Form 10-QSB -- Quarterly or Transitional Report
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1998
[ ] TRANSITION REPORT UNDER SECTION 13
OR 15(d) OF THE EXCHANGE ACT
For the transition period from ___________ to ___________
Commission File Number 2-6806-NY
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 March 31, 1998, the outstanding common equity of Concord Energy
Incorporated comprised 6,045,745 shares of common stock, $.0001 par value.
1
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
The following financial statements are filed as part of this report:
Pages
-----
Consolidated Balance Sheet (Unaudited),
March 31, 1998 and 1997 F-1
Consolidated Statements of Operations and
Accumulated Deficit (Unaudited)
Three and Nine Months Ended March 31, 1998, and 1997 F-2
Consolidated Statements of Cash Flows (Unaudited),
Three and Nine Months Ended March 31, 1998, and 1997 F-3
Notes to Consolidated Financial Statements F-4 - F-18
2
<PAGE>
Item 2. Management's Discussion and Analysis or Plan of Operation.
General Operations
In May, 1993 the Company consummated an Agreement and Plan of
Reorganization ("Agreement") pursuant to which it entered the oil and gas
industry. Under the Agreement, the Company changed its name to Concord Energy
Incorporated (referred to herein as the "Company") and became the parent of an
entity which manages and owns interests in approximately 75 oil and gas wells
primarily located in East Texas and the Louisiana Gulf Coast. The Company's oil
and gas subsidiary had been formed in June 1991 in order to effectuate a
consolidation of 166 oil and gas partnerships.
In May, 1995, the Company acquired Knight Equipment & Manufacturing
Corporation ("KEMCO"), which locates, designs, refurbishes, and installs gas
processing plants for the natural gas industry.
In March, 1996, the Company acquired Integrated Petroleum Systems
Corporation ("IPS"), which developed a unique, proprietary software used to
collect, process and transmit data relative to petroleum production and
processing operations. Results of Operations
The Company's revenues are primarily derived through its KEMCO subsidiary
from the engineering, manufacturing, construction and leasing of gas processing
equipment. The Company also realizes revenue through the sale of oil and gas,
well operations and the sale of oil and gas data gathering software developed by
IPS. During the nine months ended March 31, 1998 the Company reported total
revenues of $18,835,485. Contract revenues during the nine month period were
$18,003,486. Rental income for the nine month period was $93,105. The Company's
oil sales during the nine month period were $358,114 while gas sales totaled
3
<PAGE>
$165,767. The Company reported revenue from software sales of $189,448 and well
operating income of $25,566 during the nine month period ended March 31, 1998.
By comparison, during the nine months ended March 31, 1997 the Company reported
total revenues of $11,901,677, including contract revenues of $10,395,544,
rental income of $164,664, oil sales of $666,607, gas sales of $489,308,
software sales of $155,174 and well operating income of $30,380.
Total revenues increased by $6,933,808 during the nine months ended March
31, 1998 compared to the nine month period ended March 31, 1997. This increase
is primarily due to the increase in contract revenues of $7,607,942.
Total costs and operating expenses during the nine months ended March 31,
1998 were $19,920,421, an increase of $9,224,421 from the nine month period
ended March 31, 1997, and is primarily the result of an increase in the cost of
contract revenue associated with the increase in contract revenues. This
substantial increase is the result of the Company's obtaining a variety of
larger contracts compared to contracts obtained in prior periods.
Cost of contract revenue during the period was $17,675,464. Cost of
contract revenue as a percentage of contract revenue was approximately 98%. In
comparison, during the nine month period ended March 31, 1997 total costs and
operating expenses were $10,696,000, costs of contract revenue were $7,484,171
and cost of contract revenue as a percentage of contract revenue was
approximately 72%. The increase in cost of contract revenue of $10,191,293 is
primarily the result of the increase in contract revenues.
During the nine month period ended March 31, 1998 general and
administrative expenses were $1,524,950. During the nine month period ended
March 31, 1997, the Company's total general and administrative expenses were
$2,041,371, which includes costs of $354,636 associated with the winding down of
the Company's New Jersey and Houston office's and staff.
4
<PAGE>
Depreciation, depletion and amortization expenses during the nine month
period ended March 31, 1998 were $337,919. During the nine month period ended
March 31, 1997 these expenses were $662,823. The decrease of $324,904 is
primarily due to the elimination of amortization of IPS' goodwill which in the
nine month period ended March 31, 1997 totaled $132,660 as well as a reduction
in production of Oil and Gas .
Interest expense for the nine month period ended March 31, 1998 was
$679,965. During the nine month period ended March 31, 1997 interest expense was
$728,426.
For the nine month period ended March 31, 1998 the Company reported a net
loss of $1,742,467. For the nine month period ended March 31, 1997 the Company
reported a net income of $507,736. The decrease of $2,250,203 for the nine
months ended March 31, 1998 as compared to the nine months ended March 31, 1997,
primarily resulted from the inclusion at March 31, 1998 of an estimated loss on
a certain construction project which the Company was unable to complete due to
cash flow problems. The Company has established a reserve of $1,500,000 for
costs that the customer will incur to complete this project. During the three
months ended March 31, 1998 the Company reported a net loss of $2,653,932. The
net loss was primarily the result of an increase in the estimated cost of
contract revenue associated with certain contracts which were in progress at
December 31, 1997 and includes the construction project previously discussed.
The Company had underestimated the total cost required to complete these
contracts.
Liquidity and Capital Resources
As of March 31, 1998 and 1997, the Company reported a negative working
capital of $2,187,146 and $3,451,453, respectively, resulting in a decrease of
$5,638,599. This decrease in 1998 is the result of an increase in current assets
of $295,246 and an increase in current liabilities
5
<PAGE>
of $5,933,805. The increase in current liabilities primarily resulted from an
increase in accounts payable and accrued expenses of $6,170,458.
During the nine months ended March 31, 1998, cash provided in operating
activities was $277,843, representing an increase of $780,189 from the nine
months ended March 31, 1997. This increase primarily resulted from the
combination of the increased accounts payable and accrued expenses, decreased
inventories, increased net loss and increase in accounts receivables.
Management notes that the accompanying financial statements have been
prepared with the assumption that the Company will continue as a going concern.
As discussed in Note 11 of the financial statements, the Company has suffered
recurring losses and negative cash flows from operations in the nine months
ended March 31, 1998 and prior fiscal years, as well as significant debt
maturing in the near future.
On February 27, 1998, the Company executed a Direction, Instruction and
Consent to Forbearance by Trustee, by which $2,920,000 of debt which was due
February 27, 1998, was made due and made payable on or before February 27, 1999.
The Company has been attempting to secure long-term financing to replace the
notes that are payable on or before February 27, 1999; however, there are no
current commitments to refinance this indebtedness. Due to insufficient working
capital, the Company was unable to make the semi-annual interest payment on the
notes of $146,000 which was due on May 1, 1998. The nonpayment of the interest
resulted in an event of default under the terms of the note agreement; which
provides that the noteholders or the related Trustee may declare the $2,920,000
principal of and all accrued interest on the notes to be due and payable
immediately, although the noteholders have not yet made such a declaration. The
failure by the Company to pay the interest on the $2,920,000 constitutes an
event of default under
6
<PAGE>
other debt agreements which may result in an additional $2,564,870 principal
amount of indebtedness to be declared due and payable immediately by the holders
of such indebtedness. Upon an event of default, the noteholders or the related
Trustee may pursue any remedy by proceeding at law or in equity to collect the
indebtedness which remedies may include foreclosure of the pledged assets and
almost all of the Company's assets are pledged to secure the $5,484,870 of
principal indebtedness of the Company.
As a result of the Company's cash flow problems, the Company was unable to
complete a significant construction contract which has resulted in the
establishment of a $1,500,000 accrual for potential additional costs, that the
customer may incur to complete the contract.
Additionally, the Company is currently involved in numerous lawsuits as a
result of it's inability to meet its financial obligations to various vendors
who have supplied materials and or services to the Company, which lawsuits
collectively claim that the Company owes such vendors potentially $2,000,000.
The Company has been working to satisfy these obligations by obtaining
additional financing for working capital; however, there are no current
commitments to improve the Company's working capital.
The Company's ability to meets its current financial commitments is
dependent on the Company obtaining additional financing. Although the Company is
investigating various sources of financing, the Company presently has no
commitment for additional financing and there can be no assurance that the
Company will be successful in obtaining any additional financing. If the Company
is unable to obtain additional financing as needed, it would consider, among
other alternatives, the sale of unencumbered assets as well as other strategic
alternatives in an effort to meet its financial requirements. In view of the
current liquidity problems of the Company, any investment in the common stock of
the Company should be considered highly speculative.
7
<PAGE>
Capital Expenditures and Commitments
During the nine months ended March 31, 1998, the Company incurred capital
expenditures of $83,384. These capital expenditures primarily consisted of
equipment purchases by KEMCO.
Forward Looking Information
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 other, the following: (i) market dynamics, (ii)
regulatory changes, (iii) competition and other economic conditions and (iv)
actions of the Company's lenders, vendors and other third parties over whom the
Company has no control. It is not possible to foresee or identify all such
factors. The Company makes no commitment to update any forward-looking
statement, or to disclose any facts, events or circumstances after the date
hereof that may affect the accuracy of any forward-looking statement.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
As of March 31, 1998, the Company was involved in various litigation
matters, many of which are as a result of its inability to meet its financial
obligations to various vendors who have supplied materials and/or services to
the Company. The total amount of these claims is potentially in excess of
$2,000,000. These litigation's include, but are not limited to, the following:
a) In the State Court of Cobb County, State of Georgia
Filed April 3, 1998
Trism Specialized Carriers, Inc. v. KEMCO, Inc. and Shell Oil Company
$548,720.90
b) In the 347th Judicial District Court, Nueces County, Texas
Received April 7, 1998
Industrial Piping Specialists, Inc. vs. Knight Equipment & Mfg. Corp.
$30,241.17
c) In the District Court of Okmulgee County Oklahoma
April 23, 1998
The Pump & Motor Works, Inc. vs. Knight Equipment & Manufacturing
Corporation d/b/a KEMCO
$19,059.73
d) In the 49th Judicial District Court, Zapata County, Texas
Received April 29, 1998
Raymond E. Rabalais, Inc. d/b/a Rabalais Electrical Constructors v.
Knight Equipment & Manufacturing Corporation, d/b/a KEMCO, Concord
Energy Incorporated, and Concord Energy, Inc.
$158,144.61
e) In the 49th Judicial District Court, Zapata County, Texas
Received April 29, 1998
H & S Constructors, Inc. v. Knight Equipment & Manufacturing
Corporation, d/b/a KEMCO, Concord Energy Incorporated, and Concord
Energy, Inc.
$337,349.73
8
<PAGE>
Item 5. Other Information
On May 11, 1998, Craig Stewart resigned from the Board of Directors,
effective immediately.
Item 6. 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-QSB.
9
<PAGE>
(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.
(4)* - Indenture of Trust Amendment No. 2 between Concord Energy
Incorporated and First Union National Bank, as Successor Trustee dated as
of October 31, 1997.
b) Reports on Form 8-K
A current report on Form 8-K was filed on March 3, 1998, regarding the
execution of the Direction, Instruction and Consent to Forbearance by
Trustee, by which $2,920,000 of debt which was due February 27, 1998,
became payable on or before February 27, 1999.
- --------------------
* Previously filed
10
<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)
Dated: May 15, 1998 s\ Deral Knight
--------------------------------------
Deral Knight
President, Chief Executive Officer
and Chairman of the Board of Directors
Dated: May 15, 1998 s\ Scott Kalish
--------------------------------------
Scott Kalish
Treasurer (Principal Accounting Officer)
11
<PAGE>
Concord Energy Incorporated and Subsidiaries
Consolidated Balance Sheets
- --------------------------------------------------------------------------------
(Unaudited) (Unaudited)
March 31 March 31
1998 1997
Assets
Current assets
Cash and cash equivalents $ 254,954 $ 109,380
Costs and estimated earnings in excess
of billings on uncompleted contracts, net 1,221,609 2,512,131
Accounts receivable, net of allowance for
doubtful accounts of $24,604 and $132,930 1,685,792 1,524,566
Receivable due from Integrated, net 19,468 --
Inventories 7,123,016 5,894,470
Prepaid expenses and other assets 100,721 69,806
------------ ------------
Total current assets 10,405,559 10,110,353
Property, plant and equipment, net 7,789,077 8,115,893
Goodwill, net -- 2,461,588
Bond issuance costs, net 187,390 210,070
Other assets 35,000 50,000
------------ ------------
Total assets $ 18,417,026 $ 20,947,904
============ ============
Liabilities and Stockholders' Equity
Current liabilities
Current portion of long-term debt $ 3,621,127 $ 3,842,472
Current portion of capital lease obligations -- 8,566
Accounts payable 4,849,139 1,620,015
Accrued expenses 4,064,960 1,123,626
Payable due to Integrated, net -- 35,099
Federal income taxes payable 57,480 29,122
------------ ------------
Total current liabilities 12,592,705 6,658,900
Long term liabilities
Notes payable 2,587,266 2,557,807
Capital lease obligations -- --
------------ ------------
Total long term liabilities 2,587,266 2,557,807
------------ ------------
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 5,965,061
(post-split) shares issued and outstanding 605 605
Paid-In capital 22,812,110 22,812,110
Accumulated deficit (19,095,094) (10,600,952)
------------ ------------
3,717,621 12,211,763
Cost of Treasury Stock (480,566) (480,566)
------------ ------------
Total stockholders' equity 3,237,055 11,731,197
------------ ------------
Total liabilities and stockholders'
equity $ 18,417,026 $ 20,947,904
============ ============
The accompanying notes are an integral part
of these consolidated financial statements.
F-1
<PAGE>
Concord Energy Incorporated and Subsidiaries
Consolidated Statements of Operations
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
Quarter Ended Nine-Months Quarter Ended Nine-Months
March 31 March 31 March 31 March 31
1998 1998 1997 1997
<S> <C> <C> <C> <C>
Revenue:
Oil sales $ 118,114 $ 358,114 $ 223,302 $ 666,607
Gas sales 5,767 165,767 163,177 489,308
------------ ------------ ------------ ------------
Total oil and gas sales 123,881 523,881 386,479 1,155,915
Contract revenue 3,453,387 18,003,486 3,539,842 10,395,544
Well operating income 8,522 25,566 9,945 30,380
Rental income 47,658 93,105 87,294 164,664
Software Sales 66,025 189,448 59,638 155,174
------------ ------------ ------------ ------------
Total revenue 3,699,474 18,835,485 4,083,198 11,901,677
------------ ------------ ------------ ------------
Costs and Operating Expenses:
Lease operating 1,400 382,087 207,169 507,635
Cost of contract revenue 5,588,866 17,675,464 2,802,221 7,484,171
General and administrative: 544,238 1,524,950 502,473 2,041,371
Depreciation, depletion and amortization 2,829 337,919 264,829 662,823
------------ ------------ ------------ ------------
Total costs and operating expenses 6,137,333 19,920,421 3,776,692 10,696,000
------------ ------------ ------------ ------------
Income (loss) from Operations (2,437,859) (1,084,935) 306,506 1,205,677
------------ ------------ ------------ ------------
Other income (expense):
Other income 7,261 22,435 10,519 30,485
Interest expense (223,334) (679,965) (257,026) (728,426)
------------ ------------ ------------ ------------
Total other income (expense) (216,072) (657,530) (246,507) (697,941)
------------ ------------ ------------ ------------
Income (loss) before income taxes (2,653,932) (1,742,467) 59,999 507,736
------------ ------------ ------------ ------------
Income tax benefit -- -- -- -
------------ ------------ ------------ ------------
Net Income (loss) $ (2,653,932) $ (1,742,467) $ 59,999 $ 507,736
============ ============ ============ ============
Accumulated deficit, beginning of period (16,441,163) (17,352,628) (10,660,951) (11,108,688)
============ ============ ============ ============
Accumulated deficit, end of period $(19,095,095) $(19,095,095) $(10,600,952) $(10,600,952)
============ ============ ============ ============
Net Income (loss) per share $ (0.45) $ (0.30) $ 0.01 $ 0.09
============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements.
F-2
<PAGE>
Concord Energy Incorporated and Subsidiaries
Consolidated Statements of Cash Flows
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Unaudited) (Unaudited) (Unaudited) (Unaudited)
Quarter Ended Nine-Months Ended Quarter Ended Nine-Months Ended
March 31 March 31 March 31 March 31
1998 1998 1997 1997
<S> <C> <C> <C> <C>
Cash flows from operating activities
Net Income (loss) $(2,653,932) $(1,742,467) $ 59,999 $ 507,736
Adjustments to reconcile net
income/loss to net cash
(used in) provided by operating activities:
Depreciation, depletion and amortization 2,829 337,919 264,829 662,823
Other noncash transactions 3,487 27,591 186,654 422,217
Decrease (Increase) in assets:
Accounts receivable 110,200 (973,937) 303,832 (264,781)
Costs and estimated earning in excess
of billings on uncompleted contracts (589,028) (815,373) (1,048,650) (2,395,036)
Receivable due from affiliated company -- -- 7,853 236,415
Inventories (528,708) (1,397,173) (5,563) 187,503
Other assets and liabilities (27,994) (43,951) 29,622 (49,542)
(Decrease) Increase in liabilities
Accounts payable 1,444,784 2,710,014 270,502 287,624
Accrued expenses 2,344,498 2,162,810 (11,618) (63,608)
Federal income tax payable 8,267 24,933 (77,129) (68,796)
Receivable due from/payable due to
Integrated, net 34,565 (12,524) 35,099 35,099
----------- ----------- ----------- -----------
Net cash provided by (used in)
operating activities 148,968 277,843 15,430 (502,346)
----------- ----------- ----------- -----------
Cash flows from investing activities
Purchases of equipment, well workovers
and recompletions (11,295) (83,384) (19,674) (123,507)
----------- ----------- ----------- -----------
Net cash (used in) provided by
investing activities (11,295) (83,384) (19,674) (123,507)
----------- ----------- ----------- -----------
Cash flows from financing activities
Net proceeds from note payable 70,000 109,414 -- --
Net proceeds from issuance of common stock -- -- -- 856,665
Principal payments on notes payable
and capital lease obligations (4,629) (90,858) (192,779) (1,019,515)
----------- ----------- ----------- -----------
Net cash flows provided by (used in)
financing activities 65,371 18,556 (192,779) (162,850)
----------- ----------- ----------- -----------
Net increase (decrease) in cash
and cash equivalents 203,044 213,015 (197,023) (788,703)
----------- ----------- ----------- -----------
Cash and cash equivalents at
beginning of period 51,910 41,939 306,403 898,083
----------- ----------- ----------- -----------
Cash and cash equivalents at
end of period $ 254,954 $ 254,954 $ 109,380 $ 109,380
=========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements.
F-3
<PAGE>
Concord Energy Incorporated and Subsidiaries
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
1. Organization, Recapitalization, and Operations
Concord Energy Incorporated (the "Company") is an oil and gas exploration and
production company which also locates, designs, refurbishes and installs gas
plants and gas processing equipment for customers in the natural gas industry.
The Company also provides rentals of gas plants and gas processing equipment and
provides services such as engineering, procurement, dismantling, reapplication
and relocation of complete gas processing facilities. In addition, the Company
has developed unique, proprietary software which is used to collect, process,
and transmit data relative to petroleum production and processing operations.
The Company is headquartered in Jourdanton, Texas with substantially all of its
oil and gas operations in East Texas and the Louisiana Gulf Coast. The Company's
wholly-owned subsidiaries, Concord Energy, Inc., Concord Operating, Inc.
("COI"), and Knight Equipment & Manufacturing Corporation ("KEMCO") are located
in Jourdanton, Texas, and Integrated Petroleum Systems Corporation ("IPS") is
located in Denver, Colorado.
Concord Energy, Inc., (the Company's name prior to the recapitalization
described below) was formed in June 1991 for the purpose of combining the net
assets and operations of 166 previously independent oil and gas partnerships
(the "Partnerships") and the net assets and operations of COI through an
exchange of Partnership and COI net assets for common stock in Concord Energy,
Inc. The exchange was accounted for at historical cost. Certain limited partners
in the Partnerships which did not participate in the exchange were allocated net
working interests in the properties previously held by 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.
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.
F-4
<PAGE>
Concord Energy Incorporated and Subsidiaries
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
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.
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.
F-5
<PAGE>
Concord Energy Incorporated and Subsidiaries
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
Other property, plant and equipment is recorded at cost less accumulated
depreciation. Repairs and maintenance costs which do not extend the useful lives
of the assets are expensed as incurred. Depreciation is provided for on the
straight-line method over the estimated useful lives of the assets which range
from three to seven years, except for buildings and improvements which are
depreciated over estimated useful lives ranging from 20 to 30 years.
Goodwill
Goodwill recorded as a result of the acquisition of IPS 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 assets 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 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 March 31, 1998 and 1997 are stated net of accumulated amortization of
$383,371 and $310,691, 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.
F-6
<PAGE>
Concord Energy Incorporated and Subsidiaries
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
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 are recorded as a liability and represent contracts for
which billings to date exceed cumulative revenues recognized based on the
percentage of completion method.
Syndication sales
Under an agreement between the Company and Integrated (see Note 10) which was
terminated on June 30, 1996, the Company was entitled to receive a percentage of
the proceeds of all sales made by Integrated of syndicated retail partnerships.
This revenue was recognized when earned.
Well operating income
The Company, through its wholly owned subsidiary COI, manages and operates
wells. The revenue generated from these services is recognized when earned.
Rental revenue
The Company leases certain gas plants and separators to customers under short
term leases which are accounted for as operating leases. At March 31, 1998 and
1997, 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.
F-7
<PAGE>
Concord Energy Incorporated and Subsidiaries
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
Net loss per share
Net loss per share of common stock is based upon the weighted average number of
shares of common stock outstanding (5,904,086 and 5,960,366 at March 31, 1998
and 1997, respectively). 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 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.
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. 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 had no
future benefit. Accordingly, at June 30, 1997 the balance of the unamortized
goodwill was written-off as a charge against income from operations.
Amortization of goodwill of $191,620 is recorded as of March 31, 1997.
4. Accounts Receivable and Concentration of Credit Risk
Accounts receivable represent amounts due from customers who are in the oil and
gas business throughout North and South America. Fluctuations in market
conditions impact the credit worthiness of these customers. The Company reviews
the financial condition of purchasers and joint interest participants prior to
signing sales or joint interest agreements. Payment terms are on a short-term
basis and in accordance with industry standards.
The Company maintains account balances at several financial institutions.
Accounts are insured by the Federal Deposit Insurance Corporation up to
$100,000. In the course of business, the Company may maintain account balances,
which are generally transient in nature, in excess of the federally insured
limits.
F-8
<PAGE>
Concord Energy Incorporated and Subsidiaries
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
5. Inventory - Lower of Cost or Market Adjustment
Based on a comparison of the estimated potential sales prices to the recorded
carrying costs of the inventory of plants acquired in the KEMCO acquisition,
management has determined that the recorded cost of the inventory of such plants
was in excess of the market value of the plants which would allow a reasonable
profit margin on the sale of the plants. The recorded cost of the inventory of
such plants had been determined based on an appraisal obtained and relied upon
to establish the value of the plants at the time KEMCO was acquired. Management
subsequently determined that the values assigned to the plants were the
appraiser's estimated retail sales price of the plants rather than a wholesale
market value that would allow a reasonable profit margin on the sales of the
plants.
To adjust the carrying cost of the plants to their estimated wholesale market
value, an adjustment of $3,043,055 was charged to expense for the year ended
June 30, 1996.
6. Property, Plant and Equipment, Net
Significant components comprising property, plant and equipment at March 31
include the following:
1998 1997
Oil & gas properties:
Leasehold costs $ 7,495,916 $ 7,495,916
Lease well & equipment 1,845,508 1,845.508
Intangibles 1,904,925 1,904,925
Property, plant & equipment 484,181 484,181
Other 80,632 81,131
------------ ------------
11,811,162 11,811,661
------------ ------------
Other property, plant & equipment
Land 185,413 185,413
Buildings & improvements 362,746 361,925
Machinery & equipment 358,646 338,136
Vehicles 176,336 237,896
Furniture, fixtures & software 200,813 206,278
------------ ------------
1,283,954 1,329,648
------------ ------------
Accumulated depreciation,
depletion and amortization (5,306,039) (5,025,416)
------------ ------------
Property, plant and equipment, net $ 7,789,077 $ 8,115,893
============ ============
F-9
<PAGE>
Concord Energy Incorporated and Subsidiaries
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
Depreciation, depletion and amortization of oil and gas properties, and
depreciation of other property, plant and equipment for the periods ended March
31 are as follows:
1998 1997
Oil and gas properties $220,635 $414,446
Other property, plant and equipment 112,284 115,697
-------- --------
$332,919 $530,163
======== ========
7. Debt and Capital Lease Obligations
Debt
Notes payable and long-term debt includes the following at March 31:
1998 1997
Bond payable, dated May 1995, with interest at 10%
per annum, requiring semi-annual interest payments
through maturity on February 28, 1999. 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. 1,808,726 1,789,226
F-10
<PAGE>
Concord Energy Incorporated and Subsidiaries
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
1998 1997
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
properties owned by the Company. 756,144 737,440
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. 24,361 37,113
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. 174,000 174,000
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. 275,000 600,000
Secured note payable dated September 1997, with
interest at 8.5% per annum. Interest and principal
of $356 are due monthly through September 2001.
The note is secured with certain equipment owned
by the Company. 12,662 -
F-11
<PAGE>
Concord Energy Incorporated and Subsidiaries
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
1998 1997
Secured note payable dated January 1998, with
interest at 8% per annum. The note is secured with
certain receivables of the Company and a personnel
guarantee President, CEO and Chairman of the Board
of Directors, Deral Knigh. 70,000 --
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 (see Note 8) and July 1998. 167,500 142,500
---------- ----------
Total debt outstanding 6,208,393 6,400,279
Less: current portion 3,621,127 3,842,472
---------- ----------
Long-term debt $2,587,266 $2,557,807
========== ==========
As of March 31, 1998, maturities and scheduled payments for the next five years
and thereafter are: $3,621,127 in 1999, $12,520 in 2000, $6,311 in 2001, $3,565
in 2002, and the remainder after year 2002.
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.
F-12
<PAGE>
Concord Energy Incorporated and Subsidiaries
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
Capital lease obligations as of March 31 consist of the following:
1998 1997
Total future minimum lease payments $ -- $9,000
Less: amounts representing interest -- 434
------- ------
Present value of minimum lease payments $ -- $8,566
======= ======
The obligations under capital lease mature as follows: $0 in 1999.
8. Commitments and Contingencies
Minimum Rental Commitments
The Company has several noncancelable operating leases, primarily for yard and
office equipment, that expire over the next five years. These leases generally
are for periods ranging from three to five years and require the Company to pay
all executory costs such as maintenance and insurance.
Legal Matters
As of March 31, 1998, the Company was involved in various litigation matters
many of which are as a result of it's inability to meet its financial
obligations to various vendors who have supplied materials and or services to
the Company. The total amount of these claims is potentially in excess of
$2,000,000.
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. 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 March 31, 1998 the Company has a
reserve recorded in the amount of $175,000 for the cost of this settlement,
however the settlement has not been completed.
On August 8, 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 certain related debt, wages and agreements. Some of the
defendants have filed suit against the Company seeking payment of debts related
to IPS.
F-13
<PAGE>
Concord Energy Incorporated and Subsidiaries
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
In October 1997 the Company filed suit against one of its customers for the
collection of outstanding receivables due the Company. As of May 10, 1998 the
uncollected balance was $870,079. The customer has filed a declaratory judgment
action on this matter.
9. Outstanding Warrants
Warrants outstanding as of March 31, 1998 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 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 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
A director of the Company, together with its present chairman of the board own
or control 6.07% of the Company's common stock as of March 31, 1998.
Receivables from Related Parties/Affiliated Company
Integrated and the Company previously had an agreement by which the associated
receivables and payables were permitted to be netted. At March 31, 1998 the
Company has a net receivable due from Integrated of $19,469 and at March 31,
1997, the Company has a net payable due to Integrated of $35,099.
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. At March 31, 1998 and 1997 the Company owed AES
$17,784 and $6,863, respectively, which is included in accounts payable.
F-14
<PAGE>
Concord Energy Incorporated and Subsidiaries
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
At March 31, 1998 and 1997, respectively, there was $75,877 and $34,949 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
of accrued interest payable at March 31, 1998 and 1997.
Under the provisions of the agreement whereby the Company acquired Deral
Knight's stock in KEMCO, Deral Knight has agreed to return to the Company,
Concord Energy Incorporated common stock valued at $6.25 per share to the extent
that Deral Knight owed money to the Company at June 30, 1995. Accordingly, in
liquidation of the receivable balance, 17,130 shares of Company common stock
issued to Deral Knight as part of the purchase price of his KEMCO stock are
reflected as having been returned to the Company and are recorded as treasury
stock at December 31, 1997 and 1996.
Other Payables to Related Parties
At March 31, 1998 and 1997, $275,638 and $263,659, respectively, is reflected as
owed to Richard D. Barden, the former president of IPS, and his wife June Barden
(see Note 8). 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
At December 31, 1996, Notes Payable to stockholders, which bear interest of 6%
per annum, were payable to Deral Knight. Interest expense incurred on notes
which matured and were paid in October 1996 totaled $4,120 for the nine months
ended March 31, 1997. At March 31, 1998 a new note payable to Deral Knight in
the amount of $25,000 is included in short term debt.
Additionally, the additional $142,500 recorded as various unsecured notes in
Note 7 as of March 31, 1998 and 1997 represent notes payable to former
stockholders of IPS who became stockholders of the Company when the Company
acquired IPS.
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-15
<PAGE>
Concord Energy Incorporated and Subsidiaries
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
Acquisition of IPS
In March 1996, the Company acquired IPS. Included among 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 (see Note 8).
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). 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.
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.
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.
F-16
<PAGE>
Concord Energy Incorporated and Subsidiaries
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
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 $1,894 and $1,552 for the nine months
ended March 31, 1998 and 1997, respectively. The agreement expires December 31,
2015.
Other Related Party Transactions
In June 1996 the Company accepted 124,500 shares of the Company's common stock
from Integrated, at a value of $3.00 per share as a reduction of the net
receivable balance due from Integrated as of June 30, 1996. This stock is
included in the accompanying consolidated financial statement as Treasury stock
in stockholders' equity.
On 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.
11. Going Concern
For the nine months ended March 31, 1998 and the fiscal years ended June 30,
1997 and 1996, the Company incurred net losses and negative cash flow from
operations. In October 1997 the Company became involved in a dispute over the
completion of a significant contract which has delayed collection of a
significant account receivable (see Note 8). In February 1998 the Company's
working capital and cash flow problems resulted in the Company's inability to
complete a significant construction contract which has resulted in the
establishment of a $1,500,000 accrual for potential additional costs that the
customer may incur to complete the contract. As a result, 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 February
28, 1999 or earlier due to a recent failure of the Company to pay the interest
due on this indebtedness, 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.
F-17
<PAGE>
Concord Energy Incorporated and Subsidiaries
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
Management is currently attempting to obtain long-term financing secured by a
portion of the Company's inventory of plants to replace the notes that mature on
February 28, 1999 and supplement its working capital. The Company's ability to
continue as a going concern is dependent on its being successful in obtaining
financing to replace its maturing debt and generate sufficient working capital
or pursuing other strategic alternatives in an effort to meet its financial
obligations.
12. Events Subsequent to Date of Balance Sheet
On May 1, 1998 the Company was unable to make a required semi-annual interest
payment of $146,000 due on notes payable of $2,920,000. The Company has been
pursuing additional financing to meet this obligation, however there are no
current commitments and no assurances can be given that the Company will be
successful in its efforts to obtain the financing needed for this obligation.
F-18
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-START> JUL-01-1997
<PERIOD-END> MAR-31-1998
<CASH> 254,954
<SECURITIES> 0
<RECEIVABLES> 1,705,260
<ALLOWANCES> 24,604
<INVENTORY> 7,123,018
<CURRENT-ASSETS> 10,405,559
<PP&E> 13,095,116
<DEPRECIATION> 5,306,039
<TOTAL-ASSETS> 18,417,026
<CURRENT-LIABILITIES> 12,592,705
<BONDS> 5,484,870
0
0
<COMMON> 605
<OTHER-SE> 3,237,055
<TOTAL-LIABILITY-AND-EQUITY> 18,417,026
<SALES> 18,716,815
<TOTAL-REVENUES> 18,835,485
<CGS> 18,057,551
<TOTAL-COSTS> 19,920,421
<OTHER-EXPENSES> (22,435)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 679,965
<INCOME-PRETAX> (1,742,467)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,742,467)
<EPS-PRIMARY> (0.30)
<EPS-DILUTED> (0.30)
</TABLE>
