U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
[x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2002
OR
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
For the transition period from to
Commission file number 001-16653
EMPIRE PETROLEUM CORPORATION
(Name of small business issuer in its charter)
Delaware 73-1238709
(State or other jurisdiction of
incorporation or organization) (I.R.S. Employer Identification No.)
15 E. 5th Street, Suite 4000, Tulsa, OK 74103-4346
(Address of principal executive offices) (Zip Code)
Issuer's Telephone Number: (918) 587-8093
Securities registered under Section 12(b) of the Exchange Act:
None
Securities registered under Section 12(g) of the Exchange Act:
Common Stock, $0.001 par value
(Title of class)
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 [ ]
Check if 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 registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-KSB or any amendment to this Form 10-KSB [ X ]
The issuer's revenues for the most recent fiscal year were $ -0-.
The aggregate market value of the voting and non-voting common equity held
by non-affiliates, based upon the average bid and asked prices of the Common
Stock on February 28, 2003 was $501,623.
The number of shares outstanding of the issuer's Common Stock, as of March
21, 2003 was 35,830,190.
DOCUMENTS INCORPORATED BY REFERENCE
None.
Transitional Small Business Disclosure Format (check one): Yes [ ] No [X]
EMPIRE PETROLEUM CORPORATION
FORM 10-KSB
TABLE OF CONTENTS
ITEM NUMBER AND CAPTION PAGE NUMBER
PART I
Item 1. Description of Business 3-6
Item 2. Description of Property 6-7
Item 3. Legal Proceedings 7
Item 4. Submission of Matters to a Vote of Security Holders 7
PART II
Item 5. Market for Common Equity and Related Stockholder
Matters 7-9
Item 6. Management's Discussion and Analysis or Plan of
Operations 9-14
Item 7. Financial Statements F-1 through F-13
Item 8. Changes In and Disagreements with Accountants on
Accounting and Financial Disclosure 14-15
PART III
Item 9. Directors, Executive Officers, Promoters and Control
Persons; Compliance with Section 16(a) of the Exchange
Act 15-17
Item 10. Executive Compensation 17
Item 11. Security Ownership of Certain Beneficial Owners
and Management 17-19
Item 12. Certain Relationships and Related Transactions 19-20
Item 13. Exhibits and Reports on Form 8-K 20-21
Item 14. Controls and Procedures 21
Signatures 21
Certifications 21-22
PART I
ITEM 1. DESCRIPTION OF BUSINESS
Background
Empire Petroleum Corporation, a Delaware corporation (the "Company"),
was incorporated in the state of Utah in August 1983 under the name
Chambers Energy Corporation and domesticated in Delaware in March
1985 under the name Americomm Corporation. The Company's name was
changed to Americomm Resources Corporation in July 1995. On May 29,
2001, Americomm Resources Corporation acquired Empire Petroleum
Corporation, which became a wholly owned subsidiary of Americomm
Resources Corporation. On August 15, 2001, Americomm Resources
Corporation and Empire Petroleum Corporation merged and the Company's
name was changed to Empire Petroleum Corporation. Since August 15, 2001,
the Company has not had any subsidiaries. The Company operates from
leased office space at 15 E. 5th Street, Suite 4000, Tulsa, OK 74103-4346,
and its telephone number is (918) 587-8093.
During the past three fiscal years, the Company has focused on developing
the Cheyenne River Project as further described below. As of December
31, 2002, the Company had no income producing oil and gas properties.
However, an oil and gas test well was drilled in January, 2001. The test
well encountered continual flows of oil and natural gas during the drilling
period and was subsequently completed as an oil well. For more information
on this well, see "Oil and Gas Development Project" below.
Oil and Gas Development Project
Pursuant to that certain Americomm Cheyenne River Prospect Agreement dated
March 4, 1998, as amended (the "Prospect Agreement"), the Company paid
$234,500 in March, 1998 to cover the initial expenses of acquiring leases
in an oil and gas Project in the Eastern Powder River Basin in the State of
Wyoming (the "Cheyenne River Project or Prospect"). Also in accordance with
the Prospect Agreement, the Company issued an aggregate of 566,000 shares of
Common Stock and agreed to grant overriding royalty interests to five
individuals as consideration for services performed and to be performed in
connection with the acquisition and exploration of the Cheyenne River
Project.
Prior to the Company acquiring Empire Petroleum Corporation, the Company
entered into that certain farmout agreement dated November 15, 2000 by and
between the Company, Empire Petroleum Corporation and certain other parties
(the "Farmout Agreement"). Pursuant to the Farmout Agreement, drilling of the
Timber Draw #1-AH well commenced during December, 2000 within the 25,000 acre
Timber Draw Federal Drilling Unit included in the Cheyenne River Project.
The following parties participated with Empire Petroleum Corporation in
the drilling of the Timber Draw #1-AH test well at the following
participation levels: Maxy Resources, LLC (25%), Enterra Energy Corp.
(formerly Big Horn Resources Ltd.) (15%) and 74305 Alberta Ltd. (10%).
The drilling of the Timber Draw #1-AH well was completed at a total
measured depth of 10,578 feet, of which the last 2,030 feet were drilled
horizontally through the Newcastle "B" formation. The Company encountered
flows of oil and gas during the horizontal drilling. Thereafter, the
Company conducted a series of production methods on its Timber Draw #1-AH
well during the period from February 13 2001, to June 22, 2001. During the
test period, the well flowed 8,139 barrels of 44 degree light gravity sweet
crude and 29,072,000 cubic feet of natural gas with a BTU content of 1,493
and rich in natural gas liquids. Consulting engineers calculated that the
natural gas would yield natural gas liquids of approximately 70 barrels per
day based on estimated gas production of 500,000 cubic feet per day. The well
was shut-in on June 22, 2001 to conserve the natural gas, which was flared
during the test period. A bottom hole pressure survey of the Timber Draw #1-AH
well conducted in April 2002, which indicated a limited reservoir for this
well. Additional testing of this well will be required to determine
if it can be assigned any reserves and economic value.
The Bureau of Land Management ("BLM") has advised the Company that it
does not consider the Timber Draw Unit #1-AH well economic. In other words,
under the BLM's criteria for economic determination, the well will
not pay out the cost incurred to drill and complete the well. The Company
planned on initiating additional drilling during the second half of 2002;
however, due to poor financial market conditions, the Company was unable
to complete such drilling. The BLM also advised the Company that since it
did not commence another test well prior to August 12, 2002, the Timber
Draw Unit had been terminated.
As of December 31, 2002, the Company owns a fifty (50%) percent working
interest in the Timer Draw #1-AH well. The Company's working interest
is convertible to a seventy-five (75%) percent working interest after its
partners recover their drilling and completion costs. The Company reserves
an overriding royalty interest of seven (7%) percent proportionally reduced
until its partners' cost recovery.
During the quarter ended September, 2002, the Company determined
that certain leases located in the Cheyenne River Project were surplus to
the Company's needs. As a result, such leases were released through
non-payment of lease rentals. As of December 31, 2002, following the
release of the surplus property, the lease block for the Cheyenne River
Project constituted approximately 79,000 acres. As a result of the Farmout
Agreement, Empire has a seventy-five (75%) percent interest in 60,000 acres
of the Project and a one hundred percent (100%) in 19,000 acres of the
Project. For more Information on the Company's leases, See Item 2,
Description of Property.
Risks Inherent in Oil and Gas Exploration
Exploration for oil and gas is highly speculative and involves a great
degree of risk. The Company may be required to perform expensive
geological and/or seismic surveys with respect to its properties. Even
if the results of such surveys are favorable, only subsequent drilling at
substantial costs can determine whether commercial development of the
properties is feasible. Oil and gas drilling is frequently marked by
unprofitable efforts, not only from unproductive prospects, but also
from productive prospects that do not produce sufficient amounts to return
a profit on the investment. To further test its Cheyenne River Project, the
Company plans to continue its efforts to secure third party financing in
order to complete a 16 square mile 3-D seismic program immediately surrounding
the Timber Draw #1-AH test well and, provided the results of the seismic
survey are positive, to continue its drilling program utilizing horizontal
drilling, a technology which can drill underbalanced wells horizontally
thousands of feet into fractured reservoirs. The Company believes horizontal
drilling, while more costly than conventional drilling methods, could yield
substantial and economic reserves. However, there can be no assurance that
the Company will be able to discover, develop or produce sufficient reserves
to recover the expenses incurred in connection with the exploration of its
Cheyenne River Project and achieve profitability.
The Company's operations are subject to the substantial operating hazards
and risks inherent to exploring for and developing oil and gas, such
as encountering unusual or unexpected formations, interruptions due to adverse
weather conditions, unforeseen technical difficulties and equipment breakdowns.
Oil and gas properties are also subject to risks inherent to drilling for and
producing oil and gas, including blowouts, cratering and fires. These risks
could result in damage to or loss of life and property. Prior to commencing
drilling of the Timber Draw #1-AH test well, the Company obtained insurance
coverage that is customary for companies engaged in similar operations.
However, the Company may not be fully insured against all possible risks.
For a discussion of additional risks applicable to the Company, see Item 6,
Management's Discussion and Analysis or Plan of Operation.
Competition
The oil and gas business is extremely competitive. The Company must compete
with many long-established companies with greater financial resources and
technical capabilities. The Company is not a significant participant in the oil
and gas industry.
Markets; Price Volatility
The market price of oil and gas is volatile, subject to speculative movement
and depends upon numerous factors beyond the control of the Company, including
expectations regarding inflation, global and regional demand, political and
economic conditions and production costs. Future profitability, if any, will
depend substantially upon the prevailing prices for oil and gas. If the market
price for oil and gas is significantly depressed in the future, it could have a
material adverse effect on the Company's ability to raise additional capital
necessary to finance operations and to explore the Cheyenne River Project.
Lower oil and gas prices may also reduce the amount of oil and gas, if any,
that can be produced economically from the Company's properties.
Regulation
The oil and gas industry is subject to extensive federal, state and local
laws and regulations governing the production, transportation and sale of
hydrocarbons as well as the taxation of income resulting therefrom.
Legislation affecting the oil and gas industry is constantly changing.
Numerous federal and state departments and agencies have issued rules and
regulations applicable to the oil and gas industry. In general, these
rules and regulations regulate, among other things, the extent to which
acreage may be acquired or relinquished; spacing of wells; measures required
for preventing waste of oil and gas resources; and, in some cases, rates of
production. The heavy and increasing regulatory burdens on the oil and gas
industry increase the costs of doing business and, consequently, affect
profitability.
A substantial portion of the leases which constitute the Cheyenne River
Project are granted by the federal government and administered by the BLM
and the Minerals Management Service ("MMS") of the U.S. Department of the
Interior, both of which are federal agencies. Such leases are issued through
competitive bidding, contain relatively standardized terms and require
compliance with detailed BLM and MMS regulations and orders (which are subject
to change by the BLM and the MMS). Leases are also accompanied by stipulations
imposing restrictions on surface use and operations. Operations to be
conducted by the Company on federal oil and gas leases must comply with
numerous regulatory restrictions, including various nondiscrimination statutes.
Federal leases also generally require a complete environmental impact
assessment prior to the authorization of an exploration or development plan.
The Company's oil and gas properties and operations are also subject to numerous
federal, state and local laws and regulations relating to environmental
protection. These laws govern, among other things, the amounts and types of
substances and materials that may be released into the environment, the issuance
of permits in connection with exploration, drilling and production activities,
the release of emissions into the atmosphere, the discharge and disposition of
generated waste materials, the reclamation and abandonment of wells and facility
sites and the remediation of contaminated sites. These laws and regulations may
impose substantial liabilities for the Company's failure to comply with them or
for any contamination resulting from the Company's operations.
Although the Company is not aware of any circumstances which would cause it to
be in violation of any regulation, if the Company engages in the exploration of
oil and gas, substantial costs are expected to be required to comply with
applicable regulations and costs and delays associated with such compliance
could materially affect the economics of a given project, cause material
changes or delays in the intended activities or inhibit the development of an
oil or gas property. The effect of any future regulation on the Company's
operations cannot be determined at this time, although any increase in the cost
of the Company 's operations as a result of future regulations could have a
material adverse impact on the Company.
Employees
The Company has one employee, a full time secretary. Mr. Albert E. Whitehead,
Chairman and Chief Executive Officer, devotes a considerable amount of time to
the affairs of the Company and receives no compensation. Up until his death in
December, 2002, Mr. Tom Bradley, President, devoted a substantial amount of
time to the affairs of the Company and also received no compensation.
ITEM 2. DESCRIPTION OF PROPERTY
Cheyenne River Project - Powder River Basin, Wyoming
The Cheyenne River Project consists of approximately 79,000 acres of federal,
state and fee leases, most of which are primarily located in Niobrara County,
Wyoming. The land in the Cheyenne River Project consists of gently rolling
ranch land with a substantial network of ranch roads, which permit easy access
to most areas of the Project. The Project is located in a mature producing
area with an established pipeline and service network.
Numerous wells were drilled within the Project area in the 1950's through the
1970's, with initial potential flowing rates in the range of 200 to 1,500
barrels of oil per day. Management believes that these wells may identify a
fractured reservoir with the potential for significant oil and gas production,
which would be most effectively exploited utilizing horizontal drilling
technology. It has been determined by the Company's technical advisors that a
3-D seismic survey is necessary to properly explore the Cheyenne River Project
and the Company estimates that such seismic survey will cost approximately
$400,000. As of March 31, 2003, the Company has not been able to raise
the funds necessary to complete the seismic survey.
Pursuant to the Farmout Agreement, a test well was drilled on the Project
using horizontal drilling technology. The Company has retained a 50% interest
in such well. For more information on the other drilling participants see "Oil
and Gas Development Project" under Item 1, Description of Business.
The Company's leases in the Cheyenne River Project are predominately
federal leases with 10 year terms, most of which have five years
remaining on such terms. Since the Company did not commence drilling
another well by August 12, 2002, the BLM informed the Company the Timber
Draw Unit was terminated. Unless a new unit is formed, a well will need
to be drilled on each federal, state or fee lease in order to extend such
lease for the life of its producing capability. The Company intends to
apply for a new drilling unit in the event a favorable seismic survey is
completed and the Company is able to raise the funds necessary to
complete an additional well. The Company's state and fee leases had initial
terms of five years. As of December 31, 2002, the Company had retained
two state leases, both of which have two years remaining on their terms.
The Company's fee leases expire in April, 2003; however, at year-end, the
Company was in the process of attempting to renew these leases.
COMPANY UNDEVELOPED ACREAGE (LEASES)
AS OF DECEMBER 31, 2002
Drilling Activity
Undeveloped Acreage Productive Acreage Completed Oil Well
Gross Acres Net Acres Gross Acres Net Acres 2000 2001 2002
___________ _________ ___________ _________ _______________________
79,322 64,362 - - -0- * -0-
* Under evaluation to assess production and economic potential as of
April 15, 2003
ITEM 3. LEGAL PROCEEDINGS
On January 29, 2002, Baker Hughes, Inc. ("Baker Hughes") secured a default
judgment in the District Court of Tulsa County in the State of Oklahoma
in connection with the principal balance of $98,984.79 for labor, services
and materials furnished to the Company by Baker Hughes. The Company did not
contest Baker Hughes' action, as there was no dispute to the validity of its
claim. On March 13, 2002, Baker Hughes filed to authenticate the default
judgment in the District Court, Eighth Judicial District in the County of
Niobrara, State of Wyoming. On April 18, 2002, the Company and Baker Hughes
entered into an Agreed Order of Payment in order to resolve this matter. In
October, 2002, the Company made a final payment in connection with this Agreed
Order of Payment and Baker Hughes subsequently released the judgments in both
Tulsa and Niobrara counties.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There have been no matters submitted to a vote of security holders during
the quarter ended December 31, 2002.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Market Information:
The Company's Common Stock is traded on the National Association of Securities
Dealers Automatic Quotation (NASDAQ) over-the-counter bulletin board system
under the symbol "EMPR."
The following table sets forth the range of high and low prices at which the
Company's common stock traded during the time periods indicated, as reported
by NASDAQ.
Year ending December 31,2001:
Quarter High Low
03/31/01 2.13 .34
06/30/01 .79 .37
09/30/01 .60 .24
12/31/01 .30 .12
Year ending December 31,2002:
Quarter High Low
03/31/02 .22 .15
06/30/02 .21 .15
09/30/02 .16 .06
12/31/02 .13 .015
Quotations reflect inter-dealer prices, without retail mark-up, markdown or
commission and may not represent actual transactions.
Number of Holders of Common Stock
At December 31, 2002, there were approximately 186 stockholders of record of
the Company's Common Stock.
Dividends
The Company has never paid cash dividends on its Common Stock. The Company
intends to retain future earnings for use in its business and, therefore,
does not anticipate paying cash dividends on its Common Stock in the
foreseeable future.
Securities Authorized for Issuance under Equity Compensation Plans
As of December 31, 2002, the Company had one equity incentive plan under which
equity securities have been authorized for issuance to the Company's directors,
officers, employees and other persons who perform substantial services for or
on behalf of the Company. This plan is titled "1995 Stock Option Plan" and has
been approved by the Company's stockholders.
The following table provides certain information relating to the 1995 Stock
Option Plan as of December 31, 2002:
(a) (b) (c)
Number of securities
remaining available
for future
Number of Securities issuance under
to be issued upon Weighted-average equity compensation
exercise of exercise price of plans, excluding
outstanding options, outstanding options, securities reflected
Plan Category warrants and rights warrants and rights in column(a)
Equity 981,666 $0.89 618,334
compensation plans
approved by
security holders
Equity ------- ---------
Compensation plans
not approved by
security holders
TOTAL 981,666 618,334
_______ _______
Recent Sales of Unregistered Securities
During the quarter ended December 31,2002, the Company did not sell any
securities of the Company that were not registered under the Securities
Act. On March 17, 2003, the Company issued the following number of shares
of Common Stock without registering such Common Stock under the Securities
Act, as amended, to the following persons in exchange for the cancellation
of the debt owed by the Company to such persons as set forth below:
Amount of Debt Owed
Name Number of Shares By the Company
The Albert E. Whitehead Living Trust 8,840,315 $422,542.21
The Lacy E. Whitehead Living Trust 1,968,172 $ 59,045.15
C. A. White Wireline Services 561,797 $ 16,853,90
Of the 8,840,315 shares issued to the Albert E. Whitehead Living Trust,
874,071 shares were issued in accordance with a convertible promissory
note pursuant to which the Trust could convert the outstanding balance
under the promissory note into shares of the Company's Common Stock at
a conversion rate of $0.21 per share. The remaining shares were issued
in exchange for the cancellation of debt owed by the Company to the Trust
in connection with advances made to the Company by the Trust, using a
conversion rate of $0.03 per share. The conversion rate of $0.03 was
used for the other issuances described above.
On March 15, 2002, the Company issued a promissory note to the Albert E.
Whitehead Living Trust with a face amount of $170,000. For more
information on this note, see Item 12, Certain Relationships and Related
Transactions.
The Company relied on the exemption set forth in Section 4(2) of the
Securities Act of 1933, as amended, in connection with the issuances of
the securities set forth above. All parties listed above are sophisticated
persons or entities. There was no underwriting in connection with the
issuances of these securities and no commissions were paid to any party
upon such issuances.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
Cautionary Note Regarding Forward-Looking Statements
All statements, other than statements of historical fact contained in this
report are forward-looking statements. Forward-looking statements generally are
accompanied by words such as "anticipate," "believe," "estimate," "expect,"
"may," "might," "potential," "project" or similar statements. Although the
Company believes that the expectations reflected in such forward-looking
statements are reasonable, no assurance can be given that such expectations
will prove correct. Factors that could cause results to differ materially
from the results discussed in such forward-looking statements include:
* the need for additional capital,
* the costs expected to be incurred in exploration and development,
* unforeseen engineering, mechanical or technological difficulties in drilling
wells,
* uncertainty of exploration results,
* operating hazards,
* competition from other natural resource companies,
* the fluctuations of prices for oil and gas,
* the effects of governmental and environmental regulation, and
* general economic conditions and other risks described in the Company's
filings with the Securities and Exchange Commission.
Information on these and other risk factors are discussed under "Factors
That May Affect Future Results" below. Accordingly, the actual results of
operations in the future may vary widely from the forward-looking statements
included herein, and all forward-looking statements in this Form 10-KSB are
expressly qualified in their entirety by the cautionary statements in this
paragraph.
Readers are cautioned not to place undue reliance on these forward-looking
statements, which reflect management's analysis, judgment, belief and
expectations only as of the date hereof. The Company undertakes no obligation
to publicly revise these forward-looking statements to reflect events or
circumstances that arise after the date hereof.
Factors That May Affect Future Results
The Company does not have any income producing oil and gas properties and
has limited financial resources.
As of December 31, 2002, the Company does not have any income producing
oil and gas producing properties. For the past three fiscal years the
Company has financed its operations primarily from advances made to the
Company by Albert E. Whitehead, the Company's Chief Executive Officer.
Mr. Whitehead has no obligation to advance the Company any additional
money, and there is no assurance that he will do so. The Company will
not be able to continue operations unless it is able to obtain funding
from outside sources.
The report of the Company's independent auditor regarding the Company's
financial statements has been modified because of a going concern
uncertainty.
The Company reported losses of $6,496,614 and $244,168 for the years ending
December 31, 2002 and 2001, respectively. The Company also has an accumulated
deficit of $9,002,157 as of December 31, 2002. The Company can provide no
assurance that it will be profitable in the future and, if the Company does
not become profitable, it may have to suspend its operations. As a result of
the foregoing, the audit report of the Company's independent auditors relating
to the Company's financial statements has been modified because of a going
concern uncertainty.
The Company's success depends, in part, on its unevaluated leasehold interests
in Wyoming.
If the Company is able to raise the funds necessary to continue its
operations, its future performance will be affected by the development
results of its inventory of unproved drilling locations in Wyoming. The
failure of drilling activities to achieve anticipated quantities of
economically attractive reserves and production would have a material
adverse effect on the Company's liquidity, operations and financial results.
The Company could be adversely affected by fluctuations in oil and gas prices.
Even if the Company's drilling activities achieve commercial quantities of
economically attractive reserves and production revenue, the Company will
remain subject to prevailing prices for oil, natural gas and natural gas
liquids, which are dependent upon numerous factors such as weather, economic,
political and regulatory developments and competition from other sources of
energy. The volatile nature of the energy markets makes it particularly
difficult to estimate future prices of oil, natural gas and natural gas
liquids. Prices of oil, natural gas and natural gas liquids are subject to
wide fluctuations in response to relatively minor changes in circumstances,
and there can be no assurance that future prolonged decreases in such prices
will not occur. All of these factors are beyond the control of the Company.
Any significant decline in oil and gas prices could have a material adverse
effect on the Company's liquidity, operations and financial condition.
The Company could be adversely affected by increased costs of service
providers utilized by the Company.
In accordance with customary industry practice, the Company relies on
independent third party service providers to provide most of the services
necessary to drill new wells, including drilling rigs and related equipment and
services, horizontal drilling equipment and services, trucking services,
tubulars, fracing and completion services and production equipment. The
industry has experienced significant price increases for these services during
the last year and this trend is expected to continue into the future. These
cost increases could in the future significantly increase the Company's
development costs and decrease the return possible from drilling and
development activities, and possibly render the development of certain proved
undeveloped reserves uneconomical.
The Company is subject to numerous drilling and operating risks.
Oil and gas drilling activities are subject to numerous risks, many of which
are beyond the Company's control. The Company's operations may be curtailed,
delayed or canceled as a result of title problems, weather conditions,
compliance with governmental requirements, mechanical difficulties and
shortages or delays in the delivery of equipment. In addition, the Company's
properties may be susceptible to hydrocarbon drainage from production by
other operators on adjacent properties. Industry operating risks include the
risk of fire, explosions, blow-outs, pipe failure, abnormally pressured
formations and environmental hazards such as oil spills, gas leaks, ruptures
or discharges of toxic gases, the occurrence of any of which could result in
substantial losses to the Company due to injury or loss of life, severe
damage to or destruction of property, natural resources and equipment,
pollution or other environmental damage, clean-up responsibilities,
regulatory investigation and penalties and suspension of operations. The
Company anticipates that it will utilize horizontal drilling techniques.
The horizontal drilling activities involve greater risk of mechanical
problems than conventional vertical drilling operations.
The Company's insurance policies may not adequately protect the Company
against certain unforeseen risks.
In accordance with customary industry practice, the Company maintains insurance
against some, but not all, of the risks described herein. There can be no
assurance that any insurance will be adequate to cover the Company's losses or
liabilities. The Company cannot predict the continued availability of
insurance, or its availability at premium levels that justify its purchase.
The Company's activities are subject to extensive governmental regulation.
Oil and gas operations are subject to various federal, state and local
governmental regulations that may be changed from time to time in response to
economic or political conditions. From time to time, regulatory agencies have
imposed price controls and limitations on production in order to conserve
supplies of oil and gas. In addition, the production, handling, storage,
transportation and disposal of oil and gas, by-products thereof and other
substances and materials produced or used in connection with oil and gas
operations are subject to regulation under federal, state and local laws and
regulations primarily relating to protection of human health and the
environment. To date, expenditures related to complying with these laws and for
remediation of existing environmental contamination have not been significant
in relation to the results of operations of the Company. There can be no
assurance that the trend of more expansive and stricter environmental
legislation and regulations will not continue.
The Company is subject to various environmental risks, and governmental
regulation relating to environmental matters.
The Company is subject to a variety of federal, state and local governmental
laws and regulations related to the storage, use, discharge and disposal of
toxic, volatile or otherwise hazardous materials. These regulations subject the
Company to increased operating costs and potential liability associated with
the use and disposal of hazardous materials. Although these laws and
regulations have not had a material adverse effect on the Company's financial
condition or results of operations, there can be no assurance that the Company
will not be required to make material expenditures in the future. Moreover,
the Company anticipates that such laws and regulations will become
increasingly stringent in the future, which could lead to material costs for
environmental compliance and remediation by the Company. Any failure by the
Company to obtain required permits for, control the use of, or adequately
restrict the discharge of hazardous substances under present or future
regulations could subject the Company to substantial liability or could cause
its operations to be suspended. Such liability or suspension of operations
could have a material adverse effect on the Company's business, financial
condition and results of operations.
The Company is subject to intense competition.
The Company operates in a highly competitive environment and competes with
major and independent oil and gas companies for the acquisition of desirable
oil and gas properties, as well as for the equipment and labor required to
develop and operate such properties. Many of these competitors have financial
and other resources substantially greater than those of the Company.
The Company currently depends on the Company's Chief Executive Officer.
The Company is dependent on the experience, abilities and continued services
of its current Chief Executive Officer and President, Albert E. Whitehead.
Mr. Whitehead has played a significant role in the development and management
of the Company. The loss or reduction of services of Mr. Whitehead could have
a material adverse effect on the Company.
The Company's stock trades in a limited public market, is subject to price
volatility, and there can be no assurance that an active trading market will
be sustained.
There has been a limited public trading market for the Company's Common Stock,
and there can be no assurance that an active trading market will be sustained.
There can be no assurance that the Common Stock will trade at or above any
particular price in the public market, if at all. The trading price of the
Common Stock could be subject to significant fluctuations in response to
variations in quarterly operating results or even mild expressions of interest
on a given day. Accordingly, the Common Stock should be expected to experience
substantial price changes in short periods of time. Even if the Company is
performing according to its plan and there is no legitimate company-specific
financial basis for this volatility, it must still be expected that
substantial percentage price swings will occur in the Company's Common Stock
for the foreseeable future.
Certain restricted shares of the Company will be eligible for sale in the
future which could affect the prevailing market price of the Company's Common
Stock.
Certain of the outstanding shares of the Company's Common Stock are "restricted
securities" under Rule 144 of the Securities Act, and (except for shares
purchased by "affiliates" of the Company's as such term is defined in Rule 144)
would be eligible for sale as the applicable holding periods expire. In the
future, these shares may be sold only pursuant to a registration statement
under the Securities Act or an applicable exemption, including pursuant to
Rule 144. Under Rule 144, a person who has owned common stock for at least
one year may, under certain circumstances, sell within any three-month period
a number of shares of common stock that does not exceed the greater of 1% of the
then outstanding shares of common stock or the average weekly trading volume
during the four calendar weeks prior to such sale. A person who is not deemed
to have been an affiliate of the Company at any time during the three months
preceding a sale, and who has beneficially owned the restricted securities for
the last two years is entitled to sell all such shares without regard to the
volume limitations, current public information requirements, manner of sale
provisions and notice requirements. Sale or the expectation of sales of a
substantial number of shares of Common Stock in the public market by selling
stockholders could adversely affect the prevailing market price of the
Common Stock, possibly having a depressive effect on any trading market for
the Common Stock, and may impair the Company's ability to raise capital at
that time through additional sale of its equity securities.
The Company does not expect to declare or pay any dividends in the
foreseeable future.
The Company has not declared or paid any dividends on its Common Stock. The
Company currently intends to retain future earnings to fund the development
and growth of its businesses, to repay indebtedness and for general corporate
purposes, and therefore, does not anticipate paying any cash dividends or its
Common Stock in the foreseeable future.
The Company's Common Stock may be subject to secondary trading restrictions
related to penny stocks.
Certain transactions involving the purchase or sale of Common Stock of the
Company may be affected by a SEC rule for "penny stocks" that imposes
additional sales practice burdens and requirements upon broker-dealers that
purchase or sell such securities. For transactions covered by this penny
stock rule, broker-dealers must make certain disclosures to purchasers prior
to purchase or sale. Consequently, the penny stock rule may impede the ability
of broker-dealers to purchase or sell the Company's securities for their
customers and the ability of persons now owning or subsequently acquiring the
Company's securities to resell such securities.
The Company's principal shareholders own a significant amount of Common
Stock.
Albert E. Whitehead and his wife beneficially own approximately 40% of the
Company's Common Stock. As a result, by coordinating with other shareholders,
such as the former management of the Company, Mr. and Mrs. Whitehead may be
able to control the outcome of shareholder votes, including votes concerning
the election of directors, the adoption or amendment of provisions in the
Company's certificate of incorporation or bylaws and the approval of merger
and other significant corporate transactions. This concentrated ownership
makes it unlikely that any other holder or group of holders of Common Stock
will be able to affect the way the Company is managed or the direction of its
business. These factors may also delay or prevent a change in the management
or voting control of the Company.
Plan of Operation
The Company has no income producing oil and gas properties at December 31,
2002. An oil and gas test well (Timber Draw #1-AH) was drilled in January
2001 on the Cheyenne River Project. The Timber Draw #1-AH well encountered
flows of oil and natural gas during the drilling period and was subsequently
completed as an oil well. The well is shut-in pending evaluation to assess
its production and economic potential. The Company's diminutive revenues in
2001 are attributable to this well.
As of December 31, 2002, the Company had $5,454 of cash on hand.
The Company expects that its cash on hand and advances the Company
anticipates it will receive from its Chairman will be sufficient to fund
its operations for the next 3 months: however, there is no assurance that
such advances will be made. The Company's material commitments consist of a
lease payment on the Cheyenne River Project in April, 2003, of which the
Company's portion will be approximately $94,000. In addition, the Company
leases office space in Tulsa, Oklahoma from an unrelated party. The lease
calls for monthly lease payments of $3,893 through the end of the term of
the lease in June, 2003. The Company currently sublets part of its office
space on a month to month basis for approximately $1,000 per month. The
Company's former management(Messrs. McGrain and Jacobsen) entered into a
lease agreement for office space in Canada. This office was closed after
Messrs. McGrain and Jacobsen resigned as officers of the Company. However,
as of December 31, 2002, the Company was still a party to such lease
agreement, which calls for monthly lease and tax payments of approximately
$4,400 (U.S.) and expires in 2006. The Company has attempted but has not
been able to formally sublease this office space. No lease payment was made
in January, 2003 and the Company has been notified that the lease has been
terminated without prejudice to the landlord's right to hold the Company
liable for future damages related to lost rent.
Management plans to continue to support the Company financially during
the next several months. It will continue to seek partners to explore
its Cheyenne River Project, look for merger opportunities and consider
public or private financings.
ITEM 7. FINANCIAL STATEMENTS
The financial statements of the Company are set forth on pages F-1 through
F-13 at the end of this Form 10-KSB.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
KPMG LLP served as the principal accountants for Empire Petroleum
in connection with the audit of the Company's financial statements
for the fiscal year ended December 31, 2001. On August 23, 2002 that
firm's appointment as principal accountants was terminated and Magee
Rausch & Shelton, LLP Accounting Firm was engaged as principal
accountants. The decision to change accountants was approved by the
board of directors.
In connection with the audit of the fiscal year ended December 31, 2001,
and the subsequent interim period through August 23, 2002, there were no
disagreements with KPMG LLP on any matter of accounting principles or
practices, financial statement disclosure, or auditing scope or procedures,
which disagreements if not resolved to their satisfaction would have caused
them to make reference in connection with their opinion to the subject
matter of the disagreement.
The audit report of KPMG LLP on the financial statements of Empire Petroleum
Corporation as of and for the year ended December 31, 2001, was modified
because of a going concern uncertainty.
Magee Rausch & Shelton, LLP served as the principal accountant
for Empire Petroleum Corporation for the period from August 23,
2002 until February 12, 2003, when such accounting firm resigned
as Empire's principal accountant. On February 12, 2003, Tullius
Taylor Sartain & Sartain LLP was engaged to serve as Empire's
principal accountant. The decision to engage Tullius Taylor
Sartain & Sartain LLP was approved by Empire's board of directors.
Magee Rausch & Shelton also served as Empire's principal accountant
for the fiscal year 2000. In connection with Magee Rausch & Shelton's
engagement as Empire's principal accountant during the fiscal year ended
December 31, 2000 and during the interim period from August 23, 2002
through February 12, 2003, there were no disagreements with Magee Rausch &
Shelton, LLP on any matter of accounting principles or practices,
financial statement disclosure, or auditing scope or procedures, which
disagreements if not resolved to their satisfaction would have caused
them to make reference in connection with their opinion to the subject
matter of the disagreement.
Magee Rausch & Shelton did not issue any reports in connection with
their engagement as Empire's principal accountant for the period
from August 31, 2002 through February 12, 2003. The audit report of
Magee Rausch & Shelton relating to the financial statements of Empire
Petroleum Corporation as of and for the year ended December 31, 2000
did not contain any adverse opinion or disclaimer of opinion, nor were
they qualified or modified as to uncertainty, audit scope, or accounting
principals, except such audit report was modified because of a going
concern uncertainty.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL
PERSONS; COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
EXECUTIVE OFFICERS AND DIRECTORS
Term as Director
Name Age Position Expires
John P. McGrain 56 Chairman & C.E.O --
Thomas J. Jacobsen 68 President and Director --
Albert E. Whitehead 73 Director; Chairman & C.E.O 2003
Thomas R. Bradley 79 Director; President --
John C. Kinard 69 Director 2003
________________________________________
Mr. McGrain and Mr. Jacobsen were elected as directors and appointed as
officers, effective as of May 29, 2001 and resigned from such positions
on April 16, 2002. At such time, Messrs. Whitehead and Bradley were
re-elected to the board of directors, and were re-appointed as Chief
Executive Officer and President, respectfully.
John P. McGrain. Mr. McGrain served as Chairman and Chief Executive
Officer of the Company from May 2001 to April 16, 2002. He has served as
the Chairman of Enterra Energy Corporation (NASDAQ:ENTR) since April 2001,
Chairman and Chief Executive Officer of International Colin Energy
from 1991 to 1994, and Chairman and Chief Executive Officer of Conversion
Industries from 1984 to 1994. In 1997, Mr. McGrain filed for protection under
personal bankruptcy Chapter 11 and was discharged in 1998. Mr. McGrain
graduated from UCLA with a Bachelor of Arts degree in 1967.
Thomas J. Jacobsen. Mr. Jacobsen served as President of the Company from May
2001 to April 16, 2002. He has acted as the Chief Operating Officer and a
member of the Board of Directors of Enterra Energy Corporation (NASDAQ:ENTR)
since October 2000. Through his wholly owned company, Wells Gray Resort &
Resources Ltd., the Company granted him a consulting contract pursuant to
which Mr. Jacobsen was in charge of the Company's drilling, completion and
equipping projects. His more than 40 years of experience in the oil and gas
industry in Alberta and Saskatchewan, Canada includes serving as President
and Chief Executive Officer of Niaski Environmental Inc. from November, 1996
to February, 1999; President and Chief Executive Officer of International
Pedco Energy Corporation from September, 1993 to February, 1996, and
President of International Colin Energy Corporation from October, 1987 to
June, 1993. Mr. Jacobsen also currently serves as a director of Niaski
Environmental Inc., a company listed on the Canadian Venture Exchange.
Albert E. Whitehead. Mr. Whitehead served as Chairman of the Board and Chief
Executive Officer from March 1998 to May 2001, when John P. McGrain assumed
such roll. Mr. Whitehead again assumed the role of Chairman and Chief
Executive Officer April 16, 2002 upon the resignation of Mr. McGrain. Mr.
Whitehead served as the Chairman and Chief Executive Officer of Seven Seas
Petroleum Inc., a publicly held company, engaged in international oil
and gas exploration from February 1995 to May 1997. From April 1987 through
January 1995, Mr. Whitehead served as Chairman and Chief Executive Officer of
Garnet Resources Corporation, a publicly held oil and gas exploration and
development company.
Thomas R. Bradley. Mr. Bradley served as President of the Company from
December 1991 to May 2001, when such role was assumed by Thomas J. Jacobsen,
and as Executive Vice President from March 1985 to December 1991. Mr. Bradley
again assumed the position of President April 16, 2002 upon the resignation of
Mr. Jacobsen. Mr. Bradley served on the board of directors from March, 1985
until his death in December, 2002. Mr. Bradley was the owner of Bradley &
Associates Marketing, a sole proprietorship consulting firm providing domestic
and foreign sales and marketing management services to small manufacturers.
From January 1987 to March 1990, Mr. Bradley was also a partner in Capstone
Communications, an industrial advertising agency.
John C. Kinard. Mr. Kinard is currently a Partner in Silver Run Investments,
LLC, an oil and gas investment firm and has served as a Director of the
Company since June 1998. Mr. Kinard served as President of the Remuda
Corporation, a private oil and gas exploration company, from 1967 until 2002.
From 1990 through December 1995, Mr. Kinard served as President of Glen
Petroleum, Inc., a private oil and gas exploration company. From 1990-2002,
Mr. Kinard served as the Chairman of Envirosolutions UK Ltd., a private
industrial wastewater treatment company.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Security Exchange Act of 1934 requires the Company's
Directors, executive officers, and persons who beneficially own more than 10
percent of a registered class of the Company's equity securities, to file with
the Securities and Exchange Commission (the "SEC") initial reports of ownership
and reports of changes in ownership of Common Stock and other equity securities
of the Company. Officers, directors and greater than ten percent stockholders
are required by SEC regulation to furnish the Company with copies of all
Section 16(a) forms they file.
Based solely on review of the copies of such reports furnished to the Company
and any written representations that in other reports were required during
the year ended December 31, 2002, to the Company's knowledge, all Section 16(a)
filing requirements applicable to its officers, directors and greater than 10%
beneficial owners during the year ended December 31, 2002 were complied with on
a timely basis.
ITEM 10. EXECUTIVE COMPENSATION
EXECUTIVE COMPENSATION AND OTHER MATTERS
During the last three completed fiscal years no executive officer received a
salary or any other benefits as a part of executive compensation, except
for Mr. Bradley who received a base salary of $51,450 and $13,942 on fiscal
years 2001 and 1999 respectively. The following table sets forth compensation
paid to the Company's Chief Executive Officer during the last three fiscal
years:
Summary Compensation Table
Long-term compensation
awards
Name & principal Year Securities underlying
Position ended
Albert E. Whitehead(1) 2002 -
Chairman, Chief 2001 -
Executive Officer 2000 70,000
Compensation of Directors
The Company does not have any formal procedure for compensating the members
of its board of directors. From time to time in the past, the Company has
granted options to the members of its board of directors under its 1995
Stock Option Plan as compensation for serving on the board of directors.
No options were granted to the Company's directors in the years ended
December 31, 2001 and 2002.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information regarding the beneficial ownership
of our Common Stock as of March 31, 2003 for:
* each person who is known to own beneficially more than 5% of our
outstanding Common Stock;
* each of our executive officers and directors; and
* all executive officers and directors as a group.
The percentage of beneficial ownership for the following table is based on
35,830,190 shares of Common Stock outstanding as of March 21, 2003.
Unless otherwise indicated below, to the Company's knowledge, all persons and
entities listed below have sole voting and investment power over their shares
of Common Stock.
Amount and
nature of
beneficial Percent of
Name and address of beneficial owner ownership class (1)
John P. McGrain, 2,178,647 (3) 6.08%
Chairman of the Board and
Chief Executive Officer (2)
1363 N. Country Ranch Road
Westlake Village, CA 91361
Thomas J. Jacobsen, 1,660,418 (5) 4.63%
President and Director (4)
Box 176
Didsbury, Alberta T0M 0W0
Albert E. Whitehead, 14,338,025 (7) 39.86%
Chairman of the Board and
Chief Executive Officer (6)
2236 E. 55th Place
Tulsa, OK 74105-6124
Thomas R. Bradley Trust (8) 970,000 (9) 2.71%
6617 South New Haven
Tulsa, OK 74136
John C. Kinard, (10) 481,331 (10) 1.34%
Director
240 Cook Street
Denver, CO 80206-0590
All current directors and executive officers
as a group (2 persons) 14,819,356 (11) 41.00%
(1) The percentage ownership for each person is calculated in
accordance with the rules of the SEC, which provide that any shares a
person is deemed to beneficially own by virtue of having a right to acquire
shares upon the conversion of options or other rights are considered
outstanding solely for purposes of calculating such person's percentage
ownership.
(2) Mr. McGrain served as the Company's Chairman of the Board and
Chief Executive Officer from May 29, 2001 until he resigned on April 16, 2002.
(3) This number includes: (i) 1,966,838 shares directly owned by Mr.
McGrain; and (ii) 211,809 shares owned by Patrick Williams Advisors Ltd.,
which is controlled by Mr. McGrain.
(4) Mr. Jacobsen served as the Company's President and a member of
the board of directors from May 29, 2001 until he resigned on April 16, 2002.
(5) This number includes: (i) 659,733 shares directly owned by Mr.
Jacobsen; (ii) 382,896 shares of Common Stock held by Wells Gray Resort
and Resources Ltd., a company that is wholly-owned by Mr. Jacobsen; and (iii)
617,789 shares owned by Six Pack Investments, Inc., a company wholly-owned
by Mr. Jacobsen's children, but controlled by Mr. Jacobsen.
(6) After Mr. McGrain's resignation, Mr. Whitehead assumed the roles
of the Company's Chairman of the Board and Chief Executive Officer.
(7) This number includes: (i) 11,332,742 shares directly owned by the
Albert E. Whitehead Living Trust, of which Mr. Whitehead is the trustee; (ii)
170,000 shares that Mr. Whitehead has the right to acquire pursuant to options
granted to him under the 1995 Stock Option Plan; and (iii) 2,835,283 shares
directly owned by the Lacy E. Whitehead Living Trust, of which Ms. Whitehead,
Mr. Whitehead's wife, is trustee. Mr. Whitehead disclaims any interest in
the shares owned by the Lacy E. Whitehead Living Trust.
(8) Thomas R. Bradley served as the President of the Company for the
time of Mr. Jacobsen's resignation on April 16, 2002 until his death in
December, 2002.
(9) This number includes: (i) 533,334 shares directly owned by the
Thomas R. Bradley Trust; and (ii) 436,666 shares the Thomas R. Bradley Trust
has the right to acquire pursuant to options granted to Mr. Bradley under
the 1995 Stock Option Plan.
(10) This number includes: (i) 170,000 shares Mr. Kinard has the right
to acquire pursuant to options granted to him under the 1995 Stock Option
Plan; and (ii) 150,000 shares directly owned by Mr. Kinard's wife, of which
Mr. Kinard disclaims any interest.
(11) This number includes 340,000 shares issuable upon the exercise of
options granted under the 1995 Stock Option Plan.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Related Party Debt
On March 15, 2000, the Company issued a convertible promissory note due March
15, 2001 in the principal amount of $295,508 to the Albert E. Whitehead Living
Trust, bearing interest at the rate of 10% per annum and convertible into
shares of the Company's Common Stock at a conversion rate of $0.4370 per share,
which represented the market price of the Company's Common Stock on such date.
The convertible note was issued to the Albert E. Whitehead Living Trust in
consideration of the surrender of another note issued to the Albert E.
Whitehead Living Trust and the advancement of an additional $110,000 to the
Company by the Albert E. Whitehead Living Trust. The proceeds of this
additional loan were used to pay lease rentals on the Cheyenne River Project.
On March 1, 2001, Albert E. Whitehead, as trustee of the Albert E. Whitehead
Living Trust, exercised the right to convert this note to shares of the
Company's Common Stock and received 748,319 shares covering the principal and
interest due on this note at March 1, 2001. Mr. Whitehead requested that this
new share issue be divided equally between the Albert E. Whitehead Living Trust
and the Lacy E. Whitehead Living Trust. Lacy E. Whitehead is Mr. Whitehead's
spouse and Mr. Whitehead disclaims any interest in the shares owned by the Lacy
E. Whitehead Living Trust. On March 15, 2002, Mr. Whitehead loaned the Company
$170,000 in the form of a convertible note. The note accrued interest at the
rate of 10% per year, had a one year term and was convertible into shares of
Common Stock at $0.21 per share on February 14, 2003, as further described in
the section titled "Recent Sales of Unregistered Securities" under Item 5,
Market for Common Equity and Related Stockholder Matters. Also on February 14,
2003, shares of Common Stock of the Company were issued to the Lacy E. Whitehead
Living Trust as further described under the section titled "Recent Sales of
Unregistered Securities" under Item 5, Market for Common Equity and Related
Stockholder Matters.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit Description
No.
3.1 Articles of Incorporation of the Company, as amended
(incorporated herein by reference to Exhibit 3.1 of the Company's Form
10-QSB for the period ended September 30, 1995, (SEC File No. 0-20193)
which was filed November 6, 1995)
3.2 Bylaws of the Company
(incorporated herein by reference to Exhibit 3.2 of the Company's Form
10-QSB for the period ended March 31, 1998, which was filed May 15 1998)
10.1 1995 Stock Option Plan
(incorporated herein by reference to Appendix A of the Company's
Form DEFS 14A dated June 13, 1995, (SEC File No. 0-20193)
which was filed June 14, 1995)
10.2 Form of Stock Option Agreement
(incorporated herein by reference to Exhibit 10(g) of the Company's Form
10-KSB for the year ended December 31, 1995, (SEC File No. 0-20193)
which was filed March 29, 1996)
10.3 Americomm Cheyenne River Development Prospect Agreement dated March
4, 1998 by and among the Company, Fred S. Jensen, Richard A. Bate, A. R.
Briggs and Thomas L. Thompson
(incorporated herein by reference to Exhibit 10(j) of the Company's Form
10-QSB for the period ended June 30, 1998, which was filed August 12,
1998)
10.4 Promissory Note dated March 15, 2000 issued to the Albert E. Whitehead
Living Trust
(incorporated herein by reference to Exhibit 10.1 of the Company's Form
10-QSB/A for the period ended March 31, 2000, which was filed November
14, 2000)
10.5 Farmout Agreement dated November 15, 2000 by and among the Company and
the other parties named therein (incorporated hereby reference to
Exhibit 10(e) of the Company's Form 10-KSB for the year ended
December 31, 2000, which was filed March 29, 2001)
10.6 Share Exchange Agreement by and among Americomm Resources Corporation,
Empire Petroleum Corporation and each of the shareholders of Empire
Petroleum Corporation
(incorporated herein by reference to Exhibit 2.1 of the Company's Form
8-K dated May 29, 2001, which was filed June 5, 2001)
10.7 Promissory Note dated March 15, 2002 issued to the Albert E. Whitehead
Living Trust
99.1 Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
(b) Reports on Form 8-K
None.
ITEM 14. CONTROLS AND PROCEDURES
(a) Within 90 days prior to the date of this report, the Company's Chief
Executive Officer and principal financial officer carried out an evaluation
of the effectiveness of the design and operation of the Company's disclosure
controls and procedures pursuant to Exchange Act Rule 13a-14. Based on that
evaluation, the Chief Executive Officer and principal financial officer
concluded that the Company's disclosure controls and procedures are effective
in timely alerting them to material information relating to the Company
(including its consolidated subsidiaries) required to be included in the
Company's periodic SEC filings.
(b) Subsequent to the date of this evaluation, there have been no changes
in the Company's internal controls or in other factors that could significantly
affect these controls, and no discoveries of any significant deficiencies or
material weaknesses in such controls that would require the Company to take
corrective actions.
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the Registrant
caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
Empire Petroleum Corporation
(Registrant)
Date: April 15, 2003 By: /s/Albert E. Whitehead
Albert E. Whitehead
Chief Executive Officer
In accordance with the Exchange Act, 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 Title Date
/s/Albert E. Whitehead Chairman, Chief Executive Officer April 15, 2003
Albert E. Whitehead
/s/John C. Kinard Director April 15, 2003
John C. Kinard
SECTION 302 CERTIFICATION
I, Albert E. Whitehead, Chief Executive Officer and principal financial officer
of Empire Petroleum Corporation certify that:
1. I have reviewed this annul report on Form 10-KSB of Empire Petroleum
Corporation;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. I am responsible for establishing and maintaining disclosure controls
and procedures (as defined in Exchange Act Rules 11a-14 and 15d-14) for the
registrant and I have;
(a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to me by others within
those entities, particularly during the period in which this
annual report is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior
to the filing date of this annual report (the "Evaluation
Date"); and
(c) presented in this annual report of conclusions about the
effectiveness of the disclosure controls and procedures
based on my evaluation as the Evaluation Date;
5. I have disclosed, based on my recent evaluation, to the registrant's
auditors and the audit committee of registrant's board of directors (or persons
performing the equivalent function):
(a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial
data and have identified for the registrant's auditors any
material weaknesses in internal controls; and
(b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
I have indicated in this annual report whether or not there were
significant changes in internal controls or in other factors that could
significantly affect internal controls subsequent to the date of our most
recent evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Date: April 15, 2003 /s/ Albert E. Whitehead
Albert E. Whitehead,
Chief Executive Officer and
Principal Financial Officer
EMPIRE PETROLEUM CORPORATION
FINANCIAL STATEMENTS
CONTENTS
Page No.
December 31, 2001:
Independent Auditors' Report (Tullius Taylor
Sartain & Sartain LLP) F-1
Independent Auditors' Report (KPMG LLP) F-2
Balance Sheet at December 31, 2002 F-3
Statement of Operations for the years ended
December 31, 2002 and December 31, 2001 F-4
Statement of Changes in Stockholders' Equity
for the years ended December 31, 2002 and
December 31, 2001 F-5
Statement of Cash Flows for the years ended
December 31, 2002 and December 31, 2001 F-6
Notes to Financial Statements F-7 through F-13
EMPIRE PETROLEUM CORPORATION
FINANCIAL STATEMENTS
DECEMBER 31, 2002
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
Empire Petroleum Corporation
We have audited the accompanying balance sheet of Empire Petroleum
Corporation as of December 31, 2002, and the related statements of
operations, cash flows and stockholders' equity for the year then
ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion
on these financial statements based on our audit.
We conducted our audit in accordance auditing standards generally
accepted in the United States of America. 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.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of Empire
Petroleum Corporation as of December 31, 2002, and the results of its
operations and its cash flows for the year then ended in conformity
with accounting principles generally accepted in the United States
of America.
The accompanying financial statements have been prepared assuming that
the Company will continue as a going concern. As discussed in Note 1
to the financial statements, the Company has been incurring significant
losses and has a significant working capital deficiency at December
31, 2002. The Company also recognized an impairment charge of $6,496,614
on its oil and gas property in 2002. The ultimate recoverability of
the Company's investment in its oil and gas interests is dependent upon
the existence and discovery of economically recoverable oil and gas
reserves and the ability of the Company to obtain necessary financing to
further develop the interests. This condition raises substantial doubt
about its ability to continue as a going concern. Management's plan
concerning this matter is also described in Note 1. The financial
statements do not include any adjustments that might result from the
outcome of this uncertainty.
TULLIUS TAYLOR SARTAIN & SARTAIN LLP
March 24, 2003
F-1
EMPIRE PETROLEUM CORPORATION
FINANCIAL STATEMENTS
DECEMBER 31, 2002
INDEPENDENT AUDITORS' REPORT
To the Directors of
Empire Petroleum Corporation (formerly known as Americomm
Resources Corporation):
We have audited the statements of income, cash flows and changes in
stockholders' equity of Empire Petroleum Corporation (formerly known as
Americomm Resources Corporation) for the year ended December 31, 2001.
These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with United States generally accepted
auditing standards. Those standards require that we plan and perform an
audit to obtain reasonable assurance 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.
In our opinion, these financial statements referred to above present fairly, in
all material respects, the results of its operations and cash flows for the year
ended December 31, 2001 in conformity with United States generally accepted
accounting principles.
The accompanying financial statements have been prepared assuming that the
Company has a significant working capital deficiency and will continue as a
going concern. As discussed in a note to the financial statements, the company
has suffered recurring losses from operations, conditions that raise substantial
doubt about its ability to continue as a going concern. The financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.
KPMG LLP
Chartered Accountants
Calgary, Canada
March 18, 2002
F-2
EMPIRE PETROLEUM CORPORATION
BALANCE SHEET
ASSETS December 31,
2002
___________
Current assets:
Cash $ 5,454
Accounts receivable 2,533
Prepaid expenses 3,920
___________
Total current assets 11,906
___________
Property & equipment, net of accumulated
depreciation and depletion 600,025
___________
$ 611,931
___________
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
Current liabilities:
Accounts payable and accrued liabilities $ 486,564
Debenture payable 50,000
___________
Total current liabilities 536,564
___________
Notes payable-related party 170,000
___________
Total liabilities 706,564
___________
Stockholders' deficiency:
Common stock, at $.001 par value,
50,000,000 shares authorized,
24,459,906 shares issued and
outstanding 24,460
Additional paid in capital 7,633,064
Accumulated deficit (7,752,157)
___________
Total stockholders' deficiency (94,633)
___________
$ 611,931
___________
See accompanying notes to financial statements.
F-3
EMPIRE PETROLEUM CORPORATION
STATEMENTS OF OPERATIONS
Years ended December 31, 2002 and 2001
2002 2001
___________ ___________
Revenue:
Petroleum and natural gas sales $ - $ 12,410
Royalty expense - (2,482)
___________ ___________
- 9,928
___________ ___________
Costs and expenses:
Operating expenses 157,427 30,913
General and administrative 223,738 217,366
Depreciation and amortization 4,150 5,262
Leasehold impairment 6,496,614 -
___________ ___________
6,881,929 253,541
___________ ___________
Operating loss (6,881,929) (243,613)
___________ ___________
Other income and (expense):
Interest income - 6,918
Interest expense (62,676) (7,473)
Miscellaneous income 1,870 -
___________ __________
Total other income and expense (60,806) (555)
___________ __________
Net loss before income taxes (6,942,735) (244,168)
Deferred tax benefit (1,250,000) -
___________ __________
Net loss $(5,692,735) $ (244,168)
___________ __________
Net loss per common share $ ( 0.24) $ (0.01)
___________ __________
Weighted average number of
common shares outstanding -
Basic and diluted 23,896,824 20,405,078
___________ __________
See accompanying notes to financial statements
F-4
EMPIRE PETROLEUM CORPORATION
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Years ended December 31, 2002 and 2001
Additional
Paid in Accumulated
Shares Amount Capital deficit Total
__________ _______ __________ ___________ ___________
Balances January
1, 2000 14,879,721 $14,880 $2,365,528 $(1,815,254) $ 565,154
Net loss - - - (244,168) (244,168)
Issuance of Common
Stock 8,615,670 8,615 5,075,571 - 5,084,186
__________ _______ __________ ___________ ___________
Balances December
31, 2001 23,495,391 23,495 7,441,099 (2,059,422) 5,405,172
Net loss - - - (5,692,735) (5,692,735)
Issuance of Common
stock 964,515 965 191,965 - 192,930
__________ _______ __________ ___________ ___________
Balances December
31, 2002 24,459,906 $24,460 $7,633,064 $(7,752,157) $( 94,633)
__________ _______ __________ ___________ ___________
See accompanying notes to financial statements
F-5
EMPIRE PETROLEUM CORPORATION
STATEMENTS OF CASH FLOWS
Years ended December 31, 2002 and 2001
2002 2001
___________ ___________
Cash flows from operating activities:
Net loss $(5,692,735) $ (244,168)
Adjustments to reconcile net loss to
net cash used in operating activities:
Common stock issued for services 3,982 -
Depreciation 4,150 5,262
Leasehold impairment 6,496,614 -
Deferred tax benefit (1,250,000) -
Change in operating assets and
liabilities:
Accounts receivable 125,177 92,106
Prepaid expenses 1,403 1,754
Accounts payable and accrued
liabilities 108,621 148,334
___________ ___________
Net cash used in operating activities (202,788) 3,288
___________ ___________
Cash flows from investing activities:
Cash payments for investments in
prospects - (384,631)
Acquisition of Empire, net of cash
acquired - 136,691
Change in non-cash investing working
capital - (92,106)
___________ ___________
Net cash used in investing activities - (340,046)
___________ ___________
Cash flows from financing activities:
Issuance of common stock - 150,000
Proceeds from issuance of note payable -
related party 170,000 -
Debenture payables - affiliate - 212,000
____________ ___________
Net cash provided by financing
activities 170,000 362,000
____________ ___________
Net increase (decrease) in cash (32,788) 25,242
Cash - Beginning 38,242 13,000
____________ ___________
Cash - Ending $ 5,454 $ 38,242
____________ ___________
Supplemental cash flow information:
Cash paid for interest $ 14,644 $ 7,473
____________ ___________
Non-cash investing and financing
activities:
Conversion of debt and other
liabilities to Common Stock $ 188,949 $ -
____________ ___________
See accompanying notes to financial statements
F-6
EMPIRE PETROLEUM CORPORATION
NOTES TO CONSOLDIATED FINANCIAL STATEMENTS
DECEMBER 31, 2002 and 2001
General:
On July 20, 2001 Americomm Resources Corporation merged with its wholly-
owned subsidiary, Empire Petroleum Corporation, and simultaneously changed
the name of the Corporation to Empire Petroleum Corporation (the "Company").
Both the merger and name change were effective August 15, 2001. Americomm
Resources Corporation was originally incorporated in the State of Utah
on the 22nd day of August 1983, as Chambers Energy Corporation. On the 7th
day of March 1985, the state of incorporation was changed to Delaware by means
of a merger with Americomm Corporation, a Delaware corporation formed for the
purpose of effecting the said change. In July 1995, the Company changed its
name to Americomm Resources Corporation. The Company is involved in oil and
gas exploration.
1. Continuing operations:
The continuation of the Company is dependent upon the ability of the Company
to attain future profitable operations. These financial statements have been
prepared on the basis of United States generally accepted accounting
principles applicable to a company with continuing operations, which assume
that the Company will continue in operation for the foreseeable future and will
be able to realize its assets and discharge its obligations in the normal
course of operations. Management believes the going concern assumption to be
appropriate for these financial statements. If the going concern assumption
were not appropriate for these financial statements, then adjustments might be
necessary to the carrying value of assets and liabilities, reported expenses
and the balance sheet classifications used.
The Company continues to explore and develop its oil and gas interests. The
ultimate recoverability of the Company's investment in its oil and gas
interests is dependent upon the existence and discovery of economically
recoverable oil and gas reserves, confirmation of the Company's interest in
the oil and gas interests, the ability of the Company to obtain necessary
financing to further develop the interests, and upon the ability to attain
future profitable production. The Company has been incurring significant
losses in recent years and has a significant working capital deficiency as
of December 31, 2002. The Company also recognized an impairment charge of
$6,496,614 on its oil and gas property in 2002. See Note 9, Property and
Equipment.
The accompanying financial statements have been prepared on the basis of
United States generally accepted accounting principles applicable to a
company with continuing operations. Should the Company not be able to meet
the objectives described above and have continued operations, certain assets
and liability accounts would require adjustment and reclassification.
Management plans to continue to support the Company financially during
the next several months. It will continue to seek partners to explore
its Cheyenne River Project, look for merger opportunities and consider
public or private financings.
F-7
2. Significant accounting policies:
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the amounts reported in the financial statements and accompanying
notes. Actual results could differ from those estimates. The financial
statements have, in management' s opinion, been properly prepared using
careful judgment with reasonable limits of materiality and within the
framework of the significant policies summarized below:
(a) Capital assets:
The Company uses the successful efforts method of accounting for its oil and
gas activities. Costs incurred are deferred until exploration and completion
results are evaluated. At such time, costs of activities with economically
recoverable reserves are capitalized as proven properties, and costs of
unsuccessful or uneconomical development work are expensed.
(b) Future site restoration and abandonment costs:
Site restoration and abandonment costs are provided for over the life of the
estimated proven reserves on a unit-of-production basis. Costs are estimated
each year by management in consultation with the Company's engineers based on
current regulations, costs, technology and industry standards. The period
charge is expensed and actual site restoration and abandonment expenditures
are charged to the accumulated provision account as incurred.
(c) Per share amounts:
Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings Per
Share" requires presentation of basic earnings per share ("Basic EPS") and
diluted earnings per share ("Diluted EPS"). The computation of basic
earnings per share is computed by dividing earnings available to common
stockholders by the weighted average number of outstanding common shares
during the period. Diluted EPS gives effect to all dilutive potential
common shares outstanding during the period. The computation of diluted
EPS does not assume conversion, exercise or contingent exercise of
securities that would have an anti-dilutive effect on losses.
(d) Income taxes:
The Company accounts for income taxes in accordance with the asset and
liability method of accounting for income taxes set forth in SFAS No. 109,
"Accounting for Income Taxes". Under the asset and liability method of
SFAS 109, deferred tax assets and liabilities are recognized for the future
tax consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and operating loss and tax credit carry forwards. Deferred tax assets
and liabilities are measured using enacted tax rates expected to apply to the
taxable income in the years in which those temporary differences are expected
to be recovered or settled. Under SFAS 109, the effect on deferred tax
assets and liabilities of a change in tax rates is recognized in income in
the period that includes the enactment date.
(e) Financial instruments:
The carrying value of current assets and current liabilities approximate their
fair value due to the relatively short period to maturity of the instruments.
F-8
(f) Stock option plan:
The Company has a stock option plan that is described in note 5 and uses the
intrinsic value method of accounting for stock-based compensation in accordance
with Accounting Principles Board Opinion ("APB") No. 25. When stock options
are granted, no compensation expense is recorded. Consideration received on
the exercise of the stock options is credited to additional paid in capital.
(g) New accounting standards
The Financial Accounting Standards Board ("FASB") periodically issues new
accounting standards in a continuing effort to improve standards of financial
accounting and reporting. Management has reviewed the recently issued
pronouncements and concluded that the following new accounting standards are
potentially applicable to the Company.
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement
Obligations." SFAS No. 143 requires major changes in the accounting for
asset retirement obligations, such as required decommissioning of oil and
gas production platforms, facilities and pipelines. SFAS No. 143 requires
entities to record the fair value of a liability for an asset retirement
obligation in the period when it is incurred (typically when the asset is
installed at the production location). When the liability is initially
recorded, the entity capitalizes the cost by increasing the carrying amount
of the related property, plant and equipment. Over time, the liability is
accreted for the change in its present value each period, and the initial
capitalized cost is depreciated over the useful life of the related asset.
SFAS No. 143 is effective January 1, 2003. Upon adoption of SFAS No. 143,
these asset retirement obligations are required to be recorded, significantly
increasing asset retirement liabilities on the balance sheet with an
offsetting increase to properties, plant and equipment. Management has
not yet determined the impact of SFAS No. 143 on its financial statements.
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements
No. 4, 44, and 64, amendment of FASB Statement No. 13, and Technical
Corrections". SFAS No. 145 rescinds SFAS No. 4, which required all gains and
losses from extinguishment of debt to be aggregated and, if material, classified
as an extraordinary item. As a result, the criteria in APB Opinion No. 30 will
now be used to classify those gains and losses. SFAS No. 64 amended SFAS No. 4,
and is no longer necessary because SFAS No. 4 has been rescinded. SFAS No. 44
was issued to establish accounting requirements for the effects of transition to
the provisions of the Motor Carrier Act of 1980. Because the transition has
been completed, SFAS No. 44 is no longer necessary. SFAS No. 145 amends SFAS
No. 13 to require that certain lease modifications that have economic effects
similar to sale-leaseback transactions be accounted for in the same manner as
sale-leaseback transactions. SFAS No. 145 also makes technical corrections to
other existing pronouncements. The provisions of SFAS No. 145 are generally
applicable for fiscal years beginning or transactions occurring after May 15,
2002. The Company does not expect a material impact from the adoption of SFAS
No. 145 on its financial statements.
In June 2002, the FASB voted in favor of issuing SFAS No. 146, "Accounting
for Exit or Disposal Activities." SFAS No. 146 addresses significant issues
regarding the recognition, measurement, and reporting of costs that are
associated with exit and disposal activities, including restructuring activities
that are currently accounted for pursuant to the guidance that the Emerging
Issues Task Force ("EITF") has set forth in EITF Issue No. 94-3, "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit
F-9
an Activity (including Certain Costs Incurred in a Restructuring)". The scope
of SFAS No. 146 also includes (1) costs related to terminating a contract that
is not a capital lease and (2) termination benefits that employees who are
involuntarily terminated receive under the terms of a one-time benefit
arrangement that is not an ongoing benefit arrangement or an individual
deferred-compensation contract. The Company will be required to adopt SFAS
No, 146 for exit or disposal activities initiated after December 31, 2002.
The Company does not expect a material impact from the adoption of SFAS No.
146 on its financial statements.
3. Empire Petroleum Corporation acquisition:
On May 29, 2001 the Company acquired Empire Petroleum Corporation ("Empire"),
a private company that owns a 25% interest in the Cheyenne River Prospect,
increasing the Company's working interest in the Cheyenne River Wyoming
Prospect to 75%. The acquisition of Empire was accomplished by the issuance
of 7,492,351 common shares or 30.6% of the total 24,476,925 shares outstanding
at the time of acquisition on a fully diluted basis. The Company's shares
issued were valued at $0.55 each for this transaction. The results of
operations of Empire were included in the Company's financial statements
effective May 29, 2001. The acquisition was accounted for using the purchase
method of accounting as follows:
Value of shares issued $ 4,120,793
___________
Current assets 347,762
Investments 206,250
Current liabilities (607,182)
Deferred taxes (1,250,000)
Petroleum and natural gas properties 5,423,963
___________
$ 4,120,793
___________
4. Debentures payable:
On June 4, 2001 the Company received proceeds from two notes payable in
the amount of $116,000 and signed a debenture note payable from an
affiliated person for a further $66,000. These notes were unsecured and
bear interest at 12% per year, with interest payable monthly. They were
due and payable by the corporation on June 4, 2002 including a 3% premium
on the principal amounts due.
On August 23, 2001 the Company received proceeds of a long-term note payable
in the amount of $30,000. The note was unsecured and bore interest at 1% per
month and was convertible, at the note holder's option, into a .5% working
interest in the Timber Draw project.
In May 2002, two of the above notes and the accrued interest, together
totaling $176,666 were converted to 903,231 shares of Company common stock
at a price of $.20 per share. In addition, the Company paid the note holders
$3,982 in consulting services for a total consideration of $180,646. The
third note was converted to common stock subsequent to December 31, 2002.
See Note 10, Subsequent Events.
In addition, the Company issued 61,284 shares of Company Common Stock as
payment for accounts payable of $12,283.
F-10
5. Stock options:
Under a stock option plan adopted in 1995, the Company may grant options for
up to 1,600,000 shares of common stock. The compensation committee of the
Board of Directors has sole discretion for the granting of the options.
Stock options granted under the plan expire ten years from the date of grant
plus 30 days. The exercise price of the options is the fair market value on
the date of grant.
The following table summarizes information about stock options outstanding
at December 31, 2002:
Options Outstanding Options Exercisable
_________________________________________________________________
Weighted
Average Weighted Weighted
Range of Number Remaining Average Number Average
Exercise Outstanding Contractual Exercise Exercisable Exercise
Prices at 12/31/02 Life Price at 12/31/02 Price
____________________________________________________________________________
$0.437-$1.375 981,666 5.47 Years $0.89 981,666 $0.89
There were no options granted during the years ended December 31, 2002 and 2001.
6. Income taxes:
The provision for income taxes differs from the amount obtained by applying
the Federal income tax rate of 34% to income before income taxes. The
difference relates to the following items:
Statutory tax rate 34%
___________
Expected recovery $(2,361,000)
Benefit of losses not recognized 1,111,000
___________
Tax provision (benefit) as reported $(1,250,000)
___________
The components of deferred income taxes at December 31, 2002 are as
follows:
Deferred tax assets:
Loss carry-forwards $ 488,000
Valuation allowance (201,000)
___________
287,000
Deferred tax liabilities:
Property and equipment 287,000
___________
Net deferred taxes $ -
___________
A deferred tax benefit of $1,250,000 results from reversal of the temporary
differences between the Company's book and tax bases for property and
equipment as a result of the leasehold impairment.
F-11
7. Related party transactions:
On March 15, 2002, Mr. Whitehead loaned the Company $170,000 in the form of
a convertible note. The note accrues interest at the rate of 10% per year,
has a one year term and is convertible into Company common shares at $0.21
per share. On February 14, 2003, this note was converted into Common Stock
of the Company. Mr. Whitehead also paid $245,181 of operating expenses on
behalf of the Company which the Company has recorded in accounts payable
in the accompanying balance sheet. See Note 10, Subsequent Events.
8. Operating lease:
The Company leases office space under operating lease agreements with
unrelated parties, which will expire in 2003 and 2006.
The future minimum lease payments under the operating leases are as
follows:
2003 $ 52,697
2004 28,421
2005 28,421
2006 9,473
________
$119,012
Rent expense for the years ended December 31, 2002 and 2001, respectively,
was $41,913 and $59,184.
Since December, 2002, the Company has not paid the monthly lease and tax
Payments of approximately $4,400 (U.S.) on the Canadian office lease. The
Company has been notified that the lease has been terminated without
prejudice to the landlord's right to hold the Company liable for future
damages related to lost rent.
9. Property and equipment:
The Company's management determined that an impairment allowance of $6,496,614
was necessary to properly value the Company's oil and gas properties bringing
the net book value of the oil and gas properties to $594,915. The basis for
the impairment was the determination by the United States Bureau of Land
Management ("BLM") that it does not consider the Timber Draw #1-AH well
economic. In other words, under the BLM's criteria for economic
determination, the well will not pay out the cost incurred to drill and
complete the well. The Timber Draw #1-AH was completed as an oil well.
However, it continues to be shut-in while being evaluated to assess its
production and economic potential. The BLM also advised the Company that
since it did not commence another test well prior to August 12, 2002, the
Timber Draw Unit had been terminated. Furthermore, a bottom hole pressure
survey conducted in April, 2002 indicated a limited reservoir for the well.
The value was calculated using an estimated $10 per acre market price for the
leases multiplied by the Company's working interest.
The Company's other property and equipment, totaling $20,086 at December 31,
2002, consists entirely of office furniture, fixtures and equipment with
accumulated depreciation of $14,977.
10. Subsequent Events:
On February 14, 2003, the Albert E. Whitehead Living Trust (the "Trust")
converted the $170,000 note payable plus interest to 874,071 shares at $0.21
per share. The Trust also received 7,966,244 shares for cancellation of debt
F-12
owed by the Company to the Trust in connection with advances made to the
Company by the Trust, using a conversion rate of $0.03 per share. C. A.
White Wireline Services also converted $16,854 owed by the Company in
connection with well costs related to the Timber Draw #1-AH well. C.A.
White Wireline Services received 561,797 shares at a conversion price of
$0.03 per share. This exchange proposal was made to all creditors.
F-13
EXHIBIT 99.1
CERTIFICATION PURSUANT TO 18 U.S.C. 1350,
AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report on Form 10-KSB for the year ended
December 31, 2002 (the "Report") of Empire Petroleum Corporation (the
"Registrant"), as filed with the Securities and Exchange Commission on the
date hereof, I, Albert E. Whitehead, the Chief Executive Officer and the
Chief Financial Officer of the Registrant certify, to the best of my
knowledge, information and belief, that:
(1) The Report fully complies with the requirements of Section 13(a)
or 15(d) of the Securities Exchange Act of 1934, as amended; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations
of the Registrant.
/s/ Albert E. Whitehead
-----------------------------------
Name: Albert E. Whitehead
Date: April 15, 2003