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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: January 31, 2004
----------------
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
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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
--- ---
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12-2 of the Exchange Act). Yes No X
--- ---
The number of shares outstanding of each of the Issuer's Classes of Common
Stock, as of March 22, 2004:
Common - $0.01 Par Value - 6,887,734
ELECTRIC & GAS TECHNOLOGY, INC. AND SUBSIDIARIES
Index to Form 10-Q
For the Quarter Ended January 31, 2004
Part I - Financial Information Page
Item 1. Condensed Consolidated Financial Statements:
(a) Condensed Consolidated Balance Sheets as of January 31,
2004 (unaudited) and July 31, 2003 3
(b) Condensed Consolidated Statements of Operations for the
three and six months ended January 31, 2004 (unaudited) and
2003 (unaudited) 4
(c) Condensed Consolidated Statement of Changes in
Stockholders' Equity for the six months ended January 31, 2004
(unaudited) 5
(d) Condensed Consolidated Statements of Cash Flows for the
six months ended January 31, 2004 (unaudited) and 2003
(unaudited) 6-7
(e) Notes to Condensed Consolidated Financial Statements
(unaudited) 8-12
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 13-17
Item 3. Quantitative and Qualitative Disclosures about Market Risk 17
Item 4. Controls and Procedures 18
Part II - Other Information
Item 1. Legal Proceedings 19-20
Item 6. Exhibits and Reports on Form 8-K 21
Signature (Pursuant to General Instruction E) 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
ELECTRIC & GAS TECHNOLOGY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
January 31, 2004 July 31, 2003
---------------- ----------------
(Unaudited)
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 74,569 $ 46,352
Investments, at market -- 56,965
Accounts receivable, net 1,870,000 2,167,316
Inventories 3,006,833 2,683,919
Deferred tax asset 19,045 17,856
Prepaid expenses 87,800 86,721
---------------- ----------------
Total current assets 5,058,247 5,059,129
---------------- ----------------
PROPERTY, PLANT AND EQUIPMENT, net 2,937,825 2,978,748
---------------- ----------------
OTHER ASSETS 2,057,454 2,309,687
---------------- ----------------
TOTAL ASSETS $ 10,053,526 $ 10,347,564
================ ================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Notes payable $ 1,485,685 $ 1,728,991
Accounts payable 2,009,612 1,859,223
Accrued liabilities 463,461 375,482
Income taxes payable 43,697 40,716
Current maturities of long-term obligations 388,941 580,174
---------------- ----------------
Total current liabilities 4,391,396 4,584,586
---------------- ----------------
LONG-TERM OBLIGATIONS
Long-term obligations 3,468,050 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 (5,872,605) (5,399,947)
Minimum pension liability (1,168,016) (1,168,016)
Cumulative translation adjustment (337,200) (419,805)
---------------- ----------------
2,263,849 2,653,902
Treasury stock, 59,200 and 123,000 shares (69,769) (145,019)
---------------- ----------------
at cost, respectively
Total stockholders' equity 2,194,080 2,508,883
---------------- ----------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 10,053,526 $ 10,347,564
================ ================
See accompanying notes to the condensed financial statements.
3
ELECTRIC & GAS TECHNOLOGY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three months ended Six months ended
January 31, January 31,
--------------------------------------------------------
2004 2003 2004 2003
----------- ----------- ----------- -----------
Sales $ 3,525,780 $ 3,127,075 $ 7,491,284 $ 5,625,013
Cost of goods sold 2,812,534 2,128,566 5,833,857 4,002,179
----------- ----------- ----------- -----------
Gross profit 713,246 998,509 1,657,427 1,622,834
Selling, general and administrative
expenses 1,047,381 1,031,706 2,136,187 1,751,486
----------- ----------- ----------- -----------
Operating (loss) (334,135) (33,197) (478,760) (128,652)
----------- ----------- ----------- -----------
Other income (expense)
Interest, net (62,931) (53,425) (111,533) (72,342)
Investment gain (loss) 51,139 -- 143,045 --
Other, net 11,952 10,625 20,875 10,777
----------- ----------- ----------- -----------
Total other income (expense) 160 (42,800) 52,387 (61,565)
----------- ----------- ----------- -----------
(Loss) before income taxes (333,975) (75,997) (426,373) (190,217)
Income taxes (12,103) (2,807) (46,285) (16,410)
----------- ----------- ----------- -----------
NET (LOSS) $ (346,078) $ (78,804) $ (472,658) $ (206,627)
=========== =========== =========== ===========
(Loss) available per Common share:
Net (loss) $ (.05) $ (0.01) $ (.07) $ (0.03)
----------- ----------- ----------- -----------
Weighted average common shares
outstanding 6,887,734 6,823,934 6,852,020 6,823,934
See accompanying notes to condensed financial statements.
4
ELECTRIC & GAS TECHNOLOGY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
For the six months ended January 31, 2004
(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 -- -- (472,658) -- -- (472,658)
Currency translation adjustments -- -- -- 82,605 -- 82,605
-----------
Comprehensive loss -- -- -- -- -- --
Treasury stock transferred to pension plan 75,250 75,250
----------- ----------- ----------- ----------- ----------- -----------
Balance at January 31, 2004 $ 69,469 $ 9,572,201 $(5,872,605) $(1,505,216) $ (69,769) $ 2,194,080
=========== =========== =========== =========== =========== ===========
See accompanying notes to condensed financial statements.
5
ELECTRIC & GAS TECHNOLOGY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Six months ended January 31,
2004 2003
------------ ------------
Cash flows from operating activities:
Net loss $ (472,658) $ (206,627)
Adjustments to reconcile net loss
to net cash used in operating activities:
Depreciation and amortization 202,206 145,616
Gain on sale of assets (143,045) --
Changes in assets and liabilities:
Accounts receivable 297,316 206,341
Inventories (322,914) (272,442)
Prepaid expenses (1,080) 45,301
Other assets 29,547 (257,444)
Accounts payable 157,258 326,609
Accrued liabilities 122,979 (40,261)
Deferred taxes 10,457 --
Federal income taxes 1,792 --
------------ ------------
Net cash used in operating activities (118,142) (52,907)
------------ ------------
Cash flows from investing activities:
Cash acquired in acquisition -- 38,548
Proceeds from sales or maturities of investments 322,215 --
Due to from affiliates (12,335) (92,098)
Purchase of property, plant and equipment (87,224) (151,516)
Certificates of deposits 56,000 --
------------ ------------
Net cash provided by investing activities 278,656 (205,066)
------------ ------------
Cash flows from financing activities:
Net change in notes payable and long-term debt (140,842) 414,386
------------ ------------
Effect of exchange rate changes on cash 8,545 13,625
Net increase (decrease) in cash and cash equivalents (28,217) 170,038
Cash and cash equivalents - beginning of period 46,352 54,615
------------ ------------
Cash and cash equivalents - end of period $ 74,569 $ 224,653
============ ============
Supplemental disclosures of cash flow information:
Cash paid during the period for interest $ 60,718 $ 71,429
============ ============
See accompanying notes to condensed financial statements.
6
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
(Unaudited)
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 was classified as marketable securities for the quarter ended
October 31, 2003 and a portion was subsequently sold and the remainder was
transferred to an affiliate, Interfederal Capital, Inc. in the quarter ended
January 31, 2004. The receivable from Dresser was classified as other assets for
the year ended July 31, 2003.
Rentech stock, with a fair market value of $78,178 was transferred to an
affiliated company, Interfederal Capital, Inc. during the quarter ended January
31, 2004.
Treasury stock with a cost of $75,250 was transferred to the pension plan in the
quarter ended January 31, 2004. The cost basis approximated the fair market
value at the time of the transfer.
Capacitive Deionization Technology (CDT) stock, with a market value of $56,965,
was transferred to the Retech employees pension plan in the quarter ended
January 31, 2004.
See accompanying notes to condensed financial statements.
7
ELECTRIC & GAS TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
January 31, 2004
(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 January 31,
2004 and 2003 and the results of operations and cash flows for the periods then
ended.
NOTE B - ACQUISITION
On January 1, 2003, the Company acquired 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
8
ELECTRIC & GAS TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
January 31, 2004
(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:
January 31, 2004 July 31, 2003
---------------- ----------------
Raw materials $ 1,166,295 $ 1,035,450
Work in process 631,104 607,343
Finished goods 1,209,434 1,041,126
---------------- ----------------
$ 3,006,833 $ 2,683,919
================ ================
NOTE D - NOTES PAYABLE AND LONG-TERM OBLIGATIONS
Hydel borrowed an additional $265,000 from the Canadian bank with which it had a
demand bank loan with a maximum loan amount of $1,563,000 payable on demand, for
which the amount outstanding at January 31, 2004 was $644,000. The proceeds of
the new loan were used to repay indebtedness to the parent company.
NOTE E - 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 82,605 -- 82,605
----------- ----------- -----------
Balance at January 31, 2004 $ (337,200) $(1,168,016) $(1,505,216)
=========== =========== ===========
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.
9
ELECTRIC & GAS TECHNOLOGY, INC. AND SUBSIDIA
NOTE F - 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 has accrued $30,000 and transferred marketable securities with a value
of $125,200 to the pension plan for a total contribution, paid or accured, in
the quarter ended January 31, 2004 in the amount of $165,200, and must make the
balance of $53,159 to meet 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 has received registered shares to replace
the unregistered shares as of March 2, 2004. See Note 12 in July 31, 2003 Form
10-K.
10
ELECTRIC & GAS TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
January 31, 2004
(Unaudited)
NOTE G - 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.
3 months 6 months
January 31, January 31,
Operating revenues 2004 2003 2004 2003
Water $ 3,111 $ 153,000 $ 62,343 $ 155,161
Utilities 2,574,138 2,488,353 5,522,457 4,984,130
Fabrication* 948,531 485,722 1,906,484 485,722
----------- ----------- ----------- -----------
Total sales $ 3,525,780 $ 3,127,075 $ 7,491,284 $ 5,625,013
=========== =========== =========== ===========
Operating income (loss)
Water $ (74,957) $ 104,346 $ (136,054) $ 38,767
Utilities (61,493) 68,355 143,867 201,082
Fabrication* (20,310) 44,671 (61,310) 44,669
----------- ----------- ----------- -----------
Total segment operating income
(loss) (156,760) 217,372 (53,497) 284,518
General corporate expenses (177,375) (250,569) (425,263) (413,170)
Other income (expense) 160 (42,800) 52,387 (61,565)
----------- ----------- ----------- -----------
Loss before income taxes $ (333,975) $ (75,997) $ (426,373) $ (190,217)
=========== =========== =========== ===========
* Operations commenced in January 2003.
11
ELECTRIC & GAS TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
January 31, 2004
(Unaudited)
NOTE H - RELATED PARTY TRANSACTIONS
The following is a summary of advances to and from affiliated companies included
in other assets at January 31, 2004 and July 31, 2003:
January 31, 2004 July 31, 2003
---------------- ----------------
Interfederal Capital, Inc. $ 470,513 $ 373,048
IFC Industries, a subsidiary of Interfederal Capital, Inc. 49,639 14,774
M&M Trans Exchange 382,301 375,118
Comtec, Inc. 18,014 18,014
Glauber Management (72,100) (60,600)
Petroleum Dynamic (4,222) (4,222)
Officers (327,449) (289,949)
---------------- ----------------
$ 516,696 $ 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 and six months ended January 31,
2004 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.
During the quarter ended January 31, 2004, the Company transferred 90,000
shares of Rentech stock to Interfederal Capital, Inc. The sale was recorded at
$78,178, which was the fair market of the Rentech stock on the date of transfer.
12
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 $(472,658) and $(346,078) for
the six and three months ended January 31, 2004, respectively. This compared to
$(206,627) and $(78,804) for the six and three months ended January 31, 2003,
respectively. Segment operating loss increased by $338,015 and $374,132 for the
six and three month periods, the result of lower sales in the WaterMaker
business and continued losses in the fabrication sector, with negative change in
the product mix of the utilities segment. The Utility segment reported increases
in revenue of $538,327 and $85,785 with operating profits decreasing by $57,409
and $129,848 for the six and three month periods, respectively. The water
segment reported decreased revenues of $92,818 and $149,889, with operating
profits decreasing $174,821 and 179,303 for the six and three months ended
January 31, 2004. The Metal Fabrication business revenues increased $1,420,762
and $462,809 while operating loss from this segment increased by $105,785 and
$64,981, respectively. Gross margins decreased from 28.85% to 22.12% for the six
months ended January 31, 2004 and from 31.93% to 20.23% for the three months
ended January 31, 2004. Selling, general and administrative expenses as a
percent of revenues decreased from 31.14% to 28.52% for the six months ended
January 31, 2004 and decreased from 32.99% to 29.71% of revenue for the three
months ended January 31, 2004. Other income was affected by gain on sale of
Rentech Stock.
Increases (decreases) for the three and six months periods ended January
31, 2004, as compared with the similar period of 2003, for key operating data
were as follows:
Three months ended Six months ended
January 31, 2004 January 31, 2004
Increase/ Increase/
(Decrease) Percent Change (Decrease) Percent Change
Sales 398,705 12.75% 1,866,271 33.18%
Segment operating loss 374,132 172.12% 338,015 118.80%
Loss before income tax 257,978 (339.46%) 236,156 (124.15%)
Net loss per share (0.04) (400.00%) (0.04) (133.33%)
13
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 Six months ended
Increase/ Increase/
(Decrease) Percent (Decrease) Percent
----------- ----------- ----------- -----------
Operating revenues
- ------------------
Water $ (149,889) (97.97%) $ (92,818) (59.82%)
Utilities 85,785 3.45% 538,327 10.80%
Fabrication 462,809 95.28% 1,420,762 292.51%
----------- ----------- ----------- -----------
Total sales $ 398,705 12.75% $ 1,866,271 33.18%
=========== =========== =========== ===========
Operating income (loss)
- -----------------------
Water $ (179,303) (171.84%) $ (174,821) (450.95%)
Utilities (129,848) (189.96%) (57,409) (28.45%)
Fabrication (64,981) (145.47%) (105,785) (236.82%)
----------- ----------- ----------- -----------
Total segment operating
income (loss) (374,132) (172.12%) (338,015) (118.80%)
General corporate expenses 73,194 (29.21%) (12,093) 2.93%
Other income (expense) 42,960 (100.37%) 113,952 (185.09%)
----------- ----------- ----------- -----------
Loss before income taxes $ (257,978) 339.46% $ (185,855) 124.15%
=========== =========== =========== ===========
Water revenues amounted to $62,343 for the six months ended January 31,
2004 primarily reflecting the purchase of demonstration units for India and
Mexico. Expenses were $198,942 and $120,328 for the three and six months ended
January 31, 2004, respectively. The Company has identified distributors/agents
for India, UAE and Sri Lanka.
Utility revenues increased by $538,327 and $85,785 for the three and six
months ended January 31, 2004. Operating income decreased by $57,409 and
$129,868 for the three and six months ended January 31, 2004 resulting in
operating profit of $143,867 in the six months of 2004 and an operating loss of
$(61,493) in the three months ending January 31, 2004. This segment was
adversely affected by the events of September 11, 2001 and the overall economy.
The segment has introduced new products for the digital recording of multiple
pressure points, to begin replacing the paper graph recorders, and is completing
a new "drip" odorization system for which there appears to be an un-served niche
in the low volume natural gas delivery business. The products for the gas
service is generally a capital purchase by the Company's customers and will
require time for new products to be integrated into their purchasing cycle.
14
ELECTRIC & GAS TECHNOLOGY, INC. AND SUBSIDIARIES
Results of Operations (continued)
Fabrication began manufacturing for the electric and gas industry starting
January 1, 2003, with the initial month revenue of $485,722 for the 6 months and
3 months with the acquisition of Logic Metals Technology, Inc. Revenue was
$948,531 and 1,906,484 for the three and six months ended January 31, 2004,
respectively. 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 $73,194 and increased by $12,093 relative to the
corresponding 3 month and six month periods in the prior year, respectively. The
Company believes there is a worldwide need for safe reliable drinking water and
the market can be exploited with its products. The Company has had to expend
approximately $4,260 in the quarter ended January 31, 2004 and approximately
$200,000 total, in vigorously defending its ownership of its general corporate
offices in litigation with the SBA. (Also see Part II, Item 1. "Legal
Proceedings").
Liquidity and Capital Resources
Liquidity. Current assets of the Company total $5,058,247 at January 31,
2004, down from current assets of $5,059,129 at July 31, 2003, or a decrease of
$882. Current liabilities decreased by $193,190, resulting in working capital
(current assets less current liabilities) of $666,851 at January 31, 2004 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. Additionally, Hydel has
borrowed $264,000 to repay the loans due to the U.S. corporate facility.
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 and $337,000 for the purchase of machinery.
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ELECTRIC & GAS TECHNOLOGY, INC. AND SUBSIDIARIES
Liquidity and Capital Resources (Continued)
While the Company has incurred losses over the past years, the Company has,
in the past, demonstrated 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 January 31, 2004, 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 from potential sale of treasury
stock.
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.
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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.
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ELECTRIC & GAS TECHNOLOGY, INC. AND SUBSIDIARIES
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit 31.1 - Certification of Chairman and Chief Executive Officer of
Electric & Gas Technology, Inc. and Subsidiaries required by Rule 13a - 14(1) or
Rule 15d - 14(a) of the Securities Exchange Act of 1934, as adopted pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
Exhibit 31.2 - Certification of Chief Financial Officer of Electric & Gas
Technology, Inc. and Subsidiaries required by Rule 13a - 14(1) or Rule 15d -
14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302
of the Sarbanes-Oxley Act of 2002.
Exhibit 32.1 -- Certification of Chairman and Chief Executive Officer of
Electric & Gas Technology, Inc. and Subsidiaries pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 and Section 1350 of 18 U.S.C. 63.
Exhibit 32.2 -- Certification of Chief Financial Officer of Electric & Gas
Technology, Inc. and Subsidiaries pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002 and Section 1350 of 18 U.S.C. 63.
(b) Reports on Form 8-K.
NONE
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: March 22, 2004
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