<PAGE> 1
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------------------
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1998
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
----------------------------
MARCUM NATURAL GAS SERVICES, INC.
(Exact name of small business issuer as specified in its charter)
----------------------------
DELAWARE 84-1169358
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1675 Broadway, Suite 2150
Denver, Colorado 80202
(Address of principal executive offices) (Zip code)
(303)592-5555
(Registrant's telephone number, including area code)
----------------------------
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12
months (or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days.
Yes X No
--- ---
As of July 31, 1998, there were 3,564,626 shares of the issuer's Common
Stock outstanding.
Transitional Small Business Disclosure Format
Yes No X
--- ---
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MARCUM NATURAL GAS SERVICES, INC.
FORM 10-QSB
TABLE OF CONTENTS
Page
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Unaudited Consolidated Balance Sheets -
June 30, 1998 and December 31, 1997 3
Unaudited Consolidated Statements of Operations -
For the Three Months Ended June 30, 1998 and
June 30, 1997
For the Six Months Ended June 30, 1998 and
June 30, 1997 5
Unaudited Consolidated Statements of Cash Flows -
For the Six Months Ended June 30, 1998 and
June 30, 1997 6
Notes to Unaudited Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 13
PART II. OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds 21
Item 4. Submission of Matters to a Vote of Security Holders 21
Item 6. Exhibits and Reports on Form 8-K 22
Signatures 23
2
<PAGE> 3
PART I.
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
<TABLE>
MARCUM NATURAL GAS SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<CAPTION>
JUNE 30, DECEMBER 31,
1998 1997
----------- ------------
<S> <C> <C>
ASSETS
- ------
CURRENT ASSETS:
Cash and cash equivalents $ 725,364 $ 1,938,554
Trade receivables, less allowance for doubtful accounts
of $119,354 and $121,278, respectively 3,219,477 3,466,282
Other receivables 290,419 276,322
Inventory 4,583,668 2,748,626
Net assets of discontinued operations 160,001 204,067
Prepaid expenses and other current assets 340,096 291,004
----------- -----------
Total current assets 9,319,025 8,924,855
----------- -----------
PROPERTY, PLANT AND EQUIPMENT, AT COST:
Equipment 2,730,948 2,413,850
Vehicles 23,985 56,793
Furniture and fixtures 453,798 452,389
Land, building and improvements 414,395 399,491
----------- -----------
Total 3,623,126 3,322,523
Less accumulated depreciation 2,138,583 2,047,837
----------- -----------
Property, plant and equipment, net 1,484,543 1,274,686
----------- -----------
OTHER ASSETS:
Customer list (net of accumulated amortization
of $2,288,071 and $2,065,449, respectively) 6,604,816 6,827,438
Goodwill and other intangibles (net of accumulated
amortization of $564,055 and $478,348, respectively) 3,287,309 854,629
Investments in unconsolidated affiliates 351,325 435,177
Other assets 219,104 362,679
----------- -----------
Total other assets 10,462,554 8,479,923
----------- -----------
TOTAL $21,266,122 $18,679,464
=========== ===========
</TABLE>
See notes to unaudited consolidated financial statements.
3
<PAGE> 4
<TABLE>
MARCUM NATURAL GAS SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<CAPTION>
JUNE 30, DECEMBER 31,
1998 1997
------------ ------------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
CURRENT LIABILITIES:
Accounts payable $ 702,228 $ 615,778
Accrued and other liabilities 1,424,068 1,826,434
Current maturities of notes payable 182,878
Current maturities of long-term debt and
capital lease obligations 11,137 14,791
------------ ------------
Total current liabilities 2,137,433 2,639,881
------------ ------------
LONG-TERM NOTE PAYABLE 1,481,773 177,778
------------ ------------
CAPITAL LEASE OBLIGATIONS 10,544 12,443
------------ ------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Redeemable preferred stock - Series A, $.01 par value;
authorized, 1,000,000 shares; none issued and outstanding
Redeemable preferred stock - Series B, $.01 par value;
authorized, 1,000,000 shares; none issued and outstanding
Redeemable preferred stock - Series C, $.01 par value;
authorized, 500,000 shares; none issued and outstanding
Common stock, $.01 par value; authorized, 25,000,000 shares;
issued and outstanding, 3,555,632 and 3,077,822 shares,
respectively 35,556 30,778
Additional paid-in capital 39,156,533 37,005,983
Foreign currency translation adjustment 6,657 6,657
Accumulated deficit (21,562,374) (21,194,056)
------------ ------------
Total stockholders' equity 17,636,372 15,849,362
------------ ------------
TOTAL $ 21,266,122 $ 18,679,464
============ ============
</TABLE>
See notes to unaudited consolidated financial statements.
4
<PAGE> 5
<TABLE>
MARCUM NATURAL GAS SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
----------------------------- ------------------------------
JUNE 30, JUNE 30, JUNE 30, JUNE 30,
1998 1997 1998 1997
---------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
REVENUES:
Natural gas measurement sales and services $4,245,350 $5,435,643 $8,695,146 $ 9,695,667
Other 68,222 83,195 287,031 182,591
---------- ---------- ---------- -----------
Total revenues 4,313,572 5,518,838 8,982,177 9,878,258
---------- ---------- ---------- -----------
COSTS AND EXPENSES:
Cost of measurement sales and services 2,743,626 3,361,421 5,639,097 6,040,236
General and administrative 1,030,972 937,555 2,016,610 1,960,458
Selling, marketing and service 356,470 420,122 664,229 777,486
Depreciation and amortization 239,769 232,717 477,061 467,230
Research and development 237,821 287,670 451,364 504,682
Interest and other 90,425 18,878 102,134 54,977
---------- ---------- ---------- -----------
Total costs and expenses 4,699,083 5,258,363 9,350,495 9,805,069
---------- ---------- ---------- -----------
INCOME (LOSS) FROM CONTINUING
OPERATIONS BEFORE TAXES (385,511) 260,475 (368,318) 73,189
INCOME TAX PROVISION
---------- ---------- ---------- -----------
INCOME (LOSS) FROM CONTINUING
OPERATIONS (385,511) 260,475 (368,318) 73,189
---------- ---------- ---------- -----------
DISCONTINUED OPERATIONS:
Loss from operations (278,769)
Loss from disposal (430,578) (1,730,578)
---------- ---------- ---------- -----------
LOSS FROM DISCONTINUED OPERATIONS (430,578) (2,009,347)
---------- ---------- ---------- -----------
NET LOSS $ (385,511) $ (170,103) $ (368,318) $(1,936,158)
========== ========== ========== ===========
INCOME (LOSS) PER BASIC COMMON
SHARE:
Continuing operations $ (0.11) $ 0.08 $ (0.11) $ 0.02
Discontinued operations 0.00 (0.14) 0.00 (0.65)
---------- ---------- ---------- -----------
NET LOSS PER BASIC
COMMON SHARE $ (0.11) $ (0.06) $ (0.11) $ (0.63)
========== ========== ========== ===========
INCOME (LOSS) PER COMMON SHARE -
ASSUMING DILUTION:
Continuing operations $ (0.11) $ 0.08 $ (0.11) $ 0.02
Discontinued operations 0.00 (0.14) 0.00 (0.65)
---------- ---------- ---------- -----------
NET LOSS PER SHARE -
ASSUMING DILUTION $ (0.11) $ (0.06) $ (0.11) $ (0.63)
========== ========== ========== ===========
</TABLE>
See notes to unaudited consolidated financial statements.
5
<PAGE> 6
<TABLE>
MARCUM NATURAL GAS SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
--------------------------------
1998 1997
----------- ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (368,318) $(1,936,158)
Adjustments to reconcile net loss to net cash provided
(used) by continuing operations:
Loss from discontinued operations 278,769
Loss from disposal of discontinued operations 1,730,578
Depreciation and amortization 477,061 467,230
Stock compensation expense 77,664
(Gain) loss on disposal of assets (3,712) 3,780
Equity in loss (income) of unconsolidated affiliates 7,095 (27,768)
Changes in other assets and liabilities, net of effect of acquisitions:
Trade receivables 246,805 (299,785)
Inventory (570,275) (242,411)
Other current assets (63,189) 94,657
Other noncurrent assets 138,945 (9,750)
Accounts payable 86,450 402,021
Accrued and other liabilities (402,366) (104,203)
----------- -----------
Net cash provided (used) by continuing operations (373,840) 356,960
Net cash provided (used) by discontinued operations 44,066 (168,569)
----------- -----------
Net cash provided (used) by operating activities (329,774) 188,391
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property, plant and equipment (79,009) (151,923)
Acquisitions (1,485,618)
Proceeds from sale of property, plant and equipment 8,431 4,583
Distributions from unconsolidated affiliates 76,757 37,512
----------- -----------
Net cash used in investing activities (1,479,439) (109,828)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowing on notes payable to bank 881,773 400,000
Payments on notes payable to bank (360,656) (141,058)
Issuance of common stock 77,664 66,500
Payments on long-term debt and capital lease obligations (2,758) (8,258)
----------- -----------
Net cash provided by financing activities 596,023 317,184
----------- -----------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (1,213,190) 395,747
CASH AND CASH EQUIVALENTS AT BEGINNING
OF PERIOD 1,938,554 889,543
----------- -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 725,364 $ 1,285,290
=========== ===========
</TABLE>
See notes to unaudited consolidated financial statements.
6
<PAGE> 7
MARCUM NATURAL GAS SERVICES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
As of June 30, 1998 and December 31, 1997
For the Three Month Periods Ended June 30, 1998 and 1997 and
For the Six Month Periods Ended June 30, 1998 and 1997
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accompanying consolidated financial statements include the accounts
of Marcum Natural Gas Services, Inc. and its wholly owned subsidiaries and have
been prepared pursuant to rules and regulations of the Securities and Exchange
Commission. The accompanying consolidated financial statements and notes thereto
should be read in conjunction with the consolidated financial statements and
notes thereto included in the Company's Annual Report on Form 10-KSB for the
year ended December 31, 1997.
In the opinion of the Company's management, all adjustments (all of
which are normal and recurring) have been made which are necessary for a fair
statement of the consolidated financial position of the Company and its
subsidiaries as of June 30, 1998 and the consolidated results of their
operations and cash flows for the three and six month periods ended June 30,
1998 and 1997.
2. REVERSE STOCK SPLIT
On July 6, 1998, the Company effected a 1-for-4 reverse split of the
Company's common stock. Accordingly, all historical amounts contained in the
consolidated financial statements, including weighted average share and per
share amounts in the consolidated statements of operations as well as common
stock and additional paid-in capital amounts in the consolidated balance sheets,
have been adjusted to reflect the reverse stock split on a retroactive basis.
3. ACQUISITIONS
Pursuant to an asset purchase agreement entered into on March 23, 1998,
the Company, through its wholly owned subsidiary, Metretek, Incorporated
("Metretek"), purchased, on May 4, 1998, substantially all of the assets and
business of American Meter Software Corporation (formerly known as Eagle
Research Corporation), a subsidiary of American Meter Company ("American
Meter"), which is ultimately controlled by Ruhrgas AG, a German corporation. The
assets acquired by Metretek include certain inventory, equipment, trademarks and
technology of American Meter Software Corporation ("American Meter Software")
and American Meter used in the design, manufacture and sales of electronic
measurement process control and telemetry systems to utility companies in the
natural gas and petroleum industries. In connection with the acquisition,
Metretek assumed certain transitional employee costs and product warranty
obligations of American Meter Software. The assets and business operations
acquired have been relocated to Metretek's existing facility in Melbourne,
Florida.
7
<PAGE> 8
The purchase price included $1,300,000 cash, a $1,200,000 convertible
subordinated promissory note ($600,000 of which is contingent upon Metretek
exceeding certain target sales levels described below), and 439,560 shares of
Common Stock of the Company valued at $2,000,000. The purchase price is subject
to upward adjustment based upon Metretek's actual sales of products in the
business acquired from American Meter Software during the 18-month period
commencing July 1, 1998. If Metretek's annualized sales of products in the
business acquired are greater than $3,900,000 during such period, then the
purchase price will be increased on a dollar-for-dollar basis to the extent of
such sales surplus, but the purchase price shall not be increased above
$4,500,000 even if annualized sales are greater than that amount. Any increase
in the purchase price will be reflected as an adjustment to the principal
balance of the promissory note and allocated to goodwill. The purchase price is
also subject to upward or downward adjustment based upon certain changes in
American Meter Software's inventory between December 31, 1997 and May 4, 1998,
and any adjustment will be paid in cash.
A maximum amount of $1,028,107 of the principal balance of the note may
be converted, in the discretion of American Meter Software, into up to 180,766
shares of Common Stock of the Company at the rate of approximately $5.69 per
share. The note bears interest on the unpaid principal balance at a fixed rate
equal to 7.5% per annum, payable quarterly in arrears. The note is due and
payable May 4, 2002, and may be prepaid at any time without penalty or premium.
In connection with the transaction, the Company granted American Meter
Software the one-time option to cause the shares of Common Stock issued to
American Meter Software at the closing and upon the conversion of the note to be
registered under the Securities Act of 1993, as amended, and applicable state
securities laws, and has also granted American Meter Software certain piggy-back
registration rights to include such shares in any registration statement filed
by the Company, subject to customary underwriter cutbacks.
American Meter and American Meter Software also entered into a
Non-Competition Agreement with the Company and Metretek, pursuant to which
American Meter and American Meter Software have agreed not to compete with
Metretek in the acquired business for five years from the closing date, and all
such parties have mutually agreed to confidentiality covenants.
Metretek also entered into a license agreement ("License Agreement")
with American Meter and American Meter Software, providing for the license by
American Meter and American Meter Software to Metretek of certain operating
software, and the development, manufacture and sale by Metretek to American
Meter and American Meter Software of certain electronic components and related
equipment pertaining to electronic temperature and pressure correction to be
imbedded with certain new rotary and turbine meters of American Meter. The
License Agreement also grants American Meter and its affiliates the right to
sell Metretek products in the United States and Canada at certain agreed-upon
prices.
8
<PAGE> 9
Concurrent with the acquisition, Harry I. Skilton, President, Chief
Executive Officer and a director of American Meter and Vice President of
American Meter Software, became a member of the Board of Directors of the
Company.
The acquisition was accounted for as a purchase, and therefore the
results of operations of the American Meter Software business acquired have been
combined with those of the Company effective May 4, 1998.
On June 15, 1998, Metretek, through its wholly owned subsidiary, Sigma
VI, Inc., acquired substantially all of the assets of Quality Contract
Manufacturing, Inc. ("QCMI") in exchange for $150,000 in cash. QCMI is a
contract manufacturer of electronic circuit boards, sub-assemblies, and cable
assemblies serving customers in Melbourne, Florida and the immediately
surrounding area. The acquisition was accounted for as a purchase and therefore
the results of operations of QCMI have been combined with those of the Company
effective June 15, 1998.
The purchase price of both acquisitions (including transaction costs)
have been allocated as follows:
American Meter
Software QCMI
-------- ----
Inventory $1,265,000
Property, plant and equipment 228,000 $ 75,000
Goodwill and other intangibles 2,443,000 75,000
---------- --------
$3,936,000 $150,000
========== ========
The following summary unaudited pro forma results of operations for the
six months ended June 30, 1998 and 1997 assumes that the American Meter Software
and QCMI acquisitions occurred on January 1, 1997. These pro forma results have
been prepared for comparative purposes and do not purport to be indicative of
results of operations which actually would have resulted had the combination
been in effect on the dates indicated, or which may result in the future.
Six Months Ended
--------------------------
June 30, June 30,
1998 1997
----------- -----------
Total revenues $10,335,000 $11,833,000
Net income (loss) from continuing operations $ (295,000) $ 308,000
Net income (loss) per share from continuing
operations - assuming dilution $ (0.09) $ 0.10
9
<PAGE> 10
4. INVESTMENTS IN UNCONSOLIDATED AFFILIATES
The Company, through its wholly owned subsidiary Marcum Gas
Transmission, Inc. ("MGT"), owns a 4% limited partnership interest in
Marcum-Patrick Pipeline Program 1993-1, L.P. ("MPP 1993-1"), of which MGT is a
co-managing general partner. On March 30, 1998, MPP 1993-1 sold substantially
all of its assets to Franks Petroleum Inc. for $1,650,000. Upon completion of
the sale, MGT received $32,000 which it had advanced to MPP 1993-1, $115,941 of
unpaid administrative and management fees, and a $54,000 distribution from the
partial liquidation of MPP 1993-1.
5. DEBT
On April 14, 1998, the Company and its wholly owned subsidiaries,
Southern Flow Companies, Inc. ("SFC") and Metretek, entered into a loan and
security agreement (the "Loan Agreement") with a commercial bank (the "Lender")
providing for a combined $5,000,000 credit facility consisting of loans (the
"Loans") and letters of credit to SFC and Metretek, subject to limitations
described below. Terms of the Loan Agreement provide for daily advances to SFC
and Metretek in the form of Loans to fund capital requirements, daily paydowns
on outstanding balances of the Loans from collection of customer accounts
receivable, monthly interest payments computed at prime plus 1% (9.5% at June
30, 1998) on outstanding balances of the Loans, and a maturity of March 14,
2001. The Loans are secured by the tangible and intangible assets of the
Company, SFC, and Metretek, including equipment, inventory, receivables, and
cash deposits, and the pledge of the shares of the Company's subsidiaries. The
Loan Agreement requires the Company to maintain a minimum tangible net worth, a
maximum debt to tangible net worth ratio, minimum annual net income, a minimum
debt service coverage ratio, and contains other standard covenants related to
operations of the Company, including prohibitions on the payment of dividends
and the issuance of securities (with certain exceptions) without the Lender's
consent. Borrowings on the Loans are limited to the sum of 80% of eligible
accounts receivable of SFC and Metretek and 50% of raw materials and finished
goods inventory (up to a combined maximum of $1,500,000) of SFC and Metretek.
At June 30, 1998, the Company had a combined $3,043,872 Loan
availability, of which $881,773 had been borrowed by SFC and Metretek, leaving
$2,162,099 unused and available to borrow under the Loan Agreement. Proceeds
from initial advances under the Loan Agreement were used to extinguish the
Company's existing loans and lines of credit with two commercial bank lenders in
the aggregate amount of $468,993, including accrued interest.
6. STOCK PLANS
In January 1998, the Company approved a non-qualified, compensatory
Employee Stock Purchase Plan (the "1998 Stock Purchase Plan"), which allows
eligible employees to purchase shares of the Company's common stock through
payroll deductions. The shares can be purchased for 100% of the lower of the
beginning or ending fair market value of each one-
10
<PAGE> 11
month offering period and are matched by the Company on a share-for-share basis.
Purchases are limited to 15% of an employee's eligible compensation. A total of
50,000 shares of common stock are registered for offer and issuance under the
1998 Stock Purchase Plan, of which 38,250 shares were issued during the six
months ended June 30, 1998. Stock compensation expense in the amount of $77,664
was recognized during the six months ended June 30, 1998 representing the market
value of the shares matched by the Company under the 1998 Stock Purchase Plan.
In March 1998, the Board of Directors of the Company adopted the Marcum
Natural Gas Services, Inc. 1998 Stock Incentive Plan (the "1998 Stock Incentive
Plan"), which was approved by the Company's stockholders at the Annual Meeting
of Stockholders held on June 12, 1998. The 1998 Stock Incentive Plan authorizes
the Board of Directors to grant non-qualified stock options, incentive stock
options, stock appreciation rights, restricted stock, performance awards and
other stock-based awards to officers, directors, employees, consultants and
advisors of the Company and its subsidiaries for up to 250,000 shares of the
Company's common stock. The 1998 Stock Incentive Plan replaced the Company's
existing 1991 Stock Option Plan and the Company's Directors' Stock Option Plan
(the "Prior Plans"), and no further awards will be made under the Prior Plans,
although options outstanding under the Company's Prior Plans will not be
affected by the adoption of the 1998 Stock Incentive Plan.
7. INCOME (LOSS) PER SHARE
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128, "Earnings Per Share," which
the Company adopted during the year ended December 31, 1997. Income (loss) per
basic common share is based upon the weighted average shares of common stock
outstanding during the respective period. For each of the three and six months
ended June 30, 1998 and 1997, the Company's income (loss) from continuing
operations, loss from discontinued operations and net loss, for purposes of
computing the basic and diluted per share amounts, are identical. The following
is a reconciliation of the weighted average shares outstanding to the weighted
average shares outstanding assuming dilution:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
-------------------------- --------------------------
June 30, June 30, June 30, June 30,
1998 1997 1998 1997
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Weighted average common shares 3,383,666 3,076,831 3,234,143 3,074,468
Incremental shares from assumed
exercise of stock options -- 186 -- 313
--------- --------- --------- ---------
Weighted average common shares
assuming dilution 3,383,666 3,077,017 3,234,143 3,074,781
========= ========= ========= =========
</TABLE>
11
<PAGE> 12
8. WARRANT DIVIDEND
On August 7, 1998, the Company filed a Registration Statement with the
Securities and Exchange Commission covering the issuance of up to 936,347 shares
of its Common Stock upon the exercise of Common Stock Purchase Warrants (the
"Warrants"). The Warrants will be distributed as a dividend (the "Warrant
Dividend") to stockholders of Marcum on the basis of one Warrant for each four
shares of Common Stock outstanding on the record date of the Warrant Dividend.
Each Warrant will be exercisable, for five years after issuance, into one share
of Common Stock at an anticipated exercise price of $6.00. The Warrants will be
subject to redemption by the Company in the event the Common Stock trades at or
above $7.50 per share for 20 consecutive trading days. The Warrant Dividend is
contingent upon the effectiveness of the Registration Statement. The record date
for the Warrant Dividend is anticipated to be in approximately 30 to 60 days.
The Registration Statement also covers the resale of up to 155,081 Warrants by a
selling securityholder. Any proceeds from Warrant exercises will be used for
general corporate purposes.
12
<PAGE> 13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
INTRODUCTION
The following discussion of the results of operations for the Company
for the six month periods ended June 30, 1998 and 1997 and of the consolidated
financial condition of the Company as of June 30, 1998 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>
SIX MONTHS ENDED
JUNE 30,
----------------------
1998 1997
------ -------
(DOLLAR AMOUNTS IN THOUSANDS)
<S> <C> <C>
REVENUES:
Southern Flow $5,454 $ 5,505
Metretek 3,241 4,191
Other 287 182
------ -------
Total $8,982 $ 9,878
====== =======
GROSS PROFIT:
Southern Flow $1,308 $ 1,405
Metretek 1,748 2,251
------ -------
Total $3,056 $ 3,656
====== =======
NET INCOME (LOSS):
Southern Flow $ 459 $ 535
Metretek (153) 208
Other (674) (670)
------ -------
Income (loss) from continuing operations (368) 73
Loss from discontinued operations (2,009)
------ -------
Total $ (368) $(1,936)
====== =======
</TABLE>
On June 27, 1997, the Company sold its natural gas refueling equipment
segment and substantially all of the operating assets related thereto. The
financial statements account for this segment as discontinued operations. The
following discussion relates only to the Company's continuing operations.
13
<PAGE> 14
SIX MONTHS ENDED JUNE 30, 1998 COMPARED TO SIX MONTHS ENDED JUNE 30, 1997
Revenues. The Company's consolidated revenues for the six months ended
June 30, 1998 decreased $896,081, or 9%, compared to the same period in 1997,
due principally to a decrease in the revenues of Metretek, offset, in part, by
an increase in the Company's other revenues. Metretek's revenues for the six
months ended June 30, 1998 decreased $949,728, or 23%, compared to the same
period in 1997, consisting of a decrease in domestic sales of $574,490 and a
decrease in international sales of $375,238. The decrease in Metretek's domestic
revenues in 1998 was the net result of two key factors: (i) a decrease in sales
of automated energy consumption monitoring and recording systems, Metretek's
core business, due to overall decreased domestic market demand; and (ii)
improved circuit board assembly sales by its wholly owned subsidiary, Sigma VI,
due to an expansion of Sigma VI's business. The decrease in Metretek's
international revenues in 1998 was due primarily to reduced sales by Metretek
Europe, its European distribution subsidiary, as well as a decrease in sales to
Metretek's Canadian customers. Southern Flow's revenues decreased $50,793, or
less than 1%, for the six months ended June 30, 1998, compared to the same
period in 1997. Other Company revenues increased $104,440 or 57%, for the six
months ended June 30, 1998, compared to the same period in 1997, due principally
to the net effect of three factors: (i) an increase in MGT fees earned from the
management of its unconsolidated affiliates; (ii) reduced MGT equity income from
its unconsolidated affiliates; and (iii) increased interest income.
Costs and Expenses. Cost of sales and services for the six months ended
June 30, 1998 decreased $401,139, or 7%, compared to the same period in 1997.
Metretek's cost of sales and services for the six months ended June 30, 1998
decreased $446,971, or 23%, compared to the same period in 1997 and was due
primarily to decreased sales activity in 1998. Metretek's gross profit margin
after costs of sales and services for the six months ended June 30, 1998,
increased slightly from 53.7% to 53.9% compared to the same period in 1997.
Southern Flow's cost of sales and services for the six months ended June 30,
1998 decreased $45,832, or 1%, compared to the same period in 1997. Southern
Flow's gross profit margin after costs of sales and services for the six months
ended June 30, 1998 decreased from 25.5% to 24.0% compared to the same period in
1997.
General and administrative expenses for the six months ended June 30,
1998 increased $56,152, or 3%, compared to the same period in 1997, due
principally to the net effect of the following factors: (i) a decrease in
expenses of MGT of approximately $221,000 related to costs that were incurred in
1997 associated with the organization of a business trust for which there were
no comparable costs in 1998; (ii) a decrease in expenses of Southern Flow of
approximately $16,000 attributable to reduced state and franchise taxes in 1998
compared to 1997; and (iii) increases in general and corporate expenses of
approximately $288,000 due to increased personnel, professional services, and
public company reporting costs as well as
14
<PAGE> 15
compensation costs associated with the Company's 1998 Employee Stock Purchase
Plan for which there were no comparable costs in 1997.
Selling, marketing and service expenses for the six months ended June
30, 1998 decreased $113,257, or 15%, compared to the same period in 1997,
substantially all of which related to activities at Metretek. The decrease in
these expenses was due principally to the effects of the following: (i)
decreases of approximately $47,000 incurred at its wholly owned subsidiaries,
Metretek Europe and Sigma VI; and (ii) a decrease of approximately $63,000 at
Metretek due to a reduction in sales commissions, advertising and promotional
expenses.
Depreciation and amortization expenses for the six months ended June
30, 1998 increased $9,831, or 2%, compared to the same period in 1997. This
increase was due to increased depreciation at Southern Flow.
Research and development expenses for the six months ended June 30,
1998 decreased $53,318, or 11%, compared to the same period in 1997, due to
reduced product development costs at Metretek.
Interest and other expenses for the six months ended June 30, 1998
increased $47,157, or 86%, compared to the same period in 1997. The increase
reflects interest expense on additional borrowings in 1998 compared to 1997 in
order to fund Metretek's acquisitions of American Meter Software and QCMI and
other expenses associated with integrating the operations of the acquired
businesses into Metretek's facilities.
SEASONALITY AND CYCLICALITY
The business of Metretek is subject to seasonal and cyclical
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.
15
<PAGE> 16
Net cash used by operating activities was approximately $330,000 for
the six months ended June 30, 1998, which was the net result of the following:
(i) approximately $190,000 of cash provided by continuing operations, before
changes in assets and liabilities; (ii) approximately $564,000 in cash used to
fund changes in working capital and other asset and liability accounts; and
(iii) approximately $44,000 of cash provided by discontinued operations.
The Company, through its wholly owned subsidiary, MGT, owns a 4%
limited partnership interest in Marcum Patrick Pipeline Program 1993-1, L.P.
("MPP 1993-1"), of which MGT is a co-managing general partner. On March 30,
1998, MPP 1993-1 sold substantially all of its assets to Franks Petroleum Inc.
for $1,650,000. Upon completion of the sale, MGT received $32,000 which it had
advanced to MPP 1993-1, $115,941 of unpaid administrative and management fees,
and a $54,000 distribution from the partial liquidation of MPP 1993-1.
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 1998 will be approximately
$1,050,000, all of which will relate to Metretek's business. Research and
development expenses in the amount of $451,364 were incurred in the six month
period ended June 30, 1998.
The Company anticipates capital expenditures in 1998 of approximately
$250,000, primarily for production and laboratory equipment, computer software
and hardware. Capital expenditures for the six month period ended June 30, 1998
totaled $79,009.
Pursuant to an asset purchase agreement entered into on March 23, 1998,
the Company, through its wholly owned subsidiary, Metretek, purchased, on May 4,
1998, substantially all of the assets and business of American Meter Software
Corporation (formerly known as Eagle Research Corporation), a subsidiary of
American Meter Company ("American Meter"), which is ultimately controlled by
Ruhrgas AG, a German corporation. The assets acquired by Metretek include
certain inventory, equipment, trademarks and technology of American Meter
Software Corporation ("American Meter Software") and American Meter used in the
design, manufacture and sales of electronic measurement process control and
telemetry systems to utility companies in the natural gas and petroleum
industries. In connection with the acquisition, Metretek assumed certain
transitional employee costs and product warranty obligations of American Meter
Software. The assets and business operations acquired have been relocated to
Metretek's existing facility in Melbourne, Florida.
The purchase price included $1,300,000 cash, a $1,200,000 convertible
subordinated promissory note ($600,000 of which is contingent upon Metretek
exceeding certain target sales levels described below), and 439,560 shares of
Common Stock of the Company valued at $2,000,000. The purchase price is subject
to upward adjustment based upon Metretek's actual
16
<PAGE> 17
sales of products in the business acquired from American Meter Software during
the 18-month period commencing July 1, 1998. If Metretek's annualized sales of
products in the business acquired are greater than $3,900,000 during such
period, then the purchase price will be increased on a dollar-for-dollar basis
to the extent of such sales surplus, but the purchase price shall not be
increased above $4,500,000 even if annualized sales are greater than that
amount. Any increase in the purchase price will be reflected as an adjustment to
the principal balance of the promissory note and allocated to goodwill. The
purchase price is also subject to upward or downward adjustment based upon
certain changes in American Meter Software's inventory between December 31, 1997
and May 4, 1998, and any adjustment will be paid in cash.
A maximum amount of $1,028,107 of the principal balance of the note may
be converted, in the discretion of American Meter Software, into up to 180,766
shares of Common Stock of the Company at the rate of approximately $5.69 per
share. The note bears interest on the unpaid principal balance at a fixed rate
equal to 7.5% per annum, payable quarterly in arrears. The note is due and
payable May 4, 2002, and may be prepaid at any time without penalty or premium.
On June 15, 1998, Metretek, through its wholly owned subsidiary, Sigma
VI, Inc., acquired substantially all of the assets of Quality Contract
Manufacturing, Inc. ("QCMI") in exchange for $150,000 in cash. QCMI is a
contract manufacturer of electronic circuit boards, sub-assemblies, and cable
assemblies serving customers in Melbourne, Florida and the immediately
surrounding area.
On April 14, 1998, the Company and its wholly owned subsidiaries,
Southern Flow and Metretek, entered into a loan and security agreement (the
"Loan Agreement") with a commercial bank (the "Lender") providing for a combined
$5,000,000 credit facility consisting of loans (the "Loans") and letters of
credit to Southern Flow and Metretek, subject to limitations described below.
Terms of the Loan Agreement provide for daily advances to Southern Flow and
Metretek in the form of Loans to fund capital requirements, daily paydowns on
outstanding balances of the Loans from collection of customer accounts
receivable, monthly interest payments computed at prime plus 1% (9.5% at June
30, 1998) on outstanding balances of the Loans, and a maturity of March 14,
2001. The Loans are secured by the tangible and intangible assets of the
Company, Southern Flow, and Metretek, including equipment, inventory,
receivables, and cash deposits, and the pledge of the shares of the Company's
subsidiaries. The Loan Agreement requires the Company to maintain a minimum
tangible net worth, a maximum debt to tangible net worth ratio, minimum annual
net income, a minimum debt service coverage ratio, and contains other standard
covenants related to operations of the Company, including prohibitions on the
payment of dividends and the issuance of securities (with certain exceptions)
without the Lender's consent. Borrowings on the Loans are limited to the sum of
80% of eligible accounts receivable of Southern Flow and Metretek and 50% of raw
materials and finished goods inventory (up to a combined maximum of $1,500,000)
of Southern Flow and Metretek.
17
<PAGE> 18
At June 30, 1998, the Company had a combined $3,043,872 Loan
availability, of which $881,773 had been borrowed by SFC and Metretek, leaving
$2,162,099 unused and available to borrow under the Loan Agreement. Proceeds
from initial advances under the Loan Agreement were used to extinguish the
Company's existing loans and lines of credit with two commercial bank lenders in
the aggregate amount of $468,993, including accrued interest.
Based on the Company's current plans and assumptions, management
believes that its capital resources, including its cash on hand, available
borrowings and expected cash flow from continuing operations, and additional
proceeds from the disposition of the remaining net assets of its discontinued
operations, 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. 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.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting
Comprehensive Income", which requires businesses to disclose comprehensive
income and its components in their general-purpose financial statements, with
reclassification of comparative (earlier period) financial statements. The
Company adopted the provisions of SFAS No. 130 effective January 1, 1998. The
adoption of SFAS 130 did not have a material impact on the Company's
disclosures.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments
of an Enterprise and Related Information", which is effective for periods
beginning after December 15, 1997. SFAS 131 redefines how operating segments are
determined and requires disclosure of certain financial and descriptive
information about a company's operating segments. The Company adopted the
provisions of SFAS No. 131 effective January 1, 1998. The adoption of SFAS 131
did not have a material impact on the Company's disclosures.
In February 1998, the FASB issued SFAS No. 132, "Employer's Disclosures
about Pension and Other Postretirement Benefits", which is effective for periods
after December 15, 1997. SFAS No. 132 revises disclosures about pension and
other postretirement benefit plans. These standards increase disclosure in the
financial statements and will have no impact on the Company's financial position
or results of operations.
18
<PAGE> 19
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities", which is effective for all fiscal quarters
of fiscal years beginning after June 15, 1999. SFAS No. 133 establishes
accounting and reporting standards for derivative instruments and for hedging
activities. The Company is currently evaluating the impact SFAS No. 133 will
have on its financial statements, if any.
YEAR 2000 COMPLIANCE
To the extent that the Company's software applications contain source
code that is unable to appropriately interpret the upcoming calendar year
"2000", some level of modification or even possibly replacement of such source
code or applications will be necessary. The Company has initiated the process of
analyzing its software applications and those of its significant external
suppliers, service providers and customers. However, there can be no assurance
that the Company will identify all such Year 2000 problems in its systems or in
the computer systems of its suppliers, service providers or customers in advance
of their occurrence or that the Company's suppliers and customers will be able
to successfully rectify any problems that are discovered. Although the expenses
of the Company's efforts to identify and address such problems, or the expenses
or liabilities to which the Company may become subject as a result of such
problems, are not expected to have a material adverse effect on the Company,
there can be no assurance that the cost of interruptions with the systems of
suppliers, service providers or customers will not have a material adverse
effect on the Company's business, financial condition or results of operations.
FORWARD-LOOKING STATEMENTS
This Management's Discussion and Analysis of Financial Condition and
Results of Operations, as well as in other parts of this report on Form 10-QSB,
contains certain forward-looking statements within the meaning of and made
pursuant to the safe harbor provisions of Section 27A of the Securities Act of
1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as
amended. From time to time, the Company may publish or otherwise make available
forward-looking statements of this nature. 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. The words "may", "will", "project",
"intend", "continue", "believe", "anticipate", "estimate", "expect" and similar
expressions, as they relate to the Company or the Company's management, are
intended to identify forward-looking statements.
Such forward-looking statements are based on the current beliefs and
expectations of management as well as assumptions made by and information
currently available to 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. These risks and
uncertainties include, but are not limited to, changes in the energy industry in
general and the natural gas industry in particular; the capital resources,
technological requirements and
19
<PAGE> 20
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; general economic conditions;
the Company's ability to successfully integrate and utilize the product lines
and business acquired from American Meter, and the timing, amount and value of
future sales of those product lines and business; the impact and timing of the
deregulation of the various energy markets; utility purchasing patterns and
delays and potential changes to the federal and state regulatory frameworks
within which the utility industry operates; risks associated with international
operations; reliance on strategic alliances; the amount of additional proceeds
from the disposition of the remaining net assets, and the gross margin payments
on the disposed portion, of the natural gas refueling equipment segment; the
receipt and timing of future customer orders; the impact of competitive factors
affecting the Company's operations; Year 2000 technology issues; 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. The Company does not intend to, and assumes no
responsibility to, update any forward-looking statements, whether as a result of
new information, future events or otherwise.
20
<PAGE> 21
PART II.
OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
(a) On July 6, 1998, the Company effected a 1-for-4 reverse split
of the Common Stock, par value $.01 per share, of the Company.
In lieu of receiving fractional shares of Common Stock as a
result of the reverse split, holders of fractional shares
received a proportional cash payment at the rate of $.75 per
share, the closing sale price of the Common Stock as reported
on the Nasdaq National Market on July 6, 1998. Other than the
elimination of resulting fractional shares, no rights of
holders of Common Stock were modified in the reverse split.
All historical amounts contained in the consolidated financial
statements included in this Form 10-QSB, including weighted
average share and per share amounts in the consolidated
statements of operations as well as Common Stock and
additional paid-in capital amounts in the consoldiated balance
sheets, have been adjusted to reflect the reverse stock split
on a retroactive basis.
(b) Not applicable.
(c) Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the annual meeting of stockholders of Marcum Natural Gas Services,
Inc., held on June 12, 1998, the following proposals were submitted to a vote of
security holders:
Proposal 1: To elect three directors of the Company, each for a three
year term expiring at the 2001 Annual Meeting of Stockholders.
FOR WITHHOLD
--- --------
W. Phillip Marcum 11,897,675 179,871
Basil M. Briggs 11,909,078 168,468
Robert Lloyd 11,909,975 167,571
Proposal 2: To adopt and approve the Marcum Natural Gas Services, Inc.
1998 Stock Incentive Plan.
BROKER
FOR AGAINST ABSTAIN NON-VOTES
--- ------- ------- ---------
4,833,246 1,172,327 31,029 6,040,944
21
<PAGE> 22
Proposal 3: To adopt and approve a proposal to amend Article Fourth of
the Company's Restated Certificate of Incorporation to
implement a reverse split ("Reverse Split") of the Company's
Common Stock in the range between one-for-two and
one-for-four, inclusive, in the event the Board of Directors
determines that a Reverse Split is necessary or advisable at
any time within one year from the date of the Annual Meeting,
with the exact size of the Reverse Split to be determined by
the Board of Directors.
FOR AGAINST ABSTAIN
--- ------- -------
11,688,505 359,322 29,719
Proposal 4: To ratify the appointment of Deloitte & Touche LLP as the
Company's independent auditors for the fiscal year ending
December 31, 1998.
FOR AGAINST ABSTAIN
--- ------- -------
11,937,206 126,309 14,031
All of the proposals were adopted by the shareholders.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27.1 Financial Data Schedule
(b) The Company filed a report on Form 8-K with the Securities and
Exchange Commission on May 12, 1998 (Items 2 and 7), as amended by
a report on Form 8-K/A filed on July 16, 1998, reporting the
acquisition of substantially all of the assets and business of
American Meter Software Corporation (formerly known as Eagle
Research Corporation), a wholly owned subsidiary of American Meter
Company.
The Company filed a report on Form 8-K with the Securities and
Exchange Commission on July 7, 1998 (Item 5), reporting an
amendment to its Restated Certificate of Incorporation effecting a
1-for-4 reverse split of its common stock, par value $.01 per
share, effective as of 5:00 P.M., New York, New York time, on July
6, 1998.
22
<PAGE> 23
SIGNATURES
In accordance with the requirements of the Securities Exchange Act of
1934, the registrant caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
MARCUM NATURAL GAS SERVICES, INC.
Date: August 13, 1998 By: /s/ W. Phillip Marcum
----------------- -------------------------------------
W. Phillip Marcum
President and Chief Executive Officer
Date: August 13, 1998 By: /s/ A. Bradley Gabbard
----------------- -------------------------------------
A. Bradley Gabbard
Executive Vice President
and Chief Financial Officer
23
<PAGE> 24
EXHIBIT INDEX
Exhibit
Number
------
27.1 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FINANCIAL
STATEMENTS CONTAINED IN THE COMPANY'S FORM 10-QSB FOR THE PERIOD ENDED
JUNE 30, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 725,364
<SECURITIES> 0
<RECEIVABLES> 3,338,831
<ALLOWANCES> 119,354
<INVENTORY> 4,583,668
<CURRENT-ASSETS> 9,319,025
<PP&E> 3,623,126
<DEPRECIATION> 2,138,583
<TOTAL-ASSETS> 21,266,122
<CURRENT-LIABILITIES> 2,137,433
<BONDS> 1,492,317
0
0
<COMMON> 35,556
<OTHER-SE> 17,600,816
<TOTAL-LIABILITY-AND-EQUITY> 21,266,122
<SALES> 8,695,146
<TOTAL-REVENUES> 8,982,177
<CGS> 5,639,097
<TOTAL-COSTS> 9,248,361
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 102,134
<INCOME-PRETAX> (368,318)
<INCOME-TAX> 0
<INCOME-CONTINUING> (368,318)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (368,318)
<EPS-PRIMARY> (0.11)
<EPS-DILUTED> (0.11)
</TABLE>
