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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1996
or
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________ to________
Commission File Number 0-19793
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MARCUM NATURAL GAS SERVICES, INC.
(Exact name of small business issuer as specified in its charter)
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DELAWARE 84-1169358
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1675 Broadway, Suite 2150
Denver, Colorado 80202
(Address of principal executive offices) (Zip code)
(303)592-5555
(Issuer's telephone number)
------------------------------
Check whether the Issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12
months (or for such shorter period that the Registrant was required to file
such reports), and (2) has been subject to such filing requirements for the
past 90 days.
Yes X No
----- -----
As of October 31, 1996 there were 12,261,172 shares of the issuer's
Common Stock outstanding.
Traditional Small Business Disclosure Format
Yes No X
----- -----
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MARCUM NATURAL GAS SERVICES, INC.
FORM 10-QSB
TABLE OF CONTENTS
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Page
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PART I: FINANCIAL INFORMATION
Item 1. Financial Statements
Unaudited Consolidated Balance Sheets -
September 30, 1996 and December 31, 1995 3
Unaudited Consolidated Statements of Operations -
For the Three Months Ended September 30, 1996 and
September 30, 1995
For the Nine Months Ended September 30, 1996 and
September 30, 1995 5
Unaudited Consolidated Statements of Cash Flows -
For the Nine Months Ended September 30, 1996 and
September 30, 1995 6
Notes to Unaudited Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 9
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 15
Signatures 16
</TABLE>
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PART I.
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
MARCUM NATURAL GAS SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1996 1995
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ASSETS
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CURRENT ASSETS:
Cash and cash equivalents $ 1,270,673 $ 1,500,812
Trade receivables, less allowance for doubtful accounts
of $122,867 and $167,032, respectively 4,312,638 4,761,242
Other receivables 219,775 387,138
Inventory 4,587,764 3,510,958
Prepaid expenses and other current assets 353,553 362,254
----------- -----------
Total current assets 10,744,403 10,522,404
----------- -----------
PROPERTY, PLANT AND EQUIPMENT, AT COST:
Equipment 2,684,369 2,566,102
Vehicles 136,917 155,189
Furniture and fixtures 663,265 633,991
Land, building and improvements 483,255 439,958
----------- -----------
Total 3,967,806 3,795,240
Less accumulated depreciation 2,232,901 1,873,968
----------- -----------
Property, plant and equipment, net 1,734,905 1,921,272
----------- -----------
OTHER ASSETS:
Customer lists (net of amortization of $1,692,133 and
$1,316,970, respectively) 7,593,323 7,968,486
Goodwill and other intangibles (net of amortization of
$525,887 and $429,017, respectively) 1,404,988 1,057,013
Investments in unconsolidated affiliates 312,927 152,460
Other 203,375 156,622
----------- -----------
Total other assets 9,514,613 9,334,581
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TOTAL $21,993,921 $21,778,257
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</TABLE>
See notes to unaudited consolidated financial statements.
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MARCUM NATURAL GAS SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
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SEPTEMBER 30, DECEMBER 31,
1996 1995
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LIABILITIES AND STOCKHOLDERS' EQUITY
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<S> <C> <C>
CURRENT LIABILITIES:
Accounts payable $ 1,684,345 $ 1,007,982
Accrued and other liabilities 1,891,427 1,624,126
Current maturities of notes payable 681,071 821,607
Current maturities of long-term debt 12,819 14,678
------------ ------------
Total current liabilities 4,269,662 3,468,393
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LONG-TERM NOTE PAYABLE 117,113
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COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Redeemable preferred stock - Series A, $.01 par value;
authorized, 1,000,000 shares; none issued and outstanding
Redeemable preferred stock - Series B, $.01 par value;
authorized, 1,000,000 shares; none issued and outstanding
Redeemable preferred stock - Series C, $.01 par value;
authorized, 500,000 shares; none issued and outstanding
Common stock, $.01 par value, authorized, 25,000,000
shares; issued and outstanding, 12,261,172 and
11,742,032 shares, respectively 122,612 117,420
Additional paid-in-capital 36,921,348 36,320,946
Accumulated deficit (19,436,814) (18,128,502)
------------ ------------
Total stockholders' equity 17,607,146 18,309,864
------------ ------------
TOTAL $ 21,993,921 $ 21,778,257
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</TABLE>
See notes to unaudited consolidated financial statements.
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MARCUM NATURAL GAS SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
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THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------- ------------------------
1996 1995 1996 1995
----------- ------------ ----------- -----------
<S> <C> <C> <C> <C>
REVENUES:
Natural gas measurement sales and services $ 4,195,598 $ 4,285,274 $13,635,574 $14,039,888
Natural gas refueling equipment sales 1,149,434 566,416 3,235,667 2,830,323
Other 72,114 37,666 485,082 141,377
----------- ----------- ----------- -----------
Total revenues 5,417,146 4,889,356 17,356,323 17,011,588
----------- ----------- ----------- -----------
COSTS AND EXPENSES:
Cost of measurement sales and services 2,766,113 2,933,401 8,953,636 9,254,852
Cost of refueling equipment sales 1,008,821 448,660 2,751,965 2,257,961
General and administrative 1,304,731 1,187,945 3,846,254 3,374,988
Selling, marketing and service 548,809 745,708 1,662,842 2,407,756
Depreciation and amortization 284,003 307,885 874,344 999,550
Research and development 161,313 353,704 503,571 1,197,419
Interest and other 23,815 179,227 72,023 222,700
----------- ----------- ----------- -----------
Total costs and expenses 6,097,605 6,156,530 18,664,635 19,715,226
----------- ----------- ----------- -----------
NET LOSS $ (680,459) $(1,267,174) $(1,308,312) $(2,703,638)
=========== =========== =========== ===========
NET LOSS PER COMMON SHARE $(0.06) $(0.11) $(0.11) $(0.23)
====== ====== ====== ======
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING 12,187,409 11,732,032 12,045,569 11,733,363
=========== =========== =========== ===========
</TABLE>
See notes to unaudited consolidated financial statements.
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MARCUM NATURAL GAS SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
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<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
-------------------------------
1996 1995
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<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Loss $(1,308,312) $(2,703,638)
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation and amortization 874,344 999,550
Stock compensation expense 219,652
Royalty payments made with restricted stock 41,667
Loss on disposal of assets 11,705 138,598
Equity in (income) loss of unconsolidated affiliates (56,290) 4,423
Changes in other assets and liabilities, net of effects
of acquisitions:
Trade receivables 580,757 617,687
Inventory (1,066,341) 539,280
Other current assets 273,368 292,590
Other noncurrent assets (47,891) (35,005)
Accounts payable 609,831 (420,970)
Accrued and other liabilities 169,949 (344,272)
----------- ----------
Net cash provided by (used in) operating activities 302,439 (911,757)
----------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property, plant and equipment (178,916) (573,507)
Additions to manufacturing rights and
software development costs (402,845) (222,241)
Net cash from acquisitions 164,308
Proceeds from sale of assets 30,390 8,868
Investments in unconsolidated affiliates (245,125)
Distributions from unconsolidated affiliates 27,106 124,166
----------- ----------
Net cash used in investing activities (605,082) (662,714)
----------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net payments on note payable to bank (23,423) (26,393)
Issuance of common stock, net 112,327
Payments to redeem common stock subject
to put agreement (55,300)
Payments on long-term debt and capital
lease obligations (16,400) (79,102)
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Net cash provided by (used in) financing activities 72,504 (160,795)
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NET DECREASE IN CASH AND CASH EQUIVALENTS (230,139) (1,735,266)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 1,500,812 3,370,852
---------- ----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 1,270,673 $ 1,635,586
=========== ===========
</TABLE>
See notes to unaudited consolidated financial statements.
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MARCUM NATURAL GAS SERVICES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
As of September 30, 1996 and December 31, 1995
For the Three Month Periods Ended September 30, 1996 and 1995 and
For the Nine Month Periods Ended September 30, 1996 and 1995
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accompanying consolidated financial statements include the
accounts of Marcum Natural Gas Services, Inc. and its wholly-owned
subsidiaries and have been prepared pursuant to rules and regulations of the
Securities and Exchange Commission. The accompanying consolidated financial
statements and notes thereto should be read in conjunction with the
consolidated financial statements and notes thereto included in the Company's
Annual Report on Form 10-KSB for the year ended December 31, 1995.
In the opinion of the Company's management, all adjustments (all of
which are normal and recurring) have been made which are necessary for a fair
statement of the consolidated financial position of the Company and its
subsidiaries as of September 30, 1996 and the consolidated results of their
operations and cash flows for the three and nine month periods ended September
30, 1996 and 1995.
2. ACQUISITIONS
Effective January 1, 1996, the Company, through its wholly-owned
subsidiary, Metretek, Incorporated, acquired the remaining 57.5% outstanding
shares of Metretek Europe, of which Metretek previously owned 42.5% of the
outstanding shares. In connection with this acquisition, the Company issued
175,000 shares of restricted common stock valued at $141,815. The fair value
of assets acquired was $389,085, including cash in the amount of $211,747. The
fair value of liabilities assumed was $133,428. Metretek's investment in
Metretek Europe at December 31, 1995 was $113,842. The acquisition was
accounted for as a purchase and the results of operations of Metretek Europe,
which are immaterial to consolidated operations, have been included in the
Consolidated Statement of Operations from the date of acquisition.
On June 21, 1996, the Company, through its wholly-owned subsidiary,
Metretek, acquired substantially all of the assets of Sigma VI. Total
consideration for the assets of Sigma VI was $90,000 payable $45,000 at
closing, $15,000 payable September 18, 1996 and $30,000 payable December 17,
1996. Sigma VI is engaged in circuit board assembly, cable assembly and
related services primarily to customers in the electronics industry located in
Melbourne, Florida and the surrounding area. The acquisition was accounted for
as a purchase and the results of operations of Sigma VI, which are immaterial
to consolidated operations, have been included in the Consolidated Statement of
Operations from the date of acquisition.
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3. NOTES PAYABLE
On August 5, 1996, Metretek entered into a loan and security agreement
with a commercial bank converting the $821,607 outstanding balance of its
demand note with the bank into two loans: a $421,607 term loan repayable in
equal monthly principal payments plus interest over an 18 month period, and a
$400,000 revolving line of credit payable on demand, pending demand, with
interest only payable monthly and a maturity of January 31, 1998. The term
loan and the line of credit are secured by Metretek's accounts receivable,
inventory and equipment, cross-collateralized and cross-defaulted. In
addition, the Company has provided a guaranty to the bank. The loan agreement
requires Metretek to maintain a minimum adjusted working capital level, a
minimum current ratio, a maximum debt to tangible net worth ratio and contains
other standard covenants related to operations by Metretek. Cumulative
borrowings under the loan agreement are limited to the sum of 75% of eligible
domestic trade accounts receivable, 55% of eligible foreign trade accounts
receivable and 50% of raw materials inventory of Metretek. The line of credit
is subject to a mandatory reduction provision which requires the balance
outstanding to be reduced to $300,000 and $200,000 for 30 consecutive day
periods during 1996 and 1997, respectively.
4. STOCK COMPENSATION AND STOCK OPTIONS
In January 1996, the Company approved a non-qualified, compensatory
Employee Stock Purchase Plan (the "1996 Plan"), which allows eligible employees
to purchase shares of the Company's common stock through payroll deductions.
The shares can be purchased for 100% of the lower of the beginning or ending
fair market value of each one-month offering period and are matched by the
Company on a share-for-share basis. Purchases are limited to 15% of an
employee's eligible compensation. A total of 200,000 shares of common stock
are registered for offer and issuance under the 1996 Plan, of which 183,913
shares had been issued through September 30, 1996. No additional shares of
common stock are expected to be issued under the 1996 Plan.
In March 1996, the Board of Directors approved the issuance of up to
90,000 restricted shares of the Company's common stock to seven key executives,
of which 87,500 shares have been issued and the remaining shares have been
forfeited.
Effective June 4, 1996, pursuant to stockholder ratification of the
Board of Directors' authorization, all outstanding stock options held by the
officers, directors, employees and consultants of the Company were repriced to
an exercise price of $1.59 per share, the last sale price of the Common Stock
as reported on the Nasdaq National Market on March 8, 1996, the date of the
Board of Directors' authorization.
5. COMMITMENTS AND CONTINGENCIES
On June 27, 1996, the Company, through its wholly-owned subsidiary,
Metretek, amended certain payment provisions of its license agreement related
to sales by Metretek of royalty-bearing products utilizing certain metering
patents owned by the licensor. Under terms of the original license agreement,
Metretek had a commitment to pay in cash a 5% royalty on
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sales of royalty-bearing products with a minimum annual royalty of $50,000
through the year 2003. Payment terms under the amended license agreement
provide for 1) the issuance of restricted shares of the Company's common stock
with a market value of $100,000 as determined based on the average of the last
sale price of the Company's shares as reported on the Nasdaq National Market
for ten consecutive trading days preceding the amendment date in payment of
royalties due on November 6, 1996 and 1997; and 2) the issuance on November 6
annually through the year 2001 of restricted shares of the Company's common
stock with a market value equal to the royalty amount due as determined based
on the average of the last sale price of the Company shares as reported on the
Nasdaq National Market for ten consecutive trading days preceding each November
6. In connection with the amended license agreement, 72,727 restricted shares
of the Company's common stock were issued on June 27, 1996.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
INTRODUCTION
The following discussion of the results of operations for the Company
for the nine month periods ended September 30, 1996 and 1995 and of the
consolidated financial condition of the Company as of September 30, 1995 should
be read in conjunction with the Company's consolidated financial statements and
related notes thereto included elsewhere herein.
RESULTS OF OPERATIONS
The following table sets forth selected information related to the
Company's primary products and services and should assist in an understanding
of the Company's results of operations for the periods presented.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
------------------------------
1996 1995
---------- ----------
(DOLLAR AMOUNTS IN THOUSANDS)
<S> <C> <C> <C>
REVENUES:
Southern Flow $ 8,057 $ 8,152
Metretek 5,578 5,888
Marcum Fuel 3,236 2,830
Total 17,356 17,012
GROSS PROFIT:
Southern Flow 2,027 2,238
Metretek 2,655 2,547
Marcum Fuel 484 572
Total 5,166 5,357
NET INCOME (LOSS):
Southern Flow 700 734
Metretek 83 (1,039)
Marcum Fuel (1,208) (1,338)
Total (1,308) (2,704)
</TABLE>
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NINE MONTHS ENDED SEPTEMBER 30, 1996 COMPARED TO NINE MONTHS ENDED SEPTEMBER
30, 1995
Revenues. Revenues decreased $344,735, or 2%, for the nine months
ended September 30, 1996 compared to the same period in 1995. Revenues from
Southern Flow decreased $94,430, or 1%, for the nine months ended September 30,
1996, compared to the same period in 1995, due to increased pricing pressures
from customers and competitors. Revenues from Metretek decreased $309,884, or
5%, for the nine months ended September 30, 1996, compared to the same period
in 1995, which was comprised of a decrease in international sales of $768,525,
offset in part by an increase in Metretek's domestic sales of $458,641. The
decrease in Metretek's international sales was comprised of a decrease in sales
to a South American customer of approximately $435,000, as well as a decrease
in sales to Canadian customers of approximately $464,000, offset in part by an
increase in European sales of approximately $126,000 through Metretek's
wholly-owned subsidiary, Metretek Europe. The increase in Metretek's domestic
revenues was comprised of an approximate $480,000 increase in automatic meter
reading (AMR) systems, as well as an approximate $82,000 increase in circuit
board assembly sales through Metretek's wholly-owned subsidiary, Sigma VI,
offset in part by an approximately $103,000 decrease in sales primarily to one
customer of OEM products which are then resold by the customer, mainly to
natural gas utility companies. The Company believes that a significant portion
of the increase in Metretek's domestic AMR revenues is attributable to the
deregulation of the interstate natural gas pipeline industry, which has
increased the need for timely and accurate measurement data for the Company's
natural gas utility customers in order to support more sophisticated billing
techniques, and to an increase in the price of certain products. Revenues from
Marcum Fuel increased $405,344, or 14%, for the nine months ended September 30,
1996 compared to the same period in 1995 due to an increase in projects awarded
in its natural gas refueling station design, construction and installation
service operations. Other revenues increased $343,705, or 243%, for the nine
months ended September 30, 1996 compared to the same period in 1995. The
primary reasons for the increase resulted from additional MGT revenue of
approximately $252,000 due to fees, reimbursements and equity income received
by MGT from a business trust formed in February 1996 for which there were no
comparable fees, reimbursements and equity income received in 1995 and an
increase of approximately $156,000 in other revenues from Metretek resulting
primarily from the receipt of approximately $124,000 in settlement with a
former licensee for royalty payments due through June 30, 1995, the date the
former licensee ceased operations. These increases were partially offset by an
approximately $61,000 decrease in interest income for the nine months ended
September 30, 1996, compared to the same period in 1995.
Costs and Expenses. Cost of sales and services increased $192,788, or
2%, for the nine months ended September 30, 1996 compared to the same period in
1995. Cost of sales and services from Southern Flow increased $117,255, or 2%,
in the nine months ended September 30, 1996 compared to the same period last
year. Southern Flow's gross profit margin after costs of sales and services
decreased from 27.5% to 25.2% in the 1996 period compared to the same period in
the previous year due primarily to increased pricing pressures from customers
and competitors as well as increased operating lease costs incurred in 1996.
Costs of sales and services from Metretek decreased $418,471, or 13%, in the
nine month period in 1996 compared to the same period in 1995 and was due
primarily to Metretek's decreased sales in 1996, including a decrease in
certain orders in South America relating to the resale of measurement
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equipment not manufactured by Metretek. These South American sales have higher
associated costs than sales of AMR products manufactured by Metretek and, as a
result, when combined with cost reductions effected by Metretek in August 1995,
Metretek's gross profit margin after costs of sales and services increased from
43.2% to 47.6% in the 1996 period compared to the same period in 1995. Costs
of sales and services from Marcum Fuel increased $494,004, or 22%, in the nine
months ended September 30, 1996 compared to the same period last year due to
higher activity levels in this segment. Marcum Fuel's gross profit margin
after costs of sales decreased from 20.2% to 14.9% in the 1996 period compared
to the same period in 1995, reflecting competitive pricing pressures in the
industry.
General and administrative expenses increased $471,266, or 14%, for
the nine months ended September 30, 1996 compared to the same period in 1995.
This increase resulted primarily from increases in expenses of Metretek of
approximately $330,000 due to costs incurred at its wholly-owned subsidiary,
Metretek Europe, for which there were no comparable costs in 1995, an increase
in expenses of Southern Flow of approximately $92,000 attributable to increased
personnel costs, an increase in expenses of Marcum Fuel of approximately
$43,000 attributable to increased professional costs incurred, and an increase
in general corporate expenses of approximately $6,000 attributable to the
implementation of the Company's new employee stock purchase plan, offset in
part by a reduction in professional and other administrative costs incurred.
Selling, marketing and service expenses decreased $744,914, or 31%,
for the nine months ended September 30, 1996 compared to the same period in
1995. This decrease resulted primarily from (i) an overall decrease in
Metretek's sales, (ii) a reduction in personnel and (iii) a reduction in
advertising and promotional expenses, and (iv) to a lesser extent, to the
transition from an exclusive distributorship arrangement for Metretek's
products in the United States and Canada to a direct sales force in the United
States in 1995.
Depreciation and amortization expenses decreased $125,206, or 13%, for
the nine months ended September 30, 1996 compared to the same period in 1995.
This decrease was primarily due to reduced depreciation costs associated with
Southern Flow leased vehicles, no longer accounted for as a capital lease
arrangement, as well as the 1995 write-off of $135,035 of certain Southern Flow
assets no longer in service. The lease was amended and is now accounted for as
an operating lease and the lease expense is reflected primarily in costs of
measurement sales and services.
Research and development expenses decreased $693,848, or 58%, for the
nine months ended September 30, 1996 compared to the same period in 1995, which
resulted from a decrease of approximately $151,000 related to Marcum Fuel and a
decrease of approximately $543,000 related to Metretek. The decrease in
research and development expenses at Marcum Fuel reflects the completion of
certain product developments in early 1995. The decrease in research and
development expenses at Metretek reflects the termination of two projects
during 1995 and a reduction in personnel in August 1995.
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Interest and other expenses decreased $150,677, or 68%, for the nine
months ended September 30, 1996 compared to the same period in 1995. This
decrease was primarily due to a non-cash charge of $135,035 in 1995 for the
write-off of certain Southern Flow assets no longer in service.
SEASONALITY
The business of Metretek is subject to seasonal fluctuations, being
largely dependent on sales to natural gas utilities. The utility industry is
generally characterized by long budget and purchase cycles. Purchases of
Metretek's products by utilities are, to a substantial extent, deferrable in
the event utilities reduce capital expenditures as a result of such conditions
as unfavorable regulatory decisions, poor revenues due to weather conditions or
general economic downturns.
FINANCIAL CONDITION AND LIQUIDITY
The Company requires capital principally for (i) the financing of
inventory and accounts receivable, (ii) research and development expenses,
(iii) capital expenditures for property and equipment and software development,
and (iv) the funding of possible future acquisitions.
Net cash provided by operating activities was approximately $302,000
for the nine months ended September 30, 1996. The principal components of this
increase in cash were (i) cash provided of approximately $581,000 due to the
reduction in accounts receivables, (ii) cash provided in the amount of
approximately $610,000 for the increase of accounts payable, (iii)
approximately $394,000 of net cash provided for a combination of the payment of
miscellaneous liabilities offset by proceeds from miscellaneous assets, (iv)
approximately $217,000 of cash used in operations, before changes in assets and
liabilities, and (v) cash used in the amount of approximately $1,066,000
related to the increases in inventory levels.
The Company plans to continue research and development efforts to
enhance its existing products and develop new products. The Company
anticipates that its research and development costs in 1996 will be
approximately $747,000, of which approximately $731,000 will relate to
Metretek's business and approximately $16,000 will relate to Marcum Fuel's
business. Research and development expenses in the amount of $503,571 were
incurred in the nine month period ended September 30, 1996.
The Company anticipates capital expenditures in 1996 of approximately
$620,000, including $410,000 expected to be capitalized in connection with
manufacturing rights and software development at Metretek and Marcum Fuel. The
Company's capital expenditures in the nine month period ended September 30,
1996, were $581,761, including capitalized manufacturing rights and software
development costs in the amount of $402,845. The Company's capital
expenditures are expected to be primarily for production and laboratory
equipment, computer hardware and software.
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The Company sells certain of its products and services under
protection of various purchaser warranties. The Company provides a reserve for
estimated warranty repair costs. Warranty repair expenses in the amount of
$52,494 were incurred in the nine month period ended September 30, 1996, and
the estimated reserve balance was approximately $13,000 at that date.
On August 5, 1996, Metretek entered into a loan and security agreement
with a commercial bank converting the $821,607 outstanding balance of its
demand note with the bank into two loans: a $421,607 term loan repayable in
equal monthly principal payments plus interest over an 18 month period, and a
$400,000 revolving line of credit payable on demand, pending demand, with
interest only payable monthly and a maturity of January 31, 1998. The term
loan and the line of credit are secured by Metretek's accounts receivable,
inventory and equipment, cross-collateralized and cross-defaulted. In
addition, the Company has provided a guaranty to the bank. The loan agreement
requires Metretek to maintain a minimum adjusted working capital level, a
minimum current ratio, a maximum debt to tangible net worth ratio and contains
other standard covenants related to operations by Metretek. Cumulative
borrowings under the loan agreement are limited to the sum of 75% of eligible
domestic trade accounts receivable, 55% of eligible foreign trade accounts
receivable, and 50% of raw materials inventory of Metretek. The line of credit
is subject to a mandatory reduction provision which requires the balance
outstanding to be reduced to $300,000 and $200,000 for 30 consecutive day
periods during 1996 and 1997, respectively.
In connection with the formation of Marcum Midstream 1995-2 Business
Trust (the Trust) on February 8, 1996, MGT acquired 5% of the total preferred
shares of the Trust for approximately $245,000. Funding for the acquired
interest was provided by reimbursements to MGT of fees and expenses by the
Trust when it was formed.
Based on the Company's current plans and assumptions, management
believes that its capital resources, including its cash on hand, and expected
cash flow from operations will be sufficient to fund its working capital needs,
capital commitments and debt service requirements for at least the next twelve
months. Depending upon the Company's financial condition, including its
liquidity needs and business activity, the conditions in the capital and other
financial markets, as well as other factors, the Company may from time to time
seek additional funds from the proceeds of debt financing, the sale of equity
or assets or other financing methods. However, there can be no assurance that
the Company will be able to obtain any such additional funds when needed or on
terms that will be favorable to the Company.
13
<PAGE> 14
FORWARD-LOOKING STATEMENTS
The statements contained in the Management's Discussion and Analysis
of Financial Condition and Results of Operations, as well as certain other
parts of this report on Form 10-QSB, that are not based upon historical fact
are forward-looking statements. The forward-looking statements in this report
are based on the current expectations of management and are subject to risks
and uncertainties that could cause actual results to differ materially from
those expressed or implied by those statements. The risks and uncertainties
include, but are not limited to, changes in the natural gas and other
alternative fuels industries and the regulation thereof; the capital resources,
technological requirements and internal business plans of the natural gas
utilities industry; technological changes in the natural gas industry; the
timely development and market acceptance of new product designs and
technologies; the receipt and timing of future customer orders; as well as
other risks and uncertainties that are discussed in this report or that are
discussed from time to time in the Company's other reports and filings with the
Securities and Exchange Commission.
14
<PAGE> 15
PART II.
OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(b) The Company did not file any reports on Form 8-K during the
quarterly period ended September 30, 1996.
15
<PAGE> 16
SIGNATURES
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.
MARCUM NATURAL GAS SERVICES, INC.
By: /s/ W. Phillip Marcum
---------------------------------
Date: November 5, 1996 W. Phillip Marcum
President and Chief Executive
Officer
By: /s/ A. Bradley Gabbard
----------------------------------
Date: November 5, 1996 A. Bradley Gabbard
Executive Vice President and
Chief Financial Officer
16
<PAGE> 17
EXHIBIT INDEX
EXHIBIT
- -------
27 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FINANCIAL
STATEMENTS CONTAINED IN THE COMPANY'S FORM 10-QSB FOR THE PERIOD ENDED SEPTEMBER
30, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> SEP-30-1996
<CASH> 1,270,673
<SECURITIES> 0
<RECEIVABLES> 4,435,505
<ALLOWANCES> 122,867
<INVENTORY> 4,587,764
<CURRENT-ASSETS> 10,744,403
<PP&E> 3,967,806
<DEPRECIATION> 2,232,901
<TOTAL-ASSETS> 21,993,921
<CURRENT-LIABILITIES> 4,269,622
<BONDS> 117,113
0
0
<COMMON> 122,612
<OTHER-SE> 17,484,534
<TOTAL-LIABILITY-AND-EQUITY> 21,993,921
<SALES> 16,871,241
<TOTAL-REVENUES> 17,356,323
<CGS> 11,705,601
<TOTAL-COSTS> 18,592,612
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 72,023
<INCOME-PRETAX> (1,308,312)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,308,312)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,308,312)
<EPS-PRIMARY> (.11)
<EPS-DILUTED> (.11)
</TABLE>
