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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
For the fiscal year ended July 31, 2003
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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 28, 2003, the aggregate market value of the shares of Common Stock
held by non-affiliates of the registrant was approximately $4,606,000. At such
date there were 6,823,934 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 and Logic were 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". Fridcorp Plastics,
Inc. ("Fridcorp") was acquired by the Company in January, 1992, in exchange for
162,000 shares of Company Common Stock. Fridcorp was subsequently sold December
1997. 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, 1995, 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 Water Technology, Inc. (Formerly Atmospheric and Magnetics
Technology, Inc.) ("AWT") on June 10, 1996 under the laws of the State of Texas.
AWT was formed to undertake the Company's venture into the water industry. The
company acquired Logic Metals Technology, Inc. ("LMT") on January 1, 2003 under
the laws of Texas.
The Company presently is the owner of 100% of Reynolds and Hydel, owns
91.5% of AWT, and 80% of LMT and, through such subsidiaries, operates in three
distinct business segments: (1) Water Products - production of atmospheric
water, filtration and enhanced water products; (2) Utilities Products -
manufacture and sale of products for the Utilities sector, consisting of natural
gas measurement, metering and odorization equipment, and electric meter
enclosures and pole-line hardware for the electric utility industry and the
general public, and (3) Contract Manufacturing - sheet metal fabrication for a
diverse customer base, including telecom and networking cabinetry, elevator
controls, and other sheet metal applications. Effective October 1, 1997, the
Company made a decision to sell its defense electronics business segment and the
business has been treated as a discontinued operation. Effective July 31, 1997,
the Company sold and 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 75244-4410. Its telephone number is (972) 934-8797 and its
facsimile number is (972) 991-3265.
The public may read and copy any materials the Company files with the SEC at the
SEC's Public Reference Room at 450 Fifth Street, N.W., Washington, D.C. 20549.
The public may obtain information on the operation of the Public Reference Room
by calling the SEC at 1-800-SEC-0330.
The SEC maintains an internet site that contains reports, proxy and information
statements, and other information regarding issuers that file electronically
with the SEC. The address on the World Wide Web is http://www.sec.gov.
Information about the company is available at http://www.elgt-amti.com and
http://www.reynoldsequipment.com.
2
Item 1. Business (continued)
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 31,2003 July 31,2002 July 31,2001
------------ ------------ ------------
Revenue
- -------
Water $ 474,432 $ 18,685 $ 152,441
Utilities 10,954,972 9,674,491 11,108,734
Fabrication 2,210,335 -- --
------------ ------------ ------------
Total $ 13,639,739 $ 9,693,176 $ 11,261,175
============ ============ ============
Operating Income
- ----------------
(Loss):
- -------
Water $ 32,799 $ (213,455) $ (70,300)
Utilities 534,455 309,371 387,564
Fabrication (280,787) -- --
------------ ------------ ------------
Total $ 286,467 $ 95,916 $ 317,264
============ ============ ============
Identifiable Assets:
- --------------------
Water $ 47,913 $ 6,493 $ 68,714
Utilities 6,071,286 5,489,527 6,096,945
Fabrication 2,089,654 -- --
Corporate 2,138,711 2,913,179 4,364,535
------------ ------------ ------------
Total $ 10,347,564 $ 8,409,199 $ 10,530,194
============ ============ ============
Geographic information
- ----------------------
Financial data by geographic area for the fiscal year ended July 31, 2003
are as follows:
Operating Identifiable
Sales (loss)Income Assets
------------ ------------ ------------
United States $ 5,298,001 $ (116,568) $ 6,193,209
Canada 8,341,738 403,035 4,154,355
------------ ------------ ------------
Total $ 13,639,739 $ 286,467 $ 10,347,564
============ ============ ============
3
Item 1. Business (continued)
Water (AWT)
History
-------
Atmospheric Water Technology, Inc. (Formerly Atmospheric & Magnetics
Technology, Inc.) (AWT) was incorporated June 10, 1996 under the laws of the
State of Texas. AWT was created by the Company to exploit the opportunities in
the Water Industry.
Products
--------
AWT 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."
Industry, Customers and Competition
-----------------------------------
Industry. AWT operates in an industry that supplies potable drinking water
equipment to all segments of government, military, commercial, industrial and
consumer markets. This equipment is used to extract water from the atmosphere,
and includes proprietary filtration, assuring water with total dissolved solid
level (TDS) of less than 28, compared to 300+ for current technology
desalination. AWT estimates that the industry develops sales of several billion
dollars. According to the United Nations, and specifically, UNICEF and the World
Health Organization, the world supply of potable drinking water continues to
become more scarce as the growth in the world's population increases, causing a
higher level of attention to alternative sources of water for human consumption.
Customers. AWT's potential customers will include government (embassies,
emergency operations, municipalities, etc.), military sales (command posts,
field support, naval vessels, etc.), commercial sales (Hotels, Professionals,
Schools, Clinics, etc.), medical applications (drug manufacture, surgical
instrument cleaning), industrial sales (Mining, Offshore Oil Drilling,
Manufacturing, etc.) and consumer's sales (Health Food Stores, Health Clubs,
General Food Channels, etc.) domestically and internationally.
Competition. AWT's atmospheric technology competes with well water, surface
sources, and desalination processes.
Marketing
---------
The current emphasis is on identification of channels of distribution for
the "Watermaker" product. This includes identifying representatives,
distributors and distributed manufacturing to support a worldwide marketing
strategy. AWT is also addressing funding sources for the purchase of
"Watermaker" products for humanitarian purposes.
4
Item 1. Business (continued)
Employees
---------
As of July 31, 2003 this segment had 2 employees and is being supported by
Net Breeze, Inc. (a sales and marketing consulting firm) in the development of a
worldwide marketing strategy. Administrative services have been provided by the
Company.
Utilities Segment - Reynolds Equipment Company and Hydel Enterprises, Ltd.
(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 Retech in exchange for common stock of the Company and
later transferred direct ownership to the Company. Reynolds maintains its
principal offices at 410 South 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 has completed Beta testing of an electronic digital data recorder,
which is initially anticipated to replace the mechanical instrumentation.
Initial market announcements have been favorably received. 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, as required by Federal Laws.
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
annual 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, with a blue chip utility customer base.
Products are primarily marketed through in-house sales, with minor remoter
customers serviced by commissioned manufacturers representatives, resale
distributors and contract engineering firms.
5
Item 1. Business (continued)
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., Equimeter
Incorporated, YZ Industries and others.
Employees
---------
Reynolds employs approximately 26 persons, including 1 company officer and
2 administrative clerical personnel. A labor union or other labor association
represents none of the employees, and relations with its employees are
considered excellent. Reynolds has never experienced nor anticipates a strike or
other work stoppage.
(Hydel)
History
-------
Hydel. Hydel Enterprises, Ltd (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. 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.
Products
--------
Hydel. Hydel operates two industrial facilities, one located within
metropolitan Toronto, Ontario and the other in Welland, Ontario. The Welland
facility primarily manufactures the pole line hardware and subcontracts
manufacturing and assembly for a local company. The Scarborough plant
manufactures a full line of proprietary metal cabinets and other metal
enclosures, electric meter sockets and industrial safety switches. Hydel's
products are approved by the Canadian Standards Association which is the
Canadian equivalent of U. L.
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.
6
Item 1. Business (continued)
Customers-Hydel. Hydel sells its electric utility supply products to
utilities and others in Canada.
Competition-Hydel. Hydel faces 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 Slater/Tridem, Joslyn and A.B. Chance.
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.
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.
Employees
Hydel. Hydel currently employs 56 persons, including 15 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.
Fabrication Segment - Logic Metals Technology, Inc.
(Logic Metals Technology, Inc.) (LMT)
History
-------
LMT. LMT was incorporated in 2002 under the laws of the State of Texas and
assumed the assets and certain liabilities of Garland Manufacturing, Inc. of
Garland, Texas. The company acquired an 80% interest in LMT from an affiliate on
January 1, 2003. Ken Wilemon, President of LMT, owns the remaining 20%. LMT has
operated as a fabrication contractor in the punching, forming and assembly of
products from sheets of steel, aluminum and copper requiring a high degree of
accuracy. LMT operates primarily in the United States markets. LMT maintains its
executive office at 3233 Kingsley Road, Garland, Texas 75042.
7
Item 1. Business (continued)
Products
--------
LMT. LMT operates within one industrial facility, located in Garland,
Texas. The Garland facility primarily manufactures electronic enclosures and
custom panels, to the customers' specifications.
Industry, Customers and Competition
-----------------------------------
Industry-LMT. LMT primarily operates within the electronics industry. LMT
competes primarily within the Dallas-Fort Worth, Texas metropolitan area
markets.
Customers-LMT. LMT's major customers are international telecom/electronics
companies with manufacturing and assembly operations in the Dallas-Fort Worth,
Texas metropolitan area, and international electronic assembly companies,
servicing the telecom/electronics companies.
Competition-LMT. LMT competes with other local sheet metal fabrication
businesses for low volume, high quality production work. The major competitors
are Precision Metal, Flextronics and Karlee Manufacturing.
Marketing
---------
LMT. LMT employs 2 sales persons to identify and approach new customers,
while providing ongoing support to existing customers.
Employees
---------
LMT. LMT currently employs 31 persons, including 8 in administrative and
sales positions. None of the employees are represented by a labor union or other
labor organization. LMT enjoys good relations with its employees and has never
experienced a strike or work stoppage. The jobs encompassed in LMT's
manufacturing operations require about 50% skilled and 50% unskilled workers.
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 and is fully adequate to
serve its needs.
Hydel leases one industrial building in metropolitan Toronto, Ontario. The
Scarborough facility is leased until March 2007 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.
8
Item 1. Business (continued)
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.
LMT and AWT operate in a leased facility located on 5 acres of land in
Garland, Texas. The plant is a one story concrete building containing
approximately 144,000 square feet of air-conditioned floor space, which includes
approximately 12,000 feet of office space. The building is owned by an
affiliate, and the company expects to purchase the building in 2004.
Item 3. Legal Proceedings.
Unites States of America, Plaintiff Vs Commercial Technology, Inc., et.al.,
Defendant in the United States District Court, Northern District of Texas. Case
number 3-99-CV-2668-X. Plaintiff brought an action to collect on a defective
judgment to force the sale of an office building, which was acquired from the
defendant by ELGT in 1987. The court has ruled that the transaction the
Government relied upon to enforce the judgment was not a debt and was therefore
not entitled to relief under the Act; and that they are not entitled to a
judicial sale of the property. The Government's only further action was under
the Texas Fraudulent Conveyance. A jury trial was held between March 26 and
April 6, 2002. The court granted a motion as to the Company and dismissed all
claims. However, a unanimous verdict was returned in favor of the Plaintiff on
April 6, 2002 finding that Commercial Technology, Inc. ("Comtec") transferred a
piece of real property to the Company in violation of the Texas Uniform
Fraudulent Transfer Act ("Act"). Commercial Technology, Inc. and the Company
filed on April 27, 2002 a renewed motion for judgment as a matter of law, or,
alternatively, for a new trial. Such motion will show that the real property is
not an asset under the Act, the Company's Hypothecation Agreement operates as a
deed and therefore the Company acquired equitable title and/or is entitled to
subrogation. The Company's appeal was pending Comtec's filing of a Chapter 11
bankruptcy proceeding on July 3, 2002. Such proceeding has been dismissed. The
Company's appeal to the United States Court of Appeals for the Fifth Circuit is
presently in progress. In order to go forward with the appeal, the court
required the Company to obtain a performance bond in the amount of approximately
$500,000. CIT Group Credit Finance, Inc. ("CIT") held what bankruptcy counsel
believes is a secured lien on the building as a result of their loans to the
Company. An affiliate of the Company acquired CIT's secured lien on the
building. The Company will vigorously defend its position. The Company believes
the ultimate outcome of the above matter will not have a material effect on the
Company's financial position.
Electric & Gas Technology, Inc., Retech, Inc. and Hydel Enterprises, Inc.
(Plaintiff) Vs Nathan Mazurek, American Circuit Breaker Corp. and Provident
Group, Inc. (Defendants)- Civil Action N. 3:01-CV-2756-G. Plaintiff filed suit
in the 160th District Court in Dallas, County. The Case has been removed to
United States District Court for the Northern District of Texas, Dallas
Division. Plaintiff alleges the non-payment of a note to Retech, Inc. of
approximately $1,150,000, unpaid accounts receivable to Hydel Enterprises, Inc.
9
of approximately $975,000 (Canadian Dollars), plus added sums in penalties,
damages and attorneys fees. The court dismissed Nathan Mazurek on jurisdictional
grounds and granted Plaintiff's motion to stay pending litigation in Delaware
involving the related parties over the same issues.
Electric & Gas Technology, Inc. and Terry Lebleu (Plaintiffs) Vs Liquid
Air, Inc. (Defendant) - Civil Action. On November 3, 2003, plaintiff filed suit
for infringement of intellectual property, regarding the patents owned by the
company relating to the WaterMaker (TM) product. This suit was filed after the
end of the fiscal year.
Item 4. Submission of Matters to a Vote of Security Holders.
(a) Annual meeting of stockholders, February 14, 2003.
(b) Not applicable.
(c) Not applicable.
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
Bulletin Board 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 sales prices, by quarters,
since August 1, 2001 (Retroactively restated for a 3 for 4 reverse stock split
effective June 13, 2002), 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, 2003: High Low
---- ---
First Quarter 1.010 .200
Second Quarter 1.010 .470
Third Quarter 1.150 .250
Fourth Quarter 1.500 .740
Fiscal year ended July 31, 2002: High Low
---- ---
First Quarter .850 .180
Second Quarter .330 .180
Third Quarter .350 .190
Fourth Quarter .260 .150
The Company has paid no dividend on the Common Stock and payment of
dividends in the foreseeable future is not anticipated.
As of July 31, 2003 there were 446 holders of record of the Common Stock of
the Company, exclusive of beneficial ownership through brokerage firm nominee
name.
10
Item 6. Selected Financial Data.
STATEMENT OF OPERATIONS DATA:
(In dollars, except shares outstanding)
Fiscal Years Ended July 31,
2003 2002 2001 2000 1999
---- ---- ---- ---- ----
Revenues $ 13,639,739 $ 9,693,176 $ 11,261,175 $ 11,276,204 $ 11,316,334
Gross Profit 3,331,567 2,443,310 2,832,574 2,458,026 1,935,750
Selling, G&A Expense 3,839,402 3,415,551 3,594,440 3,344,336 3,826,446
Other Income (Expense) (657,260) (1,518,073) (1,274,280) 894,624 (2,968,994)
Earnings (Loss) from
Continuing Operations (1,230,224) (2,498,699) (2,124,676) 166,262 (4,803,436)
Net Earnings (Loss) (1,230,224) (2,498,699) (2,124,676) 166,262 (6,353,436)
Net Earnings (Loss)
per Share* (0.19) (0.40) (0.34) 0.03 (1.04)
Weighted Average
Number of Shares
Outstanding* 6,632,267 6,223,767 6,215,184 6,285,689 6,111,324
* Retroactively restated for a 3 for 4 reverse stock split effective June 13,
2001.
BALANCE SHEET DATA:
As of July 31,
2003 2002 2001 2000 1999
---- ---- ---- ---- ----
Total assets $10,347,564 $8,409,199 $10,530,194 $12,841,116 $13,472,290
Long-term obligations 3,254,095 2,466,611 1,576,245 833,500 1,210,254
Shareholders' equity 2,508,883 3,434,086 6,457,016 9,189,685 8,771,594
11
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Critical Accounting Policies
----------------------------
Management's discussion and analysis of its financial condition and results of
operations are based upon the Company's consolidated financial statements, which
have been prepared in accordance with accounting principles generally accepted
in the United States. The preparation of these financial statements requires the
Company to make estimates and judgments that affect the reported amounts of
assets, liabilities, revenues, and expenses, and related disclosures of
contingent assets and liabilities. On an on-going basis, the Company evaluates
its estimates, including those related to revenue recognition, accounts
receivable and allowance for doubtful accounts, deferred tax assets, property
and equipment, investments, accrued expenses, contingencies and litigation. The
Company bases its estimates on historical experience and on various other
assumptions that are believed to be reasonable under the circumstances, the
results of which form the basis for making judgments about the carrying values
of assets and liabilities that are not readily apparent from these sources.
Actual results may differ from these estimates under different assumptions or
conditions. We have identified the policies below as critical to the Company's
business operations and the understanding of the Company's results of
operations. For a detailed discussion on the application of these and other
accounting policies, see Note 2 in the notes to Consolidated Financial
Statements.
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.
Accounts Receivable
The Company performs periodic credit evaluations of its customers'
financial condition and extends credit to virtually all of its customers without
collateralization. Credit losses to date have been insignificant and within
management's expectations. As of July 31, 2003, management has recorded no
allowance for bad debts. As of July 31, 2002, management had recorded an
allowance for bad debts of $20,094. In the event of complete non-performance by
the Company's customers, the maximum exposure to the Company is the outstanding
accounts receivable balance at the date of non-performance.
Inventories
Inventories, consisting 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.
12
Revenue and Expense Recognition
The Company recognizes revenue when title passes to its customers upon
shipment of its products for final delivery. Expenses are recognized in the
period in which incurred.
Impairment of Long-Lived Assets
The Company periodically evaluates the net realizable value of long-lived
assets, including property, equipment and investments, relying on a number of
factors, including operating results, business plans, economic projections and
anticipated future cash flows. Impairment is assessed by evaluating the
estimated undiscounted cash flows over the asset's remaining life. If estimated
cash flows are insufficient to recover the investment, an impairment loss is
recognized.
Background
----------
The Company, through its subsidiaries, operates within three 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; and (iii) the manufacture and sale of
metal enclosures and other electrical equipment for use in the electric utility
industry.
Results of Operations
The discussion below relates to the Company's operations during the fiscal
years ended July 31, 2003, 2002 and 2001.
Summary. The Company reported net losses of $(1,230224), $(2,498,699) and
$(2,124,676) for fiscal years 2003, 2002 and 2001, respectively. During fiscal
2003, the company reduced its operating loss by $464,406 through improved sales
in the utility group, and significant sales in the Water group, while Selling,
General and Administrative expenses increased as a result of acquisition of LMT.
In 2002, the net losses were primarily the result of losses in evaluating the
decline in value of investments of $(1,370,700); and research and development
costs in the Water segment of approximately $(213,000).
13
For the years ended July 31,
2003 2002
---- ----
Increase Percent Increase Percent
(Decrease) Change (Decrease) Change
Operating revenues $ 3,946,563 40.71% $(1,567,999) (13.93)
Operating income (loss) 464,406 47.77% (210,375) (27.62)
Earnings (loss)
before income taxes 1,325,219 53.21% (454,168) (22.31)
Net Earnings (loss) Per Share 0.21 52.50% (0.06) (17.65)
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,
2003 2002
---- ----
Increase Increase
(Decrease) Percent (Decrease) Percent
Operating revenues:
Water $ 455,747 2,439.11% $ (133,756) (87.75%)
Utilities 1,280,481 13.24% (1,434,243) 12.91%
Fabrication 2,210,334 -- -- --
----------- ----------- ----------- -----------
Total operating revenues $ 3,946,562 40.71% $(1,567,999) 13.93%)
=========== =========== =========== ===========
Operating income (loss):
Water $ 246,254 15.37% $ (143,155) (203.64%)
Utilities 225,084 76.65% (78,193) (20.18%
Fabrication (280,787) -- -- --
----------- ----------- ----------- -----------
Total operating (loss) 190,551 302.92% (221,348) (69.77%)
----------- =========== ----------- ===========
General corporate 273,855 10,973
Other (expense) 860,813 (243,793)
----------- -----------
Earnings from continuing
operations before income taxes $ 1,325,219 $ (454,168)
=========== ===========
14
Water revenues amounted to $474,432, $18,685, and $152,441 in 2003, 2002
and 2001, respectively. Sales in 2003 were primarily the first units to Lockheed
Martin per a contract signed in November of 2002, and initial units for
distributors in UAE, India and Sri Lanka. Sales in previous years were sales of
demonstrators of this segment's "Watermaker" product. Expenses were $441,633,
$232,140, and $222,741 in 2003, 2002 and 2001, respectively, included
development of a business plan, testing and development of a new watermaker
model and marketing expenses. AWT has recently signed exclusive sales, marketing
and manufacturing agreements with strategic partners in India, UAE and Sri
Lanka, in addition to the 3-year agreement signed last year with Lockheed
Martin. The effects of such agreements are expected to continue to positively
impact 2004.
Utilities revenues increased (decreased) by $1,280,481, $(1,434,243), and
$(163,229) in fiscal 2003, 2002 and 2001, respectively, while operating income
was $534,455, $309,371 and $387,564 for fiscal 2003, 2002 and 2001,
respectively. Despite lower revenue in 2002 and 2001, the company was able to
maintain gross profit margins and trim support costs, maintaining positive
operating profit. This is achieved by closely monitoring staffing levels and
restricting increased salary changes.
Gross profit margins were 24.43%, 25.21% and 25.16% for fiscal 2003, 2002
and 2001, with selling, general and administrative expenses as a percentage of
sales for the same period of 28.15%, 35.24% and 31.92% for fiscal 2003, 2002 and
2001, respectively, allowing the operating profit as a percent of sales to grow
from 3.49% to 4.88% from 2001 to 2003.
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 75.58%, 74.79% and 74.85% for the
years ended July 31, 2003, 2002 and 2001, respectively as a result of mix change
in revenue. Selling, general and administrative expenses as a percentage of
revenues were 28.15%, 35.24% and 31.92% for the years ended July 31, 2003, 2002
and 2001, respectively.
Liquidity and Capital Resources
Liquidity. Cash flow used by operating activities amounted to $(400,174),
$(297,888) and $(138,793) for fiscal years 2003, 2002 and 2001, respectively.
Operating cash flow has been supplemented by cash made available from the
proceeds on the sale of the various segments and operating divisions.
Current assets of the Company totaled $5,059,129 at July 31, 2003, an
increase of $1,184,029, or 30.55% of the balance at July 31, 2002. Current
liabilities increased from fiscal 2002 to fiscal 2003 by $2,076,136, resulting
in a decrease in working capital (current assets less current liabilities) to
$474,543 at July 31, 2003, from $1,426,009, a decrease of (66.72%). This
decrease is primarily attributable to the acquisition of Logic Metals and the
result of utilization of cash and short-term investments in operations. The
Company believes it has sufficient cash to meet its working capital requirements
and debt obligations.
15
To accelerate the strategic goals to continue to grow the revenue and
improve profitability, the Company is actively seeking a private placement of
its public equity. Investment candidates include accredited high net worth
individual investors and private investment pools. The Company has, as of
October 31, 2003 engaged the corporate finance department of a major placement
agent for an initial four-month non-exclusive term. The Company is offering
whatever form of investment instrument is attractive to potential investors
including but not limited to restricted and free tradable common stock,
preferred stock or other convertible security.
Management believes that it can attract investment capital of between
$500,000 and $2,000,000 based on the Company's business strategy. The amount of
equity the Company will offer will depend in part on share/conversion price,
discount or premium on current market share price and dilution prospects. In
addition, the company has available resources, including the sale of treasury
stock, sale of marketable securities and imminent release of collateral to
generate an additional $500,000.
There can be no assurances that the Company will be successful in raising
the additional working capital through the placement of equity instruments.
Failure to obtain additional equity funding will slow the growth of the Company.
Capital Resources. Hydel has a working capital line-of-credit with a
Canadian bank in the amount of $1,400,000. The Canadian credit facility is
secured by receivables and inventories of Hydel. Reynolds has a working capital
line-of-credit of $400,000 with a major U.S. bank, secured by receivables and
inventory. Logic Metals has a working capital line-of-credit of $450,000 with a
major U.S. bank, secured by receivables and inventory.
Capital Expenditures
The Company purchased equipment consisting of normal asset acquisitions and
replacements totaling $836,700, $184,970 and $576,807 during fiscal 2003, 2002
and 2001, respectively. Software developed by Reynolds Equipment for resale in
the utility market passed Beta test and was capitalized for expenses incurred
subsequent to proof of technological feasibility, in accordance with Statement
of Financial Accounting Standards ("SFAS") No. 86, Par 5. A Finn-Power turret
press for its fabrication segment for approximately $400,000 was purchased in
fiscal 2003 and additional costs of placing purchased equipment in service of
$197,000. The Company anticipates significant capital expenditures for the
furtherance of capability for the newly acquired Logic Metals, including a laser
cutting machine, powder coating capability and additional punch capacity.
Otherwise, expenditures should be 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.
16
Other Business Matters
Accounting for Post-Retirement Benefits. The Company provides no
post-retirement benefits for current employees; therefore, FASB No. 106 will
have no impact on the Company's financial position or result of operations. The
pension benefits reflected in the financial statements of the Company are in
regard to employees of a discontinued operation.
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.
Information regarding and factors affecting forward looking statements.
Forward-looking statements include statements concerning plans, objectives,
goals, strategies, future events or performances and underlying assumption and
other statements which are other than statements of historical facts. Certain
statements contained herein are forward-looking statements and, accordingly,
involve risks and uncertainties which could cause actual results or outcomes to
differ materially from those expressed in the forward-looking statements. The
Company's expectations, beliefs and projections are expressed in good faith and
are believed by the Company to have a reasonable basis, including without
limitations, management's examination of historical operating trends, data
contained in the Company's records and other data available from third parties,
but there can be no assurance that management's expectations, beliefs or
projections will result, or be achieved, or accomplished.
Item 8. Financial Statements and Supplementary Data.
Information required by this item appears in the Consolidated Financial
Statements and Report of Independent Certified Public Accountants of Electric &
Gas Technology, Inc. and Subsidiaries for July 31, 2003, 2002, and 2001 as
listed under Item 14.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
On July 16, 2003, Electric & Gas Technology, Inc. (the "Registrant" or the
"Company") dismissed Whitley Penn (formerly "Jackson & Rhodes PC) as its
certifying accountants. The Registrant's Audit Committee has approved this
action.
The audit reports of Whitley Penn on the Registrant's financial statements
for the years ended July 31, 2002 and 2001 did not contain any adverse opinion
or disclaimer of opinion and were not qualified or modified as to uncertainty,
audit scope or accounting principles.
17
During the Registrant's two most recent fiscal years and through July 16,
2003, there were no disagreements with Whitley Penn on any matter of accounting
principles or practices, financial statement disclosure or auditing scope or
procedure, which disagreements, if not resolved to the satisfaction of Whitley
Penn, would have caused Whitley Penn to make reference thereto in connection
with its reports on the financial statements for such years.
During the two most recent fiscal years and through July 16, 2003, there
have been no reportable events (as defined in Regulation S-K Item 304(a)(1)(v)).
The Registrant delivered a copy of this Form 8-K report to Whitley Penn on
July 16, 2003. Concurrently therewith, the Registrant requested that Whitley
Penn furnish it with a letter addressed to the Securities and Exchange
Commission (the "SEC") stating whether Whitley Penn agrees with the above
statements and, if not, stating the respects in which Whitley Penn does not
agree.
On July 16, 2003, the Registrant engaged Lightfoot Guest Moore & Co., PC
("LGM") as its new independent accountant. The Registrant's Audit Committee has
approved this action.
During the Registrant's two most recent fiscal years and through July 16,
2003, the Registrant did not consult with LGM regarding either (1) the
application of accounting principles to a specified transaction, either
completed or proposed; or the type of audit opinion that might be rendered on
the Registrant's financial statements, and neither a written report was provided
to the Registrant or oral advice was provided that LGM concluded was an
important factor considered by the Registrant in reaching a decision as to the
accounting, auditing, or financial reporting issue; or (2) any matter that was
either the subject of a disagreement, as defined in Item 304(a)(1)(iv)of
Regulation S-K, or a reportable event pursuant to Item 304(a)(1)(v) of
Regulation S-K.
18
PART III
Item 10. Directors and Executive Officers of Registrant
(a) During fiscal year ended July 31, 2003, the following persons served as
directors of Registrant:
Shares
Director Beneficially (%) of
Name and Age Position Since Owned Outstanding
S. Mort Zimmerman (76) Chairman of the Board, 1985 928,825 13.37%
and Director
Daniel A. Zimmerman (42) President 1989 294,286 4.24%
and Director
George M. Johnston (58) Vice President, Chief 2002 -- --
Financial Officer and Director
Fred M. Updegraff (69) Vice President, 1987 79,683 1.15%
Treasurer and Director
James J. Ling (80) 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
19
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. He received his Liberal
Arts Degree from Austin College in Sherman, Texas in May, 1982.
George M. Johnston, CPA: Mr. Johnston has served as Vice President and
Chief Financial Officer of the Company since May 1, 2002. He was elected a
member of the Board of Directors May 2002. From January 1995 to May 2002, Mr.
Johnston was an individual practicing public accountant in San Angelo, Texas.
From October 1989 to January 1995, Mr. Johnston was Controller and CFO for a
privately held mail sorting equipment manufacturer in Dallas, Texas. Other
experience includes Controller of Canmax corporation, a public company engaged
in the design of convenience store software, various controller positions for
and Mostek Corporation and, CFO of Hamilton Standard Digital Systems,
subsidiaries of United Technologies. Mr. Johnston earned a B.B.A. degree in
Accounting from Texas Tech University, Lubbock, Texas, and has completed 24 of
32 hours toward an M.S. in Accounting at University of North Texas.
20
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.
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.
21
Item 11. Executive Compensation
Summary Compensation Table
Long Term Compensation
----------------------
Annual Compensation Awards Payouts
------------------- ------ -------
Other Restricted Number of Shares Long Term
Name or principal Annual Stock Covered By Incentive Plan All Other
position Year Salary Bonus Compensation Awards Option Grant Payout Compensation
- ------------------- ---- ----------- ------- ------------ ------ ------------ ------ ------------
S. Mort Zimmerman 2003 $193,760(a) $ -- $ -- -- -- -- $ 5,100 (b)
Daniel A Zimmerman 2003 $120,000 $ -- $ -- -- -- -- $ 9,112 (c)
S. Mort Zimmerman 2002 $193,760(a) $ -- $ -- -- -- -- $ 5,100 (b)
Daniel A Zimmerman 2002 $132,593 $ -- $ -- -- -- -- $ 9,112 (c)
S. Mort Zimmerman 2001 $237,400(a) $ -- $ -- -- 3,155 -- $ 5,100 (b)
Daniel A. Zimmerman 2001 $146,134 $ -- $ -- -- 18,750 -- $15,138 (c)
Edmund W. Bailey 2001 $120,000 $ -- $ -- -- 22,500 -- $ 1,200 (d)
S. Mort Zimmerman-Chairman of the Board.
Daniel A. Zimmerman-President.
George M. Johnston-Vice President and Chief Financial Officer.
(a) A portion of the payments were made to an affiliate, Interfederal Capital,
Inc., as a management fee and includes accrued and unpaid compensation of
$75,000 for fiscal year 2003, 2002 and 2001, respectively.
(b) Expense allowances.
(c) Company match of 401 (K) employee contributions and expense allowances.
(d) Company match of 401 (K) employee contributions.
22
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%) percent of its Common Stock at July 31, 2003.
Amount and Nature of Percent of
Name and Address Beneficial Owner Class
- ---------------- ---------------- -----
S. Mort Zimmerman 928,825 (1) 13.37%
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, 2003:
Amount and Nature of Percent of
Name of Beneficial Owner Beneficial Ownership Class
- ------------------------ -------------------- -----
S. Mort Zimmerman 928,825 (1) 13.37%
Chairman of the Board
and President
Daniel A. Zimmerman 294,286 (2) 4.24%
Sr. Vice President
and Director
Fred M. Updegraff 79,683 1.15%
Vice President Treasurer
and Director
All Officers and Directors,
as a Group 1,330,357 19.15%
(1) Includes (i) 111,351 shares of the 1,113,507 shares owned beneficially
and of record by Trans-Exchange Corporation, in which S. Mort
Zimmerman has a 10% beneficial interest; and (ii) 23,572 shares owned
by Glauber Management Company, a firm 42% owned by S. Mort Zimmerman
and in which he effectively controls the voting of the company's stock
owned by such firm. S. Mort Zimmerman disclaims any beneficial
interest in the shares owned by his wife's estate and their adult
children.
(2) S. Mort Zimmerman and Daniel A. Zimmerman are father and son.
23
Item 13. Certain Relationships and Related Transactions
THE FOLLOWING IS A SUMMARY OF ADVANCES TO AND FROM AFFILIATED COMPANIES AT
JULY 31, 2003:
2003 2002
--------- ---------
Interfederal Capital, Inc. $ 328,673 $ 213,776
IFC Industries 14,774 78,206
M&M Trans Exchange 375,118 304,330
Comtec, Inc. 62,389 --
Glauber Management (60,600) (75,000)
Petroleum Dynamic (4,222) 463
Officers (289,949) (214,949)
--------- ---------
$426,183 $327,941
========= ========
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 at July 31, 2003 and July 31, 2002.
(iii)Consolidated Statements of Operations for the three years ended
July 31, 2003, 2002 and 2001.
(iv) Consolidated Statements of Changes in Stockholders' Equity for
the three years ended July 31, 2003, 2002 and 2001.
(v) Consolidated Statements of Cash Flows for the three years ended
July 31, 2003, 2002 and 2001.
(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 Registrant (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.
24
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.
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. (filed as exhibit 10.34 to Form 10-Q.
filed December 6, 1995 and incorporated herein by reference).
25
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. (filed as exhibit 10.37
to Form 8-K, filed August 27, 1997 and incorporated herein by
reference).
(b) Reports on form 8-K
Current report-Form 8-K filed July 22, 2003: Item 4. Change in
Registrant's Certifying Accountant.
26
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/ George M. Johnston
----------------------
George M. Johnston, 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 November 12, 2003
- ---------------------
S. Mort Zimmerman
/s/ Daniel A. Zimmerman Senior Vice President November 12, 2003
- ----------------------- and Director
Daniel A. Zimmerman
/s/ George M. Johnston Vice President, November 12, 2003
- ---------------------- Chief Financial Officer And Director
George M. Johnston
/s/ Fred M. Updegraff Vice President, Treasurer November 12, 2003
- --------------------- and Director
Fred M. Updegraff
/s/ James J. Ling Director November 12, 2003
- -----------------
James J. Ling
27
ELECTRIC & GAS TECHNOLOGY, INC.
AND SUBSIDIARIES
JULY 31, 2003 AND 2002
Page
----
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS 31-32
CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS 33-34
CONSOLIDATED STATEMENTS OF OPERATIONS 35
CONSOLIDATED STATEMENTS OF CHANGES IN
STOCKHOLDERS' EQUITY 36-37
CONSOLIDATED STATEMENTS OF CASH FLOWS 38-39
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 40-63
31
Report of Independent Certified Public Accountants
Board of Directors and Stockholders
Electric & Gas Technology, Inc. and Subsidiaries
We have audited the accompanying consolidated balance sheet of Electric &
Gas Technology, Inc. and Subsidiaries as of July 31, 2003, and the related
consolidated statements of operations, changes in stockholders' equity and cash
flows for the year then ended. 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 audit.
We conducted our audit in accordance with auditing standards generally
accepted in the United States of America. 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 audit provides 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, 2003, and the consolidated
results of their operations and their cash flows for the year then ended in
conformity with accounting principles generally accepted in the United States of
America.
LightfootGuestMoore P.C.
Dallas, Texas
November 12, 2003
32
Report of Independent Certified Public Accountants
Board of Directors and Stockholders
Electric & Gas Technology, Inc. and Subsidiaries
We have audited the accompanying consolidated balance sheet of Electric &
Gas Technology, Inc. and Subsidiaries as of July 31, 2002, and the related
consolidated statements of operations, changes in stockholders' equity and cash
flows for each of the two years in the period ended July 31, 2002. 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 auditing standards generally
accepted in the United States of America. 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, 2002, and the consolidated
results of their operations and their cash flows for each of the two years in
the period ended July 31, 2002, in conformity with accounting principles
generally accepted in the United States of America.
Whitley Penn
Dallas, Texas
October 28, 2002
33
ELECTRIC & GAS TECHNOLOGY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
July 31,
ASSETS
CURRENT ASSETS 2003 2002
------------ ------------
Cash and cash equivalents $ 46,352 $ 54,615
Investments, market 56,965 127,500
Accounts receivable trade 2,167,316 1,377,531
Inventories 2,683,919 2,240,673
Deferred tax asset 17,856 --
Prepaid expenses 86,721 74,781
------------ ------------
Total current assets 5,059,129 3,875,100
------------ ------------
PROPERTY, PLANT AND EQUIPMENT, net
Property, plant and equipment 5,835,403 3,912,052
Less accumulated depreciation (2,856,655) (2,311,630)
------------ ------------
Total property, plant and equipment 2,978,748 1,600,422
------------ ------------
OTHER ASSETS
Investment in Dresser Engineers and Contractors 257,200 190,500
Investment in Orasee Corp. 447,019 990,000
Certificates of deposit, pledged 601,750 830,481
Idle facility 447,110 447,110
Due from affiliates - net 426,183 327,941
Other 130,425 147,645
------------ ------------
Total other 2,309,687 2,933,677
------------ ------------
TOTAL ASSETS $ 10,347,564 $ 8,409,199
============ ============
See accompanying notes
34
ELECTRIC & GAS TECHNOLOGY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (CONTINUED)
July 31,
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES 2003 2002
------------ ------------
Notes payable $ 1,728,991 $ 995,602
Accounts payable 1,859,223 1,023,606
Accrued liabilities 375,482 240,408
Income taxes payable 40,716 9,609
Current maturities of long-term obligations 361,815 149,672
Current portion of minimum pension liability 218,359 89,605
------------ ------------
Total current liabilities 4,584,586 2,508,502
------------ ------------
LONG-TERM OBLIGATIONS
Long-term obligations, less current maturities 2,134,639 1,366,143
Minimum pension liability 958,983 1,007,568
Deferred tax liability 160,473 92,900
------------ ------------
Total long-term obligations 3,254,095 2,466,611
------------ ------------
COMMITMENTS AND CONTINGENCIES -- --
STOCKHOLDERS' EQUITY
Preferred stock, $10 par value, 5,000,000 shares
Authorized -- --
Common stock, $.01 par value, 30,000,000 shares
authorized, issued 6,946,934 in 2003 and 6,471,934
in 2002 69,469 64,719
Additional paid-in capital 9,572,201 9,362,601
Accumulated deficit (5,399,947) (4,169,723)
Pension liability adjustment (1,168,016) (1,073,446)
Cumulative translation adjustment (419,805) (605,046)
------------ ------------
Stockholders equity before treasury stock 2,653,902 3,579,105
Treasury stock, at cost 123,000 shares in 2003 and (145,019) (145,019)
------------ ------------
2002
Total stockholders' equity 2,508,883 3,434,086
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 10,347,564 $ 8,409,199
============ ============
See accompanying notes
35
ELECTRIC & GAS TECHNOLOGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Years ended July 31,
2003 2002 2001
------------ ------------ ------------
Sales $ 13,639,739 $ 9,693,176 $ 11,261,175
Cost of goods sold 10,308,172 7,249,866 8,428,601
------------ ------------ ------------
Gross profit 3,331,567 2,443,310 2,832,574
Selling, general and administrative expenses 3,839,402 3,415,551 3,594,440
------------ ------------ ------------
Operating loss (507,835) (972,241) (761,866)
------------ ------------ ------------
Other income and (expenses)
Interest, net (197,811) (146,400) (105,870)
Other:
Investment gain (loss) (475,408) (1,370,700) (1,191,425)
Other 15,959 (973) 23,015
------------ ------------ ------------
Total other expenses (657,260) (1,518,073) (1,274,280)
------------ ------------ ------------
Loss before income taxes (1,165,095) (2,490,314) (2,036,146)
Provision for income taxes 65,129 8,385 88,530
------------ ------------ ------------
NET LOSS $ (1,230,224) $ (2,498,699) $ (2,124,676)
============ ============ ============
Loss available per common share $ (0.19) $ (0.40) $ (0.34)
============ ============ ============
Weighted average common shares outstanding 6,632,267 6,223,767 6,215,184
============ ============ ============
See accompanying notes
36
ELECTRIC & GAS TECHNOLOGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Years ended July 31, 2003, 2002 and 2001
Preferred Common Paid-in Retained
Stock Stock capital Earnings
------------ ----------- ----------- -----------
Balance at July 31, 2000 $ -- $ 62,576 $ 9,279,653 $ 453,652
Net loss for the year -- -- -- (2,124,676)
Pension liability adjustment -- -- -- --
Currency translation adjustments -- -- -- --
Comprehensive income (loss) -- -- -- --
Purchase of treasury stock -- -- -- --
Redemption of preferred stock -- 263 30,217 --
------------ ----------- ----------- -----------
Balance at July 31, 2001 -- 62,839 9,309,870 (1,671,024)
Net loss for the year -- -- -- (2,498,699)
Pension liability adjustment -- -- -- --
Currency translation adjustments -- -- -- --
Comprehensive income (loss) -- -- -- --
Purchase of treasury stock -- -- -- --
Stock issued for services -- 1,880 52,731 --
------------ ----------- ----------- -----------
Balance at July 31, 2002 -- 64,719 9,362,601 (4,169,723)
Net loss for the year -- -- -- (1,230,224)
Pension liability adjustment -- -- -- --
Currency translation adjustments -- -- -- --
Comprehensive income (loss) -- -- -- --
Purchase of treasury stock -- -- -- --
Stock issued for acquisition -- 4,000 169,400 --
Stock issued for services -- 750 40,200 --
------------ ----------- ----------- -----------
Balance at July 31, 2003 $ -- $ 69,469 $ 9,572,201 $(5,399,947)
============ =========== =========== ===========
See accompanying notes
37
ELECTRIC & GAS TECHNOLOGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (CONTINUED)
Years ended July 31, 2003, 2002 and 2001
Accumulated Reserve
Pension Other Redemption
liability Translation Comprehensive Preferred Treasury
adjustment adjustment Income Stock Stock Total
----------- ----------- ----------- ------------ -----------
Balance at July 31, 2000 $ (84,085) $ (512,748) $ (596,833) $ -- $ (9,363) $ 9,189,685
Net loss for the year -- -- -- -- -- (2,124,676)
Pension liability adjustment (457,231) -- (457,231) -- -- (457,231)
Currency translation adjustments -- (46,262) (46,262) -- -- (46,262)
-----------
Comprehensive income (loss) -- -- -- -- -- (2,628,169)
Purchase of treasury stock -- -- -- -- (134,980) (134,980)
Redemption of preferred stock -- -- -- -- -- 30,480
----------- ----------- ----------- ------------ ----------- -----------
Balance July 31, 2001 (541,316) (559,010) (1,100,326) -- (144,343) 6,457,016
Net loss for the year -- -- -- -- -- (2,498,699)
Pension liability adjustment (532,130) -- (532,130) -- -- (532,130)
Currency translation adjustments -- (46,036) (46,036) -- -- (46,036)
-----------
Comprehensive income (loss) -- -- -- -- -- (3,076,865)
Purchase of treasury stock -- -- -- -- (676) (676)
Stock issued for services -- -- -- -- -- 54,611
----------- ----------- ----------- ------------ ----------- -----------
Balance July 31, 2002 (1,073,446) (605,046) (1,678,492) -- (145,019) 3,434,086
Net loss for the year -- -- -- -- -- (1,230,224)
Pension liability adjustment (94,570) -- (94,570) -- -- (94,570)
Currency translation adjustments -- 185,241 185,241 -- -- 185,241
Comprehensive income (loss) -- -- -- -- -- (1,139,553)
Stock issued for acquisition 173,400
Stock issued for services -- -- -- -- -- 40,950
----------- ----------- ----------- ------------ ----------- -----------
Balance at July 31, 2003 $(1,168,016) $ (419,805) $(1,587,821) $ -- $ (145,019) $ 2,508,883
=========== =========== =========== ============ =========== ===========
See accompanying notes.
38
ELECTRIC & GAS TECHNOLOGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended July 31,
2003 2002 2001
----------- ----------- -----------
Cash flows from operating activities:
Net loss $(1,230,224) $(2,498,699) $(2,124,676)
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation of property, plant and
equipment 257,830 217,043 161,365
Stock issued for services 40,950 54,611 30,480
Amortization of goodwill and patents -- 94,213 6,684
Loss (Gain) on sale of assets -- 37,674 (18,500)
Gains/Losses on investments 475,408 1,370,700 1,191,425
Changes in assets and liabilities:
Accounts receivable (343,272) 191,134 357,348
Inventories (124,380) 123,245 89,129
Prepaid expenses (11,941) 12,268 8,380
Other assets 3,282 123,403 (14,952)
Accounts payable 402,792 26,479 60,867
Accrued liabilities 48,557 4,652 66,487
Deferred income taxes 49,717 -- --
Income taxes 31,107 -- 47,170
----------- ----------- -----------
Net cash used in operating activities (400,174) (243,277) (138,793)
----------- ----------- -----------
Cash flows from investing activities:
Purchase of property, plant and equipment (836,700) (184,970) (576,807)
Proceeds from sale of equipment -- -- 18,500
Cash acquired in acquisition of subsidiary 38,548 -- --
Investments in affiliates (98,705) 79,041 (106,197)
Investments 71,408 300 135,849
Certificate of deposits 228,731 (2,348) 1,137,327
----------- ----------- -----------
Net cash (used in) provided by investing activities (596,718) (107,977) 608,672
----------- ----------- -----------
Cash flows from financing activities:
Proceeds on long-term obligations 729,000 86,551 442,007
Payments on long-term obligations (319,195) (202,641) (160,275)
Purchase of treasury stock -- (676) (134,980)
Increase (decrease) in notes payable 483,389 (17,978) (482,501)
----------- ----------- -----------
Net cash provided by (used in) financing activities 893,194 (134,744) (335,749)
----------- ----------- -----------
See accompanying notes.
39
ELECTRIC & GAS TECHNOLOGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
Years ended July 31,
2003 2002 2001
--------- --------- ---------
Effect of exchange rate changes on cash 95,435 (17,386) (26,398)
--------- --------- ---------
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS (8,263) (503,384) 107,732
Cash and cash equivalents - beginning of year 54,615 557,999 450,267
--------- --------- ---------
Cash and cash equivalents - end of year $ 46,352 $ 54,615 $ 557,999
========= ========= =========
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest $ 215,785 $ 234,963 $ 521,430
========= ========= =========
Income taxes $ -- $ 47,016 $ 36,056
========= ========= =========
Non-cash transactions:
The Company issued 400,000 shares of common stock valued at $173,400 in exchange
for 80% of the common stock outstanding of LMT. The assets received and the
liabilities assumed are as follows: See Note 13.
Assets acquired:
Cash $ 38,548
Accounts receivable 446,513
Inventories 318,866
Equipment 709,649
----------
Total assets 1,513,576
----------
Liabilities assumed:
Notes payable 250,000
Accounts payable 420,979
Accrued expenses 86,517
Long-term debt 570,834
Minority interest 11,846
----------
Total liabilities assumed 1,340,176
----------
Net investment $ 173,400
==========
See accompanying notes.
40
ELECTRIC & GAS TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Nature of Business
Organization and operations
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 and Logic were 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". 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
acquisition of Hydel was 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 Water Technology,
Inc. (formerly Atmospheric and Magnetics Technology, Inc.) ("AWT") on June 10,
1996 under the laws of the State of Texas. AWT was formed to undertake the
Company's venture into the water industry. The Company acquired an 80% interest
in Logic Metals Technology, Inc. ("LMT") a corporation organized under the laws
of Texas from an affiliate of the Company (Interfederal Capital, Inc.) on
January 1, 2003 under the laws of Texas.
The Company presently is the owner of 100% of Reynolds and Hydel, 91.5% of
AWT and 80% of LMT and, through such subsidiaries, operates in three distinct
business segments: (1) production of atmospheric water, filtration and enhanced
water products (AWT); (2) the manufacture and sale of natural gas measurement,
metering and odorization equipment (Reynolds); and (3) the manufacture and sale
of electric meter enclosures and pole-line hardware for the electric utility
industry and the general public (Hydel).
While the Company has incurred losses over the past years, the Company has the
ability to raise capital in order to accelerate the strategic goals to continue
to grow the revenue and improve profitability. The Company is actively seeking a
private placement of its public equity. Investment candidates include accredited
high net worth individual investors and private investment pools. The Company
has, as of October 31, 2003, engaged the corporate finance department of a major
placement agent for an initial four-month non-exclusive term. The Company is
offering whatever form of investment instrument is attractive to potential
investors including but not limited to restricted and free tradable common
stock, preferred stock or other convertible security.
Management believes that it can attract investment capital of between
$500,000 and $2,000,000 based on the Company's business strategy. The amount of
equity the Company will offer will depend in part on share/conversion price,
discount or premium on current market share price and dilution prospects. In
addition, the company has available resources, including the sale of treasury
stock, sale of marketable securities and imminent release of collateral to
generate an additional $500,000.
While management believes that the Company would be able to achieve the
above funding, there is no assurance that this will occur. Failure to obtain
additional equity funding will slow the growth of the Company.
41
ELECTRIC & GAS TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. Accounting Policies
A summary of the significant accounting policies consistently applied in
the preparation of the accompanying consolidated financial statements follows.
Basis of Accounting
The accounts are maintained and the consolidated financial statements have
been prepared using the accrual basis of accounting in accordance with
accounting principles generally accepted in the United States of America.
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.
Reclassifications
Certain reclassifications have been made to the 2002 consolidated financial
statements to conform to the 2003 presentation. The company retroactively
restated its financial statements to reflect a 3 for 4 reverse stock split
effective June 13, 2001.
Use of Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that 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.
Cash Equivalents
For purposes of the statement of cash flows, the Company considers any
short-term cash investments with an original maturity of three months or less to
be a cash equivalent.
42
ELECTRIC & GAS TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. Accounting policies (continued)
Accounts Receivable
The Company performs periodic credit evaluations of its customers'
financial condition and extends credit to virtually all of its customers without
collateralization. Credit losses to date have been insignificant and within
management's expectations. As of July 31, 2003, management has recorded no
allowance for bad debts. As of July 31, 2002, management had recorded an
allowance for bad debts of $20,094. In the event of complete non-performance by
the Company's customers, the maximum exposure to the Company is the outstanding
accounts receivable balance at the date of non-performance.
Inventories
Inventories, consisting 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
Research and Development Costs
In accordance with Statements of Financial Accounting Standards ("SFAS")
No. 86, Accounting for the Costs of Computer Software to Be Sold, Leased, or
Otherwise Marketed, all costs incurred to establish the technological
feasibility are research and development costs. In accordance with this
provision, the Company has expensed approximately $217,000 of research and
development related expenses from inception through February 2003. The costs
that were expensed related to the creation a working model from the white paper
created by the engineer, mainly related to the labor of the technicians and
programmers, with a small portion being related to various computer components.
The Company reached technological feasibility in February 2003 and a working
model was the product's first independent usage. Costs incurred subsequent to
February 2003 aggregating $132,000 for such software development have been
capitalized and will be amortized over a 5 year period.
43
ELECTRIC & GAS TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Income Taxes
Deferred income taxes are determined using the liability method in
accordance with SFAS No. 109, Accounting for Income Taxes. Deferred tax assets
and liabilities are recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of existing assets
and liabilities and their respective tax bases. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date. In addition, a valuation allowance is established to reduce any
deferred tax asset for which it is determined that it is more likely than not
that some portion of the deferred tax asset will not be realized.
Earnings (Loss) Per Share
Basic earnings (loss) per share is calculated by dividing net loss
available to common stockholders by the weighted average number of common shares
outstanding for the period. Diluted earnings (loss) per share reflects the
potential dilution that could occur if accounts or other contracts to issue
common stock were exercised or converted into common stock or resulted in the
issuance of common stock that then shared in the earnings of the Company. For
the years ended July 31, 2003, 2002 and 2001, dilutive earnings (loss) per
common share is not presented since there exist no dilutive common stock
equivalents.
Stock-Based Compensation
Stock-based compensation is determined in accordance with SFAS No. 123,
Accounting for Stock-Based Compensation. SFAS No. 123 defines a fair value based
method of accounting for an employee stock option or similar equity instrument
and encourages all entities to adopt that method of accounting for all of their
employee stock compensation plans. Under the fair value based method,
compensation cost is measured at the grant date based on the value of the award.
However, SFAS No. 123 also allows an entry to continue to measure compensation
cost for those plans using the intrinsic value based method of accounting
prescribed by the Accounting Principles Board ("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 grant date or other measurement date
over the amount an employee must pay to acquire the stock. Entities electing to
remain with the accounting in APB Opinion No. 25 are required to make pro forma
disclosures of net income and earnings per share as if the fair value based
method of accounting had been applied. The Company has elected to measure
compensation cost for options issued to employees under APB Opinion No. 25.
Options issued to non-employees are measured in accordance with SFAS No. 123.
Revenue and Expense Recognition
The Company recognizes revenue when title passes to its customers upon
shipment of its products for final delivery. Expenses are recognized in the
period in which incurred.
44
ELECTRIC & GAS TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. Accounting policies (continued)
Foreign Currency Translation
The financial statements are presented in United States dollars. In
accordance with SFAS No. 52, Foreign Currency Translation, foreign denominated
monetary assets and liabilities are translated to their United States dollar
equivalents using foreign exchange rates which prevailed at the balance sheet
date. Revenue and expenses are translated at average rates of exchange during
the year. Related translation adjustments are reported as a separate component
of shareholders' equity, whereas gains or losses resulting from foreign currency
transactions are included in results of operations.
Comprehensive Income
The Company reports comprehensive income in accordance with the provisions
of SFAS No. 130, Reporting Comprehensive Income. SFAS No. 130 establishes
standards for the reporting and presentation of comprehensive income and its
components in a full set of financial statements. Comprehensive loss consists of
net loss, foreign currency translation adjustments and pension liability
adjustment and is presented in the accompanying consolidated statement of
changes in stockholders' equity. SFAS No. 130 requires only additional
disclosures in the financial statements; it does not affect the Company's
financial position or results of operations.
Impairment of Long-Lived Assets
The Company periodically evaluates the net realizable value of long-lived
assets, including property, equipment and investments, relying on a number of
factors, including operating results, business plans, economic projections and
anticipated future cash flows. Impairment is assessed by evaluating the
estimated undiscounted cash flows over the asset's remaining life. If estimated
cash flows are insufficient to recover the investment, an impairment loss is
recognized.
Product Warranties
The Company offers a two and four year warranty for certain utility
products. The specific terms and conditions of those warranties vary depending
upon the product sold. The Company provides a basic limited warranty, including
parts and labor, for those products for two or four years. The Company's
warranty expense has been minimal.
Shipping and Handling Costs
In accordance with the Emerging Issue Task Force ("EITF") issue 00-10,
"Accounting for Shipping and Handling Fees and Costs", the Company includes
shipping and handling fees billed to customers as a credit (offset) to shipping
costs in operating expenses and shipping and handling costs associated with
outbound freight in operating expenses in the accompanying consolidated
statements of operations. The shipping and handling costs associated with
outbound freight in operating expenses were approximately $65,000, $57,000 and
$42,000 for the fiscal years ended July 31, 2003, 2002 and 2001, respectively.
Affiliates
The Company is affiliated with various entities (together, the
"Affiliates"). The Affiliates are primarily owned by the Company's Chief
Executive Officer, S. Mort Zimmerman, and his family. See Note 11 for discussion
of related-party transaction with the Affiliates.
3. Inventories
Inventories consisted of the following at July 31,:
2003 2002
---------- ----------
Raw materials $1,035,450 $ 942,187
Work-in-process 607,343 385,443
Finished goods 1,041,126 913,043
---------- ----------
$2,683,919 $2,240,673
========== ==========
45
ELECTRIC & GAS TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. Property, Plant and Equipment
Property, plant and equipment consisted of the following at July 31,:
2003 2002
----------- -----------
Land $ 181,644 $ 177,630
Buildings and improvements 1,299,976 1,160,955
Machinery and equipment 3,751,458 2,208,893
Furniture, fixtures & equipment 602,325 364,574
----------- -----------
5,835,403 3,912,052
Less accumulated depreciation (2,856,655) (2,311,630)
----------- -----------
$ 2,978,748 $ 1,600,422
=========== ===========
5. Other Assets
In June 1997, litigation was commenced by the Company regarding certain
transactions related to a loan from American Circuit Breaker Corporation arising
out of its previous sale of the meter socket division of Retech. On December 12,
1997, the litigation was dismissed as result of an agreement between the parties
whereby the Company received a 20% interest in Pioneer Power Corporation
("Pioneer"). The Company and the settling parties agreed that the value of the
20% interest was worth $1,250,000. Pioneer owns 100% of Pioneer Transformers
Ltd. ("Pioneer Ltd."), a Canadian company that manufactures and sells
transformers and Conte Glacz Industries, Inc., ("CGI") which manufacture
electrical control and power distribution equipment. As of December 31, 2001
Pioneer Ltd.'s and CGI's audited financial information reflected total assets of
approximately $15,900,000 with corresponding revenues for the year then ended of
approximately $35,600,000. As part of the agreement, the Company intended to
spin-off approximately 80% of its 20% interest in Pioneer to its shareholders.
The Company fully reserved its investment in Pioneer during the year ended July
31, 2002. Pioneer agreed to the obligation to the company in a written agreement
to avoid further litigation, and then refiled a petition disputing the debt in
Delaware. As of July 31, 2003, the Company is contesting the petition.
The Company has loaned Dresser Engineers and Contractors, Inc. ("Dresser")
$1,046,800 as of July 31, 2001 Dresser has defaulted on the repayment of this
debt. Accordingly, the Company wrote down its receivable to $500,000 in fiscal
2001. During fiscal 2002, the Company assigned $175,000 of the estimated loan
then valued at $500,000 in exchange for common stock in CDT Systems, Inc.
Subsequently, the value of the collateral declined by approximately 50% and the
Company wrote down its value of the note to $190,500 as of July 31, 2002, the
amount it expects to recover from collateral and personal guarantees. A portion
of the note to Dresser is guaranteed by Dresser's principal shareholder and is
collateralized by approximately 500,000 shares of a public company's common
stock that trades at approximately $.50 per share. Subsequent to July 31, 2003,
the company has received a judgment transferring the title of the 500,000 shares
of Rentech stock to the company. In addition, CDT Systems, Inc. has assigned its
interest in the Rentech, Inc. common stock in exchange for unpaid rent of
$66,700 and other expenses due to the Company. The rent income was recorded in
other income. The Company has sold 350,000 shares at prices ranging from $0.70
to $0.75 per share as of November 10, 2003. See Note 11.
During the year ended July 31, 1999, the Company invested $500,000 in
common stock whick was fuly reserved in the forth quarter 2003 and $500,000
($447,019 at July 31, 2003) in a convertible debenture in Orasee Corp. (formerly
i3-Dx.com, Inc.) ("Orasee"), a privately held company which is in the
development stage. Orasee is a high-tech company that utilizes the internet for
the development and distribution of its products. Orasee's technology is based
on three-dimensional photographic lenticular imaging and is suitable for any
application that may benefit from increased visualization, such as medical
imaging, advertising and marketing. The Company owns approximately 7.3% of
Orasee's Class A common shares (4.5 million shares) and has warrants to purchase
another 2.5 million shares.
A note in the amount of $447,110 is due from the purchaser of Retech's
Paris, Texas dormant manufacturing facility. The note provided for monthly
payments of $2,981 interest only for twelve months and then forty-eight
successive monthly payments of $4,272, which includes principal and interest.
The purchaser of the building, after making a few payments, has deeded back the
property. The Company will continue to market the remaining facility and expects
to recover its basis in such property.
46
ELECTRIC & GAS TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. Notes Payable
Notes payable consisted of the following at July 31,:
2003 2002
---------- ----------
Note payable, bank Canada (a) $ 921,850 $ 746,586
Note payable bank - Reynolds (b) 356,761 231,216
Note payable bank - LMT (c) 450,000 --
Note payables, ELGT 380 17,800
---------- ----------
$1,728,991 $ 995,602
========== ==========
(a) Note payable Canadian bank, consists of a demand bank loan with a
maximum loan amount of $1,563,000, payable on demand; bearing interest at the
bank's prime rate plus 1.00%; secured by trade receivables and inventories; and
collateralized by guaranties of $36,000 from Retech, Inc. and $710,000 from the
Company and a demand installment loan of $34,000 to a bank, also collateralized
by the aforementioned guarantees, and a payable due a bank collateralized by an
affiliate's certificate of deposit with interest at 7%.
(b) 2003 - Note payable, bank Reynolds consists of a line of credit with a
maximum loan amount of $400,000, payable on demand; bearing interest at the
bank's prime rate plus 2.00%; secured by trade receivables and inventories, and
guaranteed by Dan Zimmerman, an officer of The Company. 2002 - Note payable,
bank Reynolds consists of an interim loan, secured by a certificate of deposit
with a fixed 7% rate of interest.
(c) Note payable, bank LMT consists of a line of credit with a maximum loan
amount of $450,000, payable on demand; bearing interest at the bank's prime rate
plus 2.00%; secured by trade receivables and inventories, guaranteed by the
president of LMT, S. Mort Zimmerman, an officer of The Company and by
Interfederal Capital, Inc., an affiliate.
Information relating to short-term borrowing is as follows:
2003 2002
---------- ----------
Balance at end of year $1,728,991 $ 995,602
Maximum borrowing $2,250,000 $1,089,216
Average balance $1,227,416 $ 922,328
Average effective interest rate 5.9% 6.5%
Maximum borrowings are the maximum amount of aggregate short-term borrowing
outstanding at any month end during the year. The average short-term borrowings
were computed by dividing the aggregate borrowing for the year by the number of
days the borrowings 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,:
2003 2002
-------- --------
Mortgage note payable due in monthly payments of principle
and interest at 2.75% above prime from October 10, 1994 over
twenty years. Guaranteed by the Small Business
Administration.(a) $337,149 $482,239
Note payable to a bank, bearing interest at prime plus
1.25%, due in monthly principal and interest installments of
$12,000 until October 2003, secured by machinery and
equipment and land and building.(b) -- 18,284
47
ELECTRIC & GAS TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. Long-term Obligations (continued)
2003 2002
Capitalized lease obligation to a bank bearing interest at -------- --------
7.75%. Interest only until August 2003, then in monthly
installments of $12,179 including interest.(c) 489,736 501,803
Note payable to a bank bearing interest at 5.2%, due in
monthly principal and interest installments of $9,118 until
November 4, 2007, secured by a certificate of deposit.(a) 431,415 490,000
Note payable to a bank, bearing interest at 5.44%, due in
monthly installments of $5,854 until March 5, 2006. secured
by certain equipment. Guaranteed by an officer of ELGT and
an officer of LMT and Interfederal Capital, Inc. an
affiliate. LMT has obtained a waiver of certain loan
covenants on its assumed debt in the acquired subsidiary
through January 31, 2004. (d) 324,215 --
Note payable to bank bearing interest at an effective rate
of 5.5%, principal and interest are due in monthly
installments of $10,357 until July 2007, secured by certain
equipment. (d) 443,985 --
Note payable (unsecured) to an individual, imputed interest
at an effective rate of 5.5%, principal and interest are due
in monthly installments of $1,000 until January 2010.(d) 65,456 --
Mortgage payable to a bank bearing interest at 6.27%,
principal and interest are due in monthly installments of
$3,186 until February 2018, secured by the building.
Guaranteed by Dan Zimmerman, an officer of the company.(b) 386,421 --
2003 2002
----------- -----------
Various other installment notes and capitalized
lease obligations 18,077 23,489
----------- -----------
Total amount of obligations 2,496,454 1,515,815
Less current maturities (361,815) (149,672)
----------- -----------
$ 2,134,639 $ 1,366,143
=========== ===========
The prime rate was 4.00% and 4.75% at July 31, 2003 and 2002, respectively.
The aggregate annual principal payments are as follows:
Year Ending July 31,
2004 $ 361,815
2005 379,033
2006 585,189
2007 356,908
2008 181,328
Thereafter 632,181
-----------
Total $2,496,454
==========
(a) ELGT
(b) Reynolds
(c) Hydel
(d) LMT
48
ELECTRIC & GAS TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8. Accrued Liabilities
Accrued liabilities consisted of the following at July 31:
2003 2002
-------- --------
Payroll $123,779 $ 82,342
Commissions 47,673 32,947
Vacation pay 94,282 25,668
Taxes 38,812 24,012
Interest 17,800 1,489
Miscellaneous 53,136 73,950
-------- --------
$375,482 $240,408
========= ========
9. Commitments and Contingencies
Rent expense, principally for the Canadian manufacturing facility and
beginning in the year ended July 31, 2003, the building for AWT and LMT, owned
by an affiliate, for the years ended July 31, 2003, 2002 and 2001, was $267,799,
$141,000 and $135,000, respectively, consisting primarily of minimum rentals.
The minimum lease commitment is as follows:
2004 $177,561
2005 181,528
2006 193,429
2007 134,242
See note 11.
Litigation
Allied Products Co had filed suit against the Company regarding 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). The Cooper
bankruptcy court confirmed the debtor's Plan of Reorganization on November 21,
1997.
49
ELECTRIC & GAS TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
9. Commitments and Contingencies (continued)
The Illinois' court awarded Allied a summary judgment and dismissed the
Company's counterclaim on November 3, 1998; however, the issue of damages was
not addressed by the court at that time. On January 28, 2000, the court awarded
a judgment in favor of Allied and against the Company in the amount of
approximately $1,100,000. The pending lawsuit between Allied and the Company has
now been settled and dismissed. The settlement required the repurchase by the
Company of the 90,000 shares of preferred stock for $1.1 million which would
satisfy a judgment by the Court requiring such a purchase. An affiliate acquired
said 90,000 shares and the judgment. The transaction was completed by the
affiliate with $1.2 million of collateral supplied by the Company. The affiliate
pursued the sale of the preferred stock to a third party, however, on July 31,
2000, the Company retired the preferred stock.
The Company is involved with its Chairman and an affiliated company in
actions brought by the U.S. Justice Department who is seeking to sell the
Company's office building to satisfy a judgment against the affiliate. The
Company's investment in the land and building at July 31, 2003 is approximately
$250,000. The Company has and will continue to vigorously defend its position to
retain this asset for which it had previously paid.
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.
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.
The Company sells a broad range of products to the electric and gas utility
industries. Concentrations of credit risk with respect to trade receivables are
limited due to the large number of customers comprising the Company's customer
base. As of July 31, 2003, approximately 15% of the accounts receivable balance
is due from one customer. 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.
50
ELECTRIC & GAS TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
9. Commitments and Contingencies
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. Benefit Plans
Retech sponsored a defined benefit pension plan that covered all of its
hourly employees. The plan called 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,:
2003 2002 2001
--------- --------- ---------
Service cost $ -- $ -- $ --
Interest cost 73,323 74,421 69,227
Actual return on assets held for the plan (12,702) 388,973 321,892
Distribution to affiliate. (see note 11) 100,000 -- --
Net amortization of prior service cost,
transition liability and net gain 14,401 14,401 14,401
--------- --------- ---------
Pension expense $ 175,022 $ 477,795 $ 405,520
========= ========= =========
51
ELECTRIC & GAS TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
10. Benefit Plans (continued)
The following sets forth the funded status of the plan and the amounts shown
in the accompanying consolidated balance sheets at July 31,:
2003 2002
----------- -----------
Pension benefit obligations:
Vested $ 1,165,714 $ 1,126,488
Non-vested -- --
----------- -----------
Projected benefit obligation 1,165,714 1,126,488
Fair value of assets held in plan 293,712 426,162
----------- -----------
Unfunded excess of projected benefit obligation
over plan assets $ 872,002 $ 700,326
=========== ===========
Unrecognized net transition obligation $ -- $ --
Unrecognized prior service costs 9,326 23,727
Unrecognized net loss 1,168,016 1,073,446
Pension (asset) liability recognized (305,340) (396,847)
----------- -----------
Accrued pension liability $ 872,002 $ 700,326
=========== ===========
The following is a summary of the changes in the fair value of Plan assets for
each year:
2003 2002
----------- -----------
Fair value of Plan asset at beginning of year $ 426,162 $ 484,467
Actual return on Plan assets 12,702 (388,973)
Distribution to an affiliate (see note 11) (100,000) --
Company contributions 7,038 378,300
Benefits paid (52,190) (47,632)
----------- -----------
Fair value of Plan assets at end of year $ 293,712 $ 426,162
=========== ===========
52
ELECTRIC & GAS TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
10. Benefit Plans (continued)
The following is a summary of the components of net benefit cost for each year:
2003 2002
---- ----
Interest cost $ 73,323 $ 74,421
Expected return on Plan assets (32,274) (52,590)
Amortization of transition obligation -- --
Amortization of prior service cost 14,401 14,401
Amortization losses/gains 43,095 27,841
---------- -----------
Net periodic benefit cost $ 98,545 $ 64,073
========= ========
The Company has recognized a minimum pension liability for the under-funded
plan. 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
liabilities of $1,177,342 and $1,097,173, intangible assets of $9,326 and
$23,727 and a stockholders' equity reduction of $1,168,016 and $1,073,446 as of
July 31, 2003 and 2002, respectively. The Company must make its minimum required
contribution of $218,359 to the plan no later than April 30, 2004. See Note 11.
Retech will terminate this plan upon funding its pension liability. The
plan assets consist of common stock equities and government securities
administered by the trust department of Comerica Bank, Dallas, Texas. The
custodian of the Pension Plan assets had advised Retech that shares of CDT
Systems transferred to the plan were unregistered shares and will be returned to
Retech subsequent to year-end. Retech will have to fund the said amount of
$90,000 by April 2004. See Note 11.
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 8.0% and 6.50% at July 31, 2003 and 8.5% and 6.75% at July 31,
2002, respectively.
The Company has established a defined contribution (401-K) plan covering
substantially all United States employees. Charges to operations for this plan
for the years ended July 31, 2003, 2002 and 2001 were $496, $7,642 and $9,191,
respectively.
53
ELECTRIC & GAS TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
10. Benefit Plans (continued)
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.
Following is a summary of options (restated for the reverse stock split of 3 for
4 shares) under the plan as of and for the years ended July 31,:
2003 2002 2001
------ ------- ------
Options outstanding at beginning of year -- 57,905 57,905
Granted 50,000 -- --
Terminated -- (57,905) --
Exercised -- -- --
------ ------- ------
Options outstanding at end of year 50,000 -- 57,905
====== ======= ======
Options exercisable at end of year -- -- 57,905
====== ======= ======
Exercise price per share $ 1.00 $ .67 to
$ .73
54
ELECTRIC & GAS TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
11. 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)
before income taxes for the periods ended July 31,:
2003 2002 2001
--------- --------- ---------
Expected provision (benefit) for federal
income taxes $(248,000) $(846,000) $(692,000)
Taxes on Canadian subsidiary 65,621 8,385 52,474
Prior years taxes (Refund) -- -- 36,056
Unavailable loss carrybacks 248,000 846,000 692,000
--------- --------- ---------
Income taxes (benefit) $ 65,621 $ 8,385 $ 88,530
========= ========= =========
The Company files a consolidated tax return with its U.S. subsidiaries. The
Company has a net operating loss carry-forward of approximately $6,700,000,
which will expire from 2015 to 2018.
Income tax expense (benefit) consisted of the following:
2003 2002 2001
--------- --------- ---------
Current $ 41,146 $ 11,085 $ 88,330
Deferred 24,475 (2,700) 200
--------- --------- ---------
$ 65,621 $ 8,385 $ 88,530
========= ========= =========
Deferred tax expense (benefit) and deferred tax liabilities in all years
are Canadian tax result principally from differences in depreciation for tax and
financial statement purposes stated in United States dollars.
55
ELECTRIC & GAS TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
11. Income Taxes (continued)
The components of the net deferred tax (assets) liability included in the
balance sheet are as follows at July 31,:
2003 2002
----------- -----------
Net operating loss carryforward $(2,200,000) $(2,500,000)
Depreciation 173,000 158,000
Provision for losses (1,200,000) (1,250,000)
Valuation allowance 3,387,473 3,684,900
----------- -----------
$ 160,473 $ 92,900
=========== ===========
The Company has provided a valuation allowance against its deferred tax
asset as it has determined that it is more likely than not the temporary
differences will not be utilized for tax purposes.
12. Related Party Transactions
The following is a summary of advances to and from affiliated companies at
July 31,:
2003 2002
---------- ----------
Interfederal Capital, Inc. $ 328,673 $ 213,776
IFC Industries 14,774 78,206
M&M Trans Exchange 375,118 304,330
Comtec, Inc. 62,389 (53,885)
Glauber Management (60,600) (75,000)
Petroleum Dynamic (4,222) -463
S. Mort Zimmerman (289,949) (214,949)
---------- ----------
$ 426,183 $ 327,941
========== ==========
56
ELECTRIC & GAS TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
12. Related Party Transactions (continued)
Interfederal Capital, Inc. (Interfederal), a Texas corporation, is owned by
S. Mort Zimmerman and his four (4) children. The Company paid Interfederal
$82,800, $118,000 and $162,000 in management fees for the years ended July 31,
2003, 2002 and 2001, respectively. The fees were included in S. Mort Zimmerman's
annual compensation. Accumulated borrowings for the years ended July 31, 2003
and 2002 were $328,673 and 213,776, respectively. During the year ended July 31,
2003, the Company purchased an 80% interest in LMT from Interfederal in exchange
for 400,000 shares of restricted common stock. The stock was valued at $173,400.
See acquisition note 13.
During fiscal year 2003, Interfederal borrowed $100,000 from the Retech
pension plan. The Company has not recorded the loan, nor does the plan assets
include such loan. Interfederal has placed shares of publicly traded companies
into the pension plan with a market value of $100,000 on November 3, 2003.
Interfederal has guaranteed LMT's line of credit and equipment loan that
were obtained during the year ended July 31, 2003.
Interfederal Capital Industries, Inc. ("IFC") a Texas corporation and a
subsidiary of Interfederal, has net balances due to the Company of $14,774 and
$78,206 for the years ended July 31, 2003 and 2002, respectively.
LMT and AWT occupies a facility owned by IFC on a month-to-month basis and
paid a fee in lieu of rent of approximately $65,000 for the year ended July 31,
2003. The Company has an agreement, subject to certain conditions, to purchase
the building currently occupied by LMT and AWT at an estimated cost of $2.6
million from IFC.
The proceeds from a certificate of deposit of approximately $171,000 was
used to pay an IFC bank loan in the year ended July 31, 2003.
M&M TransExchange, Inc. ("M&M"), a Texas corporation, wholly owned by S.
Mort Zimmerman has balances due to The Company of $375,118 and $304,330,
respectively for the year ended July 31, 2003 and 2002.
The payable to officer of $289,949 and $214,949 for the years ended July
31, 2003 and 2002, respectively, are the accrued but unpaid balances due to S.
Mort Zimmerman for compensation.
Comtec, Inc. is a Texas corporation and a subsidiary of Interfederal with
net receivables of $62,389 and ($53,855) for the years ended July 31, 2003 and
2002, respectively.
Glauber Management, Inc. ("Glauber"), is wholly owned by S. Mort Zimmerman.
The Company has net payable to Glauber of $60,600 at the year ended
July 31, 2003.
A portion of Hydel's management fee, which was eliminated in the
consolidated financial statements of $180,000, was remitted to Interfederal
during 2003. This payment was for loans to secure the building at 3233 Kingsley
Road, Garland, Texas in anticipation of the building being transferred to the
Company at IFC's Cost.
The Company has pledged a certificate of deposit in the amount of $100,000
for a loan in the name of DOL, Inc., a publicly held corporation that is
controlled by S. Mort Zimmerman.
57
ELECTRIC & GAS TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
13. Segment Information
Industrial Segments
- -------------------
The Company operates principally in three industries: Water, Utilities and
Fabrication. Operations in the water industry involve the production of
atmospheric water, filtration and enhanced water products. Operations in the
Utilities industry involve the development, manufacture, and sale of gas meters,
gas measurement equipment, meter sockets, electric pole line equipment and other
electrical equipment. The Company's former segments defense electronics,
plastics and metal fabrication have been treated as a discontinued operations.
The segments for 2003 and 2002 for gas and electric were combined into the
Utility segment. The fabrication segment results from the acquisition of LMT.
58
ELECTRIC & GAS TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Following is a summary of segment information for the years ended July 31,:
2003 2002 2001
------------ ------------ ------------
Sales to unaffiliated customers:
Water $ 474,432 $ 18,685 $ 152,441
Utilities 10,954,973 9,674,491 11,108,734
Fabrication 2,210,334 -- --
------------ ------------ ------------
$ 13,639,739 $ 9,693,176 $ 11,261,175
============ ============ ============
Operating income (loss):
Water $ 32,799 $ (213,455) $ (70,300)
Utilities 534,455 309,371 387,564
Fabrication (280,787) -- --
------------ ------------ ------------
$ 286,467 $ 95,916 $ 317,264
General corporate expenses (794,302) $ (1,068,157) $ (1,079,130)
Other income (expense), net (657,260) (1,518,073) (1,274,280)
------------ ------------ ------------
Loss before income taxes $ (1,165,095) $ (2,490,314) $ (2,036,146)
============ ============ ============
Identifiable assets:
Water $ 58,288 $ 6,493 $ 68,714
Utilities 6,057,363 5,489,527 6,096,945
Fabrication 2,120,455 -- --
------------ ------------ ------------
8,236,106 5,496,020 6,165,659
General corporate assets 2,111,458 2,913,179 4,364,535
------------ ------------ ------------
Total assets $ 10,347,564 $ 8,409,199 $ 10,530,194
============ ============ ============
Capital expenditures:
Water $ 950 $ 1,757 $ --
Utilities 227,377 171,713 513,653
Fabrication 608,373 -- --
General corporate -- 11,500 63,154
------------ ------------ ------------
$ 836,700 $ 184,940 $ 576,807
============ ============ ============
Depreciation and amortization:
Water $ 351 $ 263 $ 1,792
Utilities 141,450 194,745 143,281
Fabrication 94,300 -- --
General corporate 21,957 22,035 16,292
------------ ------------ ------------
$ 257,830 $ 217,043 $ 161,365
============ ============ ============
59
ELECTRIC & GAS TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
13. 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, investments and the corporate headquarters building.
Individual customers who exceeded 10% of consolidated revenues accounted
for none, $1,483,000, and $1,343,000 in sales for the year ended July 31, 2003,
2002 and 2001, respectively.
Geographic information
- ----------------------
Financial data by geographic area for the years ended July 31,:
2003
------------
Operating
Income Identifiable
------------
Sales (loss) Assets
------------ ------------
United States $ 5,298,000 $ (116,568) $ 6,570,044
Canada 8,341,739 403,035 4,210,820
------------ ------------ ------------
Total $ 13,639,739 $ 286,467 $ 10,780,864
============ ============ ============
2002
Operating
(loss) Identifiable
Sales Income Assets
United States $ 2,727,374 $ (142,846) $ 1,707,438
Canada 6,965,802 238,762 3,788,582
------------ ------------ ------------
Total $ 9,693,176 $ 95,916 $ 5,496,020
============ ============ ============
60
ELECTRIC & GAS TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
13
ACQUISITION
14. Acquisition
On January 1, 2003, the Company acquired 80% of the shares in LMT in exchange
for 400,000 shares of the Company's restrictive common stock. The restrictive
common stock was valued at $.43 per share, which was 60% of the average trading
price for the month of December 2002. LMT manufactures metal fabrication. The
financial results of LMT are included in the Fabrication segment. The
acquisition was recorded under the purchase method, whereby LMT's net assets
were recorded at estimated fair value and its operations have been reflected in
the statement of operations since that date. The allocation of purchase price is
as follows:
Assets:
Cash $ 38,548
Accounts receivable 446,513
Inventories 318,866
Equipment 709,649
----------
Total assets $1,513,576
Liabilities:
Notes payable $ 250,000
Accounts payable 420,979
Accrued expenses 86,517
Long-term debt 570,834
Minority interest 11,846
----------
Net investment $ 173,400
==========
The following table represents the unaudited proforma results of operations as
though the acquisition of ELGT occurred on August 1, 2001.
For the Year Ended
July 31, 2003 July 31, 2002
Net sales $ 14,848,877 $ 11,850,580
Income from operations (630,242) (2,057,909)
Loss before income taxes (1,310,689) (3,254,035)
61
ELECTRIC & GAS TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
15. Fourth Quarter Results
During the fourth quarter fiscal 2002, the Company fully reserved its
investment in Pioneer Power for $1,250,000 and further adjusted its investment
in Dresser Engineers and Constructors, Inc. by $134,500.
During the fourth quarter fiscal 2003, the Company recorded the sale of
Rentech stock that originally occurred in October 2002 and wrote off the
increase in market value of $100,000 that was previously recognized.
During the fourth quarter of 2003, the Company determined that the computer
component of the software to be sold met the criteria of SFAS No. 86 and
accordingly the Company capitalized cost related to such software development of
approximately $132,000.
During the fourth quarter of 2003, the Company recorded a reserve against
its investment in Orasee, Inc. for $500,000.
16. Recent Accounting Pronouncements
In May 2003, the Financial Accounting Standards Board ("FASB") issued SFAS
No.150, "Accounting for Certain Financial Instruments with Characteristics of
Both Liabilities and equity" ("SFAS 150"). SFAS 150 establishes standards for
how a company classifies and measures certain financial instruments with
characteristics of both liabilities and equity. SFAS 150 is effective for
financial instruments entered into or modified after May 31, 2003 and otherwise
is effective at the beginning of the first interim period beginning after June
15, 2003. The Company formally adopted SFAS 150 on August 1, 2003, which is the
beginning of its 2004 fiscal year. The adoption of SFAS 150 did not have any
impact on the Company's financial statements.
In May 2003, the FASB's Emerging Issues Task Force ("EITF") issued EITF
Issue No. 00-21, "Accounting for Revenue Arrangements with Multiple
deliverables" ("EITF 00-21"). EITF 00-21 addresses certain aspects of the
accounting by a company for arrangements under which it will perform multiple
revenue-generating activities. The guidance in Issue 00-21 is effective for
revenue arrangements entered into in reporting periods (annual or interim)
beginning after June 15, 2003. The Company formally adopted EITF No. 00-21 on
August 1, 2003, which is the beginning of its 2004 fiscal year. The adoption of
EITF 00-21 had no impact on the Company's operating results or financial
position.
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133
Derivative Instruments and Hedging Activities" ("SFAS 149"). SFAS 149 amends and
clarifies financial accounting and reporting for derivative instruments,
including certain derivative instruments embedded in other contracts
(collectively referred to as derivatives) and for hedging activities under FASB
Statement No. 133, "Accounting for Derivative Instruments and Hedging
activities" ("SFAS 133"). SFAS 149 is effective for contracts entered into or
modified after June 30, 2003. The Company does not expect the adoption of SFAS
149 to have a significant impact on the Company's financial position or results
of operations.
In January 2003, the FASB issued Financial Interpretation No. 46,
"Consolidation of Variable Interest Entities" ("FIN 46"). FIN 46 requires that
if an entity has a controlling financial interest in a variable interest entity,
the assets, liabilities and results of activities of the variable interest
entity should be included in the consolidated financial statements of the
entity. FIN 46 requires that its provisions are effective immediately for all
arrangements entered into after January 31, 2003. For any arrangements entered
into prior to January 31, 2003, the FIN 46 provisions are required to be adopted
at the beginning of the first interim or annual period beginning after December
15, 2003. The Company adopted FIN 46 on February 1, 2003. The adoption of FIN 46
had no impact on the Company's operating results or financial position as the
Company does not have any variable interest entities.
62
ELECTRIC & GAS TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In November 2002, the FASB issued Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others" ("FIN 45"). FIN 45 elaborates on the
disclosures to be made by a guarantor in its interim and annual financial
statements about its obligations under certain guarantees that it has issued. It
also clarifies that a guarantor is required to recognize, at the inception of a
guarantee, a liability for the fair value of the obligation undertaken in
issuing the guarantee. The initial recognition and measurement provisions of the
interpretation are applicable on a prospective basis to guarantees issued or
modified after December 31, 2002 and the disclosure requirements in this
interpretation are effective for financial statements of interim or annual
periods ending after December 15, 2002. The Company adopted FIN 45 on January 1,
2003. The adoption of FIN 45 had no significant impact on the Company's
financial position or results of operations. Disclosure requirements of FIN 45
are included in notes 7 and 9 to the Company's consolidated financial
statements.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities" ("SFAS 146"). This Statement
addresses financial accounting and reporting for costs associated with exit or
disposal activities and nullifies Emerging Issues Task Force ("EITF") Issue No.
94-3, "Liability Recognition for Certain Employee Termination Benefits and Other
Costs to Exit an Activity (Including Certain Costs Incurred in Restructuring."
Under SFAS 146 companies recognize a cost associated with an exit or disposal
activity when a liability has been incurred, while under EITF Issue No. 94-3
companies recognized costs once management implemented a plan to exit an
activity. SFAS 146 also introduces discounting the liability associated with the
exit or disposal activity for the time between the cost being incurred and when
the liability is ultimately settled. The Company will adopt the provisions of
SFAS 146 if any exit or disposal activities are initiated in the future.
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements
No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Corrections", which provides for the rescission of several previously issued
accounting standards, new accounting guidance for the accounting of certain
lease modifications and various technical corrections that are not substantive
in nature to existing pronouncements. The Company adopted SFAS No. 145,
effective August 1, 2002, and such adoption had no material impact on the
Company's results of operations or financial position.
In October 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets" ("SFAS 144"). SFAS 144 supersedes
previous guidance for financial accounting and reporting for the impairment or
disposal of long-lived assets and for segments of a business to be disposed of.
The Company adopted SFAS No. 144, effective August 1, 2002, and such adoption
had no material impact on the Company's results of operations or financial
position.
In August 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations"("SFAS 143"). SFAS No. 143 addresses financial accounting
and reporting for obligations associated with the retirement of tangible
long-lived assets and the associated retirement costs. The Company adopted SFAS
No. 143, effective August 1, 2002, and such adoption had no material impact on
the Company's results of operations or financial position.
In July 2001, the FASB issued SFAS No. 141, "Business Combinations," and
SFAS No. 142, "Goodwill and Other Intangible Assets" ("SFAS 141"). SFAS No. 141
requires that all business combinations be accounted for under the purchase
method only and that certain acquired intangible assets in a business
combination be recognized as assets apart from goodwill. SFAS No. 142 requires
that ratable amortization of goodwill be replaced with periodic tests of the
goodwill's impairment and that intangible assets other than goodwill should be
amortized over their useful lives. Management adopted SFAS No. 142 on August 1,
2001, and such adoption had no material impact on the Company's results of
operations or financial position.
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