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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 SEPTEMBER 30, 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 November 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 SEPTEMBER 30, 2003
TABLE OF CONTENTS
Page
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Unaudited Consolidated Balance Sheets -
September 30, 2003 and December 31, 2002 3
Unaudited Consolidated Statements of Operations -
For the Three and Nine Months Ended September 30, 2003
and September 30, 2002 5
Unaudited Consolidated Statements of Cash Flows -
For the Nine Months Ended September 30, 2003
and September 30, 2002 6
Notes to Unaudited Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 17
Item 3. Quantitative and Qualitative Disclosures about Market Risk 38
Item 4. Controls and Procedures 39
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 40
Item 6. Exhibits and Reports on Form 8-K 40
Signatures 41
2
PART I.
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
METRETEK TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
SEPTEMBER 30, DECEMBER 31,
2003 2002
-------------- --------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 2,149,351 $ 884,843
Trade receivables, net of allowance for doubtful accounts
of $217,160 and $281,422, respectively 7,863,471 4,209,942
Other receivables 52,932 44,199
Inventories 4,071,179 3,208,774
Prepaid expenses and other current assets 670,204 519,113
-------------- --------------
Total current assets 14,807,137 8,866,871
-------------- --------------
PROPERTY, PLANT AND EQUIPMENT:
Equipment 3,834,738 3,776,586
Vehicles 64,491 63,867
Furniture and fixtures 587,055 580,551
Land, building and improvements 748,591 742,424
-------------- --------------
Total property, plant and equipment, at cost 5,234,875 5,163,428
Less accumulated depreciation and amortization 3,712,956 3,449,635
-------------- --------------
Property, plant and equipment, net 1,521,919 1,713,793
-------------- --------------
OTHER ASSETS:
Goodwill 7,617,196 7,617,196
Patents and capitalized software development, net of accumulated
amortization of $1,007,473 and $930,633, respectively 314,293 389,133
Investment in unconsolidated affiliate 611,206 554,460
Other assets 72,988 57,988
-------------- --------------
Total other assets 8,615,683 8,618,777
-------------- --------------
TOTAL $ 24,944,739 $ 19,199,441
============== ==============
See accompanying notes to unaudited consolidated financial statements.
3
METRETEK TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
SEPTEMBER 30, DECEMBER 31,
2003 2002
-------------- --------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 2,450,044 $ 1,596,870
Accrued and other liabilities 6,663,599 2,868,771
Notes payable 582,914 261,387
Deposits and capital lease obligations 29,746 42,458
-------------- --------------
Total current liabilities 9,726,303 4,769,486
-------------- --------------
LONG-TERM NOTES PAYABLE 4,883,246 4,690,758
-------------- --------------
NON-CURRENT CAPITAL LEASE OBLIGATIONS 23,160 41,893
-------------- --------------
COMMITMENTS AND CONTINGENCIES
MINORITY INTEREST IN SUBSIDIARIES 121,765
-------------- --------------
REDEEMABLE PREFERRED STOCK - SERIES B,
$.01 PAR VALUE; 1,000,000 SHARES AUTHORIZED;
7,000 ISSUED AND OUTSTANDING;
REDEMPTION VALUE $1,000 PER SHARE 9,194,141 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 (54,171,443) (53,987,204)
-------------- --------------
Total stockholders' equity 996,124 1,165,363
-------------- --------------
TOTAL $ 24,944,739 $ 19,199,441
============== ==============
See accompanying notes to unaudited consolidated financial statements
4
METRETEK TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------------- ----------------------------
2003 2002 2003 2002
------------ ------------ ------------ ------------
REVENUES:
Sales and services $ 11,925,533 $ 8,006,559 $ 30,106,924 $ 20,477,549
Other 93,376 54,335 445,801 153,796
------------ ------------ ------------ ------------
Total revenues 12,018,909 8,060,894 30,552,725 20,631,345
------------ ------------ ------------ ------------
COSTS AND EXPENSES:
Cost of sales and services 9,349,454 5,976,167 22,981,143 15,145,017
General and administrative 1,435,271 1,366,877 4,692,720 4,180,372
Selling, marketing and service 404,229 383,175 1,078,842 1,105,807
Depreciation and amortization 171,214 154,124 518,453 486,344
Research and development 180,523 137,290 471,328 411,798
Interest, finance charges and other 61,713 49,418 210,513 136,345
Nonrecurring charges - - - 257,504
------------ ------------ ------------ ------------
Total costs and expenses 11,602,404 8,067,051 29,952,999 21,723,187
------------ ------------ ------------ ------------
OPERATING INCOME (LOSS) 416,505 (6,157) 599,726 (1,091,842)
MINORITY INTEREST (59,304) - (121,765) -
INCOME TAXES - - - -
------------ ------------ ------------ ------------
NET INCOME (LOSS) 357,201 (6,157) 477,961 (1,091,842)
PREFERRED STOCK
DEEMED DISTRIBUTION (224,314) (207,549) (662,200) (613,014)
------------ ------------ ------------ ------------
NET INCOME (LOSS) APPLICABLE
TO COMMON SHAREHOLDERS $ 132,887 $ (213,706) $ (184,239) $ (1,704,856)
============ ============ ============ ============
NET INCOME (LOSS) PER COMMON SHARE:
BASIC $ 0.02 $ (0.04) $ (0.03) $ (0.28)
============ ============ ============ ============
DILUTED $ 0.02 $ (0.04) $ (0.03) $ (0.28)
============ ============ ============ ============
WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING:
BASIC 6,043,469 6,077,764 6,043,469 6,077,764
============ ============ ============ ============
DILUTED 6,053,018 6,077,764 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)
NINE MONTHS ENDED
SEPTEMBER 30,
-------------------------------
2003 2002
-------------- --------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 477,961 $ (1,091,842)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization 518,453 486,344
Minority interest in subsidiary 136,765
Loss on disposal of property, plant and equipment 3,622 7,665
Equity in income of unconsolidated affiliate (328,340) (7,437)
Changes in operating assets and liabilities:
Trade receivables, net (3,653,529) (1,156,059)
Inventories (862,405) 87,771
Other current assets (159,824) (430,794)
Other noncurrent assets (15,000) 262,138
Accounts payable 853,174 994,328
Accrued and other liabilities 3,794,828 742,374
-------------- --------------
Net cash provided by (used in) operating activities 765,705 (105,512)
-------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capitalized software purchases or development (2,000) (5,845)
Purchases of property, plant and equipment (253,361) (148,908)
Distributions from unconsolidated affiliate 271,594 70,311
Proceeds from sale of property, plant and equipment 1,500
-------------- --------------
Net cash provided by (used in) investing activities 16,233 (82,942)
-------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings on line of credit 539,158 112,309
Proceeds from equipment loan 30,169
Payments on equipment loans (49,346)
Payments on mortgage loan and capital lease obligations (37,411) (5,739)
-------------- --------------
Net cash provided by financing activities 482,570 106,570
-------------- --------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 1,264,508 (81,884)
CASH AND CASH EQUIVALENTS AT
BEGINNING OF PERIOD 884,843 696,076
-------------- --------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 2,149,351 $ 614,192
============== ==============
See accompanying notes to unaudited consolidated financial statements.
6
METRETEK TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
As of September 30, 2003 and December 31, 2002 and
For the Three and Nine Month Periods Ended September 30, 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.
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 (which was subsequently reduced to 13% of its outstanding common
stock to two 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 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 nine months
ended September 30, 2003, because the minority interest shareholders losses are
limited to their capital contributions and accumulated earnings, which was $0 at
September 30, 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
7
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
during the first quarter of 2003 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
minority interest in the income of PowerSecure for the three and nine month
periods ended September 30, 2003, was $59,304 and $121,765, respectively, and is
included as a separate line-item in the consolidated statements of operations.
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.
The following table illustrates the effect on net income (loss) and income
(loss) per share if the Company had applied the fair value recognition
provisions of FAS 123 for the three and nine month periods ended September 30,
2003 and 2002:
8
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------------- ----------------------------
2003 2002 2003 2002
------------ ------------ ------------ ------------
Net income (loss) applicable to common
shareholders - as reported $ 132,887 $ (213,706) $ (184,239) $ (1,704,856)
Deduct total stock-based employee
compensation expense determined
under fair value based method (72,718) - (113,416) (34,837)
------------ ------------ ------------ ------------
Net income (loss) applicable to common
shareholders - pro forma $ 60,169 $ (213,706) $ (297,655) $ (1,739,693)
============ ============ ============ ============
Income (loss) per basic and
diluted Common Share:
As reported $ 0.02 $ (0.04) $ (0.03) $ (0.28)
============ ============ ============ ============
Pro forma $ 0.01 $ (0.04) $ (0.05) $ (0.29)
============ ============ ============ ============
The fair values of stock options were calculated using the
Black-Scholes stock option valuation model with the following weighted average
assumptions for stock option grants during the periods ended September 30, 2003
and 2002: a stock price volatility of 107% and 105%, respectively; risk-free
interest rate of 3.50% per year; dividend rate of $0.00 per year; and an
expected life of 4 years for options granted to employees and 10 years for
options granted to directors.
INCOME (LOSS) PER SHARE - The Company's net income (loss) per share is
computed based on the net income (loss) applicable to common shareholders and
the weighted average number of shares of common stock outstanding during the
periods presented. The Company's net income (loss) applicable to common
shareholders is the same for purposes of computing both basic and diluted per
share amounts for all periods presented. The following is a reconciliation of
basic and diluted weighted average common shares outstanding:
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------------- ----------------------------
2003 2002 2003 2002
------------ ------------ ------------ ------------
Weighted average common shares
outstanding--basic 6,043,469 6,077,764 6,043,469 6,077,764
Add: Assumed conversion of dilutive
stock options outstanding 9,549 - - -
------------ ------------ ------------ ------------
Weighted average common shares
outstanding--diluted 6,053,018 6,077,764 6,043,469 6,077,764
============ ============ ============ ============
The assumed conversion of "out-of-the-money" stock options, convertible
preferred stock and warrants has been excluded from weighted average shares
because the effect would be anti-dilutive.
RECLASSIFICATION - Certain 2002 amounts have been reclassified to
conform to current year presentation. Such reclassifications had no impact on
the Company's net income (loss) or stockholders' equity.
9
In the opinion of the Company's management, all adjustments (all of
which are normal and recurring) have been made which are necessary for a fair
presentation of the consolidated financial position of the Company and its
subsidiaries as of September 30, 2003 and the consolidated results of their
operations and cash flows for the three and nine month periods ended September
30, 2003 and September 30, 2002.
2. COMPREHENSIVE INCOME (LOSS)
The Company's comprehensive income for the nine months ended September
30, 2003 was $477,961, the same as its net income for the period. The Company's
comprehensive loss for the nine months ended September 30, 2002 was $1,065,182,
which included foreign currency translation adjustments related to its Metretek
Europe operations that were terminated during 2002.
3. INVESTMENT IN UNCONSOLIDATED AFFILIATE
During 1998, the Company decided to discontinue the operations of MGT,
a wholly owned subsidiary of the Company. MGT had been formed by the Company in
1991 to acquire or finance the acquisition of natural gas assets through
privately financed programs, and then to manage and maintain a small ownership
interest in those programs. Between 1992 and 1998, MGT formed and invested in
three such programs. The decision to discontinue MGT was based on the declining
prospects of MGT's markets and to enable the Company to focus on its other
operations. As part of the discontinuation of MGT, one of the programs in which
MGT participated was liquidated and MGT sold one-third of its interests in each
of the two other programs. Subsequently, MGT wrote-off the balance of its
remaining investment in one of the programs, and its equity interest in the last
program was offered for sale. At December 31, 2002, the balance of the remaining
net assets of MGT was $561,747. For a variety of reasons, including the Class
Action Litigation described in Note 5, the Company was unable to complete the
disposition of the remaining net assets of MGT as it had originally planned.
During the third quarter of 2003, the Company determined that retaining
and potentially expanding its equity interest in the last program would be a
more economically viable alternative to disposing its equity interest.
Accordingly, management has decided to retain MGT's investment in the remaining
program and evaluate opportunities to expand its existing investment.
As a result of this decision, the remaining net assets of MGT have been
reclassified from other assets to its various components in the accompanying
balance sheets at September 30, 2003 and December 31, 2002, as follows:
10
SEPTEMBER 30, DECEMBER 31,
2003 2002
-------------- --------------
Assets:
Other receivables $ 52,689 $ 43,611
Investment in unconsolidated affiliate 611,206 554,460
-------------- --------------
Total $ 663,895 $ 598,071
============== ==============
Liabilities:
Accounts payable $ 19,779 $ 20,290
Accrued and other liabilities 17,563 16,034
-------------- --------------
Total $ 37,342 $ 36,324
============== ==============
MGT utilizes the equity method to account for its investment in
unconsolidated affiliate. MGT's revenues, consisting of equity earnings and
management and administrative fees, included in other revenues for the nine
months ended September 30, 2003 and 2002 was $450,784 and $149,000,
respectively. MGT's costs, consisting of costs associated with managing the
unconsolidated affiliate and other legal and administrative costs, included in
general and administrative expenses for the nine months ended September 30, 2003
and 2002 was $213,455 and $149,000, respectively.
4. DEBT
LINES OF CREDIT - In September 2003, the Company restructured its
existing $3,000,000 Credit Facility with Wells Fargo Business Credit, Inc.
("Wells Fargo") by:
- adding PowerSecure as an additional borrower under the Credit
Facility through a Credit and Security Agreement (the "PowerSecure
Credit Agreement") between Wells Fargo and PowerSecure, which added
certain eligible accounts receivable of PowerSecure to the borrowing
base of the Credit Facility; and
- amending the Southern Flow Credit Agreement and the Metretek Florida
Credit Agreement to extend the maturity dates thereof to September
30, 2006, and to make certain other changes discussed below.
The $3,000,000 maximum borrowing capacity under the Credit Facility was
not changed in the Credit Facility restructuring, although the additional assets
of PowerSecure included in the borrowing base are intended to facilitate
increased borrowing capacity, up to the maximum limit.
The obligations of PowerSecure under the PowerSecure Credit Agreement
have been guaranteed by the Company, Southern Flow, Metretek Florida and MCM
(collectively, the "Guarantors"). These guarantees have been secured by a
guaranty agreement and a security agreement ("Security Agreement") entered into
by each of the Guarantors, along with a subordination agreement entered into by
the Company. The Security Agreements grant to Wells Fargo a first priority
security interest in virtually all of the assets of each of the Guarantors. The
PowerSecure Credit Facility is further secured by a first priority security
interest in virtually all of the assets of PowerSecure.
11
The PowerSecure Credit Agreement contains financial covenants by
PowerSecure to maintain a minimum tangible net worth and minimum net income
levels and maximum capital expenditures. The PowerSecure Credit Agreement
contains other standard covenants related to PowerSecure's operations, including
prohibitions on the payment of dividends, the sale of assets and other corporate
transactions by PowerSecure, without the Lender's consent. PowerSecure is
permitted to advance funds under the PowerSecure Credit Agreement to the
Guarantors, provided that after making such advances the Credit Facility
availability is not less than $100,000 and that total advances to the Guarantors
do not exceed $800,000 during 2003.
Borrowings under the aggregate Credit Agreement are limited to a
borrowing base equal to between 80% and 85% of eligible accounts receivable, 65%
of Southern Flow's eligible unbilled accounts receivable, and 20% of Southern
Flow's eligible inventory. At September 30, 2003, the Company had an aggregate
borrowing base of $3,000,000 under the Credit Facility, of which $2,010,000 had
been borrowed, leaving $990,000 available to borrow.
In connection with the restructuring of the Credit Facility, Southern
Flow and Metretek Florida each amended their respective Credit and Security
Agreements with Wells Fargo to extend the maturity dates thereof until September
30, 2006 and to work in conformity with the PowerSecure Credit Agreement. In
addition, the Metretek Florida Credit and Security Agreement was amended to
modify and reduce the financial covenants of Metretek Florida related to minimum
tangible net worth and minimum net income.
The Credit Facility, which constitutes the Company's primary credit
agreement, has been used and is expected to continue to be used primarily to
fund the operations and growth of the Company's subsidiaries, especially
PowerSecure and MCM.
5. 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.
12
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 Florida 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 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
13
- the final and successful resolution of any appeals related to
the Final Settlement and Order and the Heins Stipulation and
the Interpleader Complaint 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 against the
Metretek Defendants, the Farstad Defendants and the Class Action Plaintiff (the
"Interpleader Complaint") 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
Complaint is in front of the same judge in the Denver Court as the Class Action.
On April 18, 2003, the Denver Court granted Gulf's motion to deposit the
remaining insurance proceeds into the registry of the court. The Metretek
Defendants filed their answer to the Interpleader Complaint asking the Denver
Court to utilize the remainder of the insurance proceeds to fund, in part, the
Heins Settlement. The Farstad Defendants filed their answer to the Interpleader
Complaint and asserted counterclaims against Gulf, objecting to Gulf's use of
the remaining limits of the Policy to fund the proposed Heins Settlement. The
Class Action Plaintiff also filed its answer to the Interpleader Complaint,
indicating no objection to Gulf utilizing the proceeds of the Policy to fund, in
part, the Heins Settlement. On August 4, 2003, Gulf filed an unopposed motion to
file an amended Interpleader Complaint (the "Amended Interpleader Complaint").
The Amended Interpleader Complaint is similar to the original Interpleader
Complaint, but also includes allegations on the same issues raised by the
Farstad Defendants in their counterclaims. In August 2003, all Defendants filed
answers to the Amended Interpleader Complaint similar to their answers to the
original Interpleader Complaint, but the Farstad Defendants did not reassert
their counterclaims.
As of November 4, 2003, no date has been set for the preliminary
approval hearing on the Heins Settlement.
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 the Company's business, financial condition or
results of operations.
6. 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.
14
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 September 30, 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.
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.
15
SUMMARIZED SEGMENT FINANCIAL INFORMATION
(all amounts reported in thousands)
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------- --------------------
2003 2002 2003 2002
-------- -------- -------- --------
REVENUES:
Southern Flow $ 2,923 $ 2,986 $ 8,746 $ 9,342
PowerSecure 6,161 3,326 13,583 6,480
Metretek Florida 2,841 1,695 7,778 4,656
Other 94 54 446 154
-------- -------- -------- --------
Total $ 12,019 $ 8,061 $ 30,553 $ 20,632
======== ======== ======== ========
SEGMENT PROFIT (LOSS):
Southern Flow $ 378 $ 428 $ 1,018 $ 1,559
PowerSecure 408 217 871 (226)
Metretek Florida (74) (180) 30 (693)
Other (295) (471) (1,319) (1,732)
-------- -------- -------- --------
Total $ 417 $ (6) $ 600 $ (1,092)
======== ======== ======== ========
CAPITAL EXPENDITURES:
Southern Flow $ 61 $ 29 $ 100 $ 87
PowerSecure 37 111 16
Metretek Florida 6 18 40 41
Other 4 11
-------- -------- -------- --------
Total $ 104 $ 47 $ 255 $ 155
======== ======== ======== ========
DEPRECIATION AND AMORTIZATION:
Southern Flow $ 32 $ 32 $ 97 $ 103
PowerSecure 17 12 46 35
Metretek Florida 117 104 359 331
Other 5 6 16 17
-------- -------- -------- --------
Total $ 171 $ 154 $ 518 $ 486
======== ======== ======== ========
September 30,
2003 2002
-------- --------
TOTAL ASSETS:
Southern Flow $ 9,473 $ 9,395
PowerSecure 7,729 4,143
Metretek Florida 6,981 6,345
Other 762 1,162
-------- --------
Total $ 24,945 $ 21,045
======== ========
16
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
INTRODUCTION
The following discussion of our results of operations for the three and
nine month periods ended September 30, 2003 (referred to herein as the "third
quarter 2003" and "nine month period 2003", respectively) and for the three and
nine month periods ended September 30, 2002 (referred to herein as the "third
quarter 2002" and "nine month period 2002", respectively) and of our financial
condition as of September 30, 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
17
our consolidated financial statements contained in our Annual Report on Form
10-KSB for the 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
18
in the future, resulting in an impairment of their ability to make payments,
additional allowances 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
19
value of the assets exceeds their fair value. For goodwill, the impairment
evaluation includes a 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 and other factors. 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.
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.
20
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------- --------------------
2003 2002 2003 2002
-------- -------- -------- --------
(all amounts reported in thousands)
REVENUES:
Southern Flow $ 2,923 $ 2,986 $ 8,746 $ 9,342
PowerSecure 6,161 3,326 13,583 6,480
Metretek Florida 2,841 1,695 7,778 4,656
Other 94 54 446 154
-------- -------- -------- --------
Total $ 12,019 $ 8,061 $ 30,553 $ 20,632
======== ======== ======== ========
GROSS PROFIT:
Southern Flow $ 738 $ 785 $ 2,079 $ 2,598
PowerSecure 1,268 755 3,104 1,312
Metretek Florida 570 490 1,943 1,422
-------- -------- -------- --------
Total $ 2,576 $ 2,030 $ 7,126 $ 5,332
======== ======== ======== ========
SEGMENT PROFIT (LOSS):
Southern Flow $ 378 $ 428 $ 1,018 $ 1,559
PowerSecure 408 217 871 (226)
Metretek Florida (74) (180) 30 (693)
Other (295) (471) (1,319) (1,732)
-------- -------- -------- --------
Total $ 417 $ (6) $ 600 $ (1,092)
======== ======== ======== ========
Our reportable segments are strategic business units that offer
different products and services. They are managed separately because each
business requires different technology and marketing strategies. Our reportable
business segments include: natural gas measurement services; distributed
generation; and automated energy data management.
The operations of our natural gas measurement services segment are
conducted by Southern Flow. Southern Flow's services include on-site field
services, chart processing and analysis, laboratory analysis, and data
management and reporting. These services are provided principally to customers
involved in natural gas production, gathering, transportation and processing.
The operations of our distributed generation segment are conducted by
PowerSecure. The primary elements of PowerSecure's distributed generation
products and services include project design and engineering, negotiation with
utilities to establish tariff structures and power interconnects, generator
acquisition and installation, process control and switchgear design and
installation, and ongoing project monitoring and servicing. PowerSecure markets
its distributed generation service packages directly to large end-users of
electricity and through outsourcing partnerships with utilities. Through
September 30, 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
21
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.
THIRD QUARTER 2003 COMPARED TO THIRD QUARTER 2002
Revenues. Our revenues are derived almost entirely from the sales of
products and services by our subsidiaries. Our consolidated revenues for the
third quarter 2003 increased $3,958,000, or 49%, compared to the third quarter
2002. The increase was due to an increase in revenues by PowerSecure and by
Metretek Florida, partially offset by a small decrease in revenues by Southern
Flow. PowerSecure's revenues increased $2,835,000, or 85%, during the third
quarter 2003 compared to the third quarter 2002. The increase in PowerSecure's
revenues was due to both a significant increase in the number of PowerSecure's
completed and in-process projects during the third quarter 2003 compared to the
third quarter 2002, together with the positive effects on revenues of an
increase in size of PowerSecure's projects during the third quarter 2003
compared to the third quarter 2002. PowerSecure had 22 projects completed or in
process during the third quarter 2003 compared to 17 projects completed or in
process during the third quarter 2002. In addition, PowerSecure's average
revenue per project for completed and in-process projects was $276,000 during
the third quarter 2003 compared to $194,000 during the third quarter 2002. As
discussed below under "Quarterly Fluctuations", PowerSecure's revenues have
fluctuated significantly in the past and are expected to continue to fluctuate
significantly in the future. Metretek Florida's revenues increased $1,146,000,
or 68%, during the third quarter 2003 compared to the third quarter 2002,
consisting of an increase in domestic sales of $991,000, together with an
increase in international sales of $155,000. The increase in Metretek Florida's
domestic sales was due to an increase of $968,000 in sales of field devices,
data collection software products, and communications solutions products,
combined with a $23,000 increase in its circuit board contract manufacturing
sales. The increase in domestic sales of field devices, data collection software
products, and communications solutions products was attributable primarily to
final shipments on a significant order from Public Service Electric and Gas
22
(PSE&G) of New Jersey, approximately one-third of which was shipped during the
third quarter 2003. Southern Flow's revenues decreased $63,000, or 2% during the
third quarter 2003, compared to the third quarter 2002, primarily due to
decreases in chart processing services and on-site field services. These
decreases were partially offset by increases in equipment sales and laboratory
analysis services. We believe that the overall decrease in Southern Flow's
revenues was attributable to cutbacks by some customers concerned about future
oil price volatility due to the on-going situation in 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 third quarter 2003
increased $3,373,000, or 56%, compared to the third quarter 2002, attributable
almost entirely to increased sales activity at PowerSecure and at Metretek
Florida. PowerSecure's costs of sales and services for the third quarter 2003
increased $2,323,000, or 90%, compared to the third quarter 2002. The increase
in PowerSecure's costs of sales and services was primarily a direct result of
the 85% increase in PowerSecure's revenues. PowerSecure's gross profit margin
was 20.6% for the third quarter 2003 compared to 22.7% for the third quarter
2002, which is within the range of normal operating fluctuations for
PowerSecure. Metretek Florida's costs of sales and services for the third
quarter 2003 increased $1,067,000, or 89%, compared to the third quarter 2002.
The increase in Metretek Florida's costs of sales and services was primarily a
direct result of the 68% increase in Metretek Florida's revenues. Metretek
Florida's overall gross profit margin decreased to 20.0% for the third quarter
2003, compared to 28.9% for the third quarter 2002. The primary reason for the
decrease in Metretek Florida's gross profit margin was greater than normal
materials costs related to its field devices, data collection software products,
and communications solutions products. Southern Flow's costs of sales and
services for the third quarter 2003 decreased $17,000, or less than 1%, compared
to the third quarter 2002. The slight decrease in Southern Flow's costs of sales
and services was due primarily to the 2% decrease in Southern Flow's revenues.
Southern Flow's gross profit margin decreased to 25.3% for the third quarter
2003 compared to 26.3% for the third quarter 2002, which is within the range of
normal operating fluctuations for Southern Flow.
General and administrative expenses include personnel and related
overhead costs for the support and administrative functions. General and
administrative expenses for the third quarter 2003 increased $68,000, or 5%,
compared to the third quarter 2002, due to increased personnel and related
overhead costs associated with the continued development of the business of
PowerSecure together with increased personnel and related overhead costs at
Metretek Florida during the third quarter 2003 compared to the third quarter
2002.
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 third quarter 2003 increased $21,000, or 5%,
compared to the third quarter 2002. The increase in selling, marketing and
service expenses is due to the partially offsetting effects of the following:
increased personnel, commission costs, and business development expenses
associated with the continued development of the business of PowerSecure; and
reduced personnel and marketing costs at Metretek Florida during the third
quarter 2003 compared to the third quarter 2002.
23
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 third quarter 2003 increased $17,000, or 11%, compared to the third
quarter 2002. The increase in depreciation and amortization expense primarily
reflects additional depreciation of equipment at Metretek Florida and
PowerSecure during the third quarter 2003 compared to the third 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 for the third
quarter 2003 increased $43,000, or 31%, compared to the third quarter 2002. The
increase in research and development expenses primarily reflects the
reallocation of certain personnel and associated costs at Metretek Florida
during the third quarter 2003 compared to the third 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 third quarter 2003
increased $12,000, or 25%, compared to the third 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 third quarter 2003. The Metretek Florida line of credit commenced in
September 2002 and the equipment loan commenced in the fourth quarter 2002.
NINE MONTH PERIOD 2003 COMPARED TO NINE MONTH PERIOD 2002
Revenues. Our revenues are derived almost entirely from the sales of
products and services by our subsidiaries. Our consolidated revenues for the
nine month period 2003 increased $9,921,000, or 48%, compared to the nine month
period 2002. The increase was due to increases in revenues by PowerSecure and by
Metretek Florida, partially offset by a decrease in revenues by Southern Flow.
PowerSecure's revenues increased $7,103,000, or 110%, during the nine month
period 2003 compared to the nine month period 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 nine month period
2003 compared to the nine month period 2002. PowerSecure had 48 projects
completed or in process during the nine month period 2003 compared to 23
projects completed or in process during the nine month period 2002.
PowerSecure's average revenue per project for completed and in-process projects
was $279,000 during the nine month period 2003 compared to $278,000 during the
nine month period 2002. In addition, PowerSecure's revenues during the nine
month period 2003 included $114,000 of professional service revenue compared to
$45,000 of professional service revenue during the nine month period 2002. As
discussed below under "Quarterly Fluctuations", PowerSecure's revenues have
fluctuated significantly in the past and are expected to continue to fluctuate
significantly in the future. Metretek Florida's revenues increased $3,122,000,
or 67%, during the nine month period 2003 compared to the nine month period
2002, consisting of an increase in
24
domestic sales of $2,954,000, together with a slight increase in international
sales of $168,000. The increase in Metretek Florida's domestic sales was due to
an increase of $2,106,000 in sales of field devices, data collection software
products, and communications solutions products, combined with an $848,000
increase in its contract manufacturing sales. The increase in domestic sales of
field devices, data collection software products, and communications solutions
products was attributable primarily to shipments on a significant order from
Public Service Electric and Gas (PSE&G) of New Jersey. The increase in domestic
circuit board contract manufacturing sales was attributable primarily to the
initial shipments on a significant multi-year contract to build electronic
assemblies for a large domestic furniture manufacturer. Southern Flow's revenues
decreased $596,000, or 6% during the nine month period 2003, compared to the
nine month period 2002, primarily due to a decrease in chart processing
services, on-site field services, equipment sales, and laboratory analysis
services. We believe that the decrease in Southern Flow's revenues was
attributable to (i) cutbacks by some customers concerned about future oil price
volatility due to the on-going situation in Iraq; and (ii) Gulf Coast weather
incidents that reduced Southern Flow's opportunities to provide on-site field
services to its customers.
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 nine month period 2003
increased $7,836,000, or 52%, compared to the nine month period 2002,
attributable almost entirely to increased sales activity at PowerSecure and at
Metretek Florida. PowerSecure's costs of sales and services for the nine month
period 2003 increased $5,311,000, or 103%, compared to the nine month period
2002. The increase in PowerSecure's costs of sales and services was primarily a
direct result of the 110% increase in PowerSecure's revenues. PowerSecure's
gross profit margin was 22.8% for the nine month period 2003 compared to 20.2%
for the nine month period 2002, which is within the range of normal operating
fluctuations for PowerSecure. Metretek Florida's costs of sales and services for
the nine month period 2003 increased $2,602,000, or 80%, compared to the nine
month period 2002. The increase in Metretek Florida's costs of sales and
services was primarily a direct result of the 67% increase in Metretek Florida's
revenues. Metretek Florida's overall gross profit margin decreased to 25.0% for
the nine month period 2003, compared to 30.6% for the nine month period 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; (ii) lower margins earned on MCM's contract manufacturing
products which comprised a greater percentage of Metretek Florida's total sales
in the nine month period 2003 compared to the nine month period 2002; and (iii)
greater than normal materials costs related to its field devices, data
collection software products, and communications solutions products. Southern
Flow's costs of sales and services for the nine month period 2003 decreased
$77,000, or 1%, compared to the nine month period 2002. The slight decrease in
Southern Flow's costs of sales and services despite an overall 6% decrease in
Southern Flow's revenues was due to the cost structure of Southern Flow's
service operations which remains generally fixed, over short periods, relative
to fluctuations in its service related revenues. As a result, Southern Flow's
gross profit margin after costs of sales and services decreased to 23.8% for the
nine month period 2003 compared to 27.8% for the nine month period 2002.
25
General and administrative expenses include personnel and related
overhead costs for the support and administrative functions. General and
administrative expenses for the nine month period 2003 increased $512,000, or
12%, compared to the nine month period 2002, due to substantial increases in
personnel and related overhead costs associated with the continued development
of the business of PowerSecure together with smaller increases in personnel and
related overhead costs Metretek Florida and at Southern Flow during the nine
month period 2003 compared to the nine month period 2002.
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 nine month period 2003 decreased $27,000, or 2%,
compared to the nine month period 2002. The decrease in selling, marketing and
service expenses is due to the partially offsetting effects of the following:
reduced personnel and marketing costs at Metretek Florida; and increased
personnel, commission costs, and business development expenses associated with
the continued development of the business of PowerSecure during the nine month
period 2003 compared to the nine month period 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 nine month period 2003 increased $32,000, or 7%, compared to the nine
month period 2002. The increase in depreciation and amortization expense
primarily reflects additional depreciation of equipment at Metretek Florida and
PowerSecure during the nine month period 2003 compared to the nine month period
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 for the nine
month period 2003 increased $60,000, or 15%, compared to the nine month period
2002. The increase in research and development expenses primarily reflects the
reallocation of certain personnel and associated costs at Metretek Florida
during the nine month period 2003 compared to the nine month period 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 nine month period 2003
increased $74,000, or 54%, compared to the nine month period 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 nine month period 2003. The Metretek Florida line of credit
commenced in September 2002 and the equipment loan commenced in the fourth
quarter 2002.
Nonrecurring charges of $258,000 for the nine month period 2002
includes the costs related to the June 2002 changes in management at Metretek
Florida, principally termination benefits paid to former Metretek Florida
management personnel. There were no similar nonrecurring charges in the nine
month period 2003.
26
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 such as Metretek Florida's InvisiConnect product;
- the pace of development of our new businesses;
- 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;
- the size and timing of new projects initiated by utilities that may
affect demand for Metretek Florida products;
- 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
27
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, such as the sale of Metretek Florida products
to PSE&G, 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 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. 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 September 30, 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 and in our Annual Report on Form 10-KSB for the fiscal year ended
December 31, 2002, you should not rely on quarter-to-quarter, period-to-period
or year-to-year comparisons of our results of operations as an indication of our
future performance. Quarterly, period or annual comparisons of our operating
results are not necessarily meaningful or indicative of future performance.
28
LIQUIDITY AND CAPITAL RESOURCES
Capital Requirements. We require capital primarily to finance our:
- operations;
- inventories (including project expenses);
- 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 PowerSecure may require significant
capital in the future, to the extent that PowerSecure pursues development of
significant "company-owned" projects.
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 September 30, 2003, we had working capital of $5,081,000,
including $2,149,000 in cash and cash equivalents, compared to working capital
of $4,097,000 on December 31, 2002, which included $885,000 in cash and cash
equivalents.
Net cash provided by operating activities was $766,000 in the nine
month period 2003, consisting of approximately $808,000 of cash provided by
operations, before changes in assets and liabilities, and approximately $42,000
of cash used by changes in working capital and other asset and liability
accounts. This compares to net cash used in operating activities of $106,000 in
the nine month period 2002, consisting of approximately $605,000 of cash used in
operations, before changes in assets and liabilities, and approximately $499,000
of cash provided by changes in working capital and other asset and liability
accounts.
Net cash provided by investing activities was $16,000 in the nine month
period 2003, as compared to cash used in investing activities of $83,000 in the
nine month period 2002. The net cash provided by investing activities during the
nine month period 2003 was attributable to distributions from MGT's
unconsolidated affiliate which was partially offset by the purchase of equipment
primarily at PowerSecure and Southern Flow. The net cash used by investing
activities during the nine month period 2002 was attributable to the purchase of
equipment primarily at Southern Flow and Metretek Florida which was partially
offset by distributions from MGT's unconsolidated affiliate.
Net cash provided by financing activities was $483,000 in the nine
month period 2003, compared to net cash provided by financing activities of
$107,000 in the nine month period 2002. The net cash provided by financing
activities during the nine month period 2003 represented net borrowings on our
line of credit and proceeds from an equipment loan which were partially offset
by payments on our equipment loans and payments on our capital lease obligations
and a
29
mortgage loan. The net cash provided by financing activities during the nine
month period 2002 represented initial net borrowings on Metretek Florida's line
of credit offset, in part, by net payments on Southern Flow's line of credit and
payments on our mortgage loan.
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
$471,000 during the nine month period 2003. We anticipate that our research and
development expenses in fiscal 2003 will total approximately $663,000, virtually
all of which will be directed to Metretek Florida's business and the development
of its new M2M (Machine-to-Machine) communication products such as
InvisiConnect and DCM100.
Our capital expenditures in the nine month period 2003 were
approximately $255,000. We anticipate capital expenditures in fiscal 2003 of
approximately $400,000 which will benefit all of our key subsidiaries. In
addition, any increase in activities related to the development of PowerSecure's
"company-owned" program business could 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.
Working Capital Credit Facility. In September 2003, we restructured our
existing $3,000,000 working capital Credit Facility with Wells Fargo by:
- adding PowerSecure as an additional borrower under the Credit
Facility through a Credit and Security Agreement between Wells
Fargo and PowerSecure, which added certain eligible accounts
receivable of PowerSecure to the borrowing base of the Credit
Facility; and
- amending the Southern Flow Credit Agreement and the Metretek
Florida Credit Agreement to extend the maturity dates thereof to
September 30, 2006, and to make certain other changes discussed
below.
The $3,000,000 maximum borrowing capacity under the Credit Facility was
not changed in the Credit Facility restructuring, although the additional assets
of PowerSecure included in the borrowing base are intended to facilitate
increased borrowing capacity, up to the maximum limit.
The obligations of PowerSecure under the PowerSecure Credit Agreement
have been guaranteed by Metretek Technologies, Southern Flow, Metretek Florida
and MCM. These guarantees have been secured by a guaranty agreement and a
security agreement entered into by each of the Guarantors, along with a
subordination agreement entered into by Metretek Technologies. The Security
Agreements grant to Wells Fargo a first priority security interest in virtually
all of the assets of each of the Guarantors. The PowerSecure Credit Facility is
further secured by a first priority security interest in virtually all of the
assets of PowerSecure.
30
The PowerSecure Credit Agreement contains financial covenants by
PowerSecure to maintain a minimum tangible net worth and minimum net income
levels and maximum capital expenditures. The PowerSecure Credit Agreement
contains other standard covenants related to PowerSecure's operations, including
prohibitions on the payment of dividends, the sale of assets and other corporate
transactions by PowerSecure, without the Lender's consent. PowerSecure is
permitted to advance funds under the PowerSecure Credit Agreement to the
Guarantors, provided that after making such advances the Credit Facility
availability is not less than $100,000 and that total advances to the Guarantors
do not exceed $800,000 during 2003.
Borrowings under the aggregate Credit Agreement are limited to a
borrowing base equal to between 80% and 85% of eligible accounts receivable, 65%
of Southern Flow's eligible unbilled accounts receivable, and 20% of Southern
Flow's eligible inventory. At September 30, 2003, we had an aggregate borrowing
base of $3,000,000 under the Credit Facility, of which $2,010,000 had been
borrowed, leaving $990,000 available to borrow.
In connection with the restructuring of the Credit Facility, Southern
Flow and Metretek Florida each amended their respective Credit and Security
Agreements with Wells Fargo to extend the maturity dates thereof until September
30, 2006 and to work in conformity with the PowerSecure Credit Agreement. In
addition, the Metretek Florida Credit and Security Agreement was amended to
modify and reduce the financial covenants of Metretek Florida related to minimum
tangible net worth and minimum net income.
The Credit Facility, which constitutes our primary credit agreement,
has been used and is expected to continue to be used primarily to fund the
operations and growth of our subsidiaries, especially PowerSecure and MCM. While
the Credit Facility will restrict our ability to sell or finance our
subsidiaries without the consent of Wells Fargo, 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, Metretek Florida, or PowerSecure, 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
31
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 settlement
are more fully discussed, and the capitalized terms used in this paragraph are
defined, in "Part I, Item 1 - Note 5 to the Notes to Unaudited Consolidated
Financial Statements." The loss resulting from the amounts due on the Heins
Settlement, other than interest on the Heins Settlement Note, was recorded in
fiscal 2002.
Contractual Obligations and Commercial Commitments. We incur various
contractual obligations and commercial commitments in our normal course of
business. We lease certain office space, operating facilities and equipment
under long-term lease agreements. 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 September 30, 2003:
PAYMENTS DUE BY PERIOD (1)
-----------------------------------------------------------------------
REMAINDER YEARS YEARS AFTER
TOTAL OF 2003 2004-2005 2006-2007 2007
----------- ----------- ----------- ----------- -----------
CONTRACTUAL OBLIGATIONS
Credit Facility (2) $ 2,010,000 $ - $ - $ 2,010,000 $ -
Capital Lease Obligations 59,000 13,000 46,000 - -
Operating Leases 1,655,000 208,000 1,138,000 309,000 -
Series B Preferred Stock (3) 9,194,000 - 9,194,000 - -
Heins Settlement (4) 3,375,000 - 1,500,000 1,500,000 375,000
Other Long-Term
Obligations 456,000 24,000 204,000 228,000 -
----------- ----------- ----------- ----------- -----------
Total $16,749,000 $ 245,000 $12,082,000 $ 4,047,000 $ 375,000
----------- ----------- ----------- ----------- -----------
- ------------------------
(1) Does not include interest that may become due and payable on such
obligations in any future period.
(2) Total repayments are based upon borrowings outstanding as of September 30,
2003, not projected borrowings under the Credit Facility.
(3) Based upon accrued and unpaid dividends as of September 30, 2003.
(4) Assumes the Heins Settlement becomes effective in the first quarter 2004,
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 nine month period 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.
32
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 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 it cash flow positive, the operations of
Metretek Florida, or its 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
33
or decrease our ability to generate revenues from product and
service sales beyond our current expectations.
We may seek to raise any needed or desired additional capital from the
proceeds of public or private equity or debt offerings at the Metretek
Technologies level or at the subsidiary level or both, from asset or business
sales, from traditional credit financings or from other financing sources.
However, our ability to obtain additional capital when needed or desired will
depend on many factors, including general economic and market conditions, our
operating performance and investor sentiment, and thus cannot be assured. In
addition, depending on how it is structured, a financing could require the
consent of our current lender, of the holders of our Series B Preferred Stock or
of 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 financial position, results of operations or cash
flows.
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
34
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 financial position,
results of operations or cash flows.
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 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 any impact on our consolidated financial
position, results of operations or cash flows 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
financial position and results of operations. 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, the adoption of FIN 46 did not have any effect on our
consolidated financial position, results of operations or cash flows.
In April 2003, the FASB issued FAS No. 149, "Amendment of Statement 133
on Derivative Instruments and Hedging Activities". FAS 149 amends and clarifies
the accounting for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities under FAS
133, "Accounting for Derivative Instruments and Hedging Activities." FAS 149 is
generally effective for contracts entered into or modified after June 30, 2003
and for hedging relationships designated after June 30, 2003. The adoption of
FAS 149 did not have any effect on our consolidated financial position, results
of operations or cash flows.
In May 2003, the FASB issued FAS 150, "Accounting for Certain Financial
Instruments
35
with Characteristics of both Liabilities and Equity". FAS 150 requires that
certain financial instruments, which under previous guidance were accounted for
as equity, must now be accounted for as liabilities. The financial instruments
affected include mandatory redeemable stock, certain financial instruments that
require or may require the issuer to buy back some of its shares in exchange for
cash or other assets and certain obligations that can be settled with shares of
stock. FAS 150 is effective for all financial instruments entered into or
modified after May 31, 2003, and otherwise is effective at the beginning of the
first interim period beginning after June 15, 2003. The adoption of FAS 150 did
not have any effect on our consolidated financial position, results of
operations or cash flows.
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains "forward-looking
statements" within the meaning of and made under the safe harbor provisions of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"). From time to
time in the future, we may make additional forward-looking statements in
presentations, at conferences, in press releases, in other reports and filings
and otherwise. Forward-looking statements are all statements other than
statements of historical facts, including statements that refer to plans,
intentions, objectives, goals, strategies, hopes, beliefs, projections,
expectations or other characterizations of future events or performance, and
assumptions underlying the foregoing. The words "may", "could", "should",
"would", "will", "project", "intend", "continue", "believe", "anticipate",
"estimate", "forecast", "expect", "plan", "potential", "opportunity" and
"scheduled", variations of such words, and other similar expressions are often,
but not always, used to identify forward-looking statements. Examples of
forward-looking statements include statements regarding, among other matters,
our plans, intentions, objectives, goals, strategies, beliefs, projections and
expectations about the following:
- our prospects, including our future revenues, expenses, net
income, margins, profitability, cash flow, liquidity,
financial condition and results of operations;
- our products and services, market position, market share,
growth and strategic relationships;
- our business plans, strategies, goals and objectives;
- market demand for and customer benefits attributable to our
products and services;
- industry trends and customer preferences;
- 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.
36
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, notwithstanding our recent financial
results, 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;
- 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 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
37
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, and all reports filed or
furnished thereafter.
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.
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ITEM 4. CONTROLS AND PROCEDURES
Our Chief Executive Officer and our Chief Financial Officer evaluated
our disclosure controls and procedures (as defined in Rules 13a-15(e) and
15d-15(e) under the Securities Act of 1934, as amended (the "Exchange Act")) as
of September 30, 2003, the end of the period covered by this report. Based upon
that evaluation, our Chief Executive Officer and our Chief Financial Officer
have concluded that our disclosure controls and procedures were effective to
ensure that information required to be disclosed by us in the reports that we
file or submit under the Exchange Act is recorded, processed, summarized and
reported within the time periods specified in the Securities and Exchange
Commission's rules and forms.
When designing and evaluating controls and procedures, we make
assumptions about the likelihood of future events. At the same time, we make
judgments about the cost-benefit relationship of possible controls and
procedures. We cannot assure that this design will succeed in achieving its
stated goals under all potential future conditions. Similarly, we cannot assure
that our evaluation of controls will detect all control issues or instances of
fraud, if any.
During the quarter ended September 30, 2003, no change in our internal
control over financial reporting (as defined in Rule 13a-15(f) under the
Exchange Act) occurred that has materially affected, or is reasonably likely to
materially affect, our internal control over financial reporting.
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PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
From time to time, we are involved in disputes and legal proceedings.
For a description of these legal proceedings, see Note 5 to our consolidated
financial statements, "Commitments and Contingencies," which is contained in
Part I of this Report and incorporated herein by this reference.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
31.1 Certification of Chief Executive Officer pursuant to
Rule 13a-14(a) under the Securities Exchange Act of
1934, as amended.
31.2 Certification of Chief Financial Officer pursuant to
Rule 13a-14(a) under the Securities Exchange Act of
1934, as amended.
32.1 Certification of Chief Executive Officer pursuant to
18 U.S.C. Section 1350, as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
32.2 Certification of Chief Financial Officer pursuant to
18 U.S.C. Section 1350, as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
(b) REPORTS ON FORM 8-K
We filed the following Current Reports on Form 8-K during the
quarter ended September 30, 2003 and subsequent thereto:
Date Item No. Description
- ------------------ -------- --------------------------------------------
August 12, 2003 7, 12 Press release announcing financial
results for second quarter 2003.
September 29, 2003 7, 9 Disclosed investment materials to be
presented to investment analysts and others.
October 3, 2003 5, 7 PowerSecure, Inc. Credit and Security
Agreement with Wells Fargo Business
Credit, Inc.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
METRETEK TECHNOLOGIES, INC.
Date: November 10, 2003 By: /s/ W. Phillip Marcum
--------------------------------------
W. Phillip Marcum
President and Chief Executive Officer
Date: November 10, 2003 By: /s/ A. Bradley Gabbard
--------------------------------------
A. Bradley Gabbard
Executive Vice President
and Chief Financial Officer
41