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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-KSB
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996
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 Number 0-19793
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MARCUM NATURAL GAS SERVICES, INC.
(Name of small business issuer 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, CO 80202
(Address of principal executive offices) (zip code)
(303) 592-5555
(Issuer's telephone number, including area code)
Securities registered under Section 12(b) of the Exchange Act: None
Securities registered under Section 12(g) of the Exchange Act:
Common Stock, $.01 Par Value
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(Title of Class)
Check whether the issuer: (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act 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
--- ---
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB.
----
The issuer's revenues for its most recent fiscal year ended December 31, 1996
were $23,614,051.
As of February 28, 1997, the aggregate market value of the shares of Common
Stock held by non-affiliates was $10,261,186, based upon $1.06 per share of
Common Stock, the last sale price of the Common Stock as reported on the Nasdaq
National Market as of the close of business on such date.
As of February 28, 1997, 12,307,327 shares of the issuer's Common Stock were
outstanding.
Transitional Small Business Disclosure Format (check one): Yes No x
--- ---
DOCUMENTS INCORPORATED BY REFERENCE
None
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FORM 10-KSB
TABLE OF CONTENTS
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Page
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PART I ITEM 1. DESCRIPTION OF BUSINESS 1
General 1
Business Strategy 1
Southern Flow Companies, Inc. 2
Metretek, Incorporated 2
Marcum Fuel Systems, Inc. 4
Marcum Gas Transmission, Inc. 5
Competition 6
Regulation 7
Employees 9
Research and Development 9
Raw Materials 9
Patents and Other Proprietary Rights 9
ITEM 2. DESCRIPTION OF PROPERTY 10
ITEM 3. LEGAL PROCEEDINGS 11
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 11
PART II ITEM 5. MARKET FOR COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS 12
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS 14
Results of Operations 14
Financial Condition and Liquidity 16
ITEM 7. FINANCIAL STATEMENTS 18
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE 18
PART III ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND
CONTROL PERSONS; SECTION 16(a) BENEFICIAL
OWNERSHIP REPORTING COMPLIANCE 19
Directors and Executive Officers 19
Key Employees 21
Section 16(a) Beneficial Ownership Reporting Compliance 21
ITEM 10. EXECUTIVE COMPENSATION 22
Summary Compensation 22
Employment Agreements and Compensation Arrangements 22
Stock Option Grants 23
Stock Option Exercises and Values 24
Director Compensation 24
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT 26
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 27
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K 27
SIGNATURES 31
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
GENERAL
Marcum Natural Gas Services, Inc. is a diversified provider of
products and services to the natural gas and natural gas utility industries.
References to the "Company" herein include Marcum Natural Gas Services, Inc.
and its subsidiaries, unless the context indicates otherwise. The Company's
operations include natural gas measurement services, the manufacture and
distribution of remote natural gas meter reading systems, and the engineering,
design, manufacture, and sale of complete compressed natural gas ("CNG")
fueling equipment for the natural gas vehicle market. The Company is also
engaged in the acquisition of natural gas gathering, processing and
transportation facilities and related assets.
The Company, incorporated in Delaware on April 5, 1991, is a holding
company that conducts its operations through four directly-owned subsidiaries:
Southern Flow Companies, Inc. ("Southern Flow"), Metretek, Incorporated
("Metretek"), Marcum Fuel Systems, Inc. ("Marcum Fuel"), and Marcum Gas
Transmission, Inc. ("MGT"). In June 1991, the Company commenced its operations
by acquiring a natural gas measurement company and rights to its CNG dispensers
and licenses of certain technologies. In April 1993, the Company
significantly enlarged its natural gas measurement operations by acquiring
substantially all of the assets of the Southern Flow Companies division of
Weatherford International Incorporated ("Weatherford") and expanded its CNG
operations by acquiring a provider of CNG refueling station equipment and
engineering, design and equipment selection services. Marcum Fuel was formed
in April 1993 to consolidate the Company's CNG businesses. On March 17, 1994,
the Company acquired Metretek, a manufacturer of remote natural gas meter
reading systems, pursuant to a merger.
BUSINESS STRATEGY
The Company's strategy is to position itself as an integrated provider
of natural gas support products and services. Recently, the natural gas
industry has been characterized by relatively abundant domestic reserves,
increasing demand, volatile prices and regulatory changes that include the
deregulation of the interstate pipeline industry and the Clean Air Act
Amendments of 1990 ("Clean Air Act Amendments"). The Company's strategy has
been to acquire and develop businesses that are positioned to take advantage of
these trends.
In implementing this strategy, the Company acquired substantially all
of the assets of the Southern Flow Companies division of Weatherford, a
provider of natural gas measurement services, and Metretek, a manufacturer of
natural gas meter reading systems. Metretek has benefitted from the increased
need for natural gas measuring and monitoring services that resulted from the
Federal Energy Regulatory Commission ("FERC") Order 636 that required
interstate pipelines to unbundle, or separate, their natural gas sales and
transportation services. The Company expects Metretek to continue to benefit
as individual state regulatory agencies implement provisions similar to FERC
Order 636 on local gas distribution companies ("LDC"s), which have historically
been significant customers of Metretek's products.
In addition, the Company has acquired and developed certain CNG
dispenser technology, and has become a provider of CNG refueling station
products and services. To date, demand for Marcum Fuel's products and services
has been due to both the economic advantages of the use of CNG as a fuel in
fleets, transit authorities and similar mass-vehicle users, as well as
legislation and governmental incentives. These businesses may further
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benefit from regulatory requirements, such as the Energy Policy Act of 1992
("Energy Policy Act") and the Clean Air Act Amendments.
While the Company regularly engages in discussions relating to
potential acquisitions and dispositions, the Company has no present agreement,
commitment or understanding with respect to any such acquisition or
disposition.
SOUTHERN FLOW COMPANIES, INC.
Southern Flow provides a full range of natural gas measurement
services. This subsidiary commenced operations on June 11, 1991 under the name
Measurement Auditors Company, Inc. (and later renamed Marcum Gas Measurement,
Inc.) and was significantly expanded on April 30, 1993 when it acquired
substantially all of the assets of a division of Weatherford, after which it
changed its name to Southern Flow Companies, Inc. Through its predecessors,
Southern Flow has provided measurement services to the natural gas industry
since 1953.
Southern Flow provides a broad array of integrated natural gas
measurement services, including on-site field services, chart processing and
analysis, laboratory analysis, and data management and reporting. Natural gas
measurement services are used by producers of natural gas and pipeline
companies to verify the quantity of natural gas production from producing
wells. To ensure that such data is accurate, on-site field services and data
collection must be coordinated with chart integration and data development and
management to produce timely reports. Southern Flow's field services include
the installation, testing, calibration, sales and maintenance of measurement
equipment and instruments. Southern Flow's chart processing operations include
analyzing, digitizing and auditing well charts and providing custom reports as
requested by the customer. Southern Flow provides these services through 10
division offices located throughout the Gulf of Mexico, Southwest,
Mid-Continent and Rocky Mountain regions.
A majority of natural gas measurement services are currently performed
internally by natural gas producers and pipeline companies. The market for
independent natural gas measurement services is fragmented, with no single
company having the ability to exercise control. In addition to price, the
primary consideration for natural gas measurement customers is the quality of
services and the ability to maintain data integrity since natural gas
measurement has a direct effect on the natural gas producer's revenue and
royalty and working interest owner obligations. The Company believes that it
is able to effectively compete by (i) providing dependable integrated
measurement services, (ii) maintaining local offices in proximity to its
customer base, and (iii) retaining experienced and competent personnel.
Southern Flow provides measurement services to a variety of customers
with various natural gas measurement needs, including independent natural gas
producers and major oil and natural gas companies. Southern Flow also provides
its measurement services to a variety of natural gas gathering, pipeline and
transmission companies, and petro-chemical companies.
METRETEK, INCORPORATED
Metretek was acquired by the Company pursuant to a merger on March 17,
1994. Metretek was founded in Melbourne, Florida in February 1977 as a
developer, manufacturer and distributor of remote electronic automatic meter
reading ("AMR") systems. Metretek's current line of products consists
primarily of automated systems based on a patented technology that collect and
analyze natural gas consumption data and communicate it over existing voice
telephone networks to a central computer for additional processing. These AMR
systems
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are used primarily to monitor the consumption by industrial and commercial
customers of natural gas distribution utility companies, commonly referred to
as local distribution companies ("LDC"s). AMR systems allow natural gas
transporters and sellers to monitor the natural gas consumption of their
customers from a single remote site, typically the LDC's headquarters, without
the need to travel on-site to collect customer consumption data.
Metretek's product development efforts are designed to allow it to be
responsive to customers' specific requirements. AMR systems can be modified to
communicate using cellular telephone technology or VHF radio technology and can
be powered by a variety of sources. Metretek's ability to use alternative
communication techniques and power supplies allows it to customize its products
based on specific customer needs. In addition to its AMR systems, Metretek has
developed an electronic corrector interface that allows natural gas metering
devices to communicate with central computers using a variety of communication
protocols. Metretek also offers a broad array of customer support services
which are directed at maintaining customer satisfaction and obtaining customer
loyalty.
For the two years ended 1996, sales of AMR systems represented
approximately 91% of Metretek's revenues compared to approximately 80% of
Metretek revenues in 1994. The remainder of Metretek's revenues for the three
year period were attributable primarily to sales of products made on an
original equipment manufacturer ("OEM") basis, primarily to one customer who
resold the OEM products mainly to natural gas utility companies. The increase
in percentage of AMR sales in 1996 and 1995 compared to 1994 is due to a
reduction in OEM sales. Until January 1995, Metretek's products were marketed
in the U.S. and Canada exclusively through Mercury Instruments, Inc. under the
supervision of Metretek's regional sales managers. Since then, Metretek has
been marketing and distributing its products in the U.S. and Canada entirely
through its own direct sales force.
Metretek's export sales have decreased over the past two years from
approximately 25% to 21% of Metretek's revenues (which constituted a decline
from 9% to 7% of the Company's consolidated revenues). Approximately 67% of
Metretek's exports for 1996 went to Western Europe, approximately 26% went to
Canada, and approximately 6% went to Australia. Effective January 1, 1996,
Metretek acquired the remaining 57.5% ownership interest in Metretek Europe
Limited ("Metretek Europe") in exchange for 175,000 shares of restricted Common
Stock of the Company, at which time Metretek Europe became a wholly-owned
subsidiary of Metretek. Metretek Europe, of which Metretek previously owned
42.5%, is a company organized under the laws of Great Britain and located in
Camberley, England. Metretek Europe sells Metretek products in Western Europe
and certain Asian nations including Pakistan and Taiwan. Metretek utilizes a
direct sales force in conjunction with distributors to market its products in
Argentina, Mexico, Australia, Brazil and Columbia.
Metretek's AMR systems customers are primarily LDCs. Metretek's OEM
product customers are primarily manufacturers of measurement products. During
the 1996 fiscal year, Metretek sold its AMR products to approximately 90
customers and sold OEM products primarily to one manufacturer.
On June 21, 1996, Metretek acquired the assets of Sigma VI, Inc.
("Sigma VI") for a total purchase price of $90,000 cash. 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. Revenues from Sigma VI, since the date of acquisition,
totaled approximately $214,000 in 1996.
In January 1997, Metretek entered into a Memorandum of Understanding
(the "MOU") with CellNet Data Systems, Inc. ("CellNet"), which is engaged in
the provision of wireless data communication services to utilities for the
principal purpose of providing automated network meter reading, to cooperate
through a strategic alliance that would engage in the development of "end point
products" compatible with CellNet's wireless data
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communications network in order to offer a broader range of information and
communication services to the natural gas utility industry. The MOU provides
for (i) CellNet to license to Metretek its technology for Metretek to develop
and produce end-point products compatible with CellNet's communications network
and to market them to CellNet and/or subscribers to CellNet's services in the
United States, (ii) the parties to explore the use of CellNet's residential gas
product enclosure as the housing for a new Metretek residential telephone-based
metering product, (iii) Metretek to license to CellNet its data collection and
management software system for integration into the CellNet system, and (iv)
Metretek and CellNet to agree to non-exclusive joint marketing and sales
efforts.
Metretek's business strategy includes developing cooperative
relationships with measurement equipment providers and software application
developers that will utilize or enhance Metretek's metering devices or
software. The Company believes that Metretek's success in penetrating markets
for industrial applications in the natural gas utility industry as well as in
the residential commercial market will depend in large part on its ability to
develop and cultivate these relationships. There can be no assurance that
Metretek will be able to develop these relationships, or that the alliance with
CellNet will continue or be successful in achieving its purposes.
The natural gas utility industry is in transition. Customer demands
and regulatory mandates by federal, state and local governments are forcing
utilities to transform themselves from regulated monopolies into competitive
enterprises. Today, commercial and industrial customers can negotiate to
purchase natural gas directly from producers or brokers, while utilities are
required to provide transportation of such gas to customers' facilities.
Metretek is currently exploring various other remote monitoring and
consumption recording application opportunities both within and outside of the
natural gas utility industry. First generation products have been developed
and are being sold for pressure monitoring and cathodic protection monitoring
of natural gas pipelines. Products are in development for remote monitoring
and control of stand-by power generators and for power outage detection and
reporting. In addition, modifications to existing products are also being
considered to produce products and systems that would automatically and
remotely determine, measure, record and report on liquid levels in storage
tanks.
MARCUM FUEL SYSTEMS, INC.
In June 1991, the Company acquired from Engineering Measurements
Company, Inc. ("EMCO") the rights to its CNG dispensers and the license of
certain technologies (including proprietary metering and flow control
technology) giving the Company the exclusive right to use such technology to
manufacture and sell CNG dispensers and related products. In April 1993, the
Company acquired a provider of CNG refueling station equipment and engineering,
design and equipment selection services. Marcum Fuel was formed in April 1993
to consolidate the Company's CNG businesses, DVCO Fuel Systems, Inc. and Marcum
CNG Systems, Inc.
Marcum Fuel is in the business of engineering, manufacturing,
marketing and selling its CNG fueling equipment, systems and related products.
Marcum Fuel holds three patents on the technology relating to its CNG
dispensers, which utilize a proprietary metering system to measure and regulate
the flow of CNG during refueling of vehicles. Marcum Fuel's metering
technology combines the use of sonic nozzles, densitometers, microcomputers and
other instruments which measure natural gas flowing through the dispenser.
Marcum Fuel's CNG dispenser technology allows accurate metering to be achieved
under widely varying pressure and temperature environments and flow conditions.
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Marcum Fuel is also engaged in the business of engineering, designing,
assembling, installing and servicing CNG refueling stations. Marcum Fuel
provides refueling station equipment, engineering, design and equipment
selection services, as well as station installation and start-up and also
provides maintenance and technical services to its customers.
Domestic demand for CNG fueling products and services has been
influenced by federal and state clean air and pollution control legislation
imposing tighter emission standards, and clean fuel fleet program mandates
contained in the Clean Air Act Amendments and the Energy Policy Act, which
legislation is intended to increase the use of alternative transportation
fuels. The Clean Air Act Amendments and the Energy Policy Act establish
requirements that certain percentages of purchases of new vehicles within
"covered" fleets be powered by an alternative transportation fuel. However,
the implementation of many of these requirements has been delayed, and other
requirements have not been met or enforced. In addition, numerous regulatory
rulings and actions are required to be made in order to implement most of these
requirements. There is no assurance as to when or how many of these
requirements will be implemented, or as to what these rulings or actions will
provide, when they will be made, or what their impact will be upon the Company.
Demand for Marcum Fuel's products and services has also been
influenced by certain economic considerations of the use of CNG as a fuel
including the effects of legislation and governmental incentives. Demand for
Marcum Fuel's CNG products and services has been influenced by federal and
state incentive programs encouraging the use of natural gas vehicles. A number
of federal programs exist to provide financial assistance to state government
and private sector interests to encourage the increased use of alternative
fuels, including the Congestion Mitigation and Air Quality Improvement Program,
the Department of Energy's Clean Cities Program and the Energy Policy Act.
Several states offer some form of tax subsidy or interest subsidy to reduce the
incremental cost of purchasing an alternative fuel vehicle or of converting an
existing vehicle.
Currently, several states have various programs in place that promote
the use of alternative transportation fuels. Other factors that may influence
the alternative transportation fuels domestic market include continuing concern
about the nation's dependence on foreign, unstable supplies of crude oil and
the recognition of relatively abundant and inexpensive domestic natural gas
reserves. CNG is one of a number of alternative transportation fuels, and
studies have demonstrated that CNG produces low levels of pollutant emissions
compared to both traditional and other alternative transportation fuels. In
addition to the domestic market, CNG is increasingly being used as an
alternative transportation fuel in certain international markets. Purchasers
of NGVs and Marcum Fuel's CNG products and services include utilities, private
fleet owners, major gasoline retailers, school systems and transit authorities.
MARCUM GAS TRANSMISSION, INC.
MGT was organized in 1991 to acquire natural gas gathering, processing
and transportation facilities and related assets. The strategy of MGT is to
acquire the assets and transfer them to partnerships or similar entities and to
receive management compensation from and to retain an ownership interest in
such entities. Marcum Capital Resources, Inc. ("MCR"), a broker-dealer
registered with the National Association of Securities Dealers, Inc., was
formed in 1992 as a wholly-owned subsidiary of MGT to secure private capital to
finance acquisitions by these partnerships and other entities.
MGT has formed and is a manager of and an investor in two ventures.
In March 1994, MGT and Goodrich Petroleum Company of Louisiana ("GPCL"), a
significant stockholder of the Company, formed, and are the co-managing general
partners of, Marcum-Patrick Pipeline Program 1993-1 L.P. (the "Pipeline
Partnership"), which owns certain natural gas gathering systems and related
assets in northwest Louisiana and
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northeast Texas. MGT and GPCL also hold a 4% and 6% limited partner interest,
respectively, in the Pipeline Partnership. In 1996, MGT, as a co-managing
general partner of the Pipeline Partnership, received approximately $24,000 as
administrative and management fees.
In February 1996, MGT formed Marcum Midstream 1995-2 Business Trust
("MM 1995-2"), of which MGT is the managing trustee. MM 1995-2 purchased two
deep injection water disposal facilities located in northeastern Colorado,
which purchase was financed by a $5,650,000 private placement of preferred
shares in MM 1995-2. MGT purchased 5% of the preferred shares in MM 1995-2
which was funded by reimbursements to MGT of fees and expenses by MM 1995-2
when it was formed. MGT, as managing trustee, is responsible for
administrative activities of MM 1995-2 for which it is entitled to compensation
from MM 1995-2. In addition, MGT, as managing trustee, is entitled to receive
performance distributions equal to approximately 10% of the cash available for
distribution by MM 1995-2 before "payout" and approximately 25% after "payout",
as defined in the Declaration of Trust. In 1996, MGT earned approximately
$99,000 in management and administrative fees and $121,000 in performance
distributions.
On February 7, 1997, MGT, as managing trustee of Marcum Midstream
1997-1 Business Trust ("MM 1997-1"), entered into an option purchase agreement
with Farstad Gas & Oil, LLC ("Farstad"). Pursuant to that agreement, Farstad
has granted to MGT, on behalf of MM 1997-1, the sole and exclusive option
("Farstad Option") to acquire and expand a natural gas liquids processing plant
located near Midland, Texas (the "Facility") at any time on or before August 21,
1997 for a base purchase price of $2,500,000 plus a subordinated beneficial
interest in MM 1997-1. MM 1997-1 intends to acquire and expand the Facility
with funding provided through a maximum $8,000,000 private placement of certain
beneficial interests in MM 1997-1 referred to as preferred shares ("Preferred
Shares"). MGT, as managing trustee of MM 1997-1, will be responsible for MM
1997-1's administrative activities for which it will be entitled to compensation
from MM 1997-1 and will be entitled to receive performance distributions equal
to approximately 10% of the cash available for distribution by MM 1997-1 before
"payout" and approximately 25% after "payout", to be defined in the declaration
of trust. In addition, MGT intends to acquire 5% of the total Preferred Shares
of MM 1997-1 for a purchase price of a maximum of $400,000, which is the same
price applicable to outside investors. In the event of the closing of the
private placement and the exercise of the Farstad Option, MGT will be reimbursed
for certain organizational, offering and acquisition expenses. However, the
organization and capitalization of MM 1997-1 and the exercise of the Farstad
Option are dependent on, among other things, the following: (i) that proceeds of
at least $5,000,000 are raised in the private placement, and (ii) that MGT
acquires 5% of the total Preferred Shares of MM 1997-1. There can be no
assurance that these conditions will be met. See "Management's Discussion and
Analysis -- Financial Condition and Liquidity."
COMPETITION
Numerous companies compete directly with Southern Flow in the natural
gas measurement services industry, including companies which provide the same
services as Southern Flow and those which provide additional or related field
services. Although a majority of natural gas measurement services is currently
performed internally by natural gas producers and pipeline companies, most of
Southern Flow's direct competition consists of small measurement companies
providing limited services and serving limited geographical areas. Southern
Flow offers a complete range of natural gas measurement services over a wide
geographical area which management believes offers Southern Flow advantages
over its competitors.
The market for Metretek's natural gas AMR systems is serviced mainly
by large manufacturers of metering devices which emphasize sales of its
metering devices and offer remote monitoring and communication devices
primarily as an accessory. Metretek believes that it has an advantage over
these competitors because of
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its emphasis on the supply of automated remote meter reading systems. Metretek
experiences additional competition from manufacturers of residential AMR
systems, but believes that those systems are typically less functional and do
not present a significant threat to Metretek's current customer base. Metretek
competes primarily on the basis of product quality, applications expertise, and
the quality of its service and support, rather than on the basis of price.
To the knowledge of management, Marcum Fuel faces direct competition
from a few companies utilizing technologies similar to that employed by Marcum
Fuel. Marcum Fuel also faces competition from alternative transportation fuels
which compete directly with CNG including reformulated gasoline, ethanol,
methanol, clean diesel, electricity and propane. Management of the Company
expects competition in this business to increase commensurate with the growth
and development of the alternative fuels industry.
MGT encounters strong competition from major and independent oil and
natural gas companies and independent operators in acquiring and operating
natural gas gathering, processing and transportation systems.
REGULATION
Regulation of Natural Gas Industry Generally. The Company's
operations are affected in various degrees by political developments and
federal and state laws and regulations. In particular, natural gas production,
operations and economics are affected by price controls, by environmental, tax
and other laws relating to the natural gas industry, by changes in such laws
and by changing administrative regulations and the interpretations and
application of such laws, rules and regulations. Natural gas industry
legislation and agency regulation is periodically changed for a variety of
political, economic and other reasons.
The Company's international operations are also subject to the
political, economic and other uncertainties of doing business abroad including,
among others, risks of war, cancellation, expropriation, renegotiation or
modification of contracts, export and transportation regulations and tariffs,
taxation and royalty policies, foreign exchange restrictions, international
monetary fluctuations and other hazards arising out of foreign government
sovereignty over certain areas in which the Company conducts, plans to conduct
or in the future may conduct operations.
Federal and State Regulation of Natural Gas. FERC regulates the
transportation and resale of natural gas in interstate commerce pursuant to the
Natural Gas Act of 1938. In 1992, FERC issued its Order 636 which extensively
revised the regulation of interstate pipelines by requiring the operators of
such pipelines to unbundle their transportation services from sales services
(and allow customers to choose and pay for only the services they desire). The
primary thrust of FERC Order 636 was to divest the interstate pipelines of
their virtual monopoly over the interstate gas sales function. Management of
the Company believes that as implementation of FERC Order 636 is undertaken by
state regulatory agencies at the LDC level, demand for Metretek's products and
services will increase due to increased emphasis on the importance of timely
and accurate measurement and monitoring of natural gas in transportation and
sales transactions.
Environmental Regulation. While various federal, state and local laws
and regulations covering the discharge of materials into the environment, or
otherwise relating to the protection of the environment, may affect the
Company's operations as a result of their effect on natural gas development,
exploration, production, transportation and dispensing operations, the
Company's operations are not currently subject to substantial environmental
laws and regulations. The Company believes it is in material compliance with
those environmental laws and regulations to which it is subject. It is not
anticipated that the Company will be required in the near future to expend
amounts that are material in relation to its total capital expenditures program
by reason of
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environmental laws and regulations. However, inasmuch as such laws and
regulations are frequently changed, the Company is unable to predict the
ultimate effect on the Company and cost of compliance to the Company.
Clean Air Act Amendments. The Clean Air Act Amendments mandate the
development of regulations for "clean alternative fuels," which include CNG, as
well as reformulated gasoline, methanol, ethanol, diesel, liquid petroleum gas,
hydrogen and electricity. The Clean Air Act Amendments require, among other
things, the purchase of "clean fuel vehicles" by public and private owners in
those primarily metropolitan areas of the United States that are shown to be
"out of attainment" due to higher than allowable air pollution levels and who
operate 10 or more motor vehicles capable of being centrally refueled. These
fleet provisions are scheduled to be phased in commencing in 1998. Numerous
regulatory rulings and actions are required to be made under the Clean Air Act
Amendments in order to implement these fleet provisions. Based on U.S. EPA
data for reporting years 1993-1995, 106 counties were designated non-attainment
for ozone and 41 counties were designated non-attainment for particulate
matter, nationwide. However, U.S. EPA has proposed new regulations further
tightening air emission standards which, if adopted, are predicted to add an
additional 229 counties to the ozone non-attainment list and an additional 167
counties to the particulate matter non-attainment list. The nature and timing
of these rulings and actions could have an impact on sales of the Company's CNG
dispensing products and services, and there is no assurance that currently
scheduled requirements will be enforced or not. The Company cannot predict
whether the currently scheduled provisions will be met or enforced, or what
future rulings and actions will provide, when they will be made or what their
impact will be on the Company.
Energy Policy Act. The Energy Policy Act, enacted in October 1992,
emphasizes vehicle fuel efficiency and the development of renewable energy
sources. The final rule implementing the Energy Policy Act became effective
April 15, 1996. The Energy Policy Act mandates equal treatment of domestic and
imported natural gas supplies, expands the use of natural gas and other
alternative fuel vehicles and funds natural gas research and development. The
Energy Policy Act requires the use of "alternative fuel vehicles" in fleets of
20 or more light-duty motor vehicles capable of being centrally fueled that are
used primarily in affected areas and that are owned, operated, leased or
controlled by a governmental entity or any other person who controls 50 or more
such vehicles. The areas affected by the Energy Policy Act include more than
120 metropolitan statistical areas, each with a 1980 population of more than
250,000. Alternative fuels permitted under the Energy Policy Act includes CNG,
as well as methanol, ethanol, liquid petroleum gas, hydrogen, coal-derived
liquid fuels and electricity, but do not presently include reformulated
gasoline, a fuel staunchly opposed for inclusion by the Department of Energy
("DOE"). These fleet requirements began to phase-in during 1993, but the
implementation of many of these requirements has been delayed, and other
requirements have not been met or enforced. Initial fleet reporting
requirements for model year 1997 vehicles must be submitted to the DOE by the
end of calendar year 1997. The Company expects these provisions of the Energy
Policy Act and its final rule to have a positive impact on the revenues of the
Company's CNG dispensing products and services. However, numerous regulatory
rulings and actions are necessary under the Energy Policy Act to implement
these requirements, and the Company cannot predict what these rulings and
actions will provide, when they will be made or what their impact will be on
the Company, or whether additional fuels such as reformulated gasoline will be
included as permitted alternative fuels.
Regulation of CNG Activities. The Company's CNG dispensers utilize
equipment that measures and regulates the flow and pressure of CNG. In
addition, the Company provides complete CNG refueling station equipment and
designs for equipment, components and stations. This equipment is typically
subject to minimum safety standards. For example, National Fire Protection
Association ("NFPA")-52 specifies the most common accepted standard for CNG
vehicular fuel systems and NFPA-54 may apply to facilities utilized to deliver
natural gas to vehicles. Even if such standards have not been adopted by
governmental authorities in jurisdictions where the Company operates, they are
typically referred to by purchasers to establish equipment specifications for
8
<PAGE> 11
equipment supplied by the Company. Additionally, dispensing equipment for
natural gas must meet or exceed federal and state government standards of
measurement accuracy. These existing safety and measurement standards and
future changes in such standards may affect the market for the Company's CNG
products and services.
EMPLOYEES
At February 28, 1997, the Company and its subsidiaries had 256
full-time employees. None of the employees are covered by a collective
bargaining agreement. The Company believes that its relations with its
employees are good.
RESEARCH AND DEVELOPMENT
The Company conducts and/or contracts for basic research and product
development on a continuing basis. Research activities have been primarily
directed toward monitoring devices in its Metretek operations and CNG flow
metering and dispensing products and services in its Marcum Fuel operations.
The Company incurred $746,646 and $1,410,998 for research and development
expenses during the years ended December 31, 1996 and 1995, respectively. The
Company intends to continue to allocate resources to the research and
development of new products in the future, which in the near future will be
primarily in connection with Metretek's business.
Metretek conducts product research and development on a continuing
basis directed towards product improvement in anticipation of current and
anticipated customer needs and towards developing products for potential new
markets. Current research and development activities for existing markets are
aimed at improving communications technology and the flexibility of user
interfaces. Current research and development activities for potential new
markets are directed at the development of pressure monitoring devices and
corrosion protection measuring and monitoring in utility pipelines.
A substantial portion of the research and development expenses
relating to Marcum Fuel that were incurred in 1995 and 1996 related to the
further development of the Company's proprietary metering system and
improvements in the performance of its CNG dispenser. Marcum Fuel will
continue to assess the need for further research and development of its CNG
products and services as the CNG market and technology continues to develop.
RAW MATERIALS
The Company's subsidiaries purchase memory chips, electronic
components, printed circuit boards, fabricated sheet metal parts, machined
components, raw steel, aluminum, metallic castings and various other raw
materials for their products. While, in the opinion of management, the loss of
any one supplier of materials would not have a material adverse impact on the
business or operations of the Company, shortages in certain components such as
memory chips, supply problems from the Company's suppliers or the Company's
inability to develop alternative sources of supply quickly or cost-effectively
could materially impact the Company's ability to manufacture its products and
therefore could adversely affect the Company's business and operations. The
Company mitigates this risk by maintaining an inventory of such materials.
PATENTS AND OTHER PROPRIETARY RIGHTS
The Company believes that its patents with respect to technologies
employed by Metretek and Marcum Fuel are important but are not indispensable to
Metretek's and Marcum Fuel's businesses. Although the
9
<PAGE> 12
Company anticipates seeking patent protection when possible, the Company relies
to a greater extent on the technical expertise and know-how of its personnel to
maintain its competitive position. Each of Metretek and Marcum Fuel requires
its respective key employees to execute confidentiality agreements upon the
commencement of employment.
Metretek's monitoring devices utilize technology protected by patents
which expire between 1997 and 2008. Metretek has licensed the use of its
patented technology for its AMR systems to other manufacturing companies for
integration into their products.
Marcum Fuel holds four patents which expire between 2010 and 2013
regarding certain aspects of its CNG dispenser. Marcum Fuel has taken steps in
various foreign countries to register these patents internationally. Marcum
Fuel has also acquired from EMCO certain perpetual licenses to the proprietary
metering technology underlying the CNG dispenser. Marcum Fuel has agreed to
pay EMCO a 5% royalty on gross sales and leases of CNG dispensers and related
products (and/or components of systems which incorporate or utilize the
technology licensed by EMCO to Marcum Fuel) realized through 1997, subject to a
minimum royalty of $50,000 per year. Marcum Fuel's license from EMCO may be
terminated by either party in the event of a default by the other party for a
material failure to comply with the terms of the license, or automatically in
the event Marcum Fuel's sales of CNG dispensers and related products are less
than $100,000 annually after six years.
ITEM 2. DESCRIPTION OF PROPERTY
The Company leases its corporate executive offices located in downtown
Denver, Colorado, which contain 3,443 square feet. The lease currently has a
monthly rental obligation of $3,916, including operating costs, expires July
31, 2001, and contains a market-rate renewable lease provision.
Southern Flow leases office facilities in the following locations:
Lafayette, Belle Chasse and Shreveport, Louisiana; Jackson, Mississippi;
Houston and Victoria, Texas; Tulsa, Oklahoma; Brighton, Colorado; and Aztec,
New Mexico. These offices have an aggregate of approximately 54,000 square
feet, total monthly rental obligations of approximately $30,400 and terms
expiring at various times through 2001. In addition, Southern Flow owns and
occupies land and a 7,000 square foot office building in Dallas, Texas.
Metretek leases its principal business offices, located in Melbourne,
Florida, for its executive, manufacturing, engineering, warehouse and marketing
operations. This facility has 39,125 square feet and a monthly rental
obligation of $23,017. The lease expires June 30, 2005. Metretek has
sub-leased 8,470 square feet of its space for $6,678 monthly rental, thereby
reducing its net square footage and monthly rent to 30,655 and $16,339,
respectively.
Marcum Fuel currently leases approximately 15,000 square feet in an
industrial district in Denver, Colorado, including office space and shop space.
The lease has a monthly rental obligation of $4,667 and expires on December 31,
1998.
MGT occupies a portion of the Company's corporate executive offices in
downtown Denver referred to above.
10
<PAGE> 13
ITEM 3. LEGAL PROCEEDINGS
A former employee filed an action in Denver District Court against
DVCO Fuel Systems, Inc. and the Company on or about December 30, 1993 which is
currently scheduled for trial on August 11, 1997. The former employee's
remaining claims allege that the Company conspired with certain third parties
to defraud him and that the Company intentionally interfered with certain
contracts in which he had an interest. The former employee is seeking damages
in the amount of approximately $420,000 and punitive damages. The Company has
denied the former employee's claims and has asserted counterclaims against the
former employee, alleging that (i) he breached an agreement with the Company
which included a legal release, (ii) he made intentional and/or negligent
misrepresentations regarding his qualification and reputation in the compressed
natural gas industry, (iii) he breached his fiduciary duty to the Company, and
(iv) he disparaged the Company. Management of the Company believes that the
former employee's claims are without merit and that both its counterclaims and
its defenses to the former employee's claims are valid, and management intends
to defend the lawsuit vigorously.
Other than as set forth above, there are no legal proceedings pending
or, to the knowledge of the Company, threatened against the Company or any of
its assets, other than litigation incidental to its business. Although the
outcome of this litigation is not determinable with certainty, in the opinion
of the Company's management, this litigation is not expected to have a material
adverse effect on the business, financial condition or results of operations of
the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
NONE
11
<PAGE> 14
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock is traded on the Nasdaq National Market
under the symbol "MGAS". The following table sets forth, for the periods
indicated, the high and low sale prices of the Common Stock as reported on the
Nasdaq National Market:
<TABLE>
<CAPTION>
PRICE RANGE
-------------------
PERIOD HIGH LOW
- ------ ---- ----
<S> <C> <C> <C>
1995:
First Quarter . . . . . . . . . . . . . . . 2.06 1.31
Second Quarter . . . . . . . . . . . . . . 1.81 1.25
Third Quarter . . . . . . . . . . . . . . . 1.53 1.00
Fourth Quarter . . . . . . . . . . . . . . 1.34 1.00
1996:
First Quarter . . . . . . . . . . . . . . . 1.69 1.13
Second Quarter . . . . . . . . . . . . . . 1.56 1.13
Third Quarter . . . . . . . . . . . . . . . 1.44 1.06
Fourth Quarter . . . . . . . . . . . . . . 1.13 .75
</TABLE>
As of February 28, 1997, there were 361 holders of record of the
Common Stock. Because many of the shares of Common Stock are held by brokers
and other institutions on behalf of the stockholders, the Company estimates
there are at least 3,000 beneficial holders of its Common Stock.
The Company has never declared or paid any cash dividends on its
Common Stock. The Company's Board of Directors does not anticipate paying any
cash dividends in the foreseeable future, as it intends to retain any earnings
to finance the growth of the Company's business. In addition, the Company's
existing loan agreement does and its contemplated loan agreement is expected to
(see "Item 6. Management's Discussion and Analysis -- Financial Condition and
Liquidity") limit or restrict the ability of the Company to receive dividends
from its subsidiaries, which effectively limits or restricts the Company's
ability to pay dividends. The payment of any cash dividends on the Common
Stock in the future will depend on such factors as the earnings, anticipated
growth requirements, the operating and financial condition of the Company,
contractual restrictions and any other factors deemed relevant by the Board of
Directors.
The Company issued 5,000 shares of Common Stock on March 8, 1996 and
2,500 shares of Common Stock on June 10, 1996 to Bobby W. Page, who was the
Company's Vice President and Chief Financial Officer at the time of such
issuances, as compensation for services rendered as an employee. On March 29,
1996, the Company issued 175,000 shares of Common Stock to the two remaining
shareholders of Metretek Europe in exchange for 5,750 shares of Metretek
Europe, constituting the remaining 57.5% of the outstanding shares of Metretek
Europe. The Company, through Metretek, had previously owned 4,250 shares of
Metretek Europe, constituting 42.5% of the outstanding shares of Metretek
Europe. The Company issued 72,727 shares of Common Stock on June 27, 1996 and
50,155 shares of Common Stock on November 6, 1996 to a licensor under
12
<PAGE> 15
the terms of an amended license agreement as royalty payments for the license
of certain metering patent rights. The foregoing transactions constitute all
of the equity securities of the Company sold by the Company during 1996 that
were not registered under the Securities Act of 1993, as amended ("Securities
Act").
Each of the unregistered sales described above was made pursuant to
Section 4(2) of the Securities Act, as a transaction not involving a public
offering, based upon the facts that the Company reasonably believed that each
purchaser had such knowledge and experience in financial and business matters
to be capable of evaluating the merits and risks of the investment, and each
purchaser represented an intention to acquire the securities for investment
only and not with a view to the distribution thereof. In connection with each
transaction, no broker-dealers were used, no commissions were paid, and
appropriate legends restricting transfer were affixed to the stock certificates
issued in the transactions.
13
<PAGE> 16
ITEM 6. 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 years ended December 31, 1996 and 1995 and of the consolidated
financial condition of the Company as of December 31, 1996 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>
YEARS ENDED
DECEMBER 31,
------------------------
1996 1995
-------- --------
(DOLLAR AMOUNTS IN THOUSANDS)
REVENUES:
<S> <C> <C>
Southern Flow . . . . . . . . . . . . . $10,835 $10,815
Metretek . . . . . . . . . . . . . . . . 7,584 8,202
Marcum Fuel . . . . . . . . . . . . . . 4,594 4,090
Total . . . . . . . . . . . . . . . . . 23,614 23,244
GROSS PROFIT:
Southern Flow . . . . . . . . . . . . . 2,689 2,901
Metretek . . . . . . . . . . . . . . . . 3,743 3,835
Marcum Fuel . . . . . . . . . . . . . . 687 820
Total . . . . . . . . . . . . . . . . . 7,119 7,556
NET INCOME (LOSS):
Southern Flow . . . . . . . . . . . . . 976 983
Metretek . . . . . . . . . . . . . . . . 152 (534)
Marcum Fuel . . . . . . . . . . . . . . (1,549) (1,771)
Total . . . . . . . . . . . . . . . . . (1,541) (2,629)
</TABLE>
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995
Revenues. Revenues increased $369,770, or 2%, for the year ended
December 31, 1996 compared to the same period in 1995. Revenues from Southern
Flow increased $20,438, or less than 1%, for the year ended December 31, 1996,
compared to the same period in 1995. Revenues from Metretek decreased
$618,291, or 8%, for the year ended December 31, 1996, compared to the same
period in 1995, which was comprised of a decrease in international sales of
$434,097, along with a decrease in Metretek's domestic sales of $184,194. The
decrease
14
<PAGE> 17
in Metretek's international sales was comprised of a decrease in sales to a
South American customer of approximately $433,000, as well as a decrease in
sales to Canadian customers of approximately $316,000, offset in part by an
increase in European sales of approximately $332,000 through Metretek's
wholly-owned subsidiary, Metretek Europe. The decrease in Metretek's domestic
revenues was comprised of an approximate $222,000 decrease in automatic meter
reading (AMR) systems, as well as by an approximate $176,000 decrease in sales
primarily to one customer of OEM products which are then resold by the
customer, mainly to natural gas utility companies. These decreases were
offset, in part, by an approximate $214,000 increase in circuit board assembly
sales through Metretek's wholly-owned subsidiary, Sigma VI. The Company
believes that the decrease in Metretek's domestic AMR revenues is attributable
to the deferral of orders by utility companies and others who use Metretek's
products offset, in part, by an increase in the price of certain products.
Revenues from Marcum Fuel increased $503,440, or 12%, for the year ended
December 31, 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 $464,183, or 338%,
for the year ended December 31, 1996 compared to the same period in 1995. The
primary reasons for the increase resulted from additional MGT revenue of
approximately $328,000 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 $203,000 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 $71,000 decrease in corporate interest income for the year ended
December 31, 1996, compared to the same period in 1995.
Costs and Expenses. Cost of sales and services increased $342,493, or
2%, for the year ended December 31, 1996 compared to the same period in 1995.
Cost of sales and services from Southern Flow increased $232,873, or 3%, in the
year ended December 31, 1996 compared to the same period last year. Southern
Flow's gross profit margin after costs of sales and services decreased from
26.8% to 24.8% 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 $526,442, or 12%, for the year
ended December 31, 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 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
46.8% to 49.4% in the 1996 period compared to the same period in 1995. Costs
of sales and services from Marcum Fuel increased $636,062, or 19%, in the year
ended December 31, 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 20.0% to 15.0% in the 1996 period compared to the same
period in 1995, reflecting competitive pricing pressures in the industry.
General and administrative expenses increased $490,753, or 11%, for
the year ended December 31, 1996 compared to the same period in 1995. This
increase resulted primarily from increases in expenses of Metretek of
approximately $345,000 due to costs incurred at its wholly-owned subsidiaries,
Metretek Europe and Sigma VI, for which there were no comparable costs in 1995,
an increase in expenses of Southern Flow of approximately $80,000 attributable
to increased personnel costs, an increase in expenses of MGT of approximately
$114,000 attributable to increased professional and personnel costs incurred.
These increases were partially offset by a decrease in general corporate
expenses of approximately $50,000 attributable to reduction in professional and
personnel costs incurred.
15
<PAGE> 18
Selling, marketing and service expenses decreased $628,240, or 21%,
for the year ended December 31, 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 at Metretek and Marcum Fuel, (iii) a reduction in
advertising and promotional expenses at Metretek and Marcum Fuel, 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 $101,732, or 8%, for
the year ended December 31, 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 $664,352, or 47%, for the
year ended December 31, 1996 compared to the same period in 1995, which
resulted from a decrease of approximately $188,000 related to Marcum Fuel and a
decrease of approximately $476,000 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 involved in research and development
activities in August 1995.
Interest and other expenses decreased $157,058, or 63%, for the year
ended December 31, 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 $114,000
for the year ended December 31, 1996. The principal components of this
increase in cash were (i) cash provided of approximately $395,000 due to the
reduction in accounts receivables, (ii) cash provided in the amount of
approximately $135,000 for the increase of accounts payable, (iii)
approximately $459,000 of net cash provided for a combination of the payment of
miscellaneous liabilities offset by proceeds from miscellaneous assets, (iv)
approximately $218,000 of cash used in operations, before changes in assets and
liabilities, and (v) cash used in the amount of approximately $657,000 related
to the increases in inventory levels.
16
<PAGE> 19
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 1997 will be
approximately $1,220,000, substantially all of which will relate to Metretek's
business. Research and development expenses in the amount of $746,646 were
incurred in the year ended December 31, 1996.
The Company's capital expenditures in 1996 were $632,579, including
capitalized manufacturing rights and software development costs in the amount
of $423,740. The Company anticipates capital expenditures in 1997 of
approximately $250,000 primarily for production and laboratory equipment,
computer hardware and software. The Company does not anticipate any capital
expenditures related to capitalized software development costs in 1997.
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
$65,731 were incurred in the year ended December 31, 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, and
guaranteed by the Company. 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 MM 1995-2 on February 8, 1996, MGT
acquired 5% of the total preferred shares of MM 1995-2 for approximately
$245,125. Funding for the acquired interest was provided by reimbursements to
MGT of fees and expenses by MM 1995-2 when it was formed.
In order to fund its investment in MM 1997-1 and to enable it to
exercise the Farstad Option (see "Item 1. Description of Business -- Marcum
Gas Transmission, Inc."), MGT has received a written commitment from a
commercial bank for a $400,000 term loan repayable in equal monthly principal
payments plus interest over a 36 month period (the "MGT Loan"). The loan
commitment is contingent upon execution of a mutually satisfactory loan
agreement which contains, among other things, the terms described herein. The
MGT Loan will, if funded, be secured by the accounts receivable, inventory,
selected equipment and real estate of Southern Flow and an assignment of MGT's
preferred share interest in MM 1997-1 and will be guaranteed by the Company.
The loan agreement is expected to require the Company to maintain a minimum
consolidated tangible net worth and Southern Flow to maintain a minimum debt
service coverage ratio, and is expected to contain other standard covenants
affecting the operations of Southern Flow and MGT. The outstanding balance
under the loan agreement is expected to be limited to an amount equal to 80% of
the eligible accounts receivable of Southern Flow (to be defined in the loan
agreement). Although the Company expects to enter into the loan agreement in
April 1997, there is no assurance that the loan agreement will be closed in
April 1997 or at all. The failure of
17
<PAGE> 20
the MGT Loan to be timely funded could have an adverse effect on MGT's ability
to organize and capitalize MM 1997-1 and exercise the Farstad Option and on the
cash flow, business and operations of the Company.
Based on the Company's current plans and assumptions (including the
assumption that the MGT Loan is timely funded), management believes that its
capital resources, including its cash on hand, its expected cash flow from
operations and its borrowings will be sufficient to fund its
currently-anticipated 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. In the event the MGT Loan is not funded, then the Company may be
required to alter its current business plans (such as by not exercising the
Farstad Option) and seek additional funds. 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.
FORWARD-LOOKING STATEMENTS
Management's Discussion and Analysis of Financial Condition and
Results of Operations, as well as certain other parts of this report on Form
10-KSB contains forward-looking statements. Forward-looking statements include
statements concerning plans, objectives, goals, strategies, future events or
performance, and underlying assumptions and other statements which are other
than statements of historical facts. From time to time, the Company may
publish or otherwise make available forward-looking statements of this nature.
All such forward-looking statements are based on the current expectations of
management and are subject to, and are qualified by, 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; changes in competitive factors affecting the
Company's operations; unanticipated impacts of restructuring initiatives in
natural gas utilities; occurrences of events affecting the Company's ability to
obtain funds from operations, debt or equity to finance needed capital
expenditures and other investments; the ability to successfully identify and
finance natural gas opportunities; the impact of current and future laws and
government regulations affecting the energy industry in general and the natural
gas industry in particular; 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.
ITEM 7. FINANCIAL STATEMENTS
The information required by this item is included herein on pages F-1
through F-18.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
Not applicable.
18
<PAGE> 21
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; SECTION
16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
DIRECTORS AND EXECUTIVE OFFICERS
Certain information with respect to the directors and executive
officers of the Company is set forth below:
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
W. Phillip Marcum(1) 53 President, Chief Executive Officer,
Chairman of the Board and Director
A. Bradley Gabbard 42 Executive Vice President, Chief Financial
Officer, Treasurer and Director
U. E. Patrick(1)(2) 68 Director
Basil M. Briggs 61 Director
Robert Lloyd(2) 58 Director
Stephen E. McGregor(1) 47 Director
Albert F. Thomasson(2) 55 Director
Anthony D. Pell 58 Director
</TABLE>
- --------------------
(1) Member, Compensation Committee
(2) Member, Audit Committee
W. PHILLIP MARCUM, a founder of the Company, has served as the
President, Chief Executive Officer, Chairman of the Board and a director of the
Company since its incorporation in April 1991. He is also the Chairman and
Chief Executive Officer of each of the Company's direct wholly-owned
subsidiaries. He currently serves on the board of directors of one public
corporation, Key Energy Group, Inc., East Brunswick, New Jersey, an oilfield
service provider, and one privately-held corporation, Hydrologic, Inc.,
Asheville, North Carolina, a water analysis company. From November 1987 until
February 1991, Mr. Marcum was employed in the corporate finance department of
Boettcher & Company, Denver, Colorado, serving as a Senior Vice President.
From 1976 to 1987, Mr. Marcum was employed by MGF Oil Corporation, Midland,
Texas, serving as its President and Chief Executive Officer the last three of
those years.
A. BRADLEY GABBARD, a founder of the Company, has served as a director
of the Company since April 1991, Executive Vice President since July 1993, and
Chief Financial Officer and Treasurer from April 1991 through July 1993 and
since August 1996. He also served as its Vice President and Secretary from
April 1991 through July 1993. Since July 1993, Mr. Gabbard has served as the
President of Marcum Fuel. From October 1990 to February 1991, Mr. Gabbard was
employed by Boettcher & Company, serving as Vice President in its research
department. In 1987, Mr. Gabbard joined Great Horn, Inc., a privately-held New
York based investment corporation, as its Vice President in charge of western
oil and gas investment activities. In 1988, Great Horn acquired a controlling
interest in Premier Resources, Ltd., Denver, Colorado, and appointed Mr.
Gabbard as the Executive Vice President and Chief Operating Officer, where he
served until the sale of Premier in 1990. From 1981 to 1987, Mr. Gabbard was
employed by Search Drilling Company, Wichita, Kansas, a privately held oil and
gas company, initially serving as its Vice President of Finance, and later as
an Executive
19
<PAGE> 22
Vice President. From 1976 to 1981, Mr. Gabbard was employed in the Oklahoma
City office of Ernst and Whinney (now Ernst and Young), principally serving
clients in the oil and gas industry. Mr. Gabbard is a certified public
accountant.
U. E. PATRICK has served as a director of the Company since June 1991.
He was President, Chief Executive Officer and a director of Patrick Petroleum
Company ("PPC"), Jackson, Michigan, and of its predecessor from its
incorporation in 1963 until it was acquired by Goodrich Petroleum Corporation
("GPC") in August 1995. Mr. Patrick served as the Chairman of the Board and a
director of GPC from August 1995 until March 1996. Mr. Patrick has been engaged
in oil and gas exploration and production since 1962 and is presently engaged in
various investment activities.
BASIL M. BRIGGS has served as a director of the Company since June
1991. He has been a practicing attorney in Detroit, Michigan since 1961 and is
currently practicing law with Basil M. Briggs, P.C., which is of counsel with
Miro, Weiner & Kramer, P.C. in Bloomfield Hills, Michigan. He was the
President of Briggs & Williams, P.C., attorneys at law, from its formation in
1977 through 1986. Mr. Briggs was the Secretary of PPC from 1984, and a
director of PPC from 1970, until it was acquired by GPC in August 1995. Since
August 1995, he has been a director of GPC.
ROBERT LLOYD was elected as a director of the Company in July 1993.
He currently manages his personal investments. From 1988 to 1989 he was an
Executive Director of Interallianz London Limited, the wholly-owned corporate
finance subsidiary of Interallianz Bank Zurich A.G. Mr. Lloyd formerly held
several positions with Drexel Burnham Lambert Inc. and its affiliates,
including Managing Director and Senior Corporate Finance Officer in Europe.
STEPHEN E. MCGREGOR was elected as a director of the Company in July
1993. Since 1992, Mr. McGregor has been involved in private financial
consulting and investment banking activities and is currently a senior advisor
to B.T. Wolfensohn. Mr. McGregor was a partner of Skadden, Arps, Slate,
Meagher & Flom in the firm's Washington, D.C. and London offices from 1982
until 1992, during which time he led its international energy practice, and was
of counsel from 1992 until March 1996.
ALBERT F. THOMASSON was elected as a director of the Company in March
1994. Mr. Thomasson was a director of Metretek from 1981 until it was acquired
by the Company in March 1994. For the past six years, Mr. Thomasson has been
President of AFT Corporation, which provides management consulting services to
selected businesses in the Birmingham, Alabama area; President of AFTCO
Properties, Inc. and Brookhaven Properties, III, Inc., which are engaged in
residential real estate development in the Birmingham area; President of
Thomasson, Coal & Coke, Inc., a manufacturer of alloy block for foundries until
it merged into AFT Corporation in 1996; and Managing General Partner of Opto
Oil and Gas Company, which is engaged in the exploration and development of oil
and gas fields.
ANTHONY D. PELL was elected as a director of the Company in June 1994.
Mr. Pell is a director of Rochdale Investment Management Inc., New York, New
York. He was the President and co-owner of Pell, Rudman & Co., Boston,
Massachusetts, an investment advisory firm, until 1993, when it was acquired by
United Asset Management Company, since which time he has served as a
consultant. Mr. Pell was a director of Metretek from 1985 until Metretek was
acquired by the Company in March 1994. Mr. Pell was associated with the law
firm of Coudert Brothers from 1966 to 1968 and with the law firm of Cadwalder,
Wickersham and Taft from 1968 to 1972, specializing in estate and tax planning.
In 1972, Mr. Pell joined Boston Company Financial Strategies, Inc. as a Vice
President and was appointed a Senior Vice President in 1975.
20
<PAGE> 23
The Company's Board of Directors is divided into three classes, one of
which is elected at each annual meeting of stockholders to hold office for a
three-year term. Effective September 1, 1996, Charles E. Miller resigned as a
director of the Company and, thereafter, the number of directors was reduced to
eight. Class I directors, whose term expires in 1998, are Messrs. Marcum,
Briggs and Lloyd. Class II directors, whose term expires in 1999, are Messrs.
Gabbard, McGregor and Thomasson. Class III directors, whose term expires in
1997, are Messrs. Patrick and Pell. Officers are appointed by the Board of
Directors and serve at its discretion subject to the employment agreements
discussed below.
KEY EMPLOYEES
Certain information with respect to key employees of the Company is
set forth below:
WOOD BREAZEALE, 67, has been President and Chief Operating Officer and
a director of Southern Flow since May 1993. Mr. Breazeale was President and
Chief Operating Officer of the Southern Flow Companies, a division of Homco
International, Inc., and a Vice President of Homco International, Inc. from
1979 until the Company purchased the assets of the Southern Flow Companies
division of Weatherford in April 1993. Mr. Breazeale founded Southern Flow
Companies in 1953.
RONALD W. MCKEE, 49, has been President and Chief Operating Officer of
Metretek since September 1, 1995. Mr. McKee had previously been Vice
President of Marketing of Metretek since joining Metretek in 1989. From 1970
to 1989, Mr. McKee held various sales and marketing management positions with
Rockwell International, Pittsburgh, Pennsylvania and became the general sales
and marketing manager for Rockwell International's plug valve business unit in
1987.
GARY J. ZUIDERVEEN, 38, has been the Controller of the Company since
May 1994. Mr. Zuiderveen was elected Secretary and Principal Accounting
Officer of the Company on August 7, 1996. From June 1992 until May 1994, Mr.
Zuiderveen was the General Accounting Manager at the University Corporation for
Atmospheric Research in Boulder, Colorado. From 1983 until June 1992, Mr.
Zuiderveen was employed in the Denver, Colorado office of Deloitte & Touche
LLP, providing accounting and auditing services to clients primarily in the
manufacturing and financial services industries and serving in the firm's
national office accounting research department.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934, as amended,
requires the Company's executive officers and directors to file reports of
ownership on Form 3 and changes in ownership on Form 4 or Form 5 with the
Securities and Exchange Commission and the Nasdaq Stock Market, and to furnish
the Company with copies of all such reports filed.
Based solely upon its review of the copies of such forms received by
the Company, and written representations from certain reporting persons that no
Form 5's were required to be filed by such persons, the Company believes that,
during 1996, its executive officers and directors filed all reports required by
Section 16(a), except that the following reports were filed late by the
following persons: one report covering one transaction by Mr. Marcum; one
report covering one transaction by Mr. Gabbard; one report covering one
transaction by Mr. Page; one report covering one transaction by Mr. Miller; and
one report covering one transaction by Mr. Thomasson.
21
<PAGE> 24
ITEM 10. EXECUTIVE COMPENSATION
SUMMARY COMPENSATION
The following table sets forth the total compensation that the Company
paid or accrued for the last three fiscal years to its Chief Executive Officer
and its only other executive officer ("Named Executive Officers") whose total
salary and bonus exceeded $100,000 in the fiscal year ended December 31, 1996
("fiscal 1996"):
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
Long Term
Compensation
------------
Awards
------
Annual Compensation Securities
------------------- Underlying All Other
Name and Principal Position Year Salary Bonus Options (#) Compensation(1)
--------------------------- ---- ------ ----- ----------- ---------------
<S> <C> <C> <C> <C> <C>
W. PHILLIP MARCUM 1996 $162,000 $21,900 305,000(2) $12,678
President and Chief Executive Officer 1995 162,000 2,250 -0- 5,869
1994 180,000 -0- 120,000(3) 5,594
A. BRADLEY GABBARD 1996 121,000 13,200 93,000(2) 8,821
Executive Vice President and 1995 117,000 1,625 -0- 4,461
Chief Financial Officer 1994 130,000 -0- 48,000(3) 4,603
</TABLE>
- ----------------
(1)Includes amounts paid or accrued by the Company on behalf of the Named
Executive Officers in fiscal 1996 for (i) matching contributions under
the Company's 401(k) plan of $4,750 for Mr. Marcum and $3,776 for Mr.
Gabbard; (ii) amounts reimbursed for the payment of taxes of $5,963 for
Mr. Marcum and $3,578 for Mr. Gabbard; (iii) premiums for group term
life insurance of $877 for Mr. Marcum and $655 for Mr. Gabbard; and
(iv) premiums for long-term disability insurance of $1,088 for Mr.
Marcum and $812 for Mr. Gabbard.
(2)Includes 280,000 options originally granted prior to 1996 to Mr. Marcum
and 78,000 options originally granted prior to 1996 to Mr. Gabbard that
were repriced in 1996.
(3)Represents options originally granted prior to 1994 at exercise prices
in excess of $4.13 per share that were repriced in 1994. No other
options were granted in 1994.
EMPLOYMENT AGREEMENTS AND COMPENSATION ARRANGEMENTS
The Company has entered into employment agreements for the full-time
services of W. Phillip Marcum, its President, Chief Executive Officer and
Chairman of the Board, and A. Bradley Gabbard, its Executive Vice President and
Chief Financial Officer. Each employment agreement was originally for a period
of three years commencing on June 11, 1991, and automatically extends for
additional one-year periods unless either party gives 60 days notice of
termination. Each employment agreement is presently in the third one-year
extension period. The original base salaries under these employment agreements
were $100,000 for Mr. Marcum and $80,000 for Mr. Gabbard. These salaries,
which are subject to further annual upward adjustments at the discretion of the
Board of Directors, are currently set at $162,000 for Mr. Marcum and $125,000
for Mr. Gabbard. In addition to the base annual compensation, the employment
agreements provide, among other things, standard benefits commensurate with the
management levels involved. The employment agreements also provide for the
Company to establish an incentive compensation fund, to be administered by the
Compensation Committee of the Board of Directors, to provide for incentive
compensation to be paid to each officer or employee (including Messrs.
22
<PAGE> 25
Marcum and Gabbard) deemed by the Compensation Committee to have made a
substantial contribution to the Company in the event of a change of control of
the Company or of the sale of substantially all of the assets of the Company or
similar transactions. The total amount of incentive compensation from the fund
available for distribution will be determined by a formula based on the amount
by which the fair market value per share of the Common Stock exceeds $2.52,
multiplied by a factor ranging from 10-20% depending upon the ratio of the fair
market value to $2.52. In the case of the sale of a significant subsidiary of
the Company or substantially all of the assets of a significant subsidiary, a
similar pro rata distribution is required. The employment agreements also
contain certain restrictions on each employee's ability to compete, use of
confidential information and use of inventions and other intellectual property.
Effective February 1996, the Company adopted the 1996 Employee Stock
Purchase Plan, pursuant to which all full- time employees of the Company,
including Messrs. Marcum and Gabbard, were entitled to purchase shares of the
Company's Common Stock at fifty percent (50%) of its market value, which market
value was equal to the closing sale price of the Common Stock as reported on
the Nasdaq National Market. A total of 200,000 shares of Common Stock were
reserved for issuance under the 1996 Employee Stock Purchase Plan, of which
183,913 shares were issued during 1996. The Board of Directors has since
discontinued the 1996 Employee Stock Purchase Plan.
STOCK OPTION GRANTS
On March 8, 1996, the Board of Directors authorized, subject to
stockholder approval (which occurred on June 4, 1996), the repricing of all
stock options held by the officers, directors, employees and consultants of the
Company to an exercise price of $1.59 per share, the last sale price of the
Common Stock on the date of the Board of Directors authorization as reported on
the Nasdaq National Market. A total of 280,000 options held by Mr. Marcum and
78,000 options held by Mr. Gabbard were repriced to $1.59 per share.
The following table sets forth certain information with respect to
stock option grants during fiscal 1996 to the Named Executive Officers:
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
% OF TOTAL
NUMBER OF SECURITIES OPTIONS GRANTED TO
UNDERLYING EMPLOYEES IN EXERCISE EXPIRATION
NAME OPTIONS GRANTED (1) FISCAL YEAR (2) PRICE (3) DATE
- ---- ------------------- --------------- --------- ----
<S> <C> <C> <C> <C>
W. Phillip Marcum 160,000(4) 16.7% $1.59 Aug. 6, 2002
60,000(5) 6.3% $1.59 Mar. 5, 2003
60,000(5) 6.3% $1.59 May 19, 2003
25,000 2.6% $0.88 Dec. 2, 2006
A. Bradley Gabbard 30,000(4) 3.1% $1.59 Aug. 6, 2002
24,000(5) 2.5% $1.59 Mar. 5, 2003
24,000(5) 2.5% $1.59 May 19, 2003
15,000 1.6% $0.88 Dec. 2, 2006
</TABLE>
- --------------------
(1) As of December 31, 1996, all options were fully vested and fully
exercisable.
23
<PAGE> 26
(2) Based upon 957,087 options granted by the Company during 1996 to
employees, consisting of 234,000 new options and 723,087 repriced
options to employees during fiscal 1996.
(3) The exercise price of the option is the per share market value of the
underlying Common Stock, based upon the last sale price of the Common
Stock as reported on the Nasdaq National Market, on the date of grant
or repricing, as appropriate.
(4) These options, which were originally granted prior to 1996 at an
exercise price equal to the per share market value of the underlying
Common Stock on the date of grant, were repriced on June 4, 1996 to the
current exercise price, which was the per share market value of the
underlying Common Stock on the date of repricing.
(5) These options, which were originally granted prior to 1996 at an
exercise price equal to the per share market value of the underlying
Common Stock on the date of grant, and repriced on June 17, 1994 to the
per share market value of the underlying Common Stock on such date,
were repriced on June 4, 1996 to the current exercise price, which was
the per share market value of the underlying Common Stock on the date
of repricing.
STOCK OPTION EXERCISES AND VALUES
The following table sets forth certain information, based upon the
last sale price of the Common Stock on December 31, 1996 as reported on the
Nasdaq National Market, with respect to stock options held by the Named
Executive Officers on December 31, 1996:
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
Number of Securities Value of
Underlying Unexercised
Unexercised In-the-Money
Options at Options at
Fiscal Year-End Fiscal Year-End(1)
--------------- ------------------
Shares Acquired Exercisable/ Exercisable/
Name on Exercise (#) Value Realized ($) Unexercisable Unexercisable
- ---- --------------- ------------------ ------------- -------------
<S> <C> <C> <C> <C>
W. Phillip Marcum 0 $0 305,000/0 $0/$0
A. Bradley Gabbard 0 $0 93,000/0 $0/$0
</TABLE>
(1) The exercise price of all options exceeded the value of the underlying
Common Stock based upon the last sale price of the Common Stock on
December 31, 1996 ($0.84) as reported on the Nasdaq National Market.
DIRECTOR COMPENSATION
Directors receive no cash compensation for serving on the Board of
Directors or any committees thereof but are reimbursed for the cost of
attending Board of Directors and committee meetings. Directors who are not
employees of the Company or its subsidiaries receive stock options granted by
the Company under the Directors' Stock Option Plan (the "Directors' Plan").
The Directors' Plan, which is administered by the Board of Directors, provides
for the granting of NQSOs for up to 650,000 shares of Common Stock to
non-employee directors of the Company. Each person who is first elected or
appointed to serve as a non-employee director of the Company
24
<PAGE> 27
is automatically granted an option to purchase 20,000 shares of Common Stock.
On the date of the Annual Meeting of Shareholders each year, each person who
has served as a non-employee director for the previous six months is
automatically granted an option to purchase 10,000 shares of Common Stock.
Additional options can be granted to non- employee directors in the discretion
of the Board of Directors. All options vest immediately upon grant and are
exercisable at a price equal to the fair market value of the Common Stock on
the date of grant. In 1996, the Board of Directors authorized, and the
stockholders of the Company approved, an amendment to the Directors' Plan
repricing options outstanding on March 8, 1996 to an exercise price of $1.59
per share, the last sale price of the Common Stock on such date, as reported on
the Nasdaq National Market. As of December 31, 1996, options to purchase
300,000 shares of Common Stock were outstanding under the Directors' Plan at
exercise prices ranging from $1.53 to $1.59 per share.
On March 7, 1997, options to purchase 50,000 shares of Common Stock
were granted to Mr. McGregor and options to purchase 10,000 shares of Common
Stock were granted to Mr. Lloyd under the Directors' Plan at an exercise price
of $1.03 per share for personal services rendered in connection with the
CellNet strategic alliance. See "Item 1. Description of Business -- Metretek,
Incorporated" and "Item 12. Certain Relationships and Related Transactions."
25
<PAGE> 28
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information as of February 28,
1997 (except as otherwise noted in the footnotes) regarding the beneficial
ownership of the Company Stock by (i) each person known to the Company to be the
beneficial owner of more than 5% of the outstanding shares of Common Stock, (ii)
each director of the Company, (iii) each Named Executive Officer, and (iv) all
directors and executive officers of the Company as a group. Except as otherwise
indicated, the Company believes that the persons named in the table below have
sole investment and voting power with respect to the Common Stock owned by them,
subject to community property laws where applicable.
<TABLE>
<CAPTION>
Shares Beneficially Owned
-------------------------
Name Number Percentage(1)
---- ------ -------------
<S> <C> <C>
Alphi Investment Management Company(2) 1,318,100 10.7
155 Pfingsten Road, Suite 360
Deerfield, Illinois 60015
Goodrich Petroleum Company of Louisiana(3) 701,990 5.7
Post Office Box 1664
Shreveport, Louisiana 71165-1664
W. Phillip Marcum(4) 399,569 3.2
Albert F. Thomasson(5) 320,287 2.6
Robert Lloyd(6) 165,000 1.3
A. Bradley Gabbard(7) 115,725 0.9
U. E. Patrick(8) 100,000 0.8
Anthony D. Pell(9) 94,640 0.8
Stephen E. McGregor(10) 90,000 0.7
Basil M. Briggs(11) 40,000 0.3
All directors and executive officers as a group (8 persons)(12) 1,325,221 10.2
</TABLE>
(1) The percentages are based upon 12,307,327 shares of Common Stock
outstanding as of February 28, 1997.
(2) Information based solely upon Amendment No. 2 to Schedule 13G, dated
February 10, 1997, filed with the Securities and Exchange Commission.
According to information contained therein, Alphi Investment Management
Company, in its capacity as general partner of Alphi Fund L.P. ("Alphi"),
has the sole power to vote and sole power to dispose of 1,173,100 shares
owned by Alphi, and has shared power to vote 100,000 shares.
(3) These shares are owned of record by GPCL, a wholly-owned subsidiary of
GPC. Includes 26,790 shares as to which GPCL has purchase option rights
which become exercisable March 31, 1997. Does not include an additional
62,511 shares as to which GPCL has a right of first refusal.
(4) Includes 280,000 shares which may be acquired by Mr. Marcum under
currently exercisable stock options. Also includes 10,000 shares
owned by Mr. Marcum's wife.
(5) Includes 9,351 shares beneficially owned or held of record by Mr.
Thomasson's wife and 64,487 shares held in trusts for the benefit of family
members of which he is trustee ("Thomasson Trusts"). Also includes 2,057
and 48,291 shares which may be acquired under currently exercisable
warrants by Mr. Thomasson and by the Thomasson Trusts, respectively, and
40,000 shares which may be acquired by Mr. Thomasson under currently
exercisable stock options.
(6) Includes 50,000 shares which may be acquired by Mr. Lloyd under currently
exercisable stock options.
(7) Includes 78,000 shares which may be acquired by Mr. Gabbard under currently
exercisable stock options. Also includes 3,000 shares owned by Mr.
Gabbard's minor children.
26
<PAGE> 29
(8) Mr. Patrick was a director of GPC until March 1996, but no shares of
Common Stock held by GPCL have been attributed to Mr. Patrick. Includes
90,000 shares which may be acquired by Mr. Patrick under currently
exercisable stock options.
(9) Includes 40,000 shares which may be acquired by Mr. Pell under currently
exercisable stock options and 8,200 shares held by Mr. Pell's wife.
(10) Includes 50,000 shares which may be acquired by Mr. McGregor under
currently exercisable stock options.
(11) Mr. Briggs is a director of GPC, but no shares of Common Stock held by
GPCL have been attributed to Mr. Briggs. Represents 40,000 shares which
may be acquired by Mr. Briggs under currently exercisable stock options.
(12) See notes (4) through (11).
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Charles E. Miller, a former director and a former consultant of the
Company, is the founder, Chairman of the Board, President, Chief Executive
Officer and a principal stockholder of EMCO, a stockholder of the Company. In
May 1991, the Company entered into two agreements with EMCO which included
certain licensing and manufacturing obligations with respect to the CNG
dispensers. See "Item 1. Description of Business - Patents and Other
Proprietary Rights." The relationships established by Mr. Miller with both
companies have presented the possibility of conflicts of interest that may have
been resolved in some cases contrary to the Company's best interests.
MGT and GPCL, a significant stockholder of the Company, are
co-managing general partners of, and hold limited partnership interests in, the
Pipeline Partnership. See "Item 1. Description of Business - Marcum Gas
Transmission, Inc."
On March 7, 1997, options to purchase 50,000 shares of Common Stock
were granted to Mr. McGregor and options to purchase 10,000 shares of Common
Stock were granted to Mr. Lloyd under the Directors' Plan at an exercise price
of $1.03 per share for personal services rendered by such non-employee
directors in connection with the CellNet strategic alliance. In addition, in
its discretion, the Board of Directors may, in 1998, grant options to purchase
up to an additional 50,000 shares of Common Stock to Mr. McGregor and up to an
additional 10,000 shares of Common Stock to Mr. Lloyd as additional
compensation for their personal services in connection with the CellNet
strategic alliance, depending upon the value of the CellNet strategic alliance
to the Company as determined by the Board of Directors at such time.
Any future material transactions between the Company and its
affiliates will be approved by a majority of the disinterested directors.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(A) EXHIBITS
(2) PLAN OF PURCHASE, SALE, REORGANIZATION, ARRANGEMENT, LIQUIDATION OR
SUCCESSION:
(2.1) Sale and License Agreement, dated as of May 1, 1991, among
Engineering Measurements Company, The Digital Valve Company
and DVCO, Inc. (subsequently renamed DVCO Fuel Systems,
Inc.). (Incorporated by reference to Exhibit 2.1 to the
Registration Statement on Form S-18, Registration No.
33-44558.)
27
<PAGE> 30
(2.2) Manufacturing and Lease Agreement, dated as of May 1, 1991,
among Engineering Measurements Company, The Digital Valve
Company and DVCO, Inc. (subsequently renamed DVCO Fuel
Systems, Inc.). (Incorporated by reference to Exhibit 2.2
to the Registration Statement on Form S-18, Registration
No. 33-44558.)
(2.3) Agreement of Merger, dated May 17, 1991, among Engineering
Measurements Company, Measurement Auditors Company, Inc.
(subsequently renamed Southern Flow Companies,Inc.), United
Measurements Company, General Metrology Corporation and
Marcum Natural Gas Services, Inc. (Incorporated by
reference to Exhibit 2.3 to the Registration Statement on
Form S-18, Registration No. 33-44558.)
(2.4) Asset Purchase Agreement, dated April 30, 1993, among
Weatherford U.S., Marcum Natural Gas Services, Inc.
(Incorporated by reference to Exhibit 2.1 to the Form 8-K
filed on May 14, 1993.)
(2.5) Stock Purchase Agreement, dated as of May 19, 1993, by and
among Marcum Natural Gas Services, Inc., Marcum CNG
Systems, Inc., James Woodcock and Kerry Moorhead.
(Incorporated by reference to Exhibit 2.5 to the
Registration Statement on Form SB-2, Regulation No.
33-82868.)
(2.6) Amended and Restated Agreement and Plan of Merger, dated as
of December 17, 1993, amended and restated as of January
31, 1994, among Marcum Natural Gas Services, Inc., Marcum
Acquisition Corp. and Metretek, Incorporated.
(Incorporated by reference to Appendix A of the Proxy
Statement- Prospectus filed as a part of the Registration
Statement on Form S-4, Registration No. 33-73874.)
(2.7) Share Purchase Agreement, dated as of April 19, 1996, by
and between Harry J. Schneider, Theodore J. Zeller,
Metretek Europe Limited, Metretek, Incorporated and Marcum
Natural Gas Services, Inc. (Incorporated by reference to
Exhibit 2.1 to the Quarterly Report on Form 10-QSB for the
quarterly period ended March 31, 1996).
(3) ARTICLES OF INCORPORATION AND BY-LAWS:
(3.1) Restated Certificate of Incorporation of Marcum Natural Gas
Services, Inc., as amended. (Incorporated by reference to
Exhibit 3.1 to Registration Statement on Form S-18,
Registration No. 33-44558.)
(3.2) By-Laws of Marcum Natural Gas Services, Inc., as amended.
(Incorporated by reference to Exhibit 3.2 to the
Registration Statement on Form SB-2, Registration No.
33-82868.)
(4) INSTRUMENT DEFINING THE RIGHTS OF SECURITY HOLDERS, INCLUDING
INDENTURES:
(4.1) Specimen Common Stock Certificate. (Incorporated by
reference to Exhibit 4.1 to the Registration Statement on
Form S-18, Registration No. 33-44558.)
28
<PAGE> 31
(4.2) Form of Certificate representing warrants to purchase
shares of Common Stock of Marcum Natural Gas Services, Inc.
issued to former holders of warrants of Metretek,
Incorporated. (Incorporated by reference to Exhibit 4.2 to
the Registration Statement on Form S-4, Registration No.
33-73874.)
(4.3) Rights Agreement, dated as of December 2, 1991, between
Marcum Natural Gas Services, Inc. and American Securities
Transfer, Inc. (Incorporated by reference to Exhibit 10.6
to the Registration Statement on Form S-18, Registration
No. 33-44558.)
(4.4) Form of Registration Rights Agreement among Marcum Natural
Gas Services, Inc. and the former warrant holders of
Metretek, Incorporated. (Incorporated by reference to
Exhibit 4.4 to the Registration Statement on Form S-4,
Registration No. 33-73874.)
(10) MATERIAL CONTRACTS:
(10.1) Subscription Agreement, dated June 11, 1991, between Marcum
Natural Gas Services, Inc. and Patrick Petroleum
Corporation of Michigan. (Incorporated by reference to
Exhibit 10.1 to the Registration Statement on Form S-18,
Registration No. 33-44558.)
(10.2) Marcum Natural Gas Services, Inc. 1991 Stock Option Plan,
as amended and restated December 2, 1996.*
(10.3) Marcum Natural Gas Services, Inc. Directors' Stock Option
Plan, as amended and restated December 5, 1996.*
(10.4) Employment Agreement, dated as of June 11, 1991, between
Marcum Natural Gas Services, Inc. and W. Phillip Marcum.
(Incorporated by reference to Exhibit 10.4 to the
Registration Statement on Form S-18, Registration No.
33-44558.)*
(10.5) Employment Agreement, dated as of June 11, 1991, between
Marcum Natural Gas Services, Inc. and A. Bradley Gabbard.
(Incorporated by reference to Exhibit 10.4 to the
Registration Statement on Form S-18, Registration No.
33-44558.)*
(10.6) Marcum Natural Gas Services, Inc. 1996 Employee Stock
Purchase Plan. (Incorporated by reference to Exhibit 4.3
to the Registration Statement on Form S-8, Registration No.
333-00820.)*
(10.7) Loan and Security Agreement, dated as of August 5, 1996,
between Metretek, Incorporated and First Union Bank of
Florida. (Incorporated by reference to Exhibit 10.2 to the
Quarterly Report on Form 10-QSB for the quarterly period
ended June 30, 1996.)
(21) SUBSIDIARIES OF THE SMALL BUSINESS ISSUER:
(21.1) Subsidiaries of Marcum Natural Gas Services, Inc.
(23) CONSENTS OF EXPERTS AND COUNSEL:
(23.1) Deloitte & Touche LLP
29
<PAGE> 32
(27) FINANCIAL DATA SCHEDULE
(27.1) Financial Data Schedule
- -------------------
*Management contract or compensation plan or arrangement required to be
filed as an exhibit to this form pursuant to Item 13(a) of Form 10-KSB.
(B) REPORTS ON FORM 8-K
The Company did not file any reports on Form 8-K during the last quarter
of the period covered by this report.
30
<PAGE> 33
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the
Registrant 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
-------------------------------------
W. Phillip Marcum, President and
Chief Executive Officer
Date: March 25, 1997
In accordance with the Exchange Act, this report has been signed below
by the following persons on behalf of the Registrant and in the capacities and
on the dates indicated:
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C>
/s/ W. Phillip Marcum Chairman of the Board, President, March 25, 1997
- --------------------------------- Chief Executive Officer and Director
W. Phillip Marcum (Principal Executive Officer)
/s/ A. Bradley Gabbard Executive Vice President, Chief Financial March 25, 1997
- --------------------------------- Officer and Director (Principal
A. Bradley Gabbard Financial Officer)
/s/ Gary J. Zuiderveen Secretary, Controller and Principal March 25, 1997
- --------------------------------- Accounting Officer
Gary J. Zuiderveen
/s/ U. E. Patrick Director March 7, 1997
- ---------------------------------
U. E. Patrick
/s/ Basil M. Briggs Director March 25, 1997
- ---------------------------------
Basil M. Briggs
/s/ Robert Lloyd Director March 25, 1997
- ---------------------------------
Robert Lloyd
/s/ Stephen E. McGregor Director March 25, 1997
- ---------------------------------
Stephen E. McGregor
/s/ Albert F. Thomasson Director March 7, 1997
- ---------------------------------
Albert F. Thomasson
/s/ Anthony D. Pell Director March 25, 1997
- ---------------------------------
Anthony D. Pell
</TABLE>
31
<PAGE> 34
INDEX TO FINANCIAL STATEMENTS PAGE
<TABLE>
CONSOLIDATED FINANCIAL STATEMENTS OF MARCUM PAGE
NATURAL GAS SERVICES, INC. AND SUBSIDIARIES
<S> <C>
Independent Auditors' Report F-2
Consolidated Balance Sheets as of December 31, 1996 and 1995 F-3
Consolidated Statements of Operations for the Years Ended
December 31, 1996 and 1995 F-5
Consolidated Statements of Stockholders' Equity for the Years
Ended December 31, 1996 and 1995 F-6
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1996 and 1995 F-7
Notes to Consolidated Financial Statements F-8
</TABLE>
F-1
<PAGE> 35
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
Marcum Natural Gas Services, Inc.:
We have audited the consolidated balance sheets of Marcum Natural Gas Services,
Inc. and subsidiaries as of December 31, 1996 and 1995, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
the years then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on the
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 consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Marcum Natural Gas
Services, Inc. and subsidiaries at December 31, 1996 and 1995, and the results
of their operations and their cash flows for the years then ended in conformity
with generally accepted accounting principles.
/s/ DELOITTE & TOUCHE LLP
DELOITTE & TOUCHE LLP
Denver, Colorado
March 21, 1997
F-2
<PAGE> 36
MARCUM NATURAL GAS SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
ASSETS 1996 1995
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 889,543 $ 1,500,812
Trade receivables, less allowance for doubtful accounts
of $136,967 and $167,032, respectively 4,498,231 4,761,242
Other receivables 121,302 387,138
Inventory 4,176,643 3,510,958
Prepaid expenses and other current assets 352,274 362,254
----------- -----------
Total current assets 10,037,993 10,522,404
----------- -----------
PROPERTY, PLANT AND EQUIPMENT, AT COST
(Note 3):
Equipment 2,686,145 2,566,102
Vehicles 104,979 155,189
Furniture and fixtures 670,743 633,991
Land, building and improvements 483,255 439,958
----------- -----------
Total 3,945,122 3,795,240
Less accumulated depreciation 2,313,890 1,873,968
----------- -----------
Property, plant and equipment, net 1,631,232 1,921,272
----------- -----------
OTHER ASSETS:
Customer list (net of accumulated amortization of $1,817,187 and
$1,316,970, respectively) 7,468,269 7,968,486
Goodwill and other intangibles (net of accumulated amortization
of $593,387 and $429,017, respectively) 1,358,382 1,057,013
Investments in unconsolidated affiliates 297,584 152,460
Other assets 192,626 156,622
----------- -----------
Total other assets 9,316,861 9,334,581
----------- -----------
TOTAL $20,986,086 $21,778,257
=========== ===========
</TABLE>
See notes to consolidated financial statements
F-3
<PAGE> 37
MARCUM NATURAL GAS SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY 1996 1995
<S> <C> <C>
CURRENT LIABILITIES:
Accounts payable $ 1,209,315 $ 1,007,982
Accrued and other liabilities 1,843,549 1,624,126
Current maturities of notes payable (Note 3) 581,071 821,607
Current maturities of long-term debt (Note 3) 12,819 14,678
------------ ------------
Total current liabilities 3,646,754 3,468,393
------------ ------------
LONG-TERM NOTE PAYABLE (NOTE 3) 46,845
------------ ------------
COMMITMENTS AND CONTINGENCIES (NOTE 4)
STOCKHOLDERS' EQUITY (NOTE 6):
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, 12,231,327 and 11,742,032
shares, respectively 122,313 117,420
Additional paid-in-capital 36,844,447 36,320,946
Foreign currency translation adjustment (4,354)
Accumulated deficit (19,669,919) (18,128,502)
------------ ------------
Total stockholders' equity 17,292,487 18,309,864
------------ ------------
TOTAL $ 20,986,086 $ 21,778,257
============ ============
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE> 38
MARCUM NATURAL GAS SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
----------------------------
1996 1995
<S> <C> <C>
REVENUES:
Natural gas measurement sales and services $ 18,418,917 $ 19,016,770
Natural gas refueling equipment sales 4,593,663 4,090,223
Other 601,471 137,288
------------ ------------
Total revenues 23,614,051 23,244,281
------------ ------------
COSTS AND EXPENSES:
Cost of measurement sales and services 11,987,012 12,280,581
Cost of refueling equipment sales 3,906,430 3,270,368
General and administrative 4,837,147 4,346,394
Selling, marketing and service 2,379,950 3,008,190
Depreciation and amortization 1,206,023 1,307,755
Research and development 746,646 1,410,998
Interest and other 92,260 249,318
------------ ------------
Total costs and expenses 25,155,468 25,873,604
------------ ------------
NET LOSS $ (1,541,417) $ (2,629,323)
============ ============
NET LOSS PER COMMON SHARE $ (0.13) $ (0.22)
============ ============
WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING 12,100,881 11,734,699
============ ============
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE> 39
MARCUM NATURAL GAS SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1996 AND 1995
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FOREIGN
COMMON STOCK ADDITIONAL CURRENCY
------------------------ PAID-IN TRANSLATION ACCUMULATED
SHARES VALUE CAPITAL ADJUSTMENT DEFICIT TOTAL
<S> <C> <C> <C> <C> <C> <C>
BALANCE,
JANUARY 1, 1995 11,739,932 $ 117,399 $ 36,314,717 $(15,499,179) $ 20,932,937
Retirement of shares subject to put
agreement (7,900) (79) 79
Stock issued as compensation 10,000 100 6,150 6,250
Net loss (2,629,323) (2,629,323)
---------- ----------- ------------ --------- ------------ ------------
BALANCE,
DECEMBER 31, 1995 11,742,032 117,420 36,320,946 (18,128,502) 18,309,864
Stock issued in acquisition of Metretek
Europe 175,000 1,750 140,065 141,815
Stock issued for royalty payments 122,882 1,229 148,771 150,000
Stock issued under Employee Stock
Purchase Plan 183,913 1,839 222,815 224,654
Other stock compensation 7,500 75 11,850 11,925
Foreign currency translation adjustment $ (4,354) (4,354)
Net loss (1,541,417) (1,541,417)
---------- ----------- ------------ --------- ------------ ------------
BALANCE,
DECEMBER 31, 1996 12,231,327 $ 122,313 $ 36,844,447 $ (4,354) $(19,669,919) $ 17,292,487
========== =========== ============ ========= ============ ============
</TABLE>
See notes to consolidated financial statements.
F-6
<PAGE> 40
MARCUM NATURAL GAS SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
--------------------------
1996 1995
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(1,541,417) $(2,629,323)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
Depreciation and amortization 1,206,023 1,307,755
Stock compensation expense 124,252 6,250
Royalty payments made with restricted stock 50,000
Loss on disposal of assets 3,858 137,159
Equity in (income) loss of unconsolidated affiliates (61,113) 25,815
Changes in other assets and liabilities:
Trade receivables 395,164 183,931
Inventory (657,015) 786,222
Other current assets 332,987 89,610
Other noncurrent assets 812 46,894
Accounts payable 134,801 (392,379)
Accrued and other liabilities 125,952 (354,664)
----------- -----------
Net cash provided by (used in) operating activities 114,304 (792,730)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property, plant and equipment (208,839) (693,273)
Additions to manufacturing rights
and software development costs (423,740) (362,468)
Net cash from acquisitions 164,308
Proceeds from sale of assets 42,306 18,969
Investment in unconsolidated affiliate (245,125)
Distributions from unconsolidated affiliates 47,163 123,975
----------- -----------
Net cash used in investing activities (623,927) (912,797)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on notes payable to bank (193,691) (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 (20,282) (82,820)
----------- -----------
Net cash used in financing activities (101,646) (164,513)
----------- -----------
NET DECREASE IN CASH AND CASH EQUIVALENTS (611,269) (1,870,040)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 1,500,812 3,370,852
----------- -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 889,543 $ 1,500,812
=========== ===========
</TABLE>
See notes to consolidated financial statements
F-7
<PAGE> 41
MARCUM NATURAL GAS SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE
YEARS ENDED DECEMBER 31, 1996 AND 1995
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION - The accompanying consolidated financial statements include
the accounts of Marcum Natural Gas Services, Inc. ("MNGS") and its
wholly-owned subsidiaries, Southern Flow Companies, Inc. ("SFC"),
Metretek, Incorporated ("Metretek") and its wholly-owned subsidiaries,
Metretek Europe, Limited ("Metretek Europe"), and Sigma VI, Inc. ("Sigma
VI"), Marcum Fuel Systems, Inc. ("MFS") and its wholly-owned
subsidiaries, DVCO Fuel Systems, Inc. ("DVCO") and Marcum CNG Systems,
Inc. ("MCNG"), Marcum Gas Transmission, Inc. ("MGT") and its wholly-owned
subsidiary Marcum Capital Resources, Inc. ("MCRI"), collectively referred
to as the Company.
MNGS was incorporated on April 5, 1991. The focus of its business
operations is in four areas relating to the natural gas industry: 1)
natural gas measurement services, 2) manufacture and sale of remote
electronic automatic meter reading devices, 3) sales of compressed
natural gas refueling stations and related equipment, and 4) acquisition
of natural gas gathering, processing and transportation facilities and
related assets. SFC provides natural gas measurement services. Metretek
manufactures and sells remote electronic automatic meter reading devices.
MFS provides compressed natural gas refueling station design,
construction and installation service. MFS is also involved in the
manufacture and sale of dispensing equipment and controls for compressed
natural gas refueling stations. MGT purchases natural gas gathering,
processing and transportation facilities and related assets. MCRI raises
capital for acquisitions by MGT.
PRINCIPLES OF CONSOLIDATION - The consolidated financial statements
include the accounts of MNGS and its subsidiaries after elimination of
intercompany accounts and transactions. The Company uses the equity
method to account for its limited partnership interest in Marcum-Patrick
Pipeline Program 1993-1, L.P. and its preferred shareholder interest in
Marcum Midstream 1995-2 Business Trust.
REVENUE RECOGNITION - Natural gas measurement revenues are recognized as
services are provided; and equipment and supply sales and station
design/refueling equipment sales are recognized when delivered.
LOSS PER SHARE - Loss per common share is based upon the weighted average
shares of common stock outstanding during the respective period. Common
stock equivalents have been excluded from the calculation of earnings per
share as their effect is anti-dilutive.
STATEMENT OF CASH FLOWS - The Company considers all investments with a
maturity of three months or less at time of purchase to be cash
equivalents.
<TABLE>
<CAPTION>
<S> <C> <C>
Cash paid for interest $ 92,260 $97,567
Noncash financing and investing activities:
Acquisition of automobiles and equipment by
capital lease $ - $38,185
</TABLE>
F - 8
<PAGE> 42
INVENTORIES - Inventories are stated at the lower of first-in, first-out
cost or market. Inventories at December 31, 1996 and 1995 are summarized
as follows:
<TABLE>
1996 1995
<S> <C> <C>
Work in process $1,436,558 $1,066,470
Raw materials and supplies 1,698,968 1,286,486
Finished goods and merchandise 1,041,117 1,158,002
---------- ----------
Total $4,176,643 $3,510,958
========== ==========
</TABLE>
PROPERTY, PLANT AND EQUIPMENT - Property, plant and equipment is stated
at cost and is generally depreciated on the straight-line basis over
estimated useful lives ranging from 2 to 40 years. Property, plant and
equipment includes items under capital lease with a net book value of
$14,787 and $24,118 at December 31, 1996 and 1995, respectively.
INTANGIBLE ASSETS - SFC customer lists are being amortized over 20 years
using the straight-line method. Goodwill and other intangibles are being
amortized over periods ranging from 10 to 20 years. The Company
capitalizes software development costs integral to its products once
technological feasibility of the products and software has been
determined. Software development costs are being amortized over 5 years,
using the straight-line method. Unamortized software development costs
at December 31, 1996 and 1995 are $678,578 and $416,598, respectively.
Patents and license agreements are amortized on a straight-line basis
over the lesser of their estimated economic lives or their legal term of
existence.
ACCRUED AND OTHER LIABILITIES - Accrued and other liabilities at December
31, 1996 and 1995 are summarized as follows:
<TABLE>
<Caption
1996 1995
<S> <C> <C>
Payroll, employee benefits and related liabilities $ 583,021 $ 726,761
Sales deposits and deferred service revenue 428,707 171,273
Sales, property and other taxes payable 302,324 61,254
Accrued equipment installation costs and warranty reserve 232,193 105,852
Insurance premiums and reserves 205,502 240,471
Other 91,802 318,515
---------- ----------
Total $1,843,549 $1,624,126
========== ==========
</TABLE>
USE OF ESTIMATES - The preparation of the Company's consolidated
financial statements in conformity with generally accepted accounting
principles requires management to make estimates and assumptions that
affect the amounts reported in these financial statements and
accompanying notes. Actual results could differ from those estimates.
INVESTMENTS IN AND ADVANCES TO UNCONSOLIDATED AFFILIATES - At December
31, 1995, Metretek owned a 42.5% interest in Metretek Europe. The
remaining 57.5% of the outstanding shares of Metretek Europe were
acquired effective January 1, 1996 (see Note 2). Amounts due from
Metretek Europe included in accounts receivable at December 31, 1995 were
$79,292. Total sales to Metretek Europe for the year ended December 31,
1995 were $739,430. Debentures due from Metretek Europe included in
other receivables at December 31, 1995 was $75,000.
F - 9
<PAGE> 43
MGT owns a 4% limited partnership interest in Marcum-Patrick Pipeline
Program 1993-1, L.P. ("MPP 1993-1"). As co- managing general partner of
the MPP 1993-1, MGT is entitled to administrative and management fees.
Administrative and management fees earned and received from MPP 1993-1
for the years ended December 31, 1996 and 1995 were $24,079 and $35,206,
respectively. Advances due from MPP 1993-1 included in other assets at
December 31, 1996 and 1995 were $32,000.
In February 1996, MGT formed Marcum Midstream 1995-2 Business Trust ("MM
1995-2"), of which MGT is the managing trustee. MM 1995-2 purchased two
deep injection water disposal facilities located in northeastern
Colorado, which purchase was financed by a $5,650,000 private placement
of preferred shares of MM 1995-2. MGT purchased 5% of the preferred
shares of MM 1995-2 for $245,125. MGT, as managing trustee, is
responsible for the administrative activities of MM 1995-2 for which it
is paid management and administrative fees by MM 1995-2. In addition,
MGT holds performance shares of MM 1995-2 which entitles it to receive
performance share distributions equal to approximately 10% of the cash
available for distribution by MM 1995-2 prior to "payout" and
approximately 25% of the cash available for distribution subsequent to
"payout," as defined in the Declaration of Trust. In 1996, MGT earned
$99,321 in management and administrative fees as managing trustee of MM
1995-2 and $121,012 in performance share distributions. In addition,
upon formation of MM 1995-2, MGT was paid a $75,000 acquisition expense
reimbursement from proceeds of the private placement. Amounts due from
MM 1995-2 for accrued management and administrative fees and performance
share distributions included in other receivables at December 31, 1996
were $50,726.
INDUSTRY SEGMENTS - The following table sets forth the Company's
principal industry segments and their contribution to the revenues,
operating profits, capital expenditures, and depreciation and
amortization for the period. Also shown are identifiable assets
associated with each segment as of December 31, 1996 and 1995.
<TABLE>
<CAPTION>
1996 1995
-------------------------------------------- ---------------------------------------------
MEASUREMENT REFUELING MEASUREMENT REFUELING
SALES AND EQUIPMENT SALES AND EQUIPMENT
SERVICES SALES TOTAL SERVICES SALES TOTAL
<S> <C> <C> <C> <C> <C> <C>
Revenues $ 18,418,917 $ 4,593,663 $ 23,012,580 $ 19,016,770 $ 4,090,223 $23,106,993
============ ============ ============ ============ ============ ============
Operating profit (loss) $ 1,176,391 $ (1,545,986) (369,595) $ 549,835 $ (1,767,924) (1,218,089)
============ ============ ============ ============
General corporate
expense, net (1,171,822) (1,411,234)
------------ -----------
Net loss $ (1,541,417) $(2,629,323)
============ ===========
Depreciation and
amortization $ 896,047 $ 298,860 $ 1,194,907 $ 1,027,060 $ 269,396 $ 1,296,456
============ ============ ============ ============ ============ ============
Capital expenditures $ 150,218 $ 38,283 $ 188,501 $ 551,456 $ 141,817 $ 693,273
============ ============ ============ ============ ============ ============
Net identifiable assets $ 16,195,331 $ 4,072,783 20,268,114 $ 16,971,91 $ 3,297,599 20,269,512
============ ============ ============ ============
Net corporate assets 717,972 1,508,745
------------ ------------
Total assets $ 20,986,086 $21,778,257
============ ============
</TABLE>
F - 10
<PAGE> 44
EXPORT SALES - The following table sets forth the Company's sales by
geographic area for its measurement sales and services segment for the
years ended December 31, 1996 and 1995:
<TABLE>
<CAPTION>
UNITED SOUTH
STATES EUROPE CANADA AUSTRALIA AMERICA CONSOLIDATED
<S> <C> <C> <C> <C> <C> <C>
1996 Measurement
sales & services $16,805,244 $ 1,063,944 $ 441,903 $ 91,952 $ 15,874 $18,418,917
1995 Measurement
sales & services $16,957,229 $ 739,430 $ 758,569 $ 112,211 $ 449,331 $19,016,770
</TABLE>
FOREIGN CURRENCY - The assets and liabilities of Metretek Europe are
translated at the rate of exchange at year end while sales and expenses
are translated at the average rates in effect during the year. The net
effect of this translation adjustment is shown in the accompanying
financial statements as a component of stockholders' equity.
IMPAIRMENT OF LONG-LIVED ASSETS - The Company adopted Statement of
Financial Accounting Standards No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" ("SFAS
121") effective January 1, 1996. SFAS 121 requires that long-lived
assets be reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable and establishes guidelines for determining recoverability
based on future net cash flows from the use of the asset and for the
measurement of the impairment loss. Impairment loss is calculated as the
difference between the carrying amount of the asset and its fair value.
Any impairment loss is recorded in the period in which the recognition
criteria are first applied and met. Adoption of SFAS 121 had no effect
on the financial position or results of operations of the Company.
STOCK BASED COMPENSATION - The Company adopted Statement of Financial
Accounting Standards No. 123, "Accounting for Stock Based Compensation"
("SFAS 123") effective January 1, 1996. SFAS 123 requires that stock
based compensation be either accounted for, or disclosed, in the
financial statements. The Company adopted SFAS 123, electing only the
disclosure provisions of SFAS 123. Accordingly, adoption of SFAS 123 had
no effect on the financial position or results of operations of the
Company.
2. ACQUISITIONS
METRETEK EUROPE - Effective January 1, 1996, the Company, through its
wholly-owned subsidiary, Metretek, acquired the remaining 57.5% of the
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.
SIGMA VI - 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. 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
F - 11
<PAGE> 45
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.
3. DEBT
NOTES PAYABLE - The notes payable at December 31, 1996 consist of
$327,916 borrowed by Metretek under a term loan and $300,000 borrowed by
Metretek under a line of credit agreement with a commercial bank with an
interest rate at prime plus 1% (9.25% at December 31, 1996). On August 5,
1996, Metretek entered into a loan and security agreement with a
commercial bank converting the then $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, and guaranteed by the Company.
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. Metretek had $100,000 available to borrow
under its line of credit at December 31, 1996.
LONG-TERM DEBT - Long-term debt at December 31, 1996 and 1995 consists of
various notes payable due in monthly installments, including interest
ranging from 8% to 12% collateralized by certain vehicles and equipment.
4. COMMITMENTS AND CONTINGENCIES
LEGAL PROCEEDINGS - A former employee filed an action in Denver District
Court against DVCO Fuel Systems, Inc. and the Company on or about
December 30, 1993 which is currently scheduled for trial on August 11,
1997. The former employee's remaining claims allege that the Company
conspired with certain third parties to defraud him and that the Company
intentionally interfered with certain contracts in which he had an
interest. The former employee is seeking damages in the amount of
approximately $420,000 and punitive damages. The Company has denied the
former employee's claims and has asserted counterclaims against the
former employee, alleging that (i) he breached an agreement with the
Company which included a legal release, (ii) he made intentional and/or
negligent misrepresentations regarding his qualification and reputation
in the compressed natural gas industry, (iii) he breached his fiduciary
duty to the Company, and (iv) he disparaged the Company. Management of
the Company believes that the former's employee's claims are without
merit and that both its counterclaims and its defenses to the former
employee's claims are valid, and management intends to defend the lawsuit
vigorously.
Other than as set forth above, the are no legal proceedings pending or,
to the knowledge of the Company, threatened against the Company or any of
its assets, other than litigation incidental to its business. Although
the outcome of this litigation is not determinable with certainty, in the
opinion of the Company's management, this litigation is not expected to
have a material adverse effect on the business, financial condition or
results of operations of the Company.
F - 12
<PAGE> 46
OPERATING LEASES - The Company leases business facilities and vehicles
under operating lease agreements which specify minimum rentals.
Substantially all leases have renewal provisions. Rental expense for the
years ended December 31, 1996 and 1995 totaled $889,199 and $863,904,
respectively.
Future minimum rental payments under noncancelable operating leases
having an initial or remaining term of more than one year are as follows:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31:
<S> <C>
1997 $ 694,215
1998 689,997
1999 553,751
2000 479,844
2001 391,427
------------
Total $ 2,809,234
============
</TABLE>
EMPLOYEE BENEFIT PLANS - In 1993 the Company adopted a savings and
investment plan under Section 401(k). Metretek adopted a similar plan for
its employees in 1989 (the "Plans"). During 1996, the Plans were combined
under one plan. All employees age 21 or older with at least one year of
service are eligible to participate in the Plans. The Plans provide for
discretionary contributions by employees of up to 15% of their eligible
compensation. The Company may make discretionary matching contributions
up to 50% of participant contributions, subject to a maximum of 6% of
each participants' eligible compensation. The Company's 401(k) expense
for the years ended December 31, 1996 and 1995 was $151,653 and $151,424,
respectively.
MPP 1993-1 PARTNERSHIP UNIT REPURCHASE COMMITMENT - Each year commencing
January 1, 1996, MGT must offer to purchase, for an amount not to exceed
$200,000 in the aggregate, MPP 1993-1 partnership units from interested
unit holders. The purchase price of each MPP 1993-1 partnership unit
shall equal two and one-half times the net cash from operations of MPP
1993-1 for its previous fiscal year divided by the total number of MPP
1993-1 partnership units outstanding. Each annual offer to purchase will
be extended for a period of up to 60 days or until the maximum annual
commitment amount of $200,000 has been used to purchase MPP 1993-1
partnership units. The maximum annual commitment amount is
non-cumulative. No MPP 1993-1 partnership units were repurchased in 1996.
Based on the cash from operations of MPP 1993-1 in 1996, MGT's repurchase
commitment amount in 1997 is limited to approximately $121,500.
MM 1995-2 PREFERRED SHARES REPURCHASE COMMITMENT - Each year commencing
January 1, 2000, MGT must offer to purchase, for an amount not to exceed
$452,000 in the aggregate, MM 1995-2 preferred shares from interested
shareholders. The purchase price of each MM 1995-2 preferred share shall
equal one and one-half times the net cash from operations of MM 1995-2
for its previous fiscal year, as adjusted in the reasonable discretion of
MGT for extraordinary and nonrecurring historical and expected items,
divided by the total number of MM 1995-2 preferred shares outstanding.
Each annual offer to purchase will be extended for a period of up to 60
days or until the maximum annual commitment amount of $452,000 has been
used to purchase MM 1995-2 preferred shares. The maximum annual
commitment amount is non-cumulative.
OPTION PURCHASE AGREEMENT - On February 7, 1997, MGT, as managing trustee
of Marcum Midstream 1997-1 Business Trust ("MM 1997-1"), entered into an
option purchase agreement with Farstad Gas & Oil, LLC ("Farstad").
Pursuant to that agreement, Farstad has granted to MGT, on behalf of MM
1997-
F - 13
<PAGE> 47
1, the sole and exclusive option ("Farstad Option") to acquire and expand
a natural gas liquids processing plant located near Midland, Texas (the
"Facility") at any time on or before August 21, 1997 for a base purchase
price of $2,500,000 plus a subordinated beneficial interest in MM 1997-1.
MM 1997-1 intends to acquire and expand the Facility with funding
provided through a maximum $8,000,000 private placement of certain
beneficial interests in MM 1997-1 referred to as preferred shares
("Preferred Shares"). MGT, as managing trustee of MM 1997-1, will be
responsible for MM 1997-1's administrative activities for which it will
be entitled to compensation from MM 1997-1 and will be entitled to
receive performance distributions equal to approximately 10% of the cash
available for distribution by the MM 1997-1 before "payout" and
approximately 25% after "payout," to be defined in the declaration of
trust. In addition, MGT intends to acquire 5% of the total Preferred
Shares of MM 1997-1 for a purchase price of a maximum of $400,000, which
is the same price applicable to outside investors. In the event of the
closing of the private placement and the exercise of the Farstad Option,
MGT will be reimbursed for certain organizational, offering and
acquisition expenses. However, the organization and capitalization
of MM 1997-1 and the exercise of the Farstad Option are dependent on,
among other things, the following: (1) that proceeds of at least
$5,000,000 are raised in the private placement, and (ii) that MGT
acquires 5% of the total Preferred Shares of MM 1997-1.
In order to fund its investment in MM 1997-1 and to enable it to exercise
the Farstad Option, MGT has received a written commitment from a
commercial bank for a $400,000 term loan repayable in equal monthly
principal payments plus interest over a 36 month period (the "MGT Loan").
The loan commitment is contingent upon execution of a mutually
satisfactory loan agreement which contains, among other things, the terms
described below. The MGT Loan will, if funded, be secured by the
accounts receivable, inventory, selected equipment and real estate of
Southern Flow and an assignment of MGT's preferred share interest in MM
1997-1 and will be guaranteed by the Company. The loan agreement is
expected to require the Company to maintain a minimum consolidated
tangible net worth and Southern Flow to maintain a minimum debt service
coverage ratio, and is expected to contain other standard covenants
affecting the operations of Southern Flow and MGT. The outstanding
balance under the loan agreement is expected to be limited to an amount
equal to 80% of the eligible accounts receivable of Southern Flow (to be
defined in the loan agreement).
LICENSE AGREEMENT - On June 27, 1996, 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 sales of royalty-bearing
products with a minimum annual royalty of $50,000 through the year 2003.
Payments 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 and 50,155 restricted shares of
the Company's common stock were issued on November 6, 1996. Royalty
expense of $50,000 was recognized in both 1996 and 1995, and the 1997 and
1998 prepaid royalties are included in other assets at December 31, 1996.
F - 14
<PAGE> 48
5. INCOME TAXES
No tax provision has been recognized in the current period because of net
operating losses incurred and a valuation allowance has been provided for
100% of the net deferred tax assets at December 31, 1996 and 1995.
The components of the Company's deferred tax assets and liabilities at
December 31, 1996 and 1995 are shown below:
<TABLE>
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
Assets:
Net operating loss carryforwards $ 6,854,000 $ 6,206,000
Tax credit carryforwards 258,000 258,000
Allowance for bad debts 47,000 57,000
Warranty reserve and other accrued liabilities 89,000 91,000
----------- -----------
7,248,000 6,612,000
Liabilities:
Excess of income tax depreciation and amortization
over financial statement amounts 584,000 377,000
Other 59,000 54,000
----------- -----------
643,000 431,000
Net deferred tax asset 6,605,000 6,181,000
Valuation allowance (6,605,000) (6,181,000)
----------- -----------
Total $ 0 $ 0
=========== ===========
</TABLE>
At December 31, 1996, the Company had unused net operating losses to
carry forward against future years' taxable income of approximately
$20,160,000 expiring in various amounts from 1997 to 2011. At December
31, 1996, the Company had unused investment tax credits, general business
tax credits, and research and development tax credit carryforwards
aggregating approximately $258,000 expiring in various amounts from 1997
to 2002.
As a result of its acquisition of Metretek in 1994, the Company acquired
net operating loss carryforwards for tax purposes of $6,037,000 expiring
between 1997 and 2002. As a result of the change in ownership,
utilization of the carryforwards is limited to approximately $762,000
annually under Section 382 of the Internal Revenue Code.
As a result of an acquisition in 1991, the Company acquired net operating
loss carryforwards for tax purposes of approximately $1,084,000
($363,000, net of limitation). Such carryforwards expire in years 1997
through 2005. As a result of the change in ownership upon acquisition,
utilization of these net operating loss carryforwards is limited to
approximately $33,000 annually. The valuation allowance provided includes
$123,000 related to the net operating losses of the acquired Company.
When the benefits related to the net operating loss carryforward that was
not recognized at the acquisition date is recognized in a subsequent
period, it will first reduce to zero any goodwill related to the
acquisition, then reduce to zero all other noncurrent intangible assets,
and then reduce income tax expense.
6. CAPITAL STOCK
STOCK COMPENSATION - In January 1996, the Company approved a
non-qualified, compensatory Employee Stock Purchase Plan (the "1996
Plan"), which allowed eligible employees to purchase shares
F - 15
<PAGE> 49
of the Company's common stock through payroll deductions. The shares
could be purchased for 100% of the lower of the beginning or ending fair
market value of each one-month offering period and were matched by the
Company on a share-for-share basis. Purchases were limited to 15% of an
employee's eligible compensation. A total of 200,000 shares of common
stock were registered for offer and issuance under the 1996 Plan, of
which 183,913 shares were issued during the year ended December 31, 1996.
The Company has since discontinued the 1996 Plan. Stock compensation
expense in the amount of $112,327 was recognized in 1996 representing the
market value of shares matched by the Company 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. In December 1996, the Board of Directors rescinded 80,000 of
the shares. Of the remaining 10,000 restricted shares granted, 7,500
shares were issued and 2,500 shares were forfeited upon the resignation
of one of the employees.
STOCK OPTIONS - In December 1991, the Company adopted the 1991 Stock
Option Plan which was amended and restated on June 4, 1996 ("1991 SOP")
and the Director's Stock Option Plan ("Director SOP"). Under the 1991
SOP, incentive stock options and nonqualified stock options may be
granted to officers and employees for up to 1,400,000 shares of common
stock. Under the 1991 SOP, options granted must be at exercise prices
not less than the fair market value of Company common stock on the date
of grant. The 1991 SOP options have a term of ten years with the vesting
terms determined on the date of the grant. The Director SOP permits the
granting of nonqualified stock options for up to 650,000 shares of common
stock to nonemployee directors of the Company. Each Director SOP option
is exercisable at a price not less than the fair market value of Company
common stock on the date of grant. The Director SOP options have a term
of ten years and are vested on the date of grant. Options granted to
certain officers and non-employee directors contain limited rights for
receipt of cash for appreciation in stock value in the event of certain
changes in control.
METRETEK STOCK OPTION PLANS - Metretek stock options (all of which have
been assumed by the Company) were granted to certain key employees and
Board of Director members of Metretek under incentive stock option plans
adopted in various years. The incentive stock options granted are for
terms not exceeding 10 years from the date granted and become exercisable
on the date of grant. In May 1993, Metretek adopted the Metretek 1993
Long-Term Employee Stock Option Plan, (the "1993 Plan") which provided
for the grant of non-statutory stock options to purchase up to 71,939
shares of common stock at an exercise price of $5.56 per share. No
options were outstanding under the 1993 Plan at December 31, 1996 or
December 31, 1995.
F - 16
<PAGE> 50
Options to purchase shares of common stock are summarized as follows:
<TABLE>
<CAPTION>
DIRECTORS STOCK 1991 STOCK
OPTION PLAN OPTION PLAN METRETEK OPTIONS OTHER OPTIONS
--------------------- --------------------- ------------------- ---------------------
WEIGHTED WEIGHTED WEIGHTED WEIGHTED
NUMBER AVERAGE NUMBER AVERAGE NUMBER AVERAGE NUMBER AVERAGE
OF OPTION OF OPTION OF OPTION OF OPTION
SHARES PRICE SHARES PRICE SHARES PRICE SHARES PRICE
------- ---- ------- ---- ------ ---- ------- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Outstanding at
January 1, 1995 160,000 $ 6.73 710,500 $ 3.45 221,257 $ 3.48 200,000 $ 3.71
Granted 70,000 1.50 4,800 5.56
Exercised
Forfeited (48,500) 3.18 (153,419) 3.46
------- ---- ------- ---- ------ ---- ------- ----
Outstanding at
December 31, 1995 230,000 5.14 662,000 3.47 72,638 3.67 200,000 3.71
Granted 300,000 1.58 902,500 1.53 54,587 1.59 180,000 1.59
Exercised
Forfeited (230,000) 5.14 (711,750) 3.34 (75,717) 3.42 (200,000) 3.70
Expired (14,891) 2.44
------- ---- ------- ---- ------ ---- ------- ----
Outstanding at
December 31, 1996 300,000 $ 1.58 852,750 $ 1.52 36,617 $ 1.59 180,000 $ 1.59
======= ==== ======= ==== ====== ==== ======= ====
Exercisable at
December 31:
1996 300,000 $ 1.58 672,750 $ 1.51 36,617 $ 1.59 180,000 $ 1.59
======= ==== ======= ==== ====== ==== ======= ====
1995 230,000 $ 5.14 600,813 $ 3.45 72,638 $ 3.67 200,000 $ 3.71
======= ==== ======= ==== ====== ==== ======= ====
</TABLE>
On June 4, 1996, pursuant to stockholder ratification of the Board of
Directors' authorization, all outstanding options held by the officers,
directors, employees and consultants of the Company were repriced to
$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. The repriced options are reflected as
forfeitures and new grants during the year ended December 31, 1996 in the
summary above.
The weighted average grant date fair values of options granted during the
years 1996 and 1995 were $931,000 (including $779,000 attributable to
options that were repriced in 1996) and $46,000, respectively. The
weighted average remaining contractual life of options outstanding at
December 31, 1996 was approximately 7.0 years. The fair values of stock
options were calculated using a variation of the Black-Scholes stock
option valuation model with the following weighted average assumptions
for grants in 1996 and 1995: stock price volatility at 45%; risk-free
rate of return of 6.5%; dividend rate of $0.00 per year; and an expected
term of 4 years. If the fair value based method of accounting set forth
in SFAS 123 had been applied, the Company's net loss and net loss per
share would have increased to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1996 1995
<S> <C> <C>
Net loss - as reported $ (1,541,417) $ (2,629,323)
Net loss - pro forma $ (2,472,417) $ (2,675,323)
Loss per Common Share - as reported $ (0.13) $ (0.22)
Loss per Common Share - pro forma $ (0.20) $ (0.23)
</TABLE>
The fair value of stock options included in the pro forma amounts for the
years 1996 and 1995 is not necessarily indicative of future effects on
net earnings and income per share.
F - 17
<PAGE> 51
STOCKHOLDER RIGHTS PLAN - On December 12, 1991, the shareholders of the
Company approved the Stockholder Rights Plan ("Plan"). The Plan calls
for the issuance of one preferred share purchase right ("Right") for each
share of common stock held by shareholders of record on December 2, 1991.
Each Right represents the right to purchase one one-hundredth of a share
of Series C Preferred Stock of the Company at an initial exercise price
of $25 per share. The Rights are exercisable through December 1, 2001,
unless earlier redeemed by the Company. In the event that the Company is
involved in a business combination, the Rights provide for the holder to
acquire common stock of the Company, or acquiring company, at a 50%
discount. The rights are redeemable by the Company at $.01 per Right.
STOCK WARRANTS - In September 1994, the Company settled a lawsuit related
to a dispute over services rendered by an individual in connection with
the acquisition of Southern Flow. As part of the settlement, the Company
issued 40,000 stock purchase warrants which entitle the holder to
purchase one share of Common Stock at $4.25 per share, the market price
of the stock on the settlement date. The warrants are immediately
exercisable and expire September 27, 1999.
On February 13, 1996, the Company's remaining 1,767,365 common stock
purchase warrants issued pursuant to the Company's 1992 initial public
offering expired without being exercised.
METRETEK STOCK WARRANTS - Metretek stock warrants were issued by Metretek
in prior periods in connection with issues of common stock and
debentures. Stock warrants were also issued by Metretek to certain
stockholders as remuneration for loans provided to Metretek and to a
venture capital company as remuneration for services rendered in
connection with a new issue of special preference stock. At December 31,
1996, stock warrants outstanding allow the holders to purchase a total of
146,480 shares of common stock at prices ranging from $11.12 to $22.24
per share. The Metretek stock warrants are exercisable over periods
expiring at various dates from 1999 to 2004.
The shares of the Company's common stock issuable upon the exercise of the
Metretek Warrants cannot be resold unless such resale is registered under
the Securities Act and under applicable state securities laws or is made
pursuant to an available exemption therefrom. The holders of the Metretek
Warrants have the right, under certain circumstances, to require the
Company to register the shares of the Company's common stock issuable upon
exercise of the Metretek Warrants under the Securities Act and applicable
state securities laws.
COMMON STOCK SUBJECT TO A PUT AGREEMENT - In connection with a previous
acquisition, on February 15, 1995, the Company repurchased the remaining
7,900 shares of Common Stock subject to a put agreement at $7.00 per
share.
7. RELATED PARTIES
In connection with the purchase of manufacturing rights to the CNG
dispenser and related assets, DVCO has agreed to pay a 5% royalty on
gross sales and leases of the CNG dispenser and related products (and/or
components of systems which incorporate or utilize the technology
licensed to DVCO) realized through 1997. A minimum royalty of $50,000 is
due in 1997. Royalty expense of $50,000 was recognized in both 1996 and
1995.
* * * * *
F - 18
<PAGE> 52
MARCUM NATURAL GAS SERVICES, INC.
FORM 10-KSB
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO. EXHIBIT
- ----------- -------
<S> <C>
10.2 Marcum Natural Gas Services, Inc.
1991 Stock Option Plan, as amended
and restated December 2, 1996
10.3 Marcum Natural Gas Services, Inc.
Directors' Stock Option Plan, as
amended and restated December 5, 1996
21.1 Subsidiaries
23.1 Consent of Deloitte & Touche LLP
27.1 Financial Data Schedule
</TABLE>
<PAGE> 1
EXHIBIT 10.2
MARCUM NATURAL GAS SERVICES, INC.
1991 STOCK OPTION PLAN
AMENDED AND RESTATED
AS OF DECEMBER 2, 1996
1. PURPOSE
The purpose of this 1991 Stock Option Plan (the "Plan") is to enable
Marcum Natural Gas Services, Inc. (the "Company"), and such of its subsidiaries
(as defined in Section 424(f) of the Internal Revenue Code of 1986, as amended
(the "Code")), as the Board of Directors of the Company (the "Board") shall
from time to time designate ("Participating Subsidiaries"), to attract and
retain qualified employees, and to provide such persons with additional
motivation to advance the interests of the Company and its Participating
Subsidiaries. The Plan provides for the grant of Stock Options, Limited Rights
and Supplemental Bonuses to employees of the Company.
2. CERTAIN DEFINITIONS
2.1 "Change of Control" shall mean any of the following events:
(A) any "Person," as such term is used in Sections 13(d)
and 14(d) of the Exchange Act (other than the Company, any trustee or
other fiduciary holding securities under an employee benefit plan of
the Company, or any company owned, directly or indirectly, by the
stockholders of the Company in substantially the same proportions as
their ownership of stock of the Company) is or becomes the "Beneficial
Owner" as defined in Rule 13d-3 under the Exchange Act, directly or
indirectly, of 25% or more of the combined voting power of the
Company's outstanding securities;
(B) individuals who constitute the Board on the effective
date of the Plan (the "Incumbent Board") cease for any reason to
constitute at least a majority thereof, provided that any person
becoming a director subsequent to such effective date whose election,
or nomination for election, by the Company's stockholders, was
approved by a vote of at least a majority of the directors comprising
the Incumbent Board (either by a specific vote or by approval of the
proxy statement of the Company in which such person is named as a
nominee for director, without objection to such nomination) shall be,
for purposes of this clause (B), considered as though such person were
a member of the Incumbent Board;
(C) the stockholders of the Company shall approve a
merger, consolidation, recapitalization, or reorganization of the
Company, a reverse stock split of outstanding voting securities, or
consummation of any such transaction if stockholder approval is not
obtained, other than (1) any such transaction which would result in at
least 50% of the total voting power represented by the voting
securities of the surviving entity outstanding immediately after such
transaction being "Beneficially Owned" (as defined above) by 75% or
more of the holders of outstanding voting securities of the Company
immediately prior to the transaction, with the voting power of each
such continuing holder relative to other such continuing holders not
substantially altered in the transaction, or (2) a merger or
consolidation effected to implement a recapitalization of
<PAGE> 2
the Company (or similar transaction) in which no "Person" (as defined
above) acquires more than 25% of the combined voting power of the
Company's then outstanding securities, or
(D) the stockholders of the Company approve a plan of
complete liquidation of the Company or an agreement for the sale or
disposition by the Company of all or substantially all of the
Company's assets.
Notwithstanding anything in the foregoing to the contrary, no Change
of Control shall be deemed to have occurred with respect to any particular
Director by virtue of any transaction which results in such Director, or a
group of Persons which includes such Director, acquiring, directly or
indirectly, 25% or more of the combined voting power of the Company's
outstanding securities.
2.2 "Committee" shall mean the Committee as described in Section 3
hereof, if such Committee has been appointed, or the Board, if such Committee
has not been appointed.
2.3 "Common Stock" shall mean a share of Common Stock, par value
$0.01 per share, of the Company.
2.4 "Company" shall mean Marcum Natural Gas Services, Inc.
2.5 "Employee" shall mean an employee of the Company or any
Participating Subsidiary.
2.6 "Exchange Act" shall mean the Securities Exchange Act of 1934,
as amended from time to time.
2.7 "Fair Market Value" of a share of Common Stock on any date
shall mean the last sale price, or if there was no sale the last bid price, of
the Common Stock as reported in the Wall Street Journal for securities listed
on the Nasdaq Stock Market for the date in question, or, if no such sale price
or bid price is available, the last sale price or bid price on the next
preceding date for which a sale price or bid price was so reported. If the
Common Stock is traded on an exchange, the closing price of the Common Stock
shall be used in lieu of sale price or bid price. If the Common Stock is not
listed on the Nasdaq Stock Market or traded on an exchange, the Fair Market
Value shall be such amount as determined by the Board or the Committee, if any.
2.8 "Immediate Family Members" of a Participant shall mean such
Participant's spouse, children and grandchildren (whether by blood or
adoption).
2.9 "Limited Right" shall mean the right, granted pursuant to
Section 8, to receive payment, in cash, following a Change of Control, of an
amount equal to the product computed by multiplying (i) the excess of (a) the
higher of (x) the Minimum Price Per Share, if the Change of Control occurs as a
result of a Transaction, tender offer or exchange offer, or (y) the highest
Fair Market Value per share during the period commencing thirty days prior to
the Change of Control and ending immediately prior to the date the Limited
Right is exercised, over (b) the exercise price per share under the Directors'
Option to which such Limited Right relates, by (ii) the number of shares of
Common Stock as to which such Limited Right is being exercised provided that,
in the case of a Limited Right that has not been outstanding at least seven
months at the time the Change of Control occurs, the amount computed under part
(A) of the foregoing formula shall be equal to the highest amount that could be
computed under part (y) of such formula using a Fair Market
2
<PAGE> 3
Value that first became determinable six months or more after the date of grant
of the Limited Right (with such Fair Market Value otherwise determined in
accordance with the foregoing formula).
2.10 "Minimum Price Per Share" shall mean the highest gross price
(before brokerage commissions and soliciting dealer's fees) paid or to be paid
for a share of Common Stock (whether by way of exchange, conversion,
distribution or upon liquidation or otherwise) in any Transaction, tender offer
or exchange offer occurring prior to the date on which such Limited Right is
exercised. If the consideration paid or to be paid in any such Transaction,
tender offer or exchange offer shall consist, in whole or in part, of
consideration other than cash, the Board or the Committee, if any, shall take
such action, as in its judgment it deems appropriate, to establish the cash
value of such consideration, but such valuation shall not be less than the
value, if any, attributed to such consideration in writing by any party to such
Transaction, tender offer or exchange offer other than the Company.
2.11 "Non-Employee Director" shall mean a Director of the Company
who is not an employee of the Company or any Subsidiary within the meaning of
Rule 16b-3.
2.12 "Participant" shall mean an Employee to whom a Stock Option,
Limited Right or Supplemental Bonus is granted.
2.13 "Plan" shall mean this 1991 Stock Option Plan of the Company,
as initially authorized and adopted by the Board of Directors on December 12,
1991 and by the stockholders of the Company on August 6, 1992, as amended
effective June 4, 1996 and December 3, 1996, and as amended thereafter from
time to time.
2.14 "Rule 16b-3" shall mean Rule 16b-3 (as from time to time
amended) and including any successor provisions promulgated under the Exchange
Act.
2.15 "Stock Option" shall mean the right granted under the Plan to
an Employee to purchase, at such time or times and at such price or prices
("Option Price") as are determined by the Committee, the number of shares of
Common Stock determined by the Committee.
2.16 "Subsidiary" shall mean any corporation in which the Company
owns, directly or indirectly, stock possessing fifty percent (50%) or more of
the total combined voting power of all classes of stock.
2.17 "Supplemental Bonus" shall mean the right to receive payment,
in shares of Common Stock, cash or a combination of shares of Common Stock and
cash, of an amount specified by the Committee pursuant to Section 7.6.
2.18 "Transaction" shall mean (A) any consolidation or merger of
the Company in which the Company is not the surviving corporation other than a
merger solely to effect a reincorporation or a merger of the Company as to
which stockholder approval is not required pursuant to Sections 251(f) or 253
of the Delaware General Corporation Law, or (B) any sale, lease, exchange or
other transfer (in one transaction or a series of related transactions) of 50%
or more of the assets or earning power of the Company, or (C) the adoption of
any plan or proposal for the liquidation or dissolution of the Company.
For purposes of this Plan, the Committee may, by resolution, clarify
the date as of which a Change of Control shall be deemed to have occurred.
3
<PAGE> 4
3. INCENTIVE STOCK OPTIONS AND NONSTATUTORY STOCK OPTIONS
The Stock Options granted under the Plan may be either:
(a) Incentive Stock Options ("ISOs") which are intended to be
"incentive stock options" as that term is defined in Section 422 of the Code;
or
(b) Nonstatutory Stock Options ("NSOs") which are intended to be
options that do not qualify as "incentive stock options" under Section 422 of
the Code.
The individual Option Agreement(s) (as defined in Section 5.3) shall
clearly designate whether the Stock Options granted are ISOs or NSOs. Subject
to other provisions of the Plan, a Participant may receive ISOs and NSOs at the
same time, provided that the ISOs and NSOs are clearly designated as such.
Except as otherwise expressly provided herein, all of the provisions
and requirements of the Plan relating to Stock Options shall apply to ISOs and
NSOs.
4. ADMINISTRATION
4.1 Committee. The Plan shall be administered by the Board of
Directors of the Company or by the Employee Stock Option Committee of the
Board. If appointed, the Committee shall consist of two or more Non-Employee
Directors. Subject to the provisions of the Plan, the Board or the Committee,
if any, shall have full authority to administer the Plan, including authority
to grant awards under the Plan and determine the terms thereof, to interpret
and construe any provision of the Plan and any Stock Option, Limited Right or
Supplemental Bonus granted thereunder, to adopt such rules and regulations for
administering the Plan, including those it may deem necessary in order to
comply with the requirements of the Code or in order that Stock Options that
are intended to be ISOs will be classified as incentive stock options under the
Code, or in order to conform to any regulation or to any change in any law or
regulation applicable thereto, and to make all other decisions and
determinations under the Plan.
4.2 Actions of Committee. All actions taken and all
interpretations and determinations made by the Board or the Committee, if any,
in good faith (including determinations of Fair Market Value) shall be final
and binding upon all Participants, the Company and all other interested
persons. No member of the Board or the Committee, if any, shall be personally
liable for any action, determination or interpretation made in good faith with
respect to the Plan, and all members of Board and the Committee, if any, shall,
in addition to their rights as directors, be fully protected by the Company
with respect to any such action, determination or interpretation.
5. ELIGIBILITY AND PARTICIPATION
5.1 Eligible Employees. Grants of Stock Options, Limited Rights and
Supplemental Bonuses may be made to Employees. Any director of the Company or
of a Participating Subsidiary who is also an Employee shall also be eligible,
but directors who are not Employees shall not be eligible, to receive Stock
Options, Limited Rights or Supplemental Bonuses under the Plan. The Committee
shall from time to time determine the Employees to whom Stock Options shall be
granted, the number of shares of Common Stock subject to each Stock Option to
be granted to each such Employee, the Option Price of such Stock Options and
the terms and conditions of such Stock Options, subject to the provisions of
this Plan.
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5.2 Option Price. Except as otherwise provided in Section 7.8,
the Option Price of any ISO or NSO shall not be less than the Fair Market Value
of a share of Common Stock on the date on which the Stock Option is granted and
shall not be less than par value of Common Stock. If an ISO is granted to an
Employee who then owns stock possessing more than 10% of the total combined
voting power of all classes of stock of the Company or any parent or subsidiary
corporation of the Company, the Option Price of such ISO shall be at least 110%
of the Fair Market Value of the Common Stock subject to the ISO on the date
such ISO is granted, and such ISO shall not be exercisable after five years
after the date on which it was granted.
5.3 Option Agreement. Each Stock Option shall be evidenced by a
written agreement ("Option Agreement") containing such terms and provisions as
the Committee may determine, subject to the provisions of this Plan.
6. SHARES OF COMMON STOCK SUBJECT TO THE PLAN
6.1 Maximum Number. The maximum aggregate number of shares of
Common Stock that may be issued under the Plan shall be 1,400,000 shares,
subject to adjustment as provided in Section 6.2. Such shares may be
authorized and unissued shares or may be treasury shares. The aggregate Fair
market Value (determined as of the time an ISO is granted) of the Common Stock
as to which all ISOs granted to an individual may first become exercisable in a
particular calendar year may not exceed $100,000; provided that to the extent
that Stock Options intended to be ISOs (together with all incentive stock
options granted under other Company plans to such individual) become
exercisable in a given year in excess of $100,000, such Stock Options shall be
deemed to be NSOs and shall be exercisable as such. If any shares of Common
Stock subject to Stock Options are not purchased or otherwise paid for before
such Stock Options expire or otherwise terminate, unless such Stock Options are
surrendered upon exercise of Limited Rights, such shares may again be made
subject to Stock Options or otherwise issued under the Plan. Shares shall be
treated as issued under the Plan and counted against the maximum number set
forth in this Section 6.1, including with respect to the payment of
Supplemental Bonuses, in a manner that complies with applicable requirements
under Rule 16b-3.
6.2 Capital Changes. In the event any changes are made to the
shares of Common Stock (whether by reason of merger, consolidation,
reorganization, recapitalization, stock dividend in excess of one percent (1%)
at any single time, stock split, combination of shares, exchange of shares,
extraordinary cash dividend, change in corporate structure or otherwise), the
Board or the Committee, if any, shall, in order to prevent dilution or
enlargement of Participants' rights, make appropriate adjustments in: (i) the
number and kind of shares theretofore made subject to Stock Options, and in the
Option Price of said shares; and (ii) the aggregate number and kind of shares
which may be issued under the Plan. If any of the foregoing adjustments shall
result in a fractional share, the fraction shall be disregarded, and the
Company shall have no obligation to make any cash or other payment with respect
to such a fractional share.
7. EXERCISE OF STOCK OPTIONS
7.1 Time of Exercise. Subject to the provisions of the Plan,
including without limitation Section 7.7, the Committee, in its discretion,
shall determine the time when a Stock Option, or a portion of a Stock Option,
shall become exercisable, and the time when a Stock Option, or a portion of a
Stock Option, shall expire. Such time or times shall be set forth in the
Option Agreement evidencing such Stock Option. An ISO shall expire, to the
extent not exercised, no later than the tenth anniversary of the date on which
it was
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<PAGE> 6
granted, and an NSO shall expire, to the extent not exercised, no later than 10
years and one day after the date on which it was granted. The Committee may
accelerate the vesting of any Participant's Stock Option by giving written
notice to the Participant. Unless otherwise determined by the Committee, the
acceleration of the exercise period of a Stock Option shall not affect the
expiration date of that Stock Option.
7.2 Surrender of Shares in Payment of Exercise Price. The
Committee, in its sole discretion, may permit a Participant to surrender to the
Company shares of Common Stock as part or full payment for the exercise of a
Stock Option. Such surrendered shares shall be valued at their Fair Market
Value on the date of exercise. Unless otherwise determined by the Committee,
any such shares surrendered by the Participant shall have been held by him for
at least six months prior to surrender.
7.3 Use of Promissory Note; Exercise Loans. The Committee may, in
its sole discretion, impose terms and conditions, including conditions relating
to the manner and timing of payments of the Option Price, on the exercise of
Stock Options. Such terms and conditions may include, but are not limited to,
permitting a Participant to deliver to the Company his promissory note as
payment for the exercise of a Stock Option; provided that, with respect to any
promissory note given as payment or partial payment for the exercise of an ISO,
all terms of such note shall be determined at the time the Stock Option is
granted and set forth in the Option Agreement. The Committee, in its sole
discretion, may authorize the Company to make a loan to a Participant in
connection with the exercise of Stock Options, or authorize the Company to
arrange or guaranty loans to a Participant by a third party, including in
connection with broker-assisted cashless exercises. The foregoing
notwithstanding, a Participant shall pay at least the par value of the Common
Stock to be acquired upon exercise of a Stock Option in the form of lawful
consideration under the Delaware General Corporation law prior to issuance of
such shares.
7.4 Stock Restriction Agreement. The Committee may provide that
shares of Common Stock issuable upon the exercise of a Stock Option shall,
under certain conditions, be subject to restrictions whereby the Company has a
right of first refusal with respect to such shares or a right or obligation to
repurchase all or a portion of such shares, which restrictions may survive a
Participant's term of employment with the Company. The acceleration of time or
times at which the Stock Option becomes exercisable may be conditioned upon the
Participant's agreement to such restrictions.
7.5 Termination of Employment Before Exercise. If a Participant's
employment with the Company or a Participating Subsidiary shall terminate for
any reason other than the Participant's disability, any ISO then held by the
Participant, to the extent then exercisable under the applicable Option
Agreement(s), shall remain exercisable after the termination of his employment
for a period of three months. If the Participant's employment is terminated
because the Participant is disabled within the meaning of Section 22(e)(3) of
the Code, any ISO then held by the Participant, to the extent then exercisable
under the applicable Option Agreement(s), shall remain exercisable after the
termination of his employment for a period of one year (but in no event beyond
ten years from the date of grant of the ISO). If the Stock Option is not
exercised during the applicable period, it shall be deemed to have been
forfeited and of no further force or effect. The period and extent to which an
NSO may be exercised following termination of employment shall be determined by
the Committee.
7.6 Grant of Supplement Bonuses. The Committee, either at the
time of grant or at any time prior to exercise of any NSO or Limited Right, may
provide for a Supplemental Bonus from the Company or Participating Subsidiary
in connection with a specified number of shares of Common Stock then
purchasable, or which may become purchasable, under an NSO, or a specified
number of Limited Rights which may be or
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<PAGE> 7
become exercisable. A Supplemental Bonus shall be automatically payable upon
the exercise of the NSO or Limited Right with regard to which such the
Supplemental Bonus was granted. A Supplemental Bonus shall not exceed the
amount necessary to reimburse the Participant for the income tax liability
incurred by him upon the exercise of the NSO or upon the exercise of such
Limited Right, calculated using the maximum combined federal and applicable
state income tax rates then in effect and taking into account the tax liability
arising from the Participant's receipt of the Supplemental Bonus, all as
determined by the Committee. The Committee may, in its discretion, elect to
pay any part or all of the Supplemental Bonus in: (i) cash; (ii) shares of
Common Stock; or (iii) any combination of cash and shares of Common Stock;
provided that bonuses payable in respect of Limited Rights shall be payable
only in cash. The Committee's election shall be made by giving written notice
to the Participant not later than 90 days after the related exercise, which
notice shall specify the portion which the Committee elects to pay in cash,
shares of Common Stock or a combination thereof. In the event any portion is
to be paid in shares of Common Stock, the number of shares to be delivered
shall be determined by dividing the amount which the Committee elects to pay in
shares of Common Stock by the Fair Market Value of one share of Common Stock on
the date of exercise. Any fractional share resulting from any such calculation
shall be disregarded. Said shares, together with any cash payable to the
Participant, shall be delivered within said 90-day period.
7.7 Option Vesting Upon Change of Control of the Company. In the
event of a Change of Control of the Company the vesting of Stock Options
granted pursuant to the Plan shall automatically be accelerated, so that all
Stock Options outstanding at the time of such Change of Control will be
exercisable immediately except as otherwise provided in Section 2.1.
7.8 Stand-Alone, Additional, Tandem, and Substitute Awards.
Awards granted under the Plan may, in the discretion of the Committee, be
granted either alone or in addition to, in tandem with, or in substitution for,
any other award granted under the Plan or any other plan of the Company or any
Participating Subsidiary or any other right of a Participant to receive payment
from the Company or any Participating Subsidiary. If an award is granted in
substitution for another such award, the Committee shall require the surrender
of such other award in consideration for the grant of the new award. Awards
granted in addition to or in tandem with other awards may be granted either as
of the same time as or a different time from the grant of such other awards.
The per share Option Price of any Stock Option:
(A) Granted in substitution for an outstanding award
shall be not less than the lesser of the Fair Market Value of a share
of Common Stock at the date such substitute award is granted or such
Fair Market Value at that date reduced to reflect the fair market
value (as determined by the Committee) at that date of the award
required to be surrendered by the Participant as a condition to
receipt of the substitute award; or
(B) Retroactively granted in tandem with an outstanding
award shall be not less than the lesser of the Fair Market Value of a
share of Common Stock at the date of grant of the later award or at
the date of grant of the earlier award.
Except for the Option Price required to be paid upon the exercise of Stock
Options and except as provided in this Section 7.8, only services may be
required as consideration for the grant of any award under the Plan.
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<PAGE> 8
8. LIMITED RIGHTS
8.1 Grant of Limited Rights. The Committee may in its discretion
grant Limited Rights to a Participant concurrently with the grant of each ISO
or at any time with respect to any NSO. Such Limited Rights shall be
exercisable with respect to the number of shares of Common Stock which are, or
may become, purchasable under any such Stock Option. The Committee may, in its
discretion, specify the terms and conditions of such rights, including without
limitation the date or dates upon which such rights shall expire and become
void and unexercisable, except that Limited Rights granted with respect to an
ISO shall only be exercisable, and shall expire, at the time or times the ISO
is exercisable and expires, respectively. Each Participant to whom Limited
Rights are granted shall be given written notice advising him of the grant of
such rights and specifying the terms and conditions of the rights, which shall
be subject to all the provisions of this Plan.
8.2 Exercise of Limited Rights. Subject to the limitations set
forth in Section 8.1, a Limited Right may be exercised only during the period
beginning on the first day following the occurrence of a Change of Control and
ending on the sixtieth day following such date. Upon the occurrence of a
tender or exchange offer constituting a Change of Control, a Limited Right may
be exercised in such manner regardless of whether the Board supports or opposes
such tender or exchange offer. A Participant shall exercise his Limited Rights
by delivering a written notice to the Committee specifying the number of shares
with respect to which he exercises Limited Rights and agreeing to surrender the
right to purchase an equivalent number of shares of Common Stock subject to his
Stock Option. If a Participant exercises Limited Rights, payment of his
Limited Rights shall be made in accordance with Section 8.3 on or before the
thirtieth day after the date of exercise of the Limited Rights. A Limited
Right shall remain exercisable during the exercise periods specified in
accordance with Section 8.1 and this Section in the event of a termination of
employment of the Participant holding the Limited Right after a Change of
Control. Notwithstanding the above, upon a termination of the employment of
the holder of the Limited Right before the occurrence of any Change of Control,
the Limited Right shall expire immediately.
8.3 Form of Payment. If a Participant elects to exercise Limited
Rights as provided in Section 8.2, the Company shall pay to the Participant in
cash the amount set forth in Section 2.11 hereof, calculated with respect to
the shares as to which the Participant has exercised Limited Rights, within
thirty days after the date of exercise of the Limited Rights. If such amount
is not paid in full within the prescribed period, the Company shall be liable
to such Participant for the costs of collection of such amount, including
attorney's fees.
8.4 Termination. When a Limited Right is exercised, the Stock
Option to which it relates, if any, shall cease to be exercisable to the extent
of the number of shares of Common Stock with respect to which such Limited
Right was exercised. Upon the exercise or termination of a Stock Option, any
Limited Right granted with respect thereto shall terminate to the extent of the
number of shares as to which such Stock Option was exercised or terminated.
9. NO CONTRACT OF EMPLOYMENT
Nothing in this Plan shall confer upon the Participant the right to
continue in the employ of the Company, or any Participating Subsidiary, nor
shall it interfere in any way with the right of the Company, or any such
Participating Subsidiary, to discharge the Participant at any time for any
reason whatsoever, with or without cause. Nothing in this Article 9 shall
affect any rights or obligations of the Company or any Participant under any
written contract of employment.
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10. NO RIGHTS AS A STOCKHOLDER
A Participant shall have no rights as a stockholder with respect to
any shares of Common Stock subject to a Stock Option, until such Stock Option
is exercised. Except as provided in Section 6.2, no adjustment shall be made
in the number of shares of Common Stock issued to a Participant, or in any
other rights of the Participant upon exercise of a Stock Option by reason of
any dividend, distribution or other right granted to stockholders for which the
record date is prior to the date of exercise of the Participant's Stock Option.
11. TRANSFERABILITY
No Stock Option, Limited Right or Supplemental Bonus granted under
this Plan, nor any other rights acquired by a Participant under this Plan,
shall be assignable or transferable by a Participant, other than by will or the
laws of descent and distribution, or pursuant to a qualified domestic relations
order as defined under the Code or Title I of the Employment Retirement Income
Security Act of 1974, and any ISO shall be exercisable, during the
Participant's lifetime, only by him. Notwithstanding the immediately preceding
sentence, an NSO and any related Limited Right or Supplemental Bonus shall also
be transferable by a Participant without consideration (other than in exchange
for an interest in a transferee's partnership, limited liability company or
other similar entity), but only to (a) any Immediate Family Members of the
Participant, (b) any trust or trusts for the exclusive benefit of such
Immediate Family Members, or (c) a partnership, limited liability company or
other similar entity in which such Immediate Family Members and the Participant
are the sole partners or members; provided, however, that (i) the Board or the
Committee in granting an NSO, may impose additional restrictions on transfer or
prohibit such transfer entirely, (ii) following transfer, any such NSOs and any
related Limited Rights or Supplemental Bonus shall continue to be subject to
the same terms and conditions as were applicable immediately prior to transfer,
provided that for purposes of this Agreement, any reference to a Participant as
an optionee shall be deemed to refer to the transferee, and (iii) the events of
termination of employment of Section 7.5 hereof shall continue to be applied
with respect to the original optionee Participant, following which the NSOs and
any related Limited Right or Supplemental Bonus shall be exercisable by the
transferee only to the extent, and for the periods specified at Section 7.5.
In the event of a transferee's death, a Stock Option or Limited Right may be
exercised by the personal representative of the transferee's estate or, if no
personal representative has been appointed, by the successor or successors in
interest determined under the transferee's will or under the applicable laws of
descent and distribution.
12. COMPLIANCE WITH RULE 16B-3
It is the intent of the Company that the Plan comply in all respects
with Rule 16b-3 in connection with any award granted to a person who is subject
to Section 16 of the Exchange Act. Accordingly, if any provision of the Plan
or any agreement hereunder does not comply with the requirements of Rule 16b-3
as then applicable to any such person, such provision shall be construed or
deemed amended to the extent necessary to conform to such requirements with
respect to such person.
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<PAGE> 10
13. AMENDMENT
The Company by action of the Board may amend, modify or terminate this
Plan at any time or, by action of the Committee may amend, modify or terminate
any outstanding Option Agreement, except that any such amendment, modification
or termination of the Plan shall be subject to the approval of the Company's
stockholders if such stockholder approval is required by any federal or state
law or regulation or the rules of the Nasdaq Stock Market or any stock exchange
or automated quotation system on which the Common Stock may be listed, traded
or quoted, or if the Board in its discretion determines that obtaining such
stockholder approval is for any reason advisable, provided that any increase in
the aggregate number of shares of Common Stock that may be issued under this
Plan, other than in connection with an adjustment pursuant to Section 6.2,
shall require the approval of the Company's stockholders. Moreover, no action
may be taken by the Company without the consent of the affected Participant
which will materially impair the rights of such Participant under any award
then outstanding or which will prevent an ISO from continuing to qualify under
Section 422 of the Code.
14. REGISTRATION OF OPTIONED SHARES
No Stock Option shall be exercisable unless the Company's sale of such
optioned shares is pursuant to an applicable effective registration statement
under the Securities Act of 1933, as amended, or unless, in the opinion of
counsel to the Company, the Company's sale of such optioned shares would be
exempt from the registration requirements of the Securities Act of 1933, as
amended, and unless, in the opinion of such counsel, such sale would be exempt
from the registration or qualification requirements of applicable state
securities laws.
15. WITHHOLDING TAXES
The Company or a Participating Subsidiary may take such steps as the
Committee may deem necessary or appropriate for the withholding of any taxes
which the Company or the Participating Subsidiary is required by any law or
regulation or any governmental authority, whether federal, state or local,
domestic or foreign, to withhold in connection with any Stock Option, Limited
Right or Supplemental Bonus, and to take such other action as the Committee may
deem necessary or advisable to enable the Company and Participants to satisfy
obligations for the payment of tax liabilities in excess of such withholding
obligations relating to any such award. This authority shall include authority
to withhold or receive shares or other property and to make cash payments in
respect thereof in satisfaction of Participant's tax obligations.
16. FINANCING ARRANGEMENTS
The Committee, in its discretion, may enter into arrangements with one
or more banks, brokers or other financial institutions to facilitate the
exercise, and the disposition of shares acquired upon exercise, of Stock
Options or Supplemental Bonuses, including, without limitation, arrangements
for the simultaneous exercise of Stock Options (including a related
Supplemental Bonus), and sale of the shares acquired upon such exercise.
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17. NONEXCLUSIVITY OF THE PLAN
Neither the adoption of the Plan by the Board nor the submission of
the Plan to stockholders of the Company for approval shall be construed as
creating any limitations on the power or authority of the Board to adopt such
other or additional incentive or other compensation arrangements of whatever
nature as the Board may deem necessary or desirable or preclude or limit the
continuation of any other plan, practice or arrangement for the payment of
compensation or fringe benefits to employees generally, or to any class or
group of employees, which the Company or any subsidiary now has lawfully put
into effect, including, without limitation, any retirement, pension, savings
and stock purchase plan, insurance, death and disability benefits and executive
short-term incentive plans.
18. EFFECTIVE DATE
This Plan was adopted by the Board of Directors and became effective
upon approval by the Company's stockholders at the annual stockholders' meeting
on August 6, 1992. This Plan was amended by the Board of Directors and the
stockholders of the Company effective June 4, 1996, and by the Board of
Directors of the Company effective December 2, 1996. No ISO shall be granted
subsequent to ten years after the effective date of the Plan. Unless earlier
terminated by the Board, the Plan shall terminate when no shares of Common
Stock remain reserved and available for issuance and the Company has no further
obligation with respect to any award granted under the Plan.
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EXHIBIT 10.3
MARCUM NATURAL GAS SERVICES, INC.
DIRECTORS' STOCK OPTION PLAN
AMENDED AND RESTATED
AS OF DECEMBER 5, 1996
1. PURPOSE
The purpose of this Directors' Stock Option Plan (the "Plan") is to
assist Marcum Natural Gas Services, Inc. in attracting, motivating and
retaining qualified non-employee directors by providing a means whereby such
persons will be given an opportunity to acquire a proprietary interest in the
Company's future growth.
2. CERTAIN DEFINITIONS
When used in this Plan, unless the context otherwise requires:
2.1 "Board of Directors" or "Board" shall mean the Board of
Directors of Marcum Natural Gas Services, Inc. as constituted at any time.
2.2 "Change of Control" shall mean any of the following events:
(A) any "Person," as such term is used in Sections 13(d)
and 14(d) of the Exchange Act (other than the Company, any trustee or
other fiduciary holding securities under an employee benefit plan of
the Company, or any company owned, directly or indirectly, by the
stockholders of the Company in substantially the same proportions as
their ownership of stock of the Company) is or becomes the "Beneficial
Owner" as defined in Rule 13d-3 under the Exchange Act, directly or
indirectly, of 25% or more of the combined voting power of the
Company's outstanding securities;
(B) individuals who constitute the Board on the effective
date of the Plan (the "Incumbent Board") cease for any reason to
constitute at least a majority thereof, provided that any person
becoming a director subsequent to such effective date whose election,
or nomination for election, by the Company's stockholders, was
approved by a vote of at least a majority of the directors comprising
the Incumbent Board (either by a specific vote or by approval of the
proxy statement of the Company in which such person is named as a
nominee for director, without objection to such nomination) shall be,
for purposes of this clause (B), considered as though such person were
a member of the Incumbent Board;
(C) the stockholders of the Company shall approve a
merger, consolidation, recapitalization, or reorganization of the
Company, a reverse stock split of outstanding voting securities, or
consummation of any such transaction if stockholder approval is not
obtained, other than (1) any such transaction which would result in at
least 50% of the total voting power represented by the voting
securities of the surviving entity outstanding immediately after such
transaction being "Beneficially Owned" (as defined above) by 75% or
more of the holders of outstanding voting securities of the Company
immediately prior to the transaction, with the voting power of each
such continuing holder relative to other such continuing holders not
substantially altered in the transaction, or (2) a merger or
consolidation effected to implement a recapitalization of
<PAGE> 2
the Company (or similar transaction) in which no "Person" (as defined
above) acquires more than 25% of the combined voting power of the
Company's then outstanding securities, or
(D) the stockholders of the Company approve a plan of
complete liquidation of the Company or an agreement for the sale or
disposition by the Company of all or substantially all of the
Company's assets.
Notwithstanding anything in the foregoing to the contrary, no Change
of Control shall be deemed to have occurred with respect to any particular
Director by virtue of any transaction which results in such Director, or a
group of Persons which includes such Director, acquiring, directly or
indirectly, 25% or more of the combined voting power of the Company's
outstanding securities.
2.3 "Committee" shall mean the Committee as described in Section 3
hereof, if such Committee has been appointed, or the Board, if such Committee
has not been appointed.
2.4 "Common Stock" shall mean a share of Common Stock, par value
$0.01 per share, of the Company.
2.5 "Company" shall mean Marcum Natural Gas Services, Inc.
2.6 "Director" shall mean a person who, on any date a Directors'
Option would be granted to a Director hereunder, is a member of the Board of
Directors but who is not then an employee of the Company or any Subsidiary;
provided, however, that no member of the Board serving as a result of a
nomination or appointment pursuant to the terms of any debt instrument,
preferred stock, underwriting agreement, or other contract entered into by the
Company shall be deemed a Director for purposes of the Plan.
2.7 "Directors' Options" shall mean options to purchase shares
(subject to adjustment pursuant to Section 6.2 hereof) of Common Stock which
may be granted by the Company to each Director pursuant to Section 7.
2.8 "Exchange Act" shall mean the Securities Exchange Act of 1934,
as amended from time to time.
2.9 "Fair Market Value" of a share of Common Stock on any date
shall mean the last sale price, or if there was no sale the last bid price, of
the Common Stock as reported in the Wall Street Journal for securities listed
on the Nasdaq Stock Market for the date in question, or, if no such sale price
or bid price is available, the last sale price or bid price on the next
preceding date for which a sale price or bid price was so reported. If the
Common Stock is traded on an exchange, the closing price of the Common Stock
shall be used in lieu of sale price or bid price. If the Common Stock is not
listed on the Nasdaq Stock Market or traded on an exchange, the Fair Market
Value shall be such amount as determined by the Board or the Committee, if any.
2.10 "Immediate Family Members" of a Director shall mean such
Director's spouse, children and grandchildren (whether by blood or adoption).
2.11 "Limited Right" shall mean the right, granted pursuant to
Section 8, to receive payment, in cash, following a Change of Control, of an
amount equal to the product computed by multiplying (i) the excess of (a) the
higher of (x) the Minimum Price Per Share, if the Change of Control occurs as a
result of a
2
<PAGE> 3
Transaction, tender offer or exchange offer, or (y) the highest Fair Market
Value per share during the period commencing thirty days prior to the Change of
Control and ending immediately prior to the date the Limited Right is
exercised, over (b) the exercise price per share under the Directors' Option to
which such Limited Right relates, by (ii) the number of shares of Common Stock
as to which such Limited Right is being exercised provided that, in the case of
a Limited Right that has not been outstanding at least seven months at the time
the Change of Control occurs, the amount computed under part (A) of the
foregoing formula shall be equal to the highest amount that could be computed
under part (y) of such formula using a Fair Market Value that first became
determinable six months or more after the date of grant of the Limited Right
(with such Fair Market Value otherwise determined in accordance with the
foregoing formula).
2.12 "Minimum Price Per Share" shall mean the highest gross price
(before brokerage commissions and soliciting dealer's fees) paid or to be paid
for a share of Common Stock (whether by way of exchange, conversion,
distribution or upon liquidation or otherwise) in any Transaction, tender offer
or exchange offer occurring prior to the date on which such Limited Right is
exercised. If the consideration paid or to be paid in any such Transaction,
tender offer or exchange offer shall consist, in whole or in part, of
consideration other than cash, the Board or the Committee, if any, shall take
such action, as in its judgment it deems appropriate, to establish the cash
value of such consideration, but such valuation shall not be less than the
value, if any, attributed to such consideration in writing by any party to such
Transaction, tender offer or exchange offer other than the Company.
2.13 "Non-Employee Director" shall mean a Director of the Company
who is not an employee of the Company or any Subsidiary within the meaning of
Rule 16b-3.
2.14 "Plan" shall mean this Directors' Stock Option Plan of the
Company, as initially authorized and adopted by the Board of Directors on
December 12, 1991 and by the stockholders of the Company on August 6, 1992, as
amended effective June 1, 1995, June 4, 1996 and December 5, 1996, and as
amended thereafter from time to time.
2.15 "Rule 16b-3" shall mean Rule 16b-3 (as from time to time
amended) and including any successor provisions promulgated under the Exchange
Act.
2.16 "Subsidiary" shall mean any corporation in which the Company
owns, directly or indirectly, stock possessing fifty percent (50%) or more of
the total combined voting power of all classes of stock.
2.17 "Transaction" shall mean (A) any consolidation or merger of
the Company in which the Company is not the surviving corporation other than a
merger solely to effect a reincorporation or a merger of the Company as to
which stockholder approval is not required pursuant to Sections 251(f) or 253
of the Delaware General Corporation Law, or (B) any sale, lease, exchange or
other transfer (in one transaction or a series of related transactions) of 50%
or more of the assets or earning power of the Company, or (C) the adoption of
any plan or proposal for the liquidation or dissolution of the Company.
3. ADMINISTRATION
The Plan shall be administered by the Board of Directors or by a
Director Stock Option Committee consisting of two or more Non-Employee
Directors appointed by the Board. The Board and the Committee, if any, shall
have full power and authority to construe, interpret and administer the Plan
and to make determinations which shall be final, conclusive and binding upon
all persons, including but not limited to
3
<PAGE> 4
the Company, the stockholders and any person having an interest in any
Directors' Options, provided that a Director shall disqualify himself from
deciding any question that is unique to his own Directors' Option. If a member
of the Committee, for any reason, shall cease to serve, the vacancy may be
filled by the Board of Directors. Any member of the Committee may be removed
at any time, with or without cause, by the Board of Directors. No member of
the Board or the Committee, if any, shall be personally liable for any action,
determination or interpretation made in good faith with respect to the Plan.
4. COMPLIANCE WITH RULE 16B-3
It is the intent of the Company that the Plan comply in all material
respects with Rule 16b-3. Accordingly, if any provision of the Plan or any
agreement hereunder does not comply with the applicable requirements of Rule
16b-3, such provision shall be construed or deemed amended to the extent
necessary to conform to such requirements.
5. ELIGIBILITY
5.1 ELIGIBLE DIRECTORS. Directors' Options and Limited Rights may
be granted only to Directors. Employees of the Company or any of its
Subsidiaries are not eligible to receive Directors' Options or other awards
under the Plan.
5.2 OPTION AGREEMENT. Each Directors' Option shall be evidenced
by a written agreement ("Option Agreement") containing such terms and
provisions as the Board or the Committee, if any, may determine, subject to the
provisions of this Plan.
6. SHARES OF COMMON STOCK SUBJECT TO THE PLAN
6.1 MAXIMUM NUMBER. The maximum aggregate number of shares of
Common Stock that may be issued under the Plan shall be 650,000 shares. Such
shares may be authorized and unissued shares or may be treasury shares. If any
shares of Common Stock subject to a Directors' Option are not purchased before
such Directors' Option expires or otherwise terminates, unless the Directors'
Option is surrendered upon exercise of a Limited Right, such shares may again
be made subject to a Directors' Option.
6.2 CAPITAL CHANGES. In the event any changes are made to the
shares of Common Stock (whether by reason of merger, consolidation,
reorganization, recapitalization, stock dividend in excess of one percent (1%)
at any single time, stock split, combination of shares, exchange of shares,
extraordinary cash dividend, change in corporate structure or otherwise), the
Board or the Committee, if any, shall, in order to prevent dilution or
enlargement of Participants' rights, make appropriate adjustments in: (i) the
number and kind of shares of Common Stock theretofore made subject to
Directors' Options, and/or in the exercise price of said shares; and (ii) the
aggregate number and kind of shares which may be issued under the Plan. If any
of the foregoing adjustments shall result in a fractional share, the fraction
shall be disregarded, and the Company shall have no obligation to make any cash
or other payment with respect to such a fractional share.
4
<PAGE> 5
7. OPTION GRANTS
7.1 INITIAL GRANTS TO NEW DIRECTORS. A Directors' Option to
purchase 20,000 shares of Common Stock shall be automatically granted to each
person who is first elected or appointed to serve as a member of the Board
after the effective date of the Plan and who, at the time of such election or
appointment, is a Director and was not, during the one-year period prior to the
date of such election or appointment, an employee of the Company or any
Subsidiary.
7.2 ANNUAL GRANTS TO DIRECTORS. A Directors' Option to purchase
10,000 shares of Common Stock shall be granted for each Director each year on
the date of the Annual Meeting of Shareholders; provided, however, that a
Directors' Option shall not be granted under this Section 7.2 to a Director in
a given year if, during the six-month period prior to and including the date
the Directors' Option would otherwise be granted pursuant to this Section 7.2,
such Director either was granted a Directors' Option pursuant to Section 7.1 or
such Director was an employee of the Company or any Subsidiary.
7.3 ADDITIONAL DISCRETIONARY GRANTS TO DIRECTORS. In addition to
the formula grants of Directors' Options to Directors set forth in Sections 7.1
and 7.2, additional Directors' Options may be granted in the discretion of the
Board or the Committee, if any, to such Directors and exercisable to purchase
such number of shares of Common Stock as the Board or the Committee, if any,
shall determine.
7.4 TERMS OF DIRECTORS' OPTIONS. Directors' Options shall be
nonstatutory stock options which shall be granted for no consideration other
than services, and shall be subject to the following terms and conditions:
(i) EXERCISE PRICE. The exercise price per share
of Common Stock purchasable under a Directors' Option shall be
equal to 100% of the Fair Market Value of a share of Common
Stock on the date of grant of such Directors' Option. A
Directors' Option shall be exercised by giving written notice
of exercise to the Company accompanied by payment in full of
the exercise price in cash (including by check) or by
surrender of shares of Common Stock acquired by the Director
at least six months prior to the exercise date (if the
repurchase of shares by the Company is permissible on the date
of exercise under applicable law), which shares have a fair
market value at the time of delivery equal to the exercise
price, or a combination of a cash payment and such a surrender
of shares. Each share surrendered in payment of the exercise
price shall be valued at its Fair Market Value at the exercise
date.
(ii) EXERCISABILITY. A Directors' Option shall be
exercisable immediately upon grant, subject to the provisions
of Section 14.
(iii) TERM AND TERMINATION OF SERVICE. Each
Directors' Option shall expire at the earlier of (a) ten years
after the date of grant, (b) the number of years after the
Director ceases to serve as a member of the Board equal to the
number of years (including any partial years) the Director
served as a member of the Board, if the Director ceases to
serve as a member of the Board for any reason other than
dismissal for cause, and (c) at the time the Director ceases
to serve as a member of the Board, if he is dismissed for
cause; provided, however, that, if a Director ceases serving
as a member of the Board and, immediately thereafter, he is
employed by the Company or a Subsidiary, then, solely for
purposes of this Section 7.4, he shall not be deemed to have
ceased to serve as a member of the Board at that time, and his
continued employment by the Company or any Subsidiary shall be
deemed to be continued service as a member of the Board for
purposes of the Plan (except that such former Board
5
<PAGE> 6
member shall not be eligible for additional grants of
Directors' Options under the Plan); and provided further, that
a Directors' Option shall be exercisable after the date a
Director ceases to serve as a member of the Board (unless the
Director continues to be employed by the Company or a
Subsidiary under the preceding proviso) only to the extent
such Directors' Option was exercisable at such date.
7.5 REPRICING OF DIRECTORS' OPTIONS. Notwithstanding any other
provision of this Plan to the contrary, the exercise price per share of Common
Stock purchasable under all Directors' Options outstanding on March 8, 1996
shall be repriced (whether such repricing increases or decreases the exercise
price) to $1.59, which was the last sale price of the Common Stock reported on
the Nasdaq National Market on March 8, 1996, and which represented 100% of the
Fair Market Value of a share of Common Stock on such date.
8. LIMITED RIGHTS
8.1 GRANT OF LIMITED RIGHTS. A Limited Right shall be
automatically granted to each Director concurrently with the grant of each
Directors' Option to such Director. Such Limited Right shall be exercisable
with respect to the number of shares of Common Stock which are, or may become,
purchasable under any such Directors' Option, at the times specified in Section
8.2, and shall expire at the time the Directors' Option to which the Limited
Right relates expires. Each Director to whom Limited Rights are granted shall
be given written notice advising him of the grant of such rights specifying the
terms and conditions of the rights, which shall be subject to all the
provisions of this Plan.
8.2 EXERCISE OF LIMITED RIGHTS. Subject to the limitations set
forth in Section 8.1, a Limited Right may be exercised only during the period
beginning on the first day following the occurrence of a Change of Control and
ending on the sixtieth day following such date. Upon the occurrence of a
tender or exchange offer constituting a Change of Control, a Limited Right may
be exercised in such manner regardless of whether the Board supports or opposes
such tender or exchange offer. A Director shall exercise his Limited Right by
delivering a written notice to the Board of Directors specifying the number of
shares with respect to which he exercises a Limited Right and agreeing to
surrender the right to purchase an equivalent number of shares of Common stock
subject to his Directors' Option. If a Director exercises a Limited Right,
payment of his Limited Right shall be made in accordance with Section 8.3 on or
before the thirtieth day after the date of exercise of the Limited Right. A
Limited Right shall remain exercisable for so long as the Directors' Option to
which it relates is exercisable, as provided in Section 7.4, in the event a
Director ceases being a member of the Board after a Change of Control.
Notwithstanding the above, if a Director ceases being a member of the Board
before the occurrence of any Change of Control, his Limited Rights shall expire
immediately.
8.3 FORM OF PAYMENT. If a Director elects to exercise a Limited
Right as provided in Section 8.2, the Company shall pay to the Director in cash
the amount set forth in Section 2.11 hereof, calculated with respect to the
shares as to which the Director has exercised such Limited Right, within thirty
days of the date of exercise of the Limited Right. If such amount is not paid
in full within the prescribed period, the Company shall be liable to such
Director for the costs of collection of such amount, including attorney's fees.
8.4 TERMINATION. When a Limited Right is exercised, the
Directors' Option to which it relates, if any, shall cease to be exercisable to
the extent of the number of shares of Common Stock with respect to which such
Limited Right was exercised. Upon the exercise or termination of a Directors'
Option, any Limited Right granted with respect thereto shall terminate to the
extent of the number of shares as to which such Directors' Option was exercised
or terminated.
6
<PAGE> 7
9. TRANSFERABILITY
Directors' Options and Limited Rights granted under this Plan, and any
other rights acquired by a Director under this Plan, shall be transferable by a
Director, but only (i) without consideration (other than in exchange for an
interest in a transferee's partnership, limited liability company or other
similar entity), (a) to any Immediate Family Members of the Director, (b) to
any trust or trusts for the exclusive benefit of such Immediate Family Members,
or (c) to a partnership, limited liability company or other similar entity in
which such Immediate Family Members and the Director are the sole partners or
members; (ii) by will or the laws of descent and distribution; or (iii)
pursuant to a qualified domestic relations order as defined under the Internal
Revenue Code of 1986, as amended (the "Code") or Title I of the Employee
Retirement Income Security Act of 1974 ("ERISA"); provided, however, that (1)
the Board or the Committee, in granting a Directors' Option or Limited Right,
may impose additional restrictions on transfer or prohibit transfer entirely;
(2) following transfer, any Directors' Option or Limited Right shall continue
to be subject to the same terms and conditions as were applicable immediately
prior to transfer, provided that for purposes of this Plan, any reference to a
Director as an optionee shall be deemed to refer to the transferee; and (3) the
events of termination of employment of Section 7.4(iii) shall continue to be
applied with respect to the original optionee Director, following which the
Directors' Option or Limited Right shall be exercisable by the transferee only
to the extent and for the periods specified at Section 7.4(iii). In the event
of a transferee's death, the Directors' Option or any Limited Right may be
exercised by the personal representative of the transferee's estate or, if no
personal representative has been appointed, by the successor or successors in
interest determined under the transferee's will or under the applicable laws of
descent and distribution.
10. NO RIGHTS AS A STOCKHOLDER
A Director shall have no rights as a stockholder with respect to any
shares of Common Stock subject to a Directors' Option, until such Directors'
Option is exercised. Except as provided in Section 6.2, no adjustment shall be
made in the number of shares of Common Stock issued to a Director, or in any
other rights of the Director upon exercise of a Directors' Option, by reason of
any dividend, distribution, or other right granted to stockholders for which
the record date is prior to the date of exercise of the Director's Option.
11. AMENDMENT
The Company by action of the Board may amend, modify or terminate this
Plan at any time or amend, modify, or terminate any outstanding option
agreement; provided, however, that any such amendment, modification or
termination shall be subject to the approval of the Company's stockholders if
such stockholder approval is required by any federal or state law or regulation
or the rules of the Nasdaq Stock Market or of any stock exchange or automated
quotation system on which the Common Stock may be listed, traded or quoted, or
if the Board in its discretion determines that obtaining such stockholder
approval is for any reason advisable, provided that any increase in the
aggregate number of shares of Common Stock that may be issued under this Plan,
other than in connection with an adjustment pursuant to Section 6.2, shall
require the approval of the Company's stockholders, and provided, further, that
no action may be taken by the Company without the consent of the affected
Director which will materially impair the rights of such Director under any
award.
7
<PAGE> 8
12. REGISTRATION OF OPTIONED SHARES
The Directors' Options shall not be exercisable unless the sale of
such optioned shares is registered pursuant to an applicable effective
registration statement under the Securities Act of 1933, as amended, or unless,
in the opinion of counsel to the Company, the sale of such optioned shares
would be exempt from the registration requirements of the Securities Act of
1933, as amended, and unless, in the opinion of such counsel, the sale would be
exempt from the registration or qualification requirements of applicable state
securities laws.
13. FINANCING ARRANGEMENTS
The Board of Directors or the Committee, if any, in its discretion,
may enter into arrangements with one or more banks, brokers or other financial
institutions to facilitate the exercise of Directors' Options and disposition
of shares acquired upon such exercise, including, without limitation,
arrangements for the simultaneous exercise of Directors' Options and sale of
the shares acquired upon such exercise, provided that no such arrangements may
be made if the making of such arrangement, or the authorization of such
arrangements pursuant to this Section 13, would cause the Plan to no longer
comply in all material respects with Rule 16b-3.
14. EFFECTIVE DATE
This Plan was initially authorized and adopted by the Board of
Directors on December 12, 1991, and became effective upon approval by the
Company's stockholders at the annual meeting of stockholders on August 6, 1992.
This Plan was amended effective June 1, 1995, June 4, 1996 and December 5,
1996. Unless earlier terminated by the Board, the Plan shall terminate when no
shares of Common Stock remain reserved and available for issuance and the
Company has no further obligation with respect to any award granted under the
Plan.
8
<PAGE> 1
EXHIBIT 21.1
MARCUM NATURAL GAS SERVICES, INC.
SUBSIDIARIES
WHOLLY-OWNED SUBSIDIARIES OF MARCUM NATURAL GAS SERVICES, INC.:
Marcum Fuel Systems, Inc., a Colorado corporation
Southern Flow Companies, Inc., a Delaware corporation
Metretek, Incorporated, a Florida corporation
Marcum Gas Transmission, Inc., a Colorado corporation
WHOLLY-OWNED SUBSIDIARIES OF MARCUM FUEL SYSTEMS, INC.:
DVCO Fuel Systems, Inc., a Colorado corporation
Marcum CNG Systems, Inc., a Colorado corporation
Marcum Fuel Systems, Inc. of Texas, a Texas corporation
WHOLLY-OWNED SUBSIDIARY OF MARCUM GAS TRANSMISSION, INC.:
Marcum Capital Resources, Inc., a Colorado corporation
WHOLLY-OWNED SUBSIDIARIES OF METRETEK, INCORPORATED:
Metretek Europe Limited, a company organized and existing
under the laws of Great Britain
Sigma VI, Inc., a Florida corporation
<PAGE> 1
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in (i) Registration
Statement No. 33-54398 on Form S-8; (ii) Registration Statement No.
33-60048 on Form S-8; (iii) Registration Statement No. 33-78348 on
Form S-8; (iv) Registration Statement No. 33-88200 on Form S-8; (v)
Registration Statement No. 333-00820 on Form S-8; and (vi)
Registration Statement No. 333-07515 on Form S-8 of our report dated
March 21, 1997 appearing in this Annual Report on Form 10-KSB of
Marcum Natural Gas Services, Inc. for the year ended December 31,
1996.
/S/ DELOITTE & TOUCHE LLP
DELOITTE & TOUCHE LLP
Denver, Colorado
March 25, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FINANCIAL
STATEMENTS CONTAINED IN THE COMPANY'S FORM 10-KSB FOR THE YEAR ENDED DECEMBER
31, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 889,543
<SECURITIES> 0
<RECEIVABLES> 4,635,198
<ALLOWANCES> 136,967
<INVENTORY> 4,176,643
<CURRENT-ASSETS> 10,037,993
<PP&E> 3,945,122
<DEPRECIATION> 2,313,890
<TOTAL-ASSETS> 20,986,086
<CURRENT-LIABILITIES> 3,646,754
<BONDS> 46,845
0
0
<COMMON> 122,313
<OTHER-SE> 17,170,174
<TOTAL-LIABILITY-AND-EQUITY> 20,986,086
<SALES> 23,012,580
<TOTAL-REVENUES> 23,614,051
<CGS> 15,893,442
<TOTAL-COSTS> 25,063,208
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 92,260
<INCOME-PRETAX> (1,541,417)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,541,417)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,541,417)
<EPS-PRIMARY> (0.13)
<EPS-DILUTED> (0.13)
</TABLE>
