-----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, SvL5aQpciS/HXZsq1LBL5RZ9Nc59YAW7Ibe7BDo0to8+UDGncplY76H31hjmFOmB PYoBqs4gdU7B0QdgZJwT5Q== 0000785819-97-000010.txt : 19971028 0000785819-97-000010.hdr.sgml : 19971028 ACCESSION NUMBER: 0000785819-97-000010 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19970731 FILED AS OF DATE: 19971027 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: SEC FILE NUMBER: 000-14754 FILM NUMBER: 97700941 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, 1997 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 17, 1997, the aggregate market value of the shares of Common Stock held by non-affiliates of the registrant was approximately $5,345,000. At such date there were 8,030,624 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 incorporated Atmospheric and Magnetics Technology, Inc. ("AMT") on June 10, 1996 under the laws of the State of Texas. AMT which remain dormant during most of Fiscal 1997 was formed to undertake the Company's venture into the water industry. The Company presently is the owner of 100% of Retech, which currently owns 80% of ABI and the Company owns 91.5 % of AMT and 100% of Reynolds, Hydel, SMI and Fridcorp, and, through such subsidiaries, operates in five distinct business segments: (1) production of atmospheric water, filtration and enhanced water products (AMT); (2) the manufacture and sale of natural gas measurement, metering and odorization equipment (Reynolds); (3) the manufacture and sale of electric meter enclosures and pole- line hardware for the electric utility industry and the general public (Hydel and Retech); (4) the design and manufacture of defense electronic components (SMI); and (5) the manufacture of vacuum-form and injection-mold products (Fridcorp). The entrance into the Water Industry will be the major focus for the future development and growth on the Company. Effective July 31, 1997, the Company discontinued the operations of its metal fabrication segment which previously was engaged in the manufacture and sale of precision metal enclosures for telecommunication and computer equipment (Logic). 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) from continuing operations and identifiable assets of the Company by segment, for the fiscal years ended July 31,: Year Ended Year Ended Year Ended July 31, 1997 July 31, 1996 July 31, 1995 Revenue Water $ 75,234 $ - $ - Gas 3,135,249 2,935,326 3,143,711 Electric 7,744,912 7,575,126 16,167,174 Defense electronics 5,799,455 7,013,706 6,577,333 Plastics 1,176,399 1,275,673 1,369,693 Operating Income (Loss): Water $ (212,742) $ - $ - Gas 40,784 (646,568) 75,643 Electric 161,043 324,602 659,788 Defense electronics (1,212,197) (279,348) (95,196) Plastics (2,242) 48,451 (25,483) Identifiable Assets: Water $ 954,690 $ - $ - Gas 1,882,753 2,198,034 2,493,657 Electric 4,828,751 4,648,198 8,596,181 Defense electronics 2,140,005 3,581,838 3,974,844 Plastics 681,089 655,493 788,769 Corporate 14,877,315 2,694,693 2,503,133 Geographic information Financial data by geographic area for the fiscal year ended July 31, 1997 are as follows: Operating (loss) Identifiable Sales Income Assets United States $10,186,337 $(1,582,783) $ 6,445,677 Canada 7,744,912 357,429 4,041,611 Total $17,931,249 $(1,225,354) $10,487,288
3 Water (AMT) History Atmospheric & Magnetics Technology, Inc. (AMT) was incorporated June 10, 1997 under the laws of the State of Texas. AMT was created by the Company to exploit the opportunities in the Water Industry. AMT has just recently begun to do so. Products AMT owns patented technology that extracts water from the atmosphere, turning it into clean drinking water, known as the "Watermaker," "Wet Air" and "Infinite Fountain of Water." Additionally, AMT holds agreements for the distribution of: The patented Vortex water filter for the Philippines that utilizes ultraviolet, ozonization and carbon filtration. The patented Sunroc Water Cooler for the Philippines that provides both cold and hot water once connected to a water source. Exclusive (Philippines) and non-exclusive (Worldwide) rights to the sale of turnkey bottled water plants and peripherals manufactured by International Water Technology Corp. AMT also holds licensing agreements for the distribution of Oxygenated, spring, purified and filtered bottle water products under the "Ironman" trade-name for the world. Industry, Customers and Competition Industry. AMT operates in an industry that supplies potable drinking water equipment to all segments of commercial, industrial and consumer markets. This equipment is used to extract water from the atmosphere, filter water, purify water, store water and both chill or heat water. AMT estimates that the industry develops sales of several billion dollars, This industry estimate is expected to grow significantly every year as potable drinking water continues to become more scarce worldwide. Customers. AMT sells to distributors, who in turn sell commercially (Hotels, Professionals, Schools, Clinics, etc.), industrially (Mining, Offshore Oil Drilling, Manufacturing, etc.) and to consumers (Health Food Stores, Health Clubs, General Food Channels, etc.) domestically and internationally. Product lines are sold direct and through traditional distribution channels. Competition. AMT's atmospheric technology is leading edge with no significant direct competition. However, the indirect filtration and bottled water alternative potable drinking water sources are well developed worldwide. The atmospheric water niche is yet to be clearly defined at this time, but "point of use" applications are plentiful. 4 Marketing AMT, through its marketing division "Aquamerica," is aggressively pursuing well established organizations in the Pacific Rim (Philippines, Malaysia, Indonesia, Singapore, etc.) and several other regions where potable drinking water is scarce or non- existing. Employees As of July 31, 1997 this segment had no employees and has been conducting its preliminary work through the use of consultants. This segment now has one full time employee. Administrative services have been provided by the Company. 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. 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. Its principal competitors are Mercury Instruments, Inc., American Meter Company, Equimeter Incorporated, YZ Industries and others. Employees Reynolds employs approximately 25 persons, including 2 company officers and 11 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. 5 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. 6 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, Thomas & Betes 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 were 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 52 persons, including 10 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.). 7 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 Raytheon T.I. Systems Inc.(RTI), formerly Texas Instruments Incorporated. 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 RTI. 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 RTI where it must compete with other vendors for the sale of magnetic products to RTI. SMI is a certified supplier to RTI. 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 8 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 79 full-time employees, including 41 clerical, engineering and administrative employees and approximately 38 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. 8 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. 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 and hatch covers. 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 and hatch covers, 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. 9 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 23 persons on a full-time basis, of which 7 work in the Forming division, 12 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. Discontinued operations-Metal fabrication (LOGIC) and Metal extraction (ABI) Logic Design Metals, Inc. ("Logic") was incorporated in Texas on March 16, 1977 and became part of the Company in 1988. Logic manufactured customized, precision-formed metal enclosures for the telecommunications and computer industries. Effective July 31, 1997, the Company sold Logic and accordingly, the former metal fabrication segment has been treated as a discontinued operation. 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 March 2002 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. 10 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. 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 Company currently has a pending contract for sale of the land and building. Item 3. Legal Proceedings. The former manufacturers representative of Logic, Ammon & Rizos Co, has filed a suit against the Company, the Company's chairman of the board, Logic, and New Logic Design Metals, Inc. ("New Logic")(the purchaser of the assets) for unpaid fees, assumed by New Logic and a previous adjustment in prior fees plus prospective fee from New Logic's sales. The case is in early stages of discovery; management believes there will be no material effect on the Company. Allied Products Co has sued the Company under the Preferred Stock issued by the Company in connection with its investment in Cooper Manufacturing Corporation ("Cooper") and the rights pertaining thereto. The suit was filed in the Eastern District of Illinois (Chicago) and currently, all activity is directed at jurisdictional issues. The Company has filed a counter suit alleging security violations (10b5) demanding return of its Preferred Stock. In addition, the Company has been advised by the Cooper debtor-in-possession that they plan to initiate litigation claiming preference violations by Allied. The ultimate resolution of this case will depend in part upon the outcome of the Cooper bankruptcy case which will shortly be voting on a Plan of Reorganization. The Company reserved its investment at July 31, 1997 to $350,000, the anticipated cash payment under the debtor's Plan. Management does not believe that this suit will have any further material effect on the Company. Item 4. Submission of Matters to a Vote of Security Holders. (a) Annual meeting of stockholders, April 4, 1997. (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, 1994, 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, 1997: High Low First Quarter 1-5/16 11/16 Second Quarter 3/4 1/2 Third Quarter 15/16 15/32 Fourth Quarter 2-1/8 1-9/16 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 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 102,353 as of July 31, 1997 must be paid on preferred stock before any dividends can be paid on Common Stock. As of July 31, 1997 there were 486 holders of record of the Common Stock of the Company, exclusive of beneficial ownership through brokerage firm nominee name. 12 UNITS OF COMMON STOCK AND WARRANTS The Company has issued warrants to an investment banking firm to purchase 150,000 and 300,000 shares of common stock at $2.00 and $2.30 per share, respectively. The warrants are protected against dilution and expire July 31, 2001 and September 15, 2001, respectively. The warrants contain piggyback registration rights and the agreement allows the warrants holders to request registration of the warrants, if unregistered, between January 1, 1999 and July 31, 2002. The Company has not recorded any expense relating to the warrants since the exercise price exceeded the market price at the date of issuance. 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. Item 6. Selected Financial Data. STATEMENT OF OPERATIONS DATA: (In dollars, except shares outstanding) Fiscal Years Ended July 31, 1997 1996 1995 1994 1993 Revenues $17,931,249 $18,799,831 $27,257,911 $31,493,417 $30,586,168 Gross Profit 5,046,161 5,279,632 8,116,397 7,810,570 10,226,537 Selling, G&A Expense 7,932,042 6,731,128 8,569,054 9,140,938 8,604,004 Other Income (Expense) (2,239,761) (3,154,070) 615,821 (1,125,514) (638,892) Earnings (Loss) from Continuing Operations (4,912,270) (4,605,566) 218,060 (2,114,157) 812,440 Net Earnings (loss) 9,362,399 (5,032,551) 850,577 (6,106,377) 981,189 Net Earnings (loss) per Share 1.07 (.66) .11 (.80) .13 Weighted Average Number of Shares Outstanding 8,659,365 7,635,624 7,615,474 7,634,432 7,353,489
For additional information with respect to reclassification for discontinued operations and acquisitions and dispositions see note 2 to the consolidated financial statements. BALANCE SHEET DATA: As of July 31, 1997 1996 1995 1994 1993 Total Assets $25,364,603 $15,094,090 $20,336,094 $22,164,220 $31,059,113 Long-Term Obligations 2,921,669 2,349,579 2,514,768 2,735,462 3,181,440 Shareholders' Equity 16,041,119 6,720,930 10,427,861 9,289,363 15,301,380
13 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) production of atmospheric water, filtration and enhanced water products; (ii) the manufacture of natural gas measurement equipment and gas odorization products; (iii) the manufacture and sale of metal enclosures and other electrical equipment for use in the electric utility industry; (iv) the manufacture and sale of defense electronic components; and (v) the manufacture of vacuum-form and injection-mold products. Results of Operations The discussion below relates to the Company's operations during the fiscal years ended July 31, 1997, 1996 and 1995. Summary. The Company reported net earnings (loss) from continuing operations of $(4,912,270), $(4,605,566) and $218,060 and net earnings (loss) of $9,362,399, $(5,032,551) and $850,577 for fiscal years 1997, 1996 and 1995, respectively. The 1997 substantial increase in net income was attributable to improved earnings in the discontinued metal fabrication segment of $1,627,730 and the gain of $12,646,939 on the sale of this segment. Losses from continuing operations were from the electric segment performing less profitable than during 1996, the plastic segment's breakeven performance and substantial losses in the defense segment. The defense segment has experienced declining sales, tighter margins and an additional obsolescence charge of approximately $458,000 against inventory. Also, corporate expenses have increased due to legal and other cost associated with the Company's investments and venture into the water business. The Company's investments in Refinery Consolidated Technology, Inc. and Cooper Manufacturing Corporation were also reserved at July 31, 1997. 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 1997 and 1996. The increase in earnings between 1994 and 1995 from continuing operations before income tax was $2,332,217 or 110.31% which is attributable to the Electric segment offset by decreases in Defense, Gas and Plastic segments. The increase in operating profits was $1,422,573 and decreases of $(23,874), $(132,850) and $(92,027), respectively. Earnings (loss) per common share were $1.07, $(.66) and $.11 in fiscal 1997, 1996 and 1995, respectively. For the Years Ended July 31, 1997 1996 Increase Percent Increase Percent (Decrease) Change (Decrease) Change Operating Revenues $(868,582) (4.62) $(8,458,080) (31.03) Operating Income (672,491) (121.64) (1,167,615) 189.93 Earnings (Loss) from continuing operations before income taxes (306,704) (6.66) (4,823,626) (2,212.06) Net Earnings Per Share 1.73 262.12 (.77) (700.00)
14 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, 1997 1996 Increase Increase (Decrease) Percent (Decrease) Percent Operating Revenues: Water $ 75,234 8.66 $ - - Gas 199,923 23.02 (208,385) (2.47) Electric 169,786 19.55 (8,592,048) (101.58) Defense electronics (1,214,251) (139.80) 436,373 5.16 Plastics (99,274) (11.43) (94,020) (1.11) $(868,582) 100.00 $(8,458,080) 100.00 Operating Income (Loss): Water $ (212,742) (31.63) $ - - Gas 687,352 102.21 (722,211) (61.85) Electric (163,559) (24.32) (335,186) (28.71) Defense electronics (932,849) (138.72) (184,152) (15.77) Plastics (50,693) (7.54) 73,934 6.33 (672,491) 100.00 (1,167,615) 100.00 General Corporate (761,894) 168,776 Other Income (Expense) 1,127,681 (3,824,787) Earnings from Continuing Operations Before Income Taxes $(306,704) $(4,823,626)
Water revenues amounted to $75,234 which were essentially sales of a few demonstrators of this segments "Watermaker" product. Expenses were $287,976, included early development of a business plan and marketing expenses. While the Company has been working on this project for sometime, only recently has any meaningful activity taken place. Gas revenues increased (decreased) by $199,923, $(208,385) and $(276,360) or 6.81%, (6.63%) and (8.08%) in fiscal 1997, 1996 and 1995, respectively. During fiscal 1997, this segment developed the next generation of their "Recor" product line. This product is currently being tested by customers and has slowed sales on the first generation "Recor." It is not expected to create meaningful additional revenues until fiscal 1998. During fiscal 1996, sales of the "Recor" were relatively unchanged with most of the sales decline occurring in the odorization systems due to increased industry competition. Operating income (loss) was $40,784, $(646,568), and $75,643 for fiscal 1997, 1996 and 1995, 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. 15 Electric revenues increased slightly by $169,786, the effect of an increase in Canada of $742,327 offset by the U.S. sales decline of $572,541 which was the loss of the first quarter sales of the sold Test Switch business. 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 1997 decreased by $(163,559) the effect of continuing cost associated with the U.S. plant located in Paris, Texas while Canadian operations performed similar to the prior year. There is a sale pending on the Paris property. 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 business 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. Gross profit margins were 24.34%, 24.51% and 22.59% for fiscal 1997, 1996 and 1995, with selling, general and administrative expenses as a percentage of sales for the same period of 22.26%, 20.22% and 18.51%, respectively. Selling, general and administrative expenses have increased as a percentage of sales due to lower sales from sold operations and carrying cost associated with aforementioned plant building which was not sold with the meter socket business. Defense electronics sales decreased by $(1,214,251) to $5,799,455 during fiscal 1997 due to cutbacks in defense spending, consolidation in the industry and the older defense programs completing production. The 1996 increase in revenue was due to new customers and the F22 tactical fighter program increasing greater than decreases in older programs slowly terminating. The operating losses between 1997, 1996 and 1995 increased by $(932,849), $(184,152) and $(23,874), the result of declining revenues and obsolescence reserves of approximately $458,000 and $214,000 against certain inventory in 1997 and 1996, respectively, which in a large part was inventory acquired in the original purchase from Texas Instruments. Gross margins for fiscal 1997, 1996 and 1995 were 27.58%, 33.19% and 42.78%. 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 48.48% in 1997, 37.17% in 1996 and 44.22% in 1995 as a percentage of sales with fiscal 1997 reflecting significant lower sales and during fiscal 1996 reflecting cost cutting and reductions in overhead expenses. Plastics revenues declined by $(99,274) and $(94,020) during fiscal 1997 and 1996, operating profits decreased by $(50,693) to a negative $(2,242) after having increased by $73,934 to a positive $48,451. Revenues increased slightly by $109,111 or 8.66% 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. Expense relationships to the various changes in revenues effecting cost of sales and selling, general and administrative expenses are as follows. Cost of sales as a percentage of revenues amounted to 71.86%, 71.92% and 70.22% for the years ended July 31, 1997, 1996 and 1995, respectively. Selling, general and administrative expenses as a percentage of revenues were 34.89%, 31.02% and 27.52% for the years ended July 31, 1997, 1996 and 1995, respectively. 16 Liquidity and Capital Resources Liquidity. Cash flow from (used by) operating activities amounted to $(1,527,027), $(764,230) and $(1,131,612) for fiscal years 1997, 1996 and 1995, respectively. Operating cash flow has been supplemented by cash made available from the proceeds on the sale of the various segment and operating divisions. Current assets of the Company totaled $21,008,185 at July 31, 1997, up from current assets of $7,722,681 at July 31, 1996. Current liabilities increased from fiscal 1996 to fiscal 1997 by $295,230, resulting in an increase in working capital (current assets less current liabilities) to $14,689,374 at July 31, 1997, from $1,749,100, an increase of (739.82%). This increase was the result of the sale of the metal fabrication segment. The Company believes it has sufficient cash 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 $1,560,000. The Canadian credit facility is secured by receivables and inventories of Hydel. In November 1993 the Company began a five-year financing arrangement with the CIT Group Credit/Finance, Inc. (CIT). Their original 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 and has been reduced due to the operations sold. Borrowing under this financing amounted to $767,902 in term debt and $631,788 in revolving debt at July 31, 1997. 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. The Company sold one segment in fiscal 1997 and one division in fiscal 1996 and two divisions in fiscal 1995 receiving approximately $20,828,385, $2,068,583 and $3,492,093, respectively in cash proceeds which were used to pay current obligations, reduce debt and provide additional working capital. Capital Expenditures The Company purchased equipment consisting of normal asset acquisitions and replacement of approximately $261,504, $181,643 and $277,848 during fiscal 1997, 1996 and 1995, respectively. 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). 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 $102,353 as of July 31, 1997. Further, additional dividends of $15,879 were due on September 30, 1997 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. 17 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, 1997, 1996, and 1995 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. PART III Item 10. Directors and Executive Officers of Registrant (a) During fiscal year ended July 31, 1997, the following persons served as directors of Registrant: Shares Beneficially Director Owned (%) of Name and Age Position Since Outstanding S. Mort Zimmerman (70) Chairman of the Board, 1985 831,240 9.66% President and Director Daniel A. Zimmerman (36) Sr. Vice President 1989 370,131 4.30% and Director Edmund W. Bailey (55) Vice President, Chief 1994 52,221 0.61% Financial Officer and Director Fred M. Updegraff (63) Vice President, 1987 76,073 0.88% Treasurer and Director Dick T. Bobbitt (72) Director 1997 - James J. Ling (74) Director 1997 -
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 18 BACKGROUND S. Mort Zimmerman: Mr. Zimmerman is 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 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 and Vice President and Director of Superior. 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 W. 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. degrees 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. Dick T. Bobbitt: Mr. Bobbitt has been president of VEC Technology, Inc. (VEC) since August 1991. VEC is a consulting firm involved in research and development of new products. Mr. Bobbitt was one of the founders of American Technological University and served as Chairman of the Board from 1973 to 1979. Prior years were spent with RCA Corporation and Random House Publishing Co. 19 James J. Ling: Mr. Ling is co-founder, chairman and chief executive officer of Empiric Energy, Inc. since November 1992. Mr. Ling founded Ling Electronics in 1955 and through a series of mergers and acquisitions which includes, Temco Aircraft Corporation, Chance-Vought, The Wilson Company, Braniff Airlines, Jones & Laughlin and National Car Rental, guided the conglomerate Ling-Temco-Vought (LTV) to a position among the largest companies in the Nation with annual sales of $3.2 billion. Mr. Ling resigned in 1971. Since 1985, Mr. Ling has been President of Hill Investors, Inc., a company organized to hold oil and gas investments and which also offers business consulting services. (c) Significant and Key Employees: The following provides certain information regarding key employees who serve as officers of the subsidiary companies of the Company: 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 Annual Compensation Awards Payouts Other Restricted Number of Shares Long Term Annual Stock Covered By Incentive Plan All Other Name and Principal Year Salary Bonus Compensation Awards Option Grant Payout Compensation Pposition S. Mort Zimmerman 1997 $239,760 (a) $333,400(b) $ - - 212,000 - - Daniel A Zimmerman 1997 $ 97,596 $59,802(b) $ - - 31,667 - $19,629 (d) Edmund W. Bailey 1997 $108,000 $59,802(b) $ - - 36,666 - $2,160 (c) Gabriel Prieto 1997 $106,950 $3,380(b) $ - - 16,667 - $12,797 (d) S. Mort Zimmerman 1996 $219,400 (a) $14,166(b) $ - - 232,000 - - S. Mort Zimmerman 1995 $110,000 $ - $ - - 232,000 - $642 (c)
S. Mort Zimmerman-President and Chairman of the Board. Daniel A. Zimmerman-Senior Vice President. Edmund W. Bailey-Vice President and Chief Financial Officer. Gabriel Prieto-President of SMI. (a) A portion of the payments were made to an affiliate of S. Mort Zimmerman and includes accrued and unpaid compensation of $75,000 for fiscal year 1997 and 1996, respectively. (b) Includes cash and bonus shares of Common Stock valued at $1.69 and $1.25 per share in 1997 and 1996, respectively. (c) Company match of 401 (K) employee contributions. (d) Company match of 401 (K) employee contributions and expense allowances. 20 1997 Stock Option Grants The following table sets forth stock options granted in fiscal 1997 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. Number of % of Total Shares Options Covered by Granted to Date of Option Employees Exercise Expiration Grant Grant Grants Prices Date 0% 5% 10% S. Mort Zimmerman 4/7/97 180,000 62.1% $.55 4/7/02 - $27,000 $61,200 Daniel A. Zimmerman 4/7/97 25,000 8.6% $.50 4/7/02 - 3,500 7,750 Edmund W. Bailey 4/7/97 30,000 10.3% $.50 4/7/02 - 4,200 9,300 Gabriel Prieto 4/7/97 10,000 3.5% $.50 4/7/02 - 1,400 3,100 All employees as a group...... 4/7/97 45,000 15.5% $.50 4/7/02 - 6,300 13,950 Total potential stock price appreciation from April 1997 to April 2002 for all stockholders at assumed rates of stock price appreciation(a).................... - 1,174,133 2,639,029 Potential realizable value of options granted to all employees at the end of their five-year option term as a percentage of total potential stock price appreciation from April 1997 to April 2002 for all stockholders at assumed rates of stock price appreciation..................................................... - 3.6% 3.6% (a) Based on a price of $.50 on April 7, 1997 and a total of 8,030,624 shares of Common Stock outstanding.
Aggregate Option Exercises and Year-end Option Values Set forth below are the number of shares covered by exercisable and unexercisable options held on July 31, 1997 and the aggregate gains that would have been realized had these options been exercised on July 31, 1997, even though these options were not exercised, and the unexercisable options could not have been exercised, on July 31, 1997. Number of Shares Value of Unexercised Covered by Unexercised In-The-Money Options on 7/31/97 Options as of 7/31/96 Name Exercisable Unexercisable Exercisable (a) Unexercisable S. Mort Zimmerman 32,000 (a) 180,000 -0- $210,600 Daniel A. Zimmerman 6,667 (a) 25,000 -0- $30,500 Edmund W. Bailey 6,666 (a) 30,000 -0- $36,600 Gabriel Prieto 6,667 (a) 10,000 -0- $12,200
(a) Market value of shares covered by in-the-money options on July 31, 1997 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. 21 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, 1997. Name and Address Amount and Nature of Percent of Beneficial Owner Class S. Mort Zimmerman 830,240 (1) 9.66% 13636 Neutron Road Dallas, Texas 75244-4410 (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, 1997: Name of Amount and Nature of Percent of Beneficial Owner Beneficial Ownership Class S. Mort Zimmerman 830,240 (1) 9.66% Chairman of the Board and President Daniel A. Zimmerman(5) 370,131 (2) 4.30% Sr. Vice President and Director Edmund W. Bailey 52,221 (3) .61% Vice President & Chief Financial Officer Fred M. Updegraff 76,073 (4) .88% Vice President Treasurer & Director All Officers & Directors, as a Group 1,352,999 15.73% (1)Includes (i) 212,000 shares subject to options owned by Mr. S. Mort Zimmerman; (ii) 82,888 shares of the 828,878 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. 22 Item 13. Certain Relationships and Related Transactions THE FOLLOWING IS A SUMMARY OF ADVANCES FROM/TO AFFILIATED COMPANIES AT JULY 31, 1997. 1997 1996 Refineries Consolidated Technology, Inc. $ - $ 415,000 Cooper Manufacturing Corporation 350,000 1,191,869 Others (369,824) (58,561) $(19,824) $1,548,308 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. ("RCT") and Cooper Manufacturing Corporation ("Cooper") approximately $1,028,000. 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 1997 the Company has provided a reserve for the entire receivable from RCT ($723,000) and also provided a reserve of $867,000 against the Cooper investment. The remaining $350,000 investment in Cooper represents the amount of cash the Company expects to receive from Cooper's Plan filed in the bankruptcy court. During 1994 the Company purchased equipment with a cost of approximately $47,000 and subsequently sold the equipment to an affiliated company for $200,000. A gain of approximately $153,000 was included in other income in 1994. During 1997 the Company repurchased the equipment from the affiliated company for its original price sold and subsequently sold the equipment to an unaffiliated company incurring a loss of $180,000. 23 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, 1997 and July 31, 1996. (iii) Consolidated Statements of Operations for the three years ended July 31, 1997. (iv) Consolidated Statements of Changes in Stockholders' Equity for the three years ended July 31, 1997. (v) Consolidated Statements of Cash Flows for the three years ended July 31, 1997. (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. 24 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. 10.37 Assets Purchase Agreement among New Logic Design Metals, Inc. of Chatham Enterprises Inc., of Chatham Technologies, Inc., Logic Design Metals, Inc. and Precision Techniques, Inc. and Electric & Gas Technology, Inc. Dated July 15, 1997. (b) Reports on form 8-K Current Report-Form 8-K filed August 27, 1997: Item 2.- Acquisition or Disposition of Assets. Sale of the assets of wholly owned subsidiary Logic Design Metals, Inc. 25 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 October 27, 1997 S. Mort Zimmerman /s/ Daniel A. Zimmerman Senior Vice President Daniel A. Zimmerman and Director October 27, 1997 /s/ Edmund W. Bailey Vice President, Chief Financial Edmund W. Bailey Officer and Director October 27, 1997 /s/ Fred M. Updegraff Vice President, Treasurer Fred M. Updegraff and Director October 27, 1997 /s/ Marie W. Pazol Secretary October 27, 1997 Marie W. Pazol 26 ELECTRIC & GAS TECHNOLOGY, INC. AND SUBSIDIARIES JULY 31, 1997 AND 1996 Page REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS 28 CONSOLIDATED FINANCIAL STATEMENTS CONSOLIDATED BALANCE SHEETS 29 CONSOLIDATED STATEMENTS OF OPERATIONS 30-31 CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY 32 CONSOLIDATED STATEMENTS OF CASH FLOWS 33-34 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 35-50 27 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, 1997 and 1996, 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, 1997. 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, 1997 and 1996, and the consolidated results of their operations and their cash flows for each of the three years in the period ended July 31, 1997, in conformity with generally accepted accounting principles. Jackson & Rhodes P.C. Dallas, Texas October 15, 1997 28 ELECTRIC & GAS TECHNOLOGY, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS July 31, ASSETS CURRENT ASSETS 1997 1996 Cash and cash equivalents $14,529,904 $ 879,110 Accounts receivable trade, less allowance for doubtful receivables of $4,889 in 1997 and $18,798 in 1996 2,125,914 2,334,334 Inventories 4,199,997 4,454,425 Prepaid expenses 152,370 54,812 Total current assets 21,008,185 7,722,681 PROPERTY, PLANT AND EQUIPMENT, net 3,211,611 3,634,258 OTHER ASSETS Discontinued operations - 1,069,973 Other assets 1,144,807 2,667,178 Total other assets 1,144,807 3,737,151 TOTAL ASSETS $25,364,603 $15,094,090 LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Notes payable $ 2,264,145 $ 3,040,997 Accounts payable 1,831,667 1,847,779 Accrued liabilities 1,425,794 650,200 Federal income taxes 323,705 - Current maturities oflong-term obligations 473,500 484,605 Total current liabilities 6,318,811 6,023,581 LONG-TERM OBLIGATIONS Long-term obligations, less current maturities 2,196,810 1,643,933 Other 724,859 705,646 Total long-term obligations 2,921,669 2,349,579 COMMITMENTS AND CONTINGENCIES - - MINORITY INTEREST IN SUBSIDIARY 83,004 - STOCKHOLDERS' EQUITY Preferred stock, $10 par value, 5,000,000 shares authorized, 90,000 issued and outstanding 900,000 900,000 Common stock, $.01 par value, 30,000,000 shares authorized, issued 8,275,444 and 8,250,416 in 1997 and 1996, respectively 82,504 82,504 Additional paid-in capital 10,099,338 10,201,334 Retained earnings (Deficit) 6,421,117 (2,941,282) Pension liability adjustment (329,805) (214,639) Cumulative translation adjustment (432,274) (430,870) 16,740,880 7,597,047 Less treasury stock, 219,792 and 274,792 shares in 1997 and 1996, at cost (699,761) (876,117) Total stockholders' equity 16,041,119 6,720,930 TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $25,364,603 $15,094,090
See accompanying notes. 29 ELECTRIC & GAS TECHNOLOGY, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS Years ended July 31, 1997 1996 1995 Sales $17,931,249 $18,799,831 $27,257,911 Cost of goods sold 12,885,088 13,520,199 19,141,514 Gross profit 5,046,161 5,279,632 8,116,397 Selling, general and administrative expenses 7,932,042 6,731,128 8,569,054 Operating profit (loss) (2,885,881) (1,451,496) (452,657) Other income and (expenses) Interest, net (664,375) (834,489) (615,693) Other (Note 2): Gain on sale of operating divisions - 577,336 1,094,743 Default on purchase obligation - (1,813,838) - Investment losses (1,590,755) (1,130,590) - Minority interest in subsidiary 18,063 - - Other (2,694) 47,511 136,771 (2,239,761) (3,154,070) 615,821 Earning (loss) from continuing operations before income tax (5,125,642) (4,605,566) 163,164 Provision (credit) for income taxes (213,372) - (54,896) Earnings (loss) from continuing operations (4,912,270) (4,605,566) 218,060 Discontinued operations (Note 2): Earnings (loss) from operations of discontinued metal fabrication segment 1,627,730 (426,985) 632,517 Gain on disposal of metal fabrication segment, net of $323,705 in tax 12,646,939 - - NET EARNINGS (LOSS) 9,362,399 (5,032,551) 850,577 Dividends on Preferred Stock (63,000) (39,353) - Net earnings or loss applicable to Common Stock $9,299,399 $(5,071,904) $ 850,577
See accompanying notes. 30 ELECTRIC & GAS TECHNOLOGY, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (CONTINUED) Years ended July 31, 1997 1996 1995 Earnings (loss) per common share: Primary: Continuing operations $(0.57) $(0.60) $0.03 Discontinued operations 1.64 (0.06) 0.08 Net earnings $ 1.07 $(0.66) $0.11 Fully diluted: Continuing operations $(0.54) $(0.60) $0.03 Discontinued operations 1.55 (0.06) 0.08 Net earnings $ 1.01 $(0.66) $0.11 Weighted average number of common shares outstanding 8,659,365 7,635,624 7,615,474 Fully dilutive 9,182,621 (1) N/A (1) Conversion of Preferred Stock is anti-dilutive.
See accompanying notes. 31 ELECTRIC & GAS TECHNOLOGY, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY Years ended July 31, 1997, 1996 and 1995 Retained Pension Preferred Common Paid-in (Deficit) liability Translation Treasury Stock Stock Capital Earnings adjustment adjustments Stock Total Balance at July 31, 1994 $ - $79,054 $9,843,734 $1,240,692 $(473,823) $(460,847) $(939,417) $9,289,393 Net loss for the year - - - 850,577 - - - 850,577 Pension liability adjustment - - - - 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 Net earnings for the year - - - 9,362,399 - - - 9,362,399 Pension liability adjustment - - - - (115,166) - - (115,166) Cumulative translation adjustments - - - - - (1,404) - (1,404) Treasury stock issued for bonuses - - (101,996) - - - 176,356 74,360 Balance at July 31, 1997 $900,000 $82,504 $10,099,338 $6,421,117 $(329,805) $(432,274) $(699,761) $16,041,119
See accompanying notes 32 ELECTRIC & GAS TECHNOLOGY, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS Years ended July 31, 1997 1996 1995 Increase (decrease) in cash: Cash flows from operating activities: Net earnings (loss) $9,362,399 $(5,032,551) $ 850,577 Adjustments to reconcile net earnings ( loss) to net cash provided by operating activities: Discontinued operations (1,627,730) 426,985 (632,517) Depreciation of property, plant and equipment 589,168 666,151 728,928 Issuance of stock for services 74,360 181,250 - Deferred income tax - - (75,345) Minority interest in subsidiary 83,004 - - Amortization of goodwill and patents 6,684 6,684 6,892 Treasury stock transferred for expenses - - 60,600 Gain on sale of business segment (12,646,939) - - Gain on sale of operating divisions - (577,336) (1,092,492) Deferred income (33,879) 61,066 - Losses on investments 1,590,755 2,797,948 - Changes in assets and liabilities: Accounts receivable 48,575 288,962 1,167,280 Inventories 254,428 590,168 (389,542) Prepaid expenses (235,971) 12,556 108,585 Other assets (75,068) 535,351 (610,202) Accounts payable (16,112) (421,073) (796,608) Accrued liabilities 775,594 (300,391) (457,768) Federal income taxes 323,705 - - Net cash provided by (used in) operating activities (1,527,027) (764,230) (1,131,612) Cash flows from investing activities: Proceeds from sale of property, plant and equipment 36,288 2,068,583 3,492,093 Purchase of property, plant and equipment (261,504) (181,643) (277,848) Proceeds on note receivable - 264,167 - Investments in affiliates - (681,869) - Proceeds on sale of business segment 20,828,385 - - Net cash provided by (used in) investing activities 20,603,169 1,469,238 3,214,245 Cash flows from financing activities: Proceeds from issuance oflong-term obligations 953,975 21,645 3,177,839 Issuance of common stock - 200,000 - Payments on long-term obligations (5,597,688) (630,798) (3,396,857) Purchase of treasury stock - - (17,500) Increase (decrease) in notes payable (776,852) (455,303) (1,467,232) Net cash provided by (used in) financing activities (5,420,565) (864,456) (1,703,750) Effect of exchange rate changes on cash (4,783) (6,293) 27,723 NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 13,650,794 (165,741) 406,606 Cash and cash equivalents - beginning of year 879,110 1,044,851 638,245 Cash and cash equivalents - end of year $14,529,904 $ 879,110 $1,044,851
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: 1997 1996 1995 Cash paid during the year for: Interest $824,451 $859,675 $793,558 Income tax $ - $5,771 $24,969
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. 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 incorporated Atmospheric and Magnetics Technology, Inc. ("AMT") on June 10, 1996 under the laws of the State of Texas. AMT which remain dormant during most of Fiscal 1997 was formed to undertake the Company's venture into the water industry. The Company presently is the owner of 100% of Retech, which currently owns 80% of ABI and the Company owns 91.5% of AMT and 100% of AMT, Reynolds, Hydel, SMI and Fridcorp, and, through such subsidiaries, operates in five distinct business segments: (1) production of atmospheric water, filtration and enhanced water products (AMT); (2) the manufacture and sale of natural gas measurement, metering and odorization equipment (Reynolds); (3) the manufacture and sale of electric meter enclosures and pole-line hardware for the electric utility industry and the general public (Hydel and Retech); (4) the design and manufacture of defense electronic components (SMI); and (5) the manufacture of vacuum-form and injection-mold products (Fridcorp). The entrance into the Water Industry will be the major focus for the future development and growth on the Company. Effective July 31, 1997, the Company discontinued the operations of its metal fabrication segment which previously was engaged in the manufacture and sale of precision metal enclosures for telecommunication and computer equipment (Logic). 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. 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 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 1996 and 1995 consolidated financial statements to conform to the 1997 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 its metal fabrication segment effective July 31, 1997 (Logic and Precision), accordingly, the financial statements have been reclassified to reflect this segment as a discontinued operation. Proceeds from the sale amounted to approximately $20,850,000 with a corresponding gain of approximately $12,650,000. Sales, cost of goods sold, selling, general and administrative expense and other were as follows: 1997 1996 1995 Sales $17,012,935 $15,168,121 $14,105,717 Cost of goods sold 12,645,313 12,815,178 11,774,092 Selling, general and administrative 2,048,470 2,118,827 1,512,980 Other 691,422 661,101 186,128 Discontinued operations $ 1,627,730 $ (426,985) $ 632,517
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 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,: 1997 1996 1995 Sales: Test Switch $ - $573,000 $1,906,000 U.S. Meter Socket $ - $ - $5,179,000 Heating $ - $ - $2,262,000 Cost of goods sold: Test Switch $ - $487,000 $942,000 U.S. Meter Socket $ - $ - $4,241,000 Heating $ - $ - $1,543,000 Selling, general and administrative: Test Switch $ - $229,000 $296,000 U.S. Meter Socket $ - $ - $589,000 Heating $ - $ - $82,000 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. Logic and precision were sold effective July 31, 1997 (see above). 37 ELECTRIC & GAS TECHNOLOGY, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 2 DISPOSITIONS AND ACQUISITIONS (Continued) 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. 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. 3 INVENTORIES Inventories consisted of the following at July 31,: 1997 1996 Raw materials $2,036,183 $2,225,974 Work-in-process 460,037 620,462 Finished goods 1,703,777 1,607,989 $4,199,997 $4,454,425 4 PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment consisted of the following at July 31,: 1997 1996 Land $ 307,993 $ 308,096 Buildings and improvements 2,897,723 2,878,601 Machinery and equipment 4,353,170 4,585,696 Furniture, fixtures & equipment 299,391 268,176 7,858,277 8,040,569 Less accumulated depreciation (4,646,666) (4,406,311) $3,211,611 $3,634,258 38 ELECTRIC & GAS TECHNOLOGY, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 5 OTHER ASSETS Other assets consisted of the following at July 31,: 1997 1996 Investments and advances (Notes 10 and 13) $ 350,000 $ 1,606,869 Note receivable 231,400 285,000 Investment in equity securities 216,026 216,026 Intangible pension asset 144,203 170,723 Deferred debt issue costs 41,718 260,816 Goodwill, net 120,949 127,633 Patents 174,177 - Due from (to) affiliates (Note 13) (369,824) (58,561) Deposits and other assets 3,112 33,454 Land held for resale 19,674 19,674 Deferred tax asset 213,372 - Research and development equipment - 5,544 $1,144,807 $2,667,178 6 NOTES PAYABLE Notes payable consisted of the following at July 31,: 1997 1996 Note payable, CIT (a) $ 631,788 $ 814,686 Note payable, bank (b) 450,000 450,000 Note payable, bank (c) 1,046,027 1,776,311 Note payable, bank 136,330 - $2,264,145 $3,040,997 (a) Part of a $5,000,000 Revolving credit and term facility with The CIT Group Credit/Finance, Inc. (CIT) due November 1999. Interest due monthly at 2.75% above prime. 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 promissory note as of July 31, 1997 and 1996, due November 30, 1997. Interest due monthly at 10.25%. The note is secured by a $450,000 certificate of deposit of the Company. (c) Note payable, bank, consists of a line of credit with a maximum loan amount of $1,560,000, 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. 40 ELECTRIC & GAS TECHNOLOGY, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 6 NOTES PAYABLE (Continued) Information relating to short-term borrowing is as follows: 1997 1996 Balance at end of year $2,264,145 $3,040,997 Maximum borrowing $3,000,626 $3,769,605 Average balance $2,602,730 $3,234,653 Average effective interest rate 11.5% 10.8% 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. 7 LONG-TERM OBLIGATIONS Long-term obligations consist of the following at July 31,: 1997 1996 Term loan payable to The CIT Group Credit/Finance, Inc. (CIT) under a $5,000,000 credit facility (See note 6), due in monthly installments of $20,258, plus interest at prime plus 2.75%. 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. $ 767,902 $ 412,275 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. 961,306 76,676 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. 217,252 256,941 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 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
40 ELECTRIC & GAS TECHNOLOGY, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 7 LONG-TERM OBLIGATIONS (Continued) 1997 1996 Note payable to a bank, bearing interest at 8.75%, in monthly principal installments of $7,300 until March 1998, $8,000 until March 1999 and $8.750 until August 2002, secured by machinery and equipment and land and building 510,682 - Various other installment notes and capitalized lease obligations. 213,168 343,287 2,670,310 2,128,538 Less current maturities (473,500) (484,605) $ 2,196,810 $1,643,933
The prime rate was 8.25% and 8.50% at July 31, 1997 and 1996, respectively. The aggregate annual principal payments are as follows: Year Ending July 31, 1998 $473,500 1999 452,619 2000 459,492 2001 230,148 2002 175,990 Thereafter 878,561 8 ACCRUED LIABILITIES Accrued liabilities consisted of the following at July 31: 1997 1996 Payroll $1,014,105 $ 324,616 Commissions 24,718 12,758 Pension plan (124,943) (81,590) Vacation pay 135,893 154,469 Taxes 224,391 72,197 Interest - 2,910 Miscellaneous 151,630 164,840 $1,425,794 $650,200 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, 1997, 1996 and 1995, was $285,272, $276,873 and $527,881, respectively, consisting primarily of minimum rentals. Litigation: The former manufacturers representative of Logic, Ammon & Rizos Co, has filed a suit against the Company, the Company's chairman of the board, Logic, and New Logic Design Metals, Inc. ("New Logic")(the purchaser of the assets) for unpaid fees, assumed by New Logic and a previous adjustment in prior fees plus prospective fees from New Logic's sales. The case is in early stages of discovery; management believes there will be no material effect on the Company. Allied Products Co has sued the Company under the Preferred Stock issued by the Company in connection with its investment in Cooper Manufacturing Corporation ("Cooper") and the rights pertaining thereto. The suit was filed in the Eastern District of Illinois (Chicago) and currently, all activity is directed at jurisdictional issues. The ultimate resolution of this case will depend in part upon the outcome of the Cooper bankruptcy case which will shortly be voting on a Plan of Reorganization. The Company reserved its investment at July 31, 1997 to $350,000, the anticipated cash payment under the debtor's Plan. Management does not believe that this suit will have any further material effect on the Company. American Brass, Inc. (ABI) discontinued its operation in January 1993 and was 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. 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. 42 ELECTRIC & GAS TECHNOLOGY, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 9 COMMITMENTS AND CONTINGENCIES (Continued) The Company sells a broad range of products to the electric and gas utility industries and the defense 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. 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 $2.00 per share which if sold at that price would require 450,000 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, 1997 amounted to $102,353 with additional dividends accruing of $15,879 on September 30, 1997. 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 a portion of 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 $350,000 remains due from Cooper and is included in other assets in the accompanying balance sheet. The debtor's Plan of reorganization is about to be voted upon. 43 ELECTRIC & GAS TECHNOLOGY, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 10 STOCKHOLDERS' EQUITY (Continued) 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 55,000 shares of its treasury stock with a basis of $3.19 per share to key management employees as additional consideration. The market value of the common stock was $1.35 per share, accordingly, $74,360 was recorded as an expense and $101,996 reduced additional paid-in capital. 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 a financial consulting agreement entered into on July 28, 1997, the Company has issued warrants to an investment banking firm to purchase 150,000 and 300,000 shares of the common stock at $2.00 and $2.30 per share, respectively. The warrants are protected against dilution and expire July 31, 2001 and September 15, 2001, respectively. The warrants contain piggyback registration rights and the agreement allows the warrants holders to request registration of the warrants, if unregistered, between January 1, 1999 and July 31, 2002. The Company has not recorded any expense relating to the warrants since the exercise price exceeded the market price at the date of issuance. 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. 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,: 1997 1996 1995 Service cost $ - $ - $ - Interest cost 135,845 130,347 127,781 Actual return on assets held for the plan (202,965) (107,462) (83,194) Net amortization of prior service cost, transition liability and net gain 115,511 43,540 53,872 Pension expense $ 48,391 $ 66,425 $ 98,459
44 ELECTRIC & GAS TECHNOLOGY, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 11 BENEFIT PLANS (Continued) The following sets forth the funded status of the plans and the amounts shown in the accompanying consolidated balance sheets at July 31,: 1997 1996 Pension benefit obligations Vested $799,093 $1,684,683 Non-vested 14,143 16,995 Projected benefit obligation 813,236 1,701,678 Fair value of assets held in plan 479,652 1,410,122 Unfunded excess of projected benefit obligation over plan assets $333,584 $ 291,556 Unrecognized net transition obligation $ 48,473 $ 60,592 Unrecognized prior service costs 95,730 110,131 Unrecognized net loss 329,805 214,639 Pension (asset) liability recognized (140,424) (93,806) Accrued pension liability $333,584 $ 291,556
The Company purchased approximately $1,161,000 in annuities for all those individuals who were currently receiving retirement benefits during 1997. 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 $474,008 and $385,362, intangible assets of $144,203 and $170,723 and a stockholders' equity reduction of $329,805 and $214,639 as of July 31, 1997 and 1996, 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. 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 8.25% and 8.5% at July 31, 1997 and 1996, 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, 1997, 1996 and 1995 were $78,237, $38,588 and $60,524, respectively. The Company has an Incentive Stock Option Plan. 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. The Plan provides for 400,000 shares of common stock. 46 ELECTRIC & GAS TECHNOLOGY, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 11 BENEFIT PLANS (Continued) Following is a summary of options under the plan as of and for the years ended July 31,: 1997 1996 1995 Options outstanding at beginning of year 394,999 394,999 394,999 Granted 290,000 - - Terminated (332,999) - - Exercised - - - Options outstanding at end of year 352,000 394,999 394,999 Options exercisable at end of year 62,000 333,000 333,000 Exercise price per share $.50 to $2.50 to $2.50 to $2.75 $4.68 $4.68
The Financial Accounting Standards Board issued SFAS 123, "Accounting for Stock-Based Compensation ." SFAS 123 defines a fair value based method of accounting for an employee stock option or similar equity instrument. Under the fair value based method, compensation cost is measured at the grant date based on the value of the award. However, an entity may continue to measure compensation cost for those plans using the intrinsic value based method of accounting prescribed by APB Opinion No. 25, "Accounting for Stock Issued to Employees." Under the intrinsic value based method, compensation cost is the excess, if any, of the quoted market price of the stock at the grant date or other measurement date over the amount an employee must pay to acquire the stock. The Company has elected to retain the accounting in Opinion 25, accordingly there were no expenses for the year ended July 31, 1997. Pro forma disclosure for the fiscal year ended July 31, 1997 are as follows: Pro forma net income $9,190,148 Pro forma net income per share $1.09 Pro forma net income attributable to common shareholders $9,227,148 Pro forma net income per share $1.09 The fair value of the award was estimated at the grant date using a Black-Scholes option pricing model with the following weighted average assumptions for 1997: risk-free interest rate of 5.64%; volatility factor of 82%; and an expected life of the award of two years. The weighted average fair value of stock options for the year ended July 31, 1997 was $.25. 46 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,: 1997 1996 1995 Expected provision (benefit) for federal income taxes $3,220,000 $(1,711,000) $270,532 Expected provision for state income taxes 474,000 - - Canadian income tax (benefit) - - (54,896) Utilization of tax loss carryforward (3,583,667) (61,000) (270,532) Unavailable loss carrybacks - 1,772,000 - Income taxes (benefit) $ 110,333 $ - $(54,896)
The Company files a consolidated tax return with its U.S. subsidiaries. Income tax expense (benefit) is reported as follows for the years ended July 31,: 1997 1996 1995 Income from continuing operations $(213,372) $ - $ - Gain on sale of discontinued metal fabrication segment 323,705 - - $110,333 $ - $ - Income tax expense (benefit) consisted of the following: Current $323,705 $ - $ 20,449 Deferred (213,372) - (75,345) $110,333 $ - $(54,896)
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 (assets) liability included in the balance sheet are as follows at July 31,: 1997 1996 Depreciation - U. S. $ 68,640 $ 283,000 Accrued liabilities and deferred income - (110,200) Provision for losses (282,012) (886,052) Operating and capital loss carryforwards - (2,035,900) Deferred tax asset valuation allowance - 2,749,152 $ (213,372) $ -
47 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,: 1997 1996 Refineries Consolidated Technology, Inc. $ - $ 415,000 Cooper Manufacturing Corporation 350,000 1,191,869 Others (369,824) (58,561) $ (19,824) $1,548,308 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. ("RCT") and Cooper Manufacturing Corporation ("Cooper") approximately $1,028,000. 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 1997 the Company has provided a reserve for the entire receivable from RCT ($723,000) and also provided a reserve of $867,000 against the Cooper investment. The remaining $350,000 investment in Cooper represents the amount of cash the Company expects to receive from Cooper's Plan filed in the bankruptcy court. During 1994 the Company purchased equipment with a cost of approximately $47,000 and subsequently sold the equipment to an affiliated company for $200,000. A gain of approximately $153,000 was included in other income in 1994. During 1997 the Company repurchased the equipment from the affiliated company for its original price sold and subsequently sold the equipment to an unaffiliated company incurring a loss of $180,000. 14 SEGMENT INFORMATION Industrial Segments The Company operates principally in five industries: Water, gas, electric, defense electronics and plastics. Operations in the water industry involve the production of atmospheric water, filtration and enhanced water products. Operations in the gas industry involve the development, manufacture, and sale of gas meters and measurement equipment. 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 plastics industry include the manufacture and sale of vacuum-form and injection-mold products. The Company's former segment, metal fabrication has been treated as a discontinued operation. Following is a summary of segment information for the years ended July 31,: 1997 1996 1995 Sales to unaffiliated customers: Water $ 75,234 $ - $ - Gas 3,135,249 2,935,326 3,143,711 Electric 7,744,912 7,575,126 16,167,174 Defense electronics 5,799,455 7,013,706 6,577,333 Plastics 1,176,399 1,275,673 1,369,693 $17,931,249 $18,799,831 $27,257,911
49 ELECTRIC & GAS TECHNOLOGY, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 14 SEGMENT INFORMATION (Continued) 1997 1996 1995 Operating income (loss): Water $ (212,742) $ - $ - Gas 40,784 (646,568) 75,643 Electric 161,043 324,602 659,788 Defense electronics (1,212,197) (279,348) (95,196) Plastics (2,242) 48,451 (25,483) (1,225,354) (552,863) 614,752 General corporate expenses (1,660,527) (898,633) (1,067,409) Other income (expense), net (2,239,761) (3,154,070) 615,821 Earnings (loss) from continuing operations before income taxes $(5,125,642) $(4,605,566) $ 163,164 Identifiable assets: Water $ 954,690 $ - $ - Gas 1,882,753 2,198,034 2,493,657 Electric 4,828,751 4,648,198 8,596,181 Defense electronics 2,140,005 3,581,838 3,974,844 Plastics 681,089 655,493 788,769 10,487,288 11,083,563 15,853,451 General corporate assets 14,877,315 4,010,527 4,482,643 Total assets $25,364,603 $15,094,090 $20,336,094 Capital expenditures: Water $ 7,670 $ - $ - Gas 28,960 63,900 176,724 Electric 66,095 31,931 54,594 Defense electronics 126,491 63,243 250,672 Plastics 28,889 19,614 53,756 General corporate 3,399 2,955 - $261,504 $181,643 $535,746 Depreciation and amortization: Water $ 2,131 $ - $ - Gas 155,346 188,745 162,622 Electric 133,054 150,007 200,693 Defense electronics 263,029 296,767 294,239 Plastics 23,317 21,621 62,568 General corporate 12,291 15,695 15,698 $589,168 $672,835 $735,820
49 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 $4,839,000, $4,385,000 and $5,490,000 in sales for the year ended July 31, 1997, 1996 and 1995, respectively. Geographic information Financial data by geographic area for the years ended July 31,: 1997 Operating (loss) Identifiable Sales Income Assets United States $10,186,337 $(1,582,783) $ 6,445,677 Canada 7,744,912 357,429 4,041,611 Total $17,931,249 $(1,225,354) $10,487,288 1996 United States $11,797,246 $(918,626) $ 7,131,398 Canada 7,002,585 365,763 3,952,165 Total $18,799,831 $(552,863) $11,083,563
15 FOURTH QUARTER RESULTS During the fourth quarter of fiscal 1997 and 1996, the Company recorded the following adjustments which are unusual and non- recurring in nature: For fiscal 1997; (i) provided a reserve of $867,000 against the Company's investment in Cooper (See Note 13); (ii) provided a reserve of $723,000 against the Company's receivable from RCT (See Note 13); and (iii) provided a reserve of $457,800 against inventory obsolescence at SMI. 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. 50
EX-27 2
5 12-MOS JUL-31-1997 JUL-31-1997 14,529,904 0 2,130,803 4,889 4,199,997 21,008,185 7,858,277 4,646,666 25,364,603 6,318,811 0 0 900,000 82,504 15,058,615 25,364,603 17,931,249 17,931,249 12,885,088 20,817,130 2,239,761 1,590,755 664,375 (5,125,642) (213,372) (4,912,270) 1,627,730 0 0 9,362,399 1.07 1.01
EX-27 3
5 12-MOS JUL-31-1996 JUL-31-1996 879,110 0 2,353,132 18,798 4,454,425 7,722,681 8,040,569 4,406,311 15,094,090 6,023,581 0 0 900,000 82,504 5,738,426 15,094,090 18,799,831 18,799,831 13,520,199 20,251,327 3,154,070 1,130,590 834,489 (4,605,566) 0 (4,605,566) (426,985) 0 0 (5,032,551) (.66) (.66)
EX-27 4
5 12-MOS JUL-31-1995 JUL-31-1995 1,044,851 0 3,254,729 163,317 6,389,107 11,276,769 8,872,473 4,827,679 20,336,094 7,393,465 0 0 0 79,054 10,348,807 20,336,094 27,257,911 27,257,911 19,141,514 27,710,568 (615,821) 0 615,693 163,164 (54,896) 218,060 632,517 0 0 850,577 .11 .11
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