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UNITED STATES
SECURITIES & EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
( X ) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 (FEE REQUIRED)
For the fiscal year ended July 31, 1997
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 (FEE REQUIRED)
For the transition period from to
Commission File Number 014754
ELECTRIC & GAS TECHNOLOGY, INC.
(Exact Name of Registrant as Specified in Charter)
Texas 75-2059193
State or Other Jurisdiction of I.R.S. Employer
Incorporation or Organization Identification No.
13636 Neutron Road, Dallas, Texas 75244-4410
(Address of Principal Executive Office) (Zip Code)
Registrant's Telephone Number: (972) 934-8797
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
Title of each class Name of each exchange on which registered
None None
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
Common Stock, $0.01 Par Value
(Title of Class)
Indicate by check mark whether Registrant has (i) filed all
reports required by Section 13 or 15(d)of the Securities Exchange
Act of 1934 during the preceding twelve months, and (ii) been
subject to such filings requirements for the past ninety (90)
days. Yes X No.
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of Regulation S-K is not contained herein,
and will not be contained, to the best of registrant's knowledge,
in definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any amendment to this
Form 10-K. ( )
At October 17, 1997, the aggregate market value of the shares of
Common Stock held by non-affiliates of the registrant was
approximately $5,345,000. At such date there were 8,030,624
shares of the registrant's Common Stock outstanding.
PART I
Item 1. Business
General
Electric & Gas Technology, Inc.("the Company"or "ELGT") was
organized under the laws of the State of Texas on March 18, 1985,
to serve as a holding company for operating subsidiary
corporations. In April, 1985, the Company (i) acquired from
Commercial Technology, Inc. ("COMTEC"), an affiliated company,
all of the stock of Reynolds Equipment Company ("Reynolds") for
stock of the Company and (ii) acquired from a subsidiary of
COMTEC all of the stock of Retech, Inc. ("Retech") [formerly
Test Switch Technology, Inc.("Test Switch"), formerly Superior
Technology, Inc. ("Superior")] for stock of the Company. In
1988, the Company acquired 85% (and subsequently 100%) of the
stock of Data Automation Company, Inc. ("DAC") from Video Science
Technology, Inc., formerly an affiliate of COMTEC and of the
Company; DAC owned 100% of Domac Plastics, Inc. ("Domac") and
Logic Design Metals, Inc. ("Logic"). Domac was subsequently
sold. During 1992 Logic merged into DAC, its parent, and DAC
changed its name to Logic Design Metals, Inc. and is referred to
herein as "Logic". In June 1986 Superior acquired from Petro
Imperial Corp. (A subsidiary of COMTEC) its ownership in American
Brass, Inc. ("ABI"). Fridcorp Plastics, Inc. ("Fridcorp") was
acquired by the Company in January, 1992, in exchange for 162,000
shares of Company Common Stock. Hydel Enterprises, Inc.
("Hydel") [formerly Stelpro Limited ("Stelpro")] was acquired by
the Company in April, 1992, in exchange for 166,474 shares of
Company Common Stock and $1,100,000 (Cdn. funds)(April 30, 1992,
exchange rate: .8370). On August 1, 1992, Hydel acquired all of
the outstanding capital stock of Hydel Engineering Limited
("Hydel Engineering") for cash and notes payable of approximately
$719,000 ($850,000 Cdn.). Hydel Engineering was merged into
Hydel effective August 1, 1995. The number of shares of Company
Common Stock issued in the acquisitions of Fridcorp and Hydel
was, in each case, determined through arms-length negotiations.
Superior Magnetics, Inc. ("SMI") was formed by the Company to
acquire the operating assets of the business operations of
Denison Magnetics of Texas Instruments Incorporated on November
30, 1992 for cash and deferred payments of approximately
$2,900,000. The Company incorporated Atmospheric and Magnetics
Technology, Inc. ("AMT") on June 10, 1996 under the laws of the
State of Texas. AMT which remain dormant during most of Fiscal
1997 was formed to undertake the Company's venture into the water
industry.
The Company presently is the owner of 100% of Retech, which
currently owns 80% of ABI and the Company owns 91.5 % of AMT and
100% of Reynolds, Hydel, SMI and Fridcorp, and, through such
subsidiaries, operates in five distinct business segments: (1)
production of atmospheric water, filtration and enhanced water
products (AMT); (2) the manufacture and sale of natural gas
measurement, metering and odorization equipment (Reynolds); (3)
the manufacture and sale of electric meter enclosures and pole-
line hardware for the electric utility industry and the general
public (Hydel and Retech); (4) the design and manufacture of
defense electronic components (SMI); and (5) the manufacture of
vacuum-form and injection-mold products (Fridcorp). The entrance
into the Water Industry will be the major focus for the future
development and growth on the Company. Effective July 31, 1997,
the Company discontinued the operations of its metal fabrication
segment which previously was engaged in the manufacture and sale
of precision metal enclosures for telecommunication and computer
equipment (Logic). The Company sold its Canadian heating
division and its U.S. meter socket and Test Switch divisions
during fiscal 1996 and 1995. These operations were part of the
electric segment. The Company's Headquarters is located at 13636
Neutron Road, Dallas, Texas 75244. Its telephone number is
(972) 934-8797 and its facsimile number is (972) 991-3265.
2
Financial Information by Segment
The following table depicts revenues, operating income
(loss) from continuing operations and identifiable assets of the
Company by segment, for the fiscal years ended July 31,:
Year Ended Year Ended Year Ended
July 31, 1997 July 31, 1996 July 31, 1995
Revenue
Water $ 75,234 $ - $ -
Gas 3,135,249 2,935,326 3,143,711
Electric 7,744,912 7,575,126 16,167,174
Defense electronics 5,799,455 7,013,706 6,577,333
Plastics 1,176,399 1,275,673 1,369,693
Operating Income (Loss):
Water $ (212,742) $ - $ -
Gas 40,784 (646,568) 75,643
Electric 161,043 324,602 659,788
Defense electronics (1,212,197) (279,348) (95,196)
Plastics (2,242) 48,451 (25,483)
Identifiable Assets:
Water $ 954,690 $ - $ -
Gas 1,882,753 2,198,034 2,493,657
Electric 4,828,751 4,648,198 8,596,181
Defense electronics 2,140,005 3,581,838 3,974,844
Plastics 681,089 655,493 788,769
Corporate 14,877,315 2,694,693 2,503,133
Geographic information
Financial data by geographic area for the fiscal year ended July
31, 1997 are as follows:
Operating
(loss) Identifiable
Sales Income Assets
United States $10,186,337 $(1,582,783) $ 6,445,677
Canada 7,744,912 357,429 4,041,611
Total $17,931,249 $(1,225,354) $10,487,288
3
Water (AMT)
History
Atmospheric & Magnetics Technology, Inc. (AMT) was incorporated
June 10, 1997 under the laws of the State of Texas. AMT was
created by the Company to exploit the opportunities in the Water
Industry. AMT has just recently begun to do so.
Products
AMT owns patented technology that extracts water from the
atmosphere, turning it into clean drinking water, known as the
"Watermaker," "Wet Air" and "Infinite Fountain of Water."
Additionally, AMT holds agreements for the distribution of:
The patented Vortex water filter for the Philippines
that utilizes ultraviolet, ozonization and carbon
filtration.
The patented Sunroc Water Cooler for the Philippines
that provides both cold and hot water once connected to
a water source.
Exclusive (Philippines) and non-exclusive (Worldwide)
rights to the sale of turnkey bottled water plants and
peripherals manufactured by International Water Technology
Corp.
AMT also holds licensing agreements for the distribution of
Oxygenated, spring, purified and filtered bottle water products
under the "Ironman" trade-name for the world.
Industry, Customers and Competition
Industry. AMT operates in an industry that supplies potable
drinking water equipment to all segments of commercial,
industrial and consumer markets. This equipment is used to
extract water from the atmosphere, filter water, purify water,
store water and both chill or heat water. AMT estimates that the
industry develops sales of several billion dollars, This
industry estimate is expected to grow significantly every year as
potable drinking water continues to become more scarce worldwide.
Customers. AMT sells to distributors, who in turn sell
commercially (Hotels, Professionals, Schools, Clinics, etc.),
industrially (Mining, Offshore Oil Drilling, Manufacturing, etc.)
and to consumers (Health Food Stores, Health Clubs, General Food
Channels, etc.) domestically and internationally. Product lines
are sold direct and through traditional distribution channels.
Competition. AMT's atmospheric technology is leading edge with
no significant direct competition. However, the indirect
filtration and bottled water alternative potable drinking water
sources are well developed worldwide. The atmospheric water
niche is yet to be clearly defined at this time, but "point of
use" applications are plentiful.
4
Marketing
AMT, through its marketing division "Aquamerica," is aggressively
pursuing well established organizations in the Pacific Rim
(Philippines, Malaysia, Indonesia, Singapore, etc.) and several
other regions where potable drinking water is scarce or non-
existing.
Employees
As of July 31, 1997 this segment had no employees and has been
conducting its preliminary work through the use of consultants.
This segment now has one full time employee. Administrative
services have been provided by the Company.
Gas (Reynolds)
History
Reynolds Equipment Company ("Reynolds") was incorporated March
31, 1967 under laws of the State of Texas. In 1982, all of the
stock of Reynolds was acquired by COMTEC, an affiliate of the
Company. Subsequently, the stock of Reynolds was sold to Test
Switch in exchange for common stock of the Company and later
transferred direct ownership to the Company. Reynolds maintains
its principal offices at 410 Kirby Street, Garland, Texas 75042.
Products
Reynolds manufactures equipment used in the natural gas industry.
Its principal products known as "RECOR" are electronic pressure,
temperature and volumetric instrumentation and accessories
peripheral to gas measurement. Reynolds continues to produce its
traditional line of mechanical instrumentation including
pressure, temperature and volumetric recording and indicating
devices. In addition, Reynolds provides engineering and
equipment used to accomplish the odorization of natural gas.
Industry, Customers and Competition
Industry. Reynolds operates in the industry which supplies
equipment to the natural gas industry. This equipment is used to
measure, control and monitor the flow of natural gas in
pipelines. Reynolds estimates that its industry develops annuals
sales of approximately $100,000,000. Odorization of natural gas
is important and Reynolds is a recognized provider to the
industry with its expertise and service.
Customers. Reynolds sells to natural gas utilities, pipeline
and production companies domestically and worldwide. Products
are marketed through commissioned manufacturers representatives,
resale distributors and contract engineering firms.
Competition. Reynolds operates in a competitive industry that is
not dominated by one or a few large companies. It is a major
factor in the sale of chart drives. Its principal competitors
are Mercury Instruments, Inc., American Meter Company, Equimeter
Incorporated, YZ Industries and others.
Employees
Reynolds employs approximately 25 persons, including 2 company
officers and 11 administrative clerical personnel. None of the
employees is represented by a labor union or other labor
association, and relations with its employees are considered
excellent. Reynolds has never experienced nor anticipates a
strike or other work stoppage.
5
Electric (Hydel and Retech)
History
Hydel. Hydel (formerly Stelpro) was incorporated in 1977 under
the laws of the Province of Ontario, Canada, and has operated as
a manufacturer of electrical equipment for use in the electric
utility industry since its inception. In 1982, Hydel purchased a
baseboard heater manufacturing business from Westinghouse.
Stelpro changed its name to Hydel in January 1995 upon the sale
of its heating manufacturing business. Hydel Engineering which
was merged into Hydel effective August 1, 1995, was incorporated
in November 1969 under the Laws of the province of Ontario,
Canada, and as in the case of Hydel operated as a manufacturer of
electric equipment for use in the electric utility industry since
its inception. Hydel operates primarily within Canadian markets,
though some sales of electric heaters were made in the
Northeastern United States. Hydel maintains its executive office
at 49 Howden Road, Scarborough, Ontario M1R 3C9 and a
manufacturing facility at 566 Ridge Road, Welland, Ontario L3B
5R4.
Retech. Retech (formerly Test Switch, formerly Superior) was
incorporated in Texas in May, 1984. It purchased the assets of
Superior Switchboard & Devices, Inc., an Ohio corporation
("SSDI"), in 1984. SSDI was an old-line manufacturer of
electrical testing equipment, organized in 1920 by a group of
electrical utility employees. In about 1929, electric utility
companies began using meters on the outside of residences to
measure electricity consumption, creating a need for metal
enclosures to protect the meters. SSDI undertook the manufacture
of such enclosures, and (in 1943) was acquired by a national
company and operated as a division. In 1980, this division was
sold to the officers and employees of the division in a leveraged
buy-out. The business was not successfully operated under its
then current management, and the organizers of Retech arranged
for the purchase of the assets of SSDI by Retech in 1984.
Effective April 30, 1995, Superior changed its name to Test
Switch upon the sale of its meter socket division which was
located in the Paris, Texas plant and effective, October 31, 1995
Test Switch changed it name to Retech upon the sale of its
remaining operating division in Canton, Ohio. Retech a non-
operating entity maintains its office at 13636 Neutron Road,
Dallas, Texas 75244-4410.
Products
Hydel. Hydel operated two industrial facilities located within
metropolitan Toronto, Ontario until January 1995 when one
operation was sold. The business which was sold, manufactured
and assembled a line of proprietary electric heating products,
including baseboard heaters and fan-driven heaters. Hydel
Engineering which was merged and operations consolidate with
Hydel, operated out of two industrial facilities: Scarborough,
which was shared with Hydel, and Welland. The Welland facility
continues to be used primarily to manufacture the pole line
hardware with assembly and finished goods storage in the
Scarborough plant. The "Murray Jansen" line is produced at the
Scarborough plant. The Scarborough plant manufactures a full
line of proprietary metal cabinets and other metal enclosures,
electric meter sockets and industrial safety switches. All of
Hydel's products have been approved by the Canadian Standards
Association which is the Canadian equivalent of U. L.
Retech. Retech operated two industrial facilities, one in
Canton, Ohio, the other in Paris, Texas during most of fiscal
1995 and only its Canton facility during the first quarter of
fiscal 1996. The Canton, Ohio, facility produced a line of
proprietary products approved by Underwriters' Laboratory
("U.L."), an independent testing organization; a line of test
switches. The Paris, Texas, facility produced a full line of
metal cabinets, transformer boxes, meter pedestals and other
metal enclosures for the electric utility industry, marketed
under various trade names. Products included a combination of
test switches and phasing transformers marketed under the trade
name "Reactiformer" and a voltage surge and transient suppressor,
which protects against overloads, marketed under the trade name
"Linegard". In addition, to U.L. approval of Retech's products,
they were also approved by the National Electrical Manufacturers
Association for residential and industrial usage.
6
Industry, Customers and Competition
Industry-Hydel. Hydel operates within the electric equipment
supply industry and manufacturing equipment for use in the
electric utility industry. Hydel competes primarily within
Canadian markets.
Industry-Retech. Retech until October 1995, operated in an
industry consisting of suppliers of equipment and accessories to
the public utility industry. The customers for Retech's products
were spread nationwide.
Customers-Hydel. Hydel sells its electric utility supply
products to utilities and others in Canada. Hydel sold its
electric heaters to distributors throughout Canada, as well as in
parts of the Northeastern United States.
Customers-Retech. Retech sold its products to major electric
utilities across the nation.
Competition-Hydel. Hydel faces extreme Canadian competition for
sales of its electric utility supply products primarily from two
electric utility supply manufacturers, Thomas & Betes and
Commander. Pole line hardware's main competitors are Salcan and
Almet.
Competition-Retech. Retech faced competition from numerous
competitors. There was no single dominant competitor in the
industry. Retech's chief competitors were Milbank Manufacturing
Co., Inc., Meter Devices, Inc. and States Electric, Inc.
Marketing
Hydel. Hydel employs a general sales manager who is responsible
for coordinating company-wide sales, as well as directing sales
in the Province of Ontario. Hydel utilizes independent
manufacturers representatives to promote sales in the remainder
of Canada.
Retech. Retech employed a general sales manager, one outside
salesman and twelve sales representatives to market its products
throughout the United States.
Raw Materials
Hydel. Hydel uses sheet aluminum and sheet steel of various
gauges in its manufacturing processes and two vendors to
galvanize their pole line hardware products. Bar materials are
purchased directly from mills. Hydel purchases products directly
from the mills or distributors. There are adequate sources of
such materials, though price fluctuations have occurred in the
past.
Retech. Retech purchased copper, brass, aluminum and plastic
which are all readily available through numerous vendors.
Employees
Hydel. Hydel currently employs 52 persons, including 10 in
administrative and sales positions. None of the employees is
represented by a labor union or other labor organization. Hydel
enjoys good relations with its employees and has never
experienced a strike or work stoppage. The jobs encompassed in
Hydel's manufacturing operations do not require highly skilled
workers, except in a few positions.
Retech. Retech currently has no employees. In prior years the
work force ranged from 150 to 20 persons, including
administrative and sales positions. The hourly paid employees
were represented by a local of the International Brotherhood of
Electrical Works (A.F.L.-C.I.O.).
7
Defense electronics (SMI)
History
Superior Magnetics, Inc. ("SMI") was incorporated in the state of
Texas on August 31, 1992 for the purpose of acquiring the
magnetics operations from Raytheon T.I. Systems Inc.(RTI),
formerly Texas Instruments Incorporated. SMI began business on
December 1, 1992 with an already established reputation as a
major producer of magnetics-based transformers, inductors, radar
modulators and high density devices for the defense and
commercial clientele. SMI maintains its manufacturing and
executive offices at 3401 Texoma Drive, Denison, Texas 75020.
Products
SMI operates a single manufacturing facility in Denison, Texas in
which their design expertise and exacting manufacturing standards
have made their custom product lines of magnetic based
transformers, inductor, radar modulators and high density devices
a significant part of the modern-worlds defense and industrial
electronics. Adherence to stringent international ISO 9001
standards and the ability to meet the requirements of MIL-I-45208
and MIL-I-9858 insures achieving product excellence.
Industry, Customers and Competition
Industry. SMI specializes in the custom design and manufacturing
of unique or special magnetics products. It currently sells
almost exclusively in defense related products, including
missiles, avionics, night-vision and control systems for the
military. There are numerous competitors producing magnetic
products for defense and civilian uses.
Customers. SMI's principal customer is RTI. SMI has been
successful in broadening its customer base to include other
defense contractors, such as Boeing and others.
Competition. SMI's current market is principally with RTI where
it must compete with other vendors for the sale of magnetic
products to RTI. SMI is a certified supplier to RTI. SMI has an
active marketing program underway to broaden its customer base.
Such efforts are resulting in new orders from other defense
contractors. The market is highly competitive. SMI is believed
to have one of the best design capabilities and exacting
manufacturing standards (ISO 9001), including the latest in
design and manufacturing processes (6-Sigma reliability
standards).
Marketing
SMI has an in-house sales staff which works closely with the
design engineering in submitting proposals to potential
customers. SMI also engages 8 manufacturing representatives
throughout the United States.
Raw Materials
Metal cores, wire and compounds comprise the bulk of primary raw
materials for SMI'S products. There is a readily available
supply of such materials and SMI doesn't foresee any difficulty
in procuring such materials in the future.
Employees
SMI employs approximately 79 full-time employees, including 41
clerical, engineering and administrative employees and
approximately 38 hourly-paid plant workers. None of its
employees is represented by a union or other labor organization
and relations with employees are considered good. SMI has never
experienced nor anticipates a strike or other work stoppage.
8
Plastics (Fridcorp)
History
Fridcorp Plastics, Inc. ("Fridcorp") was incorporated under the
laws of the State of Texas in April, 1988, under the name
"Century Enterprises, Inc." The name change to Fridcorp occurred
in February, 1992. The Company acquired all of the stock of
Fridcorp in exchange for shares of common stock of the Company in
January, 1992. Fridcorp maintains its manufacturing and
corporate office at 4809 Century Drive, Fort Worth, Texas 76140.
Products
Fridcorp has two divisions, one of which manufactures injection-
mold plastic products ("Molding") and the other of which
manufactures vacuum-form plastic products ("Forming"), as well as
tooling utilized in such operations. Molding's primary products
are plastic bases for boat seats and hatch covers. Such product
is proprietary in nature. Only one other company is known to
compete against Fridcorp for sales to boat manufacturers.
Forming provides customer tooling for a particular customer's
requirements and vacuum-mold manufacturing of various products.
The primary products of Forming are display cases and accessories
for express optical products retailers and parts sold in the air
conditioning and automobile parts aftermarket.
All of the products manufactured by Molding are comprised
primarily of recycled plastic material, such as plastic milk
cartons, plastic soft drink cases and the like. Also, the scrap
plastic generated in the manufacturing process of both Molding
and Forming is reused in later production runs or sold back to
waste recycling firms.
Industry, Customers and Competition
Industry. Fridcorp operates in two distinct industries, the
injection mold plastic product manufacturing industry and the
vacuum-form plastic product manufacturing industry. Fridcorp is
not a significant factor in either of such industries.
Customers. Fridcorp sells its injection mold products, primarily
plastic bases for boat seats and hatch covers, to boat seat
manufacturers and directly to boat manufacturers. It sells its
vacuum-form plastic products, primarily jobbed products, to a
wide range of customers.
Competition. Fridcorp's two divisions, Molding and Forming, are
subject to differing competitive pressures. Molding's primary
product, plastic bases for boat seats, is proprietary and Molding
faces competition from one other firm for sales of such product.
Fridcorp has undertaken expansion of its Molding product lines in
an attempt to increase productivity.
Forming completes in an industry in which customer relations and
product quality play an important part. Forming maintains a good
reputation in the industry but faces strong competition for
customers from local companies.
Marketing
Fridcorp has an aggressive marketing plan in an effort to
increase sales and achieve greater product diversification and
attempting to rely less on its primary business of sales of boat
seat bases and optical display cases. The potential for success
in such marketing plans appears good, however, there is no
assurance that such marketing plan will yield higher sales or
operating income.
9
Raw Materials
Both Molding and Forming utilize recycled plastic products as
well as new plastic materials in manufacturing its products.
Fridcorp does not foresee any shortage in supplies of such
materials.
Employees
Fridcorp employs approximately 23 persons on a full-time basis,
of which 7 work in the Forming division, 12 persons are in the
Molding division and 4 perform administrative functions. None of
its employees is represented by a union or other labor
organization and relations with employees are considered good.
Fridcorp has never experienced nor anticipates a strike or other
work stoppage.
Discontinued operations-Metal fabrication (LOGIC) and Metal
extraction (ABI)
Logic Design Metals, Inc. ("Logic") was incorporated in Texas on
March 16, 1977 and became part of the Company in 1988. Logic
manufactured customized, precision-formed metal enclosures for
the telecommunications and computer industries. Effective July
31, 1997, the Company sold Logic and accordingly, the former
metal fabrication segment has been treated as a discontinued
operation.
American Brass, Inc. ("ABI") was incorporated in the State of
Alabama in 1978. Until December 16, 1992, ABI operated a brass
and bronze ingot smelter in Headland, Alabama. Principal raw
materials for this operation consisted of various forms of scrap
metal materials containing high copper and other base materials
utilized in the production process. This process produces
"Slag", which is refuse or dross separated from the brass and
bronze in the smelting process. Inasmuch as the slag contains
trace elements of lead, it is an environmentally hazardous
substance in view of the Environmental Protection Agency (EPA).
ABI processes its slag through a ball mill which reduces the slag
to a powdered saleable product used in fertilizer. The ABI site
is located on approximately 134 acres including a number of
special purpose buildings all under a long-term lease with the
Headland Industrial Development Foundation. ABI has defaulted
under this lease obligation. This operation is treated as a
discontinued operation. The Company on January 29, 1993 entered
into an agreement with an unaffiliated corporation, Trans Metals,
Inc. (TMI), to restart the smelting operation. Such agreement
assigned ABI's leasehold interest together with 150,000 shares of
the Company's common stock to TMI in exchange for 850,000 shares
of $5.00 par value preferred stock, a $950,000 4% note payable
due January 25, 1995 and $25,000 in cash.
Based on current economic conditions in the scrap, cooper and
brass markets and the estimated operating margins needed, a
restart of the facility under these conditions with similar
manufacturing processes would require an estimated $5,000,000
investment with anticipated marginal returns. TMI has been
unsuccessful to-date in re-starting, seeking joint venture
partners or selling the Alabama operation. The Company has
written off its investment in TMI (ABI).
ITEM 2. Properties
The Company maintains executive offices at 13636 Neutron Road,
Dallas, Texas 75244-4410 in a 7,800 sq. ft. one story building
(owned in fee) and is fully adequate to serve its needs.
Hydel leases one industrial building in metropolitan Toronto,
Ontario. The Scarborough facility is leased until March 2002 and
contains approximately 67,000 square feet, including
approximately 7,000 square feet of office space. In addition,
Hydel owns a 22,000 square foot manufacturing and office space on
approximately 7 acres of land located in Welland, Ontario. Such
facility provides 20,000 square feet of manufacturing and 2,000
square feet of office space.
10
SMI conducts its manufacturing and administrative functions
through a 86,000 square feet concrete leased building in Denison,
Texas. The lease expires on October 31, 1997. Approximately
48,000 square feet are used for manufacturing, testing and
inventory storage and 16,000 square feet are used as engineering,
sales and administration. There is approximately 22,000 square
feet under lease available for expansion and is currently sublet.
Reynolds carries on its manufacturing and sales activities in a
building owned by it situated on 40,000 square feet of land in
Garland, Texas. The plant is a one story, concrete building
containing approximately 15,500 square feet of floor space, which
includes approximately 2,000 feet of office space.
Fridcorp carries on its manufacturing and sales activities in two
buildings owned by it, located on 8 acres of land in Fort Worth,
Texas. One of such buildings provides 2,000 square feet of space
for Fridcorp's offices, 1,200 square feet for a pattern shop,
10,000 square feet for the Forming operations and a 5,000 square
foot warehouse. The other of such buildings houses the entire
operations of Molding and contains approximately 15,000 square
feet and contains a small office (300 square feet). The
remainder of the building is divided among the actual injection-
mold manufacturing (7,500 square feet), a storage area for
finished goods (3,600 square feet) and a storage area for raw
materials (plastic chips) used in the manufacturing process
(3,600 square feet).
Retech had occupied an industrial building in Canton, Ohio
(leased) which was assumed by the purchaser of Test Switch
operations. The Paris, Texas facility (owned) was vacated as
result of the sale of the meter socket division in April 1995.
This facility, consists of a vacant industrial building
containing approximately 80,000 square feet of space, including
approximately 3,000 square feet of office space. The Company
currently has a pending contract for sale of the land and
building.
Item 3. Legal Proceedings.
The former manufacturers representative of Logic, Ammon & Rizos
Co, has filed a suit against the Company, the Company's chairman
of the board, Logic, and New Logic Design Metals, Inc. ("New
Logic")(the purchaser of the assets) for unpaid fees, assumed by
New Logic and a previous adjustment in prior fees plus
prospective fee from New Logic's sales. The case is in early
stages of discovery; management believes there will be no
material effect on the Company.
Allied Products Co has sued the Company under the Preferred Stock
issued by the Company in connection with its investment in Cooper
Manufacturing Corporation ("Cooper") and the rights pertaining
thereto. The suit was filed in the Eastern District of Illinois
(Chicago) and currently, all activity is directed at
jurisdictional issues. The Company has filed a counter suit
alleging security violations (10b5) demanding return of its
Preferred Stock. In addition, the Company has been advised by
the Cooper debtor-in-possession that they plan to initiate
litigation claiming preference violations by Allied. The
ultimate resolution of this case will depend in part upon the
outcome of the Cooper bankruptcy case which will shortly be
voting on a Plan of Reorganization. The Company reserved its
investment at July 31, 1997 to $350,000, the anticipated cash
payment under the debtor's Plan. Management does not believe
that this suit will have any further material effect on the
Company.
Item 4. Submission of Matters to a Vote of Security Holders.
(a) Annual meeting of stockholders, April 4, 1997.
(b) Not applicable.
(c) Not applicable.
11
PART II
Item 5. Market for Registrant's Common Stock and Related
Stockholder Matters:
(a) Principal Market
The Common Stock of the Registrant is traded in the Over-the-
Counter Market and quoted on the National Association of
Securities Dealers Automated Quotation System (NASDAQ) under the
symbol ELGT.
(b) Stock Prices and Dividend Information
The following table sets forth the range of "Bid" and "Ask"
prices, by quarters, since July 31, 1994, as compiled by NASDAQ
and representing prices between dealers which does not include
retail markups or commissions, thus, such prices may not
represent actual transactions.
Fiscal year ended July 31, 1997:
High Low
First Quarter 1-5/16 11/16
Second Quarter 3/4 1/2
Third Quarter 15/16 15/32
Fourth Quarter 2-1/8 1-9/16
Fiscal year ended July 31, 1996:
High Low
First Quarter 2-7/8 2-1/4
Second Quarter 3-5/32 2-3/4
Third Quarter 3 2-1/2
Fourth Quarter 2 1
Fiscal year ended July 31, 1995:
High Low
First Quarter 2-9/16 1-1/2
Second Quarter 2-5/8 1-13/16
Third Quarter 3-7/16 2-1/8
Fourth Quarter 3-1/8 2-5/16
No dividend has been paid on the Common Stock by the Company and
payment of dividends in the foreseeable future is not
anticipated. Cumulative and unpaid dividends of 102,353 as of
July 31, 1997 must be paid on preferred stock before any
dividends can be paid on Common Stock.
As of July 31, 1997 there were 486 holders of record of the
Common Stock of the Company, exclusive of beneficial ownership
through brokerage firm nominee name.
12
UNITS OF COMMON STOCK AND WARRANTS
The Company has issued warrants to an investment banking firm to
purchase 150,000 and 300,000 shares of common stock at $2.00 and
$2.30 per share, respectively. The warrants are protected
against dilution and expire July 31, 2001 and September 15, 2001,
respectively. The warrants contain piggyback registration rights
and the agreement allows the warrants holders to request
registration of the warrants, if unregistered, between January 1,
1999 and July 31, 2002. The Company has not recorded any expense
relating to the warrants since the exercise price exceeded the
market price at the date of issuance.
In connection with the Company's financing agreement with The CIT
Group/Credit Finance, Inc. in 1994, the Company issued warrants
to purchase 25,000 shares of common stock of the Company at $4.25
per share. Such warrants are exercisable in whole or part on or
before November 24, 1998 and have piggy-back rights with respect
to any shares to be registered by the Company.
Item 6. Selected Financial Data.
STATEMENT OF OPERATIONS DATA:
(In dollars, except shares outstanding)
Fiscal Years Ended July 31,
1997 1996 1995 1994 1993
Revenues $17,931,249 $18,799,831 $27,257,911 $31,493,417 $30,586,168
Gross Profit 5,046,161 5,279,632 8,116,397 7,810,570 10,226,537
Selling, G&A Expense 7,932,042 6,731,128 8,569,054 9,140,938 8,604,004
Other Income (Expense) (2,239,761) (3,154,070) 615,821 (1,125,514) (638,892)
Earnings (Loss) from
Continuing Operations (4,912,270) (4,605,566) 218,060 (2,114,157) 812,440
Net Earnings (loss) 9,362,399 (5,032,551) 850,577 (6,106,377) 981,189
Net Earnings (loss)
per Share 1.07 (.66) .11 (.80) .13
Weighted Average
Number of Shares
Outstanding 8,659,365 7,635,624 7,615,474 7,634,432 7,353,489
For additional information with respect to reclassification for
discontinued operations and acquisitions and dispositions see
note 2 to the consolidated financial statements.
BALANCE SHEET DATA:
As of July 31,
1997 1996 1995 1994 1993
Total Assets $25,364,603 $15,094,090 $20,336,094 $22,164,220 $31,059,113
Long-Term Obligations 2,921,669 2,349,579 2,514,768 2,735,462 3,181,440
Shareholders' Equity 16,041,119 6,720,930 10,427,861 9,289,363 15,301,380
13
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations.
Background
The Company, through its subsidiaries, operates within five
separate industries. These are (i) production of atmospheric
water, filtration and enhanced water products; (ii) the
manufacture of natural gas measurement equipment and gas
odorization products; (iii) the manufacture and sale of metal
enclosures and other electrical equipment for use in the electric
utility industry; (iv) the manufacture and sale of defense
electronic components; and (v) the manufacture of vacuum-form
and injection-mold products.
Results of Operations
The discussion below relates to the Company's operations during
the fiscal years ended July 31, 1997, 1996 and 1995.
Summary. The Company reported net earnings (loss) from
continuing operations of $(4,912,270), $(4,605,566) and $218,060
and net earnings (loss) of $9,362,399, $(5,032,551) and $850,577
for fiscal years 1997, 1996 and 1995, respectively. The 1997
substantial increase in net income was attributable to improved
earnings in the discontinued metal fabrication segment of
$1,627,730 and the gain of $12,646,939 on the sale of this
segment. Losses from continuing operations were from the
electric segment performing less profitable than during 1996, the
plastic segment's breakeven performance and substantial losses in
the defense segment. The defense segment has experienced
declining sales, tighter margins and an additional obsolescence
charge of approximately $458,000 against inventory. Also,
corporate expenses have increased due to legal and other cost
associated with the Company's investments and venture into the
water business. The Company's investments in Refinery
Consolidated Technology, Inc. and Cooper Manufacturing
Corporation were also reserved at July 31, 1997. The 1996 losses
are primarily related to the following events: (i) a default on
obligations owed the Company by the purchaser of the U.S. meter
socket division of approximately $1,800,000; (ii) obsolescence on
certain inventories of approximately $600,000; (iii) write-off of
the remaining Trans Metals, Inc. assets of approximately
$391,000; (iv) and investment losses of approximately $1,000,000.
Also, see discussion of individual segments for items which
adversely affected those operations during fiscal 1997 and 1996.
The increase in earnings between 1994 and 1995 from continuing
operations before income tax was $2,332,217 or 110.31% which is
attributable to the Electric segment offset by decreases in
Defense, Gas and Plastic segments. The increase in operating
profits was $1,422,573 and decreases of $(23,874), $(132,850) and
$(92,027), respectively. Earnings (loss) per common share were
$1.07, $(.66) and $.11 in fiscal 1997, 1996 and 1995,
respectively.
For the Years Ended July 31,
1997 1996
Increase Percent Increase Percent
(Decrease) Change (Decrease) Change
Operating Revenues $(868,582) (4.62) $(8,458,080) (31.03)
Operating Income (672,491) (121.64) (1,167,615) 189.93
Earnings (Loss) from
continuing operations
before income taxes (306,704) (6.66) (4,823,626) (2,212.06)
Net Earnings Per Share 1.73 262.12 (.77) (700.00)
14
The following table represents the changes [increase/(decrease)]
in operating revenues, operating income and earnings from
continuing operations before income taxes by the respective
industry segments when compared to the previous period:
For the Years Ended July 31,
1997 1996
Increase Increase
(Decrease) Percent (Decrease) Percent
Operating Revenues:
Water $ 75,234 8.66 $ - -
Gas 199,923 23.02 (208,385) (2.47)
Electric 169,786 19.55 (8,592,048) (101.58)
Defense electronics (1,214,251) (139.80) 436,373 5.16
Plastics (99,274) (11.43) (94,020) (1.11)
$(868,582) 100.00 $(8,458,080) 100.00
Operating Income (Loss):
Water $ (212,742) (31.63) $ - -
Gas 687,352 102.21 (722,211) (61.85)
Electric (163,559) (24.32) (335,186) (28.71)
Defense electronics (932,849) (138.72) (184,152) (15.77)
Plastics (50,693) (7.54) 73,934 6.33
(672,491) 100.00 (1,167,615) 100.00
General Corporate (761,894) 168,776
Other Income (Expense) 1,127,681 (3,824,787)
Earnings from Continuing
Operations Before Income
Taxes $(306,704) $(4,823,626)
Water revenues amounted to $75,234 which were essentially sales
of a few demonstrators of this segments "Watermaker" product.
Expenses were $287,976, included early development of a business
plan and marketing expenses. While the Company has been working
on this project for sometime, only recently has any meaningful
activity taken place.
Gas revenues increased (decreased) by $199,923, $(208,385) and
$(276,360) or 6.81%, (6.63%) and (8.08%) in fiscal 1997, 1996 and
1995, respectively. During fiscal 1997, this segment developed
the next generation of their "Recor" product line. This product
is currently being tested by customers and has slowed sales on
the first generation "Recor." It is not expected to create
meaningful additional revenues until fiscal 1998. During fiscal
1996, sales of the "Recor" were relatively unchanged with most of
the sales decline occurring in the odorization systems due to
increased industry competition. Operating income (loss) was
$40,784, $(646,568), and $75,643 for fiscal 1997, 1996 and 1995,
respectively. The 1996 loss resulted from inventory obsolescence
of approximately $385,000 and declining revenues with staffing
levels anticipating higher demand for the Company's Recor product
which did not materialize. The consolidations and mergers
currently taking place in the utility industry and the warmer
than average winters have also contributed to the lower product
demand.
15
Electric revenues increased slightly by $169,786, the effect of
an increase in Canada of $742,327 offset by the U.S. sales
decline of $572,541 which was the loss of the first quarter sales
of the sold Test Switch business. Revenues declined by
$8,592,048 during fiscal 1996 to $7,575,126 the result of the
sales of the meter socket business in April 1995 and the test
switch business in October 1995 for the U.S. operations and the
sale of the heating business in the Canadian operations in
January 1995. The 1995 revenues decreased by $(3,271,111) or
decreases in the Canadian operations of $(2,278,154) and U.S.
operations of $(992,957). Operating income for 1997 decreased by
$(163,559) the effect of continuing cost associated with the U.S.
plant located in Paris, Texas while Canadian operations performed
similar to the prior year. There is a sale pending on the Paris
property. Operating income for 1996 decreased by $(335,186) the
net effect of increased operating income of $965,015 for the
Canadian operations and a decrease of $(1,300,201) in U.S.
operations, the result of the aforementioned business sales
during fiscal 1996 and 1995. Operating income for 1995 increased
for Retech by $674,869 and $747,704 in the Canadian operations or
a total increase of $1,422,573. The decline in revenues is
attributed primarily to the sale in January 1995 of the heating
division of Hydel and the sale in April 1995 of the meter socket
division of Retech. Operating profits, however, improved
substantially on these lower sales, returning this segment to a
positive contributor to the Company's profits.
Gross profit margins were 24.34%, 24.51% and 22.59% for fiscal
1997, 1996 and 1995, with selling, general and administrative
expenses as a percentage of sales for the same period of 22.26%,
20.22% and 18.51%, respectively. Selling, general and
administrative expenses have increased as a percentage of sales
due to lower sales from sold operations and carrying cost
associated with aforementioned plant building which was not sold
with the meter socket business.
Defense electronics sales decreased by $(1,214,251) to $5,799,455
during fiscal 1997 due to cutbacks in defense spending,
consolidation in the industry and the older defense programs
completing production. The 1996 increase in revenue was due to
new customers and the F22 tactical fighter program increasing
greater than decreases in older programs slowly terminating. The
operating losses between 1997, 1996 and 1995 increased by
$(932,849), $(184,152) and $(23,874), the result of declining
revenues and obsolescence reserves of approximately $458,000 and
$214,000 against certain inventory in 1997 and 1996,
respectively, which in a large part was inventory acquired in the
original purchase from Texas Instruments.
Gross margins for fiscal 1997, 1996 and 1995 were 27.58%, 33.19%
and 42.78%. Current margins reflect the additional reserves
charged against cost of sales and lower margins normally
associated with new programs. Selling, general and
administrative expenses were 48.48% in 1997, 37.17% in 1996 and
44.22% in 1995 as a percentage of sales with fiscal 1997
reflecting significant lower sales and during fiscal 1996
reflecting cost cutting and reductions in overhead expenses.
Plastics revenues declined by $(99,274) and $(94,020) during
fiscal 1997 and 1996, operating profits decreased by $(50,693) to
a negative $(2,242) after having increased by $73,934 to a
positive $48,451. Revenues increased slightly by $109,111 or
8.66% in 1995. Both the increase and decline in operating
profits were directly related to manufacturing problems occurring
during fiscal 1995 which required replacement and additional
maintenance on key injection molding equipment.
Expense relationships to the various changes in revenues
effecting cost of sales and selling, general and administrative
expenses are as follows. Cost of sales as a percentage of
revenues amounted to 71.86%, 71.92% and 70.22% for the years
ended July 31, 1997, 1996 and 1995, respectively. Selling,
general and administrative expenses as a percentage of revenues
were 34.89%, 31.02% and 27.52% for the years ended July 31, 1997,
1996 and 1995, respectively.
16
Liquidity and Capital Resources
Liquidity. Cash flow from (used by) operating activities amounted
to $(1,527,027), $(764,230) and $(1,131,612) for fiscal years
1997, 1996 and 1995, respectively. Operating cash flow has been
supplemented by cash made available from the proceeds on the sale
of the various segment and operating divisions.
Current assets of the Company totaled $21,008,185 at July 31,
1997, up from current assets of $7,722,681 at July 31, 1996.
Current liabilities increased from fiscal 1996 to fiscal 1997 by
$295,230, resulting in an increase in working capital (current
assets less current liabilities) to $14,689,374 at July 31, 1997,
from $1,749,100, an increase of (739.82%). This increase was the
result of the sale of the metal fabrication segment. The Company
believes it has sufficient cash to meet its working capital
requirements and debt obligations.
Capital Resources. Hydel has a working capital line-of-credit
with a Canadian bank in the amount of $1,560,000. The Canadian
credit facility is secured by receivables and inventories of
Hydel.
In November 1993 the Company began a five-year financing
arrangement with the CIT Group Credit/Finance, Inc. (CIT). Their
original total commitment to the Company amounted to $7,000,000
of term and revolving credit at 2.75% above prime. However, the
maximum amount to be borrowed is determined based upon eligible
collateral, including equipment, receivables and inventory and
has been reduced due to the operations sold. Borrowing under
this financing amounted to $767,902 in term debt and $631,788 in
revolving debt at July 31, 1997.
The Company received $1,000,000 in proceeds from an SBA mortgage
loan which was funded on September 23, 1994. Such proceeds were
added to working capital.
The Company sold one segment in fiscal 1997 and one division in
fiscal 1996 and two divisions in fiscal 1995 receiving
approximately $20,828,385, $2,068,583 and $3,492,093,
respectively in cash proceeds which were used to pay current
obligations, reduce debt and provide additional working capital.
Capital Expenditures
The Company purchased equipment consisting of normal asset
acquisitions and replacement of approximately $261,504, $181,643
and $277,848 during fiscal 1997, 1996 and 1995, respectively.
The Company does not anticipate any other significant capital
expenditures, other than in the ordinary course of replacing
worn-out or obsolete machinery and equipment utilized by its
subsidiaries. The Company may, from time to time, purchase such
machinery and equipment provided such assets serve as additional
collateral for outstanding loans to the Company (and its
subsidiaries).
Dividend Policy
No cash dividends have been declared on common stock by the
Company's Board of Directors since the Company's inception. The
Company does not contemplate paying cash dividends on its common
stock in the foreseeable future since it intends to utilize its
cash flow to service debt, for working capital and capital
additions, and to finance expansion of its operations.
Cumulative dividends on the Series A, 7% Convertible Preferred
Stock, have not been paid and amounted to $102,353 as of July 31,
1997. Further, additional dividends of $15,879 were due on
September 30, 1997
Other Business Matters
Accounting for Post-Retirement Benefits. The Company
provides no post-retirement benefits; therefore, FASB No. 106
will have no impact on the Company's financial position or result
of operations.
17
Inflation. The Company does not expect the current effects
of inflation to have any effect on its operations in the
foreseeable future. The largest single impact effecting the
Company's overall operations is the general state of the economy
and principally the home construction sector.
Item 8. Financial Statements and Supplementary Date.
Information required by this item appears in the
Consolidated Financial Statements and Auditors' Report of
Electric & Gas Technology, Inc. and Subsidiaries for July 31,
1997, 1996, and 1995 as listed under Item 14.
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure.
There have been no disagreements on accounting and financial
disclosure.
PART III
Item 10. Directors and Executive Officers of Registrant
(a) During fiscal year ended July 31, 1997, the following
persons served as directors of Registrant:
Shares
Beneficially
Director Owned (%) of
Name and Age Position Since Outstanding
S. Mort Zimmerman (70) Chairman of the Board, 1985 831,240 9.66%
President and Director
Daniel A. Zimmerman (36) Sr. Vice President 1989 370,131 4.30%
and Director
Edmund W. Bailey (55) Vice President, Chief 1994 52,221 0.61%
Financial Officer and
Director
Fred M. Updegraff (63) Vice President, 1987 76,073 0.88%
Treasurer and Director
Dick T. Bobbitt (72) Director 1997 -
James J. Ling (74) Director 1997 -
S. Mort Zimmerman and Daniel A. Zimmerman are father and son.
(b) Executive Officers:
The Executive Officers of Registrant are:
See (a) above.
Marie W. Pazol, Secretary
18
BACKGROUND
S. Mort Zimmerman: Mr. Zimmerman is Chairman of the Board,
President and Chief Executive Officer of the Company since its
formation in March 1985.
After attending Georgia Institute of Technology and Oglethorpe,
Mr. Zimmerman graduated in 1958 with a Bachelor of Science in
Electrical Engineering from Pacific International University. He
established the first electronics subsidiary for the predecessor
corporation of LTV Corporation which was formed to market a low
cost television camera invented by Zimmerman and for which he was
awarded a United States Patent in 1958. Prior to 1963 he
participated in the engineering and installation of 18 television
stations.
In 1965 Mr. Zimmerman formed the first "one-bank holding company"
of its kind in the United States and which later served as a
model from which many bank holding companies were formed. He
served as Chairman of the Board of four individual banking
institutions, three of which were located in Florida (Springs
National of Tampa, Metropolitan of Miami and Mercantile National
of Miami Beach) and New York City (Underwriters Trust). After
obtaining a public underwriting these banks were sold to others.
In 1967 Intercontinental Industries, Inc. was organized and Mr.
Zimmerman served as its Chairman and Chief Executive Officer.
This diversified holding company was primarily engaged in the
operations of Intercontinental Manufacturing Company, a weapons
manufacturer that was later sold. Through his research and
development in the field of video X-ray and imaging, Mr.
Zimmerman caused the organization of Video Science Technology,
Inc. in 1981 to exploit the inventions for which he was awarded
two U. S. Patents. Patents awarded include: Television Camera-
Video Amplifier and Blanking Circuits-1958, Electronic
Thermometer-1963, Video-X-Ray Imaging System and Method-1977,
Video System and Method for Presentation and Reproduction of X-
Ray Film Images-1977, Electromagnetic Radio Frequency Excited
Explosion Proof Lighting Method and System-1986, and Laser
Display of an Electronically Generated Image Signal-1987.
Recently, Mr. Zimmerman participated as a co-inventor on new
Electronic Refrigeration technology to which patents are pending.
Daniel A. Zimmerman: Mr. Zimmerman was elected Senior Vice
President in 1991 and was re-elected as a Director of the Company
in 1990 (Mr. Zimmerman served as a director from March, 1985 to
January, 1988). Mr. Zimmerman is presently serving as President
and Director of Reynolds and Vice President and Director of
Superior. He also serves as Vice President Marketing for SMI
since its inception, December 1, 1992. He received his Liberal
Arts Degree from Austin College in Sherman, Texas in May, 1982.
Edmund W. Bailey, CPA: Mr. Bailey has served as Vice President
and Chief Financial Officer of the Company since March, 1992. He
was elected a member of the Board of Directors May 1994. From
January 1989 to March, 1992, Mr. Bailey was a shareholder in the
public accounting firm of Jackson & Rhodes P.C., Dallas, Texas.
From August, 1987 to December, 1988, Mr. Bailey served as Vice
President and Chief Financial Officer of Southern Foods Group,
Inc., an independent milk producer. From May, 1986 to July,
1987, he was with the public accounting firm of Pannell Kerr
Foster, Dallas, Texas. Prior experience included 16 years in
public accounting with Fox & Company and Arthur Young & Company
(now Ernst & Young). Mr. Bailey earned a B.S. degrees in
Business from Monmouth College, West Long Branch, New Jersey, and
an M.B.A. degree from Southern Methodist University, Dallas,
Texas. Mr. Bailey is licensed in the State of Texas as a
Certified Public Accountant.
Fred M. Updegraff: Mr. Updegraff has served as Vice President
and Treasurer of the Company since 1985. He was elected
Treasurer and a member of the Board of Directors in May, 1987.
Mr. Updegraff is also Vice President, Controller and Director
of DOL Resources which files reports under Section 13 of the
Securities Act of 1934. From 1976 to 1981, he was Vice
President of a manufacturing company engaged in the manufacture
of brass valves for the plumbing industry. Mr. Updegraff
graduated from Emporia State University with Bachelor Degrees in
Business Administration and Education.
Dick T. Bobbitt: Mr. Bobbitt has been president of VEC
Technology, Inc. (VEC) since August 1991. VEC is a consulting
firm involved in research and development of new products. Mr.
Bobbitt was one of the founders of American Technological
University and served as Chairman of the Board from 1973 to 1979.
Prior years were spent with RCA Corporation and Random House
Publishing Co.
19
James J. Ling: Mr. Ling is co-founder, chairman and chief
executive officer of Empiric Energy, Inc. since November 1992.
Mr. Ling founded Ling Electronics in 1955 and through a series of
mergers and acquisitions which includes, Temco Aircraft
Corporation, Chance-Vought, The Wilson Company, Braniff Airlines,
Jones & Laughlin and National Car Rental, guided the conglomerate
Ling-Temco-Vought (LTV) to a position among the largest companies
in the Nation with annual sales of $3.2 billion. Mr. Ling
resigned in 1971. Since 1985, Mr. Ling has been President of
Hill Investors, Inc., a company organized to hold oil and gas
investments and which also offers business consulting services.
(c) Significant and Key Employees:
The following provides certain information regarding key
employees who serve as officers of the subsidiary companies of
the Company:
Gabriel Prieto: Mr. Prieto became President of SMI on December
1, 1992, the effective date the Company completed the acquisition
of the Texas Instruments Incorporated magnetics operation in
Denison, Texas. He has also served as President of Fridcorp
since its acquisition in January, 1992. From 1989 until January,
1992, Mr. Prieto was engaged as an independent business
consultant. During 1988 and 1989, he was an officer of Domac
Plastics, Inc., a corporation formerly wholly owned by the
Company; from 1982 to 1988, he served as a Vice President and
Senior Petroleum Engineer for Nations Bank, N.A., Dallas, Texas;
from 1980 to 1982, he was employed by Freeport McMoran, Inc. an
oil and gas exploration firm based in New Orleans, Louisiana;and
from 1976 to 1980, he was employed by Mobil Oil Corporation as a
senior petroleum engineer in its New Orleans, Louisiana offices
and earned a B.S. degree in Petroleum Engineering from Louisiana
Tech University, Ruston, Louisiana. He is a registered Petroleum
Engineer in the State of Texas. Also, Mr. Prieto is a member of
the Society of Petroleum Engineers, the Society of Plastics
Engineers and the International Association of Energy Economists.
Item 11. Executive Compensation
Summary Compensation Table
Long Term Compensation
Annual Compensation Awards Payouts
Other Restricted Number of Shares Long Term
Annual Stock Covered By Incentive Plan All Other
Name and Principal Year Salary Bonus Compensation Awards Option Grant Payout Compensation
Pposition
S. Mort Zimmerman 1997 $239,760 (a) $333,400(b) $ - - 212,000 - -
Daniel A Zimmerman 1997 $ 97,596 $59,802(b) $ - - 31,667 - $19,629 (d)
Edmund W. Bailey 1997 $108,000 $59,802(b) $ - - 36,666 - $2,160 (c)
Gabriel Prieto 1997 $106,950 $3,380(b) $ - - 16,667 - $12,797 (d)
S. Mort Zimmerman 1996 $219,400 (a) $14,166(b) $ - - 232,000 - -
S. Mort Zimmerman 1995 $110,000 $ - $ - - 232,000 - $642 (c)
S. Mort Zimmerman-President and Chairman of the Board.
Daniel A. Zimmerman-Senior Vice President.
Edmund W. Bailey-Vice President and Chief Financial Officer.
Gabriel Prieto-President of SMI.
(a) A portion of the payments were made to an affiliate of S. Mort Zimmerman
and includes accrued and unpaid
compensation of $75,000 for fiscal year 1997 and 1996, respectively.
(b) Includes cash and bonus shares of Common Stock valued at $1.69 and $1.25
per share in 1997 and 1996, respectively.
(c) Company match of 401 (K) employee contributions.
(d) Company match of 401 (K) employee contributions and expense allowances.
20
1997 Stock Option Grants
The following table sets forth stock options granted in fiscal
1997 to the Company's executive officer named in the Summary
Compensation Table and to all other employees as a group. The
table also sets forth the hypothetical gains that would exist for
the options at the end of their 5 year term, assuming rates of
stock appreciation of 0%, 5% and 10%. The actual future value of
the options depend on the market value of the Company's Common
stock.
Number of % of Total
Shares Options
Covered by Granted to
Date of Option Employees Exercise Expiration
Grant Grant Grants Prices Date 0% 5% 10%
S. Mort Zimmerman 4/7/97 180,000 62.1% $.55 4/7/02 - $27,000 $61,200
Daniel A. Zimmerman 4/7/97 25,000 8.6% $.50 4/7/02 - 3,500 7,750
Edmund W. Bailey 4/7/97 30,000 10.3% $.50 4/7/02 - 4,200 9,300
Gabriel Prieto 4/7/97 10,000 3.5% $.50 4/7/02 - 1,400 3,100
All employees as a
group...... 4/7/97 45,000 15.5% $.50 4/7/02 - 6,300 13,950
Total potential stock price appreciation from April 1997 to April 2002 for all
stockholders at assumed rates of stock price appreciation(a).................... - 1,174,133 2,639,029
Potential realizable value of options granted to all employees at the end of
their five-year option term as a percentage of total potential stock price
appreciation from April 1997 to April 2002 for all stockholders at assumed rates
of stock price appreciation..................................................... - 3.6% 3.6%
(a) Based on a price of $.50 on April 7, 1997 and a total of 8,030,624 shares
of Common Stock outstanding.
Aggregate Option Exercises and Year-end Option Values
Set forth below are the number of shares covered by exercisable
and unexercisable options held on July 31, 1997 and the aggregate
gains that would have been realized had these options been
exercised on July 31, 1997, even though these options were not
exercised, and the unexercisable options could not have been
exercised, on July 31, 1997.
Number of Shares Value of Unexercised
Covered by Unexercised In-The-Money
Options on 7/31/97 Options as of 7/31/96
Name Exercisable Unexercisable Exercisable (a) Unexercisable
S. Mort Zimmerman 32,000 (a) 180,000 -0- $210,600
Daniel A. Zimmerman 6,667 (a) 25,000 -0- $30,500
Edmund W. Bailey 6,666 (a) 30,000 -0- $36,600
Gabriel Prieto 6,667 (a) 10,000 -0- $12,200
(a) Market value of shares covered by in-the-money options on
July 31, 1997 less option exercise price. Options are in-the-
money if the market value of the shares covered thereby is
greater than the option exercise price.
21
Item 12. Security Ownership of Certain Beneficial Owners and
Management
(a) The following tables sets forth the number of shares
of Common Stock of holders of the Company known to the Company to
be the beneficial owner of more than five (5%) per cent of its
Common Stock at July 31, 1997.
Name and Address Amount and Nature of Percent of
Beneficial Owner Class
S. Mort Zimmerman 830,240 (1) 9.66%
13636 Neutron Road
Dallas, Texas 75244-4410
(b) The following table sets forth the number of shares of
Common Stock of Registrant owned by all directors and officers as
a group as of July 31, 1997:
Name of Amount and Nature of Percent of
Beneficial Owner Beneficial Ownership Class
S. Mort Zimmerman 830,240 (1) 9.66%
Chairman of the
Board and President
Daniel A. Zimmerman(5) 370,131 (2) 4.30%
Sr. Vice President
and Director
Edmund W. Bailey 52,221 (3) .61%
Vice President &
Chief Financial Officer
Fred M. Updegraff 76,073 (4) .88%
Vice President
Treasurer & Director
All Officers &
Directors, as a
Group 1,352,999 15.73%
(1)Includes (i) 212,000 shares subject to options owned by Mr. S.
Mort Zimmerman; (ii) 82,888 shares of the 828,878 shares owned
beneficially and of record by Trans-Exchange Corporation, in
which Mr. S. Mort Zimmerman has a 10% beneficial interest; and
(iii) 31,429 shares owned by Glauber Management Company, a firm
42% owned by Mr. S. Mort Zimmerman and in which he effectively
controls the voting of the Company's stock owned by such firm.
Mr. S. Mort Zimmerman disclaims any beneficial interest in the
shares owned by his wife's estate and their adult children.
(2)Includes 31,667 shares subject to options owned by Mr.
Zimmerman.
(3)Includes 36,666 shares subject to options owned by Mr. Bailey.
(4)Includes 31,666 shares subject to options owned by Mr.
Updegraff.
(5)S. Mort Zimmerman and Daniel A. Zimmerman are father and son.
22
Item 13. Certain Relationships and Related Transactions
THE FOLLOWING IS A SUMMARY OF ADVANCES FROM/TO AFFILIATED
COMPANIES AT JULY 31, 1997.
1997 1996
Refineries Consolidated Technology, Inc. $ - $ 415,000
Cooper Manufacturing Corporation 350,000 1,191,869
Others (369,824) (58,561)
$(19,824) $1,548,308
The Company for several years has been owed approximately
$530,000 due from Comtec, a dormant affiliate. During 1996, it
was determined that $235,000 of this amount was actually paid for
the benefit of the Company and was written-off in 1996 in other
expenses. It has been determined that Comtec does not have the
capability to liquidate the remaining debt and the remaining
receivable was offset against accrued salaries of the officer who
had guaranteed the receivable. The Company has advanced through
the pledging of its certificates of deposit with a bank,
corresponding to direct bank loans and direct advances to
Refineries Consolidated Technology, Inc. ("RCT") and Cooper
Manufacturing Corporation ("Cooper") approximately $1,028,000.
The Company has also acquired a secured note receivable from
Cooper in exchange for 90,000 shares of its $10.00 par value
Preferred Stock to an unaffiliated company who previously owned
Cooper. During 1997 the Company has provided a reserve for the
entire receivable from RCT ($723,000) and also provided a reserve
of $867,000 against the Cooper investment. The remaining
$350,000 investment in Cooper represents the amount of cash the
Company expects to receive from Cooper's Plan filed in the
bankruptcy court.
During 1994 the Company purchased equipment with a cost of
approximately $47,000 and subsequently sold the equipment to an
affiliated company for $200,000. A gain of approximately
$153,000 was included in other income in 1994. During 1997 the
Company repurchased the equipment from the affiliated company for
its original price sold and subsequently sold the equipment to an
unaffiliated company incurring a loss of $180,000.
23
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports
on Form 8-K.
(a) Documents filed as part of this Report
1. Financial Statements
Consolidated Financial Statements of Electric & Gas
Technology, Inc. and Subsidiaries:
(i) Reports of Independent Certified Public
Accountants
(ii) Consolidated Balance Sheets July 31, 1997
and July 31, 1996.
(iii) Consolidated Statements of Operations for the
three years ended July 31, 1997.
(iv) Consolidated Statements of Changes in
Stockholders' Equity for the three years ended
July 31, 1997.
(v) Consolidated Statements of Cash Flows for the
three years ended July 31, 1997.
(vi) Notes to Consolidated Financial Statements
2. Financial Statement Schedules Required by Item 8
of Form 10-K and paragraph (d) of Item 14
None
3. Exhibits
3.1 Articles of Incorporation of Registration (filed as
Exhibit 3.1 and 3.2 to Registration Statement form S-18
- Registrant No. 33-2147FW of Registrant and
Incorporation herein by reference.
3.2 By-laws of Registrant (filed as Exhibit 3.3
Registration Statement on Form S-18 - Registrant No.
33-2147FW - of Registrant and incorporated herein by
reference.
4.1 Specimen Copy of Common Stock Certificate (filed as
Exhibit 1.1 to Registration Statement under the
Securities Exchange Act on Form 8-A and incorporated
herein by reference).
4.1 Warrant Agreement and Text of Warrant (filed Exhibit
4.1 to Amendment No. 1 to Registration Statement on
Form S-18, Registration #33-2147FW, of Registrant
incorporated herein by reference.
24
10.1 Agreement and Plan of Acquisition between Petro
Imperial Corp. and Superior Technology, Inc. dated
June 30, 1986 for the acquisition of 80% of American
Brass, Inc. (filed as Exhibit 1 to Registrant's Form 8-
K Report dated July 9, 1986, Commission File No. 0-
14754 and incorporate herein by reference).
10.2 Acquisition Agreement dated July 29, 1988 and Amendment
thereto dated November 15, 1988, (filed as Exhibit 1 to
Form 8-K Report, as amended on Form 8 filed August 9,
1988 and incorporated herein by reference).
10.32 U. S. Small Business Administration
authorization and loan agreement dated
August 3, 1994 between Independence Funding
Company Ltd. and Electric & Gas Technology,
Inc., Reynolds Equipment Company, Superior
Technology, Inc. and Fridcorp Plastics, Inc.
and Note for $1,000,000 (filed as exhibit
10.32 to Form 10-K, filed October 27, 1994
and incorporated herein by reference).
10.33 Asset Purchase Agreement dated as of April
18, 1995 by and between Superior Technology,
Inc. and American Circuit Breaker
Corporation (filed as exhibit 10.32 to Form
10-Q, filed June 12, 1995 and incorporated
herein by reference).
10.34 "Asset Purchase Agreement" dated as of
October 31,1995 by and between Test Switch
Technology, Inc., Electric & Gas Technology,
Inc. and The Durham Co.
10.37 Assets Purchase Agreement among New Logic Design
Metals, Inc. of Chatham Enterprises Inc., of Chatham
Technologies, Inc., Logic Design Metals, Inc. and
Precision Techniques, Inc. and Electric & Gas
Technology, Inc. Dated July 15, 1997.
(b) Reports on form 8-K
Current Report-Form 8-K filed August 27, 1997: Item 2.-
Acquisition or Disposition of Assets. Sale of the assets of
wholly owned subsidiary Logic Design Metals, Inc.
25
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of
the Securities Exchange Act of 1934, Registrant has duly caused
this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
ELECTRIC & GAS TECHNOLOGY, INC.
By: /s/ Edmund W. Bailey
Edmund W. Bailey, Vice President
and Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act
of 1934, this report has been signed below by the following
persons on behalf of Registrant and in the capacity and on the
date set-forth following their name:
Signature Capacity Date
/s/ S. Mort Zimmerman Chairman and President October 27, 1997
S. Mort Zimmerman
/s/ Daniel A. Zimmerman Senior Vice President
Daniel A. Zimmerman and Director October 27, 1997
/s/ Edmund W. Bailey Vice President, Chief Financial
Edmund W. Bailey Officer and Director October 27, 1997
/s/ Fred M. Updegraff Vice President, Treasurer
Fred M. Updegraff and Director October 27, 1997
/s/ Marie W. Pazol Secretary October 27, 1997
Marie W. Pazol
26
ELECTRIC & GAS TECHNOLOGY, INC.
AND SUBSIDIARIES
JULY 31, 1997 AND 1996
Page
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS 28
CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS 29
CONSOLIDATED STATEMENTS OF OPERATIONS 30-31
CONSOLIDATED STATEMENTS OF CHANGES IN
STOCKHOLDERS' EQUITY 32
CONSOLIDATED STATEMENTS OF CASH FLOWS 33-34
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 35-50
27
Report of Independent Certified Public Accountants
Board of Directors and Stockholders
Electric & Gas Technology, Inc.
and Subsidiaries
We have audited the accompanying consolidated balance sheets of
Electric & Gas Technology, Inc. and Subsidiaries as of July 31,
1997 and 1996, and the related consolidated statements of
operations, changes in stockholders' equity and cash flows for
each of the three years in the period ended July 31, 1997. These
financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the consolidated
financial position of Electric & Gas Technology, Inc. and
Subsidiaries as of July 31, 1997 and 1996, and the consolidated
results of their operations and their cash flows for each of the
three years in the period ended July 31, 1997, in conformity with
generally accepted accounting principles.
Jackson & Rhodes P.C.
Dallas, Texas
October 15, 1997
28
ELECTRIC & GAS TECHNOLOGY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
July 31,
ASSETS
CURRENT ASSETS 1997 1996
Cash and cash equivalents $14,529,904 $ 879,110
Accounts receivable trade, less allowance for doubtful
receivables of $4,889 in 1997 and $18,798 in 1996 2,125,914 2,334,334
Inventories 4,199,997 4,454,425
Prepaid expenses 152,370 54,812
Total current assets 21,008,185 7,722,681
PROPERTY, PLANT AND EQUIPMENT, net 3,211,611 3,634,258
OTHER ASSETS
Discontinued operations - 1,069,973
Other assets 1,144,807 2,667,178
Total other assets 1,144,807 3,737,151
TOTAL ASSETS $25,364,603 $15,094,090
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Notes payable $ 2,264,145 $ 3,040,997
Accounts payable 1,831,667 1,847,779
Accrued liabilities 1,425,794 650,200
Federal income taxes 323,705 -
Current maturities oflong-term obligations 473,500 484,605
Total current liabilities 6,318,811 6,023,581
LONG-TERM OBLIGATIONS
Long-term obligations, less current maturities 2,196,810 1,643,933
Other 724,859 705,646
Total long-term obligations 2,921,669 2,349,579
COMMITMENTS AND CONTINGENCIES - -
MINORITY INTEREST IN SUBSIDIARY 83,004 -
STOCKHOLDERS' EQUITY
Preferred stock, $10 par value, 5,000,000 shares
authorized, 90,000 issued and outstanding 900,000 900,000
Common stock, $.01 par value, 30,000,000 shares authorized,
issued 8,275,444 and 8,250,416 in 1997 and 1996,
respectively 82,504 82,504
Additional paid-in capital 10,099,338 10,201,334
Retained earnings (Deficit) 6,421,117 (2,941,282)
Pension liability adjustment (329,805) (214,639)
Cumulative translation adjustment (432,274) (430,870)
16,740,880 7,597,047
Less treasury stock, 219,792 and 274,792 shares in 1997 and
1996, at cost (699,761) (876,117)
Total stockholders' equity 16,041,119 6,720,930
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $25,364,603 $15,094,090
See accompanying notes.
29
ELECTRIC & GAS TECHNOLOGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Years ended July 31,
1997 1996 1995
Sales $17,931,249 $18,799,831 $27,257,911
Cost of goods sold 12,885,088 13,520,199 19,141,514
Gross profit 5,046,161 5,279,632 8,116,397
Selling, general and administrative expenses 7,932,042 6,731,128 8,569,054
Operating profit (loss) (2,885,881) (1,451,496) (452,657)
Other income and (expenses)
Interest, net (664,375) (834,489) (615,693)
Other (Note 2):
Gain on sale of operating divisions - 577,336 1,094,743
Default on purchase obligation - (1,813,838) -
Investment losses (1,590,755) (1,130,590) -
Minority interest in subsidiary 18,063 - -
Other (2,694) 47,511 136,771
(2,239,761) (3,154,070) 615,821
Earning (loss) from continuing operations
before income tax (5,125,642) (4,605,566) 163,164
Provision (credit) for income taxes (213,372) - (54,896)
Earnings (loss) from continuing operations (4,912,270) (4,605,566) 218,060
Discontinued operations (Note 2):
Earnings (loss) from operations of discontinued
metal fabrication segment 1,627,730 (426,985) 632,517
Gain on disposal of metal fabrication segment,
net of $323,705 in tax 12,646,939 - -
NET EARNINGS (LOSS) 9,362,399 (5,032,551) 850,577
Dividends on Preferred Stock (63,000) (39,353) -
Net earnings or loss applicable to Common Stock $9,299,399 $(5,071,904) $ 850,577
See accompanying notes.
30
ELECTRIC & GAS TECHNOLOGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (CONTINUED)
Years ended July 31,
1997 1996 1995
Earnings (loss) per common share:
Primary:
Continuing operations $(0.57) $(0.60) $0.03
Discontinued operations 1.64 (0.06) 0.08
Net earnings $ 1.07 $(0.66) $0.11
Fully diluted:
Continuing operations $(0.54) $(0.60) $0.03
Discontinued operations 1.55 (0.06) 0.08
Net earnings $ 1.01 $(0.66) $0.11
Weighted average number of common
shares outstanding 8,659,365 7,635,624 7,615,474
Fully dilutive 9,182,621 (1) N/A
(1) Conversion of Preferred Stock is anti-dilutive.
See accompanying notes.
31
ELECTRIC & GAS TECHNOLOGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Years ended July 31, 1997, 1996 and 1995
Retained Pension
Preferred Common Paid-in (Deficit) liability Translation Treasury
Stock Stock Capital Earnings adjustment adjustments Stock Total
Balance at July 31, 1994 $ - $79,054 $9,843,734 $1,240,692 $(473,823) $(460,847) $(939,417) $9,289,393
Net loss for the year - - - 850,577 - - - 850,577
Pension liability adjustment - - - - 208,521 - - 208,521
Cumulative translation
adjustments - - - - - 36,270 - 36,270
Treasury stock transferred - - (20,200) - - - 80,800 60,600
Purchase of treasury stock - - - - - - (17,500) (17,500)
Balance at July 31, 1995 - 79,054 9,823,534 2,091,269 (265,302) (424,577) (876,117) 10,427,861
Net earnings for the year - - - (5,032,551) - - - (5,032,551)
Pension liability adjustment - - - - 50,663 - - 50,663
Cumulative translation
adjustments - - - - - (6,293) - (6,293)
Preferred Stock issued 900,000 - - - - - - 900,000
Bonus stock issued - 1,450 179,800 - - - - 181,250
Stock issued for cash - 2,000 198,000 - - - - 200,000
Balance at July 31, 1996 900,000 82,504 10,201,334 (2,941,282)( 214,639) (430,870) (876,117) 6,720,930
Net earnings for the year - - - 9,362,399 - - - 9,362,399
Pension liability adjustment - - - - (115,166) - - (115,166)
Cumulative translation
adjustments - - - - - (1,404) - (1,404)
Treasury stock issued for
bonuses - - (101,996) - - - 176,356 74,360
Balance at July 31, 1997 $900,000 $82,504 $10,099,338 $6,421,117 $(329,805) $(432,274) $(699,761) $16,041,119
See accompanying notes
32
ELECTRIC & GAS TECHNOLOGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended July 31,
1997 1996 1995
Increase (decrease) in cash:
Cash flows from operating activities:
Net earnings (loss) $9,362,399 $(5,032,551) $ 850,577
Adjustments to reconcile net earnings ( loss)
to net cash provided by operating activities:
Discontinued operations (1,627,730) 426,985 (632,517)
Depreciation of property, plant
and equipment 589,168 666,151 728,928
Issuance of stock for services 74,360 181,250 -
Deferred income tax - - (75,345)
Minority interest in subsidiary 83,004 - -
Amortization of goodwill and patents 6,684 6,684 6,892
Treasury stock transferred for expenses - - 60,600
Gain on sale of business segment (12,646,939) - -
Gain on sale of operating divisions - (577,336) (1,092,492)
Deferred income (33,879) 61,066 -
Losses on investments 1,590,755 2,797,948 -
Changes in assets and liabilities:
Accounts receivable 48,575 288,962 1,167,280
Inventories 254,428 590,168 (389,542)
Prepaid expenses (235,971) 12,556 108,585
Other assets (75,068) 535,351 (610,202)
Accounts payable (16,112) (421,073) (796,608)
Accrued liabilities 775,594 (300,391) (457,768)
Federal income taxes 323,705 - -
Net cash provided by (used in) operating activities (1,527,027) (764,230) (1,131,612)
Cash flows from investing activities:
Proceeds from sale of property, plant and equipment 36,288 2,068,583 3,492,093
Purchase of property, plant and equipment (261,504) (181,643) (277,848)
Proceeds on note receivable - 264,167 -
Investments in affiliates - (681,869) -
Proceeds on sale of business segment 20,828,385 - -
Net cash provided by (used in) investing activities 20,603,169 1,469,238 3,214,245
Cash flows from financing activities:
Proceeds from issuance oflong-term obligations 953,975 21,645 3,177,839
Issuance of common stock - 200,000 -
Payments on long-term obligations (5,597,688) (630,798) (3,396,857)
Purchase of treasury stock - - (17,500)
Increase (decrease) in notes payable (776,852) (455,303) (1,467,232)
Net cash provided by (used in) financing activities (5,420,565) (864,456) (1,703,750)
Effect of exchange rate changes on cash (4,783) (6,293) 27,723
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS 13,650,794 (165,741) 406,606
Cash and cash equivalents - beginning of year 879,110 1,044,851 638,245
Cash and cash equivalents - end of year $14,529,904 $ 879,110 $1,044,851
See accompanying notes.
33
ELECTRIC & GAS TECHNOLOGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
Years ended July 31,
Supplemental disclosures of cash flow information:
1997 1996 1995
Cash paid during the year for:
Interest $824,451 $859,675 $793,558
Income tax $ - $5,771 $24,969
Supplemental schedule of noncash investing and financing activities:
During the year ended July 31, 1996, the following noncash
transactions occurred:
The Company issued 90,000 shares of Series A, $10.00 par value, 7%
Convertible Preferred Stock ($900,000)
in partial exchange for a $1,000,000 Note Receivable from Cooper
Manufacturing Corporation.
During the year ended July 31, 1995, the following noncash
transactions occurred:
The Company received non-cash consideration in the form of notes and
accounts receivable from the
sale of the meter socket division in the amount of $1,344,792.
The Company acquired machinery and equipment amounting to $257,898
with notes payable and lease
purchase obligations.
See accompanying notes.
34
ELECTRIC & GAS TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1
SUMMARY OF ACCOUNTING POLICIES
A summary of the significant accounting policies consistently
applied in the preparation of the accompanying consolidated
financial statements follows.
Organization:
Electric & Gas Technology, Inc.("the Company"or "ELGT") was
organized under the laws of the State of Texas on March 18, 1985,
to serve as a holding company for operating subsidiary
corporations. In April, 1985, the Company (i) acquired from
Commercial Technology, Inc. ("COMTEC"), an affiliated company, all
of the stock of Reynolds Equipment Company ("Reynolds") for stock
of the Company and (ii) acquired from a subsidiary of COMTEC all of
the stock of Retech, Inc. ("Retech") [formerly Test Switch
Technology, Inc.("Test Switch"), formerly Superior Technology, Inc.
("Superior")] for stock of the Company. In 1988, the Company
acquired 85% (and subsequently 100%) of the stock of Data
Automation Company, Inc. ("DAC") from Video Science Technology,
Inc., formerly an affiliate of COMTEC and of the Company; DAC owned
100% of Domac Plastics, Inc. ("Domac") and Logic Design Metals,
Inc. ("Logic"). Domac was subsequently sold. During 1992 Logic
merged into DAC, its parent, and DAC changed its name to Logic
Design Metals, Inc. and is referred to herein as "Logic". In June
1986 Superior acquired from Petro Imperial Corp. (A subsidiary of
COMTEC) its ownership in American Brass, Inc. ("ABI"). Fridcorp
Plastics, Inc. ("Fridcorp") was acquired by the Company in January,
1992, in exchange for 162,000 shares of Company Common Stock.
Hydel Enterprises, Inc. ("Hydel") [formerly Stelpro Limited
("Stelpro")] was acquired by the Company in April, 1992, in
exchange for 166,474 shares of Company Common Stock and $1,100,000
(Cdn. funds)(April 30, 1992, exchange rate: .8370). On August 1,
1992, Hydel acquired all of the outstanding capital stock of Hydel
Engineering Limited ("Hydel Engineering") for cash and notes
payable of approximately $719,000 ($850,000 Cdn.). Hydel
Engineering was merged into Hydel effective August 1, 1995. The
number of shares of Company Common Stock issued in the acquisitions
of Fridcorp and Hydel was, in each case, determined through arms-
length negotiations. Superior Magnetics, Inc. ("SMI") was formed
by the Company to acquire the operating assets of the business
operations of Denison Magnetics of Texas Instruments Incorporated
on November 30, 1992 for cash and deferred payments of
approximately $2,900,000. The Company incorporated Atmospheric and
Magnetics Technology, Inc. ("AMT") on June 10, 1996 under the laws
of the State of Texas. AMT which remain dormant during most of
Fiscal 1997 was formed to undertake the Company's venture into the
water industry.
The Company presently is the owner of 100% of Retech, which
currently owns 80% of ABI and the Company owns 91.5% of AMT and
100% of AMT, Reynolds, Hydel, SMI and Fridcorp, and, through such
subsidiaries, operates in five distinct business segments: (1)
production of atmospheric water, filtration and enhanced water
products (AMT); (2) the manufacture and sale of natural gas
measurement, metering and odorization equipment (Reynolds); (3) the
manufacture and sale of electric meter enclosures and pole-line
hardware for the electric utility industry and the general public
(Hydel and Retech); (4) the design and manufacture of defense
electronic components (SMI); and (5) the manufacture of vacuum-form
and injection-mold products (Fridcorp). The entrance into the
Water Industry will be the major focus for the future development
and growth on the Company. Effective July 31, 1997, the Company
discontinued the operations of its metal fabrication segment which
previously was engaged in the manufacture and sale of precision
metal enclosures for telecommunication and computer equipment
(Logic). The Company sold its Canadian heating division and its
U.S. meter socket and Test Switch divisions during fiscal 1996 and
1995. These operations were part of the electric segment.
Principles of Consolidation:
The consolidated financial statements include the accounts of the
Company and its subsidiaries. All significant intercompany
accounts and transactions have been eliminated in consolidation.
35
ELECTRIC & GAS TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1
SUMMARY OF ACCOUNTING POLICIES (Continued)
Inventories:
Inventories of raw materials, work-in-process and finished goods
are stated at the lower of cost or market as determined by the
first-in, first-out method.
Depreciation and Amortization:
Depreciation and amortization are provided in amounts sufficient to
relate the cost of depreciable assets to operations over their
estimated service lives. Leasehold improvements are amortized over
the lives of the respective leases or the service lives of the
improvements whichever is shorter. Leased property under capital
leases is amortized over the lives of the respective leases or over
the service lives of the assets for those leases which
substantially transfer ownership. The straight-line method of
depreciation is followed for newly acquired assets and straight-
line and accelerated methods have been used for older assets for
financial reporting purposes, accelerated methods are used for tax
purposes.
Property, Plant and Equipment:
Property, plant and equipment are stated at cost. Depreciation is
computed based on the following useful lives:
Years
Machinery and equipment 3 -15
Buildings and improvements 4 -33
Furniture, fixtures and equipment 3 -10
Cash Equivalents:
For purposes of the statement of cash flows, the Company considers
all highly liquid debt instruments with an original maturity of
three months or less to be cash equivalents.
Earnings Per Share:
Earnings per common share are computed by dividing net earnings by
the weighted average number of shares of common stock and common
stock equivalents outstanding during each period.
Reclassification:
Certain reclassification have been made to the 1996 and 1995
consolidated financial statements to conform to the 1997
presentation.
Use of Estimates:
The Company uses estimates and assumptions in preparing financial
statements in accordance with generally accepted accounting
principles. Those estimates and assumptions affect the reported
amounts of assets and liabilities, disclosure of contingent assets
and liabilities and the reported revenues and expenses. Actual
results may well vary from the estimates that are used.
36
ELECTRIC & GAS TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2
DISPOSITIONS AND ACQUISITIONS
The Company sold its metal fabrication segment effective July 31,
1997 (Logic and Precision), accordingly, the financial statements
have been reclassified to reflect this segment as a discontinued
operation. Proceeds from the sale amounted to approximately
$20,850,000 with a corresponding gain of approximately $12,650,000.
Sales, cost of goods sold, selling, general and administrative
expense and other were as follows:
1997 1996 1995
Sales $17,012,935 $15,168,121 $14,105,717
Cost of goods sold 12,645,313 12,815,178 11,774,092
Selling, general and administrative 2,048,470 2,118,827 1,512,980
Other 691,422 661,101 186,128
Discontinued operations $ 1,627,730 $ (426,985) $ 632,517
The Company sold the Test Switch division on October 31, 1995 for
cash of approximately $2,100,000. The gain on the sale was
approximately $580,000 and is included in other income. Effective
April 30, 1995, the Company sold inventory, machinery and equipment
and the business operations of the meter socket division of
Superior. Proceeds amounted to approximately $3,064,000 of which
approximately $1,750,000 was for cash and the balance in a note
receivable of approximately $1,315,000. The note was due in equal
monthly installments over a twenty-four month period commencing
September 1995. Such transaction resulted in a gain of
approximately $463,000 and was included in other income for fiscal
1995. The purchaser has defaulted on the note, as well as other
obligations to buy certain remaining inventories; accordingly, the
entire amount as been fully reserved (see Note 15). On December
30, 1994, the Company sold inventory, machinery and equipment and
the business operations of the heating division of its Canadian
subsidiary, Hydel for cash. Proceeds from the sale amounted to
$1,688,963 which resulted in a gain of approximately $623,000 and
is included in other income.
The following are the sales, cost of goods sold and selling,
general and administrative expenses included in the years ended
July 31,:
1997 1996 1995
Sales:
Test Switch $ - $573,000 $1,906,000
U.S. Meter Socket $ - $ - $5,179,000
Heating $ - $ - $2,262,000
Cost of goods sold:
Test Switch $ - $487,000 $942,000
U.S. Meter Socket $ - $ - $4,241,000
Heating $ - $ - $1,543,000
Selling, general and administrative:
Test Switch $ - $229,000 $296,000
U.S. Meter Socket $ - $ - $589,000
Heating $ - $ - $82,000
The Company acquired for cash of approximately $400,000, Precision
Techniques, Inc., in January 1995, a company which consisted of a
painting facility. Precision currently paints almost exclusively
for Logic and this acquisition has been treated as an acquisition
of assets (Paint Facility) instead of a business combination.
Prior to the acquisition, Logic accounted for a significant part of
the prior business. Logic also uses other third-party facilities
for its painting needs. Logic and precision were sold effective
July 31, 1997 (see above).
37
ELECTRIC & GAS TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2
DISPOSITIONS AND ACQUISITIONS (Continued)
Effective January 31, 1993, the Company discontinued the operations
of its 80% owned subsidiary, American Brass, Inc. (ABI). Prior
periods were reclassified to exclude the Company's former metal
extraction business as a discontinued operation as of July 31,
1993. The Company sold the leasehold interests of ABI, subject to
related debt and 150,000 shares of the Company's treasury stock to
Trans Metals, Inc. (TMI) for 850,000 shares of $5.00 preferred
stock and a $950,000 4% note of TMI. The Company originally valued
the stock and note at $3,923,077 and $842,826, respectively,
resulting in a gain on the sale of the discontinued operation of
$4,265,903. Subsequently in 1993, the Company determined that the
carrying value of its investment in TMI was less than the value
originally recorded and recorded a valuation reserve of $1,000,000.
During fiscal 1994, TMI with the assistance of the Company made
every effort to re-start and/or sell the Alabama operation.
However, it has become probable that little can be salvaged from
this operation. Accordingly, the Company provided in fiscal 1994
an additional reserve against its investment in TMI of $4,000,000.
The Company was unsuccessful in any further sales of any remaining
ABI assets and, accordingly, wrote-off the remaining balance of its
investment in Trans Metals, Inc. of approximately, $391,000 in
fiscal 1996.
3
INVENTORIES
Inventories consisted of the following at July 31,:
1997 1996
Raw materials $2,036,183 $2,225,974
Work-in-process 460,037 620,462
Finished goods 1,703,777 1,607,989
$4,199,997 $4,454,425
4
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consisted of the following at
July 31,:
1997 1996
Land $ 307,993 $ 308,096
Buildings and improvements 2,897,723 2,878,601
Machinery and equipment 4,353,170 4,585,696
Furniture, fixtures & equipment 299,391 268,176
7,858,277 8,040,569
Less accumulated depreciation (4,646,666) (4,406,311)
$3,211,611 $3,634,258
38
ELECTRIC & GAS TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5
OTHER ASSETS
Other assets consisted of the following at July 31,:
1997 1996
Investments and advances (Notes 10 and 13) $ 350,000 $ 1,606,869
Note receivable 231,400 285,000
Investment in equity securities 216,026 216,026
Intangible pension asset 144,203 170,723
Deferred debt issue costs 41,718 260,816
Goodwill, net 120,949 127,633
Patents 174,177 -
Due from (to) affiliates (Note 13) (369,824) (58,561)
Deposits and other assets 3,112 33,454
Land held for resale 19,674 19,674
Deferred tax asset 213,372 -
Research and development equipment - 5,544
$1,144,807 $2,667,178
6
NOTES PAYABLE
Notes payable consisted of the following at July 31,:
1997 1996
Note payable, CIT (a) $ 631,788 $ 814,686
Note payable, bank (b) 450,000 450,000
Note payable, bank (c) 1,046,027 1,776,311
Note payable, bank 136,330 -
$2,264,145 $3,040,997
(a) Part of a $5,000,000 Revolving credit and term facility with
The CIT Group Credit/Finance, Inc. (CIT) due November 1999.
Interest due monthly at 2.75% above prime. The revolving credit
borrowing base is based on eligible accounts receivable and
inventory, as defined (See note 7).
(b) Note payable, bank, consists of a $450,000 promissory note as
of July 31, 1997 and 1996, due November 30, 1997. Interest due
monthly at 10.25%. The note is secured by a $450,000 certificate
of deposit of the Company.
(c) Note payable, bank, consists of a line of credit with a maximum
loan amount of $1,560,000, payable on demand; bearing interest at
the bank's prime rate plus 1.25%; secured by trade receivables and
inventories of Hydel.
(d) Various notes payable due on demand.
40
ELECTRIC & GAS TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6
NOTES PAYABLE (Continued)
Information relating to short-term borrowing is as
follows: 1997 1996
Balance at end of year $2,264,145 $3,040,997
Maximum borrowing $3,000,626 $3,769,605
Average balance $2,602,730 $3,234,653
Average effective interest rate 11.5% 10.8%
Maximum borrowing are the maximum amount of aggregate short-term
borrowing outstanding at any month end during the year.
The average short-term borrowing were computed by dividing the
aggregate borrowing for the year by the number of days the
borrowing were outstanding during the year. The weighted average
rate was computed by dividing the average borrowing into total
interest on short-term borrowing.
7
LONG-TERM OBLIGATIONS
Long-term obligations consist of the following at July 31,:
1997 1996
Term loan payable to The CIT Group Credit/Finance, Inc. (CIT)
under a $5,000,000 credit facility (See note 6), due in monthly
installments of $20,258, plus interest at prime plus 2.75%.
The term portion is secured by machinery and equipment of U.S.
subsidiaries, however, substantially all assets of U.S.
subsidiaries are pledged under the total facility as collateral. $ 767,902 $ 412,275
Mortgage note payable due in monthly payments of principal and
interest at 2.75% above prime from October 10, 1994 over twenty
years. Guaranteed by the Small Business Administration. 961,306 76,676
Note payable to a bank, interest at the effective base lending
rate of the bank plus 1 1/2% (11.75% at July 31, 1996); due in
monthly installments of $3,053 plus interest through June 2000,
collateralized by land and building of the Company. 217,252 256,941
Note payable to a bank, bearing interest at 1 1/4% over the
Canadian prime rate, due in monthly installments of $6,111
principal and interest with final balance due October 31, 1997. - 90,936
Note payable bearing interest at 8% due $73,340 on August 1,
1993, 1994 and 1995 and final installment of $36,670 due
August 1, 1996 plus interest. - 48,423
40
ELECTRIC & GAS TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7
LONG-TERM OBLIGATIONS (Continued)
1997 1996
Note payable to a bank, bearing interest at 8.75%, in monthly
principal installments of $7,300 until March 1998, $8,000 until
March 1999 and $8.750 until August 2002, secured by machinery
and equipment and land and building 510,682 -
Various other installment notes and capitalized lease
obligations. 213,168 343,287
2,670,310 2,128,538
Less current maturities (473,500) (484,605)
$ 2,196,810 $1,643,933
The prime rate was 8.25% and 8.50% at July 31, 1997 and 1996,
respectively.
The aggregate annual principal payments are as follows:
Year Ending
July 31,
1998 $473,500
1999 452,619
2000 459,492
2001 230,148
2002 175,990
Thereafter 878,561
8
ACCRUED LIABILITIES
Accrued liabilities consisted of the following at July 31:
1997 1996
Payroll $1,014,105 $ 324,616
Commissions 24,718 12,758
Pension plan (124,943) (81,590)
Vacation pay 135,893 154,469
Taxes 224,391 72,197
Interest - 2,910
Miscellaneous 151,630 164,840
$1,425,794 $650,200
41
ELECTRIC & GAS TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
9
COMMITMENTS AND CONTINGENCIES
Total rent expense for the years ended July 31, 1997, 1996 and
1995, was $285,272, $276,873 and $527,881, respectively, consisting
primarily of minimum rentals.
Litigation:
The former manufacturers representative of Logic, Ammon & Rizos Co,
has filed a suit against the Company, the Company's chairman of the
board, Logic, and New Logic Design Metals, Inc. ("New Logic")(the
purchaser of the assets) for unpaid fees, assumed by New Logic and
a previous adjustment in prior fees plus prospective fees from New
Logic's sales. The case is in early stages of discovery;
management believes there will be no material effect on the
Company.
Allied Products Co has sued the Company under the Preferred Stock
issued by the Company in connection with its investment in Cooper
Manufacturing Corporation ("Cooper") and the rights pertaining
thereto. The suit was filed in the Eastern District of Illinois
(Chicago) and currently, all activity is directed at jurisdictional
issues. The ultimate resolution of this case will depend in part
upon the outcome of the Cooper bankruptcy case which will shortly
be voting on a Plan of Reorganization. The Company reserved its
investment at July 31, 1997 to $350,000, the anticipated cash
payment under the debtor's Plan. Management does not believe that
this suit will have any further material effect on the Company.
American Brass, Inc. (ABI) discontinued its operation in January
1993 and was involved in several lawsuits arising principally out
of secured and unsecured creditors' claims against ABI. Under most
of these cases the courts have awarded judgements against ABI for
the amounts owed such creditors plus costs. Although ABI has not
declared bankruptcy, there are insufficient assets to satisfy any
of the unsecured creditor claims. The principal secured creditor
currently has a deficiency of approximately $1,500,000; however
there are remaining assets which could be sufficient enough to
satisfy their claims. Superior Technology, Inc. had guaranteed
this secured creditor. Accordingly, if there were insufficient
assets to satisfy this claim, the Company could be liable for this
deficiency. Management does not believe that the Company will
ultimately have any material liability with respect to this
guarantee.
Other:
Reynolds has no insurance against risk of loss that may result from
product liability. Management considers such potential losses as
remote; accordingly, no provision has been made in the consolidated
financial statements for any claims or possible claims that may
arise.
See Note 10 regarding the Company's guarantee of the value of its
Preferred Stock to Allied Products Corporation.
Concentration of Credit Risk:
The Company invests its cash and certificates of deposit primarily
in deposits with major banks. Certain deposits are in excess of
federally insured limits. The Company has not incurred losses
related to its cash.
42
ELECTRIC & GAS TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
9
COMMITMENTS AND CONTINGENCIES (Continued)
The Company sells a broad range of products to the electric and gas
utility industries and the defense industry. Concentrations of
credit risk with respect to trade receivables are limited due to
the large number of customers comprising the Company's customer
base. Ongoing credit evaluations of customers' financial condition
are performed and, generally, no collateral is required. The
Company maintains reserves for potential credit losses and such
losses have not exceeded management's expectations.
Fair value of Financial Instruments:
The estimated fair value amounts have been determined by the
Company, using available market information and appropriate
valuation methodologies. The fair value of financial instruments
classified as current assets or liabilities including cash and cash
equivalents, receivables and accounts payable approximate carrying
value due to the short maturity of the instruments. The fair value
of short-term and long-term debt approximate carrying value based
on their effective interest rates compared to current market rates.
10
STOCKHOLDERS' EQUITY
On December 15, 1995, the Company closed on a Note Purchase
Agreement with Allied Products Corporation ("Allied"), thereby
obtaining Allied's right, title and interest in and to a certain
Promissory Note and all security existing thereunder and
obligations of Cooper Manufacturing Corporation ("Cooper") under
this Note and the Facility Agreement formerly executed by Cooper
and its shareholders in exchange for $100,000 in cash and newly
issued 90,000 shares of Series A, $10.00 par value, 7% Convertible
Preferred stock of the Company. The promissory note was due on
December 31, 1995 and demand for payment was made on Cooper and its
guarantors. The preferred stock is convertible into common stock
of the Company at the ratio of two shares of common stock for each
share of preferred stock. Each holder of record of the shares of
preferred stock is entitled to one vote per share equal to the
voting rights of the common shareholders. The Company has agreed
to make whole any deficiency upon conversion and subsequent sale
after December 31, 1997 of the Company's common stock for less than
$900,000. The Company's common stock is trading at less than $2.00
per share which if sold at that price would require 450,000 shares
to be sold to retire the obligation to Allied. The Preferred
shares are redeemable in cash plus accrued dividends at any time as
the result of an underwriting as defined therein. Cumulative
dividends as of July 31, 1997 amounted to $102,353 with additional
dividends accruing of $15,879 on September 30, 1997.
The individuals whose stock was pledged and who personally
guaranteed the Allied Note, petitioned the court on behalf of
Cooper to file for protection under the U.S. Bankruptcy laws in a
Houston, Texas court. A hearing was held on January 17, 1996 and
reconvened on January 19, 1996 in which the court deferred any
decision pending settlement negotiations between the parties. The
Company believes the filing was improper as those individuals who
petitioned the court as debtors in possession did not have standing
for such petition. Although the outcome of any bankruptcy
proceeding cannot be determined, the Company believes it has the
only secured creditor position and first rights to the assets of
Cooper. Further, the Company and its affiliate believe they will
recover a portion of their investment and advances to Cooper. The
Company had a Letter of Intent to acquire Cooper which has expired
and was determined by the Company not to be pursued. Approximately
$350,000 remains due from Cooper and is included in other assets in
the accompanying balance sheet. The debtor's Plan of
reorganization is about to be voted upon.
43
ELECTRIC & GAS TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
10
STOCKHOLDERS' EQUITY (Continued)
The Company issued on August 3, 1995, 45,000 shares of its $.01 par
value common stock (restricted) valued at $1.25 per share to
certain of its key management personnel and 100,000 shares valued
at $1.25 per share plus $1,500 in cash to an affiliate of the
Chairman of the Board and President as a fee for providing
continuing collateral securing the Company's $450,000 note payable
to a bank. On October 26, 1995, the Company issued 200,000 shares
of its $.01 par value common stock (restricted) valued at $1.00 per
share for cash to the same affiliate. Proceeds were used to repay
a portion of the Bank One Texas note payable.
The Company transferred 55,000 shares of its treasury stock with a
basis of $3.19 per share to key management employees as additional
consideration. The market value of the common stock was $1.35 per
share, accordingly, $74,360 was recorded as an expense and $101,996
reduced additional paid-in capital.
The Company transferred 20,200 shares of its treasury stock with a
basis of $4.00 per share on March 30, 1995 to a shareholder in
settlement of a potential claim. The market value of the Company's
common stock on March 30, 1995 was $3.00 per share, accordingly,
$60,600 was recorded as an expense and $20,200 reduced additional
paid-in capital.
In connection with a financial consulting agreement entered into on
July 28, 1997, the Company has issued warrants to an investment
banking firm to purchase 150,000 and 300,000 shares of the common
stock at $2.00 and $2.30 per share, respectively. The warrants are
protected against dilution and expire July 31, 2001 and September
15, 2001, respectively. The warrants contain piggyback
registration rights and the agreement allows the warrants holders
to request registration of the warrants, if unregistered, between
January 1, 1999 and July 31, 2002. The Company has not recorded
any expense relating to the warrants since the exercise price
exceeded the market price at the date of issuance.
In connection with the Company's financing agreement with The CIT
Group/Credit Finance, Inc. in 1994, the Company issued warrants to
purchase 25,000 shares of common stock of the Company at $4.25 per
share. Such warrants are exercisable in whole or part on or before
November 24, 1998 and have piggy-back rights with respect to any
shares to be registered by the Company.
11
BENEFIT PLANS
Retech sponsors defined benefit pension plans that cover all of its
hourly employees. The plans call for benefits to be paid to
eligible employees at retirement based upon years of service and
compensation rates near retirement. Retech's policy is to fund
pension expenses accrued.
Pension expense for the years ended July 31,:
1997 1996 1995
Service cost $ - $ - $ -
Interest cost 135,845 130,347 127,781
Actual return on assets held for the plan (202,965) (107,462) (83,194)
Net amortization of prior service cost,
transition liability and net gain 115,511 43,540 53,872
Pension expense $ 48,391 $ 66,425 $ 98,459
44
ELECTRIC & GAS TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
11
BENEFIT PLANS (Continued)
The following sets forth the funded status of the plans and the
amounts shown in the accompanying consolidated balance sheets at
July 31,:
1997 1996
Pension benefit obligations
Vested $799,093 $1,684,683
Non-vested 14,143 16,995
Projected benefit obligation 813,236 1,701,678
Fair value of assets held in plan 479,652 1,410,122
Unfunded excess of projected benefit obligation over plan assets $333,584 $ 291,556
Unrecognized net transition obligation $ 48,473 $ 60,592
Unrecognized prior service costs 95,730 110,131
Unrecognized net loss 329,805 214,639
Pension (asset) liability recognized (140,424) (93,806)
Accrued pension liability $333,584 $ 291,556
The Company purchased approximately $1,161,000 in annuities for all
those individuals who were currently receiving retirement benefits
during 1997.
The Company has recognized a minimum pension liability for the
under-funded plans. The minimum liability is equal to the excess
of the projected benefit obligation over plan assets. A
corresponding amount is recognized as either an intangible asset or
reduction of stockholders' equity. The Company recorded additional
liabilities of $474,008 and $385,362, intangible assets of $144,203
and $170,723 and a stockholders' equity reduction of $329,805 and
$214,639 as of July 31, 1997 and 1996, respectively.
Retech will terminate these plans upon funding its pension
liability. The plan assets consist of common equities and
government securities administered by the trust department of
United Bank, Canton, Ohio.
The assumed long-term rate of investment return and the interest
rate for obligations used in determining the actuarial present
value of accumulated plan benefits was 8.25% and 8.5% at July 31,
1997 and 1996, respectively.
The Company has established a defined contribution (401-K) plan
covering substantially all U. S. employees. Charges to operations
for this plan for the years ended July 31, 1997, 1996 and 1995 were
$78,237, $38,588 and $60,524, respectively.
The Company has an Incentive Stock Option Plan. The option price
must be at least 100% of the fair market value of the common stock
at the time options are granted. If the person to whom the option
is granted is more than a 10% shareholder of the Company, the
option price must be at least 110% of the fair market value of the
stock at the time options are granted. No employee may be granted
options in any calendar year greater than a value of $100,000, plus
certain carry-over allowances from the previous years, as defined
in the Plan. Each option becomes exercisable only after two years
continued employment following the date the option is granted. The
Plan provides for 400,000 shares of common stock.
46
ELECTRIC & GAS TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
11
BENEFIT PLANS (Continued)
Following is a summary of options under the plan as of and for the
years ended July 31,:
1997 1996 1995
Options outstanding at beginning of year 394,999 394,999 394,999
Granted 290,000 - -
Terminated (332,999) - -
Exercised - - -
Options outstanding at end of year 352,000 394,999 394,999
Options exercisable at end of year 62,000 333,000 333,000
Exercise price per share $.50 to $2.50 to $2.50 to
$2.75 $4.68 $4.68
The Financial Accounting Standards Board issued SFAS 123, "Accounting
for Stock-Based Compensation ." SFAS 123 defines a
fair value based method of accounting for an employee stock option
or similar equity instrument. Under the fair value based method,
compensation cost is measured at the grant date based on the value
of the award. However, an entity may continue to measure
compensation cost for those plans using the intrinsic value based
method of accounting prescribed by APB Opinion No. 25, "Accounting
for Stock Issued to Employees." Under the intrinsic value based
method, compensation cost is the excess, if any, of the quoted
market price of the stock at the grant date or other measurement
date over the amount an employee must pay to acquire the stock.
The Company has elected to retain the accounting in Opinion 25,
accordingly there were no expenses for the year ended July 31,
1997.
Pro forma disclosure for the fiscal year ended July 31, 1997 are as
follows:
Pro forma net income $9,190,148
Pro forma net income per share $1.09
Pro forma net income attributable to common shareholders $9,227,148
Pro forma net income per share $1.09
The fair value of the award was estimated at the grant date using a
Black-Scholes option pricing model with the following weighted
average assumptions for 1997: risk-free interest rate of 5.64%;
volatility factor of 82%; and an expected life of the award of two
years. The weighted average fair value of stock options for the
year ended July 31, 1997 was $.25.
46
ELECTRIC & GAS TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
12
INCOME TAXES
Following is a reconciliation between reported income taxes
and the amount computed by applying the statutory federal
income tax rates to earnings (loss) from continuing operations
before income taxes for the periods ended July 31,:
1997 1996 1995
Expected provision (benefit) for federal income taxes $3,220,000 $(1,711,000) $270,532
Expected provision for state income taxes 474,000 - -
Canadian income tax (benefit) - - (54,896)
Utilization of tax loss carryforward (3,583,667) (61,000) (270,532)
Unavailable loss carrybacks - 1,772,000 -
Income taxes (benefit) $ 110,333 $ - $(54,896)
The Company files a consolidated tax return with its U.S.
subsidiaries.
Income tax expense (benefit) is reported as follows for the years
ended July 31,:
1997 1996 1995
Income from continuing operations $(213,372) $ - $ -
Gain on sale of discontinued metal fabrication segment 323,705 - -
$110,333 $ - $ -
Income tax expense (benefit) consisted of the following:
Current $323,705 $ - $ 20,449
Deferred (213,372) - (75,345)
$110,333 $ - $(54,896)
Deferred tax expense (credit) and deferred tax liabilities in all
years (all Canadian) result principally from differences in
depreciation for tax and financial statement purposes.
The components of the net deferred tax (assets) liability included
in the balance sheet are as follows at July 31,:
1997 1996
Depreciation - U. S. $ 68,640 $ 283,000
Accrued liabilities and deferred income - (110,200)
Provision for losses (282,012) (886,052)
Operating and capital loss carryforwards - (2,035,900)
Deferred tax asset valuation allowance - 2,749,152
$ (213,372) $ -
47
ELECTRIC & GAS TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
13
RELATED PARTY TRANSACTIONS
The following is a summary of advances from/to affiliated
companies at July 31,:
1997 1996
Refineries Consolidated Technology, Inc. $ - $ 415,000
Cooper Manufacturing Corporation 350,000 1,191,869
Others (369,824) (58,561)
$ (19,824) $1,548,308
The Company for several years has been owed approximately $530,000
due from Comtec, a dormant affiliate. During 1996, it was
determined that $235,000 of this amount was actually paid for the
benefit of the Company and was written-off in 1996 in other
expenses. It has been determined that Comtec does not have the
capability to liquidate the remaining debt and the remaining
receivable was offset against accrued salaries of the officer who
had guaranteed the receivable. The Company has advanced through
the pledging of its certificates of deposit with a bank,
corresponding to direct bank loans and direct advances to
Refineries Consolidated Technology, Inc. ("RCT") and Cooper
Manufacturing Corporation ("Cooper") approximately $1,028,000. The
Company has also acquired a secured note receivable from Cooper in
exchange for 90,000 shares of its $10.00 par value Preferred Stock
to an unaffiliated company who previously owned Cooper. During
1997 the Company has provided a reserve for the entire receivable
from RCT ($723,000) and also provided a reserve of $867,000 against
the Cooper investment. The remaining $350,000 investment in Cooper
represents the amount of cash the Company expects to receive from
Cooper's Plan filed in the bankruptcy court.
During 1994 the Company purchased equipment with a cost of
approximately $47,000 and subsequently sold the equipment to an
affiliated company for $200,000. A gain of approximately $153,000
was included in other income in 1994. During 1997 the Company
repurchased the equipment from the affiliated company for its
original price sold and subsequently sold the equipment to an
unaffiliated company incurring a loss of $180,000.
14
SEGMENT INFORMATION
Industrial Segments
The Company operates principally in five industries: Water, gas,
electric, defense electronics and plastics. Operations in the
water industry involve the production of atmospheric water,
filtration and enhanced water products. Operations in the gas
industry involve the development, manufacture, and sale of gas
meters and measurement equipment. Operations in the electric
industry involve the manufacture and sale of meter sockets and
other electrical equipment. Operations in the defense industry
involve the manufacture and sale of electronic components.
Operations in the plastics industry include the manufacture and
sale of vacuum-form and injection-mold products. The Company's
former segment, metal fabrication has been treated as a
discontinued operation.
Following is a summary of segment information for the years ended
July 31,:
1997 1996 1995
Sales to unaffiliated customers:
Water $ 75,234 $ - $ -
Gas 3,135,249 2,935,326 3,143,711
Electric 7,744,912 7,575,126 16,167,174
Defense electronics 5,799,455 7,013,706 6,577,333
Plastics 1,176,399 1,275,673 1,369,693
$17,931,249 $18,799,831 $27,257,911
49
ELECTRIC & GAS TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
14
SEGMENT INFORMATION (Continued)
1997 1996 1995
Operating income (loss):
Water $ (212,742) $ - $ -
Gas 40,784 (646,568) 75,643
Electric 161,043 324,602 659,788
Defense electronics (1,212,197) (279,348) (95,196)
Plastics (2,242) 48,451 (25,483)
(1,225,354) (552,863) 614,752
General corporate expenses (1,660,527) (898,633) (1,067,409)
Other income (expense), net (2,239,761) (3,154,070) 615,821
Earnings (loss) from continuing operations
before income taxes $(5,125,642) $(4,605,566) $ 163,164
Identifiable assets:
Water $ 954,690 $ - $ -
Gas 1,882,753 2,198,034 2,493,657
Electric 4,828,751 4,648,198 8,596,181
Defense electronics 2,140,005 3,581,838 3,974,844
Plastics 681,089 655,493 788,769
10,487,288 11,083,563 15,853,451
General corporate assets 14,877,315 4,010,527 4,482,643
Total assets $25,364,603 $15,094,090 $20,336,094
Capital expenditures:
Water $ 7,670 $ - $ -
Gas 28,960 63,900 176,724
Electric 66,095 31,931 54,594
Defense electronics 126,491 63,243 250,672
Plastics 28,889 19,614 53,756
General corporate 3,399 2,955 -
$261,504 $181,643 $535,746
Depreciation and amortization:
Water $ 2,131 $ - $ -
Gas 155,346 188,745 162,622
Electric 133,054 150,007 200,693
Defense electronics 263,029 296,767 294,239
Plastics 23,317 21,621 62,568
General corporate 12,291 15,695 15,698
$589,168 $672,835 $735,820
49
ELECTRIC & GAS TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
14
SEGMENT INFORMATION (Continued)
Operating income represents sales less operating expenses for each
segment and excludes income and expenses of a general corporate
nature. Identifiable assets by segment are those assets that are
used in the Company's operations within that industry but exclude
investments in other industry segments. General corporate assets
consist principally of corporate cash, receivables from affiliates
and the corporate headquarters building.
Individual customers who exceeded 10% of consolidated revenues
accounted for $4,839,000, $4,385,000 and $5,490,000 in sales for
the year ended July 31, 1997, 1996 and 1995, respectively.
Geographic information
Financial data by geographic area for the years ended July 31,:
1997
Operating
(loss) Identifiable
Sales Income Assets
United States $10,186,337 $(1,582,783) $ 6,445,677
Canada 7,744,912 357,429 4,041,611
Total $17,931,249 $(1,225,354) $10,487,288
1996
United States $11,797,246 $(918,626) $ 7,131,398
Canada 7,002,585 365,763 3,952,165
Total $18,799,831 $(552,863) $11,083,563
15
FOURTH QUARTER RESULTS
During the fourth quarter of fiscal 1997 and 1996, the Company
recorded the following adjustments which are unusual and non-
recurring in nature: For fiscal 1997; (i) provided a reserve of
$867,000 against the Company's investment in Cooper (See Note 13);
(ii) provided a reserve of $723,000 against the Company's
receivable from RCT (See Note 13); and (iii) provided a reserve of
$457,800 against inventory obsolescence at SMI. For fiscal 1996;
(i) As result of a default by the purchaser of the Retech meter
socket operation, the Company fully reserved all amounts owed from
the purchaser of approximately $1,800,000; (ii) obsolete and slow
moving inventory write-offs in the Gas and Defense segments
amounted to approximately $600,000; (iii) the remaining assets of
Trans Metals investment were written-off totaling approximately
$391,000; (iv) and investment losses of approximately $1,000,000.
50