UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended: October 31, 2006
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 October 31, 2006:
Common - $0.01 Par Value - 8,595,461
ELECTRIC & GAS TECHNOLOGY, INC. AND SUBSIDIARIES
Index to Form 10-QSB
For the Quarter Ended October 31, 2006
Part I - Financial Information Page
Item 1. Condensed Consolidated Financial Statements:
(a) Condensed Consolidated Balance Sheets at October 31,
2006 (unaudited) and July 31, 2006 3
(b) Condensed Consolidated Statements of Operations for
the three months ended October 31, 2006 (unaudited) and
October 31, 2005 (unaudited) 4
(c) Condensed Consolidated Statement of Changes in
Stockholders' Deficit for the three months ended October
31, 2006 (unaudited) 5
(d) Condensed Consolidated Statements of Cash Flows for
the three months ended October 31, 2006 (unaudited) and
October 31, 2005 (unaudited) 6
(e) Notes to Condensed Consolidated Financial Statements
(unaudited) 7-13
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 13-16
Item 3. Controls and Procedures 16
Part II - Other Information
Item 1. Legal Proceedings 17
Item 4. Submission of Matters to Vote of Security Holders 17
Item 6. Exhibits and Reports on Form 8-K 18
Signature (Pursuant to General Instruction E) 18
Certifications 19-22
All other items called for by the instructions are omitted as they are either
not applicable, not required, or the information is included in the Condensed
Financial Statements or Notes thereto.
2
ELECTRIC & GAS TECHNOLOGY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
October 31, 2006 July 31, 2006
---------------- ----------------
(Unaudited)
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 92,475 $ 536,723
Accounts receivable, net 1,006,293 1,774,113
Inventories 2,392,547 2,197,959
Prepaid expenses 53,152 111,958
Other assets - current 11,438 --
---------------- ----------------
Total current assets 3,555,905 4,620,753
---------------- ----------------
PROPERTY, PLANT AND EQUIPMENT, net 5,007,387 5,122,453
---------------- ----------------
OTHER ASSETS
Certificates of deposit, pledged 100,000 100,000
Assets held for sale 344,831 344,831
Other assets 148,528 152,499
---------------- ----------------
Total other 593,359 597,280
---------------- ----------------
TOTAL ASSETS $ 9,156,651 $ 10,340,486
================ ================
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES
Notes payable $ 1,011,376 $ 1,473,533
Accounts payable 1,821,516 2,293,119
Accrued liabilities 535,847 674,400
Note payable to affiliate 512,211 493,595
Payable to officers 20,000 --
Current maturities of long-term obligations 321,048 324,003
Current portion of minimum pension liability 288,499 288,499
Liabilities of discontinued operations 71,608 71,608
Total current liabilities 4,582,105 5,618,757
---------------- ----------------
LONG-TERM OBLIGATIONS
Long-term obligations, less current maturities 4,308,337 4,411,430
Minimum pension liability 898,043 898,043
---------------- ----------------
Total long-term obligations 5,206,380 5,309,473
---------------- ----------------
STOCKHOLDERS' DEFICIT
Preferred stock, $10 par value, 5,000,000 shares authorized,
none issued
Common stock, $.01 par value, 30,000,000 shares authorized,
issued 8,599,461 and 8,242,461 shares respectively 85,995 82,425
Additional paid-in capital 10,453,099 10,242,469
Accumulated deficit (10,011,386) (9,753,096)
Accumulated comprehensive losses (1,159,542) (1,159,542)
---------------- ----------------
Total stockholders' deficit (631,834) (587,744)
---------------- ----------------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $ 9,156,651 $ 10,340,486
================ ================
See accompanying notes to the condensed consolidated financial statements.
3
ELECTRIC & GAS TECHNOLOGY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three months ended
October 31,
--------------------------
2006 2005
--------------------------
Sales $ 2,128,804 $ 1,921,113
Cost of goods sold 1,606,512 1,604,723
Gross profit 522,292 316,390
Selling, general and administrative expenses 688,734 618,900
--------------------------
Loss from operations (166,442) (302,510)
--------------------------
Other income (expense)
Interest (99,253) (62,067)
Settlement of civil action -- 170,000
Other income (expense), net 7,405 (382)
--------------------------
Total other income (expense) (91,848) 107,551
--------------------------
Net loss from continuing operations before minority interest (258,290) (194,959)
Minority interest in subsidiary --
3,206
--------------------------
Net loss $ (258,290) $ (191,753)
==========================
Loss available per common share:
Net loss $ (0.03) $ (0.03)
==========================
Weighted average common shares outstanding 8,454,307 7,337,903
==========================
See accompanying notes to condensed consolidated financial statements.
4
ELECTRIC & GAS TECHNOLOGY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' DEFICIT
For the three months ended October 31, 2006
(Unaudited)
Common Accumulated
stock Other
shares Common Paid-in Accumulated Comprehensive
issued stock capital Deficit Losses Total
------------- ------------- ------------- ------------- ------------- -------------
Balance at July 31, 2006 8,242,461 $ 82,425 $ 10,242,469 $ (9,753,096) $ (1,159,542) $ (587,744)
Stock issued for cash 357,000 3,570 210,630 -- -- 214,200
Net loss -- -- -- (258,290) -- (258,290)
Balance at October 31, 2006 8,599,461 $ 85,995 $ 10,453,099 $ (10,011,386) $ (1,159,542) $ (631,834)
============= ============= ============= ============= ============= =============
See accompanying notes to condensed consolidated financial statements.
5
ELECTRIC & GAS TECHNOLOGY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Three months ended October 31,
2006 2005
------------- -------------
Cash flows from operating activities:
Net loss $ (258,290) $ (191,753)
Adjustments to reconcile net loss
to net cash used in operating activities:
Depreciation of property, plant and equipment 115,066 87,623
Stock issued as interest expense for loans -- 10,965
Lawsuit -- (170,000)
Changes in operating assets and liabilities:
Accounts receivable 767,820 (188,266)
Inventories (194,588) (217,809)
Prepaid expenses 58,806 (40,029)
Other assets (7,517) 50,953
Accounts payable (471,603) 124,646
Customer deposits -- 385,582
Accrued liabilities (138,553) (105,018)
Accrued pension plan -- (1,000)
Net cash provided by (used in) operating activities (128,859) (254,106)
Cash flows from investing activities:
Purchase of equipment -- (25,259)
Investments in affiliates 18,616 20,664
Net cash provided by (used in) investing activities 18,616 (4,595)
Cash flows from financing activities:
Issuance of common stock 214,200 --
Proceeds from officer 20,000 47,530
Payments on long-term obligations (106,048) (57,651)
Net change on notes payable (462,157) 189,610
Minority interest in subsidiary -- (3,206)
Net cash provided by (used in) financing activities (334,005) 176,283
Net increase (decrease) in cash and cash equivalents (444,248) (82,418)
Cash and cash equivalents - beginning of period 536,723 200,455
Cash and cash equivalents - end of period $ 92,475 $ 118,037
============= =============
Supplemental disclosures of cash flow information:
Cash paid during the period for interest $ 99,253 $ 70,174
See accompanying notes to condensed consolidated financial statements.
6
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
listing of two commercial properties.
The Company presently is the owner of 100% of Reynolds Equipment, Inc.
(Reynolds) and Logic Metals Technology, Inc. (LMT). Through these subsidiaries,
the Company operates in two distinct business segments: (1) Utilities Products
and (2) Contract Manufacturing.
Reynolds, operating in the Utilities Products segment, 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 boards utilizing industry standard components, industry
standard probes and hardware. The manufacturability of the boards is readily
available through a large number of local low cost circuit board assembly
operations. All other items are available through multiple vending sources. The
products are primarily marketed directly by the Company and, to a lesser degree,
through some manufacturers' representatives.
LMT, operating in the Contract Manufacturing sector, 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 manufacturer's 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. Currently,
the Company has one customer that represented over 36% of its total revenue for
the year ended July 31, 2006 and one contract that represented over 24%.
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. Consolidation of the organizations has been completed and
migration of the manufacturing systems into one common system is an ongoing
effort.
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.
7
ELECTRIC & GAS TECHNOLOGY, INC. AND SUBSIDIARIES
NOTE A - BUSINESS AND BASIS OF PRESENTATION (continued)
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.
NOTE B - INVENTORIES
Inventories are comprised as follows:
October 31, 2006 July 31, 2006
---------------- ----------------
Raw materials $ 894,149 $ 939,848
Work in process 260,441 220,717
Finished goods 1,397,957 1,197,394
Allowance for obsolescence (160,000) (160,000)
---------------- ----------------
Total inventory $ 2,392,547 $ 2,197,959
================ ================
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 C- NOTES PAYABLE AND LONG-TERM OBLIGATIONS
On September 20, 2006, the Company entered into an agreement to borrow $125,000
bearing interest at 12%, maturing on March 20, 2007 from an individual third
party accredited investor.
NOTE D - 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.
The Company is holding for sale the former Reynolds occupied and owned building
situated on 40,000 square feet of land in Garland, Texas. The plant is a one
story, concrete building containing approximately 15,500 square feet of floor
space, which includes approximately 2,000 feet of office space. The building has
a remaining mortgage of $322,389 with a local bank. The Company has replacement
8
ELECTRIC & GAS TECHNOLOGY, INC. AND SUBSIDIARIES
value insurance on the building. As the building is being held for sale, it is
not being depreciated. However, prior depreciation for federal income tax and
financial reporting was previously over a 40 year period on the straight line
method.
The total carrying value of the assets held for sale as of October 31, 2006 is
the net book value of $344,831 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. As of December 6, 2006,
the Company has a contract for the sale of the building located at 410 South
Kirby Street, in Garland, Texas. The offered price is $447,000, and the Company
expects expenses to be approximately $37,000. This contract is cancelable, and
the buyer may not perform, or may not be able to secure financing to complete
the transaction.
The following is the carrying value of assets held for sale and the
corresponding liabilities at October 31, 2006.
Carrying Current Long-term Total
value liabilities liabilities Liabilities
----------- ----------- ----------- -----------
Paris building $ 324,234 $ 22,761 $ 243,264 $ 266,025
Garland building 20,597 9,861 322,389 332,250
Total $ 344,831 $ 32,622 $ 565,653 $ 598,275
=========== =========== =========== ===========
NOTE E - 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. During the three months ended October 31, 2005 the Company recorded
and subsequently received $170,000 in settlement.
Failure to collect on the note previously had, 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
9
ELECTRIC & GAS TECHNOLOGY, INC. AND SUBSIDIARIES
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, 2006, the date of the last actuarial valuation,
was $898,043, resulting in a stockholders' equity reduction of $1,159,542.
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 the
transfer of equity of $125,000 in the Paris, TX building and 20 acres to the
Plan as a contribution. The transfer of equity 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 F - INDUSTRY SEGMENT DATA
The Company's current business is primarily comprised of two industry segments:
(i) The Utilities Products segment, where 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, where 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
October 31,
2006 2005
----------- -----------
Operating revenues:
Utilities Products $ 473,023 $ 518,767
Contract Manufacturing 1,655,781 1,402,346
Total sales $ 2,128,804 $ 1,921,113
Operating income (loss):
Utilities Products $ (2,673) $ (17,969)
Contract Manufacturing 47,035 (142,036)
Total segment operating income (loss) 44,362 (160,005)
General corporate expenses (210,804) (142,505)
Minority Interest in subsidiary -- 3,206
Other income (expense), net (91,848) 107,551
Net income (loss) $ (258,290) $ (191,753)
=========== ===========
10
ELECTRIC & GAS TECHNOLOGY, INC. AND SUBSIDIARIES
NOTE G - RELATED PARTY TRANSACTIONS
The following is a summary of advances to and from affiliated companies included
in other assets at October 31, 2006 and July 31, 2006:
October 31, 2006 July 31, 2006
---------------- ----------------
Net Due To Affiliates - Interfederal Capital, Inc. $ 512,211 $ 493,595
================ ================
Net Payable to Officers $ 20,000 $ --
================ ================
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. Interfederal has loaned the Company $493,595 as of July 31, 2006
and an additional 18,616 during the quarter ended October 31, 2006.
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 years ended July 31, 2003, 2005
and 2006.
The Company has a payable of $20,000 that is due to Daniel A. Zimmerman as of
October 31, 2006 which was used to fund various 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 by Glauber Management, an affiliate of DOL, and the
Company believes that Glauber has sufficient resources to continue servicing the
debt. The carrying value on the balance sheet for DOL is $1 at October 31, 2006
and July 31, 2006.
NOTE H - 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 is 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.
NOTE I - SUBSEQUENT EVENTS
None.
11
ELECTRIC & GAS TECHNOLOGY, INC. AND SUBSIDIARIES
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
The Company, through its subsidiaries, operates within two industries. These are
(i) the Utilities Products segment, in which the Company designs, manufactures
and markets products for natural gas measurement, metering and odorization and
(ii) the Contract Manufacturing segment, in which the Company provides metals
fabrication and assembly for a diverse customer base, including telecom and
networking cabinetry, electrical controls, and other functional and aesthetic
fabricated 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 owned proprietary products and external customers through a common
organization.
Results of operations
Summary. The Company reported revenues of $2,128,804 for the three months ended
October 31, 2006. This compares to revenues of $1,921,113 for the same period in
2005. The increase in revenue is primarily attributed to added customers in the
Contract Manufacturing segment, while a slump in Utilities Products segment was
the result of lower capital spending by utility companies.
The Company reported a net income from continuing operations of $44,362 for the
three months ended October 31, 2006. This compares to a net loss from continuing
operations of $(160,005) for the same period in 2005. The results are primarily
due to renewed focus on product pricing resulting in higher margins and moving
people from operation expense to corporate expense to meet expanded
Sarbanes-Oxley requirements for public companies.
Gross margins for the Company increased from 16.47% for the three months ended
October 31, 2005, to 24.53% for the three months ended October 31, 2006. Gross
margins increased as the result of accepting orders with higher gross margins
and renegotiation of existing contracts.
Inventories have increased in raw materials during the three months ended
October 31, 2006 compared to October 31, 2005 by $195,255 and increased $603,059
in finished goods. Contracts with the major customers have "demand pull"
requirements, obligating the Company to have certain inventory to provide
products as required. The customers agree to take all of the requirements within
the time of the projection, which is usually a rolling 6 months.
Selling, general and administrative expenses as a percent of revenues remained
constant changing from 32.22% for the three months ended October 31, 2005, to
32.35% for the three months ended October 31, 2006.
12
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
October 31, 2006
Increase/ (Decrease) Percent
=================== ===========
Operating revenues:
- -----------------------------------------
Utilities Products $ (45,744) (8.82%)
Contract Manufacturing 253,435 18.07%
Total sales $ 207,691 10.81%
Operating income (loss):
- ------------------------
Utilities Products $ 15,296 NA
Contract Manufacturing 189,071 NA
Total segment operating income (loss) 204,367 NA
General corporate expenses (68,299) NA
Minority interest in subsidiary (3,206) NA
Other income (expense) (199,399) NA
Net income (loss), net $ (66,537) NA
=================== ===========
Utilities Products - This segment reported a decrease in revenue of ($45,744)
with operating income being increased by $15,296 for the three month period
ending October 31, 2006. The decrease in revenue was the result of softened
demand for the electronic products. The increase in operating profit is the
result of moving accounting and other administrative expenses to the corporate
expense in line with consolidation of functions and to prepare to meet Sarbanes
Oxley requirements.
This segment's core product, which is a volume corrector for industrial natural
gas users, is approaching end of life, and a product (chartless data recorder or
"CDR") introduced 3 years ago is beginning to be ordered. The Company has the
first large order in house for this product.
Contract Manufacturing - In this segment, revenues increased $253,435 and
operating profit was increased by $189,071 for the quarter ended October 31,
2006, as compared to the quarter ended October 31, 2005. These increases were
due primarily to the expanded requirements from the second largest customer,
while the largest customer declined slightly for the second consecutive year.
The increase in profit is the result of the October 2005 increase in staffing in
preparation for a contract to supply $2.5 million in cabinets by the middle of
February 2006.
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.
Corporate overhead expenses increased by $68,299 for the three months ended
October 31, 2006, relative to the corresponding three month period in the prior
year. This increase is primarily the result consolidation of administrative
functions previously reported in the segments, and preparation for Sarbanes
Oxley requirements.
13
ELECTRIC & GAS TECHNOLOGY, INC. AND SUBSIDIARIES
Other income decreased by $199,399 for the three months ended October 31, 2006
relative to the same period in the prior year. This net decrease is due
primarily to a $170,000 gain on investment the Company recorded during the three
months ended October 31, 2005.
During the fiscal year ending July 31, 2006, the Company exchanged 60,000 shares
the Company's stock for the outstanding 250,000 shares of Logic Metals
Technology, Inc. common stock. This increased the position of the Company from
98.1% to 100% ownership of Logic Metals Technology, Inc.
Liquidity and Capital Resources
The Company's current assets are $3,555,905 at October 31, 2006, as compared to
$4,620,753 at July 31, 2006, which is a decrease of $1,064,848. Current
liabilities also decreased from July 31, 2006 to October 31, 2006 by $1,036,652,
contributing to a decrease in working capital (current assets less current
liabilities) to ($1,026,200) at October 31, 2006 as compared to ($998,004) at
July 31, 2006. This is primarily the result of payment of long term debt
principal. The Company believes that it can generate sufficient cash to meet its
working capital requirements.
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.
Capital Expenditures
For fiscal 2007, the Company does not anticipate capital expenditures.
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
14
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.
The Company has increased controls of cash management and expenditure approvals.
15
ELECTRIC & GAS TECHNOLOGY, INC. AND SUBSIDIARIES
PART II
ITEM 1. LEGAL PROCEEDINGS
None.
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.
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
None.
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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.
None.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ELECTRIC & GAS TECHNOLOGY, INC.
/s/ Daniel A. Zimmerman
- -----------------------
Daniel A. Zimmerman
President and
Chief Executive Officer
Dated: December 20, 2006
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