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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: April 30, 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.)
3233 West Kingsley Road, Garland, Texas 75041
(Address of Principal Executive Offices) (Zip Code)
(972) 840-3223
(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 June 18, 2004:
Common - $0.01 Par Value - 6,887,734
ELECTRIC & GAS TECHNOLOGY, INC. AND SUBSIDIARIES
Index to Form 10-Q
For the Quarter Ended April 30, 2004
Part I - Financial Information Page
Item 1. Condensed Consolidated Financial Statements:
(a) Condensed Consolidated Balance Sheets as
of April 30, 2004 (unaudited) and July 31, 2003 3
(b) Condensed Consolidated Statements of Operations for the
three and nine months ended April 30, 2004 (unaudited) and
2003 (unaudited) 4
(c) Condensed Consolidated Statement of Changes in
Stockholders' Equity for the nine months ended April 30, 2004
(unaudited) 5
(d) Condensed Consolidated Statements of Cash Flows for
the nine months ended April 30, 2004 (unaudited) and 2003
(unaudited) 6-7
(e) Notes to Condensed Consolidated Financial Statements
(unaudited) 8-14
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 15-19
Item 3. Quantitative and Qualitative Disclosures about Market Risk 19
Item 4. Controls and Procedures 20
Part II - Other Information
Item 1. Legal Proceedings 21-22
Item 3. Default on Senior Securities 22
Item 5. Other information 22
Item 6. Exhibits and Reports on Form 8-K 23
Signature (Pursuant to General Instruction E) 23
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
April 30, 2004 July 31, 2003
-------------- --------------
(Unaudited)
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 51,464 $ 40,930
Investments, at market 5,684 56,965
Accounts receivable, net 975,132 962,697
Inventories 1,119,671 983,649
Prepaid expenses 72,005 41,655
Assets held for sale 486,900 --
Current assets of discontinued operations 2,828,677 2,973,233
-------------- --------------
Total current assets 5,539,533 5,059,129
-------------- --------------
PROPERTY, PLANT AND EQUIPMENT, net 1,359,999 1,797,013
-------------- --------------
OTHER ASSETS
Assets held for sale 538,052 447,110
Non current assets on discontinued operations 904,431 1,254,967
Other assets 1,062,031 1,789,345
-------------- --------------
Total other assets 2,504,514 3,491,422
-------------- --------------
TOTAL ASSETS $ 9,404,046 $ 10,347,564
============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Notes payable $ 2,398,340 $ 840,828
Accounts payable 1,064,769 732,900
Accrued liabilities 386,859 203,660
Current maturities of long-term obligations 178,817 512,910
Current liabilities of discontinued operations 2,138,277 2,294,288
-------------- --------------
Total current liabilities 6,167,062 4,584,586
-------------- --------------
LONG-TERM OBLIGATIONS
Non current liabilities of discontinued operations 815,420 599,194
Minimum pension liability 1,008,983 958,983
Non current maturities of long-term obligations 597,147 1,695,918
-------------- --------------
Total long-term obligations 2,421,550 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 (7,204,137) (5,399,947)
Minimum pension liability (1,168,016) (1,168,016)
Cumulative translation adjustment (384,314) (419,805)
-------------- --------------
885,203 2,653,902
Treasury stock, 59,200 and 123,000 shares (69,769) (145,019)
at cost, respectively
Total stockholders' equity 815,434 2,508,883
-------------- --------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 9,404,046 $ 10,347,564
============== ==============
See accompanying notes to the condensed consolidated financial statements.
3
ELECTRIC & GAS TECHNOLOGY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three months ended Nine months ended
April 30, April 30,
-------------------------- --------------------------
2004 2003 2004 2003
----------- ----------- ----------- -----------
Sales $ 1,671,963 $ 1,682,283 $ 4,649,970 $ 3,583,203
Cost of goods sold 1,344,783 1,129,799 3,654,648 2,195,407
----------- ----------- ----------- -----------
Gross profit 327,180 552,484 995,322 1,387,796
Selling, general and administrative 608,933 704,263 2,069,787 1,941,978
----------- ----------- ----------- -----------
Operating loss (281,753) (151,779) (1,074,465) (554,182)
----------- ----------- ----------- -----------
Other income (expense):
Interest, net (37,891) (23,821) (105,328) (61,782)
Investment gain (loss) (497,578) (34,567) (284,794) (34,567)
Other, net (192,728) (1,620) (171,854) 9,150
----------- ----------- ----------- -----------
Total other expense (728,197) (60,008) (561,976) (87,199)
----------- ----------- ----------- -----------
Loss from continuing operations (1,009,950) (211,787) (1,636,441) (641,381)
----------- ----------- ----------- -----------
Discontinued operations:
Income from discontinued
operations,
net of income tax expense of
$1,559, $567, $48,851, and
$16,977 4,818 54,234 254,630 208,951
Loss on sale of discontinued
operations, net of income tax
benefit of $157,586 (422,379) -- (422,379) --
----------- ----------- ----------- -----------
Gain (loss) from discontinued (412,743) 54,234 (167,749) 208,951
----------- ----------- ----------- -----------
operations
Net loss $(1,427,511) $ (157,553) $(1,804,190) $ (432,430)
=========== =========== =========== ===========
Income (loss) available per
Common share:
Loss from continued operations $ (0.15) $ (0.03) $ (0.24) $ (0.09)
Gain (loss) from discontinued
operations (0.06) 0.01 (0.02) 0.03
----------- ----------- ----------- -----------
Net loss $ (0.21) $ (0.02) $ (0.26) $ (0.06)
=========== =========== =========== ===========
Weighted average common
shares outstanding 6,887,734 6,823,934 6,863,751 6,823,934
=========== =========== =========== ===========
See accompanying notes to condensed consolidated financial statements.
4
ELECTRIC & GAS TECHNOLOGY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
For the nine months ended April 30, 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 -- -- (1,804,190) -- -- (1,804,190)
Currency translation adjustments -- -- -- 35,491 -- 35,491
Comprehensive loss -- -- -- -- -- (1,768,699)
Treasury stock transferred to pension plan -- -- -- -- 75,250 75,250
----------- ----------- ----------- ----------- ----------- -----------
Balance at April 30, 2004 $ 69,469 $ 9,572,201 $(7,204,137) $(1,552,330) $ (69,769) $ 815,434
=========== =========== =========== =========== =========== ===========
See accompanying notes to condensed consolidated financial statements.
5
ELECTRIC & GAS TECHNOLOGY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine months ended April 30,
2004 2003
----------- -----------
Cash flows from operating activities:
Net loss $(1,804,190) $ (432,430)
(Gain) loss on discontinued operations 167,749 (208,951)
----------- -----------
Loss from continuing operations (1,636,441) (641,381)
Adjustments to reconcile net loss
to net cash provided by (used in) operating activities:
Depreciation and amortization 194,191 65,483
Change in market value of investments -- 34,567
Gain on sale of assets (143,045) --
Loss on investments 447,019 --
Changes in assets and liabilities:
Accounts receivable (12,435) (206,928)
Inventories (136,022) (43,508)
Prepaid expenses (30,350) 5,016
Other assets (33,726) 213,399
Accounts payable 338,738 551,486
Accrued liabilities 233,199 138,416
----------- -----------
Net cash provided by (used in) operating activities (778,872) 116,550
----------- -----------
Cash flows from investing activities:
Purchase of property, plant and equipment (335,019) (438,092)
Cash acquired in acquisition -- 38,548
Proceeds from sales or maturities of investments 322,215 --
Investments in affiliates 61,723 94,888
Certificates of deposits 67,591 40,000
----------- -----------
Net cash provided by (used in) investing activities 116,510 (264,656)
----------- -----------
Cash flows from financing activities:
Payments on long-term obligations (293,147) (427,159)
Net change in notes payable and long-term debt 542,994 542,058
----------- -----------
Net cash provided by financing activities 249,847 114,899
----------- -----------
Net cash provided by discontinued operations 423,049 24,479
----------- -----------
Net increase (decrease) in cash and cash equivalents 10,534 (8,728)
Cash and cash equivalents - beginning of period 40,930 36,189
----------- -----------
Cash and cash equivalents - end of period $ 51,464 $ 27,461
=========== ===========
Supplemental disclosures of cash flow information:
Cash paid during the period for interest $ 185,399 $ 154,784
----------- -----------
Taxes paid in discontinued operations during the period $ 33,673 $ 21,487
----------- -----------
See accompanying notes to condensed consolidated financial statements.
6
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
(Unaudited)
Non-cash activities:
During the period ended April 30, 2004, 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, with a
fair market value of $78,178, was transferred to an affiliate, Interfederal
Capital, Inc. The receivable from Dresser was classified as other assets for the
year ended July 31, 2003.
Treasury stock with a cost of $75,250 was transferred to the pension plan during
the nine month period ended April 30, 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 nine month period
ended April 30, 2004.
During the period ended April 30, 2004, the Company's corporate office building
and the Reynolds' office/warehouse building along with the related land and
improvements for both facilities were reclassified as assets held for sale at
its net book value of $577,842.
During the period ended April 30, 2004, certain long-term debt were is default
with the bank. Accordingly, the note payable balances of $1,014,518 were
reclassified to notes payable
During the period ended April 30, 2003, the Company acquired Logic Metals
Technology, Inc. through the issuance of 400,000 shares of common stock valued
at $173,400 and the assumption of notes on equipment of $447,894.
See accompanying notes to condensed consolidated financial statements.
7
ELECTRIC & GAS TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
April 30, 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 Equipment Company and Hydel Enterprise, Inc., 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 Company has signed a "letter
of intent" to sell the assets of Hydel Enterprises, Inc. Management can give no
assurances that the sale will be completed. Hydel is classified as discontinued
operation, but was previously included in the Utilities sector. (See Note C.)
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 April 30,
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 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
businesses, including elevator
8
ELECTRIC & GAS TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
April 30, 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 - DISCONTINUED OPERATIONS
An inquiry was received regarding the availability for sale of a wholly owned
subsidiary of the Company located in Canada, Hydel Enterprises, Inc. and on June
6, 2004, the Company signed a letter of intent to pursue the sale of the Hydel
assets, including current assets and plant, property and equipment. The current
agreed date of record, assuming the sale is consummated, is July 30, 2004. In
accordance with APB Opinion No. 30, as amended by SFAS No. 144, the assets and
liabilities of Hydel have been disclosed separately in the balance sheets as
assets and liabilities of discontinued operations. The assets were written down
to the estimated fair value of the sale price.
The results of discontinued operations are as follows for the nine months ended:
April 30, 2004 April 30, 2003
-------------- --------------
Net sales $ 6,277,080 $ 5,711,563
Income from discontinued operations net of income
tax expense of $48,851 and $16,977 $ 254,630 $ 208,951
Loss on sale of discontinued operations, net of
income tax benefit of $157,586 (428,379) --
-------------- --------------
Gain (loss) of discontinued operations $ (167,749) $ 208,951
============== ==============
NOTE D - INVENTORIES
Inventories are comprised as follows:
April 30, 2004 July 31, 2003
-------------- --------------
Raw materials $ 660,508 $ 516,199
Work in process 210,130 80,123
Finished goods 249,033 387,327
-------------- --------------
Total inventory $ 1,119,671 $ 983,649
============== ==============
9
ELECTRIC & GAS TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
April 30, 2004
(Unaudited)
NOTE E - NOTES PAYABLE AND LONG-TERM OBLIGATIONS
Subsequent to July 31, 2003, Hydel borrowed an additional $265,000 from the
Canadian bank with which it had a bank loan with a maximum loan amount of
$1,563,000 payable on demand, for which the amount outstanding at April 30, 2004
was $644,000 and is reflected in liabilities of discontinued operations. The
proceeds of the new loan were used to repay indebtedness to the parent.
As a result of the loss of the lawsuit defending the Company's title of the
Corporate office building with the Small Business Administration, the Company
has entered into a current term mortgage with a Dallas area bank. The original
amount of the term mortgage was $459,936 bearing an interest rate of 6% with
interest only payments of $2,343.78 due monthly and the balance due on July 5,
2005. The Company has relocated its Corporate offices to 3233 Kingsley Road,
Garland, Texas 75041 and placed the building at 13636 Neutron Road for sale. The
Company currently has a contract for the sale of the building, which will
satisfy the mortgage. The building has been classified to assets held for sale
and is included in current assets at April 30, 2004.
A bank has declared the Company in default on notes for revolving lines of
credit, a mortgage on a building at 410 S. Kirby street in Garland, Texas and a
long term note on a press. The Company is discussing refinancing the revolving
lines to reflect the significantly increased accounts receivable base. When the
revolving lines of credit are resolved, along with the additional cash required
to fund the increased business, the bank is discussing releasing the default
status on the equipment loan, pending a valuation of the equipment. The Company
has consolidated all Dallas area offices and manufacturing into one building and
placed the building on Kirby street for sale or lease.
Another bank has declared the Company in default on an equipment note for slow
payment, which the Company is curing at this time. The loan should be current
when the Company attains new financing to more adequately cover accounts
receivable and completes the sale of Hydel.
NOTE F - IMPAIRMENT OF LONG-LIVED ASSETS AND ASSETS HELD FOR SALE
The Company reviews for impairment, long-lived assets and certain identifiable
intangibles whenever events or changes in circumstances indicate that the
carrying amount of any asset may not be recoverable. In the event of impairment,
the asset is written down to its fair market value.
Assets to be disposed of are recorded at the lower of net book value or fair
market value less cost to sell at the date management commits to a plan of
disposal and are classified as assets held for sale. Such amounts aggregated
$1,024,592 at April 30, 2004. During the quarter ended April 30, 2004, the
Company wrote off its investment, which was classified as a non-current asset at
July 31, 2004, of $447,019 in Orasee Corporation.
In addition, the Utilities segment reserved approximately $132,000 of slow
moving and obsolete inventory related to a product line which is no longer sold,
but for which the Company is required to maintain replacement and repair
inventory for products previously sold.
10
ELECTRIC & GAS TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
April 30, 2004
(Unaudited)
NOTE G - 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 35,491 -- 35,491
----------- ----------- -----------
Balance at April 30, 2004 $ (384,314) $(1,168,016) $(1,552,330)
=========== =========== ===========
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.
NOTE H - 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 ongoing.
The Company has listed the Paris, Texas property for sale, classified as asset
held for sale, with a national real estate firm.
11
ELECTRIC & GAS TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
April 30, 2004
(Unaudited)
NOTE H - CONTINGENCIES (Continued)
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 $45,000 and transferred marketable securities with a value of
$125,200 to the pension plan for a total contribution, paid or accrued, in the
quarter ended April 30, 2004 in the amount of $165,200, and was required to pay
the balance of $53,159 to meet its minimum required contribution of $218,359 to
the plan no later than April 30, 2004. The Company has not made the additional
contribution to the plan. Currently, the Company expects to receive stock in a
public company for amounts due to the Company and use the stock to satisfy this
liability. 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.
NOTE I - INDUSTRY SEGMENT DATA
The Company's current business is primarily comprised of three industry
segments: (i) production of atmospheric water, filtration and enhanced water
products (AWT); (ii) the manufacture and sale of products serving the utilities
industry, specifically natural gas measurement equipment and gas odorization
products (Reynolds) and (iii) fabrication of cabinets and piece parts from sheet
metal for diversified end customers as set forth below (Logic).
The Company has signed a letter of intent to pursue the sale of the Canadian
portion of the utility segment. Accordingly, those assets, liabilities and
operations have been classified as discontinued operations, and are no longer
included in the segment data. Management can give no assurances that the sale
will be completed.
12
ELECTRIC & GAS TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
April 30, 2004
(Unaudited)
NOTE I - INDUSTRY SEGMENT DATA (Continued)
Three months ended Nine months ended
April 30, April 30,
Operating revenues 2004 2003 2004 2003
Water $ 18,622 $ 199,001 $ 80,965 $ 354,162
Utilities 396,833 686,953 1,406,013 1,946,991
Fabrication* 1,256,508 796,329 3,162,992 1,282,050
----------- ----------- ----------- -----------
Total sales $ 1,671,963 $ 1,682,283 $ 4,649,970 $ 3,583,203
=========== =========== =========== ===========
Operating income (loss)
Water $ (66,227) $ 58,454 $ (202,281) $ 97,221
Utilities (311,613) 25,667 (367,863) 21,249
Fabrication* 197,357 (41,584) 136,047 3,084
----------- ----------- ----------- -----------
Total segment operating income (loss) (180,483) 42,537 (434,097) 121,554
General corporate expenses (101,270) (194,316) (640,368) (675,736)
Other expense (728,197) (60,008) (561,976) (87,199)
----------- ----------- ----------- -----------
Loss from continuing operations (1,009,950) (211,787) (1,636,441) (641,381)
Income of discontinued operations,
net of income tax expense of $1,599,
$567, $48,851, and $16,977 4,818 54,234 254,630 208,951
Loss on sale of discontinued
operations net of income tax benefit
of $157,586 (422,379) -- (422,379) --
----------- ----------- ----------- -----------
Net loss $(1,427,511) $ (157,553) $(1,804,190) $ (432,430)
=========== =========== =========== ===========
* Operations commenced in January 2003.
13
ELECTRIC & GAS TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
April 30, 2004
(Unaudited)
NOTE J - RELATED PARTY TRANSACTIONS
The following is a summary of advances to and from affiliated companies included
in other assets at April 30, 2004 and July 31, 2003:
April 30, 2004 July 31, 2003
-------------- --------------
Interfederal Capital, Inc. $ 405,792 $ 373,048
IFC Industries, a subsidiary of Interfederal Capital, Inc. 46,089 14,774
M&M Trans Exchange 31,045 85,169
Comtec, Inc. 18,014 18,014
Glauber Management (59,766) (60,600)
Petroleum Dynamic (4,222) (4,222)
-------------- --------------
$ 436,952 $ 426,183
============== ==============
Interfederal Capital, Inc. (Interfederal), a Texas corporation, is managed under
a voting trust by S. Mort Zimmerman and ownership is held by his wife and four
(4) children. The Company advanced Interfederal Capital, Inc. $27,600 and
$82,800 for the three and nine months ended April 30, 2004, 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 period ended April 30, 2004, the Company transferred 90,000 shares of
Rentech stock to Interfederal Capital, Inc. The transfer was recorded at
$78,178, which was the fair market of the Rentech stock on the date of transfer,
resulting in a gain.
Interfederal owns the 144,000 square foot building which is currently occupied
by ELGT corporate offices and its Texas subsidiaries.
14
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 from continuing operations of
$(1,636,441) and $(641,381) for the nine and three months ended April 30, 2004,
respectively. This compared to $(1,009,950) and $(211,784) for the nine and
three months ended April 30, 2003, respectively. Segment operating loss
increased by $555,651 and $223,020 for the nine and three month periods, the
result of lower sales in the WaterMaker and the utility segment, offset by
increased sales and profit in the fabrication segment. The Water segment
reported decreased revenues of $273,197 and $180,379, with operating losses
increasing $299,502 and $124,681 for the nine and three months ended April 30,
2004. The Utility segment reported decreases in revenue of $540,978 and $290,120
with operating income decreasing by $389,112 and $337,280 for the nine and three
month periods, respectively, due in a large part by an inventory reserve of
$132,376, that was recorded during the third quarter, for slow moving inventory.
The Metal Fabrication business revenues increased $1,880,942 and $460,179 while
operating profit from this segment increased by $132,963 and $238,941,
respectively. Gross margins decreased from 38.73% to 21.40% for the nine months
ended April 30, 2004 and from 32.84% to 19.57% for the three months ended April
30, 2004. Selling, general and administrative expenses as a percent of revenues
decreased from 54.20% to 44.51% for the nine months ended April 30, 2004 and
decreased from 41.86% to 36.42% of revenue for the three months ended April 30,
2004. Other income was affected by gain on sale of Rentech Stock, the loss of
the lawsuit with the Small Business Administration of $200,483 and the write-off
of the investment in Orasee Corporation of $447,019.
Increases (decreases) for the three and nine months periods ended April 30,
2004, as compared with the similar period of 2003, for key operating data were
as follows:
Three months ended Nine months ended
------------------------------- -------------------------------
April 30, 2004 April 30, 2004
------------------------------- -------------------------------
Increase/ Increase/
(Decrease) Percent Change (Decrease) Percent Change
-------------- -------------- -------------- --------------
Sales (10,320) (.61%) 1,066,767 29.77%
Segment operating loss 223,020 524.30% 555,651 457.12%
Loss from continuing operations (798,163) (376.87%) (995,060) (155.14%)
Net loss per share (0.19) (950.00%) (0.20) (333.33%)
15
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) from continuing operations
by the respective industry segments when compared to the previous period:
Three months ended Nine months ended
April 30, 2004 April 30, 2004
-------------------------- --------------------------
Increase/ Increase/
Operating revenues (Decrease) Percent (Decrease) Percent
----------- ----------- ----------- -----------
Water $ (180,379) (90.64%) $ (273,197) (77.14%)
Utilities (290,120) (42.23%) (540,978) (27.79%)
Fabrication * 460,179 57.79% 1,880,942 146.71%
Total sales $ (10,320) (0.61%) $ 1,066,767 29.77%
Operating income (loss)
Water $ (124,681) (213.30%) $ (299,502) (308.06%)
Utilities (337,280) (1,314.06%) (389,112) (1,831.20%)
Fabrication * 238,941 574.60% 132,963 4,311.38%
Total segment operating income
(loss) (223,020) (524.30%) (555,651) (457.12%)
General corporate expenses (93,046) (47.88%) 35,368 5.23%
Other income (expense) (668,190) (1,113.50%) (474,777) (544.48%)
Loss from continuing operations $ (798,163) (376.87%) $ (995,060) (196.81%)
* Operations commenced in January 2003
Water revenues decreased by $273,197 and $180,379 for the nine and three months
ended April 30, 2004 respectively. Operating income decreased by $299,502 and
$124,681 for the three and nine months ended April 30, 2004, respectively. The
Company has identified distributors/agents for India, UAE and Sri Lanka.
Utility revenues decreased by $540,978 and $290,120 for the nine and three
months ended April 30, 2004. Operating income decreased by $389,112 and $337,280
for the nine and three months ended April 30, 2004 resulting in operating loss
of $367,863 in the nine months of 2004 and an operating loss of $311,613 in the
three months ending April 30, 2004. The Utility segment reported decreases in
sales due to 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
16
ELECTRIC & GAS TECHNOLOGY, INC. AND SUBSIDIARIES
Results of Operations (continued)
service are generally a capital purchase by the Company's customers and will
require time for new products to be integrated into their purchasing cycle. An
inventory reserve of $132,376 was taken for a discontinued product line.
Fabrication began manufacturing for ELGT starting January 1, 2003. Revenues
increased $1,880,942 and $460,179 for the nine and three months ended April 30,
2004, resulting in revenue for the periods of $3,162,992 and $1,256,508
respectively. The profit in the quarter ended April 30, 2004 of $197,357 was
sufficient to generate a year to date operating income of $136,241. The revenue
has increased as a result of improvement in the telecom industry, as a result of
the deployment of the new cell phone technology. Logic Metals is a sheet metal
fabrication company with customers in the telecom and elevators industries.
With the exception of expense relationships discussed above in the specific
segment discussion, such other relationships remain consistent. Corporate
overhead expenses decreased by $93,046 and increased by $35,368 relative to the
corresponding three month and nine month periods in the prior year,
respectively.
The Company lost in the defense of its ownership of its general corporate
offices in litigation with the SBA, resulting in a net loss for the period of
$200,483, which is included in other income and expense. (Also see Part II, Item
1. "Legal Proceedings").
Liquidity and Capital Resources
Liquidity. Current assets of the Company total $5,539,533 at April 30, 2004, up
from current assets of $5,509,129 at July 31, 2003, or an increase of $480,404.
Current liabilities increased by $1,582,476, resulting in working capital
deficiency (current assets less current liabilities) of $(627,529) at April 30,
2004 as compared to $474,543 at July 31, 2003. This is primarily the result of
reclassifying loans to current liabilities, offset by buildings held for sale
classified as Other assets. The Company believes that it has and can generate
sufficient cash to meet its working capital requirements.
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. These loans are currently considered in
default by the bank and have been reclassified to current liabilities at April
30, 2004. These loans are currently considered in default by the bank.
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. These loans are currently
considered in default by the bank and have been reclassified to current
liabilities at April 30, 2004. A note payable of $344,312 with a second area
bank is also considered in default at April 30, 2004 and has been reclassified
to current liabilities.
17
ELECTRIC & GAS TECHNOLOGY, INC. AND SUBSIDIARIES
Liquidity and Capital Resources (Continued)
The Company is raising cash, which management believes will be adequate to meet
the operating needs of the Company through the sale of Hydel, and arranging a
new revolving line of credit on the receivables of Logic and Reynolds.
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 April 30, 2004, engaged the corporate
finance department of a placement agent. 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. The sale of
Hydel Enterprises, Inc. will provide sufficient working capital if the sale is
consummated. 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 and the sale of Hydel Enterprises, Inc. 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.
18
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, a discontinued operation,
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.
19
ELECTRIC & GAS TECHNOLOGY, INC. AND SUBSIDIARIES
Item 4. CONTROLS AND PROCEDURES
(a) Evaluation of disclosure controls and procedures.
The Company's principal executive and financial officers have conducted an
evaluation of the effectiveness of the Company's disclosure controls and
procedures pursuant to Rule 13a-15(b) under the Securities Exchange Act of 1934
as of a date (the "Evaluation Date") the end of the period. Based upon that
evaluation, the Company's principal executive and financial officers have
concluded that, as of the Evaluation Date, the Company's disclosure controls and
procedures were effective in ensuring that all material information relating to
the Company required to be filed in this quarterly report has been made known to
them 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 has or will likely materially affect internal controls
over financial reporting.
20
ELECTRIC & GAS TECHNOLOGY, INC. AND SUBSIDIARIES
PART II
ITEM 1. LEGAL PROCEEDINGS
Electric & Gas Technology, Inc., Retech, Inc. and Hydel Enterprises, Inc.
(Plaintiffs) vs. Nathan Mazurek, American Circuit Breaker Corp. and Provident
Group, Inc. (Defendants) Plaintiffs allege the non-payment of a note to Retech,
Inc. and unpaid accounts receivable to Hydel Enterprises, Inc. A settlement
agreement was reached but the defendant did not perform. The matter is now in
Delaware court where the enforceability of the settlement agreement will be
decided.
Electric & Gas Technology, Inc., Atmospheric Water Technology, Inc. vs Universal
Communications Systems, Inc. The Company is a party to two lawsuits and
counterclaims with Universal Communications Systems, Inc. (UCSY) US District
Court in Florida. The first suit alleges patent infringement related to the
Company's water segment and the other alleges defamation resulting from comments
included in a press release issued by the Company. The Company has filed motions
for consolidation of the two causes but no ruling has been made. A trial date is
set for June 2005 and scheduling orders have been issued and the parties are
proceeding with discovery. The Company believes that its patents and copyrights
are valid and that there is no merit to the complaint of defamation. The Company
believes it will prevail in its defense and counterclaims if settlement cannot
be reached.
The Company withdrew as interpleader in a water segment patent infringement case
in California after settlement hearings proved unsuccessful.
The Company lost its appeal on the SBA lawsuit pertaining to a real estate
transaction dating back to 1987, resulting in a judgment against the Company of
$462,379.
21
ELECTRIC & GAS TECHNOLOGY, INC. AND SUBSIDIARIES
ITEM 1. LEGAL PROCEEDINGS (Continued)
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 3. DEFAULT ON SENIOR SECURITIES
A bank has declared the Company in default on notes for revolving lines of
credit, a mortgage on a building at 410 S. Kirby street in Garland, Texas and a
long term note on a press. The Company is discussing refinancing the revolving
lines to reflect the significantly increased accounts receivable base. When the
revolving lines of credit are resolved, along with the additional cash required
to fund the increased business, the bank is discussing releasing the default
status on the equipment loan, pending a valuation of the equipment. The Company
has consolidated all Dallas area offices and manufacturing into one building and
placed the building on Kirby street for sale or lease.
Another bank has declared the Company in default on an equipment note for slow
payment, which the Company is curing at this time. The loan should be current
when the Company attains new financing to more adequately cover accounts
receivable and completes the sale of Hydel.
ITEM 5. OTHER INFORMATION
On June 6, 2004, management has signed a letter of intent to sale the assets of
Hydel Enterprises, Inc., a wholly owned subsidiary. Accordingly, the assets,
liabilities and operations have been classified as discontinued operations.
Management can give no assurances that the sale will be completed.
22
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: June 18, 2004