10-Q 1 elgt10q043003.txt UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark One) [x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarter period ended: April 30, 2003 -------------- OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _______________to________________ Commission File:# 0-14754 --------- ELECTRIC & GAS TECHNOLOGY, INC. ------------------------------- (Exact Name of Registrant as specified in its Charter) TEXAS 75-2059193 (State or other Jurisdiction of I R S. Employer incorporation or organization) Identification No.) 13636 Neutron Road, Dallas, Texas 75244-4410 (Address of Principal Executive Offices) (Zip Code) (972) 934-8797 (Registrant's telephone number, including area code) ---------------------------------------------------- Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES X NO The number of shares outstanding of each of the Issuer's Classes of Common Stock, as of the close of the period covered by this report: Common - $0.01 Par Value - 6,946,934 shares at June 12, 2003. ELECTRIC & GAS TECHNOLOGY, INC. AND SUBSIDIARIES Index to Form 10-Q For the Quarter Ended April 30, 2003 Page Part I - Financial Information Item 1. Condensed Consolidated Financial Statements: (a) Condensed Consolidated Balance Sheets as of April 30, 2003 (unaudited) and July 31, 2002 3 (b) Condensed Consolidated Statements of Operations for the three and nine months ended April 30, 2003 (unaudited) and 2002 (unaudited) 4 (c) Condensed Consolidated Statement of Changes in Stockholders' Equity for the nine months ended April 30, 2003 (unaudited) 5 (d) Condensed Consolidated Statements of Cash Flows for the Nine months ended April 30, 2003 (unaudited) and 2002 (unaudited) 6 (e) Notes to Condensed Consolidated Financial Statements (unaudited) 7-10 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 11-15 Item 3. Controls and procedures 16 Part II - Other Information Item 1. Legal Proceedings 17 Item 6. Exhibits and Reports on Form 8-K 17 Signature (pursuant to General Instruction E) 18 All other items called for by the instructions are omitted as they are either inapplicable, not required, or the information is included in the Condensed Financial Statements or Notes thereto. 2

See accompanying notes 3

See accompanying notes. 4

See accompanying notes. 5

Non-cash activities: The company acquired Logic Metals Technology, Inc. through the issuance of 400,000 shares of common stock valued at $173,400, plus the assumption of notes on equipment of $447,894. See accompanying notes. 6 ELECTRIC & GAS TECHNOLOGY, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS April 30, 2003 (Unaudited) NOTE A - 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. The Company presently is the owner of 100% of Reynolds and Hydel, owns 91.5% of AWT, and 80% of Logic Metals and, through such subsidiaries, operates in three distinct business segments: (1) production of atmospheric water, filtration and enhanced water products; (2) manufacture and sale of products for the Utilities sector, consisting of natural gas measurement, metering and odorization equipment, and electric meter enclosures and pole-line hardware for the electric utility industry and the general public, and (3) sheet metal fabrication for a diverse customer base, including telecom and networking cabinetry, elevator controls, and other sheet metal applications. The accompanying condensed consolidated financial statements have been prepared in accordance with the regulations of the Securities and Exchange Commission ("SEC") for inclusion in the Company's Quarterly Report on Form 10-Q. The accompanying financial statements reflect all adjustments of a normal recurring nature, which are, in the opinion of management, necessary for a fair statement of the results of operations for the interim periods. The statements were prepared using accounting principles generally accepted in the United States. As permitted by the SEC, the statements depart from generally accepted accounting disclosure principles in that certain data is combined, condensed or summarized that would otherwise be reported separately and certain disclosures of the type that were made in the Notes to Financial Statements for the year ended July 31, 2002 have been omitted, even though they are necessary for a fair presentation of the financial position at April 30, 2003 and 2002 and the results of operations and cash flows for the periods then ended. NOTE B - ACQUISITION On January 6, 2003, the Company acquired the personnel, and 80% of the outstanding stock of privately held Logic Metals Technology, Inc. ("LMT"), located in the Garland, Texas. LMT specializes in the fabrication of components from sheet metal and assembly of those components into cabinets to house electronic components and systems. The company builds products based on specifications provided by other companies. Customers of LMT have historically been in the telecom business, with requirements for metal cabinets to house electronic switches and other components, but newer and proposed customers are 7 ELECTRIC & GAS TECHNOLOGY, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) April 30, 2003 (Unaudited) in a variety of businesses, including elevator control systems, traffic signal systems, and gaming machines. The aggregate cost of the acquisition was the issuance of 400,000 shares of common stock valued at $173,400. The fair market value of the Company's common stock was based on the closing price as of January 6, 2003, when the terms of the acquisition were agreed to by the parties to the transaction. Results of operations of LMT are included in the results of the Company from the date of the acquisition. NOTE C - INVENTORIES Inventories are comprised as follows: April 30, 2003 July 31, 2002 -------------- -------------- Raw materials $ 1,144,351 $ 942,187 Work in process 532,718 385,443 Finished goods 1,333,564 913,043 -------------- -------------- $ 3,010,633 $ 2,240,673 ============== ============== NOTE D - ACCUMULATED OTHER COMPREHENSIVE LOSS: The components of accumulated other comprehensive loss are as follows: Cumulative Minimum Translation Pension Adjustment Liability Total ----------- ----------- ----------- Balance at July 31, 2002 $ (605,046) $(1,073,446) $(1,678,492) Currency translation adjustments 56,287 -- 56,287 ----------- ----------- ----------- Balance at April 30, 2003 $ (548,759) $(1,073,446) $(1,622,205) =========== =========== =========== The earnings associated with the Company's investment in its foreign subsidiary are considered to be permanently invested and no provision for U.S. federal income taxes on these earnings or translation adjustments has been provided. 8 ELECTRIC & GAS TECHNOLOGY, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) April 30, 2003 (Unaudited) NOTE E - CONTINGENCIES: The Company's former U.S. electric operations were sold in 1996 and 1995. The sale of the meter socket division of Retech, Inc. ("Retech") included a note receivable of approximately $1,250,000 and the continuing ownership of an 80,000 square foot manufacturing facility in Paris, Texas. Under the sale, Retech would continue to be responsible for the frozen Defined Benefit Pension Plan for Bargaining Employees (the "Plan"). The Company sued for collection of the note receivable and subsequently entered into an agreement for the exchange of a 20% interest in Pioneer Power, an affiliate of the note maker. Further, the Company was to distribute 80% of its 20% interest to its shareholders in accordance with the court approved agreement. The maker failed to perform under this Agreement and has caused the Company to again pursue legal recourse against the maker and their affiliates. Legal proceedings are just underway and currently issues dealing with proper court jurisdiction are pending. The Company had a contract for the sale of the Paris facility pending the buyer's ability to finance the purchase. The buyer did not perform. As the result of Retech's non-liquid status, it has been unable to currently fund the annual pension liability. The Plan's pension liability as of July 31, 2002, the date of the last actuarial valuation, was approximately $580,000 and is reflected in Stockholders' Equity at April 30, 2003. In February 2002, the Company contributed approximately $350,000 in public equity securities to the Pension Trust. The Company is liable for excise taxes on the funding deficiency of approximately $44,000. Further, the IRS could impose 100% penalties on the funding deficiency. A waiver of such penalties has been requested. All beneficiaries eligible to receive benefits are currently receiving such benefits from the Plan's Trust. Should the IRS impose the full amount of the penalties it would have a material adverse effect on the Company's liquidity. 9 ELECTRIC & GAS TECHNOLOGY, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) April 30, 2003 (Unaudited) NOTE F - INDUSTRY SEGMENT DATA: The Company's business is primarily comprised of three industry segments: (i) production of atmospheric water, filtration and enhanced water products; (ii) the manufacture and sale of products serving the utilities industry, specifically, natural gas measurement equipment and gas odorization products, and metal enclosures and other hardware for use in the electric utility industry, and (iii) fabrication of cabinets and piece parts from sheet metal for diversified end customers as set forth below.

10 ELECTRIC & GAS TECHNOLOGY, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 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 and sale of products serving the Utilities industry, specifically, natural gas measurement equipment and gas odorization products, and metal enclosures and other hardware for use in the electric utility industry, and (iii) fabrication of cabinets and piece parts from sheet metal for diversified end customers. Results of Operations Summary. The Company reported net losses of $(432,430) and $(157,553) for the nine and three months ended April 30, 2003, respectively. This compared to $(718,922) and $(215,595) for the nine and three months ended April 30, 2002, respectively. Operating loss decreased by $346,232 and $6,308 for the nine and three month periods, respectively, primarily as a result of increases in revenue and operating profits in the Water and Utility segments as well as the acquisition of Logic Metals Technology, Inc. The Utility segment reported an increase in revenue of $741,724 and $333,180 with income before income taxes improving by $145,425 and declining by $50,673 for the nine and three month periods, respectively. The water segment reported increased revenues of $354,162 and $199,001, with income before income taxes increasing $198,712 and $94,880 for the nine and three month periods, repectively. Revenue was recognized for the metal fabrication business for the first time in January of 2003. Revenue for the metal fabrication business was $1,282,050 and $796,329 for the nine and three month periods, respectively. Gross margins increased from 26.68% to 27.76% for the nine months ended April 30, 2003. Also, selling, general and administrative expenses as a percent of revenues at the segment level decreased from 35.64% to 30.71% of revenue for the nine month periods, respectively. Other income (expense) decreased $53,260 for the nine month period ended April 30, 2003 compared to 2002 primarily as a result of a decrease in investment market values. 11 ELECTRIC & GAS TECHNOLOGY, INC. AND SUBSIDIARIES Results of Operations (continued) Increases (decreases) for the three and nine months periods ended April 30, 2003, as compared with the similar period of 2002, for key operating data were as follows:

12 ELECTRIC & GAS TECHNOLOGY, INC. AND SUBSIDIARIES Results of Operations (continued) Water revenues amounted to $354,162 for the nine months ended April 30, 2003 primarily reflecting the first payment for granting of an exclusive market niche to Lockheed Martin and payment of $150,001 received from Lockheed Martin for the first unit. Expenses were $256,941 and $140,547 for the nine and three months ended April 30, 2003, respectively. Expenses were $101,491 and $36,426 for the nine and three months ended April 30, 2002, respectively. The Company has identified distributors/agents for India, UAE and Sri Lanka, in addition to Lockheed Martin. Utility revenues increased by $741,724 and $333,180 for the nine and three months ended April 30, 2003 Operating income increased by $145,425 and decreased by $50,673 for the nine and three months ended April 30, 2003 resulting in operating profits of $301,792 and $100,709,respectively. Selling, general and administrative expenses decreased to 23.94% of revenues when compared to 24.89% for the corresponding nine month period in the prior year. This segment was adversely affected by the events of September 11, 2001 and the overall economy. Business is showing signs of improvement, and the sector has introduced new products for the digital recording of multiple pressure points, to begin replacing the paper graph recorders. Fabrication began manufacturing for the electric and gas industry starting January 1, 2003 with revenues to date of $485,722. Revenue was $1,282,050 and $796,329 for the nine months and three months ended April 30, 2003, respectively. Logic Metals is a sheet metal fabrication company with customers in the telecom and elevators industries, and has established a strategic alliance with Mecanova OY of Finland to provide international solutions. With the exception of expense relationships discussed above in the specific segment discussion, such other relationships remain consistent. Corporate overhead expenses remain relatively consistent with prior period amounts. Operating profits generated by the Company's business segments are beginning to approach the level required to cover selling, general and administrative expenses. The Company believes there is a worldwide need for safe reliable drinking water and the market can be exploited with its products. Further, the Company has had to expend approximately $200,000 in vigorously defending its ownership of its general corporate offices in litigation with the SBA, which currently remains unresolved at June 12, 2003. (Also see Part II, Item 1. Legal Proceedings) 13 ELECTRIC & GAS TECHNOLOGY, INC. AND SUBSIDIARIES Liquidity and Capital Resources Liquidity. Current assets of the Company total $5,222,383 at April 30, 2003, up from current assets of $3,875,100 at July 31, 2002, or an increase of $1,347,283. Current liabilities increased by $2,085,615, resulting in a decrease in working capital (current assets less current liabilities) of $687,677 at April 30, 2003, from $1,426,009 at July 31, 2002. The Company believes that it has and can generate sufficient cash to meet its working capital requirements. Hydel has a working capital line-of-credit with a Canadian bank in the amount of approximately $1,500,000. The Canadian credit facility is secured by receivables, inventories and equipment of Hydel. Reynolds has established a working capital line of credit of approximately $400,000 with a national bank in the Dallas, Texas area. The line is secured by accounts receivable and inventory of Reynolds. Reynolds has also received a mortgage loan in connection with refinancing of the building it occupies for $397,000. Logic has received funding from a national bank in the Dallas, Texas area of $450,000 on a revolving line of credit secured by accounts receivable and inventory. As more fully described in Note E of the Condensed Financial Statements, the Company could be liable for substantial penalties for Retech, Inc.'s pension plan. Such penalties would have a material adverse affect on the Company's liquidity. Capital Expenditures For fiscal 2003, the Company anticipates capital expenditures in the metal fabrication area as additional capacity is required to meet customer requirements. Otherwise, expenditures for capital equipment will be for the ordinary replacement of worn-out or obsolete machinery and equipment utilized by its subsidiaries. Dividend Policy The Company's Board of Directors has declared no cash dividends since the Company's inception. The Company does not contemplate paying cash dividends on its common stock in the foreseeable future since it intends to utilize it cash flow to invest in its businesses. 14 ELECTRIC & GAS TECHNOLOGY, INC. AND SUBSIDIARIES Other Business Matters 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 affecting the Company's overall operations is the general state of the economy and principally new home construction. 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. 15 ELECTRIC & GAS TECHNOLOGY, INC. AND SUBSIDIARIES Item 3. CONTROLS AND PROCEDURES (a) Evaluation of disclosure controls and procedures. The President has conducted an evaluation of the effectiveness of the Company's disclosure controls and procedures pursuant to Rule 13a-14 under the Securities Exchange Act of 1934 as of a date (the "Evaluation Date") within 90 days prior to the filing date of this report. Based upon that evaluation, the President concluded that, as of the Evaluation Date, the Company's disclosure controls and procedures were effective in ensuring that all material information relating the Company required to be filed in this quarterly report has been made known to him in a timely manner. (b) Changes in internal controls. There have been no significant changes made in the Company's internal controls or in other factors that could significantly affect internal controls subsequent to the Evaluation Date. 16 ELECTRIC & GAS TECHNOLOGY, INC. AND SUBSIDIARIES PART II ITEM 1. 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 the Company 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. The Company will vigorously defend its position. Electric & Gas Technology, Inc., Retech, Inc. and Hydel Enterprises, Inc. (Plaintiffs) vs. Nathan Mazurek, American Circuit Breaker Corp. and Provident Group, Inc. (Defendants) - Civil Action N. 3:01-CV-2756-G. Plaintiffs filed suit in the 160th District Court in Dallas, County. The case has been removed to United States District Court for the Northern District of Texas, Dallas Division. Plaintiffs allege the non-payment of a note to Retech, Inc. of approximately $1,150,000, unpaid accounts receivable to Hydel Enterprises, Inc. of approximately $975,000 (Canadian Dollars), plus added sums in penalties, damages and attorneys fees. Plaintiffs have also filed a motion to stay other pending litigation in Delaware involving the related parties. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) NONE (b) Reports on Form 8-K. 17 ELECTRIC & GAS TECHNOLOGY, INC. AND SUBSIDIARIES SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. ELECTRIC & GAS TECHNOLOGY, INC. /s/ S Mort Zimmerman -------------------- S Mort Zimmerman Chairman and Chief Executive Officer Dated: June 23, 2003 18 ELECTRIC & GAS TECHNOLOGY, INC. AND SUBSIDIARIES CERTIFICATIONS I, S. Mort Zimmerman, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Electric & Gas Technology, Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the consolidated financial statements, and other financial information included in this quarterly report, fairly present in all material respects the consolidated financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in the Exchange Act Rules 13a- 14 and 15d- 14) for the registrant and have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 19 ELECTRIC & GAS TECHNOLOGY, INC. AND SUBSIDIARIES 6. The registrant's other certifying officer and I have indicated in this quarterly report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: June 23, 2003 /s/ S. Mort Zimmerman ---------------------- S. Mort Zimmerman President and Chairman of the Board I, George M. Johnston, certify that: 1. 1 have reviewed this quarterly report on Form 10-Q of Electric & Gas Technology, Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the consolidated financial statements, and other financial information included in this quarterly report, fairly present in all material respects the consolidated financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in the Exchange Act Rules 13a- 14 and 15d- 14) for the registrant and have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 20 ELECTRIC & GAS TECHNOLOGY, INC. AND SUBSIDIARIES 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officer and I have indicated in this quarterly report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: June 23, 2003 /s/ George M. Johnston ---------------------- George M. Johnston Vice President & Chief Financial Officer 21

ELECTRIC & GAS TECHNOLOGY INC 10-Q