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: January 31, 2005
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 January 31, 2005:
Common - $0.01 Par Value - 6,997,034
ELECTRIC & GAS TECHNOLOGY, INC. AND SUBSIDIARIES
Index to Form 10-QSB
For the Quarter Ended January 31, 2005
Part I - Financial Information Page
Item 1. Condensed Consolidated Financial Statements:
(a) Condensed Consolidated Balance Sheets at January 31, 2005
(unaudited) and July 31, 2004 3
(b) Condensed Consolidated Statements of Operations for the
three and six months ended January 31, 2005 (unaudited) and
January 31, 2004 (unaudited) 4
(c) Condensed Consolidated Statement of Changes in
Stockholders' Deficit for the six months ended January 31,
2005 (unaudited) 5
(d) Condensed Consolidated Statements of Cash Flows for the
six months ended January 31, 2005 (unaudited) and 2004
(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 14-17
Item 3. Controls and Procedures 17-18
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
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.
ELECTRIC & GAS TECHNOLOGY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
January 31, 2005 July 31, 2004
---------------- ----------------
(Unaudited)
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 354,689 $ 37,139
Accounts receivable, net 1,029,552 1,069,163
Inventories 1,242,538 1,066,706
Prepaid expenses 50,419 38,092
Receivable from sale of discontinued operations -- 3,731,209
---------------- ----------------
Total current assets 2,677,198 5,942,309
---------------- ----------------
PROPERTY, PLANT AND EQUIPMENT, net 1,705,890 1,343,123
---------------- ----------------
OTHER ASSETS
Certificates of deposit, pledged 173,907 501,016
Assets held for sale 759,155 752,865
Due from affiliates - net 238,407 271,654
Other 108,088 72,282
---------------- ----------------
Total other 1,279,557 1,597,817
---------------- ----------------
TOTAL ASSETS $ 5,662,645 $ 8,883,249
================ ================
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES
Notes payable $ 1,288,653 $ 1,486,698
Accounts payable 1,104,155 1,288,192
Accrued liabilities 135,900 660,897
Current maturities of long-term obligations 209,113 298,172
Current portion of minimum pension liability 409,555 373,555
Current liabilities of discontinued operations 11,035 2,517,356
---------------- ----------------
Total current liabilities 3,158,411 6,624,870
---------------- ----------------
LONG-TERM OBLIGATIONS
Long-term obligations, less current maturities 1,476,572 1,417,236
Minimum pension liability 1,025,834 1,037,134
---------------- ----------------
Total long-term obligations 2,502,406 2,454,370
---------------- ----------------
Minority interest in subsidiary 52,892 --
---------------- ----------------
STOCKHOLDERS' DEFICIT
Preferred stock, $10 par value, 5,000,000 shares authorized,
none issued
Common stock, $.01 par value, 30,000,000 shares
authorized, 7,062,034 issued, and 6,997,034 outstanding 70,620 70,620
Additional paid-in capital 9,611,301 9,611,301
Accumulated deficit (8,245,660) (8,390,587)
Pension liability adjustment (1,410,689) (1,410,689)
---------------- ----------------
Stockholders' equity (deficit) before treasury
stock 25,572 (119,355)
Treasury stock, 65,000 shares at cost (76,636) (76,636)
---------------- ----------------
Total stockholders' deficit (51,064) (195,991)
---------------- ----------------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $ 5,662,645 $ 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 Six months ended
January 31, January 31,
--------------------------------------------------------
2005 2004 2005 2004
--------------------------------------------------------
Sales $ 2,463,714 $ 1,345,545 $ 4,610,915 $ 2,978,006
Cost of goods sold 1,724,367 1,099,235 3,219,124 2,309,866
--------------------------------------------------------
Gross profit 739,347 246,310 1,391,791 668,140
Selling, general and administrative expenses 558,123 649,946 1,106,095 1,351,415
--------------------------------------------------------
Income (loss) from operations 181,224 (403,636) 285,696 (683,275)
--------------------------------------------------------
Other income (expense)
Interest, net (41,752) (36,688) (104,539) (67,436)
Investment gain (loss) -- 51,138 -- 143,045
Loss of civil action (49,000) -- (49,000) --
Other, net 14,624 11,952 26,290 20,875
--------------------------------------------------------
Total other income (expense) (76,128) 26,402 (127,249) 96,484
--------------------------------------------------------
Income (loss) from continuing operations before
minority interest 105,096 (377,234) 158,447 (586,791)
Minority interest in subsidiary (14,715) -- (52,892) --
--------------------------------------------------------
Income (loss) from continuing operations 90,381 (377,234) 105,555 (586,791)
Discontinued operations, net of tax -- 31,156 39,372 114,133
--------------------------------------------------------
Net income (loss) $ 90,381 $ (346,078) $ 144,927 $ (472,658)
========================================================
Income (loss) available per Common share:
Income (loss) from continued operations $ 0.01 $ (0.05) $ 0.02 $ (0.09)
Income from discontinued operations -- 0.00 0.00 0.02
--------------------------------------------------------
Net income (loss) $ 0.01 $ (0.05) $ 0.02 $ (0.07)
--------------------------------------------------------
Weighted average common shares outstanding
6,997,034 6,887,734 6,997,034 6,852,020
========================================================
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 six months ended January 31, 2005
(Unaudited)
Common Accumulated
Stock Other
Shares Common Paid-in Accumulated Comprehensive Treasury
Issued 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 -- -- -- 144,927 -- -- 144,927
----------- ----------- ----------- ----------- ----------- ----------- -----------
Balance at January 31, 2005 7,062,034 $ 70,620 $ 9,611,301 $(8,245,660) $(1,410,689) $ (76,636) $ (51,064)
=========== =========== =========== =========== =========== =========== ===========
See accompanying notes to condensed consolidated financial statements.
5
ELECTRIC & GAS TECHNOLOGY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Six months ended January 31,
2005 2004
------------ ------------
Cash flows from operating activities:
Net income (loss) $ 144,927 $ (472,658)
Discontinued operations, net of tax (39,372) (114,133)
------------ ------------
Income (loss) from continuing operations 105,555 (586,791)
Adjustments to reconcile net income (loss)
to net cash provided by (used in) operating activities:
Depreciation 130,724 137,371
Gain on sale of assets -- (19,873)
Gains on investments -- (123,172)
Loss of lawsuit 49,000 --
Changes in assets and liabilities:
Accounts receivable 39,611 (1,757)
Inventories (175,832) (182,041)
Prepaid expenses (12,327) (24,066)
Other assets (35,806) 29,547
Accounts payable (184,037) 255,490
Accrued liabilities (573,997) 66,543
Accrued pension plan 24,700 --
------------ ------------
Net cash used in operating activities (632,409) (448,749)
------------ ------------
Cash flows from investing activities:
Proceeds from sales or maturities of investments -- 395,335
Purchase of property, plant and equipment (493,491) (89,169)
Investments in affiliates 33,247 (90,513)
Idle facility (6,290) --
Certificates of deposits 327,109 18,000
------------ ------------
Net cash provided by investing activities (139,425) 233,653
------------ ------------
Cash flows from financing activities:
Payments on long-term obligations (29,723) (126,373)
Net change in notes payable and long-term debt (198,045) 95,509
Minority interest in subsidiary 52,892 --
------------ ------------
Net cash used in financing activities (174,876) (30,864)
------------ ------------
Net cash provided by discontinued operations 1,264,260 274,178
------------ ------------
Net increase (decrease) in cash and cash equivalents 317,550 28,217
Cash and cash equivalents - beginning of period 37,139 46,352
------------ ------------
Cash and cash equivalents - end of period $ 354,689 $ 74,569
============ ============
Supplemental disclosures of cash flow information:
Cash paid during the period for interest $ 111,242 $ 125,506
------------ ------------
Taxes paid in discontinued operations during the period $ -- $ 46,285
------------ ------------
See accompanying notes to condensed consolidated financial statements.
6
ELECTRIC & GAS TECHNOLOGY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
(Unaudited)
During the six months ended January 31, 2005, the Company received the cash
payment for the sale of the assets of Hydel Enterprises, Inc. for $3,731,209
U.S. From these proceeds, the company paid vendors, employees and other expenses
related to the Hydel operation and sale of $2,506,321, leaving a net of
$1,224,888. These funds have been used to reduce notes payable, accounts payable
and accrued liabilities of the Company's continuing operations.
Non-cash activities:
During the six months ended January 31, 2005, the Company recognized the
settlement of litigation with UCSY by conveyance of $25,000 in cash and 150,000
shares of the Company's 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.
See accompanying notes to condensed consolidated financial statements.
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 is a more coordinated 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)
Utility Products, and (2) Contract Manufacturing.
In the Utility 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 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 employed a strategy to merge operational functions wherever
possible with the short term objective of operating a single manufacturing group
serving both internal (Reynolds) and external (Contract Manufacturing) customers
through a common organization.
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 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 in the second quarter concluded the disposal of
this asset as described in Non-cash activities above.
8
ELECTRIC & GAS TECHNOLOGY, INC. AND SUBSIDIARIES
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.
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 January 31,
2005 and the results of operations and cash flows for the periods then ended.
NOTE B - DISCONTINUED OPERATIONS
On July 30, 2004, the Company consummated the sale of assets of its wholly owned
subsidiary located in Canada, Hydel Enterprises, Inc. The sale included 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:
January 31, 2005 July 31, 2004
---------------- ----------------
Raw materials $ 675,046 $ 576,080
Work in process 178,574 128,259
Finished goods 388,918 362,367
---------------- ----------------
Total inventory $ 1,242,538 $ 1,066,706
================ ================
Inventories, consisting of raw materials, work-in-process and finished goods,
are stated at the lower of cost or market as determined by the first-in,
first-out method. The Company reviews inventory usage by line item at least
annually, and accents material as potentially slow moving when usage for the
9
ELECTRIC & GAS TECHNOLOGY, INC. AND SUBSIDIARIES
prior 12 months is less than the current "on-hand" quantity. In subsequent
review, alternative and substitute uses are identified, and the slow moving
quantity is adjusted. The carrying value of excess inventory is adjusted for
financial reporting purposes. Obsolete inventory is associated with obsolete
products, no longer supported by the Company. Obsolete inventory is identified
when a product is determined to be obsolete, and will no longer be supported by
the Company. Customers are notified of final opportunity to purchase the product
and spares, and the inventory is subsequently destroyed and/or sold as scrap.
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.
During the six months ended January 31, 2005, the Company repaid a Bridge loan
in the amount of $200,000.
The Company has refinanced a revolving credit agreement collateralized by
accounts receivable and inventory with a major regional bank. The new line has a
lending cap of $1,750,000 as compared to the previous cap of $850,000.
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.
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. Although none of these properties have
been sold to date, there has been significant interest in each of them.
Currently the corporate facility in Dallas, Texas has been fully leased and a
portion of the idle facility in Paris, Texas has been leased, both to
un-affiliated tenants.
The total carrying value of the assets held for sale as of January 31, 2005 is
the net book value of $752,865 and is included in long-term assets. Based on
appraisals and independent comparative sales reports, the Company believes that
the fair market value for these assets exceeds $1.4 million.
10
ELECTRIC & GAS TECHNOLOGY, INC. AND SUBSIDIARIES
The following is the carrying value of assets held for sale and the
corresponding liabilities at January 31, 2005:
Carrying Current Long-term Total
value liabilities liabilities Liabilities
----------- ----------- ----------- -----------
Corporate building $ 227,423 $ 459,936 $ -- $ 459,936
Garland building 84,622 15,492 348,327 363,819
Paris building 447,110 17,174 285,442 302,616
----------- ----------- ----------- -----------
Total $ 759,155 $ 492,602 $ 633,769 $ 1,126,371
=========== =========== =========== ===========
NOTE F - CONTINGENCIES
The sale of the Company's former subsidiary Superior Switchboard and Devices
Inc. (Superior) was completed in 1996. Consideration received from this sale
included a note receivable of approximately $1,250,000. The surviving business
of Superior, renamed Retech, Inc., continued to own an 80,000 square foot
manufacturing facility in Paris, Texas and continued to be responsible for the
frozen Defined Benefit Pension Plan for Bargaining Employees (the "Plan") that
covered all of its hourly employees. The Plan called for benefits to be paid to
eligible employees at retirement based upon years of service and compensation
rates near retirement.
The maker defaulted on the $1.25 million note. The Company sued for collection
and subsequently entered into a Settlement Agreement. Again the maker failed to
perform under this Agreement and has caused the Company to pursue further
recourse. Legal proceedings are ongoing. Failure to collect on the note has in
part impaired the Company's ability to meet minimum funding requirements as a
portion of the proceeds would have been used by the Company to support the Plan.
The entire note was written off by the Company during FY 2002 and no portion of
it was ever booked as an asset of the Plan.
The Plan began experiencing deficiencies when its asset values were diminished
by poor stock market conditions. Poor financial performance of the Company over
consecutive years also contributed to the condition of the Plan. Since, 2001,
the Company has struggled to keep the Plan in line with minimum funding
requirements. 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. The Company has accrued
$36,000 for the current year, through the quarter ended January 31, 2005.
Current management recognizes the condition of the Plan and is working with the
IRS to enter into a Closing Agreement that brings the plan into acceptable
funding status. An important element to the Agreement is an in-kind contribution
of a stock and bond portfolio owned by an affiliate and other tangible assets to
include the real estate owned by the Company in Paris, Texas.
11
ELECTRIC & GAS TECHNOLOGY, INC. AND SUBSIDIARIES
The Company is committed to restoring the plan to full compliance. This is a
stepwise process, currently focused on the Closing Agreement and meeting minimum
funding requirement. Once this step is completed the Company will address any
other matters of compliance related to the Plan. The inability to resolve these
matters in a satisfactory manner could have a severely negative impact on the
Company's performance and future.
The Closing Agreement and the aforementioned in-kind contributions and related
transactions are expected to be finalized on or before April 15, 2005 and
reported in final detail in future filings.
NOTE G - INDUSTRY SEGMENT DATA
The Company's current business is primarily comprised of two industry segments:
(i) In the Utility 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.
3 months 6 months
January 31, January 31,
2005 2004 2005 2004
----------- ----------- ----------- -----------
Operating revenues
Utility Products 462,748 397,014 1,056,610 1,009,115
Contract Manufacturing 2,000,966 948,531 3,554,305 1,968,891
Total sales $ 2,463,714 $ 1,345,545 $ 4,610,915 $ 2,978,006
=========== =========== =========== ===========
Operating income (loss)
Utility Products (68,687) (161,063) (43,252) (120,909)
Contract Manufacturing 202,214 (20,310) 457,984 (61,310)
----------- ----------- ----------- -----------
Income (loss) from operations 133,527 (181,373) 414,732 (182,219)
General corporate expenses 47,697 (222,263) (129,036) (501,056)
Minority interest in subsidiary (14,715) -- (52,892) --
Other income (expense) (76,128) 26,402 (127,249) 96,484
----------- ----------- ----------- -----------
Income (loss) from continuing
operations 90,381 (377,234) 105,555 (586,791)
----------- ----------- ----------- -----------
Discontinued operations, net of tax -- (31,156) (39,372) (114,133)
----------- ----------- ----------- -----------
Net income (loss) $ 90,381 $ (346,078) $ 144,927 $ (472,658)
=========== =========== =========== ===========
12
ELECTRIC & GAS TECHNOLOGY, INC. AND SUBSIDIARIES
NOTE H - RELATED PARTY TRANSACTIONS
The following is a summary of advances to and from affiliated companies included
in other assets at January 31, 2005 and July 31, 2004:
January 31, 2005 July 31, 2004
---------------- ----------------
Interfederal Capital, Inc. $ 241,273 $ 258,609
IFC Industries, a subsidiary of Interfederal Capital, Inc. 43,589 43,589
M&M Trans Exchange 364,689 364,989
Comtec, Inc. 18,018 18,014
---------------- ----------------
Total receivable from affiliates 667,566 685,201
---------------- ----------------
Glauber Management (52,620) (57,348)
S. Mort Zimmerman (333,699) (333,699)
Daniel A. Zimmerman (42,840) (22,500)
---------------- ----------------
Total due to affiliates (429,159) (413,547)
---------------- ----------------
$ 238,407 $ 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.
Interfederal, S. Mort Zimmerman individually and/or Daniel A. Zimmerman
individually have guaranteed the Company's lines of credit, real estate 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
January 31, 2005 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 January 31, 2005 and
July 31, 2004.
The payable to S. Mort Zimmerman of $333,699 at January 31, 2005 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 $18,018 and $18,014 at January 31, 2005 and July 31, 2004,
respectively.
Glauber Management, Inc. ("Glauber") is wholly owned by S. Mort Zimmerman. The
Company has net payable to Glauber of $52,620 and $57,348 at January 31, 2005
and July 31, 2004, respectively.
S. Mort Zimmerman, Interfederal Capital, Inc., IFC Industries, M&M Trans
Exchange, Comtec, Inc. and Glauber Management have agreed to collectively
reconcile and consolidate their balances for the
13
ELECTRIC & GAS TECHNOLOGY, INC. AND SUBSIDIARIES
NOTE H - RELATED PARTY TRANSACTIONS (continued)
purpose of legal offset with the Company prior to the end of the current fiscal
year ended July 31, 2005.
The Company has pledged a certificate of deposit in the amount of $100,000 for a
loan in the name of DOL Resources, Inc., a publicly held corporation in which
Electric & Gas Technology, Inc. owns a 19.9% equity interest. The note is
currently being serviced, and the company believes DOL has sufficient revenue to
continue servicing the debt. The carrying value on the balance sheet for DOL is
$1.
NOTE I - REVENUE RECOGNITION POLICIES
The Company recognizes revenue when title passes to its customers upon shipment
of its products for final delivery. The Company ships goods and performs
services, only after receiving purchase orders from customers, or authorization
to charge a credit card and the credit card is validated. Revenue for shipments
to customers delivered by company truck are recognized when a signed receiving
document is returned to the plant. Shipments made by common carrier and by
freight forwarders are FOB manufacturing plant, and the customer is charged for
shipping expense. The revenue is recognized when the carrier has signed for
possession of the goods. The Company does not utilize stocking distributors, and
ships to "end use" customers. No right of return exists in regard to stocking
levels or lack of requirement. Defective products can be exchanged or repaired
at the Company's discretion.
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 Utility 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.
The Company has employed a strategy to merge operational functions wherever
possible with the short term objective of operating a single manufacturing group
serving both internal (Reynolds) and external (Contract Manufacturing) customers
through a common organization.
Results of operations
Summary. The Company reported revenues of $2,463,714 and $4,610,915 for the
three months and six months ended January 31, 2005, respectively. This compares
to revenues of $1,345,545 and $2,978,006 for the same periods in 2004. These
gains in revenue are primarily attributed to increased sales activity and
improvement in market conditions, especially in the Metal Fabrication segment.
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ELECTRIC & GAS TECHNOLOGY, INC. AND SUBSIDIARIES
The Company reported income from operations of $181,224 and $285,696 for the
three months and six months ended January 31, 2005, respectively. This compares
to losses of $(403,636) and $(683,275) for the same periods in 2004. These
improvements are due primarily to the increase in sales, consolidation of
manufacturing facilities and improvement in operating efficiencies.
Gross margins for the Company increased from 18.31% and 22.44% for the three
months and six months ended January 31, 2004, respectively, to 30.01% and 30.18%
for the three months and six months ended January 31, 2005, respectively. Gross
margins improved as the result of significantly increasing sales while
maintaining or reducing fixed and semi-fixed costs in the manufacturing area as
the result of consolidation of facilities and functions from 3 buildings into 1
building and combination of functions across operating segments.
Selling, general and administrative expenses as a percent of revenues decreased
from 48.30% and 45.38% for the three months and six months ended January 31,
2004, respectively, to 22.65% and 23.99% for the three months and six months
ended January 31, 2005, respectively. This results primarily from the Company
being able to enjoy an increase in sales while maintaining or reducing costs
through consolidation of facilities and functions.
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 Six months ended
January 31, 2005 January 31, 2005
-------------------------- --------------------------
Increase/ Increase/
(Decrease) Percent (Decrease) Percent
----------- ----------- ----------- -----------
Operating revenues:
Utility Products $ 65,734 16.56% $ 47,495 4.71%
Contract Manufacturing 1,052,435 110.95% 1,585,414 80.52%
----------- ----------- ----------- -----------
Total sales $ 1,118,169 83.10% $ 1,632,909 54.83%
=========== =========== =========== ===========
Income (loss) from continuing operations:
Utility Products $ 92,376 NA $ 77,657 NA
Contract Manufacturing 222,524 NA 519,294 NA
----------- ----------- ----------- -----------
Total segment operating income
(loss) 314,900 NA 596,951 NA
General corporate expenses 269,960 NA 372,020 NA
Minority interest in subsidiary (14,715) NA (52,892) NA
Other income (expense) (102,530) NA (223,733) NA
----------- ---------- ----------- -----------
Income (loss) from continuing operations $ 467,615 NA $ 692,346 NA
=========== =========== =========== ===========
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ELECTRIC & GAS TECHNOLOGY, INC. AND SUBSIDIARIES
Utility Products - This segment reported increases in revenue of $65,734 with
operating income improving by $92,376 for the three month period ending January
31, 2005. These increases were due primarily to increased sales activity and
improvements in operating efficiencies resulting from a consolidation of
facilities and support functions across operating segments.
Contract Manufacturing - In this segment, revenues increased $1,052,435 while
operating profit increased by $222,524 for the quarter ended January 31, 2005.
These increases were due primarily to increased sales activity, an improvement
in the market environment and improvements in operating efficiencies resulting
from a consolidation of facilities and support functions across operating
segments.
Corporate overhead expenses decreased by $269,960 and $372,020 relative to the
corresponding three and six month periods respectively in the prior year. This
reduction resulted primarily from a reduction in staff, negotiation of reduction
in previously invoiced professional services, and a consolidation of facilities
and functions.
Other expenses increased by $102,530 and $223,733 for the three months and six
months ended January 31, 2005 (respectively) relative to the same period in the
prior year. These net increases are due primarily to an increase in the current
3 month period of $49,000 resulting form the loss in a civil action described
herein, and an increase of $37,103 in interest expense for the current 6 month
period, as compared to a $143,045 gain on sale of stock that occurred in the
same period for 2004.
Liquidity and Capital Resources
Liquidity. Current assets of the Company total $2,677,198 at January 31, 2005,
down from current assets of $5,942,309 at July 31, 2004, or a decrease of
$3,265,111. Current liabilities decreased by $3,466,459, reducing the working
capital deficiency (current assets less current liabilities) to $481,213 at
January 31, 2005 as compared to $682,561 at July 31, 2004. This is primarily the
result of collecting on the sale of Hydel assets (see below), 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 has recently completed the movement of its 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 Enterprises, Inc.
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
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ELECTRIC & GAS TECHNOLOGY, INC. AND SUBSIDIARIES
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
needed, the Company could obtain 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 2005, the Company anticipates capital expenditures in the metal
fabrication area as additional capacity is required to meet customer
requirements. The most recent purchase was a laser cutting machine, which was
received on December 10, 2004. The Company anticipates purchasing additional
machinery for the Contract Manufacturing area during this fiscal year in the
amount of approximately $100,000. Other 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.
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.
Item 3. CONTROLS AND PROCEDURES
(a) Evaluation of disclosure controls and procedures.
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ELECTRIC & GAS TECHNOLOGY, INC. AND SUBSIDIARIES
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).
In the period ended January 31, 2005, the Company recognized the settlement of
the litigation with UCSY for $25,000 in cash and 150,000 shares of restricted
stock of the Company, 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.
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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ELECTRIC & GAS TECHNOLOGY, INC. AND SUBSIDIARIES
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit 31.1 - Certification of President 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 President 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 8-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: March 22, 2005
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