Electric Controls and Service Co., Inc. - Page 7

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          ending July 2, 1989.  Each of these monthly financial statements            
          reflected total liabilities in excess of total assets and a net             
          operating loss for Clinch River that increased significantly for            
          almost every month, as set forth below:                                     
                                                                                     
                              Total          Total          Net Operating             
          Month Ending        Assets      Liabilities       Loss (To Date)            
          July 31, 1988       $10,812,640    $12,231,286    $  (609,170)              
          Aug. 28, 1988       10,623,865     12,798,253     (1,309,637)               
          Sep. 25, 1988       10,745,749     13,978,696     (2,352,740)               
          Oct. 23, 1988       11,430,129     15,014,491     (2,651,004)               
          Nov. 20, 1988       10,468,891     14,703,381     (3,234,931)               
          Dec. 18, 1988       10,571,153     15,344,598     (3,704,189)               
          Jan. 15, 1989       10,518,158     15,573,595     (3,935,168)               
          Feb. 13, 1989       10,325,572     15,893,548     (4,340,926)               
          Mar. 12, 1989       9,200,617      15,190,987     (4,704,722)               
          Apr.  9, 1989       9,123,278      15,722,158     (5,206,418)               
          June  4, 1989       9,086,060      16,568,885     (5,938,446)               
          July  2, 1989       9,072,587      17,057,265     (6,372,108)               

               In order to cover expenses associated with production, the             
          paper mill apparently had to produce and sell at least 170 tons             
          of paper per day.  As of January 25, 1989, the paper mill was               
          apparently producing only 150-170 tons of paper per day, dropping           
          to 123 tons per day as of April 9, 1989, and rising to 140 tons             
          per day as of July 30, 1989.                                                
               In summary, with regard to payments due from Clinch River,             
          as of February 28, 1989, the close of petitioner's 1989 taxable             
          year, petitioner had not received from Clinch River the                     
          $1,956,000 balance due under the original October 1987 contract,            
          the $400,000 due under the first provision of the November 1988             
          contract, nor the $59,852 due under the first provision of the              




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