<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 SEPTEMBER 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
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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 October 31, 1998, there were 3,518,231 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
<TABLE>
<CAPTION>
Page
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<S> <C> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Unaudited Consolidated Balance Sheets -
September 30, 1998 and December 31, 1997 3
Unaudited Consolidated Statements of Operations -
For the Three Months Ended September 30, 1998 and
September 30, 1997
For the Nine Months Ended September 30, 1998 and
September 30, 1997 5
Unaudited Consolidated Statements of Cash Flows -
For the Nine Months Ended September 30, 1998 and
September 30, 1997 6
Notes to Unaudited Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 14
PART II. OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds 25
Item 6. Exhibits and Reports on Form 8-K 25
Signatures 27
</TABLE>
2
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PART I.
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
MARCUM NATURAL GAS SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1998 1997
----------- -----------
<S> <C> <C>
ASSETS
- ------
CURRENT ASSETS:
Cash and cash equivalents $ 627,934 $ 1,938,554
Trade receivables, less allowance for doubtful accounts
of $117,510 and $121,278, respectively 3,969,129 3,466,282
Other receivables 292,213 276,322
Inventory 5,021,501 2,748,626
Net assets of discontinued operations 147,945 204,067
Prepaid expenses and other current assets 286,064 291,004
----------- -----------
Total current assets 10,344,786 8,924,855
----------- -----------
PROPERTY, PLANT AND EQUIPMENT, AT COST:
Equipment 2,798,017 2,413,850
Vehicles 23,985 56,793
Furniture and fixtures 467,623 452,389
Land, building and improvements 452,538 399,491
----------- -----------
Total 3,742,163 3,322,523
Less accumulated depreciation 2,236,078 2,047,837
----------- -----------
Property, plant and equipment, net 1,506,085 1,274,686
----------- -----------
OTHER ASSETS:
Customer list (net of accumulated amortization
of $2,399,382 and $2,065,449, respectively) 6,493,505 6,827,438
Goodwill and other intangibles (net of accumulated
amortization of $651,908 and $478,348, respectively) 3,284,600 854,629
Investments in unconsolidated affiliates 326,802 435,177
Other assets 218,203 362,679
----------- -----------
Total other assets 10,323,110 8,479,923
----------- -----------
TOTAL $22,173,981 $18,679,464
=========== ===========
</TABLE>
See notes to unaudited consolidated financial statements.
3
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MARCUM NATURAL GAS SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1998 1997
------------ ------------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
CURRENT LIABILITIES:
Accounts payable $ 439,708 $ 615,778
Accrued and other liabilities 1,508,812 1,826,434
Current maturities of notes payable 182,878
Current maturities of long-term debt and
capital lease obligations 9,293 14,791
------------ ------------
Total current liabilities 1,957,813 2,639,881
------------ ------------
LONG-TERM NOTES PAYABLE 2,803,419 177,778
------------ ------------
CAPITAL LEASE OBLIGATIONS 9,554 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, 3,546,269 and 3,077,822
shares, respectively 35,463 30,778
Additional paid-in capital 39,078,555 37,005,983
Foreign currency translation adjustment 6,657 6,657
Accumulated deficit (21,717,480) (21,194,056)
------------ ------------
Total stockholders' equity 17,403,195 15,849,362
------------ ------------
TOTAL $ 22,173,981 $ 18,679,464
============ ============
</TABLE>
See notes to unaudited consolidated financial statements.
4
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MARCUM NATURAL GAS SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------------- --------------------------
1998 1997 1998 1997
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
REVENUES:
Natural gas measurement sales and services $ 4,635,454 $ 5,165,135 $13,330,600 $14,860,802
Other 10,443 132,656 297,474 315,247
----------- ----------- ----------- -----------
Total revenues 4,645,897 5,297,791 13,628,074 15,176,049
----------- ----------- ----------- -----------
COSTS AND EXPENSES:
Cost of measurement sales and services 2,993,568 3,359,785 8,632,665 9,400,021
General and administrative 823,368 706,610 2,839,978 2,667,068
Selling, marketing and service 390,810 393,069 1,055,039 1,170,555
Depreciation and amortization 314,707 239,124 791,768 706,354
Research and development 253,758 292,250 705,122 796,932
Interest and other 24,792 20,677 126,926 75,654
----------- ----------- ----------- -----------
Total costs and expenses 4,801,003 5,011,515 14,151,498 14,816,584
----------- ----------- ----------- -----------
INCOME (LOSS) FROM CONTINUING
OPERATIONS BEFORE TAXES (155,106) 286,276 (523,424) 359,465
INCOME TAX PROVISION
----------- ----------- ----------- -----------
INCOME (LOSS) FROM CONTINUING
OPERATIONS (155,106) 286,276 (523,424) 359,465
----------- ----------- ----------- -----------
DISCONTINUED OPERATIONS:
Loss from operations (278,769)
Loss from disposal (1,730,578)
----------- ----------- ------------ -----------
LOSS FROM DISCONTINUED OPERATIONS (2,009,347)
----------- ----------- ------------ -----------
NET (LOSS) INCOME $ (155,106) $ 286,276 $ (523,424) $(1,649,882)
=========== ============ ============ ===========
INCOME (LOSS) PER BASIC COMMON
SHARE:
Continuing operations $(0.04) $0.09 $(0.16) $0.12
Discontinued operations 0.00 0.00 0.00 (0.65)
---- ---- ----- ----
NET INCOME (LOSS) PER BASIC
COMMON SHARE $(0.04) $0.09 $(0.16) $(0.53)
==== ==== ==== =====
INCOME (LOSS) PER COMMON SHARE -
ASSUMING DILUTION:
Continuing operations $(0.04) $0.09 $(0.16) $0.12
Discontinued operations 0.00 0.00 0.00 (0.65)
---- ---- ---- ----
NET INCOME (LOSS) PER SHARE -
ASSUMING DILUTION $(0.04) $0.09 $(0.16) $(0.53)
==== ==== ==== ====
</TABLE>
See notes to unaudited consolidated financial statements.
5
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MARCUM NATURAL GAS SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
-------------------------------
1998 1997
----------- ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (523,424) $(1,649,882)
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 791,768 706,354
Stock plan compensation expense 88,629
Loss on disposal of assets 1,641 11,361
Equity in loss (income) of unconsolidated affiliates 19,896 (24,210)
Changes in other assets and liabilities, net of effect of acquisitions:
Trade receivables (502,847) 44,964
Inventory (1,008,108) (457,242)
Other current assets (10,951) 38,385
Other noncurrent assets 129,449 (23,516)
Accounts payable (176,070) 265,546
Accrued and other liabilities (317,622) (381,379)
----------- ------------
Net cash provided (used) by continuing operations (1,507,639) 539,728
Net cash provided by discontinued operations 56,122 40,905
----------- ------------
Net cash provided (used) by operating activities (1,451,517) 580,633
----------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property, plant and equipment (208,503) (257,757)
Acquisitions (1,570,764)
Proceeds from sale of property, plant and equipment 8,681 6,283
Investment in unconsolidated affiliate (340,000)
Distributions from unconsolidated affiliates 88,478 55,769
----------- ------------
Net cash used in investing activities (1,682,108) (535,705)
----------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowing on notes payable to bank 2,203,419 400,000
Payments on notes payable to bank (360,656) (339,659)
Issuance of common stock 88,629 70,000
Repurchase of common stock (100,000)
Payments on long-term debt and capital lease obligations (8,387) (10,920)
----------- ------------
Net cash provided by financing activities 1,823,005 119,421
----------- ------------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (1,310,620) 164,349
CASH AND CASH EQUIVALENTS AT BEGINNING
OF PERIOD 1,938,554 889,543
----------- ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 627,934 $ 1,053,892
=========== ============
</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 September 30, 1998 and December 31, 1997
For the Three Month Periods Ended September 30, 1998 and 1997 and
For the Nine Month Periods Ended September 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 September 30, 1998 and the consolidated results of their
operations and cash flows for the three and nine month periods ended September
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
On May 4, 1998, the Company, through its wholly owned subsidiary,
Metretek, Incorporated ("Metretek"), purchased 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"). American Meter and American Meter Software Corporation ("American Meter
Software") are corporations that are ultimately controlled by Ruhrgas AG, a
German corporation. The assets acquired by Metretek include certain inventory,
equipment, trademarks and technology of 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
7
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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 sales of products in the
business acquired from American Meter Software during the 18-month period that
commenced 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 will 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. Subsequent to
September 30, 1998, the purchase price was adjusted down by $85,000 to reflect a
decrease in American Meter Software's inventory between December 31, 1997 and
May 4, 1998, partially offset by transitional costs assumed by Metretek.
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 to American
Meter Software the one-time option to cause the shares of Common Stock issued at
the closing and issuable upon the conversion of the note to be registered under
the Securities Act of 1993, as amended, and applicable state securities laws,
and also granted to 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
8
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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.
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 primarily 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 prices of the foregoing acquisitions (including
transaction costs) have been allocated as follows:
<TABLE>
<CAPTION>
American Meter
Software QCMI
-------- ----
<S> <C> <C>
Inventory $1,265,000
Property, plant and equipment 228,000 $ 75,000
Goodwill and other intangibles 2,523,000 80,000
--------- --------
$4,016,000 $155,000
========== ========
</TABLE>
The following summary unaudited pro forma results of operations for the
nine months ended September 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
combinations been in effect on the dates indicated, or which may result in the
future.
<TABLE>
<CAPTION>
Nine Months Ended
------------------------------------
September 30, September 30,
1998 1997
----------- -----------
<S> <C> <C>
Total revenues $14,978,000 $18,188,000
Net income (loss) from continuing operations $ (452,000) $ 818,000
Net income (loss) per share from continuing
operations - assuming dilution $ (0.14) $ 0.27
</TABLE>
9
<PAGE> 10
4. INVESTMENTS IN UNCONSOLIDATED AFFILIATES
The Company, through its wholly owned subsidiary Marcum Gas
Transmission, Inc. ("MGT"), owned a 4% limited partnership interest in
Marcum-Patrick Pipeline Program 1993-1, L.P. ("MPP 1993-1"). MGT was a
co-managing general partner of MPP 1993-1. On March 30, 1998, MPP 1993-1 sold
substantially all of its assets to Franks Petroleum Inc. for $1,650,000.
Subsequently, the assets of MPP 1993-1 were liquidated. As a result of the sale
and liquidation, MPP 1993-1 distributed to MGT $32,000 in repayment of advances,
$115,941 for unpaid administrative and management fees, and $58,659 as
liquidating distributions.
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. The Loan Agreement provides for daily advances to SFC and
Metretek in the form of Loans to fund capital requirements, and daily paydowns
on outstanding balances of the Loans from collection of customer accounts
receivable. The Company makes monthly interest payments computed at prime plus
1% (9.5% at September 30, 1998) on outstanding balances of the Loans. The Loans
mature on 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 (loss), 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 or repurchase 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 September 30, 1998, the Company had a combined $3,359,469 Loan
availability, of which $2,203,419 had been borrowed by SFC and Metretek, leaving
$1,156,050 in unused Loan availability. 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 adopted a non-qualified, compensatory
Employee Stock Purchase Plan (the "1998 Stock Purchase Plan"), which allowed
eligible employees to
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purchase shares of the Company's Common Stock through payroll deductions. Under
the 1998 Stock Purchase Plan, employees purchased shares at a price 100% of the
lower of the beginning or ending fair market value of the shares during each
one-month offering period. The Company matched the employees' purchases on a
share-for-share basis. The maximum payroll deduction was 15% of an employee's
eligible compensation. The Company reserved and registered a total of 50,000
shares of Common Stock for offer and issuance under the 1998 Stock Purchase
Plan. The Company issued 47,244 shares under the 1998 Stock Purchase Plan which
has been discontinued. Stock compensation expense in the amount of $88,629 was
recognized during the nine months ended September 30, 1998 representing the
market value of the shares of Common Stock 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 new 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.
In September 1998, the Board of Directors of the Company adopted a
stock repurchase plan (the "Stock Repurchase Plan") pursuant to which the
Company is authorized to purchase up to approximately 7% of its outstanding
Common Stock in open market transactions, from time to time as management deems
appropriate, if the market price of the Company's stock remains below certain
levels. The Company may use the repurchased shares for employee benefit plans
and other corporate purposes, may hold the repurchased shares in treasury or may
retire the purchased shares. Through September 30, 1998, the Company had not
repurchased any shares of its Common Stock. During October 1998, the Company
repurchased 28,038 shares of its Common Stock at an average price of $2.19 per
share.
In September 1998, prior to adopting the Stock Repurchase Plan, the
Company repurchased 18,181 shares of Common Stock that were issued to a licensor
pursuant to a license agreement in order to satisfy certain obligations of the
Company under the license agreement.
On October 6, 1998, the Board of Directors approved the repricing of
all outstanding stock options held by officers, directors and employees of the
Company to an exercise price of $2.00 per share, the last sale price of the
Common Stock as reported on the Nasdaq National Market on such date. No repriced
officer or employee options (whether or not vested) shall be exercisable prior
to October 6, 1999. The other terms of the outstanding stock options generally
remain unchanged.
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7. WARRANT DIVIDEND
On September 18, 1998, the Company distributed 886,442 Common Stock
Purchase Warrants (the "Warrants") as a dividend to stockholders of the Company
on the basis of one Warrant for each four shares of Common Stock outstanding on
September 10, 1998, the record date for the Warrant dividend. Each Warrant is
exercisable, for a five year period, for one share of Common Stock at an
exercise price of $4.00. The Warrants trade on the Nasdaq SmallCap Market under
the symbol "MGASW". The Warrants are subject to redemption by the Company in the
event the Common Stock trades at or above $6.50 per share for 20 consecutive
trading days. The registration statement and prospectus covering the Common
Stock issuable upon exercise of the Warrants also covers the resale of up to
155,081 Warrants by a selling security holder.
No Warrants have been exercised through September 30, 1998. Any
proceeds from Warrant exercises will be used for general corporate purposes.
8. 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 nine months
ended September 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 Nine Months Ended
---------------------------- -----------------------------
September 30, September 30, September 30, September 30,
1998 1997 1998 1997
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Weighted average common shares 3,555,568 3,077,049 3,342,462 3,075,338
Incremental shares from assumed
exercise of stock options - 21,657 - 4,715
--------- --------- --------- ---------
Weighted average common shares
assuming dilution 3,555,568 3,098,706 3,342,462 3,080,053
========= ========= ========= =========
</TABLE>
9. COMPREHENSIVE INCOME (LOSS)
Effective January 1998, the Company adopted Statement of Financial
Accounting Standards No. 130 ("SFAS 130"), "Reporting Comprehensive Income."
SFAS 130 requires that all items recognized under accounting standards as
components of comprehensive earnings be reported in an annual financial
statement that is displayed with the same prominence as other annual financial
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statements. SFAS 130 also requires that an entity classify items of other
comprehensive earnings by their nature in an annual financial statement. For
example, other comprehensive earnings may include foreign currency translation
adjustments, minimum pension liability adjustments and unrealized gains and
losses on marketable securities classified as available-for-sale. Annual
financial statements for prior periods will be reclassified, as required. The
Company's total comprehensive earnings were as follows:
<TABLE>
<CAPTION>
Nine months ended
September 30,
---------------------------------
1998 1997
--------- -----------
<S> <C> <C>
Net loss $(523,424) $(1,649,882)
Cumulative translation adjustment - 11,011
--------- -----------
Total comprehensive loss $(523,424) $(1,638,871)
========= ===========
</TABLE>
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
INTRODUCTION
The following discussion of the results of operations for the Company
for the nine month periods ended September 30, 1998 and 1997 and of the
consolidated financial condition of the Company as of September 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>
NINE MONTHS ENDED
SEPTEMBER 30,
1998 1997
-------- --------
(DOLLAR AMOUNTS IN THOUSANDS)
<S> <C> <C>
REVENUES:
Southern Flow $ 8,120 $ 8,349
Metretek 5,211 6,512
Other 297 315
-------- --------
Total $ 13,628 $ 15,176
======== ========
GROSS PROFIT:
Southern Flow $ 1,821 $ 2,113
Metretek 2,877 3,348
-------- --------
Total $ 4,698 $ 5,461
======== ========
NET INCOME (LOSS):
Southern Flow $ 541 $ 839
Metretek (47) 190
Other (1,017) (670)
-------- --------
Income (loss) from continuing operations (523) 359
Loss from discontinued operations (2,009)
-------- --------
Total $ (523) $ (1,650)
======== ========
</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.
14
<PAGE> 15
NINE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
1997
Revenues. The Company's consolidated revenues for the nine months ended
September 30, 1998 decreased $1,547,975, or 10%, compared to the same period in
1997, due principally to a decrease in the revenues of both Metretek,
Incorporated ("Metretek") and Southern Flow Companies, Inc. ("Southern Flow").
Metretek's revenues for the nine months ended September 30, 1998 decreased
$1,301,069, or 20%, compared to the same period in 1997, consisting of a
decrease in domestic sales of $1,082,771 and a decrease in international sales
of $218,298. 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, Inc. ("Sigma VI"), due
to the acquisition of Quality Contract Manufacturing, Inc. ("QCMI") as well as
the expansion of its line of business. The decrease in Metretek's international
revenues in 1998 was due primarily to reduced sales by Metretek Europe Limited
("Metretek Europe"), its European distribution subsidiary, as well as a decrease
in sales to Metretek's customers in South America. Southern Flow's revenues
decreased $229,133, or less than 3%, for the nine months ended September 30,
1998, compared to the same period in 1997 due to adverse weather conditions in
the Gulf Coast during the third quarter which limited Southern Flow's operating
activities in its principal operating region. Other Company revenues decreased
$17,773 or 6%, for the nine months ended September 30, 1998, compared to the
same period in 1997, due principally to the net effect of three factors: (i) a
reduction in Marcum Gas Transmission, Inc. ("MGT") equity income from its
unconsolidated affiliates; (ii) a reduction in MGT fees earned upon the
formation of a business trust in 1997 for which there were no comparable fees
earned in 1998; and (iii) an increase in MGT fees earned from the management of
its unconsolidated affiliates.
Costs and Expenses. Cost of sales and services for the nine months
ended September 30, 1998 decreased $767,356, or 8%, compared to the same period
in 1997. Metretek's cost of sales and services for the nine months ended
September 30, 1998 decreased $829,520, or 26%, compared to the same period in
1997 due primarily to decreased sales activity in 1998. Metretek's gross profit
margin after costs of sales and services for the nine months ended September 30,
1998, increased from 51.4% to 55.2% compared to the same period in 1997. The
improvement in Metretek's gross profit margin reflects cost reductions in
electronic parts used in its products as well as a reduction in outsourcing
costs to assemble the electronic components of its products. Southern Flow's
cost of sales and services for the nine months ended September 30, 1998
increased $62,164, or 1%, compared to the same period in 1997, despite the
overall decline in Southern Flow's revenues. Southern Flow's gross profit margin
after costs of sales and services for the nine months ended September 30, 1998
decreased from 25.3% to 22.4% compared to the same period in 1997. Southern
Flow's gross profit margin declined because virtually all of its employee
service costs continued unabated despite adverse weather conditions that reduced
Southern Flow's revenues by limiting its service operations.
15
<PAGE> 16
General and administrative expenses for the nine months ended September
30, 1998 increased $172,910, or 7%, compared to the same period in 1997, due
principally to the net effect of the following factors: (i) a decrease in
expenses of Metretek of approximately $112,000 attributable to a reduction in
personnel at Metretek Europe as well as overall cost savings at Metretek and
Sigma VI resulting from combining certain administrative functions; (ii) a
decrease in expenses of MGT of approximately $52,000 attributable to reduced
personnel costs; (iii) a decrease in expenses of Southern Flow of approximately
$8,000; and (iv) increases in general and corporate expenses of approximately
$345,000 due to increased personnel, professional services, and public company
reporting costs as well as 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 nine months ended
September 30, 1998 decreased $115,516, or 10%, 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 a reduction in Metretek's sales
commissions attributable to a reduction in revenues as well as a reduction in
advertising and promotional expenses.
Depreciation and amortization expenses for the nine months ended
September 30, 1998 increased $85,414, or 12%, compared to the same period in
1997. This increase was due to additional goodwill amortization costs related to
Metretek's recent acquisitions of the assets of American Meter Software
Corporation ("American Meter Software") and QCMI as well as increased
depreciation expense at both Metretek and Southern Flow.
Research and development expenses for the nine months ended September
30, 1998 decreased $91,810, or 12%, compared to the same period in 1997, due to
reduced product development costs at Metretek.
Interest and other expenses for the nine months ended September 30,
1998 increased $51,272, or 68%, 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.
SEASONALITY AND CYCLICALITY
Metretek derives substantially all of its revenues from sales of its
products and services to the utility industry. The Company has experienced
variability of operating results on both an annual and a quarterly basis due
primarily to utility purchasing patterns and delays of purchasing decisions as a
result of mergers and acquisitions in the utility industry and changes or
potential changes to the federal and state regulatory frameworks within which
the utility industry operates. The utility industry, both domestic and foreign,
is generally characterized by long budgeting, purchasing and regulatory process
cycles that can take up to several years to complete. The Company's utility
customers typically issue requests for quotes and
16
<PAGE> 17
proposals, establish committees to evaluate the purchase, review different
technical options with vendors, analyze performance and costs/benefit
justifications and perform a regulatory review, in addition to applying the
normal budget approval process within a utility. Purchases of the Company's
products are, to a substantial extent, deferrable in the event that utilities
reduce capital expenditures as a result of mergers and acquisitions, pending or
unfavorable regulatory decisions, poor revenues due to weather conditions,
rising interest rates or general economic downturns, among other factors.
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 used by operating activities was approximately $1,452,000 for
the nine months ended September 30, 1998, which was the net result of the
following: (i) approximately $378,000 of cash provided by continuing operations,
before changes in assets and liabilities; (ii) approximately $1,886,000 of cash
used to fund changes in working capital and other asset and liability accounts;
and (iii) approximately $56,000 of cash provided by discontinued operations.
The Company, through its wholly owned subsidiary, MGT, owned a 4%
limited partnership interest in Marcum Patrick Pipeline Program 1993-1, L.P.
("MPP 1993-1"). MGT was a co-managing general partner of MPP 1993-1. On March
30, 1998, MPP 1993-1 sold substantially all of its assets to Franks Petroleum
Inc. for $1,650,000. Subsequently, the assets of MPP 1993-1 were liquidated. As
a result of the sale and liquidation, MPP 1993-1 distributed to MGT $32,000 in
repayment of advances, $115,941 for unpaid administrative and management fees,
and $58,659 as liquidating distributions.
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 $705,122 were incurred in the nine month
period ended September 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 nine month period ended September 30,
1998 totaled $208,503.
On May 4, 1998, the Company, through its wholly-owned subsidiary,
Metretek, purchased substantially all of the assets and business of American
Meter Software (formerly known as Eagle Research Corporation), a subsidiary of
American Meter Company ("American
17
<PAGE> 18
Meter"). American Meter and American Meter Software are corporations that are
ultimately controlled by Ruhrgas AG, a German corporation. The assets acquired
by Metretek include certain inventory, equipment, trademarks and technology of
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 sales of products in the
business acquired from American Meter Software during the 18-month period that
commenced 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 will 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. Subsequent to
September 30, 1998, the purchase price was adjusted down by $85,000 to reflect a
decrease in American Meter Software's inventory between December 31, 1997 and
May 4, 1998, partially offset by transitional costs assumed by Metretek.
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 acquired substantially all of the assets of
QCMI in exchange for $150,000 in cash. QCMI is a contract manufacturer of
electronic circuit boards, sub-assemblies, and cable assemblies serving
customers primarily 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.
The Loan Agreement provides for daily advances to Southern Flow and Metretek in
the form of Loans to fund capital requirements, and daily paydowns on
outstanding balances of the Loans from collection of customer accounts
receivable. The
18
<PAGE> 19
Company makes monthly interest payments computed at prime plus 1% (9.5% at
September 30, 1998) on outstanding balances of the Loans. The Loans mature on
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 (loss), 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 or repurchase 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.
At September 30, 1998, the Company had a combined $3,359,469 Loan
availability, of which $2,203,419 had been borrowed by Southern Flow and
Metretek, leaving $1,156,050 in unused Loan availability. 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.
In September 1998, the Board of Directors of the Company adopted a
stock repurchase plan (the "Stock Repurchase Plan") pursuant to which the
Company is authorized to purchase up to approximately 7% of its outstanding
Common Stock in open market transactions, from time to time as management deems
appropriate, if the market price of the Company's stock remains below certain
levels. The Company may use the repurchased shares for employee benefit plans
and other corporate purposes, may hold the repurchased shares in treasury or may
retire the purchased shares. Through September 30, 1998, the Company had not
repurchased any shares of its Common Stock. During October 1998, the Company
repurchased 28,038 shares of its Common Stock at an average price of $2.19 per
share.
In September 1998, prior to adopting the Stock Repurchase Plan, the
Company repurchased 18,181 shares of Common Stock that were issued to a licensor
pursuant to a license agreement in order to satisfy certain obligations of the
Company under the license agreement.
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
19
<PAGE> 20
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.
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
The Company is currently in the process of assessing the impact of the
Year 2000 with respect to its information technology systems and its embedded
chip systems. The "Year 2000 problem," which presents potential risks and
uncertainties to virtually all businesses, is a result of computer programs that
use two digits rather than four to define the applicable year. Any computer
programs that have time-sensitive software may recognize a date using "00" as
the year 1900 rather than the year 2000. This situation could result in system
failures or miscalculations causing disruptions to operations, including, among
other things, a temporary inability to process transactions, send invoices, or
engage in similar or normal business activities.
20
<PAGE> 21
The Company has and will continue to modify and replace portions of its
existing information technology systems so they will function properly with
respect to dates in the year 2000 and thereafter. The Company expects that any
Year 2000 problems will be resolved by either internal software programming
adjustments or by the installation of Year 2000 compliant information systems.
The Company expects to complete substantially all modifications and replacements
required for Year 2000 compliance in its information systems by mid-1999. The
Company is also in the process of assessing non-information technology system
containing embedded chips that may be Year 2000 sensitive to identify operating
systems and equipment that are necessary or critical for continued operations.
The Company intends to test essential operating systems and equipment containing
embedded chips for Year 2000 compliance and to reprogram or replace such
equipment as appropriate. Based upon its assessments to date, the Company is not
aware of any significant Year 2000 issues in its control that will not be
resolved prior to the Year 2000.
The Company has also extensively tested the technologies it sells for
Year 2000 problems. The Company believes that the technologies and services it
currently sells are Year 2000 compliant, but the Company intends to continue
testing to address any Year 2000 problems and issues that may arise. The Company
has made available Year 2000 modifications, upgrades and replacement technology
to its customers that purchased prior technologies that were not Year 2000
compliant. To the extent any Year 2000 problems arise with respect to
technologies and services sold by the Company, the Company intends to make all
requisite modifications, replacements and patches in order to resolve Year 2000
problems.
The Company believes that the greatest risk from Year 2000 problems
will result from the failure of third parties, with which the Company has
material relationships, to become Year 2000 compliant. The Company relies on
third party service providers for services such as telecommunications, internet
services, utilities and other key services. Interruption of these services due
to Year 2000 issues could materially adversely effect the Company's operations.
The Company has initiated communications with certain third parties, including
vendors, suppliers, service providers and customers, that the Company believes
are critical to its business operations and with respect to which the Company
believes Year 2000 problems could materially affect the Company's business.
Although the Company is not presently aware of any significant vendor, supplier,
service provider or customer that will have Year 2000 problems material to the
Company's operations, many businesses are resistant to providing any written or
binding assurances that they will be Year 2000 compliant. In addition, the
Company has no control over Year 2000 compliance programs by third parties.
Accordingly, the Company cannot provide any assurance that the systems of its
essential vendors, suppliers, service providers or customers will be Year 2000
compliant. The lack of Year 2000 compliance by such third parties could have a
material adverse impact on the Company's results of operations, financial
condition and business. If any such third parties (other than customers) are not
Year 2000 compliant and such non-compliance had or is likely to have a material
adverse effect on the Company, then the Company expects to utilize alternate
21
<PAGE> 22
vendors, suppliers and service providers (subject to availability) which are
Year 2000 compliant.
The Company expects total incremental costs (other than internal labor
time) of becoming Year 2000 compliant not to exceed approximately $200,000. The
Company intends to fund the costs associated with Year 2000 compliance through
operating cash flows and does not expect to defer any information technology
projects in order to become Year 2000 compliant. The Company intends to
capitalize and depreciate costs which represent investments in new or upgraded
technology and qualify as capital investments over their estimated useful lives,
and to expense all other costs as incurred.
It is difficult to predict with a high degree of accuracy, and
impossible to guarantee, what impact any Year 2000 problems will have on the
Company. The Company is in the process of attempting to assess the most
reasonably likely worst case Year 2000 scenario, although the Company believes
that it, as most businesses, will not be able to identify such scenario with any
meaningful degree of certainty, given all the risks and uncertainties related to
the Year 2000 problem, many of which are outside of its control. The Company
currently anticipates a minimal level of disruption in its operations as a
result of systems failures, primarily related to non-compliance by third
parties. The Company believes the most reasonably worst case scenario would
occur if there are electric power supply and telecommunication outages. Such
outages could prevent the Company from providing its services in measuring and
monitoring the energy consumption of its customers, and prevent or delay the
delivery of energy measurement and monitoring information results to its
customers. If the Company is unable to provide such services, then its revenues
and results of operation, will be materially reduced. Year 2000 issues may also
cause temporary delays in the delivery of raw materials and supplies, but the
Company does not expect any such delays to materially affect the Company's
operations. Other possible consequences include, but are not limited to,
interruption of banking and commercial payment system, inability to process
customer transactions or otherwise engage in similar normal business activities,
which events are beyond the reasonable ability of the Company to assess or
control. There can be no assurance that Year 2000 problems will not be material
to the Company, or that the cost of interruptions with the systems of third
parties will not have a material adverse effect on the Company's business,
financial condition or results of operations.
Although the Company has not created a specific contingency plan to
address the most reasonably likely worst case Year 2000 scenario, the Company is
in the process of developing contingency plans for certain Year 2000 problems,
such as identifying alternate vendors, suppliers and service providers,
identifying alternative methods for transmitting energy measurement and
monitoring information to its customers and preparing manual back-up methods for
certain software-intensive operations. However, as the Company continues to
assess the Year 2000 issue, in the event management believes it is warranted,
the Company will develop a specific Year 2000 "worst case" contingency plan. The
Company will continually refine its contingency plans throughout 1999 as
additional information becomes
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<PAGE> 23
available.
This section discussing Year 2000 issues contains forward-looking
statements. The costs and anticipated completion dates for Year 2000 compliance
by the Company and the estimated impact of Year 2000 issues on the Company are
based on management's best estimates at this time, which were derived utilizing
numerous assumptions as to future events and third party activities, including
the continued availability of certain resources, third party modifications plans
and other factors, and may be updated from time to time as additional
information becomes available. However, the Company cannot guarantee that these
estimates will be achieved, and actual results could differ materially from
those anticipated. Specific factors that may cause such material differences
include, but are not limited to, the availability and costs of Year 2000
compliant technology, the ability to identify and correct potential Year 2000
sensitive problems, the ability of essential third parties to bring their
systems into Year 2000 compliance, the level of Year 2000 disruptions
experienced by the Company's vendors, suppliers, service providers and
customers, the success of any required contingency actions and similar
uncertainties.
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", "could", "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 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
23
<PAGE> 24
changes to the federal and state regulatory frameworks within which the utility
industry operates; risks and uncertainties associated with Year 2000 problems
(See "Year 2000 Compliance" above); the effect of any corporate acquisition,
dispositions or other corporate transactions; 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; 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, particularly the Company's Registration Statement on Form
S-3 (Registration No. 333-60925) and the prospectus contained therein. 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.
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<PAGE> 25
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 consolidated balance
sheets, have been adjusted to reflect the reverse stock split
on a retroactive basis.
On September 18, 1998, the Company distributed 886,442 Common
Stock Purchase Warrants (the "Warrants") as a dividend to
stockholders of the Company on the basis of one Warrant for
each four shares of Common Stock outstanding on September 10,
1998, the record date for the Warrant dividend. Each Warrant
is exercisable, for a five year period, for one share of
Common Stock at an exercise price of $4.00. The Warrants trade
on the Nasdaq SmallCap Market under the symbol "MGASW". The
Warrants are subject to redemption by the Company in the event
the Common Stock trades at or above $6.50 per share for 20
consecutive trading days. The registration statement and
prospectus covering the Common Stock issuable upon exercise of
the Warrants also covers the resale of up to 155,081 Warrants
by a selling security holder.
No Warrants have been exercised through September 30, 1998.
Any proceeds from Warrant exercises will be used for general
corporate purposes.
(b) Not applicable.
(c) Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27.1 Financial Data Schedule
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<PAGE> 26
(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.
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<PAGE> 27
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.
By: /s/ W. Phillip Marcum
---------------------------------
Date: November 10, 1998 W. Phillip Marcum
President and Chief Executive Officer
By: /s/ A. Bradley Gabbard
---------------------------------
Date: November 10, 1998 A. Bradley Gabbard
Executive Vice President
and Chief Financial Officer
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<PAGE> 28
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 SEPTEMBER
30, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 627,934
<SECURITIES> 0
<RECEIVABLES> 4,086,639
<ALLOWANCES> 117,510
<INVENTORY> 5,021,501
<CURRENT-ASSETS> 10,344,786
<PP&E> 3,742,163
<DEPRECIATION> 2,236,078
<TOTAL-ASSETS> 22,173,981
<CURRENT-LIABILITIES> 1,957,813
<BONDS> 2,812,973
0
0
<COMMON> 35,463
<OTHER-SE> 17,367,732
<TOTAL-LIABILITY-AND-EQUITY> 22,173,981
<SALES> 13,330,600
<TOTAL-REVENUES> 13,628,074
<CGS> 8,632,665
<TOTAL-COSTS> 14,024,572
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 126,926
<INCOME-PRETAX> (523,424)
<INCOME-TAX> (0)
<INCOME-CONTINUING> (523,424)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (523,424)
<EPS-PRIMARY> (0.16)
<EPS-DILUTED> (0.16)
</TABLE>
