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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2001
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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Commission File Number 0-19793
METRETEK TECHNOLOGIES, INC.
(Exact name of small business issuer as specified in its charter)
DELAWARE 84-1169358
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
600 Seventeenth Street, Suite 800 North
Denver, Colorado 80202
(Address of principal executive offices) (Zip code)
(303) 416-9200
(Issuer's telephone number, including area code)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 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
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As of October 31, 2001 there were 6,077,764 shares of the issuer's
Common Stock outstanding.
Transitional Small Business Disclosure Format
Yes No X
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METRETEK TECHNOLOGIES, INC.
FORM 10-QSB
TABLE OF CONTENTS
Page
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Unaudited Consolidated Balance Sheets -
September 30, 2001 and December 31, 2000 3
Unaudited Consolidated Statements of Operations -
For the Three Months Ended September 30, 2001 and
September 30, 2000
For the Nine Months Ended September 30, 2001 and
September 30, 2000 5
Unaudited Consolidated Statements of Cash Flows -
For the Nine Months Ended September 30, 2001 and
September 30, 2000 6
Notes to Unaudited Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 12
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 25
Item 6. Exhibits and Reports on Form 8-K 27
Signatures 28
PART I.
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
METRETEK TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
SEPTEMBER 30, DECEMBER 31,
ASSETS 2001 2000
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CURRENT ASSETS:
Cash and cash equivalents $ 690,441 $ 468,813
Trade receivables, less allowance for doubtful accounts
of $297,955 and $548,153, respectively 4,060,220 4,476,841
Other receivables 18,060 7,960
Inventories 3,650,702 3,226,995
Net assets of discontinued operations 384,365 545,454
Prepaid expenses and other current assets 422,396 768,474
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Total current assets 9,226,184 9,494,537
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PROPERTY, PLANT AND EQUIPMENT, AT COST:
Equipment 4,114,691 4,391,990
Vehicles 50,227 49,185
Furniture and fixtures 584,094 609,472
Land, building and improvements 735,759 881,859
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Total 5,484,771 5,932,506
Less accumulated depreciation 3,205,023 2,862,990
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Property, plant and equipment, net 2,279,748 3,069,516
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OTHER ASSETS:
Customer list (net of accumulated amortization of $3,735,117
and $3,401,183, respectively) 5,157,770 5,491,704
Goodwill (net of accumulated amortization of
$877,906 and $706,871, respectively) 2,420,512 2,344,711
Patents and capitalized software development (net of
accumulated amortization of $795,438 and
$691,406, respectively) 490,452 117,650
Other assets 320,448 277,773
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Total other assets 8,389,182 8,231,838
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TOTAL $19,895,114 $20,795,891
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See notes to unaudited consolidated financial statements.
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METRETEK TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
SEPTEMBER 30, DECEMBER 31,
LIABILITIES AND STOCKHOLDERS' EQUITY 2001 2000
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CURRENT LIABILITIES:
Accounts payable $ 1,159,950 $ 780,173
Accrued and other liabilities 1,856,528 1,278,867
Notes payable 2,471,426 2,419,874
Deposits and capital lease obligations 1,896 207,058
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Total current liabilities 5,489,800 4,685,972
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LONG-TERM NOTES PAYABLE 1,172,356 1,929,759
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COMMITMENTS AND CONTINGENCIES
REDEEMABLE PREFERRED STOCK - SERIES B,
$.01 PAR VALUE; AUTHORIZED, 1,000,000 SHARES;
7,000 ISSUED AND OUTSTANDING;
REDEMPTION VALUE $1,000 PER SHARE 7,444,915 6,903,485
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STOCKHOLDERS' EQUITY:
Preferred stock - undesignated, $.01 par value; authorized,
2,000,000 shares; none issued and outstanding
Preferred stock - Series C, $.01 par value; authorized, 500,000
shares; none issued and outstanding
Common stock, $.01 par value; authorized, 25,000,000 shares; issued and
outstanding, 6,077,764 and 5,908,067 shares,
respectively 60,778 59,081
Additional paid-in-capital 55,116,789 54,814,659
Accumulated other comprehensive loss (55,349) (5,926)
Accumulated deficit (49,334,175) (47,591,139)
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Total stockholders' equity 5,788,043 7,276,675
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TOTAL $ 19,895,114 $ 20,795,891
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See notes to unaudited consolidated financial statements.
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METRETEK TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------------------- ----------------------------
2001 2000 2001 2000
REVENUES:
Sales and services $ 5,960,692 $ 4,996,434 $ 22,239,529 $ 15,152,330
Other (30,577) 53,958 269,121 285,099
------------ ------------ ------------ ------------
Total revenues 5,930,115 5,050,392 22,508,650 15,437,429
------------ ------------ ------------ ------------
COSTS AND EXPENSES:
Cost of sales and services 4,260,904 3,771,220 16,758,390 11,315,106
General and administrative 1,381,268 1,347,150 4,146,543 3,963,264
Selling, marketing and service 355,167 700,345 1,031,099 1,728,753
Depreciation and amortization 344,617 474,372 1,086,631 1,164,064
Research and development 288,170 2,214,006 572,958 9,546,833
Interest, finance charges and other 33,815 33,208 114,635 112,864
------------ ------------ ------------ ------------
Total costs and expenses 6,663,941 8,540,301 23,710,256 27,830,884
------------ ------------ ------------ ------------
OPERATING LOSS (733,826) (3,489,909) (1,201,606) (12,393,455)
MINORITY INTEREST IN LOSS -- 183,727 -- 860,143
INCOME TAXES -- -- -- --
------------ ------------ ------------ ------------
NET LOSS (733,826) (3,306,182) (1,201,606) (11,533,312)
PREFERRED STOCK
DEEMED DISTRIBUTION (180,477) (180,477) (541,430) (5,258,388)
------------ ------------ ------------ ------------
NET LOSS APPLICABLE
TO COMMON SHAREHOLDERS $ (914,303) $ (3,486,659) $ (1,743,036) $(16,791,700)
============ ============ ============ ============
NET LOSS PER BASIC
AND DILUTED COMMON SHARE $ (0.15) $ (0.63) $ (0.29) $ (3.32)
============ ============ ============ ============
WEIGHTED AVERAGE BASIC
AND DILUTED COMMON
SHARES OUTSTANDING 6,077,764 5,507,496 6,015,604 5,065,010
============ ============ ============ ============
See notes to unaudited consolidated financial statements.
- 5 -
METRETEK TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
NINE MONTHS ENDED
SEPTEMBER 30,
-----------------------------
2001 2000
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (1,201,606) $(11,533,312)
Adjustments to reconcile net loss to net cash
provided (used) by operating activities:
Depreciation and amortization 1,086,631 1,164,064
Minority interest in PowerSpring -- (860,143)
Stock based compensation expense -- 133,200
Loss on disposal of property, plant and equipment 87,425 13,022
Changes in other assets and liabilities, net of effect of acquisitions:
Trade receivables 416,621 (260,960)
Inventories (423,707) (98,644)
Other current assets 335,978 45,643
Other noncurrent assets (46,661) (1,907)
Accounts payable 125,220 3,048,813
Accrued and other liabilities 120,641 (321,076)
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Net cash provided (used) by continuing operations 500,542 (8,671,300)
Net cash provided (used) by discontinued operations 161,089 (182,192)
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Net cash provided (used) by operating activities 661,631 (8,853,492)
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CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition -- (463,484)
Additions to capitalized software development (476,834) --
Additions to property, plant, equipment (117,632) (3,253,743)
Proceeds from sale of property, plant and equipment 323,810 11,249
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Net cash used by investing activities (270,656) (3,705,978)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from private placement -- 10,586,895
Net payments on line of credit (1,011,541) (273,659)
Proceeds from new line of credit 1,172,356 --
Payment on notes payable (125,000) --
Exercise of stock options and warrants -- 3,197,840
Payments on capital lease obligations (205,162) (7,816)
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Net cash provided (used) by financing activities (169,347) 13,503,260
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NET INCREASE IN CASH AND CASH EQUIVALENTS 221,628 943,790
CASH AND CASH EQUIVALENTS AT
BEGINNING OF PERIOD 468,813 361,658
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CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 690,441 $ 1,305,448
============ ============
See notes to unaudited consolidated financial statements.
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METRETEK TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
As of September 30, 2001 and December 31, 2000 and
For the Three Month Periods Ended September 30, 2001 and 2000 and
For the Nine Month Periods Ended September 30, 2001 and 2000
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accompanying consolidated financial statements include the accounts
of Metretek Technologies, Inc. and its subsidiaries, primarily Metretek,
Incorporated ("Metretek Florida"), Southern Flow Companies, Inc. ("Southern
Flow"), PowerSecure, Inc. ("PowerSecure") and PowerSpring, Inc. ("PowerSpring")
and have been prepared pursuant to rules and regulations of the Securities and
Exchange Commission. The accompanying consolidated financial statements and
notes thereto should be read in conjunction with the consolidated financial
statements and notes thereto included in the Company's Annual Report on Form
10-KSB for the year ended December 31, 2000.
Minority interest amounts included in the consolidated financial
statements represented an outside shareholder's 12.5% ownership interest in
PowerSpring. As of March 31, 2001 the Company repurchased that minority
interest. In addition, certain 2000 amounts have been reclassified to conform to
current year presentation.
Due to the short-term nature of the PowerSecure contracts, the Company
uses the completed-contract method of revenue recognition. Under the
completed-contract method, revenue is recognized only when a contract is
completed or substantially completed.
In the opinion of the Company's management, all adjustments (all of
which are normal and recurring) have been made which are necessary for a fair
presentation of the consolidated financial position of the Company and its
subsidiaries as of September 30, 2001 and the consolidated results of their
operations and cash flows for the three and nine month periods ended September
30, 2001 and 2000.
2. COMPREHENSIVE LOSS
The Company's comprehensive loss for the nine months ended September
30, 2001 and 2000 was $1,251,029 and $11,535,140, respectively. The Company's
comprehensive loss includes net loss and foreign currency translation
adjustments.
3. POWERSPRING TERMINATION
Effective as of March 31, 2001, the Company completed various actions
in furtherance of the discontinuance of its PowerSpring subsidiary as an entity
and the restructuring of its business, including the transfer of management and
control of the PowerSpring product to Metretek Florida. As part of those
actions, the Company,
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PowerSpring and John A. Harpole entered into a Termination Agreement and Mutual
Release that terminated the employment of Mr. Harpole, formerly the Vice
President of PowerSpring, and set forth the terms and conditions of the
termination, which included the termination of various agreements and
instruments to which the Company, PowerSpring and Mr. Harpole were parties.
In connection with the termination: (i) the $741,666 promissory note
made by PowerSpring to Mr. Harpole was cancelled, and the related security
agreement pursuant to which PowerSpring had granted a security interest in its
asset to Mr. Harpole was terminated, (ii) Mr. Harpole transferred his 2,500,000
shares of PowerSpring common stock, which represented 12.5% of the outstanding
capital stock of PowerSpring, back to PowerSpring, (iii) Mr. Harpole's
employment and non-competition agreement was terminated, (iv) PowerSpring
transferred the assets and business of Mercator to Mercator Energy LLC ("New
Mercator"), a new limited liability company formed by Mr. Harpole, (v)
PowerSpring agreed to pay $250,000 to Mr. Harpole over the next year, (vi) the
Company reduced the exercise prices of Mr. Harpole's warrants to purchase 60,000
shares of Company common stock by $1.50 per share to a range of $3.00 to $4.00,
(vii) the Company issued Mr. Harpole options to purchase 80,000 shares of common
stock at $2.00 per share, (viii) PowerSpring retained New Mercator on an eight
month consulting basis at $5,000 per month, and (ix) the parties entered into a
standard mutual release of all claims.
The Company recorded other income in March 2001 of approximately
$255,000, which represents the difference between the note amount of $741,666
and the costs to the Company in connection with the termination of PowerSpring.
4. ACQUISITION
On April 10, 2001, the Company, through its wholly-owned subsidiary
PowerSecure, acquired Industrial Automation Corp. ("Industrial Automation"), a
North Carolina corporation. The Company issued 150,000 restricted shares of its
common stock in exchange for all of the issued and outstanding capital stock of
Industrial Automation. As a result of the acquisition, Industrial Automation has
become a wholly-owned subsidiary of PowerSecure.
Industrial Automation, founded in 1991 and headquartered in Greensboro,
North Carolina, is in the business of designing and marketing process controls
used in distributed generation operations. This acquisition is intended to
enhance PowerSecure's technology and time to market in the field of distributed
generation.
PowerSecure also entered into five-year employment and non-competition
agreements with each of the two former owners of Industrial Automation. The
employment and non-competition agreements include an "earn out" that generally
entitles the former owners to any net earnings of PowerSecure arising from
projects commenced by Industrial Automation prior to the acquisition. The
acquisition was accounted for as a purchase, and therefore the results of
operations of Industrial Automation have been
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combined with those of the Company effective April 10, 2001. The entire amount
of the purchase price of $246,836, including costs of the acquisition, have been
allocated to goodwill. Pro forma results of operations for the nine months ended
September 30, 2001 and 2000 assuming the acquisition had occurred on January 1,
2001 and 2000 have not been included herein as the effects of the acquisition
were not material to the Company's results of operations.
5. CREDIT FACILITY
On September 24, 2001, Southern Flow entered into a Credit and Security
Agreement (the "Credit Agreement") with Wells Fargo Business Credit, Inc. (the
"Lender"), providing for a $2,000,000 credit facility (the "Credit Facility").
Amounts borrowed under the Credit Facility bear interest at prime plus one
percent. The Credit Facility contains minimum interest charges and unused credit
line and termination fees, and matures on September 30, 2004. The Credit
Facility refinances the Company's prior credit facility with National Bank of
Canada.
The obligations of Southern Flow under the Credit Agreement have been
guaranteed by the Company along with PowerSecure and Metretek Florida
(collectively, the "Guarantors"). These guarantees have been secured by a
guaranty agreement ("Guaranty") and a security agreement ("Security Agreement")
entered into by each of the Guarantors. The Security Agreements grant to the
Lender 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 Southern Flow.
The Credit Agreement contains financial covenants by Southern Flow to
maintain a minimum tangible net book value, minimum quarterly and annual net
income levels and maximum capital expenditures through 2002. Thereafter, the
Lender and Southern Flow must renegotiate the terms of those financial
covenants. The Credit Agreement contains other standard covenants related to
Southern Flow's operations, including prohibitions on the payment of dividends,
the sale of assets and other corporate transactions by Southern Flow, without
the Lender's consent.
Borrowings under the Credit Facility are limited to a borrowing base
consisting of the sum of 85% of Southern Flow's eligible accounts receivable
plus the lesser of 20% of Southern Flow's eligible inventory (consisting
primarily of raw materials and finished goods inventory) or $200,000. As of
September 30, 2001, Southern Flow had a borrowing base of $1,802,038 under the
Credit Facility, of which $1,172,356, had been borrowed, leaving $629,682 in
unused Credit Facility availability.
Southern Flow is permitted to advance funds under the Credit Facility
to the Company, PowerSecure and Metretek Florida, provided that total
inter-company indebtedness owing from all Guarantors to Southern Flow may not
exceed the greater of the amount of the borrowing base less $150,000 or the
cumulative net income of Southern Flow from January 1, 2001. The Credit
Facility, which constitutes the
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Company's primary credit agreement, is expected to be used primarily to fund the
operations and growth of PowerSecure, as well as the operations of Southern Flow
and Metretek Florida.
6. COMMITMENTS AND CONTINGENCIES
LITIGATION
On January 5, 2001, Douglas W. Heins, individually and on behalf of a
class of other persons similarly situated (the "Denver Plaintiff"), filed a
complaint (the "Denver Proceeding") in the District Court for the City and
County of Denver, Colorado (the "Denver Court") against the Company, Marcum
Midstream 1997-1 Business Trust (the "Trust"), Marcum Midstream-Farstad, LLC,
Marcum Gas Transmission, Inc. ("MGT"), Marcum Capital Resources, Inc. ("MCR"),
W. Phillip Marcum, Richard M. Wanger, and Daniel J. Packard (the foregoing,
collectively, the ("Metretek Defendants"), Farstad Gas & Oil, LLC ("Farstad
LLC") and Farstad Gas & Oil, Inc. ("Farstad Inc.") (and collectively with
Farstad LLC, the "Farstad Entities"), and Jeff Farstad ("Farstad" and
collectively with the Farstad Entities, the "Farstad Defendants"). The Denver
Proceeding alleges that the Metretek Defendants and the Farstad Defendants
(collectively, the "Denver Defendants"), either directly or as "controlling
persons", violated certain provisions of the Colorado Securities Act in
connection with the sale of interests in Marcum Midstream 1997-1 Business Trust,
an energy program of which MGT, a wholly-owned subsidiary of Metretek, is the
managing trustee and Messrs. Marcum, Wanger and Farstad are or were the active
trustees. Specifically, the Denver Plaintiff claims that his damages resulted
from the Denver Defendants allegedly negligently, recklessly or intentionally
making false and misleading statements, and/or willfully participating in a
scheme or conspiracy and/or aiding or abetting violations of Colorado law, which
scheme and statements related to the specification of the natural gas liquids
product to be delivered under certain contracts, for the purpose of selling the
Trust's units. The Trust raised $9.25 million from investors in a private
placement in 1997 in order to finance the purchase, operation and improvement of
a natural gas liquids processing plant located in Texas. The Denver Plaintiff
seeks, among other things, to have the Denver Court declare the Denver
Proceeding a proper class action and award compensation and/or punitive damages
in an unspecified amount, together with interest, attorneys' fees and other
costs.
In March 2001, the Denver Defendants filed motions to dismiss the
Denver Proceeding, and the Denver Plaintiff filed briefs in response to these
motions to dismiss. On May 11, 2001, the Denver Court granted in part the
Denver Defendants' motions to dismiss by narrowing certain claims and dismissing
the fourth claim for relief, the allegation that the Farstad Defendants, Mr.
Packard, MCR and MGT are liable under Colorado law for giving substantial
assistance and further of securities violations, as to all Denver Defendants
except MCR. The Denver Court also granted a motion to dismiss the Farstad
Entities.
On May 24, 2001, the Metretek Defendants filed an answer to the Denver
Proceeding, generally denying the allegations and claims therein and setting
forth cross-claims against the Farstad Defendants. On July 13, 2001, the
Metretek Defendants filed additional cross-claims and third party complaints
against the Farstad Defendants. The Farstad Defendants have filed a motion to
dismiss these cross-claims and complaints. On October 5, 2001, the Metretek
Defendants sought leave to file their second amended cross claims and third
party complaint adding jurisdictional allegations against the Farstad
Defendants, which filing is not opposed by the Farstad Defendants.
On March 27, 2001, the Denver Plaintiff filed a motion seeking
certification of a class with respect to this matter and filed a brief in
support of his motion for class certification. On July 27, 2001, the Metretek
Defendants and the Farstad Defendants each filed a brief in opposition to the
plaintiff's motion for class certification. On September 28, 2001, the Denver
Court granted the Denver Plaintiff's motion for class certification with respect
to this matter. As of the date of this report, discovery has not commenced and a
trial date has not been set.
On May 30, 2001, Michael Mongiello and Charlotte Mongiello, trustees of
the Mongiello Family Trust dated 8/1/90, et.al. (the "California Plaintiffs"),
filed, and subsequently served, a first amended complaint (the "California
Proceeding") in the Superior Court in the State of California for the County of
San Diego (the "California Proceeding") against the Metretek Defendants, the
Farstad Defendants, United Pacific Securities, Inc., JBS Financial Corporation,
IFG Network Securities, Inc., and numerous officers, directors, employees and
brokers related to such brokerage houses (the "California Defendants"). The
California Proceeding contains allegations similar to those contained in the
Denver Proceeding, along with allegations of wrong-doing in and with the sale of
interest in the Trust against the additional defendants. The California
Plaintiffs' claims for relief include a breach of fiduciary duty, sale
securities in violation of California blue sky laws, fraud and deceit, negligent
misrepresentation and omission, mutual mistake, justify and rescission,
negligence, fraud on senior citizens and declaratory relief. The California
Plaintiffs seek, among other things, damages of not less than $712,500,
interest, attorneys' fees, rescission and restitution, punitive and exemplary
damages, prejudgment interest, a declaratory judgment and other damages.
On August 24, 2001, the Metretek California Defendants filed a motion
to stay the California Proceeding, due to the pendency of the Denver Proceeding.
On October 9, 2001, the California Plaintiffs filed a brief in opposition to
this motion. On October 26, 2001, the California Court denied the stay, relying
on the representations of counsel for the California Plaintiffs that his clients
planned to opt out of the Denver Proceeding.
On October 5, 2001, the California Court granted the motion by the
Metretek Defendants to dismiss the claims against the Company, Mr. Marcum and
Mr. Wanger for lack of personal jurisdiction. The California Court also granted
a similar motion dismissing the claims against the Farstad Defendants for lack
of personal jurisdiction. On November 5, 2001, the MGT, MCR, Mr. Packard and
the Trust (the "Metretek California Defendants") filed an answer generally
denying the allegations and claims therein. While discovery has commenced in
the California Proceeding, no trial date has been set as of the date of this
report.
Because the foregoing litigation is in early stages, the Company cannot
predict the outcome of this litigation or the impact the resolution of these
claims will have on the business, financial position or results of operations of
the Company. The Company intends to vigorously defend the claims against it and
the other Metretek Defendants, and intends to vigorously pursue appropriate
cross-claims and third party complaints.
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 outstanding claims against it. Although the ultimate
outcome of these claims cannot be predicted with certainty due to the inherent
uncertainty of litigation, in the opinion of management, based upon current
information, none of the other currently pending or overtly threatened disputes
is expected to have a material adverse effect on the business, financial
condition or results of operations of the Company.
7. 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 has four reportable business segments: natural gas
measurement services; distributed generation; automated energy data management;
and Internet-based energy information and services.
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.
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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 design, switch gear acquisition and
installation, assistance in obtaining third-party project financing, and ongoing
project monitoring and servicing. PowerSecure markets its distributed generation
service package primarily through outsourcing partnerships with utilities.
The operations of the Company's automated energy data management
segment are conducted by Metretek Florida. Metretek Florida's manufactured
products fall into three categories: remote data collection products; electronic
corrector products; and application-specific products. Metretek Florida also
provides energy data collection and management services and post-sale support
services for its manufactured products.
The operations of the Company's Internet-based energy information and
services segment were conducted by PowerSpring through March 31, 2001.
PowerSpring commenced limited revenue generating operations in the second
quarter of 2000. Effective April 1, 2001, PowerSpring's business was
restructured and transferred to Metretek Florida.
The Company evaluates the performance of its operating segments based
on 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, results of insignificant operations and, as it relates to segment
profit or loss, income and expense not allocated to reportable segments.
INTERNET-BASED
NATURAL GAS AUTOMATED ENERGY
MEASUREMENT DISTRIBUTED ENERGY DATA INFORMATION
SERVICES GENERATION MANAGEMENT AND SERVICES (1) OTHER TOTAL
----------- ---------- ----------- ----------------- ----- -----
SEPTEMBER 30, 2001
Revenues $9,700,593 $7,741,783 $4,520,568 $ 276,585 $ 269,121 $22,508,650
Segment profit (loss) 1,183,874 476,459 (933,574) (612,371) (1,315,994) (1,201,606)
Total assets 9,752,085 1,527,323 7,248,279 -- 1,367,427 19,895,114
SEPTEMBER 30, 2000
Revenues $8,272,739 $ -- $6,563,420 $ 316,171 $ 285,099 $15,437,429
Segment profit (loss) 755,791 (69,392) (647,815) (11,383,169) (1,048,870) (12,393,455)
Total assets 9,941,129 2,437 8,950,057 5,748,214 944,929 25,586,766
(1) Effective April 1, 2001, the Company's Internet-Based Energy
Information and Services segment was restructured and transferred into
its Automated Energy Data Management segment.
- 11 -
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 nine
month periods ended September 30, 2001 and 2000 and of our financial condition
as of September 30, 2001 should be read in conjunction with our consolidated
financial statements and related notes thereto included elsewhere in this
report.
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. Segment profit (loss)
amounts shown are prior to the deduction of minority interest in PowerSpring.
Nine Months Ended
September 30,
------------------------------
2001 2000
--------- ----------
(amounts in thousands)
REVENUES:
Southern Flow $ 9,700 $ 8,273
PowerSecure 7,742 --
Metretek Florida 4,521 6,563
PowerSpring 277 316
Other 269 285
--------- ----------
Total $ 22,509 $ 15,437
========= ==========
GROSS PROFIT:
Southern Flow $ 2,515 $ 2,068
PowerSecure 1,529 --
Metretek Florida 1,548 2,055
PowerSpring (111) (286)
--------- ----------
Total $ 5,481 $ 3,837
========= ==========
SEGMENT PROFIT (LOSS):
Southern Flow $ 1,184 $ 756
PowerSecure 476 (69)
Metretek Florida (934) (648)
PowerSpring (612) (11,383)
Other (1,316) (1,049)
--------- ----------
Total $ (1,202) $ (12,393)
========= ==========
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.
- 12 -
We currently have four reportable business segments: natural gas
measurement services; distributed generation; automated energy data management;
and internet-based energy information and services.
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. 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 design, switch gear acquisition and installation, assistance
in obtaining third-party project financing, and ongoing project monitoring and
servicing. PowerSecure markets its distributed generation service package
primarily through outsourcing partnerships with utilities.
The operations of our automated energy data management segment are
conducted by Metretek Florida. Metretek Florida's manufactured products fall
into three categories: remote data collection products; electronic corrector
products; and application-specific products. Metretek Florida also provides
energy data collection and management services and post-sale support services
for its manufactured products.
The operations of our internet-based energy information and services
segment were conducted by PowerSpring through March 31, 2001. PowerSpring
commenced limited revenue generating operations in the second quarter of 2000.
Effective April 1, 2001, PowerSpring's product was restructured and transferred
to Metretek Florida.
We evaluate the performance of our operating segments based on income
(loss) before taxes, nonrecurring items and interest income and expense.
Intersegment sales are not significant.
NINE MONTHS ENDED SEPTEMBER 30, 2001 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
2000
Revenues. Our consolidated revenues for the nine months ended September
30, 2001 increased $7,071,000, or 45.8%, compared to the same period in 2000.
The increase was primarily due to the first-time generation of revenue by
PowerSecure, as well as an increase in revenues by Southern Flow, which
increases were partially offset by a decrease in revenues by Metretek Florida.
PowerSecure generated revenues of $7,742,000, for which there were no comparable
revenues earned in the same period in 2000. Southern Flow's revenues increased
$1,427,000, or 17.3%, compared to the same period in 2000, primarily due to an
increase in equipment sales and services resulting from an improved domestic
natural gas market. PowerSpring generated revenues of $536,000 during the nine
months ended September 30, 2001, which included
- 13 -
approximately $255,000 relating to the termination of PowerSpring. Comparable
revenues for PowerSpring for the same period in 2000 were $316,000. We do not
anticipate any material revenues by PowerSpring as an entity in future quarters
due to the disposition of the Mercator business as discussed below and the
transfer of the PowerSpring products and business to Metretek Florida. Any
future revenues attributable to PowerSpring's business will be recorded as
revenues of Metretek Florida. Metretek Florida's revenues decreased $2,042,000,
or 31.1%, compared to the same period in 2000, consisting of a decrease in
domestic sales of $1,835,000, and a decrease in international sales of $207,000.
The decrease in Metretek Florida's domestic sales was primarily due to a
decrease in circuit board assembly sales resulting from the loss of a major
contract-manufacturing customer which sold its business. A comparison of
Metretek Florida's current domestic and international product mix is as follows:
Nine Months Ended September 30,
-------------------------------
2001 2000
---- ----
(dollar amounts in thousands)
Remote data collection
products and systems $2,951 65% $3,504 54%
Electronic corrector products 1,348 30% 1,408 21%
Circuit board assembly sales 222 5% 1,651 25%
------- ------
Total $4,521 $6,563
===== ======
Costs and Expenses. Costs of sales and services include materials, labor,
personnel and related overhead costs incurred to manufacture products and
provide services. Cost of sales and services for the nine months ended September
30, 2001 increased $5,443,000, or 48.1%, compared to the same period in 2000.
PowerSecure's costs of sales on completed distributed generation projects
totaled $6,213,000, for which there were no comparable costs incurred in the
same period in 2000. PowerSecure's gross profit margin after costs of sales and
services was 19.8% for the nine months ended September 30, 2001. Southern Flow's
cost of sales and services for the nine months ended September 30, 2001
increased $982,000, or 15.8%, compared to the same period in 2000, almost
entirely attributable to increased sales. Southern Flow's gross profit margin
after costs of sales and services increased slightly to 25.9% for the nine
months ended September 30, 2001 compared to 25.0% for the comparable period in
2000. Metretek Florida's cost of sales and services for the nine months ended
September 30, 2001 decreased $1,537,000, or 34.1%, compared to the same period
in 2000. This decrease was primarily due to lower circuit board assembly sales.
Circuit board assembly sales generally result in lower gross margins than that
of traditional products at Metretek Florida. As a result, although Metretek
Florida's revenues for the nine months ended September 30, 2001 decreased
approximately 31% compared to the same period in 2000, Metretek Florida's
overall gross profit margin increased from 31.3% to 34.3% compared to the same
period in 2000. PowerSpring incurred costs of sales and services in the amount
of $388,000 during the nine months ended September 30, 2001, compared to
$602,000 during the same period in 2000.
- 14 -
General and administrative expenses include personnel and related
overhead costs for the support and administrative functions. General and
administrative expenses for the nine months ended September 30, 2001 increased
$183,000, or 4.6%, compared to the same period in 2000. PowerSecure's general
and administrative expenses increased $899,000, or 1,296.1%, compared to the
same period in 2000, as a result of nine months of personnel, travel and
overhead costs in 2001 compared to only limited activities during the same
period in 2000. The increase in general and administrative expenses at
PowerSecure was partially offset by a $706,000 reduction in personnel and
overhead activities at PowerSpring.
Selling, marketing and service expenses consist of personnel and
related overhead costs, including commissions for sales and marketing
activities, together with advertising and promotion costs. Selling, marketing
and service expenses for the nine months ended September 30, 2001 decreased
$698,000, or 40.4%, compared to the same period in 2000. This decrease in
selling, marketing and service expenses was primarily due to the discontinuation
of independent sales activity by PowerSpring and a reduction in sales personnel
at Metretek Florida.
Depreciation and amortization expenses include the depreciation and
amortization of real property, customer list, goodwill, patents and capitalized
software development costs. Depreciation and amortization expenses for the nine
months ended September 30, 2001 decreased $77,000, or 6.7%, compared to the same
period in 2000. The decrease is due almost entirely to the effects of the
impairment of depreciable and amortizable assets at PowerSpring that was
recorded in the last three months of 2000. The impairment of these assets
reduced depreciation and amortization expenses of PowerSpring by $96,000 for the
nine months ended September 30, 2001, compared to the same period in 2000. The
reduction in depreciation and amortization expenses at PowerSpring was partially
offset by increased depreciation and amortization expenses at PowerSecure.
Research and development expenses include payments to third parties,
personnel and related overhead costs for product and service development,
enhancements, and upgrades. Research and development expenses for the nine
months ended September 30, 2001 decreased $8,974,000, or 94.0%, compared to the
same period in 2000. The decrease is due almost exclusively to the substantial
reduction commenced in the second half of 2000 of research and development
expenses related to PowerSpring's business.
Interest, finance charges and other expenses include interest and
finance charges on our credit facility as well as other non-operating expenses.
Interest, finance charges and other expenses for the nine months ended September
30, 2001 increased $2,000, or 1.6%, compared to the same period in 2000. The
increase reflects increased bank borrowings in the first nine months of 2001
compared to the same period in 2000.
QUARTERLY FLUCTUATIONS
Our quarterly revenues, expenses, margins and results of operations are
difficult to
- 15 -
predict and have fluctuated significantly 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, orders, contracts and
projects, including customers choosing to push out their
purchase commitments, or purchases in smaller than expected
quantities;
- 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, and those of our competitors;
- the pace of development of our new businesses;
- the growth of the market for distributed generation and online
energy products, services and information;
- changes in our pricing policies and those of our competitors;
- variations in the length of our product and service
implementation process;
- the mix of products and services sold;
- the mix of international and domestic revenues;
- the life cycles of our products and services;
- budgeting cycles of utilities;
- general economic and political conditions;
- economic conditions in the energy industry in general and the
natural gas and electricity industries in particular;
- the effects of governmental regulations and regulatory changes
in our current and new markets;
- changes in the prices charged by our suppliers;
- the timing of acquisitions of technology or businesses;
- changes in our operating expenses; and
- the development and maintenance of business relationships with
strategic partners.
Because many of our operating expenses are relatively fixed, a
shortfall in anticipated revenue or delay in recognizing revenue could cause our
operating results to vary significantly from quarter-to-quarter and could result
in operating losses in any particular quarter. The timing of large individual
sales is also difficult for us to predict. As a result, quarterly comparisons of
operating results are not necessarily meaningful or indicative of future
performance.
- 16 -
PowerSecure's operations generated revenues for the first time during
the second quarter of 2001. Although we only have a limited operating history
with PowerSecure, consisting of less than a full fiscal year, we expect the
revenues and associated costs, gross margins, cash flow and other operating
results of PowerSecure to vary from quarter to quarter for a number of reasons,
including the factors mentioned above. PowerSecure's revenues will depend in
large part upon the timing of projects being awarded to PowerSecure, as well as
the timing of the completion of those projects. Because we are using the
completed-contract method of revenue recognition, under which we will recognize
revenue only when a contract is completed or substantially completed, our
recognition of revenues will be dependent upon the timing of completion of
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.
Metretek Florida historically derives substantially all of its revenues
from sales of its products and services to the utility industry. Metretek
Florida has experienced variability of operating results on both an annual and a
quarterly basis due primarily to utility purchasing patterns and delays of
purchasing decisions as a result of mergers and acquisitions in the utility
industry and changes or potential changes to the federal and state regulatory
frameworks within which the utility industry operates. The utility industry,
both domestic and foreign, is generally characterized by long budgeting,
purchasing and regulatory process cycles that can take up to several years to
complete.
FINANCIAL CONDITION AND LIQUIDITY
We require capital principally for (i) the financing of inventory and
accounts receivable, (ii) research and development expenses, (iii) capital
expenditures for property and equipment and software development, and (iv) the
funding of possible future acquisitions.
Net cash provided by operating activities of approximately $662,000 for
the nine months ended September 30, 2001 was the net result of the following:
(i) approximately $27,000 of cash used by continuing operations, before changes
in assets and liabilities; (ii) approximately $528,000 of cash provided by
changes in working capital and other asset and liability accounts; and (iii)
approximately $161,000 of cash provided by discontinued operations.
We plan to continue our research and development efforts to enhance our
existing products and services and to develop new products. Research and
development expenses in the amount of $573,000 were incurred in the nine months
ended September 30, 2001. We anticipate that our research and development costs
in 2001 will total approximately $775,000, all of which is expected to relate to
Metretek Florida's business, including further development and enhancement of
the PowerSpring product.
- 17 -
We anticipate capital expenditures in 2001 of approximately $660,000,
primarily for product software development for the PowerSpring and PowerSecure
products. Capital expenditures for the nine months ended September 30, 2001 were
approximately $594,000.
On September 24, 2001, Southern Flow entered into a Credit and Security
Agreement (the "Credit Agreement") with Wells Fargo Business Credit, Inc. (the
"Lender"), providing for a $2,000,000 credit facility (the "Credit Facility").
Amounts borrowed under the Credit Facility bear interest at prime plus one
percent. The Credit Facility contains minimum interest charges and unused credit
line and termination fees, and matures on September 30, 2004. The Credit
Facility refinances the Company's prior credit facility with National Bank of
Canada.
The obligations of Southern Flow under the Credit Agreement have been
guaranteed by the Company along with PowerSecure and Metretek Florida
(collectively, the "Guarantors"). These guarantees have been secured by a
guaranty agreement ("Guaranty") and a security agreement ("Security Agreement")
entered into by each of the Guarantors. The Security Agreements grant to the
Lender 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 Southern Flow.
The Credit Agreement contains financial covenants by Southern Flow to
maintain a minimum tangible net book value, minimum quarterly and annual net
income levels and maximum capital expenditures through 2002. Thereafter, the
Lender and Southern Flow must renegotiate the terms of those financial
covenants. The Credit Agreement contains other standard covenants related to
Southern Flow's operations, including prohibitions on the payment of dividends,
the sale of assets and other corporate transactions by Southern Flow, without
the Lender's consent.
Borrowings under the Credit Facility are limited to a borrowing base
consisting of the sum of 85% of Southern Flow's eligible accounts receivable
plus the lesser of 20% of Southern Flow's eligible inventory (consisting
primarily of raw materials and finished goods inventory) or $200,000. As of
September 30, 2001, Southern Flow had a borrowing base of $1,802,038 under the
Credit Facility, of which $1,172,356 had been borrowed, leaving $629,682 in
unused Credit Facility availability.
Southern Flow is permitted to advance funds under the Credit Facility
to the Company, PowerSecure and Metretek Florida, provided that total
inter-company indebtedness owing from all Guarantors to Southern Flow may not
exceed the greater of the amount of the borrowing base less $150,000 or the
cumulative net income of Southern Flow from January 1, 2001. The Credit
Facility, which constitutes the Company's primary credit agreement, is expected
to be used primarily to fund the operations and growth of PowerSecure, as well
as the operations of Southern Flow and Metretek Florida.
- 18 -
While the Credit Facility will restrict the ability of the Company to
sell or finance its subsidiaries without the consent of the Lender, in the event
that the Company is able to secure debt or equity financing for a subsidiary
that is a Guarantor or the sale or merger of such subsidiary and such subsidiary
repays all advances made to it by Southern Flow, then the Lender has agreed to
terminate the applicable restrictions in the Credit Facility relating to such
subsidiary as a Guarantor.
Effective as of March 31, 2001, we completed various actions in
furtherance of the discontinuance of our PowerSpring subsidiary as an entity and
the restructuring of its business, including the transfer of management and
control of the PowerSpring product to Metretek Florida. As part of those
actions, we, PowerSpring and John A. Harpole entered into a Termination
Agreement and Mutual Release that terminated the employment of Mr. Harpole and
set forth the terms and conditions of the termination, which included the
termination of various agreements and instruments to which we, PowerSpring and
Mr. Harpole were parties.
In connection with the termination, among other things: (i) the
$741,666 promissory note made by PowerSpring to Mr. Harpole was cancelled, and
the related security agreement pursuant to which PowerSpring had granted a
security interest in its asset to Mr. Harpole was terminated, (ii) PowerSpring
agreed to pay $250,000 to Mr. Harpole over the next year, and (iii) we reduced
the exercise prices of Mr. Harpole's warrants to purchase 60,000 shares of
Company common stock by $1.50 per share to a range of $3.00 to $4.00. We
recorded other income of approximately $255,000 in March 2001, which represents
the difference between the note amount of $741,666 and our costs incurred in
connection with the termination of PowerSpring.
On September 28, 2000, we issued a $2.8 million unsecured convertible
promissory note to Scient Corporation ("Scient") in connection with Scient's
consulting services relating to our Internet-based PowerSpring business. The
convertible note is payable in quarterly installments, due March 31, 2002, bears
no interest, and is convertible at any time at Scient's discretion into either
shares of our Common Stock at the rate of $5.94 per share or shares of
PowerSpring common stock at the rate of $0.60 per share. As of September 30,
2001, the outstanding balance of the unsecured note was stated as approximately
$2.5 million. However, it is our position that, due to various offsets and
issues, we do not owe Scient any further amounts. As of the date of this report,
Scient has acknowledged some of the issues that are in dispute and has stayed
any claim for payment for the time being. However, until final resolution is
reached, we cannot predict with certainty the ultimate outcome of any dispute
with Scient, or the effects thereof on our liquidity and operations.
Based on our current plans and assumptions, management believes that
our capital resources, including cash and cash equivalents, amounts available
under the Credit Facility and funds generated from continuing 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
requirements. However, unanticipated events, over
- 19 -
which we have no control, could increase our operating costs or decrease our
ability to generate revenues from product and service sales. In addition, we
will also require additional capital in the future in order to make any
significant acquisitions of businesses or technologies.
Obtaining additional financing will depend on many factors, including
market conditions, our operating performance and investor sentiment. Terms of
debt financing could restrict our ability to operate our business or to expand
our operations. In addition, if we raise additional capital by issuing capital
stock or securities convertible into capital stock, stockholders could suffer a
significant dilution of their percentage ownership interests, and the new
capital stock or other new securities could have rights, preferences or
privileges senior to those of our current stockholders. Depending on how it is
structured, our capital raising could require the consent of the Lender or of
the holders of our Series B Preferred Stock or both. We also cannot assure you
that sufficient additional funds will be available to us on a timely basis or
that, if available on a timely basis, such funds can be obtained on terms
satisfactory to us and acceptable to the Lender and to the holders of our Series
B Preferred Stock, if their consents are required. Our inability to obtain
sufficient additional capital on a timely basis on terms that are acceptable
could have a material adverse effect on our business, financial condition and
results of operations.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("FAS") No. 133, "Accounting for
Derivative Instruments and Hedging Activities", which was amended in June 2000
by FAS No. 138, "Accounting for Certain Derivative Instruments and Certain
Hedging Activities". FAS 133, as amended, establishes methods of accounting for
derivative financial instruments and hedging activities related to those
instruments as well as other hedging activities including hedging foreign
currency expenses. We have adopted FAS 133 for our fiscal year ending December
31, 2001. Because we do not utilize derivative financial instruments, the
adoption of FAS 133 did not have a material impact on our financial position or
results of operations.
In July 2001, the FASB issued FAS No. 141 "Business Combinations". FAS
141 requires that all business combinations be accounted for under the purchase
method of accounting. FAS 141 also changes the criteria for the separate
recognition of intangible assets acquired in a business combination. FAS 141 is
effective for all business combinations initiated after June 30, 2001.
In July 2001, the FASB issued FAS No. 142 "Goodwill and Other
Intangible Assets". FAS 142 addresses accounting and reporting for intangible
assets acquired, except for those acquired in a business combination. FAS 142
presumes that goodwill and certain intangible assets have indefinite useful
lives. Accordingly, goodwill and certain intangibles will not be amortized but
rather will be tested at least annually for impairment. FAS 142 also addresses
accounting and reporting for goodwill and other
- 20 -
intangible assets subsequent to their acquisition. FAS 142 is effective for
fiscal years beginning after December 15, 2001. We have not yet completed our
assessment of the impact of FAS 141 and 142 on our financial statements.
In October 2001, the FASB issued FAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets", which addresses financial
accounting and reporting for the impairment and disposal of long-lived assets.
While FAS 144 supercedes FAS No. 121, "Accounting for the Impairment of Long
-Lived Assets and for Long-Lived Assets to be Disposed Of", it retains many of
the fundamental provisions of FAS No. 121 for recognition and measurement of the
impairment of long-lived assets to be held and used and for measurement of
long-lived assets to be disposed of by sale. FAS 144 also supercedes the
accounting and reporting provisions of APB Opinion No. 30, "Reporting Results of
Operations-Reporting the Effects of Disposal of a Segment of a Business and
Extraordinary, Unused and Infrequently Occurring Events and Transactions", for
the disposal of segments of a business. FAS 144 establishes a single accounting
model, based on the framework established in FAS 121, for long-lived assets to
be disposed of by sale. FAS 144 will be effective for fiscal years beginning
after December 15, 2001. We have not yet completed our assessment of the impact
of FAS 144 on our financial statements.
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Form 10-QSB 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. Forward-looking statements are all statements other than statements
of historical facts, including statements concerning management's plans,
objectives, goals, strategies, hopes and beliefs; projections about earnings,
revenues and other financial and non-financial items, events and performance;
statements about proposed products, services, technologies and operations; and
statements of assumptions underlying any of the foregoing. The words "may",
"could", "should", "will", "project, "intend", "continue", "believe",
"anticipate", "estimate", "expect", "plan", "potential", or "scheduled",
variations of such words, and similar expressions are intended to identify
forward-looking statements. Examples of forward-looking statements include
statements regarding, among other matters, our plans, intentions, beliefs and
expectations about the following:
- our future prospects, including our revenues, income, margins,
profitability, cash flow, liquidity, financial condition and
results of operations;
- the sufficiency of funds, from operations, available
borrowings and other capital resources, to meet our future
working capital, capital expenditure and business growth
needs;
- our products and services, market position and strategic
relationships;
- our business plans and strategies;
- market demand for and customer benefits attributable to our
products and services;
- competition and industry and market conditions, segments and
trends;
- our ability to successfully develop and operate our
PowerSecure business;
- our ability to successfully develop and operate our
restructured PowerSpring business;
- the effects of litigation; and
- future economic, business and regulatory conditions.
- 21 -
These forward-looking statements are based on the current plans,
intentions, goals, strategies, type, beliefs and expectations of management as
well as assumptions made by and information currently available to management.
You are cautioned not to place undue reliance on these forward-looking
statements. Forward-looking statements are not guarantees of future performance
or events, but are subject to and qualified by a number of known and unknown
risks, uncertainties and other factors that could cause actual results to differ
materially from those express or implied by the forward-looking statements.
These risks, uncertainties and other factors include, but are not limited to,
the following:
- our history of losses and uncertainty of future profitability;
- our ability to obtain and maintain sufficient capital and
liquidity to meet our operating and capital requirement and
growth needs, including the sufficiency of the Credit
Facility;
- our ability to successfully and timely develop and market
PowerSecure's products, services, and technologies;
- our lack of operating history in our new businesses and the
unproven business models in our PowerSecure and PowerSpring
businesses;
- the successful and timely development and market acceptance of
the product, service and technology offerings of PowerSecure;
- the successful restructuring of PowerSpring as a division of
Metretek Florida;
- the complexity, uncertainty and time constraints associated
with the development and market acceptance of new product and
service designs and technologies;
- the effects of competition in our markets, including the
introduction of competitors' products, services and
technologies and our timely and successful response thereto;
- utility purchasing patterns and delays and potential changes
to the federal and state regulatory frameworks within which
the utility industry operates;
- fluctuations in our quarterly operating results;
- the effects of pending and future lawsuits, including the
expenses of defending claims against us and the effects of the
ultimate resolution thereof;
- the effects and timing of the resolution of any dispute with
Scient over payment obligations;
- 22 -
- our ability to attract, retain and motivate key personnel;
- our ability to secure and maintain key contracts, business
relationships and alliances;
- our ability to make successful acquisitions and in the future
to successfully integrate and utilize any acquired product
lines, key employees and businesses;
- changes in the energy industry in general, and technological
and market changes in the natural gas and electricity
industries in particular;
- the impact and timing of the deregulation of the natural gas
and electricity markets;
- our ability to manage the anticipated growth of PowerSecure;
- the capital resources, technological requirements, and
internal business plans of the natural gas and electricity
utilities industry;
- restrictions on our capital raising ability imposed by the
terms of the Credit Facility and the Series B Preferred Stock;
- dividends on the Series B Preferred Stock increasing our
future net loss available to common shareholders and net loss
per share;
- general economic and business 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 and timing 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 proprietary information and
technology;
- the impact of current and future laws and government
regulations affecting the energy industry in general and the
natural gas and electricity industries in
- 23 -
particular; and
- other risks and uncertainties that are discussed in this
report or that are discussed from time to time in our other
reports and filings with the SEC, including but not limited to
our Annual Report on Form 10-KSB for the fiscal year ended
December 31, 2000.
We do not intend, and we undertake no duty or obligation, to update or
revise any forward-looking statements for any reason, whether as the result of
new information, future events or otherwise.
- 24 -
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On January 5, 2001, Douglas W. Heins, individually and purportedly on
behalf of a class of other persons similarly situated (the "Denver Plaintiff"),
filed a complaint (the "Denver Proceeding") in the District Court for the City
and County of Denver, Colorado (the "Denver Court") against the Company, Marcum
Midstream 1997-1 Business Trust (the "Trust"), Marcum Midstream-Farstad, LLC,
Marcum Gas Transmission, Inc. ("MGT"), Marcum Capital Resources, Inc. ("MCR"),
W. Phillip Marcum, Richard M. Wanger, and Daniel J. Packard (the foregoing,
collectively, the ("Metretek Defendants"), Farstad Gas & Oil, LLC ("Farstad
LLC") and Farstad Gas & Oil, Inc. ("Farstad Inc.") (and collectively with
Farstad LLC, the "Farstad Entities"), and Jeff Farstad ("Farstad" and
collectively with the Farstad Entities, the "Farstad Defendants"). The Denver
Proceeding alleges that the Metretek Defendants and the Farstad Defendants
(collectively, the "Denver Defendants"), either directly or as "controlling
persons", violated certain provisions of the Colorado Securities Act in
connection with the sale of interests in Marcum Midstream 1997-1 Business Trust,
an energy program of which MGT, a wholly-owned subsidiary of Metretek, is the
managing trustee and Messrs. Marcum, Wanger and Farstad are or were the active
trustees. Specifically, the Denver Plaintiff claims that his damages resulted
from the Denver Defendants allegedly negligently, recklessly or intentionally
making false and misleading statements, and/or willfully participating in a
scheme or conspiracy and/or aiding or abetting violations of Colorado law, which
scheme and statements related to the specification of the natural gas liquids
product to be delivered under certain contracts, for the purpose of selling the
Trust's units. The Trust raised $9.25 million from investors in a private
placement in 1997 in order to finance the purchase, operation and improvement of
a natural gas liquids processing plant located in Texas. The Denver Plaintiff
seeks, among other things, to have the Denver Court declare the Denver
Proceeding a proper class action and award compensation and/or punitive damages
in an unspecified amount, together with interest, attorneys' fees and other
costs.
In March 2001, the Denver Defendants filed motions to dismiss the
Denver Proceeding, and the Denver Plaintiff filed briefs in response to these
motions to dismiss. On May 11, 2001, the Denver Court granted in part the Denver
Defendants' motions to dismiss by narrowing certain claims and dismissing the
fourth claim for relief, the allegation that the Farstad Defendants, Mr.
Packard, MCR and MGT are liable under Colorado law for giving substantial
assistance and further of securities violations, as to all Denver Defendants
except MCR. The Denver Court also granted a motion to dismiss the Farstad
Entities.
On May 24, 2001, the Metretek Defendants filed an answer to the Denver
Proceeding, generally denying the allegations and claims therein and setting
forth cross-claims against the Farstad Defendants. On July 13, 2001, the
Metretek Defendants filed
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additional cross-claims and third party complaints against the Farstad
Defendants. The Farstad Defendants have filed a motion to dismiss these
cross-claims and complaints. On October 5, 2001, the Metretek Defendants sought
leave to file their second amended cross claims and third party complaint adding
jurisdictional allegations against the Farstad Defendants, which filing is not
opposed by the Farstad Defendants.
On March 27, 2001, the Denver Plaintiff filed a motion seeking
certification of a class with respect to this matter and filed a brief in
support of his motion for class certification. On July 27, 2001, the Metretek
Defendants and the Farstad Defendants each filed a brief in opposition to the
plaintiff's motion for class certification. On September 28, 2001, the Denver
Court granted the Denver Plaintiff's motion for class certification with respect
to this matter. As of the date of this report, discovery has not commenced and a
trial date has not been set.
On May 30, 2001, Michael Mongiello and Charlotte Mongiello, trustees of
the Mongiello Family Trust dated 8/1/90, et.al. (the "California Plaintiffs"),
filed, and subsequently served, a first amended complaint (the "California
Proceeding") in the Superior Court in the State of California for the County of
San Diego (the "California Proceeding") against the Metretek Defendants, the
Farstad Defendants, United Pacific Securities, Inc., JBS Financial Corporation,
IFG Network Securities, Inc., and numerous officers, directors, employees and
brokers related to such brokerage houses (the "California Defendants"). The
California Proceeding contains allegations similar to those contained in the
Denver Proceeding, along with allegations of wrong-doing in and with the sale of
interest in the Trust against the additional defendants. The California
Plaintiffs' claims for relief include a breach of fiduciary duty, sale
securities in violation of California blue sky laws, fraud and deceit, negligent
misrepresentation and omission, mutual mistake, justify and rescission,
negligence, fraud on senior citizens and declaratory relief. The California
Plaintiffs seek, among other things, damages of not less than $712,500,
interest, attorneys' fees, rescission and restitution, punitive and exemplary
damages, prejudgment interest, a declaratory judgment and other damages.
On August 24, 2001, the Metretek California Defendants filed a motion
to stay the California Proceeding, due to the pendency of the Denver Proceeding.
On October 9, 2001, the California Plaintiffs filed a brief in opposition to
this motion. On October 26, 2001, the California Court denied the stay, relying
on the representations of counsel for the California Plaintiffs that his clients
planned to opt out of the Denver Proceeding.
On October 5, 2001, the California Court granted the motion by the
Metretek Defendants to dismiss the claims against the Company, Mr. Marcum and
Mr. Wanger for lack of personal jurisdiction. The California Court also granted
a similar motion dismissing the claims against the Farstad Defendants for lack
of personal jurisdiction. On November 5, 2001, the MGT, MCR, Mr. Packard and the
Trust (the "Metretek California Defendants") filed an answer generally denying
the allegations and claims therein. While discovery has commenced in the
California Proceeding, no trial date has been set as of the date of this report.
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Because the foregoing litigation is in early stages, the Company cannot
predict the outcome of this litigation or the impact the resolution of these
claims will have on the business, financial position or results of operations of
the Company. The Company intends to vigorously defend the claims against it and
the other Metretek Defendants, and intends to vigorously pursue appropriate
cross-claims and third party complaints.
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 outstanding claims against it. Although the ultimate
outcome of these claims cannot be predicted with certainty due to the inherent
uncertainty of litigation, in the opinion of management, based upon current
information, none of the other currently pending or overtly threatened disputes
is expected to have a material adverse effect on the business, financial
condition or results of operations of the Company.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
None
(b) REPORTS ON FORM 8-K
Since June 30, 2001, the Company filed the following Current Report on
Form 8-K with the Securities and Exchange Commission:
Filing Date Item No Description
----------- -------- -----------
October 5, 2001 5,7 New Credit Facility
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SIGNATURES
In accordance with the requirements of the Securities Exchange Act of
1934, the registrant caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
METRETEK TECHNOLOGIES, INC.
Date: November 12, 2001 By: /s/ W. Phillip Marcum
-------------------------------------
W. Phillip Marcum
President and Chief Executive Officer
Date: November 12, 2001 By: /s/ A. Bradley Gabbard
-------------------------------------
A. Bradley Gabbard
Executive Vice President
and Chief Financial Officer
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