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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 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
----- -----
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes No X
----- -----
Indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Exchange Act).
Yes No X
----- -----
As of November 1, 2005, 12,357,217 shares of the issuer's Common Stock were
outstanding.
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METRETEK TECHNOLOGIES, INC.
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2005
TABLE OF CONTENTS
Page
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Unaudited Consolidated Balance Sheets -
September 30, 2005 and December 31, 2004 3
Unaudited Consolidated Statements of Operations -
For the Three and Nine Months Ended September 30, 2005
and September 30, 2004 5
Unaudited Consolidated Statements of Cash Flows -
For the Nine Months Ended September 30, 2005 and
September 30, 2004 6
Notes to Unaudited Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 17
Item 3. Quantitative and Qualitative Disclosures about Market Risk 42
Item 4. Controls and Procedures 42
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 44
Item 6. Exhibits 44
Signatures 45
2
PART I.
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
METRETEK TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
SEPTEMBER 30, DECEMBER 31,
2005 2004
------------- ------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 648,879 $ 2,951,489
Trade receivables, net of allowance for doubtful accounts
of $98,589 and $740,742, respectively 10,429,623 8,702,437
Other receivables 21,594 25,850
Inventories 3,225,945 3,190,653
Prepaid expenses and other current assets 625,815 524,508
----------- -----------
Total current assets 14,951,856 15,394,937
----------- -----------
PROPERTY, PLANT AND EQUIPMENT:
Equipment 5,648,783 5,052,664
Vehicles 97,968 61,041
Furniture and fixtures 551,872 543,127
Land, building and improvements 508,155 796,182
----------- -----------
Total property, plant and equipment, at cost 6,806,778 6,453,014
Less accumulated depreciation and amortization 3,638,371 3,715,884
----------- -----------
Property, plant and equipment, net 3,168,407 2,737,130
----------- -----------
OTHER ASSETS:
Goodwill 8,840,148 8,840,148
Patents and capitalized software development,
net of accumulated amortization of $1,217,567
and $1,135,843, respectively 300,083 233,390
Investment in unconsolidated affiliate 2,334,814 2,077,301
Assets of discontinued operations 298,858 780,000
Other assets 56,857 148,010
----------- -----------
Total other assets 11,830,760 12,078,849
----------- -----------
TOTAL $29,951,023 $30,210,916
=========== ===========
See accompanying notes to unaudited consolidated financial statements.
3
METRETEK TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
SEPTEMBER 30, DECEMBER 31,
2005 2004
------------- ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 3,319,038 $ 3,206,094
Accrued and other liabilities 6,432,757 5,896,493
Notes payable 1,250,390 1,171,988
Capital lease obligations 3,778 3,477
------------ ------------
Total current liabilities 11,005,963 10,278,052
------------ ------------
LONG-TERM NOTES PAYABLE 4,615,573 6,075,065
------------ ------------
NON-CURRENT CAPITAL LEASE OBLIGATIONS 4,222 7,094
------------ ------------
LIABILITIES OF DISCONTINUED OPERATIONS 40,990 843,649
------------ ------------
COMMITMENTS AND CONTINGENCIES
MINORITY INTEREST IN SUBSIDIARIES 162,071 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; 12,341,088and 12,186,741 shares
issued and outstanding, respectively 123,411 121,867
Additional paid-in-capital 71,741,693 71,413,120
Deferred compensation (82,500) (132,000)
Accumulated deficit (57,660,400) (58,485,723)
------------ ------------
Total stockholders' equity 14,122,204 12,917,264
------------ ------------
TOTAL $ 29,951,023 $ 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 NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------------- -------------------------
2005 2004 2005 2004
----------- ------------ ----------- -----------
REVENUES:
Sales and services $10,074,442 $ 9,114,187 $31,720,110 $25,591,905
Other 102,346 67,203 303,076 376,593
----------- ----------- ----------- -----------
Total revenues 10,176,788 9,181,390 32,023,186 25,968,498
----------- ----------- ----------- -----------
COSTS AND EXPENSES:
Cost of sales and services 7,146,321 6,565,650 22,844,583 18,167,020
General and administrative 2,007,820 1,675,421 5,817,286 4,859,432
Selling, marketing and service 692,186 483,374 1,989,167 1,492,727
Depreciation and amortization 134,778 142,223 392,783 405,881
Research and development 189,430 171,622 515,287 500,659
Interest, finance charges and other 201,604 175,742 495,444 343,693
----------- ----------- ----------- -----------
Total costs and expenses 10,372,139 9,214,032 32,054,550 25,769,412
----------- ----------- ----------- -----------
Income (loss) from continuing operations before
minority interest and income taxes (195,351) (32,642) (31,364) 199,086
Equity in income of unconsolidated affiliate 418,690 269,606 1,340,731 890,639
Minority interest (51,789) (59,664) (168,354) (201,438)
Income taxes (2,405) (12,016) (15,690) (35,987)
----------- ----------- ----------- -----------
INCOME FROM CONTINUING OPERATIONS 169,145 165,284 1,125,323 852,300
----------- ----------- ----------- -----------
DISCONTINUED OPERATIONS OF MCM (NOTE 2)
Loss on disposal of MCM (3,354,629) (300,000) (3,354,629)
Loss from operations of MCM (514,758) (1,154,639)
----------- ----------- ----------- -----------
LOSS ON DISCONTINUED OPERATIONS (3,869,387) (300,000) (4,509,268)
----------- ----------- ----------- -----------
NET INCOME $ 169,145 $(3,704,103) $ 825,323 $(3,656,968)
=========== =========== =========== ===========
PER SHARE AMOUNTS (NOTE 1):
INCOME (LOSS) FROM CONTINUING OPERATIONS:
Basic $ 0.01 $ (0.00) $ 0.09 $ (0.03)
=========== =========== =========== ===========
Diluted $ 0.01 $ (0.00) $ 0.08 $ (0.03)
=========== =========== =========== ===========
NET INCOME (LOSS):
Basic $ 0.01 $ (0.35) $ 0.07 $ (0.54)
=========== =========== =========== ===========
Diluted $ 0.01 $ (0.35) $ 0.06 $ (0.54)
=========== =========== =========== ===========
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:
Basic 12,289,743 11,136,629 12,248,096 8,830,444
=========== =========== =========== ===========
Diluted 13,456,174 11,136,629 12,912,244 8,830,444
=========== =========== =========== ===========
See accompanying notes to unaudited consolidated financial statements.
5
METRETEK TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
NINE MONTHS ENDED
SEPTEMBER 30,
-------------------------
2005 2004
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 825,323 $(3,656,968)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Loss on discontinued operations 300,000 4,509,268
Depreciation and amortization 392,783 405,881
Minority interest in subsidiaries 168,354 201,438
(Gain) loss on disposal of property, plant and equipment 2,880 (91)
Equity in income of unconsolidated affiliate (1,340,731) (890,639)
Distributions from unconsolidated affiliate 1,128,453 652,400
Stock compensation expense 49,500 33,000
Changes in other assets and liabilities:
Trade receivables, net (1,607,610) (2,128,349)
Inventories (2,649) (1,231,973)
Other current assets (147,051) (243,658)
Other noncurrent assets 91,153 (76,523)
Accounts payable 112,944 1,216,804
Accrued and other liabilities 986,912 702,726
----------- -----------
Net cash provided (used) by continuing operations 960,261 (506,684)
Net cash used by discontinued operations of MCM (675,592) (976,439)
----------- -----------
Net cash provided by (used in) operating activities 284,669 (1,483,123)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment (780,550) (2,064,510)
Investment in unconsolidated affiliate (58,045) (955,784)
Capitalized patent and software costs (148,417) (13,475)
Increase in restricted cash investment (1,000,000)
Proceeds from sale of property, plant and equipment 5,200
----------- -----------
Net cash used in investing activities (987,012) (4,028,569)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from private placement 9,830,619
Proceeds from stock option and warrant exercises 335,924 298,517
Repurchase of stock warrants (5,807)
Net payments on lines of credit (806,115) (476,865)
Proceeds from equipment and project loans 335,247 1,212,570
Proceeds from investment loan 960,784
Principal payments on long-term notes payable (910,222) (564,878)
Distributions to minority interests (96,075) (32,075)
Payments on preferred stock redemptions (450,648)
Payments on capital lease obligations (2,571) (81,074)
----------- -----------
Net cash provided by (used in) financing activities (1,600,267) 11,147,598
----------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (2,302,610) 5,635,906
CASH AND CASH EQUIVALENTS AT
BEGINNING OF PERIOD 2,951,489 2,101,675
----------- -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 648,879 $ 7,737,581
=========== ===========
See accompanying notes to unaudited consolidated financial statements.
6
METRETEK TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
As of September 30, 2005 and December 31, 2004 and
For the Three and Nine Month Periods Ended September 30, 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 September 30, 2005 and the consolidated results of their
operations and cash flows for the three and nine month periods ended September
30, 2005 and September 30, 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 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 and nine months
ended September 30, 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 NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------- -------------------------
2005 2004 2005 2004
----------- ----------- ----------- -----------
Income from continuing operations $ 169,145 $ 165,284 $ 1,125,323 $ 852,300
Less preferred stock
deemed distribution -- (174,326) -- (1,117,213)
----------- ----------- ----------- -----------
Income (loss) from continuing
operations to be allocated 169,145 (9,042) 1,125,323 (264,913)
Less allocation of undistributed earnings
to participating preferred stock -- -- -- --
----------- ----------- ----------- -----------
Income (loss) from continuing operations
attributable to common shareholders 169,145 (9,042) 1,125,323 (264,913)
Loss from discontinued operations -- (3,869,387) (300,000) (4,509,268)
----------- ----------- ----------- -----------
Net income (loss) attributable
to common shareholders $ 169,145 $(3,878,429) $ 825,323 $(4,774,181)
=========== =========== =========== ===========
Basic weighted-average common
shares outstanding in period 12,289,743 11,136,629 12,248,096 8,830,444
Add dilutive effects of stock options (1) 1,166,431 -- 664,148 --
----------- ----------- ----------- -----------
Diluted weighted-average common
shares outstanding in period 13,456,174 11,136,629 12,912,244 8,830,444
=========== =========== =========== ===========
Basic earnings (loss) per common share:
Income from continuing operations $ 0.01 $ (0.00) $ 0.09 $ (0.03)
Loss from discontinued operations -- (0.35) (0.02) (0.51)
----------- ----------- ----------- -----------
Basic earnings (loss) per common share $ 0.01 $ (0.35) $ 0.07 $ (0.54)
=========== =========== =========== ===========
Diluted earnings (loss) per common share:
Income from continuing operations $ 0.01 $ (0.00) $ 0.08 $ (0.03)
Loss from discontinued operations -- (0.35) $ (0.02) (0.51)
----------- ----------- ----------- -----------
Diluted earnings (loss) per common share $ 0.01 $ (0.35) $ 0.06 $ (0.54)
=========== =========== =========== ===========
(1) The assumed conversion of stock options has been excluded from weighted
average shares outstanding for the three and nine months ended September
30, 2004 because the effect would be anti-dilutive.
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.
8
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 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 and
nine month periods ended September 30, 2005 and 2004:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------- -----------------------
2005 2004 2005 2004
-------- ----------- --------- -----------
Net income (loss) applicable to common
shareholders - as reported $169,145 $(3,878,429) $ 825,323 $(4,774,181)
Deduct: Total stock-based employee
compensation expense determined
under fair value based method (78,356) (51,539) (263,666) (152,035)
-------- ----------- --------- -----------
Net income (loss) applicable to common
shareholders - pro forma $ 90,789 $(3,929,968) $ 561,657 $(4,926,216)
======== =========== ========= ===========
Income (loss) per basic common share:
As reported $ 0.01 $ (0.35) $ 0.07 $ (0.54)
======== =========== ========= ===========
Pro forma $ 0.01 $ (0.35) $ 0.05 $ (0.56)
======== =========== ========= ===========
Income (loss) per diluted common share:
As reported $ 0.01 $ (0.35) $ 0.06 $ (0.54)
======== =========== ========= ===========
Pro forma $ 0.01 $ (0.35) $ 0.04 $ (0.56)
======== =========== ========= ===========
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 55%, respectively;
risk-free interest rate of 4.42% 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.
9
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.
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 and nine months ended September 30, 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.
In connection with the sale to InstruTech Florida, the Company provided $50,000
in the form of a bridge loan to 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, and
inventory liquidators.
On May 9, 2005, the Company received notice that InstruTech Florida
intended to discontinue the acquired business. As a result, the Company took
possession of the purchased
10
equipment from InstruTech Florida and commenced liquidating the equipment. The
Company also completed an 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. As a result, the
Company recorded an additional provision for Loss on Disposal of MCM (and its
remaining net assets) by $300,000 during the three months ended March 31, 2005.
Management has updated its estimate net recovery values of MCM assets
through September 30, 2005, and believes no additional loss on disposal of the
discontinued assets will be required. However, the Company 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.
The operations of the discontinued MCM business for the three and nine
months ended September 30, 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 27% economic interest in
Marcum Midstream 1995-2 Business Trust ("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 September 30, 2005 and December 31, 2004 and for
the three and nine months ended September 30, 2005 and 2004, are as follows:
SEPTEMBER 30, DECEMBER 31,
2005 2004
------------- ------------
Total current assets $2,251,841 $1,766,687
Property, plant and equipment, net 5,980,140 5,158,373
Total other assets 17,361 16,537
---------- ----------
Total assets $8,249,342 $6,941,597
========== ==========
Total current liabilities $ 797,407 $ 812,796
Long-term note payable 1,050,835 419,559
Total shareholders' equity 6,401,100 5,709,242
---------- ----------
Total liabilities and shareholders' equity $8,249,342 $6,941,597
========== ==========
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------------- -----------------------
2005 2004 2005 2004
---------- ---------- ---------- ----------
Total revenues $2,332,456 $1,555,081 $7,397,103 $5,113,992
Total costs and expenses 1,008,545 720,418 3,105,245 2,352,902
---------- ---------- ---------- ----------
Net income $1,323,911 $ 834,663 $4,291,858 $2,761,090
========== ========== ========== ==========
11
4. DEBT
LINES OF CREDIT - On September 2, 2005, the Company, along with
Southern Flow, PowerSecure and Metretek Florida, entered into a Credit Agreement
(the "Credit Agreement") with First National Bank of Colorado (the "FNBC"),
providing for a $4.5 million revolving credit facility (the "Credit Facility").
Southern Flow and PowerSecure are the borrowers under the Credit Facility.
Amounts borrowed under the Credit Facility bear interest at a rate of prime plus
one and a half percent (prime + 1.50%). The Credit Facility matures on September
1, 2007. The Credit Facility refinanced the Company's existing credit facility
with Wells Fargo Business Credit, Inc. ("Wells Fargo"). The Credit Facility is
expected to be used primarily to fund the operations and growth of PowerSecure,
as well as the operations of Southern Flow and Metretek Florida.
The Credit Facility is structured in two parts: a $2.5 million
facility for PowerSecure (the "PowerSecure Facility") and a $2.0 million
facility for Southern Flow (the "Southern Flow Facility"). Borrowings under the
PowerSecure Facility are limited to a borrowing base consisting of the sum of
75% of PowerSecure's eligible accounts receivable, plus 25% of the sum of
PowerSecure's unbilled accounts receivable less the amount of PowerSecure's
unearned revenues or advanced billings on contracts, plus 25% of PowerSecure's
inventory. Borrowings under the Southern Flow Facility are limited to a
borrowing base consisting of the sum of 80% of Southern Flow's eligible accounts
receivable, plus 20% of Southern Flow's inventory, plus 70% of Metretek
Florida's eligible accounts receivable. As of September 30, 2005, the aggregate
borrowing base under the Credit Facility was $4,404,000, of which $1,815,000 had
been borrowed, leaving $2,589,000 in unused Credit Facility availability.
The obligations of PowerSecure and Southern Flow, as borrowers, under
the Credit Agreement are secured by security agreements (the "Security
Agreements") by Southern Flow, PowerSecure and Metretek Florida and are
guaranteed by the Company in a guaranty (the "Guaranty"). The Security
Agreements grant to FNBC a first priority security interest in virtually all of
the assets of each of the parties to the Credit Agreement.
The Credit Agreement contains customary representations and warranties
and affirmative and negative covenants, including financial covenants pertaining
to minimum cash flow coverage ratios and maximum debt to tangible net worth
ratios of the Company and PowerSecure, minimum current assets to current
liabilities ratios of PowerSecure and Southern Flow, as well as a minimum
tangible net worth by Southern Flow. The Credit Agreement does not contain any
financial covenants pertaining to Metretek Florida. The Credit Agreement
contains other customary covenants that apply to the Company, PowerSecure,
Southern Flow and Metretek Florida, limiting the incurrence of additional
indebtedness or liens, restricting dividends and redemptions of capital stock,
restricting their ability to engage in mergers, consolidations, sales and
acquisitions, to make investments, to issue guarantees of other obligations, to
engage in transactions with affiliates to or make restricted payments and other
matters customarily restricted in secured loan agreements, without FNBC's prior
written consent.
12
The Credit Agreement contains customary events of default, including
payment defaults, breach of representations and warranties, covenant defaults,
cross-defaults, certain bankruptcy or insolvency events, judgment defaults and
certain ERISA-related events. The Credit Facility also contains an annual unused
credit line fee.
In connection with entering the Credit Agreement described above, the
Company terminated its credit facility with Wells Fargo (the "Wells Fargo Credit
Facility"). The Wells Fargo Credit Facility was a $3.26 million secured
revolving line of credit that previously constituted the Company's primary
credit facility and was scheduled to expire on September 30, 2006. In connection
with the termination of the Wells Fargo Credit Facility, the Company paid Wells
Fargo a $32,600 termination fee, which is included in interest and finance
charges in the accompanying consolidated statements of operations, representing
one percent (1%) of the maximum line of $3,260,000.
TERM LOANS - PowerSecure has three shared savings project loans
outstanding to Caterpillar Financial Services Corporation ("Caterpillar") in the
aggregate amount of $1,265,000 at September 30, 2005. 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.
Monthly payments on the project loans are being 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 September 30, 2005, PowerSecure had $3.6
million available for additional equipment purchases under the Caterpillar line
of credit.
13
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 $5,795,000 has been paid through September 30,
2005. The balance of the unpaid redemption obligation at September 30, 2005 and
December 31, 2004, was $443,000 and $894,000, respectively, and is included in
Accrued and other liabilities in the accompanying consolidated balance sheets.
14
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 September 30, 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, machine-to-machine
(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, interest
and finance charges and income and expense items (including nonrecurring
charges) not allocated to reportable segments. The table information excludes
the
15
revenues, depreciation, and losses of the discontinued MCM operations as well as
the equity income in our unconsolidated affiliate, minority interest and income
taxes for all periods presented.
SUMMARIZED SEGMENT FINANCIAL INFORMATION
(all amounts reported in thousands)
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ -----------------
2005 2004 2005 2004
------- ------ ------- -------
REVENUES:
Southern Flow $ 3,096 $3,216 $ 9,683 $ 9,544
PowerSecure 5,980 5,108 19,525 13,658
Metretek Florida 999 790 2,512 2,390
Other 102 67 303 376
------- ------ ------- -------
Total $10,177 $9,181 $32,023 $25,968
======= ====== ======= =======
SEGMENT PROFIT (LOSS) (1):
Southern Flow $ 296 $ 485 $ 1,323 $ 1,394
PowerSecure 159 241 849 773
Metretek Florida (7) (8) (334) (204)
Other (643) (751) (1,869) (1,764)
------- ------ ------- -------
Total $ (195) $ (33) $ (31) $ 199
======= ====== ======= =======
CAPITAL EXPENDITURES:
Southern Flow $ 19 $ 21 $ 93 $ 142
PowerSecure 170 1,364 746 1,857
Metretek Florida 32 27 87 75
Other 3 1 3 4
------- ------ ------- -------
Total $ 224 $1,413 $ 929 $ 2,078
======= ====== ======= =======
DEPRECIATION AND AMORTIZATION:
Southern Flow $ 32 $ 32 $ 100 $ 94
PowerSecure 65 38 173 83
Metretek Florida 31 64 98 205
Other 7 8 22 24
------- ------ ------- -------
Total $ 135 $ 142 $ 393 $ 406
======= ====== ======= =======
September 30,
-----------------
2005 2004
------- -------
TOTAL ASSETS:
Southern Flow $ 9,521 $ 9,883
PowerSecure 13,887 9,241
Metretek Florida 3,960 5,435
Other 2,583 9,459
------- -------
Total $29,951 $34,018
======= =======
(1) Segment profit (loss) represents income from continuing operations before
equity income in our unconsolidated affiliate, minority interest and income
taxes.
16
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
INTRODUCTION
The following discussion of our results of operations for the three
and nine month periods ended September 30, 2005 (referred to herein as the
"third quarter 2005" and "nine month period 2005", respectively) and 2004
(referred to herein as the "third quarter 2004" and "nine month period 2004",
respectively) and of our financial condition as of September 30, 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.
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 27% economic interest in an unconsolidated business, 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.
In recent 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.
Our revenues and results of operations, on a quarterly, period and
annual basis, are dependent upon, and are the consolidated result of, the
revenues and results of operations of each
17
of our operating subsidiaries, our economic interest in MM 1995-2 and our
corporate overhead. While we operate generally in the energy technology
products, services and data management industry, our businesses are diversified
and each of our business segments is operated independently of the others and
influenced and affected by many factors that may apply only to that segment.
Accordingly, our consolidated results of operations are an aggregation of
different businesses and thus dependent upon a variety of factors applicable to
each of these businesses.
PowerSecure is an expanding business that has developed a distributed
generation turn-key business while at the same time is developing new related
lines of businesses. Due to the nature of these business activities, PowerSecure
is in large part dependent upon the size and timing of projects, and its results
of operations can be significantly impacted by large, individual projects.
During the third quarter 2005, PowerSecure's revenues showed improvements over
the third quarter 2004 primarily due to an increase in the number of completed
or in-process projects as well as normal quarter-to-quarter fluctuations
inherent in its operations. PowerSecure's segment profit declined during the
third quarter 2005 as a result of increases in personnel and overhead costs
associated with its continued development and growth of its core and its related
lines of business.
Southern Flow is a well established, strong and expanding oil field
services company that renders natural gas measurement and other services to oil
and gas production companies. Due to the location of the production assets of
many of its key customers, Southern Flow's business in the third quarter 2005
was adversely affected by Hurricanes Katrina and Rita. These hurricanes caused
substantial disruptions to the operations of certain customer assets commencing
in late August 2005 and reduced Southern Flow's opportunities to provide
services related to the affected assets until their repairs are made and
operations restored. These disruptions continued in September 2005 and are
expected to continue to have some adverse impact on Southern Flow's business
during the remainder of 2005. We estimate that the effects of the hurricanes
reduced Southern flow's revenues and segment profits by approximately $300,000
in the third quarter 2005, and will have a similar effect on its fourth quarter
results.
Metretek Florida has been in operation since 1977 with a core business
of designing, manufacturing and selling data collection and energy measurement
monitoring systems. In late 2004, we decided to restructure Metretek Florida's
business and discontinue its contract manufacturing operations. Metretek
Florida's future results of operations will be largely dependent upon its
ability to successfully address its core markets, as well as its ability to
generate incremental sales from certain new markets into which it has recently
introduced new telemetry products. Metretek Florida's revenues increased by
$209,000, or 26%, during the third quarter 2005 as compared to the third quarter
2004, partially due to shipments that had been deferred from the second quarter
2005 due to delays related to the transition of production activities from
internal to external contract manufacturers. Despite the increase in Metretek
Florida's revenues during the third quarter 2005, its segment profit remained
substantially unchanged from the third quarter 2004, due in part to a higher
level of sales and marketing expenses being directed toward the development of
new markets.
In addition to our operating subsidiaries, our results of operations
are significantly
18
impacted by our interest in MM 1995-2, which is recorded as equity in income of
unconsolidated affiliate and included in our income from continuing operations
and our net income.
Due principally to an increase in revenues at our PowerSecure
operating segment, our consolidated revenues during the third quarter 2005
increased by $996,000, representing a nearly 11% increase over third quarter
2004 consolidated revenues. Despite the adverse effects of Hurricanes Katrina
and Rita, we recorded income from continuing operations of $169,000 during the
third quarter 2005, including $419,000 equity in income from MM 1995-2, as
compared to income from continuing operations of $165,000 during the third
quarter 2004, which included $270,000 equity in income of MM 1995-2. Our net
income after discontinued operations was $169,000 during the third quarter 2005,
as compared to a net loss after discontinued operations of $3,704,000 during the
third quarter 2004, which included a $3,869,000 loss on the discontinued
operations of MCM.
During the nine month period 2005, PowerSecure's revenues and segment
profit showed improvements over the nine month period 2004 as a result of a 98%
increase in the number of completed and in-process projects. Even after the
adverse effects of Hurricanes Katrina and Rita, Southern Flow's revenues also
showed improvements during the nine month period 2005 over the nine month period
2004 as a result of generally improved market conditions. Metretek Florida's
revenues also increased modestly during the nine month period 2005 over the nine
month period 2004 partially as a result of new products introduced during the
period. The improved segment profit at PowerSecure was slightly offset by a
decline in segment profits at Southern Flow (due to the effects of the
hurricanes) and Metretek Florida during the nine month period 2005, as compared
to the nine month period 2004.
Due principally to the increases in revenues at each of our operating
segments, our consolidated revenues during the nine month period 2005 increased
by $6,055,000, representing a 23% increase over the nine month period 2004
consolidated revenues. We recorded income from continuing operations of
$1,125,000 during the nine month period 2005, including $1,341,000 equity in
income from MM 1995-2, as compared to income from continuing operations of
$852,000 during the nine month period 2004, which included $891,000 equity in
income of MM 1995-2. We recorded a net loss on discontinued operations of
$300,000 during the nine month period 2005 to reflect an increase in our
provision for loss on the disposal of the discontinued operations. As a result,
our net income after discontinued operations was $825,000 during the nine month
period 2005, as compared to net loss after discontinued operations of $3,657,000
during the nine month period 2004, which included a $4,509,000 loss on the
discontinued operations of MCM.
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
19
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."
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 as
well as equity income in our unconsolidated affiliate, minority interest and
income taxes.
20
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ -----------------
2005 2004 2005 2004
------- ------ ------- -------
(all amounts reported in thousands)
REVENUES:
Southern Flow $ 3,096 $3,216 $ 9,683 $ 9,544
PowerSecure 5,980 5,108 19,525 13,658
Metretek Florida 999 790 2,512 2,390
Other 102 67 303 376
------- ------ ------- -------
Total $10,177 $9,181 $32,023 $25,968
======= ====== ======= =======
GROSS PROFIT:
Southern Flow $ 682 $ 850 $ 2,451 $ 2,474
PowerSecure 1,675 1,299 5,080 3,733
Metretek Florida 571 399 1,345 1,218
------- ------ ------- -------
Total $ 2,928 $2,548 $ 8,876 $ 7,425
======= ====== ======= =======
SEGMENT PROFIT (LOSS) (1):
Southern Flow $ 296 $ 485 $ 1,323 $ 1,394
PowerSecure 159 241 849 773
Metretek Florida (7) (8) (334) (204)
Other (643) (751) (1,869) (1,764)
------- ------ ------- -------
Total $ (195) $ (33) $ (31) $ 199
======= ====== ======= =======
----------
(1) Segment profit (loss) represents income from continuing operations before
equity income in our unconsolidated affiliate, minority interest and income
taxes.
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 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
21
outsourcing partnerships with utilities. Through September 30, 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, interest and finance charges, 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 third quarter 2005 compared to the third quarter 2004 and the nine month
period 2005 compared to the nine month period 2004 excludes revenues and costs
and expenses of the discontinued MCM operations.
THIRD QUARTER 2005 COMPARED TO THIRD QUARTER 2004
Revenues. Our revenues are derived almost entirely from the sales of
products and services by our subsidiaries. Our consolidated revenues for the
third quarter 2005 increased $996,000, or 11%, compared to the third quarter
2004. The increase was due to increases in revenues at PowerSecure and Metretek
Florida, partially offset by a decline in revenues at Southern Flow.
PowerSecure's revenues increased $872,000, or 17%, during the third
quarter 2005 compared to the third quarter 2004. The increase in PowerSecure's
revenues during the third quarter 2005 compared to the third quarter 2004 was
due to a $502,000 increase in distributed generation turn-key system project
sales and services as well as an increase of $370,000 in revenues from shared
savings projects, professional services, monitoring and other service
22
related revenues, due to an increased marketing focus on such projects and
services. PowerSecure's increase in distributed generation turn-key system
project sales and service revenues was due to both an increase in the number of
completed or in-process projects during the third quarter 2005 compared to the
third quarter 2004 as well as normal quarter-to-quarter fluctuations inherent in
its operations. Overall, PowerSecure's results for the third quarter 2005
reflect a 76% increase in the total number of distributed generation turn-key
projects either completed or in progress, compared to the third quarter 2004,
although the average project size decreased by 37%, 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 third 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.
Southern Flow's revenues decreased $120,000, or nearly 4%, during the
third quarter 2005, as compared to the third quarter 2004. The decrease in
Southern Flow's revenues was entirely attributable to the combined effects on
Southern Flow's customers of Hurricanes Katrina and Rita. Southern Flow's Gulf
Coast division offices and related assets experienced no major damage from the
hurricanes. However, production assets owned by many of Southern Flow's Gulf
Coast customers were heavily damaged and the affected assets may be out of
service for indefinite periods. As a result, some Southern Flow services to its
Gulf Coast customers are likely to remain curtailed until such time as damage
can be repaired and normal operations can be restored. Based upon information
provided by its customers, Southern Flow currently expects that Gulf Coast
operations will continue to be impaired throughout the remainder of 2005 but
should return to normal levels by early 2006. We estimate that Southern Flow's
third quarter 2005 revenues and segment profit were reduced by approximately
$300,000 as a result of the effects of Hurricanes Katrina and Rita and we expect
a similar effect in the fourth quarter of 2005.
Metretek Florida's revenues increased $209,000, or 26%, during the
third quarter 2005 compared to the third quarter 2004. The increase in Metretek
Florida's revenues during the third quarter 2005 compared to the third quarter
2004 was due, in part, to shipments that had been deferred from the first half
of 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 increased $35,000 during the third quarter 2005, as
compared to the third quarter 2004. This increase was comprised principally of
increased fee revenue earned by
23
MGT, which is the managing trustee of MM 1995-2, in the third quarter 2005
compared to the third quarter 2004.
Costs and Expenses. The following table sets forth our costs and
expenses during the periods indicated:
QUARTER ENDED QUARTER-OVER-QUARTER
SEPTEMBER 30, DIFFERENCE
--------------- --------------------
2005 2004 $ %
------ ------ ---- ---
(IN THOUSANDS)
COSTS AND EXPENSES:
Costs of Sales and Services
Southern Flow $2,414 $2,366 $ 48 2%
PowerSecure 4,305 3,809 496 13%
Metretek Florida 427 391 36 9%
------ ------ ----
Total 7,146 6,566 580 9%
General and administrative 2,008 1,675 333 20%
Selling, marketing and service 692 483 209 43%
Depreciation and amortization 135 142 (7) -5%
Reserarch and development 189 172 17 10%
Interest, finance charges and other 202 176 26 15%
Income taxes 2 12 (10) -83%
Costs of sales and services include materials, personnel and related
overhead costs incurred to manufacture products and provide services. The 9%
increase in cost of sales and services for the third quarter 2005, compared to
the third quarter 2004, was attributable almost entirely to increased revenues
at PowerSecure and Metretek Florida.
The 13% increase in PowerSecure's costs of sales and services in the
third quarter 2005 is almost entirely a direct result of the 17% increase in
PowerSecure's revenues. PowerSecure's gross profit margin increased to 28.0%
during the third quarter 2005, as compared to 25.4% during the third quarter
2004, reflecting a higher level of revenues from shared savings projects,
professional services, monitoring and other service related activities that
generally result in higher margins to PowerSecure.
The 2% increase in Southern Flow's costs of sales and services in the
third quarter 2005 despite an overall 4% decrease in Southern Flow's revenues is
due to the cost structure of Southern Flow's service operations which remains
generally fixed, over short-term periods, relative to fluctuations in its
service related revenues. As a result, Southern Flow's gross profit margin
decreased to 22.0% for the third quarter 2005, compared to 26.4% during the
third quarter 2004, due to the $300,000 estimated reduction in revenues
attributable to the effects of the hurricanes without any significant reduction
in costs over the same period.
The 9% increase in Metretek Florida's costs of sales and services in
the third quarter 2005 was likewise a direct result of the 26% increase in
Metretek Florida's revenues. Metretek Florida's gross profit margin increased to
57.2% for the third quarter 2005, compared to 50.5% for the third quarter 2004.
The improved gross profit margin for the third quarter 2005 reflects cost
efficiencies achieved from the transition of production activities from internal
to external
24
contract manufacturers and other cost reduction measures taken in connection
with the restructuring of Metretek Florida's business.
General and administrative expenses include personnel and related
overhead costs for the support and administrative functions. The 20% increase in
general and administrative expenses in the third quarter 2005, as compared to
the third quarter 2004, was due almost entirely to increases in personnel and
related overhead costs associated with the development and growth of
PowerSecure's business.
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 43% increase in
selling, marketing and service expenses in the third quarter 2005, as compared
to the third quarter 2004, was due primarily to increases in personnel and
commission costs at Metretek Florida as well as increased personnel and business
development expenses associated with the development and growth of the business
of PowerSecure during the third quarter 2005.
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 third quarter 2005, as compared to the third
quarter 2004, was due primarily to the offsetting effects of a reduction in
depreciable assets at Metretek Florida offset by an increase in depreciable
equipment at PowerSecure.
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 10% increase in research and development expenses in the third
quarter 2005, as compared to the third quarter 2004, reflects additional
personnel and associated costs at Metretek Florida.
Interest, finance charges and other expenses include interest and
finance charges on our credit facility as well as other non-operating expenses.
The 15% increase in interest, finance charges and other expenses in the third
quarter 2005, as compared to the third quarter 2004, reflects additional
interest costs related to a significant PowerSecure shared savings project loan
that commenced in May 2005 and the $32,600 credit facility termination fee paid
to Wells Fargo in September 2005. These interest costs were partially offset by
reduced interest charges at Metretek Florida from lower levels of debt
outstanding during the third quarter 2005, as compared the third quarter 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 decrease in
income taxes in the third quarter 2005, as compared to the third quarter 2004,
was due to a decrease in state income taxes incurred by Southern Flow, primarily
in Louisiana.
25
NINE MONTH PERIOD 2005 COMPARED TO NINE MONTH PERIOD 2004
Revenues. Our consolidated revenues for the nine month period 2005
increased $6,055,000, or 23%, compared to the nine month period 2004. The
increase was due to an increase in revenues at each of our operating
subsidiaries.
PowerSecure's revenues increased $5,867,000, or 43%, during the nine
month period 2005 compared to the nine month period 2004. The increase in
PowerSecure's revenues during the nine month period 2005 compared to the nine
month period 2004 was due to a $5,288,000 increase in distributed generation
turn-key system project sales and services together with an increase of $579,000
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 increase in distributed generation turn-key
system project sales and service revenues was due entirely to both an increase
in the number of completed or in-process projects during the nine month period
2005 compared to the nine month period 2004 as well as normal quarter-to-quarter
fluctuations inherent in its operations. Overall, PowerSecure's results for the
nine month period 2005 reflect a 98% increase in the total number of distributed
generation turn-key projects either completed or in progress, compared to the
nine month period 2004, although the average project size decreased by 29%,
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 nine month period 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.
Southern Flow's revenues increased $139,000, or less than 2%, during
the nine month period 2005, as compared to the nine month period 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. The positive effects of improved market conditions for its services
in the first seven months of 2005 were largely offset by the combined effects on
Southern Flow's customers of Hurricanes Katrina and Rita during August and
September 2005. Southern Flow's Gulf Coast division offices and related assets
experienced no major damage from the hurricanes. However, production assets
owned by many of Southern Flow's Gulf Coast customers were heavily damaged and
the affected assets may be out of service for indefinite periods. As a result,
some Southern Flow services to its Gulf Coast customers are likely to remain
curtailed until such time as damage can be repaired and normal operations can be
restored. Based upon information provided by its customers, Southern Flow
currently expects that Gulf Coast operations will continue to be impaired
throughout the
26
remainder of 2005 but should return to normal levels by early 2006. We estimate
that Southern Flow's nine month period 2005 revenues and segment profit were
reduced by approximately $300,000 as a result of the effects of Hurricanes
Katrina and Rita and we expect a similar effect in the fourth quarter of 2005.
Metretek Florida's revenues increased $122,000, or 5%, during the nine
month period 2005 compared to the nine month period 2004. The increase in
Metretek Florida's revenues during the nine month period 2005 compared to the
nine month period 2004 was due, in part, to new products introduced during the
period. 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 $73,000 during the nine month period 2005, as
compared to the nine month period 2004. This decrease was comprised principally
of non-recurring fee revenue recorded by MGT in the nine month period 2004 for
which there was no similar fee revenue in the nine month period 2005.
Costs and Expenses. The following table sets forth our costs and
expenses during the periods indicated:
NINE MONTHS ENDED PERIOD-OVER-PERIOD
SEPTEMBER 30, DIFFERENCE
----------------- ------------------
2005 2004 $ %
------- ------- ------ ---
(IN THOUSANDS)
COSTS AND EXPENSES:
Costs of Sales and Services
Southern Flow $ 7,232 $ 7,071 $ 161 2%
PowerSecure 14,445 9,925 4,520 46%
Metretek Florida 1,168 1,171 (3) 0%
------- ------- ------
Total 22,845 18,167 4,678 26%
General and administrative 5,817 4,859 958 20%
Selling, marketing and service 1,989 1,493 496 33%
Depreciation and amortization 393 406 (13) -3%
Reserarch and development 515 501 14 3%
Interest, finance charges and other 495 344 151 44%
Income taxes 16 36 (20) -56%
The overall 26% increase in cost of sales and services for the nine
month period 2005, compared to the nine month period 2004, was attributable
almost entirely to increased revenues at Southern Flow and PowerSecure.
The 46% increase in PowerSecure's costs of sales and services in the
nine month period 2005 is almost entirely a direct result of the 43% increase in
PowerSecure's revenues. PowerSecure's gross profit margin decreased to 26.0%
during the nine month period 2005, as compared to 27.3% during the nine month
period 2004, reflecting recent cost increases in both key equipment components
and outsourced installation and construction costs that were not passed on to
certain large customers, principally during the first six months of the nine
month period 2005, compared to the nine month period 2004. As noted previously,
PowerSecure's
27
gross profit margin was 28.0% during the third quarter 2005.
The 2% increase in Southern Flow's costs of sales and services in the
nine month period 2005 is the result of the 1% increase in its revenues.
Southern Flow's gross profit margin decreased to 25.3% for the nine month period
2005, compared to 25.9% during the nine month period 2004, which was partially
due to the effects of Hurricanes Katrina and Rita, but still within the range of
normal fluctuations for Southern Flow.
The less than 1% decrease in Metretek Florida's costs of sales and
services in the nine month period 2005 was a direct result of cost efficiencies
achieved from the transition of production activities from internal to external
contract manufacturers. As a result, Metretek Florida's gross profit margin
increased to 53.5% for the nine month period 2005, compared to 51.0% for the
nine month period 2004.
The 20% increase in general and administrative expenses in the nine
month period 2005, as compared to the nine month period 2004, was due primarily
to increases in personnel and related overhead costs associated with the
development and growth of PowerSecure's business. In addition, smaller increases
in personnel and related overhead costs at Southern Flow and Metretek Florida
also contributed to the overall increase in general and administrative expense
during the nine month period 2005, as compared to the nine month period 2004.
The 33% increase in selling, marketing and service expenses in the
nine month period 2005, as compared to the nine month period 2004, was due
primarily to increased personnel and business development expenses associated
with the development and growth of the business of PowerSecure as well as
increased personnel and business development expenses at Metretek Florida during
the nine month period 2005.
The 3% decrease in depreciation and amortization expenses in the nine
month period 2005, as compared to the nine month period 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 nine month period 2005.
The 3% increase in research and development expenses in the nine month
period 2005, as compared to the nine month period 2004, primarily reflects
additional personnel and associated costs at Metretek Florida.
The 44% increase in interest, finance charges and other expenses in
the nine month period 2005, as compared to the nine month period 2004, reflects
interest on the $3 million class action settlement note that began accruing on
July 1, 2004, additional interest costs related to two PowerSecure shared
savings project loans that commenced in the latter half of fiscal 2004 and in
the second quarter of 2005, respectively, the $32,600 credit facility
termination fee paid to Wells Fargo in September 2005, and a generally higher
level of interest rates on outstanding borrowings during the respective periods.
The decrease in income taxes in the nine month period 2005, as
compared to the nine
28
month period 2004, was due to 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:
- the size, timing and terms of sales and orders, including customers
delaying, deferring or canceling purchase orders or making smaller
purchases than expected;
- the effects of severe weather conditions, such as Hurricanes Katrina
and Rita, on the demand requirements of our customers;
- 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;
- economic conditions in the energy industry, especially in the natural
gas and electricity sectors including the effect of cyclical changes
in energy prices;
- 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;
- 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.
29
Because we have little or no control over most of these factors, our
operating results are difficult to predict. Any substantial adverse change in
any of these factors could negatively affect our business and results of
operations.
Our revenues and other operating results are heavily dependant upon
the volume and timing of customer orders and payments and the date of product
delivery. The timing of large individual sales is difficult for us to predict.
Because our operating expenses are based on anticipated revenues and because a
high percentage of these are relatively fixed, a shortfall or delay in
recognizing revenue could cause our operating results to vary significantly from
quarter-to-quarter and could result in significant operating losses in any
particular quarter. If our revenues fall below our expectations in any
particular quarter, we may not be able to reduce our expenses rapidly in
response to the shortfall, which could result in us suffering significant
operating losses in that quarter.
Over PowerSecure's five 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. As PowerSecure develops new related lines of business,
revenues and costs will fluctuate. Another factor that could cause material
fluctuations in PowerSecure's quarterly results is the amount of recurring, as
opposed to non-recurring, sources of revenue. Through September 30, 2005, the
majority of PowerSecure's revenues constituted non-recurring revenues.
Southern Flow's operating results tend to vary, to some extent, with
energy prices, especially the price of natural gas. For example, in recent
years, the high price of natural gas has led to an increase in production
activity by Southern Flow's customers, resulting in higher revenues and net
income by Southern Flow. Since energy prices tend to be cyclical, rather than
stable, future cyclical changes in energy prices are likely to affect Southern
Flow's future revenues and net income. In addition, Southern Flow's Gulf Coast
customers are exposed to the risks of hurricanes and tropical storms, which can
adversely affect Southern Flow's results of operations during hurricane season,
such as this year.
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
30
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.
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 September 30, 2005, we had working capital of $3,946,000, including
$649,000 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. As
of September 30, 2005, we had $2,589,000 of additional borrowing capacity from
our credit facilities available to support working capital needs, compared to
$639,000 of additional borrowing capacity at December 31, 2004.
Net cash provided by operating activities was $285,000 in the nine
month period 2005, consisting of approximately $1,527,000 of cash provided by
operations, before changes in assets and liabilities, approximately $566,000 of
cash used in changes in working capital and other asset and liability accounts,
and approximately $676,000 of cash used by discontinued operations of MCM. This
compares to net cash used in operating activities of $1,483,000 in the nine
month period 2004, consisting of approximately $1,254,000 of cash provided by
operations, before changes in assets and liabilities, approximately $1,761,000
of cash used in changes in working capital and other asset and liability
accounts, and approximately $976,000 of cash used by discontinued operations of
MCM.
Net cash used in investing activities was $987,000 in the nine month
period 2005, as compared to net cash used by investing activities of $4,029,000
in the nine month period 2004.
31
The majority of the net cash used by investing activities during the nine month
period 2005 was attributable to equipment purchases for two shared savings
distributed generation projects. Net cash used in investing activities during
the nine month period 2004 included the purchase of a $1,000,000 restricted
certificate of deposit in connection with the waiver and amendment of certain
loan covenant compliance requirements for Metretek Florida. In addition during
the nine month period 2004, we purchased additional equity interests in our
unconsolidated affiliate for $956,000 and used $2,065,000 to purchase equipment
items, including $1,724,000 of capital expenditures for three PowerSecure
"company-owned" distributed generation projects.
Net cash used by financing activities was $1,600,000 in the nine month
period 2005, compared to net cash provided by financing activities of
$11,148,000 in the nine month period 2004. The majority of the net cash used by
financing activities during the nine month period 2005 was attributable to
principal payments on debt obligations, and cash payments made on our preferred
stock redemptions. The majority of the net cash provided by financing activities
in the nine month period 2004 was attributable to $9,831,000 net proceeds from a
Private Placement of our Common Stock in May 2004, $1,213,000 proceeds from two
loans to fund the purchase of equipment for two company-owned distributed
generation projects, and $961,000 proceeds from a bank term loan used to finance
the acquisition of the additional equity interests in our unconsolidated
affiliate.
Our research and development expenses totaled $515,000 in the nine
month period 2005 compared to $501,000 in the nine month period 2004. All of our
nine month period 2005 research and development expenses were directed toward
the enhancement and support of Metretek Florida's business, including the
development of its M2M communications products. During the remainder of 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 $710,000, all of which will be directed to Metretek Florida's
business.
Our capital expenditures in the nine month period 2005 were $929,000,
the majority of which related to PowerSecure, including $439,000 of capital
expenditures incurred in building three PowerSecure shared savings distributed
generation projects. In the nine month period 2004, our capital expenditures
were $2,078,000, including $1,724,000 of capital expenditures related to three
PowerSecure shared savings distributed generation projects. We anticipate
capital expenditures in fiscal 2005 of approximately $1.1 million, including
$500,000 of capital invested in shared savings distributed generation projects.
The remaining $600,000 in capital expenditures will benefit all of our key
subsidiaries. The majority of costs incurred in PowerSecure's future 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 three shared savings project loans outstanding
to Caterpillar Financial Services Corporation ("Caterpillar") in the aggregate
amount of $1,265,000 at September
32
30, 2005. 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 September 30, 2005, PowerSecure had $3.6
million available for additional equipment purchases under the Caterpillar line
of credit.
Working Capital Credit Facility. On September 2, 2005, the Company,
along with Southern Flow, PowerSecure and Metretek Florida, entered into a
Credit Agreement (the "Credit Agreement") with First National Bank of Colorado
(the "FNBC"), providing for a $4.5 million revolving credit facility (the
"Credit Facility"). Southern Flow and PowerSecure are the borrowers under the
Credit Facility. Amounts borrowed under the Credit Facility bear interest at a
rate of prime plus one and a half percent (prime + 1.50%). The Credit Facility
matures on September 1, 2007. The Credit Facility refinanced the Company's
existing credit facility with Wells Fargo Business Credit, Inc. ("Wells Fargo").
The Credit Facility is expected to be used primarily to fund the operations and
growth of PowerSecure, as well as the operations of Southern Flow and Metretek
Florida.
The Credit Facility is structured in two parts: a $2.5 million
facility for PowerSecure (the "PowerSecure Facility") and a $2.0 million
facility for Southern Flow (the "Southern Flow Facility"). Borrowings under the
PowerSecure Facility are limited to a borrowing base consisting of the sum of
75% of PowerSecure's eligible accounts receivable, plus 25% of the sum of
PowerSecure's unbilled accounts receivable less the amount of PowerSecure's
unearned revenues or advanced billings on contracts, plus 25% of PowerSecure's
inventory. Borrowings
33
under the Southern Flow Facility are limited to a borrowing base consisting of
the sum of 80% of Southern Flow's eligible accounts receivable, plus 20% of
Southern Flow's inventory, plus 70% of Metretek Florida's eligible accounts
receivable. As of September 30, 2005, the aggregate borrowing base under the
Credit Facility was $4,404,000 of which $1,815,000 had been borrowed, leaving
$2,589,000 in unused Credit Facility availability.
The obligations of PowerSecure and Southern Flow, as borrowers, under
the Credit Agreement are secured by security agreements (the "Security
Agreements") by Southern Flow, PowerSecure and Metretek Florida and are
guaranteed by the Company in a guaranty (the "Guaranty"). The Security
Agreements grant to FNBC a first priority security interest in virtually all of
the assets of each of the parties to the Credit Agreement.
The Credit Agreement contains customary representations and warranties
and affirmative and negative covenants, including financial covenants pertaining
to minimum cash flow coverage ratios and maximum debt to tangible net worth
ratios of the Company and PowerSecure, minimum current assets to current
liabilities ratios of PowerSecure and Southern Flow, as well as a minimum
tangible net worth by Southern Flow. The Credit Agreement does not contain any
financial covenants pertaining to Metretek Florida. The Credit Agreement
contains other customary covenants that apply to the Company, PowerSecure,
Southern Flow and Metretek Florida, limiting the incurrence of additional
indebtedness or liens, restricting dividends and redemptions of capital stock,
restricting their ability to engage in mergers, consolidations, sales and
acquisitions, to make investments, to issue guarantees of other obligations, to
engage in transactions with affiliates to or make restricted payments and other
matters customarily restricted in secured loan agreements, without FNBC's prior
written consent.
The Credit Agreement contains customary events of default, including
payment defaults, breach of representations and warranties, covenant defaults,
cross-defaults, certain bankruptcy or insolvency events, judgment defaults and
certain ERISA-related events. The Credit Facility also contains an annual unused
credit line fee.
In connection with entering the Credit Agreement described above, the
Company terminated its credit facility with Wells Fargo (the "Wells Fargo Credit
Facility"). The Wells Fargo Credit Facility was a $3.26 million secured
revolving line of credit that previously constituted the Company's primary
credit facility and was scheduled to expire on September 30, 2006. The Company
paid Wells Fargo a $32,600 termination fee, representing one percent (1%) of the
maximum line of $3,260,000.
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
$5,795,000 has been paid through September 30, 2005.
Term Loan. CAC LLC has a term loan outstanding to a commercial bank in
the amount of $679,000 at September 30, 2005. The term loan financed our
purchase of additional equity
34
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 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 $1,875,000 at September 30, 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 by
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. In addition, in connection with the
sale to InstruTech Florida, we advanced $50,000 to InstruTech Florida under
terms of a 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, and to
inventory liquidators.
On May 9, 2005, we received notice that InstruTech Florida intended to
discontinue the acquired business. As a result, we took possession of the
purchased equipment from InstruTech Florida and commenced liquidating the
equipment. We also completed an 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
valuation, we recorded an additional provision for Loss on Disposal of MCM (and
its remaining net assets) by $300,000 in the first quarter 2005.
We have updated our estimate of the net recovery values of MCM assets
through September 30, 2005, and believe no additional losses on disposal will be
required. However, 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 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
September 30, 2005:
35
PAYMENTS DUE BY PERIOD (1)
-------------------------------------------------------------
REMAINDER OF YEARS YEARS AFTER
TOTAL 2005 2006-2007 2008-2009 2009
---------- ------------ ---------- ---------- -------
CONTRACTUAL OBLIGATIONS
Credit Facility (2) $1,815,000 $ -- $1,815,000 $ -- $ --
Capital Lease Obligations 9,000 2,000 7,000 -- --
Operating Leases 1,414,000 138,000 849,000 427,000 --
Series B Preferred Stock 443,000 443,000 -- -- --
Settlement Note 1,875,000 188,000 1,500,000 187,000 --
Term Loan 679,000 43,000 404,000 232,000 --
Project Loans 1,265,000 64,000 606,000 568,000 27,000
Discontinued operations (3) 41,000 41,000 -- -- --
Other Long-Term Obligations 231,000 3,000 228,000 -- --
---------- -------- ---------- ---------- -------
Total $7,772,000 $922,000 $5,409,000 $1,414,000 $27,000
========== ======== ========== ========== =======
----------
(1) Does not include interest that may become due and payable on such
obligations in any future period.
(2) Total repayments are based upon borrowings outstanding as of September 30,
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 third 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 assurance that our actual cash requirements will
not be greater than we currently expect or that these sources of liquidity will
be available when needed.
For the following reasons, we may require additional funds, beyond our
currently anticipated resources, to support our working capital requirements,
our operations or our other cash flow needs:
- While we have reorganized our Metretek Florida business with the goal
of making it cash
36
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 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
37
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.
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
38
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.
In May 2005, the FASB issued FAS No. 154, "Accounting Changes and
Error Corrections" ("FAS 154"). FAS 154 changes the requirements for the
accounting and reporting of a change in accounting principle, and applies to all
voluntary changes in accounting principle as well as to changes required by an
accounting pronouncement that does not include specific transition provisions.
Previously, most changes in accounting principles were required to be recognized
by way of including the cumulative effect of the changes in accounting principle
in the income statement in the period of change. FAS 154 requires that such
changes in accounting principle be retrospectively applied as of the beginning
of the first period presented as if that accounting principle had always been
used, unless it is impracticable to determine either the period-specific effects
or the cumulative effect of the change. FAS 154 is effective for accounting
changes and corrections of errors made in fiscal years beginning after December
15, 2005. However, FAS 154 does not change the transition provisions of any
existing accounting pronouncements. We do not believe adoption of FAS 154 will
have a material impact on our financial position or 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
39
relationships;
- our business plans, strategies, goals and objectives;
- market demand for and customer benefits attributable to our products
and services;
- industry trends and customer preferences;
- the nature and intensity of our competition, and our ability to
successfully compete in our market;
- the sufficiency of funds, from operations, available borrowings and
other capital resources, to meet our future working capital, capital
expenditure, debt service and business growth needs;
- pending or potential business acquisitions, combinations, sales,
alliances, relationships and other similar business transactions;
- our ability to successfully develop and operate our new businesses;
- the effects on our financial condition, results of operations and cash
flows of the resolution of pending or threatened litigation; and
- future economic, business, market and regulatory conditions.
Any forward-looking statements we make are based on our current plans,
intentions, objectives, goals, strategies, hopes, beliefs, projections and
expectations, as well as assumptions made by and information currently available
to management. You are cautioned not to place undue reliance on any
forward-looking statements, any or all of which could turn out to be wrong.
Forward-looking statements are not guarantees of future performance or events,
but are subject to and qualified by substantial risks, uncertainties and other
factors, which are difficult to predict and are often beyond our control.
Forward-looking statements will be affected by assumptions we might make that do
not materialize or that prove to be incorrect and by known and unknown risks,
uncertainties and other factors that could cause actual results to differ
materially from those expressed, anticipated or implied by such forward-looking
statements. These risks, uncertainties and other factors include, but are not
limited to, the following:
- our history of losses and, notwithstanding our recent profitable
quarters, no assurance of continued future profitability;
- our ability to maintain a sufficient amount of capital and liquidity
to meet our operating and capital requirement and growth needs;
- the size, timing and terms of customer orders;
- our ability to successfully and timely develop, market, operate and
expand PowerSecure's systems, including its products, services, and
technologies;
- the effects of adverse weather conditions, such as hurricanes, on the
demand requirements of our customers;
- the effects of litigation and claims pending from time to time;
- the effects of changes in utility tariffs in the regions in which
PowerSecure sells its distributed generation systems;
- the effects of changes in environmental laws, rules and regulations by
federal, state or local governmental authorities or regulatory
agencies on the economic viability of PowerSecure's distributed
generation technology solution;
- our ability to obtain adequate supplies of key components and
materials for our products on a timely and cost-effective basis;
40
- our ability to develop, on a profitable basis, Metretek Florida's
InvisiConnect business;
- our ability to recover value and receive proceeds from the disposition
of the assets of the discontinued MCM contract manufacturing business;
- the complexity, uncertainty and time constraints associated with the
development and market acceptance of new product and service designs
and technologies;
- the effects of intense competition in our markets, including the
introduction of competitors' products, services and technologies and
our timely and successful response thereto, and our ability to
successfully compete in those markets;
- utility purchasing patterns and delays and potential changes to the
federal and state regulatory frameworks within which the utility
industry operates;
- fluctuations in our operating results, and the long and variable sales
cycles of many of our products and services;
- 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 changes in energy prices, especially in 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;
- 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
41
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.
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 September 30, 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
42
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 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 Rules 13a-15(f) and 15d-15(f) under the Exchange Act) occurred during the
quarter ended September 30, 2005 that has materially affected, or is reasonably
likely to materially affect, our internal control over financial reporting.
43
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. See Note 5, "Commitments and Contingencies," to
our consolidated financial statements, which is contained in Item I of this
Report and incorporated herein by reference.
ITEM 6. EXHIBITS
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.)
44
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
METRETEK TECHNOLOGIES, INC.
Date: November 14, 2005 By: /s/ W. Phillip Marcum
-------------------------------------
W. Phillip Marcum
President and Chief Executive Officer
Date: November 14, 2005 By: /s/ A. Bradley Gabbard
-------------------------------------
A. Bradley Gabbard
Executive Vice President
and Chief Financial Officer
45