<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-KSB
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES AND EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1997 Commission File Number: 0-18049
NEROX ENERGY CORPORATION
<TABLE>
<CAPTION>
<S> <C>
Nevada 91-1317131
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
18400 Von Karman Avenue, Suite 600
Irvine, California 92612
(Address of principal executive offices) (Zip Code)
</TABLE>
Issuer's Telephone Number: (714) 955-9136
Securities registered under Section 12(b) of the Exchange Act:
(Title of each class) (Name of each exchange on which registered)
NONE NONE
Securities registered under Section 12(g) of the Exchange Act:
(Title of each class)
COMMON STOCK ($0.004167)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. YES [_] NO [X]
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will 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-KSB or any
amendment to this Form 10-KSB. [X]
State issuer's revenues for its most recent fiscal year: $91,000.
The aggregate value of the Registrants Common Stock held by non-affiliates of
the Registrant was approximately $578,550 as of February 27, 1998, computed by
reference to the price at which the stock was last sold in negotiated
transactions.
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date: There were 8,047,627 shares of the
Registrants Common Stock issued and outstanding as of February 27, 1998.
<PAGE>
PART I
ITEM 1 DESCRIPTION OF BUSINESS
Nature of Business
The Registrant was incorporated in the State of Nevada in 1985. The
Company's primary activities have been directed towards the development of the
Jonesville Coal Mine ("Jonesville Mine") located in Sutton, Alaska. In October
1995, the Company acquired a 100% interest in the Jonesville Mine from Placer
Dome, USA, Ltd. for approximately $1,020,000 through its wholly-owned
subsidiary, Nerox Power Systems, Inc. ("NPSI"). In addition, the Company
acquired mining equipment, leases and permits from Hobbs Industries, Inc.
("Hobbs") in exchange for a 19% interest in NPSI. The assets received were
valued at $1,355,000. In December 1995, Hobbs filed a lawsuit in an attempt to
avoid the contract and the matter was settled in September 1996 by the Company
reacquiring the 19% minority interest and promising royalties on future coal
development. See Item 3 Legal Proceedings.
The Company also holds production interests in 6 oil and gas wells in three
states. Production declined by 17% in 1997 because the oil and gas producing
properties are approaching the end of their productive lives.
Investment Properties
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Well Location Type Operator
- --------------------------------------------------------------------------------------------------------------
Ellerbe #1 Clairborne Parish, LA Gas/Oil Pride Exploration Corp.
Herold-Agurs #1 Caddo 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.
Simon Bldg. & Devel. Caddo Parish, LA Gas Pride Exploration Corp.
Emerson Caddo Parish, LA Oil Pride Exploration Corp. Sold in 1997
Rollins #1A Caddo Parish, LA Gas Pride Exploration Corp. Shut in 1996
Montgomery-Heirs #1 Madison Parish, LA Gas Pride Exploration Corp. Shut in 1996
Montgomery Heirs #2 Madison Parish, LA Gas Pride Exploration Corp. Shut in 1996
West McArthur River Cook Inlet, Alaska Gas/Oil Stewart Petroleum Shut in 1996
</TABLE>
In September 1994, the Company acquired proved oil and gas properties in
Alaska from individuals through the issuance of 108,394 shares of common stock
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 had a value
of less than $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
additional stock representing the difference between market value and $35.71 per
share or pay cash to the shareholders representing the difference between market
value and $35.71 per share. In late 1996, the Company had a liability of over
$3.7 million which it could not satisfy. The Company was able to reach an
agreement with the shareholders for $1,004,170, of which $429,610 is due as cash
flow allows, and the remainder in 844,940 shares of common stock at $.68 per
share. At December 31, 1997, $114,640 has been converted to common stock.
Revenues
The Registrant's revenues in 1997 and 1996 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.
<PAGE>
Competitive Conditions
Coal operation activities are estimated to contribute over 90% 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. 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. The coal industry is highly competitive, and the Company will compete
in the future with a large number of other coal producers, most of which will be
substantially larger and have greater financial resources and larger reserve
bases than the Company.
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.
Regulations Affecting Coal Mining
Coal mining is subject to strict regulation by federal, state, and local
authorities, including, most significantly, with respect to permitting,
environmental, and health and safety matters. The Company believes that, upon
the filing of the required information with the appropriate regulatory agencies,
all permits necessary for commencing operations of the mine will be obtained.
Once operations of the coal mine commence, the Company will be subject to
numerous state and federal statutes which establish strict standards with
respect to mining health and safety and environmental consequences. Numerous
federal and state laws and regulations pertaining to the discharge of materials
into the environment impose requirements for capital expenditures in the normal
course of mine development and for subsequent events which cause adverse
environmental effects, irrespective of fault or willfulness by the mining
company involved. These statutes will in the future require substantial capital
investments and may adversely affect results of operations.
Regulation of Oil and Gas 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.
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 "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.
<PAGE>
Future Legislation
Legislation affecting the coal mining and oil and gas industries are under
constant review for amendment or expansion. Because such laws and regulations
are frequently amended or reinterpreted, management is unable to predict what
additional legislation may be proposed or enacted or the future cost and impact
of complying with existing or future regulations.
Regulation of the Environment - Oil and Gas Production
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, and mining of coal, 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 March 25, 1998, the Registrant had no employees. Currently, the
Registrant is charged for office space and clerical staff time through the
offices of Jack Utter & Associates, President and CEO.
ITEM 2 DESCRIPTION OF PROPERTIES
Jonesville Coal Mine
The 1410 acre Jonesville Coal Mine is owned by NPSI and currently not
operational. The Company needs additional financing to prepare it for
operations.
Oil and Gas Properties
The six producing wells in 1997 were originally drilled by operators in
joint venture 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.
ITEM 3 LEGAL PROCEEDINGS
In 1995 NPSI entered into an agreement with Hobbs to purchase all interest
of Hobbs in the Jonesville 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 several million dollars in damages. In
September 1996, the Company reached a settlement with Hobbs whereby Hobbs
relinquished his 19% ownership in NPSI in exchange for $.40 per ton of coal
extracted and sold by Nerox from the coal mine up to a maximum amount of
$1,000,000. In the event that Nerox elects to sell the coal mine or any interest
therein, Hobbs will receive 19% of the sales price, up to the difference between
$1,000,000 and the amount Hobbs has received in royalty payments as of the date
of the sale.
<PAGE>
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5 MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER 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) by
quarter in 1997 and 1996. 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.
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Mar 1997 Jun 1997 Sep 1997 Dec 1997
-------- -------- -------- --------
High 1 9/16 7/8 17/32 13/32
Low 11/16 17/32 3/8 1/8
<CAPTION>
<S> <C> <C> <C> <C>
Mar 1996 Jun 1996 Sep 1996 Dec 1996
-------- -------- -------- --------
High 2 1/2 3 3 1/2 2 7/8
Low 1 1 3/8 2 1/8 1 1/8
</TABLE>
Holders
At the date of this filing there are approximately 431 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. The Company paid $10,500 in
dividends on its Class A preferred shares in 1997 and accrued dividends of
$31,025.
ITEM 6 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.
1997 compared to 1996
Total revenues from oil and gas sales for 1997 were $90,875, a decrease of
17% from $109,228 in 1996. The decrease is due to production of fewer barrels
of oil from wells in which the Company has working interest, 10,738 barrels in
1997 compared to 24,734 barrels in 1996, partially offset by an increase in the
amount of natural gas produced from wells in which the Company has working
interests, 108,256 mcfs in 1997 compared to 101,554 mcfs in 1996. Oil
production declined because the oil producing properties are approaching the end
of their productive lives. Costs of production from oil and gas sales in 1997
increased 35% due to the rework of wells.
<PAGE>
Mining costs reflect costs to get the Jonesville coal mine ready for
operations. Mining costs of $222,115 in 1997 decreased 19% from $275,665 in
1996. General and administrative expenses decreased by 22% from $788,412 in
1996 to $617,801 in 1997. Of the total general and administrative expenses
$149,467 can be attributed to NPSI for coal mine activities, a decrease of 63%
from $401,072 in 1996. The remaining general and administrative expenses of
$468,334 for Nerox increased from $387,340 in 1996 mostly due to increased
professional services paid for by the issuance of common stock for services in
1997. Interest costs decreased from $203,287 to $134,098 as the Company was
able to convert debt to common stock in 1997. Depletion decreased marginally
from $60,081 in 1996 to $60,000 in 1997. There was no impairment in 1997 as
substantially all oil and gas properties were written down in 1996. In late
1996, the Company reached agreements with shareholders for $1,004,170, of which
$429,610 is due as cash flow allows, and the remainder in 844,940 shares of
common stock at $.68 per share.
The Company's largest oil and gas holdings were shut in during 1996 and its
coal mine is not yet operational. The Company must raise capital to develop its
coal mine and remain viable.
1996 compared to 1995
Total revenues from oil and gas sales for 1996 were $109,228, a decrease of
51% from $220,833 in 1995. The decrease is due to production of fewer barrels
of oil from wells in which the Company has working interest, 24,734 barrels in
1996 compared to 97,300 barrels in 1995, and a decrease in the amount of natural
gas produced from wells in which the Company has working interests, 101,554 mcfs
in 1996 compared to 188,800 mcfs in 1995. Oil and gas 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. Costs of production from oil and gas sales in
1996 declined 48% due to the decrease in revenues.
Mining costs reflect costs to get the Jonesville coal mine ready for
operations. Mining costs of $275,665 in 1996 increased 5% from $262,704 in
1995. General and administrative expenses increased by 41% from $557,312 in
1995 to $788,412 in 1996. Of the total general and administrative expenses
$401,072 can be attributed to NPSI for coal mine activities, an increase of 17%
from $342,397 in 1995. The remaining general and administrative expenses of
$387,340 for Nerox increased from $214,915 in 1995 mostly due to additional
outside fees and accounting fees associated with raising capital for the coal
mine. Interest costs increased from $68,388 to $203,287 as the Company has
increasingly had to rely on borrowings to finance its operations. Depletion
decreased from $102,814 in 1995 to $60,081 in 1996 due to a decrease in
equivalent barrels produced. The impairment allowance of $4,073,034 reflects
the shut in of the Alaska oil wells. In late 1996, the Company reached
agreements with shareholders for $1,004,170, of which $429,610 is due as cash
flow allows, and the remainder in 844,940 shares of common stock at $.68 per
share.
Liquidity and Capital Resources
At December 31, 1997, the Company had current liabilities totaling
$1,165,850 and no current assets for a working capital deficit of $1,165,850 due
primarily to operating losses and short-term borrowings to purchase and develop
the Jonesville Coal Mine. In late 1997, the Company was successful in converting
$568,186 debt to common stock and $150,000 preferred stock to common stock at
$1.00 per share, and the Company's largest shareholder forgave $655,416 in debt.
Management is seeking additional equity financing to meet short-term working
capital requirements and to fund the cost of bringing the coal mine into
operations.
Inflation
Inflation during the year ended December 31, 1997 has had little effect on
the Company's capital costs and results of operations.
<PAGE>
ITEM 7 FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See Exhibit A, Auditor's Report, attached hereto and incorporated herein by
this reference.
ITEM 8 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
On January 23, 1998, the Company filed an 8-K to report the appointment of
Hurley & Company as its new independent accountants.
PART III
ITEM 9 DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Board of Directors
<TABLE>
<CAPTION>
Name Age Position with the Company Since
- ---------------- --- ------------------------------- -----
<S> <C> <C> <C>
Jack Utter 60 Chairman, President and CEO 1997
William D. Artus 48 Director (Resigned March 1998) 1992
Joe Brock 66 Director 1992
</TABLE>
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, Cardona 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.
William Artus is the managing partner of Artus & Choquette, a law firm in
Anchorage, Alaska. He resigned as director in March 1998.
Joe Brock is a retired business-owner. Mr. Brock also serves on the Board
of Directors of another public company.
Executive Officer
Jack Utter is Chairman, President and Chief Executive Officer and his
spouse, Raleigh Utter, is Secretary.
ITEM 10 EXECUTIVE COMPENSATION
During the fiscal year ended December 31, 1997, 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 12.
ITEM 11 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information as of February 27, 1998
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.
<PAGE>
<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. 2,401,247 29.84%
1042 N. Mountain Ave., B-562
Upland, California 91786
Scott Kelly 500,000 6.21%
2630 Plymouth Way
San Bruno, CA 94066
Jack Utter 143,143 1.78%
18400 Von Karman Ave., Suite 600
Irvine, CA 92612
William Artus 354,016 4.40%
629 L Street, Suite 101
Anchorage, Alaska 99501
Joe Brock 114,000 1.42%
1042 N. Mountain Ave., B-562
Upland, California 91786
All officers and directors as a group 611,159 7.59%
</TABLE>
(1) A person is deemed to be the beneficial owner of securities than can be
acquired by such person within 60 days from February 27, 1998 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 February 27, 1998 have been exercised.
ITEM 12 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Mr. Jack Utter, President and CEO, provided legal services to the Company
in 1997 and 1996 valued at $122,015 and $91,948, respectively.
Mr. William Artus, Director, provided legal services to the Company in 1997
and 1996 valued at $36,500 and $31,696, respectively.
Mr. Scott Kelly, shareholder, provided consulting services to the Company
in 1997 valued at $62,500.
Mr. Joe Brock, Director, provided consulting services to the Company in
1997 valued at $12,500.
Mr. Leroy Studer, a shareholder and former Company Director and CFO now
deceased, provided accounting services to the Company in 1996 valued at $27,613.
ITEM 13 EXHIBITS AND REPORTS ON FORM 8-K
EXHIBIT A Auditors' Report
<PAGE>
FORM 8-K
On March 6, 1998 the Company filed an 8-K, approved by the Board of
Directors on October 31, 1997 and effective as of that date, noting the
resignation of Nicholas E. Ross as Chairman of the Board and the appointment of
Jack Utter as new Chairman of the Board.
<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: March 25, 1998 NEROX ENERGY CORPORATION
By: /s/ JACK UTTER
---------------------------------
Jack Utter, 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 date indicated.
Dated: March 25, 1998 By: /s/ JACK UTTER
---------------------------------
Jack Utter, President and Chief
Executive Officer
<PAGE>
EXHIBIT LIST
EXHIBIT A Auditors' Report
EXHIBIT 27 Financial Data Schedule
<PAGE>
EXHIBIT A
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
--------------------------------------------------
The Board of Directors and Stockholders
Nerox Energy Corporation and Subsidiary
We have audited the accompanying consolidated balance sheet of Nerox Energy
Corporation and Subsidiary (the "Company") as of December 31, 1997, and the
related consolidated statements of operations, stockholders' equity and cash
flows for each of the two years ended December 31, 1997. 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.
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 consolidated 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 consolidated
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Nerox
Energy Corporation and Subsidiary as of December 31, 1997, and the results of
their consolidated operations and cash flows for each of the two years ended
December 31, 1997, in conformity with generally accepted accounting principles.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As shown in the consolidated
financial statements, the Company has incurred significant net losses in 1997
and 1996, and is experiencing cash flow shortages. These conditions raise
substantial doubt about the Company's ability to continue as a going concern.
Management's plans in regard to those matters are also described in Note 10.
The consolidated financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
HURLEY & COMPANY
Granada Hills, California
March 24, 1998
<PAGE>
NEROX ENERGY CORPORATION AND SUBSIDIARY
Consolidated Balance Sheet
<TABLE>
<CAPTION>
December 31,
1997
------------
ASSETS
<S> <C>
Property and Equipment, at cost:
Alaska coal mine and related equipment $ 2,110,460
--------------
Proved oil and gas properties, using successful efforts accounting 1,748,367
Less accumulated depletion (632,018)
Less impairment allowance (1,055,422)
--------------
60,927
--------------
$ 2,171,387
==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Notes payable to:
Shareholders $ 145,000
Placer Dome 158,463
--------------
303,463
Accounts payable 482,526
Accrued expenses 64,891
Settlement of shareholder contingency 314,970
--------------
Total current liabilities 1,165,850
--------------
Commitments and Contingencies -
Stockholders' Equity:
Preferred stock, 10% cumulative, non-voting, convertible, no par value;
shares authorized 200,000, issued and outstanding 49,282 345,000
Common stock, par value $.004167; shares authorized 12,000,000,
issued and outstanding 6,697,627 (net of 563,319 treasury shares) 27,909
Additional paid-in capital 12,339,220
Accumulated deficit (11,706,592)
--------------
Net stockholders' equity 1,005,537
--------------
$ 2,171,387
==============
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
NEROX ENERGY CORPORATION AND SUBSIDIARY
Consolidated Statements of Operations
<TABLE>
<CAPTION>
Year ended December 31,
----------------------------
1997 1996
---------- -----------
<S> <C> <C>
Revenues:
Oil and gas sales $ 90,875 $ 109,228
Gain on disposition of oil and gas properties 85,000 -
---------- -----------
175,875 109,228
---------- -----------
Cost and expenses:
Oil and gas costs 65,645 48,451
Coal mine costs 222,115 275,665
General and administrative 617,801 788,412
Interest 134,098 203,287
Depletion 60,000 60,081
Loss on lease impairment - 4,073,034
Settlement of shareholder contingency - 1,004,170
---------- -----------
1,099,659 6,453,100
---------- -----------
Net loss $ (923,784) $(6,343,872)
Basic net loss per share $ (0.19) $ (3.26)
========== ===========
Diluted net loss per share $ (0.19) $ (3.26)
=========== ===========
Basic weighted average number of
common shares outstanding 5,137,102 1,961,016
========== ===========
Diluted weighted average number of
common shares outstanding 5,137,102 1,961,016
========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
NEROX ENERGY CORPORATION AND SUBSIDIARY
Consolidated Statements of Stockholders' Equity
Years Ended December 31, 1997 and 1996
<TABLE>
<CAPTION>
Preferred Stock Common Stock
------------------------------ ------------------------------------------
Amount Amount Additional
Number of ------------------- Number of ------------------ Paid-in
Shares Per Share Total Shares Per Share Total Capital
--------- --------- -------- --------- --------- ------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, JANUARY 1, 1996 70,709 $ - $495,000 1,400,000 $ - $ 5,833 $ 8,652,764
Sales of stock for cash - - - 310,889 $0.95 1,296 292,932
Exercise of options - - - 200,000 $1.25 833 249,167
Conversion of related party obligations - - - 651,931 $1.27 2,717 823,673
Conversion of related party obligations - - - 600,000 $0.64 2,500 381,135
Stock issued to settle shareholder contingency - - - 844,940 $0.68 3,521 571,039
Reacquisition of minority interest - - - - - - (319,662)
Stock issued for services - - - 10,000 $1.25 42 12,458
Preferred stock dividend - - - - - - -
Net loss - - - - - - -
-------- -------- --------- ------- -----------
BALANCE, DECEMBER 31, 1996 70,709 - 495,000 4,017,760 - 16,742 10,663,506
Stock issued for services - - - 2,525,000 $0.125 10,522 305,104
Conversion of related party obligations (21,427) - (150,000) 718,186 $1.000 2,993 715,194
Forgiveness of related party debt - - - - - - 655,416
Acquisition of treasury shares - - - (563,319) - (2,347) -
Preferred stock dividend - - - - $0.004 - -
Net loss - - - - - - -
--------- -------- --------- - ------- -----------
BALANCE, DECEMBER 31, 1997 49,282 - $345,000 6,697,627 - $27,909 $12,339,220
========
</TABLE>
<TABLE>
<CAPTION>
Minority Net
Interest Accumulated Stockholders'
Receivable Deficit Equity
---------- ------------ -------------
<S> <C> <C> <C>
BALANCE, JANUARY 1, 1996 $(525,690) $ (4,339,936) $ 4,287,971
Sales of stock for cash - - 294,228
Exercise of options - - 250,000
Conversion of related party obligations - - 826,390
Conversion of related party obligations - - 383,635
Stock issued to settle shareholder contingency - - 574,560
Reacquisition of minority interest 525,690 - 206,028
Stock issued for services - - 12,500
Preferred stock dividend - (49,500) (49,500)
Net loss - (6,343,872) (6,343,872)
-------- ------------ -----------
BALANCE, DECEMBER 31, 1996 - (10,733,308) 441,940
Stock issued for services - - 315,626
Conversion of related party obligations - - 568,187
Forgiveness of related party debt - - 655,416
Acquisition of treasury shares - - (2,347)
Preferred stock dividend - (49,500) (49,500)
Net loss (923,784) (923,784)
--------- ------------- -------------
BALANCE, DECEMBER 31, 1997 $ - $(11,706,592) $ 1,005,537
========= ============ =============
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
NEROX ENERGY CORPORATION AND SUBSIDIARY
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Year ended December 31,
----------------------------
1997 1996
---------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net loss $(923,784) $(6,343,872)
Adjustments to reconcile net loss to net cash
used by operating activities:
Gain on disposition of oil and gas (85,000) -
properties
Depletion 60,000 60,081
Amortization of loan discount - 128,290
Loss on lease impairment - 4,073,034
Settlement of shareholder contingency - 1,004,170
Write off computer equipment 6,431 -
Issuance of common stock for services 315,626 12,500
(Increase) decrease in assets:
Other assets - 49,649
Increase (decrease) in liabilities:
Accounts payable 348,833 279,320
Accrued expenses 51,359 92,893
---------- -----------
Net cash used by operating activities (226,535) (643,935)
---------- -----------
Cash flows from investing activities:
Proceeds from disposition of oil and gas 85,000 -
properties
Coal mine renovations and acquisitions - (386,797)
---------- ----------
Net cash provided (used) by investing 85,000 (386,797)
activities
---------- -----------
Cash flows from financing activities:
Borrowings from notes payable 219,477 578,041
Payments made on notes payable (132,250) (45,135)
Sales of common stock - 294,228
Exercise of options - 250,000
Payment of dividends (10,500) (48,082)
---------- -----------
Net cash provided by financing activities 76,727 1,029,052
---------- -----------
Net decrease in cash (64,808) (1,680)
Cash and cash equivalents, beginning of year 64,808 66,488
--------- -----------
Cash and cash equivalents, end of year $ - $ 64,808
========== ===========
</TABLE>
(continued)
The accompanying notes are an integral part of these financial statements.
<PAGE>
NEROX ENERGY CORPORATION AND SUBSIDIARY
Consolidated Statements of Cash Flows (continued)
<TABLE>
<CAPTION>
Year ended December 31,
----------------------------
1997 1996
---------- -----------
<S> <C> <C>
Supplemental disclosure of cash flow activities:
Cash paid for interest $ 5,013 $ 6,450
========== ==========
Non-cash investing and financing transactions:
Dividends in arrears $ 31,025 $ 8,912
========== ==========
Debt to equity conversion $ 568,186 $1,210,025
========== ==========
Contribution of related party note to capital $ 655,416 $ -
==========
Conversion of preferred stock to common stock $ 150,000 $ -
========== ==========
Acquisition of minority interest $ - $ 206,028
========== ==========
Issuance of common stock for services $ 315,626 $ 12,500
========== ==========
Acquisition of treasury shares $ 2,347 $ -
========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
NEROX ENERGY CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1997
1. Summary of significant accounting policies
- ----------------------------------------------
Nature of business
------------------
Nerox Energy Corporation was incorporated on September 26, 1985 as Gemini
Energy Corporation under the laws of the State of Nevada. On January 28,
1994, the Company's name was changed to Nerox Energy Corporation.
In 1995, the Company purchased rights to the Jonesville Coal Mine near
Sutton, Alaska. Mining operations have not commenced as the Company needs
additional financing to become operational; however, the Company's primary
activities consist of preparing the coal mine for operations. The Company
also has working interests in several oil and gas wells primarily in
Louisiana. Oil and gas production is sold at the wellhead to purchasers of
crude oil. All of the oil and gas production was sold to three customers
during 1997 and 1996.
Principles of consolidation
---------------------------
The consolidated financial statements include the accounts of Nerox Energy
Corporation and its wholly-owned subsidiary, Nerox Power Systems, Inc.
(NPSI). All significant intercompany balances and transactions have been
eliminated in consolidation.
Cash and cash equivalents
-------------------------
For purposes of the statement of cash flows, cash equivalents include time
deposits, certificates of deposit and all highly liquid debt instruments
with original maturities of three months or less. Substantially all deposits
are on account with one institution.
Coal mine
---------
Costs of ordinary maintenance and repairs are expensed while major mine
development costs are capitalized. Capitalized mine development costs are
recorded at cost. When the coal mine becomes operational, the Company will
begin to depreciate the capitalized costs based on estimates of tons to be
produced, the cost of property, plant and equipment employed, and the
estimated economic lives of the mine and equipment. The rates will be
revised periodically to reflect operating experience and will approximate
straight-line depreciation for normal annual periods.
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 are accumulated and
(continued)
<PAGE>
NEROX ENERGY CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
1. Summary of significant accounting policies (continued)
- ----------------------------------------------------------
Oil and gas properties (continued)
----------------------------------
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 are 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 1997 and 1996 were $2.08 and $1.72, 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
$4,073,034 was recognized in 1996.
Capitalized costs of unproved oil and gas properties are evaluated annually
and adjusted for any impairment of the properties. Gains or losses from
abnormal retirements or sales are credited or charged to income; other gains
and losses are credited or charged to oil and gas properties.
Impairment of long-lived assets
-------------------------------
Impairment losses are recorded on long-lived assets used in operations when
indicators of impairment are present and the undiscounted cash flows
estimated to be generated by those assets are less than the assets' carrying
amount.
Income taxes
------------
Deferred income taxes are recognized for tax consequences in future years of
differences between the tax bases of assets and liabilities and their
financial reporting amounts at each year-end based on enacted tax laws and
statutory rates applicable to the periods in which the differences are
expected to affect taxable income. Valuation allowances are established,
when necessary, to reduce deferred tax assets to the amount expected to be
realized. The provision for income taxes represents that tax payable for the
period and the change during the period in deferred tax assets and
liabilities.
(continued)
<PAGE>
NEROX ENERGY CORPORATION AND SUBSIDIARY
Notes to consolidated Financial Statements
1. Summary of significant accounting policies (continued)
- ----------------------------------------------------------
Stock compensation
------------------
The Company accounts for compensation costs related to employee stock
options and other forms of employee stock-based compensation plans in
accordance with the requirements of Accounting Principles Board Opinion 25
("APB 25"). APB 25 requires compensation costs for stock based compensation
plans to be recognized based on the difference, if any, between the fair
market value of the stock on the date of the grant and the option exercise
price. In October 1995, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards 123, Accounting for Stock-Based
Compensation ("SFAS 123"). SFAS 123 established a fair value-based method of
accounting for compensation costs related to stock options and other forms
of stock-based compensation plans. However, SFAS 123 allows an entity to
continue to measure compensation costs using the principles of APB 25 if
certain pro forma disclosures are made. The Company adopted the provisions
of pro forma disclosure requirements of SFAS 123 in 1996. Options granted to
non-employees are recognized at their estimated fair value at the date of
grant.
Fair value of financial instruments
-----------------------------------
The fair value of financial instruments, consisting principally of notes
payable, is based on interest rates available to the Company and comparison
to quoted prices. The fair value of these financial instruments approximated
carrying value.
Basic and diluted net loss per share
------------------------------------
Net loss per share is calculated in accordance with Statement of Financial
Accounting Standards 128, Earnings Per Share ("SFAS 128"), which superseded
Accounting Principles Board Opinion 15 ("APB 15"). Net loss per share for
all periods presented has been restated to reflect the adoption of SFAS 128.
Basic net loss per share is based upon the weighted average number of common
shares outstanding. Diluted net loss per share is based on the assumption
that all dilutive convertible shares and stock options were converted or
exercised. Dilution is computed by applying the treasury stock method. Under
this method, options and warrants are assumed to be exercised at the
beginning of the period (or at the time of issuance, if later), and as if
funds obtained thereby were used to purchase common stock at the average
market price during the period.
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
consolidated financial statements and the reported amounts of revenues
(continued)
<PAGE>
NEROX ENERGY CORPORATION AND SUBSIDIARY
Notes to consolidated Financial Statements
1. Summary of significant accounting policies (continued)
- ----------------------------------------------------------
Use of estimates (continued)
----------------------------
and expenses during the reporting period. Actual results could differ from
those estimates.
Reclassification of prior year amounts
--------------------------------------
Certain prior year balances have been reclassified to conform to the current
year presentation.
2. Alaska coal mine and related equipment
- ------------------------------------------
<TABLE>
<CAPTION>
1997
----------
<S> <C>
Acquisition cost $1,020,000
Capitalized mine expenses 201,992
Equipment 315,943
Licenses and permits 572,525
----------
$2,110,460
==========
</TABLE>
The Company has a five year permit expiring on July 31, 2001 to mine coal in
Alaska. The lease is indefinite as long as production begins by January 4,
2001. The mine is not currently operational.
3. Notes payable
- -----------------
<TABLE>
<CAPTION>
1997
----------
<S> <C>
Shareholders:
Unsecured notes payable at 10% interest. These notes are in default. 145,000
Placer Dome:
Unsecured note payable, with imputed interest at 10%, due on or
before December 31, 1997. This note is in default. 158,463
-----------
$ 303,463
===========
</TABLE>
4. Stockholders' equity
- ------------------------
On April 20, 1995, the Company's board of directors authorized two classes
of no par value 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. The
(continued)
<PAGE>
NEROX ENERGY CORPORATION AND SUBSIDIARY
Notes to consolidated Financial Statements
4. Stockholders' equity (continued)
- ------------------------------------
Company amended its bylaws to combine the two classes of stock to one class
of 200,000 shares of cumulative, convertible, non-voting preferred stock on
April 20, 1996. After one year, the 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 preferred stock in 1995 for cash of $495,000. In
late 1997, in order to induce conversion due to the inability to pay
dividends, the Company offered to convert shares at 7 to 1. At December 31,
1997, 21,427 shares were converted to common stock as well as $16,887 in
accrued dividends. Dividends in arrears were $31,025 and $8,912 at December
31, 1997 and 1996, respectively.
In 1996, 310,889 shares of common stock were sold for $294,228 cash.
In September 1996, the Company issued to consultants 200,000 options to
purchase shares of common stock at an exercise price of $1.25 expiring on
December 31, 1996. All of the options were exercised as of December 31,
1996.
The Company's largest shareholder converted $826,390 of debt to common stock
in the third quarter of 1996 when the market price approximated $1.27, and
converted $383,635 in late 1996 when the market price approximated $.64.
In late 1996, the Company issued 10,000 shares of common stock for payment
of $12,500 in legal services.
In the third quarter of 1997, 2,525,000 shares of common stock were issued
to consultants for payment of $315,626 in services.
Related parties converted $568,186 debt and $150,000 preferred stock at a
price of $1.00 per share in 1997, resulting in the issuance of 718,186
shares of common stock.
At September 30, 1997, the Company's largest shareholder forgave $655,416 of
notes payable and accrued interest.
On September 30, 1997, the Company purchased 563,319 shares of common stock
for its treasury at par value from its largest shareholder.
(continued)
<PAGE>
NEROX ENERGY CORPORATION AND SUBSIDIARY
Notes to consolidated Financial Statements
5. Income taxes
- ----------------
The Company and its subsidiary do not file consolidated income tax returns.
<TABLE>
<CAPTION>
1997 1996
---------- -----------
<S> <C> <C>
Computed income tax benefit at statutory rate $ 314,000 $ 2,156,000
Operating loss with no current tax benefit (314,000) (2,156,000)
---------- -----------
$ - $ -
========== ===========
</TABLE>
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 Federal net operating loss carryforward of $10,216,065
that may be offset against future taxable income. The carryforward will
begin to expire in 2006.
The Company's deferred tax benefit, which has been offset entirely by a
valuation allowance, is comprised of the following at December 31, 1997:
<TABLE>
<CAPTION>
1997
-----------
<S> <C>
Loss carryforwards $10,216,065
Temporary differences in basis
of oil and gas properties 1,012,224
-----------
11,228,289
Applicable tax rate 34%
-----------
3,817,618
Valuation allowance (3,817,618)
-----------
$ -
===========
</TABLE>
The net change during the year ended December 31, 1997 in the total
valuation allowance was an increase of $314,086.
(continued)
<PAGE>
NEROX ENERGY CORPORATION AND SUBSIDIARY
Notes to consolidated Financial Statements
6. Basic and diluted net loss per share
- ----------------------------------------
The following table illustrates the required disclosure of the
reconciliation of the numerators and denominators of the basic and diluted
earnings per share computations.
<TABLE>
<CAPTION>
December 31,
------------------------------------------
1997 1996
----------------- ------------------
<S> <C> <C>
Basic earnings per share:
- -------------------------
Numerator
---------
Net loss $ (923,784) $(6,343,872)
Less: Preferred stock dividends (49,500) (49,500)
----------- -----------
Net loss (973,284) (6,393,372)
----------- -----------
Denominator
-----------
Basic weighted average number of common shares
outstanding during the period 5,137,102 1,961,016
----------- -----------
Basic net loss per share $ (0.19) $ (3.26)
----------- -----------
Diluted earnings per share:
- ---------------------------
Numerator
---------
Net loss $ (923,784) $(6,343,872)
Less: Preferred stock dividends (49,500) (49,500)
----------- ----------
Net loss (973,284) (6,393,372)
----------- ----------
Denominator
-----------
Basic weighted average number of common shares
outstanding during the period 5,137,102 1,961,016
----------- ----------
Diluted net loss per share $ (0.19) $ (3.26)
----------- -----------
</TABLE>
7. Other related party transactions
- ------------------------------------
The Company leases office space from an affiliate at $400 per month on a
month to month basis. Total rent expense for years ended December 31, 1997
and 1996 was $30,809 and $27,280, respectively.
Monthly accounting services provided by a former director amounted to
$27,613 in 1996.
(continued)
<PAGE>
NEROX ENERGY CORPORATION AND SUBSIDIARY
Notes to consolidated Financial Statements
7. Other related party transactions (continued)
- ------------------------------------------------
Legal services are provided by two of the Company's directors, Mr. Jack
Utter and Mr. William Artus. Mr. Artus resigned as director in March 1998.
The Company incurred expenses to Mr. Utter in 1997 and 1996 in the amounts
of $122,015 and $91,948, respectively. The Company incurred expenses to Mr.
Artus in the amounts of $ 36,500 and $31,696 in 1997 and 1996, respectively.
Mr. Artus also loaned the Company $85,432 in 1997. The Company issued
143,143 shares to Mr. Utter and 151,016 shares to Mr. Artus in 1997 in
conversion of debt.
8. Commitments and contingencies
- ---------------------------------
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 rescind the transaction and Hobbs refused to
deliver most of the mining equipment. Due to these circumstances, the
Company initially recorded $295,000 of equipment and $411,000 of related
items which are in its possession. The remaining $649,000 was recorded as a
receivable offsetting the Company's equity by $525,690 and the minority
interest by $123,310. In September 1996, the Company reached a settlement
with Hobbs whereby Hobbs relinquished its 19% ownership in NPSI in exchange
for $.40 per ton of coal extracted and sold by Nerox from its Alaska coal
mine up to a maximum amount of $1,000,000.
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 1,410 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 $150,000 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. No royalties were paid in 1997
and 1996.
Oil and gas
-----------
In September 1994, the Company acquired proved oil and gas properties in
Alaska from individuals through the issuance of 108,394 shares of common
stock valued at $3,871,198. The agreement included the Company's promise
that the stock would reach $35.71 per share stock value at the end of two
years. If the common stock had a value of less than $35.71 per share two
years from the date of transfer, then, at the Company's option, the Company
may buy back the stock for $35.71 per share, issue additional stock
representing the difference between market value and $35.71 per share or pay
cash to the
(continued)
<PAGE>
NEROX ENERGY CORPORATION AND SUBSIDIARY
Notes to consolidated Financial Statements
8. Commitments and contingencies (continued)
- ---------------------------------------------
Oil and gas (continued)
-----------------------
shareholders representing the difference between market value and $35.71 per
share. In late 1996, the Company had a liability of over $3.7 million which
it could not satisfy. The Company was able to reach an agreement with the
shareholders for $1,004,170, of which $429,610 is due as cash flow allows,
and the remainder in 844,940 shares of common stock at $.68 per share. At
December 31, 1997, $114,640 had been converted to common stock.
9. Subsequent event
- --------------------
During 1998, 1,350,000 shares of common stock were issued to consultants for
$168,750 in services.
10. 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. As shown in the financial statements, the
Company has incurred a net loss of $7,270,000 during the two years ended
December 31, 1997, and, as of that date, had a working capital deficiency of
approximately $1,165,000. Additional capital infusion is necessary to begin
mining operations. As of February 27, 1998 the mine is not yet operational.
These factors raise substantial doubt about the Company's ability to
continue as a going concern.
Management is currently seeking additional financing and a joint venture
partner to develop the coal mine. The methods employed by the Company to
reduce the stockholder's deficit and attract new capital and begin mining
operations include the following:
<TABLE>
<CAPTION>
1997
---------
<S> <C>
Loans from shareholders, net $ 87,227
Conversion of notes payable and accrued interest to common stock 82,819
Conversion of accounts payable to common stock 485,367
Conversion of preferred stock to common stock 150,000
Issuance of common stock for services 315,626
Forgiveness of related party debt 655,416
</TABLE>
There can be no assurance that the Company will be successful in its efforts
to obtain additional financing and begin mining operations.
(continued)
<PAGE>
NEROX ENERGY CORPORATION AND SUBSIDIARY
Notes to consolidated Financial Statements
11. Segment information
- -----------------------
The Company's operations are classified into two principal industry
segments: oil and gas, and coal. Following is a summary of segment
information:
<TABLE>
<CAPTION>
Oil and Gas Coal Total
---------- ---------- ----------
1997
- ----
<S> <C> <C> <C>
Net sales $ 90,875 $ - $ 90,875
Loss from operations $ (358,104) $ (371,582) $ (729,686)
Depreciation, depletion and
amortization $ 60,000 $ - $ 60,000
Identifiable assets $ - $2,110,460 $ 2,110,460
1996
- ----
Net sales $ 109,228 $ - $ 109,228
Loss from operations $ (326,462) $ (676,839) $(1,003,301)
Depreciation, depletion and
amortization $ 60,081 $ - $ 60,081
Loss on lease impairment $4,073,034 $ 4,073,034
Settlement of shareholder contingency $1,004,170 $ - $ 1,004,170
Identifiable assets $ 175,713 $2,126,913 $ 2,302,626
Capital expenditures $ - $ 386,797 $ 386,797
</TABLE>
(continued)
<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.
HURLEY & COMPANY
Granada Hills, California
March 24, 1998
<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) for both proved reserves and proved developed reserves
was 16,671 and 27,409 for petroleum liquids (in bbls) and 348,963 and 326,719
for natural gas (in MCF) at December 31, 1997 and 1996, respectively.
The changes in proved reserves for 1997 and 1996 were as follows:
<TABLE>
<CAPTION>
Petroleum Natural
liquids gas
(bbls) (MCF)
--------- --------
<S> <C> <C>
Reserves at December 31, 1995 525,200 472,400
Revisions of previous estimates (487,742) 6,667
Production (10,049) (152,348)
--------- ---------
Reserves at December 31, 1996 27,409 326,719
Revisions of previous estimates - 130,500
Production (10,738) (108,256)
--------- ---------
Reserves at December 31, 1997 16,671 348,963
========= =========
</TABLE>
(continued)
<PAGE>
NEROX ENERGY CORPORATION AND SUBSIDIARY
Supplemental Information
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, 1997 and 1996:
<TABLE>
<CAPTION>
1997 1996
---- -------
<S> <C> <C>
$814 $ 644
Future cash inflows 466 337
Future development and production costs ---- ------
Future net cash flow 348 307
10% annual discount 268 231
---- ------
Standardized measure of discounted future cash flows $ 80 $ 76
==== ======
Primary changes in standardized measure of discounted
future net cash flow:
Beginning of year $ 76 $ 4,584
Sales of oil and gas, net of production costs - -
Net changes in prices and impairments 4 (4,508)
---- -------
$ 80 $ 76
==== =======
</TABLE>
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.
As of December 31, 1997, the aggregate amount of capitalized costs relating
to oil and gas producing activities is $1,748,367 and the related accumulated
depletion and valuation allowance is $632,018 and $1,055,422, respectively.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 2,171,387
<DEPRECIATION> 0
<TOTAL-ASSETS> 2,171,387
<CURRENT-LIABILITIES> 1,165,850
<BONDS> 0
0
345,000
<COMMON> 27,909
<OTHER-SE> 632,628
<TOTAL-LIABILITY-AND-EQUITY> 2,171,387
<SALES> 90,875
<TOTAL-REVENUES> 175,875
<CGS> 287,760
<TOTAL-COSTS> 287,760
<OTHER-EXPENSES> 677,801
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 134,098
<INCOME-PRETAX> (923,784)
<INCOME-TAX> 0
<INCOME-CONTINUING> (923,784)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (923,784)
<EPS-PRIMARY> (.19)
<EPS-DILUTED> (.19)
</TABLE>
