<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: June 30, 1997
( ) 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
I.R.S. Employer I.D. Number: 13-3103494
Address of Principal Executive Offices: Suite N-425 1111 Northshore Drive
Knoxville, Tennessee 37919
Issuer's Telephone Number: (423) 909-0890
Indicate by check mark whether the Registrant (1) has filed all reports required
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: 19,430,639 Date: August 13, 1997
Transitional Small Business Disclosure Format
(Check One): Yes ( ) No (X)
Page 1 of 20
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UNITED PETROLEUM CORPORATION AND SUBSIDIARIES
INDEX
Part I. Financial Information
Item 1. Condensed Financial Statements ( Unaudited )
Condensed consolidated balance sheets - June 30, 1997 and
December 31, 1996
Condensed consolidated statements of operations - Three
months ended June 30, 1997 and 1996; six months ended June
30, 1997 and 1996
Condensed consolidated statement of stockholders' equity
Condensed consolidated statements of cash flows - Six months
ended June 30, 1997 and 1996
Notes to condensed consolidated financial statements - June
30, 1997
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Part II. Other Information
Signatures
Page 2 of 20
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PART I. - Financial Information Item 1. Financial Statements
United Petroleum Corporation and Subsidiaries
Consolidated Balance Sheets
At June 30, 1997 and December 31, 1996
June 30, 1997 Dec. 31, 1996
Current Assets
Cash $ 54,055 $ 19,759
Marketable Securities $ 0 $ 122,373
Accounts and Notes Receivable $ 313,192 $ 472,123
Inventories $ 379,530 $ 634,265
Other Current Assets $ 69,822 $ 71,081
------------ ------------
$ 816,599 $ 1,319,601
Property and Equipment
Gas and Oil properties $ 8,288,546 $ 8,236,094
Premises and Equipment ( Net ) $ 10,511,289 $ 12,875,902
Deferred Tax Assets $ 2,972,100 $ 2,972,100
Intangibles and Other Assets $ 1,601,050 $ 1,663,553
------------ ------------
Total Assets $ 24,189,584 $ 27,067,250
============ ============
Liabilities and Stockholders' Equity
Current Liabilities
Accounts Payable $ 683,389 $ 636,966
Accrued Expenses $ 600,941 $ 678,533
Accrued Interest $ 131,693 $ 0
Accrued and Deferred Taxes $ 0 $ 0
Unamortized Discount $ 1,246,400 $ 0
Accrued Dividend Payable $ 298,175 $ 0
Bank Line Of Credit $ 227,000 $ 250,000
Current Maturities-Long Term Debt $ 976,114 $ 1,669,836
------------ ------------
$ 4,163,712 $ 3,235,335
Long Term Liabilities
Long Term Debt-Less Current Maturities $ 12,661,843 $ 22,229,143
Unearned Revenue $ 200,000 $ 200,000
Deferred Income Taxes $ 87,100 $ 87,100
------------ ------------
Total Liabilities $ 17,112,655 $ 25,751,578
Stockholders' Equity
Common Stock, $.01 Par Value $ 172,252 $ 118,281
(50,000,000 shares authorized,
17,225,270 and 11,828,156 issued)
Additional Paid-In Capital(Common) $ 11,854,120 $ 13,696,878
Preferred Stock, $.01 Par Value $ 99 $ 0
(10,000,000 shares authorized,
9,912 and 0 issued)
Additional Paid-In Capital(Preferred) $ 9,911,901 $ 0
Retained Earnings ($13,648,516) ($11,262,484)
------------ ------------
$ 8,289,856 $ 2,552,675
Less: Stockholder note receivable ($ 1,212,927) ($ 1,237,003)
------------ ------------
Total Stockholders' Equity $ 7,076,929 $ 1,315,672
------------ ------------
Total Stockholders' Equity & Liabilities $ 24,189,584 $ 27,067,250
============ ============
The accompanying notes are an integral part of these financial statements.
Page 3 of 20
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United Petroleum Corporation and Subsidiaries
Consolidated Statement of Operations
For The Three Month Periods Ended June 30, 1997 and 1996
June 30, 1997 June 30, 1996
Revenues $ 2,531,617 $ 3,253,888
Cost of Sales $ 1,702,926 $ 2,209,676
------------ ------------
Gross Profit $ 828,691 $ 1,044,212
Operating Expenses:
Salaries and Wages $ 223,335 $ 295,529
Payroll Taxes $ 63,760 $ 75,056
Other General and Administrative $ 938,546 $ 623,646
Interest Expense $ 387,811 $ 198,298
Depreciation and Amortization $ 284,625 $ 201,452
------------ ------------
$ 1,898,077 $ 1,393,981
Other Income ( Expense ) $ 28,646 $ 30,060
------------ ------------
Net Income Before Income Taxes ($ 1,040,740) ($ 319,709)
Provision For Income Taxes $ 0 $ 32,493
------------ ------------
Net Income After Taxes ($ 1,040,740) ($ 287,216)
============ ============
Primary Earnings Per Share ($ 0.060) ($ 0.06)
============ ============
Weighted Average Shares Outstanding 17,225,270 4,623,313
============ ============
Fully Diluted Earnings Per Share ($ 0.060) ($ 0.06)
============ ============
Fully Diluted Weighted Average Shares 17,225,270 4,623,313
Outstanding
============ ============
The accompanying notes are an integral part of these financial statements.
Page 4 of 20
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United Petroleum Corporation and Subsidiaries
Condensed Consolidated Statements of Operations
For the Six Month Periods Ended June 30, 1997 and 1996
June 30, 1997 June 30, 1996
Revenues $ 6,230,264 $ 6,598,717
Cost of Sales $ 4,319,259 $ 4,426,945
------------ ------------
Gross profit $ 1,911,005 $ 2,171,772
Operating Expenses:
Salaries and Wages $ 524,122 $ 549,002
Payroll Taxes $ 135,825 $ 164,658
Other General and Administrative $ 1,528,179 $ 1,193,607
Interest Expense $ 1,474,536 $ 305,305
Depreciation and Amortization $ 676,906 $ 320,588
------------ ------------
$ 4,339,568 $ 2,533,160
Other Income (Expense) $ 42,531 $ 43,897
------------ ------------
Net Income Before Taxes ($ 2,386,032) ($ 317,491)
Provision For Income Taxes $ 0 $ 32,160
------------ ------------
Net Income After Taxes ($ 2,386,032) ($ 285,331)
============ ============
Primary Earnings Per Share ($ 0.14) ($ 0.06)
============ ============
Weighted Average Shares Outstanding 17,225,270 4,623,313
============ ============
Fully Diluted earnings Per Share ($ 0.14) ($ 0.06)
============ ============
Fully Diluted Weighted Average Shares 17,225,270 4,623,313
Outstanding
The accompanying notes are an integral part of these statements.
Page 5 of 20
United Petroleum Corporation and Subsidiaries
Consolidated Statement of Stockholders' Equity
<TABLE>
<CAPTION>
Additional
Common Stock Paid-In
Shares Amount Capital
(Common)
------------ ------ ---------
<S> <C> <C> <C>
Balance, January 1, 1997 11,828,156 $118,281 $13,696,878
Shares issued for services 749,540 $7,495 $199,861
Shares issued to effect 1,445,948 $14,459 $342,945
conversion of debentures(net)
Shares issued in payment of 95,066 $950 $45,597
interest on debentures
Net Income
---------- -------- -----------
Balance, March 31, 1997 14,118,710 $141,185 $14,285,281
Shares issued in payment of 1,108,270 $11,083 $542,842
interest on debentures
Shares issued for services 1,544,868 $15,449 $427,564
Shares issued to effect 453,422 $4,535 $211,065
conversion of debentures(net)
Charge related to unamortized ($3,314,457)
discounts resulting from
conversion of debentures
Issuance of preferred stock
Preferred Stock Dividend ($298,175)
Payments received on stock-
holder note receivable
Net Income
---------- -------- -----------
Balance, June 30, 1997 17,225,270 $172,252 $11,854,120
<CAPTION>
Additional
Retained Stockholder Preferred Stock Paid-In
Earnings Note Shares Amount Capital Total
Receivable (Preferred)
----------- ----------- ------ ------ ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1997 ($11,262,484) ($1,237,003) $1,315,672
Shares issued for services $207,356
Shares issued to effect $357,404
conversion of debentures(net)
Shares issued in payment of $46,547
interest on debentures
Net Income ($1,345,292) ($1,345,292)
------------ ----------- ------ ------ ----------- ----------
Balance, March 31, 1997 ($12,607,776) ($1,237,003) $0 $0 $0 $581,687
Shares issued in payment of $553,925
interest on debentures
Shares issued for services $443,013
Shares issued to effect $215,600
conversion of debentures(net)
Charge related to unamortized ($3,314,457)
discounts resulting from
conversion of debentures
Issuance of preferred stock 9,912 $99.00 $9,911,901 $9,912,000
Preferred Stock Dividend ($298,175)
Payments received on stock- $24,076 $24,076
holder note receivable
Net Income ($1,040,740) ($1,040,740)
------------ ----------- ------ ------ ------------- -----------
Balance, June 30, 1997 ($13,648,516) ($1,212,927) 9,912 $99 $9,911,901 $7,076,929
</TABLE>
Page 6 of 20
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United Petroleum Corporation and Subsidiaries
Consolidated Statements of Cash Flows
For The Six Month Periods Ended June 30, 1997 and 1996
June 30, 1997 June 30, 1996
------------- -------------
Operating Activities
Net Income ($ 2,386,032) ($ 285,331)
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and Amortization $ 676,906 $ 320,588
Shares issued for services $ 650,369 $ 51,515
Changes in operating assets and liabilities:
Decrease ( increase ) in-
Accounts notes receivable $ 158,593 ($ 62,026)
Inventories $ 254,735 $ 20,230
Other Current Assets $ 1,259 $ 247,004
Proceeds from unearned purchase discounts $ 0 $ 0
Increase ( decrease ) in -
Accounts Payable and Accrued Liabilities ($ 1,346,924) ($ 130,712)
------------ ------------
($ 1,991,094) $ 161,268
Investing Activities:
Property and Equipment Additions $ 2,364,613 ($ 1,170,880)
Acquisition of gas and oil properties ($ 52,454) ($ 429,391)
Decrease ( increase ) in other assets $ 62,503 ($ 818,756)
----------- ------------
$ 2,374,662 ($ 2,419,027)
Financing Activities:
Principal payments on debt ($ 2,422,156) ($ 512,413)
Proceeds from short term borrowings $ 203,000 $ 0
Payments on short term borrowings ($ 23,000) ($ 250,000)
Net proceeds from bank financing $ 435,008 $ 1,368,161
Net proceeds from issuance of debentures $ 500,000 $ 4,822,917
Proceeds from issuance of common stock $ 957,876 $ 0
----------- -----------
($ 349,272) $ 5,428,665
----------- -----------
Increase(Decrease) in Cash and Cash Equivalents $ 34,296 $ 3,170,906
Cash and Cash Equivalents, Beginning of Period $ 19,759 $ 37,941
----------- -----------
Cash and Cash Equivalents, End of Period $ 54,055 $ 3,208,847
=========== ===========
The accompanying notes are an integral part of these financial statements.
Page 7 of 20
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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 1996 financial statements in order for them to conform with
classifications used in 1997. Operating results for the three month and six
month periods ended June 30, 1997 are not necessarily indicative of the results
that may be expected for the year ended December 31, 1997. For further
information, refer to the consolidated financial statements and footnotes
thereto included in the Registrant and Subsidiaries' annual report on Form
10-KSB for the year ended December 31, 1996.
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,
Pennsylvania and Missouri.
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 20
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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 20
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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 quarter the Company issued 1,344,868 common shares as payment
for services with an aggregate value of $ 405,513 pursuant to the Company's S-8
registration. These shares were issued at market value as of the date of
issuance. Said S-8 shares were issued at prices ranging from $ 0.25 to $ 0.4375.
The majority of these shares were issued in payment of legal fees, public
relations expenses and investment banking services related to mergers and
acquisitions. The Company issued 200,000 restricted shares issued as payment for
services in the aggregate amount of $ 37,500. The shares were valued at fifty
percent (50%) of market value as of the date of issuance. Said restricted shares
were issued at $ 0.1875 per share. These shares were issued to Michael F.
Thomas, President and CEO of the Company, as a bonus related to the debenture
restructuring effective April 30, 1997.
During the quarter the Company issued 1,108,270 common shares as payment
for interest due on debentures in the aggregate amount of $ 553,925.48. The
Company also issued 453,422 common shares to effect conversion of debentures
with an approximate face value of $ 215,600.00 at prices between $ 0.45 and $
0.50 per share.
During the quarter, effective April 30, 1997, the Company entered into an
agreement with holders of $ 16,822,400.00 of debentures. The agreement provided,
among other things, for the exchange of $ 9,912,000.00 worth of debentures into
9,912 shares of Series "A" Preferred Stock, after a reduction of ten percent
(10%) in the face amount of the debentures. The preferred stock will pay a
cumulative dividend of eighteen percent (18%) for a period of one year.
Thereafter, at the option of the preferred shareholder, the dividend shall
either be reduced to seven percent (7%) for the second year or, a preferred
shareholder, at his option, may surrender to the Company ten percent (10%) of
the preferred stock and continue to receive a dividend of eighteen percent
(18%). At the option of the Company, dividends may be paid in cash or in the
Company's common stock.
Preferred shareholders shall have voting rights equal to those which they
would have if they converted their preferred shares to common stock at the then
conversion price, provided, however, that no preferred shareholder or group of
affiliated preferred shareholders may, at any time, vote more than 4.99% of the
total of the stock entitled to vote.
Page 10 of 20
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United Petroleum Corporation and Subsidiaries
Notes to Consolidated Financial Statements-Continued
(Unaudited)
Commencing July 1, 1997, one-thirteenth of the preferred stock may be
converted each month on a cumulative basis. The conversion price shall be the
lesser of $ 3.00 or the average closing bid price for the five trading days
prior to the conversion. Notwithstanding the forgoing, the minimum conversion
price for the first three months commencing July 1, 1997 shall be the greater of
$ 2.50 per share or two-thirds of the average of the closing bid prices for the
prior month. For the next three months, the minimum conversion price shall be
the greater of $ 2.00 per share or two-thirds of the average closing bid prices
for the prior month. For the next three months, the minimum conversion price
shall be the greater of $ 1.50 per share or two-thirds of the average closing
bid prices for the prior month. Thereafter, the minimum conversion price shall
be the greater of $ 1.00 or two-thirds of the average closing bid prices for the
prior month.
The preferred shares may be automatically converted by the Company by
notice given between October 1, 1999 and October 10, 1999 at a price equal to
the average of the closing bid prices for the five trading days prior to giving
of the notice. Each preferred share shall have liquidation rights equal to $
1,000.00 and shall have a preference over common shareholders and junior
preferred shareholders. The Company may redeem the preferred shares at any time
upon payment of the liquidation price together with any accrued dividends.
The agreement provides that the preferred shareholders shall vote their
shares for the continuation of current management and shall not participate in
any proxy contests so long as the Company is not in default with respect to any
of the provisions of the agreement, the preferred shares or the debentures.
The agreement provides that the holders of approximately $ 3,943,466 of the
debentures shall receive in their place amended convertible debentures in the
amount of approximately $ 3,549,120 in face value after a reduction the face
value of the old debentures equal to ten percent (10%). The maturity date of the
amended debentures is September 1, 1999.
The interest rate on the amended debentures is eighteen percent (18%) for
one year and seven percent (7%) thereafter, provided, however, that the amended
debenture holders shall have the option at the end of one year to surrender to
the Company, for no consideration, ten percent (10%) of their amended debentures
and to receive interest of eighteen percent (18%) on the remaining amended
debentures. At the option of the Company, interest may be paid in cash or common
stock.
As a part of this agreement, debentures with a face value of approximately
$ 623,200, together with shares issued in payment of interest accrued through
April 30, 1997 were converted to common stock at a price of $ 0.50 per share.
Page 11 of 20
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United Petroleum Corporation and Subsidiaries
Notes to Consolidated Financial Statements-Continued
(Unaudited)
The above referenced transactions, effective April 30, 1997, will reduce
the liabilities of the Company and increase the equity of the Company for the
following reasons: (1.) the conversion of debentures into common stock, (2.) the
conversion of debentures into preferred stock and (3.) the forgiveness of
debenture balances with a face value equal to approximately $ 1,495,680. The
forgiveness of debt is typically treated as an other income item for statement
purposes. However, in the case of the debenture restructure agreement the
debenture holders received an increased yield in return for the forgiveness. In
an effort to prevent phantom income related to the debenture forgiveness from
appearing on the Company's income statement, the Company has elected to classify
the amount forgiven as "unamortized discount" for statement purposes and will
amortize the amount over a twelve month period. This will represent a reduction
in interest expense of approximately $ 124,640 per month beginning May 1, 1997.
During the quarter the Company declared a preferred stock dividend in the
amount of $ 298,175 which is payable in common stock of the Company. As of June
30, 1997, the dividend is shown as a payable on the books of the Company and has
been deducted from equity.
The Company made a charge against capital during the quarter in the amount
of $ 3,314,457 resulting from the write off of unamortized discounts and fees
associated with the conversion and forgiveness of debentures.
Page 12 of 20
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Item 2. - Management's Discussion and Analysis of Operations
The Company realized net loss of ($ 1,040,740) for the three month period
ended June 30, 1997, compared to a net loss of ($ 287,216) for the same period
last year.
A summary of comparative results between the second quarter of 1997 and the
second quarter of 1996 is as follows:
Revenues were realized as follows:
Quarter Ended Quarter Ended
June 30, 1996 June 30, 1996
Retail Subsidiary:
Gasoline $ 756,408 $1,158,391
Car Wash 1,145,851 1,457,380
Oil & Lube 397,412 295,434
Grocery 93,651 173,354
Other Sales 85,450 169,329
Energy Subsidiary:
Natural Gas 28,957 0
Oil 23,888 0
---------- ----------
Total Revenue For Quarter $2,531,617 $3,253,888
========== ==========
Retail Subsidiary (Calibur Systems, Inc.)
The Company experienced a decreased gross profit margin on gasoline sales
from 14.1 % in the second quarter of 1996 to 6.5 % in the second quarter of
1997. Volume decreased from 1,181,177 gallons in the second quarter of 1996 to
747,147 gallons in the second quarter of 1997 for a decrease of 434,030 gallons
or approximately 36.7 %. The decreased gross profit margin can mainly be
attributed to unfavorable wholesale gasoline prices and increased competition.
The decrease in volume is mainly attributed to the decrease in the number of
Company locations selling gasoline. During the first quarter the Company sold a
location in Cookeville, Tennessee and a location in Farragut, Tennessee to
Michael F. Thomas, the President and CEO of the Company. For further information
refer to the quarterly statement on Form 10-KSB for the period ended March 31,
1997. The Company also ceased operations of a Solway, Tennessee location which
sold gasoline due to repeated poor performance at the location.
Car wash revenue decreased by $ 311,529 for the quarter as compared to the
same quarter last year. Same store car wash revenues decreased by $ 204,990 and
the balance of the decrease is
Page 13 of 20
<PAGE>
Management's Discussion and Analysis of Operations - Continued
attributed to the sale of a car wash location in Farragut, Tennessee as
referenced above. It is the belief of management that excessive rainfall during
the second quarter caused the decrease in same store revenue.
Oil and lube revenue was $101,978 higher for the quarter as compared to the
same quarter last year which represents an increase of 34.5%. Of this amount
$108,954 is attributed to the following new locations: (1.) Newport, Tennessee,
(2.) Morristown, Tennessee, (3.) Oak Ridge, Tennessee and (4.) Merchants Road in
Knoxville, Tennessee. Same store decreases of $ 6,976 accounted for the balance
of the difference. The poor performance in same store revenues is attributed to
the excessive level of rainfall during the second quarter in the opinion of
management. As of the end of the second quarter of this year the Company had ten
oil and lube centers in operation as compared to six oil and lube centers open
at the end of second quarter in 1996.
Grocery revenue was $ 93,651 for the quarter as compared to $ 173,354 for
the same quarter last year. Other revenues were $ 85,450 for the quarter as
compared to $ 169,329 for the previous year. Both decreases are mainly
attributed to the decrease in the number of Company locations.
The Calibur Systems, Inc. subsidiary had a net loss of ($234,723) for the
quarter as compared to an income of $ 42,338 for the same quarter last year.
Energy Subsidiary (Jackson-United Petroleum Corporation)
Natural gas revenues increased to $ 28,957 for the quarter as compared to
$0 for the same period last year. The majority of these revenues were from the
sixteen Pennsylvania wells drilled in 1996 under a joint venture agreement with
Kastle Resources Enterprises, Inc. ("Kastle") of Edinboro, Pennsylvania. Natural
gas production and revenues in both Pennsylvania and Kentucky were below
anticipated levels due to the fact that several wells require additional work
which decreased the number of producing days during the quarter as well as
lowered the daily volumes of the wells requiring additional work. Rework costs
decreased the net revenues to the Company during the quarter.
Oil revenue for the quarter was $ 23,888 for the quarter as compared to $ 0
for the same period last year. These revenues were produced from several of the
Pennsylvania wells drilled under a joint venture agreement with Kastle as
mentioned above. As of the date of this report the Company has one well in
Kentucky that requires additional work and two additional wells in Kentucky that
are shut-in awaiting pipeline. Oil revenues are expected to increase in the
third
Page 14 of 20
<PAGE>
Management's Discussion and Analysis of Operations - Continued
quarter of this year as revenues from the "pilot" phase of a water-flood project
are scheduled to begin. The water-flood is a joint venture with Western
Engineering, Inc. ("Western") of Evansville, Indiana. The cost of the Company's
participation was approximately $ 275,000. The Company and Western drilled three
horizontal production wells to enhance the recovery of oil from Western's Belton
Unit in Cass County, Missouri. The producing formation is the Squirrel
Sandstone. Production commenced on April 10, 1997 with approximately 20 barrels
produced per day and as of the date of this report is approaching 80 barrels per
day. Western receives the first 40 barrels of daily production and the Company
receives the next 55 barrels. Above 95 barrels per day, production is shared
equally between the two companies.
The Jackson-United Petroleum Corporation subsidiary had a net income of
$18,632 for the quarter as compared to a loss of ($ 4,901) for the same period
last year. Depreciation and depletion were $ 15,000 for the quarter as compared
to $ 0 for the same period last year.
Consolidated Operations
Operating expenses were $1,898,077 for the second quarter of 1997 as
compared to $1,393,981 for the same period last year. This increase is mainly
attributed to increases in legal fees, professional fees, public relations
expense, investment banking services, accounting expenses and increased
shareholder relations expenses. Interest expense was also higher for the quarter
as compared to last year as a result of the interest paid on debentures, via the
issuance of common stock, which was partially off-set by the amortization of
unearned discounts in the amount of $ 249,280 related to the face value of
debentures forgiven by debenture holders pursuant to the restructure agreement
completed by the Company effective April 30, 1997. In the agreement, as
mentioned earlier in this report, debenture holders forgave debentures with a
face value of $ 1,495,680. The Company has elected to amortize this discount
over a period of twelve months which corresponds with the term associated with
the debenture forgiveness in the agreement.
Financial Condition - The working capital deficit of approximately
($2,492,797) as of March 31, 1997 has increased to a deficit of approximately
($3,347,113) as of the end of June 30, 1997. The increase of the working capital
deficit was not anticipated by management. This increase is the result of the
accounting method used to account for the forgiveness of debenture balance by
debenture holders in the amount of $ 1,495,680 as referenced earlier in this
report. The unamortized portion of this debenture forgiveness is included in the
current liabilities section of the balance sheet in the amount of $ 1,246,400.
Approximately $ 373,920 of this amount will be amortized per quarter over the
next year which will represent a reduction in interest expense and remove the
item from the balance sheet. Excluding this extraordinary item the working
capital position of the Company actually improved by approximately $ 392,084.
The net worth of the Company increased from $ 581,687 as of March 31, 1997
to $ 7,076,929 as of June 30, 1997. This increase is primarily associated with
the conversion of debentures
Page 15 of 20
<PAGE>
Management's Discussion and Analysis of Operations - Continued
into both common and preferred stock as well as the forgiveness of debentures
with a face value of approximately $ 1,495,680. The debt to worth ratio of the
Company has greatly improved from 40 to 1 as of March 31, 1997 to approximately
2.4 to 1 as of June 30, 1997. The majority of the changes in the capital
structure for the quarter are the result of an agreement effective April 30,
1997 between the Company and convertible debenture holders. For further
information regarding this agreement please refer to the description of the
agreement contained earlier in this report.
During 1997, the Company will continue to seek additional sources of
capital for the following reasons:
(1.) To increase the 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 prove beneficial. No
assurance can be given that the Company will be able to obtain the desired
capital.
(2.) To further expand the Company's drilling programs and to acquire
producing oil and gas properties. Management is presently negotiating with
several firms in the asset based lending segment of the oil and gas industry.
Firms of this type are willing to finance oil and gas properties based on the
value of each individual acquisition as opposed to requiring a fixed amount of
equity. By means of this type of financing the Company may have the opportunity
to acquire oil and gas properties without the issuance of additional equity
securities. Lenders of this type are also accustomed to production payments as
opposed to fixed payments as required by more traditional lenders. This would
allow the Company to be assured of a positive cashflow associated with the
properties being acquired via this means of financing. There can be no assurance
that the Company will locate any attractive oil and gas acquisition candidates
nor is there any assurance that the appropriate capital and/or debt financing
will be available to the Company.
(3.) Although the focus of the Company will be on the growth of the oil
and gas subsidiary, the Company will continue to look for attractive
acquisitions in the retail automotive subsidiary or any other business industry
that the Board deems appropriate. In the event such an opportunity should arise,
capital would be required. There can be no assurance that the Company will
locate any attractive acquisition candidates nor is there any assurance that the
appropriate capital and/or debt financing will be available to the Company.
Expansion and Capital Improvements
As of June 30, 1997, the Company is committed to certain expansion projects
and they are as follows:
(1.) The company has recently completed the construction of a new Ten
Minute Lube Center
Page 16 of 20
<PAGE>
Management's Discussion and Analysis of Operations - Continued
in Ft. Oglethorpe, Georgia which opened during the second quarter of 1997. Cost
overruns associated with this project totaled approximately $ 48,000. The
Company does not presently have the funds necessary to satisfy these payables.
(2.) The Company has recently completed the construction of a new Pennzoil
Ten Minute Lube Center in Morristown, Tennessee which opened during the second
quarter of 1997. Cost overruns associated with this project totaled
approximately $ 32,000. The Company does not presently have the funds necessary
to satisfy these payables.
(3.) The Company presently has a new Pennzoil Ten Minute Lube Center at
8016 Kingston Pike in Knoxville, Tennessee under construction. Cost overruns to
date at this location are approximately $ 15,000. The Company does not presently
have the funds necessary to satisfy these payables.
(4.) The Company has recently completed the construction of a new Pennzoil
Ten Minute Lube Center in Newport, Tennessee which opened earlier this year.
Cost overruns associated with this project are approximately $ 17,000. The
Company does not presently have the funds necessary to satisfy these payables.
On June 17, 1997 the Board of Directors of the Company approved the sale of
a full service car wash located at 8817 Kingston Pike in Knoxville, Tennessee to
Michael F. Thomas, the Company's President & CEO for $ 300,000 in cash.. There
is no debt on the location. The proposed sale was deemed necessary by the Board
such that the proceeds of the sale may be used to satisfy all of the above
referenced cost overruns in the Calibur Systems, Inc. subsidiary. To date, Mr.
Thomas, does not have a loan commitment to obtain the necessary funds to
purchase the location from the Company. No assurance can be given that Mr.
Thomas will be able to acquire the financing necessary to purchase the location
from the Company.
(5.) As of the date of this report, the Company has accounts payable in the
energy subsidiary of approximately $ 369,500 related to the drilling of wells in
eastern Kentucky. The Company intends to leverage the producing wells in the
energy subsidiary to enable the Company to pay the payables. No assurance can be
given that appropriate financing will be made available to the Company.
The Company has recently reviewed several potential acquisitions to its
retail and energy subsidiaries. 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 may be required. No assurance can be given that the Company will be able
to acquire the necessary capital to make such acquisitions.
Page 17 of 20
<PAGE>
Management's Discussion and Analysis of Operations - Continued
During the quarter the Board of Directors of the Company approved the
cancellation of a lease between the Company and Michael F. Thomas, Company
President & CEO. Said lease is related to two properties that have been leased
by Mr. Thomas to the Company. The properties are located at 4867 N. Broadway in
Knoxville, Tennessee and at 5907 Lee Highway in Chattanooga, Tennessee. The
exact terms of the lease cancellation are to be completed during the third
quarter of 1997.
During the second quarter the Company transferred the Exxon distributorship
contract to, Michael F. Thomas, the Company's President & CEO. Mr. Thomas was
the designated "key person" in the original distributorship contract between the
Company and Exxon. The transfer became necessary due to the fact that the letter
of credit posted by the Company in favor of Exxon matured. Exxon required the
letter of credit to be extended and increased from $ 100,000 to $ 200,000. In
order to extend and increase the letter of credit the issuer required the
personal guarantee of Mr. Thomas which is no longer available to the Company.
Page 18 of 20
<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 entered
into an agreement in principle to acquire a U.S. Coast Guard approved barge
terminal in Celina, Tennessee from Southern Kentucky Enterprises, Inc. for $
2,000,000 payable in the common stock of the Company. The facility includes
storage capacity for approximately 50,000 barrels of product and a
loading/unloading rack. Due diligence on the acquisition has began as of the
date of this report.
Item 6 Exhibits and Reports on Form 8-K
(a.) Exhibits - None
(b.) Reports on Form 8-K - None
Page 19 of 20
<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
August 18, 1997 /S/ Michael F. Thomas
Date: ____________________ By: ____________________________
Michael F. Thomas
President & CEO
August 18, 1997 /S/ Charles B. Lobetti
Date: _____________________ By: ____________________________
Charles B. Lobetti
Chief Financial Officer
Page 20 of 20
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<PERIOD-END> JUN-30-1997
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