Form 10-QSB -- Quarterly or Transitional Report
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1997
[ ] TRANSITION REPORT UNDER SECTION 13
OR 15(d) OF THE EXCHANGE ACT
For the transition period from ___________ to ___________
Commission File Number 0-23814
CONCORD ENERGY INCORPORATED
(Exact name of small business issuer as specified in its charter)
Delaware 22-2670198
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
1515 Simmons Street, Jourdanton, TX 78026
(Address of principal executive offices)
(210) 769-3955
(Issuer's telephone number)
(Former name, former address and former fiscal
year, if changed since last report)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes X No
At March 31, 1997, the outstanding common equity of Concord Energy
Incorporated comprised 6,045,745 shares of common stock, $.0001 par value.
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
The following financial statements are filed as part of this report:
Pages
-----
Consolidated Balance Sheet (Unaudited),
March 31, 1997 and 1996 F-1
Consolidated Statements of Operations and
Accumulated Deficit (Unaudited)
Three and Nine Months Ended March 31, 1997, and 1996 F-2
Consolidated Statements of Cash Flows (Unaudited),
Three and Nine Months Ended March 31, 1997, and 1996 F-3
Notes to Consolidated Financial Statements F-4 - F-18
2
<PAGE>
Item 2. Management's Discussion and Analysis or Plan of Operation. General
Operations
In May, 1993 the Company consummated an Agreement and Plan of
Reorganization ("Agreement") pursuant to which it entered the oil and gas
industry. Under the Agreement, the Company changed its name to Concord Energy
Incorporated (referred to herein as the "Company") and became the parent of an
entity which manages and owns interests in approximately 75 oil and gas wells
primarily located in East Texas and the Louisiana Gulf Coast. The Company's oil
and gas subsidiary had been formed in June 1991 in order to effectuate a
consolidation of 166 oil and gas partnerships.
In May, 1995, the Company acquired Knight Equipment and Manufacturing
Corporation ("KEMCO"), which locates, designs, refurbishes, and installs gas
processing plants for the natural gas industry. The effective date of the
acquisition was April 1, 1995.
In March, 1996, the Company acquired Integrated Petroleum 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.
Results of Operations
The Company's revenues are primarily derived through its KEMCO subsidiary
from the engineering, manufacturing, construction and leasing of gas processing
equipment. The Company also realizes revenue through the sale of oil and gas,
well operations and the sale of oil and gas data gathering software developed by
IPS. During the nine months ended March 31, 1997 the Company reported total
revenues
3
<PAGE>
of $11,901,677. Contract revenues during the nine month period were $10,395,544.
Rental income for the nine month period was $164,664. The Company's oil sales
during the nine month period were $666,607 while gas sales totaled $489,308. The
Company reported revenue from well operating income of $30,380 and software
sales of $155,174 during the nine month period ended March 31, 1997. By
comparison, during the nine month period ended March 31, 1996 the Company
reported total revenues of $9,131,747, including contract revenues of
$8,094,810, rental income of $88,101, oil sales of $417,475, gas sales of
$348,865, revenue from the Company's share of the proceeds of syndication sales
made by Integrated Energy Incorporated ("Integrated"), revenue interests
associated with such sales in the amount of $140,000, well operating income of
$39,902 and software sales of $2,594.
Total revenues increased by $2,769,930 during the nine months ended March
31, 1997 compared to the nine month period ended March 31, 1996. This increase
is primarily due to the increases in contract revenue of $2,300,734, software
sales of $152,580 and oil and gas sales of $249,132 and $140,443, respectively.
Total costs and operating expenses during the nine months ended March 31,
1997 were $10,696,000, a decrease of $1,287,703 from the nine month period ended
March 31, 1996.
Cost of contract revenue during the period was $7,484,171. Cost of contract
revenue as a percentage of contract revenue was approximately 72%. In
comparison, during the nine month period ended March 31, 1996 total costs and
operating expenses were $11,983,703, costs of
4
<PAGE>
contract revenue were $5,728,799 and cost of contract revenue as a percentage of
contract revenue was approximately 71%. The increase in cost of contract
revenue of $1,755,372 is primarily the result of the increase in contract
revenues.
Included in the costs and expenses in the nine month period ended March 31,
1996 was the recording of a $3,043,055 inventory restatement. This was a result
of inventory having been recorded at retail market value at the time of the
KEMCO acquisition rather than at wholesale value, with the balance of the cost
of acquisition being charged to goodwill as it should have been. Current
management and the Company's new auditors have determined that the allocated
acquisition costs were in error, and chose to take a one time adjustment in
fiscal 1996 in order to more accurately reflect the operations of the Company.
The decrease in total costs and operating expenses of $1,287,703 in the
nine month period ended March 31, 1997 as compared to the nine month period
ended March 31, 1996 primarily resulted from the inclusion of the inventory
restatement, partially offset by the increase in cost of contract revenue.
Lease operating expenses accounted for $507,635 during the nine month
period. Lease operating expenses as a percentage of total oil and gas sales were
approximately 44%. Lease operating expenses were $507,641 and lease operating
expenses as a percentage of oil and gas sales were approximately 66%. Lease
operating expenses as a percentage of total oil and gas sales decreased by
approximately 22%.
During the nine month period ended March 31, 1997 general and
administrative expenses were $2,041,371. During the nine month period ended
March 31, 1996, the Company's total general and administrative expenses were
$2,363,424, of which
5
<PAGE>
$1,044,000 were incurred under the Company's management agreement with
Integrated, which terminated on June 30, 1996. Included in the nine month period
ended March 31, 1997 were costs of $354,636 associated with the winding down of
the Company's New Jersey office and staff, which costs have recently been
reduced significantly as described in the Company's Form 10-KSB for the fiscal
year ended June 30, 1996.
Depreciation, depletion and amortization expenses during the nine month
period ended March 31, 1997 were $662,823. During the nine month period ended
March 31, 1996 these expenses were $340,784. The increase of $322,039 is
primarily due to the addition of amortization of IPS' goodwill totaling $132,660
and the increase in oil and gas production.
Interest expense for the nine month period ended March 31, 1997 was
$729,722. During the nine month period ended March 31, 1996 interest expense was
$704,059.
For the nine month period ended March 31, 1997 the Company reported a net
income of $507,736. For the nine month period ended March 31, 1996 the Company
reported a net loss of $3,532,241. The increase of $3,024,505 for the nine
months ended March 31, 1997 as compared to the nine months ended March 31, 1996
primarily resulted from the combination of the above-described inventory
restatement of $3,043,055 and the increased contract revenue of $2,300,734,
partially offset by the increased cost of contract revenue of $1,755,372.
6
<PAGE>
Liquidity and Capital Resources
As of March 31, 1997 the Company reported working capital of $3,451,453
compared to working capital of $5,113,664 at March 31, 1996. Total current
assets increased by $28,851 which is the combination of a decrease in cash and
cash equivalents of $323,114, an increase in receivables of $1,220,545 and a
decrease in inventories and other current assets of $868,580, as compared to
March 31, 1996. Total current liabilities increased from $4,967,838 as of March
31, 1996 to $6,658,900 as of March 31, 1997, for a net increase of $1,691,062.
The combination of the foregoing resulted in a net decrease in working capital
of $1,662,211 from March 31, 1996 to March 31, 1997. This decrease is primarily
related to the reclassification of $2,920,000 from long term debt to short term
debt and the addition of $160,056 of short term debt acquired with IPS, offset
by the increase in receivables of $1,220,545.
Capital Expenditures and Commitments
During the nine months ended March 31, 1997, the Company incurred capital
expenditures of $123,507. These capital expenditures primarily consisted
of equipment purchases by KEMCO.
7
<PAGE>
SIGNATURES
In accordance with the requirements of the Exchange Act, the Registrant
caused this Report to be signed on its behalf by the undersigned, thereunto duly
authorized.
CONCORD ENERGY INCORPORATED
(Registrant)
s\Deral Knight
----------------------------------------
Dated: May 14, 1997 Deral Knight
President, Chief Executive Officer
and Chairman of the Board of Directors
Dated:May 14, 1997 s\Scott Kalish
----------------------------------------
Scott Kalish
Treasurer (Principal Accounting Officer)
8
<PAGE>
Concord Energy Incorporated and Subsidiaries
Consolidated Balance Sheet
- --------------------------------------------------------------------------------
(Unaudited) (Unaudited)
March 31 March 31
1997 1996
Assets
Current assets
Cash and cash equivalents $ 109,380 $ 432,494
Costs and estimated earnings in excess
of billings on uncompleted contracts 2,512,131 363,937
Accounts receivable, net of allowance for
doubtful accounts of $132,390 and $67,490 1,524,566 1,555,707
Receivable from stockholder -- 106,636
Receivable due from Integrated, net -- 789,872
Inventories 5,894,470 6,743,501
Prepaid expenses and other assets 69,806 89,355
------------ ------------
Total current assets 10,110,353 10,081,502
Property, plant and equipment, net 8,115,893 8,547,141
Goodwill, net 2,461,588 2,638,468
Bond issuance costs, net 210,070 494,649
Other assets 50,000 50,012
------------ ------------
Total assets $ 20,947,904 $ 21,811,772
============ ============
Liabilities and Stockholders' Equity
Current liabilities
Current portion of long-term debt $ 3,842,472 $ 1,768,750
Current portion of capital lease obligations 8,566 --
Accounts payable 1,620,015 1,843,688
Accrued expenses 1,123,626 1,233,118
Payable due to Integrated, net 35,099 --
Federal income taxes payable 29,122 122,282
------------ ------------
Total current liabilities 6,658,900 4,967,838
Long term liabilities
Notes payable 2,557,807 6,193,362
Capital lease obligations -- 46,673
------------ ------------
Total Long term liabilities 2,557,807 6,240,035
------------ ------------
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, 6,045,745 and 4,444,350
(post-split) shares issued and outstanding 605 444
Paid-In capital 22,812,110 18,437,091
Accumulated deficit (10,600,952) (7,833,636)
------------ ------------
12,211,763 10,603,899
Treasury Stock (480,566) --
------------ ------------
Total stockholders' equity 11,731,197 10,603,899
------------ ------------
Total liabilities and stockholders' equity $ 20,947,904 $ 21,811,772
============ ============
The accompanying notes are an integral part of
these consolidated financial statements.
F - 1
<PAGE>
Concord Energy Incorporated and Subsidiaries
Consolidated Statement of Operations
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
Quarter Ended Nine-Months Quarter Ended Nine-Months
March 31 March 31 March 31, March 31,
1997 1997 1996 1996
<S> <C> <C> <C> <C>
Revenue:
Oil sales $ 223,302 $ 666,607 $ 140,397 $ 417,475
Gas sales 163,177 489,308 168,565 348,865
------------ ------------ ------------ ------------
Total oil and gas sales 386,479 1,155,915 308,962 766,340
Contract revenue 3,539,842 10,395,544 2,340,260 8,094,810
Syndication sales and revenue interests -- -- -- 140,000
Well operating income 9,945 30,380 13,916 39,902
Rental income 87,294 164,664 37,367 88,101
Software Sales 59,638 155,174 2,594 2,594
------------ ------------ ------------ ------------
Total revenue 4,083,198 11,901,677 2,703,099 9,131,747
------------ ------------ ------------ ------------
Costs and Operating Expenses:
Lease operating 207,169 507,635 138,359 507,641
Cost of contract revenue 2,802,221 7,484,171 1,524,131 5,728,799
Inventory - adjustment to lower
of cost or market -- -- -- 3,043,055
General and administrative:
Management agreement -- -- 348,000 1,044,000
Other expenses 502,473 2,041,371 579,084 1,319,424
Depreciation, depletion and amortization 264,829 662,823 69,740 340,784
------------ ------------ ------------ ------------
Total costs and operating expenses 3,776,692 10,696,000 2,659,314 11,983,703
------------ ------------ ------------ ------------
Income (Loss) from Operations 306,506 1,205,677 43,785 (2,851,956)
------------ ------------ ------------ ------------
Other income (expense)
Other income 10,519 30,485 1,778 23,774
Interest expense (257,026) (728,426) (43,916) (704,059)
------------ ------------ ------------ ------------
(246,507) (697,941) (42,138) (680,285)
------------ ------------ ------------ ------------
Income (Loss) before income taxes 59,999 507,736 1,647 (3,532,241)
------------ ------------ ------------ ------------
Income tax expense -- -- -- --
------------ ------------ ------------ ------------
Net Income (Loss) $ 59,999 $ 507,736 $ 1,647 $ (3,532,241)
============ ============ ============ ============
Accumulated deficit, beginning of period (10,660,951) (11,108,688) (7,835,283) (4,301,395)
============ ============ ============ ============
Accumulated deficit, end of period $(10,600,952) $(10,600,952) (7,833,636) (7,833,636)
============ ============ ============ ============
Income (Loss) per share $ 0.01 $ 0.0 $ 0.00 $ (0.79)
============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements.
F - 2
<PAGE>
Concord Energy Incorporated and Subsidiaries
Consolidated Statement of Cash Flows
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
(Unaudited) (Unaudited)
(Unaudited) Nine-Months (Unaudited) Nine-Months
Quarter Ended Ended Quarter Ended Ended
March 31 March 31 March 31 March 31
1997 1997 1996 1996
<S> <C> <C> <C> <C>
Cash flows from operating activities
Net Income (loss) $ 59,999 $ 507,736 $ 1,647 $(3,532,241)
Adjustments to reconcile net income/loss to net cash
(used in) provided by operating activities:
Depreciation, depletion and amortization 264,829 662,823 69,740 340,784
Other noncash transactions 186,654 422,217 519 3,043,055
Decrease (Increase) in assets:
Accounts receivable 303,832 (264,781) (415,071) (859,150)
Costs and estimated earning in excess
of billings on uncompleted contracts (1,048,650) (2,395,036) 369,092 194,924
Receivable due from Stockholder -- -- 8,441 (3,017)
Receivable due from affiliated company 7,853 236,415 (789,872) (773,935)
Inventories (5,563) 187,503 320,830 (1,333,931)
Deferred income taxes -- --
Other assets and liabilities 29,622 (49,542) 37,940 (17,648)
(Decrease) Increase in liabilities
Accounts payable 270,502 287,624 141,725 1,030,154
Accrued expenses (11,618) (63,608) (432,836) 686,875
Federal income tax payable (77,129) (68,796) 8,333 2,184
Receivable due from/payable due to Integrated, net 35,099 35,099 (259,052) (594,685)
Interest payable to stockholders -- --
----------- ----------- ----------- -----------
Net cash provided by (used in) operating activities 15,430 (502,346) (938,564) (1,816,631)
----------- ----------- ----------- -----------
Cash flows from investing activities
Purchase of propery, plant , oil and gas equipment,
well workovers and recompletions (19,674) (123,507) (111,568) (162,762)
Acquisition of business, net of cash acquired -- -- (897,280) (897,280)
Sale of oil and gas interests -- -- -- 477,332
----------- ----------- ----------- -----------
Net cash (used in) provided by investing activities (19,674) (123,507) (1,008,848) (582,710)
----------- ----------- ----------- -----------
Cash flows from financing activities
Net proceeds from note payable -- -- 1,054,000 1,879,000
Net proceeds from issuance of common stock -- 856,665 -- --
Net proceeds from sale of common stock -- -- 1,189,730 1,689,730
Principal payments on notes payable
and capital lease obligations (192,779) (1,019,515) (93,938) (994,683)
----------- ----------- ----------- -----------
Net cash flows provided by (used in)
financing activities (192,779) (162,850) 2,149,792 2,574,047
----------- ----------- ----------- -----------
Net increase (decrease) in cash and cash equivalents (197,023) (788,703) 202,380 174,706
----------- ----------- ----------- -----------
Cash and cash equivalents at beginning of period 306,403 898,083 230,114 257,788
----------- ----------- ----------- -----------
Cash and cash equivalents at end of period $ 109,380 $ 109,380 $ 432,494 $ 432,494
=========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements.
F - 3
<PAGE>
Concord Energy Incorporated and Subsidiaries
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
1. Organization, Recapitalization, and Operations
Concord Energy Incorporated (the "Company") is an oil and gas exploration and
production company which also locates, designs, refurbishes and installs gas
plants and gas processing equipment for customers in the natural gas industry.
The Company also provides rentals of gas plants and gas processing equipment and
provides services such as engineering, procurement, dismantling, reapplication
and relocation of complete gas processing facilities. In addition, the Company
has developed unique, proprietary software which is used to collect, process,
and transmit data relative to petroleum production and processing operations.
The Company is headquartered in Jourdanton, Texas with substantially all of its
oil and gas operations in East Texas and the Louisiana Gulf Coast. The Company's
wholly-owned subsidiaries, Concord Operating, Inc. ("COI"), and Knight Equipment
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 who did not participate in the exchange were allocated net
working interests in the properties previously held by their respective
Partnerships.
Prior to the exchange, the Partnerships were managed by Integrated Energy, Inc.
("Integrated") and Tucker Financial, Inc. ("Tucker") which were in the business
of establishing and managing oil and gas limited partnerships. Subsequent to the
exchange through June 30, 1996, Integrated continued to provide certain
management and administrative services to the Company pursuant to a management
agreement between the Company and Integrated, which terminated on June 30, 1996.
COI manages the production of Company-owned oil and gas properties.
On May 19, 1993, Monoclonal International Technology, Inc. ("MITI")
acquired all of the outstanding common stock of Concord Energy, Inc., with MITI
as the acquirer (i.e. a reverse acquisition). In connection with the
acquisition, MITI later changed its name to Concord Energy Incorporated, had
previously approved a 1 for 230 reverse split of its 127,784,100 shares of
common stock and issued 10,556,077 shares of its common stock in exchange for
all the outstanding common stock of Concord Energy, Inc.
F-4
<PAGE>
Concord Energy Incorporated and Subsidiaries
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
In December 1995, the company effectuated a 1 for 5 reverse split of its
outstanding stock. Historical stockholders equity has been retroactively
restated for all periods presented in the accompanying consolidated financial
statements to reflect this reverse split.
2. Summary of Significant Accounting Policies
Principles of consolidation
The consolidated financial statements are comprised of the Company and its
wholly-owned subsidiaries, Concord Energy, Inc., Concord Operating, Inc., Knight
Equipment & Manufacturing Corporation and its wholly-owned subsidiary, K & S
Engineering, Inc. and Integrated Petroleum Systems. All significant intercompany
accounts and transactions are eliminated in consolidation.
Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
effect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Cash equivalents
Cash and cash equivalents include all cash and highly liquid investments with
original maturities of three months or less.
Inventories
Inventories are stated at the lower of cost or market using the first-in
first-out method. Inventory consists principally of gas plants, compressors,
separators, supplies and repair parts utilized by the Company in conjunction
with its design and refurbishing of gas plants and gas processing equipment.
Property, plant and equipment
Property, plant and equipment is stated at cost less accumulated depreciation,
depletion and amortization.
F-5
<PAGE>
Concord Energy Incorporated and Subsidiaries
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
The Company accounts for its oil and gas properties under the full cost method
of accounting. Under the full cost method, all costs incurred in acquiring,
exploring and developing oil and gas reserves are capitalized to the full cost
pool. When oil and gas properties are sold, retired or otherwise disposed of,
any applicable proceeds are credited to the full cost pool, with no gain or loss
recognized, unless the sale would have a significant impact on the relationship
between capitalized costs and proved reserves. Since all of its oil and gas
operations are within the United States, the Company utilizes one cost pool to
account for its oil and gas properties. Depreciation, depletion and amortization
of oil and gas properties is computed based on the unit-of-production method for
the cost pool, based on estimates of proved reserves as determined by an
independent reserve engineer.
Other property, plant and equipment is recorded at cost less accumulated
depreciation. Repairs and maintenance costs which do not extend the useful lives
of the assets are expenses as incurred. Depreciation is provided for on the
straight-line method over the estimated useful lives of the assets which range
from three to seven years, except for buildings and improvements which are
depreciated over estimated useful lives ranging from 20 to 30 years.
Goodwill
Goodwill is amortized straight-line over its estimated useful life of 15 years
in accordance with Generally Accepted Accounting Principles.
Leases
Leases which meet certain criteria evidencing substantive ownership by the
Company are capitalized and the related capital lease obligations are included
in liabilities. Amortization and interest are charges to expense, with rent
payments being treated as payments of the capital lease obligation. All other
leases are accounted for as operating leases, with rent payments being charges
to expense as incurred.
Deferred financing and bond issuance costs
Costs incurred in conjunction with obtaining financing (including costs
associated with the issuance of bonds) are amortized using the straight-line
method over the term of the related financing agreement or bond. Bond issuance
costs at March 31, 1997 and 1996 are stated net of accumulated amortization of
$310,691 and $31,445, respectively.
F-6
<PAGE>
Concord Energy Incorporated and Subsidiaries
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
Revenue recognition
Oil and gas sales
Revenues from oil and gas sales are accrued as earned based on production volume
statements and joint interest billings obtained from the well operator.
Contract revenue
Revenues from construction contracts are recognized based on the percentage of
completion method, measured on the basis of costs incurred to date to estimated
total budgeted costs for each contract. Contract costs include all direct
material and labor costs, including those indirect labor and repair costs
related to contract performance. Selling, general and administrative costs are
charged to expense as incurred. Provisions for estimated losses on uncompleted
contracts are made in the period in which such losses are determined. Changes in
job performance, job conditions, estimated profitability and final contract
settlements are monitored on a periodic basis in order to determine if revisions
to the income and cost estimates are necessary as a result of such changes.
Revisions to the income and cost estimates, if any, are recognized in the period
in which such revisions are determined to be necessary. Costs and earnings in
excess of billings on uncompleted contracts represent an asset based on revenues
recognized in excess of amounts billed to customers. Billings in excess of costs
and earnings on uncompleted contracts are recorded as a liability and represent
contracts for which billings to date exceed cumulative revenues recognized based
on the percentage of completion method.
Share of Syndication sales
Under an agreement between the Company and Integrated (see Note 10) which was
terminated on June 30, 1996, the Company was entitled to receive a percentage of
the proceeds 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 March 31, 1997 and
1996, there are no significant future minimum rentals to be received under these
noncancelable operating leases.
F-7
<PAGE>
Concord Energy Incorporated and Subsidiaries
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
Software sales
The Company, through its wholly owned subsidiary IPS, sells, installs and
maintains its proprietary software. The revenue generated from these services is
recognized when earned.
Income taxes
The Company accounts for income taxes under the asset and liability method.
Under the asset and liability method, deferred tax assets and liabilities are
recognized based upon differences arising from the carrying of amounts of the
Company's assets and liabilities for tax and financial reporting purposes using
enacted tax rates in effect for the year in which the differences are expected
to reverse. The effect on deferred tax assets and liabilities of a change in tax
rates is recognized in income in the period when the change in tax rates is
enacted.
Net income (loss) per share
Net income (loss) per share of common stock is based upon the weighted average
number of shares of common stock outstanding (5,960,366 at March 31, 1997 and
4,444,350 at March 31, 1996). The Company's common stock equivalents, which
consist of outstanding warrants to purchase the Company's common stock, are not
considered in the net income (loss) per share calculation since their effect is
anti-dilutive.
3. Business Combinations
On May 7, 1995, the Company acquired all of the issued and outstanding shares of
the common stock of KEMCO for $7,000,000 in a business combination accounted for
under the purchase method of accounting. The acquisition was financed by the
issuance of 400,000 shares of the Company's common stock and payment of
$4,500,000 in cash. Financing for the cash portion of the purchase price was
obtained primarily through the net proceeds from debt financing totaling
approximately $3,700,000 and the net proceeds from the sale of 260,000 shares of
the Company's common stock totaling approximately $800,000. The results of
operations of KEMCO and its wholly-owned subsidiary, K & S Engineering, Inc.,
subsequent to April 1, 1995, the date effective control of KEMCO transferred to
the Company for financial reporting purposes, are included in these consolidated
financial statements.
F-8
<PAGE>
Concord Energy Incorporated and Subsidiaries
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
On March 1, 1996 the Company acquired all of the issued and outstanding shares
of the common stock of IPS for 600,000 shares of the Company's common stock in a
business combination accounted for under the purchase method of accounting. The
results of operations of IPS subsequent to March 1, 1996, are included in these
consolidated financial statements.
At the time of purchase, IPS' liabilities exceeded the value of it's assets by
$853,208, which when added to the $1,800,000 value assigned to the shares of
common stock issued, resulted in goodwill of $2,653,208 being recorded.
Amortization of $191,620 and $ 14,740 is recorded as of March 31, 1997 and 1996,
respectively.
4. Accounts Receivable and Concentration of Credit Risk
Accounts receivable represents 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.
5. Inventory - Lower of Cost or Market Adjustment
Based on a comparison of the estimated potential sales prices to the recorded
carrying costs of the inventory of plants acquired in the KEMCO acquisition,
management has determined that the recorded cost of the inventory of such plants
was in excess of the market value of the plants which would allow a reasonable
profit margin on the sale of the plants. The recorded cost of the inventory of
such plants had been determined based on an appraisal obtained and relied upon
to establish the value of the plants at the time KEMCO was acquired. Management
subsequently determined that the values assigned to the plants were the
appraiser's estimated retail sales prices of the plants rather than wholesale
market value that would result in a reasonable profit margin on the sales of the
plants.
To adjust the carrying cost of the plants to their estimated wholesale market
value, an adjustment of $3,043,055 was charged to expense for the quarter ended
September 30, 1995.
6. Property, Plant and Equipment, Net
Significant components comprising property, plant and equipment at March 31
include the following:
F-9
<PAGE>
Concord Energy Incorporated and Subsidiaries
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
1997 1996
Oil & gas properties:
Leasehold costs $ 7,495,916 $ 6,806,177
Lease well & equipment 1,845,508 1,944,882
Intangibles 1,904,925 1,904,925
Property, plant & equipment 484,181 945,431
Other 81,131 58,551
------------ ------------
11,811,661 11,659,966
------------ ------------
Other property, plant & equipment
Land 185,413 159,913
Buildings & improvements 361,925 374,719
Machinery & equipment 338,136 234,921
Vehicles 237,896 218,769
Furniture, fixtures & software 206,278 163,633
------------ ------------
1,329,648 1,151,955
------------ ------------
Accumulated depreciation,
depletion and amortization (5,025,416) (4,264,780)
------------ ------------
Property, plant and equipment, net $ 8,115,893 $ 8,547,141
============ ============
Depreciation, depletion and amortization of oil and gas properties, and
depreciation of other property, plant and equipment for the periods ended March
31, is as follows:
1997 1996
Oil and gas properties $414,446 $236,044
Other property, plant and equipment 115,697 90,000
-------- --------
$530,163 $326,044
======== ========
F-10
<PAGE>
Concord Energy Incorporated and Subsidiaries
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
7. Debt and Capital Lease Obligations
Debt
Long-term debt includes the following at March 31:
1997 1996
Bond payable, dated May 1995, with
interest at 10% per annum, requiring
semi-annual interest payments through
maturity on November 1, 1997. The bond
is secured by the assets of KEMCO. As
additional consideration, the Company
issued 90,000 shares of common shares to
the lender. (See Note 12) $2,920,000 $2,920,000
Secured notes payable, dated December
1994, with a face value of $2,500,000
issued at $750,000 discount. The notes
bear interest at 9% per annum with an
effective interest rate of 15% per
annum. Semi-annual interest payments of
$112,500 are required through maturity
in January 2010. The notes are secured
by certain gas plants and equipment and
a guarantee of the Company. 1,789,226 1,760,263
Secured notes payable, dated September
1994, with a face value of $1,400,000
issued at a $604,500 discount. The notes
bear interest at 6% per annum payable
semi-annually with an effective interest
rate of 14.02% per annum. Annual
principal payments of $140,000 are
required beginning in August 2005
through maturity in August 2009. The
notes are secured by certain oil and gas
property owned by the Company. 737,440 708,787
F-11
<PAGE>
Concord Energy Incorporated and Subsidiaries
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
Acquisition bridge financing evidenced
by notes payable which bear interest at
12% per annum. The interest and related
principal are due at various maturity
dates through November 1996.
Approximately $180,000 and $500,000 of
the notes at June 30, 1996 and 1995,
respectively are secured by a personal
guarantee from Jerry Swon former
Chairman of the Company's Board of
Directors, who is also a shareholder of
the Company. -- 270,000
Unsecured notes payable, bearing
interest at 7% to 7.5% per annum.
Interest and principal were due at
various dates through fiscal 1996. -- 450,000
12% convertible notes, dated October
1994, convertible at maturity into
shares of the Company's common stock.
$125,000 of these notes matured and were
converted into 25,000 shares of the
Company's common stock. Upon the
conversion, an additional 3,000 shares
of the Company's common stock was issued
as consideration for accrued interest
expense through the date of conversion
totaling $15,000. The remainder of the
notes mature in October 1996. The notes
are secured by certain oil and gas
property owned by the Company. -- 125,000
Secured note payable date January 1996,
with interest at 9% per annum. Interest
and principal of $1,271 are due monthly
through January 2000. The note is
secured with certain equipment owned by
the Company. 37,113 --
Unsecured non-interest bearing note
payable dated March 1996 payable in
monthly installments of $43,599 through
maturity on December 15, 1996. 174,000 --
F-12
<PAGE>
Concord Energy Incorporated and Subsidiaries
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
Secured note payable dated February
1996, with interest at 12% per annum.
Principal and interest are due at
maturity on February 28, 1997. The note
is secured by a certain gas plant owned
by the Company. 600,000 600,000
In July, 1995 the Company issued $500,000
of 12% convertible notes. Upon maturity, or
any time prior thereto, each $250,000
portion of the obligation is convertible
into additional shares of common stock.
The notes mature, one half each July 7,
1996 and August 7, 1996, respectively. -- 500,000
On August 21, 1995, the Company issued
$275,000 of 12% convertible notes. Upon
maturity, or any time prior thereto, the
obligation is convertible into
additional shares of common stock at
$5.00 per share. The note matures on
August 21, 1996. -- 275,000
Various convertible notes payable,
bearing interest of 10% to 12%. -- 123,062
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. 142,500 230,000
---------- ----------
Total debt outstanding 6,400,279 7,962,112
Less: current portion 3,842,472 1,768,750
---------- ----------
Long-term debt $2,557,807 $6,193,362
========== ==========
As of March 31, 1997, maturities and scheduled payments for the next five years
and thereafter are: $3,842,472 in 1998, $13,276 in 1999, $14,522 in 2000, and
the remainder after year 2001.
F-13
<PAGE>
Concord Energy Incorporated and Subsidiaries
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
Capital Lease Obligations
In conjunction with its acquisition of KEMCO, the Company acquired certain
leased equipment which is accounted for as capital leases. Prior to the
acquisition, certain of the leases were prepaid at inception. Capital lease
obligations recorded in the accompanying consolidated financial statements
represent the present value of the lease purchase options which are exercisable
at the end of the lease term in December 1997, discounted at an interest rate of
16% and the future payments due on a lease of a yard facility discounted at 12%.
Capital lease obligations as of March 31 consist of the following:
1997 1996
Total future minimum lease payments $ 9,000 $67,106
Less: amounts representing interest 434 20,433
------- -------
Present value of minimum lease payments $ 8,566 $46,673
======= =======
The obligations under capital lease mature as follows: $8,566 in 1997.
8. Commitments and Contingencies
Minimum Rental Commitments
The Company has several noncancelable operating leases, primarily for yard and
office equipment, that expire over the next five years. These leases generally
are for periods ranging from three to five years and require the Company to pay
all executory costs such as maintenance and insurance.
Legal Matters
As of March 31, 1997, 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. Additional details may be obtained by
examining the Company's Form 10-KSB in the fiscal year ended June 30, 1996.
F-14
<PAGE>
Concord Energy Incorporated and Subsidiaries
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
9. Outstanding Warrants
Warrants outstanding as of March 31, 1997 entitling the holders to purchase
shares of the Company's common stock are summarized as follows:
Date of Issuance Number of Shares Exercise Price/Share Expiration Date
November 1994 1,500 $7.50 November 1997
June 1995 50,000 2.90 February 1998
June 1995 100,000 7.50 July 1997
November 1995 20,000 5.00 November 1998
February 1996 25,000 4.00 January 1999
May 1996 20,000 3.75 June 1998
May 1996 100,000 3.75 June 1999
May 1996 15,000 4.00 January 1998
May 1996 100,000 4.50 March 2001
May 1996 200,000 2.625 July 1999
The Company has sufficient shares authorized but not issued for use in the event
these warrants are exercised.
10. Transactions with Related Parties
Related Party Ownership Interests
The former chairman of the Company's board of directors, personally and through
Integrated and Tucker, which are companies that he owns, own 2.48% of the
Company's common stock as of March 31, 1997. Additionally, certain officers and
directors of the Company, together with its present chairman of the board own or
control 6.57% of the Company's common stock as of March 31, 1997.
Receivables from Related Parties/Affiliated Company
Integrated and the Company previously had an agreement by which the associated
receivables and payables were permitted to be netted. At March 31, 1997, the
Company has a net payable due to Integrated of $35,099. At March 31, 1996, the
Company had a net receivable due from Integrated of $789,872.
F-15
<PAGE>
Concord Energy Incorporated and Subsidiaries
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
As part of its ongoing operations, the Company conducts business with Atascosa
Electric Services ("AES"), an entity which is owned and controlled the family of
Deral Knight, CEO, chairman of the board of directors and a stockholder of the
Company. At March 31, 1997, there was no receivable due from stockholder (Deral
Knight) or due from affiliated company (AES). At March 31, 1996, the receivable
due from stockholder (Deral Knight) and due from affiliated company (AES) were
$106,636 and $0, respectively.
Under the provisions of the agreement whereby the Company acquired Deral
Knight's stock in KEMCO, Deral Knight has agreed to return to the Company,
Concord Energy Incorporated common stock valued at $6.25 per shares to the
extent that Deral Knight owed money to the Company at June 30, 1995.
Accordingly, in liquidation of the receivable balance, approximately 17,000
shares of Company common stock issued to Deral Knight as part of the purchase
price of his KEMCO stock are reflected as having been returned to the Company
and are recorded as treasury stock at September 30, 1996.
Other Payables to Related Parties
At March 31, 1997, $263,659 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.
Management Agreement
The Company and Integrated had entered into an agreement (the "Management
Agreement") that required Integrated to provide certain management,
administrative and accounting services to the Company and certain subsidiaries
for $116,000 per month, which agreement terminated on June 30, 1996. The
Management Agreement had been provided for under the terms of the consolidation
of Partnerships, the assets of which were exchanged for Concord Energy, Inc.
stock (see Note 1 above). 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
F-16
<PAGE>
Concord Energy Incorporated and Subsidiaries
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
Management Agreement, aggregating $363,266. Revenue interest income earned was
also remitted to Integrated in connection with the sale. The proceeds from the
sale were recorded as reduction of the Company's full-cost oil and gas
properties pool. In the period ended March 31, 1997 and 1996 the Company
recorded income from Integrated for as follows:
1997 1996
Share of Syndication Income $ -- $140,000
-------- --------
$ -- $140,000
======== ========
Employment Agreements
On November 1, 1991 IPS entered into an employment agreement with its president,
Richard D. Barden. The agreement as modified on October 4, 1994 provides for him
to receive an annual base salary of $96,200 per year. The agreement also
provides for certain fringe benefits and bonuses and expires December 31, 2000.
On November 9, 1994 KEMCO entered into an employment agreement with its
president, Deral Knight. The agreement provides for him to receive a base salary
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
gross revenue, and 5% of gross revenue thereafter. The agreement expires
December 31, 2015.
F-17
<PAGE>
Concord Energy Incorporated and Subsidiaries
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
Other Related Party Transactions
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 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.
On November 22, 1996 the Company repurchased from Integrated plants and related
equipment for $361,415. The purchase price was netted against the net receivable
due from Integrated at June 30, 1996 of $236,415 which resulted in a net payment
to Integrated of $125,000.
On November 22, 1996 Jerry Swon resigned as chairman and board member of the
Company's board of directors. In conjunction with his resignation, the board of
directors approved a severance payment of six months of his then current salary
totaling $75,000.
12. Events Subsequent to Date of Balance Sheet
In April 1997 the Company completed the obtaining of extensions from holders of
a $2,920,000 bond payable which originally was to mature on May 1, 1997. The
bond payable maturity date was extended to November 1, 1997, and the Company has
agreed to pay the holders an additional 2% interest in return for the
extensions.
F-18
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-START> JUL-01-1996
<PERIOD-END> MAR-31-1997
<CASH> 109,380
<SECURITIES> 0
<RECEIVABLES> 1,524,566
<ALLOWANCES> 132,930
<INVENTORY> 5,894,470
<CURRENT-ASSETS> 10,110,353
<PP&E> 13,141,309
<DEPRECIATION> 5,025,416
<TOTAL-ASSETS> 20,947,904
<CURRENT-LIABILITIES> 6,658,900
<BONDS> 5,446,666
0
0
<COMMON> 605
<OTHER-SE> 11,731,197
<TOTAL-LIABILITY-AND-EQUITY> 20,947,904
<SALES> 11,706,633
<TOTAL-REVENUES> 11,901,677
<CGS> 7,991,806
<TOTAL-COSTS> 10,696,000
<OTHER-EXPENSES> (30,485)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 728,426
<INCOME-PRETAX> 507,736
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 507,736
<EPS-PRIMARY> 0.09
<EPS-DILUTED> 0.09
</TABLE>
