UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
Annual Report Pursuant to Section 13 or 15(d) of
the Securities and Exchange Act of 1934
For the fiscal year ended December 31, 1996
Exchange Act File No.: 0-20760
PETRO UNION INC.
Exact name of Registrant as specified in its charter
Colorado 84-1091986
State or other jurisdiction I.R.S. Employer Identification
incorporation or organization Number
123 Main Street, Suite 300
Evansville, Indiana 47708
Address of principal executive offices Zip Code
Registrant's telephone number, including area code: (812)
424-6745
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
$.125 Par Value Common Stock.
Indicate by check mark whether the Registrant (1) has filed all
reports required to be filed by Section 13 or
15(d) of the Securities Exchange Act of 1934 during the preceding
12 months and (2) has been subject to such
filing requirements for the past 90 days.
YES (X) NO ( )
Indicate by check mark if there is no disclosure of delinquent
filers in response to Item 405 of Regulation S-B
is not contained in this form, and no disclosure will be
contained, to the best of the Registrant's knowledge,
in definitive proxy or information statements incorporated by
reference in Part III of this Form 10-KSB or any
amendments to this Form 10-KSB. ( X )
Registrant's revenues for its most recent fiscal year: $403,968
As of December 31, 1996, the aggregate market value of the common
stock of Petro Union, Inc. held by
nonaffiliates was approximately: $2,625,000.
Number of Shares
Outstanding
Class March 31, 1996
Common Stock, $.125 par value 17,537,945
DOCUMENTS INCORPORATED BY REFERENCE
None
Transitional Small Business Disclosure Format.
Yes No ( X )
<PAGE>
PART I
Item 1. Description of Business.
History and Organization
Petro Union, Inc., (the "Registrant" or the "Company" or
"PUI"), was organized under the laws of the State of Colorado on
June 27, 1988 as Kiwi III, Ltd. to complete a public offering to
raise funds to acquire or merge with an operating business. The
Registrant's Form S-18 was declared effective on November 14,
1988 and raised $152,000 through the sale of 15,200 Units of
1,000 shares each of the Registrant's $.001 par value common
stock at an offering price of $10.00 per Unit.
On September 29, 1989, the Registrant executed an agreement
and plan of reorganization to acquire all of the issued and
outstanding shares of Beat the House Enterprises, Inc. ("BTHE"),
a closely-held Delaware corporation, in exchange for 151,000,000
shares of the Registrant's $.0001 par value Common Stock. BTHE
shareholders purchased an additional 9,000,000 shares of the
Registrant's $.0001 par value common stock from selling
shareholders and 230,000,000 common stock purchase warrants from
selling warrant holders. BTHE's plans never successfully
materialized and until July 28, 1992 the Registrant had no
operations.
On July 28, 1992, the Registrant executed an agreement and
plan of reorganization with two individuals, Parvin E. Day and
Richard D. Wedel, and Petro Union, Inc., an Indiana corporation,
whereby the Registrant acquired 100% of the outstanding shares of
Petro Union, Inc., in exchange for the issuance of 7,240,000
shares (90.5%) of the Registrant's common stock. The transaction
was a tax free exchange and was accounted for as a reverse merger
with Kiwi III, Ltd. being the survivor. Kiwi III, Ltd. then
changed its name to Petro Union Inc. to reflect the new business
of the Company. Petro Union has the following subsidiaries:
Calox, Inc., and American Energy Corporation.
Business Activities
The initial business objective of the Registrant was to
explore for and develop oil and gas reservoirs through the use of
a network of independent geologists from which it developed
drilling prospects followed by its Land Department acquiring the
appropriate leases relative to these drilling sites. Over the
years, the Registrant evolved into an exploration and production
company internally generating geological and geophysical drilling
data, acquiring leases, arranging industry participation for
drilling, managing drilling and completion activities and
supervising production. Most of the Company's drilling to date
has occurred in the Illinois Basin, which is located in the
States of Illinois, Indiana, and Kentucky.
The Registrant is still in the development stage with
respect to its drilling program in the Hayes field and its
non-oil and gas mineral acquisitions. The Registrant has
principally relied on its activities as a contract operator for
oil and gas wells to generate revenues. Currently it is the
operator for approximately 9 oil and gas wells, which, with few
exceptions, were wells developed and drilled by the Registrant
since 1981, with its working interest later spun off to others,
while the Registrant continued to act as the operator. As a
result of this activity, the Registrant has maintained minority
interests in approximately 6 wells which, during 1996, generated
a total of 1252 net barrels of oil. In addition to the proceeds
from the sale of these hydrocarbons, the Registrant earns
revenues from its contract operator agreements. As a contract
operator, the Registrant incurs 100% of the operating expenses of
each well which it thereafter bills to the working interest
owners along with its contracted for supervisory fee. Management
anticipates that a small portion of future revenues will be
earned from continuing these types of operations.
Acquisitions and Mergers
On July 15, 1992, PUI acquired Calox, Inc., an Indiana
corporation ("Calox"), in a common stock exchange whereby Calox
became a wholly owned subsidiary of PUI. Calox was organized in
June, 1992 to acquire, develop, and produce coal and other
mineral reserves. At the time of PUI's acquisition of Calox,
Calox owned the Central City coal reserve in Muhlenberg County,
Kentucky and a large limestone production site located in central
Indiana.
On August 9, 1993, the Registrant formed American Energy
Corporation ("American Energy") under the laws of the State of
Kentucky as a wholly owned subsidiary and infused into it the
Central City coal reserves formerly held by Calox, Inc.
On April 10, 1993, the Registrant acquired all of the issued
and outstanding shares of Green Coal Company, Inc. ("Green Coal")
for $100,000 in cash, a promissory note of $2,952,000 originally
payable August 15, 1993, subsequently extended by mutual consent,
1,000,000 shares of the Registrant's restricted common stock
valued at $3,950,000, and a 1% overriding royalty interest. The
parties to this transaction agreed that, at the time of payment
of the balance due, Registrant could forgive the note due the
former principal shareholder in the amount of $1,052,000 in
exchange for payment in cash of that amount, leaving cash due of
$1,900,000. As a result of this transaction Green Coal became a
wholly owned subsidiary of the Registrant. On July 11, 1994, the
Registrant filed a voluntary petition in the United States
Bankruptcy Court of the Western District of Kentucky, seeking to
reorganize Green Coal under Chapter 11 of the United States
Bankruptcy Code. The filing for protection under the Code was
necessary due to the severe liquidity problems caused by
substantial increases in existing high debt service demands and
lack of profitability on some existing coal contracts. Due to
these liquidity problems, the Company and Green Coal were unable
to pay the acquisition liabilities due to the former stockholders
of Green Coal.
These former stockholders filed a motion in the bankruptcy
court to have their shares returned to them. The judge granted
the motion and Thomas E. Green took ownership control of Green
Coal Company, Inc. on August 8, 1994.
The accompanying consolidated financial statements reflect
Green Coal's results of operation as a discontinued operation.
Current Operations
It is the Registrant's belief that, in the foreseeable
future, the United States will constantly be looking for
alternate sources of energy in its efforts to not only conserve,
but clean up, the environment. For the time being, the United
States is substantially reliant upon fossil fuels such as oil,
natural gas and coal as energy sources. It is the Registrant's
belief that the domestic, as well as international,
political/economic climate is, and will continue to be, such that
society will require that there be a consistent market for the
Registrant's products.
The Registrant's present business strategy is to concentrate
on expanding its asset base and cash flow primarily through (i)
development of a horizontal drilling service company utilizing
the Amoco short radius technology licensed by the Registrant;
(ii) development drilling and horizontal drilling recompletion
activities on proved locations; (iii) exploitation by drilling or
horizontal drilling recompleting prospective formations not
currently classifiable as proved, but believed by Management to
have potential based upon its technical evaluation or development
activity in the area; (iv) acquisitions of oil and gas producing
properties and mineral reserves, which Management believes have
potential for increasing production and reserves; and, (v)
reduction programs and utilization of improved drilling and
completion techniques designed to lower per unit operating and
reserve addition costs.
The Extractive Minerals Industry
Coal Reserves
Historically, there has been a very limited change in
demand for coal in the United States. In the past, major oil
companies have searched for and obtained control over a large
percentage of the known coal reserves in the United States.
Management believes that many of the major companies have elected
to liquidate their ownership interests in a substantial portion
of these coal reserves as a result of changing environmental
regulations. As of the date of this Report, there are, what
Management believes to be, a considerable number of large coal
reserves available for sale by many companies. The registrant's
management has significant operating experience in the coal
fields of Kentucky, Indiana and Illinois. The Registrant
continually evaluates opportunities to acquire available
reserves.
Discontinuance of Coal Operations
The Central City Reserve lease obligation required annual
lease payments of $100,000. Due to the liquidity problems caused
by the Green Coal acquisition (discussed above), the Company has
been unable to make the lease payments due in 1994 and 1995.
Management's efforts to obtain a renegotiated payment plan for
this lease obligation were not successful.
On August 8, 1994, the Judge in the Green Coal Bankruptcy
unexpectedly rendered a decision to return the stock of Green
Coal to its former owner, Tom Green. This affect on the Company
was similar to an involuntary conversion in that the Company lost
all operating control of Green Coal and was not compensated for
this loss. The Company has appealed the Bankruptcy Judge's
decision in this matter. Legal counsel believes that the Company
has certain legal remedies available in this matter against
certain third parties that could ultimately result in the partial
overturning or modification of the Judge's order.
Since the Company lacks the resources to (1) pursue its
legal remedies in the Green Coal matter and (2) bring the Central
City Reserve obligation current, the Company has effectively lost
control and title to all of its coal reserves and operations. In
April, 1995, management decided to discontinue it operations in
the coal industry. Accordingly, the Company's investment in its
coal reserves and operations have been written off in the
accompanying statement of operations as "discontinued operations"
and "disposal of a coal segment."
Management has no current plans to acquire any additional
investments in the coal industry at this time, but would consider
re-entering this industry at some future date when it has the
resources needed to compete successfully in this highly capital
intensive industry.
Limestone Reserves
As a result of the acquisition of Calox, the Registrant also
acquired a limestone reserve located in Monroe County, Indiana.
The 355 acre property is owned "in fee." That is, the Registrant
owns the land, timber and 100% of the mineral rights associated
with the property. The reserves are made up of Salem limestone,
which produces a high industrial grade calcium oxide or calcium
carbonate used in scrubbing machinery that cleans the gaseous
emissions from coal burning generators. Engineering reports
obtained by the Registrant indicate there are 73,458,000 tons of
proven reserves on 200 acres of the property. The current plans
of the Registrant include a joint venture with a mining company
to open the quarry and equip it to produce approximately 400,000
to 500,000 tons per year in crushed form.
Management estimates approximately $400,000 will be
necessary to open and equip the quarry. Current pricing for this
product ranges between $5.00 and $6.00 per ton. The Registrant's
joint venture partner has the expertise necessary to calcinate
limestone and sell it to the end-user for scrubbing purposes.
The type of lime which can be produced from the Registrant's
reserves is currently selling for approximately $50.00 to $60.00
per ton in calcinated form. It is not possible at this time to
determine that when the Registrant commences limestone mining
such operations will be profitable. A description of these
reserves is as follows:
Location: Monroe County, Indiana
Means of access: State Highway 46 to County Road
Title, claim, lease or option description: Owned in fee warranty
deed
Conditions to obtain or retain the property: none
Expiration date of lease or option: N/A
Maps: Incorporated by reference from the Registrants' fiscal
1992 Form 10-KSB
History of previous operators: none
Present condition of property: Timber land
Work completed by Registrant on the property: Drilling, testing
and engineering
Proposed program of exploration or development: Develop rock
quarry to produce rock and/or crushed limestone
Current state of exploration or development: none
Open pit or underground: Open pit
Source of Power: Public Service of Indiana
Rock formations and mineralization of existing or potential
economic significance: Limestone
Proven recoverable reserves: 73,458,000
Quality: 98% CA CO2
Name of person making estimates: John R. Coombs - geological
engineer
Relationship to Registrant of such person making estimates: none
On August 16, 1996, the Registrant received the signed order
dated August 15, 1996 from the United States Bankruptcy Court for
the Southern District of Indiana approving a loan transaction
with Pembrooke Holding Corporation for a post-petition financing
to meet the Registrant's present working capital needs. The
Registrant has entered into an agreement with Pembrooke Holding
Corporation whereby $150,000 will be loaned to the Registrant for
a period of 180 days without interest, secured by a pledge of 50%
of the stock of Calox Corporation (a wholly owned subsidiary of
the Registrant). Upon the Court's confirmation of the plan of
reorganization, Pembrooke was to receive, in satisfaction of its
$150,000 loan, a debenture in the amount of $150,000 which shall
be convertible to stock at a price of 12.5 cents per share. The
Registrant was also to issue warrants for its stock to Pembrooke
as a part of a plan of reorganization for a total of 2,333,334
warrants exercisable at 58% of the market price at the time of
exercise. The Registrant was also to receive $130,000 from
Pembrooke to acquire a 60% working interest in each well
developed in a certain oil and gas property which the Registrant
is currently in negotiation to lease. At such time that
Pembrooke receives oil and gas production payments were equal to
its investments in each well, Pembrooke's working interest was to
have been reduced to 50%.
On April 16, 1997, the Registrant filed a motion in the United
States Bankruptcy Court to amend the post-petition loan agreement
as agreed between the Registrant and Pembrooke Holding
Corporation on April 3, 1997. The amended agreement provides for
the extension of the term of the loan for an initial term of 90
calendar days which may be further extended for an additional 90
days. The principal balance of $150,000 shall bear interest at
the rate of 8% per annum from the 16th day of September, 1996
until paid. Upon the entry of a final order confirming a plan of
reorganization, Pembrooke shall (i) convert the loan, interest,
and certain expenses to common stock of the Registrant at the
ratio of $0.125 cents per share, (ii) convert expenses of $75,000
to common stock at $.25 per share; and (iii) be entitled to a
continuing royalty interest in the Company's limestone reserves
of 10%. Upon the execution of this amended agreement and the
approval by the Bankruptcy Court by final order, Pembrooke shall
have no further rights to acquire any other shares of stock,
debentures, warrants, or any other interests of the Registrant
except as a consulting fee, Pembrooke is to receive 400,000
shares of common stock. Additionally, Pembrooke shall have (i)
the right of first refusal in the event the Registrant proposes
to sell the limestone reserves to a third party and (ii) the
first option to purchase the reserves from the Registrant for a
period of twenty-four (24) calendar months from the Court's entry
of an order confirming a plan of reorganization for the
Registrant for a sum of not less than Three Million Five Hundred
Thousand Dollars ($3,500,000.00) nor more than Four Million Five
Hundred Thousand Dollars ($4,500,000.00).
The Oil and Gas Industry
PUI was founded in 1981 with the primary objective of
exploring for and developing oil and gas reserves. Initially the
Registrant established a network of independent geologists which
it drew upon for exploration drilling prospects. The Registrant
successfully brokered these prospects to other companies.
Eventually, PUI evolved into a full scale exploration and
production company generating its own geological and geophysical
drilling prospects, acquiring leases, arranging drilling
participation, and finally managing the drilling, completion and
supervision of production.
During the last ten years, PUI has conducted extensive
proprietary research and development of geological structures in
the Illinois Basin, which Management believes has lead to the
discovery of deeper targets for its exploration within the
Illinois Basin in specific areas.
The Registrant plans to use its staff to locate reservoirs
of oil and gas and, in certain instances, to acquire reserves
which have been engineered by others. Once the Registrant has
leased up the necessary rights it will extract these reserves by
using the horizontal drilling technique. The principal advantage
of the horizontal drilling technique is that it results in a
substantially greater surface area for drainage, and thus
extraction, of the oil from the reservoir. In industry terms
this is referred to as "communicating zones of permeability."
The horizontal drilling technique to be used by the Registrant
was developed by Amoco Production Company and offers the ability
to turn the drill from vertical to horizontal in as little as
twenty-five feet. This allows the drilling rig operator
significant precision in targeting known reservoirs.
Additionally, this technique is advantageous in shallow basins,
such as the Illinois Basin, since the short turning radius
capability avoids certain geologic problems related to sequences
of sand, shale and limestone, which are water bearing, and where
typically, the drilling units are not large enough for long or
medium radius drilling techniques.
Hayes Field
The Registrant has acquired from Gullickson Farms the rights
to 50% of the mineral interest in a 754 acre lease for a portion
of the Hayes Field, located near Champaign, Illinois.
Previously, this property produced oil from wells at 1,050 feet,
but was later plugged to drill to a deeper zone for gas storage
purposes. This field has been engineered at 9.9 million barrels
of oil reserves, of which, 155,000 barrels have been extracted.
Management believes that it should be able to extract
approximately 20% of the oil in the known reservoirs, less the
155,000 barrels already extracted, for a total recovery of
approximately 1.8 million barrels. The Registrant owns a 7/8
working interest in the lease. Through December, 1996, the
Registrant has spent $222,902 on the development of the field and
approximately $110,000 on equipment. Management continues to
seek funding for the development of this field.
Horizontal Drilling
In October of 1994, the Company acquired from Amoco
Production Company ("Amoco") a U. S. license to Amoco's Patented
Slim Hole Short Radius Horizontal Drilling Technology. Amoco
initiated a project in 1989 to develop a short radius drilling
system for completing and re-completing wells to enhance the
economical production of oil and gas. The system has been
developed and tested to the point where, in management's opinion,
it can now be offered as a commercial service to other producers.
The Company, in its first effort successfully field tested the
technology by drilling a 35' radius curve and a lateral extension
to 515' from the vertical well bore.
The oil and gas industry has long recognized that only a
percentage of the in-place oil can be produced from any given
reservoir. Amoco, like many other oil producers, recognizes that
well stimulations from existing well bores are essential to
enhancing recovery from proven reserves. The Amoco technology is
capable of re-entering wells case-lined as small as 4 1/2" in
diameter, the standard casing program in many areas of the U.S.,
and drilling curvatures from 25' to 60' of radii with lateral
penetrations of several hundred feet to increase the production.
Management of the Company considers this proprietary
technology a leading edge and a ground floor opportunity as both
a producer and service provider to other producers. It is
believed by management that through utilization of the system of
the Company has the ability to cost-effectively drill lateral
completions and re-entries in shallow oil and gas producing zones
where existing technology has not been available or affordable.
Drilling horizontal laterals has the potential to: tap fresh oil
by intersecting fractures, penetrating pay discontinuities and
drain up-dip traps; correct production problems such as water
coning, gas coning, and excessive water cuts from hydraulic
fractures which extend below the oil-water contact; and
supplement enhanced secondary and tertiary oil recovery
techniques.
Because drilling new wells from the surface is not a
necessity and current production infrastructures can be utilized,
it is anticipated that the economics will be improved. Potential
zones such as shale gas and coalbed methane that contain
trillions of cubic feet of untapped reserves in the United States
are believed by management to be candidates for short radius
horizontal drilling technology.
The company assembled one (1) set of horizontal drilling
equipment and commenced field operations late in 1995. The
company continues to provide its horizontal drilling services on
a fee basis or partial fee plus working interest basis in wells
where its technology is used. The company intends to exploit the
horizontal drilling technology in wells for its own account.
The Registrant plans to form a joint venture service company
to provide horizontal drilling services throughout the United
States, with operations beginning in the states of Illinois and
Indiana located in the Illinois Basin. Discussions are being
held with several major energy entities that have expressed a
positive interest in becoming a joint venture partner to fund the
service company. It is anticipated that the Company will
maintain operating control of the service company. The Company
has proposed to supply the technical expertise, management, and
the licensed technology under a management contract.
The company has received $300,000 from TransTexas Gas
Corporation as an advance payment towards a Joint Venture and for
a horizontal service contract on a test well in southwest Texas.
Drilling operations on the test well were successfully completed
in April of 1996.
On February 8, 1997, the Registrant entered into a service
contract with Newstar Energy USA, Inc. whereby the Registrant
will provide its short radius horizontal drilling services on
twenty (20) wells over a twelve (12) month period in the Dundee
Oil Field located in Michigan. The Registrant estimates services
to Newstar will generate approximately One Million to One Million
Five Hundred Thousand Dollars ($1,000,000.00 to $1,500,000.00)
from the first twenty (20) wells. The contract further provides
that upon completion of the twenty (20) wells it is the intent of
the Registrant and Newstar to form an alliance, joint venture, or
formal relationship to exploit oil properties with the use of the
Registrant's technology.
Oil and Gas Reserves
The Registrant engaged independent petroleum engineer, John
Coombs to estimate the Registrant's proved reserves, project
future production and estimate future net revenues from
production of the proved reserves as of December 31, 1993. Mr.
Coombs' estimates were based upon a review of production
histories and other geologic, economic, ownership and engineering
data provided by the Registrant. In determining the estimates of
the reserve quantities that are economically recoverable, Mr.
Coombs used oil and gas prices and estimated development and
production costs as of December 31, 1993.
The following table sets forth information estimated as of
December 31, 1993 derived from the reserve reports of Mr. Coombs.
The present values of estimated future net revenues (discounted
at 10% per annum) shown in the table are not intended to
represent the current market value of the estimated oil and gas
reserves owned by the Registrant. For further information
concerning the present value of future net revenue from these
proved reserves, see the Notes to Consolidated Financial
Statements.
Proved Reserves (1)
Developed Undeveloped Total
Oil (Mbbls) 94,080 866,460 960,540
Gas (Mmcf) Nil Nil Nil
Equivalent
barrels
(MBOE) (2) 94,080 866,460 960,540
(1) These reserves acquired or under contract to be acquired
have an estimated present value of future net revenues of
$7,769,409.
(2) Natural gas converted to oil at the ratio of six Mcf of
natural gas to one Bbl of oil. Natural gas liquids are included
as natural gas in this calculation without adjustment for higher
BTU value.
There are numerous uncertainties inherent in estimating
quantities of proved reserves and in projecting future rates of
production and timing of development expenditures, including many
factors beyond the control of the producer. The reserve data set
forth above represents only estimates. Reserve engineering is a
subjective process of estimating underground accumulations of oil
and gas that cannot be measured in an exact way, and the accuracy
of any reserve estimate is a function of the quality of available
data and of engineering and geological interpretation and
judgment and the existence of development plans. As a result,
estimates of different engineers often vary. For example, the
Registrant has substantially increased its proved undeveloped
reserves from initial reserve estimates made at the time of
certain acquisitions. In addition, results of drilling, testing
and production subsequent to the date of an estimate may justify
revision of such estimates. Accordingly, reserve estimates are
often different from the quantities of oil and gas that are
ultimately recovered. Further, the estimated future net revenues
from proved reserves and the present value thereof are based
upon certain assumptions, including geologic success, prices,
future production levels and costs, that may not prove correct
over time. Predictions about prices and future production levels
are subject to great uncertainty, and the meaningfulness of such
estimates is highly dependent upon the accuracy of the
assumptions upon which they are based. Oil and gas prices have
fluctuated widely in recent years. The weighted average sales
price utilized for the purposes of estimating the Registrant's
proved reserves and future net revenues therefrom as of December
31, 1996 was $20.42 per Bbl for oil.
Production
The following table sets forth the average sale price, the
average production cost (lifting costs) and net production to the
Registrant for each of the last three fiscal years of oil and gas
production in the Illinois Basin (Illinois, Indiana, and
Kentucky) per unit of production (oil barrels, Bbl; gas, mcf;):
1994 1995 1996
Average Sales Price
Per Unit:
Oil $15.73 $16.73 $20.42
Gas 1.53 0 0
Lifting Costs Per Unit:
Oil $11.68 $11.88 $10.94
Gas .82 0 0
Net Production to
the Registrant:
Oil 1223 1203 1252
Gas 1321 0 0
Acreage
The following table sets forth the gross and net acres of
developed and undeveloped oil and gas leases held by the
Registrant as of December 31, 1996, and includes the
854 net acres owned as of year end. Undeveloped acreage includes
leasehold interests which may already have been classified as
containing proved undeveloped reserves.
Developed Acreage(1) Undeveloped Acreage
Gross Net Gross Net
Indiana 170 17 1520 380
Illinois 115 80 754 377
Total 285 97 2274 757
Drilling Activity
The following table sets forth the wells drilled and
completed by the Registrant during the periods indicated:
Years ended December 31
1994 1995 1996
Gross Net Gross Net Gross Net
Development:
Oil 1 .875 1 .125 3 .375
Gas - - - - - -
Non-
Productive - - - - - -
Total 1 .875 1 .125 3 .375
(1) Developed acreage is acreage assigned to producing
wells for the spacing unit of the producing formation. Developed
acreage in certain of the Company's properties that include
multiple formations with different well spacing requirements may
be considered undeveloped for certain formations, but have only
been included as developed acreage in the presentation above.
Development Activities
The Registrant has drilled wells in the Illinois Basin since
1981 and Management believes it has been a leader in advancing
exploration and completion methods in the several formations
found there. The Registrant holds 39 proved undeveloped
locations in inventory. Beginning with the acquisition of Green
Coal in April, 1993 and until its involuntary disposal in August,
1994, Management has had to substantially devote all of its time
and energy to solving pre-existing operational and permitting
problems of Green Coal. Registrant's program for the development
of these proved locations is expected to continue upon the
availability of funds.
Exploitation Activities
The Registrant's exploitation activities are characterized
by a higher level of risk with potentially higher rates of return
than its development program, but the risk is still believed to
be less than that of exploration. The targets are typically
step-outs to existing production or deeper formations on existing
proved locations with multiple potential completion horizons in
areas that are on trend with or close to production from the
exploitation target formation. The reserves for these target
formations are not classified as proved, but the Registrant
believes that these formations may contain commercial potential
by reason of the success of similar operations in the area.
Accordingly, these exploitation efforts are likely to be adjusted
based on results obtained.
Exploration Strategy
In addition to its development and exploitation activities,
the Registrant is building a portfolio of exploration prospects
which gives the Registrant an opportunity to utilize its
technical expertise to increase its reserve base. Exploration
drilling involves substantially more risk than development and
exploitation drilling. The Registrant's existing prospects have
multiple pay objectives and are commonly located in association
with existing producing fields. They are also in areas where
management has expertise or previous experience. The Registrant
plans to invest a small portion of its cash flow in exploration
ventures.
Development Exploration and Acquisition Expenditures
The following table sets forth certain information regarding
the costs incurred by the Registrant in its development,
exploration and acquisition activities during the periods
indicated:
Years Ended December 31
1995 1996
Development
Costs $108,229* $90,000
Exploration
Costs --- ________
Acquisition
Costs:
a) Unproved
Properties --- ________
b) Proved
Properties --- ________
Total Capital
Expenditure $108,229* $90,000
* Restated as amounts previously reported contained a clerical
error.
Marketing
Substantially all of the Registrant's oil production is
sold to Ashland Oil, Marathon Oil, and the Indiana Farm Bureau at
posted prices for the area. Domestic oil demand exceeds the
supply and management does not see this changing in the near
future.
Competition
The Registrant believes that the locations of its leasehold
acreage, its exploration, drilling and production capabilities
and the experience of its management generally enable it to
compete effectively in its principal producing areas.
Competition in the energy industry is intense, however, and a
number of the Registrant's competitors have financial resources
and exploration and development budgets that are substantially
greater than those of the Registrant, which may adversely affect
the Registrant's ability to compete, particularly in regions
outside of the Registrant's principal producing areas.
Regulation
The following discussion of regulation of the oil and gas
industry is necessarily brief and is not intended to constitute a
complete discussion of the various statutes, rules, regulations
or governmental orders to which operations of the Registrant may
be subject.
Price Controls on Liquid Hydrocarbons
Oil sold by the Registrant is no longer subject to the Crude
Oil Windfall Profits Tax Act of 1980, as amended, which was
repealed in 1988. As a result, the Registrant sells oil produced
from its properties at unregulated market prices.
Federal Regulation of First Sales and Transportation of Natural
Gas
The sale and transportation of natural gas production from
properties owned by the Registrant may be subject to regulation
under various federal and state laws including, but not limited
to, the Natural Gas Act ("NGA") and the Natural Gas Policy Act
("NGPA"), both of which are administered by the Federal Energy
Regulatory Commission ("FERC"). The provisions of these acts and
regulations are complex. Under these acts, producers and
marketers have been required to obtain certificates from FERC to
make sales, as well as obtaining abandonment approval from FERC
to discontinue sales. Additionally, first sales ("first sales")
have been subject to maximum lawful price regulation. However,
the NGPA provided for phased-in deregulation of most new gas
production and, as a result of the enactment on July 26, 1989 of
the Natural Gas Wellhead Decontrol Act of 1989, the remaining
regulations imposed by the NGA and the NGPA with respect to
"first sales" were terminated by not later than January 1, 1993.
FERC jurisdiction over transportation and sales other than "first
sales" has not been affected.
Because of current market conditions, many producers,
including the Registrant, are receiving contract prices
substantially below most remaining maximum lawful prices under
the NGPA. Management believes that most of the gas to be
produced from the Registrant's properties is already
price-deregulated. The price at which such gas may be sold will
continue to be affected by a number of factors, including the
price of alternate fuels such as oil. At present, two factors
affecting prices are gas-to-gas competition among various gas
marketers and storage of natural gas. Moreover, the actual
prices realized under the Registrant's current gas sales
contracts also may be affected by the nature of the decontrolled
price provisions included therein and whether any indefinite
price escalation clauses in such contracts have been triggered by
federal decontrol.
The economic impact on the Registrant and gas producers
generally of price decontrol is uncertain, but it currently
appears to be resulting in lower gas prices. Currently, there is
a surplus of deliverable gas in most areas of the United States
and, accordingly, it remains possible that gas prices will
continue to remain at relatively depressed levels or decrease
further. Moreover, many gas sales contracts provide for price
redetermination upon decontrol, and, as a result, it is possible
that the newly redetermined prices applicable under such
contracts are likely to reflect the lower prices prevalent in
today's market. Producers such as the Registrant or resellers
may be required to reduce prices in order to assure continued
sales. It is also possible that gas production from certain
properties may be shut-in altogether for lack of an available
market.
Commencing in the mid-1980's, FERC promulgated several
orders designed to correct market distortions and to make gas
markets more competitive by removing the transportation barriers
to market access. These orders have had a profound influence
upon natural gas markets in the United States and have, among
other things, fostered the development of a large spot market for
gas. The following is a brief description of the most
significant of those orders and is not intended to constitute a
complete description of those orders or their impact.
On April 8, 1992, FERC issued Order 636, which is intended
to restructure both the sales and transportation services
provided by interstate natural gas pipelines. The purpose of
Order 636 is to improve the competitive structure of the pipeline
industry and maximize consumer benefits from the competitive
wellhead gas market. The major function of Order 636 is to
assure that the services non-pipeline companies can obtain from
pipelines is comparable to the services pipeline companies offer
to their gas sales customers. One of the key features of the
Order is the "unbundling" of services that pipelines offer their
customers. This means that pipelines must offer transportation
and other services separately from the sale of gas. The Order is
complex, and faces potential challenges in court. The Registrant
is not able to predict the effect the Order might have on its
business.
FERC regulates the rates and services of "natural-gas
companies", which the NGA defines as persons engaged in the
transportation of gas in interstate commerce for resale. As
previously discussed, the regulation of producers under the NGA
is being gradually phased out. Interstate pipelines, however,
continue to be regulated by FERC under the NGA. Various state
commissions also regulate the rates and services of pipelines
whose operations are purely intrastate in nature, although
generally sales to and transportation on behalf of other
pipelines or industrial end-users are not subject to material
state regulation.
There are many legislative proposals pending in Congress
and in the legislatures of various states that, if enacted, might
significantly affect the petroleum industry. It is impossible to
predict what proposals will be enacted and what effect, if any,
such proposals would have on the Registrant.
State and Local Regulation of Drilling and Production
State regulatory authorities have established rules and
regulations requiring permits for drilling, drilling bonds and
reports concerning operations. The states in which the
Registrant operates also have statutes and regulations governing
a number of environmental and conservation matters, including the
unitization and pooling of oil and gas properties and
establishment of maximum rates of production from oil and gas
wells. A few states also pro-rate production to the market
demand for oil and gas.
Environmental Regulations
Operations of the Registrant are subject to numerous laws
and regulations governing the discharge of materials into the
environmental or otherwise relating to environmental protection.
These laws and regulations may require the acquisition of a
permit before drilling commences, prohibit drilling activities on
certain lands lying within wilderness and other protected areas
and impose substantial liabilities for pollution resulting from
drilling operations. Such laws and regulations may also restrict
air or other pollution resulting from the Registrant's
operations. Moreover, many commentators believe that the state
and federal environmental laws and regulations will become more
stringent in the future. For instance, proposed legislation
amending the federal Resource Conservation and Recovery Act would
reclassify oil and gas production wastes as "hazardous waste".
If such legislation were to pass, it could have a significant
impact on the operating costs of the Registrant, as well as the
oil and gas industry in general. State initiatives to further
regulate the disposal of oil and gas wastes are also pending in
certain states, including states in which the Registrant has
operations, and these various initiative could have a similar
impact on the Registrant.
The Registrant has not filed any reports with estimates of
its reserves with any federal authority or agency, other than the
Securities and Exchange Commission and the Department of Energy.
Title to Properties
Substantially all of the Registrant's property interests are
held pursuant to leases from third parties. A title opinion is
typically obtained prior to the commencement of drilling
operations on properties. The Registrant has obtained title
opinions on substantially all of its producing properties and
believes that it has satisfactory title to such properties in
accordance with standards generally accepted in the oil and gas
industry. The Registrant's properties are subject to customary
royalty interests, liens for current taxes and other burdens
which the Registrant believes do not materially interfere with
the use of or affect the value of such properties. The
Registrant performs only a minimal title investigation before
acquiring undeveloped properties.
Operational Hazards and Insurance
The Registrant's operations are subject to the usual hazards
incident to the drilling and production of oil and gas, such as
blowouts, cratering, explosions, uncontrollable flows of oil, gas
or well fluids, fires, pollution, releases of toxic gas and other
environmental hazards and risks. These hazards can cause
personal injury and loss of life, severe damage to and
destruction of property and equipment, pollution or environmental
damage and suspension of operations.
The Registrant has $2,000,000 of general liability
insurance. The Registrant's insurance does not cover every
potential risk associated with the drilling and production of oil
and gas. In particular, coverage is not obtainable for certain
types of environmental hazards. The occurrence of a significant
adverse event, the risks of which are not fully covered by
insurance, could have a material adverse effect on the
Registrant's financial condition and results of operations.
Moreover, no assurance can be given that the Registrant will be
able to maintain adequate insurance in the future at rates it
considers reasonable.
Employees
At March 31, 1997, the Registrant had five employees,
consisting of four full-time employees and one part-time
employee. None of the Registrant's employees are subject to a
collective bargaining agreement. The Registrant considers its
relations with its employees to be good. The Registrant
anticipates that it will hire additional field personnel to
implement its growth plans.
Offices
The Registrant leases approximately 1,250 square feet of
office space in Evansville, Indiana for its executive offices on
a one year lease. If it were to require added space, the
Registrant believes that additional space is readily available
for lease. The Registrant leases a field office and storage
facility and equipment yard in Spencer County, Indiana.
Bank Guarantees
During the ordinary course of business, the Company
guaranteed certain notes for Green Coal Company, Inc. at the
National City Bank of Louisville, Kentucky for a bank line of
credit secured by coal reserves, supply agreements, mining
equipment, a coal processing plant and the personal guarantee of
Mr. Thomas Green, a previous shareholder of Green Coal.
Item 2. Description of Properties
Substantially all of the Registrant's property interests are
held pursuant to leases from third parties. A title opinion is
typically obtained prior to the commencement of drilling
operations on properties. The Registrant has obtained title
opinions on substantially all of its producing properties and
believes that it has satisfactory title to such properties in
accordance with standards generally accepted in the oil and gas
industry. The Registrant's properties are subject to customary
royalty interests, liens for current taxes and other burdens
which the Registrant believes do not materially interfere with
the use of or affect the value of such properties. The
Registrant performs only a minimal title investigation before
acquiring undeveloped properties.
Item 3. Legal Proceedings.
Except as set forth below, there are no other material,
pending litigation not incidental to the business to which the
Registrant or its subsidiaries is a party or against any of its
Officers or Directors as a result of their capacities with the
Corporation. All of the following claims have been listed as
creditors in the Registrant's petition in bankruptcy:
Name: Caterpillar Financial Services Corp. Vs.
Petro Union Inc.
Location: Daviess Circuit Court
Owensboro, Kentucky
Civil Action Number: 94-C1-01378
Description: Demand on Guarantee for Green Coal Co., Inc.
Status: Judgment in favor of Caterpillar Financial Services
Corp. for $10,333,302 for equipment purchases by Green
Coal Company, Inc. On September 27, 1996, the
bankruptcy court involuntarily converted Green Coal to
a Chapter 7 and appointed a trustee. Subsequently, the
Registrant, without further defense, agreed to judgment
of Caterpillar's claim.
Name: Petro Union Inc. Vs Thomas E. Green, Et. al.
Location: United States District Court, Western District of
Kentucky
Civil Action Number: 94-CV-0126-0(C)
Description: Claim for damages
Status: No trial date has been set.
Claim:
On July 13, 1995, the Company brought suit against Thomas E.
Green, Etal and the former stockholders of Green Coal Company
seeking judgment for $100,000,000 plus court costs. The suit
alleges: (a) Thomas E. Green, Etal, breached the Green Coal
Company acquisition agreement by demanding delivery of the Green
Coal stock; and (b) Thomas E. Green, Etal, misrepresented
material facts constituting fraud, deceit, and negligent
misrepresentations. Management is unable to determine the
outcome of this litigation.
Name: Ron Orin and The OR Company Vs Petro Union Inc.
Location: United States District Court, Southern District of
Indiana
Civil Action Number: EV95-155
Description: Disputed Claim for Damages
Status: No trial date has been set.
Claim:
On or about May, 1994, The OR Company purchased and Petro Union
sold 500,000 shares of its $.125 common stock to The OR Company
pursuant to exemptions from registration provided by Regulations
'S' promulgated pursuant to the Securities Act of 1933 as
amended. The parties executed and delivered a Regulation 'S'
Securities Agreement and an Amendment thereto. A certificate for
500,000 shares was issued to The OR Company and delivered to it.
Another similar Regulation 'S' sale of 200,000 shares of Petro
Union shares of its $.125 common stock to The OR Company was done
in June, 1994.
In connection with both transactions, The OR Company granted
options to Petro Union to repurchase these shares of stock.
Several months later, OR Company's officials contacted Petro
Union and asked Petro Union to execute promissory notes
documenting the indebtedness which would be owed if Petro Union
exercised its option to repurchase the securities. These notes
were not intended to create, and did not create, any additional
obligations of the parties.
The notes were not to be of any consequence if Petro Union failed
to exercise its option to purchase. The notes specifically
provided that the non-exercise of the option to purchase was
a satisfaction of the notes. Because Petro Union did not
exercise its option, it is management's opinion. There was no
consideration for the notes and they are void or voidable.
notes have been satisfied.
Name: ICI Explosives USA, Inc. Vs Petro Union Inc.
Location: Jefferson Circuit Court Division 15, Louisville,
Kentucky
Civil Action Number: 96-CI-00401
Description: Claim for Repayment under 50% Guarantee
Status: Stayed pending bankruptcy court action
Claim:
In November of 1993, Petro Union entered into a Security
Agreement to guarantee 50% of the repayment of explosives and
blasting supplies sold by ICI to Petro Union's wholly owned
subsidiary, Green Coal Company, Inc. Petro Union further pledged
a Page Model 747 Electric Dragline located near Central City,
Kentucky. Petro Union sold said dragline with $70,000 applied to
ICI's claim. The balance owing is allocated as unsecured.
Name: Voluntary Petition for Reorganization
Location: United States Bankruptcy Court, Souther District of
Indiana
Case: 96-70559-BHL-11
Description: Chapter 11 Reorganization
Status: Debtor-in-Possession
Date: May 13, 1996
The Company voluntary filed a petition for "Reorganization"
pursuant to Chapter 11 in the United States Bankruptcy Court for
the Southern District of Indiana. The filing was due to the
liabilities and contingent liabilities resulting from the
acquisition and subsequent disposition of Green Coal Company,
Inc.
Status:
The Company must file a plan of reorganization on or before June
16, 1997. That plan is currently being developed.
It is the intention of the Registrant to file a plan of
reorganization to fund both the reorganization and corporate
re-structuring that will enable the Registrant to emerge from
Chapter 11 Reorganization and fulfill its obligations to Newstar
while proceeding to execute its business plan.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of security holders of
the Registrant during the quarter ending December 31, 1996.
Annual meetings of the shareholders of the Registrant are held in
accordance with Colorado law.
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters.
The Registrant's common stock has been quoted on NASDAQ
since February 19, 1993. On March 31, 1997, there were fourteen
(14) market makers in the Registrant's securities and the closing
bid quotation was $.19 per share. These prices, which have been
adjusted for the Registrant's 1 for 1,250 shares reverse split on
July 31, 1992, are believed to be representative of inter-dealer
quotations, without retail markup, markdown or commissions, but
may not represent actual transactions. There can be no assurance
that a public market for the Registrant's common stock will be
sustained in the future.
Bid
Quarter Ended Low High
December 31, 1995 .16 .16
March 31, 1996 .19 .22
June 30, 1996 .13 .13
September 30, 1996 .25 .31
December 31, 1996 .19 .25
March 31, 1997 .19 .25
On March 31, 1997, there were approximately 600 registered
holders of the Registrant's common stock, including those persons
having beneficial positions in street name holdings.
Holders of common stock are entitled to receive such
dividends as may be declared by the Registrant's Board of
Directors. The Registrant has not yet paid any dividends, and
the Board of Directors of the Registrant presently intends to
pursue a policy of retaining earnings, if any, for use in the
Registrant's operations and to finance expansion of its business.
With respect to the Common Stock, the declaration and payment of
dividends in the future, of which there can be no assurance, will
be determined by the Board of Directors in light of conditions
then existing, including the Registrant's earnings, financial
condition, capital requirements and other factors.
Item 6. Management's Discussion and Analysis or Plan of
Operations
The following discussion addresses the Company's results of
operations for the years ended December 31, 1996 and 1995, as
well as liquidity and capital resources as of December 31, 1996.
As a result of the involuntary disposition of Green Coal
Company on August 8, 1994, the financial condition of the
Registrant changed dramatically. The disposition was accounted
for as a discontinued operation and resulted in a significant
change in the business of the Registrant. All of the
Registrant's revenues and operations after the loss of Green Coal
are now in the oil and gas business. The Registrant considers
its results to be comparative for the purposes of this
discussion and analysis; however, on May 13, 1996, the Company
filed a Petition for reorganization pursuant to Chapter 11 of the
U.S. Bankruptcy Code, which resulted in certain adjustments.
Results of Operations
Year Ended December 31, 1996 Compared to December 31, 1995
Revenues increased $261,788 or 184% from 1995 to 1996. The
increase was primarily due to increased horizontal drilling
service activities.
Cost of revenues increased $149,190 or 166% from 1995 to
1996. The increase was due to increased horizontal drilling
activities.
Selling, general, and administrative expenses decreased for
the year ended December 31, 1996 as compared to the year ended
December 31, 1995 by $213,273 or 40%. The decrease was primarily
a result of adjustments relating to the Chapter 11
reorganization.
Liquidity and Capital Resources
During the twelve months ended December 31, 1996, working
capital increased $222,144 from the prior year as a result of an
increase in revenues and a decrease in G&A. During this period
the Company's accounts payable decreased from $517,091 to
$380,220 or 26%.
At the present time, the Registrant is more than thirty (30)
days past due on the majority of its accounts payable.
Management is in discussions with certain entities to assist the
Company in developing its plan of reorganization and disclosure
statement to be presented on or before June 16, 1997 to the
bankruptcy court. Should negotiations fail, Management cannot
reasonably predict the outlook for continuing operations.
Management is working toward a strategic relationship that
provides the financing needed for a successful Company if its
plan is approved; however, what impact this may have on current
shareholders and creditors cannot be determined at this time.
Inflation
The Registrant does not believe that inflation will have a
material impact on the Registrant's future operations.
Item 7. Financial Statements
Please see accompanying index to Financial Statements
commencing on page F-1.
Item 8. Changes in and Disagreements With Accountants on
Accounting and Financial Disclosure
There have been no disagreements between the Registrant and
its independent accountants on any matter of accounting
principles or practices or financial statement disclosure since
the Registrant's inception. O'Neal and White, P.C. resigned as
auditors on February 8, 1995. The Registrant hired C. Williams &
Associates, P.C. during March, 1995 and filed an 8-K reporting
the change.
C. Williams & Associates, P.C. performed an audit of the
Company's financial statements for 1994 and issued its report on
that audit on April 14, 1995. The report of C. Williams &
Associates, P.C. with respect to the 1994 fiscal year financial
statements included an explanatory paragraph with respect to the
substantial doubt existing about the ability of the Company to
continue as a going concern due to its recurring net losses,
negative cash flows from operating activities since its
inception, limited liquid resources and negative working capital.
On January 29, 1996, the Texas State Board of Public Accountancy
made a determination that the firm of C. Williams & Associates,
P.C. was not properly licensed to practice public accounting in
Texas, retroactive back to March 2, 1995.
Article 2 of Regulation S-X provides that, after March 2,
1995, the firm of C. Williams & Associates, P.C. is not qualified
to practice before the Commission. Shareholders of the Company
continue to retain legal rights to sue and recover damages from
C. Williams & Associates, P.C., for material misstatements or
omissions, if any, in the financial statements.
Should C. Williams & Associates, P.C. dissolve under the
laws of Texas, its state of incorporation, the rights of the
Company's shareholders to sue and recover damages from C.
Williams & Associates, P.C. and its directors, officers and
shareholders would be determined by the laws of the State of
Texas governing the dissolution of Texas professional
corporations.
On March 22, 1996, the Company engaged the firm of Bateman,
Blomstrom & Co. to review the Company's 1994 financial
statements and to perform the 1995 audit. No change was required
to the 1994 audit as a result of this review.
PART III
Item 9. Directors and Executive Officers, Promoters and Control
Persons; Compliance with Section 16(a) of the Exchange
Act.
The executive officers, key employees and directors of the
Registrant and their ages and positions with the Registrant or
its subsidiaries are as follows:
Period from
Name Age Position which served
Parvin Day 73 Chief Financial and 7/92-12/10/96
Accounting Officer
and Chairman of the
Board of Directors
Resigned as Officer
and Director on
12/10/96
Richard D.
Wedel 49 President and Director 7/92 - current
Chairman 12/10/96-current
William E.
Will 69 Director 7/92-12/10/96
Resigned as Director
on 12/10/96
The Registrant has no knowledge of any arrangement or
understanding in existence between any executive officer named
above and any other person pursuant to which any such executive
officer was or is to be elected to such office or offices. All
officers of the Registrant serve at the pleasure of the Board of
Directors. No family relationship exists among the directors or
executive officers of the Registrant. All Officers of the
Registrant will hold office until the next Annual Meeting of the
Registrant. There is no person who is not a designated Officer
who is expected to make any significant contribution to the
business of the Registrant.
The following sets forth biographical information as to the
business experience of each current Officer and Director of the
Registrant for at least the past five years.
Richard D. Wedel, President and a Director. Mr. Wedel has been
President and a Director of the Registrant since July, 1992, and
of its wholly-owned subsidiary, Petro Union of Indiana, since
1981 and has been Chairman of the Registrant since December 10,
1996. He has been engaged in oil and gas exploration and
production in Ohio, Indiana, Illinois, Kentucky and Kansas since
the mid-1970's. From 1985 to 1991, Mr. Wedel was also an officer
and principal shareholder of Trans-American Drilling Corporation,
an Indiana corporation engaged in contract drilling of oil and
gas wells. From 1986 to 1988, Mr. Wedel served as the Chairman
of the Illinois Basin Chapter of the American Petroleum
Institute, and is current Chairman of the Eastern Advisory
Committee of the API. He is also a member of the
Indiana-Kentucky Geological Society, the Indiana Oil and Gas
Association, and the Tri-State Oil Producers Association. Mr.
Wedel also served as a Captain in the U. S. Marine Corps. Mr.
Wedel received a Bachelor of Science degree from the University
of Evansville, Indiana, in 1969.
During the past five years, there have been no petitions
under the Bankruptcy Act or any state insolvency law filed by or
against, nor have there been any receivers, fiscal agents, or
similar officers appointed by any court for the business or
property of any of the Registrant's incumbent directors or
executive officers, or any partnership in which any such person
was a general partner within two years before the time of such
filing, or any corporation or business association of which any
such director or executive officer was an executive officer
within two years before the time of such filing, EXCEPT Mr.
Parvin Day while Chairman of the Company voluntarily filed for a
Chapter 11 Reorganization in May, 1996 as a result of personal
guarantees made on behalf of the Company securing certain
obligations due to the Company's involvement with Green Coal
Company, Inc. Mr. Day resigned as a director and officer of the
Company on December 10, 1996.
During the past five years, no incumbent director or
executive officer of the Registrant has been convicted of any
criminal proceeding (excluding traffic violations and other minor
offenses) and no such person is the subject of a criminal
prosecution which is presently pending.
Compliance With Section 16(a) Under the Securities Exchange Act
of 1934
Based solely on a review of reports filed with the Company, all
Directors and Executive Officers timely filed all reports
regarding transactions in the Company's securities required to be
filed during the last fiscal year by Section 16(a) under the
Securities Exchange Act of 1934.
Item 10. Executive Compensation.
Summary Compensation Table
The following summary compensation table sets forth in
summary form the compensation received during each of the
Company's last two completed fiscal years by the Registrant's
Executive Officers.
(a) Summary Compensation Table
LONG TERM
ANNUAL COMPENSATION COMPENSATION
Name/ Fiscal
Position Year Salary(1) Bonus(2) Other(2) (2)
Parvin Day, CFO 1996 $90,000 -0- -0- -0-
1995 $90,000 -0- -0- -0-
Richard Wedel,
CEO 1996 $90,000 -0- -0- -0-
1995 $90,000 -0- -0- -0-
(1) Salaries were accrued, but not paid in cash. A total of
500,000 shares of stock were issued to each officer in 1996 as
payment in full for the $90,000 of salary accrued in 1995.
(2) During the period covered by the Table, the Company did not
pay its executive officers any bonuses or other compensation and
the Company did not make any award of long-term compensation.
Messrs. Day and Wedel devoted 100% of their time to the Company.
No other officer, director or employee of the Company or its
subsidiaries received total compensation in excess of $100,000
during the last two fiscal years. The Company has no employment
agreements with its executives.
(b) Option and Long-Term Compensation Tables
No options have been granted to any officers or directors of
the Company during the two years ended December 31, 1996.
(c) Options and Stock Appreciation Rights
The Company has not granted any options or stock
appreciation rights to any of its directors or executive
officers.
(d) Employment Contracts and Termination Agreements
None
(e) Director Compensation
Each director who is not an employee of the Registrant (the
"Outside Directors") will be paid the sum of $1,000 for each
meeting of the Board of Directors attended by them. Additionally
they will be reimbursed for expenses incurred in attending
meetings of the Board of Directors and related committees. As of
the date of this Prospectus, the Registrant has no Outside
Directors. No compensation was paid to any Outside Director
during fiscal 1996.
Item 11. Security Ownership of Certain Beneficial Owners and
Management
As of December 31, 1996, there were 17,537,945 shares of
common stock issued and outstanding.
The following table sets forth, as of the date of this
Report, the common stock ownership of each person known by the
Registrant to be the beneficial owner of five percent or more of
the Registrant's common and preferred stock, all Directors
individually, and all Directors and Officers of the Registrant as
a group. Except as noted, each person has sole record and
beneficial ownership and voting power with respect to the shares
shown.
Name and Address Common Percent
of Beneficial Owner Stock (1) of Class(1)
Parvin Day 2,565,000 14.63%
224 W. Main Street, Ste. 1
Boonville, IN 47601
Richard Wedel 3,640,400 20.75%
123 Main Street, Suite 300
Evansville, IN 47708
All Directors and Officers 3,640,000 20.75%
as a Group (1 person)
_________________
(1) Calculations assume exercise and conversion of all
warrants, option and conversion rights into the underlying shares
of common stock. All common and preferred shares held by the
Officers, Directors and Principal Shareholders listed above are
"restricted securities" and as such are subject to limitations on
resale. The shares may be sold pursuant to Rule 144 under
certain circumstances.
Rule 13d-3 under the Securities Exchange Act of 1934,
involving the determination of beneficial owners of securities,
includes as beneficial owners of securities, among others, any
person who directly or indirectly, through any contract,
arrangement, understanding, relationship or otherwise has, or
shares, voting power and/or investment power with respect to
such securities; and, any person who has the right to acquire
beneficial ownership of such security within sixty days through
means, including, but not limited to, the exercise of any option,
warrant or conversion of a security. Any securities not
outstanding which are subject to such options, warrants or
conversion privileges shall be deemed to be outstanding for the
purpose of computing the percentage of outstanding securities of
the class owned by such person, but shall not be deemed to be
outstanding for the purpose of computing the percentage of the
class by any other person.
All shares are "restricted securities" and as such are
subject to limitations on resale. The shares may be sold
pursuant to Rule 144 under certain circumstances.
There are no contractual arrangements or pledges of the
Registrant's securities, known to the Registrant, which may at a
subsequent date result in a change of control of the Registrant.
Item 12. Certain Relationships and Related Transactions
During the past three years, the Registrant issued
securities which were not registered under the Securities Act of
1933, as amended, to related parties as follows:
Number of Shares
$0.125 Par Value
Name Date Common Stock Consideration
Richard D. Wedel 06/08/95 450,000 (1)
Parvin E. Day 06/08/95 1,265,000 (1)
Richard D. Wedel 01/26/96 500,000 (2)
Parvin E. Day 01/26/96 500,000 (2)
Lawrence Felder 01/26/96 15,000 (3)
Sherryl R. Noble 01/26/96 5,000 (3)
Donald E. Frank 01/26/96 5,000 (3)
Oscar Ray Trout,
Sr. 01/26/96 5,000 (3)
Scott Reedy 01/26/96 500 (3)
(1) Issued for employee compensation.
(2) Issued for employee compensation.
(3) Issued for employee stock plan.
Director Loans to Registrant
The Registrant is indebted to Parvin Day, its Chairman, at
December 31, 1996 in the amount of approximately $19,330.13 and
to Richard D. Wedel, its President, in the approximate amount o
$9,758.60 for monies advanced to the Registrant for operational
expenses. The advances have no repayment terms and are
non-interest bearing.
Working Interests
Prior to the acquisition of Petro Union, Inc., Rick Wedel,
the President of the Registrant, historically acquired working
interests in certain of the Company's oil and gas properties.
Mr. Wedel is required to pay his proportionate share of all
costs, including acreage costs.
Overriding Royalty Income
The Registrant has historically assigned overriding royalty
interests to certain of its employees. Employees own overriding
royalty interests on oil and gas wells operated by the
Registrant. Conflicts of interest may arise between employees
owning overriding royalty interests in Registrant-operated
locations and the Registrant.
Future Transactions
Any further transactions between the Registrant and an
officer, director, principal stockholder or affiliate of the
Registrant will be approved by a majority of the directors, only
if they have determined that the transaction is fair to the
Registrant and its stockholders and that the terms of such
transaction are no less favorable to the Registrant than could be
obtained from unaffiliated parties.
Item 13. Exhibits, Financial Statement Schedules, and Reports on
Form 8-K
(a) Exhibits
Exhibit Description Location
3A Articles of Incorpora- Incorporated by reference
tion and Bylaws to Exhibit No. 3 to the
Registrant's Registration
Statement (#33-24265-LA)
3B Amended Articles Incorporated by reference
of Incorporation to Exhibit No. 2B of
Registrant's Form 8-A
Registration Statement
(File #0-20760)
4 Specimen of Securities Incorporated by reference
to Exhibit Nos. 1A and 1B of
Registrant's Form 8-A
Registration Statement
(File #0-20760)
10A Agreement and Plan Incorporated by reference
of Reorganization to Form 8-K dated August
12, 1992
10B Acquisition Agreement Incorporated by reference
For Green Coal Company, to Exhibit 10 to Form 10-KSB
Inc. for the period ended December
31, 1992
10C United States Bank- Incorporated by reference
ruptcy Court Voluntary to Form 10KSB dated
Petition for Green Coal December 31, 1994
Company, Inc.
Dated July 11, 1994
10D United States Bank- Incorporated by reference
ruptcy Court Transcript to Form 10KSB dated
of Ruling Returning December 31, 1994
Ownership of Green
Coal Company, Inc. to
Thomas Green and Family
10E Post-Petition Loan Included herewith
Agreement
10F Amended Post-Petition Included herewith
Loan Agreement
10G Horizontal Drilling Included herewith
Services Letter
Agreement
(b) One report on Form 8-K dated December 12, 1996 concerning
resignations of Registrant's Directors, Parvin E. Day and William
E. Will, was filed during the last quarter of the year covered by
this report.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities and Exchange Act of 1934, the Registrant has duly
caused this Report to be signed on its behalf by the undersigned,
thereunto duly authorized.
PETRO UNION INC.
Dated: May 6, 1997 By: /s/ Richard D. Wedel
Richard D. Wedel, President
Pursuant to the requirements of the Securities Exchange Act
of 1934, this report has been signed below by the following
persons on behalf of the Registrant and in the capacities and on
the dates indicated.
Signature Capacity Date
/s/ Richard D. Wedel President and May 6, 1997
Richard D. Wedel Chief Financial
Officer
PETRO UNION, INC.
INDEX TO FINANCIAL STATEMENTS AND SCHEDULES
REQUIRED BY ITEM 8 AND ITEM 14
FINANCIAL STATEMENTS PAGE
Reports of Independent Public Accountants F-2
Consolidated Balance Sheet as of December 31, 1996 F-3
Consolidated Statements of Operations for the Two
Years Ended December 31, 1996 and 1995 F-4
Consolidated Statements of Stockholders' Equity for
the Two Years Ended December 31, 1996 and 1995 F-5
Consolidated Statements of Cash Flows for the Two
Years Ended December 31, 1996 and 1995 F-6
Notes to Consolidated Financial Statements F-7
FINANCIAL STATEMENT SCHEDULES (1)
(1) Schedules are omitted because of the absence of the
conditions under which they are required, or because the
information required by such omitted schedule is contained in
the consolidated financial statements or the notes thereto.
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To The Board of Directors and Stockholders
Petro Union Inc.
Evansville, Indiana
We have audited the accompanying consolidated balance sheet of
Petro Union, Inc. and subsidiaries as of December 31, 1996 and
the related consolidated statements of operations, stockholders'
equity, and cash flows for the two years then ended. We have also
audited the financial statement schedules listed in Item 14 of
the Form 10KSB. These financial statements and financial
statement schedules are the responsibility of the Company's
management. Our responsibility is to express an opinion on these
financial statements and financial statement schedules based on
our audit.
We conducted our audit in accordance with generally accepted
auditing standards. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement.
An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting
principles used and significant estimates made by management,
as well as evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable
basis for our opinion.
As indicated in Notes 1 and 3, property and equipment includes
$3,500,000 of limestone reserves which are not currently
producing any revenue, and approximately $420,000 in
capitalized oil and gas exploration costs on which modest
production occurred in 1996. Realization of these assets
depends upon the Company s ability to fully develop and
exploit these properties, or sell them to a third party for an
amount at least equal to their carrying amount. The financial
statements do not include any adjustments that might result
from impairment of these assets. In addition, as indicated in
Note 4, the Company is a Debtor In Possession under the U.S.
Bankruptcy Code. The financial statements do not reflect any
adjustments that might result from this filing.
In our opinion, except for any adjustments, if any, which
might result from the effects of the matters discussed in the
preceding paragraph, the consolidated financial statements
referred to above present fairly, in all material respects,
the financial position of Petro Union, Inc. and subsidiaries
as of December 31, 1996, and the results of its operations and
cash flows for the two years then ended in conformity with
generally accepted accounting principles.
The accompanying consolidated financial statements have been
prepared assuming that the Company will continue as a going
concern. As discussed in Note 9 to the consolidated financial
statements, the Company has suffered recurring losses from
operations and has a working capital deficiency that raise
substantial doubt about its ability to continue as a going
concern. Management's plans regarding those matters are
described in Note 9. The consolidated financial statements do
not include any adjustments that might result from the outcome
of this uncertainty.
Houston, Texas
BATEMAN, BLOMSTROM & CO.
April 30, 1997
PETRO UNION, INC. AND SUBSIDIARIES
(A Debtor-In-Possession)
Consolidated Balance Sheet
December 31, 1996
ASSETS
Current Assets:
Cash $ 22,132
Restricted cash, certificates
of deposit (Note 2) 30,747
Accounts receivable, trade 132,262
Total current assets $ 185,141
Properties and equipment, net
(Notes 3 and 11) 4,237,267
Total assets $ 4,422,408
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities not subject to
compromise (Note 4):
Current liabilities:
Short term notes payable and
current maturities of long
term note, pre-petition $ 6,700
Short term note payable,
post-petition (Note 11) 150,000
Accounts payable, trade,
post-petition 31,164
Accrued taxes, pre-petition 14,306
Other accrued expenses 96,095
Total current liabilities 298,265
Long term note payable, net of
portion due within one year,
pre-petition (Note 11) 16,416
Liabilities subject to compromise
(Note 4)
Accounts payable and accrued
expenses 296,968
Avances from related parties 52,088
Advance on joint venture
agreement 230,000
Amounts arising from guaranties
of discontinued operations 24,022,791
Total liabilities subject to
compromise 24,601,847
Total liabilities 24,916,528
Commitments and contingencies
(Note 6)
Stockholders' equity
(Notes 8 and 11)
Common stock, $.125 par value,
50,000,000 shares authorized,
17,537,945 shares issued and
outstanding 2,192,243
Capital in excess of
par value 14,076,088
Accumulated deficit (36,747,451)
(20,479,120)
Less, stock subscript on
receivable (15,000)
Total stockholders' equity (20,494,120)
Total liabilities and
stockholders' equity $ 4,422,408
The accompanying notes are an integral part of these financial
statements.
<PAGE>
PETRO UNION, INC. AND SUBSIDIARIES
(A Debtor-In-Possession)
Consolidated Statements of Operations
For the Years Ended December 31,
1996 1995
Revenues $ 403,968 $ 142,180
Cost of revenues 239,008 89,815
Gross profit 164,960 52,365
General and administrative
expenses 314,299 527,572
Loss from continuing
operations (149,339) (475,207)
Other income (expense):
Other (64,200) 22,834
Interest income 1,636 2,162
Interest expense (18,898) (2,734)
Net other income (expense) (81,462) 22,262
Net loss from continuing
operations before taxes
on income (230,801) (452,945)
Provision for taxes on income --- ---
Net loss from continuing
operations (230,801) (452,945)
Discontinued operations
(Note 10):
Loss from discontinued
operations (24,092,791) ---
Net loss $ (24,323,592) $ (452,945)
Earnings (loss)
per share $ (1.40) $ (0.03)
Weighted average
number of common
shares used to
compute earnings
(loss) per share $ 17,423,621 $ 15,087,350
The accompanying notes are an integral part of these financial
statements.
PETRO UNION, INC. AND SUBSIDIARIES
(A Debtor-In-Possession)
Consolidated Statements of Stockholders' Equity
For the Years Ended December 31, 1996 and 1995
Capital
in
Excess Accumu-
Common Stock of Par lated
Shares Amount Value Deficit Total
Balance, December 31, 1994
13,496,760 1,687,095 13,919,522 (11,970,914) $ 3,635,703
Stock issued for services and accrued liabilities
2,430,685 303,835 100,040 -- 403,875
Net loss
- --- --- ---- (452,945) (452,945)
Balance, December 31, 1995
15,927,445 1,990,930 14,019,562 (12,423,859) 3,586,633
Stock issued for services and accrued liabilities
1,610,500 201,313 56,526 -- 257,839
Net loss
- --- --- ---- (24,323,592) (24,323,592)
Balance, December 31, 1996
17,537,945 2,192,243 14,076,088 $(36,747,451) $(20,479,120)
The accompanying notes are an integral part of these financial
statements.
PETRO UNION, INC. AND SUBSIDIARIES
(A Debtor-In-Possession)
Consolidated Statements of Cash Flows
For the Years Ended December 31,
1996 1995
Cash flows from operating
activities:
Net loss $ (24,323,592) $ (452,945)
Adjustments to reconcile net
loss to net cash provided
(used) by operations:
Amount attributable to
discontinued operations 24,022,791 --
Depreciation, depletion,
and amortization 150,603 91,989
Book value of assets sold 142,500
Stock issued for services 3,813 --
(Increase) decrease in
accounts receivable (132,262) --
(Increase) decrease in
advance royalties (20,000) --
Decrease in other assets -- 5,000
Increase (decrease) in
accounts payable (53,118) 310,707
Increase in accrued
liabilities 146,889 27,586
Net cash provided (used) by
operating activities (62,376) (17,663)
Cash flows from investing
activities:
Increase in properties and
equipment (118,283) (611,250)
Net cash provided (used) by
investing activities (118,283) (611,250)
Cash flows from financing
activities:
Increase (decrease) in due to
related parties 35,713 (134,125)
Proceeds from notes payable 150,000 40,356
Repayments of notes payable (9,535) (7,208)
Increase in advance on joint
venture agreement -- 250,000
Decrease (increase) in stock
subscription receivable 20,000 25,000
Stock issued in payment of
accrued liabilities -- 403,875
Net cash provided (used) by
financing activities 196,178 577,898
Net increase (decrease) in
cash and cash equivalents 15,519 (51,015)
Cash and cash equivalents:
Beginning of year 37,360 88,375
End of year $ 52,879 $ 37,360
Non-cash financing and
investing activities:
Stock issued for services $ 140,000 $ --
Stock issued in payment of
accrued liabilities 114,026 403,875
Equipment acquired by
issuance of note payable -- 40,356
Supplementary cash flow data:
Interest paid 22,432 2,734
Income taxes paid -- --
The accompanying notes are an integral part of these financial
statements.
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Business and Organization - Petro Union Inc. offers
geological and geophysical evaluation services in connection with
land and lease acquisitions, drilling, completing and producing
oil and gas properties, and ownership of mining properties. The
Company is based in Evansville, Indiana, and offers its services
primarily in the Midwestern United States. As indicated in Note
4, the Company has filed for protection under the U.S. Bankruptcy
Code, and is currently operating as a Debtor In Possession.
Petro Union Inc. (the "Company") was organized under the laws of
the State of Colorado on June 27, 1988 as KIWI, III, LTD. An
initial public offering to raise funds to acquire or merge with
an operating business was completed on November 14, 1988. A
total of $152,000 was raised through the sale of 15,200 Units of
1,000 shares each of the Company's $.001 par value common stock
at an offering price of $10.00 per Unit.
Petro Union, Inc. (the "Predecessor Company") was organized in
March, 1981 under the laws of the State of Indiana as an
independent energy company engaged in oil, gas, coal and mineral
exploration, development and extraction and the acquisition of
producing properties.
On July 15, 1992, the Predecessor Company acquired 100% of the
outstanding shares of Calox Corporation ("Calox") in exchange for
the issuance of 5,275,690 shares of the Predecessor Company's
common stock. Calox Corporation was organized in early 1992 to
acquire, develop and produce coal and other mineral reserves.
Additionally, on July 26, 1992, Calox issued 877,756 shares of
its common stock valued at $3,500,000 to Regional Resources for
355 acres of property located in Monroe County, Indiana. This
property has estimated proven limestone reserves of approximately
73,458,000 tons.
On July 27, 1992, Kiwi III, Ltd. entered into a reverse merger
agreement and plan of reorganization with the shareholders of the
Predecessor Company in which Kiwi III, Ltd. issued 90.5% of its
common stock in exchange for 100% of the issued and outstanding
common stock of the Predecessor Company. As part of the
reorganization, Kiwi III, Ltd. changed its name to Petro Union
Inc. and the Board of Directors unanimously adopted a resolution
which caused a reverse split of one new share for each 1,250 old
shares of the common stock of the Company and changed the par
value to $0.125 per share. Consequently, the number of common
shares outstanding was reduced from 950,000,000 to 760,000. The
transaction was accounted for as a pooling of interests.
On April 10, 1993, the Company entered into an agreement to
purchase 100% of the issued and outstanding common stock of Green
Coal Company, Inc. ("Green Coal"), a Kentucky corporation, for
$100,000 in cash, a $2,952,000 promissory note payable with no
specified maturity date, and 1,000,000 shares of the Company's
restricted common stock (valued at $3,950,000), and a 1%
overriding royalty on controlled reserves in place. A $1,052,000
note due to Green Coal from the former stockholder was forgiven
by the Company as a non-compete agreement for five years. This
acquisition was accounted for under the purchase method of
accounting and, accordingly, certain assets and liabilities of
Green Coal were restated to their fair market values.
On July 11, 1994, the Company placed Green Coal under protection
of Chapter 11 of the United States Bankruptcy Code in the
Bankruptcy Court of the Western District of Kentucky in
Louisville, Kentucky. In a hearing on August 8, 1994, the Judge
of the Bankruptcy Court granted a motion to return ownership
control of Green Coal back to Thomas E. Green, the former owner.
Basis of presentation - The accounting and reporting policies of
the Company conform to generally accepted accounting principles
applicable to development stage enterprises.
Principles of Consolidation - The consolidated financial
statements include the accounts and transactions of the Company
and the following wholly-owned subsidiaries, all of which are
dormant:
Calox, Inc.
American Energy Corporation
Petro Union Oil Corporation
All significant intercompany accounts and transactions have been
eliminated in the accompanying consolidated financial statements.
Uses of estimates - The preparation of financial statements in
conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial
statements and the reported amount of revenues and expenses
during the reporting period. Actual results could differ from
those estimates. The Company's periodic filings with the
Securities and Exchange Commission include, where applicable,
disclosures of estimates, assumptions, uncertainties and
concentrations in products and markets which could affect the
financial statements and future operations of the Company.
Cash and Cash Equivalents - The Company considers all highly
liquid investments purchased with an original maturity of three
months or less to be cash equivalents.
Accounts Receivable - The Company provides an allowance for
uncollectible receivables when it is determined that collection
is doubtful. Substantially all of the Company's trade
receivables are from its directional drilling and oilfield
services activities. No allowance was deemed necessary at
December 31, 1996.
Concentrations of credit risk - Substantially all of the
Company's accounts receivable are from companies engaged in the
oil and gas business, and concentrated in the Midwestern United
States. Generally, the Company does not require collateral for
its accounts receivable.
Properties and Equipment - Properties and equipment are stated at
cost. Depreciation of equipment is provided over estimated
useful lives of five to ten years using the straight line method
of depreciation. Renewals and betterments are capitalized when
incurred. Costs of maintenance and repairs that do not improve
or extend asset lives are charged to expense.
The Company's investment in oil and gas properties is accounted
for by the "successful efforts" method of accounting. The cost
of working interests in oil and gas properties are capitalized
pending determination whether the wells have found proved
reserves which justify commercial development. If such reserves
are not found, the drilling costs will be charged to expense.
Intangible drilling costs applicable to productive wells and to
development dry holes, as well as tangible equipment costs
related to the development of oil and gas reserves, are
capitalized.
The costs of productive leaseholds and other capitalized costs
related to producing activities, including tangible and
intangible costs, are being depreciated on a straight line basis
over a period of ten years. Estimated future restoration and
abandonment costs will be taken into account in determining
amortization and depreciation rates.
The Company's investment in limestone reserves will be amortized
on a unit-of-production basis as the reserves are mined and
produced. Since the acquisition of the limestone reserves in
1993, there has been no development or production of these
properties. Management has determined that there is no
impairment in value of the reserves at December 31, 1996.
For purposes of determining and recognizing any permanent
impairment of its investment in oil and gas properties, the
Company compares the unrecovered cost carrying basis of these
assets to the undiscounted projection of net future cash flows
from those assets. Any significant impairment of proved reserves
that are not yet in a production status will be determined and
recognized on an individual property basis each year.
No impairment has been recorded as of December 31, 1996 with
respect to the Company s limestone reserves and oil and gas
properties. While it is at least reasonably possible that the
estimate will change materially in the near term, due to the
Company s filing under the bankruptcy code as described in Note
4, no estimate can be made of the range of loss that is at least
reasonably possible.
Advance Royalties - Rights to mineral properties are often
acquired by making advance royalty payments. If recoupable
against future production, the payments are capitalized. As
production occurs on these properties, the advance is offset
against earned royalties and is included in the cost of
production.
Environmental Expenditures - If and when remediation of a
property is probable and the related costs can be reasonably
estimated, the environmentally-related remediation costs will be
expensed and recorded as liabilities. If recoveries of
environmental costs from third parties are probable, a receivable
will be recorded. Management is not currently aware of any
required remediation.
Revenue Recognition - For financial reporting purposes, revenues
from drilling and well servicing operations are recognized in the
accounting period which corresponds with the performance of the
service to the customer. The related costs and expenses are
recognized when incurred.
Federal Income Tax - The Company adopted SFAS No. 109, Accounting
for Income Taxes", during the year ended December 31, 1993. SFAS
required a change from the deferred method of accounting for
income taxes to the liability method. Under SFAS No. 109,
deferred tax liabilities and assets are determined based on
differences between the financial statement and tax basis of
assets and liabilities using enacted tax rates expected to be in
effect for the year in which the differences are expected to
reverse. The net change in deferred tax assets and liabilities
is reflected in the statement of operations. The primary
differences between financial reporting and tax reporting relate
to the availability of a net operating loss carryover.
Earnings (Loss) Per Share - Earnings (loss) per share is computed
on the basis of the weighted average number of shares outstanding
during the year.
NOTE 2 - RESTRICTED CASH-CERTIFICATES OF DEPOSIT:
In the ordinary course of business, the Company has to
occasionally place funds in certificates of deposit and pledge
these certificates to various third parties to guarantee the
Company's performance pursuant to various contracts. As of
December 31, 1996, substantially all of such certificates of
deposit were pledged or otherwise restricted.
NOTE 3 - PROPERTIES AND EQUIPMENT:
A summary of the Company's investment in properties and equipment
at December 31, 1996 is as follows:
Nonproducing limestone reserves $ 3,500,000
Lease and well costs 421,131
Drilling, lease, and well equipment 461,446
Automotive equipment 29,410
Office furniture and equipment 23,529
Land and rental property 50,012
4,485,528
Less, Accumulated depreciation (248,261)
Net properties and equipment $ 4,237,267
Depreciation charged against income for the years ended December
31, 1996 and 1995 was $150,603 and $91,989, respectively. At
December 31, 1996, the Company had not incurred any development
or production costs related to the limestone reserve.
NOTE 4 - FILING UNDER BANKRUPTCY CODE:
During May, 1996, the Company filed for protection under Chapter
11 in the U.S. Bankruptcy Court for the Southern District of
Indiana, and was appointed a Debtor in Possession. Under Chapter
11, certain claims against the Debtor in existence prior to the
filing of the petitions for relief under the federal bankruptcy
laws are stayed while the Debtor continues to operate as Debtor
In Possession. The claims are reflected in the December 31, 1996
balance sheet as liabilities subject to compromise. Additional
claims may arise subsequent to the filing date resulting from
rejection of executory contracts, including leases, and from
determination by the court, or agreed to by parties in interest,
of allowed claims for contingencies and other disputed amounts.
Claims secured against the Debtor's assets ( secured claims ) are
also stayed, although the holders of such claims have the right
to move the court for relief from the stay. Secured claims are
secured primarily by liens on the Debtor s property and
equipment.
The filing was made necessary as a result of several obligations,
primarily from contingent liabilities and guarantees, arising
from the Company's previous ownership of Green Coal Company, as
described above. The obligations were not previously reflected
on the Company's financial statements, and included the following
amounts likely to be allowed by the bankruptcy court:
Payable to For Amount
A bank Guarantees of bank loans $ 8,799,670
An equipment Guarantees of equipment $10,333,302
finance company loans
A bonding company Performance bond 1,524,519
Seller of Green Purchase note (disputed) 1,900,000
Coal Co.
Others Guarantees 1,465,300
Total $24,022,791
The Company has accounted for the bankruptcy filing in accordance
with SOP 90-7, Financial Reporting by Entities in Reorganization
Under The Bankruptcy Code, issued by the American Institute of
Certified Public Accountants. The Company recognized expenses
attributable to the Green Coal guarantees of $24,092,791 during
1996, and such amount is included in the accompanying statement
of operations as loss from discontinued operations.
The Company has not yet filed a plan of reorganization. However,
Management expects to submit a plan to compromise the
pre-petition liabilities in the following estimated amounts:
Estimated
Amount Compro-
Likely to Expected mised
Be Allowed Reduction Amount
Accounts payable and $296,968 $57,770 $239,198
accrued expenses
Advances from related 52,088 52,088 --
parties
Advance on joint venture $230,000 117,053 112,947
agreement
Amounts arising from 24,022,791 23,722,791 300,000
guaranties of
discontinued operations
Totals $24,601,847 23,949,702 $ 652,145
The plan must be submitted for approval by creditors, and must
also be approved by the Court. Although Management believes
creditors and the Bankruptcy Court will approve its plan, when
submitted, there can be no assurance that it will, in fact, be
approved by them.
NOTE 5 - OTHER EXPENSE:
Details of other income are as follows:
1996 1995
Gain (loss) on sale of equipment $ 64,200 $ -
Partial repayment of note -- 51,146
receivable written off
in a prior year
Writeoff of prepaid royalty on an -- (25,000)
acquisition that
was not consummated
Other, Net -- (3,312)
Total $ 64,200 $22,834
NOTE 6 - COMMITMENTS AND CONTINGENCIES:
The Company is obligated on an operating lease for office space
requiring rentals of $600 per month, and expiring in September,
1997. The Company has an option to renew the lease for an
additional one year period at the rate of $700 per month. The
aggregate commitment under the lease at December 31, 1996 was
$5,400. During 1996, the Company incurred rent expense of
$2,400.
The Company has licensed certain directional drilling technology
from several major companies. The license requires annual
minimum payments of $15,000 or $1,500 per well for each well
drilled under the license. During 1996, the Company incurred
license payments of approximately $13,000.
NOTE 7 - FEDERAL INCOME TAXES:
The Company adopted SFAS No. 109, "Accounting for Income Taxes",
during 1993. Pursuant to the requirements of SFAS No. 109, the
Company has recorded deferred tax assets and liabilities as
follows:
1996 1995
Deferred tax asset attributable to:
Net operating loss carryforward $4,344,000 $4,216,000
Less, Valuation Allowance (4,344,000) (4,216,000)
Net deferred tax asset $ -- $ --
At December 31, 1996, the Company had a net operating loss
carryforward for Federal income tax purposes of approximately
$12,776,400 which will expire, if unused, as follows:
Expires In: Amount
2007 $ 193,000
2008 7,236,400
2009 4,520,100
2010 452,900
2011 374,000
Total $12,776,400
There is no provision or credit for taxes on income in 1996 or
1995 because the Company has never reported taxable income.
NOTE 8 - ISSUANCE OF COMMON STOCK:
During the year ended December 31, 1996, the Company issued
30,500 shares of common stock to employees for services rendered,
valued at $3,812, issued 1,000,000 shares to officers for
salaries accrued in prior years, valued at $140,000, and issued
580,000 shares to its attorney and a consultant for services
rendered in prior years, valued at $114,026. During the two
years ended December 31, 1995, the Company issued 800,000 shares
of its common stock to a public relations firm that has provided
various services to the Company. Also, in 1995, the Company
issued 2,030,685 shares of stock in exchange for accrued
liabilities incurred in prior years.
Prior to the placing of Green Coal in bankruptcy in July, 1994,
the Company issued 500,000 shares of its stock to an escrow
account in June, 1994 to partially collateralize unpaid amounts
due to a major vendor of Green Coal.
NOTE 9 - UNCERTAINTY, GOING CONCERN:
As shown in the accompanying consolidated financial statements,
the Company incurred operating losses of more than $230,000 and
$450,000 for 1996 and 1995, and has filed for protection under
the U.S. Bankruptcy Code, as explained in Note 4. As of December
31, 1996, the Company's current liabilities not subject to
compromise exceeded its current assets by more than $113,000,
including many accounts payable and accrued liabilities being
past due. Moreover, as indicated in Note 4, a substantial
portion of the liabilities subject to compromise are expected to
be payable when the Company submits its plan of reorganization
and the Court approves it. These factors create substantial
doubt about the Company's ability to continue as a going concern.
The ability of the Company to continue as a going concern is
dependent upon (a) obtaining sufficient additional debt or equity
financing to finance operations, capital improvements, and
horizontal drilling activities, (b) attaining a profitable level
of operations, (c) sales of assets, or (d) a combination of these
actions. The Company is currently negotiating with several major
energy companies related to its horizontal drilling technology in
a joint venture company to obtain an infusion of new capital. In
addition, the Company is continuing discussions with private
investment groups. The financial statements do not include any
adjustments that might be necessary if the Company is unable to
continue as a going concern.
NOTE 10 - DISCONTINUED OPERATIONS:
In April, 1995, the Company discontinued the operations of its
coal mining segment. This decision resulted from the following
events:
(1) Involuntary conversion of the Company's investment in Green
Coal by a Bankruptcy Judge on August 8, 1994; and
(2) Loss of the Company's leasehold interest in the Central City
coal reserves in Muhlenberg County, Kentucky due to the Company's
inability to pay lease royalties due April, 1994 and April, 1995.
The discontinuance of the Company's coal operations was effective
as of August 8, 1994. As indicated in Note 4, the recognition of
liabilities arising from guaranties of Green Coal obligations is
reported as discontinued operations in the 1996 statement of
operations.
NOTE 11 - NOTES PAYABLE:
The Company is obligated on a note to an automobile finance
company in the amount of $22,203, requiring monthly payments of
$673 including 16.2% interest, maturing in May, 2000, and
collateralized by a truck costing $27,410. At December 31,
1996, maturities of long term debt were as follows:
Year Ended
December 31:
1997 $5,787
1998 5,524
1999 7,006
2000 3,886
Total 22,203
Less, Amount due within 5,787
one year
Noncurrent portion $16,416
In October, 1996, the Company borrowed $150,000 from Pembrooke
Holding Corporation. The terms of the loan were amended in
April, 1997 to provide for interest at the rate of 8% per annum,
and the extension of the maturity date to July, 1997. The loan
is collateralized by a mortgage on 50% of the Company's interest
in the limestone reserves described in Note 3. In addition, upon
the entry of a final order confirming a Plan of Reorganization
for the Debtor by the Bankruptcy Court, Pembrooke shall (1) have
the loan and any accrued interest converted to common stock of
the Company at the ratio of $0.125 cents per share; (2) have an
agreed sum of $75,000 converted to common stock of the Company at
the ratio of $0.25 per share; and (3) have a continuing
assignment of a 10% interest in any royalties, profits or
proceeds derived from the development or sale of the limestone
reserves. The note has a superpriority administrative claim
under the Bankruptcy Code.
In addition, the April 1997 amendment provided for the Company
to engage the principal of Pembrooke as a consultant, to be
compensated by the issuance of 400,000 shares of the Company's
common stock, of which 200,00 shares shall be issued within
two days following approval of the amended agreement by the
Bankruptcy Court, and 200,000 shares will be issued at the end
of 90 days following the final order by the Bankruptcy Court.
NOTE 12 - SUPPLEMENTAL OIL AND GAS INFORMATION (UNAUDITED)
The accompanying table presents information concerning the
Company's oil and gas producing activities and is prepared in
accordance with Statement of Financial Accounting Standards
No. 69, "Disclosures about Oil and Gas Producing Activities."
Also shown, in a comparative format, is similar information about
the Company's investment in limestone reserves.
The Company acquired its limestone reserves in July, 1992
through the acquisition of Calox, Inc. The Company has not
commenced production and development activities on these acquired
reserves. The following summarizes activity related to these
acquired reserves:
LIMESTONE OIL
RESERVES RESERVES
Capitalized costs:
Acquisition Costs $ 3,500,000 $ 84,230
Production and 336,901
Development Costs
Amortization/Depletion - (54,032)
Balance, December $ 3,500,000 $ 367,099
31, 1996
LIMESTONE OIL
RESERVES RESERVES
(TONS) (BBLS)
Proven Reserves:
Initial Proven Reserves 73,458,000 1,827,000
at Acquisition
Production - (615)
Change in Estimates - -
Estimated reserves, 73,458,000 1,826,385
December 31, 1996
The accompanying table reflects the standardized measure of
discounted future net cash flows relating to the Company's
interests in proved reserves as of December 31, 1996:
OIL AND
LIMESTONE GAS
Future cash inflows $ 367,290,000 $ 32,874,000
Future costs:
Development (18,000,000) (3,000,000)
Production (202,374,000) (24,000,000)
Future net cash flows 146,916,000 8,871,000
before income taxes
10% discount to reflect (77,699,000) (2,400,000)
timing of cash flows
Standardized measure of 69,217,000 6,471,000
discounted future cash
flows before income taxes
Future income taxes, net (44,075,000) (2,600,000)
of 10% annual discount
Standard measure of dis- $25,142,000 $3,871,000
counted future net
cash flows
Future cash inflows are computed by applying year-end prices of
oil and gas and limestone relating to the year-end quantities of
those reserves. Future development and production costs are
computed by independent consultants by estimating the
expenditures to be incurred in developing and producing proved
limestone and oil and gas reserves at the end of the year, based
on year-end costs and assuming continuation of existing economic
conditions.
Future income tax expenses are computed by applying the
appropriate statutory tax rates to the future pretax net cash
flows relating to proved reserves, exclusive of the tax basis
of the properties involved. The future income tax expense gives
effect to permanent differences and tax credits, but does not
reflect the impact of continuing operations. Future income tax
expense has been reduced by estimated future nonconventional fuel
source income tax credits to be utilized.
The 10% annual discount is applied to reflect the timing of the
future net cash flows. The standardized measure of discounted
cash flows is the future net cash flows less the computed
discounts.
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<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<EXCHANGE-RATE> 1
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<PP&E> 4485528
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<CURRENT-LIABILITIES> 298265
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0
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<COMMON> 2192243
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<TOTAL-LIABILITY-AND-EQUITY> 4422408
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<INTEREST-EXPENSE> 18898
<INCOME-PRETAX> (230801)
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</TABLE>
POST-PETITION LOAN AND SALE AGREEMENT
AGREEMENT made this day of July 1996, by and between
PEMBROOKE HOLDING CORPORATION ("Pembrooke"), with offices located
at 25 Montgomery Street, New York, New York, and PETRO UNION,
INC. (the "Debtor"), with offices located at 224 West Main
Street, Suite 1, Booneville, Indiana 47601.
W I T N E S S E T H:
WHEREAS, the Debtor filed a voluntary petition under Chapter
11 of Title 11 of the United States Code (the "Bankruptcy Code")
on May 13, 1996 (the "Filing Date") in the United States
Bankruptcy Court for the Southern District of Indiana (the
"Bankruptcy Court"); and
WHEREAS, since the Filing Date, the Debtor has continued in
possession and management of its property as a
debtor-in-possession pursuant to 11 U.S.C. Sections 1107 and
1108; and
WHEREAS, the Debtor is currently engaged in oil drilling
activities in among other states, Illinois and Texas, and has
requested that Pembrooke provide a working capital loan for
continued business operations and acquire partial ownership of
certain drilling interests; and
WHEREAS, Pembrooke has agreed to make a working capital loan
to the Debtor and to acquire by assignment a fifty percent
working interest in those oil wells located in the Hayes Oil
Field in Douglas and Champagne counties, Illinois (the "Hayes Oil
Field") which are financed for drilling by Pembrooke (hereinafter
the "Fifty Percent Working Interest"), subject to existing
royalty agreements and other working interests, on the terms and
conditions set forth below.
NOW, THEREFORE, in consideration of the promises and mutual
obligations herein set forth and other good and valuable
consideration, the parties agree as follows:
I. THE LOAN
1.01. Subject to the terms and conditions hereof, Pembrooke
shall loan to the Debtor the sum of $150,000.00 (the "Loan") as
follows:
1.02. Upon entry of a final order approving this Agreement
by the Bankruptcy Court, Pembrooke shall loan to the Debtor the
sum of $150,000.00 for an initial term of one hundred eighty
(180) days (the "Initial Term") as evidenced by a promissory note
in form and content satisfactory to Pembrooke and Pembrooke's
counsel which meets the requirements of the requirements of the
Uniform Commercial Code in terms of negotiability. The proceeds
of the Loan shall be used solely by Debtor for reasonable and
necessary operating expenses as set forth on the attached budget
annexed hereto as Exhibit "A".
1.03. The Loan shall not bear interest so long as one of
the following conditions are satisfied within the Initial Term:
(i) the Loan is repaid, in full, or (ii) the Debtor files a plan
of reorganization and disclosure statement with the Clerk of the
Bankruptcy Court containing the provisions set forth below and
the Bankruptcy Court confirms the filed plan of reorganization
within seventy-five (75) days after filing by entry of a final
order of confirmation (the "Interest Waiver Events"). Such plan
of reorganization shall provide, inter alia, that this Agreement
is reaffirmed and ratified by the Debtor as a Reorganized Debtor
in its entirety (hereinafter Debtor following confirmation of a
plan of reorganization is referred to as the "Reorganized
Debtor"), with the sole exception that the Loan shall be subject
to the following alternate treatment in bankruptcy:
(i) The Loan and the underlying promissory note shall
be replaced and superseded by a secured Debenture
(the "Debenture") in form and content satisfactory
to Pembrooke and Pembrooke's counsel in the
principal sum of $150,000.00.
(ii) The Debenture shall bear interest at a fixed rate
of eight percent (8%) per annum and shall be
fully due and payable two years after the entry of
a final order confirming the Debtor's plan of
reorganization by the Bankruptcy Court (the
"Maturity").
(iii) Interest on the Debenture shall be payable on the
first day of each month, in equal consecutive
monthly installments, with the first payment due
thirty (30) days after entry of a final order
confirming the Debtor's plan of reorganization by
the Bankruptcy Court. No principal shall be due
until Maturity of the Debenture, whereupon the
entire principal amount shall become fully due and
payable, together with any unpaid interest and
other expenses.
(iv) The Debenture shall be convertible, at Pembrooke's
sole option, into registered common stock of the
Reorganized Debtor at the rate of 12.5 cents per
share, or 1.2 million shares, if the principal
amount of the Debenture is fully covered (the
"Conversion Option").
(v) Within thirty (30) days after the entry of a final
order confirming the Debtor's plan of
reorganization by the Bankruptcy Court, the
Reorganized Debtor, at its sole cost and expense,
shall file a Registration Statement with the
Securities and Exchange Commission seeking to
register the common stock issuable upon exercise
of the Conversion Option (the "Registration
Statement") and take all appropriate action to
cause the same to be declared effective and remain
effective until the exercise of the Conversion
Option or the full payment of the Debenture with
all accrued interest, whichever shall first occur.
(vi) The Debenture shall not be subject to prepayment
penalty; however, prepayment may not be made
unless and until the Registration Statement has
been declared effective for at least thirty (30)
days and the Reorganized Debtor has given at least
thirty (30) days prior written notice of its
intent to prepay the Debenture, during which
period of time Pembrooke may exercise the
Conversion Option as provided in subparagraph (iv)
above.
(vii) Until such time as Pembrooke exercises the
Conversion Option as provided in subparagraph (iv)
above, if ever, the Debenture shall be secured by
a real property mortgage in form and content
satisfactory to Pembrooke and Pembrooke's counsel
covering fifty percent (50%) interest in certain
limestone reserves owned by the Debtor's
subsidiary, Calox Corporation, in Monroe County,
Indiana. To further induce Pembrooke to exercise
the Conversion Option as provided in subparagraph
(iv) above, upon such conversion, the Reorganized
Debtor shall grant Pembrooke a continuing
assignment of a ten percent (10%) interest in any
royalties, profits or proceeds derived from the
development or sale of the Limestone Reserves in
Monroe, Indiana by the Debtor or Calox
Corporation.
(viii) The Debtor's plan of reorganization shall further
provide that at Pembrooke's sole election,
Pembrooke shall be eligible for 1.2 million free
trading shares of the Reorganized Debtor's common
stock upon the effective date of the plan of
reorganization in lieu of receiving the principal
amount of the Debenture and additional shares in
lieu of accrued interest thereon calculated at a
rate of eight shares per dollar, e.g., 12.5 cents
per share in full satisfaction of the Loan.
(ix) In addition to the foregoing, the Debtor's plan of
reorganization shall provide that upon the
Effective Date thereof, the Reorganized Debtor
shall issue to Pembrooke a total of 2,333,334
warrants (the "Warrants"). The Warrants shall be
in form and content satisfactory to Pembrooke and
Pembrooke's counsel and shall contain the
following features:
(a) Each warrant may be exercised to acquire one
share of the common stock of the Reorganized
Debtor.
(b) The exercise price shall be 58% of the
closing bid price of the Reorganized Debtor's
common stock NASDAQ on the previous trading
day but in no case shall the exercise price
be less than fifteen cents ($.15) per share.
(c) The Warrants shall be exercisable for a
period of five (5) years from the date of
issue after which date they shall terminate
but the term of the Warrants shall be reduced
to a period of one (1) year from the date
that the registration statement registering
the common shares underlying the Warrants is
declared effective.
(d) The Reorganized Debtor to immediately proceed
to register the common shares underlying the
Warrants, use its best efforts to have said
Registration Statement declared effective
and maintain the effectiveness of the
Registration Statement during any period of
time that any warrants remain outstanding
subject to rights of exercise.
(e) The Warrants may not be transferred without
written approval of the Reorganized Debtor.
(f) The Warrants may not be called (a) until the
Registration Statement is in effect, (b) not
sooner than sixty (60) days after the closing
bid price of the Reorganized Debtor's stock
on NASDAQ first exceeds thirty-five cents
($.35) per share, and (c) only if during said
sixty (60) day period such price exceeds
thirty-five cents ($.35) per share on fifteen
(15) consecutive trading days.
(g) The Reorganized Debtor shall have the
absolute right to call for redemption of one
half (1/2) of the issued and outstanding
Warrants and a conditional right to call the
other one half (1/2) of the issued and
outstanding Warrants. Should an investment
of $175,000 be made into the Reorganized
Debtor as a result of the introduction of an
investor to the Reorganized Debtor by
Pembrooke, the call provision with respect to
the second half of the outstanding
Warrants shall expire and said Warrants shall
remain outstanding until they terminate.
1.04. In the event that neither of the Interest Waiver
Events occur in the time prescribed herein, or an Event of
Default occurs at any time which is not timely cured (if
curable) as provided in paragraph 5.02, infra, then in such
circumstance, (i) the Loan shall bear interest at a fixed rate of
eight percent (8%) per annum retroactive to entry of a final
order approving this Agreement; and (ii) all accrued interest and
principal with respect to the Loan shall become fully due and
payable five (5) days after notice is given by Pembrooke to the
Debtor.
II. SALE OF WORKING INTEREST IN THE HAYES OIL FIELD
2.01. In addition to the Loan, and upon entry of a final
order (i) approving this Agreement; and (ii) confirming that the
Debtor's oil and gas lease with Panhandle Eastern Pipe Line
Company ("Panhandle") for the Hayes Oil Field is currently valid
and enforceable and has been extended for a period up to and
including July 15, 1997 or for such lesser period as Pembrooke
and the Debtor may agree, the Debtor shall assign and transfer to
Pembrooke, and Pembrooke shall accept and acquire, the Fifty
Percent (50%) Working Interest (as that term is commonly used and
understood and previously defined herein) which equates to
40.625% of the Debtor's net income interest in the Hayes Oil
Field. The assignment and transfer of the Fifty Percent (50%)
Working Interest shall be subject to mutually satisfactory
operating agreement relating to the well(s) to be developed in
the Hayes Oil Field.
2.02. The purchase price for the assignment and transfer of
the Fifty Percent (50%) Working Interest to Pembrooke shall be
the sum of $130,000 (the "Purchase Price"), payable as follows:
(i) upon entry of a final order approving this Agreement,
Pembrooke shall pay the Debtor the initial sum of $78,000 to
enable the Debtor to begin drilling at the Hayes Oil Field; and
(ii) the balance of the Purchase Price (amounting to $52,000)
shall be paid by Pembrooke to the Debtor fourteen (14) days after
initiation of the first well for drilling and development in the
Hayes Oil Field. The entire Purchase Price shall be used
exclusively by the Debtor for the drilling and development of
wells in the Hayes Oil Field.
2.03. The assignment and transfer of the Fifty Percent
(50%) Working Interest to Pembrooke shall be absolute and
indefeasible and shall be free and clear of all liens, taxes and
encumbrances pursuant to Section 363(b) and (f) of the Bankruptcy
Code, but subject to an existing royalty interest of 18.75%
creating a net income interest at 81.25% owned by the Debtor, one
half is being assigned to Pembrooke pursuant to this Agreement
and conveyancing documents.
2.04. The assignment and transfer of the Fifty Percent
(50%) Working Interest to Pembrooke shall be memorialized by an
assignment of leasehold interest in recordable form or other like
conveyancing document in form and content satisfactory to
Pembrooke and Pembrooke's counsel. The costs and expenses of
preparing and filing the assignment of leasehold interest or
other like conveyancing document shall be the sole responsibility
of the Debtor.
2.05. To the extent that additional financing is needed for
development of further wells in the Hayes Oil Field (whether by
loan, lease, sale or otherwise), the Debtor (or Reorganized
Debtor as the case may be) hereby grants Pembrooke a right of
first refusal to provide such additional financing. To this end,
the Debtor (or Reorganized Debtor as the case may be) shall
notify Pembrooke in writing of its desire to obtain additional
financing for further development of wells in the Hayes Oil Field
and thereafter the Debtor shall negotiate with third parties.
After the Debtor (or Reorganized Debtor) as the case may be) has
entered into a bona fide agreement with respect to the foregoing,
it shall give to Pembrooke and Pembrooke's counsel written notice
thereof, with a copy of such agreement, and Pembrooke shall have
the sole and exclusive right, within seven (7) business days of
receipt of such notice and such agreement, to provide such
additional financing on the same terms and conditions as set
forth therein. If the amount involved in the bona fide agreement
for additional financing exceeds $150,000. Then in such event
Pembrooke shall have fifteen (15) business days to exercise its
right of first refusal granted hereunder and provide such
additional financing on the same terms and conditions as set
forth therein.
2.06. Pembrooke's obligations hereunder to acquire the
Fifty Percent (50%) Working Interest are expressly conditioned
upon Pembrooke receiving an estoppel certificate in form and
content satisfactory to Pembrooke and its counsel from Panhandle,
as landlord, confirming that the Debtor's oil and gas lease for
the Hayes Oil Field is currently valid and enforceable and has
been extended for a period of up to and including July 15, 1997
or for such lesser period as Pembrooke and the Debtor may agree.
Should Pembrooke fail to receive such estoppel certificate from
Panhandle prior to the Bankruptcy Court hearing to approve this
Agreement, then in such event, Pembrooke shall have the sole and
exclusive option to forego acquisition of the Fifty Percent (50%)
Working Interest.
III. SUPER PRIORITY EXPENSE CLAIM AND MORTGAGE
3.01. Pembrooke shall be allowed a super-priority
administration expense claim pursuant to 11 U.S.C. Section
364(c)(1) equal to the amount of the Loan plus any accrued
interest. This super-priority administration expense claim shall
have priority and payment over all other obligations or
liabilities now in existence or incurred hereafter by the Debtor
and all expenses of the kind specified in 11 U.S.C. Section
503(b) or 11 U.S.C. Section 507(b), subject only to the payment
of professional fees incurred during the Debtor's Title 11 case
as fixed and determined by the Bankruptcy Court and any quarterly
fees owed to the Office of the United States Trustee under Title
28 of the United States Code.
3.02. In addition to the foregoing and as further security
for the prompt and full payment of the Loan, the Debtor shall
cause its subsidiary, Calox Corporation, to execute a mortgage to
Pembrooke in form and content satisfactory to Pembrooke and
Pembrooke's counsel covering a fifty percent (50%) interest in
certain limestone reserves owned by Calox Corporation in Monroe
County, Indiana (hereinafter the "Monroe County Reserves"). The
costs and expenses of preparing and filing this mortgage shall be
the sole responsibility of the Debtor or Calox Corporation.
IV. REPRESENTATIONS
In order to induce Pembrooke to enter into this Agreement
and to make the Loan and acquisition hereunder, the Debtor
represents and warrants to Pembrooke that:
4.01. Corporate Authority. The execution, delivery and
performance of this Agreement and the transactions contemplated
hereby including the assignment of the Fifty Percent (50%)
Working Interest and the mortgage with respect to the Monroe
County Reserves are within the corporate power and authority of
the Debtor and its affiliate, Calox Corporation, and have been
authorized by all necessary corporate proceedings, and do not and
will not (i) require any consent or approval of the shareholders
of the Debtor or Calox Corporation; (ii) contravene any provision
of the charter documents or bylaws of the Debtor or Calox
Corporation, or any law, rule or regulation applicable to the
Debtor or Calox Corporation; (iii) contravene any provision of,
or constitute an event of default or event that, but for the
requirement that time elapse or notice be given, or both, would
constitute an event of default under, any other agreement,
instrument, order or undertaking binding on the Debtor or Calox
Corporation; or (iv) result in or require the imposition of any
encumbrance on any of the properties, assets or rights of Debtor
or Calox Corporation except as contemplated hereby.
4.02. Valid Obligations. This Agreement, the assignment of
Fifty Percent (50%) Working Interest and the mortgage with
respect to Monroe County Reserves are the legal, valid and
binding obligations of the Debtor or Calox Corporation as
approved by the Bankruptcy Court, enforceable in accordance with
their respective terms, notwithstanding any bankruptcy,
insolvency, reorganization, moratorium and/or other laws
affecting the enforcement of creditors' rights generally.
4.03. Consents or Approvals. The execution, delivery and
performance of this Agreement, and the transactions contemplated
hereby including the assignment of the Fifty Percent (50%)
Working Interest and mortgage with respect to the Monroe County
Reserves do not require any approval or consent of, or filing or
registration with, any governmental or other agency or authority,
or any other party, other than the Bankruptcy Court.
4.04. Hayes Oil Field Working Interest. The Debtor
currently leases the Hayes Oil Field in consideration for an
18.75% royalty interest under a currently valid and enforceable
oil and gas lease with Panhandle, as landlord, that has been
extended for a period up to and including July 15, 1997 or for
such lesser period as Pembrooke and the Debtor may agree; and the
Debtor is authorized and empowered to assign and transfer, in
whole or part, the remaining 81.25 percent net income interest in
the Hayes Oil Field, subject to an existing 12.5% working
interest previously reserved by Joseph Wilderman.
V. BORROWER'S COVENANTS
So long as the loan remains outstanding or Pembrooke owns a
working interest in the Hayes Oil Field, the Debtor covenants as
follows:
5.01. Information. The Debtor will deliver to Pembrooke
all information concerning the business of the Debtor as
Pembrooke shall reasonably request and provide Pembrooke and
Pembrooke's counsel with copies of all operating reports as may
be filed with the Bankruptcy Court. All financial information
provided hereunder other than public filings with the Bankruptcy
Court, Securities Exchange Commission or otherwise shall be
deemed confidential and shall not be released to any third party
without the written consent of the Debtor.
5.02. Compliance with Laws. The Debtor shall duly observe
and comply in all material respects with all applicable laws and
requirements of any governmental authorities and relative to: (i)
its corporate existence, rights, licenses, and franchises; (ii)
the conduct of its business and its property and assets; and
(iii) shall maintain and keep in full force and effect all
licenses and permits necessary in any material respect to the
proper conduct of its business.
5.03. Maintain Properties and Insurance. The Debtor shall
maintain its equipment and machinery in good repair, working
order and condition as required for the normal conduct of its
business and shall adequately insure same and name Pembrooke as
an additional insured or loss payee (as the case may be) on all
such insurance and provide Pembrooke with written confirmation of
same.
5.04. Taxes. The Debtor shall pay or cause to be paid all
taxes, assessments or governmental charges on or against it or
its properties on or prior to the time when they become due
arising subsequent to the Filing Date, provided that this
covenant shall not apply to any tax, assessment or charge that is
being contested in good faith by appropriate proceedings and with
respect to which adequate reserves have been established and are
being maintained in accordance with generally accepted principles
if no lien shall have been filed to secure such tax, assessment
or charge.
5.05. Inspection. The Debtor shall permit Pembrooke or its
designee(s), at any reasonable time and at reasonable intervals
of time, and upon reasonable notice (or if an Event of Default
shall have occurred and is continuing, at any time and without
prior notice), for the purposes of ascertaining compliance with
this Agreement, to (i) visit and inspect the properties of the
Debtor, (ii) examine and make copies of and take abstract from
the books and records of the Debtor and (iii) discuss the
affairs, finances and accounts of the Debtor with their
appropriate officers, employees and accountants.
5.06. Preservation of Corporate Existence. The Debtor
shall maintain the corporate existence of each of the Debtor and
Calox Corporation, their respective rights, franchises and
privileges, and cause each to qualify and remain qualified as a
foreign corporation in each jurisdiction in which qualification
is necessary in view of their respective business and operations.
5.07. Payment of Debts. The Debtor shall pay and discharge
all taxes, assessments and governmental charges or levies imposed
upon the Debtor, its income or profits and any property belonging
to it and make timely payment of its other obligations and debts,
and all lawful claims which if unpaid might become a lien or a
charge upon any properties of the Debtor, other than the
indebtedness existing immediately prior to the Filing Date which
is stayed by the bankruptcy proceeding.
5.08. Maintenance of Insurance. The Debtor shall maintain
insurance with reputable and licensed insurance companies, in
such amounts and covering such risks as are usually carried by
companies engaged in similar businesses and owning similar
properties in the same general areas in which the Debtor
operates.
5.09 Records and Books of Account. The Debtor shall keep
accurate records and books of account in which complete entries
will be made in accordance with generally accepted accounting
principles consistently applied, reflecting all transactions of
the Debtor, and give Pembrooke and its representatives access to
all of the same and all other corporate records of the Debtor
during normal business hours and upon reasonable prior notice.
5.10. Filing of a Plan of Reorganization and Disclosure
Statement. The Debtor shall proceed in a reasonable time and
manner to file a plan of reorganization and disclosure statement
with the Bankruptcy Court. Any such plan of reorganization or
disclosure statement shall expressly incorporate this Agreement
in its entirety and be fully consistent with all of the terms
hereof.
VI. CALOX CORPORATION'S COVENANTS
6.01. So long as Pembrooke shall have an interest in the
Debtor or Reorganized Debtor in any capacity (i.e. secured
creditor or equity holder), Calox Corporation covenants that it
will not assign, encumber, hypothecate, mortgage or otherwise
dispose, sell and transfer any interest in the Monroe County
Reserves without the prior written consent and authorization of
Pembrooke. Notwithstanding the foregoing, Calox Corporation may
mortgage its Fifty Percent (50%) Working Interest in the Monroe
County Reserves which is not subject to Pembrooke's mortgage,
without Pembrooke's written consent.
VII. DEFAULT
7.01. The following shall constitute an "Event of Default":
(a) if there is a default in the payment of the Loan
due Pembrooke by the Debtor as provided herein; or
(b) any violation or breach of the representation(s)
and covenant(s) made by the Debtor hereunder or
with respect to the mortgage pertaining to the
Monroe County Reserves; or
(c) there shall occur any material adverse change in
the assets, liabilities, financial condition,
business or prospects of the Debtor, taken as a
whole, as determined by Pembrooke acting in good
faith;
(d) appointment of a trustee or other fiduciary for
the Debtor or the property of the estate of the
Debtor; or
(e) conversion of the Debtor's Chapter 11 case to a
case under Chapter 7 of the Bankruptcy Code.
7.02. If an Event of Default occurs which is not cured
within ten (10) business days after written notice to the Debtor
and its counsel (other than non-monetary defaults under
subparagraphs 5.01(b), 5.01(d) or 5.01(e), which are not subject
to cure), then the Loan shall become immediately due and payable
with all accrued interest (the "Accelerated Debt") and Pembrooke
shall be authorized to move before the Bankruptcy Court on an
expedited basis to obtain payment of its super priority claim
granted hereunder and foreclose on the mortgage pertaining to the
Monroe County Reserves on three (3) days notice to the Debtor and
its counsel, counsel to the Official Committee of Unsecured
Creditors if appointed in the Debtor's Chapter 11 case, the
Office of the United States Trustee and any other party-in-
interest filing a notice of appearance and request for service of
papers in Debtor's bankruptcy case.
VIII. BANKRUPTCY COURT APPROVAL
8.01. This Agreement and the transactions contemplated
hereby are subject to the approval of the Bankruptcy Court having
jurisdiction over the Debtor's Chapter 11 case and the Debtor
shall move promptly to obtain such approval on notice to all
necessary creditors and other parties-in-interest as required by
applicable bankruptcy law and rules.
8.02. This Agreement shall become binding and effective
upon the entry of a final order of the Bankruptcy court having
jurisdiction over the Debtor's Chapter 11 case in form and
content satisfactory to Pembrooke and Pembrooke's attorneys
authorizing, inter alia, the Debtor to enter into this Agreement
and the transactions contemplated herein, including assignment
and transfer of the Fifty Percent (50%) Working Interest, free
and clear of all liens, taxes and encumbrances, and granting
Pembrooke a super priority administration expense claim pursuant
to Section 364(c)(1) of the Bankruptcy Code and mortgage
pertaining to the Monroe County Reserves.
IX. CONSULTING
9.01. The Debtor desires Pembrooke's principal, Norman
Alston, to provide, and Mr. Alston is willing to provide,
consulting services to the Debtor and/or Reorganized Debtor as
the case may be on mutually acceptable terms and conditions
relating to the marketing and sale of limestone products for the
Initial Term and for six months thereafter. In consideration for
his consulting services, the Reorganized Debtor shall grant
Norman Alston an option to acquire 1,500,000 "free trading"
shares of its common stock following confirmation of a plan of
reorganization, at a price equal to twenty percent (20%) of the
closing bid price thereof, on the day immediately preceding the
day of option exercise. This option will be exercisable once the
closing bid price for the Reorganized Debtor's common stock has
been one dollar or more for ten (10) consecutive trading days and
the option granted to Norman Alston hereunder shall remain
exercisable for a period of one year from the entry of a final
order approving the Debtor's plan of reorganization by the
Bankruptcy Court.
9.02. As used throughout this Agreement, "free trading"
shares shall mean shares of the Reorganized Debtor's common stock
which have been registered under the Securities Act of 1993, as
amended, or are exempt from registration thereunder pursuant to
applicable provisions of applicable law, as confirmed by the
written opinion of the Reorganized Debtor's securities counsel in
form and content acceptable to Pembrooke and the Pembrooke's
counsel and issued by a law firm reasonably acceptable to Norman
Alston.
X. MISCELLANEOUS PROVISIONS
10.01. All notices to be given hereunder shall be in
writing and deemed given if sent by a combination of overnight
mail and facsimile transmission addressed to the parties set
forth herein and their respective attorneys or such other
addresses as may be used from time to time.
10.02. If any provision of this Agreement shall be
determined to be invalid or unenforceable, it shall be the intent
and understanding of the parties that the remainder of this
Agreement shall continue in full force and effect.
10.03. This Agreement embodies the entire agreement and
understanding between the parties with respect to the subject
matter hereof and there are no agreements, representations,
promises, inducements or warranties, by whomever made, other than
those set forth, provided for or referred to herein.
10.04. This Agreement is binding and enforceable on the
parties' respective successors or assigns (including any trustee
or other fiduciary appointed as a legal representative of the
Debtor or with respect to the property of the estate of the
Debtor.
10.05. All documents, notes and/or instruments to be
executed in furtherance hereof that are made subject to Pembrooke
or Pembrooke's attorneys' satisfaction shall be deemed acceptable
if same meets commercially reasonable standards.
10.06. This Agreement may be signed in counterpart by
facsimile signature.
IN WITNESS WHEREOF, the parties hereto have respectfully
signed and sealed this Agreement as of the 16th day of July,
1996.
PEMBROOKE HOLDING CORPORATION
By:
Name:
Title:
PETRO UNION, INC.
By: /s/ Richard D. Wedel
Name: Richard D. Wedel
Title: President
ABOVE AGREED AND CONSENTED
TO AS RELATES TO CALOX CORPORATION
CALOX CORPORATION
By: /s/ Homer Barton
Name: Homer Barton
Title: President
AMENDED POST-PETITION LOAN AGREEMENT
THIS AMENDED POST-PETITION LOAN AGREEMENT (the "Amended
Agreement"), made and entered into this _____ day of April, 1997,
by and between PEMBROOKE HOLDING CORPORATION ("Pembrooke"), with
offices located at 25 Montgomery Street, New York, New York, and
PETRO UNION, INC. (the "Debtor"), with offices located at 123
Main Street, Suite 300, Evansville, Indiana 47708.
W I T N E S S E T H:
WHEREAS, the Debtor filed a voluntary petition pursuant to
Chapter 11 of Title 11 of the United States Code (the "Bankruptcy
Code") on May 13, 1996 (the "Filing Date") in the United States
Bankruptcy Court for the Southern District of Indiana (the
"Bankruptcy Court"); and
WHEREAS, since the Filing Date, the Debtor has continued in
possession and management of its property as a
Debtor-in-Possession pursuant to 11 U.S.C. Sections 1107 and
1108; and
WHEREAS, the Debtor is currently engaged in oil drilling
activities in various states; and
WHEREAS, on the 16th day of July, 1996, Pembrooke and the
Debtor entered into a Post-Petition Loan and Sale Agreement (the
"Agreement") which was approved in part by the Bankruptcy Court
on the 15th day of August, 1996; and
WHEREAS, the Debtor has requested an extension of certain
terms and conditions of the Post-Petition Loan and Pembrooke has
agreed to such extension upon certain terms and conditions set
forth in this Amended Agreement; and
WHEREAS, the parties wish to restate the terms and
conditions of the Agreement upon which Pembrooke will agree to an
extension of payment on the original Promissory Note as approved
by the Bankruptcy Court, and to mutually seek immediate approval
of the terms and conditions of the modification of the original
Post-Petition Loan and Sale Agreement as approved by the
Bankruptcy Court on August 15, 1996.
NOW, THEREFORE, in consideration of the promises and mutual
obligations set forth and other good and valuable consideration,
the parties agree as follows:
I. The Loan.
1.01. Subject to the terms and conditions hereof,
Pembrooke shall extend the existing loan of One Hundred Fifty
Thousand Dollars ($150,000.00) (the "Loan").
1.02. From the 16th day of March, 1997, Pembrooke shall
extend the term of the Loan as evidenced by the Promissory Note,
which was executed pursuant to the terms and conditions of the
Agreement (the "Note"), for an initial term of ninety (90)
calendar days by a Renewal Promissory Note (the "Renewal Note")
in form and content substantially similar to that previously
executed by the Debtor to Pembrooke.
1.03. At the sole and exclusive election of the Debtor,
and under the express condition that there be no default as
defined in this Amended Agreement and no default by the Debtor
under its Consulting Agreement with the principal of Pembrooke,
the Debtor may extend for an additional ninety (90) calendar days
the term for the repayment of the Renewal Note. Notice of any
extension of the Renewal Note shall be provided by the Debtor, in
writing, to Pembrooke at least three (3) business days prior to
the ending date of the initial ninety (90) day extension.
1.04. The Note, subject to this Amended Agreement, shall
bear interest at the rate of eight (8%) percent per annum from
the 16th day of September, 1996, until paid in full.
1.05. Upon the entry of a final order confirming a Plan
of Reorganization for the Debtor by the Bankruptcy Court,
Pembrooke shall: (1) Have the Loan and any accrued interest
converted to common stock of the Debtor at the ratio of $0.125
Cents per share; (2) Have an agreed sum of Seventy-Five Thousand
Dollars ($75,000.00) converted to common stock of the Debtor at
the ratio of $0.25 Cents per share; and (3) Have a continuing
assignment (the "Assignment") of a ten (10%) percent interest in
any royalties, profits or proceeds derived from the development
or sale of the Monroe County Reserves (as defined in Sec. 202 of
this Amended Agreement) by the Debtor or Calox Corp., as provided
in the second sentence of Sec. 203 of the Agreement.
II. Continuation of Superpriority Expenses,
Claim and Mortgage.
2.01. Pembrooke shall continue to have a superpriority
administrative claim pursuant to 11 U.S.C. Sec.364(c)(1) equal to
the amount of the Loan plus any accrued interest. The
superpriority administrative claim shall have priority in payment
over all other obligations or liabilities now in existence or
incurred hereafter by the Debtor and all expenses of the kind
specified in 11 U.S.C. Sec.503(b) or 11 U.S.C. Sec.507(b),
subject only
to the payment of professional fees incurred by the Debtor's
Title 11 case as fixed and determined by the Bankruptcy Court and
quarterly fees owed to the Office of the United States Trustee
under Title 28 of the United States Code.
2.02. In addition to the foregoing, Pembrooke shall
continue to maintain as security for the prompt and full payment
of the Loan, the Mortgage previously executed in favor of
Pembrooke by Calox Corporation, the subsidiary of the Debtor.
Said Mortgage shall continue to cover the fifty (50%) percent
interest in certain limestone reserves owned by Calox Corporation
in Monroe County, Indiana (hereinafter the "Monroe County
Reserves"). Any further costs and expenses in preparing and
filing any security documentation, including extensions of
Mortgage, if any, shall be the sole responsibility of the Debtor
or Calox Corporation.
III. Representations.
In order to induce Pembrooke to provide the extension of the
Loan contemplated by this Amended Agreement, the Debtor reaffirms
the representations and warranties previously made to Pembrooke
solely to the extent set forth below:
3.01. Corporate Authority. The execution, delivery and
performance of this Agreement, the transactions contemplated
hereby, and the Mortgage and the Assignment with respect to the
Monroe County Reserves are within the corporate power and
authority of the Debtor and its affiliate, Calox Corporation, and
have been authorized by all necessary corporate proceedings, and
do not and will not (i) require any consent or approval of the
shareholders of the Debtor or Calox Corporation; (ii) contravene
any provision of the charter documents or by-laws of the Debtor
or Calox Corporation, or any law, rule regulation applicable to
the Debtor or Calox Corporation; (iii) contravene any provision
of, or constitute an event of default or event that, but for the
requirement that time elapse or notice be given, or both, would
constitute an event of default under, any other agreement,
instrument, order or undertaking binding on the Debtor or Calox
Corporation; or (iv) result in or require the imposition of any
encumbrance on any of the properties, assets or rights of the
Debtor or Calox Corporation except as contemplated hereby.
3.02. Valid Obligations. This Agreement, the Mortgage,
and the Assignment with respect to Monroe County Reserves are and
will be the legal, valid and binding obligations of the Debtor or
Calox Corporation as approved by the Bankruptcy Court,
enforceable in accordance with their respective terms,
notwithstanding any bankruptcy, insolvency, reorganization,
moratorium and/or other laws affecting the enforcement of the
creditors' rights generally.
3.03. Consents or Approvals. The execution, delivery
and performance of this Agreement, the transactions contemplated
hereby, including the Mortgage and the Assignment with respect to
the Monroe County Reserves do not require and will not require
approval or consent of, or filing or registration with, any
governmental or other agency or authority, or any other party,
other than the Bankruptcy Court.
IV. Borrower's Covenants.
So long as the Loan remains outstanding, the Debtor
covenants as follows:
4.01. Information. The Debtor will deliver to Pembrooke
all information concerning the business of the Debtor as
Pembrooke shall reasonably request and provide Pembrooke and
Pembrooke's counsel with copies of all operating reports as may
be filed with the Bankruptcy Court. All financial information
provided hereunder other than public filings with the Bankruptcy
Court, Securities Exchange Commission, or otherwise shall be
deemed confidential and shall not be released to any third party
without the written consent of the Debtor.
4.02. Compliance with Laws. The Debtor shall duly
observe and comply in all material respects with all applicable
laws and requirements of any governmental authorities relative
to: (i) its corporate existence, rights, licenses, and
franchises; (ii) the conduct of its business and its property and
assets; and (iii) shall maintain and keep in full force and
effect all licenses and permits necessary in any material respect
to the proper conduct of its business.
4.03. Maintain Properties and Insurance. The Debtor
shall maintain good and marketable title to the Monroe County
Reserves, and maintain its equipment and machinery in good
repair, working order and condition as required for the normal
conduct of its business, normal wear and tear accepted, and shall
adequately insure same and name Pembrooke as an additional
insured or loss payee (as the case may be) on all such insurance
and provide Pembrooke with written confirmation of same.
4.04. Taxes. The Debtor shall pay or cause to be paid
all taxes, assessments or governmental charges on or against it
or the properties on or prior to the date when they become due
arising subsequent to the Filing Date; provided, that this
covenant shall not apply to any tax, assessment or charge that is
being contested in good faith by appropriate proceedings and with
respect to which adequate reserves have been established and are
being maintained in accordance with generally accepted principles
if no lien shall have been filed to secure such tax, assessment
or charge.
4.05. Inspection. The Debtor shall permit Pembrooke or
its designee(s), at any reasonable time and at reasonable
intervals of time, and upon reasonable notice (or if an event of
default shall have occurred and is continuing at any time and
without prior notice) for the purpose of ascertaining compliance
with this Agreement, to (i) visit and inspect the properties of
the Debtor, (ii) examine and make copies of and take abstract
from the books and records of the Debtor and (iii) discuss the
affairs, finances and accounts of the Debtor with their
appropriate officers, employees and accountants.
4.06. Preservation of Corporate Existence. The Debtor
shall maintain the corporate existence of each of the Debtor and
Calox Corporation, their respective rights, franchises and
privileges, and cause each to qualify and remain qualified as a
foreign corporation in each jurisdiction in which qualification
is necessary in view of their respective business and operations.
4.07. Payment of Debts. The Debtor shall pay and
discharge all taxes, assessments and governmental charges or
levies imposed upon the Debtor, its income or profits and any
property belonging to it and make timely payment of its other
obligations and debts, and all lawful claims which if unpaid
might become a lien or a charge upon any properties of the
Debtor, other than the indebtedness existing immediately prior to
the Filing Date which is stayed by the bankruptcy proceeding.
4.08. Maintenance of Insurance. The Debtor shall
maintain insurance with reputable and licensed insurance
companies, in such amounts and covering such risks as are usually
carried by companies engaged in similar businesses and owning
similar properties in the same general areas in which the Debtor
operates.
4.09. Records and Books of Account. The Debtor shall
keep accurate records and books of account in which complete
entries will be made in accordance with generally accepted
accounting principles consistently applied, reflecting all
transactions of the Debtor, and give Pembrooke and its
representatives access to all of the same and all other corporate
records of the Debtor during normal business hours and upon
reasonable prior notice.
4.10. Filing of a Plan of Reorganization and Disclosure
Statement. The Debtor shall proceed in a reasonable time and
manner to file a Plan of Reorganization and Disclosure Statement
with the Bankruptcy Court. Any such Plan of Reorganization or
Disclosure Statement shall expressly incorporate this Amended
Agreement in its entirety and be fully consistent with all of the
terms hereof.
V. Calox Corporation's Covenants.
5.01. So long as Pembrooke shall have any secured debt
with the Debtor, Calox Corporation covenants that it will not
assign, encumber, hypothecate, mortgage or otherwise dispose,
sell and/or transfer any interest in the Monroe County Reserves
without the prior written consent and authorization of Pembrooke.
Pembrooke shall have (i) the right of first refusal in the event
Calox Corporation proposes to sell the Monroe County Reserves to
a third party and (ii) the first option to purchase the Reserves
from Calox for a period of twenty-four (24) calendar months from
the Court's entry of an Order confirming a Plan of Reorganization
for the Debtor for a sum of not less than Three Million Five
Hundred Thousand Dollars ($3,500,000.00) nor more than Four
Million Five Hundred Thousand Dollars ($4,500,000.00).
Notwithstanding the foregoing, Calox Corporation may mortgage its
remaining fifty (50%) percent interest in the Monroe County
Reserves which is not subject to Pembrooke's Mortgage, without
Pembrooke's written consent, provided any such mortgage does not
violate the terms of the Assignment.
VI. Default.
6.01. The following shall constitute an "Event of
Default":
(a) if there is a default in: (i) the payment of the
Loan due Pembrooke by the Debtor as provided
herein, or (ii) Debtor's performance of its
Consulting Agreement described in Article 8 of
this Agreement; or
(b) any violation or breach of the representation(s)
and covenant(s) made by the Debtor hereunder or
with respect to the Mortgage or Assignment
pertaining to the Monroe County Reserves; or
(c) there shall occur any material adverse change in
the assets, liabilities, financial condition,
business or prospects of the Debtor, as determined
in good faith; or
(d) appointment of a Trustee or other fiduciary for
the Debtor or the property of the estate of the
Debtor; or
(e) conversion of the Debtor's Chapter 11 case to a
case under Chapter 7 of the Bankruptcy Code.
6.02. If an Event of Default occurs which is not cured
within ten (10) business days after written notice to the Debtor
and its counsel (other than (i) non-monetary defaults which are
not subject to cure and (ii) any defaults under the Consulting
Agreement, none of which are subject to cure), then the Loan
shall become immediately due and payable with all accrued
interest (the "Accelerated Debt") and Pembrooke shall be
authorized to move before the Bankruptcy Court on an expedited
basis to obtain payment of its super-priority claim granted
hereunder or foreclose on the Mortgage pertaining to the Monroe
County Reserves after providing three (3) days' notice to the
Debtor and its counsel, counsel to the Official Committee of
Unsecured Creditors if appointed in the Debtor's Chapter 11 case,
the Office of the United States Trustee and any other
party-in-interest filing a notice of appearance and request for
service of papers in the Debtor's bankruptcy case, by telefax or
overnight delivery.
VII. Bankruptcy Court Approval.
7.01. This Amended Agreement and the transactions
contemplated hereby are subject to the approval of the Bankruptcy
Court having jurisdiction over the Debtor's Chapter 11 case and
the Debtor shall move promptly to obtain such approval on notice
to all necessary creditors and other parties-in-interest as
required by applicable bankruptcy law and rules.
7.02. This Amended Agreement shall become binding and
effective upon the entry of a final Order of the Bankruptcy Court
having jurisdiction over the Debtor's Chapter 11 case,
authorizing, inter alia, the Debtor to enter into this Amended
Agreement and the transactions contemplated herein, and granting
Pembrooke a super-priority administration expense claim pursuant
to Sec. 364(c)(1) of the Bankruptcy Code and Mortgage pertaining
to
the Monroe County Reserves.
VIII. Consulting.
8.01. Norman Alston, the principal of Pembrooke, has
rendered certain services to the Debtor to aid in the completion
of a Plan of Reorganization which can be confirmed by the
Bankruptcy Court. Further, Mr. Alston, as the principal of
Pembrooke, covenants and warrants that he will continue to work
with the Debtor in the same capacity. Compensation for the
services rendered, and upon completion of the rendition of the
services to be performed shall be awarded a total of Four Hundred
Thousand (400,000) shares of the Debtor. Said shares shall be
transferred to Mr. Alston in the following manner:
(a) Within two (2) business days after the entry of a
final Order Approving this Amended Agreement, the
Debtor shall register under the Securities Act of
1933 on a form S-8 registration statement Four
Hundred Thousand (400,000) share of its common
stock and transfer Two Hundred Thousand (200,000)
of said shares of stock to Mr. Alston. When
issued, said shares of stock shall be deemed fully
paid and non-assessable for the services which Mr.
Alston has rendered as of the 16th day of March,
1997.
(b) At the end of ninety (90) days from the entry of
the final Order by the Bankruptcy Court, the
Debtor shall transfer the remaining Two Hundred
Thousand (200,000) of S-8 shares of stock to Mr.
Alston. When issued, said shares of stock shall
be deemed fully paid and non-assessable, for any
and all additional services rendered by Mr. Alston
after March 16, 1997 through the date of issuance.
IX. Termination of Other Terms and Conditions of
Original Agreement.
9.01. By the agreement between the Debtor and Pembrooke,
this Amended Agreement shall constitute the entirety of the terms
and conditions of their agreement and does hereby replace, in
full, the terms and conditions of the original Agreement, as
approved by the Bankruptcy Court on the 15th day of August, 1996,
except to the extent otherwise approved and continued herein. In
the event there is any discrepancy or alleged ambiguities between
the two (2) Agreements, the terms and conditions of this Amended
Agreement shall be deemed controlling.
9.02. Termination of All Other Interests. Upon the
execution of this Amended Agreement and the approval of this
Amended Agreement by the Bankruptcy Court by final Order, neither
Pembrooke, or its principal, Norman Alston, shall have any rights
to acquire any other shares of stock, debentures, warrants, or
any other interests of the Debtor, or any Reorganized Debtor,
except to the extent set forth in this Amended Agreement.
X. Miscellaneous Provisions.
10.01. All notices to be given hereunder shall be in
writing and deemed given if sent by a combination of overnight
mail and facsimile transmission addressed to the parties set
forth herein and their respective attorneys or such other
addresses as may be used from time to time.
10.02. If any provision of this Amended Agreement shall
be determined to be invalid or unenforceable, it shall be the
intent and understanding of the parties that the remainder of
this Amended Agreement shall continue in full force and effect.
10.03. This Amended Agreement embodies the entire
agreement and understanding between the parties with respect to
the subject matter hereof and there are no agreements,
representations, promises, inducements or warranties, by whomever
made, other than those set forth, provided for or referred to
herein.
10.04. This Amended Agreement is binding and enforceable
on the parties' respective successors or assigns (including any
trustee or other fiduciary appointed as a legal representative of
the Debtor or with respect to the property of the estate of the
Debtor).
10.05. This Amended Agreement may be signed in
counterpart by facsimile signature.
IN WITNESS WHEREOF, the parties hereto have executed this
Amended Post-Petition Loan and Sale Agreement as of the day and
year first above written.
PEMBROOKE HOLDING CORPORATION
BY:
ITS:
PETRO UNION, INC.
BY:
ITS:
PETRO UNION, INC.
123 Main Street, Suite 300
Evansville, IN 47708
(812) 424-6745
Fax: (812) 424-3576
February 8, 1997
Mr. Jack Piedmonte, President
NEWSTAR ENERGY USA, INC.
104 West Front Street
Monroe, Michigan 48161
Re: Letter Agreement
Horizontal Drilling Services
Dear Jack:
This letter will serve as a agreement between Petro
Union as a service contractor and Newstar as the Operator whereby
Petro will provide its short radius horizontal drilling services
on a limited turnkey basis. Newstar agrees to contract such
services for a quantity of twenty (20) wells in the Dundee Oil
Field located in Michigan in accordance with the terms and
conditions below.
A. Petro shall provide equipment, technology and
services necessary to operate its system with the operation of
the horizontal drilling equipment exclusively by Petro. Petro's
equipment shall include the angle building assemblies, lateral
assemblies, control house with single conductor cable on
hydraulic reel, flexible curve and lateral drill pipe, anti-whirl
bi-center PDC bits, survey equipment and other such equipment as
identified on Exhibit "A".
B. Newstar shall provide drilling/support equipment
and third party services as identified on Exhibit "B" to
facilitate the horizontal drilling operations. Newstar as
operator shall obtain all necessary drilling permits and provide
the necessary ingress and egress to the well locations with roads
and sites suitable for highway equipped vehicles. Newstar shall
furnish Petro all necessary information to plan and executed safe
drilling activities and shall use all reasonable means to provide
equipment and well conditions for safe and efficient operations.
C. This agreement shall remain in force and effect
for a period of one (1) year or until the horizontal drilling
operations are completed on the twenty (20) wells, whichever
occurs first.
2. The balance of the fees, expenses, and
charges herein provided are due and payable to Petro upon
completion of each well.
L. Each well will be deemed completed; when
horizontal drilling activities have been performed in accordance
with the proposed well plan; if Petro and Newstar mutually agree
to stop work; or Newstar elects to halt operations.
M. In the event that Petro terminates the work after
commencement of operations but before all operation have been
completed according to the proposed well plan because Petro
acting in good faith and reasonable, determines there is
unacceptable danger to the tools and equipment in the hole, and
unsurmountable technical problem encountered or
geological/geophysical condition, whether unforeseen or not,
Petro shall be entitled to fifty percent (50%) of the rates,
charges, and expenses that Petro would have earned under this
agreement for that well.
N. If either party is rendered unable wholly or in
material part, by reason of Force Majeure to carry out any of its
obligations hereunder, other than obligations to pay money, then
on such party giving notice and particulars in writing to the
other party within a reasonable time after the occurrence of the
cause relied upon, such obligations shall be suspended. Force
Majeure shall include acts of God, laws and regulations,
government action, war, civil disturbances, strikes, lightening,
fire, flood, washout storm, breakage or accident to equipment or
machinery, and any other causes that are not reasonably within
the control of the party so affected.
O. It is understood that Petro is an independent
contractor with the authority to control and direct the
performance of the details of the work.
P. Failure by Newstar to use Petro's services on
twenty (20) wells within one (1) year shall cause Newstar to
forfeit any right for credit or claim upon Petro for funds
advanced to Petro according to paragraph E that remain
outstanding at that time.
Q. Newstar will have a representative on location to
supervise well preparation services and available for onsultation
throughout the horizontal drilling operations.
R. Any disputes and controversies between the parties
arising out of or in connection with this Agreement shall be
submitted to arbitration in accordance with the rules of the
American Arbitration Association.
S. At the expiration of this Agreement it is the
intent of Newstar and Petro to enter into good faith negotiations
for an ongoing alliance, joint venture, or formal relationship
for the mutual benefit through the use of Petro's horizontal
drilling technology.
T. Neither party may assign this Agreement without
the prior written consent of the other party and prompt notice of
any such intent shall be given to the other party.
U. This Agreement and attached Exhibits constitutes
the sole understanding of the parties and supersedes any previous
agreements or understanding with respect to the subject matter
hereof. No amendments, modifications or alterations of the
agreement shall be binding unless done in writing and duly
executed by both parties.
V. The terms and provisions of this Agreement shall
be construed under the laws of the State of Indiana.
We trust that you find the terms and conditions are
acceptable and this Agreement is the beginning of a long and
mutually profitable relationship.
Respectfully submitted,
/s/ Richard W. Wedel
Richard W. Wedel, President
Petro Union, Inc.
Accepted this the 8th day of February, 1997
Jack Piedmont, President
NEWSTAR ENERGY USA, INC.
