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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarter period ended: October 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:# 0-14754
-------
ELECTRIC & GAS TECHNOLOGY, INC.
-------------------------------
(Exact Name of Registrant as specified in its 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 Offices) (Zip Code)
(972) 934-8797
(Registrant's telephone number, including area code)
--------------------------------------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. YES X NO
--- ---
The number of shares outstanding of each of the Issuer's Classes of Common
Stock, as of the close of the period covered by this report:
Common - $0.01 Par Value - 6,823,934 shares at December 18, 2003.
ELECTRIC & GAS TECHNOLOGY, INC. AND SUBSIDIARIES
Index to Form 10-Q
For the Quarter Ended October 31, 2003
Part I - Financial Information Page
Item 1. Condensed Consolidated Financial Statements:
(a) Condensed Consolidated Balance Sheets as
of October 31, 2003 (unaudited) and July 31, 2003 3
(b) Condensed Consolidated Statements of Operations for
the three months ended October 31, 2003 (unaudited) and
2002 (unaudited) 4
(c) Condensed Consolidated Statement of Changes in Stockholders'
Equity for the three months ended October 31, 2003 (unaudited) 5
(d) Condensed Consolidated Statements of Cash Flows for the
three months ended October 31, 2003 (unaudited) and 2002 (unaudited) 6
(e) Notes to Condensed Consolidated Financial Statements
(unaudited) 7-11
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 12-16
Item 3. Quantitative and Qualitative Disclosures about Market Risk 16
Item 4. Controls and Procedures 17
Part II - Other Information
Item 1. Legal Proceedings 18-19
Item 5. Other Information 19
Item 6. Exhibits and Reports on Form 8-K 20
Signature (Pursuant to General Instruction E) 20
Certifications 21
All other items called for by the instructions are omitted as they
are either not applicable, not required, or the information is
included in the Condensed Financial Statements or Notes thereto.
2
CONDENSED CONSOLIDATED BALANCE SHEETS
October 31, 2003 July 31, 2003
---------------- ----------------
(Unaudited)
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 28,606 $ 46,352
Investments, at market 300,858 56,965
Accounts receivable, net 2,508,886 2,167,316
Inventories 2,842,861 2,683,919
Deferred tax asset 19,045 17,856
Prepaid expenses 84,133 86,721
---------------- ----------------
Total current assets 5,784,389 5,059,129
---------------- ----------------
PROPERTY, PLANT AND EQUIPMENT, net 3,030,789 2,978,748
---------------- ----------------
OTHER ASSETS 1,946,369 2,309,687
---------------- ----------------
TOTAL ASSETS $ 10,761,547 $ 10,347,564
================ ================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Notes payable $ 1,824,920 $ 1,728,991
Accounts payable 2,101,743 1,859,223
Accrued liabilities 438,347 375,482
Income taxes payable 78,785 40,716
Current maturities of long-term obligations 538,360 580,174
---------------- ----------------
Total current liabilities 4,982,155 4,584,586
---------------- ----------------
LONG-TERM OBLIGATIONS
Long-term obligations 3,281,089 3,254,095
---------------- ----------------
STOCKHOLDERS' EQUITY
Preferred stock, $10 par value, 5,000,000 shares
authorized, none issued -- --
Common stock, $.01 par value, 30,000,000 shares
authorized, issued 6,946,934 69,469 69,469
Additional paid-in capital 9,572,201 9,572,201
Accumulated deficit (5,526,527) (5,399,947)
Minimum pension liability (1,168,016) (1,168,016)
Cumulative translation adjustment (303,835) (419,805)
---------------- ----------------
2,643,292 2,653,902
Treasury stock, 123,000 shares at cost (145,019) (145,019)
---------------- ----------------
Total stockholders' equity 2,498,273 2,508,883
---------------- ----------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 10,761,517 $ 10,347,564
================ ================
See accompanying notes to the financial statements.
3
ELECTRIC & GAS TECHNOLOGY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended
October 31,
2003 2002
----------- -----------
Sales $ 3,965,504 $ 2,497,938
Cost of goods sold 3,021,323 1,873,613
----------- -----------
Gross profit 944,181 624,325
Expenses 1,088,806 719,780
----------- -----------
Operating loss (144,625) (95,455)
----------- -----------
Other income (expense):
Interest, net (48,602) (18,917)
Investment gain (loss) 91,906 --
Other, net 8,923 152
----------- -----------
Total other income (expense) 52,227 (18,765)
----------- -----------
Loss before income taxes (92,398) (114,220)
Income taxes (34,182) (13,603)
----------- -----------
Net loss $ (126,580) $ (127,823)
=========== ===========
Net loss available per common share: $ (0.02) $ (0.02)
=========== ===========
Weighted average common shares
Outstanding 6,823,934 6,348,934
=========== ===========
See accompanying notes to the financial statements.
4
ELECTRIC & GAS TECHNOLOGY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
For the Three Months Ended October 31, 2003
(Unaudited)
Accumulated
Other
Common Paid-in Accumulated Comprehensive Treasury
Stock Capital Deficit Loss Stock Total
------------- ------------- ------------- ------------- ------------- -------------
Balance at July 31, 2003 $ 69,469 $ 9,572,201 $ (5,399,947) $ (1,587,821) $ (145,019) $ 2,508,883
Net loss -- -- (126,580) -- -- (126,580)
Currency translation adjustments -- -- -- 115,970 -- 115,970
-------------
Comprehensive loss -- -- -- -- -- (10,610)
------------- ------------- ------------- ------------- ------------- -------------
Balance at October 31, 2003 $ 69,469 $ 9,572,201 $ (5,526,527) $ (1,471,851) $ (145,019) $ 2,498,273
============= ============= ============= ============= ============= =============
See accompanying notes to the financial statements.
5
ELECTRIC & GAS TECHNOLOGY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months Ended October 31,
2003 2002
------------- -------------
Cash flows from operating activities:
Net loss $ (126,580) $ (127,823)
Adjustments to reconcile net loss
to net cash used in operating activities:
Depreciation and amortization 109,306 55,349
Gain on sale of assets (19,873) --
Gains on investments (72,033) --
Changes in assets and liabilities:
Accounts receivable (341,570) 68,056
Inventories (158,942) (245,362)
Prepaid expenses 2,587 17,660
Other assets 15,320 104,097
Accounts payable 242,552 (94,405)
Accrued liabilities 62,865 (46,243)
Deferred taxes 32,754 --
Federal income taxes 36,880 --
------------- -------------
Net cash used in operating activities (216,734) (268,671)
------------- -------------
Cash flows from investing activities:
Proceeds from sales or maturities of investments 105,212 --
Due to from affiliates 72,799 195,368
Purchase of property, plant and equipment (87,288) (35,311)
Certificates of deposits 18,000 --
Net cash provided by investing activities 108,723 160,057
------------- -------------
Cash flows from financing activities:
Increase in notes payable and long-term debt 48,355 125,652
------------- -------------
Effect of exchange rate changes on cash 41,910 --
Net increase (decrease) in cash and cash equivalents (17,746) 17,038
Cash and cash equivalents - beginning of period 46,352 54,615
------------- -------------
Cash and cash equivalents - end of period $ 28,606 $ 71,653
============= =============
Supplemental disclosures of cash flow information:
Cash paid during the period for interest $ 60,718 $ 43,070
============= =============
Non-cash activities:
During the quarter ended October 31, 2003, the Company obtained title to the
Rentech stock which was the collateral for the receivable from Dresser. The
Rentech stock has been classified as marketable securities for the quarter ended
October 31, 2003. The receivable from Dresser was classified as other assets for
the year ended July 31, 2003.
See accompanying notes to the financial statements.
6
ELECTRIC & GAS TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
October 31, 2003
(Unaudited)
NOTE A - 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. The Company presently is the
owner of 100% of Reynolds and Hydel, owns 91.5% of AWT, and 80% of Logic Metals.
Through such subsidiaries, the Company operates in three distinct business
segments: (1) production of atmospheric water, filtration and enhanced water
products; (2) 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) sheet metal fabrication for a diverse
customer base, including telecom and networking cabinetry, elevator controls,
and other sheet metal applications.
The accompanying condensed consolidated financial statements have been
prepared in accordance with the regulations of the Securities and Exchange
Commission ("SEC") for inclusion in the Company's quarterly report on Form 10-Q.
The accompanying financial statements reflect all adjustments of a normal
recurring nature, which are, in the opinion of management, necessary for a fair
statement of the results of operations for the interim periods.
The statements were prepared using accounting principles generally
accepted in the United States of America. As permitted by the SEC, the
statements depart from generally accepted accounting disclosure principles in
that certain data is combined, condensed or summarized that would otherwise be
reported separately. Certain disclosures of the type that were made in the Notes
to Financial Statements for the year ended July 31, 2003 have been omitted, even
though they are necessary for a fair presentation of the financial position at
October 31, 2003 and 2002 and the results of operations and cash flows for the
periods then ended.
NOTE B - ACQUISITION
On January 1, 2003, the Company acquired the personnel, and 80% of the
outstanding stock of privately held Logic Metals Technology, Inc. ("LMT"),
located in Garland, Texas. LMT specializes in the fabrication of components from
sheet metal and assembly of those components into cabinets to house electronic
components and systems. LMT builds products based on specifications provided by
other companies. Customers of LMT have historically been in the telecom
business, with requirements for metal cabinets to house electronic switches and
other components, but newer and proposed customers are in a variety of
7
ELECTRIC & GAS TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
October 31, 2003
(Unaudited)
NOTE B - ACQUISITION (Continued)
businesses, including elevator control systems, traffic signal systems, and
gaming machines. The aggregate cost of the acquisition was the issuance of
400,000 shares of common stock valued at $173,400. The fair market value of the
Company's common stock was based on the closing price as of January 1, 2003,
when the parties of the transaction agreed to the terms of the acquisition.
Results of operations of LMT are included in the results of the Company from the
date of the acquisition.
NOTE C - INVENTORIES
Inventories are comprised as follows:
October 31, 2003 July 31, 2003
---------------- ----------------
Raw materials $ 1,104,808 $ 1,035,450
Work in process 694,451 607,343
Finished goods 1,043,602 1,041,126
---------------- ----------------
$ 2,842,861 $ 2,683,919
================ ================
NOTE D - ACCUMULATED OTHER COMPREHENSIVE LOSS:
The components of accumulated other comprehensive loss are as follows:
Cumulative Minimum
Translation Pension
Adjustment Liability Total
----------- ----------- -----------
Balance at July 31, 2003 $ (419,805) $(1,168,016) $(1,587,821)
Currency translation adjustments 115,970 -- 115,970
----------- ----------- -----------
Balance at October 31, 2003 $ (303,835) $(1,168,016) $(1,471,851)
=========== =========== ===========
The earnings associated with the Company's investment in its foreign
subsidiary are considered to be permanently invested and no provision for U.S.
federal income taxes on these earnings or translation adjustments has been
provided.
8
ELECTRIC & GAS TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
October 31, 2003
(Unaudited)
NOTE E - CONTINGENCIES:
The Company's former U.S. electric operations were sold in 1996 and
1995. The sale of the meter socket division of Retech, Inc. ("Retech") included
a note receivable of approximately $1,250,000 and the continuing ownership of an
80,000 square foot manufacturing facility in Paris, Texas. Under the sale,
Retech would continue to be responsible for the frozen Defined Benefit Pension
Plan for Bargaining Employees (the "Plan"). The Company sued for collection of
the note receivable and subsequently entered into an agreement for the exchange
of a 20% interest in Pioneer Power, an affiliate of the note maker. Further, the
Company was to distribute 80% of its 20% interest to its shareholders in
accordance with the court approved agreement. The maker failed to perform under
this Agreement and has caused the Company to again pursue legal recourse against
the maker and their affiliates. Legal proceedings are just underway and
currently issues dealing with proper court jurisdiction are pending.
The Company had a contract for the sale of the Paris facility pending
the buyer's ability to finance the purchase. The buyer did not perform.
As the result of Retech's non-liquid status, it has been unable to
currently fund the annual pension liability. 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 Plan's pension liability as of July 31, 2003, the date
of the last actuarial valuation, was $1,177,342, intangible assets were $9,326
and a stockholders' equity reduction of $1,168,016 as of July 31, 2003. The
Company must make its minimum required contribution of $218,359 to the plan no
later than April 30, 2004. See Note 12 in July 31, 2003 Form 10-K.
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 12 in July 31, 2003 Form 10-K.
9
ELECTRIC & GAS TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
October 31, 2003
(Unaudited)
NOTE F - INDUSTRY SEGMENT DATA:
The Company's business is primarily comprised of three industry
segments: (i) production of atmospheric water, filtration and enhanced water
products; (ii) the manufacture and sale of products serving the utilities
industry, specifically natural gas measurement equipment and gas odorization
products, and metal enclosures and other hardware for use in the electric
utility industry, and (iii) fabrication of cabinets and piece parts from sheet
metal for diversified end customers as set forth below.
For Three Months Ended
--------------------------
October 31 October 31
2003 2002
----------- -----------
Operating revenues
- ------------------
Water $ 59,232 $ 2,161
Utilities 2,948,319 2,495,777
Fabrication* 957,953 --
----------- -----------
Total sales $ 3,965,504 $ 2,497,938
----------- -----------
Operating income (loss)
- -----------------------
Water $ (61,097) $ (65,580)
Utilities 205,166 132,726
Fabrication* (40,806) --
----------- -----------
103,263 67,146
General corporate expenses (247,888) (162,601)
Other income (expense) 52,227 (18,765)
----------- -----------
Loss before income taxes $ (92,398) $ (114,220)
=========== ===========
* Operations commenced in January 2003.
10
ELECTRIC & GAS TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
October 31, 2003
(Unaudited)
NOTE G - RELATED PARTY TRANSACTIONS
The following is a summary of advances to and from affiliated companies included
in other assets at October 31, 2003 and July 31, 2003:
October 31, 2003 July 31, 2003
---------------- ----------------
Interfederal Capital, Inc. $ 330,798 $ 373,048
IFC Industries, a subsidiary of Interfederal Capital, Inc. 29,757 14,774
M&M Trans Exchange 355,614 375,118
Comtec, Inc. 18,014 18,014
Glauber Management (72,100) (60,600)
Petroleum Dynamic -- (4,222)
Officers (308,699) (289,949)
---------------- ----------------
$ 353,384 $ 426,183
================ ================
Interfederal Capital, Inc. (Interfederal), a Texas corporation, is
owned by S. Mort Zimmerman and his four (4) children. The Company paid
Interfederal Capital, Inc. $27,600 and $82,800 for the three months ended
October 31, 2003 and year ended July 31, 2003, respectively. The fees are
included in S. Mort Zimmerman's annual compensation. Accumulated borrowings for
the years ended July 31, 2003 and 2002 were $373,048 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 of the July 31, 2003
Form 10-K.
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.
11
ELECTRIC & GAS TECHNOLOGY, INC. AND SUBSIDIARIES
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
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 and sale of products serving the
utilities industry, specifically, natural gas measurement equipment and gas
odorization products, and metal enclosures and other hardware for use in the
electric utility industry, and (iii) fabrication of cabinets and piece parts
from sheet metal for diversified end customers.
Results of Operations
Summary. The Company reported net losses of $(126,580) and $(127,823)
for the three months ended October 31, 2003 and 2002, respectively. Operating
loss increased by $49,170 for the three month period, primarily as a result of
increases in corporate general and administration expenses of $85,287 and
operating loss in the fabrication segment in its first quarter operations of
$40,806. The utility segment reported an increase in revenue of $452,542 with
income before income taxes improving by $72,440 compared to the three months
ending October 31, 2002. The water segment reported increased revenues of
$57,071, with income before income taxes increasing $4,483 for the three month
period. Revenue was recognized for the metal fabrication business for the first
time in January of 2003. Revenue for the fabrication segment was $957,953 for
the three months ended October 31, 2003, and the operating loss was $40,806 for
the same period. Overall, gross margins decreased from 24.99% for the three
months ended October 31, 2002 to 23.81% for the three months ended October 31,
2003. Also, selling, general and administrative expenses as a percent of
revenues at the segment level increased from 22.31% to 27.16% of revenue for the
three-month periods, respectively due to LMT not being included in the prior
year results. Other income and (expense) decreased $70,992 for the three-month
period ended October 31, 2003 compared to 2002 primarily as a result of realized
and unrealized gain in fair market value of Rentech stock which is held in other
assets.
Increases (decreases) for the three months periods ended October 31,
2003, as compared with the similar period of 2002, for key operating data were
as follows:
Three Months Ended
October 31, 2003
----------------
Increase Percent
(Decrease) Change
---------- ------
Sales $1,467,566 58.75
Operating loss (49,170) (51.51)
Loss before income taxes 21,822 19.11
Net loss available per common share (.00) na
12
ELECTRIC & GAS TECHNOLOGY, INC. AND SUBSIDIARIES
Results of Operations (continued)
The following table represents the changes [increase/(decrease)] in
operating revenues, operating income (loss) and income (loss) before income
taxes by the respective industry segments when compared to the previous period:
Three Months Ended
October 31, 2003
---------------------------
Increase Percent
(Decrease) Change
----------- -----------
Operating revenues:
------------------
Water $ 57,071 2640.95%
Utility 452,542 18.13%
Fabrication 957,953 N/A
----------- -----------
$ 1,467,566 58.75%
=========== ===========
Operating income (loss):
-----------------------
Water $ 4,483 (6.84)%
Utility 72,440 54.58%
Fabrication (40,806) N/A
-----------
36,117 (50.25)%
General corporate expenses (85,287) 52.45%
Other income (expense) 70,992 378.33%
----------- -----------
Loss before income taxes $ (21,822) 19.11%
=========== ===========
Water revenues amounted to $59,232 for the three months ended October
31, 2003 primarily reflecting the purchase of demonstration units for India and
Mexico. Expenses were $120,329 and $67,741 for the three months ended October
31, 2003, and October 31, 2002, respectively. The Company has identified
distributors/agents for India, UAE and Sri Lanka, in addition to Lockheed
Martin.
Utility revenues increased by $452,542 for the three months ended
October 31, 2003. Operating income increased by $72,440 for the three months
ended October 31, 2003 resulting in operating income of $205,166. Selling,
general and administrative expenses decreased $39,184 to $557,801. The reduction
represents a reduction of revenues when compared to 24.89% for the corresponding
nine month period in the prior year. This segment was adversely affected by the
events of September 11, 2001 and the overall economy. Business is showing signs
of improvement, and the sector has introduced new products for the digital
recording of multiple pressure points, to begin replacing the paper graph
recorders.
13
ELECTRIC & GAS TECHNOLOGY, INC. AND SUBSIDIARIES
Results of Operations (continued)
Fabrication began manufacturing for the electric and gas industry
starting January 1, 2003. Revenue was $957,953 for the three months ended
October 31, 2003. Logic Metals is a sheet metal fabrication company with
customers in the telecom and elevators industries, and has established a
strategic alliance with Mecanova OY of Finland to provide international
solutions.
With the exception of expense relationships discussed above in the
specific segment discussion, such other relationships remain consistent.
Corporate overhead expenses decreased by approximately $85,000 relative to the
corresponding 3 month period in the prior year. Gross profits generated by the
Company's business segments are beginning to approach the level required to
cover selling, general and administrative expenses. The Company believes there
is a worldwide need for safe reliable drinking water and the market can be
exploited with its products. Further, the Company has had to expend
approximately $6,000 in the quarter ended October 31, 2003 and $200,000 total,
in vigorously defending its ownership of its general corporate offices in
litigation with the SBA, which currently remains unresolved at December 16,
2003. (Also see Part II, Item 1. "Legal Proceedings").
Liquidity and Capital Resources
Liquidity. Current assets of the Company total $5,784,389 at October
31, 2003, up from current assets of $5,059,129 at July 31, 2003, or an increase
of $725,260. Current liabilities increased by $397,569, resulting in working
capital (current assets less current liabilities) of $802,234 at October 31,
2003 as compared to $474,543 at July 31, 2003. The Company believes that it has
and can generate sufficient cash to meet its working capital requirements.
Hydel has a working capital line-of-credit with a Canadian bank in the
amount of approximately $1,500,000. The Canadian credit facility is secured by
receivables, inventories and equipment of Hydel.
Reynolds has established a working capital line of credit of
approximately $400,000 with a national bank in the Dallas, Texas area. The line
is secured by accounts receivable and inventory of Reynolds. During the year
ended July 31, 2003, Reynolds also received a mortgage loan in connection with
refinancing of the building it occupies for $397,000.
Logic has received funding from a national bank in the Dallas, Texas
area of $450,000 on a revolving line of credit secured by accounts receivable
and inventory.
14
ELECTRIC & GAS TECHNOLOGY, INC. AND SUBSIDIARIES
Liquidity and Capital Resources (Continued)
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.
As more fully described in Note E of the Condensed Financial
Statements, the Company could be liable for substantial penalties for Retech,
Inc.'s pension plan. Such penalties would have a material adverse affect on the
Company's liquidity.
Capital Expenditures
For fiscal 2004, the Company anticipates capital expenditures in the
metal fabrication area as additional capacity is required to meet customer
requirements. Otherwise, expenditures for capital equipment will be for the
ordinary replacement of worn-out or obsolete machinery and equipment utilized by
its subsidiaries.
Dividend Policy
The Company's Board of Directors has declared no cash dividends 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 it
cash flow to invest in its businesses.
15
ELECTRIC & GAS TECHNOLOGY, INC. AND SUBSIDIARIES
Other Business Matters
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 affecting the Company's overall operations is the general state of
the economy and principally new home construction.
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 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is subject to exposure from fluctuations in U.S. dollar
exchange rates and the Canadian dollar exchange rates. Hydel conducts its
business in Canadian dollars. The exchange rate between Canadian dollars and
U.S. dollars has fluctuated historically. The Company has not engaged in
transactions to offset currency fluctuations. If the value of the Canadian
dollar against the U.S. dollar weakens, then the revenues and earnings of the
Canadian operations will be reduced when it is translated to U.S. dollars. Also,
the value of the Canadian net assets in U.S. dollars may decline.
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ELECTRIC & GAS TECHNOLOGY, INC. AND SUBSIDIARIES
Item 4. CONTROLS AND PROCEDURES
(a) Evaluation of disclosure controls and procedures.
The President has conducted an evaluation of the effectiveness of the Company's
disclosure controls and procedures pursuant to Rule 13a-14 under the Securities
Exchange Act of 1934 as of a date (the "Evaluation Date") within 90 days prior
to the filing date of this report. Based upon that evaluation, the President
concluded that, as of the Evaluation Date, the Company's disclosure controls and
procedures were effective in ensuring that all material information relating the
Company required to be filed in this quarterly report has been made known to him
in a timely manner.
(b) Changes in internal controls.
There have been no significant changes made in the Company's internal controls
or in other factors that could significantly affect internal controls subsequent
to the Evaluation Date.
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ELECTRIC & GAS TECHNOLOGY, INC. AND SUBSIDIARIES
PART II
ITEM 1. 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 the Company 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, 2001. 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, 2001 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, 2001 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 is currently on hold pending
Comtec's filing of a Chapter 11 bankruptcy proceeding on July 3, 2001. CIT Group
Credit Finance, Inc. ("CIT") holds what bankruptcy counsel believes is a secured
lien on the building as a result of their loans to the Company. The Company has
offered to purchase the building with the bulk of the proceeds going to satisfy
the CIT obligation. The Company will vigorously defend its position.
Electric & Gas Technology, Inc., Retech, Inc. and Hydel Enterprises,
Inc. (Plaintiffs) vs. Nathan Mazurek, American Circuit Breaker Corp. and
Provident Group, Inc. (Defendants) - Civil Action N. 3:01-CV-2756-G. Plaintiffs
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. Plaintiffs allege the non-payment of a note to Retech, Inc. of
approximately $1,150,000, unpaid accounts receivable to Hydel Enterprises, Inc.
of approximately $975,000 (Canadian Dollars), plus added sums in penalties,
damages and attorneys' fees. Plaintiffs have also filed a motion to stay other
pending litigation in Delaware involving the related parties.
Status of Electric & Gas Technology, Inc. lawsuits, regarding AWT
patent infringement. The Company has filed a $60 million complaint alleging
infringement and fraud against Universal Communication Systems, Inc. ("UCSY")
and J.J Reidy and Company, Inc. filed in Federal District Court, Northern
District of Texas - Dallas Division Cause No. 3-03CV-1798-G. In answer to the
complaint UCSY filed a motion to dismiss based on lack of jurisdiction in Texas.
The court in the Texas case ruled in favor of UCSY but without prejudice to the
complaint of infringement and fraud, freeing ELGT to pursue the original
complaint in an alternate venue. In no way has the primary complaint of
infringement and fraud been compromised or otherwise ruled upon.
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ELECTRIC & GAS TECHNOLOGY, INC. AND SUBSIDIARIES
ITEM 1. LEGAL PROCEEDINGS (Continued)
Separately, UCSY's $118 million complaint filed in Federal District
Court, Southern District of Florida Cause No. 03-22196-CIV-Seitz/Bandstra,
alleging defamation by ELGT and a company director has been dismissed in Florida
for failure to comply with court orders. UCSY's counterclaim of infringement
filed in the same Federal District Court, Southern District of Florida Cause No.
03-22250-CIV-King/O'Sullivan is pending UCSY's compliance with court orders.
ELGT also announced that the Federal District Court of California,
Central District of California for the Western Division has granted ELGT's
request for intervention (Cause No. CV-03-642-PA-AJWX) in the case of Worldwide
Water, Inc. and Worldwide Water, LLP vs. Liquid Air, parties that ELGT alleges
patent infringement. Worldwide Water and UCSY have previously announced their
collaboration in a press release dated August 14, 2003.
ELGT encourages all interested parties to use public access sources
such as PACER (http://pacer.pcs.uscurts.gov) to confirm facts related to these
and any legal proceeding.
ITEM 5. OTHER INFORMATION
As 8-K was filed in July 2003, to dismiss Whitley Penn (formerly
"Jackson & Rhodes PC) as its certifying accountants and to engage Lightfoot
Guest Moore & Co., P.C. as its certifying accountants. The Registrant's Audit
Committee has approved this action.
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ELECTRIC & GAS TECHNOLOGY, INC. AND SUBSIDIARIES
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) NONE
(b) Reports on Form 8-K.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ELECTRIC & GAS TECHNOLOGY, INC.
/s/ S Mort Zimmerman
--------------------
S Mort Zimmerman
Chairman and
Chief Executive Officer
Dated: December 22, 2003
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