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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 MARCH 31, 2002
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.)
303 East Seventeenth Avenue, Suite 660
Denver, Colorado 80203
(Address of principal executive offices) (Zip code)
(303) 785-8080
(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 May 1, 2002 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
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2002
TABLE OF CONTENTS
PAGE
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Unaudited Consolidated Balance Sheets -
March 31, 2002 and December 31, 2001 3
Unaudited Consolidated Statements of Operations -
For the Three Months Ended March 31, 2002 and
March 31, 2001 5
Unaudited Consolidated Statements of Cash Flows -
For the Three Months Ended March 31, 2002 and
March 31, 2001 6
Notes to Unaudited Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 13
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 27
Item 5. Other Information 29
Item 6. Exhibits 30
Signatures 31
2
PART I.
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
METRETEK TECHNOLOGIES, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(unaudited)
MARCH 31, DECEMBER 31,
ASSETS 2002 2001
----------- -----------
CURRENT ASSETS:
Cash and cash equivalents $ 1,318,940 $ 696,076
Trade receivables, net of allowance for doubtful accounts
of $155,565 and $169,632, respectively 4,218,721 4,980,419
Other receivables 2,841 14,929
Inventories 3,122,112 3,135,297
Prepaid expenses and other current assets 824,225 559,562
----------- -----------
Total current assets 9,486,839 9,386,283
----------- -----------
PROPERTY, PLANT AND EQUIPMENT:
Equipment 3,902,398 4,150,686
Vehicles 50,227 50,227
Furniture and fixtures 570,983 561,664
Land, building and improvements 736,388 736,388
----------- -----------
Total property, plant and equipment, at cost 5,259,996 5,498,965
Less accumulated depreciation 3,168,726 3,318,054
----------- -----------
Property, plant and equipment, net 2,091,270 2,180,911
----------- -----------
OTHER ASSETS:
Customer list, net of accumulated amortization of $3,846,428 5,046,459 5,046,459
Goodwill, net of accumulated amortization of $936,946 2,361,472 2,361,472
Patents and capitalized software development, net of accumulated
amortization of $848,082 and $818,065, respectively 462,808 489,860
Other assets 717,746 691,042
----------- -----------
Total other assets 8,588,485 8,588,833
----------- -----------
TOTAL $20,166,594 $20,156,027
=========== ===========
See accompanying notes to unaudited consolidated financial statements.
3
METRETEK TECHNOLOGIES, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(unaudited)
MARCH 31, DECEMBER 31,
LIABILITIES AND STOCKHOLDERS' EQUITY 2002 2001
------------ ------------
CURRENT LIABILITIES:
Accounts payable $ 1,024,570 $ 1,405,632
Accrued and other liabilities 2,625,558 1,964,513
Notes payable 2,479,362 2,479,172
------------ ------------
Total current liabilities 6,129,490 5,849,317
------------ ------------
LONG-TERM NOTES PAYABLE 1,341,883 1,268,024
------------ ------------
COMMITMENTS AND CONTINGENCIES
REDEEMABLE PREFERRED STOCK - SERIES B,
$.01 PAR VALUE; 1,000,000 SHARES AUTHORIZED;
7,000 ISSUED AND OUTSTANDING;
REDEMPTION VALUE $1,000 PER SHARE 7,881,365 7,680,217
------------ ------------
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;
6,077,764 shares issued and outstanding 60,778 60,778
Additional paid-in-capital 55,116,789 55,116,789
Accumulated other comprehensive loss (66,718) (65,935)
Accumulated deficit (50,296,993) (49,753,163)
------------ ------------
Total stockholders' equity 4,813,856 5,358,469
------------ ------------
TOTAL $ 20,166,594 $ 20,156,027
============ ============
See accompanying notes to unaudited consolidated financial statements.
4
METRETEK TECHNOLOGIES, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
(unaudited)
THREE MONTHS ENDED
MARCH 31,
---------------------------
2002 2001
----------- -----------
REVENUES:
Sales and services $ 6,404,530 $ 4,888,983
Other (3,247) 259,587
----------- -----------
Total revenues 6,401,283 5,148,570
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COSTS AND EXPENSES:
Cost of sales and services 4,704,524 3,738,727
General and administrative 1,336,188 1,402,985
Selling, marketing and service 346,561 342,659
Depreciation and amortization 168,728 367,481
Research and development 144,761 137,907
Interest, finance charges and other 43,203 35,534
----------- -----------
Total costs and expenses 6,743,965 6,025,293
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OPERATING LOSS (342,682) (876,723)
INCOME TAXES - -
----------- -----------
NET LOSS (342,682) (876,723)
PREFERRED STOCK DEEMED DISTRIBUTION (201,148) (180,476)
----------- -----------
NET LOSS APPLICABLE TO COMMON SHAREHOLDERS $ (543,830) $(1,057,199)
=========== ===========
NET LOSS PER COMMON SHARE, BASIC AND DILUTED $ (0.09) $ (0.18)
=========== ===========
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING, BASIC AND DILUTED 6,077,764 5,908,067
=========== ===========
See accompanying notes to unaudited consolidated financial statements.
5
METRETEK TECHNOLOGIES, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(unaudited)
THREE MONTHS ENDED
MARCH 31,
--------------------------
2002 2001
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (342,682) $ (876,723)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization 168,728 367,481
Loss on disposal of property, plant and equipment 7,031
Changes in other assets and liabilities:
Trade receivables 761,698 575,259
Inventories 13,185 (438,925)
Other current assets (252,575) 449,271
Other noncurrent assets (26,704) 27,620
Accounts payable (381,062) 63,118
Accrued and other liabilities 660,262 (306,565)
----------- -----------
Net cash provided by (used in) operating activities 607,881 (139,464)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to capitalized software development (2,965) (204,609)
Purchases of property, plant and equipment (57,101) (7,895)
Proceeds from sale of property, plant and equipment 1,000
----------- -----------
Net cash used in investing activities (59,066) (212,504)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings on line of credit 75,916 767,878
Payments on mortgage loan and capital lease obligations (1,867) (12,301)
----------- -----------
Net cash provided by financing activities 74,049 755,577
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NET INCREASE IN CASH AND CASH EQUIVALENTS 622,864 403,609
CASH AND CASH EQUIVALENTS AT
BEGINNING OF PERIOD 696,076 468,813
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CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 1,318,940 $ 872,422
=========== ===========
See accompanying notes to unaudited consolidated financial statements.
6
METRETEK TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
As of March 31, 2002 and December 31, 2001 and
For the Three Month Periods Ended March 31, 2002 and 2001
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"), Metretek, Incorporated ("Metretek Florida"), 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, 2001.
REVENUE RECOGNITION - During the initial startup period of
PowerSecure's operations in 2001, the Company used the completed-contract method
of revenue recognition for PowerSecure's contracts. Under the completed-contract
method, revenue is recognized when a project or contract is completed or
substantially completed. Effective January 1, 2002, the Company elected to
change its method of accounting for PowerSecure's contracts to the
percentage-of-completion method of accounting. Under the
percentage-of-completion method of accounting, PowerSecure recognizes project
revenues (and associated project costs) based on estimates of the value added
for each portion of the projects completed. Revenues and gross profit are
adjusted prospectively for revisions in estimated total contract costs and
contract values. Estimated losses, if any, are recorded when identified. Amounts
billed to customers in excess of revenues recognized to date are classified as
current liabilities. Management believes the percentage-of-completion method of
accounting results in a better matching of revenues and costs to the period in
which the earnings process occurs and the costs are actually incurred.
As a result of the adoption of the new accounting method described
above, sales and service revenues for the three months ended March 31, 2002
increased $1,506,774 and net loss for the period ended March 31, 2002 decreased
$379,051, or $0.06 per share. There was no financial statement effect on any
period prior to December 31, 2001, as a result of the adoption of the new
accounting method, due to the short-term nature of PowerSecure's contracts
through December 31, 2001.
GOODWILL AND OTHER INTANGIBLE ASSETS - Effective January 1, 2002, the
Company adopted the provisions of Statement of Financial Accounting Standards
("FAS") No. 141, "Business Combinations" and FAS No. 142 "Goodwill and Other
Intangible Assets." These pronouncements significantly modify the accounting for
business combinations, goodwill, and intangible assets. FAS 141 eliminates the
pooling-of-interests method of
7
accounting for business combinations and further clarifies the criteria to
recognize intangible assets separately from goodwill. FAS 142 states that
goodwill and intangible assets with indefinite lives are no longer amortized but
are reviewed for impairment annually (or more frequently if impairment
indicators arise). Separable intangible assets that do not have an indefinite
life continue to be amortized over their estimated useful lives. The Company has
not yet determined the financial impact that the impairment provisions of FAS
142 will have on its consolidated financial statements. Any impairment charge
resulting from the transitional impairment testing will be reflected as a
cumulative effect of a change in accounting principle.
The following table reflects unaudited pro forma results of operations
of the Company, giving effect to FAS 142 as if it were adopted on January 1,
2001:
THREE MONTHS
ENDED
MARCH 31, 2001
--------------
Net loss applicable to common shareholders, as reported $(1,057,199)
Add back: amortization expense, net of tax 164,738
-----------
Pro forma net loss applicable to common shareholders $ (892,461)
===========
Net loss per common share, basic and diluted
As reported $ (0.18)
===========
Pro forma $ (0.15)
===========
RECLASSIFICATION - Certain 2001 amounts have been reclassified to
conform to current year presentation. Such reclassifications had no impact on
the Company's net loss or stockholders' equity.
In the opinion of the Company's management, all adjustments (all of
which are normal and recurring) have been made which are necessary for a fair
presentation of the consolidated financial position of the Company and its
subsidiaries as of March 31, 2002 and the consolidated results of their
operations and cash flows for the three month periods ended March 31, 2002 and
March 31, 2001.
2. COMPREHENSIVE LOSS
The Company's comprehensive loss for the three months ended March 31,
2002 and 2001 was $343,465 and $872,314, respectively. The Company's
comprehensive loss includes net loss and foreign currency translation
adjustments.
3. COMMITMENTS AND CONTINGENCIES
On January 5, 2001, Douglas W. Heins, individually and on behalf of a
class of other persons similarly situated (the "Class Action Plaintiff"), filed
a complaint (the "Class Action") in the District Court for the City and County
of Denver, Colorado (the
8
"Denver Court") against the "Company, Marcum Midstream 1997-1 Business Trust
(the "1997 Trust"), Marcum Midstream-Farstad, LLC ("MMF"), 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
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 1997 Trust is an energy program of
which MGT, a wholly-owned subsidiary of the Company, is the managing trustee,
and Messrs. Marcum, Wanger and Farstad are or were the active trustees.
The 1997 Trust raised approximately $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 Midland, Texas.
The Class Action alleges that the Metretek Defendants and the Farstad Defendants
(collectively, the "Class Action Defendants"), either directly or as
"controlling persons", violated certain provisions of the Colorado Securities
Act in connection with the sale of interests in the 1997 Trust. Specifically,
the Class Action Plaintiff claims that his and the class's damages resulted from
the Class Action Defendants allegedly negligently, recklessly or intentionally
making false and misleading statements, failing to disclose material
information, and willfully participating in a scheme or conspiracy and 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 1997 Trust's units. The damages sought
in the Class Action include compensatory and punitive damages, interest,
attorneys' fees and other costs.
On May 11, 2001, the Denver Court granted in part the Class Action
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 in further any of securities violations, as to all Class Action
Defendants except MCR. The Denver Court also granted a motion to dismiss the
claims against the Farstad Entities.
On May 24, 2001, the Metretek Defendants filed answers to the Class
Action, generally denying its allegations and claims and making cross-claims
against the Farstad Defendants. The Metretek Defendants have filed additional
cross-claims and third party complaints against the Farstad Defendants alleging
fraud, negligent misrepresentation and contractual indemnification and
contribution, among other claims. The Farstad Defendants have filed answers
generally denying these claims and have asserted cross-claims and third party
counter-claims against the Metretek Defendants. The Metretek Defendants have
denied the allegations of the Farstad Defendants.
On September 28, 2001, the Denver Court granted the Class Action
Plaintiff's motion to certify a class consisting of all investors in the 1997
Trust. Ten investors, representing a net investment of approximately $288,000,
have opted out of the class. These investors are pursuing a separate lawsuit in
California as described below. As of
9
the date of this Report, a trial date had not been set in the Class Action and
no significant discovery had been conducted.
On May 30, 2001, 21 individual plaintiffs including Michael Mongiello
and Charlotte Mongiello, trustees of the Mongiello Family Trust dated 8/1/90
(the "Mongiello Plaintiffs"), filed, and subsequently served, a first amended
complaint (the "Mongiello Case") in the Superior Court in the State of
California for the County of San Diego (the "California Court) against the
Metretek Defendants, the Farstad Defendants, United Pacific Securities, Inc.,
GBS Financial Corporation, IFG Network Securities, Inc., and numerous officers,
directors, employees and brokers related to such brokerage houses (the
"California Defendants"). The Mongiello Case contains allegations against the
Metretek Defendants similar to those contained in the Class Action. The net
investment in the 1997 Trust by the Mongiello Plaintiffs is approximately
$542,000. The Mongiello Plaintiffs' claims for relief include breach of
fiduciary duty, sale of securities in violation of California blue sky laws,
fraud and deceit, negligent misrepresentation and omission, mutual mistake,
rescission, negligence, fraud on senior citizens and declaratory relief. The
Mongiello Plaintiffs seek, among other things, compensatory damages, interest,
attorneys' fees, rescission and restitution, punitive and exemplary damages, a
declaratory judgment and other damages.
On October 5, 2001, the California Court granted the motion by the
Metretek Defendants to dismiss the claims against Metretek Technologies, 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, MGT, MCR,
MMF, Mr. Packard and the 1997 Trust, as the remaining Metretek Defendants, filed
an answer generally denying the allegations and claims in the Mongiello Case. On
or about March 29, 2002, the California Court granted this motion. The net
investment of the remaining Mongiello Plaintiffs is approximately $288,000.
These remaining Mongiello Plaintiffs have opted out of the Class Action. As of
the date of this Report, only limited discovery has been conducted. A trial has
been set to commence after the trial call scheduled for March 4, 2003.
In January 2002, six individual plaintiffs including Glenn Puddy (the
"Puddy Plaintiffs") served a complaint (the "Puddy Case") in the California
Court against the same defendants as in the Mongiello Case, containing
allegations, legal claims and damages similar to those in the Mongiello Case.
The Puddy Plaintiffs and the Mongiello Plaintiffs have the same legal counsel.
The net investment of the Puddy Plaintiffs in the 1997 Trust was approximately
$89,000. All of the Metretek Defendants have been dismissed from the Puddy Case
for lack of personal jurisdiction. A motion by the Puddy Plaintiffs to
consolidate the Puddy Case with the Mongiello Case, or to allow the Mongiello
Plaintiffs to amend their complaint to add the Puddy Plaintiffs as additional
plaintiffs, was denied. The Puddy Plaintiffs have indicated that they intend to
appeal these rulings.
10
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 its business, financial position or results of operations.
The Company intends to vigorously defend the claims against us and the other
Metretek Defendants and to vigorously pursue appropriate cross-claims and third
party complaints. However, an adverse judgment against the Company in the
foregoing litigation could have a material adverse effect on its business,
financial condition and results of operations.
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 it. 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 the Company's business, financial condition or
results of operations.
4. 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; automated energy data management;
and (until April 1, 2001) 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. 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 service packages directly to large end-users of electricity, either
on a "turn-key" customer-owned basis or through its recently commenced
"company-owned" platform, involving distributed generation systems that are
owned by PowerSecure and leased to customers on a long-term basis, and 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
11
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. Effective
April 1, 2001, PowerSpring's business was restructured and the remaining limited
business was transferred to Metretek Florida, and since that date the Company
has included and reported the remnants of the Internet-based energy information
business of PowerSpring with Metretek Florida's automated data management
segment.
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. Amounts
are reported in thousands.
Internet-based
Natural Gas Automated Energy
Measurement Distributed Energy Data Information
Services Generation Management and Services Other Total
MARCH 31, 2002
Revenues $ 3,131 $ 1,613 $ 1,660 $ $ (3) $ 6,401
Segment profit (loss) 505 (81) (276) (491) (343)
Total assets 9,556 2,349 6,748 1,514 20,167
Capital expenditures 38 4 9 9 60
Depreciation and amortization 36 11 117 5 169
MARCH 31, 2001
Revenues $ 3,290 $ 1,365 $ 234 $ 260 $ 5,149
Segment profit (loss) 382 $ (231) (232) (287) (509) (877)
Total assets 9,662 491 6,836 2,943 949 20,881
Capital expenditures 4 209 213
Depreciation and amortization 152 145 66 4 367
12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
INTRODUCTION
The following discussion of our results of operations for the three
month periods ended March 31, 2002 (referred to herein as the "first quarter
2002") and 2001 (referred to herein as the "first quarter 2001") and of our
financial condition as of March 31, 2002 should be read in conjunction with our
consolidated financial statements and related notes thereto included elsewhere
in this report.
SIGNIFICANT ACCOUNTING POLICIES
We prepare our consolidated financial statements in conformity with
accounting principles generally accepted in the United States of America. As
such, we are required to make certain decisions, judgments, estimates and
assumptions that we believe are reasonable based upon the information available
that affect the reported amounts of assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses during
the periods presented. These decisions include the selection of the appropriate
accounting principles to be applied and the assumptions on which to base
accounting estimates. In reaching such decisions, management applies judgment
based on its understanding and analysis of the relevant circumstances. Note 1 to
our consolidated financial statements contained in our Annual Report on Form
10-KSB for the year ended December 31, 2001 and Note 1 to our consolidated
financial statements for the three months ended March 31, 2002 contained
elsewhere in this Report provides a summary of the significant accounting
policies followed in the preparation of our consolidated financial statements.
Other notes to our consolidated financial statements describe various elements
of our consolidated financial statements and the assumptions on which specific
amounts were determined. While actual results could differ from those estimated
at the time of preparation of our consolidated financial statements, management
is committed to preparing financial statements that incorporate accounting
policies, assumptions and estimates that promote the representational
faithfulness, verifiability, neutrality and transparency of the accounting
information included in the consolidated financial statements.
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.
13
Three Months Ended
March 31,
---------------------------
2002 2001
------- -------
(amounts in thousands)
REVENUES:
Southern Flow $ 3,131 $ 3,290
PowerSecure 1,613 -
Metretek Florida 1,660 1,365
PowerSpring - 234
Other (3) 260
------- -------
Total $ 6,401 $ 5,149
======= =======
GROSS PROFIT:
Southern Flow $ 835 $ 823
PowerSecure 380 -
Metretek Florida 485 482
PowerSpring - (154)
------- -------
Total $ 1,700 $ 1,151
======= =======
SEGMENT PROFIT (LOSS):
Southern Flow $ 505 $ 382
PowerSecure (81) (231)
Metretek Florida (276) (232)
PowerSpring - (287)
Other (491) (509)
------- -------
Total $ (343) $ (877)
======= =======
Our reportable segments are strategic business units that offer
different products and services. They are managed separately because each
business requires different technology and marketing strategies.
Our reportable business segments include: natural gas measurement
services; distributed generation; automated energy data management; and (until
April 1, 2001) 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 switchgear design and installation, and ongoing project
monitoring and servicing. PowerSecure markets its distributed generation service
packages directly to large end-users of
14
electricity, either on a "turn-key" customer-owned basis or through its recently
commenced "company-owned" platform, involving distributed generation systems
that are owned by PowerSecure and leased to customers on a long-term basis, and
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. Effective April 1,
2001, PowerSpring's business was restructured and the remaining limited business
was transferred to Metretek Florida, and since that date we have included and
reported the remnants of the Internet-based energy information business of
PowerSpring with Metretek Florida's automated data management segment.
We evaluate the performance of our operating segments based on income
(loss) before income taxes, nonrecurring items and interest income and expense.
Other profit (loss) amounts in the table above include corporate related items,
results of insignificant operations, and income and expense not allocated to its
operating segments. Intersegment sales are not significant.
FIRST QUARTER 2002 COMPARED TO FIRST QUARTER 2001
Revenues. Our revenues are derived almost entirely from the sales of
products and services by our subsidiaries. Our consolidated revenues for the
first quarter 2002 increased $1,253,000, or 24.3%, compared to the first quarter
2001. The increase was primarily due to the generation of revenue by PowerSecure
and an increase in revenues by Metretek Florida, partially offset by a decrease
in revenues by Southern Flow and PowerSpring. PowerSecure generated revenues of
$1,613,000 during the first quarter 2002. There were no comparable revenues for
PowerSecure during the first quarter 2001 because PowerSecure did not commence
revenue generating operations until after the first quarter 2001. Metretek
Florida's revenues increased $295,000, or 21.6%, during the first quarter 2002
compared to the first quarter 2001, consisting of an increase in domestic sales
of $175,000 and an increase in international sales of $120,000. The increase in
Metretek Florida's domestic sales was primarily due to an increase in sales of
remote data collection products and systems to one natural gas distribution
company located in the Midwest. The increase in international sales is
attributable to an increase in sales of Metretek Florida's remote data
collection products and systems in Canada. A comparison of Metretek Florida's
current domestic and international product mix is as follows:
15
THREE MONTHS ENDED MARCH 31,
----------------------------
2002 2001
---- ----
(dollar amounts in thousands)
Remote data collection
products and systems $1,282 77% $884 65%
Electronic corrector products 305 19% 418 31%
Circuit board assembly sales 73 4% 63 4%
----- ------
Total $1,660 $1,365
===== ======
Southern Flow's revenues decreased $159,000, or 4.8% during the first quarter
2002, compared to the first quarter 2001, primarily due to a decrease in
equipment sales which was partially offset by an increase in chart processing
and analysis revenues. The reduction in equipment sales was due primarily to a
reduction in customer requirements for such equipment during the first quarter
2002. PowerSpring's revenues decreased by $488,000 during the first quarter
2002, compared to the first quarter 2001, which included approximately $255,000
in other revenues related to the termination of PowerSpring effective March 31,
2001. PowerSpring's monitoring products and services, now operated by Metretek
Florida, generated approximately $16,000 of domestic revenues at Metretek
Florida during the first quarter 2002.
Costs and Expenses. Costs of sales and services include materials,
personnel and related overhead costs incurred to manufacture products and
provide services. Cost of sales and services for the first quarter 2002
increased $966,000, or 25.8%, compared to the first quarter 2001, almost
entirely attributable to the operations of PowerSecure, and resulting sales and
expenses in the first quarter 2002, that commenced after the first quarter 2001.
PowerSecure's gross profit margin after costs of sales and services was 23.6%
for the first quarter 2002. Metretek Florida's cost of sales and services for
the first quarter 2002 increased $292,000, or 33.1%, compared to the first
quarter 2001. This increase reflects both increased sales and higher materials,
personnel and related overhead costs attributable to sales of its remote data
collection products and systems. As a result, Metretek Florida's overall gross
profit margin decreased to 29.2% for the first quarter 2002, compared to 35.3%
for the first quarter 2001. Southern Flow's cost of sales and services for the
first quarter 2002 decreased $171,000, or 6.9%, compared to the first quarter
2001, almost entirely attributable to decreased equipment sales. Southern Flow's
gross profit margin after costs of sales and services increased slightly to
26.7% for the first quarter 2002 compared to 25.0% for the first quarter 2001.
The increase in Southern Flow's gross profit margin reflects slightly higher
margins on increased chart processing and analysis revenues offset by the
decreased equipment sales, which generally have lower gross profit margins.
PowerSpring's costs of sales and services decreased by $388,000 during the first
quarter 2002, compared to the first quarter 2001 due to the termination of
PowerSpring as a separate operating entity effective March 31, 2001.
16
General and administrative expenses include personnel and related
overhead costs for the support and administrative functions. General and
administrative expenses for the first quarter 2002 decreased $67,000, or 4.8%,
compared to the first quarter 2001, due primarily to reduced corporate overhead
costs; reduced personnel, travel and overhead costs at Metretek Florida; and the
2001 termination of PowerSpring. These reductions were partially offset by
increased overhead costs associated with the continued development of the
business of PowerSecure during the first quarter 2002.
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 first quarter 2002 increased $4,000, or 1.1%,
compared to the first quarter 2001. The slight increase in selling, marketing
and service expenses is due to the offsetting effects of the following:
(i) an increase in selling and marketing costs at Metretek Florida due to
increased sale activity; (ii) an increase in selling and marketing costs related
to the continued business development activities of PowerSecure; and (iii) a
decrease in selling and marketing costs resulting from the 2001 termination of
PowerSpring.
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. Prior to the required adoption of
Statement of Financial Accounting Standards ("FAS") No. 142 "Goodwill and Other
Intangible Assets" on January 1, 2002, Southern Flow and Metretek Florida also
amortized other intangible assets with indefinite useful lives including
customer list and goodwill. Depreciation and amortization expenses for the first
quarter 2002 decreased $199,000, or 54.1%, compared to the first quarter 2001.
The decrease in depreciation and amortization expense primarily reflects a
reduction of amortization expense in the amount of $116,000 and $49,000 at
Southern Flow and Metretek Florida, respectively, related to goodwill and other
intangible assets with indefinite useful lives, which are no longer amortized
under FAS 142. The remaining decrease is due primarily to reduced depreciation
on surplus property plant and equipment items previously held by PowerSpring
prior to its termination that was disposed of throughout 2001.
Research and development expenses include payments to third parties,
personnel and related overhead costs for product and service development,
enhancements, upgrades, testing, and quality assurance. Research and development
expenses for the first quarter 2002 increased $7,000, or 5.0%, compared to the
first quarter 2001. The slight increase is due entirely to personnel related
product development expenses 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.
Interest, finance charges and other expenses for the first quarter 2002
increased $8,000, or 21.6%, compared to the first quarter 2001. The increase
reflects increased borrowings throughout the first three months of 2002 compared
to the same period in 2001.
17
QUARTERLY FLUCTUATIONS
Our quarterly revenues, expenses, margins, net income and other
operating results have fluctuated significantly from quarter-to-quarter and from
year-to-year in the past and are expected to continue to fluctuate significantly
in the future due to a variety of factors, many of which are outside of our
control. These factors include, without limitation, the following:
- the size, timing and terms of sales and orders, including customers
delaying, deferring or canceling purchase orders, or making smaller
purchases than expected;
- our ability to implement our business plans and strategies and the
timing of such implementation;
- the timing, pricing and market acceptance of our new products and
services, and those of our competitors;
- the pace of development of our new businesses;
- the success of our brand building and marketing campaigns for our
PowerSecure and PowerSpring products and services;
- the growth of the market for distributed generation systems 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;
- changes in the mix of products and services having differing margins;
- changes in the mix of international and domestic revenues;
- the life cycles of our products and services;
- budgeting cycles of utilities;
- general economic and political conditions;
- economic conditions in the energy industry, especially in the natural
gas and electricity sectors;
- the effects of governmental regulations and regulatory changes in our
current and new 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
18
could negatively affect our business and results of operations.
Our revenues and other operating results depend 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.
PowerSecure's operations generated revenues for the first time during
the second quarter of 2001. Although PowerSecure has a limited operating
history, we expect the revenues, costs, gross margins, cash flow, net income 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, and to a lesser extent the timing of the completion of those
projects. In addition, distributed generation is an emerging market and
PowerSecure is a new competitor in the market, so there is no established
customer base on which to rely or certainty as to future contracts. Another
factor that could cause material fluctuations in PowerSecure's quarterly results
is the amount of recurring, as opposed to non-recurring, sources of revenue.
Through March 31, 2002, virtually all of PowerSecure's revenues constituted
non-recurring revenues, but a greater proportion of PowerSecure's revenues will
be from recurring sources in future years if PowerSecure is able to successfully
develop and market its "company-owned" business platform.
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.
Due to all of these factors and the other risks discussed in this
Report, you should not rely on quarter-to-quarter or year-to-year comparisons of
our results of operations as an indication of our future performance. Quarterly
or annual comparisons of our operating results are not necessarily meaningful or
indicative of future performance.
LIQUIDITY AND CAPITAL RESOURCES
We require capital primarily to finance our:
- operations;
19
- inventory;
- accounts receivable;
- research and development efforts;
- property and equipment acquisitions;
- software development;
- debt service requirements; and
- business and technology acquisitions and other growth transactions.
In addition, we anticipate that PowerSecure's capital requirements may
increase significantly in fiscal 2002 in order to fund its purchases of
equipment and technology to be used in its "company-owned" distributed
generation systems.
We have historically financed our operations and growth primarily
through a combination of cash on hand, cash generated from operations,
borrowings under credit facilities, and proceeds from private and public sales
of equity. As of March 31, 2002, we had working capital of $3,357,000, including
$1,319,000 in cash and cash equivalents, compared to working capital of
$3,537,000 on December 31, 2001, which included $696,000 in cash and cash
equivalents. Our working capital balances at March 31, 2002 and December 31,
2001 have each been reduced by the balance of the note payable (the "Scient
Note") to Scient Corporation ("Scient"). The amount due under the Scient Note is
in dispute, and we do not believe we owe Scient any further amounts thereunder.
However, due to the March 31, 2002 stated maturity date of the Scient Note, the
entire balance of the Scient Note ($2.5 million) is carried on our consolidated
financial statements as a current liability as of March 31, 2002 and December
31, 2001, even though Scient has indefinitely stayed our obligation to make any
further payments on the Scient Note pending resolution of the dispute. Until
this dispute is finally resolved, we cannot predict the amount, if any, of any
further payments we will be required to make under the Scient Note, or the
effects of such resolution on our liquidity, financial condition or results of
operations.
Net cash provided by operating activities was $608,000 for the three
months ended March 31, 2002, consisting of approximately $775,000 of cash
provided by changes in working capital and other asset and liability accounts,
and approximately $167,000 of cash used in operations, before changes in assets
and liabilities. This compares to net cash used in operating activities of
$139,000 during the same period in 2001, of which $509,000 was attributable to
cash used in operations, before changes in assets and liabilities, and $370,000
was provided by changes in working capital and other asset and liability
accounts.
Net cash used by investing activities was $59,000 for the three months
ended March 31, 2002, as compared to $213,000 during the same period in 2001.
The majority of the net cash used by investing activities during the three
months ended March 31, 2002 was attributable to the purchase of equipment items
at Southern Flow and Metretek Florida. The reduction in net cash used by
investment activities compared to the same period in 2001 was attributable to a
reduction in capitalized software development costs.
20
Net cash provided by financing activities was $74,000 for the three
months ended March 31, 2002, compared to net cash provided by financing
activities of $756,000 during the same period in 2001. The net cash used by
financing activities during the three months ended March 31, 2002 represented an
increase in borrowings on our credit facility. Virtually all of the net cash
provided by financing activities during the comparable period in 2001 was
attributable to borrowings on our line of credit to fund PowerSecure's initial
operating activities and to fund software development costs.
During the remainder of 2002, we plan to continue our research and
development efforts to enhance our existing products and services and to develop
new products and services. Our research and development expenses totaled
$145,000 during the three months ended March 31, 2002. We anticipate that our
research and development expenses in fiscal 2002 will total approximately
$600,000, virtually all of which will be directed to Metretek Florida's
business.
Our capital expenditures during the three months ended March 31, 2002
were approximately $60,000. We anticipate capital expenditures in fiscal 2002 of
approximately $250,000, primarily for the purchase of equipment to be used in
Southern Flow's and PowerSecure's businesses. However, the development of
PowerSecure's "company-owned" business will require and depend upon us raising
substantial additional capital. We cannot provide any assurance we will be
successful in raising additional capital, or that the amount of any additional
capital that we are able to raise will be sufficient to allow PowerSecure to
meet our objectives for its growth and development or will be on favorable
terms.
In September 2001, Southern Flow entered into a Credit and Security
Agreement (the "Credit Agreement") with Wells Fargo Business Credit, Inc.,
providing for a $2,000,000 credit facility (the "Credit Facility"). As of March
31, 2002, Southern Flow had a borrowing base of $1,587,131 under the Credit
Facility, of which $1,101,686 had been borrowed (and of that amount,
approximately $756,000 had been advanced to fund the business of PowerSecure),
leaving $485,445 in unused Credit Facility availability.
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 the Credit Facility and funds expected to
be generated from our operations, will be sufficient to meet our anticipated
cash needs during the next 12 months, including our working capital needs,
capital requirements and debt service commitments, other than the development of
the "company-owned" business of PowerSecure. However, 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. We cannot provide
any assurance that these sources of liquidity will be available when needed or
that our actual cash requirements will not be greater than we currently expect.
In addition, an adverse resolution related to the dispute as to the amount we
owe under the Scient Note could also significantly increase our cash
requirements beyond our available capital resources. Accordingly, we may require
additional funds to support our working capital requirements, our operations or
our other cash flow needs.
21
We expect that the development and growth of PowerSecure, including
equipment and other capital costs of developing distributed generation systems
for its company-owned business package, will require us to raise significant
additional funds, beyond our current capital resources. In addition, from time
to time as part of our business plan, we engage in discussions regarding
potential acquisitions of businesses and technologies. While our ability to
finance future acquisitions will probably require us to raise additional
capital, as of the date of this Report, we have not entered into any agreement
committing us to any such acquisition. In addition, we continually evaluate our
cash flow requirements as well as our opportunity to raise additional capital in
order to improve our financial position. 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.
Our ability to obtain additional capital when needed or desired will
depend on many factors, including general economic and market conditions, our
operating performance and investor sentiment, and thus cannot be assured. In
addition, depending on how it is structured, a capital raising financing could
require the consent of the Lender or of the holders of our Series B Preferred
Stock or both. 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 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 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 favorable terms could have a
material adverse effect on our business, financial condition and results of
operations.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board ("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 recognition of intangible assets acquired in a
business combination separately from goodwill and requires unallocated negative
goodwill to be written off immediately as an extraordinary gain. FAS 141 is
applicable to all business combinations initiated after June 30, 2001.
In June 2001, the FASB also issued FAS No. 142 "Goodwill and Other
Intangible Assets". FAS 142 addresses accounting and reporting for intangible
assets acquired and the accounting and reporting for goodwill and other
intangible assets subsequent to their
22
acquisition. Under the provisions of FAS 142, goodwill and intangible assets
with indefinite lives are no longer amortized but rather are tested at least
annually for impairment. Separable intangible assets that do not have an
indefinite life continue to be amortized over their estimated useful lives.
We adopted the provisions of FAS 141 and 142 effective January 1, 2002.
The non-amortization provisions of FAS 142 resulted in a $165,000 reduction in
our net loss applicable to common shareholders in the first quarter 2002, and is
expected to reduce our full-year net loss or increase our full-year net income
applicable to common shareholders by approximately $675,000. We have not yet
determined the financial impact that the impairment provisions of FAS 142 will
have on our consolidated financial statements. Any impairment charge resulting
from the transitional impairment testing will be reflected as a cumulative
effect of a change in accounting principle.
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 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. We adopted the provisions of FAS 144 effective January
1, 2002. Adoption of FAS 144 had no effect on our financial position or results
of operations.
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report on 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. 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", "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, beliefs and expectations about the
following:
23
- our prospects, including our future revenues, expenses, net
income, margins, profitability, cash flow, liquidity, financial
condition and results of operations;
- our products and services, market position, market share, growth
and strategic relationships;
- our business plans, strategies, goals and objectives;
- market demand for and customer benefits attributable to our
products and services;
- industry trends and customer preferences;
- the nature and intensity of our competition, and our ability
to successfully compete in our market;
- the sufficiency of funds, from operations, available borrowings
and other capital resources, to meet our future working capital,
capital expenditure, debt service and business growth needs;
- pending or potential business acquisitions, combinations, sales,
alliances, relationships and other similar business transactions;
- our ability to successfully develop and operate our PowerSecure
business;
- the effects on our financial condition and results of operations
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 prove incorrect or by known or unknown risks, uncertainties
and other factors that could cause actual results to differ materially from
those expressed, anticipated or implied by such forward-looking statements.
These risks, uncertainties and other factors include, but are not limited to,
the following:
- our history of losses and no assurance of future profitability;
- our ability to obtain, on favorable terms if at all, and to
maintain a sufficient amount 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, market and
operate PowerSecure's systems, including its products, services,
and technologies, and also including new and future platforms and
offerings;
- the effects of pending and future lawsuits, including the
expenses of defending claims against us and the effects of the
ultimate resolution thereof;
- our lack of operating history in our new businesses and the
unproven business models in our PowerSecure business;
- the complexity, uncertainty and time constraints associated with
the
24
development and market acceptance of new product and service
designs and technologies;
- the effects of intense competition in our markets, including the
introduction of competitors' products, services and technologies
and our timely and successful response thereto, and our ability
to successfully compete in those markets;
- utility purchasing patterns and delays and potential changes to
the federal and state regulatory frameworks within which the
utility industry operates;
- fluctuations in our operating results, and the long and variable
ales cycles of many of our products and services;
- restrictions imposed on us by the terms of our Series B Preferred
Stock and our Credit Facility;
- the effects and timing of the resolution of any dispute with
Scient over payment obligations;
- the negative effect that dividends on our Series B Preferred
Stock have on our results of operations;
- the effect of rapid technologic changes on our ability to
maintain competitive products, services and technologies;
- our ability to attract, retain and motivate key management,
technical and other critical personnel;
- our ability to secure and maintain key contracts, business
relationships and alliances;
- our ability to make successful acquisitions and in the future to
successfully integrate and utilize any acquired product lines,
key employees and businesses;
- changes in the energy industry in general, and technological and
market changes in the natural gas and electricity industries in
particular;
- the impact and timing of the deregulation of the natural gas and
electricity markets;
- our ability to manage the anticipated growth of PowerSecure;
- 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, 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 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 technology, including our proprietary
information, and
25
our intellectual property rights;
- the effects of recent terrorist activities and resulting military
and other actions;
- the effects of the potential delisting of the Common Stock from
the Nasdaq National Market;
- 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; 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 filings with the SEC and the exhibits to such
filings, including but not limited to our Annual Report on Form
10-KSB for the fiscal year ended December 31, 2001.
Any forward-looking statements contained herein speak only as of the
date of this Report, and any other forward-looking statements we make from time
to time in the future speaks only as of the date it is made. We do not intend,
and we undertake no duty or obligation, to update or revise any forward-looking
statement for any reason, whether as a result of changes in our expectations or
the underlying assumptions, new information, future or unanticipated events,
circumstances or conditions or otherwise.
26
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On January 5, 2001, Douglas W. Heins, individually and on behalf of a
class of other persons similarly situated (the "Class Action Plaintiff"), filed
a complaint (the "Class Action") in the District Court for the City and County
of Denver, Colorado (the "Denver Court") against Metretek Technologies, Inc.
(the "Company"), Marcum Midstream 1997-1 Business Trust (the "1997 Trust"),
Marcum Midstream-Farstad, LLC ("MMF"), 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 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 1997 Trust is an energy program of which MGT, a wholly-owned
subsidiary of the Company, is the managing trustee, and Messrs. Marcum, Wanger
and Farstad are or were the active trustees.
The 1997 Trust raised approximately $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 Midland, Texas.
The Class Action alleges that the Metretek Defendants and the Farstad Defendants
(collectively, the "Class Action Defendants"), either directly or as
"controlling persons", violated certain provisions of the Colorado Securities
Act in connection with the sale of interests in the 1997 Trust. Specifically,
the Class Action Plaintiff claims that his and the class's damages resulted from
the Class Action Defendants allegedly negligently, recklessly or intentionally
making false and misleading statements, failing to disclose material
information, and willfully participating in a scheme or conspiracy and 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 1997 Trust's units. The damages sought
in the Class Action include compensatory and punitive damages, interest,
attorneys' fees and other costs.
On May 11, 2001, the Denver Court granted in part the Class Action
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 in further any of securities violations, as to all Class Action
Defendants except MCR. The Denver Court also granted a motion to dismiss the
claims against the Farstad Entities.
On May 24, 2001, the Metretek Defendants filed answers to the Class
Action, generally denying its allegations and claims and making cross-claims
against the Farstad
27
Defendants. The Metretek Defendants have filed additional cross-claims and third
party complaints against the Farstad Defendants alleging fraud, negligent
misrepresentation and contractual indemnification and contribution, among other
claims. The Farstad Defendants have filed answers generally denying these claims
and have asserted cross-claims and third party counter-claims against the
Metretek Defendants. The Metretek Defendants have denied the allegations of the
Farstad Defendants.
On September 28, 2001, the Denver Court granted the Class Action
Plaintiff's motion to certify a class consisting of all investors in the 1997
Trust. Ten investors, representing a net investment of approximately $288,000,
have opted out of the class. These investors are pursuing a separate lawsuit in
California as described below. As of the date of this Report, a trial date had
not been set in the Class Action and no significant discovery had been
conducted.
On May 30, 2001, 21 individual plaintiffs including Michael Mongiello
and Charlotte Mongiello, trustees of the Mongiello Family Trust dated 8/1/90
(the "Mongiello Plaintiffs"), filed, and subsequently served, a first amended
complaint (the "Mongiello Case") in the Superior Court in the State of
California for the County of San Diego (the "California Court) against the
Metretek Defendants, the Farstad Defendants, United Pacific Securities, Inc.,
GBS Financial Corporation, IFG Network Securities, Inc., and numerous officers,
directors, employees and brokers related to such brokerage houses (the
"California Defendants"). The Mongiello Case contains allegations against the
Metretek Defendants similar to those contained in the Class Action. The net
investment in the 1997 Trust by the Mongiello Plaintiffs is approximately
$542,000. The Mongiello Plaintiffs' claims for relief include breach of
fiduciary duty, sale of securities in violation of California blue sky laws,
fraud and deceit, negligent misrepresentation and omission, mutual mistake,
rescission, negligence, fraud on senior citizens and declaratory relief. The
Mongiello Plaintiffs seek, among other things, compensatory damages, interest,
attorneys' fees, rescission and restitution, punitive and exemplary damages, a
declaratory judgment and other damages.
On October 5, 2001, the California Court granted the motion by the
Metretek Defendants to dismiss the claims against Metretek Technologies, 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, MGT, MCR,
MMF, Mr. Packard and the 1997 Trust, as the remaining Metretek Defendants, filed
an answer generally denying the allegations and claims in the Mongiello Case. On
or about March 29, 2002, the California Court granted this motion. The net
investment of the remaining Mongiello Plaintiffs is approximately $288,000.
These remaining Mongiello Plaintiffs have opted out of the Class Action. As of
the date of this Report, only limited discovery has been conducted. A trial has
been set to commence after the trial call scheduled for March 4, 2003.
In January 2002, six individual plaintiffs including Glenn Puddy (the
"Puddy
28
Plaintiffs") served a complaint (the "Puddy Case") in the California Court
against the same defendants as in the Mongiello Case, containing allegations,
legal claims and damages similar to those in the Mongiello Case. The Puddy
Plaintiffs and the Mongiello Plaintiffs have the same legal counsel. The net
investment of the Puddy Plaintiffs in the 1997 Trust was approximately $89,000.
All of the Metretek Defendants have been dismissed from the Puddy Case for lack
of personal jurisdiction. A motion by the Puddy Plaintiffs to consolidate the
Puddy Case with the Mongiello Case, or to allow the Mongiello Plaintiffs to
amend their complaint to add the Puddy Plaintiffs as additional plaintiffs, was
denied. The Puddy Plaintiffs have indicated that they intend to appeal these
rulings.
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 its business, financial position or results of operations.
The Company intends to vigorously defend the claims against us and the other
Metretek Defendants and to vigorously pursue appropriate cross-claims and third
party complaints. However, an adverse judgment against the Company in the
foregoing litigation could have a material adverse effect on its business,
financial condition and results of operations.
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 it. 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 the Company's business, financial condition or
results of operations.
ITEM 5. OTHER INFORMATION
The Common Stock of the Company is listed and trades on the Nasdaq
National Market. On February 14, 2002, the Company received a notice from the
Nasdaq Stock Market that the Common Stock had failed to maintain compliance with
the $1.00 minimum bid price requirement and the $5 million public float
requirement for continued listing on the Nasdaq National Market. If the Company
is unable to regain compliance with these requirements by May 15, 2002, the
Common Stock will be subject to delisting from the Nasdaq National Market. At
that time, the Company can either apply to transfer the Common Stock listing to
the Nasdaq SmallCap Market, which is the Company's current intention, or appeal
Nasdaq's delisting determination. Since the Company's ability to fulfill the
listing requirements of the Nasdaq Stock Market is driven in large part by
market forces outside of its control, the Company cannot provide any assurance
that it will be able to regain compliance with the continued listing
requirements of the Nasdaq National Market or, if the Common Stock listing is
transferred to the Nasdaq Small Cap Market, to maintain compliance with the
listing requirements of the Nasdaq SmallCap Market. If the Company is not able
to maintain its listing on the Nasdaq National Market or, if the Common Stock
listing is transferred to the Nasdaq SmallCap Market, to maintain its listing
on Nasdaq SmallCap Market, then trading activity in the Common Stock could
decline significantly, which could cause the trading price of the Common Stock
to decline further.
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
18 Letter on Change in Accounting Principles
(b) FORM 8-K
The Company did not file any Current Reports on Form 8-K
during the quarter ended March 31, 2002.
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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: May 13, 2002 By: /s/ W. Phillip Marcum
-------------------------------------
W. Phillip Marcum
President and Chief Executive Officer
Date: May 13, 2002 By: /s/ A. Bradley Gabbard
-------------------------------------
A. Bradley Gabbard
Executive Vice President
and Chief Financial Officer
31