<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, 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: 26,398,349 Date: October 30, 1997
Transitional Small Business Disclosure Format
(Check One): Yes ( ) No (X)
Page 1 of 27
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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, 1997 and
December 31, 1996
Condensed consolidated statements of operations - Three months
ended Sept. 30, 1997 and 1996; nine months ended Sept. 30,
1997 and 1996
Condensed consolidated statement of stockholders' equity
Condensed consolidated statements of cash flows - Nine months
ended Sept. 30, 1997 and 1996
Notes to condensed consolidated financial statements - Sept.
30, 1997
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Part II. Other Information
Signatures
Page 2 of 27
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PART I. - Financial Information Item 1. Financial Statements
United Petroleum Corporation and Subsidiaries
Consolidated Balance Sheets
At September 30, 1997 & December 31, 1997
Sept. 30, 1997 Dec. 31, 1996
Current Assets
Cash $402,240 $19,759
Marketable Securities $0 $122,373
Accounts and Notes Receivable $491,620 $472,123
Inventories $355,971 $634,265
Other Current Assets $270,978 $71,081
------------ ------------
$1,520,809 $1,319,601
Property and Equipment
Gas and Oil properties $8,243,546 $8,236,094
Premises and Equipment ( Net ) $7,678,018 $12,875,902
Deferred Tax Assets $3,137,000 $2,972,100
Intangibles and Other Assets $1,642,583 $1,663,553
------------ ------------
Total Assets $22,221,956 $27,067,250
============ ============
Liabilities and Stockholders' Equity
Current Liabilities
Accounts Payable $542,680 $636,966
Accrued Expenses $125,390 $678,533
Accrued Interest $209,197 $0
Accrued and Deferred Taxes $417,834 $0
Unamortized Discount $872,480 $0
Accrued Dividend Payable $509,690 $0
Bank Line Of Credit $250,000 $250,000
Current Maturities $1,981,393 $1,669,836
------------ ------------
$4,908,664 $3,235,335
Long Term Liabilities
Long Term Debt-Less Current Maturities $9,015,051 $22,229,143
Unearned Revenue $0 $200,000
Deferred Income Taxes $7,000 $87,100
------------ ------------
Total Liabilities $13,930,715 $25,751,578
Minority Interest In Consolidated Subsidiary $200,000 $0
Stockholders' Equity
Common Stock, $.01 Par Value $231,312 $118,281
(50,000,000 shares authorized,
23,131,263 and 11,828,156 issued)
Additional Paid-In Capital(Common) $11,979,314 $13,696,878
Preferred Stock, $.01 Par Value $117 $0
(10,000,000 shares authorized,
11,745 and 0 issued)
Additional Paid-In Capital(Preferred) $11,745,216 $0
Retained Earnings ($14,451,791) ($11,262,484)
------------ ------------
$9,504,168 $2,552,675
Less: Stockholder note receivable ($1,212,927) ($1,237,003)
------------ ------------
Total Stockholders' Equity $8,291,241 $1,315,672
------------ ------------
Total Stockholders' Equity & Liabilities $22,221,956 $27,067,250
============ ============
The accompanying notes are an integral part of these financial statements.
Page 3 of 27
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United Petroleum Corporation and Subsidiaries
Consolidated Statement of Operations
For The Three Month Periods Ended Sept. 30, 1997 & 1996
Sept. 30, 1997 Sept. 30, 1996
Revenues $1,914,109 $3,153,075
Cost of Sales $1,182,351 $2,255,190
------------ ------------
Gross Profit $731,758 $897,885
Operating Expenses:
Salaries and Wages $326,580 $265,649
Payroll Taxes $58,340 $75,566
Other General and Administrative $576,411 $535,513
Interest Expense $324,421 $735,892
Depreciation and Amortization $286,839 $265,592
------------ ------------
$1,572,591 $1,878,212
Other Income (Expense) $37,558 $21,834
------------ ------------
Net Income Before Income Taxes ($803,275) ($958,493)
Provision For Income Taxes $0 $0
------------ ------------
Net Income After Taxes ($803,275) ($958,493)
============ ============
Primary Earnings Per Share ($0.035) ($0.15)
============ ============
Weighted Average Shares Outstanding 23,131,263 6,214,330
============ ============
Fully Diluted Earnings Per Share ($0.035) ($0.15)
============ ============
Fully Diluted Weighted Average Shares 23,131,263 6,214,330
Outstanding
============ ============
The accompanying notes are an integral part of these financial statements.
Page 4 of 27
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United Petroleum Corporation and Subsidiaries
Condensed Consolidated Statements of Operations
For The Nine Month Periods Ended Sept. 30, 1997 & 1996
Sept. 30, 1997 Sept. 30, 1996
Revenues $8,144,372 $9,751,792
Cost of Sales $5,495,089 $6,682,135
------------ ------------
Gross Profit $2,649,283 $3,069,657
Operating Expenses:
Salaries and Wages $969,327 $814,651
Payroll Taxes $194,167 $240,224
Other General and Administrative $1,977,450 $1,729,120
Interest Expense $1,797,864 $1,041,197
Depreciation and Amortization $963,745 $586,180
------------ ------------
$5,902,553 $4,411,372
Other Income (Expense) $61,087 $65,731
------------ ------------
Net Income Before Taxes ($3,192,183) ($1,275,984)
Provision For Income Taxes $0 $32,160
------------ ------------
Net Income After Taxes ($3,192,183) ($1,243,824)
============ ============
Primary Earnings Per Share ($0.14) ($0.06)
============ ============
Weighted Average Shares Outstanding 23,131,263 6,214,330
============ ============
Fully Diluted earnings Per Share ($0.14) ($0.06)
============ ============
Fully Diluted Weighted Average Shares 23,131,263 6,214,330
Outstanding
The accompanying notes are an integral part of these statements.
Page 5 of 27
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United Petroleum Corporation and Subsidiaries
Consolidated Statement of Stockholders' Equity
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Additional Additional
Common Stock Paid-In Retained Stockholder Preferred Stock Paid-In
Shares Amount Capital Earnings Note Shares Amount Capital Total
(Common) Receivable (Preferred)
Balance, January 1, 1997 11,828,156 $118,281 $13,696,878 ($11,262,484) ($1,237,003) $1,315,672
Shares issued for services 749,540 $7,495 $199,861 $207,356
Shares issued to effect 1,445,948 $14,459 $342,945 $357,404
conversion of debentures(net)
Shares issued in payment of 95,066 $950 $45,597 $46,547
interest on debentures
Net Income ($1,345,292) ($1,345,292)
----------- -------- ----------- ------------ ----------- ------ ------- ----------- -----------
Balance, March 31, 1997 14,118,710 $141,185 $14,285,281 ($12,607,776) ($1,237,003) $0 $0 $0 $581,687
Shares issued in payment of 1,108,270 $11,083 $542,842 $553,925
interest on debentures
Shares issued for services 1,544,868 $15,449 $427,564 $443,013
Shares issued to effect 453,422 $4,535 $211,065 $215,600
conversion of debentures(net)
Charge related to unamortized ($3,314,457) ($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) ($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 17,225,270 $172,252 $11,854,120 ($13,648,516) ($1,212,927) 9,912 $99 $9,911,901 $7,076,929
Shares issued for services 1,265,322 $12,653 $323,492 $336,145
Shares issued in payment of 962,967 $9,630 $322,824 $332,454
interest on debentures
Shares issued to effect 2,589,081 $25,891 $611,989 $637,880
conversion of debentures(net)
Shares issued in payment of 1,088,623 $10,886 $227,305 $238,191
dividends
Correction of 2nd quarter $922,623 $922,623
charge related to unamortized
discounts
Charge to effect issuance of ($1,833,333) ($1,833,333)
preferred stock in settlement
of debenture lawsuit
Issuance of Preferred Stock 1,833 $18.00 $1,833,315 $1,833,333
Preferred Stock Dividend ($449,706) ($449,706)
Net Income ($803,275) ($803,275)
----------- -------- ----------- ------------ ----------- ------ ------- ----------- -----------
Balance September 30, 1997 23,131,263 $231,312 $11,979,314 ($14,451,791) ($1,212,927) 11,745 $117.00 $11,745,216 $8,291,241
</TABLE>
Page 6 of 27
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United Petroleum Corporation and Subsidiaries
Consolidated Statements of Cash Flows
For The Nine Month Periods Ended Sept. 30, 1997 and 1996
Sept. 30, 1997 Sept. 30, 1996
-------------- --------------
Operating Activities
Net Income ($3,192,183) ($1,243,824)
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and Amortization $963,745 $586,180
Shares issued for services $986,514 $58,078
Changes in operating assets and liabilities:
Decrease ( increase ) in-
Accounts notes receivable ($19,497) ($9,101,861)
Inventories $278,294 ($96,090)
Other Current Assets ($199,897) $227,522
Proceeds from unearned purchase discounts $0
Increase ( decrease ) in -
Accounts Payable and Accrued Liabilities ($1,361,772) ($304,880)
------------ ------------
($2,544,796) ($9,874,875)
Investing Activities:
Property and Equipment Additions $5,197,884 ($2,553,742)
Acquisition of gas and oil properties ($7,452) ($1,510,322)
Decrease ( increase ) in other assets $20,970 ($6,113,351)
------------ ------------
$5,211,402 ($10,177,415)
Financing Activities:
Principal payments on debt ($5,582,009) ($588,536)
Proceeds from short term borrowings $203,000 $52,000
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 $1,725,000 $18,401,667
Proceeds from issuance of common stock $957,876 $3,758,157
------------ ------------
($2,284,125) $22,741,449
------------ ------------
Increase(Decrease) in Cash and Cash Equivalents $382,481 $2,689,159
Cash and Cash Equivalents, Beginning of Period $19,759 $37,941
------------ ------------
Cash and Cash Equivalents, End of Period $402,240 $2,727,100
============ ============
The accompanying notes are an integral part of these financial statements.
Page 7 of 27
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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 nine
month periods ended September 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 corporation formed
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.
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 27
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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 27
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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 the Company issued 433,255 common shares to
debenture holders in payment of interest on debentures in the amount of
$216,627.50 which was due and payable during the second quarter of 1997. The
shares were issued at $0.50 per share pursuant to the April 30, 1997 debenture
restructure agreement.
During the third quarter of 1997 the Company issued 1,265,322 common shares
as payment for services with an aggregate value of $336,145.43 pursuant to the
Company's existing 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
$0.21875 to $0.375 per share. The majority of these shares were issued in
payment of public relations expenses, investment banking services related to
acquisitions and for services related to due diligence being performed on
projects related to potential acquisitions.
During the third quarter the Company issued 529,712 common shares as
payment for interest due on debentures in the aggregate amount of $115,826.96 at
prices between $0.21875 and $0.375 per share. The Company issued 2,589,081
common shares to effect conversion of debentures during the quarter with an
approximate face value of $637,880.00 at prices between $0.21875 and $0.375 per
share. In addition, the Company issued 1,088,623 common shares during the
quarter as payment of dividends on preferred shares in the amount of $238,190.79
at $0.21875 per share.
An action, as more fully described in the Company's most recent annual
report on Form 10-KSB for the period ended December 31, 1996, entitled Mantel
International Investments, Limited ("Mantel"), Plaintiff, vs. United Petroleum
Corporation and Interwest Transfer Co., Inc., Defendants, was settled on July 1,
1997. The settlement agreement contains, among other items, the following
provisions: (1.) that 466,667 shares of the Company's common stock which were
held in escrow pending the outcome of the action be released to Mantel, (2.) the
Company
Page 10 of 27
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United Petroleum Corporation and Subsidiaries
Notes to Condensed Consolidated Financial Statements - Continued
(Unaudited)
authorized the issuance of 2,000 shares of a newly created Class "B" Convertible
Preferred Stock, (3.) the Company acknowledge that Mantel retains $1,833,333.00
in principal amount of the Company's Convertible Debenture due May 1, 1998 with
an original face amount of $2,666,666.00 and (4.) that the Company allow Mantel
to exchange the $1,833,333.00 remaining balance of the debenture for 1,833 Class
"B" Preferred Shares and a warrant to purchase 300,000 shares of the Company's
common stock at a price of $1.00 per share. The Preferred Shares will bear a
dividend rate of eight percent (8%) per annum with dividends payable quarterly.
At the option of the Company the dividends may be paid in cash or in common
stock of the Company. The conversion of the Preferred Shares is limited such
that no more than 1/15th of the Class "B" Preferred Shares may be converted per
month commencing July 1, 1997. Further, the Company has the right to
automatically convert any remaining Class "B" Convertible Preferred Shares into
common stock of the Company on October 10, 2000. The mandatory conversion price
shall be equal to the average market price for the five(5) consecutive trading
days immediately preceding the conversion date. Regarding conversion prior to
the mandatory conversion, the conversion price shall be equal to the lesser of
(x) $3.00 (as adjusted pursuant to the following clauses) and (y) the greater of
(i) the fixed conversion price and (ii) the average market price for the five
(5) consecutive trading days immediately preceding the conversion date;
provided, if the average monthly price for the preceding month is greater than
$3.00, then the price for such month shall be the greater of (x) $3.00 and (y)
66-2/3% of the average monthly price for such preceding month. The "fixed
conversion price" shall be equal to the following:
$ 2.50 per share through September 30, 1997
$ 2.00 per share from October 1, 1997 through December 31, 1997
$ 1.50 per share from January 1, 1998 through March 31, 1998
$ 1.00 per share after April 1, 1998
in each case adjusted as follows:
if the average monthly market price for the trading days in the
applicable calendar month of the common stock for any calendar month commencing
October 1997 is greater than the fixed conversion price, then the fixed
conversion price shall be the greater of the fixed conversion price and
66-2/3rds % of the average monthly price for the preceding calendar month.
On August 29, 1997, the Company entered into an agreement with one of
the holders of the Company's Preferred Stock and Amended Convertible Debentures
to amend the terms of the
Page 11 of 27
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United Petroleum Corporation and Subsidiaries
Notes to Condensed Consolidated Financial Statements - Continued
(Unaudited)
Preferred Shares set forth in the Certificate of Designation by reducing the
Fixed Conversion Price after April 1, 1998 from $1.00 to $0.50 per share. The
Company further agreed to amend the terms of the Amended Debentures by reducing
the Fixed Conversion Price after October 1, 1997 from $2.00 to $0.50 per share.
In addition, the agreement further provided that the Company issue a promissory
note in the form of a convertible debenture in the amount of $1,575,000.00 for a
cash purchase price of $1,250,000.00. The difference in the amount of the note
and the purchase price being a discount in the amount of $325,000.00. Said note
was funded in two advances. The first advance was in the amount of $625,000.00
face value for proceeds of $500,000.00. The second advance was in the amount of
$950,000.00 face value with proceeds of $750,000.00. The note has a maturity of
February 28, 1998 with interest payable monthly at the rate of 18%. Interest on
the two advances was prepaid through October 31, 1997 at closing. Closing costs
equal to $25,000.00 were also deducted from the first advance. The note is
unsecured. In conjunction with the issuance of the note the Company issued
400,000 warrants to purchase common stock with an initial purchase price of
$0.3688. The agreement contains provisions such that the number of warrants
could increase and/or the exercise price of the warrants could be adjusted
subject to specific anti-dilutive provisions agreed to by the Company. The
agreement also contains an agreement by the Company to file a registration
statement regarding the resale of the warrants if and when exercised, the resale
of the common stock issued as payment of interest regarding the obligation and
the resale of the common stock issued by the Company in the event the holder
converts all or a portion of the obligation into common stock. The holder is
entitled, at its option, at any time commencing from and after March 31, 1998 to
convert up to 100% of the unpaid principal amount of the debenture into common
stock of the Company at a conversion price equal to the lesser of (i) $1.00 per
share and (ii) the average market price of the Company's common stock for the
five (5) consecutive trading days immediately preceding the conversion date.
During the quarter the Company discovered an error in the accounting for
amortized issuance costs related to convertible debentures and amortized
discounts related to convertible debentures as reported in fiscal year 1997. The
error was contained in a charge made to the paid-in capital account during the
second quarter in the amount of $3,314,457. This charge was overstated by
$992,623. The entry necessary to correct this error has resulted in the Company
posting an increase to the paid-in capital account during the third quarter by
$992,623 (see Consolidated Statement of Stockholder's Equity).
Page 12 of 27
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United Petroleum Corporation and Subsidiaries
Notes to Condensed Consolidated Financial Statements-Continued
(Unaudited)
During the quarter the Company formed five new subsidiaries in preparation
of anticipated acquisitions, two of which were capitalized while the remaining
three new subsidiaries were not activated. The newly formed subsidiaries which
were activated are as follows: (1.) CTV Studios, Inc. and (2.) UCI Teleport,
Inc.) The capitalization for each newly formed subsidiary was obtained via the
sale of a ten percent (10%) interest in each new subsidiary with an option to
purchase an additional ten percent (10%). The initial capitalization for CTV
Studios, Inc. was $50,000.00. Said funds were used to place a deposit toward the
purchase of a production studio in Miami, Florida. For additional information
regarding this potential acquisition see the "Expansion, Capital Requirements
and Divestitures" section of Item 2 - Management's Discussion and Analysis of
Operations contained in this report. The initial capitalization of UCI Teleport,
Inc. was $150,000.00. Said funds were used to place a deposit toward the
purchase of a teleport facility in Miami, Florida. For additional information
regarding this potential acquisition see the "Expansion, Capital Requirements
and Divestitures" section of Item 2 - Management's Discussion and Analysis of
Operations contained in this report. In aggregate the minority position created
by the newly formed subsidiaries and the subsequent sale of the twenty percent
(20%) interest in each is shown on the balance sheet as "Minority Interest In
Consolidated Subsidiary" in the amount of $200,000.00.
Page 13 of 27
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Item 2. - Management's Discussion and Analysis of Operations
The Company realized a net loss of ($803,275) for the three month period
ended September 30, 1997, compared to a net loss of ($958,493) for the same
period last year.
A summary of comparative results between the third quarter of 1997 and the
third quarter of 1996 is as follows:
Revenues were realized as follows:
Quarter Ended Quarter Ended
Sept. 30, 1997 Sept. 30, 1996
Retail Subsidiary:
Gasoline $ 396,828 $1,223,282
Car Wash 996,049 1,225,757
Oil & Lube 321,224 313,854
Grocery 56,483 163,395
Other Sales 36,309 222,881
Energy Subsidiary:
Natural Gas 78,268 3,906
Crude Oil 28,948 0
---------- ----------
Total Revenue For Quarter $1,914,109 $3,153,075
========== ==========
Retail Subsidiary (Calibur Systems, Inc.)
The Company experienced a decreased gross profit margin on gasoline sales
from 12.4 % in the third quarter of 1996 to 3.8 % in the third quarter of 1997.
Volume decreased from 1,024,412 gallons in the third quarter of 1996 to 357,089
gallons in the third quarter of 1997 for a decrease of approximately 65.1 %. The
decrease in volume is attributed to the decrease in the number of Company
locations selling gasoline from 13 locations to 7 locations. For further
information related to the decrease in the number of Company locations selling
gasoline refer to the "Expansion, Capital Requirements and Divestitures" section
of this report located in the Management's Discussion and Analysis of Operations
section on page 17.
Car wash revenue was $229,708 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. The balance of the decrease is attributed to the decrease in the
number of full service car wash locations from 16 locations to 11 locations. For
Page 14 of 27
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Item 2 - Management's Discussion and Analysis of Operations - Continued
further information related to the decrease in the number of the Company's full
service car wash locations refer to the "Expansion, Capital Requirements and
Divestitures" section of this report located in the Management's Discussion and
Analysis of Operations section on page 17.
Oil and lube revenue was $7,370 higher for the quarter as compared to the
same quarter last year which represents an increase of approximately 2.3 %. 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 nine oil and lube centers in
operation as compared to eight oil and lube centers open at the end of the third
quarter in 1996.
Grocery revenue was $56,483 for the quarter as compared to $163,395 for the
same period last year. Other revenues were $36,309 for the quarter as compared
to $222,881 for the same period last year. The decrease in both cases is mainly
attributed to the decrease in the number of locations carrying such products.
For further information related to the decrease in the number of the Company's
locations selling grocery and other items refer to the "Expansion, Capital
Requirements and Divestitures" section of this report located in the
Management's Discussion and Analysis of Operations section on page 17.
The Calibur Systems, Inc. subsidiary had a net loss of ($164,268) for the
quarter as compared to a net income of $181,618 for the same period last year.
Energy Subsidiary (Jackson-United Petroleum Corporation)
Natural gas revenues increased to $78,268 for the quarter as compared to
$3,906 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.
Oil revenue for the quarter was $28,948 for the quarter as compared to $0
for the same period last year. The majority of 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. A portion of these revenues were
produced from the "pilot" phase of a water-flood project which is a joint
venture with Western Engineering, Inc. ("Western") of Evansville, Indiana. The
cost of the Company's participation was
Page 15 of 27
<PAGE>
Item 2 - Management's Discussion and Analysis of Operations - Continued
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.
The Jackson-United Petroleum Corporation subsidiary had a net income of
$41,338 for the quarter as compared to a net loss of ($37,626) for the same
period last year. Depreciation and depletion were $45,000 for the quarter as
compared to $0 last year for the same period.
Consolidated Operations
The decrease in revenues and cost of sales, as reported for the quarter and
year to date, are attributed to the decrease in the number of Calibur locations
operated by the Company. For further information related to the number of
Company locations operated in the Calibur subsidiary refer to the "Expansion,
Capital Improvements and Divestitures" section of this report located in the
Management's Discussion and Analysis of Operations section on page 17.
Operating and interest expenses were $1,572,591 for the third quarter of
1997 as compared to $1,878,212 for the same period last year. The decrease is
attributed to the amortization of the debenture forgiveness which occurred
during the second quarter. The Company chose to classify the amount forgiven as
an "unamortized discount" for statement purposes and is recognizing $373,920 per
quarter as a reduction in interest expense for the period.
Management expected a loss for the quarter. However, the loss for the third
quarter exceeded the expectations of management. The operating loss, excluding
the effects of the debentures, was approximately ($229,571). The primary factors
associated with the decreased operating income were: (1.) lower than expected
gasoline volume, (2.) lower than expected car wash revenue, (3.) lower than
expected lube center revenues during the quarter and (4.) higher wage costs for
the quarter. The higher wage costs for the quarter are primarily related to
increased personnel related to acquisitions and the evaluation of all Company
properties. 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 third
quarter.
Financial Condition - The working capital deficit of the Company as of
September 30, 1997 is approximately ($3,387,855) as compared to a deficit of
approximately ($3,347,113) as of the end of the previous quarter. The net worth
of the Company increased from $7,076,929 as of June 30, 1997 to $8,291,241 as of
September 30, 1997. The increase is mainly attributed to the conversion of
debentures with a face value of approximately $637,880 into common stock and an
adjustment to the paid-in capital account in the amount of $922,623 to correct
errors discovered in the accounting for amortized issuance costs associated with
convertible debentures and amortized
Page 16 of 27
<PAGE>
Item 2 - Management's Discussion and Analysis of Operations - Continued
discounts associated with convertible debentures. The debt to worth ratio of the
Company has improved from 2.4 to 1 as of June 30, 1997 to 1.7 to 1 as of
September 30, 1997. Included in the current assets of the Company as of
September 30, 1997 is a note receivable from, Michael F. Thomas, the Company's
Chairman and President. The note is the result of the sale of a Company location
to Mr. Thomas. For further information regarding this sale refer to the
"Expansion, Capital Requirements and Divestitures" section of this report
located in the Management's Discussion and Analysis of Operations section on
page 17. Inventories on the balance sheet decreased from $634,265.00 as of
December 31, 1996 to $355,971.00 as of September 30, 1997. This decrease is the
result of the sale of several Company locations in the Calibur subsidiary.
Premises and Equipment on the balance sheet has decreased from $12,875,902.00 as
of December 31, 1996 to $7,678,018 as of September 30, 1997. This decrease is
the result of the sale of several Company locations in the Calibur subsidiary.
For further information regarding the sale of the Company locations refer to the
"Expansion, Capital Requirements and Divestitures" section of this report
located in the Management's Discussion and Analysis of Operations section on
page 17. Long term debt on the balance sheet has decreased from $22,229,143.00
as of December 31, 1997 to $9,015,051.00 as of September 30, 1997. The decrease
is the result of a combination of the following: (1.) the exchange of
convertible debentures with a face value of approximately $10,000,000.00 into
convertible preferred stock, (2.) the forgiveness of convertible debentures with
a face value of approximately $1,495,680.00, (3.) the conversion of convertible
debentures with a face value of approximately $1,553,480.00 into common stock
and (4.) the pay-off of all notes associated with Company locations sold during
the year.
During the balance of 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 continues to negotiate 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
Page 17 of 27
<PAGE>
Item 2 - Management's Discussion and Analysis of Operations - Continued
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, Capital Improvements and Divestitures
During the quarter the Company performed due diligence and evaluated
numerous potential acquisitions in several business sectors as follows: in the
home shopping industry, the telecommunications industry, the entertainment
industry and the oil and natural gas industry. The following is a summary of the
events regarding these potential acquisitions:
In August the Company announced the formation of a new division, UCI
Entertainment Group, in anticipation of entering the entertainment industry. The
Company further announced the intent to change the name of the Company to United
Companies International, Inc. or "UCI". The name change is not in effect at this
time as the change would require the approval of a majority vote of
shareholders. The Company entered into a letter of intent to purchase the
following: (1.) Royal Pictures, Inc. which is an existing company formed for the
production of motion pictures for domestic and international distribution, (2.)
Havana Horse Productions, Inc. which is a talent agency owned by Actor Steven
Bauer, (3.) the purchase of an existing studio used in the production of films
and programs for television, (4.) Compravision Home Shopping Network which is a
company whose focus is home shopping via television or cable networks and (5.)
Viatel Shopping Network, SA which is an existing South American company whose
focus is the shop-at-home market. The Following is a brief summary of the
present status of each of the potential acquisitions:
Royal Pictures, Inc. - Due diligence related to the assets of and future
potential of Royal Pictures, Inc. has led to the decision not to pursue the
acquisition further.
Miami based production studio - Due diligence related to the assets of and
future potential of the studio has led to the decision not to pursue the
acquisition further. A contract to purchase the studio was entered into and a
deposit of $50,000.00 was placed with the seller. The funds for the deposit came
from the sale of a ten percent (10%) interest in a newly formed subsidiary, CTV
Studios, Inc., which was formed during the quarter. Due to the decision not to
proceed with the acquisition the Company shall seek the return of the deposit No
assurance can be given that the
Page 18 of 27
<PAGE>
Item 2 - Management's Discussion and Analysis of Operations - Continued
deposit will be returned.
Havana Horse Productions, Inc. - Due to the decision not to proceed with
either the Royal Pictures, Inc. or the studio acquisitions the Company has no
use for a talent agency. For this reason the decision was made not to pursue the
acquisition further.
Compravision Home Shopping Network - Although the Company finds the Spanish
language home shopping concept to be of great interest, due diligence related to
the assets of and the complications of a start-up home shopping network have led
to the decision not to pursue the acquisition further.
Viatel Shopping Network, SA - The decision not to pursue the Spanish
language home shopping market in general and the due diligence performed by the
Company led to the decision not to pursue the acquisition further.
In August the Company further announced the formation of a new division,
UCI Telecommunications Group, in anticipation of entering the telecommunications
industry. During the quarter the Company entered a letter of intent to purchase
the Mastec, Inc. teleport located in Miami, Florida. Simultaneously, the Company
entered into a letter of intent with a Florida based long distance carrier whose
business is located in Mexico. The revenues of the Mexican based operation are
approximately $26,000,000.00 per year. A newly formed subsidiary, UCI Teleport,
Inc. was formed during the quarter. Capital for the new division was raised via
the sale of a ten percent (10%) interest in the new subsidiary. The following is
a brief summary of the potential acquisitions:
The Mastec Teleport - Subsequent to extensive due diligence by the Company,
the decision was made to pursue the acquisition. Not only did the acquisition of
the teleport alone have merit but it was discovered that the teleport could
substantially improve the operating profits of the Mexican long distance carrier
as over forty percent (40%) of it's long distance calls are terminated in the
United States. These calls are now being transmitted via the use of other
teleport facilities for which the charge is significant. The use of one's own
teleport could create a substantial savings. The Company has placed a deposit
with the owners of the teleport in the amount of $150,000.00 with closing
anticipated during the forth quarter of 1997. The funds for the deposit came
from the sale of a ten percent (10%) interest in the newly formed subsidiary as
mentioned above. The acquisition of the teleport will require additional
financing in the amount of approximately $3,350,000.00 and create the need for
working capital in the amount of approximately $2,000,000.00. The Company is
presently seeking the necessary capital. There can be no assurance that the
necessary capital will be available to the Company in a form which is acceptable
to shareholders.
Page 19 of 27
<PAGE>
Item 2 - Management's Discussion and Analysis of Operations - Continued
Long Distance Carrier - Subsequent to extensive due diligence by the
Company, the decision was made to pursue the acquisition. The long distance
carrier has revenues of approximately $26,000,000.00 per year and a cashflow of
approximately $3,500,000.00 per year. The operation can be significantly
enhanced via the use of the above referenced teleport and the operation can be
expanded significantly into other countries. The purchase price is approximately
$9,000,000.00 and the need for working capital is estimated to be approximately
$5,500,000.00. The Company is presently seeking the necessary capital. There can
be no assurance that the necessary capital will be available to the Company in a
form which is acceptable to shareholders.
As of September 30, 1997 the Company is committed to certain expansion
projects in the retail subsidiary and they are as follows:
(1.) The Company presently has a new Pennzoil Ten Minute Lube Center at
8016 Kingston Pike in Knoxville, Tennessee under construction. The facility is
presently about 95% complete and all invoices associated with this location have
been paid. The cost to complete the location is expected to be approximately
$25,000. The Company expects to complete the location during the forth quarter
of 1997.
(2.) The Company recently completed Pennzoil Ten Minute Lube Centers in
Newport, Tennessee, Ft. Oglethorpe, Georgia and Morristown, Tennessee. Each of
these locations is now in operation and all payables related to the construction
of these locations have now been paid.
(3.) During the quarter the Company ceased operations at the following
Calibur locations: (1.) 4867 North Broadway in Knoxville, Tennessee, (2.) 5907 &
5909 Lee Highway in Chattanooga, Tennessee, (3.) 1330 W. Broad Street in
Murfreesboro, Tennessee and (4.) 8871 Kingston Pike in Knoxville, Tennessee.
Operations at 4867 North Broadway and 5907 & 5909 Lee Highway in
Chattanooga, Tennessee were ceased due to the cancellation of the lease for the
facilities from, Michael F. Thomas, the Company's President and Chairman. The
cancellation, approved by the Board of Directors in the second quarter of 1997,
was by mutual consent of both the Company and Mr. Thomas. A review of the
financial performance of the two locations indicated that the two locations
combined produced an annual cashflow of approximately $100,000.00. Mr. Thomas
agreed to reduce his annual compensation by $100,000.00 and allow the Company to
cancel the lease for the two properties. It is anticipated that the Company will
be able to further reduce expenses such as area management and accounting as a
result of the decreased level of activity in the Calibur subsidiary.
Operations at 1330 W. Broad Street in Murfreesboro, Tennessee were ceased
due to a lack of profitability at the location. In addition, the loan on the
property from Sun Trust Bank matured and the bank was unwilling to renew the
loan. The Company was unable to refinance the loan at
Page 20 of 27
<PAGE>
Item 2 - Management's Discussion and Analysis of Operations - Continued
any other financial institution due to the locations poor operating statements.
Being a guarantor on the note, Michael F. Thomas, was required to acquire the
location and pay-off of the note. The Board of Directors approved the sale as
the sale would prevent a potential problem situation with SunTrust Bank which
could adversely effect other banking relationships of the Company. In addition,
the sale was approved due to the poor financial performance of the location over
the past few years.
Operations at 8871 Kingston Pike in Knoxville, Tennessee ceased due to the
sale of the property to, Michael F. Thomas, the Company's President and Chairman
for $300,000.00. Mr. Thomas has a loan approved for the purchase of the location
with closing expected to occur during the forth quarter of 1997. The sales price
of $300,000.00 is carried as a receivable on the books of the Company as of
September 30, 1997. The Board of Directors made the decision to sell this
location in order to raise working capital for the Company. There was no debt on
the location. The fact that the location was built on leased property and the
fact that the location required substantial refurbishing and updating
contributed to the decision to sell the facility.
In addition to the above divestitures, the Company sold an existing
non-operational vacant piece of real estate on Ashville Highway in Knoxville,
Tennessee to, Michael F. Thomas, the Company's President and Chairman. The
vacant land, acquired from Exxon for approximately $125,000.00, was sold via the
assumption of a loan in the approximate amount of $140,000.00 from First
American Bank in Knoxville, Tennessee. The note had matured and the Company was
not in the position to develop the site or pay the loan off. As a guarantor of
the note, Mr. Thomas, agreed to assume the note personally in return for the
conveyance of the vacant piece of real estate.
All of the above referenced divestitures involving properties being
transferred to, Michael F. Thomas, the Company's President and Chairman were
analyzed by the Company's CFO, the accounting department and Board of Directors
of the Company. The result was that an assumption agreement was entered into
between the Company and Mr. Thomas on July 3, 1997. The purpose of the agreement
was to insure that the transaction was fair and equitable to both parties. The
agreement provided, among other things, that Mr. Thomas would assume or pay the
following: (1.) a note payable to Pennzoil in the approximate amount of
$219,829.17, (2.) the Pennzoil Unearned Discount in the amount of $200,000.00,
(3.) a note payable to Pennzoil in the approximate amount of $68,240.88, (4.) a
note payable to Coffman Oil Co., Inc. in the approximate amount of $25,405.57,
(5.) a note payable to Sun Trust Bank in the approximate amount of $389,387.00,
(6.) a note payable to First American Bank in the approximate amount of
$140,000.00, (7.) real estate taxes in the approximate amount of $85,529.00 and
(8.) pay to the Company the sum of $300,000.00. As a result of the divestitures
and the assumption of numerous debts of the Company, the Company experienced a
loss on the sales of approximately ($22,966.27). These transactions decreased
the liabilities of the Company by approximately $1,137,935.00.
Page 21 of 27
<PAGE>
Item 2 - Management's Discussion and Analysis of Operations - Continued
In August the Company sold the real estate at a Company owned location in
Oak Ridge, Tennessee which contained a full service car wash, two bay Pennzoil
Lube Center, gasoline facility and small convenience store to a non-affiliated
local petroleum distributor. The purpose of the sale was to raise capital and
pay-off a short term loan on the facility in the amount of $300,000.00 which was
owed to, Michael F. Thomas, the Company's President and Chairman. The funds
loaned to the Company had been borrowed by Mr. Thomas personally from a local
bank. The note matured and the Company was unable to pay the note as agreed. The
sale enabled the Company to pay-off the existing first mortgage from Nations
Bank, pay-off the note to Mr. Thomas and raise approximately $144,548.00 in
working capital. The location continues to be operated by the Company as the
transaction was in the form of a sale/lease back.
In September the Company sold a full service car wash facility in
Cookeville, Tennessee to, Dwight Thomas, the Company's Secretary and a member of
the Board of Directors. The location was sold for $516,000.00 versus an M.A.I.
appraised value of $536,000.00. The price was deemed acceptable due to the fact
that the location was in need of capital improvements, including environmental
updates necessary to meet 1998 standards, in excess of approximately $80,000.00
at the time of the sale. The purpose of the sale was to raise working capital
for the Company. The Company received net proceeds from the sale in the amount
of $152,385.24.
During the quarter the Company entered into an employment agreement with
Arthur Van Buren, a member of the Board of Directors, to be the Controller of
the Company. The terms of the agreement, among other things, states the term to
be for five years with an annual salary of $100,000.00 to be paid $84,000.00 in
cash and the remaining $16,000.00 to be paid in stock. In addition, Mr. Van
Buren was granted 250,000 options to purchase common stock in the Company at the
market price as of the date of the agreement.
Page 22 of 27
<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, on October 3, 1997 the Company
received notification that the Nasdaq Stock Exchange had decided to delist its
common stock from trading on the Nasdaq SmallCap market effective as of the
close of business October 17, 1997.
It first alleged that the Company has entered into various consulting
agreements with the sole purpose of expanding investor interest in the Company's
shares, which arrangements are said to have led to a deterioration of
shareholder value. It is the Company's position that the consulting arrangements
were not solely or even primarily for the purpose of expanding shareholder
interest, but, rather were for the purpose of obtaining investment banking
assistance, primarily in connection with the location of possible acquisitions
and in arranging financing for those acquisitions and for the development of the
Company's oil and gas properties. Moreover, the Company does not believe that
these arrangements, in any way, led to a deterioration of shareholder value.
Compensation for these services was paid primarily with stock or options and the
number of shares involved did not significantly dilute shareholder equity.
It is further alleged that the Company facilitated and pursued manipulative
transactions in the Company's stock. This allegation apparently refers to the
sale of convertible debentures and the actions thereafter which were initiated
by virtue of the improper actions of certain of the purchasers of the
debentures. The facts are these. The debentures contained provisions prohibiting
short sales and contained representations that they were being purchased for
investment and not for resale. In fact, certain of the debenture holders
apparently sold short substantial quantities of shares prior to conversion of
their debentures placing downward pressure on the price of the shares. The
Company was unaware of these activities until the price of the shares began to
fall sharply. Believing that the lower prices were not justified, and in an
effort to stabilize the market in the shares, the Company's Board of Directors
authorized a share buy-back program. However,
Page 23 of 27
<PAGE>
Part II - Other Information - Continued
the Company never actually put this program into effect. It deposited some of
the proceeds of the debenture sale with TAJ Global Securities, a broker/dealer
for use if and when purchases were desired. At that time, TAJ had entered into a
proposed public offering of shares of the Company's stock.
TAJ, without the Company's knowledge or consent, purchased a large quantity
of shares from its own customers when the price of the shares commenced to drop.
Those purchases were initially made through the TAJ trading account. Apparently,
when that account became too large, the shares were transferred to the account
of Strategic Holdings Corporation from which TAJ had a power of attorney.
Strategic, which had assisted the Company in connection with the sale of the
debentures and which had a consulting agreement with the Company contends that
it did not authorize such transaction and that it did not even know they had
taken place.
When TAJ and Strategic were unable to pay for these trades, TAJ and
National Financial, TAJ's clearing broker, made demands upon the Company to pay
for those trades, threatening to liquidate the shares, an action which would
have clearly damaged the interests of the shareholders. The Company, with good
intentions, but, perhaps unwisely, made payment for those shares. All these
transactions took place over a period of a little over a month.
There was no intent on the part of the Company to manipulate or facilitate
the manipulation of the price of the Company's stock. Unfortunately, the
Company's activities which were intended to protect the shareholders were
unsuccessful. The price of the stock remained at a very low level which enabled
debenture holders to obtain large quantities of stock upon conversion, which,
according to the terms of the debentures was at market. It was as a result of
these conversions that the equity of the shareholders was seriously diluted, not
through any fault of the Company.
Insofar as the 1,834,407 shares which were purchased through the Strategic
account are concerned, they were placed in escrow as collateral for the return
of the money which had been advanced by the Company. They were never transferred
to the Company and were never treated as redeemed stock by the Company. This
treatment was approved by the Company's auditors who also approved of the
recognition of a deferred tax asset as a result of the loss resulting from the
write-off of the advance for the payment for the Strategic shares. It is not
correct that the Company repurchased its shares through the Strategic account.
The allegations set forth by Nasdaq also relates to the valuation placed
upon the Company's reserves of oil and gas by virtue of the purported doubt
about the Company's abilities to exploit these reserves. In fact, the Company
has been exploiting its reserves. At present, the Company has twenty producing
wells which are producing revenue.
Page 24 of 27
<PAGE>
Part II - Other Information - Continued
With respect to the concern expressed over the Company's attempt to enter
into unrelated fields of business, none of the transactions has been
consummated. If and when any of these acquisitions are finalized, the Company
will have first satisfied itself of the availability of competent management.
The financing of these transactions is intended to be accomplished with the
participation of the debenture holders in an agreement which will reduce the
Company's debt and provide the Company with additional sources of income.
Finally, it is asserted that the Company has violated Marketplace Rule
4330(c) by failing to respond to the staff's requests for information and by
failing to meet the staff's deadlines for responding. The Company did provide
all information requested and provided most of such information in a timely
fashion. A small portion of the responses were provided a short time after the
deadline as a result of work pressure in the Company's offices and the large
effort required to accumulate all of the requested information. The Company
believes that it acted in good faith and to the best of its ability.
The Company does not believe that its conduct merits its being delisted, an
action which will seriously hamper its ability to improve its fortunes and the
fortunes of its shareholders. The Company is presently engaged in negotiations
with a large group of debenture holders and with certain selling entities, which
if successful, could result in a sharp turn-around in the Company's financial
condition. The Company has requested that any decision to delist be postponed
until at least March 1, 1998, by which time, it is anticipated that the
Company's financial condition will be substantially improved. If it is not, the
Company will most likely be automatically delisted at that time by virtue of the
fact that its stock price will probably be under $1.00.
The Company has appealed the decision and a hearing has been scheduled
between Nasdaq and the Company on November 21, 1997. The Company's shares
continue to be traded on the Nasdaq SmallCap market pending the outcome of the
hearing. If delisted, the Company would attempt to have its common stock traded
over-the-counter via the Electronic Bulletin Board or "pink sheets".
Subsequent to the end of the quarter, on October 31, 1997, Charles Lobetti,
the Chief Financial Officer of the Company informed the Company of his
resignation to pursue other interests. No formal resignation has been received
by the Company to date.
In December 1996, the Company entered into an escrow agreement with
Strategic Holdings Corporation ("Strategic") regarding 1,834,407 shares of
Company stock acquired by Strategic from TAJ Global Equities Corporation
(hereinafter referred to as "Shares"). Said Shares were pledged by Strategic as
collateral on a note from the Company to Strategic. Said Shares were held in
escrow as follows: 334,407 of the Shares were held in escrow by the counsel for
Strategic as
Page 25 of 27
<PAGE>
Part II - Other Information - Continued
security for management fees due Strategic and the remaining 1,500,000 of the
Shares were held in escrow by Neal Melnick, a member of the Board of Directors.
The December 1996 agreement provides for Strategic to receive a minimum of
$465,000.00 or 5% of the sales price of such shares whichever is greater,
payable at a minimum of $200,000.00 in 1997 and $265,000.00 in 1998. The
agreement further provides that the Company was to pay Strategic a management
fee of $5,000.00 per month for two months and $7,500.00 a month thereafter for a
minimum of one year or until such time as all of the collateral shares have been
sold or transferred whichever is later. For further information regarding this
agreement and the events leading up to the execution of the agreement refer to
the Company's annual report on Form 10-KSB for the period ended December 31,
1996.
During the quarter the escrowed shares were released from escrow and were
distributed as follows: (1.) 184,000 shares to Robert Brent dba Royal Pictures,
Inc. in payment of expenses related to the purchase of his company, (2.) 900,000
shares to Strategic Holdings Corporation in settlement of the escrow agreement
and (3.) 750,000 shares to Equity Management Partners in payment of expenses and
pre-paid commissions associated with acquisitions. The market price of the
Company's common stock at the time of the release was approximately $0.25 per
share. The aggregate value of the shares released was therefor approximately
$458,601.75 which was less than the aggregate balance due Strategic under the
terms of the escrow agreement.
Item 6 Exhibits and Reports on Form 8-K
(a.) Exhibits - None
(b.) Reports on Form 8-K - None
Page 26 of 27
<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: November 19, 1997 By: /s/ Michael F. Thomas
----------------- ---------------------
Michael F. Thomas
President & CEO
Page 27 of 27
