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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------------------
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2005
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _________________ to
Commission File Number 0-19793
METRETEK TECHNOLOGIES, INC.
(Exact name of registrant as specified in its charter)
Delaware 84-1169358
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
303 East Seventeenth Avenue, Suite 660
Denver, Colorado 80203
(Address of principal executive offices) (Zip code)
(303) 785-8080
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
As of May 2, 2005, 12,258,782 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 MARCH 31, 2005
TABLE OF CONTENTS
Page
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Unaudited Consolidated Balance Sheets -
March 31, 2005 and December 31, 2004 3
Unaudited Consolidated Statements of Operations -
For the Three Months Ended March 31, 2005 and
March 31, 2004 5
Unaudited Consolidated Statements of Cash Flows -
For the Three Months Ended March 31, 2005 and
March 31, 2004 6
Notes to Unaudited Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 16
Item 3. Quantitative and Qualitative Disclosures about Market Risk 35
Item 4. Controls and Procedures 35
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 37
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 37
Item 5. Other Events 37
Item 6. Exhibits 37
Signatures 39
2
PART I.
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
METRETEK TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
MARCH 31, DECEMBER 31,
ASSETS 2005 2004
------------ ------------
CURRENT ASSETS:
Cash and cash equivalents $ 1,333,937 $ 2,951,489
Trade receivables, net of allowance for doubtful accounts
of $781,215 and $740,742, respectively 7,131,966 8,702,437
Other receivables 81,427 25,850
Inventories 3,662,168 3,190,653
Prepaid expenses and other current assets 378,446 524,508
------------ ------------
Total current assets 12,587,944 15,394,937
------------ ------------
PROPERTY, PLANT AND EQUIPMENT:
Equipment 5,490,217 5,052,664
Vehicles 97,662 61,041
Furniture and fixtures 541,528 543,127
Land, building and improvements 799,245 796,182
------------ ------------
Total property, plant and equipment, at cost 6,928,652 6,453,014
Less accumulated depreciation and amortization 3,818,245 3,715,884
------------ ------------
Property, plant and equipment, net 3,110,407 2,737,130
------------ ------------
OTHER ASSETS:
Goodwill 8,840,148 8,840,148
Patents and capitalized software development, net of accumulated
amortization of $1,162,024 and $1,135,843, respectively 231,519 233,390
Investment in unconsolidated affiliate 2,071,267 2,077,301
Note receivable, net of reserve (Note 2) 570,000 780,000
Other assets 148,010 148,010
------------ ------------
Total other assets 11,860,944 12,078,849
------------ ------------
TOTAL $ 27,559,295 $ 30,210,916
============ ============
See accompanying notes to unaudited consolidated financial statements.
3
METRETEK TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
MARCH 31, DECEMBER 31,
LIABILITIES AND STOCKHOLDERS' EQUITY 2005 2004
------------ ------------
CURRENT LIABILITIES:
Accounts payable $ 2,212,154 $ 3,206,094
Accrued and other liabilities 5,464,420 5,896,493
Notes payable 1,178,354 1,171,988
Capital lease obligations 3,574 3,477
------------ ------------
Total current liabilities 8,858,502 10,278,052
------------ ------------
LONG-TERM NOTES PAYABLE 5,134,848 6,075,065
------------ ------------
NON-CURRENT CAPITAL LEASE OBLIGATIONS 6,163 7,094
------------ ------------
LIABILITIES OF DISCONTINUED OPERATIONS 692,973 843,649
------------ ------------
COMMITMENTS AND CONTINGENCIES
MINORITY INTEREST IN SUBSIDIARIES 105,792 89,792
------------ ------------
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; 12,258,782 and 12,186,741 shares issued
and outstanding, respectively 122,588 121,867
Additional paid-in-capital 71,517,741 71,413,120
Deferred compensation (115,500) (132,000)
Accumulated deficit (58,763,812) (58,485,723)
------------ ------------
Total stockholders' equity 12,761,017 12,917,264
------------ ------------
TOTAL $ 27,559,295 $ 30,210,916
============ ============
See accompanying notes to unaudited consolidated financial statements.
4
METRETEK TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
THREE MONTHS ENDED
MARCH 31,
------------------------------
2005 2004
------------ ------------
REVENUES:
Sales and services $ 7,698,340 $ 8,173,404
Other 112,297 240,906
------------ ------------
Total revenues 7,810,637 8,414,310
------------ ------------
COSTS AND EXPENSES:
Cost of sales and services 5,438,033 5,819,545
General and administrative 1,816,483 1,665,165
Selling, marketing and service 573,613 496,032
Depreciation and amortization 124,441 129,955
Research and development 161,804 166,267
Interest, finance charges and other 147,198 80,189
------------ ------------
Total costs and expenses 8,261,572 8,357,153
------------ ------------
Income (loss) from continuing operations before
minority interest, income taxes, and equity income (450,935) 57,157
Minority interest (71,124) (74,510)
Income taxes (13,285) (11,955)
Equity in income of unconsolidated affiliate 557,255 368,419
------------ ------------
INCOME FROM CONTINUING OPERATIONS 21,911 339,111
DISCONTINUED OPERATIONS:
Loss on disposal of MCM (300,000)
Loss from operations of MCM (334,786)
------------ ------------
LOSS ON DISCONTINUED OPERATIONS (300,000) (334,786)
------------ ------------
NET INCOME (LOSS) $ (278,089) $ 4,325
============ ============
PER SHARE AMOUNTS (Note 1):
Income from continuing operations:
Basic $ 0.00 $ 0.01
============ ============
Diluted $ 0.00 $ 0.01
============ ============
Net income (loss)
Basic $ (0.02) $ (0.04)
============ ============
Diluted $ (0.02) $ (0.04)
============ ============
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:
Basic 12,194,720 6,111,945
============ ============
Diluted 12,733,632 6,815,957
============ ============
See accompanying notes to unaudited consolidated financial statements.
5
METRETEK TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
THREE MONTHS ENDED
MARCH 31,
------------------------------
2005 2004
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (278,089) $ 4,325
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Loss on discontinued operations 300,000 334,786
Depreciation and amortization 124,441 129,955
Minority interest in subsidiaries 71,124 74,510
(Gain) loss on disposal of property, plant and equipment 840 (2,250)
Equity in income of unconsolidated affiliate (557,255) (368,419)
Distributions from unconsolidated affiliate 563,289 248,533
Stock compensation expense 16,500
Changes in other assets and liabilities:
Trade receivables, net 1,570,471 944,167
Inventories (408,405) (486,685)
Other current assets 40,485 172,708
Other noncurrent assets (101,088)
Accounts payable (993,940) 612,455
Accrued and other liabilities (134,088) (348,961)
------------ ------------
Net cash provided by continuing operations 315,373 1,214,036
Net cash used by discontinued operations of MCM (244,370) (292,790)
------------ ------------
Net cash provided by operating activities 71,003 921,246
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment (506,103) (333,416)
Investment in unconsolidated affiliate (955,784)
Proceeds from sale of property, plant and equipment 4,000
------------ ------------
Net cash used in investing activities (506,103) (1,285,200)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from stock option exercises 111,149 180,955
Repurchase of stock warrants (5,807)
Net payments on line of credit (641,431) (836,247)
Proceeds from equipment loan 110,250
Proceeds from investment loan 960,784
Principal payments on long-term notes payable (292,420) (21,717)
Distributions to minority interests (55,124)
Payments on preferred stock redemptions (297,985)
Payments on capital lease obligations (834) (8,437)
------------ ------------
Net cash provided by (used in) financing activities (1,182,452) 385,588
------------ ------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (1,617,552) 21,634
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 2,951,489 2,101,675
------------ ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 1,333,937 $ 2,123,309
============ ============
See accompanying notes to unaudited consolidated financial statements.
6
METRETEK TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
As of March 31, 2005 and December 31, 2004 and
For the Three Month Periods Ended March 31, 2005 and 2004
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, 2004.
In the opinion of the Company's management, all adjustments (all of which
are normal and recurring) have been made which are necessary for a fair
presentation of the consolidated financial position of the Company and its
subsidiaries as of March 31, 2005 and the consolidated results of their
operations and cash flows for the three month periods ended March 31, 2005 and
March 31, 2004.
INCOME (LOSS) PER SHARE - Basic income (loss) per share is computed using
the weighted average number of shares outstanding. Diluted income (loss) per
share reflects the potential dilutions that would occur if stock options were
exercised using the average market price for the Company's stock for the period.
The Emerging Issues Task Force ("EITF") 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 was
a participating security under the provisions of EITF 03-6 for periods prior to
its redemption on December 9, 2004. No undistributed earnings are allocable to
the Company's Series B Redeemable Preferred Stock for the three months ended
March 31, 2005 since such shares were redeemed in December 2004.
7
The following table sets forth the calculation of basic and diluted earnings per
share:
THREE MONTHS ENDED MARCH 31,
2005 2004
------------ ------------
Income from continuing operations $ 21,911 $ 339,111
Less preferred stock deemed distribution - (231,741)
------------ ------------
Income from continuing operations to be allocated 21,911 107,370
Less allocation of undistributed earnings
to participating preferred stock - (36,577)
------------ ------------
Income from continuing operations
attributable to common shareholders 21,911 70,793
Loss from discontinued operations (300,000) (334,786)
------------ ------------
Net loss attributable
to common shareholders $ (278,089) $ (263,993)
============ ============
Basic weighted-average common
shares outstanding in period 12,194,720 6,111,945
Add dilutive effects of stock options 538,912 704,012
------------ ------------
Diluted weighted-average common
shares outstanding in period 12,733,632 6,815,957
============ ============
Basic earnings (loss) per common share:
Income from continuing operations $ 0.00 $ 0.01
Loss from discontinued operations (0.02) (0.05)
------------ ------------
Basic earnings (loss) per common share $ (0.02) $ (0.04)
============ ============
Diluted earnings (loss) per common share:
Income from continuing operations $ 0.00 $ 0.01
Loss from discontinued operations (0.02) (0.05)
------------ ------------
Diluted earnings (loss) per common share $ (0.02) $ (0.04)
============ ============
STOCK BASED COMPENSATION - The Company currently utilizes the intrinsic
value method to account for employee stock options as well as stock options
issued to independent members of the board of directors. The Company utilizes
the fair value method to account for stock based compensation to non-employees.
In December 2002, the FASB issued FAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure". FAS No. 148 amends FAS No. 123,
"Accounting for Stock-Based Compensation", to provide alternative methods for
voluntary transition to FAS 123's fair value method of accounting for
stock-based employee compensation ("the fair value method"). FAS No. 148 also
requires disclosure of the effects of an entity's accounting policy with respect
to stock-based employee compensation on reported net income (loss) and earnings
(loss) per share in annual and interim financials statements.
The Company has three stock-based employee and director compensation
plans. The Company accounts for these plans under the recognition and
measurement principles of APB
8
Opinion No. 25, "Accounting for Stock Issued to Employees", and related
Interpretations. Accordingly, no compensation cost has been recognized for stock
option grants to employees and directors, as all options granted under those
plans had an exercise price 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 if the Company had applied the fair
value recognition provisions of FAS No. 123 for the three months ended March 31,
2005 and 2004:
THREE MONTHS ENDED MARCH 31,
2005 2004
------------ ------------
Net loss applicable to common
shareholders - as reported $ (278,089) $ (263,993)
Deduct: Total stock-based employee
compensation expense determined
under fair value based method (81,373) (42,884)
------------ ------------
Net loss applicable to common
shareholders - pro forma $ (359,462) $ (306,877)
============ ============
Income (loss) per basic common share:
As reported $ (0.02) $ (0.04)
============ ============
Pro forma $ (0.03) $ (0.05)
============ ============
Income (loss) per diluted common share:
As reported $ (0.02) $ (0.04)
============ ============
Pro forma $ (0.03) $ (0.05)
============ ============
The fair values of stock options were calculated using the Black-Scholes
stock option valuation model with the following weighted average assumptions for
grants in 2005 and 2004: stock price volatility of 46% and 53%, respectively;
risk-free interest rate of 4.25% in 2005 and 3.5% in 2004; 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.
In December 2004, the FASB issued its final standard on accounting for
employee stock options, FAS No. 123 (Revised 2004), "Share-Based Payment" ("FAS
No. 123(R)"). FAS No. 123(R) replaces FAS No. 123, "Accounting for Stock-Based
Compensation" ("FAS No. 123"), and supersedes Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees". FAS No. 123(R)
requires companies to measure compensation costs for all share-based payments,
including grants of employee stock options, based on the fair value of the
awards on the grant date and to recognize such expense over the period during
which an employee is required to provide services in exchange for the award. The
pro forma disclosures previously permitted under FAS No. 123 will no longer be
an alternative to financial statement recognition.
In April 2005, the SEC amended Rule 4-01(a) of Regulation X under the
Exchange Act to defer the effective date of FAS 123(R) to the first fiscal year
beginning on or after June 15, 2005 (or December 15, 2005, for small business
issuers). As so modified, FAS 123(R) is to become effective for all awards
granted, modified, repurchased or cancelled on or after, and to unvested
9
portions of previously issued and outstanding awards vesting on or after January
1, 2006. We are currently evaluating the effect of adopting FAS 123(R) on our
financial position and results of operations, and we have not yet determined
whether the adoption of FAS 123(R) will result in expenses in amounts that are
similar to the current pro forma disclosures under FAS 123.
In March 2005, the SEC issued Staff Accounting Bulletin No. 107,
"Share-Based Payment" ("SAB 107"). SAB 107 provides the SEC staff's position
regarding the application of FAS 123(R), contains interpretive guidance related
to the interaction between FAS 123(R) and certain SEC rules and regulations, and
also provides the SEC staff's views regarding the valuation of share-based
payment arrangements for public companies. We are currently assessing the impact
of SAB 107 in conjunction with our evaluation of the impact of FAS 123(R).
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.
MINORITY INTEREST - The minority shareholder's interest in the equity and
the income of CAC LLC is included in minority interest in the accompanying
consolidated financial statements. In addition, the minority interest in the
income of PowerSecure, which the Company acquired during the fourth quarter of
2004, is included in minority interest in the accompanying consolidated
statement of operations for the three months ended March 31, 2004.
RECLASSIFICATION - Certain 2004 amounts have been reclassified to conform
to current year presentation. Such reclassifications had no impact on the
Company's net income (loss) or stockholders' equity.
2. DISCONTINUED OPERATIONS OF MCM AND NOTE RECEIVABLE FROM INSTRUTECH FLORIDA
During the fourth quarter of 2004, the Company sold certain contract
manufacturing assets and the business of its MCM operations to InstruTech
Florida, LLC ("InstruTech Florida"). InstruTech Florida issued a promissory note
in the amount of $780,000 to the Company for the assets and business acquired.
The note is payable only out of 50% of the net cash flow of InstruTech Florida
and accrues interest at the rate of 4.75%. In connection with the sale to
InstruTech Florida, the Company has agreed to provide up to $150,000 in the form
of a bridge loan to InstruTech Florida for a period of six months ending June
30, 2005. Through May 9, 2005, the Company advanced $50,000 under terms of the
bridge loan.
The assets of the discontinued operations not included in the sale to
InstruTech Florida, which consist principally of receivables and inventory, are
being liquidated through collections of receivables and through subsequent sales
of inventory to contract manufacturers, including InstruTech Florida.
On May 9, 2005, the Company received notice that InstruTech Florida
intends to discontinue the acquired business. As a result, the Company expects
to take possession of the purchased equipment from IndustruTech Florida and will
then engage in efforts to liquidate such equipment. The Company has completed a
preliminary estimate of the net recoverable value of the equipment, including
the effect on the recovery of the note receivable from InstruTech and amounts
advanced under terms of the bridge loan. Based upon this preliminary valuation,
the Company has increased its provision for Loss on Disposal of MCM (and its
remaining net assets) by $300,000.
While the Company has estimated net recovery values of MCM assets, based
upon the information currently available, it cannot provide any assurance of
the amounts that will ultimately be recovered from the liquidation of the
remaining inventory and equipment, and recovery of accounts receivable.
10
The operations of the discontinued MCM business for the three months ended
March 31, 2004, have been reclassified to discontinued operations in the
accompanying consolidated statement of operations.
3. INVESTMENT IN UNCONSOLIDATED AFFILIATE
The Company, through MGT and CAC LLC, owns a 26% economic interest in MM
1995-2. The Company utilizes the equity method to account for its investment in
MM 1995-2. Summarized financial information for MM 1995-2 at March 31, 2005 and
December 31, 2004 and for the three months ended March 31, 2005 and 2004, are as
follows:
MARCH 31, DECEMBER 31,
2005 2004
------------ ------------
Total current assets $ 1,753,423 $ 1,766,687
Property, plant and equipment, net 5,117,846 5,158,373
Total other assets 15,121 16,537
------------ ------------
Total assets $ 6,886,390 $ 6,941,597
============ ============
Total current liabilities $ 919,370 $ 812,796
Long-term note payable 264,037 419,559
Total shareholders' equity 5,702,983 5,709,242
------------ ------------
Total liabilities and shareholders' equity $ 6,886,390 $ 6,941,597
============ ============
THREE MONTHS ENDED MARCH 31,
----------------------------
2005 2004
------------ ------------
Total revenues $ 2,705,586 $ 1,908,666
Total costs and expenses 911,844 766,093
------------ ------------
Net income $ 1,793,742 $ 1,142,573
============ ============
11
4. DEBT
LINES OF CREDIT - For the three months ended March 31, 2005, Metretek
Florida was not in compliance with the minimum net income financial covenant of
its credit agreement with Wells Fargo Business Credit ("Wells Fargo"). Wells
Fargo has waived the financial covenants for the period ended March 31, 2005.
The Company is negotiating with Wells Fargo to amend the Metretek Florida credit
agreement to establish less restrictive financial covenants for the remainder of
2005. No assurance can be provided that the Company will be able to successfully
negotiate terms that are less restrictive and that will limit the risk that
Metretek Florida will be out of compliance in future periods. At March 31, 2005,
Metretek Florida had borrowed $130,164 under its credit agreement with Wells
Fargo.
TERM LOANS - PowerSecure has two shared savings project loans outstanding
to Caterpillar Financial Services Corporation ("Caterpillar") in the aggregate
amount of $1,068,000 at March 31, 2005. Subsequent to March 31, 2005,
PowerSecure borrowed an additional $335,000 from Caterpillar to finance a third
shared savings project. The project loans are secured by the distributed
generation equipment purchased from Caterpillar as well as the revenues
generated by the PowerSecure projects. The project loans provide for 60 monthly
payments of principal and interest (at rates ranging from 6.75% to 7.85%) in the
aggregate amount of approximately $31,000 per month. The Company expects that
monthly payments on the project loans will be funded through payments from
customers utilizing the distributed generation equipment on their sites.
On May 9, 2005, Caterpillar offered PowerSecure a $5,000,000 line of
credit to finance the purchase, from time to time, of Caterpillar generators to
be used in PowerSecure projects, primarily in shared savings arrangements,
pursuant to a letter by Caterpillar to PowerSecure containing the terms of this
credit line. Under this line of credit, PowerSecure may submit equipment
purchases to Caterpillar for financing, and Caterpillar may provide such
financing in its discretion at an interest rate, for a period of time between 12
and 60 months and upon such financing instruments, such as a promissory note or
an installment sales contract, as are set by Caterpillar on a project by project
basis. With respect to any equipment financed by Caterpillar, PowerSecure must
make a 10% cash down payment of the purchase price and grant to Caterpillar a
first priority security interest in the equipment being financed as well as
other equipment related to the project.
The line of credit expires on April 30, 2006 (subject to renewal, if
requested by PowerSecure and accepted by Caterpillar in its sole discretion), or
at an earlier date upon notice to PowerSecure given by Caterpillar in its sole
discretion. The letter setting forth the terms of the line of credit confirms
the intent of Caterpillar to finance equipment purchases by PowerSecure, but is
not an unconditional binding commitment to provide such financing. The line of
credit is contingent upon the continued credit-worthiness of PowerSecure in the
sole discretion of Caterpillar. As of May 9, 2005, Caterpillar had financed
$1,403,000 of equipment purchases, leaving PowerSecure with $3,597,000 available
for additional equipment purchases under the Caterpillar line of credit.
12
5. COMMITMENTS AND CONTINGENCIES
CLASS ACTION AND RELATED LITIGATION--In January 2001, a class action was
filed in the District Court for the City and County of Denver, Colorado against
the Company and certain affiliates and parties unrelated to the Company. The
class action alleged that the defendants violated certain provisions of the
Colorado Securities Act in connection with the sale of interests in an energy
program of which MGT was the managing trustee.
A settlement to fully resolve all claims by the class against the Company
and its affiliates was submitted and granted final approval by the district
court on June 11, 2004. The loss that occurred as a result of the class action
and settlement was recorded by the Company in the fourth quarter of 2002.
The Company is vigorously pursuing cross-claims and third party claims
("Other Party Claims"), including claims against the prior owners of the assets,
attorneys, consultants and a brokerage firm (the "Other Parties") involved in
the transactions underlying the claims in the class action, seeking recovery of
damages and contribution, among other things, from the Other Parties. Some of
the Other Parties have asserted counterclaims against the Company, which the
Company is aggressively defending and believes are without merit. Out of any net
recovery from the resolution of any of these claims, which is calculated by
deducting the Company's litigation expenses and any counterclaims against the
Company that result in a recovery by Other Parties related to the Other Parties'
liability to the Class (but is calculated without deducting any other
counterclaims successfully asserted against the Company by the Other Parties),
50% would be allocated to offset the Company's class action settlement
obligations, and the remaining 50% would be allocated as additional settlement
funds. The Company cannot provide any assurance that it will be successful on
any of these Other Party Claims or the Other Party counterclaims or, even if
successful, on the amount, if any, or the timing of any recovery from any of
these claims.
From time to time, the Company is involved in other disputes and legal
actions arising in the ordinary course of business. The Company intends to
vigorously defend all claims against us. Although the ultimate outcome of these
claims cannot be accurately predicted due to the inherent uncertainty of
litigation, in the opinion of management, based upon current information, no
other currently pending or overtly threatened dispute is expected to have a
material adverse effect on our business, financial condition or results of
operations.
PREFERRED STOCK REDEMPTION--The terms of the Company's Series B Preferred
Stock required it to redeem all shares of Series B Preferred Stock that remained
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
Company's total redemption obligation was approximately $6.2 million, of which a
total of $5,643,000 has been paid through March 31, 2005. The balance of the
unpaid redemption obligation at March 31, 2005 and December 31, 2004, was
$596,000 and $894,000, respectively, and is included in Accrued and other
liabilities in the accompanying consolidated balance sheets.
13
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 March 31, 2005, the
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.
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.
The Company evaluates the performance of its operating segments based on
operating income (loss) before income taxes, nonrecurring items and interest
income and expense. Intersegment sales are not significant.
Summarized financial information concerning the Company's reportable
segments is shown in the following table. The "Other" column includes corporate
related items, revenues and expenses from managing MM 1995-2, results of
insignificant operations and, as it relates to segment profit or loss, income
and expense (including nonrecurring charges) not allocated to reportable
segments. The table information excludes the revenues, depreciation, and losses
of
14
the discontinued MCM operations for all periods presented.
SUMMARIZED SEGMENT FINANCIAL INFORMATION
(all amounts reported in thousands)
Three Months Ended
March 31,
-----------------------
2005 2004
--------- ---------
REVENUES:
Southern Flow $ 3,236 $ 3,096
PowerSecure 3,818 4,202
Metretek Florida 644 875
Other 112 241
--------- ---------
Total $ 7,810 $ 8,414
========= =========
SEGMENT PROFIT (LOSS):
Southern Flow $ 458 $ 358
PowerSecure (134) 224
Metretek Florida (185) (99)
Other (590) (426)
--------- ---------
Total $ (451) $ 57
========= =========
CAPITAL EXPENDITURES:
Southern Flow $ 46 $ 27
PowerSecure 445 165
Metretek Florida 15 140
Other 1
--------- ---------
Total $ 506 $ 333
========= =========
DEPRECIATION AND AMORTIZATION:
Southern Flow $ 34 $ 30
PowerSecure 49 21
Metretek Florida 34 74
Other 7 5
--------- ---------
Total $ 124 $ 130
========= =========
March 31,
----------------------
2005 2004
--------- ---------
TOTAL ASSETS:
Southern Flow $ 9,445 $ 9,333
PowerSecure 11,129 5,199
Metretek Florida 4,730 7,298
Other 2,452 2,238
--------- ---------
Total $ 27,756 $ 24,068
========= =========
15
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
INTRODUCTION
The following discussion of our results of operations for the three month
periods ended March 31, 2005 (referred to herein as the "first quarter 2005")
and 2004 (referred to herein as the "first quarter 2004") and of our financial
condition as of March 31, 2005 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:
- PowerSecure, which designs, sells and manages distributed generation
systems;
- Southern Flow, which provides natural gas measurement services; and
- Metretek Florida, which designs, manufactures and sells data collection
and energy measurement monitoring systems.
Until recently, Metretek Florida had also provided contract manufacturing
services through its MCM subsidiary. These contract manufacturing services were
discontinued during fiscal 2004, and the contract manufacturing business and
most of its assets were sold in December 2004. Operations of the contract
manufacturing business prior to fiscal 2005 have been reclassified to
discontinued operations in our consolidated financial statements for all periods
presented.
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"), which owns and operates water disposal facilities
in northeastern Colorado.
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.
16
During the first quarter 2005, Southern Flow's revenues and segment profit
showed improvements over the first quarter 2004 as a result of generally
improved market conditions. The improved revenues and segment profit at Southern
Flow were offset by declines in revenues and segment results at both Metretek
Florida and PowerSecure during the first quarter 2005, as compared to the first
quarter 2004. PowerSecure's revenues during the first quarter 2005 were 9% less
than its first quarter 2004 revenues. PowerSecure's decline in revenues reflects
normal quarter-to-quarter fluctuations inherent in its operations. Metretek
Florida's revenues declined by $231,000, or 26%, during the first quarter 2005
as compared to the first quarter 2004, due to shipments deferred to the second
quarter 2005 due to delays related to the transition of production activities
from internal to external contract manufacturers.
Due principally to the decline in revenues at PowerSecure and Metretek
Florida, our consolidated revenues during the first quarter 2005 decreased by
$604,000, representing a 7% decrease over first quarter 2004 consolidated
revenues. We recorded income from continuing operations of $22,000 during the
first quarter 2005, including $557,000 equity in income from MM 1995-2, as
compared to income from continuing operations of $339,000 during the first
quarter 2004, which included $368,000 equity in income of MM 1995-2. We
recorded a net loss on discontinued operations of $300,000 during the first
quarter 2005 to reflect an increase in our provision for loss on the disposal
of the discontinued operations due to our receipt of notice that the purchaser
of the assets of the discontinued operations intends to discontinue the
business. As a result, our net loss after discontinued operations was $278,000
during the first quarter 2005, as compared to net income of $4,000 during the
first quarter 2004.
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, 2004 in "Item 7. Management's
Discussion and Analysis of Financial Condition and Results of Operations."
17
RESULTS OF OPERATIONS
The following table sets forth selected information related to our primary
business segments and is intended to assist you in an understanding of our
results of operations for the periods presented. During the third quarter of
2004, our Board of Directors approved a plan to discontinue the business of MCM
and sell all of its manufacturing assets. The operations of the discontinued MCM
disposal group have been reclassified to discontinued operations for all periods
presented in our consolidated statements of operations. The following table
excludes revenues and costs and expenses of the discontinued MCM operations.
Three Months Ended
March 31,
-----------------------
2005 2004
--------- ---------
(all amounts reported
in thousands)
REVENUES:
Southern Flow $ 3,236 $ 3,096
PowerSecure 3,818 4,202
Metretek Florida 644 875
Other 112 241
--------- ---------
Total $ 7,810 $ 8,414
========= =========
GROSS PROFIT:
Southern Flow $ 877 $ 776
PowerSecure 1,074 1,138
Metretek Florida 310 440
--------- ---------
Total $ 2,261 $ 2,354
========= =========
SEGMENT PROFIT (LOSS):
Southern Flow $ 458 $ 358
PowerSecure (134) 224
Metretek Florida (185) (99)
Other (590) (426)
--------- ---------
Total $ (451) $ 57
========= =========
We have three reportable segments. 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 are 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
18
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 March
31, 2005, the majority of PowerSecure's revenues have been generated from sales
of distributed generation systems on a turn-key basis, where the customer
purchases the systems from PowerSecure.
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 contract manufacturing operations. During fiscal 2004, we
discontinued the contract manufacturing business of MCM.
We evaluate the performance of our operating segments based on operating
income (loss) before taxes, nonrecurring items and interest income and expense.
Other profit (loss) amounts in the table above include corporate related items,
fees earned from managing our unconsolidated affiliate, results of insignificant
operations, and income and expense including non-recurring charges not allocated
to its operating segments. Intersegment sales are not significant.
During the third quarter of 2004, our Board of Directors approved a plan
to discontinue the contract manufacturing business of MCM and all of its
manufacturing assets were sold in December 2004. The operations of the
discontinued MCM disposal group have been reclassified to discontinued
operations for all periods presented in our consolidated statements of
operations. The following discussion regarding revenues and costs and expenses
for the first quarter 2005 compared to the first quarter 2004 excludes revenues
and costs and expenses of the discontinued MCM operations.
FIRST QUARTER 2005 COMPARED TO FIRST QUARTER 2004
Revenues. Our revenues are derived almost entirely from the sales of
products and services by our subsidiaries. Our consolidated revenues for the
first quarter 2005 decreased $604,000, or 7%, compared to the first quarter
2004. The decrease was due to reductions in
19
revenues by PowerSecure and Metretek Florida, partially offset by an increase in
revenues of Southern Flow.
Southern Flow's revenues increased $140,000, or nearly 5%, during the
first quarter 2005, as compared to the first quarter 2004. The increase in
Southern Flow's revenues was primarily attributable to a generally improved
market for its services due principally to a higher level of natural gas prices.
PowerSecure's revenues decreased $384,000, or 9%, during the first quarter
2005 compared to the first quarter 2004. The decrease in PowerSecure's revenues
during the first quarter 2005 compared to the first quarter 2004 was due to a
$503,000 decrease in distributed generation turn-key system project sales and
services partially offset by an increase of $119,000 in revenues from shared
savings projects, professional services, monitoring and other service related
revenues, due to an increased marketing focus on such projects and services.
PowerSecure's decline in distributed generation turn-key system project sales
and service revenues was due entirely to normal quarter-to-quarter fluctuations
inherent in its operations. Overall, PowerSecure's results for the first quarter
2005 reflect a 202% increase in the total number of distributed generation
turn-key projects either completed or in progress, compared to the first quarter
2004, although the average project size decreased by 71%, resulting from a
substantially increased number of sales of distributed generation systems that
excluded a generator from the package, such as sales of PowerSecure's QuickPower
system. As PowerSecure has increased the marketing of its systems and expanded
the scope of its offerings and of its geographic marketing, it has experienced a
major increase in the number of projects. However, many of the systems it sold
in the first quarter 2005 were systems where the customer acquired or leased its
own generator, the single biggest component in a complete distributed generation
system, from another source. There is no assurance, however, that these recent
trends in the number or size of PowerSecure projects will continue during the
remainder of fiscal 2005 or thereafter, due to quarterly and annual
fluctuations, 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.
Metretek Florida's revenues decreased $231,000, or 26%, during the first
quarter 2005 compared to the first quarter 2004. The decrease in Metretek
Florida's revenues during the first quarter 2005 compared to the first quarter
2004 was due to shipments deferred to the second quarter 2005 due to delays
related to the transition of production activities from internal to external
contract manufacturers. 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.
Other revenues decreased $129,000 during the first quarter 2005, as
compared to the first quarter 2004. This decrease was comprised principally of
non-recurring fee revenue recorded by MGT in the first quarter 2004 for which
there was no similar fee revenue in the first quarter 2005.
20
Costs and Expenses. The following table sets forth our costs and expenses
during the periods indicated:
QUARTER-OVER-QUARTER
QUARTER ENDED MARCH 31, DIFFERENCE
----------------------- --------------------
2005 2004 $ %
--------- ---------- --------- ------
(IN THOUSANDS)
COSTS AND EXPENSES:
Costs of Sales and Services
Southern Flow $ 2,359 $ 2,320 $ 39 2%
PowerSecure 2,744 3,064 (320) -10%
Metretek Florida 335 435 (100) -23%
-------- -------- --------
Total 5,438 5,819 (381) -7%
General and administrative 1,816 1,665 151 9%
Selling, marketing and service 574 496 78 16%
Depreciation and amortization 124 130 (6) -5%
Research and development 162 166 (4) -2%
Interest, finance charges and other 147 80 67 84%
Income taxes 13 12 1 8%
Costs of sales and services include materials, personnel and related
overhead costs incurred to manufacture products and provide services. The 7%
decrease in cost of sales and services for the first quarter 2005, compared to
the first quarter 2004, was attributable almost entirely to reduced revenues at
PowerSecure and Metretek Florida.
The 2% increase in Southern Flow's costs of sales and services in the
first quarter 2005 is the result of the nearly 5% increase in its revenues.
Southern Flow's gross profit margin improved to 27.1% for the first quarter
2005, compared to 25.1% during the first quarter 2004, which is within the range
of normal fluctuations for Southern Flow.
The 10% decrease in PowerSecure's costs of sales and services in the first
quarter 2005 is almost entirely a direct result of the 9% decrease in
PowerSecure's revenues. PowerSecure's gross profit margin increased to 28.1%
during the first quarter 2005, as compared to 27.1% during the first quarter
2004, reflecting both cost efficiencies in project installation and construction
as well as a higher percentage of professional service revenues, which have
higher associated profit margins, in the first quarter 2005 compared to the
first quarter 2004.
The 23% decrease in Metretek Florida's costs of sales and services in the
first quarter 2005 was likewise a direct result of the 26% decrease in Metretek
Florida's revenues. Metretek Florida's gross profit margin decreased to 48.1%
for the first quarter 2005, compared to 50.2% for the first quarter 2004,
primarily as the result of cost increases in component parts of its products.
General and administrative expenses include personnel and related overhead
costs for the support and administrative functions. The 9% increase in general
and administrative expenses in the first quarter 2005, as compared to the first
quarter 2004, was due entirely to increases in personnel and related overhead
costs associated with the development and growth of PowerSecure's business.
21
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 16% increase in selling,
marketing and service expenses in the first quarter 2005, as compared to the
first quarter 2004, was due primarily to increased personnel and business
development expenses associated with the development and growth of the business
of PowerSecure during the first quarter 2005. The increase in selling,
marketing, and service expenses at PowerSecure was partially offset by
reductions in personnel and commission costs at Metretek Florida.
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 5% decrease in depreciation and
amortization expenses in the first quarter 2005, as compared to the first
quarter 2004, primarily reflects a reduction in depreciable assets at Metretek
Florida partially offset by an increase in depreciable equipment at PowerSecure
in the latter portions of fiscal 2004 and during the first quarter 2005.
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
2% decrease in research and development expenses in the first quarter 2005, as
compared to the first quarter 2004, primarily reflects a reduction of third
party costs.
Interest, finance charges and other expenses include interest and finance
charges on our credit facility as well as other non-operating expenses. The 84%
increase in interest, finance charges and other expenses in the first quarter
2005, as compared to the first quarter 2004, reflects interest on the $3 million
class action settlement note under which we commenced payments on June 30, 2004,
as well as additional interest costs related to a significant PowerSecure shared
savings project loan which commenced in the latter half of fiscal 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 slight
increase in income taxes in the first quarter 2005, as compared to the first
quarter 2004, was due to increases in state income taxes incurred by PowerSecure
in North Carolina, partially offset by a decrease in state income taxes incurred
by Southern Flow, primarily in Louisiana.
QUARTERLY FLUCTUATIONS
Our 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:
22
- the size, timing and terms of sales and orders, including customers
delaying, deferring or canceling purchase orders or making smaller
purchases than expected;
- our ability to obtain adequate supplies of key components and materials
for our products on a timely and cost-effective basis;
- our ability to implement our business plans and strategies and the timing
of such implementation;
- the timing, pricing and market acceptance of our new products and services
such as Metretek Florida's new M2M offerings;
- 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
23
operating losses in that quarter.
Over PowerSecure's four year operating history, its revenues, costs, gross
margins, cash flow, net income and other operating results have varied from
quarter-to-quarter, period-to-period and year-to-year for a number of reasons,
including the factors mentioned above, and we expect such fluctuations to
continue in the future. PowerSecure's revenues depend in large part upon the
timing and the size of projects awarded to PowerSecure, and to a lesser extent
the timing of the completion of those projects. In addition, distributed
generation is an emerging market and PowerSecure is a new competitor in the
market, so there is no established customer base on which to rely or certainty
as to future contracts. Another factor that could cause material fluctuations in
PowerSecure's quarterly results is the amount of recurring, as opposed to
non-recurring, sources of revenue. Through March 31, 2005, 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 in its 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 addition, Metretek Florida has only a limited operating history
with its new M2M and telemetry business, and its operating results in this new
business may fluctuate significantly as it develops this business.
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,
2004, you should not rely on quarter-to-quarter, period-to-period or
year-to-year comparisons of our results of operations as an indication of our
future performance. Quarterly, period, or annual comparisons of our operating
results are not necessarily meaningful or indicative of future performance.
LIQUIDITY AND CAPITAL RESOURCES
Capital Requirements. We require capital primarily to finance our:
- operations;
- inventory;
- accounts receivable;
- research and development efforts;
- property and equipment acquisitions, including investments in shared
savings projects;
- software development;
- debt service requirements;
- liabilities of our discontinued MCM operations; and
- business and technology acquisitions and other growth transactions.
24
Cash Flow. We have historically financed our operations and growth
primarily through a combination of cash on hand, cash generated from operations,
borrowings under credit facilities, borrowings on shared savings projects,
borrowings on a term loan to fund our acquisition of additional interests in our
unconsolidated affiliate, and proceeds from private and public sales of equity.
As of March 31, 2005, we had working capital of $3,729,000, including $1,334,000
in cash and cash equivalents, compared to working capital of $5,117,000 on
December 31, 2004, which included $2,951,000 in cash and cash equivalents.
Net cash provided by operating activities was $71,000 in the first quarter
2005, consisting of approximately $241,000 of cash provided by operations,
before changes in assets and liabilities, approximately $74,000 of cash provided
by changes in working capital and other asset and liability accounts, and
approximately $244,000 of cash used by discontinued operations of MCM. This
compares to net cash provided by operating activities of $921,000 in the first
quarter 2004, consisting of approximately $421,000 of cash provided by
operations, before changes in assets and liabilities, approximately $793,000 of
cash provided by changes in working capital and other asset and liability
accounts, and approximately $293,000 of cash used by discontinued operations of
MCM.
Net cash used in investing activities was $506,000 in the first quarter
2005, as compared to net cash used by investing activities of $1,285,000 in the
first quarter 2004. The majority of the net cash used by investing activities
during the first quarter 2005 was attributable to equipment purchases for two
shared savings distributed generation projects. The net cash used by investing
activities during the first quarter 2004 was attributable to the purchase of our
additional investment in our unconsolidated affiliate.
Net cash used by financing activities was $1,182,000 in the first quarter
2005, compared to net cash provided by financing activities of $386,000 in the
first quarter 2004. The majority of the net cash used by financing activities
during the first quarter 2005 was attributable to net payments on our line of
credit, principal payments on debt obligations, and cash payments made on our
preferred stock redemptions. The majority of the net cash provided by financing
activities during the first quarter 2004 was attributable to proceeds from a
bank term loan used to finance the acquisition of the additional equity
interests in our unconsolidated affiliate and proceeds from a commercial loan to
finance the construction of a shared savings distributed generation project at
PowerSecure.
Our research and development expenses totaled $162,000 during the first
quarter 2005 compared to $166,000 during the first quarter 2004. Virtually all
of our first quarter 2005 research and development expenses were directed toward
the enhancement of Metretek Florida's business, including the development of its
M2M communications products. During fiscal 2005, we plan to continue our
research and development efforts to enhance our existing products and services
and to develop new products and services. We anticipate that our research and
development expenses in fiscal 2005 will total approximately $410,000, virtually
all of which will be directed to Metretek Florida's business.
Our capital expenditures during the first quarter 2005 were approximately
$506,000,
25
including $335,000 of capital expenditures incurred in building two PowerSecure
shared savings distributed generation projects. During the first quarter 2004,
our capital expenditures were approximately $333,000, including $110,000 of
capital expenditures for one PowerSecure shared savings distributed generation
project. We anticipate capital expenditures in fiscal 2005 of approximately $4.4
million, including $4.0 million of capital invested in shared savings
distributed generation projects. The remaining $400,000 in capital expenditures
will benefit all of our key subsidiaries. PowerSecure's shared savings 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.
Project Loans. We have two shared savings project loans outstanding to
Caterpillar Financial Services Corporation ("Caterpillar") in the aggregate
amount of $1,068,000 at March 31, 2005. Subsequent to March 31, 2005,
PowerSecure borrowed an additional $335,000 from Caterpillar to finance a third
shared savings project. The project loans are secured by the distributed
generation equipment purchased from Caterpillar as well as the revenues
generated by the PowerSecure projects. The project loans provide for 60 monthly
payments of principal and interest (at rates ranging from 6.75% to 7.85%) in the
aggregate amount of approximately $31,000 per month. We expect that monthly
payments on the project loans will be funded through payments from customers
utilizing the distributed generation equipment on their sites.
On May 9, 2005, Caterpillar offered PowerSecure a $5,000,000 line of
credit to finance the purchase, from time to time, of Caterpillar generators to
be used in PowerSecure projects, primarily in shared savings arrangements,
pursuant to a letter by Caterpillar to PowerSecure containing the terms of this
credit line. Under this line of credit, PowerSecure may submit equipment
purchases to Caterpillar for financing, and Caterpillar may provide such
financing in its discretion at an interest rate, for a period of time between 12
and 60 months and upon such financing instruments, such as a promissory note or
an installment sales contract, as are set by Caterpillar on a project by project
basis. With respect to any equipment financed by Caterpillar, PowerSecure must
make a 10% cash down payment of the purchase price and grant to Caterpillar a
first priority security interest in the equipment being financed as well as
other equipment related to the project.
The line of credit expires on April 30, 2006 (subject to renewal, if
requested by PowerSecure and accepted by Caterpillar in its sole discretion), or
at an earlier date upon notice to PowerSecure given by Caterpillar in its sole
discretion. The letter setting forth the terms of the line of credit confirms
the intent of Caterpillar to finance equipment purchases by PowerSecure, but is
not an unconditional binding commitment to provide such financing. The line of
credit is contingent upon the continued credit-worthiness of PowerSecure in the
sole discretion of Caterpillar. As of May 9, 2005, Caterpillar had financed
$1,403,000 of equipment purchases, leaving PowerSecure with $3,597,000 available
for additional equipment purchases under the Caterpillar line of credit.
Working Capital Credit Facility. We have a $3,260,000 credit facility
("Credit Facility")
26
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 consists of
separate credit agreements between Wells Fargo, as lender, and each of Southern
Flow, Metretek Florida and PowerSecure, as borrowers. At March 31, 2005, we had
an aggregate borrowing base of $3,061,000 under the Credit Facility, of which
$1,980,000 had been borrowed, leaving $1,081,000 available to borrow. We expect
to continue to utilize at least $2 million of available borrowings under the
Credit Facility during fiscal 2005, and may at times borrow the maximum amount
available depending on our cash requirements.
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 and the other borrowers. 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. The Credit Facility, which
constitutes our primary credit agreement, is used primarily to fund the
operations and growth of our subsidiaries, especially PowerSecure.
Each credit agreement contains standard affirmative and negative covenants
by the borrower, including financial covenants such as minimum net income and
minimum tangible net worth 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.
A failure to comply with these covenants could entitle Wells Fargo to accelerate
the underlying obligations.
At March 31, 2005, Metretek Florida was not in compliance with the minimum
year-to-date net income financial covenant of its credit agreement with Wells
Fargo for the first quarter 2005. Wells Fargo has waived the financial covenant
for that period. The Company is negotiating with Wells Fargo to amend the
Metretek Florida credit agreement to establish less restrictive financial
covenants for the remainder of 2005. No assurance can be provided that the
Company will be able to successfully negotiate terms that are less restrictive
and that will limit the risk that Metretek Florida will be out of compliance in
future periods.
Preferred Stock Redemption. The terms of our Series B Preferred Stock
required us to redeem all shares of our Series B Preferred Stock that remained
outstanding on December 9, 2004 at a redemption price equal to the liquidation
preference of $1,000 per share plus accumulated and unpaid dividends. Our total
redemption obligation was approximately $6.2 million, of which a total of
$5,643,000 has been paid through March 31, 2005.
Term Loan. CAC LLC has a term loan outstanding to a commercial bank in the
amount of $776,000 at March 31, 2005. The term loan financed our purchase of
additional equity interests in our unconsolidated affiliate, MM 1995-2, in
fiscal 2004. The term loan is secured by our interests in MM 1995-2, and we
provided a guaranty of $625,000 of the term loan. The term loan provides for 60
monthly payments of principal and interest (at a rate of 5.08%) in the
27
amount of approximately $18,500 per month. We expect that monthly payments on
the term loan will be funded through cash distributions from MM 1995-2.
Settlement Note. We have a settlement note outstanding in the amount of
$2,250,000 at March 31, 2005 as a result of class action litigation that was
settled in fiscal 2004. The settlement note bears interest at the rate of prime
plus three percent, is payable in 16 quarterly installments of $187,500
principal plus accrued interest each, and is guaranteed by the 1997 Trust and
our subsidiaries.
Discontinued Operations of MCM. In connection with our sale of MCM to
InstruTech Florida in fiscal 2004, InstruTech Florida issued to Metretek Florida
a promissory note in the amount of $780,000. The promissory note, which bears
interest at the annual rate of 4.75%, is payable by InstruTech Florida in an
amount equal to and solely out of 50% of the net cash flow of InstruTech
Florida.
In addition, in connection with the sale to InstruTech Florida, we agreed
to provide working capital in an amount of up to $150,000 in the form of a
bridge loan to InstruTech Florida for a period of six months ending June 30,
2005. Through May 9, 2005, we have advanced $50,000 to InstruTech Florida
under terms of the bridge loan. Any amounts advanced under the bridge loan are
to be repaid in amounts equal to and solely out of 75% of the monthly positive
cash flow from the operations of InstruTech Florida.
The assets of the discontinued operations not included in the sale to
InstruTech Florida, which consist principally of receivables and inventory, are
being liquidated through collections of receivables and through subsequent sales
of inventory to contract manufacturers, including InstruTech Florida.
On May 9, 2005, we received notice that InstruTech Florida intends to
discontinue the acquired business. As a result, we expect to take possession of
the purchased equipment from InstruTech Florida and will then engage in efforts
to liquidate such equipment. We have completed a preliminary estimate of the
net recoverable value of the equipment, including the effect on the recovery of
the note receivable from InstruTech and amounts advanced under terms of the
bridge loan. Based upon this preliminary valuation, we have increased our
provision for Loss on Disposal of MCM (and our remaining net assets)
by $300,000.
While we have estimated net recovery values of MCM assets, based
upon the information currently available, we cannot provide any assurance of
the amounts that will ultimately be recovered from the liquidation of the
remaining inventory and equipment, and recovery of accounts receivable.
Contractual Obligations and Commercial Commitments. We incur various
contractual
28
obligations and commercial commitments in our normal course of business. We
lease certain office space, operating facilities and equipment under long-term
lease agreements. We are obligated to make future payments under the Credit
Facility and other loans. In addition, we have obligations related to our
discontinued MCM operations. Finally, we are required to make certain payments
under the terms of the class action Settlement Note. The following table sets
forth our contractual obligations and commercial commitments as of March 31,
2005:
PAYMENTS DUE BY PERIOD (1)
---------------------------------------------------------
REMAINDER OF YEARS YEARS AFTER
TOTAL 2005 2006-2007 2008-2009 2009
----------- ------------ ---------- ----------- -----
CONTRACTUAL OBLIGATIONS
Credit Facility (2) $ 1,980,000 $ - $1,980,000 $ - $ -
Capital Lease Obligations 10,000 3,000 7,000 - -
Operating Leases 1,692,000 416,000 849,000 427,000 -
Series B Preferred Stock 596,000 596,000 - - -
Settlement Note 2,250,000 562,000 1,500,000 188,000 -
Term Loan 776,000 140,000 404,000 232,000 -
Project Loans 1,067,000 164,000 481,000 422,000 -
Discontinued operations (3) 693,000 315,000 311,000 67,000 -
Other Long-Term Obligations 240,000 12,000 228,000 - -
----------- ----------- ---------- ----------- -----
Total $ 9,304,000 $ 2,208,000 $5,760,000 $ 1,336,000 $ -
=========== =========== ========== =========== =====
----------------
(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 March 31, 2005,
not projected borrowings under the Credit Facility.
(3) Represents accrued termination and shutdown costs of our discontinued MCM
operations.
Off-Balance Sheet Arrangements. During the first quarter 2005, we did not
engage in any material off-balance sheet activities or have any relationships or
arrangements with unconsolidated entities established for the purpose of
facilitating off-balance sheet arrangements or other contractually narrow or
limited purposes. Further, we have not guaranteed any obligations of
unconsolidated entities nor do we have any commitment or intent to provide
additional funding to any such entities.
Liquidity. Based upon our plans and assumptions as of the date of this
Report, we currently believe that our capital resources, including our cash and
cash equivalents, amounts available under our Credit Facility, along with funds
expected to be generated from our operations, will be sufficient to meet our
anticipated cash needs during the next 12 months, including our working capital
needs, capital requirements and debt service commitments, other than the
development of the shared savings 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
29
assurance that our actual cash requirements will not be greater than we
currently expect or that these sources of liquidity will be available when
needed.
For the following reasons, we may require additional funds, beyond our
currently anticipated resources, to support our working capital requirements,
our operations or our other cash flow needs:
- While we have reorganized our Metretek Florida business with the goal of
making its cash flow positive, the operations of Metretek Florida, and the
discontinued operations of its MCM subsidiary, may require us to fund
future operating losses or costs of business expansion.
- We may recover less than the full amount of the net value of the
inventory, equipment and accounts receivable of the discontinued contract
manufacturing operations, as recorded on our financial statements,
reducing our expected cash flow therefrom.
- 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 shared savings business package,
would, require us to raise significant additional funds, beyond our
current capital resources.
- As our businesses grow, especially PowerSecure, our cash flow may
fluctuate due to the timing of receipts from sales of products and
services and the completion of projects, and despite increasing sales we
could experience temporary shortages in liquidity as our cash flow is tied
up in equipment and supplies, in accounts receivable and awaiting project
completion.
- From time to time as part of our business plan, we engage in discussions
regarding potential acquisitions of businesses and technologies. Our
ability to finance any acquisition in the future will be dependent upon
our ability to raise additional capital. As of the date of this report, we
have not entered into any binding agreement or understanding committing us
to any such acquisition, but we regularly engage in discussions related to
such acquisitions.
- 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
30
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. In
addition, we continually evaluate opportunities to improve our credit
facilities, through increased credit availability, lower debt costs or other
more favorable terms. However, our ability to obtain additional capital or
replace or improve our credit facilities when needed or desired will depend on
many factors, including general economic and market conditions, our operating
performance and investor and lender sentiment, and thus cannot be assured. In
addition, depending on how it is structured, a financing could require the
consent of our current lender. 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.
RECENT ACCOUNTING PRONOUNCEMENTS
In December 2004, the FASB issued its final standard on accounting for
employee stock options, FAS No. 123 (Revised 2004), "Share-Based Payment" ("FAS
No. 123(R)"). FAS No. 123(R) replaces FAS No. 123, "Accounting for Stock-Based
Compensation" ("FAS No. 123"), and supersedes Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees". FAS No. 123(R)
requires companies to measure compensation costs for all share-based payments,
including grants of employee stock options, based on the fair value of the
awards on the grant date and to recognize such expense over the period during
which an employee is required to provide services in exchange for the award. The
pro forma disclosures previously permitted under FAS No. 123 will no longer be
an alternative to financial statement recognition.
In April 2005, the SEC amended Rule 4-01(a) of Regulation X under the
Exchange Act to defer the effective date of FAS 123(R) to the first fiscal year
beginning on or after June 15, 2005 (or December 15, 2005, for small business
issuers). As so modified, FAS 123(R) is to become effective for all awards
granted, modified, repurchased or cancelled on or after, and to unvested
portions of previously issued and outstanding awards vesting on or after January
1, 2006. We are currently evaluating the effect of adopting FAS 123(R) on our
financial position and results of operations, and we have not yet determined
whether the adoption of FAS 123(R) will result in expenses in amounts that are
similar to the current pro forma disclosures under FAS 123.
31
In March 2005, the SEC issued Staff Accounting Bulletin No. 107,
"Share-Based Payment" ("SAB 107"). SAB 107 provides the SEC staff's position
regarding the application of FAS 123(R), contains interpretive guidance related
to the interaction between FAS 123(R) and certain SEC rules and regulations, and
also provides the SEC staff's views regarding the valuation of share-based
payment arrangements for public companies. We are currently assessing the impact
of SAB 107 in conjunction with our evaluation of the impact of FAS 123(R).
In March 2005, the FASB issued Interpretation No. 47, "Accounting for
Conditional Asset Retirement Obligations" ("FIN 47"). FIN 47 clarifies that the
term "conditional asset retirement obligation" as used in FASB Statement No.
143, "Accounting for Asset Retirement Obligations," refers to a legal obligation
to perform an asset retirement activity in which the timing and/or method of
settlement are conditional on a future event that may or may not be within the
control of the entity. However, the obligation to perform the asset retirement
activity is unconditional even though uncertainty exists about the timing or
method of settlement. FIN 47 requires that the uncertainty about the timing or
method of settlement of a conditional asset retirement obligation be factored
into the measurement of the liability when sufficient information exists. FIN 47
also clarifies when an entity would have sufficient information to reasonably
estimate the fair value of an asset retirement obligation. FIN 47 is effective
for fiscal years ending after December 15, 2005, which will be our fiscal year.
We are currently evaluating the impact of FIN 47 on our financial position 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 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;
32
- the nature and intensity of our competition, and our ability to
successfully compete in our market;
- the sufficiency of funds, from operations, available borrowings and other
capital resources, to meet our future working capital, capital
expenditure, debt service and business growth needs;
- pending or potential business acquisitions, combinations, sales,
alliances, relationships and other similar business transactions;
- our ability to successfully develop and operate our new businesses;
- the effects on our financial condition, results of operations and cash
flows of the resolution of pending or threatened litigation; and
- future economic, business, market and regulatory conditions.
Any forward-looking statements we make are based on our current plans,
intentions, objectives, goals, strategies, hopes, beliefs, projections and
expectations, as well as assumptions made by and information currently available
to management. You are cautioned not to place undue reliance on any
forward-looking statements, any or all of which could turn out to be wrong.
Forward-looking statements are not guarantees of future performance or events,
but are subject to and qualified by substantial risks, uncertainties and other
factors, which are difficult to predict and are often beyond our control.
Forward-looking statements will be affected by assumptions we might make that do
not materialize or that prove to be incorrect and by known and unknown risks,
uncertainties and other factors that could cause actual results to differ
materially from those expressed, anticipated or implied by such forward-looking
statements. These risks, uncertainties and other factors include, but are not
limited to, the following:
- our history of losses and no assurance of future profitability;
- our ability to maintain a sufficient amount of capital and liquidity to
meet our operating and capital requirement and growth needs;
- our ability to successfully and timely develop, market and operate
PowerSecure's systems, including its products, services, and technologies;
- the effects of litigation and claims pending from time to time;
- our limited operating history in and expansion of our PowerSecure
business;
- the effects of changes in utility tariffs in the regions in which
PowerSecure sells its distributed generation systems;
- our ability to obtain adequate supplies of key components and materials
for our products on a timely and cost-effective basis;
- our ability to develop, on a profitable basis, Metretek Florida's
InvisiConnect business;
- our ability to recover value and receive proceeds from the disposition of
the assets of the discontinued MCM contract manufacturing business;
- the complexity, uncertainty and time constraints associated with the
development and market acceptance of new product and service designs and
technologies;
- the effects of intense competition in our markets, including the
introduction of competitors' products, services and technologies and our
timely and successful response thereto, and our ability to successfully
compete in those markets;
- utility purchasing patterns and delays and potential changes to the
federal and state regulatory frameworks within which the utility industry
operates;
33
- 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 Credit Facility, and the May 2004 private placement;
- the effect of rapid technologic changes on our ability to maintain
competitive products, services and technologies;
- our ability to attract, retain and motivate key management, technical and
other critical personnel;
- our ability to secure and maintain key contracts, business relationships
and alliances;
- our ability to make successful acquisitions and in the future to
successfully integrate and utilize any acquired product lines, key
employees and businesses;
- changes in the energy industry in general, and technological and market
changes in the natural gas and electricity industries in particular;
- the impact and timing of the deregulation of the natural gas and
electricity markets;
- our ability to manage the anticipated growth of PowerSecure;
- the capital resources, technological requirements, and internal business
plans of the natural gas and electricity utilities industry;
- general economic and business conditions, including downturns in market
conditions;
- effects of changes in product mix on our expected gross margins and net
income;
- risks inherent in international operations;
- risks associated with our management of private energy programs;
- the receipt, timing and size of future customer orders;
- unexpected events affecting our ability to obtain funds from operations,
debt or equity to finance operations, pay interest and other obligations,
and fund needed capital expenditures and other investments;
- our ability to protect our technology, including our proprietary
information and our intellectual property rights;
- risks of physical injury and property damage inherent in natural gas and
electrical operations;
- 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, 2004.
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.
34
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to certain market risks arising from transactions we enter
into in the ordinary course of business. These market risks are primarily due to
changes in interest rates, foreign exchange rates and commodity prices, which
may adversely affect our financial condition, results of operations and cash
flow.
Our exposure to market risk resulting from changes in interest rates
relates primarily to income from our investments in short-term interest-bearing
marketable securities, which is dependent upon the interest rate of the
securities held, and to interest expenses attributable to our Credit Facility,
which is based on floating interest rates as described in "Item 2. Management's
Discussion and Analysis of Financial Conditions and Results of Operations" of
this Report. However, we do not believe that changes in interest rates have had
a material impact on us in the past or will have a material impact on us in the
foreseeable future. For example, a change of 1% in the interest rate on either
our investments or our borrowings would not have a material impact on our
financial condition, results of operations or cash flow.
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. While we are subject to some market risk from fluctuating commodity prices
in certain raw materials we use, we do not believe that our exposure to
commodity price changes is material.
We do not use derivative financial instruments to manage or hedge our
exposure to interest rate changes or other market risks, or for trading or other
speculative purposes.
ITEM 4. CONTROLS AND PROCEDURES
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
Our management, with the participation of 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 Exchange Act) as of March
31, 2005, 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 SEC's rules and forms.
A control system, no matter how well conceived and operated, can provide
only reasonable, not absolute, assurance that the objectives of the control
system are met. Further, the design of a control system must reflect the fact
that there are resource constraints, and the benefits of controls must be
considered relative to their costs. Because of the inherent limitations on all
control systems, no evaluation of controls can provide absolute assurance that
all errors, control issues and instances of fraud, if any, with a company have
been detected. The design of any system of controls is also based in part on
certain assumptions regarding the likelihood of
35
future events, and there can be no assurance that any design will succeed in
achieving its stated goals under all potential future conditions.
CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING
No change in our internal control over financial reporting (as defined in
Rule 13a-15(f) and 15d-15(f) under the Exchange Act) occurred during the quarter
ended March 31, 2005 that has materially affected, or is reasonably likely to
materially affect, our internal control over financial reporting.
36
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
From time to time, we are involved in disputes and legal proceedings.
There has been no material change in our pending legal proceedings as described
in "Item 3. Legal Proceedings" in our Annual Report on Form 10-K for the fiscal
year ended December 31, 2004.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
In February 2004, we repurchased 8,065 warrants to purchase shares of our
Common Stock at an average price per warrant of $0.72, for an aggregate purchase
price of $5,807. Such purchase was a private transaction, not part of any
publicly announced plan or program.
ITEM 5. OTHER EVENTS
On May 9, 2005, Caterpillar Financial Services, Inc ("Caterpillar")
offered PowerSecure a $5,000,000 line of credit to finance the purchase, from
time to time, of Caterpillar generators to be used in PowerSecure projects,
primarily in shared savings arrangements, pursuant to a letter by Caterpillar to
PowerSecure containing the terms of this credit line. Under this line of credit,
PowerSecure may submit equipment purchases to Caterpillar for financing, and
Caterpillar may provide such financing in its discretion at an interest rate,
for a period of time between 12 and 60 months and upon such financing
instruments, such as a promissory note or an installment sales contract, as are
set by Caterpillar on a project by project basis. With respect to any equipment
financed by Caterpillar, PowerSecure must make a 10% cash down payment of the
purchase price and grant to Caterpillar a first priority security interest in
the equipment being financed as well as other equipment related to the project.
The line of credit expires on April 30, 2006 (subject to renewal, if
requested by PowerSecure and accepted by Caterpillar in its sole discretion), or
at an earlier date upon notice to PowerSecure given by Caterpillar in its sole
discretion. The letter setting forth the terms of the line of credit confirms
the intent of Caterpillar to finance equipment purchases by PowerSecure, but is
not an unconditional binding commitment to provide such financing. The line of
credit is contingent upon the continued credit-worthiness of PowerSecure in the
sole discretion of Caterpillar. As of May 9, 2005, Caterpillar had financed
$1,403,000 of equipment purchases, leaving PowerSecure with $3,597,000 available
for additional equipment purchases under the Caterpillar line of credit.
ITEM 6. EXHIBITS
(a) EXHIBITS
10.1 Line of Credit Letter, dated May 9, 2005, by Caterpillar
Financial Services
37
Corporation to PowerSecure, Inc.
31.1 Certification of Chief Executive Officer pursuant to Rule
13a-14(a) or 15d-14(a) under the Securities Exchange Act of 1934,
as amended, as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002 (Filed herewith.)
31.2 Certification of Chief Financial Officer pursuant to Rule
13a-14(a) or 15d-14(a) under the Securities Exchange Act of 1934,
as amended, as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002 (Filed herewith.)
32.1 Certification of Chief Executive Officer pursuant to 18 U.S.C.
Section 1350 and Rule 13a-14(b) or 15d-14(b) under the Securities
Exchange Act of 1934, as amended, as adopted pursuant to Section
906 of the Sarbanes-Oxley Act of 2002 (Filed herewith.)
32.2 Certification of Chief Financial Officer pursuant to 18 U.S.C.
Section 1350 and Rule 13a-14(b) or 15d-14(b) under the Securities
Exchange Act of 1934, as amended, as adopted pursuant to Section
906 of the Sarbanes-Oxley Act of 2002 (Filed herewith.)
38
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.
METRETEK TECHNOLOGIES, INC.
Date: May 13, 2005 By: /s/ W. Phillip Marcum
-------------------------------------
W. Phillip Marcum
President and Chief Executive Officer
Date: May 13, 2005 By: /s/ A. Bradley Gabbard
-------------------------------------
A. Bradley Gabbard
Executive Vice President
and Chief Financial Officer
39