<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, 1996 Commission File Number: 0-18049
NEROX ENERGY CORPORATION
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)
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 [X] NO [_]
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: $109,000.
The aggregate value of the Registrants Common Stock held by non-affiliates of
the Registrant was approximately $527,076 as of January 31, 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 7,032,760 shares of the
Registrants Common Stock issued and outstanding as of January 31, 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 7 oil and gas wells in three
states. Production declined by 50% in 1996 because many of the oil and gas
producing properties are nearing the end of their productive lives.
Investment Properties
The current oil and gas producing properties are as follows:
<TABLE>
<S> <C>
Proved Developed Producing Reserves 7 Units
Proved Developed Non-Producing Reserves 6 Offsets
Proved Undeveloped Reserves 4 Leases
</TABLE>
<TABLE>
<CAPTION>
Well Location Type Operator
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Ellerbe #1 Clairborne Parish, LA Gas/Oil Pride Exploration Corp.
Herold-Agurs #1 Caddo Parish, LA Gas Pride Exploration Corp.
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
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.
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 reached agreements 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.
Revenues
The Registrant's revenues in 1996 and 1995 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 January 31, 1998, the Registrant had one salaried employee. 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 seven producing wells 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 1996 and 1995. 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>
Mar 1996 Jun 1996 Sep 1996 Dec 1996
-------- -------- -------- --------
<S> <C> <C> <C> <C>
High 2 1/2 3 3 1/2 2 7/8
Low 1 1 3/8 2 1/8 1 1/8
<CAPTION>
Mar 1995 Jun 1995 Sep 1995 Dec 1995
-------- -------- -------- --------
<S> <C> <C> <C> <C>
High 3 1/8 4 9/32 7 5/32 6
Low 23/32 1 25/32 1 25/32 2 1/2
</TABLE>
Holders
At the date of this filing there are approximately 423 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 $48,082 in
dividends on its Class A preferred shares in 1996 and accrued dividends of
$8,912.
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.
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.
<PAGE>
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.
The Company's largest oil and gas holdings were shut in in 1996 and its
coal mine is not yet operational. The Company must raise capital to develop its
coal mine and remain viable.
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 in 1995 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.
Interest costs increased from $7,531 to $68,388 as the Company has increasingly
had to rely on borrowings to finance its operations. 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. The minority interest in the loss
of NPSI occurred due to the sale of 19% of NPSI to Hobbs.
Liquidity and Capital Resources
At December 31, 1996, the Company had current liabilities totaling
$1,860,686 and current assets of $64,808 for a working capital deficit of
$1,795,878 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.
Inflation
Inflation during the year ended December 31, 1996 has had little effect on
the Company's capital costs and results of operations.
ITEM 7 FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See Exhibit 99, Auditor's Report, attached hereto and incorporated herein
by this reference.
<PAGE>
ITEM 8 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
On September 26, 1996, the Registrant filed a Form 8-K to report the
resignation of its certifying accountants, Saddington-Cacciamatta. In
connection with the audits of the two fiscal years ended December 31, 1995 and
the subsequent interim periods, there were no disagreements with Saddington-
Cacciamatta on any matter of accounting principles or practices, financial
statement disclosure or auditing scope or procedures, which disagreements if not
resolved to their satisfaction would have caused them to make reference to the
subject matter of disagreement in connection with their report. The board of
directors accepted the resignation.
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 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.
Joe Brock is a retired business-owner. Mr. Brock also serves on the Board
of Directors of another public company.
Executive Officers
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, 1996, 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 January 31, 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. 2,049,150 29.14%
846 West Foothill Blvd., Suite Y
Upland, California 91786
Scott Kelly 500,000 7.11%
2630 Plymouth Way
San Bruno, CA 94066
Jack Utter 0 -- %
18400 Von Karman Ave., Suite 600
Irvine, CA 92612
William Artus 203,000 2.89%
629 L Street, Suite 101
Anchorage, Alaska 99501
Joe Brock 114,000 1.62%
846 West Foothill Blvd., Suite Y
Upland, California 91786
All officers and directors as a group 767,000 10.91%
</TABLE>
(1) A person is deemed to be the beneficial owner of securities than can be
acquired by such person within 60 days from January 31, 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 January 31, 1998 have been exercised.
ITEM 12 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Payments to Directors for Professional Services
Mr. Jack Utter, President and CEO, provided legal services to the Company
in 1996 and 1995 valued at $91,948 and $46,289, respectively.
Mr. William Artus, Director, provided legal services to the Company in 1996
and 1995 valued at $31,696 and $16,066, respectively.
Mr. Leroy Studer, a shareholder and former Company Director now deceased,
provided accounting services to the Company in 1996 and 1995 valued at $27,613
and $46,322, respectively.
ITEM 13 EXHIBITS AND REPORTS ON FORM 8-K
EXHIBIT 99 Auditors' Report
<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: February 3, 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: February 3, 1998 By: /s/ JACK UTTER
-----------------------------
Jack Utter, President and Chief
Executive Officer
<PAGE>
EXHIBIT LIST
EXHIBIT 99 Financial Statements
EXHIBIT 27 - Financial Data Schedule
<PAGE>
EXHIBIT 99
NEROX ENERGY CORPORATION
AND SUBSIDIARY
Consolidated Financial Statements
December 31, 1996
<PAGE>
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, 1996, and the
related consolidated statements of operations, stockholders' equity and cash
flows for the year 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 audit.
We conducted our audit 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 audit provides 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, 1996, and the results of
their consolidated operations and cash flows for the year then ended, 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 1996
and 1995, 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 9. The
consolidated financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
HURLEY & COMPANY
Granada Hills, California
January 30, 1998
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
--------------------------------------------------
The Board of Directors and Stockholders
Nerox Energy Corporation
We have audited the accompanying consolidated statements of operations,
stockholders' equity and cash flows for the year ended December 31, 1995 of
Nerox Energy Corporation and Subsidiary (the "Company"). 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 audit.
We conducted our audit 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 audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the results of consolidated operations and cash flows of
Nerox Energy Corporation and Subsidiary for the year ended December 31, 1995 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. The Company incurred a
substantial loss in 1995 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 classifications of liabilities that might be
necessary in the event the Company cannot continue in existence.
SADDINGTON-CACCIAMATTA
May 17, 1996
Irvine, California
<PAGE>
NEROX ENERGY CORPORATION AND SUBSIDIARY
Consolidated Balance Sheet
<TABLE>
<CAPTION>
December 31,
1996
------------
ASSETS
<S> <C>
Current assets:
Cash and cash equivalents $ 64,808
------------
Property and Equipment, at cost:
Alaska coal mine and related equipment 2,116,891
------------
Proved oil and gas properties, using successful
efforts method accounting:
Alaska properties 4,320,298
Less accumulated depletion (130,176)
Less impairment allowance (4,190,122)
------------
0
------------
Louisiana properties 1,748,367
Less accumulated depletion (572,018)
Less impairment allowance (1,055,422)
------------
120,927
------------
Total property and equipment 2,237,818
------------
$ 2,302,626
============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Notes payable to:
Shareholders $ 645,000
Placer Dome 204,233
------------
849,233
Accounts payable 487,532
Accrued settlement of shareholder contingency 429,610
Accrued expenses 94,311
------------
Total current liabilities 1,860,686
------------
Commitments and contingencies -
Stockholders' Equity:
Preferred stock, 10% cumulative, non-voting,
convertible, no par value;
shares authorized 200,000, issued and outstanding
70,709 495,000
Common stock, par value $.004167; shares authorized
12,000,000, issued and outstanding 4,017,760 16,742
Additional paid-in capital 10,663,506
Accumulated deficit (10,733,308)
------------
Net stockholders' equity 441,940
------------
$ 2,302,626
============
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
NEROX ENERGY CORPORATION AND SUBSIDIARY
Consolidated Statements of Operations
<TABLE>
<CAPTION>
Years ended December 31,
-------------------------
1996 1995
----------- -----------
<S> <C> <C>
Revenues:
Oil and gas sales $ 109,228 $ 220,833
----------- -----------
Cost and expenses:
Oil and gas costs 48,451 220,006
Coal mine costs 275,665 262,704
General and administrative 788,412 557,312
Interest 203,287 68,388
Depletion 60,081 102,814
Loss on lease impairment 4,073,034 -
Settlement of shareholder contingency 1,004,170 -
----------- -----------
6,453,100 1,211,224
----------- -----------
Loss before minority interest (6,343,872) (990,391)
Minority interest - 125,419
----------- -----------
Net loss $(6,343,872) $ (864,972)
=========== ===========
Net loss per common share $ (3.26) $ (0.63)
=========== ===========
Weighted average number
of common shares outstanding 1,961,016 1,381,520
=========== ===========
</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, 1996 and 1995
<TABLE>
<CAPTION>
PREFERRED STOCK COMMON STOCK
------------------------------ --------------------------------------------
AMOUNT AMOUNT ADDITIONAL MINORITY
NUMBER OF ------------------- NUMBER OF -------------------- PAID-IN INTEREST
SHARES PER SHARE TOTAL SHARES PER SHARE TOTAL CAPITAL RECEIVABLE
--------- --------- -------- --------- --------- --------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE, JANUARY 1, 1995 -- $ -- $ -- 1,335,738 $ -- $ 5,566 $ 7,558,647 $ --
Stock issued in settlement of
liabilities -- -- -- 49,516 $2.86 206 141,314 --
Sales of stock for cash 70,709 $7.00 495,000 14,746 $3.57 61 52,560 --
Sale of minority interest -- -- -- -- -- -- 900,243 (525,690)
Preferred stock dividend -- -- -- -- -- -- -- --
Net loss -- -- -- -- -- -- -- --
------ -------- --------- ------- ----------- ---------
BALANCE, DECEMBER 31, 1995 70,709 -- 495,000 1,400,000 -- 5,833 8,652,764 (525,690)
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 debt -- -- -- 651,931 $1.27 2,717 823,673 --
Conversion of related party debt -- -- -- 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) 525,690
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 $ --
====== ======== ========= ======= =========== =========
<CAPTION>
NET
ACCUMULATED STOCKHOLDERS'
DEFICIT EQUITY
------------ ------------
<S> <C> <C>
BALANCE, JANUARY 1, 1995 $ (3,467,470) $ 4,096,743
Stock issued in settlement of
liabilities -- 141,520
Sales of stock for cash -- 547,621
Sale of minority interest -- 374,553
Preferred stock dividend (7,494) (7,494)
Net loss (864,972) (864,972)
------------ -----------
BALANCE, DECEMBER 31, 1995 (4,339,936) 4,287,971
Sales of stock for cash -- 294,228
Exercise of options -- 250,000
Conversion of related party debt -- 826,390
Conversion of related party debt -- 383,635
Stock issued to settle shareholder -- 574,560
contingency
Reacquisition of minority interest -- 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
============ ===========
</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>
YEARS ENDED DECEMBER 31,
--------------------------
1996 1995
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(6,343,872) $ (864,972)
Adjustments to reconcile net loss to net cash
used by operating activities:
Minority interest 0 (125,419)
Depletion 60,081 102,814
Amortization of discount and prepaid interest 128,290 0
Loss on lease impairment 4,073,034 0
Settlement of shareholder contingency 1,004,170 0
Issuance of common stock for services 12,500 0
(Increase) decrease in assets:
Other current assets 49,649 (32,016)
Increase (decrease) in liabilities:
Accounts payable 279,320 381,281
Accrued expenses 92,893 0
----------- -----------
Net cash used by operating activities (643,935) (538,312)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of oil and gas properties 0 21,934
Purchase of coal mine 0 (1,020,943)
Coal mine renovation costs (386,797) (253,151)
----------- -----------
Net cash used by investing activities (386,797) (1,252,160)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings from notes payable 578,041 1,258,853
Payments made on notes payable (45,135) 0
Sales of common stock for cash 294,228 52,621
Exercise of options 250,000 0
Sales of preferred stock for cash 0 495,000
Payment of dividends (48,082) 0
----------- -----------
Net cash provided by financing activities 1,029,052 1,806,474
----------- -----------
Net increase (decrease) in cash (1,680) 16,002
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 66,488 50,486
----------- -----------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 64,808 $ 66,488
=========== ===========
</TABLE>
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>
Years ended December 31,
-----------------------
1996 1995
---------- -----------
<S> <C> <C>
SUPPLEMENTAL DISCLOSURE OF CASH FLOW ACTIVITIES:
Cash paid for interest $ 6,450 $ -
NON-CASH INVESTING AND FINANCING TRANSACTIONS:
Dividends in arrears $ 8,912 $ 7,494
Debt to equity conversion $1,210,025 $ 141,520
Acquisition of minority interest $ 206,028 $ -
Issuance of common stock for services $ 12,500 $ -
Acquisition of property through issuance
of common stock $ - $ 295,000
Issuance of subsidiary shares in exchange
for a receivable $ - $ 649,000
</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, 1996
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 1996 and 1995.
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 1996 and 1995 were $1.72 and $.83, 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.
Net loss per share
------------------
Net loss per common share is computed by dividing reported net loss, adjusted
by preferred dividends, by the weighted average number of shares of common
stock outstanding during the respective periods.
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 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.
(continued)
<PAGE>
NEROX ENERGY CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
2. Alaska coal mine and related equipment
- -----------------------------------------
<TABLE>
<CAPTION>
1996
------------
<S> <C>
Acquisition cost $1,020,000
Capitalized mine expenses 201,992
Equipment 322,374
Licenses and permits 572,525
------------
$2,116,891
============
</TABLE>
The Company has a five year permit expiring on July 31, 2001 to mine coal in
Alaska. The mine is not currently operational.
3. Notes payable
- ----------------
<TABLE>
<CAPTION>
1996
---------------
Shareholders:
<S> <C>
Unsecured notes payable at 10% interest. These notes are in default. 145,000
Unsecured note payable, with interest at 24%, due on November 15,
1996. This note is in default. 500,000
---------------
645,000
Placer Dome:
Unsecured note payable, with imputed interest at 10%, due on or
before December 31, 1997. This note is in default. 204,233
---------------
$ 849,233
===============
</TABLE>
4. Stockholders' equity
- -----------------------
Preferred stock
---------------
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 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. Dividends in arrears were $8,912 and $7,494 at
December 31, 1996 and 1995, respectively. None of the shares issued were
converted at December 31, 1996.
(continued)
<PAGE>
NEROX ENERGY CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
4. Stockholders' equity (continued)
- -----------------------------------
Options
-------
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.
5. Income taxes
- ---------------
The Company and its subsidiary do not file consolidated income tax returns.
<TABLE>
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
Computed income tax benefit at statutory rate $ 2,156,000 $ 294,000
Operating loss with no current tax benefit (2,156,000) (294,000)
----------- -----------
$ - $ -
=========== ===========
</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 $9,292,281 that
may be offset against future taxable income. The carryforward will begin to
expire in 2006.
(continued)
<PAGE>
NEROX ENERGY CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
5. Income taxes (continued)
- ---------------------------
The Company's deferred tax benefit, which has been offset entirely by a
valuation allowance, is comprised of the following at December 31, 1996:
<TABLE>
<CAPTION>
1996
-----------
<S> <C>
Loss carryforwards $ 9,292,281
Temporary differences in basis
of oil and gas properties 1,012,224
-----------
10,304,505
Applicable tax rate 34%
-----------
3,503,532
Valuation allowance (3,503,532)
-----------
$ -
===========
</TABLE>
The net change during the year ended December 31, 1996 in the total valuation
allowance was an increase of $2,143,900.
6. Other related party transactions
- -----------------------------------
The Company leases office space from an affiliate at $400 per month on a
month to month basis.
The Company's largest shareholder converted $1,210,025 of debt to common
stock in 1996.
Monthly accounting services provided by a minority shareholder amounted to
$27,613 and $46,322 in 1996 and 1995, respectively.
Legal services are provided by two of the Company's directors, Mr. Jack Utter
and Mr. William Artus. The Company incurred expenses to Mr. Utter in 1996
and 1995 in the amounts of $91,948 and $46,289, respectively. The Company
incurred expenses to Mr. Artus in the amounts of $31,696 and $16,066 in 1996
and 1995, respectively.
Included in accounts payable at December 31, 1996 is $109,074 due to related
parties.
7. 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
(continued)
<PAGE>
NEROX ENERGY CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
7. Commitments and contingencies (continued)
- --------------------------------------------
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 $200,000 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 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 shareholders representing the difference between market value and
$35.71 per share. In late 1996, the Company reached agreements 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.
8. Subsequent events
- --------------------
During 1997, 2,525,000 shares of common stock were issued to consultants for
services. The shares were valued at the market value at the time of issuance
and ranged from $0.0416 to $0.125.
(continued)
<PAGE>
NEROX ENERGY CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
9. 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 over $7,200,000 during the two years
ended December 31, 1996, and, as of that date, had a working capital
deficiency of approximately $1,800,000. Additional capital infusion is
necessary to begin mining operations. As of January 30, 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. There can be no assurance that the Company
will be successful in its efforts to obtain financing and begin mining
operations.
10. 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
----------- ---------- -----------
1996
- ----
<S> <C> <C> <C>
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
1995
- ----
Net sales $ 220,833 $ - $ 220,833
Loss from operations $ (214,088) $ (605,101) $ (819,189)
Depreciation, depletion and
amortization $ 102,814 $ - $ 102,814
Identifiable assets $4,318,311 $1,786,233 $ 6,104,544
Capital expenditures $ 250,000 $1,299,094 $ 1,549,094
</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.
Granada Hills, California
January 30, 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 than 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 27,409 and 525,200 for petroleum liquids (in bbls) and 326,719 and
472,400 for natural gas (in MCF) at December 31, 1996 and 1995, respectively.
The changes in proved reserves for 1996 were as follows:
<TABLE>
<CAPTION>
Petroleum Natural
liquids gas
(bbls) (MCF)
------------- -------------
<S> <C> <C>
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
Revisions of previous estimates (487,742) 6,667
Production (10,049) (152,348)
----------- -----------
Reserves at December 31, 1996 27,409 326,719
=========== ===========
</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, 1996 and 1995:
<TABLE>
<CAPTION>
1996 1995
----------- ----------
<S> <C> <C>
Future cash inflows $ 644 $16,398
Future development and production costs 337 5,453
------- -------
Future net cash flow 307 10,945
10% annual discount 231 6,361
------- -------
Standardized measure of discounted future cash flows $ 76 $ 4,584
======= =======
Primary changes in standardized measure of discounted
future net cash flow:
Beginning of year $ 4,584 $ 4,130
Sales of oil and gas, net of production costs - -
Net changes in prices and impairments (4,508) 454
------- -------
$ 76 $ 4,584
======= =======
</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, 1996, the aggregate amount of capitalized costs relating to
oil and gas producing activities is $6,068,665 and the related accumulated
depletion and valuation allowance is $702,194 and $5,245,544, respectively.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 64,808
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 64,808
<PP&E> 2,237,818
<DEPRECIATION> 0
<TOTAL-ASSETS> 2,302,626
<CURRENT-LIABILITIES> 1,860,686
<BONDS> 0
0
495,000
<COMMON> 16,742
<OTHER-SE> 10,663,506
<TOTAL-LIABILITY-AND-EQUITY> 2,302,626
<SALES> 109,228
<TOTAL-REVENUES> 109,228
<CGS> 324,116
<TOTAL-COSTS> 324,116
<OTHER-EXPENSES> 5,925,697
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 203,287
<INCOME-PRETAX> (6,343,872)
<INCOME-TAX> 0
<INCOME-CONTINUING> (6,343,872)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (6,343,872)
<EPS-PRIMARY> (3.26)
<EPS-DILUTED> 0
</TABLE>
