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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2004
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _________________ to
Commission File Number 0-19793
METRETEK TECHNOLOGIES, INC.
(Exact name of registrant as specified in its charter)
Delaware 84-1169358
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
303 East Seventeenth Avenue, Suite 660
Denver, Colorado 80203
(Address of principal executive offices) (Zip code)
(303) 785-8080
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
As of November 1, 2004, 11,230,141 shares of the issuer's Common Stock
were outstanding.
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes [ ] No [X]
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METRETEK TECHNOLOGIES, INC.
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2004
TABLE OF CONTENTS
Page
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Unaudited Consolidated Balance Sheets -
September 30, 2004 and December 31, 2003 3
Unaudited Consolidated Statements of Operations -
For the Three and Nine Months Ended September 30, 2004
and September 30, 2003 5
Unaudited Consolidated Statements of Cash Flows -
For the Nine Months Ended September 30, 2004
and September 30, 2003 6
Notes to Unaudited Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 17
Item 3. Quantitative and Qualitative Disclosures about Market Risk 39
Item 4. Controls and Procedures 40
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 41
Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases
of Equity Securities 41
Item 6. Exhibits 42
Signatures 43
2
PART I.
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
METRETEK TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
SEPTEMBER 30, DECEMBER 31,
2004 2003
----------- -------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 7,737,581 $ 2,101,675
Trade receivables, net of allowance for doubtful accounts
of $981,290 and $200,706, respectively 7,996,009 6,613,153
Other receivables 19,765 59,864
Inventories 3,187,549 3,984,223
Prepaid expenses and other current assets 773,010 489,253
----------- -----------
Total current assets 19,713,914 13,248,168
----------- -----------
PROPERTY, PLANT AND EQUIPMENT:
Equipment 4,522,636 3,810,632
Vehicles 49,416 66,590
Furniture and fixtures 597,481 588,869
Land, building and improvements 785,556 754,167
----------- -----------
Total property, plant and equipment, at cost 5,955,089 5,220,258
Less accumulated depreciation and amortization 3,239,793 3,814,908
----------- -----------
Property, plant and equipment, net 2,715,296 1,405,350
----------- -----------
OTHER ASSETS:
Goodwill 7,556,920 7,617,196
Patents and capitalized software development, net of accumulated
amortization of $1,110,104 and $1,033,109, respectively 225,137 288,657
Investment in unconsolidated affiliate 1,872,853 691,100
Restricted cash investment (Note 5) 1,000,000
Assets held for sale (Note 2) 781,034
Other assets 152,593 76,070
----------- -----------
Total other assets 11,588,537 8,673,023
----------- -----------
TOTAL $34,017,747 $23,326,541
=========== ===========
See accompanying notes to unaudited consolidated financial statements.
3
METRETEK TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
SEPTEMBER 30, DECEMBER 31,
2004 2003
------------- -------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 3,195,030 $ 1,978,226
Accrued and other liabilities 5,228,653 4,530,149
Notes payable 1,281,882 750,753
Capital lease obligations 3,382 25,411
------------ ------------
Total current liabilities 9,708,947 7,284,539
------------ ------------
LONG-TERM NOTES PAYABLE 5,827,432 5,226,950
------------ ------------
NON-CURRENT CAPITAL LEASE OBLIGATIONS 8,000 16,483
------------ ------------
LIABILITIES OF DISCONTINUED OPERATIONS (NOTE 2) 1,000,268
------------ -------------
COMMITMENTS AND CONTINGENCIES
MINORITY INTEREST IN SUBSIDIARIES 376,643 207,280
------------ ------------
REDEEMABLE PREFERRED STOCK - SERIES B,
$.01 PAR VALUE; 1,000,000 SHARES AUTHORIZED;
4,500 AND 7,000 SHARES ISSUED AND OUTSTANDING,
RESPECTIVELY, REDEMPTION VALUE $1,000 PER SHARE 6,112,057 9,422,132
------------ ------------
STOCKHOLDERS' EQUITY:
Preferred stock - undesignated, $.01 par value; 2,000,000 shares
authorized; none issued and outstanding
Preferred stock - Series C, $.01 par value; 500,000 shares
authorized; none issued and outstanding
Common stock, $.01 par value; 25,000,000 shares
authorized; 11,161,741 and 6,043,469 shares issued
and outstanding, respectively 111,617 60,435
Additional paid-in-capital 69,810,374 55,107,132
Deferred compensation (165,000)
Accumulated deficit (58,772,591) (53,998,410)
------------ ------------
Total stockholders' equity 10,984,400 1,169,157
------------ ------------
TOTAL $ 34,017,747 $ 23,326,541
============ ============
See accompanying notes to unaudited consolidated financial statements.
4
METRETEK TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------------- ---------------------------
2004 2003 2004 2003
------------ ------------ ------------ ------------
REVENUES:
Sales and services $ 9,114,187 $ 11,711,033 $ 25,591,905 $ 28,747,295
Other 336,809 93,376 1,267,232 445,801
------------ ------------ ------------ ------------
Total revenues 9,450,996 11,804,409 26,859,137 29,193,096
------------ ------------ ------------ ------------
COSTS AND EXPENSES:
Cost of sales and services 6,565,650 8,935,167 18,167,020 21,361,886
General and administrative 1,675,421 1,331,920 4,859,432 4,377,317
Selling, marketing and service 483,374 404,229 1,492,727 1,078,842
Depreciation and amortization 142,223 130,166 405,881 383,627
Research and development 171,622 180,523 500,659 471,328
Interest, finance charges and other 175,742 61,713 343,693 210,513
------------ ------------ ------------ ------------
Total costs and expenses 9,214,032 11,043,718 25,769,412 27,883,513
------------ ------------ ------------ ------------
Income from continuing operations before
minority interest and income taxes 236,964 760,691 1,089,725 1,309,583
Minority interest (59,664) (59,304) (201,438) (121,765)
Income taxes (12,016) (12,016) (35,987) (44,964)
------------ ------------ ------------ ------------
INCOME FROM CONTINUING OPERATIONS 165,284 689,371 852,300 1,142,854
------------ ------------ ------------ ------------
DISCONTINUED OPERATIONS OF MCM (NOTE 2)
Loss on disposal of MCM (3,354,629) (3,354,629)
Loss from operations of MCM (514,758) (332,170) (1,154,639) (664,893)
------------ ------------ ------------ ------------
LOSS ON DISCONTINUED OPERATIONS (3,869,387) (332,170) (4,509,268) (664,893)
------------ ------------ ------------ ------------
NET INCOME (LOSS) $ (3,704,103) $ 357,201 $ (3,656,968) $ 477,961
============ ============ ============ ============
PER SHARE AMOUNTS:
INCOME FROM CONTINUING OPERATIONS:
Basic $ (0.00) $ 0.05 $ (0.03) $ 0.05
============ ============ ============ ============
Diluted $ (0.00) $ 0.05 $ (0.03) $ 0.05
============ ============ ============ ============
NET INCOME (LOSS):
Basic $ (0.35) $ (0.00) $ (0.54) $ (0.06)
============ ============ ============ ============
Diluted $ (0.35) $ (0.00) $ (0.54) $ (0.06)
============ ============ ============ ============
WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING:
Basic 11,136,629 6,043,469 8,830,444 6,043,469
============ ============ ============ ============
Diluted 11,136,629 6,053,018 8,830,444 6,046,190
============ ============ ============ ============
See accompanying notes to unaudited consolidated financial statements.
5
METRETEK TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
NINE MONTHS ENDED
SEPTEMBER 30,
--------------------------
2004 2003
------------ -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (3,656,968) $ 477,961
Adjustments to reconcile net income to net cash
provided (used) by operating activities:
Loss on disposal of MCM operations 3,354,629
Loss from discontinued operations of MCM 1,154,639 664,893
Depreciation and amortization 405,881 383,627
Minority interest 169,363 136,765
(Gain) Loss on disposal of property, plant and equipment (91) 3,622
Equity in income of unconsolidated affiliate (890,639) (328,340)
Distributions from unconsolidated affiliate 652,400 271,594
Stock compensation 33,000
Changes in operating assets and liabilities:
Trade receivables, net (2,128,349) (3,653,529)
Inventories (1,231,973) (862,405)
Other current assets (243,658) (159,824)
Other noncurrent assets (76,523) (15,000)
Accounts payable 1,216,804 853,174
Accrued and other liabilities 702,726 3,794,828
------------ -----------
Net cash provided (used) by continuing operations (538,759) 1,567,366
Net cash used by discontinued operations of MCM (976,439) (530,067)
------------ -----------
Net cash provided (used) by operating activities (1,515,198) 1,037,299
------------ -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Investment in unconsolidated affiliate (955,784)
Increase in restricted cash investment (1,000,000)
Purchases of property, plant and equipment (2,064,510) (253,361)
Capitalized software purchases or development (13,475) (2,000)
Proceeds from sale of property, plant and equipment 5,200
------------ -----------
Net cash used in investing activities (4,028,569) (255,361)
------------ -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from private placement 9,830,619
Proceeds from stock option exercises 298,517
Net (payments) borrowings on line of credit (476,865) 539,158
Proceeds from equipment and project loans 1,212,570 30,169
Proceeds from investment loan 960,784
Principal payments on long-term notes payable (564,878) (55,312)
Payments on capital lease obligations (81,074) (31,445)
------------ -----------
Net cash provided by financing activities 11,179,673 482,570
------------ -----------
NET INCREASE IN CASH AND CASH EQUIVALENTS 5,635,906 1,264,508
CASH AND CASH EQUIVALENTS AT
BEGINNING OF PERIOD 2,101,675 884,843
------------ -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 7,737,581 $ 2,149,351
============ ===========
See accompanying notes to unaudited consolidated financial statements.
6
METRETEK TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
As of September 30, 2004 and December 31, 2003 and
For the Three and Nine Month Periods Ended September 30, 2004 and 2003
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION - The accompanying consolidated financial statements include
the accounts of Metretek Technologies, Inc. and its subsidiaries, primarily
Southern Flow Companies, Inc. ("Southern Flow"), PowerSecure, Inc.
("PowerSecure"), and Metretek, Incorporated ("Metretek Florida") (and its
majority-owned subsidiary, Metretek Contract Manufacturing Company, Inc.
("MCM")), and Marcum Gas Transmission, Inc. ("MGT") (and its majority-owned
subsidiary, Conquest Acquisition Company LLC ("CAC LLC")), collectively referred
to as the "Company" or "we" or "us" or "our". These consolidated financial
statements have been prepared pursuant to rules and regulations of the
Securities and Exchange Commission. The accompanying consolidated financial
statements and notes thereto should be read in conjunction with the consolidated
financial statements and notes thereto included in the Company's Annual Report
on Form 10-K for the year ended December 31, 2003.
In the opinion of the Company's management, all adjustments (all of which
are normal and recurring) have been made which are necessary for a fair
presentation of the consolidated financial position of the Company and its
subsidiaries as of September 30, 2004 and the consolidated results of their
operations and cash flows for the three and nine month periods ended September
30, 2004 and September 30, 2003.
RECLASSIFICATION - During the third quarter of 2004, the Board of
Directors of the Company approved a plan to discontinue the business of MCM and
sell all of its manufacturing assets (See Note 2). The operations of the
discontinued MCM disposal group have been reclassified to discontinued
operations for all periods presented in the accompanying consolidated statements
of operations. In addition, certain other 2003 amounts have been reclassified to
conform to current year presentation. These reclassifications had no impact on
the Company's net income or stockholders' equity.
MINORITY INTEREST IN POWERSECURE - At September 30, 2004 and December 31,
2003, senior management and certain key employees of PowerSecure held a 14%
minority interest in the Company's PowerSecure subsidiary. During the third
quarter of 2004, the Company entered into agreements to exchange 950,000 shares
of the Company's common stock for the 14% minority interest in PowerSecure.
Consummation of these exchange agreements is subject to certain customary
closing conditions, including the receipt of a fairness opinion, and is expected
to occur during the fourth quarter of 2004. These exchanges will increase the
number of the Company's common stock outstanding as well as eliminate $307,000
of minority interest in the accompanying consolidated balance sheet at September
30, 2004.
INCOME (LOSS) PER SHARE - The Emerging Issues Task Force ("EITF") has
issued EITF Issue No. 03-6, "Participating Securities and the Two-Class Method
under FASB Statement No.
7
128, Earnings per Share" ("EITF 03-6"). The Company adopted EITF 03-6 as of
April 1, 2004, and has retroactively adjusted prior periods pursuant to its
provisions. EITF 03-6 provides guidance for the computation of earnings per
share using the two-class method for enterprises with participating securities
or multiple classes of common stock as required by Statement of Financial
Accounting Standards No. 128. The two-class method allocates undistributed
earnings to each class of common stock and participating securities for the
purpose of computing basic earnings per share. The Company's Series B Redeemable
Preferred Stock is a participating security under the provisions of EITF 03-6.
The following table sets forth the calculation of basic and diluted
earnings per share:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------------- --------------------------
2004 2003 2004 2003
------------ ----------- ----------- ------------
Income from continuing operations $ 165,284 $ 689,371 $ 852,300 $ 1,142,854
Less preferred stock
deemed distribution (1) (174,326) (224,314) (1,117,213) (662,200)
------------ ----------- ----------- -----------
Income (loss) from continuing
operations to be allocated (9,042) 465,057 (264,913) 480,654
Less allocation of undistributed earnings
to participating preferred stock - (154,530) - (159,713)
------------ ----------- ----------- -----------
Income (loss) from continuing operations
attributable to common shareholders (9,042) 310,527 (264,913) 320,941
Loss from discontinued operations (3,869,387) (332,170) (4,509,268) (664,893)
------------ ----------- ----------- -----------
Net loss attributable
to common shareholders $ (3,878,429) $ (21,643) $(4,774,181) $ (343,952)
============ =========== =========== ===========
Basic weighted-average common
shares outstanding in period (4) 11,136,629 6,043,469 8,830,444 6,043,469
Add dilutive effects of stock options (2) - 9,549 - 2,721
------------ ----------- ----------- -----------
Diluted weighted-average common
shares outstanding in period (4) 11,136,629 6,053,018 8,830,444 6,046,190
============ =========== =========== ===========
Basic earnings (loss) per common share:
Income (loss) from continuing operations (0.00) 0.05 (0.03) 0.05
Loss from discontinued operations (0.35) (0.05) (0.51) (0.11)
------------ ----------- ----------- -----------
Basic earnings per common share (3) $ (0.35) $ (0.00) $ (0.54) $ (0.06)
============ =========== =========== ===========
Diluted earnings (loss) per common share:
Income (loss) from continuing operations (0.00) 0.05 (0.03) 0.05
Loss from discontinued operations (0.35) (0.05) (0.51) (0.11)
------------ ----------- ----------- -----------
Diluted earnings per common share (3) $ (0.35) $ (0.00) $ (0.54) $ (0.06)
============ =========== =========== ===========
(1) The preferred stock deemed distribution for the three and nine month
periods ended September 30, 2004 include non-cash charge (expense) of
$25,000 and $568,000, respectively, which represents the estimated fair
market value of inducement conveyed to the converting Preferred
Stockholders in connection with the Private Placement discussed further in
Note 2.
(2) The assumed conversion of stock options, convertible preferred stock and
warrants has been
8
excluded from weighted average shares outstanding for the three and nine
month periods ended September 30, 2004 because the effect would be
anti-dilutive.
(3) Basic and diluted earnings per share for the three and nine month periods
ended September 30, 2003 differ from the amounts originally presented in
the Company's Quarterly Report on Form 10-Q dated September 30, 2003 for
the effects of the allocation of earnings to participating preferred stock
as required by the provisions of EITF 03-6.
(4) During the third quarter of 2004, the Company entered into agreements to
exchange 950,000 shares of its common stock for the currently outstanding
14% minority interest in its PowerSecure subsidiary. The basic and diluted
weighted-average common shares outstanding amounts at September 30, 2004
do not include the 950,000 shares of common stock that will be issued when
the exchanges are consummated in the fourth quarter of 2004.
STOCK BASED COMPENSATION - The Company has three stock-based employee and
director compensation plans, which it accounts for under the recognition and
measurement principles of APB Opinion No. 25, "Accounting for Stock Issued to
Employees", and related Interpretations. Accordingly, the Company does not
recognize compensation cost for stock option grants to employees and directors,
as all options granted under those plans have exercise prices equal to or in
excess of the market value of the underlying common stock on the date of grant.
In October 2004, the FASB concluded that Statement of Financial Accounting
Standards No. 123R, "Share-Based Payment" ("FAS 123R"), which would require all
companies to measure compensation cost for all share-based payments (including
employee stock options) at fair value), would be effective for public companies
for interim or annual periods beginning after June 15, 2005. The following table
illustrates the effect on net loss and loss per share applicable to common
shareholders if the Company had applied the fair value recognition provisions of
FAS 123 for the three and nine month periods ended September 30, 2004 and 2003:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------- ---------------------------
2004 2003 2004 2003
------------ --------- ------------ -----------
Net loss attributable to common
shareholders - as reported $ (3,878,429) $ (21,643) $ (4,774,181) $ (343,952)
Deduct total stock-based employee
compensation expense determined
under fair value based method (87,721) (72,718) (351,495) (113,416)
------------ --------- ------------ -----------
Net income (loss) attributable to common
shareholders - pro forma $ (3,966,150) $ (94,361) $ (5,125,676) $ (457,368)
============ ========= ============ ===========
Income (loss) per basic common share:
As reported $ (0.35) $ (0.00) $ (0.54) $ (0.06)
============ ========= ============ ===========
Pro forma $ (0.36) $ (0.02) $ (0.58) $ (0.08)
============ ========= ============ ===========
Income (loss) per diluted common share:
As reported $ (0.35) $ (0.00) $ (0.54) $ (0.06)
============ ========= ============ ===========
Pro forma $ (0.36) $ (0.02) $ (0.58) $ (0.08)
============ ========= ============ ===========
The fair values of stock options were calculated using the Black-Scholes
stock option valuation model with the following weighted average assumptions for
stock option grants during the periods ended September 30, 2004 and 2003: stock
price volatility of 55% and 107%, respectively; risk-free interest rate of 3.50%
per year; dividend rate of $0.00 per year; and an expected life of 4 years for
options granted to employees and 10 years for options granted to
9
directors.
STATEMENT OF CASH FLOWS - The Company considers all highly liquid and
unrestricted investments with a maturity of three months or less from the date
of purchase to be cash equivalents. During the nine months ended September 30,
2004, the company incurred capital lease obligations in the aggregate amount of
$526,395, primarily in connection with the acquisition of manufacturing
equipment at Metretek Florida. At September 30, 2004, the balance of the capital
lease obligations related to the discontinued MCM operations (see Note 2) has
been included in liabilities of discontinued operations in the accompanying
consolidated balance sheet.
2. DISCONTINUED OPERATIONS OF MCM
During the third quarter of 2004, the Board of Directors of the Company
approved a plan to discontinue the business of MCM and sell all of its
manufacturing assets. The Company made its determination to exit the contract
manufacturing business as the result of recent unacceptable losses in that
business that have adversely affected the consolidated financial results of the
Company, as well as industry and market factors and recent projections of
operations that are not favorable to the Company in the foreseeable future. The
discontinuance of the contract manufacturing operations will allow Metretek
Florida to focus on its telemetry and automated meter reading business lines,
including the operations related to its new InvisiConnect technology.
In connection with the planned disposal, the Company entered into a
non-binding letter of intent with InstruTech, Inc. for the sale of the contract
manufacturing business and related manufacturing assets of MCM. InstruTech is a
Colorado-based contract manufacturer of printed circuit boards and other
instrumentation products. The sale is expected to close no later than December
31, 2004. The proposed sale is subject to execution of a mutually acceptable
definitive agreement and other customary conditions to closing, and thus there
is no assurance that the sale will be consummated. The assets of the disposal
group not included in the sale to InstruTech (principally receivables and
inventory) will be liquidated through collections on receivables, operations
through the disposal date, and through subsequent sale of remaining inventory to
other contract manufacturers (including InstruTech). The assets of the MCM
disposal group have been written down to the Company's best estimate of their
fair value less costs to sell. The write-down amounts total $2,834,000 and are
included in loss on disposal of MCM in the accompanying consolidated statement
of operations. The assets and liabilities of the MCM disposal group at September
30, 2004, are as follows:
Assets:
Accounts receivable $ 258,281
Inventory 563,378
Equipment 1,728,174
Accumulated depreciation (947,140)
-----------
$ 1,602,693
===========
Liabilities:
Capital lease obligations $ 648,209
Operating lease obligations 135,392
Employee severance obligations 216,667
-----------
$ 1,000,268
===========
10
Revenues of the MCM disposal group for the three months ended September
30, 2004 and 2003 were $868,794 and $214,500, respectively. Revenues of the MCM
disposal group for the nine months ended September 30, 2004 and 2003 were
$3,266,963 and $1,359,629, respectively. Operations of the MCM disposal group
had previously been included in the Company's Metretek Florida operating
segment.
3. PRIVATE PLACEMENT AND CONVERSION OF SERIES B PREFERRED STOCK
In May 2004, the Company completed a private placement to institutional
and accredited investors of 3,510,548 shares of its common stock and warrants to
purchase 702,109 shares of its common stock (the "Private Placement"), raising
gross proceeds of $10,883,000. The price paid in the Private Placement was $3.10
per unit, each unit consisting of one share of common stock and a warrant to
purchase 0.2 shares of common stock. Roth Capital Partners, LLC acted as
placement agent in the Private Placement.
The Company received net cash proceeds of $9,831,000 from the Private
Placement, after deducting transaction expenses including the placement agent's
fee. The net proceeds from the Private Placement are intended to be used by the
Company principally to meet its mandatory redemption obligations related to its
Series B Preferred Stock, par value $.01 per share ("Series B Preferred Stock"),
which matures on December 9, 2004 (the "Mandatory Redemption Date"), and for
other business commitments and initiatives.
The warrants issued in the Private Placement have an exercise price of
$3.41 per share of common stock and expire in May 2009. The warrants are
callable by the Company commencing one year after issuance if the trading price
of the common stock is at least two times the warrant exercise price for 30
consecutive trading days and certain other conditions are satisfied. In addition
to the warrants issued to the investors, the Company issued warrants to purchase
up to 351,055 shares of common stock to the placement agent, which warrants are
on the same basic terms as the warrants issued to the investors. The Company
filed a registration statement with the Securities and Exchange Commission (the
"SEC"), which registration statement has been declared effective by the SEC,
covering resales from time to time of shares of common stock issued in the
Private Placement or upon the exercise of the warrants.
In addition, as a condition precedent to the closing of the Private
Placement, certain holders of the Company's outstanding shares of Series B
Preferred Stock converted a total of 2,500 shares of Series B Preferred Stock,
including accrued and unpaid dividends thereon. The purpose of this conversion
was to reduce the Company's potential preferred stock mandatory redemption
liability at the Mandatory Redemption Date from approximately $10.3 million to
approximately $6.6 million, a reduction of $3.7 million. Upon conversion, the
converting Preferred Stockholders received 1,209,133 shares of common stock
(inclusive of 55,871 additional shares of common stock ("Additional Shares")
intended to compensate the converting Preferred Stockholders for dividends that
they would otherwise receive on the converted preferred shares between the
Private Placement closing date and the Mandatory Redemption Date) and new
warrants to purchase 1,209,133 shares of common stock. The new warrants may
11
be exercised at a strike price of $3.0571 per share of common stock and expire
on June 9, 2005. The strike price of the new warrants is the same price as the
conversion price of the Series B Preferred Stock. The Company included both the
Additional Shares and the shares of common stock issuable upon exercise of the
new warrants in the registration statement filed with the SEC in connection with
the Private Placement.
As a result of the Preferred Stock conversion described in the immediately
preceding paragraph, the Company recorded a second quarter of 2004 non-cash
charge (expense) in the amount of $543,000 as an additional preferred stock
deemed dividend. This charge represents the approximate fair market value of
inducement conveyed to the converting Preferred Stockholders. The inducement
amount relates principally to the estimated fair market values of the new
warrants and the Additional Shares. See also Note 1 - "Income (Loss) per Share."
During the third quarter of 2004, additional holders of the Company's
outstanding shares of Series B Preferred Stock converted a total of 250 shares
of Series B Preferred Stock, including accrued and unpaid dividends. The
conversion terms were identical to those terms offered to holders who converted
their shares of Series B Preferred stock in connection with the Private
Placement. Upon conversion, the converting Preferred Stockholders received
120,040 shares of common stock and new warrants to purchase 120,040 shares of
common stock at a strike price of $3.0571 per share of common stock. These new
warrants also expire on June 9, 2005. The Company recorded a third quarter 2004
non-cash charge in the amount of $25,000 as an additional preferred stock deemed
dividend, representing the fair market value of inducement conveyed to the
converting Preferred Stockholders.
4. INVESTMENT IN UNCONSOLIDATED AFFILIATE
During the first quarter of 2004, additional equity interests in MGT's
unconsolidated affiliate, Marcum Midstream 1995-2 Business Trust ("MM 1995-2"),
were acquired at a purchase price of $956,000, with an effective date of the
acquisition of January 1, 2004. As a result of this acquisition of additional
equity interests, as of September 30, 2004, the Company owned an approximate 26%
economic interest in MM 1995-2.
To facilitate the acquisition of the additional equity interests, MGT
formed CAC LLC, a majority-owned subsidiary. Financing of the acquired equity
interests was provided by a $961,000 term loan from a commercial bank to CAC
LLC. The loan is secured by CAC LLC's and MGT's collective interests in MM
1995-2, and the Company has provided a guaranty of $625,000 of the term loan.
The term loan provides for 60 monthly payments of principal and interest (at a
rate of 5.08%) in the amount of approximately $18,500 per month. Cash
distributions from MM 1995-2 to CAC LLC will be used to fund the monthly
payments on the term loan.
Upon formation, MGT acquired 73.75% of CAC LLC. CAC LLC accounts for its
interests in MM1995-2 under the equity method of accounting. The minority
shareholder's interest in CAC LLC at September 30, 2004, is included in minority
interest in the accompanying consolidated financial statements.
Summarized financial information for MM 1995-2 at September 30, 2004 and
December
12
31, 2003 and for the three and nine months ended September 30, 2004 and 2003,
are as follows:
SEPTEMBER 30, DECEMBER 31,
2004 2003
------------- -------------
Total current assets $1,521,638 $1,510,302
Property, plant and equipment, net 4,810,328 4,681,899
Total other assets 18,114 23,801
---------- ----------
Total assets $6,350,080 $6,216,002
========== ==========
Total current liabilities $ 716,205 $ 795,599
Long-term note payable 572,944 1,020,561
Total shareholders' equity 5,060,931 4,399,842
---------- ----------
Total liabilities and shareholders' equity $6,350,080 $6,216,002
========== ==========
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------------- -----------------------
2004 2003 2004 2003
---------- ---------- ---------- ----------
Total revenues $1,555,081 $1,153,921 $5,113,992 $3,779,982
Total costs and expenses 720,418 684,433 2,352,902 1,810,028
---------- ---------- ---------- ----------
Net income $ 834,663 $ 469,488 $2,761,090 $1,969,954
========== ========== ========== ==========
5. RESTRICTED CASH INVESTMENT
At April 30, 2004, Metretek Florida was not in compliance with certain
financial covenants in its credit agreement with Wells Fargo Business Credit
("Wells Fargo"). Wells Fargo waived the financial covenants and the Metretek
Florida credit agreement was amended to establish less restrictive financial
covenants. As a condition to the waiver of default and amendment to the credit
agreement, the Company agreed to purchase a $1,000,000 certificate of deposit
(the "Restricted Cash Investment"), in which Wells Fargo has been granted a
security interest. The Restricted Cash Investment is held in the Company's name
in a depository account at Wells Fargo and it matures on December 4, 2004,
subject to renewal at the instruction of Wells Fargo Business Credit. The
Restricted Cash Investment is carried at cost, which approximates fair value,
and is restricted as to withdrawal or use by the Company, except as may be
permitted by Wells Fargo. The Restricted Cash Investment has been classified as
a non-current asset in the accompanying consolidated balance sheet at September
30, 2004, because its use has been restricted.
At September 30, 2004, Metretek Florida was not in compliance with the
minimum tangible net worth and the minimum net income financial covenants in the
Metretek Florida credit facility, due primarily to the financial results of the
contract manufacturing business that has been discontinued. However, Wells Fargo
has waived these financial covenants, and Metretek Florida intends, subject to
Wells Fargo's consent, to establish new financial covenants for 2004 and 2005
reflecting Metretek Florida's projected financial results and condition
resulting from its operations without the contract manufacturing business.
13
6. COMMITMENTS AND CONTINGENCIES
CLASS ACTION LITIGATION - As described in our Annual Report on Form 10-K
for the fiscal year ended December 31, 2003 ("2003 Form 10-K"), in January 2001,
Douglas W. Heins (the "Class Action Plaintiff"), individually and on behalf of a
class of other persons similarly situated, filed a complaint (the "Class
Action") in the District Court for the City and County of Denver, Colorado (the
"Denver Court") against the Company, Marcum Midstream 1997-1 Business Trust (the
"1997 Trust"), Marcum Midstream-Farstad, LLC ("MMF"), MGT, Marcum Capital
Resources, Inc. ("MCR"), W. Phillip Marcum, Richard M. Wanger and Daniel J.
Packard (the foregoing, collectively, the "Metretek Defendants"), Farstad Gas &
Oil, LLC ("Farstad LLC") and Farstad Oil, Inc. ("Farstad Inc." and, collectively
with Farstad LLC, the "Farstad Entities"), and Jeff Farstad ("Farstad" and,
collectively with the Farstad Entities, the "Farstad Defendants").
On March 27, 2003, the Company, along with the Class Action Plaintiff,
filed a Stipulation of Settlement, which contains the terms and conditions of a
proposed settlement intended to fully resolve all claims by the Class Action
Plaintiff against the Company and the other Metretek Defendants in the Class
Action. On March 2, 2004, the Company and the Class Action Plaintiff filed a
revised Stipulation of Settlement, which revises certain terms of the settlement
(as revised, the "Heins Settlement"). The terms and conditions of the Heins
Settlement are set forth in the 2003 Form 10-K.
The Heins Settlement was granted final approval by the Denver Court on
June 11, 2004 and became effective on July 26, 2004. The Heins Settlement
creates a settlement fund (the "Heins Settlement Fund") for the benefit of the
Class. In settlement of the Interpleader Action discussed below, $2,375,000 in
proceeds of the Company's directors' and officers' insurance policy (the
"Policy") was used in the Heins Settlement. Pursuant to the Heins Settlement,
the Company has paid $375,000, and has issued a note payable to the Heins
Settlement Fund in the amount of $3.0 million (the "Heins Settlement Note"), and
commenced payments thereunder on June 30, 2004. The Heins Settlement Note bears
interest at the rate of prime plus three percent (prime + 3%), payable in 16
quarterly installments, each of $187,500 principal plus accrued interest, and is
guaranteed by the 1997 Trust and all of the Company's subsidiaries.
On March 28, 2003, Gulf Insurance Company ("Gulf"), who issued the Policy,
filed an interpleader complaint against the Metretek Defendants, the Farstad
Defendants and the Class Action Plaintiff (the "Interpleader Action") in the
Denver Court, seeking a determination by the Denver Court as to the proper
beneficiaries of the Policy. In March 2004, we settled the Interpleader Action
with Gulf and the Farstad Defendants (the "Interpleader Settlement"). Pursuant
to the terms of the Interpleader Settlement, Gulf paid $2,375,000 for use in the
Heins Settlement, and has paid the remainder of the Policy proceeds to the
Farstad Defendants. In exchange, the Company and the Farstad Defendants have
fully released Gulf from all further claims under the Policy. The Interpleader
Action was dismissed on April 2, 2004.
The Company and the Metretek Defendants are vigorously pursuing
appropriate cross-claims and third party claims, including claims against the
Farstad Defendants and against attorneys, consultants and a brokerage firm
involved in the transactions underlying the claims in the Class Action. Out of
any net recovery, after litigation expenses, from the resolution of any of these
claims, 50% would be allocated to offset the Company's obligations under the
Heins
14
Settlement Note, and the remaining 50% would be allocated to the Heins
Settlement Fund as additional settlement funds. The Company cannot provide any
assurance that it will be successful on any of these claims or, even if
successful, on the amount, if any, or the timing of any recovery from any of
these claims.
7. SEGMENT INFORMATION
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's
reportable business segments include: natural gas measurement services;
distributed generation; and automated energy data management.
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 operations of the Company's distributed generation segment are
conducted by PowerSecure. PowerSecure commenced operations in September 2000.
The primary elements of PowerSecure's distributed generation products and
services include project design and engineering, negotiation with utilities to
establish tariff structures and power interconnects, generator acquisition and
installation, process control and switchgear design and installation, and
ongoing project monitoring and servicing. PowerSecure markets its distributed
generation products and services directly to large end-users of electricity and
through outsourcing partnerships with utilities. Through September 30, 2004, the
vast majority of PowerSecure's revenues have been generated from sales of
distributed generation systems on a "turn-key" basis, where the customer
acquires the systems from PowerSecure. To date, PowerSecure has also generated a
small portion of its revenues from "company-owned" distributed generation assets
that are leased to customers on a long-term basis.
The operations of the Company's automated data collection and telemetry
segment are conducted by Metretek Florida. Metretek Florida's manufactured
products fall into the following categories: field devices, including data
collection products and electronic gas flow computers; data collection software
products (such as InvisiConnect(TM), DC2000 and PowerSpring); and communications
solutions that can use public networks operated by commercial wireless carriers
to provide real time IP-based wireless internet connectivity, traditional
cellular radio, 900 MHz unlicensed radio or traditional wire-line phone service
to provide connectivity between the field devices and the data collection
software products. Metretek Florida also provides data collection, M2M telemetry
connectivity and post-sale support services for its manufactured products and
turn-key solutions. In June 2002, Metretek Florida formed MCM to conduct and
expand its circuit board contract manufacturing operations. During the third
quarter of 2004, the Board of Directors of the Company approved a plan to
discontinue the business of MCM and sell all of its manufacturing assets. See
further discussion in Note 2.
The Company evaluates the performance of its operating segments based on
income from continuing operations before minority interest, income taxes,
nonrecurring items and interest
15
income and expense. Intersegment sales are not significant.
Summarized financial information concerning the Company's reportable
segments is shown in the following table. The amounts shown as "Other" include
corporate related items, equity in earnings of unconsolidated affiliate, results
of insignificant operations and, as it relates to segment profit or loss, income
and expense not allocated to reportable segments. The table information excludes
the revenues, depreciation, and losses of the discontinued MCM operations for
all periods presented.
SUMMARIZED SEGMENT FINANCIAL INFORMATION
(ALL AMOUNTS REPORTED IN THOUSANDS)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------- --------------------
2004 2003 2004 2003
------- -------- -------- --------
REVENUES:
Southern Flow $ 3,216 $ 2,923 $ 9,544 $ 8,746
PowerSecure 5,108 6,161 13,658 13,583
Metretek Florida 790 2,627 2,390 6,418
Other 337 93 1,267 446
------- -------- -------- --------
Total $ 9,451 $ 11,804 $ 26,859 $ 29,193
======= ======== ======== ========
SEGMENT PROFIT (LOSS):
Southern Flow $ 486 $ 423 $ 1,394 $ 1,063
PowerSecure 241 407 773 871
Metretek Florida (8) 258 (204) 695
Other (482) (327) (873) (1,319)
------- -------- -------- --------
Total $ 237 $ 761 $ 1,090 $ 1,310
======= ======== ======== ========
CAPITAL EXPENDITURES:
Southern Flow $ 21 $ 61 $ 142 $ 100
PowerSecure 1,364 37 1,857 111
Metretek Florida 27 6 75 40
Other 4 4
------- -------- -------- --------
Total $ 1,412 $ 104 $ 2,078 $ 255
======= ======== ======== ========
DEPRECIATION AND AMORTIZATION:
Southern Flow $ 32 $ 32 $ 94 $ 97
PowerSecure 38 17 83 46
Metretek Florida 64 75 205 225
Other 8 6 24 16
------- -------- -------- --------
Total $ 142 $ 130 $ 406 $ 384
======= ======== ======== ========
SEPTEMBER 30,
--------------------
2004 2003
-------- --------
TOTAL ASSETS:
Southern Flow $ 9,883 $ 9,473
PowerSecure 9,241 7,729
Metretek Florida 5,435 6,981
Other 9,459 762
-------- --------
Total $ 34,018 $ 24,945
======== ========
16
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
INTRODUCTION
The following discussion of our results of operations for the three and
nine month periods ended September 30, 2004 (referred to herein as the "third
quarter 2004" and "nine month period 2004", respectively) and for the three and
nine month periods ended September 30, 2003 (referred to herein as the "third
quarter 2003" and "nine month period 2003", respectively) and of our financial
condition as of September 30, 2004 should be read in conjunction with our
consolidated financial statements and related notes thereto included elsewhere
in this report.
OVERVIEW
We are a diversified provider of energy technology products, services and
data management systems primarily to industrial and commercial users and
suppliers of natural gas and electricity. As a holding company, we conduct our
operations and derive our revenues through our three operating subsidiaries,
each of which operates a separate business:
- Southern Flow, which provides natural gas measurement services;
- PowerSecure, which designs, sells and manages distributed generation
systems; and
- Metretek Florida, which designs, manufactures and sells data
collection and energy measurement monitoring systems. Until
recently, Metretek Florida had also provided contract manufacturing
services through its majority-owned subsidiary, Metretek Contract
Manufacturing, Inc. ("MCM"). These contract manufacturing services
are being discontinued and the MCM manufacturing assets are being
sold.
In addition to these operating subsidiaries, we also own an approximate
26% economic interest in an unconsolidated business, the Marcum Midstream 1995-2
Business Trust (MM 1995-2). We acquired additional equity interests in MM 1995-2
during the first quarter of 2004. As a result, the income from this equity
investment is becoming a more significant part of our operating results.
We commenced operations in 1991 as an energy services holding company,
owning subsidiaries with businesses designed to exploit service opportunities
primarily in the natural gas industry. Since then, our business has evolved and
expanded through acquisitions of companies, businesses and new product lines
that have allowed us to reach not only a broader portion of the energy market
(including the electricity market) but also markets outside of the energy field.
Over the past two years, we have focused our efforts on growing our businesses
by offering new and enhanced products, services and technologies, and by
entering new markets, within a framework emphasizing the goal of achieving
profitable operations on a sustained basis.
During the third quarter 2004, our Board of Directors approved a plan to
discontinue the business of MCM and sell all of its manufacturing assets.
Operations of the MCM disposal group had previously been included in our
Metretek Florida operating segment. We made our
17
determination to exit the contract manufacturing business as the result of
recent unacceptable losses in that business that have adversely affected our
consolidated financial results as well as industry and market factors and recent
projections of operations that were not favorable to us in the foreseeable
future. The discontinuance of the contract manufacturing operations will allow
Metretek Florida to focus on its telemetry and automated meter reading business
lines, including the operations related to its new InvisiConnect technology.
In connection with the planned disposal, we entered into a non-binding
letter of intent with InstruTech, Inc. for the sale of the contract
manufacturing business and related manufacturing assets of MCM. InstruTech is a
Colorado-based contract manufacturer of printed circuit boards and other
instrumentation products. We expect the sale to close no later than December 31,
2004. The proposed sale is subject to execution of a mutually acceptable
definitive agreement and other customary conditions to closing, and there is no
assurance that the sale will be consummated. The assets of the disposal group
not included in the sale to InstruTech (principally receivables and inventory)
will be liquidated through collections on receivables, operations through the
disposal date, and through subsequent sale of remaining inventory to other
contract manufacturers (including InstruTech).
We recorded a loss on discontinued operations of MCM during the third
quarter 2004 of $3,869,000, including a $3,355,000 loss anticipated from the
disposal of the MCM assets. The assets of the MCM disposal group have been
written down to our best estimate of their fair value less costs to sell. The
write-down amounts included in the loss from disposal of MCM total $2,834,000.
The remaining $514,000 loss from disposal of the MCM group represents accrued
severance and shutdown costs.
During the third quarter 2004 and nine month period 2004, Metretek Florida
showed a decline in revenues of $1,837,000 and $4,028,0000, respectively, and a
substantial decline in segment profitability for both periods compared to the
third quarter 2003 and nine month period 2003. These period-to-period declines
were principally due to two significant projects involving sales of field
devices that were recorded in the second and third quarter of 2003. Third
quarter 2003 and nine month period 2003 revenues related to these projects were
$1,696,000 and $4,258,000, respectively. No similar sized projects were included
in sales in either the third quarter 2004 or nine month period 2004.
Southern Flow's revenues and segment profits showed substantial
improvement in both the third quarter 2004 and nine month period 2004, as
compared to the comparable periods of 2003, as a result of generally improved
market conditions and strong natural gas wellhead prices.
PowerSecure's revenues for the third quarter 2004 declined $1,053,000 as
compared to the third quarter 2003, resulting in a corresponding decline in
segment profitability. This decline generally reflects longer lead-time
requirements on key components and equipment, a reduction in size of its
projects, and quarterly fluctuations in the timing of its projects.
PowerSecure's revenues for the nine month period 2004 improved slightly by .5%
compared to the nine month period 2003. However, PowerSecure segment profit for
the nine month period 2004 declined $98,000 compared to the nine month period
2003 as the result of increased general, administrative and sales expenses,
partially offset by higher gross profit margins.
18
Consolidated revenues for the third quarter 2004 declined $2,353,000
compared to the third quarter 2003. This decline was principally due to the
$1,837,000 decline in revenues at Metretek Florida and the $1,053,000 decline at
PowerSecure, but partially offset by increased revenues at Southern Flow, as
well as an increase in other revenues. Total segment profits were down $524,000,
due principally to declines in segment profits at Metretek Florida and
PowerSecure, and due to higher interest and general and administrative expenses.
During the third quarter 2004, we recorded a deemed distribution on our
Series B Preferred Stock of $174,000 compared to $224,000 during the third
quarter 2003. The third quarter 2004 deemed distribution decreased from the
third quarter 2003 due to a reduction in the number of Series B Preferred Stock
outstanding as a result of the conversion of a total of 2,750 shares of Series B
Preferred Stock (including accrued and unpaid dividends) in connection with or
subsequent to the Private Placement discussed below.
After the loss from discontinued operations, the non-cash preferred stock
deemed distribution, and allocation of undistributed earnings to participating
preferred stock, our net loss attributable to common shareholders in the third
quarter 2004 increased to $3,878,000 as compared to $22,000 net loss
attributable to common shareholders in the third quarter 2003. The primary
reasons for the change in net loss attributable to common shareholders were the
loss from disposal of MCM and the reduction in segment profitability at Metretek
Florida and PowerSecure. These factors were partially offset by improved segment
profitability at our Southern Flow subsidiary, and an increase in other revenues
principally related to our unconsolidated investment in MM 1995-2.
Consolidated revenues for the nine month period 2004 declined $2,334,000
compared to the nine month period 2003. This decline was principally due to the
$4,028,000 million decline in revenues at Metretek Florida, but partially offset
by increased revenues at Southern Flow and PowerSecure, as well as an increase
in other revenues. Total segment profits were down $220,000, due principally to
a decline in segment profits at Metretek Florida of $899,000.
During the nine month period 2004, we recorded a net loss from
discontinued operations of $4,509,000 compared to $665,000 during the nine month
period 2003. The nine month period 2004 loss from discontinued operations
increased over the nine month period 2003 primarily as a result of the
$3,355,000 charge for the expected loss on disposal of MCM discussed above, but
also as a result of increasing losses of MCM, which contributed to our decision
to discontinue the operations of MCM.
Also during the nine month period 2004, we recorded a non-cash deemed
distribution on our Series B Preferred Stock of $1,117,000 compared to $662,000
during the nine month period 2003. The nine month period 2004 deemed
distribution increased over the nine month period 2003 due to a $568,000
non-cash inducement to Preferred Stockholders who converted a total of 2,750
shares of Series B Preferred Stock (including accrued and unpaid dividends) in
connection with or subsequent to the Private Placement discussed above.
After the loss from discontinued operations of MCM, the non-cash preferred
stock deemed distribution and allocation of undistributed earnings to
participating preferred stock, our net loss attributable to common shareholders
in the nine month period 2004 increased to $4,774,000 as compared to a $344,000
net loss attributable to common shareholders in the nine
19
month period 2003. The primary reason for this decrease was the charge for the
loss from disposal of MCM, the non-cash deemed dividend inducement to the
converting Preferred Stockholders in connection with the Private Placement and
the decline in the performance of Metretek Florida.
During the nine month period 2004, we took substantial steps to improve
our balance sheet and liquidity. In May 2004, we completed a Private Placement
to institutional and accredited investors of 3,510,548 shares of our Common
Stock and warrants to purchase 702,109 shares of our Common Stock, raising gross
proceeds of $10,883,000. We received net cash proceeds of $9,831,000 from the
Private Placement, after deducting transaction expenses including the placement
agent's fee. The net proceeds from the Private Placement are intended to be used
principally to meet our mandatory redemption obligations related to our Series B
Preferred Stock and for other business commitments and initiatives.
In addition, certain holders of our outstanding shares of Series B
Preferred Stock converted a total of 2,750 shares of Preferred Stock, including
accrued and unpaid dividends thereon. As a result of the conversion of these
shares of Series B Preferred Stock, our maximum aggregate redemption obligation
at December 9, 2004 was reduced from $10.3 million to approximately $6.2
million, and the deemed distribution on the Series B Preferred Stock will be
reduced for future periods as a result of the reduction in shares of Series B
Preferred Stock outstanding. See "Liquidity and Capital Resources" below in this
Item for further discussion concerning the Private Placement and the conversion
of Preferred Stock.
Finally, during the nine month period 2004, we acquired additional equity
interests in our unconsolidated affiliate, Marcum Midstream 1995-2 Business
Trust ("MM 1995-2"), at a purchase price of $956,000. We financed the
acquisition of the additional equity interests through a $961,000 term loan from
a commercial bank to a newly formed majority owned subsidiary, CAC LLC. The
additional equity income from MM1995-2 increased our other revenues
substantially during the nine month period 2004. We expect cash distributions
from MM 1995-2 to CAC LLC will be sufficient to fund the monthly payments on the
term loan, as well as provide cash for other business commitments and
initiatives.
Unless the holders of our remaining Series B Preferred Stock elect to
convert their Preferred Stock to Common Stock, the terms of our Series B
Preferred Stock will require us to redeem all shares of our Series B Preferred
Stock that remain outstanding on December 9, 2004 at a redemption price equal to
the liquidation preference of $1,000 per share plus accumulated and unpaid
dividends. The Series B Preferred Stock is convertible, at the option of the
holders thereof, into Common Stock at the conversion rate of approximately $3.06
per share of Common Stock. While the conversion of shares of Series B Preferred
Stock into shares of Common Stock prior to the redemption date will reduce our
redemption obligation, we cannot determine at this time how many shares, if any,
of Series B Preferred Stock will ultimately be converted. As of September 30,
2004, the total redemption obligation was approximately $6.1 million, and due to
additional accrued dividends may rise to a maximum redemption obligation of $6.2
million on the December 9, 2004 mandatory redemption date.
Another important factor in our liquidity relates to the settlement of the
Class Action lawsuit. On June 11, 2004, the Denver Court granted final approval
of the Heins Settlement,
20
which became effective on July 26, 2004. Under the Heins Settlement, we
commenced payments on a four year $3 million promissory note on June 30, 2004.
See "--Liquidity and Capital Resources" below in this Item.
CRITICAL ACCOUNTING POLICIES
Management's discussion and analysis of our financial condition and
results of operations are based on our consolidated financial statements, which
have been prepared in conformity with accounting principles generally accepted
in the United States of America. The preparation of these financial statements
requires management to make estimates, judgments and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and the reported amounts
of revenues and expenses during the reporting period. On an on-going basis, we
evaluate our estimates, including those related to revenue recognition and
percentage of completion, fixed price contracts, product returns, warranty
obligations, bad debt, inventories, cancellations costs associated with long
term commitments, investments, intangible assets, assets subject to disposal,
income taxes, restructuring, service contracts, contingencies and litigation. We
base our estimates on historical experience and on various other assumptions
that are believed to be reasonable under the circumstances, the results of which
form the basis for making estimates and judgments about the carrying value of
assets and liabilities that are not readily apparent from other sources.
Estimates, by their nature, are based on judgment and available information.
Therefore, actual results could differ from those estimates and could have a
material impact on our consolidated financial statements, and it is possible
that such changes could occur in the near term.
We have identified the accounting principles which we believe are most
critical to understanding our reported financial results by considering
accounting policies that involve the most complex or subjective decisions or
assessments. These accounting policies are described in our Annual Report on
Form 10-K for the year ended December 31, 2003 in "Item 7. Management's
Discussion and Analysis of Financial Condition and Results of Operations."
RESULTS OF OPERATIONS
The following table sets forth selected information related to our primary
continuing business segments and is intended to assist you in an understanding
of our results continuing operations for the periods presented. The table
information excludes the revenues, gross profit, and losses of the discontinued
MCM operations for all periods presented.
21
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------- --------------------
2004 2003 2004 2003
------- -------- -------- --------
(all amounts reported in thousands)
REVENUES:
Southern Flow $ 3,216 $ 2,923 $ 9,544 $ 8,746
PowerSecure 5,108 6,161 13,658 13,583
Metretek Florida 790 2,627 2,390 6,418
Other 337 93 1,267 446
------- -------- -------- --------
Total $ 9,451 $ 11,804 $ 26,859 $ 29,193
======= ======== ======== ========
GROSS PROFIT:
Southern Flow $ 850 $ 739 $ 2,474 $ 2,079
PowerSecure 1,299 1,268 3,733 3,104
Metretek Florida 399 769 1,218 2,202
------- -------- -------- --------
Total $ 2,548 $ 2,776 $ 7,425 $ 7,385
======= ======== ======== ========
SEGMENT PROFIT (LOSS):
Southern Flow $ 486 $ 423 $ 1,394 $ 1,063
PowerSecure 241 407 773 871
Metretek Florida (8) 258 (204) 695
Other (482) (327) (873) (1,319)
------- -------- -------- --------
Total $ 237 $ 761 $ 1,090 $ 1,310
======= ======== ======== ========
Our 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. Our reportable business
segments include: natural gas measurement services; distributed generation; and
automated energy data management.
The operations of our 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 operations of our distributed generation segment are conducted by
PowerSecure. The primary elements of PowerSecure's distributed generation
products and services include project design and engineering, negotiation with
utilities to establish tariff structures and power interconnects, generator
acquisition and installation, process control and switchgear design and
installation, and ongoing project monitoring and servicing. PowerSecure markets
its distributed generation products and services directly to large end-users of
electricity and through outsourcing partnerships with utilities. Through
September 30, 2004, the vast majority of PowerSecure's revenues have been
generated from sales of distributed generation systems on a "turn-key" basis,
where the customer purchases the systems from PowerSecure. PowerSecure has also
generated a small portion of its revenues from "company-owned" distributed
generation assets that are leased to customers on a long-term basis.
22
The operations of our automated data collection and telemetry segment are
conducted by Metretek Florida. Metretek Florida's manufactured products fall
into the following categories: field devices, including data collection products
and electronic gas flow computers; data collection software products (such as
InvisiConnect(TM), DC2000 and PowerSpring); and communications solutions that
can use public networks operated by commercial wireless carriers to provide real
time IP-based wireless internet connectivity, traditional cellular radio, 900
MHz unlicensed radio or traditional wire-line phone service to provide
connectivity between the field devices and the data collection software
products. Metretek Florida also provides data collection, M2M telemetry
connectivity and post-sale support services for its manufactured products and
turn-key solutions. In June 2002, Metretek Florida formed MCM to conduct and
expand its PCB contract manufacturing operations. During the third quarter of
2004, our Board of Directors approved a plan to discontinue the business of MCM
and sell all of its manufacturing assets.
We evaluate the performance of our operating segments based on operating
income (loss) before taxes, nonrecurring items and interest income and expense.
Other revenues and profit (loss) amounts in the table above include corporate
related items, equity income in an unconsolidated affiliate, results of
insignificant operations, and income and expense including non-recurring charges
not allocated to its operating segments. Intersegment sales are not significant.
During the third quarter of 2004, our Board of Directors approved a plan
to discontinue the business of MCM and sell all of its manufacturing assets. The
operations of the discontinued MCM disposal group have been reclassified to
discontinued operations for all periods presented in our consolidated statements
of operations. The following discussion regarding revenues and costs and
expenses for the third quarter 2004 compared to third quarter 2003 and the nine
month period 2004 compared to nine month period 2003 excludes revenues and costs
and expenses of the discontinued MCM operations.
THIRD QUARTER 2004 COMPARED TO THIRD QUARTER 2003
Revenues. Our revenues are derived almost entirely from the sales of
products and services by our subsidiaries. Our consolidated revenues for the
third quarter 2004 decreased $2,353,000, or 20%, compared to the third quarter
2003. The decrease was due principally to decreases in revenues by Metretek
Florida and PowerSecure, partially offset by an increase in revenues by Southern
Flow as well as an increase in equity income from our investment in MM 1995-2.
The 70% decrease in Metretek Florida's revenues during the third quarter
2004 compared to the third quarter 2003 was almost entirely attributable to a
$1,614,000 decrease in domestic sales of field devices, data collection software
products, and communications solutions products. The decrease in domestic sales
of field devices, data collection software products, and communications
solutions products was due primarily to sales related to two significant
projects in the third quarter 2003, which resulted in the recognition of
$1,696,000 in sales during that quarter. There were no comparable projects in
the third quarter 2004. As discussed below under "Quarterly Fluctuations",
Metretek Florida's revenues have fluctuated significantly in the past and are
expected to continue to fluctuate significantly in the future.
The 17% decrease in PowerSecure's revenues during the third quarter 2004
compared to
23
the third quarter 2003 was due to a decrease of $1,784,000 in distributed
generation turnkey project sales and services partially offset by an increase of
$517,000 in switchgear project sales and an increase of $214,000 in revenues
from company-owned projects and service related revenues. The decrease in
PowerSecure's distributed generation turnkey project sales and services is due
to increased lead-time requirements on key components and equipment; a reduction
in size of its projects; and quarterly fluctuations in the timing of its
projects. Overall, PowerSecure had 78 turnkey distributed generation and
switchgear projects completed or in process during the third quarter 2004
compared to 22 projects completed or in process during the third quarter 2003.
PowerSecure's average revenue per project for completed and in-process turnkey
projects was $61,000 during the third quarter 2004 compared to $276,000 during
the third quarter 2003. PowerSecure's completed or in process turnkey projects
during the third quarter 2004 included 31 switchgear projects compared to 2
switchgear projects during the third quarter 2003. PowerSecure's switchgear
projects are typically smaller than distributed generation projects, but
generally yield higher profit margins compared to distributed generation
projects. PowerSecure's third quarter 2004 revenues also included $312,000 of
company owned project and service related revenues, as compared to $98,000
during the third quarter 2003. As discussed below under "Quarterly
Fluctuations", PowerSecure's revenues are influenced by the number, size and
timing of various projects and have fluctuated significantly in the past and are
expected to continue to fluctuate significantly in the future.
Southern Flow's revenues increased by 10% during the third quarter 2004,
as compared to the third quarter 2003. This increase in Southern Flow's revenues
was primarily attributable to a generally improved market for its services due
principally to a higher level of natural gas wellhead prices.
Other revenues increased $243,000 during the third quarter 2004, as
compared to the third quarter 2003. This increase was comprised principally of
an increase in equity income earned from our unconsolidated investment in MM
1995-2, that operates three water processing and deep injection facilities in
northeastern Colorado. The increase was due to higher levels of natural gas
production activity in its operating area as well as the additional equity
interests that we acquired in the first quarter of 2004.
Costs and Expenses. The following table sets forth our costs and expenses
from continuing operations during the periods indicated:
24
QUARTER-OVER-QUARTER
QUARTER ENDED SEPTEMBER 30, DIFFERENCE
--------------------------- ----------------------
2004 2003 $ %
--------- ----------- ---------- -------
(IN THOUSANDS)
COSTS AND EXPENSES:
Costs of Sales and Services
Southern Flow $ 2,366 $ 2,184 $ 182 8%
PowerSecure 3,809 4,893 (1,084) -22%
Metretek Florida 391 1,858 (1,467) -79%
------- ------- -------
Total 6,566 8,935 (2,369) -27%
General and administrative 1,675 1,332 343 26%
Selling, marketing and service 483 404 79 20%
Depreciation and amortization 142 130 12 9%
Reserarch and development 172 181 (9) -5%
Interest, finance charges and other 176 62 114 184%
Income taxes 12 12 - 0%
Costs of sales and services include materials, personnel and related
overhead costs incurred to manufacture products and provide services. The 27%
decrease in cost of sales and services for the third quarter 2004, compared to
the third quarter 2003, was attributable to reduced sales activity at Metretek
Florida and at PowerSecure.
The 8% increase in Southern Flow's costs of sales and services in the
third quarter 2004 reflects the 10% increase in its revenues. Southern Flow's
gross profit margin was 26.4% for the third quarter 2004, compared to 25.3%
during the third quarter 2003. The improved gross profit margin reflects
generally improved market conditions.
The 22% decrease in PowerSecure's costs of sales and services in the third
quarter 2004 is a combined result of the 17% decrease in PowerSecure's revenues,
cost efficiencies in project installation and construction, and a higher
percentage of revenues from switchgear projects, company-owned projects, and
professional service revenues, with higher associated profit margins, in the
third quarter 2004 compared to the third quarter 2003. As a result,
PowerSecure's gross profit margin increased to 25.4% during the third quarter
2004, as compared to 20.6% during the third quarter 2003.
The 79% decrease in Metretek Florida's costs of sales and services in the
third quarter 2004 was likewise a direct result of the 70% decrease in Metretek
Florida's revenues. Metretek Florida's gross profit margin increased to 50.5%
for the third quarter 2004, compared to 29.3% for the third quarter 2003. The
primary cause of this increase in Metretek Florida's gross profit margin was a
change in the mix of products sold in the third quarter 2004 compared to the
third quarter 2003.
General and administrative expenses include personnel and related overhead
costs for the support and administrative functions. The 26% increase in general
and administrative expenses in the third quarter 2004, as compared to the third
quarter 2003, was primarily due to an increase in corporate costs and an
increase in expenses associated with managing our unconsolidated investment MM
1995-2. The increase in corporate costs include additional personnel costs,
director expenses, insurance costs, and professional expenses associated with
the Company's investor awareness program and costs incurred in connection with
analyzing and documenting our internal accounting control systems as required by
Sarbanes Oxley.
25
Selling, marketing and service expenses consist of personnel and related
overhead costs, including commissions for sales and marketing activities,
together with advertising and promotion costs. The 20% increase in selling,
marketing and service expenses in the third quarter 2004, as compared to the
third quarter 2003, was due entirely to increased personnel, commission costs,
and business development expenses associated with the development and growth of
the business of PowerSecure during the third quarter 2004.
Depreciation and amortization expenses include the depreciation of
property, plant and equipment and the amortization of certain intangible assets
including capitalized software development costs and other intangible assets
that do not have indefinite useful lives. The 9% increase in depreciation and
amortization expenses in the third quarter 2004, as compared to the third
quarter 2003, primarily reflects an increase in depreciation of PowerSecure's
company-owned distributed generation equipment placed in service during the
third quarter 2004.
Research and development expenses, all of which relate to activities at
Metretek Florida, include payments to third parties, wages and related expenses
for personnel, materials costs and related overhead costs related to product and
service development, enhancements, upgrades, testing and quality assurance. The
5% decrease in research and development expenses in the third quarter 2004, as
compared to the third quarter 2003, primarily reflects a reduction in personnel
and associated costs at Metretek Florida.
Interest, finance charges and other expenses include interest and finance
charges on our Credit Facility and a note payable issued in connection with
settlement of our Class Action litigation as well as interest and finance
charges on equipment and company-owned project loans and an investment loan. The
184% increase in interest, finance charges and other expenses in the third
quarter 2004, as compared to the third quarter 2003, reflects interest on the
$3,000,000 Class Action settlement note on which we commenced repayment June 30,
2004; additional bank finance charges and interest on borrowings related to
PowerSecure's line of credit, which commenced in September 2003; as well as
additional interest costs related to two PowerSecure company-owned project loans
and the term loan used to finance our additional equity interest in our
unconsolidated affiliate, all of which commenced in 2004.
Income tax expenses include state income taxes in various state
jurisdictions in which we have taxable activities. We incur no federal income
tax expense because of our consolidated net operating losses. The estimated
state income tax expense during the third quarter 2004 was unchanged from our
estimate of state income tax expense during the third quarter 2003.
NINE MONTH PERIOD 2004 COMPARED TO NINE MONTH PERIOD 2003
Revenues. Our consolidated revenues for the nine month period 2004
decreased $2,334,000, or 8%, compared to the nine month period 2003. The
decrease was due a decrease in revenues by Metretek Florida. This revenue
decrease was partially offset by increases in revenues by Southern Flow and by
PowerSecure as well as an increase in equity income from our investment in an
unconsolidated affiliate.
Metretek Florida's revenues decreased $4,029,000, or 63%, during the nine
month period 2004 compared to the nine month period 2003, consisting of a
decrease in domestic sales of
26
$3,647,000, together with a decrease in international sales of $382,000. The
decrease in Metretek Florida's domestic sales of field devices, data collection
software products, and communications solutions products was due to sales
related to two significant projects in the nine month period 2003, which
resulted in the recognition of approximately $4,258,000 in sales. There were no
comparable projects in the nine month period 2004.
Southern Flow's revenues increased $798,000, or 9%, during the nine month
period 2004, as compared to the nine month period 2003. The increase in Southern
Flow's revenues was primarily attributable to a generally improved market for
its services due principally to a higher level of natural gas prices.
PowerSecure's revenues increased $75,000 during the nine month period 2004
compared to the nine month period 2003. The slight increase in PowerSecure's
revenues during the nine month period 2004 compared to the nine month period
2003 was due to the net effects of a decrease of $2,146,000 in distributed
generation turnkey project sales and services offset by an increase of
$1,560,000 in switchgear project sales and an increase of $661,000 in revenues
from company-owned projects and service related revenues. The decrease in
PowerSecure's distributed generation turnkey project sales and services is due
to increased lead-time requirements on key components and equipment; a reduction
in size of its projects; and quarterly fluctuations in the timing of its
projects. Overall, PowerSecure had 105 turnkey distributed generation and
switchgear projects completed or in process during the nine month period 2004
compared to 48 projects completed or in process during the nine month period
2003. PowerSecure's average revenue per project for completed and in-process
turnkey projects was $122,000 during the nine month period 2004 compared to
$279,000 during the nine month period 2003. PowerSecure's completed or in
process turnkey projects during the nine month period 2004 included 37
switchgear projects compared to 3 switchgear projects during the nine month
period 2003. PowerSecure's switchgear projects are typically smaller than
distributed generation projects, but generally yield higher profit margins
compared to distributed generation projects. PowerSecure's nine month period
2004 revenues also included $859,000 of company owned project and service
related revenues, as compared to $198,000 during the nine month period 2003. As
discussed below under "Quarterly Fluctuations", PowerSecure's revenues are
influenced by the number, size and timing of various projects and have
fluctuated significantly in the past and are expected to continue to fluctuate
significantly in the future.
Other revenues increased $821,000 during the nine month period 2004, as
compared to the nine month period 2003. This increase was comprised principally
of an increase in equity income earned from our unconsolidated investment in MM
1995-2 that operates three water processing and deep injection facilities in
northeastern Colorado, The increase is due to higher levels of natural gas
production activity in its operating area as well as the additional equity
interests that we acquired in the first quarter of 2004.
Costs and Expenses. The following table sets forth our costs and expenses
during the periods indicated:
27
PERIOD-OVER-PERIOD
NINE MONTHS ENDED SEPTEMBER 30, DIFFERENCE
------------------------------- -------------------
2004 2003 $ %
--------- ------- ------- -------
(IN THOUSANDS)
COSTS AND EXPENSES:
Costs of Sales and Services
Southern Flow $ 7,071 $ 6,667 $ 404 6%
PowerSecure 9,925 10,479 (554) -5%
Metretek Florida 1,171 4,216 (3,045) -72%
------- ------- -------
Total 18,167 21,362 (3,195) -15%
General and administrative 4,859 4,377 482 11%
Selling, marketing and service 1,493 1,079 414 38%
Depreciation and amortization 406 384 22 6%
Reserarch and development 501 471 30 6%
Interest, finance charges and other 344 211 133 63%
Income taxes 36 45 (9) -20%
The overall 15% decrease in cost of sales and services for the nine month
period 2004, compared to the nine month period 2003, was attributable almost
entirely to decreased activity at Metretek Florida.
The 6% increase in Southern Flow's costs of sales and services in the nine
month period 2004 reflects the 9% increase in its revenues. Southern Flow's
gross profit margin was 25.9% for the nine month period 2004, compared to 23.8%
during the nine month period 2003. The improved gross profit margin reflects
generally improved market conditions.
The 5% decrease in PowerSecure's costs of sales and services in the nine
month period 2004 is a combined result of the slight increase in PowerSecure's
revenues, cost efficiencies in project installation and construction, and a
higher percentage of revenues from switchgear projects, company-owned projects,
and professional service revenues, with higher associated profit margins, in the
nine month period 2004 compared to the nine month period 2003. As a result,
PowerSecure's gross profit margin increased to 27.3% during the nine month
period 2004, as compared to 22.8% during the nine month period 2003.
The 72% decrease in Metretek Florida's costs of sales and services in the
nine month period 2004 was a direct result of the 63% decrease in Metretek
Florida's revenues. Metretek Florida's gross profit margin increased to 51.0%
for the nine month period 2004, compared to 34.3% for the nine month period
2003. The primary cause of this increase in Metretek Florida's gross profit
margin was a change in the mix of products sold, represented by a significant
decrease in lower margin sales of OEM products to a single customer in the nine
month period 2003 for which there were no comparable sales during the nine month
period 2004.
The 11% increase in general and administrative expenses in the nine month
period 2004, as compared to the nine month period 2003, was primarily due to
increases in corporate costs and increases in overhead costs associated with the
development and growth of PowerSecure's business necessitating an expansion of
PowerSecure's workforce. The increase in corporate costs include additional
personnel costs, director expenses, insurance costs, and professional expenses
associated with our investor awareness program and costs incurred in connection
with analyzing and documenting our internal accounting control systems as
required by Sarbanes-Oxley. These general and administrative expense increases
were partially offset by a
28
reduction in legal expenses associated with the Class Action lawsuit during the
nine month period 2004 compared to the nine month period 2003.
The 38% increase in selling, marketing and service expenses in the nine
month period 2004, as compared to the nine month period 2003, was due entirely
to increased personnel, commission costs, and business development expenses
associated with the development and growth of the business of PowerSecure during
the nine month period 2004.
The 6% increase in depreciation and amortization expenses in the nine
month period 2004, as compared to the nine month period 2003, primarily reflects
an increase in depreciable equipment at PowerSecure, including depreciation of
two company-owned projects placed in service during 2004, as well as
amortization of the premium paid for the Company's additional investment in its
unconsolidated affiliate early in 2004.
The 6% increase in research and development expenses in the nine month
period 2004, as compared to the nine month period 2003, primarily reflects
additional personnel and associated costs at Metretek Florida that were
specifically directed toward further development of our new InvisiConnect suite
of M2M products.
The 63% increase in interest, finance charges and other expenses in the
nine month period 2004, as compared to the nine month period 2003, reflects
interest on the $3,000,000 Class Action settlement note on which we commenced
repayment June 30, 2004; additional bank finance charges and interest on
borrowings related to PowerSecure's line of credit, which commenced in September
2003; as well as additional interest costs related to two PowerSecure
company-owned project loans and the term loan used to finance our additional
equity interest in our unconsolidated affiliate, all of which commenced in 2004.
Income tax expenses include state income taxes in various state
jurisdictions in which we have taxable activities. We incur no federal income
tax expense because of our consolidated net operating losses. The 20% decrease
in income taxes in the nine month period 2004, as compared to the nine month
period 2003, was entirely due to reduced state income tax expense accrued by
Southern Flow in Louisiana, Oklahoma, and Mississippi.
QUARTERLY FLUCTUATIONS
Our quarterly revenues, expenses, margins, net income and other operating
results have fluctuated significantly from quarter-to-quarter, period-to-period
and year-to-year in the past and are expected to continue to fluctuate
significantly in the future due to a variety of factors, many of which are
outside of our control. These factors include, without limitation, the
following:
- the size, timing and terms of sales and orders, including customers
delaying, deferring or canceling purchase orders, or making smaller
purchases than expected;
- our ability to obtain adequate supplies of key components and
materials for our products on a timely and cost-effective basis;
- our ability to implement our business plans and strategies and the
timing of such implementation;
- the timing, pricing and market acceptance of our new products and
services such as
29
Metretek Florida's new InvisiConnect offering;
- the pace of development of our new businesses and the growth of
their markets;
- changes in our pricing policies and those of our competitors;
- variations in the length of our product and service implementation
process;
- changes in the mix of products and services having differing
margins;
- changes in the mix of international and domestic revenues;
- the life cycles of our products and services;
- budgeting cycles of utilities and other major customers;
- general economic and political conditions;
- the resolution of pending and any future litigation and claims;
- economic conditions in the energy industry, especially in the
natural gas and electricity sectors;
- the effects of governmental regulations and regulatory changes in
our markets;
- changes in the prices charged by our suppliers;
- our ability to make and obtain the expected benefits from
acquisitions of technology or businesses, and the costs related to
such acquisitions;
- changes in our operating expenses; and
- the development and maintenance of business relationships with
strategic partners.
Because we have little or no control over most of these factors, our
operating results are difficult to predict. Any substantial adverse change in
any of these factors could negatively affect our business and results of
operations.
Our revenues and other operating results are heavily dependant upon the
volume and timing of customer orders and payments and the date of product
delivery. The timing of large individual sales is difficult for us to predict.
Because our operating expenses are based on anticipated revenues and because a
high percentage of these are relatively fixed, a shortfall or delay in
recognizing revenue could cause our operating results to vary significantly from
quarter-to-quarter and could result in significant operating losses in any
particular quarter. If our revenues fall below our expectations in any
particular quarter, we may not be able to reduce our expenses rapidly in
response to the shortfall, which could result in us suffering significant
operating losses in that quarter.
Over PowerSecure's three year operating history, its revenues, costs,
gross margins, cash flow, net income and other operating results have varied
from quarter-to-quarter, period-to-period and year-to-year, for a number of
reasons, including the factors mentioned above, and we expect such fluctuations
to continue in the future. PowerSecure's revenues depend in large part upon the
timing and the size of projects awarded to PowerSecure, and to a lesser extent
the timing of the completion of those projects. In addition, distributed
generation is an emerging market and PowerSecure is a new competitor in the
market, so there is no established customer base on which to rely or certainty
as to future contracts. Another factor that could cause material fluctuations in
PowerSecure's quarterly results is the amount of recurring, as opposed to
non-
30
recurring, sources of revenue. Through September 30, 2004, the majority of
PowerSecure's revenues constituted non-recurring revenues.
Metretek Florida has historically derived most of its revenues from sales
of its products and services to the utility industry. Metretek Florida has
experienced variability of operating results on both an annual and a quarterly
basis due primarily to utility purchasing patterns and delays of purchasing
decisions as a result of mergers and acquisitions in the utility industry and
changes or potential changes to the federal and state regulatory frameworks
within which the utility industry operates. The utility industry, both domestic
and foreign, is generally characterized by long budgeting, purchasing and
regulatory process cycles that can take up to several years to complete.
Due to all of these factors and the other risks discussed in this Report
and in our Annual Report on Form 10-K for the fiscal year ended December 31,
2003, you should not rely on quarter-to-quarter, period-to-period, or
year-to-year comparisons of our results of operations as an indication of our
future performance. Quarterly, period or annual comparisons of our operating
results are not necessarily meaningful or indicative of future performance.
LIQUIDITY AND CAPITAL RESOURCES
Capital Requirements. We require capital primarily to finance our:
- operations;
- inventory;
- accounts receivable;
- research and development efforts;
- property and equipment acquisitions;
- software development;
- debt service requirements;
- liabilities of our discontinued MCM operations; and
- business and technology acquisitions and other growth transactions.
In addition, the terms of our Series B Preferred Stock will require us to
redeem all shares of our Series B Preferred Stock that remain outstanding on
December 9, 2004. See " -- Preferred Stock Redemption" below.
Cash Flow. We have historically financed our operations and growth
primarily through a combination of cash on hand, cash generated from operations,
borrowings under credit facilities, borrowings on company-owned projects,
borrowings on a term loan to fund our acquisition of additional interests in our
unconsolidated affiliate, and proceeds from private and public sales of equity.
As of September 30, 2004, we had working capital of $10,005,000, including
$7,738,000 in cash and cash equivalents, compared to working capital of
$5,964,000 on December 31, 2003, which included $2,102,000 in cash and cash
equivalents.
Net cash used in operating activities was $1,515,000 in the nine month
period 2004, consisting of approximately $1,222,000 of cash provided by
continuing operations, before changes in assets and liabilities, approximately
$1,761,000 of cash used by changes in working
31
capital and other asset and liability accounts, and approximately $976,000 of
cash used by discontinued operations of MCM. This compares to net cash provided
by operating activities of $1,037,000 in the nine month period 2003, consisting
of approximately $1,610,000 of cash provided by continuing operations, before
changes in assets and liabilities, approximately $43,000 of cash used by changes
in working capital and other asset and liability accounts, and approximately
$530,000 of cash used by discontinued operations of MCM.
Net cash used in investing activities was $4,029,000 in the nine month
period 2004, as compared to cash used in investing activities of $255,000 in the
nine month period 2003. During the nine month period 2004, we purchased
additional equity interests in our unconsolidated affiliate for $956,000 and
used $2,065,000 to purchase equipment items, including $1,724,000 used to
purchase equipment for three company-owned distributed generation facilities
(one of which is still under construction at September 30, 2004). Net cash used
in investing activities during the nine month period 2004 also included the
purchase of a $1,000,000 restricted certificate of deposit in connection with
the waiver and amendment of certain loan covenant compliance requirements for
Metretek Florida. The net cash used in investing activities during the nine
month period 2003 was attributable to the purchase of equipment at PowerSecure
and Southern Flow.
Net cash provided by financing activities was $11,180,000 in the nine
month period 2004, compared to net cash provided by financing activities of
$483,000 in the nine month period 2003. The majority of the net cash provided by
financing activities in the nine month period 2004 was attributable to
$9,831,000 net proceeds from a Private Placement of our Common Stock in May
2004, $1,213,000 proceeds from two loans to fund the purchase of equipment for
two company-owned distributed generations facilities, and $961,000 proceeds from
a bank term loan used to finance the acquisition of the additional equity
interests in our unconsolidated affiliate. These cash proceeds were partially
offset by net payments on our credit facility, payments on long-term notes
payable and payments on capital lease obligations. The net cash provided by
financing activities in the nine month period 2003 represented net borrowings on
our line of credit and proceeds from an equipment loan which were partially
offset by payments on our equipment loans and payments on capital lease
obligations.
During the remainder of 2004, we plan to continue our research and
development efforts to enhance our existing products and services and to develop
new products and services. Our research and development expenses totaled
$501,000 during the nine month period 2004. We anticipate that our research and
development expenses in fiscal 2004 will total approximately $690,000, virtually
all of which will be directed to Metretek Florida's business.
Our capital expenditures during the nine month period 2004 were
approximately $2,078,000, including $1,724,000 of capital expenditures for three
PowerSecure "company-owned" distributed generation projects, one of which is
still under construction at September 30, 2004. We anticipate capital
expenditures in fiscal 2004 of approximately $2,400,000, including $2.0 million
of capital invested in "company-owned" distributed generation projects. The
remaining $400,000 in capital expenditures will benefit all of our key
subsidiaries. We also acquired approximately $526,000 of equipment through
capital leases in the nine month period 2004, primarily for manufacturing
equipment for MCM. PowerSecure's "company-owned" projects are anticipated to be
funded primarily through long-term financing arrangements provided through
PowerSecure's major suppliers. However, we cannot provide any assurance
32
that those financing arrangements will be sufficient to allow PowerSecure to
meet our objectives for its growth and development without internal funding or
will be on favorable terms.
Project Loans. Financing in the amount of $1,213,000 for two PowerSecure
company-owned projects has been provided through Caterpillar Financial Services
Corporation. The project loans are secured by the equipment purchased from
Caterpillar as well as the revenues generated by the projects. The project loans
provide for 60 monthly payments of principal and interest (at a rate of 6.75%)
in the aggregate amount of approximately $24,000 per month. We expect that
monthly payments on the project loans will be funded through payments from
customers utilizing the distributed generation equipment on their sites.
Working Capital Credit Facility. We have a $3 million credit facility
("Credit Facility") with Wells Fargo Business Credit, Inc. ("Wells Fargo") that
matures in September 2006. The Credit Facility restricts our ability to sell or
finance our subsidiaries, without Wells Fargo's consent. The Credit Facility,
which constitutes our primary credit agreement, is used primarily to fund the
operations and growth of our subsidiaries, especially PowerSecure and MCM.
The Credit Facility consists of separate credit agreements between Wells
Fargo and each of Southern Flow, Metretek Florida and PowerSecure, as borrowers.
At September 30, 2004, we had an aggregate borrowing base of $3,000,000 under
the Credit Facility, of which $2,069,000 had been borrowed, leaving $931,000
available to borrow.
The Credit Facility contains minimum interest charges and unused credit
line and termination fees. The obligations of each of the borrowers have been
guaranteed by Metretek Technologies, the other borrowers and MCM. These
guarantees have been secured by guaranty agreements and security agreements
entered into by the guarantors. The security agreements grant to Wells Fargo a
first priority security interest in virtually all of the assets of each of the
guarantors. The Credit Facility is further secured by a first priority security
interest in virtually all of the assets of each borrower. Each credit agreement
contains standard affirmative and negative covenants by the borrower, including
financial covenants and other standard covenants related to operations,
including limitations on future indebtedness and the payment of dividends the
sale of assets and other corporate transactions, without Wells Fargo's consent.
The Credit Facility between Wells Fargo and Southern Flow was amended in the
first quarter 2004 to provide for new financial covenants applicable to certain
financial results of Southern Flow during fiscal 2004.
The Credit Facility between Wells Fargo and Metretek Florida was amended
during the third quarter 2004 to establish less restrictive financial covenants
for the remainder of fiscal 2004. As a condition to the waiver of an existing
default and the amendment to the credit agreement, we agreed to purchase a
$1,000,000 certificate of deposit (the "Restricted Cash Investment"), in which
Wells Fargo has been granted a security interest. The Restricted Cash Investment
is held in the Company's name in a depository account at Wells Fargo Bank,
National Association and it matures on December 4, 2004, subject to renewal at
the instruction of Wells Fargo. The Restricted Cash Investment is carried at
cost, which approximates fair value, and is restricted as to withdrawal or use
by the Company, except as may be permitted by Wells Fargo. The Restricted Cash
Investment has been classified as a non-current asset in our consolidated
balance sheet at September 30, 2004.
33
During and at the end of the third quarter 2004, Metretek Florida was not
in compliance with the minimum tangible net worth and the minimum net income
financial covenants in the Metretek Florida Credit Facility, due primarily to
the financial results of the contract manufacturing business that has been
discontinued. However, Wells Fargo has waived these financial covenants, and
Metretek Florida intends, subject to Wells Fargo's consent, to establish new
financial covenants for 2004 and 2005 reflecting Metretek Florida's projected
financial results and condition resulting from its operations without the
contract manufacturing business.
Preferred Stock Redemption. Unless the holders of our Series B Preferred
Stock elect to convert their Preferred Stock to Common Stock, the terms of our
Series B Preferred Stock will require us to redeem all shares of our Series B
Preferred Stock that remain outstanding on December 9, 2004 at a redemption
price equal to the liquidation preference of $1,000 per share plus accumulated
and unpaid dividends. The Series B Preferred Stock is convertible, at the option
of the holders thereof, into Common Stock at the conversion rate of
approximately $3.06 per share of Common Stock. While the conversion of shares of
Series B Preferred Stock into shares of Common Stock prior to the redemption
date will reduce our redemption obligation, we cannot determine at this time how
many shares of Series B Preferred Stock will ultimately be converted. As of
September 30, 2004, the total redemption obligation was approximately $6.1
million.
Term Loan. During the first quarter 2004, we formed Conquest Acquisition
Company LLC, a majority-owned subsidiary, for the purpose of acquiring $956,000
of additional equity interests in our unconsolidated affiliate, MM1995-2.
Financing of the acquired equity interests was provided by a term loan from a
commercial bank. The term loan is secured by our interests in MM1995-2, and we
provided a guaranty of $625,000 of the loan. The term loan provides for 60
monthly payments of principal and interest (at a rate of 5.08%) in the amount of
approximately $18,500 per month. We expect that monthly payments on the term
loan will be funded through cash distributions from MM1995-2.
Heins Stipulation. On June 11, 2004, the Denver Court granted final
approval of the Heins Settlement, which became effective on July 26, 2004. The
Heins Settlement fully resolves all claims by the Class Action Plaintiff against
us and the other Metretek Defendants in the Heins Class Action. The Heins
Settlement includes payment of $2,375,000 from the proceeds of our directors'
and officers' insurance policy. We have paid $375,000 for use in the Heins
Settlement, and we have issued the Heins Settlement Note payable to the Heins
Settlement Fund in the amount of $3.0 million, and commenced payments thereunder
on June 30, 2004. The Heins Settlement Note bears interest at the rate of prime
plus three percent (prime + 3%), payable in 16 quarterly installments, each of
$187,500 principal plus accrued interest, and is guaranteed by the 1997 Trust
and all of our subsidiaries. This litigation and settlement are more fully
discussed, and the capitalized terms used in this paragraph are defined, in the
notes to our consolidated financial statements. The loss resulting from the
amounts due on the Heins Settlement, other than interest on the Heins Settlement
Note, was recorded in fiscal 2002.
Contractual Obligations and Commercial Commitments. We incur various
contractual obligations and commercial commitments in our normal course of
business. We lease certain office space, operating facilities and equipment
under long-term lease agreements. We are obligated to make future payments under
the Credit Facility, project loans, term loan, and a mortgage loan, and to
redeem our Series B Preferred Stock in December 2004. In addition, we
34
have obligations related to our discontinued MCM operations. Finally, we are
required to make certain payments under the terms of a class action litigation
settlement, payments of which commenced June 30, 2004. The following table sets
forth our contractual obligations and commercial commitments as of September 30,
2004:
PAYMENTS DUE BY PERIOD (1)
----------------------------------------------------------------------------
REMAINDER OF YEARS YEARS AFTER
TOTAL 2004 2005-2006 2007-2008 2008
----------- ------------ ----------- ----------- ---------
CONTRACTUAL OBLIGATIONS
Credit Facility (2) $ 2,069,000 $ - $ 2,069,000 $ - $ -
Capital Lease Obligations 11,000 1,000 7,000 3,000 -
Operating Leases 1,652,000 195,000 899,000 558,000 -
Series B Preferred Stock (3) 6,112,000 6,112,000 - - -
Heins Settlement 2,625,000 188,000 1,500,000 937,000 -
Term Loan 883,000 39,000 375,000 414,000 55,000
Project Loans 1,172,000 52,000 449,000 515,000 156,000
Discontinued operations (4) 1,000,000 142,000 637,000 215,000 6,000
Other Long-Term
Obligations 361,000 117,000 34,000 210,000 -
----------- ----------- ----------- ----------- ---------
Total $15,885,000 $ 6,846,000 $ 5,970,000 $ 2,852,000 $ 217,000
=========== =========== =========== =========== =========
---------------
(1) Does not include interest that may become due and payable on such
obligations in any future period.
(2) Total repayments are based upon borrowings outstanding as of
September 30, 2004, not projected borrowings under the Credit
Facility.
(3) Based upon accrued and unpaid dividends as of September 30, 2004,
although the redemption date is December 9, 2004. The Series B
Preferred Stock is convertible, at the option of the holders
thereof, into Common Stock at the conversion rate of approximately
$3.06 per share of Common Stock, but the amount set forth in the
table does not give effect to any shares of Series B Preferred Stock
that may be converted prior to the redemption date.
(4) Represents accrued termination and shutdown costs as well as
remaining obligations under leases of our discontinued MCM
operations.
Off-Balance Sheet Arrangements. During the nine month period 2004, we did
not engage in any material off-balance sheet activities nor have any
relationships or arrangements with unconsolidated entities established for the
purpose of facilitating off-balance sheet arrangements or other contractually
narrow or limited purposes. Further, we have not guaranteed any obligations of
unconsolidated entities nor do we have any commitment or intent to provide
additional funding to any such entities.
Liquidity. Based upon our plans and assumptions as of the date of this
Report, we currently believe that our capital resources, including our cash and
cash equivalents, amounts available under our Credit Facility, along with funds
expected to be generated from our operations, will be sufficient to meet our
anticipated cash needs during the next 12 months, including our working capital
needs, capital requirements including the redemption of the Series B Preferred
Stock and debt service commitments, other than the development of the
company-owned business of PowerSecure. However, any projections of future cash
needs and cash flows are subject to substantial risks and uncertainties. See
"Cautionary Note Regarding Forward-Looking Statements" below. We cannot provide
any assurance that our actual cash requirements
35
will not be greater than we currently expect or that these sources of liquidity
will be available when needed.
For the following reasons, we may require additional funds, beyond our
currently anticipated resources, to support our working capital requirements,
our operations or our other cash flow needs:
- While we have reorganized our Metretek Florida business with the
goal of making its cash flow positive, the operations of Metretek
Florida, and the discontinued operations of its MCM subsidiary, may
require us to fund future operating losses or costs of business
expansion.
- We expect that the costs of financing the continuing and anticipated
development and growth of PowerSecure, including the equipment,
labor and other capital costs of significant turn-key projects that
arise from time to time depending on backlog and customer
requirements, will, and that similar costs that would be associated
with developing any future distributed generation systems for its
company-owned business package, would, require us to raise
significant additional funds, beyond our current capital resources.
- From time to time as part of our business plan, we engage in
discussions regarding potential acquisitions of businesses and
technologies. Our ability to finance any acquisition in the future
will be dependent upon our ability to raise additional capital. As
of the date of this report, we have not entered into any binding
agreement or understanding committing us to any such acquisition,
but we regularly engage in discussions related to such acquisitions.
- We continually evaluate our opportunity to raise additional funds in
order to improve our financial position as well as our cash flow
requirements, and we may seek additional capital in order to take
advantage of such an opportunity or to meet changing cash flow
requirements.
- An adverse resolution to claims that may arise from time to time
against us could significantly increase our cash requirements beyond
our available capital resources.
- Unanticipated events, over which we have no control, could increase
our operating costs or decrease our ability to generate revenues
from product and service sales beyond our current expectations.
We may seek to raise any needed or desired additional capital from the
proceeds of public or private equity or debt offerings at the Metretek
Technologies level or at the subsidiary level or both, from asset or business
sales, from traditional credit financings or from other financing sources.
However, our ability to obtain additional capital when needed or desired will
depend on many factors, including general economic and market conditions, our
operating performance and investor sentiment, and thus cannot be assured. In
addition, depending on how it is structured, a financing could require the
consent of our current lender, of the holders of our Series B Preferred Stock or
of the investors in the Private Placement. Even if we are able to raise
additional capital,
36
the terms of any financings could be adverse to the interests of our
stockholders. For example, the terms of a debt financing could restrict our
ability to operate our business or to expand our operations, while the terms of
an equity financing, involving the issuance of capital stock or of securities
convertible into capital stock, could dilute the percentage ownership interests
of our stockholders, and the new capital stock or other new securities could
have rights, preferences or privileges senior to those of our current
stockholders. We cannot assure you that sufficient additional funds will be
available to us when needed or desired or that, if available, such funds can be
obtained on terms favorable to us and our stockholders and acceptable to those
parties who must consent to the financing. Our inability to obtain sufficient
additional capital on a timely basis on favorable terms when needed or desired
could have a material adverse effect on our business, financial condition and
results of operations.
RECENT ACCOUNTING PRONOUNCEMENTS
In October 2004, the FASB concluded that Statement of Financial Accounting
Standards No. 123R, "Share-Based Payment" ("FAS 123R"), which would require all
companies to measure compensation cost for all share-based payments (including
employee stock options) at fair value), would be effective for public companies
for interim or annual periods beginning after June 15, 2005. Note 1, "Summary of
Significant Accounting Policies--Stock-Based Compensation", sets forth the pro
forma effect on net income and earnings per share assuming the Company had
applied the fair value recognition provisions of FAS 123 for the periods
indicated.
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains "forward-looking statements"
within the meaning of and made under the safe harbor provisions of Section 27A
of the Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"). From time to time in the
future, we may make additional forward-looking statements in presentations, at
conferences, in press releases, in other reports and filings and otherwise.
Forward-looking statements are all statements other than statements of
historical facts, including statements that refer to plans, intentions,
objectives, goals, strategies, hopes, beliefs, projections, expectations or
other characterizations of future events or performance, and assumptions
underlying the foregoing. The words "may", "could", "should", "would", "will",
"project", "intend", "continue", "believe", "anticipate", "estimate",
"forecast", "expect", "plan", "potential", "opportunity" and "scheduled",
variations of such words, and other similar expressions are often, but not
always, used to identify forward-looking statements. Examples of forward-looking
statements include statements regarding, among other matters, our plans,
intentions, objectives, goals, strategies, beliefs, projections and expectations
about the following:
- our prospects, including our future revenues, expenses, net income,
margins, profitability, cash flow, liquidity, financial condition
and results of operations;
- our products and services, market position, market share, growth and
strategic relationships;
- our business plans, strategies, goals and objectives;
- market demand for and customer benefits attributable to our products
and services;
- industry trends and customer preferences;
37
- the nature and intensity of our competition, and our ability to
successfully compete in our market;
- the sufficiency of funds, from operations, available borrowings and
other capital resources, to meet our future working capital, capital
expenditure, debt service and business growth needs;
- pending or potential business acquisitions, combinations, sales,
alliances, relationships and other similar business transactions;
- our ability to successfully develop and operate our new businesses;
- the effects on our financial condition, results of operations and
cash flows of the resolution of pending or threatened litigation;
and
- future economic, business, market and regulatory conditions.
Any forward-looking statements we make are based on our current plans,
intentions, objectives, goals, strategies, hopes, beliefs, projections and
expectations, as well as assumptions made by and information currently available
to management. You are cautioned not to place undue reliance on any
forward-looking statements, any or all of which could turn out to be wrong.
Forward-looking statements are not guarantees of future performance or events,
but are subject to and qualified by substantial risks, uncertainties and other
factors, which are difficult to predict and are often beyond our control.
Forward-looking statements will be affected by assumptions we might make that do
not materialize or that prove to be incorrect and by known and unknown risks,
uncertainties and other factors that could cause actual results to differ
materially from those expressed, anticipated or implied by such forward-looking
statements. These risks, uncertainties and other factors include, but are not
limited to, the following:
- our history of losses and no assurance of future profitability;
- our ability to maintain a sufficient amount of capital and liquidity
to meet our operating and capital requirement and growth needs;
- our ability to successfully and timely develop, market and operate
PowerSecure's systems, including its products, services, and
technologies;
- the effects of pending and future litigation;
- our limited operating history in our PowerSecure business;
- the effects of changes in utility tariffs in the regions in which
PowerSecure sells its distributed generation systems;
- our ability to obtain adequate supplies of key components and
materials for our products on a timely and cost-effective basis;
- our ability to develop, on a profitable basis, Metretek Florida's
InvisiConnect business;
- our ability to recover value and receive proceeds from the
disposition of the assets of the discontinued MCM contract
manufacturing business;
- the complexity, uncertainty and time constraints associated with the
development and market acceptance of new product and service designs
and technologies;
- the effects of intense competition in our markets, including the
introduction of competitors' products, services and technologies and
our timely and successful response thereto, and our ability to
successfully compete in those markets;
- utility purchasing patterns and delays and potential changes to the
federal and state regulatory frameworks within which the utility
industry operates;
- fluctuations in our operating results, and the long and variable
sales cycles of many of our products and services;
38
- restrictions imposed on us and our ability to raise additional
capital by the terms of our Series B Preferred Stock, our Credit
Facility, and the Private Placement;
- the negative effect that dividends on our Series B Preferred Stock
have on our results of operations;
- the effect of rapid technologic changes on our ability to maintain
competitive products, services and technologies;
- our ability to attract, retain and motivate key management,
technical and other critical personnel;
- our ability to secure and maintain key contracts, business
relationships and alliances;
- our ability to make successful acquisitions and in the future to
successfully integrate and utilize any acquired product lines, key
employees and businesses;
- changes in the energy industry in general, and technological and
market changes in the natural gas and electricity industries in
particular;
- the impact and timing of the deregulation of the natural gas and
electricity markets;
- our ability to manage the anticipated growth of PowerSecure;
- the capital resources, technological requirements, and internal
business plans of the natural gas and electricity utilities
industry;
- general economic and business conditions, including downturns in
market conditions;
- effects of changes in product mix on our expected gross margins and
net income;
- risks inherent in international operations;
- risks associated with our management of private energy programs;
- the receipt, timing and size of future customer orders;
- unexpected events affecting our ability to obtain funds from
operations, debt or equity to finance operations, pay interest and
other obligations, and fund needed capital expenditures and other
investments;
- our ability to protect our technology, including our proprietary
information and our intellectual property rights;
- the effects of recent terrorist activities and military actions;
- the impact of current and future laws and government regulations
affecting the energy industry in general and the natural gas and
electricity industries in particular;
- the effect of changes in laws, regulations and financial accounting
standards; and
- other risks, uncertainties and other factors that are discussed in
this Report or that are discussed from time to time in our other
reports and documents we file with or furnish to the SEC and the
exhibits to such filings, including but not limited to our Annual
Report on Form 10-K for the fiscal year ended December 31, 2003.
Any forward-looking statements contained in this Report speak only as of
the date of this Report, and any other forward-looking statements we make from
time to time in the future speaks only as of the date it is made. We do not
intend, and we undertake no duty or obligation, to update or revise any
forward-looking statement for any reason, whether as a result of changes in our
expectations or the underlying assumptions, the receipt of new information,
occurrence of future or unanticipated events, circumstances or conditions or
otherwise.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to certain financial instrument market risks, primarily due
to changes in interest rates, which may adversely affect our financial
condition, results of operations and cash
39
flow. Our exposure to market risk for changes in interest rates relates
primarily to (i) income from our investments in short-term interest-bearing
marketable securities, the income from which is dependent upon the interest rate
of the securities held, and (ii) interest expenses attributable to its long-term
debt, including our Credit Facility, which is based on floating interest rates
as described in "Item 2. Management's Discussion and Analysis and Results of
Operations" above. Since substantially all of our revenues, expenses and capital
spending are transacted in U.S. dollars, we are not exposed to significant
foreign exchange risk. We do not believe that our exposure to commodity price
changes is material. We do not use derivative financial instruments to manage
exposure to interest rate changes, or for trading or other speculative purposes.
ITEM 4. CONTROLS AND PROCEDURES
Our Chief Executive Officer and our Chief Financial Officer evaluated our
disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e)
under the Securities Act of 1934, as amended (the "Exchange Act")) as of
September 30, 2004, the end of the period covered by this report. Based upon
that evaluation, our Chief Executive Officer and our Chief Financial Officer
have concluded that our disclosure controls and procedures were effective to
ensure that information required to be disclosed by us in the reports that we
file or submit under the Exchange Act is recorded, processed, summarized and
reported within the time periods specified in the Securities and Exchange
Commission's rules and forms.
When designing and evaluating controls and procedures, we make assumptions
about the likelihood of future events. At the same time, we make judgments about
the cost-benefit relationship of possible controls and procedures. We cannot
assure that this design will succeed in achieving its stated goals under all
potential future conditions. Similarly, we cannot assure that our evaluation of
controls will detect all control issues or instances of fraud, if any.
During the quarter ended September 30, 2004, no change in our internal
control over financial reporting (as defined in Rule 13a-15(f) under the
Exchange Act) occurred that has materially affected, or is reasonably likely to
materially affect, our internal control over financial reporting.
40
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
From time to time, we are involved in disputes and legal proceedings. For
a description of these legal proceedings, see Note 6 to our consolidated
financial statements, "Commitments and Contingencies," which is contained in
Part I of this Report and incorporated herein by this reference.
ITEM 2. CHANGES IN SECURITIES, USE OF PROCEEDS AND ISSUER PURCHASES OF EQUITY
SECURITIES
On July 8, 2004, two holders ("Preferred Stockholders") of outstanding
shares of our Series B Preferred Stock, par value $.01 per share ("Series B
Preferred Stock"), converted a total of 250 shares of Series B Preferred Stock,
including accrued and unpaid dividends thereon. Upon conversion, the converting
Preferred Stockholders received an aggregate of 120,040 shares of our Common
Stock, par value $.01 per share ("Common Stock"), including an aggregate of
3,906 shares of Common Stock (the "Additional Shares") intended to compensate
the converting Preferred Stockholders for dividends that they would have
received on the converted shares of Series B Preferred Stock between the date of
conversion and December 9, 2004, the mandatory redemption date of the Series B
Preferred Stock, plus warrants ("Warrants") to purchase an aggregate of 120,040
shares of Common Stock. The Warrants are exercisable on or after November 6,
2004 at an exercise price of $3.0571 per share of Common Stock and expire on
June 9, 2005. The exercise price of the Warrants is the same price as the
conversion price of the Series B Preferred Stock. The shares of Common Stock
issued in the conversion, other than the Additional Shares, may be resold under
a currently effective registration statement filed under the Securities Act of
1933, as amended (the "Securities Act").
On September 10, 2004, we entered into Stock Purchase Agreements
("Purchase Agreements") with the employee-shareholders of PowerSecure, Inc., a
Delaware corporation and a majority-owned subsidiary ("PowerSecure"). Upon
closing of the Purchase Agreements, we will issue 950,000 shares of its Common
Stock, par value $.01 per share ("Common Stock"), in exchange for the minority
13.9% interest in PowerSecure owned by the employee-shareholders of PowerSecure.
After the closing of the Purchase Agreements, we will own all of the issued and
outstanding shares of PowerSecure, and PowerSecure will become a wholly-owned
subsidiary. A total of 485,401 shares of Common Stock will be issued to Sidney
Hinton, the President of PowerSecure, on the same terms as the shares of Common
Stock are issued to the other PowerSecure employee-shareholders. The closing of
the purchase of the minority interest in PowerSecure is subject to a number of
conditions, including the receipt of a fairness opinion by an investment banking
firm and the approval of certain stockholders who received their shares in a
private placement in May 2004, as well as certain other customary closing
conditions.
The foregoing sales and issuances of Common Stock and Warrants were and
will be made by us in reliance upon the exemptions from registration provided
under Section 4(2) of the Securities Act, and Rule 506 of Regulation D under the
Securities Act. The offers and sales were and will be made to a limited number
of accredited investors as defined in Rule 501(a) under the Securities Act, in
the July issuance, and to a limited number of existing employees, in connection
41
with the Purchase Agreements; no general solicitation was made by us or any
person acting on our behalf; the securities were or will be sold subject to
transfer restrictions; and the certificates for those securities contained or
will contain an appropriate legend stating that they had not been registered
under the Securities Act and may not be offered or sold absent registration or
pursuant to an exemption therefrom.
ITEM 6. EXHIBITS
31.1 Certification of Chief Executive Officer pursuant to Section
302 of the Sarbanes-Oxley Act of 2002 and Rule 13a-14(a) under
the Securities Exchange Act of 1934, as amended.
31.2 Certification of Chief Financial Officer pursuant to Section
302 of the Sarbanes-Oxley Act of 2002 and Rule 13a-14(a) under
the Securities Exchange Act of 1934, as amended.
32.1 Certification of Chief Executive Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, and Rule 13a-14(b) under the
Securities Exchange Act of 1934, as amended
32.2 Certification of Chief Financial Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
42
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
METRETEK TECHNOLOGIES, INC.
Date: November 12, 2004 By: /s/ W. Phillip Marcum
----------------------------------
W. Phillip Marcum
President and Chief Executive Officer
Date: November 12, 2004 By: /s/ A. Bradley Gabbard
----------------------------------
A. Bradley Gabbard
Executive Vice President
and Chief Financial Officer
43