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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------------------
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2004
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _____________ to
Commission File Number 0-19793
METRETEK TECHNOLOGIES, INC.
(Exact name of registrant as specified in its charter)
Delaware 84-1169358
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
303 East Seventeenth Avenue, Suite 660
Denver, Colorado 80203
(Address of principal executive offices) (Zip code)
(303) 785-8080
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
As of May 6, 2004 there were 10,943,201 shares of the issuer's Common
Stock outstanding.
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes [ ] No [X]
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METRETEK TECHNOLOGIES, INC.
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2004
TABLE OF CONTENTS
Page
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Unaudited Consolidated Balance Sheets -
March 31, 2004 and December 31, 2003 3
Unaudited Consolidated Statements of Operations -
For the Three Months Ended March 31, 2004 and
March 31, 2003 5
Unaudited Consolidated Statements of Cash Flows -
For the Three Months Ended March 31, 2004 and
March 31, 2003 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. Quantitative and Qualitative Disclosures about Market Risk 33
Item 4. Controls and Procedures 33
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 35
Item 2. Unregistered Securities 35
Item 6. Exhibits and Reports on Form 8-K 37
Signatures 39
2
PART I.
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
METRETEK TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
MARCH 31, DECEMBER 31,
2004 2003
----------- -----------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 2,123,309 $ 2,101,675
Trade receivables, net of allowance for doubtful accounts
of $299,581 and $200,706, respectively 5,668,986 6,613,153
Other receivables 38,591 59,864
Inventories 4,470,908 3,984,223
Prepaid expenses and other current assets 337,818 489,253
----------- -----------
Total current assets 12,639,612 13,248,168
----------- -----------
PROPERTY, PLANT AND EQUIPMENT:
Equipment 4,136,964 3,810,632
Vehicles 38,876 66,590
Furniture and fixtures 595,365 588,869
Land, building and improvements 758,545 754,167
----------- -----------
Total property, plant and equipment, at cost 5,529,750 5,220,258
Less accumulated depreciation and amortization 3,925,713 3,814,908
----------- -----------
Property, plant and equipment, net 1,604,037 1,405,350
----------- -----------
OTHER ASSETS:
Goodwill 7,617,196 7,617,196
Patents and capitalized software development, net of accumulated
amortization of $1,058,744 and $1,033,109, respectively 263,022 288,657
Investment in unconsolidated affiliate 1,766,770 691,100
Other assets 177,158 76,070
----------- -----------
Total other assets 9,824,146 8,673,023
----------- -----------
TOTAL $24,067,795 $23,326,541
=========== ===========
See accompanying notes to unaudited consolidated financial statements.
3
METRETEK TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
MARCH 31, DECEMBER 31,
2004 2003
------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 2,590,681 $ 1,978,226
Accrued and other liabilities 4,181,188 4,530,149
Notes payable 1,099,108 750,753
Capital lease obligations 30,727 25,411
------------ ------------
Total current liabilities 7,901,704 7,284,539
------------ ------------
LONG-TERM NOTES PAYABLE 5,089,634 5,226,950
------------ ------------
NON-CURRENT CAPITAL LEASE OBLIGATIONS 18,098 16,483
------------ ------------
COMMITMENTS AND CONTINGENCIES
MINORITY INTEREST IN SUBSIDIARIES 281,790 207,280
------------ ------------
REDEEMABLE PREFERRED STOCK - SERIES B,
$.01 PAR VALUE; 1,000,000 SHARES AUTHORIZED;
7,000 ISSUED AND OUTSTANDING;
REDEMPTION VALUE $1,000 PER SHARE 9,653,874 9,422,132
------------ ------------
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; 6,163,057 and 6,043,469 shares issued
and outstanding, respectively 61,631 60,435
Additional paid-in-capital 55,286,891 55,107,132
Accumulated deficit (54,225,827) (53,998,410)
------------ ------------
Total stockholders' equity 1,122,695 1,169,157
------------ ------------
TOTAL $ 24,067,795 $ 23,326,541
============ ============
See accompanying notes to unaudited consolidated financial statements.
4
METRETEK TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
THREE MONTHS ENDED
MARCH 31,
---------------------------
2004 2003
----------- -----------
REVENUES:
Sales and services $ 9,102,400 $ 7,181,669
Other 609,325 201,200
----------- -----------
Total revenues 9,711,725 7,382,869
----------- -----------
COSTS AND EXPENSES:
Cost of sales and services 6,955,946 5,776,581
General and administrative 1,750,550 1,613,359
Selling, marketing and service 496,032 223,061
Depreciation and amortization 171,951 172,312
Research and development 166,267 144,621
Interest, finance charges and other 80,189 65,571
----------- -----------
Total costs and expenses 9,620,935 7,995,505
----------- -----------
OPERATING INCOME (LOSS) 90,790 (612,636)
MINORITY INTEREST IN SUBSIDIARIES (74,510) (11,020)
INCOME TAXES (11,955) (20,932)
----------- -----------
NET INCOME (LOSS) 4,325 (644,588)
PREFERRED STOCK DEEMED DISTRIBUTION (231,742) (217,176)
----------- -----------
NET LOSS APPLICABLE TO COMMON SHAREHOLDERS $ (227,417) $ (861,764)
=========== ===========
NET LOSS PER COMMON SHARE, BASIC AND DILUTED $ (0.04) $ (0.14)
=========== ===========
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING, BASIC AND DILUTED 6,111,945 6,043,469
=========== ===========
See accompanying notes to unaudited consolidated financial statements.
5
METRETEK TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
THREE MONTHS ENDED
MARCH 31,
--------------------------------
2004 2003
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 4,325 $ (644,588)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization 171,951 172,312
Minority interest in subsidiaries 74,510 26,020
(Gain) loss on disposal of property, plant and equipment (2,250) 833
Equity in income of unconsolidated affiliate (368,419) (135,223)
Changes in other assets and liabilities:
Trade receivables 944,167 (765,401)
Inventories (486,685) (567,017)
Other current assets 172,708 173,379
Other noncurrent assets (101,088) (15,012)
Accounts payable 612,455 1,803,632
Accrued and other liabilities (348,961) 49,860
----------- -----------
Net cash provided by operating activities 672,713 98,795
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment (333,416) (56,787)
Investment in unconsolidated affiliate (955,784)
Distributions from unconsolidated affiliate 248,533 120,250
Proceeds from sale of property, plant and equipment 4,000
----------- -----------
Net cash (used in) provided by investing activities (1,036,667) 63,463
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from stock option exercises 180,955
Net payments on line of credit (836,247) (476,775)
Proceeds from equipment loan 110,250
Proceeds from investment loan 960,784
Payments on equipment loans (21,717) (13,270)
Payments on mortgage loan and capital lease obligations (8,437) (12,281)
----------- -----------
Net cash provided by (used in) financing activities 385,588 (502,326)
----------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 21,634 (340,068)
CASH AND CASH EQUIVALENTS AT
BEGINNING OF PERIOD 2,101,675 884,843
----------- -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 2,123,309 $ 544,775
=========== ===========
See accompanying notes to unaudited consolidated financial statements.
6
METRETEK TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
As of March 31, 2004 and December 31, 2003 and
For the Three Month Periods Ended March 31, 2004 and 2003
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION - The accompanying consolidated financial statements include
the accounts of Metretek Technologies, Inc. and its subsidiaries, primarily
Southern Flow Companies, Inc. ("Southern Flow"), PowerSecure, Inc.
("PowerSecure"), and Metretek, Incorporated ("Metretek Florida") (and its
majority-owned subsidiary, Metretek Contract Manufacturing Company, Inc.
("MCM")), and Marcum Gas Transmission, Inc. ("MGT") (and its majority-owned
subsidiary, Conquest Acquisition Company LLC ("CAC LLC")), collectively referred
to as the "Company" or "we" or "us" or "our". These consolidated financial
statements have been prepared pursuant to rules and regulations of the
Securities and Exchange Commission. The accompanying consolidated financial
statements and notes thereto should be read in conjunction with the consolidated
financial statements and notes thereto included in the Company's Annual Report
on Form 10-K for the year ended December 31, 2003.
In the opinion of the Company's management, all adjustments (all of which
are normal and recurring) have been made which are necessary for a fair
presentation of the consolidated financial position of the Company and its
subsidiaries as of March 31, 2004 and the consolidated results of their
operations and cash flows for the three month periods ended March 31, 2004 and
March 31, 2003.
RECLASSIFICATION - Certain 2003 amounts have been reclassified to conform
to current year presentation. Such reclassifications had no impact on the
Company's net income (loss) or stockholders' equity.
STOCK BASED COMPENSATION - The Company has three stock-based employee and
director compensation plans, which it accounts for under the recognition and
measurement principles of APB Opinion No. 25, "Accounting for Stock Issued to
Employees", and related Interpretations. Accordingly, the Company does not
recognize compensation cost for stock option grants to employees and directors,
as all options granted under those plans have exercise prices equal to or in
excess of the market value of the underlying common stock on the date of grant.
The following table illustrates the effect on net loss and loss per share
applicable to common shareholders if the Company had applied the fair value
recognition provisions of FAS 123 for the three month periods ended March 31,
2004 and 2003:
7
THREE MONTHS ENDED
MARCH 31,
----------------------------------
2004 2003
----------- -----------
Net loss applicable to common
shareholders - as reported $ (227,417) $ (861,764)
Deduct total stock-based employee
compensation expense determined
under fair value based method (104,000) -
----------- -----------
Net loss applicable to common
shareholders - pro forma $ (331,417) $ (861,764)
=========== ===========
Net loss per basic and
diluted Common Share:
As reported $ (0.04) $ (0.14)
=========== ===========
Pro forma $ (0.05) $ (0.14)
=========== ===========
The fair values of stock options were calculated using the Black-Scholes
stock option valuation model with the following weighted average assumptions for
stock option grants during the period ended March 31, 2004: stock price
volatility of 111%; risk-free interest rate of 3.50% per year; dividend rate of
$0.00 per year; and an expected life of 4 years for options granted to
employees. There were no stock option grants during the period ended March 31,
2003.
2. INVESTMENT IN UNCONSOLIDATED AFFILIATE
During the first quarter of 2004, additional equity interests in MGT's
unconsolidated affiliate, Marcum Midstream 1995-2 Business Trust ("MM 1995-2"),
were acquired at a purchase price of $956,000, with an effective date of the
acquisition of January 1, 2004. To facilitate the acquisition of the additional
equity interests, MGT formed CAC LLC, a majority-owned subsidiary. Financing of
the acquired equity interests was provided by a $956,000 term loan from a
commercial bank to CAC LLC. The loan is secured by CAC LLC's and MGT's
collective interests in MM 1995-2, and the Company has provided a guaranty of
$625,000 of the term loan. The term loan provides for 60 monthly payments of
principal and interest (at a rate of 5.08%) in the amount of approximately
$18,500 per month. Cash distributions from MM 1995-2 to CAC LLC will be used to
fund the monthly payments on the term loan.
Upon formation, MGT acquired 73.75% of CAC LLC. CAC LLC accounts for its
interests in MM 1995-2 under the equity method of accounting. The minority
shareholder's interest in CAC LLC at March 31, 2004, is included in minority
interest in the accompanying consolidated financial statements.
3. COMMITMENTS AND CONTINGENCIES
CLASS ACTION LITIGATION - As described in our Annual Report on Form 10-K
for the fiscal year ended December 31, 2003 ("2003 Form 10-K"), in January 2001,
Douglas W. Heins (the "Class Action Plaintiff"), individually and on behalf of a
class of other persons similarly situated, filed a complaint (the "Class
Action") in the District Court for the City and County of Denver,
8
Colorado (the "Denver Court") against the Company, Marcum Midstream 1997-1
Business Trust (the "1997 Trust"), Marcum Midstream-Farstad, LLC ("MMF"), 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").
On March 27, 2003, the Company, along with the Class Action Plaintiff,
filed a Stipulation of Settlement, which contains the terms and conditions of a
proposed settlement intended to fully resolve all claims by the Class Action
Plaintiff against the Company and the other Metretek Defendants in the Class
Action. On March 2, 2004, the Company and the Class Action Plaintiff filed a
revised Stipulation of Settlement (as revised, the "Heins Stipulation"), which
revises certain terms of the settlement (as revised, the "Heins Settlement").
The terms and conditions of the Heins Settlement are set forth in the 2003 Form
10-K. Because this is a class action, the Heins Settlement is subject to
objection by the Class members and will have to be approved by the Denver Court
as described below. Other defendants in the Class Action that are not parties to
the Heins Stipulation may also attempt to object to the Heins Settlement.
The Heins Settlement is contingent, among other things, upon the payment
of not less than $2,375,000 from the proceeds of the Company's directors' and
officers' insurance policy (the "Policy"), which was issued by Gulf Insurance
Company ("Gulf"). In settlement of the Interpleader Action discussed below, Gulf
has paid into escrow $2,375,000 in Policy proceeds to be used in the Heins
Settlement. Pursuant to the Heins Stipulation, the Company has paid $375,000
into escrow for use in the Heins Settlement, and the Company has agreed to issue
a note payable to the Heins Settlement Fund in the amount of $3.0 million (the
"Heins Settlement Note"), and to commence payments thereunder in escrow
beginning June 30, 2004. The Heins Settlement Note will bear interest at the
rate of prime plus three percent (prime + 3%), payable in 16 quarterly
installments, each of $187,500 principal plus accrued interest, and will be
guaranteed by the 1997 Trust and all of the Company's subsidiaries. The Heins
Stipulation creates a settlement fund (the "Heins Settlement Fund") for the
benefit of the Class. If the Denver Court approves the Heins Settlement and all
other conditions to the Heins Settlement are met, then the Heins Settlement Fund
will be funded by the escrowed funds and by the Company's payments on the Heins
Settlement Note which will then be paid directly to the Heins Settlement Fund.
At the preliminary approval hearing held by the Denver Court on the Heins
Settlement on April 15, 2004, the Denver Court granted preliminary approval,
authorized notice of the Heins Settlement to be sent to the Class, and set a
date for the final approval hearing on June 11, 2004. Notice of the Heins
Settlement has been sent to the Class members. The Company cannot provide any
assurance that the Denver Court will grant final approval of the Heins
Settlement. In addition, final approval by the Denver Court may be subject to
post-judgment challenge or appeal.
On March 28, 2003, Gulf filed an interpleader complaint against the
Metretek Defendants, the Farstad Defendants and the Class Action Plaintiff (the
"Interpleader Action") in
9
the Denver Court, seeking a determination by the Denver Court as to the proper
beneficiaries of the Policy. In March 2004, we settled the Interpleader Action
with Gulf and the Farstad Defendants (the "Interpleader Settlement"). Pursuant
to the terms of the Interpleader Settlement, Gulf paid into escrow $2,375,000
for use in the Heins Settlement, and has paid the remainder of the Policy
proceeds to the Farstad Defendants. In exchange, the Company and the Farstad
Defendants have fully released Gulf from all further claims under the Policy.
The Interpleader Action was dismissed on April 2, 2004.
The Company cannot provide any assurance that the conditions to the Heins
Settlement will be satisfied and that the Heins Stipulation will become
effective, or if it becomes effective the timing of such effectiveness. If the
Heins Stipulation does not become effective, the Company cannot predict the
outcome of this litigation or the impact the resolution of the Class Action will
have on its business, financial position or results of operations. The Company
and the Metretek Defendants dispute the allegations of wrongdoing in the Class
Action and intend to vigorously defend the claims against it and them and to
vigorously pursue appropriate cross-claims and third party claims. However,
failure to consummate the Heins Settlement or an adverse judgment against us in
the Class Action could have a material adverse effect on the Company's business,
financial condition and results of operations.
4. SEGMENT INFORMATION
The Company's reportable segments are strategic business units that offer
different products and services. They are managed separately because each
business requires different technology and marketing strategies. The Company's
reportable business segments include: natural gas measurement services;
distributed generation; and automated energy data management.
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 March 31, 2004, 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.
10
The operations of our automated data collection and telemetry segment are
conducted by Metretek Florida. Metretek Florida's manufactured products fall
into the following categories: field devices, including data collection products
and electronic gas flow computers; data collection software products (such as
InvisiConnect(TM), DC2000 and PowerSpring); and communications solutions that
can use public networks operated by commercial wireless carriers to provide real
time IP-based wireless internet connectivity, traditional cellular radio, 900
MHz unlicensed radio or traditional wire-line phone service to provide
connectivity between the field devices and the data collection software
products. Metretek Florida also provides data collection, M2M telemetry
connectivity and post-sale support services for its manufactured products and
turn-key solutions. In June 2002, Metretek Florida formed MCM to conduct and
expand its circuit board contract manufacturing operations.
The Company evaluates the performance of its operating segments based on
income (loss) before minority interest, 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 amounts shown as "Other" include
corporate related items, equity in earnings of unconsolidated affiliate, results
of insignificant operations and, as it relates to segment profit or loss, income
and expense not allocated to reportable segments.
11
SUMMARIZED SEGMENT FINANCIAL INFORMATION
(all amounts reported in thousands)
Three Months Ended
March 31,
-------------------------
2004 2003
------- -------
REVENUES:
Southern Flow $ 3,096 $ 2,984
PowerSecure 4,202 3,024
Metretek Florida 1,804 1,174
Other 610 201
------- -------
Total $ 9,712 $ 7,383
======= =======
SEGMENT PROFIT (LOSS):
Southern Flow $ 358 $ 320
PowerSecure 224 99
Metretek Florida (434) (562)
Other (57) (470)
------- -------
Total $ 91 $ (613)
======= =======
CAPITAL EXPENDITURES:
Southern Flow $ 27 $ 29
PowerSecure 165 6
Metretek Florida 140 22
Other 1
------- -------
Total $ 333 $ 57
======= =======
DEPRECIATION AND AMORTIZATION:
Southern Flow $ 30 $ 33
PowerSecure 21 13
Metretek Florida 116 121
Other 5 5
------- -------
Total $ 172 $ 172
======= =======
March 31,
-------------------------
2004 2003
------- -------
TOTAL ASSETS:
Southern Flow $ 9,333 $ 8,851
PowerSecure 5,199 3,572
Metretek Florida 7,298 6,649
Other 2,238 860
------- -------
Total $24,068 $19,932
======= =======
5. SUBSEQUENT EVENTS
On May 6, 2004, the Company completed a private placement to institutional
and accredited investors of 3,510,548 shares of its common stock and warrants to
purchase 702,109 shares of its common stock (the "Private Placement"), raising
gross proceeds of $10.9 million.
12
The price paid in the Private Placement was $3.10 per unit, each unit consisting
of one share of common stock and a warrant to purchase 0.2 shares of common
stock. Roth Capital Partners, LLC acted as placement agent in the Private
Placement.
The Company received net cash proceeds of approximately $9.9 million from
the Private Placement, after deducting transaction expenses including the
placement agent's fee. The net proceeds from the Private Placement are intended
to be used by the Company principally to meet its mandatory redemption
obligations related to its Series B Preferred Stock, par value $.01 per share
("Series B Preferred Stock"), which matures on December 9, 2004, and for other
business commitments and initiatives.
The warrants issued in the Private Placement have an exercise price of
$3.41 per share of common stock and expire in May 2009. The warrants are
callable by the Company commencing one year after issuance if the trading price
of the common stock is at least two times the warrant exercise price for 30
consecutive trading days and certain other conditions are satisfied. In addition
to the warrants issued to the investors, the Company issued warrants to purchase
up to 351,055 shares of common stock to the placement agent, which warrants are
on the same basic terms as the warrants issued to the investors. The Company has
agreed to file a registration statement with the Securities and Exchange
Commission covering resales from time to time of shares of common stock issued
in the Private Placement or upon the exercise of the warrants.
In addition, certain holders of the Company's outstanding shares of Series
B Preferred Stock have converted a total of 2,500 shares of Series B Preferred
Stock, including accrued and unpaid dividends thereon, and received upon such
conversion 1,209,133 shares of common stock plus warrants to purchase 1,209,133
shares of common stock exercisable until June 9, 2005 at an exercise price of
$3.0571 per share, which is the same price as the conversion price of the Series
B Preferred Stock into each share of common stock. The Company has agreed to
include the shares of common stock issuable upon exercise of such warrants in
the registration statement to be filed in connection with the Private Placement.
The following table illustrates the pro forma effects of the Private
Placement and conversion of the Series B Preferred Stock on the Company's
financial position, as if the transactions had occurred on March 31, 2004:
13
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
MARCH 31, 2004
PRO FORMA
HISTORICAL ADJUSTMENTS NOTES PRO FORMA
------------ ------------ ----- ------------
ASSETS
Current Assets:
Cash and cash equivalents $ 2,123,309 $ 9,800,000 (a) $ 11,923,309
Other current assets 10,516,303 10,516,303
------------ ------------
Total current assets 12,639,612 22,439,612
------------ ------------
Property, plant and equipment, net 1,604,037 1,604,037
Total other assets 9,824,146 9,824,146
------------ ------------ ------------
TOTAL $ 24,067,795 $ 9,800,000 $ 33,867,795
============ ============ ============
LIABILITIES AND STOCKHOLDERS'
EQUITY
Total current liabilities $ 7,901,704 $ 7,901,704
Long-term notes payable 5,089,634 5,089,634
Non-current capital lease obligations 18,098 18,098
Minority interest in subsidiaries 281,790 281,790
Redeemable preferred stock-Series B 9,653,874 (3,479,669) (b) 6,174,205
Total stockholders' equity 1,122,695 13,279,669 (c) 14,402,364
------------ ------------ ------------
TOTAL $ 24,067,795 $ 9,800,000 $ 33,867,795
============ ============ ============
Notes:
(a) Represents gross cash proceeds upon issuance of 3,510,548 shares of common
stock at $3.10 per share less placement agent fees and other financing
costs of $1,082,700, including costs to register the shares issued in the
Private Placement.
(b) Represents conversion of 2,500 shares of preferred stock ($2,500,000) and
accrued but unpaid dividends ($979,669) at March 31, 2004.
(c) Represents the effect of issuing 1,209,133 common shares for the
conversion of the Series B Preferred Stock plus the issuance of 3,510,548
shares of common stock at $3.10 in the Private Placement, net of placement
agent fees and financing costs, less a deemed distribution on the
Preferred Shares redeemed.
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 month
periods ended March 31, 2004 (referred to herein as the "first quarter 2004")
and 2003 (referred to herein as the "first quarter 2003") and of our financial
condition as of March 31, 2004 should be read in conjunction with our
consolidated financial statements and related notes thereto included elsewhere
in this report.
OVERVIEW
We are a diversified provider of energy technology products, services and
data management systems primarily to industrial and commercial users and
suppliers of natural gas and electricity. As a holding company, we conduct our
operations and derive our revenues through our three operating subsidiaries,
each of which operates a separate business:
- Southern Flow, which provides natural gas measurement services;
- PowerSecure, which designs, sells and manages distributed generation
systems; and
- Metretek Florida, which designs, manufactures and sells data collection
and energy measurement monitoring systems and provides contract
manufacturing services.
We commenced operations in 1991 as an energy services holding company,
owning subsidiaries with businesses designed to exploit service opportunities
primarily in the natural gas industry. Since then, our business has evolved and
expanded through acquisitions of companies, businesses and new product lines
that have allowed us to reach not only a broader portion of the energy market
(including the electricity market) but also markets outside of the energy field.
Over the past two years, we have focused our efforts on growing our businesses
by offering new and enhanced products, services and technologies, and by
entering new markets, within a framework emphasizing the goal of achieving
profitable operations on a sustained basis.
During the first quarter 2004, Metretek Florida showed improvements over
the first quarter 2003 in its revenues and in a reduction of its losses, which
resulted primarily from the continued expansion of its contract manufacturing
business. The distributed generation business and operations of PowerSecure also
expanded significantly. PowerSecure's revenues during the first quarter 2004
were 39% greater than its first quarter 2003 revenues. PowerSecure's growth
reflects an increase in the number of projects awarded to PowerSecure as well as
an expansion of its professional services. Southern Flow's revenues and segment
profit also showed improvement during the first quarter 2004, as compared to the
first quarter 2003, as a result of generally improved market conditions.
Also during the first quarter of 2004, we acquired additional equity
interests in our
15
unconsolidated affiliate, Marcum Midstream 1995-2 Business Trust ("MM 1995-2"),
at a purchase price of $956,000. We financed the acquisition of the additional
equity interests through a $956,000 term loan from a commercial bank to a newly
formed majority owned subsidiary, CAC LLC. The additional equity income from
MM 1995-2 increased our other revenues substantially during the first quarter of
2004. We expect cash distributions from MM 1995-2 to CAC LLC will be sufficient
to fund the monthly payments on the term loan, as well as provide cash for other
business commitments and initiatives.
We recorded a net loss applicable to common shareholders of $227,000
during the first quarter 2004, which represents a substantial reduction as
compared to the net loss applicable to common shareholders of $862,000 during
the first quarter 2003. Overall, our consolidated revenues during the first
quarter 2004 increased by $2,239,000, representing a 32% increase over first
quarter 2003 consolidated revenues. The deemed distribution on our Series B
Preferred Stock was $232,000 during the first quarter 2004, and will reduce any
net income, or increase any net loss, during the remainder of 2004.
Unless the holders of our Series B Preferred Stock elect to convert their
Preferred Stock to Common Stock, the terms of our Series B Preferred Stock will
require us to redeem all shares of our Series B Preferred Stock that remain
outstanding on December 9, 2004 at a redemption price equal to the liquidation
preference of $1,000 per share plus accumulated and unpaid dividends. The Series
B Preferred Stock is convertible, at the option of the holders thereof, into
Common Stock at the conversion rate of approximately $3.06 per share of Common
Stock. While the conversion of shares of Series B Preferred Stock into shares of
Common Stock prior to the redemption date will reduce our redemption obligation,
we cannot determine at this time how many shares of Series B Preferred Stock
will ultimately be converted. As of March 31, 2004, the total redemption
obligation was approximately $9.7 million, but that amount was subsequently
reduced to approximately $6.2 million as a result of the exercise of the
conversion option by certain holders of the Series B Preferred Stock.
Another important factor in our liquidity relates to the settlement of the
Class Action lawsuit. The Heins Settlement is subject to certain conditions,
including final court approval. Under the Heins Settlement, we are required to
commence payments on a four year $3 million promissory note on the earlier of
June 30, 2004 or shortly after final court approval. On April 15, 2004, the
Denver Court granted preliminary approval of the Heins Settlement and set a June
11, 2004 date for the final court approval hearing, although there is no
assurance that final court approval will be granted. If the Heins Settlement is
not approved, then we will be required to recommence our defense of the Class
Action, with all of the costs and risks inherent in litigation. See "Part II,
Item 1. Legal Proceedings" in this Report and "-Liquidity and Capital Resources"
below in this Item.
After the first quarter 2004, we took substantial steps to improve our
balance sheet and liquidity. On May 6, 2004, we completed a Private Placement to
institutional and accredited investors of 3,510,548 shares of our Common Stock
and warrants to purchase 702,109 shares of our Common Stock, raising gross
proceeds of $10.9 million. We received net cash proceeds of approximately $9.9
million from the Private Placement, after deducting transaction expenses
16
including the placement agent's fee. The net proceeds from the Private Placement
are intended to be used principally to meet our mandatory redemption obligations
related to our Series B Preferred Stock and for other business commitments and
initiatives.
In addition, certain holders of our outstanding shares of Series B
Preferred Stock have converted a total of 2,500 shares of Preferred Stock,
including accrued and unpaid dividends thereon. As a result of the conversion of
these shares of Series B Preferred Stock, our maximum aggregate redemption
obligation at December 9, 2004 was reduced to approximately $6.6 million, and
the dividend and the deemed distribution on the Series B Preferred Stock will be
reduced for future periods as a result of the reduction in shares of Series B
Preferred Stock outstanding. See "-Liquidity and Capital Resources" below in
this Item for further discussion concerning the Private Placement and the
conversion of Preferred Stock.
CRITICAL ACCOUNTING POLICIES
Management's discussion and analysis of our financial condition and
results of operations are based on our consolidated financial statements, which
have been prepared in conformity with accounting principles generally accepted
in the United States of America. The preparation of these financial statements
requires management to make estimates, judgments and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and the reported amounts
of revenues and expenses during the reporting period. On an on-going basis, we
evaluate our estimates, including those related to revenue recognition and
percentage of completion, fixed price contracts, product returns, warranty
obligations, bad debt, inventories, cancellations costs associated with long
term commitments, investments, intangible assets, assets subject to disposal,
income taxes, restructuring, service contracts, contingencies and litigation. We
base our estimates on historical experience and on various other assumptions
that are believed to be reasonable under the circumstances, the results of which
form the basis for making estimates and judgments about the carrying value of
assets and liabilities that are not readily apparent from other sources.
Estimates, by their nature, are based on judgment and available information.
Therefore, actual results could differ from those estimates and could have a
material impact on our consolidated financial statements, and it is possible
that such changes could occur in the near term.
We have identified the accounting principles which we believe are most
critical to understanding our reported financial results by considering
accounting policies that involve the most complex or subjective decisions or
assessments. These accounting policies are described in our Annual Report on
Form 10-K for the year ended December 31, 2003 in "Item 7. Management's
Discussion and Analysis of Financial Condition and Results of Operations."
RESULTS OF OPERATIONS
The following table sets forth selected information related to our primary
business segments and is intended to assist you in an understanding of our
results of operations for the periods presented.
17
Three Months Ended
March 31,
------------------------------------
2004 2003
------- -------
(all amounts reported in thousands)
REVENUES:
Southern Flow $ 3,096 $ 2,984
PowerSecure 4,202 3,024
Metretek Florida 1,804 1,174
Other 610 201
------- -------
Total $ 9,712 $ 7,383
======= =======
GROSS PROFIT:
Southern Flow $ 776 $ 679
PowerSecure 1,138 677
Metretek Florida 232 49
------- -------
Total $ 2,146 $ 1,405
======= =======
SEGMENT PROFIT (LOSS):
Southern Flow $ 358 $ 320
PowerSecure 224 99
Metretek Florida (434) (562)
Other (57) (470)
------- -------
Total $ 91 $ (613)
======= =======
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; and
automated energy data management.
The operations of our natural gas measurement services segment are
conducted by Southern Flow. Southern Flow's services include on-site field
services, chart processing and analysis, laboratory analysis, and data
management and reporting. These services are provided principally to customers
involved in natural gas production, gathering, transportation and processing.
The operations of our distributed generation segment are conducted by
PowerSecure. The primary elements of PowerSecure's distributed generation
products and services include project design and engineering, negotiation with
utilities to establish tariff structures and power interconnects, generator
acquisition and installation, process control and switchgear design and
installation, and ongoing project monitoring and servicing. PowerSecure markets
its distributed generation products and services directly to large end-users of
electricity and through outsourcing partnerships with utilities. Through March
31, 2004, the vast majority of PowerSecure's revenues have been generated from
sales of distributed generation systems on a "turn-key" basis, where the
customer purchases the systems from PowerSecure. PowerSecure has also generated
a
18
small portion of its revenues from "company-owned" distributed generation assets
that are leased to customers on a long-term basis.
The operations of our automated data collection and telemetry segment are
conducted by Metretek Florida. Metretek Florida's manufactured products fall
into the following categories: field devices, including data collection products
and electronic gas flow computers; data collection software products (such as
InvisiConnect(TM), DC2000 and PowerSpring); and communications solutions that
can use public networks operated by commercial wireless carriers to provide real
time IP-based wireless internet connectivity, traditional cellular radio, 900
MHz unlicensed radio or traditional wire-line phone service to provide
connectivity between the field devices and the data collection software
products. Metretek Florida also provides data collection, M2M telemetry
connectivity and post-sale support services for its manufactured products and
turn-key solutions. In June 2002, Metretek Florida formed MCM to conduct and
expand its PCB contract manufacturing operations.
We evaluate the performance of our operating segments based on operating
income (loss) before taxes, nonrecurring items and interest income and expense.
Other revenues and profit (loss) amounts in the table above include corporate
related items, equity income in an unconsolidated affiliate, results of
insignificant operations, and income and expense including non-recurring charges
not allocated to its operating segments. Intersegment sales are not significant.
FIRST QUARTER 2004 COMPARED TO FIRST QUARTER 2003
Revenues. Our revenues are derived almost entirely from the sales of
products and services by our subsidiaries. Our consolidated revenues for the
first quarter 2004 increased $2,329,000, or 32%, compared to the first quarter
2003. The increase was due to an increase in revenues by each of our operating
subsidiaries as well as an increase in equity income from our investment in an
unconsolidated affiliate.
The 39% increase in PowerSecure's revenues during the first quarter 2004
compared to the first quarter 2003 was due to a significant increase in the
number of PowerSecure's completed and in-process projects. PowerSecure had 47
projects completed or in process during the first quarter 2004 compared to 30
projects completed or in process during the first quarter 2003. The positive
effect on revenues of the increased volume of projects was partially offset by a
reduction in the average revenue per project recognized during the first quarter
2004 compared to the first quarter 2003. PowerSecure's average revenue per
project for completed and in-process projects was $83,000 during the first
quarter 2004 compared to $98,000 during the first quarter 2003. We believe
PowerSecure is successfully identifying and closing more projects as a result of
an increasingly effective sales effort and increased marketplace awareness of
its presence. PowerSecure's first quarter 2004 revenues also included $279,000
of service related revenues, as compared to $78,000 during the first quarter
2003. 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.
19
The 54% increase in Metretek Florida's revenues during the first quarter
2004 compared to the first quarter 2003 was the net result of an increase in
domestic sales of $699,000, partially offset by a decrease in international
sales of $69,000. The increase in Metretek Florida's domestic sales was due to
an increase of $217,000 in sales of field devices, data collection software
products, and communications solutions products, combined with an increase of
$427,000 in its contract manufacturing sales. The increase in domestic sales of
field devices, data collection software products, and communications solutions
products was due to general economic improvements, strengthened financial
condition of energy companies, and regulatory changes that initiated utility
projects. The increase in domestic circuit board contract manufacturing sales
was due primarily to higher sales to MCM's three largest circuit board contract
manufacturing customers. As discussed below under "--Quarterly Fluctuations",
Metretek Florida's revenues have fluctuated significantly in the past and are
expected to continue to fluctuate significantly in the future.
Southern Flow's revenues increased by approximately 4% during the first
quarter 2004, as compared to the first quarter 2003. We believe that the
increase in Southern Flow's revenues was primarily attributable to modest price
increases charged to its customers for certain of its services, as well as a
generally improved market for its services due, in part, to a higher level of
natural gas prices.
Other revenues, almost exclusively comprised of equity income earned from
our investment in an unconsolidated affiliate that operates three water
processing and deep injection facilities in northeastern Colorado, increased
$409,000 during the first quarter 2004, as compared to the first quarter 2003.
The increase is due to higher levels of natural gas production activity in its
operating area as well as the additional equity interests that we acquired in
the first quarter 2004.
Costs and Expenses. The following table sets forth our costs and expenses
during the periods indicated:
QUARTER-OVER-QUARTER
QUARTER ENDED MARCH 31, DIFFERENCE
---------------------- --------------------
2004 2003 $ %
------- ------- -------- -----
(IN THOUSANDS)
Costs and Expenses:
Costs of Sales and Services
Southern Flow $ 2,320 $ 2,305 $ 15 1%
PowerSecure 3,064 2,347 717 31%
Metretek Florida 1,572 1,125 447 40%
------- ------- ------
Total 6,956 5,777 1,179 20%
General and administrative 1,751 1,613 138 9%
Selling, marketing and service 496 223 273 122%
Depreciation and amortization 172 172 - 0%
Reserarch and development 166 145 21 14%
Interest, finance charges and other 80 66 14 21%
Income taxes 12 21 (9) -43%
Costs of sales and services include materials, personnel and related
overhead costs
20
incurred to manufacture products and provide services. The 20% increase in cost
of sales and services for the first quarter 2004, compared to the first quarter
2003, was attributable almost entirely to increased activity at PowerSecure and
Metretek Florida.
The 1% increase in Southern Flow's costs of sales and services in the
first quarter 2004 reflects slightly higher costs associated with Southern Flow
equipment resales. Southern Flow's gross profit margin was 25.1% for the first
quarter 2004, compared to 22.8% during the first quarter 2003. The improved
gross profit margin reflects the modest price increases charged to Southern
Flow's customers commencing in the first quarter 2004, as well as generally
improved market conditions.
The 31% increase in PowerSecure's costs of sales and services in the first
quarter 2004 is almost entirely a direct result of the 39% increase in
PowerSecure's revenues. PowerSecure's gross profit margin was 27.1% during the
first quarter 2004, as compared to 22.4% during the first quarter 2003, which
reflects both cost efficiencies in project installation and construction as well
as a higher percentage of professional service revenues, with higher associated
profit margins, in the first quarter 2004 compared to the first quarter 2003.
The 40% increase in Metretek Florida's costs of sales and services in the
first quarter 2004 was likewise a direct result of the 54% increase in Metretek
Florida's revenues. Metretek Florida's gross profit margin increased to 12.9%
for the first quarter 2004, compared to 4.2% for the first quarter 2003. The
primary cause of this increase in Metretek Florida's gross profit margin was a
higher level of sales of field devices, data collection and communications
solutions which generally sell at higher margins to Metretek Florida.
General and administrative expenses include personnel and related overhead
costs for the support and administrative functions. The 9% increase in general
and administrative expenses in the first quarter 2004, as compared to the first
quarter 2003, was primarily due to increases in personnel and related overhead
costs associated with the development and growth of PowerSecure's business
necessitating an expansion of PowerSecure's workforce. In addition, the first
quarter 2004 general and administrative expenses also increased as the result of
smaller increases in personnel and related overhead costs at the parent level
and at Southern Flow during the first quarter 2004 attributable to increases in
professional fees, insurance costs, salaries and wages.
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. The 122% increase in selling,
marketing and service expenses in the first quarter 2004, as compared to the
first quarter 2003, was due entirely to increased personnel, commission costs,
and business development expenses associated with the development and growth of
the business of PowerSecure during the first quarter 2004.
Depreciation and amortization expenses include the depreciation of
property, plant and equipment and the amortization of certain intangible assets
including capitalized software development costs and other intangible assets
that do not have indefinite useful lives. The less
21
than 1% decrease in depreciation and amortization expenses in the first quarter
2004, as compared to the first quarter 2003, primarily reflects an increase in
depreciable equipment at PowerSecure, all of which was offset by reductions in
depreciation and amortization expense at each of the other operating
subsidiaries during the first quarter 2004.
Research and development expenses, all of which relate to activities at
Metretek Florida, include payments to third parties, wages and related expenses
for personnel, materials costs and related overhead costs related to product and
service development, enhancements, upgrades, testing and quality assurance. The
14% increase in research and development expenses in the first quarter 2004, as
compared to the first quarter 2003, primarily reflects additional personnel and
associated costs at Metretek Florida.
Interest, finance charges and other expenses include interest and finance
charges on our Credit Facility as well as other non-operating expenses. The 21%
increase in interest, finance charges and other expenses in the first quarter
2004, as compared to the first quarter 2003, reflects the additional bank
finance charges and interest on borrowings related to PowerSecure's line of
credit, which commenced in September 2003, as well as additional interest costs
related to a PowerSecure project loan and the term loan used to finance our
additional equity interest in our unconsolidated affiliate, both of which
commenced in the first quarter 2004.
Income tax expenses include state income taxes in various state
jurisdictions in which we have taxable activities. We incur no federal income
tax expense because of our consolidated net operating losses. The 43% decrease
in income taxes in the first quarter 2004, as compared to the first quarter
2003, was entirely due to decreases in state income taxes incurred by Southern
Flow in Louisiana, Oklahoma, and Mississippi.
QUARTERLY FLUCTUATIONS
Our quarterly revenues, expenses, margins, net income and other operating
results have fluctuated significantly from quarter-to-quarter, period-to-period
and year-to-year in the past and are expected to continue to fluctuate
significantly in the future due to a variety of factors, many of which are
outside of our control. These factors include, without limitation, the
following:
- the size, timing and terms of sales and orders, including customers
delaying, deferring or canceling purchase orders, or making smaller
purchases than expected;
- our ability to implement our business plans and strategies and the
timing of such implementation;
- the timing, pricing and market acceptance of our new products and
services such as Metretek Florida's new InvisiConnect offering;
- the pace of development of our new businesses and the growth of
their markets;
- changes in our pricing policies and those of our competitors;
- variations in the length of our product and service implementation
process;
- changes in the mix of products and services having differing
margins;
22
- changes in the mix of international and domestic revenues;
- the life cycles of our products and services;
- budgeting cycles of utilities and other major customers;
- general economic and political conditions;
- the resolution of pending and any future litigation and claims;
- economic conditions in the energy industry, especially in the
natural gas and electricity sectors;
- the effects of governmental regulations and regulatory changes in
our markets;
- changes in the prices charged by our suppliers;
- our ability to make and obtain the expected benefits from
acquisitions of technology or businesses, and the costs related to
such acquisitions;
- changes in our operating expenses; and
- the development and maintenance of business relationships with
strategic partners.
Because we have little or no control over most of these factors, our
operating results are difficult to predict. Any substantial adverse change in
any of these factors could negatively affect our business and results of
operations.
Our revenues and other operating results are heavily dependant upon the
volume and timing of customer orders and payments and the date of product
delivery. The timing of large individual sales is difficult for us to predict.
Because our operating expenses are based on anticipated revenues and because a
high percentage of these are relatively fixed, a shortfall or delay in
recognizing revenue could cause our operating results to vary significantly from
quarter-to-quarter and could result in significant operating losses in any
particular quarter. If our revenues fall below our expectations in any
particular quarter, we may not be able to reduce our expenses rapidly in
response to the shortfall, which could result in us suffering significant
operating losses in that quarter.
Over PowerSecure's three year operating history, its revenues, costs,
gross margins, cash flow, net income and other operating results have varied
from quarter-to-quarter, period-to-period and year-to-year, for a number of
reasons, including the factors mentioned above, and we expect such fluctuations
to continue in the future. PowerSecure's revenues depend in large part upon the
timing and the size of projects awarded to PowerSecure, and to a lesser extent
the timing of the completion of those projects. In addition, distributed
generation is an emerging market and PowerSecure is a new competitor in the
market, so there is no established customer base on which to rely or certainty
as to future contracts. Another factor that could cause material fluctuations in
PowerSecure's quarterly results is the amount of recurring, as opposed to
non-recurring, sources of revenue. Through March 31, 2004, the majority of
PowerSecure's revenues constituted non-recurring revenues.
Metretek Florida has historically derived substantially all of its
revenues from sales of its
23
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 recent years, Metretek
Florida has diversified its business by entering the contract manufacturing
market, but this business heavily depends upon the amount, size and timing of
customer orders, and is subject to customers delaying, deferring or canceling
purchase orders, or making smaller purchases than expected.
Due to all of these factors and the other risks discussed in this Report
and in our Annual Report on Form 10-K for the fiscal year ended December 31,
2003, you should not rely on quarter-to-quarter or year-to-year comparisons of
our results of operations as an indication of our future performance. Quarterly
or annual comparisons of our operating results are not necessarily meaningful or
indicative of future performance.
LIQUIDITY AND CAPITAL RESOURCES
Capital Requirements. 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.
Cash Flow. We have historically financed our operations and growth
primarily through a combination of cash on hand, cash generated from operations,
borrowings under credit facilities, and proceeds from private and public sales
of equity. As of March 31, 2004, we had working capital of $4,738,000, including
$2,123,000 in cash and cash equivalents, compared to working capital of
$5,964,000 on December 31, 2003, which included $2,102,000 in cash and cash
equivalents.
Net cash provided by operating activities was $673,000 in the first
quarter 2004, consisting of approximately $120,000 of cash used in operations,
before changes in assets and liabilities, and approximately $793,000 of cash
provided by changes in working capital and other asset and liability accounts.
This compares to net cash provided by operating activities of $99,000 in the
first quarter 2003, consisting of approximately $580,000 of cash used in
operations, before changes in assets and liabilities, and approximately $679,000
of cash provided by changes in working capital and other asset and liability
accounts.
24
Net cash used in investing activities was $1,037,000 in the first quarter
2004, as compared to cash provided by investing activities of $63,000 in the
first quarter 2003. The majority of the net cash used by investing activities
during the first quarter 2004 was attributed to the purchase of additional
equity interests in our unconsolidated affiliate. The net cash provided by
investing activities during the first quarter 2003 was attributable to
distributions from our unconsolidated affiliate, partially offset by the
purchase of equipment at Southern Flow and Metretek Florida.
Net cash provided by financing activities was $386,000 in the first
quarter 2004, compared to net cash used in financing activities of $502,000 in
the first quarter 2003. The majority of the net cash provided by financing
activities during the first quarter 2004 was attributable to proceeds from a
bank term loan used to finance the acquisition of the additional equity
interests in our unconsolidated affiliate and proceeds from a commercial loan to
finance the construction of a "company-owned" distributed generation project at
PowerSecure. The net cash provided by financing activities during the first
quarter 2003 represented net payments on our line of credit, payments on an
equipment loan, and payments on capital lease obligations and a mortgage loan.
During the remainder of 2004, 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
$166,000 during the first quarter 2004. We anticipate that our research and
development expenses in fiscal 2004 will total approximately $812,000, virtually
all of which will be directed to Metretek Florida's business.
Our capital expenditures in the first quarter 2004 were approximately
$333,000, including $110,000 of capital expenditures for a PowerSecure
"company-owned" distributed generation project. We anticipate capital
expenditures in fiscal 2004 of approximately $425,000 (excluding any
"company-owned" distributed generation projects), which will benefit all of our
key subsidiaries. We also expect to acquire approximately $600,000 of equipment
through capital leases in the second quarter of 2004, substantially all of which
will be used to increase MCM's production capacity. In addition, we are
continuing early development of PowerSecure's "company-owned" business program
which, depending on the size of individual projects and the volume of projects,
would require significant additional capital expenditures. Financing of
PowerSecure's "company-owned" projects to date has been generated internally or
funded through long-term financing arrangements provided through one of
PowerSecure's major suppliers. We cannot provide any assurance we will be
successful in raising additional capital, or that the amount of any additional
capital that we are able to raise will be sufficient to allow PowerSecure to
meet our objectives for its growth and development or will be on favorable
terms.
Working Capital Credit Facility. We have a $3 million credit facility
("Credit Facility") with Wells Fargo Business Credit, Inc. ("Wells Fargo") that
matures in September 2006. The Credit Facility restricts our ability to sell or
finance our subsidiaries, without Wells Fargo's consent. The Credit Facility,
which constitutes our primary credit agreement, is used primarily to fund the
operations and growth of our subsidiaries, especially PowerSecure and MCM.
25
The Credit Facility consists of separate credit agreements between Wells
Fargo and each of Southern Flow, Metretek Florida and PowerSecure, as borrowers.
At March 31, 2004, we had an aggregate borrowing base of $2,117,000 under the
Credit Facility, of which $1,709,000 had been borrowed, leaving $408,000
available to borrow.
The Credit Facility contains minimum interest charges and unused credit
line and termination fees. The obligations of each of the borrowers have been
guaranteed by Metretek Technologies, the other borrowers and MCM. These
guarantees have been secured by guaranty agreements and security agreements
entered into by the guarantors. The security agreements grant to Wells Fargo a
first priority security interest in virtually all of the assets of each of the
guarantors. The Credit Facility is further secured by a first priority security
interest in virtually all of the assets of each borrower. Each credit agreement
contains standard affirmative and negative covenants by the borrower, including
financial covenants and other standard covenants related to operations,
including limitations on future indebtedness and the payment of dividends the
sale of assets and other corporate transactions, without Wells Fargo's consent.
The Credit Facility between Wells Fargo and Southern Flow was amended in March
2004 to provide for new financial covenants applicable to certain financial
results of Southern Flow during fiscal 2004.
Term Loan. During the first quarter 2004, we formed Conquest Acquisition
Company LLC, a majority-owned subsidiary, for the purpose of acquiring $956,000
of additional equity interests in our unconsolidated affiliate, MM 1995-2.
Financing of the acquired equity interests was provided by a term loan from a
commercial bank. The term loan is secured by our interests in MM 1995-2, and we
provided a guaranty of $625,000 of the loan. The term loan provides for 60
monthly payments of principal and interest (at a rate of 5.08%) in the amount of
approximately $18,500 per month. We expect that monthly payments on the term
loan will be funded through cash distributions from MM 1995-2.
Heins Stipulation. On March 27, 2003, we filed the Heins Stipulation,
which was amended in March 2004. The Heins Stipulation contains the terms and
conditions of the Heins Settlement, which is intended to fully resolve all
claims by the Class Action Plaintiff against us and the other Metretek
Defendants in the Heins Class Action. The Heins Settlement is contingent, among
other things, upon the payment of at least $2,375,000 from the proceeds of our
directors' and officers' insurance policy and court approval. The Policy
proceeds will be made available under the terms of the Interpleader Settlement.
In settlement of the Interpleader Action, Gulf has agreed to pay into escrow
$2,375,000 in Policy proceeds to be used in the Heins Settlement. Pursuant to
the Heins Stipulation, we have paid $375,000 into escrow for use in the Heins
Settlement, and we have agreed to issue the Heins Settlement Note payable to the
Heins Settlement Fund in the amount of $3.0 million, and to commence payments
thereunder in escrow, upon the earlier of June 30, 2004 or 51 days after the
date the Denver Court grants final approval (subject to appeal) of the Heins
Settlement. The Heins Settlement Note will bear interest at the rate of prime
plus three percent (prime + 3%), payable in 16 quarterly installments, each of
$187,500 principal plus accrued interest, and will be guaranteed by the 1997
Trust and all of our subsidiaries. If the Denver Court approves the Heins
Settlement and all other conditions to the Heins Settlement are met, then the
Heins Settlement Fund will be funded by the escrowed
26
funds and by our payments on the Heins Settlement Note directly to the Heins
Settlement Fund. If the Heins Stipulation does not receive final and
non-appealable approval by December 31, 2006, then the escrowed payments we have
made will be returned to us. This litigation and proposed settlement are more
fully discussed, and the capitalized terms used in this paragraph are defined,
in "Part II, Item 1. Legal Proceedings." The loss resulting from the amounts due
on the Heins Settlement, other than interest on the Heins Settlement Note, was
recorded in fiscal 2002.
Contractual Obligations and Commercial Commitments. We incur various
contractual obligations and commercial commitments in our normal course of
business. We lease certain office space, operating facilities and equipment
under long-term lease agreements. In addition, we are obligated to make future
payments under the Credit Facility and a mortgage loan, and to redeem our Series
B Preferred Stock in December 2004. Moreover, if the Heins Stipulation becomes
effective, we will be required to make certain payments under its terms. The
following table sets forth our contractual obligations and commercial
commitments as of March 31, 2004:
PAYMENTS DUE BY PERIOD (1)
-----------------------------------------------------------------------
REMAINDER OF YEARS YEARS AFTER
TOTAL 2004 2005-2006 2007-2008 2008
----------- ----------- ----------- ----------- -----------
CONTRACTUAL OBLIGATIONS
Credit Facility (2) $ 1,709,000 $ - $ 1,709,000 $ - $ -
Capital Lease Obligations 49,000 23,000 26,000 - -
Operating Leases 2,298,000 704,000 1,036,000 558,000 -
Series B Preferred Stock (3) 9,654,000 9,654,000 - - -
Heins Settlement (4) 3,000,000 562,000 1,500,000 938,000 -
Term Loan 961,000 117,000 375,000 414,000 55,000
Other Long-Term
Obligations 519,000 179,000 75,000 258,000 7,000
----------- ----------- ----------- ----------- -----------
Total $18,190,000 $11,239,000 $ 4,721,000 $ 2,168,000 $ 62,000
=========== =========== =========== =========== ===========
-----------------------
(1) Does not include interest that may become due and payable on such
obligations in any future period.
(2) Total repayments are based upon borrowings outstanding as of March 31,
2004, not projected borrowings under the Credit Facility.
(3) Based upon accrued and unpaid dividends as of March 31, 2004, although the
redemption date is December 9, 2004. The Series B Preferred Stock is
convertible, at the option of the holders thereof, into Common Stock at
the conversion rate of approximately $3.06 per share of Common Stock, but
the amount set forth in the table does not give effect to any shares of
Series B Preferred Stock that were converted in May 2004 or that may be
converted prior to the redemption date.
(4) Assumes payments begin on the Heins Settlement Note on June 30, 2004, but
excludes interest. We cannot provide any assurance that the Heins
Settlement will obtain final approval and become effective, or if so, on
the timing of such approval or effectiveness. See "Part II, Item 1. Legal
Proceedings" in this Report.
Off-Balance Sheet Arrangements. During the first quarter 2004, we did not
engage in any material off-balance sheet activities or have any relationships or
arrangements with unconsolidated entities established for the purpose of
facilitating off-balance sheet arrangements
27
or other contractually narrow or limited purposes. Further, we have not
guaranteed any obligations of unconsolidated entities nor do we have any
commitment or intent to provide additional funding to any such entities.
Liquidity. Based upon our plans and assumptions as of the date of this
Report, we currently believe that our capital resources, including our cash and
cash equivalents, amounts available under our Credit Facility, along with funds
expected to be generated from our operations, will be sufficient to meet our
anticipated cash needs during the next 12 months, including our working capital
needs, capital requirements and debt service commitments, other than the
development of the company-owned business of PowerSecure. However, any
projections of future cash needs and cash flows are subject to substantial risks
and uncertainties. See "--Cautionary Note Regarding Forward-Looking Statements"
below. We cannot provide any assurance that our actual cash requirements will
not be greater than we currently expect or that these sources of liquidity will
be available when needed.
Unless the holders of our Series B Preferred Stock elect to convert their
Preferred Stock to Common Stock, the terms of our Series B Preferred Stock will
require us to redeem all shares of our Series B Preferred Stock that remain
outstanding on December 9, 2004 at a redemption price equal to the liquidation
preference of $1,000 per share plus accumulated and unpaid dividends. The Series
B Preferred Stock is convertible, at the option of the holders thereof, into
Common Stock at the conversion rate of approximately $3.06 per share of Common
Stock. While the conversion of shares of Series B Preferred Stock into shares of
Common Stock prior to the redemption date will reduce our redemption obligation,
we cannot determine at this time how many shares of Series B Preferred Stock
will ultimately be converted. As of March 31, 2004, the total redemption
obligation was approximately $9.7 million, but that amount was subsequently
reduced to approximately $6.2 million as a result of the exercise of the
conversion option by certain holders of the Series B Preferred Stock.
For the following reasons, we may require additional funds, beyond our
currently anticipated resources, to support our working capital requirements,
our operations or our other cash flow needs:
- While we have reorganized our Metretek Florida business with the
goal of making its cash flow positive; the operations of Metretek
Florida, or its recently formed subsidiary MCM, may require us to
fund future operating losses or costs of business expansion.
- 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
28
potential acquisitions of businesses and technologies. Our ability
to finance any an acquisition in the future will be dependent upon
our ability to raise additional capital. As of the date of this
Report, we have not entered into any binding agreement or
understanding committing us to any such acquisition, but we
regularly engage in discussions related to such acquisitions.
- We continually evaluate our opportunity to raise additional funds in
order to improve our financial position as well as our cash flow
requirements, and we may seek additional capital in order to take
advantage of such an opportunity or to meet changing cash flow
requirements.
- An adverse resolution to claims currently pending against us,
including but not limited to the Class Action if the proposed
settlement does not become effective, or to other claims that arise
from time to time against us, could significantly increase our cash
requirements beyond our available capital resources.
- Unanticipated events, over which we have no control, could increase
our operating costs or decrease our ability to generate revenues
from product and service sales beyond our current expectations.
After the first quarter 2004, we took substantial steps to improve our
balance sheet and liquidity. On May 6, 2004, we completed a Private Placement to
institutional and accredited investors of 3,510,548 shares of our Common Stock
and warrants to purchase 702,109 shares of our Common Stock, raising gross
proceeds of $10.9 million. The price paid in the Private Placement was $3.10 per
unit, each unit consisting of one share of Common Stock and a warrant to
purchase 0.2 shares of Common Stock. Roth Capital Partners, LLC acted as
placement agent in the Private Placement.
We received net cash proceeds of approximately $9.9 million from the
Private Placement, after deducting transaction expenses including the placement
agent's fee. The net proceeds from the Private Placement are intended to be used
principally to meet our mandatory redemption obligations related to our Series B
Preferred Stock, which matures on December 9, 2004, and for other business
commitments and initiatives.
The warrants issued in the Private Placement have an exercise price of
$3.41 per share of common stock and expire in May 2009. The warrants are
callable by us commencing one year after issuance if the trading price of our
Common Stock is at least two times the warrant exercise price for 30 consecutive
trading days and certain other conditions are satisfied. In addition to the
warrants issued to the investors, we issued warrants to purchase up to 351,055
shares of Common Stock to the placement agent, which warrants are on the same
basic terms as the warrants issued to the investors. We have agreed to file a
registration statement with the Securities and Exchange Commission covering
resales from time to time of shares of Common Stock issued in the Private
Placement or upon the exercise of the warrants. We have also agreed
29
not to offer or sell any Common Stock or Common Stock equivalents to anyone,
except under certain conditions, until the 90th trading day after the
registration statement becomes effective, or to make any such sales at any time
thereafter until 18 months after the registration statement becomes effective
without allowing the investors to participate in 50% of such sale upon the same
terms as offered to others.
In addition, certain holders of our outstanding shares of Series B
Preferred Stock have converted a total of 2,500 shares of Preferred Stock,
including accrued and unpaid dividends, and received upon such conversion
1,209,133 shares of Common Stock plus warrants to purchase 1,209,133 shares of
Common Stock exercisable until June 9, 2005 at an exercise price of $3.0571 per
share, which is the same price as the conversion price of the preferred stock
into each share of common stock. As a result of the conversion of these shares
of Series B Preferred Stock, our maximum aggregate redemption obligation at
December 9, 2004 was reduced to approximately $6.6 million, and the dividend
and the deemed distribution on the Series B Preferred Stock will be reduced for
future periods as a result of the reduction in shares of Series B Preferred
Stock outstanding. We also agreed to include the shares of Common Stock issuable
upon exercise of such warrants in the registration statement to be filed in
connection with the Private Placement.
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 financing could require the
consent of our current lender, of the holders of our Series B Preferred Stock or
of the investors in the Private Placement. Even if we are able to raise
additional capital, the terms of any financings could be adverse to the
interests of our stockholders. For example, the terms of a debt financing could
restrict our ability to operate our business or to expand our operations, while
the terms of an equity financing, involving the issuance of capital stock or of
securities convertible into capital stock, could dilute the percentage ownership
interests of our stockholders, and the new capital stock or other new securities
could have rights, preferences or privileges senior to those of our current
stockholders. We cannot assure you that sufficient additional funds will be
available to us when needed or desired or that, if available, such funds can be
obtained on terms favorable to us and our stockholders and acceptable to those
parties who must consent to the financing. Our inability to obtain sufficient
additional capital on a timely basis on favorable terms when needed or desired
could have a material adverse effect on our business, financial condition and
results of operations.
RECENT ACCOUNTING PRONOUNCEMENTS
There are no recent accounting pronouncements affecting the consolidated
results of operation or financial position of the Company.
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
30
This Quarterly Report on Form 10-Q contains "forward-looking statements"
within the meaning of and made under the safe harbor provisions of Section 27A
of the Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"). From time to time in the
future, we may make additional forward-looking statements in presentations, at
conferences, in press releases, in other reports and filings and otherwise.
Forward-looking statements are all statements other than statements of
historical facts, including statements that refer to plans, intentions,
objectives, goals, strategies, hopes, beliefs, projections, expectations or
other characterizations of future events or performance, and assumptions
underlying the foregoing. The words "may", "could", "should", "would", "will",
"project", "intend", "continue", "believe", "anticipate", "estimate",
"forecast", "expect", "plan", "potential", "opportunity" and "scheduled",
variations of such words, and other similar expressions are often, but not
always, used to identify forward-looking statements. Examples of forward-looking
statements include statements regarding, among other matters, our plans,
intentions, objectives, goals, strategies, beliefs, projections and expectations
about the following:
- our prospects, including our future revenues, expenses, net income,
margins, profitability, cash flow, liquidity, financial condition
and results of operations;
- our products and services, market position, market share, growth and
strategic relationships;
- our business plans, strategies, goals and objectives;
- market demand for and customer benefits attributable to our products
and services;
- industry trends and customer preferences;
- the nature and intensity of our competition, and our ability to
successfully compete in our market;
- the sufficiency of funds, from operations, available borrowings and
other capital resources, to meet our future working capital, capital
expenditure, debt service and business growth needs;
- pending or potential business acquisitions, combinations, sales,
alliances, relationships and other similar business transactions;
- our ability to successfully develop and operate our new businesses;
- the effects on our financial condition, results of operations and
cash flows of the resolution of pending or threatened litigation;
and
- future economic, business, market and regulatory conditions.
Any forward-looking statements we make are based on our current plans,
intentions, objectives, goals, strategies, hopes, beliefs, projections and
expectations, as well as assumptions made by and information currently available
to management. You are cautioned not to place undue reliance on any
forward-looking statements, any or all of which could turn out to be wrong.
Forward-looking statements are not guarantees of future performance or events,
but are subject to and qualified by substantial risks, uncertainties and other
factors, which are difficult to predict and are often beyond our control.
Forward-looking statements will be affected by assumptions we might make that do
not materialize or that prove to be incorrect and by known and unknown risks,
uncertainties and other factors that could cause actual results to differ
materially from those expressed, anticipated or implied by such forward-looking
statements. These risks, uncertainties and other factors include, but are not
limited to, the following:
31
- our history of losses and no assurance of future profitability;
- our ability to maintain a sufficient amount of capital and liquidity
to meet our operating and capital requirement and growth needs;
- our ability to successfully and timely develop, market and operate
PowerSecure's systems, including its products, services, and
technologies;
- the effects of pending and future litigation, including the risk the
conditions to the Heins Stipulation will not be satisfied;
- our limited operating history in our PowerSecure business;
- the effects of changes in utility tariffs in the regions in which
PowerSecure sells its distributed generation systems;
- our ability to develop, on a profitable basis, Metretek Florida's
InvisiConnect and contract manufacturing businesses;
- 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
sales cycles of many of our products and services;
- restrictions imposed on us and our ability to raise additional
capital by the terms of our Series B Preferred Stock, our Credit
Facility, and the Private Placement;
- 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;
- general economic and business conditions, including downturns in
market conditions;
- effects of changes in product mix on our expected gross margins and
net income;
- risks inherent in international operations;
- risks associated with our management of private energy programs;
- the receipt, timing and size of future customer orders;
32
- 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 military actions;
- the impact of current and future laws and government regulations
affecting the energy industry in general and the natural gas and
electricity industries in particular;
- the effect of changes in laws, regulations and financial accounting
standards; and
- other risks, uncertainties and other factors that are discussed in
this Report or that are discussed from time to time in our other
reports and documents we file with or furnish to the SEC and the
exhibits to such filings, including but not limited to our Annual
Report on Form 10-K for the fiscal year ended December 31, 2003.
Any forward-looking statements contained in this Report speak only as of
the date of this Report, and any other forward-looking statements we make from
time to time in the future speaks only as of the date it is made. We do not
intend, and we undertake no duty or obligation, to update or revise any
forward-looking statement for any reason, whether as a result of changes in our
expectations or the underlying assumptions, the receipt of new information,
occurrence of future or unanticipated events, circumstances or conditions or
otherwise.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to certain financial instrument market risks, primarily due
to changes in interest rates, which may adversely affect our financial
condition, results of operations and cash flow. Our exposure to market risk for
changes in interest rates relates primarily to (i) income from our investments
in short-term interest-bearing marketable securities, the income from which is
dependent upon the interest rate of the securities held, and (ii) interest
expenses attributable to its long-term debt, including our Credit Facility,
which is based on floating interest rates as described in "Item 2. Management's
Discussion and Analysis and Results of Operations" above. Since substantially
all of our revenues, expenses and capital spending are transacted in U.S.
dollars, we are not exposed to significant foreign exchange risk. We do not
believe that our exposure to commodity price changes is material. We do not use
derivative financial instruments to manage exposure to interest rate changes, or
for trading or other speculative purposes.
ITEM 4. CONTROLS AND PROCEDURES
Our Chief Executive Officer and our Chief Financial Officer evaluated our
disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e)
under the Securities Act of 1934, as amended (the "Exchange Act")) as of March
31, 2004, the end of the period covered by this report. Based upon that
evaluation, our Chief Executive Officer and our Chief Financial Officer have
concluded that our disclosure controls and procedures were effective to ensure
that information required to be disclosed by us in the reports that we file or
submit under the Exchange Act is recorded, processed, summarized and reported
within the time periods specified in the Securities and Exchange Commission's
rules and forms.
33
When designing and evaluating controls and procedures, we make assumptions
about the likelihood of future events. At the same time, we make judgments about
the cost-benefit relationship of possible controls and procedures. We cannot
assure that this design will succeed in achieving its stated goals under all
potential future conditions. Similarly, we cannot assure that our evaluation of
controls will detect all control issues or instances of fraud, if any.
During the quarter ended March 31, 2004, no change in our internal control
over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act)
occurred that has materially affected, or is reasonably likely to materially
affect, our internal control over financial reporting.
34
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
From time to time, we are involved in disputes and legal proceedings. For
a description of these legal proceedings, see Note 3 to our consolidated
financial statements, "Commitments and Contingencies," which is contained in
Part I of this Report and incorporated herein by this reference.
ITEM 2. UNREGISTERED SECURITIES
On May 6, 2004, we completed a Private Placement to institutional and
accredited investors of 3,510,548 shares of our Common Stock and warrants to
purchase 702,109 shares of our Common Stock, raising gross proceeds of $10.9
million. The price paid in the Private Placement was $3.10 per unit, each unit
consisting of one share of Common Stock and a warrant to purchase 0.2 shares of
Common Stock. Roth Capital Partners, LLC acted as placement agent in the Private
Placement.
We received net cash proceeds of approximately $9.9 million from the
Private Placement, after deducting transaction expenses including the placement
agent's fee. The net proceeds from the Private Placement are intended to be used
principally to meet our mandatory redemption obligations related to our Series B
Preferred Stock, which matures on December 9, 2004, and for other business
commitments and initiatives.
The warrants issued in the Private Placement have an exercise price of
$3.41 per share of common stock and expire in May 2009. The warrants are
callable by us commencing one year after issuance if the trading price of our
Common Stock is at least two times the warrant exercise price for 30 consecutive
trading days and certain other conditions are satisfied. In addition to the
warrants issued to the investors, we issued warrants to purchase up to 351,055
shares of Common Stock to the placement agent, which warrants are on the same
basic terms as the warrants issued to the investors. Finally we have agreed to
file a registration statement with the Securities and Exchange Commission
covering resales from time to time of shares of Common Stock issued in the
Private Placement or upon the exercise of the warrants.
In addition, certain holders of our outstanding shares of Series B
Preferred Stock have converted a total of 2,500 shares of Preferred Stock,
including accrued and unpaid dividends, and received upon such conversion
1,209,133 shares of Common Stock plus warrants to purchase 1,209,133 shares of
Common Stock exercisable until June 9, 2005 at an exercise price of $3.0571 per
share, which is the same price as the conversion price of the preferred stock
into each share of common stock. As a result of the conversion of these shares
of Series B Preferred Stock, our maximum aggregate redemption obligation at
December 9, 2004 was reduced to approximately $6.6 million, and the dividend
and the deemed distribution on the Series B Preferred Stock will
35
be reduced for future periods as a result of the reduction in shares of Series B
Preferred Stock outstanding. We also agreed to include the shares of Common
Stock issuable upon exercise of such warrants in the registration statement to
be filed in connection with the Private Placement.
The sales and issuances of common stock and warrants to purchase common
stock in the foregoing private placement was made by us in reliance upon the
exemptions from registration provided under Section 4(2) of the Securities Act
of 1933, as amended (the "Securities Act"), and Rule 506 of Regulation D under
the Securities Act. The offers and sales were made to accredited investors as
defined in Rule 501(a) under the Securities Act, no general solicitation was
made by us or any person acting on our behalf; the securities sold were subject
to transfer restrictions, and the certificates for those securities contained an
appropriate legend stating that they had not been registered under the
Securities Act and may not be offered or sold absent registration or pursuant to
an exemption therefrom.
Pursuant to the authorization of the Company's Board of Directors, and in
order to prevent the Private Placement and the conversion of the shares of
Series B Preferred Stock or the acquisition of Common Stock or warrants by the
investors in connection with the Private Placement or by the Series B Preferred
Stockholders in connection with their conversion of shares of Series B Preferred
Stock or upon the exercise of the warrants, from triggering the protections
provided by the Company's Amended and Restated Rights Agreement, dated as of
November 30, 2001 (the "Rights Agreement"), on April 22, 2004, the Company
adopted and entered into Amendment No. 1 to the Rights Agreement. All
capitalized terms used below but not defined herein have the respective meanings
given to them in the Rights Agreement.
Amendment No. 1 amended Sections 1(a), 1(jj), 3(a), 11 and 13 of the
Rights Agreement to:
(a) prevent any Private Placement investors or Series B Preferred
Stockholders and their Affiliates and Associates from becoming an
"Acquiring Person" (as that term is used and defined in the Rights
Agreement),
(b) prevent a "Shares Acquisition Date" (as that term is used and defined
in the Rights Agreement) from occurring,
(c) prevent a "Distribution Date" (as that term is used and defined in the
Rights Agreement) from occurring, and
(d) prevent any adjustment of the purchase price, number and kind of
shares, number of rights or other protection set forth in Sections 11 and
13 from being triggered; in each case, as the result of:
(i) the execution and delivery of the document, agreements and
instruments in connection with the Private Placement or in the
conversion of the Series B Preferred Stock, or any amendments
thereto in accordance with the terms thereof ("Documents"),
(ii) any actions taken by any of the investors in the Private
Placement or any of the Series B Preferred Stockholders pursuant to
the terms of any of the Documents,
(iii) the consummation of the transactions contemplated by any of
the Documents, or
(iv) the announcement or commencement thereof, including, without
limitation,
36
the acquisition by any of the investors in the Private Placement or
any of the Series B Preferred Stockholders now or at any time in the
future of any Common Stock, warrants, and Common Stock issued or
issuable upon exercise of warrants, or any other acquisition of any
such securities, in each case pursuant to any of the Documents.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
10.1 Fifth Amendment to Credit and Security Agreement, dated as of
March 29, 2004, between Southern Flow Companies, Inc. and
Wells Fargo Business Credit, Inc.
31.1 Certification of Chief Executive Officer pursuant to Section
302 of the Sarbanes-Oxley Act of 2002 and Rule 13a-14(a) under
the Securities Exchange Act of 1934, as amended.
31.2 Certification of Chief Financial Officer pursuant to Section
302 of the Sarbanes-Oxley Act of 2002 and Rule 13a-14(a) under
the Securities Exchange Act of 1934, as amended.
32.1 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, and Rule 13a-14(b) under the
Securities Exchange Act of 1934, as amended
32.2 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) REPORTS ON FORM 8-K
We filed the following Current Reports on Form 8-K during the
quarter ended March 31, 2004 and subsequent thereto:
Date Item No. Description
---- -------- -----------
January 22, 2004 7, 9 Release of investor presentation.
February 5, 2004 7, 9 Press release to update guidance on 2004 financial results.
March 30, 2004 7, 12 Press release announcing financial results for fiscal year 2003.
37
April 30, 2004 5, 7 Disclosure of Private Placement and conversion of Certain Preferred Stock.
May 6, 2004 5, 7 Completion of Private Placement and conversion of Certain Preferred Stock.
38
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
METRETEK TECHNOLOGIES, INC.
Date: May 14, 2004 By: /s/ W. Phillip Marcum
-------------------------------------
W. Phillip Marcum
President and Chief Executive Officer
Date: May 14, 2004 By: /s/ A. Bradley Gabbard
-------------------------------------
A. Bradley Gabbard
Executive Vice President
and Chief Financial Officer
39