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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------------------
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 MARCH 31, 2003
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 May 1, 2003 there were 6,043,469 shares of the issuer's Common
Stock 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
--- ---
METRETEK TECHNOLOGIES, INC.
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2003
TABLE OF CONTENTS
Page
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Unaudited Consolidated Balance Sheets -
March 31, 2003 and December 31, 2002 3
Unaudited Consolidated Statements of Operations -
For the Three Months Ended March 31, 2003 and
March 31, 2002 5
Unaudited Consolidated Statements of Cash Flows -
For the Three Months Ended March 31, 2003 and
March 31, 2002 6
Notes to Unaudited Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 13
Item 3. Quantitative and Qualitative Disclosures about Market Risk 31
Item 4. Controls and Procedures 31
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 32
Item 6. Exhibits and Reports on Form 8-K 34
Signatures 35
Certifications 36
2
PART I.
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
METRETEK TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
MARCH 31, DECEMBER 31,
ASSETS 2003 2002
----------- -----------
CURRENT ASSETS:
Cash and cash equivalents $ 544,775 $ 884,843
Trade receivables, net of allowance for doubtful accounts
of $279,875 and $281,422, respectively 4,975,343 4,209,942
Other receivables 324 576
Inventories 3,775,791 3,208,774
Prepaid expenses and other current assets 344,619 519,113
----------- -----------
Total current assets 9,640,852 8,823,248
----------- -----------
PROPERTY, PLANT AND EQUIPMENT:
Equipment 3,717,501 3,776,586
Vehicles 63,867 63,867
Furniture and fixtures 581,631 580,551
Land, building and improvements 744,925 742,424
----------- -----------
Total property, plant and equipment, at cost 5,107,924 5,163,428
Less accumulated depreciation and amortization 3,486,920 3,449,635
----------- -----------
Property, plant and equipment, net 1,621,004 1,713,793
----------- -----------
OTHER ASSETS:
Goodwill 7,617,196 7,617,196
Patents and capitalized software development, net of accumulated
amortization of $956,202 and $930,633 respectively 365,564 389,133
Other assets 525,699 619,747
----------- -----------
Total other assets 8,508,459 8,626,076
----------- -----------
TOTAL $19,770,315 $19,163,117
=========== ===========
See accompanying notes to unaudited consolidated financial statements
3
METRETEK TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
MARCH 31, DECEMBER 31,
LIABILITIES AND STOCKHOLDERS' EQUITY 2003 2002
------------ ------------
CURRENT LIABILITIES:
Accounts payable $ 3,351,069 $ 1,576,580
Accrued and other liabilities 2,806,340 2,852,737
Notes payable 462,547 261,387
Deposits and capital lease obligations 38,269 42,458
------------ ------------
Total current liabilities 6,658,225 4,733,162
------------ ------------
LONG-TERM NOTES PAYABLE 3,997,496 4,690,758
------------ ------------
NON-CURRENT CAPITAL LEASE OBLIGATIONS 35,858 41,893
------------ ------------
COMMITMENTS AND CONTINGENCIES
MINORITY INTEREST IN SUBSIDIARIES 11,020
------------ ------------
REDEEMABLE PREFERRED STOCK - SERIES B,
$.01 PAR VALUE; 1,000,000 SHARES AUTHORIZED;
7,000 ISSUED AND OUTSTANDING;
REDEMPTION VALUE $1,000 PER SHARE 8,749,117 8,531,941
------------ ------------
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;
6,043,469 shares issued and outstanding 60,435 60,435
Additional paid-in-capital 55,107,132 55,092,132
Accumulated deficit (54,848,968) (53,987,204)
------------ ------------
Total stockholders' equity 318,599 1,165,363
------------ ------------
TOTAL $ 19,770,315 $ 19,163,117
============ ============
See accompanying notes to unaudited consolidated financial statements.
4
METRETEK TECHNOLOGIES, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
(unaudited)
Three Months Ended
March 31,
-------------------------------
2003 2002
----------- -----------
REVENUES:
Sales and services $ 7,181,669 $ 6,404,530
Other (2,843) (3,247)
----------- -----------
Total revenues 7,178,826 6,401,283
----------- -----------
COSTS AND EXPENSES:
Cost of sales and services 5,776,581 4,704,524
General and administrative 1,430,248 1,336,188
Selling, marketing and service 223,061 346,561
Depreciation and amortization 172,312 168,728
Research and development 144,621 144,761
Interest, finance charges and other 65,571 43,203
----------- -----------
Total costs and expenses 7,812,394 6,743,965
----------- -----------
OPERATING LOSS (633,568) (342,682)
MINORITY INTEREST IN SUBSIDIARIES (11,020) --
INCOME TAXES -- --
----------- -----------
NET LOSS (644,588) (342,682)
PREFERRED STOCK DEEMED DISTRIBUTION (217,176) (201,148)
----------- -----------
NET LOSS APPLICABLE TO COMMON SHAREHOLDERS $ (861,764) $ (543,830)
=========== ===========
NET LOSS PER COMMON SHARE, BASIC AND DILUTED $ (0.14) $ (0.09)
=========== ===========
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING, BASIC AND DILUTED 6,043,469 6,077,764
=========== ===========
See accompanying notes to unaudited consolidated financial statements.
5
METRETEK TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
THREE MONTHS ENDED
MARCH 31,
-------------------------------
2003 2002
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (644,588) $ (342,682)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation and amortization 172,312 168,728
Minority interest in subsidiary 26,020
Loss on disposal of property, plant and equipment 833 7,031
Changes in other assets and liabilities:
Trade receivables (765,401) 761,698
Inventories (567,017) 13,185
Other current assets 174,746 (252,575)
Other noncurrent assets 94,049 (26,704)
Accounts payable 1,774,489 (381,062)
Accrued and other liabilities (46,397) 660,262
----------- -----------
Net cash provided by operating activities 219,046 607,881
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capitalized software purchases or development (2,001) (2,965)
Purchases of property, plant and equipment (54,787) (57,101)
Proceeds from sale of property, plant and equipment 1,000
----------- -----------
Net cash used in investing activities (56,788) (59,066)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net (payments) borrowings on line of credit (476,775) 75,916
Payments on equipment loan (13,270)
Payments on mortgage loan and capital lease obligations (12,281) (1,867)
----------- -----------
Net cash (used in) provided by financing activities (502,326) 74,049
----------- -----------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (340,068) 622,864
CASH AND CASH EQUIVALENTS AT
BEGINNING OF PERIOD 884,843 696,076
----------- -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 544,775 $ 1,318,940
=========== ===========
See accompanying notes to unaudited consolidated financial statements.
6
METRETEK TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
As of March 31, 2003 and December 31, 2002 and
For the Three Month Periods Ended March 31, 2003 and 2002
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 have been
prepared pursuant to rules and regulations of the Securities and Exchange
Commission. The accompanying consolidated financial statements and notes thereto
should be read in conjunction with the consolidated financial statements and
notes thereto included in the Company's Annual Report on Form 10-KSB for the
year ended December 31, 2002.
In the opinion of the Company's management, all adjustments (all of
which are normal and recurring) have been made which are necessary for a fair
presentation of the consolidated financial position of the Company and its
subsidiaries as of March 31, 2003 and the consolidated results of their
operations and cash flows for the three month periods ended March 31, 2003 and
March 31, 2002.
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.
There were no stock options granted to employees or directors under the
Company's stock-based compensation plans during the three-month periods ended
March 31, 2003 or 2002.
MINORITY INTEREST IN SUBSIDIARIES - Upon formation of Metretek Contract
Manufacturing Company, Inc., a subsidiary of Metretek Florida ("MCM"), in June
2002, MCM issued shares totaling 17% of its outstanding common stock to three of
its employees, including 8% to the President and Chief Executive Officer of
Metretek Florida, as equity incentive compensation. The employee-shareholders of
MCM entered into a shareholder agreement with MCM providing for the following:
- MCM holds a right of first refusal on the sale of any MCM
shares by any employee-shareholders;
- MCM employee-shareholders have the right to participate in a
sale of a majority of the outstanding MCM shares by Metretek
Florida;
- If Metretek Florida desires to sell its MCM shares that
constitute a majority of all then
7
outstanding MCM shares, then Metretek Florida has the right to
force the employee-shareholders to also sell their MCM shares;
- MCM employee-shareholders have the preemptive right to
maintain their pro rata equity percentage in MCM in the event
of future issuances of MCM shares by participating in such
issuances on the same terms as other buyers; and
- Upon the termination of employment of any MCM
employee-shareholder, MCM has the right to purchase such MCM
shares at an appraised value.
There was no minority interest in losses of MCM during the three months
ended March 31, 2003, because the minority interest shareholders losses are
limited to their capital contributions and accumulated earnings, which was $0 at
March 31, 2003.
Effective January 1, 2003, PowerSecure issued, or authorized the
issuance of, shares totaling up to 15% of its outstanding common stock to its
employees, including 7% to the President and Chief Executive Officer of
PowerSecure, as equity incentive compensation. The employee shareholders of
PowerSecure entered into a shareholder agreement with PowerSecure providing for
the following:
- PowerSecure holds a right of first refusal on the sale of any
PowerSecure shares by any employee-shareholders;
- PowerSecure employee-shareholders have the right to
participate in a sale of a majority of the outstanding
PowerSecure shares by the Company;
- If the Company desires to sell its PowerSecure shares that
constitute a majority of all then outstanding PowerSecure
shares, then the Company has the right to force the
employee-shareholders to also sell their PowerSecure shares;
- If PowerSecure issues additional PowerSecure shares in the
future to third persons, then PowerSecure will grant an option
for its employee-shareholders to purchase additional
PowerSecure shares in order to maintain their pro rata equity
percentage in PowerSecure, at the price as paid by such third
persons; and
- Upon the termination of employment of any PowerSecure
employee-shareholder, PowerSecure has the right to purchase
such PowerSecure shares at an appraised value.
The Company recognized compensation expense in the amount of $15,000
upon the issuance of shares of PowerSecure to its employee shareholders based on
the estimated fair value of the shares on the date of issuance, net of amounts
owed by PowerSecure to the Company. The compensation expense amount is included
in the consolidated statement of operations for the three months ended March 31,
2003. The minority interest in the income of PowerSecure for the three months
ended March 31, 2003, was $11,020, and is included as a separate line-item in
the consolidated statement of operations.
2. COMPREHENSIVE LOSS
The Company's comprehensive loss for the three months ended March 31,
2003 was $644,588, the same as its net loss for the period. The Company's
comprehensive loss for the three months ended March 31, 2002 was $343,465, which
included foreign currency translation
8
adjustments related to its Metretek Europe operations that were terminated
during 2002.
3. COMMITMENTS AND CONTINGENCIES
CLASS ACTION LITIGATION - In January 2001, Douglas W. Heins,
individually and on behalf of a class of other persons similarly situated (the
"Class Action Plaintiff"), 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"),
an energy program managed by the Company's subsidiary Marcum Gas Transmission,
Inc. ("MGT"), and certain affiliates, officers and employees of the Company and
MGT (the foregoing, collectively, the "Metretek Defendants"), as well as against
Farstad Gas & Oil, LLC, Farstad Oil, Inc. , and Jeff Farstad (collectively, the
"Farstad Defendants").
The 1997 Trust raised approximately $9.25 million from investors in a
private placement in 1997 in order to finance the purchase, operation and
improvement of a natural gas liquids processing plant located in Midland, Texas.
The Class Action alleges that the Metretek Defendants and the Farstad Defendants
(collectively, the "Class Action Defendants"), either directly or as
"controlling persons", violated certain provisions of the Colorado Securities
Act in connection with the sale of interests in the 1997 Trust. The damages
sought in the Class Action include compensatory and punitive damages, pre- and
post-judgment interest, attorneys' fees and other costs.
On March 27, 2003, the Company, along with the Class Action Plaintiff,
filed a Stipulation of Settlement (the "Heins Stipulation"), which contains the
terms and conditions of a proposed settlement (the "Heins Settlement") intended
to fully resolve all claims by the Class Action Plaintiff against the Company
and the other Metretek Defendants in the Heins Class Action. The Heins
Settlement is contingent, among other things, upon the payment of not less than
$2,375,000 from the proceeds of the Company's directors' and officers' insurance
policy (the "Policy"), which was issued by Gulf Insurance Company ("Gulf"). The
Heins Stipulation creates a settlement fund (the "Heins Settlement Fund") for
the benefit of the Class. If the Denver Court approves the Heins Settlement and
all other conditions to the Heins Settlement are met, then the Company will pay
$2.75 million into the Heins Settlement Fund, of which no less than $2,375,000
must come from the proceeds of the Policy, and the Company will issue a note
payable to the Heins Settlement Fund in the amount of $3.0 million (the "Heins
Settlement Note"). The Heins Settlement Note would bear interest at the rate of
prime plus three percent (prime + 3%), payable in 16 quarterly installments,
each of $187,500 principal plus accrued interest, commencing six months after
the effective date of the Heins Settlement. The Heins Settlement Note would be
guaranteed by the 1997 Trust and all of the Company's subsidiaries.
Under the Heins Stipulation, the Company is required to obtain the
consent of the Class's lead counsel before it can sell any shares of stock of
Southern Flow, Metretek or PowerSecure, although such consent is not required if
the Company makes a prepayment of at least $1 million on the Heins Settlement
Note with the proceeds of any such sale of subsidiary stock. The Heins
Stipulation may require the Company to commence its payment obligations
thereunder pursuant to an escrow arrangement after the Denver Court issues its
final judgment and order approving
9
the Heins Stipulation, but before all appeals, if any, on that judgment and
order have been concluded. If the Heins Stipulation does not receive final and
non-appealable approval by December 31, 2006, or such later date as is agreed to
by the parties, then the escrowed funds will be returned to the Company and the
Class Action will continue against the Metretek Defendants. In addition, under
the Heins Stipulation, the Company would be required to prosecute all third
party and cross-claims and equally share the net recovery of any amounts
collected from the resolution of these third party claims with the Heins
Settlement Fund, with the portion accruing to the Company being in the form
prepayments on the Heins Settlement Note.
The effective date of the Heins Stipulation is conditioned, among other
things, upon the following events:
- payment by Gulf, the Company's insurance carrier, of at least
$2,375,000 in insurance proceeds from the Policy for the
benefit of the Heins Settlement Fund;
- the entry by the Denver Court of a preliminary approval order
containing certain procedural orders, preliminarily approving
the settlement terms and scheduling a settlement hearing;
- the entry by the Denver Court of a Final Judgment and Order
directing consummation of the Heins Settlement and containing
certain other procedural findings and orders; and
- the final and successful resolution of any appeals related to
the Final Settlement and Order and the Heins Stipulation and
the Interpleader Action described below.
The Company recorded the loss resulting from the amounts due on the
Heins Settlement and the obligations under the Heins Settlement Note, other than
interest on the Heins Settlement Note, in its December 31, 2002 consolidated
financial statements.
On March 28, 2003, Gulf filed an interpleader complaint (the
"Interpleader Action") in the District Court, City and Country of Denver,
Colorado, seeking a determination by the court as to the proper beneficiaries of
the Policy, and concurrently filed a motion to deposit the remaining amount
payable under the Policy into the registry of the court. The Interpleader Action
is in front of the same judge in the Denver Court as the Class Action. The
Metretek Defendants have filed their answer to the Interpleader Action asking
the Denver Court to utilize the remainder of the insurance proceeds to fund, in
part, the Heins Settlement, but no other defendants have responded as of April
30, 2003. On April 18, 2003, the Denver Court granted Gulf's motion to deposit
the remaining insurance proceeds into the registry of the court.
As of April 30, 2003, no date has been set for the preliminary approval
hearing on the Heins Settlement, and no further action has been taken on the
Interpleader Action.
From time to time, the Company is involved in other disputes and legal
actions arising in the ordinary course of business. The Company intends to
vigorously defend all claims against it. Although the ultimate outcome of these
claims cannot be accurately predicted due to the inherent uncertainty of
litigation, in the opinion of management, based upon current information, no
other currently pending or overtly threatened dispute is expected to have a
material adverse effect on
10
the Company's business, financial condition or results of operations.
4. 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. 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 service packages
directly to large end-users of electricity and through outsourcing partnerships
with utilities. Through March 31, 2003, 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.
The operations of the Company's automated energy data management
segment are conducted by Metretek Florida. Metretek Florida's manufactured
products fall into the following categories: field devices, including metering
data collection products and electronic gas flow computers; data collection
software products (such as DC2000 and PowerSpring); and communications solutions
that can use GSM/GPRS real time wireless internet, 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 energy data collection and management
services and post-sale support services for its manufactured products. In June
2002, Metretek Florida formed MCM to conduct and expand its circuit board
contract manufacturing operations.
The Company evaluates the performance of its operating segments based
on income (loss) before minority interest, income taxes, nonrecurring items and
interest income and expense. Intersegment sales are not significant.
11
Summarized financial information concerning the Company's reportable
segments is shown in the following table. The amounts shown as "Other" include
corporate related items, results of insignificant operations and, as it relates
to segment profit or loss, income and expense not allocated to reportable
segments.
SUMMARIZED SEGMENT FINANCIAL INFORMATION
(all amounts reported in thousands)
Three Months Ended
March 31,
-----------------------
2003 2002
------- -------
REVENUES:
Southern Flow $ 2,984 $ 3,131
PowerSecure 3,024 1,613
Metretek Florida 1,174 1,660
Other (3) (3)
------- -------
Total $ 7,179 $ 6,401
======= =======
SEGMENT PROFIT (LOSS):
Southern Flow $ 299 $ 505
PowerSecure 99 (81)
Metretek Florida (562) (276)
Other (470) (491)
------- -------
Total $ (634) $ (343)
======= =======
CAPITAL EXPENDITURES:
Southern Flow $ 29 $ 38
PowerSecure 6 4
Metretek Florida 22 9
Other 9
------- -------
Total $ 57 $ 60
======= =======
DEPRECIATION AND AMORTIZATION:
Southern Flow $ 33 $ 36
PowerSecure 13 11
Metretek Florida 121 117
Other 5 5
------- -------
Total $ 172 $ 169
======= =======
March 31,
TOTAL ASSETS: 2003 2002
------- -------
Southern Flow $ 8,851 $ 9,556
PowerSecure 3,572 2,349
Metretek Florida 6,649 6,748
Other 698 1,514
------- -------
Total $19,770 $20,167
======= =======
12
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
month periods ended March 31, 2003 (referred to herein as the "first quarter
2003") and 2002 (referred to herein as the "first quarter 2002") and of our
financial condition as of March 31, 2003 should be read in conjunction with our
consolidated financial statements and related notes thereto included elsewhere
in this report.
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
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 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 described below include:
- - revenue recognition;
- - allowance for doubtful accounts;
- - inventories;
- - warranty reserve;
- - valuation of goodwill and other intangible assets; and
- - deferred tax valuation allowance.
For further discussion of our significant accounting polices, refer to
note 1 of the notes to our consolidated financial statements contained in our
Annual Report on Form 10-KSB for the
13
year ended December 31, 2002.
Revenue Recognition. We recognize product revenue, in accordance with
SAB 101, when persuasive evidence of a non-cancelable arrangement exists,
delivery has occurred and/or services have been rendered, the price is fixed or
determinable, collectibility is reasonably assured, legal title and economic
risk is transferred to the customer, and when an economic exchange has taken
place. Virtually all product sales are to end users of the product, who are
responsible for payment for the product. In limited circumstances, sales
representatives or resellers may purchase our products for resale to end users.
In such circumstances, the reseller is responsible for payment to us regardless
of whether the reseller collects payment from the end user.
For our long-term distributed generation projects, we recognized
revenue and profit as work progresses using the percentage-of-completion method,
which relies on estimates of total expected contract revenue and costs. We
follow this method as reasonably dependable estimates of the revenue and costs
applicable to various stages of a project can be made. Recognized revenues and
profits are subject to revision as a project progresses to completion. Revisions
in profit estimates are charged to income in the period in which the facts that
give rise to the revision become known. In addition, certain contracts provide
for cancellation provisions prior to completion of a project. The cancellation
provisions provide for payment of costs incurred, but may result in an
adjustment to profit already recognized in a prior period.
Service revenue includes chart services, field services, laboratory
analysis, allocation and royalty services, professional engineering,
installation services, training, and consultation services. Revenues from these
services are recognized when the service is performed and the customer has
accepted the work.
Software revenue relates the operating systems we license to our
customers designed to manage the collection and presentation of recorded data.
The license revenue is recognized over the 12-month non-cancelable term of the
annual license agreement. The portion of software license fees that has not been
recognized as revenue at any balance sheet date is recorded as a current
liability. In addition, when a customer engages us to install the software and
make any customizations for them, installation service revenue is recognized
when the installation and any related customizations have been completed and the
customer has accepted the product.
Allowance for Doubtful Accounts. We maintain allowances for doubtful
accounts for estimated losses resulting from the inability of our customers to
make required payments. We assess the customer's ability to pay based on a
number of factors, including our past transaction history with the customer and
the credit worthiness of the customer. Management specifically analyzes accounts
receivable and historical bad debts, customer credit-worthiness, customer
concentrations, current economic trends, and changes in our customer payment
patterns when we evaluate the adequacy of our allowances for doubtful accounts.
We estimate the collectibility of our accounts receivable on an
account-by-account basis. In addition, we provide for a general reserve for all
accounts receivable. If the financial condition of our customers were to
deteriorate in the future, resulting in an impairment of their ability to make
payments, additional allowances
14
may be required.
Inventories. Inventories are stated at the lower of cost (determined
primarily on a first-in, first-out method) or market (estimated net realizable
value). A portion of our inventory is acquired for specific projects; a portion
of our inventory is acquired to assemble component parts for use in later
assemblies; and a portion of our inventory consists of spare parts and supplies
that we maintain to support a full-product range and a wide variety of customer
requirements. The portion of our inventory acquired for specific projects tends
to be high-dollar value quick turnaround equipment items. The portion of our
inventory used to assemble component parts tends to be comprised of electronic
parts, which may be subject to obsolescence or quality issues. The portion of
our inventory that supports older product lines and other customer requirements
may also be slow-moving and subject to potential obsolescence due to product
lifecycle and product development plans.
We perform periodic assessments of inventory that includes a review of
component demand requirements, product lifecycle and product development plans,
and quality issues. As a result of this assessment, we write-down inventory for
estimated losses due to obsolescence and unmarketability equal to the difference
between the cost of the inventory and the estimated market value based on
assumptions and estimates concerning future demand, market conditions and
similar factors. If actual demand and market conditions are less favorable than
those estimated by management, additional inventory write-downs may be required.
Warranty Reserve. We provide a standard one-year warranty for hardware
product sales and distributed generation equipment. In addition, we offer
extended warranty terms on our distributed generation turnkey projects as well
as certain hardware products. We reserve for the estimated cost of product
warranties when revenue is recognized, and we evaluate our reserve periodically
by comparing our warranty repair experience by product. While we engage in
product quality programs and processes, including monitoring and evaluating the
quality of our components suppliers and development of methods to remotely
detect and correct failures, our warranty obligation is affected by actual
product failure rates, parts and equipment costs and service labor costs
incurred in correcting a product failure. In addition, our operating history in
the distributed generation market is limited. Should actual product failure
rates, parts and equipment costs, or service labor costs differ from our
estimates, revisions to the estimated warranty liability would be required.
Valuation of Goodwill and Other Intangible Assets. In assessing the
recoverability of goodwill and other intangible assets, we make assumptions
regarding the estimated future cash flows and other factors to determine the
fair value of these assets. If these estimates or their related assumptions
change in the future, we may be required to record impairment charges against
these assets in the reporting period in which the impairment is determined. For
intangible assets, this evaluation includes an analysis of estimated future
undiscounted net cash flows expected to be generated by the assets over their
estimated useful lives. If the estimated future undiscounted net cash flows are
insufficient to recover the carrying value of the assets over their estimated
useful lives, we will record an impairment charge in the amount by which the
carrying value of the assets exceeds their fair value. For goodwill, the
impairment evaluation includes a
15
comparison of the carrying value of the reporting unit which carries the
goodwill to that reporting unit's fair value. The fair value of each reporting
unit is based upon an estimate of the net present value of future cash flows. If
the reporting unit's estimated fair value exceeds the reporting unit's carrying
value, no impairment of goodwill exists. If the fair value of the reporting unit
does not exceeds its carrying value, then further analysis is required to
determine the amount of goodwill impairment, if any. We perform our required
annual goodwill impairment testing effective October 1st of each year.
Deferred Tax Valuation Allowance. We currently record a valuation
allowance for 100% of our deferred tax assets based on our net operating losses
incurred in the past, consideration of future taxable income and ongoing prudent
and feasible tax planning strategies. In the event we were to determine that we
would be able to realize deferred tax assets in the future in excess of our net
recorded amount, an adjustment to the deferred tax assets would increase the
income in the period such determination was made. Likewise, in the future,
should we have a net deferred tax asset and determine that we would not be able
to realize all or part of that asset, an adjustment to the deferred tax asset
would be charged to income in the period that such determination was made.
16
RESULTS OF OPERATIONS
The following table sets forth selected information related to our
primary business segments and is intended to assist you in an understanding of
our results of operations for the periods presented.
Three Months Ended
March 31,
------- -------
2003 2002
------- -------
(all amounts reported in thousands)
REVENUES:
Southern Flow $ 2,984 $ 3,131
PowerSecure 3,024 1,613
Metretek Florida 1,174 1,660
Other (3) (3)
------- -------
Total $ 7,179 $ 6,401
======= =======
GROSS PROFIT:
Southern Flow $ 679 $ 835
PowerSecure 677 380
Metretek Florida 49 485
------- -------
Total $ 1,405 $ 1,700
======= =======
SEGMENT PROFIT (LOSS):
Southern Flow $ 299 $ 505
PowerSecure 99 (81)
Metretek Florida (562) (276)
Other (470) (491)
------- -------
Total $ (634) $ (343)
======= =======
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
17
interconnects, generator acquisition and installation, process control and
switchgear design and installation, and ongoing project monitoring and
servicing. PowerSecure markets its distributed generation service packages
directly to large end-users of electricity and through outsourcing partnerships
with utilities. Through March 31, 2003, 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.
The operations of our automated energy data management segment are
conducted by Metretek Florida. Metretek Florida's manufactured products fall
into the following categories: field devices, including metering data collection
products and electronic gas flow computers; data collection software products
(such as DC2000 and PowerSpring); and communications solutions that can use
GSM/GPRS real time wireless internet, 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 energy data collection and management services and
post-sale support services for its manufactured products. In June 2002, Metretek
Florida formed MCM to conduct and expand its circuit board contract
manufacturing operations.
We evaluate the performance of our operating segments based on income
(loss) before minority interest, income taxes, nonrecurring items and interest
income and expense. Amounts shown as "Other" in the table above include
corporate related items, results of insignificant operations, and income and
expense not allocated to its operating segments. Intersegment sales are not
significant.
FIRST QUARTER 2003 COMPARED TO FIRST QUARTER 2002
Revenues. Our revenues are derived almost entirely from the sales of
products and services by our subsidiaries. Our consolidated revenues for the
first quarter 2003 increased $778,000, or 12%, compared to the first quarter
2002. The increase was due to an increase in revenues by PowerSecure, partially
offset by decreases in revenues by Metretek Florida and by Southern Flow.
PowerSecure's revenues increased $1,411,000, or 87%, during the first quarter
2003 compared to the first quarter 2002. The increase in PowerSecure's revenues
was due to a significant increase in the number of PowerSecure's completed and
in-process projects during the first quarter 2003 compared to the first quarter
2002, although the effect on revenues of this increased volume of projects was
partially offset due to the reduced size of PowerSecure's projects during the
first quarter 2003 compared to the first quarter 2002. While PowerSecure had 30
projects completed or in process during the first quarter 2003 compared to 5
projects completed or in process during the first quarter 2002, PowerSecure's
average revenue per project for completed and in-process projects was $98,000
during the first quarter 2003 compared to $317,000 during the first quarter
2002. In addition, PowerSecure's revenues during the first quarter 2003 included
$63,000 of professional service revenue compared to $11,000 of professional
service revenue during the first quarter 2002. As discussed below under
"Quarterly Fluctuations", PowerSecure's revenues have fluctuated significantly
in the past and are expected
18
to continue to fluctuate significantly in the future. Metretek Florida's
revenues decreased $486,000, or 29%, during the first quarter 2003 compared to
the first quarter 2002, consisting of a decrease in domestic sales of $559,000,
partially offset by an increase in international sales of $73,000. The decrease
in Metretek Florida's domestic sales was due to a decline of $931,000 in sales
of field devices, data collection software products, and communications
solutions products, partially offset by a $372,000 increase in its circuit board
contract manufacturing sales. The Company believes that the decline in domestic
sales of field devices, data collection software products, and communications
solutions products was attributable primarily to a general reduction in
purchases of energy monitoring and equipment by utilities, the primary market
for Metretek Florida's core products and services. Southern Flow's revenues
decreased $147,000, or 5% during the first quarter 2003, compared to the first
quarter 2002, primarily due to a decrease in chart processing services and
equipment sales which were partially offset by an increase in on-site field
service revenues. The Company believes that the decrease in Southern Flow's
revenues was Attributable in large part to cutbacks by some customers concerned
about future oil price volatility due to the war with Iraq.
Costs and Expenses. Costs of sales and services include materials,
personnel and related overhead costs incurred to manufacture products and
provide services. Cost of sales and services for the first quarter 2003
increased $1,072,000, or 23%, compared to the first quarter 2002, attributable
almost entirely to increased activity at PowerSecure. PowerSecure's costs of
sales and services for the first quarter 2003 increased $1,113,000, or 90%,
compared to the first quarter 2002. The increase in PowerSecure's costs of sales
and services was primarily a direct result of the 87% increase in PowerSecure's
revenues. PowerSecure's gross profit margin after costs of sales and services
was 22.4% for the first quarter 2003 compared to 23.6% for the first quarter
2002, which is within the range of normal fluctuations for PowerSecure. Southern
Flow's costs of sales and services for the first quarter 2003 increased $9,000,
or less than 1%, compared to the first quarter 2002. The slight increase in
Southern Flow's costs of sales and services despite an overall 5% decrease in
Southern Flow's revenues was due to higher personnel related costs in the first
quarter 2003 compared to the first quarter 2002. As a result, Southern Flow's
gross profit margin after costs of sales and services decreased to 22.8% for the
first quarter 2003 compared to 26.7% for the first quarter 2002. Metretek
Florida's costs of sales and services for the first quarter 2003 decreased
$50,000, or 4%, compared to the first quarter 2002. The decrease in Metretek
Florida's costs of sales and services that resulted from the decrease in
Metretek Florida's revenues was substantially offset by the effects of higher
materials, personnel and related overhead costs attributable to increased
circuit board contract manufacturing sales. As a result, Metretek Florida's
overall gross profit margin after costs of sales and services decreased to 4.2%
for the first quarter 2003, compared to 29.2% for the first quarter 2002. The
primary causes of this decrease in Metretek Florida's gross profit margin was
(i) the ramping up of production and overhead costs at MCM in anticipation of
future growth; and (ii) lower sales of Metretek Florida's field devices, data
collection software products, and communications solutions products without a
corresponding decrease in fixed production and overhead costs related to such
products.
General and administrative expenses include personnel and related
overhead costs for the support and administrative functions. General and
administrative expenses for the first quarter 2003 increased $94,000, or 7%,
compared to the first quarter 2002, due to the offsetting effects of the
following: increased personnel and related overhead costs at Southern Flow;
increased personnel and related overhead costs associated with the continued
development of the business of PowerSecure; reductions in corporate overhead
related to travel, equipment rental, and professional services; and reductions
in personnel and related overhead costs at Metretek Florida during the first
quarter 2003 compared to the first quarter 2002.
19
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. Selling, marketing
and service expenses for the first quarter 2003 decreased $124,000, or 36%,
compared to the first quarter 2002. The decrease in selling, marketing and
service expenses is due to lower personnel and commission costs at Metretek
Florida and reduced business development expenses at PowerSecure during the
first quarter 2003 compared to the first quarter 2002.
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. Depreciation and amortization expenses
for the first quarter 2003 increased $4,000, or 2%, compared to the first
quarter 2002. The increase in depreciation and amortization expense primarily
reflects additional depreciation of equipment at Metretek Florida and
PowerSecure during the first quarter 2003 compared to the first quarter 2002.
Research and development expenses, all of which relate to activities at
Metretek Florida, include payments to third parties, personnel and related
overhead costs for product and service development, enhancements, upgrades,
testing, and quality assurance. Research and development expenses of $145,000
for the first quarter 2003 were the same as in the first quarter 2002.
Interest, finance charges and other expenses include interest and
finance charges on our credit facility as well as other non-operating expenses.
Interest, finance charges and other expenses for the first quarter 2003
increased $22,000, or 52%, compared to the first quarter 2002. The increase
reflects higher bank finance charges and interest on borrowings related to
Metretek Florida's line of credit and interest costs related to an equipment
loan in the first quarter 2003. The Metretek Florida line of credit and the
equipment loan did not exist during the first quarter 2002.
QUARTERLY FLUCTUATIONS
Our quarterly revenues, expenses, margins, net income and other
operating results have fluctuated significantly from quarter-to-quarter and from
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 implement our business plans and strategies and
the timing of such implementation;
- the timing, pricing and market acceptance of our new products
and services, and those of our competitors;
- the pace of development of our new businesses;
20
- the success of our brand building and marketing campaigns for
our PowerSecure products and services;
- the growth of the market for distributed generation systems;
- 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;
- general economic and political conditions;
- economic conditions in the energy industry, especially in the
natural gas and electricity sectors;
- the effects of governmental regulations and regulatory changes
in our current and new 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 depend 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.
PowerSecure has a limited operating history, and we expect the
revenues, costs, gross margins, cash flow, net income and other operating
results of PowerSecure to vary from quarter-to-quarter for a number of reasons,
including the factors mentioned above. PowerSecure's revenues will depend in
large part upon the timing and the size of projects being 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.
21
Another factor that could cause material fluctuations in PowerSecure's quarterly
results is the amount of recurring, as opposed to non-recurring, sources of
revenue. Through March 31, 2003, the majority of PowerSecure's revenues
constituted non-recurring revenues, but a greater proportion of PowerSecure's
revenues will be from recurring sources in future years if PowerSecure is able
to successfully develop and market its "company-owned" business platform and if
PowerSecure is able to continue to successfully market its professional
services.
Metretek Florida historically derives substantially all 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, you should not rely on quarter-to-quarter or year-to-year comparisons of
our results of operations as an indication of our future performance. Quarterly
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; and
- - business and technology acquisitions and other growth transactions.
In addition, we anticipate that the cash flow requirements of
PowerSecure, primarily to finance "turn-key" distributed generation projects but
also to finance future significant "company-owned" projects, if any, will
require significant capital in future periods.
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, and proceeds from private and public sales
of equity. As of March 31, 2003, we had working capital of $2,983,000, including
$545,000 in cash and cash equivalents, compared to working capital of $4,090,000
on December 31, 2002, which included $885,000 in cash and cash equivalents.
22
Net cash provided by operating activities was $219,000 in the first
quarter 2003, consisting of approximately $445,000 of cash used in operations,
before changes in assets and liabilities, and approximately $664,000 of cash
provided by changes in working capital and other asset and liability accounts.
This compares to net cash provided by operating activities of $608,000 in the
first quarter 2002, consisting of approximately $167,000 of cash used in
operations, before changes in assets and liabilities, and approximately $775,000
of cash provided by changes in working capital and other asset and liability
accounts.
Net cash used in investing activities was $57,000 in the first quarter
2003, as compared to $59,000 in the first quarter 2002. The majority of the net
cash used by investing activities during the first quarter 2003 and during the
first quarter 2002 was attributable to the purchase of equipment at Southern
Flow and Metretek Florida.
Net cash used in financing activities was $502,000 in the first quarter
2003, compared to net cash provided by financing activities of $74,000 in the
first quarter 2002. The net cash used in financing activities during the first
quarter 2003 represented net payments on our line of credit, payments on an
equipment loan, and payments on capital lease obligations and a mortgage loan.
The net cash provided by financing activities during the first quarter 2002 was
attributable to net borrowings on our line of credit.
During the remainder of 2003, 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
$145,000 during the first quarter 2003. We anticipate that our research and
development expenses in fiscal 2003 will total approximately $792,000, virtually
all of which will be directed to Metretek Florida's business.
Our capital expenditures in the first quarter 2003 were approximately
$57,000. We anticipate capital expenditures in fiscal 2003 of approximately
$280,000 which will benefit all of our key subsidiaries. In addition, the
development of PowerSecure's "company-owned" program business would entail
significant additional capital expenditures, which would require and depend upon
us raising substantial additional capital. We cannot provide any assurance we
will be successful in raising additional capital, or that the amount of any
additional capital that we are able to raise will be sufficient to allow
PowerSecure to meet our objectives for its growth and development or will be on
favorable terms.
Credit Facility. In September 2001, Southern Flow entered into a Credit
and Security Agreement (the "Southern Flow Credit Agreement") with Wells Fargo
Business Credit, Inc. ("Wells Fargo"), providing for a $2,000,000 credit
facility (the "Southern Flow Credit Facility"). Southern Flow is permitted to
advance funds under the Southern Flow Credit Facility to Metretek Technologies,
PowerSecure and Metretek Florida, which have guaranteed the obligations of
Southern Flow under the Southern Flow Credit Facility, provided that total
inter-company indebtedness owing from all the guarantors to Southern Flow may
not exceed the cumulative net income of Southern Flow from January 1, 2001, or
reduce Southern Flow's tangible net worth below $1,400,000. At March 31, 2003,
Southern Flow had a borrowing base of $1,358,000 under the Southern Flow Credit
Facility, of which $792,000 had been borrowed, leaving $566,000
23
available to borrow. On April 4, 2003, the Southern Flow Credit Agreement was
amended to allow for a $200,000 "overadvance" on the borrowing base (subject to
the $2,000,000 maximum available under the Southern Flow Credit Facility)
through August 1, 2003.
In September 2002, Metretek Florida entered into a Credit and Security
Agreement (the "Metretek Florida Credit Agreement" and, collectively with the
Southern Flow Credit Agreement, the "Credit Agreement") with Wells Fargo,
providing for a $1,000,000 credit facility (the "Metretek Florida Credit
Facility" and, collectively with the Southern Flow Credit Facility, the "Credit
Facility"). The Metretek Florida Credit Facility operates as an extension of the
Southern Flow Credit Facility. Metretek Florida is permitted to advance funds
under the Metretek Florida Credit Facility to Metretek Technologies,
PowerSecure, Southern Flow and MCM, which have guaranteed the obligations of
Metretek Florida under the Metretek Florida Credit Facility, provided that after
making such advances the Metretek Florida Credit Facility availability is not
less than $100,000 and that total advances to the guarantors do not exceed
$500,000 during 2002. At March 31, 2003, Metretek Florida had a borrowing base
of $278,000 under the Metretek Florida Credit Facility, of which $202,000 had
been borrowed, leaving $76,000 available to borrow.
The Credit Facility, which constitutes our primary credit agreement, is
used primarily to fund the operations and growth of PowerSecure, as well as the
operations of Metretek Florida and Southern Flow. While the Credit Facility will
restrict our ability to sell or finance our subsidiaries without the consent of
Wells Fargo's, in the event that we are able to secure debt or equity financing
for a subsidiary that is a guarantor or the sale or merger of such subsidiary
and such subsidiary repays all advances made to it by Southern Flow or Metretek
Florida, as applicable, then Wells Fargo has agreed to terminate the applicable
restrictions in the Credit Facility relating to such subsidiary as a Guarantor.
Heins Stipulation. On March 27, 2003, we filed the Heins Stipulation,
which contains the terms and conditions of the Heins Settlement that is intended
to fully resolve all claims by the Class Action Plaintiff against us and the
other Metretek Defendants in the Heins Class Action. The Heins Settlement is
contingent, among other things, upon the payment of at least $2,375,000 from the
proceeds of our directors' and officers' insurance policy. If the Denver Court
approves the Heins Settlement and all other conditions to the Heins Settlement
are met, then we will pay $2.75 million into the Heins Settlement Fund, of which
no less than $2,375,000 must come from the proceeds of our insurance policy. In
addition, we will issue the Heins Settlement Note, a note payable to the
Settlement Fund in the amount of $3.0 million. The Heins Settlement Note would
bear interest at the rate of prime plus three percent (prime + 3%), payable in
16 quarterly installments, each of $187,500 principal plus accrued interest,
commencing six months after the effective date of the Heins Settlement. The
Heins Settlement Note would be guaranteed by the 1997 Trust and all of our
subsidiaries. The Heins Stipulation requires us to commence our payment
obligations thereunder pursuant to an escrow arrangement after the Denver Court
issues its final judgment and order approving the Heins Stipulation, but before
all appeals, if any, on that judgment and order have been concluded. If the
Heins Stipulation does not receive final and non-appealable approval by December
31, 2006, or such later date as we and the Class Action Plaintiff agree, then
the escrowed funds will be returned to us. This litigation and proposed
24
settlement are more fully discussed, and the capitalized terms used in this
paragraph are defined, in "Part II, Item 1. Legal Proceedings." 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. In addition, we are obligated to make future
payments under the Credit Facility and a mortgage loan, and to redeem our Series
B Preferred Stock in December 2004. Moreover, if the Heins Stipulation becomes
effective, we will be required to make certain payments under its terms. The
following table sets forth our contractual obligations and commercial
commitments as of March 31, 2003:
PAYMENTS DUE BY PERIOD (1)
----------------------------------------------------------------------
REMAINDER YEARS YEARS AFTER
CONTRACTUAL OBLIGATIONS TOTAL OF 2003 2004-2005 2006-2007 2007
- ----------------------- ----- ------- --------- --------- ----
Credit Facility (2) $ 994,000 - $994,000 - -
Capital Lease Obligations 83,000 $ 37,000 46,000 - -
Operating Leases 2,071,000 624,000 1,138,000 $309,000 -
Series B Preferred Stock (3) 8,749,000 - 8,749,000 - -
Heins Settlement (4) 3,375,000 562,500 1,500,000 1,312,500 -
Other Long-Term Obligations 466,000 59,000 193,000 214,000 -
----------- ---------- ----------- ---------- ---
Total (4) $15,738,000 $1,282,500 $12,620,000 $1,835,500 -
=========== ========== =========== ========== ===
(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 March 31, 2003,
not projected borrowings under the Credit Facility.
(3) Based upon accrued and unpaid dividends as of March 31, 2003.
(4) Assumes the Heins Settlement becomes effective in the fall of 2003, but
excludes interest on the Heins Settlement Note. We cannot provide any assurance
as to whether the Heins Settlement will obtain final approval, or the timing of
such approval. See "Part II, Item 1. Legal Proceedings".
Off-Balance Sheet Arrangements. During the first quarter 2003, we did
not engage in any material off-balance sheet activities or 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 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
25
assurance that our actual cash requirements 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, or its recently formed subsidiary MCM, 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 an 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 currently pending against us,
including but not limited to the Class Action if the proposed
settlement does not become effective, or to other claims that 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
26
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 lead counsel in the Class
Action. Even if we are able to raise additional capital, 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 our current lender, to the holders of our
Series B Preferred Stock and to lead counsel in the Class Action, if their
consents are required. 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 July 2002, the Financial Accounting Standards Board "FASB" issued
Financial Accounting Standards "FAS" No. 146, "Accounting for Costs Associated
With Exit or Disposal Activities", which provides guidance for financial
accounting and reporting of costs associated with exit or disposal activities
and nullifies EITF Issue No. 94-3, "Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit an Activity (including Certain
Costs Incurred in a Restructuring)". FAS 146 requires the recognition of a
liability for a cost associated with an exit or disposal activity when the
liability is incurred, as opposed to when the entity commits to an exit plan
under EITF No. 94-3. FAS 146 is effective for exit or disposal activities that
are initiated after December 31, 2002. The adoption of FAS No.146 did not have
any effect on our consolidated results of operations or financial position.
In November 2002, the FASB issued FASB Interpretation No. 45 ("FIN
45"), "Guarantor's Accounting and Disclosure Requirements for Guarantees,
Including Indirect Guarantees and Indebtedness of Others". FIN 45 elaborates on
the disclosures to be made by the guarantor in its interim and annual financial
statements about its obligations under certain guarantees that it has issued. It
also requires that a guarantor recognize, at the inception of a guarantee, a
liability for the fair value of the obligation undertaken in issuing the
guarantee. The initial recognition and measurement provisions of this
interpretation are applicable on a prospective basis to guarantees issued or
modified after December 31, 2002, while the provisions of the disclosure
requirements are effective for financial statements of interim or annual reports
ending after December 15, 2002. We adopted the disclosure provisions of FIN 45
during the fourth quarter of fiscal 2002 and we adopted the recognition
provisions of FIN 45 during the first quarter 2003 and such adoptions did not
have any effect on our consolidated results of operations or financial position.
In December 2002, the FASB issued FAS No. 148, "Accounting for
Stock-Based Compensation - Transition and Disclosure". FAS 148 amends FAS No.
123, "Accounting for
27
Stock-Based Compensation", to provide alternative methods for voluntary
transition to FAS 123's fair value method of accounting for stock-based employee
compensation ("the fair value method"). FAS 148 also requires disclosure of the
effects of an entity's accounting policy with respect to stock-based employee
compensation on reported net income (loss) and earnings (loss) per share in
annual and interim financials statements. The provisions of FAS 148 are
effective in fiscal years ending after December 15, 2002. The adoption of FAS
148 did not have a material impact on our consolidated results of operations and
financial position since we have not adopted the fair value method. However,
should we be required to adopt the fair value method in the future, such
adoption would have a material impact on our consolidated results of operations
and financial position. See the notes to our consolidated financial statements
included elsewhere in this Report for additional disclosure concerning
stock-based compensation.
In January 2003, the FASB issued FASB Interpretation No. 46 ("FIN 46"),
"Consolidation of Variable Interest Entities". In general, a variable interest
entity is a corporation, partnership, trust, or any other legal structure used
for business purposes that either (a) does not have equity investors with voting
rights or (b) has equity investors that do not provide sufficient financial
resources for the entity to support its activities. FIN 46 requires certain
variable interest entities to be consolidated by the primary beneficiary of the
entity if the investors do not have the characteristics of a controlling
financial interest or do not have sufficient equity at risk for the entity to
finance its activities without additional subordinated financial support from
other parties. The consolidation requirements of FIN 46 apply immediately to
variable interest entities created after January 31, 2003. The consolidation
requirements apply to older entities in the first fiscal year or interim period
beginning after June 15, 2003. Certain of the disclosure requirements apply in
all financial statements issued after January 31, 2003, regardless of when the
variable interest entity was established. Since we currently have no variable
interest entities, adoption of the disclosure provisions of FIN 46 had no impact
on our consolidated results of operations and we expect that the adoption of the
remaining consolidation provisions of FIN 46 will not have a material impact on
our consolidated results of operations or financial position.
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,
28
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;
- 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 PowerSecure
business;
- 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 obtain, on favorable terms if at all, and to maintain
a sufficient amount of capital and liquidity to meet our operating
and capital requirement and growth needs, including the sufficiency
of the Credit Facility;
- 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, including the risk the
conditions to the Heins Stipulation will not be satisfied;
- our limited operating history and unproven business model in our
PowerSecure business;
- the complexity, uncertainty and time constraints associated with the
development and market acceptance of new product and service designs
and technologies;
29
- 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;
- restrictions imposed on us and our ability to raise additional
capital by the terms of our Series B Preferred Stock and our Credit
Facility;
- the effects and timing of the resolution of any dispute with Scient
over payment obligations;
- 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-KSB for the fiscal year ended December 31, 2002.
30
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 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
(a) EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
Our Chief Executive Officer and our Chief Financial Officer have
evaluated the effectiveness of our disclosure controls and procedures (as
defined in Rules 13a-14 and 15d-14 of the Exchange Act) as of a date within 90
days of the filing date of this Quarterly Report on Form 10-Q (the "Evaluation
Date"). Based upon that evaluation, our Chief Executive Officer and our Chief
Financial Officer have concluded that, as of the Evaluation Date, our disclosure
controls and procedures were effective and adequate to ensure that material
information relating to us, including our consolidated subsidiaries, 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 by Securities and Exchange Commission rules and forms.
It should be noted, however, that the design of any system of controls
and procedures is based upon certain assumptions about the likelihood of future
events, and there can be no assurance that any design will succeed in achieving
its stated goals under all potential future conditions.
(b) CHANGES IN INTERNAL CONTROLS
There were no significant changes in our internal controls or in other
factors that could significantly affect these controls subsequent to the
Evaluation Date.
31
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
GENERALLY
From time to time, we are involved in disputes and legal actions
arising in the ordinary course of business. We intend to vigorously defend all
claims against us. As of the date of this Report, other than as set forth below,
no litigation is currently pending or overtly threatened against us, the adverse
outcome of which, indirectly or in aggregate, we believe would have a material
adverse impact on our business, financial conditions or results of operations.
CLASS ACTION LITIGATION
As described in our Annual Report on Form 10-KSB for the fiscal year
ended December 31, 2002 ("2002 Form 10-KSB"), in January 2001, Douglas W. Heins,
individually and on behalf of a class of other persons similarly situated (the
"Class Action Plaintiff"), filed a complaint (the "Class Action") in the
District Court for the City and County of Denver, Colorado (the "Denver Court")
against us, Marcum Midstream 1997-1 Business Trust (the "1997 Trust"), an energy
program managed by our subsidiary Marcum Gas Transmission, Inc. ("MGT"), and
certain affiliates, officers and employees of us and MGT (the foregoing,
collectively, the "Metretek Defendants"), as well as against Farstad Gas & Oil,
LLC, Farstad Oil, Inc. , and Jeff Farstad (collectively, the "Farstad
Defendants").
The 1997 Trust raised approximately $9.25 million from investors in a
private placement in 1997 in order to finance the purchase, operation and
improvement of a natural gas liquids processing plant located in Midland, Texas.
The Class Action alleges that the Metretek Defendants and the Farstad Defendants
(collectively, the "Class Action Defendants"), either directly or as
"controlling persons", violated certain provisions of the Colorado Securities
Act in connection with the sale of interests in the 1997 Trust. The damages
sought in the Class Action include compensatory and punitive damages, pre- and
post-judgment interest, attorneys' fees and other costs.
On March 27, 2003, we, along with the Class Action Plaintiff, filed a
Stipulation of Settlement (the "Heins Stipulation"), which contains the terms
and conditions of a proposed settlement (the "Heins Settlement") intended to
fully resolve all claims by the Class Action Plaintiff against us and the other
Metretek Defendants in the Heins Class Action. The Heins Settlement is
contingent, among other things, upon the payment of not less than $2,375,000
from the proceeds of our directors' and officers' insurance policy (the
"Policy"), which was issued by Gulf Insurance Company ("Gulf"). The Heins
Stipulation creates a settlement fund (the "Heins Settlement Fund") for the
benefit of the Class. If the Denver Court approves the Heins Settlement and all
other conditions to the Heins Settlement are met, then we will pay $2.75 million
into the Heins Settlement Fund, of which no less than $2,375,000 must come from
the
32
proceeds of the Policy, and we will issue a note payable to the Heins Settlement
Fund in the amount of $3.0 million (the "Heins Settlement Note"). The Heins
Settlement Note would bear interest at the rate of prime plus three percent
(prime + 3%), payable in 16 quarterly installments, each of $187,500 principal
plus accrued interest, commencing six months after the effective date of the
Heins Settlement. The Heins Settlement Note would be guaranteed by the 1997
Trust and all of our subsidiaries.
Under the Heins Stipulation, we are required to obtain the consent of
the Class's lead counsel before we can sell any shares of stock of Southern
Flow, Metretek or PowerSecure, although such consent is not required if we make
a prepayment of at least $1 million on the Heins Settlement Note with the
proceeds of any such sale of subsidiary stock. The Heins Stipulation may require
us to commence our payment obligations thereunder pursuant to an escrow
arrangement after the Denver Court issues its final judgment and order approving
the Heins Stipulation, but before all appeals, if any, on that judgment and
order have been concluded. If the Heins Stipulation does not receive final and
non-appealable approval by December 31, 2006, or such later date as is agreed to
by the parties, then the escrowed funds will be returned to us and the Class
Action will continue against the Metretek Defendants. In addition, under the
Heins Stipulation, we would be required to prosecute all third party and
cross-claims and equally share the net recovery of any amounts collected from
the resolution of these third party claims with the Heins Settlement Fund, with
the portion accruing to us being in the form prepayments on the Heins Settlement
Note.
The effective date of the Heins Stipulation is conditioned, among other
things, upon the following events:
- payment by Gulf, our insurance carrier, of at least $2,375,000 in
insurance proceeds from the Policy for the benefit of the Heins
Settlement Fund;
- the entry by the Denver Court of a preliminary approval order
containing certain procedural orders, preliminarily approving the
settlement terms and scheduling a settlement hearing;
- the entry by the Denver Court of a Final Judgment and Order
directing consummation of the Heins Settlement and containing
certain other procedural findings and orders; and
- the final and successful resolution of any appeals related to the
Final Settlement and Order and the Heins Stipulation and the
Interpleader Action described below.
On March 28, 2003, Gulf filed an interpleader complaint (the
"Interpleader Action") in the District Court, City and Country of Denver,
Colorado, seeking a determination by the court as to the proper beneficiaries of
the Policy, and concurrently filed a motion to deposit the remaining amount
payable under the Policy into the registry of the court. The Interpleader Action
is in front of the same judge in the Denver Court as the Class Action. The
Metretek Defendants have filed their answer to the Interpleader Action asking
the Denver Court to utilize the remainder of the insurance proceeds to fund, in
part, the Heins Settlement, but no other defendants have responded as of April
30, 2003. On April 18, 2003, the Denver Court granted Gulf's motion to deposit
the remaining insurance proceeds into the registry of the court.
33
As of April 30, 2003, no date has been set for the preliminary approval
hearing on the Heins Settlement, and no further action has been taken on the
Interpleader Action.
SCIENT NOTE LITIGATION
Also as described in our 2002 Form 10-KSB, in 1999, we retained Scient
Corporation ("Scient"), an "eBusiness" consultant, to design and install an
eBusiness program that would enable us to provide our energy management services
to commercial customers via an Internet project (the "PowerSpring Project"). In
September 2000, as Scient's engagement was being terminated, we issued a
non-negotiable promissory note to Scient for approximately $2.8 million (the
"Scient Note") for the outstanding balance of services invoiced by Scient in
connection with the PowerSpring Project. In June 2001, after we discovered
fraudulent activity by Scient and uncovered other matters of dispute in
connection with Scient's services and billings, Scient agreed to suspend our
payment obligations under the Scient Note until the amount of the fraudulent
activity could be resolved. In May 2002, Scient's engagement manager in charge
of the PowerSpring Project pleaded guilty to federal wire fraud and mail fraud
charges stemming primarily from his activities during Scient's engagement by us.
In March 2003, we and Scient jointly filed a Stipulation and Order of
Settlement (the "Scient Settlement"), which fully and finally resolves all
claims and disputes with Scient. Under the terms of the Scient Settlement, in
exchange for our payment of $50,000 to Scient, Scient agreed to release us from
any further payment obligations under the Scient Note and we agreed to dismiss
all claims against Scient. The Scient Settlement became final and non-appealable
in April 2003.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
10.1 Third Amendment to Credit and Security Agreement, Dated as
of April 4, 2003, between Southern Flow Companies, Inc. and
Wells Fargo Business Credit, Inc.
99.1 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
99.2 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
(b) FORM 8-K
We did not file any Current Reports on Form 8-K during the
quarter ended March 31, 2003.
34
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: May 14, 2003 By: /s/ W. Phillip Marcum
-------------------------------------
W. Phillip Marcum
President and Chief Executive Officer
Date: May 14, 2003 By: /s/ A. Bradley Gabbard
-------------------------------------
A. Bradley Gabbard
Executive Vice President
and Chief Financial Officer
35
CERTIFICATIONS
I, W. Phillip Marcum, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Metretek
Technologies, Inc.;
2. Based on my knowledge, this quarterly report does not contain
any untrue statement of a material fact or omit to state a
material fact necessary to make the statements made, in light
of the circumstances under which such statements were made,
not misleading with respect to the period covered by this
quarterly report;
3. Based on my knowledge, the financial statements, and other
financial information included in this quarterly report,
fairly present in all material respects the financial
condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are
responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act Rules
13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to
ensure that material information relating to the
registrant, including its consolidated subsidiaries,
is made known to us by others within those entities,
particularly during the period in which this
quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's
disclosure controls and procedures as of a date
within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions
about the effectiveness of the disclosure controls
and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have
disclosed, based on our most recent evaluation, to the
registrant's auditors and the audit committee of registrant's
board of directors (or persons performing the equivalent
function):
a) all significant deficiencies in the design or
operation of internal controls which could adversely
affect the registrant's ability to record, process,
summarize and report financial data and have
identified for the registrant's
36
auditors any material weaknesses in internal
controls; and
b) any fraud, whether or not material, that involves
management or other employees who have a significant
role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have
indicated in this quarterly report whether or not there were
significant changes in internal controls or in other factors
that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and
material weaknesses.
Dated: May 14, 2003 /s/ W. Phillip Marcum
------------------------------
W. Phillip Marcum
President and Chief
Executive Officer
I, A. Bradley Gabbard, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Metretek
Technologies, Inc.;
2. Based on my knowledge, this quarterly report does not contain
any untrue statement of a material fact or omit to state a
material fact necessary to make the statements made, in light
of the circumstances under which such statements were made,
not misleading with respect to the period covered by this
quarterly report;
3. Based on my knowledge, the financial statements, and other
financial information included in this quarterly report,
fairly present in all material respects the financial
condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are
responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act Rules
13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to
ensure that material information relating to the
registrant, including its consolidated subsidiaries,
is made known to us by others within those entities,
particularly during the period in which this
quarterly report is being
37
prepared;
b) evaluated the effectiveness of the registrant's
disclosure controls and procedures as of a date
within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions
about the effectiveness of the disclosure controls
and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have
disclosed, based on our most recent evaluation, to the
registrant's auditors and the audit committee of registrant's
board of directors (or persons performing the equivalent
function):
a) all significant deficiencies in the design or
operation of internal controls which could adversely
affect the registrant's ability to record, process,
summarize and report financial data and have
identified for the registrant's auditors any material
weaknesses in internal controls; and
b) any fraud, whether or not material, that involves
management or other employees who have a significant
role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have
indicated in this quarterly report whether or not there were
significant changes in internal controls or in other factors
that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and
material weaknesses.
Dated: May 14, 2003 /s/ A. Bradley Gabbard
--------------------------
A. Bradley Gabbard
Executive Vice President
and Chief Financial
Officer
38