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: April 30, 2005
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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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
(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 April 30, 2005:
Common - $0.01 Par Value - 6,997,034
ELECTRIC & GAS TECHNOLOGY, INC. AND SUBSIDIARIES
Index to Form 10-QSB
For the Quarter Ended April 30, 2005
Part I - Financial Information Page
Item 1. Condensed Consolidated Financial Statements:
(a) Condensed Consolidated Balance Sheets at April 30, 2005
(unaudited) and July 31, 2004 3
(b) Condensed Consolidated Statements of Operations for the
three and nine months ended April 30, 2005 (unaudited) and
April 30, 2004 (unaudited) 4
(c) Condensed Consolidated Statement of Changes
in Stockholders' Deficit for the nine months ended
April 30, 2005 (unaudited) 5
(d) Condensed Consolidated Statements of Cash Flows for the
nine months ended April 30, 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 14-19
Item 3. Controls and Procedures 19
Part II - Other Information
Item 1. Legal Proceedings 20
Item 4. Submission of Matters to Vote of Security Holders 21
Item 6. Exhibits and Reports on Form 8-K 22
Signature (Pursuant to General Instruction E) 22
Certifications 23-26
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)
April 30, 2005 July 31, 2004
-------------- --------------
(Unaudited)
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 254,995 $ 37,139
Accounts receivable, net 1,053,631 1,069,163
Inventories 1,386,733 1,066,706
Prepaid expenses 48,828 38,092
Assets held for sale - current 226,102 --
Receivable from sale of discontinued operations -- 3,731,209
-------------- --------------
Total current assets 2,970,289 5,942,309
-------------- --------------
PROPERTY, PLANT AND EQUIPMENT, net 1,732,062 1,343,123
-------------- --------------
OTHER ASSETS
Certificates of deposit, pledged 174,493 501,016
Assets held for sale 85,943 752,865
Due from affiliates - net 301,434 294,154
Other 96,048 72,282
-------------- --------------
Total other 657,918 1,620,317
-------------- --------------
TOTAL ASSETS $ 5,360,269 $ 8,905,749
============== ==============
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES
Notes payable $ 1,470,207 $ 1,486,698
Accounts payable 1,178,019 1,288,192
Accrued liabilities 170,489 660,897
Payable to officers 40,780 22,500
Current maturities of long-term obligations 383,886 298,172
Current portion of minimum pension liability 125,094 373,555
Current liabilities of discontinued operations 11,035 2,517,356
-------------- --------------
Total current liabilities 3,379,510 6,647,370
-------------- --------------
LONG-TERM OBLIGATIONS
Long-term obligations, less current maturities 1,017,485 1,417,236
Minimum pension liability 1,004,080 1,037,134
-------------- --------------
Total long-term obligations 2,021,565 2,454,370
-------------- --------------
Minority interest in subsidiary 8,630 --
-------------- --------------
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 (8,244,032) (8,390,587)
Pension liability adjustment (1,410,689) (1,410,689)
-------------- --------------
Stockholders' equity (deficit) before treasury stock 27,200 (119,355)
Treasury stock, 65,000 shares at cost (76,636) (76,636)
-------------- --------------
Total stockholders' deficit (49,436) (195,991)
-------------- --------------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $ 5,360,269 $ 8,905,749
============== ==============
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,
-------------------------- --------------------------
2005 2004 2005 2004
----------- ----------- ----------- -----------
Sales $ 2,024,000 $ 1,653,341 $ 6,634,915 $ 4,569,005
Cost of goods sold 1,237,991 1,290,694 4,457,115 3,474,007
----------- ----------- ----------- -----------
Gross profit 786,009 362,647 2,177,800 1,094,998
Selling, general and administrative expenses 795,014 578,173 1,901,109 1,967,182
----------- ----------- ----------- -----------
Income (loss) from operations (9,005) (215,526) 276,691 (872,184)
----------- ----------- ----------- -----------
Other income (expense)
Interest, net (58,317) (37,892) (162,856) (105,328)
Investment gain (loss) -- (497,578) -- (284,794)
Settlement of civil action -- -- (49,000) --
Other, net 24,688 (192,727) 50,978 (171,854)
----------- ----------- ----------- -----------
Total other income (expense) (33,629) (728,197) (160,878) (561,976)
----------- ----------- ----------- -----------
Income (loss) from continuing operations before
minority interest (42,634) (943,723) 115,813 (1,434,160)
Minority interest in subsidiary 44,262 -- (8,630) --
----------- ----------- ----------- -----------
Income (loss) from continuing operations 1,628 (943,723) 107,183 (1,434,160)
Discontinued operations, net of tax -- (61,409) 39,372 52,349
Loss on sale of discontinued operations -- (422,379) -- (422,379)
----------- ----------- ----------- -----------
Net income (loss) $ 1,628 $(1,427,511) $ 146,555 $(1,804,190)
Income (loss) available per Common share:
Income (loss) from continued operations $ 0.00 $ (0.14) $ 0.02 $ (0.21)
Income from discontinued operations -- (0.07) 0.00 (0.05)
----------- ----------- ----------- -----------
Net income (loss) $ 0.00 $ (0.21) $ 0.02 $ (0.26)
----------- ----------- ----------- -----------
Weighted average common shares outstanding
6,997,034 6,887,734 6,997,034 6,863,751
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 nine months ended April 30, 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 -- -- -- 146,555 -- -- 146,555
----------- ----------- ----------- ----------- ----------- ----------- -----------
Balance at April 30, 2005 7,062,034 $ 70,620 $ 9,611,301 $(8,244,032) $(1,410,689) $ (76,636) $ (49,436)
=========== =========== =========== =========== =========== =========== ===========
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,
2005 2004
----------- -----------
Cash flows from operating activities:
Net income (loss) $ 146,555 $(1,804,190)
Discontinued operations, net of tax 39,372 (370,030)
----------- -----------
Income (loss) from continuing operations 107,183 (1,434,160)
Adjustments to reconcile net income (loss)
to net cash used in operating activities:
Depreciation 214,132 194,191
Gain on sale of assets -- (162,225)
Loss on investments -- 447,019
Settlement of civil action 49,000 --
Changes in assets and liabilities:
Accounts receivable 15,532 (12,435)
Inventories (320,027) (136,022)
Prepaid expenses (10,736) (30,350)
Other assets (23,766) (33,726)
Accounts payable (110,173) 338,738
Accrued liabilities (539,408) 233,194
Accrued pension plan (130,581) --
----------- -----------
Net cash used in operating activities (748,844) (595,776)
----------- -----------
Cash flows from investing activities:
Proceeds from sales or maturities of investments -- 341,395
Purchase of property, plant and equipment (603,071) (335,019)
Investments in affiliates (7,280) 61,723
Idle facility (6,290) --
Certificates of deposits 326,523 67,591
----------- -----------
Net cash provided by (used in) investing activities (290,118) 135,690
----------- -----------
Cash flows from financing activities:
Proceeds from officer 18,280 --
Payments on long-term obligations (17,861) (293,147)
Net change in notes payable and long-term debt (16,491) 542,994
Minority interest in subsidiary 8,630 --
-----------
Net cash provided by (used in) financing activities (7,442) 249,847
----------- -----------
Net cash provided by discontinued operations 1,264,260 170,773
----------- -----------
Net increase (decrease) in cash and cash equivalents 217,856 (39,466)
Cash and cash equivalents - beginning of period 37,139 90,930
Cash and cash equivalents - end of period $ 254,995 $ 51,464
=========== ===========
Supplemental disclosures of cash flow information:
Cash paid during the period for interest $ 170,033 $ 185,399
----------- -----------
Taxes paid in discontinued operations during the period $ -- $ 33,675
----------- -----------
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 nine months ended April 30, 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 a total of $2,506,321 to vendors and
employees and for other expenses related to the Hydel transaction, 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 nine months ended April 30, 2005, the Company recognized the
settlement of litigation in regards to Atmospheric Water Technology, Inc. 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.
During the nine months ended April, 2005, the IRS approved the transfer of the
Paris, TX building, included in idle facility with a book value of $447,110,
along with the related debt of $296,176 to the Retech pension plan as a
contribution.
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 facility containing 144,000 square feet, 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 97.5% of Logic Metals Technology, Inc. (LMT). During the three
months ended April 30, 2005, the Company accepted 9,146,482 shares of Logic
Metals Technology, Inc. common stock in satisfaction of debt at a rate of $0.13
per share. This increased the position of the Company from 80% to 97.5%
ownership of Logic Metals Technology, Inc 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 its direct sales force. 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 nine months ended
April 30, 2005 and 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 owned proprietary products and external customers through a common
organization. As of April 30, 2005, the organizations have been consolidated and
the manufacturing systems are being migrated to one system with a projected
completion date of October 2005.
8
ELECTRIC & GAS TECHNOLOGY, INC. AND SUBSIDIARIES
The Company ceased the active pursuit of sales of the Watermaker(TM) products in
its Atmospheric Water Technology (AWT) subsidiary in the first quarter of this
fiscal year and concluded the disposal of this asset in the second quarter as
described in Non-cash activities on page 7.
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 April 30,
2005 and the results of operations and cash flows for the periods then ended.
Reclassification
Certain reclassifications have been made to the 2004 consolidated condensed
financial statements to conform with the 2005 presentation.
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 the settlement of litigation, the Company agreed to transfer
its 91.5% ownership of AWT, Inc and its associated intellectual property to the
plaintiff, 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.
9
ELECTRIC & GAS TECHNOLOGY, INC. AND SUBSIDIARIES
NOTE C - INVENTORIES
Inventories are comprised as follows:
April 30, 2005 July 31, 2004
-------------- --------------
Raw materials $ 671,718 $ 576,080
Work in process 363,748 128,259
Finished goods 351,267 362,367
-------------- --------------
Total inventory $ 1,386,733 $ 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
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 identified when a product
will no longer be produced or 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
$174,493.
During the nine months ended April 30, 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.
During the nine months ended April, 2005, the IRS approved the transfer of the
Paris, TX building, included in idle facility with a book value of $447,110,
along with the related debt of $296,176 to the Retech pension plan as a
contribution.
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.
10
ELECTRIC & GAS TECHNOLOGY, INC. AND SUBSIDIARIES
During the fourth quarter of fiscal 2004, the Company actively began marketing
for sale, the former corporate facility, located in Dallas, Texas and the former
Reynolds' facility, located in Garland, Texas, in an effort to consolidate
operations and reduce costs. Currently, the facility in Dallas, Texas is under a
sales contract which is scheduled to close in June. The Garland, TX facility is
listed for sale or lease and discussions are underway with several interested
buyers. The Paris, Texas facility has been transferred to Retech's Defined
Benefit Pension Plan as described in Note F.
The total carrying value of the assets held for sale as of April 30, 2005 is the
net book value of $312,045 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 $400,000.
The following is the carrying value of assets held for sale and the
corresponding liabilities at April 30, 2005. The Paris building was transferred
to the Retech Pension Plan during the nine months ended April 30, 2005, as
described in Note F.
Carrying Current Long-term Total
value liabilities liabilities Liabilities
----------- ----------- ----------- -----------
Corporate building
- current $ 226,102 $ 459,936 $ -- $ 459,936
Garland building 85,943 15,658 345,648 361,306
----------- ----------- ----------- -----------
Total $ 312,045 $ 475,594 $ 45,648 $ 821,242
=========== =========== =========== ===========
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 and a steady decline in interest rates. 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
11
ELECTRIC & GAS TECHNOLOGY, INC. AND SUBSIDIARIES
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 resulting in a stockholders'
equity reduction of $1,168,016. The Company has accrued $36,000 for the current
year, through the quarter ended April 30, 2005.
Current management recognized the condition of the Plan and worked with the IRS
to enter into a Closing Agreement executed April 15, 2005 that brought the plan
into acceptable funding status. An important element to the Agreement was an
in-kind contribution of a stock and bond portfolio owned by an affiliate and
other tangible assets to include the real estate and associated mortgage owned
by the Company in Paris, Texas. The transfer of real estate into the Plan had no
material affect on the financial position of ELGT.
The Company is committed to restoring the plan to full compliance. This is a
stepwise process, focused first on the Closing Agreement and meeting current
minimum funding requirement. Now that this step has been completed the Company
will address other matters of compliance related to the Plan. Whereas the
Company believes that it will be able to resolve these matters in a satisfactory
manner, failure to do so could have a negative impact on the Company's future
performance.
NOTE G - INDUSTRY SEGMENT DATA
The Company's current business is primarily comprised of two industry segments:
(i) 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) 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.
12
ELECTRIC & GAS TECHNOLOGY, INC. AND SUBSIDIARIES
3 months 9 months
April 30, April 30,
2005 2004 2005 2004
----------- ----------- ----------- -----------
Operating revenues
Utility Products $ 505,148 $ 396,833 $ 1,561,757 $ 1,406,013
Contract Manufacturing 1,518,852 1,256,508 5,073,158 3,162,992
----------- ----------- ----------- -----------
Total sales $ 2,024,000 $ 1,653,341 $ 6,634,915 $ 4,569,005
=========== =========== =========== ===========
Operating income (loss)
Utility Products (72,293) (311,613) (115,545) (367,863)
Contract Manufacturing 243,189 197,357 701,173 136,047
----------- ----------- ----------- -----------
Income (loss) from operations 170,896 (114,256) 585,628 (231,816)
General corporate expenses (179,901) (101,270) (308,937) (640,368)
Minority interest in subsidiary 44,262 -- (8,630) --
Other income (expense) (33,629) (728,197) (160,878) (561,976)
----------- ----------- ----------- -----------
Income (loss) from continuing
operations 1,628 (943,723) 107,183 (1,434,160)
----------- ----------- ----------- -----------
Discontinued operations, net of tax -- (61,409) 39,372 52,349
Loss on sale of discontinued
operations -- (422,379) -- (422,379)
----------- ----------- ----------- -----------
Net income (loss) $ 1,628 $(1,427,511) $ 146,555 $(1,804,190)
=========== =========== =========== ===========
NOTE H - RELATED PARTY TRANSACTIONS
The following is a summary of advances to and from affiliated companies included
in other assets at April 30, 2005 and July 31, 2004:
April 30, 2005 July 31, 2004
-------------- --------------
Net Due To/From Affiliates - Interfederal Capital, Inc. $ 301,434 $ 294,154
============== ==============
Net Payable to Officers $ (40,780) $ (22,500)
============== ==============
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 loans that were obtained during the year ended July 31, 2003 and the
nine months ending April 30, 2005.
13
ELECTRIC & GAS TECHNOLOGY, INC. AND SUBSIDIARIES
NOTE H - RELATED PARTY TRANSACTIONS (continued)
S. Mort Zimmerman, IFC Industries, M&M Trans Exchange, Comtec, Inc. and Glauber
Management have agreed to consolidate their balances into the account of
Interfederal Capital, Inc. for the purpose of legal offset. The consolidated
balance of $301,434 due to the Company from Interfederal Capital, Inc. is
recoverable when, and if, it exercises its option to purchase the real estate it
currently leases from Interfederal, as described in Capital Expenditures. The
offset occurred during the nine months ending April 30, 2005. The balance of
$301,434 due from Interfederal is a payment by the Company toward the purchase
of the facility it leases from Interfederal. Should the Company not be able to
finance said purchase on or before the option expiration date, the amount of the
offset due the Company will be recovered against lease payments due.
The Company has a payable of $40,780 that is due to Daniel A. Zimmerman as of
April 30, 2005, compared to a $22,500 payable due as of July 31, 2004. These
amounts were used to fund legal and other professional fees and trade or other
payables of the Company.
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 at April 30, 2005 and July 31, 2004.
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 OR PLAN OF OPERATION
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.
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ELECTRIC & GAS TECHNOLOGY, INC. AND SUBSIDIARIES
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 owned proprietary products and external customers through a common
organization.
Results of operations
Summary. The Company reported revenues of $2,024,000 and $6,634,915 for the
three months and nine months ended April 30, 2005, respectively. This compares
to revenues of $1,653,341 and $4,569,005 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 Contract Manufacturing
segment.
The Company reported income/(loss) from operations of $(9,005) and $276,691 for
the three months and nine months ended April 30, 2005, respectively. This
compares to losses of $(215,526) and $(872,184) 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 21.93% and 23.97% for the three
months and nine months ended April 30, 2004, respectively, to 38.83% and 32.82%
for the three months and nine months ended April 30, 2005, respectively. Gross
margins improved as the result of being able to increase sales while maintaining
or reducing fixed and semi-fixed costs as the result of consolidation of
facilities and functions.
Inventories have increased in both raw materials and work in process during the
nine months ended April 30, 2005. In an effort to keep up the current customer
lead time demands, the Company has implemented a system to stock frequently used
raw materials to reduce lead time. Work in process inventory increased as the
result of increased concentration of longer cycle integrated processes for
established and new customers.
Selling, general and administrative expenses as a percent of revenues increased
from 34.97% for the three months and decreased from 43.05% for the nine months
ended April 30, 2004, to 39.28% and 28.65%, respectively, for the three months
and nine months ended April 30, 2005. The improvement for the nine months
results primarily from the Company being able to enjoy an increase in sales
while maintaining or reducing costs through consolidation of facilities and
functions.
15
ELECTRIC & GAS TECHNOLOGY, INC. AND SUBSIDIARIES
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, 2005 April 30, 2005
-------------------------- --------------------------
Increase/ Increase/
(Decrease) Percent (Decrease) Percent
----------- ----------- ----------- -----------
Operating revenues:
Utility Products $ 108,315 27.29% $ 155,744 11.08%
Contract Manufacturing 262,344 20.88% 1,910,166 60.39%
Total sales $ 370,659 22.42% $ 2,065,910 45.22%
Income (loss) from continuing operations:
Utility Products $ 239,320 NA $ 252,318 NA
Contract Manufacturing 45,832 NA 565,126 NA
Total segment operating income
(loss) 285,152 NA 817,444 NA
General corporate expenses 78,631 NA (331,431) NA
Minority interest in subsidiary 44,262 NA (8,630) NA
Other income (expense) 694,568 NA 401,098 NA
Income (loss) from continuing operations $ 945,351 NA $ 1,541,343 NA
Utility Products - This segment reported increases in revenue of $108,315 with
operating income improving by $239,320 for the three month period ending April
30, 2005. These increases were due primarily to increased sales activity and
improvements in general market conditions for these products and improvements in
operating efficiencies resulting from a consolidation of facilities and support
functions across operating segments.
This segment acquired a product line that it has branded Co-Pilot (TM) . This
product is used in combination with the segment's other instrumentation to allow
a gas utility operator to remotely monitor and control pressure and flow in a
gas pipeline. It also commercialized one of its product research and development
efforts, introducing a new gas odorization system branded Smart Drip (TM).
Contract Manufacturing - In this segment, revenues increased $262,344 while
operating profit increased by $45,832 for the quarter ended April 30, 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.
This segment has begun an initiative to enhance its sales effectiveness and
broaden its range of services offered. It is exploring opportunities to develop
or acquire proprietary products. Current facilities and capital equipment base
will support substantial increases in business.
16
ELECTRIC & GAS TECHNOLOGY, INC. AND SUBSIDIARIES
Corporate overhead expenses increased by $78,631 and decreased by $331,431
relative to the corresponding three and nine month periods in the prior year.
This nine month 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 decreased by $694,568 and $401,098 for the three months and nine
months ended April 30, 2005 (respectively) relative to the same period in the
prior year. This net decrease is due primarily to a $447,000 Orasees investment
write off in the previous year. The Orasees investment was written off
subsequent to Orasees ceasing operations. The Company did not write off of
investments in the current period.
As the result of the settlement of litigation, the Company agreed to transfer
its 91.5% ownership of AWT, Inc and its associated intellectual property to the
plaintiff, 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.
During the three months ended April 30, 2005, the Company accepted 9,146,482
shares of Logic Metals Technology, Inc. common stock in satisfaction of debt at
a rate of $0.13 per share. This increased the position of the Company from 80%
to 97.5% ownership of Logic Metals Technology, Inc
Liquidity and Capital Resources
Current assets of the Company total $2,970,289 at April 30, 2005, down from
current assets of $5,942,309 at July 31, 2004, or a decrease of $2,972,020.
Current liabilities decreased by $3,267,860, reducing the working capital
deficiency (current assets less current liabilities) to $409,221 at April 30,
2005 as compared to $705,061 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 has a contract for the sale of the Dallas, TX building,
to close by the end of June, 2005, which will provide working capital. The
Company believes that it 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.
During the nine months ended April, 2005, the IRS approved the transfer of the
Paris, TX building, included in idle facility with a book value of $447,110,
along with the related debt of $296,176 to the Retech pension plan as a
contribution.
During the nine months ended April 30, 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 a total of $2,506,321 to vendors and
employees and for other expenses related to the Hydel transaction, 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.
17
ELECTRIC & GAS TECHNOLOGY, INC. AND SUBSIDIARIES
While the Company has incurred losses over the past years it 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 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 Contract
Manufacturing segment as additional capacity is required to meet customer
requirements. The most recent purchases include a laser cutting machine, which
was received in December, 2004, and additional press brakes and other machinery
(totaling approximately $100,000) for the Contract Manufacturing area received
in April, 2005. Other expenditures for capital equipment will be for the
ordinary replacement of worn or obsolete machinery and equipment utilized by its
subsidiaries.
The Company leases its primary facility from Interfederal. The lease agreement
includes the option for the Company to purchase the facility, which it intends
to do on or before the expiration date of the option. The terms of the option
are the purchase price is $3,600,000 and the closing costs are to be paid by the
seller exclusive of the purchaser's financing costs and the FMV appraisal. The
expiration date of the option is January 31, 2006.
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
18
ELECTRIC & GAS TECHNOLOGY, INC. AND SUBSIDIARIES
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.
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.
19
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. A mediation date for this matter, though not confirmed, is scheduled
for the summer of 2005.
Electric & Gas Technology, Inc., Atmospheric Water Technology, Inc. vs Universal
Communications Systems, Inc. (UCSY). The Company has reached a settlement in two
lawsuits and counterclaims with UCSY. In the period ended April 30, 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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ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
On March 30, 2005, the annual shareholders' meeting was held. The Board of
Directors was elected. The following people were elected to the Board: S. Mort
Zimmerman, Director/Chairman of the Board; Daniel A. Zimmerman,
Director/President/Chief Executive Officer; George M. Johnston, Director/Vice
President/Chief Financial Officer; and Fred M. Updegraff, Director. An
additional matter voted upon at the annual stockholders' meeting was the
appointment of Turner Stone & Co. as independent accountants. The tabulated
votes for each matter are as follows:
- ------------------------------------- ------------- ---------- -----------
FOR AGAINST ABSTAIN
- ------------------------------------- ------------- ---------- -----------
ELECTION OF BOARD OF DIRECTORS
- --------------------------------------------------------------------------
S. Mort Zimmerman 5,103,343 2,138 70,287
- ------------------------------------- ------------- ---------- -----------
Daniel A. Zimmerman 5,103,098 2,383 70,287
- ------------------------------------- ------------- ---------- -----------
George M. Johnston 4,947,258 158,223 70,287
- ------------------------------------- ------------- ---------- -----------
Fred M. Updegraff 5,103,185 2,296 70,287
- ------------------------------------- ------------- ---------- -----------
APPOINTMENT OF INDEPENDENT ACCOUNTS TURNED STONE & CO.
- ------------------------------------- ------------- ---------- -----------
Turner Stone & Co. 5,103,866 71,902 0
- ------------------------------------- ------------- ---------- -----------
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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: June 20, 2005
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