Form 10-QSB -- Quarterly or Transitional Report
(Mark One)
|X| QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1996
|_| TRANSITION REPORT UNDER SECTION 13
OR 15(d) OF THE EXCHANGE ACT
For the transition period from ___________ to ___________
Commission File Number 0-23814
CONCORD ENERGY INCORPORATED
(Exact name of small business issuer as specified in its charter)
Delaware 22-2670198
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
1515 Simmons Street, Jourdanton, TX 78026
(Address of principal executive offices)
(210) 769-3955
(Issuer's telephone number)
(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 Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days. Yes|X| No|_|
At September 30, 1996, the outstanding common equity of Concord Energy
Incorporated comprised 5,958,811 shares of common stock, $.0001 par value.
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
The following financial statements are filed as part of this report:
Pages
-----
Consolidated Balance Sheet (Unaudited),
September 30, 1996 and 1995 F-1
Consolidated Statements of Operations and
Accumulated Deficit (Unaudited)
Three Months Ended September 30, 1996, and 1995 F-2
Consolidated Statements of Cash Flows (Unaudited),
Three Months Ended September 30, 1996, and 1995 F-3
Notes to Consolidated Financial Statements F-4 - F-18
2
<PAGE>
Item 2. Management's Discussion and Analysis or Plan of Operation.
General Operations
In May 1993 the Company consummated an Agreement and Plan of Reorganization
("Agreement") pursuant to which it entered into the oil and gas industry. Under
the Agreement, the Company changed its name to Concord Energy Incorporated
(referred to herein as the "Company") and became the parent of an entity which
manages and owns interests in approximately 75 oil and gas wells primarily
located in East Texas and the Louisiana Gulf Coast. The Company's oil and gas
subsidiary was formed in June 1991 in order to effectuate a consolidation of 166
oil and gas partnerships.
In May 1995, the Company acquired Knight Equipment and Manufacturing
Corporation ("KEMCO"), which locates, designs, refurbishes, and installs gas
processing plants for the natural gas industry. The effective date of the
acquisition was April 1, 1995.
In March 1996, the Company acquired Integrated Petroleum System Corporation
("IPS"), which has developed a unique, proprietary software which is used to
collect, process and transmit data relative to petroleum production and
processing operations.
Results of Operations
The Company's revenues are primarily derived through its KEMCO subsidiary
from the engineering, manufacturing, constructing and leasing of gas processing
equipment. The Company also realizes revenue through the sale of oil and gas,
well operations and the sale of oil and gas data gathering software developed by
IPS. During the three months ended September 30, 1996 the Company reported total
3
<PAGE>
income from operations of $4,496,758. Contract revenues during the three months
period were $3,978,351. Rental income for the three months period was $37,367.
The Company's oil sales during the three month period were $241,354 and the gas
sales totaled $178,479. The Company reported revenue from well operating income
of $10,721 and software sales of $50,485 during the three months period ended
September 30, 1996. By comparison, during the three months period ended
September 30, 1995 the Company reported total income from operations of
$3,160,628, including contract revenues of $2,781,384, rental income of $34,447,
oil sales of $155,643, gas sales of $94,837, revenue from syndication sales and
revenue interests of $80,000 and well operating income of $14,317.
Total revenues increased by $1,336,130 during the three months ended
September 30, 1996 compared to the three months period ended September 30, 1995.
This increase is primarily due to the increase in contract revenues of
$1,196,967 and increases in oil and gas sales of $85,711 and $84,642,
respectively.
Total costs and operating expenses during the three months ended September
30, 1996 were $4,049,173. Cost of contract revenue during the period was
$2,922,840. Lease operating expenses accounted for $167,939. Lease operating
expenses as a percentage of total oil and gas sales were approximately 40%. In
comparison, during the three months period ended September 30, 1995 total costs
and operating expenses were $5,725,108. During the period ended September 30,
1995 costs of contract revenue were $1,573,934, lease operating expenses were
$218,717 and lease operating expenses as a percentage of oil and gas sales were
approximately 87%. Total costs and operating expenses decreased by $1,675,935,
and lease operating expenses decreased by $50,778 during the three months period
4
<PAGE>
ended September 30, 1996 as compared to the three months period ended September
30, 1995, and lease operating expenses as a percentage of total oil and gas
sales decreased by approximately 47%. Included in the costs and expenses in the
three months period ended September 30, 1995 was the recording of a $3,043,055
inventory restatement. This was a result of a retail market value being booked
at the time of the KEMCO acquisition rather than at wholesale value with the
balance of the cost of acquisition being charged to goodwill as it should have
been. Current management and the Company's new auditors have determined that the
allocated costs were in error and has chosen to take a one time adjustment to
more accurately reflect the operations of the Company. The decrease in costs and
operating expenses from the September 30, 1995 quarter to that ending September
30, 1996 primarily relate to the inclusion of this adjustment in the prior
period.
During the three months period ended September 30, 1996, general and
administrative expenses were $751,281. During the three months period ended
September 30, 1995, the Company's total general and administrative expenses were
$748,358, of which $348,000 consisted of payments under the Company's management
agreement with Integrated, which was terminated on June 30, 1996. Also included
in the three months period ended September 30, 1996 were costs of $155,740
associated with the winding down of the Company's New Jersey office and staff
which costs have recently been reduced significantly as described in the
Company's Form 10-KSB, for the fiscal year ended June 30, 1996.
5
<PAGE>
Depreciation, depletion and amortization expenses during the three months
period ended September 30, 1996 were $207,113. During the three months period
ended September 30, 1995 these expenses were $141,044. The increase of $66,069
is primarily due to the addition of $44,220 of amortization for IPS goodwill and
the increase in oil and gas production.
Interest expense for the three months period ended September 30, 1996 was
$243,612. During the three months period ended September 30, 1995 interest
expense was $348,096. The decrease of $104,484 is primarily the result of the
elimination of bridge financing costs associated with the KEMCO acquisition.
For the three months period ended September 30, 1996 the Company reported
net income of $209,143. For the three months period ended September 30, 1995 the
Company reported a net loss of $2,906,268. The increased net income of
$3,043,055 for the three months ended September 30, 1996, as compared to the
three months ended September 30, 1995, primarily resulted from the inventory
restatement of $3,043,055 recorded in the three months period ended September
30, 1995 previously discussed.
Liquidity and Capital Resources
As of September 30, 1996 the Company reported working capital of $2,491,153
compared to working capital of $3,843,101 at September 30, 1995. Total current
assets increased by $1,748,136 which is the combination of a decrease in cash
and cash equivalents of $29,098, an increase in receivables of $2,188,596 and a
decrease in inventories and other current assets of $411,362, as compared to
September 30, 1995. Total current liabilities increased from $4,661,931 as of
6
<PAGE>
September 30, 1995 to $7,762,015 as of September 30, 1996, for a net increase of
$3,100,084. The combination of the foregoing resulted in a net decrease in
working capital of $1,351,948 from September 30, 1995 to September 30, 1996.
This decrease is primarily related to the reclassification of $2,920,000 from
long term debt to short term debt, and the addition of $148,140 of short term
debt acquired with IPS, partially offset by a net increase in cash and accounts
receivable of $2,159,498.
Capital Expenditures and Commitments
During the three months ended September 30, 1996, the Company incurred
capital expenditures of $73,881. These capital expenditures were primarily for
equipment purchases by KEMCO.
7
<PAGE>
SIGNATURES
In accordance with the requirements of the Exchange Act, the Company caused
this Report to be signed on it's behalf by the undersigned, thereunto duly
authorized.
CONCORD ENERGY INCORPORATED
(Company)
Dated: December 11, 1996 /s/ Deral Knight
-----------------------------------------
Deral Knight
President, Chief Executive Officer
and Chairman of the Board of Directors
Dated: December 11, 1996 /s/ Scott Kalish
-----------------------------------------
Scott Kalish
Treasurer
(Principal Accounting Officer)
8
<PAGE>
Concord Energy Incorporated and Subsidiaries
Consolidated Balance Sheet
- --------------------------------------------------------------------------------
(Unaudited) (Unaudited)
September 30, September 30,
1996 1995
Assets
Current assets
Cash and cash equivalents $ 761,929 $ 791,027
Costs and estimated earnings in excess
of billings on uncompleted contracts 1,515,817 787,979
Accounts receivable, net of allowance for
doubtful accounts of $132,390 and $67,490 2,190,894 811,898
Receivable from stockholder -- 115,602
Receivable due from Integrated, net 197,364 --
Inventories 5,475,899 5,842,350
Prepaid expenses and other assets 111,265 156,176
------------ -----------
Total current assets 10,253,168 8,505,032
Property, plant and equipment, net 8,433,538 9,029,312
Goodwill, net 2,550,028 --
Bond issuance costs, net 293,075 494,649
Other assets 50,000 50,000
------------ -----------
Total assets $ 21,579,808 $ 18,078,993
============ ===========
Liabilities and Stockholders' Equity
Current liabilities
Current portion of notes payble to stockholders $ 250,000 $ 325,000
Current portion of long-term debt 4,126,344 1,200,000
Current portion of capital lease obligations 15,161 --
Accounts payable 1,772,613 1,196,106
Accrued expenses 1,499,979 1,375,882
Payable due to Integrated, net -- 428,107
Federal income taxes payable 97,918 136,836
------------ -----------
Total current liabilities 7,762,015 4,661,931
Long term liabilities
Notes payable 2,539,549 5,641,174
Capital lease obligations 52,368 46,673
------------ -----------
Total Long term liabilities 2,591,917 5,687,847
------------ -----------
Commitments and Contingencies
Stockholders' equity
Preferred Stock, $.01 par value, 1,000 shares
authorized, 0 shares issued and outstanding -- --
Common stock, $.0001 par value, 20,000,000
shares authorized, 5,958,811 and 3,104,224
(pre-split) shares issued and outstanding 594 310
Paid-In capital 22,605,392 14,936,568
Accumulated deficit (10,899,544)
------------ -----------
11,706,442 7,729,215
Treasury Stock (480,566) --
------------ -----------
Total stockholders' equity 11,225,876 7,729,215
------------ -----------
Total liabilities and stockholders' equity $ 21,579,808 $ 18,078,993
============ ===========
The accompanying notes are an integral part
of these consolidated financial statements.
F-1
<PAGE>
Concord Energy Incorporated and Subsidiaries
Consolidated Statement of Operations
- --------------------------------------------------------------------------------
(Unaudited) (Unaudited)
Quarter Ended Quarter Ended
September 30, September 30,
1996 1995
Revenue:
Oil sales $ 241,354 $ 155,643
Gas sales 178,479 94,837
------------ -----------
Total oil and gas sales 419,833 250,480
Contract revenue 3,978,351 2,781,384
Syndication sales and revenue interests -- 80,000
Well operating income 10,721 14,317
Rental income 37,367 34,447
Software Sales 50,485 --
------------ -----------
Total revenue 4,496,758 3,160,628
------------ -----------
Costs and Operating Expenses:
Lease operating 167,939 218,717
Cost of contract revenue 2,922,840 1,573,934
Inventory - adjustment to lower of cost or market -- 3,043,055
General and administrative:
Management agreement -- 348,000
Other expenses 751,281 400,358
Depreciation, depletion and amortization 207,113 141,044
------------ -----------
Total costs and operating expenses 4,049,173 5,725,108
------------ -----------
Income (Loss) from Operations 447,585 (2,564,480)
------------ -----------
Other income (expense)
Other income 5,170 6,308
Interest expense (243,612) (348,096)
------------ -----------
(238,442) (341,788)
------------ -----------
Income (Loss) before income taxes 209,143 (2,906,268)
------------ -----------
Income tax expense -- --
------------ -----------
Net Income (Loss) $ 209,143 $(2,906,268)
============ ===========
Accumulated deficit, beginning of period (11,108,688) $(4,301,395)
============ ===========
Accumulated deficit, end of period $(10,899,545) $(7,207,663)
============ ===========
Income (Loss) per share $ 0.04 $ (0.94)
============ ===========
The accompanying notes are an integral part
of these consolidated financial statements.
F-2
<PAGE>
Concord Energy Incorporated and Subsidiaries
Consolidated Statement of Cash Flows
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
(Unaudited) (Unaudited)
Quarter Ended Quarter Ended
September 30, September 30,
1996 1995
<S> <C> <C>
Cash flows from operating activities
Net Income (loss) $ 209,143 $(2,906,268)
Adjustments to reconcile net income/loss to net cash
(used in) provided by operating activities:
Depreciation, depletion and amortization 207,113 141,044
Other noncash transactions 132,485 3,043,055
Decrease (Increase) in assets:
Accounts receivable (931,109) (115,340)
Costs and estimated earning in excess
of billings on uncompleted contracts (1,398,722) (326,327)
Receivable due from Stockholder -- (11,983)
Receivable due from affiliated company -- 15,937
Inventories 606,074 (432,780)
Deferred income taxes -- 22,006
Other assets and liabilities (91,001) (77,327)
(Decrease) Increase in liabilities
Accounts payable 440,223 337,571
Accrued expenses 312,745 871,264
Federal income tax payable -- 16,738
Receivable due from/payable due to Integrated, net 39,051 (166,578)
Interest payable to stockholders -- 3,375
----------- -----------
Net cash provided by (used in) operating activities (473,998) 414,388
----------- -----------
Cash flows from investing activities
Purchase of propery, plant , oil and gas equipment,
well workovers and recompletions (73,882) 37,601
----------- -----------
Net cash (used in) provided by investing activities (73,882) 37,601
----------- -----------
Cash flows from financing activities
Net proceeds from note payable -- 775,000
Net proceeds from issuance of common stock 856,665 --
Principal payments on notes payable and
capital lease obligations (444,939) (693,750)
----------- -----------
Net cash flows provided by (used in)
financing activities 411,726 81,250
----------- -----------
Net increase (decrease) in cash and cash equivalents (136,154) 533,238
----------- -----------
Cash and cash equivalents at beginning of period 898,083 257,788
----------- -----------
Cash and cash equivalents at end of period $ 761,929 $ 791,027
=========== ===========
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements.
F-3
<PAGE>
Concord Energy Incorporated and Subsidiaries
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
1. Organization, Recapitalization, and Operations
Concord Energy Incorporated (the "Company") is an oil and gas production and
service company which also locates, designs, refurbishes and installs gas plants
and gas processing equipment for customers in the natural gas industry. In
addition, the Company provides rentals of gas plants and gas processing
equipment and provides services such as engineering, procurement, dismantling,
reapplication and relocation of complete gas processing facilities. In addition,
the Company has developed unique, proprietary software which is used to collect,
process and transmit data relative to petroleum production and processing
operations. The Company is headquartered in Jourdanton, Texas with substantially
all of its oil and gas operations in East Texas and the Louisiana Gulf Coast.
The Company's wholly-owned subsidiaries, Concord Operating, Inc. ("COI"), and
Knight Equipment & Manufacturing Corporation ("KEMCO") are located in
Jourdanton, Texas, and Integrated Petroleum Systems Corporation ("IPS") is
located in Denver, Colorado.
Concord Energy, Inc., (the Company's name prior to the recapitalization
described below) was formed in June 1991 for the purpose of combining the net
assets and operations of 166 previously independent oil and gas partnerships
(the "Partnerships") and the net assets and operations of COI through an
exchange of Partnership and COI net assets for common stock in Concord Energy,
Inc. The exchange was accounted for at historical cost. Certain limited partners
in the Partnerships which did not participate in the exchange were allocated net
working interests in the properties previously held by the respective
Partnerships.
Prior to the exchange, the Partnerships were managed by Integrated Energy, Inc.
("Integrated") and Tucker Financial, Inc. ("Tucker") which were in the business
of establishing and managing oil and gas limited partnerships. Subsequent to the
exchange through June 30, 1996, Integrated continued to provide certain
management and administrative services to the Company pursuant to a management
agreement between the Company and Integrated, which was terminated on June 30,
1996. COI manages the production of Company-owned oil and gas properties.
On May 19, 1993, Monoclonal International Technology, Inc. ("MITI") acquired all
of the outstanding common stock of Concord Energy, Inc., with MITI as the
acquirer (i.e. a reverse acquisition). In connection with the acquisition, MITI
later changed its name to Concord Energy Incorporated, approved a 1 for 230
reverse split of its 127,784,100 shares of common stock and issued 10,556,077
shares of its common stock in exchange for all the outstanding common stock of
Concord Energy, Inc.
F-4
<PAGE>
Concord Energy Incorporated and Subsidiaries
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
In December 1995, the company effectuated a 1 for 5 reverse split of it's
outstanding stock. Historical stockholders equity has been retroactively
restated for all periods presented in the accompanying consolidated financial
statements to reflect this reverse split.
2. Summary of Significant Accounting Policies
Principles of consolidation
The consolidated financial statements are comprised of the Company and its
wholly-owned subsidiaries, Concord Energy, Inc., Concord Operating, Inc., Knight
Equipment & Manufacturing Corporation and its wholly-owned subsidiary, K & S
Engineering, Inc. and Integrated Petroleum Systems. All significant intercompany
accounts and transactions are eliminated in consolidation.
Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
effect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Cash equivalents
Cash and cash equivalents include all cash and highly liquid investments with
original maturities of three months or less.
Inventories
Inventories are stated at the lower of cost or market using the first-in
first-out method. Inventory consists principally of gas plants, compressors,
separators, supplies and repair parts utilized by the Company in conjunction
with its design and refurbishing of gas plants and gas processing equipment.
Property, plant and equipment
Property, plant and equipment is stated at cost less accumulated depreciation,
depletion and amortization.
F-5
<PAGE>
Concord Energy Incorporated and Subsidiaries
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
The Company accounts for its oil and gas properties under the full cost method
of accounting. Under the full cost method, all costs incurred in acquiring,
exploring and developing oil and gas reserves are capitalized to the full cost
pool. When oil and gas properties are sold, retired or otherwise disposed of,
any applicable proceeds are credited to the full cost pool, with no gain or loss
recognized, unless the sale would have a significant impact on the relationship
between capitalized costs and proved reserves. Since all of its oil and gas
operations are within the United States, the Company utilizes one cost pool to
account for its oil and gas properties. Depreciation, depletion and amortization
of oil and gas properties is computed based on the unit-of-production method for
the cost pool, based on estimates of proved reserves as determined by an
independent reserve engineer.
Other property, plant and equipment is recorded at cost less accumulated
depreciation. Repairs and maintenance costs which do not extend the useful lives
of the assets are expenses as incurred. Depreciation is provided for on the
straight-line method over the estimated useful lives of the assets which range
from three to seven years, except for buildings and improvements which are
depreciated over estimated useful lives ranging from 20 to 30 years.
Goodwill
Goodwill is amortized straight-line over it's estimated useful life of 15 years
in accordance with Generally Accepted Accounting Principles.
Leases
Leases which meet certain criteria evidencing substantive ownership by the
company are capitalized and the related capital lease obligations are included
in liabilities. Amortization and interest are charges to expense, with rent
payments being treated as payments of the capital lease obligation. All other
leases are accounted for as operating leases, with rent payments being charges
to expense as incurred.
Deferred financing and bond issuance costs
Costs incurred in conjunction with obtaining financing (including costs
associated with the issuance of bonds) are amortized using the straight-line
method over the term of the related financing agreement or bond. Bond issuance
costs at June 30, 1996 and 1995 is stated net of accumulated amortization of
$227,686 and $31,445, respectively.
F-6
<PAGE>
Concord Energy Incorporated and Subsidiaries
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
Revenue recognition
Oil and gas sales
Revenues from oil and gas sales are accrued as earned based on joint interest
billings obtained from the well operator.
Contract revenue
Revenues from construction contracts are recognized based on the percentage of
completion method, measured on the basis of costs incurred to date to estimated
total budgeted costs for each contract. Contract costs include all direct
material and labor costs, including those indirect labor and repair costs
related to contract performance. Selling, general and administrative costs are
charged to expense as incurred. Provisions for estimated losses on uncompleted
contracts are made in the period in which such losses are determined. Changes in
job performance, job conditions, estimated profitability and final contract
settlements are monitored on a periodic basis in order to determine if revisions
to the income and cost estimates are necessary as a result of such changes.
Revisions to the income and cost estimates, if any, are recognized in the period
in which such revisions are determined to be necessary. Costs and earnings in
excess of billings on uncompleted contracts represent an asset based on revenues
recognized in excess of amounts billed to customers. Billings in excess of costs
and earnings on uncompleted contracts are recorded as a liability and represent
contracts for which billings to date exceed cumulative revenues recognized based
on the percentage of completion method.
Syndication sales
Under an agreement between the company and Integrated (see Note 10) which was
terminated on June 30, 1996, the Company was entitled to receive 20% of all
sales made by Integrated of syndicated retail partnerships. This revenue was
recognized when earned.
Well operating income
The Company, through its wholly owned subsidiary COI, manages and operates
wells. The revenue generated from these services is recognized when earned.
Rental revenue
The Company leases certain gas plants and separators to customers under short
term leases which are accounted for as operating leases. At September 30, 1996
and 1995, there are no significant future minimum rentals to be received under
these noncancelable operating leases.
F-7
<PAGE>
Concord Energy Incorporated and Subsidiaries
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
Software sales
The Company, through its wholly owned subsidiary IPS, sells, installs and
maintains its proprietary software. The revenue generated from these services is
recognized when earned.
Income taxes
The Company accounts for income taxes under the asset and liability method.
Under the asset and liability method, deferred tax assets and liabilities are
recognized based upon differences arising from the carrying of amounts of the
Company's assets and liabilities for tax and financial reporting purposes using
enacted tax rates in effect for the year in which the differences are expected
to reverse. The effect on deferred tax assets and liabilities of a change in tax
rates is recognized in income in the period when the change in tax rates is
enacted.
Net income (loss) per share
Net loss per share of common stock is based upon the number of shares of common
stock outstanding (5,958,811 in fiscal 1996 and 3,104,224 in fiscal 1995) . The
Company's common stock equivalents, which consist of outstanding warrants to
purchase the Company's common stock, are not considered in the net income (loss)
per share calculation since their effect is anti-dilutive.
3. Business Combinations
On May 7, 1995, the company acquired all of the issued and outstanding shares of
the common stock of KEMCO for $7,000,000 in a business combination accounted for
under the purchase method of accounting. The acquisition was financed through
400,000 shares of the Company's common stock and $4,500,000 in cash. Financing
for the cash portion of the purchase price was obtained primarily through the
net proceeds from debt financing totaling approximately $3,700,000 and the net
proceeds from the issuance of 260,000 shares of the Company's common stock
totaling approximately $800,000. The results of operations of KEMCO and its
wholly-owned subsidiary, K & S Engineering, Inc., subsequent to April 1, 1995,
the date effective control of KEMCO transferred to the Company for financial
reporting purposes, are included in these consolidated financial statements.
F-8
<PAGE>
Concord Energy Incorporated and Subsidiaries
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
On March 1, 1996 the Company acquired all of the issued and outstanding shares
of the common stock of IPS for 600,000 shares of the Company's common stock in a
business combination accounted for under the purchase method of accounting. The
results of operations of IPS subsequent to March 1, 1996, are included in these
consolidated financial statements.
At the time of purchase, IPS liabilities exceed the value of it's assets by
$853,208, which when added to the $1,800,000 value assigned to the shares of
common stock issued resulted in goodwill of $2,653,208 being recorded.
Amortization of $103,180 is recorded as of September 30, 1996.
4. Accounts Receivable and Concentration of Credit Risk
Accounts receivable represent amounts due from customers who are in the oil and
gas business throughout North America. Fluctuations in market conditions impact
the credit worthiness of these customers. The Company reviews the financial
condition of purchasers and joint interest participants prior to signing sales
or joint interest agreements. Payment terms are on a short-term basis and in
accordance with industry standards.
5. Inventory - Lower of Cost or Market Adjustment
Based on a comparison of the estimated potential sales prices to the recorded
carrying costs of the inventory of plants acquired in the KEMCO acquisition,
management has determined that the recorded cost of the inventory of such plants
was in excess of the market value of the plants which would allow a reasonable
profit margin on the sale of the plants. The recorded cost of the inventory of
such plants had been determined based on an appraisal obtained and relied upon
to establish the value of the plants at the time KEMCO was acquired. Management
subsequently determined that the values assigned to the plants were the
appraiser's estimated retail sales price of the plants rather than a wholesale
market value that would allow a reasonable profit margin on the sales of the
plants.
To adjust the carrying cost of the plants to their estimated market value, an
adjustment of $3,043,055 was charged to expense for the quarter ended September
30, 1995.
6. Property, Plant and Equipment, Net
Significant components comprising property, plant and equipment at September 30
include the following:
F-9
<PAGE>
Concord Energy Incorporated and Subsidiaries
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
1996 1995
Oil & gas properties:
Leasehold costs $ 7,495,916 $ 7,368,416
Lease well & equipment 1,845,508 1,944,882
Intangibles 1,904,925 1,904,925
Property, plant & equipment 484,181 945,431
Other 80,632 58,551
------------ ------------
11,811,162 12,222,205
------------ ------------
Other property, plant & equipment
Land 185,413 159,913
Buildings & improvements 359,535 239,675
Machinery & equipment 305,999 186,820
Vehicles 237,896 218,769
Furniture, fixtures & software 191,679 81,710
------------ ------------
1,280,522 886,887
------------ ------------
Accumulated depreciation,
depletion and amortization (4,658,146) (4,079,780)
------------ ------------
Property, plant and equipment, net $ 8,433,53 8 $ 9,029,312
------------ ------------
Depreciation, depletion and amortization of oil and gas properties, and
depreciation of other property, plant and equipment for the periods ended
September 30, is as follows:
1996 1995
Oil and gas properties $130,498 $111,044
Other property, plant and equipment 32,395 30,000
-------- --------
$162,893 $141,044
======== ========
F-10
<PAGE>
Concord Energy Incorporated and Subsidiaries
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
7. Debt and Capital Lease Obligations
Debt
Long-term debt includes the following at September 30:
1996 1995
Bond payable, dated May 1995, with
interest at 10% per annum, requiring
semi-annual interest payments through
maturity on May 1, 1997. The bond is
secured by the assets of KEMCO. As
additional consideration, the Company
issued 90,000 shares of common
shares to the lender $2,920,000 $2,920,000
Secured notes payable, dated December
1994, with a face value of $2,500,000
issued at $750,000 discount. The notes
bear interest at 9% per annum with an
effective interest rate of 15% per
annum. Semi-annual interest payments of
$112,500 are required through maturity
in January 2010. The notes are secured
by certain gas plants and equipment
and a guarantee of the Company. 1,779,476 1,762,387
Secured notes payable, dated September
1994, with a face value of $1,400,000
issued at a $604,500 discount. The notes
bear interest at 6% per annum payable
semi-annually with an effective interest
rate of 14.02% per annum. Annual
principal payments of $140,000 are
required beginning in August 2005
through maturity in August 2009. The
notes are secured by certain oil and gas
property owned by the Company. 728,088 708,787
F-11
<PAGE>
Concord Energy Incorporated and Subsidiaries
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
Acquisition bridge financing evidenced
by notes payable which bear interest at
12% per annum. The interest and related
principal are due at various maturity
dates through November 1996.
Approximately $180,000 and $500,000 of
the notes at June 30, 1996 and 1995,
respectively are secured by a personal
guarantee from Jerry Swon, former
Chairman of the Company's Board of
Directors, who is also a shareholder
of the Company. 60,000 500,000
Unsecured notes payable, bearing
interest at 7% per annum. Interest and
Principal were due at various
dates through August 1995. -- 50,000
12% convertible notes, dated October
1994, convertible at maturity into
shares of the Company's common stock.
$125,000 of these notes matured and were
converted into 25,000 shares of the
Company's common stock. Upon the
conversion, an additional 3,000 shares
of the Company's common stock was issued
as consideration for accrued interest
expense through the date of conversion
totaling $15,000. The remainder of the
notes mature in October 1996. The notes
are secured by certain oil and gas
property owned by the Company. 125,000 125,000
secured note payable date January 1996,
with interest at 9% per annum. Interest
and principal of $1,271 are due monthly
through January 2000. The note is
secured with certain equipment owned by
the Company. 43,774 --
Unsecured non-interest bearing note
payable dated March 1996 payable in
monthly installments of $43,599 through
maturity on December 15, 1996. 217,500 --
F-12
<PAGE>
Concord Energy Incorporated and Subsidiaries
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
Secured note payable dated February
1996, with interest at 12% per annum.
Principal and interest are due at
maturity on February 28, 1997. The note
is secured by a certain gas plant owned
by the Company. 600,000 --
In July, 1995 issued $500,000 of 12%
convertible notes. Upon maturity, or any
time prior thereto, each $250,000
portion of the obligation is convertible
into additional shares of common stock.
The notes mature, one half each July 7,
1996 and August 7, 1996, respectively. -- 500,000
On August 21, 1995, the Company issued
$275,000 of 12% convertible notes. Upon
maturity, or any time prior thereto, the
obligation is convertible into
additional shares of common stock at
$5.00 per share. The note matures on
August 21, 1996. -- 275,000
Various unsecured notes payable, bearing
interest of 4.5% to 12% per annum. The
interest and principal are due at various
maturity dates through May 1997. 192,055 --
---------- ----------
Total debt outstanding 6,665,893 6,841,174
Less: current portion 4,126,344 1,200,000
---------- ----------
Long-term debt $2,539,549 $5,641,174
---------- ----------
As of September 30, 1996, maturities and scheduled payments for the next five
fiscal years and thereafter are: $4,126,344 in fiscal 1997, $12,608 in fiscal
1998, 58,790 in fiscal 1999, $8,635 in fiscal 2000, and the remainder after
fiscal year 2001.
Capital Lease Obligations
In conjunction with its acquisition of KEMCO, the Company acquired certain
leased equipment which is accounted for as capital leases. Prior to the
acquisition, certain of the leases were prepaid at inception. Capital lease
obligations recorded in the accompanying consolidated financial statements
represent the present value of the lease purchase options which are exercisable
F-13
<PAGE>
Concord Energy Incorporated and Subsidiaries
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
at the end of the lease term in December 1997, discounted at an interest rate of
16% and the future payments due on a lease of a yard facility discounted at 12%.
Capital lease obligations as of September 30 consist of the following:
1996 1995
Total future minimum lease payments $79,106 $67,106
Less: amounts representing interest 11,577 20,433
------- -------
Present value of minimum lease payments $67,529 $46,673
======= =======
The obligations under capital lease mature as follows: $15,161 in fiscal 1997
and $52,368 in fiscal 1998.
Capital lease obligations as of June 30 consist of the following:
1996 1995
Total future minimum lease payments $85,106 $67,106
Less: amounts representing interest 14,013 20,433
------- -------
Present value of minimum lease payments $71,093 $46,673
------- -------
The obligations under capital leases mature as follows; $23,100 in fiscal 1997
and $47,993 in fiscal 1998.
8. Commitments and Contingencies
Minimum Rental Commitments
The Company has several noncancelable operating leases, primarily for yard and
office equipment, that expire over the next five years. These leases generally
are for periods ranging from three to five years and require the Company to pay
all executory costs such as maintenance and insurance.
F-14
<PAGE>
Concord Energy Incorporated and Subsidiaries
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
Legal Matters
As of September 30, 1996, the Company was involved in various litigation matters
which it considers to be in the normal course of business. In the opinion of
management, based upon consultation with legal counsel, the claims either lack
merit, or the potential liability, if any, upon the ultimate disposition of
these lawsuits will not have a material effect on the Company's financial
position or results of operations.
9. Outstanding Warrants
Warrants outstanding as of September 30, 1996 to purchase shares of the
Company's common stock are summarized as follows:
Date of Issuance Number of Shares Exercise Price/Share Expiration Date
November 1994 1,500 $7.50 November 1997
June 1995 50,000 2.90 February 1998
June 1995 100,000 7.50 July 1997
August 1995 27,500 7.50 August 1996
November 1995 20,000 5.00 November 1998
February 1996 25,000 4.00 January 1999
February 1996 103,800 4.50 October 1996
February 1996 100,000 5.00 October 1996
May 1996 25,000 3.00 November 1996
May 1996 20,000 3.75 June 1998
May 1996 100,000 3.75 June 1999
May 1996 15,000 4.00 January 1998
May 1996 100,000 4.50 March 2001
May 1996 200,000 2.625 July 1999
The Company has sufficient shares authorized but not issued for use in the event
these warrants are exercised.
F-15
<PAGE>
Concord Energy Incorporated and Subsidiaries
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
10. Transactions with Related Parties
Related Party Ownership Interests
The former chairman of the Company's board of directors, personally and through
Integrated and Tucker, which are companies that he owns, own 2.58% of the
Company's common stock as of September 30, 1996. Additionally, certain officers
and directors of the Company, together with present chairman of the board own or
control 6.69% of the Company's common stock as of September 30, 1996.
Receivables from Related Parties/Affiliated Company
Integrated and the Company had an agreement by which the associated receivables
and payables may be netted. At September 30, 1996, the Company had a net
receivable due from Integrated of $197,364. At September 30, 1995, the Company
had a net Payable due to Integrated of $428,107.
As part of its ongoing operations, the Company conducts business with Atascosa
Electric Services ("AES"), an entity which is owned and controlled by the family
of Deral Knight, the president of KEMCO, who is also CEO, chairman of the board
of directors and a stockholder of the Company. At September 30, 1996, there was
no receivable due from stockholder (Deral Knight) or due from affiliated company
(AES). At September 30, 1995, the receivable due from stockholder (Deral Knight)
and due from affiliated company (AES) were $115,602 and $0, respectively
Under the provisions of the agreement whereby the Company acquired Deral
Knight's stock in KEMCO, Deral Knight has agreed to return to the Company,
Concord Energy Incorporated common stock valued at $6.25 per shares to the
extent that Deral Knight owed money to the Company at June 30, 1995.
Accordingly, in liquidation of the receivable balance, approximately 17,000
shares of Company common stock issued to Deral Knight as part of the purchase
price of his KEMCO stock are reflected as having been returned to the Company
and are recorded as treasury stock at September 30, 1996.
Other Payables to Related Parties
At September 30, 1996, $267,968 is owed to Richard D. Barden, the president of
IPS, and his wife June Barden. The balance generally consists of accrued
compensation and expense reimbursements due to them and is included in accrued
expenses in the accompanying balance sheet.
F-16
<PAGE>
Concord Energy Incorporated and Subsidiaries
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
Management Agreement
The Company and Integrated had entered into an agreement (the "Management
Agreement") that required Integrated to provide certain management,
administrative and accounting services to the Company and certain subsidiaries
for $116,000 per month which was terminated on June 30, 1996. The services
provided by Integrated include the receipt of cash for oil and gas sales and the
payment of operating and capital expenditures on behalf of the Company. In
accordance with the original provisions of the Management Agreement, the Company
is also entitled to 10% of all syndicated retail partnership gross sales made by
Integrated. As additional consideration for the Management Agreement, Integrated
assigned to the Company, effective June 1, 1991 through March 31, 1994, its
revenue sharing in future program syndication's. Effective March 31, 1994, the
Management Agreement was modified to provide the Company with 20% of all
syndicated retail partnership gross sales made by Integrated. During fiscal
1994, the Company sold to Integrated all of its revenue sharing interests which
were earned under the Management Agreement, aggregating $363,266. Revenue
interest income earned was also remitted to Integrated in connection with the
sale. The proceeds from the sale were recorded as reduction of the Company's
full-cost oil and gas properties pool. In the period ended September 30, 1996
and 1995 the Company recorded income from Integrated for as follows:
1996 1995
Syndication income $ -- $80,000
--------- -------
$ -- $80,000
--------- -------
Employment Agreements
On November 1, 1991 IPS entered into an employment agreement with its president,
Richard D. Barden. The agreement as modified on October 4, 1994 provides for him
to receive an annual base salary of $96,200 per year. The agreement also
provides for certain fringe benefits and bonuses and expires December 31, 2000.
On November 9, 1994 KEMCO entered into an employment agreement with its
president, Deral Knight. The agreement provides for him to receive a base salary
if $125,000 per annum plus a bonus consisting of ten percent of KEMCO's pre-tax
net profits from $1,500,000 to $2,000,000 and fifteen percent of pre-tax net
profits which exceed $2,000,000. The agreement also provides for certain fringe
benefits and expires May 7, 2000.
F-17
<PAGE>
Concord Energy Incorporated and Subsidiaries
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
Royalty Agreement
In March, 1992 IPS entered into a royalty agreement with its president, Richard
D. Barden, for any related oil and gas industry applications developed from the
original idea of developing a set of proprietary software programs. Royalties
under this agreement are calculated as follows: 1% of the first $1,500,000 of
annual gross revenue, and 5% of annual gross revenue thereafter. The agreement
expires December 31, 2015.
Other Related Party Transactions
The two automobiles held under capital lease are to be transferred to an officer
and an employee of KEMCO, respectively upon the execution of the lease purchase
options at the expiration of the lease terms.
In June 1996 the Company accepted 124,500 shares of the Company's common stock
from Integrated, at a value of $3.00 per share. This stock is included in the
accompanying consolidated financial statement as Treasury stock in stockholders'
equity. The purchase price of this stock was netted against the Receivable due
from Integrated.
11. Events Subsequent to Date of Balance Sheet
On November 22, 1996 the Company repurchased from Integrated plants and related
equipment for $361,415. The purchase price was netted against the net receivable
due from Integrated at June 30, 1996 of $236,415 which resulted in a net payment
to Integrated of $125,000.
On November 22, 1996 Jerry Swon resigned as chairman of the Company's board of
directors. In conjunction with his resignation, the board of directors approved
a severance payment of six months of his current salary totaling $75,000.
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-START> JUL-01-1996
<PERIOD-END> SEP-30-1996
<CASH> 761,929
<SECURITIES> 0
<RECEIVABLES> 2,520,648
<ALLOWANCES> 132,930
<INVENTORY> 5,475,899
<CURRENT-ASSETS> 10,253,168
<PP&E> 13,091,684
<DEPRECIATION> 4,658,146
<TOTAL-ASSETS> 21,579,808
<CURRENT-LIABILITIES> 7,762,015
<BONDS> 5,427,564
0
0
<COMMON> 594
<OTHER-SE> 11,225,282
<TOTAL-LIABILITY-AND-EQUITY> 21,579,808
<SALES> 4,448,669
<TOTAL-REVENUES> 4,496,758
<CGS> 3,090,779
<TOTAL-COSTS> 4,049,173
<OTHER-EXPENSES> 5,170
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 243,612
<INCOME-PRETAX> 0
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 209,143
<EPS-PRIMARY> 0.04
<EPS-DILUTED> 0.04
</TABLE>
