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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 JUNE 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]
As of August 1, 2005, 12,270,282 shares of the issuer's Common Stock were
outstanding.
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METRETEK TECHNOLOGIES, INC.
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2005
TABLE OF CONTENTS
Page
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Unaudited Consolidated Balance Sheets -
June 30, 2005 and December 31, 2004 3
Unaudited Consolidated Statements of Operations -
For the Three and Six Months Ended June 30, 2005 and
June 30, 2004 5
Unaudited Consolidated Statements of Cash Flows -
For the Six Months Ended June 30, 2005 and
June 30, 2004 6
Notes to Unaudited Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 16
Item 3. Quantitative and Qualitative Disclosures about Market Risk 39
Item 4. Controls and Procedures 39
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 41
Item 4. Submission of Matters to a Vote of Security Holders 41
Item 6. Exhibits 41
Signatures 43
2
PART I.
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
METRETEK TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
JUNE 30, DECEMBER 31,
2005 2004
----------- -----------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 2,757,082 $ 2,951,489
Trade receivables, net of allowance for doubtful accounts
of $613,468 and $740,742, respectively 12,056,452 8,702,437
Other receivables 32,761 25,850
Inventories 2,933,031 3,190,653
Prepaid expenses and other current assets 197,051 524,508
----------- -----------
Total current assets 17,976,377 15,394,937
----------- -----------
PROPERTY, PLANT AND EQUIPMENT:
Equipment 5,555,800 5,052,664
Vehicles 97,968 61,041
Furniture and fixtures 541,559 543,127
Land, building and improvements 816,542 796,182
----------- -----------
Total property, plant and equipment, at cost 7,011,869 6,453,014
Less accumulated depreciation and amortization 3,838,782 3,715,884
----------- -----------
Property, plant and equipment, net 3,173,087 2,737,130
----------- -----------
OTHER ASSETS:
Goodwill 8,840,148 8,840,148
Patents and capitalized software development, net of accumulated
amortization of $1,188,821 and $1,135,843, respectively 223,017 233,390
Investment in unconsolidated affiliate 2,431,963 2,077,301
Assets of discontinued operations (Note 2) 119,023 780,000
Other assets 144,851 148,010
----------- -----------
Total other assets 11,759,002 12,078,849
----------- -----------
TOTAL $32,908,466 $30,210,916
=========== ===========
See accompanying notes to unaudited consolidated financial statements.
3
METRETEK TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
JUNE 30, DECEMBER 31,
2005 2004
----------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 3,815,063 $ 3,206,094
Accrued and other liabilities 7,989,776 5,896,493
Notes payable 1,242,674 1,171,988
Capital lease obligations 3,675 3,477
----------- ------------
Total current liabilities 13,051,188 10,278,052
----------- ------------
LONG-TERM NOTES PAYABLE 5,775,724 6,075,065
----------- ------------
NON-CURRENT CAPITAL LEASE OBLIGATIONS 5,206 7,094
----------- ------------
LIABILITIES OF DISCONTINUED OPERATIONS 213,332 843,649
----------- ------------
COMMITMENTS AND CONTINGENCIES
MINORITY INTEREST IN SUBSIDIARIES 151,232 89,792
----------- ------------
STOCKHOLDERS' EQUITY:
Preferred stock - undesignated, $.01 par value; 2,000,000 shares authorized;
none issued and outstanding
Preferred stock - Series C, $.01 par value; 500,000 shares authorized; none
issued and outstanding
Common stock, $.01 par value; 25,000,000 shares authorized; 12,258,782 and
12,186,741 shares issued and outstanding, respectively 122,588 121,867
Additional paid-in-capital 71,517,741 71,413,120
Deferred compensation (99,000) (132,000)
Accumulated deficit (57,829,545) (58,485,723)
---------- -----------
Total stockholders' equity 13,711,784 12,917,264
----------- ------------
TOTAL $32,908,466 $ 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 SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------------- --------------------------
2005 2004 2005 2004
------------ ----------- ------------ -----------
REVENUES:
Sales and services $ 13,947,328 $ 8,304,314 $ 21,645,668 $16,477,718
Other 88,433 68,484 200,730 309,390
------------ ----------- ------------ -----------
Total revenues 14,035,761 8,372,798 21,846,398 16,787,108
------------ ----------- ------------ -----------
COSTS AND EXPENSES:
Cost of sales and services 10,260,229 5,781,825 15,698,262 11,601,370
General and administrative 1,992,983 1,518,846 3,809,466 3,184,011
Selling, marketing and service 723,368 513,321 1,296,981 1,009,353
Depreciation and amortization 133,564 133,704 258,005 263,659
Research and development 164,053 162,771 325,857 329,038
Interest, finance charges and other 146,642 87,762 293,840 167,951
------------ ----------- ------------ -----------
Total costs and expenses 13,420,839 8,198,229 21,682,411 16,555,382
------------ ----------- ------------ -----------
Income from continuing operations before
minority interest and income taxes 614,922 174,569 163,987 231,726
Equity in income of unconsolidated affiliate 364,786 252,614 922,041 621,033
Minority interest (45,441) (67,264) (116,565) (141,774)
Income taxes - (12,016) (13,285) (23,971)
------------ ----------- ------------ ------------
INCOME FROM CONTINUING OPERATIONS 934,267 347,903 956,178 687,014
------------ ----------- ------------ -----------
DISCONTINUED OPERATIONS OF MCM (NOTE 2)
Loss on disposal of MCM (300,000)
Loss from operations of MCM (305,094) (639,880)
------------ ----------- ------------ -----------
LOSS ON DISCONTINUED OPERATIONS (305,094) (300,000) (639,880)
------------ ----------- ------------ -----------
NET INCOME $ 934,267 $ 42,809 $ 656,178 $ 47,134
============ =========== ============ ===========
PER SHARE AMOUNTS (NOTE 1):
INCOME (LOSS) FROM CONTINUING OPERATIONS:
Basic $ 0.08 $ (0.04) $ 0.08 $ (0.03)
============ =========== ============ ===========
Diluted $ 0.07 $ (0.04) $ 0.07 $ (0.03)
============ =========== ============ ===========
NET INCOME (LOSS):
Basic $ 0.08 $ (0.07) $ 0.05 $ (0.12)
============ =========== ============ ===========
Diluted $ 0.07 $ (0.07) $ 0.05 $ (0.12)
============ =========== ============ ===========
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:
Basic 12,258,782 9,217,416 12,226,928 7,664,681
============ =========== ============ ===========
Diluted 12,781,075 9,217,416 12,757,620 7,664,681
============ =========== ============ ===========
See accompanying notes to unaudited consolidated financial statements.
5
METRETEK TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
SIX MONTHS ENDED
JUNE 30,
---------------------------
2005 2004
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 656,178 $ 47,134
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Loss on discontinued operations 300,000 639,880
Depreciation and amortization 258,005 263,659
Minority interest in subsidiaries 116,565 109,699
(Gain) loss on disposal of property, plant and equipment 3,276 (340)
Equity in income of unconsolidated affiliate (922,041) (621,033)
Distributions from unconsolidated affiliate 559,199 528,132
Stock compensation expense 33,000
Changes in other assets and liabilities:
Trade receivables, net (3,234,439) (931,021)
Inventories 290,265 (960,593)
Other current assets 270,546 365,319
Other noncurrent assets 3,159 (76,222)
Accounts payable 608,969 1,016,546
Accrued and other liabilities 2,516,041 (109,575)
------------ ------------
Net cash provided by continuing operations 1,458,723 271,585
Net cash used by discontinued operations of MCM (345,065) (534,072)
------------ ------------
Net cash provided by (used in) operating activities 1,113,658 (262,487)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment (662,574) (654,792)
Investment in unconsolidated affiliate (955,784)
Capitalized patent and software costs (42,605) (10,100)
Increase in restricted cash investment (1,000,000)
Proceeds from sale of property, plant and equipment 5,200
------------ ------------
Net cash used in investing activities (705,179) (2,615,476)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from private placement 9,849,146
Proceeds from stock option exercises 111,149 298,517
Repurchase of stock warrants (5,807)
Net borrowings (payments) on line of credit 32,579 (481,528)
Proceeds from equipment loan 335,247 110,250
Proceeds from investment loan 960,784
Principal payments on long-term notes payable (596,481) (259,125)
Distributions to minority interests (55,125)
Payments on preferred stock redemptions (422,758)
Payments on capital lease obligations (1,690) (47,815)
------------ ------------
Net cash provided by (used in) financing activities (602,886) 10,430,229
------------ ------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (194,407) 7,552,266
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 2,951,489 2,101,675
------------ ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 2,757,082 $ 9,653,941
============ ============
See accompanying notes to unaudited consolidated financial statements.
6
METRETEK TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
As of June 30, 2005 and December 31, 2004 and
For the Three and Six Month Periods Ended June 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 June 30, 2005 and the consolidated results of their
operations and cash flows for the three and six month periods ended June 30,
2005 and June 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 has retroactively adjusted prior periods pursuant to its provisions.
EITF 03-6 provides guidance for the computation of earnings per share using the
two-class method for enterprises with participating securities or multiple
classes of common stock as required by Statement of Financial Accounting
Standards No. 128. The two-class method allocates undistributed earnings to each
class of common stock and participating securities for the purpose of computing
basic earnings per share. The Company's Series B Redeemable Preferred Stock was
a participating security under the provisions of EITF 03-6 for periods prior to
its redemption on December 9, 2004. No undistributed earnings are allocable to
the Company's Series B Redeemable Preferred Stock for the three and six months
ended June 30, 2005 since such shares were redeemed in December 2004.
The following table sets forth the calculation of basic and diluted earnings per
share:
7
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
---------------------- ---------- ----------
2005 2004 2005 2004
----------- --------- ---------- ----------
Income from continuing operations $ 934,267 $ 347,903 $ 956,178 $ 687,014
Less preferred stock
deemed distribution - (711,144) - (942,887)
----------- --------- ---------- ----------
Income (loss) from continuing operations to be allocated 934,267 (363,241) 956,178 (255,873)
Less allocation of undistributed earnings to participating preferred stock - - - -
----------- --------- ---------- ----------
Income (loss) from continuing operations
attributable to common shareholders 934,267 (363,241) 956,178 (255,873)
Loss from discontinued operations - (305,094) (300,000) (639,880)
----------- --------- ---------- ----------
Net income (loss) attributable to common shareholders $ 934,267 $(668,335) $ 656,178 $ (895,753)
=========== ========= ========== ==========
Basic weighted-average common shares outstanding in period 12,258,782 9,217,416 12,226,928 7,664,681
Add dilutive effects of stock options (1) 522,293 - 530,692 -
----------- --------- ---------- ----------
Diluted weighted-average common shares outstanding in period 12,781,075 9,217,416 12,757,620 7,664,681
=========== ========= ========== ==========
Basic earnings (loss) per common share:
Income from continuing operations $ 0.08 $ (0.04) $ 0.08 $ (0.03)
Loss from discontinued operations - (0.03) (0.03) (0.09)
----------- --------- ---------- ----------
Basic earnings (loss) per common share $ 0.08 $ (0.07) $ 0.05 $ (0.12)
=========== ========= ========== ==========
Diluted earnings (loss) per common share:
Income from continuing operations $ 0.07 $ (0.04) $ 0.07 $ (0.03)
Loss from discontinued operations - (0.03) (0.02) (0.09)
----------- --------- ---------- ----------
Diluted earnings (loss) per common share $ 0.07 $ (0.07) $ 0.05 $ (0.12)
=========== ========= ========== ==========
(1) The assumed conversion of stock options has been excluded from weighted
average shares outstanding for the three and six months ended June 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 six month periods ended June 30, 2005 and 2004:
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
--------------------- ----------------------
2005 2004 2005 2004
--------- --------- --------- ----------
Net income (loss) applicable to common
shareholders - as reported $ 934,267 $(668,335) $ 656,178 $ (895,753)
Deduct: Total stock-based employee
compensation expense determined
under fair value based method (103,937) (57,612) (185,310) (100,496)
--------- --------- --------- ----------
Net income (loss) applicable to common
shareholders - pro forma $ 830,330 $(725,947) $ 470,868 $ (996,249)
========= ========= ========= ==========
Income (loss) per basic common share:
As reported $ 0.08 $ (0.07) $ 0.05 $ (0.12)
========= ========= ========= ==========
Pro forma $ 0.07 $ (0.08) $ 0.04 $ (0.13)
========= ========= ========= ==========
Income (loss) per diluted common share:
As reported $ 0.07 $ (0.07) $ 0.05 $ (0.12)
========= ========= ========= ==========
Pro forma $ 0.06 $ (0.08) $ 0.04 $ (0.13)
========= ========= ========= ==========
The fair values of stock options were calculated using the Black-Scholes
stock option valuation model with the following weighted average assumptions for
grants in 2005 and 2004: stock price volatility of 46% and 53%, respectively;
risk-free interest rate of 4.25% in 2005 and 3.5% in 2004; dividend rate of
$0.00 per year; and an expected life of 4 years for options granted to employees
and 10 years for options granted to directors.
In December 2004, the FASB issued its final standard on accounting for
employee stock options, FAS No. 123 (Revised 2004), "Share-Based Payment" ("FAS
No. 123(R)"). FAS No. 123(R) replaces FAS No. 123, "Accounting for Stock-Based
Compensation" ("FAS No. 123"), and supersedes Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees". FAS No. 123(R)
requires companies to measure compensation costs for all share-based payments,
including grants of employee stock options, based on the fair value of the
awards on the grant date and to recognize such expense over the period during
which an employee is required to provide services in exchange for the award. The
pro forma disclosures previously permitted under FAS No. 123 will no longer be
an alternative to financial statement recognition.
In April 2005, the SEC amended Rule 4-01(a) of Regulation X under the
Exchange Act to defer the effective date of FAS 123(R) to the first fiscal year
beginning on or after June 15, 2005
9
(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 six months ended June 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 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
10
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 June 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 six
months ended June 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 26% 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 June 30, 2005 and December 31, 2004 and for the
three and six months ended June 30, 2005 and 2004, are as follows:
JUNE 30, DECEMBER 31,
2005 2004
------------ ------------
Total current assets $ 2,593,645 $ 1,766,687
Property, plant and equipment, net 5,275,028 5,158,373
Total other assets 13,870 16,537
------------ ------------
Total assets $ 7,882,543 $ 6,941,597
============ ============
Total current liabilities $ 952,058 $ 812,796
Long-term note payable 53,296 419,559
Total shareholders' equity 6,877,189 5,709,242
------------ ------------
Total liabilities and shareholders' equity $ 7,882,543 $ 6,941,597
============ ============
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------- ------------------------
2005 2004 2005 2004
------------ ----------- ----------- -----------
Total revenues $ 2,359,060 $ 1,650,244 $ 5,064,647 $ 3,558,910
Total costs and expenses 1,184,855 866,391 2,096,699 1,632,483
------------ ----------- ----------- -----------
Net income $ 1,174,205 $ 783,853 $ 2,967,948 $ 1,926,427
============ =========== =========== ===========
4. DEBT
LINES OF CREDIT - At June 30, 2005, Metretek Florida was not in compliance
with the minimum tangible net worth and net income financial covenants of its
credit agreement with
11
Wells Fargo Business Credit ("Wells Fargo"). Wells Fargo has waived the
financial covenants for the period ended June 30, 2005. The Company is
negotiating with Wells Fargo to amend the Metretek Florida credit agreement to
establish less restrictive financial covenants for the remainder of 2005. No
assurance can be provided that the Company will be able to successfully
negotiate terms that are less restrictive and that will limit the risk that
Metretek Florida will be out of compliance in future periods. At June 30, 2005,
Metretek Florida had borrowed $129,545 under its credit agreement with Wells
Fargo.
TERM LOANS - PowerSecure has three shared savings project loans
outstanding to Caterpillar Financial Services Corporation ("Caterpillar") in the
aggregate amount of $1,339,000 at June 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. The
Company expects that monthly payments on the project loans will be funded
through payments from customers utilizing the distributed generation equipment
on their sites.
On May 9, 2005, Caterpillar offered PowerSecure a $5,000,000 line of
credit to finance the purchase, from time to time, of Caterpillar generators to
be used in PowerSecure projects, primarily in shared savings arrangements,
pursuant to a letter by Caterpillar to PowerSecure containing the terms of this
credit line. Under this line of credit, PowerSecure may submit equipment
purchases to Caterpillar for financing, and Caterpillar may provide such
financing in its discretion at an interest rate, for a period of time between 12
and 60 months and upon such financing instruments, such as a promissory note or
an installment sales contract, as are set by Caterpillar on a project by project
basis. With respect to any equipment financed by Caterpillar, PowerSecure must
make a 10% cash down payment of the purchase price and grant to Caterpillar a
first priority security interest in the equipment being financed as well as
other equipment related to the project.
The line of credit expires on April 30, 2006 (subject to renewal, if
requested by PowerSecure and accepted by Caterpillar in its sole discretion), or
at an earlier date upon notice to PowerSecure given by Caterpillar in its sole
discretion. The letter setting forth the terms of the line of credit confirms
the intent of Caterpillar to finance equipment purchases by PowerSecure, but is
not an unconditional binding commitment to provide such financing. The line of
credit is contingent upon the continued credit-worthiness of PowerSecure in the
sole discretion of Caterpillar. As of June, 2005, PowerSecure had $3.6 million
available for additional equipment purchases under the Caterpillar line of
credit.
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.
12
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 $5,767,000 has been paid through June 30, 2005. The
balance of the unpaid redemption obligation at June 30, 2005 and December 31,
2004, was $471,000 and $894,000, respectively, and is included in Accrued and
other liabilities in the accompanying consolidated balance sheets.
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.
13
The operations of the Company's natural gas measurement services segment
are conducted by Southern Flow. Southern Flow's services include on-site field
services, chart processing and analysis, laboratory analysis, and data
management and reporting. These services are provided principally to customers
involved in natural gas production, gathering, transportation and processing.
The operations of the Company's distributed generation segment are
conducted by PowerSecure. PowerSecure commenced operations in September 2000.
The primary elements of PowerSecure's distributed generation products and
services include project design and engineering, negotiation with utilities to
establish tariff structures and power interconnects, generator acquisition and
installation, process control and switchgear design and installation, and
ongoing project monitoring and servicing. PowerSecure markets its distributed
generation products and services directly to large end-users of electricity and
through outsourcing partnerships with utilities. Through June 30, 2005, the
majority of PowerSecure's revenues have been generated from sales of distributed
generation systems on a "turn-key" basis, where the customer acquires the
systems from PowerSecure.
The operations of our automated data collection and telemetry segment are
conducted by Metretek Florida. Metretek Florida's manufactured products fall
into the following categories: field devices, including data collection products
and electronic gas flow computers; data collection software products (such as
InvisiConnect(TM), DC2000 and PowerSpring); and communications solutions that
can use public networks operated by commercial wireless carriers to provide real
time IP-based wireless internet connectivity, traditional cellular radio, 900
MHz unlicensed radio or traditional wire-line phone service to provide
connectivity between the field devices and the data collection software
products. Metretek Florida also provides data collection, M2M telemetry
connectivity and post-sale support services for its manufactured products and
turn-key solutions.
The Company evaluates the performance of its operating segments based on
operating income (loss) before income taxes, nonrecurring items and interest
income and expense. Intersegment sales are not significant.
Summarized financial information concerning the Company's reportable
segments is shown in the following table. The "Other" column includes corporate
related items, revenues and expenses from managing MM 1995-2, results of
insignificant operations and, as it relates to segment profit or loss, income
and expense (including nonrecurring charges) not allocated to reportable
segments. The table information excludes the revenues, depreciation, and losses
of the discontinued MCM operations as well as the equity income in our
unconsolidated affiliate, minority interest and income taxes for all periods
presented.
14
SUMMARIZED SEGMENT FINANCIAL INFORMATION
(all amounts reported in thousands)
Three Months Ended Six Months Ended
June 30, June 30,
--------------------------- ------------------------------
2005 2004 2005 2004
----------- ------------- ------------- --------------
REVENUES:
Southern Flow $ 3,351 $ 3,232 $ 6,587 $ 6,328
PowerSecure 9,727 4,348 13,545 8,550
Metretek Florida 870 725 1,514 1,600
Other 88 68 200 309
----------- ------------- ------------- --------------
Total $ 14,036 $ 8,373 $ 21,846 $ 16,787
=========== ============= ============= ==============
SEGMENT PROFIT (LOSS) (1):
Southern Flow $ 568 $ 550 $ 1,027 $ 908
PowerSecure 824 308 690 532
Metretek Florida (141) (97) (327) (196)
Other (636) (586) (1,226) (1,012)
----------- ------------- ------------- --------------
Total $ 615 $ 175 $ 164 $ 232
=========== ============= ============= ==============
CAPITAL EXPENDITURES:
Southern Flow $ 28 $ 94 $ 74 $ 121
PowerSecure 131 328 576 493
Metretek Florida 40 (92) 55 48
Other 2 3
----------- ------------- ------------- --------------
Total $ 199 $ 332 $ 705 $ 665
=========== ============= ============= ==============
DEPRECIATION AND AMORTIZATION:
Southern Flow $ 34 $ 32 $ 68 $ 62
PowerSecure 59 24 108 45
Metretek Florida 34 66 67 140
Other 7 12 15 17
----------- ------------- ------------- --------------
Total $ 134 $ 134 $ 258 $ 264
=========== ============= ============= ==============
June 30,
------------------------------
2005 2004
------------- --------------
TOTAL ASSETS:
Southern Flow $ 9,514 $ 9,119
PowerSecure 16,467 6,278
Metretek Florida 4,414 8,545
Other 2,513 11,393
------------- --------------
Total $ 32,908 $ 35,335
============= ==============
(1) Segment profit (loss) represents income from continuing operations before
equity income in our unconsolidated affiliate, minority interest and
income taxes.
15
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
INTRODUCTION
The following discussion of our results of operations for the three and
six month periods ended June 30, 2005 (referred to herein as the "second quarter
2005" and "six month period 2005", respectively) and 2004 (referred to herein as
the "second quarter 2004" and "six month period 2004", respectively) and of our
financial condition as of June 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.
Until recently, Metretek Florida had also provided contract manufacturing
services through its MCM subsidiary. These contract manufacturing services were
discontinued during fiscal 2004, and the contract manufacturing business and
most of its assets were sold in December 2004. Operations of the contract
manufacturing business prior to fiscal 2005 have been reclassified to
discontinued operations in our consolidated financial statements for all periods
presented.
In addition to these operating subsidiaries, we also own an approximate
26% economic interest in an unconsolidated business, the Marcum Midstream 1995-2
Business Trust ("MM 1995-2"), which owns and operates water disposal facilities
in northeastern Colorado.
We commenced operations in 1991 as an energy services holding company,
owning subsidiaries with businesses designed to exploit service opportunities
primarily in the natural gas industry. Since then, our business has evolved and
expanded through acquisitions of companies, businesses and new product lines
that have allowed us to reach not only a broader portion of the energy market
(including the electricity market) but also markets outside of the energy field.
Over the past two years, we have focused our efforts on growing our businesses
by offering new and enhanced products, services and technologies, and by
entering new markets, within a framework emphasizing the goal of achieving
profitable operations on a sustained basis.
16
During the second quarter 2005, PowerSecure's revenues and segment profit
showed significant improvements over the second 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. During the second
quarter 2005, Southern Flow's revenues and segment profit also showed
improvements over the second quarter 2004 as a result of generally improved
market conditions resulting from the high level of natural gas prices. Metretek
Florida's revenues also increased by $145,000, or 20%, during the second quarter
2005 as compared to the second quarter 2004, partially due to shipments that had
been deferred from the first quarter 2005 due to delays related to the
transition of production activities from internal to external contract
manufacturers.
Due to the increase in revenues at each of our operating segments, our
consolidated revenues during the second quarter 2005 increased by $5,663,000,
representing a nearly 68% increase over second quarter 2004 consolidated
revenues. We recorded income from continuing operations of $934,000 during the
second quarter 2005, including $365,000 equity in income from MM 1995-2, as
compared to income from continuing operations of $348,000 during the second
quarter 2004, which included $253,000 equity in income of MM 1995-2. Our net
income after discontinued operations was $934,000 during the second quarter
2005, as compared to net income after discontinued operations of $43,000 during
the second quarter 2004.
During the six month period 2005, PowerSecure's revenues and segment
profit showed significant improvements over the six month period 2004 as a
result of a 130% increase in the number of completed and in-process projects.
Southern Flow's revenues and segment profit also showed improvements during the
six month period 2005 over the six month period 2004 as a result of generally
improved market conditions. The improved revenues and segment profit at
PowerSecure and Southern Flow were slightly offset by a decline in revenues and
segment results at Metretek Florida during the six month period 2005, as
compared to the six month period 2004. Metretek Florida's revenues declined by
$86,000, or 5%, during the six month period 2005 as compared to the six month
period 2004, due to shipments deferred due to delays related to the transition
of production activities from internal to external contract manufacturers as
well as Metretek Florida's recent facilities relocation.
Due principally to the increases in revenues at PowerSecure and Southern
Flow, our consolidated revenues during the six month period 2005 increased by
$5,059,000, representing a 30% increase over the six month period 2004
consolidated revenues. We recorded income from continuing operations of $956,000
during the six month period 2005, including $922,000 equity in income from MM
1995-2, as compared to income from continuing operations of $687,000 during the
six month period 2004, which included $621,000 equity in income of MM 1995-2. We
recorded a net loss on discontinued operations of $300,000 during the six 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 $656,000 during the six month period 2005, as compared to net
income after discontinued operations of $47,000 during the six month period
2004.
17
CRITICAL ACCOUNTING POLICIES
Management's discussion and analysis of our financial condition and
results of operations are based on our consolidated financial statements, which
have been prepared in conformity with accounting principles generally accepted
in the United States of America. The preparation of these financial statements
requires management to make estimates, judgments and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and the reported amounts
of revenues and expenses during the reporting period. On an on-going basis, we
evaluate our estimates, including those related to revenue recognition and
percentage of completion, fixed price contracts, product returns, warranty
obligations, bad debt, inventories, cancellations costs associated with long
term commitments, investments, intangible assets, assets subject to disposal,
income taxes, restructuring, service contracts, contingencies and litigation. We
base our estimates on historical experience and on various other assumptions
that are believed to be reasonable under the circumstances, the results of which
form the basis for making estimates and judgments about the carrying value of
assets and liabilities that are not readily apparent from other sources.
Estimates, by their nature, are based on judgment and available information.
Therefore, actual results could differ from those estimates and could have a
material impact on our consolidated financial statements, and it is possible
that such changes could occur in the near term.
We have identified the accounting principles which we believe are most
critical to understanding our reported financial results by considering
accounting policies that involve the most complex or subjective decisions or
assessments. These accounting policies are described in our Annual Report on
Form 10-K for the year ended December 31, 2004 in "Item 7. Management's
Discussion and Analysis of Financial Condition and Results of Operations."
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.
18
Three Months Ended Six Months Ended
June 30, June 30,
---------------------- ----------------------
2005 2004 2005 2004
-------- -------- -------- --------
(all amounts reported in thousands)
REVENUES:
Southern Flow $ 3,351 $ 3,232 $ 6,587 $ 6,328
PowerSecure 9,727 4,348 13,545 8,550
Metretek Florida 870 725 1,514 1,600
Other 88 68 200 309
-------- -------- -------- --------
Total $ 14,036 $ 8,373 $ 21,846 $ 16,787
======== ======== ======== ========
GROSS PROFIT:
Southern Flow $ 893 $ 847 $ 1,769 $ 1,623
PowerSecure 2,331 1,296 3,405 2,434
Metretek Florida 463 379 773 819
-------- -------- -------- --------
Total $ 3,687 $ 2,522 $ 5,947 $ 4,876
======== ======== ======== ========
SEGMENT PROFIT (LOSS) (1):
Southern Flow $ 568 $ 550 $ 1,027 $ 908
PowerSecure 824 308 690 532
Metretek Florida (141) (97) (327) (196)
Other (636) (586) (1,226) (1,012)
-------- -------- -------- --------
Total $ 615 $ 175 $ 164 $ 232
======== ======== ======== ========
----------------------
(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
19
outsourcing partnerships with utilities. Through June 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, 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 second quarter 2005 compared to the second quarter 2004 and the six
month period 2005 compared to the six month period 2004 excludes revenues and
costs and expenses of the discontinued MCM operations.
SECOND QUARTER 2005 COMPARED TO SECOND QUARTER 2004
Revenues. Our revenues are derived almost entirely from the sales of
products and services by our subsidiaries. Our consolidated revenues for the
second quarter 2005 increased $5,663,000, or 68%, compared to the second quarter
2004. The increase was due to increases in revenues at each of our operating
segments.
PowerSecure's revenues increased $5,379,000, or 124%, during the second
quarter 2005 compared to the second quarter 2004. The increase in PowerSecure's
revenues during the second quarter 2005 compared to the second quarter 2004 was
due to a $5,289,000 increase in distributed generation turn-key system project
sales and services as well as an increase of $90,000 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
20
revenues was due to both an increase in the number of completed or in-process
projects during the second quarter 2005 compared to the second quarter 2004 as
well as normal quarter-to-quarter fluctuations inherent in its operations.
Overall, PowerSecure's results for the second quarter 2005 reflect a 135%
increase in the total number of distributed generation turn-key projects either
completed or in progress, compared to the second quarter 2004, although the
average project size decreased by 2%, 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 second
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 increased $119,000, or nearly 4%, during the
second quarter 2005, as compared to the second quarter 2004. The increase in
Southern Flow's revenues was primarily attributable to a generally improved
market for its services due principally to a higher level of natural gas prices.
Metretek Florida's revenues increased $145,000, or 20%, during the second
quarter 2005 compared to the second quarter 2004. The increase in Metretek
Florida's revenues during the second quarter 2005 compared to the second quarter
2004 was due to shipments that had been deferred from the first quarter 2005 due
to delays related to the transition of production activities from internal to
external contract manufacturers. As discussed below under "--Quarterly
Fluctuations", Metretek Florida's revenues have fluctuated significantly in the
past and are expected to continue to fluctuate significantly in the future.
Other revenues increased $20,000 during the second quarter 2005, as
compared to the second quarter 2004. This increase was comprised principally of
increased fee revenue earned by MGT in the second quarter 2005 compared to the
second quarter 2004.
Costs and Expenses. The following table sets forth our costs and expenses
during the periods indicated:
21
QUARTER-OVER-QUARTER
QUARTER ENDED MARCH 31, DIFFERENCE
----------------------- --------------------
2005 2004 $ %
--------- ------- ------- ----
(IN THOUSANDS)
COSTS AND EXPENSES:
Costs of Sales and Services
Southern Flow $ 2,458 $ 2,385 $ 73 3%
PowerSecure 7,396 3,052 4,344 142%
Metretek Florida 406 345 61 18%
--------- ------- -------
Total 10,260 5,782 4,478 77%
General and administrative 1,993 1,519 474 31%
Selling, marketing and service 723 513 210 41%
Depreciation and amortization 134 134 - 0%
Research and development 164 163 1 1%
Interest, finance charges and other 147 88 59 67%
Income taxes - 12 (12) -100%
Costs of sales and services include materials, personnel and related
overhead costs incurred to manufacture products and provide services. The 77%
increase in cost of sales and services for the second quarter 2005, compared to
the second quarter 2004, was attributable almost entirely to increased revenues
at each of our operating segments.
The 142% increase in PowerSecure's costs of sales and services in the
second quarter 2005 is almost entirely a direct result of the 124% increase in
PowerSecure's revenues. PowerSecure's gross profit margin decreased to 24.0%
during the second quarter 2005, as compared to 29.8% during the second quarter
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 in the second quarter 2005 compared to the second
quarter 2004.
The 3% increase in Southern Flow's costs of sales and services in the
second quarter 2005 is the result of the nearly 4% increase in its revenues.
Southern Flow's gross profit margin improved to 26.6% for the second quarter
2005, compared to 26.2% during the second quarter 2004, which is within the
range of normal fluctuations for Southern Flow.
The 18% increase in Metretek Florida's costs of sales and services in the
second quarter 2005 was likewise a direct result of the 20% increase in Metretek
Florida's revenues. Metretek Florida's gross profit margin increased to 53.3%
for the second quarter 2005, compared to 52.4% for the second quarter 2004,
which is within the range of normal fluctuations for Metretek Florida.
General and administrative expenses include personnel and related overhead
costs for the support and administrative functions. The 31% increase in general
and administrative expenses in the second quarter 2005, as compared to the
second 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
22
promotion costs. The 41% increase in selling, marketing and service expenses in
the second quarter 2005, as compared to the second quarter 2004, was due
primarily to increased personnel and business development expenses associated
with the development and growth of the business of PowerSecure during the second
quarter 2005 as well as increases in personnel and commission costs at Metretek
Florida.
Depreciation and amortization expenses include the depreciation of
property, plant and equipment and the amortization of certain intangible assets
including capitalized software development costs and other intangible assets
that do not have indefinite useful lives. The amount of depreciation and
amortization expenses in the second quarter 2005, as compared to the second
quarter 2004, was virtually unchanged, 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
less than 1% increase in research and development expenses in the second quarter
2005, as compared to the second quarter 2004, reflects the stable level of
research and development activity 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 67%
increase in interest, finance charges and other expenses in the second quarter
2005, as compared to the second quarter 2004, reflects interest on the $3
million class action settlement note that began accruing on June 30, 2004, as
well as additional interest costs related to a significant PowerSecure shared
savings project loan that commenced in the latter half of fiscal 2004.
Income tax expenses include state income taxes in various state
jurisdictions in which we have taxable activities. We incur no federal income
tax expense because of our consolidated net operating losses. The decrease in
income taxes in the second quarter 2005, as compared to the second quarter 2004,
was due to a decrease in state income taxes incurred by Southern Flow, primarily
in Louisiana.
SIX MONTH PERIOD 2005 COMPARED TO SIX MONTH PERIOD 2004
Revenues. Our consolidated revenues for the six month period 2005
increased $5,059,000, or 30%, compared to the six month period 2004. The
increase was due to an increase in revenues at Southern Flow and PowerSecure,
partially offset by a reduction in revenues at Metretek Florida.
PowerSecure's revenues increased $4,995,000, or 58%, during the six month
period 2005 compared to the six month period 2004. The increase in PowerSecure's
revenues during the six month period 2005 compared to the six month period 2004
was due to a $4,786,000 increase in distributed generation turn-key system
project sales and services together with an increase of $209,000 in revenues
from shared savings projects, professional services, monitoring and other
23
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 six month period 2005
compared to the six month period 2004 as well as normal quarter-to-quarter
fluctuations inherent in its operations. Overall, PowerSecure's results for the
six month period 2005 reflect a 130% increase in the total number of distributed
generation turn-key projects either completed or in progress, compared to the
six month period 2004, although the average project size decreased by 31%,
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 six 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 $259,000, or 4%, during the six month
period 2005, as compared to the six 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.
Metretek Florida's revenues decreased $86,000, or 5%, during the six month
period 2005 compared to the six month period 2004. The decrease in Metretek
Florida's revenues during the six month period 2005 compared to the six month
period 2004 was due to shipments deferred due to delays related to the
transition of production activities from internal to external contract
manufacturers as well as Metretek Florida's recent facilities relocation. 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 $109,000 during the six month period 2005, as
compared to the six month period 2004. This decrease was comprised principally
of non-recurring fee revenue recorded by MGT in the six month period 2004 for
which there was no similar fee revenue in the six month period 2005.
Costs and Expenses. The following table sets forth our costs and expenses
during the periods indicated:
24
PERIOD-OVER-PERIOD
SIX MONTHS ENDED JUNE 30, DIFFERENCE
------------------------- ------------------
2005 2004 $ %
-------- --------- ------- ----
(IN THOUSANDS)
COSTS AND EXPENSES:
Costs of Sales and Services
Southern Flow $ 4,817 $ 4,704 $ 113 2%
PowerSecure 10,140 6,116 4,024 66%
Metretek Florida 741 781 (40) -5%
-------- --------- -------
Total 15,698 11,601 4,097 35%
General and administrative 3,809 3,184 625 20%
Selling, marketing and service 1,297 1,009 288 29%
Depreciation and amortization 258 264 (6) -2%
Research and development 326 329 (3) -1%
Interest, finance charges and other 294 168 126 75%
Income taxes 13 24 (11) -46%
The overall 35% increase in cost of sales and services for the six month
period 2005, compared to the six month period 2004, was attributable almost
entirely to increased revenues at Southern Flow and PowerSecure.
The 66% increase in PowerSecure's costs of sales and services in the six
month period 2005 is almost entirely a direct result of the 58% increase in
PowerSecure's revenues. PowerSecure's gross profit margin decreased to 25.1%
during the six month period 2005, as compared to 28.5% during the six 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 in the six month period 2005 compared to the six month
period 2004.
The 2% increase in Southern Flow's costs of sales and services in the six
month period 2005 is the result of the 4% increase in its revenues. Southern
Flow's gross profit margin improved to 26.9% for the six month period 2005,
compared to 25.7% during the six month period 2004, which is within the range of
normal fluctuations for Southern Flow.
The 5% decrease in Metretek Florida's costs of sales and services in the
six month period 2005 was a direct result of the 5% decrease in Metretek
Florida's revenues. Metretek Florida's gross profit margin decreased slightly to
51.1% for the six month period 2005, compared to 51.2% for the six month period
2004, which is within the normal range of fluctuations for Metretek Florida.
The 20% increase in general and administrative expenses in the six month
period 2005, as compared to the six 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 six month period 2005, as compared to the six month period 2004.
The 29% increase in selling, marketing and service expenses in the six
month period
25
2005, as compared to the six 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 six month period
2005.
The 2% decrease in depreciation and amortization expenses in the six month
period 2005, as compared to the six 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 six month period 2005.
The 1% decrease in research and development expenses in the six month
period 2005, as compared to the six month period 2004, primarily reflects a
reduction of third party costs.
The 75% increase in interest, finance charges and other expenses in the
six month period 2005, as compared to the six month period 2004, reflects
interest on the $3 million class action settlement note that began accruing on
June 30, 2004, as well as additional interest costs related to a significant
PowerSecure shared savings project loan that commenced in the latter half of
fiscal 2004.
The decrease in income taxes in the six month period 2005, as compared to
the six 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;
- 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;
26
- 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.
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 four year operating history, its revenues, costs, gross
margins, cash flow, net income and other operating results have varied from
quarter-to-quarter, period-to-period and year-to-year for a number of reasons,
including the factors mentioned above, and we expect such fluctuations to
continue in the future. PowerSecure's revenues depend in large part upon the
timing and the size of projects awarded to PowerSecure, and to a lesser extent
the timing of the completion of those projects. In addition, distributed
generation is an emerging market and PowerSecure is a new competitor in the
market, so there is no established customer base on which to rely or certainty
as to future contracts. Another factor that could cause material fluctuations in
PowerSecure's quarterly results is the amount of recurring, as opposed to
non-recurring, sources of revenue. Through June 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
27
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.
Metretek Florida has historically derived most of its revenues from sales
of its products and services to the utility industry. Metretek Florida has
experienced variability in its operating results on both an annual and a
quarterly basis due primarily to utility purchasing patterns and delays of
purchasing decisions as a result of mergers and acquisitions in the utility
industry and changes or potential changes to the federal and state regulatory
frameworks within which the utility industry operates. The utility industry,
both domestic and foreign, is generally characterized by long budgeting,
purchasing and regulatory process cycles that can take up to several years to
complete. In addition, Metretek Florida has only a limited operating history
with its new M2M and telemetry business, and its operating results in this new
business may fluctuate significantly as it develops this business.
Due to all of these factors and the other risks discussed in this Report
and in our Annual Report on Form 10-K for the fiscal year ended December 31,
2004, you should not rely on quarter-to-quarter, period-to-period or
year-to-year comparisons of our results of operations as an indication of our
future performance. Quarterly, period, or annual comparisons of our operating
results are not necessarily meaningful or indicative of future performance.
LIQUIDITY AND CAPITAL RESOURCES
Capital Requirements. We require capital primarily to finance our:
- operations;
- inventory;
- accounts receivable;
- research and development efforts;
- property and equipment acquisitions, including
investments in shared savings projects;
- software development;
- debt service requirements;
- liabilities of our discontinued MCM operations; and
- business and technology acquisitions and other growth
transactions.
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 June 30, 2005, we had working capital of $4,925,000, including $2,757,000
in cash and cash equivalents, compared to working capital of $5,117,000 on
December 31, 2004, which included $2,951,000 in cash and cash equivalents.
Net cash provided by operating activities was $1,114,000 in the six month
period 2005,
28
consisting of approximately $1,004,000 of cash provided by operations, before
changes in assets and liabilities, approximately $455,000 of cash provided by
changes in working capital and other asset and liability accounts, and
approximately $345,000 of cash used by discontinued operations of MCM. This
compares to net cash used in operating activities of $262,000 in the six month
period 2004, consisting of approximately $967,000 of cash provided by
operations, before changes in assets and liabilities, approximately $695,000 of
cash used in changes in working capital and other asset and liability accounts,
and approximately $534,000 of cash used by discontinued operations of MCM.
Net cash used in investing activities was $705,000 in the six month period
2005, as compared to net cash used by investing activities of $2,615,000 in the
six month period 2004. The majority of the net cash used by investing activities
during the six month period 2005 was attributable to equipment purchases for two
shared savings distributed generation projects. Net cash used in investing
activities during the six month period 2004 included the purchase of a
$1,000,000 restricted certificate of deposit in connection with the waiver and
amendment of certain loan covenant compliance requirements for Metretek Florida.
In addition during the six month period 2004, we purchased additional equity
interests in our unconsolidated affiliate for $956,000 and used $665,000 to
purchase equipment items at each of our operating subsidiaries.
Net cash used by financing activities was $603,000 in the six month period
2005, compared to net cash provided by financing activities of $10,430,000 in
the six month period 2004. The majority of the net cash used by financing
activities during the six 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 six month period 2004 was attributable to $9,849,000 net proceeds from a
Private Placement of our Common Stock in May 2004 as well as $961,000 proceeds
from a bank term loan used to finance the acquisition of the additional equity
interests in our unconsolidated affiliate.
Our research and development expenses totaled $326,000 in the six month
period 2005 compared to $329,000 in the six month period 2004. All of our six
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 $650,000, all of which will be directed to Metretek Florida's
business.
Our capital expenditures in the six month period 2005 were $705,000,
including $427,000 of capital expenditures incurred in building three
PowerSecure shared savings distributed generation projects. In the six month
period 2004, our capital expenditures were $665,000, including $417,000 of
capital expenditures for one PowerSecure shared savings distributed generation
project. We anticipate capital expenditures in fiscal 2005 of approximately $2.4
million, including $2.0 million of capital invested in shared savings
distributed generation projects. The remaining $400,000 in capital expenditures
will benefit all of our key subsidiaries. PowerSecure's shared savings projects
are anticipated to be funded
29
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 $1,339,000 at June 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 June, 2005, PowerSecure had $3.6 million
available for additional equipment purchases under the Caterpillar line of
credit.
Working Capital Credit Facility. We have a $3,260,000 credit facility
("Credit Facility") with Wells Fargo Business Credit, Inc. ("Wells Fargo") that
matures in September 2006. The Credit Facility restricts our ability to sell or
finance our subsidiaries, without Wells Fargo's consent. The Credit Facility
consists of separate credit agreements between Wells Fargo, as lender, and each
of Southern Flow, Metretek Florida and PowerSecure, as borrowers. At June 30,
2005, we had an aggregate borrowing base of $3,260,000 under the Credit
Facility, of which $2,654,000 had been borrowed, leaving $606,000 available to
borrow. We expect to continue to utilize at least $2 million of available
borrowings under the Credit Facility during fiscal 2005, and may at times borrow
the maximum amount available depending on our cash requirements.
30
The Credit Facility contains minimum interest charges and unused
credit line and termination fees. The obligations of each of the borrowers have
been guaranteed by Metretek Technologies and the other borrowers. These
guarantees have been secured by guaranty agreements and security agreements
entered into by the guarantors. The security agreements grant to Wells Fargo a
first priority security interest in virtually all of the assets of each of the
guarantors. The Credit Facility is further secured by a first priority security
interest in virtually all of the assets of each borrower. The Credit Facility,
which constitutes our primary credit agreement, is used primarily to fund the
operations and growth of our subsidiaries, especially PowerSecure.
Each credit agreement contains standard affirmative and negative
covenants by the borrower, including financial covenants such as minimum net
income and minimum tangible net worth and other standard covenants related to
operations, including limitations on future indebtedness and the payment of
dividends, the sale of assets and other corporate transactions, without Wells
Fargo's consent. A failure to comply with these covenants could entitle Wells
Fargo to accelerate the underlying obligations.
At June 30, 2005, Metretek Florida was not in compliance with the
minimum tangible net worth and year-to-date net income financial covenants of
its credit agreement with Wells Fargo. Wells Fargo has waived the financial
covenants for June 30, 2005. The Company is negotiating with Wells Fargo to
amend the Metretek Florida credit agreement to establish less restrictive
financial covenants for the remainder of 2005. No assurance can be provided that
the Company will be able to successfully negotiate terms that are less
restrictive and that will limit the risk that Metretek Florida will be out of
compliance in future periods.
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 $5,767,000 has been paid through June 30, 2005.
Term Loan. CAC LLC has a term loan outstanding to a commercial bank
in the amount of $728,000 at June 30, 2005. The term loan financed our purchase
of additional equity interests in our unconsolidated affiliate, MM 1995-2, in
fiscal 2004. The term loan is secured by our interests in MM 1995-2, and we
provided a guaranty of $625,000 of the term loan. The term loan provides for 60
monthly payments of principal and interest (at a rate of 5.08%) in the amount of
approximately $18,500 per month. We expect that monthly payments on the term
loan will be funded through cash distributions from MM 1995-2.
Settlement Note. We have a settlement note outstanding in the amount
of $2,062,500 at June 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.
31
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 June 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
June 30, 2005:
32
PAYMENTS DUE BY PERIOD (1)
----------------------------------------------------------------------
REMAINDER OF YEARS YEARS AFTER
TOTAL 2005 2006-2007 2008-2009 2009
---------- ------------ ---------- ---------- --------
Credit Facility (2) $2,654,000 $ - $2,654,000 $ - $ -
Capital Lease Obligations 9,000 2,000 7,000 - -
Operating Leases 1,553,000 277,000 849,000 427,000 -
Series B Preferred Stock 471,000 471,000 - - -
Settlement Note 2,063,000 375,000 1,500,000 188,000 -
Term Loan 728,000 92,000 404,000 232,000 -
Project Loans 1,339,000 138,000 606,000 568,000 27,000
Discontinued operations (3) 213,000 213,000 - - -
Other Long-Term
Obligations 235,000 7,000 228,000 - -
---------- ------------ ---------- ---------- --------
Total $9,265,000 $ 1,575,000 $6,248,000 $1,415,000 $ 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 June 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 second 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
33
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
34
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
35
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
36
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
quarter, 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;
- our ability to successfully and timely develop, market, operate and
expand PowerSecure's systems, including its products, services, and
technologies;
- 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;
- our ability to obtain adequate supplies of key components and
materials for our products on a timely and cost-effective basis;
- our ability to develop, on a profitable basis, Metretek Florida's
InvisiConnect business;
- our ability to recover value and receive proceeds from the
disposition of the assets of the discontinued MCM contract
manufacturing business;
- the complexity, uncertainty and time constraints associated with the
development and market acceptance of new product and service designs
and technologies;
- the effects of intense competition in our markets, including the
introduction of
37
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;
- the receipt, timing and size of future customer orders;
- unexpected events affecting our ability to obtain funds from
operations, debt or equity to finance operations, pay interest and
other obligations, and fund needed capital expenditures and other
investments;
- our ability to protect our technology, including our proprietary
information and our intellectual property rights;
- risks of physical injury and property damage inherent in natural gas
and electrical operations;
- the effects of recent terrorist activities and military actions;
- the impact of current and future laws and government regulations
affecting the energy industry in general and the natural gas and
electricity industries in particular;
- the effect of changes in laws, regulations and financial accounting
standards; and
- other risks, uncertainties and other factors that are discussed in
this Report or that are discussed from time to time in our other
reports and documents we file with or furnish to the SEC and the
exhibits to such filings, including but not limited to our Annual
Report on Form 10-K for the fiscal year ended December 31, 2004.
Any forward-looking statements contained in this Report speak only as
of the date of this Report, and any other forward-looking statements we make
from time to time in the future
38
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 June
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 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
39
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 June 30, 2005 that has materially affected, or is reasonably
likely to materially affect, our internal control over financial reporting.
40
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
From time to time, we are involved in disputes and legal proceedings.
There has been no material change in our pending legal proceedings as described
in "Item 3. Legal Proceedings" in our Annual Report on Form 10-K for the fiscal
year ended December 31, 2004.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the Company's Annual Meeting of Stockholders, held on June 6, 2005, the
following proposals were submitted to and approved by the stockholders of the
Company:
PROPOSAL 1: To elect two directors for a three-year term and until his
successor is duly elected and qualified:
For Withhold
--------- --------
A. Bradley Gabbard 8,321,667 56,373
Kevin P Collins 8,345,417 32,623
PROPOSAL 2: To ratify the appointment of Hein & Associates LLP as the
Company's independent registered public accounting firm for
the fiscal year ending December 31, 2005.
For Against Abstain Broker Non-Votes
--------- -------- ------- ----------------
8,281,981 26,790 69,269 0
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.)
41
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.)
42
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
METRETEK TECHNOLOGIES, INC.
Date: August 12, 2005 By: /s/ W. Phillip Marcum
---------------------------------------
W. Phillip Marcum
President and Chief Executive Officer
Date: August 12, 2005 By: /s/ A. Bradley Gabbard
---------------------------------------
A. Bradley Gabbard
Executive Vice President
and Chief Financial Officer
43