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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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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 MARCH 31, 1998
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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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 May 4, 1998 there were 14,170,979 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
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Page
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Unaudited Consolidated Balance Sheets -
March 31, 1998 and December 31, 1997 3
Unaudited Consolidated Statements of Operations -
For the Three Months Ended March 31, 1998 and
March 31, 1997 5
Unaudited Consolidated Statements of Cash Flows -
For the Three Months Ended March 31, 1998 and
March 31, 1997 6
Notes to Unaudited Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 11
PART II. OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds 18
Item 6. Exhibits and Reports on Form 8-K 19
Signatures 20
</TABLE>
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PART I.
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
MARCUM NATURAL GAS SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1998 1997
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ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 2,448,595 $ 1,938,554
Trade receivables, less allowance for doubtful accounts
of $119,376 and $121,278, respectively 2,946,131 3,466,282
Other receivables 345,063 276,322
Inventory 2,824,175 2,748,626
Net assets of discontinued operations 180,169 204,067
Prepaid expenses and other current assets 244,675 291,004
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Total current assets 8,988,808 8,924,855
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PROPERTY, PLANT AND EQUIPMENT, AT COST:
Equipment 2,433,026 2,413,850
Vehicles 44,942 56,793
Furniture and fixtures 453,798 452,389
Land, building and improvements 404,866 399,491
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Total 3,336,632 3,322,523
Less accumulated depreciation 2,115,875 2,047,837
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Property, plant and equipment, net 1,220,757 1,274,686
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OTHER ASSETS:
Customer lists (net of accumulated amortization
of $2,176,760 and $2,065,449, respectively) 6,716,127 6,827,438
Goodwill and other intangibles (net of accumulated
amortization of $521,201 and $478,348, respectively) 811,776 854,629
Investments in unconsolidated affiliates 372,193 435,177
Other assets 391,687 362,679
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Total other assets 8,291,783 8,479,923
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TOTAL $18,501,348 $18,679,464
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</TABLE>
See notes to unaudited consolidated financial statements.
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MARCUM NATURAL GAS SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
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MARCH 31, DECEMBER 31,
1998 1997
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LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 632,366 $ 615,778
Accrued and other liabilities 1,413,610 1,826,434
Current maturities of notes payable 182,878
Current maturities of long-term debt
and capital lease obligations 12,969 14,791
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Total current liabilities 2,058,945 2,639,881
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LONG-TERM NOTE PAYABLE 478,778 177,778
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CAPITAL LEASE OBLIGATIONS 11,507 12,443
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COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Redeemable preferred stock - Series A, $.01 par value; authorized,
1,000,000 shares; none issued and outstanding
Redeemable preferred stock - Series B, $.01 par value; authorized,
1,000,000 shares; none issued and outstanding
Redeemable preferred stock - Series C, $.01 par value; authorized, 500,000
shares; none issued and outstanding
Common stock, $.01 par value; authorized, 25,000,000 shares;
issued and outstanding, 12,391,819 and 12,311,288
shares, respectively 123,918 123,113
Additional paid-in capital 36,998,406 36,913,648
Foreign currency translation adjustment 6,657 6,657
Accumulated deficit (21,176,863) (21,194,056)
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Total stockholders' equity 15,952,118 15,849,362
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TOTAL $ 18,501,348 $ 18,679,464
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</TABLE>
See notes to unaudited consolidated financial statements.
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MARCUM NATURAL GAS SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
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THREE MONTHS ENDED
MARCH 31,
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1998 1997
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REVENUES:
Natural gas measurement sales and services $ 4,449,796 $ 4,260,024
Other 218,809 99,396
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Total revenues 4,668,605 4,359,420
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COSTS AND EXPENSES:
Cost of measurement sales and services 2,895,471 2,678,815
General and administrative 985,638 1,022,903
Selling, marketing and service 307,759 357,364
Depreciation and amortization 237,292 234,513
Research and development 213,543 217,012
Interest and other 11,709 36,099
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Total costs and expenses 4,651,412 4,546,706
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INCOME (LOSS) FROM CONTINUING OPERATIONS
BEFORE TAXES 17,193 (187,286)
INCOME TAX PROVISION
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INCOME (LOSS) FROM CONTINUING OPERATIONS 17,193 (187,286)
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DISCONTINUED OPERATIONS:
Loss from operations (278,769)
Loss from disposal (1,300,000)
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LOSS FROM DISCONTINUED OPERATIONS (1,578,769)
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NET INCOME (LOSS) $ 17,193 $(1,766,055)
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INCOME (LOSS) PER BASIC COMMON SHARE:
Continuing operations $ 0.00 $ (0.01)
Discontinued operations 0.00 (0.13)
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NET INCOME (LOSS) PER BASIC COMMON SHARE $ 0.00 $ (0.14)
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INCOME (LOSS) PER COMMON SHARE - ASSUMING DILUTION:
Continuing operations $ 0.00 $ (0.01)
Discontinued Operations 0.00 (0.13)
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NET INCOME (LOSS) PER SHARE - ASSUMING DILUTION $ 0.00 $ (0.14)
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</TABLE>
See notes to unaudited consolidated financial statements.
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MARCUM NATURAL GAS SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
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THREE MONTHS ENDED
MARCH 31,
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1998 1997
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 17,193 $(1,766,055)
Adjustments to reconcile net income (loss) to net cash
provided by continuing operations:
Loss from discontinued operations 278,769
Loss from disposal of discontinued operations 1,300,000
Depreciation and amortization 237,292 234,513
Stock compensation expense 42,782
(Gain) loss on disposal of assets (682) 3,583
Equity in income of unconsolidated affiliates (4,356) (17,604)
Changes in other assets and liabilities:
Trade receivables 520,151 345,884
Inventory (75,549) (186,524)
Other current assets (22,412) 131,989
Other noncurrent assets (30,028) 11,798
Accounts payable 16,588 204,241
Accrued and other liabilities (412,824) (333,852)
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Net cash provided by continuing operations 288,155 206,742
Net cash provided (used) by discontinued operations 23,898 (106,312)
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Net cash provided by operating activities 312,053 100,430
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CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property, plant and equipment (29,744) (31,259)
Proceeds from sale of property, plant and equipment 2,246 3,819
Distributions from unconsolidated affiliates 67,340 31,027
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Net cash provided by investing activities 39,842 3,587
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CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on notes payable to bank (80,178) (270,267)
Borrowings on notes payable to bank 198,300
Issuance of common stock 42,782 66,500
Payments on long-term debt and capital lease obligations (2,758) (2,081)
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Net cash provided (used) by financing activities 158,146 (205,848)
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NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS 510,041 (101,831)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 1,938,554 889,543
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CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 2,448,595 $ 787,712
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</TABLE>
See notes to unaudited consolidated financial statements.
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MARCUM NATURAL GAS SERVICES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
As of March 31, 1998 and December 31, 1997
and For the Three Month Periods Ended March 31, 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 March 31, 1998 and the consolidated results of their
operations and cash flows for the three month periods ended March 31, 1998 and
1997.
2. ACQUISITION
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 Eagle Research Corporation ("Eagle"), 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 Eagle 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 Eagle. The
assets and business operations acquired are being 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, and 1,758,242 shares of Common Stock of the
Company valued at $2,032,967. The purchase price is subject to downward
adjustment based upon Metretek's actual sales of products in the business
acquired from Eagle during the 18-month period commencing July 1, 1998. If
Metretek's annualized sales of products in the business acquired are less than
$4,500,000 during such period, then the purchase price will be decreased on a
dollar-for-dollar basis to the extent of such sales deficit, but the purchase
price shall not be reduced below $3,900,000 even if annualized sales are less
than that amount. Any reduction in the purchase price will be effected by
reducing the amount of the note. The purchase price is also subject to upward or
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downward adjustment based upon certain changes in Eagle'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 Eagle, into up to 723,064 shares of Common
Stock of the Company at the rate of approximately $1.42 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, it 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 Eagle the
one-time option to cause the shares of Common Stock issued to Eagle 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 Eagle 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 Eagle also entered into a Non-Competition Agreement
with the Company and Metretek, pursuant to which American Meter and Eagle 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 Eagle, providing for the license by American Meter and Eagle
to Metretek of certain operating software, and the development, manufacture and
sale by Metretek to American Meter and Eagle 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.
Concurrent with the acquisition, Harry I. Skilton, President, Chief
Executive Officer and a director of American Meter and Vice President of Eagle,
became a member of the Board of Directors of the Company.
The acquisition has been accounted for as a purchase, and therefore the
results of operations of the Eagle business acquired will be combined with those
of the Company effective from the date of acquisition. The allocation of the
purchase price among inventory, equipment, goodwill and other intangibles has
not yet been determined.
3. 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
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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.
4. 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% 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.
As of the date of the loan closing, SFC and Metretek had a combined
$2,321,220 Loan availability 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.
5. 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-month offering period and are
matched by the Company on a share-for-share basis. Purchases are limited to 15%
of an employee's eligible compensation. A total of 200,000 shares of common
stock are registered for offer and issuance under the 1998 Stock Purchase Plan,
of which 80,531 shares were issued during the three months ended March 31, 1998.
Stock compensation expense in the amount of $42,782 was recognized during the
three months ended March 31, 1998
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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"), subject to approval by the Company's stockholders at the Annual Meeting
of Stockholders which will be held 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 1,000,000 shares of the Company's common stock. The 1998 Stock Incentive
Plan, if adopted by the Company's stockholders, will become effective as of June
12, 1998 and will replace the Company's existing 1991 Stock Option Plan and the
Company's Directors' Stock Option Plan, and no further awards will be made under
such existing plans, although options outstanding under the Company's existing
plans will not be affected by the adoption of the 1998 Stock Incentive Plan.
6. 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 months ended
March 31, 1998 and 1997, the Company's net income (loss) from continuing
operations, loss from discontinued operations and net income (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>
March 31,
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1998 1997
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Weighted average common shares 12,331,833 12,288,316
Incremental shares from assumed exercise of stock options 48,833 2,876
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Weighted average common shares assuming dilution 12,380,666 12,291,192
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</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 three month periods ended March 31, 1998 and 1997 and of the consolidated
financial condition of the Company as of March 31, 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>
Three Months Ended
March 31,
1998 1997
(dollar amounts in thousands)
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REVENUES:
Southern Flow $ 2,737 $ 2,722
Metretek 1,713 1,538
Other 219 99
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Total $ 4,669 $ 4,359
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GROSS PROFIT:
Southern Flow $ 654 $ 631
Metretek 900 950
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Total $ 1,554 $ 1,581
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NET INCOME (LOSS):
Southern Flow $ 213 $ 162
Metretek 2 0
Other (198) (349)
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Income (loss) from continuing operations 17 (187)
Loss from discontinued operations (1,579)
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Total $ 17 $(1,766)
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</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.
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THREE MONTHS ENDED MARCH 31, 1998 COMPARED TO THREE MONTHS ENDED MARCH 31, 1997
Revenues. The Company's consolidated revenues for the three months
ended March 31, 1998 increased $309,185, or 7%, compared to the same period in
1997, due to an increase in revenues by each of the Company's two subsidiaries
engaged in natural gas measurement sales and services and an increase in the
Company's other revenues. Metretek's revenues for the three months ended March
31, 1998 increased $174,213, or 11%, compared to the same period in 1997,
consisting of an increase in international sales of $258,162, offset in part by
a decrease in domestic sales of $83,949. The increase in Metretek's
international revenues in 1998 was due primarily to improved sales by Metretek,
Europe, its European distribution subsidiary, as well as an increase in sales to
Metretek's Canadian customers. 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. Southern Flow's revenues increased $15,559, or less than
1%, for the three months ended March 31, 1998, compared to the same period in
1997, as a result of its customers engaging in increased natural gas exploration
and production activities. Other Company revenues increased $119,413, or 120%,
for the three months ended March 31, 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 three months
ended March 31, 1998 increased $216,656, or 8%, compared to the same period in
1997. Metretek's cost of sales and services for the three months ended March 31,
1998 increased $223,886, or 38%, compared to the same period in 1997 and was due
primarily to increased sales activity in 1998 and a higher cost of sales factor
associated with sales of Sigma VI. Costs of circuit board assembly sales as a
percentage of sales is higher than the costs of sales of Metretek's automated
energy consumption monitoring and recording systems. As a result of increased
circuit board assembly sales as a percentage of its total sales, Metretek's
gross profit margin after costs of sales and services for the three months ended
March 31, 1998, decreased from 61.8% to 52.6% compared to the same period in
1997. Southern Flow's cost of sales and services for the three months ended
March 31, 1998 decreased $7,230, or less than 1%, compared to the same period in
1997. Southern Flow's gross profit margin after costs of sales and services for
the three months ended March 31, 1998 increased slightly from 23.2% to 23.9%
compared to the same period in 1997.
General and administrative expenses for the three months ended March
31, 1998 decreased $37,265, or 4%, 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 $128,000 related to costs that were incurred in
1997 associated with the organization of
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a business trust for which there were no comparable costs in 1998; (ii) a
decrease in expenses of Southern Flow of approximately $24,000 attributable to
reduced state and franchise taxes in 1998 compared to 1997; (iii) increases in
general and corporate expenses of approximately $81,000 due to increased
personnel costs and compensation costs associated with the Company's 1998
Employee Stock Purchase Plan for which there were no comparable costs in 1997;
and (iv) an increase in expenses of Metretek of approximately $34,000.
Selling, marketing and service expenses for the three months ended
March 31, 1998 decreased $49,605, or 14%, compared to the same period in 1997,
all of which related to activities at Metretek. The decrease in these expenses
was due principally to the net effects of the following: (i) decreases of
approximately $8,000 incurred at its wholly owned subsidiaries, Metretek Europe
and Sigma VI; and (ii) a decrease of approximately $42,000 at Metretek due to a
reduction in advertising and promotional expenses.
Depreciation and amortization expenses for the three months ended March
31, 1998 increased $2,779, or 1%, compared to the same period in 1997. This
increase was due to increased depreciation at Southern Flow.
Research and development expenses for the three months ended March 31,
1998 decreased $3,469, or 2%, compared to the same period in 1997, due to
reduced product development costs at Metretek.
Interest and other expenses for the three months ended March 31, 1998
decreased $24,390, or 68%, compared to the same period in 1997. These expenses
decreased because Metretek reduced its borrowings under its credit facilities in
1998 compared to 1997.
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, (iv)
the Eagle Research Corporation asset acquisition discussed elsewhere herein, and
(iv) the funding of possible future acquisitions.
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Net cash provided by operating activities was approximately $312,000
for the three months ended March 31, 1998, which resulted primarily from
approximately $292,000 of cash provided by continuing operations, before changes
in assets and liabilities. Approximately $4,000 in cash used to fund changes in
working capital and other asset and liability accounts was more than offset by
approximately $24,000 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
$1,250,000, all of which will relate to Metretek's business. Research and
development expenses in the amount of $213,543 were incurred in the three month
period ended March 31, 1998.
The Company anticipates capital expenditures in 1998 of approximately
$425,000, primarily for production and laboratory equipment, computer software
and hardware. Capital expenditures for the three month period ended March 31,
1998 totaled $29,744.
On May 4, 1998, the Company, through its wholly owned subsidiary,
Metretek, purchased substantially all of the assets and business of Eagle
Research Corporation ("Eagle"), 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 Eagle 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 Eagle. The
assets and business operations acquired are being 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, and 1,758,242 shares of Common Stock of the
Company valued at $2,032,967. The purchase price is subject to downward
adjustment based upon Metretek's actual sales of products in the business
acquired from Eagle during the 18-month period commencing July 1, 1998. If
Metretek's annualized sales of products in the business acquired are less than
$4,500,000 during such period, then the purchase price will be decreased on a
dollar-for-dollar basis to the extent of such sales deficit, but the purchase
price shall not be reduced below $3,900,000 even if annualized sales
14
<PAGE> 15
are less than that amount. Any reduction in the purchase price will be effected
by reducing the amount of the note. The purchase price is also subject to upward
or downward adjustment based upon certain changes in Eagle'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 Eagle, into up to 723,064 shares of Common
Stock of the Company at the rate of approximately $1.42 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, it is due and payable May 4, 2002, and may
be prepaid at any time without penalty or premium.
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% 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.
As of the date of the loan closing, Southern Flow and Metretek had a
combined $2,321,220 Loan availability 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
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<PAGE> 16
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.
FORWARD-LOOKING STATEMENTS
Statements in 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 that look forward in time, which include everything other than
historical information, are forward-looking statements made pursuant to the safe
harbor provisions of the Private Securities Litigation Reform Act of 1995.
Forward-looking statements include statements concerning plans, objectives,
goals, strategies, future events or performance, and underlying assumptions and
other statements which are other than statements of historical facts. From time
to time, the Company may publish or otherwise make available forward-looking
statements of this nature. All such forward-looking statements are based on the
current expectations of management and are subject to, and are qualified by,
risks and uncertainties that could cause actual results to differ materially
from those expressed or implied by those statements. 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 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
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<PAGE> 17
the various energy markets; the effect of weather patterns on utility purchasing
requirements; 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; changes in competitive factors
affecting the Company's operations; unanticipated impacts of restructuring
initiatives in natural gas utilities; occurrences of events affecting the
Company's ability to obtain funds from operations, debt or equity to finance
needed capital expenditures and other investments; the ability to successfully
identify and finance natural gas opportunities; the impact of current and future
laws and government regulations affecting the energy industry in general and the
natural gas industry in particular; as well as other risks and uncertainties
that are discussed in this report or that are discussed from time to time in the
Company's other reports and filings with the Securities and Exchange Commission.
The Company assumes no responsibility to update any forward-looking statements,
whether as a result of new information, future events or otherwise.
17
<PAGE> 18
PART II.
OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
(a) On March 23, 1998, in connection with the Asset Purchase Agreement
("Purchase Agreement"), dated March 23, 1998, among American Meter
Company ("American Meter'), Eagle Research Corporation, the Company and
Metretek, Incorporated, the Company executed Amendment No. 1 (the
"Amendment") to the Rights Agreement ("Rights Agreement"), dated as of
December 2, 1991, by and between the Registrant and American Securities
Transfer & Trust, Inc. (formerly named American Securities Transfer,
Inc.), as rights agent. The Rights Agreement, as amended, sets forth
the rights, terms and conditions of the Preferred Share Purchase Rights
(the "Rights"). Until certain events specified in the Rights Agreement,
as amended, occur, one Right is attached to each share of Common Stock.
The Amendment amends Section 1(a), 3(a) and 11 of the Rights Agreement
to (a) prevent American Meter and its affiliates from becoming an
"Acquiring Person" (as such term is defined and used in the Rights
Agreement), (b) prevent a "Distribution Date" (as such term is defined
and used in the Rights Agreement) from occurring, and (c) prevent an
adjustment of the Purchase Price, number and kind of shares, and the
number of "Rights" (as such term is defined in the Rights Agreement),
as a result of: (i) the execution of the Purchase Agreement (or any
amendment thereto in accordance with the terms thereof), or the
consummation of the transactions contemplated thereby, or the
announcement or commencement thereof, or (ii) the beneficial ownership
by American Meter and its affiliates of up to, but not in excess of,
25% of the Common Shares then outstanding pursuant to the Purchase
Agreement or otherwise. The Amendment also amends Section 13 of the
Rights Agreement to exempt the execution of the Purchase Agreement (or
any amendment thereto in accordance with the terms thereof), the
consummation of the transactions contemplated thereby, or the
announcement or commencement thereof, from the triggering provisions of
Section 13. The Amendment also provides for certain conforming
technical amendments in Sections 1, 3(c) and 27 of the Rights
Agreement.
(b) Not applicable
(c) On March 13, 1998, the Company issued a warrant to purchase 200,000
shares of the Company's Common Stock to National Securities
Corporation, for final advisory services, pursuant to Section 4(2) of
the Securities Act of 1933, as amended, as a transaction not involving
a public offering based on the facts that the Company reasonably
believed that the warrant holder had
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<PAGE> 19
such knowledge and experience in financial and business matters to be
capable of evaluating the merits and risks of the transaction, the
warrant holder represented an intention to acquire the securities for
investment only and not with a view to the distribution thereof, no
commissions were paid, and an appropriate legend restricting transfer
is affixed to the warrant certificate.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.1 Loan and Security Agreement, by and between National Bank of
Canada, Marcum Natural Gas Services, Inc., Metretek,
Incorporated and Southern Flow Companies, Inc., dated April 14,
1998.
10.2 Warrant for the purchase of 200,000 shares of Common Stock, $.01
par value per share, dated March 13, 1998, issued by Marcum
Natural Gas Services, Inc. to National Securities Corporation.
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), reporting the
acquisition of substantially all of the assets and business of Eagle
Research Corporation, a wholly owned subsidiary of American Meter
Company.
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<PAGE> 20
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: May 13, 1998 By: /s/ W. Phillip Marcum
------------- ---------------------------------------
W. Phillip Marcum
President and Chief Executive Officer
Date: May 13, 1998 By: /s/ A. Bradley Gabbard
------------- ---------------------------------------
A. Bradley Gabbard
Executive Vice President
and Chief Financial Officer
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<PAGE> 21
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number
- -------
<S> <C>
10.1 Loan and Security Agreement, by and between National Bank of Canada,
Marcum Natural Gas Services, Inc., Metretek, Incorporated and Southern
Flow Companies, Inc., dated April 14, 1998.
10.2 Warrant for the purchase of 200,000 shares of Common Stock, $.01 par
value per share, dated March 13, 1998, issued by Marcum Natural Gas
Services, Inc. to National Securities Corporation.
27.1 Financial Data Schedule
</TABLE>
<PAGE> 1
EXHIBIT 10.1
LOAN AND SECURITY AGREEMENT
THIS AGREEMENT made this 14th day of April, 1998 by and between
NATIONAL BANK OF CANADA, a Canadian chartered bank ("Lender"), with an address
at One Tabor Center, 1200 17th Street, Suite 2760, Denver, Colorado 80202,
MARCUM NATURAL GAS SERVICES, INC., a Delaware corporation ("Marcum"), METRETEK,
INCORPORATED, a Florida corporation ("Metretek") and SOUTHERN FLOW COMPANIES,
INC., a Delaware corporation (each, a "Borrower" and collectively, "Borrower"
or "Borrowers"), each with an address at 1675 Broadway, Suite 2150, Denver, CO
80202, and SIGMA VI, INC., a Florida corporation, ("Pledgor"), each with an
address of c/o Marcum Natural Gas Services, Inc., 1675 Broadway, Suite 2150,
Denver, CO 80202.
WITNESSETH:
WHEREAS, the parties wish to provide for the terms and conditions upon
which Loans may be made, and Letters of Credit may be issued, for the account
of Borrowers;
WHEREAS, Pledgor acknowledges that Pledgor is a subsidiary of Metretek
and will benefit from Lender making the Loans to Borrowers;
NOW, THEREFORE, in consideration of any Loans made and/or Letters of
Credit issued for the account of Borrowers, and for other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged by
Borrowers and Pledgor, the parties agree as follows:
1. DEFINITIONS.
(a) "Account," "Account Debtor," "Chattel Paper,"
"Documents," "Equipment," "General Intangibles," "Goods," "Instruments" and
"Inventory" shall have the respective meanings assigned to such terms, as of
the date of this Agreement, in the Colorado Uniform Commercial Code.
(b) "Affiliate" shall mean any Person directly or
indirectly controlling, controlled by or under common control with another
Person.
(c) "Agreement" shall mean this Loan and Security
Agreement, any exhibits or schedules hereto, any concurrent or subsequent
riders hereto and any extensions, supplements, amendments or modifications
hereto.
(d) "Blocked Account" shall have the meaning specified in
paragraph 8 hereof.
(e) "Business Day" means any day that Lender is open for
the normal conduct of business.
<PAGE> 2
(f) "Collateral" shall mean all of the property of
Borrowers or Pledgor described in paragraph 5 hereof, together with all other
real or personal property of Borrowers or Pledgor now or hereafter pledged to
Lender to secure repayment of any of the Liabilities, including, without
limitation, all Accounts, Inventory, General Intangibles and Equipment of
Borrowers and Pledgor.
(g) "Collateral Report" shall have the meaning specified
in paragraph 9 hereof.
(h) "Eligible Accounts" shall mean those Accounts of the
applicable Borrower (but excluding in every case, Marcum) which are unpaid less
than ninety (90) days from invoice date, and which Lender, in its sole
discretion, determines to be eligible. Without limiting Lender's discretion,
unless otherwise agreed by Lender, the following Accounts of the applicable
Borrower are not Eligible Accounts: (i) all Accounts owing by a single Account
Debtor, including currently scheduled Accounts, if twenty-five percent (25%) or
more of the balance owing by such Account Debtor to the applicable Borrower is
ineligible for any reason; (ii) Accounts with respect to which the Account
Debtor is an officer, director, employee, Subsidiary or Affiliate of any
Borrower; (iii) Accounts with respect to which the Account Debtor is the United
States of America or any department, agency or instrumentality thereof, unless
the applicable Borrower assigns its right to payment of such Accounts to Lender
pursuant to, and in full compliance with, the Assignment of Claims Act of 1940,
as amended; (iv) Accounts with respect to which the Account Debtor is not a
resident of the continental United States unless the Account Debtor has
supplied the applicable Borrower (A) with an irrevocable letter of credit, in
form and substance satisfactory to Lender, issued by a U.S. financial
institution satisfactory to Lender, to cover the full amount of such Account,
and such letter of credit is assigned and delivered to Lender or (B) a credit
insurance policy acceptable to Lender issued by an insurer satisfactory to
Lender, to cover the full amount of such account, and such credit insurance
policy is assigned and delivered to Lender; (v) Accounts in dispute or with
respect to which the Account Debtor has asserted or may assert a counterclaim
or has asserted or may assert a right of setoff; (vi) Accounts with respect to
which the prospect of payment or performance by the Account Debtor is or will
be impaired, as determined by Lender in the exercise of its sole discretion;
(vii) Accounts with respect to which Lender does not have a first and valid
fully perfected security interest; (viii) Accounts with respect to which the
Account Debtor is the subject of bankruptcy or a similar insolvency proceeding
or has made an assignment for the benefit of creditors or whose assets have
been conveyed to a receiver or trustee; (ix) Accounts with respect to which the
Account Debtor's obligation to pay the Account is conditional upon the Account
Debtor's approval or is otherwise subject to any prepurchase obligation or
return right, as with sales made on a bill-and-hold, guaranteed sale,
sale-and-return, sale on approval or consignment basis; (x) Accounts to the
extent that the Account Debtor's indebtedness to the applicable Borrower
exceeds a credit limit determined by Lender in Lender's reasonable discretion;
(xi) Accounts with respect to which the Account Debtor is located in New Jersey
or Minnesota unless the applicable Borrower (a) with respect to each such
state, has received a certificate of authority to do business and is in good
standing in such state, or (b) has filed a Notice of Business Activities Report
with the New Jersey Division of Taxation or the Minnesota Department of
Revenue, as applicable, for the then current year; (xii) Accounts which arise
out
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<PAGE> 3
of sales not made in the ordinary course of the applicable Borrowers' business;
(xiii) Accounts with respect to which the Account Debtor has returned to the
applicable Borrower any portion of the Inventory the sale of which gave rise to
such Accounts; and (xiv) Accounts with respect to which any document or
agreement executed or delivered in connection therewith, or any procedure used
in connection with any such document or agreement, fails in any material
respect to comply with the requirements of applicable law.
(i) "Eligible Inventory" shall mean Inventory of the
applicable Borrower (but excluding, in each case, Marcum) consisting of raw
materials and finished goods which Lender, in its sole discretion, determines
to be eligible. Without limiting Lender's discretion, unless otherwise agreed
by Lender, the following Inventory of the applicable Borrower is not Eligible
Inventory: (i) Inventory which is in transit; (ii) Inventory which is not in
good condition, or not currently usable or currently saleable in the ordinary
course of the applicable Borrowers' business; (iii) Inventory which is
obsolete; (iv) Inventory which Lender determines, in the exercise of its
reasonable discretion, to be unacceptable due to age, type, category and/or
quantity; (v) Inventory with respect to which Lender does not have a first and
valid fully perfected security interest; (vi) Inventory consisting of
work-in-progress, packaging materials or supplies; or (vii) Inventory which is
stored with or located on the premises of a bailee, consignee, warehouseman,
processor or other third party.
(j) "ERISA" shall mean the Employee Retirement Income
Security Act of 1974, as amended.
(k) "Event of Default" shall have the meaning specified
in paragraph 13 hereof.
(l) "Indemnified Party" shall have the meaning specified
in paragraph 15 hereof.
(m) "Letters of Credit" shall mean any Letter of Credit
which shall now or hereafter be issued by the Lender at the request and for the
account of either Metretek or Southern Flow pursuant to the terms of this
Agreement.
(n) "Liabilities" shall mean any and all obligations,
liabilities and indebtedness of any Borrower to Lender or to any Affiliate of
Lender of any and every kind and nature, howsoever created, arising or
evidenced and howsoever owned, held or acquired, whether now or hereafter
existing, whether now due or to become due, whether primary, secondary, direct,
indirect, absolute, contingent or otherwise (including without limitation
obligations of performance), whether several, joint or joint and several, and
whether arising or existing under written or oral agreement or by operation of
law, including without limitation all obligations for payment of the Loans and
for payment of the reimbursement obligations under paragraph 2(b) with respect
to the Letters of Credit.
(o) "Loan" or "Loans" shall mean collectively the
Metretek Loans and the Southern Flow Loans.
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<PAGE> 4
(p) "Loan Availability" shall mean collectively the
Metretek Loan Availability and the Southern Flow Loan Availability; on the
condition that the maximum amount of Loan Availability based solely on the
Metretek Inventory Availability and the Southern Flow Inventory Availability
combined shall not exceed $1,500,000.
(q) "Maturity Date" shall mean the earliest to occur of
the following: (i) March 14, 2001, and (ii) the date the Liabilities are
accelerated pursuant to paragraph 14 hereof.
(r) "Metretek Loan" or "Metretek Loans" shall mean all
advances made by Lender to Metretek pursuant to Paragraph 2(a) hereof.
(s) "Metretek Loan Availability" shall mean, at any time,
the sum of the following:
(i) up to eighty percent (80%) of the face amount (less
maximum discounts, credits and allowances which may be taken by or
granted to Account Debtors in connection therewith) then outstanding
under existing Eligible Accounts of Metretek at such time, less such
reserves as Lender in its sole discretion elects to establish; plus
(ii) up to fifty percent (50%) of the value of
then-existing Eligible Inventory of Metretek, valued at the lower of
cost (determined on a FIFO basis) or market, less such reserves as
Lender in its sole discretion elects to establish (the amount
determined pursuant to the provisions of this subparagraph (ii) is
referred to herein as the "Metretek Inventory Availability"); plus
(iii) the aggregate undrawn face amount of the Letters of
Credit issued at the request of or for the benefit of Metretek.
Lender may at any time and from time to time in its sole
discretion change the advance percentages as set forth above.
(t) "Obligor" shall mean each Borrower and each Person
who is or shall become primarily or secondarily liable for any of the
Liabilities.
(u) "Other Agreements" shall mean all agreements,
instruments and documents, including without limitation guaranties, mortgages,
trust deeds, pledges, powers of attorney, consents, assignments, security
agreements, intercreditor agreements, financing statements and all other
writings heretofore, now or from time to time hereafter executed by or on
behalf of each Borrower or any other Person and delivered to Lender or to any
Affiliate of Lender in connection with the Liabilities or the transactions
contemplated hereby.
(v) "Permitted Liens" shall mean (i) statutory liens of
landlords, carriers, warehousemen, mechanics, materialmen or suppliers or
similar statutory liens incurred in the ordinary course of business and
securing amounts not yet due or declared to be due by the claimant thereunder,
(ii) liens or security interests in favor of Lender, (iii) zoning restrictions
and easements, licenses, covenants and other restrictions affecting the use of
real property that do not
-4-
<PAGE> 5
individually or in the aggregate have a material adverse effect on the
applicable Borrower's ability to use such real property for its intended
purpose in connection with such Borrower's business, (iv) liens for taxes,
assessments and other governmental charges which are not delinquent or which
are being contested in good faith and for which adequate reserves have been
established on the books of the Borrower or, if requested by Lender, Borrower
has provided such security therefor as Lender may reasonably require, and (v)
the Right of First Refusal.
(w) "Person" shall mean any individual, sole
proprietorship, partnership, joint venture, trust, unincorporated organization,
association, corporation, institution, entity, party or foreign or United
States government (whether federal, state, county, city, municipal or
otherwise), including without limitation any instrumentality, division, agency,
body or department thereof.
(x) "Plan" shall mean any employee benefit plan defined
in Section 3(3) of ERISA, including any multi-employer plan or any employee
welfare benefit plan which is maintained or has been maintained pursuant to a
collective bargaining agreement to which two or more unrelated employers
contribute and in respect of which any Borrower is an "employer" as defined in
Section 3(5) of ERISA.
(y) "Reference Rate" shall mean the rate of interest per
annum publicly announced from time to time by National Bank of Canada at its
principal office as its United States (rather than Canadian) prime lending
rate. The Reference Rate is a reference rate and does not necessarily
represent the lowest or best rate actually charged to any customer. Any change
in the Reference Rate shall be effective as of the effective date stated in the
announcement by National Bank of Canada of such change. In addition, the
aggregate unpaid principal amount of all Loans outstanding to Metretek shall
not at any time exceed the Metretek Loan Availability and the aggregate unpaid
principal of all Loans at any time outstanding to Southern Flow shall not
exceed the Southern Flow Loan Availability.
(z) "Representations and Warranty Certificates" shall
mean, collectively, (a) that certain Representations and Warranty Certificate
dated of even date herewith from Marcum Natural Gas Services, Inc. to Lender,
attached hereto as Exhibit A; (b) that certain Representations and Warranty
Certificate dated of even date herewith from Southern Flow Companies, Inc. to
Lender, attached hereto as Exhibit B; (c) that certain Representations and
Warranty Certificate dated of even date herewith from Metretek, Incorporated to
Lender, attached hereto as Exhibit C; and (d) that certain Representations and
Warranty Certificate dated of even date herewith from Sigma VI, Inc. to Lender
attached hereto as Exhibit D.
(aa) "Southern Flow Loan" or "Southern Flow Loans" shall
mean all advances made by Lender to Southern Flow pursuant to Paragraph 2(a)
hereof.
(bb) "Southern Flow Loan Availability" shall mean, at any
time, the sum of the following:
(i) up to eighty percent (80%) of the face amount (less
maximum discounts, credits and allowances which may be taken by or
granted to Account Debtors in
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<PAGE> 6
connection therewith) then outstanding under existing Eligible
Accounts of Southern Flow at such time, less such reserves as Lender
in its sole discretion elects to establish; plus
(ii) up to fifty percent (50%) of the value of
then-existing Eligible Inventory of Southern Flow located in the State
of Louisiana (or any other state if (A) Lender has received a UCC
search from such state acceptable to Lender, (B) Lender has a valid,
perfected, first priority lien on Inventory in such state and (C)
Lender has received such landlord waivers as Lender may require from
landlords in such state), valued at the lower of cost (determined on a
FIFO basis) or market, less such reserves as Lender in its sole
discretion elects to establish (the amount determined pursuant to the
provisions of this subsection (ii) is referred to herein as the
"Southern Flow Inventory Availability"); plus
(iii) the aggregate undrawn face amount of the Letters of
Credit issued at the request of or for the benefit of Southern Flow.
Lender may at any time and from time to time in its sole
discretion change the advance percentages as set forth above.
(cc) "Subsidiary" shall mean any corporation of which more
than fifty percent (50%) of the outstanding capital stock having ordinary
voting power to elect a majority of the board of directors of such corporation
(irrespective of whether at the time stock of any other class of such
corporation shall have or might have voting power by reason of the happening of
any contingency) is at the time, directly or indirectly, owned by any Borrower
or by any partnership or joint venture of which more than fifty percent (50%)
of the outstanding equity interests are at the time, directly or indirectly,
owned by any Borrower.
2. LOANS, LETTERS OF CREDIT.
(a) Subject to the terms and conditions of this Agreement
and the Other Agreements, prior to the Maturity Date, Lender may, in its sole
discretion, make such Loans to either Metretek or Southern Flow as Metretek or
Southern Flow shall from time to time request; on the condition that the
aggregate unpaid principal of all Metretek Loans and Southern Flow Loans
outstanding at any one time shall not exceed the lesser of (A) Five Million
Dollars ($5,000,000) minus the aggregate undrawn face amount of the Letters of
Credit and (B) the Loan Availability at such time. In addition, the aggregate
unpaid principal amount of all Loans outstanding to Metretek shall not at any
time exceed the Metretek Loan Availability and the aggregate unpaid principal
amount of all Loans at any time outstanding to Southern Flow shall not exceed
the Southern Flow Loan Availability. Loans shall be repaid as provided
elsewhere in this Agreement. If at any time the outstanding principal balance
of the Loans exceeds Loan Availability, Borrowers shall immediately, and
without the necessity of a demand of Lender, pay to Lender such amount as may
be necessary to eliminate such excess. Similarly, if at any time the
outstanding principal balance of the Metretek Loans exceeds the Metretek Loan
Availability, Metretek shall immediately, and without the necessity of demand
by Lender, pay the Lender such amounts that may be necessary to eliminate such
excess and if at any time the outstanding principal balance of the Southern
Flow Loans exceeds the Southern Flow Loan Availability,
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<PAGE> 7
Southern Flow shall immediately, and without the necessity of a demand of
Lender, pay to Lender such amounts as may be necessary to eliminate such
excess.
(b) Subject to the terms and conditions of this Agreement
and the Other Agreements, prior to the Maturity Date, Lender may, in its sole
discretion, at Metretek's or Southern Flow's request, cause the Letters of
Credit to be issued for the account of Metretek or Southern Flow; provided,
that the aggregate undrawn face amount of the Letters of Credit shall not at
any time exceed the lesser of (i) Two Hundred Thousand Dollars ($200,000) and
(ii) the amount by which Loan Availability at such time exceeds the outstanding
principal balance of the Loans at such time. In addition, the aggregate
undrawn face amount of Letters of Credit issued at the request of or for the
benefit of Metretek shall not at any time exceed the amount by which the
Metretek Loan Availability at such time exceeds the outstanding principal
balance of the Metretek Loans at such time and the aggregate undrawn face
amount of Letters of Credit issued at the request of or for the benefit of
Southern Flow shall not at any time exceed the amount by which the Southern
Flow Loan Availability at such time exceeds the outstanding principal balance
of the Southern Flow Loans at such time. If at any time the outstanding
principal balance of the Loans is zero and Loan Availability is less than zero,
Borrowers shall provide cash collateral to Lender in an amount equal to the
amount by which Loan Availability is less than zero to secure any Letters of
Credit. The Letters of Credit shall be in form and substance satisfactory to
Lender and shall not have an expiration date later than twelve (12) months from
the date of issuance and must expire prior to the Maturity Date. Borrowers
shall reimburse Lender, immediately upon demand, in the amount of any payments
made by Lender to any Person with respect to the Letters of Credit, and until
Lender shall have been so reimbursed by Borrowers such payments by Lender shall
be deemed to be Loans. Metretek shall be primarily responsible for reimbursing
Lender for any amounts required pursuant to the preceding sentence with respect
to any Letters of Credit issued at the request of or for the benefit of
Metretek and Southern Flow shall be primarily responsible for reimbursing
Lender for any amounts required pursuant to the preceding sentence for Letters
of Credit issued at the request of or for the benefit of Southern Flow. In
connection with the Letters of Credit, Borrowers hereby indemnify Lender for
any payments made by Lender with respect to the Letters of Credit and for any
taxes, levies, deductions, charges and costs and expenses incurred by Lender
with respect to the Letters of Credit.
(c) The Loans and all other amounts due to Lender from
Borrowers shall be due and payable in full on the Maturity Date.
(d) Notwithstanding anything to the contrary set forth in
this Section 2, the liabilities of Borrowers shall be joint and several and
each Borrower shall be fully liable for repayment of all Loans (and not just
the Loans made to such Borrower), all as set forth more fully in Section 24
below.
3. FEES AND CHARGES. Borrowers shall pay to Lender the following
fees:
(a) Borrowers shall pay to Lender interest on the
outstanding principal balance of the Loans monthly in arrears beginning on
April 1, 1998, at the per annum rate of one percent (1.00%) plus the Reference
Rate. Following the occurrence of an Event of Default, Borrowers
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<PAGE> 8
shall pay to Lender interest on the outstanding principal balance of the Loans
at the per annum rate of four percent (4.00%) plus the Reference Rate.
Interest shall be computed on the basis of a year of three hundred sixty (360)
days for the actual number of days elapsed.
(b) Borrowers shall pay to Lender a letter of credit fee
equal to two percent (2.00%) per annum (computed on the basis of a year of
three hundred sixty (360) days for the actual number of days elapsed) of the
average undrawn face amount of the Letters of Credit, payable quarterly in
advance beginning on April 1, 1998; provided, that following the occurrence of
an Event of Default, the letter of credit fee shall increase to five percent
(5.00%) per annum. In addition, Borrowers shall pay to Lender all expenses
incurred by Lender in connection with the issuance and negotiation of any
Letter of Credit, payable on the date incurred by Lender.
(c) Borrowers shall pay to Lender a loan fee in the
amount of $25,000, payable prior to the first Loan advance.
(d) Borrowers shall pay to Lender an audit fee at a rate
of Five Hundred Dollars ($500.00) per auditor per day, plus travel and other
out-of-pocket expenses, which shall be payable by Borrowers upon completion of
each audit.
(e) Borrowers shall pay to Lender a monthly unused fee
equal to the (i) product obtained by multiplying (A) three-eighths of one
percent (0.375%) per annum (computed on the basis of a year of three hundred
sixty (360) days for the actual number of days elapsed) times, (B) the amount
by which $5,000,000 minus the outstanding face amount of all Letters of Credit
during the time authorized exceeds the average daily outstanding balance of the
Loans during each calendar month, and (ii) dividing such product by 360 and
multiplying the result by the number of days in the month. Such unused fee
shall be payable monthly in arrears within 10 days after the end of each month.
(f) Borrowers have the right, in their sole discretion,
to prepay in whole at any time or in part from time-to-time the outstanding
balance of the Loans and any Liabilities; provided, however until such time as
Borrower terminates this Agreement, Borrower shall be obligated to pay the
unused fee set forth in paragraph (e) above. If Borrowers elect to terminate
this Agreement prior to the Maturity Date, Borrowers will pay Lender an early
termination fee equal to (i) $100,000 if the termination occurs before April
14, 1999, (ii) $50,000 if the termination occurs between April 14, 1999 and
April 13, 2000, and (iii) no fee if the termination occurs between April 14,
2000 and the Maturity Date; except that Borrowers shall not be required to pay
an early termination fee if (1) Borrowers terminate this Agreement at the
Lender's request, (2) Lender chooses not to grant increases in the Maximum
Availability which another lender irrevocably agrees in writing to the grant to
Borrowers, (3) Lender exercises its right to change the advance percentages
with respect to Southern Flow Loan Availability or Metretek Loan Availability
and such change in the advance percentages causes Borrowers' accountants to
classify the Loans as a current liability as determined in accordance with GAAP
or (4) Lender exercises the discretion granted to Lender herein to elect not to
make a Loan even if a Borrower is in compliance with all requirements of
Section 4 with respect to such Loan. In the event of repayment of the Loans
following an Event of Default, the fee required pursuant to this
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<PAGE> 9
Section 3(f) shall be due and payable in connection with any repayment of the
Loans following an Event of Default.
It is the intent of the parties that the rate of interest and the other fees
and charges to Borrowers under this Agreement shall be lawful; therefore, if
for any reason the interest or other fees and charges payable under this
Agreement are found by a court of competent jurisdiction, in a final
determination, to exceed the limit which Lender may lawfully charge Borrowers,
then the obligation to pay interest and other charges shall automatically be
reduced to such limit and, if any amount in excess of such limit shall have
been paid, then such amount shall be refunded to Borrowers.
4. CONDITIONS OF ADVANCES AND LETTERS OF CREDIT AND METHOD OF
ADVANCE.
(a) Each Borrower has established an account at Lender
which each Borrower will use as a primary operating account for purposes of
paying the obligations incurred by such Borrower. In the event that there is
an overdraft in the operating account of Southern Flow, Lender may, but shall
be under no obligation, to make a Southern Flow Loan to cover such overdraft;
provided, however, that following such Southern Flow Loan, the outstanding
amount of Southern Flow Loans shall not exceed the Southern Flow Loan
Availability. Likewise, in the event that there is an overdraft in the
operating account of Metretek, Lender may, but shall be under no obligation, to
make a Metretek Loan to cover such overdraft; provided, however, that following
such Metretek Loan, the outstanding amount of Metretek Loans shall not exceed
the Metretek Loan Availability. Any advances to cover overdrafts in either
Borrowers' operating account shall be in Lender's discretion and shall be
subject to all the terms and conditions of this Agreement.
(b) In addition, Borrower may make a request for an
advance by providing Lender (i) with respect to a request for an advance, by at
least twelve o'clock p.m. (12:00 p.m.) Denver time on the day on which such
advance is requested to be made hereunder, a telephonic request from an officer
of Metretek or Southern Flow requesting the advance (or any Person authorized
by Metretek or Southern Flow pursuant to a written list provided to Lender),
for an advance in a specific amount, and (ii) with respect to a request for the
issuance of a Letter of Credit, at least five days prior to the date such
Letter of Credit is requested to be issued, an application for such Letter of
Credit executed by an officer of Metretek or Southern Flow requesting the
issuance of a Letter of Credit. In addition, Lender shall also have received
all of the schedules and reports required to have been delivered by Borrowers
pursuant to paragraph 9 hereof.
(c) Without limiting Lender's discretion to make advances
hereunder, the making of any advance provided for in this Agreement shall be
conditioned upon the following:
(i) no Default shall have occurred and be continuing, and
no event that with notice, or the passage of time, or both could
become a Default shall have occurred;
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<PAGE> 10
(ii) all of the representations and warranties contained
in this Agreement and the Other Agreements shall be true and correct
in all material respects as if made on the date the request for an
advance or Letter of Credit is made;
(iii) Lender shall have received, in form and substance
satisfactory to Lender, all certificates, orders, authorities,
consents, affidavits, schedules, instruments, security agreements,
financing statements, mortgages and other documents which are provided
for hereunder, or which Lender may at any time reasonably request,
including, without limitation, all items set forth on the List and
Closing Documents prepared by Lender;
(iv) with respect to the initial advance of the Loan,
Borrower shall provide evidence to Lender acceptable to Lender that
the Loan Availability following the initial advance of the Loan is at
least $1,000,000;
(v) with respect to the initial advance of the Loan, such
advance shall be used to repay in full all amounts borrowed from
Commercial National Bank in Shreveport and First Union National Bank
of Florida and to pay in part the purchase price of the Eagle Assets
(as defined below); and
(vi) there shall have been no material adverse change in
the conditions, financial or otherwise, of any Borrower or Pledgor as
reasonably determined by Lender.
5. GRANT OF SECURITY INTEREST TO LENDER. As security for the
payment or other satisfaction of all Liabilities, Borrowers and Pledgor hereby
assign to Lender and grant to Lender a continuing security interest in the
following property of Borrowers and Pledgor, whether now or hereafter owned,
existing, acquired or arising and wherever now or hereafter located: (a) all
Accounts and all Goods whose sale, lease or other disposition by any Borrower
or Pledgor has given rise to Accounts and have been returned to or repossessed
or stopped in transit by any Borrower or Pledgor; (b) all Chattel Paper,
Instruments, Documents and General Intangibles (including without limitation
all patents, patent applications, trademarks, trademark applications, trade
names, trade secrets, goodwill, copyrights, registrations, licenses,
franchises, customer lists, tax refund claims, claims against carriers and
shippers, guarantee claims, contracts rights, security interests, security
deposits and any rights to indemnification); (c) all Inventory and other Goods,
including without limitation Equipment, vehicles and fixtures; (d) all deposits
and cash and any other property of Borrowers and Pledgor now or hereafter in
the possession, custody or control of Lender or any agent or any Affiliate of
Lender or any participant with Lender in the Loans and/or Letters of Credit for
any purpose (whether for safekeeping, deposit, collection, custody, pledge,
transmission or otherwise); (e) the Blocked Account and all amounts at any time
on deposit in the Blocked Account together with all other accounts, deposit
accounts, and all amounts on deposit in such accounts, together with all other
cash and funds; and (f) all additions and accessions to, substitutions for, and
replacements, products and proceeds of the foregoing property, including
without limitation proceeds of all
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<PAGE> 11
insurance policies insuring the foregoing property, and all of Borrowers' and
Pledgor's books and records relating to any of the foregoing and to Borrowers'
and Pledgor's business.
6. PRESERVATION OF COLLATERAL AND PERFECTION OF SECURITY
INTERESTS THEREIN. Borrowers and Pledgor shall, at Lender's reasonable
request, at any time and from time to time, execute and deliver to Lender such
financing statements, documents and other agreements and instruments (and pay
the cost of filing or recording the same in all public offices deemed necessary
or desirable by Lender) and do such other acts and things as Lender may deem
necessary or desirable in order to establish and maintain a valid, attached and
perfected security interest in the Collateral in favor of Lender (free and
clear of all other liens, claims and rights of third parties whatsoever,
whether voluntarily or involuntarily created, except Permitted Liens) to secure
payment of the Liabilities, and in order to facilitate the collection of the
Collateral. Borrowers and Pledgor irrevocably hereby make, constitute and
appoint Lender (and all Persons designated by Lender for that purpose) as
Borrowers' and Pledgor's true and lawful attorney and agent-in-fact to execute
such financing statements, documents and other agreements and instruments and
do such other acts and things as may be necessary to preserve and perfect
Lender's security interest in the Collateral. Borrowers and Pledgor further
agree that a carbon, photographic, photostatic or other reproduction of this
Agreement or of a financing statement shall be sufficient as a financing
statement.
7. CAPITAL ADEQUACY. If Lender shall reasonably determine that
the application or adoption of any law, rule, regulation, directive,
interpretation, treaty or guideline regarding capital adequacy, or any change
therein or in the interpretation or administration thereof, whether or not
having the force of law, increases the amount of capital required or expected
to be maintained by Lender or any Person controlling, directly or indirectly,
Lender, and such increase is based upon the existence of Lender's obligations
hereunder and other commitments of this type, then from time to time, within
ten (10) Business Days after demand from Lender, Borrowers shall pay to Lender
such amount or amounts as will compensate Lender or such controlling Person, as
the case may be, for such increased capital requirement. The determination of
any amount to be paid by Borrowers under this paragraph 7 shall take into
consideration the policies of Lender or any Person controlling Lender with
respect to capital adequacy and shall be based upon any reasonable averaging,
attribution and allocation methods selected by Lender. A certificate of Lender
setting forth the amount or amounts as shall be necessary to compensate Lender
as specified in this paragraph 7 shall be delivered to Borrowers and shall be
conclusive in the absence of manifest error.
8. COLLECTIONS.
(a) Each Borrower shall establish an account (the
"Blocked Account") in such Borrower's name with a financial institution
reasonably acceptable to Lender, into which such Borrower will immediately
deposit all payments received by such Borrower with respect to Accounts and
other Collateral in the identical form in which such payments were made,
whether by cash or check. If any Borrower, any Affiliate or Subsidiary of any
Borrower, or any shareholder, officer, director, employee or agent of any
Borrower or any Affiliate or Subsidiary of any Borrower, or any other Person
acting for or in concert with any Borrower shall receive any
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<PAGE> 12
monies, checks, notes, drafts or other payments relating to or as proceeds of
Accounts or other Collateral, such Borrower and each such Person shall receive
all such items in trust for, and as the sole and exclusive property of, Lender
and, immediately upon receipt thereof, shall remit the same (or cause the same
to be remitted) in kind to the Blocked Account. The financial institution with
which the Blocked Account is established shall acknowledge and agree, in a
manner reasonably satisfactory to Lender, that the amounts on deposit in such
Blocked Account are the sole and exclusive property of Lender, that such
financial institution has no right to setoff against the Blocked Account, and
that such financial institution shall wire, or otherwise transfer in
immediately available funds in a manner satisfactory to Lender, funds deposited
in the Blocked Account on a daily basis as such funds are collected, to
Lender's account at Lender's New York Branch in accordance with Lender's
instructions. Lender shall, two (2) Business Days after receipt by Lender of
immediately available funds in its account at Lender's New York Branch, apply
the whole or any part of such collections or proceeds against the Liabilities
in such order as Lender shall determine in its sole discretion. Each Borrower
agrees that all payments deposited to such Blocked Account or otherwise
received by Lender, whether in respect of the Accounts or as proceeds of other
Collateral or otherwise, will be applied on account of the Liabilities in
accordance with the terms of this Agreement. Borrowers acknowledge that Lender
may apply collections or proceeds in such manner as Lender shall determine in
its sole and absolute discretion and that Lender may, but shall be under no
obligation to apply amounts received on behalf of Metretek to the Liabilities
of Metretek and amounts received on behalf of Southern Flow to the Liabilities
of Southern Flow; on the condition that if all of the Liabilities have been
repaid in full and no amounts remain outstanding under any of the Loans and
there has occurred no Event of Default or event that with notice or passage of
time or both would constitute an Event of Default, Borrower shall be entitled
to withdraw any amounts which are in excess of those amounts required to repay
in full all Liabilities and all amounts outstanding under the Loan. All
checks, drafts, instruments and other items of payment or proceeds of
Collateral shall be endorsed by the applicable Borrower to Lender, and, if that
endorsement of any such item shall not be made for any reason, Lender is hereby
irrevocably authorized to endorse the same on such Borrower's behalf. For the
purpose of this paragraph, each Borrower irrevocably hereby makes, constitutes
and appoints Lender (and all Persons designated by Lender for that purpose) as
each Borrower's true and lawful attorney and agent-in-fact (i) to endorse
Borrowers' name upon said items of payment and/or proceeds of Collateral and
upon any Chattel Paper, document, instrument, invoice or similar document or
agreement relating to any Account of any Borrower or goods pertaining thereto;
(ii) to take control in any manner of any item of payment or proceeds thereof;
and (iii) to have access to any lock box or postal box into which any of
Borrowers' mail is deposited, and open and process all mail addressed to any
Borrower and deposited therein; provided however that Lender shall not exercise
the rights set forth in this sentence unless: (A) Lender determines that
Borrower has failed to promptly take such action, (B) an Event of Default has
occurred or an event that with notice or passage of time, or both, would
constitute an Event of Default has occurred or (C) Lender otherwise has a good
faith belief that its security or position has been or is likely to be
impaired.
(b) Lender may, at any time and from time to time,
whether before or after notification to any Account Debtor and whether before
or after the maturity of any of the Liabilities, (i) enforce collection of any
of Borrowers' or Pledgor's Accounts or contract rights by suit or otherwise;
(ii) exercise all of Borrowers' and Pledgor's rights and remedies with respect
to
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<PAGE> 13
proceedings brought to collect any Accounts; (iii) surrender, release or
exchange all or any part of any Accounts, or compromise or extend or renew for
any period (whether or not longer than the original period) any indebtedness
thereunder; (iv) sell or assign any Account of Borrowers or Pledgor upon such
terms, for such amount and at such time or times as Lender deems advisable; (v)
prepare, file and sign Borrowers' or Pledgor's name on any proof of claim in
bankruptcy or other similar document against any Account Debtor; and (vi) do
all other acts and things which are necessary, in Lender's reasonable
discretion, to fulfill Borrowers' and Pledgor's obligations under this
Agreement and to allow Lender to collect the Accounts; provided however that
Lender shall not exercise the rights set forth in this Subsection (b) unless
(A) Lender determines that Borrower has failed to promptly take such action,
(B) an Event of Default has occurred or an event that with notice or passage of
time, or both, would constitute an Event of Default has occurred or (C) Lender
otherwise has a good faith belief that its security or position has been or is
likely to be impaired. In addition to any other provision hereof, Lender may
at any time, whether before or after the occurrence of an Event of Default, at
Borrowers' expense, notify any parties obligated on any of the Accounts to make
payment directly to Lender of any amounts due or to become due thereunder.
(c) Lender, in its sole discretion, without waiving or
releasing any obligation, liability or duty of Borrowers or Pledgor under this
Agreement or the other Agreements or any Event of Default, may at any time or
times hereafter, but shall not be obligated to, pay, acquire or accept an
assignment of any security interest, lien, encumbrance or claim asserted by an
Person in, upon or against the Collateral. All sums paid by Lender in respect
thereof and all costs, fees and expenses, including without limitation
reasonable attorney fees, all court costs and all other charges relating
thereto incurred by Lender shall constitute Loans, payable by Borrowers to
Lender on demand and, until paid, shall bear interest at the highest rate then
applicable to Loans hereunder.
(d) Immediately upon any Borrower's or Pledgor's receipt
of any portion of the Collateral evidenced by an agreement, Instrument or
Document, including without limitation any Chattel Paper, such Borrower or
Pledgor shall deliver the original thereof to Lender together with an
appropriate endorsement or other specific evidence of assignment thereof to
Lender (in form and substance acceptable to Lender). If an endorsement or
assignment of any such items shall not be made for any reason, Lender is hereby
irrevocably authorized, as Borrowers' and Pledgor's attorney and agent-in-
fact, to endorse or assign the same on Borrowers' or Pledgor's behalf.
9. SCHEDULES AND REPORTS.
(a) Metretek and Southern Flow shall each deliver to
Lender on a weekly basis or more frequently as reasonably requested by Lender,
a collateral report (the "Collateral Report") describing all Eligible Accounts
created or acquired by each of Metretek and Southern Flow subsequent to the
immediately preceding Collateral Report, information in connection with any
Account which has ceased to be an Eligible Account since the most recent
Collateral Report, and information on all amounts collected by each of Metretek
and Southern Flow on Accounts subsequent to the immediately preceding
Collateral Report. The Collateral Reports shall also include on a monthly
basis an aging of Accounts, a schedule of Inventory (identifying raw materials
and finished goods separately) owned by each of Metretek and Southern Flow and
in
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<PAGE> 14
each of Metretek and Southern Flow's possession valued at FIFO cost,
information on all sales of or other reduction of and all additions to
Inventory, all returns of Inventory, all credits issued by each of Metretek and
Southern Flow and all complaints and claims against each of Metretek and
Southern Flow in connection with Inventory subsequent to the immediately
preceding Collateral Report. The Collateral Reports shall contain such
additional information as Lender shall require. Each of Metretek and Southern
Flow shall also furnish copies of any other reports or information concerning
the Accounts and Inventory included, described or referred to in the Collateral
Reports, including without limitation, but only if specifically requested by
Lender, copies of all invoices prepared in connection with Accounts. Lender,
through its officers, employees or agents, shall have the right, at any time
and from time to time in Lender's name, in the name of a nominee of Lender or
in either of Metretek and Southern Flow' name, to verify the validity, amount
or any other matter relating to any of the Accounts, by mail, telephone,
telegraph or otherwise. Borrowers shall reimburse Lender, on demand, for all
costs, fees and expenses incurred by Lender in this regard.
(b) Without limiting the generality of the foregoing,
each of Metretek and Southern Flow shall deliver to Lender, at least once a
month (or more frequently when reasonably requested by Lender), a report with
respect to each of Metretek's and Southern Flow's Accounts and Inventory
reconciling the information described in paragraph 9(a) for such month.
(c) All schedules, certificates, reports, and assignments
and other items delivered by any Borrower to Lender hereunder shall be executed
by an authorized representative of such Borrower and shall be in such form and
contain such information as Lender shall specify.
10. TERMINATION. This Agreement shall be in effect until the
Liabilities have been fully satisfied and any rights of Borrowers to any Loans
hereunder or to the issuance of any Letters of Credit shall have been fully
terminated and be of no further force and effect. The security interests and
liens created under this Agreement and the Other Agreements shall survive such
termination until the Letters of Credit have been terminated and canceled and
the payment of the other Liabilities has become indefeasible. At such time as
Borrowers have repaid all of the Liabilities and this Agreement has terminated,
(i) Borrowers shall deliver to Lender a release, in form and substance
satisfactory to Lender, of all obligations and liabilities of Lender and its
officers, directors, employees, agents and Affiliates to Borrowers, and (ii)
Lender shall deliver to Borrowers a release of all Collateral unless Lender has
a good faith reason to believe any repayment of the Loans may be subject to any
claims of preference, fraudulent conveyance or may be set aside for any other
reason.
11. REPRESENTATIONS, WARRANTIES AND COVENANTS. Borrowers and
Pledgor hereby represent, warrant and covenant that:
(a) the consolidated and consolidating financial
statements delivered or to be delivered by Borrowers to Lender at or prior to
the date of this Agreement and at all times subsequent thereto accurately
reflect the financial condition of Borrowers, and there has been no material
adverse change in the financial condition or the operations of any Borrower
since the date of the financial statements delivered to Lender most recently
prior to the date of this Agreement;
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<PAGE> 15
(b) the office where Borrowers and Pledgor keep their
books, records and accounts (or copies thereof) concerning the Collateral,
Borrowers' and Pledgor's principal place of business and all of Borrowers' and
Pledgor's other places of business, locations of Collateral and post office
boxes are as set forth in Schedules 1 and 2 of the Representations and Warranty
Certificate for the applicable Borrower or Pledgor (or such other locations as
Borrowers has advised Lender in accordance with the requirements of this
Agreement); Borrowers and Pledgor shall promptly (but in no event less than ten
(10) Business Days prior thereto) advise Lender in writing of the proposed
opening of any new place of business, the closing of any existing place of
business, any change in the location of Borrowers' or Pledgor's books, records
and accounts (or copies thereof) or the opening or closing of any post office
box of any Borrower or Pledgor;
(c) the Collateral, including, without limitation, the
Equipment (except any part thereof which prior to the date of this Agreement
Borrowers or Pledgor shall have advised Lender in writing consists of
Collateral normally used in more than one state) is and shall be kept, or, in
the case of vehicles, based, only at the addresses set forth on the first page
of this Agreement or on Schedules 1 and 2 of the Representations and Warranty
Certificate for the applicable Borrower or Pledgor (or such other locations as
Borrowers has advised Lender in accordance with the requirements of this
Agreement);
(d) if any of the Collateral consists of Goods of a type
normally used in more than one state, whether or not actually so used,
Borrowers or Pledgor shall immediately give written notice to Lender of any use
of any such Goods in any state other than a state in which Borrowers or Pledgor
have previously advised Lender in writing that such Goods shall be used, and
such Goods shall not, unless Lender shall otherwise consent in writing, be used
outside of the continental United States;
(e) each Account or item of Inventory which shall,
expressly or by implication, request Lender to classify as an Eligible Account
or as Eligible Inventory, respectively, shall, as of the time when such request
is made, conform in all respects to the requirements of such classification as
set forth in the respective definitions of "Eligible Account" and "Eligible
Inventory" as set forth herein and as otherwise established by Lender from time
to time, and Borrowers or Pledgor shall promptly notify Lender in writing if
any such Eligible Account or Eligible Inventory shall subsequently become
ineligible;
(f) each Borrower and Pledgor is and shall at all times
be the lawful owner of its respective property now purportedly owned or
hereafter purportedly acquired by such Borrower or Pledgor, free from all
liens, claims, security interests and encumbrances whatsoever, whether
voluntarily or involuntarily created and whether or not perfected, other than
the Permitted Liens;
(g) each Borrower and Pledgor has the right and power and
is duly authorized and empowered to enter into, execute and deliver this
Agreement and the Other Agreements and perform its obligations hereunder and
thereunder; Borrowers' and Pledgor's execution, delivery and performance of
this Agreement and the Other Agreements does not and shall not conflict with
the provisions of any statute, regulation, ordinance or rule of law, or any
agreement, contract
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<PAGE> 16
or other document which may now or hereafter be binding on Borrowers and
Pledgor, and Borrowers' and Pledgor's execution, delivery and performance of
this Agreement and the Other Agreements shall not result in the imposition of
any lien or other encumbrance upon any of the Borrowers' or Pledgor's property
under any existing indenture, mortgage, deed of trust, loan or credit agreement
or other agreement or instrument by which Borrowers or Pledgor or any of their
property may be bound or affected;
(h) except as described in Marcum's Form 10-KSB for the
fiscal year ended on December 31, 1997 ("Form 10-KSB") there are no actions or
proceedings which are pending or, to Borrower's knowledge, threatened against
any Borrower or Pledgor which might result in any material adverse change in
its financial condition or materially adversely affect Borrowers' or Pledgor's
property and Borrowers and Pledgor shall, promptly upon becoming aware of any
such pending or threatened action or proceeding, give written notice thereof to
Lender;
(i) each Borrower has obtained all licenses,
authorizations, approvals, and permits, the lack of which would have a material
adverse effect on the operation of its business, and each Borrower is and shall
remain in compliance in all material respects with all applicable federal,
state, local and foreign statutes, orders, regulations, rules and ordinances,
the failure to comply with which could reasonably be expected to have a
material adverse effect on its business, property, assets, operations or
condition, financial or otherwise;
(j) all written information (other than budgets,
projections, forecasts and other forward-looking information) now, heretofore
or hereafter furnished by Borrowers or Pledgor to Lender is and shall be true
and correct in all material respects as of the date with respect to which such
information was or is furnished;
(k) Borrowers are not conducting, permitting or suffering
to be conducted, nor shall it conduct, permit or suffer to be conducted, any
activities or transactions with any Affiliate of any Borrower (other than a
Borrower, Pledgor or wholly-owned subsidiary thereof); provided, however, that
Borrowers may enter into transactions with Affiliates of Borrowers in the
ordinary course of business pursuant to terms that are no less favorable to
such Borrower than the terms upon which such transfers or transactions would
have been made had they been made to or with a Person that is not an Affiliate
of Borrowers and, in connection therewith, may transfer cash or property to
Affiliates of Borrowers for fair value;
(l) Each Borrower's name has always been as set forth on
the first page of this Agreement and no Borrower uses any trade names or
division names in the operation of its business, except as set forth on page 1
of the Representations and Warranty Certificate for each applicable Borrower;
each Borrower shall notify Lender in writing within ten (10) Business Days of
the change of its name or the use of any trade names or division names not
previously disclosed to Lender in writing;
(m) with respect to Borrowers' and Pledgor's Equipment:
(i) each Borrower and Pledgor has good and indefeasible and merchantable title
to and ownership of all Equipment, including, without limitation, the Equipment
described or listed on the schedule of Equipment delivered to Lender
concurrently with this Agreement; (ii) each Borrower and Pledgor shall keep
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and maintain the Equipment in good operating condition and repair (ordinary
wear and tear excepted) and shall make all necessary replacements thereof and
renewals thereto so that the value and operating efficiency thereof shall at
all times be preserved and maintained; (iii) No Borrower or Pledgor shall
permit any such items to become a fixture to real estate or an accession to
other personal property; and (iv) each Borrower and Pledgor, immediately on
demand by Lender, shall deliver to Lender any and all evidence of ownership of,
including without limitation certificates of title and applications of title
to, any of the Equipment;
(n) this Agreement and the Other Agreements to which
Borrowers or Pledgor is a party are the legal, valid and binding obligations of
Borrowers and Pledgor and are enforceable against Borrowers and Pledgor in
accordance with their respective terms;
(o) Each Borrower and Pledgor is solvent, is able to pay
its debts as they become due and has capital sufficient to carry on its
business, now owns property having a value both at fair valuation and at
present fair saleable value greater than the amount required to pay its debts,
and will not be rendered insolvent by the execution and delivery of this
Agreement or any of the Other Agreements or by completion of the transactions
contemplated hereunder or thereunder;
(p) No Borrower or Pledgor is now obligated, nor shall it
create, incur, assume or become obligated (directly or indirectly), for any
loans or other indebtedness for borrowed money other than the Loans, except
that Borrowers may (i) borrow money from a Person other than Lender on an
unsecured and subordinated basis if a subordination agreement in favor of
Lender and in form and substance reasonably satisfactory to Lender is executed
and delivered to Lender relative thereto; (ii) maintain any present
indebtedness to any Person which is set forth in the Representations and
Warranty Certificates, but excluding those loans described in the
Representations and Warranty Certificates from Commercial National Bank in
Shreveport and First Union National Bank of Florida; (iii) incur unsecured
indebtedness to trade creditors in the ordinary course of Borrowers' business;
(iv) borrow money from a Borrower, Pledgor or a wholly- owned subsidiary
thereof on an unsecured and subordinated basis and (v) the Subordinated Note;
(q) Borrowers do not own any margin securities, and none
of the proceeds of the Loans hereunder shall be used for the purpose of
purchasing or carrying any margin securities or for the purpose of reducing or
retiring any indebtedness which was originally incurred to purchase any margin
securities or for any other purpose not permitted by Regulation G or Regulation
U of the Board of Governors of the Federal Reserve System as in effect from
time to time;
(r) Schedule 4 of the Representations and Warranty
Certificates sets forth the names of all of the shareholders of each Borrower
(other than Marcum, which is a publicly-held corporation whose principal
shareholders are set forth in Form 10-KSB) and except as set forth on Schedule
5 of the Representations and Warranty Certificates, Borrowers have no
Subsidiaries or divisions, nor is any Borrower engaged in any joint venture or
partnership with any other Person;
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<PAGE> 18
(s) Each Borrower is duly organized and in good standing
in its state of organization and each Borrower is duly qualified and in good
standing in all states where the nature and extent of the business transacted
by it or the ownership of its assets makes such qualification necessary;
(t) No Borrower is in default under any material
contract, lease or commitment to which it is a party or by which it is bound,
nor does any Borrower know of any dispute regarding any contract, lease or
commitment which is material to the continued financial success and well-being
of each Borrower;
(u) there are no controversies pending or threatened
between any Borrower and any of its employees, other than employee grievances
arising in the ordinary course of business which are not, in the aggregate,
material to the continued financial success and well-being of such Borrower,
and each Borrower is in compliance in all material respects with all federal
and state laws respecting employment and employment terms, conditions and
practices; and
(v) Each Borrower possesses, and shall continue to
possess, adequate licenses, patents, patent applications, copyrights, service
marks, trademarks, trademark applications, trade styles and trade names to
continue to conduct its business as heretofore conducted by it.
(w) Each Borrower hereby affirms and reaffirms all of the
representations, warranties and information set forth in the Representation and
Warranties Certificates, dated of even date herewith, copies of which are
attached hereto, and agrees that all such representations, warranties and
information set forth therein are incorporated herein by this reference as if
such representations, warranties and information were set forth directly
herein.
Borrowers and Pledgor represent, warrant and covenant to Lender that all
representations, warranties and covenants of Borrowers and Pledgor contained in
this Agreement (whether appearing in paragraphs 11 or 12 hereof or elsewhere)
shall be true at the time of Borrowers' and Pledgor's execution of this
Agreement, shall survive the execution, delivery and acceptance hereof by the
parties hereto and the closing of the transactions described herein or related
hereto, shall remain true in all material respects until the repayment in full
of all of the Liabilities and termination of this Agreement, and shall be
remade by Borrowers or Pledgor at the time each Loan is made or Letters of
Credit issued pursuant to this Agreement; except changes occurring after the
date of this Agreement which have been approved in writing by Lender, which
approval shall be in Lender's sole discretion.
12. ADDITIONAL COVENANTS OF BORROWER. Until payment or
satisfaction in full of all Liabilities and termination of this Agreement,
unless Borrowers or Pledgor obtains Lender's prior written consent waiving or
modifying any of Borrowers' or Pledgor's covenants hereunder in any specific
instance, Borrowers and Pledgor agree as follows:
(a) Each Borrower and Pledgor shall at all times keep
accurate and complete books, records and accounts with respect to all of such
Borrower's and Pledgor's business activities, in accordance with sound
accounting practices and generally accepted accounting
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principles consistently applied, and shall keep such books, records and
accounts, and any copies thereof, only at the addresses indicated for such
purpose on Schedule 1 of the Representations and Warranty Certificate for each
applicable Borrower or Pledgor;
(b) Marcum agrees to deliver to Lender the following
financial information, all of which shall be prepared in accordance with
generally accepted accounting principles consistently applied: (i) no later
than thirty (30) days after each calendar month, copies of internally prepared
consolidated statements of income, certified by the Chief Financial Officer of
Marcum; (ii) no later than 45 days after the end of Marcum's fiscal quarter,
quarterly consolidated financial statements as set forth in its Form 10-QSB for
each quarter, certified by the Chief Financial Officer of Marcum, (iii) no
later than ninety (90) days after the end of Borrowers' fiscal years, annual
consolidated financial statements certified by the Chief Financial Officer of
Marcum; and (iv) such other financial information as Lender shall reasonably
request;
(c) Each Borrower shall promptly advise Lender in writing
of any material adverse change in business, assets or condition, financial or
otherwise, of such Borrower, the occurrence of any Event of Default hereunder
or the occurrence of any event which, if uncured, will become an Event of
Default hereunder after notice or lapse of time (or both) and copies of any
material notices given or received in connection with the Asset Purchase
Agreement (as defined below);
(d) Lender, or any Persons designated by it, shall have
the right, at any time, to call at any Borrower's or Pledgor's places of
business at any reasonable times, and, without hindrance or delay, to inspect
the Collateral and to inspect, audit, check and make extracts from such
Borrower's or Pledgor's books, records, journals, orders, receipts and any
correspondence and other data relating to such Borrower's or Pledgor's
business, the Collateral or any transactions between the parties hereto, and
shall have the right to make such verification concerning such Borrower's or
Pledgor's business as Lender may consider reasonable under the circumstances.
Each Borrower and Pledgor shall furnish to Lender such information relevant to
Lender's rights under this Agreement as Lender shall at any time and from time
to time reasonably request. Each Borrower and Pledgor authorizes Lender to
discuss the affairs, finances and business of such Borrower or Pledgor with any
officers, employees or directors of such Borrower or Pledgor or with any
Affiliate or the officers, employees or directors of any Affiliate, and to
discuss the financial condition of such Borrower or Pledgor with such
Borrower's or Pledgor's independent public accountants. Any such discussions
shall be without liability to Lender or to such Borrower's or Pledgor's
independent public accountants. Borrowers shall pay to Lender all customary
fees and out-of-pocket expenses incurred by Lender in the exercise of its
rights hereunder, and all of such fees and expenses shall constitute Loans
hereunder, payable on demand and, until paid, shall bear interest at the
highest rate then applicable to Loans hereunder;
(e)
(i) Each Borrower and Pledgor shall keep the
Collateral properly housed and shall keep the Collateral
insured for the full insurable value thereof against loss or
damage by fire, theft, explosion, sprinklers, collision (in
the case of motor vehicles) and such other risks as are
customarily insured against by Persons engaged in businesses
similar to that of Borrowers and Pledgor with such
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<PAGE> 20
companies, in such amounts and under policies in such form as
shall be satisfactory to Lender. At the request of Lender,
original (or certified) copies of such policies of insurance
shall be delivered to Lender, together with evidence of
payment of all premiums therefor, and shall contain an
endorsement, in form and substance acceptable to Lender,
showing loss under such insurance policies payable to Lender.
Such endorsement, or an independent instrument furnished to
Lender, shall provide that the insurance company shall give
Lender at least thirty (30) days written notice before any
such policy of insurance is altered or canceled and that no
act, whether willful or negligent, or default of Borrowers or
Pledgor or any other Person shall affect the right of Lender
to recover under such policy of insurance in case of loss or
damage. Borrowers and Pledgor hereby direct all insurers
under such policies of insurance to pay all proceeds payable
thereunder directly to Lender and all proceeds received by
Lender may be applied to the Liabilities in such order and
manner as Lender shall determine. Each Borrower and Pledgor
irrevocably, makes, constitutes and appoints Lender (and all
officers, employees or agents designated by Lender) as
Borrowers' and Pledgor's true and lawful attorney (and
agent-in-fact) for the purpose of making, settling and
adjusting claims under such policies of insurance, endorsing
the name of Borrowers and Pledgor on any check, draft,
instrument or other item of payment for the proceeds of such
policies of insurance and making all determinations and
decisions with respect to such policies of insurance; and
(ii) Each Borrower shall maintain, at its expense,
such public liability and third party property damage
insurance as is customary for Persons engaged in businesses
similar to that of Borrowers with such companies and in such
amounts, with such deductibles and under policies in such form
as shall be satisfactory to Lender and, at the request of
Lender, original (or certified) copies of such policies shall
be delivered to Lender, together with evidence of payment of
all premiums therefor; each such policy shall contain an
endorsement showing Lender as additional insured thereunder
and providing that the insurance company shall give Lender at
least thirty (30) days written notice before any such policy
shall be altered or canceled.
If Borrowers or Pledgor at any time or times hereafter shall
fail to obtain or maintain any of the policies of insurance required above or
to pay any premium in whole or in part relating thereto, then Lender, without
waiving or releasing any obligation or default by Borrowers or Pledgor
hereunder, may (but shall be under no obligation to) obtain and maintain such
policies of insurance and pay such premiums and take such other actions with
respect thereto as Lender deems advisable. All sums disbursed by Lender in
connection with any such actions, including without limitation court costs,
expenses, other charges relating thereto and reasonable attorneys' fees, shall
constitute Loans hereunder and shall be payable on demand by Borrowers to
Lender and, until paid, shall bear interest at the highest rate then applicable
to Loans hereunder;
(f) no Borrower or Pledgor shall use its property, or any
part thereof, in any unlawful business or for any unlawful purpose or use or
maintain any of its property in any
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<PAGE> 21
manner that does or could result in material damage to the environment or a
violation of any applicable environmental laws, rules or regulations; each
Borrower and Pledgor shall keep its property in good condition, repair and
order (ordinary wear and tear excepted); shall permit Lender to examine any of
its property at any time; shall not permit its property, or any part thereof,
to be levied upon under execution, attachment, distraint or other legal
process; shall not grant a security interest in or suffer to exist a lien on
any of its property (except for Permitted Liens); shall not sell, lease,
transfer or otherwise dispose of any of its property except for the sale of
Inventory in the ordinary course of its business and except for sales of
property, which in the aggregate do not exceed $50,000 per year; and shall not
secrete or abandon any of its property, or remove or permit removal of any of
its property from any of the locations listed on Schedules 1 and 2 of the
Representations and Warranties Certificate for the applicable Borrower or
Pledgor or in any written notice to Lender pursuant to paragraph 10(b) hereof,
except for the removal of Inventory sold in the ordinary course of Borrowers'
or Pledgor's business;
(g) all monies and other property obtained by Borrowers
from Lender pursuant to this Agreement will be used solely for business
purposes of Borrowers;
(h) each Borrower and Pledgor shall, at the request of
Lender, indicate on its records concerning the Collateral a notation, in form
satisfactory to Lender, of the security interest of Lender hereunder, and no
Borrower or Pledgor shall maintain duplicates or copies of such records at any
address other than Borrowers' and Pledgor's principal place of business set
forth on the first page of this Agreement;
(i) each Borrower shall file all required tax returns and
pay all of its taxes when due, including without limitation taxes imposed by
federal, state or municipal agencies, and shall cause any liens for taxes to be
promptly released; provided, that a Borrower shall have the right to contest
the payment of such taxes in good faith by appropriate proceedings so long as
(i) the amount so contested is shown on such Borrower's financial statements,
(ii) the contesting of any such payment does not give rise to a lien for taxes,
(iii) such Borrower keeps on deposit with Lender (such deposit to be held
without interest) an amount of money which, in the sole judgment of Lender, is
sufficient to pay such taxes and any interest or penalties that may accrue
thereon, and (iv) if such Borrower fails to prosecute such contest with
reasonable diligence, Lender may apply the money so deposited in payment of
such taxes. If any Borrower fails to pay any such taxes and in the absence of
any such contest by such Borrower, Lender may (but shall be under no obligation
to) advance and pay any sums required to pay any such taxes and/or to secure
the release of any lien therefor, and any sums so advanced by Lender shall
constitute Loans hereunder, shall be payable by Borrowers to Lender on demand,
and, until paid, shall bear interest at the highest rate then applicable to
Loans hereunder;
(j) Borrowers shall not assume, guarantee or endorse, or
otherwise become liable in connection with, the obligations of any Person,
except by endorsement of instruments for deposit or collection or similar
transactions in the ordinary course of business;
(k) except as set forth in Section 13 below and except
for the transactions described on Exhibit F attached hereto, no Borrower shall
enter into any merger or consolidation, or enter into any transaction outside
the ordinary course of such Borrower's business, including
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<PAGE> 22
without limitation any purchase, redemption or retirement of any shares of any
class of its stock, and any issuance of any shares of, or warrants or other
rights to receive or purchase any shares of, any class of its stock;
(l) except as set forth in Section 13 below and except
for the transactions described on Exhibit F attached hereto, no Borrower shall
declare or pay any dividend or other distribution (whether in cash or in kind)
of any kind on any class of its stock;
(m) each Borrower shall (i) keep in full force and effect
any and all plans which may, from time to time, come into existence under
ERISA, unless such Plans can be terminated without liability to such Borrower;
(ii) make contributions to all of the Plans in a timely manner and in a
sufficient amount to comply with the requirements of ERISA; (iii) comply with
all material requirements of ERISA which relate to Plans (including without
limitation the minimum funding standards of Section 302 of ERISA); and (iv)
notify Lender immediately upon receipt by any Borrower of any notice of the
institution of any proceeding or other action which may result in the
termination of any Plans;
(n) except as set forth in Section 13 below and except
for the transactions described on Exhibit F attached hereto, no Borrower shall
invest in, purchase or otherwise acquire, or contract to invest in, purchase or
otherwise acquire, the obligations or stock of any Person, other than (i)
direct obligations of the United States, (ii) certificates of deposits with a
maturity of one year or less, which are issued by a national bank or state
chartered bank and are fully insured by the Federal Deposit Insurance
Corporation (or equivalent thereof) and (iii) commercial paper rated A or
better by Standard and Poor's or Moody's or similar rating service;
(o) no Borrower shall amend its organizational documents
or change its fiscal year, except for the "Reverse Stock Split Proposal" as set
forth in Marcum's proxy statement relating to the 1997 annual meeting of
stockholders, and except for a substantially similar Reverse Stock Split
Proposal if adopted and approved by the stockholders at Marcum's 1998 annual
meeting of stockholders;
(p) Borrowers shall reimburse Lender for all costs and
expenses, including without limitation legal expenses and reasonable attorneys'
fees up to a maximum of $20,000 plus expenses, reasonably incurred by Lender in
connection with documentation and consummation of this transaction and any
other transactions between Borrowers and Lender, including without limitation
Uniform Commercial Code and other public record searches, lien filings, Federal
Express or similar express or messenger delivery, appraisal costs, surveys,
title insurance and environmental audit or review costs, and in seeking to
administer, collect, protect or enforce any rights in or to the Collateral or
incurred by Lender in seeking to collect any Liabilities and to administer,
participate, assign and/or enforce any of Lender's rights under this Agreement
and the Other Agreements. All such costs, expenses and charges shall
constitute Loans hereunder, shall be payable by Borrowers to Lender on demand,
and, until paid, shall bear interest at the highest rate then applicable to
Loans hereunder;
(q) Marcum, on a consolidated basis, shall comply at all
times with the following financial covenants:
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<PAGE> 23
(i) Marcum, on a consolidated basis, shall not make or
incur any capital expenditures (as such term is defined in accordance
with GAAP), exceeding $750,000 in the aggregate for any fiscal year.
(ii) Marcum's consolidated combined minimum tangible net
worth (as such term is defined in accordance with GAAP and including
any and all subordinate debt which has been approved by Lender in this
Agreement or otherwise in its sole discretion) shall not be less than
$7,400,000 at any time.
(iii) The ratio of Marcum's consolidated combined total
liabilities to tangible net worth (as such terms are defined in
accordance with GAAP) shall not exceed 2.00 to 1.0 at any time.
(iv) Marcum, on a consolidated basis, shall maintain net
profit before taxes and before extraordinary gains (as such terms are
defined in accordance with GAAP) determined on a combined basis of at
least $400,000 for each fiscal year.
(v) The ratio of Marcum's consolidated earnings before
interest, taxes, depreciation, amortization and extraordinary gains to
interest expense (as such terms are defined in accordance with GAAP)
and determined on a combined basis shall not be less than 2.0 to 1.0
for each fiscal year.
13. ACQUISITION OF EAGLE RESEARCH CORPORATION.
(a) Lender acknowledges that Metretek will be acquiring
from Eagle Research Corporation ("Eagle") certain inventory, equipment,
licenses and related products (the "Eagle Assets") all as described in the Form
10-KSB and the Asset Purchase Agreement, by and among Eagle, American Meter
Company, Metretek and Marcum dated March 23, 1998 (the "Asset Purchase
Agreement"). Marcum will issue 1,758,242 shares of common stock and a
$1,200,000 convertible subordinated promissory note ("Subordinated Note") and
pay $1,300,000 cash to Eagle as consideration for the purchase of the Eagle
Assets.
(b) Lender consents to the acquisition of the Eagle
Assets and the issuance of the stock and the Subordinated Note (and the
conversion thereof) on the condition that:
(i) The acquisition takes place substantially in the
manner described in the Form 10-KSB and the Asset Purchase Agreement
and the acquisition price does not exceed $5,000,000.
(ii) Immediately upon acquiring the Eagle Assets, Metretek
pledges all such assets to Lender and executes all documents required
to give Lender a first priority lien on all such assets.
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<PAGE> 24
(iii) Metretek has granted Eagle a right of first refusal
to acquire the stock and/or assets of Metretek as set forth more fully
in Section 10.7 of the Asset Purchase Agreement (the "Right of First
Refusal").
(iv) All of the Eagle Assets shall be acquired free and
clear of all liens and encumbrances other than the Subordinated Note
(which is unsecured) and the Right of First Refusal.
(v) The holders of the Subordinate Indebtedness shall
execute a subordination agreement acceptable to Lender in form and
substance.
(vi) Borrower shall take all such other actions and
execute all such other documents as may be reasonably required by
Lender in connection with the acquisition of the Eagle Assets.
14. DEFAULT. The occurrence of any one or more of the following
events shall constitute an "EVENT OF DEFAULT" by Borrowers hereunder:
(a) the failure of any Obligor to pay when due, declared
due, or demanded by Lender, any of the Liabilities;
(b) the failure of any Obligor or Pledgor to perform,
keep or observe any of the covenants, conditions, promises, agreements or
obligations of such obligor under this Agreement or any of the Other
Agreements, and such failure shall not be cured within ten (10) Business Days;
(c) the failure of any Obligor to perform, keep or
observe any of the covenants, conditions, promises, agreements or obligations
of such Obligor under any other agreement with any Person if such failure may
have a material adverse effect on such Obligor's business property, assets,
operations or condition, financial or otherwise and such failure is not cured
within the applicable cure period, if any, granted to Obligor;
(d) the making or furnishing by any Obligor or Pledgor to
Lender of any representation, warranty, certificate, schedule, report or other
communication within or in connection with this Agreement or the or the Other
Agreements or in connection with any other agreement between such Obligor or
Pledgor and Lender, which is untrue or misleading in any material respect;
(e) the making or any attempt to make any levy, seizure
or attachment of any of any Borrower's or Pledgor's property that is not
consented to by Lender;
(f) the commencement of any proceedings in bankruptcy by
or against any Obligor or Pledgor or for the liquidation or reorganization of
any Obligor or Pledgor, or alleging that such Obligor or Pledgor is insolvent
or unable to pay its debts as they mature, or for the readjustment or
arrangement of any Obligor's or Pledgor's debts, whether under the United
States Bankruptcy Code or under any other law, whether state or federal, now or
hereafter existing for
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<PAGE> 25
the relief of debtors, or the commencement of any analogous statutory or
non-statutory proceedings involving any Obligor or Pledgor; provided, however,
that if such commencement of proceedings against such Obligor or Pledgor is
involuntary and such Obligor or Pledgor is contesting such proceedings in good
faith, such action shall not constitute an Event of Default unless such
proceedings are not dismissed within sixty (60) days after the commencement of
such proceedings;
(g) the appointment of a receiver or trustee for any
Obligor or Pledgor, for any of the Collateral or for any substantial part of
any Obligor's or Pledgor's assets or the institution of any proceedings for the
dissolution, or the full or partial liquidation, of any Obligor or Pledgor
which is a corporation or a partnership; provided, however, that if such
appointment or commencement of proceedings against such Obligor or Pledgor is
involuntary and such Obligor or Pledgor is contesting such proceedings in good
faith, such action shall not constitute an Event of Default unless such
appointment is not revoked or such proceedings are not dismissed within thirty
(30) days after the commencement of such proceedings;
(h) the entry of any judgment or order against any
Obligor in an amount in excess of $25,000 which remains unsatisfied or
undischarged and in effect for thirty (30) days after such entry without a stay
of enforcement or execution, unless Obligor has provided such security in
connection with such judgment as Lender may reasonably require;
(i) the dissolution of any Obligor which is a partnership
or corporation;
(j) the occurrence of a change of control, direct or
indirect, of any Borrower;
(k) the occurrence of an event of default under, or the
revocation or termination of, any agreement, instrument or document executed
and delivered by any Person to Lender pursuant to which such Person has
guaranteed to Lender the payment of all or any of the Liabilities or has
granted Lender a security interest in or lien upon some or all of such Person's
real and/or personal property to secure the payment of all or any of the
Liabilities; or
(l) the institution in any court of a criminal felony
proceeding against any Obligor or the principal officer of any Obligor relating
to such officer's activities in connection with Obligor, or the indictment of
any Obligor or the principal officer of any Obligor relating to such officer's
activities in connection with Obligor, for any felony.
15. REMEDIES UPON AN EVENT OF DEFAULT.
(a) Without limiting Lender's right to demand payment of
the Liabilities at any time, upon the occurrence of an Event of Default
described in paragraph 14(f) hereof, all of Borrowers' Liabilities shall
immediately and automatically become due and payable, without notice of any
kind and upon the occurrence of any other Event of Default, all Liabilities
may, at the option of Lender, and without demand, notice or legal process of
any kind, be declared, and immediately shall become, due and payable.
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(b) Upon the occurrence of an Event of Default, Lender
may exercise from time to time any rights and remedies available to it under
the Uniform Commercial Code and any other applicable law in addition to, and
not in lieu of, any rights and remedies expressly granted in this Agreement or
in any of the Other Agreements and all of Lender's rights and remedies shall be
cumulative and non-exclusive to the extent permitted by law. In particular,
but not by way of limitation of the foregoing, Lender may, without notice,
demand or legal process of any kind, take possession of any or all of the
Collateral (in addition to Collateral of which it already has possession),
wherever it may be found, and for that purpose may pursue the same wherever it
may be found, and may enter into any of Borrowers' or Pledgor's premises where
any of the Collateral may be, and search for, take possession of, remove, keep
and store any of the Collateral until the same shall be sold or otherwise
disposed of, and Lender shall have the right to store the same at any of
Borrowers' or Pledgor's premises without cost to Lender. At Lender's request,
Borrowers shall, at Borrowers' expense, assemble the Collateral and make it
available to Lender at one or more places to be designated by Lender and
reasonably convenient to Lender and Borrowers. Borrowers recognize that if
Borrowers fail to perform, observe or discharge any of its Liabilities under
this Agreement or the Other Agreements, no remedy at law will provide adequate
relief to Lender, and agrees that Lender shall be entitled to temporary and
permanent injunctive relief in any such case without the necessity of proving
actual damages. Any notification of intended disposition of any of the
Collateral required by law will be deemed reasonably and properly given if
given at least ten (10) calendar days before such disposition. Any proceeds of
any disposition by Lender of any of the Collateral may be applied by Lender to
the payment of expenses in connection with the Collateral, including, without
limitation, legal expenses and reasonable attorneys' fees, and any balance of
such proceeds may be applied by Lender toward the payment of such of the
Liabilities, and in such order of application, as Lender may from time to time
elect, including, without limitation, to provide cash collateral to secure the
Letters of Credit.
16. INDEMNIFICATION. Each Borrower agrees to defend (with counsel
satisfactory to Lender), protect, indemnify and hold harmless Lender, each
Affiliate of Lender, and each of their respective officers, directors,
employees, attorneys and agents (each an "INDEMNIFIED PARTY") from and against
any and all liabilities, obligations, losses, damages, penalties, actions,
judgments, suits, claims, costs, expenses and disbursements of any judgments,
suits, claims, costs, expenses and disbursements of any kind or nature
(including, without limitation, the disbursements and the reasonable fees of
counsel for each Indemnified Party in connection with any investigative,
administrative or judicial proceeding, whether or not the Indemnified Party
shall be designated a party thereto), which may be imposed on, incurred by, or
asserted against, any Indemnified Party (whether direct, indirect or
consequential and whether based on any federal, state or local laws or
regulations, including, without limitation, securities, environmental and
commercial laws and regulations, under common law or in equity, or based on
contract or otherwise) in any manner relating to or arising out of this
Agreement or any Other Agreement, or any act, event or transaction related or
attendant thereto, the making and the management of the Loans or any Letters of
Credit or the use or intended use of the proceeds of the Loans or any Letters
of Credit; provided, however, that Borrowers shall not have any obligation
hereunder to any Indemnified Party with respect to matters caused by or
resulting from the willful misconduct or gross negligence or breach of this
Agreement by such Indemnified Party. To the extent that the undertaking to
indemnify set forth in the preceding sentence may be
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<PAGE> 27
unenforceable because it is violative of any law or public policy, Borrowers
shall satisfy such undertaking to the maximum extent permitted by applicable
law. Any liability, obligation, loss, damage, penalty, cost or expense covered
by this indemnity shall be paid to each Indemnified Party on demand, and,
failing prompt payment, shall, together with interest thereon at the highest
rate then applicable to Loans hereunder from the date incurred by each
Indemnified Party until paid by Borrowers, be added to the Liabilities of
Borrowers and be secured by the Collateral. The provisions of this paragraph
16 shall survive the satisfaction and payment of the other Liabilities and the
termination of this Agreement.
17. NOTICE. All written notices and other written communications
with respect to this Agreement shall be sent by ordinary, certified or
overnight mail, by telecopy, delivered in person or sent by Federal Express or
other nationally recognized overnight courier service, and in the case of
Lender shall be sent to it at the address set forth on the first page of this
Agreement, Attention: Raymond L. Yager, and in the case of Borrowers shall be
sent to them at its principal place of business set forth on the first page of
this Agreement, Attention: A. Bradley Gabbard, and in the case of each Pledgor
shall be sent to it at its principal place of business set forth on the first
page of this Agreement, Attention A. Bradley Gabbard.
18. CHOICE OF GOVERNING LAW; CONSTRUCTION; FORUM SELECTION. This
Agreement and the Other Agreements are submitted by Borrowers and Pledgor to
Lender for Lender's acceptance or rejection at Lender's principal place of
business as an offer by Borrowers to borrow monies from Lender now and from
time to time hereafter, and as an offer by Pledgor to pledge Collateral to
Lender as security for the Loans, and shall not be binding upon Lender or
become effective until accepted by Lender, in writing, at said place of
business. If so accepted by Lender, this Agreement and the Other Agreements
shall be deemed to have been made at said place of business. THIS AGREEMENT
AND THE OTHER AGREEMENTS SHALL BE GOVERNED AND CONTROLLED BY THE INTERNAL LAWS
OF THE STATE OF COLORADO AS TO INTERPRETATION, ENFORCEMENT, VALIDITY,
CONSTRUCTION, EFFECT, AND IN ALL OTHER RESPECTS, INCLUDING, WITHOUT LIMITATION,
THE LEGALITY OF THE INTEREST RATE AND OTHER CHARGES, BUT EXCLUDING PERFECTION
OF THE SECURITY INTERESTS IN THE COLLATERAL, WHICH SHALL BE GOVERNED AND
CONTROLLED BY THE LAWS OF THE RELEVANT JURISDICTION. If any provision of this
Agreement shall be held to be prohibited by or invalid under applicable law,
such provision shall be ineffective only to the extent of such prohibition or
invalidity, without invalidating the remainder of such provision or remaining
provisions of this Agreement.
To induce Lender to accept this Agreement, Borrowers and
Pledgor irrevocably agree that, subject to Lender's sole and absolute election,
ALL ACTIONS OR PROCEEDINGS IN ANY WAY, MANNER OR RESPECT ARISING OUT OF OR FROM
OR RELATED TO THIS AGREEMENT, THE OTHER AGREEMENTS OR THE COLLATERAL SHALL BE
LITIGATED IN COURTS HAVING SITUS WITHIN THE CITY OF DENVER, STATE OF COLORADO.
BORROWERS AND PLEDGOR HEREBY CONSENT AND SUBMIT TO THE JURISDICTION OF ANY
LOCAL, STATE OR FEDERAL COURTS LOCATED WITHIN SAID CITY AND STATE.
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<PAGE> 28
BORROWERS AND PLEDGOR HEREBY WAIVE ANY RIGHT THEY MAY HAVE TO TRANSFER OR
CHANGE THE VENUE OF ANY LITIGATION BROUGHT AGAINST BORROWERS OR PLEDGOR BY
LENDER IN ACCORDANCE WITH THIS PARAGRAPH.
19. PARTICIPATION; ASSIGNMENT. Lender shall have the right to
assign all or any of its rights under this Agreement and the Other Agreements,
and/or to offer participation interests therein, to any Person, without the
consent of Borrowers. In such event, Borrowers shall execute such agreements,
instruments and documents as Lender shall request in connection therewith,
including, without limitation, agreements, instruments and documents in favor
of each assignee and participant.
20. MODIFICATION AND BENEFIT OF AGREEMENT. This Agreement and the
Other Agreements may not be modified, altered or amended except by an agreement
in writing signed by Borrowers, Pledgor and Lender. Borrowers or Pledgor may
not sell, assign or transfer this Agreement, or the Other Agreement or any
portion thereof, including, without limitation, Borrowers' and Pledgor's
rights, titles, interest, remedies, powers or duties thereunder.
21. HEADINGS OF SUBDIVISIONS. The headings of subdivisions in
this Agreement are for convenience of reference only, and shall not govern the
interpretation of any of the provisions of this Agreement.
22. POWER OF ATTORNEY. Each Borrower and Pledgor acknowledges and
agrees that its appointment of Lender as its attorney and agent-in-fact for the
purposes specified in this Agreement is an appointment coupled with an interest
and shall be irrevocable until all of the Liabilities are paid in full and this
Agreement is terminated.
23. WAIVER OF JURY TRIAL; OTHER WAIVERS.
(a) EACH BORROWER AND PLEDGOR HEREBY WAIVES ALL RIGHTS TO
TRIAL BY JURY IN ANY ACTION OR PROCEEDING WHICH PERTAINS DIRECTLY OR INDIRECTLY
TO THIS AGREEMENT, ANY OF THE OTHER AGREEMENTS, THE LIABILITIES, THE
COLLATERAL, ANY ALLEGED TORTIOUS CONDUCT BY BORROWERS, PLEDGOR OR LENDER OR
WHICH, IN ANY WAY, DIRECTLY OR INDIRECTLY, ARISES OUT OF OR RELATES TO THE
RELATIONSHIP BETWEEN BORROWERS, PLEDGOR AND LENDER. IN NO EVENT SHALL LENDER
BE LIABLE FOR LOST PROFITS OR OTHER SPECIAL OR CONSEQUENTIAL DAMAGES.
(b) Each Borrower and Pledgor hereby waives demand,
presentment, protest and notice of nonpayment, and further waives the benefit
of all valuation, appraisal and exemption laws.
(c) EACH BORROWER AND PLEDGOR HEREBY WAIVES ALL RIGHTS TO
NOTICE AND HEARING OF ANY KIND PRIOR TO THE EXERCISE BY LENDER OF ITS RIGHTS TO
REPOSSESS THE COLLATERAL OF BORROWERS
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<PAGE> 29
AND PLEDGOR WITHOUT JUDICIAL PROCESS OR TO REPLEVY, ATTACH OR LEVY UPON SUCH
COLLATERAL WITHOUT PRIOR NOTICE OR HEARING.
(d) Lender's failure, at any time or times hereafter, to
require strict performance by Borrowers or Pledgor of any provision of this
Agreement or any of the Other Agreements shall not waive, affect or diminish
any right of Lender thereafter to demand strict compliance and performance
therewith. Any suspension or waiver by Lender of an Event of Default under
this Agreement or any default under any of the Other Agreements shall not
suspend, waive or affect any other Event of Default under this Agreement or any
other default under any of the Other Agreements, whether the same is prior to
subsequent thereto and whether of the same or of a different kind or character.
No delay on the part of Lender in the exercise of any right or remedy under
this Agreement or any Other Agreement shall preclude other or further exercise
thereof or the exercise of any right or remedy. None of the undertakings,
agreements, warranties, covenants and representations of Borrowers or Pledgor
contained in this Agreement or any of the Other Agreements and no Event of
Default under this Agreement or default under any of the Other Agreements shall
be deemed to have been suspended or waived by Lender unless such suspension or
waiver is in writing, signed by a duly authorized officer of Lender and
directed to Borrowers specifying such suspension or waiver.
24. JOINT AND SEVERAL.
(a) Each Borrower hereby agrees that all references to
"Borrower" or "Borrowers" in this Agreement or any of the Other Agreements
shall jointly and severally refer to each Borrower. Without limiting the
generality of the foregoing, Marcum acknowledges and agrees that Marcum has
joint, several and unlimited liability for all obligations of Borrowers
hereunder, including without limitation all Metretek Loans and Southern Flow
Loans and all other Liabilities.
(b) Without limiting the generality of the foregoing,
each Borrower acknowledges and agrees that Lender has no obligation to commence
any action against the other Borrowers, attempt to collect any amounts from the
other Borrowers or otherwise take any action against the other Borrowers in
order to or as a condition precedent to collect from such Borrower. Lender may
proceed directly against any Borrower for the entire amount of the Obligations
without bringing any action against the other Borrowers. The obligations of
one Borrower hereunder shall not be reduced, released, or diminished by any
release of either of the other Borrowers or by the uncollectibility of any
obligations of the other Borrowers or by any actions or inactions of any nature
whatsoever of Lender or any other party with respect to the other Borrowers.
(c) Except as otherwise expressly provided herein, all
references in this Agreement and the Other Agreements to Borrower shall be
deemed to refer to each Borrower individually and to each Borrower
collectively. Without limiting the generality of the foregoing, all references
to Borrower in the representations and warranties, covenants and defaults
section of this Agreement shall refer to each Borrower individually and to all
Borrowers collectively.
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<PAGE> 30
IN WITNESS WHEREOF, the parties hereto have duly executed this
Agreement as of the 14th day of April, 1998.
LENDER:
NATIONAL BANK OF CANADA, a Canadian
chartered bank
By /s/ RAYMOND L. YAGER
------------------------------------------
Raymond L. Yager
Vice President
By /s/ ANDREW M. CONNEEN
------------------------------------------
Andrew M. Conneen
Vice President
BORROWERS:
MARCUM NATURAL GAS SERVICES, INC.,
a Delaware corporation
By: /s/ W. PHILLIP MARCUM
-----------------------------------------
W. Phillip Marcum
President and Chief Executive Officer
METRETEK, INCORPORATED, a Florida corporation
By: /s/ W. PHILLIP MARCUM
-----------------------------------------
W. Phillip Marcum
Chairman and Chief Executive Officer
SOUTHERN FLOW COMPANIES, INC.,
a Delaware corporation
By: /s/ W. PHILLIP MARCUM
-----------------------------------------
W. Phillip Marcum
Chairman and Chief Executive Officer
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<PAGE> 31
PLEDGOR:
SIGMA VI, INC., a Florida corporation
By: /s/ W. PHILLIP MARCUM
-----------------------------------------
W. Phillip Marcum
Vice President
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<PAGE> 32
LIST OF EXHIBITS
A - Representations and Warranty Certificate-Marcum Natural Gas Services,
Inc.
B - Representations and Warranty Certificate-Southern Flow Companies, Inc.
C - Representations and Warranty Certificate-Metretek, Incorporated
D - Representations and Warranty Certificate-Sigma VI, Inc.
E - Omitted
F - Permitted Securities Issuances
<PAGE> 1
EXHIBIT 10.2
THIS WARRANT AND ANY SHARES ISSUABLE UPON THE EXERCISE OF THIS WARRANT HAVE NOT
BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), NOR
UNDER ANY STATE SECURITIES LAW AND SUCH SECURITIES MAY NOT BE PLEDGED, SOLD,
ASSIGNED, HYPOTHECATED, OR OTHERWISE TRANSFERRED UNTIL (1) A REGISTRATION
STATEMENT WITH RESPECT THERETO IS EFFECTIVE UNDER THE ACT AND ANY APPLICABLE
STATE SECURITIES LAW OR (2) THE COMPANY RECEIVES AN OPINION OF COUNSEL TO THE
COMPANY OR COUNSEL TO THE HOLDER OF SUCH SECURITIES, WHICH COUNSEL AND OPINION
ARE REASONABLY SATISFACTORY TO THE COMPANY, THAT SUCH SECURITIES MAY BE
PLEDGED, SOLD, ASSIGNED, HYPOTHECATED, OR TRANSFERRED WITHOUT AN EFFECTIVE
REGISTRATION STATEMENT UNDER THE ACT AND APPLICABLE STATE SECURITIES LAWS.
THE TRANSFER OF THIS WARRANT AND THE SHARES ISSUABLE UPON THE EXERCISE HEREOF
IS RESTRICTED AS DESCRIBED HEREIN.
MARCUM NATURAL GAS SERVICES, INC.
WARRANT FOR THE PURCHASE OF 200,000 SHARES OF COMMON STOCK,
$.01 PAR VALUE PER SHARE
No. 1
THIS CERTIFIES that, for good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, National Securities
Corporation (the "Holder") is entitled to subscribe for and purchase from
Marcum Natural Gas Services, Inc., a Delaware corporation (the "Company"), upon
the terms and conditions set forth herein, at any time or from time to time,
during the period commencing on the date hereof (March 13, 1998) (the
"Effective Date") and expiring at 5:00 p.m. New York time on March 13, 2003 or
earlier as described below in Section 1(d) (the "Exercise Period"), 200,000
shares of the Company's common stock, par value $.01 per share (the "Common
Stock"), at a price (the "Exercise Price") per share of Common Stock as
described below. As used herein, the term "this Warrant" shall mean and
include this Warrant and any Warrant or Warrants hereafter issued as
<PAGE> 2
a consequence of the exercise or transfer of this Warrant in whole or in part.
As used herein, the term "Holder" shall include any transferee to whom this
Warrant has been transferred in accordance with the terms hereof.
The number of shares of Common Stock issuable upon exercise of
the Warrants (the "Warrant Shares") and the Exercise Price may be adjusted from
time to time as hereinafter set forth.
1. (a) Subject to the provisions of Section 2,
this Warrant may be exercised during the Exercise Period, as to all or any
portion of the Warrant Shares which have vested pursuant to the schedule set
forth below in Section 1(b), by transmission by telecopy of the Election to
Exercise, followed within three (3) business days by the surrender of this
Warrant (with the Election to Exercise attached hereto duly executed) to the
Company at its office at 1675 Broadway, Suite 2150, Denver, Colorado 80202, or
at such other place as is designated in writing by the Company, together with a
certified or bank cashier's check payable to the order of the Company in an
amount equal to the product of the Exercise Price and the number of Warrant
Shares for which this Warrant is being exercised (the "Aggregate Exercise
Price"). Alternatively, for as long as the Common Stock is publicly traded on
a national stock exchange or listed in a national stock quotation system, this
Warrant may be exercised in the manner set forth in the preceding sentence by
surrendering this Warrant in exchange for the number of Warrant Shares equal to
the product of (x) the number of shares of Common Stock as to which this
Warrant is being exercised, multiplied by (y) a fraction, the numerator of
which is the Market Price (as defined below) of the shares of Common Stock
minus the Exercise Price of the shares of Common Stock and the denominator of
which is the Market Price per share of Common Stock. Solely for the purposes
of this Section 1, Market Price shall be calculated as the average of the
Market Price for each of the twenty (20) trading days immediately preceding the
date on which the form of election attached hereto is deemed to have been sent
to the Company pursuant to this Section 1 (the "Notice Date"). As used herein,
the phrase "Market Price" at any date shall be deemed to be the last reported
sale price, or, in case no such reported sale takes place on such day, the
average of the last reported sale prices for the last three (3) trading days,
in either case as officially reported by the principal securities exchange on
which the Common Stock is listed or admitted to trading, or, if the Common
Stock is not listed or admitted to trading on any national securities exchange,
the average closing sale price as furnished by the NASD through The Nasdaq
Stock Market, Inc. ("Nasdaq") or similar organization if Nasdaq is no longer
reporting such information, or if the Common Stock is not quoted on Nasdaq, as
determined in good faith by resolution of the Board of Directors of the
Company, based on the best information available to it.
(b) The warrants shall vest in four 50,000
warrant tranches (each, a "Tranche"). The first Tranche shall vest as of the
Effective Date (March 13, 1998) and shall
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<PAGE> 3
become exercisable six months from the Effective Date (September 13, 1998).
The Exercise Price for the first Tranche shall be $1.107 per share.
(c) The remaining three Tranches shall vest
based upon the closing price of the Common Stock, as reported on Nasdaq,
achieving or exceeding the stock price trigger (the "Trigger") for each of the
remaining Tranches for at least twenty (20) consecutive trading days (the last
day of which shall be the vesting date for such Tranche) occurring on or after
the Effective Date. Each of the remaining three Tranches shall become
exercisable six (6) months following the date in which its Trigger is achieved.
Two or more Tranches may vest on the same date. For each of the remaining
three Tranches, the Exercise Price shall equal the Trigger. The number of
Warrants vesting and the Exercise Price and Triggers for each of the remaining
three Tranches shall be as follows:
<TABLE>
<CAPTION>
Number of Warrants Vested Exercise Price and Trigger
------------------------- --------------------------
<S> <C>
50,000 $1.50 per share
50,000 $2.00 per share
50,000 $2.50 per share
</TABLE>
Any Warrants which have not vested as of the earlier of (i) March 13, 2000 and
(ii) the date that the Financial Advisory and Consulting Agreement, dated March
13, 1998, between the Company and the Holder shall be terminated, shall expire
without vesting and shall be unexercisable.
(d) The Warrants shall expire and become
unexercisable on the earlier of the following: (i) March 13, 2003; (ii) six (6)
months following the date upon which the employment with the Holder of both
Gregg D. Pollack ("Pollack") and Brian Friedman ("Freidman") is terminated
(the "Employment Expiration"); or (iii) six (6) months following the date upon
which both Pollack and Friedman discontinue serving as the Holder's primary
contacts with the Company ("Change of Contact"). The Company, in its sole
discretion, may agree to waive the Employment Expiration or to substitute one
or more of the contacts applicable to the Change of Contacts.
2. Upon each exercise of the Holder's rights to purchase
Warrant Shares, the Holder shall be deemed to be the holder of record of the
Warrant Shares issuable upon such exercise, notwithstanding that the transfer
books of the Company shall then be closed or certificates representing such
Warrant Shares shall not then have been actually delivered to the Holder.
Within five (5) business days after each such exercise of this Warrant and
receipt by the Company of this Warrant, the Election to Exercise and the
Aggregate Exercise Price, the
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<PAGE> 4
Company shall issue and deliver to the Holder a certificate or certificates for
the Warrant Shares issuable upon such exercise, registered in the name of the
Holder or its designee. If this Warrant should be exercised in part only, the
Company shall, upon surrender of this Warrant for cancellation, execute and
deliver a new Warrant evidencing the right of the Holder to purchase the
balance of the Warrant Shares (or portions thereof) subject to purchase
hereunder.
3. Any Warrants issued upon the transfer or exercise in
part of this Warrant shall be numbered and shall be registered in a warrant
register (the "Warrant Register") as they are issued. The Company shall be
entitled to treat the registered holder of any Warrant on the Warrant Register
as the owner in fact thereof for all purposes and shall not be bound to
recognize any equitable or other claim to or interest in such Warrant on the
part of any other person, and shall not be liable for any registration of
transfer of Warrants which are registered or to be registered in the name of a
fiduciary or the nominee of a fiduciary unless made with the actual knowledge
of the general counsel of the Company that a fiduciary or nominee is committing
a breach of trust in requesting such registration of transfer. In all cases of
transfer by an attorney, executor, administrator, guardian, or other legal
representative, duly authenticated evidence of his or its authority shall be
produced. Upon any registration of transfer, the Company shall deliver a new
Warrant or Warrants to the person entitled thereto. This Warrant may be
exchanged, at the option of the Holder thereof, for another Warrant, or other
Warrants of different denominations, of like tenor and representing in the
aggregate the right to purchase a like number of Warrant Shares (or portions
thereof), upon surrender to the Company or its duly authorized agent.
Notwithstanding anything contained herein to the contrary, the Company shall
have no obligation to cause Warrants to be transferred on its books to any
person if, in the opinion of counsel to the Company, such transfer does not
comply with the provisions of the Act and any applicable state securities laws
and the rules and regulations thereunder.
4. The Company shall at all times reserve and keep
available out of its authorized and unissued Common Stock, solely for the
purpose of providing for the exercise of the rights to purchase all Warrant
Shares granted pursuant to the Warrants, such number of shares of Common Stock
as shall, from time to time, be sufficient therefor. The Company covenants
that all shares of Common Stock issuable upon exercise of this Warrant, upon
receipt by the Company of the required documentation, properly signed, and the
full Exercise Price therefor, shall be validly issued, fully paid,
nonassessable, and free of preemptive rights.
5. The Exercise Price in effect at any time and the
number and kind of securities purchasable upon the exercise of this Warrant
shall be subject to adjustment from time to time upon the happening of certain
events as follows:
(a) In case the Company shall (i) declare a
dividend or make a distribution on its outstanding shares of Common Stock, in
each case, in shares of Common Stock, (ii) subdivide or reclassify its
outstanding shares of Common Stock into a greater number
-4-
<PAGE> 5
of shares, or (iii) combine or reclassify its outstanding shares of Common
Stock into a smaller number of shares, the Exercise Price in effect at the time
of the record date for such dividend or distribution or of the effective date
of such subdivision, combination or reclassification shall be proportionately
adjusted so that after such event the Exercise Price shall equal the price
determined by multiplying the Exercise Price by a fraction, the denominator of
which shall be the number of shares of Common Stock outstanding after giving
effect to such action, and the numerator of which shall be the number of shares
of Common Stock outstanding immediately prior to such action. Such adjustment
shall be made successively whenever any event listed above shall occur.
(b) Upon each adjustment of the Exercise Price
pursuant to the provisions of this Section 5, the number of Warrant Shares
issuable upon the exercise at the adjusted Exercise Price of each Warrant shall
be adjusted so that after the event necessitating the adjustment to the
Exercise Price, the number of Warrant Shares into which this Warrant shall be
exercisable shall be equal to the nearest number of whole shares of Common
Stock determined by multiplying a number equal to the Exercise Price in effect
immediately prior to such adjustment by the number of Warrant Shares issuable
upon exercise of this Warrant immediately prior to such adjustment and dividing
the product so obtained by the adjusted Exercise Price.
(c) For the purpose of this Warrant, the term
"Common Stock" shall mean (i) the class of stock designated as Common Stock in
the Certificate of Incorporation of the Company as amended as of the date
hereof, or (ii) any other class of stock resulting from successive changes or
reclassifications of such Common Stock consisting solely of changes in par
value, or from par value to no par value, or from no par value to par value.
(d) In case of any consolidation of the Company
with, or merger of the Company into, another corporation (other than a
consolidation or merger which does not result in any reclassification or change
of the outstanding Common Stock), the corporation formed by such consolidation
or merger shall execute and deliver to the Holder a supplemental warrant
agreement providing that the Holder of this Warrant shall have the right
thereafter (until the expiration of such Warrant) to receive, upon exercise of
such Warrant, the kind and amount of shares of stock and other securities and
property receivable upon such consolidation or merger by a holder of the number
of shares of Common Stock for which such Warrant might have been exercised
immediately prior to such consolidation, merger, sale or transfer. Such
supplemental warrant agreement shall provide for adjustments which shall be
identical to the adjustments provided in this Section 5. The above provision
of this subsection shall similarly apply to successive consolidations or
mergers.
(e) No adjustment in the Exercise Price or the
number of Warrant Shares shall be required if such adjustment is less than
one-tenth of one percent (0.1%) of such Exercise Price or number of Warrant
Shares; provided, however, that any adjustments which
-5-
<PAGE> 6
by reason of this Section 5(e) are not required to be made shall be carried
forward and taken into account in any subsequent adjustment. All calculations
under this Section 5 shall be made to the nearest one-tenth of one cent
($0.001) and one-thousandth of one share (.001).
(f) In any case in which this Section 5 shall
require that an adjustment in the number of Warrant Shares be made effective as
of a record date for a specified event, the Company may elect to defer, until
the occurrence of such event, issuing to the Holder, if the Holder exercised
this Warrant after the record date, the Warrant Shares, if any, issuable upon
such exercise over and above the Warrant Shares, if any, issuable upon such
exercise prior to such adjustment; provided, however, that the Company shall
deliver to the Holder a due bill or other appropriate instrument evidencing the
Holder's right to receive such additional Warrant Shares upon the occurrence
of the event requiring such adjustment.
(g) Whenever there shall be an adjustment as
provided in this Section 5, the Company shall promptly cause written notice
thereof to be sent by certified mail, postage prepaid, to the Holder, at its
address as it shall appear in the Warrant Register, which notice shall be
accompanied by an officer's certificate setting forth the number of Warrant
Shares issuable upon the exercise of this Warrant if such Warrant were
exercisable on the date of such notice, and setting forth a brief statement of
the facts requiring such adjustment and the computation thereof, which
officer's certificate shall be conclusive evidence of the correctness of any
such adjustment absent manifest error.
6. In case at any time the Company shall propose
(a) to pay any dividend or make any distribution
on shares of Common Stock in shares of Common Stock or make any other
distribution in excess of five percent (5%) of the Market Price of the Common
Stock (other than regularly scheduled cash dividends which are not in a greater
amount per share than the most recent such cash dividend) to all holders of
Common Stock; or
(b) to issue any rights, warrants, or other
securities to all holders of Common Stock entitling them to purchase any
additional shares of Common Stock or any other rights, warrants, or other
securities; or
(c) to effect any reclassification or change of
outstanding shares of Common Stock, or any consolidation or merger, described
in Section 7; or
(d) to effect any liquidation, dissolution, or
winding-up of the Company,
then, and in any one or more of such cases, the Company shall give written
notice thereof, by registered mail, postage prepaid, to the Holder at the
Holder's address as it shall appear in the
-6-
<PAGE> 7
Warrant Register, mailed at least 15 days prior to (i) the date as of which the
holders of record of shares of Common Stock to be entitled to receive any such
dividend, distribution, rights, warrants, or other securities are to be
determined, or (ii) the date on which any such reclassification, change of
outstanding shares of Common Stock, consolidation, merger, liquidation,
dissolution, or winding-up is expected to become effective, and the date as of
which it is expected that holders of record of shares of Common Stock shall be
entitled to exchange their shares for securities or other property, if any,
deliverable upon such reclassification, change of outstanding shares,
consolidation, merger, sale, lease, conveyance of property, liquidation,
dissolution, or winding-up.
7. The issuance of any shares or other securities upon
the exercise of this Warrant, and the delivery of certificates or other
instruments representing such shares or other securities, shall be made without
charge to the Holder for any tax or other charge in respect of such issuance,
other than applicable transfer taxes. The Company shall not, however, be
required to pay any tax which may be payable in respect of any transfer
involved in the issue and delivery of any certificate in a name other than that
of the Holder and the Company shall not be required to issue or deliver any
such certificate unless and until the person or persons requesting the issue
thereof shall have paid to the Company the amount of such tax or shall have
established to the satisfaction of the Company that such tax has been paid.
8. (a) If, at any time during the Exercise Period on or
after September 13, 1998, the Company proposes to register any of its
securities under the Act (other than on a Form S-4 or a Form S-8 or successor
form thereto), it will give written notice by registered mail, at least fifteen
(15) days prior to the filing of each such registration statement, to the
Holders of this Warrant or the Warrant Shares of its intention to do so. If
any of the Holders of this Warrant or the Warrant Shares notify the Company
within fifteen (15) days after mailing of any such notice of its or their
desire to include any Warrant Shares in such registration statement, the
Company shall afford such Holders the opportunity to have any such Warrant
Shares registered under such registration statement. In the event that the
managing underwriter for said offering advises the Company in writing that in
its opinion the number of Warrant Shares requested to be included in such
registration exceeds the number which can be sold in such offering without
causing a diminution in the offering price or otherwise adversely affecting the
offering, the Company will include in such registration (a) first, the
securities the Company proposes to sell, (b) second, the securities held by
persons and entities that have demand registration rights, (c) third, the
Warrant Shares requested to be included in such registration which in the
opinion of such underwriter can be sold, pro rata among those persons having
registration rights similar those set forth in this Section 8 who requested
such registration, and (d) fourth, other securities requested to be included in
such registration. Notwithstanding the provisions of this Section 8, the
Company shall have the right at any time after it shall have given written
notice pursuant to this Section 8(a) (irrespective of whether a written request
for inclusion of any such securities shall have been made) to elect not to file
any such proposed registration statement or to withdraw the same after the
filing but prior to the effective date thereof.
-7-
<PAGE> 8
(b) At any time during the Exercise Period on or
after September 13, 1998, the Holder shall have the right, exercisable by
written notice to the Company, to have the Company prepare and file with the
Securities and Exchange Commission (the "Commission"), on one occasion, an
appropriate registration statement as selected by the Company and such other
documents, including a prospectus, as may be necessary in the opinion of both
counsel for the Company and counsel for the Holder, in order to comply with the
provisions of the Act, so as to permit a public offering and sale of Warrant
Shares by the Holder. The Company shall use its commercially reasonable
efforts to have such registration statement filed with and declared effective
by the Commission within one hundred twenty (120) days of receipt of the notice
from the Holder. If the Holder intends for the public offering covered by its
demand request to occur by means of an underwriting, it shall so advise the
Company as a part of its demand request, and the managing underwriter of such
underwritten public offering shall be selected by the Holder and shall be
reasonably acceptable to the Company. The Company shall be entitled to include
in any registration statement filed pursuant to this Section 8(b) additional
shares of Common Stock for its own account and for the account of its other
security holders. If the managing underwriter advises the Company in writing
that the inclusion of any or all such additional shares of Common Stock would
materially adversely affect the marketing of the public offering of the Warrant
Shares, then the Company shall not be entitled to include such additional
shares of Common Stock in any such registration statement to the extent the
managing underwriter advises. Notwithstanding the provisions of this Section
8(b), the Company shall have the right to delay or suspend the filing of a
registration statement for up to 90 days from the time the filing thereof would
otherwise be required under this Section 8(b) if, in the good faith
determination of the Company's board of directors, such registration would be
seriously detrimental to the Company and its stockholders or would materially
adversely affect the business, affairs, properties, financial condition,
results of operations or prospects of the Company or any pending or proposed
acquisition, merger, reorganization, recapitalization or other transaction or
public offering of the Company's securities, or would require premature
disclosure thereof not in the best interests of the Company; provided, however,
that the Company shall not be entitled to exercise this right more than once.
(c) It shall be a condition precedent to the
obligation of the Company hereunder to register the Warrant Shares under this
Section 8 that the holder thereof furnish to the Company and the managing
underwriter such information regarding itself, the intended method of
disposition of such Warrant Shares and such other information as the Company or
the managing underwriter shall from time to time reasonably request and that
shall be reasonably required to effect the registration of the Warrant Shares.
(d) The holder of the Warrant Shares shall pay all
underwriting and brokerage fees, discounts and commissions related to the sale
of the Warrant Shares in a public offering registered pursuant to the
provisions of this Section 8, together with the fees and expenses of any
separate counsel, accountants and other advisors retained by the Holder in
connection with the offering. All other fees, costs and expenses incurred in
connection with any
-8-
<PAGE> 9
registration of such public offering including, but not limited to, all federal
and state registration, qualification, filing fees, printing and document
distribution costs and expenses, fees and disbursements of the Company's
counsel, accountants and other experts, Nasdaq additional listing fees,
transfer fees, exchange fees, fees of transfer agents and registrants shall be
borne as follows: (i) if pursuant to a demand registration under Section 8(b),
the Company shall bear the first $10,000 of such costs, fees and expenses, and
the Holder shall bear the difference, except that the Company shall also bear
its proportionate share of any such costs, fees and expenses to the extent it
includes additional shares of Common Stock in such registration, and (ii) if
pursuant to a piggyback registration under Section 8(a), by the Company.
9. Unless registered as contemplated by Section 8
hereof, the Warrant Shares issued upon exercise of the Warrants shall be
subject to a stop transfer order and the certificate or certificates evidencing
such Warrant Shares shall bear the following, or a substantially similar,
legend:
"THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE BEEN
NOT REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED. SUCH SHARES MAY NOT BE OFFERED OR SOLD
EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION
STATEMENT UNDER SUCH ACT, OR AN EXEMPTION FROM
REGISTRATION UNDER SUCH ACT. SUCH SHARES ARE SUBJECT
TO CERTAIN RESTRICTIONS ON TRANSFER CONTAINED IN A
WARRANT, DATED MARCH 13, 1998, A COPY OF WHICH ARE ON
FILE WITH THE SECRETARY OF THE COMPANY."
10. Upon receipt of evidence satisfactory to the Company
of the loss, theft, destruction, or mutilation of any Warrant (and upon
surrender of any Warrant if mutilated), and upon reimbursement of the Company's
reasonable incidental expenses and, if reasonably requested, an indemnity
reasonably acceptable to the Company, the Company shall execute and deliver to
the Holder thereof a new Warrant of like date, tenor, and denomination.
11. The Holder of any Warrant shall not have, solely on
account of such status, any rights of a stockholder of the Company, either at
law or in equity, or to any notice of meetings of stockholders or of any other
proceedings of the Company, except as provided in this Warrant.
-9-
<PAGE> 10
12. Neither this Warrant nor, unless registered as
contemplated by Section 8 hereof, the Warrant Shares issuable upon exercise of
this Warrant, may be offered, sold, assigned, hypothecated or otherwise
transferred, in whole or in part, except (i) to the officers, directors,
shareholders or employees of the Holder, (ii) by will or the laws of descent
and distribution as a result of the death of any permitted transferee, or (iii)
to any successor to the business of the Holder. In addition, neither this
Warrant nor, until registered as contemplated by Section 8 hereof, any Warrant
Shares issued upon exercise of this Warrant, may be pledged, offered, sold,
assigned, hypothecated or otherwise transferred until (i) a registration
statement with respect thereto has been filed and become effective under the
Act and under the applicable state securities laws, or (ii) the Company has
received an opinion of counsel to the Company or counsel to the holder of such
securities, which counsel and opinion are reasonably satisfactory to the
Company, that such securities may be pledged, offered, sold, assigned,
hypothecated or transferred without an effective registration statement under
the Act and applicable state securities laws. It shall be a condition to the
transfer of this Warrant and any Warrant Shares that any transferee hereof or
thereof deliver to the Company its written agreement to accept and be bound by
all of the terms and conditions of this Warrant.
13. The Holder and each transferee of this Warrant or of
the Warrant Shares issuable upon the exercise of this Warrant, by their
acceptance of this Warrant or of any Warrant Shares, each hereby represents and
warrants that this Warrant and the Warrant Shares issuable upon exercise of
this Warrant are being acquired or will be acquired for investment purposes for
the account of the holder of such securities with no intention of a sale,
transfer or other distribution that is not in compliance with the Act and
applicable state securities laws.
14. The Company shall not be required to issue any
fraction of a share of Common Stock upon the exercise of this Warrant. If any
fraction of a share of Common Stock would be issuable upon the exercise of this
Warrant, the Company shall, in lieu of issuing such fractional interest, pay to
the Holder an amount of cash equal to such fraction multiplied by the Market
Price of a share of Common Stock as of the trading date preceding the date of
exercise.
-10-
<PAGE> 11
15. This Warrant shall be construed in accordance with
the laws of the State of New York applicable to contracts made and performed
within such State, without regard to principles of conflicts of law.
Dated: March 13, 1998
MARCUM NATURAL GAS SERVICES, INC.
By: /s/ A. BRADLEY GABBARD
------------------------------------
Name: A. Bradley Gabbard
Title: Executive Vice President
-11-
<PAGE> 12
FORM OF ASSIGNMENT
(To be executed by the registered holder if such holder desires to transfer the
attached Warrant.)
FOR VALUE RECEIVED, ____________________________ hereby sells,
assigns, and transfers unto __________________ a Warrant to purchase __________
shares of Common Stock, no par value per share, of Marcum Natural Gas Services,
Inc. (the "Company"), together with all right, title, and interest therein, and
does hereby irrevocably constitute and appoint
______________________________________________ attorney to transfer such
Warrant on the books of the Company, with full power of substitution.
Dated:
--------------------
Signature
----------------------------
Signature Guaranteed:
NOTICE
The signature on the foregoing Assignment must correspond to
the name as written upon the face of this Warrant in every particular, without
alteration or enlargement or any change whatsoever.
<PAGE> 13
To: Marcum Natural Gas Services, Inc.
1675 Broadway, Suite 2150
Denver, Colorado 80202
ELECTION TO EXERCISE
The undersigned hereby exercises his or its rights to purchase
_______ Warrant Shares covered by the within Warrant and tenders payment
herewith [in the amount of $_________] [in the form of ________ number of
Warrant Shares] in accordance with the terms thereof, certifies that he
owns this Warrant free and clear of any and all claims, liens and/or
encumbrances and requests that certificates for such securities be issued
in the name of, and delivered to:
--------------------------------------------
--------------------------------------------
--------------------------------------------
(Print Name, Address and Social Security
or Tax Identification Number)
and, if such number of Warrant Shares shall not be all the Warrant Shares
covered by the within Warrant, that a new Warrant for the balance of the
Warrant Shares covered by the within Warrant be registered in the name
of, and delivered to, the undersigned at the address stated below.
Dated: Name
--------------- --------------------------------
(Print)
Address:
----------------------------------------------------------------
-----------------------------------
(Signature)
<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 MARCH 31,
1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 2,448,595
<SECURITIES> 0
<RECEIVABLES> 3,065,507
<ALLOWANCES> 119,376
<INVENTORY> 2,824,175
<CURRENT-ASSETS> 8,988,808
<PP&E> 3,336,632
<DEPRECIATION> 2,115,875
<TOTAL-ASSETS> 18,501,348
<CURRENT-LIABILITIES> 2,058,945
<BONDS> 490,285
0
0
<COMMON> 123,918
<OTHER-SE> 15,828,200
<TOTAL-LIABILITY-AND-EQUITY> 18,501,348
<SALES> 4,449,796
<TOTAL-REVENUES> 4,668,605
<CGS> 2,895,471
<TOTAL-COSTS> 4,639,703
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 11,709
<INCOME-PRETAX> 17,193
<INCOME-TAX> 0
<INCOME-CONTINUING> 17,193
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 17,193
<EPS-PRIMARY> 0.00
<EPS-DILUTED> 0.00
</TABLE>
