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Previous: ENGAGE INC, 8-K, EX-99, 2000-06-22 |
Next: INTERMOUNTAIN REFINING CO INC, S-1/A, EX-3.1, 2000-06-22 |
S1-1<PAGE>
APPROXIMATE DATE OF COMMENCEMENT OF THE PROPOSED SALE TO THE PUBLIC: As Soon as Practicable after this Registration Statement Becomes Effective.
If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. { }
If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. { }
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. { }
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. { }
If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. { }
| Outstanding Common Stock, no par value per share | ||||
| Total |
| * Arbitrary price based on book value of shares as of August 31, 1999. |
| ** Calculated only for purposes of determining the Registration Fee. |
The registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment
which specifically states that this registration statement shall thereafter become effective in accordance with section 8(a) of the securities act of 1933 or until the registration statement shall become effective on
such date as the commission, acting pursuant to said section 8(a), may determine.
S1-2<PAGE>
| ITEM IN FORM S-1 | CAPTION IN PROSPECTUS | Page in Prospectus |
| Item 1 : Outside front cover of prospectus | Outside front cover page of prospectus | 1 |
| Item 2: Inside front and outside back cover pages of prospectus | Inside front cover page of prospectus
Outside back cover page of prospectus |
2 |
| Item 3: Summary Information, Risk Factors and Ratio of Earnings to Fixed Charges | Prospectus Summary
Risk Factors Ratio of Earnings to Fixed Charges (Not Applicable) |
3
|
| Item 4: Use of Proceeds | Use of Proceeds | 9 |
| Item 5: Determination of Offering Price | Determination of Offering Price | 9 |
| Item 6: Dilution | Dilution | 11 |
| Item 7: Selling Security Holders | Selling Security Holders | 11 |
| Item 8: Plan of Distribution | Plan of Distribution | 11 |
| Item 9: Description of Securities to be Registered | Description of Securities | 13 |
| Item 10: Interests of named Experts and Counsel | Interests of Named Experts and Council | 14 |
| Item 11: Information with respect to the Registrant | Information About Intermountain
Table of Contents contains detailed cross reference to Item 11 subsections. |
14 |
| Item 12: Disclosure of Commission Position on Indemnification for Securities Act Liabilities | Not Applicable | N/A |
| |
S1-3<PAGE>
Intermountain will distribute 1,155,609 shares of its common stock to eligible shareholders of Unico, Inc. If you are an eligible shareholder of Unico, the shares will be distributed to you as a Unico stock dividend on the basis of one share of Intermountain common stock for each share of Unico common stock that you held on July 12, 1999. The distribution of our shares will take place as soon as is practical after a registration statement filed with the Securities and Exchange Commission covering the shares being distributed has become effective. Intermountain will not receive any proceeds from the distribution of these shares.
We urge you to read this prospectus carefully since it contains information that is important to you. Also, pay particular attention to the Risk Factors beginning on page 4.
Neither the Securities and Exchange Commission nor any state securities regulator has approved or disapproved of these securities or passed upon the adequacy or accuracy of the prospectus. Any representation to the contrary is a criminal offense.
The information in this prospectus is not complete and may be changed. We may not sell or distribute these securities until the registration statement filed with the Securities and Exchange Commission becomes effective. This prospectus shall not constitute an offer to sell, or the solicitation of an offer to buy, nor shall there be any sale of the company's common stock in any jurisdiction where the offer, solicitation or sale would be unauthorized or unlawful.
S1-4<PAGE>
(Inside Front Cover Page of Prospectus)
| Page | |
| Prospectus Summary | 3 |
| Risk Factors | 4 |
| Use Of Proceeds | 9 |
| Determination Of Offering Price | 9 |
| Federal Income Tax Consequences Of The Distribution | 9 |
| Dilution | 11 |
| Selling Security Holders | 11 |
| Plan Of Distribution | 11 |
| Description Of Securities | 13 |
| Interests Of Named Experts And Counsel | 14 |
| Information About Intermountain | |
| History Of Business | 14 |
| Description Of Business Activities | 16 |
| Description Of Properties | 20 |
| Legal Proceedings | 20 |
| Market Price, Dividends, And Other Matters | 21 |
| Financial Statements Of Intermountain | 22 |
| Supplemental Financial Information | 22 |
| Selected Financial Data | 22 |
| Managements Discussion And Analysis Of Financial | |
| Condition And Results Of Operations | 24 |
| Changes In And Disagreements With Accountants | 32 |
| Directors And Executive Officers | 32 |
| Compensation Of Directors And Executive Officers | 33 |
| Security Ownership Of Certain Beneficial | |
| Owners And Management | 34 |
| Certain Relationships And Related Party Transactions | 35 |
| Index To Financial Statements | 38 |
S1-5<PAGE>
Please read all of this prospectus carefully. It describes the reason for the distribution of Intermountain stock as well as the finances and business activities of Intermountain. Federal and state securities laws require that this prospectus include all important information that investors will need to make an investment decision. Investors should rely only on the information contained in this prospectus when making an investment decision. We have not authorized anyone to provide you with information that is different from what is contained in this prospectus. The following is a summary of the information contained in this prospectus.
Intermountain's Business Activities
Currently, Intermountain is in the business of producing natural gas and storing asphalt products. Our natural gas production operations consist of owning a working interest in, and operating 20 natural gas producing wells located in southwestern Kansas. From time to time, we have used storage tanks and loading equipment at our Fredonia, Arizona refinery to provide paving asphalt storage services for others. We are now expanding this operation to include the manufacture and sale of asphalt based products used for the construction and maintenance of streets, parking lots, and highways. This project is expected to be operational in June 2000. In the future, Intermountain intends to utilize its expertise in developing and managing crude oil and petroleum products refining and processing projects to enlarge the scope of its business activities. There can be no assurance that we will be successful in implementing these plans.
Over the past several years, Intermountain has experienced significant operating losses associated with its current and past operating activities and failed corporate mergers. Cash flows from operating activities have not been adequate to cover normal operating costs because s everal of our revenue sources have been discontinued or have substantially declined over the past four years. Intermountain has positive working capital, positive stockholders' equity, and has no debt service requirements at February 29, 2000. Intermountain's current declining revenue stream will allow us to sustain our operations on an ongoing basis for at least the next fiscal year but we recognize that Intermountain must generate additional revenues to avoid depleting its working capital.
Distribution of Intermountain's Common Stock
Reason for Distribution
Intermountain has operated as a private company since June 30, 1998. Prior to that time Intermountain was a wholly owned subsidiary of Unico. In February 1998, Unico entered into a
stock purchase agreement with Starlicon Group Inc. to acquire all of the outstanding stock of Starlicon International Corporation, a wholly owned subsidiary of Starlicon Group, in exchange for common and preferred stock
of Unico. The stock issued to Starlicon Group would have resulted in a change in control of Unico. Subsequently, Unico unilaterally rescinded the stock purchase agreement because the financial condition of Starlicon
International did not meet the financial requirements established in the stock purchase agreement. Unico also filed a legal action against Starlicon Group seeking a court ordered rescission of the stock purchase
agreement.
In June 1998, Unico and Starlicon Group reached a settlement of the legal action and entered into a novation agreement. The novation agreement provided for Unico to complete the purchase of Starlicon International but additionally incorporated the rescission and settlement terms sought by Unico. The rescission and settlement terms of the novation agreement provided for Intermountain to own and control all of Unico's assets that existed immediately before the acquisition of Starlicon International and for Unico to relinquish all rights of ownership and control over Intermountain's common stock. Control of Intermountain's common stock was vested with the current board of directors of Intermountain who were entitled to distribute Intermountain's stock to shareholders of Unico who held Unico common stock that had been issued and outstanding prior to the acquisition of Starlicon International. All of the outstanding stock of Intermountain was placed in a trust for the benefit of those Unico shareholders who are eligible to receive it.
S1-6<PAGE>
The Distribution
Intermountain is distributing all of its common stock to the shareholders of Unico who are eligible to receive the shares. The distribution to the eligible shareholders will be made as soon as is practical after a registration statement filed with the Securities and Exchange Commission covering the shares to be distributed has been declared effective.
Shareholders Eligible to Receive the Distribution : The Unico shareholders eligible to receive the distribution of Intermountain stock include all Unico shareholders who held Unico stock as of July 12, 1999 except: (i) those Unico shareholders who held Unico stock issued in connection with the Starlicon International acquisition; and (ii) those shareholders who held Unico stock issued by Unico after June 30, 1998 with the exception of those holders of 30,000 shares of Unico stock which were originally issued to Mr. Leo Murphy after June 30, 1998.If you are an eligible shareholder you will receive one share of Intermountain common stock for each share of Unico common stock that you owned on July 12, 1999. The Intermountain shares will be distributed as a Unico dividend. You will pay nothing for the shares that you receive, although you may have to pay taxes on the value of the shares. You will continue to own your Unico shares. There is currently no public trading market for Intermountain stock.
The Securities To Be Distributed
| Type of Security : | Common Stock, no par value per share |
| Number of Shares Presently Outstanding | 1,155,609 shares (Held in trust) |
| Number of Shares Outstanding After the Distribution: | 1,155,609 shares |
1,155,609 shares of Intermountain common stock will be distributed from the trust to the eligible shareholders. After completing the distribution, Intermountain estimates there will be approximately 425 shareholders.
You should consider the common stock of Intermountain to be an investment involving a high degree of risk. You should read this entire prospectus and carefully consider the risk involved with this investment including the following factors:
<PAGE> S1-7
Risks Related to Intermountain's Operations
Intermountain has sustained operating losses in the recent past and may continue to sustain such losses in the future. The table below summarizes income/loss associated with continuing
and discontinued operations experienced by Intermountain over the last four years:
| Year Ended | Continuing Operations | Discontinued Operations | Net Income/Loss |
| February 28, 2000 | $(100,857) | $ (3,820) | $(104,677) |
| February 28, 1999 | $(750,557) | $ 20,090 | $(730,467) |
| February 28, 1998 | $(185,235) | $210,673 | $ 25,438 |
| February 28, 1997 | $(213,556) | $(512,020) | $(725,576) |
Intermountain has experienced declines in revenues related to operations that have been severely reduced or discontinued over the past several years. We have sought to improve or replace revenue sources but our efforts thus far have not been very successful. As part of our efforts, during fiscal 1997 and fiscal 1999, we entered into two separate merger agreements that were intended to foster diversification and growth. Both mergers however failed resulting in considerable losses from legal and professional expenses incurred, and impairment losses recorded for investments made in conjunction with one of the mergers. Continued losses from our operations or expenses incurred to resolve outstanding merger issues may result in depletion of our working capital and significantly limit our ability to sustain our current operations.
Our revenues are presently derived from the production and sale of natural gas, interest on our cash balances, rental income from office space, and fees earned from consulting and asphalt storage activities. Theses revenue sources are limited and you should not consider them to have significant potential for increasing revenues or profits. Even with further economies and improvements, we do not expect our present operations to result in significant positive earnings. Moreover, negative trends in natural gas prices, interest rates and maintenance costs or other factors could cause greater operating losses.
Development of possible future projects has a high degree of risk and uncertainty. In an effort to expand our current revenue base we intend to pursue potential projects that apply our experience in processing and storage of petroleum products and hopefully achieve greater utilization of our petroleum product refining assets. Projects of this type are often costly to develop and are subject to a considerable number of uncertainties that may result in the failure of the project and loss of development costs invested.
Intermountain's capital available for development of future projects is very limited. Projects that we may consider for future development may require capital expenditures beyond the funds we have available. As of February 29, 2000, Intermountain had working capital of $785,000. However, $500,000 of cash is restricted from use because it has been pledged as security for a bank letter of credit issued to Paramount Petroleum Corporation. The remaining $285,000 of working capital is needed to fund our ongoing operations. If a viable project is identified in the near future, we may be required to seek additional funding by engaging a partner, incurring debt, or raising additional equity. There is no assurance that the necessary capital could be obtained from any of these sources in a timely manner or under terms that would be acceptable to Intermountain or its shareholders. Debt financing could additionally involve restrictive covenants that could affect future capital raising activities and financial and operational matters.
Intermountain's ability to develop future projects is diminished because it has limited human resources. Our management staff is currently at minimum size in order to conserve our financial resources. Our ability to work on more than two or three potential projects at a time is limited. It is possible that viable opportunities could be missed because of these personnel constraints.
Reliance on exclusive contracts reduces the ability of Intermountain to diversify its revenue sources and increases the potential for loss associated with credit risk and actions by customers.
The introduction of new laws could impose compliance burdens that require allocation of limited human and financial resources beyond our current means.
- Increasing the amount of potential liability associated with a particular event,
- Expanding the categories of participants who may be responsible for the liabilities associated with that event,
- Increasing reporting requirements; and
- Subjecting operations to greater requirements for advance regulatory clearance.
Your ability to sell your Intermountain stock in the future may be limited because there is currently no market for trading our common stock and no assurance that a market will ever develop or, if established, will be maintained. Intermountain's common stock does not now, and may never qualify for listing on any securities exchange. In the absence of an over-the-counter market in Intermountain's common stock, or listing on an exchange, holders of the common stock will be unable to sell their shares through normal brokerage channels and may be unable to determine the value of their securities accurately. Consequently, selling our shares will probably be more difficult. We have had discussions with a market maker regarding participation as a market maker for these securities, but there is no assurance that any market maker will participate.
S1-10<PAGE>
Regulations affecting low priced stock may make it more difficult to resell your shares. Because of the potential low price of our common stock and the fact that it is not listed on any exchange, the shares may be subject to a number of regulations which may affect the price of the shares and your ability to sell the shares in the market.
The Securities and Exchange Commission's regulations define a penny stock to be any equity security that has a market price or exercise price of less
than $5.00 per share, subject to some exceptions. We believe that the penny stock rules will apply to our stock. The penny stock rules require a broker-dealer to deliver a standardized risk disclosure document
prepared by the Securities and Exchange Commission, to provide the customer with additional information including current bid and offer quotations for the penny stock, the compensation of the broker-dealer and its
salesperson in the transaction, monthly account statements showing the market value of each penny stock held in the customer's account, and to make a special written determination that the penny stock is a suitable
investment for the purchaser and receive the purchaser's written agreement to the transaction. These requirements probably will reduce the level of trading activity for our common stock and may adversely affect the
ability of broker-dealers to sell our securities.
If you are an affiliate of Intermountain your ability to sell your shares will be limited. If you are an affiliate of Intermountain under the rules and regulations of the
Securities and Exchange Commission you may not sell your shares unless you comply with Rule 144 or another exemption from registration. You will be considered an affiliate if you are an officer or director of
Intermountain or if you beneficially own 5% or more of its securities. We believe that the only shareholders who may be affiliates after the distribution are Mr. Hagler, a director and President, and Mr. Hurt, a
director, Secretary and Treasurer of Intermountain and Mr. and Mrs. William Braddock, individuals, who will own in excess of 5% of our shares. See " Security Ownership of Certain Beneficial Owners and
Management."
Future sales of large amounts of stock in the open market may adversely affect the market price of our common stock. We are unable to predict the effect that sales made Under Rule 144 or otherwise, may have on the then prevailing market price of our common stock. It is likely that market sales of large amounts of the shares of Intermountain (or the potential for those sales even if they do not actually occur), will have the effect of depressing the market price of our common stock. After the distribution of our stock is completed, there will be 1,155,609 shares of our common stock outstanding. Of this amount, 716,712 shares, or 62% of the total outstanding shares, will be held by three individuals who are considered affiliates of Intermountain who are subject to trading limitations under Rule 144. The maximum number of shares that each of these individuals may sell during any three month period will be the greater of 11,556 shares, (1% of the total outstanding stock of Intermountain) or; the average weekly trading volume of Intermountain stock for the four trading weeks prior to the sale by the individual. The remaining 438,897 shares, 38%, will be held by non-affiliates who will not be subject to any trading limitations. See "Description of Securities" and "Market Price, Dividends and Other Matters."
Eligible shareholders may be taxed on the distribution The shareholders who receive a distribution of Intermountain stock may be taxed if the fair market value of
Intermountain common stock at the time of the distribution exceeds the holders tax basis in their Unico stock. Unico will report a dividend distribution to the Internal Revenue Service based on the estimated fair market
value of the Intermountain shares on the date of the distribution. However, the Internal Revenue Service may disagree and attribute a substantially higher fair market value to the Intermountain common stock, in
which case, the tax impact on the shareholders could increase significantly. See "Federal Income Tax Consequences of the Distribution."
S1-11<PAGE>
Forward Looking Information
Some of the statements contained in this prospectus relate to future expectations, contain projections of results of operations or financial condition or include other
forward-looking information. When used in this prospectus, the words "estimate", "project", "anticipate", "intend", "believe", "hope", "may" and
similar expressions, as well as "will", "shall" and other indications of future tense, are intended to identify forward-looking statements. Those statements are subject to known and unknown risks,
uncertainties and other factors that could cause the actual results to differ materially from those contemplated by the statements. You are cautioned not to place undue reliance on the forward-looking statements.
Forward-looking information is based on various factors and assumptions. Important factors that may cause actual results to differ from projections include, for example,
Use of Proceeds
Neither Unico nor Intermountain will receive any proceeds or other consideration for the Intermountain shares distributed to the eligible shareholders.
Determination of Offering Price
The offering price, for purposes of this prospectus, is the estimated net book value of Intermountain common stock on February 29, 2000 of $1.89 per share. For purposes of establishing a fair market value of the shares to be distributed for taxation reporting, the price will be based upon the "first trade" of the shares after completion of the distribution and public trading begins. See "Federal Income Tax Consequences of the Distribution".
There has never been an established market for public trading of Intermountain's stock and no prediction can be made as to the initial trading price after completion of the
distribution and public trading, if any, begins.
Federal Income Tax Consequences of the Distribution
The following discussion is a summary of the material U.S. federal income tax consequences of the distribution of Intermountain's shares to the eligible shareholders. However, it is not a complete discussion of all potential tax effects that might be relevant to the distribution. It also is limited to domestic non-corporate shareholders. It may not apply to some classes of taxpayers, including corporations, nonresident aliens, insurance companies, tax-exempt organizations, financial institutions, securities dealers, and broker-dealers. Taxpayers in any of these or similar categories should consult their own tax advisors regarding the tax consequences of the distribution.
The following summary is based our understanding of laws, regulations, rulings, practice and judicial decisions in effect at the date of the registration statement. Legislative, regulatory, or interpretive changes, or future court decisions or interpretations may or may not be retroactive and could affect the tax consequences described herein.
S1-12 <PAGE>
Neither Unico nor Intermountain intend to request a ruling from the Internal Revenue Service regarding the federal income tax consequences of the distribution.
Based on the facts of the proposed distribution, the transaction does not qualify as a tax free distribution. Unico will report the transaction as a taxable distribution controlled by Section 301 of the Internal
Revenue Code of 1986 discussed as follows:
Each recipient of Intermountain stock will be considered to have received a potentially taxable distribution in the amount equal to the fair market value of Intermountain's stock on the date of the distribution. The stock will be taxed as ordinary dividend income to each recipient in an amount equal to the lesser of the current and accumulated "earnings and profits" of Unico, or the value of Intermountain's stock distributed. Based upon a preliminary analysis, it is not believed that Unico has, or will have, any such "earnings and profits" on the date of the distribution. Accordingly, no portion of the value of Intermountain's stock distributed will be taxable as dividend income. Assuming this is the case, the value of Intermountain stock distributed will first be applied against, and will reduce, the recipient's adjusted basis in their Unico common stock, and any remaining amount will be treated as gain from the sale or exchange of property.
For example : Assume two Unico shareholders, A and B, each purchased one share of Unico common stock several years ago for differing amounts and are eligible to receive a distribution of Intermountain common stock. Also assume that the fair market value of Intermountain's common stock on the date of the distribution was equal to its book value on February 29, 2000. The following table illustrates the federal income tax impact of the distribution on the two shareholders individually:
| All amounts in $ per share |
| A | B | |
| Original purchase price paid for Unico common stock | $5.00 | $1.50 |
| Assumed market value of Intermountain common stock | $1.89 | $1.89 |
| Ordinary dividend income assuming Unico has no accumulated earnings and profits on the date of the distribution | $0.00 | $0.00 |
| Reduction of basis in Unico stock | $1.89 | $1.50 |
| Taxable gain from the sale or exchange of property | $0.00 | $0.39 |
| Income tax liability assuming a tax rate of 27% | $0.00 | $0.11 |
| Adjusted basis in Unico stock | $3.11 | $0.00 |
For tax valuation purposes, the fair market value of the shares on the date of the distribution will be based on the "first trade" of the shares after completion of the distribution and public trading begins. The "first trade" is the first occurrence of a trade transaction, or series of closely timed trade transactions, between unrelated parties after the stock becomes available for sale in a public trading market. The length of time from the date of the distribution and the occurrence of the "first trade" cannot be reasonably predicted and is dependent on a public trading market developing. See "Risk Factors - Risks Related to Owning Intermountain Common Stock" .
Upon completion of the distribution and establishment of a fair market value, the eligible shareholders will receive a copy of the Form 1099 filed with the Internal Revenue Service by Unico, along with appropriate documentation and forms to be used to assist the shareholders in preparing their income tax returns.
The foregoing statements represent the opinion of Intermountain's management. The Internal Revenue Service is not bound by and may not agree with this opinion regarding the value of the Intermountain's shares or the other matters discussed above. If the Internal Revenue Service were to successfully assert that a substantially higher value should be placed on the Intermountain shares distributed, the tax impact could increase significantly.
S1-13 <PAGE>
The summary of federal income tax consequences set forth above is for general information only. All recipients of the distribution should consult their own tax advisors as to the particular tax consequences of the distribution to them, including the applicability and effect of state, local and foreign tax laws.
The distribution represents an initial distribution of Intermountain stock to the public. Since 100% of the issued and outstanding stock of Intermountain will be distributed and each of the eligible shareholders will receive a number of Intermountain shares equal to their holdings of Unico common stock held on July 12, 1999, there will be no dilution.
The distribution represents a complete distribution of Intermountain common stock as settlement of a prior legal action. Since 1985 and until June 30, 1998, Unico had been the sole shareholder of Intermountain. All of the issued and outstanding stock of Intermountain was transferred into a trust to be held for the benefit of the eligible shareholders. Unico no longer owns any shares of Intermountain common stock and will not receive any proceeds as a result of this distribution.
Intermountain will distribute 1,155,609 shares of its no par value common stock to shareholders of Unico who are eligible to receive them. The Intermountain shares distributed will be treated as a Unico dividend by the eligible shareholders.
The eligible shareholders will receive one share of Intermountain common stock for each share of Unico common stock they held as of July 12, 1999. The certificates representing the dividend shares will be mailed to the eligible shareholders as soon as is reasonably practical after a registration statement filed with the Securities and Exchange Commission to register the shares being distributed has been declared effective. The eligible shareholders will not be required to make any payment or take any other action in connection with the dividend shares. The value of the Intermountain shares distributed however may be taxable to the eligible recipients. See - Federal Income Tax Consequences of the Distribution .
Upon completion of the distribution, there will be approximately 425 shareholders of Intermountain based upon the estimated number of eligible shareholders as shown on the stock records of Unico as of July 12, 1999.
The distribution is the result of the settlement of a legal action filed by Unico in May 1998 to rescind a stock purchase agreement to acquire the stock of Starlicon International from the Starlicon Group. The terms of the settlement are embodied in the novation agreement made between Unico and Starlicon Group that was effective on June 30, 1998. The settlement terms included in the novation agreement provided for the following actions:
On July 30, 1999, 50,000 shares of Intermountain common stock, representing all of the outstanding stock of Intermountain at that time, were transferred into a trust for the benefit of the Unico shareholders eligible to receive the distribution. The important provisions of the trust include the following:
S1-15 <PAGE>
No underwriters or brokers are involved in the distribution. A copy of this prospectus will be mailed to each eligible shareholder as soon as is practical after the registration statement has been declared effective. Intermountain will also mail copies of this prospectus to brokers and dealers who are known to trade or make a market in Unico's common stock or who may reasonably be expected to trade or make a market in Intermountain's common stock in the future. However, Intermountain does not anticipate that an active market for its common stock will develop in the near future, and there can be no assurance that a trading market will develop at any time. See Risk Factors - Risks Associated with Owning Intermountain Common Stock."
The authorized capital stock of Intermountain consists of 10,000,000 shares of common stock, no par value, and 5,000,000 of shares of undesignated preferred stock, $.01 par value.
Common Stock
There are presently 1,155,609 shares of the Company's common stock issued and outstanding which are held in a trust for the benefit of the eligible shareholders. Such shares will be distributed to the eligible shareholders when the registration statement has been declared effective.
The securities to be distributed consist of 1,155,609 shares of Intermountain common stock, with no stated par value. Such stock will be fully paid and non-assessable and shall be entitled to receive dividends as may be declared by Intermountain's board of directors from time to time. Each share of common stock shall have voting rights equivalent to one vote for each share. Cumulative voting is not allowed. Common stockholders do not have any preemptive rights to acquire additional shares if additional common stock is issued by Intermountain in the future.
After the distribution is completed, the total number of shares of common stock outstanding will be 1,155,609. There are no outstanding options, warrants to purchase, or securities convertible into, common stock of Intermountain. Of the aforementioned 1,155,609 shares, 716,712 will be subject to trading restrictions under Rule 144 of the Securities Act to the extent that they will be held by officers, directors and greater than five percent (5%) owners of Intermountain common stock.
Preferred Stock
There are 5,000,000 shares of undesignated preferred stock authorized and no shares of preferred stock issued or outstanding. Intermountain's articles of incorporation authorize the board
of directors to designate and issue preferred stock at any time. Preferred stock, if designated by the board of directors in the future, may have rights, preferences or privileges senior to those of the common stock.
Examples of preferred stock rights or preferences that may be designated by the board of directors may include:
Possible Anti Takeover Effect of Authorized But Unissued Stock
Intermountain's authorized but unissued capital stock will consist of 8,844,391 shares of common stock and 5,000,000 shares of preferred stock. The existence
of authorized but unissued capital stock, particularly undesignated preferred stock, may prevent or discourage transactions that shareholders might believe to be in their best interests or in which shareholders might
receive a premium for their stock over its then market price. For example, if the board of directors were to determine that a takeover proposal was not in Intermountain's best interests, such shares could be issued in
one or more private placements or other transactions without shareholder approval. Such transactions may prevent or render more difficult or costly the completion of the takeover transaction by:
The financial statements of Intermountain as of February 29, 2000 included in this prospectus have been audited by Atkinson & Co. Ltd., Certified Public Accountants, 707 Broadway NE,
Suite 400, Albuquerque, NM 87102, and are included in reliance upon the authority of that firm as experts in accounting and auditing. Atkinson & Co., Ltd., including its principals and partners, hold no interest,
beneficial or otherwise, in Intermountain or Unico.
History of Business
Intermountain was incorporated under the laws of the state of New Mexico in January 1984 for the purpose of acquiring an asphalt refinery located in northern Arizona and engaging in the refining, processing and marketing of the refined petroleum products. In January 1985, Unico acquired 100% of the outstanding common stock of Intermountain for cash and notes. Intermountain operated as a wholly owned subsidiary of Unico until June 30, 1998.
Unico was incorporated under the laws of the state of New Mexico in April, 1979 for the purpose of engaging in wholesale and retail distribution of gasoline, diesel fuel and lubricants. In February, 1984, Unico became publicly traded through an initial public offering of its common stock under Regulation A of the Securities Act of 1933. Unico filed a Form 10 with the Securities and Exchange Commission in September 1986 and became a reporting company under the Securities Act of 1934. On June 14, 1999, Unico filed a Form 15 with the Securities and Exchange Commission to remove itself from periodic reporting requirements. Unico was previously traded on the Nasdaq Stock Market(sm) under the symbol UNRC.
In February 1986, a 3,000 kilowatt co-generation facility was placed in service at Intermountain's refinery. The co-generation facility was substantially constructed under an operating lease with Caterpillar Finance Corporation and was operated by Intermountain until it was taken out of service in 1998. The leased equipment was purchased by Intermountain at the end of the lease term in 1996.
In July 1988, Unico purchased the assets of Methanol Production Corporation for Unico common stock and the assumption of debt. This acquisition included approximately 2.9 billion cubic feet of proven producing natural gas reserves and a development package for a methanol, (methyl alcohol), manufacturing facility proposed for the Denver, Colorado area. The natural gas production acquired from Methanol Production Corporation was owned and operated directly by Unico until May 1998 when ownership and operation of the properties was transferred to Intermountain.
The construction and operation of the methanol manufacturing facility was carried out by Sand Creek Chemical LP, a partnership formed between IC Partners LP, and General Electric Capital Corporation. IC Partners, the general partner of Sand Creek Chemical, was formed between Intermountain Chemical, Inc., a newly formed subsidiary of Unico, and Public Service Company of Colorado. Intermountain Chemical was named as the managing general partner of Sand Creek Chemical and carried out engineering, construction, management and operation of the facility. The facility was placed in service in mid 1992 and was operated by Intermountain Chemical until September, 1997. In 1994, Public Service Company of Colorado sold a portion of its interest in IC Partners to Gas Technologies Inc., another newly formed subsidiary of Unico. In August 1997, IC Partners sold its interest in Sand Creek Chemical. IC Partners was then liquidated by distributing its net assets to its partners and then dissolved. After IC Partners was liquidated, Intermountain Chemical and Gas Technologies were also liquidated by distributing their net assets, consisting solely of cash, to Unico and in turn themselves dissolved. Management fees, expense reimbursements, and Intermountain Chemical's and Gas Technologies' share of partnership income and loss allocations are now classified as discontinued operations for historical financial reporting purposes.
In 1996, Unico entered into a letter of intent to acquire the outstanding common stock of Chatfield Dean & Co., a Denver based stock brokerage firm. The merger however was subsequently terminated by mutual agreement of the parties. Concurrent with the execution of the letter of intent, Unico purchased $600,000 of Chatfield preferred stock in a private placement and subsequently exercised a warrant to purchase 50,000 shares of Chatfield common stock for $500. The preferred and common stock was transferred to Intermountain in May 1998.
In February, 1998, Unico entered into an agreement to acquire 100% of the outstanding stock of privately held Starlicon International from Starlicon Group for newly issued Unico common and preferred stock. Starlicon International marketed computer peripherals under the "Paradise" brand name as well as other generic computer components. The transaction, which contemplated a change in control of Unico, was contingent on, among other things, the completion of an audit of Starlicon International's financial statements. The audited statements subsequently revealed that the unaudited statements originally provided to Unico were not accurate. In May, 1998 Unico notified Starlicon Group and Starlicon International that it was rescinding the transaction. In addition, Unico filed a complaint in the United States District Court for the Central District of California seeking confirmation of Unico's rescission of the transaction. Effective June 30, 1998, the parties settled the pending litigation by entering into a novation agreement. Under the novation agreement, ownership and control of all Unico assets and business operations as they existed immediately before the effective date of the novation agreement were transferred to Intermountain to be held in trust for Unico's original shareholders.
The ultimate effect of the novation agreement was to restore the ownership and control of the assets and business operations of Unico that existed prior to the execution of the novation agreement, back to the original shareholders of Unico. The assets previously owned by Unico, and its business activities, are now owned and operated exclusively by Intermountain as an independent corporation completely separate from Unico.
Description of Intermountain's Business Activities
Intermountain conducts its business in the following areas:
Intermountain has also conducted other business activities that have recently been discontinued including:
Intermountain owns working interests in and operates 20 natural gas producing wells located in Southwestern Kansas. Natural gas and helium produced is sold, under exclusive contract, to Kinder Morgan (formerly KN Energy). Day to day operation and maintenance of the wells is performed by an individual under contract with Intermountain. Intermountain recently completed a new well on an existing gas lease in Kansas that was acquired through the exercise of a dry hole take over option under a farmout agreement with an unrelated oil exploration company. Intermountain has no current plans to drill additional wells on the Kansas leases. Further, Intermountain has no plans to expand its natural gas production activities in other areas since it believes that it lacks the financial resources to do so effectively.
The exclusive contract with Kinder Morgan contains the following material provisions:
Intermountain depends on Kinder Morgan for substantially all of its natural gas sales which represents a significant portion of Intermountain's total revenues. Such reliance on a single source of revenues may represent a significant risk. See Risk Factors - Risks Related to Intermountain's Operations.
Refining and Asphalt Products Manufacturing and Storage :
From 1985 until 1997, Intermountain processed low-cost, heavy crude oil and other supplemental raw materials at its Fredonia, Arizona refinery to produce naphtha, diesel fuel, fuel oil and asphalt products which were generally marketed on a wholesale basis in Utah, Arizona and Nevada. In January 1997, crude oil refining operations were discontinued due to a sharp reduction in the availability of crude oil from traditional sources and the inability to obtain a continuing supply of suitable raw materials from alternative sources. Since that time, Intermountain has periodically provided asphalt storage services for others. Asphalt storage activities include the use of storage tanks and loading equipment at the refinery facility to receive, store, and subsequently ship asphalt products owned by others. Intermountain has received fees and expense reimbursements related to the services provided. Fees received for asphalt storage since 1997 totaled only $30,000 and to date, have not represented a significant source of revenues.
In November 1999, Intermountain entered into an agreement with Paramount Petroleum Corporation to expand its asphalt storage activities to include the
manufacture of asphalt emulsions and cut backs for sale to Paramount. These products are used in the construction, repair and maintenance of highways, streets, and parking lots. The agreement with Paramount contains the
following material provisions:
The contract with Paramount is an exclusive contract where Intermountain will be dependant on Paramount for the supply of raw materials, and for the marketing and sale of finished
products. Reliance on a single supplier and a single marketer may represent a significant risk. See Risk Factors - Risks Related to Intermountain's Operations.
Possible future refining and processing projects: Intermountain is pursuing several future projects including:
Currently there are no plans, intentions, arrangements, agreements, or understandings concerning specific projects nor is there any assurance that we will be successful in any of these efforts. See "Risk Factors" for further information regarding the risks associated with the development of future projects.
Other Business Activities :
On occasion, we have provided management and consulting services to others. Fees charged for management and consulting services vary depending on the services performed. Such services were performed for Saba Petroleum Company during fiscal 1999 and for Red Hills Manufacturing, Inc. during fiscal 1999 and 2000. Both companies are or were related parties to Intermountain. Intermountain currently provides management and accounting services to Red Hills for a fee of $1,000 per month. While we expect to continue to provide occasional services to others in the future, there can be no assurance that such opportunities will be available or that we can maintain any significant level of revenues from such activities.
In addition, we lease unused office space in our Farmington, New Mexico office building to unrelated third parties and actively manage the building. Revenues from office leasing varies between $13 and $25 per foot annually depending on the type of space rented and additional services provided to the tenant such as secretarial, phone answering, cleaning, and office machine use. Leasing of office space should not be viewed as a material source of revenues for Intermountain.
Generation of Electric Power (Discontinued Operation) :
Intermountain's co-generation plant located at its refinery in Fredonia Arizona was capable of producing up to 3,000 kilowatts of electrical energy along with steam that was used in the refining process. From 1986 until 1998, electric power and standby generating capacity was sold under contracts with local power distributors which have expired. We have concluded that there is little likelihood of developing a local market for electric power in the foreseeable future and that using the generators solely for steam and power use at the refinery facility would not be cost effective. In June 1999, we entered into a contract with third parties to provide for the refurbishing and marketing of the generators. The generators were removed from the Fredonia facility in October 1999. There can be no assurance that this equipment will be sold on a timely basis or that the price offered will be acceptable. The generators and related co-generation equipment have a book value of $76,130. Activities associated with the co-generation facilities are reported as discontinued operations in the accompanying financial statements.
Operation and Management of Methanol Manufacturing Facility (Discontinued Operation):
From 1990 until 1997, Unico, through its then wholly owned subsidiaries Intermountain Chemical and Gas Technologies, developed, constructed, managed and owned partnership interests in the Sand Creek Chemical methanol manufacturing facility located in Commerce City, Colorado. The methanol, or methyl alcohol, was marketed under long term contracts with large distributors. Unico and Intermountain Chemical received reimbursements of direct costs incurred in the operation of the facility as well as a monthly management fee. Intermountain Chemical and Gas Technologies were allocated a share of profits and losses of the Sand Creek Chemical operation along with cash distributions, in accordance with their respective partnership interests in IC Partners. Such allocations were included in the consolidated results of operations of Unico. Activities associated with the investment in IC Partners and management of the Sand Creek Chemical facility are reported as discontinued operations in the accompanying financial statements.
Employees:
Intermountain presently employs six people, including officers. Three of the employees work in our administrative offices in Farmington, New Mexico, are salaried and are employed on a full time basis. The remaining three employees are employed at our Fredonia Arizona facility, two on a full time basis and one on a part time basis. The Fredonia employees are involved in the expansion of our asphalt products manufacturing facilities. All full time employees are eligible to participate in Intermountain's SIMPLE IRA Plan and a group medical insurance program. None of our employees are represented by a union and management believes its employee relations to be satisfactory.
Research and Development Activities:
Intermountain has not spent any material amount on research or development activities since its inception.
Government Regulations, Environmental Laws and Taxes:
Our business is subject to certain national, state and local laws and regulations relating to the production and transportation of natural gas and the processing of hydrocarbons, as well as environmental and safety matters. Many of these laws and regulations have become more stringent in recent years, imposing greater liability on a larger number of potentially responsible parties. Intermountain believes it has complied in all material respects with these laws and regulations. Because the requirements imposed by such laws and regulations are frequently changed, we are unable to predict the ultimate cost of compliance with these requirements or their effect on its operations.
The operation of gas fields and the processing of hydrocarbons inherently involve environmental risks. These risks can be minimized, but not eliminated, through the use of various engineering and other technological methods. Intermountain intends to employ such methods to industry standards.
Severance taxes on natural gas production in Kansas are collected and paid by Kinder Morgan, the first purchaser of the gas.
Competition:
The petroleum and natural gas industries are highly competitive. We encounter competition from other oil and gas and petroleum companies in all of our operations, including the acquisition
of producing properties, obtaining services, including oil field services, and the sale of natural gas. Our competitors include integrated petroleum and natural gas companies and numerous independent oil and gas
companies, and individuals. Many of these competitors are large and well-established with substantially larger operating staffs and greater capital resources and who, in many instances, have been engaged in the energy
business for a much longer time than Intermountain. Such competitors may be able to develop better information and provide better analysis of available information, to pay more for raw materials and productive oil and
natural gas properties and exploratory prospects and to define, evaluate, bid for and purchase a greater number of properties and prospects than our resources permit.
Impact of Year 2000:
Like most companies, Intermountain faced the Year 2000 issue. Many computer programs use two digits rather than four (for example, "98" for 1998) to define dates. As a result, any programs that have time-sensitive software may recognize a date using "00" as the year 1900 rather than the year 2000. This could result in a system failure or miscalculations causing disruptions of operations, including, among other things, a temporary inability to process transactions or engage in other normal business activities. During the two years prior to January 1, 2000, we evaluated the potential impact of Year 2000 issues on Intermountain and we implemented procedures that we believed were adequate to avoid any material year 2000 problems. Substantially all of our critical data processing hardware and software, process control equipment, and communications systems were examined, modified or replaced as necessary, and tested for operability with year 2000 and beyond. Financial institutions with which we do business and all major customers, vendors, and a prospective transfer agent were contacted and assurances received that Year 2000 issues would not have a material impact on their ability to operate. To date, we are not aware of any third party that experienced, or may experience, a Year 2000 issue that would materially impact our results of operations, liquidity, or capital resources. However, we have no means of ensuring that all third parties with whom we conduct business are Year 2000 compliant. Nevertheless, Intermountain, thus far, has not experienced any disruptions of its business activities as a result of Year 2000 issues.
Description of Properties
Except for the mineral leases associated with our Kansas gas properties which are held by production, all properties used by Intermountain in the conduct of its businesses are owned in
fee. There are no outstanding mortgages on any of the properties owned by Intermountain.
Intermountain's refining and asphalt storage and manufacturing facility is situated on 21 acres of fee-owned land in Fredonia Arizona. The facility includes atmospheric and vacuum
distillation units having daily capacities of 4,000 and 2,000 barrels respectively; storage tanks; boilers; a cooling tower; various buildings; loading racks and other ancillary facilities.
Intermountain owns an average 81.8% working interest in, and is the operator of 20 producing natural gas wells on 11,241 lease acres in Scott and Finney Counties in southwest Kansas. As of February 29, 2000, the proven producing reserves are estimated to be 2.410 billion cubic feet net to Intermountain's interest. For the year ended February 29, 2000, Intermountain produced 236 million cubic feet gas net to its interest. No reserve estimates have been filed with any Federal authorities or agencies. Additional information relative Intermountain's natural gas reserves and activities is included in Note M of its February 29, 2000 financial statements included on page 57 of this prospectus.
Intermountain owns a 7,000 square foot office building in Farmington, New Mexico. Approximately one half of the office building is used by Intermountain for its corporate office. The remainder of the space is leased to various non-related tenants.
Legal Proceedings
In December 1998, Intermountain notified Unico of its intent to distribute Intermountain's common stock to the eligible Unico shareholders as provided by the novation agreement. The new management of Unico however withheld cooperation in completing the distribution and requested a renegotiation of the terms of the novation agreement involving Unico's obligations to Intermountain., While Intermountain was under no obligation to renegotiate the agreement, discussions were held on specific changes over the following months. The parties however were unable to reach mutually acceptable amendments and on March 29, 1999 Intermountain filed suit in the United States District Court for the Central District of California entitled Intermountain Refining Co., Inc. v. Starlicon, etc., etal. USDC Case No.CV99-3405 DT (SHX) , seeking; (1) an injunction against shareholders of Unico from revoking proxies to vote in favor of the intended distribution, (if such vote were determined to be required), and; (2) an order requiring the new management of Unico to perform its duties and obligations under the novation agreement. After a brief hearing on April 1, 1999, the parties agreed to proceed with the distribution under the original terms of the novation agreement and that the proxies would not be revoked. Intermountain agreed to withdraw its suit with the understanding that the suit could be refiled in the event that Unico failed to promptly fulfill its obligations.
Market Price, Dividends and Other Matters
Market for Intermountain Common Stock:
There is presently no market for Intermountain's common stock. It is the intent of Intermountain to seek a listing on the OTC Electronic Bulletin Board for the purpose of establishing a public trading market for the shares being distributed to the eligible shareholders. There is no assurance that such listing will be obtained, however, we believe that the listing requirements for the OTC Electronic Bulletin Board can reasonably be met.
There has never been a public market for Intermountain's common stock, and no prediction can be made as to the effect, if any, that the sale of shares, or the availability of shares for sale, will have on the market price prevailing from time to time. Nevertheless, sales of substantial amounts of the common stock in the public market could adversely affect prevailing market prices and the ability of Intermountain to raise equity capital in the future.
Shares Eligible for Future Sale:
Upon effectiveness of the registration statement and completion of the distribution to the eligible shareholders, there will be 1,155,609 shares of Intermountain common stock outstanding held by approximately 425 shareholders. The shares distributed to the eligible shareholders will not be "restricted securities" under Rule 144. They will be freely tradable in the public market without restriction or further registration under the Securities Act of 1933, except for any shares acquired by affiliates of Intermountain as that term is defined in Rule 144 under the Securities Act.
In general, under Rule 144 as currently in effect, a person (or persons whose shares are required to be aggregated), including an affiliate of
Intermountain, or who beneficially owns restricted shares acquired from Intermountain or an affiliate of Intermountain at least one year prior to the sale, is entitled to sell within any three-month period a number of
shares that does not exceed the greater of the following:
Shares held by persons who are deemed to be affiliates of Intermountain, including any shares acquired by affiliates in the distribution, are subject to volume limitations, manner of sale provisions, notification requirements and requirements as to the availability of current public information concerning Intermountain, regardless of how long the shares have been owned or how they were acquired. As defined in Rule 144, an affiliate of an issuer is a person that directly or indirectly through the use of one or more intermediaries, controls, or is controlled by, or is under common control with, such issuer. Mr. William N. Hagler, Mr. Rick L. Hurt and Mr. William Braddock & Mrs. Helen Braddock may be considered affiliates of Intermountain. The shares held by them may be regarded as unrestricted shares held by an affiliate, subject to the provisions of Rule 144, other than the holding period requirement of Rule 144(d). If any of these persons ceased to be considered an affiliate of Intermountain, their shares would be marketable under Rule 144(k), three months later. See "Security Ownership of Certain Beneficial Owners and Management"
Dividends:
Intermountain has never paid any dividends on its common stock and does not anticipate paying any dividends in the foreseeable future.
Financial Statements of Intermountain
The audited financial statements of Intermountain as of February 28, 1999 and February 29, 2000 and for the years ended February 28, 1998 and 1999 and February 29, 2000 are included beginning on page 38 of this prospectus.
Supplemental Financial Information
Supplemental financial information relative to Intermountain's natural gas reserves and activities is included in Notes L and M to Intermountain's audited financial statements as of
February 29, 2000 beginning on page 56 of this prospectus.
Selected Financial Data
| Financial Position: | |||||
| Working capital |
$ 173
|
$ 863
|
$ 1,294
|
$ 923
|
$ 785
|
|
|
|
|
|
|
|
| Current ratio |
1.31:1
|
4.09:1
|
14.37:1
|
1.31:1
|
1.72:1
|
|
|
|
|
|
|
|
| Total assets |
$ 4,422
|
$ 3,178
|
$ 3,174
|
$ 2,596
|
$ 3,275
|
|
|
|
|
|
|
|
| Long term debt, including current portion |
$ 310
|
$ 197
|
$ -
|
$ -
|
$ -
|
|
|
|
|
|
|
|
| Long term debt, excluding current portion |
$ 234
|
$ 9
|
$ -
|
$ -
|
$ -
|
|
|
|
|
|
|
|
| Stockholders' equity |
$ 3,528
|
$ 2,803
|
$ 3,019
|
$ 2,288
|
$ 2,180
|
|
|
|
|
|
|
|
| Results of Operations: | |||||
| Revenues | |||||
| Natural gas production |
$ 141
|
$ 245
|
$ 216
|
$ 213
|
$ 299
|
| Asphalt storage and |
|
|
|
|
|
| manufacturing agreements |
60
|
-
|
-
|
30
|
3
|
| Petroleum product sales |
468
|
479
|
-
|
1
|
-
|
| Real estate rental |
15
|
12
|
13
|
20
|
26
|
| Consulting fees |
-
|
-
|
3
|
41
|
21
|
| Other income |
116
|
-
|
4
|
-
|
57
|
| Total revenues |
$ 800
|
$ 736
|
$ 236
|
$ 305
|
$ 406
|
|
|
|
|
|
|
|
| Net income (loss) from continuing operations before income taxes |
$ (420)
|
$ (327)
|
$ (278)
|
$ (841)
|
$ (101)
|
|
|
|
|
|
|
|
| Net income (loss) from continuing operations |
$ (274)
|
$ (214)
|
$ (185)
|
$ (751)
|
$ (101)
|
|
|
|
|
|
|
|
| Net income (loss) from discontinued operations |
$ 816
|
$ (512)
|
$ 210
|
$ 20
|
$ (4)
|
|
|
|
|
|
|
|
| Net income (loss) |
$ 542
|
$ (726)
|
$ 25
|
$ (731)
|
$ (105)
|
|
|
|
|
|
|
|
| Common shares outstanding (as restated) |
1,156
|
1,156
|
1,156
|
1,156
|
1,156
|
|
|
|
|
|
|
|
| Net income (loss) from continuing operations per common share |
$ (0.24)
|
$ (0.18)
|
$ (0.16)
|
$ (0.65)
|
$ (0.09)
|
|
|
|
|
|
|
|
| Net income (loss) from discontinued operations per common share |
$ 0.71
|
$ (0.44)
|
$ 0.18
|
$ 0.02
|
$ NIL
|
|
|
|
|
|
|
|
| Net income (loss) per common share |
$ 0.47
|
$ (0.62)
|
$ 0.02
|
$ (0.63)
|
$ (0.09)
|
|
|
|
|
|
|
|
| Cash flow from operations |
$ (45)
|
$ 12
|
$ 546
|
$ (171)
|
$ (439)
|
|
|
|
|
|
|
|
| Cash flow from financing activities |
$ (86)
|
$ (113)
|
$ (28)
|
$ -
|
$ -
|
|
|
|
|
|
|
|
| Cash flow from investing activities |
$ (152)
|
$ 218
|
$ 369
|
$ 77
|
$ (71)
|
|
|
|
|
|
|
|
| Dividends declared per common share |
$ N/A
|
$ N/A
|
$ N/A
|
$ N/A
|
$ N/A
|
|
|
|
|
|
|
|
Management's Discussion and Analysis of Financial Condition and Results of Operations
The following discussion of our financial condition and results of operations for the years ended February 28, 1998, 1999 and February 29, 2000 should be read in conjunction with our financial statements, the notes related thereto, and the other financial data included elsewhere in this prospectus.
Liquidity and Capital Resources :
Intermountain has sustained substantial operating losses over the past several years. Such losses are the direct result of a decline in revenue sources as well as increased costs associated with two failed mergers. The losses in revenues and increased costs have resulted in significant declines in our cash balances and working capital available to fund ongoing operations. Management believes that cash flow from ongoing operations will be adequate to meet cash demands for the coming year. We recognize that it will be necessary to develop additional sources of cash flow to avoid depletion of cash and working capital in the longer term. We are actively exploring additional projects which would allow Intermountain to increase cash flows and investment returns. Except for the project to manufacture asphalt paving products, no specific plans are currently in place.
The following table presents selected financial data regarding cash and working capital for each of the past three fiscal years:
| Cash and cash equivalents (unrestricted) | |||||
| Cash and cash equivalents (restricted) | |||||
| Total cash and cash equivalents | |||||
| Working capital | |||||
|
|
|
|
|||
|
|
|
|
|||
|
|
|
|
|||
During the fiscal year ended February 29, 2000, Intermountain sustained a $439,000 use of cash from operating activities which represents Intermountain's primary use of cash during the year. The reduction in cash from operating activities resulted primarily from Intermountain's operating loss and changes in operating working capital. Significant or unusual operating cash items included:
Cash requirements for the next twelve months include an estimated $15,000 in legal and accounting fees associated with the registration and distribution of Intermountain's stock and
normal general and administrative costs of approximately $22,000 per month. In its efforts to develop additional sources of revenues, Intermountain may incur some project development costs. We are unable to predict the
level of such costs that may be incurred during the next year.
Expected sources of cash during the next twelve months consist of $115,000 reimbursement of costs, net of accrued payables, incurred for modifications and improvements made to
asphalt product manufacturing facilities, $101,000 from collections of notes receivable from Unico and/or guarantors of the notes, and cash flows from normal operating activities estimated at $16,000 per month from
natural gas operations, $2,500 per month from rental activities, $1,000 per month from management fees, and $1,600 per month interest earned on cash balances. It is expected that the asphalt product manufacturing
activities will begin in June 2000. We estimate that Intermountain could realize an increase in cash flows from this activity of approximately $10,000 per month over time. However, as the activity will be in its initial
stages, gaining market share may be difficult and cash flows during the next fiscal year will probably be well below our long term expectations.
Estimates of future sources and uses of cash presented herein are based on our assumptions and expectations that our operations will continue at current levels without material interruption and that collection of accounts will occur under agreed terms. Actual results may be materially different.
Results of Operations:
The following table summarizes the results of Intermountain's operations for each of the past three fiscal years. All percentage amounts were calculated using the underlying data.
| Revenues |
$236,262
|
$ 305,240
|
$ 405,877
|
||
| Costs and Expenses |
514,185
|
1,143,127
|
506,611
|
||
| Loss from continuing operations before taxes |
$(277,923)
|
$(840,887)
|
$ (100,734)
|
||
| Income taxes |
(92,688)
|
(90,330)
|
123
|
||
| Net loss from continuing operations |
$(185,235)
|
$(750,557)
|
$ (100,857)
|
||
| Income (loss) from discontinued operations, net of taxes |
210,673
|
20,090
|
(3,820)
|
||
| Net income (loss) |
$25,438
|
$(730,467)
|
$ (104,677)
|
||
|
|
|
|
|||
|
|
|
|
Revenues :
The increase in revenues for the year ended February 29, 2000 compared to fiscal 1999, consisted of an increase in natural gas revenues of $86,000, an increase of real estate rental revenues of $6,000, an increase of other revenues $58,000, a decrease in asphalt storage revenues of $27,000 and a decrease in consulting fees of $21,000.
The increase in revenues for the year ended February 28, 1999 as compared to fiscal 1998 was comprised of a $30,000 increase in asphalt storage revenues, a $38,000 increase in consulting fee revenues, and a $7,000 increase in real estate rental revenues, offset by a $3,000 decline in natural gas production revenues and a $4,000 decrease in other income.
Changes in individual components of revenues are discussed below:
Natural gas revenues:The increase in natural gas revenues for the year ended February 29, 2000 included an increase of $76,000 from sales of natural gas produced and a one time $10,000 from the sublease of deep drilling rights on leases held by production of natural gas. The $76,000 increase in natural gas sales consisted primarily of an increase in natural gas prices experienced during the year. The average selling price of natural gas during fiscal 2000 was $1.20 per Mcf compared to $0.90 per Mcf realized during fiscal 1999. The increase in natural gas prices consisted of an overall increase in natural gas market prices of approximately 16% over the prior year plus an approximately $0.16 per Mcf decrease in contracted gas gathering fees. The quantity of natural gas produced, net to Intermountain's interest, during the year ended February 29, 2000 of 236,455 Mcf remained relatively unchanged from the 236,327 Mcf produced during the prior year. The increase in sales of natural gas also includes approximately $5,000 received during fiscal 2000 from the retroactive application of the decrease in gas gathering fees to January of 1999. It is expected that revenues from the sale of natural gas for the next twelve months will remain consistent with fiscal 2000 sales assuming that there is no material change in current natural gas prices.
The decline in natural gas revenues during the fiscal year ended February 28, 1999 was primarily due to a significant reduction in sales prices received as compared to fiscal 1998. The average price received for natural gas during fiscal 1999 was $0.90 per Mcf compared to $1.02 per Mcf in 1998 representing a 12% decline. The decline in price during fiscal 1999 was mitigated somewhat by an increase in production from 211,628 Mcf during fiscal 1998 to 236,327 Mcf during fiscal 1999 representing an increase of 12%. It should be noted that Intermountain received approximately $5,000 during fiscal 2000 that represented a $0.16 per Mcf contract price adjustment that was applied retroactive to January of 1999. The increase in production during fiscal 1999 was primarily the result of well repairs that were performed during 1998 and 1999 that improved productivity from several of our wells.
Real estate rental:S1-30<PAGE>The increase in revenues from real estate rental for the year ended February 29, 2000 consisted of an increase of $3,000 received for rental of office space in Intermountain's Farmington, NM office building plus an increase of $3,000 realized for rent of land and buildings at the Fredonia, AZ refinery facility. The increase in rental income is due to increased occupancy in the Farmington office building and the initiation of charging Red Hills for use of the Fredonia shop building but offset by the discontinuation of a $100 per month land lease at the facility. Occupancy at the Farmington office building is near capacity as of February 29, 2000. It is expected that real estate rental income will increase slightly during the next twelve months primarily due to the $750 per month rent that is now being charged to Red Hills.
27
The increase in real estate rental revenues during the year ended February 28, 1999 was the result of increased occupancy of the Farmington, NM office building.Asphalt storage and manufacturing :
The decline in asphalt storage revenues during the year ended February 29, 2000 was the result of withholding the storage facility from use by others during fiscal 2000 in order to allow for the implementation of the asphalt emulsion and cutback manufacturing project with Paramount. We have been active in developing the project since the beginning of fiscal 2000. Intermountain expects to begin shipping products from the facility in June 2000, however revenues from the sale of finished products are not expected to be significant in the first few months due to expected strong initial competition for local market share.
The increase in asphalt storage revenues during the year ended February 28, 1999 was the result of Intermountain contracting to provide asphalt storage services during the 1998 - 1999 winter months. Intermountain had not provided such services during the previous winter. Intermountain had expected to continue to provide the winter storage services on a continuing basis until it identified the potentially more viable asphalt emulsions and cutbacks manufacturing project early during fiscal 2000.
Consulting fee revenues:
The decline in consulting fee revenues for the year ended February 29, 2000 was primarily related to the discontinuation of services to Saba Petroleum near the beginning of fiscal 2000. Intermountain realized approximately $29,000 during fiscal 1999 for consulting services performed for Saba by Mr. Hagler. No services were performed for Saba during fiscal 2000. Intermountain received $21,000 for consulting services during fiscal 2000 including $14,000 for management and accounting services provided to Red Hills and $7,000 for consulting services performed for an unrelated party. Fees received from Red Hills increased from $12,000 received during fiscal 1999. The increase in the Red Hills fees was the result of the initiation of a $1,000 per month charge for such services that began in January 2000. It is anticipated that Intermountain will continue to receive the $1,000 per month from Red Hills during the next fiscal year. Intermountain has no current plans to provide consulting services for any other parties during the next twelve months.
The increase in consulting fee revenues during the year ended February 28, 1999 was the result of Intermountain receiving $12,000 for management and accounting services provided to Red Hills during the year and the realization of $29,000 for consulting services performed for Saba Petroleum. During the year ended February 28, 1998, Intermountain received $3,000 from the performance of outside consulting services.
Other revenues:
The $58,000 increase in other income for the year ended February 29, 2000 is exclusively due to the one time recognition of income associated with the settlement with Unico of obligations due to Intermountain under the novation agreement.
Costs and Expenses :
The following table presents a summary of Intermountain's costs and expenses for the last three fiscal years:
| Cost of sales |
$101,787
|
$ 152,057
|
$ 99,164
|
||
| General and administrative costs |
318,451
|
610,360
|
320,515
|
||
| Depletion, depreciation and amortization |
122,800
|
125,422
|
125,289
|
||
| Bad debt expense |
-
|
8,024
|
-
|
||
| Unrealized loss on writedown of investment |
-
|
300,250
|
-
|
||
| Interest and investment income, net |
(28,853)
|
(49,986)
|
(38,357)
|
||
| Total costs and expenses |
$514,185
|
$1,146,127
|
$ 506,611
|
||
|
|
|
|
|||
Changes in individual components of costs and expenses are discussed below.
Cost of sales:S1-33<PAGE>Cost of sales includes costs incurred in the production of natural gas and the costs of producing refined products and maintaining the refinery facility.
The decline in cost of sales during the year ended February 29, 2000 is primarily attributed to a $38,000 reduction in natural gas production costs and a $15,000 decline in refinery facility operating costs.
The $38,000 reduction in natural gas production costs was primarily due to a significant reduction in well repairs during fiscal 2000 compared to fiscal 1999. There were no significant well equipment problems encountered during fiscal 2000. There were no significant changes in other cost categories related to natural gas production during fiscal 2000 compared to fiscal 1999.
The reduction in refinery facility costs during the year ended February 29, 2000 was primarily due to the write off of $21,000 of petroleum product inventory during fiscal 1999, offset by a slight increase in costs primarily related to the implementation of the asphalt manufacturing project.
The increase in cost of sales during the year ended February 28, 1999 is attributed to the write off of $21,000 of petroleum product inventories during the year and a $15,000 increase in natural gas well repair costs as compared to fiscal 1998.
During fiscal 1999 Intermountain wrote off its inventories of petroleum products stored at its Fredonia refinery facility because it was determined that the products did not have any significant value after deducting estimated selling costs.
During the year ended February 28, 1999, Intermountain incurred approximately $56,000 in gas well equipment repairs compared to $42,000 experienced during fiscal 1998. The cost to repair well equipment was considered to be much higher than normal in both fiscal 1998 and in fiscal 1999 because of the unusual number of unexpected equipment failures that were experienced during those two years. Most other cost categories related to natural gas production remained relatively constant or were consistent with changes in production levels.
General and administrative expenses:
General and administrative expenses include the cost of Intermountain's officers and administrative employees, costs incurred to operate and maintain the Farmington office building, and all items of general overhead required to manage and administer the corporate affairs of Intermountain.
The decrease in general and administrative expenses during the year ended February 29, 2000 was primarily due to a $252,000 reduction in legal, accounting and consulting fees, a reduction of insurance costs of $15,000, and a decline in office building repairs of $14,000. Other general and administrative expense categories remained relatively unchanged from the prior year.
During the year ended February 29, 2000, Intermountain incurred approximately $195,000 in legal, accounting and consulting costs that were primarily related to registration of Intermountain's stock and enforcement of the terms of the novation agreement. These costs were partially offset by $125,000 recovered from Unico in the form of notes receivable. The $125,000 was recognized as settlement of Unico's obligation to reimburse Intermountain for up to $125,000 for stock registration costs.
During the fiscal year ended February 28, 1999, Intermountain incurred $321,000 in legal, accounting and consulting costs which included $275,000 for the one time settlement of a legal services claim for services performed in conjunction with the failed Chatfield Dean merger, and $46,000 that was primarily related to the novation agreement and registration of Intermountain's common stock.
The legal, accounting and consulting costs that Intermountain has incurred during the last two years in association with the failed Chatfield Dean and Starlicon International mergers have represented a significant drain on Intermountain's financial resources. We will continue to incur legal, accounting and consulting costs associated with completing the distribution of Intermountain's stock but are hopeful that the process can be completed without significant additional costs.
The reduction in insurance costs during the fiscal year ended February 29, 2000 was primarily the result of a decrease in officer life insurance costs of $11,000, and a reduction of employee health insurance costs of $5,000, offset by a slight increase in general liability and casualty insurance. Officer life insurance premiums are presently $26,000 per year but are offset by annual increases in the cash surrender value of the policies. The reduction in employee health insurance costs was the result of a change in the coverage provided to Mr. Hagler.
30
The reduction in office building repairs during the fiscal year ended February 29, 2000 were primarily related to office building refurbishing performed during fiscal 1999. Intermountain did not perform any significant improvements to its office building during fiscal 2000. The improvements performed during fiscal 1999 allowed Intermountain in increase occupancy of the building during fiscal 1999 and fiscal 2000.The overall increase of $291,000 in general and administrative expenses during the year ended February 28, 1999 as compared to fiscal 1998 was primarily due to the legal, accounting and consulting costs experienced during fiscal 1999 as previously discussed. Intermountain was able to decrease some of its ongoing administrative costs during fiscal 1999 as a result of the discontinuation of management of the Sand Creek methanol facility during fiscal 1998.
Bad debt expense:
During the fiscal year ended February 28, 1999, Intermountain wrote off a note receivable that had been determined to be uncollectable. Intermountain did not have any accounts or notes receivable that were determined to be uncollectable during fiscal 1998 or fiscal 2000.
Unrealized loss on writedown of investment:
During the fiscal year ended February 28, 1999, Intermountain recorded a writedown for impairment in valuation of its investment in preferred and common stock of Chatfield Dean in the amount of $300,250 which represented one half of the original cost of these investments. Intermountain did not record any valuation allowances for investments during the fiscal years ended February 29, 2000 or February 28, 1998.
Interest and investment income (net):
Interest and investment income includes earnings on cash balances and certificates of deposit, earnings on notes receivable, and net earnings on investments, less interest expense incurred.
The decrease in interest and investment income during fiscal 2000 as compared to fiscal 1999 was primarily the result of decreased cash balances during the year. Intermountain earned interest on its cash balances of approximately $28,000 during fiscal 2000 compared to $46,000 earned during fiscal 1999. Interest earned on notes receivable was $8,000 for fiscal 2000 compared to $3,000 during fiscal 1999. Other interest and investment income earned was $3,000 for fiscal 2000 compared to $2,000 for fiscal 1999. Interest expense incurred during fiscal 2000 was $0 compared to $2,000 incurred in fiscal 1999.
The increase in interest and investment income during fiscal 1999 as compared to fiscal 1998 was the result of a decrease in interest expense and increased cash balances during most of fiscal 1999, offset by a decrease in earnings from notes receivable. Interest earned on cash balances during fiscal 1999 was $46,000 compared to $26,000 earned during fiscal 1998. Interest earned on notes receivable was $3,000 during fiscal 1999 compared to $22,000 during fiscal 1998. The decrease in earnings on notes receivable during fiscal1999 was because Red Hills retired its credit line early in the year. Other interest and investment income earned was $2,000 for fiscal 1999 compared to $1,000 for fiscal 1998.
Interest expense incurred during fiscal 1999 was $2,000 compared to $20,000 incurred during fiscal 1998. Interest expense incurred during fiscal 1998 included approximately $19,000 accrued on debentures payable. The debentures were converted to Unico common stock on February 28, 1998.
Inflation, Deflation and Changing Prices:
The results of operations and capital expenditures will continue to be affected by inflation, deflation and changing prices. Prices of natural gas could have a materially adverse effect on Intermountain's operations. Management is unable to determine the full impact of inflation, deflation and changing prices on the results of operations or working capital.
Changes in and Disagreements with Accountants
Atkinson and Co. Ltd., Albuquerque New Mexico had performed the annual audits of Unico and its subsidiaries from 1992 until 1998. Intermountain engaged Atkinson to continue to audit its
financial statements for the years ended February 28, 1999 and February 29, 2000. There have been no disagreements between Intermountain and its accountants regarding financial disclosure issues.
Directors and Executive Officers
| William N. Hagler 603 Merino Kraal Farmington, New Mexico 87401 |
|||
| Rick L. Hurt 5701 Tee Dr. Farmington, New Mexico 87402 |
Background information concerning the Officers and Directors is as follows:
William N. Hagler has been the president and a director of Intermountain since 1984. Mr. Hagler received a B.S. degree in Industrial Engineering from North Carolina State University in 1955. From 1955 to 1968, he was employed by Esso Standard Oil, Cities Service Oil Co. and Riffe Petroleum Co. in various phases of the petroleum refining and marketing industry. In July 1968, he became assistant to the president and later vice president of Plateau, Inc., Farmington, New Mexico, a regional refining and marketing firm. His responsibilities have included refinery management, marketing, corporate development, economics and planning, crude oil supply, negotiation and administration of processing arrangements, labor relations, coordination of refinery acquisition and expansion programs, and relations with state and federal regulatory bodies. In 1979, Mr. Hagler organized Unico and served as its president and as a director from its inception until June 1998 when he resigned both positions. In April 1993, Mr. Hagler accepted an appointment as a director of Saba Petroleum and from October 1998 until December 1998 also served as its management committee chairman. He resigned from all Saba Petroleum positions in March 1999. During 1999, Mr. Hagler accepted an appointment as chairman of the board of directors of Petrominerals Corporation. Mr. Hagler is also a member of the Farmington, New Mexico Public Utilities Commission.S1-35<PAGE>Rick L. Hurt has been the secretary, treasurer and a director of Intermountain since May, 1985. Mr. Hurt received a BBA degree in Accounting from the University of New Mexico in 1979. From 1979 to 1982, he was employed as a staff accountant and later as a senior accountant by the accounting firm of Fox & Company in its Albuquerque, New Mexico, offices. From 1982 until March 1985 he was employed as chief accountant for the law firm of Davis and Davis in Austin, Texas. Mr. Hurt is certified as a public accountant in the states of New Mexico and Texas although he has not maintained his licenses to practice public accounting in those states. Mr. Hurt joined Unico as assistant controller in March 1985, and became its controller, secretary, treasurer, and a director on May 20, 1985. Mr. Hurt resigned from these positions in June 1998.
32
Both Mr. Hagler and Mr. Hurt may be deemed a parent or promoter of Intermountain as those terms are defined in the rules and regulations promulgated under the Securities Act of 1933.
No family relationship exists between any officer or director of Intermountain and no officer or director has been involved in any proceeding of the nature described in paragraph (d) of Item 401 of Regulation S-K.
No officer or director of Intermountain has been subject, during the preceding 5 years, to any of the events set forth in paragraph (f) of Item 401 of Regulation S-K.
Compensation of Directors and Executive Officers
The following table will inform you about the compensation earned by all of Intermountain's executive officers for services rendered to Intermountain during the last three fiscal years.
| William N. Hagler | ||||||
| Chief Executive Officer and Director | ||||||
| 1998 | $100,958 | $ 0 | $ 0 | 0 | $ 0 | |
| Rick L. Hurt | ||||||
| Secretary, Treasurer, and Director | ||||||
| 1998 | $54,777 | $2,500 | $ 0 | 0 | $ 0 | |
| All officers and directors as a group ( 2 persons) |
(1) Consists of SIMPLE IRA employer matching contributions of the lesser of employee elective deferrals or 3% of salary.
Intermountain's employees, including officers, may receive such bonuses and salary increases as the board of directors, in its sole discretion, may award from time to time. Intermountain has not increased officers salaries since April, 1997 at which time a 2.5% cost of living adjustment was awarded.
Intermountain provides health insurance benefits to the officers and all other full time employees.
Intermountain maintains a SIMPLE IRA plan for its officers and all of its full time employees. Participation in the plan is voluntary and employee contributions are limited by regulations established annually by the Internal Revenue Service. Intermountain is required to match employee contributions up to the lesser of 3% of salary or the amount of employee contributions.
No director has been compensated for attending meetings of the board of directors. However, by resolution of the board of directors, a fixed sum and expenses of attendance, if any, may be allowed for attendance at each regular and special meeting of the board of directors.
Intermountain does not currently maintain director and officer liability insurance.
Intermountain has no employment contracts with any of its employees. All employees can terminate employment at will.
Security Ownership of Certain Beneficial Owners and Management
Principal Shareholders:
There are presently 1,155,609 shares of Intermountain's common stock outstanding. All of the shares are held in a trust for the benefit of those Unico shareholders who are eligible to receive the distribution of Intermountain common stock. All of the shares will be distributed to the eligible shareholders upon effectiveness of the registration statement covering the shares to be distributed.
Security Ownership of Certain Owners:
The following table lists the only persons known to Intermountain who, after giving effect to the distribution, will beneficially own five percent (5%) or more of the issued and outstanding Intermountain common stock, its only voting security:
| Common stock, | William N. Hagler | 560,408 shares of | |
| no par value | 603 Merino Kraal | record and beneficially | |
| Farmington, NM 87401 | |||
| Common stock, | William & Helen Braddock | 149,400 shares of | |
| no par value | P.O. Box 403 | record and beneficially | |
| Dorado, PR 00646 |
Security Ownership of Management:
The following table lists the ownership of Intermountain common stock by the management of Intermountain, after giving effect to the distribution:
| Common stock, | William N. Hagler | 560,408 shares of | |
| no par value | 603 Merino Kraal | record and beneficially | |
| Farmington, NM 87401 | |||
| Common stock, | Rick L. Hurt | 6,904 shares of | |
| no par value | 5701 Tee Dr. | record and beneficially | |
| Farmington, NM 87402 | |||
| Common stock, | All officers and directors | 567,312 shares of | |
| no par value | (2 people) as a group | record and beneficially |
Certain Relationships and Related Party Transactions
Intermountain was a wholly owned subsidiary of Unico from 1985 until June 1998. During that period of time, there have been numerous transactions between these companies in the ordinary course of their respective businesses. Mr. Hagler and Mr. Hurt have been officers and directors of Intermountain since 1985. They were, likewise, officers and directors of Unico. Mr. Hagler was the chairman of the board of directors and an officer of Unico from 1979 until 1998. Mr. Hurt was a director and an officer of Unico from 1985 to 1998. As of February 29, 2000, it is estimated that Mr. Hagler owned 8.5% of Unico's outstanding common stock and will, upon completion of the distribution, own 48.50% of Intermountain's outstanding common stock.
Following are descriptions of transactions involving Intermountain and other related parties that occurred during the fiscal year ended February 29, 2000 and such other periods as are helpful in understanding the transactions described. We believe that the terms of the transactions discussed were at least as favorable to Intermountain as those that could have been secured in arm's length transactions.
Unico and Starlicon International:
In May 1998, in contemplation of the execution of the novation agreement, Unico transferred substantially all of its assets and operating properties to Intermountain in exchange for additional paid in capital of $1,043,197 and reduction in debt owed by Unico to Intermountain. Assets transferred in exchange for additional paid in capital included the natural gas producing properties in Kansas, the Farmington New Mexico office building, and the Chatfield Dean investment. All assets were transferred at book value and no gain or loss was recognized by Unico on the transaction. Assets transferred as payment of debt included cash, accounts and notes receivable, cash value of life insurance policies, and income tax refunds receivable, less accounts payable associated with operating activities.
As of February 28, 1999, Unico was indebted to Intermountain for an estimated income tax refund of $22,000 from the carryback of a net operating loss to fiscal 1998 from the final Unico consolidated tax returns that were filed for the four months ended June 30, 1998. Intermountain collected the refund during the year ended February 29, 2000.
As part of the novation agreement Starlicon International agreed to reimburse Intermountain for approximately $31,300 in legal fees and expenses that Intermountain incurred in connection with the legal action and preparation of the novation agreement. As of February 28, 1999, Starlicon International owed Intermountain approximately $26,300 of such reimbursable costs. In July 1999, as part of a global settlement of all remaining obligations due to Intermountain under the novation agreement, Intermountain accepted 375,800 shares of Unico common stock, valued at $28,185, in exchange for the balance due on this receivable plus accrued interest thereon of approximately $1,900.
The novation agreement provided for Unico to pay Intermountain up to $200,000 if the distribution of Intermountain's stock to Unico shareholders was taxable. The distribution does not qualify as tax exempt under current Internal Revenue Service regulations and is therefore a taxable event. In July 1999, as part of a global settlement of all remaining obligations due to Intermountain under the novation agreement, Intermountain accepted 761,000 shares of Unico common stock, valued at $57,143, as settlement of the "if taxable" obligation.
The 1,136,800 (375,800 plus 761,000) shares of Unico common stock received was valued at $0.075 per share based on average published trade prices of Unico common stock during August 1999 of approximately $0.12 per share, less a discount of 40%. The discount was applied because the stock is restricted under Rule 144 of the Securities Act of 1933 as to the timing and quantity of future sales..
The novation agreement provided for Unico to reimburse Intermountain for up to $125,000 in costs incurred for registration of Intermountain's stock with the Securities and Exchange Commission. The registration of Intermountain's stock is necessary to complete the distribution of Intermountain's stock to the eligible Unico shareholders. In July 1999, Intermountain accepted two notes receivable from Unico totaling $125,000 ($50,000 and $75,000), as settlement of this obligation.
The $50,000 note is payable to Intermountain in four monthly installments of $12,500, plus accrued interest at 9% per annum, beginning on August 1, 1999, and is collateralized by 190,500 shares of Unico common stock. The $75,000 note is payable to Intermountain in four annual installments of $18,750, plus accrued interest at 10% per annum, beginning on August 1, 2000, and is collateralized by 357,100 shares of Unico common stock. The $50,000 note and the first installment of the $75,000 note are personally guaranteed by three individuals who are shareholders and officers of Unico. In the event that Unico defaults on any payment of the $50,000 note, the entire remaining balance on both notes becomes subject to the personal guarantees.
As of February 29, 2000, the balance due from Unico on the two notes totaled $100,833 plus accrued interest of $5,188. As of February 29, 2000, scheduled payments on the $50,000 note were past due and Intermountain, in accordance with the note and related security agreements, has declared both of the notes to be in default. Demand for payment has been made to both Unico and the Unico officers and shareholders who personally guaranteed them. It is Intermountain's intention to vigorously pursue collection of both notes.
Red Hills Manufacturing:
Red Hills is a New Mexico corporation controlled by Intermountain's officers and directors William N. Hagler and Rick L. Hurt, and two former employees of Intermountain. Red Hills manufactures hardwood stamp blocks and occupies unused building space at Intermountain's refinery facility in Arizona. Red Hills was previously allowed to use the building in exchange for the performance of routine maintenance and monitoring services at the refinery facility. During the year ended February 29, 2000, Intermountain recognized $4,739 of rental income from Red Hills that was an offset of $4,739 in refinery modification work performed by Red Hills personnel. Beginning March 1, 2000, Intermountain will charge Red Hills $750 per month for rent of the building.
Intermountain provides management and accounting services for Red Hills. Fees received for such services were $12,000 during the year ended February 28, 1999, and $14,000 during the year ended February 29, 2000. Beginning in January, 2000, Intermountain began charging Red Hills $1,000 per month for management and accounting services.
Red Hills was indebted to Intermountain for management fees and accrued expenses in the amount of $888 as of February 28, 1999 and $2,162 as of February 29, 2000.
Saba Petroleum:
In April 1993, Mr. Hagler, president and director of Intermountain, accepted an appointment as a director of Saba Petroleum Company. In October 1998,
Mr. Hagler accepted a temporary appointment as the management committee chairman of Saba with the agreement that Saba would reimburse Intermountain for Mr. Hagler's monthly employment costs during the period of the
appointment. During the year ended February 28, 1999, Saba reimbursed Intermountain approximately $29,000. Mr. Hagler resigned all of his positions with Saba in March 1999.
Index to Financial Statements
|
Page |
|
| Report of Independent Auditors | |
| Balance Sheets as of February 28, 1999 and February 29, 2000 | |
| Statements of Operations for the years ended | |
| February 28, 1998, 1999 and February 29, 2000 | |
| Statements of Cash Flows for the years ended | |
| February 28, 1998, 1999 and February 29, 2000 | |
| Statements of Changes in Stockholders' Equity | |
| for the years ended February 28, 1998, 1999 and February 29, 2000 | |
| Notes to financial statements | |
Report of Independent Auditors
Stockholders and Board of Directors
Intermountain Refining Co., Inc.
We have audited the accompanying balance sheets of Intermountain Refining Co., Inc. as of February 29, 2000, and February 28, 1999 and the related statements of operations and comprehensive income, changes in stockholders' equity, and cash flows for the years ended February 29, 2000, and February 28, 1999. These financial statements are the responsibility of Intermountain'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 accounting 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 Intermountain Refining Co., Inc. as of February 29, 2000 and February 28, 1999, and the results of operations and cash flows for the years then ended, in conformity with generally accepted accounting principles.
We previously audited and reported on the consolidated statements of operations and cash flows of Unico, Inc. and Subsidiaries for the year ended February 28, 1998, prior to their restatement for the
1999 change in reporting entity as discussed in Note A to the financial statements. Our report dated May 14, 1998 expressed an unqualified opinion on those statements.
Atkinson & Co., Ltd.
Albuquerque, New Mexico
May 18, 2000
| Intermountain Refining Co., Inc. | ||
| Balance Sheets | ||
| Assets | ||
|
Current Assets |
||
| Cash and cash equivalents - Note A |
$ 1,142,794
|
$ 132,347
|
| Restricted cash and cash equivalents - Note I |
-
|
500,000
|
| Accounts receivable - Note B |
38,740
|
216,343
|
| Accounts receivable from related parties - Note H |
27,171
|
2,162
|
| Inventories - Note D |
-
|
1,018,999
|
| Income tax refund receivable - Note H |
22,018
|
-
|
| Prepaid expenses |
-
|
10,000
|
| Total Current Assets |
1,230,723
|
1,879,851
|
|
Property, Plant and Equipment , at cost - Note H |
||
| Land, buildings and improvements |
463,654
|
463,654
|
| Equipment |
164,930
|
164,930
|
| Crude oil refining equipment |
1,212,333
|
1,212,333
|
| Oil and gas properties, (successful efforts method) - Note L and M |
894,400
|
985,731
|
|
2,735,317
|
2,826,648
|
|
| Less accumulated depletion and depreciation |
(1,939,203)
|
(2,064,492)
|
|
796,114
|
762,156
|
|
| Other Assets | ||
| Investment in Chatfield Dean, (net) - Note O |
300,250
|
175,250
|
| Investment in Unico - Note H |
-
|
85,328
|
| Available-for-sale investments - Note E |
138,000
|
111,325
|
| Notes and accrued interest receivable from related parties - Note H |
-
|
106,021
|
| Deferred tax receivable - Note G |
-
|
1,861
|
| Certificate of deposit - Note A |
20,000
|
20,000
|
| Co-generation facilities available for sale - Note P |
76,130
|
76,130
|
| Other assets - Note C |
34,862
|
57,577
|
|
569,242
|
633,492
|
|
|
$ 2,596,079
|
$ 3,275,499
|
|
|
========
|
========
|
| Intermountain Refining Co., Inc. | ||
| Balance Sheets, Continued | ||
| Liabilities and Stockholders' Equity | ||
|
Current Liabilities |
||
| Accounts payable |
$ 29,311
|
$ 1,091,886
|
| Legal service claim payable - Note O |
275,000
|
-
|
| Taxes other than income taxes |
3,201
|
3,328
|
| Income taxes payable - Note G |
250
|
100
|
| Total Current Liabilities |
307,762
|
1,095,314
|
|
Deferred Taxes - Note G |
-
|
-
|
|
Commitments and Contingencies - Note I |
-
|
-
|
|
Stockholders' Equity - Notes A, H and I |
||
| Common stock, no par value, authorized 10,000,000 shares, |
|
|
| issued and outstanding 1,155,609 shares in 1999 and 2000 |
1,455,314
|
1,455,314
|
|
|
|
|
| Preferred stock, $0.01 par value, authorized 5,000,000 shares, |
|
|
| 0 shares issued and outstanding. |
-
|
-
|
|
|
|
|
| Retained earnings |
833,003
|
728,326
|
| Accumulated other comprehensive loss - Note E |
-
|
(3,455)
|
|
2,288,317
|
2,180,185
|
|
|
$ 2,596,079
|
$ 3,275,499
|
|
|
========
|
========
|
| The accompanying notes are an integral part of these financial statements. |
| Intermountain Refining Co., Inc. |
| Statements of Operations | |
| Revenues | |||
| Natural gas production revenues |
$ 216,137
|
$ 212,987
|
$ 299,247
|
| Asphalt storage and manufacturing agreements - Note D |
-
|
30,000
|
2,743
|
| Petroleum product sales |
-
|
584
|
-
|
| Real estate rental income |
13,182
|
20,344
|
26,225
|
| Consulting fees - Note H |
3,315
|
41,325
|
20,519
|
| Other income - Note H |
3,628
|
-
|
57,143
|
|
236,262
|
305,240
|
405,877
|
|
| Costs and Expenses |
|
|
|
| Cost of sales |
101,787
|
152,057
|
99,164
|
| General and administrative - Note O |
318,451
|
610,360
|
320,515
|
| Depletion, depreciation and amortization |
122,800
|
125,422
|
125,289
|
| Bad debt expense |
-
|
8,024
|
-
|
| Unrealized loss on writedown of investment in Chatfield Dean - Note O |
-
|
300,250
|
-
|
| Interest and investment income, net |
(28,853)
|
(49,986)
|
(38,357)
|
|
514,185
|
1,146,127
|
506,611
|
|
| Loss From Continuing Operations Before Income Taxes |
(277,923)
|
(840,887)
|
(100,734)
|
|
|
|
|
|
| Provision (benefit) for income taxes - Note G |
|
|
|
| Current |
(76,998)
|
(32,405)
|
123
|
| Deferred |
(15,690)
|
(57,925)
|
-
|
|
(92,688)
|
(90,330)
|
123
|
|
| Net Loss From Continuing Operations |
(185,235)
|
(750,557)
|
(100,857)
|
|
|
|
|
|
| Discontinued Operations: |
|
|
|
| Income (loss) from co-generation operations (less applicable income taxes of $(3,511) in 1998, $10,318 in 1999 and $0 in 2000) - Notes P and G |
(6,493)
|
20,090
|
(3,820)
|
|
|
|
|
|
| Income (loss) from operations related to the investment in IC Partners, Ltd (less applicable income taxes of $80,384) - Note N |
264,732
|
-
|
-
|
|
|
|
|
|
| Loss on disposal of investment in IC Partners, Ltd (less applicable income tax credit of $14,443) - Note N |
(47.566)
|
-
|
-
|
|
|
|
|
|
| Net Income (Loss) - Note A |
25,438
|
(730,467)
|
(104,677)
|
|
|
|
|
|
| Other Comprehensive Income , net of tax: |
|
|
|
| Unrealized holding losses on investments available for sale (net of income tax benefit of $(1,861) - Notes E and G |
-
|
-
|
(3,455)
|
|
|
|
|
|
| Comprehensive Income (Loss) |
$ 25,438
|
$ (730,467)
|
$ (108,132)
|
|
=========
|
=========
|
=========
|
|
| Weighted Average Number of Shares Outstanding - Note A |
1,155,609
|
1,155,609
|
1,155,609
|
|
|
|
|
|
| Basic and Fully Diluted Earnings Per Share |
|
|
|
| Net loss from continuing operations |
$ (0.16)
|
$ (0.65)
|
$ (0.09)
|
| Net income (loss) from discontinued operations |
0.18
|
0.02
|
(0.00)
|
| Net income (loss) per share |
$ 0.02
|
$ (0.63)
|
$ (0.09)
|
|
========
|
=========
|
========
|
| The accompanying notes are an integral part of these financial statements. |
| Intermountain Refining Co., Inc. |
| Statements of Cash Flows |
| Cash Flows From Operating Activities | |||
| Net income (loss) |
$ 25,438
|
$ (730,467)
|
$ (104,677)
|
| Adjustments to reconcile net income (loss) to net cash provided (used) by operating activities: |
|
|
|
| Depreciation, depletion and amortization |
131,743
|
134,365
|
125,289
|
| Deferred income taxes |
(27,550)
|
(58,250)
|
-
|
| Bad debt expense |
-
|
8,024
|
-
|
| Unrealized loss on writedown of investment - Note O |
-
|
300,250
|
-
|
| Notes receivable accepted as reimbursement of legal costs - Note H |
-
|
-
|
(125,000)
|
| Receipt of Unico common stock included in income - Note H |
-
|
-
|
(57,143)
|
| Realized loss on disposal of investments available for sale |
-
|
-
|
2,732
|
| Conversion of interest on debentures to common stock |
18,690
|
-
|
-
|
| Loss on investment in partnership - Note N |
(44,121)
|
-
|
-
|
| Changes in operating assets and liabilities: |
|
|
|
| (Increase) decrease in accounts receivable |
98,135
|
(41,462)
|
(180,779)
|
| (Increase) decrease in inventories |
-
|
20,861
|
(1,018,999)
|
| Increase in prepaid expenses |
-
|
-
|
(10,000)
|
| Increase in accrued interest receivable |
-
|
-
|
(5,188)
|
| Decrease in refundable deposits |
2,541
|
-
|
-
|
| Increase (decrease) in accounts payable and accrued expenses |
(17,890)
|
235,803
|
912,702
|
| Increase (decrease) in income taxes accrued/receivable |
358,755
|
(40,225)
|
21,868
|
| Net Cash Flow Provided (Used) by Operating Activities |
545,741
|
(171,101)
|
(439,195)
|
|
|
|
|
|
| Cash Flows From Investing Activities |
|
|
|
| Purchases of available for sale mutual funds |
-
|
(138,000)
|
(38,540)
|
| Proceeds from disposal of available for sale mutual funds |
-
|
-
|
57,167
|
| Decrease (increase) in cash value of life insurance polices |
(18,048)
|
133,004
|
(22,715)
|
| Increase in certificates of deposit |
-
|
(20,000)
|
-
|
| Capitalized gas well completion costs |
-
|
-
|
(91,331)
|
| Cash distributions from partnership |
178,784
|
-
|
-
|
| Investment in Chatfield Dean |
(500)
|
-
|
-
|
| Issuance of notes receivable |
(416,300)
|
(147,572)
|
-
|
| Collections of notes receivable |
625,409
|
249,957
|
24,167
|
| Net Cash Flow Provided (Used) by Investing Activities |
369,345
|
77,389
|
(71,252)
|
|
|
|
|
|
| Cash Flows From Financing Activities |
|
|
|
| Purchase of Unico treasury stock |
(9,016)
|
-
|
-
|
| Payments on long-term debt |
(18,619)
|
-
|
-
|
| Net Cash Flow (Used) by Financing Activities |
(27,635)
|
-
|
-
|
| Increase (Decrease) in Cash and Cash Equivalents |
887,451
|
(93,712)
|
(510,447)
|
|
|
|
|
|
| Cash and Cash Equivalents at Beginning of Year |
349,055
|
1,236,506
|
1,142,794
|
|
|
|
|
|
| Cash and Cash Equivalents at End of Year |
$ 1,236,506 =========
|
$ 1,142,794 =========
|
$ 632,347 ========
|
| Intermountain paid interest of approximately $1,600 in 1998, $1,462 in 1999, and $17 in 2000. |
| Intermountain paid income taxes of $200 in 1998, $25,030 in 1999, and$250 in 2000, and, and received refunds of income taxes of $362,300 in 1998, $6,567 in 1999, and $21,995 in 2000. |
| Supplemental Schedule of Noncash Investing Activities: During 2000, Intermountain accepted $125,000 of notes receivable from Unico as reimbursement of registration costs incurred and accepted 1,137,700 shares of Unico common stock valued at $85,328 as settlement of accounts receivable of $26,282, interest on the receivable of $1,903, and other obligations under the novation agreement of $57,143. During 2000, Intermountain transferred 25,000 shares of Chatfield Dean preferred stock having a book value of $125,000 to Watson Farley as partial settlement of a previously accrued legal services claim. During 2000, Intermountain's available for sale securities declined in value by $5,316, net of deferred taxes of $1,861 |
| Supplemental Schedule of Noncash Financing Activities: During 1998, Unico converted $178,000 of debentures to Unico common stock. |
| The accompanying notes are an integral part of these financial statements. |
| Intermountain Refining Co., Inc. |
| Statements of Changes in Stockholders' Equity |
| Balance, February 28, 1997 , as restated - Note A |
1,155,609
|
$ 1,455.314
|
$1,538,032
|
$ -
|
$ 2,993,346
|
|
|
|
|
|
|
|
| Net income |
-
|
-
|
25,438
|
-
|
25,438
|
|
|
|
|
|
|
|
| Balance, February 28, 1998 , as restated - Note A |
1,155,609
|
1,455,314
|
1,563,470
|
-
|
3,018,784
|
|
|
|
|
|
|
|
| Net loss |
-
|
-
|
(730,467)
|
-
|
(730,467)
|
|
|
|
|
|
|
|
| Balance, February 28, 1999, as restated - Note A |
1,155,609
|
1,455,314
|
833,003
|
-
|
2,288,317
|
|
|
|
|
|
|
|
| Holding loss on available for sale |
|
|
|
|
|
| investments - Notes E and G |
-
|
-
|
-
|
(3,455)
|
(3,455)
|
|
|
|
|
|
|
|
| Net loss |
-
|
-
|
(104,677)
|
-
|
(104,677)
|
|
|
|
|
|
|
|
| Balance, February 29, 2000 |
1,155,609
|
$ 1,455,314
|
$ 728,326
|
$ (3,455)
|
$ 2,180,185
|
|
======
|
========
|
=======
|
=========
|
=========
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| The accompanying notes are an integral part of these financial statements. |
Intermountain Refining Co., Inc.
Notes to Financial Statements
February 29, 2000 and February 28, 1999
Note A - Summary of Significant Accounting Policies
Basis of Presentation: The accompanying financial statements include the operations of Intermountain Refining Co., Inc. as well as the operations of Unico, Inc., through June 30, 1998, and prior years discontinued operations of Intermountain Chemical, Inc., and Gas Technologies Group, Inc. In contemplation of the legal settlement and rescission provisions contained in the novation agreement made between Unico and Starlicon Group, Inc. in June 1998, Unico transferred substantially all of its assets to Intermountain in May 1998. Unico's employees were transferred to Intermountain at the end of June 1998. All of Intermountain's common stock was transferred into a trust for the benefit of Unico shareholders. The management of Intermountain retained full control over the voting stock, assets and operations of Intermountain - Note H. As part of the novation agreement, Unico acquired, for stock, Starlicon International Corporation, which resulted in a change in control of Unico. As the assets and operations of Intermountain consist almost entirely of the consolidated assets and operations of Unico prior to the Starlicon International acquisition, the accompanying financial statements are presented as if the transfer of assets occurred on March 1, 1998. In addition, the financial statements for 1998 as presented in the accompanying financial statements represent the consolidated financial statements of Unico and subsidiaries as previously reported on by Atkinson & Company, Ltd.
Operations of Intermountain Chemical and Gas Technologies consisted of investments in IC Partners Ltd. which was the general partner of Sand Creek Chemical Ltd.. Intermountain Chemical served as the managing general partner of Sand Creek. Intermountain Chemical's and Gas Technology's partnership interests in IC Partners were sold on September 1, 1997 and Intermountain Chemical withdrew as managing general partner. Intermountain Chemical and Gas Technologies were liquidated into Unico and the operations of Intermountain Chemical and Gas Technologies are presented as discontinued operations in the accompanying financial statements - Note N.
Intermountain, in the past, has provided electrical capacity and energy through a 3,000 kilowatt co-generation facility located in Fredonia, Arizona. In June 1999, Intermountain entered into an equipment sale agreement which provides for the Co-generation equipment to be placed on the market for sale. The equipment to be disposed of is presented as co-generation facilities available for sale and the related electrical capacity and energy operations are presented as discontinued operations in the accompanying financial statements - Note P.
Stock Split: Effective as of February 29, 2000, the board of directors of Intermountain declared a 23.11218 for 1 common stock split increasing the number of its outstanding shares from 50,000 to 1,155,609. The stock split was implemented in anticipation of the distribution of Intermountain's common stock to Unico shareholders as discussed in Note I. All references in Intermountain's financial statements to the number of shares and earnings per share have been restated to reflect the stock split.
Business Activity: Intermountain owns an interest in 20 natural gas producing wells located in southwestern Kansas and is the operator of the properties. Intermountain owns a petroleum products refinery and asphalt products storage facility in Fredonia, Arizona. In November 1999, Intermountain entered into an agreement with Paramount Petroleum Corporation to expand asphalt storage activities. Beginning in December 1999, Intermountain began receiving asphalt raw material inventories from Paramount and it is expected that processing and shipment of finished products will begin in June, 2000. Intermountain also owns an office building in Farmington, New Mexico which it uses for its corporate offices and leases unused space to others.
Intermountain Refining Co., Inc.
Notes to Financial Statements, Continued
Intermountain's financial statements for the year ended February 29, 2000 have been prepared on a going concern basis which contemplates the realization of assets and the settlement of liabilities and commitments in the normal course of business.
Intermountain incurred a net loss from continuing operations of $185,235 for the year ended February 28, 1998, a net loss of $730,467 for the year ended February 28, 1999, and a net loss of $104,677 for the year ended February 29, 2000. Several of Intermountain's revenue sources have substantially declined over the past four years. Management recognizes that Intermountain must generate additional resources to replace its existing depleting revenue base. Intermountain has positive working capital and positive stockholders' equity at February 29, 2000. Intermountain also has no debt service requirements at February 29, 2000. Intermountain's current declining revenue stream would allow Intermountain to sustain its operations on an ongoing basis for at least the next fiscal year. Management's plans to enhance its revenue base include expanding its asphalt storage services, and exploring potential opportunities to better utilize its refinery equipment investment. Additional opportunities may include restarting and operating the refinery facility to process specialty products, contributing the refinery equipment to a new venture at a different location in exchange for equity participation in such a venture, engaging in petroleum processing projects unrelated to its refinery, and seeking an industry related merger and/or acquisition. However, there can be no assurance that management will be successful in implementing any of these plans.
Cash and Cash Equivalents: For purposes of reporting cash flows, cash and cash equivalents include cash on hand, cash in depository institutions, and interest bearing over-night cash investments. Intermountain maintains its cash balances and certificates of deposit in various local financial institutions. The balances maintained are in excess of the maximum insurance provided by the Federal Deposit Insurance Corporation. Intermountain does not believe that it has any significant credit risk for amounts in excess of the Federally insured amounts. Cash and cash equivalents as of February 29, 2000 includes restricted cash in the amount of $500,000 that is pledged as collateral on a $500,000 irrevocable letter of credit as discussed in Note I.
Certificate of Deposit: Intermountain maintains a certificate of deposit which is payable jointly to Intermountain and the Kansas Corporation Commission as cash security for future well plugging costs in accordance with Kansas licensing requirements. Interest earned on the certificate of deposit is paid directly to Intermountain.
Inventories: Raw materials, refined products, materials, and supplies inventories of Intermountain are stated at the lower of cost (first-in, first-out) or market.
Property, Plant and Equipment: Property, plant and equipment is stated at cost. Depreciation of property and equipment is provided on the straight-line method over the following useful lives:
| Buildings | |
| Equipment | |
| Crude Oil Refining Equipment |
Maintenance, repairs and renewals which neither materially add to the value of the property nor appreciably prolong its life are charged to expense as incurred. Gains or losses on disposition of property are included in results of operations.
Long-lived assets to be held and used are reviewed for impairment whenever events or changes in circumstances indicate that the related carrying amount may not be recoverable. When required, impairment losses on assets to be held are recognized based on the excess of the assets carrying amount over the fair value of the asset, and long-lived assets to be disposed of are reported at the lower of carrying amount or fair value less cost to sell.
Intermountain Refining Co., Inc.
Notes to Financial Statements, Continued
Investments in Chatfield Dean and Unico: The investment in Chatfield Dean is reported at cost less reserve for impairment in value and is discussed in Note O to these financial statements. The investment in Unico is reported at cost and is discussed in Note H to these financial statements.
Oil and Gas Properties: The successful efforts method of accounting for the acquisition, exploration, development and production of oil and gas properties is utilized. Costs of acquiring undeveloped oil and gas leases are capitalized. All development costs of proved properties are capitalized as incurred and all exploration costs are expensed. The capitalized costs of oil and gas wells and related equipment are amortized by the units-of-production method based on the estimated proved oil and gas reserves.
Income Taxes: Deferred income taxes are provided on temporary differences arising primarily from the use of straight-line depreciation for financial reporting purposes and accelerated depreciation on certain assets for income tax purposes. Intermountain filed consolidated income tax returns with Unico through June 30, 1998 and filed a separate tax return for the eight months ended February 28, 1999. Intermountain will file separate tax returns for subsequent years. For periods in which consolidated returns were filed, taxes were allocated to each subsidiary as if separate returns were filed. Investment tax credits have been accounted for on the flow-through method.
Earnings Per Share: Income (loss) per share is based on the weighted average number of common shares outstanding during each period.
Reclassifications: Certain reclassifications have been made to the 1998 and 1999 financial statements to conform with the 2000 presentation.
Estimates: The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that effect certain reported amounts and disclosures. Accordingly, actual results could differ from those estimates.
Fair Value of Financial Instruments: The carrying amount of cash and cash equivalents, certificate of deposit, accounts receivable, accounts payable, and accrued expenses approximate fair value because of the short maturity of these amounts. The carrying amount of notes receivable approximates fair value because the interest rates are at or near market value.
Available for Sale Investments: Available for sale investments include investments in mutual funds. The carrying amount of Intermountain's investment in mutual funds is reflected at fair value. Unrealized holding gains and losses in the market value of mutual funds is reported as other comprehensive income and included in changes in equity.
Concentration of Credit Risk: Intermountain generates substantially all of its natural gas revenues from one customer, Kinder Morgan, formerly KN Energy. Intermountain has not experienced any credit losses with respect to it natural gas receivables. Accordingly, no provision for doubtful accounts on such receivables has been recorded by Intermountain. Collateral is not required on natural gas receivables.
Other Comprehensive Income: Other comprehensive income for the year ended February 29, 2000 includes unrealized gains and losses on changes in the value of available for sale investments and is recorded as changes in equity. For the years ended February 28, 1998, and 1999, Intermountain had no changes in equity which constitute components of other comprehensive income.
Intermountain Refining Co., Inc.
Notes to Financial Statements, Continued
Note B - Accounts and Notes Receivable
Accounts receivable consists of amounts due from customers for sales of natural gas, office space rental, services rendered, and
reimbursements of costs incurred in conjunction with modifications to asphalt storage equipment. Credit sales are generally made on terms ranging from net 10 days to net 30 days in accordance with normal industry
practice. Intermountain performs periodic credit evaluations of its customers' financial condition and generally does not require collateral. Management does not believe that an allowance for bad debts on
accounts receivable is necessary.
Note C - Other Assets
Other assets consist of the following:
| Cash value of life insurance contracts |
$ 34,587
|
$ 57 ,302
|
| Utility and license deposits |
275
|
275
|
|
$ 34,862
|
$ 57,577
|
From time to time, Intermountain has used storage tanks and loading facilities at its refinery facility in Fredonia, Arizona to provide asphalt storage services to others on a fee basis. Asphalt storage services include the receipt, storage, and shipment of asphalt products owned by others. During the year ended February 28, 1999, Intermountain received $30,000 for storage of paving asphalt owned by others.
In November 1999, Intermountain entered into an agreement with Paramount Petroleum Corporation to manufacture asphalt emulsions and cutback products for shipment to Paramount's customers. Asphalt emulsions and cutback products are used for construction, repair, and maintenance of highways, streets, and parking lots. The term of the agreement is for five years from the first delivery of finished products by Intermountain. Necessary equipment modifications have been underway since June 1999 and initial processing and shipments of finished products are expected to commence during June 2000.
All costs incurred by Intermountain for making equipment modifications are to be reimbursed by Paramount who will own the equipment modifications. Intermountain invoiced Paramount approximately $263,000 for equipment modification costs incurred during the year ended February 29, 2000. Amounts receivable from Paramount for such invoices was approximately $144,000 as of February 29, 2000. In addition to modifications made to Intermountain's equipment, Paramount also installed additional asphalt processing equipment at the facility that will be leased to Intermountain over the term of the agreement. Intermountain will pay Paramount $500 per month for the leased equipment beginning on the date of the first delivery of products from the facility.
Under the agreement, Intermountain will purchase asphalt raw materials exclusively from Paramount, process the raw materials into finished products on an as ordered basis, and then deliver the finished products to Paramount's customers. The cost of raw materials used in finished products delivered to Paramount's customers will be recorded by Intermountain as sales to Paramount. Paramount is responsible for marketing the products to customers in the Southern Utah and Northern Arizona region and collection of proceeds from such sales.
Intermountain Refining Co., Inc.
Notes to Financial Statements, Continued
Intermountain will receive monthly payments from Paramount for reimbursement of Intermountain's operating costs associated with this activity, including a fixed overhead allocation, and for 40% of the profits, if any, from sales of finished products. Profits will be determined on a monthly basis and will be calculated by deducting the cost of raw materials used, Intermountain's operating costs including equipment rental, and amortization of equipment modification costs from the monthly sales to Paramount's customers. To the extent that there are no profits in any given month, Intermountain's share of losses will be carried forward for offset against future profits.
Amounts due to Paramount for raw materials purchased are payable only upon processing and delivery of finished products and will be offset against amounts receivable from Paramount for products delivered. The price of asphalt raw material purchased from Paramount is determined from independently published prices for the region. Intermountain has provided Paramount with a $500,000 letter of credit to secure payment for asphalt raw materials purchased. Paramount has provided Intermountain with a $500,000 letter of credit to secure the payment for asphalt products sold. Under the agreement, Intermountain may require that Paramount repurchase, at Intermountain's cost, any unused asphalt inventories at the end of the contract term. During the year ended February 29, 2000, Intermountain purchased approximately $1,019,000 of asphalt raw material from Paramount . No products were processed or produced during the year ended February 29, 2000 and the entire amount purchased is included in inventory as of February 29, 2000. As of February 29, 2000, the amount payable to Paramount for such purchases was approximately $1,019,000.
Note E - Available-For-Sale Investments
Available-for-sale investments consist of the following:
| Investment in mutual funds, at fair value |
$ 138,000
|
$ 111,325
|
| Total investments available for sale |
$ 138,000
|
$ 111,325
|
Investments in mutual funds are stated at their estimated fair value as of the balance sheet date presented. The mutual funds were purchased near Intermountain's February 28, 1999 year-end, therefore no material unrealized gains or losses were incurred that would have been recorded as a separate component of stockholders' equity for that period. As of February 29, 2000, the fair value of the mutual funds was $5,316 less than cost representing a holding loss which was included as a reduction of stockholders' equity. Gains and losses on the sale of investment securities (when incurred) are determined using the specific identification method. Given that the investments are mutual funds, no contractual maturities exist that would require separate disclosure.
Note F - Convertible Subordinated Debentures
Unico had $178,000 of four year 10.5% subordinated convertible debentures issued to related parties which were originally issued in September 1986. The maturity date of the debentures had been extended on several occasions by mutual agreement of the parties. Effective February 28, 1998, Unico accepted an offer by the holder of the debentures to convert all of the debentures, along with the accrued interest thereon, into 142,718 shares of Unico common stock. The conversion price accepted in the offer was $1.40 per share compared to the original conversation price of $8.00 per share.
Interest expense related to these debentures was $18,700 in 1998.
Intermountain Refining Co., Inc.
Notes to Financial Statements, Continued
Note G - Income Taxes
Income tax expense (benefit) from continuing operations differs from income tax at the statutory rate of 34% as follows:
| Income at statutory rate |
(34)%
|
(34)%
|
(34)%
|
| State income taxes |
- %
|
- %
|
- %
|
| Other (net) |
1 %
|
23%
|
34%
|
| Income tax expense (benefit) |
(33)%
|
(11)%
|
- %
|
| Continuing Operations: | |||
| Current | |||
| Federal |
$ (78,035)
|
$ (32,655)
|
$ -
|
| State |
1.037
|
250
|
123
|
| Deferred |
|
|
|
| Federal |
(15,690)
|
(57,925)
|
-
|
| State |
-
|
-
|
-
|
| Total taxes continuing operations |
$ (92,688)
|
$ (90,330)
|
$ 123
|
| Discontinued Operations: | |||
| Current | |||
| Federal |
$ 74,290
|
$ 10,643
|
$ -
|
| State |
-
|
-
|
-
|
| Deferred |
|
|
|
| Federal |
(11,860)
|
(325)
|
-
|
| State |
-
|
-
|
-
|
| Total taxes discontinued operations |
$ 62,430
|
$ 10,318
|
$ -
|
|
$ 358,570
|
||
|
174,597
|
||
|
$ 533,167
|
Intermountain Refining Co., Inc.
Notes to Financial Statements, Continued
Deferred taxes as of February 28, 1999 and February 29, 2000 consist of the following:
| Deferred tax liability arising from using accelerated depreciation for income tax purposes |
$ (41,173)
|
$ (23,260)
|
|
|
|
|
| Deferred tax asset arising from net operating loss carryforward |
121,275
|
186,608
|
|
|
|
|
| Valuation allowance provided for deferred tax assets |
(80,102)
|
(163,348)
|
|
|
|
|
| Deferred taxes payable |
$ -
|
$ -
|
|
|
|
|
| Deferred tax receivable from unrealized holding loss on available for sale investments recorded as other comprehensive income/loss |
$ -
|
$ 1,861
|
|
|
|
Officers and Directors: Unico was obligated under debentures payable to an officer, director and stockholder totaling $178,000 during the year ended February 28, 1998. Interest expense on the debentures was $18,700 in 1998. As of February 28, 1998, the debentures, along with accrued interest of $21,805, were converted into 142,718 shares of Unico's common stock - Note F.
IC Partners Ltd. and Sand Creek Chemical Ltd.: In conjunction with Intermountain Chemical's management of Sand Creek's Commerce City, Colorado methanol production facilities, Intermountain Chemical received certain payments and reimbursements of payroll and related costs. All payments, with the exception of a basic monthly management fee were based on actual costs accrued. Management fees paid to Intermountain Chemical were $20,833 per month from December 1995 through August 1997 when the partnership investments in IC Partners were sold and Intermountain Chemical resigned as the managing general partner of Sand Creek. Amounts received from Sand Creek for the year ended February 28, 1998 included $240,118 for management fees - Note N.
Intermountain Chemical and Gas Technologies received cash distributions from IC Partners associated with its investment in Sand Creek. During 1998, Intermountain Chemical and Gas Technologies combined received $178,784 for estimated tax liabilities associated with Sand Creek operations through August 31, 1997 and the liquidation of IC Partners - Note N.
Red Hills Manufacturing: On November 1, 1996, Intermountain issued an 8%, $325,000 revolving line of credit to Red Hills, a New Mexico Corporation controlled by the current officers and two former employees of Intermountain. Red Hills manufactures hardwood stamp blocks. The revolving line of credit was established to facilitate the purchase of equipment and to fund start-up working capital requirements of Red Hills. The revolving credit line was scheduled to terminate on December 31, 1997 but was extended until December 31, 1998. The credit line was secured by cash, accounts receivable, inventories and equipment owned by Red Hills. The balance outstanding on the revolving credit line was completely repaid prior to its expiration on December 31, 1998 and the line of credit was not renewed. Interest income received from Red Hills was $21,811 for the year ended February 28, 1998, and $3,426 for the year ended February 28, 1999.
Red Hills occupies unused building space at Intermountain's refinery facility in Arizona. Red Hills was previously allowed to use the building in exchange for the performance of routine maintenance and monitoring services at the refinery facility. During the year ended February 29, 2000, Intermountain recognized $4,739 of rental income from Red Hills that was an offset of $4,739 in asphalt storage equipment modifications performed by Red Hills. Beginning March 1, 2000, Intermountain will charge Red Hills $750 per month for rent of the building.
Intermountain Refining Co., Inc.
Notes to Financial Statements, Continued
Intermountain provides management and accounting services for Red Hills. Fees charged to Red Hills were $12,000 during the year ended February 28, 1999, and $14,000 during the year ended February 29, 2000. Beginning in January 2000, Intermountain began charging Red Hills $1,000 per month for management and accounting services.
Red Hills was indebted to Intermountain for management fees and accrued expenses in the amount of $888 as of February 28, 1999 and $2,162 as of February 29, 2000.
Unico and Starlicon International: Effective as of June 30, 1998, Unico entered into a novation agreement with Starlicon Group as settlement of a legal action taken by Unico to rescind a stock purchase agreement entered into in February 1998. Under the novation agreement, Unico acquired all of the outstanding stock of Starlicon International in exchange for common and preferred stock of Unico which resulted in a change in control of Unico. The agreement required Unico to transfer all of its assets and business operations that existed prior to the effective date to Intermountain. In addition, Unico relinquished all control over Intermountain and the agreement provided for a distribution of Intermountain's stock to Unico shareholders who held Unico stock that was issued and outstanding prior to the effective date of the agreement. Accordingly, effective as of July 1, 1998, Unico was no longer a stockholder of Intermountain. All of Intermountain's stock is currently held in trust for the benefit of those Unico shareholders who are eligible to receive it pending completion of a registration statement on Form S-1 that has been filed with the Securities and Exchange Commission. See Note I - Registration and Distribution of Intermountain Common Stock.
In May 1998, in contemplation of the execution of the novation agreement, Unico transferred substantially all of its assets and operating properties to Intermountain in exchange for additional paid in capital of $1,043,197 and reduction in debt owed by Unico to Intermountain. Assets transferred in exchange for additional paid in capital included the Kansas Gas Properties, the Farmington New Mexico office building, and the Chatfield Dean investment. All assets were transferred at book value and no gain or loss was recognized by Unico on the transaction. Assets transferred as payment of debt included cash, accounts and notes receivable, cash value of life insurance policies, and income tax refunds receivable, less certain accounts payable associated with operating activities. As of February 28, 1999, Unico was indebted to Intermountain for an estimated income tax refund of $22,018 from the carryback of a net operating loss to fiscal 1998 from the final consolidated tax returns that were filed by Unico for the four months ended June 30, 1998. Intermountain collected the refund during the year ended February 29, 2000.
In December 1998, Intermountain notified the new management of Unico of its intent to proceed with the distribution of Intermountain stock to the eligible shareholders of Unico. The new management of Unico however withheld cooperation and requested a renegotiation of some of the terms of the novation agreement. While Intermountain was under no obligation to renegotiate the terms, discussions were held on proposed changes over the following three months. The parties however were unable to reach mutually acceptable changes and on March 29, 1999 Intermountain filed suit in the United States District Court for the Central District of California entitled Intermountain Refining Co., Inc. v. Starlicon, etc., etal. USDC Case No.CV99-3405 DT (SHX), seeking the Court to order an injunction against certain shareholders of Unico from revoking proxies to vote in favor of the intended distribution, (if such vote were determined to be required), and additionally ordering the new management of Unico to perform its duties and obligations under the novation agreement. After a brief hearing on April 1, 1999, the parties agreed to proceed with the distribution under the original terms of the novation agreement. Intermountain agreed to withdraw its suit without prejudice with the understanding that the suit could be refiled in the future in the event that Unico failed to promptly fulfill its obligations under the novation agreement.
Intermountain Refining Co., Inc.
Notes to Financial Statements, Continued
As part of the novation agreement Starlicon International agreed to reimburse Intermountain for approximately $31,300 in legal fees and expenses that Intermountain incurred in connection with the legal action and preparation of the novation agreement. As of February 28, 1999, Starlicon International owed Intermountain approximately $26,300 of such reimbursable costs. In July 1999, as part of a global settlement of all remaining obligations due to Intermountain under the novation agreement, Intermountain accepted 375,800 shares of Unico common stock, valued at $28,185, in exchange for the balance due on this receivable plus accrued interest thereon of approximately $1,900.
The novation agreement provided for Unico to pay Intermountain up to $200,000 if the distribution of Intermountain's stock to Unico shareholders was taxable. The distribution does not qualify as tax exempt under current Internal Revenue Service regulations and is therefore a taxable event. In July 1999, as part of a global settlement of all remaining obligations due to Intermountain under the novation agreement, Intermountain accepted 761,000 shares of Unico common stock, valued at $57,143, as settlement of the "if taxable" obligation.
The 1,136,800 (375,800 plus 761,000) shares of Unico common stock received was valued at $0.075 per share based on average published trade prices of Unico common stock during August 1999 of approximately $0.12 per share, less a discount of 40%. The discount was applied because the stock is restricted under Rule 144 of the Securities Act of 1933 as to the timing and quantity of future sales. The investment in Unico common stock is stated at cost because estimation of a current fair value is unreliable due to historical low trading volume and extreme volatility in quoted market prices. Trading prices and activity for Unico common stock is currently quoted on the Electronic Bulletin Board under the symbol UNRC. However, it is believed that quotation on the bulletin board will be discontinued during calendar 2000 because Unico does not currently file periodic reports with the Securities and Exchange Commission, a requirement for quotation on the bulletin board.
The novation agreement provided for Unico to reimburse Intermountain for up to $125,000 in costs incurred for registration of Intermountain's stock with the Securities and Exchange Commission. The registration of Intermountain's stock is necessary to complete the distribution of Intermountain's stock to the eligible Unico shareholders. In July 1999, Intermountain accepted two notes receivable from Unico totaling $125,000 ($50,000 and $75,000), as settlement of this obligation.
The $50,000 note is payable to Intermountain in four monthly installments of $12,500, plus accrued interest at 9% per annum, beginning on August 1, 1999, and is collateralized by 190,500 shares of Unico common stock. The $75,000 note is payable to Intermountain in four annual installments of $18,750, plus accrued interest at 10% per annum, beginning on August 1, 2000, and is collateralized by 357,100 shares of Unico common stock. The $50,000 note and the first installment of the $75,000 note are personally guaranteed by three individuals who are shareholders and officers of Unico. In the event that Unico defaults on any payment of the $50,000 note, the entire remaining balance on both notes becomes subject to the personal guarantees.
As of February 29, 2000, the balance due from Unico on the two notes totaled $100,833 plus accrued interest of $5,188. As of February 29, 2000, scheduled payments on the $50,000 note were past due and Intermountain, in accordance with the note and related security agreements, has declared both of the notes to be in default. Demand for payment has been made to both Unico and the Unico officers and shareholders who personally guaranteed them. It is Intermountain's intention to vigorously pursue collection of both notes. Intermountain believes that the personal guarantees as well as the Unico stock pledged as collateral on the notes should be adequate security to ultimately recover the substantially all of the current carrying value of the notes. Accordingly, no provision for doubtful accounts has been made as of February 29, 2000.
Saba Petroleum: In April 1993, Mr. Hagler, president and director of Intermountain, accepted an appointment as a director of Saba Petroleum Company. In October 1998, Mr. Hagler accepted a temporary appointment as the management committee chairman of Saba with the agreement that Saba would reimburse Intermountain for Mr. Hagler's monthly employment costs during the period of the appointment. During the year ended February 28, 1999, Saba reimbursed Intermountain approximately $29,000. Mr. Hagler resigned all of his positions with Saba in March 1999.
Intermountain Refining Co., Inc.
Notes to Financial Statements, Continued
Note I - Commitments and Contingencies
Environmental Matters: Intermountain has been involved in the manufacture, storage, and sale of petroleum products since 1984, which exposes Intermountain to potential claims for environmental remediation costs, if any, of sites operated by Intermountain. Intermountain is not aware of any claims pending for such sites.
Plugging and Abandonment Liabilities: Intermountain has not established specific reserves for the plugging and abandonment of its natural gas producing properties in Kansas. Based on past experience with plugging and abandonment of uneconomic wells in Kansas, management does not believe that future plugging and abandonment costs, net of equipment salvage, will be material.
Registration and Distribution of Intermountain Common Stock: In accordance with the terms of the novation agreement between Unico and Starlicon Group, the management of Intermountain has notified the new management of Unico of it's intent to distribute Unico's holdings of Intermountain stock to shareholders of Unico who are eligible to receive them. In July 1999, Unico notified its shareholders that July 12, 1999 had been set for the record date to establish the holders of Unico common stock who were eligible to receive the distribution of Intermountain common stock. Generally, Unico shareholders eligible to receive the distribution of Intermountain common stock are those Unico shareholders who, on July 12, 1999, held shares of Unico common stock that had been issued and outstanding prior to June 30, 1998. In addition, 30,000 additional shares of Intermountain common stock will be issued to holders of 30,000 shares of Unico common stock who purchased shares that had been issued to Leo Murphy after June 30, 1998 who in turn sold the shares into the open market. Such shares, under the novation agreement, should have been restricted from participation in the distribution but Intermountain has been unable to specifically identify the holders of such improperly issued shares. Each eligible Unico shareholder will receive 1 share of Intermountain common stock for each share of Unico common stock that they held on July 12, 1999. In November 1999, Intermountain filed a preliminary Form S-1 registration statement with the Securities and Exchange Commission and is currently preparing an amendment to the registration statement in response to comments received from the Securities and Exchange Commission. All 1,155,609 shares of Intermountain's common stock outstanding will be distributed to the eligible Unico shareholders upon effectiveness of the registration statement.
Standby Letter of Credit and Restriction of Cash: In February 2000, Intermountain provided a $500,000 irrevocable letter of credit, issued by a bank, to Paramount for the purpose of securing payment for asphalt raw materials purchased. In order to induce the bank to issue the letter of credit, Intermountain pledged $500,000 of cash deposited with the bank as collateral. Under the pledge agreement, Intermountain will continue to earn interest on the cash deposited with the bank but is restricted from using the funds for the payment of other obligations. The letter of credit expires in February 2001.
Note J - Simple IRA Plan
In March 1998 Intermountain implemented a SIMPLE IRA plan for the benefit of all of its full time employees. The plan
provides for the elective deferral of employee wages, subject to annual limits established by the Internal Revenue Service, and provides a mandatory employer matching contribution. Mandatory matching contributions
are the lesser of 3% of employee compensation or the amount of elective deferrals. Intermountain may elect to reduce the matching percentage to 1% for two out of five consecutive calendar years. Intermountain
made matching contributions of $5,460 in 1999 and $5,385 in 2000.
Intermountain Refining Co., Inc.
Notes to Financial Statements, Continued
Note K - Financial Information Relating to Industry Segments
Intermountain's major industry segments are natural gas production and petroleum refining and asphalt product manufacturing and storage. Intermountain also rents office space in its Farmington, New Mexico office building and in addition to the overall management of Intermountain, management occasionally performs management and consulting services for others. All costs and expenses associated with the overall management of Intermountain and other miscellaneous activities are included under "Other" in the following segment information. Selected financial information relating to these segments is as follows:
| Revenues | |||
| Refining, asphalt product manufacturing and storage |
$ -
|
$ 30
|
$ 8
|
| Natural gas production |
216
|
213
|
299
|
| Other |
20
|
62
|
99
|
|
$ 236
|
$ 305
|
$ 406
|
|
| Operating Profit (Loss) | |||
| Refining, asphalt product manufacturing and storage |
$ (71)
|
$ (63)
|
$ (65)
|
| Natural gas production |
76
|
45
|
170
|
| Other |
(283)
|
(823)
|
(206)
|
|
$ (278)
|
$ (841)
|
$ (101)
|
|
|
|
|
|
| Identifiable Assets | |||
| Refining, asphalt product manufacturing and storage |
$ 451
|
$ 399
|
$ 1,522
|
| Natural gas production |
369
|
370
|
442
|
| Other |
2,354
|
1,827
|
1,312
|
|
$ 3,174
|
$ 2,596
|
$ 3,276
|
|
|
|
|
|
| Depreciation and Depletion | |||
| Refining, asphalt product manufacturing and storage |
$ 65
|
$ 65
|
$ 65
|
| Natural gas production |
34
|
38
|
38
|
| Other |
23
|
22
|
22
|
|
$ 122
|
$ 125
|
$ 125
|
|
|
|
|
|
Intermountain sells substantially all natural gas produced from the Kansas gas properties to one customer. Natural gas sales to the customer, net to Intermountain's interest, was approximately $210,000 for 1998, $206,000 for 1999, and $281,000 for 2000.
Intermountain Refining Co., Inc.
Notes to Financial Statements, Continued
Note L - Oil and Gas Properties
Kansas Gas Properties: On July 1, 1988, Unico acquired certain natural gas producing properties from Methanol Production Corporation (MPC), a privately held Denver firm. The assets, valued at $902,000, included an estimated 2,850,000 Mcf, net to Intermountain's interest, of proven and developed natural gas reserves and related production equipment located in Southwestern Kansas. In exchange for the assets, Unico gave $180,000 in cash, issued 106,851 shares of its common stock, and incurred a $290,000 note payable to a bank. Unico transferred all of it's interest in the properties to Intermountain in May 1998.
| Capitalized Costs: Capitalized costs relating to oil and gas producing activities, as of February 28, 1999 and February 29, 2000 are as follows: |
| Proved gas properties |
$ 894,400
|
$ 985,731
|
|
| Unproved oil and gas properties |
-
|
-
|
|
| Less accumulated depletion |
(578,145)
|
(616,285)
|
|
| Net capitalized costs |
$ 316,255
|
$ 369,446
|
|
| Results of Operations: Results of operations of oil and gas producing activities, excluding overhead and interest allocations, for the years ended February 28, 1998, February 28, 1999 and February 29, 2000 are as follows: |
| Revenues |
|
|
|
| Natural gas sales |
$ 216,137
|
$ 212,987
|
$ 289,247
|
| Other |
-
|
-
|
10,000
|
|
216,137
|
212,987
|
299,247
|
|
|
|
|||
| Costs and Expenses | |||
| Operating costs |
103,199
|
126,633
|
83,851
|
| General and administrative |
2,438
|
3,052
|
7,401
|
| Depletion, depreciation and amortization |
34,109
|
38,108
|
38,140
|
|
139,746
|
167,793
|
129,392
|
|
| Pre-tax net income |
76,391
|
45,194
|
169,855
|
| Income tax expense |
26,737
|
15,818
|
59,449
|
| Net income |
$ 49,654
|
$ 29,376
|
$ 110,406
|
Intermountain Refining Co., Inc.
Notes to Financial Statements, Continued
Note M - Gas Reserve Data and Supplemental Data (Unaudited)
In accordance with Statement of Financial Accounting Standards No. 69, the following unaudited information is presented with regard to
Intermountain's proved gas reserves. Information for gas is presented in million cubic feet (MMcf) except where otherwise indicated in thousand cubic feet (Mcf).
| Production: Intermountain's net gas production, average sales price and production cost for the years ended February 28, 1998, February 28, 1999 and February 29, 2000 are as follows: |
| Net gas production (Mcf) |
211,528
|
236,327
|
236,455
|
| Average sales price ($/Mcf) |
$ 1.0218
|
$ 0.9012
|
$ 1.2020
|
| Average production cost ($/Mcf) |
$ 0.4994
|
$ 0.5488
|
$ 0.3859
|
|
|
|
|
| Reserves: On July 1, 1988 Intermountain acquired natural gas producing properties in Western Kansas. (See Note L). The gas reserves as of
February 28, 1999 and years prior are based upon an independent reserve report prepared in 1991 and data developed internally by Intermountain. The gas reserves as of February 29, 2000 are based on an independent
reserve report prepared for Intermountain dated February 25, 2000.
Estimated net quantities of proved developed and proved undeveloped gas reserves as of February 28, 1999 and February 29, 2000 are as follows: |
| Proved developed |
1,961
|
2,410
|
|
| Proved undeveloped |
-
|
-
|
|
|
1,961
|
2,410
|
||
|
|
|
| Statement of Changes in Quantities of Proved Developed and Undeveloped Gas Reserves for the years ended February 28, 1998, February 28, 1999 and February 29, 2000 are as follows: |
| Proved reserves - beginning of year |
2,422
|
2,198
|
1,961
|
| Adjustments to reserves (1) |
(13)
|
(1)
|
448
|
| Additions to reserves (2) |
-
|
-
|
237
|
| Production |
( 211)
|
(236)
|
(236)
|
| Proved reserves - end of year |
2,198
|
1,961
|
2,410
|
|
|
|
|
| (1)The adjustment to reserves in 2000 was the result of increasing estimated proved reserves based on a new independent reserve analysis prepared as of February 25, 2000. |
|
|
|
|
| (2) The addition to reserves was the result of adding additional estimated reserves associated with the completion of one new well during the year ended February 29, 2000. Estimated reserves associated with this well were included in the independent reserve analysis prepared as of February 25, 2000. |
|
|
|
|
| The Standardized Measure of Discounted Future Net Cash Flows relating to Proved Gas Reserves as of February 28, 1999 and February 29, 2000 are as follows: |
|
|
|||
| Future cash inflows |
$ 1,767
|
$ 2,896
|
|
| Future production costs |
(1,076)
|
(930)
|
|
| Future income tax expense |
(131)
|
(558)
|
|
| Future net cash flow |
560
|
1,408
|
|
| Ten percent discount factor |
(205)
|
(625)
|
|
| Standardized measure of discounted future net cash flows |
$ 355
|
$ 783
|
|
|
|
|
Intermountain Refining Co., Inc.
Notes to Financial Statements, Continued
| Changes in the Standardized Measure of Discounted Future Net Cash Flows From Proved Gas Reserve Quantities for the years ended February 28, 1998, February 28, 1999 and February 29, 2000 are as follows: |
| Standardized measure - beginning of year |
$ 759
|
$ 499
|
$ 355
|
| Adjustment to reserves |
(2)
|
-
|
212
|
| Addition to reserves |
-
|
-
|
115
|
| Sales, net of production costs and income taxes |
(84)
|
(67)
|
(142)
|
| Accretion of discount (including changes in present value due to price changes) |
(174)
|
(77)
|
242
|
| Standardized measure - end of year |
$ 499
|
$ 355
|
$ 783
|
| Developed and Undeveloped Acreage: The following summarizes Intermountain's gross and net undeveloped and developed acreage at February 28, 1999 and at February 29, 2000: |
| Developed Acreage | ||||
| Kansas | ||||
| Undeveloped Acreage | ||||
| "Gross Acres" refers to the number of acres in which Intermountain owns a working interest. "Net Acres" refers to the sum of the fractional working interest owned by Intermountain in gross acres. |
| Other: Intermountain held interests, at February 28, 1999 and February 29, 2000, in the following wells, none of which are multiple completion wells: |
| Producing gas wells | ||||
From July 1989 until August 1997, Unico, through its wholly owned subsidiary Intermountain Chemical served as the managing general partner of Commerce City Colorado based Sand Creek Chemical, Ltd. that manufactured and marketed chemical grade methanol using facilities leased from General Electric Capital Corporation. During that time, Intermountain Chemical held a general partnership interest in IC Partners, which was the general partner of Sand Creek. Gas Technologies, another wholly owned subsidiary of Unico, acquired a limited partnership interest in IC Partners in December 1994. Unico's investments in IC Partners were accounted for using the equity method wherein partnership allocations of income or loss were included in the results of operations of Unico, and distributions of cash were recorded as reductions in the partnership investment. In addition, Intermountain Chemical and Unico received reimbursements of certain labor costs and management fees in connection with the management of the facility - Note H. In August 1997, IC Partners sold its partnership interests in Sand Creek to an unrelated third party, distributed its assets, consisting solely of cash, to its partners, and then dissolved. Intermountain Chemical withdrew as managing general partner of Sand Creek. Intermountain Chemical and Gas Technologies were then liquidated into Unico and dissolved. The results of operations related to the investment in IC Partners and management of Sand Creek have been reported as discontinued operations in the accompanying financial statements.
Intermountain Refining Co., Inc.
Notes to Financial Statements, Continued
| Income/loss allocations for the six months ended August 31, 1997 were as follows: |
| Income (Loss) from Operations |
|
Intermountain Chemical & Gas Technologies |
||||
|
|
|
|
||
| Income (Loss) from Sale of Assets |
|
|
|
|
||
| Changes in the investment in IC Partners, accounted for using the equity method, for the year ended February 28, 1998 were as follows: |
| (1) Includes $106,180 net operating income offset by a net loss on the sale of the investment of $62,009 which was limited to the remaining basis of the investment. |
| (2) Cash distributions by Sand Creek were contractually restricted with exception of distributions for the payment of income taxes to the extent that income allocations resulted in taxable income to individual partners. In 1998, Intermountain Chemical and Gas Technologies received a total of $178,784 as a liquidating distribution from IC Partners which included $28,822 distributed by Sand Creek for estimated tax liabilities through August 31, 1997. |
Note O - Investment in Chatfield Dean
Failed Merger: On January 15, 1996 Unico executed a letter of intent with Chatfield Dean & Co., Inc. setting out the terms of a proposed acquisition, by Unico, of all of the outstanding common and preferred stock of Chatfield Dean. On July 20, 1996, Unico and Chatfield Dean executed a definitive merger agreement. On February 10, 1997, Unico filed a Form S-4 with the Securities and Exchange Commission and received comments on the Form S-4 from the SEC on March 27, 1997. On May 14, 1997, the merger agreement was terminated by mutual agreement of the parties, and the Form S-4 was withdrawn.
Intermountain Refining Co., Inc.
Notes to Financial Statements, Continued
Investment in Chatfield Dean: On January 13, 1996, Unico acquired 50,000 shares of Chatfield Dean, Series B 7% cumulative preferred stock directly from Chatfield for $500,000. The shares have not been registered with the Securities and Exchange Commission and are therefore restricted. The shares are redeemable by Chatfield Dean upon the occurrence of certain events for an amount equal to $10 per share, plus unpaid accumulated dividends plus a premium ranging from $1 to $5 per share depending upon the length of time the shares are outstanding. In addition to the shares acquired, Unico received 50,000 warrants to purchase 50,000 shares of Chatfield Dean common stock with an exercise price of $0.01 per share. On September 12, 1997 Unico exercised all of the warrants and received 50,000 shares of Chatfield Dean common stock for $500. Ownership of the 50,000 Series B preferred stock and the 50,000 shares common stock were transferred to Intermountain by Unico in May 1998.
On March 8, 1996, Unico purchased 10,000 shares of Chatfield Dean Series A 7% cumulative, convertible preferred stock directly from Chatfield Dean for $100,000. The shares have not been registered with the Securities and Exchange Commission and are therefore restricted. The shares are convertible into Chatfield Dean common stock at any time at the option of the shareholder at the ratio of 1 share for 3.33 shares of common stock subject to certain events. The shares may be redeemed by Chatfield Dean for the original issue price of $10 per share plus $1 per share for each year after issuance up to a maximum of $15 per share. No dividends were received during the fiscal years ended February 28, 1998, February 28, 1999 and February 29, 2000. Ownership of the 10,000 Series A preferred shares was transferred to Intermountain in May 1998.
Both the 50,000 shares of Series B and the 10,000 shares of Series A preferred stock were to be sold to a third party prior to closing of the merger. Intermountain has sought Chatfield Dean's assistance in locating a buyer for or other disposition of the shares. As the shares are not publicly traded and there is currently no apparent market for the shares, the liquidity of this investment is questionable and, to date, no buyer has been found. Based on an evaluation of the financial condition of Chatfield, during fiscal 1999, Intermountain established a valuation allowance in the amount of $300,250 representing a write down of 50% of the original cost of the investments in Chatfield Dean. As noted below, Intermountain transferred 25,000 Series B preferred shares, valued at $125,000, to Watson, Farley & Williams as part of the consideration in settlement of a claim for legal services performed in conjunction with the failed merger. The book value of the remaining investment in Chatfield Dean as of February 29, 2000 was $175,250, net of the write down of $175,250.
Settlement of Legal Services Claim: In December 1998 Intermountain was contacted by a representative of Watson, Farley & Williams regarding an unpaid balance of approximately $425,000 for legal and consulting services performed in connection with the failed merger between Unico and Chatfield Dean. While it was originally understood that Chatfield had agreed to participate in settling the account directly with Watson, Farley & Williams, Chatfield has failed to perform and Watson, Farley & Williams sought to collect the account from Unico. Unico had originally engaged Watson Farley & Williams and had paid a retainer of $25,000. Intermountain negotiated a settlement with Watson Farley & Williams that was agreed to by Watson, Farley & Williams, Unico and Intermountain. In accordance with the agreement, Intermountain paid $150,000 in cash and transferred 25,000 shares of Chatfield Dean Series B 7% cumulative preferred stock to Watson, Farley & Williams in return for a full release of liability of Unico and Intermountain. Intermountain retained the right, but has no obligation, to recover costs, if any, from Chatfield Dean and to repurchase the 25,000 shares of Chatfield Dean preferred stock for $125,000 in the future. The settlement agreement was executed on April 6, 1999. The total settlement amount of $275,000 was recorded as a current liability and charged to results of operations for the year ended February 28, 1999. Payment of the $125,000 cash and transfer of the 25,000 shares of Chatfield Dean preferred stock was made in April, 1999.
Intermountain Refining Co., Inc.
Notes to Financial Statements, Continued
Note P - Co-Generation Facilities (Discontinued Operation)
Intermountain installed electrical co-generation facilities at its refinery and commenced operations of the co-generation equipment in February 1986. The co-generation facilities and certain ancillary equipment had been acquired under an operating lease with the manufacturer of the equipment. In April 1996, after expiration of the lease, Intermountain acquired the generators from the lessor for $26,950.
In conjunction with the operation of the co-generation facilities, Intermountain had entered into an agreement with a local utility company for the sale of electrical capacity and energy. The agreement was terminated in 1997 and Intermountain had no revenues or operating lease expenses associated with the facility during 1998, 1999 or 2000.
In June of 1999, the management of Intermountain determined that the probability of developing a local market for the sale of electrical energy was low and decided to enter into a marketing agreement which provides for the co-generation equipment to be placed on the market for sale. The net book value of the equipment of $76,130, ($231,971 cost less $155,841 accumulated depreciation), which includes the diesel engine/generator sets, electric switch gear, substation, and heat recovery boilers, was reclassified from property, plant and equipment and presented as co-generation facilities available for sale as of February 28, 1999. In 1999, the engine/generator sets were transported to California for refurbishing and to improve marketability. Costs incurred for transportation and refurbishing are being born by the marketer of the equipment. As of February 29, 2000, Intermountain had not received any formals offers to purchase the equipment. The management of Intermountain believes that the amount projected to be realized from the sale of the equipment will exceed the carrying costs. Accordingly, no impairment allowance is considered necessary.
As of February 28, 1999, the generator building, land, and transformers used to power the refinery equipment and previously included in co-generation equipment were reclassified to refinery land, buildings and equipment as they will continue to be used by Intermountain. The book value of the reclassified assets totaled $23,963, ($58,327 cost less $34,364 accumulated depreciation), as of February 28, 1999.
Results of operations for the discontinued co-generation activities for the years ended February 28, 1998, 1999, and February 29, 2000 are as follows:
| Electrical capacity and energy revenues |
$ -
|
$ -
|
$ -
|
| Operating costs |
-
|
(39,351)
|
3,820
|
| Depreciation |
8,943
|
8,943
|
-
|
| Interest expense |
1,061
|
-
|
-
|
|
10,004
|
(30,408)
|
3,820
|
|
| Net income (loss) before income taxes |
(10,004)
|
30,408
|
(3,820)
|
| Provision (benefit) for income taxes - Note G | |||
| Current |
(3,501)
|
10,643
|
-
|
| Deferred |
(10)
|
(325)
|
-
|
|
(3,511)
|
10,318
|
-
|
|
| Net income (loss) |
$ (6,493)
|
$ 20,090
|
$ (3,820)
|
The credit of $39,351 for operating costs during the year ended February 28, 1999 includes the write off of a previously accrued liability for generator
repair services that were never performed. Operating costs for the year ended February 29, 2000 of $3,820 include property taxes on the leased equipment for a prior year that the lessor had not previously billed to
Intermountain.
The date of this prospectus is June 22, 2000
Dealer Prospectus Delivery Obligation
Until (90 days after the effective date of this prospectus), all dealers that effect transactions in these securities, whether or not participating in this
offering, may be required to deliver a prospectus. This is in addition to the dealers' obligation to deliver a prospectus when acting as underwriters and with respect to their unsold allotments or subscriptions.
The following itemized table contains estimates of the costs and expenses associated with the issuance and distribution of the Intermountain common stock:
| SEC registration fees |
$ 775
|
| State registration fees |
5,000
|
| Federal taxes |
-
|
| State taxes |
-
|
| Transfer agent fees |
3,500
|
| Printing and engraving |
4,000
|
| Legal fees |
92,000
|
| Accounting fees |
65,000
|
| Engineering fees |
3,700
|
| Insurance premiums for D&O coverage with respect to this registration statement |
-
|
| Total estimated costs and expenses |
$ 170,275
|
|
=======
|
New Mexico law provides for the indemnification of corporate officers, directors, and employees in some circumstances. Intermountain's Articles of Incorporation have been conformed to New Mexico law to provide for such indemnifications.
Intermountain's Articles provide that: (i) it may indemnify any person who is a party or threatened to be made a party to any lawsuit (other than a suit by or for the corporation) by reason of the fact he is or was a director, officer, employee, or agent of the corporation, against expense (including attorneys' fees), judgment, fines, and settlement reasonably incurred by him, if he acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the corporation and, with respect to any criminal action or proceeding, had no reasonable cause to believe his conduct was unlawful; (ii) the corporation may indemnify any director, officer, employee or agent of the corporation who was or is a party or is threatened to be made a party to any threatened, pending, or completed action or suit by or for the corporation, against expenses (including attorneys' fees) in connection with the defense or settlement of such suit, if he acted in good faith and in a manner he reasonably believed to be in, or not opposed to, the best interests of the corporation. No indemnification will be made in respect of any matter as to which such person will have been adjudged to be liable for negligence or misconduct in the performance of his duties to the corporation unless the court determines that person is entitled to indemnity for such expenses; (iii) to the extent that a director, employee, or agent of the corporation has been successful in defense of any proceeding referred to in subparagraph (i) or (ii), he may be indemnified against expenses (including attorneys' fees); (iv) any indemnification under subparagraphs (i) or (ii) (unless ordered by a court) may be made by the corporation only as authorized upon a determination that indemnification of the director, officer, employee or agent is proper because he has met the applicable standard of conduct set forth in subparagraphs (i) or (ii).
The determination will be made (1) by the board of directors by a majority vote of a quorum consisting of directors who were not parties to the proceeding, or (2) if such a quorum is not obtainable or, even if obtainable a quorum of disinterested directors so directs, by independent legal counsel in a written opinion, or (3) by the shareholders; (v) expenses (including attorneys' fees) incurred in defending a civil or criminal proceeding may be paid by the corporation in advance provided the directors, officer, employee, or agent agree to repay such amount unless it will ultimately be determined that he is entitled to be indemnified by the corporation; and (vi) the indemnification provided by the Articles is not exclusive of any other rights to which those indemnified may be entitled under any bylaw, agreement, vote of shareholders, disinterested directors or otherwise, both while holding such office, and afterwards.
Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of Intermountain under
the foregoing provisions, or otherwise, Intermountain has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act of
1933 and is, therefore, unenforceable.
There have been no recent sales of Intermountain's common or preferred stock.
The following exhibits are filed with this Registration Statement:
| 3.1 | Amended and Restated Articles of Incorporation |
| 3.2 | Bylaws |
| 5.1 | Opinion of Counsel |
| 10.1 | Stock Purchase Agreement |
| 10.2 | Novation Agreement |
| 10.2.1 | Amendment No. 1 to the Novation Agreement |
| 10.3 | Trust Agreement |
| 10.4 | Kinder Morgan / KN Energy Gas Sales Agreement |
| 10.5 | Paramount Petroleum Agreement |
| 23.1 | Consent of Jacobvitz, Thuma & Walker (included in opinion EX 5.1) |
| 23.2 | Consent of Atkinson & Co., Ltd. |
| 27.1 | Financial Data Schedule (Years ended 2/28/98, 2/28/99 and 2/29/00) |
The undersigned registrant hereby undertakes:
A. To file, during any period in which it offers or sells securities, a post-effective amendment to this registration statement to:
B. For determining liability under the Securities Act of 1933, treat each post-effective amendment as a new registration statement of the securities offered, and the offering of the securities at that time to be the initial bona fide offering.i. Include any prospectus required by section 10(a)(3) of the Securities Act of 1933;ii. Reflect in the prospectus any facts or events which, individually or together, represent a fundamental change in the information in the registration statement; and notwithstanding the foregoing, any increase or decrease in volume of securities offered (if the total dollar value of securities offered would not exceed that which was registered) and any deviation from the low or high end of the estimated maximum offering range may be reflected in the form of prospects filed with the Commission under Rule 424(b) if, in the aggregate, the changes in the volume and price represent no more than a 20% change in the maximum aggregate offering price set forth in the "Calculations of Registration Fee" table in the effective registration statement.
iii. Include any additional or changed material information in the plan of distribution.
C. File a post-effective amendment to remove from registration any of the securities that remain unsold at the end of the offering.
D. Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the small business issuer under the foregoing
provisions or otherwise, the small business issuer has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against pubic policy as expressed in the Securities Act of 1933
and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the small business issuer of expenses incurred or paid by a director, officer or
controlling person of the small business issuer in the successful defense of any action, suit, or proceeding) is asserted by such director, officer or controlling person in connection with the securities being
registered, the small business issuer will, unless in the opinion of its counsel the matter has been settled by a controlling precedent, submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Securities Act of 1933 and will be governed by the final adjudication of such issue.
Pursuant to the requirements of the Securities Act of 1933, the registrant has duly caused this declaration statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Farmington, State of New Mexico, on June 22, 2000.
Intermountain Refining Co., Inc.
By: /s/ William N. Hagler
William N. Hagler, President
Pursuant to the requirements of the Securities Act of 1933, this registration statement has been signed by the following persons in the capacities and on the dates indicated.
/s/ William N. Hagler _________________ Date: June 22, 2000
William N. Hagler, Chairman of the Board of
Directors, and President
/s/ Rick L. Hurt ____________________ Date: June 22, 2000
Rick L. Hurt, Secretary, Treasurer, Director
| 3.1 | Amended and Restated Articles of Incorporation | S1_EX-1 |
| 3.2 | Bylaws | S1_EX-10 |
| 5.1 | Opinion of Counsel | S1_EX-20 |
| 10.1 | Stock Purchase Agreement | S1_EX-23 |
| 10.2 | Novation Agreement | S1_EX-53 |
| 10.2.1 | Amendment No. 1 to the Novation Agreement | S1_EX-69 |
| 10.3 | Trust Agreement | S1_EX-71 |
| 10.4 | Kinder Morgan / KN Energy Gas Sales Agreement | S1_EX-76 |
| 10.5 | Paramount Petroleum Agreement | S1-EX-87 |
| 23.1 | Consent of Jacobvitz, Thuma & Walker ( Included in Exhibit 5.1) | S1_EX-18 |
| 23.2 | Consent of Atkinson & Co., Ltd. | S1_EX-98 |
| 27.1 | Financial Data Schedule - Years ended 2/28/98, 2/28/99 and 2/29/00 | |
S1-70<PAGE>
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