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 and Logic were 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". Fridcorp Plastics, Inc. ("Fridcorp") was acquired by the Company in January, 1992, in exchange for 162,000 shares of Company Common Stock. Fridcorp was subsequently sold December 1997. 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 Reynolds and Hydel and owns 91.5% of AMT and, through such subsidiaries, operates in three 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); and (3) the manufacture and sale of electric meter enclosures and pole-line hardware for the electric utility industry and the general public (Hydel). Effective October 1, 1997, the Company made a decision to sell its defense electronics business segment and such operations has been treated as discontinued operation. Effective July 31, 1997, the Company sold and 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 75244-4410. Its telephone number is (972) 934-8797 and its facsimile number is (972) 991-3265.
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, 2001
July 31, 2000
July 31,1999
Revenue
Water
$ 152,441
$ 4,241
$ 2,000
Gas
3,449,128
2,510,286
2,917,327
Electric
7,659,606
8,761,677
8,397,007
Operating Income (Loss):
Water
$ (70,300)
$ (73,128)
$ (631,977)
Gas
121,214
(112,366)
(228,308)
Electric
266,350
225,339
236,133
Identifiable Assets:
Water
$ 68,714
$ 300,079
$ 283,480
Gas
1,861,253
1,732,599
1,884,695
Electric
4,235,692
4,229,757
4,302,129
Corporate
4,364,535
6,578,681
7,001,986
Geographic information
Financial data by geographic area for the fiscal year ended July 31, 2001 are as follows:
Operating
Identifiable
Sales
(loss)Income
Assets
United States
$ 3,601,569
$ (19,841)
$2,377,077
Canada
7,659,606
337,105
3,788,582
Total
$11,261,175
$317,264
$6,165,659
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.
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."
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's potential customers will include commercial sales (Hotels, Professionals, Schools, Clinics, etc.), industrial sales (Mining, Offshore Oil Drilling, Manufacturing, etc.) and consumer's sales (Health Food Stores, Health Clubs, General Food Channels, etc.) domestically and internationally.
Competition. AMT's atmospheric technology competes with similar products and 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.
Marketing
Emphasis on marketing will concentrate its efforts on the "Watermaker" products upon completion of further testing and design modifications.
Employees
As of July 31, 2001 this segment had no employees and has been conducting its preliminary work through the use of consultants. 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 Retech in exchange for common stock of the Company and later transferred direct ownership to the Company. Reynolds maintains its principal offices at 410 Kirby Street, Garland, Texas 75042.
Products
Reynolds manufactures equipment used in the natural gas industry. Its principal products known as "RECOR" are electronic pressure, temperature and volumetric instrumentation and accessories peripheral to gas measurement. Reynolds continues to produce its traditional line of mechanical instrumentation including pressure, temperature and volumetric recording and indicating devices. In addition, Reynolds provides engineering and equipment used to accomplish the odorization of natural gas. Reynolds is currently under a contract with Niagara Mohawk Power to develop an affordable accurate BTU gas measuring device. The proto-type meter continues to be field-tested.
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, in-house sales, 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 29 persons, including 1 company officer and 6 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.
Electric (Hydel)
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. 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.
Products
Hydel. Hydel operates two industrial facilities, one located within metropolitan Toronto, Ontario and the other in Welland, Ontario. The Welland facility primarily manufactures the pole line hardware and subcontracts manufacturing and assembly for a local company. The Scarborough plant manufactures a full line of proprietary metal cabinets and other metal enclosures, electric meter sockets and industrial safety switches. Hydel's products are approved by the Canadian Standards Association which is the Canadian equivalent of U. L.
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.
Customers-Hydel. Hydel sells its electric utility supply products to utilities and others in Canada.
Competition-Hydel. Hydel faces 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 Slater/Tridem, Joslyn and A.B. Chance.
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.
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.
Employees
Hydel. Hydel currently employs 55 persons, including 15 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.
Discontinued operations-Defense electronics (SMI)
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. SMI manufactured and sold defense electronic components. Effective October 1, 1997, the Company made a determination to sell the business, accordingly the defense electronics segment has been treated as a discontinued operation.
ITEM 2.
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 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.
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.
Item 3.
Item 3. Legal Proceedings.
Unites States of America, Plaintiff Vs Commercial Technology, Inc., et.al., Defendant in the United States District Court, Northern District of Texas. Case number 3-99-CV-2668-X. Plaintiff brought an action to collect on a defective judgment to force the sale of an office building, which was acquired from the defendant by ELGT in 1987. The court has ruled that the transaction the Government relied upon to enforce the judgment was not a debt and was therefore not entitled to relief under the Act; and that they are not entitled to a judicial sale of the property. The Government's only further action was under the Texas Fraudulent Conveyance. A jury trial was held between March 26 and April 6, 2001. The court granted a motion as to the Company and dismissed all claims. However, a unanimous verdict was returned in favor of the Plaintiff on April 6, 2001 finding that Commercial Technology, Inc. ("Comtec") transferred a piece of real property to the Company in violation of the Texas Uniform Fraudulent Transfer Act ("Act"). Commercial Technology, Inc. and the Company filed on April 27, 2001 a renewed motion for judgment as a matter of law, or, alternatively, for a new trial. Such motion will show that the real property is not an asset under the Act, the Company's Hypothecation Agreement operates as a deed and therefore the Company acquired equitable title and/or is entitled to subrogation. The Company's appeal is currently on hold pending Comtec's filing of a Chapter 11 bankruptcy proceeding on July 3, 2001. CIT Group Credit Finance, Inc. ("CIT") holds what bankruptcy counsel believes is a secured lien on the building as a result of their loans to the Company. The Company has offered to purchase the building with the bulk of the proceeds going to satisfy the CIT obligation. ELGT will vigorously defend its position.
Item 4.
Item 4. Submission of Matters to a Vote of Security Holders.
(a) Annual meeting of stockholders, March 16, 2001.
(b) Not applicable.
(c) Not applicable.
PART II
Item 5.
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 Bulletin Board 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, 1998 (Retroactively restated for a 3 for 4 reverse stock split effective June 13, 2001), 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.
No dividend has been paid on the Common Stock by the Company and payment of dividends in the foreseeable future is not anticipated.
As of July 31, 2001 there were 426 holders of record of the Common Stock of the Company, exclusive of beneficial ownership through brokerage firm nominee name.
Item 6.
Item 6. Selected Financial Data.
STATEMENT OF OPERATIONS DATA:
* Retroactively restated for a 3 for 4 reverse stock split effective June 13, 2001.
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:
Item 7.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.
Background
The Company, through its subsidiaries, operates within three 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; and (iii) the manufacture and sale of metal enclosures and other electrical equipment for use in the electric utility industry.
Results of Operations
The discussion below relates to the Company's operations during the fiscal years ended July 31, 2001, 2000 and 1999.
Summary. The Company reported net (loss) earnings from continuing operations of $(2,124,676), $166,262 and $(4,803,436) and net (loss) earnings of $(2,124,676), $166,262 and $(6,353,436) for fiscal years 2001, 2000 and 1999, respectively. During fiscal 2001, the net loss was primarily the result of losses in evaluating the value of investments of $(1,191,425). The substantial net loss during fiscal 1999 was primarily the result of fully reserving the Company's investment in Afritel, writing off the remaining receivable from Refinery Consolidated Technology, Inc. and inventory and patents write offs in the water segment. The Company's discontinued defense segment was adjusted downward by $1,550,000 reflecting the net realizable value.
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:
Water revenues amounted to $152,441, $4,241 and $2,000 in 2001, 2000 and 1999, respectively which were essentially sales of a few demonstrators of this segment's "Watermaker" product. Expenses were $222,741, $77,369 and $633,977 in 2001, 2000 and 1999, respectively, included development of a business plan, testing and development of a new watermaker model and marketing expenses. During fiscal 1999 inventory of the original model watermaker and related parts were fully reserved and expired patents were written off. The Company has not found a qualified acquisition nor joint venture partner candidate, but continues to seek interested parties in further development and marketing of the products.
Gas revenues increased (decreased) by $938,842, $(407,041) and $178,292 or 37.40%, (13.95)% and 6.51% in fiscal 2001, 2000 and 1999, respectively. Operating income (loss) was $121,214, $(112,366) and $(228,308) for fiscal 2001, 2000 and 1999, respectively. Sales, including operating profits improved due to expanded marketing and in-house direst sales. Declining sales from competitive pricing during fiscal 2000 resulted in lower margins to cover administrative and engineering costs. The 1999 loss resulted from inventory adjustments, product development expenses and higher staffing levels related to the Mohawk Niagara BTU meter development.
Electric revenues after successive years of increases, declined significantly in 2001 by $(1,102,071). Revenues increased slightly by $364,670 and $245,044 during 2000 and 1999, respectively. This decline is attributed to prior years demand for Y2K contingency purchases and a large winter storm that effect Canada in 1999. However, in spite of the changes in sales, operating income increased (decreased) by $41,011, $(10,794) and $(56,402) for fiscal 2001, 2000 and 1999, respectively. The continued improvement in operating income was provided by improved operating margins and reduced cost associated with the U.S. former employees of Retech's pension plan costs that amounted to approximately $130,000 during fiscal 2000. Also, the decrease in the 1999 operating profits were the result of an additional charge to adjust the carrying value of the idle Paris, Texas facility which was sold on June 30, 2000 and some inventory obsolescence in Canada.
Gross profit margins were 20.00%, 17.50% and 18.26% for fiscal 2001, 2000 and 1999, with selling, general and administrative expenses as a percentage of sales for the same period of 16.52%, 14.93% and 15.45%, respectively. Improved margins during fiscal 2001 were partially offset by higher selling, general and administrative cost as a percentage of lower sales dollars from which the percentage is calculated. The decline in 1999 margins result from the aforementioned adjustments.
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 74.85%, 78.20% and 82.89% for the years ended July 31, 2001, 2000 and 1999, respectively. Selling, general and administrative expenses as a percentage of revenues were 22.34%, 21.44% and 22.62% for the years ended July 31, 2001, 2000 and 1999, respectively. Selling, general and administrative expenses increased as a percentage of sales due to reduced sales in the electric segment and increases in corporate overhead.
Liquidity and Capital Resources
Liquidity. Cash flow used by operating activities amounted to $(138,793), $(931,676) and $(755,771) for fiscal years 2001, 2000 and 1999, respectively. Operating cash flow has been supplemented by cash made available from the proceeds on the sale of the various segments and operating divisions.
Current assets of the Company totaled $5,533,564 at July 31, 2001, down from current assets of $7,285,867 at July 31, 2000. Current liabilities decreased from fiscal 2000 to fiscal 2001 by $(320,998), resulting in a decrease in working capital (current assets less current liabilities) to $3,036,631 at July 31, 2000, from $4,467,936, a decrease of (32.04%). This decrease was the result of utilization of cash and short-term investments in operations. 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 $1,400,000. 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. The agreement was modified and extended to $3,500,000 and November 2001, respectively. 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 $23,081 in term debt and $315,833 in revolving debt at July 31, 2001.
Capital Expenditures
The Company purchased a Finn-Power turret press for its electrical segment for approximately $450,000 and other equipment consisting of normal asset acquisitions and replacement totaling $576,807, $120,185 and $169,155 during fiscal 2001, 2000 and 1999, 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, amounted to $228,353 as of July 31, 1999. The stock was retired effective July 31, 2000 at par plus $209,476 which was applied as a dividend to retained earnings.
Other Business Matters
Accounting for Post-Retirement Benefits. The Company provides no post-retirement benefits; therefore, FASB No. 106 will have no impact on the Company's financial position or result of operations.
Inflation. The Company does not expect the current effects of inflation to have any effect on its operations in the foreseeable future. The largest single impact effecting the Company's overall operations is the general state of the economy and principally the home construction sector.
Information regarding and factors affecting forward looking statements. Forward-looking statements include statements concerning plans, objectives, goals, strategies, future events or performances and underlying assumption and other statements which are other than statements of historical facts. Certain statements contained herein are forward-looking statements and, accordingly, involve risks and uncertainties which could cause actual results or outcomes to differ materially from those expressed in the forward-looking statements. The Company's expectations, beliefs and projections are expressed in good faith and are believed by the Company to have a reasonable basis, including without limitations, management's examination of historical operating trends, data contained in the Company's records and other data available from third parties, but there can be no assurance that management's expectations, beliefs or projections will result, or be achieved, or accomplished.
Item 8.
Item 8. Financial Statements and Supplementary Data.
Information required by this item appears in the Consolidated Financial Statements and Auditors' Report of Electric & Gas Technology, Inc. and Subsidiaries for July 31, 2001, 2000, and 1999 as listed under Item 14.
Item 9.
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.
Item 10. Directors and Executive Officers of Registrant
(a) During fiscal year ended July 31, 2001, the following persons served as directors of Registrant:
Shares
Director
Beneficially
(%) of
Name and Age
Position
Since
Owned
Outstanding
S. Mort Zimmerman (74)
Chairman of the Board,
686,980
10.93%
President and Director
Daniel A. Zimmerman (40)
Sr. Vice President
293,036
4.66%
and Director
Edmund W. Bailey (59)
Vice President, Chief
47,105
0.75%
Financial Officer and
Director
Fred M. Updegraff (67)
Vice President,
69,683
1.11%
Treasurer and Director
James J. Ling (78)
Director
-
-
Dallas Talley (67)
Director
-
-
S. Mort Zimmerman and Daniel A. Zimmerman are father and son.
(b) Executive Officers:
The Executive Officers of Registrant are:
See (a) above.
Marie W. Pazol, Secretary
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. 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 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.
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.
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.
Dallas Talley: Mr. Talley is Chairman and President, of Capacitive Deionization Technology Systems, Inc. and has over twenty-five years of high tech senior executive experience. He has been CEO of New York Stock Exchange and NASDAQ companies including Qantel Business Computers, Televideo Systems and Zentec Corp. He has also been founder director of several emerging companies. Mr. Talley was Managing Partner of an international technology development group specializing in technology transfers in Asia Pacific, Europe and selected developing nations. He served on the Board of Directors of the American Electronics Association (AEA) from 1984 to 1989 and served as Chairman of AEA's Silicon Valley Chapter.
Item 11.
Item 11. Executive Compensation
Summary Compensation Table
S. Mort Zimmerman-President and Chairman of the Board.
Daniel A. Zimmerman-Senior Vice President.
Edmund W. Bailey-Vice President and Chief Financial Officer.
(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 2001 and 2000, respectively.
(b) Expense allowances.
(c) Company match of 401 (K) employee contributions and expense allowances.
(d) Company match of 401 (K) employee contributions.
1999 Stock Option Grants
NONE
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, 2001 and the aggregate gains that would have been realized had these options been exercised on July 31, 2001, even though these options were not exercised, and the unexercisable options could not have been exercised, on July 31, 2001.
(a) Market value of shares covered by in-the-money options on July 31, 2001 less option exercise price. Options are in-the-money if the market value of the shares covered thereby is greater than the option exercise price.
Item 12.
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, 2001.
Name and Address
Amount and Nature of
Percent of
Beneficial Owner
Class
S. Mort Zimmerman
686,980 (1)
10.93%
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, 2001:
Amount and Nature of
Percent of
Name of Beneficial Owner
Beneficial Ownership
Class
S. Mort Zimmerman
686,980 (1)
10.93%
Chairman of the Board and President
Amount and Nature of
Percent of
Name of Beneficial Owner
Beneficial Ownership
Class
Daniel A. Zimmerman(4)
293,036 (2)
4.66%
Sr. Vice President and Director
Edmund W. Bailey
47,105 (3)
.75%
Vice President, CFO and Director
Fred M. Updegraff
69,683
1.11%
Vice President Treasurer and Director
All Officers and Directors, as a Group
1,112,367
17.70%
(1) Includes (i) 3,155 shares subject to options owned by Mr. S. Mort Zimmerman; (ii) 62,166 shares of the 621,659 shares owned beneficially and of record by Trans-Exchange Corporation, in which Mr. S. Mort Zimmerman has a 10% beneficial interest; and (iii) 23,572 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 18,750 shares subject to options owned by Mr. Zimmerman.
(3) Includes 22,500 shares subject to options owned by Mr. Bailey.
(4) S. Mort Zimmerman and Daniel A. Zimmerman are father and son.
Item 13.
Item 13. Certain Relationships and Related Transactions
THE FOLLOWING IS A SUMMARY OF ADVANCES FROM/TO AFFILIATED COMPANIES AT JULY 31, 2001:
Interfederal Capital, Inc.
$298,305
$296,653
Others
108,214
3,669
$406,519
$300,322
The Company had advanced funds 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"). RCT ceased operations and the balance due from RCT was written off during fiscal 1999.
PART IV
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 9, 2001
S. Mort Zimmerman
/s/ Daniel A. Zimmerman
Senior Vice President
October 9, 2001
Daniel A. Zimmerman
and Director
/s/ Edmund W. Bailey
Vice President, Chief Financial
October 9, 2001
Edmund W. Bailey
Officer and Director
/s/ Fred M. Updegraff
Vice President, Treasurer
October 9, 2001
Fred M. Updegraff
and Director
/s/ Marie W. Pazol
Secretary
October 9, 2001
Marie W. Pazol
ELECTRIC & GAS TECHNOLOGY, INC.
AND SUBSIDIARIES
JULY 31, 2001 AND 2000
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, 2001 and 2000, 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, 2001. 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, 2001 and 2000, and the consolidated results of their operations and their cash flows for each of the three years in the period ended July 31, 2001, in conformity with generally accepted accounting principles.
Jackson & Rhodes P.C.
Dallas, Texas
September 28, 2001
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 and Logic were 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". Fridcorp Plastics, Inc. ("Fridcorp") was acquired by the Company in January, 1992, in exchange for 162,000 shares of Company Common Stock. Fridcorp was subsequently sold December 1997. 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 remained dormant during most of Fiscal 1997 was formed to undertake the Company's venture into the water industry.
SUMMARY OF ACCOUNTING POLICIES (CONTINUED)
The Company presently is the owner of 100% of Reynolds and Hydel and owns 91.5% of AMT and, through such subsidiaries, operates in three 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); and (3) the manufacture and sale of electric meter enclosures and pole-line hardware for the electric utility industry and the general public (Hydel). Effective October 1, 1997, the Company agreed to sell its defense electronics business segment and on December 31, 1997 it sold its plastics segment. Both such operations have been treated as discontinued operations. 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.
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.
SUMMARY OF ACCOUNTING POLICIES (CONTINUED)
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 and restatement:
Certain reclassifications have been made to the 2000 consolidated financial statements to conform to the 2001 presentation. The Company restated its financial statements to reflect a 3 for 4 reverse stock split effective June 13, 2001.
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.
Income taxes:
Deferred income taxes result from the temporary differences between the financial statement and income tax basis of assets and liabilities and are figured using the enacted tax rates and laws that will be in effect when the differences are excepted to reverse.
DISPOSITIONS
The Company discontinued its defense electronics business segment (SMI) effective October 1, 1997 as result of a decision to sell this business segment. The original agreement to sell SMI would have resulted in a small gain. However, the Company was unable to close this sale and subsequently, the Company has negotiated with other parties to sell SMI. The Company has recorded a loss of $1,550,000 during the year ended July 31, 1999 to recognize the subsequent reduction in the value of SMI. Accordingly, the financial statements have been reclassified to reflect this segment as a discontinued operation. Sales, cost of goods sold, selling, general and administrative expense and other of discontinued operations were as follows:
Sales
$ -
$ -
$ -
Cost of goods sold
-
-
-
Selling, general and administrative
-
-
-
Other
-
-
(1,550,000)
Discontinued operations
$ -
$ -
$(1,550,000)
INVENTORIES
Inventories consisted of the following at July 31,:
Raw materials
$ 911,479
$ 945,411
Work-in-process
404,049
320,926
Finished goods
1,048,390
1,186,710
$2,363,918
$2,453,047
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consisted of the following at July 31,:
Land
$ 178,630
$ 179,677
Buildings and improvements
1,151,490
1,115,219
Machinery and equipment
2,152,093
1,679,566
Furniture, fixtures & equipment
361,395
344,234
3,843,608
3,318,696
Less accumulated depreciation
(2,144,789)
(2,015,455)
$1,698,819
$1,303,241
OTHER ASSETS
In June 1997, litigation was commenced by the Company regarding certain transactions related to a loan from American Circuit Breaker Corporation arising out of its previous sale of the meter socket division of Retech. On December 12, 1997, the litigation was dismissed as result of an agreement between the parties whereby the Company received a 20% interest in Pioneer Power Corporation ("Pioneer"). The Company and the settling parties agreed that the value of the 20% interest was worth $1,250,000. Pioneer owns 100% of Pioneer Transformers Ltd. ("Pioneer Ltd."), a Canadian company which manufactures and sells transformers and Conte Glacz Industries, Inc., ("CGI") which manufactures electrical control and power distribution equipment. As of December 31, 2001, Pioneer Ltd.'s and CGI's audited financial information reflected total assets of approximately $15,900,000 with corresponding revenues for the year then ended of approximately $35,600,000. As part of the agreement the Company intends to spin-off approximately 80% of its 20% interest in Pioneer to its shareholders.
OTHER ASSETS (CONTINUED)
The Company has loaned Dresser Engineers and Contractors, Inc. ("Dresser") $1,046,800 as of July 31, 2001. Dresser has defaulted on the repayment of this debt. Accordingly, the Company has written down its receivable to $500,000, the amount it expects to recover from collateral and personal guarantees. A portion of the note to Dresser is guaranteed by Dresser's principal shareholder and is collateralized by approximately 500,000 shares of a public company's common stock that trades around $1.00 per share.
During the year ended July 31, 1999, the Company invested in Orasee Corp. (formerly i3-Dx.com, Inc.) ("Orasee"), a privately held company which is in the development stage. Orasee is a high-tech company that utilizes the internet for the development and distribution of its products. Orasee's technology is based on three-dimensional photographic lenticular imaging and is suitable for any application that may benefit from increased visualization, such as medical imaging, advertising and marketing. The Company owns approximately 7.3% of Orasee's Class A common shares (4.5 million shares) and has warrants to purchase another 2.5 million shares. Once Orasee can complete and obtain approval of its SEC filings, the Company intends to distribute a portion of the shares to its shareholders.
During the year ended July 31, 1998, the Company entered into an agreement to acquire 100% of the outstanding common stock of African Telecommunications, Inc. ("AfriTel"), subject to approval of the Company's stockholders. In connection with the agreement, the Company had lent AfriTel $1,977,000 as of July 31, 1999. In the event that the AfriTel acquisition was not completed, the note was due on November 30, 1999, including interest at 8%. AfriTel, through Afritel (SPRL), holds communications licenses in the Democratic Republic of Congo ("DRC") and Ghana. AfriTel was proceeding with installation of a digital wireless local loop telephone system in the DRC when that country became involved in a civil war. Lacking sufficient resources, Afritel agreed to sell 60% of Afritel (SPRL) to Shaz Investment Ltd. ("Shaz"). Shaz currently operates a telecommunication system through Telecel (SPRL) Congo in the DRC. Under the terms of the agreement, Shaz is to provide the capital and expertise to execute Afritel's business plan. As result of the uncertainty of the recoverability of its loan to Afritel, the Company has fully reserved its investment during the year ended July 31, 1999, amounting to $1,977,000. Afritel SPRL began operation during fiscal 2000 in the DRC. It is anticipated that at some pointing time, Shaz may seek to acquire the remaining 40% of Afritel SPRL in currently does not own, although there can be no assurance such a transaction would proceed. In the event of a transaction, the Company would expect to receive shares in a public company which could be sold to recover some or all its previous investment in Afritel.
OTHER ASSETS (CONTINUED)
A note in the amount of $417,074 was due from Superior Magnetics, Inc. in monthly installments of $5,110 which included interest at 6.5%, through December 1, 2004 when the then remaining principal and interest was due. The obligor defaulted on this note. Because such note is not collateralized, any recovery is remote. Accordingly, the Company has written-off this note. A note in the amount of $447,110 is due from the purchaser of Retech's Paris, Texas dormant manufacturing facility. The note provides for monthly payments of $2,981 interest only for twelve months and then forty-eight successive monthly payments of $4,272, which includes principal and interest. The balance is due August 1, 2005.
NOTES PAYABLE
Notes payable consisted of the following at July 31,:
Note payable, CIT (a)
$ 315,833
$ 303,939
Note payable, bank (b)
697,747
1,008,600
Note payable, bank (c)
-
183,542
$1,013,580
$1,496,081
(a.) Part of a $3,500,000 Revolving credit and term facility with The CIT Group Credit/Finance, Inc. (CIT) due November 2001. 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 line of credit with a maximum loan amount of $1,400,000, payable on demand; bearing interest at the bank's prime rate plus 1.00%; secured by trade receivables and inventories.
(c.) Note payable, bank, interest at 7.62%, secured by a $355,000 certificate of deposit.
NOTES PAYABLE (CONTINUED)
Information relating to short-term borrowing is as follows:
Balance at end of year
$1,013,580
$1,496,081
Maximum borrowing
$1,522,028
$1,782,394
Average balance
$1,271,807
$1,384,813
Average effective interest rate
9.4%
9.8%
Maximum borrowing are the maximum amount of aggregate short-term borrowing outstanding at any month end during the year. The average short-term borrowings were computed by dividing the aggregate borrowing for the year by the number of days the borrowings were outstanding during the year. The weighted average rate was computed by dividing the average borrowing into total interest on short-term borrowing.
LONG-TERM OBLIGATIONS
Long-term obligations consist of the following at July 31,:
Term loan payable to The CIT Group Credit/Finance,
Inc. (CIT) under a $3,500,000 credit facility (See note
6), due in monthly installments of $1,430, 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.
$ 23,081
$ 40,244
LONG-TERM OBLIGATIONS (CONTINUED)
Mortgage note payable due in monthly payments of
principle and interest at 2.75% above prime from
October 10, 1994 over twenty years. Guaranteed by
the Small Business Administration.
505,307
519,832
Note payable to a bank, bearing interest at 8.75%,
in monthly principal installments of $8,100 until
August 2002, secured by machinery and equipment
and land and building, refinanced
-
201,720
Note payable to a bank, bearing interest at prime
plus 1.25%, due in monthly principal installments of
$7,825 until August 2002, secured by machinery
and equipment and land and building
112,747
-
Capitalized lease obligation to a bank bearing interest
at 7.75%. Interest only until August 2002, then in
monthly installments of $12,179 including interest.
442,007
-
Various other installment notes and capitalized lease
obligations.
58,763
98,377
1,141,905
860,173
Less current maturities
( 152,082)
(165,103)
$ 989,823
$ 695,070
The prime rate was 6.75% and 9.5% at July 31, 2001 and 2000, respectively.
LONG-TERM OBLIGATIONS (CONTINUED)
The aggregate annual principal payments are as follows:
Year Ending July 31,
$152,082
110,893
109,225
97,042
105,610
Thereafter
567,053
ACCRUED LIABILITIES
Accrued liabilities consisted of the following at July 31:
Payroll
$ 89,433
$ 69,063
Commissions
26,841
29,648
Pension plan
60,000
-
Vacation pay
36,980
28,937
Taxes
16,106
7,894
Interest
30,365
Miscellaneous
6,016
3,362
$235,756
$169,269
COMMITMENTS AND CONTINGENCIES
Total rent expense for the years ended July 31, 2001, 2000 and 1999, was $135,000, $119,000 and $126,000, respectively, consisting primarily of minimum rentals.
COMMITMENTS AND CONTINGENCIES (CONTINUED)
Litigation:
Ammon & Rizos Co., Inc. the former manufacturers representative of Logic Design Metals, Inc. ("Logic"), 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. This case was settled by all parties on November 17, 1999 with a payment of $500,000 to the plaintiff of which the Company contributed $200,000 to the settlement. The balance of $300,000 was paid by New Logic. The Company had previously sold (1997) its metal fabrication business to New Logic.
Allied Products Co had 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). The Cooper bankruptcy court confirmed the debtor's Plan of Reorganization on November 21, 1997. The Illinois' court awarded Allied a summary judgment and dismissed the Company's counterclaim on November 3, 1998; however, the issue of damages was not addressed by the court at that time. On January 28, 1999, the court awarded a judgment in favor of Allied and against the Company in the amount of approximately $1,100,000. The pending lawsuit between Allied and the Company has now been settled and dismissed. The settlement required the repurchase by the Company of the 90,000 shares of preferred stock for $1.1 million which would satisfy a judgment by the Court requiring such a purchase. An affiliate acquired said 90,000 shares and the judgment. The transaction was completed by the affiliate with $1.2 million of collateral supplied by the Company. The affiliate pursued the sale of the preferred stock to a third party, however, on July 31, 2000; the Company retired the preferred stock.
The Company is involved with its Chairman and an affiliated company in actions brought by the U.S. Justice Department who is seeking to sell the Company's office building to satisfy a judgment against the affiliate. The Company's investment in the land and building at July 31, 2001 is approximately $334,000. The Company has and will continue to vigorously defend its position to retain this asset for which it had previously paid for.
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.
COMMITMENTS AND CONTINGENCIES (CONTINUED)
Concentration of Credit Risk:
The Company invests its cash and certificates of deposit primarily in deposits with major banks. Certain deposits are in excess of federally insured limits. The Company has not incurred losses related to its cash.
The Company sells a broad range of products to the electric and gas utility industries. 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.
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 hereunder 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 was 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 was entitled to one vote per share equal to the
STOCKHOLDERS' EQUITY (CONTINUED)
voting rights of the common shareholders. The Company had 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.
An Illinois's court awarded a judgment on January 28, 1999 in favor of Allied and against the Company in the amount of approximately $1,100,000. The lawsuit between Allied and the Company was settled and dismissed. The settlement required the repurchase by the Company of the 90,000 shares of preferred stock for $1.1 million which would satisfy a judgment by the Court requiring such a purchase. An affiliate acquired said 90,000 shares and the judgment. The transaction was completed by the affiliate with $1.2 million of collateral supplied by the Company. The affiliate pursued the sale of the preferred stock to a third party, however, on July 31, 2000, the Company retired the preferred stock.
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. The Bankruptcy Court approved the debtor's plan of reorganization in the Cooper bankruptcy on December 5, 1997. In accordance with such plan, the Company received cash of $700,000, notes receivable totaling $220,000, a 2.5% royalty agreement on new rigs sold and 1,000,000 shares of Cabec Energy Corp. The investment in Cooper was adjusted to the value of the consideration received. As of July 31, 2000, all amounts owed or due the Company have been settled and paid.
The following table sets forth the computation of basic and diluted earnings per share:
STOCKHOLDERS' EQUITY (CONTINUED)
Assumed conversion of preferred stock and exercise of options in 2001 and 2000 are antidilutive. The preferred stock was retired in fiscal 2000.
BENEFIT PLANS
Retech sponsored a defined benefit pension plan that covered all of its hourly employees. The plan called for benefits to be paid to eligible employees at retirement based upon years of service and compensation rates near retirement. Retech's policy is to fund pension expenses accrued.
Pension expense for the years ended July 31,:
Service cost
$ -
$ -
$ -
Interest cost
69,227
68,170
69,073
Actual return on assets held for the plan
321,892
(170,892)
(46,703)
Net amortization of prior service cost,
transition liability and net gain
14,401
23,446
62,874
Pension expense
$405,520
$(79,276)
$85,244
The following sets forth the funded status of the plan and the amounts shown in the accompanying consolidated balance sheets at July 31,:
Pension benefit obligations
Vested
$981,290
$881,095
Non-vested
-
-
Projected benefit obligation
981,290
881,095
Fair value of assets held in plan
484,467
840,043
Unfunded excess of projected benefit obligation
over plan assets
$496,823
$ 41,052
Unrecognized net transition obligation
$ -
$ -
Unrecognized prior service costs
38,128
52,529
Unrecognized net loss
541,316
84,085
Pension (asset) liability recognized
(82,621)
(95,562)
Accrued pension liability
$496,823
$ 41,052
BENEFIT PLANS (CONTINUED)
The following is a summary of the changes in the fair value of Plan assets for each year:
Fair value of Plan asset at July 31,
$840,043
$634,858
Actual return on Plan assets
(321,892)
170,892
Company contributions
-
103,125
Benefits paid
(33,684)
(68,832)
Fair value of Plan assets at July 31,
$484,467
$840,043
The following is a summary of the components of net benefit cost for each year:
Interest cost
$ 69,227
$ 68,170
Expected return on Plan assets
(70,746)
(52,605)
Amortization of transition obligation
-
-
Amortization of prior service cost
14,401
14,401
Amortization losses/gains
-
9,047
Net periodic benefit cost
$ 12,882
$ 39,013
The Company has recognized a minimum pension liability for the under-funded plan. The minimum liability is equal to the excess of the projected benefit obligation over plan assets. A corresponding amount is recognized as either an intangible asset or reduction of stockholders' equity. The Company recorded additional liabilities of $579,444 and $136,614, intangible assets of $38,128 and $52,529 and a stockholders' equity reduction of $541,316 and $84,085 as of July 31, 2001 and 2000, respectively.
Retech will terminate this plan 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.
BENEFIT PLANS (CONTINUED)
The assumed long-term rate of investment return and the interest rate for obligations used in determining the actuarial present value of accumulated plan benefits was 8.5% and 7.5% at July 31, 2001 and 8.75% and 8% at July 31, 2000, 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, 2001, 2000 and 1999 were $9,191, $5,787 and $6,301, 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.
Following is a summary of options (restated for the reverse stock split of 3 for 4 shares) under the plan as of and for the years ended July 31,:
Options outstanding at beginning of year
57,905
57,905
264,000
Granted
-
-
-
Terminated
-
-
(46,500)
Exercised
-
-
(159,595)
Options outstanding at end of year
57,905
57,905
57,905
Options exercisable at end of year
57,905
57,905
57,905
Exercise price per share
$.67 to
$.67 to
$.67 to
$.73
$.73
$.73
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) before income taxes for the periods ended July 31,:
Expected provision (benefit) for federal
income taxes
$(692,000)
$2,800
$(2,180,000)
Taxes on Canadian subsidiary
52,474
-
-
Expected provision for state income taxes
-
-
(256,000)
Prior years taxes (Refund)
36,056
(157,948)
-
Unavailable loss carrybacks
692,000
-
2,379,746
Other
-
(2,800)
-
Income taxes (benefit)
$ 88,530
$(157,948)
$ (56,254)
The Company files a consolidated tax return with its U.S. subsidiaries. The Company has a net operating loss carry-forward of approximately $4,400,000 which will expire from 2015 to 2016.
Income tax expense (benefit) is reported as follows for the years ended July 31,:
Income (loss) from continuing operations
$88,530
$(157,948)
$(56,254)
Income tax expense (benefit) consisted of the following:
Current
$83,330
$(157,948)
$(269,626)
Deferred
5,200
-
213,372
$88,530
$(157,948)
$ (56,254)
INCOME TAXES (CONTINUED)
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,:
Net operating loss carryforward
$(2,207,000)
$(1,165,000)
Depreciation - U. S.
70,000
85,000
Provision for losses
(2,112,000)
(1,195,000)
Valuation allowance
4,254,200
2,275,000
$ 5,200
$ -
The Company has provided a valuation allowance against its deferred tax asset as it has determined that it is more likely than not the temporary differences will not be utilized for tax purposes.
RELATED PARTY TRANSACTIONS
The following is a summary of advances from/to affiliated companies at July 31,:
Interfederal Capital, Inc.
$298,305
$296,653
Others
108,214
3,669
$406,519
$300,322
RELATED PARTY TRANSACTIONS (CONTINUED)
The Company had advanced funds 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"). RCT ceased operations and the balance due from RCT, amounting to $480,000 was written off during fiscal 1999.
SEGMENT INFORMATION
Industrial Segments
The Company operates principally in three industries: Water, gas and electric. 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. The Company's former segments defense electronics, plastics and metal fabrication have been treated as a discontinued operations.
Following is a summary of segment information for the years ended July 31,:
Sales to unaffiliated customers:
Water
$ 152,441
$ 4,241
$ 2,000
Gas
3,449,128
2,510,286
2,917,327
Electric
7,659,606
8,761,677
8,397,007
$11,261,175
$11,276,204
$11,316,334
Operating income (loss):
Water
$ (70,300)
$ (73,128)
$ (631,977)
Gas
121,214
(112,366)
(228,308)
Electric
266,350
225,339
236,133
317,264
39,845
(624,152)
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, investments and the corporate headquarters building.
SEGMENT INFORMATION (CONTINUED)
Individual customers who exceeded 10% of consolidated revenues accounted for $1,343,000, $1,547,000 and $1,360,000 in sales for the year ended July 31, 2001, 2000 and 1999, respectively.
Geographic information
Financial data by geographic area for the years ended July 31,:
FOURTH QUARTER RESULTS
During the fourth quarter of fiscal 2001, the Company recorded a loss of approximately $600.000 on its investment in Dresser Engineers and Contractors, Inc. (See Note 2). During the fourth quarter of fiscal 1999, the Company recorded the following adjustments which are unusual and non-recurring in nature: (i) provided a reserve against various Company investments, including Afritel, Cooper and RCT, in the amount of $3,515,000; (ii) provided for a loss of $1,550,000 to recognize a reduction in the value of SMI (See Note 2).