Form 10-QSB -- Quarterly or Transitional Report
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 1996
[ ] TRANSITION REPORT UNDER SECTION 13
OR 15(d) OF THE EXCHANGE ACT
For the transition period from ___________ to ___________
Commission File Number 2-6806
CONCORD ENERGY INCORPORATED
(Exact name of small business issuer as specified in its charter)
Delaware 22-2670198
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
1515 Simmons Street, Jourdanton, TX 78026
(Address of principal executive offices)
(210) 769-3955
(Issuer's telephone number)
- --------------------------------------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days. Yes X No __
At December 31, 1996, the outstanding common equity of Concord Energy
Incorporated comprised 5,965,061 shares of common stock, $.0001 par value.
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
The following financial statements are filed as part of this report:
Pages
-----
Consolidated Balance Sheet (Unaudited),
December 31, 1996 and 1995 F-1
Consolidated Statements of Operations and
Accumulated Deficit (Unaudited)
Three and Six Months Ended December 31, 1996, and 1995 F-2
Consolidated Statements of Cash Flows (Unaudited),
Three and Six Months Ended December 31, 1996, and 1995 F-3
Notes to Consolidated Financial Statements F-4 - F-18
2
<PAGE>
Item 2. Management's Discussion and Analysis or Plan of Operation.
General Operations
In May 1993 the Company consummated an Agreement and Plan of Reorganization
("Agreement") pursuant to which it entered into the oil and gas industry. Under
the Agreement, the Company changed its name to Concord Energy Incorporated
(referred to herein as the "Company") and became the parent of an entity which
manages and owns interests in approximately 75 oil and gas wells primarily
located in East Texas and the Louisiana Gulf Coast. The Company's oil and gas
subsidiary was formed in June 1991 in order to effectuate a consolidation of 166
oil and gas partnerships.
In May 1995, the Company acquired Knight Equipment and Manufacturing
Corporation ("KEMCO"), which locates, designs, refurbishes, and installs gas
processing plants for the natural gas industry. The effective date of the
acquisition was April 1, 1995. In March 1996, the Company acquired Integrated
Petroleum System Corporation ("IPS"), which has developed a unique, proprietary
software which is used to collect, process and transmit data relative to
petroleum production and processing operations.
Results of Operations
The Company's revenues are primarily derived through its KEMCO subsidiary
from the engineering, manufacturing, construction and leasing of gas processing
equipment. The Company also realizes revenue through the sale of oil and gas,
well operations and the sale of oil and gas data gathering software developed by
IPS. During the six months ended December 31, 1996 the Company reported total
3
<PAGE>
revenues of $7,818,478. Contract revenues during the six month period were
$6,855,702. Rental income for the six month period was $77,370. The Company's
oil sales during the six month period were $443,306 while gas sales totaled
$326,131. The Company reported revenue from well operating income of $20,432 and
software sales of $95,537 during the six month period ended December 31, 1996.
By comparison, during the six months period ended December 31, 1995 the Company
reported total revenues of $6,428,647, including contract revenues of
$5,754,550, rental income of $50,734, oil sales of $277,078, gas sales of
$180,300, revenue from the Company's share of the proceeds of syndication sales
made by Integrated Energy Incorporated ("Integrated"), revenue interests
associated with such sales in the amount of $140,000 and well operating income
of $25,985.
Total revenues increased by $1,389,831 during the six months ended December
31, 1996 compared to the six month period ended December 31, 1995. This increase
is primarily due to the increase in contract revenues of $1,101,152 and
increases in oil and gas sales of $166,228 and $145,831, respectively.
Total costs and operating expenses during the six months ended December 31, 1996
were $6,919,308. Cost of contract revenue during the period was $4,681,950.
Lease operating expenses accounted for $300,466 during the six month period.
Lease operating expenses as a percentage of total oil and gas sales were
approximately 39%. In comparison, during the six month period ended December 31,
1995 total costs and operating expenses were $9,324,389. During the period ended
December 31, 1995 costs of contract revenue were $4,204,668, lease operating
expenses were $369,282 and lease operating expenses as a percentage of oil and
gas sales were approximately 81%. Total costs and operating expenses decreased
by $2,405,081 and lease operating expenses decreased by $68,816 during the six
4
<PAGE>
month period ended December 31, 1996 as compared to the six month period ended
December 31, 1995, and lease operating expenses as a percentage of total oil and
gas sales decreased by approximately 42% .
Included in the costs and expenses in the six month period ended December
31, 1995 was the recording of a $3,043,055 inventory restatement. This was a
result of inventory having been valued at retail market value at the time of the
KEMCO acquisition rather than at wholesale value with the balance of the cost of
acquisition having been charged to goodwill as it should have been. Current
management and the Company's new auditors have determined that the allocation of
costs was in error and chose to take a one time adjustment in order to more
accurately reflect the operations of the Company. The decrease in costs and
operating expenses in the six month period ended December 31, 1996 compared to
the six month period ended December 31, 1995 primarily relate to the inclusion
of this inventory adjustment in the prior period.
During the six month period ended December 31, 1996 general and
administrative expenses were $1,538,898. During the six month period ended
December 31, 1995, the Company's total general and administrative expenses were
$1,436,340, of which $696,000 were incurred under the Company's management
agreement with Integrated, which terminated on June 30, 1996. Included in the
six month period ended December 31, 1996 were costs of $329,574 associated with
the winding down of the Company's New Jersey office and staff, which costs have
recently been reduced significantly as described in the Company's Form 10-KSB,
for the fiscal year ended June 30, 1996.
Depreciation, depletion and amortization expenses during the six month
period ended December 31, 1996 were $397,994. During the six month period ended
5
<PAGE>
December 31, 1995 these expenses were $271,044. The increase of $126,950
is primarily due to the addition of amortization of IPS goodwill totaling
$88,440 and the increase in oil and gas production.
Interest expense for the six month period ended December 31 , 1996 was
$471,400. During the six month period ended December 31, 1995 interest expense
was $660,143. The decrease of $188,743 is primarily the result of the
elimination of bridge financing costs associated with the KEMCO acquisition.
For the six month period ended December 31, 1996 the Company reported net
income of $447,736. For the six month period ended December 31, 1995 the Company
reported a net loss of $3,533,888. The increased net income of $3,981,624 for
the six months ended December 31, 1996 as compared to the six months ended
December 31, 1995, primarily resulted from the inventory restatement of
$3,043,055 previously discussed.
Liquidity and Capital Resources
As of December 31 , 1996 the Company reported working capital of $3,003,272
compared to working capital of $4,501,346 at December 31, 1995. Total current
assets increased by $183,454 which is the combination of an increase in cash and
cash equivalents of $76,289, an increase in receivables of $1,310,989 and a
decrease in inventories and other current assets of $1,203,824, as compared to
December 31, 1995. Total current liabilities increased from $4,909,668 as of
December 31, 1995 to $6,591,196 as of December 31, 1996, for a net increase of
$1,681,528. The combination of the foregoing resulted in a net decrease in
6
<PAGE>
working capital of $1,498,074 from December 31, 1995 to December 31, 1996. This
decrease is primarily related to the reclassification of $2,920,000 from long
term debt to short term debt and the addition of $160,056 of short term debt
assumed as part of the acquisition of IPS, partially offset by a net increase in
cash and accounts receivable of $1,387,278.
Capital Expenditures and Commitments
During the six months ended December 31, 1996, the Company made capital
expenditures of $103,833 consisting primarily of equipment purchases by KEMCO.
7
<PAGE>
SIGNATURES
In accordance with the requirements of the Exchange Act, the Registrant
caused this Report to be signed on its behalf by the undersigned, thereunto duly
authorized.
CONCORD ENERGY INCORPORATED
(Registrant)
s\Deral Knight
---------------------------------------
Dated: February 7, 1997 Deral Knight
President, Chief Executive Officer
and Chairman of the Board of Directors
Dated: February 7, 1997 s\Scott Kalish
---------------------------------------
Scott Kalish
Treasurer (Principal Accounting Officer)
8
<PAGE>
Concord Energy Incorporated and Subsidiaries
Consolidated Balance Sheet
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
(Unaudited) (Unaudited)
December 31 December 31
1996 1995
------------ ------------
<S> <C> <C>
Assets
Current assets
Cash and cash equivalents $ 306,403 $ 230,114
Costs and estimated earnings in excess
of billings on uncompleted contracts 1,463,481 733,029
Accounts receivable, net of allowance for
doubtful accounts of $132,390 and $67,490 1,828,397 1,140,636
Receivable from stockholder -- 115,077
Receivable due from Integrated, net 7,853 --
Inventories 5,888,907 7,064,331
Prepaid expenses and other assets 99,427 127,827
------------ ------------
Total current assets 9,594,468 9,411,014
Property, plant and equipment, net 8,316,827 8,435,573
Goodwill, net 2,505,808 --
Bond issuance costs, net 251,572 494,649
Other assets 50,000 50,000
------------ ------------
Total assets $ 20,718,675 $ 18,391,236
============ ============
Liabilities and Stockholders' Equity
Current liabilities
Current portion of notes payble to stockholders $ -- $ 273,000
Current portion of long-term debt 3,985,028 895,750
Current portion of capital lease obligations 15,160 --
Accounts payable 1,349,513 1,711,963
Accrued expenses 1,135,244 1,655,954
Payable due to Integrated, net -- 259,052
Federal income taxes payable 106,251 113,949
------------ ------------
Total current liabilities 6,591,196 4,909,668
Long term liabilities
Notes payable 2,552,068 5,833,300
Capital lease obligations 49,368 46,673
------------ ------------
Total Long term liabilities 2,601,436 5,879,973
------------ ------------
Commitments and Contingencies (see Note 8)
Stockholders' equity
Preferred Stock, $.01 par value, 1,000 shares
authorized, 0 shares issued and outstanding -- --
Common stock, $.0001 par value, 20,000,000
shares authorized, 5,965,061 and 3,346,071
(post-split) shares issued and outstanding 596 1,552
Paid-In capital 22,666,965 15,435,326
Accumulated deficit (10,660,952) (7,835,283)
------------ ------------
12,006,609 7,601,595
Treasury Stock (480,566) --
------------ ------------
Total stockholders' equity 11,526,043 7,601,595
------------ ------------
Total liabilities and stockholders' equity $ 20,718,675 $ 18,391,236
============ ============
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements.
F-1
<PAGE>
Concord Energy Incorporated and Subsidiaries
Consolidated Statement of Operations
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
Quarter Ended Six-Months Quarter Ended Six-Months
December 31 December 31 December 31 December 31
1996 1996 1995 1995
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenue:
Oil sales $ 201,952 $ 443,306 $ 121,434 $ 277,078
Gas sales 147,652 326,131 85,463 180,300
------------ ------------ ------------ ------------
Total oil and gas sales 349,604 769,437 206,897 457,378
Contract revenue 2,877,350 6,855,702 2,973,166 5,754,550
Share of syndication sales and revenue interests -- -- 60,000 140,000
Well operating income 9,712 20,432 11,668 25,985
Rental income 40,003 77,370 16,287 50,734
Software Sales 45,051 95,537
------------ ------------ ------------ ------------
Total revenue 3,321,720 7,818,478 3,268,018 6,428,647
------------ ------------ ------------ ------------
Costs and Operating Expenses:
Lease operating 132,528 300,466 150,564 369,282
Cost of contract revenue 1,759,110 4,681,950 2,630,734 4,204,668
Inventory - adjustment to lower of cost or market -- -- -- 3,043,055
General and administrative:
Management agreement -- -- 348,000 696,000
Other expenses 787,617 1,538,898 339,982 740,340
Depreciation, depletion and amortization 190,881 397,994 130,000 271,044
------------ ------------ ------------ ------------
Total costs and operating expenses 2,870,136 6,919,308 3,599,280 9,324,389
------------ ------------ ------------ ------------
Income (Loss) from Operations 451,584 899,170 (331,262) (2,895,742)
------------ ------------ ------------ ------------
Other income (expense)
Other income 14,796 19,966 15,688 21,997
Interest expense (227,788) (471,400) (312,046) (660,143)
------------ ------------ ------------ ------------
(212,992) (451,434) (296,358) (638,146)
------------ ------------ ------------ ------------
Income (Loss) before income taxes 238,592 447,736 (627,620) (3,533,888)
------------ ------------ ------------ ------------
Income tax expense -- -- -- --
------------ ------------ ------------ ------------
Net Income (Loss) $ 238,592 $ 447,736 $ (627,620) $ (3,533,888)
============ ============ ============ ============
Accumulated deficit, beginning of period (10,899,544) (11,108,688) (7,207,663) (4,301,395)
============ ============ ============ ============
Accumulated deficit, end of period $(10,660,952) $(10,660,952) (7,835,283) (7,835,283)
============ ============ ============ ============
Income (Loss) per share $ 0.04 $ 0.08 $ (0.19) $ (1.06)
============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements.
F - 2
<PAGE>
Concord Energy Incorporated and Subsidiaries
Consolidated Statement of Cash Flows
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
Quarter Ended Six-Months Ended Quarter Ended Six-Months Ended
December 31 December 31 December 31 December 31
1996 1996 1995 1995
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Cash flows from operating activities
Net Income (loss) $ 238,592 $ 447,736 $ (627,620) $(3,533,888)
Adjustments to reconcile net income/loss to net cash
(used in) provided by operating activities:
Depreciation, depletion and amortization 190,881 397,994 130,000 271,044
Other noncash transactions 103,080 235,563 -- 3,043,055
Decrease (Increase) in assets:
Accounts receivable 362,496 (568,613) (328,738) (444,079)
Costs and estimated earnings in excess
of billings on uncompleted contracts 52,336 (1,346,386) 54,950 (174,169)
Receivable due from stockholder -- -- 525 (11,458)
Receivable due from affiliated company 189,512 228,562 -- 15,937
Inventories (413,008) 193,066 (1,221,981) (1,654,761)
Deferred income taxes -- --
Other assets and liabilities 11,837 (79,163) 28,350 (56,107)
(Decrease) Increase in liabilities
Accounts payable (423,100) 17,122 515,856 853,428
Accrued expenses (364,735) (51,990) 311,073 1,189,468
Federal income tax payable 8,333 8,333 (22,887) (6,149)
Payable due to Integrated, net -- -- (169,055) (335,633)
Interest payable to stockholders -- -- 3,375 6,750
----------- ----------- ----------- -----------
Net cash provided by (used in) operating activities (43,776) (517,776) (1,326,152) (836,562)
----------- ----------- ----------- -----------
Cash flows from investing activities
Purchase of property, plant, oil and gas equipment,
well workovers and recompletions (29,951) (103,833) 2,489 (51,194)
Sale of oil and gas interests -- -- 461,250 477,332
----------- ----------- ----------- -----------
Net cash (used in) provided by investing activities (29,951) (103,833) 463,739 426,138
----------- ----------- ----------- -----------
Cash flows from financing activities
Net proceeds from note payable -- -- 50,000 825,000
Net proceeds from issuance of common stock -- 856,665
Net proceeds from sale of common stock -- -- 500,000 500,000
Principal payments on notes payable
and capital lease obligations (381,799) (826,736) (248,500) (942,250)
----------- ----------- ----------- -----------
Net cash flows provided by (used in)
financing activities (381,799) 29,929 301,500 382,750
----------- ----------- ----------- -----------
Net increase (decrease) in cash and cash equivalents (455,526) (591,680) (560,913) (27,674)
----------- ----------- ----------- -----------
Cash and cash equivalents at beginning of period 761,929 898,083 791,027 257,788
----------- ----------- ----------- -----------
Cash and cash equivalents at end of period $ 306,403 $ 306,403 $ 230,114 $ 230,114
=========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements.
F-3
<PAGE>
Concord Energy Incorporated and Subsidiaries
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
1. Organization, Recapitalization, and Operations
Concord Energy Incorporated (the "Company") is an oil and gas exploration and
production company which primarily locates, designs, refurbishes and installs
gas plants and gas processing equipment for customers in the natural gas
industry. The Company also provides rentals of gas plants and gas processing
equipment and provides services such as engineering, procurement, dismantling,
reapplication and relocation of complete gas processing facilities. In addition,
the Company has developed unique, proprietary software which is used to collect,
process, analyze and transmit data relative to petroleum production and
processing operations. The Company is headquartered in Jourdanton, Texas with
substantially all of its oil and gas operations in East Texas and the Louisiana
Gulf Coast. The Company's wholly-owned subsidiaries, Concord Operating, Inc.
("COI"), and Knight Equipment and Manufacturing Corporation ("KEMCO") are
located in Jourdanton, Texas, and Integrated Petroleum Systems Corporation
("IPS") is located in Denver, Colorado.
Concord Energy, Inc., (the Company's name prior to the recapitalization
described below) was formed in June 1991 for the purpose of combining the net
assets and operations of 166 previously independent oil and gas partnerships
(the "Partnerships") and the net assets and operations of COI through an
exchange of Partnership and COI net assets for common stock in Concord Energy,
Inc. The exchange was accounted for at historical cost. Certain limited partners
in Partnerships which did not participate in the exchange were allocated net
working interests in the properties previously held by the respective
Partnerships.
Prior to the exchange, the Partnerships were managed by Integrated Energy,
Incorporated ("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, the Company, then knwon as Monoclonal International Technology,
Inc. ("MITI") acquired all of the outstanding common stock of Concord Energy,
Inc., which would thereafter be the surviving operating entity (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 outstanding shares of common stock and issued 10,556,077 new shares
of its common stock in exchange for all the outstanding common stock of Concord
Energy, Inc.
F-4
<PAGE>
Concord Energy Incorporated and Subsidiaries
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
In December 1995, the Company effectuated a 1 for 5 reverse split of its then
outstanding common stock. Historical stockholders' equity has been retroactively
restated for all periods presented in the accompanying consolidated financial
statements to reflect this reverse split. The words "post-split" refer to that
stock split.
2. Summary of Significant Accounting Policies
Principles of consolidation
The consolidated financial statements are comprised of those 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 Corporation. All
significant intercompany accounts and transactions are eliminated in
consolidation.
Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
effect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements, and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Cash equivalents
Cash and cash equivalents include all cash and highly liquid investments with
original maturities of three months or less.
Inventories
Inventories are stated at the lower of cost or market using the first-in
first-out method. Inventory consists principally of gas plants, compressors,
separators, supplies and repair parts utilized by the Company in conjunction
with its design and refurbishing of gas plants and gas processing equipment.
Property, plant and equipment
Property, plant and equipment is stated at cost less accumulated depreciation,
depletion and amortization.
F-5
<PAGE>
Concord Energy Incorporated and Subsidiaries
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
The Company accounts for its oil and gas properties under the full cost method
of accounting. Under the full cost method, all costs incurred in acquiring,
exploring and developing oil and gas reserves are capitalized to the full cost
pool. When oil and gas properties are sold, retired or otherwise disposed of,
any applicable proceeds are credited to the full cost pool, with no gain or loss
recognized, unless the sale would have a significant impact on the relationship
between capitalized costs and proved reserves. Since all of its oil and gas
operations are within the United States, the Company utilizes one cost pool to
account for its oil and gas properties. Depreciation, depletion and amortization
of oil and gas properties is computed based on the unit-of-production method for
the cost pool, based on estimates of proved reserves as determined by an
independent reserve engineer.
Other property, plant and equipment is recorded at cost less accumulated
depreciation. Repairs and maintenance costs which do not extend the useful lives
of the assets are treated as expenses as incurred. Depreciation is provided for
on the straight-line method over the estimated useful lives of the assets which
range from three to seven years, except for buildings and improvements which are
depreciated over estimated useful lives ranging from 20 to 30 years.
Goodwill
Goodwill is amortized on the straight-line method over its estimated useful life
of 15 years in accordance with generally accepted accounting principles.
Leases
Leases which meet certain criteria evidencing substantive ownership by the
Company are capitalized and the related capital lease obligations are included
in liabilities. Amortization and interest are charged to expense, with rent
payments being treated as payments of the capital lease obligation. All other
leases are accounted for as operating leases, with rent payments being charged
to expense as incurred.
Deferred financing and bond issuance costs
Costs incurred in conjunction with obtaining financing (including costs
associated with the issuance of bonds) are amortized using the straight-line
method over the term of the related financing agreement or bond. Bond issuance
costs at December 31, 1996 and 1995 are stated net of accumulated amortization
of $269,189 and $31,445, respectively.
F-6
<PAGE>
Concord Energy Incorporated and Subsidiaries
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
Revenue recognition
Oil and gas sales
Revenues from oil and gas sales are accrued as earned based on joint interest
billings obtained from the well operator.
Contract revenue
Revenues from construction contracts are recognized based on the percentage of
completion method, measured on the basis of costs incurred to date to estimated
total budgeted costs for each contract. Contract costs include all direct
material and labor costs, including those indirect labor and repair costs
related to contract performance. Selling, general and administrative costs are
charged to expense as incurred. Provisions for estimated losses on uncompleted
contracts are made in the period in which such losses are determined. Changes in
job performance, job conditions, estimated profitability and final contract
settlements are monitored on a periodic basis in order to determine if revisions
to the income and cost estimates are necessary as a result of such changes.
Revisions to the income and cost estimates, if any, are recognized in the period
in which such revisions are determined to be necessary. Costs and earnings in
excess of billings on uncompleted contracts represent an asset based on revenues
recognized in excess of amounts billed to customers. Billings in excess of costs
and earnings on uncompleted contracts are recorded as a liability and represent
contracts for which billings to date exceed cumulative revenues recognized based
on the percentage of completion method.
Share of syndication sales
Under a management agreement between the Company and Integrated (see Note 10)
which terminated on June 30, 1996, during fiscal 1996 the Company was entitled
to receive 20% of the proceeds of all sales made by Integrated of syndicated
retail partnerships. This revenue was recognized when earned.
Well operating income
The Company, through its wholly owned subsidiary COI, manages and operates
wells. The revenue generated from these services is recognized when earned.
Rental revenue
The Company leases certain gas plants and separators to customers under short
term leases which are accounted for as operating leases. At December 31, 1996
and 1995, there are no significant future minimum rentals to be received under
these noncancelable operating leases.
F-7
<PAGE>
Concord Energy Incorporated and Subsidiaries
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
Software sales
The Company, through its wholly owned subsidiary IPS, sells, installs and
maintains its proprietary software. The revenue generated from these services is
recognized when earned.
Income taxes
The Company accounts for income taxes under the asset and liability method.
Under the asset and liability method, deferred tax assets and liabilities are
recognized based upon differences arising from the carrying of amounts of the
Company's assets and liabilities for tax and financial reporting purposes using
enacted tax rates in effect for the year in which the differences are expected
to reverse. The effect on deferred tax assets and liabilities of a change in tax
rates is recognized in income in the period when the change in tax rates is
enacted.
Net income (loss) per share
Net loss per share of common stock is based upon the number of shares of common
stock outstanding (5,965,061 in fiscal 1996 and 3,346,071 in fiscal 1995) . The
Company's common stock equivalents, which consist of outstanding warrants to
purchase the Company's common stock, are not considered in the net income (loss)
per share calculation since their effect is anti-dilutive.
3. Business Combinations
On May 7, 1995, the company acquired all of the issued and outstanding shares of
the common stock of KEMCO for $7,000,000 in a business combination accounted for
under the purchase method of accounting. The acquisition was financed by means
of 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 from the net proceeds of debt financing totaling
approximately $3,700,000 and the net proceeds from the sale of 260,000 shares of
the Company's common stock yielding approximately $800,000. The results of
operations of KEMCO and its wholly-owned subsidiary, K & S Engineering, Inc.,
subsequent to April 1, 1995, the date effective control of KEMCO transferred to
the Company for financial reporting purposes, are included in these consolidated
financial statements.
F-8
<PAGE>
Concord Energy Incorporated and Subsidiaries
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
On March 1, 1996 the Company acquired all of the issued and outstanding shares
of the common stock of IPS in exchange for 600,000 shares of the Company's
common stock in a business combination accounted for under the purchase method
of accounting. The results of operations of IPS subsequent to March 1, 1996, are
included in these consolidated financial statements.
At the time of purchase, IPS' liabilities exceeded the value of 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 $147,400 is recorded as of December 31, 1996.
4. Accounts Receivable and Concentration of Credit Risk
Accounts receivable represent amounts due from customers who are in the oil and
gas business throughout North and South America. Fluctuations in market
conditions impact upon the creditworthiness of these customers. The Company
reviews the financial condition of prospective purchasers and joint interest
participants prior to signing sales or joint interest agreements. Payment terms
are on a short-term basis and in accordance with industry standards.
5. Inventory - Lower of Cost or Market Adjustment
Based on a comparison of the estimated potential sales prices to the recorded
carrying costs of the inventory of plants acquired in the KEMCO acquisition,
management has determined that the recorded cost of the inventory of such plants
was in excess of the wholesale market value of the plants which would allow a
reasonable profit margin at the time of 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 had been the appraiser's estimated retail sales price of the plants
rather than a wholesale market value that would allow a reasonable profit margin
on the sales of the plants.
To adjust the carried cost of the plants to their estimated market value, an
adjustment of $3,043,055 was charged to expense in the quarter ended September
30, 1995.
6. Property, Plant and Equipment, Net
Significant components comprising property, plant and equipment at December 31
include the following:
F-9
<PAGE>
Concord Energy Incorporated and Subsidiaries
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
1996 1995
Oil & gas properties:
Leasehold costs $ 7,495,916 $ 6,799,166
Lease well & equipment 1,845,508 1,944,882
Intangibles 1,904,925 1,904,925
Property, plant & equipment 484,181 945,431
Other 80,632 58,551
------------ ------------
11,811,162 11,652,955
------------ ------------
Other property, plant & equipment
Land 185,413 159,913
Buildings & improvements 306,019 345,186
Machinery & equipment 327,135 186,820
Vehicles 237,896 218,769
Furniture, fixtures & software 200,010 81,710
------------ ------------
1,310,473 992,398
------------ ------------
Accumulated depreciation,
depletion and amortization (4,804,807) (4,209,780)
------------ ------------
Property, plant and equipment, net $ 8,316,827 $ 8,435,573
------------ ------------
Depreciation, depletion and amortization of oil and gas properties, and
depreciation of other property, plant and equipment for the periods ended
December 31, are as follows:
1996 1995
Oil and gas properties $232,416 $211,044
Other property, plant and equipment 77,138 60,000
-------- --------
$309,554 $271,044
======== ========
F-10
<PAGE>
Concord Energy Incorporated and Subsidiaries
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
7. Debt and Capital Lease Obligations
Debt
Long-term debt includes the following at December 31:
1996 1995
Bond payable, dated May 1995, with interest at 10%
per annum, requiring semi-annual interest payments
through maturity on May 1, 1997. The bond is
secured by the assets of KEMCO. As additional
consideration, the Company issued 90,000 shares of
common shares to the lender. $2,920,000 $2,920,000
Secured notes payable, dated December 1994, with a
face value of $2,500,000 issued at $750,000
discount. The notes bear interest at 9% per annum
with an effective interest rate of 15% per annum.
Semi-annual interest payments of $112,500 are
required through maturity in January 2010. The
notes are secured by certain gas plants and
equipment and a guarantee of the Company. 1,784,351 1,760,263
Secured notes payable, dated September 1994, with
a face value of $1,400,000 issued at a $604,500
discount. The notes bear interest at 6% per annum
payable semi-annually with an effective interest
rate of 14.02% per annum. Annual principal
payments of $140,000 are required beginning in
August 2005 through maturity in August 2009. The
notes are secured by certain oil and gas property
owned by the Company. 732,764 708,787
F-11
<PAGE>
Concord Energy Incorporated and Subsidiaries
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
Acquisition bridge financing evidenced by notes
payable which bear interest at 12% per annum. The
interest and related principal are due at various
maturity dates through November 1996.
Approximately $180,000 and $500,000 of the notes
at June 30, 1996 and 1995, respectively are
secured by a personal guarantee from Jerry Swon
former, Chairman of the Company's Board of
Directors, who is also a shareholder of the
Company. -- 390,000
Unsecured notes payable, bearing interest at 7%
per annum. Interest and Principal were due at
various dates through August 1995. -- 50,000
12% convertible notes, dated October 1994,
convertible at maturity into shares of the
Company's common stock. $125,000 of these notes
matured and were converted into 25,000 shares of
the Company's common stock. Upon the conversion,
an additional 3,000 shares were issued as
consideration for accrued interest expense through
the date of conversion totaling $15,000. The
remainder of the notes matured in October 1996.
The notes are secured by certain oil and gas
property owned by the Company. 125,000 125,000
Secured note payable dated January 1996, with
interest at 9% per annum. Interest and principal
of $1,271 are due monthly through January 2000.
The note is secured by certain equipment owned by
the Company. 40,925 --
Unsecured non-interest bearing note payable dated
March 1996 payable in monthly installments of
$43,599 through maturity on December 15, 1996. 174,000 --
F-12
<PAGE>
Concord Energy Incorporated and Subsidiaries
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
Secured note payable dated February 1996, with
interest at 12% per annum. Principal and interest
are due at maturity on February 28, 1997. The note is
secured by a certain gas plant owned by the Company. 600,000 --
In July, 1995 the Company issued $500,000 of 12%
convertible notes. Upon maturity, or any time
prior thereto, each $250,000 portion of the
obligation is convertible into additional shares
of common stock. The notes mature, one half each
July 7, 1996 and August 7, 1996, respectively. -- 500,000
On August 21, 1995, the Company issued $275,000 of
12% convertible notes. Upon maturity, or any time
prior thereto, the obligation is convertible into
additional shares of common stock at $5.00 per
share. The note matures on August 21, 1996. -- 275,000
Various 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. 160,056 --
---------- ----------
Total debt outstanding 6,537,096 6,729,050
Less: current portion 3,985,028 895,750
---------- ----------
Long-term debt $2,552,068 $5,833,300
---------- ----------
As of December 31, 1996, maturities and scheduled payments for the next five
years and thereafter are: $3,985,028 in 1997, $13,186 in 1998, $14,423 in 1999,
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, certain of the leases were prepaid at inception. Capital lease
obligations recorded in the accompanying consolidated financial statements
represent the present value of the
F-13
<PAGE>
Concord Energy Incorporated and Subsidiaries
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
lease purchase options which are exercisable at the end of the lease term in
December 1997, discounted at an interest rate of 16% and the future payments due
on a lease of a yard facility discounted at 12%.
Capital lease obligations as of December 31 consist of the following:
1996 1995
Total future minimum lease payments $73,352 $67,106
Less: amounts representing interest 8,824 20,433
------- -------
Present value of minimum lease payments $64,528 $46,673
======= =======
The obligations under capital lease mature as follows: $15,161 in 1997 and
$49,367 in 1998.
8. Commitments and Contingencies
Minimum Rental Commitments
The Company has several noncancelable operating leases, primarily for yard and
office equipment, that expire over the next five years. These leases generally
are for periods ranging from three to five years and require the Company to pay
all executory costs such as maintenance and insurance.
Legal Matters
As of December 31, 1996, the Company was involved in various litigation matters
which it considers to be in the normal course of business. In the opinion of
management, based upon consultation with legal counsel, the claims either lack
merit, or the potential liability, if any, upon the ultimate disposition of
these lawsuits will not have a material effect on the Company's financial
position or results of operations. Additional information concerning pending
litigation may be found in the Company's Form 10-KSB for the fiscal year ended
June 30, 1996.
F-14
<PAGE>
Concord Energy Incorporated and Subsidiaries
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
9. Outstanding Warrants
Warrants outstanding as of December 31, 1996 for the purchase of shares of the
Company's common stock are summarized as follows:
Date of Issuance Number of Shares Exercise Price/Share Expiration Date
November 1994 1,500 $7.50 November 1997
June 1995 50,000 2.90 February 1998
June 1995 100,000 7.50 July 1997
November 1995 20,000 5.00 November 1998
February 1996 25,000 4.00 January 1999
May 1996 20,000 3.75 June 1998
May 1996 100,000 3.75 June 1999
May 1996 15,000 4.00 January 1998
May 1996 100,000 4.50 March 2001
May 1996 200,000 2.625 July 1999
The Company has sufficient shares authorized but not issued for use in the event
these warrants are exercised.
10. Transactions with Related Parties
Related Party Ownership Interests
The former chairman of the Company's board of directors, personally and through
Integrated and Tucker, which are companies that he owns, owns or controls 2.58%
of the Company's common stock as of December 31, 1996. Additionally, certain
officers and directors of the Company, together with the present chairman of the
board own or control 6.69% of the Company's common stock as of December 31,
1996.
Receivables from Related Parties/Affiliated Company
Integrated and the Company have an agreement by which the associated receivables
and payables may be netted. At December 31, 1996, the Company has a net
receivable due from Integrated of $7,853. At December 31, 1995, the Company had
a net payable due to Integrated of $259,052.
F-15
<PAGE>
Concord Energy Incorporated and Subsidiaries
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
As part of its ongoing operations, the Company conducts business with Atascosa
Electric Services ("AES"), an entity which is owned and controlled by the family
of Deral Knight, the president of KEMCO, who is also CEO, chairman of the board
of directors and a stockholder of the Company. At December 31, 1996, there was
no receivable balance due from stockholder (Deral Knight) or due from affiliated
company (AES). At December 31, 1995, the receivable due from stockholder (Deral
Knight) and due from affiliated company (AES) were $115,077 and $0,
respectively.
Under the provisions of the agreement whereby the Company acquired Deral
Knight's stock in KEMCO, Mr. Knight has agreed to return to the Company, Concord
Energy Incorporated common stock valued at $6.25 per share to the extent that he
owed money to the Company at June 30, 1995. Accordingly, in liquidation of the
receivable balance, approximately 17,000 shares of Company common stock issued
to Deral Knight as part of the purchase price of his KEMCO stock are reflected
as having been returned to the Company and are so recorded as treasury stock at
September 30, 1996.
Other Payables to Related Parties
At December 31, 1996, $262,240 is owed to Richard D. Barden, the president of
IPS, and his wife June Barden. The balance generally consists of accrued
compensation and expense reimbursements due to them and is included in accrued
expenses in the accompanying balance sheet.
Management Agreement
The Company and Integrated had entered into and operated under 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 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 include the receipt of
cash for oil and gas sales and the payment of operating and capital expenditures
on behalf of the Company. In accordance with the original provisions of the
Management Agreement, the Company was also entitled to 10% of all syndicated
retail partnership gross sales made by Integrated. As additional consideration
for the Management Agreement, Integrated assigned to the Company, effective June
1, 1991 through March 31, 1994, its revenue sharing in future program
syndications. Effective March 31, 1994, the Management Agreement was modified to
provide the Company with 20% of all syndicated retail partnership gross sales
made by Integrated. During fiscal 1994, the Company sold to Integrated all of
its revenue sharing interests which were earned under the Management Agreement,
aggregating $363,266. Revenue interest income earned was also remitted to
Integrated in connection with the sale. The proceeds from the sale were recorded
as reduction of
F-16
<PAGE>
Concord Energy Incorporated and Subsidiaries
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
the Company's full-cost oil and gas properties pool. In the period ended
December 31, 1996 and 1995 the Company recorded income from Integrated as
follows:
1996 1995
Share of syndication income $ -- $140,000
-------- --------
$ -- $140,000
-------- --------
Employment Agreements
On November 1, 1991 IPS entered into an employment agreement with its president,
Richard D. Barden. The agreement as modified on October 4, 1994 provides for him
to receive an annual base salary of $96,200 per year. The agreement also
provides for certain fringe benefits and bonuses and expires December 31, 2000.
On November 9, 1994 KEMCO entered into an employment agreement with its
president, Deral Knight. The agreement provides for him to receive a base salary
of $125,000 per annum plus a bonus consisting of ten percent of KEMCO's pre-tax
net profits from $1,500,000 to $2,000,000 and fifteen percent of any such
pre-tax net profits which exceed $2,000,000. The agreement also provides for
certain fringe benefits and expires May 7, 2000.
Royalty Agreement
In March, 1992 IPS entered into a royalty agreement with its president, Richard
D. Barden, for any related oil and gas industry applications developed from the
original idea of developing a set of proprietary software programs. Royalties
under this agreement are calculated as follows: 1% of the first $1,500,000 of
annual gross revenue, and 5% of annual gross revenue thereafter. The agreement
expires December 31, 2015.
Other Related Party Transactions
The two automobiles held under capital lease are to be transferred to an officer
and an employee of KEMCO, respectively upon the execution of the lease purchase
options at the expiration of the lease terms.
In June 1996 the Company accepted 124,500 shares of its 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.
F-17
<PAGE>
Concord Energy Incorporated and Subsidiaries
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
On November 22, 1996 the Company repurchased from Integrated plants and related
equipment for $361,415. The purchase price was netted against the net receivable
due from Integrated at June 30, 1996 of $236,415 which resulted in a net payment
to Integrated of $125,000.
On November 22, 1996 Jerry Swon resigned as chairman of the Company's board of
directors. In conjunction with his resignation, the board of directors approved
a severance payment of six months of his then current salary totaling $75,000.
F-18
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-mos
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-START> JUL-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 306,403
<SECURITIES> 0
<RECEIVABLES> 1,969,180
<ALLOWANCES> 132,930
<INVENTORY> 5,888,907
<CURRENT-ASSETS> 9,594,468
<PP&E> 13,121,635
<DEPRECIATION> 4,804,807
<TOTAL-ASSETS> 20,718,675
<CURRENT-LIABILITIES> 6,591,196
<BONDS> 5,437,115
0
0
<COMMON> 596
<OTHER-SE> 11,526,043
<TOTAL-LIABILITY-AND-EQUITY> 20,718,675
<SALES> 7,720,676
<TOTAL-REVENUES> 7,818,478
<CGS> 4,982,416
<TOTAL-COSTS> 6,919,308
<OTHER-EXPENSES> (19,966)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 471,400
<INCOME-PRETAX> 447,736
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 447,736
<EPS-PRIMARY> 0.08
<EPS-DILUTED> 0.08
</TABLE>
