<PAGE>
U.S. Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-QSB
(X) QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the quarterly period ended: September 30, 1996
( ) TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES ACT OF 1934
For the transition period ended:
Commission File Number: 0-25006
Name of Small Business Issuer in Charter: UNITED PETROLEUM CORPORATION
State or Other Jurisdiction of Incorporation or Organization: DELAWARE
IRS Employer I.D. Number: 13-3103494
Address of Principal Executive Offices: 4867 N. Broadway
Knoxville, Tennessee 37918
Issuer's Telephone Number: (615) 688-0582
Indicate by check mark whether the Registrant (1) has filed all reports to be
filed by Sections 13 or 15(d) of the Securities Act of 1934 during the
preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
(1) Yes (X) No ( ) (2) Yes (X) No ( )
APPLICABLE ONLY TO CORPORATE ISSUERS
Indicate the numbers of shares outstanding of each of the Registrant's classes
of common stock, as of the latest practicable date:
Common Voting Stock: 6,854,497 Date: November 5, 1996
Transitional Small Business Disclosure Format (Check one). Yes ( ) No (X)
Page 1 of 21
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UNITED PETROLEUM CORPORATION AND SUBSIDIARIES
INDEX
Part I. Financial Information
Item 1. Condensed Financial Statements (Unaudited)
Condensed consolidated balance sheets - Sept. 30, 1996 and
December 31, 1995
Condensed consolidated statements of operations - Three months ended
Sept. 30, 1996 and 1995; nine months ended Sept. 30, 1996 and 1995
Condensed consolidated statement of stockholders' equity
Condensed consolidated statements of cash flows - Nine months ended
Sept. 30, 1996 and 1995
Notes to condensed consolidated financial statements - Sept. 30, 1996
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Part II. Other Information
Signatures
Page 2 of 21
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PART I. - Financial Information Item 1. Financial Statements
United Petroleum Corporation and Subsidiaries
Condensed Consolidated Balance Sheets
At September 30, 1996 and December 31, 1995
(Unaudited)
Sept 30, 1996 Dec. 31, 1995
Current Assets
Cash $2,727,100 $37,941
Accounts and Notes Receivable $9,252,393 $150,532
Inventories $668,898 $572,808
Other Current Assets $225,415 $452,937
--------------------------------
$12,873,806 $1,214,218
Property and Equipment
Gas and Oil properties $4,631,837 $3,050,680
Premises and Equipment (Net) $12,993,593 $11,026,031
Other Assets $6,364,665 $251,314
--------------------------------
Total Assets $36,863,901 $15,542,243
============== =================
Liabilities and Stockholders' Equity
Current Liabilities
Accounts Payable $255,358 $602,137
Accrued Expenses $411,562 $337,503
Accrued Federal and State Income Tax $0 $5,160
Bank Line Of Credit $52,000 $250,000
Current Maturities-Long Term Debt $594,569 $514,968
--------------------------------
$1,313,489 $1,709,768
Long Term Liabilities
Long Term Debt-Less Current Maturities $9,059,914 $8,359,890
Debentures $18,401,667 $0
Unearned Revenue $200,000 $200,000
Deterred Income Taxes $568,000 $595,000
--------------------------------
$29,543,070 $10,864,658
Stockholders' Equity
Common Stock, $.01 Par Value $62,143 $46,028
(50,000,000 shares authorized,
6,214,330 and 4,602,840 issued)
Additional Paid-In Capital $8,192,703 $4,321,748
Retained Earnings ($934,015) $309,809
--------------------------------
Total Stockholders' Equity $7,320,831 $4,677,585
--------------------------------
Total Stockholders' Equity & Liabilities $36,863,901 $15,542,243
============== =================
The accompanying notes are an integral part of these financial statements.
Page 3 of 21
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United Petroleum Corporation and Subsidiaries
Condensed Consolidated Statements of Operations
For The Three Month Periods Ended September 30, 1996 and 1995
(Unaudited)
Sept. 30, 1996 Sept. 30, 1995
Revenues $3,153,075 $3,331,980
Cost of Sales $2,255,190 $2,268,757
---------------------------------
Gross Profit $897,885 $1,063,223
Operating Expenses:
Salaries and Wages $265,649 $214,683
Payroll Taxes $75,566 $84,838
Other General and Administrative $535,513 $446,984
Depreciation and Amortization $265,592 $131,937
---------------------------------
$1,142,320 $878,442
---------------------------------
Operating Income (Loss) ($244,435) $184,781
Interest Expense $735,892 $182,712
Other Income (Expense) $21,834 $10,442
---------------------------------
Net Income (Loss) Before Income Taxes ($958,493) $12,511
Provision For Income Taxes $0 ($3,814)
---------------------------------
Net Income (Loss) After Taxes ($958,493) $8,697
============= ===================
Primary Earnings (Loss) Per Share ($0.15) $0.00
============= ===================
Weighted Average Shares Outstanding 6,214,330 4,133,267
============= ===================
Fully Diluted Earnings Per Share ($0.15) $0.00
============= ===================
Fully Diluted Weighted Average Shares
Outstanding 6,214,330 4,749,264
============= ===================
The accompanying notes are an integral part of these financial statements.
Page 4 of 21
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United Petroleum Corporation and Subsidiaries
Condensed Consolidated Statements of Operations
For The Nine Month Periods Ended September 30, 1996 and 1995
(Unaudited)
Sept. 30, 1996 Sept. 30, 1995
Revenues $9,751,792 $9,787,039
Cost of Sales $6,682,135 $6,643,853
-----------------------------
Gross Profit $3,069,657 $3,143,186
Operating Expenses
Salaries & Wages $814,651 $779,071
Payroll Taxes $240,224 $236,326
Other General and Administrative $1,729,120 $1,280,492
Depreciation and Amortization $586,180 $368,515
-----------------------------
$3,370,175 $2,664,404
-----------------------------
Operating Income (Loss) ($300,518) $478,782
Interest Expense $1,041,197 $511,819
Other Income (Expense) $65,731 $270,555
-----------------------------
Net Income (Loss) Before Income Taxes ($1,275,984) $237,518
Income Tax (Expense) Benefit $32,160 ($74,818)
-----------------------------
Net Income (Loss) ($1,243,824) $162,700
============ ================
Primary Earnings (Loss) Per Share ($0.20) $0.04
============ ================
Weighted Average Shares Outstanding 6,214,330 4,133,267
============ ================
Fully Diluted Earnings (Loss) Per Share ($0.20) $0.04
============ ================
Fully Diluted Weighted Average Shares 6,214,330 4,749,264
Outstanding ============ ================
The accompanying notes are an integral part of these financial statements.
Page 5 of 21
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United Petroleum Corporation and Subsidiaries
Condensed Consolidated Statement of Stockholders' Equity
For The Nine Month Period Ended September 30, 1996
<TABLE>
<CAPTION>
Common Stock
Additional
Shares Amount Paid-In Retained
Capital Earnings Total
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1995 4,602,840 $46,028 $5,681,124 $309,809 $6,036,961
Adjustment to reflect receivable
from shareholder ($1,359,376) ($1,359,376)
---------- --------- ------------ ---------- -----------
December 31, 1995 restated to
reflect shareholder receivable 4,602,840 $46,028 $4,321,748 $309,809 $4,677,585
Shares issued for services 23,500 $235 $57,843 $58,078
Shares issued in cancellation
of warrants 2,334 $23 ($23) $0
Shares issued to acquire oil
& gas properties 31,482 $315 $70,520 $70,835
Shares issued to retire 1,554,175 $15,542 $3,742,615 $3,758,157
debentures
Net Income (Loss) ($1,243,824) ($1,243,824)
---------- --------- ------------ ---------- -----------
Balance, June 30, 1996 6,214,331 $62,143 $8,192,703 ($934,015) $7,320,831
========== ========= ============ ========== ===========
</TABLE>
Page 6 of 21
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United Petroleum Corporation and Subsidiaries
Condensed Consolidated Statements of Cash Flows
For The Nine Month Periods Ended September 30, 1996 & 1995
Sept. 30, 1996 Sept. 30, 1995
-------------------------------
Operating Activities
Net Income (Loss) ($1,243,824) $115,260
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Depreciation and Amortization $586,180 $230,841
Shares Issued For Services $58,078
Changes in operating assets and liabilities:
Decrease (increase) in -
Accounts notes receivable ($9,101,861) $37,479
Inventories ($96,090) ($27,946)
Other Current Assets $227,522 ($73,784)
Proceeds from unearned purchase discounts $0 $0
Increase (decrease) in -
Accounts Payable and Accrued Liabilities ($304,880) ($2,806)
------------------------------
Net Cash Provided By Operating Activities ($9,874,875) $279,044
Investing Activities
Property and Equipment Additions ($2,553,742) ($2,371,956)
Acquisition of gas and oil properties ($1,510,322) ($330,293)
Decrease (Increase) in other assets ($6,113,351) ($155,641)
------------------------------
Net Cash Provided By Investing Activities ($10,177,415) ($2,857,890)
Financing Activities
Principal payments on debt ($588,536) ($1,456,425)
Proceeds from short term borrowings $52,000 $0
Payments on short term borrowings ($250,000) $0
Net proceeds from bank financing $1,368,161 $3,715,560
Net proceeds from issuance of debentures $18,401,667 $0
Proceeds from issuance of common stock $3,758,157 $274,120
------------------------------
Net Cash Provided By Financing Activities $22,741,449 $2,533,255
------------------------------
Increase (Decrease) in Cash and Cash Equivalents $2,689,159 ($45,591)
Cash and Cash Equivalents, Beginning of Period $37,941 $105,776
------------------------------
Cash and Cash Equivalents, End of Period $2,727,100 $60,185
============= =================
The accompanying notes are an integral part of these financial statements.
Page 7 of 21
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United Petroleum Corporation and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Note 1 - Summary of Significant Accounting Policies
Basis of Presentation - The accompanying unaudited condensed consolidated
financial statements have been prepared in accordance with generally accepted
accounting principles for interim financial information and with the
instructions to Form 10-QSB of Regulation S-B. Accordingly, they do not include
all of the information and footnotes required by generally accepted accounting
principles for complete statements. In the opinion of management, all
adjustments (consisting of normal recurring accruals) considered necessary for a
fair presentation have been included. Certain reclassifications have been made
to the 1995 financial statements in order for them to conform with
classifications used in 1996. Operating results for the three month and nine
month periods ended September 30, 1996 are not necessarily indicative of the
results that may be expected for the year ended December 31, 1996. For further
information, refer to the consolidated financial statements and footnotes
thereto included in the Registrant and Subsidiaries' annual report on Form
I0-KSB for the year ended December 31, 1995.
Principles of Consolidation - The consolidated financial statements include the
accounts of United Petroleum Corporation (the "Company") and its wholly owned
subsidiaries, Calibur Systems, Inc. and Jackson-United Petroleum Corporation.
All significant intercompany accounts and transactions have been eliminated in
consolidation.
Business Activities - The Company's business activities are conducted through
its subsidiaries and are contained within two primary industry segments. Calibur
Systems, Inc. operates convenience stores, express lube centers, and car washes
providing a variety of car wash and detail services, gasoline, automotive, food
and beverage and related products throughout middle and eastern Tennessee and
northern Georgia. Jackson-United Petroleum Corporation is a newly formed
corporation for the purpose of developing gas and oil properties and marketing
of gas and oil production. Currently all of the Company's gas and oil properties
are located within the United States in central and eastern Kentucky and are
under development.
Cash and Cash Equivalents - The Company considers cash on hand, deposits in
banks, certificates of deposit and investments with original maturity of three
months or less to be cash or cash equivalents.
Inventories - Inventories are stated at the lower of cost or market. Cost of
gasoline sales is determined using the first-in first-out method. Cost of
convenience store sales is determined using the average retail cost method.
Page 8 of 21
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United Petroleum Corporation and Subsidiaries
Notes to Condensed Consolidated Financial Statements - Continued
(Unaudited)
Gas and Oil Properties - The Company follows the full cost method of accounting
for gas and oil properties. Accordingly, all costs associated with acquisition,
exploration and development of gas and oil reserves, including directly related
overhead costs, are capitalized.
All capitalized costs of gas and oil properties, including the estimated future
costs to develop proved reserves, are amortized on the unit-of-production method
using estimates of proved reserves. Investments in unproved properties and major
development projects are not amortized until proved reserves associated with the
projects can be determined or until impairment occurs. If the results of an
assessment indicate that the properties are impaired, the amount of the
impairment is added to the capitalized costs to be amortized.
In addition, the capitalized costs are subject to a "ceiling test", which
basically limits such costs to the aggregate of the "estimated present value",
discounted at 10 percent interest rate of future net reserves from proved
reserves, based on current economic and operating conditions, plus lower of cost
or fair market value of unproved properties.
Retail Operations - Property and equipment of the retail operations is stated at
cost. Routine repairs and maintenance are charged to expense as incurred. Upon
disposition, the cost and related accumulated depreciation are removed from the
accounts and resulting gain or loss is reflected in operations of the period.
The Company generally depreciates property and equipment on a straight-line
basis over the useful lives of the related assets estimated to be 15 to 20 years
for buildings and improvements, 6 to 10 years for equipment, and 3 to 4 years
for vehicles.
Capitalized Interest - The Company capitalizes interest on construction in
progress and expenditures made in connection with exploration and development
projects that are not subject to current amortization. Interest is capitalized
only for the period that activities are in progress to bring these projects to
their intended use.
Income Taxes - Deferred Taxes are provided in accordance with Statement and
Financial Accounting Standards Number 109, Accounting For Income Taxes. Deferred
taxes are provided to account for accumulated temporary differences for assets
and liabilities for financial reporting and income tax purposes, including
alternative minimum taxes. The Company's temporary differences are primarily due
to different financial reporting and tax methods of accounting for depreciation
and intangible drilling costs.
Non-Cash Equity Transactions - Goods and services acquired through the issuance
of the Company's common stock are valued at the fair market value of the stock
on the date of
Page 9 of 21
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United Petroleum Corporation and Subsidiaries
Notes to Condensed Consolidated Financial Statements - Continued
(Unaudited)
acquisition. When restricted shares are issued, the value of the shares given in
exchange is discounted approximately 50% from the fair market value of freely
traded common stock. It is the intent of management to reduce the discount
related to the issuance of restricted shares if and when the market for the
Company's common stock becomes less volatile and the average daily trading
volume increases significantly.
Equity Transactions
During the third quarter of 1996 the Company successfully completed a
private placement of six convertible debentures pursuant to Regulation S of the
Securities and Exchange Commission which have a maturity of approximately two
years and interest rates of 6% and 7%. The debentures contain a mandatory
provision such that the Company can force the conversion of the debentures into
equity one year from the date of issuance subject to the fact that the
conversion will not force the holder of the debenture to be a beneficial owner
of more than five percent (5%) of the common stock of the Company. The aggregate
face value of the debentures issued during the quarter was approximately
$17,766,667 with proceeds to the Company of approximately $13,232,500 before
expenses of approximately $1,852,500 (see footnote below). Debentures with a
face value of approximately $7,766,667 carry a 7% interest rate and the
remaining debentures with a face value of approximately $10,000,000.00 carry an
interest rate of 6%. The debentures are convertible into common stock of the
Company. The conversion price is equal to 100% of the average market price per
share as reported by Nasdaq for the five business days preceeding the conversion
date subject to a ceiling price per share of $4.00 per shares on debentures with
a face value of approximately $666,667, $5.00 per share on debentures with a
face value of approximately $7,100,000, $8.00 per share on debentures with a
face value of approximately $7,500,000 and $11.00 per share on debentures with
a face value of approximately $2,500,000.
During the quarter debentures with a face value of approximately $5,798,000
were converted into equity via the issuance of 1,554,175 shares of common stock
in the Company. The conversions prices were from $2.00 to $4.00 per share.
Subsequent to the end of the quarter the Company successfully completed an
additional private placement of three convertible debentures which have a
maturity of approximately two years and an interest rate of 6%. The aggregate
face value of the additional debentures was approximately $3,300,000 with
proceeds to the Company of approximately $2,574,000 before expenses of
approximately $412,650. The debentures are convertible into common stock of the
Company. The conversion price is equal to 100% of the average market price per
share as reported by Nasdaq for the five business days preceding the conversion
date subject to a ceiling price of $4.50 per share on debentures with a face
value of approximately $1,300,000 and a ceiling price of $4.00 per share on
debentures with a face value of approximately $2,000,000.
Footnote: During the prior quarter the Company issued debentures with a face
vale of approximately $6,433,000 with proceeds to the Company of approximately
$4,822,917 before expenses of approximately $611,000.
Page 10 of 21
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Item 2 - Management's Discussion and Analysis of Operations
The Company realized a net loss of ($958,493) for the three month period
ended September 30, 1996, compared to net income of $8,697 for the same period
last year.
A summary of comparative results between the third quarter of 1996 and the
third quarter of 1995 is as follows:
Revenues were realized as follows:
Quarter Ended Quarter Ended
Sept. 30, 1996 Sept. 30, 1995
-------------- --------------
Retail Subsidiary:
Gasoline $ 1,223,282 $ 1,306,445
Car Wash 1,225,757 392,071
Oil & Lube 313,854 268,711
Grocery 163,395 192,579
Other Sales 222,881 172,174
Energy Subsidiary:
Natural Gas 3,906 0
Crude Oil 0 0
-------------- --------------
Total Revenue For Quarter $ 3,153,075 $ 3,331,980
============== ==============
The Company experienced an increased gross profit margin on gasoline sales
from 11.5% in the third quarter of 1995 to 12.4% in the third quarter of 1996.
Volume decreased from 1,149,444 gallons in the third quarter of 1995 to
1,024,412 gallons in third quarter of 1996 for a decrease of approximately
10.8%. The increased gross profit margin can mainly be attributed to favorable
wholesale gasoline prices.
Car wash revenue was $166,314 lower for the quarter as compared to the same
quarter last year. It is the belief of management that extended periods of
rainfall during the quarter created the decrease in same store car wash
revenues.
Oil and lube revenue was $45,143 higher for the quarter as compared to the
same quarter last year which represents an increase of approximately 16.8%. Of
this amount $48,770 is attributed to the following new locations: (1.)
Knoxville, Tennessee at Merchants Road, (2.) Atlanta, Georgia and (3.)
Cleveland, Tennessee. Same store sales decreased by $3,627. The decrease in
same store sales is attributed to unfavorable weather conditions. This overall
trend of increasing sales is expected to continue as lube centers require
approximately two to three years to reach their potential. As of the end of the
third quarter of this year the Company had eight oil and lube centers in
operation as compared to five oil and lube centers open at the end of the third
quarter in 1995. Revenues from the three above referenced locations are expected
to grow substantially over the next few years.
Page 11 of 21
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Management's Discussion and Analysis of Operations - Continued
Operating and interest expenses were $1,878,212 for the third quarter of
1996 as compared to $1,061,154 for the same period last year. A substantial
portion of the increase is attributed to $408,635 in interest associated with
debentures and $153,870 in amortized issuance costs related to the debentures
being written off over the life of the debentures. The remaining increase is
mainly attributed to increases in legal and professional fees as well as
increased shareholder relations expenses. Interest and depreciation expenses in
the retail subsidiary were also higher for the quarter as compared to last year
as a result of the continued growth in retail locations owned by the Company.
Additionally, approximately $94,212 in interest expense was capitalized
associated with the carried cost of non-producing oil and gas properties
presently in the development stage. No interest is capitalized in relation to
producing oil and gas properties.
Management expected a loss for the quarter as a result of the costs
associated with the debentures as mentioned above, however, earnings for the
third quarter did not meet the expectations of management. Operating income,
excluding the effects of the debentures, was approximately ($90,565). The
primary factors associated with the decreased operating income were: (1.) lower
than expected gasoline volume and (2.) lower than expected car wash revenue
during the quarter. All of these factors combined with the increased costs
associated with such costs as legal, professional and shareholder relations were
the major factors which resulted in the loss sustained by the Company in the
second quarter.
The Company posted its first revenues from the oil and gas subsidiary
during this quarter as a result of natural gas sales from the Bogar #1 well in
Pike County, Kentucky. The well was placed into production on September 16, 1996
with resulting revenues of $3,906 by September 30, 1996. The oil and gas
business segment had a net loss ($37,626) for the quarter ended September 30,
1996.
During the Company's three most recent years, it has drilled four (4)
exploratory wells on the Company's central Kentucky leases, all during 1993 and
1994. Natural gas has been discovered on three (3) of these wells. No gas was
discovered in the fourth well, and the three wells exhibiting the presence of
natural gas are presently shut-in.
During the third quarter of 1996 the Company drilled two (2) exploratory
wells, known as the TL #1 and the Wilson #1, in Pike County, Kentucky under a
farmout agreement with Penn Virginia Oil & Gas Corporation. Natural gas has been
discovered in both of these wells and the Company is presently in the process of
connecting the wells to a pipeline. Natural gas sales from these two wells are
expected to commence in November of 1996. Sales of natural gas from the first
well drilled under the farmout agreement began in late September of 1996 from
the Bogar #1 well as mentioned above.
In addition to the wells drilled under the farmout agreement in Pike
County, Kentucky the Company drilled one (1) exploratory well, known as the
Stepp #1 well, on the Company's lease in
Page 12 of 21
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Management's Discussion and Analysis of Operations - Continued
Martin County, Kentucky. Natural gas and oil was discovered on this well. The
Company anticipates that sales of natural gas and oil from this well will begin
in November of 1996.
On September 17, 1996 the Company entered into an agreement with Kastle
Resources Enterprises, Inc. of Edinboro, Pennsylvania which will allow the
Company to participate in the drilling of up to 100 wells in Pennsylvania and an
additional 200 wells in Ohio. The following is a summary of the two prospects
and the present status of the Company's involvement:
The Pennsylvania Prospect - Under the terms of the agreement Kastle is to
provide twenty-five percent (25%) and the Company will provide the remaining
seventy-five percent (75%) of the funds required to drill and complete each
well. Ownership of each well drilled under the agreement is twenty-five percent
(25%) to Kastle and seventy-five percent (75%) to the Company. The prospect is
located on approximately 6,000 acres in Crawford County, Pennsylvania where
Kastle presently owns and operates approximately fifty-five (55) producing
natural gas wells. Kastle is designated as the operator of the wells to be
drilled in the Pennsylvania prospect. As of September 30, 1996 the aggregate
investment by the Company in the Pennsylvania venture is approximately $236,250.
As of the date of this report and subsequent to the end of the quarter the
Company invested an additional $1,286,250 in the Pennsylvania venture for an
aggregate of $1,522,500 invested by the Company. The initial plans are to drill
twenty (20) wells under the agreement in Pennsylvania by December 31, 1996 at a
cost of approximately $175,000 per well. No assurance can be given that the
Company will be able to acquire the necessary capital to continue participation
in the Pennsylvania drilling venture.
Drilling commenced on two (2) wells in Pennsylvania prior to the end of the
quarter known as the Curtis #1 and Gall #1 wells. The presence of natural gas
was discovered on both wells. Subsequent to the end of the quarter both wells
were connected to a pipeline and sales of natural gas commenced during October
of 1996.
Subsequent to the end of the quarter drilling operations commenced on eight
(8) additional wells in Pennsylvania. As of the date of this report drilling has
been completed on four (4) of these wells and the presence of natural gas was
discovered in each well. Each of these four (4) wells has subsequently been
connected to a pipeline and sales of natural gas has commenced from each of the
four (4) wells. Drilling operations continue on the remaining four (4) wells
begun subsequent to the end of the quarter. Results from these four (4) wells
was not available as of the date of this report.
The Ohio Prospect - Under the terms of the agreement Kastle is to provide
thirty percent (30%) and the Company is to provide the remaining seventy percent
(70%) of the funds required to drill and complete each well. Ownership of each
well drilled under the agreement is thirty percent (30%) to Kastle and seventy
percent (70%) to the Company. The prospect is located on
Page 13 of 21
<PAGE>
Management's Discussion and Analysis of Operations - Continued
approximately 40,000 acres in Pickaway County, Ohio. Kastle designated as the
operator of the wells to be drilled in the Ohio prospect. The Company had no
investment in the Ohio drilling venture as of September 30, 1996. However, as
of the date of this report and subsequent to the end of the quarter the Company
invested approximately $269,500 in the Ohio drilling venture. The initial plans
are to drill twenty (20) wells in Ohio under the agreement by December 31, 1996
at a cost of approximately $175,000 per well including the cost of 30-D seismic.
No assurance can be given that the Company will be able to acquire the necessary
capital to continue participation in the Ohio drilling venture.
Subsequent to the end of the quarter three (3) wells were drilled under the
agreement on the Ohio prospect. The presence of oil was discovered in the first
well drilled. The well, known as the J. Schneider #1, is presently being
completed and is expected to begin production in November of 1996. The Company
estimates the well will produce approximately sixty (60) to eighty (80) barrels
of oil per day during the first year. No oil was discovered in the second or
third well drilled under the agreement in Ohio. Drilling has presently been
ceased in Ohio such that the Company and Kastle can review the 3-D seismic data
to ascertain if there is a problem with the information.
Financial Condition - The working capital position of the Company as of
September 30, 1996 is approximately $11,560,317, however, approximately
$9,026,957 of this is represented by a receivable as discussed below. There can
be no assurance that the receivable will ultimately be collectable by the
Company. The majority of this increase in working capital resulted from the
issuance of $17,766,667 face value of convertible debentures during the third
quarter of 1996. The debentures were issued at a twenty-five percent (25%)
discount to face value and bear an interest rate of between six to seven
percent. The discounts in the amount of $4,368,618 appear in the category "other
assets" on the enclosed financial statements and is expensed through
amortization over the life of the debentures. The debentures have a maturity of
approximately two years. In addition, approximately $1,900,000 of the cash on
hand is dedicated to existing drilling projects in Pennsylvania.
The debt to equity ratio of the Company increased during the quarter.
Management is aware that the present ratio of 4.04 to 1 is greater than the
desired ratio of 2.5 to 1 or less. However, when the debentures are converted
into common stock the ratio should improve. The debenture documents contain a
mandatory provision such that the Company can force the conversion of the
debentures into equity one year from the date of issuance subject to the fact
that the conversion will not force the holder of the debenture to be a
beneficial owner of more than five percent (5%) of the common stock of the
Company.
On or about June 27, 1996, the Company engaged TAJ Global Equities ("TAJ")
to act as the Company's underwriter for a $20,000,000 offering of the Company's
common stock which was to take place during the third quarter of 1996.
Page 14 of 21
<PAGE>
Management's Discussion and Analysis of Operations - Continued
During the third quarter 1,554,175 shares were issued to six of the
purchasers of the debentures issued by the Company who exercised their
conversion rights. The debentures were converted at share prices ranging from
$2.40 to $4.00 per share. Each of the debenture subscription agreements required
that the purchasers refrain from short sales of securities acquired upon
conversion, prior to conversion. Despite this requirement, many debenture
holders sold short substantial quantities of the Company's shares prior to
conversion of their debentures resulting in a sharp drop in the price of the
Company's shares. On July 11, 1996, the Board of Directors of the Company
authorized the purchase in the open market of up to one million (1,000,000)
shares of the Company's common stock. This action was taken in view of the fact
that the unauthorized short selling by debenture holders had caused the price of
the Company's shares to drop from approximately $5.50 per share to approximately
$2.00 per share.
During late July and early August the Company wired funds to TAJ in the
amount of $850,000 for use in the repurchase of the Company's shares. To the
Company's knowledge no shares were purchased with these funds for the account of
the Company. Short selling by the debenture holders who planned to convert their
shares continued throughout August and September, 1996 and TAJ as a market
maker, purchased shares in its trading account at an increasing rate -
approximately 1,259,843 shares in August and approximately 1,940,187 shares in
September. TAJ did not consult with the Company when making these purchases and
did not advise the Company of these purchases until afterward. Some of the
shares were resold by TAJ to its customers and some were transferred to an
account at TAJ in the name of Strategic Holdings. Strategic Holdings, a
consulting firm which had been retained by the Company, has advised the Company
that it never authorized those purchases but that they had been accomplished by
TAJ by the use of a power of attorney which Strategic had given to TAJ. In any
event, neither TAJ nor Strategic were able to pay for most of the securities
purchased and they requested that the Company lend them sufficient funds to
cover the cost of the purchases promising to return those funds upon resale of
the shares. The Company received numerous frantic telephone calls from TAJ and
National Financial Service Corporation, TAJ's clearing broker, requesting it to
advance the funds necessary to pay for the shares which had been purchased by
TAJ and sold to Strategic. In response to those calls the Company agreed to
lend to Strategic the $850,000 previously forwarded to TAJ and it advanced
additional sums during the quarter totaling $8,176,957. Subsequent to the end
of the quarter additional funds were wired in the amount of $1,749,704. There
are presently 2,154,307 shares of the Company's common stock in the account of
Strategic and Strategic has executed a note in the amount of $10,776,660.90 and
a loan agreement with the Company. It is the opinion of counsel to the Company
that, in view of the large percentage of shares owned by Strategic, it is an
affiliate, and the shares presently held by Strategic cannot be sold, except in
accordance with the limitations imposed by Rule 144 of the Rules and regulations
of the Securities and Exchange Commission. The Company has notified Strategic
and the
Page 15 of 21
<PAGE>
Management's Discussion and Analysis of Operations - Continued
Company's transfer agent of this opinion. It is the intention of the Company to
prepare a registration statement, Form S-3, covering the shares being held by
Strategic. Upon the sale of those shares, the Company anticipates that its loan
to Strategic will be repaid. However, no assurance can be given as to when or if
this might occur.
During the balance of 1996 and in 1997, the Company will continue to seek
additional sources of capital for the following reasons:
(1.) To be able to expand the number of retail locations owned or operated
by the Company by a minimum of four new locations per year. In order to maintain
the necessary financial ratios required by the financial industry and sound
business policies the Company is required to use both equity and debt to finance
new locations. This alone will create the need for substantial capital if the
Company's business is to grow at the pace desired by management. No assurance
can be given that the Company will be able to obtain the desired capital.
(2.) To be able to continue to add services such as lube centers and food
courts to existing locations. A typical lube center added to a location already
owned by the Company can cost as much as $200,000 per location. In most cases
financing for such additions can only be arranged for up to three to five years.
For this reason several lube centers financed entirely by debt can have a
substantial effect on the annual debt service of the Company. It is the intent
of management to decrease annual debt service as much as possible and therefore
increase the Companies ability to generate cashflow, which requires that a large
portion of the funds used to complete new lube centers should be provided
through one or more infusions of additional capital.
(3.) To be able to develop the Company's oil and natural gas properties and
to continue drilling operations. Without sufficient capital the Company will not
be able to convert the oil and natural gas subsidiary into an income generating
asset of the Company. No assurance can be given that the Company will be able to
raise sufficient capital to continue the development of the oil and gas
subsidiary.
(4.) To increase overall balance sheet liquidity of the Company. Without
the necessary liquidity to be able to act quickly the Company is deprived of the
opportunity to make acquisitions that could be beneficial.
Expansion and Capital Improvements -
As of September 30, 1996 the Company is committed to certain expansion
projects in the retail subsidiary and they are as follows:
Page 16 of 21
<PAGE>
Management's Discussion and Analysis of Operations - Continued
(1.) The Company has a new Pennzoil Ten Minute Lube Center in Oak Ridge,
Tennessee which was built as an extension to the Company's existing car wash
facility at that location. The new lube center opened in August of 1996. No
further financing is required. A construction and permanent loan was obtained
prior to beginning construction from a bank in an amount sufficient to cover the
estimated costs of the project.
(2.) The Company is presently building a new Pennzoil Ten Minute Lube
Center in Newport, Tennessee. No further financing is required. A loan to cover
the majority of the costs associated with this new location was obtained prior
to commencement of construction. The facility is expected to open in November of
1996.
(3.) The Company is presently building a Pennzoil Ten Minute Lube Center in
Morristown, Tennessee. No further financing is required. A loan to cover the
majority of the costs associated with this new location was obtained prior to
commencement of construction. The facility is expected to open in December of
1996.
(4.) The Company intends to build a new Pennzoil Ten Minute Lube Center at
8016 Kingston Pike in Knoxville, Tennessee. A loan to cover approximately
seventy-five percent of the estimated costs of the project has recently been
completed. The remainder of the funds necessary for this project will be paid
in cash. Construction is expected to begin in the fourth quarter of 1996.
(5.) The Company desires to open three new Exxon branded gasoline locations
in 1996. The land for these three projects has already been purchased by the
Company. It is the intent of the Company at this time to convey one of these
properties to Michael F. Thomas, the Company's chief executive officer, or a
third party and execute a lease with the third party such that the Company will
operate the locations but will not own the locations. The locations are as
follows: (1) Ashville Highway in Knoxville, Tennessee, (2) Cumberland Avenue in
Knoxville, Tennessee and (3) Lee Highway in Chattanooga, Tennessee. Financing
for the Cumberland Avenue property was completed subsequent to the end of the
quarter and the property conveyed to Michael F. Thomas. Construction has begun
and the location is expected to open in December of 1996. Financing has been
arranged for the Company to own and operate the Ashville Highway location in
Knoxville, Tennessee. The loan is scheduled to close in the fourth quarter of
1996. No financing has been arranged for the other Exxon branded location in
Chattanooga, Tennessee and no assurance can be given that suitable financing
will be available to the Company for this two project.
As of September 30, 1996 the Company desires to expand drilling operations
in their energy subsidiary. The below outlined plans are not commitments of the
Company, however, Company management is of the opinion that these expenditures
are required to enable the energy subsidiary to contribute to the profitability
of the Company. A summary of the immediate plans are as follows:
Page 17 of 21
<PAGE>
Management's Discussion and Analysis of Operations - Continued
(1.) The Company desires to participate in the drilling of one-hundred
(100) wells in Pennsylvania via the agreement signed with Kastle Resources
Enterprises, Inc. To date sufficient funds have been dedicated to drill fifteen
(15) wells of which ten (10) wells have already either been drilled or are in
the process of being drilled. No assurance call be given that the Company will
be able to acquire the necessary capital to participate in drilling additional
wells in Pennsylvania beyond the number of wells for which capital has already
be dedicated.
(2.) The Company desires to participate in the drilling of two-hundred
(200) wells in Ohio via the agreement signed with Kastle Resources Enterprises,
Inc. To date sufficient funds have been dedicated to drill three (3) wells
which have all been drilled as of the date of this report. No assurance can be
given that the Company will be able to acquire the necessary capital to drill
additional wells in Ohio.
The Company has recently reviewed several potential acquisitions for its
retail subsidiary and several potential acquisitions for the oil and gas
subsidiary. As of the date of this report none of these potential acquisitions
have become commitments of the Company. In the event the Company should desire
to make such an acquisition or acquisitions substantial capital will be
required. No assurance can be given that the Company will be able to acquire the
necessary capital to make such acquisitions.
On May 2, 1996 the Company entered into a letter of intent with the Silicon
Group, Inc. (hereinafter "SGI") headquartered in Coral Springs, Florida to
acquire eighty percent (80%) of the outstanding shares of SGI. As of the date
of this report no formal agreement has been completed.
During the quarter the Company issued 5,000 restricted common shares as
payment for services. All of the shares were issued at 50% of market value as of
the date of issuance. Said shares were issued at a price of $1.3125 per share.
The aggregate issuance price associated with the issued shares was $6,563.
In August the Company issued options to purchase 100,000 shares of the
Company's common stock at $4.0625 per share to Donald D. Patton. The options
were issued at the fair market value of the Company's common stock as of the
date of the grant. These options were issued as an additional incentive to
induce Mr. Patton to enter into a five year employment agreement with the
Company. To date none of these options have been exercised. Mr. Patton was
hired by the Company from Ashland Exploration, Inc. of Houston Texas to serve as
an Executive Vice President of the Company with duties including the acquisition
and development of oil and gas properties for the Company's oil and gas
subsidiary.
Page 18 of 21
<PAGE>
Management's Discussion and Analysis of Operations - Continued
In September the Company issued options to purchase 500,000 shares of the
Company's common stock at $3.25 per share to Michael F. Thomas. These options
were issued at the fair market value of the Company's common stock as of the
date of the grant. Also in September the Company issued Mr. Thomas additional
options to purchase 157,800 shares of the Company's common stock at $3.25 per
share. These additional options were issued as an incentive to induce Mr. Thomas
to enter into a five year employment agreement with the Company and in lieu of
fees for his past guaranty of Company obligations and debts. To date none of
these options have been exercised. Mr. Thomas is the President and Chairman of
the Company.
In September the Company issued options to purchase 250,000 shares of
common stock at $5.1875 per share to L. Douglas Keene, Jr. The options were
issued at the fair market value of the Company's stock as of the date of the
grant. These options were issued as an additional incentive to induce Mr. Keene
to enter into a five year employment with the Company. To date none of these
options have been exercised. Mr. Keene is the Executive Vice President & Chief
Financial Officer of the Company.
Page 19 of 21
<PAGE>
Part II - Other Information
Item 1 Legal Proceedings
None, not applicable
Item 2 Changes In Securities
None, not applicable
Item 3 Defaults Upon Senior Securities
None, not applicable
Item 4 Submission of Matters to a Vote of Security Holder
None, not applicable
Item 5 Other Information
Subsequent to the end of the quarter the Company issued three additional 6%
convertible debentures with an aggregate face value of $3,300,O00 resulting in
additional cash being received by the Company in the amount of $2,574,000 before
expenses of approximately $412,650. As of the date of this report and
subsequent to the end of the third quarter approximately $2,460,666 in face
value of debentures have been converted into common stock at prices of
between $2.38 to $4.00 per share.
Subsequent to the end of the quarter the Company advanced additional funds
to Strategic Holdings in the amount of approximately $1,749,704 bringing the
total advanced by the Company to Strategic Holdings to approximately $10,776,660
as of the date of this report. For additional information regarding this
transaction refer to the enclosed section known as "Management's Discussion and
Analysis of Operations".
Item 6 Exhibits and Reports on Form 8-K
(a.) Exhibits - None
(b.) Reports on Form 8-K - None
Page 20 of 21
<PAGE>
Signatures
Pursuant to the requirement 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.
United Petroleum Corporation
Date: 11/14/96 By: /S/ Michael F. Thomas
------------------- ---------------------------
Michael F. Thomas
President & CEO
Date: 11/14/96 By: /S/ L. Douglas Keene, Jr.
------------------- ---------------------------
L. Douglas Keene, Jr.
Executive Vice President &
Chief Financial Officer
Page 21 of 21
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<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> SEP-30-1996
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