SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended June 30, 1996
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Transition Period from _________________
Commission File Number 2-6806-NY
Concord Energy Incorporated
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(Name of small business issuer in its charter)
Delaware 22-2670198
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(State or other jurisdiction of (I.R.S. Employer
in corporation or organization) Identification No.)
1515 Simmons Street, Jourdanton, TX 78026
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(Address of principal (Zip Code)
executive offices)
Issuer's telephone number (210) 769-3955
Securities registered under Section 12(b) of the Exchange Act:
None
Securities registered under Section 12(g) of the Exchange Act:
None
<PAGE>
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____
Check if there is no disclosure of delinquent filers contained in this form in
response to Item 405 of Regulation S-B, and no disclosure will be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. [ X ]
Issuer's revenues for its fiscal year ended June 30, 1996: $10,828,209
-----------
Aggregate market value of the voting stock held
by non-affiliates as of November 18, 1996: $13,921,062*
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Number of shares of common stock outstanding
as of November 18, 1996: 5,965,061
Documents incorporated by reference:
NONE
Transitional small business disclosure format.
YES____ NO __X__
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* This valuation was arrived at by applying the $2.6875 per share bid quotation
on November 18, 1996 on the NASDAQ Small Cap Market to the total of 5,179,930
shares held by non-affiliates
<PAGE>
PART I
ITEM 1 DESCRIPTION OF BUSINESS
A. BUSINESS DEVELOPMENT
Concord Energy Incorporated ( the "Company") was incorporated in the State
of Delaware in 1985 under the name Monoclonal International Technology, Inc.
("Monoclonal"). In 1986 Monoclonal conducted a public offering of its securities
and commenced its plans to engage in the research, development, production and
marketing of biomedical research reagents. Monoclonal's planned operations did
not materialize and it ceased research and development activities in 1989. In
May 1993 Monoclonal entered into an agreement and plan of reorganization
("Agreement") with Concord Energy, Inc. a privately held Nevada corporation
("Concord").
Pursuant to the terms of the Agreement, Monoclonal issued approximately
10,556,000 shares of its common stock in exchange for all outstanding shares of
Concord and Concord became a subsidiary of Monoclonal. After giving effect to
the transaction, the shareholders of Concord owned approximately 95% of the
issued and outstanding stock of Monoclonal. Pursuant to the Agreement,
Monoclonal changed its name to Concord Energy Incorporated and all of
Monoclonal's prior officers and directors resigned. The existing officers and
directors of Concord were then appointed as replacement officers and directors
of the Company.
In May of 1995 Knight Equipment and Manufacturing Corporation and its
wholly-owned subsidiary K & S Engineering, Inc. ("KEMCO") were acquired by the
Company. KEMCO locates, designs, refurbishes, and installs gas processing
equipment for the natural gas industry worldwide.
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In March 1996, the Company acquired Integrated Petroleum Systems
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.
The Company also owns an interest in approximately 75 oil and gas wells
located primarily in Texas and Louisiana. The Company's wholly-owned subsidiary,
Concord Operating, Inc., (COI), manages approximately 15 producing oil and gas
wells. The remainder of the wells are operated by various nonrelated or
affiliated companies. The Company's headquarters are located at 1515 Simmons
Street, Jourdanton, Texas 78026.
Concord Energy Incorporated including its wholly-owned subsidiaries KEMCO,
Concord Energy, Inc., Concord Operating, Inc., and Integrated Petroleum System
Corporation are collectively referred to herein as the "Company".
B. BUSINESS OF ISSUER
The Company is primarily a petroleum industry service company with emphasis
on locating, designing, refurbishing and installing gas processing plants and
equipment for the natural gas industry. In addition, the Company provides
rentals of process equipment and services including engineering, procurement,
dismantling, reapplication and relocation of complete gas processing facilities.
The company also develops, installs and maintains its proprietary software, used
to collect, process and transmit data. The Company has interests in
approximately 75 wells which are located primarily in East Texas and the
Louisiana Gulf Coast. The wells range in depth from 3,500 feet to 15,000 feet
and produce oil and gas from formations which historically are known to have
quality reserves.
In June 1996 the Company's headquarters relocated from Bernardsville, New
Jersey to Jourdanton, Texas where the Company's subsidiary, KEMCO, has its
offices and manufacturing facilities. The Company's exploration and operating
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office relocated from Houston, to Jourdanton, Texas in June 1996. Prior to the
acquisition of KEMCO, the Company's revenues were primarily derived from the
sale of oil and gas. KEMCO's revenues from April 1, 1995 (the effective date of
the KEMCO acquisition) are included in the Company's financial statements for
the year ended June 30, 1995 and contributed approximately 41% of the Company's
revenue. KEMCO accounted for approximately 87% of the Company's revenues for the
year ended June 30, 1996.
Approximately 5%, 26% and 42% of the Company's revenues during the years
ended June 30, 1996, 1995 and 1994, respectively, were from the sale of crude
oil.
Natural gas sales represented approximately 6%, 14% and 31% of the
Company's revenues during the 1996, 1995 and 1994 fiscal years, respectively.
Revenue derived from syndication sales by Integrated Energy Incorporated
(Integrated) and related revenue interests accounted for approximately 1%, 17%
and 23% of total revenues during fiscal 1996, 1995 and 1994, respectively (see
Item 12). Revenue from well operating activities represented approximately 1%,
2% and 4% of total 1996, 1995 and 1994 revenues, respectively.
C. BUSINESS STRATEGY
The Company is committed to a strategy which emphasizes growth in oil and
gas service industry. Pursuant to this strategy the Company acquired KEMCO in
May of 1995 and IPS in March 1996. The Company intends to continue to expand
KEMCO's manufacturing operations by commencing the manufacturing of new
equipment as well as expanding KEMCO's rental, leasing and operating of
processing equipment and complete gas processing plants and by developing
processing operation services. The Company intends to continue to develop and
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expand the marketing of its proprietary software through the Company's
wholly-owned subsidiary IPS. COI, a wholly-owned subsidiary of the Company,
manages the Company's field oil and gas production operations. By utilizing
COI's operating capabilities, the Company has the ability to efficiently manage
the production of its wells at lower overhead and operating expenses, compared
to wells operated by other non-related operators.
D. EQUIPMENT AND MANUFACTURING OPERATIONS
The equipment and manufacturing activities of the Company consist of
locating, designing, refurbishing and installing predominately natural gas
processing equipment. The Company also provides rentals of gas processing
equipment and services including engineering, procurement, dismantling and
moving and erecting of gas processing equipment at new locations. The Company
maintains most of its equipment inventory at its facilities in Jourdanton,
Texas. These facilities include construction and storage areas, mechanical,
machine, and metal workshops as well as engineering and administrative offices.
Within the Jourdanton facilities is a sandblasting area approved by the Texas
Natural Resource Conservation Commission ("TNRCC"), and registered for abrasive
cleaning. KEMCO is authorized by the National Board of Boiler and Pressure
Vessel Inspectors for repair and registration of "U" stamped vessels and is
certified by the American Society of Mechanical Engineers ("ASME") for the
construction of new "U" stamped pressure vessels. KEMCO maintains an inventory
of gas processing equipment and complete gas plants and miscellaneous parts,
such as vessels, valves, pipe, fittings and electrical components which are
needed to complete refurbishing projects. KEMCO's equipment inventory is
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available for sale on an "As-Is, Where-Is" basis, or can be redesigned and
refurbished to meet a customer's specific needs.
E. EXPLORATION AND PRODUCTION OPERATIONS
The exploration and production activities of the Company consist of the
geological and geographical evaluation of prospective oil and gas properties,
the acquisition of oil and gas leases or other interests in prospects and the
development and operation of properties for the production and sale of oil and
gas. The Company generates most of its projects through outside independent
consultants. The Company conducts its development and production operations
primarily in East Texas and the Louisiana Gulf Coast.
The majority of the Company's natural gas is marketed through third party
operators. The majority of the Company's crude oil production is sold under
short term contracts at current posted prices for each geographic region.
The following summarizes certain of the Company's major prospects:
THE KILGORE WATERFLOOD PROJECT
A waterflood is an enhanced oil recovery method in which water is injected
into an oil rich reservoir through injection wells. The injected water "pushes"
or "sweeps" the oil toward a select pattern of collector or producer wells. The
Kilgore Field is in excess of 400 acres in size and has one water injection well
and nine producing wells. Water injection commenced in September 1993 and oil
production commenced in November 1993. The Kilgore Field is currently producing
approximately 20 barrels per day and test results from core samples, engineering
data, geological mapping and independent engineer reports, indicate that there
are approximately 1,500,000 gross barrels, in which the Company's interest is
approximately 1,080,000 barrels.
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THE HESTER FIELD PROJECT
The Hester Field Project (the "Hester Field") is located in St. James
Parish, Louisiana. The producing formation present in the Hester Field is the
D-3 sand reservoir. To date the field has produced approximately 315,000 barrels
of oil. The Hester Field oil reservoir is approximately 140 acres in size and
has very distinct geological boundaries. The Hester Field is currently producing
approximately 65 BOPD and bottom hole pressure tests indicate recoverable
reserves from the existing wells to be approximately 219,000 gross barrels of
oil. By drilling an additional well, approximately another 238,000 gross barrels
of oil could potentially be recovered. The Company's share of the Hester Field
is approximately 34%.
F. SOFTWARE DEVELOPMENT, SALES, AND INSTALLATION OPERATIONS
The Company's wholly owed subsidiary IPS has developed computer software to
gather and process production data of oil and gas wells more efficiently in the
field and transmit the data to the home office of an oil or gas development
company, The software operates on conventional PC platforms and special
hand-held computers. The information collected at the well can be imported
directly into the accounting systems typically used by the petroleum industry.
The Company's proprietary software system is called APEXTM (for "Analysis and
Production Express") and allows companies to: (1) reduce field personnel and
clerical support; (2) increase productivity and operating efficiency in the
field; (3) gain access to well test and production data every 24 hours; (4)
improve the quality and accuracy of the client's central data base by
eliminating errors resulting from manually performed calculations and copying
from form to form; and (5) easily generate reports involving all types of
production data.
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G. EMPLOYEES
Prior to July 1, 1996, the Company's management, administrative and
internal accounting functions were fulfilled by Integrated personnel under a
management agreement, (see Item 12, Certain Relationships and Related Party
Transactions), with the exception of KEMCO and IPS. KEMCO and IPS's employees
are compensated directly. Effective July 1, 1996 the management agreement
between Company and Integrated terminated. The Company now pays its general and
administrative and all other costs directly.
KEMCO has an average full-time work force of approximately 60 employees in
addition to approximately 20 independent contractors who perform various
technical services. The employees include engineers, yard supervisors, field
supervisors, laborers, technical personnel and field installation and start-up
specialists. KEMCO has eight administrative employees including its management.
IPS employs six people; one supervising all sales and general management, one
administrative, and four programmers.
H. COMPETITION
Competition in the oil and gas industry is intense. The Company encounters
competition from numerous gas processing equipment service companies; however,
the Company believes that few of its competitors offer the complete range of
services provided by the Company.
There are numerous oil and gas companies engaged in drilling and income
programs, partnerships and other joint ventures which offer competition for oil
and gas development. Many of these companies are large, well-established
entities with substantially larger operating staffs and greater capital
resources than the Company. In addition, many of such companies have engaged in
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the manufacturing and energy businesses for a much longer period than the
Company.
I. REGULATIONS
The oil and gas exploration, production and service industry is extensively
regulated by federal, state and local authorities. Legislation and regulation
affecting the industry are under constant review for amendment or expansion,
raising the possibilities of changes that may adversely affect the Company in
areas such as pricing and marketing of services, equipment and oil and gas
production. Substantial penalties may be assessed for noncompliance with various
applicable statutes and regulations and the overall regulatory burden on the
industry increases the cost of doing business, thereby reducing profits. Federal
legislation and regulatory control generally affect the oil and gas produced by
the Company and the manner in which such products are marketed, sold and
transported.
The Company is required to meet all the Occupational Safety and Health
Administration ("OSHA") regulations as well as those issued by Texas Workman's
Compensation; Labor laws, sales tax, ASME Codes, Electrical codes, fire
regulations, etc. In accordance with these regulations, KEMCO requires each of
its employees to signify receipt, understanding and acceptance of KEMCO's "CODE
OF ETHICS - EMPLOYEE HANDBOOK SAFETY MANUAL". All contractors who perform
services for KEMCO must also signify their compliance with these regulations. In
an attempt to prevent such hazards, KEMCO maintains extensive safety and
training programs. The Company is required to comply with numerous state and
local regulations affecting different aspects of the oil and gas drilling and
production activities including the drilling of wells, the spacing of wells, the
utilization or pooling of oil and gas properties, environmental matters, safety
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standards, the sharing of markets, production limitations, plugging and
abandonment, and restoration.
Moreover, various federal, state and local laws and regulations cover the
discharge of materials into the environment or otherwise relate to the
protection of the environment. These regulations may affect the Company's cost
of operations. It is not anticipated that the Company will be required in the
near future to expend amounts of money in relation to its total capital
expenditure program by reason of environmental laws or regulations. However,
since such laws and regulations are frequently changed, the Company cannot
predict the ultimate cost of compliance therewith.
J. INDUSTRY RISKS
The Company's equipment and manufacturing operations are subject to all the
hazards and risks normally incident to manufacturing and working with heavy
equipment. Employer's liability, performance liability and comprehensive general
liability insurance coverage in the aggregate amount of $10,000,000 is
maintained.
The Company's oil and gas operations are subject to all of the operating
hazards and risks normally incident to drilling and production of oil and gas,
such as explosions, encountering formations with abnormal pressure, blowouts,
cratering and oil spills, any of which can result in the loss of hydrocarbons,
environmental pollution, personal injury claims and loss of life. Such hazards
can also severely damage or destroy equipment, subsurface structures,
surrounding areas or property of others. The Company maintains insurance
coverage in the aggregate amount of $2,000,000, including physical damage on
certain risks, employer's liability and comprehensive general liability.
The Company believes that it's insurance coverage is adequate and customary
for Companies of a similar size engaged in operations comparable to those of the
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Company. The Company also requires that all third party contract services carry
insurance which meets the Company's requirements.
However, there can be no assurance that losses will not occur from
uninsurable risks or in amounts in excess of existing coverage. The Company does
not carry business interruption insurance due to the prohibitive cost. The
occurrence of any event that is not fully covered by insurance could have an
adverse impact upon the Company's financial condition and results of operations.
ITEM 2. DESCRIPTION OF PROPERTIES
A. KEMCO PROPERTIES
KEMCO's facilities in Jourdanton Texas include a main yard of approximately
5 acres. Within the main yard are: an administrative office building of
approximately 4,000 square feet, a warehouse and purchasing office building of
approximately 6,000 square feet, a mechanical workshop building of approximately
10,000 square feet, and instrument and valve storage and repair building of
approximately 12,000 square feet. Across from KEMCO's main yard, the Company
owns a 6,000 square foot building which is utilized by KEMCO's engineering
department.
KEMCO's two other yards in Jourdanton, Texas are a 7 acre laydown and
dismantling yard and a 20 acre sandblasting, painting and storage yard. Both of
these yards are in close proximity to the main yard.
B. IPS PROPERTIES
IPS leases 2,700 square feet of office space at 8480 East Orchard Road,
Suite 4350, Englewood, Colorado 80111.
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C. OIL AND GAS PROPERTIES
The Company has an ownership interest in approximately 75 producing wells
primarily located in East Texas and the Louisiana Gulf Coast, of which it
manages approximately 15 of said wells.
PROVED OIL AND GAS RESERVES
The following table sets forth estimates of proved developed and proved
undeveloped oil and gas reserves and the present value of estimated future net
revenues attributable to such reserves, based on the assumptions that oil and
gas prices, and operating costs will remain fixed at year end levels. The
present value of the estimated future net revenues for proved oil and gas
reserves on the dates indicated below was computed by discounting the aggregate
future net revenues by 10% per year. The present value does not represent the
fair market value of such reserves. For the years ending June 30, 1996, 1995 and
1994, this information is based upon the reserve reports prepared by Harris
Engineering Services of Houston, Texas. Proved reserves are the estimated
quantities of oil, gas and natural gas liquids which geological and engineering
data demonstrate with reasonable certainty to be recoverable in future years
from known reserves under existing economic and operating conditions. Proved
developed reserves are proved reserves that can be expected to be recovered
through existing wells with existing equipment and operating methods. The
estimation of reserves requires substantial judgment on the part of petroleum
engineers sometimes resulting in imprecise determinations, particularly with
respect to new discoveries. The accuracy of any reserve estimate depends on the
quality of available data, engineering and geological interpretation and
judgment. Results of drilling, testing and production subsequent to the date of
the estimate may result in revisions of any such estimate. Accordingly,
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estimates of reserves are often materially different from the quantities of oil
and gas that are ultimately recovered and such estimates will change as future
production and development information becomes available. The reserve data
represents estimates only and should not be construed as being exact.
Estimates of proved reserves at June 30, 1996 have not been previously
filed by the Company with or included in reports to any federal authority or
agency.
<TABLE>
<CAPTION>
June 30,
----------------------------------------------
1996 1995 1994
--------- ---------- ------------
<S> <C> <C> <C>
Estimated proved developed
and proved undeveloped oil
and gas reserves:
Oil (Bbls) 1,840,834 1,748,260 2,053,247
Gas (Mcf) 1,616,990 2,369,230 2,185,352
EQB* 2,110,332 2,143,130 2,417,471
Present value of future net reserves $21,529,556 $17,581,610 $21,467,268
Present value of future net reserves
discounted at 10% $12,390,060 $10,340,158 $12,565,490
Estimated proved developed oil and gas reserves:
Oil (Bbls) 375,061 435,915 691,511
Gas (Mcf) 924,019 1,026,085 1,544,510
EQB 529,064 606,929 948,929
Present value of future net reserves $ 4,326,975 $ 4,295,220 $ 7,233,884
Present value of future net reserves
discounted at 10% $ 2,979,752 $ 2,702,211 $ 4,611,568
</TABLE>
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* Equivalent barrels (Mcf of gas is converted to equivalent barrels by dividing
by 6)
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The present value of future net reserves as stated above is determined by using
the Securities and Exchange Commission Regulations which include constant prices
of oil and gas as of the end of the fiscal year. PRODUCTIVE WELLS, DEVELOPED AND
UNDEVELOPED ACREAGE AND DRILLING ACTIVITY ACREAGE The following tables set forth
the Company's developed acreage and productive wells as of June 30, 1996, 1995
and 1994. "Gross" refers to total acres or wells in which the Company has a
working interest and "Net" refers to gross acres or wells multiplied by the
percentage of working interest owned by the Company.
DEVELOPED ACREAGE
-------------------
GROSS NET
----- ---
1996 8,160 1,377
1995 11,120 2,075
1994 13,560 2,723
<TABLE>
<CAPTION>
PRODUCTIVE WELLS
OIL GAS
---------------------------------------- -------------------------------------------
Gross Net Gross Net Gross Net Gross Net
Number Number Developed Developed Number Number Developed Developed
of Wells of Wells Acreage Acreage of Wells of Wells Acreage Acreage
-------- -------- ------- ------- -------- -------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1996 59 16 4,080 915 18 3 4,080 462
1995 98 25 5,920 1,482 26 4 5,200 593
1994 122 34 7,520 2,094 29 4 6,040 629
</TABLE>
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At June 30, 1996, the Company owned the rights to 1,094 gross (792 net)
undeveloped acres, all of which are located in the United States. The following
table sets forth the states in which such acreage is located and the number of
gross and net acres:
STATE GROSS ACRES NET ACRES
- ----- ----------- ---------
Texas 614 440
Louisiana 480 352
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Total 1,094 792
========== =======
During the last three years, the Company did not drill or participate in
the drilling of any exploratory and development wells1:
PRODUCTION, UNIT PRICES AND COSTS
The following sets forth the production and average unit prices and costs
for the years ended June 30, 1996, 1995 and 1994:
YEAR ENDED JUNE 30,
----------------------------------------
1996 1995 1994
---- ---- ----
Production:
Oil and condensate (Bbls) 32,815 51,257 67,280
Gas (Mcf) 302,583 295,626 379,859
Average sales price:
Oil and condensate (per Bbl) $17.71 $16.77 $14.85
Gas (per Mcf) $2.06 $1.51 $1.95
Average production costs
per EQB* $7.68 $7.43 $8.46
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1 A majority of the Company's activities since inception have consisted of
upgrading service equipment and production facilities and conducting workovers
and recompletions.
* Production costs include lease operating expenses, production taxes and
expensed workovers.
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ITEM 3. LEGAL PROCEEDINGS
From time to time, the Company is involved in litigation relating to claims
arising out of its operations in the normal course of business. As of November
15, 1996, the Company was not engaged in any legal proceedings that are
expected, individually or in the aggregate, to have a material adverse effect on
the Company. However, the Company, together with Integrated, Jerry Swon and
Bruce Deichl, has been named as a defendant in a lawsuit commenced by three
investors in two oil and gas partnerships sponsored by Integrated, in the Court
of Common Pleas in Philadelphia, Pennsylvania. The plaintiffs allege in essence
that they were induced to participate in the partnerships by false
representations concerning the safety and earnings potential of the well
properties. They are seeking recovery of their investment which exceeded $3
million. The Company had no dealings whatever with the plaintiffs, and its sole
link to the operative facts is that the Company received 10% of invested funds
under its management agreement with Integrated. Plaintiffs are urging that all
defendants must be viewed as intertwined because of the control allegedly
exercised at the time by Messrs. Swon and Deichl. In the view of Company
counsel, plaintiffs' theory that the Company is indistinguishable from its
co-defendants lacks merit. Accordingly, based on an assessment of its exposure
in the suit, the Company has concluded that the lawsuit is not material to its
financial condition and need not be disclosed here. At present, motions seeking
dismissal of the case for lack of jurisdiction in Pennsylvania are pending
before the Philadelphia court.
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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the Company's annual meeting of shareholders on August 9, 1996 the
following matter was submitted to security holders for vote:
1) To elect a board of five directors
The following five individuals were elected and received the following
votes:
INDIVIDUAL NAME VOTES FOR VOTES WITHHELD
--------------- --------- --------------
Jerry Swon 3,815,360 10,954
Deral Knight 3,815,357 10,957
Barry Laidlaw 3,806,883 19,431
Paul Chernis 3,806,983 19,331
Dr. Neal Glass 3,811,775 14,539
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Trading in the Company's common stock is currently reported on the NASDAQ
Small Cap Market under the symbol CODE. The following table sets forth the high
and low bid prices for the Company's common stock for the periods indicated. The
Company's common stock was not listed on the NASDAQ Small Cap Market until
January, 1996. Thus, prices prior to that date are based on trading on the
Electronic Bulletin Board operated by the National Association of Securities
Dealers, Inc. ("Bulletin Board") under symbol CCNG.
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The following price information has been adjusted to reflect the Company's
December 1995 one for five reverse split.
HIGH BID LOW BID
-------- -------
June 30, 1993 6 1/4 3 3/4
Sept. 30, 1993 12 1/2 4 3/8
Dec. 31, 1993 13 1/8 11 7/8
Mar 31, 1994 12 1/2 10
June 30, 1994 9 3/8 5
Sept. 30, 1994 10 5/16 5 5/8
Dec. 31, 1994 9 1/16 3 1/8
Mar. 31, 1995 6 1/4 1 7/8
June 30, 1995 11 1/4 3 3/4
Sept. 30, 1995 6 1/4 3 1/8
Dec. 31, 1995 5 5/16 3 1/4
Mar. 31, 1996 6 3 3/4
June 30, 1996 4 3/8 3 1/4
Nov. 18, 1996 2 11/16
The above quotations represent prices between dealers and do not include
retail markups, markdowns or commissions. Such quotations do not necessarily
represent actual transactions.
APPROXIMATE NUMBER OF EQUITY SECURITY HOLDERS
As of November 18, 1996, the approximate number of shareholders of record
of the Company's common stock was 530. That number was determined from the
Company's transfer agent's list of shareholders and does not include beneficial
owners of the Company's common stock whose shares are held in the names of
various dealers and clearing agents.
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DIVIDENDS
The Company has never paid any dividends, whether cash or property, on its
securities. For the foreseeable future it is anticipated that any earnings which
may be generated from operations of the Company will be used to finance the
growth of the Company and that dividends will not be paid to stockholders.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
The following should be read in conjunction with the summary financial data
and the Company's consolidated financial statements and related notes thereto
appearing elsewhere in this report. The financial data and information contained
in this report for fiscal 1996, 1995 and 1994 respectively, reflect financial
information for KEMCO for the period of April 1, 1995 through June 30, 1996, and
IPS for the period March 1, through June 30, 1996 only.
GENERAL OPERATIONS
In May 1993, Monoclonal consummated an Agreement and Plan of Reorganization
("Agreement") with Concord pursuant to which it entered into oil and gas
industry (see "Description of Business - Business Development"). Under the
Agreement, Monoclonal changed its name to Concord Energy Incorporated (referred
to herein as the "Company") and became the parent of Concord, that owns
interests in approximately 75 oil and gas wells which are located primarily in
East Texas and the Louisiana Gulf Coast. In June 1991 Concord was formed to
effectuate a consolidation of approximately 166 oil and gas partnerships.
Following Monoclonal's acquisition of Concord, the Company changed its fiscal
year end to June 30.
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In May 1995, the Company acquired 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 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
COMPARISON OF 1996 TO 1995:
Historically, the Company's revenue was generated primarily through the
sale of oil and gas. With the acquisition of KEMCO, effective April 1, 1995,
approximately 87% of the Company's revenue for the fiscal year ending June 30,
1996 was generated by KEMCO. During the year ending June 30, 1996, the Company
reported total revenue of $10,828,209 representing an increase of $7,555,002 or
approximately 230% from the prior fiscal year. The Company reported contract
revenue during fiscal 1996 of $9,285,939 representing an increase of $7,973,546
or approximately 608% from the prior fiscal year, which accounts for the
majority of the net increase in total revenue from fiscal 1995 to 1996. This
increase is attributable to the fact that in fiscal 1996, KEMCO's revenues are
included for a full year.
Oil sales during fiscal 1996 decreased by $278,200 or approximately 32%
from the prior fiscal year. This decrease was primarily attributable to a
reduction in production volumes due to normal production decline of wells and
the cessation of operations of certain unprofitable wells, partially offset by
the increase of approximately $.94 in the average price per barrel received by
the Company. During fiscal 1996, gas sales increased by $176,870, or
approximately 40% from the prior fiscal year. This increase was primarily
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related to an increase of approximately $.55 in the average price per Mcf of gas
received by the Company.
Syndication sales and revenue interest income during fiscal 1996 were
$140,000, which represents a decrease of $412,490, or approximately 75% below
the prior fiscal year. During fiscal 1996, well operating income decreased by
$13,510 or approximately 21% from the prior fiscal year. This decrease is
primarily due to shutting down certain uneconomical wells for which COI had been
the operator.
Total costs and expenses during fiscal 1996 were $16,491,510 as compared to
$4,568,661 in fiscal 1995. The increase of $11,922,849 or approximately 261% is
primarily the result of an increase in the cost of KEMCO's contract revenue of
$7,157,227 or approximately 658% from the prior fiscal year. Fiscal 1995
included KEMCO's cost of contract revenue for the period of April 1, 1995
through June 30, 1996. The increase in cost of contract revenue is primarily the
result of it's inclusion for an entire year.
Included in the cost of contract revenue in fiscal 1996, was a Project
Audit settlement. This audit resulted in a $521,500 balance due to a Customer
and represents additional costs previously incurred by the customer. In March
1996, KEMCO agreed to reimburse the customer, and no reserve for such expense
had been established. Additionally, a restatement of inventory was recorded in
the amount of a $3,043,055 reduction. This was the result of a retail fair
market value being booked at the time of the KEMCO acquisition rather than a
wholesale value with the balance being charged to goodwill. Current management
has determined that the allocated costs were in error and has chosen to take
this one time adjustment to more accurately reflect the operations of the
Company.
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<PAGE>
Lease operating expenses during fiscal 1996 decreased by $107,732 or
approximately 14% from the prior fiscal year. Lease operating expenses as a
percentage of total oil and gas sales were 53% in fiscal 1996, compared to 57%
in fiscal 1995. This decrease is primarily due to the cessation of uneconomical
wells as stated above.
Total general and administrative expenses during fiscal 1996 increased by
$1,799,530 or approximately 84% to $3,940,856. Under the terms of the Company's
management agreement with Integrated, $1,392,000 remained constant from the
prior fiscal year. General and administrative costs during the fiscal 1996 of
$1,284,179 are associated with the KEMCO operations. In fiscal 1995, general and
administrative expenses for KEMCO were $318,827. The increase in KEMCO's general
and administrative expense of $965,352 or approximately 303% is primarily the
result of its inclusion for the entire 1996 year. The Company's general and
administrative expense for fiscal 1996 also include costs of $208,039 related to
the newly acquired subsidiary IPS for the period of March 1 through June 30,
1996. Additionally, included in the general and administrative expenses during
fiscal 1996 is a one time charge of $150,000 for expenses which represent costs
incurred by Integrated which had not been previously charged to the Company.
Depreciation, depletion and amortization expense during fiscal 1996
increased by $30,769 or approximately 5%, compared to the prior fiscal year.
This increase is primarily the result of the inclusion for an entire year of
KEMCO's depreciation, depletion and amortization expense partially offset by a
decrease in oil and gas production volume as previously discussed.
23
<PAGE>
Interest expense during fiscal 1996 increased by $878,631 to $1,199,949.
The increase is primarily due to interest charges for short and long term debt
associated with inventory acquisitions for KEMCO, and associated with the
acquisition cost of KEMCO.
COMPARISON OF 1995 TO 1994:
Historically, the Company's revenue was generated primarily through the
sale of oil and gas. With the acquisition of KEMCO, effective April 1, 1995,
approximately 40% of the Company's total revenue for the fiscal year ending June
30, 1995 was generated from KEMCO's contract revenues. Also during the year
ending June 30, 1995, the Company reported total revenue of $3,273,207
representing an increase of $904,953 or approximately 38% from the prior fiscal
year. The Company reported contract revenue during fiscal 1995 of $1,312,393,
which accounts for the increase in total revenue from fiscal 1994 to 1995.
Oil sales during fiscal 1995 decreased by $139,623 or approximately 14%
from the prior fiscal year. This decrease was primarily attributable to a
reduction in production volumes due to normal production decline of wells and
the cessation of operations of certain unprofitable wells, partially offset by
the increase in the price per barrel received by the Company. During fiscal
1995, gas sales declined by $294,229, or approximately 40% from the prior fiscal
year. This decrease was primarily related to a reduction in the production
volume caused by the same factors that contributed to the reduction in oil
production volumes as noted above, combined with a decrease of approximately 23%
in the price per Mcf of gas received by the Company.
Syndication sales and revenue interests income during fiscal 1995 were
$552,490, which represents an increase of $19,416, or approximately 4% from the
prior fiscal year.
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<PAGE>
During fiscal 1995, well operating income decreased by $31,513 or
approximately 33% from the prior fiscal year. This decrease is primarily due to
shutting down of certain unprofitable and uneconomical wells for which COI had
been the operator.
Total costs and expenses during fiscal 1995 were $4,568,661 as compared to
$3,428,644 in fiscal 1994. The increase of $1,140,017 or approximately 33% is
primarily the result of inclusion of the cost of contract revenue of $1,087,163
from KEMCO. Lease operating expenses during fiscal 1995 decreased by $357,679 or
approximately 32% from the prior fiscal year. Lease operating expenses as a
percentage of total oil and gas sales were 57% in fiscal 1995, compared to 64%
in fiscal 1994. This decrease is primarily due to the ceasing of uneconomical
wells as stated above.
Total general and administrative expenses during fiscal 1995 increased by
$454,290 to $2,141,326. Under the terms of the Company's management agreement
with Integrated, $1,392,000 remained constant from the prior fiscal year.
General and administrative costs associated with the newly acquired subsidiary
KEMCO were responsible for a majority of the increase approximately 26% from the
prior fiscal year.
Depreciation, depletion and amortization expense during fiscal 1995
decreased by $43,757 or approximately 7%, compared to the prior fiscal year due
to the decrease in oil and gas production volume as previously discussed.
Interest expense during fiscal 1995 increased by $253,426 to $321,318. The
increase is primarily due to interest charges for short and long term debt
associated with inventory acquisitions and the acquisition cost of KEMCO.
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<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
As of June 30, 1996 and 1995, the Company had working capital of $1,193,748
and $6,604,297, respectively, resulting in a decrease of $5,410,549. This
decrease in 1996 is primarily the result of to the combination of the
reclassification of $3,145,000 from long term debt to short term debt and the
inventory restatement of $3,043,055 previously discussed, and the addition of
$340,196 of short term debt acquired with IPS, partially offset by a net
increase in cash and accounts receivable of $1,473,300.
During fiscal 1996, cash used in operating activities was $3,212,404
representing an increase of $2,236,830 or approximately 229% from fiscal year
1995. This increase primarily resulted from the combination of the increased
interest expenses, reduction in production revenues as previously discussed, the
inclusion of IPS for the period of March 1 through June 30, 1996, the increased
general and administrative expenses incurred in fiscal 1996 as well as payout of
$217,000 of the $521,500 previously discussed. The Company is presently
negotiating the extension of two of obligations with maturities in February 1997
and May 1997 of $600,000 and $2,920,000, respectively.
At June 30, 1996 KEMCO had work in progress with $397,369 in revenues
remaining to be earned. Through November 18, 1996 KEMCO obtained commitments for
additional contracts with future revenues of $6,733,225 with a total backlog at
November 18, 1996 of $7,130,594.
CAPITAL EXPENDITURES AND COMMITMENTS
During fiscal 1996, the Company completed the acquisition of IPS for the
issuance of 600,000 shares (post split) of the Company's common stock valued at
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$3.00 per share, a commitment to fund working capital of $550,000, assumption of
$350,196 additional notes and $300,000 repayment of debt to Integrated, a
related party.
IPS's president, Richard Barden, continues to serve as IPS's president
pursuant to a 9 year employment agreement, which expires in December 2000.
During fiscal 1995, the Company completed the acquisition of KEMCO for the
issuance of 400,000 shares (post split) of the Company's common stock valued at
$6.25 per share, and a cash payment of $4,500,000 to KEMCO's former
stockholders. The funds used to make the cash payment were obtained through the
issuance of short term and long term notes and the sale of 260,000 shares of the
Company's common stock. Two of the short term notes had been personally
guaranteed by the Company's former Chairman of the Board of Directors, President
and CEO, Jerry Swon. KEMCO's former principal stockholder, Deral Knight,
continues to serve as KEMCO's President pursuant to a five-year employment
agreement, which expires in May 2000.
During fiscal 1996 and 1995, the Company invested $149,581 and $56,482 ,
respectively, in oil and gas activities including acquisition of producing
properties, surface equipment and production facility upgrades, capitalized well
workovers and recompletions. The majority of these capital expenditures were
funded through the issuance of 42,500 shares of the Company's common stock in
fiscal 1996.
During fiscal 1996 the Company incurred additional capital expenditures of
$317,761. These capital expenditures were primarily for equipment and the
purchase and renovation of a building acquired in November 1995. The building is
located across from KEMCO's main yard and was required to consolidate and expand
KEMCO's engineering staff. The total cost of the building and its renovations
were $85,844.
Based upon the current level of operations, the Company believes that cash
flow from future operations will be adequate to meet its anticipated
requirements for working capital, capital expenditures and scheduled interest
27
<PAGE>
payments through June 30, 1997. However, various contingencies including, but
not limited to, those items previously discussed in the Industry Risk Section of
this report would, if they materialize, have a material adverse effect on the
Company's cash flow and could force the Company to revise its planned capital
expenditures or to raise money through stock issuance or to borrow additional
funds.
SUMMARY FINANCIAL DATA
YEAR ENDED JUNE 30,
-------------------------------------------
OPERATING DATA 1996 1995 1994
---- ---- ----
Total oil and gas sales $ 1,203,559 $ 1,304,889 $ 1,738,741
Contract revenue 9,285,939 1,312,393 --
Total revenue 10,828,209 3,273,207 2,368,254
Loss from operations (5,663,301) (1,295,454) (1,060,390)
Net loss (6,807,293) (1,580,793) (1,125,982)
Net loss per share (1.97) (.67) (.51)
JUNE, 30
-------------------------------------------
BALANCE SHEET DATA 1996 1995 1994
------------ ------------ -----------
Total current assets $ 8,613,615 $10,147,608 $ 577,900
Total assets 20,114,991 19,834,512 9,433,857
Working capital (deficit) 1,193,748 6,604,297 (147,931)
Notes payable, long term debt
and capital lease obligations 7,428,361 7,124,468 466,667
Total liabilities 10,045,905 9,199,029 919,580
Total stockholders' equity 10,069,086 10,635,483 8,514,276
All statements other than statements of historical facts included in this
report regarding the Company's financial position, business strategy and
objectives of management for future operations are forward-looking statements
that involve risks and uncertainties. Although the Company believes the
expectations reflected in such forward-looking statements are reasonable, it can
28
<PAGE>
give no assurance that such expectations will prove to have been correct. Such
forward-looking statements are made in reliance on the "safe harbor" protection
provided under the Private Securities Litigation Reform Act of 1995. Factors
that could cause actual results to differ materially from the Company's
expectations include, among others, the following: (i) market dynamics, (ii)
regulatory changes, (iii) competition and other economic conditions.
ITEM 7. FINANCIAL STATEMENTS
The following financial statements are filed with this report, beginning on
page F-1:
Page
----
Report of Independent Accountants ...................................... F-1
Report of Former Independent Accountants ................................ F-2
Consolidated Balance Sheet, June 30, 1996 and 1995 ..................... F-3
Consolidated Statement of Operations, Years Ended
June 30, 1996, 1995 and 1994 ......................................... F-4
Consolidated Statement of Changes in Stockholders'
Equity, Years Ended June 30, 1996, 1995 and 1994 .................... F-5
Consolidated Statement of Cash Flows, Years Ended
June 30, 1996, 1995 and 1994 ......................................... F-6
Notes to Consolidated Financial Statements .............................. F-7
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
On September 5, 1996, the Company dismissed its former independent
accountants Price Waterhouse LLP ("Price Waterhouse") and engaged Hill, Kotara &
Ford to audit the Company's consolidated financial statements. The decision to
change independent accountants was recommended and approved by the Company's
Board of Directors.
Price Waterhouse served as independent accountants of the Company for the
years ended June 30, 1995 and 1994. The reports of Price Waterhouse on the
Company's financial statements for the years ended June 30, 1995 and 1994
29
<PAGE>
contained no adverse opinion or disclaimer of opinion and were not qualified or
modified as to uncertainty, audit scope or accounting principle. In connection
with its audits for the years ended June 30, 1995 and 1994, and during the
fiscal year 1996 prior to Price Waterhouse's dismissal, the Company had no
disagreements with Price Waterhouse on matters of accounting principle,
financial statement disclosure, or auditing scope or procedure, which
disagreements if not resolved to the satisfaction of Price Waterhouse would have
caused them to make reference thereto in their report on the financial
statements for such years.
PART III
ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS
MANAGEMENT
The following table sets forth the names of all current directors and
officers of the Company and the positions in the Company held by them:
NAME AGE POSITIONS & OFFICES DIRECTOR OR OFFICER SINCE
- ---- --- ------------------- -------------------------
Deral Knight 55 Chairman, CEO 1996
Barry Laidlaw 47 Director 1996
Neal Glass 50 Director 1993
Paul Chernis 61 Director 1993
Todd B. Hesse 34 Secretary 1993
Scott Kalish 37 Treasurer 1993
30
<PAGE>
All directors and/or officers, other than Deral Knight, served as members
of the Board of Directors of Concord Energy, Inc. (a Nevada corporation ) since
the time of the Agreement with Monoclonal in May, 1993 (See Item 1. Description
of Business - Business Development ). In December 1995, Barry Laidlaw resigned
from the Board of Directors of the Company, but he rejoined the board in May
1996. In May of 1996, Bruce Deichl resigned from the Board of Directors, and as
an officer of the Company. Also in May of 1996, Charles Fallon resigned from the
Board of Directors of the Company and Deral Knight joined the Board of Directors
of the Company. On November 22, 1996, Jerry Swon resigned his position as
Director and Chairman of the Board and Deral Knight became Chairman of the
Board. Directors are elected to serve until the next annual meeting of
stockholders and until their successors have been elected and qualified.
Officers are appointed to serve until the meeting of the Board of Directors
following the next annual meeting of stockholders and until their successors
have been elected and qualified. The last annual meeting was held on August 9,
1996.
DERAL KNIGHT - As part of the KEMCO acquisition, Mr. Knight agreed to continue
as the president of Knight Equipment and Manufacturing Corp. which he founded.
In May 1996 Mr. Knight became a director of the Company and in June 1996 became
the President and CEO of the Company. In November 1996, he became Chairman of
the Board. Mr. Knight has been involved in the oil and gas service industry
since 1964. He is a graduate of Oklahoma University, where he received his
Bachelor of Science degree in Chemical Engineering.
BARRY LAIDLAW - Upon the consummation of the Monoclonal transaction, Mr. Laidlaw
became a director of the Company. Mr. Laidlaw is the President of Concord
Operating, Inc. which was organized in 1990. Prior to the organization of
Concord Operating, Inc. Mr. Laidlaw was president of West Gas, Inc. where he was
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<PAGE>
involved in all aspects of the oil and gas business from negotiating contracts
to field operations.
NEAL GLASS - Upon the consummation of the Monoclonal transaction, Dr. Neal R.
Glass, M.D., became a director of the Company. Dr. Glass is a general surgeon
who received his undergraduate training at New York University (1964-1968) and
his M.D. degree from the State University of New York (1968-1972), where he also
received his postgraduate surgical training (1972-1978). Dr. Glass has been an
assistant and then associate professor of surgery at the University of Wisconsin
(1978-1985), and a professor of surgery at Texas Tech University in Lubbock
(1985-1989), where he initiated and directed an organ procurement and transplant
program. From 1989-1993 he directed organ transplant programs at St. Louis
University and subsequently at Our Lady of Lourdes Medical Center in Camden,
N.J. Dr. Glass is a member of numerous professional organizations, including the
American College of Surgeons and the American Society of Transplant Surgeons.
During his academic career, he published and lectured extensively in
peer-reviewed medical journals and at peer-reviewed national medical meetings.
Since 1993, he has been in private practice in south-central Ohio.
PAUL CHERNIS - Upon the consummation of the Monoclonal transaction, Mr. Chernis
became a director of the Company. He has been a director of Concord since its
inception in July, 1991. He has rendered legal services to the Company and he
has also rendered legal services to Integrated and Tucker Financial, Inc. He has
been a member of the firm of Silverman, Collura & Chernis, P.C. since June 1990,
specializing in corporate and securities law. Mr. Chernis is a graduate of New
York University School of Law, and prior to entering private practice in 1972,
he served as Assistant Regional Administrator of the New York Regional Office of
the Securities and Exchange Commission.
TODD B. HESSE - Upon the consummation of the Monoclonal transaction, Mr. Hesse
became the Company's Secretary. In 1991 Mr. Hesse became a member of Concord's
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management team. Prior to that, he was a senior associate with James J. Lowery &
Co., a municipal financial advisory firm. At James J. Lowery & Co., Mr. Hesse
was involved with the issuance of tax-exempt bonds and notes, as well as
developing reinvestment programs for various project funds. Mr. Hesse is a
graduate of Delaware Valley College.
SCOTT S. KALISH - Mr. Kalish became Treasurer of the Company upon the
consummation of the Monoclonal transaction. Mr. Kalish has served as Concord's
Controller since 1991. Previously, he was supervisor of financial accounting at
Elf Acquitaine Offshore ("Elf") in Houston where he specialized in oil and gas
accounting and taxation. Prior to his association with Elf he was an oil and gas
accounting supervisor with Cliffs Drilling Company. Mr. Kalish is a graduate of
Roger Williams College.
ITEM 10. EXECUTIVE COMPENSATION
The Company's Summary Compensation Table is Provided herein. The Company
has no Option/SAR Grants, Aggregated Option/SAR Exercises or Fiscal year-end
Option/SARs for the years ended June 30, 1996, 1995, or 1994 nor are there any
long-term incentive plan ("LTIP") awards, or stock options or stock appreciation
rights.
Non-employee directors are not compensated for Board of Directors meetings
attended.
33
<PAGE>
SUMMARY COMPENSATION TABLE
For the Years Ended June 30, 1996, 1995, and 1994
<TABLE>
<CAPTION>
Annual Compensation Awards Payouts
---------------------------------------------------------------------
(a) (b) (c) (d) (e) (f) (g) (h) (i)
Name Other
and Year Annual Restricted All other
Principal Ended Compensation Compen- Stock Options/ LTIP Compen-
Position June 30 Salary* Bonus ($) sation($)* Awards ($) SARs Payouts ($) sation($)*
- --------------- ----------- ------------ --------- ---------- ---------- -------- ---------- ---------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Jerry Swon 1996 $150,000 None None None None None None
Chairman & 1995 $150,000 None None None None None None
Past President 1994 $150,000 None None None None None None
Deral Knight (1)
President 1996 $128,706 None None None None None None
Bruce Diechl (2) 1996 $100,000 None None None None None None
Executive Vice 1995 $100,000 None None None None None None
President 1994 $100,000 None None None None None None
Barry Laidlaw 1996 $ 70,000 None None None None None None
Director 1995 $ 70,000 None None None None None None
1994 $ 70,000 None None None None None None
Scott S Kalish 1996 $ 70,000 None None None None None None
Controller 1995 $ 70,000 None None None None None None
1994 $ 70,000 None None None None None None
Todd Hesse 1996 $ 45,000 None None None None None None
Secretary 1995 $ 45,000 None None None None None None
1994 $ 45,000 None None None None None None
</TABLE>
*Note: Salaries shown above, with the exception of Deral Knight, have been
allocated to listed payees out of fund paid by Concord to Integrated under
the management agreement (see Item 12, Certain Relationships and Related
Party Transactions, and Notes To Financial Statements.)
1- Deral Knight joined the Company's Board of Directors in May of 1996 and in
June 1996 became President and CEO of the Company. Prior to Joining Mr.
Knight was, and still remains, President of the Company's Subsidiary KEMCO.
His compensation reflected above represents the total compensation he
received from the Company from July 1, 1995 through June 30, 1996.
2- Bruce Deichl resign from the Board of Directors of the Company and as an
officer of the Company in May 1996.
34
<PAGE>
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table contains information as of November 29, 1996 as to the
beneficial ownership of shares of the Company's common stock by each person who
was the beneficial owner of more than 5% of the outstanding shares of that
class, each person who is a director or officer of the Company and all persons
as a group who are officers and directors of the Company, and as to the
percentage of outstanding shares held.
NAME OF SHARES APPROXIMATE
BENEFICIAL OWNER BENEFICIALLY OWNED (1) PERCENT OF CLASS (2)
- ---------------- ---------------------- --------------------
Deral Knight (3) 360,000 6.04%
Richard Barden (4) 177,675 2.98%
Paul Chernis (5) 30,044 .50%
Dr. Neil Glass 23,971 .40%
Total Held by Officers
and Directors 414,015 6.94%
(1) As used in this section, the term beneficial ownership with respect to a
security is defined by Rule 13d-3 under the Securities Exchange Act of 1934 to
consist of sole or shared voting power (including the power to vote or direct
the vote) and/or sole or shared investment power (including the power to dispose
or direct the disposition with respect to the security in question through any
contract, arrangement, understanding, relationship or otherwise).
(2) As of November 18, 1996 there were 5,965,061 shares of common stock issued
and outstanding.
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<PAGE>
(3) Mr. Knight's shares of the Company's common stock were obtained pursuant to
the Company's acquisition of KEMCO.
(4) Mr. Barden is the President of the Company's subsidiary IPS. His shares of
the Company's common stock were obtained pursuant to the Company's acquisition
of IPS. Mr. Barden is not an officer or director of the Company and therefore is
not included in the caption "Total Held By Officers and Directors" in this
section.
(5) Includes 30,000 shares held by the law firm of Silverman, Collura & Chernis,
P.C.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
Jerry Swon, former President and former Chairman of the Board of the
Company owns all of the outstanding stock of Integrated, which is also a
shareholder of the Company. Integrated had provided certain services to the
Company pursuant to a management agreement (see below).
Certain officers and directors of the Company own a total of 6.94% of the
Company's outstanding common stock as of November 18, 1996. This total also
includes the 6.04% of the Company's common stock owned by Deral Knight, Company
Chairman of the Board and CEO and President of the Company's wholly-owned
subsidiary KEMCO.
At June 30, 1996, promissory notes, aggregating $298,000 (originally
$400,000) are payable to Walter Goehausen, and Deral Knight, both of whom are
stockholders of the Company. The notes bear interest at rates of 12% - 6% per
annum, which are generally payable in monthly installments through maturity.
Approximately $50,000 of the notes are secured by future production of
approximately 75,000 equivalent barrels of oil. The Company paid an origination
fee of 3% to Integrated for costs associated with obtaining the Goehausen note
which originally totaled $150,000. The notes mature at various dates through
August 1996.
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<PAGE>
The Company and Integrated, entered into an agreement in June, 1991 that
required Integrated to provide certain management, administrative and accounting
services to the Company and its subsidiaries, Concord and COI, for $116,000 per
month through June 30, 1996. While the agreement was in effect, the Company was
also entitled to 10%, through March 31, 1994 and 20% thereafter, of all the
syndicated retail partnership gross sales made by Integrated. As additional
consideration for the agreement, Integrated assigned to the Company, effective
June 1, 1991 through March 31, 1994, its revenue sharing interest in all program
syndications. In fiscal 1996, the Company recorded $140,000 in syndication
income. In fiscal 1995, the Company recorded $539,000 in syndication income and
$13,490 in management fee income, compared to $522,053 in syndication income and
$11,021 in management fee income In fiscal 1994. The services provided by
Integrated included the receipt of cash for oil and gas sales and the payment of
operating and capital expenditures on behalf of the Company. As of July 1, 1996,
the management agreement terminated.
In conjunction with the above referenced management agreement, the Company
and Integrated entered into an agreement by which the associated receivables and
payables were netted. At June 30, 1996, the Company had a net receivable due
from Integrated of $236,415. At June 30, 1995, the Company had a net payable due
to Integrated of $594,685.
As part of its ongoing operations, the Company conducts business with
Atascosa Electric Services ("AES"), an entity which is owned by the family of
Deral Knight. At June 30, 1996, there were no receivables due from Mr. Knight or
37
<PAGE>
from AES. At June 30, 1995, the receivables due from Mr. Knight and AES were
$103,619 and $15,937, 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 common stock valued at $6.25 per share to the extent that Deral Knight
owed money to the Company at June 30, 1996. Accordingly, in liquidation of the
receivable balance of $107,062.50, 17,130 shares of Company common stock have
been returned to the Company.
In December 1994, KEMCO (prior to its acquisition by the Company) entered
into an agreement with Integrated (the "Joint Venture Agreement") in which
Integrated agreed to finance the purchase of certain gas plant and gas
processing equipment. Upon the sale of the equipment, KEMCO and Integrated would
equally share in the "Where Is - As Is" profit or losses. During the three
months ended June 30, 1995, the Company sold the related inventory, as part of a
$1,550,000 total contact, for $900,000 which is included in contract revenue in
the accompanying statement of operations for fiscal 1995. Integrated's share of
the profit totaling $182,500 and the $535,000 cost of the inventory, are
included in the cost of contract revenue in the accompanying statement of
operations for fiscal 1995.
In August, 1995, the Company's board of directors considered the
acquisition of a 63% interest in IPS. At that time, the acquisition involved a
cash investment of $1.4 million. The Company's board declined to make the
acquisition at that time because the Company needed to conserve its available
cash following the recent acquisition of KEMCO. The board was also concerned
because IPS had just completed its development stage, had no written orders and
was just starting to market its products. After the board rejected the IPS
38
<PAGE>
transaction, former Company president Jerry Swon disclosed to the board that he
wished to pursue the IPS venture through a company controlled by him.
Thereafter, on August 22, 1995, IPS entered into an agreement with Tucker
Financial, Inc. ("Tucker"), a company controlled by former Company President
Jerry Swon, whereby Tucker provided funding to IPS in the amount of $300,000, as
part of an agreement that gave Tucker the right to acquire up to 63% of IPS by
furnishing a total of $1.4 million in working capital to IPS.
On October 18, 1995 Tucker arranged with an entity known as the SMR Group
to provide net equity capital to IPS in the amount of $1.4 million for a 25%
interest in IPS. That arrangement contemplated combining IPS with a public
company in which Tucker would have held a 28% interest. The sum of $300,000 was
to be repaid by IPS to Tucker. No such repayment actually took place because the
deal between IPS and SMR Group was never finalized.
On December 12, 1995, Mr. Swon recommended that the Company's board of
directors reconsider the acquisition of IPS based on the progress made by that
company during the second half of 1995, and the immediate outlook for IPS and
its principal products. Mr. Swon advised the board that he felt confident that
the acquisition could be made for stock at this time and that IPS's agreement
with the SMR Group could be terminated. The board authorized him to negotiate
with IPS and report back at a subsequent meeting.
On December 26, 1995, Mr. Swon advised the Company's board of directors
that 100% of IPS could be purchased for 600,000 shares of the Company's common
stock. He also indicated that an additional 100,000 shares could eliminate
$400,000 of indebtedness including $300,000 in debt that IPS had incurred in
39
<PAGE>
connection with the financing arranged by Tucker. Mr. Swon advised the board
that IPS would require up to an estimated $700,000 in working capital during the
next 12 months, and the Company would assist IPS in raising or obtaining these
funds. The board unanimously resolved to purchase IPS on the proposed terms.
As part of the acquisition, Tucker relinquished its right to purchase IPS
shares as described above. The IPS shareholders receiving Company shares for
their IPS holdings included seven individuals representing 55% of the
outstanding stock of IPS, and who had no prior interest in the Company, and ten
shareholders originally introduced to IPS by Tucker, which shareholders
represented 45% of IPS. Eight of those shareholders have made investments in
other ventures in which Mr. Swon, Tucker, or Integrated had an interest, and
presently own stock in the Company.
At the time of the IPS acquisition there existed a royalty agreement with
its president 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 gross revenue, and 5% of gross revenue thereafter. The agreement
expires December 31, 2015.
In March 1996, the Company finalized a sale of gas processing and related
equipment to Integrated for $550,000. The Company's profit on the sale of these
items was approximately $200,000.
In June 1996, Integrated returned 124,500 shares of the Company's common
stock to treasury, at a value of $3.00 per share as partial payment of
Integrated's intercompany debt.
40
<PAGE>
In June of 1996, the Company acknowledged $150,000 of expenses which
represented costs incurred by Integrated outside of the scope of the management
contract and which costs were deemed reimbursable to Integrated and thus were
credited to Integrated's intercompany obligation.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibits
Exhibits marked with an asterisks have been previously filed with the
Securities and Exchange Commission by the Company, and are incorporated by
reference, as indicated. Other exhibits, if not so designated, are filed with
this Form 10-KSB.
Exhibit No. Description of Exhibits Page No.
----------- ----------------------- --------
3 Certificate of Incorporation as
amended, and by-laws* N/A
10.8 Agreement and Plan of Reorganization
between the Registrant and Concord
Energy, Inc.*** N/A
10.9 KEMCO acquisition agreement** N/A
10.10 KEMCO - Deral Knight employment
agreement** N/A
b) Reports on Form 8-K
On May 26, 1995, the Company filed a Report on Form 8-K, disclosing the
acquisition of KEMCO and including KEMCO's financial statements for the period
ended June 30, 1994 together with a copy of the acquisition agreement and the
Deral Knight employment agreement.
On February 7, 1996 the Company filed a Report on Form 8-K, disclosing the
Company's intention to acquire IPS and included a copy of the letter of intent
with IPS.
- -------------
* Previously filed
** Included in the Company's Form 8-K filed on May 26, 1995
*** Filed as an exhibit to the registration statement filed with the Commission
on Form SB-2 on August 13, 1996
41
<PAGE>
On July 17, 1996 the Company filed a Report on Form 8-K, disclosing a
realignment of duties of the Chairman of the Board, CEO and CFO of the Company.
Additionally, it disclosed that Deral Knight would assume the positions of
president and CEO of the Company, which were previously held by the Company's
former Chairman of the Board, Mr. Swon.
On September 5, 1996 the Company filed a Report on Form 8-K, disclosing the
dismissal of the Company's former independent accountants Price Waterhouse LLP
and the engagement of Hill, Kotara & Ford as the Company's new independent
accountants.
42
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the Company has
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
CONCORD ENERGY INCORPORATED
By: /s/ DERAL KNIGHT
----------------------
DERAL KNIGHT, President
and Principal Executive Officer
Dated: November 29, 1996
In accordance with the Exchange Act, this report has been signed below by
the following persons on behalf of the Company and in the capacities and on the
dates indicated.
A Majority of the Board of Directors
- ------------------------------------
/s/ DERAL KNIGHT November 29, 1996
- ------------------------------------
DERAL KNIGHT
Chairman of the Board of Directors
/s/ BARRY LAIDLAW November 29, 1996
- ------------------------------------
BARRY LAIDLAW
Director
November 29, 1996
- ------------------------------------
NEAL GLASS
Director
/s/ PAUL CHERNIS
- ------------------------------------
PAUL CHERNIS November 29, 1996
Director
/s/ SCOTT KALISH
- ------------------------------------
SCOTT KALISH November 29, 1996
Treasurer (Principal Accounting Officer)
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders
of Concord Energy Incorporated
We have audited the accompanying consolidated balance sheet of Concord Energy
Incorporated and subsidiaries as of June 30, 1996, and the related consolidated
statements of operations, changes in stockholders' equity, and cash flows for
the year then ended. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Concord Energy
Incorporated and its subsidiaries as of June 30, 1996, and the results of its
operations and its cash flows for the year then ended in conformity with
generally accepted accounting principles.
/s/ Hill, Kotara & Ford, P.C.
-----------------------------
Hill, Kotara & Ford, P.C.
San Antonio, Texas
November 18, 1996
Except for Notes 15, e. and 15, f., as to
which the date is November 22, 1996
F-1
<PAGE>
Report of Independent Accountants
Board of Directors and
Stockholders of Concord Energy Incorporated
In our opinion, based upon our audits and the report of other auditors, the
accompanying consolidated balance sheet and the related consolidated statements
of operations, of changes in stockholders' equity and of cash flows present
fairly, in all material respects, the financial position of Concord Energy
Incorporated and its subsidiaries at June 30, 1995 and 1994, and the results of
their operations and their cash flows for each of the three years in the period
ended June 30, 1995 in conformity with generally accepted principles. These
financial statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We did not audit the consolidated financial statements of Knight
Equipment & Manufacturing Corporation, a wholly-owned subsidiary which was
acquired by the Company during 1995 (see Note 3), which statements reflect total
assets of $1,352,370 for the period from April 1, 1995 through June 30, 1995.
Those statements were audited by other auditors whose report thereon has been
furnished to us, and our opinion expressed herein, insofar as it relates to the
amounts included for Knight Equipment & Manufacturing Corporation, is based
solely on the report of other auditors. We conducted our audits of these
statements in accordance with generally accepted auditing standards which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits and the report of
other auditors provide a reasonable basis for the opinion expressed above.
/s/ Price Waterhouse LLP
- ------------------------
Price Waterhouse LLP
Morristown, NJ
October 23, 1995
F-2
<PAGE>
CONCORD ENERGY INCORPORATED AND SUBSIDIARIES
Consolidated Balance Sheets
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
June 30,
1996 1995
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 898,083 $ 257,788
Accounts receivable, net of allowance for doubtful accounts of $132,930 and $67,490 1,259,785 696,558
Receivable due from Integrated, net 236,415 --
Receivable due from stockholder -- 103,619
Receivable due from affiliated company -- 15,937
Costs and estimated earnings in excess of billings on uncompleted contracts 117,095 558,861
Inventories 6,081,973 8,452,625
Prepaid expenses and other current assets 20,264 62,220
----------- -----------
Total current assets 8,613,615 10,147,608
Property, plant and equipment, net 8,522,550 9,132,755
Goodwill, net 2,594,248 --
Bond issue costs, net 334,578 504,149
Other assets 50,000 50,000
----------- -----------
Total assets $20,114,991 $19,834,512
=========== ===========
Liabilities and Stockholders' Equity
Current liabilities:
Current portion of notes payable to stockholders $ 298,000 $ 243,750
Current portion of long-term debt 4,481,223 1,225,000
Current portion of capital lease obligations 23,100 --
Accounts payable 1,332,392 858,535
Accrued expenses 1,114,523 501,243
Billings in excess of costs and estimated earnings on uncompleted contracts 72,711 --
Payable due to Integrated, net -- 594,685
Federal income taxes payable 97,918 120,098
-------------- -------------
Total current liabilities 7,419,867 3,543,311
Notes payable to stockholders -- 225,000
Long-term debt 2,578,045 5,384,045
Capital lease obligations 47,993 46,673
----------- -----------
Total liabilities 10,045,905 9,199,029
----------- -----------
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,
5,899,735 and 3,104,224 shares issued 590 310
Paid-in capital 22,514,415 14,936,568
Accumulated deficit (11,108,688) (4,301,395)
----------- -----------
11,406,317 10,635,483
Common stock subscribed (856,665) --
Cost of treasury stock (480,566) --
----------- -----------
Total stockholders' equity 10,069,086 10,635,483
----------- -----------
Total liabilities and stockholders' equity $20,114,991 $19,834,512
=========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE>
CONCORD ENERGY INCORPORATED AND SUBSIDIARIES
Consolidated Statements of Operations
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Years Ended June 30,
1996 1995 1994
<S> <C> <C> <C>
Revenue:
Oil sales $ 581,138 $ 859,338 $ 998,961
Gas sales 622,421 445,551 739,780
----------- ----------- -----------
Total oil and gas sales 1,203,559 1,304,889 1,738,741
Contract revenue 9,285,939 1,312,393 --
Syndication sales and revenue interests 140,000 552,490 533,074
Well operating income 51,416 64,926 96,439
Rental income 125,468 38,509 --
Software sales 21,827 -- --
----------- ----------- -----------
Total revenue 10,828,209 3,273,207 2,368,254
----------- ----------- -----------
Costs and Operating Expenses:
Lease operating 639,271 747,003 1,104,682
Cost of contract revenue 8,244,390 1,087,163 -
Inventory - adjustment to lower of cost or market 3,043,055
General and administrative:
Management agreement 1,392,000 1,392,000 1,392,000
Other expenses 2,548,856 749,326 295,036
Depreciation, depletion and amortization 623,938 593,169 636,926
----------- ----------- -----------
Total costs and operating expenses 16,491,510 4,568,661 3,428,644
----------- ----------- -----------
Loss from operations (5,663,301) (1,295,454) (1,060,390)
----------- ----------- -----------
Other income (expense):
Other income 49,584 14,244 2,300
Interest expense (1,199,949) (321,318) (67,892)
----------- ----------- -----------
Total other income (expense) (1,150,365) (307,074) (65,592)
----------- ----------- -----------
Loss before income taxes (6,813,666) (1,602,528) (1,125,982)
Income tax benefit 6,373 21,735 --
----------- ----------- -----------
Net loss $(6,807,293) $(1,580,793) $(1,125,982)
============ =========== ===========
Net loss per share $ (1.97) $ (0.67) $ (0.51)
============ =========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE>
CONCORD ENERGY INCORPORATED AND SUBSIDIARIES
Consolidated Statements of Changes in Stockholders' Equity
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Common Stock Treasury Stock
--------------- Paid-in Accumulated Subscriptions -----------------
Shares Amount capital deficit Receivable Shares Value Total
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at June 30, 1993 11,111,660 $ 1,111 $11,233,768 $ (1,594,620) $ -- -- $ -- $ 9,640,259
Net loss -- -- -- (1,125,982) -- -- -- (1,125,982)
--------- -------- ----------- ------------ --------- ------- --------- -----------
Balance at June 30, 1994 11,111,660 1,111 11,233,768 (2,720,602) -- -- -- 8,514,277
Issuance of common stock 4,284,462 429 3,576,570 -- -- -- -- 3,576,999
Issuance of common stock upon
conversion of debt 125,000 12 124,988 -- -- -- -- 125,000
Net loss -- -- -- (1,580,793) -- -- -- (1,580,793)
--------- -------- ----------- ------------ --------- ------- --------- -----------
Balance at June 30, 1995 15,521,122 1,552 14,935,326 (4,301,395) -- -- -- 10,635,483
1 for 5 stock reversion (12,416,898) (1,242) 1,242 -- -- -- -- --
--------- -------- ----------- ------------ --------- ------- --------- -----------
Balance at June 30, 1995
as restated 3,104,224 310 14,936,568 (4,301,395) -- -- -- 10,635,483
Issuance of common stock 2,413,907 242 6,552,885 -- (856,665) -- -- 5,696,462
Issuance of common stock upon
conversion of debt 381,604 38 1,024,962 -- -- -- -- 1,025,000
Acquisition of treasury stock by
increasing payable to
Integrated -- -- -- -- -- 124,500 (373,500) (373,500)
Receipt of shares in lieu of
repayment of receivable
from stockholder -- -- -- -- -- 17,130 (107,066) (107,066)
Net loss -- -- -- (6,807,293) -- -- -- (6,807,293)
--------- -------- ----------- ------------ --------- ------- --------- -----------
Balance at June 30, 1996 5,899,735 $ 590 $22,514,415 $(11,108,688) $(856,665) 141,630 $ 480,566 $10,069,086
========= ======== =========== ============ ========= ======= ========= ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE>
CONCORD ENERGY INCORPORATED AND SUBSIDIARIES
Consolidated Statements of Cash Flows
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Years Ended June 30,
1996 1995 1994
<S> <C> <C> <C>
Cash flows from operating activities
Net loss $(6,807,293) $(1,580,793) $(1,125,982)
Adjustments to reconcile net loss to net cash (used in)
provided by operating activities:
Depreciation, depletion and amortization 788,176 593,169 636,926
Other noncash transactions 4,068,808 124,345 --
Decrease (increase) in assets:
Accounts receivable (538,085) (10,755) 140,322
Receivable due from stockholders (3,447) (93,528) --
Receivable due from affiliated company 15,937 15,352 --
Costs and estimated earnings in excess of billings on
uncompleted contracts 441,766 (507,427) --
Inventories (558,270) 34,982 --
Deferred income taxes -- (21,735) --
Other assets and liabilities 54,903 (44,367) --
(Decrease) increase in liabilities:
Accounts payable 450,653 (152,596) 80,564
Accrued expenses 328,517 39,646 (1,452)
Federal income taxes payable (22,180) (182,357) --
Franchise tax payable -- 1,500 (32,264)
Receivable due from/payable due to Integrated, net (1,504,600) 808,990 61,548
Billings in excess of costs and estimated earnings on
uncompleted contracts 72,711 -- --
----------- ----------- ----------
Net cash (used in) provided by operating activities (3,212,404) (975,574) (240,338)
----------- ----------- ----------
Cash flows from investing activities
Purchases of equipment, well workovers and recompletions (314,342) (56,482) (177,315)
Acquisition of business, net of cash acquired -- (3,851,523) --
Sale of oil and gas interests and equipment 468,750 -- 407,134
Other, net -- (4,937) (630)
----------- ----------- ----------
Net cash (used in) provided by investing activities 154,408 (3,912,942) 229,189
----------- ----------- ----------
Cash flows from financing activities
Net proceeds from bonds payable -- 3,233,134 --
Net proceeds from notes payable 1,696,065 1,150,000 --
Net proceeds from issuance of common stock 3,208,602 927,749 --
Principal payments on notes payable and capital lease obligations (1,206,376) (231,180) (100,000)
------------ ----------- ----------
Net cash flows provided by (used in) financing activities 3,698,291 5,079,703 (100,000)
----------- ----------- ----------
Net increase (decrease) in cash and cash equivalents 640,295 191,187 (111,149)
Cash and cash equivalents at beginning of period 257,788 66,601 177,750
----------- ----------- ----------
Cash and cash equivalents at end of period $ 898,083 $ 257,788 $ 66,601
=========== =========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<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 production in East Texas and the Louisiana Gulf Coast. The Company's
wholly-owned subsidiaries, Concord Operating, Inc. ("COI"), and Knight
Equipment and 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 and 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. For
accounting purposes, the acquisition has been treated as a recapitalization
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.
In December 1995, the company effectuated a 1 for 5 reverse split of it's
outstanding stock. Historical stockholders' equity and net loss per share
information 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.,
Integrated Petroleum Systems Corporation and Knight Equipment &
Manufacturing Corporation and its wholly-owned subsidiary, K & S
Engineering, Inc. 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 affect 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.
F-7
<PAGE>
CONCORD ENERGY INCORPORATED AND SUBSIDIARIES
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
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.
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 expensed 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 recorded as a result of the acquisition of IPS is being 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 charged 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 charged 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 $186,183, and $21,945, respectively.
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 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 represents an asset based on revenues recognized in
excess of amounts billed to customers. Billings in excess of costs and
earnings on uncompleted contracts is recorded as a liability and represents
contracts for which billings to date exceed cumulative revenues recognized
based on the percentage of completion method.
F-8
<PAGE>
CONCORD ENERGY INCORPORATED AND SUBSIDIARIES
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
Syndication sales
Under an agreement between the Company and Integrated (see Note 13), 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 June 30,
1996 and 1995, there are no significant future minimum rentals to be
received under these noncancelable operating leases.
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 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 loss per share
Net loss per share of common stock is based upon the weighted average
number of shares of common stock outstanding (3,454,627 in fiscal 1996,
2,376,991 in fiscal 1995 and 2,222,330 in fiscal 1994). The Company's
common stock equivalents, which consist of outstanding warrants to purchase
the Company's common stock, are not considered in the net loss per share
calculation since their effect is anti-dilutive.
3. Business Combinations
KEMCO - On May 7, 1995, the Company acquired all of the issued and
outstanding shares of 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
financings totalling approximately $3,700,000 and the net proceeds from the
issuance of 260,000 shares of the Company's common stock totalling
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.
Assuming that KEMCO had been purchased on July 1, 1994, the Company's
consolidated revenues, loss from operations, net loss and net loss per
share for the fiscal year ended June 30, 1995 would have been as follows:
1995
(unaudited)
Revenues $ 8,069,302
Loss from operations (1,114,982)
Net loss (1,496,488)
Net loss per share (.63)
F-9
<PAGE>
CONCORD ENERGY INCORPORATED AND SUBSIDIARIES
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
IPS - 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, valued at $1,800,000, 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 exceeded the value of its assets
by $853,208, which when added to the $1,800,000 value assigned to the
shares of common stock issued to acquire the Company, resulted in goodwill
of $2,653,208 being recorded. Amortization of goodwill of $58,960 is
recorded as of June 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 and South 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.
The Company maintains account balances at several financial institutions.
Accounts are insured by the Federal Deposit Insurance Corporation up to
$100,000. In the normal course of business, the Company may maintain
account balances which are generally transient in nature in excess of the
federally insured limits.
5. Costs and Estimated Earnings on Uncompleted Contracts
Information on contracts in progress at June 30 is as follows:
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
Expenditures on uncompleted contracts $1,637,171 $ 902,330
Estimated earnings thereon 338,164 203,135
---------- -----------
1,975,335 1,105,465
Less: Billings on uncompleted contracts 1,930,951 546,604
---------- -----------
$ 44,384 $ 558,861
========== ===========
Included in the accompanying balance sheets under the following captions:
Costs and estimated earnings in excess of billings on uncompleted contracts $ 117,095 $ 558,861
Billings in excess of costs and estimated earnings on uncompleted contracts (72,711) -0-
---------- -----------
$ 44,384 $ 558,861
========== ===========
</TABLE>
6. 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 sales 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 year ended June
30, 1996.
F-10
<PAGE>
CONCORD ENERGY INCORPORATED AND SUBSIDIARIES
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
7. Property, Plant and Equipment, Net
Significant components comprising property, plant and equipment at June 30
include the following:
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
Oil and gas properties:
Leasehold costs $ 7,495,916 $ 7,368,416
Lease well and equipment 1,836,882 1,944,882
Intangibles 1,904,925 1,904,925
Property, plant and equipment 484,181 945,431
Other 80,632 58,551
------------ ------------
Total oil and gas properties 11,802,536 12,222,205
------------ ------------
Other property, plant and equipment:
Land 185,413 159,913
Buildings and improvements 359,535 239,675
Machinery and equipment 244,776 149,219
Vehicles 237,896 218,769
Furniture, fixtures and software 187,646 81,710
------------ ------------
Total other property, plant and equipment 1,215,266 849,286
------------ ------------
Accumulated depreciation, depletion and amortization (4,495,252) (3,938,736)
------------ ------------
Property, plant and equipment, net $ 8,522,550 $ 9,132,755
============ ============
Depreciation, depletion and amortization of oil and gas properties, and
depreciation of other property, plant and equipment for the fiscal years
ended June 30 is as follows:
1996 1995 1994
Oil and gas properties $ 431,914 $ 544,868 $ 619,254
Other property, plant & equipment 133,064 48,301 17,672
--------- --------- ---------
$ 564,978 $ 593,169 $ 636,926
========= ========= =========
</TABLE>
At June 30, 1996 and 1995 vehicles recorded under capital leases totalled
$105,127 and the related accumulated amortization through June 30, 1996 and
1995 is $26,282 and $5,256. Amortization expense related to these vehicles
totalled $21,026, $5,256 and $0, in 1996, 1995 and 1994, respectively.
8. Debt and Capital Lease Obligations
Debt
Notes payable and long-term debt includes the following at June 30:
<TABLE>
<CAPTION>
<S> <C> <C>
Bond payable, dated May 1995, with interest at 10% per annum, requiring 1996 1995
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 stock to the lenders. $ 2,920,000 $ 2,920,000
</TABLE>
F-11
<PAGE>
CONCORD ENERGY INCORPORATED AND SUBSIDIARIES
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
Secured notes payable, dated December 1994, with a face value of $2,500,000
issued at a $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. 1,774,601 1,757,634
Secured notes payable, dated September 1994, with a face value of
$1,400,000 issued at a $699,500 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. 723,412 706,411
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 25, 1996. The notes are secured by a
personal guarantee from Jerry Swon, the chairman of the board of directors
and a shareholder of the Company. 180,000 800,000
Unsecured note payable, bearing interest at 7% per annum. Interest and
principal are due at various dates through August 1995. -- 300,000
12% convertible notes, dated October 1994, convertible at maturity into
shares of Company's common stock at $5 per share. During 1995, $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 totalling $15,000. The remainder of
the notes mature November 17, 1996. The notes are secured by certain oil
and gas property owned by the Company. 125,000 125,000
Secured note payable dated 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. 46,559 --
Unsecured non-interest bearing note payable dated March 1996 payable in
monthly installments of $43,599 through maturity on December 15, 1996. 304,500 --
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 --
6% convertible note, dated April 1996, convertible at maturity into shares
of the Company's common stock. The note matures in April 1999, with
interest payable quarterly in shares of the Company's common stock. 45,000 --
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. 340,196 --
---------- ----------
Total debt outstanding 7,059,268 6,609,045
Less: current portion 4,481,223 1,225,000
---------- ----------
Long-term debt $2,578,045 $5,384,045
========== ==========
</TABLE>
F-12
<PAGE>
CONCORD ENERGY INCORPORATED AND SUBSIDIARIES
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
As of June 30, 1996, maturities and scheduled payments for the next five
fiscal years and thereafter are $4,481,223 in 1997, $12,608 in 1998,
$58,790 in 1999, $8,635 in 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, 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 at the end of the lease term, 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 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.
9. 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. Rent
expense for the year ended June 30, 1996, 1995 and 1994 was $62,567, $11,633
and $0, respectively.
Future minimum lease payments under noncancelable operating leases as of
June 30, 1996 are as follows:
Fiscal Year
1997 $ 43,998
1998 20,465
1999 9,666
2000 3,600
2001 3,600
----------
Total minimum lease payments $ 81,329
==========
Legal Matters
As of June 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.
During the year ended June 30, 1996 the Company agreed to a project audit
settlement related to a claim on a contract performed by KEMCO prior to its
acquisition by the Company. The $521,500 cost of the project audit
settlement is recorded as a component of cost of contract revenue for the
year ended June 30, 1996.
F-13
<PAGE>
CONCORD ENERGY INCORPORATED AND SUBSIDIARIES
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
10.Outstanding Warrants
Warrants outstanding as of June 30, 1996 to purchase shares of the
Company's common stock are summarized as follows:
<TABLE>
<CAPTION>
Date of Issuance Number of Shares Exercise Price/Share Expiration Date
<S> <C> <C> <C>
November 1994 1,500 $7.50 November 1997
June 1995 100,000 2.90 November 1996
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 175,000 4.50 November 1996
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 June 1999
May 1996 200,000 2.625 July 1999
</TABLE>
The Company has sufficient shares authorized but not issued for use in the
event these warrants are exercised.
11.Supplementary Cash Flow Information
Supplementary cash flow information for the fiscal year ended June 30 is as
follows:
<TABLE>
<CAPTION>
1996 1995 1994
<S> <C> <C> <C>
Interest paid $ 697,031 $ 483,092 $ 67,892
Taxes paid 39,482 213,519 82,264
Noncash investing and financing activities:
Issuance of common stock to acquire business and goodwill 2,653,208 2,500,000 -
Issuance of common stock to convert notes payable 1,025,000 125,000 -
Issuance of common stock in exchange for services 560,360 149,250 -
Issuance of common stock for subscription receivable 856,665 - -
Issuance of common stock to acquire property, plant and equipment 127,500 - -
Property, plant and equipment transferred to inventory 108,186 - -
Land acquired by capital lease 25,500 - -
Treasury stock acquired by incurring payable to Integrated 373,500 - -
Treasury stock acquired in lieu of collection of stockholder receivable 107,666 - -
Other noncash transactions for the year ended June 30, 1996 is composed of
the following:
Lower of cost or market adjustment to inventory $3,043,055
Expenses paid by issuance of common stock 560,360
Expenses paid by issuance of debt 421,500
Amortization on bond and lease discounts 42,008
Loss on sale of equipment 1,885
----------
Total $4,068,808
==========
</TABLE>
F-14
<PAGE>
CONCORD ENERGY INCORPORATED AND SUBSIDIARIES
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
12.Income Taxes
For the year ended June 30, 1996, the income tax benefit of $6,373 results
from the adjustment of federal income taxes payable to the amount currently
due. For the year ended June 30, 1995, the income tax benefit of $21,735 is
comprised of federal and state deferred tax benefits of $562,395 and
$2,637, respectively, offset by an increase in the deferred tax asset
valuation allowance of $543,297. For the year ended June 30, 1994, no
income tax provision (benefit) for federal or state income taxes was
recorded.
The provision (benefit) for income taxes differs from the statutory federal
rate for the fiscal years ended June 30 as follows:
1996 1995 1994
Federal statutory rate (34.0%) (34.0%) (34.0%)
Valuation allowance of
deferred income tax asset 34.0 33.9 34.0
Other 0.0 .1 (0.0)
------- ------- -------
Effective tax rate 0.0% 0.0% 0.0%
======= ======= =======
The components of the net deferred income tax asset as of June 30 are as
follows:
1996 1995
Temporary differences:
Depreciation, depletion and amortization
of intangible drilling costs $ (976,118) $(1,067,999)
Book vs. tax treatment of
acquisition of subsidiaries 1,015,928 -
Other 57,815 153,244
----------- -----------
Total 97,625 (914,755)
Tax credit carryforward 55,017 -
Operating loss carryforward 5,097,314 3,428,367
----------- -----------
Deferred income tax asset 5,249,956 2,513,612
Valuation allowance (5,249,956) (2,513,612)
----------- -----------
Deferred income tax asset, net $ 0 $ 0
=========== ===========
The significant items included in the company's noncurrent deferred tax
asset result from differences between the rates used in computing
depreciation, depletion and amortization of intangible drilling costs for
book and tax purposes, and the different accounting treatment of the
acquisitions of KEMCO and IPS for book and tax purposes. The Company's
valuation allowance increased $2,736,344 in fiscal 1996 and $543,297 in
fiscal 1995.
As of June 30, 1996, the Company had a net operating loss carryforward of
approximately $14,992,000 for regular tax purposes. Of these losses,
approximately $4,772,000 were incurred by Concord Energy, Inc., prior to
its acquisition by MITI, and $1,114,000 (and the tax credit carryforward)
were incurred by IPS prior to its acquisition by the Company, and will be
subject to the separate return limitation years rules of the Internal
Revenue Code. These losses will expire, if not utilized, in fiscal years
ending June 30, 2007 through 2011.
13.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 2.61%
of the Company's common stock as of June 30, 1996. Additionally, certain
officers and directors of the Company, together with the chairman of the
board own or control 7.02% of the Company's common stock as of June 30,
1996.
F-15
<PAGE>
CONCORD ENERGY INCORPORATED AND SUBSIDIARIES
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
Receivables from Related Parties/Affiliated Company
Integrated and the Company have an agreement by which the associated
receivables and payables may be netted. At June 30, 1996, the Company has a
net receivable due from Integrated of $236,415. At June 30, 1995, the
Company had a net payable due to Integrated of $594,685.
As part of its ongoing operations, KEMCO 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, director
and a stockholder of the Company. For the year ended June 30, 1996, KEMCO
subcontracted $283,400 in electrical work to AES and at June 30, 1996 owed
AES $37,040 which is included in accounts payable. At June 30, 1996, there
was no receivable due from stockholder (Deral Knight) or due from
affiliated company (AES). At June 30, 1995, the receivable due from
stockholder (Deral Knight) and due from affiliated company (AES) were
$103,619 and $15,937, 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 share to the
extent that Deral Knight owed money to the Company at June 30, 1995.
Accordingly, in liquidation of the receivable balance, 17,130 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 June 30, 1996.
Other Payables to Related Parties
At June 30, 1996, $270,227 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.
Notes Payable to Stockholders
Notes Payable to stockholders bear interest at rates ranging from 6% to 12%
per annum which are generally payable at maturity. Interest expense
incurred on these notes during fiscal 1996, 1995, and 1994 totals $26,000,
$42,661 and $67,892, respectively. The notes mature at various dates
through August 1996. Approximately $50,000 of the notes at June 30, 1996
are secured by future production of approximately 75,000 equivalent barrels
of oil.
Additionally, $230,000 of the $340,196 recorded as various unsecured notes
at Note 8 represents notes payable to the former stockholders of IPS who
became stockholders of the Company when the Company acquired IPS. Interest
expense on these stockholder notes from March 1, 1996 through June 30, 1996
was $6,775.
Joint Venture Agreement with Integrated
In December 1994, KEMCO (prior to its acquisition by the Company) entered
into an agreement with Integrated (the "Joint Venture Agreement") in which
Integrated agreed to finance the purchase of certain gas plant and gas
processing equipment, which was sold by KEMCO, in exchange for 50% of the
profit realized by KEMCO on the sale of the inventory. During the three
months ended June 30, 1995, the Company sold part of the related inventory
for $900,000 which is included in contract revenue in the accompanying
statement of operations for fiscal 1995. Integrated's share of the profit
totalling $182,500 and the $535,000 cost of the inventory, are included in
cost of contract revenue in the accompanying statement of operations for
fiscal 1995. During the year ended June 30, 1996, KEMCO acquired the
remaining inventory from the joint venture. The resulting $50,000 profit
paid to Integrated is recorded as a cost of contract revenue in the
statement of operations for fiscal 1996.
Acquisition of IPS
In March 1996, the Company acquired IPS, which at the time of the
acquisition, had among its shareholders ten shareholders representing 45%
of IPS's outstanding stock who were introduced to IPS by Tucker, eight of
whom have made investments in the past in other ventures in which Mr. Swon,
Tucker, Integrated and/or KEMCO had an interest, and eight of which
shareholders had owned stock in the Company. Included with the acquisition
of IPS was a $300,000 liability from IPS to Tucker, for funds previously
advanced to IPS from Tucker. This $300,000 was applied to, and is included
in the net receivable balance due from Integrated to the Company at June
30, 1996.
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") which was terminated on June 30, 1996, that required Integrated
to provide certain management, administrative and accounting services to
the Company and certain subsidiaries for $116,000 per month. The services
provided by Integrated included 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 was 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
syndications. 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 a reduction to the Company's
full-cost oil and gas properties pool. In the fiscal years ended June 30,
the company recorded income from Integrated as follows:
1996 1995 1994
Syndication income $ 140,000 $ 539,000 $ 522,053
Revenue interest income - - -
Management fee income - 13,490 11,021
--------- ---------- ----------
$ 140,000 $ 552,490 $ 533,074
========= ========= =========
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 of $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.
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 March 1996 the Company finalized a sale of gas processing and related
equipment to Integrated for $550,000. The Company's profit on the sale of
these items was approximately $250,000. The plant was leased to a third
party by KEMCO, which billed and collected the rentals and remitted them to
Integrated.
F-17
<PAGE>
CONCORD ENERGY INCORPORATED AND SUBSIDIARIES
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
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 which has been
recorded in fiscal 1996 as a reduction of the net receivable balance due
from Integrated as of June 30, 1996. This stock is included in the
accompanying consolidated financial statement as treasury stock in
stockholders' equity.
In June 1996, in conjunction with the termination of the management
agreement between the Company and Integrated, the Company recognized
$150,000 of expenses from Integrated. These expenses represent costs
incurred by Integrated between March 1994 and June 30, 1996, outside of the
scope of the management contract which had not been previously charged to
the Company. These costs were included in the accompanying consolidated
financial statement within other expense in the consolidated statement of
operations.
14.Supplemental Oil and Gas Information
The following tables set forth information about the Company's oil and gas
producing activities. All of the Company's activities are within the United
States.
a) Oil and Gas Reserves (Unaudited) - The following table of estimated
proved developed and proved undeveloped reserves of oil and gas has been
prepared by the Company utilizing estimates of year-end reserve quantities
provided by independent petroleum consultants. Reserve estimates for
producing oil and gas properties and for new discoveries are inherently
imprecise and are expected to change as additional performance data becomes
available.
Proved developed and proved undeveloped reserves:
Oil Gas Total
(bbls) (Mcf) (EQB) (1)
Balance at June 30, 1993 2,023,547 1,999,359 2,356,772
Revisions of previous estimates 110,306 406,222 178,010
Extensions and discoveries 1,691 241,640 41,964
Production (67,280) (379,859) (130,590)
Sales of minerals in place (15,017) (82,010) (28,685)
---------- ---------- ----------
Balance at June 30, 1994 2,053,247 2,185,352 2,417,471
Revisions of previous estimates (573,450) (223,880) (610,763)
Extensions and discoveries 319,720 703,384 436,951
Production (51,257) (295,626) (100,528)
Sales of minerals in place - - -
---------- ---------- ----------
Balance at June 30, 1995 1,748,260 2,369,230 2,143,131
Revisions of previous estimates 175,439 (258,528) 132,351
Extensions and discoveries - - -
Production (32,815) (302,583) (83,246)
Sales of minerals in place (50,050) (191,129) (81,904)
---------- ---------- ----------
Balance at June 30, 1996 1,840,834 1,616,990 2,110,332
========== ========== ==========
Proved developed reserves:
June 30, 1994 691,511 1,544,510 948,929
June 30, 1995 435,915 1,026,085 606,929
June 30, 1996 375,061 924,019 529,064
(1) Equivalent barrels (Mcf of gas is converted to equivalent barrels by
dividing by six).
F-18
<PAGE>
CONCORD ENERGY INCORPORATED AND SUBSIDIARIES
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
b) Capitalized Costs Relating to Oil and Gas Producing Activities - are as
follows:
<TABLE>
<CAPTION>
June 30
1996 1995 1994
<S> <C> <C> <C>
Proved and unproved oil and gas properties $ 11,802,536 $ 12,222,205 $ 12,165,723
Accumulated depletion and valuation
allowances (4,287,790) (3,855,255) (3,310,387)
------------ ------------ ------------
Net capitalized costs $ 7,514,746 $ 8,366,950 $ 8,855,336
============ ============ ============
Depletion, depreciation and amortization
per equivalent barrel of production $ 5.19 $ 5.43 $ 4.74
============ ============ ============
</TABLE>
c). Costs incurred in Oil and Gas Property Acquisition, Exploration, and
Development Activities are as follows:
Year Ended June 30,
1996 1995 1994
Property acquisition costs $ 22,081 $10,754 $ 34,093
Development costs 127,500 45,728 143,222
-------- ------- --------
Total $149,581 $56,482 $177,315
======== ======= ========
The Company has no unevaluated capitalized costs which are not currently
subject to depletion.
d). Results of Operations for Oil and Gas Producing Activities (excluding
corporate overhead and interest costs) are as follows:
Year Ended June 30,
1996 1995 1994
Oil and gas sales $1,203,559 $1,304,889 $1,738,741
Production Costs (639,271) (747,003) (1,104,682)
Depreciation, depletion
and amortization (431,914) (544,868) (619,254)
---------- ---------- ----------
132,374 13,018 14,805
Income tax expense - - -
---------- ---------- -----------
Results of operations for
oil and gas producing
activities (excluding
corporate overhead and
interest costs) $ 132,374 $ 13,018 $ 14,805
========== ========== ===========
e). Standardized Measure of Discounted Future Net Cash Flows and Changes
Therein Relating to Proved Oil and Gas Reserves (Unaudited) - The following
table presents a standardized measure of future net cash inflows relating
to proved oil and gas reserves. Future cash inflows were computed by
applying year-end prices of oil and gas relating to the Company's proved
reserves to the estimated year-end quantities of those reserves. Future
production and development costs were computed by estimating the
expenditures expected to be incurred in developing and producing the proved
oil and gas reserves at the end of the year, based on year-end costs and
assuming continuation of existing economic conditions. Future income tax
expenses were computed by applying year-end statutory tax rates with
consideration of future tax rates already legislated, to the future pre-tax
net cash flows relating to the Company's proved oil and gas reserves, less
the tax basis of the properties involved. The future income tax expense
gives effect to tax credits and allowances relating to the Company's proved
oil and gas reserves. Because of the imprecise nature of reserve estimates
and the unpredictable nature of the other variables used, actual future
cash inflows may vary considerably and the standardized measure does not
necessarily represent the fair market value of the company's oil and gas
reserves.
F-19
<PAGE>
CONCORD ENERGY INCORPORATED AND SUBSIDIARIES
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended June 30,
1996 1995 1994
<S> <C> <C> <C>
Future cash inflows $ 38,952,790 $ 33,376,800 $ 40,221,450
Future production and development costs (17,423,234) (15,795,180) (18,754,182)
Future income tax (expense) benefit 707,514 (473,342) (1,646,771)
------------ ------------ ------------
Future net cash flows 22,237,070 17,108,278 19,820,497
10% annual discount for estimated timing of cash flows (9,139,496) (7,241,460) (8,901,778)
------------ ------------ ------------
Standardized measure of discounted future net cash flows 13,097,574 9,866,818 10,918,719
at the end of the year
Standardized measure of discounted future net cash flows 9,866,818 10,918,719 10,974,401
------------ ------------ ------------
at the beginning of the year
Total change in standardized measure during the year $ 3,230,756 $ (1,051,901) $ (55,682)
============ ============ ============
</TABLE>
The following table sets forth an analysis of changes in the standardized
measure of discounted future net cash flows from proved oil and gas
reserves:
<TABLE>
<CAPTION>
Year Ended June 30,
1996 1995 1994
<S> <C> <C> <C>
Sales of oil and gas produced, net of production costs $ (564,290) $ (557,886) $ (634,059)
Net changes in price and production costs 2,198,328 306,084 (706,812)
Extensions, discoveries, and improved recovery, less related
costs - 2,118,471 204,643
Development costs incurred during the year (127,500) (45,728) (143,222)
Revisions of previous quantity estimates 2,989,749 (3,873,137) 291,731
Accretion of discount 1,758,162 2,146,727 2,074,013
Net change in income taxes 1,180,856 1,173,428 94,963
Sales of reserves in place (468,513) - 407,134
Other (3,736,036) (2,319,860) (1,644,073)
------------ ------------ ------------
Total change in standardized measure during the year $ 3,230,756 $ (1,051,901) $ (55,682)
============ ============ ============
</TABLE>
F-20
<PAGE>
CONCORD ENERGY INCORPORATED AND SUBSIDIARIES
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
Average sales price and production costs per unit of production were as
follows:
Year Ended June 30
1996 1995 1994
Average sales price:
Crude oil, per barrel $ 17.71 $ 16.77 $ 14.85
Natural gas, per thousand
cubic feet 2.06 1.51 1.95
Average crude oil and gas
sales, per equivalent barrel 4.46 12.98 13.31
Average production costs, per
equivalent barrel 7.68 7.43 8.46
15.Events Subsequent to Date of Balance Sheet
a. In August 1996, a 6% convertible note payable for $45,000 was converted
to 22,557 shares of the Company's common stock by the note-holder. Upon the
conversion, an additional 226 shares of the Company's common stock was
issued as consideration for accrued interest expense through the date of
conversion totaling $451.
b. In August 1996, various notes which totaled $87,696 were converted to
14,616 shares of the Company's common stock. Upon the conversion, an
additional 560 shares of the Company's common stock was issued as
consideration for accrued interest expense through the date of conversion
totaling $3,362. This stock was converted under agreements that require the
Company to pay the difference between the price of the Company's stock on
July 1, 1997 and $6 per share.
c. In July 1996, the stock subscription receivable of $856,665 was
collected in full.
d. Through November 18, 1996, warrants to purchase 231,300 shares of the
Company's common stock expired unexercised. These included a warrant for
100,000 shares that was replaced by a 50,000 share warrant which expires in
February 1998.
e. 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.
f. 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 severence payment of six months of his current salary
totalling $75,000.
16. Business Segments
The Company's operations are classified into two principal industry
segments: oil and gas exploration and production (oil and gas) and
locating, designing, refurbishing and installation of gas plants and gas
processing equipment, including rentals (contracting). Prior to 1996 the
Company operated primarily in the oil and gas industry. Following is a
summary of segmented information for 1996.
1996
Net sales to unaffiliated customers:
Oil and gas $ 1,203,559
Contracting 9,411,407
All other segments as reported in
the accompanying statement
of operations 213,243
-----------
$10,828,209
===========
F-21
<PAGE>
CONCORD ENERGY INCORPORATED AND SUBSIDIARIES
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
1996
Income (loss) from operations:
Oil and gas $ 132,374
Contracting (1,932,348)
All other segments 200,577
------------
(1,599,397)
Other income 49,584
Other expenses (2,671,904)
Management agreement (1,392,000)
Interest expense (1,199,949)
------------
Loss before income tax as reported in the accompanying
statement of operations $ (6,813,666)
Identifiable assets:
Oil and gas $ 7,812,111
Contracting 7,652,392
All other segments -
------------
15,464,503
General corporate assets 4,650,488
------------
Total assets as reported in the accompanying balance sheet $ 20,114,991
============
Capital expenditures:
Oil and gas $ 130,365
Contracting 149,581
All other segments -
Corporate 188,071
------------
Total capital expenditures $ 468,017
============
Depreciation, Depletion and Amortization:
Oil and gas $ 431,914
Contracting 68,576
All other segments -
Corporate 123,448
------------
Total depreciation depletion and amortization $ 623,938
============
In 1996 net sales to two customers of the Company's contracting segment
amounted to $3,418,778 and $3,103,783 accounting for 60% of the total
revenues of the Company.
The loss from operations of the contracting segment includes a lower of
cost or market writedown of inventory of $3,043,055 and a charge of
$521,500 for settlement of claim on a contract completed in a prior year as
more fully discussed in notes 6 and 9, respectively.
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-mos
<FISCAL-YEAR-END> JUN-30-1996
<PERIOD-START> JUL-01-1995
<PERIOD-END> JUN-30-1996
<CASH> 898,083
<SECURITIES> 0
<RECEIVABLES> 1,629,130
<ALLOWANCES> 132,930
<INVENTORY> 6,081,973
<CURRENT-ASSETS> 8,613,615
<PP&E> 13,017,802
<DEPRECIATION> 4,495,252
<TOTAL-ASSETS> 20,114,991
<CURRENT-LIABILITIES> 7,419,867
<BONDS> 5,418,013
0
0
<COMMON> 590
<OTHER-SE> 10,068,496
<TOTAL-LIABILITY-AND-EQUITY> 20,114,991
<SALES> 10,511,325
<TOTAL-REVENUES> 10,828,209
<CGS> 8,883,661
<TOTAL-COSTS> 16,491,510
<OTHER-EXPENSES> (49,584)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,199,949
<INCOME-PRETAX> (6,813,665)
<INCOME-TAX> (6,373)
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (6,807,293)
<EPS-PRIMARY> (1.97)
<EPS-DILUTED> (1.97)
</TABLE>
