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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
---------
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1996
Commission file number: 0-28204
XAVIER CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 76-049006
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
Formerly Named
XAVIER MINES LIMITED
(Exact name of registrant as specified in its charter)
ONTARIO, CANADA 76-049009
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
1600 SMITH STREET, SUITE 4700
HOUSTON, TX 77002
(Address of principal offices)
(713) 652-5111
(Issuer's telephone number)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
YES [X] NO [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date:
20,060,945 shares of common stock, $0.0001 par value, issued and outstanding at
November 12, 1996.
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XAVIER CORPORATION
TABLE OF CONTENTS
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PART I FINANCIAL INFORMATION
Item 1 Financial Statements
CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Balance Sheets as of September 30, 1996 and
December 31, 1995................................................. 3
Consolidated Statements of Income (Loss) and Retained Deficit for
the three months and nine months ended September 30, 1996 and 1995 5
Consolidated Statements of Cash Flows for the nine months ended
September 30, 1996 and 1995....................................... 6
Condensed Notes to Consolidated Financial Statements............... 7
Item 2 Management's Discussion and Analysis of Financial Condition and
Results of Operations........................................ 8
PART II OTHER INFORMATION
Item 1--Legal Proceedings............................................ 14
Item 2--Changes in Securities........................................ 14
Item 3--Defaults upon Senior Securities.............................. 14
Item 4--Submission of Matters to a Vote of Security Holders.......... 14
Item 5--Other Information............................................ 14
Item 6--Exhibits and Reports on Form 8-K............................. 14
(a) Exhibits
(b) Reports on Form 8-K
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XAVIER CORPORATION
CONSOLIDATED BALANCE SHEETS
(Unaudited)
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September 30 December 31
1996 1995
--------------------- -------------------
ASSETS
CURRENT ASSETS:
Cash ........................................................... $ 62,250 $ 25,435
Cash-restricted ................................................ - 1,000,000
Accounts receivable ............................................ 2,450,073 882,925
Short-term note receivable, collateralized by the stock of
KMNGG whose reserves are principally unproved ................ 19,949,532 19,949,532
Othe ............................................................ 380,574 193,323
------------------ ------------------
Total current assets ...................................... 22,842,429 22,051,215
------------------ ------------------
OIL AND GAS CONTRACT RIGHTS, FULL COST METHOD, NET .............. 38,777,597 29,427,822
INVESTMENT IN AND ADVANCES TO OIL AND GAS JOINT VENTURE ........... 11,470,978 11,870,107
INVESTMENT IN PRODUCTION PLATFORM HELD FOR RESALE, NET ............ 1,499,877 1,499,877
INTANGIBLE ASSETS, NET ............................................ 7,557,568 8,132,791
OTHER EQUIPMENT, NET .............................................. 1,534,874 1,419,293
LOAN RECEIVABLE-AFFILIATED COMPANY ................................ 1,356,794 914,845
LOAN RECEIVABLE - OTHER ........................................... 2,130,183 895,613
DEFERRED FINANCING COSTS .......................................... 3,516,357 4,229,036
OTHER ............................................................. 651,596 631,894
------------------ ----------------
$ 91,338,253 $ 81,072,493
================== ================
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XAVIER CORPORATION
CONSOLIDATED BALANCE SHEETS
(Unaudited)
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September 30 December 31
1996 1995
------------------ -----------------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued liabilities ............................... $ 13,333,733 $ 7,604,765
Notes payable .......................................................... 939,069 1,376,646
Production platform advances ........................................... 1,519,037 1,519,037
Due to affiliates:
Accounts payable .................................................... 42,220 42,220
Management and consulting fees ...................................... 237,159 180,909
Deferred revenue and other ............................................. 951,420 29,988
------------------ -----------------
Total current liabilities ........................................ 17,022,638 10,753,565
------------------ -----------------
SHARE SUBSCRIPTIONS RECEIVED .............................................. 14,000 -
DEFERRED INCOME TAX ....................................................... 3,055,033 3,252,042
LONG TERM NOTES PAYABLE ................................................... 29,525,956 20,888,400
OTHER ..................................................................... 2,802,040 131,745
MINORITY INTEREST IN NET ASSETS OF
CONSOLIDATED SUBSIDIARIES .............................................. 1,024,693 6,637,496
SHAREHOLDERS' EQUITY
Share capital ....................................................... 70,616,609 58,309,202
Deficit ............................................................. (32,722,716) (18,899,957)
------------------ -----------------
37,893,893 39,409,245
------------------ -----------------
$ 91,338,253 $ 81,072,493
================== =================
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4
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XAVIER CORPORATION
CONSOLIDATED STATEMENTS OF INCOME (LOSS)
(Unaudited)
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<S> <C> <C>
For the Three months ended For the Nine months ended
September 30, September 30,
--------------- -------------- -------------- ----------------
1996 1995 1996 1995
--------------- -------------- -------------- ----------------
REVENUES:
Oil and gas ............................... $ 3,078, 571 $ 1,336,121 $ 14,145,451 $ 7,933,070
Pipeline repair ........................... 459,729 14,649 2,839,290 14,649
--------------- -------------- -------------- ----------------
TOTAL REVENUES .............................. 3,538,300 1,350,770 16,984,741 7,947,719
--------------- -------------- -------------- ----------------
EXPENSES:
Production taxes and fees ................. 1,180,942 954,630 6,600,864 3,633,398
Lease operating expense .................. 1,969,853 272,576 5,715,387 516,183
Pipeline repair cost of sales ............. 371,595 (13,590) 2,017,233 (13,590)
Depreciation and amortization ............. 812,167 717,639 3,361,463 1,453,449
General and administrative ................ 1,523,602 1,284,634 7,299,468 2,699,756
Interest and loan fees .................... 1,769,112 (50,836) 4,115,036 572,855
--------------- -------------- -------------- ----------------
TOTAL EXPENSES .............................. 7,627,271 3,165,053 29,109,451 8,862,051
--------------- -------------- -------------- ----------------
OTHER INCOME (EXPENSE):
Interest income ........................... 297,808 46,997 1,651,205 170,418
Litigation settlement expense ............. - - (4,100,000) -
Equity in net loss of oil and gas joint
venture .................................. (20,000) (3,050) (59,067) (12,200)
--------------- -------------- -------------- ----------------
TOTAL OTHER INCOME (EXPENSE) ................ 277,808 43,947 (2,507,862) 158,218
--------------- --------------- -------------- ----------------
LOSS BEFORE THE FOLLOWING ................... (3,811,163) (1,770,336) (14,632,572) (756,114)
PROVISION FOR DEFERRED INCOME TAX............ 65,670 11,513 197,009 (886,170)
MINORITY INTEREST IN NET LOSS OF
CONSOLIDATED SUBSIDIARIES ................ 291,617 532,923 612,803 532,923
--------------- -------------- -------------- ----------------
NET INCOME (LOSS) ........................... $ (3,453,876) $ (1,225,900) $ (13,822,760) $ (1,109,361)
=============== ============== ============== ================
NET INCOME (LOSS) PER SHARE ................. $ (0.20) $ (0.10) $ (0.86) $ (0.16)
=============== ============== ============== ================
</TABLE>
5
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XAVIER CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN CASH FLOW
(Unaudited)
For The Nine Months Ended
------------------------------
September 30, September 30,
1996 1995
------------------------------
OPERATING ACTIVITY
Net income (loss) for the period (13,822,760) (1,576,312)
Non-cash items
Depreciation 3,361,463 1,999,793
Amortization of deferred financing 1,678,366 0
Revaluation of foreign notes payable 350,236 0
Deferred foreign income tax (197,009) 968,978
Minority interest in loss of subsidiaries (612,803) (733,245)
----------------------------
(9,242,507) 659,214
Net changes in non-cash balances
relating to operating activities 7,760,202 1,269,854
----------------------------
(1,482,305) 1,929,068
INVESTING ACTIVITY
Expenditures for oil and gas
investment and contract rights (11,449,036) (27,858,231)
Purchase of other equipment (435,236) (315,028)
Purchase of interest in Bandera 0 (5,282,766)
Loans to affiliated company (441,949) (537,491)
Loans & advances to others (1,234,570) (959,696)
Other (17,178) (1,826,784)
----------------------------
(13,577,969) (36,779,996)
FINANCING ACTIVITY
Shares issued for cash 5,928,157 35,417,764
Shares issued for consulting &
loan fees 412,562 1,555,502
Share Subscriptions received 14,000 0
Warrants issued in connection
with notes payable 965,688 0
Repayment of debt (500,000) (2,373,686)
Line of credit compensating balance 1,000,000 (1,344,447)
Conversion of third party debt to stock (500,000) 0
Proceeds from third party borrowings 7,776,682 2,523,988
----------------------------
15,097,089 35,779,121
INCREASE (DECREASE) IN CASH 36,815 928,193
CASH, beginning of period 25,435 141,985
----------------------------
CASH, end of period 62,250 1,070,178
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XAVIER CORPORATION
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------------------------
(UNAUDITED)
NOTE 1 - ACCOUNTING POLICIES:
- -----------------------------
The accompanying unaudited consolidated financial statements have been
prepared in accordance with the instructions to interim financial reporting as
prescribed by the Securities and Exchange Commission. All adjustments, which,
in the opinion of management, are necessary for a fair presentation of the
results for the interim periods have been reflected in the accompanying
unaudited financial statements. For further information regarding accounting
policies, refer to the Company's audited financial statements for the years
ended December 31, 1995 and 1994 included in its 1995 Annual Report or on Form
S-4 as submitted to the Commission.
NOTE 2 - NOTES PAYABLE:
- -----------------------
The Company is in default on a $250,000 (principal) note payable. Interest
due through September 30, 1996 totals $22,500. The holder has issued the
Company a demand letter for payment of the note and interest.
The Bandera Group (Bandera), Xavier's 54.5%-owned subsidiary, is in default
on its $500,000 notes payable that were due on June 30, 1996 to the sellers of
the "Miller Pipeline Service Company". Interest due at September 30 totals
approximately $59,000. The notes are secured by certain tangible and intangible
assets transferred in the sale. Xavier Corporation is currently negotiating to
buy the notes from the holders.
NOTE 3 - COMMITMENTS AND CONTINGENCIES:
- ---------------------------------------
The Southwest Merchants Group trial date has been rescheduled for late
November 1996.
NOTE 4 - SHARE CAPITAL:
- -----------------------
On July 26, 1996, Genesis Eurasia Corporation notified the Company of its
intention to put its 1,000 shares of Xavier BG Inc. exchangeable preferred stock
to Xavier in exchange for 675,000 shares of Xavier common stock. The Xavier
Corporation stock was exchanged for the Xavier BG Inc. preferred stock in August
1996.
NOTE 5 - SUBSEQUENT EVENTS:
- ---------------------------
In October and November 1996, the Company issued an aggregate of 2,800,000
shares of Xavier Corporation common stock pursuant to Regulation S as an
exemption to the registration provisions under the Securities Act of 1933 as
amended. The net proceeds from the issuance totaled $4,370,000.
7
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XAVIER CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
---------------------------------------
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
OVERVIEW
In the third quarter of 1996, all field activity in the Company's West
Siberian license areas was restricted due to lack of ice roads and seasonal
flood waters. At the Kamennoye East license area, four wells requiring daily
maintenance were temporarily shut-in to reduce operating costs. The wells will
be returned to production during the winter operating season. Four free-flowing
wells produced throughout the quarter. At the Kamennoye West license area, four
wells were drilled and cased to within 100 meters of the top of the Cretaceous
formation by the Company's Russian drilling contractor. A total of sixteen
wells have now been drilled to within 100 meters of the top of the Cretaceous
formation. As of November 5, 1996, the Company began operations to rig-up its
western drilling rig in preparation for completing the existing Cretaceous wells
this winter using under-balanced drilling techniques. At the Potanay field
(within the Potanay and Kartopyinskoye license area), construction activities
continued on the supply base, the separation/stabilization/pumping (DNS)
facility and the fuel and lubricant storage (GMS) facility. Five free-flowing
wells were active during the quarter; one well was shut-in due to high
concentrations of natural gas. At the Kartopyinskoye field, two producing wells
were shut-in, as oil must be trucked to the central DNS facility, which is
currently accessible only via ice roads.
RESULTS OF OPERATIONS
QUARTERS ENDED SEPTEMBER 30, 1996 AND 1995
TSA - Revenue. Total revenue for the quarter ended September 30, 1996
increased by $1,742,450 to $3,078,571 from $1,336,121 in the same period in
1995. TSA revenue increased on higher sales volumes and higher crude prices.
Pipeline Repair Revenue. Total pipeline repair revenue for the quarter
ended September 30, 1996 increased $445,080 to $459,729 from $14,649 in the same
period in 1995. This is a result of the Company's acquisition of a majority
equity interest in the Bandera Group (Bandera) in July of 1995.
Production Taxes and Fees. Production taxes and fees for the quarter ended
September 30, 1996 increased by $226,312 to $1,180,942 from $954,630 in the same
period for 1995. Production taxes and fees increased with higher sales volumes
and because of higher per-unit production taxes in the Khanty Mansiysk region of
western Siberia.
Lease Operating Expense. Lease operating expense for the quarter ended
September 30, 1996 increased by $1,697,277 to $1,969,853 from $272,576 in the
same period in 1995. The higher charges are due to expanding operations and
increased production volumes at the Potanay and Kamennoye East TSAs and because
of unusually large charges for direct and indirect costs billed by
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the Company's Russian partner to the venture. The Company is reviewing the
charges and will seek adjustments where the billings cannot be substantiated.
Depreciation and Amortization. Depreciation and amortization expense for
the quarter ended September 30, 1996 increased by $94,528 to $812,167 from
$717,639 for the same period in 1995. The increase resulted primarily from
depletion, depreciation and amortization associated with increased sales of
crude production.
General and Administrative. General and administrative expenses for the
quarter ended September 30, 1996 increased by $238,968 to $1,523,602 from
$1,284,634 for the same period in 1995. The increase was the result of
expanding operations activity in the west Siberian license areas and the Moscow
and Houston corporate offices.
Interest and Loan Fees. Interest and loan fees for the quarter ended
September 30, 1996 increased by $1,819,948 to $1,769,112 from ($50,836) for the
same period in 1995. The increase in interest expense and loan fees was
principally the result of accrued interest on the Carnegie loans and
amortization of the associated warrants.
Other (Income) and Expense. Other income and expense for the quarter ended
September 30, 1996 increased by $233,861 to income of $277,808 from income of
$43,947 for the same period in 1995. The increase principally reflects interest
income on the Convertible Note due from Aitorneftegaz (ANG), interest income
from loans made to certain entities to fund the Company's commodities trading
venture and is offset by a revaluation of the SEK loan.
Income Taxes. Deferred income taxes for the quarter ended September 30,
1996 decreased $54,157 to $65,670 from $11,513 for the same period in 1995.
Deferred income taxes arise primarily from timing differences between the book
and tax basis of Bandera's intangible assets and from the Russian treatment of
the Company's advances under the TSA's. The change in deferred taxes as
reported in the Company's financial statements is due to the amortization of the
step-up in the basis of Bandera's assets. The Company's Russian branch has a
deferred foreign tax liability.
Net Income (Loss). The Company had a net loss of $3,453,876 for the
quarter ended September 30, 1996, as compared to a net loss of $1,225,900 for
the 1995 period. The net loss for the 1996 period was the result of higher
general and administrative expense, higher oil and gas operations expense,
higher interest expense and currency exchange loss from the SEK loan, reduced by
TSA revenue, interest income and pipeline repair income.
NINE MONTHS ENDED JUNE 30, 1996 AND 1995
TSA - Revenue. Total revenue for the nine months ended September 30, 1996
increased by $6,212,381 to $14,145,451 from $7,933,070 in the same period in
1995. TSA revenue increased on higher sales volumes and higher crude prices.
Pipeline Repair Revenue. Total pipeline repair revenue for the nine months
ended September 30, 1996 increased $2,824,641 to $2,839,290 from $14,649 in the
same period in 1995. This is a result of the Company's acquisition of a
majority equity interest in Bandera in July of 1995.
Production Taxes and Fees. Production taxes and fees for the nine months
ended September 30, 1996 increased by $2,967,466 to $6,600,864 from $3,633,398
in the same period
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for 1995. Production taxes and fees increased with higher sales volumes and
because of higher per-unit production taxes in the Khanty Mansiysk region of
western Siberia.
Lease Operating Expense. Lease operating expense for the nine months ended
September 30, 1996 increased by $5,199,204 to $5,715,387 from $516,183 in the
same period in 1995. The higher charges are due to expanding operations at the
Potanay and Kamennoye East TSAs and, in the second and third quarters, unusually
high charges for direct and indirect costs billed by the Company's Russian
partner to the venture. The Company is reviewing the charges and will seek
adjustments where the billings cannot be substantiated.
Depreciation and Amortization. Depreciation and amortization expense for
the nine months ended September 30, 1996 increased by $1,908,014 to $3,361,463
from $1,453,449 for the same period in 1995. The increase resulted from
amortization of the intangible assets obtained in the purchase of 54.5% of
Bandera, higher charges to depreciation for equipment obtained in the Bandera
purchase, for depreciation of new corporate assets purchased as the Company's
business expanded, and for depletion, depreciation and amortization associated
with increased sales of crude production.
General and Administrative. General and administrative expenses for the
nine months ended September 30, 1996 increased by $4,599,712 to $7,299,468 from
$2,699,756 for the same period in 1995. The increase was the result of
expanding operations activity in the Siberian license areas and the Moscow and
Houston corporate offices, unusually high legal and accounting fees associated
with a registration statement and a nonrecurring litigation settlement, and
write-offs associated with a line of credit and a bond offering.
Interest and Loan Fees. Interest and loan fees for the nine months ended
September 30, 1996 increased by $3,542,181 to $4,115,036 from $572,855 for the
same period in 1995. The increase in interest expense and loan fees was
principally the result of accrued interest on the Carnegie loans and
amortization of the associated warrants.
Other (Income) and Expense. Other income and expense for the nine months
ended September 30, 1996 decreased by $2,666,080 to expense of $2,507,862 from
income of $158,218 for the same period in 1995. The decrease principally
reflects a one time charge related to a litigation settlement and a revaluation
of the SEK loan and is offset by interest income on the Convertible Note due
from Aitorneftegaz (ANG), interest income from a promissory note due from
Kachina Capital Corporation (KCC) and interest income from loans made to certain
entities to fund the Company's commodities trading venture.
Income Taxes. Deferred income taxes for the nine months ended September
30, 1996 decreased $1,083,179 to $197,009 from ($886,170) for the same period in
1995. Deferred income taxes arise primarily from timing differences between the
book and tax basis of Bandera's intangible assets and from the Russian treatment
of the Company's advances under the TSA's. The change in deferred taxes as
reported in the Company's financial statements is due to the amortization of the
step-up in the basis of Bandera's assets. The Company's Russian branch has a
deferred foreign tax liability.
Net Income (Loss). The Company had a net loss of $13,822,760 for the nine
months ended September 30, 1996, as compared to net loss of $1,109,361 for the
1995 period. The net loss for the 1996 period was the result of higher general
and administrative expense, higher oil and gas operations expense, higher
interest expense, higher depreciation and amortization expense, the costs
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of litigation settlement and currency exchange loss on the SEK loan, reduced by
TSA revenue, interest income and pipeline repair income.
LIQUIDITY AND CAPITAL RESOURCES
The Company has an immediate need for cash to meet its currently due
obligations. At September 30, 1996, the Company had $62,250 of unrestricted
cash on hand. Of the available cash on hand, $24,438 was attributable to
Bandera, and as such, was unavailable to the Company. At November 11, 1996,
Xavier had approximately $1,100,000 of cash on hand (net of Bandera).
Bandera has an immediate need for cash to meet current obligations and has
been selling accounts receivable to raise cash. Xavier and Bandera are
currently negotiating with each other to sever their current legal relationship.
Contemporaneous with the above, Xavier is negotiating to acquire Bandera's
$500,000 past due secured notes from the current holders (See Note 2). If
Xavier is unable to acquire the notes, or Bandera is unable to pay off the
notes, or other arrangements are not made to satisfy the noteholders,
foreclosure on the secured assets would likely be forthcoming.
At September 30, 1996 the Company's contractual interest in TSA production
was oversold by 68,047 barrels (net P&K and Kamennoye East production). The net
overlift balance ($939,554) is reflected as deferred revenue in the balance
sheet. The Company believes the overlift is temporary; typically, management
expects to be in an underlift position. Also, Xavier is in default on a
$250,000 promissory note that matured June 30, 1996 ( See Note 2).
In January 1996, Xavier received $2,000,000 from PETECO, a partner in the
P&K and Kamennoye East TSA's. In March 1996, the Company received $1,000,000
before deductions of commissions and fees from the sale of equity via a private
placement. The Company also extended the conversion terms of a convertible note
in the amount of $500,000 due December 31, 1995 to April 15, 1996. This
convertible note was subsequently converted to equity in the second quarter of
1996. In April 1996 the Company sold 3,365,385 shares of common stock. The
proceeds were used to pay drilling costs of $600,000 in the West Kamennoye
license area and to make a $675,000 prepayment toward a $1,320,000 hook-up
contract for connecting the Cretaceous wells with the existing gathering system,
to provide a non-refundable agency fee of $1,000,000 for a debenture/bond
placement contract, and for working capital. In June 1996, the Company issued an
unsecured promissory note for SEK 55,000,000 (US$ 8,259,000) under the same
terms and conditions as the December 1995 Carnegie note. The Company must also
issue 6,008,064 warrants to Morgan Grenfell International Funds, Ltd. which
facilitated the additional funding tranche of the Carnegie loan. The warrants
carry the same terms and conditions as per the prior funding (exercise price SEK
9.15 and expiring November 28, 1997). Also in June 1995, the Company received
$1,000,000 from a private placement of 1,368,000 shares. Funds from the June
note proceeds and June private placement were disbursed: $3.6 million to settle
litigation; $2,000,000 to facilitate the buying and re-selling of ammonium
nitrate vis-a-vis the Gazprom joint venture; $662,000 to Vector Development for
the on-going Cretaceous drilling program; $250,000 to PETECO, the Company's
partner in the Kamennoye East and Potanay TSAs, and on July 17, 1996, a $500,000
note was paid in final settlement with a former employee. The remainder was
used to reduce accounts payable and for general corporate purposes. In October
and November 1996 the Company sold 2,800,000 shares of its common stock via a
Regulation S offering with net proceeds of $4.4 million. From the net proceeds,
$750,000 was advanced to support the Company's (Gazprom) commodities trading
program (discussed below), $653,000 was spent on the Kamennoye West drilling
program, and $1.9 million was used to reduce accounts payable and
11
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for general corporate purposes. The balance of the proceeds will be used for the
Kamennoye West drilling program and other general corporate purposes.
In the first quarter of 1996, the Company made a payment of $147,000 in
connection with the Gazprom joint venture (which payment was made in the fourth
quarter of 1995 by the Company's 54.5%-owned subsidiary, Bandera, and which
Xavier repaid to Bandera in the first quarter of 1996). In the second quarter
of 1996, the Company advanced $2,000,000 to facilitate the buying and reselling
of ammonium nitrate from a Russian supplier to a western buyer. Through the
Company's relationship with Gazprom, it has agreed to enter into commercial
agreements with the Kirovo Chepetsk chemical complex to market chemical products
derived from natural gas processing. Initial sales contracts are for 25,000 to
50,000 metric tons per month for each of anhydrous ammonia and ammonium nitrate
(nitrogen fertilizers). The initial transaction in June 1996 concerned the sale
of ammonium nitrate through terminal space in Tallinn, Estonia. Xavier is
attempting to establish a source of trade credit for these trading activities by
collertalizing an inventory position in the port of Tallinn and the associated
accounts receivable. In August, the venture returned $801,000 to the Company.
In October and November, Xavier invested an additional $750,000 in the venture
to secure larger volumes of product to re-sell. To date, the Company's
aggregate investment in the Gazprom venture is approximately $2,880,000.
The Company's principal future capital commitments arise under the
Kamennoye East and Kamennoye West TSA's. Each of these TSA's has contractual
requirements that obligate the Company to contribute a minimum amount of funds
per year for a specified number of years unless, in the case of the Kamennoye
East TSA, the Company determines that development of the license area becomes
uneconomic. Under the Kamennoye West TSA, the Company agreed to make aggregate
capital contributions of $75,000,000, payable over a five-year period ending in
2000, at the rate of $15,000,000 per year. The Kamennoye East TSA requires
aggregate capital contributions of $40,000,000 payable over a four year period.
Such funds may be supplied to the development of either the Kamennoye East or
P&K fields. The Company is obligated to fund 90% of such amount at the rate of
$9,000,000 per year in each of years 1994, 1995, 1996 and 1997. The Company and
PETECO have agreed to reinvest the first $8,000,000 of TSA net revenue under
each of the Kamennoye East TSA and the P&K TSA in the development of the
applicable license area with such reinvestment to be applied to the Company's
contractual commitments under the Kamennoye East TSA. Annual field development
expenditures, or capital contributions in excess of the annual minimum
requirements specified in the Kamennoye East and Kamennoye West TSA's, may be
carried forward and applied against the following year's contractual capital
spending requirements. In January 1996, the Company received $2.0 million from
PETECO, which reduced its TSA advance account balance. This transfer, when
combined with the net reinvested revenue from P&K and Kamennoye East production
through the first three quarters of 1996, leaves a remaining contractual
investment requirement of $6.1 million against the $36 million, four year
investment horizon. At September 30, 1996, the Company had invested $11.9
million (including the funding carryover from 1995 and net of the overlift
position) vis-a-vis the $9 million annual contractual investment requirement.
At November 12, 1996, the Company had invested approximately $14.6 million
toward the $15 million annual contractual capital commitment at Kamennoye West.
The $14.6 million investment leaves a remaining contractual investment
requirement of $60.4 million against the $75 million, five year investment
horizon The Kamennoye West TSA funding commitment year runs from July to June,
however managemtent does not believe the underfunding will effect the
contractual status of the TSA.
As disclosed in the Company's October 22, 1996 press release, in September
1996, the Regional Department of State Geological Control ("DSGC") again
reviewed the Black Gold Joint
12
<PAGE>
Venture's operations and noted that it was still not in compliance with certain
regulations and terms of the agreements. This was primarily due to the lack of
progress by Stavropolneftegas ("STNG") (30% JV interest) in enabling the Joint
Venture to commence operating activities. The DSGC recommended again to
Roscomnedra (the federal Russian licensing body) and to the Stavropol Resource
Usage Committee (regional) that the Joint Venture licenses be revoked.
In early October 1996 the Stravropol Resource Usage Committee met and heard
the DSGC's findings. The committee recognized the preparatory work which the
Joint Venture had accomplished, but resolved to join the DSGC in the petition to
the Stavropol Regional Government. Neither Roscomnedra nor the Stavropol
Regional Government (the higher authorities) have indicated that they will take
any further immediate action to revoke the Black Gold Joint Venture licenses.
Black Gold Joint Venture representatives met with Roscomnedra (the federal
level) in the spring of 1996 and have negotiated at that level to resolve
outstanding partnership issues. The Stavropol Regional Government (20% JV
interest) and Xavier management believe that continued cooperation with
Roscomnedra should cure any regulatory violations or contractual defects.
As previously disclosed, there can be no assurance that such cures will
occur. In the event such violations are not cured, the Joint Venture could be
subjected to administrative action, or the licenses could even be permanently
revoked. There is currently no oil production associated with Xavier's
interest.
The Company intends to seek such additional required capital primarily
through a combination of funding sources that may include offerings of equity
and debt securities, including possible public offerings in the United States
and internationally, which the Company believes will be facilitated by its
domestication in the United States. In addition, the Company has entered into
discussions with certain entities concerning the private placement in Europe of
up to $100 million in convertible debentures. Xavier has no definitive
agreement with respect to the issue of such private placement and there can be
no assurances that such an agreement will be concluded.
With the Company's domestication in the United States, it expects to be in
a better position to seek capital and/or loan guarantees from US and foreign
governmental and quasi-governmental agencies in connection with its Russian
projects. The Company may also seek an industry partner looking for an entrance
into the Russian oil and gas arena or could sell an interest in one or more of
its concessions to a third party. There can be no assurance, however, that the
Company will be successful in obtaining the funds required to meet its capital
needs on a timely basis or, if it is successful, that the terms on which such
funds are obtained will be advantageous to the Company. If the Company is
unable to obtain sufficient capital in a timely manner, either as described
above or otherwise, it would be forced to delay the development of the
properties and/or seek to renegotiate its obligations under the TSA's, either of
which could have a material adverse effect on the financial condition and
results of operations of the Company. There can be no assurance that the
Company would be able to renegotiate its obligations under the TSA's if required
to do so.
13
<PAGE>
XAVIER CORPORATION
PART II - OTHER INFORMATION
ITEM 1 - Legal Proceedings - None
ITEM 2 - Changes in Securities - None
ITEM 3 - Defaults upon Senior Securities - None
ITEM 4 - Submission of Matters to a Vote of Security Holders - None
ITEM 5 - Other Information - None
ITEM 6 - Exhibits and Reports on Form 8-K - None
14
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, who has signed this
report on behalf of the Registrant and as the principal financial and accounting
officer of the Registrant.
XAVIER CORPORATION
Date: November 14, 1996 By: /S/
----------------------------
Robert S. Parsons
Vice President and Chief Financial Officer
15
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