UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
Annual Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the fiscal year ended February 28, 1998
Commission file number 0-14973
UNICO,INC.
(Exact name of Registrant as specified in its charter)
New Mexico 85-0270072
(State of Incorporation) (IRS Employer ID #)
Registrant's address: 1921 Bloomfield Blvd., Farmington, New Mexico 87401
Registrant's telephone number, including area code: 505-326-2668
Securities registered pursuant to Section 12(g) of the Act:
Name of exchange
Title of class on which registered
$0.20 par value common stock NASDAQ
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days. Yes X
No .
Indicate by check mark if disclosure of delinquent filers in response
to Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of Registrant's knowledge, in definitive proxy or
information statements incorporated by reference in part III of this Form
10-K or any amendment to this Form 10-K X .
The aggregate market value of the registrant's $0.20 par value common
stock held by non-affiliates at April 30, 1998, was $728,000.
On April 30, 1998, there were 1,125,609 shares of Registrant's $0.20
par value common stock outstanding excluding 3,699 shares held by the
Registrant for resale.
Documents incorporated by reference: Portions of the Registrant's
annual report to stockholders for the year ended February 28, 1998 are
incorporated by reference to Parts I and II.
(1)
<PAGE>
INDEX
TO REPORT ON FORM 10-K
FOR UNICO, INC.
Item in Form 10-K Page
PART I
Item 1. Business 3
Item 2. Properties 3
Item 3. Legal Proceedings 3
Item 4. Submission of Matters to a Vote of Security Holders 4
PART II
Item 5. Market for Registrant's Common Stock and Related Stockholder
Matters 4
Item 6. Selected Financial Data 4
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations 4
Item 8. Financial Statements and Supplementary Data 4
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure 5
PART III
Item 10. Directors and Executive Officers of the Registrant 5
Item 11. Executive Compensation 6
Item 12. Security Ownership of Certain Beneficial Owners and Management 7
Item 13. Certain Relationships and Related Transactions 9
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on
Form 8-k 9
(2)
<PAGE>
PART I
Item 1. Business:
Information relative to Registrant's business on pages 5 and 6 of
the Registrant's Annual Report to Stockholders for the year ended February
28, 1998 and information with respect to industry segments on pages 23
through 24 of the Annual Report are incorporated herein by reference.
Item 2. Properties.
Information relative to properties owned by the Registrant on page 7
of the Registrant's Annual Report to Stockholders for the year ended
February 28, 1998 is incorporated herein by reference.
Item 3. Legal Proceedings
Other than collection actions or other actions arising in the
ordinary course of the Registrant's business, no legal proceedings to which
the Registrant is a party or of which any of its property is subject are
pending or known to be contemplated, and the Registrant knows of no legal
proceedings pending or threatened, or judgment against any director or
officer of the Registrant in their capacity as such, except the following:
(a) Information relative to pending litigation is discussed in Note
Q on Page 32 of the Registrants Annual Report to Stockholders
for the year ended February 28, 1998 incorporated herein by
reference.
Item 4. Submission of Matters to a Vote of Security Holders.
During the fourth quarter of the fiscal year covered by this report
the Registrant held its annual meeting of stockholders. Matters presented
for a vote of the stockholders and the results of such vote were reported
on the Registrants Form 10-Q for the quarter ended November 30, 1997 filed
with the Commission on January 15, 1998.
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters.
Information relative to Registrant's common stock on the inside
front cover of the Registrant's Annual Report to Stockholders for the year
ended February 28, 1998 is incorporated herein by reference.
Item 6. Selected Financial Data
Information relative to selected financial data on page 4 of the
Registrant's Annual Report to Stockholders for the year ended February 28,
1998 is incorporated herein by reference.
(3)
<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations.
Information relative to management's discussion and analysis of
financial condition and results of operations on pages 7 through 10 of the
Registrant's Annual Report to Stockholders for the year ended February 28,
1998 is incorporated herein by reference.
Item 8. Financial Statements and Supplementary Data.
The consolidated financial statements on pages 12 through 32 of the
Registrant's Annual Report to Stockholders for the year ended February 28,
1998 are incorporated herein by reference.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
There has not been any disagreement between the Registrant and its
Accountants of a nature which would require disclosure in compliance with
Item 304 of Regulation S-K.
PART III
Item 10. Directors and Executive Officers of Registrant.
The directors and executive officers of the Registrant, their ages and
positions held in the Registrant are as follows:
Name Age Position Held Since
William N. Hagler 66 President and Director 1979
603 Merino Kraal
Farmington, New Mexico 87401
Rick L. Hurt 45 Controller, Secretary, 1985
5701 Tee Dr. Treasurer
Farmington, New Mexico 87401
William Hickey 66 Director 1998
100 Sunrise Way, Suite 430
Palm Springs, California 92262
Joe G. Watson 68 Director 1998
2713 E. 20th
Farmington, NM 87401
Background information concerning the Officers and Directors is as
follows:
(4)
<PAGE>
William N. 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 of 1968, he became assistant to the president and later vice president
of Plateau, Inc., of 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 the
Registrant and has served as its president and as a director at all times
since organization. In April 1993, William N. Hagler accepted an
appointment as a director of Saba Petroleum Company which is registered
under section 12 of the Exchange Act.
Rick L. 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 of
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. Mr. Hurt joined the Registrant as
Assistant Controller in March of 1985, and became its Controller,
Secretary, Treasurer, and a Director on May 20, 1985. Mr. Hurt resigned as
a Director in 1998 to allow the appointment of Joe G. Watson to serve as an
outside director for the Registrant.
William Hickey a graduate of Cornell Law School, was general counsel,
corporate secretary and a director of Saba Petroleum Company (SAB; AMEX)
until 1997. Retired from active legal practice, he is now a legal
consultant to Saba in complex business transactions. Mr. Hickey is also
retained by Saba's parent company, Capco Resources, Ltd. (CRS, ASE), to
provide counsel in matters of corporate governance and regulatory
compliance. Upon graduation from law school, Mr. Hickey was an antitrust
litigation attorney and corporate counsel for the General Electric Company.
Later, he served as senior vice-president, general counsel and a director
of Consolidated Freightways, Inc. (CNF; NYSE); and, vice-president and
general counsel of Litton Industries, Inc. (Business Equipment Group)
(LIT;NYSE). Prior to joining Saba, Mr. Hickey was a professor of
corporation and securities law at California Pacific College of law. A
member of the American Bar Association corporate law section, and the
American Society of Corporate Counsel, Mr. Hickey has been active in the
development of rules of corporate governance by these organizations. An
officer in the U.S. Air Force Reserve for 25 years, Mr. Hickey is retired
with the permanent rank of captain. Mr. Hickey is active in community
charitable work providing volunteer services to the Palm Springs Stroke
Center and the Angel View Crippled Children's Center.
Joe G. Watson received a Bachelor of Business Administration from the
University of New Mexico in 1951. Mr. Watson officially retired in 1996 but
currently serves as a director and officer of Four Corners Insurance, Inc.
in Farmington, New Mexico, a business he formed in 1961. Mr. Watson served
as a director for Four Corners Savings and Loan from 1961 until 1986,
during which time he served as it's managing officer from 1967 until 1970
and then its president until the company was sold in 1986. Mr. Watson has
served on various governing boards including 6 years on the board of the
New Mexico Savings and Loan League, the last year as its president, 4 years
on the board of the Federal Home Loan Bank in Dallas, the last year as its
vice-chairman, and 15 years on the New Mexico State Board of Educational
Finance, the last 5 years as its vice-chairman. Mr. Watson is active in
various charitable organizations in the local community and is a member of
the New Mexico Amigos, a statewide organization recognized by the Governor
and the Legislature as the Official Goodwill Ambassadors for the State of
New Mexico.
Mr. Hagler and Mr. Hurt devote substantially all of their time to the
affairs of the Registrant and will continue to do so in the future.
No family relationship exists between any officer or director of the
Registrant 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 the registrant 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.
(5)
<PAGE>
Since the Common Stock of the Registrant is registered pursuant to
Section 12(g) of the Securities Exchange Act of 1934 (the"Exchange Act"),
the executive officers and directors of the Registrant and beneficial
owners of greater than 10% of the Registrant's Common Stock ("10%
beneficial owners") are required to file beneficial ownership reports,
pursuant to Section 16(a) of the Exchange Act, with both the Securities and
Exchange Commission ("SEC") and the Registrant, disclosing changes in
beneficial ownership of the Common Stock. SEC rules, pursuant to Section
16, require disclosure by the Registrant of the failure of an executive
officer, director or 10% beneficial owner of the Registrant to file
beneficial ownership reports on a timely basis. Based on the Registrants
review of such ownership reports, no executive officer or director of the
Registrant failed to file such an ownership report on a timely basis during
the 1998 fiscal year.
Item 11. Executive Compensation.
The following table sets forth certain information concerning the
remuneration paid by the Registrant for the three most recent fiscal years
ending February 28, 1998.
Annual Compensation
Name Other
and Annual
Principal Compen-
Position Year Salary Bonus sation
(1)
William N. Hagler 1998 $100,958 $ 0 $ 0
CEO and Director 1997 $ 98,696 $ 0 $ 0
1996 $ 94,783 $ 0 $1,441
(1) Includes discretionary employer 401(k) contributions totalling
$2,222 for all officers including $1,441 for Mr. Hagler during
1996. There were no 401(k) contributions made during 1997, or
1998.
The Registrant's employees, including the Registrant's officers, may
also receive such bonuses and salary increases as the Board of Directors,
in its sole discretion, may award.
The Registrant provides health insurance benefits to the officers and
directors and all other full time employees.
No Registrant Director is compensated for attending meetings of the
Board of Directors.
Effective for the year ended February 28, 1989, the Registrant adopted
an Employee Stock Ownership Plan ("ESOP"), for the benefit of all of its
employees, including those of wholly owned subsidiaries. Contributions to
the plan were made at the sole discretion of the Board of Directors and
were limited to the maximum amount deductible for income tax purposes.
Eligible employees included all full time employees with a minimum of six
months of service as of any anniversary date of the plan with vesting
taking place on a six year graded basis applied retroactive as of the
effective date of the plan. During 1998, 1997 and 1996, the Registrant
made no contributions to the ESOP. A copy of the plan was filed with the
Commission as an exhibit to the Registrant's Form 10-K filed for the fiscal
year ended February 28, 1989.
During 1998, the ESOP was determined to be no longer cost effective and
was terminated effective February 5, 1998. Amounts accrued to the benefit
of plan participants, consisting solely of common stock of the Registrant,
were distributed to the plan participants in accordance with the plan.
Shares previously held by the ESOP for the benefit of officers and
directors totaled 17,719 shares including 11,315 shares held for the
benefit of William N. Hagler. All such shares were distributed to
individual retirement accounts as qualified rollovers from the ESOP upon
termination of the plan.
Effective for the year ended February 28, 1994, the Registrant adopted
a 401(k) Plan for the benefit of all of its full time employees, including
those of wholly owned subsidiaries. Employees meeting certain minimal
eligibility requirements were entitled to make voluntary contributions to
the Plan subject to limitations set by Internal Revenue Regulations. The
Registrant, at it's sole discretion, could make both matching and
discretionary contributions for the benefit of participants of the Plan
limited by the maximum amounts deductible for income tax purposes.
Employees were automatically 100% vested in voluntary contributions and
vested in Registrant contributions on a six year graded basis applied
retroactive as of the effective date of the Plan. During 1998 and 1997,
the Registrant made no contributions to the Plan. During 1996, the
Registrant contributed $11,754 to the Plan which was allocated based on
elective deferrals made by employees during the year not exceeding 1.52% of
gross earnings. A copy of the 401(k) Plan was filed with the Commission as
an exhibit to its Form 10-K filed for the year ended February 28, 1995.
(6)
<PAGE>
During fiscal 1998, continued maintenance of the 401(k) plan was
determined not to be cost effective and the plan was terminated with all
plan assets distributed to participants in accordance with the plan.
Item 12. Security Ownership of Certain Beneficial Owners and Management
(a) Security ownership of certain owners.
On February 28, 1998, the only persons known to the Registrant to own
5% or more of the issued and outstanding Registrant common stock, its only
voting security, are as follows:
Name and address Amount and nature
Title of of of Percent
Class Beneficial owner Beneficial ownership of class
$0.20 par value William N. Hagler 560,408 shares of 49.62%
common stock 603 Merino Kraal record and beneficially
Farmington, NM 87401
$0.20 par value William & Helen Braddock 149,400 shares of 13.23%
common stock P.O. Box 403 record and beneficially
Dorado, PR 00646
<PAGE>
(b) Security ownership of management.
On February 28, 1998, the ownership by the Registrant's management of
its common stock, its only voting security, was as follows:
Name and address Amount and nature
Title of of of Percent
Class Beneficial owner Beneficial
ownership of class
$0.20 par value William N. Hagler 560,408 shares of 49.62%
common stock 603 Merino Kraal record and beneficially
Farmington, NM 87401
$0.20 par value all officers and 567,312 shares of 50.40%
common stock directors (2 People) record and beneficially
No shares of the Registrant's Series A Preferred Stock are presently
issued and outstanding.
(c) Changes in control.
There are no arrangements known to the Registrant, including any
pledge by any person of securities of the Registrant, the operation of
which may at a subsequent date result in a change of control of the
Registrant, except as discussed in Note Q on Page 32 of the Registrant's
Annual Report to Stockholders for the year ended February 28, 1998
incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions.
Since the beginning of the Registrant's last fiscal year, there were
no transactions, or series of similar transactions, or currently proposed
transactions, to which the Registrant or its subsidiaries was or is to be a
party, in which the amount involved exceeds $60,000, and in which any
director or executive officer, nominee for election as a director, security
holder known by Registrant to own 5% or more of any class of the
Registrant's voting securities or any member of the immediate family of any
of the foregoing, had or will have a direct or indirect material interest
except as follows:
(a) On November 1, 1996 the Registrants wholly owned subsidiary
IRC, issued an 8% $325,000 revolving line of credit to Red
Hills Manufacturing, Inc. ("RHMCO"), a New Mexico
Corporation, which is collectively controlled by William N.
Hagler and Rick L. Hurt who are both officers and directors
of the Registrant. The line of credit was issued to RHMCO
for the purpose of purchasing certain equipment and for
start-up working capital requirements of RHMCO. During the
year ended February 28, 1998, the maximum balance under the
credit line was $433,000 and the balance due to IRC as of
February 28, 1998 is $102,000. The note is secured by cash,
accounts receivable, inventories and equipment owned by
RHMCO. During the year ended February 28, 1998 neither Mr.
Hagler or Mr. Hurt received any payments in the form of
compensation or dividends from RHMCO.
(b) In February 1998, William N. Hagler, President and a
Director of the Registrant, offered to convert $178,000 face
value 10.5% convertible subordinated debentures into common
stock of the Registrant at a conversion price of $1.40 per
share. In addition, Mr. Hagler requested that accrued
interest on the debentures be paid to him by the issuance of
common stock priced at $1.40 per share and that warrants to
purchase 11,125 shares of common stock, which were attached
to the debentures, be amended to reflect an exercise price
of $1.40 per share and the expiration date extended to
December 31, 1999. The Registrant accepted Mr. Hagler's
offer and on February 28, 1998 issued 142,718 shares of
common stock to Mr. Hagler in exchange for cancellation of
the $178,000 face value debentures and accrued interest of
$21,805.
(7)
<PAGE>
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
(a) Financial Statements and Schedules:
The financial statements and schedules listed in the accompanying
Index to Financial Statements and Schedules are filed as part of this
report.
All other schedules for which provision is made in the applicable
accounting regulations of the Securities and Exchange Commission are
not required under the related instructions, are inapplicable, or have
been provided elsewhere in this report, and therefore have been
omitted.
(b) No reports on Form 8-K were filed by the Registrant during the fiscal
year ended February 28, 1998 except as follows:
(a) On May 19, 1997, the Registrant filed a Form 8-K reporting
the mutual termination of a merger agreement made between
the Registrant and Chatfield Dean & Co.
(c) (3) Exhibits required by Rule 601 of Regulation S-K
3. Articles of Incorporation and bylaws are incorporated by reference
to the Registrant's registration statement on Form 10 filed
September 9, 1986 and amendments thereto filed on July 29, 1994 on
Form 8-K.
4. Instruments defining the rights of security holders including
indentures are incorporated by reference to the Registrant's
registration statement on Form 10 filed September 9, 1986.
10. 401(k) Profit Sharing Plan adopted effective March 1, 1993 is
incorporated by reference to the Registrants Form 10-K filed for
the year ended February 28, 1995. Other material contracts are
incorporated by reference to the Registrant's Form 8-K filed on
June 13, 1990.
11. Statement regarding computation of per share earnings.
13. The Annual Report to Stockholders of the Registrant for the fiscal
year ended February 28, 1998 (except for pages and information
thereof expressly incorporated by reference in this report is
provided solely for the information of the Securities and Exchange
Commission and is not deemed "filed" as part of this report).
21. Subsidiaries of the Registrant.
(8)
<PAGE>
23. (a) Report of Atkinson & Co., Ltd., dated May 14, 1998, on the
consolidated financial statements of Registrant for the three years
ended February 28, 1998.
27. Financial Data Schedule pursuant to Item 601(c) of Regulation S-K
for the year ended February 28, 1998.
All other exhibits required by Rule 601 are not applicable to this
Registrant or this report.
Incorporated by reference are the following documents:
a. Quarterly Reports on Form 10-Q for the quarters ended May 31,
August 31, and November 30, 1997.
(9)
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15d of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized:
UNICO, INC
June 15, 1998
By William N. Hagler
William N. Hagler, President
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated:
By: William N. Hagler Date: June 15, 1998
William N. Hagler, President,
Director and Chief Executive
Officer
By: Rick L. Hurt Date: June 15, 1998
Rick L. Hurt, Controller,
Secretary, Treasurer,
and Chief Financial Officer
By: William Hickey Date: June 15, 1998
William Hickey, Director
By: Joe G. Watson Date: June 15, 1998
Joe G. Watson, Director
(10)
<PAGE>
UNICO, INC.
ANNUAL REPORT ON FORM 10-K
ITEM 8, ITEM 14(a)
INDEX TO FINANCIAL STATEMENTS AND SCHEDULES
The following consolidated financial statements of Unico, Inc. and
subsidiaries are contained in the Registrant's Annual Report to
Stockholders included in Exhibit 13 of the report. Page numbers listed
herein correspond to the page number in the annual report:
Page No.
in Annual
Report ("AR")
Consolidated Balance Sheets - February 28, 1998,
and February 28, 1997. AR 12
Consolidated Statements of Operations - Years ended
February 28, 1998, February 28, 1997, and
February 29, 1996. AR 14
Consolidated Statements of Cash Flows - Years ended
February 28, 1998, February 28, 1997, and
February 29, 1996. AR 15
Consolidated Statements of Changes in Stockholders'
Equity - Years ended February 28, 1998,
February 28, 1997, and February 29, 1996. AR 16
Notes to Consolidated Financial Statements -
February 28, 1998 AR 17
(11)
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT 11
STATEMENT REGARDING COMPUTATION OF EARNINGS (LOSS) PER SHARE
OF
UNICO, INC.
Year ended February
1998 1997 1996
<S> <C> <C> <C>
Basic Earnings (Loss) Per Common Share:
Weighted average number of shares outstanding 986,413 986,590 986,590
Basic earnings (loss) per share
from continuing operations $ (0.19) $ (0.11) $ (0.29)
Basic earnings (loss) per share
from discontinued operations 0.22 (0.63) 0.84
Basic earnings (loss) per share $ 0.03 $ (0.74) $ 0.55
Fully Diluted Earnings (Loss) Per Common Share:
Weighted average number of shares outstanding 967,519 996,583 997,149
Fully diluted earnings (loss) per share
from continuing operations $ (0.20) $ (0.10) $ (0.28)
Fully diluted earnings (loss) per share
from discontinued operations 0.23 (0.62) 0.83
Fully diluted earnings (loss) per share $ 0.03 $ (0.72) $ .55
<FN>
For fully diluted earnings per share presented for fiscal 1996 and
1997, the calculation assumes the exercise of subordinated debentures into
stock there-by increasing net income by the related interest savings net of
income taxes. The number of shares assumed to be converted was 22,250 for
the years ended February 28, 1997 and February 29, 1996. The subject
debentures were converted into common stock of the Registrant as of
February 28, 1998 and are therefore included in the weighted number of
shares outstanding for both basic and fully diluted earnings per share. In
addition, 11,125 warrants to purchase common stock of the company were
outstanding as of the end of each of the periods presented and are included
in the calculation of the weighted average number of shares outstanding
using the treasury stock method. Fully diluted earnings per share is not
reported in the audited financial statements because the impact of the
assumed debenture conversion and the assumed exercise of warrants are both
antidilutive or the reduction in fully diluted earnings per share is
insignificant.
</TABLE>
(12)
<PAGE>
EXHIBIT 13
UNICO, INC. AND SUBSIDIARIES
ANNUAL REPORT TO STOCKHOLDERS
For the Year Ended February 28, 1998
(13)
<PAGE>
Table of Contents
President's Letter to Stockholders . . . . . . . . . . . Page 2
Selected Financial Data . . . . . . . . . . . . . . . . Page 4
Description of Business . . . . . . . . . . . . . . . . Page 5
Management's Discussion and Analysis of
Results of Operations and Financial Condition . . . . . Page 7
Report of Independent Auditors . . . . . . . . . . . . Page 11
Financial Statements . . . . . . . . . . . . . . . . . . Page 12
Corporate Information . . . . . . . . . . . Inside Front Cover
(1)
<PAGE>
President's Letter to Stockholders
(2)
<PAGE>
Very truly yours,
William N. Hagler
(3)
<PAGE>
<TABLE>
<CAPTION>
Selected Financial Data
RESULTS OF OPERATIONS
Year ended February
1998 1997 1996 1995 1994
(in thousands except per share data)
<S> <C> <C> <C> <C> <C>
Revenues
Electrical capacity and energy $ - $ 215 $ 666 $ 1,031 $ 1,001
Processing and terminalling
agreements - - 60 17 40
Natural gas production 216 245 141 193 257
Petroleum product sales - 478 468 675 3,218
Commissions - - 116 126 -
Rent and other income 20 13 15 19 155
Total revenues $ 236 $ 951 $ 1,466 $ 2,061 $ 4,671
Net income (loss) from continuing operations
before income taxes $ (288) $ (161) $ (440) $ (236) $ (284)
Net income (loss) from continuing operations $ (192) $ (106) $ (287) $ (153) $ (185)
Net income (loss) discontinued operations $ 217 $ (620) 829 859 (193)
Net income (loss) $ 25 $ (726) $ 542 $ 706 $ (378)
Net income (loss) from continuing operations
per common share $ (0.19) $ (0.11) $ (0.29) $ (0.16) $ (0.19)
Net income (loss) from discontinued operations
per common share $ 0.22 $ (0.63) $ 0.84 $ 0.88 $ (0.20)
Net income (loss) per common share $ 0.03 $ (0.74) $ 0.55 $ 0.72 $ (0.39)
Cash flow from operations $ 546 $ 13 $ (44) $ 228 $ (13)
Dividends declared per common share $ - $ - $ - $ - $ -
FINANCIAL POSITION
February 28, February 28, February 29, February 28, February 28,
1998 1997 1996 1995 1994
(in thousands)
Working capital $ 1,294 $ 863 $ 173 $ 470 $ 836
Current ratio 14.37:1 4.09:1 1.31:1 1.73:1 5.33:1
Total assets $ 3,174 $ 3,178 $ 4,422 $ 3,838 $ 2,690
Long-term debt, including
current portion $ - $ 197 $ 310 $ 396 $ 226
Long-term debt, excluding
current portion $ - $ 9 $ 234 $ 122 $ 207
Stockholders' equity $ 3,019 $ 2,803 $ 3,528 $ 2,986 $ 2,268
Long-term debt-to-equity ratio .0:1 .003:1 .07:1 .04:1 .09:1
</TABLE>
(4)
<PAGE>
Description of Business Activities
BUSINESS
The Company was incorporated under the laws of the State of New Mexico
in April, 1979. Company resources are segmented into three categories of
business; petroleum product refining and processing, electrical energy
production and natural gas production. Currently, refining and processing
and electrical energy production are performed by the Company's wholly-
owned subsidiary, Intermountain Refining Co., Inc. ("IRC"), while natural
gas production is carried-out by the Company under the name Unico
Resources. Until August 31, 1997, through its wholly-owned subsidiary,
Intermountain Chemical, Inc. ("IC"), the Company managed and operated a
methanol production facility, owned by others, in Commerce City, Colorado.
The facility was sold as of September 1, 1997 and is now classified as a
discontinued operation.
Refining
The Company refines low-cost, heavy crude oil and other low gravity
refined products into diesel fuel, fuel oils, and asphalt that are
generally marketed on a wholesale basis in the intermountain region. IRC
has experienced a sharp reduction in the availability of crude oil from
it's traditional sources and has operated it's refinery only on a limited
basis during the past five years. The Company is hopeful that a long term
solution to the supply shortage can be resolved, but thus far has been
unsuccessful in locating raw materials that would allow the economic
operation of the facility. IRC periodically provides certain asphalt
terminalling services wherein IRC receives fees and reimbursement of
certain operating expenses directly related to the service provided.
Co-Generation
The co-generation plant is capable of producing up to 3,000 kilowatts of
electrical energy that has been sold to an electric company in the local
area. When in operation, the plant produces all electricity and a portion
of the steam used in the refining process thereby contributing some savings
in refinery operating costs. The generators are not presently in operation
but are available for use if needed for operation of the refinery or if an
electrical energy market is developed in the area.
Natural Gas Production
The Company has an interest in and operates 19 natural gas wells located
in the Hugoton basin in Southwestern Kansas. Natural gas and helium
produced is sold, under exclusive contract, to K.N. Energy, of Lakewood,
Colorado.
Methanol Production
In July, 1988, the Company initiated a project to construct a 250 ton
per day methanol production facility in the Denver, Colorado area. The
facility converted natural gas into chemical grade methanol which was
marketed to refiners and chemical distributors. Until September 1, 1997,
the Company, through its subsidiary IC, was the managing general partner of
Sand Creek Chemical Limited Partnership ("SCCLP") which performed all
production and marketing operations associated with the facility. IC held
the general partnership interest in IC Partners Limited, ("IC-PL"), the
general partner of SCCLP. The facility is owned by Fleet Bank, formerly
Shawmut Bank Connecticut, who leases the facility to SCCLP under a fifteen
year operating lease. Construction and start-up testing of the facility was
substantially completed in October 1993 and the facility is currently
operating near design capacity. The Company provided management,
accounting and personnel services to the facility and had been active in
the completion of construction of the project. The Company has received
various payments and expense reimbursements associated with its services
and activities on the project.
(5)
<PAGE>
Description of Business Activities, Continued
In December 1994, the Company, through a newly formed wholly-owned
subsidiary Gas Technologies Group, Inc. ("GTGI"), acquired a limited
partnership interest in IC-PL. The Company has received allocations of
SCCLP income and losses in accordance with its various interests in IC-PL.
Effective as of September 1, 1997, IC-PL sold all of its interest in SCCLP
to an unrelated third party and then
dissolved. Both IC and GTGI received cash distributions upon the
dissolution of ICPL. Effective as of February 28, 1998, both IC and GTGI
were liquidated into the Company. Operations related to the Company's
investment in IC-PL are reflected as discontinued operations in the
Company's financial statements effective for the year ended February 28,
1998.
Competition
The Company competes in the purchase of raw materials and the sale of
its products with other refiners, as well as many large independent
petroleum marketers, many of whom have been established longer and have
access to greater financial and other resources than the Company.
The Company competes with other electrical power producers in the Utah
and Arizona general market areas.
The Company competes with other producers of natural gas in the
Southwestern Kansas area. Gas supply is abundant, but gathering and
marketing resources in the area are somewhat limited. The Company has not
had any problems selling its gas production.
Employees
As of February 28, 1998, the Company employs 3 people, including
officers of Unico. All of the employees work in the administrative offices
of the Company in Farmington, New Mexico. All three employees are salaried
and are employed on a full time basis. On January 1, 1997, 26 full time
employees who were employed by the Company's subsidiary Intermountain
Chemical, Inc. were transferred to Sand Creek Chemical Ltd. Prior to that
time, Sand Creek reimbursed the Company 100% of the employment costs
incurred by the Company for these employees. Also effective on January 1,
1997, 3 employees who were employed by the Company's subsidiary
Intermountain Refining were laid off. All of the full time employees
including those transferred to Sand Creek Chemical Ltd., were eligible to
participate in the Company's Employee Stock Ownership Plan, ("ESOP") and
401(k) Plan. However, subsequent to the discontinuation of the Company's
investment in IC-PL, both the ESOP and the 401(k) Plan were terminated with
plan assets distributed to participants in accordance with the plans. None
of the employees are represented by a union and the Company believes its
employee relations to be satisfactory.
Regulations and Taxes
All operations of the Company are regulated by the United States
Environmental Protection Agency and various state environmental and health
departments. The Company is responsible for the payment of applicable
Federal and State excise taxes on the sale of refined products. Severance
taxes on natural gas production in Kansas are collected and paid by K.N.
Energy, the purchaser of the gas.
Impact of Year 2000
The Company has reviewed the potential impact of Year 2000 issues and
believes that the cost to replace and or modify equipment, computer
hardware, and computer software will not be material and that Year 2000
issues will not have a material impact on the Company's ability to operate
into the next century.
(6)
<PAGE>
Description of Business Activities, Continued
PROPERTIES
All properties used by the Company in the conduct of its business are
owned in fee. The Company's refinery is located on approximately 21 acres
of fee-owned land in Fredonia, Arizona. Facilities include: a 4,000 barrel
per day crude and vacuum distillation unit, a 3,000 kilowatt co-generation
plant, boilers, cooling towers, offices, shops, control and electrical
buildings, loading racks, storage tanks and associated ancillary
facilities. In addition, the plant contains a reforming unit which is not
currently employed in the refining operation. The co-generation plant was
previously held under a 36 month lease requiring payments of $7,300 per
month. The lease expired during 1996 and was carried on a month to month
basis thereafter. In April, 1996, the Company acquired the generators from
the lessor for approximately $27,000.
The Company owns an interest in and operates 19 producing natural gas
wells located in Southwestern Kansas. Developed proven reserves are
estimated at 2,942 MMCF gross and 2,198 MMCF net to the Company's interest
as of February 28, 1998. No reserve estimates have been filed with any
Federal authorities or agencies.
The Company owns a 7,000 square foot office building in Farmington, New
Mexico. Approximately 33 percent of the office building is being fully
utilized by the Company for its corporate office, tenants are leasing
another 43 percent, while the rest is currently vacant and offered for
lease to others. There are no outstanding mortgages on any of the
properties owned by the Company.
Management's Discussion and Analysis of Financial
Condition and Results of Operations
RESULTS OF OPERATIONS
Fiscal 1998 compared to fiscal 1997
Revenues decreased to $236,000, down 75% from $951,000 realized in fiscal
1997. Net income from continuing operations declined to a loss of
$192,000, down 81% from a loss of $106,000 realized in the prior year.
Cash flow from operations increased to $546,000, up 4,160% from $13,000
last year. Net income from discontinued operations increased to $217,000,
up 135% from a loss of $619,000 experienced last year.
The reduction in revenues is attributed substantially to the termination of
crude oil sales in February 1997 and the termination of the electric
capacity stand-by contract in January 1997. The Company previously
maintained a contract to purchase a small amount of crude oil which had
been processed at its refinery. However, as the quantity was insufficient
to economically process at its refinery, the Company sold the crude to
other refiners. The contract expired in February of 1997 and the Company
was unsuccessful in bidding to renew the contract. The electric capacity
stand-by contract was terminated in January 1997 which resulted in a
decline in revenues of $215,000. The Company, as yet, has not been
successful in identifying a new market for the sale of electric capacity
and energy and the generators are presently standing idle but are available
for use if needed. Revenues associated with natural gas sales also
declined by 12% during fiscal 1998 which is entirely related to a decline
in natural gas prices as compared to those received during the prior year.
(7)<PAGE>
Management's Discussion and Analysis of Financial
Condition and Results of Operations, Continued
Operating income (loss),from continuing operations by industry segment,
before allocation of general corporate overhead for 1998 compared to 1997
was as follows:
Increase
Segment 1998 1997 (Decrease)
Refining $ (35,064) $ (114,136) $ 79,072
Electrical generation (11,937) 127,821 (139,758)
Gas production 76,389 135,811 (59,422)
Corporate overhead and other (317,315) (310,868) (6,447)
$ (287,927) $ (161,372) $ (126,555)
The reduction in losses associated with refining activities is attributed
to the refinery facility being placed in a cold shutdown mode in January
1997 which significantly reduced on going maintenance costs. The Company
continues to seek alternatives that would allow utilization of the
facility. It is anticipated that a portion of the facilities asphalt
storage tanks will be rented to a third party during the summer of 1998
which will provide approximately $30,000 in revenue with little or no
operating costs. The Company will provide minimal terminalling services
associated with this activity. The Company is also presently evaluating a
plan to utilize the refinery in a wax manufacturing venture. The exact
nature of the relationship to be developed, and the manner in which the
Company might participate, have not yet been determined. Income associated
with electrical generation declined by $140,000 from last year due to the
termination of the electrical capacity stand-by contract in January 1997.
The generators are presently in a cold shutdown mode and require little
cost to maintain. The Company has been unsuccessful in locating an
electrical capacity and energy market for the generators but has been
contacted by parties interested in purchasing the equipment. However, if
the Company is successful in developing the manufacturing venture
previously mentioned, the generators would be used to provide electrical
power to the refining process. Operating income associated with natural
gas production declined by 78% during fiscal 1998 due to a 12% decline in
revenues coupled with a 42% increase in operating costs. Production
quantities were relatively unchanged from the prior year, however,the
Company incurred a substantial increase in well maintenance costs
associated with down hole equipment failures. The Company believes that
the repairs performed during fiscal 1998 should allow greater production
efficiency in the future. The increase in costs associated with corporate
overhead cost represents an overall 2% increase in such costs which is
consistent with normal inflation. The Company, since the disposal of its
methanol manufacturing activities, has been reviewing ongoing overhead
costs with the intention of minimizing such costs.
Fiscal 1997 compared to fiscal 1996
Revenues decreased to $951,000 down 35% from $1,466,000 in the prior
year. Net income from continuing operations improved to a loss of
$106,000, up 63% from a loss of $287,000 during fiscal 1996. Cash flow
from operations increased to $13,000, up 130% from a use of $44,000 in the
prior year. Income associated with discontinued operations declined to a
loss of $619,000, down 175% from income of $829,000 during the previous
year.
The decline in revenues relates to a significant decline in electrical
energy sales of $452,000, the termination of the COTTI contract in the
prior year accounting for a decline of $116,000, and the termination of
processing of terminalling agreements in the prior year resulting in a
decline of $60,000. The decline in electrical energy sales was the result
of a change during fiscal 1997 whereby the electric generators were
provided on a stand-by capacity basis and only operated briefly when
needed. The decline in revenues was partially offset by a 74% increase in
natural gas sales due to a substantial increase in selling prices offset by
a slight reduction in production compared to the prior year.
(8)
<PAGE>
Management's Discussion and Analysis of Financial
Condition and Results of Operations, Continued
Operating income (loss), by industry segment, before allocation of
general corporate overhead for 1997 compared to 1996 was as follows:
Increase
Segment 1997 1996 (Decrease)
Refining $ (114,136) $ (95,412) $ (18,724)
Electrical generation 127,821 (147,733) 275,554
Gas production 135,811 483 135,328
Corporate overhead and other (310,868) (197,668) (113,200)
$ (161,372) $ (440,330) $ 278,958
The decline in refining income is attributed to a $5,000 decline in gross
profits from sales of crude oil and earnings associated with terminalling
services, a $20,000 decline in interest earned on the investment of cash
balances, offset by a $6,000 reduction in refinery overhead and
depreciation costs. The substantial improvement in electrical generation
earnings is attributed to the stand-by mode of operation of the generators
which was put into place effective April 1, 1996. The stand-by agreement
was discontinued effective January 1, 1997. During that period, the
generators were only operated briefly resulting in substantial cost savings
and the Company received $19,000 per month for providing the electric
generation capacity. In addition, the Company purchased the generators
from the lessor in April 1996 which reduced the fixed cost of the
generators substantially. Earnings associated with the production and sale
of natural gas improved by $135,000 over the prior year due mainly to the
substantial increase in sales prices realized during 1997 compared to 1996.
The increase in corporate overhead loss is attributed to the termination of
the COTI agreement in December 1995.
LIQUIDITY AND CAPITAL RESOURCES
The Company had cash and cash equivalents of $1,237,000 at February 28,
1998 compared to $349,000 at February 28, 1997 representing a $888,000
increase during the current year. The increase is comprised of a $546,000
increase in cash from operations, an increase of $369,000 from investing
activities, offset by $28,000 used in financing activities. Significant
sources of cash during fiscal 1998 included $362,000 received from income
tax refunds, $179,000 received from the disposal of the Company's
investment in IC Partners, Ltd., and net collections on notes receivable of
$209,000. The Company had no significant uses of cash during the year.
Future capital requirements in the coming year are presently viewed as
minimal as the Company has no debt and management believes that cash flow
from ongoing operations will be adequate to meet cash demands in the near
future. It is however recognized that it will be necessary to develop
additional sources of cash flow to avoid depletion of working capital.
Significant sources of cash in the coming year consists of estimated cash
flow from natural gas production and sales of approximately $10,000 per
month, approximately $2,500 per month from refinery tank leases, and
approximately $5,000 per month from office space rental and interest
income. There are presently no anticipated significant uses of cash
projected for the coming year other than funding of ongoing monthly
overhead costs of approximately $18,000 per month.
(9)
<PAGE>
Management's Discussion and Analysis of Financial
Condition and Results of Operations, Continued
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 and generator fuel could have a materially adverse effect on the
Company's operations. Management is unable to determine the full impact of
inflation, deflation and changing prices on the results of operations or
working capital.
FINANCIAL ACCOUNTING STANDARDS
Transfer and Servicing of Financial Assets and Extinguishment of
Liabilities: The Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 125, "Transfer and Servicing of
Financial Assets and Extinguishment of Liabilities." This Statement
requires that transferred assets could be recognized only when control is
surrendered, rather than when risks and rewards related to the asset are
passed to another party. A liability would be extinguished when the
creditor no longer has ultimate responsibility for the liability. In
December of 1996, the FASB issued SFAS No. 127, "Deferral of the Effective
Date of Certain Provisions of SFAS No. 125." It defers for one year the
effective date of certain provisions of SFAS 125. This Statement has not
had and is not anticipated to have a material impact on the Company's
financial condition.
Earnings per Share: Recently the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards No. 128, "Earnings per
Share." It simplifies the standards for computing earnings per share,
superseding the standards previously found in Opinion 15. It replaces the
presentation of primary earnings per share with a presentation of basic
earnings per share. It also requires dual presentation of basic and
diluted earnings per share on the face of the income statement for all
entities with complex capital structures and requires a reconciliation of
the numerator and denominator of the basic earnings per share computation
to the numerator and denominator of the earnings per share computation.
This Statement was effective for the Company's financial statements issued
as of February 28, 1998 and did not have a material effect on previous
earnings per share presentations.
Disclosure of information about an Entity's Capital Structure: The
Financial Accounting Standards Board recently issued Statement of Financial
Accounting Standards No. 129, "Disclosure of Information about an Entity's
Capital Structure." This Statement applies to all entities. Its
requirements are a consolidation of those found in APB Opinions 10 and 15,
and Statement of Financial Accounting Standards No. 47, and it eliminates
the exemption of non public entities from certain disclosure requirements.
This Statement will affect the financial statements issued by the Company
after December 15, 1997.
Reporting Comprehensive Income: In June 1997, the FASB issued SFAS No.
130, "Reporting Comprehensive Income". This Statement establishes
standards for reporting and display of comprehensive income on its
components (revenues, expenses, gains and losses). Comprehensive income is
defined as the change in equity of a business enterprise, during a period,
from transactions and other events and circumstances from nonowner sources.
The Statement requires that entities classify items of other comprehensive
income by their nature in a financial statement and display the accumulated
balance of other comprehensive income separately from retained earnings and
additional paid-in-capital in the equity section of a statement of
financial position. This Statement is effective for fiscal years beginning
after December 31, 1997.
Disclosures About Segments: Also in June 1997, the FASB issued SFAS
no. 131, "Disclosures About Segments of an Enterprise and Related
Information." This Statement establishes standards for the way that public
entities report information about operating segments in annual financial
statements and requires that selected information about operating segments
be reported in interim financial reports as well. It also establishes
standards for related disclosures about products and services, geographic
areas and major customers. This Statement is effective for fiscal years
beginning after December 31, 1997.
(10)
<PAGE>
Report of Independent Auditors
Stockholders and Board of Directors
Unico, Inc.
We have audited the accompanying consolidated balance sheets of Unico, Inc.
and subsidiaries as of February 28, 1998 and 1997, and the related
consolidated statements of operations, changes in stockholders' equity, and
cash flows for each of the three years in the period ended February 28,
1998. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted accounting
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Unico,
Inc. and subsidiaries as of February 28, 1998 and 1997, and the
consolidated results of operations and cash flows for each of the three
years in the period ended February 28, 1998, in conformity with generally
accepted accounting principles.
Atkinson & Co., Ltd.
Albuquerque, New Mexico
May 14, 1998 (Except Note Q, for which the date is June 11, 1998)
(11)
<PAGE>
<TABLE>
<CAPTION>
UNICO, INC.
Consolidated Balance Sheets
February 28, February 28,
1998 1997
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 1,236,506 $ 349,055
Accounts receivable - Note B 22,059 114,685
Accounts and accrued interest receivable
from related parties - Note H 2,390 7,899
Inventories 20,861 20,861
Income tax refund receivable 6,567 340,298
Notes receivable from related parties - Note H 102,026 310,200
TOTAL CURRENT ASSETS 1,390,409 1,142,998
PROPERTY, PLANT AND EQUIPMENT, at cost - Note E
Land, buildings and improvements 434,327 434,327
Equipment 164,930 164,930
Crude oil refining equipment 1,183,333 1,183,333
Co-generation facilities - Note D 290,298 290,298
Oil and gas properties, (successful efforts
method) - Notes L and M 894,400 894,400
2,967,288 2,967,288
Less accumulated depletion and depreciation (1,960,679) (1,828,936)
1,006,609 1,138,352
OTHER ASSETS
Notes receivable - Note B 8,383 9,318
Investment in partnership - Note N - 134,663
Investment in Chatfield Dean - Note O 600,500 600,000
Other assets and deferred charges,
net - Note C 167,866 152,359
776,749 896,340
$ 3,173,767 $ 3,177,690
(12)
<PAGE>
Consolidated Balance Sheets, Continued
February 28, February 28,
1998 1997
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 62,553 $ 87,033
Taxes other than income taxes 9,156 2,566
Other accrued expenses - 3,115
Income taxes payable - Note G 25,024 -
Current portion of convertible subordinated
debentures payable to related parties
- Notes F and H - 178,000
Current portion of long-term debt - Note E - 8,892
TOTAL CURRENT LIABILITIES 96,733 279,606
LONG-TERM DEBT, net of current portion - Note E - 9,727
DEFERRED TAXES PAYABLE - Note G 58,250 85,800
COMMITMENTS AND CONTINGENCIES - Note I - -
STOCKHOLDERS' EQUITY
Preferred stock, $0.01 par value,
authorized 8,000,000 shares, none
outstanding
Common stock, $0.20 par value,
authorized 2,500,000 shares,
issued and outstanding 1,129,308
shares in 1998 and 986,590 in 1997
- Notes A and F 225,862 197,318
Additional paid in capital - Notes A and F 2,213,837 2,042,576
Less: Treasury stock 3,699 shares in 1998 (9,016) -
Retained earnings 588,101 562,663
3,018,784 2,802,557
$ 3,173,767 $ 3,177,690
The accompanying notes are an integral part of these financial statements.
</TABLE>
(13)
<PAGE>
<TABLE>
<CAPTION>
UNICO, INC.
Consolidated Statements of Operations
For the year ended
February 28, February 28, February 29,
1998 1997 1996
<S> <C> <C> <C>
REVENUES
Natural gas sales $ 216,137 $ 244,666 $ 140,794
Electrical capacity and energy - 214,697 666,345
Processing and terminalling agreements - - 59,944
Petroleum product sales - 478,662 468,491
COTI commissions - - 116,051
Rent and other income 20,125 12,947 14,468
236,262 950,972 1,466,093
COSTS AND EXPENSES
Cost of sales 101,787 676,637 1,478,679
General and administrative 318,451 293,484 293,252
Depletion, depreciation and amortization 131,743 135,340 140,483
Interest, net (27,792) 6,883 (5,991)
524,189 1,112,344 1,906,423
INCOME (LOSS) FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES (287,927) (161,372) (440,330)
Provision (benefit) for income taxes - Note G
Current (80,499) (39,132) (142,227)
Deferred (15,700) (16,100) (10,800)
(96,199) (55,232) (153,027)
NET INCOME (LOSS) FROM
CONTINUING OPERATIONS (191,728) (106,140) (287,303)
DISCONTINUED OPERATIONS
Income from operations related to the investment
in IC Partners, Ltd. (Less applicable income
taxes of $80,384, $(263,574), and $527,953
for 1998, 1997, and 1996 respectively-Note N 264,732 (619,436) 829,219
Loss on disposal of investment in IC
Partners, Ltd.(Less applicable income
tax credit of $(14,443)-Note N (47,566) - -
NET INCOME (LOSS) $ 25,438 $ (725,576) $ 541,916
WEIGHTED AVERAGE NUMBER OF
SHARES OUTSTANDING 986,413 986,590 986,590
BASIC AND FULLY DILUTED EARNINGS PER SHARE
Net income (loss) from continuing
operations $ (0.19) $ (0.11) $ (0.29)
Net income (loss) from discontinued
operations 0.22 (0.63) 0.84
Net income (loss) per share $ 0.03 $ (0.74) $ 0.55
<FN>
The accompanying notes are an integral part of these financial statements.
</TABLE>
(14)
<PAGE>
<TABLE>
<CAPTION>
UNICO, INC.
Consolidated Statements of Cash Flows
For the year ended
February 28, February 28, February 29,
1998 1997 1996
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ 25,438 $ (725,576) $ 541,916
Adjustments to reconcile net income (loss) to net
cash provided (used) by operating activities:
Depreciation, depletion and amortization 131,743 135,340 140,483
Deferred income taxes (27,550) (15,250) 150
Dry hole costs - - 28,310
Conversion of interest on debentures to common stock 18,690 - -
(Income) loss on investment in partnership (44,121) 1,347,238 (1,029,736)
Changes in operating assets and liabilities:
(Increase) decrease in accounts receivable 98,135 (16,333) 99,913
Decrease in inventories - 15,455 46,797
Increase (decrease) in accounts payable
and accrued expenses (17,890) (22,606) 663
Decrease in refundable deposits 2,541 1,720 -
Increase (decrease) in income taxes
accrued/receivable 358,755 (707,449) 127,195
NET CASH FLOW (USED) BY
OPERATING ACTIVITIES 545,741 12,539 (44,309)
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment - (26,950) -
Increase in cash value of life insurance polices (18,048) (22,455) (23,015)
Increase in certificates of deposit and
short-term investments - (6,616) (52,309)
Decrease in certificates of deposit and
short-term investments - 128,474 -
Redemption of certificates of deposit - 235,000 -
Cash distributions from partnership 178,784 318,829 417,554
Investment in Chatfield Dean (500) (100,000) (500,000)
Issuance of notes receivable (416,300) (310,200) (350,000)
Collections of notes receivable 625,409 1,500 355,500
NET CASH FLOW PROVIDED (USED) BY
INVESTING ACTIVITIES 369,345 217,582 (152,270)
CASH FLOWS FROM FINANCING ACTIVITIES
Purchase of treasury stock (9,016) - -
Proceeds from issuing long-term debt - 26,950 -
Payments on long-term debt (18,619) (140,425) (86,207)
NET CASH FLOW (USED) BY
FINANCING ACTIVITIES (27,635) (113,475) (86,207)
INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS 887,451 116,646 (282,786)
CASH AND CASH EQUIVALENTS AT BEGINNING
OF YEAR 349,055 232,409 515,195
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 1,236,506 $ 349,055 $ 232,409
<FN>
The Company paid interest of approximately $1,600, $29,000, and $36,600 in 1998, 1997 and 1996, respectively.
The Company paid income taxes of $200 in 1998, $406,981 in 1997, and $251,000 in 1996 and received a refund of income
taxes of $362,300 in 1998, $1,300 in 1997, and $3,400 in 1996.
Supplemental Schedule of Noncash Financing Activities:
The Company converted $178,000 of debentures to common stock on February 28, 1998.
The accompanying notes are an integral part of these financial statements.
</TABLE>
(15)
<PAGE>
<TABLE>
<CAPTION>
UNICO, INC.
Consolidated Statements of Changes
in Stockholders' Equity
Additional Total
Common Stock Paid In Retained Treasury Stockholders'
Shares Par value Capital Earnings Stock Equity
<S> <C> <C> <C> <C> <C> <C>
BALANCE, February 28, 1995 986,590 $ 197,318 $ 2,042,576 $ 746,323 $ - $ 2,986,217
Net income - - - 541,916 - 541,916
BALANCE, February 29, 1996 986,590 197,318 2,042,576 1,288,239 - 3,528,133
Net loss - - - (725,576) - (725,576)
BALANCE, February 28, 1997 986,590 197,318 2,042,576 562,663 - 2,802,557
Conversion of debentures 142,718 28,544 171,261 - - 199,805
Purchase of treasury stock - - - - (9,016) (9,016)
Net income - - - 25,438 - 25,438
BALANCE, February 28, 1998 1,129,308 $ 225,862 $ 2,213,837 $ 588,101 $ (9,016) $ 3,018,784
<FN>
The accompanying notes are an integral part of these financial statements.
</TABLE>
(16)
<PAGE>
UNICO, INC.
Notes to Consolidated Financial Statements
February 28, 1998
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business Activity: The Company operates a petroleum products refinery and
a 3,000 kilowatt co-generation facility. The Company owns an interest in
certain natural gas producing properties located in southwestern Kansas and
is the operator of the properties. Until September 1, 1997, the Company was
the general partner and a limited partner of a partnership which is engaged
in the operation of a 250 ton per day methanol production facility in
Commerce City, Colorado. Effective as of September 1, 1997, the Company
sold its interest in the partnership and operating results related to this
activity are reported as discontinued operations for all years presented.
The Company's financial statements for the year ended February 28, 1998
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. The Company incurred a net loss of
$725,576 for the year ended February 28, 1997 and incurred a loss from
continuing operations of $191,728 for the year ended February 28, 1998, and
several of the Company's revenue sources have substantially declined over
the past two years. Management recognizes that the Company must generate
additional resources to replace its existing depleting revenue base. The
Company has positive working capital and positive stockholders' equity at
February 28, 1998. The Company also has no debt service requirements at
February 28, 1998. The Company's current declining revenue stream would
allow the Company to sustain operations on an ongoing basis for at least
the next fiscal year. Management's plans to enhance its revenue base
include consideration of the sale of its refinery in Fredonia, Arizona,
with a possible continued equity participation, acquisition of additional
refinery equipment in other locations through a private placement offering,
or other business transactions which would generate sufficient resources to
assure continuation of the Company's operations. See Also Note Q.
Basis of Presentation: The accompanying consolidated financial statements
include the operations of Unico's wholly-owned subsidiaries, Intermountain
Refining Co., Inc. ("IRC"), Intermountain Chemical, Inc., ("IC") and Gas
Technologies Group, Inc., ("GTGI"). All significant intercompany accounts
and transactions have been eliminated. The operations of IC and GTGI were
liquidated into the Company on February 28, 1998. See also Note N.
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. The Company 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.
Inventories: Raw materials, refined products, materials, and supplies
inventories of IRC 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 15-20
Equipment 3-20
Crude Oil Refining Equipment 5-20
Co-generation Facilities 5-15
(17)
<PAGE>
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. Electrical generator repair expenses are accrued based on machine
hours utilized. Actual repair costs are charged against the accrued
liability when 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
and 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.
Investment in Partnership and Chatfield Dean: The investment in IC
Partners Limited Partnership has been accounted for under the equity
method. The Company's share of the results of operations of the
Partnership, are reflected in discontinued operations of the Company. Cash
distributions from the Partnership have been reflected as a reduction of
the investment in the Partnership. Summarized financial information for IC
Partners Limited Partnership has been presented in Note N to these
financial statements. The Company sold its interest in the partnership
effective as of September 1, 1997. The investment in Chatfield Dean is
reported at cost and is discussed in Note O 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. The Company files a consolidated income tax return
with its wholly-owned subsidiaries. Taxes are allocated to each subsidiary
as if separate returns are filed. Investment tax credits are 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. Stock
warrants are not included in fully diluted earnings per share because they
are antidilutive. The assumed conversion of subordinated debentures into
common stock prior to their conversion in 1998 were not included in fully
diluted earnings per share because they were antidilutive.
Reclassifications: Certain reclassifications have been made to the 1997
and 1996 financial statements to conform with the 1998 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, accounts receivable, accounts payable, and accrued expenses
approximate fair value because of the short maturity of these amounts. The
carrying amount of the Company's notes receivable, long-term debt and
debentures approximate fair value because the interest rates are at or near
market value.
(18)
<PAGE>
NOTE B - ACCOUNTS AND NOTES RECEIVABLE
Accounts receivable consists of amounts due from customers for sales of
petroleum products, natural gas, and electrical energy and capacity. Such
credit sales are generally made on terms ranging from net 10 days to net 30
days in accordance with normal industry practice. The Company 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.
Notes receivable consists of a note to a related party for $102,026 (See
Note H), and a $8,383 note, due in monthly installments through 2000,
secured by various collateral including real estate and equipment. The
Company uses the specific write-off method of accounting for bad debts.
NOTE C - OTHER ASSETS AND DEFERRED CHARGES
Other assets and deferred charges consist of the following:
February 28, February 28,
1998 1997
Cash value of life insurance contracts $ 167,591 $ 149,543
Utility and license deposits 275 2,816
$ 167,866 $ 152,359
NOTE D - CO-GENERATION FACILITIES
IRC installed energy 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
January 1993, the original lease of the co-generation facilities expired
and a new operating lease was negotiated. The new lease had a term of
three years with fixed monthly lease payments of $7,300. As of February
29, 1996, the lease had expired and continued on a month to month basis
pending re-negotiation of the lease. In April 1996, the Company acquired
the generators from the lessor for $26,950.
In conjunction with the operation of the co-generation facilities, IRC had
entered into an agreement with a local utility company for the sale of
electrical capacity and energy. The agreement was terminated in 1997.
Revenues from the sale of electrical generating capacity and energy were
approximately $0 in 1998, $215,000 in 1997, and $666,000 in 1996, and
rental expense under the operating lease was approximately $7,300 in 1997,
and $88,000 in 1996.
NOTE E - LONG-TERM DEBT
Long-term debt consists of the following:
February 28, February 28,
1998 1997
Note payable to Caterpillar Financial
Services, fixed rate of 9%, due in monthly
installments of $851 per month through
03/01/99. Secured by co-generation equipment
with a book value of $23,000 as of February
28, 1998. This note was fully retired
during 1998. $ - $ 18,619
- 18,619
Less current portion - (8,892)
$ - $ 9,727
(19)
<PAGE>
NOTE F - CONVERTIBLE SUBORDINATED DEBENTURES
The Company 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, the Company 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 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.
In addition to the conversion of the debentures, the Company reduced the
exercise price on 11,125 warrants attached to the debentures from $5.00 per
share to $1.40 per share and extended the expiration date of the warrants
to December 31, 1999.
Interest expense related to these debentures was approximately $18,700 in
1998, $18,700 in 1997, and $18,700 in 1996.
NOTE G - INCOME TAXES
Income tax expense (benefit) from continuing operations differs from income
tax at the statutory rate of 34% as follows:
February 28,February 28,February 29,
1998 1997 1996
Income taxes at statutory rate (34)% (34)% (34)%
State income taxes - 3 % (5)%
Other (net) 1 % (3)% 4 %
Income tax expense (benefit) (33)% (34)% (35)%
Income tax expense (benefit) for the periods ended February 28, 1998,
February 28, 1997 and February 29, 1996 consists of the following:
Continuing Operations: 1998 1997 1996
Current
Federal $ (81,536) $ (44,082) $(119,724)
State 1,037 4,950 (22,503)
Deferred
Federal (15,700) (16,100) (10,800)
State - - -
Total taxes continuing operations $ (96,199) $ (55,232) $(153,027)
Discontinued Operations:
Current
Federal 77,791 $(264,424) $ 456,390
State - - 60,613
Deferred
Federal (11,850) 850 10,950
State - - -
Total taxes discontinued operations $ 65,941 $(263,574) $ 527,953
(20)
<PAGE>
As of February 28, 1998, there were no net operating loss carry forwards or
unused investment tax credit carry forwards for Federal income tax
purposes. As of February 28, 1998 there were approximately $1,163,000 in
operating loss carry forwards for state income tax purposes which expire in
4 to 15 years depending on the State to which the carry forwards are
allocated. No deferred tax assets have been provided for on the state
carryforwards as the realization of those carryforwards is uncertain.
Deferred taxes payable as of February 28, 1998 and February 28, 1997
consist of the following:
1998 1997
Deferred tax liability arising from
using accelerated depreciation
for income tax purposes $ 58,250 $ 73,950
Deferred tax liability arising from
basis differences in investment in partnership
for financial and tax reporting purposes - 11,850
Deferred taxes payable $ 58,250 $ 85,800
NOTE H - RELATED PARTY TRANSACTIONS
The Company was obligated under debentures payable to an officer, director
and stockholder totaling $178,000 at February 28, 1997 and during the year
ended February 28, 1998. Interest expense on the debentures was
approximately $18,700 in 1998, 1997 and 1996. As of February 28, 1998, the
debentures, along with accrued interest of $21,805, were converted into
142,718 shares of the Company's common stock. See Note F.
In conjunction with the Company's management of SCCLP's Commerce City,
Colorado methanol production facilities, the company 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 by the Company. Management fees paid to the Company were
$20,833 per month from December 1995 through August 1998, and $8,333 per
month from March 1995 through November 1995.
1998 1997 1996
Direct payroll and benefits $ - $ 1,045,426 $ 1,218,879
Management fees and overhead costs 240,118 465,210 328,815
Liquified CO2 sales - - 19,997
$ 240,118$ 1,510,636 $ 1,567,691
Amounts receivable from SCCLP for these transactions were $0 as of February
28, 1998 and $520 as of February 28, 1997.
In addition to payments received from SCCLP in conjunction with the
Company's management of SCCLP, the Company has also received cash
distributions associated with its investment in SCCLP. The Company
received $318,829 in 1997 and $417,554 in 1996 representing the estimated
tax liabilities associated with taxable partnership income allocations
through February 1996, and received $178,784 during 1998 representing
estimated tax liabilities for operations through August 31, 1997 and the
liquidation of IC-PL.
(21)
<PAGE>
On November 1, 1996, IRC issued an 8%, $325,000 revolving line of credit to
Red Hills Manufacturing, Inc. ("RHMCO)" a New Mexico Corporation controlled
by certain current and former officers and employees of IRC. The revolving
line of credit was established to facilitate the purchase of certain
woodworking equipment and to fund start-up working capital requirements of
RHMCO. The revolving credit line was scheduled to terminate on December
31, 1997 but was extended until December 31, 1998. The credit line is
secured by cash, accounts receivable, inventories and equipment owned by
RHMCO. The balance outstanding on the revolving credit line was $102,026
as of February 28, 1998 and $310,200 as of February 28, 1997. In addition,
RHMCO was indebted to the Company in the amount of $2,390 as of February
28, 1998 and $7,400 as of February 28, 1997 for interest and accrued
expenses. RHMCO is currently occupying unutilized building space owned by
IRC in exchange for certain maintenance and monitoring services required by
IRC.
NOTE I - COMMITMENTS AND CONTINGENCIES
Reservation of Common Stock: At February 28, 1998, the Company has
11,125 shares of common stock reserved for issuance under stock purchase
warrants outstanding. Holders of convertible debentures were issued
warrants to purchase common stock at $5.00 per share that expired on
September 17, 1990. In consideration to those holders that agreed to
extend the maturity date of debentures held by them, the Company extended
the expiration date on the associated warrants to purchase 11,125 shares of
common stock, until September 17, 1997. In conjunction with the conversion
of the debentures on February 28, 1998, the Company agreed to reduce the
exercise price on the warrants to $1.40 per share and extend the expiration
date to December 31, 1999.
Guarantee of Debt of Others: In January 1994, the Company agreed to
provide credit support to Consolidated Oil and Transportation, Inc.
("COTI") in the form of guarantees of commercial credit and stand by
letters of credit. COTI is a marketer and transporter of heavy fuel oils
and asphalt. The agreement between the parties provided for the Company to
obtain a collateral position in COTI, subordinated to commercial lenders to
COTI. In exchange for credit support provided to COTI, the Company
received a commission of 8.75% of the gross profits of COTI. The Company
does not have an ownership interest in COTI. The Agreement expired on
December 31, 1995 and has not been renewed. However, the Company continues
to be the guarantor on one account. As of the date of this report,
commitments to creditors of COTI amount to approximately $1,296,000 under a
railcar lease agreement. The railcar lease guarantee relates to a 5 year
lease of 100 railcars and the limit of the guarantee is reduced by $648,000
annually as long as COTI is not in default under the terms of the lease.
The Company believes that COTI has sufficient working capital to satisfy
its outstanding obligations secured by the guarantee.
Environmental Matters: The Company has been involved in the manufacture,
storage, and sale of petroleum products since 1979, which exposes the
Company to potential claims for environmental remediation costs, if any, of
sites previously operated by the Company. The Company is not aware of any
claims pending for such sites.
Starlicon Merger: The Company has entered into an agreement to acquire all
of the outstanding stock of Starlicon International, Inc. as discussed in
Note Q to these financial statements.
NOTE J - EMPLOYEE STOCK OWNERSHIP AND 401(k) PLANS
Effective for the year ended February 28, 1989, the Company adopted an ESOP
for the benefit of all of its full time employees. Company contributions to
the plan were determined at the discretion of the Company and were limited
to the maximum amount deductible for income tax purposes. Eligible
employees included all full time employees with a minimum of six months of
service as of any anniversary date of the plan and vesting over a six year
graded basis applied retroactive as of the effective date of the plan. The
Company made no contributions to the ESOP during 1998, 1997, or 1996.
Effective as of February 5, 1998, the ESOP plan was terminated with all
plan assets distributed to plan participants in accordance with the plan.
(22)
<PAGE>
In 1994, the Company adopted a 401(k) Plan for the benefit of all its full
time employees. Company contributions to the Plan were determined at the
discretion of the Company and were limited to the maximum amount deductible
for income tax purposes. Eligible employees included all full time
employees with a minimum of six months of service as of a semi-annual
anniversary date of the plan. Employees were 100% vested in all voluntary
contributions and vested in Company contributions over a six year graded
basis applied retroactive as of the effective date of the plan. Company
contributions to the Plan were $0 for 1998 and 1997, and $11,758 for 1996.
Effective as of December 31, 1998 the plan was terminated and all plan
assets were distributed to the participants in accordance with the plan.
NOTE K - FINANCIAL INFORMATION RELATING TO INDUSTRY SEGMENTS
The Company's major industry segments are natural gas production, petroleum
refining and processing, and electrical co-generation. Selected financial
information relating to these segments is as follows:
Years Ended
February 28, February 28, February 29,
1998 1997 1996
(Dollars in thousands)
REVENUES
Petroleum refining and processing $ - $ 478 $ 528
Electrical co-generation - 215 666
Natural gas production 216 245 141
Other 20 13 131
$ 236 $ 951 $ 1,466
OPERATING PROFIT (LOSS)
Petroleum refining and processing $ (36) $ (91) $ (47)
Electrical co-generation (12) 66 (4)
Natural gas production (15) 60 (43)
Other (1) (225) (196) (346)
$ (288) $ (161) $ (440)
IDENTIFIABLE ASSETS
Petroleum refining and processing $ 1,031 $ 1,008 $ 1,096
Electrical co-generation 121 132 179
Natural gas production 369 467 435
Other 1,653 1,571 2,712
$ 3,174 $ 3,178 $ 4,422
DEPRECIATION, AMORTIZATION AND DEPLETION
Petroleum refining and processing $ 65 $ 66 $ 64
Electrical co-generation 11 15 -
Natural gas production 40 39 43
Other (1) 16 15 33
$ 132 $ 135 $ 140
(1) Amounts include allocations of general and administrative, interest
and depreciation costs previously allocated to methanol plant operations
which were discontinued during 1998.
(23)
<PAGE>
Years Ended
February 28, February 28, February 29,
1998 1997 1996
(Dollars in thousands)
CAPITAL EXPENDITURES
Petroleum refining and processing $ - $ - $ -
Electrical co-generation - 27 -
Natural gas production - - -
Other - - -
$ - $ 27 $ -
Sales of crude oil during 1997 were made substantially to one customer.
Sales to the customer during 1997 were $479,000. No sales of crude oil were
made in 1998.
Electrical energy and capacity has been sold substantially to one customer.
Sales of energy and capacity to the customer were $0 for 1998, $215,000 for
1997, and $666,000 for 1996.
The Company sells substantially all natural gas produced from the Kansas
gas properties to one customer. Natural gas sales to the customer, net to
the Company's interest, totaled $210,000 for 1998, $240,000 for 1997, and
$135,000 for 1996.
NOTE L - OIL AND GAS PROPERTIES
Kansas Gas Properties: On July 1, 1988, the Company 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 the Company's interest, of
proven and developed natural gas reserves and related production equipment
located in Southwestern Kansas. In exchange for the assets, the Company
gave $180,000 in cash, issued 106,851 shares of its common stock, and
incurred a $290,000 note payable to a bank.
Oil and Gas Leases: In September 1988, the Company acquired a 25% revenue
interest in certain unproven oil and gas leases located in Hardeman County,
Texas, for $22,500. In conjunction with the acquisition, the Company agreed
to participate, to the extent of a 33 1/3% working interest, in the
drilling of one test well. Drilling activity on the test well was completed
and initial results indicated that the well would not produce sufficient
quantities
of oil or gas to warrant final completion. During 1996, the Company
determined that it had no further interest in the lease and accordingly,
wrote off the remaining capitalized costs in the project.
Capitalized Costs: Capitalized costs relating to oil and gas producing
activities, as of February 28, 1998 and February 28, 1997 are as follows:
1998 1997
Proved gas properties $ 894,400 $ 894,400
Unproved oil and gas properties - -
Less accumulated depletion (540,037) (505,928)
Net capitalized costs $ 354,363 $ 388,472
(24)
<PAGE>
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, 1997 and February 29, 1996 are as
follows:
1998 1997 1996
Revenues
Natural gas sales $ 216,137 $ 244,666 $ 140,794
Costs and Expenses
Operating costs 103,199 72,576 98,384
General and administrative 2,438 2,992 1,703
Depletion, depreciation and
amortization 34,109 33,988 40,224
139,746 109,556 140,311
Pre-tax net income (loss) 76,391 135,110 483
Income tax expense 26,737 45,937 164
Net income (loss) $ 49,654 $ 89,173 $ 319
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 the Company's
proved gas reserves. Information for gas is presented in million cubic feet
(MMcf) except where otherwise indicated in thousand cubic feet (Mcf).
Production: The Company's net gas production, average sales price and
production cost for the years ended February 28, 1998, February 28, 1997
and February 29, 1996 are as follows:
1998 1997 1996
Net gas production (Mcf) 211,528 211,723 250,568
Average sales price ($/Mcf) $ 1.0218 $ 1.1556 $ 0.5619
Average production cost ($/Mcf) $ 0.4994 $ 0.3569 $ 0.2865
Reserves: On July 1, 1988 the Company acquired certain natural gas
producing properties, (See Note L).The gas reserves are located primarily
in Western Kansas and are based upon the Jerry R. Bergeson & Associates
Petroleum Engineers Reserve Report, dated May 10, 1991 and reserve
information developed internally by the Company. Estimated net quantities
of proved developed and proved undeveloped gas reserves as of February 28,
1998 and February 28, 1997 are as follows:
1998 1997
(MMcf) (MMcf)
Proved developed 2,198 2,422
Proved undeveloped - -
2,198 2,422
Statement of Changes in Quantities of Proved Developed and Undeveloped Gas
Reserves for the years ended February 28, 1998, February 28, 1997 and
February 29, 1996 are as follows:
1998 1997 1996
(MMcf) (MMcf) (MMcf)
Proved reserves - beginning of year 2,422 2,634 2,884
Adjustment to reserves (13) - 1
Production (211) (212) (251)
Proved reserves - end of year 2,198 2,422 2,634
(25)
<PAGE>
The Standardized Measure of Discounted Future Net Cash Flows relating to
Proved Gas Reserves as of February 28, 1998 and February 28, 1997 are as
follows:
1998 1997
($/1000) ($/1000)
Future cash inflows $ 2,246 $ 2,799
Future production costs (1,098) (864)
Future income tax expense (278) (541)
Future net cash flow 870 1,394
Ten percent discount factor (371) (635)
Standardized measure of discounted
future net cash flows $ 499 $ 759
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, 1997 and February 29, 1996 are as follows:
1998 1997 1996
($/1,000) ($/1000) ($/1000)
Standardized measure - beginning
of year $ 759 $ 353 $ 619
Adjustment to reserves (2) - -
Sales, net of production costs
and income taxes (84) (122) (59)
Accretion of discount (including
changes in present value due
to price changes) (174) 528 (207)
Standardized measure - end of year $ 499 $ 759 $ 353
Developed and Undeveloped Acreage: The following summarizes the Company's
gross and net undeveloped and developed acreage at February 28, 1998 and at
February 28, 1997:
1998 1997
Gross Net Gross Net
Developed Acreage
Kansas 11,088 9,040 11,568 9,324
Undeveloped Acreage - - - -
"Gross Acres" refers to the number of acres in which the Company owns a
working interest. "Net Acres" refers to the sum of the fractional working
interest owned by the Company in gross acres.
Other: The Company held interests, at February 28, 1998 and February 28,
1997, in the following wells, none of which are multiple completion wells:
1998 1997
Gross Net Gross Net
Producing gas wells 19 15.49 20 16.12
(26)
<PAGE>
NOTE N - METHANOL PLANT DEVELOPMENT
In July 1989, the Company initiated a project to construct and operate a
250 ton per day methanol production facility in the Denver, Colorado area.
In December 1989, the Company accepted a proposal from General Electric
Capital Corporation ("GECC"), for financing and third party equity
investment for the $26,000,000 facility. In accordance with the proposal,
GECC provided a $24,000,000 construction loan which, upon completion of the
facility, was to be replaced by a $20,000,000 term loan. Ownership of the
facility was to vest in Sand Creek Chemical Limited Partnership ("SCCLP"),
a Colorado limited partnership, with the Company acting as the managing
general partner. The initial partnership equity contributions were to
consist of $4,000,000 in cash to be provided by the GECC limited partner
upon completion of construction, and $2,000,000 in cash, capitalized costs
and equipment provided by the general partner and funded upon closing of
the construction loan. The construction loan was closed effective on May
31, 1990.
The general partner of SCCLP was IC Partners Limited ("IC-PL"), a Colorado
limited partnership, the initial ownership of which consisted of the
Company as the general partner and Public Service Company of Colorado
("PSCO"), as the limited partner. The initial equity contributions to IC-PL
consisted of capitalized costs and equipment valued at $500,000 provided by
the Company and $1,500,000 provided by PSCO. On December 1, 1994, PSCO
sold it's 46% interest in IC-PL, 31.7% to Gas Technologies Group, Inc.,
("GTGI") a wholly owned subsidiary of the Company, and 14.3% to William N.
Hagler, president, director, and stockholder of the Company.
The Company's investment in IC-PL through ICI was recorded at the book
value of the equipment and capitalized costs contributed to the partnership
totalling $250,000, but was valued at $500,000 for purposes of establishing
ownership and profit sharing percentages in IC-PL and SCCLP. No gain was
recognized by the Company on the transaction. The Company's investment in
IC-PL through GTGI was recorded at cost of $200,000.
Construction of the facility was originally scheduled to be completed
during December 1991. However, in late November 1991, amid concerns
regarding the financial stability of a major subcontractor, the general
contractor terminated it's contract with the subcontractor and advised
SCCLP that it was unable to complete the project under the terms of the
existing construction contract with SCCLP. SCCLP advised the general
contractor that it expected full performance under the construction
contract without amendment. On December 11, 1991, the general contractor
discontinued all construction activity on the project. Upon notice to the
general contractor and its bonding company, SCCLP took over construction
activities on the project. Funding for the project continued under the
terms of the construction loan agreement, as amended, to cover additional
costs associated with the general contractor's abandonment of the project.
SCCLP initiated a legal claim against the general contractor claiming
damages for the costs to complete construction of the facility plus delay
penalties and interest in accordance with the construction contract. In
March 1995, SCCLP was awarded a judgement in the net amount of $9,415,559.
In December 1995, SCCLP settled the claim for a cash payment of $7,500,000.
As the cost to complete the facility materially exceeded the budgeted
construction funding and it was uncertain as to the amount and timing of
the receipt of damages from the legal claim against the contractor, SCCLP
and GECC agreed that it was necessary to restructure the existing financing
arrangements for the project. Effective on November 1, 1993, substantially
all of the facility assets were sold to Fleet Bank, formerly Shawmut Bank
Connecticut, for $34,600,000 who then leased the facility back to SCCLP
under a 15 year operating lease. The sale transaction resulted in a loss
to SCCLP of approximately $7,578,000. The proceeds from the sale were
applied entirely to outstanding construction debt owed to GECC.
(27)
<PAGE>
Immediately prior to the sale to Fleet, GECC transferred its limited
partnership interest in SCCLP to San Juan Holdings, ("SJH"), a Colorado
limited liability corporation owned by William Hagler and Rick Hurt, who
are officers and directors of the Company.
Simultaneous with the sale to Fleet, GECC loaned $7,800,000, non-recourse
term debt to SCCLP, the proceeds of which were applied first to the
remaining construction loan and credit line then outstanding and then
deposited the remainder in a restricted account to be used by SCCLP for
future capacity and safety modifications and such other purposes as may
have been approved by GECC. In addition, GECC provided a $1,000,000 credit
line to SCCLP for the purpose of funding working capital as needed to
operate the facility. Both of the credit facilities were secured by cash,
accounts receivable, inventories, and other property and equipment held by
SCCLP. During 1995 the term loan to GECC was paid in its entirety out of
cash flow from operations and proceeds from the legal settlement.
On October 6, 1997 and effective as of September 1, 1997, IC-LP sold all of
its interest in SCCLP to an unrelated third party and dissolved by
distributing its net assets to its partners. The Company, through its
investments in IC-LP, received cash distributions totaling $178,784 in
conjunction with the dissolution of IC-LP.
The Company has been allocated income and losses from SCCLP through its
investment in IC-LP based on allocation percentages contained in the
partnership agreements. In accordance with the operative sections of the
SCCLP and IC-LP partnership agreements, IC's effective allocation
percentage for distributions and income/loss allocations from SCCLP was
approximately 38% and approximately 60% for allocation of income associated
with SCCLP's receipt of proceeds resulting from the contractor litigation.
GTGI's effective allocation percentage for distributions and income/loss
allocations from SCCLP was approximately 22% and approximately 7% for
allocation of income associated with SCCLP's receipt of proceeds resulting
from the contractor litigation.
The Company's share of income/loss allocations for the fiscal years ended
February 29, 1996, February 28, 1997, and the six months ended August 31,
1997 are as follows:
INCOME (LOSS) FROM OPERATIONS
IC & GTGI
Partnership SCCLP IC-LP IC & GTGI Effective
Year Ended Income (Loss) Income (Loss) Income (Loss) Allocation %
February 29, 1996 (2,699,032) (1,889,322) (1,619,420) 60.0%
February 28, 1997 (2,245,397) (1,571,778) (1,347,238) 60.0%
August 31, 1997 176,906 123,821 106,130 60.0%
INCOME (LOSS) FROM SALE OF ASSETS AND LEGAL SETTLEMENT
IC & GTGI
Partnership SCCLP IC-LP IC & GTGI Effective
Year Ended Income (Loss) Income (Loss) Income (Loss) Allocation %
February 29, 1996 6,346,570 4,442,599 4,235,574 66.7%
February 28, 1997 - - - -
August 31, 1997 - (1,313,623) (913,530) 70.0%
(28)
<PAGE>
Changes in the Company's investment in IC-LP, accounted for using the
equity method, for the three most recent fiscal years is as follows:
Investment Cash
Fiscal Beginning Income (Loss) Investment Investment
Year Ended of Year Allocations (Distributions) End of Year
(1) (2)
IC - General Partner:
February 29, 1996 - 1,156,590 (1) (22,244) 1,134,346
February 28, 1997 1,134,346 (848,760) (267,607) 17,979
February 28, 1998 17,979 94,674 (112,653) -
GTGI - Limited Partner:
February 29, 1996 1,188,548 (126,854) (395,310) 666,384
February 28, 1997 666,384 (498,478) (51,222) 116,684
February 28, 1998 116,684 (50,553) (66,131) -
(1) Total losses allocated to the General Partner through the year ended
February 28, 1994 totaled $4,774,218. The allocated losses recognized in
1994 represented only allocated losses to the extent of its basis in the
investment. Income allocated to IC for the year ended February 28, 1995
totaled $2,924,733. The remaining unrecognized loss of $1,599,385 as of
February 28, 1995 was carried forward and utilized to offset allocations of
income from the legal settlement of $3,776,209 in 1996. The net amount of
income allocations recognized for 1996 includes an allocated operating loss
of $1,020,234. The net amount of income allocations recognized in 1998
include $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 to partners were restricted until such time as the
note payable to GECC was fully paid and cash reserves for future plant
rental payments were established at contractually established levels.
However, cash distributions have been made to partners to the extent that
income allocations resulted in taxable income to individual partners. The
Company received cash distributions for estimated income tax liabilities
for income allocations of $318,829 in 1997 and $417,534 in 1996. Included
with the $178,784 liquidating distribution received from IC-PL in 1998 was
$28,822 distributed by SCCLP for estimated tax liabilities through August
31, 1997.
Although the Company owned a greater than 50% ownership in IC-PL through
its wholly owned subsidiaries, management determined that control did not
rest with the Company and therefore IC-PL had not been consolidated with
the Company's financial statements.
Financial statements for IC-LP consist only of its investment in SCCLP and
specific disclosure herein is not considered necessary.
Condensed balance sheet information for SCCLP as of August 31, 1997,
February 28, 1997, and February 28, 1996 is as follows:
August February February
1997 1997 1996
(Audited)(1) (Audited) (Audited)
$/1000 $/1000 $/1000
Current assets $ 2,171 $ 2,381 $ 5,100
Property, plant and equipment
(net) 437 461 433
Other assets (net) 219 229 250
Total Assets $ 2,827 $ 3,071 $ 5,783
(29)
<PAGE>
Current liabilities $ 1,620 $ 1,993 $ 1,614
Long-term debt (net of current
portion) - - -
Other liabilities - - -
Partners' capital (deficit) 1,207 1,078 4,169
Total liabilities and partners'
capital $ 2,827 $ 3,071 $ 5,783
Condensed results of operations for SCCLP for the six months ended August
31, 1997, and the years ended February 28, 1997, and February 29, 1996, is
as follows:
August 31, February 28, February 29,
1997 1997 1996
(Audited)(1) (Audited) (Audited)
$/1000 $/1000 $/1000
Revenues $ 6,184 $ 9,847 $ 7,767
Costs and expenses (5,995) (12,116) (10,192)
Interest expense (net) 21 89 (72)
Depreciation and amortization (33) (65) (202)
Income (loss) from operations 177 (2,245) (2,699)
Extraordinary item - - 6,347
Net income (loss) $ 177 $ (2,245) $ 3,648
(1) A separately issued audit report has not been prepared for SCCLP as of
August 31, 1997 and for the six month period then ended, however, the
information has been audited for the inclusion in these notes to the
Company's financial statements.
NOTE O - INVESTMENT IN CHATFIELD DEAN
On January 15, 1996 the Company executed a Letter of Intent with Chatfield
Dean & Co., ("Chad") setting out the terms of a proposed acquisition, by
the Company, of all of the outstanding Common and Preferred stock of Chad.
On July 20, 1996, the Company and Chad executed a definitive merger
agreement. On February 10, 1997, the Company filed a Form S-4 with the
Securities and Exchange Commission ("SEC") 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. There are no
current plans to renegotiate the merger agreement and the Form S-4 was
withdrawn.
Investment in Chatfield Dean: On January 13, 1996, the Company acquired
50,000 shares of Chatfield Dean & Co., Inc., (Chatfield Dean) Series B 7%
commutative preferred stock directly from Chatfield Dean for $500,000. The
shares have not been registered with the SEC 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, the Company 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 the Company exercised all of the warrants and received
50,000 shares of Chatfield Dean common stock for $500.
On March 8, 1996, the Company 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 SEC and
are therefore restricted. The shares are convertible into Chatfield Dean
common stock at any time at the option of the Company 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 $1
per share plus $1 per share for each year after issuance up to a maximum of
$15 per share. During the fiscal year ended February 28, 1997, the Company
received $1,517 in dividends on this investment. No dividends were received
during the fiscal year ended February 28, 1998.
(30)
<PAGE>
Both the 50,000 shares of Series B and the 10,000 shares of Series A
preferred stock were, under the now terminated merger agreement, to be sold
to a third party prior to closing of the merger. In the absence of the
agreement, the Company, through the assistance of Chad, intends to seek 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. However, it is believed
that the shares can ultimately be sold or disposed of without material loss
to the Company and in the opinion of Management, the establishment of a
valuation allowance is not necessary at this time.
NOTE P - FINANCIAL ACCOUNTING STANDARDS
The following new accounting standards will impact the Company in future
reporting periods:
Transfer and Servicing of Financial Assets and Extinguishment of
Liabilities: The Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 125, "Transfer and Servicing of
Financial Assets and Extinguishment of Liabilities." This Statement
requires that transferred assets could be recognized only when control is
surrendered, rather than when risks and rewards related to the asset are
passed to another party. A liability would be extinguished when the
creditor no longer has ultimate responsibility for the liability. In
December of 1996, the FASB issued SFAS No. 127, "Deferral of the Effective
Date of Certain Provisions of SFAS No. 125." It defers for one year the
effective date of certain provisions of SFAS 125. This Statement has not
had and is not anticipated to have a material impact on the Company's
financial condition.
Earnings per Share: Recently the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards No. 128, "Earnings per
Share." It simplifies the standards for computing earnings per share,
superseding the standards previously found in Opinion 15. It replaces the
presentation of primary earnings per share with a presentation of basic
earnings per share. It also requires dual presentation of basic and
diluted earnings per share on the face of the income statement for all
entities with complex capital structures and requires a reconciliation of
the numerator and denominator of the basic earnings per share computation
to the numerator and denominator of the earnings per share computation.
This Statement was effective for the Company's financial statements issued
as of February 28, 1998 and did not have a material effect on previous
earnings per share presentations.
Disclosure of information about an Entity's Capital Structure: The
Financial Accounting Standards Board recently issued Statement of Financial
Accounting Standards No. 129, "Disclosure of Information about an Entity's
Capital Structure." This Statement applies to all entities. Its
requirements are a consolidation of those found in APB Opinions 10 and 15,
and Statement of Financial Accounting Standards No. 47, and it eliminates
the exemption of non public entities from certain disclosure requirements.
This Statement will affect the financial statements issued by the Company
after December 15, 1997.
(31)
<PAGE>
Reporting Comprehensive Income: In June 1997, the FASB issued SFAS No.
130, "Reporting Comprehensive Income". This Statement establishes
standards for reporting and display of comprehensive income on its
components (revenues, expenses, gains and losses). Comprehensive income is
defined as the change in equity of a business enterprise, during a period,
from transactions and other events and circumstances from nonowner sources.
The Statement requires that entities classify items of other comprehensive
income by their nature in a financial statement and display the accumulated
balance of other comprehensive income separately from retained earnings and
additional paid-in-capital in the equity section of a statement of
financial position. This Statement is effective for fiscal years beginning
after December 31, 1997.
Disclosures About Segments: Also in June 1997, the FASB issued SFAS no.
131, "Disclosures About Segments of an Enterprise and Related Information."
This Statement establishes standards for the way that public entities
report information about operating segments in annual financial statements
and requires that selected information about operating segments be reported
in interim financial reports as well. It also establishes standards for
related disclosures about products and services, geographic areas and major
customers. This Statement is effective for fiscal years beginning after
December 31, 1997.
NOTE Q - STARLICON MERGER
On February 21, 1998 the Company entered into an agreement ("the
Agreement") with Starlicon Group Inc. ("SGI") to acquire 100% of the
outstanding stock of privately held Starlicon International Corporation
("SI"). Based in Fremont, California, SI markets computer peripherals
under the Paradise brand name as well as certain generic computer
components. The effective date of the transaction was to have been
November 30, 1997.
A preliminary audit of SI's books as of November 30, 1997 revealed
that SI failed to meet certain financial criteria. As a result, the
Company notified SGI and SI on May 20, 1998 of its unilateral rescission of
the transaction. In addition, on May 21, 1998, the Company filed a
Complaint in the United States District Court for the Central District of
California entitled Unico, Inc. v. Starlicon Group, Inc., Starlicon
International Corporation, et al, Case No. CV 98-3990 DT (Shx), seeking the
Court's confirmation of the Company's unilateral rescission.
The parties have subsequently agreed that the Agreement executed on
February 21, 1998 did not close and are presently negotiating a novation
agreement which, among other things, would result in a subsequent effective
date for the merger. In connection with these negotiations, the Company has
agreed to withdraw its Complaint upon execution of the novation agreement.
(32)
<PAGE>
Corporate Information
QUARTERLY STOCK PRICES
The Company's $0.20 par
value common stock is listed on
the Nasdaq Stock Market
(SmallCap) under the symbol
UNRC. On February 28, 1998,
there were approximately 444
beneficial owners of the
Company's common stock,
including approximately 374
round lot holders with
beneficial interest of 100 or
more shares. No dividends have
been declared on the Company's
common stock and there are no
plans to pay dividends in the
foreseeable future. The
quarterly range of the high and
the low trade prices for the
Company's common stock for the
most recent two fiscal years,
is as follows:
Trade Prices
Quarter Ended High Low
February 29, 19963.000 2.125
May 31, 1996 4.125 2.500
August 31, 1996 3.500 2.250
November 30, 19963.500 2.000
February 28, 19972.500 1.750
May 31, 1997 2.250 1.750
August 31, 1997 2.938 1.500
November 30, 19971.875 1.250
February 28, 19983.250 1.000
FORM 10-K
A copy of the Company's
Annual Report on Form 10-K, as
filed with the Securities and
Exchange Commission, is
available upon request. Please
direct your request to Rick L.
Hurt, Secretary, at the
Corporate office.
<PAGE>
OFFICERS AND DIRECTORS
William N. Hagler
Chairman of the Board,
President and
Chief Executive Officer
Rick L. Hurt
Secretary and Treasurer
Thois Chatterley
Vice President,
Intermountain Refining Co.,
Inc.
William Hickey
Director
Joe G. Watson
Director
COUNSEL
Thad H. Turk
P.O. Box 27560
Albuquerque, New Mexico 87125
AUDITORS
Atkinson & Co., Ltd.
P.O. Box 25246
Albuquerque, New Mexico 87125
TRANSFER AGENT
Corporate Stock Transfer,
Inc.
Republic Plaza
370 17th Street, Suite 2350
Denver, Colorado 80202-4614
CORPORATE OFFICES
1921 Bloomfield Blvd.
P.O. Box 35
Farmington, New Mexico 87499
(INSIDE FRONT COVER)
<PAGE>
EXHIBIT 22
LIST OF SUBSIDIARIES
OF
UNICO, INC.
NAME OF SUBSIDIARY STATE OF INCORPORATION
1. Intermountain Refining Co., Inc. New Mexico
2. Intermountain Chemical, Inc. (1) Colorado
3. Gas Technologies Group, Inc. (1) Colorado
The Registrant has three subsidiaries. Each does business only under
their individual corporate name.
(1) Effective as of February 28, 1998 the Registrant liquidated its
wholly owned subsidiaries Intermountain Chemical Inc. and Gas
Technologies, Inc. by transferring their remaining assets to itself,
and then dissolved the two subsidiaries.
(14)
<PAGE>
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