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 February 28, 1998
---------------------------
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 March 31, 1998, the issuer has 4,638,056 shares of its Common
Stock outstanding.
<PAGE>
INDEX PAGE(S)
PART 1. FINANCIAL INFORMATION
ITEM 1. Financial Statements
Consolidated Balance Sheet as of
February 28, 1998 (unaudited).................. F-2 -F-3
Consolidated Statements of Operations for the three
and six months ended February 28, 1998 and 1997
(unaudited)..................................... F-4
Consolidated Statements of Stockholder's Equity for
the years ended August 31, 1997 and 1996,
and for the six months ended February 28, 1998
(unaudited)..................................... F-5 - F-6
Consolidated Statements of Cash Flows for the six
months ended February 28, 1998 and 1997
(unaudited)...................................... F-7
Selected Notes to the Consolidated Financial Statements F-8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS F-9 - F-14
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings F-15
Signature Pages F-16
F-1
<PAGE>
HALSTEAD ENERGY CORP. AND SUBSIDIARIES
Consolidated Balance Sheet
February 28, 1998
(Unaudited)
<TABLE>
A S S E T S
-----------
<CAPTION>
CURRENT ASSETS
<S> <C>
Cash................................................. $ 38,752
Accounts Receivable - Trade, Net of Allowance
for Doubtful Accounts of $110,000.................. 1,021,891
Inventories.......................................... 176,668
Note Receivable...................................... 230,000
Note Receivable - Related Party...................... 512,468
Income Tax Receivable................................ 241,000
Prepaid Expenses and Other Current Assets............ 547,513
-----------
TOTAL CURRENT ASSETS.......................... 2,768,292
PROPERTY PLANT AND EQUIPMENT - NET
Land................................................. 944,500
Property Plant and Equipment......................... 10,897,009
-----------
TOTAL PROPERTY PLANT AND EQUIPMENT............ 11,841,009
OTHER ASSETS
Net Deferred Tax Asset........................... 337,000
Notes Receivable - Net of Current Portion........ 213,752
Intangible Assets - Net.......................... 1,371,076
Other ........................................... 2,045
------------
TOTAL OTHER ASSETS............................ 1,923,873
------------
TOTAL ASSETS.................................. $ 16,533,174
------------
------------
<FN>
See selected notes to the consolidated financial statements.
</FN>
</TABLE>
F-2
<PAGE>
HALSTEAD ENERGY CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
February 28, 1998
(Unaudited)
<TABLE>
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
<CAPTION>
<S> <C>
CURRENT LIABILITIES
Accounts Payable Trade................................ 1,704,759
Notes ................................................ 500,000
Current Portion of Long-Term Debt..................... 456,091
Deferred Revenue ..................................... 620,864
Accrued Expenses and Other Current Liabilities........ 265,423
-----------
TOTAL CURRENT LIABILITIES.................... 3,547,137
Long-Term Debt - Net of Current Portion.................... 3,629,388
Security Deposits Payable.................................. 323,565
Due to Related Parties..................................... 438,380
-----------
TOTAL LONG-TERM LIABILITIES.................. 4,391,333
TOTAL LIABILITIES............................ 7,938,470
-----------
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
($4,340,977 aggregate liquidation preference).... 560
Common Stock, $00.1 Par Value, 50,000,000 Shares
Authorized, 4,588,056 Issued and Outstanding
as of February 28, 1998.......................... 4,588
Paid in Capital: Preferred................................ 3,616,694
Common................................... 6,075,457
Accumulated Deficit....................................... (2,066,764)
Subscription Receivable................................... (100,000)
-----------
TOTAL STOCKHOLDERS' EQUITY 7,530,535
-----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $16,533,174
===========
<FN>
See selected notes to the consolidated financial statements.
</FN>
</TABLE>
F-3
<PAGE>
HALSTEAD ENERGY CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
Unaudited Unaudited
Three Months Ended Six Months Ended
February 28, February 28,
-------------------- ----------------------
1998 1997 1998 1997
-------------------- ----------------------
<CAPTION>
<S> <C> <C> <C> <C>
Revenues....................... $3,653,592 $5,632,127 $7,635,346 $10,400,561
Cost of Revenues............... 2,669,714 4,372,587 5,677,077 8,126,037
---------- ---------- ---------- -----------
GROSS PROFIT................... 983,878 1,259,540 1,958,269 2,274,524
OPERATING EXPENSES
Selling General & Adm. Expenses 1,049,648 929,098 1,826,215 1,692,920
Management Fee, Related Party 90,000 90,000 180,000 180,000
Net Rental Income............. (259,490) (198,977) (414,257) (338,804)
Depreciation & Amortization... 298,379 208,300 577,059 419,823
--------- ---------- --------- ----------
INCOME (LOSS) FROM OPERATIONS (194,659) 231,119 (210,748) 320,585
Interest Expense, Net......... 167,244 84,382 337,509 100,483
--------- --------- --------- ---------
INCOME (LOSS) BEFORE
INCOME TAXES (361,903) 146,737 (548,257) 220,102
PROVISION FOR INCOME TAXES 0 65,858 0 79,432
--------- --------- --------- ---------
Net Income (Loss).............. (361,903) 80,879 (548,257) 140,670
Preferred Stock Dividends...... (157,813) (106,802) (644,529) (303,600)
--------- --------- --------- ---------
Net Loss Applicable to
Common Stock.................. $ (519,716) $(25,923)$(1,192,786) $(162,930)
--------- --------- --------- --------
Net Loss Per Share............. ($0.11) ($0.01) ($0.27) ($0.04)
--------- --------- --------- --------
Weighted Average Number of Common and
Equivalent Shares Outstanding 4,564,898 4,006,934 4,436,749 3,979,547
--------- ---------- --------- ---------
<FN>
See selected notes to the consolidated 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
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)
Employee
Compensation 0 0 15,000 15 8,560 0 0 8,575
Common
Shares issued
for acquisition
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 an employee
for future
services 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 ($37,804) $ 0 ($37,804)
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)
Restructuring of
Series B Preferred
and Conversion of
Debt Costs 0 0 0 0 (99,562) 0 0 (99,562)
Common Shares
Issued in Lieu
of Dividends 69,455 69 138,842 (138,911) (0)
Net (Loss) -
February 28,
1998 0 0 0 0 0 (548,257) 0 (548,257)
---- ----- ----- ---- ---- ------- ---- --------
Balances at
February 28,
1998 560,125 $560 $4,588,056 4,588 $9,692,151($2,066,764)($100,000)$7,530,535
======= === ========= ===== ========= ========== ======== =========
<FN>
See selected notes to the consolidted financial statements.
</FN>
</TABLE>
F-6
<PAGE>
HALSTEAD ENERGY CORP.
CONSOLIDATED STATEMENTS OF CASH FLOW
(Unaudited)
<TABLE>
Six Months Ended
February 28,
1998 1997
---- ----
<CAPTION>
<S> <C> <C>
Cash flows from Operating Activities:
Net Income (Loss)............................ ($548,257) $140,670
Adjustments to Reconcile Net Income (Loss)
to Net Cash provided by Operating Activities:
Depreciation & Amortization................. 577,059 419,823
Deferred Income Tax Expense................. 45,000 0
Change in Operating Assets and Liabilities:.
Accounts Receivable......................... 26,573 (721,107)
Inventory................................... (7,738) (551,646)
Prepaid Expenses and other Current Assets... 68,309 (138,342)
Accounts Payable, Accrued Expenses and Other
Current Liabilities....................... (220,382) 314,729
Deferred Revenue............................ (54,282) 131,862
Income Tax Payable.......................... (241,000) (600)
--------- ---------
Net Cash Used by Operations (354,718) (404,609)
Cash Flows From Investing Activities:
Intangible Assets........................... 0 (544,457)
Proceeds From Capital Contribution.......... 0 (1,183,058)
Acquisition of Property and Equipment...... (135,004) 0
Advances in Note Receivable ................ 124,013 0
Net Repayment (Advance) Note Receivable-ATI 66,380 (330,471)
Security Deposits Payable................... 85,759 0
---------- ---------
Net Cash Provided (Used) in Investing Activities 141,148 (2,057,986)
Cash Flows From Financing Activities:
Increase (Decrease) in Cash Overdraft....... (74,265) 196,978
Net Proceeds from the Issuance of Common Stock 149,415 201,070
Proceeds from Short Term Borrowings......... 14,690 0
Proceeds from Long Term Borrowings.......... 664,616 195,960
Net Borrowing from Related Parties.......... 79,100 0
Repayment of Long Term Debt................ 0 (153,611)
Preferred Stock Dividends................... (644,529) (39,276)
---------- ---------
Net Cash Provided by Financing Activities....... 189,027 401,121
Net Decrease in Cash............................. (24,543) (2,061,474)
Cash and Cash Equivalents at Beginning of Period 63,295 2,061,474
---------- ---------
Cash and Cash Equivalents at End of Period .. $ 38,752 $ 0
--------- ----------
Supplement Disclosure of Cash Flow Information
Cash Paid During the Period For:
Interest Expense............................. $359,577 $ 178,108
Income Taxes................................. $ 0 $ 0
Acquisition of Property & Equipment......... $135,004 $ 0
Acquisition of Land.......................... $ 50,000 $ 0
Non Cash Transactions:
Acquisition of Property and Equipment $ 0 $ 387,500
Preferred Stock Issued for Unpaid Dividends.. $546,066 $ 0
Conversion of Preferred Stock to Long Term Debt $600,000 $ 0
Common Stock Issued for Unpaid Dividends..... $138,911 $ 0
<FN>
See Selected notes to the consolidted financial statements.
</FN>
</TABLE>
F-7
<PAGE>
Selected Notes to the Consolidated Financial Statements
Three Months Ended February 28, 1998
(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 February 28, 1998.
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 six month period ended February 28, 1998
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 February 28, 1998:
Amount Term Issue Date Exercise Price ($)
297,125 5 yrs. 03/05/96 40% of market
10,000 5 yrs. 11/04/96 .3125
19,547 5 yrs. 11/05/96 .767
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 applicable
would be anti-dilutive. Therefore, there are no potentially dilutive securities.
(4) Certain Reclassifications were made in the prior year to conform to the
current year presentation.
F-8
<PAGE>
Item 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
Results of Operations
Three Months Ended February 28, 1998
Revenues for the three months ended February 28, 1998, decreased by
$1,978,535 to $3,653,592 from $5,632,127 for the three months ended February 28,
1997. The decrease is due in part to lost home heating oil sales and service
revenues resulting from the sale of Rockland Fuel Oil customer list of
approximately $ 692,500. Commerical gasoline sales revenues declined by
approximately $619,400 as a result of competive pricing and lower selling
prices. Revenues resulting from the Company's terminal operations also declined
by approximately $580,000 due primarily to warm winter temperatures. Propane and
retail gasoline product revenues decreased by approximately $86,600 due to lower
product costs resulting in lower selling prices.
Cost of revenues for the three months ended February 28, 1998 decreased
by $1,702,873 to $2,669,714 (or 73.1%)from $4,372,587 (or 77.6%)for the three
months ended February 28, 1997. This decrease is due to the lower cost of
product and to the other factors described above.
Gross profit margin as a percentage of revenues increased to 26.9% from
22.4%. This improvement in margin resulted in part from lower product costs and
in part from operation efficiencies.
Selling, General and Administrative Expenses for the three months ended
February 28, 1998 increased by $120,550 to $1,049,648 from $929,098 for the
three months ended February 28, 1997. The increase is primarily due to higher
salaries, inceased insurance expense and maintenance and repair expenses, offset
in part by lower equipment expenses, telephone, uniform and selling expenses.
Depreciation and amortization expense for the three months ended
February 28, 1998 increased by $90,079 to $298,379 from $208,300 for the three
months ended February 28, 1997. This increase is mainly due to the additions to
property, plant and equipment.
Interest Expense, net for the three months ended February 28, 1998,
increased $82,862 to $167,244 from $84,382 for the three months ended February
28, 1997 due to an increase in certain indebtedness of the Company, reduced in
part by the interest income on the ATI Note.
F-9
Six Months Ended February 28, 1998
Revenues for the six months ended February 28, 1998, decreased by
$2,765,215 to $7,635,346 from $10,400,561 for the six months ended February 28,
1997. The decrease is primarily due to lost home heating oil sales revenues
resulting from the sale of Rockland Fuel Oil customer list of approximately
$1,113,900. Commercial gasoline sales revenues declined by approximately
$648,450 as a result of competitive pricing and lower selling prices. Wholesale
oil terminaling operation revenues also declined by approximately $750,600 due
to warm winter temperatures. Propane and retail gasoline product revenues
decreased by approximately $244,100 due to lower product costs in the industry.
In addition, thruput income decreased by approximately $224,000 as compared to
the same period last year.
Cost of revenues for the six months ended February 28, 1998 decreased
by $2,448,960 to $5,677,077 (or 74.3%) from $8,126,037 (or 78.1%) for the six
months ended February 28, 1997. This decrease is due to lower cost of product
and to the other factors described above.
Selling, General and Administrative Expenses for the six months ended
February 28, 1998 increased by $133,295 to $1,826,215 from $1,692,920 for the
six months ended February 28, 1997. The increase is primarily doe to higher
salaries, increased telephone, uniform and selling expenses and maintenance and
repair and equipment lease expenses, offset in part by decreases in professional
fees and office and other expenses.
Depreciation and amortization expense for the six months ended
February 28, 1998 increased by $157,236 to $577,059 from $419,823 for the six
months ended February 28, 1997. This increase is mainly due to the additions to
property, plant and equipment.
Interest expense , net for the six months ended February 28, 1998,
increased by $237,026 to $337,509 from $100,483 for the six months ended
February 28, 1997 due to an increase in certain indebtedness of the Company as
compared to the same period last year, reduced in part by the interest income on
the ATI Note.
F-10
Liquidity and Capital Resources
Management has seen a recent decline in the cost of petroleum products
which has resulted in decreased sales revenues. While the Company has achieved
increased efficiencies in its core businesses, the Company is not in a position
to meet its working capital, capital expenditure and acquisition requirements
through operations. Without additional financing, there can be no assurance that
the Company will be able to meet its cash requirements for the next twelve
months. In this regard, management believes that its underlying assets have been
significantly underutilized for quite some time due to the Company's lack of
success in obtaining the desired level of financing. The Company will continue
to pursue additional financing from a lending facility or an offering of its
securities to enable the Company to meet the above-referenced cash requirements.
There can be no assurance that the financing will occur or that the Company can
find suitable acquisitions in the foreseeable future.
HQ Gasoline will have to invest by December 1998 approximately $325,000
in order to meet Federal EPA and State Regulations for underground storage
tanks. Through February 28, 1998, the mandatory requirements for six of the
Company's locations have been completed.
In addition the Company plans to modernize 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
modernization 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 six months ended February 28, 1998 were
$135,004. 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 $86,504.
On June 8, 1995 the Company acquired all of the capital stock of
White Plains Fuel, Inc. in exchange for Company 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 February 28, 1998, the Company declared
dividends on the Series A Preferred Stock totaling $37,804. 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 February 28, 1998 are 434,000
leaving a balance of 216,000 shares in reserve as of February 28, 1998.
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 December 31, 1996 the Company entered into an agreement with a third
party distributor pursuant to which it is leasing to such distributor eight (8)
gasoline stations for a period of 10 years with an option for renewal. The
distributor prepaid to the Company $280,238 for the second year of the lease
term and the Company is carrying $233,531 as deferred income as of February 28,
1998.
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, none of which have been exercised)at $.3125
per warrant exercise price, and 15,000 five (5) year warrants dated 11/05/96
(none of which have been exercised) 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 February 28, 1998, the outstanding principal balance
was $805,000.
F-12
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 six months ended February 28, 1998, certain
Related Parties have loaned to the Company an aggregate of $232,954 which amount
accrues interest at a rate of 8% per annum, payable on demand at anytime on or
after September 1, 1998.
The Company had a working capital deficiency of approximately $778,845
and a ratio of current assets to current liabilities of approximately 78% or
1:1.28 as at February 28, 1998.
Inflation
There was no significant impact on the Company's operations as a result
of inflation during fiscal 1997 and the six months ended February 28, 1998.
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-13
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.
Forward-Looking Statements
The discussion in this report regarding the Company and its business and
operations contains "forward-looking statements." Such statements consist of any
statement other than a recitation of a historical fact and can be identified by
the use of forward-looking terminology such as "may," "expect," "anticipate,"
"estimate" or "continue" or the negative of any thereof or other variations
thereon or comparable terminology. All forward-looking statements are
necessarily speculative and there are certain risks and uncertainties that could
cause actual events or results to differ materially from those referred to in
such forward- looking statements. The Company does not have a policy of updating
or revising forward-looking statements, and thus it should not be assumed that
silence by management of the Company over time means that actual events or
results are occurring as estimated in such forward-looking statements.
F-14
<PAGE>
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 writte-off, and has taken as a
charge against earnings as a bad debt expense for the fiscal yer ended August
31, 1997, 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-15
<PAGE>
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: April 20, 1998 By: /s/ Claire E. Tarricone
------------------------
President
Dated: April 20, 1998 By: /s/ Joseph A. Tarricone
------------------------
Vice President/Treasurer
F-16
<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 FEBRUARY 28, 1998 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> DEC-1-1997
<PERIOD-END> FEB-28-1998
<CASH> 38,752
<SECURITIES> 0
<RECEIVABLES> 1,131,891
<ALLOWANCES> 110,000
<INVENTORY> 176,668
<CURRENT-ASSETS> 2,768,292
<PP&E> 11,841,009
<DEPRECIATION> 278,680
<TOTAL-ASSETS> 16,533,174
<CURRENT-LIABILITIES> 3,547,137
<BONDS> 4,391,333
1,064,169
3,617,253
<COMMON> 5,980,045
<OTHER-SE> (2,066,763)
<TOTAL-LIABILITY-AND-EQUITY> 16,533,174
<SALES> 3,653,592
<TOTAL-REVENUES> 3,913,082
<CGS> 2,669,714
<TOTAL-COSTS> 4,107,741
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 167,244
<INCOME-PRETAX> (361,903)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (361,903)
<EPS-PRIMARY> (.11)
<EPS-DILUTED> (.11)
</TABLE>
