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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 JUNE 30, 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 August 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 JUNE 30, 2002
TABLE OF CONTENTS
Page
-----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Unaudited Consolidated Balance Sheets -
June 30, 2002 and December 31, 2001 3
Unaudited Consolidated Statements of Operations -
For the Three and Six Months Ended June 30, 2002
and June 30, 2001 5
Unaudited Consolidated Statements of Cash Flows -
For the Six Months Ended June 30, 2002 and
June 30, 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 31
Item 4. Submission of Matters to a Vote of Security Holders 31
Item 6. Exhibits and Reports on Form 8-K 31
Signatures 33
2
PART I.
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
METRETEK TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
JUNE 30, DECEMBER 31,
ASSETS 2002 2001
--------------------- ----------------------
CURRENT ASSETS:
Cash and cash equivalents $ 889,112 $ 696,076
Trade receivables, net of allowance for doubtful accounts
of $134,202 and $169,632, respectively 4,347,819 4,980,419
Other receivables 3,885 14,929
Inventories 3,052,932 3,135,297
Prepaid expenses and other current assets 592,517 559,562
----------- -----------
Total current assets 8,886,265 9,386,283
----------- -----------
PROPERTY, PLANT AND EQUIPMENT:
Equipment 3,944,139 4,150,686
Vehicles 50,227 50,227
Furniture and fixtures 578,625 561,664
Land, building and improvements 736,388 736,388
----------- -----------
Total property, plant and equipment, at cost 5,309,379 5,498,965
Less accumulated depreciation 3,307,076 3,318,054
----------- -----------
Property, plant and equipment, net 2,002,303 2,180,911
----------- -----------
OTHER ASSETS:
Customer list 5,046,459 5,046,459
Goodwill 2,361,472 2,361,472
Patents and capitalized software development, net of accumulated
amortization of $878,284 and $818,065, respectively 435,486 489,860
Other assets 513,205 691,042
----------- -----------
Total other assets 8,356,622 8,588,833
----------- -----------
TOTAL $19,245,190 $20,156,027
=========== ===========
See accompanying notes to unaudited consolidated financial statements.
3
METRETEK TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
JUNE 30, DECEMBER 31,
LIABILITIES AND STOCKHOLDERS' EQUITY 2002 2001
-------------------- --------------------
CURRENT LIABILITIES:
Accounts payable $ 1,683,183 $ 1,405,632
Accrued and other liabilities 2,010,239 1,964,513
Notes payable 2,479,557 2,479,172
------------ ------------
Total current liabilities 6,172,979 5,849,317
------------ ------------
LONG-TERM NOTES PAYABLE 1,111,188 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 8,085,682 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 (57,913) (65,935)
Accumulated deficit (51,244,313) (49,753,163)
------------ ------------
Total stockholders' equity 3,875,341 5,358,469
------------ ------------
TOTAL $ 19,245,190 $ 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 SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------------------- ---------------------------------
2002 2001 2002 2001
REVENUES:
Sales and services $ 6,066,460 $ 11,389,854 $ 12,470,990 $ 16,278,837
Other (3,875) 40,111 (7,122) 299,698
------------ ------------ ------------ ------------
Total revenues 6,062,585 11,429,965 12,463,868 16,578,535
------------ ------------ ------------ ------------
COSTS AND EXPENSES:
Cost of sales and services 4,464,326 8,758,759 9,168,850 12,497,486
General and administrative 1,370,724 1,362,290 2,706,912 2,765,275
Selling, marketing and service 376,071 333,273 722,632 675,932
Depreciation and amortization 163,492 374,533 332,220 742,014
Research and development 129,747 146,881 274,508 284,788
Interest, finance charges and other 43,724 45,286 86,927 80,820
Nonrecurring charges 257,504 -- 257,504 --
------------ ------------ ------------ ------------
Total costs and expenses 6,805,588 11,021,022 13,549,553 17,046,315
------------ ------------ ------------ ------------
OPERATING (LOSS) INCOME (743,003) 408,943 (1,085,685) (467,780)
INCOME TAXES -- -- -- --
------------ ------------ ------------ ------------
NET (LOSS) INCOME (743,003) 408,943 (1,085,685) (467,780)
PREFERRED STOCK
DEEMED DISTRIBUTION (204,317) (180,477) (405,465) (360,953)
------------ ------------ ------------ ------------
NET (LOSS) INCOME APPLICABLE
TO COMMON SHAREHOLDERS $ (947,320) $ 228,466 $ (1,491,150) $ (828,733)
============ ============ ============ ============
NET (LOSS) INCOME PER COMMON
SHARE, BASIC AND DILUTED $ (0.16) $ 0.04 $ (0.25) $ (0.14)
============ ============ ============ ============
WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING,
BASIC AND DILUTED 6,077,764 6,059,116 6,077,764 5,984,009
============ ============ ============ ============
See accompanying notes to unaudited consolidated financial statements.
5
METRETEK TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
SIX MONTHS ENDED
JUNE 30,
---------------------------
2002 2001
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(1,085,685) $ (467,780)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation and amortization 332,220 742,014
Loss on disposal of property, plant and equipment 7,772 80,857
Changes in other assets and liabilities:
Trade receivables 632,600 819,004
Inventories 82,365 (58,578)
Other current assets (21,911) 105,491
Other noncurrent assets 177,837 146,794
Accounts payable 277,551 507,212
Accrued and other liabilities 53,748 343,998
----------- -----------
Net cash provided by operating activities 456,497 2,219,012
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to capitalized software development (5,845) (421,511)
Purchases of property, plant and equipment (102,165) (88,521)
Proceeds from sale of property, plant and equipment 1,000 323,810
----------- -----------
Net cash used in investing activities (107,010) (186,222)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net payments on line of credit (152,672) (780,660)
Payments on notes payable (125,000)
Payments on mortgage loan and capital lease obligations (3,779) (205,162)
----------- -----------
Net cash used in financing activities (156,451) (1,110,822)
----------- -----------
NET INCREASE IN CASH AND CASH EQUIVALENTS 193,036 921,968
CASH AND CASH EQUIVALENTS AT
BEGINNING OF PERIOD 696,076 468,813
----------- -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 889,112 $ 1,390,781
=========== ===========
See accompanying notes to unaudited consolidated financial statements.
6
METRETEK TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
As of June 30, 2002 and December 31, 2001 and
For the Three and Six Month Periods Ended June 30, 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 six months ended June 30, 2002
increased $474,888 and net loss for the period ended June 30, 2002 decreased
$8,990, or less than $0.01 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
determined that the transitional impairment provisions of FAS 142 had no
impact on its consolidated financial statements at June 30, 2002.
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 SIX MONTHS
ENDED ENDED
JUNE 30, 2001 JUNE 30, 2001
------------- -------------
Net income (loss) applicable to
common shareholders, as reported $ 228,466 $(828,733)
Add back: amortization expense, net of tax 169,879 334,617
--------- ---------
Pro forma net income (loss)
applicable to common shareholders $ 398,345 $(494,116)
========= =========
Net income (loss) per common share, basic and diluted
As reported $ 0.04 $ (0.14)
========= =========
Pro forma $ 0.07 $ (0.08)
========= =========
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 June 30, 2002 and the consolidated results of their
operations and cash flows for the three and six month periods ended June 30,
2002 and 2001.
2. COMPREHENSIVE LOSS
The Company's comprehensive loss for the six months ended June 30, 2002
and 2001 was $1,077,663 and $529,058, respectively. The Company's comprehensive
loss includes net loss and foreign currency translation adjustments.
3. NONRECURRING CHARGES
Nonrecurring charges for the three and six months ended June 30, 2002
includes the costs related to the June 2002 changes in management at Metretek
Florida, principally termination benefits paid or payable to former Metretek
Florida management personnel.
8
4. 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 "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.
9
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
March 6, 2002, the remaining Metretek Defendants filed a motion to dismiss the
claims of the non-California resident Mongiello Plaintiffs on forum non
conveniens grounds. On or about March 29, 2002, the California Court granted
this motion, dismissing the claims of 11 of the 21 Mongiello Plaintiffs. 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
10
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. None of the Puddy Plaintiffs
opted out of the Class Action.
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.
5. 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
11
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 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 (including nonrecurring charges) 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
JUNE 30, 2002
Revenues $ 6,356 $ 3,154 $ 2,961 $ $ (7) $ 12,464
Segment profit (loss) 1,131 (443) (513) (1,261) (1,086)
Total assets 9,224 2,261 6,314 1,446 19,245
Capital expenditures 58 16 23 11 108
Depreciation and amortization 71 23 227 11 332
JUNE 30, 2001
Revenues $ 6,510 $ 6,328 $ 3,164 $ 277 $ 300 $ 16,579
Segment profit (loss) 864 474 (449) (612) (745) (468)
Total assets 9,543 1,048 7,626 2,076 20,293
Capital expenditures 73 87 350 510
Depreciation and amortization 305 7 288 134 8 742
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 and
six month periods ended June 30, 2002 (referred to herein as the "second quarter
2002" and "six month period 2002", respectively) and for the three and six month
periods ended June 30, 2001 (referred to herein as the "second quarter 2001" and
"six month period 2001", respectively) and of our financial condition as of June
30, 2002 should be read in conjunction with our consolidated financial
statements and related notes thereto included elsewhere in this report.
CRITICAL 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 and six month periods ended June 30, 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 Six Months Ended
June 30, June 30,
------------------------------------ ------------------------------------
2002 2001 2002 2001
(all amounts reported in thousands)
REVENUES:
Southern Flow $ 3,225 $ 3,220 $ 6,356 $ 6,510
PowerSecure 1,541 6,328 3,154 6,328
Metretek Florida 1,301 1,799 2,961 3,164
PowerSpring 43 277
Other (4) 40 (7) 300
-------- -------- -------- --------
Total $ 6,063 $ 11,430 $ 12,464 $ 16,579
======== ======== ======== ========
GROSS PROFIT:
Southern Flow $ 978 $ 915 $ 1,813 $ 1,738
PowerSecure 177 1,041 557 1,041
Metretek Florida 447 631 932 1,113
PowerSpring 43 (111)
-------- -------- -------- --------
Total $ 1,602 $ 2,630 $ 3,302 $ 3,781
======== ======== ======== ========
SEGMENT PROFIT (LOSS):
Southern Flow $ 626 $ 482 $ 1,131 $ 864
PowerSecure (362) 705 (443) 474
Metretek Florida (237) (217) (513) (449)
PowerSpring (325) (612)
Other (770) (236) (1,261) (745)
-------- -------- -------- --------
Total $ (743) $ 409 $ (1,086) $ (468)
======== ======== ======== ========
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.
14
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 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 (including
nonrecurring charges) not allocated to its operating segments. Intersegment
sales are not significant.
SECOND QUARTER 2002 COMPARED TO SECOND QUARTER 2001
Revenues. Our revenues are derived almost entirely from the sales of
products and services by our subsidiaries. Our consolidated revenues for the
second quarter 2002 decreased $5,367,000, or 47%, compared to the second quarter
2001. The decrease was primarily due to decreased revenues by PowerSecure. The
decrease in revenues was also caused by decreases in revenues by Metretek
Florida and PowerSpring, partially offset by a slight increase in revenues by
Southern Flow. PowerSecure revenues decreased $4,787,000, or 76%, during the
second quarter 2002 compared to the second quarter 2001. The decrease in
PowerSecure's revenues was due to the reduced size of PowerSecure's completed
and in-process projects during the second quarter 2002 compared to the second
quarter 2001. PowerSecure had 12 projects completed or in process during the
second quarter 2002 compared to 5 projects completed (none in process) during
the second quarter 2001. PowerSecure's average revenue per project for completed
and in-process projects was approximately $126,000 during the second quarter
15
2002 compared to approximately $1,266,000 during the second quarter 2001. As
discussed below under "Quarterly Fluctuations", PowerSecure's revenues have
fluctuated significantly in the past and are expected to continue to fluctuate
significantly in the future. Metretek Florida's revenues decreased $498,000, or
28%, during the second quarter 2002 compared to the second quarter 2001,
consisting of a decrease in domestic sales of $391,000 and a decrease in
international sales of $107,000. The decrease in Metretek Florida's domestic
sales was due to a decrease in sales of remote data collection products and
systems and a decrease in sales of electronic corrector products. The decrease
in domestic sales of remote data collection products and systems is attributable
primarily to reduced sales in the second quarter 2002 to one customer in the
Midwest that has deferred its equipment orders until certain of its regulatory
issues are resolved. The decrease in domestic sales of electronic corrector
products is attributable to a decline in sales to two customers in the second
quarter 2002. The decrease in international sales is attributable to reduced
remote data collection product and system sales to customers in the U.K. A
comparison of Metretek Florida's current domestic and international product mix
is as follows:
Three Months Ended June 30,
2002 2001
---------------- ----------------
(dollar amounts in thousands)
Metretek Florida revenues by product line:
Remote data collection
products and systems $ 827 64% $1,138 63%
Electronic corrector products 364 28% 562 31%
Circuit board assembly sales 110 8% 99 6%
------ ------
Total $1,301 $1,799
====== ======
PowerSpring's revenues decreased by $43,000 during the second quarter 2002,
compared to the second quarter 2001. PowerSpring's monitoring products and
services, now operated by Metretek Florida, generated approximately $14,000 of
domestic revenues at Metretek Florida during the second quarter 2002. Southern
Flow's revenues increased $5,000, or less than 1% during the second quarter
2002, compared to the second quarter 2001, primarily due to an increase in chart
processing and analysis revenues which was partially offset by a decrease in
equipment sales. The reduction in equipment sales was due primarily to a
reduction in customer requirements for such equipment during the second 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 second quarter 2002
decreased $4,294,000, or 49%, compared to the second quarter 2001, almost
entirely attributable to the lower sales at PowerSecure,
16
as well as lower sales at Metretek Florida. PowerSecure's cost of sales and
services for the second quarter 2002 decreased $3,922,000, or 74%, compared to
the second quarter 2001. PowerSecure's gross profit margin after costs of sales
and services declined to 11.5% for the second quarter 2002 compared to 16.5% for
the second quarter 2001. The decline in PowerSecure's gross profit margin was
attributable to lower margins, net to PowerSecure, from projects during the
second quarter 2002 as compared to the gross profit margins from projects during
the second quarter 2001. As discussed below, PowerSecure's gross profit margins,
like its revenues, may vary significantly from quarter to quarter depending on
the financial structure of the specific projects PowerSecure undertakes during
any particular quarter. Metretek Florida's cost of sales and services for the
second quarter 2002 decreased $315,000, or 27%, compared to the second quarter
2001. Metretek Florida's overall gross profit margin decreased slightly to 34.4%
for the second quarter 2002, compared to 35.1% for the second quarter 2001.
Southern Flow's cost of sales and services for the second quarter 2002 decreased
$58,000, or 3%, compared to the second quarter 2001, almost entirely
attributable to decreased equipment sales. Southern Flow's gross profit margin
after costs of sales and services increased slightly to 30.3% for the second
quarter 2002 compared to 28.4% for the second 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.
General and administrative expenses include personnel and related
overhead costs for the support and administrative functions. General and
administrative expenses for the second quarter 2002 increased $8,000, or less
than 1%, compared to the second quarter 2001, due primarily to increased
overhead costs associated with the continued development of the business of
PowerSecure during the second quarter 2002. These reductions were partially
offset by reduced corporate overhead costs; reduced personnel, travel and
overhead costs at Metretek Florida; and the 2001 termination of PowerSpring as a
separate operating entity.
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 second quarter 2002 increased $43,000, or 13%,
compared to the second quarter 2001. The increase in selling, marketing and
service expenses is due to the effects of the following: (i) a $25,000 increase
in selling and marketing costs related to the continued business development
activities of PowerSecure; and (ii) a $17,000 increase in selling and marketing
costs at Metretek Florida due to consulting, personnel, and service contract
costs associated with Metretek Florida's monitoring products and services
transferred from PowerSpring and now operated by Metretek Florida.
Depreciation and amortization expenses include the depreciation of
property, plant and equipment and the amortization of certain intangible assets
including capitalized software development costs and other intangible assets
that do not have indefinite useful lives. Prior to the required adoption of
Statement of Financial Accounting Standards ("FAS") No. 142 "Goodwill and Other
Intangible Assets" on
17
January 1, 2002, Southern Flow, Metretek Florida, and PowerSecure also amortized
other intangible assets with indefinite useful lives including customer list and
goodwill. Depreciation and amortization expenses for the second quarter 2002
decreased $211,000, or 56%, compared to the second quarter 2001. The decrease in
depreciation and amortization expense primarily reflects a reduction of
amortization expense in the amount of $116,000, $49,000, and $5,000 at Southern
Flow, Metretek Florida, and PowerSecure, 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 second quarter 2002 decreased $17,000, or 12%, compared to the
second quarter 2001. The slight decrease is due entirely to reduced 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 second quarter 2002
decreased $2,000, or 3%, compared to the second quarter 2001. The decrease
reflects reduced interest rates on borrowings during the second quarter 2002
compared to the second quarter 2001.
Nonrecurring charges for the second quarter 2002 includes the costs
related to the June 2002 changes in management at Metretek Florida, principally
termination benefits paid or payable to former Metretek Florida management
personnel. There were no similar nonrecurring charges in the second quarter
2001.
SIX MONTH PERIOD 2002 COMPARED TO SIX MONTH PERIOD 2001
Revenues. Our revenues are derived almost entirely from the sales of
products and services by our subsidiaries. Our consolidated revenues for the six
month period 2002 decreased $4,115,000, or 25%, compared to the six month period
2001. The decrease was primarily due to decreased revenues by PowerSecure. The
decrease in revenues was also caused by decreases in revenues by PowerSpring,
Metretek Florida, and by Southern Flow. PowerSecure revenues decreased
$3,174,000, or 50%, during the six month period 2002 compared to the six month
period 2001. The decrease in PowerSecure's revenues was due to the reduced size
of PowerSecure's completed and in-process projects during the six month period
2002 compared to the six month period 2001. PowerSecure had 13 projects
completed or in process during the six month period 2002 compared to 5 projects
completed (none in process) during the six month period 2001. PowerSecure's
average revenue per project for completed and in-process projects was
approximately $239,000 during the six month period 2002 compared to
approximately $1,266,000 during the six month period 2001. As discussed below
under
18
"Quarterly Fluctuations", PowerSecure's revenues have fluctuated significantly
in the past and are expected to continue to fluctuate significantly in the
future. Metretek Florida's revenues decreased $203,000, or 6%, during the six
month period 2002 compared to the six month period 2001, consisting of a
decrease in domestic sales of $216,000 partially offset by an increase in
international sales of $13,000. The decrease in Metretek Florida's domestic
sales was primarily due to a decrease in sales of electronic corrector products
partially offset by an increase in sales of remote data collection products and
systems and contract manufacturing activities. The decrease in domestic sales of
Metretek Florida's electronic corrector products is due to a decline in sales to
three customers in the six month period 2002. The increase in international
sales is attributable to an increase in sales of Metretek Florida's electronic
corrector product in South America. A comparison of Metretek Florida's current
domestic and international product mix is as follows:
SIX MONTHS ENDED JUNE 30,
2002 2001
---------------- ----------------
(dollar amounts in thousands)
Metretek Florida revenues by product line:
Remote data collection
products and systems $2,109 71% $2,022 64%
Electronic corrector products 669 23% 980 31%
Circuit board assembly sales 183 6% 162 5%
------ ------
Total $2,961 $3,164
====== ======
PowerSpring's revenues decreased by $532,000 during the six month period 2002,
compared to the six month period 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 $30,000 of domestic revenues at Metretek
Florida during the six month period 2002. Southern Flow's revenues decreased
$154,000, or 2% during the six month period 2002, compared to the six month
period 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 six month period 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 six month period 2002
decreased $3,329,000, or 27%, compared to the six month period 2001,
attributable to the lower sales at each of the Company's subsidiaries.
PowerSecure's cost of sales and services for the six month period 2002 decreased
$2,689,000, or 51%, compared to the six month period 2001.
19
PowerSecure's gross profit margin after costs of sales and services was 17.6%
for the six month period 2002 compared to 16.5% for the six month period 2001.
Southern Flow's cost of sales and services for the six month period 2002
decreased $229,000, or 5%, compared to the six month period 2001, despite only a
2% decrease in revenues. As a result, Southern Flow's gross profit margin after
costs of sales and services increased slightly to 28.5% for the six month period
2002 compared to 26.7% for the six month period 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. Metretek Florida's cost of sales and
services for the six month period 2002 decreased $23,000, or 1%, compared to the
six month period 2001. The percentage decrease in Metretek's cost of sales was
less than the percentage decrease in revenues reflecting higher materials,
personnel and related overhead costs attributable to sales of its remote data
collection products and systems and electronic corrector products. As a result,
Metretek Florida's overall gross profit margin decreased to 31.5% for the six
month period 2002, compared to 35.2% for the six month period 2001.
PowerSpring's costs of sales and services decreased by $388,000 during the six
month period 2002, compared to the six month period 2001 due to the termination
of PowerSpring as a separate operating entity effective March 31, 2001.
General and administrative expenses include personnel and related
overhead costs for the support and administrative functions. General and
administrative expenses for the six month period 2002 decreased $58,000, or 2%,
compared to the six month period 2001, due primarily to reduced corporate
overhead costs; reduced personnel, travel and overhead costs at Metretek
Florida; and the 2001 termination of PowerSpring as a separate operating entity.
These reductions were partially offset by increased overhead costs associated
with the continued development of the business of PowerSecure during the six
month period 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 six month period 2002 increased $47,000, or 7%,
compared to the six month period 2001. The 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
consulting, personnel, and service contract costs associated with Metretek
Florida's monitoring products and services transferred from PowerSpring and now
operated by Metretek Florida; (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 of PowerSpring, which is no
longer operating as a separate subsidiary.
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
20
January 1, 2002, Southern Flow, Metretek Florida, and PowerSecure also amortized
other intangible assets with indefinite useful lives including customer list and
goodwill. Depreciation and amortization expenses for the six month period 2002
decreased $410,000, or 55%, compared to the six month period 2001. The decrease
in depreciation and amortization expense primarily reflects a reduction of
amortization expense in the amount of $233,000, $97,000, and $5,000 at Southern
Flow, Metretek Florida, and PowerSecure, 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 six month period 2002 decreased $10,000, or 4%, compared to the
six month period 2001. The slight decrease is due entirely to reduced 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 six month period 2002
increased $6,000, or 8%, compared to the six month period 2001. The increase
reflects increased borrowings throughout the six month period 2002 compared to
the six month period 2001 partially offset by the effects of reduced interest
rates on borrowings during the six month period 2002 compared to the six month
period 2001.
Nonrecurring charges for the six month period 2002 includes the costs
related to the June 2002 changes in management at Metretek Florida, principally
termination benefits paid or payable to former Metretek Florida management
personnel. There were no similar nonrecurring charges in the six month period
2001.
QUARTERLY FLUCTUATIONS
Our revenues, expenses, margins, net income and other operating results
have fluctuated significantly from quarter-to-quarter, period-to-period 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
21
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 and other large customers;
- 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 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
22
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 June 30, 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, period-to-period or
year-to-year comparisons of our results of operations as an indication of our
future performance. Quarterly, period or annual comparisons of our operating
results are not necessarily meaningful or indicative of future performance.
LIQUIDITY AND CAPITAL RESOURCES
We require capital primarily to finance our:
- operations;
- 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 the cash flow requirements of
PowerSecure, primarily to finance turn-key distributed generations projects but
also to commence funding PowerSecure's "company-owned" projects, will require
significant capital during 2002.
23
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 June 30, 2002, we had working capital of $2,713,000, including
$889,000 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 June 30, 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 June 30, 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. In July 2002,
Scient filed for Chapter 11 bankruptcy protection. 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 $456,000 for the six
months ended June 30, 2002, consisting of approximately $1,202,000 of cash
provided by changes in working capital and other asset and liability accounts,
and approximately $746,000 of cash used in operations, before changes in assets
and liabilities. This compares to net cash provided by operating activities of
$2,219,000 during the same period in 2001, of which $355,000 was attributable to
cash provided by operations, before changes in assets and liabilities, and
$1,864,000 provided by changes in working capital and other asset and liability
accounts.
Net cash used by investing activities was $107,000 for the six months
ended June 30, 2002, as compared to $186,000 during the same period in 2001. The
majority of the net cash used by investing activities during the six months
ended June 30, 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.
Net cash used by financing activities was $156,000 for the six months
ended June 30, 2002, compared to net cash used by financing activities of
$1,111,000 during the same period in 2001. The net cash used by financing
activities during the six months ended June 30, 2002 represented net payments on
our line of credit and payments on our mortgage loan. Virtually all of the net
cash used by financing activities during the comparable period in 2001 was
attributable to net payments on our line of credit, payments on notes payable,
and payments on capital lease obligations.
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
$275,000 during the six months
24
ended June 30, 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 six months ended June 30, 2002 were
approximately $108,000. 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 June
30, 2002, Southern Flow had a borrowing base of $1,365,720 under the Credit
Facility, of which $873,098 had been borrowed (virtually all of that amount had
been advanced to fund the business of PowerSecure), leaving $492,622 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 under a proposed
additional credit facility, along with funds expected to be generated from our
operations, will be sufficient to meet our anticipated cash needs during the
next 12 months, including our working capital needs, capital requirements and
debt service commitments, other than the development of the "company-owned"
business of PowerSecure. However, any projections of future cash needs and cash
flows are subject to substantial uncertainty. See "Additional Factors that May
Affect Future Results." We cannot provide any assurance that our actual cash
requirements will not be greater than we currently expect or that these sources
of liquidity, including the proposed additional credit facility, will be
available when needed.
For the following reasons, we may require additional funds, beyond our
currently anticipated resources, to support our working capital requirements,
our operations or our other cash flow needs:
- We expect that the costs of financing the continuing and anticipated
development and growth of PowerSecure, including the equipment, labor
and other capital costs of significant turn-key projects that arise
from time to time depending on backlog and customer requirements and
similar costs that would be associated with developing distributed
generation systems for its company-owned business package, will
require us to raise significant additional funds, beyond our current
capital resources.
- From time to time as part of our business plan, we engage in
discussions regarding
25
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.
- We continually evaluate our opportunity to raise additional funds in
order to improve our financial position as well as our cash flow
requirements, and may seek additional capital in order to take
advantage of such an opportunity or to meet changing cash flow
requirements.
- 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.
- 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 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.
However, 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
26
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 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 $335,000 reduction in
our net loss applicable to common shareholders in the six months 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 determined
that the transitional impairment provisions of FAS 142 had no impact on our
consolidated financial statements at June 30, 2002.
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
27
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:
- 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 of capital and liquidity to meet our operating and
capital requirements and growth needs, especially the funding
requirements of PowerSecure's turn-key projects that require
significant project financing, including the sufficiency of the Credit
Facility and our ability to obtain an additional credit facility;
28
- 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
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
29
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 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 and current reports on Form 8-K
that are filed thereafter.
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.
30
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
No material changes from the disclosure set forth in the same item in
the Company's Form 10-QSB for the quarterly period ended March 31, 2002.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the Company's Annual Meeting of Stockholders, held on June 13, 2002,
the following proposals were submitted to and approved by the stockholders of
the Company:
PROPOSAL 1: To elect one director for a three-year term expiring at
the 2005 Annual Meeting of Stockholders:
For Withhold
--- --------
A. Bradley Gabbard 4,801,907 16,582
PROPOSAL 2: To ratify the appointment by the Board of Directors
of Deloitte & Touche LLP as the Company's independent
auditors for the fiscal year ending December 31, 2002.
For Against Abstain
--- ------- -------
4,801,027 2,396 15,066
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
99.1 Certification of Chief Executive Officer pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002
99.2 Certification of Chief Financial Officer pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002
31
(b) FORM 8-K
The Company filed the following Current Reports on Form 8-K since
March 31, 2002.
Filing Date Item No. Description
----------- -------- -----------
June 6, 2002 5,7 Transfer of Common Stock Listing
to the Nasdaq SmallCap Market
and announced letter of intent to
sell PowerSecure, Inc.
July 16, 2002 5,7 Termination of letter of intent to
sell PowerSecure, Inc.
32
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: August 12, 2002 By: /s/ W. Phillip Marcum
----------------------------------------
W. Phillip Marcum
President and Chief Executive Officer
Date: August 12, 2002 By: /s/ A. Bradley Gabbard
----------------------------------------
A. Bradley Gabbard
Executive Vice President
and Chief Financial Officer
33