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 May 31, 1999
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 (I.R.S. Employer Identification No.)
Incorporation or Organization)
33 Hubbells Drive, Mt. Kisco, New York 10549
(Address of principal Executive Offices)
914-666-5800
(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 July 8, 1999, the issuer has 3,013,750 shares of its Common
Stock outstanding.
<PAGE>
INDEX PAGE(S)
PART 1. FINANCIAL INFORMATION
ITEM 1. Financial Statements
Consolidated Balance Sheet as of May 31, 1999
(unaudited)...................................... F-2 -F-3
Consolidated Statements of Operations for the three
and nine months ended May 31, 1999 and 1998
(unaudited)....................................... F-4
Consolidated Statements of Stockholders' Equity for
the year ended August 31, 1998 and for the nine
months ended May 31, 1999 (unaudited)............. F-5 - F-6
Consolidated Statements of Cash Flows for the nine
months ended May 31, 1999 and 1998 (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-11
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings F-12 - F-14
Signature Pages F-15
F-1
<PAGE>
HALSTEAD ENERGY CORP. AND SUBSIDIARIES
Consolidated Balance Sheet
May 31, 1999
(Unaudited)
<TABLE>
A S S E T S
-----------
<CAPTION>
CURRENT ASSETS
<S> <C>
Accounts Receivable - Trade, Net of Allowance
for Doubtful Accounts of $51,382................... $ 1,389,012
Inventories.......................................... 74,136
Note Receivable...................................... 60,910
Note Receivable - Related Party...................... 903,674
Prepaid Expenses and Other Current Assets............ 266,672
Deferred Tax Asset................................... 27,000
----------
TOTAL CURRENT ASSETS.......................... 2,721,404
PROPERTY PLANT AND EQUIPMENT - NET
Land................................................. 944,000
Property Plant and Equipment......................... 10,127,389
-----------
TOTAL PROPERTY PLANT AND EQUIPMENT............ 11,071,389
OTHER ASSETS
Net Deferred Tax Asset........................... 355,000
Intangible Assets - Net.......................... 896,826
------------
TOTAL OTHER ASSETS............................ 1,251,826
------------
TOTAL ASSETS.................................. $ 15,044,619
============
<FN>
See Accompanying Notes.
</FN>
</TABLE>
F-2
<PAGE>
HALSTEAD ENERGY CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
May 31, 1999
(Unaudited)
<TABLE>
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
<CAPTION>
<S> <C>
CURRENT LIABILITIES
Accounts Payable - Trade.............................. $ 3,210,887
Notes Payable - Related Party......................... 220,525
Current Portion of Long-Term Debt..................... 2,977,387
Deferred Revenue ..................................... 58,446
Accrued Expenses and Other Current Liabilities........ 916,652
-----------
TOTAL CURRENT LIABILITIES.................... 7,383,897
Long-Term Debt - Net of Current Portion.................... 1,583,429
Security Deposits Payable.................................. 270,535
Deferred Revenue........................................... 111,084
-----------
TOTAL LIABILITIES............................ 9,348,945
-----------
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,
580,646 Shares Authorized-Series B
Convertible Redeemable 560,125
Shares Issued and Outstanding
($4,338,580 aggregate liquidation preference).... 560
Common Stock, $00.1 Par Value, 25,000,000 Shares
Authorized, 3,013,750 Issued and Outstanding 3,013
Paid in Capital: Preferred................................ 3,614,800
Common................................... 6,845,197
Accumulated Deficit....................................... (5,732,065)
Subscription Receivable................................... ( 100,000)
-----------
TOTAL STOCKHOLDERS' EQUITY 4,631,505
-----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 15,044,619
===========
<FN>
See Accompanying Notes.
</FN>
</TABLE>
F-3
<PAGE>
HALSTEAD ENERGY CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
Unaudited Unaudited
Three Months Ended Nine Months Ended
May 31, May 31,
1999 1998 1999 1998
---- ---- ---- ----
<CAPTION>
<S> <C> <C> <C> <C>
Revenues.........................$ 2,754,480 $3,182,098 $8,813,696 $10.817,444
Cost of Revenues................. 1,843,072 2,306,827 5,781,315 7,985,128
GROSS PROFIT..................... 911,408 875,271 3,032,381 2,832,316
OPERATING EXPENSES
Selling General & Adm. Expenses. 1,148,156 795,020 3,133,022 2,481,692
Management Fee, Related Party... 56,891 90,000 236,891 270,000
Gain on Sale of Customer List... 0 (200,000) 0 (200,000)
Loss on early termination of lease 0 0 174,764 0
Net Rental Income............... (16,973) (133,166) (88,514) (547,423)
Other Income.................... (144,477) 0 (144,477) 0
Depreciation and Amortization... 242,445 264,973 727,335 842,032
INCOME (LOSS) FROM OPERATIONS (374,634) 58,444 (1,006,640) (13,985)
Interest Expense, Net 195,654 181,657 604,865 517,942
LOSS BEFORE TAX PROVISION (570,288) (123,213)(1,611,505) (531,928)
PROVISION FOR INCOME TAXES 0 0 0 0
Net Loss ....................... (570,288) (123,213)(1,611,505) (531,928)
Preferred Stock Dividends 0 149,131 37,812 880,717
Net Loss Available to Common
Share.......................... (570,288) $(272,344)(1,649,317)$(1,412,645)
Basic and Diluted Loss Per Share ($0.19) ($0.06) ($0.56) ($0.31)
Average Number of Common Shares 3,013,750 4,703,171 2,969,342 4,525,559
========= ========== ========= ==========
<FN>
See Accompanying Notes.
</FN>
</TABLE>
F-4
<PAGE>
HALSTEAD ENERGY CORP.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Unaudited)
<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,
1997 567,085 567 2,059,301 2,060 9,545,257 (873,978) (100,000) 8,573,906
Dividends
Declared:
Preferred
Series A 0 0 0 0 0 (75,609) 0 (75,609)
Dividends
Declared:
Preferred
Series B 0 0 0 0 0 (467,814) 0 (467,814)
Common Shares
Issued on
Conversion of
Options 0 0 200,000 200 163,800 0 0 164,000
Common Shares
Issued to
Consultant for
Services
Rendered 0 0 172,495 172 232,761 0 0 232,933
Conversion of
Series B Preferred
Stock to Debt
(6,960) (7) 0 0 (56,261) 0 0 (56,268)
Restructuring of
Series B Preferred
Stock 0 0 0 0 (75,881) 0 0 (75,881)
Exercise of
Warrants 0 0 25,000 25 11,535 0 0 11,560
Common Shares
Issued in Exchange
for Dividends 0 0 67,285 67 269,000 (269,067) 0 0
Net Loss -
August 31,
1998 0 0 0 0 0 (2,396,280) 0 (2,396,280)
---- ---- ------- ------- ------- ---------- -- ---------
Balances at
August 31,
1998 560,125 $560 2,524,081 $2,524 $10,090,211($4,082,748)($100,000)$5,910,547
Coimmon Shares
Issued on Debt
Conversion 399,669 399 292,595 292,994
Common Shares
Issued to
Consultant for
Services
Rendered 90,000 90 77,191 77,281
Dividends
Declared:
Preferred
Series A (37,812) (37,812)
Net Loss -
May 31,
1999 (1,611,505) (1,611,505)
Balance at
May 31,
1999 560,125 $560 3,013,750 $3,013 $10,459,997 ($5,732,065)($100,000)$4,631,505
======= ==== ========= ====== =========== ========== ======== ========
F-6
<FN>
See Accompanying Notes.
</FN>
</TABLE>
<PAGE>
HALSTEAD ENERGY CORP.
CONSOLIDATED STATEMENTS OF CASH FLOW
(Unaudited)
<TABLE>
Nine Months Ended
May 31,
1999 1998
---- ----
<CAPTION>
<S> <C> <C>
Cash flows from Operating Activities:
Net Income (Loss)............................ ($1,611,505)($531,928)
Adjustments to Reconcile Net Income (Loss)
to Net Cash Provided by Operating Activities:
Non Employee Compensation Expense from Common
Stock Issued During the Period............. 77,281 0
Depreciation & Amortization................. 552,628 842,032
Gain on Sale of Customer List............... 0 (200,000)
Loss of Early Termination of Lease.......... 174,707 0
Change in Operating Assets and Liabilities:.
Accounts Receivable......................... (635,084) (69,884)
Inventory................................... 121,188 (44,507)
Prepaid Expenses and other Current Assets... 47,472 (4,314)
Accounts Payable, Accrued Expenses and Other
Current Liabilities......................... 1,056,151 (323,234)
Deferred Revenue............................ (189,112) (180,342)
---------- ---------
Net Cash Used in Operating Activities (406,274) (512,177)
Cash Flows From Investing Activities:
Intangible Asets............................ 0 (280,897)
Net Proceeds from Sale of Customer List..... 265,193 200,000
Acquisition of property and Equipment....... (81,520) (230,887)
Net Repayment (Advance) Note Receivable..... (25,564) 0
Security Deposits Payable................... 41,425 (2,756)
---------- ---------
Net Cash Provided By Investing Activities 199,534 (314,540)
Cash Flows From Financing Activities:
Net Proceeds from the Issuance of Common Stock 0 299,394
Proceeds from Short Term Borrowings......... 1,049,841 0
Proceeds from Long Term Borrowings.......... 0 426,886
Repayment of Long Term Borrowings........... (823,339) 0
Net Borrowings from Related Parties......... 18,050 831,689
Preferred Stock Dividends................... (37,812) (763,411)
---------- ---------
Net Cash Provided By Financing Activities 206,740 794,558
Net Increase (Decrease) in Cash.................. 0 (32,159)
Cash and Cash Equivalents at Beginning of Period 0 63,295
---------- ---------
Cash and Cash Equivalents at End of Period... $ 0 $ 31,136
---------- ---------
---------- ---------
Supplement Disclosure of Cash Flow Information
Cash Paid During the Period For:
Interest Expense............................. $ 530,451 $ 359,577
Acquisition of Property & Equipment.......... $ 0 $ 180,887
Acquisition of Land.......................... $ 0 $ 50,000
Supplemental Schedule of Non Cash Investing and
Financing Activities:
Exchange of Related Party Debt for Common Stock 292,994 $ 0
Preferred Stock Issued for Unpaid Dividends.. 0 $ 524,520
Conversion of Preferred Stock to Long Term Debt 0 $ 600,000
Common Stock Issued for Unpaid Dividends 0 $ 269,140
<FN>
See Accompanying Notes.
</FN>
</TABLE>
F-7
<PAGE>
Selected Notes to the Consolidated Financial Statements
(Unaudited)
(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 presentation of
results at May 31, 1999.
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, 1998 contained in the Company's
Annual Report on Form 10-KSB dated November 25, 1998.
The results reflected for the three month period ended February 28, 1999,
are not necessarily indicative of the results for the entire fiscal year ending
August 31, 1999.
(2) Options and Warrants:
The following table sets forth the options and warrants of the Company
as of May 31, 1999.
Amount Term Issue Date Exercise Price ($)
123,563 5 yrs. 03/05/96 40% of market
5,000 5 yrs. 11/04/96 .625
9,774 5 yrs. 11/05/96 1.534
600,000 5 yrs. 11/14/96 .625
112,500 5 yrs. 01/10/97 .625
45,000 5 yrs. 02/18/97 .625
104,500 5 yrs. 08/12/97 1.260
85,000 5 yrs. 07/30/98 1.06
(3) Earnings (Loss)Per Share
On October 16, 1998 the Company effected a 1 for 2 reverse stock split.
All share and per share data have been restated.
During the year ended August 31, 1998, the Company adopted Statement of
Financial Accounting Standard No. 128 (SFAS 128) "Earnings Per Share."
This statement requires the presentation of basic and diluted earnings per
share ("EPS"). Basic EPS excludes dilution and is computed by dividing
income (loss) less preferred dividends by the weighted average number of
common shares outstanding for the period. Diluted EPS gives effect to all
dilutive potential common shares that were outstanding during the period.
The effect on loss per share of the Company's outstanding stock options
and convertible warrants is anti dilutive for all periods presented and
accordingly not included in the calculation of the weighted average number
of common shares outstanding.
(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 OF FINANCIAL CONDITION AND RESULTS
OF OPERATION
Results of Operations
Three Months Ended May 31, 1999
Revenues for the three months ended May 31, 1999, decreased by $427,618 to
$2,754,480 from $3,182,098 for the three months ended May 31, 1998. The decrease
is due, among other things, to the loss of customers in the commercial and
retail gasoline business, (which has experienced competitive pricing) and to the
loss of credit and working capital resulting from or relating to certain legal
procedures which are more fully described in "Part II. Other information, Item
I. Legal Proceedings" below.
Cost of revenues for the three months ended May 31, 1999 decreased by
$463,755 to 1,843,072 or (66.9% of revenue)from $2,306,827 (or 72.4% of revenue)
for the three months ended May 31, 1998. This decrease is due to the lower cost
of product and to the other factors described above.
Selling, General and Administrative Expenses for the three months ended May
31, 1999 increased by $353,136 to $1,148,156 from $795,020 for the three months
ended May 31, 1998. The increase is primarily due to increased professional
fees, real estate taxes, maintenance and repair expenses, telephone, and selling
expenses.
Net Rental Income for the three months ended May 31, 1999 decreased by
$116,193 to $16,973 from $133,166 for the three months ended May 31, 1998. This
decrease is primarily due to the loss of rental income due to the sale of White
Plains Fuel and the temporary closing of gasoline stations due to cosmetic and
environmental upgrades.
Other income for the three months ended May 31, 1999 increased by $144,477
to $144,777 from $0 for the three months ended May 31, 1998. The increase is due
to the receipt of the final installment due from the sale of the company's
retail fuel oil customer list.
Depreciation and amortization expense for the three months ended May 31,
1999 decreased by $22,528 to $242,445 from $264,973 for the three months ended
May 31, 1998. This decrease is mainly due to certain property, plant and
equipment being fully depreciated.
Interest Expense, net for the three months ended May 31, 1999, increased
from $13,997 to $195,654 from $181,657 for the three months ended May 31, 1998
due to an increase in certain indebtedness of the Company.
Nine Months Ended May 31, 1999
Revenues for the nine months ended May 31, 1999, decreased by $2,003,748 to
$8,813,696 from $10,817,444 for the nine months ended May 31, 1998. The decrease
is primarily due to the loss of customers in the commercial and retail gasoline
business, (which has experienced competitive pricing), and from the loss of
credit and working capital experienced during the third quarter resulting from,
or relating to, certain legal proceedings which are more fully described in
"Park II. Other Information, Item I. Legal proceedings" below.
Cost of revenues for the nine months ended May 31, 1999 decreased by
$2,203,813 to $5,781,315 (or 65.5% of revenue)from $7,985,128 (or 73.8%of
revenue) for the nine months ended May 31, 1998. This decrease is due to lower
cost of product and to the other factors described above.
Selling, General and Administrative Expenses for the nine months ended May
31, 1999 increased by $651,330 to $3,133,022 from $2,481,692 for the nine months
ended May 31, 1998. This increase is due primarily to increases in salaries,
professional fees and real estate taxes.
In October of 1998, the Company sold its White Plains Fuel customer list.
As a result, the Company realized a $174,764 loss on the early termination of
its lease.
Depreciation and amortization expense for the nine months ended May 31,
1999 decreased by $114,697 to $727,335 from $842,032 for the nine months ended
May 31, 1998. This decrease is mainly due to certain property, plant and
equipment being fully depreciated.
Interest expense , net for the nine months ended May 31, 1999, increased by
$86,923 to $604,865 from $517,942 for the nine months ended May 31, 1998 due to
an increase in certain indebtedness of the Company.
Liquidity and Capital Resources
As described, the Registrant and its wholly-owned subsidiary, Halstead
Quinn Propane, Inc. ("HQ"), have filed petitions requesting relief as
debtors-in- possession under Chapter 11 of the Bankruptcy Code. The loss of
credit and working capital resulting from or relating to the legal proceedings
which are more fully described in such "Part II" have had a material adverse
effect on the Company's liquidity and capital resources. The Company intends to
restructure its financial affairs and to file a Plan(s) of Reorganization in
connection with such bankruptcy proceedings. In this regard, the Company is
pursuing certain financing alternatives, the sale of certain assets, and/or a
joint venture relating to certain of its assets in an effort to effectively
reorganize. There can be no assurance that the Company will be successful in
this regard ot that it will be able to meet its cash requirements for the next
twelve months.
Halstead Quinn Gasoline Division will have to invest approximately an
additional $150,000 in order to meet certain Federal EPA and State Regulations
for underground storage tanks. Through May 31, 1999, the Company has
substantially completed the requirements for the 8 gasoline stations where
upgrades are necessary under applicable law. The Company is in compliance and/or
has completed all of the relevant upgrades at all of its other facilities.
Failure to complete the required upgrades in a timely fashion may have a
material adverse effect on the business, financial condition and operations of
the Company.
In addition, with additional financing, the Company plans to rebuild 9 of
23 gasoline stations which will generally require $20,000 to $750,000 per
location for an aggregate of $2,250,000 (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.
On January 10, 1996, a total of 325,000 shares of the Company's common
stock was reserved for the 1996 stock option incentive plan for officers and
employees. Common stock which had been granted under such plan through May 31,
1998 was 242,000 (all of which are five year options granted in either November
1996, August 1997 or July 1998), at exercise prices ranging from $.6250 per
share to $1.26 per share, leaving a balance of 83,000 options in reserve under
such plan as of May 31, 1999. Additionally, certain officers and employees of
the Company were granted five year options (outside of such plan) to purchase a
total of 600,000 shares of the Company's common stock in November 1996, at an
exercise price of $.6250 per share (500,000 of which were assigned to Infinity
(as described below) in March 1998), and five year options (also outside of such
plan) to purchase 60,000 shares of the Company's common stock in July 1998 at an
exercise price of $1.06 per share.
The Company granted ten year options, in partial payment of the purchase
price for a propane customer list and certain other assets acquired in April
1998, to acquire 10,000 shares of the Company's common stock at an exercise
price of $1.12 per share. Prior thereto, the Company issued, for certain
consulting services, 50,000 five year warrants (5,000 in November 1996 and
45,000 in February 1997) at an exercise price of $.6250 per share, and 9,773
five year warrants (in November 1996) at an exercise price of $1.534 per share.
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 recorded this sale on an installment basis. In
connection with this sale, since the related receivable was collectible over an
extended period of time and collectibility was uncertain, profit was recognized
under the installment method as the receivable was collected. The final payment
was received in April 1999.
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, and thereafter, such indebtedness is payable on
demand. 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 increased 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
May 31, 1999 the outstanding principal balance was $1,060,353.
The Company has advanced funds to A. Tarricone, Inc. ("ATI") its former
parent and brother-sister corporation with the same majority shareholders, for
necessary and ordinary gasoline and diesel purchases. ATI is currently operating
under Chapter 11 of the Federal Bankruptcy Laws.Such advances are secured by a
first lien of 50% of all of the ATI's post-petition assets and a second lien on
the balance of ATI's post petition assets.In addition, the Company reimburses
ATI, under a management agreement which expired on August 31, 1998, which is now
month to month,for certain trucking costs, administrative and union payroll,
payroll taxes and fringes and other costs incurred by ATI. Such management fee
is accrued monthly and is recorded as a reduction of the amount due to ATI. For
nine months ended May 31, 1999 and 1998, the Company was charged $236,891 in
connection with such expenses.
F-11
During the quarter ending May 31, 1999, the Company made additional
advances to ATI of $816,218 of which $669,353 was repaid. At May 31, 1999 the
Company was owed $876,648.
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
6,960 shares of Series B Preferred Stock in the Company, all accrued and unpaid
dividends on the outstanding shares of Series B Preferred Stock and
appriximately $78,000 of indebtedness owing to Infinity 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
Company is disputing the indebtedness evidenced by the Note in the bankruptcy
proceeding referenced in Part II, Item 1(c). The terms of the balance of the
560,125 shares of Series B Preferred Stock owned by Infinity were amended to
provide, among other things, for (i) a fixed conversion price of $4.00 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( which the Company also agreed to register), and
(iii) an increase in the dividend rate of the Series B Preferred Stock to 12%
from 8% per annum. In March 1998, pursuant to the applicable provisions of the
Restructuring Agreement, Infinity elected to further amend the terms of the
Series B Preferred Stock to the effect that dividends would cease accuring
(i.e., the dividend rate would decrease from 12% per annum to 0% per annum), and
in connection therewith, Infinity elected to cause certain of the Company's
officers/directors to transfer to Infinity five year options to acquire 500,000
shares of the Company's common stock at an exercise price of $.6250 per share
(as referenced above).
At May 31, 1999, certain parties were owed an aggregate of $328,686 by
the Company, which are non-interest bearing, payable on demand at any time on or
after September 1, 1998. In October 1998, $292,994 of this amount was exchanged
for common stock in the company.
The Company had a working capital deficiency of approximately $4,662,493
and a ratio of current assets to current liabilities of approximately 37% or
1:2.71 as at May 31, 1999.
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 implementation of the Year 2000 safeguards were not
material to the Company. The Company has completed the Year 2000 conversion in
March 1999.
F-12
<PAGE>
Part II. OTHER INFORMATION
Item 1. Legal Proceedings
(a) 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 written-off, and has taken as a
charge against earnings as a bad debt expense for the fiscal year 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 ultimate resolution of the above-referenced bankruptcy
proceeding. The Company has withdrawn its most recent application with the State
of New York for a terminal operator's and diesel motor fuel license based on its
belief that approval of the same would not be granted at the present time(due to
the circumstances which are the subject of the preceding paragraph). If the
Company determines to resubmit such application in the future, there can be no
assurance about the prospect of obtaining the approval of the same. 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.
There can be no assurance that at the conclusion of such proceeding, if the
result were a liquidation of ATI (which the Company believes is the likely
result),and therefore, a termination of such licenses, that the Company, by that
time, would 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.
<PAGE>
F-13
(b) On March 22, 1999, Infinity Investors Limited ("Infinity"), a creditor
and shareholder of Halstead Energy Corp. (the "Registrant"), filed a Motion for
Ex Parte Appointment of Receiver against the Registrant, corporation, Claire E.
Tarricone, Anthony J. Tarricone, Joseph A. Tarricone, Edwin Goldwasser, Joseph
Gatti and Does 1 through 10 (the "Defendants"), with the Second Judicial
District Court of the State of Nevada in and for the County of Washoe. On March
23, 1999, the Second Judicial District Court of the State of Nevada in and for
the County of Washoe granted the Motion for Ex Parte Appointment of Receiver and
further ordered that Bernard A. Katz ("Katz"), a partner of J.H. Cohn LLP ("J.H.
Cohn"), be appointed receiver of the Registrant to (i) preserve the assets of
the Registrant for the benefit of its shareholders and creditors; (ii) possess
and control the accounts, funds, monies and books and records of the Registrant;
and (iii) undertake the daily business operations of the Registrant pursuant to
the function, powers and duties conferred on receivers as provided under Nevada
State Law. Upon the issuance of the order, the Receiver entered upon and secured
possession of the premises of Halstead Quinn Propane, Inc., a New York
coporation and a wholly-owned operating subsidiary of the Registrant ("HQ"), by
changing the locks of, answering the phones of, and denying HQ management entry
onto the premises owned by, HQ.
Unable to conduct its business,on March 26, 1999, HQ filed a motion for
order to show cause with temporary restraining order against the Receiver in
Part 1 of the Supreme Court of the State of New York ("New York State"). On that
same day, an order to show cause with temporary restraining order was granted
enjoining and restraining the Receiver, its agents, employees, affiliates,
subsidiaries or any other entity or person acting under and/or of its authority
or direction from taking any action with respect to HQ's property in New York
and (i) enjoining the Receiver, directly or indirectly, from exercising or
attempting to exercise possession, custody or control over HQ's property in New
York; (ii) enjoining the Receiver, directly or indirectly, from interfering with
the management and operation of HQ's business or its property in New York;
(iii)enjoining the Receiver, directly or indirectly, from restraining, impeding
or interfering with the officers, directors and/or employees of HQ from managing
or operating the business and affairs in New York; (iv) compelling the Receiver
to surrender all of HQ's property in their custody, possession or control
derived from their entry upon HQ's premises in Mt. Kisco, including copies of
any books, records or information made or obtained by the Receiver thereof; and
(v) compelling the Receiver to surrender to HQ all keys, passes, combinations,
locks or other physical restraints placed or imposed directly or indirectly by
the Receiver over or upon HQ's property in Mt. Kisco. HQ also on that same date
commenced a lawsuit in New York State Court against Katz and J.H. Cohn to
recover damages sustained by HQ as a result of what management believes was
Katz's and J.H. Cohn's illegal and tortious interference with HQ and its
property.
(c) On April 1, 1999, the Registrant filed a petition requesting relief
under Chapter 11 of the Bankruptcy Code (title 11 of the United States Code)
with the United States Bankruptcy Court for the Southern District of New York.
The Bandruptcy Court, in response, ordered that the Registrant, as debtor-in-
possession, as of the date of filing its Chapter 11 petition, shall retain
control of a bank account with the Hudson Valley National Bank (the "Account")
for operational purposes conditional upon the Registrant's making appropriate
notations in its books and records related to the Account to reflect the
commencement of this Chapter 11 case and all checks issued by the Registrant
including the Designation "Debtor-in-Possession" or "DIP" on the face of
such checks. The order further authorized and directed Hudson Valley to
continue to serve and administer the Account and enjoined Hudson Valley
from offsetting, freezing or otherwise impeding the use of a transfer or, or
access to, funds deposited by the Registrant in the Account by reason of any
claim, as defined in 11 U.S.C. 101(5), of Hudson Valley against the
Registrant that was prior to the filing of the Chapter 11 Petition.
Additionally, the order operated to stay all of the Nevada receivership
proceedings pursuant to automatic stay provisions of the Bankruptcy Code 11
U.S.C. 362. In connection with the foregoing, the Registrant is disputing the
indebtedness evidenced by the Infinity Note (as referenced in Part I, Item 2,
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," above).
On April 5, 1999, Infinity filed a motion in the Debtor's bankruptcy case
seeking, among other things, to have the Receiver remain in possession of the
Registrant's property (subsequent to April 5, 1999, Infinity withdrew this
motion) or, in the alternative, to appoint a Chapter 11 trustee for the
Registrant, pursuant to Section 1104 of the Bankruptcy Code. The Bankruptcy
Court held a hearing on April 26, 1999 to consider and decide Infinity's motion,
which motion was contested by the Registrant. The Bankruptcy Cout denied
Infinity's motion. Instead, the court appointed an examiner to conduct an
investigation of the Registrant and HQ, and their respective assets,
liabilities, financial condition, agreements, transactions and causes of action,
and to submit to such court as soon as practical a report of such investigation.
Additionally, the Bankruptcy Court granted the examiner, among other things
(subject to certain conditions), the authority to (i) review and approve any
and all agreements, leases, transfers, conveyances, expenditures, or payments
(collectively, "Transactions") by the Registrant or HQ, other than purchases and
sales of inventory in the ordinary course of the Registrant's or HQ's business
or other Transactions in the ordinary course of the Registrant's or HQ's
business involving less than $10,000 per Transaction, (ii) review and approve
any and all Transactions by Registrant or HQ with any person or entity
related to or affiliated with the Registrant, HQ, or any of their respective
officers or directors, and (iii) retain professionals which the examiner
determines necessary to aid such examiner in connection with the
foregoing.
(d) On July 2, 1999, HQ filed a petition requesting relief under Chapter 11
of the Bankruptcy Code (title 11 of the United States Code) with the United
States Bankruptcy Court for the Southern District of New York. The Bankruptcy
Court, in response, ordered that HQ, as debtor-in-possession, as of the date of
filing its Chapter 11 petition, shall retain control of bank accounts with the
Bank of New York collectively (the "HQ Account"), for operational purposes
conditional upon HQ making appropriate notations in its books and records
related to the HQ Account to reflect the commencement of this Chapter 11 case
and all checks issued by HQ including the designation "Debtor-in-Possession"
or "DIP"on the face of such checks. The order further authorized and directed
the Bank of New York to continue to serve and administer the HQ Account and
enjoined the Bank of New York from offsetting, freezing or otherwise impeding
the use of a transfer or, or access to, funds deposited by HQ in the HQ Account
by reason of any claim, as defined in 11 U.S.C. 101(5), of the Bank of New York
against HQ that was prior to the filing of the Chapter 11 Petition.
(e) 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-14
<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: July 15, 1999 By: /s/ Claire E. Tarricone
------------------------
President
Dated: July 15, 1999 By: /s/ Joseph A. Tarricone
------------------------
Vice President/Treasurer
F-15
<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 May 31, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS. </LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> AUG-31-1999
<PERIOD-START> MAR-1-1999
<PERIOD-END> MAY-31-1999
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 1,389,012
<ALLOWANCES> 51,382
<INVENTORY> 74,136
<CURRENT-ASSETS> 2,721,404
<PP&E> 11,071,389
<DEPRECIATION> 242,445
<TOTAL-ASSETS> 15,044,619
<CURRENT-LIABILITIES> 7,383,897
<BONDS> 0
1,064,169
3,614,800
<COMMON> 6,845,197
<OTHER-SE> (5,732,065)
<TOTAL-LIABILITY-AND-EQUITY> 15,044,619
<SALES> 2,754,480
<TOTAL-REVENUES> 2,915,930
<CGS> 1,843,072
<TOTAL-COSTS> 3,469,245
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 195,654
<INCOME-PRETAX> (570,288)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (570,288)
<EPS-BASIC> (.19)
<EPS-DILUTED> (.19)
</TABLE>
