<PAGE> 1
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------------------
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1999
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
(Issuer'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 April 30, 1999 there were 3,473,343 shares of the issuer's Common
Stock outstanding.
Transitional Small Business Disclosure Format
Yes No X
--- ---
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<TABLE>
MARCUM NATURAL GAS SERVICES, INC.
FORM 10-QSB
TABLE OF CONTENTS
<CAPTION>
Page
----
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Unaudited Consolidated Balance Sheets -
March 31, 1999 and December 31, 1998 3
Unaudited Consolidated Statements of Operations -
For the Three Months Ended March 31, 1999 and
March 31, 1998 5
Unaudited Consolidated Statements of Cash Flows -
For the Three Months Ended March 31, 1999 and
March 31, 1998 6
Notes to Unaudited Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 9
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 20
Signatures 21
</TABLE>
2
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PART I.
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
<TABLE>
MARCUM NATURAL GAS SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<CAPTION>
MARCH 31, DECEMBER 31,
1999 1998
----------- ------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 354,491 $ 639,448
Trade receivables, less allowance for
doubtful accounts of $113,253 and
$117,469, respectively 4,291,571 5,006,914
Other receivables 37,440 152,084
Inventories 4,367,148 4,412,100
Net assets of discontinued operations 302,013 319,393
Prepaid expenses and other current assets 261,018 275,782
----------- -----------
Total current assets 9,613,681 10,805,721
----------- -----------
PROPERTY, PLANT AND EQUIPMENT, AT COST:
Equipment 2,253,227 2,235,732
Vehicles 24,733 24,733
Furniture and fixtures 498,840 486,857
Land, building and improvements 714,892 714,423
----------- -----------
Total 3,491,692 3,461,745
Less accumulated depreciation 1,796,552 1,686,721
----------- -----------
Property, plant and equipment, net 1,695,140 1,775,024
----------- -----------
OTHER ASSETS:
Customer lists (net of accumulated
amortization of $2,622,005 and
$2,510,694, respectively) 6,270,882 6,382,193
Goodwill and other intangibles (net
of accumulated amortization of
$782,725 and $734,365, respectively) 3,115,713 3,204,606
Other assets 227,612 218,739
----------- -----------
Total other assets 9,614,207 9,805,538
----------- -----------
TOTAL $20,923,028 $22,386,283
=========== ===========
</TABLE>
See notes to unaudited consolidated financial statements.
3
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<TABLE>
MARCUM NATURAL GAS SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<CAPTION>
MARCH 31, DECEMBER 31,
1999 1998
------------ ------------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 350,144 $ 720,459
Accrued and other liabilities 1,044,893 1,055,372
Current maturities of capital lease
obligations 4,507 4,507
------------ ------------
Total current liabilities 1,399,544 1,780,338
------------ ------------
LONG-TERM NOTES PAYABLE 2,827,638 3,161,702
------------ ------------
DEPOSITS AND NON-CURRENT CAPITAL
LEASE OBLIGATIONS 5,143 5,342
------------ ------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Redeemable preferred stock - Series A,
$.01 par value; authorized,
1,000,000 shares; none issued and
outstanding
Redeemable preferred stock - Series B,
$.01 par value; authorized,
1,000,000 shares; none issued and
outstanding
Redeemable preferred stock - Series C,
$.01 par value; authorized, 500,000
shares; none issued and outstanding
Common stock, $.01 par value; authorized,
25,000,000 shares; issued and
outstanding, 3,473,343 and 3,489,181
shares, respectively 34,733 34,892
Additional paid-in capital 38,896,480 38,930,724
Accumulated other comprehensive income (4,098) 6,657
Accumulated deficit (22,236,412) (21,533,372)
------------ ------------
Total stockholders' equity 16,690,703 17,438,901
------------ ------------
TOTAL $ 20,923,028 $ 22,386,283
============ ============
</TABLE>
See notes to unaudited consolidated financial statements.
4
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<TABLE>
MARCUM NATURAL GAS SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
---------------------------
1999 1998
---------- ----------
<S> <C> <C>
REVENUES:
Natural gas measurement sales and
services $4,954,670 $4,449,796
Other 10,857 21,841
---------- ----------
Total revenues 4,965,527 4,471,637
---------- ----------
COSTS AND EXPENSES:
Cost of measurement sales and services 3,660,723 2,895,471
General and administrative 866,764 890,572
Selling, marketing and service 470,843 307,759
Depreciation and amortization 318,838 236,784
Research and development 274,643 213,543
Interest, finance charges and other 76,756 2,526
---------- ----------
Total costs and expenses 5,668,567 4,546,655
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LOSS FROM CONTINUING OPERATIONS BEFORE
TAXES (703,040) (75,018)
INCOME TAX PROVISION -- --
---------- ----------
LOSS FROM CONTINUING OPERATIONS (703,040) (75,018)
---------- ----------
INCOME FROM DISCONTINUED OPERATIONS -- 92,211
---------- ----------
NET INCOME (LOSS) $ (703,040) $ 17,193
========== ==========
NET INCOME (LOSS) PER BASIC AND DILUTED
COMMON SHARE:
Continuing operations $ (0.20) $ (0.02)
Discontinued operations 0.00 0.03
---------- ----------
NET INCOME (LOSS) PER BASIC AND DILUTED
COMMON SHARE $ (0.20) $ 0.01
========== ==========
WEIGHTED AVERAGE BASIC AND DILUTED
COMMON SHARES OUTSTANDING 3,475,496 3,082,958
========== ==========
</TABLE>
See notes to unaudited consolidated financial statements.
5
<PAGE> 6
<TABLE>
MARCUM NATURAL GAS SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
-------------------------
1999 1998
--------- ----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $(703,040) $ 17,193
Adjustments to reconcile net income
(loss) to net cash provided (used) by
continuing operations:
Income from discontinued operations -- (92,211)
Depreciation and amortization 318,838 236,784
Stock plan compensation expense -- 42,782
Loss (gain) on disposal of property, plant
and equipment 2,613 (682)
Changes in other assets and liabilities:
Trade receivables 715,343 520,151
Inventories 44,952 (75,549)
Other current assets 129,408 44,115
Other noncurrent assets (8,075) (64,068)
Accounts payable (370,315) 5,970
Accrued and other liabilities (10,479) (378,252)
--------- ----------
Net cash provided by continuing
operations 119,245 256,233
Net cash provided by discontinued
operations 1,342 89,827
--------- ----------
Net cash provided by operating
activities 120,587 346,060
--------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property, plant and equipment (42,477) (29,744)
Proceeds from sale of property, plant and
equipment 5,600 2,246
--------- ----------
Net cash used by investing activities (36,877) (27,498)
--------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings on notes payable to bank -- 198,300
Payments on notes payable to bank (334,064) (46,845)
Issuance of common stock -- 42,782
Repurchase of common stock (34,403) --
Payments on capital lease obligations (200) (2,758)
--------- ----------
Net cash provided (used) by financing
activities (368,667) 191,479
--------- ----------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS (284,957) 510,041
CASH AND CASH EQUIVALENTS AT BEGINNING
OF PERIOD 639,448 1,938,554
--------- ----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 354,491 $2,448,595
========= ==========
</TABLE>
See notes to unaudited consolidated financial statements.
6
<PAGE> 7
MARCUM NATURAL GAS SERVICES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
As of March 31, 1999 and December 31, 1998 and
For the Three Month Periods Ended March 31, 1999 and 1998
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, 1998.
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
presentation of the consolidated financial position of the Company and its
subsidiaries as of March 31, 1999 and the consolidated results of their
operations and cash flows for the three month periods ended March 31, 1999 and
1998.
2. COMPREHENSIVE INCOME (LOSS)
The Company's comprehensive income (loss) for the three months ended March
31, 1999 and 1998 was $(713,795) and $17,193, respectively. The Company's
comprehensive income (loss) includes net income (loss) and foreign currency
translation adjustments.
3. COMPUTER SOFTWARE COSTS
In March 1998, the Accounting Standards Executive Committee issued
Statement of Position (SOP) No. 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use", which the Company adopted
effective January 1, 1999. SOP No. 98-1 requires that the Company capitalize
certain costs incurred in connection with developing or obtaining software for
internal use. The adoption of SOP No. 98-1 did not have a material effect on the
financial position or results of operations of the Company.
4. SEGMENT INFORMATION
The Company has two reportable business segments: automated energy data
management; and natural gas measurement services. The operations of the
Company's automated energy data management segment are conducted by Metretek.
Metretek's manufactured products fall into three categories: remote data
collection products; electronic corrector products; and application-specific
products. Metretek also provides energy data collection and management services
and post-sale support services for its manufactured products.
7
<PAGE> 8
The operations of the Company's natural gas measurement services segment
are conducted by Southern Flow. Southern Flow's services include on-site field
services, chart processing and analysis, laboratory analysis, and data
management and reporting. These services are provided principally to customers
involved in natural gas production, gathering, transportation and processing.
The Company evaluates the performance of its operating segments based on
income (loss) before income taxes, nonrecurring items and interest income and
expense. Intersegment sales are not significant.
Summarized financial information concerning the Company's reportable
segments is shown in the following table. The "Other" column includes corporate
related items, results of insignificant operations and, as it relates to segment
profit, income and expense not allocated to reportable segments.
<TABLE>
<CAPTION>
AUTOMATED NATURAL GAS
ENERGY DATA MEASUREMENT
MANAGEMENT SERVICES OTHER TOTAL
THREE MONTHS ENDED:
<S> <C> <C> <C> <C>
MARCH 31, 1999
Revenues $1,897,534 $3,057,136 $ 10,857 $4,965,527
Segment profit (loss) (533,736) 261,376 (430,680) (703,040)
MARCH 31, 1998
Revenues $1,712,600 $2,737,196 $ 21,841 $4,471,637
Segment profit (loss) 139 207,338 (282,495) (75,018)
</TABLE>
8
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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, 1999 and 1998 and of the consolidated
financial condition of the Company as of March 31, 1999 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 business segments and is intended to assist the reader in an
understanding of the Company's results of operations for the periods presented.
<TABLE>
<CAPTION>
Three Months Ended
March 31,
------------------------
1999 1998
------ ------
(dollar amounts in thousands)
<S> <C> <C>
REVENUES:
Southern Flow $3,057 $2,737
Metretek 1,898 1,713
Other 11 22
------ ------
Total $4,966 $4,472
====== ======
GROSS PROFIT:
Southern Flow $ 684 $ 654
Metretek 610 900
------ ------
Total $1,294 $1,554
====== ======
SEGMENT PROFIT (LOSS):
Southern Flow $ 261 $ 207
Metretek (534) 0
Other (430) (282)
------ ------
Loss from continuing operations (703) (75)
Income from discontinued operations -- 92
------ ------
Total $ (703) $ 17
====== ======
</TABLE>
9
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The Company has two reportable business segments: automated energy data
management; and natural gas measurement services. The operations of the
Company's automated energy data management segment are conducted by Metretek.
Metretek's manufactured products fall into three categories: remote data
collection products; electronic corrector products; and application-specific
products. Metretek also provides energy data collection and management services
and post-sale support services for its manufactured products.
The operations of the Company's natural gas measurement services segment are
conducted by Southern Flow. Southern Flow's services include on-site field
services, chart processing and analysis, laboratory analysis, and data
management and reporting. These services are provided principally to customers
involved in natural gas production, gathering, transportation and processing.
The Company evaluates the performance of its operating segments based on
income (loss) before taxes, nonrecurring items and interest income and expense.
Other profit (loss) amounts in the table above include corporate related items
and income and expense not allocated to its operating segments.
During 1998, the Company decided to discontinue its business segment engaged
in acquiring or financing the acquisition of natural gas assets through private
programs. The 1998 financial statements have been reclassified to exclude the
operating results of this segment from continuing operations and to account for
this segment as discontinued operations. The following discussion relates only
to the Company's continuing operations.
THREE MONTHS ENDED MARCH 31, 1999 COMPARED TO THREE MONTHS ENDED MARCH 31, 1998
Revenues. The Company's consolidated revenues for the three months ended
March 31, 1999 increased $493,890, or 11%, compared to the same period in 1998,
due to an increase in revenues by each of the Company's two operating segments.
Southern Flow's revenues increased $319,940, or 12%, for the three months ended
March 31, 1999, compared to the same period in 1998. Metretek's revenues for the
three months ended March 31, 1999 increased $184,934, or 11%, compared to the
same period in 1998, consisting of an increase in domestic sales of $455,514,
offset in part by a decrease in international sales of $270,580. The increase in
Metretek's domestic sales was the net result of the following key factors: (i)
an increase in sales of the electronic corrector product line acquired from
American Meter in May 1998; (ii) a decrease in sales of Metretek's remote data
collection products and systems, due to an overall decrease in domestic demand;
and (iii) a decrease in Metretek's circuit board assembly sales. The decrease in
international sales is attributable to a decrease in sales of Metretek's remote
data collection products and systems in the United Kingdom and in Canada. A
comparison of Metretek's current domestic and international product mix is as
follows:
10
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<TABLE>
<CAPTION>
Three Months Ended March 31,
----------------------------
1999 1998
---- ----
(dollar amounts in thousands)
<S> <C> <C> <C> <C>
Remote data collection $1,127 59% $1,442 84%
products and systems
Electronic corrector products 673 36% -- 0%
Circuit board assembly sales 98 5% 271 16%
------ ------
Total $1,898 $1,713
====== ======
</TABLE>
Costs and Expenses. Costs of sales and services include materials, labor,
personnel and related overhead costs incurred by the Company to manufacture
products and provide services. Cost of sales and services for the three months
ended March 31, 1999 increased $765,252, or 26%, compared to the same period in
1998. Metretek's cost of sales and services for the three months ended March 31,
1999 increased $475,296, or 59%, compared to the same period in 1998. This
increase was due primarily to higher personnel and related overhead costs
associated with the integration and manufacturing of the electronic corrector
product line which was acquired by Metretek in May, 1998. Although Metretek's
revenues for the three months ended March 31, 1999 increased approximately 11%
compared to the same period in 1998 (which preceded the American Meter
acquisition), Metretek's overall gross profit margin decreased from 52.6% to
32.2% compared to the same period in 1998. Southern Flow's cost of sales and
services for the three months ended March 31, 1999 increased $289,956, or 14%,
compared to the same period in 1998. Southern Flow's gross profit margin after
costs of sales and services for the three months ended March 31, 1999 decreased
slightly from 23.9% to 22.4% compared to the same period in 1998, which is
within the range of normal fluctuations.
General and administrative expenses include personnel and related overhead
costs for the support and administration functions of the Company. General and
administrative expenses for the three months ended March 31, 1999 decreased
$23,808, or 3%, compared to the same period in 1998, due principally to the net
effect of the following factors: (i) a decrease in expenses of Southern Flow of
approximately $28,000 primarily attributable to reduced state and franchise
taxes in 1999 compared to 1998; (ii) a decrease in expenses of Metretek of
approximately $54,000 attributable to overall cost savings at Metretek and Sigma
VI resulting from combining certain administrative functions; and (iii)
increases in general and corporate expenses of approximately $58,000 due to
increased professional services, personnel and travel costs.
Selling, marketing and service expenses consist of personnel and related
overhead costs, including commissions for the sale and marketing activities of
the Company, together with advertising and promotion costs. Selling, marketing
and service expenses for the three months ended March 31, 1999 increased
$163,084, or
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53%, compared to the same period in 1998, all of which related to activities at
Metretek. The increase in these expenses was due principally to an increase in
the number of sales and customer service personnel in 1999 compared to the same
period in 1998 primarily associated with the integration of the electronic
corrector product line.
Depreciation and amortization expenses include the depreciation and
amortization of the Company's real property, customer list, goodwill and
capitalized software development costs. Depreciation and amortization expenses
for the three months ended March 31, 1999 increased $82,054, or 35%, compared to
the same period in 1998. This increase was due to additional goodwill
amortization costs related to Metretek's acquisitions in the second quarter of
1998 as well as increased depreciation expenses at both Metretek and Southern
Flow.
Research and development expenses include personnel and related overhead
costs for product and service development, enhancements, and upgrades. Research
and development expenses for the three months ended March 31, 1999 increased
$61,100, or 29%, compared to the same period in 1998, primarily due to increased
personnel costs.
Interest, finance charges and other expenses include interest and finance
charges on the Company's credit facility as well as other non-operating
expenses. Interest, finance charges and other expenses for the three months
ended March 31, 1999 increased $74,230, or 2,939%, compared to the same period
in 1998. The increase reflects interest expense on additional borrowings in 1999
compared to 1998 in order to fund Metretek's acquisitions in the second quarter
of 1998, borrowings to finance increases in Metretek's inventory and accounts
receivable, and the amortized portion of capitalized finance charges incurred in
1998 to obtain the Company's current credit facility.
SEASONALITY AND CYCLICALITY
Metretek historically derives substantially all of its revenues from sales
of its products and services to the utility industry. Metretek has experienced
variability of operating results on both an annual and a quarterly basis due
primarily to utility purchasing patterns and delays of purchasing decisions as a
result of mergers and acquisitions in the utility industry and changes or
potential changes to the federal and state regulatory frameworks within which
the utility industry operates. The utility industry, both domestic and foreign,
is generally characterized by long budgeting, purchasing and regulatory process
cycles that can take up to several years to complete. Metretek's utility
customers typically issue requests for quotes and proposals, establish
committees to evaluate the purchase, review different technical options with
vendors, analyze performance and cost/benefit justifications and perform a
regulatory review, in addition to applying the normal budget approval process
within a utility. Purchases of Metretek's products are, to a substantial extent,
deferrable in the event that utilities reduce capital expenditures as a result
of mergers and acquisitions, pending or unfavorable regulatory decisions, poor
revenues due to weather conditions, rising
12
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interest rates or general economic downturns, among other factors.
Based upon the discussion set forth in this item, the Company believes that
future revenues, expenses and results of operations are likely to vary
significantly from quarter to quarter. As a result, quarterly comparisons of
operating results are not necessarily meaningful or indicative of future
performance.
FINANCIAL CONDITION AND LIQUIDITY
The Company requires capital principally for (i) the financing of inventory
and accounts receivable, (ii) research and development expenses, (iii) capital
expenditures for property and equipment and software development, and (iv) the
funding of possible future acquisitions.
Net cash provided by operating activities was approximately $121,000 for
the three months ended March 31, 1999, which was the net result of the
following: (i) approximately $381,000 of cash used to fund continuing
operations, before changes in assets and liabilities; (ii) approximately
$501,000 of cash provided by changes in working capital and other asset and
liability accounts; and (iii) approximately $1,000 of cash provided by
discontinued operations.
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 1999 will be approximately $1,100,000, all of
which will relate to Metretek's business. Research and development expenses in
the amount of $274,643 were incurred in the three month period ended March 31,
1999.
The Company anticipates capital expenditures in 1999 of approximately
$450,000, primarily for production and laboratory equipment, computer software
and hardware. Capital expenditures for the three month period ended March 31,
1999 totaled $42,477.
On April 14, 1998, the Company and its wholly owned subsidiaries, Southern
Flow and Metretek, entered into a loan and security agreement (the "Loan
Agreement") with a commercial bank (the "Lender") providing for a combined
$5,000,000 credit facility consisting of loans (the "Loans") and letters of
credit to Southern Flow and Metretek, subject to limitations described below.
The Loan Agreement provides for daily advances to Southern Flow and Metretek in
the form of Loans to fund capital requirements, and daily paydowns on
outstanding balances of the Loans from collection of customer accounts
receivable. The Company makes monthly interest payments computed at prime plus
1% (8.75% at March 31, 1999) on outstanding balances of the Loans. The Loans
mature on March 14, 2001.
The Loans are secured by the tangible and intangible assets of the Company,
Southern Flow, and Metretek, including equipment, inventory, receivables, and
cash deposits, and the pledge of the shares of the Company's subsidiaries. The
Loan
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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 or repurchase of securities (with certain exceptions) without
the Lender's consent.
Borrowings on the Loans are limited to the sum of 80% of eligible accounts
receivable of Southern Flow and Metretek and 50% of raw materials and finished
goods inventory (up to a combined maximum of $1,500,000) of Southern Flow and
Metretek. At March 31, 1999, the Company had a combined $3,629,133 Loan
availability, of which $2,227,638 had been borrowed by Southern Flow and
Metretek, leaving $1,401,495 in unused Loan availability.
In September 1998, the Board of Directors of the Company adopted a stock
repurchase plan (the "Stock Repurchase Plan") pursuant to which the Company is
authorized to purchase up to approximately 7% of its outstanding Common Stock in
open market transactions, from time to time as management deems appropriate, if
the market price of the Company's stock remains below certain levels. The
Company may use the repurchased shares for employee benefit plans and other
corporate purposes, may hold the repurchased shares in treasury or may retire
the purchased shares. Through March 31, 1999, the Company had repurchased 72,926
shares of its Common Stock at an average price of $2.23 per share.
Based on the Company's current plans and assumptions, management believes
that the Company's capital resources, including cash and cash equivalents,
amounts available under existing credit facilities and funds generated from
continuing operations, and additional proceeds from the disposition of the
remaining assets of its discontinued operations, will be sufficient to meet its
currently anticipated cash needs, including its working capital needs, capital
commitments and debt service requirements, for at least the next twelve months.
Additionally, the Company may also use a portion of its capital resources to
acquire businesses, products or technologies or to repurchase its shares of
Common Stock. However, the Company may require additional funds to support its
working capital requirements or for other purposes. Depending upon the Company's
financial condition, including its liquidity needs and business activities, the
conditions in the equity, debt and other financial markets, as well as other
factors, the Company may from time to time seek to raise additional funds from
the proceeds of public or private equity financing, debt financing, the sale of
assets or from other sources. There can be no assurance that such additional
funds will be available to the Company or that, if available, such funds can be
obtained on terms favorable to the Company.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative
14
<PAGE> 15
Instruments and Hedging Activities", which is effective for all fiscal quarters
of fiscal years beginning after June 15, 1999. SFAS No. 133 requires that all
derivatives be recognized at fair value in the statement of financial position,
and that the corresponding gains or losses be reported either in the statement
of operations or as a component of comprehensive income, depending on the type
of hedging relationship that exists. The Company is currently evaluating the
impact SFAS No. 133 will have on its financial statements, if any.
In March 1998, the Accounting Standards Executive Committee issued
Statement of Position (SOP) No. 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use", which the Company adopted
effective January 1, 1999. SOP No. 98-1 requires that the Company capitalize
certain costs incurred in connection with developing or obtaining software for
internal use. The adoption of SOP No. 98-1 did not have a material effect on the
financial position or results of operations of the Company.
YEAR 2000 COMPLIANCE
The "Year 2000 issue," which presents potential risks and uncertainties to
virtually all businesses, is the result of computer programs that use two digits
rather than four to define the applicable year. Any computer programs that have
time-sensitive software may recognize a date using "00" as the year 1900 rather
than the year 2000. This situation could result in system failures or
miscalculations causing disruptions to operations, including, among other
things, a temporary inability to process transactions, send invoices, or engage
in similar or normal business activities.
The Company is continuing its evaluation and assessment of its information
technology and non-information technology systems, including software, hardware
and equipment that may be potentially affected by the Year 2000 issue. The
Company estimates that its evaluation and assessment of these systems will be
completed shortly. The Company has and will continue to modify and replace
portions of its existing information technology systems so they will function
properly with respect to dates in the year 2000 and thereafter. The Company
believes that any Year 2000 issues with respect to its internal information
technology systems have been substantially resolved, and the remainder will be
resolved, by either internal software programming adjustments or by the
installation of Year 2000 compliant information systems. The Company expects to
complete substantially all modifications and replacements required for Year 2000
compliance in its information systems prior to September 30, 1999. The Company
is also in the process of assessing non-information technology system containing
embedded chips that may be Year 2000 sensitive to identify operating systems and
equipment that are necessary or critical for continued operations. The Company
intends to test essential operating systems and equipment containing embedded
chips for Year 2000 compliance and to reprogram or replace such equipment as
appropriate. Based upon its assessments to date, the Company is not aware of any
significant Year 2000 issues in its control that will not be resolved prior to
the Year 2000.
15
<PAGE> 16
The Company has also extensively tested the technologies it sells for Year
2000 issues. The Company believes that the technologies and services it
currently sells are Year 2000 compliant, but the Company intends to continue
testing to address any Year 2000 issues that may arise. The Company has made
available Year 2000 modifications, upgrades and replacement technology to its
customers that purchased prior technologies that were not Year 2000 compliant.
Metretek's website includes a listing of products that Metretek has identified
as either Year 2000 compliant, non-compliant, or compliant with qualifications
as noted. The Company intends to make all requisite modifications, replacements
and patches in order to resolve any Year 2000 issues that arise with respect to
technologies and services sold by the Company.
The Company believes that the greatest risk from Year 2000 issues will
result from the failure of third parties, with which the Company has material
relationships, to become Year 2000 compliant. The Company relies on third party
service providers for services such as telecommunications, internet services,
utilities and other key services. Interruption of these services due to Year
2000 issues could materially adversely effect the Company's operations. The
Company has initiated communications with certain third parties, including
vendors, suppliers, service providers and customers, that the Company believes
are critical to its business operations and with respect to which the Company
believes Year 2000 issues could materially affect the Company's business.
Although the Company is not presently aware of any significant vendor, supplier,
service provider or customer that will have Year 2000 issues material to the
Company's operations, many businesses are resistant to providing any written or
binding assurances that they will be Year 2000 compliant. In addition, the
Company has no control over Year 2000 compliance programs by third parties.
Accordingly, the Company cannot provide any assurance that the systems of its
essential vendors, suppliers, service providers or customers will be Year 2000
compliant. The lack of Year 2000 compliance by such third parties could have a
material adverse impact on the Company's results of operations, financial
condition and business. If any such third parties (other than customers) are not
Year 2000 compliant and such non-compliance had or is likely to have a material
adverse effect on the Company, then the Company expects to utilize alternate
vendors, suppliers and service providers (subject to availability) which are
Year 2000 compliant. The Company intends to have in inventory a reserve of raw
materials, which it believes is sufficient to avoid a disruption in its
manufacturing process, to minimize the risk associated with third-party
suppliers experiencing Year 2000 issues.
The Company expects total incremental costs (other than internal labor
time) of becoming Year 2000 compliant not to exceed approximately $200,000, of
which the Company has spent approximately $130,000 through March 31, 1999. The
Company is funding the costs associated with Year 2000 compliance through
operating cash flows and does not expect to defer any significant information
technology projects in order to become Year 2000 compliant. The Company intends
to capitalize and depreciate costs which represent investments in new or
upgraded technology that qualify as capital investments and to expense all other
costs as incurred.
16
<PAGE> 17
It is difficult to predict with a high degree of accuracy, and impossible
to guaranty, what impact any Year 2000 issues will have on the Company. The
Company is in the process of attempting to assess the most reasonably likely
worst case Year 2000 scenario, although the Company believes that it, as most
businesses, will not be able to identify such scenario with any meaningful
degree of certainty, given all the risks and uncertainties related to the Year
2000 issue, many of which are outside of its control. The Company currently
anticipates a minimal level of disruption, inconveniences and inefficiencies in
its operations as a result of systems failures, primarily related to
non-compliance by third parties. The Company believes the risks are greatest
with respect to electric power and water supply, telecommunications and
transportation. Outages in any of these supplies could prevent the Company from
providing its services in measuring and monitoring the energy consumption of its
customers. Even if the Company could perform its services, these outages could
prevent or delay the delivery of the information results to its customers. If
the Company is unable to provide such services, then its revenues and results of
operation, will be materially reduced. Year 2000 issues may also cause temporary
delays in the delivery of raw materials and supplies, but the Company does not
expect any such delays to materially affect the Company's operations. Other
possible consequences include, but are not limited to, interruption of banking
and commercial payment systems, invoicing errors, collection difficulties,
inability to process customer transactions or otherwise engage in similar normal
business activities, which events are beyond the reasonable ability of the
Company to assess or control. There can be no assurance that Year 2000 issues
will not be material to the Company, or that the cost of interruptions with the
systems of third parties will not have a material adverse effect on the
Company's business, financial condition or results of operations.
Although the Company has not created a specific contingency plan to address
the most reasonably likely worst case Year 2000 scenario, the Company is in the
process of developing contingency plans for certain Year 2000 problems, such as
identifying alternate vendors, suppliers and service providers, identifying
alternative methods for transmitting energy measurement and monitoring
information to its customers and preparing manual back-up methods for certain
software-intensive operations. However, as the Company continues to assess the
Year 2000 issue, in the event management believes it is warranted, the Company
will develop a specific Year 2000 "worst case" contingency plan. The Company
will continually refine its contingency plans throughout 1999 as additional
information becomes available.
This item discussing Year 2000 issues contains forward-looking statements.
The costs and anticipated completion dates for Year 2000 compliance by the
Company and the estimated impact of Year 2000 issues on the Company are based
upon management's best estimates at this time, which were derived utilizing
numerous assumptions as to future events and third party activities, including
the continued availability of certain resources, third party modifications plans
and other factors, and may be updated from time to time as additional
information becomes available. However, the Company cannot guarantee that these
estimates will be achieved, and
17
<PAGE> 18
actual results could differ materially from those anticipated. Specific factors
that may cause such material differences include, but are not limited to, the
availability and costs of Year 2000 compliant technology, the ability to
identify and correct all potential Year 2000 sensitive issues, the ability of
essential third parties to bring their systems into Year 2000 compliance, the
level of Year 2000 disruptions experienced by the Company's vendors, suppliers,
service providers and customers, the success of any required contingency actions
and similar uncertainties.
The Year 2000 statements in this item, as well as other Company disclosures
regarding Year 2000 issues, are intended to constitute "Year 2000 Readiness
Disclosures" under the Year 2000 Information and Readiness Disclosure Act.
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Form 10-QSB contains, under "Item 2, Management's Discussion and
Analysis of Financial Condition and Results of Operations", as well as other
parts of this Form 10-QSB, certain forward-looking statements within the meaning
of and made pursuant to the safe harbor provisions of Section 27A of the
Securities Act of 1933, as amended, and Section 21E of the Securities Exchange
Act of 1934, as amended. From time to time, the Company may publish or otherwise
make available forward-looking statements of this nature. Forward-looking
statements include statements concerning plans, objectives, goals, strategies,
future events or performance, and underlying assumptions and other statements
which are other than statements of historical facts. When used in this Form
10-QSB, the words "may", "could", "will", "project", "intend", "continue",
"believe", "anticipate", "estimate", "expect" and similar predictive, future
tense or forward-looking terminology, are intended to identify forward-looking
statements. Examples of forward-looking statements include statements regarding,
among other matters, (1) the Company's plans, intentions, beliefs and
expectations with respect to its future prospects, including its products and
services, its business and growth strategies, its discontinued operations; (2)
industry trends, competitive conditions and market conditions, segments and
trends; (3) expected capital expenditures and research and development costs;
(4) the sufficiency of funds from operations and available borrowings to meet
the Company's future working capital and capital expenditure needs; and (5) the
Company's plans, intentions, beliefs and expectations with respect to Year 2000
issues.
Such forward-looking statements are based on the current plans, intentions,
beliefs and expectations of management as well as assumptions made by and
information currently available to management. Forward-looking statements are
not guarantees of future performance or events but 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, (1) changes in the energy
industry in general and the natural gas industry in particular; (2) the capital
resources, technological requirements and internal business plans of the natural
gas utilities industry; (3) technological and market changes in the natural gas
industry; (4) the complexity, uncertainty and time constraints
18
<PAGE> 19
associated with the development and market acceptance of new product and service
designs and technologies; (5) general economic and business conditions; (6) the
Company's ability to successfully implement, and the market's acceptance of,
Metretek's "TotalPlan(TM)" offering; (7) the Company's ability to successfully
integrate and utilize the product lines and business acquired from American
Meter, including the risks that revenues from the acquired business could be
lower than expected and that related costs could be higher than expected; (8)
the impact and timing of the deregulation of the various energy markets; (9)
utility purchasing patterns and delays and potential changes to the federal and
state regulatory frameworks within which the utility industry operates; (10)
risks and uncertainties associated with Year 2000 issues (See "Year 2000
Compliance" above); (11) fluctuations in quarterly operating results; (12)
effects of a change in product mix on the Company's expected gross margins and
net income; (13) the effects of any corporate acquisitions, dispositions or
other corporate transactions; (14) risks associated with international
operations; (15) reliance on strategic alliances; (16) the amount of additional
proceeds from the disposition of the remaining net assets and other revenues
from discontinued operations; (17) the receipt and timing of future customer
orders; (18) the impact of competitive factors affecting the Company's
operations, including the introduction of competitor's products, services and
technologies by competitors; (19) unexpected events affecting the Company's
ability to obtain funds from operations, debt or equity to finance operations,
pay interest and other obligations, and fund needed capital expenditures and
other investments; (20) the Company's ability to protect its proprietary
information and technology; (21) the impact of current and future laws and
government regulations affecting the energy industry in general and the natural
gas industry in particular; and (22) other risks and uncertainties that are
discussed in this Form 10-QSB or that are discussed from time to time in the
Company's other reports and filings with the Securities and Exchange Commission,
including the factors described under "Additional Factors That May Affect The
Company's Future Results" in the Company's Form 10-KSB for the fiscal year ended
December 31, 1998. The Company does not intend, and assumes no responsibility,
to update any oral or written forward-looking statements made by the Company.
19
<PAGE> 20
PART II.
OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27.1 Financial Data Schedule
(b) The Company filed a report on Form 8-K with the Securities and
Exchange Commission on April 14, 1999 (Items 5 and 7), reporting the
Company's written response to a stockholder proposal.
20
<PAGE> 21
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 12, 1999 By: /s/ W. Phillip Marcum
-------------- -------------------------------------
W. Phillip Marcum
President and Chief Executive Officer
Date: May 12, 1999 By: /s/ A. Bradley Gabbard
-------------- -------------------------------------
A. Bradley Gabbard
Executive Vice President
and Chief Financial Officer
21
<PAGE> 22
EXHIBIT INDEX
Exhibit
Number
- ------
27.1 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FINANCIAL
STATEMENTS CONTAINED IN THE COMPANY'S FORM 10-QSB FOR THE PERIOD ENDED MARCH 31,
1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 354,491
<SECURITIES> 0
<RECEIVABLES> 4,404,824
<ALLOWANCES> 113,253
<INVENTORY> 4,367,148
<CURRENT-ASSETS> 9,613,681
<PP&E> 3,491,692
<DEPRECIATION> 1,796,552
<TOTAL-ASSETS> 20,923,028
<CURRENT-LIABILITIES> 1,399,544
<BONDS> 2,832,781
0
0
<COMMON> 34,733
<OTHER-SE> 16,655,970
<TOTAL-LIABILITY-AND-EQUITY> 20,923,028
<SALES> 4,954,670
<TOTAL-REVENUES> 4,965,527
<CGS> 3,660,723
<TOTAL-COSTS> 5,591,811
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 76,756
<INCOME-PRETAX> (703,040)
<INCOME-TAX> 0
<INCOME-CONTINUING> (703,040)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (703,040)
<EPS-PRIMARY> (0.20)
<EPS-DILUTED> (0.20)
</TABLE>
