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, 1997
[ ] 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
(Name of small business issuer in its charter)
Delaware 22-2670198
(State or other jurisdiction of (I.R.S. Employer
in corporation or organization) Identification No.)
1515 Simmons Street, Jourdanton, TX 78026
(Address of principal (Zip Code)
executive offices)
Issuer's telephone number (830) 769-3955
Securities registered under Section 12(b) of the Exchange Act:
None
Securities registered under Section 12(g) of the Exchange Act:
Common Stock, $.0001 par value
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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, 1997: $10,483,477
-----------
Aggregate market value of the voting stock held
by non-affiliates as of October 8, 1997: $ 7,190,252*
-----------
Number of shares of common stock outstanding
as of October 8, 1997: 6,045,745
-----------
Documents incorporated by reference:
Portions of the following document are incorporated by reference into the
designated part of this form 10-KSB:
Proxy statement dated October 20, 1997 (Part III)
- ----------
* This valuation was arrived at by applying the $1.3594 per share bid quotation
on October 8, 1997 on the NASDAQ Small Cap Market to the total of 5,289,381
shares held by non-affiliates
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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 1991 Monoclonal changed its name to Asons Distributing, Inc.
In May 1993 Monoclonal entered into an agreement and plan of reorganization
("Agreement") with Concord Energy, Inc. a privately held Nevada corporation
("Concord"), which in June 1991 was formed to effectuate a consolidation of
approximately 166 oil and gas partnerships.
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. In March 1996, the Company acquired Integrated Petroleum Systems
Corporation ("IPS").
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. ("COI"), and IPS are
collectively referred to herein as the "Company".
B. BUSINESS OF ISSUER
The Company is primarily a petroleum industry service company with emphasis
on
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locating, designing, refurbishing and installing gas processing plants and
equipment for the natural gas industry. In addition, the Company provides
rentals of processing 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
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 accounted for approximately 85% and 87% of the
Company's revenues for the years ended June 30, 1997 and 1996, respectively.
Approximately 7% and 5% of the Company's revenues during the years ended
June 30, 1997 and 1996, respectively, were from the sale of crude oil.
Natural gas sales represented approximately 5% and 6% of the Company's
revenues during the 1997 and 1996 fiscal years, respectively.
C. BUSINESS STRATEGY
The Company is committed to a strategy which emphasizes growth in the 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
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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 market 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.
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. The Company 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.
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The Company's equipment inventory is available for sale on an "As-Is, Where-Is"
basis, or can be redesigned and refurbished to meet a customer's specific needs.
E. PRODUCTION AND DEVELOPMENT OPERATIONS
The production and development activities of the Company consist of the
development and operation of properties for the production and sale of oil and
gas. The Company conducts its production and development 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 40 barrels per day and test results from core samples, engineering
data, geological mapping and independent engineer reports, indicate that there
are approximately 1,750,000 gross barrels, in which the Company's interest is
approximately 1,275,000 barrels The Company's share of the estimated additional
development costs required to achieve the total potential reserves is
approximately $1,695,000.
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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 330,000 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 50 BOPD and bottom hole pressure tests indicate recoverable
reserves from the existing wells to be approximately 175,000 gross barrels of
oil. By drilling an additional well, approximately another 115,000 gross barrels
of oil could potentially be recovered. The Company's share of the Hester Field
is approximately 38%.
F. SOFTWARE DEVELOPMENT, SALES, AND INSTALLATION OPERATIONS
The Company's wholly owned 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 APEX(TM) (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
The Company and its subsidiaries have approximately ninety-eight full-time
employees. KEMCO has an average full-time work force of approximately ninety
employees in addition to approximately ten 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 five people; one supervising all sales and general
management, one administrative, and three programmers.
H. COMPETITION
Competition in the oil and gas industry is intense. The Company encounters
some competition from numerous gas processing equipment service companies;
however, 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
the manufacturing and energy businesses for a much longer period than the
Company. Competition in the oil and gas computer software industry is strong and
continues to expand.
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,
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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 related to Texas workman's
compensation laws; labor laws, sales tax, ASME Codes, Electrical codes, fire
regulations, etc. In accordance with these regulations, the Company requires
each of its employees to signify receipt, understanding and acceptance of the
Company's "CODE OF ETHICS - EMPLOYEE HANDBOOK - SAFETY MANUAL". All contractors
who perform services for the Company must also signify their compliance with
these regulations. In an attempt to prevent such hazards, the Company 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 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 substantial 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.
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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
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.
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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 three other yards in Jourdanton, Texas are a 7 acre laydown and
dismantling yard, a 2 1/2 acre leased yard with a 3,200 square foot workshop and
office trailer, and a 20 acre sandblasting, painting and storage yard. All of
these yards are in close proximity to the main yard.
B. IPS Properties
IPS leases 1,924 square feet of office space at 5990 Greenwood Plaza Blvd.,
Suite 205, Englewood, Colorado 80111.
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 producing oil and gas wells.
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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, 1997 and 1996,
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,
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.
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Estimates of proved reserves at June 30, 1997 have not been previously
filed by the Company with or included in reports to any federal authority or
agency.
June 30,
--------------------------
1997 1996
--------- --------
Estimated proved developed
and proved undeveloped oil
and gas reserves:
Oil (Bbls) 1,662,445 1,840,834
Gas (Mcf) 790,323 1,616,990
EQB* 1,794,165 2,110,332
Present value of future net reserves $14,768,810 $21,529,556
Present value of future net reserves
discounted at 10% $ 8,211,438 $12,390,060
Estimated proved developed oil and gas reserves:
Oil (Bbls) 557,442 375,061
Gas (Mcf) 790,323 924,019
EQB 689,163 529,064
Present value of future net reserves $ 4,472,861 $ 4,326,975
Present value of future net reserves
discounted at 10% $ 2,648,466 $ 2,979,752
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.
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* Equivalent barrels (Mcf of gas is converted to equivalent barrels by
dividing by 6)
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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, 1997 and 1996. "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
----- ---
1997 8,080 1,542
1996 8,160 1,377
Productive Wells
<TABLE>
<CAPTION>
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>
1997 59 20 4,080 1,083 17 3 4,000 458
1996 59 16 4,080 915 18 3 4,080 462
</TABLE>
At June 30, 1997, the Company owned the rights to 400 gross (351 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:
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State Gross Acres Net Acres
- ----- ----------- ---------
Texas 320 320
Louisiana 80 31
--- ---
Total 400 351
=== ===
During the last two years, the Company did not drill or participate in the
drilling of any exploratory and development well(1):
Production, Unit Prices and Costs
The following sets forth the production and average unit prices and costs
for the years ended June 30, 1997 and 1996:
Year Ended June 30,
-------------------
1997 1996
---- ----
Production:
Oil and condensate (Bbls) 37,067 32,815
Gas (Mcf) 215,165 302,583
Average sales price:
Oil and condensate (per Bbl) $21.01 $17.71
Gas (per Mcf) $ 2.42 $ 2.06
Average production costs
per EQB* $ 9.63 $ 7.68
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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 October 8,
1997, 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.
The Company, together with Integrated Energy Inc. ("Integrated"), Jerry
Swon and Bruce Deichl, was 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 (see Item 12, Certain
Relationships and Related Party Transactions).
While prior management reported that they did not believe that the lawsuit
had merit, current management has determined that the costs of defending this
suit combined with the potential cost if the Plaintiff's were successful,
dictated that a settlement be negotiated. Negotiations were initiated between
the Company's CEO and a principal in the lawsuit in April 1997. A verbal
agreement has been reached to settle this cause of action for 350,000 shares of
the Company's common stock and a warrant to purchase an additional 350,000
shares of the Company's common stock at $1.00 per share. At June 30, 1997 the
Company has a reserve recorded in the amount of $175,000 for the cost of this
settlement.
Subsequent to the end of fiscal 1997, the Company filed suit against Mark
T.
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Shipley, Richard D. Barden, June Barden, Jerry Swon, and Fallon & Fallon which
suit is in the United States District Court for the Western District of Texas,
San Antonio Division. The litigation relates to the Company's acquisition of
IPS. The petition alleges that members of the Company's former management,
former IPS management and other interested persons committed fraudulent acts
and/or omissions in connection with the acquisition. The specific damages sought
are monetary damages in an unspecified amount, as well as relief from certain
related debt, wages and agreements. Some of the defendants have filed suit
against the Company seeking the payments of debts related to IPS.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Since the last annual meeting of the shareholders held on August 9, 1996,
no matter was submitted to a vote of the Company's shareholders through the
solicitation of proxies or otherwise.
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 the symbol CCNG.
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All of 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, 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
Sept. 30, 1996 3 1/8 3 1/8
Dec. 31, 1996 2 9/16 1 3/8
Mar 31, 1997 2 3/8 2 1/8
June 30, 1997 1 5/8 1 1/2
Oct. 8, 1997 1 3/8 1 11/32
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 October 8, 1997, the approximate number of shareholders of record of
the Company's common stock was 490. 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.
Recent issuance's of unregistered securities
During the fiscal year ended June 30, 1997 the Company issued 145,982
unregistered shares of its common stock in transactions exempt pursuant to
Section 4(2) of the Securities Act of 1933. The following details the issuance's
of these shares.
Name of Purpose of Number of Date of
Holder Issuance Shares Issued Issuance
David A. Kocian Financial Consulting
Services 8,000 July, 19, 1996
Richard Horn Interest on Debt 617 July 23, 1996
Cannterbury Financial Consulting
Associates Services 12,500 July 23, 1996
Orta Foundation Conversion of $45,000
of debt and related interest 22,783 July 25, 1996
Mark T. Shipley Conversion of $10,000
of debt and related interest 1,861 August 26, 1996
Robert A. Barden Conversion of $30,000
of debt 5,000 August 26, 1996
Ann Hamilton Conversion of $49,891
of debt 8,315 August 26, 1996
Thomas Bruderman Financial Consulting
Services 6,250 November 13, 1996
Global Portfolios Conversion of $125,000
PTY LTD of debt and related interest 80,656 March 13, 1997
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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 1997 and 1996 respectively, reflect financial
information for IPS for the period of March 1, through June 30, 1997.
Results of Operations
Comparison of 1997 to 1996:
The Company's revenue was generated primarily from contract revenue of
KEMCO. Approximately 85% of the Company's revenue for the fiscal year ending
June 30, 1997 was generated by KEMCO. During the year ending June 30, 1997, the
Company reported total revenue of $10,483,477 representing a decrease of
$344,732 or approximately 3% from the prior fiscal year. The Company reported
contract revenue during fiscal 1997 of $8,709,511 representing a decrease of
$576,428 or approximately 6% from the prior fiscal year, which accounts for the
majority of the net decrease in total revenue from fiscal 1996 to 1997.
Oil sales, which accounted for approximately 7% of the Company's revenue
during fiscal 1997, increased by $197,498 or approximately 34% from the prior
fiscal year. This increase was primarily attributable to a net increase in
production volume of 4,252 barrels which resulted from improved recovery on
certain wells offset by normal production decline of wells and the cessation of
operations of certain unprofitable wells, and by an increase of approximately
$3.30 in the average price per barrel received by the Company. Gas sales, which
accounted for approximately 5% of the Company's revenue during fiscal 1997,
decreased by $102,247, or approximately 16% from the prior fiscal year. This
decrease was primarily related to normal production decline of wells and the
cessation of operations of certain unprofitable wells, partially offset by an
increase of approximately $.36 in the average price per Mcf of gas received by
the Company.
Due to the termination of the management agreement with Integrated (see
Item 12, Certain Relationships and Related Party Transactions) there were no
syndication sales
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and revenue interest income during fiscal 1997, which represents a decrease of
$140,000, or 100% from the prior fiscal year.
During fiscal 1997, well operating income decreased by $12,514 or
approximately 24% 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 1997 were $15,780,090 as compared to
$16,491,510 in fiscal 1996. The net decrease of $711,420 or approximately 4% is
primarily the result of a combination of the termination of the management
agreement with Integrated, a write-down of the unamortized balance of goodwill
associated with IPS of $2,417,368 at June 30, 1997, a decrease in the cost of
KEMCO's contract revenue of $884,776 or approximately 11% from fiscal 1996, and
the restatement of inventory which resulted in the recording of a reduction of
$3,043,055 in fiscal 1996.
The management agreement with Integrated was terminated effective July 1,
1996 (see Item 12, Certain Relationships and Related Party Transactions). The
cost of this agreement for fiscal 1996 was $1,392,000.
Included in the costs and operating expenses for fiscal 1997, was a
write-down of the unamortized goodwill associated with IPS of $2,417,368. Based
on the results of operations for IPS since its acquisition, current management
has determined that the unamortized goodwill had no future benefit.
The cost of KEMCO's contract revenue decreased $884,776 or approximately
11% from fiscal 1996. This decrease was primarily the result of the inclusion in
fiscal 1996 of 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.
During fiscal 1996 the Company recorded a reduction in inventory in the
amount of $3,043,055. 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 determined that the
allocated costs were in error and chose to take a one time adjustment to more
accurately reflect the operations of the Company.
Lease operating expenses during fiscal 1997 increased by $63,004 or
approximately
21
<PAGE>
10% from the prior fiscal year. Lease operating expenses as a percentage of
total oil and gas sales were 54% in fiscal 1997, compared to 53% in fiscal 1996.
Total general and administrative expenses during fiscal 1997 decreased by
$1,124,123 or approximately 29% to $2,816,713. The decrease was primarily due to
the termination of the Company's management agreement with Integrated as
previously discussed partially offset by the establishment of a reserve in the
amount of $175,000, which represents the estimated cost of settling a lawsuit
(see Item 3, Legal Proceedings), recorded in fiscal 1997. The general and
administrative costs associated with the KEMCO operations during fiscal 1997
decreased by $94,307 or approximately 7% to $1,189,872. In fiscal 1996, general
and administrative expenses for KEMCO were $1,284,179. The Company's general and
administrative expense related to IPS during fiscal 1997 increased by $335,896
or 161% to $ 543,935, compared to $208,039 for Fiscal 1996. The increase is
primilary the result of the inclusion of IPS in Fiscal 1996, for only the period
of March 1, 1996, the effective date of its' acquisition, through June 30, 1996.
Depreciation, depletion and amortization expense during fiscal 1997
increased by $90,630 or approximately 15%, compared to the prior fiscal year.
This increase is primarily the result of the inclusion for an entire year of
amortization of the IPS's goodwill which increased by $117,920 from the prior
fiscal year.
Interest expense during fiscal 1997 decreased by $221,127 to $978,822. The
decrease is primarily due to the Company's retirement of $1,303,249 debt by
principal payments and conversions to the Company's common stock.
Liquidity and Capital Resources
As of June 30, 1997 and 1996, the Company had working capital (deficit) of
$(760,076) and $1,193,748, respectively, resulting in a decrease of $1,953,824.
This decrease in 1997 is the result of a decrease in current assets of
$1,633,495 and an increase in current liabilities of $320,329. The decrease in
current assets primarily resulted from a combination of a decrease in cash and
accounts receivable of $1,296,588 and a decrease in inventories of $356,131. The
increase in current liabilities primarily resulted from an increase in accounts
payable and accrued expenses of $ 1,594,359 partially offset by a decrease in
the current portion of notes payable of $1,180,115.
22
<PAGE>
During fiscal 1997, cash used in operating activities was $548,850
representing a decrease of $2,663,554 or approximately 83% from fiscal year
1996. This decrease primarily resulted from the combination of the increased
accounts payable and accrued expenses, decrease in inventories, decrease in
receivables, decrease in total revenues and the decrease in total costs and
operating expenses.
Management notes that the accompanying Report of Independent Accountants
for the Company's financial statements includes an assumption that the Company
will continue as a going concern. As discussed in Note 15 of the financial
statements, the Company has suffered recurring losses and negative cash flows
from operations, has a negative working capital at June 30, 1997, as well as
significant debt maturing in the near future.
The Company is presently negotiating the extension and refinancing of its
note payable that matures on November 1, 1997 of $2,920,000. The Company
believes that it will be successful in obtaining refinancing utilizing the KEMCO
inventory as collateral, however there are no current commitments to refinance
this indebtedness.
At June 30, 1997 KEMCO had work in progress with $605,199 in revenues
remaining to be earned. Through October 8, 1997 KEMCO obtained commitments for
additional contracts with future revenues of $13,696,055 for a total backlog at
October 8, 1997 of $14,301,254.
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
$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.
During fiscal 1997 and 1996, the Company invested $8,625 and $149,581,
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 private issuance of 42,500 shares of the Company's common
stock in fiscal 1996.
During fiscal 1997 and 1996, the Company incurred additional capital
expenditures of $109,380 and $317,761. These capital expenditures were primarily
of equipment and the purchase and renovation of a building acquired in November
1995. The building is
23
<PAGE>
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.
To fulfill the requirements of the contracts included within the Company's
backlog at October 8, 1997, the Company will be required to make substaintial
expenditures, which in part, will be funded through progress billings paid by
the Company's customers.
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
payments through June 30, 1998. However, various factors including, but not
limited to, those items previously discussed in the Industry Risks Section of
this report would 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 1997 1996
------------ ------------
Total oil and gas sales $ 1,298,811 $ 1,203,559
Contract revenue 8,709,511 9,285,939
Total revenue 10,483,477 10,828,209
Loss from operations (5,296,613) (5,663,301)
Net loss (6,243,940) (6,807,293)
Net loss per share (1.07) (1.97)
June, 30
----------------------------
Balance Sheet Data 1997 1996
------------ ------------
Total current assets $ 6,980,120 $ 8,613,615
Total assets 15,278,359 20,114,991
Working capital (deficit) (760,078) 1,193,748
Notes payable, long term debt
and capital lease obligations 6,163,316 7,428,361
Total liabilities 10,298,838 10,045,905
Total stockholders' equity 4,979,521 10,069,086
24
<PAGE>
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
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:
Pages
Report of Independent Accountants .................................... F-1
Consolidated Balance Sheets, June 30, 1997 and 1996 .................. F-2
Consolidated Statements of Operations, Years Ended
June 30, 1997, and 1996 ............................................ F-3
Consolidated Statements of Changes in Stockholders'
Equity, Years Ended June 30, 1997, and 1996 ....................... F-4
Consolidated Statements of Cash Flows, Years Ended
June 30, 1997, and 1996 ............................................ F-5
Notes to Consolidated Financial Statements ............................ F-6
PART III
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
25
<PAGE>
ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS
There is incorporated in this item 9 by reference that portion of the
Company's definitive Proxy Statement dated October 20, 1997 appearing under the
caption "DIRECTORS AND OFFICERS".
ITEM 10. EXECUTIVE COMPENSATION
There is incorporated in this item 10 by reference that portion of the
Company's definitive Proxy Statement dated October 20, 1997 appearing under the
caption "EXECUTIVE COMPENSATION".
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
There is incorporated in this item 11 by reference that portion of the
Company's definitive Proxy Statement dated October 20, 1997 appearing under the
caption "SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT".
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 was 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 6.35% of the
Company's outstanding common stock as of October 8, 1997. This total also
includes the 5.95% of the
26
<PAGE>
Company's common stock owned by Deral Knight, Company Chairman of the Board and
CEO and former President of the Company's wholly-owned subsidiary KEMCO.
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 a percentage 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 syndication's. In fiscal 1996,
the Company recorded $140,000 in syndication income. The services provided by
Integrated Energy, Inc. 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 was terminated.
In conjunction with the above referenced agreement, the Company and
Integrated entered into an agreement by which the associated receivables and
payables may be netted. At June 30, 1997, the Company has a net payable due to
Integrated of $6,943. At June 30, 1996, the Company had a net receivable due
from Integrated of $236,415.
As part of its ongoing operations, the Company conducts business with
Atascosa Electric Services ("AES"), an entity which is owned by a relative of
Deral Knight, who is also a stockholder of the Company.
At June 30, 1997 and 1996, respectively, there was $35,684 and $9,073
payable due to Deral Knight. These amounts represent unreimbursed travel and
other business expenses incurred in the normal course of business and included
$13,193 and $9,073 accrued interest payable for fiscal 1997 and 1996,
respectively.
On December 5, 1996, KEMCO entered into a lease agreement with Deral
Knight,
27
<PAGE>
CEO, Chairman of the board of directors, and a stockholder of the Company. The
lease is for 2.42 acres of land located adjacent to property which KEMCO owns
and includes a 3,200 square ft. shop building and office trailer. The lease is
for five years at a cost of $975 per month.
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, 17,130 shares of Company common stock are reflected as
having been returned to the Company.
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 passed on the IPS
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
28
<PAGE>
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
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 individuals acquiring Company shares included ten
persons who received 45% of the Concord stock issued as consideration for IPS.
The Company is currently investigating whether these individuals were entitled
to receive the shares issued to them (see item 3 Legal Proceedings).
At the time of the IPS acquisition there existed a royalty agreement with
its president
29
<PAGE>
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. On November 22, 1996, the Company repurchased
from Integrated the gas processing 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.
In June 1996, Mr. Swon returned 124,500 shares of the Company's common
stock from Integrated, at a value of $3.00 per share as partial payment of
Integrated intercompany debt.
In June of 1996, the Company accepted $150,000 of expenses charged by
Integrated. These expenses represented costs incurred by Integrated outside of
the scope of the management contract.
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.
30
<PAGE>
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibits
Exhibits marked with an asterisk 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.
(3)* - Certificate of Incorporation as amended and by-laws, incorporated
herein as an exhibit by reference to the Current Report. Exhibit 3 therein,
under the Securities Exchange Act of 1934, filed by Registrant on Form 8-K
with the Securities and Exchange Commission on May 18, 1993, SEC File No.
2-6806.
(10.8)* - Agreement and Plan of Reorganization between the Registrant and
Concord incorporated herein as an exhibit by reference to the Current
Report, Exhibit 10.8 therein, under the Securities Exchange Act of 1934,
filed by Registrant on Form 8-K with the Securities and Exchange Commission
on May 18, 1993, SEC File No. 2-6806.
(10.9)* - KEMCO acquisition agreement incorporated herein as an exhibit by
reference to the Current Report, Exhibit 10.9 herein, under the Securities
Exchange Act of 1934, filed by Registrant on Form 8-K with the Securities
and Exchange Commission on May 26, 1995, SEC File No. 2-6806.
(10.10)*T - KEMCO - Deral Knight employment agreement incorporated herein
as an exhibit by reference to the Current Report, Exhibit 10.10 herein,
under the Securities Exchange Act of 1934, filed by Registrant on Form 8-K
with the Securities and Exchange Commission on May 26, 1995, SEC File No.
2-6806.
(21) - List of subsidiaries of the Registrant as of October 8, 1997.
No current reports on form 8K have been filed during the forth quarter of
this fiscal year.
- ----------
* Previously filed
T Management Contract
31
<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
Chairman of the Board
Dated: October 13, 1997
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.
/s/ Scott S Kalish
- ----------------------------------------
SCOTT S KALISH October 13, 1997
Treasurer (Principal Accounting Officer)
A Majority of the Board of Directors
- ----------------------------------------
/s/ Deral Knight
- ----------------------------------------
DERAL KNIGHT October 13, 1997
Director
/s/ Barry Laidlaw
- ----------------------------------------
BARRY LAIDLAW October 13, 1997
Director
Neal Glass
- ----------------------------------------
NEAL GLASS October __, 1997
Director
32
<PAGE>
"EXHIBIT 21"
List of Subsidiaries
Subsidiaries of Concord Energy Incorporated
Name Business % of Ownership
---- -------- --------------
Knight Equipment and Oil Field Services and
Manufacturing Corp Equipment Sales 100%
Concord Energy, Inc. Oil and Gas Production 100%
Concord Operating, Inc. Oil and Gas Operations 100%
Integrated Petroleum Software Sales and
Systems Corporation Development 100%
Subsidiaries of Knight Equipment and Manufacturing Corporation
Name Business % of Ownership
---- -------- --------------
K & S Engineering, Inc. Engineering Services 100%
33
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders
of Concord Energy Incorporated
We have audited the accompanying consolidated balance sheets of Concord Energy
Incorporated and subsidiaries as of June 30, 1997 and 1996, and the related
consolidated statements of operations, changes in stockholders' equity, and cash
flows for the years 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 audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated 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 audits 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 subsidiaries as of June 30, 1997 and 1996, and the results of
their operations and their cash flows for the years then ended in conformity
with generally accepted accounting principles.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 15 to
the consolidated financial statements, the Company has suffered recurring losses
and negative cash flows from operations, has a negative working capital at June
30, 1997 and significant debt maturing in the near future that raise substantial
doubt about its ability to continue as a going concern. Management's plans in
regard to these matters are also described in Note 15. The consolidated
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
/s/ Hill, Kotara & Ford, P.C.
San Antonio, Texas
September 26, 1997
Except for Notes 9, 15 and 16
as to which the date is October 8, 1997
F-1
<PAGE>
Concord Energy Incorporated and Subsidiaries
Consolidated Balance Sheets
- --------------------------------------------------------------------------------
June 30, June 30,
1997 1996
Assets
Current assets
Cash and cash equivalents $ 41,939 $ 898,083
Costs and estimated earnings in excess
of billings on uncompleted contracts 460,995 117,095
Accounts receivable, net of allowance for
doubtful accounts of $178,643 and $132,930 711,856 1,259,785
Receivable due from Integrated, net -- 236,415
Inventories 5,725,842 6,081,973
Prepaid expenses and other assets 39,488 20,264
------------ ------------
Total current assets 6,980,120 8,613,615
Property, plant and equipment, net 8,038,612 8,522,550
Goodwill, net -- 2,594,248
Bond issuance costs, net 219,627 334,578
Other assets 40,000 50,000
------------ ------------
Total assets $ 15,278,359 $ 20,114,991
============ ============
Liabilities and Stockholders' Equity
Current liabilities
Current portion of notes payble to
stockholders $ -- $ 298,000
Current portion of long-term debt 3,599,108 4,481,223
Current portion of capital lease obligations 5,566 23,100
Accounts payable 2,139,124 1,332,392
Accrued expenses 1,902,150 1,114,523
Billings in excess of costs and estimated
earnings on uncompleted contracts 54,758 72,711
Payable due to Integrated, net 6,943
Federal income taxes payable 32,547 97,918
------------ ------------
Total current liabilities 7,740,196 7,419,867
Long term liabilities
Notes payable 2,558,642 2,578,045
Capital lease obligations -- 47,993
------------ ------------
Total long term liabilities 2,558,642 2,626,038
------------ ------------
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, 6,045,717 and 5,899,735
(post-split) shares issued and outstanding 605 590
Paid-In capital 22,812,110 22,514,415
Accumulated deficit (17,352,628) (11,108,688)
------------ ------------
5,460,087 11,406,317
Common stock subscribed -- (856,665)
Cost of Treasury Stock (480,566) (480,566)
------------ ------------
Total stockholders' equity 4,979,521 10,069,086
------------ ------------
Total liabilities and stockholders' equity $ 15,278,359 $ 20,114,991
============ ============
The accompanying notes are an integral part of these consolidated financial
statements.
F-2
<PAGE>
Concord Energy Incorporated and Subsidiaries
Consolidated Statements of Operations
- --------------------------------------------------------------------------------
Year Ended Year Ended
June 30, June 30,
1997 1996
Revenue:
Oil sales $ 778,636 $ 581,138
Gas sales 520,175 622,421
------------ ------------
Total oil and gas sales 1,298,811 1,203,559
Contract revenue 8,709,511 9,285,939
Syndication sales -- 140,000
Well operating income 38,902 51,416
Rental income 243,271 125,468
Software Sales 192,982 21,827
------------ ------------
Total revenue 10,483,477 10,828,209
------------ ------------
Costs and Operating Expenses:
Lease operating 702,275 639,271
Cost of contract revenue 9,129,166 8,244,390
Inventory adjustment to lower
cost or market -- 3,043,055
General and administrative:
Management agreement -- 1,392,000
Other expenses 2,816,713 2,548,856
Write-off of goodwill, net 2,417,368 --
Depreciation, depletion and amortization 714,568 623,938
------------ ------------
Total costs and operating expenses 15,780,090 16,491,510
------------ ------------
Income (Loss) from Operations (5,296,613) (5,663,301)
------------ ------------
Other income (expense):
Other income 31,495 49,584
Interest expense (978,822) (1,199,949)
------------ ------------
Total other income (expense) (947,327) (1,150,365)
------------ ------------
Loss before income taxes (6,243,940) (6,813,666)
------------ ------------
Income tax benefit -- 6,373
------------ ------------
Net Loss $ (6,243,940) $ (6,807,293)
============ ============
Net Loss per share $ (1.07) $ (1.97)
============ ============
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE>
Concord Energy Incorporated and Subsidiaries
Consolidated Statements of Changes in Stockholders' Equity
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Common Stock
--------------------------- Paid-in Accumulated
Shares Amount capital deficit
<S> <C> <C> <C> <C>
Balance at June 30, 1995 15,521,122 $ 1,552 $ 14,935,326 $ (4,301,395)
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)
Issuance of common stock 2,413,907 242 6,552,885 --
Issuance upon conversion
of debt 381,604 38 1,024,962 --
Acquisition of treasury stock
by increasing payable to
Integrated -- -- -- --
Receipt of shares in lieu of
repayment of receivable
from stockholder -- -- -- --
Net loss -- -- -- (6,807,293)
----------- --------- ------------ ------------
Balance at June 30, 1996 5,899,735 590 22,514,415 (11,108,688)
Collections on subscriptions
receivable -- -- -- --
Issuance upon conversion
of debt and other liabilities 145,982 15 297,695 --
Net loss -- -- -- (6,243,940)
----------- --------- ------------ ------------
Balance at June 30, 1997 6,045,717 $ 605 $ 22,812,110 $(17,352,628)
=========== ========= ============ ============
<CAPTION>
Treasury Stock
Subsriptions ---------------------------
Receivable Share Value Total
<S> <C> <C> <C> <C>
Balance at June 30, 1995 $ -- -- $ -- $ 10,635,483
1 for 5 stock reversion -- -- -- --
----------- --------- ------------ ------------
Balance at June 30, 1995
as restated -- -- -- 10,635,483
Issuance of common stock (856,665) -- -- 5,696,462
Issuance upon conversion
of debt -- -- -- 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)
----------- --------- ------------ ------------
Balance at June 30, 1996 (856,665) 141,630 (480,566) 10,069,086
Collections on subscriptions
receivable 856,665 -- -- 856,665
Issuance upon conversion
of debt and other liabilities -- -- -- 297,710
Net loss -- -- -- (6,243,940)
----------- --------- ------------ ------------
Balance at June 30, 1997 $ -- 141,630 $ (480,566) $ 4,979,521
=========== ========= ============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE>
Concord Energy Incorporated and Subsidiaries
Consolidated Statements of Cash Flows
- --------------------------------------------------------------------------------
Year Ended Year Ended
June 30, June 30,
1997 1996
Cash flows from operating activities
Net Income (loss) $(6,243,940) $(6,807,293)
Adjustments to reconcile
net income/loss to net cash
(used in) provided by operating
activities:
Depreciation, depletion and
amortization 829,331 788,176
Other noncash transactions 2,583,896 4,068,808
Decrease (Increase) in assets:
Accounts receivable 547,929 (538,085)
Costs and estimated earning
in excess of billings
on uncompleted contracts (343,900) 441,766
Receivable due from Stockholder -- (3,447)
Receivable due from affiliated
company 236,415 15,937
Inventories 356,131 (558,270)
Other assets and liabilities (19,224) 54,903
(Decrease) Increase in
liabilities
Accounts payable 806,732 450,653
Accrued expenses 774,161 328,517
Federal income tax payable (65,371) (22,180)
Receivable due from/payable
due to Integrated, net 6,943 (1,504,600)
Billings in excess of costs
and estimated earnings on
uncompleted contracts (17,953) 72,711
----------- -----------
Net cash provided by (used in)
operating activities (548,850) (3,212,404)
----------- -----------
Cash flows from investing activities
Purchases of equipment, well workovers
and recompletions (118,406) (314,342)
Sale of oil and gas interests -- 468,750
----------- -----------
Net cash (used in) provided by
investing activities (118,406) 154,408
----------- -----------
Cash flows from financing activities
Net proceeds from note payable -- 1,696,065
Net proceeds from issuance of
common stock 856,665 3,208,602
Principal payments on notes payable
and capital lease obligations (1,045,553) (1,206,376)
----------- -----------
Net cash flows provided by (used in)
financing activities (188,888) 3,698,291
----------- -----------
Net increase (decrease) in cash and
cash equivalents (856,144) 640,295
----------- -----------
Cash and cash equivalents at
beginning of period 898,083 257,788
----------- -----------
Cash and cash equivalents at
end of period $ 41,939 $ 898,083
=========== ===========
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<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.
In addition, 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 Energy, Inc., 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 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 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 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 was 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.
F-6
<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 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., 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
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.
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-7
<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 recorded as a result of the acquisition of IPS was being amortized,
straight-line over it's originally estimated useful life of 15 years in
accordance with Generally Accepted Accounting Principles. At June 30, 1997
management determined that the remaining unamortized goodwill had no future
benefit and the balance was written-off as a charge against income from
operations.
Other Assets
Other assests of the Company, which include the drawings and blue prints of
amine units manufactured and serviced by Perry Gas Processors, Inc., is being
amortized, straight-line over it's estimated useful life of 5 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 charged
to expense as incurred.
F-8
<PAGE>
Concord Energy Incorporated and Subsidiaries
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
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, 1997 and 1996 are stated net of accumulated amortization of
$351,134 and $186,183, respectively.
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 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 is recorded as a liability and represent contracts for
which billings to date exceed cumulative revenues recognized based on the
percentage of completion method.
Syndication sales
Under an agreement between the Company and Integrated (see Note 13) 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.
F-9
<PAGE>
Concord Energy Incorporated and Subsidiaries
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
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, 1997 and
1996, 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 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 loss per share
Net loss per share of common stock is based upon the weighted average number of
shares of common stock outstanding (5,840,015 in fiscal 1997 and 3,454,627 in
fiscal 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 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 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.
F-10
<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 resulted in goodwill of $2,653,208 being recorded.
Amortization of goodwill of $235,840 and $58,960 is recorded as of June 30, 1997
and 1996, respectively.
Based on the results of operations for IPS since its acquisition, management has
determined that the unamortized goodwill at June 30, 1997 of $2,417,368 has no
future benefit. Accordingly, the balance of the unamortized goodwill was
written-off as a charge against income from operations.
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.
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.
F-11
<PAGE>
Concord Energy Incorporated and Subsidiaries
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
5. Costs and Estimated Earnings on Uncompleted Contracts
Information on contracts in progress at June 30 is as follows:
1997 1996
Costs incurred on uncompleted contracts $5,342,048 $1,637,171
Estimated earnings (loss) thereon (924,403) 338,164
---------- ----------
4,417,645 1,975,335
Less: Billings on uncompleted contracts 4,011,408 1,930,951
---------- ----------
$ 406,237 $ 44,384
========== ==========
Included in the accompanying balance sheets
under the following captions:
Costs and estimated earning in excess of
billings on uncompleted contracts $ 460,995 $ 117,095
Billings in excess of costs and estimated
earnings on uncompleted contracts (54,758) (72,711)
---------- ----------
$ 406,237 $ 44,384
========== ==========
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 sale of the plants. The recorded cost of the inventory of
such plants had been determined based on an appraisal obtained and relied upon
to establish the value of the plants at the time KEMCO was acquired. Management
subsequently determined that the values assigned to the plants were the
appraiser's estimated retail sales price of the plants rather than a wholesale
market value that would allow 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 year ended
June 30, 1996.
F-12
<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:
1997 1996
Oil & gas properties:
Leasehold costs $ 7,495,916 $ 7,495,916
Lease well & equipment 1,845,508 1,836,882
Intangibles 1,904,925 1,904,925
Property, plant & equipment 484,181 484,181
Other 80,632 80,632
----------- ------------
11,811,162 11,802,536
----------- ------------
Other property, plant & equipment
Land 185,413 185,413
Buildings & improvements 361,525 359,535
Machinery & equipment 329,271 244,776
Vehicles 132,769 237,896
Furniture, fixtures & software 191,592 187,646
----------- ------------
1,200,570 1,215,266
----------- ------------
Accumulated depreciation,
depletion and amortization (4,973,120) (4,495,252)
----------- ------------
Property, plant and equipment, net $ 8,038,612 $ 8,522,550
=========== ============
Depreciation, depletion and amortization of oil and gas properties, and
depreciation of other property, plant and equipment for the periods ended June
30 is as follows:
1997 1996
Oil and gas properties $375,068 $431,914
Other property, plant and equipment 152,620 133,064
-------- --------
$527,688 $564,978
======== ========
F-13
<PAGE>
Concord Energy Incorporated and Subsidiaries
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
At June 30, 1996 vehicles recorded under capital leases totaled $105,127 and the
related accumulated amortization through June 30, 1997 and 1996 was $0 and
$26,282. Amortization expense related to these vehicles totaled $8,050 and
$21,026 in 1997 and 1996, respectively. These leases were terminated during the
year ended June 30, 1997.
8. Debt and Capital Lease Obligations
Debt
Notes payable and long-term debt includes the following at June 30:
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
incentive to the note holders for
extending the original maturity date of
the note from May 1, 1997, interest was
increased by 4% per annum from May 1,
1997 through maturity. $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. 1,794,101 1,774,601
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. 742,116 723,412
F-14
<PAGE>
Concord Energy Incorporated and Subsidiaries
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
1997 1996
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 were secured by a personal
guarantee from Jerry Swon, former
Chairman of the Company's board of
directors, who was also a shareholder of
the Company. -- 180,000
12% convertible notes, dated October
1994, convertible at maturity into
shares of the Company's common stock at
$5.00 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
totaling $15,000. The remainder of the
notes and accrued interest totaling
$20,542 were converted into 80,656
shares of common stock in March 1997.
The notes were secured by certain oil
and gas property owned by the Company. -- 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. 35,033 46,559
Unsecured non-interest bearing note
payable dated March 1996 payable in
monthly installments of $43,599 through
maturity on December 15, 1996.
Subsequent to its maturity the note
bears interest at 10% per annum. 174,000 304,500
Secured note payable dated February
1996, with interest at 12% per annum
from inception through February 1, 1997.
From February 2, 1997 through August 31,
1997, interest charged increased to 18%
per annum. Interest from September 1,
1997 to maturity is at 12% per annum
Principal and interest are due at
maturity on February 1, 1998. The note
is secured by a certain gas plant owned
by the Company. 350,000 600,000
F-15
<PAGE>
Concord Energy Incorporated and Subsidiaries
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
1997 1996
6% convertible note, dated April 1996,
convertible at maturity into shares of
the Company's common stock. The note and
related accrued interest were converted
into 22,783 shares of the common stock
in July 1996. -- 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. 142,500 340,196
---------- ----------
Total debt outstanding 6,157,750 7,059,268
Less: current portion 3,599,108 4,481,223
---------- ----------
Long-term debt $2,558,642 $2,578,045
========== ==========
As of June 30, 1997, maturities and scheduled payments for the next five years
and thereafter are: $3,599,108 in 1998, $13,791 in 1999, $8,634 in 2000, and the
remainder after 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 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%. The leases
for two vehicles were terminated during 1997 without exercising the option to
purchase the vehicles.
Capital lease obligations as of June 30 consist of the following:
1997 1996
Total future minimum lease payments $ 6,000 $ 85,106
Less: amounts representing interest 434 14,013
--------- --------
Present value of minimum lease payments $ 5,566 $ 71,093
========= ========
The obligations under capital lease mature as follows: $5,566 in fiscal 1998.
F-16
<PAGE>
Concord Energy Incorporated and Subsidiaries
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
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
years ended June 30, 1997 and 1996 was $123,660 and $62,567, respectively.
Future minimum lease payments under noncancelable operating leases as of June
30, 1997 are as follows:
Fiscal Year
1998 $ 112,542
1999 66,287
2000 27,571
2001 8,475
2002 3,600
---------
Total minimum lease payments $ 218,475
=========
Legal Matters
As of June 30, 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.
The Company, together with Integrated, Jerry Swon and Bruce Deichl, was named as
a defendant in a lawsuit commenced by three investors in two oil and gas
partnerships sponsored by Integrated. Management has determined that the costs
of defending this suit combined with the potential cost if the plaintiff's were
successful, dictated that a settlement be negotiated. An agreement has been
reached to settle this cause of action for 350,000 shares of the Company's
common stock and a warrant to purchase an additional 350,000 shares of the
Company's common stock at $1.00 per share. At June 30, 1997 the Company has a
reserve recorded in the amount of $175,000 for the cost of this settlement.
F-17
<PAGE>
Concord Energy Incorporated and Subsidiaries
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
Subsequent to fiscal year 1997, the Company filed suit against Mark T. Shipley,
Richard D. Barden, June Barden, Jerry Swon and Fallon and Fallon. The litigation
relates to the Company's acquisition of IPS. The petition alleges that members
of the Company's former management, former IPS management and other interested
persons committed fraudulent acts and/or omissions in connection with the
acquisition. The specific damages sought are monetary damages in an unspecified
amount, as well as relief from certian related debt, wages and agreements. Some
of the defendants have filed suit against the Company seeking payment of debts
related to IPS.
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 the cost of revenue for the year ended June 30, 1996,
10. Outstanding Warrants
Warrants outstanding as of June 30, 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.
F-18
<PAGE>
Concord Energy Incorporated and Subsidiaries
Notes to Consolidated Financial Statements
11. Supplementary Cash Flow Information
Supplementary cash flow information for fiscal years ended June 30 is as
follows:
1997 1996
Interest paid $635,972 $ 697,031
Taxes paid 55,050 39,482
Noncash investing and financing activities:
Issuance of common stock:
to acquire business and goodwill -- 2,653,208
to convert notes payable 257,696 1,025,000
in exchange for services and payment
of liabilities 40,014 560,360
for subscription receivable -- 856,665
to acquire property, plant and equipment -- 127,500
Land acquired by capital lease -- 25,500
Treasury stock acquired:
by incurring payable to Integrated -- 373,500
in lieu of collection of stockholder receivable -- 107,666
Other non cash transactions for the fiscal years ended June 30, 1997 and 1996
are as follows:
1997 1996
Lower of cost or market adjustment to inventory $ -- $3,043,055
Write-off of goodwill 2,417,368 --
Expenses paid by issuance of common stock 53,480 560,360
Expenses paid by issuance of debt -- 421,500
Amortization on bond and lease discounts 38,204 42,008
Loss on sale and retirement of equipment 74,844 1,885
---------- ----------
Total $2,583,896 $4,068,808
========== ==========
12. Income Taxes
For the year ended June 30, 1997, there is no net income tax benefit or expense
recorded by the Company. 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 that was due.
F-19
<PAGE>
Concord Energy Incorporated and Subsidiaries
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
The provision (benefit) for income taxes differs from the statutory federal rate
for the fiscal years ended June 30 as follows:
1997 1996
Federal statutory rate (34.0%) (34.0%)
Valuation allowance of deferred income tax asset 34.0 34.0
Other 0.0 0.0
----- -----
Effective tax rate 0.0% 0.0%
The components of the net deferred income tax asset as of June 30 are as
follows:
1997 1996
Temporary differences:
Depreciation, depletion, amortization and
abandonments of oil and gas properties $(1,858,203) $ (976,118)
Book vs. tax treatment of acquisition of
subsidiaries 1,807,774 1,015,928
Other 202,240 57,815
----------- -----------
Total 151,811 97,625
Tax credit carryfoward 55,017 55,017
Operating loss carryfoward 6,334,915 5,097,314
----------- -----------
Deferred income tax asset 6,541,743 5,249,956
Valuation allowance (6,541,743) (5,249,956)
----------- -----------
Deferred income tax asset, net $ -- $ --
=========== ===========
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, the different accounting treatment of abandoned oil & gas properties
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 $1,291,787 in fiscal 1997 and $2,736,344 in fiscal 1996.
F-20
<PAGE>
Concord Energy Incorporated and Subsidiaries
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
As of June 30, 1997, the Company had a net operating loss carryforward of
approximately $18,632,000 for regular tax purposes. Of these losses,
approximately $4,772,000 were incurred by Concord Energy, Inc., prior to its
acquisition of MITI, and $1,114,000 (and the tax credit carryfoward) were
incurred by IPS prior to its acquisition by the Company, and will be subject to
the separate return limitation year rules of the Internal Revenue Code. These
losses will expire, if not utilized, in fiscal years ending June 30, 2008
through 2013.
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, owns or controls 2.30%
of the Company's common stock as of June 30, 1997. Additionally, certain
officers and directors of the Company, together with its present chairman of the
board own or control 6.07% of the Company's common stock as of June 30, 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 June 30, 1997, the
Company has a net payable due to Integrated of $6,943. At June 30, 1996, the
Company had a net receivable due from Integrated of $236,415.
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, CEO, who is also chairman of the board of directors and a
stockholder of the Company. For the year ended June 30, 1997 and 1996, KEMCO
subcontracted $277,266 and $283,400, respectively, in electrical work to AES and
at June 30, 1997 and 1996 owed AES $39,587 and $37,040, respectively, which is
included in accounts payable.
At June 30, 1997 and 1996, respectively, there was $35,684 and $9,073 payable
due to Deral Knight. These amounts represent unreimbursed travel and other
business expenses incurred in the normal course of business and include $13,193
and $9,073 of accrued interest payable at June 30, 1997 and 1996, 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
F-21
<PAGE>
Concord Energy Incorporated and Subsidiaries
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
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, 1997 and
1996.
Other Payables to Related Parties
At June 30, 1997 and 1996, $267,750 and $270,227, respectively, is reflected as
owed to Richard D. Barden, the former president of IPS, and his wife June Barden
(see Note 9). 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 rates ranging from 6% to 12% per
annum which are generally payable at maturity. Interest expense incurred on
these notes, of which $250,000 was payable to Deral Knight, during fiscal 1997
and 1996 totals $4,120 and $26,000, respectively. The notes matured at various
dates through August 1996.
Additionally, the $142,500 recorded as various unsecured notes at Note 8 as of
June 30, 1997 and $230,000 of the $340,196 recorded as various unsecured notes
at June 30, 1996 represent notes payable to former stockholders of IPS who
became stockholders of the Company when the Company acquired IPS. Interest
expense on these stockholder notes for fiscal 1997 totals $25,685 and was $6,775
for the period from March 1, 1996 through June 30, 1996. At June 30, 1997 and
1996, $13,007 and $14,028, respectively, of interest is accrued on these notes.
In August 1996 various notes which totaled $87,696 were converted to 14,616
shares of the Company's common stock. Upon conversion, an additional 560 shares
of the Company's common stock was issued as consideration for accrued interest
expense through the date of the conversion totaling $3,362. This stock was
converted under agreements that require the Company to pay the difference
between the price the of the Company's stock on July 1, 1997 and $6.00 per
share. The value of the Company's common stock at the time of conversion of
$3.00 per share or $45,528 was recorded as paid in capital, and $3.00 per share
or $45,528 as an accrued liability in the accompanying balance sheet. An
additional accrued liability of $22,764 is recorded as an expense for the
difference in the price of the Company's common stock at the time of conversion
of $3.00 per share and the price at July 1, 1997 of $1.50 per share, in the
accompanying statement of operations for fiscal 1997. The total amount of this
accrued liability of $68,292, is included in accrued expenses in the
accompanying balance sheet.
F-22
<PAGE>
Concord Energy Incorporated and Subsidiaries
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
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 plants and gas processing
equipment which was sold to KEMCO, in exchange for 50% of the profit realized by
KEMCO on the sale of the inventory. 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. Included amongst the individuals
acquiring Company shares, in connection with the acquisition of IPS, are ten
individuals who received 45% of the Concord stock issued as consideration for
IPS. Of these individuals, eight 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 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 (see note
9).
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 provisions of the Management Agreement, the Company was
also entitled to a percentage of all syndicated retail partnership gross sales
made by Integrated. In the fiscal year ended June 30, 1996 the Company recorded
$140,000 of syndication income from Integrated.
Employment Agreements
On November 1, 1991 IPS entered into an employment agreement with its former
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. The agreement terminated upon the resignation of Mr. Barden
in July 1997.
F-23
<PAGE>
Concord Energy Incorporated and Subsidiaries
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
On November 9, 1994 KEMCO entered into an employment agreement with its former
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 former 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. Royalty expense
under the terms of this agreement were $2,063 and $1,137 for the years ended
June 30, 1997 and 1996, respectively. The agreement expires December 31, 2015.
Other Related Party Transactions
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.
On November 22, 1996 the Company repurchased from Integrated the 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.
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.
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
statement of operations for fiscal 1996. Through October 31, 1996 the Company
paid Integrated $32,000 for financial services.
F-24
<PAGE>
Concord Energy Incorporated and Subsidiaries
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
On November 22, 1996 Jerry Swon resigned as chairman and 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.
On December 5, 1996 KEMCO entered into a lease agreement with Deral Knight, CEO,
and Chairman of the board of directors and a stockholder of the Company. The
lease is for 2.42 acres of land located adjacent to property which KEMCO owns,
and includes a 3,200 square ft. shop building and office trailer. The lease is
for a term of five years at a cost of $975 per month.
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 undeveloped reserves of oil and gas has been prepared by the
Company utilizing estimates of the year-end reserve quantities provided by an
independent petroleum consultant. 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, 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)
Sale of minerals in place (50,050) (191,129) (81,904)
--------- ------- ---------
Balance at June 30, 1996 1,840,834 1,616,990 2,110,332
Revisions of previous estimates (141,322) (611,502) (243,239)
Extensions and discoveries -- -- --
Production (37,067) (215,165) (72,928)
Sale of minerals in place -- --
--------- ------- ---------
Balance at June 30, 1997 1,662,445 790,323 1,794,165
========= ======= =========
(1) Equivalent barrels (Mcf of gas is converted to equivalent barrels by
dividing by six).
F-25
<PAGE>
Concord Energy Incorporated and Subsidiaries
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
Oil Gas Total
(bbls) (Mcf) (EQB) (1)
Proved developed reserves:
June 30, 1996 375,061 924,019 529,064
June 30, 1997 557,442 790,323 689,163
b) Capitalized Costs Relating to Oil and Gas Producing Activities - are as
follows:
June 30
1997 1996
Proved and unproved oil and
gas properties $11,811,162 $11,802,536
Accumulated depletion and
valuation allowances (4,662,857) (4,287,790)
----------- -----------
Net capitalized costs $ 7,148,305 $ 7,514,746
=========== ===========
Depletion, depreciation and amortization
Per equivalent barrel of production $ 5.14 $ 5.19
=========== ===========
c) Cost incurred in Oil and Gas Property Acquisition, Exploration and
Development Activities are as follows:
Year Ended June 30,
1997 1996
Property acquisition costs $ -- $ 22,081
Development costs 8,625 127,500
------ --------
Total $8,625 $149,581
====== ========
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:
F-26
<PAGE>
Concord Energy Incorporated and Subsidiaries
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
Year Ended June 30,
1997 1996
Oil and gas sales $1,298,810 $1,203,559
Production Costs (702,275) (639,271)
Depreciation, depletion and amortization (375,068) (431,914)
----------- -----------
221,467 132,374
Income tax expense -- --
----------- -----------
Results of operations for oil and gas
producing activities (excluding
corporate overhead and interest
costs) $ 221,467 $ 132,374
============= ===========
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 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-27
<PAGE>
Concord Energy Incorporated and Subsidiaries
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
Year Ended June 30,
1997 1996
Future cash inflows $30,479,333 $38,952,790
Future production and development costs (15,710,519) (17,423,234)
Future income tax (expense) benefit 1,744,869 707,514
----------- -----------
Future net cash flows 16,513,683 22,237,070
10% annual discount for estimated timing
of cash flows (6,557,376) (9,139,496)
----------- -----------
Standardized measure of discounted
future net cash flows at the
end of the year 9,956,307 13,097,574
Standardized measure of discounted
future net cash flows at the
beginning of the year 13,097,574 9,866,818
----------- -----------
Total change in standardized
measure during the year $(3,141,267) $ 3,230,756
=========== ===========
The following table sets forth an analysis of the changes in the standardized
measure of discounted future net cash flows from proved oil and gas reserves:
Year Ended June 30,
1997 1996
Sales of oil and gas produced, net
of production costs $ (596,535) $ (564,290)
Net changes in price and production costs (1,930,876) 2,198,328
Development costs incurred during the year (8,625) (127,500)
Revisions of previous quantity estimates (3,622,487) 2,989,749
Accretion of discount 2,152,956 1,758,162
Net changes in income taxes 1,037,355 1,180,856
Sales of reserves in place -- (468,513)
Other (173,055) (3,736,036)
----------- ----------
Total change in standardized
measure during the year $(3,141,267) $3,230,756
=========== ==========
F-28
<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,
1997 1996
Average sales price:
Crude oil, per barrel $ 21.01 $ 17.71
Nature gas, per thousand cubic feet 2.42 2.06
Average crude oil and gas sales,
per equivalent barrel 17.81 14.46
Average production costs,
per equivalent barrel 9.63 7.68
15. Going Concern
As shown in the accompanying financial statements, the Company incurred a net
loss of $6,243,940 and negative cash flow from operating activities of $548,850
for the year ended June 30, 1997, and a net loss of $6,813,666 and negative cash
flow from operations of $3,212,404 for the year ended June 30, 1996. At June 30,
1997 the Company's current liabilities exceeded current assets by $760,076, and
subsequent to June 30, 1997 the Company has become involved in a dispute over
the completion of a significant contract which has delayed collection of a
significant account receivable. As a result of these conditions, the Company has
had difficulties meeting its current obligations as they come due. Additionally,
the Company has notes payable of $2,920,000 maturing on November 1, 1997, for
which it must either negotiate an extension or secure other long-term debt or
equity financing. These factors create an uncertainty about the Company's
ability to continue as a going concern. The financial statements do not include
any adjustments that might be necessary if the Company is unable to continue as
a going concern.
Management is currently attempting to secure long-term financing secured by a
portion of the Company's inventory of plants to replace the notes that mature on
November 1, 1997. Additionally, subsequent to June 30, 1997 the Company has
obtained contracts for $13,696,055 which management estimates will generate
sufficient profit to relieve its current liquidity problems. The Company's
ability to continue as a going concern is dependent on its obtaining financing
to replace its maturing debt, meeting its profit estimates on contracts and
achieving profitable operations and sufficient positive cash flow from
operations to meet its obligations.
F-29
<PAGE>
Concord Energy Incorporated and Subsidiaries
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
16. Events Subsequent to Date of Balance Sheet
a. In September 1997 the Company filed suit against certain former IPS
shareholders, Jerry Swon and Fallon and Fallon. The petition alleges that
fraudulent acts and/or omissions occurred in connection with the IPS
acquisition. Some of the defendants have since filed suit against the Company
seeking the payment of debts related to IPS (see Note 9).
b. In October 1997 the Company filed suit against one of its customers for
the collection of outstanding recievables due to the Company. As of October 8,
1997 the uncollected balance was $870,079. The customer has filed a countersuit
on this matter.
c. Through October 8, 1997, warrants to purchase 100,000 shares of the
Company's common stock expired unexercised.
17. 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. The following is a summary of segmented information
for 1997 and 1996.
1997 1996
Net sales to unaffiliated customers:
Oil and gas $ 1,298,811 $ 1,203,559
Contracting 8,952,782 9,411,407
All other segments as reported in the
accompanying statement of operations 231,884 213,243
----------- -----------
$10,483,477 $10,828,209
=========== ===========
F-30
<PAGE>
Concord Energy Incorporated and Subsidiaries
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
1997 1996
Income (loss) from operations:
Oil and gas $ 221,467 $ 132,374
Contracting (146,346) (1,932,348)
All other segments (2,374,214) 200,577
------------ ------------
(2,299,093) (1,599,397)
------------ ------------
Other income 31,495 49,584
Other expenses (2,997,520) (2,671,904)
Management agreement -- (1,392,000)
Interest expense (978,822) (1,199,949)
------------ ------------
Loss before income tax as reported in the
accompanying statement of operations $ (6,243,940) $ (6,813,666)
============ ============
Identifiable assets:
Oil and gas $ 7,274,993 $ 7,812,111
Contracting 7,338,115 7,652,392
All other segments -- --
------------ ------------
14,613,108 15,464,503
General corporate assets 665,251 4,650,488
------------ ------------
Total assets as reported in the
accompanying balance sheet $ 15,278,359 $ 20,114,991
============ ============
Capital expenditures:
Oil and gas $ 8,625 $ 130,365
Contracting 43,793 149,581
All other segments
-- --
Corporate 65,988 188,071
------------ ------------
$ 118,406 $ 468,017
============ ============
F-31
<PAGE>
Concord Energy Incorporated and Subsidiaries
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
1997 1996
Depreciation, Depletion and Amortization:
Oil and gas $375,068 $431,914
Contracting 72,656 68,576
All other segments -- --
Corporate 266,844 123,448
-------- --------
Total depreciation, depletion and
amortization $714,568 $623,938
======== ========
In 1997 net sales to two customers of the Company's contracting segment amounted
to $4,406,832 and $2,203,882 accounting for 63% of the total revenues of the
Company.
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 other segments for 1997 includes a write-off of
goodwill of $2,417,368 which is more fully discussed in note 3.
The loss from operations of the contracting segment for 1996 includes a lower of
cost or market write-down 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.
F-32
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-START> JUL-01-1996
<PERIOD-END> JUN-30-1997
<CASH> 41,939
<SECURITIES> 0
<RECEIVABLES> 711,856
<ALLOWANCES> 178,643
<INVENTORY> 5,725,842
<CURRENT-ASSETS> 6,980,120
<PP&E> 13,011,732
<DEPRECIATION> 4,973,120
<TOTAL-ASSETS> 15,278,359
<CURRENT-LIABILITIES> 7,740,196
<BONDS> 5,456,217
0
0
<COMMON> 605
<OTHER-SE> 4,979,521
<TOTAL-LIABILITY-AND-EQUITY> 15,278,359
<SALES> 10,201,304
<TOTAL-REVENUES> 10,483,477
<CGS> 9,831,441
<TOTAL-COSTS> 15,780,090
<OTHER-EXPENSES> (31,495)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 978,822
<INCOME-PRETAX> (6,243,940)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (6,243,940)
<EPS-PRIMARY> (1.07)
<EPS-DILUTED> (1.07)
</TABLE>
