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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-KSB
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 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
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MARCUM NATURAL GAS SERVICES, INC.
(Name of small business issuer in its charter)
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DELAWARE 84-1169358
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1675 BROADWAY, SUITE 2150, DENVER, CO 80202
(Address of principal executive offices) (zip code)
(303) 592-5555
(Issuer's telephone number, including area code)
Securities registered under Section 12(b) of the Exchange Act: None
Securities registered under Section 12(g) of the Exchange Act:
Common Stock, $.01 Par Value,
Common Stock Purchase Warrants
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(Title of Class)
Check whether the issuer: (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes X No
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Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. / /
The issuer's revenues for its most recent fiscal year ended December 31, 1998
were $19,922,110.
As of March 16, 1999, the aggregate market value of the shares of Common Stock
held by non-affiliates was $4,361,810, based upon $1.81 per share of Common
Stock, the last sale price of the Common Stock on such date as reported on the
Nasdaq National Market.
As of March 16, 1999, 3,473,343 shares of the issuer's Common Stock were
outstanding.
Transitional Small Business Disclosure Format (check one): Yes No X
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DOCUMENTS INCORPORATED BY REFERENCE
None
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FORM 10-KSB
TABLE OF CONTENTS
<TABLE>
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Page
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PART I ITEM 1. DESCRIPTION OF BUSINESS 4
General 4
Business Strategy 5
Metretek, Incorporated 5
Southern Flow Companies, Inc. 9
Competition 10
Regulation 11
Employees 12
Research and Development 12
Raw Materials 12
Proprietary Rights 13
Additional Factors That May Affect the Company's Future Results 13
ITEM 2. DESCRIPTION OF PROPERTY 25
ITEM 3. LEGAL PROCEEDINGS 25
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 26
PART II ITEM 5. MARKET FOR COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS 27
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS 28
Results of Operations 28
Seasonality and Cyclicality 30
Financial Condition and Liquidity 31
Recent Accounting Pronouncements 33
Year 2000 Compliance 34
ITEM 7. FINANCIAL STATEMENTS 37
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE 37
PART III ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND
CONTROL PERSONS; COMPLIANCE WITH SECTION
16(a) OF THE EXCHANGE ACT 38
Directors and Executive Officers 38
Key Employees 40
Section 16(a) Beneficial Ownership Reporting Compliance 40
ITEM 10. EXECUTIVE COMPENSATION 41
Summary Compensation 41
Employment Agreements, Change in Control Arrangements
and Other Compensation Arrangements 42
Stock Option Grants 43
Stock Option Exercises and Values 45
Director Compensation 45
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT 47
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 49
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K 50
SIGNATURES 54
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CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Form 10-KSB contains, under "Item 1. Description of Business",
"Item 3. Legal Proceedings" and "Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations", as well as other parts of this
Form 10-KSB, 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 (the "Securities Act"), and Section 21E of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"). 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-KSB, 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 contained in this Form 10-KSB include statements regarding, among
other matters:
o 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
relationships with its major customers and suppliers and its
discontinued operations;
o Industry trends, competitive conditions and market conditions,
segments and trends;
o Expected capital expenditures to be made in the future;
o The sufficiency of funds from operations and available
borrowings to meet the Company's working capital and capital
expenditure needs for fiscal 1999;
o The Company's plans, intentions, beliefs and expectations with
respect to changes which have been or will be made to its
computerized management information systems, including
modifications to its payroll and billing systems and other
modifications to address Year 2000 issues; and
o Resolution of pending litigation without material adverse
effect on the Company.
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, the factors described under
"Additional Factors That May Affect The Company's Future Results" in Item 1
below, as well as other risks and uncertainties discussed elsewhere in this Form
10-KSB and in the Company's other reports and filings with the Securities and
Exchange Commission. Except as required by law, the Company does not intend to,
and assumes no responsibility to, update any forward-looking statements, whether
as a result of new information, future events or otherwise.
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
GENERAL
Marcum Natural Gas Services, Inc. (the "Company" or "Marcum") is a
diversified provider of energy measurement products, services and data
management to the energy industry. The Company, incorporated in Delaware on
April 5, 1991, is a holding company that conducts its continuing operations
through two directly owned subsidiaries:
o Metretek, Incorporated ("Metretek"), which is engaged in the
design, manufacture and distribution of automated energy
consumption monitoring and recording systems; and
o Southern Flow Companies, Inc. ("Southern Flow"), which is
engaged in the provision of natural gas measurement services
and related equipment.
References to the "Company" or "Marcum" in this Report on Form 10-KSB
mean Marcum Natural Gas Services, Inc. and its subsidiaries, unless the context
indicates otherwise.
Metretek, based in Melbourne, Florida, designs, manufactures and sells
electronic devices and systems commonly referred to as automatic meter reading
systems ("AMRs") that automatically monitor, record and transmit data from
natural gas custody transfer meters, electronic flow correctors and computers,
and other energy measurement products and services. Southern Flow, based in
Lafayette, Louisiana, provides a wide variety of natural gas measurement
services principally to producers and operators of natural gas production
facilities.
During 1998, the Company decided to discontinue the operations of
Marcum Gas Transmission, Inc. ("MGT"), a directly owned subsidiary of the
Company that was formed to acquire or finance the acquisition of natural gas
assets through private programs, and then to manage and maintain a small
ownership interest in those programs. This decision was based on the declining
prospects of the markets and in order to enable the Company to focus on its
Southern Flow and Metretek operations. In December 1997, MGT sold one-third of
its interests in two of the three programs it then managed, and in March 1998,
MGT liquidated the third program. MGT does not intend to form or manage any new
programs, although it will continue to manage the remaining two programs that
operate natural gas related assets until MGT's interest in those programs are
sold or the programs are liquidated.
Until 1997, the Company had also operated in the compressed natural gas
("CNG") industry through Marcum Denver, Inc. (formerly named Marcum Fuel
Systems, Inc.) ("Marcum Denver"), a directly owned subsidiary of the Company
which engaged in the design, manufacture and sale of CNG refueling station
equipment. In June 1997, Marcum Denver discontinued its operations by selling
substantially all of its assets, because growth in the CNG industry was not
meeting management's expectations.
In March 1999, the Board of Directors of the Company adopted a
resolution authorizing an amendment to the Company's Restated Certificate of
Incorporation, as amended, to change the name of the Company to "Metretek
Technologies, Inc." The change of the Company's name is subject to approval by
the stockholders of the Company. The Board of Directors intends to include the
proposal to change the Company's name in the Proxy Statement for the Annual
Meeting of Stockholders currently scheduled to be held on June 7, 1999.
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BUSINESS STRATEGY
The Company's business strategy is to position itself as an integrated
provider of data management products and services which enhance the flow of
information to the energy industry. To date, the Company's products and services
have been aimed primarily at the natural gas industry. The natural gas industry
is characterized by relatively abundant domestic reserves, increasing demand,
volatile prices and regulatory changes such as those resulting from the
deregulation of the interstate pipeline industry. The Company intends to provide
its products and services to other segments of the energy industry. The energy
industry generally is undergoing fundamental regulatory and structural changes
and trends. The Company's strategy is to acquire, develop and operate businesses
that are positioned to take advantage of these trends.
In implementing its business strategy, the Company has made several
acquisitions. In 1993, the Company acquired substantially all of the assets of
the Southern Flow Companies division of Weatherford International Incorporated
("Weatherford"), a provider of natural gas measurement services. In 1994, the
Company acquired Metretek. In May 1998, the Company acquired substantially all
of the assets and business of American Meter Software Corporation (formerly
Eagle Research Corporation) ("American Meter Software"), a subsidiary of
American Meter Company ("American Meter"). While the Company regularly engages
in discussions relating to potential acquisitions and dispositions, the Company
has no present agreements or commitments with respect to any material
acquisition or disposition.
METRETEK, INCORPORATED
Metretek, which was acquired by the Company in 1994, was founded in
1977 in Melbourne, Florida as a developer, manufacturer and marketer of
automated systems for monitoring and recording energy consumption. Metretek's
primary focus at present is in the natural gas metering industry.
Products. Metretek's manufactured products fall into three categories:
remote data collection products; electronic corrector products; and
application-specific products. Within these categories, Metretek's products are
often customized to fit the needs of its customers.
Remote data collection products, also referred to as AMRs, attach to
existing natural gas meters and correctors. These devices are designed to
automatically collect and transmit metering data according to a schedule preset
by the customer. The AMR is an electronic printed circuit board assembly
designed and programmed to interface with an energy meter at the point of energy
consumption. The electronic board is enclosed in an assembly that attaches to
the energy meter. The energy consumption data collected by the AMR is then sent
to a Metretek proprietary database consisting of a software system running on a
centrally located personal computer or computer network maintained at the
customer's central operations center for further processing. Communications from
the AMR to the database are generally achieved through an existing voice grade
telephone line, although cellular telephone and radio are used when telephone
lines are either not available or are not cost-effective. Depending upon the
particular features of the AMR, the data collection may be time stamped with
sufficient frequency to allow the customer to perform critical aspects of gas
flow management such as nomination, delivery, balancing, meter indexing and
billing.
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As a result of the strategic acquisition of certain assets from
American Meter in May 1998, Metretek offers a complete line of natural gas
volume electronic corrector products. These corrector products include all or
some of the following functions:
o Pressure and temperature transducers to accomplish real time
correction of meter volumes for variations in ambient
temperature and pipeline pressure;
o Microprocessor and memory for calculation of final gas volumes
based upon AGA specified formulas, and for data storage;
o Full remote data collection capabilities;
o Users definable alarm detection and fault limits;
o User definable control features such as flow control, pipeline
pressure monitoring and shutdown, odorant injection, etc;
o Automatic self-calibration features;
o Compatibility with numerous volumetric meters; and
o Capability of providing corrector features for multiple meters
simultaneously.
In addition to the two primary product lines referred to above,
Metretek also manufactures "application-specific" products designed for certain
market niches. These include cathodic protection monitors, used to monitor
rectifier and cathodic protection system failure, and gas pipeline pressure
monitors.
Services. In addition to its manufactured product lines, Metretek also
provides certain services to its customers. Metretek offers post-sale support
services which help create and maintain customer satisfaction and loyalty.
Metretek has recently commenced offering "energy data collection and management
services" under the trade name "TotalPlan" for customers who are unable or
unwilling to make the investment required to own a Metretek system. In this
turn-key service, Metretek provides and installs the required remote data
collection hardware, collects and formats the remote data in Melbourne, Florida,
and then sends the data electronically to the customer for a per month or per
communication fee. Management believes this service will help Metretek penetrate
the commercial account AMR markets.
In 1997, Metretek commenced offering contract manufacturing of
electronic circuit boards by acquiring Sigma VI, Inc. ("Sigma VI"). Metretek
expanded this business in June 1998 by acquiring the business and assets of
Quality Contract Manufacturing, Inc. ("QCMI"). Sigma VI and QCMI were two small
contract manufacturers of electronic circuit board and cable assemblies located
in Melbourne, Florida. Metretek made these acquisitions to gain control of the
quality and timeliness of Metretek's manufactured circuit boards and
subassemblies and to optimize labor hours expended in the Metretek manufacturing
operation. With the automated equipment and experienced personnel acquired,
Metretek is able to offer contract manufacturing to local electronics
manufacturers who have high quality, short run, quick turnaround requirements.
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A critical element of Metretek's product line is its data collection
and management capability. With the exception of the Sigma VI products,
virtually all of Metretek's products are integrated with Metretek's database
software package, the DC 2000 system. This system provides substantial
flexibility for the generation of reports in formats useful for Metretek's
customers to perform data management functions. As a result of the acquisition
of the American Meter Software product line, Metretek and American Meter are
working towards the cross-functionality of certain of their products in an
effort to enhance data management by Metretek's customers.
Markets. Historically, Metretek's AMR products have been marketed
principally to natural gas local distribution companies ("LDCs"). Typically,
LDCs install these devices in conjunction with custody transfer meters on their
larger customers for the purpose of meeting deregulation requirements. Sixty of
the largest one hundred LDCs in North America currently utilize Metretek systems
to monitor and record the natural gas consumption of their industrial and
commercial accounts. The timely and accurate information provided by the
Metretek system is used by the operations, engineering, natural gas supply,
marketing, customer service and billing departments of the LDC. In the future,
Metretek intends to focus its marketing efforts directly toward the commercial
and industrial users of natural gas and electricity. Markets for the electronic
corrector products are much broader and include not only LDCs and their
commercial and industrial customers, but also natural gas transportation and
distribution companies, natural gas gatherers and processors, natural gas
producers and operators, and natural gas brokers.
The U.S. market for remote data collection products for natural gas
meters consists of three classes of natural gas users:
o Industrial users, consisting of the largest 250,000 domestic
users of natural gas, such as steel mills, glass manufacturing
plants, and natural gas fired power generator plants;
o Commercial users, consisting of approximately 4,000,000
natural gas customers, such as multi-family apartment
complexes, restaurants, factories and other customers with
multiple locations within a relatively confined area; and
o Residential users, which are the smallest users and include
primarily residential single family houses.
Historically, Metretek has been the leading provider of AMRs to the
industrial natural gas market, which is becoming saturated. The primary target
for Metretek's AMR products is the recently developing commercial natural gas
user market, Metretek does not consider the residential natural gas user sector
of the market to be a viable target market for its products, primarily due to
the low margins inherent in that market.
Marketing and Customer Service. Metretek distributes its products by a
direct sales force in the United States, and uses contract representatives and
distributors to distribute its products outside the United States. Metretek also
provides implementation services for its customers designed to meet its
customer's specific needs. Metretek offers a maintenance and support team in
Melbourne, Florida that offers 24-hour, toll-free hotline support, customer
service representatives, consulting services, equipment repair and preventative
maintenance, software support and maintenance, system troubleshooting and
network management services. Metretek's marketing strategy includes utilizing
its close contacts with the utility industry through its sales representatives.
Metretek also participates in
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trade shows, symposiums and conferences designed to expand industry awareness of
its products. Metretek also utilizes direct mailing of brochures and
newsletters, and has a home page on the internet.
International. Outside of North America, Metretek has sold AMR systems
to natural gas distribution utility companies in the United Kingdom, the
Netherlands, Pakistan, Australia, Argentina and Brazil. Over the past three
years, approximately 18% to 21% of Metretek's annual sales have been to
customers outside the U.S. All of the eight major gas distribution utility
companies in Canada own and operate Metretek systems. Metretek Europe Limited
("Metretek Europe"), a wholly owned subsidiary of Metretek located in Camberley,
England, sells Metretek products primarily in Western Europe.
Acquisitions. Metretek's business strategy includes the acquisition of,
and strategic alliances with, measurement equipment providers and software
application developers that can utilize or enhance Metretek's offering of
products and services.
On May 4, 1998, Metretek acquired substantially all of the assets and
business of American Meter Software pertaining to electronic correctors and
non-radio-frequency meter reading devices in the natural gas and electric
utility industry. American Meter Software is a wholly owned subsidiary of
American Meter, which is ultimately controlled by Ruhrgas AG, a German
corporation. The assets acquired by Metretek include certain inventory,
equipment, trademarks and technology of American Meter Software and American
Meter used in the design, manufacture and sales of electronic measurement
process control and telemetry systems to utility companies in the natural gas
and petroleum industries. In connection with the acquisition, Metretek assumed
certain transitional employee costs and product warranty obligations of American
Meter Software. The assets and business operations acquired have been relocated
to Metretek's existing facility in Melbourne, Florida.
In consideration for the purchase of the assets and business, the
Company and Metretek paid and delivered to American Meter Software at the
closing an aggregate purchase price consisting of $1,300,000 in cash, 439,560
unregistered shares of Common Stock of the Company, and a $1,200,000 convertible
subordinated promissory note ($600,000 of which is contingent upon Metretek
exceeding certain sales targets, as discussed below) (the "American Meter
Note"). The purchase price is subject to upward adjustment based upon Metretek's
actual sales of products in the acquired business during the 18-month period
that commenced July 1, 1998. If Metretek's annualized sales of products in the
business acquired are greater than $3,900,000 during such period, then the
purchase price will be increased on a dollar-for-dollar basis to the extent of
such sales surplus, but the purchase price shall not be increased above
$4,500,000 even if annualized sales are greater than that amount. Any increase
in the purchase price will be effected by adjusting the principal balance of the
American Meter Note. Subsequent to the Closing, the purchase price was adjusted
down by $85,000 to reflect a decrease in American Meter Software's inventory
between December 31, 1997 and May 4, 1998, partially offset by transitional
costs assumed by Metretek.
Up to $1,028,107 of the American Meter Note is convertible at any time
at the option of American Meter Software into 180,766 shares of Common Stock of
the Company at the rate of $5.6875 of principal per share. The American Meter
Note bears interest on the unpaid principal balance at a fixed rate equal to
7.5% per annum, payable quarterly in arrears. The American Meter Note is due and
payable May 4, 2002, and may be prepaid at any time without penalty or premium.
The Company granted American Meter Software the one-time option to cause the
shares of Common Stock issued to American Meter Software at the closing or
issuable upon conversion of the American Meter Note to be registered under the
Securities Act of 1933, as amended, and applicable state securities laws, and
has
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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.
Metretek also entered into a license agreement ("License Agreement")
with American Meter and American Meter Software, providing for the license by
American Meter and American Meter Software to Metretek of certain operating
software, and the development, manufacture and sale by Metretek to American
Meter and American Meter Software of certain electronic components and related
equipment pertaining to electronic temperature and pressure correction to be
imbedded within certain new rotary and turbine meters of American Meter. The
License Agreement also grants to American Meter and its affiliates the right to
sell Metretek products in the United States and Canada at certain agreed-upon
prices. American Meter and American Meter Software have also entered into a
Non-Competition Agreement with the Company and Metretek, pursuant to which
American Meter and American Meter Software have agreed not to compete with
Metretek in the acquired business for five (5) years from the closing date. In
connection with this acquisition, Harry I. Skilton, President of American Meter,
became a member of the Board of Directors of the Company. See "Item 9.
Directors, Executive Officers, Promoters and Control Persons; Compliance with
Section 16(a) of the Exchange Act".
On June 15, 1998, Metretek acquired substantially all of the assets of
QCMI in exchange for $150,000 in cash. QCMI is a contract manufacturer of
electronic circuit boards, sub-assemblies, and cable assemblies serving
customers primarily in Melbourne, Florida and the immediately surrounding area.
SOUTHERN FLOW COMPANIES, INC.
Southern Flow provides a variety of natural gas measurement services
principally to customers involved in natural gas production, gathering,
transportation and processing. The Company commenced its operations in this line
of business in 1991 by acquiring an existing business. This business was
expanded significantly in 1993 when the Company acquired substantially all of
the assets of the Southern Flow Companies division of Weatherford. Through its
predecessors, Southern Flow has provided measurement services to the natural gas
industry since 1953.
Southern Flow provides a broad array of integrated natural gas
measurement services, including on-site field services, chart processing and
analysis, laboratory analysis, and data management and reporting. Southern
Flow's field services including the installation, testing, calibration, sales
and maintenance of measurement equipment and instruments. Southern Flow's chart
processing operations include analyzing, digitizing and auditing well charts and
providing custom reports as requested by the customer. Southern Flow also
provides laboratory analysis of natural gas and natural gas liquids chemical and
energy content. As part of its services to its customers, Southern Flow
maintains a proprietary database software system which calculates and summarizes
energy measurement data for its customers and allows for easy transfer and
integration of such data into customer's accounting systems. As an integral part
of these services, Southern Flow maintains a comprehensive inventory of natural
gas meters and metering parts, and derives approximately 25% of its annual
revenues from its "parts resale" business. Southern Flow provides its services
through 9 division offices located throughout the Gulf of Mexico, Southwest,
Mid-Continent and Rocky Mountain regions.
Natural gas measurement services are used by producers of natural gas
and pipeline companies to verify volumes of natural gas custody transfers. To
ensure that such data is accurate, on-site field
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services and data collection must be coordinated with chart integration and data
development and management to produce timely and accurate reports.
The market for independent natural gas measurement services is
fragmented, with no single company having the ability to exercise control. Many
natural gas producers and operators, and most natural gas pipeline and
transportation companies, internally perform some or all of their natural gas
measurement services. In addition to price, the primary consideration for
natural gas measurement customers is the quality of services and the ability to
maintain data integrity, because natural gas measurement has a direct effect on
the natural gas producer's revenue and royalty and working interest owner
obligations. The Company believes that it is able to effectively compete by (i)
providing dependable integrated measurement services, (ii) maintaining local
offices in proximity to its customer base, and (iii) retaining experienced and
competent personnel.
COMPETITION
The Company competes in various markets pertaining to data management
products and services for the energy industry, in primarily the natural gas
industry. These markets are highly competitive, subject to rapid technological
change and significantly affected by new product introductions. There can be no
assurance that the Company will be able to compete successfully against current
and future competitors, and any failure to do so would have a material adverse
effect on the Company's business, financial condition, results of operations and
cash flow.
The Company believes that the following are the principal competitive
factors affecting the market for its products and services:
o Responsiveness to customers' needs;
o Functionality;
o Speed of implementation;
o Ease of use;
o Performance and features;
o Quality and reliability;
o Reputation;
o Quality of customer support; and
o Price.
The Company believes that it competes favorably with respect to the
above factors, although with respect to products and services that the Company
does not believe price is a principal competitive factor, the Company does not
compete on the basis of price. In order to be successful in the future, the
Company must continue to respond promptly and effectively to the challenges of
technological change and its competitors' innovations. The Company cannot
guarantee that its products and services will continue to compete favorably or
that it will be successful in facing the increasing competition for new
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products and enhancements introduced by its existing competitors or new
competition entering the market.
The market for Metretek's products and services is very competitive.
Although Metretek's product offering is very specific to the requirements for
industrial and commercial meter reading/monitoring in natural gas distribution
utility companies, many suppliers of residential meter reading systems also
offer products for commercial and/or industrial applications and can be
formidable competitors for utility companies desiring to implement residential
meter reading and to have all automatic/remote meter reading, including
industrial and commercial, performed on a single system. Also, major natural gas
meter and instrument manufacturers offer systems to remotely read and
interrogate their own equipment, and utility companies that use certain
manufacturers' meters exclusively may also choose to buy their communication and
data collection products as well. The Company believes that several large
suppliers of equipment, services or technology to the utility industry have
developed or are currently developing products or services for the market in
which Metretek is currently or is intending to compete. Most of Metretek's
present and potential competitors have substantially greater financial,
marketing, technical and manufacturing resources, as well as greater name
recognition and experience, than Metretek. Metretek competes with a large number
of existing and potential competitors in these markets, some of which do not
compete in all of the same markets as Metretek. In addition, current and
potential competitors may make strategic acquisitions or establish cooperative
relationships among themselves or with third parties that increase their ability
to address the needs of Metretek's prospective customers. Metretek competes
primarily on the basis of product quality and reliability, applications
expertise, and the quality of its service and support.
Numerous companies compete directly with Southern Flow in the natural
gas measurement services industry, including companies which provide the same
services as Southern Flow and those which provide additional or related field
services. Although a majority of natural gas measurement services is currently
performed internally by natural gas producers and pipeline companies, most of
Southern Flow's direct competition consists of small measurement companies
providing limited services and serving limited geographical areas. Southern Flow
offers a complete range of natural gas measurement services over a wide
geographical area which management believes offers Southern Flow advantages over
its competitors.
REGULATION
Regulation of Natural Gas Industry Generally. The Company's operations
are affected in various degrees by political developments and federal and state
laws and regulations. In particular, natural gas production, operations and
economics are affected by price controls, by environmental, tax and other laws
relating to the natural gas industry, by changes in such laws and by changing
administrative regulations and the interpretations and application of such laws,
rules and regulations. Natural gas industry legislation and agency regulation is
periodically changed for a variety of political, economic and other reasons.
The Company's international operations are also subject to the
political, economic and other uncertainties of doing business abroad including,
among others, risks of war, cancellation, expropriation, renegotiation or
modification of contracts, export and transportation regulations and tariffs,
taxation and royalty policies, foreign exchange restrictions, international
monetary fluctuations and other hazards arising out of foreign government
sovereignty over certain areas in which the Company conducts, plans to conduct
or in the future may conduct operations.
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Federal and State Regulation of Natural Gas. Natural gas sales have
been deregulated at the wholesale, or pipeline, level since Federal Energy
Regulatory Commission ("FERC") Order 636 was issued in 1992. Since that time,
individual states have been studying various methods for deregulating natural
gas sales at the retail level. Many state utility commissions are currently
conducting pilot programs that allow residential and small commercial consumers
to select a provider of their choice, other than the local distribution company,
to supply their natural gas. As natural gas sales are deregulated, on a state by
state basis, the Company believes that timely collection and reporting of
consumption data will be needed and desired by utility companies and energy
service providers, particularly for residential and commercial customers who are
purchasing natural gas on an aggregate basis. The Company believes that Metretek
will benefit from such a regulatory environment.
Environmental Regulation. While various federal, state and local laws
and regulations covering the discharge of materials into the environment, or
otherwise relating to the protection of the environment, may affect the
Company's operations as a result of their effect on natural gas development,
exploration, production, transportation and dispensing operations, the Company's
operations are not currently subject to substantial environmental laws and
regulations. The Company believes it is in material compliance with those
environmental laws and regulations to which it is subject. It is not anticipated
that the Company will be required in the near future to expend amounts that are
material in relation to its total capital expenditures program by reason of
environmental laws and regulations. However, inasmuch as such laws and
regulations are frequently changed, the Company is unable to predict the
ultimate effect on the Company and cost of compliance to the Company.
EMPLOYEES
At February 28, 1999, the Company and its subsidiaries had 259
full-time employees. None of the Company's employees are covered by a collective
bargaining agreement. The Company believes that its relations with its employees
are good.
RESEARCH AND DEVELOPMENT
The Company's basic research and development activities are conducted
by Metretek. Metretek conducts research and development directed towards
improvements in its product and service offering which address anticipated
customer needs and potential new markets. Current research and development
activities for existing customers and markets are aimed at expanding the
Company's wireless communication capability, cost reduction of pulse collection
devices, and a new software operating system. Products and services currently
under development for new markets include an electric meter interface and a
monitoring and recording system for liquid levels in storage tanks (primarily
for use in propane distribution systems). The Company incurred $961,383 and
$1,062,264 for research and development expenses during the years ended December
31, 1998 and 1997 respectively. The Company intends to continue to allocate
resources to the research and development of new Metretek products and services
in the future. The Company's future services will depend, in part, on its
services in these development projects which will require continual substantial
investments.
RAW MATERIALS
The Company's subsidiaries purchase memory chips, electronic
components, printed circuit boards, fabricated sheet metal parts, machined
components, aluminum, metallic castings and various other raw materials for
their products. While, in the opinion of management, the loss of any one
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supplier of materials would not have a material adverse impact on the business
or operations of the Company, shortages in certain components such as memory
chips, supply problems from the Company's suppliers or the Company's inability
to develop alternative sources of supply quickly or cost-effectively could
materially impact the Company's ability to manufacture its products and
therefore could adversely affect the Company's business and operations. The
Company attempts to mitigate this risk by maintaining an inventory of such
materials.
PROPRIETARY RIGHTS
The Company's success and ability to compete are dependent in part upon
its proprietary rights and technology. The Company relies on a combination of
patents, copyrights, trademarks and trade secret laws to establish and protect
its rights in its products and proprietary technology. Although the Company
maintains certain patents related to its business, the Company does not believe
that its competitive position is dependent upon patent protection or that its
operations are dependent upon any individual patent. Nevertheless, the Company
believes that the following factors are more essential to protecting its
technology leadership position:
o The technological and creative skills of the Company's
personnel;
o New products and service development;
o Frequent product and service enhancements;
o Name recognition;
o Customer training and support; and
o Reliable product support.
The Company generally requires its employees and consultants to enter
into nondisclosure and assignment of invention agreements to limit use of,
access to and distribution of proprietary technology. There can be no assurance
that the Company's means of protecting its proprietary rights in the U.S. or
abroad will be adequate. In addition, the laws of some foreign countries may not
protect the Company's proprietary rights as fully or in the same manner as do
the laws in the United States. Despite the Company's efforts to protect its
proprietary rights, it may be possible for unauthorized third parties to copy,
reverse engineer or otherwise obtain, use or exploit aspects of the Company's
products, develop similar technology independently or otherwise obtain and use
information that the Company regards as proprietary. There can be no assurance
that the Company's competitors will not independently develop technologies
similar or superior to the Company's technology or design around the proprietary
rights owned by the Company. Although the Company is not aware that its products
infringe on the proprietary rights of third parties, there can be no assurance
that others will not assert claims of infringement in the future or that, if
made, such claims will not be successful.
ADDITIONAL FACTORS THAT MAY AFFECT THE COMPANY'S FUTURE RESULTS
In addition to other information in this Annual Report on Form 10-KSB,
the following factors should be carefully considered in evaluating the Company
and its business because such factors involve risks and uncertainties that may
have significant impact in the future of the Company's business, financial
condition and results of operations.
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THE COMPANY'S HISTORY OF NET LOSSES. Although the Company has reported
income from continuing operations in recent fiscal years and net income in
certain recent fiscal quarters, the Company has a history of incurring net
losses since it commenced operations in 1991. As of December 31, 1998, the
Company had an accumulated deficit of approximately $21.5 million. For the
fiscal years ended December 31, 1998 and 1997, the Company had net losses of
$339,316 and $1,524,137, respectively, although the Company had income from
continuing operations of $343,800 in 1997. Most of the Company's historical
operating losses were incurred by its CNG refueling station equipment business,
which was sold in 1997. There is no assurance that the Company will be able to
ever achieve or sustain profitability, and if the Company does achieve
profitability in any period, the Company may not be able to sustain or increase
profitability on a quarterly or annual basis.
QUARTERLY FINANCIAL RESULTS ARE SUBJECT TO SIGNIFICANT FLUCTUATIONS.
The revenues and operating results of the Company have varied widely in the
past, and the Company expects that they will continue to vary significantly from
quarter to quarter in the future due to a number of factors, some of which are
outside of the Company's control, including the following:
o Demand for the Company's products and services;
o The size and timing of sales and orders;
o The level of product and price competition that the Company
encounters;
o The length of the Company's sales cycle;
o The timing of the Company's new product introductions and
enhancements and those of its competitors;
o Market acceptance of the Company's new products;
o Changes in the Company's pricing policies and those of its
competitors;
o Variations in the length of the Company's product
implementation process;
o The mix of products and services sold;
o The mix of international and domestic revenue;
o Changes in sales incentives;
o Lifecycles of Company's products;
o Expansion of international operations;
o The general economic and political conditions;
o Budgeting cycles of utilities;
o Delays in internal product design projects;
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o Acceptance of new products and new technology in the Company's
markets;
o Shifting customer basis;
o Company's expenditures on research and development;
o Economic conditions in the utility industry;
o The effects of government regulations and regulatory changes;
o Capital expenditures and other costs relating to the expansion
of operations;
o Prices charged by suppliers; and
o Costs related to acquisitions of technology or businesses.
Because many of the Company's operating expenses are relatively fixed,
a shortfall in anticipated revenue or delay in recognizing revenue could cause
operating results to vary significantly from quarter-to-quarter and could result
in operating losses. The timing of large individual sales is also difficult for
the Company to predict. In some cases, sales have occurred in quarters
subsequent to those anticipated by the Company. To the extent one or more of
such sales are lost or occur later than expected, operating results could be
materially adversely affected. If the Company's revenues fall below expectations
in any particular quarter, the Company's business, financial condition or
results of operations could be materially adversely affected. Because the
Company generally fills orders within three to six months of receipt, revenues
for each quarter depend on sales completed in that quarter or the prior quarter.
If revenues fall below expectations, the Company will not be able to reduce its
spending rapidly in response to such a shortfall.
For reasons noted below, the Company may experience significant
seasonality and cyclicality with respect to its business. Poor weather
conditions during hurricane season can adversely affect revenues from Southern
Flow. Additionally, the natural gas utility industry is cyclical, with sales of
products to the natural gas utility industry affected by changes in the prior
winter's weather patterns. As a result of the unpredictability of the utility
sales cycles, increased uncertainty in the utility markets attributable to the
regulatory reforms referred to below, and strong competitive forces, the Company
does not have a precise basis to predict future revenues and operating results.
Due to the foregoing factors, the Company believes that
quarter-to-quarter comparisons of its operating results are not a good
indication of future performance. It is likely that the Company's results of
operations in some future quarter may be below the expectations of public market
analysts or investors. In this event, the price of the Company's Common Stock is
likely to decline.
DEPENDENCE ON UTILITY INDUSTRY AND UNCERTAINTY RESULTING FROM
REGULATORY REFORM. Metretek has historically derived 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
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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 interest rates or general economic
downturns, among other factors.
The domestic utility industry is currently the focus of regulatory
reform initiatives in virtually every state, which initiatives have resulted in
significant uncertainty for industry participants and raised concerns regarding
assets that would not be considered for recovery through ratepayer charges.
Consequently, many utilities are delaying purchasing decisions that involve
significant capital commitments. While Metretek expects some states will act on
these regulatory reform initiatives in the near term, there can be no assurance
that the current regulatory uncertainty will be resolved in the near future or
that the advent of new regulatory frameworks will not have a material adverse
effect on Metretek's business, financial condition or results of operations.
Moreover, in part as a result of the competitive pressures in the utility
industry arising from the regulatory reform process, many utility companies are
pursuing merger and acquisition strategies. Metretek has experienced
considerable delays in purchase decisions by utilities that have become parties
to merger or acquisition transactions. Typically, such purchase decisions are
put on hold indefinitely when merger negotiations begin. The pattern of merger
and acquisition activity among utilities may continue for the foreseeable
future. If such merger and acquisition activity continues at its current rate or
intensifies, the Company's results of operating may continue to be materially
adversely affected.
NEED FOR ADDITIONAL FUNDS IN THE FUTURE. The Company anticipates that
it will have a continuing need for additional funds to accomplish its business
strategy in the future. In addition, unanticipated events, over which the
Company may have no control, could increase the Company's operating costs or
decrease its ability to generate revenues from product and service sales. The
Company anticipates, based on the Company's currently proposed plans and
assumptions relating to its existing operations, that projected cash flow from
operations and its available capacity under its current credit facility will be
sufficient to satisfy its anticipated cash requirements for existing operations
in 1999. However, the Company will require additional capital in the future in
order to make any significant acquisitions of businesses or technologies. In the
event the Company's plans change, its assumptions change or prove to be
inaccurate or if projected cash flow from operations prove to be insufficient to
fund operations (including for reasons related to unanticipated technical or
other problems), the Company could be required to seek additional financing.
There is no assurance that the Company will be able to raise needed funds on
terms satisfactory to it, or that sufficient funds will be available when needed
to pursue its business plan. In addition, the terms of the Company's existing
credit facility prohibits the Company from incurring additional indebtedness
without lender consent. The Company's inability to secure necessary funds to
finance its business operations at the times and in the amounts required could
have a material adverse effect on its business, financial condition and results
of operations.
DEPENDENCE UPON AND UNCERTAINTY OF NEW PRODUCTS AND NEW TECHNOLOGIES.
The Company has made and expects to continue to make substantial investments in
technology relating primarily to Metretek's business. The success of the
Company, particularly with respect to Metretek, depends to a significant extent
on the development and implementation of new product designs and technologies,
as well as the enhancement of its existing products. This product development
will require additional
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investments in order to maintain and enhance the Company's market position.
There can be no assurance that unforeseen problems will not occur with respect
to the Company's technology or products. Development schedules for new products
are subject to uncertainty and there can be no assurance that the Company will
meet its product development schedule. The Company has experienced delays in new
product development in the past and there can be no assurance that delays will
not be experienced in the future. Delays in new product development can result
from a number of causes, including changes in definition during the development
stage, initial failures of products or unexpected behavior of products under
certain conditions, failure of third-party supplied components to meet
specifications or lack of availability of such components, unplanned
interruptions with existing products that can result in reassignment of product
development resources, and other factors. Delays in the development and
availability of new products could have a material adverse effect on the
Company's business and operations. In addition, the Company's business may be
substantially adversely impacted if the Company is unable to keep abreast of the
latest technological developments, if the Company's existing technologies are
rendered obsolete or uneconomical, if the regulations or standards that are
developed are not favorable to the Company's product lines or the Company's
competitors obtain more favorable market acceptance. There can be no assurance
that the Company will be successful in developing new products or enhancing its
existing products on a timely or cost-effective basis, or that such new products
or product enhancements will achieve market acceptance.
Also, the Company's ability to compete in new markets will depend upon
a number of factors including, without limitation the following:
o The Company's ability to create demand for its products in
such markets;
o The Company's ability to manage its growth effectively;
o The quality of its products;
o The Company's ability to respond to changes in its customers
businesses by updating existing products and introducing, in a
timely fashion, products which meet the needs of its
customers; and
o The ability of the Company to respond rapidly to technological
change.
The failure of the Company to do any of the foregoing could result in a
material adverse effect on its business, financial condition and results of
operations. No assurance can be given that the Company will be able to
successfully compete in these markets, or that it will be able to meet the
technical specifications imposed by its customers or potential customers.
RISKS DUE TO CHANGING PRODUCT MIX. The gross margin on the Company's
revenues from some of its product and service lines is higher than the gross
margin on other of its product and service offerings. Accordingly, any change in
the mix of types of products and services sold towards lower margin products and
services will affect the gross margin on the Company's total revenues and,
accordingly, will result in lower net income (or higher net losses) on the same
amount of revenues. A change in product and service mix resulting in lower gross
margin could have a material adverse effect on the Company's business, financial
condition, results of operations and cash flow.
RISKS OF MANAGING PRIVATE PROGRAMS. Although the operations of MGT have
been discontinued and MGT does not intend to form any new private programs, MGT
will remain in the
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business of managing two business trusts that operate natural gas asset programs
until MGT's interests in those business trusts are sold or the programs are
liquidated. These private programs were financed by private placements of equity
interests raising capital to acquire the assets and business operated by the
programs. Management of such private energy programs involves certain risks
including, but not limited to:
o Risks due to adverse changes in the success of the programs
due to events, conditions and factors outside of the control
of MGT, such as general and local conditions affecting the
energy market and the price of the program's products;
o Changes in the regulatory environment;
o Reliance upon suppliers and customers;
o Hazards of energy facilities; and
o Changes in technology.
RISKS ASSOCIATED WITH INTERNATIONAL OPERATIONS. The Company,
principally through Metretek, markets and sells its products and services in
certain international markets. Metretek has an established office in the United
Kingdom. International revenues, which are comprised of export sales to foreign
markets from the United States and sales by Metretek's United Kingdom
subsidiary, constituted approximately 8% and 9% of the Company's consolidated
revenues in fiscal years 1998 and 1997, respectively. The Company, primarily
through Metretek, intends to continue and expand its international operations
and enter new international markets. This expansion will require significant
management attention and financial resources. Additionally, costs associated
with international expansion include the establishment of additional offices,
hiring of additional personnel, localization and marketing of products and
services in foreign markets, and the development of relationships with
international service providers. If international revenue is not adequate to
offset the expense of expanding foreign operations, the Company's business,
financial condition and results of operations could be materially adversely
affected. The Company's international operations are also subject to other
inherent risks, including:
o Changes in applicable laws and regulatory requirements;
o Export and import restrictions;
o Export controls relating to technology;
o Tariffs and other trade barriers;
o Less favorable intellectual property laws;
o Difficulties in staffing and managing foreign operations;
o Political instability;
o Fluctuations in currency exchange rates;
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o Potential adverse tax consequences;
o Cultural and language difficulties;
o The impact of a recessionary environment in economics outside
the United States;
o The potential exchange and repatriation of foreign earnings;
o Localization and translation of products;
o Difficulties in collecting accounts receivable and longer
collection periods; and
o The impact of local economic conditions and practices.
The Company's success in expanding its international operations
depends, in part, on its ability to anticipate and effectively manage these and
other risks. The Company has limited experience in conducting its business
outside the United States and may encounter unforeseen difficulties in
conducting operations in foreign countries. In addition, while the Company's
current products are designed to meet relevant regulatory requirements of
foreign markets in which they are sold, any inability to obtain any required
foreign regulatory approval and any changes in foreign regulatory requirements
could have a material adverse effect on the Company's ability to conduct
business in such markets. In addition, the Company may confront significant
challenges in developing and implementing localized versions of its system due
to many factors including the differing standards among utilities on a country
by country basis.
A portion of the Company's revenues from sales to foreign entities is
in the form of foreign currencies. The Company has no hedging or similar foreign
currency contracts, and fluctuations in the value of foreign currencies could
adversely impact the profitability of the Company's foreign operations. There
can be no assurance that one or more of such factors will not have a material
adverse effect on the Company's future international activities and,
consequently, on the Company's business, financial condition or results of
operations.
COMPETITION. The markets for the Company's products and services are
highly competitive and are characterized by rapidly changing technology,
frequent product and service performance improvements and evolving industry
standards. The Company believes that its future ability to compete effectively
will depend, in part, upon its ability to continue to improve its products and
services and process technologies and to develop new technologies in order to
maintain the performance advantages of products and processes relative to
competitors, to adapt products and services and processes to technological
changes, to identify and adopt emerging industry standards and to adapt to
customer needs. Many of the Company's present and potential competitors have
substantially greater financial, marketing, technical, manufacturing and other
resources, name recognition and experience than the Company. The Company's
competitors may be able to respond more quickly to new or emerging technologies
and changes in customer requirements or to devote greater resources to the
development, promotion and sale of their products and services than the Company.
There can be no assurance that the Company will be able to compete successfully
in the future with any of these sources of competition. In addition, there can
be no assurance that competitive pressures will not result in price erosion,
reduced margins, loss of market share or other factors. Any of the foregoing
could have a material adverse effect on the Company's business, financial
condition and results of operations. See "Competition" above.
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DEPENDENCE UPON FUTURE ACQUISITIONS. Acquisitions have in the past
played an important role in implementing the Company's business strategy. The
Company believes that additional acquisitions in the future are important to its
growth, development and continued ability to compete effectively in the
marketplace. The Company evaluates potential acquisitions and strategic
investments on an ongoing basis. In the event the Company were to identify an
appropriate acquisition candidate, there is no assurance that the Company would
be able to successfully negotiate the terms of any such acquisition, finance
such acquisition and integrate such acquired business, products, technologies or
services into the Company's existing business and operations. Furthermore, the
integration of an acquired business could cause a diversion of management time
and resources. In addition, there can be no assurance that any acquisition of
new technology will lead to the successful development of new products, or that
any such new products or services, if developed, will achieve market acceptance
or prove to be profitable. There can be no assurance that a given acquisition,
when consummated, would not materially adversely affect the Company's business,
financial condition or results of operations. If the Company proceeds with one
or more significant acquisitions in which the consideration consists of cash, a
substantial portion of the Company's available cash could be used to consummate
the acquisitions and may result in increased indebtedness, interest and
amortization expense or decreased operating income (or increased operating
losses), any of which could have a material adverse effect on the Company's
business, financial condition and results of operations. If the Company
consummates one or more significant acquisitions in which the consideration
consists of capital stock or securities convertible into capital stock, or is
financed with the net proceeds of the issuance of capital stock or securities
convertible into capital stock, stockholders of the Company could suffer a
significant dilution of their percentage ownership interests in the Company.
Except as otherwise set forth herein, the Company presently has no agreements or
commitments with respect to any material acquisition and there can be no
assurance that any such additional businesses will be acquired. In addition,
there can be no assurance that any such acquisitions, if made, will be
successful or that they will assist the Company in the accomplishment of its
long-term business strategy.
UNCERTAINTY OF PROTECTION OF INTELLECTUAL PROPERTY AND PROPRIETARY
RIGHTS AND INFRINGEMENT RISKS. The Company's success and ability to compete are
dependent in part upon its intellectual property and proprietary rights and
technology. The Company relies on a combination of patents, copyrights,
trademark and trade secret laws, and confidentiality agreements and licensing
arrangements, to establish and protect its rights in its products and
proprietary technology. Although the Company maintains certain patents related
to its business, the Company does not believe that its competitive position is
dependent upon patent protection or that its operations are dependent upon any
individual patent. The Company generally requires its employees and consultants
to enter into nondisclosure and assignment of invention agreements to limit use
of, access to and distribution of proprietary technology. There can be no
assurance that the Company's means of protecting its proprietary rights will be
adequate. In addition, the laws of some foreign countries may not protect the
Company's proprietary rights as fully or in the same manner as do the laws of
the United States.
Despite the Company's efforts to protect its proprietary rights, it may
be possible for unauthorized third parties to copy, reverse engineer or
otherwise obtain, use or exploit aspects of the Company's products, develop
similar technology independently, or otherwise obtain and use information that
the Company regards as proprietary. There can be no assurance that the Company's
competitors will not independently develop technologies similar or superior to
the Company's technology or design around the proprietary rights owned by the
Company. In addition, the Company may resort to litigation to enforce its
intellectual property rights, to protect its trade secrets, to determine the
validity and scope of others' proprietary rights, or to defend against claims of
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infringement or invalidity in the future. Such litigation could result in
significant costs or the diversion of resources. This could materially adversely
affect the Company's business, financial condition or results of operations.
The Company may receive notice of claims of infringement of other
parties' proprietary rights in the normal course of business. Although the
Company does not believe that its products infringe the proprietary rights of
third parties, the Company cannot guarantee that such infringement or invalidity
claims will not be asserted or prosecuted against the Company. Defending such
claims, regardless of their validity, could result in significant costs and
diversion of resources. Such assertions or defense of such claims may materially
adversely affect the Company's business, financial condition or results of
operations. In addition, such assertion could result in injunctions against the
Company. Injunctions that prevent the Company from distributing its products
would have a material adverse effect on its business, financial condition and
results of operations. If such claims are asserted against the Company, the
Company may seek to obtain a license to use such intellectual property rights.
There can be no assurance that such a license would be available on commercially
reasonable terms.
UNCERTAINTY AND RISKS RESULTING FROM YEAR 2000 ISSUES. 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 normal business activities.
The Company may be affected by Year 2000 issues related to
non-compliant information technology, systems or non-information technology
systems operated by the Company or by third parties. The Company has
substantially completed its evaluation and assessment of its internal and third
party information technology systems and non-information technology systems. At
this point in its assessment, the Company is not currently aware of any Year
2000 issues relating to systems operated by the Company or by third parties that
would have a material adverse effect on the Company's business, results of
operations or financial condition. The Company has and will continue to modify
and replace portions of its existing information technology system so they will
function properly with respect to dates in the Year 2000 and thereafter. Based
on its assessment to date, the Company does not anticipate that costs associated
with remediating the Company's non-compliant information technology or
non-information technology systems will be material, although there can be no
assurance to such effect.
The Company believes that the greatest risks from Year 2000 issues will
result from the failure of third parties, with which the Company has material
relationships or on which the Company is materially dependent, to become Year
2000 compliant. 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. 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 currently anticipates a minimum level of disruption,
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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,
and telecommunications and transportation services. Outages of any of these
vital services and supplies could prevent the Company from performing its
services or impair its ability to perform its services. 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.
UNCERTAINTY OF LEGAL PROCEEDINGS. The Company and one of its
subsidiaries are defendants to a pending action filed in 1993 in Denver District
Court in which the plaintiff is seeking damages in the amount of approximately
$420,000 and punitive damages. The Company believes the allegations against it
are without merit, intends to contest such allegations vigorously, and has
asserted counterclaims against the defendant. In 1997, the Denver District Court
entered a summary judgment in favor of the Company, but the summary judgment was
reversed on February 18, 1999 by the Colorado Court of Appeals. The Company
intends to appeal the reversal of the summary judgment motion to the Colorado
Supreme Court. The Company is also from time to time involved in routine
litigation incidental to its business, although currently there are no other
pending, or to the knowledge of management, threatened material proceedings.
Based upon current information, the Company does not expect any such proceedings
to have a material adverse effect on the Company. However, the outcome of
litigation is inherently uncertain, and such litigation could, despite
management's current expectations, result in a material adverse effect on the
Company's business, financial condition or results of operation. See "Item 3.
Legal Proceedings."
RISKS INHERENT IN NATURAL GAS OPERATIONS. Some of the Company's
operations are subject to the hazards and risks inherent in the servicing and
operation of natural gas assets, including encountering unexpected pressures,
explosions, fire, natural disasters, blow-outs, cratering and pipeline ruptures,
which could result in personal injuries, loss of life, environmental damage and
other damage to the properties of the Company and others. These operations
involve numerous financial, business, regulatory, environmental, operating and
legal risks. Damages occurring as a result of these risks may give rise to
product liability claims against the Company. The Company has product liability
insurance generally providing up to $6,000,000 of coverage per occurrence and
$7,000,000 annual aggregate coverage. Although the Company believes that its
insurance is adequate and customary for companies of a similar size engaged in
operations similar to that of the Company, losses could occur for uninsurable or
uninsured risks or losses could occur in excess of existing injury coverage. The
occurrence of a significant adverse event, the risks of which are not fully
covered by insurance, could have a material adverse effect on the Company's
business, financial condition or results of operations. Moreover, the Company
cannot provide any assurance that it will be able to maintain adequate insurance
in the future at rates it considers reasonable.
GOVERNMENTAL REGULATION. The Company's business operations are subject
to extensive federal, state, local and foreign laws and regulations. The Company
cannot provide any assurance that that laws and regulations either existing or
enacted in the future or the repeal or modification of current laws and
regulations will not adversely affect the Company's business, financial
condition or results of operations. Furthermore, amendments to statutes and
regulations and the Company's expansion into new areas could require the Company
to continually modify or alter methods of operations at costs which could be
substantial. There can be no assurance that the Company will be able, for
financial or other reasons, to comply with all applicable laws and regulations.
If the Company fails to comply with such laws, rules and regulations, then it
could be the subject of substantial penalties.
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<PAGE> 23
DEPENDENCE ON KEY PERSONNEL. The Company's success depends to a large
extent on its ability to attract and retain highly qualified technical,
managerial, sales and marketing personnel, including the abilities and continued
participation of its executive officers and key employees. Competition for such
personnel is intense, and there can be no assurance that the Company will be
successful in hiring or retaining the requisite personnel in the future. The
Company does not carry key-man insurance policies on any of its officers,
directors or key employees. The loss of the services of any of these persons, or
the inability of the Company to hire qualified personnel on a timely basis and
retain their services, could have a material adverse effect on the Company's
business, financial condition or results of operations.
DEPENDENCE ON BUSINESS RELATIONSHIPS TO ACHIEVE MARKET PENETRATION. A
key element of the Company's business strategy is the formation of corporate
relationships with other companies to provide products and services to existing
and new markets. The Company is currently investing, and plans to continue to
invest, significant resources to develop these relationships. The Company
believes that its success in penetrating new markets will depend in large part
on its ability to maintain these relationships and to cultivate additional or
alternative relationships. There can be no assurance that the Company will be
able to develop additional corporate relationships with such companies, that
existing relationships will continue or be successful in achieving their
purposes or that such companies will not form competing arrangements.
CONTROL BY EXISTING STOCKHOLDERS. As of February 28, 1999, the
officers, directors and 5% or greater shareholders of the Company beneficially
owned approximately 1,612,849 shares of Common Stock (including shares issuable
upon the exercise or conversion of (i) presently exercisable stock options, (ii)
presently exercisable warrants, and (iii) the American Meter Note), which shares
constituted 40.1% of the total outstanding shares of Common Stock, assuming all
options, warrants and rights held by such persons are exercised or converted.
While the Company is unaware of any agreement among such persons to act
together, they would be able to materially influence and may effectively control
the outcome of all matters submitted to a vote of the Company's stockholders,
including (i) the election or removal of directors, and (ii) any merger,
consolidation or sale of all or substantially all of the assets of the Company.
Such a concentration of ownership may also have an adverse effect on the market
price of the Common Stock.
SHARES ELIGIBLE FOR FUTURE SALE. Virtually all of the Company's
outstanding shares of Common Stock are presently eligible for immediate sale in
the public market. Sales of substantial amounts of Common Stock into the public
market, or a perception that such sales could occur, and the existence of
options and warrants to purchase Common Stock representing an overhanging
obligation of the Company to sell additional Common Stock at prices that may be
below the then current market price of the Common Stock, could adversely affect
the market price of the Common Stock and could impair the Company's future
ability to raise the capital through the sale of its equity securities. Also, as
of February 28, 1999, options to purchase 423,298 shares of Common Stock and
warrants to purchase 983,062 shares of Common Stock were outstanding. American
Meter has certain registration rights with respect to 620,326 shares of Common
Stock issued to it by the Company or issuable to it upon the conversion of the
American Meter Note.
ANTI-TAKEOVER PROVISIONS. Certain provisions of (i) the Company's
Restated Certificate of Incorporation, as amended (the "Certificate"), and the
Company's Amended and Restated By-Laws (the "By-Laws"), including a fair price
requirement, a classified Board of Directors, anti-greenmail restrictions,
super-majority vote requirements for certain fundamental corporate actions and
certain provisions relating to stockholder actions, (ii) the termination and
changes in control arrangements in the employment
23
<PAGE> 24
contracts with certain executive officers of the Company, and (iii) the
Company's Rights Agreement, may have the effect of delaying or preventing a
change in control of the Company and may make more difficult the removal of
incumbent management even if such transactions could be beneficial to
stockholders. Further, Section 203 of the General Corporation Law of the State
of Delaware (the "DGCL") prohibits the Company from engaging in certain business
combinations with interested stockholders. These provisions could have the
effect of delaying or preventing a change in control of the Company without
action by the stockholders, and therefore could adversely affect the market
price of Common Stock.
AUTHORIZATION AND ISSUANCE OF PREFERRED STOCK. The Board of Directors
of the Company is authorized to issue, without further stockholder approval, up
to 2,500,000 shares of Preferred Stock, par value $.01 per share (the "Preferred
Stock"), which consists of 1,000,000 shares of Series A Preferred Stock,
1,000,000 shares of Series B Preferred Stock and 500,000 shares of Series C
Preferred Stock. The terms of the Series A Preferred Stock and the Series C
Preferred Stock are fixed and include rights preferential to the Common Stock
with respect to dividends and liquidation preferences. The Board of Directors is
also authorized to establish the dividend rates, liquidation preferences, voting
rights, redemption and conversion terms and privileges with respect to the
Series B Preferred Stock without further stockholder approval. The Company may
in the future issue shares of Preferred Stock or create additional series and
classification of Preferred Stock. No shares of Preferred Stock are currently
issued and outstanding, and the Company has no current plan or intention to
issue any shares of Preferred Stock. The issuance of any shares of Preferred
Stock having rights superior to those of the Common Stock may result in a
decrease in the value or market price of the Common Stock and, further, could be
used by the Board of Directors as a means to prevent a change in control of the
Company.
NO DIVIDENDS. The Company has never declared or paid any cash dividends
on its Common Stock. The Company currently intends to retain its earnings, if
any, in the foreseeable future in order to finance the operations and growth of
the Company. In addition, the Company's credit facility prohibits the payment of
cash dividends without the consent of the lender. Accordingly, the Company does
not anticipate paying dividends to holders of Common Stock in the foreseeable
future.
VOLATILITY OF COMMON STOCK PRICE. The market price of the Company's
Common Stock has in the past been, and in the future is likely to continue to
be, highly volatile. A variety of events could result in wide fluctuations in
the market price of the Common Stock, including without limitation:
o Quarter-to-quarter variations in operating results;
o News announcements;
o Trading volume;
o General trends in the industry;
o Overall market conditions;
o Technological innovations or new products or services by the
Company or its competitors;
o Revised earnings estimates or other comments by analysts; and
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<PAGE> 25
o General stock market trends and conditions.
In addition, it is possible that in some future period the Company's
operating results may be below the expectations of public market analysts and
investors. In such event, the price of the Company's Common Stock could be
materially adversely affected. Additionally, the stock market in general, and
the market for technology and energy stocks in particular, have experienced
extreme price volatility in recent years. Volatility in price and volume has had
a substantial effect on the market prices of many technology and energy
companies for reasons unrelated or disproportionate to the operating performance
of such companies. These broad market fluctuations could have a significant
impact on the market price of the Common Stock. In the past, following periods
of volatility in the market price of a company's securities, securities class
action litigation has often been instituted against such company. Such
litigation, if instituted, whether or not successful, could result in
substantial costs and diversion of management's attention and resources, which
would have a material adverse effect on the Company's business, results of
operations and financial condition.
ITEM 2. DESCRIPTION OF PROPERTY
The Company leases its corporate executive offices located in downtown
Denver, Colorado, which contain 3,443 square feet. The lease currently has a
monthly rental obligation of $4,433, including operating costs, expires July 31,
2001, and contains a market-rate renewable lease provision.
Metretek leases its principal business offices, located in Melbourne,
Florida, for its executive, manufacturing, engineering, warehouse and marketing
operations. This facility has 45,500 square feet and a current monthly rental
obligation of $29,420, including operating costs. The lease expires June 30,
2005. Metretek has sub-leased 8,470 square feet of its space for $7,053 monthly
rental.
Southern Flow leases office facilities in the following locations:
Lafayette, Belle Chasse and Shreveport, Louisiana; Jackson, Mississippi; Houston
and Victoria, Texas; Tulsa, Oklahoma; and Aztec, New Mexico. These offices have
an aggregate of approximately 57,000 square feet, total monthly rental
obligations of approximately $31,000 and terms expiring at various times through
2001. In addition, Southern Flow owns and occupies land and a 8,600 square foot
office building in Dallas, Texas.
ITEM 3. LEGAL PROCEEDINGS
In 1993, a former employee filed an action in Denver District Court
against DVCO Fuel Systems, Inc. ("DVCO"), a former subsidiary of Marcum Denver,
and the Company, alleging that the Company conspired with certain third parties
to defraud him and that the Company intentionally interfered with certain
contracts in which he had an interest. The former employee is seeking damages in
the amount of approximately $420,000 and punitive damages. The Company has
denied the former employee's claims and has asserted counterclaims against the
former employee, alleging that (i) he breached an agreement with the Company
which included a legal release, (ii) he made intentional and/or negligent
misrepresentations regarding his qualification and reputation in the compressed
natural gas industry, (iii) he breached his fiduciary duty to the Company, and
(iv) he disparaged the Company. On July 24, 1997, the former employee's action
was dismissed as a result of the Court's grant of the motion by the Company and
DVCO for summary judgement against the former employee's claims. On February 18,
1999, the Colorado Court of Appeals reversed the summary judgment. The Company
intends to appeal that ruling to the Colorado Supreme Court. The Company
believes the allegations against it and DVCO are without merit and intends to
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<PAGE> 26
defend the action vigorously. Although the outcome of litigation is inherently
uncertain, in the opinion of the Company's management, this litigation is not
expected to have a material adverse effect on the business, financial condition
or results of operations of the Company.
The Company is from time to time involved in routine litigation
incidental to its business. However, other than as set forth above, there are no
material legal proceedings currently pending, or to the knowledge of management,
threatened that the Company expects, based upon current information, to have a
material adverse effect on the business, financial condition or results of
operations of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
NONE
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<PAGE> 27
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock is traded on the Nasdaq National Market
under the symbol "MGAS". The Company's Common Stock Purchase Warrants (the
"Warrants") which were distributed as a special dividend to the Company's
stockholders on September 18, 1998 have traded on the Nasdaq SmallCap Market
since such date under the symbol "MGASW". The following table sets forth, for
the periods indicated, the closing high and low sales prices of the Common Stock
as reported on the Nasdaq National Market and of the Warrants as reported on the
Nasdaq SmallCap Market:
<TABLE>
<CAPTION>
COMMON STOCK WARRANTS
---------------- ------------
PERIOD HIGH LOW HIGH LOW
- ------ ---- --- ---- ---
<S> <C> <C> <C> <C>
1997:
First Quarter ...... $4.88 $3.00
Second Quarter ..... 3.88 2.76
Third Quarter ...... 5.64 3.32
Fourth Quarter ..... 5.00 3.52
1998:
First Quarter ...... 5.50 4.13
Second Quarter ..... 5.25 3.12
Third Quarter (since
September 18, for
Warrants) ........ 3.25 1.78 .44 .31
Fourth Quarter ..... 2.56 1.41 .75 .20
</TABLE>
As of March 16, 1999, there were 308 holders of record of the Common
Stock and 324 holders of record of the Warrants. Because many of the shares of
Common Stock are held by brokers and other institutions on behalf of
stockholders, the Company is unable to determine precisely the total number of
stockholders represented by these record holders but estimates, based upon
available information, that there are at least 3,000 beneficial owners of its
Common Stock.
The Company has never declared or paid any cash dividends on its Common
Stock. The Company's Board of Directors does not anticipate paying any cash
dividends in the foreseeable future, as it intends to retain any earnings to
finance the operations and growth of the Company. In addition, the Company's
credit facility prohibits the payment of dividends without the consent of the
lender. The payment of any cash dividends on the Common Stock in the future will
depend on such factors as the earnings, anticipated growth requirements and
operating and financial condition of the Company, contractual restrictions and
any other factors deemed relevant by the Board of Directors.
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<PAGE> 28
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
INTRODUCTION
The following discussion of the results of operations for the Company
for the years ended December 31, 1998 and 1997 and of the consolidated financial
condition of the Company as of December 31, 1998 should be read in conjunction
with the Company's consolidated financial statements and related notes thereto
included elsewhere herein.
In addition, this item contains certain forward-looking statements made
pursuant to the safe harbor provisions of Section 28A of the Securities Act and
Section 21E of the Exchange Act. Such forward-looking statements 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, the factors described
under "Item 1. Description of Business -- Additional Factors That May Affect The
Company's Future Results" and other risks and uncertainties discussed in this
Item and elsewhere in this Form 10-KSB.
RESULTS OF OPERATIONS
The following table sets forth selected information from the Company's
consolidated statement of operations 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>
YEARS ENDED
DECEMBER 31,
-----------------------
1998 1997
---- ----
(dollar amounts in thousands)
<S> <C> <C>
REVENUES:
Southern Flow .......................... $ 11,106 $ 11,585
Metretek ............................... 8,774 8,805
Other .................................. 42 43
-------- --------
Total .................................. $ 19,922 $ 20,433
======== ========
GROSS PROFIT:
Southern Flow .......................... $ 2,448 $ 2,960
Metretek ............................... 4,568 4,509
-------- --------
Total .................................. $ 7,016 $ 7,469
======== ========
SEGMENT PROFIT (LOSS):
Southern Flow .......................... $ 747 $ 1,179
Metretek ............................... 434 269
Other .................................. (1,486) (1,104)
-------- --------
Income (loss) from continuing operations (305) 344
Loss from discontinued operations ...... (34) (1,868)
-------- --------
Total .................................. $ (339) $ (1,524)
======== ========
</TABLE>
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<PAGE> 29
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. In addition, 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 have been reclassified to exclude the
operating results of these two segments from continuing operations and to
account for these segments as discontinued operations (see Note 3 to the
Consolidated Financial Statements). The following discussion relates only to the
Company's continuing operations.
YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997
Revenues. The Company's consolidated revenues for the year ended
December 31, 1998 decreased $510,727, or 2%, compared to 1997, due principally
to a decrease in the revenues of Southern Flow. Southern Flow's revenues
decreased $479,625, or 4%, for the year ended December 31, 1998, compared to
1997 due to adverse weather conditions in the Gulf Coast during the third and
fourth quarters which limited Southern Flow's operating activities in its
principal operating region. Metretek's revenues for the year ended December 31,
1998 decreased $30,465, or less than 1%, compared to 1997, consisting of a
decrease in international sales of $222,874 and an increase in domestic sales of
$192,409. The decrease in Metretek's international revenues in 1998 was the net
result of the following key factors: (i) reduced sales to Metretek's customers
in South America; (ii) increased sales through Metretek Europe, its European
distribution subsidiary; and (iii) increased sales to Metretek's customers in
Australia and Canada. The increase in Metretek's domestic revenues in 1998 was
the net result of three key factors: (i) an improvement in circuit board
assembly sales by its wholly owned subsidiary, Sigma VI, due to the acquisition
of QCMI as well as the expansion of its line of business; (ii) electronic
corrector product sales occurring as a result of its acquisition of that product
line from American Meter Software in May 1998; and (iii) reduced sales of remote
data collection products due to decreased domestic demand for those products in
1998 compared to 1997.
Costs and Expenses. Cost of sales and services include the product and
personnel and related overhead costs for the Company's goods and services. Cost
of sales and services for the year ended December 31, 1998 decreased $56,198, or
less than 1%, compared to 1997. Metretek's cost of sales and services for the
year ended December 31, 1998 decreased $89,480, or 2%, compared to 1997 due
primarily to decreased sales activity in 1998. Metretek's gross profit margin
after costs of sales and services for the year ended December 31, 1998,
increased from 51.2% to 52.1% compared to 1997. The improvement in Metretek's
gross profit margin reflected (i) cost reductions in electronic parts used in
its products; and (ii) a reduction in outsourcing costs to assemble the
electronic components of its products, which assembly is now being done
in-house. Metretek's gross profit margin is also dependent on its product mix
because the gross profit margin on some of its products and service lines is
higher than the gross profit margin on other of its products and services.
Changes in Metretek's product and service mix will affect Metretek's gross
profit margins in the future. Southern Flow's cost of sales and services for the
year ended December 31, 1998 increased $33,282, or less than 1%, compared to
1997, despite the overall decline in Southern Flow's revenues. Southern Flow's
gross profit margin after costs of sales and services for the year ended
December 31, 1998 decreased from 25.6% to 22.0% compared to 1997. Southern
Flow's gross profit margin declined because virtually all of its employee
service costs continued unabated during the periods when adverse weather
conditions reduced Southern Flow's revenues by limiting its service operations.
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<PAGE> 30
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 year ended December 31, 1998
increased $124,237, or 4%, compared to 1997, due principally to the net effect
of the following factors: (i) a decrease in expenses of Metretek of
approximately $44,000 attributable to a reduction in personnel at Metretek
Europe as well as overall cost savings at Metretek and Sigma VI resulting from
combining certain administrative functions; (ii) a decrease in expenses of
Southern Flow of approximately $89,000 attributable to reduced personnel costs;
and (iii) an increase in general and corporate expenses of approximately
$257,000 due to increased professional services, travel and public company
reporting costs, as well as compensation costs associated with the Company's
1998 Employee Stock Purchase Plan for which there were no comparable costs in
1997.
Selling, marketing and service expenses 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 year ended December 31, 1998
decreased $117,597, or 7%, compared to 1997, substantially all of which related
to activities at Metretek. The decrease in these expenses was due to the
following factors: (i) fewer sales personnel during a significant portion of
1998 compared to 1997; (ii) reduced sales commissions due to fewer sales
personnel as well as a reduction in commission rates for certain sales
personnel; and (iii) reduced advertising and promotional expenses.
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 year ended December 31, 1998 increased $167,171, or 18%, compared to
1997. This increase was due to additional goodwill amortization costs related to
Metretek's recent acquisitions of the assets of American Meter Software and QCMI
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 year ended December 31, 1998 decreased
$100,881, or 9%, compared to 1997, due to reduced costs at Metretek of personnel
engaged in product enhancements and upgrade activities.
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 year ended
December 31, 1998 increased $121,773, or 191%, compared to 1997. The increase
reflects interest expense on additional borrowings in 1998 compared to 1997 in
order to fund Metretek's acquisitions of American Meter Software and QCMI,
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
30
<PAGE> 31
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 interest rates or general economic downturns, among other factors.
Based upon the discussion set forth in this item as well as the factors
set forth under "Item 1. Description of Business - Factors That May Affect the
Company's Future Results - - Quarterly Financial Results are Subject to
Significant Fluctuations", 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 used by operating activities was approximately $1,460,000 for
the year ended December 31, 1998, which was the net result of the following: (i)
approximately $899,000 of cash provided by continuing operations, before changes
in operating assets and liabilities; (ii) approximately $2,356,000 of cash used
to fund changes in working capital and other asset and liability accounts; and
(iii) approximately $3,000 of cash used 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
$1,450,000, all of which will relate to Metretek's business. Research and
development expenses in the amount of $961,383 were incurred in the year ended
December 31, 1998.
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 year ended December 31, 1998 totaled
$608,950.
On May 4, 1998, Metretek acquired substantially all of the assets and
business of American Meter Software pertaining to electronic correctors and
non-radio-frequency meter reading devices in the natural gas and electric
utility industry. The assets acquired by Metretek include certain inventory,
equipment, trademarks and technology of American Meter Software and American
Meter used in the design, manufacture and sales of electronic measurement
process control and telemetry systems to utility companies in the natural gas
and petroleum industries. In connection with the acquisition, Metretek assumed
certain transitional employee costs and product warranty obligations of American
Meter Software. The assets and business operations acquired have been relocated
to Metretek's existing facility in Melbourne, Florida.
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<PAGE> 32
In consideration for the purchase of the assets and business, the
Company and Metretek paid and delivered to American Meter Software at the
closing an aggregate purchase price consisting of $1,300,000 in cash, 439,560
unregistered shares of Common Stock of the Company, and the $1,200,000
convertible subordinated American Meter Note ($600,000 of which is contingent
upon Metretek exceeding certain sales targets, as discussed below). The purchase
price is subject to upward adjustment based upon Metretek's actual sales of
products in the acquired business during the 18-month period that commenced July
1, 1998. If Metretek's annualized sales of products in the business acquired are
greater than $3,900,000 during such period, then the purchase price will be
increased on a dollar-for-dollar basis to the extent of such sales surplus, but
the purchase price shall not be increased above $4,500,000 even if annualized
sales are greater than that amount. Any increase in the purchase price will be
effected by adjusting the principal balance of the American Meter Note.
Subsequent to the Closing, the purchase price was adjusted down by $85,000 to
reflect a decrease in American Meter Software's inventory between December 31,
1997 and May 4, 1998, partially offset by transitional costs assumed by
Metretek.
Up to $1,028,107 of the American Meter Note is convertible at any time
at the option of American Meter Software into 180,766 shares of Common Stock of
the Company at the rate of $5.6875 of principal per share. The American Meter
Note bears interest on the unpaid principal balance at a fixed rate equal to
7.5% per annum, payable quarterly in arrears. The American Meter Note is due and
payable May 4, 2002, and may be prepaid at any time without penalty or premium.
On June 15, 1998, Metretek acquired substantially all of the assets of
QCMI in exchange for $150,000 in cash. QCMI is a contract manufacturer of
electronic circuit boards, sub-assemblies, and cable assemblies serving
customers primarily in Melbourne, Florida and the immediately surrounding area.
On April 14, 1998, the Company and its wholly owned subsidiaries,
Southern Flow and Metretek, entered into a loan and security agreement (the
"Loan Agreement") with a commercial bank (the "Lender") providing for a combined
$5,000,000 credit facility consisting of loans (the "Loans") and letters of
credit to Southern Flow and Metretek, subject to limitations described below.
The Loan Agreement provides for daily advances to Southern Flow and Metretek in
the form of Loans to fund capital requirements, and daily paydowns on
outstanding balances of the Loans from collection of customer accounts
receivable. The Company makes monthly interest payments computed at prime plus
1% (8.75% at December 31, 1998) on outstanding balances of the Loans. The Loans
mature on March 14, 2001. The Loans are secured by the tangible and intangible
assets of the Company, Southern Flow, and Metretek, including equipment,
inventory, receivables, and cash deposits, and the pledge of the shares of the
Company's subsidiaries. The Loan Agreement requires the Company to maintain a
minimum tangible net worth, a maximum debt to tangible net worth ratio, minimum
annual net income (loss), a minimum debt service coverage ratio, and contains
other standard covenants related to operations of the Company, including
prohibitions on the payment of dividends and the issuance or repurchase of
securities (with certain exceptions) without the Lender's consent. Borrowings on
the Loans are limited to the sum of 80% of eligible accounts receivable of
Southern Flow and Metretek and 50% of raw materials and finished goods inventory
(up to a combined maximum of $1,500,000) of Southern Flow and Metretek.
At December 31, 1998, the Company had a combined $4,375,458 Loan
availability, of which $2,561,702 had been borrowed by Southern Flow and
Metretek, leaving $1,813,756 in unused Loan availability. Proceeds from initial
advances under the Loan Agreement were used to extinguish the Company's existing
loans, lines of credit, and accrued interest with two commercial bank lenders in
the
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<PAGE> 33
aggregate amount of $468,993, including $279,021 of a term loan and accrued
interest owed by the Company's discontinued MGT segment to a commercial bank
lender.
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 December 31, 1998, the Company had
repurchased 57,088 shares of its Common Stock at an average price of $2.25 per
share. In September 1998, prior to adopting the Stock Repurchase Plan, the
Company repurchased 18,181 shares of Common Stock that were issued to a licensor
pursuant to a license agreement in order to satisfy certain obligations of the
Company under the license agreement.
Based on the Company's current plans and assumptions, management
believes that 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
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 is effective for periods
beginning after December 15, 1998. SOP No. 98-1 requires that the Company
capitalize certain costs incurred in connection with developing or obtaining
software for internal use. The Company currently capitalizes internal use
software obtained from third parties and expenses internal use software that it
develops. The Company is currently evaluating the impact SOP No. 98-1 will have
on its financial statements, if any.
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<PAGE> 34
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.
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
34
<PAGE> 35
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 $97,000 through December 31, 1998. The
Company intends to fund 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.
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.
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<PAGE> 36
This section discussing Year 2000 issues contains forward-looking
statements. The costs and anticipated completion dates for Year 2000 compliance
by the Company and the estimated impact of Year 2000 issues on the Company are
based 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 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 document, 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.
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<PAGE> 37
ITEM 7. FINANCIAL STATEMENTS
The information required by this item is included herein on pages F-1
through F-22.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
Not applicable.
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<PAGE> 38
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth information concerning the directors and
executive officers of the Company:
<TABLE>
<CAPTION>
NAME AGE POSITION(S)
- ---- --- -----------
<S> <C> <C>
W. Phillip Marcum (1) 55 President and Chief Executive Officer
Chairman of the Board and Director
A. Bradley Gabbard (2) 44 Executive Vice President, Chief Financial
Officer, Treasurer and Director
Ronald W. McKee 51 President of Metretek and Director
Basil M. Briggs (1) 63 Director
Robert Lloyd (2) 60 Director
Anthony D. Pell (2) 60 Director
Harry I. Skilton (1) 60 Director
Albert F. Thomasson (2) 57 Director
</TABLE>
- --------------------
(1) Member, Compensation Committee
(2) Member, Audit Committee
W. PHILLIP MARCUM, a founder of the Company, has served as the
President, Chief Executive Officer, Chairman of the Board and a director of the
Company since its incorporation in April 1991. He also serves as the Chairman
and Chief Executive Officer of each of the Company's direct wholly owned
subsidiaries. He currently serves on the board of directors of one public
corporation, Key Energy Services, Inc., East Brunswick, New Jersey, an oilfield
service provider, and one privately-held corporation, Test America, Inc.,
Asheville, North Carolina, a water analysis company.
A. BRADLEY GABBARD, a founder of the Company, has served as a director
of the Company since its incorporation in April 1991. He has served as the
Executive Vice President of the Company since July 1993, and the Chief Financial
Officer and Treasurer of the Company from April 1991 through July 1993 and since
August 1996. He also served as the Vice President and Secretary of the Company
from April 1991 through July 1993. Mr. Gabbard also serves as the Chief
Financial Officer of each of the Company's direct wholly owned subsidiaries.
From October 1990 to February 1991, Mr. Gabbard was employed by Boettcher &
Company, serving as Vice President in its research department. In 1987, Mr.
Gabbard joined Great Horn, Inc., a privately held New York based investment
corporation, as its Vice President in charge of western oil and gas investment
activities. In 1988, Great Horn acquired a controlling interest in Premier
Resources, Ltd., Denver, Colorado, and appointed Mr. Gabbard as the Executive
Vice President and Chief Operating Officer, where he served until the sale of
Premier in 1990. From 1981 to 1987, Mr. Gabbard was employed by Search Drilling
Company, Wichita, Kansas, a privately held oil and gas company, initially
serving as its Vice President of Finance, and later as an Executive Vice
President. From 1976 to 1981, Mr. Gabbard was employed
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<PAGE> 39
in the Oklahoma City office of Ernst and Whinney (now Ernst and Young),
principally serving clients in the oil and gas industry. Mr. Gabbard is a
certified public accountant.
RONALD W. MCKEE has served as a director of the Company since August
1997 and has served as the President and Chief Operating Officer of Metretek
since September 1995. Mr. McKee had previously served as the Vice President of
Marketing of Metretek since he joined Metretek in 1989. From 1970 to 1989, Mr.
McKee held various sales and marketing management positions with Rockwell
International, Pittsburgh, Pennsylvania, and became the general sales and
marketing manager for Rockwell International's plug valve business in 1987.
BASIL M. BRIGGS has served as a director of the Company since June
1991. He has been a practicing attorney in Detroit, Michigan since 1961,
practicing law with Cox, Hodgman & Giarmarco, P.C., Troy, Michigan, since
January 1997. He was of counsel with Miro, Weiner & Kramer, P.C., Bloomfield
Hills, Michigan, from 1987 through 1996. Mr. Briggs was the President of Briggs
& Williams, P.C., Attorneys at Law, from its formation in 1977 through 1986. Mr.
Briggs was the Secretary of Patrick Petroleum Company ("PPC") from 1984, and a
director of PPC from 1970, until PPC was acquired by GPC in August 1995. Since
August 1995, he has been a director of GPC.
ROBERT LLOYD has served as a director of the Company since July 1993.
He currently manages his personal investments. From 1988 to 1989 he was an
Executive Director of Interallianz London Limited, the wholly owned corporate
finance subsidiary of Interallianz Bank Zurich A.G. Mr. Lloyd formerly held
several positions with Drexel Burnham Lambert Inc. and its affiliates, including
Managing Director and Senior Corporate Finance Officer in Europe.
ANTHONY D. PELL has served as a director of the Company since June
1994. Mr. Pell is a director of Rochdale Investment Management, Inc., New York,
New York. He was the President and a co-owner of Pell, Rudman & Co., Boston,
Massachusetts, an investment advisory firm, from 1981 until 1993, when it was
acquired by United Asset Management Company, since which time he has served as a
consultant. Mr. Pell was a director of Metretek from 1985 until Metretek was
acquired by the Company in March 1994. Mr. Pell was associated with the law firm
of Coudert Brothers from 1966 to 1968 and with the law firm of Cadwalder,
Wickersham and Taft from 1968 to 1972, specializing in estate and tax planning.
In 1972, Mr. Pell joined Boston Company Financial Strategies, Inc. as a Vice
President and was appointed a Senior Vice President in 1975.
HARRY I. SKILTON has served as a director of the Company since May
1998. Since 1994, Mr. Skilton has been the President, Chief Executive Officer
and a director of American Meter Company, Horsham, Pennsylvania, a worldwide
supplier of meters and electronic instruments to the natural gas industry, and
an officer and director of various American Meter subsidiaries. American Meter
is ultimately controlled by Ruhrgas, a German corporation. Mr. Skilton is also a
director of Elster AG and Chairman of International Gas Measurement Ltd. (UK),
which are affiliates of Ruhrgas. From 1992 through 1994, Mr. Skilton was a
principal of D/R Consultants, which engaged in general industry marketing and
consulting. From 1990 through 1992, Mr. Skilton was the President, Chief
Operating Officer and a director of Lukens Inc., Coatsville, Pennsylvania, a
diversified company engaged in a manufacture of carbon, steel and related
products. From 1986 through 1990, Mr. Skilton was the Executive Vice President
and Group President of the Air Distribution Group of Phillips Industries, Inc.,
Dayton, Ohio, which produces building components, air distribution,
transportation materials handling systems. From 1965 through 1984, Mr. Skilton
served in various executive capacities with Illinois Tool Works, Inc., General
Instrument Corporation and Celanese Corporation.
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<PAGE> 40
ALBERT F. THOMASSON has served as a director of the Company since March
1994. Mr. Thomasson was a director of Metretek from 1981 until it was acquired
by the Company in March 1994. For the past five years, Mr. Thomasson has been
President of AFT Corporation, which provides management consulting services to
selected businesses in the Birmingham, Alabama area; President of AFTCO
Properties, Inc. and Brookhaven Properties, III, Inc., which are engaged in
residential real estate development in the Birmingham area; President of
Thomasson, Coal & Coke, Inc., which is a manufacturer of alloy block for
foundries until it merged into AFT Corporation in 1996; Managing General Partner
of Opto Oil and Gas Company, which owns working interests in oil and gas fields;
and Chairman of the Board of Daily Access Concepts, Inc., Mobile, Alabama, which
provides fully automated recordkeeping and trading services for qualified
retirement plans.
The Board of Directors of the Company currently consists of eight
members divided into three classes, with members of each class holding office
for staggered three-year terms. The Class I Directors, whose terms expire in
2001, are Messrs. Marcum, Briggs, and Lloyd. The Class II Directors, whose terms
expire at the Annual Meeting of Stockholders in 1999, are Messrs. Gabbard, McKee
and Thomasson. The Class III Directors, whose terms expire in 2000, are Messrs.
Pell and Skilton. Each director serves in office until his successor is duly
elected and qualified. In May 1998, in connection with the Company's acquisition
of the assets of a subsidiary of American Meter, Mr. Skilton was appointed to
the Board of Directors. Any additional members added to the Board of Directors
will be distributed among the three classes so that, as nearly as possible, each
class will consist of an equal number of directors. Officers of the Company are
appointed by the Board of Directors and serve at its discretion, subject to the
employment agreements discussed in "Item 10. Executive Compensation".
KEY EMPLOYEES
Information concerning certain key employees of the Company is set
forth below:
WOOD A. BREAZEALE, JR., 69, has served as the President, Chief
Operating Officer and a director of Southern Flow since May 1993. Mr. Breazeale
was the President and Chief Operating Officer of Southern Flow Companies, a
division of Homco International, Inc., and a Vice President of Homco
International, Inc., from 1979 until the Company purchased the assets of the
Southern Flow Companies division of Weatherford in April 1993. Mr.
Breazeale founded Southern Flow Companies in 1953.
GARY J. ZUIDERVEEN, 40, has served as the Controller of the Company
since May 1994 and as the Secretary and Principal Accounting Officer of the
Company since August 1996. From June 1992 until May 1994, Mr. Zuiderveen was the
General Accounting Manager at the University Corporation for Atmospheric
Research in Boulder, Colorado. From 1983 until June 1992, Mr. Zuiderveen was
employed in the Denver, Colorado office of Deloitte & Touche LLP, providing
accounting and auditing services to clients primarily in the manufacturing and
financial services industries and serving in the firm's national office
accounting research department.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Exchange Act ("Section 16(a)") requires the
directors and executive officers of the Company and persons who beneficially own
more than 10% of the outstanding shares of the Company's Common Stock ("10%
Stockholders") to file reports of ownership on Form 3 and changes in ownership
on Form 4 or Form 5 with the Securities and Exchange Commission and the
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<PAGE> 41
Nasdaq Stock Market, and to furnish the Company with copies of all such reports
that they file. Based solely upon its review of the copies of such forms
received by the Company, the Company believes that, during 1998, its directors,
executive officers, and 10% Stockholders timely complied with all applicable
Section 16(a) filing requirements, except for the late filing of Mr. Skilton's
initial statement of beneficial ownership on Form 3.
ITEM 10. EXECUTIVE COMPENSATION
SUMMARY COMPENSATION
The following table sets forth certain information concerning the total
compensation that the Company paid or accrued for services rendered to the
Company in all capacities during the last three fiscal years by its Chief
Executive Officer and its two other executive officers ("Named Executive
Officers") whose total salary and bonus exceeded $100,000 in the fiscal year
ended December 31, 1998 ("fiscal 1998"):
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM
COMPENSATION
------------
AWARDS
------
SECURITIES
ANNUAL COMPENSATION(1) UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY($) BONUS($) OPTIONS(#)(2) COMPENSATION($)(3)
- --------------------------- ---- --------- -------- ------------- ------------------
<S> <C> <C> <C> <C> <C>
W. Phillip Marcum ............... 1998 $200,000 $ 0 120,000(4) $ 6,436
President and Chief ....... 1997 175,250 31,395 50,000 6,127
Executive Officer ......... 1996 162,000 21,900 76,200(5) 2,678
A. Bradley Gabbard .............. 1998 145,000 0 44,500(4) 6,249
Executive Vice President .. 1997 127,292 24,225 25,000 5,877
and Chief Financial Officer 1996 121,000 13,200 23,250(5) 8,821
Ronald W. McKee (6) ............. 1998 130,000 0 25,000(4) 4,102
President of Metretek ..... 1997 100,000 19,380 12,250 3,829
</TABLE>
- --------------------
(1) Excludes perquisites and other personal benefits, if any, which were
less than the lesser of $50,000 or 10% of the total annual salary and
bonus earned for each Named Executive Officer.
(2) The number of securities underlying options has been adjusted to
reflect the one-to-four reverse split of the Common Stock effected on
July 6, 1998.
(3) Includes amounts paid or accrued by the Company on behalf of the Named
Executive Officers in fiscal 1998 for (i) matching contributions under
the Company's 401(k) plan of $5,000 for Mr. Marcum, $5,000 for Mr.
Gabbard, and $3,360 for Mr. McKee; (ii) premiums for group term life
insurance of $972 for Mr. Marcum, $785 for Mr. Gabbard, and $422 for
Mr. McKee; and (iii) premiums for long-term disability insurance of
$464 for Mr. Marcum, $464 for Mr. Gabbard, and $320 for Mr. McKee.
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<PAGE> 42
(4) Includes options originally granted prior to 1998 (120,000 to Mr.
Marcum, 44,500 to Mr. Gabbard and 12,500 to Mr. McKee) that were
cancelled and regranted pursuant to a stock option repricing in 1998.
(5) Includes options originally granted prior to 1996 (70,000 to Mr. Marcum
and 19,500 to Mr. Gabbard) that were cancelled and regranted pursuant
to a stock option repricing in 1996.
(6) Mr. McKee became an executive officer of the Company in 1997.
EMPLOYMENT AGREEMENTS, CHANGE IN CONTROL ARRANGEMENTS AND OTHER COMPENSATION
ARRANGEMENTS
The Company has entered into employment agreements with W. Phillip
Marcum, the President, Chief Executive Officer and Chairman of the Board of the
Company, and A. Bradley Gabbard, the Executive Vice President and Chief
Financial Officer of the Company. These employment agreements were amended on
December 3, 1998 to provide for an extension of the employment term until
December 3, 2001 for Mr. Marcum and until June 3, 2000 for Mr. Gabbard, with
automatic additional one-year renewal periods when the term expires, unless
either party gives six months prior written notice of termination. The base
salaries under these employment agreements, which are subject to annual upward
adjustments at the discretion of the Board of Directors, are currently set at
$210,000 for Mr. Marcum and $152,250 for Mr. Gabbard. In addition to the base
annual compensation, the employment agreements provide, among other things, for
standard benefits commensurate with the management levels involved. The
employment agreements also provide for the Company to establish an incentive
compensation fund, to be administered by the Compensation Committee of the Board
of Directors, to provide for incentive compensation to be paid to each officer
or employee (including Messrs. Marcum and Gabbard) deemed by the Compensation
Committee to have made a substantial contribution to the Company in the event of
a change of control of the Company or of the sale of substantially all of the
assets of the Company or similar transactions. The total amount of incentive
compensation from the fund available for distribution will be determined by a
formula based on the amount by which the fair market value per share of the
Common Stock exceeds $10.08, multiplied by a factor ranging from 10-20%
depending upon the ratio of the fair market value to $10.08. In the case of the
sale of a significant subsidiary of the Company or substantially all of the
assets of a significant subsidiary, a similar pro rata distribution is required.
As amended, the employment agreements with Messrs. Marcum and Gabbard provide
that if the employment period expires without being renewed, then the executive
is entitled to receive a lump-sum severance payment equal to 12 months, for Mr.
Marcum, and six months, for Mr. Gabbard, of his then base salary, and continued
participation in all insurance plans of the Company for such additional period.
The employment agreements also contain certain restrictions on each employee's
ability to compete, use of confidential information and use of inventions and
other intellectual property.
As amended, the employment agreements with Messrs. Marcum and Gabbard
also include "change in control" provisions designed to provide for continuity
of management in the event of a change in control of the Company. The agreements
provide that if within three years after a change in control of the Company, the
executive is terminated by the Company for any reason other than for "cause", or
if the executive terminates his employment for "good reason" (as such terms are
defined in the employment agreements), then the executive is entitled to receive
a lump-sum severance payment equal to two times, for Mr. Marcum, and one times,
for Mr. Gabbard, the amount of his then base salary, together with certain other
payments and benefits, including continued participation in all insurance plans
of the Company for a period of two years, for Mr. Marcum, and one year, for Mr.
Gabbard. Under these employment agreements, a "change in control" will be deemed
to have occurred only if: (i) any person or group becomes the
beneficial owner of 50% or
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<PAGE> 43
more of the Company's Common Stock; (ii) a majority of the Company's present
directors are replaced, unless the election of any new director is approved by
a two-thirds vote of the current (or properly approved successor) directors; or
(iii) the Company approves a merger, consolidation, reorganization or
combination of the Company, other than one in which the voting securities of
the Company outstanding immediately prior thereto continue to represent more
than 50% of the total voting power of the Company or the surviving corporation
following such a transaction and the directors of the Company continue to
represent a majority of the directors of the Company or of the surviving
corporation following such transaction; or (iv) the Company approves a sale of
all or substantially all of its assets.
During 1998, under the Company's 1998 Employee Stock Purchase Plan, all
full-time employees of the Company, including Messrs. Marcum, Gabbard and McKee,
were entitled to purchase shares of the Company's Common Stock at fifty percent
(50%) of the market value of the Common Stock, based upon the closing sale price
of the Common Stock as reported on the Nasdaq National Market on the purchase
dates. A total of 47,244 shares of Common Stock were purchased by 48 employees,
including 10,966 shares purchased by Mr. Marcum, 5,918 shares purchased by Mr.
Gabbard, and 5,687 shares purchased by Mr. McKee. The 1998 Employee Purchase
Plan was discontinued in July 1998.
STOCK OPTION GRANTS
On October 6, 1998, the Company repriced all stock options held by its
officers, employees and directors. The exercise price of all such options was
reduced to $2.00, the last sale price of the Common Stock as reported on the
Nasdaq National Market on the date of repricing. The terms of the options
reissued to effect the repricing were generally identical to the terms of the
options cancelled, except that (i) repriced options held by officers and
employees will not be exercisable prior to October 6, 1999 as a result of a one
year exercise blackout period, whether or not the cancelled options were
previously vested and exercised, and thereafter the options will be subject to
the original vesting conditions, and (ii) all repriced options held by Mr.
Marcum and Mr. Gabbard will be deemed vested as of October 6, 1999, irrespective
of prior vesting conditions. Options held by the Board of Directors of the
Company and the Named Executive Officers were included in the repricing.
The stock option repricing acknowledged the importance to the Company
of its officers, employees and directors and of the incentive to serve the
long-term best interests of the Company provided by stock options. In deciding
to authorize the repricing, the Board of Directors and the Compensation
Committee considered such factors as the competitive environment for obtaining
and retaining qualified employees, the advantage to the Company of utilizing
stock options as a non-cash method of compensation, and the overall benefit to
the stockholders from providing such persons with long-term equity incentives.
The Board of Directors believes that as a result of the decline in the Company's
stock price, outstanding options with exercise prices well in excess of the then
current stock price were not providing meaningful compensation or incentives for
the Company's officers, employees and directors. The Board of Directors also
believes that the future growth and the success of the Company is dependent upon
its ability to successively attract, retain and motivate its officers, employees
and directors. The Board of Directors believes that the use of stock options
aligns the interest of the optionees with the interest of stockholders, which is
in the best interest of the stockholders. Based upon all of the foregoing, and
other relevant factors, the Board of Directors agreed with the conclusion of the
Compensation Committee that a reduction in the exercise price of outstanding
options held by officers, employees and directors to market levels was necessary
and appropriate to provide meaningful incentives to option holders to operate
the Company with the goal of maximizing stockholder value and to provide
appropriate compensation for services. A total of
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<PAGE> 44
120,000 options held by Mr. Marcum, 44,500 options held by Mr. Gabbard and
12,500 options held by Mr. McKee were repriced to $2.00 per share.
The following table sets forth information with respect of stock
options granted during fiscal 1998 to the Named Executive Officers. No stock
appreciation rights ("SARs"), alone or in tandem with stock options, were
awarded in 1998. The Named Executive Officers did not exercise any stock options
during 1998.
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS(1)
----------------------------------------------------------------------------------
OPTIONS GRANTED
% OF TOTLA
NUMBER OF SECURITIES OPTIONS GRANTED
UNDERLYING TO EMPLOYEES IN EXERCISE EXPIRATION
NAME OPTIONS GRANTED (#)(2) FISCAL YEAR (3) PRICE ($)(4) DATE (5)
- ---- ---------------------- --------------- ------------ --------
<S> <C> <C> <C> <C>
W. Phillip Marcum............ 40,000 (6) 12.3% $2.00 August 6, 2002
15,000 (6) 4.6 2.00 March 5, 2003
15,000 (6) 4.6 2.00 May 19, 2003
50,000 (6) 15.4 2.00 July 14, 2007
A. Bradley Gabbard........... 7,500 (6) 2.3 2.00 August 6, 2002
6,000 (6) 1.8 2.00 March 5, 2003
6,000 (6) 1.8 2.00 May 19, 2003
25,000 (6) 7.7 2.00 July 14, 2007
Ronald W. McKee............. 12,500 (6) 3.8 2.00 March 20, 2007
12,500 3.8 2.44 December 4, 2008
</TABLE>
- --------------------
(1) All information in this table has been adjusted to reflect the
one-for-four reverse split of the Common Stock effected on July 6,
1998.
(2) The options in this table are incentive stock options or nonqualified
stock options granted under the Company's 1991 Stock Option Plan and
the Company's 1998 Stock Incentive Plan. All options have ten year
terms from the date of initial grant and vest and become fully
exercisable on October 6, 1999, one year after the date of repricing,
except that the 12,500 options granted to Mr. McKee after the repricing
were fully vested and exercisable upon grant.
(3) Based upon 325,058 options granted by the Company during 1998 to
employees, including 277,558 options that were cancelled and regranted
in connection with a repricing by the Company during 1998.
(4) The exercise price of the option is the fair market value of the Common
Stock on the date of grant or the date of repricing, as appropriate,
based upon the last sale price of the Common Stock on such date as
reported on the Nasdaq National Market.
(5) These options may terminate before their terms expire due to the
termination of the optionee's employment or the optionee's disability
or death.
44
<PAGE> 45
(6) These options were originally granted prior to 1998, at an exercise
price equal to the fair market value of the Common Stock on the date of
grant, and were cancelled and reissued in 1998, in connection with a
stock option repricing, at the fair market value of the Common Stock on
October 6, 1998, the date of the repricing.
STOCK OPTION EXERCISES AND VALUES
The following table sets forth information with respect to stock
options held by the Named Executive Officers on December 31, 1998. The Named
Executive Officers did not exercise any stock options during 1998.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
VALUE OF
NUMBER OF SECURITIES UNEXERCISED
UNDERLYING IN-THE-MONEY
UNEXERCISED OPTIONS AT OPTIONS AT
FISCAL YEAR-END (#) FISCAL YEAR-END ($)(1)
------------------------------------------ -----------------------------------
NAME EXERCISABLE UNEXERCISABLE(2) EXERCISABLE UNEXERCISABLE
- ---- ----------- ---------------- ----------- -------------
<S> <C> <C> <C> <C>
W. Phillip Marcum.......... 0 120,000 $0 $15,000
A. Bradley Gabbard......... 0 44,500 0 5,563
Ronald W. McKee............ 12,500 12,500 0 (3) 1,563
</TABLE>
- --------------------------
(1) For purposes of this table, the value of unexercised in-the-money
options is calculated based upon the difference between $2.125, the
closing sale price of the Common Stock on such date as reported on the
Nasdaq National Market, and the option exercise price.
(2) The unexercisable options included in this table are options that were
granted prior to 1998 and then cancelled and regranted in the 1998
stock option repricing. Pursuant to a one year exercise blackout period
imposed under the terms of that repricing, the unexercisable options do
not become exercisable until October 6, 1999, on which date they become
fully vested.
(3) The exercise price of these options exceeded $2.125, the closing sale
price of the Common Stock on December 31, 1998 as reported on the
Nasdaq National Market.
DIRECTOR COMPENSATION
Directors who are officers or employees of the Company or any of its
subsidiaries do not receive any additional compensation for serving on the Board
of Directors. All Directors are reimbursed for out-of-pocket costs of attending
meetings of the Board of Directors and its committees. Directors who are not
officers or employees of the Company or any of its subsidiaries ("Non-Employee
45
<PAGE> 46
Directors") currently receive a fee of $1,000 for attendance at each meeting of
the Board of Directors. Non-Employee Directors also receive stock options
granted by the Company. Until June 1998, such options were granted under the
Company's Directors' Stock Option Plan (the "Directors' Plan"). Since June 1998,
all such options are granted under the Company's 1998 Stock Incentive Plan (the
"1998 Plan"). Under the formula for these stock option grants, which is the same
in both the Directors' Plan and the 1998 Plan, each person who is first elected
or appointed to serve as a Non-Employee Director is automatically granted an
option to purchase 5,000 shares of Common Stock. On the date of the Annual
Meeting of Stockholders each year, each Non-Employee Director (who has been such
for at least six months) is automatically granted an option to purchase 2,500
shares of Common Stock. All options vest immediately upon grant. Additional
non-formula options can be granted to Non-Employee Directors under the 1998 Plan
in the discretion of the Board of Directors.
Each Non-Employee Director has the right to irrevocably elect on an
annual basis to receive additional stock options ("Meeting Options") under the
1998 Plan in lieu of cash fees for attending meetings of the Board of Directors.
The Meeting Options are granted on the date of each Annual Meeting of
Stockholders and vest in 25% increments on the date of each of the subsequent
four regular quarterly meetings of the Board of Directors attended by such
Non-Employee Director. The number of shares of Common Stock exercisable upon the
exercise of Meeting Options are such that the value of the stock options granted
is equal to the amount of fees waived.
All options granted to Non-Employee Directors are nonqualified stock
options exercisable at a price equal to the fair market value of the Common
Stock on the date of grant and have ten year terms, subject to earlier
termination in the event of the termination of the optionee's status as a
director or the optionee's death. Options typically remain exercisable for one
year after a Non-Employee Director dies and for that number of years after a
Non-Employee Director leaves the Board of Directors, for any reason other than
death or removal for cause, equal to the number of full or partial years that
the Non-Employee Director served as a director (but not beyond the ten year term
of the option). On October 6, 1998, the exercise price of all options then
outstanding to Non-Employee Directors under the Directors' Plan and under the
1998 Plan was repriced to $2.00 per share, the closing sales price of the Common
Stock as reported on the Nasdaq National Market on such date. As of December 31,
1998, options to purchase 110,000 shares of Common Stock were outstanding to
Non-Employee Directors under the Directors' Plan and options to purchase 17,428
shares of Common Stock were outstanding under the 1998 Plan, all at an exercise
price of $2.00 per share.
On March 7, 1997, options to purchase 12,500 shares of Common Stock were
granted to Stephen E. McGregor, a former director of the Company, and options to
purchase 2,500 shares of Common Stock were granted to Mr. Lloyd under the
Directors' Plan at an exercise price that was reduced in the 1998 stock option
repricing to $2.00 per share, for personal services rendered in connection with
a Metretek strategic alliance.
46
<PAGE> 47
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information regarding the beneficial
ownership of the Company's Common Stock as of March 16, 1999 (except as
otherwise noted in the footnotes) by (i) each person known to the Company to be
the beneficial owner of more than 5% of the outstanding shares of Common Stock,
(ii) each director of the Company, (iii) each Named Executive Officer, and (iv)
all directors and executive officers of the Company as a group.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY OWNED(1)
----------------------------
NAME AND ADDRESS OF BENEFICIAL OWNER NUMBER PERCENT OF CLASS (2)
- ------------------------------------ ------ --------------------
<S> <C> <C>
American Meter Software Corporation (3) ........................... 730,216 19.4
105 Erskine Lane
Scott Depot, West Virginia 25560
Kenneth B. Funsten (4) ............................................ 463,012 13.0
121 Outrigger Mall
Marina del Ray, California 90292
Famco Value Income Partners, L.P. (5) ............................. 290,250 8.2
121 Outrigger Mall
Marina del Ray, California 90292
Albert F. Thomasson (6) ........................................... 130,028 3.7
W. Phillip Marcum (7) ............................................. 120,603 3.5
Robert Lloyd (8) .................................................. 57,794 1.7
Anthony D. Pell (9) ............................................... 35,262 1.0
Ronald W. McKee (10) .............................................. 25,691 0.7
A. Bradley Gabbard (11) ........................................... 22,936 0.7
Basil M. Briggs (12) .............................................. 17,325 0.5
Harry I. Skilton (13) ............................................. 9,982 0.3
All directors and executive officers as a group (8 persons) (14) .. 419,621 11.5
</TABLE>
- --------------------------------------
(1) The Number and Percent of Class of Shares Beneficially Owned is
determined in accordance with Rule 13d-3 under the Exchange Act and the
information is not necessarily indicative of beneficial ownership for
any other purpose. Under such rule, beneficial ownership includes any
shares as to which the beneficial owner has voting power or investment
power and any shares that the beneficial owner has the right acquire
within 60 days of March 16, 1999 through the exercise of any stock
option, warrant or other right to acquire shares of Common Stock. In
additional, such shares are deemed to be outstanding in calculating the
Percent of Class of such beneficial owners, but are not deemed to be
outstanding in calculating the Percent of Class of any other beneficial
owner. Unless otherwise indicated in the footnotes, each beneficial
owner has sole voting and investment power (or shares such powers with
his or her spouse) with respect to the shares shown as beneficially
owned, subject to community property laws where applicable.
(2) The Percent of Class is based upon 3,473,343 shares of Common Stock
outstanding as of March 16, 1999.
(3) Information based upon Schedule 13D filed by American Meter Software
(under its former name, Eagle Research Corporation) with the Securities
and Exchange Commission ("SEC") on April 2, 1998.
47
<PAGE> 48
American Meter Software is a wholly owned subsidiary of American Meter,
and both corporations are ultimately controlled by Ruhrgas. Includes
180,766 shares that may be acquired by American Meter Software upon the
conversion of the American Meter Software Note and 109,890 shares that
may be acquired by American Meter Software upon the exercise of
currently exercisable warrants.
(4) Information based upon Amendment No. 1 to Schedule 13D filed by Kenneth
B. Funsten with the SEC on January 22, 1999, and Form 3 filed by Mr.
Funsten with the SEC on January 11, 1999. According to the information
contained therein, includes (a) 23,825 shares that may be acquired upon
the exercise of currently exercisable warrants owned by Mr. Funsten;
(b) 232,200 shares, and 58,050 shares that may be acquired upon the
exercise of currently exercisable warrants, owned by Famco Value Income
Partners, L.P. ("Famco VIP"); and (c) 36,250 shares, and 9,062 shares
that may be acquired upon the exercise of currently exercisable
warrants, owned by Famco Offshore, Ltd. ("Famco Offshore"). Funsten
Asset Management Company and Mr. Funsten, who is the president and
portfolio manager of Funsten Asset Management Company, are the general
partners of Famco VIP and Famco Offshore. Mr. Funsten holds sole voting
and investment power over the securities owned by Famco VIP and Famco
Offshore. The shares listed in this table as beneficially owned by Mr.
Funsten include the shares listed as beneficially owned by Famco VIP
(see note (5) below). Does not include 4,100 shares owned by an
employee of Funsten Asset Management Company which cannot be sold or
further added to without permission by Mr. Funsten by virtue of
restrictions that are placed on securities transactions by employees of
Funsten Asset Management Company, because Mr. Funsten has no investment
or voting authority over the shares of such employee and Mr. Funsten
expressly disclaims beneficial ownership of such shares.
(5) Information based upon Amendment No. 1 to Schedule 13D filed by Famco
VIP with the SEC on January 22, 1999. According to the information
contained therein, includes 58,050 shares that may be acquired by Famco
VIP upon the exercise of currently exercisable warrants. Kenneth B.
Funsten and Funsten Asset Management Company are the general partners
of Famco VIP. The shares listed in this table as beneficially owned by
Famco VIP are also included in the shares listed as beneficially owned
by Mr. Funsten (see note (4) above). Does not include 4,100 shares
owned by an employee of Funsten Asset Management Company which cannot
be sold or further added to without permission by Mr. Funsten by virtue
of restrictions that are placed on securities transactions by employees
of Funsten Asset Management Company, because Famco VIP has no
investment or voting authority over the shares of such employee and
Famco VIP expressly disclaims beneficial ownership of such shares.
(6) Includes 2,338 shares held of record by Mr. Thomasson's wife and 32,858
shares held in family trusts. Also includes 16,857 shares that may be
acquired by Mr. Thomasson upon the exercise of currently exercisable
stock options and 33,195 shares that may be acquired by Mr. Thomasson
or his wife or their family trusts upon the exercise of currently
exercisable warrants.
(7) Includes 7,750 shares owned by Mr. Marcum's wife. Also includes 22,120
shares that may be acquired by Mr. Marcum or his wife upon the exercise
of currently exercisable warrants. Does not include 120,000 shares that
may be acquired by Mr. Marcum upon the exercise of stock options that,
due to the one year exercise blackout period imposed in connection with
the 1998 stock option repricing, do not become exercisable until
October 6, 1999.
(8) Includes 21,857 shares that may be acquired by Mr. Lloyd upon the
exercise of currently exercisable stock options and 7,187 shares that
may be acquired by Mr. Lloyd upon the exercise of currently exercisable
warrants.
(9) Includes 2,600 shares held by Mr. Pell's wife. Also includes 15,000
shares that may be acquired by Mr. Pell upon the exercise of currently
exercisable stock options and 4,052 shares that may be acquired by Mr.
Pell or his wife upon the exercise of currently exercisable warrants.
(10) Includes 12,500 shares that may be acquired by Mr. McKee upon the
exercise of currently exercisable stock options and 2,638 shares that
may be acquired by Mr. McKee upon the exercise of currently
48
<PAGE> 49
exercisable warrants. Does not include 12,500 shares that may be
acquired by Mr. McKee upon the exercise of stock options that, due to
the one year exercise blackout period in connection with the 1998 stock
option repricing, do not become exercisable until October 6, 1999.
(11) Includes 1,750 shares owned by Mr. Gabbard's minor children. Also
includes 4,587 shares that may be acquired by Mr. Gabbard or his minor
children upon the exercise of currently exercisable warrants. Does not
include 44,500 shares that may be acquired by Mr. Gabbard upon the
exercise of stock options that, due to the one year exercise blackout
period imposed in connection with the 1998 stock option repricing, do
not become exercisable until October 6, 1999.
(12) Includes 375 shares owned by Mr. Briggs' wife. Also includes 16,857
shares that may be acquired by Mr. Briggs upon the exercise of
currently exercisable stock options and 93 shares that may be acquired
by Mr. Briggs' wife upon the exercise of currently exercisable
warrants.
(13) Includes 6,857 shares that may be acquired by Mr. Skilton upon the
exercise of currently exercisable stock options and 625 shares that may
be acquired by Mr. Skilton upon the exercise of currently exercisable
warrants. Although Mr. Skilton is the President, Chief Executive
Officer and a director of American Meter and an executive officer and a
director of American Meter Software, no shares owned of record by
American Meter Software have been attributed to Mr. Skilton's
beneficial ownership.
(14) See notes (6) through (13).
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
On March 7, 1997, options to purchase 12,500 shares of Common Stock
were granted to Stephen E. McGregor, a former director of the Company, and
options to purchase 2,500 shares of Common Stock were granted to Mr. Lloyd under
the Directors' Plan at an exercise price that was reduced in the 1998 stock
option repricing to $2.00 per share for personal services rendered in connection
with a Metretek strategic alliance.
In December 1997, MGT sold one-third of its preferred and performance
share interests and one-third of its interest in future management and
administrative fees in two business trusts to Odessa Exploration Incorporated
("Odessa"), a subsidiary of Key Energy Services, Inc. Odessa paid MGT $700,000
for its interest, a mutually agreed reduction from an initial purchase price
amount of $1,000,000. W. Phillip Marcum, the Chairman of the Board, President
and Chief Executive Officer and a director of the Company, is also a director of
Key Energy Services, Inc.
On May 4, 1998, in connection with the Company's acquisition, through
Metretek, of certain assets of a wholly owned subsidiary of American Meter,
Metretek entered into a License Agreement with American Meter and American Meter
Software, providing for the license by American Meter and American Meter
Software to Metretek of certain operating software, and the development,
manufacture and sale by Metretek to American Meter and American Meter Software
of certain electronic components and related equipment pertaining to electronic
temperature and pressure correction to be embedded within certain new rotary and
turbine meters of American Meter. The License Agreement also grants to American
Meter and its affiliates the right to sell Metretek products in the United
States and Canada at certain agreed-upon prices. Subsequent to the acquisition,
Metretek and American Meter
49
<PAGE> 50
entered into an international sales agreement, pursuant to which American Meter
and its affiliates have the non-exclusive right to sell Metretek products
internationally. Harry I. Skilton, the President, Chief Executive Officer and a
director of American Meter, became a member of the Board of Directors in
connection with this acquisition. During fiscal 1998, the Company recorded
revenues from American Meter of approximately $522,000 with respect to sales
under the License Agreement and the international sales agreement. The terms of
the License Agreement and the international sales agreement were the result of
arms-length negotiations between the parties.
Each material transaction between the Company and any related party is
approved by a majority of the members of the Board of Directors of the Company
who are disinterested in the transaction.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
(2) PLAN OF PURCHASE, SALE, REORGANIZATION, ARRANGEMENT,
LIQUIDATION OR SUCCESSION:
(2.1) Asset Purchase Agreement, dated as of June 27, 1997,
by and between Natural Fuels Corporation, as buyer,
and Marcum Fuel Systems, Inc., DVCO Fuel Systems,
Inc. and Marcum CNG Systems, Inc., as seller.
(Incorporated by reference to Exhibit 2.1 to the
Company's Form 8-K filed on July 11, 1997.)
(2.2) Purchase Agreement, dated December 3, 1997, by and
between Marcum Gas Transmission, Inc. and Odessa
Exploration Incorporated. (Incorporated by reference
to Exhibit 2.4 to the Company's Form 10-KSB for the
year ended December 31, 1997.)
(2.3) Asset Purchase Agreement, dated as of March 23, 1998,
by and among Eagle Research Corporation, American
Meter Company, Metretek, Incorporated and Marcum
Natural Gas Services, Inc. (Incorporated by reference
to Exhibit 2.4 to the Company's Form 10-KSB for the
year ended December 31, 1997.)
(3) ARTICLES OF INCORPORATION AND BY-LAWS:
(3.1) Restated Certificate of Incorporation, as amended, of
Marcum Natural Gas Services, Inc. (Incorporated by
reference to Exhibit 3.1 to the Company's
Registration Statement on Form S-18, Registration No.
33-44558.)
(3.2) Certificate of Amendment to the Restated Certificate
of Incorporation, as amended, of Marcum Natural Gas
Services, Inc. (Incorporated by reference to Exhibit
3.1 to the Company's Form 8-K filed on July 3, 1998.)
(3.3) Amended and Restated By-Laws of Marcum Natural Gas
Services, Inc.
(4) INSTRUMENT DEFINING THE RIGHTS OF SECURITY HOLDERS, INCLUDING
INDENTURES:
(4.1) Specimen Common Stock Certificate. (Incorporated by
reference to Exhibit 4.1 to the Company's
Registration Statement on Form S-18, Registration No.
33-44558.)
(4.2) Form of Common Stock Purchase Warrant. (Incorporated
by reference to Exhibit 4.4 to the Company's
Registration Statement on Form S-3, Registration No.
333-60925.)
50
<PAGE> 51
(4.3) Form of Warrant Agency Agreement between Marcum
Natural Gas Services, Inc. and American Securities
Transfer & Trust, Inc. (Incorporated by reference to
Exhibit 4.4 to the Registration Statement on Form
S-3, Registration No. 333-60925).
(4.4) Notice and Waiver of Registration Rights and Lock-Up
Agreement, dated September 4, 1998, between Marcum
Natural Gas Services, Inc., Metretek, Incorporated,
American Meter Software Corporation and American
Meter Corporation. (Incorporated by reference to
Exhibit 4.6 to the Company's Registration Statement
on Form S-3, Registration No. 333-60925.)
(4.5) Form of Certificate representing warrants to purchase
shares of Common Stock of Marcum Natural Gas
Services, Inc. issued to former holders of warrants
of Metretek, Incorporated. (Incorporated by reference
to Exhibit 4.2 to the Company's Registration
Statement on Form S-4, Registration No. 33-73874.)
(4.6) Rights Agreement, dated as of December 2, 1991,
between Marcum Natural Gas Services, Inc. and
American Securities Transfer, Inc. (Incorporated by
reference to Exhibit 10.6 to the Company's
Registration Statement on Form S-18, Registration No.
33-44558.)
(4.7) Amendment No. 1 to Rights Agreement, dated as of
March 23, 1998, between Marcum Natural Gas Services,
Inc. and American Securities Transfer & Trust, Inc.
(Incorporated by reference to Exhibit 2 to the
Company's Registration Form 8-A/A Amendment No. 1
filed April 3, 1998.)
(4.8) Form of Registration Rights Agreement among Marcum
Natural Gas Services, Inc. and the former warrant
holders of Metretek, Incorporated. (Incorporated by
reference to Exhibit 4.4 to the Company's
Registration Statement on Form S-4, Registration No.
33-73874.)
(4.9) Warrant for the purchase of 50,000 shares of Common
Stock, dated March 13, 1998, issued by Marcum Natural
Gas Services, Inc. to National Securities
Corporation. (Incorporated by reference to Exhibit
10.2 to the Company's Form 10-QSB for the quarter
ended March 31, 1998.)
(10) MATERIAL CONTRACTS:
(10.1) Marcum Natural Gas Services, Inc. 1991 Stock Option
Plan, as amended and restated December 5, 1996.
(Incorporated by reference to Exhibit 10.2 to the
Company's Form 10-KSB for the year ended December 31,
1996.)*
(10.2) Marcum Natural Gas Services, Inc. Directors' Stock
Option Plan, as amended and restated December 2,
1996. (Incorporated by reference to Exhibit 10.3 to
the Company's Form 10-KSB for the year ended December
31, 1996.)*
(10.3) Employment Agreement, dated as of June 11, 1991,
between Marcum Natural Gas Services, Inc. and W.
Phillip Marcum. (Incorporated by reference to Exhibit
10.4 to the Company's Registration Statement on Form
S-18, Registration No. 33-44558.)*
(10.4) Amendment No. 1 to Employment Agreement dated June
27, 1997, between Marcum Natural Gas Services, Inc.
and W. Phillip Marcum. (Incorporated by reference to
Exhibit 10.1 to the Company's Quarterly Report on
Form 10-QSB for the quarterly period ended September
30, 1997.)*
51
<PAGE> 52
(10.5) Amendment No. 2 to Employment Agreement, dated
December 3, 1998, between Marcum Natural Gas
Services, Inc. and W. Phillip Marcum.*
(10.6) Employment Agreement, dated as of June 11, 1991,
between Marcum Natural Gas Services, Inc. and A.
Bradley Gabbard. (Incorporated by reference to
Exhibit 10.4 to the Company's Registration Statement
on Form S-18, Registration No. 33-44558.)*
(10.7) Amendment No. 1 to Employment Agreement, dated June
27, 1997, between Marcum Natural Gas Services, Inc.
and A. Bradley Gabbard. (Incorporated by reference to
Exhibit 10.2 to the Company's Quarterly Report on
Form 10-QSB for the quarterly period ended September
30, 1997.)*
(10.8) Amendment No. 2 to Employment Agreement, dated
December 3, 1998, between Marcum Natural Gas
Services, Inc. and A. Bradley Gabbard.*
(10.9) Loan Agreement, dated as of April 18, 1997, as
amended May 14, 1997, among Southern Flow Companies,
Inc., Marcum Gas Transmission, Inc., Marcum Natural
Gas Services, Inc. and Commercial National Bank in
Shreveport. (Incorporated by reference to Exhibit 10
to the Company's Quarterly Report on Form 10-QSB for
the quarterly period ended March 31, 1997.)
(10.10) Loan Agreement, dated May 30, 1997, by and between
First Union National Bank of Florida and Metretek,
Incorporated. (Incorporated by reference to Exhibit
10 to the Company's Quarterly Report on Form 10-QSB
for the quarterly period ended June 30, 1997.)
(10.11) Loan and Security Agreement, dated April 14, 1998, by
and between National Bank of Canada, Marcum Natural
Gas Services, Inc., Metretek, Incorporated and
Southern Flow Companies, Inc. (Incorporated by
reference to Exhibit 10.1 to the Company's Quarterly
Report on Form 10-QSB for the quarterly period ended
March 31, 1998.)
(10.12) Amendment No. 1 to Loan and Security Agreement, dated
as of November 10, 1998, by and among National Bank
of Canada, Marcum Natural Gas Services, Inc.,
Metretek, Incorporated and Southern Flow Companies,
Inc.
(10.13) Marcum Natural Gas Services, Inc. 1998 Employee Stock
Purchase Plan. (Incorporated by reference to Exhibit
4.3 to the Company's Registration Statement on Form
S-8, Registration No. 333-43547.)*
(10.14) Marcum Natural Gas Services, Inc. 1998 Stock
Incentive Plan (Incorporated by reference to Exhibit
4.6 to the Company's Registration Statement on Form
S-3, Registration No. 333-56697.)*
(21) SUBSIDIARIES OF THE SMALL BUSINESS ISSUER:
(21.1) Subsidiaries of Marcum Natural Gas Services, Inc.
(23) CONSENTS OF EXPERTS AND COUNSEL:
(23.1) Deloitte & Touche LLP
52
<PAGE> 53
(24) POWER OF ATTORNEY:
(24.1) Power of Attorney of the executive officers and
directors of Marcum Natural Gas Services, Inc.
(Included on signature page.)
(27) FINANCIAL DATA SCHEDULE
(27.1) Financial Data Schedule
- ---------------
*Management contract or compensation plan or arrangement required to be
filed as an exhibit to this form pursuant to Item 13(a) of Form 10-KSB.
(B) REPORTS ON FORM 8-K
The Company did not file any reports on Form 8-K during the fourth
quarter of the fiscal year ended December 31, 1998.
53
<PAGE> 54
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the
Registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
MARCUM NATURAL GAS SERVICES, INC.
By: /s/ W. Phillip Marcum
------------------------------------
W. Phillip Marcum, President and
Chief Executive Officer
Date: March 24, 1999
In accordance with the Exchange Act, this report has been signed below
by the following persons on behalf of the Registrant and in the capacities and
on the dates indicated:
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C> <C>
/s/ W. Phillip Marcum Chairman of the Board, President, March 24, 1999
- ------------------------------------ Chief Executive Officer and Director
W. Phillip Marcum (Principal executive officer)
/s/ A. Bradley Gabbard Executive Vice President, Chief Financial March 24, 1999
- ----------------------------------- Officer, Treasurer and Director (Principal
A. Bradley Gabbard financial officer)
/s/ Gary J. Zuiderveen Secretary, Controller and Principal March 24, 1999
- ----------------------------------- Accounting Officer (Principal
Gary J. Zuiderveen accounting officer)
/s/ Basil M. Briggs Director March 24, 1999
- -----------------------------------
Basil M. Briggs
/s/ Robert Lloyd Director March 24, 1999
- -----------------------------------
Robert Lloyd
/s/ Albert F. Thomasson Director March 24, 1999
- ----------------------------------
Albert F. Thomasson
/s/ Anthony D. Pell Director March 24, 1999
- ---------------------------------
Anthony D. Pell
/s/ Ronald W. McKee Director March 24, 1999
- ---------------------------------
Ronald W. McKee
/s/ Harry I. Skilton Director March 24, 1999
- ---------------------------------
Harry I. Skilton
</TABLE>
54
<PAGE> 55
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
CONSOLIDATED FINANCIAL STATEMENTS OF MARCUM
NATURAL GAS SERVICES, INC. AND SUBSIDIARIES
Independent Auditors' Report F-2
Consolidated Balance Sheets as of December 31, 1998 and 1997 F-3
Consolidated Statements of Operations for the Years Ended
December 31, 1998 and 1997 F-5
Consolidated Statements of Stockholders' Equity for the Years
Ended December 31, 1998 and 1997 F-6
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1998 and 1997 F-7
Notes to Consolidated Financial Statements F-8
</TABLE>
F-1
<PAGE> 56
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
Marcum Natural Gas Services, Inc.:
We have audited the accompanying consolidated balance sheets of Marcum Natural
Gas Services, Inc. and subsidiaries as of December 31, 1998 and 1997, and the
related consolidated statements of operations, stockholders' equity, and cash
flows for the years then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Marcum Natural Gas Services, Inc.
and subsidiaries at December 31, 1998 and 1997, and the results of their
operations and their cash flows for the years then ended in conformity with
generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Denver, Colorado
March 19, 1999
F-2
<PAGE> 57
MARCUM NATURAL GAS SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------
ASSETS 1998 1997
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 639,448 $ 1,938,554
Trade receivables, less allowance for doubtful accounts
of $117,469 and $121,278, respectively 5,006,914 3,466,282
Other receivables 152,084 24,656
Inventories 4,412,100 2,748,626
Net assets of discontinued operations 319,393 450,132
Prepaid expenses and other current assets 275,782 291,004
----------- -----------
Total current assets 10,805,721 8,919,254
----------- -----------
PROPERTY, PLANT AND EQUIPMENT, AT COST
(Note 4):
Equipment 2,235,732 2,398,888
Vehicles 24,733 56,793
Furniture and fixtures 486,857 449,792
Land, building and improvements 714,423 399,491
----------- -----------
Total 3,461,745 3,304,964
Less accumulated depreciation 1,686,721 2,030,922
----------- -----------
Property, plant and equipment, net 1,775,024 1,274,042
----------- -----------
OTHER ASSETS:
Customer list (net of accumulated amortization of $2,510,694 and
$2,065,449, respectively) 6,382,193 6,827,438
Goodwill and other intangibles (net of accumulated amortization
of $734,365 and $471,952 respectively) 3,204,606 854,629
Other assets 218,739 111,644
----------- -----------
Total other assets 9,805,538 7,793,711
----------- -----------
TOTAL $22,386,283 $17,987,007
=========== ===========
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE> 58
MARCUM NATURAL GAS SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY 1998 1997
<S> <C> <C>
CURRENT LIABILITIES:
Accounts payable $ 720,459 $ 612,093
Accrued and other liabilities 1,055,372 1,443,773
Current maturities of notes payable (Note 4) -- 49,545
Current maturities of capital lease
obligations 4,507 14,791
------------ ------------
Total current liabilities 1,780,338 2,120,202
------------ ------------
LONG-TERM NOTES PAYABLE (NOTE 4) 3,161,702 --
------------ ------------
DEPOSITS AND NON-CURRENT CAPITAL LEASE
OBLIGATIONS 5,342 17,443
------------ ------------
COMMITMENTS AND CONTINGENCIES (NOTE 5)
STOCKHOLDERS' EQUITY (NOTE 7):
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, 3,489,181 and 3,077,822
shares, respectively 34,892 30,778
Additional paid-in-capital 38,930,724 37,005,983
Accumulated other comprehensive income 6,657 6,657
Accumulated deficit (21,533,372) (21,194,056)
------------ ------------
Total stockholders' equity 17,438,901 15,849,362
------------ ------------
TOTAL $ 22,386,283 $ 17,987,007
============ ============
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE> 59
MARCUM NATURAL GAS SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
-------------------------------
1998 1997
<S> <C> <C>
REVENUES:
Natural gas measurement sales and services $ 19,880,012 $ 20,390,102
Other 42,098 42,735
------------ ------------
Total revenues 19,922,110 20,432,837
------------ ------------
COSTS AND EXPENSES:
Cost of measurement sales and services 12,864,414 12,920,612
General and administrative 3,581,911 3,457,674
Selling, marketing and service 1,524,959 1,642,556
Depreciation and amortization 1,109,402 942,231
Research and development 961,383 1,062,264
Interest, finance charges and other 185,473 63,700
------------ ------------
Total costs and expenses 20,227,542 20,089,037
------------ ------------
INCOME (LOSS) FROM CONTINUING OPERATIONS
BEFORE TAXES (305,432) 343,800
INCOME TAXES (Note 6) -- --
------------ ------------
INCOME (LOSS) FROM CONTINUING OPERATIONS (305,432) 343,800
------------ ------------
DISCONTINUED OPERATIONS:
Income (loss) from operations (33,884) 129,947
Loss from disposal -- (1,997,884)
------------ ------------
LOSS FROM DISCONTINUED OPERATIONS (33,884) (1,867,937)
------------ ------------
NET LOSS $ (339,316) $ (1,524,137)
============ ============
NET INCOME (LOSS) PER BASIC COMMON SHARE:
Continuing operations $ (0.09) $ 0.11
Discontinued operations (0.01) (0.61)
------------ ------------
NET LOSS PER BASIC COMMON SHARE $ (0.10) $ (0.50)
============ ============
NET INCOME (LOSS) PER COMMON SHARE -
ASSUMING DILUTION:
Continuing operations $ (0.09) $ 0.11
Discontinued operations (0.01) (0.61)
------------ ------------
NET LOSS PER SHARE - ASSUMING DILUTION $ (0.10) $ (0.50)
============ ============
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE> 60
MARCUM NATURAL GAS SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1998 AND 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
ACCUMULATED
COMMON STOCK ADDITIONAL OTHER
-------------------------- PAID-IN COMPREHENSIVE ACCUMULATED
SHARES VALUE CAPITAL INCOME (LOSS) DEFICIT TOTAL
<S> <C> <C> <C> <C> <C> <C>
BALANCE,
JANUARY 1, 1997
AS PREVIOUSLY REPORTED 12,231,327 $ 122,313 $ 36,844,447 $ (4,354) $(19,669,919) $ 17,292,487
One-for-four common
stock reverse split (9,173,495) (91,735) 91,735
---------- ------------ ------------ ------------ ------------ ------------
BALANCE,
JANUARY 1, 1997
AS ADJUSTED 3,057,832 30,578 36,936,182 (4,354) (19,669,919) 17,292,487
Stock issued for option
exercises and Employee
Stock Purchase Plan 19,990 200 69,801 70,001
Components of
comprehensive loss:
Foreign currency
translation adjustment 11,011 11,011
Net loss (1,524,137) (1,524,137)
------------
Comprehensive loss (1,513,126)
---------- ------------ ------------ ------------ ------------ ------------
BALANCE,
DECEMBER 31, 1997 3,077,822 30,778 37,005,983 6,657 (21,194,056) 15,849,362
Stock issued in acquisition 439,560 4,396 1,995,604 2,000,000
Stock issued under
Employee Stock
Purchase Plan 47,244 472 176,785 177,257
Repurchases of
common stock (75,445) (754) (247,648) (248,402)
Net loss and
comprehensive loss (339,316) (339,316)
---------- ------------ ------------ ------------ ------------ ------------
BALANCE,
DECEMBER 31, 1998 3,489,181 $ 34,892 $ 38,930,724 $ 6,657 $(21,533,372) $ 17,438,901
============ ============ ============ ============ ============ ============
</TABLE>
See notes to consolidated financial statements.
F-6
<PAGE> 61
MARCUM NATURAL GAS SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
-----------------------------
1998 1997
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (339,316) $(1,524,137)
Adjustments to reconcile net loss to net cash provided (used) by
continuing operations:
Loss (income) from discontinued operations 33,884 (129,947)
Loss from disposal of discontinued operations -- 1,997,884
Depreciation and amortization 1,109,402 942,231
Stock plan compensation expense 88,629 --
Royalty payments made with restricted stock -- 50,000
Loss on disposal of property, plant and equipment 7,066 7,811
Changes in other assets and liabilities, net of effect of acquisitions:
Trade receivables (1,540,632) (368,526)
Inventories (398,707) (320,160)
Other current assets (112,206) 65,592
Other noncurrent assets (24,439) (1,586)
Accounts payable 108,366 184,006
Accrued and other liabilities (388,401) 271,658
----------- -----------
Net cash provided (used) by continuing operations (1,456,354) 1,174,826
Net cash provided (used) by discontinued operations (3,375) 697,588
----------- -----------
Net cash provided (used) by operating activities (1,459,729) 1,872,414
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property, plant and equipment (608,950) (307,693)
Acquisitions (1,579,624) --
Proceeds from sale of property, plant and equipment 19,197 10,283
----------- -----------
Net cash used in investing activities (2,169,377) (297,410)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings on notes payable to bank 2,561,702 --
Payments on notes payable to bank (49,545) (578,372)
Issuance of common stock 88,629 70,001
Repurchase of common stock (248,402) --
Payments on capital lease obligations (22,384) (17,622)
----------- -----------
Net cash provided (used) by financing activities 2,330,000 (525,993)
----------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (1,299,106) 1,049,011
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 1,938,554 889,543
----------- -----------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 639,448 $ 1,938,554
=========== ===========
</TABLE>
See notes to consolidated financial statements.
F-7
<PAGE> 62
MARCUM NATURAL GAS SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE
YEARS ENDED DECEMBER 31, 1998 AND 1997
- --------------------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND PROPOSED NAME CHANGE - The accompanying consolidated
financial statements include the accounts of Marcum Natural Gas
Services, Inc. ("MNGS") and its wholly owned subsidiaries, Southern
Flow Companies, Inc. ("Southern Flow"), Metretek, Incorporated
("Metretek") (and its wholly-owned subsidiaries, Metretek Europe,
Limited ("Metretek Europe"), and Sigma VI, Inc. ("Sigma VI")), Marcum
Gas Transmission, Inc. ("MGT") (and its wholly-owned subsidiary Marcum
Capital Resources, Inc. ("MCRI")), and Marcum Denver, Inc. (formerly
Marcum Fuel Systems, Inc.), collectively referred to as the Company.
MNGS was incorporated on April 5, 1991. The focus of its continuing
business operations is in two areas relating to the natural gas
industry: 1) the design, manufacture and distribution of automated
energy consumption monitoring and recording systems, and 2) natural gas
measurement services. Metretek designs, manufactures and sells
automated systems to monitor and record natural gas consumption of
commercial and industrial customers of natural gas utility companies.
Southern Flow provides natural gas measurement services. Each area of
business operation is considered to be a reportable segment - see Note
8.
In March 1999, the Board of Directors of the Company adopted a
resolution authorizing an amendment to the Company's Restated
Certificate of Incorporation, as amended, to change the name of the
Company to "Metretek Technologies, Inc." The change of the Company's
name is subject to approval by the stockholders of the Company. The
Board of Directors intends to include the proposal to change the
Company's name in the Proxy Statement for the Annual Meeting of
Stockholders currently scheduled to be held on June 7, 1999.
PRINCIPLES OF CONSOLIDATION - The consolidated financial statements
include the accounts of MNGS and its subsidiaries after elimination of
intercompany accounts and transactions.
REVERSE STOCK SPLIT - On July 6, 1998, the Company effected a 1-for-4
reverse split of the Company's Common Stock. Accordingly, all
historical amounts contained in the consolidated financial statements,
including weighted average share and per share amounts in the
consolidated statements of operations, as well as common stock and
additional paid-in capital amounts in the consolidated balance sheets
and consolidated statements of stockholder's equity, have been adjusted
to reflect the reverse stock split on a retroactive basis.
REVENUE RECOGNITION - Equipment and supply sales are recognized when
delivered, and natural gas measurement revenues are recognized as
services are provided.
F-8
<PAGE> 63
STATEMENT OF CASH FLOWS - The Company considers all investments with a
maturity of three months or less at time of purchase to be cash
equivalents. Supplemental statement of cash flows information is as
follows:
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Cash paid for interest $ 106,691 $ 74,201
Cash paid for income taxes $ 23,911 $ 49,075
Noncash financing and investing activities:
Acquisition of equipment by capital lease $ -- $ 26,637
Common stock and debt issued in acquisition $2,600,000 $ --
</TABLE>
INVENTORIES - Inventories are stated at the lower of first-in,
first-out cost or market. Inventories at December 31, 1998 and 1997 are
summarized as follows:
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Raw materials and supplies $1,469,097 $1,051,910
Work in process 1,868,144 619,791
Finished goods and merchandise 1,074,859 1,076,925
---------- ----------
Total $4,412,100 $2,748,626
========== ==========
</TABLE>
PROPERTY, PLANT AND EQUIPMENT - Property, plant and equipment is stated
at cost and is generally depreciated on the straight-line basis over
estimated useful lives ranging from 2 to 40 years. Property, plant and
equipment includes items under capital lease with a net book value of
$1,481 and $30,604 at December 31, 1998 and 1997, respectively.
INTANGIBLE ASSETS - Southern Flow customer lists are being amortized
over 20 years using the straight-line method. Goodwill and other
intangibles are being amortized over periods ranging from 10 to 20
years. The Company capitalizes software development costs integral to
its products once technological feasibility of the products and
software has been determined. Software development costs are being
amortized over five years, using the straight-line method. Unamortized
software development costs at December 31, 1998 and 1997 are $420,165
and $563,672, respectively. Patents and license agreements are
amortized on a straight-line basis over the lesser of their estimated
economic lives or their legal term of existence.
F-9
<PAGE> 64
ACCRUED AND OTHER LIABILITIES - Accrued and other liabilities at
December 31, 1998 and 1997 are summarized as follows:
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Payroll, employee benefits and related liabilities $ 562,468 $1,003,093
Deferred revenue 119,445 177,392
Sales, property and other taxes payable 124,998 97,862
Insurance premiums and reserves 79,200 109,284
Interest payable 30,000 --
Other 139,261 56,142
---------- ----------
Total $1,055,372 $1,443,773
========== ==========
</TABLE>
USE OF ESTIMATES - The preparation of the Company's consolidated
financial statements in conformity with generally accepted accounting
principles requires management to make estimates and assumptions that
affect the amounts reported in these financial statements and
accompanying notes. Actual results could differ from those estimates.
FOREIGN CURRENCY - The assets and liabilities of Metretek Europe are
translated at the rate of exchange at year end while sales and expenses
are translated at the average rates in effect during the year. The net
effect of translation adjustments are shown in the accompanying
financial statements as a component of other comprehensive income.
During 1998, the assets and liabilities and foreign currency sales and
expenses were not significant. Accordingly, there were no translation
adjustments in 1998.
COMPREHENSIVE INCOME (LOSS) - The Company adopted Statement of
Financial Accounting Standards ("SFAS") 130, "Reporting Comprehensive
Income," effective January 1, 1998. SFAS 130 establishes rules for the
reporting of comprehensive income and its components. The Company's
other comprehensive income (loss) consists of foreign currency
translation adjustments and is presented in the Consolidated Statement
of Stockholders' Equity. The adoption of SFAS 130 had no impact on the
Company's total stockholders' equity. Prior year financial statements
have been reclassified to conform to the SFAS 130 requirements.
INCOME (LOSS) PER SHARE - The Company's net income/loss from continuing
operations, loss from discontinued operations and net loss, for
purposes of computing the basic and diluted per share amounts, are
identical. The following is a reconciliation of the weighted average
shares outstanding to the weighted average shares outstanding assuming
dilution:
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Weighted average common shares 3,385,699 3,075,957
Incremental shares from assumed exercise of stock options -- 8,178
--------- ---------
Weighted average common shares assuming dilution 3,385,699 3,084,135
========= =========
</TABLE>
STOCK BASED COMPENSATION - The Company has utilized the intrinsic value
method to account for employee stock options as well as stock options
issued to independent members of the board of directors. The Company
utilized the fair value method to account for employee stock based
compensation under its 1998 Employee Stock Purchase Plan and for stock
based compensation to non-employees.
F-10
<PAGE> 65
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES - In June 1998, the
Financial Accounting Standards Board issued SFAS 133, "Accounting for
Derivative Instruments and Hedging Activities," which is effective for
all fiscal quarters of fiscal years beginning after June 15, 1999. SFAS
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 133 will have on its financial statements, if any.
COST OF COMPUTER SOFTWARE DEVELOPED OR OBTAINED FOR INTERNAL USE - 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 is
effective for periods beginning after December 15, 1998. SOP No. 98-1
requires that the Company capitalize certain costs incurred in
connection with developing or obtaining software for internal use. The
Company currently capitalizes internal use software obtained from third
parties and expenses internal use software that it develops. The
Company is currently evaluating the impact SOP No. 98-1 will have on
its financial statements, if any.
2. ACQUISITIONS
On May 4, 1998, the Company, through its wholly owned subsidiary,
Metretek, purchased substantially all of the assets and business of
American Meter Software Corporation (formerly known as Eagle Research
Corporation) ("American Meter Software"), pertaining to electronic
correctors and non-radio-frequency meter reading devices for the
natural gas and electric utility industry. American Meter Software is a
wholly owned subsidiary of American Meter Company ("American Meter"),
which is ultimately controlled by Ruhrgas AG, a German corporation. The
assets acquired by Metretek include certain inventory, equipment,
trademarks and technology of American Meter Software and American Meter
used in the design, manufacture and sales of electronic measurement
process control and telemetry systems to utility companies in the
natural gas and petroleum industries. In connection with the
acquisition, Metretek assumed certain transitional employee costs and
product warranty obligations of American Meter Software. The assets and
business operations acquired have been relocated to Metretek's existing
facility in Melbourne, Florida.
In consideration for the purchase of the assets and business, the
Company and Metretek paid and delivered to American Meter Software at
the closing an aggregate purchase price consisting of $1,300,000 in
cash, 439,560 unregistered shares of Common Stock of the Company valued
at their fair value of $2,000,000, and a $1,200,000 convertible
subordinated promissory note ($600,000 of which is contingent upon
Metretek exceeding certain sales targets, as discussed below) (the
"American Meter Note"). The purchase price is subject to upward
adjustment based upon Metretek's actual sales of products in the
acquired business during the 18-month period that commenced July 1,
1998. If Metretek's annualized sales of products in the business
acquired are greater than $3,900,000 during such period, then the
purchase price will be increased on a dollar-for-dollar basis to the
extent of such sales surplus, but the purchase price will not be
increased above $4,500,000 even if annualized sales are greater than
that amount. Any increase in the purchase price will be reflected as an
adjustment to the principal balance of the American Meter Note and
allocated to goodwill. Subsequent to closing, the purchase price was
adjusted down by $85,000 to reflect a decrease in American Meter
Software's inventory between December 31, 1997 and May 4, 1998,
partially offset by transitional costs assumed by Metretek.
Up to $1,028,107 of the American Meter Note is convertible at any time
at the option of American Meter Software, into 180,766 shares of Common
Stock of the Company at the rate of approximately
F-11
<PAGE> 66
$5.69 of principal per share. The American Meter Note bears interest on
the unpaid principal balance at a fixed rate equal to 7.5% per annum,
payable quarterly in arrears. The American Meter Note is due and
payable May 4, 2002, and may be prepaid at any time without penalty or
premium. The Company granted to American Meter Software the one-time
option to cause the shares of Common Stock issued at the closing or
issuable upon the conversion of the American Meter Note to be
registered under the Securities Act of 1993, as amended, and applicable
state securities laws, and has also granted American Meter Software
certain piggy-back registration rights to include such shares in any
registration statement filed by the Company, subject to customary
underwriter cutbacks.
Metretek also entered into a license agreement ("License Agreement")
with American Meter and American Meter Software, providing for the
license by American Meter and American Meter Software to Metretek of
certain operating software, and the development, manufacture and sale
by Metretek to American Meter and American Meter Software of certain
electronic components and related equipment pertaining to electronic
temperature and pressure correction to be imbedded with certain new
rotary and turbine meters of American Meter. The License Agreement also
grants American Meter and its affiliates the right to sell Metretek
products in the United States and Canada at certain agreed-upon prices.
American Meter and American Meter Software also entered into a
Non-Competition Agreement with the Company and Metretek, pursuant to
which American Meter and American Meter Software have agreed not to
compete with Metretek in the acquired business for five years from the
closing date.
The acquisition was accounted for as a purchase, and therefore the
results of operations of the American Meter Software business acquired
have been combined with those of the Company effective May 4, 1998.
On June 15, 1998, Metretek, through its wholly owned subsidiary, Sigma
VI, acquired substantially all of the assets of Quality Contract
Manufacturing, Inc. ("QCMI") in exchange for $150,000 in cash. QCMI is
a contract manufacturer of electronic circuit boards, sub-assemblies,
and cable assemblies serving customers primarily in Melbourne, Florida
and the immediately surrounding area. The acquisition was accounted for
as a purchase and therefore the results of operations of QCMI have been
combined with those of the Company effective June 15, 1998.
The purchase prices of the foregoing acquisitions (including
transaction costs) have been allocated as follows:
<TABLE>
<CAPTION>
AMERICAN METER
SOFTWARE QCMI
<S> <C> <C>
Inventories $1,265,000
Property, plant and equipment 228,000 $ 75,000
Goodwill and other intangibles 2,532,000 80,000
---------- ----------
$4,025,000 $ 155,000
========== ==========
</TABLE>
F-12
<PAGE> 67
The following summary unaudited pro forma results of operations for the
years ended December 31, 1998 and 1997 assumes that the American Meter
Software and QCMI acquisitions occurred on January 1, 1997. These pro
forma results have been prepared for comparative purposes and do not
purport to be indicative of results of operations which actually would
have resulted had the combinations been in effect on the dates
indicated, or which may result in the future.
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Total revenues $ 21,272,000 $ 24,475,195
Income (loss) from continuing operations $ (234,000) $ 690,000
Income (loss) per share from continuing
operations - assuming dilution $ (0.07) $ 0.20
</TABLE>
3. DISCONTINUED OPERATIONS
During 1998, the Company decided to discontinue the operations of MGT,
a directly owned subsidiary of the Company that was formed to acquire
or finance the acquisition of natural gas assets through privately
financed programs, and then to manage and maintain a small ownership
interest in those programs. This decision was based on the declining
prospects of the markets and in order to enable the Company to focus on
its Southern Flow and Metretek operations. In December 1997, MGT sold
one-third of its interests in two of the three programs it then
managed, and in March 1998, MGT liquidated the third program. MGT does
not intend to form or manage any new programs, although it will
continue to manage the remaining two programs that operate natural gas
related assets until MGT's interest in these programs are sold or the
programs are liquidated.
The Company incurred a loss from operations of the discontinued MGT
operations of $33,884 and income from operations of MGT of $408,716
during the years ended December 31, 1998 and 1997, respectively.
Revenues from the discontinued MGT operations were $269,873 and
$780,314 for the years ended December 31, 1998 and 1997, respectively.
The Company does not expect to incur a loss from the sale or
liquidation of the MGT operations.
In 1997, the Company, through its wholly-owned subsidiary, Marcum Fuel
Systems, Inc. ("MFS"), sold its refueling equipment business and
substantially all of the operating assets related thereto to Natural
Fuels Corporation ("Natural"), an affiliate of Public Service Co. of
Colorado and Colorado Interstate Gas, pursuant to the provisions of an
Asset Purchase Agreement, dated as of June 27, 1997 (the "Asset
Purchase Agreement").
The assets sold by MFS to Natural included certain inventory,
equipment, contracts, patents, trademarks and technology of MFS used in
the compressed natural gas vehicle fueling business, but excluded
receivables and payables (other than those attributed to assumed jobs),
certain inventory and contracts attributable to jobs in progress as of
the closing date, and the capital stock of its wholly-owned
subsidiaries.
Pursuant to the Asset Purchase Agreement, (a) Natural paid MFS $373,628
in cash at closing; (b) Natural agreed to pay an additional $47,735 in
cash for certain vehicles and equipment upon transfer of title to such
vehicles and equipment; (c) Natural assumed the warranty and service
obligations of MFS with respect to jobs completed by MFS and certain
liabilities and obligations of MFS in connection with pending jobs and
job quotes assumed by Natural; (d) Natural agreed to pay MFS 30% of the
gross margin upon Natural's completion of the assumed jobs; and (e)
Natural agreed to pay MFS a royalty on the sale by Natural and its
affiliates of compressed natural gas vehicle refueling dispensers that
F-13
<PAGE> 68
incorporate MFS metering technology in an amount equal to (i) $750 per
dispenser sold until the earlier of the sale of the first 500
dispensers or five years from the closing date, plus (ii) $500 per
dispenser sold thereafter until the earlier of the sale of 500
additional dispensers or five additional years. MFS also granted to
Natural a one-year license of the name "Marcum Fuel Systems, Inc." and
certain other trademarks and trade name pursuant to a License
Agreement.
The Company incurred a loss from operations of the discontinued
refueling equipment business of $278,769 in 1997 to the date of
disposition and a loss on the disposition of the business of
$1,997,884. Revenues of the discontinued refueling equipment business
in 1997 were $2,593,088 through the date of disposition. The results of
both MGT and the refueling equipment operations have been reported
separately as discontinued operations. Net assets of the discontinued
operations at December 31, 1998 and 1997 consisted of the following:
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Current assets (primarily receivables and inventory) $ 72,311 $ 460,586
Other assets, net 275,484 536,222
Accounts payable, accrued expenses and other disposal costs (28,402) (235,565)
Note payable -- (311,111)
--------- ---------
Net assets of discontinued operations $ 319,393 $ 450,132
========= =========
</TABLE>
4. DEBT
The balance of notes payable at December 31, 1998 and 1997 consists of
the following:
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Term loans $ 600,000 $ 46,845
Lines of credit 2,561,702 2,700
---------- ----------
3,161,702 49,545
Less current maturities -- 49,545
---------- ----------
Long-term notes payable $3,161,702 $ --
========== ==========
</TABLE>
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
December 31, 1998) on outstanding balances of the Loans. The Loans
mature on March 14, 2001. The Loans are secured by the tangible and
intangible assets of the Company, Southern Flow, and Metretek,
including equipment, inventories, receivables, and cash deposits, and
the pledge of the shares of the Company's subsidiaries. The Loan
Agreement requires the Company to maintain a minimum tangible net
worth, a maximum debt to tangible net worth ratio, minimum annual net
income (loss), a minimum debt service coverage ratio, and contains
other standard covenants related to operations of the Company,
including prohibitions on the payment of dividends and the issuance or
repurchase of securities (with certain exceptions) without the Lender's
consent. Borrowings on the
F-14
<PAGE> 69
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 December 31, 1998, the Company had a combined $4,375,458 Loan
availability, of which $2,561,702 had been borrowed by Southern Flow
and Metretek, leaving $1,813,756 in unused Loan availability. Proceeds
from initial advances under the Loan Agreement were used to extinguish
the Company's existing loans, lines of credit, and accrued interest
with two commercial bank lenders in the aggregate amount of $468,993,
including $279,021 of a term loan and accrued interest owed by the
Company's discontinued MGT segment to a commercial bank lender.
The balance of the term loan at December 31, 1998 consists of the
American Meter Note incurred in connection with the acquisition
discussed in Note 2.
5. COMMITMENTS AND CONTINGENCIES
LEGAL PROCEEDINGS - In 1993, a former employee filed an action in
Denver District Court against DVCO Fuel Systems, Inc. ("DVCO"), a
former subsidiary of Marcum Denver, and the Company, alleging that the
Company conspired with certain third parties to defraud him and that
the Company intentionally interfered with certain contracts in which he
had an interest. The former employee is seeking damages in the amount
of approximately $420,000 and punitive damages. The Company has denied
the former employee's claims and has asserted counterclaims against the
former employee, alleging that (i) he breached an agreement with the
Company which included a legal release, (ii) he made intentional and/or
negligent misrepresentations regarding his qualification and reputation
in the compressed natural gas industry, (iii) he breached his fiduciary
duty to the Company, and (iv) he disparaged the Company. On July 24,
1997, the former employee's action was dismissed as a result of the
Court's grant of the motion by the Company and DVCO for summary
judgment against the former employee's claims. On February 18, 1999,
the Colorado Court of Appeals reversed the summary judgment. The
Company intends to appeal that ruling to the Colorado Supreme Court.
The Company believes the allegations against it and DVCO are without
merit and intends to defend the action vigorously. Although the outcome
of this litigation is not determinable with certainty, in the opinion
of the Company's management, this litigation is not expected to have a
material adverse effect on the business, financial condition or results
of operations of the Company
Other than as set forth above, there are no legal proceedings pending
or, to the knowledge of the Company, threatened against the Company or
any of its assets, other than litigation incidental and not material to
its business.
OPERATING LEASES - The Company leases business facilities and vehicles
under operating lease agreements which specify minimum rentals.
Substantially all leases have renewal provisions. Rental expense for
the years ended December 31, 1998 and 1997 totaled $1,119,290 and
$918,669, respectively.
F-15
<PAGE> 70
Future minimum rental payments under noncancelable operating leases
having an initial or remaining term of more than one year are as
follows:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31:
<S> <C>
1999 $ 823,852
2000 744,992
2001 616,257
2002 460,558
2003 445,934
----------
Total $3,091,593
==========
</TABLE>
EMPLOYEE BENEFIT PLANS - The Company has a defined contribution savings
and investment plan (the "401(k) Plan") under Section 401(k) of the
Internal Revenue Code. All employees age 21 or older with at least one
year of service are eligible to participate in the 401(k) Plan. The
401(k) Plan provides for discretionary contributions by employees of up
to 15% of their eligible compensation. The Company may make
discretionary matching contributions up to 50% of participant
contributions, subject to a maximum of 6% of each participant's
eligible compensation. The Company's 401(k) Plan expense for the years
ended December 31, 1998 and 1997 was $146,161 and $147,061,
respectively.
LICENSE AGREEMENT - Metretek has a commitment to pay in cash or
restricted shares of common stock of the Company a 5% royalty on sales
of certain royalty-bearing products of Metretek with a minimum annual
royalty of $50,000 through the year 2002. In September 1998, the
Company repurchased 18,181 shares of its common stock that had been
issued to the licensor in prior years in order to satisfy certain
obligations of Metretek under the license agreement. Royalty expense of
$50,000 has been recognized in both 1998 and 1997 under the license
agreement.
6. INCOME TAXES
No tax expense or benefit has been recognized during the years ended
December 31, 1998 and 1997 because of net operating losses incurred and
because a valuation allowance has been provided for 100% of the net
deferred tax assets at December 31, 1998 and 1997.
F-16
<PAGE> 71
The components of the Company's deferred tax assets and liabilities at
December 31, 1998 and 1997 are shown below:
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Assets:
Net operating loss carryforwards $ 7,074,000 $ 7,361,000
Tax credit carryforwards 151,000 188,000
Allowance for bad debts 40,000 41,000
Other 9,000 --
----------- -----------
7,274,000 7,590,000
----------- -----------
Liabilities:
Excess of income tax depreciation and amortization
over financial statement amounts 650,000 414,000
Other 34,000 50,000
----------- -----------
684,000 464,000
----------- -----------
Net deferred tax asset 6,590,000 7,126,000
Valuation allowance (6,590,000) (7,126,000)
----------- -----------
Total $ 0 $ 0
=========== ===========
</TABLE>
At December 31, 1998, the Company had unused net operating losses to
carry forward against future years' taxable income of approximately
$20,806,000 expiring in various amounts from 1999 to 2013. At December
31, 1998, the Company had unused investment tax credits, general
business tax credits, and research and development tax credit
carryforwards aggregating approximately $151,000 expiring in various
amounts from 1999 to 2008.
As a result of its acquisition of Metretek in 1994, the Company
acquired a remaining net operating loss carryforwards for tax purposes
of $4,568,000 expiring between 1999 and 2002. As a result of the change
in ownership, utilization of the carryforwards is limited to
approximately $762,000 annually under Section 382 of the Internal
Revenue Code.
As a result of an acquisition in 1991, the Company acquired a remaining
net operating loss carryforwards for tax purposes of approximately
$948,000 ($231,000, net of current limitation). Such carryforwards
expire in 1999 through 2005. As a result of the change in ownership
upon acquisition, utilization of these net operating loss carryforwards
is limited to approximately $33,000 annually. If the benefits related
to the net operating loss carryforwards that were not recognized at the
acquisition date are recognized in a subsequent period, they will first
reduce to zero any goodwill related to the acquisition, then reduce to
zero all other noncurrent intangible assets, and then reduce income tax
expense.
7. CAPITAL STOCK
WARRANT DIVIDEND - On September 18, 1998, the Company distributed
886,442 Common Stock Purchase Warrants (the "Warrants") as a dividend
to stockholders of the Company on the basis of one Warrant for each
four shares of Common Stock outstanding on September 10, 1998, the
record date for the Warrant dividend. Each Warrant is exercisable, for
a five-year period, for one share of Common Stock at an exercise price
of $4.00. The Warrants are subject to redemption by the Company in the
event the Common Stock trades at or above $6.50 per share for 20
consecutive trading days. The registration statement and prospectus
covering the Common Stock issuable upon exercise of the Warrants also
covers the resale of up to 155,081 Warrants by a selling security
holder.
F-17
<PAGE> 72
No Warrants have been exercised through December 31, 1998.
STOCK COMPENSATION - In January 1998, the Company adopted a
non-qualified, compensatory Employee Stock Purchase Plan (the "1998
Stock Purchase Plan"), which allowed eligible employees to purchase
shares of the Company's Common Stock through payroll deductions. Under
the 1998 Stock Purchase Plan, employees purchased shares at a price
100% of the lower of the beginning or ending fair market value of the
shares during each one-month offering period. The Company matched the
employees' purchase on a share-for-share basis. The maximum payroll
deduction was 15% of an employee's eligible compensation. The Company
reserved and registered a total of 50,000 shares of Common Stock for
offer and issuance under the 1998 Stock Purchase Plan. The Company
issued 47,244 shares under the 1998 Stock Purchase Plan, which has been
discontinued. Stock compensation expense in the amount of $88,629 was
recognized during the year ended December 31, 1998 representing the
market value of the shares of Common Stock matched by the Company under
the 1998 Stock Purchase Plan.
STOCK INCENTIVE PLAN - In March 1998, the Board of Directors of the
Company adopted the Marcum Natural Gas Services, Inc. 1998 Stock
Incentive Plan (the "1998 Stock Incentive Plan"), which was approved by
the Company's stockholders at the Annual Meeting of Stockholders held
on June 12, 1998. The 1998 Stock Incentive Plan authorizes the Board of
Directors to grant non-qualified stock options, incentive stock
options, stock appreciation rights, restricted stock, performance
awards and other stock-based awards to officers, directors, employees,
consultants and advisors of the Company and its subsidiaries for up to
250,000 shares of the Company's Common Stock. The 1998 Stock Incentive
Plan replaced the Company's existing 1991 Stock Option Plan and the
Company's Directors' Stock Option Plan (the "Prior Plans"), and no new
awards will be made under the Prior Plans, although options outstanding
under the Company's Prior Plans will not be affected by the adoption of
the 1998 Stock Incentive Plan.
STOCK REPURCHASE PLAN - In September 1998, the Board of Directors of
the Company adopted a stock repurchase plan (the "Stock Repurchase
Plan") pursuant to which the Company is authorized to purchase up to
approximately 7% of its outstanding Common Stock in open market
transactions, from time to time as management deems appropriate, if the
market price of the Company's stock remains below certain levels. The
Company may use the repurchased shares for employee benefit plans and
other corporate purposes, may hold the repurchase shares in treasury or
may retire the purchased shares. Through December 31, 1998, the Company
repurchased 57,088 shares of its Common Stock at an average price of
$2.25 per share. The repurchased shares have been retired.
STOCK OPTIONS - In December 1991, the Company adopted the 1991 Stock
Option Plan which was amended and restated on June 4, 1996 ("1991 SOP")
and the Director's Stock Option Plan ("Director SOP"). Under the 1991
SOP, incentive stock options and nonqualified stock options may be
granted to officers and employees for up to 350,000 shares of Common
Stock. Under the 1991 SOP, options granted must be at exercise prices
not less than the fair market value of the Company's Common Stock on
the date of grant. The 1991 SOP options have a term of ten years with
the vesting terms determined on the date of the grant. The Director SOP
permits the granting of nonqualified stock options for up to 162,500
shares of Common Stock to nonemployee directors of the Company. Each
Director SOP option is exercisable at a price not less than the fair
market value of the Company's Common Stock on the date of grant. The
Director SOP options have a term of ten years and are vested on the
date of grant. Options granted to certain officers and non-employee
directors contain limited rights for receipt of cash for appreciation
in stock value in the event of certain changes in control.
F-18
<PAGE> 73
Options to purchase shares of common stock are summarized as follows:
<TABLE>
<CAPTION>
1998 STOCK DIRECTORS STOCK 1991 STOCK
INCENTIVE PLAN OPTION PLAN OPTION PLAN OTHER OPTIONS
----------------------- ---------------------- ----------------------------------------------
WEIGHTED WEIGHTED WEIGHTED WEIGHTED
NUMBER AVERAGE NUMBER AVERAGE NUMBER AVERAGE NUMBER AVERAGE
OF OPTION OF OPTION OF OPTION OF OPTION
SHARES PRICE SHARES PRICE SHARES PRICE SHARES PRICE
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Outstanding at
January 1, 1997 75,000 $ 6.30 213,188 $ 6.09 54,154 $ 6.37
Granted 30,000 3.62 102,500 3.61
Exercised (20,000) 3.50
Forfeited (35,438) 6.16
Expired (15,396) 6.37
------- -------- -------- ------
Outstanding at
December 31, 1997 -- 105,000 5.54 260,250 5.30 38,758 6.38
Granted 53,606 $ 2.65 115,000 2.12 304,750 2.29 1,559 2.00
Forfeited (17,428) 3.52 (110,000) 5.50 (289,438) 5.28 (1,559) 6.36
Expired (37,200) 6.38
------- -------- -------- ------
Outstanding at
December 31, 1998 36,178 $ 2.23 110,000 $ 2.00 275,562 $ 2.00 1,558 $ 2.00
======= ======== ======== ======
Exercisable at
December 31:
1998 36,178 $ 2.23 110,000 $ 2.00 - $ - 1,558 $ 2.00
======= ======== ======== ======
1997 -- $ -- 105,000 $ 5.54 179,687 $ 5.76 38,758 $ 6.38
======= ======== ======== ======
</TABLE>
On October 6, 1998, the Board of Directors approved the repricing of
all outstanding stock options held by officers, directors and employees
of the Company to an exercise price of $2.00 per share, the last sale
price of the Common Stock as reported on the Nasdaq National Market on
such date. No repriced officer or employee options (whether or not
vested) shall be exercisable prior to October 6, 1999. The other terms
of the outstanding stock options generally remain unchanged. The
repriced options are reflected as forfeitures and new grants during the
year ended December 31, 1998 in the summary above.
The weighted average grant date fair values of options granted
(including repriced options in 1998), during the years ended December
31, 1998 and 1997 were $.77 and $1.36 per option, respectively. The
range of exercise price for options outstanding as of December 31, 1998
was $2.00 to $2.44. The weighted average remaining contractual life of
options outstanding at December 31, 1998 was approximately 6.7 years.
If the fair value based method of accounting for stock options had been
applied, the Company's net loss and net loss per share would have
increased to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1998 1997
<S> <C> <C>
Net loss - as reported $ (339,316) $ (1,524,137)
Net loss - pro forma $ (563,789) $ (1,565,137)
Loss per basic and diluted Common Share - as reported $ (0.10) $ (0.50)
Loss per basic and diluted Common Share - pro forma $ (0.17) $ (0.51)
</TABLE>
F-19
<PAGE> 74
The fair values of stock options were calculated using a variation of
the Black-Scholes stock option valuation model with the following
weighted average assumptions for grants in 1998 and 1997: stock price
volatility at 40% and 40%, respectively; risk-free rate of return of 5%
and 5.5%, respectively; dividend rate of $0.00 per year; and an
expected term of 4 years for options granted to employees and 10 years
for options granted to directors.
STOCKHOLDER RIGHTS PLAN - On December 12, 1991, the stockholders of the
Company approved the Stockholder Rights Plan ("Plan"). The Plan calls
for the issuance of one preferred share purchase right ("Right") for
each share of Common Stock held by stockholders of record on December
2, 1991. Each Right represents the right to purchase one one-hundredth
of a share of Series C Preferred Stock of the Company at an initial
exercise price of $100 per share. The Rights are exercisable through
December 1, 2001, unless earlier redeemed by the Company. In the event
that any person or group (with certain exceptions) acquires 15% or more
of the Company's outstanding Common Stock, the Rights provide for the
holder to acquire Common Stock of the Company, or acquiring company, at
a 50% discount. The rights are redeemable by the Company at $.04 per
Right.
STOCK WARRANTS - On March 13, 1998, the Company issued 50,000 stock
purchase warrants to a consultant for financial advisory services. The
warrants vest in increments based upon the last sales price of the
Company's Common Stock as reported on the Nasdaq Stock Market achieving
the minimum levels set forth below. The exercise price of the
respective warrants will be equal to the minimum stock prices as the
warrants vest.
<TABLE>
<CAPTION>
MINIMUM STOCK PRICE
NUMBER OF WARRANTS AND EXERCISE PRICE
<S> <C>
12,500 $ 4.43
12,500 $ 6.00
12,500 $ 8.00
12,500 $10.00
</TABLE>
At December 31, 1998, 12,500 of the warrants were vested and
exercisable. All warrants that are not vested at March 13, 2000 shall
expire without vesting. All of the warrants expire March 13, 2003,
regardless of the date the warrants vest or become exercisable.
In September 1994, the Company settled a lawsuit related to a dispute
over services rendered by an individual in connection with the
acquisition of Southern Flow. As part of the settlement, the Company
issued 10,000 stock purchase warrants which entitle the holder to
purchase one share of Common Stock at $17.00 per share, the market
price of the stock on the settlement date. The warrants are exercisable
and expire September 27, 1999.
METRETEK STOCK WARRANTS - Metretek stock warrants were issued by
Metretek in prior periods in connection with issues of common stock and
debentures. Stock warrants were also issued by Metretek to certain
stockholders as remuneration for loans provided to Metretek and to a
venture capital company as remuneration for services rendered in
connection with a new issue of special preference stock. At December
31, 1998, stock warrants outstanding allow the holders to purchase a
total of 36,620 shares of common stock at prices ranging from $44.48 to
$88.96 per share. The Metretek stock warrants are exercisable over
periods expiring at various dates from 1999 to 2004.
The shares of the Company's common stock issuable upon the exercise of
the Metretek Warrants cannot be resold unless such resale is registered
under the Securities Act and under applicable state securities laws or
is made pursuant to an available exemption therefrom. The holders of
the Metretek
F-20
<PAGE> 75
Warrants have the right, under certain circumstances, to require the
Company to register the shares of the Company's common stock issuable
upon exercise of the Metretek Warrants under the Securities Act and
applicable state securities laws.
8. SEGMENT AND RELATED INFORMATION
The Company adopted SFAS 131, "Disclosures About Segments of an
Enterprise and Related Information," effective January 1, 1998. The
Company's reportable segments are strategic business units that offer
different products and services. They are managed separately because
each business requires different technology and marketing strategies.
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. Historically, Metretek's products and
services have been provided principally to natural gas local
distribution companies ("LDCs"). Typically LDCs install Metretek
products in conjunction with custody transfer meters on their larger
customers for the purpose of meeting deregulation requirements.
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 accounting policies of the reportable segments are the same as
those described in Note 1 of the Notes to Consolidated Financial
Statements. 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.
F-21
<PAGE> 76
<TABLE>
<CAPTION>
AUTOMATED NATURAL GAS
ENERGY DATA MEASUREMENT
MANAGEMENT SERVICES OTHER TOTAL
<S> <C> <C> <C> <C>
1998
Revenues $ 8,774,395 $ 11,105,617 $ 42,098 $ 19,922,110
Segment profit (loss) 433,563 746,828 (1,485,823) (305,432)
Total assets 11,054,992 10,685,373 645,918 22,386,283
Capital expenditures 416,025 189,739 3,186 608,950
Depreciation and amortization 497,922 601,911 9,569 1,109,402
1997
Revenues $ 8,804,860 $ 11,585,242 $ 42,735 $20,432,837
Segment profit (loss) 268,616 1,178,972 (1,103,788) 343,800
Total assets 4,723,547 11,473,098 1,790,362 17,987,007
Capital expenditures 110,562 184,802 12,329 307,693
Depreciation and amortization 347,425 587,046 7,760 942,231
</TABLE>
The following table presents revenues by geographic area based on the
location of the use of the product or service:
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
United States $18,294,312 $18,527,809
United Kingdom 904,581 621,446
Canada 596,777 557,865
Australia 74,601 24,598
Argentina 42,296 582,238
Brazil -- 58,885
Other 9,543 59,996
----------- -----------
Total $19,922,110 $20,432,837
=========== ===========
</TABLE>
* * * * *
F-22
<PAGE> 77
MARCUM NATURAL GAS SERVICES, INC.
FORM 10-KSB
EXHIBIT INDEX
EXHIBIT NO. EXHIBIT
----------- -------
3.3 AMENDED AND RESTATED BYLAWS OF MARCUM NATURAL GAS SERVICES,
INC.
10.5 AMENDMENT NO. 2 TO EMPLOYMENT AGREEMENT, DATED DECEMBER 3,
1998, BETWEEN MARCUM NATURAL GAS SERVICES INC. AND W. PHILLIP
MARCUM
10.8 AMENDMENT NO. 2 TO EMPLOYMENT AGREEMENT, DATED DECEMBER 3,
1998, BETWEEN MARCUM NATURAL GAS SERVICES INC. AND A. BRADLEY
GABBARD
10.12 AMENDMENT NO. 1 TO THE LOAN AND SECURITY AGREEMENT, DATED AS
OF NOVEMBER 10, 1998, BY AND AMONG NATIONAL BANK OF CANADA,
MARCUM NATURAL GAS SERVICES, INC., METRETEK, INCORPORATED AND
SOUTHERN FLOW COMPANIES, INC.
21.1 SUBSIDIARIES
23.1 CONSENT OF DELOITTE & TOUCHE LLP
27.1 FINANCIAL DATA SCHEDULE
<PAGE> 1
EXHIBIT 3.3
<PAGE> 2
MARCUM NATURAL GAS SERVICES, INC.
* * * * *
AMENDED AND RESTATED BY-LAWS
AS OF MARCH 5, 1999
* * * * *
ARTICLE I.
OFFICES
Section 1. The registered office shall be in the City of Wilmington,
County of New Castle, State of Delaware.
Section 2. The corporation may also have offices at such other places
both within and without the State of Delaware as the board of directors may from
time to time determine or the business of the corporation may require.
ARTICLE II.
MEETINGS OF STOCKHOLDERS
Section 1. All meetings of the stockholders for the election of
directors shall be held in the City of Denver, State of Colorado, at such place
as may be fixed from time to time by the board of directors, or at such other
place either within or without the State of Delaware as shall be designated from
time to time by the board of directors and stated in the notice of the meeting.
Meetings of stockholders for any other purpose may be held at such time and
place, within or without the State of Delaware, as shall be stated in the notice
of the meeting or in a duly executed waiver of notice thereof.
<PAGE> 3
Section 2.
(a) Annual meetings of stockholders shall be held on such date and at
such time as shall be designated from time to time by the board of directors and
stated in the notice of the meeting, at which they shall elect by a plurality
vote a board of directors or class of directors, and transact such other
business as may properly be brought before the meeting.
(b) To be properly brought before the annual meeting, nominations of
persons for election to the board of directors and the proposal of business to
be considered by the stockholders at the annual meeting must be: (i) specified
in the notice of the annual meeting (or any supplement thereto) given by or at
the direction of the board of directors, (ii) otherwise properly be brought
before the annual meeting by or at the direction of the board of directors, or
(iii) otherwise be properly brought before the annual meeting by a stockholder
who is a stockholder of record at the time of the giving of the notice required
by these by-laws, who is entitled to vote at the annual meeting and who complies
with the notice procedures set forth in these by-laws.
(c) For nominations or other business to be properly brought before the
annual meeting by a stockholder pursuant to clause (iii) of paragraph (c) of
this by-law, the stockholder must have given timely notice thereof in writing to
the secretary of the corporation and any such business must otherwise be a
proper matter for stockholder option under Delaware law. To be timely, a
stockholder's notice must be delivered to or mailed and
2
<PAGE> 4
received at the principal executive offices of the corporation not less than
forty-five (45) days nor more than one hundred fifty (150) days before the date
on which the corporation first mailed its proxy materials for the prior year's
annual meeting of stockholders; provided, however, that in the event that the
corporation did not hold an annual meeting in the prior year or the date of the
annual meeting has changed by more than thirty (30) days from the prior year,
then notice by the stockholder to be timely must be so received not sooner than
one hundred eighty (180) days before the annual meeting and not later than the
later of seventy-five (75) days before the annual meeting or ten (10) days
following the date on which public announcement of the date of the annual
meeting is first made. Such stockholder's notice shall set forth (i) as to each
person, if any, whom the stockholder proposes to nominate for election or
re-election as a director: (A) the name, age, business address and residence
address of such person, (B) the principal occupation or employment of such
person, (C) the class and number of shares of the corporation which are
beneficially owned by such person, (D) a description of all arrangements or
understandings between the stockholder and each nominee and any other person or
persons (naming such person or persons) pursuant to which the nominations are to
be made by the stockholder, and (E) any other information relating to such
person that is required to be disclosed in solicitations of proxies for
elections of directors, or is otherwise required, in each case pursuant to
Regulation 14A under
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the Securities Exchange Act of 1934, as amended (the "Exchange Act") (including,
without limitation such person's written consent to being named in the proxy
statement, if any, as a nominee and to serving as a director if elected); (ii)
as to any other business that the stockholder desires to bring before the
meeting, a brief description of the business desired to be brought before the
annual meeting and the reasons for conducting such business at the annual
meeting; (iii) as to the shareholder giving the notice, (A) the name and
address, as they appear on the corporation's books, of the stockholder, (B) the
class, series (if any) and number of shares of the corporation which are
beneficially owned by the stockholder, and (C) any material interest of the
stockholder in such business; and (iv) any other information that is required to
be provided by the stockholder pursuant to Regulation 14A under the Exchange
Act, in his capacity as a proponent to a stockholder proposal. Notwithstanding
the foregoing, in order to include information with respect to a stockholder
proposal in the proxy statement and form of proxy for an annual meeting,
stockholders must provide notice as required by the regulations promulgated
under the Exchange Act.
(d) Notwithstanding anything in these by-laws to the contrary, only
such persons who are nominated in accordance with the procedures set forth in
these by-laws shall be eligible to serve as directors and only such business
shall be conducted at the annual meeting as shall have been brought before the
annual
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meeting in accordance with the procedures set forth in these by-laws. The
chairman of the annual meeting shall have the power and duty to determine
whether a nomination or any business proposed to be brought before the meeting
was made in accordance with the procedures set forth in these by-laws, and, if
he should determine that any proposed nomination or business was not in
compliance with these by-laws, he shall so declare at the annual meeting that
any such proposed nomination or other business not properly brought before the
annual meeting shall not be made or transacted.
(e) For purposes of these by-laws, "public announcement" shall mean
disclosure in a press release reported by the Dow Jones News Service, Associated
Press or comparable national news service or in a document publicly filed by the
corporation with the Securities and Exchange Commission pursuant to Section 9,
13, 14 or 15(d) of the Exchange Act.
(f) Notwithstanding the foregoing provisions of this by-law, a
stockholder shall also comply with all applicable requirements of the Exchange
Act and the rules and regulations thereunder with respect to the matters set
forth in this by-law. Nothing in this by-law shall be deemed to affect any
rights of stockholders to request inclusion of proposals in the Corporation's
proxy statement pursuant to Rule 14a-8 under the Exchange Act.
Section 3. Written notice of the annual meeting stating the place, date
and hour of the meeting shall be given to each
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stockholder entitled to vote at such meeting not less than ten nor more than
sixty days before the date of the meeting.
Section 4. The officer who has charge of the stock ledger of the
corporation shall prepare and make, at least ten days before every meeting of
stockholders, a complete list of stockholders entitled to vote at the meeting,
arranged in alphabetical order, and showing the address of each stockholder and
the number of shares registered in the name of each stockholder. Such list shall
be open to the examination of any stockholder, for any purpose germane to the
meeting, during ordinary business hours, for a period of at least ten days prior
to the meeting, either at a place within the city where the meeting is to be
held, which place shall be specified in the notice of the meeting, or, if not so
specified, at the place where the meeting is to be held. The list shall also be
produced and kept at the time and place of the meeting during the whole time
thereof, and may be inspected by any stockholder who is present.
Section 5. Special meetings of the stockholders, for any purpose or
purposes, unless otherwise prescribed by statute or by the certificate of
incorporation, may be called the president and shall be called by the president
or secretary at the request in writing of a majority of the board of directors.
Such request shall state the purpose or purposes of the proposed meeting.
Section 6. Written notice of a special meeting stating the place, date
and hour of the meeting and the purpose or purposes for which the meeting is
called, shall be given not less than ten
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nor more than sixty days before the date of the meeting, to each stockholder
entitled to vote at such meeting.
Section 7. Business transacted at any special meeting of stockholders
shall be limited to the purposes stated in the notice.
Section 8. The holders of a majority of the stock issued and
outstanding and entitled to vote thereat, present in person or represented by
proxy, shall constitute a quorum at all meetings of the stockholders for the
transaction of business except as otherwise provided by statute or by the
certificate of incorporation. If, however, such quorum shall not be present or
represented at any meeting of the stockholders, the stockholders entitled to
vote thereat, present in person or represented by proxy, shall have power to
adjourn the meeting from time to time, without notice other than announcement at
the meeting, until a quorum shall be present or represented. At such adjourned
meeting at which a quorum shall be present or represented any business may be
transacted which might have been transacted at the meeting as originally
notified. If the adjournment is for more than thirty days, or if after the
adjournment a new record date is fixed for the adjourned meeting, a notice of
the adjourned meeting shall be given to each stockholder of record entitled to
vote at the meeting.
Section 9. When a quorum is present at any meeting, the vote of the
holders of a majority of the stock having voting power present in person or
represented by proxy shall decide any
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question brought before such meeting, unless the question is one upon which by
express provision of the statutes or the certificate of incorporation or these
bylaws a different vote is required, in which case such express provision shall
govern and control the decision of such question.
Section 10. Unless otherwise provided in the certificate of
incorporation each stockholder shall at every meeting of the stockholders be
entitled to one vote in person or by proxy for each share of capital stock
having voting power held by such stockholder, but no proxy shall be voted after
three years from its date, unless the proxy provides for a longer period.
Section 11. All actions which are required to be or may be taken by the
stockholders of the corporation shall be taken at a meeting of the stockholders,
duly held and upon proper notice, and may not be taken by written consent
without a meeting, and the power of stockholders to consent in writing to the
taking of any action is specifically denied.
Section 12. Meetings of stockholders shall be presided over by the
chairman of the board, if any, or in his absence by the vice chairman of the
board, if any, or in his absence by the chairman of the executive committee, if
any, or in his absence by the president, if any, or in his absence by an
executive vice president, if any, or in his absence by a senior vice president,
if any, or in his absence by a vice president, or in the absence of the
foregoing persons by a chairman designated by the board of directors, or in the
absence of such designation by a chairman
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chosen at the meeting by the vote of a majority in interest of the stockholders
present in person or represented by proxy and entitled to vote thereat. The
secretary or in his absence an assistant secretary or in the absence of the
secretary and all assistant secretaries a person whom the chairman of the
meeting shall appoint shall act as secretary of the meeting and keep a record of
the proceedings thereof.
The board of directors of the corporation shall be entitled to make
such rules and regulations for the conduct of meetings of stockholders as it
shall deem necessary, appropriate or convenient. Subject to such rules and
regulations of the board of directors, if any, the chairman of the meeting shall
have the right and authority to prescribe such rules, regulations and procedures
and to do all such acts as, in the judgment of such chairman, are necessary,
appropriate or convenient for the proper conduct of the meeting, including,
without limitation, establishing an agenda or order of business for the meeting,
rules and procedures for maintaining order at the meeting and the safety of
those present, limitations on participation in such meeting to stockholders of
record of the corporation and their duly authorized and constituted proxies, and
such other persons as the chairman shall permit, restrictions on entry to the
meeting after the time fixed for the commencement thereof, limitations on the
time allotted to questions or comments by participants and regulation of the
opening and closing of the polls for balloting and matters which are to be voted
on by
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ballot. Unless and to the extent determined by the board of directors or the
chairman of the meeting, meetings of stockholders shall not be required to be
held in accordance with rules of parliamentary procedure.
ARTICLE III.
DIRECTORS
Section 1. The number of directors which shall constitute the whole
board shall be not less than six nor more than nine as the Board of Directors
shall at the time have designated. Unless otherwise fixed by the Board of
Directors, the number of directors who shall constitute the whole board shall be
nine. The directors shall be elected as provided in the Restated Certificate of
Incorporation at the annual meeting of the stockholders, except as provided in
Section 2 of this Article, and each director elected shall hold office until his
successor is elected and qualified. Directors need not be stockholders.
Section 2. Vacancies and newly created directorships resulting from any
increase in the authorized number of directors may be filled by a majority of
the directors then in office, though less than a quorum, or by a sole remaining
director, and the directors so chosen shall hold office until the election of
the class of said directors and until their successors are duly elected and
shall qualify, unless sooner displaced. If there are no directors in office,
then an election of directors may be held in the manner provided by statute. If,
at the time of filling a
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vacancy or any newly created directorship, the directors then in office shall
constitute less than a majority of the whole board (as constituted immediately
prior to any such increase), the Court of Chancery may, upon application of any
stockholder or stockholders holding at least ten percent of the total number of
the shares at the time outstanding having the right to vote for such directors,
summarily order an election to be held to fill any such vacancies or newly
created directorships, or to replace the directors chosen by the directors then
in office.
Section 3. The business of the corporation shall be managed by or under
the direction of its board of directors which may exercise all such powers of
the corporation and do all such lawful acts and things as are not by statute or
by the certificate of incorporation or by these by-laws directed or required to
be exercised or done by the stockholders.
MEETINGS OF THE BOARD OF DIRECTORS
Section 4. The board of directors of the corporation may hold meetings,
both regular and special, either within or without the State of Delaware.
Section 5. The first meeting of the board of directors after the annual
meeting of stockholders shall be held at such time and place as shall be fixed
by the vote of the stockholders at the annual meeting and no notice of such
meeting shall be necessary to the directors in order legally to constitute the
meeting, provided a quorum shall be present. In the event of the failure of the
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stockholders to fix the time or place of such first meeting of the board of
directors, or in the event such meeting is not held at the time and place so
fixed by the stockholders, the meeting may be held at such time and place as
shall be specified in a notice given as hereinafter provided for special
meetings of the board of directors, or as shall be specified in a written waiver
signed by all of the directors.
Section 6. Regular meetings of the board of directors may be held
without notice at such time and at such place as shall from time to time be
determined by the board.
Section 7. Special meetings of the board may be called by the president
on not less than two hours notice to each director, either personally or by mail
or by telegram or by telegraph or by telephone or by means of telecopy or other
similar method; special meetings shall be called by the president or secretary
in like manner and on like notice on the written request of two directors unless
the board consists of only one director; in which case special meetings shall be
called by the president or secretary in like manner and on like notice on the
written request of the sole director.
Section 8. At all meetings of the board two-thirds of the directors
shall constitute a quorum for the transaction of business and the act of a
majority of the directors present at any meeting at which there is a quorum
shall be the act of the board of directors, except as may be otherwise
specifically provided by statute or by the certificate of incorporation. If a
quorum shall
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not be present at any meeting of the board of directors the directors present
thereat may adjourn the meeting from time to time, without notice other than
announcement at the meeting, until a quorum shall be present.
Section 9. Unless otherwise restricted by the certificate of
incorporation or these by-laws, any action required or permitted to be taken at
any meeting of the board of directors or of any committee thereof may be taken
without a meeting, if all members of the board or committee, as the case may be,
consent thereto in writing, and the writing or writings are filed with the
minutes of proceedings of the board or committee.
Section 10. Unless otherwise restricted by the certificate of
incorporation or these by-laws, members of the board of directors, or any
committee designated by the board of directors, may participate in a meeting of
the board of directors, or any committee, by means of conference telephone or
similar communications equipment by means of which all persons participating in
the meeting can hear each other, and such participation in a meeting shall
constitute presence in person at the meeting.
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COMMITTEES OF DIRECTORS
Section 11. The board of directors may, by resolution passed by a
majority of the whole board, designate one or more committees, each committee to
consist of one or more of the directors of the corporation. The board may
designate one or more directors as alternative members of any committee, who may
replace any absent or disqualified member at any meeting of the committee.
In the absence or disqualification of a member of a committee, the
member or members thereof present at any meeting and not disqualified from
voting, whether or not he or they constitute a quorum, may unanimously appoint
another member of the board of directors to act at the meeting in the place of
any such absent or disqualified member.
Any such committee, to the extent provided in the resolution of the
board of directors, shall have and may exercise all the powers and authority of
the board of directors in the management of the business and affairs of the
corporation, and may authorize the seal of the corporation to be affixed to all
papers which may require it; but no such committee shall have the power or
authority in reference to amending the certificate of incorporation, (except
that a committee may, to the extent authorized in the resolution or resolutions
providing for the issuance of shares of stock adopted by the board of directors
as provided in section 151(a) of the General Corporation Law of Delaware fix any
of the preferences or rights of such shares
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relating to dividends, redemption, dissolution, any distribution of assets of
the corporation or the conversion into, or the exchange of such shares for,
shares of any other class or classes of stock of the corporation) adopting an
agreement of merger or consolidation, recommending to the stockholders the sale,
lease or exchange of all or substantially all of the corporation's property and
assets, recommending to the stockholders a dissolution of the corporation or a
revocation of a dissolution, or amending the by-laws of the corporation; and,
unless the resolution or the certificate of incorporation expressly so provide,
no such committee shall have the power or authority to declare a dividend or to
authorize the issuance of stock or adopt a certificate of ownership and merger.
Such committee or committees shall have such name or names as may be determined
from time to time by resolution adopted by the board of directors.
Section 12. Each committee shall keep regular minutes of its meetings
and report the same to the board of directors when required.
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COMPENSATION OF DIRECTORS
Section 13. Unless otherwise restricted by the certificate of
incorporation or these by-laws, the board of directors shall have the authority
to fix the compensation of directors. The directors may be paid their expenses,
if any, of attendance at each meeting of the board of directors and may be paid
a fixed sum for attendance at each meeting of the board of directors or a stated
salary as director. No such payment shall preclude any director from serving the
corporation in any other capacity and receiving compensation therefor. Members
of special or standing committees may be allowed like compensation for attending
committee meetings.
REMOVAL OF DIRECTORS
Section 14. Unless otherwise restricted by the certificate of
incorporation or by law, any director or the entire board of directors may be
removed for cause by the holders of a majority of shares entitled to vote at an
election of directors.
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ARTICLE IV.
NOTICES
Section 1. Whenever, under the provisions of the statutes or of the
certificate of incorporation or of these by-laws, notice is required to be given
to any director or stockholder, it shall not be construed to mean personal
notice, but such notice may be given in writing, by mail, addressed to such
director or stockholder, at his address as it appears on the records of the
corporation, with postage thereon prepaid, and such notice shall be deemed to be
given at the time when the same shall be deposited in the United States mail.
Notice to directors may also be given by telegram.
Section 2. Whenever any notice is required to be given under the
provisions of the statutes or of the certificate of incorporation or of these
by-laws, a waiver thereof in writing, signed by the person or persons entitled
to said notice, whether before of after the time stated therein, shall be deemed
equivalent thereto.
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ARTICLE V.
OFFICERS
Section 1. The officers of the corporation shall be chosen by the board
of directors and shall be a president, a vice-president, a secretary and a
treasurer. The board of directors may also choose additional vice-presidents,
and one or more assistant secretaries and assistant treasurers. Any number of
offices may be held by the same person, unless the certificate of incorporation
or these by-laws otherwise provide.
Section 2. The board of directors at its first meeting after each
annual meeting of stockholders shall choose a president, one or more
vice-presidents, a secretary and a treasurer.
Section 3. The board of directors may appoint such other officers and
agents as it shall deem necessary who shall hold their offices for such terms
and shall exercise such powers and perform such duties as shall be determined
from time to time by the board.
Section 4. The salaries of all officers and agents of the corporation
shall be fixed by the board of directors.
Section 5. The officers of the corporation shall hold office until
their successors are chosen and qualify. Any officer elected or appointed by the
board of directors may be removed at any time by the affirmative vote of a
majority of the board of directors. Any vacancy occurring in any office of the
corporation shall be filled by the board of directors.
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THE PRESIDENT
Section 6. The president shall be the chief executive officer of the
corporation, shall preside at all meetings of the stockholders and the board of
directors, shall have general and active management of the business of the
corporation and shall see that all orders and resolutions of the board of
directors are carried into effect.
Section 7. He shall execute bonds, mortgages and other contracts
requiring a seal, under the seal of the corporation, except where required or
permitted by law to be otherwise signed and executed and except where the
signing and execution thereof shall be expressly delegated by the board of
directors to some other officer or agent of the corporation.
THE VICE-PRESIDENTS
Section 8. In the absence of the president or in the event of his
inability or refusal to act, the vice-president (or in the event there can be
more than one vice-president, the vice-presidents in the order designated by the
directors, or in the absence of any designation, then in the order of their
election) shall perform the duties of the president, and when so acting, shall
have all the powers of and be subject to all the restrictions upon the
president. The vice-presidents shall perform such other duties and have such
other powers as the board of directors may from time to time prescribe.
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THE SECRETARY AND ASSISTANT SECRETARY
Section 9. The secretary shall attend all meetings of the board of
directors and all meetings of the stockholders and record all the proceedings of
the meetings of the corporation and of the board of directors in a book to be
kept for that purpose and shall perform like duties for the standing committees
when required. He shall give, or cause to be given, notice of all meetings of
the stockholders and special meetings of the board of directors, and shall
perform such other duties as may be prescribed by the board of directors or
president, under whose supervision he shall be. He shall have custody of the
corporate seal of the corporation and he, or an assistant secretary, shall have
authority to affix the same to any instrument requiring it and when so affixed,
it may be attested by his signature or by the signature of such assistant
secretary. The board of directors may give general authority to any other
officer to affix the seal of the corporation and to attest to affixing by his
signature.
Section 10. The assistant secretary, or if there be more than one, the
assistant secretaries in the order determined by the board of directors (or if
there be no such determination, then in the order of their election) shall, in
the absence of the secretary or in the event of his inability or refusal to act,
perform the duties and exercise the powers of the secretary and shall perform
such other duties and have such other powers as the board of directors may from
time to time prescribe.
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THE TREASURER AND ASSISTANT TREASURERS
Section 11. The treasurer shall have the custody of the corporate funds
and securities and shall keep full and accurate accounts of receipts and
disbursements in books belonging to the corporation and shall deposit all moneys
and other valuable effects in the name and to the credit of the corporation in
such depositories as may be designated by the board of directors.
Section 12. He shall disburse the funds of the corporation as may be
ordered by the board of directors, taking proper vouchers for such
disbursements, and shall render to the president and the board of directors, at
its regular meetings, or when the board of directors so requires, an account of
all his transactions as treasurer and of the financial condition of the
corporation.
Section 13. If required by the board of directors, he shall give the
corporation a bond (which shall be renewed every six years) in such sum and with
such surety or sureties as shall be satisfactory to the board of directors for
the faithful performance of the duties of his office and for the restoration to
the corporation, in case of his death, resignation, retirement or removal from
office, of all books, papers, vouchers, money and other property of whatever
kind in his possession or under his control belonging to the corporation.
Section 14. The assistant treasurer, or if there shall be more than
one, the assistant treasurers in the order determined by the board of directors
(or if there be no such determination, then
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in the order of their election) shall, in the absence of the treasurer or in the
event of his inability or refusal to act, perform the duties and exercise the
powers of the treasurer and shall perform such other duties and have such other
powers as the board of directors may from time to time prescribe.
ARTICLE VI.
CERTIFICATES FOR SHARES
Section 1. The shares of the corporation shall be represented by a
certificate or shall be uncertificated. Certificates shall be signed by, or in
the name of the corporation by, the chairman or vice-chairman of the board of
directors, or the president or a vice-president, and by the treasurer or an
assistant treasurer, or the secretary or an assistant secretary of the
corporation.
If the corporation shall be authorized to issue more than one class of
stock or more than one series of any class, the powers, designations,
preferences and relative, participating, optional or other special rights of
each class of stock or series thereof and the qualification, limitations or
restrictions of such preferences and/or rights shall be set forth in full or
summarized on the face or back of the certificate which the corporation shall
issue to represent such class or series of stock, provided that, except as
otherwise provided in section 202 of the General Corporation Law of Delaware, in
lieu of the foregoing requirements, there may be set forth on the face or back
of the certificate which the
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corporation shall issue to represent such class or series of stock, a statement
that the corporation will furnish without charge to each stockholder who so
requests the powers, designations, preferences and relative, participating,
optional or other special rights of each class of stock or series thereof and
the qualifications, limitations or restrictions of such preferences and/or
rights.
Within a reasonable time after the issuance or transfer of
uncertificated stock, the corporation shall send to the registered owner thereof
a written notice containing the information required to be set forth or stated
on certificates pursuant to Sections 151, 156, 202(a) or 218(a) of the General
Corporation Law of Delaware or a statement that the corporation will furnish
without charge to each stockholder who so requests the powers, designations,
preferences and relative participating, optional or other special rights of each
class of stock or series thereof and the qualifications, limitations or
restrictions of such preferences and/or rights.
Section 2. Any of or all the signatures on a certificate may be
facsimile. In case any officer, transfer agent or registrar who has signed or
whose facsimile signature has been placed upon a certificate shall have ceased
to be such officer, transfer agent or registrar before such certificate is
issued, it may be issued by the corporation with the same effect as if he were
such officer, transfer agent or registrar at the date of issue.
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LOST CERTIFICATES
Section 3. The board of directors may direct a new certificate or
certificates or uncertificated shares to be issued in place of any certificate
or certificates theretofore issued by the corporation alleged to have been lost,
stolen or destroyed, upon the making of an affidavit of that fact by the person
claiming the certificate of stock to be lost, stolen or destroyed. When
authorizing such issue or a new certificate or certificates or uncertificated
shares, the board of directors may, in its discretion and as a condition
precedent to the issuance thereof, require the owner of such lost, stolen or
destroyed certificate or certificates, or his legal representative, to advertise
the same in such manner as it shall require and/or to give the corporation a
bond in such sum as it may direct as indemnity against any claim that may be
made against the corporation with respect to the certificate alleged to have
been lost, stolen or destroyed.
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TRANSFER OF STOCK
Section 4. Upon surrender to the corporation or the transfer agent of
the corporation of a certificate for shares duly endorsed or accompanied by
proper evidence of succession, assignation or authority to transfer, it shall be
the duty of the corporation to issue a new certificate to the person entitled
thereto, cancel the old certificate and record the transaction upon its books.
Upon receipt of proper transfer instructions from the registered owner of
uncertificated shares such uncertificated shares shall be cancelled and issuance
of new equivalent uncertificated shares or certificated shares shall be made to
the person entitled thereto and the transaction shall be recorded upon the books
of the corporation.
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FIXING RECORD DATE
Section 5. In order that the corporation may determine the stockholders
entitled to notice of or to vote at any meeting of stockholders or any
adjournment thereof, or entitled to receive payment of any dividend or other
distribution or allotment of rights, or entitled to exercise any rights in
respect of any change, conversion or exchange of stock or for the purpose of any
other lawful action, the board of directors may fix, in advance, a record date,
which shall not be more than sixty nor less than ten days before the date of
such meeting, nor more than sixty days prior to any other action. A
determination of stockholders of record entitled to notice of or to vote at a
meeting of stockholders shall apply to adjournment of the meeting: provided,
however, that the board of directors may fix a new record date for the adjourned
meeting.
REGISTERED STOCKHOLDERS
Section 6. The corporation shall be entitled to recognize the exclusive
right of a person registered on its books as the owner of shares to receive
dividends, and to vote as such owner, and to hold liable for calls and
assessments a person registered on its books as the owner of shares, and shall
not be bound to recognize any equitable or other claim to or interest in such
share or shares on the part of any other person, whether or not it shall have
express or other notice thereof, except as otherwise provided by the laws of
Delaware.
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ARTICLE VII.
GENERAL PROVISIONS
DIVIDENDS
Section 1. Dividends upon the capital stock of the corporation, subject
to the provisions of the certificate of incorporation, if any, may be declared
by the board of directors at any regular or special meeting, pursuant to law.
Dividends may be paid in cash, in property, or in shares of the capital stock,
subject to the provisions of the certificate of incorporation.
Section 2. Before payment of any dividend, there may be set aside out
of any funds of the corporation available for dividends such sum or sums as the
directors from time to time, in their absolute discretion, think proper as a
reserve or reserves to meet contingencies, or for equalizing dividends, or for
repairing or maintaining any property of the corporation, or for such other
purpose as the directors shall think conducive to the interest of the
corporation, and the directors may modify or abolish any such reserve in the
manner in which it was created.
ANNUAL STATEMENT
Section 3. The officers shall present at each annual meeting a full and
clear statement of the business and condition of the corporation.
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CHECKS
Section 4. All checks or demands for money and notes of the corporation
shall be signed by such officer or officers or such other person or persons as
the board of directors may from time to time designate.
FISCAL YEAR
Section 5. The fiscal year of the corporation shall be fixed by
resolution of the board of directors.
SEAL
Section 6. The corporate seal shall have inscribed thereon the name of
the corporation, the year of its organization and the words "Corporate Seal,
Delaware." The seal may be used by causing it or a facsimile thereof to be
impressed or affixed or reproduced or otherwise.
INDEMNIFICATION
Section 7. The corporation shall indemnify its officers, directors,
employees and agents to the extent permitted by the General Corporation Law of
Delaware.
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ARTICLE VIII.
AMENDMENTS
Section 1. These by-laws may be amended or added to, or repealed and
superseded by new by-laws by the directors of the Company or as provided in the
Certificate or Restated Certificate or Incorporation.
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EXHIBIT 10.5
<PAGE> 2
AMENDMENT NO. 2
TO
EMPLOYMENT AGREEMENT
THIS AMENDMENT NO. 2 TO EMPLOYMENT AGREEMENT (this "Amendment") is made
and entered into as of December 3, 1998, by and between MARCUM NATURAL GAS
SERVICES, INC., a Delaware corporation (the "Corporation"), and W. PHILLIP
MARCUM ("Officer").
RECITALS
WHEREAS, the Corporation and Officer have previously entered into that
certain Employment Agreement, dated as of June 11, 1991, and amended as of July
14, 1997 (as so amended and as the same may hereafter be amended or otherwise
modified from time to time, the "Employment Agreement"); and
WHEREAS, the Corporation and Officer now desire to amend the Employment
Agreement in order to extend the period of Officer's employment with the
Corporation; and
WHEREAS, the Board of Directors of the Company (the "Board") has
determined that it is desirable and in the best interests of the Corporation and
its stockholders to (1) assure that the Corporation will have the continued
dedication of Officer, notwithstanding the possibility, threat or occurrence of
a change in control of the Corporation, (2) diminish the inevitable distraction
of the Officer by virtue of the personal uncertainties and risks created by a
pending or threatened change in control and to encourage the Corporation's full
attention and dedication to the Corporation currently and in the event of any
threatened or pending change in control, and (3) provide Officer with
compensation and benefits arrangements upon a change in control which ensure
that the compensation and benefits expectations of Officer will be satisfied and
which are competitive with those of other corporations;
AGREEMENT
NOW, THEREFORE, in consideration of the premises and other good and
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties hereto, intending to be legally bound hereby, agree as
follows:
SECTION 1. AMENDMENTS TO EMPLOYMENT AGREEMENT. Effective as of the date
hereof, the Employment Agreement shall be amended as provided in this Section 1.
(a) AMENDMENT TO SECTION 2.1. Section 2.1 of the Employment
Agreement is hereby amended to read in its entirety as
follows:
"2.1 Basic Term. The term of Officer's employment under
this Agreement shall continue for a period of three years from
December 3, 1998, unless terminated earlier pursuant to this
Section 2 (the "Employment Period");
<PAGE> 3
provided, however, that unless the Corporation or Officer
gives to the other written notice at least six months prior to
the expiration of such three-year term of any successive
one-year extension term as provided hereafter, the Employment
Period shall be automatically extended for successive one-year
terms, unless and until terminated pursuant to this
Agreement."
(b) AMENDMENT TO SECTION 2.4. Section 2.4 of the Employment
Agreement shall be amended to read in its entirety as follows:
"2.4 Termination Without Cause. If the Corporation shall
elect to terminate Officer's employment without "cause" prior
to the expiration of the Employment Period (including prior to
the expiration of any extension period), then:
(a) The Corporation shall provide to Officer a Notice
of Termination (as defined in Section 3.4.4) setting forth the
reason for the termination of his employment, and Officer's
employment shall be terminated as of the date Officer receives
the Notice of Termination;
(b) The Corporation shall pay to Officer in a lump
sum in cash within 30 days after the Date of Termination (as
defined in Section 3.4.4) the aggregate of the following
amounts:
(i) To the extent not theretofore paid,
Officer's base salary through the Date of
Termination, at the rate in effect on the date the
Notice of Termination was given, along with any
earned but unpaid bonuses; and
(ii) In the case of compensation previously
deferred by Officer, all amounts of such compensation
previously deferred and not yet paid by the
Corporation; and
(iii) The greater of (A) one times Officer's
annual base salary at the rate in effect on the date
the Notice of Termination was given, or (B) the
aggregate amount of Officer's base salary, at the
rate in effect on the date the Notice of Termination
was given, that would be due through the end of the
Employment Period if the Notice of Termination had
not been given; and
(c) The Corporation shall, promptly upon submission
by Officer of supporting documentation, pay or reimburse to
Officer all costs and expenses paid or incurred by Officer
prior to the Date of Termination which would have been payable
under Section 3.3.2; and
(d) Officer's right to participate in the Incentive
Compensation Fund, referred to in Section 3.2 hereof, shall
immediately vest; and
2
<PAGE> 4
(e) For a period the longer of (i) one year from the
Date of Termination or (ii) the remainder of the Employment
Period if Notice of Termination had not been given, Officer
and his family shall be permitted to continue to participate
in all life, accidental death, disability, medical, dental and
other insurance plans of the Corporation. If, despite the
provisions of this Section 2.1(a), benefits shall not be
available under any of such plans because Officer is no longer
an employee of the Corporation, the Corporation itself shall,
to the extent necessary, pay or provide for payment of such
benefits to Officer and/or Officer's family, in each case at
the time such payments would be payable pursuant to the terms
of such plans.
However, Officer shall not accrue any further benefits other
than those required by law and will achieve vested status in
any other benefits offered by the Corporation under this
Agreement or any other benefit plan."
(c) AMENDMENT OF SECTION 2.7. Section 2.7 of the Employment
Agreement shall be amended to read in its entirety as follows:
"2.7. Termination Upon Expiration of Employment Period. If
the Corporation shall elect to terminate Officer's employment
hereunder upon the expiration of the Employment Period by
giving timely Notice of Termination to Officer, then, as of
the date of the expiration of the Employment Period
("Expiration Date"), Officer shall not accrue any further
benefits other than those required by law and shall not
achieve vested status in any other benefits offered by the
Corporation under this Agreement or any other benefit plan,
and the Corporation shall have no further obligation under
this Agreement, except as follows:
(a) The Corporation shall pay to Officer in a lump
sum in cash within 30 days after the Expiration Date the
aggregate of the following amounts:
(i) to the extent not theretofore paid,
Officer's base salary through the Expiration Date at
the rate then in effect, along with any earned but
unpaid bonuses; and
(ii) one times Officer's annual base salary
at the rate then in effect; and
(b) The Corporation shall, promptly upon submission
by Officer of supporting documentation, pay or reimburse to
Officer all costs and expenses paid or incurred by Officer
prior to the Expiration Date which are payable under Section
3.3.2; and
(c) For a period of one year from the Expiration
Date, Officer and his family shall be permitted to continue to
participate in all life, accidental death, disability,
medical, dental and other insurance plans of the Corporation
If, despite
3
<PAGE> 5
the provisions of this Section 2.7(c), benefits shall not be
available under any of such plans because Officer is no longer
an employee of the Corporation, the Corporation itself shall,
to the extent necessary, pay or provide for payment of such
benefits to Officer and/or Officer's family, in each case at
the time such payments would be payable pursuant to the terms
of such plans.
The payments and benefits, if any, required to be made or
provided to Officer by the Corporation pursuant to this
Section 2.7 shall be in full and complete in satisfaction of
all obligations of the Corporation owed to Officer pursuant to
this Agreement. After the Expiration Date, the Corporation
shall have no further obligations to Officer under this
Agreement except as expressly set forth herein."
(d) ADDITION OF SECTION 3.4. Following Section 3.3 of the
Employment Agreement, a new Section 3.4 shall be added to read
in its entirety as follows:
"3.4 Compensation Upon Termination of Employment Following a Change in
Control.
3.4.1 Amount of Compensation. If, during the Employment Period and
within three years of the date on which a "Change in Control" (as
defined in Section 3.4.2) occurs, the Corporation shall terminate
Officer's employment without "cause" (as defined in Section 2.2), or
the employment of Officer shall be terminated by Officer for "Good
Reason" (as defined in Section 3.4.3):
(a) The Corporation shall pay to Officer in a lump sum in
cash within 30 days after the Date of Termination the
aggregate of the following amounts:
(i) To the extent not theretofore paid, Officer's
base salary through the Date of Termination at the rate in
effect on the date the Notice of Termination was given along
with any earned but unpaid bonuses; and
(ii) Two (2) times Officer's annual base salary at
the rate in effect on the date the Notice of Termination was
given; and
(iii) In the case of compensation previously deferred
by Officer, all amounts of such compensation previously
deferred and not yet paid by the Corporation; and
(b) The Corporation shall, promptly upon submission by
Officer of supporting documentation, pay or reimburse to
Officer all costs and expenses paid or incurred by Officer
prior to the Date of Termination which would have been
payable under Section 3.3.2 if Officer's employment had not
terminated; and
(c) For a period of two years from the Date of Termination,
Officer shall continue to be treated as a key employee for
purposes of the employee benefit plans of the Corporation
described in Section 3.3 and the Corporation shall
4
<PAGE> 6
continue to provide benefits to or for the benefit of Officer
and/or Officer's family at least equal to those which would
have been provided or accrued, as the case may be, in
accordance with such plans if Officer's employment had not
been terminated. If, despite the provisions of this Section
3.4.1(c), benefits shall not be available under any of the
plans of the Corporation because Officer is no longer an
employee of the Corporation, then the Corporation itself
shall, to the extent necessary, pay or provide for payment of
benefits to Officer and/or Officer's family, or where
applicable, pay or provide to Officer and/or Officer's family
the difference between the benefits payable pursuant to this
Section 3.4.1(b) and the benefits actually payable pursuant to
the terms of such plans, in each case at the time such
payments would be payable pursuant to the terms of such plans,
programs and policies.
3.4.2 Definition of Change in Control. For the purpose of this
Agreement, a "Change in Control" shall be deemed to have occurred only
if:
(a) Any person or group (as such terms are used in Sections 13
(d) (3) and 14 (d) (2) of the Securities Exchange Act of 1934,
as amended (the "Exchange Act") acquires the beneficial
ownership (within the meaning of Rule 13d-3 promulgated under
the Exchange Act), directly or indirectly, of 50% or more of
the aggregate voting power of all classes of the Corporation's
then outstanding voting securities entitled to vote generally
in the election of directors of the Corporation; provided,
however, that the following acquisitions shall not constitute
a Change in Control: (i) any acquisition directly from the
Corporation (excluding an acquisition by virtue of the
exercise of a conversion privilege), (ii) any acquisition by
the Corporation or any subsidiary of the Corporation, or (iii)
any acquisition by any employee benefit plan (or related
trust) for employees or any subsidiary of the Corporation; or
(b) Individuals who, as of the date hereof, constitute the
Board of Directors of the Corporation (the "Board" generally,
and as of the date hereof, the "Incumbent Board") cease for
any reason to constitute at least a majority of the Board,
provided that any person becoming a director subsequent to the
date hereof whose election, or nomination for election by the
Corporation's stockholders, was approved by a vote of at least
two-thirds of the directors then comprising the Incumbent
Board (other than an election or nomination of an individual
whose initial assumption of office is in connection with an
actual or threatened election contest relating to the election
of the directors of the Corporation, as such terms are used in
Rule 14a-11 of Regulation 14A promulgated under the Exchange
Act) shall be, for purposes of this Agreement, considered as
though such individual were a member of the Incumbent Board;
or
5
<PAGE> 7
(c) Approval by the Corporation of a reorganization, merger,
combination, or consolidation, in each case, unless, following
such reorganization, merger, combination, or consolidation,
(i) more than 50% of, respectively, the then outstanding
shares of common stock of the corporation or other entity
resulting from such reorganization, merger, combination or
consolidation and the aggregate voting power of the then
outstanding voting securities of the resulting corporation or
other entity entitled to vote generally in the election of
directors is then beneficially owned, directly or indirectly,
by all or substantially all of the individuals and entities
who were the beneficial owners, respectively, of the
outstanding Common Stock and outstanding voting securities of
the Corporation immediately prior to such reorganization,
merger, combination, or consolidation, in substantially the
same proportion as their ownership immediately prior to such
reorganization, merger, combination, or consolidation, and
(ii) at least a majority of the members of the board of
directors of the corporation or other entity resulting from
such reorganization, merger, combination or consolidation were
members of the Incumbent Board at the time of the execution of
the initial agreement providing for such reorganization,
merger, combination or consolidation; or
(d) Approval by the Corporation of the sale or other
disposition of all or substantially all of the assets of the
Corporation, other than to a corporation or other entity with
respect to which following such sale or other disposition the
conditions described in clauses (i) and (ii) of Section
3.4.2(c) are satisfied.
3.4.3 Definition of Good Reason. For purposes of this Agreement, "Good
Reason" means:
(a) (i) The assignment to Officer of any position, authority,
duties or responsibilities inconsistent in any respect with
Officer's position (including, without limitation, status,
offices, title and reporting requirements), authority, duties
or responsibilities, prior to the Change in Control, or (ii)
any other action by the Corporation which results in a
diminution in such position, authority, duties or
responsibilities, other than an insubstantial and inadvertent
action which is remedied by the Corporation promptly after
receipt of notice thereof given by Officer;
(b) Any reduction in Officer's base salary or in the extent of
Officer's entitlement to the employee benefits, expenses,
fringe benefits or perquisites referred to in Section 3;
(c) The Corporation's requiring Officer to be based at an
office location or to maintain his personal residence other
than in the greater Denver, Colorado area;
(d) The failure of the Corporation to obtain a satisfactory
agreement from any successor to the Corporation to assume and
agree to perform this Agreement;
6
<PAGE> 8
(e) The imposition on Officer of business travel obligations
substantially greater than his business travel obligations
during the fiscal year prior to the Change in Control;
(f) Any purported termination by the Corporation of Officer's
employment other than as expressly permitted by this
Agreement; or
(g) Any other failure by the Corporation to comply with any
provision of this Agreement, other than an insubstantial and
inadvertent failure which is remedied by the Corporation
promptly after receipt of notice thereof given by Officer.
3.4.4 Termination of Employment.
(a) Notice of Termination. Any termination by the Corporation
for any reason or by Officer for Good Reason, shall be
communicated by Notice of Termination to the other party
hereto. For purposes of this Agreement, a "Notice of
Termination" means a written notice which (i) indicates the
specific termination provision in this Agreement relied upon,
(ii) sets forth in reasonable detail the facts and
circumstances claimed to provide a basis for termination of
the Officer's employment under the provision so indicated, and
(iii) if the Date of Termination is other than the date of
receipt of such notice, specifies the Date of Termination.
(b) Date of Termination. "Date of Termination", as used in
this Agreement, means the date Officer's employment with the
Corporation is terminated.
3.4.5 Supercedes Section 2. In the event of a Change in Control, the
provisions of this Section 3.4 shall supercede any provisions of
Section 2 that are inconsistent or in conflict with this Section 3.4."
SECTION 5. EFFECT OF AMENDMENT. From and after the date hereof, the
term "Employment Period" as used in the Employment Agreement shall be deemed to
refer to the Employment Period as such term is defined in this Amendment. Except
as and to the extent expressly modified by this Amendment, the Employment
Agreement shall remain in full force and effect in all respects in accordance
with its terms, and any reference to the Employment Agreement from and after the
date hereof shall be deemed to be a reference to the Employment Agreement as
modified by this Amendment.
SECTION 6. GOVERNING LAW. This Amendment shall be governed by and
construed in accordance with the laws of the State of Colorado.
SECTION 7. COUNTERPARTS. This Amendment may be executed in one or more
counterparts, each of which shall be deemed to be an original, but all of which
taken together shall constitute one and the same instrument.
7
<PAGE> 9
IN WITNESS WHEREOF, this Amendment No. 2 to Employment Agreement has
been duly executed and delivered by or on behalf of the undersigned as of the
date first written above.
CORPORATION:
MARCUM NATURAL GAS SERVICES, INC.
By: /s/ A. Bradley Gabbard
-------------------------------------------
A. Bradley Gabbard, Executive Vice President
OFFICER:
By: /s/ W. Phillip Marcum
-------------------------------------------
W. Phillip Marcum
8
<PAGE> 1
EXHIBIT 10.8
<PAGE> 2
AMENDMENT NO. 2
TO
EMPLOYMENT AGREEMENT
THIS AMENDMENT NO. 2 TO EMPLOYMENT AGREEMENT (this "Amendment") is made
and entered into as of December 3, 1998, by and between MARCUM NATURAL GAS
SERVICES, INC., a Delaware corporation (the "Corporation"), and A. BRADLEY
GABBARD ("Officer").
RECITALS
WHEREAS, the Corporation and Officer have previously entered into that
certain Employment Agreement, dated as of June 11, 1991, and amended as of July
14, 1997 (as so amended and as the same may hereafter be amended or otherwise
modified from time to time, the "Employment Agreement"); and
WHEREAS, the Corporation and Officer now desire to amend the Employment
Agreement in order to extend the period of Officer's employment with the
Corporation; and
WHEREAS, the Board of Directors of the Company (the "Board") has
determined that it is desirable and in the best interests of the Corporation and
its stockholders to (1) assure that the Corporation will have the continued
dedication of Officer, notwithstanding the possibility, threat or occurrence of
a change in control of the Corporation, (2) diminish the inevitable distraction
of the Officer by virtue of the personal uncertainties and risks created by a
pending or threatened change in control and to encourage the Corporation's full
attention and dedication to the Corporation currently and in the event of any
threatened or pending change in control, and (3) provide Officer with
compensation and benefits arrangements upon a change in control which ensure
that the compensation and benefits expectations of Officer will be satisfied and
which are competitive with those of other corporations;
AGREEMENT
NOW, THEREFORE, in consideration of the premises and other good and
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties hereto, intending to be legally bound hereby, agree as
follows:
SECTION 1. AMENDMENTS TO EMPLOYMENT AGREEMENT. Effective as of the date
hereof, the Employment Agreement shall be amended as provided in this Section 1.
(a) AMENDMENT TO SECTION 2.1. Section 2.1 of the Employment
Agreement is hereby amended to read in its entirety as
follows:
"2.1 Basic Term. The term of Officer's employment under this
Agreement shall continue for a period of 18 months from December 3,
1998, unless terminated earlier pursuant to this Section 2 (the
"Employment Period");
<PAGE> 3
provided, however, that unless the Corporation or Officer gives to the
other written notice at least six months prior to the expiration of
such 18-month term of any successive one-year extension term as
provided hereafter, the Employment Period shall be automatically
extended for successive one-year terms, unless and until terminated
pursuant to this Agreement."
(b) AMENDMENT TO SECTION 2.4. Section 2.4 of the Employment
Agreement shall be amended to read in its entirety as follows:
"2.4 Termination Without Cause. If the Corporation shall elect
to terminate Officer's employment without "cause" prior to the
expiration of the Employment Period (including prior to the expiration
of any extension period), then:
(a) The Corporation shall provide to Officer a Notice
of Termination (as defined in Section 3.4.4) setting forth the
reason for the termination of his employment, and Officer's
employment shall be terminated as of the date Officer receives
the Notice of Termination;
(b) The Corporation shall pay to Officer in a lump
sum in cash within 30 days after the Date of Termination (as
defined in Section 3.4.4) the aggregate of the following
amounts:
(i) To the extent not theretofore paid,
Officer's base salary through the Date of
Termination, at the rate in effect on the date the
Notice of Termination was given, along with any
earned but unpaid bonuses; and
(ii) In the case of compensation previously
deferred by Officer, all amounts of such compensation
previously deferred and not yet paid by the
Corporation; and
(iii) The greater of (A) one-half times
Officer's annual base salary at the rate in effect
on the date the Notice of Termination was given, or
(B) the aggregate amount of Officer's base salary,
at the rate in effect on the date the Notice of
Termination was given, that would be due through
the end of the Employment Period if the Notice of
Termination had not been given; and
(c) The Corporation shall, promptly upon submission
by Officer of supporting documentation, pay or reimburse to
Officer all costs and expenses paid or incurred by Officer
prior to the Date of Termination which would have been payable
under Section 3.3.2; and
(d) Officer's right to participate in the Incentive
Compensation Fund, referred to in Section 3.2 hereof, shall
immediately vest; and
<PAGE> 4
(e) For a period the longer of (i) six months from the
Date of Termination or (ii) the remainder of the Employment
Period if Notice of Termination had not been given, Officer
and his family shall be permitted to continue to participate
in all life, accidental death, disability, medical, dental and
other insurance plans of the Corporation. If, despite the
provisions of this Section 2.4(e), benefits shall not be
available under any of such plans because Officer is no longer
an employee of the Corporation, the Corporation itself shall,
to the extent necessary, pay or provide for payment of such
benefits to Officer and/or Officer's family, in each case at
the time such payments would be payable pursuant to the terms
of such plans.
However, Officer shall not accrue any further benefits other
than those required by law and will achieve vested status in
any other benefits offered by the Corporation under this
Agreement or any other benefit plan."
(c) AMENDMENT OF SECTION 2.7. Section 2.7 of the Employment
Agreement shall be amended to read in its entirety as follows:
"2.7. Termination Upon Expiration of Employment Period. If the
Corporation shall elect to terminate Officer's employment hereunder
upon the expiration of the Employment Period by giving timely Notice of
Termination to Officer, then, as of the date of the expiration of the
Employment Period ("Expiration Date"), Officer shall not accrue any
further benefits other than those required by law and shall not achieve
vested status in any other benefits offered by the Corporation under
this Agreement or any other benefit plan, and the Corporation shall
have no further obligation under this Agreement, except as follows:
(a) The Corporation shall pay to Officer in a lump
sum in cash within 30 days after the Expiration Date the
aggregate of the following amounts:
(i) to the extent not theretofore paid,
Officer's base salary through the Expiration Date at
the rate then in effect, along with any earned but
unpaid bonuses; and
(ii) one-half times Officer's annual base
salary at the rate then in effect; and
(b) The Corporation shall, promptly upon submission
by Officer of supporting documentation, pay or reimburse to
Officer all costs and expenses paid or incurred by Officer
prior to the Expiration Date which are payable under Section
3.3.2; and
(c) For a period of six months from the Expiration
Date, Officer and his family shall be permitted to continue to
participate in all life, accidental death, disability,
medical, dental and other insurance plans of the Corporation.
If,
<PAGE> 5
despite the provisions of this Section 2.7(c), benefits shall
not be available under any of such plans because Officer is no
longer an employee of the Corporation, the Corporation itself
shall, to the extent necessary, pay or provide for payment of
such benefits to Officer and/or Officer's family, in each case
at the time such payments would be payable pursuant to the
terms of such plans.
The payments and benefits, if any, required to be made or
provided to Officer by the Corporation pursuant to this
Section 2.7 shall be in full and complete in satisfaction of
all obligations of the Corporation owed to Officer pursuant to
this Agreement. After the Expiration Date, the Corporation
shall have no further obligations to Officer under this
Agreement except as expressly set forth herein."
(d) ADDITION OF SECTION 3.4. Following Section 3.3 of the
Employment Agreement, a new Section 3.4 shall be added to read
in its entirety as follows:
"3.4 Compensation Upon Termination of Employment Following a
Change in Control.
3.4.1 Amount of Compensation. If, during the Employment Period
and within three years of the date on which a "Change in Control" (as
defined in Section 3.4.2) occurs, the Corporation shall terminate
Officer's employment without "cause" (as defined in Section 2.2), or
the employment of Officer shall be terminated by Officer for "Good
Reason" (as defined in Section 3.4.3):
(a) The Corporation shall pay to Officer in a lump sum in
cash within 30 days after the Date of Termination the
aggregate of the following amounts:
(i) To the extent not theretofore paid,
Officer's base salary through the Date of Termination
at the rate in effect on the date the Notice of
Termination was given along with any earned but
unpaid bonuses; and
(ii) One times Officer's annual base
salary at the rate in effect on the date the Notice
of Termination was given; and
(iii) In the case of compensation previously
deferred by Officer, all amounts of such compensation
previously deferred and not yet paid by the
Corporation; and
(b) The Corporation shall, promptly upon submission by
Officer of supporting documentation, pay or reimburse to
Officer all costs and expenses paid or incurred by Officer
prior to the Date of Termination which would have been
payable under Section 3.3.2 if Officer's employment had not
terminated; and
(c) For a period of one year from the Date of Termination,
Officer and his family shall be permitted to continue to
participate in all life, accidental death, disability,
medical, dental and other insurance plans of the Corporation.
If,
<PAGE> 6
despite the provisions of this Section 3.4.1(c), benefits
shall not be available under any of such plans because Officer
is no longer an employee of the Corporation, then the
Corporation itself shall, to the extent necessary, pay or
provide for payment of benefits to Officer and/or Officer's
family, or where applicable, pay or provide to Officer and/or
Officer's family the difference between the benefits payable
pursuant to this Section 3.4.1(b) and the benefits actually
payable pursuant to the terms of such plans, in each case at
the time such payments would be payable pursuant to the terms
of such plans, programs and policies.
3.4.2 Definition of Change in Control. For the purpose of this
Agreement, a "Change in Control" shall be deemed to have occurred only
if:
(a) Any person or group (as such terms are used in Sections 13
(d) (3) and 14 (d) (2) of the Securities Exchange Act of 1934,
as amended (the "Exchange Act") acquires the beneficial
ownership (within the meaning of Rule 13d-3 promulgated under
the Exchange Act), directly or indirectly, of 50% or more of
the aggregate voting power of all classes of the Corporation's
then outstanding voting securities entitled to vote generally
in the election of directors of the Corporation; provided,
however, that the following acquisitions shall not constitute
a Change in Control: (i) any acquisition directly from the
Corporation (excluding an acquisition by virtue of the
exercise of a conversion privilege), (ii) any acquisition by
the Corporation or any subsidiary of the Corporation, (iii)
any acquisition by any employee benefit plan (or related
trust) for employees or any subsidiary of the Corporation; or
(b) Individuals who, as of the date hereof, constitute the
Board of Directors of the Corporation (the "Board" generally,
and as of the date hereof, the "Incumbent Board") cease for
any reason to constitute at least a majority of the Board,
provided that any person becoming a director subsequent to the
date hereof whose election, or nomination for election by the
Corporation's stockholders, was approved by a vote of at least
two-thirds of the directors then comprising the Incumbent
Board (other than an election or nomination of an individual
whose initial assumption of office is in connection with an
actual or threatened election contest relating to the election
of the directors of the Corporation, as such terms are used in
Rule 14a-11 of Regulation 14A promulgated under the Exchange
Act) shall be, for purposes of this Agreement, considered as
though such individual were a member of the Incumbent Board;
or
(c) Approval by the Corporation of a reorganization, merger,
combination, or consolidation, in each case, unless, following
such reorganization, merger, combination, or consolidation,
(i) more than 50% of, respectively, the then outstanding
shares of common stock of the corporation or other entity
resulting
<PAGE> 7
from such reorganization, merger, combination or consolidation
and the aggregate voting power of the then outstanding voting
securities of the resulting corporation or other entity
entitled to vote generally in the election of directors is
then beneficially owned, directly or indirectly, by all or
substantially all of the individuals and entities who were the
beneficial owners, respectively, of the outstanding Common
Stock and outstanding voting securities of the Corporation
immediately prior to such reorganization, merger, combination,
or consolidation, in substantially the same proportion as
their ownership immediately prior to such reorganization,
merger, combination, or consolidation, and (ii) at least a
majority of the members of the board of directors of the
corporation or other entity resulting from such
reorganization, merger, combination or consolidation were
members of the Incumbent Board at the time of the execution of
the initial agreement providing for such reorganization,
merger, combination or consolidation; or
(d) Approval by the Corporation of the sale or other
disposition of all or substantially all of the assets of the
Corporation, other than to a corporation or other entity with
respect to which following such sale or other disposition the
conditions described in clauses (i) and (ii) of Section
3.4.2(c) are satisfied.
3.4.3 Definition of Good Reason. For purposes of this
Agreement, "Good Reason" means:
(a) (i) The assignment to Officer of any position, authority,
duties or responsibilities inconsistent in any respect with
Officer's position (including, without limitation, status,
offices, title and reporting requirements), authority, duties
or responsibilities, prior to the Change in Control, or (ii)
any other action by the Corporation which results in a
diminution in such position, authority, duties or
responsibilities, other than an insubstantial and inadvertent
action which is remedied by the Corporation promptly after
receipt of notice thereof given by Officer;
(b) Any reduction in Officer's base salary or in the extent of
Officer's entitlement to the employee benefits, expenses,
fringe benefits or perquisites referred to in Section 3;
(c) The Corporation's requiring Officer to be based at an
office location or to maintain his personal residence other
than in the greater Denver, Colorado area;
(d) The failure of the Corporation to obtain a satisfactory
agreement from any successor to the Corporation to assume and
agree to perform this Agreement;
(e) The imposition on Officer of business travel obligations
substantially greater than his business travel obligations
during the fiscal year prior to the Change in Control;
(f) Any purported termination by the Corporation of Officer's
employment other than as expressly permitted by this
Agreement; or
<PAGE> 8
(g) Any other failure by the Corporation to comply with any
provision of this Agreement, other than an insubstantial and
inadvertent failure which is remedied by the Corporation
promptly after receipt of notice thereof given by Officer.
3.4.4 Termination of Employment.
(a) Notice of Termination. Any termination by the Corporation
for any reason or by Officer for Good Reason, shall be
communicated by Notice of Termination to the other party
hereto. For purposes of this Agreement, a "Notice of
Termination" means a written notice which (i) indicates the
specific termination provision in this Agreement relied upon,
(ii) sets forth in reasonable detail the facts and
circumstances claimed to provide a basis for termination of
the Officer's employment under the provision so indicated, and
(iii) if the Date of Termination is other than the date of
receipt of such notice, specifies the Date of Termination.
(b) Date of Termination. "Date of Termination", as used in
this Agreement, means the date Officer's employment with the
Corporation is terminated.
3.4.5 Supercedes Section 2. In the event of a Change in
Control, the provisions of this Section 3.4 shall supercede any
provisions of Section 2 that are inconsistent or in conflict with this
Section 3.4."
SECTION 5. EFFECT OF AMENDMENT. From and after the date hereof, the
term "Employment Period" as used in the Employment Agreement shall be deemed to
refer to the Employment Period as such term is defined in this Amendment. Except
as and to the extent expressly modified by this Amendment, the Employment
Agreement shall remain in full force and effect in all respects in accordance
with its terms, and any reference to the Employment Agreement from and after the
date hereof shall be deemed to be a reference to the Employment Agreement as
modified by this Amendment.
SECTION 6. GOVERNING LAW. This Amendment shall be governed by and
construed in accordance with the laws of the State of Colorado.
SECTION 7. COUNTERPARTS. This Amendment may be executed in one or more
counterparts, each of which shall be deemed to be an original, but all of which
taken together shall constitute one and the same instrument.
<PAGE> 9
IN WITNESS WHEREOF, this Amendment No. 2 to Employment Agreement has
been duly executed and delivered by or on behalf of the undersigned as of the
date first written above.
CORPORATION:
MARCUM NATURAL GAS SERVICES, INC.
By: /s/ W. Phillip Marcum
------------------------------------------
W. Phillip Marcum, President
OFFICER:
By: /s/ A. Bradley Gabbard
------------------------------------------
A. Bradley Gabbard
<PAGE> 1
EXHIBIT 10.12
<PAGE> 2
Exhibit 10.12
AMENDMENT NO. 1
TO
LOAN AND SECURITY AGREEMENT
THIS AMENDMENT NO. 1 (this "Amendment"), made and entered into as of
the 10th day of November, 1998, amends the Loan and Security Agreement
("Agreement"), dated as of April 14, 1998, by and among National Bank of Canada,
a Canadian chartered bank ("Lender"), Marcum Natural Gas Services, Inc., a
Delaware corporation ("Marcum"), Metretek, Incorporated, a Florida corporation,
Southern Flow Companies, Inc., a Delaware corporation, and Sigma VI, Inc., a
Florida corporation.
W I T N E S S E T H:
WHEREAS, the parties hereto had previously entered into the Agreement,
which provides, among other things, for a $5,000,000 revolving line of credit;
WHEREAS, pursuant to Section 20 of the Agreement, the Agreement may be
amended in writing by the parties thereto; and
WHEREAS, the parties to the Agreement desire to amend the Agreement as
set forth herein;
NOW, THEREFORE, in consideration of the sum of $5,000 payable by Marcum
to the Lender, and for other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties hereto, being all the
parties to the Agreement and intending to be legally bound hereby, agree as
follows:
Section 1. DEFINITIONS. Capitalized terms used in this Amendment and
not otherwise defined herein shall have the respective meanings given to them in
the Agreement.
Section 2. AMENDMENTS. Section 12(q)(iv) of the Agreement is hereby
amended in its entirety to read as follows:
"Marcum, on a consolidated basis, shall maintain net profit
(loss) before taxes and before extraordinary gains (as such
terms are defined in accordance with GAAP) determined on a
combined basis of no more than a ($550,000) loss for the
fiscal year ended December 31, 1998 and at least a $400,000
profit for each fiscal year thereafter."
<PAGE> 3
Section 3. EFFECTIVENESS OF AMENDMENT. This Amendment shall be
effective as of the date first above written, and all references to the
Agreement, including the terms "this Agreement," "hereof," "herein" and the like
contained in the Agreement, shall, as of and after such date, be deemed to be
references to the Agreement as modified by the terms of this Amendment. Except
as and to the extent expressly modified by the terms of this Amendment, the
Agreement shall remain in full force and effect in accordance with its terms.
Section 4. GOVERNING LAW. This Amendment shall in all respects be
governed by and construed in accordance with the internal substantive laws of
the State of Colorado.
Section 5. CAPTIONS. The captions used herein are solely for
convenience of reference and shall not be given any effect in the construction
or interpretation of this Amendment.
Section 6. COUNTERPARTS. This Amendment may be executed in any number
of counterparts (including counterparts executed by less than all parties
hereto), each of which shall be deemed an original, but all of which together
shall constitute one and the same instrument.
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be
executed and delivered by their respective duly authorized officers, effective
as of the date first written above.
NATIONAL BANK OF CANADA
By /s/ Raymond L. Yager
-------------------------------
Raymond L. Yager
Vice President
MARCUM NATURAL GAS SERVICES, INC.
By /s/ W. Phillip Marcum
-------------------------------
W. Phillip Marcum
President and Chief Executive Officer
METRETEK, INCORPORATED
By /s/ W. Phillip Marcum
-------------------------------
W. Phillip Marcum
Chairman and Chief Executive Officer
<PAGE> 4
SOUTHERN FLOW COMPANIES, INC.
By /s/ W. Phillip Marcum
-------------------------------
W. Phillip Marcum
Chairman and Chief Executive Officer
SIGMA VI, INC., a Florida corporation
By /s/ W. Phillip Marcum
-------------------------------
W. Phillip Marcum
Vice President
<PAGE> 1
EXHIBIT 21.1
<PAGE> 2
MARCUM NATURAL GAS SERVICES, INC.
SUBSIDIARIES
WHOLLY OWNED SUBSIDIARIES OF MARCUM NATURAL GAS SERVICES, INC.:
Southern Flow Companies, Inc., a Delaware corporation
Metretek, Incorporated, a Florida corporation
Marcum Gas Transmission, Inc., a Colorado corporation
Marcum Denver, Inc., a Colorado corporation
WHOLLY OWNED SUBSIDIARY OF MARCUM GAS TRANSMISSION, INC.:
Marcum Capital Resources, Inc., a Colorado corporation
WHOLLY OWNED SUBSIDIARIES OF METRETEK, INCORPORATED:
Metretek Europe Limited, a company organized and existing
under the laws of Great Britain
Sigma VI, Inc., a Florida corporation
<PAGE> 1
EXHIBIT 23.1
<PAGE> 2
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statement Nos.
33-54398, 33-78348, 333-07515, 333-43547 and 333-56697 on Form S-8 and No.
333-60925 on Form S-3 of Marcum Natural Gas Services, Inc. of our report dated
March 19, 1999 appearing in this Annual Report on Form 10-KSB of Marcum Natural
Gas Services, Inc. for the year ended December 31, 1998.
DELOITTE & TOUCHE LLP
Denver, Colorado
March 29, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM (A)
FINANCIAL STATEMENTS CONTAINED IN THE COMPANY'S FORM 10-KSB FOR THE YEAR ENDED
DECEMBER 31, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH (B)
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1
<CURRENCY> U.S. DOLLAR
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<EXCHANGE-RATE> 1
<CASH> 639,448
<SECURITIES> 0
<RECEIVABLES> 5,124,383
<ALLOWANCES> 117,469
<INVENTORY> 4,412,100
<CURRENT-ASSETS> 10,805,721
<PP&E> 3,461,745
<DEPRECIATION> 1,686,721
<TOTAL-ASSETS> 22,386,283
<CURRENT-LIABILITIES> 1,780,338
<BONDS> 3,167,044
0
0
<COMMON> 34,892
<OTHER-SE> 17,404,009
<TOTAL-LIABILITY-AND-EQUITY> 22,386,283
<SALES> 19,880,012
<TOTAL-REVENUES> 19,922,110
<CGS> 12,864,414
<TOTAL-COSTS> 20,042,069
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 185,473
<INCOME-PRETAX> (305,432)
<INCOME-TAX> 0
<INCOME-CONTINUING> (305,432)
<DISCONTINUED> (33,884)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (339,316)
<EPS-PRIMARY> (0.10)
<EPS-DILUTED> (0.10)
</TABLE>
