- ---------
10% note payable to a corporation controlled by
a stockholder and director of the Company,
interest and principal due in November 1998,
convertible at anytime into 541,783 shares of
the Company's common stock at $0.44 per share,
not collateralized 303,775 228,780
F-14
<PAGE>
Imperial Petroleum Recovery Corporation
(a development stage company)
NOTES TO FINANCIAL STATEMENTS
October 31, 1998 and 1997
NOTE D - LONG-TERM OBLIGATIONS - CONTINUED
<TABLE>
<CAPTION>
1998 1997
------- -------
<S> <C> <C>
10% note payable to a corporation, due September 2003, interest paid in
full at date incurred, principal due in full at maturity, not
collateralized 121,500 --
10% note payable to a limited partnership, due June 2001, interest due
semi-annually, principal due in full at maturity, not collateralized 100,000 100,000
10% note payable to an attorney and stockholder, due in full at maturity,
convertible at anytime into shares of the Company's common stock at
$0.31 per share, not collateralized 60,000 60,000
8%-10% notes payable to financing companies, $3,408 payable monthly
including interest, due in 1998, collateralized by equipment -- 16,559
-------- --------
585,275 405,339
Less current maturities 363,775 116,559
-------- --------
221,500 288,780
======== ========
</TABLE>
Scheduled maturities of long-term obligations as of October 31, 1998 are
as follows:
Year ending October 31,
-----------------------
1999 363,775
2000 --
2001 100,000
2002 --
2003 121,500
Thereafter --
----------
585,275
==========
F-15
<PAGE>
Imperial Petroleum Recovery Corporation
(a development stage company)
NOTES TO FINANCIAL STATEMENTS
October 31, 1998 and 1997
NOTE E - COMMITMENTS AND CONTINGENCIES
Operating leases
The Company leases office space, a production and lab facility and
automobiles under operating leases which expire through the year 2000.
Under these operating lease agreements the Company is liable to carry
property insurance and assume the responsibility for maintaining the
property. The Company's commitment under these leases expires as follows:
Year ending October 31,
-----------------------
1999 71,125
2000 42,647
Thereafter -
---------
113,772
=========
Total rent expense for the years ended October 31, 1998 and 1997, was
approximately $84,900 and $159,000, respectively and cumulative since
inception of approximately $595,000.
Litigation
In February of 1995, Thermal Wave International (TWI) filed third-party
claims against third party defendants, including the Company. TWI alleges
Company misrepresentation regarding technological exclusivity, disclosure
of TWI trade secrets, unfair competition, false advertising and other
claims. Remedies sought by TWI include: actual damages of an unspecified
amount, disgorgement of profits, punitive damages of an unspecified
amount, and other orders.
Management believes that TWI's claims are without merit and is vigorously
defending the matter. No amount of liability can be estimated based upon
the facts of the claim.
The Company is also included in other litigation arising from operations.
Management does not believe that any such litigation has merit or that
any such matter will have a material effect on the Company's financial
position or results of operations.
NOTE F - STOCKHOLDERS' EQUITY
1. Common stock
During fiscal 1998 and 1997, the Company issued 43,000 and 455,288 shares
of common stock, respectively, to an attorney and vendors for services
rendered on behalf of the Company. Expenses associated with these
issuances were $33,583 and $219,627, respectively, to record the fair
value of the shares issued based upon the trading price of the shares.
F-16
<PAGE>
Imperial Petroleum Recovery Corporation
(a development stage company)
NOTES TO FINANCIAL STATEMENTS
October 31, 1998 and 1997
NOTE F - STOCKHOLDERS' EQUITY - CONTINUED
1. Common stock - continued
Also during fiscal 1998 and 1997, the Company issued 17,000 and 85,333
shares, respectively, of common stock to certain employees of the Company
for services rendered. Compensation expense recorded as a result of these
stock issuances in the years ended October 31, 1998 and 1997 was $8,500
and $42,672, respectively, based upon the trading price of the shares at
the dates of issuance.
2. Stock subscription receivable
During fiscal 1998, the Company cancelled a stock subscription receivable
for 400,000 shares in the amount of $400.
NOTE G - ASSET PURCHASE SETTLEMENT
In August 1996, the Company acquired certain assets consisting of
technology, patents and furniture and laboratory equipment from Phonon
Technologies, Inc. (PTI), a Houston, Texas, based research and
development company, engaged in the development of microwave chemistry
technologies. The purchase price for the assets was $689,000, of which
$94,000 was paid at closing and the remainder financed by a nonrecourse
note payable collateralized only by the technology and assets acquired.
The Company allocated $349,500 of the purchase price to acquired research
and development costs which were expensed in the statement of operations.
The remaining $339,500 related to other technology was capitalized. The
Company paid an additional amount of $193,000 during 1997. The Company
reached an agreement in July 1997 to restructure the remaining balance
due on the note payable ($402,000). The settlement included reassigning
the capitalized technology to the seller in satisfaction of the remaining
balance on the note of $339,500 and issuance of 100,000 shares of common
stock (approximating $62,500).
NOTE H - WARRANTS
1. Stock warrants
The Company's board of directors has the authority to grant stock
warrants to employees, officers and certain non-employees. These warrants
are considered nonqualified for income tax purposes. As of October 31,
1998, the Company has granted or sold warrants to purchase 10,700,000
shares of the Company's common stock. The Company has reserved this
amount of its authorized shares. The warrants vest immediately upon grant
and have a weighted-average remaining contractual life of 3.42 years.
F-17
<PAGE>
Imperial Petroleum Recovery Corporation
(a development stage company)
NOTES TO FINANCIAL STATEMENTS
October 31, 1998 and 1997
NOTE H - WARRANTS - CONTINUED
2. Warrant activity
The following is a summary of the activity relating to warrants through
October 31, 1998:
<TABLE>
<CAPTION>
Weighted-average
Exercise exercise
Warrants price price
------------ -------------- -----------------
<S> <C> <C> <C>
Outstanding at November 1, 1996 -- $ -- $ --
Granted 200,000 0.50 0.50
----------
Outstanding at October 13, 1997 200,000 0.50 0.50
Granted 10,500,000 1.00 1.00
----------
Outstanding at October 31, 1998 10,700,000 0.50-1.00 0.99
==========
Exercisable at October 31, 1998 10,700,000 0.50-1.00 0.99
==========
</TABLE>
NOTE I - RELATED PARTY TRANSACTIONS
Related party transactions consist of the following:
1. National Security Analysts, Inc.
In fiscal 1996 and through December 1996, the Company was provided with
administrative support services and office space by National Security
Analysts, Inc. (NSA), an entity controlled by a stockholder and former
director of the Company. Such amounts totaled $236,986 and $338,451 for
the years ended October 31, 1997 and 1996, respectively. In addition, the
Company received noninterest-bearing loans in fiscal 1997 totaling
approximately $335,000 and noninterest-bearing advances to fund working
capital needs totaling $257,023 in fiscal 1996.
The Company's liability to NSA at October 31, 1996 was $138,637. During
fiscal 1997, the Company entered into a settlement agreement (the term of
which are reflected in the accompanying financial statements) wherein NSA
agreed to contribute approximately $600,000 of amounts due to the capital
of the Company as consideration for amounts due from NSA's principal
shareholder for common stock issued in 1995. In addition, the remaining
balance due was exchanged for 100,000 shares of common stock. The
reduction in the amount due to NSA resulting from the settlement of
approximately $600,000 has been credited to additional paid-in capital.
F-18
<PAGE>
Imperial Petroleum Recovery Corporation
(a development stage company)
NOTES TO FINANCIAL STATEMENTS
October 31, 1998 and 1997
NOTE I - RELATED PARTY TRANSACTIONS - CONTINUED
2. Food Development Corporation
During fiscal 1996 and early fiscal 1997, Food Development Corporation
(FDC), an entity controlled by a stockholder and director of the Company,
incurred expenses on behalf of the Company amounting of $76,261 and
$469,770, respectively. In addition, included in research and development
expense in fiscal year 1995 is $275,000 associated with prototype
development costs funded by FDC.
In fiscal 1997, the Company issued 473,625 shares of common stock valued
at $236,812 to FDC in partial satisfaction of the balance due. In
addition, the Company and FDC agreed to reduce the amount due to FDC by
approximately $132,000. This reduction has been reflected as an
extraordinary gain in the accompanying financial statement. In January
1998, the amount due was recorded as a note payable to FDC which bears
interest at 10 percent and is due no earlier than November 2, 1998 (Note
D). As of October 31, 1998, the outstanding balance on the note is
$303,775. FDC may convert the remaining balance due anytime into shares
of common stock at $0.44 per share.
3. Affiliates of Stockholder
From March through October 1997, the Company was loaned $1,884,004 from
two entities affiliated with a stockholder of the Company. The loans bore
no interest. In fiscal 1997, the Company issued 766,659 shares of common
stock, to repay the loans in full. The Company received approximately
$450,000 from the same entities as additional loans in early 1998.
4. Payable to Officers
During 1998, the Company agreed to pay an officer of the Company $217,895
for services rendered in the Company's behalf. The Company also agreed to
pay $25,000 for furniture received from the officer. As such, a liability
in the amount of $242,895 has been recorded in the accounts payable to
related parties. The Company has recorded in accounts payable to related
parties additional amounts totaling $9,710 for services rendered by
officers of the Company.
5. Management Agreement
During November 1998, the Company entered into a five year management
agreement with a company, controlled by a major stockholder. The
agreement calls for general business and financial consultation and
certain management services to be provided to the Company by the related
party in exchange for an annual management fee equal to five percent of
the Company's gross revenues.
F-19
<PAGE>
Imperial Petroleum Recovery Corporation
(a development stage company)
NOTES TO FINANCIAL STATEMENTS
October 31, 1998 and 1997
NOTE J - LOSS PER COMMON SHARE
<TABLE>
<CAPTION>
For the Year Ended October 31, 1998
------------------------------------------------------
Weighted-average
Net Loss shares Per share
(numerator) (denominator) amount
-------------- ---------------- ------------
<S> <C> <C> <C>
Net loss per common share - basic
Loss before extraordinary item (1,449,106) 13,444,674 (0.10)
============== ================ ============
Net loss available to common shareholders (1,325,328) 13,444,674 (0.09)
============== ================ ============
For the Year Ended October 31, 1997
------------------------------------------------------
Net loss per common share - basic
Loss before extraordinary item (2,831,358) 9,658,850 (0.29)
============== ================ ============
Net loss available to common shareholders (2,624,272) 9,658,850 (0.27)
============== ================ ============
</TABLE>
The average shares of warrants granted and potentially convertible debt
instruments were not included in the computation of a diluted loss per
share because their inclusion would have been antidilutive for the years
ended October 31, 1998 and 1997 (Notes D and H).
NOTE K - INCOME TAXES
Deferred income tax assets and liabilities are as follows:
<TABLE>
<CAPTION>
1998 1997
-------------- --------------
<S> <C> <C>
Deferred tax assets (liabilities)
Benefit of net operating loss carryforwards 2,910,492 2,431,161
Capitalized start up costs 69,495 93,303
Depreciable assets (19,792) (15,333)
Bad debt allowance 14,135 14,135
-------------- --------------
2,974,330 2,523,266
Less valuation allowance (2,974,330) (2,523,266)
-------------- --------------
-- --
============== ==============
</TABLE>
F-20
<PAGE>
Imperial Petroleum Recovery Corporation
(a development stage company)
NOTES TO FINANCIAL STATEMENTS
October 31, 1998 and 1997
NOTE K - INCOME TAXES - CONTINUED
The Company has sustained net operating losses in each of the periods
presented. There were no deferred tax assets or income tax benefits
recorded in the financial statements for net deductible temporary
differences or net operating loss carryforwards because the likelihood of
realization of the related tax benefits cannot be established.
Accordingly, a valuation allowance has been recorded to reduce the net
deferred tax asset to zero and consequently, there is no income tax
provision or benefit for any of the periods presented. The increase in
the valuation allowance was $451,064 and $1,038,000 for the years ended
October 31, 1998 and 1997, respectively.
As of October 31, 1998, the Company had net operating loss carryforwards
for tax reporting purposes of approximately $8,500,000 expiring in
various years through 2018.
NOTE L - SUBSEQUENT EVENTS
Sale of Stock and Warrant
During December 1998, the Company sold 225,000 shares of common stock and
a warrant to purchase an additional 875,000 shares of common stock for
$150,000.
Food Development Corporation
During December 1998, the Company issued 614,021 shares of common stock
to Food Development Corporation, a related party in exchange for relief
of a portion of outstanding debt in the amount of $268,327 (Note D).
Stock issuance to an Officer
During December 1998, the Company issued 485,790 shares of common stock
to an officer of the Company in exchange for relief of an outstanding
liability in the amount of $242,895 (Note I).
Stock issuances to an Officer and Employees
During January 1999, the Company issued 30,000 shares of common stock to
an officer and two employees of the Company for compensation of services
performed during fiscal year 1999 in the amount of $18,750.
Stock issuance to a vendor
During January 1999, the Company issued 2,490 shares of common stock to a
vendor for satisfaction of an account payable in the amount of $1,494.
F-21
Exhibit 10.2
MANAGEMENT AGREEMENT
THIS MANAGEMENT AGREEMENT (this "Agreement") is made and
entered into as of November 1, 1998 by and between MAYA LLC, A Nevada Limited
Liability Company ("Maya") and IMPERIAL PETROLEUM RECOVERY CORPORATION, a Nevada
Corporation, and any subsidiaries ("Imperial").
W I T N E S S E T H:
WHEREAS, Imperial is in the business of providing services to
the oil and gas industry;
WHEREAS, Imperial desires to have access to the services of
Maya;
WHEREAS, Maya has the ability to provide certain general
business and financial consultation and advice and management services to
Imperial in connection with the operation of its business.
NOW, THEREFORE, in consideration of the premises and the
mutual covenants of the parties hereto and other good and valuable consideration
paid and received by each of the parties to this Agreement, the receipt and
sufficiency of which are hereby acknowledged, the parties hereto hereby agree as
follows:
SECTION 1. ENGAGEMENT
Imperial hereby engages Maya as an independent contractor and
consultant to provide general business consultation and advice and management
services to Imperial and its subsidiaries in connection with the operation of
their respective businesses.
SECTION 2. MANAGEMENT SERVICES
Maya, through its members and/or employees, shall provide
Imperial with consultation and advice, when and as reasonably requested by
Imperial, in such fields as selection and retention of management employees,
planning and development, budgeting, accounting, general business management and
such other fields as Maya may offer from time to time.
SECTION 3. MANAGEMENT FEES
Commencing on the date hereof (the "Effective Date"), Imperial
shall pay to Maya a management fee, in consideration of the services rendered by
Maya pursuant to Section 2 above, equal to five percent (5%) of the gross
revenue of Imperial and any subsidiaries on a consolidated basis, determined in
accordance with generally accepted accounting principals including all
extraordinary gains; provided that such fee will be due and payable at the end
of each month and past due on the fifteenth day of the month following.
-1-
<PAGE>
SECTION 4. TERM OF AGREEMENT
The term of this Agreement shall be for a period of five (5)
years commencing on the Effective Date.
SECTION 5. TERMINATION
Maya may terminate this agreement if Imperial shall fail to
make any payment due to Maya hereunder, if such payment is not made in full
within twenty (20) days after written notice of such failure.
SECTION 6. NOTICES
6.1 Manner of Notice. All notices, statements or other
documents which any party shall be required or shall desire to give to the
others hereunder shall be in writing and shall be given by the parties hereto
only as follows: (a) by personal delivery, (b) by addressing it as indicated
below, and by depositing it certified mail, postage prepaid, in the U.S. mail,
first class (airmail if the address is outside of the country in which such
notice is deposited), or (c) by addressing it as indicated below, and by
delivering it toll prepaid to a telegraph, cable company or courier service
(e.g., Federal Express).
6.2 Delivery of Notice; Addresses. If so delivered, mailed,
telegraphed, cabled or courierd, each such notice, statement or other document
shall, except as herein expressly provided, be conclusively deemed to have been
given when personally delivered, or on the third business day after the date of
mailing, or on the date of delivery to a telegraph or cable company or on the
first business day after delivery to a courier service, as the case may be. The
addresses of the parties shall be those of which the other parties actually
receives written notice pursuant to this Section 6 and until further notice are:
If to Maya Maya LLC
2325-A Renaissance Drive
Las Vegas, NV 89119
If to Imperial Imperial Petroleum Recovery Corporation
15311 Vantage Parkway West
Suite 160
Houston, TX 77032
SECTION 7. MISCELLANEOUS
7.1 Entire Agreement; Amendments. This agreement contains all
of the terms and conditions agreed upon by the parties hereto in connection with
the subject matter hereof. This Agreement may not be amended, modified or
changed except by written instrument signed by all of the parties hereto.
-2-
<PAGE>
7.2 Assignment; Successors. This Agreement shall not be
assigned and is not assignable by any party without the prior written consent of
each of the other parties hereto; provided, however, that Maya may assign,
without the prior consent of Imperial, its rights and obligations under this
Agreement to any of its affiliates controlled by Rex Lewis and provided further,
that Maya may assign the right to receive any payment hereunder to any other
person or entity. Subject to the preceding sentence, this Agreement shall inure
to the benefit of and be binding upon the parties hereto and their respective
permitted successors and assigns.
7.3 Captions. All captions and headings are inserted for the
convenience of the parties, and shall not be used in any way to modify, limit,
construe or otherwise affect this Agreement.
7.4 Governing Law. This Agreement shall be governed by and
construed in accordance with the internal domestic laws of the State of Nevada
without reference to the choice of law principles thereof.
7.5 Attorneys' Fees. If any legal action is brought concerning
any matter relating to this Agreement, or by reason of any breach of any
covenant, condition or agreement referred to herein, the prevailing party shall
be entitled to have and recover from the other party to the action all costs and
expenses of suit, including attorneys' fees.
7.6 Severability. If any term, provision or condition of this
Agreement is determined by a court or other judicial or administrative tribunal
to be illegal, void or otherwise ineffective or not in accordance with public
policy, the remainder of this Agreement shall not be affected thereby and shall
remain in full force and effect.
7.7 Interpretation. In the event of a dispute hereunder, this
Agreement shall be interpreted in accordance with its fair meaning and shall not
be interpreted for or against any party hereto on the ground that such party
drafted or caused to be drafted this Agreement or any part hereof.
7.8 Indemnity. The parties to this Agreement shall indemnify
and hold one another and their respective officers, directors, employees and
agents, harmless from any and all loss, cost, liability and damage (including
attorneys' fees) arising out of or connected with, or claimed to arise out of or
be connected with, any act performed or omitted to be performed under this
agreement, provided such act or omission was taken in good faith, and in the
event of criminal proceedings, that the indemnitee had no reasonable cause to
believe his conduct was unlawful. An adverse judgment or plea of nolo contendere
shall not, of itself, create a presumption that the indemnitee did not act in
good faith or that he had reasonable cause to believe his conduct was unlawful.
Expenses incurred in defending a civil or criminal action shall be paid by the
indemnitor upon receipt of an undertaking by or on behalf of the indemnitee to
repay such amount if it be later shown that such person was not entitled to
indemnification.
IN WITNESS WHEREOF, the parties hereto have caused this
Management Agreement to be duly executed as of the date first above
written.
MAYA LLC
By: /s/ Rex H. Lewis
---------------------------------
Name: Rex H. Lewis
Title: Manager
-3-
<PAGE>
Imperial Petroleum Recovery Corporation
By: /s/ C. Brent Kartchner
---------------------------------
Name: C. Brent Kartchner
Title: President
-4-
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
consolidated balance sheet and consolidated statement of operations in the
Company's Annual Report on Form 10-KSB as of and for the fiscal year ended
October 31, 1998 and is qualified in its entirety by reference to such financial
statements.
</LEGEND>
<CIK> 0001020448
<NAME> Imperial Petroleum Recovery Corporation
<MULTIPLIER> 1
<CURRENCY> U.S. Dollars
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> OCT-31-1998
<PERIOD-START> NOV-01-1997
<PERIOD-END> OCT-31-1998
<EXCHANGE-RATE> 1
<CASH> 49,342
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 56,563
<PP&E> 144,712
<DEPRECIATION> 20,133
<TOTAL-ASSETS> 216,688
<CURRENT-LIABILITIES> 886,841
<BONDS> 0
0
0
<COMMON> 13,732
<OTHER-SE> (905,385)
<TOTAL-LIABILITY-AND-EQUITY> 216,688
<SALES> 0
<TOTAL-REVENUES> 26,289
<CGS> 0
<TOTAL-COSTS> 1,472,187
<OTHER-EXPENSES> 3,208
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 39,287
<INCOME-PRETAX> (1,449,106)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,449,106)
<DISCONTINUED> 0
<EXTRAORDINARY> 123,778
<CHANGES> 0
<NET-INCOME> (1,325,328)
<EPS-PRIMARY> (.09)
<EPS-DILUTED> (.09)
</TABLE>
