<PAGE>
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: Commission File Number
December 31, 1995 0-18049
NEROX ENERGY CORPORATION
Nevada 91-1317131
(State of Incorporation) (I.R.S. Employer ID No.)
846 West Foothill Blvd., Suite Y
Upland, California 91786-3770
Registrant's telephone number, including area code: (909) 981-3217
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class Name of Each Exchange on Which Registered
- - ------------------- -----------------------------------------
None None
Securities registered pursuant to Section 12(g) of the Act:
Title of Class
Common Stock ($0.02)
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 pursuant 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 statement
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.[ ]
The aggregate market value of the voting stock held by non-affiliates of
the Registrant is set forth in Part II, Item 5(B), page 7.
As of December 31, 1995, the Company has 1,400,000 shares of its Common
Stock issued and outstanding.
The Auditors' Report and financials are attached hereto.
The Annual Proxy Statement is incorporated by reference herein and attached
hereto as Exhibit A.
<PAGE>
PART I
ITEM 1. BUSINESS.
INCORPORATION. The Registrant was incorporated in the State of Nevada in
-------------
1985 for the purpose of raising capital and acquiring an interest in a business
opportunity.
AMENDMENT TO ARTICLES OF INCORPORATION. At a special meeting of the Board
--------------------------------------
of Directors, held on April 20, 1995, a resolution was unanimously adopted
ratifying an Amendment of the Articles of Incorporation reducing the number of
authorized shares from 50,000,000 to 2,500,000 and increasing the par value of
common shares from $.001 to $.02. In addition, two classes of preferred stock
were authorized: 100,000 Class-A, Preferred, convertible after one year, non-
voting, and 100,000 Class-B, Preferred, non-convertible, non-voting shares. The
preferred shares have no par value.
Pursuant to Nevada General Corporation Law and the By-laws of the Company,
the Board of Directors of the Company amended the Company's Certificate of
Incorporation in order to effectuate a reverse stock split of one for 35.714
(1:35.714), filed by the office of the Nevada Secretary of State on June 22,
1995, and effected on September 1,1995.
TRANSFER AGENT. The Transfer Agent and Registrar of the Company's common
--------------
stock is Chemical Mellon Trust Company of California, 300 South Grand Avenue,
Los Angeles, California 90071. The CUSIP assigned to the Company's common stock
is 640811-10. The stock is currently trading.
NATURE OF BUSINESS. The company's primary activities throughout the past
------------------
two years have been directed towards the development and marketing of oil and
natural gas reserves. The company currently holds production interests in 13
wells, spanning four states including Alaska.
On December 28, 1995, the company acquired a 100% interest in the
Jonesville Coal Mine from Placer Dome, USA, Ltd. for approximately $1,020,000.
In addition, the Company acquired mining equipment, leases and permits from
Hobbs Industries, Inc. ("Hobbs") in exchange for a 19% interest in the company's
previously wholly owned subsidiary, Nerox Power Systems, Inc. ("NPSI"). The
assets received were valued at $1,355,000. Subsequently, Hobbs has attempted to
avoid the contract and a lawsuit has been filed. See Item 3. Legal Proceedings.
Certified reserve analysis studies by both the United States Geological
Survey and independent consultants value the coal reserves between 37,000,000 to
42,000,000 metric tons of recoverable, high grade bituminous Class "B" coal.
NPSI has developed a mine plan which will commence in July, 1996, that will
produce between 125,000 - 130,000 tons of coal in 1996. Continued development
plans reflect projected production levels of 300,000 tpy in 1997 and between
450,000 - 500,000 tpy in 1998. Based on this production schedule, the reserve
life index at maximum productivity is over 50 years.
Under a five year contract with Glencore Ltd. (a major Pacific Rim
commodities broker) signed in mid-1995, Glencore has agreed to purchase all the
coal NPSI can produce.
INVESTMENT PROPERTIES:
---------------------
The current oil and gas producing properties are as follows:
Proved Developed Producing Reserves: 13 Units
Proved Developed Non-Producing Reserves: 6 Offsets
Proved Undeveloped Reserves: 4 Leases
2
<PAGE>
<TABLE>
<CAPTION>
WELL LOCATION TYPE OPERATOR
<S> <C> <C> <C>
LeSage #1 Clairborne Parish, LA Gas/oil Pride Exploration Corp.
LeSage #1A Clairborne Parish, LA Gas/oil Pride Exploration Corp.
Ellerbe #1 Caddo Parish, LA Gas Pride Exploration Corp.
Herold #13-1 Caddo Parish, LA Gas Pride Exploration Corp.
Herold-Augers #1 Caddo Parish, LA Gas Pride Exploration Corp.
Rollins #1A Caddo Parish, LA Gas Pride Exploration Corp.
Montgomery-Heirs #1 Madison Parish, LA Gas Pride Exploration Corp.
Montgomery-Heirs #2 Madison Parish, LA Gas Pride Exploration Corp.
Hofstetter #1 Duvall County, TX Oil ENRON
Maxted 1 Kimball County, NEB Oil EOTT Energy Corp.
Maxted 3 Kimball County, NEB Oil EOTT Energy Corp.
W. McArthur
River #1A Cook Inlet, Alaska Gas/oil Stewart Petroleum
Simon Bldg. &
Development Caddo Parish, LA Gas Pride Exploration Corp.
<CAPTION>
1995 1994 1993
Oil Gas Oil Gas Oil Gas
--- --- --- --- --- ---
<S> <C> <C> <C> <C> <C> <C>
Average Sales price: $14.20 $1.09 $15.20 $1.35 $16.10 $2.03
</TABLE>
REVENUES. The Registrant's revenues are derived from its proportionate
--------
interest in domestic oil and gas producing properties. The Registrant is not
the operator of any wells in which it owns an interest. Additionally, the
majority of near term revenues and cash flows will be derived from the
Jonesville coal mine operations.
COMPETITIVE CONDITIONS. The oil and gas industry is intensely competitive
----------------------
in all of its phases and competes with other industries in supplying the energy
and fuel requirements of industrial, commercial and individual consumers. The
principal method of competition in the production of oil and gas is the
successful location and acquisition of properties which produce commercially
profitable quantities of oil and gas. While it is not possible for the
Registrant to state accurately its position in the oil and gas industry, the
Registrant competes with numerous other oil and gas operations, independent oil
companies and major integrated oil companies, many of which have substantially
greater financial and other resources than the Registrant. The Registrant's oil
and gas operations may be adversely affected by the fact that its assets and
available personnel may not be adequate to permit it to compete with larger
companies in the acquisition and development of properties. Coal operation
activities are estimated to contribute over 60% of the Company's future revenues
and earnings stream. The Company's operational activities, however, have yet to
commence and therefore, are subject to possible working capital constraints,
start up delays, and permitting approval by state agencies.
REGULATION OF PRODUCTION OPERATION. The production of oil and gas is
----------------------------------
subject to extensive federal and state laws, rules, orders, and regulations
governing a wide variety of matters, including the drilling and spacing of
wells, allowable rates of production, prevention of waste and pollution, and
protection of the environment. Although the particular regulations applicable
in each state in which operations are conducted vary, such regulations are
generally designed to ensure that oil and gas operations are carried out in a
safe and efficient manner and to ensure that similarly-situated operators are
provided with reasonable opportunities to produce their respective fair shares
of available oil and gas reserves. In addition to the direct costs borne in
complying with such regulations, operations and revenues may be impacted to the
extent that certain regulations limit oil and gas production to below economic
levels.
3
<PAGE>
REGULATION OF SALES AND TRANSPORTATION OF NATURAL GAS. The sale of natural
-----------------------------------------------------
gas may be subject to both federal and state laws and regulations, including,
but not limited to, the Natural Gas Act of 1938 (the "NGA"), the Natural Gas
Policy Act of 1978 (the "NGPA"), and regulations promulgated by the Federal
Energy Regulatory Commission (the "FERC") under the NGA, the NGPA, and other
statutes. The provisions of the NGA and NGPA, as well as the regulations
thereunder, are complex and affect all who produce, resell, transport, or
purchase natural gas, including the Company. Although virtually all of the
Company's gas production is not subject to price regulation, the NGA, NGPA, and
FERC regulations affect the availability of gas transportation services and the
ability of gas consumers to continue to purchase or use gas at current levels.
It is anticipated that the Company will receive current market value for its
production.
FUTURE LEGISLATION. Legislation affecting the oil and gas industry is under
------------------
constant review for amendment or expansion. Because such laws and regulations
are frequently amended or reinterpreted, management is unable to predict what
additional energy legislation may be proposed or enacted or the future cost and
impact of complying with existing or future regulations.
REGULATION OF THE ENVIRONMENT. The Company's operations are subject to
-----------------------------
various federal and state laws and regulations designed to protect the
environment. Compliance with such laws and regulations, together with all
penalties resulting from noncompliance therewith, may increase the cost of
operations or may affect the ability of the Company to complete, in a timely
fashion, existing or future activities. Management anticipates that various
local, state, and federal environmental control agencies will have an increasing
impact on the Company's operations.
INSURANCE COVERAGE. The Company is subject to all of the risks inherent in
------------------
the exploration for and production of oil and gas including blowouts, pollution,
fires, and other casualties. The Company maintains insurance coverage as is
customary for entities of a similar size engaged in operations similar to that
of the Company, but losses can occur from uninsurable risks or in amounts in
excess of existing insurance coverage. The occurrence of an event which is not
fully covered by insurance could have a material adverse effect on the Company's
financial position and results of operations.
EMPLOYEES. At May 31, 1996, the Registrant had four salaried employees.
---------
Currently, the Registrant is charged for office space and clerical staff time
through the offices of Nicholas E. Ross, President and Chairman of the Board.
ITEM 2. PROPERTIES.
THE WEST MCARTHUR RIVER OIL PROPERTY. The West McArthur River Oil Field
------------------------------------
(WMRF) abuts the western shore of the Cook Inlet Basin in Alaska. The Cook
Inlet has been the site of prolific oil and gas production since the early 1960s
when a reservoir in excess of 600,000,000 barrels of oil was discovered and
produced. The Stewart Petroleum Co. drilled exploratory well in the WMRF. A
discovery was made and the well was completed in December 1992. The discovery,
WMRF Unit #1, initially produced approximately 1,500 barrels per day (bpd) until
mechanical difficulties during its bonding process, which allowed the intrusion
of water, required that the well be reworked and squeezed. The 1995 production
was limited to 75,447 barrels due to the reworking and redrilling process.
Since early 1996 the well has been fully operational with an average daily
production rate of 1,700 barrels. The Company owns a 5% working interest in
this well.
OTHER OIL AND GAS PROPERTIES. The remaining twelve producing wells were
----------------------------
originally drilled by operators in joint ventures with Ross Production Company,
an affiliate of the Company. Subsequently, the Company acquired its interest in
these properties from its affiliate and associated investors in exchange for
common stock.
JONESVILLE COAL MINE. A new property being developed is the 1410 acre
--------------------
Jonesville Coal Mine, which is 81% owned by NPSI. NPSI anticipates opening the
Jonesville coal mine and commencing delivery of coal in the second half of 1996.
4
<PAGE>
ITEM 3. LEGAL PROCEEDINGS
On August 10, 1995 NPSI entered into an agreement with Hobbs to purchase
all interest of Hobbs in a coal mine located near Sutton, Alaska and all mining
equipment, supplies and other property used or useful in connection with the
coal mine. In an effort to avoid the agreement Hobbs filed a lawsuit against
NPSI and others in December 1995 seeking to avoid the August 10, 1995 contract
and several million dollars in damages. To date, the court has made several
preliminary rulings, all favorable to NPSI. It is counsel's opinion that this
lawsuit has no merit and there is virtually no chance that plaintiffs will
succeed in their efforts to invalidate the agreement or recover damages. NPSI
has taken a very aggressive posture in the lawsuit and will continue to
vigorously contest all allegations and efforts by plaintiffs to obtain relief.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
SUBMITTED TO A VOTE. The following matters were submitted to a vote of the
-------------------
Registrant's security holders at the Annual Meeting of the Shareholders,
December 3, 1995:
1. Election of Directors of the Registrant. (See Proxy Statement).
2. Ratification of Saddington.Cacciamatta, CPAs as independent
auditors for the fiscal year ended December 31, 1994.
3. Ratification of Saddington.Cacciamatta, CPAs as independent
auditors for the fiscal year ended December 31, 1995.
PROXY STATEMENT/ANNUAL REPORT. See the Annual Proxy Statement attached
hereto as Exhibit "A".
PART II
ITEM 5. MARKET FOR COMPANY'S COMMON EQUITY AND RELATED STOCK-HOLDER MATTERS
HIGH AND LOW BID. The following table sets forth the high and low bid
----------------
prices of the Common Stock of the Registrant in the over-the-counter market (OTC
Bulletin Board) in 1995 and 1994. The information was provided by the market-
maker in the Registrant's stock and statistical reports by the NASD. Such over-
the-counter market quotations reflect inter-dealer prices, without retail mark-
up, mark-down or commission and may not necessarily represent actual
transactions. The average high and low closing prices, for the last two fiscal
years were as follows:
<TABLE>
<S> <C>
1995 High $6.50
1995 Low $0.71
1994 High $7.86
1994 Low $2.33
</TABLE>
HOLDERS. At the date of this filing there are approximately 420 holders of
-------
the Common Stock of the Registrant.
DIVIDENDS. The Company has paid no dividends on its common stock and for
---------
the foreseeable future has no plans to pay dividends. In conjunction with the
issuance of its Class-A preferred shares in 1995, the Company accrued dividends
of $7,494.
5
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
The following financial data should be read in conjunction with the
financial statements of the Registrant and the related notes and Item 7.
<TABLE>
<CAPTION>
1995 1994 1993 1992 1991
------------ ------------- ------------ ----------- -------------
<S> <C> <C> <C> <C> <C>
Operating Revenues $ 220,833 $ 287,954 $ 518,566 $ 138,304 $ 1,569
Net (loss) ($ 864,972) ($1,623,306) ($ 151,896) ($ 40,215) ($1,336,478)
Total assets $6,104,544 $4,201,180 $1,845,733 $2,037,498 $ 381,813
Long Term Debt $ 0 $ 0 $ 0 $ 0 $ 0
Net (loss) per
common share ($ .63) ($ 1.30) ($ .14) ($ .04) ($ 1.79)
Net cash dividends
declared per
common share $ .00 $ .00 $ .00 $ .00 $ .00
</TABLE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS. The following review of operations should be read
---------------------
in conjunction with the Consolidated Financial Statements and the Notes thereto
included elsewhere in this document.
1995 COMPARED TO 1994. Total revenues from oil and gas sales for 1995
---------------------
were $220,833, a decrease of 23% from $287,954 in 1994. The decrease is due to
production of fewer barrels of oil from wells in which the Company has working
interests, 97,300 barrels in 1995 compared to 335,600 barrels in 1994, partially
offset by an increase in the amount of natural gas produced from wells in which
the Company has working interests, 188,800 mcfs in 1995 as compared to 82,440 in
1994. Oil production declined because many of the oil producing properties are
nearing the end of their productive lives. Some of these wells were shut-in
during the year awaiting "behind the pipe" production. In addition, the average
sales price of oil and natural gas continued to decline in 1995.
Oil and gas production costs have increased when compared to revenues
produced due to significant well re-work, repairs and re-drilling. Mining costs
are new in 1995 and reflect costs to get the Jonesville coal mine ready for
operation. General and administrative expenses increased by 218% from $174,690
in 1994 to $556,512 in 1995. Of the total general and administrative expenses
$342,397 can be attributed to NPSI which was reactivated this year to run the
coal operation. The remaining general and administrative expenses of $214,115
for Nerox increased mostly due to additional legal fees and other fees
associated with the reverse stock split and a private placement of preferred
shares. Depletion decreased from $275,478 in 1994 to $102,814 in 1995 due to a
decrease in equivalent barrels produced plus a decrease in the oil and gas
property cost from the impairment allowance of $1,172,510 recorded in 1994.
Reserves reports in 1995 were more favorable as the WMF#1A had been drilled and
was on-line in 1995 whereas its production was still in doubt in late 1994.
Interest costs increased from $7,531 to $68,388 as the Company has increasingly
had to rely on borrowings to finance its operations. The minority interest in
the loss of NPSI occurred due to the sale of 19% of NPSI to Hobbs.
1994 COMPARED TO 1993. Total revenues from oil and gas sales for 1994
---------------------
were $287,954, a decrease of 45% from $518,566 in 1993. This decrease is due to
overall declining prices for oil and gas and the fact that some wells were shut
in for service, maintenance, "frac jobs" and acidism. Periodic "shut ins" are
common in the industry,
6
<PAGE>
and during such times, little or no production occurs. The additional
maintenance procedures described above caused production costs to increase to
$280,251 in 1994 from $197,052 in 1993.
New reserve reports indicated a severe decline in estimated future net cash
flows from the 1993 report, causing the Company to record an impairment
allowance of $1,172,510 in 1994. The overall decline in prices for oil and gas
played a significant role in this decline as did erratic production due to shut-
in wells.
General and administrative expenses decreased by $75,020 to $174,690 in
1994 from $249,710 in 1993. This represents continued efforts to decrease costs
and streamline operations. Specifically, legal and accounting fees decreased by
over $46,000. Also, contributing to the decrease were expenses incurred in 1993,
such as fees of $31,000 to outside counsel for a private placement memorandum,
that were not repeated in 1994.
LIQUIDITY AND CAPITAL RESOURCES.
-------------------------------
At December 31, 1995, the Company had current liabilities totaling
$1,610,545 and current assets of $116,137 for a working capital deficit of
$1,494,408 due primarily to operating losses and short-term borrowings to
purchase and develop the Jonesville Coal Mine. Management is seeking additional
equity financing for the short-term until coal production commences. In
addition, the Company's president has agreed to accept preferred stock in lieu
of the $826,390 of notes payable due to him and affiliates controlled by him.
INFLATION. Inflation during the three years ended December 31, 1995 has
---------
had little effect on the Company's capital costs and results of operations.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Auditors' Report and financials are attached hereto as pages 12 to 26.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
<TABLE>
<CAPTION>
BOARD OF DIRECTORS
------------------
Name Age Position with the Company Since
---------------- --- -------------------------------- -----
<S> <C> <C> <C>
Nicholas E. Ross 65 Chairman, President, CEO and CFO 1992
William D. Artus 47 Director 1992
Joe Brock 65 Director 1992
Jack Utter 59 Director 1995
Leroy Studer 66 Director (resigned December 20, 1995) 1995
</TABLE>
Nicholas E. Ross, from 1972 to 1994 has been engaged in the acquisition of
oil and gas leases and has participated in the drilling of over 300 oil and gas
properties.
William Artus is the managing partner of Artus & Choquette, a law firm in
Anchorage, Alaska.
Joe Brock is a retired business-owner. Mr. Brock also serves on the Board
of Directors of another public company.
7
<PAGE>
Jack Utter has been counsel to several major companies. He was general
counsel and a principal in Tommy Lasorda Foods, Inc., where he was instrumental
in taking this company public. In addition, Mr. Utter represented Discovery
Capital Corporation, a public corporation, Cardono Square, Ltd., a 60,000 sq.
ft. commercial office building, (built via public sale of securities) and
Meridian Hotels, an international hotel management company. Mr. Utter represents
national developers as corporate and securities counsel.
Leroy Studer is a CPA with his own firm.
EXECUTIVE OFFICERS. Nicholas E. Ross is President and Chief Financial
------------------
Officer. Raleigh Utter is Secretary.
ITEM 11. EXECUTIVE COMPENSATION
During the fiscal year ended December 31, 1995, none of the Officers or
Directors of the Company had compensation with the exception of payments to
certain directors for professional services as described in Item 13.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information as of December 31, 1995
as to each person who is known to the Registrant to be the beneficial owner of
more than 5% of the common stock of the Registrant, and as to the security
ownership of each Director of the Registrant and all officers and Directors of
the Registrant as a group. Except where specifically noted, each person listed
in the table has sole voting and investment power in the shares listed.
<TABLE>
<CAPTION>
Name and Address Number of Shares Percent of
of Beneficial Owner(1) Beneficially Owned Shares Outstanding
---------------------- ------------------ -------------------
<S> <C> <C>
Ross Production Company, Inc. 307,219 21.94%
846 West Foothill Blvd., Suite Y
Upland, California 91786
William Artus 53,000 3.78%
629 L. Street, Suite 101
Anchorage, Alaska 99501
Joe Brock 14,000 1.00%
846 West Foothill Blvd., Suite Y
Upland, California 91786
Leroy Studer 12,240 .87%
1300 Quail Street, Suite 108
Newport Beach, California 92660
All officers and directors as a group 386,459 27.59%
</TABLE>
(1) A person is deemed to be the beneficial owner of securities that can be
acquired by such person within 60 days from December 31, 1995 upon the exercise
of warrants or options. Each beneficial owner's percentage ownership is
determined by assuming that options or warrants that are held by such person
(but not those held by any other person) and which are exercisable within 60
days from December 31, 1995 have been exercised.
8
<PAGE>
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
PAYMENTS TO DIRECTORS FOR PROFESSIONAL SERVICES. The law firm of
-----------------------------------------------
Artus & Choquette, of which Mr. Artus, a Company Director, is a partner,
received compensation in the form of legal fees for services rendered to the
Company in 1995 of $16,066.
Mr. Utter, a Company Director, received compensation in the form of legal
fees for services rendered to the Company in 1995, 1994 and 1993 of $46,289,
$37,428 and $45,424, respectively.
Mr. Leroy Studer, a shareholder and former Company Director, received
compensation in the form of accounting fees for services rendered to the Company
in 1995, 1994 and 1993 of $46,322, $29,547 and $53,519, respectively.
The Company has contracted with Pride Exploration, Inc. ("Pride") to
operate certain of its oil and gas properties. Mr. John C. Grunau, Pride's
President and a former Company Director, received compensation in the form of
operator fees for services rendered to the Company in 1994 and 1993 of $27,402
and $38,765.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
EXHIBIT A - 1995 PROXY STATEMENT
EXHIBIT 23.1 - CONSENT OF AUDITORS
EXHIBIT 27 - FINANCIAL DATA SCHEDULE
9
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
Dated: June 18, 1996 NEROX ENERGY CORPORATION
By: /s/ Nicholas E. Ross
----------------------------------
Nicholas E. Ross, Chairman of the Board
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.
Dated: June 18, 1996 /s/ Nicholas E. Ross
----------------------------------
Nicholas E. Ross, President and
Chief Executive Officer
Dated: June 18, 1996 /s/ Nicholas E. Ross
----------------------------------
Nicholas E. Ross, Chairman of the
Board
Dated: June 18, 1996 /s/ Jack Utter
----------------------------------
Jack Utter, Director
10
<PAGE>
NEROX ENERGY CORPORATION AND SUBSIDIARY
Consolidated Financial Statements
December 31, 1995 and 1994
<PAGE>
REPORT OF INDEPENDENT AUDITORS
------------------------------
The Board of Directors and Stockholders
Nerox Energy Corporation
We have audited the accompanying consolidated balance sheets of Nerox Energy
Corporation and Subsidiary (the "Company") as of December 31, 1995 and 1994, and
the related consolidated statements of operations, stockholders' equity and cash
flows for the years then ended. These consolidated 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. The financial
statements of Nerox Energy Corporation for the year ended December 31, 1993 were
audited by other auditors who have ceased operations and whose report dated
March 24, 1994, expressed an unqualified opinion on those statements.
We conducted our audits in accordance with generally accepted auditing
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 the Company as of
December 31, 1995 and 1994 and the consolidated results of their operations and
cash flows for the years then ended in conformity with generally accepted
accounting principles.
The accompanying financial statements have been prepared assuming that the
company will continue as a going concern. The Company incurred substantial
losses in 1995 and 1994 and has a large working capital deficiency at December
31, 1995. These factors raise substantial doubt about the Company's ability to
continue as a going concern. The financial statements do not include any
adjustments relating to the recoverability and classification of recorded
assets, or the amounts and classification of liabilities that might be necessary
in the event the Company cannot continue in existence.
/s/ Saddington . Cacciamatta
SADDINGTON.CACCIAMATTA
May 17, 1996
Irvine, California
<PAGE>
NEROX ENERGY CORPORATION AND SUBSIDIARY
Consolidated Balance Sheets
<TABLE>
<CAPTION>
December 31,
----------------------------
1995 1994
------------ ------------
ASSETS
------
<S> <C> <C>
Current Assets:
Cash $ 66,488 $ 50,486
Other 49,649 17,633
------------ ------------
Total current assets 116,137 68,119
------------ ------------
Property and Equipment, at cost:
Coal mine and related equipment 1,730,094 -
Proved oil and gas properties,
using successful efforts accounting 6,072,936 5,844,870
Less accumulated depletion and an impairment
allowance of $1,172,510 (1,814,623) (1,711,809)
------------ ------------
5,988,407 4,133,061
------------ ------------
$ 6,104,544 $ 4,201,180
============ ============
</TABLE>
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
<TABLE>
<CAPTION>
Current Liabilities:
<S> <C> <C>
Notes payable $ 1,402,333 $ 35,000
Accounts payable 208,212 69,437
----------- ------------
Total current liabilities 1,610,545 104,437
----------- ------------
Commitments and contingencies - -
Minority interest 206,028 -
----------- ------------
Stockholders' Equity:
10% cumulative, non-voting, convertible
preferred stock, no par value, authorized
100,000 shares; issued and outstanding
70,709 shares in 1995 495,000 -
Common stock, par value $.02, authorized
2,500,000 shares; issued and outstanding
1,400,000 and 1,335,738 shares in
1995 and 1994, respectively 28,000 26,715
Additional paid-in capital 8,630,597 7,537,498
Receivable - subsidiary stock issuance (525,690) -
Accumulated deficit (4,339,936) (3,467,470)
----------- ------------
Net stockholders' equity 4,287,971 4,096,743
----------- ------------
$ 6,104,544 $ 4,201,180
=========== ============
</TABLE>
13
<PAGE>
NEROX ENERGY CORPORATION AND SUBSIDIARY
Consolidated Statements of Operations
<TABLE>
<CAPTION>
Year ended December 31
------------------------------------------
1995 1994 1993
----------- ------------ -----------
<S> <C> <C> <C>
Revenues:
Oil and gas sales $ 220,833 $ 287,954 $ 518,566
----------- ------------ -----------
Cost and expenses:
Oil and gas production 220,006 280,251 197,052
Mining 262,704 - -
General and administrative 556,512 174,690 249,710
Depletion 102,814 275,478 212,711
Interest 68,388 7,531 10,189
Impairment allowance - 1,172,510 -
----------- ------------ -----------
1,210,424 1,910,460 669,662
----------- ------------ -----------
Loss before minority interest and
provision for income taxes (989,591) (1,622,506) (151,096)
Minority interest 125,419 - -
----------- ------------ -----------
Loss before provision for income
taxes (864,172) (1,622,506) (151,096)
Provision for income taxes 800 800 800
----------- ------------ -----------
Net loss $ (864,972) $ (1,623,306) $ (151,896)
=========== ============ ===========
Net loss per share $ (.63) $ (1.30) $ (.14)
=========== ============ ===========
</TABLE>
14
<PAGE>
NEROX ENERGY CORPORATION AND SUBSIDIARY
Consolidated Statements of Stockholders' Equity
Years Ended December 31, 1995, 1994 and 1993
<TABLE>
<CAPTION>
10% Convertible
Preferred Stock Common Stock
--------------------- --------------------- Additional
Number Number of Paid-in Accumulated
of shares Amount Shares Amount Capital Receivable Deficit
--------- --------- --------- --------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31,
1992 - $ - 888,447 $ 17,769 $ 3,187,693 $ - $ (1,692,268)
Stock issued for oil
and gas properties
acquired in 1992 - - 171,310 3,426 (3,426) - -
Net loss - - - - - - (151,896)
--------- --------- --------- --------- ------------- ------------- -------------
Balance, December 31,
1993 - - 1,059,757 21,195 3,184,267 - (1,844,164)
Stock issued for oil
and gas properties
acquired in 1992 - - 134,860 2,697 (2,697) - -
Stock issued for oil
and gas properties
acquired - - 108,394 2,168 3,869,030 - -
Stock issued in
settlement of
liabilities - - 32,727 655 486,898 - -
Net loss - - - - - - (1,623,306)
--------- --------- --------- --------- ------------- ------------- -------------
Balance, December 31,
1994 - - 1,335,738 26,715 7,537,498 - (3,467,470)
Stock issued in
settlement of
liabilities - - 49,516 990 140,530 -
Sales of stock 70,709 495,000 14,746 295 52,326 -
10% Preferred stock
dividend (pro-rated) - - - - - - (7,494)
Sale of subsidiary
stock - - - - 900,243 - -
Receivable from sale
of subsidiary stock - - - - - (525,690) -
Net loss - - - - - (864,972)
--------- --------- --------- --------- ------------- ------------- -------------
Balance, December 31,
1995 70,709 $ 495,000 1,400,000 $ 28,000 $ 8,630,597 $ (525,690) $ (4,339,936)
========= ========= ========= ========= ============= ============= =============
</TABLE>
See accompanying notes to consolidated statements.
15
<PAGE>
NEROX ENERGY CORPORATION AND SUBSIDIARY
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------------
1995 1994 1993
----------- ------------ -----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss $ (864,972) $(1,623,306) $ (151,896)
Adjustments to reconcile net loss to
net cash provided (used) by
operating activities:
Minority interest (125,419) - -
Oil and gas reserve impairment - 1,172,510 -
Depletion 102,814 275,478 212,711
Decrease (increase) in other assets (32,016) 21,773 75,530
Increase (decrease) in accounts payable 381,281 72,555 (39,869)
----------- ------------ -----------
Net cash provided (used) by operating
activities (538,312) (80,990) 96,476
----------- ------------ -----------
Cash flows from investing activities:
Proceeds from sale of oil and gas
properties 21,934 - -
Purchase of coal mine (1,274,094) - -
----------- ------------ -----------
Net cash used by investing activities (1,252,160) - -
----------- ------------ -----------
Cash flows from financing activities:
Proceeds from notes payable 1,258,853 35,000 -
Sales of common stock 52,621 - -
Sales of preferred stock 495,000 - -
------------ ------------ -----------
Net cash provided by financing activities 1,806,474 35,000 -
------------ ------------ -----------
Net increase (decrease) in cash 16,002 (45,990) 96,476
Cash, beginning of year 50,486 96,476 -
------------ ------------ -----------
Cash, end of year $ 66,488 $ 50,486 $ 96,476
============ ============ ===========
Supplemental disclosures of cash flows activities
- - ----------------------------------------------------
Cash paid for:
Interest $ - $ 6,600 $ 24,050
Income taxes 800 800 800
Noncash investing and financing activities:
Acquisition of property through issuance
of common stock $ 295,000 $ 3,871,198 $ -
============ ============ ===========
Debt to equity conversion $ 141,520 $ 487,553 $ -
============ ============ ===========
Dividends in arrears $ 7,494 $ - $ -
============ ============ ===========
Issuance of subsidiary shares in exchange
for a receivable $ 649,000 $ - $ -
============ ============ ===========
</TABLE>
16
<PAGE>
NEROX ENERGY CORPORATION
Notes to Consolidated Financial Statements
December 31, 1995
1. Summary of significant accounting policies
- - ---------------------------------------------
Nature of business
------------------
Nerox Energy Corporation was incorporated on September 26, 1985 under the
laws of the State of Nevada. On January 28, 1994, the Company's name was
changed from Gemini Energy Corporation to Nerox Energy Corporation.
The Company's operations consist primarily of oil and gas exploration and
development. The financial statements reflect oil and gas revenues from
interests in producing wells in Alaska, Louisiana and three other states.
Oil and gas production is sold at the wellhead to purchasers of crude oil.
Virtually all of the oil and gas production was sold to three companies
during each of the three years in the period ended December 31, 1995.
In 1995, the Company purchased rights to a coal mine near Sutton, Alaska.
Mining operations are anticipated to begin mid-1996.
Principles of consolidation
---------------------------
The consolidated financial statements include Nerox Energy Corporation and
its majority owned subsidiary, Nerox Power Systems, Inc. (NPSI). All
significant intercompany balances and transactions have been eliminated.
Cash
----
The Company maintains its cash in bank deposit accounts which, at times, may
exceed federally insured limits. The Company has not experienced any losses
in such accounts. The Company believes it is not exposed to any significant
credit risk on cash and cash equivalents.
Oil and gas properties
----------------------
The Company utilizes the "successful efforts" method of accounting for costs
incurred in the exploration and development of oil and gas properties.
Accordingly, costs incurred in the acquisition and exploratory drilling of
oil and gas properties will be accumulated and subsequently either expensed
if the properties are determined not to have proved reserves, or capitalized
as a depletable asset if proved reserves are discovered. Costs of drilling
development wells will be capitalized. Geological, geophysical, and carrying
costs are charged to expenses as incurred. Acquisition costs relating to
producing oil and gas properties are amortized on a lease by lease basis
using the units-of-production method based on engineers' estimates of proven
oil and gas reserves. Depletion and depreciation of producing oil and gas
properties (other than acquisition costs) are amortized by lease using the
units-of-production method based on estimated proved developed reserves.
Amortization rates used to compute depletion for 1995, 1994 and 1993 were
$.83, $.67 and $.63, respectively.
Proved oil and gas properties are periodically assessed for impairment of
value, and a loss is recognized at the time of impairment. An impairment of
$1,172,510 was recognized in 1994.
Capitalized costs of unproved oil and gas properties are evaluated annually
and adjusted for any impairment of the properties.
17
<PAGE>
NEROX ENERGY CORPORATION
Notes to Consolidated Financial Statements
1. Summary of significant accounting policies (continued)
- - ---------------------------------------------------------
Use of estimates
----------------
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
continent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Net loss per share
------------------
Net loss per share is based on 1,381,520, 1,251,963 and 1,059,757 weighted
average shares outstanding for 1995, 1994 and 1993 respectively.
Reclassification of prior year amounts
--------------------------------------
Certain prior year amounts have been reclassified to conform to the current
year presentation.
2. Going concern
- - ----------------
The accompanying financial statements have been prepared in conformity with
generally accepted accounting principles, which contemplate continuation of
the Company as a going concern. However, the Company has experienced
significant net operating losses in each of the last two years. Oil and gas
production revenues declined significantly in 1994 due to declining oil and
gas prices. Additionally, in 1994 and 1995 periodic maintenance was
performed on some of the wells, with little or no production occurring during
this time. In 1995, the Company purchased a coal mine, and while it has a
contract to sell all the coal it can produce in the near future, additional
capital infusion is necessary to actually begin mining operations. These
factors raise substantial doubt about the Company's ability to continue as a
going concern.
Management is currently seeking additional financing and the Company's
majority stockholder has agreed to accept common stock in settlement of
$826,390 in notes payable. In addition, management believes that oil and gas
production will increase due to increases in prices, while production
expenses will decline, thus generating positive cash flow from that segment
of operations.
3. Acquisition of properties
- - ----------------------------
Coal mine and related equipment
-------------------------------
On August 10, 1995 the Company agreed to acquire certain mining equipment and
other related items valued at $1,355,000 in exchange for 19% of NPSI,
resulting in a minority interest of $454,757. Subsequently the new minority
shareholders, Austin R. Hobbs and Hobbs Industries, Inc. ("Hobbs"), filed
suit against the Company to avoid the transaction and refused to deliver most
of the mining equipment. While the Company has been successful at every
stage of this litigation, it is not clear when the equipment will be
delivered to NPSI and Hobbs is currently in defiance of a court order to
release such equipment. Due to these circumstances, the Company has only
recorded $295,000 of equipment and $411,000 of related items which are
18
<PAGE>
NEROX ENERGY CORPORATION
Notes to Consolidated Financial Statements
3. Acquisition of properties (continued)
- - ----------------------------------------
Coal mine and related equipment (continued)
-------------------------------------------
in its possession. The remaining $649,000 has been recorded as a receivable
offsetting the Company's equity by $525,690 and the minority interest by
$123,310.
On October 27, 1995 NPSI entered into an agreement with Placer Dome U.S. Inc.
("PDUS") to assume all obligations of PDUS under an Alaska State Coal Lease
covering approximately 1410 acres on the site known as the Evan Jones coal
mine. The purchase price for the assignment of this lease was $980,943 to
PDUS, of which $180,943 is still payable, and $40,000 to the State of Alaska.
The lease allows NPSI the exclusive right to mine coal in the leased area for
an indefinite period of time and calls for a 5% royalty on all production to
be paid to the State of Alaska, and annual rent of $3 per acre to be credited
against any royalties due.
Oil and gas
-----------
In 1994, the Company acquired proved oil and gas properties in Alaska through
the issuance of 108,394 shares of common stock. Properties acquired from
others have been valued at $3,871,198. The agreement included the Company's
promise of $35.71 per share stock value at the end of two years. If the
common stock has a value of less that $35.71 per share two years from the
date of transfer, then, at the Company's option, the Company may buy the
stock for $35.71 per share, issue stock representing the difference between
market value and $35.71 per share or pay cash to the shareholder representing
the difference between market value and $35.71 per share.
4. Notes payable
- - ----------------
<TABLE>
<CAPTION>
1995 1994
-------- ---------
<S> <C> <C>
Note payable of $500,000 (less prepaid
interest of $105,000), with interest
at 24% due November 15, 1996. This note is
secured by 140,000 shares of the
majority shareholder's common stock.
In addition, the note holder has the
option of converting this note into 4,900
shares of the Company's common stock at
any time prior to maturity. The majority
shareholder obtained this note and assigned
it to the Company on the same terms. $395,000 $ -
Unsecured note payable of $200,000 with
imputed interest at 10%, due on or before
December 31, 1996. 180,943 -
Unsecured note payable to an affiliated
company, with interest at 10%, due on or
before December 31, 1996. 400,000 -
Unsecured notes payable to an affiliated
company, with interest at 10% due on demand. 317,496 -
</TABLE>
19
<PAGE>
NEROX ENERGY CORPORATION
Notes to Consolidated Financial Statements
4. Notes payable, stockholder (continued)
- - ------------------------------------------
<TABLE>
<CAPTION>
1995 1994
---------- -------
<S> <C> <C>
Unsecured note payable to the Company's
President with interest at 10%, due on
demand. 108,894 35,000
---------- -------
$1,402,333 $35,000
========== =======
</TABLE>
5. Stockholders' equity
- - -----------------------
Preferred stock
---------------
On April 20, 1995, the Company's board of directors authorized two classes of
preferred stock: Class-A, 100,000 shares of 10% cumulative, non-voting
convertible preferred stock, and Class-B, 100,000 shares of non-convertible,
non-voting shares. After one year, the Class-A shares are convertible into
common shares on a one for one basis at the option of the holder. The
Company issued 70,709 shares of class-A preferred stock in 1995, and at
December 31, 1995, dividends in arrears were $7,494.
Common stock
------------
On April 20, 1995 the Company's board of directors authorized a one for
35.714 reverse stock split, a reduction in the total number of shares
authorized from 50,000,000 to 2,500,000 and an increase in par value from
$.001 to $.02. All share and per share data included in these financial
statements have been restated to reflect these changes.
6. Federal income taxes
- - -----------------------
Deferred tax assets and liabilities are recognized for temporary differences
between the financial reporting basis and the tax basis of the Company's
assets and liabilities. Deferred tax assets are reduced by a valuation
allowance when deemed appropriate. The measurement of deferred tax assets
and liabilities is computed using applicable current tax rates (34%), and is
based on provisions of the enacted tax law: the effects of future changes in
tax laws or rates are not anticipated.
The Company has temporary differences in the financial reporting basis and
tax basis of oil and gas properties. These differences arise principally
because the impairment of oil and gas properties is not deductible for tax
reporting purposes.
The Company has a loss carryforward of $3,179,707 that may be offset against
future taxable income. The carryforward will expire as follows:
<TABLE>
<CAPTION>
December 31
-----------
<S> <C>
2006 $1,297,307
2008 151,366
2009 450,634
2010 864,972
----------
$2,764,279
==========
</TABLE>
20
<PAGE>
NEROX ENERGY CORPORATION
Notes to Consolidated Financial Statements
6. Federal income taxes (continued)
- - -----------------------------------
The Company's deferred tax assets, which have been offset entirely by
valuation allowances, are comprised of the following at December 31, 1995,
1994 and 1993.
<TABLE>
<CAPTION>
1995 1994 1993
------------ ------------ ----------
<S> <C> <C> <C>
Loss carryforwards $ 2,764,279 $ 1,899,307 $1,448,673
Temporary differences in basis
of oil and gas properties 1,234,641 1,234,641 62,141
------------ ------------ ----------
3,998,920 3,133,948 1,510,814
Applicable tax rate x 34% x 34% x 34%
------------ ------------ ----------
1,359,632 1,065,542 513,677
Valuation allowance (1,359,632) (1,065,542) (513,677)
Deferred tax assets $ - $ - $ -
============ ============ ==========
</TABLE>
Deferred tax benefits in 1995, 1994 and 1993 have been offset entirely by
increases in the valuation allowance totaling $294,090, $551,865 and $51,644,
respectively.
7. Other related party transactions
- - -----------------------------------
The Company leases its facility from an affiliate under a three year
operating lease. The lease agreement expires in February, 1997 and has a one
year renewal option. Rent expense to this affiliate totaled $4,800 and
$4,800 for 1995 and 1994, respectively. In 1993 office space and certain
other office expenses were provided through another affiliate for $5,200.
Monthly accounting services are provided through an agreement with a minority
shareholder. Such expenses totaled $46,322, $29,547 and $53,519 in 1995,
1994 and 1993, respectively.
Legal services are provided by two of the Company's Directors, Mr. Jack Utter
and Mr. William Artus. Expenses to Mr. Utter in 1995, 1994 and 1993 totaled
$46,289, $37,428 and $45,424, respectively. Expenses to Mr. Artus in 1995
totaled $16,066.
The Company has contracted with Pride Exploration, Inc. (Pride) to operate
certain of its oil and gas properties. Pride's president was a Company board
member in 1994 and 1993. Total expenses to Pride were $27,402 and $38,765 in
1994 and 1993, respectively.
Included in accounts payable at December 31, 1994 is $18,125 due to related
parties.
8. Commitments and contingencies
- - --------------------------------
Leases
------
In addition to the leases described in notes 3 and 7, the Company leases
office space under an operating lease expiring in January 2000.
21
<PAGE>
NEROX ENERGY CORPORATION
Notes to Consolidated Financial Statements
8. Commitments and contingencies (continued)
- - --------------------------------------------
Net future minimum payments required under noncancellable operating leases
are as follows:
<TABLE>
<CAPTION>
Related
Party Other Total
------- -------- --------
<S> <C> <C> <C>
1996 $4,800 $22,820 $27,620
1997 800 25,940 26,740
1998 - 27,500 27,500
1999 - 29,060 29,060
2000 - 6,310 6,310
Thereafter - 63,450 63,450
</TABLE>
Litigation
----------
On August 10, 1995 NPSI entered into an agreement with Hobbs to purchase all
interest of Hobbs in a coal mine located near Sutton, Alaska and all mining
equipment, supplies and other property used or useful in connection with the
coal mine. In an effort to avoid the agreement Hobbs filed a lawsuit against
NPSI and others in December 1995 seeking to avoid the August 10, 1995
contract and also seeks several million dollars in damages. To date, the
court has made several preliminary rulings, all of which are favorable to
NPSI. It is counsel's opinion that this lawsuit has no merit and there is
virtually no chance that plaintiffs will succeed in their efforts to
invalidate the agreement or recover damages. NPSI has taken a very
aggressive posture in the lawsuit and will continue to vigorously contest all
allegation and efforts by plaintiffs to obtain relief.
9. Segment information
- - ----------------------
In 1995 the Company's operations are classified into two principal industry
segments: oil and gas, and coal. Prior to 1995, the Company operated in the
oil and gas industry only. Following is a summary of segment information:
<TABLE>
<CAPTION>
Oil and Gas Coal Total
------------ ------------ --------------
<S> <C> <C> <C>
Net Sales $ 220,833 $ - $ 220,833
=========== =========== =============
Loss from operations $ (530,324) $ (680,100) $ (1,210,424)
Identifiable assets $ 4,749,311 $ 1,355,233 $ 6,104,544
=========== =========== =============
Capital expenditures $ 250,000 $ 1,299,094 $ 1,549,094
=========== =========== =============
Depreciation, depletion
and amortization $ 102,814 $ - $ 102,814
=========== =========== =============
</TABLE>
22
<PAGE>
NEROX ENERGY CORPORATION AND SUBSIDIARY
Report of Independent Auditor
on Supplemental Information
The Board of Directors and Stockholders
Nerox Energy Corporation
The supplemental information regarding oil and gas producing activities on the
following pages is not a required part of the basic financial statements of
Nerox Energy Corporation and Subsidiary but is supplementary information
required by the Financial Accounting Standards Board. We have applied certain
limited procedures, which consisted principally of inquiries of management
regarding the methods of measurement and presentation of the supplementary
information. However, we did not audit the information and express no opinion
on it.
/s/ SADDINGTON.CACCIAMATTA
-----------------------
SADDINGTON.CACCIAMATTA
May 17, 1996
Irvine, California
23
<PAGE>
NEROX ENERGY CORPORATION AND SUBSIDIARY
Supplemental Information
The SEC defines proved oil and gas reserves as those estimated quantities of
crude oil, natural gas, and natural gas liquids which geological and engineering
data demonstrate with reasonable certainty to be recoverable in future years
from known reservoirs under existing economic and operating conditions. Proved
developed oil and gas reserves are reserves that can be expected to be recovered
through existing wells with existing equipment and operating methods.
Estimates of petroleum reserves have been made by nonindependent engineers. The
valuation of proved reserves may be revised in the future on the basis of new
information as it becomes available. Estimates of proved reserves are
inherently imprecise.
All of the reserves of the Company represent proved reserves. Estimated
quantities of oil and gas reserves of the Company (all of which are located in
the United States) are as follows:
<TABLE>
<CAPTION>
Petroleum Natural
liquids gas
(bbls) (MCF)
--------- ---------
<S> <C> <C>
Proved reserves
- - ---------------
December 31, 1993 248,800 1,156,200
December 31, 1994 347,800 743,600
December 31, 1995 525,200 472,400
Proved developed reserves
- - -------------------------
December 31, 1993 244,500 890,200
December 31, 1994 347,800 743,600
December 31, 1995 525,200 472,400
</TABLE>
24
<PAGE>
NEROX ENERGY CORPORATION AND SUBSIDIARY
Supplemental Information
The changes in proved reserves for 1995, 1994 and 1993 were as follows:
<TABLE>
<CAPTION>
Petroleum Natural
liquids gas
(bbls) (MCF)
------------ ------------
<S> <C> <C>
Reserves at December 31, 1992 288,500 1,722,000
Production (59,700) (565,800)
------------ ------------
Reserves at December 31, 1993 248,800 1,156,200
Revisions of previous estimates 116,600 (330,160)
Purchase of reserves-in-place 318,000 -
Production (335,600) (82,440)
------------ ------------
Reserves at December 31, 1994 347,800 743,600
Revisions of previous estimates 274,700 (82,400)
Production (97,300) (188,800)
------------ ------------
Reserves at December 31, 1995 525,200 472,400
============ ============
</TABLE>
The standardized measure of discounted estimated future net cash flows, and
charges therein, related to proved oil and gas reserves are as follows
(thousands of dollars) for December 31, 1995, 1994 and 1993:
<TABLE>
<CAPTION>
1995 1994 1993
-------- -------- --------
<S> <C> <C> <C>
Future cash inflows $ 16,398 $ 8,832 $ 6,622
Future development and production
costs 5,453 1,739 2,563
Future income tax expense - - -
-------- -------- --------
Future net cash flow 10,945 7,093 4,059
10% annual discount 6,361 2,963 1,075
-------- -------- --------
Standardized measure of discounted
future cash flows $ 4,584 $ 4,130 $ 2,354
======== ======== ========
Primary changes in standardized
measure of discounted future
net cash flow:
Beginning of year $ 4,130 $ 2,354 $ 3,458
Purchase of reserves-in-place - 3,871
Sales of oil and gas, net of
production costs - * (7) (322)
Net changes in prices and
impairments 454 (2,088) (782)
-------- -------- --------
$ 4,584 $ 4,130 $ 2,354
======== ======== ========
</TABLE>
* Negative cash flow
25
<PAGE>
NEROX ENERGY CORPORATION AND SUBSIDIARY
Supplemental Information
Estimated future cash inflows are computed by applying year end prices of oil
and gas to year end quantities of proved developed reserves. Estimated future
development and production costs are determined by estimating the expenditures
to be incurred in developing and producing the proved oil and gas reserves in
future years, based on year end costs and assuming continuation of existing
economic conditions. Estimated future income tax expenses are calculated by
applying year end statutory tax rates (adjusted for permanent differences, tax
credits and tax carryforwards) to estimated future pre-tax net cash flows
related to proved oil and gas reserves, less the tax basis of the properties
involved.
These estimates are furnished and calculated in accordance with requirements of
the Financial Accounting Standards Board and the SEC. Because of unpredictable
variances in expenses and capital forecasts, crude oil and natural price
changes, and the fact that the bases for such estimates vary significantly,
management believes the usefulness of these projections is limited. Estimates
of future net cash flows do not necessarily represent management's assessment of
future profitability or future cash flow to the Company.
The aggregate amounts of capitalized costs relating to oil and gas producing
activities and the related accumulated depletion and depreciation as of December
31, 1995, 1994 and 1993 were as follows (thousands of dollars):
<TABLE>
<CAPTION>
1995 1994 1993
---------- ---------- ----------
<S> <C> <C> <C>
Proved properties $ 6,073 $ 5,845 $ 1,973
Unproved properties - - -
Accumulated depletion,
depreciation and impairment (1,815) (1,712) (264)
---------- ---------- ----------
Net capitalized costs $ 4,258 $ 4,133 $ 1,709
========== ========== ==========
</TABLE>
26
<PAGE>
EXHIBIT LIST
EXHIBIT A 1995 PROXY STATEMENT
EXHIBIT 23.1 CONSENT OF AUDITORS
EXHIBIT 27 FINANCIAL DATA SCHEDULE
<PAGE>
EXHIBIT A
NEROX ENERGY CORPORATION
A NEVADA CORPORATION
846 WEST FOOTHILL BLVD., SUITE Y
UPLAND, CALIFORNIA 91786-3770
PROXY STATEMENT
ANNUAL MEETING OF STOCKHOLDERS
This Proxy Statement is being furnished to stockholders in connection with
the solicitation of proxies by the Board of Directors of Nerox Energy
Corporation, a Nevada Corporation (the "Company") for use at the Annual Meeting
of Stockholders of the Company to be held at The Mirage Hotel, Las Vegas, Nevada
(702) 791-7155, at 10:00 A.M., local time, on Friday, November 10, 1995, and at
any adjournments thereof, for the purpose of considering and voting upon the
matters set forth in the accompanying Notice of Annual Meeting of Stockholders.
This Proxy Statement and the accompanying form of proxy are first being mailed
to stockholders on or about October 13, 1995. The cost of the solicitation of
proxies is being borne by the Company.
The close of business on October 10, 1995, has been fixed as the record
date for the determination of stockholders entitled to notice of and to vote at
the Annual Meeting and any adjournment thereof. As of the record date, there
were 1,400,000 shares of the Company's common stock, par value $.02 per share
(the "Common Stock"), issued and outstanding. The presence, in person or by
proxy, of a majority of the outstanding shares of common Stock on the record
date is necessary to constitute a quorum at the meeting. Each share is entitled
to one vote on all questions requiring a stockholder vote at the meeting. Each
nominee for Director named in Item 1 must receive a majority of the votes cast
in order to be elected. Stockholders may not cumulate their votes in the
election of Directors. The affirmative vote of a majority of the shares of
Common Stock present or represented by proxy and entitled to vote at the Annual
Meeting is required for the approval of Items 2 and 3 set forth in the
accompanying Notice.
All shares represented by properly executed proxies, unless such proxies
previously have been revoked, will be voted at the Annual Meeting in accordance
with the directions on the proxies. If no direction is indicated, the shares
will be voted (1) FOR THE ELECTION OF THE NOMINEES NAMED HEREIN (2) FOR THE
RATIFICATION OF SADDINGTON CACCIAMATTTA, CERTIFIED PUBLIC ACCOUNTANTS, AS
INDEPENDENT AUDITORS (3) FOR APPROVAL OF APPLICATION FOR LISTING ON NASDAQ,
SMALLCAPS (4) ANY OTHER BUSINESS. The enclosed proxy even though executed and
returned, may be revoked at any time prior to the voting of the proxy (a) by the
execution and submission of a revised proxy, (b) by written notice to the
Secretary of the Company or (C) by voting in person at the Annual Meeting.
Page 1 of 4
<PAGE>
ITEM 1
ELECTION OF DIRECTORS
The Directors are elected annually by the stockholders of the company. The
Bylaws of the company provide that the number of Directors will be determined by
the Board of Directors. The stockholders will elect five (5) Directors for the
coming year. The term of such Directors are one year or until their successors
are elected and qualified. Three of the following nominees, presently serve as
Directors of the Company.
Unless otherwise instructed or unless authority to vote is withheld, the
enclosed proxy will be voted for the election of the nominees listed herein.
Although the Board of Directors of the Company does not contemplate that any of
the nominees will be unable to serve, if such a situation arises prior to the
Annual Meeting, the persons named in the enclosed proxy will vote for the
election of such other person(s) as may be nominated by the Board of Directors.
NICHOLAS E. ROSS, age 64, is the Chairman of the Board and Chief Executive
Officer/President and Chief Financial Officer of the Company. From 1972 to
1990, Mr. Ross has been engaged in the acquisition of oil and gas prospects and
has participated in the drilling of over 300 oil and gas wells. Prior to that
time he was a division manager for Charter Street Corporation, a San Francisco
brokerage house featuring public oil and gas limited partnership syndications
until 1972.
WILLIAM D. ARTUS, age 44, is a Director. From 1978 to present, Mr. Artus
was founder and managing partner of Artus & Choquette, P.C., a law firm with
offices in Anchorage and Seattle. The firm represents a wide variety of clients
in business and litigation matters. Mr. Artus has purchased and developed more
than 250 building lots in anchorage; developed and built several residential
properties, and has invested in oil and gas projects. He has a BA in Business
Administration a J.D. in law, and is a member of various bar associations.
JOE BROCK, age 60, is a Director. For over five years, on the Board of
Directors of Pacer Technology, a NASDAQ listed company. He was the owner of his
own engineering company for approximately 15 years prior to his semi-retirement.
He is presently active in the management of his personal investment portfolio.
JACK UTTER, age 58, is an interim Director. Jack Utter, Attorney at Law,
is founder and managing partner of Utter & Associates, a law firm in Irvine,
California, representing clients in business, securities and litigation matters.
Mr. Utter is General Counsel to Nerox Energy Corporation. Mr. Utter was
President, Chairman of the Board and General Counsel to Tommy Lasorda Foods,
Inc., which he took public in 1991. He has syndicated many successful projects,
including apartment buildings, commercial office buildings, medical buildings,
shopping centers, snack food companies and restaurants. Mr. Utter is, or has
been, attorney for several corporations, including the Meridien Hotel in Newport
Beach, Great Expectations Centers in Walnut Creek and
Page 2 of 4
<PAGE>
Mountain View, California. Mr. Utter represented WASA Insurance, the largest
insurance company in Scandinavia. He also represented AB Edsbyverken, the
largest furniture manufacturer in Sweden. He has represented two international
insurance companies as corporate and trial attorney .
LEROY STUDER, age 65, is a Certified Public Accountant with his own firm in
Newport Beach, California. Mr. Studer has practiced as a partner in national
and local firms representing various national companies, public and private for
the past 22 years.
The Board of Directors unanimously recommends a vote FOR the election of
each of the nominees listed above.
The Company does not presently have an audit, nominating or compensation
committee of the Board of Directors. The Company held ten meetings of the Board
of Directors during the fiscal year ended December 31, 1995, which was attended
by all then existing board members.
Compensation of Directors and Executive Officers:
-------------------------------------------------
Officers. For the fiscal year ended December 31, 1994, none of the
--------
Officers of Nerox had cash compensation which exceeded $60,000.
Directors. The Directors of the Company received no compensation for
---------
services rendered to the Company during the fiscal year ended December 31, 1994
in excess of $60,000. The Company does not currently pay any Director's fees,
but it will pay the expenses of its directors in attending board meetings.
Nerox is considering various compensation suggestions for Directors including
stock options.
ITEM 2
RATIFICATION OF INDEPENDENT AUDITORS
The Board of Directors wishes to obtain from the stockholders a
ratification of the Board's action in appointing Saddington Cacciamatta,
Certified Public Accountants, as independent auditors of the company for the
fiscal year ending December 31, 1995. Such ratification requires the
affirmative vote of the majority of the shares of common stock present or
represented by proxy and entitled to vote at the Annual Meeting.
In the event the appointment of Saddington Cacciamatta, Certified Public
Accountants as independent auditors for the fiscal year ended December 31, 1995,
is not ratified by the stockholders, the adverse vote will be considered as a
direction to the Board of Directors to select other auditors for the fiscal year
ended December 31, 1995.
Page 3 of 4
<PAGE>
A representative of the independent auditors is expected to be present at
the meeting, will have the opportunity to make a statement if he/she desires to
do so and will be available to respond to appropriate questions.
The Board of Directors unanimously recommends a vote FOR ratification of
the Board's appointment of Saddington Cacciamatta, Certified Public
Accountants, as its auditors.
1996 STOCKHOLDER PROPOSALS
The deadline for stockholders to submit proposals to be considered for
inclusion in the Proxy Statement for the 1996 Annual Meeting of Stockholders is
expected to be June 1, 1996.
NASDAQ, SMALLCAPS APPLICATION
An application is being prepared to apply for listing on NASDAQ, SmallCaps.
With the 81% stock owned by Nerox Energy Corporation in Nerox Power Systems,
Inc., and its coal mine acquisition in Alaska, the Nerox Energy Corporation
stock is expected to increase in value and trading potential.
OTHER MATTERS
The Board of Directors is not aware of any other matters to be presented
for action at the meeting. However, if any other matter is properly presented,
it is the intention of the persons named in the enclosed form of proxy to vote
in accordance with their best judgment on such matter.
NEROX ENERGY CORPORATION
BY ORDER OF THE BOARD OF DIRECTORS
/s/ NICHOLAS E. ROSS
Nicholas E. Ross, Chairman
Upland, California
October 13, 1995
Page 4 of 4
<PAGE>
EXHIBIT 23.1
AUDITORS' CONSENT
As independent public accountants, we hereby consent to the use of our
report dated May 17, 1996, included in and made part of the Form 10-K of Nerox
Energy Corporation.
/s/ SADDINGTON . CACCIAMATTA
Irvine, California
June 20, 1996
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