ELECTRIC & GAS TECHNOLOGY, INC. AND SUBSIDIARIES
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 For the quarterly period ended: October 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
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 (Issuer's
telephone number)
Indicate by check mark whether the issuer (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Act of 1934 during the past 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 December 18, 2004:
Common - $0.01 Par Value - 6,997,034
ELECTRIC & GAS TECHNOLOGY, INC. AND SUBSIDIARIES
Index to Form 10-QSB
For the Quarter Ended October 31, 2004
Part I - Financial Information Page
Item 1. Condensed Consolidated Financial Statements:
(a) Condensed Consolidated Balance Sheets at of October 31,
2004 (unaudited) and July 31, 2004 3
(b) Condensed Consolidated Statements of Operations for The
three months ended October 31, 2004 (unaudited) and 2003
(unaudited) 4
(c) Condensed Consolidated Statement of Changes in
Stockholders' Deficit for the three months ended October 31,
2004 (unaudited) 5
(d) Condensed Consolidated Statements of Cash Flows for the
three months ended October 31, 2004 (unaudited) and 2003
(unaudited) 6-7
(e) Notes to Condensed Consolidated Financial Statements
(unaudited) 8-13
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 14-17
Item 3. Controls and Procedures 18
Part II - Other Information
Item 1. Legal Proceedings 19
Item 6. Exhibits and Reports on Form 8-K 20
Signature (Pursuant to General Instruction E) 20
Certifications 21-26
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
(Unaudited)
October 31, July 31,
2004 2004
----------- -----------
(Unaudited)
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 147,256 $ 37,139
Accounts receivable, net 1,220,039 1,069,163
Inventories 1,244,832 1,066,706
Prepaid expenses 49,147 38,092
Receivable from sale of discontinued operations -- 3,731,209
----------- -----------
Total current assets 2,661,274 5,942,309
----------- -----------
PROPERTY, PLANT AND EQUIPMENT, net 1,333,538 1,343,123
----------- -----------
OTHER ASSETS
Certificates of deposit, pledged 169,458 501,016
Assets held for sale 759,155 752,865
Due from affiliates - net 281,851 271,654
Other 31,414 72,282
----------- -----------
Total other 1,241,878 1,597,817
----------- -----------
TOTAL ASSETS $ 5,236,690 $ 8,883,249
=========== ===========
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES
Notes payable $ 1,232,078 $ 1,486,698
Accounts payable 1,109,867 1,288,192
Accrued liabilities 201,843 660,897
Current maturities of long-term obligations 206,508 298,172
Current portion of minimum pension liability 391,555 373,555
Current liabilities of discontinued operations 11,035 2,517,356
----------- -----------
Total current liabilities 3,152,886 6,624,870
----------- -----------
LONG-TERM OBLIGATIONS
Long-term obligations, less current maturities 1,149,936 1,417,236
Minimum pension liability 1,037,134 1,037,134
----------- -----------
Total long-term obligations 2,187,070 2,454,370
----------- -----------
Minority interest in subsidiary 38,177 --
----------- -----------
STOCKHOLDERS' DEFICIT
Preferred stock, $10 par value, 5,000,000 shares
authorized, none issued -- --
Common stock, $.01 par value, 30,000,000 shares
authorized, issued 7,062,034 70,620 70,620
Additional paid-in capital 9,611,301 9,611,301
Accumulated deficit (8,336,039) (8,390,587)
Pension liability adjustment (1,410,689) (1,410,689)
----------- -----------
Stockholders' deficit before treasury stock (64,807) (119,355)
Treasury stock, 65,000 shares at cost (76,636) (76,636)
----------- -----------
Total stockholders' deficit (141,443) (195,991)
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $ 5,236,690 $ 8,883,249
=========== ===========
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
October 31,
2004 2003
----------- -----------
Sales $2,147,202 $ 1,573,229
Cost of goods sold 1,445,758 1,135,262
----------- -----------
Gross profit 701,444 437,967
Selling, general and administrative 547,973 662,954
----------- -----------
Income (loss) from operations 153,471 (224,987)
----------- -----------
Other income (expense):
Interest, net (62,787) (30,449)
Investment gain (loss) -- 91,906
Loss of civil action (49,000) --
Other, net 11,669 15,069
----------- -----------
Total other income (expense) (100,118) 76,526
----------- -----------
Income (loss) from continuing operations before minority
interest 53,353 (148,461)
Minority interest in subsidiary (38,177) --
----------- -----------
Income (loss) from continuing operations 15,176 (148,461)
Discontinued operations, net of tax 39,372 21,881
----------- -----------
Net income (loss) $ 54,548 $ (126,580)
=========== ===========
Income (loss) available per Common share:
Income (loss) from continued operations $ 0.00 $ (0.02)
Income from discontinued operations 0.01 0.00
----------- -----------
Net income (loss) $ 0.01 $ (0.02)
----------- -----------
Weighted average common shares outstanding 6,997,034 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' DEFICIT
For the three monthsended October 31, 2004
(Unaudited)
Accumulated
Other
Common Common Paid-in Accumulated Comprehensive Treasury
Stock Stock Capital Deficit Loss Stock Total
----------- ----------- ----------- ----------- ----------- ----------- -----------
Balance at July 31, 2004 7,062,034 $ 70,620 $ 9,611,301 $(8,390,587) $(1,410,689) $ (76,636) $ (195,991)
Net income -- -- -- 54,548 -- -- 54,548
----------- ----------- ----------- ----------- ----------- ----------- -----------
Balance at October 31, 2004 7,062,034 $ 70,620 $ 9,611,301 $(8,336,039) $(1,410,689) $ (76,636) $ (141,443)
=========== =========== =========== =========== =========== =========== ===========
See accompanying notes to condensed consolidated financial statements.
5
ELECTRIC & GAS TECHNOLOGY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Three months ended October 31,
2004 2003
----------- -----------
Cash flows from operating activities:
Net income (loss) $ 54,548 $ (126,580)
Discontinued operations, net of tax (39,372) (21,881)
----------- -----------
Income (loss) from continuing operations 15,176 (148,461)
Adjustments to reconcile net income (loss)
to net cash provided by (used in) operating activities:
Depreciation 64,140 63,597
Gain on sale of assets -- (19,873)
Gains on investments -- (72,033)
Changes in assets and liabilities:
Accounts receivable (150,876) (121,799)
Inventories (178,126) (100,115)
Prepaid expenses (11,055) (16,348)
Other assets 40,868 15,320
Accounts payable (178,325) 235,342
Accrued liabilities (459,054) 46,803
----------- -----------
Net cash used in operating activities (857,252) (117,567)
----------- -----------
Cash flows from investing activities:
Proceeds from sales or maturities of investments 105,212
Purchase of property, plant and equipment (54,555) (74,006)
Investments in affiliates (10,197) 72,799
Pension plan 18,000 18,000
Idle facility (6,290) --
Certificates of deposits 331,558 --
----------- -----------
Net cash provided by investing activities 278,516 122,005
----------- -----------
Cash flows from financing activities:
Payments on long-term obligations (358,964) (55,493)
Net change in notes payable and long-term debt (254,620) (54,115)
Minority interest in subsidiary 38,177 --
-----------
Net cash used in financing activities (575,407) (109,608)
----------- -----------
Net cash provided by discontinued operations 1,264,260 87,424
----------- -----------
Net increase (decrease) in cash and cash equivalents 110,117 (17,746)
Cash and cash equivalents - beginning of period 37,139 46,352
----------- -----------
Cash and cash equivalents - end of period $ 147,256 $ 28,606
=========== ===========
Supplemental disclosures of cash flow information:
Cash paid during the period for interest $ 65,037 $ 154,784
----------- -----------
Taxes paid in discontinued operations during the period $ -- $ 21,487
----------- -----------
See accompanying notes to condensed consolidated financial statements.
6
ELECTRIC & GAS TECHNOLOGY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
(Unaudited)
Non-cash activities:
During the quarter ended October 31, 2004, the Company recognized the settlement
of litigatjion with UCSY for $25,000 in cash and 150,000 shares of restricted
stock valued at $0.16 per share. The settlement also includes transference of
the 91.5% ownership of Atmospheric Water Technology with no assets or
liabilities, other than expired patents and other intangible assets.
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.
7
ELECTRIC & GAS TECHNOLOGY, INC. AND SUBSIDIARIES
NOTE A - Business and basis of presentation
Business
Electric & Gas Technology, Inc.("the Company" or "ELGT") was organized as a
corporation under the laws of the State of Texas on March 18, 1985, to serve as
a holding company for operating subsidiary corporations. The Company continued
in this manner until 2004, at which time the decision was made for the corporate
entity to become more actively involved in the management of subsidiary
operations. The ultimate objective of this change being a more synergistic use
of management expertise, technical resources and operating capabilities that
support a strategy of long term growth in shareholder value. Near the end of
fiscal 2004, the Company relocated all its operations, including corporate
staff, into a single 144,000 square foot facility, which it already occupied. In
addition to achieving improvements in communications and utilization of
resources, this also allowed the Company to proceed with the sale of two
commercial properties.
The Company presently is the owner of 100% of Reynolds Equipment, Inc
(Reynolds), and 80% of Logic Metals Technology Inc (LMT).. Through these
subsidiaries, the Company operates in two distinct business segments: (1)
Utilities Products, and (2) Contract Manufacturing.
In the Utilities Products sector, Reynolds designs, manufactures and markets
products for natural gas measurement, metering and odorization primarily for
municipalities and publicly owned utility companies. Materials consist of
proprietary circuit designs utilizing industry standard components, industry
standard probes, and hardware. The manufacture of the circuit boards utilized in
these designs is readily available through a large number of local, low cost
circuit board assembly operations. All other items are available through
multiple vendor sources. The products are primarily marketed directly by the
Company and through some manufacturers' representatives.
In the Contract Manufacturing sector, LMT provides precision sheet metal
fabrication and assembly for a diverse customer base, including telecom and
networking cabinetry, electrical controls, and other functional and aesthetic
sheet metal applications. The Company uses some manufacturers' representatives,
but has primarily grown the revenue from existing customers. Raw material
generally consists of standard sheet metal and general purpose fittings and
connectors available from general hardware and steel distributors. One major
customer represented over 50% of the revenue for LMT for the year ended July 31,
2004. LMT has several new marketing initiatives in place to expand its customer
base during the current fiscal year and believes that these efforts will reduce
its dependency on any one customer or industry.
The Company has concluded that the active pursuit of sales of the Watermaker(TM)
products in its Atmospheric Water Technology (AWT) subsidiary, where it holds a
91.5% ownership, has not provided acceptable recurring revenue, and is has
diverted the attention of management as well as other resources. Therefore, in
the first quarter of this fiscal year the Company ceased actively pursuing the
sale of Watermaker(TM) products, and has concluded plans to dispose of this
asset.
Interim Financial Statements
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-QSB. 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.
8
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, 2004 have been omitted, even though they
are necessary for a fair presentation of the financial position at October 31,
2004 and 2003 and the results of operations and cash flows for the periods then
ended.
NOTE B - 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 July
30, 2004, the Company signed documents consummating the sale of the Hydel
assets, including current assets and plant, property and equipment. The proceeds
were transferred to the Company on August 5, 2004, and the liabilities were
paid. 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.
As the result of a lawsuit by UCSY, the Company has agreed to transfer its 91.5%
ownership of AWT, Inc and its associated intellectual property to UCSY, with no
physical assets or liabilities. In accordance with APB Opinion No. 30, as
amended by SFAS No. 144, the assets and liabilities of AWT have been disclosed
separately in the balance sheets as assets and liabilities of discontinued
operations.
NOTE C - INVENTORIES
Inventories are comprised as follows:
October 31, July 31,
2004 2004
----------- ----------
Raw materials $ 729,610 $ 576,080
Work in process 134,210 128,259
Finished goods 381,012 362,367
---------- ----------
Total inventory $1,244,832 $1,066,706
========== ==========
NOTE D- NOTES PAYABLE AND LONG-TERM OBLIGATIONS
The Company has utilized Certificates of Deposit, which were being used as
collateral for notes payable, to terminate those notes in the amount of
$331,558.
The Company repaid a Bridge loan in the amount of $200,000.
NOTE E - 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.
8
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.
During the fourth quarter of fiscal 2004, the Company actively began marketing
for sale, the corporate facility, located in Dallas, Texas and the Reynolds'
facility, located in Garland, Texas, in an effort to consolidate operations and
reduce costs. In addition, the Company also included in assets held for sale, an
idle facility located in Paris, Texas.
The total carrying value of the assets held for sale as of July 31, 2004 is
$752,865 and is included in long-term assets.
The following is the carrying value of assets held for sale and the
corresponding liabilities at October 31, 2004:
Carrying Current Long-term Total
value liabilities liabilities Liabilities
---------- ---------- ---------- ----------
Corporate building $ 227,423 $ 459,936 $ -- $ 459,936
Garland building 84,622 14,954 357,171 372,125
Paris building 447,110 21,468 290,823 312,291
---------- ---------- ---------- ----------
Total $ 759,155 $ 496,358 $ 647,994 $1,144,352
========== ========== ========== ==========
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 ongoing.
The Company has listed the Paris, Texas property for sale, classified as asset
held for sale, with a national real estate firm.
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, 2004, 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, 2004. The Company
has accrued $18,000 during the quarter ended October 31, 2004.
10
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.
NOTE G - INDUSTRY SEGMENT DATA
The Company's current business is primarily comprised of two industry segments:
(i) In the Utilities Products segment, Reynolds designs, manufactures and
markets products for natural gas measurement, metering and odorization primarily
for municipalities and publicly owned utility companies. and (ii) In the
Contract Manufacturing segment, LMT provides precision sheet metal fabrication
and assembly for a diverse customer base, including telecom and networking
cabinetry, electrical controls, and other functional and aesthetic sheet metal
applications...
Three months ended
October 31,
Operating revenues: 2004 2003
----------- -----------
Utilities $ 593,863 $ 615,276
Fabrication 1,553,339 957,953
----------- -----------
Total sales $ 2,147,202 $ 1,573,229
=========== ===========
Income (loss) from operations:
Utilities $ 25,435 $ 40,154
Fabrication 255,770 (40,806)
----------- -----------
Total segment operating income (loss) 281,205 (652)
General corporate expenses (127,734) (224,335)
Minority interest in subsidiary (38,177) --
Other income (expense) (100,118) 76,526
----------- -----------
Income (loss) from continuing operations 15,176 (148,461)
Discontinued operations, net of tax 39,372 21,881
----------- -----------
Net income (loss) $ 54,548 $ (126,580)
=========== ===========
11
NOTE H - RELATED PARTY TRANSACTIONS
The following is a summary of advances to and from affiliated companies included
in other assets at October 31, 2004 and July 31, 2004:
October 31, July 31,
2004 2004
--------- ---------
Interfederal Capital, Inc. $ 258,542 $ 258,609
IFC Industries, a subsidiary of Interfederal Capital, Inc. 43,589 43,589
M&M Trans Exchange 364,989 364,989
Comtec, Inc. 28,329 18,014
--------- ---------
Total receivable from affiliates 695,449 685,201
--------- ---------
Glauber Management (53,971) (57,348)
Petroleum Dynamic -- --
S. Mort Zimmerman (333,699) (333,699)
Daniel A. Zimmerman (25,928) (22,500)
--------- ---------
Total due to affiliates (413,598) (413,547)
--------- ---------
$ 281,851 $ 271,654
========= =========
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 leased facilities owned by Interfederal at a rate of
$30,000 per month. During the quarter ended October 31, 2003, the Company sold
marketable securities with a fair market value of $56,965 to Interfederal.
Interfederal has guaranteed LMT's line of credit and equipment loan that were
obtained during the year ended July 31, 2003.
Interfederal Capital Industries, Inc. ("IFC") a Texas corporation and a
subsidiary of Interfederal, has net balances due to the Company of $43,589 at
October 31, 2004 and July 31, 2004.
M&M TransExchange, Inc. ("M&M"), a Texas corporation, wholly owned by S. Mort
Zimmerman has balances due to the Company of $364,989 at October 31, 2004 and
July 31, 2004.
The payable to S. Mort Zimmerman of $333,699 at October 31, 2004 and July 31,
2004 is the accrued but unpaid balance due for compensation.
Comtec, Inc., a Texas corporation and a subsidiary of Interfederal, has a
balance due of $28,329 and $18,014 at October 31, 2004 and July 31, 2004,
respectively.
Glauber Management, Inc. ("Glauber") is wholly owned by S. Mort Zimmerman. The
Company has net payable to Glauber of $53,971 and $57,348 at October 31, 2004
and July 31, 2004, respectively.
12
NOTE H - RELATED PARTY TRANSACTIONS (continued)
The Company has pledged a certificate of deposit in the amount of $100,000 for a
loan in the name of DOL, Inc., a publicly held corporation in which Electric &
Gas Technology, Inc. owns a one-third equity interest.
13
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The Company, through its subsidiaries, operates within two separate industry
segments. These are (i) The Utilities Products sector, in which Reynolds
designs, manufactures and markets products for natural gas measurement, metering
and odorization primarily for municipalities and publicly owned utility
companies. and (ii) The Contract Manufacturing sector, in which LMT provides
precision sheet metal fabrication and assembly for a diverse customer base,
including telecom and networking cabinetry, electrical controls, and other
functional and aesthetic sheet metal applications.
Results of Operations
Summary. The Company reported net profit from continuing operations of $153,471
for the three months ended October 31, 2004. This compared to a loss of
$(224,897) for the three months ended October 31, 2003. The Utility segment
reported decreases in revenue of $21,414 with operating income decreasing by
$14,718 for the three month period ending October 31, 2004 due to lower demand
for the Volume Correctors. The Metal Fabrication business revenues increased
$595,386 while operating profit from this segment increased by $296,576 for the
quarter ended October 31, 2004. Gross margins for the Company increased from
27.83% for the three months ended October 31, 2003 to 32.67% for the three
months ended October 31, 2004. Selling, general and administrative expenses as a
percent of revenues decreased from 42.14% for the three months ended October 31,
2003 to 25.52% for the three months ended October 31, 2004.
Increases (decreases) for the three month period ended October 31, 2004, as
compared with the similar period of 2003, for key operating data were as
follows:
Three months ended
October 31, 2004
Increase/
(Decrease) Percent Change
-------- --------------
Sales 573,973 36.48%
Segment operating profit 281,857 n/a
Income from continuing operations 163,637 n/a
Net income (loss) per share 0.03 n/a
14
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
October 31, 2004
Increase/
(Decrease) Percent
--------- ---------
Operating revenues:
Utilities (21,413) (3.48%)
Fabrication * 595,386 62.15%
--------- ---------
Total sales $ 573,973 36.48%
========= =========
Income (loss) from continuing operations:
Utilities (14,719) (36.66%)
Fabrication * 296,576 726.80%
--------- ---------
Total segment operating income (loss) 281,857 43,229.60%
General corporate expenses (96,601) (43.06%)
Minority interest in subsidiary 38,177 Na
---------
Other income (expense) (176,644) (230.82%)
--------- ---------
Income (loss) from continuing operations $ 163,637) (110.22%)
========= =========
Utility revenues decreased by $21,413 for the three months ended October 31,
2004. Operating income decreased by $14,718 for the three months ended October
31, 2004 resulting in operating profit of $25,435 in the three months ending
October 31, 2004. The Utility segment reported decreases in sales due to the
overall economy, and more directly from the change in utility company's
structures from "public utilities" to "For Profit Corporations". The segment has
introduced new products for the digital recording of multiple pressure points,
to begin replacing the paper graph recorders, and has completed 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 are
generally a capital purchase by the Company's customers and will require time
for new products to be integrated into their purchasing cycle.
Fabrication revenues increased $595,386 for the three months ended October 31,
2004, resulting in revenue for the periods of $1,553,339. The operating profit
increased $296,576, to $255,770 for the three months ending October 31, 2004.
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 $96,601 relative to the corresponding three month
period in the prior year.
15
Liquidity and Capital Resources
Liquidity. Current assets of the Company total $2,661,274 at October 31, 2004,
down from current assets of $5,942,309 at July 31, 2004, or a decrease of
$3,281,035. Current liabilities decreased by $3,471,984, reducing the working
capital deficiency (current assets less current liabilities) to $491,612 at
October 31, 2004 as compared to $682,561 at July 31, 2004. This is primarily the
result of collecting on the sale of Hydel, paying off accounts payable under
favorable terms and increases in accounts receivable in a profitable
environment. The Company believes that it has and can generate sufficient cash
to meet its working capital requirements.
The Company is currently evaluating the movement of the current revolving notes
secured by accounts receivable and inventory, with a total cap of $850,000 to a
facility to service the increased sales and receivables, with a cap of
$1,750,000, which the Company believes will be sufficient for near term
requirements.
The Company was able to raise additional cash immediately following the close of
its fiscal year ending July 31, 2004 by the sale of assets of its wholly owned
Canadian subsidiary Hydel.
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 support the
strategic goals to continue to grow revenue and improve profitability. The
Company may seek a private placement of its public equity. Management believes
that, if required, it can attract investment capital of up to $2,000,000 based
on the Company's business strategy. The amount of equity the Company would offer
would depend in part on share/conversion price, discount or premium on current
market share price and dilution prospects. While management believes that, if
need, the Company could achieve the above funding, there is no assurance that
this would occur. Failure to do so could slow the growth of the Company.
As more fully described in Note F 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. The most immediate purchase is a laser cutting machine, which was
received on December 10, 2004. Otherwise, expenditures for capital equipment
will be for the ordinary replacement of worn 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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Other Business Matters
Inflation. The Company does not expect inflation to have an adverse effect on
its operations in the foreseeable future.
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.
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Item 3. 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.
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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 has reached a settlement in two
lawsuits and counterclaims with Universal Communications Systems, Inc. (UCSY).
Under the terms of the settlement agreement US District Court in Florida. In the
period ended October 31,2004 the Company recognized the settlement of litigation
with UCSY for $25,000 in cash and 150,000 shares of restricted stjock valued at
$0.16 per share. The settlement also includes transference of the 91.5%
ownership of Atomospheric Water Technology with no assets jor liabilities, other
than expired patents and other intangible assets.
The Company withdrew as interpleader in a water segment patent infringement case
in California after settlement hearings proved unsuccessful.
During the year ended July 31, 2004, 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.
ELGT encourages all interested parties to use public access sources such as
PACER (http://pacer.psc.uscourts.gov/) to confirm facts related to these and any
legal proceeding.
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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.
On August 11, 2004 the Company filed a Form 9-K disclosing that on July
30, 2004, Electric & Gas Technology, Inc. (the "Registrant" or the "Company")
entered into a "closing in escrow" to sell the assets, goodwill and trade-name
of Hydel Enterprise, Inc. ("Hydel") a wholly owned Canadian subsidiary to Circa
Metals Inc., a wholly owned subsidiary of Circa Enterprises Inc. which is
headquartered in Calgary, Alberta, Canada for cash. On August 6, 2004, the
transaction was consummated. The purchase price was approximately US$3,900,000,
with a 60 day adjustment period. Hydel was included as a discontinued operation
in the Form 10Q filed for the period ended April 30, 2004. Neither Circa nor any
of its officers or directors are affiliated with the Company.
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/ Daniel A. Zimmerman
- -----------------------
Daniel A. Zimmerman
President and
Chief Executive Officer
Dated: December 19, 2004
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