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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 JUNE 30, 2004
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ____________ to
Commission File Number 0-19793
METRETEK TECHNOLOGIES, INC.
(Exact name of registrant as specified in its charter)
Delaware 84-1169358
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
303 East Seventeenth Avenue, Suite 660
Denver, Colorado 80203
(Address of principal executive offices) (Zip code)
(303) 785-8080
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
As of August 2, 2004, 11,041,701 shares of the issuer's Common Stock were
outstanding.
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Exchange Act).
Yes [ ] No [X]
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METRETEK TECHNOLOGIES, INC.
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2004
TABLE OF CONTENTS
Page
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Unaudited Consolidated Balance Sheets -
June 30, 2004 and December 31, 2003 3
Unaudited Consolidated Statements of Operations -
For the Three and Six Months Ended June 30, 2004 and
June 30, 2003 5
Unaudited Consolidated Statements of Cash Flows -
For the Six Months Ended June 30, 2004 and June 30, 2003 6
Notes to Unaudited Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 15
Item 3. Quantitative and Qualitative Disclosures about Market Risk 36
Item 4. Controls and Procedures 36
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 38
Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases
of Equity Securities 38
Item 4. Submission of Matters to a Vote of Security Holders 40
Item 6. Exhibits and Reports on Form 8-K 40
Signatures 42
2
PART I.
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
METRETEK TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
JUNE 30, DECEMBER 31,
2004 2003
----------- -----------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 9,653,941 $ 2,101,675
Trade receivables, net of allowance for doubtful accounts
of $361,287 and $200,706, respectively 7,544,174 6,613,153
Other receivables 16,495 59,864
Inventories 4,944,816 3,984,223
Prepaid expenses and other current assets 167,303 489,253
----------- -----------
Total current assets 22,326,729 13,248,168
----------- -----------
PROPERTY, PLANT AND EQUIPMENT:
Equipment 4,858,417 3,810,632
Vehicles 38,876 66,590
Furniture and fixtures 597,391 588,869
Land, building and improvements 758,148 754,167
----------- -----------
Total property, plant and equipment, at cost 6,252,832 5,220,258
Less accumulated depreciation and amortization 3,992,554 3,814,908
----------- -----------
Property, plant and equipment, net 2,260,278 1,405,350
----------- -----------
OTHER ASSETS:
Goodwill 7,617,196 7,617,196
Patents and capitalized software development, net of accumulated
amortization of $1,084,379 and $1,033,109, respectively 247,487 288,657
Investment in unconsolidated affiliate 1,731,605 691,100
Restricted cash investment 1,000,000
Other assets 152,292 76,070
----------- -----------
Total other assets 10,748,580 8,673,023
----------- -----------
TOTAL $35,335,587 $23,326,541
=========== ===========
See accompanying notes to unaudited consolidated financial statements.
3
METRETEK TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
JUNE 30, DECEMBER 31,
LIABILITIES AND STOCKHOLDERS' EQUITY 2004 2003
------------ ------------
CURRENT LIABILITIES:
Accounts payable $ 2,994,772 $ 1,978,226
Accrued and other liabilities 4,420,574 4,530,149
Notes payable 1,104,423 750,753
Capital lease obligations 132,512 25,411
------------ ------------
Total current liabilities 8,652,281 7,284,539
------------ ------------
LONG-TERM NOTES PAYABLE 5,203,662 5,226,950
------------ ------------
NON-CURRENT CAPITAL LEASE OBLIGATIONS 376,580 16,483
------------ ------------
COMMITMENTS AND CONTINGENCIES
MINORITY INTEREST IN SUBSIDIARIES 316,979 207,280
------------ ------------
REDEEMABLE PREFERRED STOCK - SERIES B,
$.01 PAR VALUE; 1,000,000 SHARES AUTHORIZED;
4,500 AND 7,000 SHARES ISSUED AND OUTSTANDING,
RESPECTIVELY, REDEMPTION VALUE $1,000 PER SHARE 6,316,785 9,422,132
------------ ------------
STOCKHOLDERS' EQUITY:
Preferred stock - undesignated, $.01 par value; 2,000,000 shares authorized;
none issued and outstanding
Preferred stock - Series C, $.01 par value; 500,000 shares authorized; none
issued and outstanding
Common stock, $.01 par value; 25,000,000 shares
authorized; 10,951,701 and 6,043,469 shares issued
and outstanding, respectively 109,517 60,435
Additional paid-in-capital 69,253,946 55,107,132
Accumulated deficit (54,894,163) (53,998,410)
------------ ------------
Total stockholders' equity 14,469,300 1,169,157
------------ ------------
TOTAL $ 35,335,587 $ 23,326,541
============ ============
See accompanying notes to unaudited consolidated financial statements.
4
METRETEK TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
---------------------------- ----------------------------
2004 2003 2004 2003
------------ ------------ ------------ ------------
REVENUES:
Sales and services $ 9,773,487 $ 10,999,722 $ 18,875,887 $ 18,181,391
Other 321,098 151,225 930,423 352,425
------------ ------------ ------------ ------------
Total revenues 10,094,585 11,150,947 19,806,310 18,533,816
------------ ------------ ------------ ------------
COSTS AND EXPENSES:
Cost of sales and services 7,403,691 7,855,108 14,359,637 13,631,689
General and administrative 1,607,435 1,611,142 3,357,985 3,224,501
Selling, marketing and service 513,321 451,552 1,009,353 674,613
Depreciation and amortization 197,516 174,927 369,467 347,239
Research and development 162,771 146,184 329,038 290,805
Interest, finance charges and other 87,762 83,229 167,951 148,800
------------ ------------ ------------ ------------
Total costs and expenses 9,972,496 10,322,142 19,593,431 18,317,647
------------ ------------ ------------ ------------
OPERATING INCOME 122,089 828,805 212,879 216,169
MINORITY INTEREST (67,264) (51,441) (141,774) (62,461)
INCOME TAXES (12,016) (12,016) (23,971) (32,948)
------------ ------------ ------------ ------------
NET INCOME $ 42,809 $ 765,348 $ 47,134 $ 120,760
============ ============ ============ ============
NET INCOME (LOSS) PER COMMON
SHARE ATTRIBUTABLE TO COMMON
SHAREHOLDERS, BASIC AND DILUTED $ (0.07) $ 0.06 $ (0.12) $ (0.05)
============ ============ ============ ============
WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING,
BASIC AND DILUTED 9,217,416 6,043,469 7,664,681 6,043,469
============ ============ ============ ============
See accompanying notes to unaudited consolidated financial statements.
5
METRETEK TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
SIX MONTHS ENDED
JUNE 30,
----------------------------
2004 2003
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 47,134 $ 120,760
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 369,467 347,239
Minority interest 109,699 77,461
(Gain) Loss on disposal of property, plant and equipment (340) 3,638
Equity in income of unconsolidated affiliate (621,033) (247,014)
Distributions from unconsolidated affiliate 528,132 271,594
Changes in operating assets and liabilities:
Trade receivables, net (931,021) (2,304,166)
Inventories (960,593) (601,519)
Other current assets 365,319 318,997
Other noncurrent assets (76,222) (15,000)
Accounts payable 1,016,546 1,299,516
Accrued and other liabilities (109,575) 1,821,627
------------ ------------
Net cash (used in) provided by operating activities (262,487) 1,093,133
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Investment in unconsolidated affiliate (955,784)
Increase in restricted cash investment (1,000,000)
Purchases of property, plant and equipment (654,792) (149,268)
Capitalized software purchases or development (10,100) (1,999)
Proceeds from sale of property, plant and equipment 5,200
------------ ------------
Net cash used in investing activities (2,615,476) (151,267)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from private placement 9,849,146
Proceeds from stock option exercises 298,517
Net (payments) borrowings on line of credit (481,528) 152,192
Proceeds from equipment loan 110,250 30,169
Proceeds from investment loan 960,784
Principal payments on long-term notes payable (259,125) (27,658)
Payments on capital lease obligations (47,815) (24,727)
------------ ------------
Net cash provided by financing activities 10,430,229 129,976
------------ ------------
NET INCREASE IN CASH AND CASH EQUIVALENTS 7,552,266 1,071,842
CASH AND CASH EQUIVALENTS AT
BEGINNING OF PERIOD 2,101,675 884,843
------------ ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 9,653,941 $ 1,956,685
============ ============
See accompanying notes to unaudited consolidated financial statements.
6
METRETEK TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
As of June 30, 2004 and December 31, 2003 and
For the Three and Six Month Periods Ended June 30, 2004 and 2003
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION - The accompanying consolidated financial statements
include the accounts of Metretek Technologies, Inc. and its subsidiaries,
primarily Southern Flow Companies, Inc. ("Southern Flow"), PowerSecure, Inc.
("PowerSecure"), and Metretek, Incorporated ("Metretek Florida") (and its
majority-owned subsidiary, Metretek Contract Manufacturing Company, Inc.
("MCM")), and Marcum Gas Transmission, Inc. ("MGT") (and its majority-owned
subsidiary, Conquest Acquisition Company LLC ("CAC LLC")), collectively referred
to as the "Company" or "we" or "us" or "our". These consolidated financial
statements have been prepared pursuant to rules and regulations of the
Securities and Exchange Commission. The accompanying consolidated financial
statements and notes thereto should be read in conjunction with the consolidated
financial statements and notes thereto included in the Company's Annual Report
on Form 10-K for the year ended December 31, 2003.
In the opinion of the Company's management, all adjustments (all of
which are normal and recurring) have been made which are necessary for a fair
presentation of the consolidated financial position of the Company and its
subsidiaries as of June 30, 2004 and the consolidated results of their
operations and cash flows for the three and six month periods ended June 30,
2004 and June 30, 2003.
RECLASSIFICATION - Certain 2003 amounts have been reclassified to
conform to current year presentation. Such reclassifications had no impact on
the Company's net income or stockholders' equity.
INCOME (LOSS) PER SHARE - The Emerging Issues Task Force ("EITF") has
issued EITF Issue No. 03-6, "Participating Securities and the Two-Class Method
under FASB Statement No. 128, Earnings per Share" ("EITF 03-6"). The Company
adopted EITF 03-6 as of April 1, 2004, and has retroactively adjusted prior
periods pursuant to its provisions. EITF 03-6 provides guidance for the
computation of earnings per share using the two-class method for enterprises
with participating securities or multiple classes of common stock as required by
Statement of Financial Accounting Standards No. 128. The two-class method
allocates undistributed earnings to each class of common stock and participating
securities for the purpose of computing basic earnings per share. The Company's
Series B Redeemable Preferred Stock is a participating security under the
provisions of EITF 03-6.
7
The following table sets forth the calculation of basic and diluted
earnings per share:
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------------- --------------------------
2004 2003 2004 2003
----------- ----------- ----------- -----------
Net income $ 42,809 $ 765,348 $ 47,134 $ 120,760
Less preferred stock
deemed distribution (1) (711,144) (220,710) (942,887) (437,886)
----------- ----------- ----------- -----------
Income (loss) to be allocated (668,335) 544,638 (895,753) (317,126)
Less allocation of undistributed earnings to participating
preferred stock - (178,002) - -
----------- ----------- ----------- -----------
Net income (loss) attributable
to common shareholders $ (668,335) $ 366,636 $ (895,753) $ (317,126)
=========== =========== =========== ===========
Weighted average common shares
outstanding, basic and diluted (2) 9,217,416 6,043,469 7,664,681 6,043,469
=========== =========== =========== ===========
Net income (loss) per common
share, basic and diluted (3) $ (0.07) $ 0.06 $ (0.12) $ (0.05)
=========== =========== =========== ===========
(1) The preferred stock deemed distribution for the three and six month
periods ended June 30, 2004 includes a non-cash charge (expense) of
$543,000, which represents the estimated fair market value of
inducement conveyed to the converting Preferred Stockholders in
connection with the Private Placement discussed further in Note 2.
(2) The assumed conversion of stock options, convertible preferred stock
and warrants has been excluded from weighted average shares outstanding
because the effect would be anti-dilutive.
(3) In its Quarterly Report on Form 10-Q dated June 30, 2003, the Company
originally reported Net income per common share, basic and diluted, for
the three month period ended June 30, 2003 of $.09 per share. For
purposes of the financial statements included in this Quarterly Report
on Form 10-Q, the amount has been recalculated to reflect an allocation
of earnings to participating preferred stock of $178,000.
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 loss and loss per share
applicable to common shareholders if the Company had applied the fair value
recognition provisions of FAS 123 for the three and six month periods ended June
30, 2004 and 2003:
8
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------------- --------------------------
2004 2003 2004 2003
----------- ----------- ----------- -----------
Net income (loss) attributable to common
shareholders - as reported $ (668,335) $ 366,636 $ (895,753) $ (317,126)
Deduct total stock-based employee
compensation expense determined
under fair value based method (159,774) (40,698) (263,774) (40,698)
----------- ----------- ----------- -----------
Net income (loss) attributable to
common shareholders - pro forma $ (828,109) $ 325,938 $(1,159,527) $ (357,824)
=========== =========== =========== ===========
Income (loss) per basic and diluted
Common Share:
As reported $ (0.07) $ 0.06 $ (0.12) $ (0.05)
=========== =========== =========== ===========
Pro forma $ (0.09) $ 0.05 $ (0.15) $ (0.06)
=========== =========== =========== ===========
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 June 30, 2004 and
2003: stock price volatility of 53% and 106%, 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.
STATEMENT OF CASH FLOWS - The Company considers all highly liquid and
unrestricted investments with a maturity of three months or less from the date
of purchase to be cash equivalents. During the six months ended June 30, 2004,
the company incurred capital lease obligations in the aggregate amount of
$485,731 in connection with the acquisition of manufacturing equipment at
Metretek Florida.
2. PRIVATE PLACEMENT
In May 2004, the Company completed a private placement to institutional
and accredited investors of 3,510,548 shares of its common stock and warrants to
purchase 702,109 shares of its common stock (the "Private Placement"), raising
gross proceeds of $10,883,000. The price paid in the Private Placement was $3.10
per unit, each unit consisting of one share of common stock and a warrant to
purchase 0.2 shares of common stock. Roth Capital Partners, LLC acted as
placement agent in the Private Placement.
The Company received net cash proceeds of $9,849,000 from the Private
Placement, after deducting transaction expenses including the placement agent's
fee. The net proceeds from the Private Placement are intended to be used by the
Company principally to meet its mandatory redemption obligations related to its
Series B Preferred Stock, par value $.01 per share ("Series B Preferred Stock"),
which matures on December 9, 2004 (the "Mandatory Redemption Date"), and for
other business commitments and initiatives.
The warrants issued in the Private Placement have an exercise price of
$3.41 per share of common stock and expire in May 2009. The warrants are
callable by the Company commencing
9
one year after issuance if the trading price of the common stock is at least two
times the warrant exercise price for 30 consecutive trading days and certain
other conditions are satisfied. In addition to the warrants issued to the
investors, the Company issued warrants to purchase up to 351,055 shares of
common stock to the placement agent, which warrants are on the same basic terms
as the warrants issued to the investors. The Company filed a registration
statement with the Securities and Exchange Commission (the "SEC"), which
registration statement has been declared effective by the SEC, covering resales
from time to time of shares of common stock issued in the Private Placement or
upon the exercise of the warrants.
In addition, as a condition precedent to the closing of the Private
Placement, certain holders of the Company's outstanding shares of Series B
Preferred Stock converted a total of 2,500 shares of Series B Preferred Stock,
including accrued and unpaid dividends thereon. The purpose of this conversion
was to reduce the Company's potential preferred stock mandatory redemption
liability at the Mandatory Redemption Date from approximately $10.3 million to
approximately $6.6 million, a reduction of $3.7 million. Upon conversion, the
converting Preferred Stockholders received 1,209,133 shares of common stock
(inclusive of 55,871 additional shares of common stock ("Additional Shares")
intended to compensate the converting Preferred Stockholders for dividends that
they would otherwise receive on the converted preferred shares between the
Private Placement closing date and the Mandatory Redemption Date) and new
warrants to purchase 1,209,133 shares of common stock. The new warrants may be
exercised at a strike price of $3.0571 per share of common stock and expire on
June 9, 2005. The strike price of the new warrants is the same price as the
conversion price of the Series B Preferred Stock. The Company included both the
Additional Shares and the shares of common stock issuable upon exercise of the
new warrants in the registration statement filed with the SEC in connection with
the Private Placement.
As a result of the Preferred Stock conversion described in the
immediately preceding paragraph, the Company recorded a second quarter of 2004
non-cash charge (expense) in the amount of $543,000 as an additional preferred
stock deemed dividend. This charge represents the approximate fair market value
of inducement conveyed to the converting Preferred Stockholders. The inducement
amount relates principally to the estimated fair market values of the new
warrants and the Additional Shares. See also Note 1 - "Income (Loss) per Share."
3. INVESTMENT IN UNCONSOLIDATED AFFILIATE
During the first quarter of 2004, additional equity interests in MGT's
unconsolidated affiliate, Marcum Midstream 1995-2 Business Trust ("MM 1995-2"),
were acquired at a purchase price of $956,000, with an effective date of the
acquisition of January 1, 2004. To facilitate the acquisition of the additional
equity interests, MGT formed CAC LLC, a majority-owned subsidiary. Financing of
the acquired equity interests was provided by a $961,000 term loan from a
commercial bank to CAC LLC. The loan is secured by CAC LLC's and MGT's
collective interests in MM 1995-2, and the Company has provided a guaranty of
$625,000 of the term loan. The term loan provides for 60 monthly payments of
principal and interest (at a rate of
10
5.08%) in the amount of approximately $18,500 per month. Cash distributions from
MM 1995-2 to CAC LLC will be used to fund the monthly payments on the term loan.
Upon formation, MGT acquired 73.75% of CAC LLC. CAC LLC accounts for
its interests in MM1995-2 under the equity method of accounting. The minority
shareholder's interest in CAC LLC at June 30, 2004, is included in minority
interest in the accompanying consolidated financial statements.
Summarized financial information for MM 1995-2 at June 30, 2004 and
December 31, 2003 and for the three and six months ended June 30, 2004 and 2003,
are as follows:
JUNE 30, DECEMBER 31,
2004 2003
----------- -----------
Total current assets $ 1,431,412 $ 1,510,302
Property, plant and equipment, net 4,708,097 4,681,899
Total other assets 19,853 23,801
----------- -----------
Total assets $ 6,159,362 $ 6,216,002
=========== ===========
Total current liabilities $ 808,874 $ 795,599
Long-term note payable 724,220 1,020,561
Total shareholders' equity 4,626,268 4,399,842
----------- -----------
Total liabilities and shareholders'
equity $ 6,159,362 $ 6,216,002
=========== ===========
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
----------------------- -----------------------
2004 2003 2004 2003
---------- ---------- ---------- ----------
Total revenues $1,650,244 $1,228,292 $3,558,910 $2,626,061
Total costs and expenses 866,391 555,144 1,632,483 1,125,595
---------- ---------- ---------- ----------
Net income $ 783,853 $ 673,148 $1,926,427 $1,500,466
========== ========== ========== ==========
4. RESTRICTED CASH INVESTMENT
At April 30, 2004, Metretek Florida was not in compliance with certain
financial covenants in its credit agreement with Wells Fargo Business Credit
("Wells Fargo"). Wells Fargo waived the financial covenants and the Metretek
Florida credit agreement was amended to establish less restrictive financial
covenants. As a condition to the waiver of default and amendment to the credit
agreement, the Company agreed to purchase a $1,000,000 certificate of deposit
(the "Restricted Cash Investment"), in which Wells Fargo has been granted a
security interest. The Restricted Cash Investment is held in the Company's name
in a depository account at Wells Fargo and it matures on December 4, 2004,
subject to renewal at the instruction of Wells Fargo Business Credit. The
Restricted Cash Investment is carried at cost, which approximates fair value,
and is restricted as to withdrawal or use by the Company, except as may be
permitted by Wells Fargo. The Restricted Cash Investment has been classified as
a non-current asset in the accompanying consolidated balance sheet at June 30,
2004, because its use
11
has been restricted.
5. COMMITMENTS AND CONTINGENCIES
CLASS ACTION LITIGATION - As described in our Annual Report on Form
10-K for the fiscal year ended December 31, 2003 ("2003 Form 10-K"), in January
2001, Douglas W. Heins (the "Class Action Plaintiff"), individually and on
behalf of a class of other persons similarly situated, filed a complaint (the
"Class Action") in the District Court for the City and County of Denver,
Colorado (the "Denver Court") against the Company, Marcum Midstream 1997-1
Business Trust (the "1997 Trust"), Marcum Midstream-Farstad, LLC ("MMF"), MGT,
Marcum Capital Resources, Inc. ("MCR"), W. Phillip Marcum, Richard M. Wanger and
Daniel J. Packard (the foregoing, collectively, the "Metretek Defendants"),
Farstad Gas & Oil, LLC ("Farstad LLC") and Farstad Oil, Inc. ("Farstad Inc."
and, collectively with Farstad LLC, the "Farstad Entities"), and Jeff Farstad
("Farstad" and, collectively with the Farstad Entities, the "Farstad
Defendants").
On March 27, 2003, the Company, along with the Class Action Plaintiff,
filed a Stipulation of Settlement, which contains the terms and conditions of a
proposed settlement intended to fully resolve all claims by the Class Action
Plaintiff against the Company and the other Metretek Defendants in the Class
Action. On March 2, 2004, the Company and the Class Action Plaintiff filed a
revised Stipulation of Settlement, which revises certain terms of the settlement
(as revised, the "Heins Settlement"). The terms and conditions of the Heins
Settlement are set forth in the 2003 Form 10-K.
The Heins Settlement was granted final approval by the Denver Court on
June 11, 2004 and became effective on July 26, 2004. The Heins Settlement
creates a settlement fund (the "Heins Settlement Fund") for the benefit of the
Class. In settlement of the Interpleader Action discussed below, $2,375,000 in
proceeds of the Company's directors' and officers' insurance policy (the
"Policy") was used in the Heins Settlement. Pursuant to the Heins Settlement,
the Company has paid $375,000, and has issued a note payable to the Heins
Settlement Fund in the amount of $3.0 million (the "Heins Settlement Note"), and
commenced payments thereunder on June 30, 2004. The Heins Settlement Note bears
interest at the rate of prime plus three percent (prime + 3%), payable in 16
quarterly installments, each of $187,500 principal plus accrued interest, and is
guaranteed by the 1997 Trust and all of the Company's subsidiaries.
On March 28, 2003, Gulf Insurance Company ("Gulf"), who issued the
Policy, filed an interpleader complaint against the Metretek Defendants, the
Farstad Defendants and the Class Action Plaintiff (the "Interpleader Action") in
the Denver Court, seeking a determination by the Denver Court as to the proper
beneficiaries of the Policy. In March 2004, we settled the Interpleader Action
with Gulf and the Farstad Defendants (the "Interpleader Settlement"). Pursuant
to the terms of the Interpleader Settlement, Gulf paid $2,375,000 for use in the
Heins Settlement, and has paid the remainder of the Policy proceeds to the
Farstad Defendants. In exchange, the Company and the Farstad Defendants have
fully released Gulf from all further claims under the Policy. The Interpleader
Action was dismissed on April 2, 2004.
The Company and the Metretek Defendants intend to vigorously pursue
appropriate
12
cross-claims and third party claims.
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.
The operations of the Company's natural gas measurement services
segment are conducted by Southern Flow. Southern Flow's services include on-site
field services, chart processing and analysis, laboratory analysis, and data
management and reporting. These services are provided principally to customers
involved in natural gas production, gathering, transportation and processing.
The operations of the Company's distributed generation segment are
conducted by PowerSecure. PowerSecure commenced operations in September 2000.
The primary elements of PowerSecure's distributed generation products and
services include project design and engineering, negotiation with utilities to
establish tariff structures and power interconnects, generator acquisition and
installation, process control and switchgear design and installation, and
ongoing project monitoring and servicing. PowerSecure markets its distributed
generation products and services directly to large end-users of electricity and
through outsourcing partnerships with utilities. Through June 30, 2004, the vast
majority of PowerSecure's revenues have been generated from sales of distributed
generation systems on a "turn-key" basis, where the customer acquires the
systems from PowerSecure. To date, PowerSecure has also generated a small
portion of its revenues from "company-owned" distributed generation assets that
are leased to customers on a long-term basis.
The operations of the Company's automated data collection and telemetry
segment are conducted by Metretek Florida. Metretek Florida's manufactured
products fall into the following categories: field devices, including data
collection products and electronic gas flow computers; data collection software
products (such as InvisiConnect(TM), DC2000 and PowerSpring); and communications
solutions that can use public networks operated by commercial wireless carriers
to provide real time IP-based wireless internet connectivity, traditional
cellular radio, 900 MHz unlicensed radio or traditional wire-line phone service
to provide connectivity between the field devices and the data collection
software products. Metretek Florida also provides data collection, M2M telemetry
connectivity and post-sale support services for its manufactured products and
turn-key solutions. In June 2002, Metretek Florida formed MCM to conduct and
expand its circuit board contract manufacturing operations.
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.
13
Summarized financial information concerning the Company's reportable
segments is shown in the following table. The amounts shown as "Other" include
corporate related items, equity in earnings of unconsolidated affiliate, results
of insignificant operations and, as it relates to segment profit or loss, income
and expense not allocated to reportable segments.
SUMMARIZED SEGMENT FINANCIAL INFORMATION
(ALL AMOUNTS REPORTED IN THOUSANDS)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------- --------------------
2004 2003 2004 2003
-------- -------- -------- --------
REVENUES:
Southern Flow $ 3,232 $ 2,839 $ 6,328 $ 5,823
PowerSecure 4,348 4,398 8,550 7,422
Metretek Florida 2,194 3,763 3,998 4,937
Other 321 151 930 352
-------- -------- -------- --------
Total $ 10,095 $ 11,151 $ 19,806 $ 18,534
======== ======== ======== ========
SEGMENT PROFIT (LOSS):
Southern Flow $ 550 $ 320 $ 908 $ 640
PowerSecure 308 364 532 463
Metretek Florida (402) 666 (836) 104
Other (334) (521) (391) (991)
-------- -------- -------- --------
Total $ 122 $ 829 $ 213 $ 216
======== ======== ======== ========
CAPITAL EXPENDITURES:
Southern Flow $ 94 $ 10 $ 121 $ 39
PowerSecure 328 68 493 74
Metretek Florida (92) 12 48 34
Other 2 4 3 4
-------- -------- -------- --------
Total $ 332 $ 94 $ 665 $ 151
======== ======== ======== ========
DEPRECIATION AND AMORTIZATION:
Southern Flow $ 31 $ 32 $ 61 $ 65
PowerSecure 24 16 45 29
Metretek Florida 130 122 246 242
Other 12 5 17 11
-------- -------- -------- --------
Total $ 197 $ 175 $ 369 $ 347
======== ======== ======== ========
JUNE 30,
--------------------
2004 2003
-------- --------
TOTAL ASSETS:
Southern Flow $ 9,119 $ 8,414
PowerSecure 6,278 5,121
Metretek Florida 8,545 8,410
Other 11,393 704
-------- --------
Total $ 35,335 $ 22,649
======== ========
14
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
six month periods ended June 30, 2004 (referred to herein as the "second quarter
2004" and "six month period 2004", respectively) and for the three and six month
periods ended June 30, 2003 (referred to herein as the "second quarter 2003" and
"six month period 2003", respectively) and of our financial condition as of June
30, 2004 should be read in conjunction with our consolidated financial
statements and related notes thereto included elsewhere in this report.
OVERVIEW
We are a diversified provider of energy technology products, services
and data management systems primarily to industrial and commercial users and
suppliers of natural gas and electricity. As a holding company, we conduct our
operations and derive our revenues through our three operating subsidiaries,
each of which operates a separate business:
- Southern Flow, which provides natural gas measurement services;
- PowerSecure, which designs, sells and manages distributed generation
systems; and
- Metretek Florida, which designs, manufactures and sells data
collection and energy measurement monitoring systems and provides
contract manufacturing services.
In addition to these operating subsidiaries, we also own an approximate
26% economic interest in an unconsolidated business, the Marcum Midstream 1995-2
Business Trust (MM 1995-2). We acquired additional equity interests in MM 1995-2
during the first quarter of 2004. As a result, the income from this equity
investment is becoming a more significant part of our operating results.
We commenced operations in 1991 as an energy services holding company,
owning subsidiaries with businesses designed to exploit service opportunities
primarily in the natural gas industry. Since then, our business has evolved and
expanded through acquisitions of companies, businesses and new product lines
that have allowed us to reach not only a broader portion of the energy market
(including the electricity market) but also markets outside of the energy field.
Over the past two years, we have focused our efforts on growing our businesses
by offering new and enhanced products, services and technologies, and by
entering new markets, within a framework emphasizing the goal of achieving
profitable operations on a sustained basis.
During the second quarter 2004, we took substantial steps to improve
our balance sheet and liquidity. In May 2004, we completed a Private Placement
to institutional and accredited investors of 3,510,548 shares of our Common
Stock and warrants to purchase 702,109 shares of our Common Stock, raising gross
proceeds of $10,883,000. We received net cash proceeds of
15
$9,849,000 from the Private Placement, after deducting transaction expenses
including the placement agent's fee. The net proceeds from the Private Placement
are intended to be used principally to meet our mandatory redemption obligations
related to our Series B Preferred Stock and for other business commitments and
initiatives.
In addition, certain holders of our outstanding shares of Series B
Preferred Stock converted a total of 2,500 shares of Preferred Stock, including
accrued and unpaid dividends thereon. As a result of the conversion of these
shares of Series B Preferred Stock, our maximum aggregate redemption obligation
at December 9, 2004 was reduced from $10.3 million to approximately $6.6
million, and the deemed distribution on the Series B Preferred Stock will be
reduced for future periods as a result of the reduction in shares of Series B
Preferred Stock outstanding. See "-Liquidity and Capital Resources" below in
this Item for further discussion concerning the Private Placement and the
conversion of Preferred Stock.
During the second quarter 2004, Metretek Florida showed a substantial
decline over the second quarter 2003 in its revenues and segment profitability.
These declines were principally due to a significant project involving the sale
of field devices that were recorded in the second and third quarter 2003. No
similar sized projects were included in sales in the second quarter 2004 that
were comparable to the approximate $2 million of the 2003 project revenues that
were included in the second quarter 2003. PowerSecure's revenues and segment
profit during the second quarter 2004 were slightly less than reported in its
second quarter 2003. Southern Flow's revenues and segment profit showed
significant improvement during the second quarter 2004, as compared to the
second quarter 2003, as a result of generally improved market conditions.
Due principally to the decline in revenues at Metretek Florida, our
consolidated revenues during the second quarter 2004 decreased by $1,056,000,
representing a 9% decrease over second quarter 2003 consolidated revenues. We
recorded net income of $43,000 during the second quarter 2004, which represents
a reduction as compared to net income of $765,000 during the second quarter
2003.
During the second quarter 2004, we recorded a deemed distribution on
our Series B Preferred Stock of $711,000 compared to $221,000 during the second
quarter 2003. The second quarter 2004 deemed distribution increased over the
second quarter 2003 due to a $543,000 non-cash inducement to Preferred
Stockholders who converted a total of 2,500 shares of Series B Preferred Stock
(including accrued and unpaid dividends) in connection with the Private
Placement discussed above.
After the non-cash preferred stock deemed distribution and allocation
of undistributed earnings to participating preferred stock, our net loss
attributable to common shareholders in the second quarter 2004 increased to
$668,000 as compared to $367,000 net income attributable to common shareholders
in the second quarter 2003. The primary reasons for the change in net income
(loss) attributable to common shareholders were the non-cash inducement amount
of $543,000 included in second quarter 2004 as additional preferred stock deemed
distribution, and the reduction in segment profitability at Metretek Florida due
to the reduction in the sale of field devices as described above. These factors
are partially offset by significantly better segment
16
profitability at our Southern Flow subsidiary, and an increase in other revenues
principally related to our unconsolidated investment in MM 1995-2.
During the six month period 2004, the distributed generation business
and operations of PowerSecure expanded significantly. PowerSecure's revenues
during the six month period 2004 were 15% greater than its six month period 2003
revenues. PowerSecure's growth reflects an increase in the number of projects
awarded to PowerSecure as well as an expansion of its professional services.
Southern Flow's revenues and segment profit also showed significant improvement
during the six month period 2004, as compared to the six month period 2003, as a
result of generally improved market conditions. Metretek Florida showed a
substantial decline over the six month period 2003 in its revenues and segment
profitability, which resulted primarily from a reduction in sales of field
devices and data collection software products in the second quarter 2004 as
described above.
Overall, our consolidated revenues during the six month period 2004
increased by $1,272,000, representing a 7% increase over six month period 2003
consolidated revenues. We recorded net income of $47,000 during the six month
period 2004 compared to net income of $121,000 during the six month period 2003.
During the six month period 2004, we recorded a non-cash deemed
distribution on our Series B Preferred Stock of $943,000 compared to $438,000
during the six month period 2003. The six month period 2004 deemed distribution
increased over the six month period 2003 due to a $543,000 non-cash inducement
to Preferred Stockholders who converted a total of 2,500 shares of Series B
Preferred Stock (including accrued and unpaid dividends) in connection with the
Private Placement discussed above. After the non-cash preferred stock deemed
distribution and allocation of undistributed earnings to participating preferred
stock, our net loss attributable to common shareholders in the six month period
2004 increased to $896,000 as compared to a $317,000 net loss attributable to
common shareholders in the six month period 2003. The primary reason for this
decrease was the charge for the non-cash deemed dividend inducement to the
converting Preferred Stockholders in connection with the Private Placement and
the decline in the performance of Metretek Florida.
Also during the six month period 2004, we acquired additional equity
interests in our unconsolidated affiliate, Marcum Midstream 1995-2 Business
Trust ("MM 1995-2"), at a purchase price of $956,000. We financed the
acquisition of the additional equity interests through a $961,000 term loan from
a commercial bank to a newly formed majority owned subsidiary, CAC LLC. The
additional equity income from MM1995-2 increased our other revenues
substantially during the six month period 2004. We expect cash distributions
from MM 1995-2 to CAC LLC will be sufficient to fund the monthly payments on the
term loan, as well as provide cash for other business commitments and
initiatives.
Unless the holders of our remaining Series B Preferred Stock elect to
convert their Preferred Stock to Common Stock, the terms of our Series B
Preferred Stock will require us to redeem all shares of our Series B Preferred
Stock that remain outstanding on December 9, 2004 at a redemption price equal to
the liquidation preference of $1,000 per share plus accumulated
17
and unpaid dividends. The Series B Preferred Stock is convertible, at the option
of the holders thereof, into Common Stock at the conversion rate of
approximately $3.06 per share of Common Stock. While the conversion of shares of
Series B Preferred Stock into shares of Common Stock prior to the redemption
date will reduce our redemption obligation, we cannot determine at this time how
many shares, if any, of Series B Preferred Stock will ultimately be converted.
As of June 30, 2004, the total redemption obligation was approximately $6.3
million, and due to additional accrued dividends may rise to a maximum
redemption obligation of $6.6 million on the December 9, 2004 mandatory
redemption date.
Another important factor in our liquidity relates to the settlement of
the Class Action lawsuit. On June 11, 2004, the Denver Court granted final
approval of the Heins Settlement, which became effective on July 26, 2004. Under
the Heins Settlement, we commenced payments on a four year $3 million promissory
note on June 30, 2004. See "Part II, Item 1. Legal Proceedings" in this Report
and "-Liquidity and Capital Resources" below in this Item.
CRITICAL ACCOUNTING POLICIES
Management's discussion and analysis of our financial condition and
results of operations are based on our consolidated financial statements, which
have been prepared in conformity with accounting principles generally accepted
in the United States of America. The preparation of these financial statements
requires management to make estimates, judgments and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and the reported amounts
of revenues and expenses during the reporting period. On an on-going basis, we
evaluate our estimates, including those related to revenue recognition and
percentage of completion, fixed price contracts, product returns, warranty
obligations, bad debt, inventories, cancellations costs associated with long
term commitments, investments, intangible assets, assets subject to disposal,
income taxes, restructuring, service contracts, contingencies and litigation. We
base our estimates on historical experience and on various other assumptions
that are believed to be reasonable under the circumstances, the results of which
form the basis for making estimates and judgments about the carrying value of
assets and liabilities that are not readily apparent from other sources.
Estimates, by their nature, are based on judgment and available information.
Therefore, actual results could differ from those estimates and could have a
material impact on our consolidated financial statements, and it is possible
that such changes could occur in the near term.
We have identified the accounting principles which we believe are most
critical to understanding our reported financial results by considering
accounting policies that involve the most complex or subjective decisions or
assessments. These accounting policies are described in our Annual Report on
Form 10-K for the year ended December 31, 2003 in "Item 7. Management's
Discussion and Analysis of Financial Condition and Results of Operations."
RESULTS OF OPERATIONS
The following table sets forth selected information related to our
primary business segments and is intended to assist you in an understanding of
our results of operations for the
18
periods presented.
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------- --------------------
2004 2003 2004 2003
-------- -------- -------- --------
(all amounts reported in thousands)
REVENUES:
Southern Flow $ 3,232 $ 2,839 $ 6,328 $ 5,823
PowerSecure 4,348 4,398 8,550 7,422
Metretek Florida 2,194 3,763 3,998 4,937
Other 321 151 930 352
-------- -------- -------- --------
Total $ 10,095 $ 11,151 $ 19,806 $ 18,534
======== ======== ======== ========
GROSS PROFIT:
Southern Flow $ 847 $ 662 $ 1,623 $ 1,341
PowerSecure 1,296 1,159 2,434 1,836
Metretek Florida 227 1,324 459 1,373
-------- -------- -------- --------
Total $ 2,370 $ 3,145 $ 4,516 $ 4,550
======== ======== ======== ========
SEGMENT PROFIT (LOSS):
Southern Flow $ 550 $ 320 $ 908 $ 640
PowerSecure 308 364 532 463
Metretek Florida (402) 666 (836) 104
Other (334) (521) (391) (991)
-------- -------- -------- --------
Total $ 122 $ 829 $ 213 $ 216
======== ======== ======== ========
Our reportable segments are strategic business units that offer
different products and services. They are managed separately because each
business requires different technology and marketing strategies. Our reportable
business segments include: natural gas measurement services; distributed
generation; and automated energy data management.
The operations of our natural gas measurement services segment are
conducted by Southern Flow. Southern Flow's services include on-site field
services, chart processing and analysis, laboratory analysis, and data
management and reporting. These services are provided principally to customers
involved in natural gas production, gathering, transportation and processing.
The operations of our distributed generation segment are conducted by
PowerSecure. The primary elements of PowerSecure's distributed generation
products and services include project design and engineering, negotiation with
utilities to establish tariff structures and power interconnects, generator
acquisition and installation, process control and switchgear design and
installation, and ongoing project monitoring and servicing. PowerSecure markets
its distributed generation products and services directly to large end-users of
electricity and through outsourcing partnerships with utilities. Through June
30, 2004, the vast majority of PowerSecure's revenues
19
have been generated from sales of distributed generation systems on a "turn-key"
basis, where the customer purchases the systems from PowerSecure. PowerSecure
has also generated a small portion of its revenues from "company-owned"
distributed generation assets that are leased to customers on a long-term basis.
The operations of our automated data collection and telemetry segment
are conducted by Metretek Florida. Metretek Florida's manufactured products fall
into the following categories: field devices, including data collection products
and electronic gas flow computers; data collection software products (such as
InvisiConnect(TM), DC2000 and PowerSpring); and communications solutions that
can use public networks operated by commercial wireless carriers to provide real
time IP-based wireless internet connectivity, traditional cellular radio, 900
MHz unlicensed radio or traditional wire-line phone service to provide
connectivity between the field devices and the data collection software
products. Metretek Florida also provides data collection, M2M telemetry
connectivity and post-sale support services for its manufactured products and
turn-key solutions. In June 2002, Metretek Florida formed MCM to conduct and
expand its PCB contract manufacturing operations.
We evaluate the performance of our operating segments based on
operating income (loss) before taxes, nonrecurring items and interest income and
expense. Other revenues and profit (loss) amounts in the table above include
corporate related items, equity income in an unconsolidated affiliate, results
of insignificant operations, and income and expense including non-recurring
charges not allocated to its operating segments. Intersegment sales are not
significant.
SECOND QUARTER 2004 COMPARED TO SECOND QUARTER 2003
Revenues. Our revenues are derived almost entirely from the sales of
products and services by our subsidiaries. Our consolidated revenues for the
second quarter 2004 decreased $1,056,000, or 9%, compared to the second quarter
2003. The decrease was due principally to a decrease in revenues by Metretek
Florida, partially offset by an increase in revenues by Southern Flow as well as
an increase in equity income from our investment in MM 1995-2.
The 42% decrease in Metretek Florida's revenues during the second
quarter 2004 compared to the second quarter 2003 was almost entirely
attributable to a decrease in domestic sales of $1,474,000. The decrease in
Metretek Florida's domestic sales was the net result of a decrease of $2,373,000
in domestic sales of field devices, data collection software products, and
communications solutions products, partially offset by an increase of $899,000
in its domestic contract manufacturing sales. The decrease in domestic sales of
field devices, data collection software products, and communications solutions
products was due to the effects of a significant order from a single customer in
the second quarter 2003, which resulted in the recognition of approximately $2
million in sales. There was no comparable order in the second quarter 2004. The
increase in domestic circuit board contract manufacturing sales was due
primarily to higher sales to MCM's largest circuit board contract manufacturing
customers. As discussed below under "--Quarterly Fluctuations", Metretek
Florida's revenues have fluctuated significantly in the past and are expected to
continue to fluctuate significantly in the future.
20
PowerSecure's revenues during the second quarter 2004 showed a nominal
decrease compared to the second quarter 2003. PowerSecure had 68 projects
completed or in process during the second quarter 2004 compared to 24 projects
completed or in process during the second quarter 2003. PowerSecure's average
revenue per project for completed and in-process projects was $60,000 during the
second quarter 2004 compared to $182,000 during the second quarter 2003.
PowerSecure's completed or in process projects during the second quarter 2004
included 31 switchgear projects compared to 2 switchgear projects during the
second quarter 2003. Switchgear projects are typically smaller than distributed
generation projects, but generally yield higher profit margins compared to
distributed generation projects. PowerSecure's second quarter 2004 revenues also
included $268,000 of service related revenues, as compared to $23,000 during the
second quarter 2003. As discussed below under "--Quarterly Fluctuations",
PowerSecure's revenues are influenced by the number, size and timing of various
projects and have fluctuated significantly in the past and are expected to
continue to fluctuate significantly in the future.
Southern Flow's revenues increased by 14% during the second quarter
2004, as compared to the second quarter 2003. This increase in Southern Flow's
revenues was primarily attributable to a generally improved market for its
services due principally to a higher level of natural gas wellhead prices.
Other revenues increased $170,000 during the second quarter 2004, as
compared to the second quarter 2003. This increase was comprised principally of
an increase in equity income earned from our unconsolidated investment in MM
1995-2, that operates three water processing and deep injection facilities in
northeastern Colorado, The increase was due to higher levels of natural gas
production activity in its operating area as well as the additional equity
interests that we acquired in the first quarter of 2004.
Costs and Expenses. The following table sets forth our costs and
expenses during the periods indicated:
QUARTER ENDED QUARTER-OVER-QUARTER
JUNE 30, DIFFERENCE
--------------- --------------------
2004 2003 $ %
------ ------ -------- --------
(IN THOUSANDS)
COSTS AND EXPENSES:
Costs of Sales and Services
Southern Flow $2,384 $2,177 $ 207 10%
PowerSecure 3,052 3,239 (187) -6%
Metretek Florida 1,967 2,438 (471) -19%
------ ------ ------
Total 7,403 7,854 (451) -6%
General and administrative 1,607 1,611 (4) 0%
Selling, marketing and service 513 452 61 13%
Depreciation and amortization 198 175 23 13%
Research and development 163 146 17 12%
Interest, finance charges and other 88 83 5 6%
Income taxes 12 12 - 0%
21
Costs of sales and services include materials, personnel and related
overhead costs incurred to manufacture products and provide services. The 6%
decrease in cost of sales and services for the second quarter 2004, compared to
the second quarter 2003, was attributable almost entirely to reduced sales
activity at Metretek Florida.
The 10% increase in Southern Flow's costs of sales and services in the
second quarter 2004 reflects the 14% increase in its revenues. Southern Flow's
gross profit margin was 26.2% for the second quarter 2004, compared to 23.3%
during the second quarter 2003. The improved gross profit margin reflects
generally improved market conditions.
The 6% decrease in PowerSecure's costs of sales and services in the
second quarter 2004 is a combined result of the 1% decrease in PowerSecure's
revenues, cost efficiencies in project installation and construction, and a
higher percentage of professional service revenues, with higher associated
profit margins, in the second quarter 2004 compared to the second quarter 2003.
As a result, PowerSecure's gross profit margin increased to 29.8% during the
second quarter 2004, as compared to 26.3% during the second quarter 2003.
The 19% decrease in Metretek Florida's costs of sales and services in
the second quarter 2004 was likewise a direct result of the 42% decrease in
Metretek Florida's revenues. Metretek Florida's gross profit margin decreased to
10.3% for the second quarter 2004, compared to 35.2% for the second quarter
2003. The primary causes of this decrease in Metretek Florida's gross profit
margin were a change in the mix of products sold, represented by a significant
decrease in higher margin sales of field devices, data collection and
communications solutions products, but offset by an increase in lower margin
contract manufacturing sales, and an net decrease in overall sales, that
resulted in a lower sales denominator over which to spread our fixed production
overhead.
General and administrative expenses include personnel and related
overhead costs for the support and administrative functions. The less than 1%
decrease in general and administrative expenses in the second quarter 2004, as
compared to the second quarter 2003, was primarily due to a reduction in legal
expenses associated with the Company's Class Action lawsuit, which has been
settled. This decrease was partially offset by increases in personnel and
related overhead costs associated with the development and growth of
PowerSecure's business necessitating an expansion of PowerSecure's workforce.
Selling, marketing and service expenses consist of personnel and
related overhead costs, including commissions for sales and marketing
activities, together with advertising and promotion costs. The 13% increase in
selling, marketing and service expenses in the second quarter 2004, as compared
to the second quarter 2003, was due entirely to increased personnel, commission
costs, and business development expenses associated with the development and
growth of the business of PowerSecure during the second quarter 2004.
Depreciation and amortization expenses include the depreciation of
property, plant and equipment and the amortization of certain intangible assets
including capitalized software development costs and other intangible assets
that do not have indefinite useful lives. The 13%
22
increase in depreciation and amortization expenses in the second quarter 2004,
as compared to the second quarter 2003, primarily reflects an increase in
depreciable equipment at PowerSecure and Metretek Florida as well as
amortization of the premium paid for the Company's additional investment in its
unconsolidated affiliate early in 2004.
Research and development expenses, all of which relate to activities at
Metretek Florida, include payments to third parties, wages and related expenses
for personnel, materials costs and related overhead costs related to product and
service development, enhancements, upgrades, testing and quality assurance. The
12% increase in research and development expenses in the second quarter 2004, as
compared to the second quarter 2003, primarily reflects additional personnel and
associated costs at Metretek Florida that were specifically directed toward
further development of our new InvisiConnect suite of M2M products.
Interest, finance charges and other expenses include interest and
finance charges on our Credit Facility as well as other non-operating expenses.
The 6% increase in interest, finance charges and other expenses in the second
quarter 2004, as compared to the second quarter 2003, reflects the additional
bank finance charges and interest on borrowings related to PowerSecure's line of
credit, which commenced in September 2003, as well as additional interest costs
related to a PowerSecure project loan and the term loan used to finance our
additional equity interest in our unconsolidated affiliate, both of which
commenced in the first quarter of 2004.
Income tax expenses include state income taxes in various state
jurisdictions in which we have taxable activities. We incur no federal income
tax expense because of our consolidated net operating losses. The estimated
state income tax expense during the second quarter 2004 was unchanged from our
estimate of state income tax expense during the second quarter 2003.
SIX MONTH PERIOD 2004 COMPARED TO SIX MONTH PERIOD 2003
Revenues. Our consolidated revenues for the six month period 2004
increased $1,272,000, or 7%, compared to the six month period 2003. The increase
was due to increases in revenues by PowerSecure and by Southern Flow as well as
an increase in equity income from our investment in an unconsolidated affiliate.
These revenue increases were partially offset by a decrease in revenues by
Metretek Florida.
PowerSecure's revenues increased $1,128,000, or 15%, during the six
month period 2004 compared to the six month period 2003. 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 six month period 2004
compared to the six month period 2003, although the effect on revenues of this
increased volume of projects was partially offset due to the reduced size of
PowerSecure's projects during the six month period 2004 compared to the six
month period 2003. While PowerSecure had 79 projects completed or in process
during the six month period 2004 compared to 36 projects completed or in process
during the six month period 2003, PowerSecure's average revenue per project for
completed and in-process projects was $101,000 during the six month period 2004
compared to $203,000 during the six month period 2003. In addition,
PowerSecure's revenues during the six month period 2004 included $547,000 of
23
professional service revenue compared to $101,000 of professional service
revenue during the six month period 2003. As discussed below under "Quarterly
Fluctuations", PowerSecure's revenues are influenced by the number, size and
timing of various projects and have fluctuated significantly in the past and are
expected to continue to fluctuate significantly in the future.
Southern Flow's revenues increased $505,000, or 9%, during the six
month period 2004, as compared to the six month period 2003. The increase in
Southern Flow's revenues was primarily attributable to a generally improved
market for its services due principally to a higher level of natural gas prices.
Metretek Florida's revenues decreased $939,000, or 19%, during the six
month period 2004 compared to the six month period 2003, consisting of a
decrease in domestic sales of $775,000, together with a decrease in
international sales of $164,000. The decrease in Metretek Florida's domestic
sales was the net result of a decrease of $2,101,000 in sales of field devices,
data collection software products, and communications solutions products,
partially offset by a $1,326,000 increase in its contract manufacturing sales.
The decrease in domestic sales of field devices, data collection software
products, and communications solutions products was due to the effects of a
significant order from a single customer in the six month period 2003, which
resulted in the recognition of approximately $2 million in sales. There was no
comparable order in the six month period 2004. The increase in domestic circuit
board contract manufacturing sales was attributable primarily to the continued
growth and emphasis on that portion of Metretek Florida's operations in 2004.
Other revenues increased $578,000 during the six month period 2004, as
compared to the six month period 2003. This increase was comprised principally
of an increase in equity income earned from our unconsolidated investment in MM
1995-2 that operates three water processing and deep injection facilities in
northeastern Colorado, The increase is due to higher levels of natural gas
production activity in its operating area as well as the additional equity
interests that we acquired in the first quarter of 2004.
Costs and Expenses. The following table sets forth our costs and
expenses during the periods indicated:
24
SIX MONTHS ENDED PERIOD-OVER-PERIOD
JUNE 30, DIFFERENCE
----------------- --------------------
2004 2003 $ %
------- ------- -------- --------
(IN THOUSANDS)
COSTS AND EXPENSES:
Costs of Sales and Services
Southern Flow $ 4,704 $ 4,482 $ 222 5%
PowerSecure 6,116 5,586 530 9%
Metretek Florida 3,539 3,564 (25) -1%
------- ------- --------
Total 14,359 13,632 727 5%
General and administrative 3,358 3,225 133 4%
Selling, marketing and service 1,009 675 334 49%
Depreciation and amortization 369 347 22 6%
Research and development 329 291 38 13%
Interest, finance charges and other 168 149 19 13%
Income taxes 24 33 (9) -27%
The overall 5% increase in cost of sales and services for the six month
period 2004, compared to the six month period 2003, was attributable almost
entirely to increased activity at PowerSecure and Southern Flow.
The 5% increase in Southern Flow's costs of sales and services in the
six month period 2004 reflects the 9% increase in its revenues. Southern Flow's
gross profit margin was 25.7% for the six month period 2004, compared to 23.0%
during the six month period 2003. The improved gross profit margin reflects
generally improved market conditions.
The 9% increase in PowerSecure's costs of sales and services in the six
month period 2004 is a combined result of the 15% increase in PowerSecure's
revenues, cost efficiencies in project installation and construction, and a
higher percentage of professional service revenues, with higher associated
profit margins, in the six month period 2004 compared to the six month period
2003. As a result, PowerSecure's gross profit margin increased to 28.5% during
the six month period 2004, as compared to 24.7% during the six month period
2003.
The 1% decrease in Metretek Florida's costs of sales and services in
the six month period 2004 was a direct result of the 19% decrease in Metretek
Florida's revenues. Metretek Florida's gross profit margin decreased to 11.5%
for the six month period 2004, compared to 27.8% for the six month period 2003.
The primary causes of this decrease in Metretek Florida's gross profit margin
were a change in the mix of products sold, represented by a significant decrease
in higher margin sales of field devices, data collection and communications
solutions products, but offset by an increase in lower margin contract
manufacturing sales, and an net decrease in overall sales, that resulted in a
lower sales denominator over which to spread our fixed production overhead.
The 4% increase in general and administrative expenses in the six month
period 2004, as compared to the six month period 2003, was primarily due to
increases in personnel and related overhead costs associated with the
development and growth of PowerSecure's business necessitating an expansion of
PowerSecure's workforce. In addition, the six month period 2004 general and
administrative expenses also increased as the result of smaller increases in
personnel
25
and related overhead costs at the parent level and at Southern Flow attributable
to increases in professional fees, insurance costs, salaries and wages. These
general and administrative expense increases were partially offset by a
reduction in legal expenses associated with the Company's Class Action lawsuit
during the six month period 2004 compared to the six month period 2003.
The 49% increase in selling, marketing and service expenses in the six
month period 2004, as compared to the six month period 2003, was due entirely to
increased personnel, commission costs, and business development expenses
associated with the development and growth of the business of PowerSecure during
the six month period 2004.
The 6% increase in depreciation and amortization expenses in the six
month period 2004, as compared to the six month period 2003, primarily reflects
an increase in depreciable equipment at PowerSecure and Metretek Florida as well
as amortization of the premium paid for the Company's additional investment in
its unconsolidated affiliate early in 2004.
The 13% increase in research and development expenses in the six month
period 2004, as compared to the six month period 2003, primarily reflects
additional personnel and associated costs at Metretek Florida that were
specifically directed toward further development of our new InvisiConnect suite
of M2M products.
The 13% increase in interest, finance charges and other expenses in the
six month period 2004, as compared to the six month period 2003, reflects the
additional bank finance charges and interest on borrowings related to
PowerSecure's line of credit, which commenced in September 2003, as well as
additional interest costs related to a PowerSecure project loan and the term
loan used to finance our additional equity interest in our unconsolidated
affiliate, both of which commenced in the first quarter of 2004.
Income tax expenses include state income taxes in various state
jurisdictions in which we have taxable activities. We incur no federal income
tax expense because of our consolidated net operating losses. The 27% decrease
in income taxes in the six month period 2004, as compared to the six month
period 2003, was entirely due to reduced state income tax expense incurred by
Southern Flow in Louisiana, Oklahoma, and Mississippi.
QUARTERLY FLUCTUATIONS
Our quarterly revenues, expenses, margins, net income and other
operating results have fluctuated significantly from quarter-to-quarter,
period-to-period and year-to-year in the past and are expected to continue to
fluctuate significantly in the future due to a variety of factors, many of which
are outside of our control. These factors include, without limitation, the
following:
- the size, timing and terms of sales and orders, including customers
delaying, deferring or canceling purchase orders, or making smaller
purchases than expected;
- our ability to 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
26
Metretek Florida's new InvisiConnect offering;
- the pace of development of our new businesses and the growth of their
markets;
- changes in our pricing policies and those of our competitors;
- variations in the length of our product and service implementation
process;
- changes in the mix of products and services having differing margins;
- changes in the mix of international and domestic revenues;
- the life cycles of our products and services;
- budgeting cycles of utilities and other major customers;
- general economic and political conditions;
- the resolution of pending and any future litigation and claims;
- economic conditions in the energy industry, especially in the natural
gas and electricity sectors;
- the effects of governmental regulations and regulatory changes in our
markets;
- changes in the prices charged by our suppliers;
- our ability to make and obtain the expected benefits from acquisitions
of technology or businesses, and the costs related to such
acquisitions;
- changes in our operating expenses; and
- the development and maintenance of business relationships with
strategic partners.
Because we have little or no control over most of these factors, our
operating results are difficult to predict. Any substantial adverse change in
any of these factors could negatively affect our business and results of
operations.
Our revenues and other operating results are heavily dependant upon
the volume and timing of customer orders and payments and the date of product
delivery. The timing of large individual sales is difficult for us to predict.
Because our operating expenses are based on anticipated revenues and because a
high percentage of these are relatively fixed, a shortfall or delay in
recognizing revenue could cause our operating results to vary significantly from
quarter-to-quarter and could result in significant operating losses in any
particular quarter. If our revenues fall below our expectations in any
particular quarter, we may not be able to reduce our expenses rapidly in
response to the shortfall, which could result in us suffering significant
operating losses in that quarter.
Over PowerSecure's three year operating history, its revenues, costs,
gross margins, cash flow, net income and other operating results have varied
from quarter-to-quarter, period-to-period and year-to-year, for a number of
reasons, including the factors mentioned above, and we expect such fluctuations
to continue in the future. PowerSecure's revenues depend in large part upon the
timing and the size of projects awarded to PowerSecure, and to a lesser extent
the timing of the completion of those projects. In addition, distributed
generation is an emerging
27
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 June 30, 2004, the majority of PowerSecure's revenues
constituted non-recurring revenues.
Metretek Florida has historically derived most of its revenues from
sales of its products and services to the utility industry. Metretek Florida has
experienced variability of operating results on both an annual and a quarterly
basis due primarily to utility purchasing patterns and delays of purchasing
decisions as a result of mergers and acquisitions in the utility industry and
changes or potential changes to the federal and state regulatory frameworks
within which the utility industry operates. The utility industry, both domestic
and foreign, is generally characterized by long budgeting, purchasing and
regulatory process cycles that can take up to several years to complete. In
recent years, Metretek Florida has diversified its business by entering the
contract manufacturing market, but this business heavily depends upon the
amount, size and timing of customer orders, and is subject to customers
delaying, deferring or canceling purchase orders, or making smaller purchases
than expected.
Due to all of these factors and the other risks discussed in this
Report and in our Annual Report on Form 10-K for the fiscal year ended December
31, 2003, you should not rely on quarter-to-quarter or year-to-year comparisons
of our results of operations as an indication of our future performance.
Quarterly or annual comparisons of our operating results are not necessarily
meaningful or indicative of future performance.
LIQUIDITY AND CAPITAL RESOURCES
Capital Requirements. We require capital primarily to finance our:
- operations;
- inventory;
- accounts receivable;
- research and development efforts;
- property and equipment acquisitions;
- software development;
- debt service requirements; and
- business and technology acquisitions and other growth
transactions.
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 June 30, 2004, we had working capital of $13,674,000, including
$9,654,000 in cash and cash equivalents, compared to working capital of
$5,964,000 on December 31, 2003, which included $2,102,000 in cash and cash
equivalents.
Net cash used in operating activities was $262,000 in the six month
period 2004,
28
consisting of approximately $433,000 of cash provided by operations, before
changes in assets and liabilities, and approximately $695,000 of cash used in
changes in working capital and other asset and liability accounts. This compares
to net cash provided by operating activities of $1,093,000 in the six month
period 2003, consisting of approximately $574,000 of cash provided by
operations, before changes in assets and liabilities, and approximately $519,000
of cash provided by changes in working capital and other asset and liability
accounts.
Net cash used in investing activities was $2,615,000 in the six month
period 2004, as compared to cash used in investing activities of $151,000 in the
six month period 2003. Net cash used in investing activities during the six
month period 2004 included the purchase of a $1,000,000 restricted certificate
of deposit in connection with the waiver and amendment of certain loan covenant
compliance requirements for Metretek Florida. In addition during the six month
period 2004, we purchased additional equity interests in our unconsolidated
affiliate for $956,000 and used $665,000 to purchase equipment items at each of
our operating subsidiaries. The net cash used in investing activities during the
six month period 2003 was attributable to the purchase of equipment at
PowerSecure and Southern Flow.
Net cash provided by financing activities was $10,430,000 in the six
month period 2004, compared to net cash provided by financing activities of
$130,000 in the six month period 2003. The majority of the net cash provided by
financing activities in the six month period 2004 was attributable to $9,849,000
net proceeds from a Private Placement of our Common Stock in May 2004 as well as
$961,000 proceeds from a bank term loan used to finance the acquisition of the
additional equity interests in our unconsolidated affiliate. The net cash
provided by financing activities in the six month period 2003 represented net
borrowings on our line of credit, partially offset by payments on long-term
notes payable and payments on capital lease obligations.
During the remainder of 2004, we plan to continue our research and
development efforts to enhance our existing products and services and to develop
new products and services. Our research and development expenses totaled
$329,000 during the six month period 2004. We anticipate that our research and
development expenses in fiscal 2004 will total approximately $812,000, virtually
all of which will be directed to Metretek Florida's business.
Our capital expenditures during the six month period 2004 were
approximately $665,000, including $417,000 of capital expenditures for two
PowerSecure "company-owned" distributed generation projects, one of which is
still under construction at June 30, 2004. We anticipate capital expenditures in
fiscal 2004 of approximately $1,800,000, including $1.4 million of capital
invested in "company-owned" distributed generation projects. The remaining
$400,000 in capital expenditures will benefit all of our key subsidiaries. We
also acquired approximately $486,000 of equipment through capital leases in the
six month period 2004, substantially all of which has been used to increase
MCM's production capacity. PowerSecure's "company-owned" projects are
anticipated to be funded primarily through long-term financing arrangements
provided through PowerSecure's major suppliers. However, we cannot provide any
assurance that those financing arrangements will be sufficient to allow
PowerSecure to meet our objectives for its growth and development without
internal funding or will be on favorable terms.
29
Working Capital Credit Facility. We have a $3 million credit facility
("Credit Facility") with Wells Fargo Business Credit, Inc. ("Wells Fargo") that
matures in September 2006. The Credit Facility restricts our ability to sell or
finance our subsidiaries, without Wells Fargo's consent. The Credit Facility,
which constitutes our primary credit agreement, is used primarily to fund the
operations and growth of our subsidiaries, especially PowerSecure and MCM.
The Credit Facility consists of separate credit agreements between
Wells Fargo and each of Southern Flow, Metretek Florida and PowerSecure, as
borrowers. At June 30, 2004, we had an aggregate borrowing base of $3,000,000
under the Credit Facility, of which $2,064,000 had been borrowed, leaving
$936,000 available to borrow.
The Credit Facility contains minimum interest charges and unused credit
line and termination fees. The obligations of each of the borrowers have been
guaranteed by Metretek Technologies, the other borrowers and MCM. These
guarantees have been secured by guaranty agreements and security agreements
entered into by the guarantors. The security agreements grant to Wells Fargo a
first priority security interest in virtually all of the assets of each of the
guarantors. The Credit Facility is further secured by a first priority security
interest in virtually all of the assets of each borrower. Each credit agreement
contains standard affirmative and negative covenants by the borrower, including
financial covenants and other standard covenants related to operations,
including limitations on future indebtedness and the payment of dividends the
sale of assets and other corporate transactions, without Wells Fargo's consent.
The Credit Facility between Wells Fargo and Southern Flow was amended in the
first quarter 2004 to provide for new financial covenants applicable to certain
financial results of Southern Flow during fiscal 2004.
The Credit Facility between Wells Fargo and Metretek Florida was
amended during the second quarter 2004 to establish less restrictive financial
covenants for the remainder of fiscal 2004. As a condition to the waiver of an
existing default and the amendment to the credit agreement, we agreed to
purchase a $1,000,000 certificate of deposit (the "Restricted Cash Investment"),
in which Wells Fargo has been granted a security interest. The Restricted Cash
Investment is held in the Company's name in a depository account at Wells Fargo
Bank, National Association and it matures on December 4, 2004, subject to
renewal at the instruction of Wells Fargo. The Restricted Cash Investment is
carried at cost, which approximates fair value, and is restricted as to
withdrawal or use by the Company, except as may be permitted by Wells Fargo. The
Restricted Cash Investment has been classified as a non-current asset in our
consolidated balance sheet at June 30, 2004.
Term Loan. During the first quarter 2004, we formed Conquest
Acquisition Company LLC, a majority-owned subsidiary, for the purpose of
acquiring $956,000 of additional equity interests in our unconsolidated
affiliate, MM1995-2. Financing of the acquired equity interests was provided by
a term loan from a commercial bank. The term loan is secured by our interests in
MM1995-2, and we provided a guaranty of $625,000 of the loan. The term loan
provides for 60 monthly payments of principal and interest (at a rate of 5.08%)
in the amount of approximately $18,500 per month. We expect that monthly
payments on the term loan will be funded through cash distributions from
MM1995-2.
30
Heins Stipulation. On June 11, 2004, the Denver Court granted final
approval of the Heins Settlement, which became effective on July 26, 2004. The
Heins Settlement fully resolves all claims by the Class Action Plaintiff against
us and the other Metretek Defendants in the Heins Class Action. The Heins
Settlement includes payment of $2,375,000 from the proceeds of our directors'
and officers' insurance policy. We have paid $375,000 for use in the Heins
Settlement, and we have issued the Heins Settlement Note payable to the Heins
Settlement Fund in the amount of $3.0 million, and commenced payments thereunder
on June 30, 2004. The Heins Settlement Note bears interest at the rate of prime
plus three percent (prime + 3%), payable in 16 quarterly installments, each of
$187,500 principal plus accrued interest, and is guaranteed by the 1997 Trust
and all of our subsidiaries. This litigation and settlement are more fully
discussed, and the capitalized terms used in this paragraph are defined, in
"Part II, Item 1. Legal Proceedings." The loss resulting from the amounts due on
the Heins Settlement, other than interest on the Heins Settlement Note, was
recorded in fiscal 2002.
Contractual Obligations and Commercial Commitments. We incur various
contractual obligations and commercial commitments in our normal course of
business. We lease certain office space, operating facilities and equipment
under long-term lease agreements. In addition, we are obligated to make future
payments under the Credit Facility and a mortgage loan, and to redeem our Series
B Preferred Stock in December 2004. Finally, we are required to make certain
payments under the terms a class action litigation settlement, payments of which
commenced June 30, 2004. The following table sets forth our contractual
obligations and commercial commitments as of June 30, 2004:
PAYMENTS DUE BY PERIOD (1)
-------------------------------------------------------------------
REMAINDER OF YEARS YEARS AFTER
TOTAL 2004 2005-2006 2007-2008 2008
----------- ------------ ----------- ----------- -----------
CONTRACTUAL OBLIGATIONS
Credit Facility (2) $ 2,064,000 $ - $ 2,064,000 $ - $ -
Capital Lease Obligations 509,000 59,000 248,000 197,000 5,000
Operating Leases 2,064,000 470,000 1,036,000 558,000 -
Series B Preferred Stock (3) 6,317,000 6,317,000 - - -
Heins Settlement 2,813,000 375,000 1,500,000 938,000 -
Term Loan 941,000 97,000 375,000 414,000 55,000
Other Long-Term
Obligations 491,000 151,000 75,000 258,000 7,000
----------- ----------- ----------- ----------- -----------
Total $15,199,000 $ 7,469,000 $ 5,298,000 $ 2,365,000 $ 67,000
=========== =========== =========== =========== ===========
- ------------------
(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 June 30, 2004,
not projected borrowings under the Credit Facility.
(3) Based upon accrued and unpaid dividends as of June 30, 2004, although the
redemption date is December 9, 2004. The Series B Preferred Stock is
convertible, at the option of the holders thereof, into Common Stock at the
conversion rate of approximately $3.06 per share of Common Stock, but the
amount set forth in the table does not give effect to any shares of Series B
Preferred Stock that may be converted prior to the redemption
31
date.
Off-Balance Sheet Arrangements. During the six month period 2004, we
did not engage in any material off-balance sheet activities nor have any
relationships or arrangements with unconsolidated entities established for the
purpose of facilitating off-balance sheet arrangements or other contractually
narrow or limited purposes. Further, we have not guaranteed any obligations of
unconsolidated entities nor do we have any commitment or intent to provide
additional funding to any such entities.
Liquidity. Based upon our plans and assumptions as of the date of this
Report, we currently believe that our capital resources, including our cash and
cash equivalents, amounts available under our Credit Facility, along with funds
expected to be generated from our operations, will be sufficient to meet our
anticipated cash needs during the next 12 months, including our working capital
needs, capital requirements 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.
Unless the holders of our Series B Preferred Stock elect to convert
their Preferred Stock to Common Stock, the terms of our Series B Preferred Stock
will require us to redeem all shares of our Series B Preferred Stock that remain
outstanding on December 9, 2004 at a redemption price equal to the liquidation
preference of $1,000 per share plus accumulated and unpaid dividends. The Series
B Preferred Stock is convertible, at the option of the holders thereof, into
Common Stock at the conversion rate of approximately $3.06 per share of Common
Stock. While the conversion of shares of Series B Preferred Stock into shares of
Common Stock prior to the redemption date will reduce our redemption obligation,
we cannot determine at this time how many shares of Series B Preferred Stock
will ultimately be converted. As of June 30, 2004, the total redemption
obligation was approximately $6.3 million.
For the following reasons, we may require additional funds, beyond our
currently anticipated resources, to support our working capital requirements,
our operations or our other cash flow needs:
- While we have reorganized our Metretek Florida business with the goal
of making its cash flow positive, the operations of Metretek Florida,
or its 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
32
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 that may arise from time to time
against us could significantly increase our cash requirements beyond
our available capital resources.
- Unanticipated events, over which we have no control, could increase our
operating costs or decrease our ability to generate revenues from
product and service sales beyond our current expectations.
We may seek to raise any needed or desired additional capital from the
proceeds of public or private equity or debt offerings at the Metretek
Technologies level or at the subsidiary level or both, from asset or business
sales, from traditional credit financings or from other financing sources.
However, our ability to obtain additional capital when needed or desired will
depend on many factors, including general economic and market conditions, our
operating performance and investor sentiment, and thus cannot be assured. In
addition, depending on how it is structured, a financing could require the
consent of our current lender, of the holders of our Series B Preferred Stock or
of the investors in the Private Placement. Even if we are able to raise
additional capital, the terms of any financings could be adverse to the
interests of our stockholders. For example, the terms of a debt financing could
restrict our ability to operate our business or to expand our operations, while
the terms of an equity financing, involving the issuance of capital stock or of
securities convertible into capital stock, could dilute the percentage ownership
interests of our stockholders, and the new capital stock or other new securities
could have rights, preferences or privileges senior to those of our current
stockholders. We cannot assure you that sufficient additional funds will be
available to us when needed or desired or that, if available, such funds can be
obtained on terms favorable to us and our stockholders and acceptable to those
parties who must consent to the financing. Our inability to obtain sufficient
additional capital on a timely basis on favorable terms when needed or desired
could have a material adverse effect on our business, financial condition and
results of operations.
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
33
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 new businesses;
- the effects on our financial condition, results of operations and cash
flows of the resolution of pending or threatened litigation; and
- future economic, business, market and regulatory conditions.
Any forward-looking statements we make are based on our current plans,
intentions, objectives, goals, strategies, hopes, beliefs, projections and
expectations, as well as assumptions made by and information currently available
to management. You are cautioned not to place undue reliance on any
forward-looking statements, any or all of which could turn out to be wrong.
Forward-looking statements are not guarantees of future performance or events,
but are subject to and qualified by substantial risks, uncertainties and other
factors, which are difficult to predict and are often beyond our control.
Forward-looking statements will be affected by assumptions we might make that do
not materialize or that prove to be incorrect and by known and unknown risks,
uncertainties and other factors that could cause actual results to differ
materially from those expressed, anticipated or implied by such forward-looking
statements. These risks, uncertainties and other factors include, but are not
limited to, the following:
- our history of losses and no assurance of future profitability;
34
- our ability to maintain a sufficient amount of capital and liquidity
to meet our operating and capital requirement and growth needs;
- our ability to successfully and timely develop, market and operate
PowerSecure's systems, including its products, services, and
technologies;
- the effects of pending and future litigation;
- our limited operating history in our PowerSecure business;
- the effects of changes in utility tariffs in the regions in which
PowerSecure sells its distributed generation systems;
- our ability to develop, on a profitable basis, Metretek Florida's
InvisiConnect and contract manufacturing businesses;
- 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, our Credit Facility, and
the Private Placement;
- the negative effect that dividends on our Series B Preferred Stock
have on our results of operations;
- the effect of rapid technologic changes on our ability to maintain
competitive products, services and technologies;
- our ability to attract, retain and motivate key management, technical
and other critical personnel;
- our ability to secure and maintain key contracts, business
relationships and alliances;
- our ability to make successful acquisitions and in the future to
successfully integrate and utilize any acquired product lines, key
employees and businesses;
- changes in the energy industry in general, and technological and
market changes in the natural gas and electricity industries in
particular;
- the impact and timing of the deregulation of the natural gas and
electricity markets;
- our ability to manage the anticipated growth of PowerSecure;
- our ability to obtain adequate supplies of key components and
materials for our products on a timely and cost-effective basis;
- 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
35
to finance operations, pay interest and other obligations, and fund
needed capital expenditures and other investments;
- our ability to protect our technology, including our proprietary
information and our intellectual property rights;
- the effects of recent terrorist activities and military actions;
- the impact of current and future laws and government regulations
affecting the energy industry in general and the natural gas and
electricity industries in particular;
- the effect of changes in laws, regulations and financial accounting
standards; and
- other risks, uncertainties and other factors that are discussed in
this Report or that are discussed from time to time in our other
reports and documents we file with or furnish to the SEC and the
exhibits to such filings, including but not limited to our Annual
Report on Form 10-K for the fiscal year ended December 31, 2003.
Any forward-looking statements contained in this Report speak only as
of the date of this Report, and any other forward-looking statements we make
from time to time in the future speaks only as of the date it is made. We do not
intend, and we undertake no duty or obligation, to update or revise any
forward-looking statement for any reason, whether as a result of changes in our
expectations or the underlying assumptions, the receipt of new information,
occurrence of future or unanticipated events, circumstances or conditions or
otherwise.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to certain financial instrument market risks, primarily
due to changes in interest rates, which may adversely affect our financial
condition, results of operations and cash flow. Our exposure to market risk for
changes in interest rates relates primarily to (i) income from our investments
in short-term interest-bearing marketable securities, the income from which is
dependent upon the interest rate of the securities held, and (ii) interest
expenses attributable to its long-term debt, including our Credit Facility,
which is based on floating interest rates as described in "Item 2. Management's
Discussion and Analysis and Results of Operations" above. Since substantially
all of our revenues, expenses and capital spending are transacted in U.S.
dollars, we are not exposed to significant foreign exchange risk. We do not
believe that our exposure to commodity price changes is material. We do not use
derivative financial instruments to manage exposure to interest rate changes, or
for trading or other speculative purposes.
ITEM 4. CONTROLS AND PROCEDURES
Our Chief Executive Officer and our Chief Financial Officer evaluated
our disclosure controls and procedures (as defined in Rules 13a-15(e) and
15d-15(e) under the Securities Act of 1934, as amended (the "Exchange Act")) as
of March 31, 2004, the end of the period covered by this report. Based upon that
evaluation, our Chief Executive Officer and our Chief Financial Officer have
concluded that our disclosure controls and procedures were effective to ensure
that information required to be disclosed by us in the reports that we file or
submit under the Exchange Act is recorded, processed, summarized and reported
within the time periods specified in the Securities and Exchange Commission's
rules and forms.
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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 June 30, 2004, no change in our internal
control over financial reporting (as defined in Rule 13a-15(f) under the
Exchange Act) occurred that has materially affected, or is reasonably likely to
materially affect, our internal control over financial reporting.
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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 3 to our consolidated
financial statements, "Commitments and Contingencies," which is contained in
Part I of this Report and incorporated herein by this reference.
ITEM 2. CHANGES IN SECURITIES, USE OF PROCEEDS AND ISSUER PURCHASES OF EQUITY
SECURITIES
On May 6, 2004, we completed a Private Placement to institutional and
accredited investors of 3,510,548 shares of our Common Stock and warrants to
purchase 702,109 shares of our Common Stock, raising gross proceeds of
$10,883,000. The price paid in the Private Placement was $3.10 per unit, each
unit consisting of one share of Common Stock and a warrant to purchase 0.2
shares of Common Stock. Roth Capital Partners, LLC acted as placement agent in
the Private Placement.
We received net cash proceeds of $9,849,000 from the Private Placement,
after deducting transaction expenses including the placement agent's fee. The
net proceeds from the Private Placement are intended to be used principally to
meet our mandatory redemption obligations related to our Series B Preferred
Stock, which matures on December 9, 2004, and for other business commitments and
initiatives.
The warrants issued in the Private Placement have an exercise price of
$3.41 per share of common stock and expire in May 2009. The warrants are
callable by us commencing one year after issuance if the trading price of our
Common Stock is at least two times the warrant exercise price for 30 consecutive
trading days and certain other conditions are satisfied. In addition to the
warrants issued to the investors, we issued warrants to purchase up to 351,055
shares of Common Stock to the placement agent, which warrants are on the same
basic terms as the warrants issued to the investors. We filed a registration
statement with the Securities and Exchange Commission (the "SEC"), which
registration statement has been declared effective by the SEC, covering resales
from time to time of shares of Common Stock issued in the Private Placement or
upon the exercise of the warrants.
In addition, as a condition precedent to the closing of the Private
Placement, certain holders of our outstanding shares of Series B Preferred Stock
converted a total of 2,500 shares of Series B Preferred Stock, including accrued
and unpaid dividends thereon. The purpose of this conversion was to reduce our
potential preferred stock mandatory redemption liability at the Mandatory
Redemption Date from approximately $10.3 million to approximately $6.6 million,
a reduction of $3.7 million. Upon conversion, the converting Preferred
Stockholders received
38
1,209,133 shares of Common Stock (inclusive of 55,871 Additional Shares intended
to compensate the converting Preferred Stockholders for dividends that they
would otherwise receive on the converted preferred shares between the Private
Placement closing date and the Mandatory Redemption Date) and new warrants to
purchase 1,209,133 shares of Common Stock. The new warrants may be exercised at
a strike price of $3.0571 per share of Common Stock and expire on June 9, 2005.
The strike price of the new warrants is the same price as the conversion price
of the Series B Preferred Stock. The Company included both the Additional Shares
and the shares of Common Stock issuable upon exercise of the new warrants in the
registration statement filed with the SEC in connection with the Private
Placement.
The sales and issuances of common stock and warrants to purchase common
stock in the foregoing private placement was made by us in reliance upon the
exemptions from registration provided under Section 4(2) of the Securities Act
of 1933, as amended (the "Securities Act"), and Rule 506 of Regulation D under
the Securities Act. The offers and sales were made to accredited investors as
defined in Rule 501(a) under the Securities Act, no general solicitation was
made by us or any person acting on our behalf; the securities sold were subject
to transfer restrictions, and the certificates for those securities contained an
appropriate legend stating that they had not been registered under the
Securities Act and may not be offered or sold absent registration or pursuant to
an exemption therefrom.
Pursuant to the authorization of the Company's Board of Directors, and
in order to prevent the Private Placement and the conversion of the shares of
Series B Preferred Stock or the acquisition of Common Stock or warrants by the
investors in connection with the Private Placement or by the Series B Preferred
Stockholders in connection with their conversion of shares of Series B Preferred
Stock or upon the exercise of the warrants, from triggering the protections
provided by the Company's Amended and Restated Rights Agreement, dated as of
November 30, 2001 (the "Rights Agreement"), on April 22, 2004, the Company
adopted and entered into Amendment No. 1 to the Rights Agreement. All
capitalized terms used below but not defined herein have the respective meanings
given to them in the Rights Agreement.
Amendment No. 1 amended Sections 1(a), 1(jj), 3(a), 11 and 13 of the
Rights Agreement to:
(a) prevent any Private Placement investors or Series B Preferred
Stockholders and their Affiliates and Associates from becoming an
"Acquiring Person" (as that term is used and defined in the Rights
Agreement),
(b) prevent a "Shares Acquisition Date" (as that term is used and
defined in the Rights Agreement) from occurring,
(c) prevent a "Distribution Date" (as that term is used and defined in
the Rights Agreement) from occurring, and
(d) prevent any adjustment of the purchase price, number and kind of
shares, number of rights or other protection set forth in Sections 11
and 13 from being triggered; in each case, as the result of:
(i) the execution and delivery of the document, agreements and
instruments in connection with the Private Placement or in the
conversion of the Series B
39
Preferred Stock, or any amendments thereto in accordance with
the terms thereof ("Documents"),
(ii) any actions taken by any of the investors in the Private
Placement or any of the Series B Preferred Stockholders
pursuant to the terms of any of the Documents,
(iii) the consummation of the transactions contemplated by any
of the Documents, or
(iv) the announcement or commencement thereof, including,
without limitation, the acquisition by any of the investors in
the Private Placement or any of the Series B Preferred
Stockholders now or at any time in the future of any Common
Stock, warrants, and Common Stock issued or issuable upon
exercise of warrants, or any other acquisition of any such
securities, in each case pursuant to any of the Documents.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the Company's Annual Meeting of Stockholders, held on June 14, 2004,
the following proposals were submitted to and approved by the stockholders of
the Company:
PROPOSAL 1: To elect two directors for a three-year term and until his
successor is duly elected and qualified:
For Withhold
--------- --------
W. Phillip Marcum 8,530,427 21,408
Basil M. Briggs 8,530,563 21,272
PROPOSAL 2: To approve an amendment to the Company's 1998 Stock
Incentive Plan to increase the number of shares of Common
Stock authorized for issuance thereunder by 1,000,000
shares to an aggregate of 2,750,000.
For Against Abstain Broker Non-Votes
- --------- ------- ------- ----------------
5,049,568 148,591 4,216 3,350,460
PROPOSAL 3: To ratify the appointment of Deloitte & Touche LLP as the
Company's independent auditors for the fiscal year ending
December 31, 2004.
For Against Abstain Broker Non-Votes
- --------- ------- ------- ----------------
8,535,670 4,813 11,352 0
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
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10.1 Fifth Amendment to Credit and Security Agreement and
Waiver of Defaults, dated as of June 3, 2004, between
Metretek, Incorporated and Wells Fargo Business
Credit, Inc.
31.1 Certification of Chief Executive Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002 and
Rule 13a-14(a) under the Securities Exchange Act of
1934, as amended.
31.2 Certification of Chief Financial Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002 and
Rule 13a-14(a) under the Securities Exchange Act of
1934, as amended.
32.1 Certification of Chief Executive Officer pursuant to
18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002, and
Rule 13a-14(b) under the Securities Exchange Act of
1934, as amended
32.2 Certification of Chief Financial Officer pursuant to
18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
(b) REPORTS ON FORM 8-K
We filed the following Current Reports on Form 8-K during the
quarter ended June 30, 2004:
Date Item No. Description
- -------------- -------- ------------------------------------------
April 30, 2004 5, 7 Disclosure of Private Placement and
conversion of Certain Preferred Stock.
May 6, 2004 5, 7 Completion of Private Placement and
conversion of Certain Preferred Stock.
May 17, 2004 7, 12 Announced financial results for the
quarter ended March 31, 2004.
June 14, 2004 5, 7 Disclosed final Court approval of
Class action settlement.
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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: August 13, 2004 By: /s/ W. Phillip Marcum
--------------------------------------
W. Phillip Marcum
President and Chief Executive Officer
Date: August 13, 2004 By: /s/ A. Bradley Gabbard
--------------------------------------
A. Bradley Gabbard
Executive Vice President
and Chief Financial Officer
42