SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-----------
FORM 10-QSB
(Mark One)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Quarterly period ended November 30, 1997
---------------------------
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _______________ to _____________________
Commission file number _______________________0-25660
HALSTEAD ENERGY CORP.
(Exact Name of Small Business Issuer as Specified in Its Charter)
NEVADA 87-044639
(State of Other Jurisdiction of
Incorporation or Organization)
33 Hubbells Drive, Mt. Kisco, New York 10549
(Address of principal Executive Offices)
914-666-3200
(Issuer's Telephone Number, Including Area Code)
N/A
(Former Name, Former Address and Former Fiscal Year, if Changed Since
Last Report)
Check whether the issuer: (1) filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12
months (or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days.
Yes ___X___ No _______
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDING
DURING THE PRECEDING FIVE YEARS:
Check whether the registrant has filed all documents and reports
required to be filed by Section 12, 13 or 15(d) of the Securities Exchange Act
of 1934 after the distribution of securities under a plan confirmed by a court.
Yes _______ No _______
APPLICABLE ONLY TO CORPORATE ISSUERS:
As of January 15, 1998, the issuer has 4,518,601 shares of its Common
Stock outstanding.
<PAGE>
INDEX PAGE(S)
PART 1. FINANCIAL INFORMATION
ITEM 1. Financial Statements
Consolidated Balance Sheet as of
November 30, 1997 (unaudited)................ F-2 -F-3
Consolidated Statements of Operations for the three
months ended November 30, 1997 and 1996
(unaudited)..................................... F-4
Consolidated Statement of Stockholder's Equity for
the years ended August 31, 1996 and 1997, and
for the three months ended November 30, 1997
(unaudited)..................................... F-5 - F-6
Consolidated Statement of Cash Flows for the three
months ended November 30, 1997 and 1996
(unaudited)...................................... F-7
Notes to the Consolidated Financial Statements.... F-8 - F-9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OR PLAN OF OPERATION F-10 - F-15
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings F-16
Signature Pages F-17
F-1
<PAGE>
HALSTEAD ENERGY CORP. AND SUBSIDIARIES
Consolidated Balance Sheet
November 30, 1997
(Unaudited)
<TABLE>
A S S E T S
-----------
<CAPTION>
CURRENT ASSETS
<S> <C>
Cash................................................. $ 61,229
Accounts Receivable - Trade, Net of Allowance
for Doubtful Accounts of $110,000.................. 1,157,233
Inventories.......................................... 202,032
Note Receivable...................................... 230,000
Note Receivable - Related Party...................... 590,959
Stock Subscription Receivable........................ 88,150
Prepaid Expenses and Other Current Assets............ 627,761
Deferred Tax Asset................................... 45,000
-----------
TOTAL CURRENT ASSETS.......................... 3,002,364
PROPERTY PLANT AND EQUIPMENT - NET
Land................................................. 942,500
Property Plant and Equipment..................... 11,093,022
TOTAL PROPERTY PLANT AND EQUIPMENT............ 12,035,522
OTHER ASSETS
Deferred Tax Asset............................... 337,000
Notes Receivable - Net of Current Portion........ 359,767
Intangible Assets - Net.......................... 1,421,544
Deposits......................................... 2,045
---------
TOTAL OTHER ASSETS............................ 2,120,356
TOTAL ASSETS.................................. $ 17,158,242
<FN>
See selected notes to financial statements
</FN>
</TABLE>
F-2
<PAGE>
HALSTEAD ENERGY CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
November 30, 1997
(Unaudited)
<TABLE>
LIABILITIES And STOCKHOLDERS' EQUITY
------------------------------------
<CAPTION>
<S> <C>
CURRENT LIABILITIES
Cash Overdraft........................................ $ 95,369
Accounts Payable Trade................................ 1,910,773
Notes ................................................ 500,000
Current Portion of Long-Term Debt..................... 450,230
Deferred Revenue ..................................... 530,087
Accrued Expenses and Other Current Liabilities........ 442,605
------------
TOTAL CURRENT LIABILITIES.................... 3,929,064
Long-Term Debt - Net of Current Portion.................... 3,619,410
Security Deposits Payable.................................. 229,595
Due to Related Parties..................................... 383,354
------------
TOTAL LONG-TERM LIABILITIES.................. 4,232,359
Preferred Stock, $.001 Par Value, 168,020 Shares
Authorized-Series A 7.5% Cumulative Convertible
Redeemable 168,020 Shares Issued and Outstanding
($1,008,120 aggregate liquidation preference)..... 168
Paid In Capital: Preferred................................. 1,064,001
------------
1,064,169
STOCKHOLDERS' EQUITY
Preferred Stock, $.001 Par Value, 5,000,000 Shares
580,646 Shares Authorized-Series B
12.0% Cumulative Convertible Redeemable 560,125
Shares Issued and Outstanding
($4,340,969 aggregate liquidation preference).... 560
Common Stock, $00.1 Par Value, 50,000,000 Shares
Authorized, 4,518,601 Issued and Outstanding..... 4,519
Paid in Capital: Preferred....................... 3,638,004
Common.......................... 5,936,615
Accumulated Deficit.............................. (1,547,048)
Subscription Receivable.......................... (100,000)
-----------
TOTAL STOCKHOLDERS' EQUITY 7,932,650
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $17,158,242
===========
<FN>
See selected notes to financial statements
</FN>
</TABLE>
F-3
<PAGE>
HALSTEAD ENERGY CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
Three Months Ended
November 30
(Unaudited)
<CAPTION>
1997 1996
---- ----
<S> <C>
Sales............................................. $3,981,764 $4,768,434
Sales............................................. 3,008,587 3,753,450
GROSS PROFIT...................................... 973,167 1,014,984
Selling, General and Administrative Expenses...... 776,567 763,822
Management Fee, Related Party .................... 90,000 90,000
Net Rental Income................................. (154,767) (139,827)
Royalty Fee ...................................... 0 25,203
Depreciation & Amortization....................... 278,680 186,320
TOTAL OPERATING EXPENSES 990,480 925,518
------- -------
INCOME (LOSS) FROM OPERATIONS................. (17,313) 89,466
OTHER INCOME (EXPENSES)
Interest Income............................ 11,577 72,795
Interest Expense........................... (181,841) (88,896)
Other Income............................... 1,223 0
NET OTHER EXPENSES (169,041) (16,101)
INCOME (LOSS) BEFORE INCOME TAX EXPENSE (186,354) 73,365
INCOME TAX EXPENSE 0 13,753
Net Income (Loss) (186,354) 59,612
Preferred Stock Dividends (573,773) (198,639)
Net Loss Applicable to Common Shares $ (760,127) $ (138,847)
======= =======
Net Loss Per Share............................... ($.18) ($.04)
======= =======
Weighted Average Number of Common
Shares Outstanding............................. 4,308,601 3,752,082
========= =========
<FN>
See notes to selected financial statements
</FN>
</TABLE>
F-4
<PAGE>
HALSTEAD ENERGY CORP.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
RETAINED
PREFERRED STOCK COMMON STOCK EARNINGS STOCK
$.001 PAR VALUE .001 PAR VALUE PAID IN (ACCUMULATED SUB. TOTAL
ISSUED AMOUNT ISSUED AMOUNT CAPITAL DEFICIT) REC. EQUITY
--------------- ------------- ------- ------------ ------ ------
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at
August 31,
1996
(as restated
in 1997)
Note 2) $572,246 572 $3,491,340 $3,492 $9,172,925 $5,320,634 0 $14,497,623
Private
Placement
Costs 0 0 0 0 (5,151) 0 0 (5,151)
Cash
Dividends
Declared
Preferred
Series A 0 0 0 0 0 (75,610) 0 (75,610)
Cash
Dividends
Declared:
Preferred,
Series B 0 0 0 0 0 ( 1,471) 0 (1,471)
Common
Shares
Issued to
Employees 0 0 15,000 15 8,560 0 0 8,575
Common
Shares
issued for
acquisition on of
customer
list 0 0 200,000 200 249,800 0 0 250,000
Conversion
of Preferred Shares
and Unpaid
Dividend to
Common
Shares (5,161) (5) 162,261 162 1,314 0 0 1,471
Common
Shares
issued to
employees 0 0 200,000 200 99,800 0(100,000) 0
Common Shares
issued on
Conversion of
Options 0 0 50,000 50 15,950 0 0 16,000
Net (Loss)
August 31,
1997 0 0 0 0 0 6,117,531) $ 0(6,117,531)
----- ------ ------ ----- ------ --------- --- ---------
Balance
at August 31,
1997 567,085 $567 4,118,601 $4,119 $9,543,198($873,978)($100,000)$8,573,906
</TABLE>
F-5
<PAGE>
HALSTEAD ENERGY CORP.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
RETAINED
PREFERRED STOCK COMMON STOCK EARNINGS STOCK
$.001 PAR VALUE .001 PAR VALUE PAID IN (ACCUMULATED SUB. TOTAL
ISSUED AMOUNT ISSUED AMOUNT CAPITAL DEFICIT) REC. EQUITY
--------------- ------------- ------- ------------ ------ ------
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Cash Dividends
Declared:
Preferred
Series A 0 $ 0 0 $ 0 0 $ ($18,902) $ 0 ($18,902)
Cash Dividends
Declared:
Preferred
Series B 0 0 0 0 0 (467,814) 0 (467,814)
Common Shares
Issued on
Conversion of
Options 0 0 400,000 400 163,600 0 0 164,000
Restructuring of
Series B Preferred
and Conversion
of Debt (6,960) (7) 0 0 (53,927) 0 0 (53,934)
Cost of
Restructuring
Series B
Preferred 0 0 0 0 (78,252) 0 0 (78,252)
Net (Loss) -
November 30,
1997 0 0 0 0 0 (186,354) 0 (186,354)
---- ----- ----- ---- ---- ------- ---- --------
Balances at
November 30,
1997 560,125 560 4,518,601 4,519 $9,574,619($1,547,048)($100,000)$7,932,650
======= === ========= ===== ========= ========== ======== =========
</TABLE>
F-6
<PAGE>
HALSTEAD ENERGY CORP.
CONSOLIDATED STATEMENTS OF CASH FLOW
(Unaudited)
Three Months Ended
November 30,
<TABLE>
1997 1996
---- ----
<S> <C> <C>
Cash flows from Operating Activities:
Net Income (Loss)....................... ($186,354) $ 59,792
Adjustments to Reconcile Net Income (Loss)
to Net Cash provided by Operating Activities:
Depreciation & Amortization............ 278,680 211,523
Changes in Operating Assets and Liabilities:
Accounts Receivable....................... (108,769) (474,049)
Inventory................................... (33,102) (937,295)
Prepaid Expenses and other Current Assets... (33,940) (95,384)
Accounts Payable, Accrued Expenses and Other
Current Liabilities....................... 187,023 431,133
Deferred Revenue............................ (145,059) 113,898
Income Tax Payable.......................... 0 6,408
-------- ---------
Net Cash Used by Operating Activities...... (41,521) (683,974)
Cash Flows From Investing Activities:
Intangible Assets........................... 0 (487,500)
Proceeds From Capital Contribution.......... 0 (11,158)
Acquisition of Property and Equipment...... (81,605) (765,427)
Advances to ATI............................. (1,256,595) (16,757)
Repayment of Notes Receivable ATI.......... 1,244,484 0
Security Deposits Payable................... (8,211) 0
--------- -------
Net Cash Used In Investing Activities...... (101,927) (1,280,842)
Cash Flows From Financing Activities:
Increase (Decrease) in Cash Overdraft....... (3,106) 0
Net Proceeds from the Issuance of Common Stock (56,336) 0
Proceeds from Long Term Debt Borrowings..... 696,734 197,709
Net Borrowing from Related Parties.......... 118,532 0
Repayment of Long Term Debt................ (109,200) (86,289)
Repayment of Stockholder's Loan............ (18,526) 0
Preferred Stock Dividends................... (486,716) (20,374)
Net Cash Provided by Financing Activities 141,382 91,046
Net Decrease in Cash and Cash Equivalents... (2,066) (1,873,770)
Cash and Cash Equivalents at Beginning of Year 63,295 2,061,474
Cash and Cash Equivalents at End of year..... $ 61,229 $ 187,704
-------- ---------
Supplement Disclosure - Cash Paid During the Period For:
Interest Expense............................. $181,841 $ 88,896
Income Taxes................................. $ 0 $ 0
Acquisition of Property & Equipment......... $ 3,106 $320,427
Acquisition of Land.......................... $ 48,500 $ 0
Supplemental Schedule of Non-Cash Investing and
Financing Activities:
Acquisition of Leaseholds in Exchange
for Repayment of Note Receivable ATI......... 0 $965,000
Acquisition of Customer List in Exchange for
Common Stock............................... $ 0 $250,000
Acquisition of Equipment in Exchange for
Note Payable............................... $ 0 $387,500
Preferred Stock Issued in Exchange for
Unpaid Dividends........................... $546,066 $ 0
Conversion of Preferred Stock to Long-Term
Debt....................................... $600,000 $ 0
</TABLE>
F-7
<PAGE>
Selected Notes to the Financial Statements
Three Months Ended November 30, 1997
(1) Summary of Significant Accounting Policies:
The accompanying condensed financial statements are not audited for the
interim period, but include all adjustments (consisting of only normal recurring
accruals) which management considers necessary for the fair representation of
results at November 30, 1997.
Moreover, these financial statements do not purport to contain complete
disclosures in conformity with generally accepted accounting principles and
should be read in conjunction with the Company's audited financial statements
at, and for the fiscal year ended, August 31, 1997 contained in the Company's
Annual Report on Form 10-KSB dated February 2, 1998.
The results reflected for the three month period ended November 30,
1997 are not necessarily indicative of the results for the entire fiscal year
ending August 31, 1998.
(2) Options and Warrants:
The following table sets forth the options and warrants of the Company
as of November 30, 1997:
Amount Term Issue Date Exercise Price ($)
297,125 5 yrs. 03/05/96 40% of market
10,000 5 yrs. 11/04/96 .3125
15,000 5 yrs. 11/05/96 1.000
1,200,000 5 yrs. 11/14/96 .3125
225,000 5 yrs. 01/10/97 .3125
90,000 5 yrs. 02/18/97 .3125
209,000 5 yrs. 08/12/97 .6300
(3) Computation of Net Income (Loss) Per Common Share Due to the net loss to the
common stock shareholders, the effect of including common stock equivalents
would be anti-dilutive. Therefore, there are no potentially dilutive securities.
F-8
Selected Notes To Financial Statements
Three Months Ended November 30, 1997
(4) Note Receivable - Related Party:
On June 10, 1997, A. Tarricone, Inc. ("ATI"), the former parent of the
Company's operating subsidiaries and divisions (ATI is wholly-owned by Claire E.
Tarricone, Anthony J. Tarricone, and Joseph A. Tarricone, the Company's
directors and principal executive officers), filed a voluntary petition for
reorganization pursuant to Chapter 11 of the Bankruptcy Code (the "Code"). ATI
has continued in possession of its property and in the management of its affairs
as a debtor-in-possession under the applicable provisions of the Code. In
connection with the bankruptcy proceeding, the Company has asserted (and ATI has
acknowledged) pre-petition claims arising under a receivable from ATI in the
amount of $3,877,563 and pre-petition liens on certain leasehold interests. The
proceeding is before the United States Bankruptcy Court, Southern District of
New York, and is referred as "A. TARRICONE, INC., 97B21488." The Company has
determined that its asserted pre-petition liens may not have been properly
"perfected," in which case the Company would be deemed an unsecured creditor
(rather than a secured creditor) in the proceeding. If it were ultimately
determined by the court that the Company's status in the proceeding is that of
an unsecured creditor, the Company's legal basis for recovery would be
materially, adversely affected. The Company is pursuing all appropriate avenues
to protect its interest in this regard. However, there can be no assurance that
the indebtedness and the liens asserted by the Company in this proceeding will
be recognized or given full effect, that the same will not be challenged,
modified or reduced, that all or any portion of such indebtedness will be repaid
to the Company or that the Company will otherwise be successful in protecting
its interests. In this regard, management has elected to write-off, and has
taken as a charge against earnings as a bad debt expense, the entire amount of
the receivable due from ATI at June 10, 1997, i.e., $3,877,563. Additionally,
all executory contracts between ATI and the Company are susceptible to
rejection, at the election of ATI, under the applicable provisions of the Code.
Furthermore, any transfers from ATI to the Company on account of antecedent debt
(of ATI to the Company) during the one year period prior to the date of filing
of ATI's voluntary petition may be subject to avoidance under the applicable
provisions of the Code. The occurrence of any such circumstances may have a
material adverse effect on the Company.
F-9
Item 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF
OPERATION
Results of Operations
Three Months Ended November 30, 1997
Revenues for the three months ended November 30, 1997, decreased by
$786,680 to $3,981,754 from $4,768,434 for the three months ended November 30,
1996. The decrease is primarily due to lost home heating oil sales revenue
resulting from the sale of the Rockland Fuel Oil customer list of approximately
$419,100. Commercial gasoline sales declined by $241,600 as a result of
competitive market pricing. In addition, thruput income declined by
approximately $94,900.
Cost of sales for the three months ended November 30, 1997 decreased by
$744,863 to $3,008,587 from $3,753,450 for the three months ended November 30,
1996. This decrease is due to lower product purchases of home heating oil of
$298,200 and gasoline of approximately $495,800 due to the sale of the Rockland
Fuel Oil customer list and a decrease in commercial account deliveries. These
cost decreases were partially offset by an increase in all other purchases of
approximately $49,100 as compared to the same period last year. The percentage
of cost of goods to sales for the three months ended November 30, 1997 and 1996
are 75.6% and 78.7% respectively. The decrease is primarily due to increased
gross profit from retail gasoline and propane sales.
Selling, General and Administrative Expenses for the three months ended
November 30, 1997 increased by $12,745 to $776,567 from $763,822 for the three
months ended November 30, 1996. The increase is primarily due to increased
salaries of $71,440, increased equipment leases of $36,881, increased telephone,
uniform and selling expenses of $54,877, increased real estate taxes of $2,651,
which increases total $165,849. These increased costs were mainly offset by
decreases in maintainence and repair and vehicle expense totaling $20,413,
decreases in professional fees of $59,025, decreases in insurance of $36,119 and
all other decreases totaling $37,547. All such decreases total $153,104 as
compared to the same period last year.
Interest income for the three months ended November 30, 1997 decreased
by $61,218 to $11,577 from $72,795 for the three months ended November 30, 1996.
This decrease is primarily due to a decrease in the interest income relating to
the note receivable due from ATI as compared to the same period last year.
Interest Expense for the three months ended November 30, 1997 increased
by $92,945 to $181,841 from $88,896 for the three months ended November 30,
1996. The increase is due to an increase in certain indebtedness of the Company
as compared to the same period last year.
F-10
Depreciation and amortization for the three months ended November 30,
1997 increased by $92,360 to $278,680 from $186,320 for the three months ended
November 30, 1996. This increase is due to the additions in fixed assets of
$33,106, and a decrese in the estimated lives of certain assets.
Royalty Expense for the three months ended November 30, 1997 decreased
by $25,203 to $0 from $25,203 for the three months ended November 30, 1996. The
decrease is primarily due to the reclassification of the expense of purchasing
the ATI trademark to an intangible asset. The Company currently recognizes the
associated amortization expense.
Liquidity and Capital Resources
Management believes that the Company's diversified business operations
and continued growth will result in increased sales revenues and gross profits
(subject, of course, to the effects of price increases which are not
sufficiently passed through to the customers as referenced below) and result in
greater amounts of working capital being generated from operations. However, the
Company's growth through acquisition has significantly increased the Company's
working capital requirements due to increased gasoline purchase requirements,
increases in accounts receivable, and increased operating expenses (including
salary expense). Additionally, expenditures relating to the rebuilding of
certain of the Company's gasoline stations and certain other capital
expenditures have further increased the Company's working capital requirements
and have adversely affected the Company's ability to meet the same. As a result,
without additional financing, there can be no assurance that the Company will be
able to meet its cash requirements for the next twelve months. If it cannot do
so, the Company will be forced to scale back its operations. In this regard, the
Company will continue to pursue additional financing from a lending facility or
an offering of its securities to enable the Company to meet such cash
requirements and to accomplish growth through acquisition which the Company is
actively pursuing. There can be no assurance that the financing will occur or
that the Company can find suitable acquisition in the foreseeable future.
HQ Gasoline will have to invest approximately $325,000 over the next
eleven months in order to meet Federal EPA and State Regulations for underground
storage tanks by December 1998. Through November 30, 1997, the mandatory
requirements for six of the Company's locations have been completed.
In addition the Company plans to rebuild 10 of 25 gasoline stations
which will generally require $20,000 to $550,000 per location for an aggregate
of $1,600,000 (inclusive of the environmental upgrades referenced above). The
rebuilds will be phased in over two years in order to minimize volume losses due
to "downtime" encountered while each station location is under construction.
F-11
Capital expenditures for the three months ended November 30, 1997 were
$81,606. Included in this amount are expenditures for land in the amount of
$48,500, and for propane equipment and other equipment and improvements to gas
stations and the terminal facility totaling $33,106.
On June 8, 1995 the Company acquired all of the capital stock of
White Plains Fuel, Inc. in exchange of stock valued at $1,008,128. The
shareholders of White Plains Fuel, Inc. received 168,020 shares of newly created
Series A - 7.5% Cumulative Convertible Redeemable preferred Stock of the
Company. For the fiscal period ended November 30, 1997, the Company declared
dividends on the Series A Preferred Stock totaling $18,902. The fuel oil
business of White Plains Fuel, Inc. is conducted by a third party operator under
the terms of a four (4) year lease under which HQ Propane receives annual rental
income of $288,000.
On January 10, 1996, a total of 650,000 shares of the Company's common
stock was reserved for the 1996 stock incentive plan for officers, employees,
and consultants. The total options granted through November 30, 1997 are 434,000
leaving a balance of 216,000 shares in reserve as of November 30, 1997.
Additionally, the Company granted to certain of its officers and employees a
total of 1,200,000 options (outside of such plan) on November 14, 1996.
On March 5, 1996, the Company issued warrants to purchase 297,125
shares of the Company's common stock to A. Tarricone, Inc. in exchange for the
Company's exclusive use of the "ATI" trademark. The exercise price is equal to
the lessor of $4.30 per share or a 40% discount to the average closing bid
price. The warrants provide that 59,425 are immediately vested, and the balance
become vested in four equal annual installments. The market price at issuance
was $4.30 per share
On September 5, 1996, the Company acquired the customer list of Dino
Oil, Inc. in exchange for 200,000 shares of the Company's common stock at $1.25
per share and $100,000 cash. The acquisition was accounted for as a purchase and
resulted in the recognition of a customer list in the amount of $350,000.
Subsequent to the September 5, 1996 acquisition, the Company acquired 4 trucks
of Dino Oil at fair market value of $166,226. This amount was financed through a
capital lease.
On June 10, 1997, A. Tarricone, Inc. ("ATI"), the former parent of the
Company's operating subsidiaries and divisions (ATI is wholly-owned by Claire E.
Tarricone, Anthony J. Tarricone, and Joseph A. Tarricone, the Company's
directors and principal executive officers), filed a voluntary petition for
reorganization pursuant to Chapter 11 of the Bankruptcy Code (the "Code"). ATI
has continued in possession of its property and in the management of its affairs
as a debtor-in-possession under the applicable provisions of the Code. In
connection with the bankruptcy proceeding, the Company has asserted (and ATI has
acknowledged) pre-petition claims arising under a receivable from ATI in the
amount of $3,877,563 and pre-petition liens on certain leasehold interests. The
proceeding is before the United States Bankruptcy Court, Southern District of
New York, and is referred as "A. TARRICONE, INC., 97B21488." The Company has
determined that its asserted pre-petition liens may not have been properly
"perfected," in which case the Company would be deemed an unsecured creditor
(rather than a secured creditor) in the proceeding.
F-12
If it were ultimately determined by the court that the Company's status in the
proceeding is that of an unsecured creditor, the Company's legal basis for
recovery would be materially, adversely affected. The Company is pursuing all
appropriate avenues to protect its interest in this regard. However, there can
be no assurance that the indebtedness and the liens asserted by the Company in
this proceeding will be recognized or given full effect, that the same will not
be challenged, modified or reduced, that all or any portion of such indebtedness
will be repaid to the Company or that the Company will otherwise be successful
in protecting its interests. In this regard, management has elected to
write-off, and has taken as a charge against earnings as a bad debt expense, the
entire amount of the receivable due from ATI at June 10, 1997, i.e., $3,877,563.
Additionally, all executory contracts between ATI and the Company are
susceptible to rejection, at the election of ATI, under the applicable
provisions of the Code. Furthermore, any transfers from ATI to the Company on
account of antecedent debt (of ATI to the Company) during the one year period
prior to the date of filing of ATI's voluntary petition may be subject to
avoidance under the applicable provisions of the Code. The occurrence of any
such circumstances may have a material adverse effect on the Company.
On December 31, 1996 the Company entered into an agreement with a third
party distributor to lease four (4) gasoline stations for a period of 10 years
with an option for renewal. The distributor prepaid the Company $149,000 for the
first year of rental expense and the Company is carrying $23,353 as deferred
income as of November 30, 1997. Simultaneously, the Company terminated the
previous third party agreement for $192,907 which resulted in the recovery of
bad debt previously written off of approximately $70,400.
On May 16, 1997 the Company entered into an agreement for the sale of
its retail fuel oil customer list to an independent third party distributor. The
terms of the sale were $200,000 at closing, $200,000 on the first anniversary,
and $127,000 on the second anniversary with interest on outstanding amounts at a
rate of 6% per annum. The Company is recording this sale on an installment basis
and accordingly, the Company will recognize profit when payments are received.
Through August 31, 1997, the Company has recognized $175,667 as profit.
During the quarter ended February 28, 1997, the Company issued for
certain consulting services 400,000 five (5) year warrants dated 2/27/97 at $.41
per warrant exercise price (all of which were exercised during the fiscal
quarter ended November 30, 1997), 100,000 five (5) year warrants (10,000 dated
11/04/96, and 90,000 dated 2/18/97) at $.3125 per warrant exercise price, and
15,000 five (5) year warrants dated 11/05/96 at $1.00 per warrant exercise
price.
On June 9, 1997, the Company obtained a one-year revolving credit
facility in the maximum principal amount of $1,000,000. The maturity date has
been extended to September 4, 1998. Interest accrues on outstanding balances at
the prime rate plus 10% per annum, subject to a minimum of 17% per annum until
June 1, 1998, at which time the minimum will increase to 20% per annum. The
credit facility is secured by a security interest in all of the Company's
accounts receivables, general intangibles, contract rights and inventory, as
well as by the guarantees of Claire E. Tarricone, Joseph A. Tarricone, and
Anthony J. Tarricone. As of November 30, 1997, the outstanding principal balance
was $815,000.
F-13
On September 24, 1997, the Company, Claire E. Tarricone, Anthony J.
Tarricone and Joseph A. Tarricone and Infinity Investors Limited ("Infinity")
entered into a certain Restructuring Agreement (the "Restructuring Agreement").
Under the terms of the Restructuring Agreement, Infinity agreed to exchange 77,
419 shares of Series B Preferred Stock in the Company and all accrued and unpaid
dividends on the outstanding shares of Series B Preferred Stock for the
Company's Subordinated Promissory Note in the principal amount of $600,000 (the
"Note"). The Note accrues interest at 12% per annum compounded quarterly through
September 24, 1999 and accrues simple interest at 12% per annum after September
24, 1999. The note matures on September 24, 2002, although the Company is
required to make mandatory prepayment upon the occurrence of certain events. The
terms of the balance of the 560,126 shares of Series B Preferred Stock owned by
Infinity were amended to provide, among other things, for (i) a fixed conversion
price of $2.00 per share of Series B Preferred Stock, (ii) the removal of
certain limitations on the rights of holders of the Series B Preferred Stock to
convert those shares into the Company's Common Stock, and (iii) an increase in
the dividend rate of the Series B Preferred Stock to 12% from 8% per annum. The
Company also agreed to register such shares of Common Stock. In connection with
the execution and delivery of the Restructuring Agreement, Infinity granted to
Elizabeth Mandel ("Mandel") an option to purchase all of the 2,170,488 shares of
Common Stock into which such 560,126 shares of Series B Preferred Stock may
convert (the "Shares"). Under the terms of the option, Mandel has the option to
acquire all of such Shares for a price of $2.00 per share until the 18-month
anniversary of the effective date of the registration statement relating to the
above-referenced registration (the "Effective Date"), subject to earlier
termination in the event that Mandel fails to purchase at least an aggregate of
250,000 Shares on or prior to the 90th day following the Effective Date and an
aggregate of 400,000 Shares on or prior to the last day of each succeeding 90
day period commencing 90 days after the effective Date.
At various times during the fiscal quarter ended November 30, 1997,
certain Related Parties have loaned to the Company an aggregate of $60,274,
which amount accrues interest at a rate of 8% per annum, payable on demand.
The Company had a working capital deficiency of approximately $926.700
and a ratio of current assets to current liabilities of approximately 76% or
1:1.31 as at November 30, 1997.
Inflation
There was no significant impact on the Company's operations as a result
of inflation during fiscal 1997 and the three months ended November 30, 1997.
Year 2000 Computer Software Conversions
The Company relies on numerous computer programs in its day to day
business. Older computer programs use only two digits to identify a year in its
date field. As a result, when the Company has to identify the year 2000, the
computer will think it means the year 1900 and the operation attempting to be
performed may fail or crash thus resulting in the potential interference in the
operations of the Company's business. The Company has formulated plans to
safeguard against the Year 2000 conversion problem. The cost of the
implementation of the Year 2000 safeguards will not be material to the Company.
F-14
New Accounting Standards
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128, Earnings Per Share
("SFAS#128"), which is required to be adopted on December 31, 1997. At that
time, the Company will be required to change the method currently used to
compute earnings (loss) per share and to restate all prior periods. Under the
new requirements for calculating basic earnings (loss) per share, the dilutive
effect of stock options will be excluded. The Company does not expect the impact
on the earnings (loss) per share to be material.
F-15
Part II. OTHER INFORMATION
Item 1. Legal Proceedings
On June 10, 1997, A. Tarricone, Inc. ("ATI"), the former parent of the
Company's operating subsidiaries and divisions (ATI is wholly-owned by Claire E.
Tarricone, Anthony J. Tarricone, and Joseph A. Tarricone, the Company's
directors and principal executive officers), filed a voluntary petition for
reorganization pursuant to Chapter 11 of the Bankruptcy Code (the "Code"). ATI
has continued in possession of its property and in the management of its affairs
as a debtor-in-possession under the applicable provisions of the Code. In
connection with the bankruptcy proceeding, the Company has asserted (and ATI has
acknowledged) pre-petition claims arising under a receivable from ATI in the
amount of $3,877,563 and pre-petition liens on certain leasehold interests. The
proceeding is before the United States Bankruptcy Court, Southern District of
New York, and is referred as "A. TARRICONE, INC., 97B21488." The Company has
determined that its asserted pre-petition liens may not have been properly
"perfected," in which case the Company would be deemed an unsecured creditor
(rather than a secured creditor) in the proceeding. If it were ultimately
determined by the court that the Company's status in the proceeding is that of
an unsecured creditor, the Company's legal basis for recovery would be
materially, adversely affected. The Comapny is pursuing all appropriate avenues
to protect its interest in this regard. However, there can be no assurance that
the indebtedness and the liens asserted by the Company in this proceeding will
be recognized or given full effect, that the same will not be challenged,
modified or reduced, that all or any portion of such indebtedness will be repaid
to the Company or that the Company will otherwise be successful in protecting
its interests. In this regard, management has elected to write-off, and has
taken as a charge against earnings as a bad debt expense, the entire amount of
the receivable due from ATI at June 10, 1997, i.e., $3,877,563. Additionally,
all executory contracts between ATI and the Company are susceptible to
rejection, at the election of ATI, under the applicable provisions of the Code.
Furthermore, any transfers from ATI to the Company on account of antecedent debt
(of ATI to the Company) during the one year period prior to the date of filing
of ATI's voluntary petition may be subject to avoidance under the applicable
provisions of the Code. The occurrence of any such circumstances may have a
material adverse effect on the Company.
The Company's principal terminal facility is currently being operated
by ATI pending the approval of the Company's application with the State of New
York for a terminal operator's and diesel motor fuel license. There can be no
assurance about the prospect of obtaining the approval of such application. The
Company has been advised by counsel that pending the conclusion of ATI's
bankruptcy proceeding, ATI will continue to maintain such licenses and will be
able to continue operating the Company's terminal and diesel motor fuel
businesses. However, there can be no assurance that at the conclusion of such
proceeding, if the result were a liquidation of ATI (and therefore, a
termination of such licenses), that the Company would by that time have received
its own licenses or would have been able to contract with another entity to
operate such businesses. The occurrence of any of these circumstances could have
a material and adverse effect on these businesses and on the Company.
The Company is not a party to any other material litigation and is not
aware of any threatened litigation that would have a material adverse effect on
its business.
F-16
SIGNATURES
In accordance with the requirements of the Securities and Exchange Act
of 1934, the registrant has caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
HALSTEAD ENERGY CORP.
Dated: February 4, 1998 By: /s/ Claire E. Tarricone
------------------------
President
Dated: February 4, 1998 By: /s/ Joseph A. Tarricone
------------------------
Vice President/Treasurer
F-17
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS OF THE COMPANY FOR THE THREE MONTH PERIOD
ENDED nOVEMBER 30, 1997 AND IS QUALIFIED IN ITS ENTIETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS. </LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> AUG-31-1998
<PERIOD-START> SEP-1-1997
<PERIOD-END> NOV-30-1997
<CASH> 61,229
<SECURITIES> 0
<RECEIVABLES> 1,157,233
<ALLOWANCES> 110,000
<INVENTORY> 202,032
<CURRENT-ASSETS> 3,002,364
<PP&E> 12,035,522
<DEPRECIATION> 278,680
<TOTAL-ASSETS> 17,158,242
<CURRENT-LIABILITIES> 3,929,064
<BONDS> 4,232,360
1,064,169
3,638,004
<COMMON> 5,941,134
<OTHER-SE> (1,647,048)
<TOTAL-LIABILITY-AND-EQUITY> 17,158,242
<SALES> 3,981,754
<TOTAL-REVENUES> 4,149,321
<CGS> 3,008,587
<TOTAL-COSTS> 4,153,834
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 181,841
<INCOME-PRETAX> (186,354)
<INCOME-TAX> 0
<INCOME-CONTINUING> (17,313)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (186,354)
<EPS-PRIMARY> (.18)
<EPS-DILUTED> (.18)
</TABLE>
