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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------------------
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 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
--- ---
As of November 1, 2002 there were 6,077,764 shares of the issuer's
Common Stock outstanding.
Transitional Small Business Disclosure Format
Yes No
--- ---
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METRETEK TECHNOLOGIES, INC.
FORM 10-QSB
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2002
TABLE OF CONTENTS
Page
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Unaudited Consolidated Balance Sheets -
September 30, 2002 and December 31, 2001 3
Unaudited Consolidated Statements of Operations -
For the Three and Nine Months Ended September 30, 2002
and September 30, 2001 5
Unaudited Consolidated Statements of Cash Flows -
For the Nine Months Ended September 30, 2002 and
September 30, 2001 6
Notes to Unaudited Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 15
Item 3. Controls and Procedures 33
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 34
Item 2. Changes in Securities and Use of Proceeds 37
Item 3. Defaults Upon Senior Securities 37
Item 6. Exhibits and Reports on Form 8-K 38
Signatures 39
Certifications 40
2
PART I.
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
METRETEK TECHNOLOGIES, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(unaudited)
September 30, December 31,
2002 2001
------------- ------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 614,192 $ 696,076
Trade receivables, net of allowance for doubtful accounts
of $117,026 and $169,632, respectively 6,136,478 4,980,419
Other receivables 2,804 14,929
Inventories 3,047,526 3,135,297
Prepaid expenses and other current assets 1,004,563 559,562
----------- -----------
Total current assets 10,805,563 9,386,283
----------- -----------
PROPERTY, PLANT AND EQUIPMENT:
Equipment 3,983,236 4,150,686
Vehicles 50,227 50,227
Furniture and fixtures 578,625 561,664
Land, building and improvements 737,525 736,388
----------- -----------
Total property, plant and equipment, at cost 5,349,613 5,498,965
Less accumulated depreciation 3,428,175 3,318,054
----------- -----------
Property, plant and equipment, net 1,921,438 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 $905,193 and $818,065, respectively 408,577 489,860
Other assets 550,725 691,042
----------- -----------
Total other assets 8,367,233 8,588,833
----------- -----------
TOTAL $21,094,234 $20,156,027
=========== ===========
See accompanying notes to unaudited consolidated financial statements.
3
METRETEK TECHNOLOGIES, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(unaudited)
September 30, December 31,
2002 2001
------------- ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 2,408,229 $ 1,405,632
Accrued and other liabilities 2,858,735 1,964,513
Notes payable 2,479,757 2,479,172
------------ ------------
Total current liabilities 7,746,721 5,849,317
------------ ------------
LONG-TERM NOTES PAYABLE 1,374,009 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 8,293,231 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 (39,275) (65,935)
Accumulated deficit (51,458,019) (49,753,163)
------------ ------------
Total stockholders' equity 3,680,273 5,358,469
------------ ------------
TOTAL $ 21,094,234 $ 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 Nine Months Ended
September 30, September 30,
------------------------------- -------------------------------
2002 2001 2002 2001
REVENUES:
Sales and services $ 8,006,559 $ 5,960,692 $ 20,477,549 $ 22,239,529
Other 11,918 (30,577) 4,796 269,121
------------ ------------ ------------ ------------
Total revenues 8,018,477 5,930,115 20,482,345 22,508,650
------------ ------------ ------------ ------------
COSTS AND EXPENSES:
Cost of sales and services 5,976,167 4,260,904 15,145,017 16,758,390
General and administrative 1,324,460 1,381,268 4,031,372 4,146,543
Selling, marketing and service 383,175 355,167 1,105,807 1,031,099
Depreciation and amortization 154,124 344,617 486,344 1,086,631
Research and development 137,290 288,170 411,798 572,958
Interest, finance charges and other 49,418 33,815 136,345 114,635
Nonrecurring charges - - 257,504 -
------------ ------------ ------------ ------------
Total costs and expenses 8,024,634 6,663,941 21,574,187 23,710,256
------------ ------------ ------------ ------------
OPERATING LOSS (6,157) (733,826) (1,091,842) (1,201,606)
INCOME TAXES - - - -
------------ ------------ ------------ ------------
NET LOSS (6,157) (733,826) (1,091,842) (1,201,606)
PREFERRED STOCK
DEEMED DISTRIBUTION (207,549) (180,477) (613,014) (541,430)
------------ ------------ ------------ ------------
NET LOSS APPLICABLE
TO COMMON SHAREHOLDERS $ (213,706) $ (914,303) $ (1,704,856) $ (1,743,036)
============ ============ ============ ============
NET LOSS PER COMMON
SHARE, BASIC AND DILUTED $ (0.04) $ (0.15) $ (0.28) $ (0.29)
============ ============ ============ ============
WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING,
BASIC AND DILUTED 6,077,764 6,077,764 6,077,764 6,015,604
============ ============ ============ ============
See accompanying notes to unaudited consolidated financial statements.
5
METRETEK TECHNOLOGIES, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(unaudited)
Nine Months Ended
September 30,
-----------------------------
2002 2001
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(1,091,842) $(1,201,606)
Adjustments to reconcile net loss to net cash
(used in) provided by operating activities:
Depreciation and amortization 486,344 1,086,631
Loss on disposal of property, plant and equipment 7,665 87,425
Changes in other assets and liabilities:
Trade receivables (1,156,059) 416,621
Inventories 87,771 (423,707)
Other current assets (432,876) 335,978
Other noncurrent assets 140,317 114,428
Accounts payable 1,002,597 125,220
Accrued and other liabilities 920,882 120,641
----------- -----------
Net cash (used in) provided by operating activities (35,201) 661,631
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to capitalized software development (5,845) (476,834)
Purchases of property, plant and equipment (148,908) (117,632)
Proceeds from sale of property, plant and equipment 1,500 323,810
----------- -----------
Net cash used in investing activities (153,253) (270,656)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings (payments) on line of credit 112,309 (1,011,541)
Proceeds from new line of credit 1,172,356
Payments on notes payable (125,000)
Payments on mortgage loan and capital lease obligations (5,739) (205,162)
----------- -----------
Net cash provided by (used in) financing activities 106,570 (169,347)
----------- -----------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (81,884) 221,628
CASH AND CASH EQUIVALENTS AT
BEGINNING OF PERIOD 696,076 468,813
----------- -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 614,192 $ 690,441
=========== ===========
See accompanying notes to unaudited consolidated financial statements.
6
METRETEK TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
As of September 30, 2002 and December 31, 2001 and
For the Three and Nine Month Periods Ended September 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 nine months ended September 30, 2002
increased $3,062,711 and net loss for the period ended September 30, 2002
decreased $648,522, or $0.11 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.
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 NINE MONTHS
ENDED ENDED
SEPTEMBER 30, 2001 SEPTEMBER 30, 2001
------------------ ------------------
Net loss applicable to
common shareholders, as reported $ (914,303) $(1,743,036)
Add back: amortization expense, net of tax 170,352 504,969
----------- -----------
Pro forma net loss applicable
to common shareholders $ (743,951) $(1,238,067)
=========== ===========
Net loss per common share, basic and diluted
As reported $ (0.15) $ (0.29)
=========== ===========
Pro forma $ (0.12) $ (0.21)
=========== ===========
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 September 30, 2002 and the consolidated results of their
operations and cash flows for the three and nine month periods ended September
30, 2002 and 2001.
2. COMPREHENSIVE LOSS
The Company's comprehensive loss for the nine months ended September
30, 2002 and 2001 was $1,065,182 and $1,251,029, respectively. The Company's
comprehensive loss includes net loss and foreign currency translation
adjustments.
3. NONRECURRING CHARGES
Nonrecurring charges for the nine months ended September 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. At September 30, 2002, the balance of unpaid
termination benefits included in accrued and other liabilities was $158,028.
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
9
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.
On August 12, 2002, the Metretek Defendants filed third party claims
against IFG Network Securities, Inc. ("IFG") and Pringle & Herigstad, P.C.,
seeking contribution under Colorado law.
On October 17, 2002, the Denver Court granted a stipulated motion by
the parties for an extension of time to serve notice of trial setting until
December 16, 2002. Accordingly, 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
10
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. None of the Puddy Plaintiffs opted out of the Class
Action.
At the present time, 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 and the
Metretek Defendants dispute the allegations of wrongdoing in these cases and
intend to vigorously defend the claims against them and to vigorously pursue
appropriate cross-claims and third party claims. 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.
During 1999 and 2000, the Company retained Scient Corporation
("Scient"), an "eBusiness" consultant, to design and install an eBusiness
program that would enable the Company to provide its energy management services
to commercial customers via an Internet project, which was called "PowerSpring"
(the "PowerSpring Project"). In connection with the PowerSpring Project, the
Company paid Scient approximately $7 million in fees and expenses, as part of a
total investment by the Company in PowerSpring in excess of $15.6 million.
In September 2000, as Scient's engagement was being terminated, the
Company issued a non-negotiable promissory note to Scient for approximately $2.8
million (the "Scient Note") for the outstanding balance of services invoiced by
Scient in connection with the PowerSpring Project. The Scient Note provided for
payments by the Company in quarterly installments $250,000 each until March 31,
2002, at which time the remaining balance of the Scient Note was to be paid in
full. In June 2001, after the Company discovered fraudulent activity by Scient
and uncovered other matters of dispute in connection with Scient's services and
billings, Scient agreed to suspend the Company's payment obligations under the
Scient Note until the amount of the fraudulent activity could be resolved. In
May 2002, Scient's engagement manager in charge of the PowerSpring Project
pleaded guilty to federal wire fraud and mail fraud charges stemming primarily
from his activities during Scient's engagement by the Company.
In July 2002, Scient filed for Chapter 11 bankruptcy protection.
Although the Company and Scient never resolved the amount in dispute, on October
17, 2002, Metretek received a letter from Scient's counsel purporting to
constitute notice by Scient that the Company was in breach of the Scient Note
for failing to make payments and
11
threatening to initiate enforcement proceedings if the remaining balance, which
as of the date hereof is approximately $2.5 million, was not paid in full. In
November 2002, the Company filed a motion with the United States Bankruptcy
Court for the Southern District of New York, seeking to have that court compel
Scient and its successors to arbitrate the dispute related to the Scient Note in
accordance with an arbitration provision in the Company's agreement with Scient.
The Company has also filed a $15.6 million proof of claim against Scient's
estate in the bankruptcy court. The Company intends to vigorously challenge
Scient's assertion that the Company has any remaining obligations under the
Scient Note and to vigorously pursue its proof of claim against Scient's estate.
However, the Company cannot provide any assurance that it will prevail in its
dispute with Scient. An adverse resolution in this matter requiring the Company
to make further payments under the Scient Note could have material adverse
effect on liquidity, financial condition and results of operations of the
Company.
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 products and services directly to large end-users of electricity and
through outsourcing partnerships with utilities. Through September 30,
12
2002, the vast majority of PowerSecure's revenues have been generated from sales
of distributed generation systems on a "turn-key" basis, where the customer
acquires the systems from PowerSecure. To date, PowerSecure has also generated a
small portion of its revenues from "company-owned" distributed generation assets
that are leased to customers on a long-term basis.
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. In June 2002, Metretek Florida formed
Metretek Contract Manufacturing Company, Inc. ("MCM") to conduct and expand its
contract manufacturing operations.
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.
13
SUMMARIZED SEGMENT FINANCIAL INFORMATION
(all amounts reported in thousands)
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------- -------------------------
2002 2001 2002 2001
REVENUES:
Southern Flow $ 2,986 $ 3,190 $ 9,342 $ 9,700
PowerSecure 3,326 1,414 6,480 7,742
Metretek Florida 1,695 1,357 4,656 4,521
PowerSpring 277
Other 11 (31) 4 269
-------- -------- -------- --------
Total $ 8,018 $ 5,930 $ 20,482 $ 22,509
======== ======== ======== ========
SEGMENT PROFIT (LOSS):
Southern Flow $ 428 $ 320 $ 1,559 $ 1,184
PowerSecure 217 2 (226) 476
Metretek Florida (180) (485) (693) (934)
PowerSpring (612)
Other (471) (571) (1,732) (1,316)
-------- -------- -------- --------
Total $ (6) $ (734) $ (1,092) $ (1,202)
======== ======== ======== ========
CAPITAL EXPENDITURES:
Southern Flow $ 29 $ 19 $ 87 $ 92
PowerSecure 18 16 105
Metretek Florida 18 47 41 397
Other 11
-------- -------- -------- --------
Total $ 47 $ 84 $ 155 $ 594
======== ======== ======== ========
DEPRECIATION AND AMORTIZATION:
Southern Flow $ 32 $ 153 $ 103 $ 458
PowerSecure 12 13 35 20
Metretek Florida 104 137 331 425
PowerSpring 134
Other 6 42 17 50
-------- -------- -------- --------
Total $ 154 $ 345 $ 486 $ 1,087
======== ======== ======== ========
September 30,
-------------------------
2002 2001
TOTAL ASSETS:
Southern Flow $ 9,395 $ 9,752
PowerSecure 4,143 1,527
Metretek Florida 6,345 7,248
Other 1,211 1,368
------- --------
Total $21,094 $ 19,895
======= ========
14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
INTRODUCTION
The following discussion of our results of operations for the three and
nine month periods ended September 30, 2002 (referred to herein as the "third
quarter 2002" and "nine month period 2002", respectively) and for the three and
nine month periods ended September 30, 2001 (referred to herein as the "third
quarter 2001" and "nine month period 2001", respectively) and of our financial
condition as of September 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 nine month periods ended September 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.
15
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------- -------------------------
2002 2001 2002 2001
-------- -------- -------- --------
(all amounts reported in thousands)
REVENUES:
Southern Flow $ 2,986 $ 3,190 $ 9,342 $ 9,700
PowerSecure 3,326 1,414 6,480 7,742
Metretek Florida 1,695 1,357 4,656 4,521
PowerSpring 277
Other 11 (31) 4 269
-------- -------- -------- --------
Total $ 8,018 $ 5,930 $ 20,482 $ 22,509
======== ======== ======== ========
GROSS PROFIT:
Southern Flow $ 785 $ 777 $ 2,598 $ 2,515
PowerSecure 755 488 1,312 1,529
Metretek Florida 490 435 1,422 1,548
PowerSpring (111)
-------- -------- -------- --------
Total $ 2,030 $ 1,700 $ 5,332 $ 5,481
======== ======== ======== ========
SEGMENT PROFIT (LOSS):
Southern Flow $ 428 $ 320 $ 1,559 $ 1,184
PowerSecure 217 2 (226) 476
Metretek Florida (180) (485) (693) (934)
PowerSpring (612)
Other (471) (571) (1,732) (1,316)
-------- -------- -------- --------
Total $ (6) $ (734) $ (1,092) $ (1,202)
======== ======== ======== ========
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.
16
The operations of the Company's distributed generation segment are
conducted by PowerSecure. PowerSecure commenced operations in September 2000.
The primary elements of PowerSecure's distributed generation products and
services include project design and engineering, negotiation with utilities to
establish tariff structures and power interconnects, generator acquisition and
installation, process control and switchgear design and installation, and
ongoing project monitoring and servicing. PowerSecure markets its distributed
generation products and services directly to large end-users of electricity and
through outsourcing partnerships with utilities. Through September 30, 2002, the
vast majority of PowerSecure's revenues have been generated from sales of
distributed generation systems on a "turn-key" basis, where the customer
acquires the systems from PowerSecure. To date, PowerSecure has also generated a
small portion of its revenues from "company-owned" distributed generation assets
that are leased to customers on a long-term basis.
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. In June 2002, Metretek Florida formed
Metretek Contract Manufacturing Company, Inc. ("MCM") to conduct and expand its
contract manufacturing operations.
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.
THIRD QUARTER 2002 COMPARED TO THIRD QUARTER 2001
Revenues. Our revenues are derived almost entirely from the sales of
products and services by our subsidiaries. Our consolidated revenues for the
third quarter 2002 increased $2,088,000, or 35%, compared to the third quarter
2001. The increase was primarily due to increased revenues by PowerSecure and
Metretek Florida, partially offset by a decrease in revenues by Southern Flow.
PowerSecure revenues increased $1,912,000, or 135%, during the third quarter
2002 compared to the third quarter 2001. The increase in PowerSecure's revenues
was due to the increased volume of PowerSecure's completed and in-process
projects during the third quarter 2002 compared to the third quarter 2001.
PowerSecure had 17 projects completed or in process during
17
the third quarter 2002 compared to 6 projects completed (none in process) during
the third quarter 2001. PowerSecure's average revenue recognized per project for
completed and in-process projects was approximately $194,000 during the third
quarter 2002 compared to approximately $229,000 during the third 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 increased $338,000, or
25%, during the third quarter 2002 compared to the third quarter 2001,
consisting of an increase in domestic sales of $187,000 and an increase in
international sales of $151,000. The increase in Metretek Florida's domestic
sales was due to an increase in electronic corrector product sales and contract
manufacturing revenues partially offset by a decrease in sales of remote data
collection products and systems. The decrease in domestic sales of remote data
collection products and systems is attributable primarily to reduced sales in
the third quarter 2002 to one customer in the Midwest that has deferred its
equipment orders until certain of its regulatory issues are resolved. The
increase in international sales is attributable to increased electronic
corrector product sales in South America and Taiwan. A comparison of Metretek
Florida's aggregate product mix is as follows:
Three Months Ended September 30,
-------------------------------------------
2002 2001
-------------------- --------------------
(dollar amounts in thousands)
Metretek Florida revenues by product line:
Remote data collection
products and systems $759 45% $929 69%
Electronic corrector products 808 48% 368 27%
Contract manufacturing services 128 7% 60 4%
------------ ------------
Total $1,695 $1,357
============ ============
Southern Flow's revenues decreased $204,000, or 6% during the third quarter
2002, compared to the third quarter 2001, primarily due to a decrease in
equipment sales partially offset by an increase in chart processing and analysis
and field services revenues. The reduction in Southern Flow's equipment sales
was due primarily to a reduction in customer requirements for such equipment
during the third quarter 2002 compared to the third quarter 2001.
Costs and Expenses. Cost 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 third quarter 2002
increased $1,715,000, or 40%, compared to the third quarter 2001, almost
entirely attributable to the increased sales at PowerSecure. PowerSecure's cost
of sales and services for the third quarter 2002 increased $1,644,000, or 178%,
compared to the third quarter 2001. PowerSecure's gross profit margin after cost
of sales and services declined to 22.7% for the third quarter 2002 compared to
34.5% for the third quarter 2001. The decline in PowerSecure's gross profit
margin was
18
attributable to lower margins, net to PowerSecure, from projects during the
third quarter 2002 as compared to the gross profit margins from projects during
the third 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
third quarter 2002 increased $284,000, or 31%, compared to the third quarter
2001. The percentage increase in Metretek Florida's cost of sales was more than
the percentage increase in revenues reflecting higher materials, personnel and
related overhead costs attributable to Metretek Florida's focus on building its
contract manufacturing business. As a result, Metretek Florida's overall gross
profit margin decreased to 28.9% for the third quarter 2002, compared to 32.1%
for the third quarter 2001. Southern Flow's cost of sales and services for the
second quarter 2002 decreased $213,000, or 9%, compared to the second quarter
2001, almost entirely attributable to decreased equipment sales. Southern Flow's
gross profit margin after cost of sales and services increased to 26.3% for the
third quarter 2002 compared to 24.3% for the third quarter 2001. The increase in
Southern Flow's gross profit margin is within the range of normal periodic
margin fluctuations and 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 third quarter 2002 decreased $57,000, or 4%,
compared to the third quarter 2001, due primarily to reduced personnel, travel
and overhead costs at Metretek Florida and reduced corporate overhead costs.
These reductions were partially offset by increased overhead costs associated
with the continued development of the business of PowerSecure during the third
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 third quarter 2002 increased $28,000, or 8%,
compared to the third quarter 2001. The increase in selling, marketing and
service expenses is due to the net effects of the following: (i) a $43,000
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; and (ii) a $15,000 reduction in selling and marketing costs
at PowerSecure.
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, Metretek Florida, and
PowerSecure also amortized other intangible assets with indefinite useful lives
including customer list and goodwill. Depreciation and amortization expenses for
the third quarter 2002 decreased $190,000, or
19
55%, compared to the third quarter 2001. The decrease in depreciation and
amortization expense primarily reflects a reduction of amortization expense in
the amount of $116,000, $46,000, and $8,000 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 third quarter 2002 decreased $151,000, or 52%, compared to the
third quarter 2001. The 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 third quarter 2002
increased $16,000, or 46%, compared to the third quarter 2001. The increase
reflects an increase in borrowings and higher finance charges during the third
quarter 2002 compared to the third quarter 2001.
NINE MONTH PERIOD 2002 COMPARED TO NINE 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
nine month period 2002 decreased $2,026,000, or 9%, compared to the nine month
period 2001. The decrease was due to decreased revenues by PowerSecure, Southern
Flow and by PowerSpring. These revenue decreases were partially offset by an
increase in revenues by Metretek Florida. PowerSecure revenues decreased
$1,262,000, or 16%, during the nine month period 2002 compared to the nine 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 nine month period
2002 compared to the nine month period 2001. The effect on revenues of the
reduced size of PowerSecure's projects was partially offset by the effects of an
increase in volume of projects during the nine month period 2002 compared to the
nine month period 2001. PowerSecure had 23 projects completed or in process
during the nine month period 2002 compared to 11 projects completed (none in
process) during the nine month period 2001. PowerSecure's average revenue per
project for completed and in-process projects was approximately $278,000 during
the nine month period 2002 compared to approximately $700,000 during the nine
month period 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. Southern Flow's
revenues decreased $358,000, or 4% during the nine month period 2002, compared
to the nine month period 2001, primarily due to a decrease in equipment sales
which was partially offset by an increase in chart processing and analysis and
field services revenues. The reduction in Southern Flow's equipment sales was
due primarily to a reduction in customer requirements for such equipment
20
during the nine month period 2002 compared to the nine month period 2001.
PowerSpring's revenues decreased by $532,000 during the nine month period 2002,
compared to the nine 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 $62,000 of domestic revenues at Metretek
Florida during the nine month period 2002. Metretek Florida's revenues increased
$135,000, or 3%, during the nine month period 2002 compared to the nine month
period 2001, consisting of an increase in international sales of $164,000
partially offset by a decrease in domestic sales of $29,000. The increase in
international sales is primarily attributable to an increase in sales of
Metretek Florida's electronic corrector product in South America and Taiwan. The
decrease in Metretek Florida's domestic sales was primarily due to a decrease in
sales of remote data collection products and systems and a decrease in sales of
electronic corrector products partially offset by in increase in revenues from
contract manufacturing activities. A comparison of Metretek Florida's aggregate
product mix is as follows:
Nine Months Ended September 30,
--------------------------------------------
2002 2001
-------------------- --------------------
(dollar amounts in thousands)
Metretek Florida revenues by product line:
Remote data collection
products and systems $2,868 61% $2,951 65%
Electronic corrector products 1,477 32% 1,348 30%
Contract manufacturing services 311 7% 222 5%
------------- ------------
Total $4,656 $4,521
============= ============
Costs and Expenses. Cost 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 nine month period 2002
decreased $1,613,000, or 10%, compared to the nine month period 2001,
attributable to the lower sales at PowerSecure, Southern Flow, and PowerSpring
partially offset by increased sales at Metretek Florida. PowerSecure's cost of
sales and services for the nine month period 2002 decreased $1,045,000, or 17%,
compared to the nine month period 2001. PowerSecure's gross profit margin after
cost of sales and services increased slightly to 20.2% for the nine month period
2002 compared to 19.8% for the nine month period 2001. Southern Flow's cost of
sales and services for the nine month period 2002 decreased $442,000, or 6%,
compared to the nine month period 2001, despite only a 4% decrease in revenues.
As a result, Southern Flow's gross profit margin after cost of sales and
services increased to 27.8% for the nine month period 2002 compared to 25.9% for
the nine month period 2001. The increase in Southern Flow's gross profit margin
reflects slightly higher margins on increased chart processing and analysis and
field service revenues offset by the decreased equipment sales, which generally
have lower gross profit margins. PowerSpring's cost of sales and services
decreased by $388,000 during the nine month
21
period 2002, compared to the nine month period 2001 due to the termination of
PowerSpring as a separate operating entity effective March 31, 2001. Metretek
Florida's cost of sales and services for the nine month period 2002 increased
$261,000, or 9%, compared to the nine month period 2001. The percentage increase
in Metretek Florida's cost of sales was more than the percentage increase in
revenues reflecting higher materials, personnel and related overhead costs
attributable to sales of its remote data collection products and systems,
electronic corrector products, and contract manufacturing activities. As a
result, Metretek Florida's overall gross profit margin decreased to 30.6% for
the nine month period 2002, compared to 34.3% for the nine month period 2001.
General and administrative expenses include personnel and related
overhead costs for the support and administrative functions. General and
administrative expenses for the nine month period 2002 decreased $115,000, or
3%, compared to the nine month period 2001, due primarily to reduced personnel,
travel and overhead costs at Metretek Florida; reduced corporate overhead costs;
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 nine 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 nine month period 2002 increased $75,000, or 7%,
compared to the nine 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 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 nine month period 2002 decreased $600,000, or 55%, compared to the nine
month period 2001. The decrease in depreciation and amortization expense
primarily reflects a reduction of amortization expense in the amount of
$349,000, $143,000, and $13,000 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
22
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 nine month period 2002 decreased $161,000, or 28%, compared to
the nine month period 2001. The 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 nine month period 2002
increased $22,000, or 19%, compared to the nine month period 2001. The increase
reflects increased borrowings and higher finance charges during the nine month
period 2002 compared to the nine month period 2001.
Nonrecurring charges for the nine 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 nine 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 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 other 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;
23
- 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;
- the development and maintenance of business relationships with
strategic partners; and
- the success of our efforts to restructure the business of Metretek
Florida.
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 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 September 30, 2002, virtually all
24
of PowerSecure's revenues constituted non-recurring revenues from sales of
distributed generating systems on a "turn-key" basis to its customers.
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. In addition, Metretek Florida has implemented several managerial and
structural changes to enhance its focus on contract manufacturing activities. If
successful, these efforts may result in a higher percentage of revenues derived
from sources other than the utility industry. Such revenues may or may not be
more predictable than Metretek Florida's historical revenues from sales of its
products and services to the utility industry.
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 generation projects but
also to finance future significant "company-owned" projects, if any, will
require significant capital in future periods.
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. At September 30, 2002, we had working capital of $3,059,000,
including $614,000 in cash and cash equivalents, compared to working capital of
$3,537,000 at December 31, 2001, which included
25
$696,000 in cash and cash equivalents. Our working capital balances at September
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 and the recent demand for payment in full thereon made
by Scient, the entire balance of the Scient Note ($2.5 million) is carried on
our consolidated financial statements as a current liability at September 30,
2002 and December 31, 2001. In July 2002, Scient filed for Chapter 11 bankruptcy
protection. We have commenced proceedings in the bankruptcy court in an effort
to obtain resolution of the dispute as to the Scient Note (see Note 4 to our
Consolidated Financial Statements). 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 used in operating activities was $35,000 for the nine month
period 2002, consisting of $598,000 of cash used in operations, before changes
in assets and liabilities, and $563,000 of cash provided by changes in working
capital and other asset and liability accounts. This compares to net cash
provided by operating activities of $662,000 during the nine month period 2001,
of which $27,000 was attributable to cash used in operations, before changes in
assets and liabilities, and $689,000 of cash provided by changes in working
capital and other asset and liability accounts.
Net cash used in investing activities was $153,000 for the nine month
period 2002, as compared to $271,000 used in investing activities during the
nine month period 2001. The majority of the net cash used in investing
activities during the nine month period 2002 was attributable to the purchase of
equipment items at Southern Flow and Metretek Florida. The reduction in net cash
used in investing activities for the nine month period 2002 compared to the nine
month period 2001 was attributable to a reduction in capitalized software
development costs.
Net cash provided by financing activities was $107,000 for the nine
month period 2002 compared to net cash used in financing activities of $169,000
during the nine month period 2001. The net cash provided by financing activities
during the nine month period 2002 represented net borrowings on Metretek
Florida's new line of credit offset, in part, by net payments on Southern Flow's
line of credit and payments on our mortgage loan. The net cash used in financing
activities during the nine month period 2001 was attributable to initial
proceeds from Southern Flow's line of credit, offset by payments on a prior
existing 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
$412,000 during the nine month period 2002. We anticipate that our research and
development expenses in fiscal 2002 will total approximately $575,000, virtually
all of which will be directed to
26
Metretek Florida's business.
Our capital expenditures during the nine month period 2002 were
approximately $155,000. We anticipate additional capital expenditures in fiscal
2002 of approximately $350,000, primarily for the purchase of equipment to be
used in Metretek Florida's contract manufacturing business. We expect to finance
approximately $240,000 of the remaining fiscal 2002 capital expenditures from
additional borrowings made available from a Term Loan with our current lender.
In September 2001, Southern Flow entered into a Credit and Security
Agreement (the "Southern Flow Credit Agreement") with Wells Fargo Business
Credit, Inc. ("Wells Fargo"), providing for a $2,000,000 credit facility (the
"Southern Flow Credit Facility"). Southern Flow is permitted to advance funds
under the Southern Flow Credit Facility to Metretek Technologies, PowerSecure
and Metretek Florida, which have guaranteed the obligations of Southern Flow
under the Southern Flow Credit Facility, provided that total inter-company
indebtedness owing from all the guarantors to Southern Flow may not exceed the
greater of the amount of the borrowing base less $150,000 or the cumulative net
income of Southern Flow from January 1, 2001. At September 30, 2002, Southern
Flow had a borrowing base of $1,444,000 under the Southern Flow Credit Facility,
of which $806,000 had been borrowed, leaving $638,000 available to borrow. The
Southern Flow Credit Facility refinanced our prior credit facility with National
Bank of Canada.
In September 2002, Metretek Florida entered into a Credit and Security
Agreement (the "Metretek Florida Credit Agreement" and, collectively with the
Southern Flow Credit Agreement, the "Credit Agreement") with Wells Fargo,
providing for a $1,000,000 credit facility (the "Metretek Florida Credit
Facility" and, collectively with the Southern Flow Credit Facility, the "Credit
Facility"). The Metretek Florida Credit Facility operates as an extension of the
Southern Flow Credit Facility. Metretek Florida is permitted to advance funds
under the Metretek Florida Credit Facility to Metretek Technologies,
PowerSecure, Southern Flow and MCM, which have guaranteed the obligations of
Metretek Florida under the Metretek Florida Credit Facility, provided that after
making such advances the Metretek Florida Credit Facility availability is not
less than $100,000 and that total advances to the guarantors do not exceed
$500,000 during 2002. At September 30, 2002, Metretek Florida had a borrowing
base of $686,000 under the Metretek Florida Credit Facility, of which $332,000
had been borrowed, leaving $354,000 available to borrow.
The Credit Facility, which constitutes our primary credit agreement,
has been and is expected to continue to be used primarily to fund the operations
and growth of PowerSecure, as well as the operations of Metretek Florida and
Southern Flow. The Credit Facility contains various financial and other
affirmative and negative covenants, provides for minimum interest charges and
unused credit line and termination fees, and matures on September 30, 2004. The
Credit Facility is secured by a first priority security interest in virtually
all of the assets of Metretek Technologies, Southern Flow, PowerSecure, Metretek
Florida and MCM.
27
While the Credit Facility will restrict our ability to sell or finance
our subsidiaries without the consent of Wells Fargo, in the event that we are
able to secure debt or equity financing for a subsidiary that is a guarantor or
the sale or merger of such subsidiary and such subsidiary repays all advances
made to it under the Credit Facility, then Wells Fargo has agreed to terminate
the applicable restrictions in the Credit Facility relating to such subsidiary
as a guarantor.
Based upon our plans and assumptions as of the date of this Report, we
currently believe that our capital resources, including our cash and cash
equivalents, amounts available under our Credit Facility, along with funds
expected to be generated from our operations, will be sufficient to meet our
anticipated cash needs during the next 12 months, including our working capital
needs, capital requirements and debt service commitments, other than the
development of the "company-owned" business of PowerSecure. However, any
projections of future cash needs and cash flows are subject to substantial risks
and uncertainties. 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 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,
will, and that similar costs that would be associated with developing
any future distributed generation systems for its company-owned
business package, would, 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 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 claims pending or that arise from
time to time against us, including but not limited 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.
28
- 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 our current 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 our current 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 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
29
non-amortization provisions of FAS 142 resulted in a $505,000 reduction in
our net loss applicable to common shareholders in the nine months ended
September 30, 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 September 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.
In July 2002, the FASB issued FAS No. 146, "Accounting for Costs
Associated With Exit or Disposal Activities", which provides guidance for
financial accounting and reporting of costs associated with exit or disposal
activities and nullifies EITF Issue No. 94-3, "Liability Recognition for Certain
Employee Termination Benefits and Other Costs to Exit an Activity (including
Certain Costs Incurred in a Restructuring)". FAS 146 requires the recognition of
a liability for a cost associated with an exit or disposal activity when the
liability is incurred, as opposed to when the entity commits to an exit plan
under EITF No. 94-3. FAS 146 is effective for exit or disposal activities that
are initiated after December 31, 2002. The adoption of FAS No. 146 is not
expected to have a material 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",
30
"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 our Credit
Facility;
- our ability to successfully and timely develop, market and operate
PowerSecure's systems, including its products, services, and
technologies, and
31
also including new and future platforms and offerings;
- the effects of pending and future lawsuits on our liquidity, financial
condition and results of operations, including the expenses of
defending claims against us and the potential costs of the ultimate
resolutions 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
our 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;
32
- 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 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.
ITEM 3. CONTROLS AND PROCEDURES
Within the 90 day period prior to the filing date of this Quarterly
Report on Form 10-QSB, the Company, under the supervision and with the
participation of its management, including its Chief Executive Officer and its
Chief Financial Officer, carried out an evaluation of the effectiveness of the
design and operation of the Company's disclosure controls and procedures, as
defined in Securities Exchange Act of 1934 Rules 13a-14 and 15d-14. Based upon
that evaluation, the Company's Chief Executive Officer and Chief Financial
Officer concluded that such disclosure controls and procedures are effective to
ensure that material information relating to the Company, including its
consolidated subsidiaries, required to be disclosed by the Company in its
periodic reports under the Securities Exchange Act is made known to them within
a time period that allows the Company to make all required disclosure in its
periodic reports.
There were no significant changes in the Company's internal controls or
in other factors that could significantly affect these controls subsequent to
the date of their evaluation.
33
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 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
34
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.
On August 12, 2002, the Metretek Defendants filed third party claims
against IFG Network Securities, Inc. ("IFG") and Pringle & Herigstad, P.C.,
seeking contribution under Colorado law.
On October 17, 2002, the Denver Court granted a stipulated motion by
the parties for an extension of time to serve notice of trial setting until
December 16, 2002. Accordingly, 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
35
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 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.
At the present time, 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 and the
Metretek Defendants dispute the allegations of wrongdoing in these cases and
intend to vigorously defend the claims against them and to vigorously pursue
appropriate cross-claims and third party claims. 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.
During 1999 and 2000, the Company retained Scient Corporation
("Scient"), an "eBusiness" consultant, to design and install an eBusiness
program that would enable the Company to provide its energy management services
to commercial customers via an Internet project, which was called "PowerSpring"
(the "PowerSpring Project"). In connection with the PowerSpring Project, the
Company paid Scient approximately $7 million in fees and expenses, as part of a
total investment by the Company in PowerSpring in excess of $15.6 million.
In September 2000, as Scient's engagement was being terminated, the
Company issued a non-negotiable promissory note to Scient for approximately $2.8
million (the "Scient Note") for the outstanding balance of services invoiced by
Scient in connection with the PowerSpring Project. The Scient Note provided for
payments by the Company in quarterly installments $250,000 each until March 31,
2002, at which time the remaining balance of the Scient Note was to be paid in
full. In June 2001, after the Company discovered fraudulent activity by Scient
and uncovered other matters of dispute in connection with Scient's services and
billings, Scient agreed to suspend the Company's payment obligations under the
Scient Note until the amount of the fraudulent activity could be resolved. In
May 2002, Scient's engagement manager in charge of the PowerSpring Project
pleaded guilty to federal wire fraud and mail fraud charges stemming primarily
from his activities during Scient's engagement by the Company.
36
In July 2002, Scient filed for Chapter 11 bankruptcy protection.
Although the Company and Scient never resolved the amount in dispute, on October
17, 2002, Metretek received a letter from Scient's counsel purporting to
constitute notice by Scient that the Company was in breach of the Scient Note
for failing to make payments and threatening to initiate enforcement proceedings
if the remaining balance, which as of the date hereof is approximately $2.5
million, was not paid in full. In November 2002, the Company filed a motion with
the United States Bankruptcy Court for the Southern District of New York,
seeking to have that court compel Scient and its successors to arbitrate the
dispute related to the Scient Note in accordance with an arbitration provision
in the Company's agreement with Scient. The Company has also filed a $15.6
million proof of claim against Scient's estate in the bankruptcy court. The
Company intends to vigorously challenge Scient's assertion that the Company has
any remaining obligations under the Scient Note and to vigorously pursue its
proof of claim against Scient's estate. However, the Company cannot provide any
assurance that it will prevail in its dispute with Scient. An adverse resolution
in this matter requiring the Company to make further payments under the Scient
Note could have material adverse effect on liquidity, financial condition and
results of operations of the Company.
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 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
On October 14, 2002, the Company issued a press release announcing that
the Nasdaq Listing Qualifications Panel has denied its request for continued
listing of its common stock, par value $.01 per share ("Common Stock"), despite
its failure to comply with the $1.00 minimum bid price requirement for continued
listing on the Nasdaq SmallCap Market, as set forth in Marketplace Rule
4310(c)(4). As a result, the Company's Common Stock was delisted from the Nasdaq
SmallCap Market effective at the opening of business on October 15, 2002.
The Company's Common Stock became eligible for trading on the OTC
Bulletin Board on October 15, 2002. The OTC Bulletin Board is a regulated
quotation service that displays real-time quotes, last-sale prices, and volume
information in over-the counter securities. Information regarding the OTC
Bulletin Board is available at www.otcbb.com.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
See discussion of Scient Note under Part II, Item 1 above.
37
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
(b) FORM 8-K
--------
The Company filed the following Current Reports on Form 8-K
since June 30, 2002.
Filing Date Item No. Description
----------- -------- -----------
August 21, 2002 5,7 Announced Nasdaq Determination
Letter concerning non-compliance
with continued listing requirments
of the Nasdaq SmallCap Market
September 10, 2002 5 Metretek Florida Credit and
Security Agreement with Wells
Fargo Business Credit, Inc.
October 15, 2002 5,7 Nasdaq SmallCap delisting and
commencement of trading on the
OTC Bulletin Board
38
SIGNATURES
In accordance with the requirements of the Securities Exchange Act of
1934, the registrant caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
METRETEK TECHNOLOGIES, INC.
Date: November 12, 2002 By: /s/ W. Phillip Marcum
-------------------------------------
W. Phillip Marcum
President and Chief Executive Officer
Date: November 12, 2002 By: /s/ A. Bradley Gabbard
-------------------------------------
A. Bradley Gabbard
Executive Vice President
and Chief Financial Officer
39
CERTIFICATIONS
I, W. Phillip Marcum, certify that:
1. I have reviewed this quarterly report on Form 10-QSB of
Metretek Technologies, Inc.;
2. Based on my knowledge, this quarterly report does not contain
any untrue statement of a material fact or omit to state a
material fact necessary to make the statements made, in light
of the circumstances under which such statements were made,
not misleading with respect to the period covered by this
quarterly report;
3. Based on my knowledge, the financial statements, and other
financial information included in this quarterly report,
fairly present in all material respects the financial
condition, results of operations and cash flows of the
registrant as of, and for, the periods in this quarterly
report;
4. The registrant's other certifying officers and I are
responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act Rules
13a-14 and 15d-14) for the registrant and we have:
(a) designed such disclosure controls and procedures to
ensure that material information relating to the
registrant, including its consolidated subsidiaries,
is made known to us by others within those entities,
particularly during the period in which this
quarterly report is being prepared;
(b) evaluated the effectiveness of the registrant's
disclosure controls and procedures as of a date
within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
(c) presented in this quarterly report our conclusions
about the effectiveness of the disclosure controls
and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have
disclosed, based on our most recent evaluation, to the
registrant's auditors and the audit committee of registrant's
board of directors (or persons performing the equivalent
function):
(a) all significant deficiencies in the design or
operation of internal controls which could adversely
affect the registrant's ability to
40
record, process, summarize and report financial data
and have identified for the registrant's auditors any
material weaknesses in internal controls; and
(b) any fraud, whether or not material, that involves
management or other employees who have a significant
role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have
indicated in this quarterly report whether or not there were
significant changes in internal controls or in other factors
that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and
material weaknesses.
Dated: November 12, 2002 /s/ W. Phillip Marcum
-----------------------------------
W. Phillip Marcum
President and Chief Executive Officer
I, A. Bradley Gabbard, certify that:
1. I have reviewed this quarterly report on Form 10-QSB of
Metretek Technologies, Inc.;
2. Based on my knowledge, this quarterly report does not contain
any untrue statement of a material fact or omit to state a
material fact necessary to make the statements made, in light
of the circumstances under which such statements were made,
not misleading with respect to the period covered by this
quarterly report;
3. Based on my knowledge, the financial statements, and other
financial information included in this quarterly report,
fairly present in all material respects the financial
condition, results of operations and cash flows of the
registrant as of, and for, the periods in this quarterly
report;
4. The registrant's other certifying officers and I are
responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act Rules
13a-14 and 15d-14) for the registrant and we have:
41
(a) designed such disclosure controls and procedures to
ensure that material information relating to the
registrant, including its consolidated subsidiaries,
is made known to us by others within those entities,
particularly during the period in which this
quarterly report is being prepared;
(b) evaluated the effectiveness of the registrant's
disclosure controls and procedures as of a date
within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
(c) presented in this quarterly report our conclusions
about the effectiveness of the disclosure controls
and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have
disclosed, based on our most recent evaluation, to the
registrant's auditors and the audit committee of registrant's
board of directors (or persons performing the equivalent
function):
(a) all significant deficiencies in the design or
operation of internal controls which could adversely
affect the registrant's ability to record, process,
summarize and report financial data and have
identified for the registrant's auditors any material
weaknesses in internal controls; and
(b) any fraud, whether or not material, that involves
management or other employees who have a significant
role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have
indicated in this quarterly report whether or not there were
significant changes in internal controls or in other factors
that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and
material weaknesses.
Dated: November 12, 2002 /s/ A. Bradley Gabbard
----------------------------------
A. Bradley Gabbard
Executive Vice President and Chief
Financial Officer
42