-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, V6OFFTMUaeN/1gWWVpC/Vt+iHOxq8V/f58a/rXVp+vf3e9XcdIbMiJBCm33RmsbK K8eToHY//5F/gg+yRP++RQ== 0000785819-96-000007.txt : 19961115 0000785819-96-000007.hdr.sgml : 19961115 ACCESSION NUMBER: 0000785819-96-000007 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19960731 FILED AS OF DATE: 19961113 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: ELECTRIC & GAS TECHNOLOGY INC CENTRAL INDEX KEY: 0000785819 STANDARD INDUSTRIAL CLASSIFICATION: INSTRUMENTS FOR MEAS & TESTING OF ELECTRICITY & ELEC SIGNALS [3825] IRS NUMBER: 752059193 STATE OF INCORPORATION: TX FISCAL YEAR END: 0731 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-14754 FILM NUMBER: 96660542 BUSINESS ADDRESS: STREET 1: 13636 NEUTRON RD CITY: DALLAS STATE: TX ZIP: 75244 BUSINESS PHONE: 2149348797 MAIL ADDRESS: STREET 1: 13636 NEUTRON ROAD CITY: DALLAS STATE: TX ZIP: 75244-4410 10-K 1 UNITED STATES SECURITIES & EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K (Mark One) ( X ) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (FEE REQUIRED) For the fiscal year ended July 31, 1996 OR ( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (FEE REQUIRED) For the transition period from to Commission File Number 014754 ELECTRIC & GAS TECHNOLOGY, INC. (Exact Name of Registrant as Specified in Charter) Texas 75-2059193 State or Other Jurisdiction of I.R.S. Employer Incorporation or Organization Identification No. 13636 Neutron Road, Dallas, Texas 75244-4410 (Address of Principal Executive Office) (Zip Code) Registrant's Telephone Number: (972) 934-8797 SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: Title of each class Name of each exchange on which registered None None SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: Common Stock, $0.01 Par Value (Title of Class) Indicate by check mark whether Registrant has (i) filed all reports required by Section 13 or 15(d)of the Securities Exchange Act of 1934 during the preceding twelve months, and (ii) been subject to such filings requirements for the past ninety (90) days. Yes X No. Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ( ) At October 29, 1996, the aggregate market value of the shares of Common Stock held by non-affiliates of the registrant was approximately $3,500,000. At such date there were 8,250,416 shares of the registrant's Common Stock outstanding. PART I Item 1. Business General Electric & Gas Technology, Inc.("the Company"or "ELGT") was organized under the laws of the State of Texas on March 18, 1985, to serve as a holding company for operating subsidiary corporations. In April, 1985, the Company (i) acquired from Commercial Technology, Inc. ("COMTEC"), an affiliated company, all of the stock of Reynolds Equipment Company ("Reynolds") for stock of the Company and (ii) acquired from a subsidiary of COMTEC all of the stock of Retech, Inc. ("Retech") [formerly Test Switch Technology, Inc.("Test Switch"), formerly Superior Technology, Inc. ("Superior")] for stock of the Company. In 1988, the Company acquired 85% (and subsequently 100%) of the stock of Data Automation Company, Inc. ("DAC") from Video Science Technology, Inc., formerly an affiliate of COMTEC and of the Company; DAC owned 100% of Domac Plastics, Inc. ("Domac") and Logic Design Metals, Inc. ("Logic"). Domac was subsequently sold. During 1992 Logic merged into DAC, its parent, and DAC changed its name to Logic Design Metals, Inc. and is referred to herein as "Logic". In June 1986 Superior acquired from Petro Imperial Corp. (A subsidiary of COMTEC) its ownership in American Brass, Inc. ("ABI"). Fridcorp Plastics, Inc. ("Fridcorp") was acquired by the Company in January, 1992, in exchange for 162,000 shares of Company Common Stock. Hydel Enterprises, Inc. ("Hydel") [formerly Stelpro Limited ("Stelpro")] was acquired by the Company in April, 1992, in exchange for 166,474 shares of Company Common Stock and $1,100,000 (Cdn. funds)(April 30, 1992, exchange rate: .8370). On August 1, 1992, Hydel acquired all of the outstanding capital stock of Hydel Engineering Limited ("Hydel Engineering") for cash and notes payable of approximately $719,000 ($850,000 Cdn.). Hydel Engineering was merged into Hydel effective August 1, 1995. The number of shares of Company Common Stock issued in the acquisitions of Fridcorp and Hydel was, in each case, determined through arms-length negotiations. Superior Magnetics, Inc. ("SMI") was formed by the Company to acquire the operating assets of the business operations of Denison Magnetics of Texas Instruments Incorporated on November 30, 1992 for cash and deferred payments of approximately $2,900,000. The Company presently is the owner of 100% of Retech, which currently owns 80% of ABI and the Company owns 100% of Logic, Reynolds, Fridcorp, Hydel and SMI, and, through such subsidiaries, operates in five distinct business segments: (1) the manufacture and sale of electric meter enclosures and pole- line hardware for the electric utility industry and the general public (Hydel and Retech); (2) the design and manufacture of defense electronic components (SMI); (3) the manufacture and sale of natural gas measurement, metering and odorization equipment (Reynolds); (4) the manufacture and sale of precision metal enclosures for telecommunication and computer equipment (Logic); and (5) the manufacture of vacuum-form and injection-mold products (Fridcorp). Effective January 31, 1993, the Company discontinued the operations of its 80% owned ABI which previously was engaged in the manufacture and sale of brass and bronze ingots. The Company sold its Canadian heating division and its U.S. meter socket and Test Switch divisions during fiscal 1996 and 1995. These operations were part of the electric segment. The Company's Headquarters is located at 13636 Neutron Road, Dallas, Texas 75244. Its telephone number is (972) 934-8797 and its facsimile number is (972) 991-3265. 2 Financial Information by Segment The following table depicts revenues, operating income (loss) and identifiable assets of the Company by segment, for the fiscal years ended July 31,: Year Ended Year Ended Year Ended July 31, 1996 July 31, 1995 July 31, 1994 Revenue Electric $ 7,575,126 $16,167,174 $19,438,285 Defense electronics 7,013,706 6,577,333 7,374,479 Gas 2,935,326 3,143,711 3,420,071 Metal fabrication 15,168,121 14,105,717 14,955,581 Plastics 1,275,673 1,369,693 1,260,582 Operating Income (Loss): Electric $ 324,602 $ 659,788 $ (762,785) Defense electronics (279,348) (95,196) (71,322) Gas (646,568) 75,643 208,493 Metal fabrication 234,116 818,645 400,288 Plastics 48,451 (25,483) 66,544 Identifiable Assets: Electric $ 4,648,198 $ 8,596,181 $12,857,150 Defense electronics 3,581,838 3,974,844 3,523,317 Gas 2,198,034 2,493,657 2,275,869 Metal fabrication 9,301,349 9,877,149 9,299,649 Plastics 665,493 788,769 805,919 Corporate 2,694,693 2,503,133 1,597,414
Geographic information Financial data by geographic area for the fiscal year ended July 31, 1996 are as follows: Operating (loss) Identifiable Sales Profit Assets United States $26,965,367 $(684,510) $16,442,797 Canada 7,002,585 365,763 3,952,115 Total $33,967,952 $(318,747) $20,394,912
3 Electric (Hydel and Retech) History Hydel. Hydel (formerly Stelpro) was incorporated in 1977 under the laws of the Province of Ontario, Canada, and has operated as a manufacturer of electrical equipment for use in the electric utility industry since its inception. In 1982, Hydel purchased a baseboard heater manufacturing business from Westinghouse. Stelpro changed its name to Hydel in January 1995 upon the sale of its heating manufacturing business. Hydel Engineering which was merged into Hydel effective August 1, 1995, was incorporated in November 1969 under the Laws of the province of Ontario, Canada, and as in the case of Hydel operated as a manufacturer of electric equipment for use in the electric utility industry since its inception. Hydel operates primarily within Canadian markets, though some sales of electric heaters were made in the Northeastern United States. Hydel maintains its executive office at 49 Howden Road, Scarborough, Ontario M1R 3C9 and a manufacturing facility at 566 Ridge Road, Welland, Ontario L3B 5R4. Retech. Retech (formerly Test Switch, formerly Superior) was incorporated in Texas in May, 1984. It purchased the assets of Superior Switchboard & Devices, Inc., an Ohio corporation ("SSDI"), in 1984. SSDI was an old-line manufacturer of electrical testing equipment, organized in 1920 by a group of electrical utility employees. In about 1929, electric utility companies began using meters on the outside of residences to measure electricity consumption, creating a need for metal enclosures to protect the meters. SSDI undertook the manufacture of such enclosures, and (in 1943) was acquired by a national company and operated as a division. In 1980, this division was sold to the officers and employees of the division in a leveraged buy-out. The business was not successfully operated under its then current management, and the organizers of Retech arranged for the purchase of the assets of SSDI by Retech in 1984. Effective April 30, 1995, Superior changed its name to Test Switch upon the sale of its meter socket division which was located in the Paris, Texas plant and effective, October 31, 1995 Test Switch changed it name to Retech upon the sale of its remaining operating division in Canton, Ohio. Retech a non- operating entity maintains its office at 13636 Neutron Road, Dallas, Texas 75244-4410. Products Hydel. Hydel operated two industrial facilities located within metropolitan Toronto, Ontario until January 1995 when one operation was sold. The business which was sold, manufactured and assembled a line of proprietary electric heating products, including baseboard heaters and fan-driven heaters. Hydel Engineering which was merged and operations consolidate with Hydel, operated out of two industrial facilities: Scarborough, which was shared with Hydel, and Welland. The Welland facility continues to be used primarily to manufacture the pole line hardware with assembly and finished goods storage in the Scarborough plant. The "Murray Jansen" line is produced at the Scarborough plant. The Scarborough plant manufactures a full line of proprietary metal cabinets and other metal enclosures, electric meter sockets and industrial safety switches. All of Hydel's products have been approved by the Canadian Standards Association which is the Canadian equivalent of U. L. Retech. Retech operated two industrial facilities, one in Canton, Ohio, the other in Paris, Texas during most of fiscal 1995 and only its Canton facility during the first quarter of fiscal 1996. The Canton, Ohio, facility produced a line of proprietary products approved by Underwriters' Laboratory ("U.L."), an independent testing organization; a line of test switches. The Paris, Texas, facility produced a full line of metal cabinets, transformer boxes, meter pedestals and other metal enclosures for the electric utility industry, marketed under various trade names. Products included a combination of test switches and phasing transformers marketed under the trade name "Reactiformer" and a voltage surge and transient suppressor, which protects against overloads, marketed under the trade name "Linegard". In addition, to U.L. approval of Retech's products, they were also approved by the National Electrical Manufacturers Association for residential and industrial usage. 4 Industry, Customers and Competition Industry-Hydel. Hydel operates within the electric equipment supply industry and manufacturing equipment for use in the electric utility industry. Hydel competes primarily within Canadian markets. Industry-Retech. Retech until October 1995, operated in an industry consisting of suppliers of equipment and accessories to the public utility industry. The customers for Retech's products were spread nationwide. Customers-Hydel. Hydel sells its electric utility supply products to utilities and others in Canada. Hydel sold its electric heaters to distributors throughout Canada, as well as in parts of the Northeastern United States. Customers-Retech. Retech sold its products to major electric utilities across the nation. Competition-Hydel. Hydel faces extreme Canadian competition for sales of its electric utility supply products primarily from two electric utility supply manufacturers, Microelectric and Commander. Pole line hardware's main competitors are Salcan and Almet. Competition-Retech. Retech faced competition from numerous competitors. There was no single dominant competitor in the industry. Retech's chief competitors are Milbank Manufacturing Co., Inc., Meter Devices, Inc. and States Electric, Inc. Marketing Hydel. Hydel employs a general sales manager who is responsible for coordinating company-wide sales, as well as directing sales in the Province of Ontario. Hydel utilizes independent manufacturers representatives to promote sales in the remainder of Canada. Retech. Retech employed a general sales manager, one outside salesman and twelve sales representatives to market its products throughout the United States. Raw Materials Hydel. Hydel uses sheet aluminum and sheet steel of various gauges in its manufacturing processes and two vendors to galvanize their pole line hardware products. Bar materials are purchased directly from mills. Hydel purchases products directly from the mills or distributors. There are adequate sources of such materials, though price fluctuations have occurred in the past. Retech. Retech purchased copper, brass, aluminum and plastic which are all readily available through numerous vendors. Employees Hydel. Hydel currently employs 60 persons, including 14 in administrative and sales positions. None of the employees is represented by a labor union or other labor organization. Hydel enjoys good relations with its employees and has never experienced a strike or work stoppage. The jobs encompassed in Hydel's manufacturing operations do not require highly skilled workers, except in a few positions. Retech. Retech currently has no employees. In prior years the work force ranged from 150 to 20 persons, including administrative and sales positions. The hourly paid employees were represented by a local of the International Brotherhood of Electrical Works (A.F.L.-C.I.O.). 5 Defense electronics (SMI) History Superior Magnetics, Inc. ("SMI") was incorporated in the state of Texas on August 31, 1992 for the purpose of acquiring the magnetics operations from Texas Instruments Incorporated (TI). SMI began business on December 1, 1992 with an already established reputation as a major producer of magnetics-based transformers, inductors, radar modulators and high density devices for the defense and commercial clientele. SMI maintains its manufacturing and executive offices at 3401 Texoma Drive, Denison, Texas 75020. Products SMI operates a single manufacturing facility in Denison, Texas in which their design expertise and exacting manufacturing standards have made their custom product lines of magnetic based transformers, inductor, radar modulators and high density devices a significant part of the modern-worlds defense and industrial electronics. Adherence to stringent international ISO 9001 standards and the ability to meet the requirements of MIL-I-45208 and MIL-I-9858 insures achieving product excellence. Industry, Customers and Competition Industry. SMI specializes in the custom design and manufacturing of unique or special magnetics products. It currently sells almost exclusively in defense related products, including missiles, avionics, night-vision and control systems for the military. There are numerous competitors producing magnetic products for defense and civilian uses. Customers. SMI's principal customer is TI. SMI has been successful in broadening its customer base to include other defense contractors, such as Boeing and others. Competition. SMI's current market is principally with TI where it must compete with other vendors for the sale of magnetic products to TI. SMI is a certified supplier to TI. SMI has an active marketing program underway to broaden its customer base. Such efforts are resulting in new orders from other defense contractors. The market is highly competitive. SMI is believed to have one of the best design capabilities and exacting manufacturing standards (ISO 9001), including the latest in design and manufacturing processes (6-Sigma reliability standards). Marketing SMI has an in-house sales staff which works closely with the design engineering in submitting proposals to potential customers. SMI also engages 18 manufacturing representatives throughout the United States. Raw Materials Metal cores, wire and compounds comprise the bulk of primary raw materials for SMI'S products. There is a readily available supply of such materials and SMI doesn't foresee any difficulty in procuring such materials in the future. Employees SMI employs approximately 105 full-time employees, including 43 clerical, engineering and administrative employees and approximately 62 hourly-paid plant workers. None of its employees is represented by a union or other labor organization and relations with employees are considered good. SMI has never experienced nor anticipates a strike or other work stoppage. 6 Gas (Reynolds) History Reynolds Equipment Company ("Reynolds") was incorporated March 31, 1967 under laws of the State of Texas. In 1982, all of the stock of Reynolds was acquired by COMTEC, an affiliate of the Company. Subsequently, the stock of Reynolds was sold to Test Switch in exchange for common stock of the Company and later transferred direct ownership to the Company. Reynolds maintains its principal offices at 410 Kirby Street, Garland, Texas 75042. Products Reynolds manufactures equipment used in the natural gas industry. Its principal products known as "RECOR" are electronic pressure, temperature and volumetric instrumentation and accessories peripheral to gas measurement. Reynolds continues to produce its traditional line of mechanical instrumentation including pressure, temperature and volumetric recording and indicating devices. In addition, Reynolds provides engineering and equipment used to accomplish the odorization of natural gas. Reynolds operated a manufacturers representative company which generated sales commission derived from unaffiliated manufacturers. This business was sold to its employees. Industry, Customers and Competition Industry. Reynolds operates in the industry which supplies equipment to the natural gas industry. This equipment is used to measure, control and monitor the flow of natural gas in pipelines. Reynolds estimates that its industry develops annuals sales of approximately $100,000,000. Odorization of natural gas is important and Reynolds is a recognized provider to the industry with its expertise and service. Customers. Reynolds sells to natural gas utilities, pipeline and production companies domestically and worldwide. Products are marketed through commissioned manufacturers representatives, resale distributors and contract engineering firms. Competition. Reynolds operates in a competitive industry that is not dominated by one or a few large companies. It is a major factor in the sale of chart drives and in the field of natural gas odorization. Its principal competitors are Mercury Instruments, Inc., American Meter Company, Equimeter Incorporated, YZ Industries and others. Employees Reynolds employs approximately 22 persons, including 2 company officers and 12 administrative clerical personnel. None of the employees is represented by a labor union or other labor association, and relations with its employees are considered excellent. Reynolds has never experienced nor anticipates a strike or other work stoppage. Metal fabrication (Logic) History Logic Design Metals, Inc.("Logic") was incorporated in Texas on March 16, 1977, and was acquired by Data Automation Company, Inc. ("DAC"), in 1979. Retech acquired DAC in 1988 from Video Science Technology, Inc., an affiliate of the Company, in exchange for shares of the Stock of the Company. In April, 1992, Logic merged into DAC, its parent, and DAC changed its name to "Logic Design Metals, Inc." and is now held directly by the Company. Logic's manufacturing and administrative offices are at 3233 West Kingsley, Garland, Texas 75041. 7 Products Logic creates customized, precision-formed metal enclosures for the telecommunications and computer industries. These enclosures vary in size from 1 x 4 x 6 for small switches, to 7 x 2 x 2 for housing telephone switching devices and computer racks. Logic is equipped with computerized production equipment which cuts, shapes, welds and finishes enclosure products. The finished products bear the distinguishing marks of the purchaser of the products, e.g., trade-names, trademarks, color combinations and proprietary configurations. Logic has successfully completed its ISO 9002 certification. Industry, Customers and Competition Industry. Logic operates in an industry which is not dominated by any single company or a small group of companies, but consists of numerous small specialty sheet metal products fabricators. Logic has maintained its place in the market by keeping abreast of technological advances in machine computerization and stressing quality control in its production. Logic has received numerous awards for quality from its customers, including AT&T, Siecor (division of Siemens Electric) and Rockwell International. Customers. Logic's principal customers are nationally and internationally known communications companies. Competition. Logic's market is in the southwestern United States, where its principal competitors are Specialty Products Company, Rockwall, Texas; Karlee Company, Garland, Texas and AA Manufacturing, Garland, Texas. Competition is strong as it is relatively easy to enter the business due to financing assistance from equipment manufacturers who desire to sell equipment. Marketing Logic engages the firm of Ammon & Rizos, Richardson, Texas, as its exclusive sales and marketing representative. Raw Materials Sheet steel and sheet aluminum comprise the primary raw materials for Logic's production of customized enclosures. There is a ready supply of such materials and Logic foresees no difficulty in procurement in the future, although shortages could occur. Employees Logic employs 210 full-time employees, including 15 clerical and administrative employees and approximately 195 hourly-paid plant workers. None of its employees is represented by a union or other labor organization and relations with employees are considered good. Logic has never experienced nor anticipates a strike or other work stoppage. Plastics (Fridcorp) History Fridcorp Plastics, Inc. ("Fridcorp") was incorporated under the laws of the State of Texas in April, 1988, under the name "Century Enterprises, Inc." The name change to Fridcorp occurred in February, 1992. The Company acquired all of the stock of Fridcorp in exchange for shares of common stock of the Company in January, 1992. Fridcorp maintains its manufacturing and corporate office at 4809 Century Drive, Fort Worth, Texas 76140. 8 Products Fridcorp has two divisions, one of which manufactures injection-mold plastic products ("Molding") and the other of which manufactures vacuum-form plastic products ("Forming"), as well as tooling utilized in such operations. Molding's primary products are plastic bases for boat seats. Such product is proprietary in nature. Only one other company is known to compete against Fridcorp for sales to boat manufacturers. Forming provides customer tooling for a particular customer's requirements and vacuum-mold manufacturing of various products. The primary products of Forming are display cases and accessories for express optical products retailers and parts sold in the air conditioning and automobile parts aftermarket. All of the products manufactured by Molding are comprised primarily of recycled plastic material, such as plastic milk cartons, plastic soft drink cases and the like. Also, the scrap plastic generated in the manufacturing process of both Molding and Forming is reused in later production runs or sold back to waste recycling firms. Industry, Customers and Competition Industry. Fridcorp operates in two distinct industries, the injection mold plastic product manufacturing industry and the vacuum-form plastic product manufacturing industry. Fridcorp is not a significant factor in either of such industries. Customers. Fridcorp sells its injection mold products, primarily plastic bases for boat seats, to boat seat manufacturers and directly to boat manufacturers. It sells its vacuum-form plastic products, primarily jobbed products, to a wide range of customers. Competition. Fridcorp's two divisions, Molding and Forming, are subject to differing competitive pressures. Molding's primary product, plastic bases for boat seats, is proprietary and Molding faces competition from one other firm for sales of such product. Fridcorp has undertaken expansion of its Molding product lines in an attempt to increase productivity. Forming completes in an industry in which customer relations and product quality play an important part. Forming maintains a good reputation in the industry but faces strong competition for customers from local companies. Marketing Fridcorp has an aggressive marketing plan in an effort to increase sales and achieve greater product diversification and attempting to rely less on its primary business of sales of boat seat bases and optical display cases. The potential for success in such marketing plans appears good, however, there is no assurance that such marketing plan will yield higher sales or operating income. Raw Materials Both Molding and Forming utilize recycled plastic products as well as new plastic materials in manufacturing its products. Fridcorp does not foresee any shortage in supplies of such materials. Employees Fridcorp employs approximately 19 persons on a full-time basis, of which 5 work in the Forming division, 10 persons are in the Molding division and 4 perform administrative functions. None of its employees is represented by a union or other labor organization and relations with employees are considered good. Fridcorp has never experienced nor anticipates a strike or other work stoppage. 9 Discontinued operations-Metal extraction (ABI) American Brass, Inc. ("ABI") was incorporated in the State of Alabama in 1978. Until December 16, 1992, ABI operated a brass and bronze ingot smelter in Headland, Alabama. Principal raw materials for this operation consisted of various forms of scrap metal materials containing high copper and other base materials utilized in the production process. This process produces "Slag", which is refuse or dross separated from the brass and bronze in the smelting process. Inasmuch as the slag contains trace elements of lead, it is an environmentally hazardous substance in view of the Environmental Protection Agency (EPA). ABI processes its slag through a ball mill which reduces the slag to a powdered saleable product used in fertilizer. The ABI site is located on approximately 134 acres including a number of special purpose buildings all under a long- term lease with the Headland Industrial Development Foundation. ABI has defaulted under this lease obligation. This operation is treated as a discontinued operation. The Company on January 29, 1993 entered into an agreement with an unaffiliated corporation, Trans Metals, Inc. (TMI), to restart the smelting operation. Such agreement assigned ABI's leasehold interest together with 150,000 shares of the Company's common stock to TMI in exchange for 850,000 shares of $5.00 par value preferred stock, a $950,000 4% note payable due January 25, 1995 and $25,000 in cash. Based on current economic conditions in the scrap, cooper and brass markets and the estimated operating margins needed, a restart of the facility under these conditions with similar manufacturing processes would require an estimated $5,000,000 investment with anticipated marginal returns. TMI has been unsuccessful to-date in re-starting, seeking joint venture partners or selling the Alabama operation. The Company has written off its investment in TMI (ABI). ITEM 2. Properties The Company maintains executive offices at 13636 Neutron Road, Dallas, Texas 75244-4410 in a 7,800 sq. ft. one story building (owned in fee) and is fully adequate to serve its needs. Hydel leases one industrial building in metropolitan Toronto, Ontario. The Scarborough facility is leased until May 1997 and contains approximately 67,000 square feet, including approximately 7,000 square feet of office space. In addition, Hydel owns a 22,000 square foot manufacturing and office space on approximately 7 acres of land located in Welland, Ontario. Such facility provides 20,000 square feet of manufacturing and 2,000 square feet of office space. SMI conducts its manufacturing and administrative functions through a 86,000 square feet concrete leased building in Denison, Texas. The lease expires on October 31, 1997. Approximately 48,000 square feet are used for manufacturing, testing and inventory storage and 16,000 square feet are used as engineering, sales and administration. There is approximately 22,000 square feet under lease available for expansion and is currently sublet. Reynolds carries on its manufacturing and sales activities in a building owned by it 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. Logic owns its office and plant facility at 3233 West Kingsley, Garland, Texas which consists of approximately 136,000 square feet of manufacturing and 8,000 square feet of connected office space located on approximately 7 acres of land. Logic acquired a paint facility located in leased property near its plant. Such leased facility consists of approximately 18,900 square feet of office, storage and production areas. 10 Fridcorp carries on its manufacturing and sales activities in two buildings owned by it, located on 8 acres of land in Fort Worth, Texas. One of such buildings provides 2,000 square feet of space for Fridcorp's offices, 1,200 square feet for a pattern shop, 10,000 square feet for the Forming operations and a 5,000 square foot warehouse. The other of such buildings houses the entire operations of Molding and contains approximately 15,000 square feet and contains a small office (300 square feet). The remainder of the building is divided among the actual injection- mold manufacturing (7,500 square feet), a storage area for finished goods (3,600 square feet) and a storage area for raw materials (plastic chips) used in the manufacturing process (3,600 square feet). Retech had occupied an industrial building in Canton, Ohio (leased) which was assumed by the purchaser of Test Switch operations. The Paris, Texas facility (owned) was vacated as result of the sale of the meter socket division in April 1995. This facility, consists of a vacant industrial building containing approximately 80,000 square feet of space, including approximately 3,000 square feet of office space. The facility is currently for sale or lease. Item 3. Legal Proceedings. ABI discontinued its operation in January 1993 and is involved in several lawsuits arising principally out of secured and unsecured creditors' claims against ABI. Under most of these cases the courts have awarded judgements against ABI for the amounts owed such creditors plus costs. Although ABI has not declared bankruptcy, there are insufficient assets to satisfy any of the unsecured creditor claims. The principal secured creditor currently has a deficiency of approximately $1,500,000; however there are remaining assets which could be sufficient to satisfy their claims. Superior had guaranteed this secured creditor. Accordingly, if there were insufficient assets to satisfy this claims, the Company could be liable for this deficiency. Management does not believe that the Company will ultimately have any liability with respect to this guarantee. The Company and its subsidiaries are involved in various routine litigation incident to its business operations. Management and Legal Counsel do not believe that any of such litigation will have a material adverse effect on the consolidated financial position of the Company. Item 4. Submission of Matters to a Vote of Security Holders. (a) Annual meeting of stockholders, March 29, 1996. (b) Not applicable. (c) Not applicable. 11 PART II Item 5. Market for Registrant's Common Stock and Related Stockholder Matters: (a) Principal Market The Common Stock of the Registrant is traded in the Over- the-Counter Market and quoted on the National Association of Securities Dealers Automated Quotation System (NASDAQ) under the symbol ELGT. (b) Stock Prices and Dividend Information The following table sets forth the range of "Bid" and "Ask" prices, by quarters, since July 31, 1993, as compiled by NASDAQ and representing prices between dealers which does not include retail markups or commissions, thus, such prices may not represent actual transactions. Fiscal year ended July 31, 1996: High Low First Quarter 2-7/8 2-1/4 Second Quarter 3-5/32 2-3/4 Third Quarter 3 2-1/2 Fourth Quarter 2 1 Fiscal year ended July 31, 1995: High Low First Quarter 2-9/16 1-1/2 Second Quarter 2-5/8 1-13-16 Third Quarter 3-7/16 2-1/8 Fourth Quarter 3-1/8 2-5/16 Fiscal year ended July 31, 1994: High Low First Quarter 6 5-1/16 Second Quarter 4-15/16 3-5/16 Third Quarter 3-15/16 2-7/16 Fourth Quarter 2-7/16 1-9/16 No dividend has been paid on the Common Stock by the Company and payment of dividends in the foreseeable future is not anticipated. Cumulative and unpaid dividends of $39,353 as of July 31, 1996 must be paid on preferred stock before any dividends can be paid on Common Stock. As of July 31, 1996 there were 490 holders of record of the Common Stock of the Company, exclusive of beneficial ownership through brokerage firm nominee name. UNITS OF COMMON STOCK AND WARRANTS In connection with the Company's financing agreement with The CIT Group/Credit Finance, Inc. in 1994, the Company issued warrants to purchase 25,000 shares of common stock of the Company at $4.25 per share. Such warrants are exercisable in whole or part on or before November 24, 1998 and have piggy-back rights with respect to any shares to be registered by the Company. 12 Item 6. Selected Financial Data. STATEMENT OF OPERATIONS DATA: (In dollars, except shares outstanding) Fiscal Years Ended July 31, 1996 1995 1994 1993 1992 Revenues $33,967,952 $41,363,628 $46,448,998 $42,822,400 $27,898,721 Gross Profit 7,632,575 10,448,022 9,957,441 12,742,943 6,673,944 Selling, G&A Expense 8,849,955 10,082,034 10,887,521 10,348,156 6,139,014 Other Income (Expense) (3,815,171) 429,693 (1,518,022) (989,448) 185,719 Earnings (Loss) from Continuing Operations (5,032,551) 850,577 (2,106,377) 1,234,138 649,150 Net Earnings (loss) (5,032,551) 850,577 (6,106,377) 981,189 404,030 Net Earnings (loss) per Share (.66) .11 (.80) .13 .05 Weighted Average Number of Shares Outstanding 7,635,624 7,615,474 7,634,432 7,353,489 6,920,223 BALANCE SHEET DATA: As of July 31, 1996 1995 1994 1993 1992 Total Assets $23,089,605 $28,233,733 $30,359,318 $36,334,255 $26,315,227 Long-Term Obligations 5,555,954 6,379,001 6,014,513 6,372,631 1,961,608 Shareholders' Equity 6,720,930 10,427,861 9,289,393 15,301,380 14,526,111
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations. Background The Company, through its subsidiaries, operates within five separate industries. These are (i) the manufacture and sale of metal enclosures and other electrical equipment for use in the electric utility industry; (ii) the manufacture and sale of defense electronic components; (iii) the manufacture of natural gas measurement equipment and gas odorization products; (iv) the manufacture and sale of precision customized metal enclosures for telecommunications and electrical equipment; and (v) the manufacture of vacuum-form and injection-mold products. 13 Results of Operations The discussion below relates to the Company's operations during the fiscal years ended July 31, 1996, 1995 and 1994. Summary. The Company reported net earnings (loss) from continuing operations of $(5,326,751), $850,577 and $(2,106,377) and net earnings (loss) of $(5,326,751), $850,577 and $(6,106,377) for fiscal years 1996, 1995 and 1994, respectively. The 1996 losses are primarily related to the following events: (i) a default on obligations owed the Company by the purchaser of the U.S. meter socket division of approximately $1,800,000; (ii) obsolescence on certain inventories of approximately $600,000; (iii) write-off of the remaining Trans Metals, Inc. assets of approximately $391,000; (iv) and investment losses of approximately $1,000,000. Also see discussion of individual segments for items which adversely affected those operations during fiscal 1996. The increase in earnings between 1994 and 1995 from continuing operations before income tax was $3,243,783 or 132.5% which is attributable to the Electric and Metal fabrication segments offset by decreases in Defense, Gas and Plastic segments. The increases in operating profits were $1,422,573 and $418,357, respectively and decreases of $(23,874), $(132,850) and $(92,027), respectively. Earnings (loss) per common share were $(.70), $.11 and $(.80) in fiscal 1996, 1995 and 1994, respectively. For the Years Ended July 31, 1996 1995 Increase Percent Increase Percent (Decrease) Change (Decrease) Change Operating Revenues $(7,395,676) (17.88) $(5,085,370) (10.95) Operating Income (1,752,144) (122.24) 1,296,068 139.35 Earnings (Loss) from continuing operations before income taxes (5,828,232) (732.48) 3,243,783 132.50 Net Earnings Per Share (.77) (700.00) .91 113.75 The following table represents the changes [increase/(decrease)] in operating revenues, operating income and earnings from continuing operations before income taxes by the respective industry segments when compared to the previous period: For the Years Ended July 31, 1996 1995 Increase Increase (Decrease) Percent (Decrease) Percent Operating Revenues: Electric $(8,592,048) (116.18) $(3,271,111) (64.32) Defense electronics 436,373 5.90 (797,146) (15.68) Gas (208,385) (2.82) (276,360) (5.43) Metal fabrication 1,062,404 14.37 (849,864) (16.71) Plastics (94,020) (1.27) 109,111 2.14 $(7,395,676) 100.00 $(5,085,370) 100.00 14 For the Years Ended July 31, 1996 1995 Increase Increase (Decrease) Percent (Decrease) Percent Operating Income (Loss): Electric $ (335,186) (19.13) $ 1,422,573 89.34 Defense electronics (184,152) (10.51) (23,874) (1.50) Gas (722,211) (41.22) (132,850) (8.34) Metal fabrication (584,529) (33.36) 418,357 26.28 Plastics 73,934 4.22 (92,027) (5.78) (1,752,144) 100.00 1,592,179 100.00 General Corporate 168,776 (296,111) Other Income (Expense) (4,244,864) 1,947,715 Earnings from Continuing Operations Before Income Taxes $(5,828,232) $ 3,243,783 Electric revenues declined by $8,592,048 during fiscal 1996 to $7,575,126 the result of the sales of the meter socket business in April 1995 and the test switch business in October 1995 for the U.S. operations and the sale of the heating business in the Canadian operations in January 1995. The 1995 revenues decreased by $(3,271,111) or decreases in the Canadian operations of $(2,278,154) and U.S. operations of $(992,957). Operating income for 1996 decreased by $(335,186) the net effect of increased operating income of $965,015 for the Canadian operations and a decrease of $(1,300,201) in U.S. operations, the result of the aforementioned sales during fiscal 1996 and 1995. Operating income for 1995 increased for Retech by $674,869 and $747,704 in the Canadian operations or a total increase of $1,422,573. The decline in revenues is attributed primarily to the sale in January 1995 of the heating division of Hydel and the sale in April 1995 of the meter socket division of Retech. Operating profits, however, improved substantially on these lower sales, returning this segment to a positive contributor to the Company's profits. During 1994 the revenues also decreased by $(1,090,240), such decrease was $(596,417) in the Canadian operations and $(493,823) in the U.S. operations. Operating profits decreased by $(1,767,786) the net effect of an increase in the U.S. operating profits of $369,437 and a decrease of $(2,137,223) in the Canadian operations after restatement of the 1994 inventories of $720,790. The Canadian operations were affected by price competition, increases in the cost of raw materials and the continuing slow Canadian economy. Gross profit margins were 24.51%, 22.59% and 14.47% for fiscal 1996, 1995 and 1994, with selling, general and administrative expenses as a percentage of sales for the same period of 20.22%, 18.51% and 18.40%, respectively. Gross profit margins regained part of what was lost during 1994, i.e. margins after decreasing by 12.27% recovered by 8.12% in fiscal 1995 and another 1.92% in fiscal 1996. Selling, general and administrative expenses have increased as a percentage of sales due to lower sales from sold operations and carrying cost associated with the physical plant building which was not sold with the meter socket business. This property is currently listed for sale. 15 Defense electronics sales increased by $436,373 to $7,013,706 during fiscal 1996 after declining by $(797,146) due to cutbacks in defense spending and the older defense programs completing production. The current years increase is due to new customers and the F22 tactical fighter program increasing greater than decreases in older programs slowly terminating. Sales increased by $1,070,497 during 1994, however, 1993 included only eight months of sales since the inception of this segment on December 1, 1992. Annualized sales would have amounted to approximately $9,500,000 based on the eight month results during 1993. With this real decline in sales levels, operating profits were significantly affected resulting in a loss of $(71,322) when compared to profits of $1,819,249 or a $(1,890,571) in 1994 negative swing. The operating losses between 1996, 1995 and 1994 increased by $(184,152) and $(23,874) to $(279,348), primarily the result of obsolescence reserves against certain inventory which was acquired in the original acquisition from Texas Instruments. Gross margins for fiscal 1996, 1995 and 1994 were 33.19%, 42.78% and 42.03%. Current margins reflect the additional reserves charged against cost of sales and lower margins normally associated with new programs. Selling, general and administrative expenses were 37.17% in 1996, 44.22% in 1995 and 43.00% in 1994 as a percentage of sales with fiscal 1996 reflecting cost cutting and reductions in overhead expenses. Gas revenues decreased by $(208,385) and $(276,360) or (6.63%) and (8.08%) in fiscal 1996 and 1995, respectively. Sales of this segment's main product, "Recor" was relatively unchanged with most of the sales decline occurring in the odorization systems due to increased industry competition. Revenues increased by $815,342 during 1994 a year of transition from representing another company's product to the development during 1993 and marketing and selling efforts during 1994 of this segment's proprietary product "Recor", a gas electronic volume corrector, replacing the older and less versatile imported "In- Line" product. Odorization remained stable in 1994 but as previously mentioned declined in 1996 and 1995. Operating income (loss) was $(646,568), $75,643 and $208,493 for fiscal 1996, 1995 and 1994, respectively. The 1996 loss resulted from inventory obsolescence of approximately $385,000 and declining revenues with staffing levels anticipating higher demand for the Company's Recor product which did not materialize. The consolidations and mergers currently taking place in the utility industry and the warmer than average winters have also contributed to the lower product demand. Metal fabrication revenues were $15,168,121, $14,105,717 and $14,955,581 for fiscal 1996, 1995 and 1994, respectively. In spite of the revenue increase of $1,062,404, operating profits declined by $(584,529) to just $234,116. Overhead and operational problems at the painting facility contributed significantly to the reduced operating profits. This situation has now been corrected. Further, during the spring and summer revenues were from contracts with generally lower margins as the principal customers were holding orders awaiting the implications of the recently passed telecommunications legislation. While revenues declined by $(849,864) during fiscal 1995, operating profits increased by $418,357 to $818,645 or a 104.53% increase. During fiscal 1995 we were reasonably successful in turning down some business with lower margin sales thereby increasing our operating profits. Operating profits were $234,116, $818,645 and $400,288 for fiscal years 1996, 1995 and 1994, respectively. During 1994 all the manufacturing operations were consolidated into a new single building. Although there were additional costs associated with this move, the long-term benefits will accrue and provide room for sales growth and capacity. Plastics revenues declined by $(94,020) during fiscal 1996, however, operating profits increased by $73,934 to a positive $48,451. Revenues increased slightly by $109,111 and $111,650 or 8.66% and 9.72% in 1995 and 1994, respectively. Operating profits after having improved to $66,544 in 1994, declined to a loss of $(25,483) in 1995. Both the increase and decline in operating profits were directly related to manufacturing problems occurring during fiscal 1995 which required replacement and additional maintenance on key injection molding equipment. 16 Expense relationship to the various changes in revenues and divestment effecting cost of sales and selling, general and administrative expenses are as follows. Cost of sales as a percentage of revenues amounted to 77.53%, 74.74% and 78.56% for the years ended July 31, 1996, 1995 and 1994, respectively. The 1996 margins were impacted by inventory obsolescence and 1994 margins were impacted by poor Canadian and lower Defense margins. Selling, general and administrative expenses as a percentage of revenues were 23.41%, 21.79% and 21.78% for the years ended July 31, 1996, 1995 and 1994, respectively. Fiscal 1996 increases in selling, general and administrative expenses were the net result of a reduction in the Defense segment offset by increases in all other segments as discussed above. Discontinued operations of ABI and the subsequent transaction with TMI, resulted in earnings decreasing by $(4,000,000) in fiscal 1994. Liquidity and Capital Resources Liquidity. Cash flow from operating activities amounted to $(145,001), $(709,772) and $502,785 for fiscal years 1996, 1995 and 1994, respectively. Operating cash flow has been supplemented by cash made available from the proceeds on the sale of the various operating divisions. The Company is presently in the process of refinancing certain of it obligations to provide needed liquidity and to improve upon its current payment history. Current assets of the Company totaled $11,697,173 at July 31, 1996, down from current assets of $15,331,633 at July 31, 1995. Current liabilities decreased from fiscal 1995 to fiscal 1996 by $(614,150), resulting in a decrease in working capital (current assets less current liabilities) to $884,452 at July 31, 1996, from $3,904,762, a decrease of (77.35%). This decrease was the result of the default on amounts owed on the sale of the meter socket business, inventory obsolescence, and investment and advances made to certain affiliates. The Company believes it will generate cash or raise funds sufficient to meet its working capital requirements and debt obligations. Capital Resources. Hydel has a working capital line-of- credit with a Canadian bank in the amount of $2,036,720. The Canadian credit facility is secured by receivables, inventories and equipment of Hydel. Hydel is currently in the process of refinancing its term and revolving debt whereby it expects to incur long-term financing from the Canadian Development Bank and reduce its reliance on its short-term revolving line of credit by approximately $500,000. In November 1993 the Company began a five-year financing arrangement with the CIT Group Credit/Finance, Inc. (CIT). Their total commitment to the Company amounted to $7,000,000 of term and revolving credit at 2.75% above prime. However, the maximum amount to be borrowed is determined based upon eligible collateral, including equipment, receivables and inventory. Borrowing under this financing amounted to $412,275 in term debt and $2,299,357 in revolving debt at July 31, 1996. In June 1995, Logic refinanced a portion of its term debt, not related to the CIT financing above, which provided an additional $500,000 in proceeds with a finance company over 60 months. The Company received $1,000,000 in proceeds from an SBA mortgage loan which was funded on September 23, 1994. Such proceeds were added to working capital. In January 1995, the Company funded a ten year $2,000,000 mortgage loan to finance the new building purchase by Logic replacing the lease purchase obligation due under the deferred purchase contract. The Company sold one division in fiscal 1996 and two divisions in fiscal 1995 receiving approximately $2,068,583 and $3,494,593, respectively in cash proceeds which were used to pay current obligations, reduce debt and provide additional working capital. Substantially all of the Company's assets, including certificates of deposit are pledged as collateral for the Company's long-term and short-term indebtedness. 17 Capital Expenditures The Company purchased equipment consisting of normal asset acquisitions and replacement of approximately $344,447 and $622,122 during fiscal 1996 and 1995, respectively. For fiscal 1994, the Company purchased machinery and equipment of $2,491,210 principally for the new facility acquired during fiscal 1993 by Logic. The Company does not anticipate any other significant capital expenditures, other than in the ordinary course of replacing worn-out or obsolete machinery and equipment utilized by its subsidiaries. The Company may, from time to time, purchase such machinery and equipment provided such assets serve as additional collateral for outstanding loans to the Company (and its subsidiaries). The Company acquired the net assets of a paint facility for approximately $400,000 in January 1995 for cash. Dividend Policy No cash dividends have been declared on common stock by the Company's Board of Directors 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 its cash flow to service debt, for working capital and capital additions, and to finance expansion of its operations. Cumulative dividends on the Series A, 7% Convertible Preferred Stock, have not been paid and amounted to $39,353 as of July 31, 1996. Further, additional dividends of $15,879 were due on September 30, 1996 Other Business Matters Accounting for Post-Retirement Benefits. The Company provides no post-retirement benefits; therefore, FASB No. 106 will have no impact on the Company's financial position or result of operations. Inflation. The Company does not expect the current effects of inflation to have any effect on its operations in the foreseeable future. The largest single impact effecting the Company's overall operations is the general state of the economy and principally the home construction sector. Item 8. Financial Statements and Supplementary Date. Information required by this item appears in the Consolidated Financial Statements and Auditors' Report of Electric & Gas Technology, Inc. and Subsidiaries for July 31, 1996, 1995, and 1994 as listed under Item 14. Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. There have been no disagreements on accounting and financial disclosure. 18 PART III Item 10. Directors and Executive Officers of Registrant (a) During fiscal year ended July 31, 1996, the following persons served as directors of Registrant: Shares Beneficially Director Owned (%) of Name and Age Position Since Outstanding S. Mort Zimmerman (69) Chairman of the Board, 1985 850,740 9.84% President and Director Daniel A. Zimmerman (35) Sr. Vice President 1989 370,131 4.28% and Director Edmund W. Bailey (54) Vice President, Chief 1994 52,221 0.60% Financial Officer and Director Fred M. Updegraff (62) Vice President, 1987 76,073 0.88% Treasurer and Director S. Mort Zimmerman and Daniel A. Zimmerman are father and son. (b) Executive Officers: The Executive Officers of Registrant are: See (a) above. Marie W. Pazol, Secretary 19 BACKGROUND S. Mort Zimmerman: Chairman of the Board, President and Chief Executive Officer of the Company since its formation in March 1985. After attending Georgia Institute of Technology and Oglethorpe, Mr. Zimmerman graduated in 1958 with a Bachelor of Science in Electrical Engineering from Pacific International University. He established the first electronics subsidiary for the predecessor corporation of LTV Corporation which was formed to market a low cost television camera invented by Zimmerman and for which he was awarded a United States Patent in 1958. Prior to 1963 he participated in the engineering and installation of 18 television stations. In 1965 Mr. Zimmerman formed the first "one-bank holding company" of its kind in the United States and which later served as a model from which many bank holding companies were formed. He served as Chairman of the Board of four individual banking institutions, three of which were located in Florida (Springs National of Tampa, Metropolitan of Miami and Mercantile National of Miami Beach) and New York City (Underwriters Trust). After obtaining a public underwriting these banks were sold to others. In 1967 Intercontinental Industries, Inc. was organized and Mr. Zimmerman served as its Chairman and Chief Executive Officer. This diversified holding company was primarily engaged in the operations of Intercontinental Manufacturing Company, a weapons manufacturer that was later sold. Through his research and development in the field of video X-ray and imaging, Mr. Zimmerman caused the organization in 1981 of Video Science Technology, Inc. in 1981 to exploit the inventions for which he was awarded two U. S. Patents. Patents awarded include: Television Camera-Video Amplifier and Blanking Circuits-1958, Electronic Thermometer-1963, Video-X-Ray Imaging System and Method-1977, Video System and Method for Presentation and Reproduction of X-Ray Film Images-1977, Electromagnetic Radio Frequency Excited Explosion Proof Lighting Method and System- 1986, and Laser Display of an Electronically Generated Image Signal-1987. Recently, Mr. Zimmerman participated as a co- inventor on new Electronic Refrigeration technology to which patents are pending. Daniel A. Zimmerman: Mr. Zimmerman was elected Senior Vice President in 1991 and was re-elected as a Director of the Company in 1990 (Mr. Zimmerman served as a director from March, 1985 to January, 1988). Mr. Zimmerman is presently serving as President and Director of Reynolds. He also serves as Vice President Marketing for SMI since its inception, December 1, 1992. He received his Liberal Arts Degree from Austin College in Sherman, Texas in May, 1982. Edmund A. Bailey, CPA: Mr. Bailey has served as Vice President and Chief Financial Officer of the Company since March, 1992. He was elected a member of the Board of Directors May 1994. From January 1989, to March, 1992, Mr. Bailey was a shareholder in the public accounting firm of Jackson & Rhodes P.C., Dallas, Texas. From August, 1987, to December, 1988, Mr. Bailey served as Vice President and Chief Financial Officer of Southern Foods Group, Inc., an independent milk producer. From May, 1986, to July, 1987, he was with the public accounting firm of Pannell Kerr Foster, Dallas, Texas. Prior experience included 16 years in public accounting with Fox & Company and Arthur Young & Company (now Ernst & Young). Mr. Bailey earned a B.S. degree in Business from Monmouth College, West Long Branch, New Jersey, and an M.B.A. degree from Southern Methodist University, Dallas, Texas. Mr. Bailey is licensed in the State of Texas as a Certified Public Accountant. Fred M. Updegraff: Mr. Updegraff has served as Vice President and Treasurer of the Company since 1985. He was elected Treasurer and a member of the Board of Directors in May, 1987. Mr. Updegraff is also Vice President, Controller and Director of DOL Resources which files reports under Section 13 of the Securities Act of 1934. From 1976 to 1981, he was Vice President of a manufacturing company engaged in the manufacture of brass valves for the plumbing industry. Mr. Updegraff graduated from Emporia State University with Bachelor degrees in Business Administration and Education. 20 (c) Significant and Key Employees: The following provides certain information regarding key employees who serve as officers of the subsidiary companies of the Company: W. Ken Wilemon: Mr. Wilemon, having served two years as General Manager, was elected President of Logic in 1984. Prior to his employment with Logic, he was a manufacturer's representative of Electra III Corporation in Dallas, Texas. Michael D. Beall: Mr. Beall presently serves as Vice Chairman of the Board of Reynolds.. In 1986 he was elected President of Reynolds and served in this position until 1992. Mr. Beall was employed by Wilson Flow Measurement in 1968, which was acquired by Louis Reynolds and the name changed in 1973. Gabriel Prieto: Mr. Prieto became President of SMI on December 1, 1992, the effective date the Company completed the acquisition of the Texas Instruments Incorporated magnetics operation in Denison, Texas. He has also served as President of Fridcorp since its acquisition in January, 1992. From 1989 until January, 1992, Mr. Prieto was engaged as an independent business consultant. During 1988 and 1989, he was an officer of Domac Plastics, Inc., a corporation formerly wholly owned by the Company; from 1982 to 1988, he served as a Vice President and Senior Petroleum Engineer for Nations Bank, N.A., Dallas, Texas; from 1980 to 1982, he was employed by Freeport McMoran, Inc. an oil and gas exploration firm based in New Orleans, Louisiana;and from 1976 to 1980, he was employed by Mobil Oil Corporation as a senior petroleum engineer in its New Orleans, Louisiana offices and earned a B.S. degree in Petroleum Engineering from Louisiana Tech University, Ruston, Louisiana. He is a registered Petroleum Engineer in the State of Texas. Also, Mr. Prieto is a member of the Society of Petroleum Engineers, the Society of Plastics Engineers and the International Association of Energy Economists. Item 11. Executive Compensation Summary Compensation Table Long Term Compensation Awards Payouts Annual Compensation Other Restricted Number of Shares Long Term Annual Stock Covered By Incentive Plan All Other Name and Principal Position Year Salary Bonus Compensation Awards Option Grant Payout Compensation S. Mort Zimmerman 1996 $219,400(a) $14,166(b) $ - - 232,000 - - Chairman of the 1995 110,000 $ - $ - - 232,000 - $642(c) Board & President 1994 185,000 $ - $ - - 200,000 - $642(c)
(a) Includes accrued and unpaid compensation of $75,000 for fiscal year 1996 and 1994, respectively. (b) Issued 11,333 shares of Common Stock valued at $1.25 per share. (c) Company match of 401 (K) employee contributions. 21 1996 Stock Option Grants The following table sets forth stock options granted in fiscal 1996 to the Company's executive officer named in the Summary Compensation Table and to all other employees as a group. The table also sets forth the hypothetical gains that would exist for the options at the end of their 5 year term, assuming rates of stock appreciation of 0%, 5% and 10%. The actual future value of the options depend on the market value of the Company's Common stock. There were no options granted during fiscal 1996. Aggregate Option Exercises and Year-end Option Values Set forth below are the number of shares covered by exercisable and unexercisable options held by S. Mort Zimmerman on July 31, 1996 and the aggregate gains that would have been realized had these options been exercised on July 31, 1996, even though these options were not exercised, and the unexercisable options would not have been exercised, on July 31, 1996. Number of Shares Value of Unexercised Covered by Unexercised In-The- Money Options on 7/31/96 Options as of 7/31/96 Name Exercisable Unexercisable Exercisable Unexercisable(a) S. Mort Zimmerman -0- -0- -0- -0- (a) Market value of shares covered by in-the-money options on July 31, 1996 less option exercise price. Options are in-the- money if the market value of the shares covered thereby is greater than the option exercise price. Item 12. Security Ownership of Certain Beneficial Owners and Management (a) The following tables sets forth the number of shares of Common Stock of holders of the Company known to the Company to be the beneficial owner of more than five (5%) per cent of its Common Stock at July 31, 1996. Name and Address Amount and Nature of Percent of Beneficial Owner Class S. Mort Zimmerman 850,740 (1) 9.84% 13636 Neutron Road Dallas, Texas 75244-4410 22 (b) The following table sets forth the number of shares of Common Stock of Registrant owned by all directors and officers as a group as of July 31, 1996: Name of Amount and Nature of Percent of Beneficial Owner Beneficial Ownership Class S. Mort Zimmerman 850,740 (1) 9.84% Chairman of the Board and President Daniel A. Zimmerman(5) 370,131 (2) 4.28% Sr. Vice President and Director Edmund W. Bailey 52,221 (3) .60% Vice President & Chief Financial Officer Fred M. Updegraff 76,073 (4) .88% Vice President Treasurer & Director All Officers & Directors, as a Group 1,363,276 15.77% (1) Includes (i) 232,000 shares subject to options owned by Mr. S. Mort Zimmerman; (ii) 82,388 shares of the 823,878 shares owned beneficially and of record by Trans-Exchange Corporation, in which Mr. S. Mort Zimmerman has a 10% beneficial interest; and (iii) 31,429 shares owned by Glauber Management Company, a firm 42% owned by Mr. S. Mort Zimmerman and in which he effectively controls the voting of the Company's stock owned by such firm. Mr. S. Mort Zimmerman disclaims any beneficial interest in the shares owned by his wife's estate and their adult children. (2) Includes 31,667 shares subject to options owned by Mr. Zimmerman. (3) Includes 36,666 shares subject to options owned by Mr. Bailey. (4) Includes 31,666 shares subject to options owned by Mr. Updegraff. (5) S. Mort Zimmerman and Daniel A. Zimmerman are father and son. 23 Item 13. Certain Relationships and Related Transactions THE FOLLOWING IS A SUMMARY OF ADVANCES FROM/TO AFFILIATED COMPANIES AT JULY 31, 1996. 1996 1995 Refineries Consolidated Technology, Inc. $ 415,000 $ - Cooper Manufacturing Corporation 1,191,869 - VSTI - 150,000 Others (58,561) 452,681 $1,548,308 $602,681 The Company for several years has been owed approximately $530,000 due from Comtec, a dormant affiliate. During 1996, it was determined that $235,000 of this amount was actually paid for the benefit of the Company and was written-off in 1996 in other expenses. It has been determined that Comtec does not have the capability to liquidate the remaining debt and the remaining receivable was offset against accrued salaries of the officer who had guaranteed the receivable. The Company has advanced through the pledging of its certificates of deposit with a bank, corresponding to direct bank loans and direct advances to Refineries Consolidated Technology, Inc. and Cooper Manufacturing Corporation ("Cooper") approximately $706,869. The Company has also acquired a secured note receivable from Cooper in exchange for 90,000 shares of its $10.00 par value Preferred Stock to an unaffiliated company who previously owned Cooper. During 1994 the Company purchased certain equipment with a cost of approximately $47,000 and subsequently sold the equipment to an affiliated company for $200,000. The gain of approximately $153,000 is included in other income. 24 PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K. (a) Documents filed as part of this Report 1. Financial Statements Consolidated Financial Statements of Electric & Gas Technology, Inc. and Subsidiaries: (i) Reports of Independent Certified Public Accountants (ii) Consolidated Balance Sheets July 31, 1996 and July 31, 1995. (iii) Consolidated Statements of Operations for the three years ended July 31, 1996. (iv) Consolidated Statements of Changes in Stockholders' Equity for the three years ended July 31, 1996. (v) Consolidated Statements of Cash Flows for the three years ended July 31, 1996. (vi) Notes to Consolidated Financial Statements 2. Financial Statement Schedules Required by Item 8 of Form 10-K and paragraph (d) of Item 14 None 3. Exhibits 3.1 Articles of Incorporation of Registration (filed as Exhibit 3.1 and 3.2 to Registration Statement form S-18 - Registrant No. 33-2147FW of Registrant and Incorporation herein by reference. 3.2 By-laws of Registrant (filed as Exhibit 3.3 Registration Statement on Form S-18 - Registrant No. 33-2147FW - of Registrant and incorporated herein by reference. 4.1 Specimen Copy of Common Stock Certificate (filed as Exhibit 1.1 to Registration Statement under the Securities Exchange Act on Form 8-A and incorporated herein by reference). 4.1 Warrant Agreement and Text of Warrant (filed Exhibit 4.1 to Amendment No. 1 to Registration Statement on Form S-18, Registration #33-2147FW, of Registrant incorporated herein by reference. 25 10.1 Agreement and Plan of Acquisition between Petro Imperial Corp. and Superior Technology, Inc. dated June 30, 1986 for the acquisition of 80% of American Brass, Inc. (filed as Exhibit 1 to Registrant's Form 8-K Report dated July 9, 1986, Commission File No. 0-14754 and incorporate herein by reference). 10.2 Acquisition Agreement dated July 29, 1988 and Amendment thereto dated November 15, 1988, (filed as Exhibit 1 to Form 8-K Report, as amended on Form 8 filed August 9, 1988 and incorporated herein by reference). 10.32 U. S. Small Business Administration authorization and loan agreement dated August 3, 1994 between Independence Funding Company Ltd. and Electric & Gas Technology, Inc., Reynolds Equipment Company, Superior Technology, Inc. and Fridcorp Plastics, Inc. and Note for $1,000,000 (filed as exhibit 10.32 to Form 10-K, filed October 27, 1994 and incorporated herein by reference). 10.33 Asset Purchase Agreement dated as of April 18, 1995 by and between Superior Technology, Inc. and American Circuit Breaker Corporation (filed as exhibit 10.32 to Form 10-Q, filed June 12, 1995 and incorporated herein by reference). 10.34 "Asset Purchase Agreement" dated as of October 31,1995 by and between Test Switch Technology, Inc., Electric & Gas Technology, Inc. and The Durham Co. (b) Reports on form 8-K None 26 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. ELECTRIC & GAS TECHNOLOGY, INC. By: /s/ Edmund W. Bailey Edmund W. Bailey, Vice President and Chief Financial Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of Registrant and in the capacity and on the date set-forth following their name: Signature Capacity Date /s/ S. Mort Zimmerman Chairman and President November 12, 1996 S. Mort Zimmerman /s/ Daniel A. Zimmerman Senior Vice President Daniel A. Zimmerman and Director November 12, 1996 /s/ Edmund W. Bailey Vice President, Chief Financial Edmund W. Bailey Officer and Director November 12, 1996 /s/ Fred M. Updegraff Vice President, Treasurer Fred M. Updegraff and Director November 12, 1996 /s/ Marie W. Pazol Secretary November 12, 1996 Marie W. Pazol 27 ELECTRIC & GAS TECHNOLOGY, INC. AND SUBSIDIARIES JULY 31, 1996 AND 1995 Page REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS 29 CONSOLIDATED FINANCIAL STATEMENTS CONSOLIDATED BALANCE SHEETS 30 CONSOLIDATED STATEMENTS OF OPERATIONS 31 CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY 32 CONSOLIDATED STATEMENTS OF CASH FLOWS 33-34 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 35-49 28 Report of Independent Certified Public Accountants Board of Directors and Stockholders Electric & Gas Technology, Inc. and Subsidiaries We have audited the accompanying consolidated balance sheets of Electric & Gas Technology, Inc. and Subsidiaries as of July 31, 1996 and 1995, and the related consolidated statements of operations, changes in stockholders' equity and cash flows for each of the three years in the period ended July 31, 1996. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Electric & Gas Technology, Inc. and Subsidiaries as of July 31, 1996 and 1995, and the consolidated results of their operations and their cash flows for each of the three years in the period ended July 31, 1996, in conformity with generally accepted accounting principles. Jackson & Rhodes P.C. Dallas, Texas October 9, 1996 (Except as to Note 7, which is as of November 12, 1996) 29 ELECTRIC & GAS TECHNOLOGY, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS July 31, ASSETS CURRENT ASSETS 1996 1995 Cash and cash equivalents $ 879,110 $ 1,044,851 Accounts receivable trade, less allowance for doubtful receivables of $39,798 in 1996 and $184,317 in 1995 4,334,153 5,112,853 Note receivable - 684,031 Inventories 6,317,992 8,317,588 Prepaid expenses 165,918 172,310 Total current assets 11,697,173 15,331,633 PROPERTY, PLANT AND EQUIPMENT, net 8,720,454 9,944,103 OTHER ASSETS Discontinued operations - 484,842 Other assets 2,671,978 2,473,155 Total other assets 2,671,978 2,957,997 TOTAL ASSETS $23,089,605 $28,233,733 LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Notes payable $ 4,525,668 $ 5,116,457 Accounts payable 3,733,576 3,609,596 Accrued liabilities 1,355,441 1,485,334 Current maturities of long-term obligations 1,198,036 1,215,484 Total current liabilities 10,812,721 11,426,871 LONG-TERM OBLIGATIONS Long-term obligations, less current maturities 4,850,308 5,944,202 Other 705,646 434,799 Total long-term obligations 5,555,954 6,379,001 COMMITMENTS AND CONTINGENCIES - - STOCKHOLDERS' EQUITY Preferred stock, $10 par value, 5,000,000 shares authorized, 90,000 issued and outstanding 900,000 - Common stock, $.01 par value, 30,000,000 shares authorized, issued 8,250,416 and 7,905,416 in 1996 and 1995, respectively 82,504 79,054 Additional paid-in capital 10,201,334 9,823,534 Retained earnings (Deficit) (2,941,282) 2,091,269 Pension liability adjustment (214,639) (265,302) Cumulative translation adjustment (430,870) (424,577) 7,597,047 11,303,978 Less treasury stock, 274,792 shares in 1996 and 1995, at cost (876,117) (876,117) Total stockholders' equity 6,720,930 10,427,861 TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $23,089,605 $28,233,733
See Accompanying notes. 30 ELECTRIC & GAS TECHNOLOGY, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS Years ended July 31, 1996 1995 1994 Sales $33,967,952 $41,363,628 $46,448,998 Cost of goods sold 26,335,377 30,915,606 36,491,557 Gross profit 7,632,575 10,448,022 9,957,441 Selling, general and administrative expenses 8,849,955 10,082,034 10,887,521 Operating profit (loss) (1,217,380) 365,988 (930,080) Other income and (expenses) Interest, net (1,495,590) (1,090,677) (1,042,380) Other (Note 2): Gain on sale of operating divisions 577,336 1,094,743 - Default on purchase obligation (1,813,838) - - Investment losses (1,130,590) - (700,000) Commission adjustment - 286,106 - Other 47,511 139,521 224,358 (3,815,171) 429,693 (1,518,022) Earning (loss) from continuing operations before income tax (5,032,551) 795,681 (2,448,102) Provision (credit) for income taxes - (54,896) (341,725) Earnings (loss) from continuing operations (5,032,551) 850,577 (2,106,377) Discontinued operations (Note 2): Loss on disposal of metal extraction segment - - (4,000,000) NET EARNINGS (LOSS) (5,032,551) 850,577 (6,106,377) Dividends on Preferred Stock (39,353) - - Net earnings or loss applicable to Common Stock $(5,071,904) $ 850,577 $(6,106,377) Earnings (loss) per common share: Primary: Continuing operations $(0.66) $ 0.11 $(0.28) Discontinued operations - - (0.52) Net earnings $(0.66) $ 0.11 $(0.80) Fully diluted (1) (1) Conversion of Preferred Stock is antidulitive. Weighted average number of common shares outstanding 7,635,624 7,615,474 7,634,432
See accompanying notes. 31 ELECTRIC & GAS TECHNOLOGY, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY Years ended July 31, 1996, 1995 and 1994 Retained Pension Preferred Common Paid-in (Deficit) liability Translation Treasury Stock Stock Capital Earnings adjustment adjustments Stock Total Balance at July 31, 1993 $ - $77,864 $10,003,000 $ 7,347,069 $(424,965) $(305,955) $(1,395,633) $15,301,380 Net loss for the year - - - (6,106,377) - - - (6,106,377) Pension liability adjustment - - - - (48,858) - - (48,858) Cumulative translation adjustments - - - - - (154,892) - (154,892) Treasury stock cancelled - (1,560) (472,156) - - - 473,716 - Purchase of treasury stock - - - - - - (17,500) (17,500) Exercise of options - 800 112,040 - - - - 112,840 Investment in Techstar Industries, Inc. - 1,950 200,850 - - - - 202,800 Balance at July 31, 1994 - 79,054 9,843,734 1,240,692 (473,823) (460,847) (939,417) 9,289,393 Net earnings for the year - - - 850,577 - - - 850,577 Pension liability adjustmen - - - - 208,521 - - 208,521 Cumulative translation adjustments - - - - - 36,270 - 36,270 Treasury stock transferred - - (20,200) - - - 80,800 60,600 Purchase of treasury stock - - - - - - (17,500) (17,500) Balance at July 31, 1995 - 79,054 9,823,534 2,091,269 (265,302) (424,577) (876,117) 10,427,861 Net earnings for the year - - - (5,032,551) - - - (5,032,551) Pension liability adjustment - - - - 50,663 - - 50,663 Cumulative translation adjustments - - - - - (6,293) - (6,293) Preferred Stock issued 900,000 - - - - - - 900,000 Bonus stock issued - 1,450 179,800 - - - - 181,250 Stock issued for cash - 2,000 198,000 - - - - 200,000 Balance at July 31, 1996 $900,000 $82,504 $10,201,334 $(2,941,282) $(214,639) $(430,870) $ (876,117) $6,720,930
See accompanying notes. 32 ELECTRIC & GAS TECHNOLOGY, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS Years ended July 31, 1996 1995 1994 Increase (decrease) in cash: Cash flows from operating activities: Net earnings (loss) $(5,032,551) $ 850,577 $(6,106,377) Adjustments to reconcile net earnings ( loss) to net cash provided by operating activities: Discontinued operations - - 4,000,000 Depreciation of property, plant and equipment 1,102,068 1,138,406 1,145,626 Issuance of stock for services 181,250 - - Deferred income tax - (75,345) (206,463) Amortization of goodwill and patents 6,684 6,892 26,850 Treasury stock transferred for expenses - 60,600 - Gain on sale of operating divisions (577,336) (1,094,743) (156,749) Deferred income 61,066 - (20,470) Losses on investments 2,797,948 - - Changes in assets and liabilities: Accounts receivable 310,584 1,428,979 (1,842,751) Inventories 655,082 (454,767) 2,604,561 Prepaid expenses 6,392 50,505 (50,041) Other assets 510,975 (749,107) 884,533 Accounts payable 143,980 (1,130,536) 86,433 Accrued liabilities (129,893) (741,233) 137,633 Net cash provided by (used in) operating activities 36,249 (709,772) 502,785 Cash flows from investing activities: Proceeds from sale of property, plant and equipment 2,068,583 3,494,593 209,010 Purchase of property, plant and equipment (344,447) (622,122) (1,009,577) Proceeds on note receivable 264,167 - - Investments in affiliates (681,869) - - Acquisition of paint facility - (400,000) - Net cash provided by (used in) investing activities 1,306,434 2,472,471 (800,567) Cash flows from financing activities: Proceeds from issuance of long-term obligations 38,976 3,763,021 921,125 Issuance of common stock 200,000 - 112,840 Payments on long-term obligations (1,150,318) (3,640,352) (2,662,578) Purchase of treasury stock - (17,500) (17,500) Increase (decrease) in notes payable (590,789) (1,488,985) 610,265 Net cash provided by (used in) financing activities (1,502,131) (1,383,816) (1,035,848) Effect of exchange rate changes on cash (6,293) 27,723 (268,200) NET INCREASE (DECREASE) IN CASH (165,741) 406,606 (1,601,830) Cash - beginning of year 1,044,851 638,245 2,240,075 Cash - end of year $ 879,110 $1,044,851 $ 638,245
See accompanying notes. 33 ELECTRIC & GAS TECHNOLOGY, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued) Years ended July 31, Supplemental disclosures of cash flow information: 1996 1995 1994 Cash paid during the year for: Interest $1,520,776 $ 1,268,542 $1,139,243 Income tax $5,771 $24,969 $42,000
Supplemental schedule of noncash investing and financing activities: During the year ended July 31, 1996, the following noncash transactions occurred: The Company issued 90,000 shares of Series A, $10.00 par value, 7% Convertible Preferred Stock ($900,000) in partial exchange for a $1,000,000 Note Receivable from Cooper Manufacturing Corporation. During the year ended July 31, 1995, the following noncash transactions occurred: The Company received non-cash consideration in the form of notes and accounts receivable from the sale of the meter socket division in the amount of $1,344,792. The Company acquired machinery and equipment amounting to $257,898 with notes payable and lease purchase obligations. During the year ended July 31, 1994, the following noncash transactions occurred: The Company acquired machinery and equipment amounting to $1,481,633 with notes payable and lease purchase obligations. The Company acquired 600,000 shares of Techstar Industries, Inc. for 195,000 shares of the Company's common stock valued at $202,800. The Company cancelled 156,000 shares of treasury stock valued at $473,716. The Company reduced the present value of future performance obligations by $140,058. See accompanying notes. 34 ELECTRIC & GAS TECHNOLOGY, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1 SUMMARY OF ACCOUNTING POLICIES A summary of the significant accounting policies consistently applied in the preparation of the accompanying consolidated financial statements follows. Organization: Electric & Gas Technology, Inc.("the Company"or "ELGT") was organized under the laws of the State of Texas on March 18, 1985, to serve as a holding company for operating subsidiary corporations. In April, 1985, the Company (i) acquired from Commercial Technology, Inc. ("COMTEC"), an affiliated company, all of the stock of Reynolds Equipment Company ("Reynolds") for stock of the Company and (ii) acquired from a subsidiary of COMTEC all of the stock of Retech, Inc. ("Retech") [formerly Test Switch Technology, Inc.("Test Switch"), formerly Superior Technology, Inc. ("Superior")] for stock of the Company. In 1988, the Company acquired 85% (and subsequently 100%) of the stock of Data Automation Company, Inc. ("DAC") from Video Science Technology, Inc., formerly an affiliate of COMTEC and of the Company; DAC owned 100% of Domac Plastics, Inc. ("Domac") and Logic Design Metals, Inc. ("Logic"). Domac was subsequently sold. During 1992 Logic merged into DAC, its parent, and DAC changed its name to Logic Design Metals, Inc. and is referred to herein as "Logic". In June 1986 Superior acquired from Petro Imperial Corp. (A subsidiary of COMTEC) its ownership in American Brass, Inc. ("ABI"). Fridcorp Plastics, Inc. ("Fridcorp") was acquired by the Company in January, 1992, in exchange for 162,000 shares of Company Common Stock. Hydel Enterprises, Inc. ("Hydel") [formerly Stelpro Limited ("Stelpro")] was acquired by the Company in April, 1992, in exchange for 166,474 shares of Company Common Stock and $1,100,000 (Cdn. funds)(April 30, 1992, exchange rate: .8370). On August 1, 1992, Hydel acquired all of the outstanding capital stock of Hydel Engineering Limited ("Hydel Engineering") for cash and notes payable of approximately $719,000 ($850,000 Cdn.). Hydel Engineering was merged into Hydel effective August 1, 1995. The number of shares of Company Common Stock issued in the acquisitions of Fridcorp and Hydel was, in each case, determined through arms- length negotiations. Superior Magnetics, Inc. ("SMI") was formed by the Company to acquire the operating assets of the business operations of Denison Magnetics of Texas Instruments Incorporated on November 30, 1992 for cash and deferred payments of approximately $2,900,000. The Company presently is the owner of 100% of Retech, which currently owns 80% of ABI and the Company owns 100% of Logic, Reynolds, Fridcorp, Hydel and SMI, and, through such subsidiaries, operates in five distinct business segments: (1) the manufacture and sale of electric meter enclosures and pole-line hardware for the electric utility industry and the general public (Hydel and Retech); (2) the design and manufacture of defense electronic components (SMI); (3) the manufacture and sale of natural gas measurement, metering and odorization equipment (Reynolds); (4) the manufacture and sale of precision metal enclosures for telecommunication and computer equipment (Logic); and (5) the manufacture of vacuum-form and injection-mold products (Fridcorp). Effective January 31, 1993, the Company discontinued the operations of its 80% owned ABI which previously was engaged in the manufacture and sale of brass and bronze ingots. The Company sold its Canadian heating division and its U.S. meter socket and Test Switch divisions during fiscal 1996 and 1995. These operations were part of the electric segment. The Company has incurred net losses of approximately $10.3 million during the last three years and has used $3.9 million in financing activities during that period, offset by approximately $5.7 million in proceeds from the sale of property, plant and equipment. As a result, the Company has experienced difficulty in meeting certain of its debt obligations. In order to alleviate this situation, management has plans for optional debt sources, plans to consider the disposition of certain assets and has reduced expenditures and increased sales in portions of its operations during the first quarter of fiscal 1997. Management believes it will be successful in these plans. Principles of Consolidation: The consolidated financial statements include the accounts of the Company and its subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation. 35 ELECTRIC & GAS TECHNOLOGY, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1 SUMMARY OF ACCOUNTING POLICIES (Continued) Inventories: Inventories 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. Depreciation and Amortization: Depreciation and amortization are provided in amounts sufficient to relate the cost of depreciable assets to operations over their estimated service lives. Leasehold improvements are amortized over the lives of the respective leases or the service lives of the improvements whichever is shorter. Leased property under capital leases is amortized over the lives of the respective leases or over the service lives of the assets for those leases which substantially transfer ownership. The straight-line method of depreciation is followed for newly acquired assets and straight- line and accelerated methods have been used for older assets for financial reporting purposes, accelerated methods are used for tax purposes. Property, Plant and Equipment: Property, plant and equipment are stated at cost. Depreciation is computed based on the following useful lives: Years Machinery and equipment 3 -15 Buildings and improvements 4 -33 Furniture, fixtures and equipment 3 -10 Cash Equivalents: For purposes of the statement of cash flows, the Company considers all highly liquid debt instruments purchased with an original maturity of three months or less to be cash equivalents. Earnings Per Share: Earnings per common share are computed by dividing net earnings by the weighted average number of shares of common stock and common stock equivalents outstanding during each period. Reclassification: Certain reclassification have been made to the 1995 and 1994 consolidated financial statements to conform to the 1996 presentation. Use of Estimates: The Company uses estimates and assumptions in preparing financial statements in accordance with generally accepted accounting principles. Those estimates and assumptions affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities and the reported revenues and expenses. Actual results may well vary from the estimates that are used. 36 ELECTRIC & GAS TECHNOLOGY, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 2 DISPOSITIONS AND ACQUISITIONS The Company sold the Test Switch division on October 31, 1995 for cash of approximately $2,100,000. The gain on the sale was approximately $580,000 and is included in other income. Effective April 30, 1995, the Company sold inventory, machinery and equipment and the business operations of the meter socket division of Superior. Proceeds amounted to approximately $3,064,000 of which approximately $1,750,000 was for cash and the balance in a note and receivable of approximately $1,315,000. The note was due in equal monthly installments over a twenty-four month period commencing September 1995. Such transaction resulted in a gain of approximately $463,000 and was included in other income for fiscal 1995. The purchaser has defaulted on the note, as well as other obligations to buy certain remaining inventories; accordingly, the entire amount as been fully reserved (see Note 15). On December 30, 1994, the Company sold inventory, machinery and equipment and the business operations of the heating division of its Canadian subsidiary, Hydel for cash. Proceeds from the sale amounted to $1,688,963 which resulted in a gain of approximately $623,000 and is included in other income. The following are the sales, cost of goods sold and selling, general and administrative expenses included in the years ended July 31,: 1996 1995 1994 Sales: Test Switch $573,000 $1,906,000 $1,700,000 U.S. Meter Socket $ - $5,179,000 $6,378,000 Heating $ - $2,262,000 $4,492,000 Cost of goods sold: Test Switch $487,000 $942,000 $1,013,000 U.S. Meter Socket $ - $4,241,000 $5,562,000 Heating $ - $1,543,000 $3,138,000 Selling, general and administrative: Test Switch $229,000 $296,000 $381,000 U.S. Meter Socket $ - $589,000 $642,000 Heating $ - $82,000 $208,000 The Company acquired for cash of approximately $400,000, Precision Techniques, Inc., in January 1995, a company which consisted of a painting facility. Precision currently paints almost exclusively for Logic and this acquisition has been treated as an acquisition of assets (Paint Facility) instead of a business combination. Prior to the acquisition, Logic accounted for a significant part of the prior business. Logic also uses other third-party facilities for its painting needs. Effective January 31, 1993, the Company discontinued the operations of its 80% owned subsidiary, American Brass, Inc. (ABI). Prior periods were reclassified to exclude the Company's former metal extraction business as a discontinued operation as of July 31, 1993. The Company sold the leasehold interests of ABI, subject to related debt and 150,000 shares of the Company's treasury stock to Trans Metals, Inc. (TMI) for 850,000 shares of $5.00 preferred stock and a $950,000 4% note of TMI. The Company originally valued the stock and note at $3,923,077 and $842,826, respectively, resulting in a gain on the sale of the discontinued operation of $4,265,903. Subsequently in 1993, the Company determined that the carrying value of its investment in TMI was less than the value originally recorded and recorded a valuation reserve of $1,000,000. During fiscal 1994, TMI with the assistance of the Company made every effort to re-start and/or sell the Alabama operation. TMI continued to sell the ball mill residue (Slag) as fertilizer. However, it has become probable that little can be salvaged from this operation. Accordingly, the Company provided in fiscal 1994 an additional reserve against its investment in TMI of $4,000,000. The Company was unsuccessful in any further sales of any remaining ABI assets and, accordingly, wrote-off the remaining balance of its investment in Trans Metals, Inc. of approximately, $391,000 in fiscal 1996. 37 ELECTRIC & GAS TECHNOLOGY, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 3 INVENTORIES Inventories consisted of the following at July 31,: 1996 1995 Raw materials $2,781,867 $4,015,142 Work-in-process 1,274,832 1,906,392 Finished goods 2,261,293 2,396,054 $6,317,992 $8,317,588 4 PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment consisted of the following at July 31,: 1996 1995 Land $ 633,096 $ 633,406 Buildings and improvements 5,771,193 5,649,578 Machinery and equipment 9,672,035 10,301,141 Furniture, fixtures & equipment 489,437 649,240 16,565,761 17,233,365 Less accumulated depreciation (7,845,307) (7,289,262) $8,720,454 $9,944,103 5 OTHER ASSETS Other assets consisted of the following at July 31,: 1996 1995 Investments and advances (Notes 10 and 13) $1,606,869 $ - Note receivable 285,000 660,761 Investment in equity securities 216,026 391,857 Intangible pension asset 170,723 197,243 Deferred debt issue costs 260,816 283,653 Goodwill, net 127,633 134,317 Other receivables - 150,000 Due from (to) affiliates (Note 13) (58,561) 602,681 Deposits and other assets 38,254 27,425 Land held for resale 19,674 19,674 Research and development equipment 5,544 5,544 $2,671,978 $2,473,155 38 ELECTRIC & GAS TECHNOLOGY, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 6 NOTES PAYABLE Notes payable consisted of the following at July 31,: 1996 1995 Note payable, CIT (a) $2,299,357 $2,339,580 Note payable, bank (b) 450,000 650,000 Note payable, bank (c) 1,776,311 1,922,975 Note payable, bank (d) - 203,902 $4,525,668 $5,116,457 (a) Part of a $7,000,000 Revolving credit and term facility with The CIT Group Credit/Finance, Inc. (CIT) due November 1998. Interest due monthly at 2.75% above prime (11.5% and 11.5% at July 31, 1996 and 1995, respectively). The revolving credit borrowing base is based on eligible accounts receivable and inventory, as defined (See note 7). (b) Note payable, bank, consists of a $450,000 and $650,000 promissory note as of July 31, 1996 and 1994, respectively, due November 30, 1996. Interest due monthly at 1.73% above Bank One certificate of deposit rate (7.5% at July 31, 1996). The note is secured by a $200,000 and $250,000 certificate of deposit of the Company and an affiliate of the Company, respectively. (c) Note payable, bank, consists of a line of credit with a maximum loan amount of $2,036,720, payable on demand; bearing interest at the bank's prime rate plus 1.25%; secured by trade receivables and inventories of Hydel. (d) Various notes payable due on demand. Information relating to short-term borrowing is as follows: 1996 1995 Balance at end of year $4,525,668 $5,116,457 Maximum borrowing $5,691,826 $6,225,406 Average balance $4,963,633 $5,730,108 Average effective interest rate 11.4% 10.9% Maximum borrowing are the maximum amount of aggregate short-term borrowing outstanding at any month end during the year. The average short-term borrowing were computed by dividing the aggregate borrowing for the year by the number of days the borrowing were outstanding during the year. The weighted average rate was computed by dividing the average borrowing into total interest on short-term borrowing. 39 ELECTRIC & GAS TECHNOLOGY, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 7 LONG-TERM OBLIGATIONS Long-term obligations consist of the following at July 31,: 1996 1995 Term loan payable to The CIT Group Credit/Finance, Inc. (CIT) under a $7,000,000 credit facility (See note 7), due in monthly installments of $14,448, plus interest at prime plus 2.75% (11.5% and 11.5% at July 31, 1996 and 1995). The term portion is secured by machinery and equipment of U.S. subsidiaries, however, substantially all assets of U.S. subsidiaries are pledged under the total facility as collateral. $ 412,275 $ 583,683 Notes payable to financing corporations, due in monthly installments of approximately $57,000 in 1996 and $57,000 in 1995 including interest at rates from 7.5% to 11.5%, through 2000, collateralized by equipment. 1,826,850 2,253,726 Mortgage note payable due in monthly payments of principal and interest at 2.75% above prime from October 10, 1994 over twenty years. Guaranteed by the Small Business Administration. 976,676 988,703 Note payable to a bank, interest at the effective base lending rate of the bank plus 1 1/2% (11.75% at July 31, 1996); due in monthly installments of $3,053 plus interest through June 2000, collateralized by land and building of the Company. 256,941 290,523 Present value of future performance payments due quarterly through December, 1995 discounted at 10% interest. Payments based on a percentage of sales of SMI ranging from 3% to 5% quarterly. - 105,502 Mortgage note payable at 9.625% interest, due in equal monthly installments of $18,806, principal and interest, through January 1, 2005 with a final payment of $1,445,706. 1,946,697 1,983,077 Note payable to a bank, bearing interest at 1 1/4% over the Canadian prime rate, due in monthly installments of $6,111 principal and interest with final balance due October 31, 1997. 90,936 165,023 Note payable bearing interest at 8% due $73,340 on August 1, 1993, 1994 and 1995 and final installment of $36,670 due August 1, 1996 plus interest. 48,423 88,008
40 ELECTRIC & GAS TECHNOLOGY, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 7 LONG-TERM OBLIGATIONS (Continued) 1996 1995 Various other installment notes and capitalized lease obligations. $ 489,546 $ 701,441 6,048,344 7,159,686 Less current maturities (1,198,036) (1,215,484) $4,850,308 $5,944,202
The prime rate was 8.75% and 8.75% at July 31, 1996 and 1995, respectively. As of July 31, 1996, the Company was not in compliance with the payment terms of its notes payable to financing corporations and the mortgage note payable (SBA loan). However, these loans were brought current as of November 11, 1996 and accordingly, the loans continue to be classified in accordance with their original terms. The aggregate annual principal payments are as follows: Year Ending July 31, 1997 $1,198,036 1998 904,246 1999 707,904 2000 444,123 2001 137,852 Thereafter 2,656,183 8 ACCRUED LIABILITIES Accrued liabilities consisted of the following at July 31: 1996 1995 Payroll $ 436,996 $ 619,512 Commissions 486,619 335,574 Pension plan (81,590) 2,584 Vacation pay 154,469 164,468 Taxes 191,197 191,674 Interest 2,910 4,144 Miscellaneous 164,840 167,378 $1,355,441 $1,485,334 41 ELECTRIC & GAS TECHNOLOGY, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 9 COMMITMENTS AND CONTINGENCIES Total rent expense for the years ended July 31, 1996, 1995 and 1994, was $463,902, $675,104 and $756,882, respectively, consisting primarily of minimum rentals. Litigation: American Brass, Inc. (ABI) the Company's subsidiary which discontinued its operation in January 1993, is involved in several lawsuits arising principally out of secured and unsecured creditors' claims against ABI. Under most of these cases the courts have awarded judgements against ABI for the amounts owed such creditors plus costs. Although ABI has not declared bankruptcy, there are insufficient assets to satisfy any of the unsecured creditor claims. The principal secured creditor currently has a deficiency of approximately $1,500,000; however there are remaining assets which could be sufficient enough to satisfy their claims. Superior Technology, Inc. had guaranteed this secured creditor. Accordingly, if there were insufficient assets to satisfy this claim, the Company could be liable for this deficiency. Management does not believe that the Company will ultimately have any material liability with respect to this guarantee. The Company through its subsidiaries is involved in various routine litigation incident to its business. Management and the Company's counsel believe that the final outcome of the litigation will not have a material adverse effect on the Company's consolidated financial position. Other: Reynolds has no insurance against risk of loss that may result from product liability. Management considers such potential losses as remote; accordingly, no provision has been made in the consolidated financial statements for any claims or possible claims that may arise. See Note 10 regarding the Company's guarantee of the value of its Preferred Stock to Allied Products Corporation. Concentration of Credit Risk: The Company invests its cash and certificates of deposit primarily in deposits with major banks. Certain deposits are in excess of federally insured limits. The Company has not incurred losses related to its cash. The Company sells a broad range of products to the electric and gas utility industries, the defense industry and the telecommunications industry. Concentrations of credit risk with respect to trade receivables are limited due to the large number of customers comprising the Company's customer base. Ongoing credit evaluations of customers' financial condition are performed and, generally, no collateral is required. The Company maintains reserves for potential credit losses and such losses have not exceeded management's expectations. Fair value of Financial Instruments: The estimated fair value amounts have been determined by the Company, using available market information and appropriate valuation methodologies. The fair value of financial instruments classified as current assets or liabilities including cash and cash equivalents, receivables and accounts payable approximate carrying value due to the short maturity of the instruments. The fair value of short-term and long-term debt approximate carrying value based on their effective interest rates compared to current market rates. 42 ELECTRIC & GAS TECHNOLOGY, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 10 STOCKHOLDERS' EQUITY On December 15, 1995, the Company closed on a Note Purchase Agreement with Allied Products Corporation ("Allied"), thereby obtaining Allied's right, title and interest in and to a certain Promissory Note and all security existing thereunder and obligations of Cooper Manufacturing Corporation ("Cooper") under this Note and the Facility Agreement formerly executed by Cooper and its shareholders in exchange for $100,000 in cash and newly issued 90,000 shares of Series A, $10.00 par value, 7% Convertible Preferred stock of the Company. The promissory note was due on December 31, 1995 and demand for payment was made on Cooper and its guarantors. The preferred stock is convertible into common stock of the Company at the ratio of two shares of common stock for each share of preferred stock. Each holder of record of the shares of preferred stock is entitled to one vote per share equal to the voting rights of the common shareholders. The Company has agreed to make whole any deficiency upon conversion and subsequent sale after December 31, 1997 of the Company's common stock for less than $900,000. The Company's common stock is trading at less than $1.00 per share which if sold at that price would require 900,000 shares to be sold to retire the obligation to Allied. The Preferred shares are redeemable in cash plus accrued dividends at any time as the result of an underwriting as defined therein. Cumulative dividends as of July 31, 1996 amounted to $35,003 with additional dividends accruing of $15,879 on September 30, 1996. The individuals whose stock was pledged and who personally guaranteed the Allied Note, petitioned the court on behalf of Cooper to file for protection under the U.S. Bankruptcy laws in a Houston, Texas court. A hearing was held on January 17, 1996 and reconvened on January 19, 1996 in which the court deferred any decision pending settlement negotiations between the parties. The Company believes the filing was improper as those individuals who petitioned the court as debtors in possession did not have standing for such petition. Although the outcome of any bankruptcy proceeding cannot be determined, the Company believes it has the only secured creditor position and first rights to the assets of Cooper. Further, the Company and its affiliate believe they will recover their investment and advances to Cooper. The Company had a Letter of Intent to acquire Cooper which has expired and was determined by the Company not to be pursued. Approximately, $1,200,000 is currently due from Cooper and is included in other assets in the accompanying balance sheet. The Company issued on August 3, 1995, 45,000 shares of its $.01 par value common stock (restricted) valued at $1.25 per share to certain of its key management personnel and 100,000 shares valued at $1.25 per share plus $1,500 in cash to an affiliate of the Chairman of the Board and President as a fee for providing continuing collateral securing the Company's $450,000 note payable to a bank. On October 26, 1995, the Company issued 200,000 shares of its $.01 par value common stock (restricted) valued at $1.00 per share for cash to the same affiliate. Proceeds were used to repay a portion of the Bank One Texas note payable. The Company transferred 20,200 shares of its treasury stock with a basis of $4.00 per share on March 30, 1995 to a shareholder in settlement of a potential claim. The market value of the Company's common stock on March 30, 1995 was $3.00 per share, accordingly, $60,600 was recorded as an expense and $20,200 reduced additional paid-in capital. In connection with the Company's financing agreement with The CIT Group/Credit Finance, Inc. in 1994, the Company issued warrants to purchase 25,000 shares of common stock of the Company at $4.25 per share. Such warrants are exercisable in whole or part on or before November 24, 1998 and have piggy-back rights with respect to any shares to be registered by the Company. The Company issued 195,000 shares of its common stock for 600,000 shares of Techstar Industries, Inc. common stock during fiscal 1994. The transaction was valued at $202,800 and is recorded in other assets. 43 ELECTRIC & GAS TECHNOLOGY, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 11 BENEFIT PLANS Retech sponsors defined benefit pension plans that cover all of its hourly employees. The plans call for benefits to be paid to eligible employees at retirement based upon years of service and compensation rates near retirement. Retech's policy is to fund pension expenses accrued. Pension expense for the years ended July 31,: 1996 1995 1994 Service cost $ - $ - $ - Interest cost 130,347 127,781 129,662 Actual return on assets held for the plan (107,462) (83,194) 11,800 Net amortization of prior service cost, transition liability and net gain 43,540 53,872 (45,840) Pension expense $ 66,425 $ 98,459 $ 95,622
The following sets forth the funded status of the plans and the amounts shown in the accompanying consolidated balance sheets at July 31,: 1996 1995 Pension benefit obligations Vested $1,684,683 $1,653,170 Non-vested 16,995 28,842 Projected benefit obligation 1,701,678 1,682,012 Fair value of assets held in plan 1,410,122 1,234,131 Unfunded excess of projected benefit obligation over plan assets $ 291,556 $ 447,881 Unrecognized net transition obligation $ 60,592 $ 72,711 Unrecognized prior service costs 110,131 124,532 Unrecognized net loss 214,639 265,302 Pension (asset) liability recognized (93,806) (14,664) Accrued pension liability $ 291,556 $ 447,881 The Company has recognized a minimum pension liability for the under-funded plans. 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 Company recorded additional liabilities of $385,362 and $462,545, intangible assets of $170,723 and $197,243 and a stockholders' equity reduction of $214,639 and $265,302 as of July 31, 1996 and 1995, respectively. Retech will terminate these plans upon funding its pension liability. The plan assets consist of common equities and government securities administered by the trust department of United Bank, Canton, Ohio. 44 ELECTRIC & GAS TECHNOLOGY, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 11 BENEFIT PLANS (Continued) The assumed long-term rate of investment return and the interest rate for obligations used in determining the actuarial present value of accumulated plan benefits was 8.5% and 8.5% at July 31, 1996 and 1995, respectively. The Company has established a defined contribution (401-K) plan covering substantially all U. S. employees. Charges to operations for this plan for the years ended July 31, 1996, 1995 and 1994 were $56,472, $80,845 and $84,001, respectively. The Company adopted a new Stock Option Plan ("New Plan") replacing the Incentive Stock Option Plan ("Old Plan") which terminated by its own terms on April 14, 1995. All options under the Old Plan have been granted. Options totaling 394,999 shares of common stock remain in full force and effect and are outstanding. Such options were exercisable December 21, 1994 with respect to 333,000 shares and on April 6, 1996 with respect to 61,999 shares. Both the Old Plan and New Plan have substantially the same structure. The option price must be at least 100% of the fair market value of the common stock at the time options are granted. If the person to whom the option is granted is more than a 10% shareholder of the Company, the option price must be at least 110% of the fair market value of the stock at the time options are granted. No employee may be granted options in any calendar year greater than a value of $100,000, plus certain carry-over allowances from the previous years, as defined in the Plan. Each option becomes exercisable only after two years continued employment following the date the option is granted. On May 16, 1994, the stockholders approved the New Plan which provides for 400,000 shares of common stock. No shares have been granted under the New Plan. Following is a summary of options under the plan as of and for the years ended July 31,: 1996 1995 1994 Options outstanding at beginning of year 394,999 394,999 465,000 Granted - - 9,999 Exercised - - (80,000) Options outstanding at end of year 394,999 394,999 394,999 Options exercisable at end of year 333,000 333,000 - Exercise price per share $2.50 to $2.50 to $2.50 to $4.68 $4.68 $4.68 45 ELECTRIC & GAS TECHNOLOGY, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 12 INCOME TAXES Following is a reconciliation between reported income taxes and the amount computed by applying the statutory federal income tax rates to earnings (loss) from continuing operations before income taxes for the periods ended July 31: 1996 1995 1994 Expected provision (benefit) for federal income taxes $(1,711,000) $270,532 $(832,300) Canadian income tax (benefit) - (54,896) - Utilization of tax loss carryforward (61,000) (270,532) - Difference in Canadian rates - - (54,400) Unavailable loss carrybacks 1,772,000 - 544,975 Income taxes (benefit) $ - $(54,896) $(341,725)
The Company files a consolidated tax return with its U.S. subsidiaries. As of July 31, 1996, the Company has available approximately $5,400,000 in net operating loss carryforwards for tax purposes which expire, if not utilized, in 2008 to 2010. The Company also has available approximately $850,000 in capital loss carryforwards. Income tax expense (benefit) (all attributable to income from continuing operations) consisted of the following: 1996 1995 1994 Current $ - $ 20,449 $(135,262) Deferred - (75,345) (206,463) $ - $(54,896) $(341,725)
Deferred tax expense (credit) and deferred tax liabilities in all years (all Canadian) result principally from differences in depreciation for tax and financial statement purposes. The components of the net deferred tax liability included in other long-term obligations are as follows at July 31,: 1996 1995 Depreciation - U. S. $ 283,000 $ 86,020 Accrued liabilities and deferred income (110,200) (109,378) Provision for loss on discontinued operations (886,052) (886,052) Operating and capital loss carryforwards (2,035,900) (57,929) Deferred tax asset valuation allowance 2,749,152 967,339 $ - $ -
46 ELECTRIC & GAS TECHNOLOGY, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 13 RELATED PARTY TRANSACTIONS The following is a summary of advances from/to affiliated companies at July 31,: 1996 1995 Refineries Consolidated Technology, Inc. $ 415,000 $ - Cooper Manufacturing Corporation 1,191,869 - VSTI - 150,000 Others (58,561) 452,681 $1,548,308 $602,681 The Company for several years has been owed approximately $530,000 due from Comtec, a dormant affiliate. During 1996, it was determined that $235,000 of this amount was actually paid for the benefit of the Company and was written-off in 1996 in other expenses. It has been determined that Comtec does not have the capability to liquidate the remaining debt and the remaining receivable was offset against accrued salaries of the officer who had guaranteed the receivable. The Company has advanced through the pledging of its certificates of deposit with a bank, corresponding to direct bank loans and direct advances to Refineries Consolidated Technology, Inc. and Cooper Manufacturing Corporation ("Cooper") approximately $706,869. The Company has also acquired a secured note receivable from Cooper in exchange for 90,000 shares of its $10.00 par value Preferred Stock to an unaffiliated company who previously owned Cooper. During 1994 the Company purchased certain equipment with a cost of approximately $47,000 and subsequently sold the equipment to an affiliated company for $200,000. The gain of approximately $153,000 is included in other income. 14 SEGMENT INFORMATION Industrial Segments The Company operates principally in five industries: electric, defense electronics, gas, metal fabrication and plastics. Operations in the electric industry involve the manufacture and sale of meter sockets and other electrical equipment. Operations in the defense industry involve the manufacture and sale of electronic components. Operations in the gas industry involve the development, manufacture, and sale of gas meters and measurement equipment. Operations in the metal fabrication operation involve the manufacture and sale of precision sheet metal. Operations in the plastics industry include the manufacture and sale of vacuum- form and injection-mold products. The Company's former segment, metal extraction has been treated as a discontinued operation. Following is a summary of segment information for the years ended July 31,: 1996 1995 1994 Sales to unaffiliated customers: Electric $ 7,575,126 $16,167,174 $19,438,285 Defense electronics 7,013,706 6,577,333 7,374,479 Gas 2,935,326 3,143,711 3,420,071 Metal fabrication 15,168,121 14,105,717 14,955,581 Plastics 1,275,673 1,369,693 1,260,582 $33,967,952 $41,363,628 $46,448,998
47 ELECTRIC & GAS TECHNOLOGY, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 14 SEGMENT INFORMATION (Continued) 1996 1995 1994 Operating income (loss): Electric $ 324,602 $ 659,788 $ (762,785) Defense electronics (279,348) (95,196) (71,322) Gas (646,568) 75,643 208,493 Metal fabrication 234,116 818,645 400,288 Plastics 48,451 (25,483) 66,544 (318,747) 1,433,397 (158,782) General corporate expenses (898,633) (1,067,409) (771,298) Other income (expense), net (3,815,171) 429,693 (1,518,022) Earnings (loss) from continuing operations before income taxes $(5,032,551) $ 795,681 $(2,448,102) Identifiable assets: Electric $ 4,648,198 $ 8,596,181 $12,857,150 Defense electronics 3,581,838 3,974,844 3,523,317 Gas 2,198,034 2,493,657 2,275,869 Metal fabrication 9,301,349 9,877,149 9,299,649 Plastics 665,493 788,769 805,919 20,394,912 25,730,600 28,761,904 General corporate assets 2,694,693 2,503,133 1,597,414 Total assets $23,089,605 $28,233,733 $30,359,318 Capital expenditures: Electric $ 30,432 $ 54,594 $ 157,458 Defense electronics 63,243 250,672 170,150 Gas 63,900 176,724 161,224 Metal fabrication 164,303 344,274 1,988,215 Plastics 19,614 53,756 12,041 General corporate 2,955 - 2,122 $ 344,447 $ 880,020 $ 2,491,210 Depreciation and amortization: Electric $ 150,007 $ 200,693 $ 305,641 Defense electronics 296,767 294,239 280,281 Gas 188,745 162,622 132,346 Metal fabrication 435,914 409,478 371,885 Plastics 21,621 62,568 67,373 General corporate 15,698 15,698 14,950 $1,108,752 $1,145,298 $ 1,172,476
48 ELECTRIC & GAS TECHNOLOGY, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 14 SEGMENT INFORMATION (Continued) Operating income represents sales less operating expenses for each segment and excludes income and expenses of a general corporate nature. Identifiable assets by segment are those assets that are used in the Company's operations within that industry but exclude investments in other industry segments. General corporate assets consist principally of corporate cash, receivables from affiliates and the corporate headquarters building. Individual customers who exceeded 10% of consolidated revenues accounted for $7,975,000, $5,490,000 and $6,950,000 in sales for the year ended July 31, 1996, 1995 and 1994, respectively. Geographic information Financial data by geographic area for the years ended July 31,: 1996 Operating (loss) Identifiable Sales Profit Assets United States $26,965,367 $ (684,510) $16,442,747 Canada 7,002,585 365,763 3,952,165 Total $33,967,952 $ (318,747) $20,394,912 1995 United States $32,281,705 $2,032,649 $20,449,381 Canada 9,081,923 (599,252) 5,281,219 Total $41,363,628 $1,433,397 $25,730,600 15 FOURTH QUARTER RESULTS During the fourth quarter of fiscal 1996 and 1994, the Company recorded the following adjustments which are unusual and non- recurring in nature. For fiscal 1996; (i) As result of a default by the purchaser of the Retech meter socket operation, the Company fully reserved all amounts owed from the purchaser of approximately $1,800,000; (ii) obsolete and slow moving inventory write-offs in the Gas and Defense segments amounted to approximately $600,000; (iii) the remaining assets of Trans Metals investment were written- off totaling approximately $391,000; (iv) and investment losses of approximately $1,000,000. A book to physical inventory adjustment at Hydel for fiscal 1994 amounted to a decrease of approximately $1,100,000. The Company provided an additional $4,000,000 reserve against its investment in Trans Metals, Inc. bringing such reserve to $5,000,000 after the $1,000,000 reserve provided in fiscal 1993. Further, the Company wrote-off or wrote-down to their estimated realizable value certain investments and receivables included in other assets of approximately, $400,000. 49
EX-27 2
5 12-MOS JUL-31-1996 JUL-31-1996 879,110 0 4,373,951 39,798 6,317,992 11,697,173 16,565,761 7,845,307 23,089,605 10,812,721 0 0 900,000 82,504 5,738,426 23,089,605 33,967,952 33,967,952 26,335,377 35,185,332 1,813,838 1,130,590 1,495,590 (5,032,551) 0 (5,032,551) 0 0 0 (5,032,551) (.66) (.66)
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