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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
(MARK ONE)
[ ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2005
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
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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, CO 80203
(Address of principal executive offices, including zip code)
Registrant's telephone number, including area code: (303) 785-8080
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
-------------------- -----------------------------------------
COMMON STOCK, PAR VALUE $.01
PER SHARE AMERICAN STOCK EXCHANGE
Securities registered pursuant to Section 12(g) of the Act:
NONE
(Title of class)
Indicate by check mark if the registrant is a well-known seasoned issuer,
as defined in Rule 405 of the Securities Act. Yes [ ] No [X]
Indicate by check mark if the registrant is not required to file reports
pursuant to Section 13 or 15(d) of the Act. Yes [ ] No [X]
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 [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
Indicate by check mark whether the registrant is a large accelerated filer,
an accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. (Check
one):
Large accelerated filer [ ] Accelerated filer [ ] Non-accelerated filer [X]
Indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Act). Yes [ ] No [X]
As of June 30, 2005, the last business day of the registrant's most
recently completed second fiscal quarter, the aggregate market value of the
shares of the registrant's Common Stock held by non-affiliates of the registrant
was approximately $24,832,000, based upon $2.85, the last sale price of the
Common Stock on such date as reported on the OTC Bulletin Board (which was the
principal market for the Common Stock on such date). For purposes of this
disclosure, shares of Common Stock held by each director and executive officer
and each person who owns 5% or more of the registrant's Common Stock have been
excluded because such persons may be deemed to be "affiliates" for this purpose.
This determination, however, is not necessarily conclusive for any other
purpose.
As of March 3, 2006, 13,443,251 shares of Common Stock were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
None
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METRETEK TECHNOLOGIES, INC.
FORM 10-K
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2005
TABLE OF CONTENTS
PAGE
----
Cautionary Note Regarding Forward-Looking Statements .................... 1
PART I
Item 1. Business ....................................................... 2
Item 1A. Risk Factors ................................................... 16
Item 1B. Unresolved Staff Comments ...................................... 29
Item 2. Properties ..................................................... 29
Item 3. Legal Proceedings .............................................. 30
Item 4. Submission of Matters to a Vote of Security Holders ............ 31
PART II
Item 5. Market for Registrant's Common Equity, Related Stockholder
Matters and Issuer Purchases of Equity Securities ........... 32
Item 6. Selected Financial Data ........................................ 33
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operation ........................................ 34
Item 7A. Quantitative and Qualitative Disclosures About Market Risk ..... 51
Item 8. Financial Statements and Supplementary Data .................... 52
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure ........................................ 52
Item 9A. Controls and Procedures ........................................ 52
Item 9B. Other Information .............................................. 53
PART III
Item 10. Directors and Executive Officers of the Registrant ............. 54
Item 11. Executive Compensation ......................................... 55
Item 12. Security Ownership of Certain Beneficial Owners and Management
and Related Stockholder Matters ............................. 62
Item 13. Certain Relationships and Related Transactions ................. 64
Item 14. Principal Accountant Fees and Services ......................... 65
PART IV
Item 15. Exhibits and Financial Statement Schedules ..................... 66
Signatures .............................................................. 70
Index to Financial Statements ........................................... F-1
Exhibit Index ........................................................... X-1
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K (this "Report") 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 (the "Securities Act"),
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 fact, including statements that
refer to plans, intentions, objectives, goals, strategies, hopes, beliefs,
projections, prospects, 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 comparable
terminology and similar expressions are often, but not always, used to identify
forward-looking statements. Examples of forward-looking statements include, but
are not limited to, statements 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 and the markets therefor, including market
position, market share, market demand and benefits to customers;
- our ability to successfully develop, operate and grow our businesses;
- our business plans, strategies, goals and objectives;
- the sufficiency of our capital resources, including our cash and cash
equivalents, funds generated from operations, available borrowings
under our credit arrangements and other capital resources, to meet our
future working capital, capital expenditure, debt service and business
growth needs;
- industry trends and customer preferences;
- the nature and intensity of our competition, and our ability to
successfully compete in our markets;
- business acquisitions, combinations, sales, alliances, ventures and
other similar business transactions and relationships;
- the effects on our business, financial condition and results of
operations of litigation and other claims and proceedings that arise
from time to time; and
- future economic, business, market and regulatory conditions.
Any forward-looking statements we make are based on our current plans,
intentions, objectives, goals, strategies, hopes, beliefs, projections and
expectations, as well as assumptions made by and information currently available
to management. You are cautioned not to place undue reliance on any
forward-looking statements, any or all of which could turn out to be wrong.
Forward-looking statements are not guarantees of future performance or events,
but are subject to and qualified by substantial risks, uncertainties and other
factors, which are difficult to predict and are often beyond our control.
Forward-looking statements will be affected by assumptions we might make that do
not materialize or prove 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, those described in "Item 1A. Risk Factors" below, as well as other
risks, uncertainties and factors discussed elsewhere in this Report, in
documents that we include as exhibits to or incorporate by reference in this
Report, and in other reports and documents we from time to time file with or
furnish to the Securities and Exchange Commission ("SEC").
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 speak only as of the date they are made. 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, the occurrence of future or
unanticipated events, circumstances or conditions or otherwise.
1
PART I
ITEM 1. BUSINESS
BACKGROUND
Metretek Technologies, Inc. is a diversified provider of energy technology
products, services and data management systems to industrial and commercial
users and suppliers of natural gas and electricity. We currently conduct our
operations through three wholly-owned subsidiaries:
- PowerSecure, Inc. ("PowerSecure"), based in Wake Forest, North
Carolina, which designs, engineers, sells and manages distributed
generation systems marketed primarily to industrial and commercial
users of electricity, and also provides energy management,
engineering, consulting and other related products and services.
- Southern Flow Companies, Inc. ("Southern Flow"), based in Lafayette,
Louisiana, which provides a wide variety of natural gas measurement
services principally to producers and operators of natural gas
production facilities.
- Metretek, Incorporated ("Metretek Florida"), based in Melbourne,
Florida, which provides data collection, telemetry and other types of
machine to machine ("M2M") connectivity solutions for applications
such as automatic meter reading ("AMR"), cathodic protection and other
types of remote monitoring and collection applications.
In addition to these subsidiaries, Marcum Gas Transmission, Inc. ("MGT"), a
wholly-owned subsidiary of ours based in Denver, Colorado, owns an approximate
27% economic interest in an unconsolidated business, Marcum Midstream 1995-2
Business Trust ("MM 1995-2"), which operates production water disposal
facilities located in northeastern Colorado. MGT acquired additional equity
interests in MM 1995-2 during 2004 and 2005. As a result, the equity income from
MM 1995-2 has become a larger part of our consolidated results in the last two
fiscal years.
Until recently, Metretek Florida had provided contract manufacturing
services through its subsidiary, Metretek Contract Manufacturing Company, Inc.
("MCM"). These contract manufacturing services were discontinued during 2004 and
MCM's contract manufacturing business and most of its assets were sold on
December 30, 2004.
In this Report, references to "Metretek", "we", "us" and "our" refer to
Metretek Technologies, Inc. together with its subsidiaries, and references to
"Metretek Technologies" refer to Metretek Technologies, Inc. without its
subsidiaries, unless we state otherwise or the context indicates otherwise.
We were incorporated in Delaware on April 5, 1991 under the name "Marcum
Natural Gas Services, Inc.," and we changed our name in June 1999 to "Metretek
Technologies, Inc." Our principal executive offices are located at 303 East
Seventeenth Avenue, Suite 660, Denver, Colorado 80203, and our telephone number
at those offices is (303) 785-8080. Our internet website address is
www.metretek.com. Information contained on our website is not incorporated into
this prospectus.
BUSINESS STRATEGY
Our business strategy is to position ourself as an integrated provider of
energy technology products, services and systems that enhance the availability
of management information and services primarily to suppliers and users of
natural gas and electricity. While our products, services and systems have
historically been aimed primarily at the natural gas industry, we are focusing
more of our current and future products, services and systems to other segments
of the energy industry, especially the electricity industry, as well as to other
industries that require energy data management services. The energy industry
continues to experience fundamental regulatory and structural changes and
significant new trends. Our strategy is to acquire, develop, operate and expand
businesses that are positioned to take advantage of these changes and trends.
In implementing our business strategy, we have acquired or formed the
following important businesses since 2000:
2
- In 2000, we formed PowerSecure to develop and operate our distributed
generation business.
- In 2001, we acquired Industrial Automation, Inc. ("Industrial
Automation"), a process control and switchgear design and
manufacturing firm, as part of PowerSecure's growth strategy.
- In 2003, we commenced the development of the Cellular Network
Interface ("CNI") and InvisiConnect(TM) series of products, which are
M2M connection solutions for wireless network technology, to enhance
the product, service and technology offerings of Metretek Florida.
- In 2004 and 2005, we significantly increased our economic interest in
MM 1995-2.
- In November 2004, we acquired the minority interest in PowerSecure.
- In 2005 and early 2006, PowerSecure launched three new complementary
energy service businesses for the purpose of expanding its business to
include providing technical engineering services, management
consulting and lighting efficiency services.
While we regularly engage in discussions relating to potential acquisitions
and dispositions of assets, businesses and companies, as of the date of this
Report we have not entered into any binding agreement or commitment with respect
to any material acquisition or disposition.
RECENT DEVELOPMENTS
In November 2005, PowerSecure received commitments from two large
commercial customers for distributed generation projects that are anticipated to
generate revenues in excess of $45 million in the aggregate. A total of $40
million in the orders were from Publix Super Markets ("Publix"). The
documentation for a substantial portion of these projects has been finalized and
executed and the documentation for the remainder of the projects is being
finalized. PowerSecure has commenced these projects, which it expects to
complete during 2006.
In March 2006, PowerSecure announced that it had received additional verbal
orders from Publix for distributed generation and switchgear projects that are
anticipated to generate revenues of approximately $75 million in the aggregate
during 2006 and 2007. The orders are subject to the finalization of payment
terms and other standard purchasing conditions, as well as the completion and
execution of definitive documentation.
During late 2005 and early 2006, PowerSecure formed three new energy
services businesses, designed to expand and complement its core distributed
generation business and customers. PowerServices, Inc. provides rate analysis
and other similar consulting services to PowerSecure's utility, commercial and
industrial customers. UtilityEngineering, Inc. provides fee-based, technical
engineering services to PowerSecure's utility partners and customers.
EnergyLite, Inc. assists customers in reducing their use of energy through
investments in more energy-efficient technologies. Each business unit operates
in a distinct market with distinct technical disciplines, but shares a common
customer base. PowerSecure intends to service and grow these new businesses
through shared resources and marketing efforts such as customer leads.
Accordingly, these new units, which did not have a significant effect on
PowerSecure's fiscal 2005 revenues, will be included within PowerSecure's
segment results in future periods. These units are intended to increase
PowerSecure's future growth, beyond and in addition to the growth in its core
distributed generation business.
POWERSECURE, INC.
We formed PowerSecure in the fall of 2000 to engage in the business of
designing, engineering, marketing, constructing and operating turn-key
distributed generation systems. In January 2001, PowerSecure received its first
distributed generation contract. The goal of PowerSecure is to be a national
provider of distributed generation systems, providing customers, primarily
industrial and commercial users of electricity, with access to back-up power
generation to facilitate reliable power and with the ability to take advantage
of peak-shaving and load interruption incentives. Distributed generation is
on-site power generation that supplements or bypasses the public power grid by
generating power at the customer's site. PowerSecure offers a power supply that
serves as an alternative source of electricity for the customer's business
needs. PowerSecure's program covers virtually all elements of the peak-power
supply chain, including system design, installation and operation as well as
rate analysis and utility rate negotiation.
3
Distributed Generation Background. The demand for distributed generation
facilities offered by PowerSecure is driven primarily by two factors: the need
for high quality and high reliability power, and the economics of energy pricing
structures by utilities and other power suppliers. The need for power quality
and reliability is driven directly by the needs of industrial and commercial
end-users of electricity and, in particular, the specific consequences to an end
user of experiencing a power outage or curtailment. This need for reliable power
became apparent to many businesses as a result of brown-outs and black-outs and
the effects of severe weather conditions. Distributed generation allows a
business to improve the reliability of its energy generation by providing a
back-up power source that is available if the primary source, for example a
local utility, becomes unable, for any reason, to provide power. Distributed
generation can protect businesses from the adverse effect of power outages
caused by storms, utility equipment failures and black-outs and brown-outs
resulting from instability on the utility power grids. In addition, businesses
utilizing distributed generation are able to mitigate their exposure to energy
price increases by being able to supply their own electricity through
alternative sources. Spikes in power prices, due to electricity spot price
volatility, have led many businesses to seek alternative sources of power to
protect against these price spikes by "peak shaving". Peak shaving, as it
generally applies in PowerSecure's business, means utilizing the back-up power
provided by a system of distributed generation to reduce specific demand to
avoid the adverse effect of high energy prices charged by utilities during peak
energy use periods.
In addition, energy usage information has become increasingly important for
energy suppliers and users. Many energy suppliers, especially utilities, have
complicated pricing and rate structures and tariffs that are difficult for
energy users to understand, which further increases the complexity of monitoring
and managing energy usage and costs. Energy deregulation, with multiple
providers of energy and diverse rate structures, adds to this complexity in
managing energy usage and costs.
PowerSecure provides a "turn-key" solution to these needs of industrial and
commercial users of electricity. By providing a complete and customized program
of distributed generation, the PowerSecure system provides energy users with a
seamless communication between the supply-side and demand-side components of the
customer's power system to capture peak-shaving opportunities and to quickly
respond to emergency and interruption situations. The typical distributed
generation system is installed and maintained at the customer's location and is
small in size relative to a utility's power plant, because it is designed to
supply power only to that one particular customer.
The primary elements of PowerSecure's turn-key distributed generation
offering include:
- designing and engineering the distributed generation system;
- negotiating with the utility to establish the electricity
inter-connect and to take advantage of preferred rates;
- acquiring and installing the generators and other system equipment and
controls;
- designing, engineering, constructing and installing the switchgear and
process controls; and
- providing ongoing monitoring and servicing of the system.
Technology. The key component in a distributed generation system is its
source of power, which is the generator. While several types of distributed
generation technologies are available, PowerSecure currently utilizes an
internal combustion power generator, typically diesel powered. These types of
generators are widely used and constitute a reliable, cost-effective distributed
generation technology, and they are able to generate sufficient power with
reasonable efficiency at a reasonable cost. However, several new generator
technologies are emerging, and PowerSecure intends to evaluate the utilization
of one or more of them if they demonstrate the ability to be a commercially
viable and reliable power source. These new technologies include microturbines,
which generate power using a small-scale natural gas-fueled turbine, fuel cells,
which combine hydrogen and oxygen as an electrochemical process to produce
electricity, and solar cells, also known as photovoltaic cells, which convert
the sun's energy into electricity.
Internal combustion generators range in individual size from five kilowatts
("KW") to 2,250 KW, while gas turbines range in individual size from 1,250 KW to
13,500 KW. Units can be installed individually or in multiple parallel
arrangements, allowing PowerSecure to service the needs of customers ranging
from small commercial users of power to large industrial businesses.
4
In conjunction with its distributed generation systems, PowerSecure designs
and manufactures its own paralleling switchgear and process controls marketed
under the registered trade name "NexGear(R)", which controls are used to
seamlessly shift power between a customer's primary power source and its
distributed generation system. Power from onsite generation systems can be
brought online and in parallel with the customer's primary power source without
disrupting the flow of electricity. This allows the customer to seamlessly
substitute power generated at the customer's site for that supplied by the
utility power plant during times of peak demand.
Staffing. PowerSecure staffs a team of engineering and project management
personnel who oversee the design and installation of generators, paralleling
switchgear and wireless remote-monitoring equipment. PowerSecure's engineering
experience and understanding of distributed generation operations provide it
with the capability to create innovative solutions to meet the needs of a wide
variety of customers.
Remote Monitoring and Maintenance and System Management. PowerSecure's
remote monitoring and maintenance services are an important part of its system
because they differentiate the PowerSecure solution from that of its
competitors. PowerSecure monitors and maintains the system for its customers,
improving reliability and removing many of the burdens associated with
ownership. Distributed generation systems must be operated periodically so that
they function properly when called upon to supply power. By installing a
communication device on the system, PowerSecure remotely starts and operates the
system and then monitors its performance. In the event of a mechanical problem,
PowerSecure dispatches the appropriate technicians. PowerSecure manages its
system on behalf of its customers so that the distributed generation is a
seamless operation to the customer. For those customers that already have
distributed generation systems, PowerSecure offers management services,
including fuel management services, preventive and emergency maintenance
services, and monitoring and dispatching services. PowerSecure also coordinates
the operation of the distributed generation system during times of peak demand
in order to allow its customers to benefit from complicated utility rate
structures. The monitoring device enables PowerSecure to monitor, on a
cost-effective basis, a geographically fragmented customer base from a
centralized location.
Sales and Marketing. PowerSecure markets its distributed generation systems
primarily through a direct sales force. PowerSecure markets its products and
services in various types of packages. PowerSecure's initial marketing focus
was, and the majority of its revenues through December 31, 2005 were derived
from, its turn-key distributed generation program. In its turn-key program,
PowerSecure offers a complete distributed generation package, including
assistance in locating and arranging financing, directly to industrial and
commercial users of electricity that desire to own their own distributed
generation system. The size of turn-key distributed generation systems designed
and sold by PowerSecure has ranged from 90 KW to 15,750 KW, although PowerSecure
has the ability to design and sell even larger turn-key systems. A variation of
the turn-key system marketed by PowerSecure involves partnering with natural gas
and electricity utilities to develop, market and manage distributed generation
systems for their customers. In this "utility partnership" model, PowerSecure
partners with a utility to combine its distributed generation package with other
products or services of that utility, and assists the utility in marketing
PowerSecure's distributed generation package to the utility's customers under
the utility's brand name.
PowerSecure also offers a "shared savings" distributed generation system
program. Shared savings programs will require significant capital to develop and
have only been offered on a limited basis through the date of this Report.
PowerSecure's shared savings program involves the design, engineering,
installation, operation and maintenance of distributed generation systems that
are owned by PowerSecure and leased to customers on a long-term basis for
monthly fees related to the benefits, including energy savings, realized by the
customer. Depending on our ability to raise sufficient additional capital,
market conditions and the preferences of industrial and commercial users of
electricity, PowerSecure believes that a more significant portion of its future
business and revenues may be derived from its shared savings program.
Engineering and Management Services. During 2005, PowerSecure formed two
new subsidiaries, UtilityEngineering, Inc. and PowerServices, Inc., to serve the
growing needs of PowerSecure's utility clients. PowerSecure is marketing these
services to utilities as means to supplement the utilities' own engineering
staffs. The scope of services offered by PowerSecure includes the design and
engineering for transmission and distribution (including substations) systems as
well as engineering services such as developing future plans for enhancing and
expanding the utility's infrastructure.
Engineering services for utilities include the engineering and design of
substations and transmission and distribution systems. UtilityEngineering
provides technical engineering services to utility partners and customers,
including design and engineering services relating to transmission and
distribution, substations and utility lighting.
5
PowerServices provides management consulting services to utilities and
commercial and industrial customers, such as planning and quality improvement,
technical studies involving reliability analysis and rate analysis, accident
investigation and related services and power supply contracts and negotiations.
UtilityEngineering and PowerServices utilize the existing internal resources of
PowerSecure along with industry experts employed by those businesses.
Energy Efficiency. During January 2006, PowerSecure formed a new
subsidiary, EnergyLite, Inc., to provide energy efficiency services to
industrial and commercial customers. EnergyLite assists customers in identifying
and implementing opportunities to reduce their consumption of energy through
investments in more energy-efficient technologies. This business focuses on
providing customers with projects that pay for themselves as a result of the
economic savings from the use of more efficient energy systems. EnergyLite
intends to provide projects that will relate to more energy efficient lighting
systems, boiler systems, cooling systems and energy control systems.
Backlog. In November 2005, PowerSecure received commitments from two large
commercial customers for distributed generation projects that are anticipated to
generate revenues in excess of $45 million in the aggregate. The projects are
expected to be completed during 2006. In March 2006, PowerSecure announced that
it had received additional verbal orders from Publix for distributed generation
and switchgear projects that are anticipated to generate revenues of
approximately $75 million in the aggregate during 2006 and 2007. As of March 3,
2006, PowerSecure's backlog was approximately $140 million, relating to secured
contracts for distributed generation projects, including these large orders, of
which approximately $90 million is scheduled to be completed during 2006 and
approximately $50 million is scheduled to be completed during 2007. Given the
irregular sales cycle of customer orders, and especially of large orders,
PowerSecure's backlog at any given time is not necessarily an accurate
indication of its future revenues.
SOUTHERN FLOW COMPANIES, INC.
Southern Flow provides a variety of natural gas measurement services
principally to customers involved in the business of natural gas production,
gathering, transportation and processing. We commenced providing natural gas
measurement services in 1991 by acquiring an existing business. We expanded this
business significantly in 1993 when we acquired substantially all of the assets
of the Southern Flow Companies division of Weatherford International
Incorporated. Through its predecessors, Southern Flow has provided measurement
services to the natural gas industry since 1953.
Southern Flow provides a broad array of integrated natural gas measurement
services, including on-site field services, chart processing and analysis,
laboratory analysis, and data management and reporting. Southern Flow's field
services include the installation, testing, calibration, sales and maintenance
of measurement equipment and instruments. Southern Flow's chart processing
operations include analyzing, digitizing and auditing well charts and providing
custom reports as requested by the customer. Southern Flow also provides
laboratory analysis of natural gas and natural gas liquids chemical and energy
content. As part of its services to its customers, Southern Flow maintains a
proprietary database software system which calculates and summarizes energy
measurement data for its customers and allows for easy transfer and integration
of such data into customer's accounting systems. As an integral part of these
services, Southern Flow maintains a comprehensive inventory of natural gas
meters and metering parts, and in 2005 derived approximately 24% of its revenues
from its parts resale business. Southern Flow provides its services through nine
division offices located throughout the Gulf of Mexico, Southwest, Mid-Continent
and Rocky Mountain regions.
Natural gas measurement services are used by producers of natural gas and
pipeline companies to verify volumes of natural gas custody transfers. To ensure
that such data is accurate, on-site field services and data collection must be
coordinated with meter maintenance, chart integration, meter data acquisition
and data management to produce timely and accurate reports.
The market for independent natural gas measurement services is fragmented,
with no single company having the ability to exercise substantial market
influence. Many natural gas producers and operators, and most natural gas
pipeline and transportation companies, internally perform some or all of their
natural gas measurement services. In addition to price, the primary
consideration for natural gas measurement customers is the quality of services
and the ability to maintain data integrity and accuracy, because natural gas
measurement has a direct effect on the natural gas producer's revenues and
royalties and working interest owner obligations. We believe that we are able to
effectively compete by:
6
- providing dependable integrated measurement services;
- maintaining local offices in proximity to our customer base; and
- retaining experienced and competent personnel.
METRETEK, INCORPORATED
Founded in 1977 in Melbourne, Florida and acquired by us in 1994, Metretek
Florida has operated primarily as a developer, manufacturer and marketer of AMR
systems for remotely monitoring, collecting, processing and managing field
devices and the data provided by such devices. Metretek Florida's systems
generally consist of three components:
- our field devices, which are intelligent, communications enabled, data
collection devices that are installed in the field and automatically
communicate with, and retrieve data from, existing customer devices;
- a communication link, which is typically a telephone wire-line or
cellular/PCS connection (analog, digital, circuit switched or
Internet-Protocol (IP)-based); and
- our DC2000 or PowerSpring software, which provide platforms for
automated data collection, management and presentation of information
retrieved from field devices or InvisiConnect(TM) or both, which
enables seamless connectivity from IP-based networks to legacy-based
serial applications.
Overview of Business. Metretek Florida's primary focus is to provide fully
integrated, turn-key systems that allow its customers to remotely monitor,
collect and manage data collected from various types of field devices.
Historically, Metretek Florida's customers have consisted principally of natural
gas and electric utilities, and field devices have been primarily connected to
natural gas and electric meters. In these markets, Metretek Florida's AMR
systems support its utility customers' business applications that provide
service to their larger commercial and industrial ("C & I") customers. In most
cases, these systems are owned, operated and managed by the utility. In such
cases, the data managed by the Metretek Florida AMR systems may support critical
functions such as billing, load management, tariff enforcement and verification.
As such, the Metretek Florida AMR system is normally an integral component of
the utility's business processes. In other situations, the systems may support
less critical functions of the utility or may be owned by a C & I customer.
The major cellular wireless carriers have recently deployed IP-based
digital wireless systems that are driving changes in numerous telemetry and M2M
applications. Metretek Florida has developed a new family of products, which it
calls InvisiConnect(TM), that enables digital wireless connectivity to be
extended to remote device data management applications in several vertical
market segments that Metretek Florida has not previously serviced. The
InvisiConnect(TM) products leverage Metretek Florida's technology and know-how,
initially developed to serve its utility markets, by seeking to expand sales of
its InvisiConnect(TM) products into several of these vertical market segments.
Products. Metretek Florida's product offerings fall into two categories:
field data collection and telemetry hardware devices and application specific
software-based solutions. Metretek Florida's hardware devices include AMRs and
electronic flow computers that are specifically sold to utility customers.
Metretek Florida's hardware devices also include telemetry products, our
Cellular Network Interface ("CNI") products, that operate with InvisiConnect(TM)
software and are designed to serve applications in other vertical market
segments as well as applications in the utility markets. All of Metretek
Florida's manufactured hardware devices are designed on similar electronic
platforms that can be configured to provide solutions designed to fit each
customer's specific requirements.
Metretek Florida's products also include a suite of software solutions that
are an inherent and critical part of system solutions sold to its customers.
Metretek Florida's primary software product utilized by its natural gas and
electric utility customers is DC2000. DC2000 is a Windows based proprietary
software system designed to simultaneously manage thousands of remote field
devices, as well as the data collected from those devices.
Metretek Florida also offers, as an alternative to the DC2000 software, its
PowerSpring solution, a subscription-based service that provides a turn-key
solution for remote data management and collection to customers who are unable
or unwilling to purchase and operate a complete Metretek DC2000 system. The
PowerSpring
7
solution includes providing and installing the remote data collection devices
required to meet the specific needs of the customer and furnishing timely,
accurate and properly formatted information in accordance with their
requirements by means of e-mail, file transfer or the internet. The customer is
charged monthly, based on the quantity of data collected and the frequency at
which it is collected.
Metretek Florida has recently introduced its InvisiConnect(TM) software
solution. Operating in conjunction with the CNI suite of telemetry hardware,
InvisiConnect(TM) provides a simple, cost-effective, plug-and-play
communications solution that allows almost any field device in virtually any
remote device data management application to be upgraded to digital wireless or
IP connectivity. In this product solution, Metretek Florida's CNI hardware
provides the digital cellular radio that is installed in the field and connects
directly to the customer's field device. The InvisiConnect(TM) software is
installed on the customer's application computer, and provides the communication
interface to the customer's legacy software package for remote device and data
management. Examples of applications that are ideal candidates for the
InvisiConnect(TM) solution include remote traffic light and intersection
control, remote signage, remote vending control and monitoring and numerous
other applications.
Utility Hardware Products. Metretek Florida's products that are typically
sold to natural gas and electric utilities, also known as automatic meter
readers or AMRs, are installed on existing utility meters. The AMRs are designed
to automatically collect and transmit energy consumption and event data
according to a schedule predetermined and preset by the customer. The AMRs
contain an electronic printed circuit board ("PCB") assembly, which is designed
and programmed to interface with a utility meter at the point of consumption.
The PCB contains a microprocessor and modem or other communication link, is
packaged with AC or DC power and is installed on, or in close proximity to, a
utility meter. Consumption data is collected, time-stamped, stored, and then
transmitted (via the communications link) by the AMR to a central location on
which Metretek Florida's DC2000 or PowerSpring software, running on a PC, or a
PC network, manages the data collection and processing as well as storing the
data in a database. Communication from the remotely located AMRs to the central
software system has historically been accomplished using existing, standard
voice grade telephone lines, although a more recent trend is evolving toward the
use of Metretek Florida's CNI digital cellular communication solutions.
Metretek Florida also manufactures and markets a complete line of
electronic natural gas flow computers and volume correctors. The corrector
product line incorporates the basic features of the AMR products and provides
the following features and functions:
- instantaneous, real time correction of metered volumes for variations
in flowing natural gas pressure and temperature;
- an on-board microprocessor and memory for calculating and storing
corrected natural gas volumes; and
- user configurable electronic outputs for control and alarm purposes.
Other Field Developments. In addition to supporting energy data collection,
remote telemetry and gas volume corrector product lines, Metretek Florida
manufactures and markets systems consisting of remote recorders and central
system software for monitoring and recording natural gas pipeline pressure and
for monitoring cathodic protection systems, as well as other similar application
specific products.
CNI Products. In order to address vertical markets in addition to the
utility markets, Metretek Florida has recently developed its Cellular Network
Interface suite of communication hardware products that enable its customers to
better utilize the wireless internet now provided by commercial carriers
worldwide through third generation ("3G") technology. With the transition to
provide enhanced wireless IP-based M2M and telemetry solutions driven by wide
scale deployments of third generation 3G wireless, internet-based networks,
Metretek Florida has identified two additional market opportunities, and is
seeking to exploit those opportunities through its product development efforts.
First, the move from analog to IP digital wireless connectivity is expected to
drive a significant need to replace existing analog and cellular digital packet
data ("CDPD") wireless connections that were installed over the past 20 years.
Second, with the deployment of more robust wireless IP connectivity, the
opportunity for new applications utilizing 3G technology is expected to spur
growth in the telemetry and wireless data sectors of the M2M market space.
Metretek Florida's CNI hardware products are used with its InvisiConnect(TM)
software to provide a seamless and transparent communication upgrade to existing
field devices, as well as their legacy applications software, provided to the
customer by virtually any vendor.
8
Markets. Historically, Metretek Florida's primary customers have been
energy utility companies that have deployed its systems in their business.
Metretek Florida currently has 71 active utility customers that operate DC2000
data collection systems, including 60 of the 100 largest natural gas
distribution utility companies in North America.
Marketing and Customer Service. In its traditional utility markets,
Metretek Florida utilizes a direct sales force and an independent, indirect
distributor and sales representative organization in the United States and the
United Kingdom, while it relies solely upon independent representatives and
distributors for the promotion, sales and support of its products outside those
two countries. Metretek Florida also provides its customers with system
installation and start-up service, 24/7 telephone technical support, regularly
scheduled product training, custom software development, system monitoring and
troubleshooting, and network management services.
Metretek Florida is introducing and actively selling its CNI suite of
hardware products and its InvisiConnect(TM) software solutions into numerous
vertical markets in which it previously had no marketing presence. Metretek
Florida is actively seeking and establishing channel partners and distribution
sources with which it intends to serve these markets.
Metretek Florida participates in utility, telecommunications and M2M
industry conferences, symposiums, and trade shows and maintains memberships in
several national and regional related associations. Metretek Florida also
advertises in and contribute editorially to industry trade journals, utilize
direct mail/e-mail and telemarketing and have a home page on the internet
(www.metretekfl.com).
During 2006, Metretek Florida plans to continue building distribution
channels in several vertical markets for the InvisiConnect(TM) product line. It
also intends to build brand name recognition in markets it is targeting but not
yet established. It also intends to engage new agents to provide additional
coverage into the energy utility market by promoting its core line of data
recording, remote monitoring and AMR systems.
International. Outside the United States, Metretek Florida has sold
products and services to utility companies in the United Kingdom, Netherlands,
Pakistan, Australia, Argentina, Columbia, Taiwan, Korea, Brazil and Canada. All
of the six major gas distribution utility companies in Canada own and operate
Metretek Florida's AMR systems. During fiscal 2005, 21% of Metretek Florida's
annual revenues were generated in international markets, compared to 24% in
fiscal 2004 and 15% in fiscal 2003.
Metretek Contract Manufacturing Company, Inc. In June 2002, Metretek
Florida formed MCM to operate and expand its printed circuit board ("PCB")
contract manufacturing business. Metretek Florida had been involved in contract
manufacturing as a part of its traditional business since 1997, but reorganized
this business and its management in fiscal 2002 in order to focus on increasing
business from third parties. Through MCM, Metretek Florida offered contract
manufacturing services to local, regional and national companies with PCB
product requirements that were short run, high quality, and quick turnaround.
During the third quarter of 2004, our Board of Directors approved a plan to
discontinue the contract manufacturing business operated by MCM and to sell all
of the contract manufacturing assets. In connection with this discontinuance, on
December 30, 2004 Metretek Florida and MCM sold their contract manufacturing
business and most of the related assets to InstruTech Florida, LLC ("InstruTech
Florida"). InstruTech Florida is a subsidiary of InstruTech, Inc., a
Colorado-based contract manufacturer of PCBs and other instrumentation products
In May 2005, Metretek Florida received notice that InstruTech Florida
intended to discontinue the acquired business. As a result, Metretek Florida
took possession of the purchased equipment from InstruTech Florida and commenced
liquidating the equipment. Metretek Florida also completed an estimate of the
net recoverable value of the equipment, including the effect on the recovery of
the note receivable from InstruTech Florida and amounts advanced under terms of
the bridge loan. As a result, we recorded an additional provision for loss on
the disposal of MCM (and its remaining net assets) by $300,000 during the first
quarter of 2005. The assets of the discontinued MCM business at December 31,
2005 consisted entirely of inventory and miscellaneous equipment and certain
accounts receivables, and no liabilities remained.
Backlog. Metretek Florida's backlog consists primarily of unfulfilled
customer orders at any given time related to its AMR and M2M business. It does
not include revenues that may be earned if customers exercise options to make
additional purchases. At December 31, 2005, Metretek Florida's backlog was
minimal. The amount of backlog is not necessarily indicative of future revenues
because short-term purchase orders, modifications to or terminations of present
orders and production delays can provide additional revenues or reduce
anticipated revenues. Metretek Florida's backlog is typically subject to large
variations from time to as new orders are received.
9
Consequently, it is difficult to make meaningful comparisons of backlog.
Metretek Florida's orders from its customers generally include provisions
permitting rescheduling, deferral or termination at any time at the convenience
of the customer.
MM 1995-2
As of December 31, 2005, MGT owned an approximate 27% economic interest in
MM 1995-2. MM 1995-2 owns and operates five oil field production water disposal
facilities located in northeastern Colorado. MM 1995-2 was formed in February
1996, and since that time MGT has served as its managing trustee. MGT acquired
additional equity interests in MM 1995-2 during the first quarter of 2004. In
connection with the acquisition of these additional equity interests, MGT formed
Conquest Acquisition Company LLC ("Conquest Acquisition") as a majority-owned
subsidiary to hold equity interests in MM 1995-2. Upon formation, MGT acquired
73.75% of Conquest Acquisition, with the remainder of the interest in Conquest
Acquisition being owned by the operator of MM 1995-2. As a result of this
acquisition, the equity income from MM 1995-2 is becoming a more significant
part of our consolidated results, contributing $1,690,000 to our income from
continuing operations during fiscal 2005, a substantial increase from $1,254,000
in fiscal 2004 and $469,000 in fiscal 2003.
CUSTOMERS
Our customers include a wide variety of mid-sized and large businesses,
utilities and institutions. From time to time, our subsidiaries have derived a
material portion of their revenues from one or more significant customers or
purchase commitments. For example, PowerSecure has recently received the largest
purchase orders in our history from one large customer. See "-Recent
Developments" above. During 2005 and 2004, Food Lion, a PowerSecure customer
accounting for approximately 15% of our consolidated revenues, was our only
customer that accounted for 10% or more of our consolidated revenues. Our
revenues derived from sales to customers outside the United States, primarily
from Metretek Florida sales, have declined in recent years to 1% of our total
consolidated revenues in fiscal 2005, as compared to 2% in fiscal 2004 and 3% in
fiscal 2003.
COMPETITION
The markets for our products, services and technology are intensely
competitive and are characterized by rapidly changing technology, new and
emerging products and services, frequent performance improvements and evolving
industry standards. We expect the intensity of competition to increase in the
future because the growth potential and deregulatory environment of the energy
market have attracted and are anticipated to continue to attract many new
competitors, including new businesses as well as established businesses from
different industries. Competition may also increase as a result of industry
consolidation. As a result of increased competition, we may have to reduce the
price of our products and services, and we may experience reduced gross margins,
loss of market share or inability to penetrate or develop new market, any one of
which could significantly reduce our future revenues and adversely affect our
operating results.
Our current and prospective competitors include:
- large and well established providers of data collection and
telemetry solutions, including AMR systems, such as Itron, Inc.,
Elster Metering, ABB, Badger Meter, Inc., Sensus Metering
Systems, Inc., Neptune Technology Group, Inc. and other smaller
entities such as Comverge, Inc., Cellnet Technology, Inc. and
Nertec, Inc.;
- numerous and diverse entities in the M2M market segments,
including Telenetics Corporation, Airlink Communications Inc.,
Sierra Wireless, Inc., Wavecom S.A. and Enfora L.P.;
- providers of natural gas volume correctors such as Mercury
Instruments, Inc., Eagle Research Corp., Instromet and Galvanic
Applied Sciences Inc.;
- large manufacturers of power generation equipment with
substantial distribution networks, such as Caterpillar Inc.,
Cummins Inc. (including Onan), Detroit Diesel Corporation, Kohler
Co. and Generac Power Systems, Inc.;
10
- large, well established and diversified companies like
Schlumberger, Emerson Electric Co., ABB, General Electric,
Siemens and Honeywell International Inc. that have divisions or
subsidiaries devoted to our markets;
- in-house services provided by utilities and major oil and gas
companies;
- large, well established and diversified oil and gas companies
like Duke Energy Corporation, Williams Energy and Hanover
Compressor Company; and
- numerous prospective competitors that may offer energy and data
management information and technology.
We believe that our ability to compete successfully will depend upon many
factors, many of which are outside of our control. These factors include:
- performance and features functionality and benefits of our, and
of our competitors', products and services;
- the value to our customers for the price they pay for our
products and services;
- the timing and market acceptance of new products and services and
enhancements to existing products and services developed by us
and by our competitors;
- our responsiveness to customers needs;
- ease of use of products and services;
- quality and reliability of our, and of our competitors', products
and services;
- reputation;
- sales and marketing efforts;
- our ability to develop and maintain our strategic relationships;
and
- the price of our, and of our competitors', products and services.
We believe that in many of our markets we have established ourselves as a
niche supplier of high quality, reliable products and services and, therefore,
that we currently compete favorably with respect to the above factors, other
than price. We do not typically attempt to be the low cost producer. Rather, we
endeavor to compete primarily on the basis of product and service quality rather
than price. In order to be successful in the future, we must continue to respond
promptly and effectively to the challenges of technological change and our
competitors' innovations. We cannot provide any assurance that our products and
services will continue to compete favorably in the future against current and
future competitors or that we will be successful in responding to changes in
other markets including new products and service and enhancements to existing
products and service introduced by our existing competitors or new competitors
entering the market.
Many of our existing and potential competitors have better name
recognition, longer operating histories, access to larger customer bases and
greater financial, technical, marketing, manufacturing and other resources than
we do. This may enable our competitors to respond more quickly to new or
emerging technologies and changes in customer requirements or preferences and to
devote greater resources to the development, promotion and sale of their
products and services than we can. Our competitors may be able to undertake more
extensive marketing campaigns, adopt more aggressive pricing policies and make
more attractive offers to potential employees, customers, strategic partners and
suppliers and vendors than we can. Our competitors may develop products and
services that are equal or superior to the products and services offered by us
or that achieve greater market acceptance than our products do. In addition,
current and potential competitors have established or may establish cooperative
relationships among themselves or with third parties to improve their ability to
address the needs of our existing and prospective customers. As a result, it is
possible that new competitors may emerge and rapidly acquire significant market
share or impede our ability to acquire market share in new markets. Increased
competition could
11
also result in price reductions, reduced gross margins and loss of market share,
and the inability to develop new businesses. We cannot provide any assurance
that we will have the financial resources, technical expertise, or marketing and
support capabilities to successfully compete against these actual and potential
competitors in the future. Our inability to compete successfully in any respect
or to timely respond to market demands or changes would have a material adverse
effect on our business, financial condition and results of operations.
Numerous companies compete directly with Southern Flow in the natural gas
measurement services industry, including companies that provide the same
services as Southern Flow and companies that provide additional or related field
services. Although a significant portion of natural gas measurement services is
currently performed internally by natural gas producers and pipeline companies,
much of Southern Flow's direct competition consists of small measurement
companies providing limited services and serving limited geographical areas.
Because Southern Flow offers a complete range of natural gas measurement
services over a wide geographical area, management believes Southern Flow offers
advantages over its competitors.
The market for distributed generation products is highly competitive and
rapidly changing and evolving. PowerSecure's competition is primarily from
manufacturers and distributors of generators and related equipment, as well as
small regional electric engineering firms that compete in certain aspects of
distributed generation production. Also, PowerSecure faces competition in some
specific portions of its distributed generation business. For example, some
small regional electric engineering firms specialize in the engineering aspects
of the distributed generation. Similarly, several well established companies
have developed microturbines used in distributed generation, such as Capstone
Turbine Corporation, which develops gas turbines. A number of companies are also
developing alternative generation technology such as fuel cells and solar cells,
such as FuelCell Energy, Inc., Ballard Power Systems, Inc. and Plug Power Inc.
Several large companies also are becoming leaders in uninterruptible power
supply system technology, including American Power Conversion Corporation,
Invensys, Liebert Corporation (a subsidiary of Emerson Electric), and PowerWare
Corporation (a subsidiary of Eaton). RealEnergy, Inc. designs, owns and operates
permanent on-site power generator systems for commercial real estate owners.
Companies developing and marketing energy-marketing software, such as eLutions
Inc., are also potential competitors to the extent they partner with distributed
generation equipment manufacturers.
The market for Metretek Florida's products and services is intensely
competitive. Although Metretek Florida's product offering is very specific to
the requirements for C & I meter reading and monitoring in natural gas and
electricity applications, many suppliers of residential meter reading systems
also offer products for C & I applications and can be formidable competitors for
utility companies desiring to implement residential meter reading and to have
all automatic/remote meter reading, including industrial and commercial,
performed on a single system. Also, major natural gas and electricity meter and
instrument manufacturers offer systems to remotely read and interrogate their
own equipment, and utility companies that use certain manufacturers' meters
exclusively may also choose to buy their communication and data collection
products as well. We believe that several large suppliers of equipment, services
or technology to the utility industry have developed or are currently developing
products or services for the markets in which Metretek Florida is currently
competing or intends to compete. In addition, as Metretek Florida expands its
product line and market focus to address other new market segments and M2M
applications, it will encounter a large number of established competitors who in
most instances already have significant market share and brand positioning
advantages. Most of Metretek Florida's present and potential competitors have
substantially greater financial, marketing, technical and manufacturing
resources, as well as greater name recognition and experience, than Metretek
Florida. Metretek Florida competes with a large number of existing and potential
competitors in these markets, some of which do not compete in all of the same
markets as Metretek Florida. In addition, current and potential competitors may
make strategic acquisitions or establish cooperative relationships among
themselves or with third parties that increase their ability to address the
needs of Metretek Florida's prospective customers. Metretek Florida competes
primarily on the basis of product quality and reliability, applications
expertise, and the quality of its service and support.
REGULATION
Our businesses and operations are affected by various federal, state, local
and foreign laws, regulations and authorities. However, to date, our compliance
with those requirements has not materially adversely affected our business,
financial condition or results of operations.
Regulation of Natural Gas. Natural gas operations and economics are
affected by price controls, by environmental, tax and other laws relating to the
natural gas industry, by changes in such laws and by changing administrative
regulations and the interpretations and application of such laws, rules and
regulations. Natural gas sales have been deregulated at the wholesale, or
pipeline, level since Federal Energy Regulatory Commission Order
12
636 was issued in 1992. Since that time, individual states have been
deregulating natural gas sales at the retail level. Some states have already
deregulated natural gas sales for industrial customers and certain classes of
commercial and residential customers, permitting those customers to purchase
natural gas directly from producers or brokers. Other states are currently
conducting pilot programs that allow residential and small commercial consumers
to select a provider of their choice, other than the local distribution company,
to supply their natural gas. As natural gas sales are deregulated, on a state by
state basis, we believe that timely collection and reporting of consumption data
will be needed and desired by certain customers, utility companies and energy
service providers.
Regulation of Electricity. The electric utility industry continues to
undergo fundamental structural changes due to deregulation and growing
competition at both wholesale and retail levels. This deregulatory movement in
the electricity industry follows a similar deregulatory movement in the natural
gas utility industry. Presently, many states offer or will soon offer
deregulated retail access, allowing customers in those states to choose their
own suppliers of electricity power generation services, while additional states
are transitioning to deregulated status. Deregulation may require recordation of
electric power consumption data more frequently than is presently customary
through a much wider use of daily, hourly and possibly even more frequent meter
readings.
Regulation of International Operations. Our international operations are
subject to the political, economic and other uncertainties of doing business
abroad including, among others, risks of war, cancellation, expropriation,
renegotiation or modification of contracts, export and transportation
regulations and tariffs, taxation and royalty policies, foreign exchange
restrictions, international monetary fluctuations and other hazards arising out
of foreign government sovereignty over certain areas in which we conduct, plan
to conduct or in the future may conduct operations.
Regulation of Environment. While various federal, state and local laws and
regulations covering the discharge of materials into the environment, or
otherwise relating to the protection of the environment, may affect our
business, our financial condition and results of operations have not been
materially adversely affected by environmental laws and regulations. We believe
we are in material compliance with those environmental laws and regulations to
which we are subject. We do not anticipate that we will be required in the near
future to make material capital expenditures due to these environmental laws and
regulations. However, because environmental laws and regulations are frequently
changed and expanded, we are unable to provide any assurance that the cost of
compliance in the future will not be material to us.
Regulation of Communication Services. With Metretek Florida's focus on
developing digital wireless-enabled data collection, monitoring and telemetry
solutions, such as InvisiConnect(TM), many of its products are or will be
subject to regulation and testing by the Federal Communications Commission (the
"FCC"). This testing focuses on compliance with FCC specifications for radio
frequency emissions. In addition, these products are designed to comply with a
significant number of industry standards and regulations, some of which are
evolving as new technologies are deployed. For example, our InvisiConnect
products must be tested and certified by the PCS Type Certification Review
Board, a wireless communications supported agency, as well as by each individual
wireless carrier for use on their respective networks. These tests are
principally designed to focus on the operating characteristics of the products
supplied to ensure that they will not have any unplanned adverse affects on the
carrier's networks as they each have them deployed in various regions The
regulatory process can be time-consuming and can require the expenditure of
substantial resources. We cannot assure you that the FCC or other testing and
certifying authorities will grant the requisite approvals for any of our
products on a timely basis, or at all. The failure of our products to comply, or
delays in compliance, with the various existing and evolving standards could
negatively impact our ability to sell our products. In addition, regulations
regarding the manufacture and sale of data communications devices are subject to
future change. We cannot predict what impact, if any, such changes may have upon
our business.
EMPLOYEES
As of March 3, 2006, we had 266 full-time employees. None of our employees
is covered by a collective bargaining agreement, and we have not experienced any
work stoppage. We consider our relations with our employees to be good. Our
future success is dependent in substantial part upon our ability to attract,
retain and motivate qualified management, technical, marketing and other
personnel.
RESEARCH AND DEVELOPMENT
Most of our basic research and development activities are conducted by
Metretek Florida. Metretek Florida's research and development efforts are
focused on enhancements to its existing product and service offerings
13
intended to take advantage of advancements in technology, address anticipated
customer requirements and provide for solutions in potential new markets.
Current research and development projects at Metretek Florida include the
development of data collection products that utilize the wireless internet
provided by the large cellular and PCS providers worldwide to provide real time
data collection capabilities to its traditional utilities customers and to
participate in developing opportunities in other market segments that are
evolving in the M2M market. From time to time, as our business needs and goals
dictate and as our capital resources allow, we may also conduct research and
development efforts for our PowerSecure and Southern Flow businesses.
Our research and development expenses, which include engineering expenses,
during 2005 were $713,000, as compared to $667,000 in 2004 and $627,000 in 2003.
We intend to continue our research and development efforts to enhance our
existing products and services and technologies and to develop new products,
services and technologies enabling us to enter into new markets and better
compete in existing markets. Our future success will depend, in part, upon the
success of our research and development efforts.
The markets for our services are dynamic, characterized by rapid
technological developments, frequent new product introductions and evolving
industry standards. The constantly changing nature of these markets and their
rapid evolution will require us to continually improve the performance, features
and reliability of our services, particularly in response to competitive
offerings, and to introduce both new and enhanced services as quickly as
possible and prior to our competitors. We believe our future success will
depend, in part, upon our ability expand and enhance the features of our
existing products and to develop and introduce new products designed to meet
changing customer needs on a cost-effective and timely basis. Consequently,
failure by us to respond on a timely basis to technological developments,
changes in industry standards or customer requirements, or any significant delay
in product development or introduction, could have a material adverse effect on
our business and results of operations. We cannot assure you that we will
respond effectively to technological changes or new product announcements by
others or that we will be able to successfully develop and market new products
or product enhancements.
RAW MATERIALS
In our businesses we purchase generators, memory chips, electronic
components, printed circuit boards, specialized sub-assemblies, relays, electric
circuit components, fabricated sheet metal parts, machined components, aluminum,
metallic castings and various other raw materials, equipment, parts and
components for our products and systems from third party vendors and suppliers.
While we generally use standard parts and components for our products and
systems that are readily available from multiple suppliers, we currently
procure, and expect to continue to procure, certain components, such as
generators, from single source manufacturers due to unique designs, quality and
performance requirements, and favorable pricing arrangements. While, in the
opinion of management, the loss of any one supplier of materials, other than
generators, would not have a material adverse impact on our business or
operations due to our belief that suitable and sufficient alternative vendors
would be available, from time to time we do encounter difficulties in acquiring
certain components due to shortages that periodically arise, supply problems
from our suppliers, obsolescence of parts necessary to support older product
designs or our inability to develop alternative sources of supply quickly or
cost-effectively, and these procurement difficulties could materially impact and
delay our ability to manufacture and deliver our products and therefore could
adversely affect our business and operations. We attempt to mitigate this risk
by maintaining an inventory of such materials. In addition, some of the raw
materials used in PowerSecure's business have significant lead times before they
are available, which may affect the timing of PowerSecure's project completions.
INTELLECTUAL PROPERTY
Our success and ability to grow depends, in part, upon our ability to
develop and protect our proprietary technology and intellectual property rights
in order to distinguish our products, services and technology from those of our
competitors. We rely primarily on a combination of copyright, trademark and
trade secret laws, along with confidentiality agreements, contractual provisions
and licensing arrangements, to establish and protect our intellectual property
rights. We hold several copyrights, service marks and trademarks in our
business, and we have applied for a patent protection related to
InvisiConnect(TM) and registrations of additional marks, although we may not be
successful in obtaining such patent and registering such marks. In the future,
we intend to continue to introduce and register new trademarks and service
marks, and to file new patent applications, as we deem appropriate or necessary
for our business and marketing needs.
Despite our efforts to protect our intellectual property rights, existing
laws afford only limited protection, and our actions may be inadequate to
protect our rights or to prevent others from claiming violations of their
14
intellectual property rights. Unauthorized third parties may copy, reverse
engineer or otherwise use or exploit aspects of our products and services, or
otherwise obtain and use information that we regard as proprietary. We cannot
assure you that our competitors will not independently develop technology
similar or superior to our technology or design around our proprietary
technology and intellectual property rights. In addition, the laws of some
foreign countries may not protect our intellectual property rights as fully or
in the same manner as the laws of the United States.
We do not believe that we are dependent upon any one copyright, trademark,
service mark or other intellectual property right. Rather, we believe that, due
to the rapid pace of technology and change within the energy industry, the
following factors are more important to our ability to successfully compete in
our markets:
- the technological and creative skills of our personnel;
- the development of new products, services and technologies;
- frequent product, service and technology enhancements;
- name recognition;
- customer training; and
- reliable product and service support.
We cannot assure you that we will be successful in competing on the basis of
these or any other factors. See "--Competition" above in this Item.
Although we do not believe that our products or technologies infringe on
the intellectual property rights of third parties, and we are not aware of any
currently pending claims of infringement, we cannot provide any assurance that
others will not assert claims of infringement against us in the future or that,
if made, such claims will not be successful or will not require us to enter into
licensing or royalty arrangements or result in costly and time-consuming
litigation.
We may in the future initiate claims or litigation against third parties
for infringement of our intellectual property rights to protect these rights or
to determine the scope and validity of our intellectual property rights or the
intellectual property rights of competitors. These claims could result in costly
litigation and the diversion of our technical and management personnel.
SEGMENT INFORMATION
We operate in three market segments:
- distributed generation;
- natural gas measurement services; and
- automated data collection and telemetry.
Financial information related to our segment operations for the past three
fiscal years is set forth in Note 11, "Segment and Related Information", of the
notes to our consolidated financial statements included elsewhere in this Report
and incorporated herein by this reference.
AVAILABLE INFORMATION
Our corporate Internet address is www.metretek.com. Through our website we
make available, free of charge, our Annual Reports on Form 10-K, Quarterly
Reports on Form 10-Q, Current Reports on Form 8-K and amendments to those
reports filed or furnished pursuant to Section 13(a) and 15(d) of the Exchange
Act as soon as reasonably practicable after we electronically file them with or
furnish them to the SEC. Our SEC filings are also available on the SEC's website
at www.sec.gov. The contents of and the information on our website is not a part
of, and is not incorporated into, this Report.
15
ITEM 1A. RISK FACTORS
Our business and future operating results may be affected by many risks,
uncertainties and other factors, including those set forth below and those
contained elsewhere in this report. However, the risks, uncertainties and other
factors described in this report are not the only ones we face. There may be
additional risks, uncertainties and other factors that we do not currently
consider material or that are not presently known to us. If any of the following
risks were to occur, our business, affairs, assets, financial condition, results
of operations, cash flows and prospects could be materially and adversely
affected. When we say that something could have a material adverse effect on us
or on our business, we mean that it could have one or more of these effects.
RISKS RELATED TO OUR BUSINESS AND INDUSTRY
WE HAVE A HISTORY OF LOSSES, AND, DESPITE OUR RECENT PROFITABILITY, WE MAY
NOT BE ABLE TO REMAIN PROFITABLE IN THE FUTURE.
Although we recorded net income of $2,334,000 in fiscal 2005, we had
incurred net losses in almost all of our prior years of operations. As of
December 31, 2005, we had an accumulated deficit of approximately $56.2 million.
Accordingly, notwithstanding our recent profitability, we may not be able to
sustain or increase that profitability in the future. Moreover, as a result of
our intended future growth and expansion of our businesses, products and
services, we may incur expenses in future periods, including significant costs
in developing and expanding the core distributed generation business of
PowerSecure and the three new businesses of PowerSecure, as well as the
telemetry business of Metretek Florida, that exceed our revenues. If our future
revenues do not meet our expectations, or if our operating expenses exceed what
we anticipate and cannot be reduced below our revenues, our business, financial
condition and results of operations will be materially and adversely affected.
FROM TIME TO TIME WE DEPEND ON REVENUES FROM SIGNIFICANT PURCHASE
COMMITMENTS, AND ANY LOSS, CANCELLATION, REDUCTION OR DELAY IN THESE LARGE
PURCHASE COMMITMENTS COULD HARM OUR BUSINESS AND OPERATING RESULTS.
From time to time, our subsidiaries have derived a material portion of
their revenues from one or more significant customers or large purchase
commitments. For example, PowerSecure has recently received the largest purchase
orders in our history from one large customer. See "Item 1. Business-Recent
Developments" above. There is no assurance PowerSecure will receive any future
orders from this customer. From time to time, PowerSecure receives other
significant, non-recurring purchase orders from customers. In fiscal 2004 and
fiscal 2005, we had one customer that was responsible for approximately 15% of
our consolidated revenues. If such commitments were to be terminated or fail to
recur, our revenues and net income would significantly decline. Our success will
depend on our continued ability to develop new relationships and manage existing
relationships with significant customers and generate recurring revenues from
them. We cannot be sure that we will be able to retain our largest current
customers, that we will be able to attract additional large customers in the
future, or that our existing customers will continue to purchase our products
and services in the same amounts as in prior years. Our business and operating
results would be adversely affected by:
- the loss of one or more large customers;
- any cancellation of orders (including verbal orders) by, or any
reduction or delay in sales to, these customers;
- the failure of large purchase commitments to be renewed or to recur;
- our inability to successfully develop relationships with additional
customers; or
- future price concessions that we may have to make to these customers.
WE DO NOT HAVE LONG-TERM OR RECURRING COMMITMENTS WITH MOST OF OUR
CUSTOMERS AND MAY BE UNABLE TO RETAIN EXISTING CUSTOMERS, ATTRACT NEW
CUSTOMERS OR REPLACE DEPARTING CUSTOMERS WITH NEW CUSTOMERS THAT CAN
PROVIDE COMPARABLE REVENUES.
Because we generally do not obtain firm, long-term volume purchase
commitments from our customers, many of our contracts and commitments from our
customers are short-term or non-recurring. For example, most of PowerSecure's
revenues are derived on a non-recurring, project by project basis, and there is
no assurance that its revenues and business will continue to grow. In addition,
customer orders can be canceled or rescheduled and volume levels can be reduced.
We cannot assure you that our customers will continue to use our products and
16
services or that we will be able to replace, in a timely or effective manner,
canceled, delayed or reduced orders with new business that generates comparable
revenues. Further, we cannot assure you that our current customers will continue
to generate consistent amounts of revenues over time. Our failure to maintain
and expand our customer relationships customers would materially and adversely
affect our business and results of operations.
WE MAY REQUIRE A SUBSTANTIAL AMOUNT OF ADDITIONAL FUNDS TO FINANCE OUR
CAPITAL REQUIREMENTS AND THE GROWTH OF OUR BUSINESS, BUT WE MAY NOT BE ABLE
TO RAISE A SUFFICIENT AMOUNT OF FUNDS TO DO SO ON TERMS FAVORABLE TO US AND
OUR STOCKHOLDERS OR AT ALL.
We may need to obtain additional capital to fund our capital obligations
and to finance the development and expansion of our businesses. For example, we
will need substantial additional capital to finance the development and growth
of the core and new businesses of PowerSecure and of Metretek Florida's
telemetry business. Further, under the settlement agreement in connection with a
class action lawsuit, we are required to make payments on a promissory note in
the annual amount of $750,000 plus interest through June 30, 2008. In addition,
from time to time as part of our business plan, we engage in discussions
regarding potential acquisitions of businesses and technologies. While our
ability to finance future acquisitions will probably depend on or ability to
raise additional capital, as of the date of this report, we have not entered
into any agreement committing us to any such acquisition. Moreover,
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, necessitating additional capital. We continually evaluate our
cash flow requirements as well as our opportunity to raise additional capital in
order to improve our financial position. In addition, we continually evaluate
opportunities to improve our credit facilities, through increased credit
availability, lower debt costs or other more favorable terms. We cannot provide
any assurance that we will be able to raise additional capital or replace our
current credit facilities when needed or desired, or that the terms of any such
financing will be favorable to us and our stockholders.
We entered into a new credit facility in September 2005, under which we
have a maximum credit facility of $4.5 million. The credit facility matures in
September 2007. Our ability to borrow funds under the credit facility is limited
to our loan availability based upon certain assets of our subsidiaries. As of
December 31, 2005, our loan availability under the credit facility was
$4,500,000, of which approximately $1,314,000 had been borrowed, leaving
$3,186,000 available for future use. The amount of our loan availability, as
well as the amount borrowed under the credit facility, will change in the future
depending on our asset base, our liquidity and our capital requirements.
Our credit facility has a number of financial covenants that our
subsidiaries must satisfy. Our ability to satisfy those covenants depends
principally upon our ability to achieve positive operating performance. If any
of our borrowing subsidiaries is unable to fully satisfy the financial covenants
of the credit facility, it will breach the terms of the credit facility. Our
obligations under the credit facility are secured by a first priority security
interest in substantially all of the assets of our subsidiaries, and by
guarantees by us and our subsidiaries. Any breach of the covenants in the credit
facility could result in a default under the credit facility and an acceleration
of payment of all outstanding debt owed, which would materially and adversely
affect our financial condition.
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, through asset or business
sales, from traditional credit financings or from other financing sources. Our
ability to obtain additional capital when needed or desired will depend on many
factors, including general market conditions, our operating performance and
investor sentiment, and thus cannot be assured. In addition, depending on how it
is structured, raising capital could require the consent of our lender. Even if
we are able to raise additional capital, the terms of any financing could be
adverse to the interests of our stockholders. For example, the terms of debt
financing could include covenants that restrict our ability to operate our
business or to expand our operations, while the terms of an equity financing,
involving the issuance of capital stock or of securities convertible into
capital stock, could dilute the percentage ownership interests of our
stockholders, and the new capital stock or other new securities could have
rights, preferences or privileges senior to those of our current stockholders.
We cannot assure you that sufficient additional funds will be available to us
when needed or desired or that, if available, such funds can be obtained on
terms favorable to us and our stockholders and acceptable to our lender, if its
consent is required. Our inability to obtain sufficient additional capital on a
timely basis on favorable terms could have a material adverse effect on our
business, financial condition and results of operations.
WE ARE SUBJECT TO LAWSUITS, CLAIMS AND PROCEEDINGS FROM TIME TO TIME, AND
IF IN THE FUTURE WE BECOME SUBJECT TO NEW LAWSUITS, AND IF ANY OF THOSE
LAWSUITS ARE MATERIAL AND ARE SUCCESSFULLY PROSECUTED AGAINST
17
US, OUR BUSINESS, FINANCIAL CONDITION AND RESULTS OF OPERATIONS COULD BE
MATERIALLY AND ADVERSELY AFFECTED.
We are subject to lawsuits, claims and other proceedings from time to time,
and we have been subject to lawsuits in the past that have had a material impact
on us. In addition, one significant lawsuit in which we are involved is still
pending. Our current proceedings are described in "Item 3. Legal Proceedings."
In the future, we may become involved in other lawsuits, claims and proceedings
that arise in the ordinary course of business. We cannot provide any assurance
that any such litigation, claims or proceedings could not materially and
adversely affect our business, financial condition and results of operation.
OUR FUTURE OPERATING RESULTS ARE DIFFICULT TO PROJECT AND HAVE FLUCTUATED
SIGNIFICANTLY IN THE PAST, AND FLUCTUATIONS IN THE FUTURE MAY ADVERSELY
AFFECT THE TRADING PRICE OF OUR COMMON STOCK.
Our 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 and any of which may cause
the trading price of our common stock to fluctuate. These factors include,
without limitation, the following:
- the size, timing and terms of sales and orders, including large
customer orders, such as the recent significant orders at PowerSecure,
and the effects of customers delaying, deferring or canceling purchase
orders or making smaller purchases than expected;
- the effects of hurricanes and other weather conditions on the needs
and demand requirements of our customers;
- our ability to obtain adequate supplies of key components and
materials for our products on a timely and cost-effective basis;
- our ability to implement our business plans and strategies and the
timing of such implementation;
- the pace of development of our new businesses, including the new
PowerSecure businesses, and the growth of their markets;
- the timing, pricing and market acceptance of our new products and
services such as Metretek Florida's new telemetry offerings;
- changes in our pricing policies and those of our competitors;
- variations in the length of our product and service implementation
process;
- changes in the mix of products and services having differing margins;
- changes in the mix of international and domestic revenues;
- the life cycles of our products and services;
- budgeting cycles of utilities and other 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
18
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.
Due to these factors and the other risks discussed in this prospectus, you
should not rely on quarter-to-quarter, period-to-period or year-to-year
comparisons of our results of operations as an indication of our future
performance. Quarterly, period and annual comparisons of our operating results
are not necessarily meaningful or indicative of future performance. It is
possible that in some future periods our results of operations may fall below
the expectations of public market analysts and investors, causing the trading
price of our common stock to decline.
SEVERE, ADVERSE WEATHER CONDITIONS, SUCH AS HURRICANES, CAN CAUSE A SEVERE
DISRUPTION IN THE BUSINESS OF SOUTHERN FLOW BY SIGNIFICANTLY REDUCING THE
SHORT AND MID-TERM DEMAND REQUIREMENTS OF ITS CUSTOMERS.
Southern Flow's business is in large part dependent upon the business of
large oil and gas producers. Severe, adverse weather conditions, such as
hurricanes, can cause serious disruptions in the production activities of those
customers, which in turns reduces their demand for Southern Flow's services.
While such production reductions tend to be temporary and after time return to
normal levels, the disruption causes Southern Flow to lose business that is
generally not replaceable. This loss of business results in a loss of revenues
for Southern Flow, but since Southern Flow's expenses tend to be fixed, at least
in the short term, these short-term losses of revenues have a significant effect
on Southern Flow's net income, and thus a material adverse impact on our
revenues, financial condition and results of operations.
BECAUSE SOME OF OUR BUSINESS AND PRODUCT OFFERINGS HAVE LIMITED HISTORIES
AND THEIR BUSINESS STRATEGIES ARE STILL BEING DEVELOPED AND ARE UNPROVEN,
LIMITED INFORMATION IS AVAILABLE TO EVALUATE THEIR FUTURE PROSPECTS.
Our business strategy includes the development and expansion of new
businesses and product lines from time to time, including PowerSecure's new
engineering services, management consulting and energy efficiency businesses and
Metretek Florida's telemetry business. Our plans and strategies with respect to
these new businesses are often based on unproven models and must be developed
and modified. Our future success depends in large part upon our ability to
develop these new businesses so that they will generate significant revenues,
profits and cash flow.
As a company developing new businesses in the rapidly evolving energy and
technology markets, we face numerous risks and uncertainties which are described
in this Item as well as other parts of this Report. Some of these risks relate
to our ability to:
- anticipate and adapt to the changing regulatory climate for energy and
technology products, services and technology;
- attract customers to our new businesses;
- anticipate and adapt to the changing energy markets and end-user
preferences;
- attract, retain and motivate qualified personnel;
- respond to actions taken by our competitors;
- integrate acquired businesses, technologies, products and services;
- generate revenues, gross margins, cash flow and profits from sales of
new products and services; and
- implement an effective marketing strategy to promote awareness of our
new businesses, products and services.
Our business and financial results in the future will depend heavily on the
market acceptance and profitability of our new businesses and these new product
and service offerings lines. If we are unsuccessful in addressing these risks or
in executing our business strategies, or if our business model fails or is
invalid, then our business would be materially and adversely affected.
19
RESTRICTIONS IMPOSED ON US BY THE TERMS OF OUR CURRENT CREDIT FACILITY AND
THE CLASS ACTION SETTLEMENT COULD LIMIT HOW WE CONDUCT OUR BUSINESS AND OUR
ABILITY TO RAISE ADDITIONAL CAPITAL.
The terms of our current credit facility and the class action settlement
contain financial and operating covenants that place restrictions on our
activities and limit the discretion of our management. These covenants place
significant restrictions on our ability to:
- incur additional indebtedness;
- create liens or other encumbrances;
- issue or redeem our securities;
- make dividend payments and investments;
- amend our charter documents;
- sell or otherwise dispose of our or our subsidiaries' stock or assets;
- liquidate or dissolve;
- merge or consolidate with other companies; or
- reorganize, recapitalize or engage in a similar business transaction.
Any future financing arrangements will likely contain similar or more
restrictive covenants. As a result of these restrictions, we may be:
- limited in how we conduct our business;
- unable to raise additional capital, through debt or equity financings,
when needed for our operations and growth; and
- unable to compete effectively or to take advantage of new business
opportunities.
If a default in our credit facility is declared and not waived or cured,
then the entire indebtedness then owed under the credit facility could be
accelerated, and we may not be able to repay it. In addition, if the credit
facility matures and is not renewed, we may not be able to obtain successor
financing on acceptable terms. The need to comply with the terms of our debt
obligations may also limit our ability to obtain additional financing and our
flexibility in planning for or reacting to changes in our business. If as a
result of these covenants, we are unable to pursue a favorable transaction or
course of action or to respond to an unfavorable event, condition or
circumstance, then our business could be materially and adversely affected.
OUR DEPENDENCE ON THIRD PARTY PARTNERS AND SUPPLIERS, INCLUDING SOLE SOURCE
SUPPLIERS, MAY PREVENT US FROM DELIVERING ACCEPTABLE PRODUCTS OR PERFORMING
ACCEPTABLE SERVICES ON A TIMELY BASIS.
We rely on single source suppliers and highly in demand parts for some of
the critical components we use in our products. Our business is dependent on our
ability to anticipate our needs for components and products and our suppliers'
ability to deliver such components and products in time to meet critical
manufacturing and installation schedules. Our business could be adversely
affected, for example, if PowerSecure is unable to obtain, on a timely and
cost-efficient basis, sufficient generators to meet its customers' installation
schedules. In addition, our business could be adversely affected if we
experience supply constraints or if we experience any other interruption or
delay in the supply chain which interfere with our ability to manufacture our
products or manage our inventory levels.
OUR POWERSECURE BUSINESS IS SUBJECT TO MANY BUSINESS RISKS, INCLUDING THE
RISK OF CHANGES IN TARIFF STRUCTURES AND IN ENVIRONMENTAL REQUIREMENTS, AND
IF ANY OF THESE RISKS MATERIALIZE, THEY COULD MATERIALLY AND ADVERSELY
AFFECT POWERSECURE'S BUSINESS AS WELL AS OUR FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
PowerSecure's business is dependent, in part, upon its ability to utilize
distributed generation to create favorable pricing for customers based on
existing tariff structures. If utility tariffs change in some regions, then
PowerSecure's business would become less viable in those regions. Moreover, even
if such tariffs do not change, if PowerSecure is unable to obtain the expected
benefits from those tariffs, its shared savings projects, that are dependent
upon such benefits, would be materially and adversely affected. Also,
PowerSecure presently utilizes diesel powered generators in its systems. If
regulatory requirements in its business regions are modified to either
20
effectively ban diesel or to make diesel no longer commercially viable in those
regions, then PowerSecure's business would be materially and adversely affected.
While PowerSecure, in such case, would utilize its efforts to find alternative
power sources, there is no assurance those alternative sources would be
economically acceptable.
SOME OF POWERSECURE'S LONG-TERM TURN-KEY CONTRACTS SUBJECT US TO RISKS.
Some of PowerSecure's contracts for turn-key distributed generation
projects have a term of many years, during which time some risks to its business
may arise due to its obligations under those contracts. For example, PowerSecure
is responsible for full maintenance on the generators and switchgear during the
term of the contract. The reserves it has set aside may not be sufficient to
cover its maintenance obligations, and the maintenance packages it purchased
designed to cover maintenance on the generators may not be adequate. In
addition, changes in circumstances that were not contemplated at the time of the
contract could exposure PowerSecure to unanticipated risks or to protracted or
costly dispute resolution.
WE DEPEND ON SOLE SOURCE OR LIMITED SOURCE SUPPLIERS FOR SOME OF THE KEY
COMPONENTS AND MATERIALS IN OUR PRODUCTS, WHICH MAKES US SUSCEPTIBLE TO
SUPPLY SHORTAGES OR PRICE INCREASES THAT COULD ADVERSELY AFFECT OUR
BUSINESS.
We depend on sole or limited source suppliers for key components and
materials for some of our products such as generators, and if we are unable to
obtain these components on a timely basis, we will not be able to deliver our
products to customers. Also, we cannot guarantee that any of the parts or
components that we purchase, if available at all, will be of adequate quality or
that the prices we pay for these parts or components will not increase. For
example, PowerSecure is dependent upon on obtaining a timely and cost-effective
supply of generators for its distributed generation system, and from time to
time these generators are in short supply, affecting the timing and cost of the
generators. We may experience delays in production if the supply of any critical
components is interrupted or reduced and we have failed to identify an
alternative vendor or if there is a significant increase in the cost of such
components, which could materially and adversely affect our business and
operations.
WE EXTEND PRODUCT WARRANTIES WHICH COULD ADVERSELY AFFECT OUR OPERATING
RESULTS.
We provide a standard one-year warranty for hardware product sales and
distributed generation equipment. In addition, we offer extended warranty terms
on our distributed generation turn-key projects as well as certain hardware
products. We reserve for the estimated cost of product warranties when revenue
is recognized, and we evaluate our reserve periodically by comparing our
warranty repair experience by product. While we engage in product quality
programs and processes, including monitoring and evaluating the quality of our
components suppliers and development of methods to remotely detect and correct
failures, our warranty obligation is affected by actual product failure
rates, parts and equipment costs and service labor costs incurred in correcting
a product failure. In addition, our operating history in the distributed
generation market is limited. If actual product failure rates, parts and
equipment costs, or service labor costs exceed our estimates, our operating
results could be adversely impacted.
BECAUSE WE ARE DEPENDENT UPON THE UTILITY INDUSTRY FOR A SIGNIFICANT
PORTION OF OUR REVENUE, CONTINUED REDUCTIONS OF PURCHASES OF OUR PRODUCTS
AND SERVICES BY UTILITIES CAUSED BY REGULATORY REFORM MAY MATERIALLY AND
ADVERSELY AFFECT OUR BUSINESS.
We currently derive a significant portion of our revenue from sales by
Metretek Florida of its products and services to the utility industry, and
particularly the natural gas utility industry. A key reason that we have
experienced variability of operating results on both an annual and quarterly
basis has been utility purchasing patterns, including delays of purchasing
decisions, as the result of mergers and acquisitions in the utility industry and
potential changes to the federal and state regulatory framework within which the
utility industry operates. The utility industry is generally characterized by
long budgeting, purchasing and regulatory process cycles that can take up to
several years to complete. Our utility customers typically issue requests for
quotes and proposals, establish committees to evaluate the purchase proposals,
review different technical options with vendors, analyze performance and
cost/benefit justifications and perform a regulatory review, in addition to
applying a normal budget approval process within the utility. In addition,
utilities may defer purchases of our products and services if the utilities
reduce capital expenditures as the result of mergers and acquisitions, pending
or unfavorable regulatory decisions, poor revenues due to weather conditions,
rising interest rates or general economic downturns, among other factors. The
natural gas utility industry has been virtually the sole market for Metretek
Florida's products and services. However, over the last few years, the
uncertainty in the utility industry that has resulted from the regulatory
uncertainty in the current era of deregulation has caused utilities to defer
even further purchases of Metretek Florida's products and services. The
continuation of this uncertain regulatory climate will materially and adversely
affect our revenues.
The domestic utility industry is currently the focus of regulatory reform
initiatives in virtually every state. These initiatives have resulted in
significant uncertainty for industry participants and raise concerns regarding
assets that would not be considered for recovery through rate payer charges.
This regulatory climate has caused many utilities to delay purchasing decisions
that involve significant capital commitments. As a result of these purchasing
decision delays, utilities have reduced their purchases of our products and
services. While we expect some states will act on these regulatory reform
initiatives in the near future, we cannot assure you that the current regulatory
uncertainty will be resolved in the short term. In addition, new regulatory
initiatives could have a material adverse effect on our business. Moreover, in
part as a result of the competitive pressures in the utility industry arising
from the regulatory reform process, many utilities are pursuing merger and
acquisition strategies. We have experienced considerable delays in purchase
decisions by utilities that have become parties to merger or acquisition
transactions.
21
Typically, capital expenditure purchase decisions are put on hold indefinitely
when merger negotiations begin. If this pattern of merger and acquisition
activity among utilities continues, our business may be materially and adversely
affected. In addition, if any of the utilities that account for a significant
portion of our revenues decide to significantly reduce their purchases of our
products and services, our financial condition and results of operations may be
materially and adversely affected.
MANY OF OUR PRODUCTS AND SERVICES EXPERIENCE LONG AND VARIABLE SALES
CYCLES, WHICH COULD HAVE A NEGATIVE IMPACT ON OUR RESULTS OF OPERATIONS FOR
ANY GIVEN QUARTER OR YEAR.
Our products and services are often used by our customers to address
critical business needs. Customers generally consider a wide range of issues
before making a decision to purchase our products and services. In addition, the
purchase of some of our products and services involves a significant commitment
of capital and other resources by a customer. This commitment often requires
significant technical review, assessment of competitive products and approval at
a number of management levels within a customer's organization. Our sales cycle
may vary based on the industry in which the potential customer operates and is
difficult to predict for any particular transaction. The length and variability
of our sales cycle makes it difficult to predict whether particular sales will
be concluded in any given quarter. While our customers are evaluating our
products and services before they place an order with us, we may incur
substantial sales and marketing and research and development expenses to
customize our products to the customer's needs. We may also expend significant
management efforts, increase manufacturing capacity and order long-lead-time
components or materials prior to receiving an order. Even after this evaluation
process, a potential customer may not purchase our products. As a result, these
long sales cycles may cause us to incur significant expenses without ever
receiving revenue to offset those expenses.
IF WE ARE UNABLE TO DEVELOP NEW AND ENHANCED PRODUCTS AND SERVICES THAT
ACHIEVE MARKET ACCEPTANCE IN A TIMELY MANNER, OUR OPERATING RESULTS AND
COMPETITIVE POSITION COULD BE HARMED.
Our future success will depend on our ability to develop new and enhanced
products and services that achieve market acceptance in a timely and
cost-effective manner. The development of technology is often complex, and we
occasionally have experienced delays in completing the development and
introduction of new products and services and enhancements thereof. Successful
development and market acceptance of our products and services depends on a
number of factors, including:
- the changing requirements of customers;
- the accurate prediction of market requirements;
- the timely completion and introduction of new products and services;
- the quality, price and performance of new products and services;
- the availability, quality, price and performance of competing
products, services and technologies;
- our customer service and support capabilities and responsiveness;
- the successful development of our relationships with existing and
potential customers; and
- changes in technology, industry standards or end-user preferences.
We cannot provide assurance that products and services that we have
recently developed or may develop in the future will achieve market acceptance.
If our new products and services fail to achieve market acceptance, or if we
fail to develop new or enhanced products and services that achieve market
acceptance, our growth prospects, operating results and competitive position
could be adversely affected.
RAPID TECHNOLOGICAL CHANGES MAY PREVENT US FROM REMAINING CURRENT WITH OUR
TECHNOLOGICAL RESOURCES AND MAINTAINING COMPETITIVE PRODUCT AND SERVICE
OFFERINGS.
The markets in which our businesses operate are characterized by rapid
technological change, frequent introductions of new and enhanced products and
services, evolving industry standards and changes in customer needs. Significant
technological changes could render our existing and planned new products,
services and technology obsolete. Our future success will depend, in large part,
upon our ability to:
- effectively use and develop leading technologies;
- continue to develop our technical expertise;
22
- enhance our current products and services;
- develop new products and services that meet changing customer needs;
and
- respond to emerging industry standards and technological changes in a
cost-effective manner.
If we are unable to successfully respond to these developments or if we do
not respond to them in a cost-effective manner, then our business will be
materially and adversely affected. We cannot assure you that we will be
successful in responding to changing technology or market needs. In addition,
products, services and technologies developed by others may render our products,
services and technologies uncompetitive or obsolete.
Even if we do successfully respond to technological advances and emerging
industry standards, the integration of new technology may require substantial
time and expense, and we cannot assure you that we will succeed in adapting our
products, services and technology in a timely and cost-effective manner. We may
experience financial or technical difficulties or limitations that could prevent
us from introducing new or enhanced products or services. Furthermore, any of
these new or enhanced products, services and technology could contain problems
that are discovered after they are introduced. We may need to significantly
modify the design of these products and services to correct problems. Rapidly
changing technology and operating systems may impede market acceptance of our
products, services and technology. Our business could be materially and
adversely affected if we experience difficulties in introducing new or enhanced
services and products or if these products and services are not received
favorably by our customers.
Development and enhancement of our products and services will require
significant additional expenses and could strain our management, financial and
operational resources. The lack of market acceptance of our products or services
or our inability to generate sufficient revenues from this development or
enhancements to offset their costs could have a material adverse effect on our
business. In the past, we have experienced delays in releasing new products and
services and enhancements, and we may experience similar delays in the future.
These delays or problems in the installation of implementation of our new
products and services and enhancements may cause customers to forego purchases
of our products and services to purchase those of our competitors.
IF WE ARE UNABLE TO CONTINUE TO ATTRACT AND RETAIN KEY PERSONNEL, OUR
BUSINESS WILL BE MATERIALLY AND ADVERSELY AFFECTED.
We believe our future success will depend in large part upon our ability to
attract and retain highly qualified technical, managerial, sales, marketing,
finance and operations personnel. Competition for qualified personnel is
intense, and we cannot assure you that we will be able to attract and retain
these key employees in the future. The loss of the services of any of our key
personnel could have a material adverse effect on our business. Although we have
entered into employment agreements with some of our executive officers, we
generally do not have employment contracts with our other key employees. In
addition, we do not have key person life insurance for most of our key
personnel. We cannot assure you that we will be able to retain our current key
personnel or that we will be able attract or retain other highly qualified
personnel in the future. We have from time to time in the past experienced, and
we expect in the future to continue to experience, difficulty in hiring and
retaining highly skilled employees with appropriate qualifications. If we are
unable to attract and retain highly qualified personnel, our business could be
materially and adversely affected.
WE FACE INTENSE COMPETITION IN THE MARKETS FOR OUR PRODUCTS, SERVICES AND
TECHNOLOGY, AND IF WE CANNOT SUCCESSFULLY COMPETE IN THOSE MARKETS, OUR
BUSINESS WILL BE MATERIALLY AND ADVERSELY AFFECTED.
The markets for our products, services and technology are intensely
competitive and subject to rapidly changing technology, new competing products
and services, frequent performance improvements and evolving industry standards.
We expect the intensity of competition to increase in the future because the
growth potential and deregulatory environment of the energy market have
attracted and are anticipated to continue to attract many new competitors,
including new businesses as well as established businesses from different
industries. Competition may also increase as a result of industry consolidation.
As a result of increased competition, we may have to reduce the price of our
products and services, and we may experience reduced gross margins and loss of
market share, which could significantly reduce our future revenues and operating
results.
Many of our existing competitors, as well as a number of potential new
competitors, have longer operating histories, greater name recognition, larger
customer bases and significantly greater financial, technical, marketing,
manufacturing and other resources than we do. This may enable our competitors to
respond more quickly to new or emerging technologies and changes in customer
requirements or preferences and to devote greater resources to the
23
development, promotion and sale of their products and services than we can. Our
competitors may be able to undertake more extensive marketing campaigns, adopt
more aggressive pricing policies and make more attractive offers to potential
employees, customers, strategic partners and suppliers and vendors than we can.
Our competitors may develop products and services that are equal or superior to
the products and services offered by us or that achieve greater market
acceptance than our products do. In addition, current and potential competitors
have established or may establish cooperative relationships among themselves or
with third parties to improve their ability to address the needs of our existing
and prospective customers. As a result, it is possible that new competitors may
emerge and rapidly acquire significant market share or impede our ability to
acquire market share in new markets. We cannot assure you that we will have the
financial resources, technical expertise, portfolio of products and services or
marketing and support capabilities to compete successfully in the future. Our
inability to compete successfully or to timely respond to market demands or
changes would have a material adverse effect on our business, conditions and
results of operations.
DOWNTURNS IN GENERAL ECONOMIC AND MARKET CONDITIONS COULD MATERIALLY AND
ADVERSELY AFFECT OUR BUSINESS.
There is potential for a downturn in general economic and market
conditions. In recent years, some segments of the economy, including the
technology industry in particular, have experienced significant economic
downturns characterized by decreased product demand, price erosion, work
slowdowns and layoffs. Moreover, there is increasing uncertainty in the energy
and technology markets attributed to many factors, including international
terrorism and strife, global economic conditions and strong competitive forces.
Our future results of operations may experience substantial fluctuations from
period to period as a consequence of these factors, and such conditions and
other factors affecting capital spending may affect the timing of orders from
major customers. An economic downturn coupled with a decline in our revenues
could adversely affect our ability meet our capital requirement, support our
working capital requirements and growth objectives, maintain our existing
financing arrangements, or otherwise adversely affect our business, financial
condition and results of operations. As a result, any economic downturns in
general or in our markets, particularly those affecting industrial and
commercial users of natural gas and electricity, would have a material adverse
effect on our business, cash flows, financial condition and results of
operations.
IF WE FAIL TO EFFECTIVELY MANAGE OUR FUTURE GROWTH, OUR ABILITY TO MARKET
AND SELL OUR PRODUCTS AND SERVICES AND TO DEVELOP NEW PRODUCTS AND SERVICES
MAY BE ADVERSELY AFFECTED.
We must plan and manage our growth effectively in order to offer our
products and services and achieve revenue growth and profitability in a rapidly
evolving market. Our future growth will place a significant strain on our
management systems and resources. If we are not able to effectively manage our
growth in the future, our business may be materially and adversely affected.
CHANGES IN OUR PRODUCT MIX COULD MATERIALLY AND ADVERSELY AFFECT OUR
BUSINESS.
The margins on our revenues from some of our product and service offerings
is higher than the margins on some of our other product and service offerings.
In addition, we cannot currently accurately estimate the margins of some of our
new and developing products and services due to their limited operating history.
Our new products and services may have lower margins than our current products
and services. If in the future we derive a proportionately greater percentage of
our revenues from lower margin products and services, then our overall margins
on our total revenues will decrease and, accordingly, will result in lower net
income, or higher net losses, and less cash flow on the same amount of revenues.
OUR MANAGEMENT OF MM 1995-2, A PRIVATE PROGRAM, PRESENTS RISKS TO US.
MGT is our subsidiary that manages and holds a minority ownership interest
in MM 1995-2, a private program that owns and operates four oil and gas
production water disposal facilities. While MGT does not intend to form any new
private programs, it may from time to time increase its economic interest in the
program or initiate or manage actions intended to expand the program's assets or
activities. This program was financed by a private placement of equity interests
raising capital to acquire the assets and business operated by the program. Our
management of this program presents risks to us, including:
- lawsuits by investors in this program who become dissatisfied with the
results of the program;
24
- material adverse changes in the business, results of operations and
financial condition of the program due to events, conditions and
factors outside of our control, such as general and local conditions
affecting the oil and gas market generally and the revenues of the
program specifically;
- risks inherent in managing a program and taking significant actions
that affect its investors;
- changes in the regulatory environment relating to the program;
- reliance upon significant suppliers and customers by the program;
- hazards of oil production water disposal facilities, including
environmental hazards; and
- changes in technology.
If any of these risks materialize and we are unsuccessful in addressing
these risks, our financial condition and results of operations could be
materially and adversely affected.
OUR INTERNATIONAL SALES ACTIVITIES ARE SUBJECT TO MANY RISKS AND
UNCERTAINTIES THAT COULD ADVERSELY AFFECT OUR OPERATING RESULTS IF THEY
MATERIALIZE.
We market and sell some of our products and services in international
markets. While our sales into international markets have declined in recent
years, generating only approximately 1% of our consolidated revenues in fiscal
2005, 2% in fiscal 2004 and 3% in fiscal 2003, one component of our strategy for
future growth involves the expansion of our products and services into new
international markets and the expansion of our marketing efforts in our current
international markets. This expansion will require significant management
attention and financial resources to establish additional offices, hire
additional personnel, localize and market products and services in foreign
markets and develop relationships with international service providers. However,
we have only limited experience in international operations, including in
developing localized versions of our products and services and in developing
relationships with international service providers. We cannot provide any
assurance that we will be successful in expanding our international operations,
or that revenues from international operations will be sufficient to offset
these additional costs. If revenues from international operations are not
adequate to offset the additional expense from expanding these international
operations, our business could be materially and adversely affected.
We are exposed to several risks inherent in conducting business on an
international level that could result in increased expenses, or could limit our
ability to generate revenues, including:
- difficulties in collecting international accounts receivable and
longer collection periods;
- the impact of local economic conditions and practices;
- difficulties in staffing and managing foreign operations;
- difficulties in complying with foreign regulatory and commercial
requirements;
- increased costs associated with maintaining international marketing
efforts;
- fluctuations in currency exchange rates;
- potential adverse tax consequences;
- adverse changes in applicable laws and regulatory requirements;
- import and export restrictions;
- export controls relating to technology;
- tariffs and other trade barriers;
- political and economic instability;
- reduced protection for intellectual property rights;
- cultural and language difficulties;
- the potential exchange and repatriation of foreign earnings; and
- the localization and translation of products and services.
Our success in expanding our international sales activities will depend in
large part on our ability to anticipate and effectively manage these and other
risks, many of which are outside of our control. Any of these risks could
materially and adversely affect our international operations and, consequently,
our operating results. We
25
cannot provide any assurance that we will be able to successfully market, sell
and deliver our products and services in foreign markets.
WE MAY BE UNABLE TO ACQUIRE OTHER BUSINESSES, TECHNOLOGY OR COMPANIES, OR
TO FORM STRATEGIC ALLIANCES AND RELATIONSHIPS, OR TO SUCCESSFULLY REALIZE
THE BENEFITS OF ANY ACQUISITION OR ALLIANCE.
In the past, we have grown by acquiring complimentary businesses,
technologies, services and products and entering into strategic alliances and
relationships with complimentary businesses. We evaluate potential acquisition
opportunities from time to time, including those that could be material in size
and scope. As part of our growth strategy, we intend to continue to evaluate
potential acquisitions, investment opportunities and strategic alliances on an
ongoing basis as they present themselves to facilitate our ability to enhance
our existing products, services and technology, and to introduce new products,
services and technology, on a timely basis. However, we do not know if we will
be able to identify any future opportunities that we believe will be beneficial
for us. Even if we are able to identify an appropriate acquisition opportunity,
we may not be able to successfully finance the acquisition. If we are unable to
identify, finance or obtain the benefits of future acquisitions and alliances,
our growth may be impaired and our business may be adversely affected.
Any future acquisition involves risks commonly encountered in business
relationships, including:
- difficulties in assimilating and integrating the operations,
personnel, technologies, products and services of the acquired
business;
- the technologies, products or businesses that we acquire may not
achieve expected levels of revenue, profitability, benefits or
productivity;
- difficulties in retaining, training, motivating and integrating key
personnel;
- diversion of management's time and resources away from our normal
daily operations;
- difficulties in successfully incorporating licensed or acquired
technology and rights into our product and service offerings;
- difficulties in maintaining uniform standards, controls, procedures
and policies within the combined organizations;
- difficulties in retaining relationships with customers, employees and
suppliers of the acquired company;
- risks of entering markets in which we have no or limited direct prior
experience;
- potential disruptions of our ongoing businesses; and
- unexpected costs and unknown liabilities associated with the
acquisitions.
For these reasons, future acquisitions could materially and adversely
affect our existing businesses. Moreover, we cannot predict the accounting
treatment of any acquisition, in part because we cannot be certain whether
current accounting regulations, conventions or interpretations will prevail in
the future.
In addition, to finance any future acquisitions, it may be necessary for us
to incur additional indebtedness or raise additional funds through public or
private financings. These financings may not be available to us at all, or if
available may not be available on terms satisfactory to us or to those whose
consents are required for such financings. Available equity or debt financings
may materially and adversely affect our business and operations and, in the case
of equity financings, may significantly dilute the percentage ownership
interests of our stockholders.
We cannot assure you that we will make any additional acquisitions or that
any acquisitions, if made, will be successful, will assist us in the
accomplishment of our business strategy, or will generate sufficient revenues to
offset the associated costs and other adverse effects or will otherwise result
in us receiving the intended benefits of the acquisition. In addition, we cannot
assure you that any acquisition of new businesses or technology will lead to the
successful development of new or enhanced products and services, or that any new
or enhanced products and services, if developed, will achieve market acceptance
or prove to be profitable.
IF WE FAIL TO ADEQUATELY PROTECT OUR INTELLECTUAL PROPERTY RIGHTS, WE COULD
LOSE IMPORTANT PROPRIETARY TECHNOLOGY, WHICH COULD MATERIALLY AND ADVERSELY
AFFECT OUR BUSINESS.
26
Our success and ability to compete depends, in substantial part, upon our
ability to develop and protect our proprietary technology and intellectual
property rights to distinguish our products, services and technology from those
of our competitors. The unauthorized use of our intellectual property rights and
proprietary technologies by others could materially harm our business. We rely
primarily on a combination of copyright, trademark and trade secret laws, along
with confidentiality agreements, contractual provisions and licensing
arrangements, to establish and protect our intellectual property rights.
Although we hold copyrights and trademarks in our business, and we have applied
for a patent and the registration of a number of new trademarks and service
marks and intend to introduce new trademarks and service marks, we believe that
the success of our business depends more upon our proprietary technology,
information, processes and know-how than on patents or trademark registrations.
In addition, much of our proprietary information and technology may not be
patentable. We may not be successful in obtaining any patents or in registering
new marks.
Despite our efforts to protect our intellectual property rights, existing
laws afford only limited protection, and our actions may be inadequate to
protect our rights or to prevent others from claiming violations of their
proprietary rights. Unauthorized third parties may attempt to copy, reverse
engineer or otherwise obtain, use or exploit aspects of our products and
services, develop similar technology independently, or otherwise obtain and use
information that we regard as proprietary. We cannot assure you that our
competitors will not independently develop technology similar or superior to our
technology or design around our intellectual property. In addition, the laws of
some foreign countries may not protect our proprietary rights as fully or in the
same manner as the laws of the United States.
We may need to resort to litigation to enforce our intellectual property
rights, to protect our trade secrets, and to determine the validity and scope of
other companies' proprietary rights in the future. However, litigation could
result in significant costs or in the diversion of management and financial
resources. We cannot assure you that any such litigation will be successful or
that we will prevail over counterclaims against us. Our failure to protect any
of our important intellectual property rights or any litigation that we resort
to in order to enforce those rights could materially and adversely affect our
business.
IF WE FACE CLAIMS OF INTELLECTUAL PROPERTY INFRINGEMENT BY THIRD PARTIES,
WE COULD ENCOUNTER EXPENSIVE LITIGATION, BE LIABLE FOR SIGNIFICANT DAMAGES
OR INCUR RESTRICTIONS ON OUR ABILITY TO SELL OUR PRODUCTS AND SERVICES.
Although we are not aware of any present infringement of our products or
technologies on the intellectual property rights of others, we cannot be certain
that our products, services and technologies do not or in the future will not
infringe on the valid intellectual property rights held by third parties. In
addition, we cannot assure you that third parties will not claim that we have
infringed their intellectual property rights. We may incur substantial expenses
in litigation defending against any third party infringement claims, regardless
of their merit. Successful infringement claims against us could result in
substantial monetary liability, require us to enter into royalty or licensing
arrangements, or otherwise materially disrupt the conduct of our business. In
addition, even if we prevail on these claims, this litigation could be
time-consuming and expensive to defend or settle, and could result in the
diversion of our time and attention, which could materially and adversely affect
our business.
In recent years, there has been a significant amount of litigation in the
United States involving patents and other intellectual property rights. In the
future, we may be a party to litigation as a result of an alleged infringement
of others' intellectual property. These claims and any resulting lawsuits, if
successful, could subject us to significant liability for damages and
invalidation of our proprietary rights. These lawsuits, regardless of their
success, would likely be time-consuming and expensive to resolve and would
divert management time and attention. Any potential intellectual property
litigation also could force us to do one or more of the following:
- stop selling, incorporating or using our products and services that
use the infringed intellectual property;
- obtain from the owner of the infringed intellectual property right a
license to sell or use the relevant technology, which license may not
be available on commercially reasonable terms, or at all; or
- redesign the products and services that use the technology.
If we are forced to take any of these actions, our business may be
seriously harmed. Although we carry general liability insurance, our insurance
may not cover potential claims of this type or may not be adequate to indemnify
us for all liability that may be imposed.
27
WE FACE SOME RISKS THAT ARE INHERENT IN NATURAL GAS AND ELECTRICAL
OPERATIONS.
Some of our operations are subject to the hazards and risks inherent in the
servicing and operation of natural gas assets, including encountering unexpected
pressures, explosions, fire, natural disasters, blowouts, cratering and pipeline
ruptures, as well as in the manufacture, sale and operation of electrical
equipment such as PowerSecure's distributed generation system, including
electrical shocks, which hazards and risks could result in personal injuries,
loss of life, environmental damage and other damage to our properties and the
properties of others. These operations involve numerous financial, business,
regulatory, environmental, operating and legal risks. Damages occurring as a
result of these risks may give rise to product liability claims against us.
Although we believe that our insurance is adequate and customary for companies
of our size that are engaged in operations similar to ours, Losses due to risks
and uncertainties could occur for uninsurable or uninsured risks or could exceed
our insurance coverage of $6 million coverage per occurrence and $7 million
annual aggregate coverage. Therefore, the occurrence of a significant adverse
effect that is not fully covered by insurance could have a material and adverse
effect on our business. In addition, we cannot assure you that we will be able
to maintain adequate insurance in the future at reasonable rates.
WE COULD BECOME SUBJECT TO BURDENSOME GOVERNMENT REGULATION THAT AFFECTS
OUR ABILITY TO OFFER OUR PRODUCTS AND SERVICES OR THAT AFFECTS DEMAND FOR
OUR PRODUCTS AND SERVICES.
Our business operations are subject to varying degrees of federal, state,
local and foreign laws and regulations. Regulatory agencies may impose special
requirements for implementation and operation of our products, services or
technologies that may significantly impact or even eliminate some of our target
markets. We may incur material costs or liabilities in complying with government
regulations. In addition, potentially significant laws, regulations and
requirements may be adopted or imposed in the future. Furthermore, some of our
customers must comply with numerous laws and regulations. The modification or
adoption of future laws and regulations could adversely affect our business and
our ability to continually modify or alter our methods of operations at
reasonable costs. We cannot provide any assurances that we will be able, for
financial or other reasons, to comply with all applicable laws and regulations.
If we fail to comply with these laws and regulations, we could become subject to
substantial penalties which could materially and adversely affect our business.
OUR BUSINESS COULD SUFFER IF WE CANNOT MAINTAIN AND EXPAND OUR CURRENT
STRATEGIC ALLIANCES AND DEVELOP NEW ALLIANCES.
One element of our business strategy is the development of corporate
relationships such as strategic alliances with other companies to provide
products and services to existing and new markets and to develop new products
and services and enhancements to existing products and services. We believe that
our success in the future in penetrating new markets will depend in large part
on our ability to maintain these relationships and to cultivate additional or
alternative relationships. However, we cannot assure you that we will be able to
develop new corporate relationships, or that these relationships will be
successful in achieving their purposes. Our failure to continue our existing
corporate relationships and develop new relationships could materially and
adversely affect our business.
TERRORIST ACTIVITIES AND RESULTING MILITARY AND OTHER ACTIONS COULD
ADVERSELY AFFECT OUR BUSINESS.
The terrorist attacks on September 11, 2001 disrupted commerce throughout
the world. In response to such attacks, the U.S. is actively using military
force to pursue those behind these attacks and initiating broader actions
against global terrorism. The continued threat of terrorism throughout the
world, the escalation of military action, and heightened security measures in
response to such threats may cause significant disruption to commerce throughout
the world. To the extent that such disruptions result in reductions in capital
expenditures or spending on technology, longer sales cycles, deferral or delay
of customer orders, or an inability to effectively market our products or
services, our business and results of operations could be materially and
adversely affected.
CHANGES IN LAWS, REGULATIONS AND FINANCIAL ACCOUNTING STANDARDS COULD CAUSE
US TO INCUR INCREASED COSTS AND EXPENSES, MATERIALLY AND ADVERSELY
AFFECTING OUR BUSINESS AND OUR REPORTED RESULTS OF OPERATIONS.
28
Recently enacted changes in the laws and regulations affecting public
companies, especially those pertaining to corporate governance and public
disclosure such as the Sarbanes-Oxley Act of 2002 and related SEC regulations,
have caused us to incur increased costs of compliance and have resulted in
changes in accounting standards or accepted practices within our industry. New
laws, regulations and accounting standards, as well as the questioning of, or
changes to, currently accepted accounting practices may increase our costs and
thus adversely affect our reported financial results, which could have an
adverse effect on our stock price. New laws, rules and regulations could also
make it more difficult for us to obtain certain types of insurance, including
director and officer liability insurance, forcing us to accept reduced policy
limits and coverage or incur substantially higher costs to obtain the same or
similar coverage. The impact of these events could also make it more difficult
for us to attract and retain qualified persons to serve on our board of
directors or as our executive officers.
CHANGES IN ACCOUNTING RULES FOR STOCK-BASED COMPENSATION MAY ADVERSELY
AFFECT OUR OPERATING RESULTS, OUR STOCK PRICE AND OUR COMPETITIVENESS IN
THE EMPLOYEE MARKETPLACE.
We have a history of using employee stock options and other stock-based
compensation to hire, motivate and retain our employees. In December 2004, the
Financial Accounting Standards Board issued Statement of Financial Accounting
Standards No. 123 (Revised 2004), "Share-Based Payment," which has required us,
since January 1, 2006, to measure compensation costs for all stock-based
compensation, including stock options, at fair value and to recognize these
costs as expenses in our statements of income. The recognition of these expenses
in our statements of income will have a negative effect on our earnings per
share, which could negatively impact our future stock price. In addition, if we
reduce or alter our use of stock-based compensation to minimize the recognition
of these expenses, our ability to recruit, motivate and retain employees may be
impaired, which could put us at a competitive disadvantage in the employee
marketplace.
THERE IS NO ASSURANCE THAT WE WILL BE ABLE TO IMPLEMENT, IN A TIMELY
MANNER, THE INTERNAL CONTROLS PROCEDURES NECESSARY TO ALLOW OUR MANAGEMENT
TO REPORT ON THE EFFECTIVENESS OF OUR INTERNAL CONTROLS.
Under Section 404 of the Sarbanes-Oxley Act of 2002, we may be required to
furnish an internal controls report of management's assessment of the
effectiveness of our internal controls as part of our Annual Report on Form 10-K
for the fiscal year ended December 31, 2006, based on the recent trading price
of our common stock. Our independent registered public accounting firm will then
be required to attest to, and report on, our assessment. In order to issue our
report, our management must document both the design of our internal controls
and the testing processes that support management's evaluation and conclusion.
Our management has begun the necessary processes and procedures for issuing its
report on our internal controls. However, there can be no assurance that we will
be able to complete the work necessary for our management to issue its
management report in a timely manner, or that management will be able to report
that our internal control over financial reporting is effective.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2. PROPERTIES
We lease our principal executive offices, which consist of 2,925 square
feet located in Denver, Colorado. This lease has a monthly rental obligation of
$3,778, including operating costs, and expires December 31, 2009, with an option
to cancel the lease on December 31, 2007.
Southern Flow leases office facilities in the following locations:
Lafayette, Belle Chasse and Shreveport, Louisiana; Jackson, Mississippi; Houston
and Victoria, Texas; Tulsa, Oklahoma; and Aztec, New Mexico. These offices have
an aggregate of approximately 64,000 square feet, total monthly rental
obligations of approximately $33,000 and terms expiring at various dates through
2008. In addition, Southern Flow owns and occupies an 8,600 square foot office
building in Dallas, Texas, which was subject to a mortgage described in the
notes to our consolidated financial statements included elsewhere in this
Report.
Until March 1, 2006, PowerSecure leased three facilities, located in
Wilmington and Wake Forest, North Carolina, consisting of 12,805 square feet in
the aggregate. The leases on these facilities had a monthly rental obligation of
$12,503 and expire during 2006. Commencing March 1, 2006, PowerSecure's
principal business
29
offices relocated to a new facility located in Wake Forest, consisting of 23,440
square feet in the aggregate. The lease on this facility has a monthly rental
obligation of $21,969, increasing by 3% annually through its expiration on
December 31, 2015. The new leased facility replaces two facilities located in
Wake Forest consisting of 12,650 square feet in the aggregate.
Metretek Florida leases its principal business offices, which are located
in Melbourne, Florida and consist of 5,950 square feet. The lease has a monthly
rental obligation of $4,730 that increases 5% annually through its expiration on
May 31, 2008.
We believe our facilities are suitable and adequate to meet our current and
anticipated needs, although PowerSecure's recent growth may require it to obtain
additional space in future years. We continually monitor our facilities
requirements, and we believe that any additional space needed in the future will
be available on commercially reasonable terms.
ITEM 3. LEGAL PROCEEDINGS
In July 2004, we obtained final approval of the settlement (the "Heins
Settlement") of the class action lawsuit (the "Class Action") filed in January
2001 by Douglas W. Heins (the "Class Action Plaintiff"), individually and on
behalf of a class of other persons similarly situated (the "Class") in the
District Court for the City and County of Denver, Colorado (the "Denver Court")
against us, Marcum Midstream 1997-1 Business Trust (the "1997 Trust"), Marcum
Midstream-Farstad, LLC, MGT, Marcum Capital Resources, Inc., W. Phillip Marcum,
Richard M. Wanger and Daniel J. Packard (the foregoing, collectively, the
"Metretek Defendants"), and against Farstad Gas & Oil, LLC, Farstad Oil, Inc.
and Jeff Farstad (collectively, the "Farstad Defendants"). The 1997 Trust was an
energy program of which MGT, the managing trustee, and Messrs. Marcum, Wanger,
Packard and Farstad are or were the active trustees. The Class Action alleged
that the Metretek Defendants and the Farstad Defendants (collectively, the
"Class Action Defendants"), either directly or as "controlling persons",
violated certain provisions of the Colorado Securities Act in connection with
the sale of interests in the 1997 Trust.
On March 27, 2003, we, 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 us and the other Metretek Defendants in the Class Action. On March 2,
2004, we 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 Heins Settlement was
granted final approval by the Denver Court on June 11, 2004 and became effective
on July 26, 2004.
The Heins Settlement created a settlement fund (the "Heins Settlement
Fund") for the benefit of the Class. A total of $2,375,000 in proceeds of our
directors' and officers' insurance policy (the "Policy") was used in the Heins
Settlement. Pursuant to the Heins Settlement, we paid $375,000 and on June 30,
2004 we issued a note payable to the Heins Settlement Fund in the amount of $3.0
million (the "Heins Settlement Note") and commenced payments under the Heins
Settlement Note. The Heins Settlement Note bears interest at the rate of prime
plus three percent, is payable in 16 quarterly installments of $187,500
principal plus accrued interest each, and is guaranteed by the 1997 Trust and
our subsidiaries.
Under the Heins Settlement, we are required to obtain the consent of the
Class's lead counsel before we can sell any shares of stock of Southern Flow,
Metretek Florida or PowerSecure, although such consent is not required if we
make a prepayment of at least $1 million on the Heins Settlement Note with the
proceeds of any such sale of subsidiary stock.
The Heins Settlement fully and finally released all claims between the
Class and us and the other Metretek Defendants. Under the Heins Settlement, the
Class also released Jeff Farstad from claims by the Class against him by reason
of his status as a trustee of the 1997 Trust. However, the Heins Settlement did
not release our claims against him or any claims by either the Class or us
against any other Farstad Defendants, or any claims by any of the Farstad
Defendants against the Metretek Defendants, which claims are still pending. In
addition, the Heins Stipulation did not release any claims against the brokerage
firms involved with the offering of the 1997 Trust's securities that are unique
to a particular Class member.
We are vigorously pursuing cross-claims and third party claims ("Other
Party Claims"), including claims against the Farstad Defendants and against
attorneys, consultants and a brokerage firm (the "Other Parties") involved in
the transactions underlying the claims in the Class Action, seeking recovery of
damages and contribution, among other things, from the Other Parties. Some of
the Other Parties have asserted counterclaims
30
against us, which we are aggressively defending. Out of any net recovery from
the resolution of any of these claims, which is calculated by deducting our
litigation expenses and any counterclaims against us that result in a recovery
by Other Parties related to the Other Parties' liability to the Class (but is
calculated without deducting any other counterclaims successfully asserted
against us by the Other Parties), 50% would be allocated to offset our
obligations under the Heins Settlement Note, and the remaining 50% would be
allocated to the Heins Settlement Fund as additional settlement funds.
A trial on all remaining claims is currently set for August 2007. We cannot
provide any assurance that we will be successful on any of the Other Party
Claims or that we will prevail on the counterclaims brought against us by the
Other Parties.
On March 14, 2006, we received a letter from the Market Regulation
Department of the National Association of Securities Dealers ("NASD"), on behalf
of the American Stock Exchange, advising us that it is conducting a review of
trading activity in our common stock from November 2005 until the present. The
NASD has requested various documents and information in connection with our
announcements, contracts and orders during that time period. We are cooperating
fully with this review, and are providing to the NASD the documentation that
confirms all such contracts and orders supporting our announcements. The NASD
letter states that its inquiry should not be construed as an indication that the
NASD has determined that any violations of American Stock Exchange rules or
federal securities laws have occurred, or a reflection upon the merits of the
securities involved or upon any person who effected transactions in such
securities. While we believe we have complied with all applicable laws, rules
and regulations in the reviewed activity, we cannot provide any assurance of the
outcome of this inquiry.
From time to time, we hire employees that are subject to restrictive
covenants, such as non-competition agreements with their former employers. We
comply, and require our employees to comply, with the terms of all known
restrictive covenants. However, we have in the past and may in the future
receive claims and demands by some former employers alleging actual or potential
violations of these restrictive covenants. While we do not believe any pending
claims have merit, we cannot provide any assurance of the outcome of these
claims.
From time to time, we are involved in other claims, proceedings and legal
actions arising in the ordinary course of business. We intend to vigorously
defend all claims against us. Although the ultimate outcome of these matters
cannot be accurately predicted due to the inherent uncertainty of litigation, in
the opinion of management, based upon current information, no other currently
pending or overtly threatened dispute is expected to have a material adverse
effect on our business, financial condition or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of our security holders during the
fourth quarter of fiscal 2005.
31
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES
MARKET INFORMATION
Since August 10, 2005, our Common Stock has been listed and traded on the
American Stock Exchange under the symbol "MEK". From October 15, 2002 through
August 9, 2005, our Common Stock was traded over-the-counter on the OTC Bulletin
Board under the symbol "MTEK".
The following table sets forth, for the periods indicated, the range of the
high and low closing sales prices of our Common Stock, as reported on the
American Stock Exchange and the OTC Bulletin Board, for the applicable periods.
Quotations for trades on the OTC Bulletin Board related inter-dealer prices
without adjustment for retail mark-ups, mark-downs or commissions and
consequently do not necessarily reflect actual transactions.
HIGH LOW
----- -----
YEAR ENDED DECEMBER 31, 2004:
First Quarter................ $3.70 $1.35
Second Quarter............... 4.17 2.45
Third Quarter................ 2.50 1.16
Fourth Quarter............... 2.50 1.65
YEAR ENDED DECEMBER 31, 2005:
First Quarter................ $3.16 $2.20
Second Quarter............... 2.90 2.25
Third Quarter................ 5.00 2.95
Fourth Quarter............... 9.35 3.70
On March 3, 2006, the last sale price of our Common Stock as reported on
the American Stock Exchange was $17.60.
HOLDERS
As of March 3, 2006, there were 338 holders of record of our Common Stock.
Because many of the shares of our Common Stock are held by brokers and other
institutions on behalf of the beneficial owners, we are unable to precisely
determine the total number of stockholders represented by these record holders,
but we estimate, based upon available information, that there are at least 3,000
beneficial owners of our Common Stock.
DIVIDENDS
We have never declared or paid any cash dividends on our Common Stock, and
we do not anticipate declaring or paying any cash dividends on our Common Stock
in the foreseeable future. We currently intend to retain all future earnings, if
any, for use in the development, operation and growth of our business and for
the servicing and repayment of indebtedness. As a holding company with no
independent operations, our ability to pay dividends is dependant upon the
receipt of dividends or other payments from our subsidiaries. The terms of our
credit facility limit our ability to pay dividends by prohibiting the payment of
dividends by Southern Flow, Metretek Florida or PowerSecure without the consent
of the lender. Future dividends, if any, will be determined by our Board of
Directors, based upon our earnings, financial condition, capital resources,
capital requirements, charter restrictions, contractual restrictions and such
other factors as our Board of Directors deems relevant.
EQUITY COMPENSATION PLANS
Information concerning securities authorized for issuance under our equity
compensation plans is included in "Item 12. Security Ownership of Certain
Beneficial Owners and Management and Related Stockholder Matters."
32
ITEM 6. SELECTED FINANCIAL DATA
The following selected consolidated financial data has been derived from
our audited consolidated financial statements. This information is not
necessarily indicative of results of our future operations, and should be read
in conjunction with our audited consolidated financial statements and the notes
thereto and with "Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations" included in this Report.
CONSOLIDATED STATEMENT OF
OPERATIONS DATA:
YEAR ENDED DECEMBER 31,
-----------------------------------------------
2005 2004 2003 2002 2001
------- ------- ------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Total revenues $47,253 $35,177 $36,474 $26,453 $29,326
Costs and expenses
Cost of sales and services 32,750 23,897 25,687 17,938 21,322
General and administrative 8,821 6,835 6,105 5,710 5,641
Selling, marketing and service 2,595 2,112 1,601 1,555 1,360
Depreciation and amortization (1) 564 579 515 576 1,418
Research and development 713 667 627 552 797
Interest, finance charges and other 609 480 285 205 154
Provision for litigation costs, net -- -- -- 1,764 --
Nonrecurring charges -- -- -- 182 --
------- ------- ------- ------- -------
Total costs and expenses 46,052 34,570 34,820 28,482 30,692
------- ------- ------- ------- -------
Income (loss) from continuing operations
before equity income minority
interest and taxes 1,201 607 1,654 (2,029) (1,366)
Equity income in unconsolidated affiliate 1,690 1,254 469 211 16
Minority interest (211) (238) (207) -- --
Income taxes (46) (48) (57) (46) (35)
------- ------- ------- ------- -------
Income (loss) from continuing operations 2,634 1,575 1,859 (1,864) (1,385)
------- ------- ------- ------- -------
Discontinued Operations (2):
Loss on disposal (300) (3,356) -- -- --
Loss from operations -- (1,463) (980) (1,518) --
------- ------- ------- ------- -------
Loss on discontinued operations (300) (4,819) (980) (1,518) --
------- ------- ------- ------- -------
Net income (loss) $ 2,334 $(3,244) $ 879 $(3,382) $(1,385)
======= ======= ======= ======= =======
PER SHARE AMOUNTS (3):
Income (loss) from continuing operations:
Basic $ 0.21 $ 0.03 $ 0.11 $ (0.45) $ (0.36)
======= ======= ======= ======= =======
Diluted $ 0.20 $ 0.03 $ 0.11 $ (0.45) $ (0.36)
======= ======= ======= ======= =======
Net income (loss):
Basic $ 0.19 $ (0.47) $ (0.06) $ (0.70) $ (0.36)
======= ======= ======= ======= =======
Diluted $ 0.18 $ (0.45) $ (0.06) $ (0.70) $ (0.36)
======= ======= ======= ======= =======
Weighted average common shares outstanding:
Basic 12,287 9,531 6,043 6,077 6,031
======= ======= ======= ======= =======
Diluted 13,361 10,036 6,051 6,077 6,031
======= ======= ======= ======= =======
33
DECEMBER 31,
CONSOLIDATED BALANCE -----------------------------------------------
SHEET DATA: 2005 2004 2003 2002 2001
------- ------- ------- ------- -------
(IN THOUSANDS)
Cash and cash equivalents $ 2,188 $ 2,951 $ 2,102 $ 885 $ 696
Working capital 4,911 5,117 5,964 4,097 3,596
Total assets 33,319 30,211 23,327 19,199 20,294
Long-term notes payable 3,594 6,075 5,227 4,691 1,268
Redeemable preferred stock 9,422 8,532 7,680
Total stockholders' equity 16,230 12,917 1,169 1,165 5,358
----------
(1) Depreciation and amortization amount for fiscal 2001 included goodwill
amortization of $675,000. On January 1, 2002, we adopted Statement of
Financial Accounting Standards (SFAS) No. 142, "Goodwill and Other
Intangible Assets", which required us to discontinue the amortization of
goodwill.
(2) During fiscal 2004, our Board of Directors approved a plan to discontinue
the business of MCM and sell all of its manufacturing assets. The
operations of the discontinued MCM disposal group have been reclassified to
discontinued operations for all periods presented. In addition, certain
other amounts prior to fiscal 2005 have been reclassified to conform to
fiscal 2005 presentation. Such reclassifications had no impact on our net
income (loss) or stockholders' equity.
(3) Per share amounts presented for fiscal 2001 through fiscal 2004 include the
effects of preferred stock deemed distributions. Per share amounts for
fiscal 2003 include the effects of allocation of earnings to participating
preferred stock as required by the provision of EITF 03-06.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis of our consolidated results of
operations for the years ended December 31, 2005 ("fiscal 2005"), December 31,
2004 ("fiscal 2004") and December 31, 2003 ("fiscal 2003") and of our
consolidated financial condition as of December 31, 2005 and 2004 should be read
in conjunction with our consolidated financial statements and related notes
included elsewhere in this Report.
The discussion in this Item, as well as in other Items in this Report,
contains forward-looking statements within the meaning of and made under the
safe harbor provisions of Section 27A of the Securities Act and Section 21E of
the Exchange Act. 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 and
expectations or other characterizations of future events or performance, and
assumptions underlying the foregoing. See "Cautionary Note Regarding
Forward-Looking Statements" at the beginning of this Report. Forward-looking
statements are not guarantees of future performance or events, but are subject
to and qualified 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, including those
risks, uncertainties and other factors described below in "Item 1A. Risk
Factors," as well as other risks, uncertainties and factors discussed elsewhere
in this Report, in documents that we include as exhibits to or incorporate by
reference in this Report, and in other reports and documents that we from time
to time file with or furnish to the SEC. You are cautioned not to place undue
reliance on any forward-looking statements, any of which could turn out to be
wrong. Any forward-looking statements made in this Report speak only as of the
date of 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:
- PowerSecure, which designs, sells and manages distributed generation
systems;
- Southern Flow, which provides natural gas measurement services; and
34
- Metretek Florida, which designs, manufactures and sells data
collection and energy measurement monitoring systems.
Metretek Florida had also provided contract manufacturing services through
its MCM subsidiary. These contract manufacturing services were discontinued
during fiscal 2004, and the contract manufacturing business and most of its
assets were sold in December 2004. Operations of the contract manufacturing
business prior to fiscal 2005 have been reclassified to discontinued operations
in our consolidated financials statements for all periods presented.
In addition to these operating subsidiaries, we own an approximate 27%
economic interest in an unconsolidated business, MM 1995-2, through our
subsidiary MGT. MGT acquired additional equity interests in MM 1995-2 during
2004 and 2005, increasing its economic interest in MM 1995-2 from 15% to 27%. As
a result of these acquisitions, the equity income from MM 1995-2 is becoming a
more significant part of our consolidated results, contributing $1,690,000 to
our income from continuing operations during fiscal 2005, a substantial increase
from $1,254,000 in fiscal 2004 and $469,000 in fiscal 2003.
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 and developments of companies, businesses and
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. In recent 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 fiscal 2005, PowerSecure continued to experience significant growth
in its distributed generation operations, expanding its customer base, utility
partnerships and geographic markets. In addition, during the second half of
fiscal 2005, PowerSecure added two new business units, UtilityEngineering and
PowerServices, to its operating segment and in January 2006, it announced a
third addition to its operations, EnergyLite. PowerServices provides rate
analysis and other similar consulting services to PowerSecure's utility,
commercial and industrial customers. UtilityEngineering provides fee-based,
technical engineering services to PowerSecure's utility partners and customers.
EnergyLite assists customers in reducing their use of energy through investments
in more energy-efficient technologies. Each business unit operates in a distinct
market with distinct technical disciplines, but shares a common customer base
which PowerSecure intends to service and grow through shared resources and
customer leads. Accordingly, these new units, which did not have a significant
effect on PowerSecure's fiscal 2005 revenues, will be included within
PowerSecure's segment results in future periods. These units are intended to
increase PowerSecure's future growth opportunities beyond its core distributed
generation business.
Southern Flow's business in the second half of fiscal 2005 was adversely
affected by Hurricanes Katrina and Rita. Due to the location of the production
assets of many of its key customers, these hurricanes caused substantial
disruptions to the operations of certain customer assets commencing in late
August 2005 and reduced Southern Flow's opportunities to provide services
related the affected assets until repairs are made and operations restored. As a
result, some of Southern Flow's recurring services to its Gulf Coast customers
were curtailed during the recovery period. The adverse effects of lost recurring
revenue were mitigated somewhat by an increase in the sale of equipment to
repair the affected assets of Southern Flow's customers. During the first
quarter of 2006, Southern Flow's Gulf Coast operations have returned to normal
levels. We estimate that Southern Flow's fiscal 2005 revenues and segment profit
were reduced by approximately $500,000 as a result of the effects of Hurricanes
Katrina and Rita. Despite the business Southern Flow lost due to the effects of
the hurricanes and the effects of the ongoing costs it incurred, Southern Flow
still managed to grow its revenues by 4% in fiscal 2005 over fiscal 2004.
During fiscal 2005, Metretek Florida continued its efforts to generate
incremental sales from certain new markets into which it has recently introduced
telemetry products. During the third quarter of 2004, our Board of Directors
approved a plan to discontinue the contract manufacturing business operated by
MCM and to sell or otherwise dispose of all of the related contract
manufacturing assets. Contract manufacturing operations had previously been
included in our Metretek Florida operating segment. We made our determination to
exit the contract manufacturing business as the result of recent unacceptable
losses in that business that adversely affected our consolidated financial
results as well as industry and market factors and projections of our contract
manufacturing operations that were not favorable in the foreseeable future. The
discontinuance of contract manufacturing operations was intended to allow
Metretek Florida to focus on its telemetry and AMR business lines, including the
operations related to its new InvisiConnect(TM) technology. Overall in fiscal
2005, Metretek Florida experienced a small reduction in revenues and gross
profit compared to fiscal 2004.
35
During fiscal 2005, our consolidated revenues rose to $47,253,000, an
increase of $12,076,000, or 34%, over our fiscal 2004 consolidated revenues.
This increase was almost entirely fueled by the $11,570,00, or 62%, increase in
revenues at PowerSecure over fiscal 2004. The remainder of the increase in our
consolidated revenues in fiscal 2005 was the net effect of the $548,000 increase
in revenues at Southern Flow, offset by the slight $70,000 decrease in revenues
at Metretek Florida. Our total segment profits on a consolidated basis in fiscal
2005 rose by $594,000 over fiscal 2004. The increase was the net result of the
increase in segment profits at PowerSecure of $1,297,000, as partially offset by
a decline in profitability at each of our other segments.
The substantial increase in fiscal 2005 revenues and segment profitability
experienced by PowerSecure was principally due to a substantial increase in the
number of completed or in-process distributed generation projects during fiscal
2005 along with an increase in PowerSecure's shared savings projects,
professional services, monitoring and other service related revenues. Southern
Flow's revenues increased in fiscal 2005, despite the effects of Hurricanes
Katrina and Rita, due principally to more favorable business conditions due to a
higher level of natural gas prices as well as increased equipment sales.
However, despite its increased revenues, Southern Flow's segment profit declined
due to the adverse effects of the hurricanes. Metretek Florida's revenues and
segment profitability declined in fiscal 2005 as compared to fiscal 2004 due to
a decline in sales of its core market products and a lack of incremental sales
of its new telemetry products, coupled with a higher level of sales and
marketing expenses directed toward the development of new markets.
During fiscal 2005, we recorded income from continuing operations of
$2,634,000 and a $300,000 loss from the discontinued contract manufacturing
operations of Metretek Florida, resulting in consolidated net income of
$2,334,000. The income from continuing operations includes the results of our
three principal wholly-owned operating subsidiaries, as well as $1,690,000 of
equity income from our investment in MM 1995-2, partially offset by an increase
in the minority shareholders' interest in CAC LLC, our majority owned subsidiary
which holds a significant portion of our equity interest in MM 1995-2. The loss
on the discontinued contract manufacturing operations was due to an additional
provision we recorded in the first quarter of fiscal 2005 for loss on the
disposal of the remaining assets of the discontinued operations. The additional
loss was required after we took possession of the assets previously disposed
after the purchaser sent us a notice in May 2005 that they intended to
discontinue the acquired business. We do not expect to record any further losses
on the discontinued contract manufacturing business.
Our overall financial position has strengthened during fiscal 2005 and
early fiscal 2006, due to the substantial improvements in the results of our
continuing operations, as well as due to other corporate actions. In September
2005, we entered into a new credit agreement with First National Bank of
Colorado providing for a $4.5 million revolving credit facility. The new credit
facility replaced a $3.26 million revolving line of credit we had with Wells
Fargo Business Credit. The new credit facility is structured in two parts: a
$2.5 million facility for PowerSecure and a $2.0 million facility for Southern
Flow. The obligations of PowerSecure and Southern flow, as borrowers, are
secured by security agreements by Southern Flow, PowerSecure and Metretek
Florida and are guaranteed by the company. The security agreements grant the
lender a first priority security interest in virtually all of the assets of each
party to the credit agreement. We expect to use the new credit facility
primarily to fund the operations and growth of PowerSecure, as well as the
operations of Southern Flow and Metretek Florida. At December 31, 2005, the
aggregate borrowing base under the credit facility was $4,500,000 of which
$1,314,000 had been borrowed, leaving $3,186,000 in unused credit facility
availability. Overall, our long-term debt was reduced by approximately $2.4
million during fiscal 2005.
In connection with a private placement to institutional and accredited
investors in May 2004, we issued warrants to purchase 1,057,000 shares of our
common stock at an exercise price of $3.41 per share. During fiscal 2005, we
received $514,000 from the exercise or redemption of 160,646 of the warrants
issued in the private placement. On January 19, 2006, we exercised our right to
call the 893,000 remaining warrants outstanding at that time. Nearly all the
warrants were exercised, resulting in cash proceeds to us of approximately $1.8
million, and the issuance of approximately 700,000 shares of common stock. We
intend to use the proceeds primarily to repay our highest interest-rate debt and
for general corporate purposes.
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
36
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 described below include:
- revenue recognition;
- allowance for doubtful accounts;
- inventories;
- warranty reserve;
- valuation of goodwill and other intangible assets;
- deferred tax valuation allowance;
- costs of exit or disposal activities and similar nonrecurring charges;
and
- stock-based compensation
Further information about our significant accounting polices is included in
note 1 of the notes to our consolidated financial statements contained elsewhere
in this Report.
Revenue Recognition. We recognize equipment and product revenue, in
accordance with the SEC's Staff Accounting Bulletin No. 101, when persuasive
evidence of a non-cancelable arrangement exists, delivery has occurred and/or
services have been rendered, the price is fixed or determinable, collectibility
is reasonably assured, legal title and economic risk is transferred to the
customer, and when an economic exchange has taken place. Virtually all equipment
and product sales are to end users of the product, who are responsible for
payment for the product. In limited circumstances, sales representatives or
resellers may purchase our products for resale to end users. In such
circumstances, the reseller is responsible for payment to us regardless of
whether the reseller collects payment from the end user.
For our distributed generation turn-key projects, we recognize revenue and
profit as work progresses using the percentage-of-completion method, which
relies on estimates of total expected contract revenue and costs. We follow this
method because reasonably dependable estimates of the revenue and costs
applicable to various stages of a project can be made. Recognized revenues and
profits are subject to revision as a project progresses to completion. Revisions
in profit estimates are charged to income in the period in which the facts that
give rise to the revision become known. In addition, certain contracts provide
for cancellation provisions prior to completion of a project. The cancellation
provisions generally provide for payment of costs incurred, but may result in an
adjustment to profit already recognized in a prior period.
Service revenue includes chart services, field services, laboratory
analysis, allocation and royalty services, professional engineering,
installation services, monitoring and maintenance services, training, and
consultation services. Revenues from these services are recognized when the
service is performed and the customer has accepted the work.
Revenues on PowerSecure's shared savings distributed generation projects
are recognized as the energy savings are realized by the customer at their site.
37
Software revenue relates to the sale and licensing to our customers of
software operating systems designed to manage the collection and presentation of
recorded data. The license revenue is recognized over the 12-month
non-cancelable term of the annual license agreement. The portion of software
license fees that has not been recognized as revenue at any balance sheet date
is recorded as a current liability. In addition, when a customer engages us to
install the software and make any customizations for them, installation service
revenue is recognized when the installation and any related customizations have
been completed and the customer has accepted the product.
Allowance for Doubtful Accounts. We maintain allowances for doubtful
accounts for estimated losses resulting from the inability of our customers to
make required payments. We assess the customer's ability to pay based on a
number of factors, including our past transaction history with the customer and
the credit worthiness of the customer. Management specifically analyzes accounts
receivable and historical bad debts, customer credit-worthiness, customer
concentrations, current economic trends, and changes in our customer payment
patterns when we evaluate the adequacy of our allowances for doubtful accounts.
We estimate the collectibility of our accounts receivable and establish
necessary reserves on an account-by-account basis. In addition, we also provide
for a general reserve for all accounts receivable. If the financial condition of
our customers were to deteriorate in the future, resulting in an impairment of
their ability to make payments, additional allowances may be required.
Inventories. Inventories are stated at the lower of cost (determined
primarily on a first-in, first-out method) or market (estimated net realizable
value). A portion of our inventory is acquired for specific projects; a portion
of our inventory is acquired to assemble component parts for use in later
assemblies; and a portion of our inventory consists of spare parts and supplies
that we maintain to support a full-product range and a wide variety of customer
requirements. The portion of our inventory acquired for specific projects tends
to be high-dollar value quick turnaround equipment items. The portion of our
inventory used to assemble component parts tends to be comprised of electronic
parts, which may be subject to obsolescence or quality issues. The portion of
our inventory that supports older product lines and other customer requirements
may also be slow-moving and subject to potential obsolescence due to product
lifecycle and product development plans.
We perform periodic assessments of inventory that includes a review of
component demand requirements, product lifecycle and product development plans,
and quality issues. As a result of this assessment, we write-down inventory for
estimated losses due to obsolescence and unmarketability equal to the difference
between the cost of the inventory and the estimated market value based on
assumptions and estimates concerning future demand, market conditions and
similar factors. If actual demand and market conditions are less favorable than
those estimated by management, additional inventory write-downs may be required.
Warranty Reserve. We provide a standard one-year warranty for hardware
product sales and distributed generation equipment. In addition, we offer
extended warranty terms on our distributed generation turn-key projects as well
as certain hardware products. We reserve for the estimated cost of product
warranties when revenue is recognized, and we evaluate our reserve periodically
by comparing our warranty repair experience by product. While we engage in
product quality programs and processes, including monitoring and evaluating the
quality of our components suppliers and development of methods to remotely
detect and correct failures, our warranty obligation is affected by actual
product failure rates, parts and equipment costs and service labor costs
incurred in correcting a product failure. In addition, our operating history in
the distributed generation market is limited. Should actual product failure
rates, parts and equipment costs, or service labor costs differ from our
estimates, revisions to the estimated warranty liability would be required.
Valuation of Goodwill and Other Intangible Assets. In assessing the
recoverability of goodwill and other intangible assets, we make assumptions
regarding the estimated future cash flows and other factors to determine the
fair value of these assets. If these estimates or their related assumptions
change in the future, we may be required to record impairment charges against
these assets in the reporting period in which the impairment is determined. For
intangible assets, this evaluation includes an analysis of estimated future
undiscounted net cash flows expected to be generated by the assets over their
estimated useful lives. If the estimated future undiscounted net cash flows are
insufficient to recover the carrying value of the assets over their estimated
useful lives, we will record an impairment charge in the amount by which the
carrying value of the assets exceeds their fair value. For goodwill, the
impairment evaluation includes a comparison of the carrying value of the
reporting unit which carries the goodwill to that reporting unit's fair value.
The fair value of each reporting unit is based upon an estimate of the net
present value of future cash flows. If the reporting unit's estimated fair value
exceeds the reporting unit's carrying value, no impairment of goodwill exists.
If the fair value of the reporting unit does not exceeds its carrying value,
then further analysis is required to determine the amount of goodwill
impairment, if any. We completed our most recent annual
38
testing of the impairment of goodwill as of October 1, 2005. As a result of the
test, we concluded that no impairment of goodwill existed as of October 1, 2005.
Deferred Tax Valuation Allowance. We currently record a valuation allowance
for 100% of our deferred tax assets based on our net operating losses incurred
in the past, consideration of future taxable income and ongoing prudent and
feasible tax planning strategies. In the event we were to determine that we
would be able to realize deferred tax assets in the future in excess of our net
recorded amount, an adjustment to the deferred tax assets would increase the
income in the period such determination was made. Likewise, in the future,
should we have a net deferred tax asset and determine that we would not be able
to realize all or part of that asset, an adjustment to the deferred tax asset
would be charged to income in the period that such determination was made.
Costs of Exit or Disposal Activities and Similar Nonrecurring Charges. We
record a liability for costs associated with exit or disposal activities equal
to the fair value of the liability when the liability is incurred. Such costs
associated with a discontinued operation are reported in results of discontinued
operations. Costs of an exit or disposal activity that do not involve a
discontinued operation are included in income (loss) from continuing operations
before income taxes in our consolidated statement of operations.
Stock-Based Compensation. Stock awards granted to our executive officers
are recognized as an expense over the vesting period of the award based on the
fair value of the stock on the date of the grant.
In addition, we have three stock-based employee and director compensation
plans. Through December 31, 2005, we accounted for stock-based compensation
related to stock options issued under these plans using the intrinsic value
method prescribed in APB Opinion No. 25, "Accounting for Stock Issued to
Employees", and related Interpretations. Accordingly, we recognized no
compensation cost for stock option grants to employees and directors, as all
options granted under those plans had an exercise price equal to or in excess of
the market value of the underlying common stock on the date of grant.
In December 2004, the Financial Accounting Standards Board issued its final
standard on accounting for employee stock options, FAS No. 123 (Revised 2004),
"Share-Based Payment" ("FAS No. 123(R)"). Under the new accounting standard,
commencing January 1, 2006, we will measure compensation costs for all
share-based payments, including grants of employee and director stock options,
based on the fair value of the awards on the grant date and recognize the
expense over the period during which an employee is required to provide services
in exchange for the award.
RESULTS OF OPERATIONS
The following table sets forth information related to our primary business
segments and is intended to assist in understanding our results of operations
for the periods presented. During the third quarter of 2004, our Board of
Directors approved a plan to discontinue the business of MCM and sell all of its
manufacturing assets. The operations of the discontinued MCM disposal group have
been reclassified to discontinued operations for all periods presented in our
consolidated statements of operations. The following table excludes revenues and
costs and expenses of the discontinued MCM operations as well as equity income
in our unconsolidated affiliate, minority interest and income taxes for all
periods presented.
39
YEARS ENDED DECEMBER 31,
---------------------------
2005 2004 2003
------- ------- -------
(ALL AMOUNTS REPORTED IN
THOUSANDS)
REVENUES:
Southern Flow $13,307 $12,759 $11,805
PowerSecure 30,200 18,630 17,122
Metretek Florida 3,242 3,312 7,405
Other 504 476 142
------- ------- -------
Total $47,253 $35,177 $36,474
======= ======= =======
GROSS PROFIT:
Southern Flow $ 3,370 $ 3,393 $ 2,993
PowerSecure 8,895 5,707 4,902
Metretek Florida 1,734 1,704 2,751
------- ------- -------
Total $13,999 $10,804 $10,646
======= ======= =======
SEGMENT PROFIT (LOSS):
Southern Flow $ 1,824 $ 1,940 $ 1,619
PowerSecure 2,639 1,342 1,574
Metretek Florida (488) (247) 709
Other (2,774) (2,428) (2,247)
------- ------- -------
Total $ 1,201 $ 607 $ 1,655
======= ======= =======
We have three reportable segments. 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 are 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
December 31, 2005, the 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. During the second half of
fiscal 2005, PowerSecure added two new business units, UtilityEngineering and
PowerServices, to its operating segment and in January 2006, it announced a
third addition to its operations, EnergyLite. PowerServices provides rate
analysis and other similar consulting services to PowerSecure's utility,
commercial and industrial customers. UtilityEngineering provides fee-based,
technical engineering services to PowerSecure's utility partners and customers.
EnergyLite assists customers in reducing their use of energy through investments
in more energy-efficient technologies. Each business unit operates in a
distinct market with distinct technical disciplines, but share a common
customer base which PowerSecure intends to service and grow through shared
resources and customer leads. Accordingly, these units will be included within
PowerSecure's segment results in future periods.
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
40
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 contract manufacturing
operations. During fiscal 2004, we discontinued that contract manufacturing
business.
We evaluate the performance of our operating segments based on operating
income (loss) before taxes, nonrecurring items and interest income and expense.
Other profit (loss) amounts in the table above include corporate related items,
fees earned from managing our 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.
During the third quarter of 2004, our Board of Directors approved a plan to
discontinue the contract manufacturing business of MCM and all of its
manufacturing assets were sold in December 2004. The operations of the
discontinued MCM disposal group have been reclassified to discontinued
operations for all periods presented in our consolidated statements of
operations. The following discussion regarding revenues and costs and expenses
for fiscal 2005 compared to fiscal 2004 and fiscal 2004 compared to fiscal 2003
excludes revenues and costs and expenses of the discontinued MCM operations.
FISCAL 2005 COMPARED TO FISCAL 2004
Revenues. Our revenues are derived almost entirely from the sales of
products and services by our subsidiaries. Our consolidated revenues for fiscal
2005 increased $12,076,000, or 34%, over our revenues in fiscal 2004 due to the
increase in revenues at PowerSecure and Southern Flow.
PowerSecure's revenues increased $11,570,000, or 62%, during fiscal 2005
compared to fiscal 2004 due to the significant growth and expansion of its core
distributed generation business. The increase in PowerSecure's revenues during
fiscal 2005 compared to fiscal 2004 was the result of a $10,700,000 increase in
distributed generation turn-key system project sales and services together with
an increase of $870,000 in revenues from shared savings projects, professional
services, monitoring and other service related revenues, due to an increased
marketing focus on such projects and services. PowerSecure's increase in
distributed generation turn-key system project sales and service revenues was
due entirely to both an increase in the number of completed or in-process
projects during fiscal 2005 compared to fiscal 2004 as well as normal
quarter-to-quarter fluctuations inherent in its operations. Overall,
PowerSecure's results for fiscal 2005 reflect a 137% increase in the total
number of distributed generation turn-key projects either completed or
in-process, compared to fiscal 2004, although the average revenue per project
completed or in-process decreased by 32%, resulting from both variations in
percentage completion on in-process projects as well as a substantially
increased number of sales of distributed generation systems that excluded a
generator from the package, such as sales of PowerSecure's QuickPower system.
There is no assurance, however, that these recent trends in the number or size
of PowerSecure projects will continue in the future, or that the recently
announced large sales orders will be repeated in the future, due to quarterly
and annual fluctuations, as discussed below under "--Quarterly Fluctuations."
PowerSecure's revenues are influenced by the number, size and timing of various
projects as well as the percentage completion on in-process projects and have
fluctuated significantly in the past and are expected to continue to fluctuate
significantly in the future.
Southern Flow's revenues increased $548,000, or 4%, during fiscal 2005, as
compared to fiscal 2004. The increase in Southern Flow's revenues was primarily
attributable to a generally improved market for its services due principally to
a higher level of natural gas prices. The positive effects of improved market
conditions for its services were partially offset by the combined effects on
Southern Flow's customers of Hurricanes Katrina and Rita that occurred in August
and September 2005 with disruptive effects that continued throughout the rest of
fiscal 2005. Southern Flow's Gulf Coast division offices and related assets
experienced no major damage from the hurricanes. However, production assets
owned by many of Southern Flow's Gulf Coast customers were heavily damaged and
the affected assets may be out of service for indefinite periods. As a result,
some of Southern Flow's recurring services to its Gulf Coast customers were
curtailed during the recovery period. The adverse effects of lost recurring
revenue were mitigated somewhat by an increase in the sale of equipment to
Southern Flow's customers repairing their production assets. During the first
quarter of 2006, Southern Flow's Gulf Coast operations have returned to normal
levels. We estimate that Southern Flow's fiscal 2005 revenues and segment profit
were reduced by approximately $500,000 as a result of the effects of Hurricanes
Katrina and Rita.
41
Metretek Florida's revenues decreased $70,000, or 2%, during fiscal 2005
compared to fiscal 2004. 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.
Costs and Expenses. The following table sets forth our costs and expenses
during the periods indicated:
YEAR ENDED YEAR-OVER-YEAR
DECEMBER 31, DIFFERENCE
----------------- --------------
2005 2004 $ %
------- ------- ------ --
(IN THOUSANDS)
COSTS AND EXPENSES:
Costs of Sales and Services
Southern Flow $ 9,937 $ 9,365 $ 572 6%
PowerSecure 21,305 12,924 8,381 65%
Metretek Florida 1,508 1,608 (100) -6%
------- ------- ------
Total 32,750 23,897 8,853 37%
General and administrative 8,821 6,835 1,986 29%
Selling, marketing and service 2,595 2,112 483 23%
Depreciation and amortization 564 579 (15) -3%
Reserarch and development 713 667 46 7%
Interest, finance charges and other 609 480 129 27%
Income taxes 46 48 (2) -4%
Costs of sales and services include materials, personnel and related
overhead costs incurred to purchase, assemble and install products and provide
services. The overall 37% increase in cost of sales and services for fiscal
2005, compared to fiscal 2004, was attributable almost entirely to the increase
in sales at PowerSecure and Southern Flow.
The 65% increase in PowerSecure's costs of sales and services in fiscal
2005 is almost entirely a direct result of the 62% increase in PowerSecure's
sales. PowerSecure's gross profit margin decreased to 29.5% during fiscal 2005,
as compared to 30.6% during fiscal 2004, reflecting recent cost increases in
both key equipment components and outsourced installation and construction costs
that were not passed on to certain large customers, principally during the first
nine months of fiscal 2005.
The 6% increase in Southern Flow's costs of sales and services in fiscal
2005 is almost entirely a direct result of the 4% increase in its sales.
Southern Flow's gross profit margin decreased to 25.3% for fiscal 2005, compared
to 26.6% during fiscal 2004, due to the loss of revenues, without a
corresponding reduction in expenses, resulting from the effects of Hurricanes
Katrina and Rita.
The 6% decrease in Metretek Florida's costs of sales and services in fiscal
2005 was a direct result of the 2% decrease in its revenues along with the
positive effects of cost efficiencies achieved from the transition of production
activities from internal to external contract manufacturers. As a result,
Metretek Florida's gross profit margin increased to 53.5% for fiscal 2005,
compared to 51.4% for fiscal 2004.
General and administrative expenses include personnel and related overhead
costs for the support and administrative functions. The 29% increase in general
and administrative expenses in fiscal 2005, as compared to fiscal 2004, was due
primarily to increases in personnel and related overhead costs associated with
the development and growth of PowerSecure's business.
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 23% increase in selling,
marketing and service expenses in fiscal 2005, as compared to fiscal 2004, was
due primarily to increased personnel and business development expenses
associated with the development and growth of the business of PowerSecure as
well as increased personnel and business development expenses at Metretek
Florida during fiscal 2005.
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 3% decrease in depreciation and
amortization expenses in fiscal 2005,
42
as compared to fiscal 2004, primarily reflects a reduction in depreciable assets
at Metretek Florida partially offset by an increase in depreciable equipment at
PowerSecure in the latter portions of fiscal 2004 and during fiscal 2005.
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
7% increase in research and development expenses in fiscal 2005, as compared to
fiscal 2004, 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 27%
increase in interest, finance charges and other expenses in fiscal 2005, as
compared to fiscal 2004, reflects interest on the $3 million class action
settlement note that began accruing on July 1, 2004, additional interest costs
related to two PowerSecure shared savings project loans that commenced in the
latter half of fiscal 2004 and in the second quarter of 2005, respectively, the
$32,600 credit facility termination fee paid to Wells Fargo in September 2005,
and a generally higher level of interest rates on outstanding borrowings during
the respective periods.
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 slight
decrease in income taxes in fiscal 2005, as compared to fiscal 2004, was due to
a decrease in state income taxes incurred by Southern Flow, primarily in
Louisiana. The decrease in state income taxes incurred by Southern Flow was
partially offset by increase state income tax expense accrued by PowerSecure in
fiscal 2005, primarily in North Carolina.
FISCAL 2004 COMPARED TO FISCAL 2003
Revenues. Our consolidated revenues for fiscal 2004 decreased $1,297,000,
or 4%, compared to fiscal 2003. The decrease in our consolidated revenues was
due a decrease in revenues by Metretek Florida, which was partially offset by
increases in revenues by Southern Flow and by PowerSecure as well as an increase
in fee income from managing the operations of MM 1995-2.
Metretek Florida's revenues decreased $4,093,000, or 55%, during fiscal
2004 compared to fiscal 2003, consisting of a decrease in Metretek Florida's
domestic sales of field devices, data collection software products, and
communications solutions products. The decrease in Metretek Florida's sales of
field devices, data collection software products and communications solutions
products was due to significant revenues generated from two large projects in
fiscal 2003, which resulted in the recognition of approximately $4,258,000 in
sales, for which there were no comparable projects in fiscal 2004. As discussed
below in this Item under "--Quarterly Fluctuations", Metretek Florida's revenues
depend upon the volume and timing of customer orders and payments and the date
of product delivery. The timing of large individual sales is difficult for us to
predict, and customers from time to time defer or cancel purchase orders.
Accordingly, Metretek Florida's revenues are expected to continue to fluctuate
significantly in the future.
Southern Flow's revenues increased $954,000, or 8%, during fiscal 2004, as
compared to fiscal 2003. The increase in Southern Flow's revenues was primarily
attributable to a generally improved market for its services due principally to
a higher level of natural gas prices.
PowerSecure's revenues increased $1,508,000, or 9%, during fiscal 2004
compared to fiscal 2003. The increase in PowerSecure's revenues during fiscal
2004 compared to fiscal 2003 was due to an increase of $977,000 in revenues from
shared savings projects, professional services, monitoring and other service
related revenues, due to an increased marketing focus on such projects and
services, and an increase of $531,000 distributed generation turn-key system
project sales and services. The increase in PowerSecure's overall distributed
generation turn-key project sales and services was attributable to a 138%
increase in the total number of projects, although the average project size
decreased by 57%, resulting from a substantially increased number of sales of
distributed generation systems that excluded a generator from the package, such
as sales of PowerSecure's QuickPower system. PowerSecure's revenues are
influenced by the number, size and timing of various projects as well as the
percentage completion on in-process projects and have fluctuated significantly
in the past and are expected to continue to fluctuate significantly in the
future.
Other revenues increased $334,000 during fiscal 2004, as compared to fiscal
2003. This increase was comprised principally of an increase in fee revenues
earned from managing MM 1995-2.
43
Costs and Expenses. The following table sets forth our costs and expenses
during the periods indicated:
YEAR ENDED YEAR-OVER-YEAR
DECEMBER 31, DIFFERENCE
----------------- -----------------
2004 2003 $ %
------- ------- ------- -------
(IN THOUSANDS)
COSTS AND EXPENSES:
Costs of Sales and Services
Southern Flow $ 9,365 $ 8,812 $ 553 6%
PowerSecure 12,924 12,220 704 6%
Metretek Florida 1,608 4,654 (3,046) -65%
------- ------- -------
Total 23,897 25,686 (1,789) -7%
General and administrative 6,835 6,105 730 12%
Selling, marketing and service 2,112 1,601 511 32%
Depreciation and amortization 579 515 64 12%
Reserarch and development 667 627 40 6%
Interest, finance charges and other 480 285 195 68%
Income taxes 48 57 (9) -16%
The overall 7% decrease in cost of sales and services for fiscal 2004,
compared to fiscal 2003, was attributable entirely to decreased activity at
Metretek Florida.
The 6% increase in Southern Flow's costs of sales and services in fiscal
2004 reflected the 8% increase in its revenues. Southern Flow's gross profit
margin increased to 26.6% for fiscal 2004, compared to 25.4% during fiscal 2003,
reflecting generally improved market conditions.
The 6% increase in PowerSecure's costs of sales and services in fiscal 2004
over fiscal 2003 was a combined result of the 9% increase in PowerSecure's
revenues, cost efficiencies in project installation and construction, and a
higher percentage of revenues from smaller but higher margin projects and
service related revenues. As a result, PowerSecure's gross profit margin
increased to 30.6% during fiscal 2004, as compared to 28.6% during fiscal 2003.
The 65% decrease in Metretek Florida's costs of sales and services in
fiscal 2004 was a direct result of the 55% decrease in Metretek Florida's
revenues. Metretek Florida's gross profit margin increased to 51.4% for fiscal
2004, compared to 37.1% for fiscal 2003. The primary cause of this increase in
Metretek Florida's gross profit margin was a change in the mix of products sold,
due to a significant decrease in lower margin sales of OEM products to a single
customer in fiscal 2003 for which there were no comparable sales during fiscal
2004.
The 12% increase in general and administrative expenses in fiscal 2004, as
compared to fiscal 2003, was primarily due to increases in corporate costs and
increases in overhead costs associated with the development and growth of
PowerSecure's business necessitating an expansion of PowerSecure's workforce.
The increase in corporate costs included additional personnel costs, director
expenses, insurance costs, and professional expenses associated with our
investor awareness program and costs incurred in connection with analyzing and
documenting our internal accounting control systems as required by the
Sarbanes-Oxley Act of 2002. These general and administrative expense increases
were partially offset by a reduction in legal expenses associated with the Class
Action lawsuit during fiscal 2004 compared to fiscal 2003.
The 32% increase in selling, marketing and service expenses in fiscal 2004,
as compared to fiscal 2003, was due entirely to increased personnel, commission
costs and business development expenses associated with the development and
expansion of the business of PowerSecure during fiscal 2004.
The 12% increase in depreciation and amortization expenses in fiscal 2004,
as compared to fiscal 2003, primarily reflects an increase in depreciable
equipment at PowerSecure, including depreciation of two shared savings projects
placed in service during 2004, as well as amortization of the premium paid for
our additional investment in MM 1995-2 in early 2004.
The 6% increase in research and development expenses in fiscal 2004, as
compared to fiscal 2003, primarily reflects additional personnel and associated
costs at Metretek Florida that were specifically directed toward further
development of our new InvisiConnect(TM) suite of M2M products.
44
The 68% increase in interest, finance charges and other expenses in fiscal
2004, as compared to fiscal 2003, reflects interest on the $3 million Heins
Settlement Note under which we commenced payments on June 30, 2004, 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 two PowerSecure shared savings project loans and the term loan used
to finance our additional equity interest in our unconsolidated affiliate, all
of which commenced in fiscal 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 16% decrease
in income taxes in fiscal 2004, as compared to fiscal 2003, was entirely due to
reduced state income tax expense accrued by Southern Flow in Louisiana,
Oklahoma, Alabama, and Mississippi.
FLUCTUATIONS
Our 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;
- the effects of severe weather conditions, such as Hurricanes Katrina
and Rita, on the demand requirements of our customers;
- our ability to obtain adequate supplies of key components and
materials for our products on a timely and cost-effective basis;
- 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 M2M offerings;
- 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;
- changes in the mix of international and domestic revenues;
- economic conditions in the energy industry, especially in the natural
gas and electricity sectors including the effect of cyclical changes
in energy prices;
- 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;
- 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.
45
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 five 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. As PowerSecure develops new related lines of business,
revenues and costs will fluctuate. 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 December 31, 2005, the
majority of PowerSecure's revenues constituted non-recurring revenues.
Southern Flow's operating results tend to vary, to some extent, with energy
prices, especially the price of natural gas. For example, in recent years, the
high price of natural gas has led to an increase in production activity by
Southern Flow's customers, resulting in higher revenues and net income by
Southern Flow. Since energy prices tend to be cyclical, rather than stable,
future cyclical changes in energy prices are likely to affect Southern Flow's
future revenues and net income. In addition, Southern Flow's Gulf Coast
customers are exposed to the risks of hurricanes and tropical storms, which can
adversely affect Southern Flow's results of operations during hurricane season,
such as this year.
Metretek Florida has historically derived most of its revenues from sales
of its products and services to the utility industry. Metretek Florida has
experienced variability in its operating results on both an annual and a
quarterly basis due primarily to utility purchasing patterns and delays of
purchasing decisions as a result of mergers and acquisitions in the utility
industry and changes or potential changes to the federal and state regulatory
frameworks within which the utility industry operates. The utility industry,
both domestic and foreign, is generally characterized by long budgeting,
purchasing and regulatory process cycles that can take up to several years to
complete. In addition, Metretek Florida has only a limited operating history
with its new M2M and telemetry business, and its operating results in this new
business may fluctuate significantly as it develops this business.
Due to all of these factors and the other risks discussed in "Item 1A--Risk
Factors", quarter-to-quarter, period-to-period or year-to-year comparisons of
our results of operations should not be relied on as an indication of our future
performance. Quarterly, period or annual comparisons of our operating results
are not necessarily meaningful or indicative of future performance.
LIQUIDITY AND CAPITAL RESOURCES
Capital Requirements. We require capital primarily to finance our:
- operations;
- inventory;
- accounts receivable;
- research and development efforts;
- property and equipment acquisitions, including investments in
shared savings projects;
- 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, borrowings on shared savings projects,
borrowings on a term loan to fund our acquisition of additional interests in our
unconsolidated affiliate, and proceeds from private and public sales of equity.
At December 31, 2005, we had working capital of $4,911,000, including $2,188,000
in cash and cash equivalents, compared to working capital of $5,117,000 on
December 31, 2004, which included $2,951,000 in cash and cash equivalents. At
December 31, 2005, we had $3,186,000 of
46
additional borrowing capacity from our credit facilities available to support
working capital needs, compared to $639,000 of additional borrowing capacity at
December 31, 2004.
Net cash provided by operating activities was $2,741,000 in fiscal 2005,
consisting of approximately $3,307,000 of cash provided by continuing
operations, before changes in assets and liabilities, approximately $45,000 of
cash provided by changes in working capital and other asset and liability
accounts, and approximately $611,000 of cash used by discontinued operations of
MCM. This compares to net cash used in operating activities of $1,869,000 in
fiscal 2004, consisting of approximately $2,012,000 of cash provided by
continuing operations, before changes in assets and liabilities, approximately
$2,439,000 of cash used by changes in working capital and other asset and
liability accounts, and approximately $1,442,000 of cash used by discontinued
operations of MCM.
Net cash used in investing activities was $1,388,000 in fiscal 2005, as
compared to net cash used in investing activities of $3,308,000 in fiscal 2004.
The majority of net cash used by investing activities during fiscal 2005 was
attributable to equipment purchases for building or completing three shared
savings distributed generation projects. During fiscal 2004, we purchased
additional equity interests in our unconsolidated affiliate for $956,000 and
used $2,230,000 to purchase equipment items, including $1,777,000 used to
purchase equipment for three shared savings distributed generation projects.
Net cash used in financing activities was $2,117,000 in fiscal 2005,
compared to net cash provided by financing activities of $6,027,000 in fiscal
2004. The majority of the net cash used in financing activities in fiscal 2005
was attributable to $1,433,000 principal payments on long-term notes payable,
$1,307,000 net payments on our line of credit, and $489,000 cash payments to
redeem our Series B Preferred Stock, and $131,000 cash distributions to our
minority shareholders in CAC LLC. These fiscal 2005 cash payments were partially
offset by $912,000 proceeds from stock warrant and option exercises and $335,000
proceeds from a loan to fund the purchase of equipment for one shared savings
distributed generation facility. The majority of the net cash provided by
financing activities in fiscal 2004 was attributable to $9,829,000 net proceeds
from a private placement of our Common Stock in May 2004, $1,213,000 proceeds
from two loans to fund the purchase of equipment for two shared savings
distributed generations facilities, $961,000 proceeds from a bank term loan used
to finance the acquisition of the additional equity interests in our
unconsolidated affiliate, and $411,000 proceeds from stock option exercises.
These fiscal 2004 cash proceeds were partially offset by $5,345,000 cash
payments to redeem our Series B Preferred Stock, and $1,062,000 payments on
long-term notes payable and capital lease obligations.
Our research and development expenses totaled $713,000 during fiscal 2005,
compared to $667,000 during fiscal 2004. All of our fiscal 2005 research and
development expenses were directed toward the enhancement of Metretek Florida's
business, including the development of its M2M communications products. During
fiscal 2006, we plan to continue our research and development efforts to enhance
our existing products and services and to develop new products and services. We
anticipate that our research and development expenses in fiscal 2006 will total
approximately $700,000, all of which will be directed to Metretek Florida's
business.
Our capital expenditures during fiscal 2005 were approximately $1,330,000,
the majority of which related to PowerSecure, including $467,000 of capital
expenditures for building or completing three PowerSecure shared savings
distributed generation projects. In fiscal 2004, our capital expenditures were
approximately $2,277,000, including $1,777,000 of capital expenditures for three
PowerSecure shared savings distributed generation projects. We anticipate
capital expenditures in fiscal 2006 of approximately $1.5 million, the vast
majority of which will benefit PowerSecure. In addition, we may incur an
additional $5.0 in capital expenditures for PowerSecure's shared savings
distributed generation projects during fiscal 2006, which we would expect to
finance through third party project financing.
Project Loans. We have three shared savings project loans outstanding to
Caterpillar Financial Services Corporation ("Caterpillar") in the aggregate
amount of $1,200,000 at December 31, 2005. The project loans are secured by the
distributed generation equipment purchased from Caterpillar as well as the
revenues generated by the PowerSecure projects. The project loans provide for 60
monthly payments of principal and interest (at rates ranging from 6.75% to
7.85%) in the aggregate amount of approximately $31,000 per month. We expect
that monthly payments on the project loans will be funded through payments from
customers utilizing the distributed generation equipment on their sites.
On May 9, 2005, Caterpillar offered PowerSecure a $5,000,000 line of credit
to finance the purchase, from time to time, of Caterpillar generators to be used
in PowerSecure projects, primarily in shared savings arrangements, pursuant to a
letter by Caterpillar to PowerSecure containing the terms of this credit line.
Under this line of credit, PowerSecure may submit equipment purchases to
Caterpillar for financing, and Caterpillar may provide such
47
financing in its discretion at an interest rate, for a period of time between 12
and 60 months and upon such financing instruments, such as a promissory note or
an installment sales contract, as are set by Caterpillar on a project by project
basis. With respect to any equipment financed by Caterpillar, PowerSecure must
make a 10% cash down payment of the purchase price and grant to Caterpillar a
first priority security interest in the equipment being financed as well as
other equipment related to the project.
The line of credit expires on April 30, 2006 (subject to renewal, if
requested by PowerSecure and accepted by Caterpillar in its sole discretion), or
at an earlier date upon notice to PowerSecure given by Caterpillar in its sole
discretion. The letter setting forth the terms of the line of credit confirms
the intent of Caterpillar to finance equipment purchases by PowerSecure, but is
not an unconditional binding commitment to provide such financing. The line of
credit is contingent upon the continued credit-worthiness of PowerSecure in the
sole discretion of Caterpillar. At December 31, 2005, PowerSecure had $3.8
million available for additional equipment purchases under the Caterpillar line
of credit.
Working Capital Credit Facility. On September 2, 2005, we, along with our
subsidiaries Southern Flow, PowerSecure and Metretek Florida, entered into a
Credit Agreement (the "Credit Agreement") with First National Bank of Colorado
(the "FNBC"), providing for a $4.5 million revolving credit facility (the
"Credit Facility"). Southern Flow and PowerSecure are the borrowers under the
Credit Facility. Amounts borrowed under the Credit Facility bear interest at a
rate of prime plus one and a half percent (prime + 1.50%). The Credit Facility
matures on September 1, 2007. The Credit Facility refinanced the Company's
previous credit facility with Wells Fargo Business Credit, Inc. ("Wells Fargo").
The Credit Facility is expected to be used primarily to fund the operations and
growth of PowerSecure, as well as the operations of Southern Flow and Metretek
Florida.
The Credit Facility is structured in two parts: a $2.5 million facility for
PowerSecure (the "PowerSecure Facility") and a $2.0 million facility for
Southern Flow (the "Southern Flow Facility"). Borrowings under the PowerSecure
Facility are limited to a borrowing base consisting of the sum of 75% of
PowerSecure's eligible accounts receivable, plus 25% of the sum of PowerSecure's
unbilled accounts receivable less the amount of PowerSecure's unearned revenues
or advanced billings on contracts, plus 25% of PowerSecure's inventory.
Borrowings under the Southern Flow Facility are limited to a borrowing base
consisting of the sum of 80% of Southern Flow's eligible accounts receivable,
plus 20% of Southern Flow's inventory, plus 70% of Metretek Florida's eligible
accounts receivable. As of December 31, 2005, the aggregate borrowing base under
the Credit Facility was $4,500,000 of which $1,314,000 had been borrowed,
leaving $3,186,000 in unused Credit Facility availability.
The obligations of PowerSecure and Southern Flow, as borrowers, under the
Credit Agreement are secured by security agreements (the "Security Agreements")
by Southern Flow, PowerSecure and Metretek Florida and are guaranteed by the
Company. The Security Agreements grant to FNBC a first priority security
interest in virtually all of the assets of each of the parties to the Credit
Agreement.
The Credit Agreement contains customary representations and warranties and
affirmative and negative covenants, including financial covenants pertaining to
minimum cash flow coverage ratios and maximum debt to tangible net worth ratios
of the Company and PowerSecure, minimum current assets to current liabilities
ratios of PowerSecure and Southern Flow, as well as a minimum tangible net worth
by Southern Flow. The Credit Agreement does not contain any financial covenants
pertaining to Metretek Florida. The Credit Agreement contains other customary
covenants that apply to us and to PowerSecure, Southern Flow and Metretek
Florida, limiting the incurrence of additional indebtedness or liens,
restricting dividends and redemptions of capital stock, restricting their
ability to engage in mergers, consolidations, sales and acquisitions, to make
investments, to issue guarantees of other obligations, to engage in transactions
with affiliates to or make restricted payments and other matters customarily
restricted in secured loan agreements, without FNBC's prior written consent.
The Credit Agreement contains customary events of default, including
payment defaults, breach of representations and warranties, covenant defaults,
cross-defaults, certain bankruptcy or insolvency events, judgment defaults and
certain ERISA-related events. The Credit Facility also contains an annual unused
credit line fee.
In connection with entering the Credit Agreement described above, we
terminated our prior credit facility with Wells Fargo (the "Wells Fargo Credit
Facility"). The Wells Fargo Credit Facility was a $3.26 million secured
revolving line of credit that previously constituted the Company's primary
credit facility and was scheduled to expire on September 30, 2006. The Company
paid Wells Fargo a $32,600 termination fee, representing one percent (1%) of the
maximum line of $3,260,000.
48
Preferred Stock Redemption. The terms of our Series B Preferred Stock
required us to redeem all shares of our Series B Preferred Stock that remained
outstanding on December 9, 2004 at a redemption price equal to the liquidation
preference of $1,000 per share plus accumulated and unpaid dividends. Our total
redemption obligation was approximately $6.2 million, of which a total of $5.8
million had been paid through December 31, 2005.
Term Loan. CAC LLC has a term loan outstanding to a commercial bank in the
amount of $630,000 at December 31, 2005. The term loan financed our purchase of
additional equity interests in our unconsolidated affiliate, MM 1995-2, in
fiscal 2004. The term loan is secured by our interests in MM 1995-2, and we
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. We expect that monthly payments on the term
loan will be funded through cash distributions from MM 1995-2.
Settlement Note. We have a settlement note outstanding in the amount of
$1,687,500 at December 31, 2005 as a result of class action litigation that was
settled in fiscal 2004. The settlement note bears interest at the rate of prime
plus three percent, is payable in 16 quarterly installments of $187,500
principal plus accrued interest each, and is guaranteed by the 1997 Trust and by
our subsidiaries.
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. We are obligated to make future payments under
the Credit Facility and other loans. In addition, we have obligations related to
our discontinued MCM operations. Finally, we are required to make certain
payments under the terms of the Heins Settlement Note, which payments commenced
June 30, 2004. The following table sets forth our contractual obligations and
commercial commitments as of December 31, 2005:
PAYMENTS DUE BY PERIOD (1)
----------------------------------------------------------------
LESS THAN MORE THAN
TOTAL 1 YEAR 1 - 3 YEARS 4 - 5 YEARS 5 YEARS
---------- ---------- ----------- ----------- ----------
Contractual Obligations
Credit Facility (2) $1,314,000 $ -- $1,314,000 $ -- $ --
Capital Lease Obligations 7,000 4,000 3,000 -- --
Operating Leases 4,274,000 699,000 1,196,000 755,000 1,624,000
Series B Preferred Stock 405,000 405,000 -- -- --
Heins Settlement 1,688,000 750,000 938,000 -- --
Term Loan 628,000 198,000 430,000 -- --
Project Loans 1,212,000 300,000 653,000 259,000 --
---------- ---------- ---------- ---------- ----------
Total $9,528,000 $2,356,000 $4,534,000 $1,014,000 $1,624,000
========== ========== ========== ========== ==========
----------
(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 December 31,
2005, not projected borrowings under the Credit Facility.
Off-Balance Sheet Arrangements. During fiscal 2005, 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 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 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
49
actual cash requirements will not be greater than we currently expect or that
these sources of liquidity will be available when needed.
For the following reasons, we may require additional funds, beyond our
currently anticipated resources, to support our working capital requirements,
our operations or our other cash flow needs:
- The short-term costs related to the rapid growth of PowerSecure's core
distributed generation business, including costs attendant to the
recent large orders for projects, such as equipment, labor and other
capital costs;
- The costs attendant with the development and growth of PowerSecure's
new businesses;
- As our businesses grow, especially PowerSecure, our cash flow may
fluctuate due to the timing of receipts from sales of products and
services and the completion of projects, and despite increasing sales
we could experience temporary shortages in liquidity as our cash flow
is tied up in equipment and supplies, in accounts receivable and
awaiting project completion;
- From time to time as part of our business plan, we engage in
discussions regarding potential acquisitions of businesses and
technologies, and our ability to finance acquisitions in the future
may be dependent upon our ability to raise additional capital;
- An adverse resolution to claims that may arise from time to time
against us could significantly increase our cash requirements beyond
our available capital resources; and
- 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.
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. In
addition, we continually evaluate opportunities to improve our credit
facilities, through increased credit availability, lower debt costs or other
more favorable terms. However, our ability to obtain additional capital or
replace or improve our credit facilities when needed or desired will depend on
many factors, including general economic and market conditions, our operating
performance and investor and lender sentiment, and thus cannot be assured. In
addition, depending on how it is structured, a financing could require the
consent of our current lender. 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
In November 2004, the FASB issued FAS No. 151, "Inventory Costs, an
amendment of ARB No 43, Chapter 4" ("FAS 151"). FAS 151 amends the guidance in
Chapter 4, "Inventory Pricing," of Accounting Research Bulletin ("ARB") No. 43,
"Restatement and Revision of Accounting Research Bulletins," to clarify the
accounting for abnormal amounts of idle facility expense, freight, handling
costs and wasted material. FAS 151 also clarifies the circumstances under which
fixed overhead costs associated with operating facilities involved in inventory
processing should be capitalized. FAS 151 are effective for fiscal years
beginning after June 15, 2005, and we will adopt FAS 151 for fiscal 2006. We do
not expect that the adoption of FAS No. 151 will have a material effect on our
consolidated financial position or results of operations.
In December 2004, the FASB issued its final standard on accounting for
employee stock options, FAS No. 123(R), "Share-Based Payment." FAS No. 123(R)
replaces FAS No. 123, "Accounting for Stock-Based Compensation" ("FAS No. 123"),
and supersedes Accounting Principles Board Opinion No. 25, "Accounting for Stock
Issued to Employees". FAS No. 123(R) requires companies to measure compensation
costs for all share-
50
based payments, including grants of employee stock options, based on the fair
value of the awards on the grant date and to recognize such expense over the
period during which an employee is required to provide services in exchange for
the award. The pro forma disclosures previously permitted under FAS No. 123 will
no longer be an alternative to financial statement recognition.
In April 2005, the SEC amended Rule 4-01(a) of Regulation X under the
Exchange Act to defer the effective date of FAS 123(R) to the first fiscal year
beginning on or after June 15, 2005 (or December 15, 2005, for small business
issuers). As so modified, FAS 123(R) became effective for all awards granted,
modified, repurchased or cancelled on or after, and for unvested portions of
previously issued and outstanding awards vesting on or after, January 1, 2006.
We believe that the adoption of FAS No. 123(R) will result in expenses in
amounts that are similar to the current pro forma disclosures under FAS No. 123.
In March 2005, the SEC issued Staff Accounting Bulletin No. 107,
"Share-Based Payment" ("SAB 107"). SAB 107 provides the SEC staff's position
regarding the application of FAS 123(R), contains interpretive guidance related
to the interaction between FAS 123(R) and certain SEC rules and regulations, and
also provides the SEC staff's views regarding the valuation of share-based
payment arrangements for public companies. We believe that application of SAB
107 in conjunction with our adoption of FAS No. 123(R), under which we intend to
utilize the modified prospective transition method, will result in expenses in
amounts that are similar to the current pro forma disclosures under FAS No. 123.
In March 2005, the FASB issued Interpretation No. 47, "Accounting for
Conditional Asset Retirement Obligations" ("FIN 47"). FIN 47 clarifies that the
term "conditional asset retirement obligation" as used in FASB Statement No.
143, "Accounting for Asset Retirement Obligations," refers to a legal obligation
to perform an asset retirement activity in which the timing and/or method of
settlement are conditional on a future event that may or may not be within the
control of the entity. However, the obligation to perform the asset retirement
activity is unconditional even though uncertainty exists about the timing or
method of settlement. FIN 47 requires that the uncertainty about the timing or
method of settlement of a conditional asset retirement obligation be factored
into the measurement of the liability when sufficient information exists. FIN 47
also clarifies when an entity would have sufficient information to reasonably
estimate the fair value of an asset retirement obligation. The adoption of FIN
47 had no effect on our financial position or results of operations for fiscal
2005.
In May 2005, the FASB issued FAS No. 154, "Accounting Changes and Error
Corrections" ("FAS 154"). FAS 154 changes the requirements for the accounting
and reporting of a change in accounting principle, and applies to all voluntary
changes in accounting principle as well as to changes required by an accounting
pronouncement that does not include specific transition provisions. Previously,
most changes in accounting principles were required to be recognized by way of
including the cumulative effect of the changes in accounting principle in the
income statement in the period of change. FAS 154 requires that such changes in
accounting principle be retrospectively applied as of the beginning of the first
period presented as if that accounting principle had always been used, unless it
is impracticable to determine either the period-specific effects or the
cumulative effect of the change. FAS 154 is effective for accounting changes and
corrections of errors made in fiscal years beginning after December 15, 2005.
However, FAS 154 does not change the transition provisions of any existing
accounting pronouncements. We do not believe adoption of FAS 154 will have a
material impact on our financial position or results of operations.
In February 2006, the FASB issued FAS No. 155, "Accounting for Certain
Hybrid Financial Instruments-an amendment of FASB Statements No. 133 and 140"
("FAS 155"). FAS 155 eliminates the exemption from applying FASB Statement
No.133 to interests in securitized financial assets. FAS 155 is effective for
the first fiscal year end that begins after September 15, 2006, which for us
will be January 1, 2007. We do not believe adoption of FAS 155 will have a
material impact on our financial position or results of operations.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to certain market risks arising from transactions we enter
into in the ordinary course of business. These market risks are primarily due to
changes in interest rates, foreign currency exchange rates and commodity prices,
which may adversely affect our financial condition, results of operations and
cash flow.
Our exposure to market risk resulting from changes in interest rates
relates primarily to income from our investments in short-term interest-bearing
marketable securities, which is dependent upon the interest rate of the
securities held, and to interest expenses attributable to our Credit Facility,
which is based on floating interest rates as described in "Item 7. Management's
Discussion and Analysis of Financial Conditions and Results of Operations" of
this Report. However, we do not believe that changes in interest rates have had
a material impact on us in the past
51
or will have a material impact on us in the foreseeable future. For example, a
change of 1% in the interest rate on either our investments or our borrowings
would not have a material impact on our financial condition, results of
operations or cash flow.
Since substantially all of our revenues, expenses and capital spending are
transacted in U.S. dollars, we are not exposed to significant foreign currency
exchange rate risk.
While we are subject to some market risk from fluctuating commodity prices
in certain raw materials we use, we do not believe that our exposure to
commodity price changes is material.
We do not use derivative financial instruments to manage or hedge our
exposure to interest rate changes or other market risks, or for trading or other
speculative purposes.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this Item is set forth on pages F-1 through
F-34 of this Report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
On September 30, 2004, we engaged Hein & Associates LLP ("Hein") to serve
as our independent registered public accounting firm and dismissed Deloitte &
Touche LLP ("Deloitte"). The change in independent registered public accounting
firms was approved by the Audit Committee of our Board of Directors. Deloitte
audited our financial statements as of and for fiscal 2003 and for all prior
fiscal years, and Hein audited our financial statements as of and for fiscal
2004 and fiscal 2005.
The audit reports of Deloitte on our consolidated financial statements as
of and for fiscal 2003 did not contain an adverse opinion or disclaimer of
opinion, and such audit reports were not qualified or modified as to any
uncertainty, audit scope or accounting practice.
During fiscal 2003 and subsequent interim periods through the date we
changed independent registered public accounting firms, there were no
disagreements between us and Deloitte on any matter of accounting principles or
practices, financial statement disclosure or auditing scope or procedures, which
disagreements, if not resolved to the satisfaction of Deloitte, would have
caused Deloitte to make reference to the subject matter of the disagreement in
connection with its report. In addition, during those same periods, no
reportable events, as defined in Item 304(a)(1)(v) of Regulation S-K, occurred,
and we did not consult with Hein regarding the application of accounting
principles to a specific transaction, either completed or proposed, or the type
of audit opinion that might be rendered on our consolidated financial
statements, or any other matters or reportable events as set forth in Item
304(a)(2) of Regulation S-K.
ITEM 9A. CONTROLS AND PROCEDURES
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
Our management, with the participation of our Chief Executive Officer and
our Chief Financial Officer, evaluated the effectiveness of our disclosure
controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the
Exchange Act) as of December 31, 2005, 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 SEC's rules and
forms and such information is accumulated and communicated to management,
including our Chief Executive Officer and our Chief Financial Officer, or
persons performing similar functions, as appropriate to allow timely decisions
regarding required disclosure.
CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING
No change in our internal control over financial reporting (as defined in
Rules 13a-15(f) and 15d-15(f) under the Exchange Act) occurred during the
quarter ended December 31, 2005 that has materially affected, or is reasonably
likely to materially affect, our internal control over financial reporting.
52
LIMITATIONS IN CONTROL SYSTEMS
Because of its inherent limitations, a control system, no matter how well
conceived and operated, can provide only reasonable, not absolute, assurance
that the objectives of the control system are met. Further, the design of a
control system must reflect the fact that there are resource constraints, and
the benefits of controls must be considered relative to their costs. Because of
the inherent limitations on all control systems, no evaluation of controls can
provide absolute assurance that all errors, control issues and instances of
fraud, if any, with a company have been detected. The design of any system of
controls is also based in part on certain assumptions regarding the likelihood
of future events, and there can be no assurance that any design will succeed in
achieving its stated goals under all potential future conditions.
ITEM 9B. OTHER INFORMATION
None.
53
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
DIRECTORS AND EXECUTIVE OFFICERS
As of March 3, 2006, our executive officers and directors, and their ages
and their positions with us, were as follows:
NAME AGE POSITION(S)
---- --- -----------
W. Phillip Marcum...... 62 Chairman of the Board, President, Chief Executive
Officer and Director
A. Bradley Gabbard..... 51 Executive Vice President, Chief Financial Officer,
Treasurer and Director
Gary J. Zuiderveen..... 47 Vice President, Controller, Principal Accounting
Officer and Secretary
Sidney Hinton.......... 43 President and Chief Executive Officer of PowerSecure
John Bernard........... 51 President and Chief Executive Officer of Southern Flow
Daniel J. Packard...... 60 President and Chief Executive Officer of MGT
Basil M. Briggs (1) ... 70 Director
Kevin P. Collins (1) .. 55 Director
Anthony D. Pell (1) ... 67 Director
----------
(1) Member of the Audit Committee, the Compensation Committee and the
Nominating and Corporate Governance Committee
W. PHILLIP MARCUM is a founder and has served as our Chairman of the Board,
President and Chief Executive Officer and as a director since our incorporation
in April 1991. He also serves as the Chairman of our principal operating
subsidiaries. Mr. Marcum currently serves on the board of directors of Key
Energy Services, Inc. ("Key Energy"), an oilfield service provider.
A. BRADLEY GABBARD is a founder and has served as an executive officer and
a director since our incorporation in April 1991. He has served as our Executive
Vice President since July 1993 and as our Chief Financial Officer and Treasurer
since August 1996 and from April 1991 through July 1993. He also serves as the
Executive Vice President and Chief Financial Officer of our principal operating
subsidiaries. Mr. Gabbard also served as our Vice President and Secretary from
April 1991 through July 1993.
GARY J. ZUIDERVEEN has served as our Vice President since April 2005 and as
our Controller, Principal Accounting Officer and Secretary since April 2001. He
previously served as our Controller from May 1994 until May 2000 and as our
Secretary and Principal Accounting Officer from August 1996 until May 2000. He
also serves in one or more of the capacities of Controller, Principal Accounting
Officer or Secretary of our of our principal operating subsidiaries. From June
1992 until May 1994, Mr. Zuiderveen was the General Accounting Manager at the
University Corporation for Atmospheric Research in Boulder, Colorado. From 1983
until June 1992, Mr. Zuiderveen was employed in the Denver, Colorado office of
Deloitte & Touche LLP, providing accounting and auditing services to clients
primarily in the manufacturing and financial services industries and serving in
the firm's national office accounting research department.
SIDNEY HINTON has served as the President, Chief Executive Officer and a
director of PowerSecure since its incorporation in September 2000. He has also
served as the Chief Executive Officer of PowerServices, UtilityEngineering and
EnergyLite since their formation. From February 2000 until May 2000, Mr. Hinton
was an Executive-in-Residence with Carousel Capital, a private equity firm. From
February 1999 until December 1999, he was the Vice President of Market Planning
and Research for Carolina Power & Light (now known as Progress Energy). From
August 1997 until December 1998, Mr. Hinton was the President and Chief
Executive Officer of IllumElex Lighting Company, a national lighting company.
From 1982 until 1997, Mr. Hinton was employed in several positions with Southern
Company and Georgia Power Company.
JOHN BERNARD has served as the President and Chief Executive Officer and a
director of Southern Flow since December 2004. Mr. Bernard has served in several
managerial capacities since joining Southern Flow in 1988, including serving as
the Vice President and General Manager of Southern Flow from June 1998 through
November 2004.
DANIEL J. PACKARD as served as the President, Chief Executive Officer and a
director of MGT since January 1999. He has also served as an Active Trustee of
MM 1995-2 since its formation in 1996 and as its President since January 1999.
BASIL M. BRIGGS has served as a director since June 1991. Mr. Briggs has
been an attorney in the Detroit, Michigan area since 1961, practicing law with
Cox, Hodgman & Giarmarco, P.C., since January 1997. Mr. Briggs was of counsel
with Miro, Weiner & Kramer, P.C., from 1987 through 1996. He was the President
of Briggs & Williams, P.C., Attorneys at Law, from its formation in 1977 through
1986. Mr. Briggs was the Secretary of Patrick Petroleum Company ("Patrick
Petroleum"), an oil and gas company, from 1984, and a director of Patrick
Petroleum from 1970, until Patrick Petroleum was acquired by Goodrich Petroleum
Company ("Goodrich Petroleum"), an oil and gas company, in August 1995. From
August 1995 until June 2000, he served as a director of Goodrich Petroleum.
KEVIN P. COLLINS has served as a director since March 2000. Mr. Collins has
been a Managing Member of The Old Hill Company LLC, which provides corporate
financial and advisory services, since 1997. From 1992 to 1997, he served as a
principal of JHP Enterprises, Ltd., and from 1985 to 1992, he served as Senior
Vice President of DG Investment Bank, Ltd., both of which were engaged in
providing corporate finance and advisory services. Mr. Collins also serves as a
director of Key Energy; The Penn Traffic Company, a food retailer; Malden Mills
Industries, Inc., a synthetic fleece manufacturer; Mail Contractors of America
Inc., a trucking company; and Deluxe Pattern, Inc., a designer of automotive
components. Mr. Collins is a Chartered Financial Analyst.
ANTHONY D. PELL has served as a director since June 1994. Mr. Pell is
President, Chief Executive Officer and co-owner of Pelican Investment
Management, an investor advisory firm that he co-founded in November 2001. Mr.
Pell is a director of Rochdale Investment Management, Inc. He was the President
and a co-owner of Pell, Rudman & Co., an investment advisory firm, from 1981
until 1993, when it was acquired by United Asset Management Company, and he
continued to serve as an employee until June 1995. Mr. Pell was a director of
Metretek Florida from 1985 until Metretek Florida was acquired by us in March
1994. Mr. Pell was associated with the law firm of Coudert Brothers from 1966 to
1968 and with the law firm of Cadwalder, Wickersham and Taft from 1968 to 1972,
specializing in estate and tax planning. In 1972, Mr. Pell joined Boston Company
Financial Strategies, Inc. as a Vice President and was appointed a Senior Vice
President in 1975.
Our Board of Directors currently consists of five members divided into
three classes, designated Class I, Class II and Class III, with members of each
class holding office for staggered three-year terms. The Class I Directors,
whose terms expire at the 2007 Annual Meeting of Stockholders, are Messrs.
Marcum and Briggs. The Class II Directors, whose terms expire at the 2008 Annual
Meeting of Stockholders, are Messrs. Gabbard and Collins. The Class III
Director, whose term expires at the 2006 Annual Meeting of Stockholders, is Mr.
Pell.
Our directors are elected by the holders of the Common Stock. Each director
serves in office until his successor is duly elected and qualified, or until his
earlier death, resignation or removal. In the future, any new members added to
the Board of Directors will be distributed among the three classes so that, as
nearly as possible, each class will consist of an equal number of directors. Our
officers are appointed by our Board of Directors and serve at its discretion,
subject to their employment agreements, as described in "Item 11. Executive
Compensation."
54
AUDIT COMMITTEE
Audit Committee Members. Our Board of Directors has established a standing
Audit Committee in accordance with Section 3(a)(58)(A) of the Exchange Act. The
members of the Audit Committee are Anthony D. Pell, Chairman, Basil M. Briggs
and Kevin P. Collins. Our Board of Directors has determined that each member of
the Audit Committee is "independent", as that term is used in Item 7(d)(3)(iv)
of Schedule 14A under the Exchange Act and Rule 10A-3 under the Exchange Act,
and is an "independent director" under the current listing standards of the
American Stock Exchange.
Audit Committee Financial Expert. Our Board of Directors has determined
that each member of the Audit Committee (Anthony D. Pell, Chairman, Basil M.
Briggs and Kevin P. Collins) is financially literate and is an "audit committee
financial expert", as that term is defined in Item 401(h)(2) of Regulation S-K
under the Exchange Act.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Exchange Act ("Section 16(a)") requires our directors
and executive officers, and persons who beneficially own more than 10% of our
outstanding Common Stock, to file initial reports of ownership on Form 3 and
reports of changes in ownership on Form 4 or Form 5 with the SEC, and to furnish
us with copies of all such reports that they file. Based solely upon our review
of the copies of such reports we have received, and written representations from
our directors and executive officers, we believe that, during fiscal 2005, all
reports required by Section 16(a) to be filed by such persons were timely filed,
except that one report of one transaction by each of Messrs. Briggs, Pell,
Hinton and Bernard, and one report of one transaction by Gruber & McBaine
Capital Management, LLC, was inadvertently filed late.
CODES OF ETHICS
We have adopted two codes of ethics, which are designed to encourage our
directors, officers and employees to act with the highest level of integrity.
These codes were attached as exhibits to our Annual Report on Form 10-K for
fiscal 2003 and are available on our website at www.metretek.com under "Investor
Info - Corporate Governance." We will provide a copy of these codes without
charge upon written request addressed to our Secretary at our principal
executive offices.
We have adopted the Metretek Technologies, Inc. Code of Ethics for
Principal Executive Officer and Senior Financial Officers, which is a code of
ethics that applies to our Chief Executive Officer, Chief Financial Officer,
Principal Accounting Officer and other senior financial employees. The purpose
of the Code of Ethics is to deter wrongdoing and to promote, among other things,
honest and ethical conduct and to ensure to the greatest possible extent that
our business is conducted in a consistently legal and ethical manner.
We have also adopted the Metretek Technologies, Inc. Code of Business
Conduct and Ethics, which is a code of conduct that applies to all of our
directors, officers and employees. Under the Code of Business Conduct and
Ethics, each officer, director and employee is required to maintain a commitment
to high standards of conduct and ethics. The Code of Business Conduct and Ethics
covers many areas of professional conduct, including conflicts of interest,
insider trading, protection of confidential information, and strict adherence to
all laws and regulations applicable to the conduct of our business. Directors,
officers and employees are strongly encouraged to report any conduct that they
believe in good faith to be an actual or apparent violation of the Code of
Business Conduct and Ethics.
If we make any amendment to, or grant any waiver from, a provision of our
Code of Ethics or our Code of Business Conduct and Ethics to any of our
directors, executive officers or senior financial officers, we will disclose the
nature of such amendment or waiver on our website or in a Current Report on Form
8-K.
ITEM 11. EXECUTIVE COMPENSATION
SUMMARY COMPENSATION
The following table sets forth the total compensation that we paid or
accrued for services rendered to us in all capacities during the last three
fiscal years by our Chief Executive Officer and by our four other most highly
compensated executive officers, based on total salary and bonus, in fiscal 2005
(the "Named Executive Officers"):
55
SUMMARY COMPENSATION TABLE
LONG TERM COMPENSATION
-------------------------
AWARDS
ANNUAL COMPENSATION(1) -------------------------
-------------------------------------- SECURITIES
OTHER RESTRICTED UNDERLYING ALL OTHER
ANNUAL STOCK AWARDS OPTIONS COMPENSATION
NAME AND PRINCIPAL POSITION YEAR SALARY($) BONUS($) COMPENSATION ($)(2) (#) ($)(3)
--------------------------- ---- --------- ----------- ------------ ------------ ---------- ------------
W. Phillip Marcum............ 2005 $325,000 $255,000(4) $ 0 0 100,000(5) $7,438
Chairman of the Board, 2004 311,615 50,000(6) 60,500(7) 110,000 50,000(8) 7,638
President and Chief 2003 295,000 0 0 0 0 7,138
Executive Officer
A. Bradley Gabbard........... 2005 200,000 235,000(4) 0 0 55,000(9) 7,438
Executive Vice 2004 191,346 55,000(6) 30,250(7) 55,000 25,000(8) 7,638
President and Chief 2003 175,000 75,000 0 0 0 7,117
Financial Officer
Sidney Hinton (10)........... 2005 262,019 191,000 0 0 50,000(5) 7,438
President and CEO, 2004 253,850 104,186(11) 18,150(7) 33,000 0 7,638
PowerSecure, Inc. 2003 250,000 117,341(11) 0 0 0 7,138
John Bernard (12)............ 2005 147,315 50,000 0 0 50,000(5) 6,571
President and CEO, 2004 112,098 8,000 0 0 25,000(8) 4,547
Southern Flow
Daniel J. Packard (13)....... 2005 130,604 52,000(14) 0 0 25,000(9) 906
President and CEO,
MGT
----------
(1) Excludes perquisites and other personal benefits, if any, which were less
than the lesser of $50,000 or 10% of the total annual salary and bonus
reported for each Named Executive Officer.
(2) The dollar value of the restricted stock awards during fiscal 2004 is
calculated by multiplying the total number of restricted shares by $2.20,
the closing sale price of our Common Stock on July 15, 2004, the date of
the awards, as reported on the OTC Bulletin Board. These dollar values do
not reflect any adjustment for risk of forfeiture or for restrictions on
transferability. All shares of restricted stock vest in three equal annual
installments, which commenced on January 1, 2005, subject to the officer
remaining employed with us on the vesting dates, and further subject to
immediate vesting upon a change in control. All awards of restricted stock
were made under our 1998 Stock Incentive Plan, as amended and restated (the
"1998 Stock Incentive Plan").
As of December 31, 2005, based on $8.95, the closing sale price of our
Common Stock on such date as reported on the American Stock Exchange, Mr.
Marcum held 33,333 unvested shares of restricted stock valued at $298,330,
Mr. Gabbard held 16,666 unvested shares of restricted stock valued at
$149,161, and Mr. Hinton held 10,000 unvested shares of restricted stock
valued at $89,500. The officer enjoys all the benefits of ownership of
unvested shares of restricted stock, including the right to vote the shares
and to receive any dividends and other distributions with respect to the
shares on the same terms as any other shares of Common Stock, other than
the right to transfer or dispose of the shares.
56
(3) Amounts paid or accrued on behalf of the Named Executive Officers in fiscal
2005 in this column include the following:
Group Long-Term
Term Life Disability
401(k) Insurance Insurance
Name Matching Premiums Premiums
---- -------- --------- ----------
W. Phillip Marcum ......... $6,300 $882 $256
A. Bradley Gabbard ........ 6,300 882 256
Sidney Hinton ............. 6,300 882 256
John Bernard .............. 4,869 738 256
Daniel Packard ............ 0 650 256
(4) Bonus from Executive Incentive Compensation Plan adopted by the
Compensation Committee in March 2005, from a bonus pool based primarily on
our net income plus other appropriate factors in the discretion of the
Compensation Committee. In addition, the bonus to Mr. Marcum includes a
$50,000 bonus unrelated to the Executive Incentive Compensation Plan.
(5) These options vested immediately upon grant.
(6) Includes a signing bonus paid in connection with the amended and restated
employment agreements of $50,000 for Mr. Marcum and $25,000 for Mr.
Gabbard.
(7) Reflects a tax "gross-up" payment intended to reimburse the executive for
taxes payable with respect to the restricted stock grant.
(8) These options vest in three equal annual installments, commencing on the
grant date, subject to immediate vesting upon a change in control.
(9) Of these options, 30,000 options granted to Mr. Gabbard and 25,000 options
granted to Mr. Packard vest in three equal annual installments, commencing
on the grant date, subject to immediate vesting upon a change in control.
The remainder of these options vested immediately upon grant.
(10) Became an executive officer during fiscal 2003. Compensation includes all
amounts paid or accrued for the entire fiscal 2003.
(11) Bonus resulting from the bonus formula based upon PowerSecure's cash flow
from operations, as provided in Mr. Hinton's employment agreement. See
"--Employment Agreements, Change in Control and Termination of Employment
Arrangements and Other Compensation Arrangements" below.
(12) Appointed as the President and Chief Executive Officer of Southern Flow on
December 1, 2004. Compensation includes all amounts paid or accrued for the
entire fiscal 2004.
(13) Became an executive officer during fiscal 2005. Compensation includes all
amounts paid or accrued for the entire fiscal 2005.
(14) Reflects bonus payments from our equity investee, MM 1995-2, for services
rendered on behalf of MM 1995-2.
EMPLOYMENT AGREEMENTS, CHANGE IN CONTROL AND TERMINATION OF EMPLOYMENT
ARRANGEMENTS AND OTHER COMPENSATION ARRANGEMENTS
W. Phillip Marcum and A. Bradley Gabbard. On March 15, 2006, we entered
into amended and restated employment agreements with W. Phillip Marcum, our
Chairman of the Board, President and Chief Executive Officer, and A. Bradley
Gabbard, our Executive Vice President and Chief Financial Officer. These amended
and restated employment agreements set forth the basic terms of employment for
each executive.
Under these employment agreements, the employment terms of Messrs. Marcum
and Gabbard continue through December 31, 2009 and will be automatically
extended for successive one-year periods, unless either we or the executive
gives six months prior written notice of termination. The base salaries under
these employment agreements, which are subject to annual upward adjustments at
the discretion of the Board of Directors, are currently set at $375,000 for Mr.
Marcum and $245,000 for Mr. Gabbard. In addition to the base salary, the
employment agreements provide, among other things, for standard benefits
commensurate with the management levels involved.
57
The employment agreements also contain certain restrictions on each executive's
ability to compete, use of confidential information and use of inventions and
other intellectual property.
The employment agreements with Messrs. Marcum and Gabbard provide that if
the employment of the executive is terminated for any reason, other than by us
for "cause" (as defined in the employment agreements), including termination by
death, by disability, by us without cause, by the executive voluntarily or due
to the expiration of the employment term or any renewal period, then the
executive will be entitled to receive a severance package in the amount of three
times, for Mr. Marcum, and two times, for Mr. Gabbard, the sum of his most
recent base salary plus his average annual bonus over the three years before the
date of termination. The severance package shall be paid pro rata over a six
year period for Mr. Marcum and over a two year period for Mr. Gabbard.
The employment agreements also include change in control provisions
designed to provide for continuity of management in the event we undergo a
change in control. If within three years after a "change in control", the
officer is terminated by us for any reason other than for cause, or if the
executive terminates his employment for "good reason", as such terms are defined
in the employment agreements, then the executive is entitled to receive a
lump-sum severance payment equal to three times, for Mr. Marcum, and two times,
for Mr. Gabbard, the amount of his then base salary, together with certain other
payments and benefits, including continued participation in all our insurance
plans for a period of three years for Mr. Marcum and two years for Mr. Gabbard.
Under these employment agreements, a change in control will be deemed to have
occurred only if:
- any person or group becomes the beneficial owner of 50% or more of our
Common Stock;
- a majority of our present directors are replaced, unless the election
of any new director is approved by a two-thirds vote of the current
(or properly approved successor) directors;
- we approve a merger, consolidation, reorganization or combination,
other than one in which our voting securities outstanding immediately
prior thereto continue to represent more than 50% of our total voting
power or of the surviving corporation following such a transaction and
our directors continue to represent a majority of our directors or of
the surviving corporation following such transaction; or
- we approve a sale of all or substantially all of our assets.
The employment agreements also provide for us to establish an incentive
compensation fund, to be administered by our Compensation Committee, to provide
for incentive compensation to be paid to each officer or employee (including
Messrs. Marcum and Gabbard) deemed by the Compensation Committee to have made a
substantial contribution to us in the event of a change of control of Metretek
or of the sale of substantially all of our assets or similar transactions. The
total amount of incentive compensation from the fund available for distribution
will be determined by a formula based on the amount by which the fair market
value per share of the Common Stock exceeds $10.08, multiplied by a factor
ranging from 10-20% depending upon the ratio of the fair market value to $10.08.
In the case of the sale of a significant subsidiary or substantially all of the
assets of a significant subsidiary, a similar pro rata distribution is required.
Sidney Hinton. On October 15, 2005, PowerSecure entered into an amended and
restated employment and non-competition agreement with Sidney Hinton, the
President and Chief Executive Officer of PowerSecure. Mr. Hinton's employment
term was extended until January 1, 2009, and is renewable for additional
one-year renewal periods when the term expires, unless either PowerSecure or Mr.
Hinton gives 30 days prior written notice of termination. In addition, Mr.
Hinton's severance period and the post-employment non-competition period was
extended to two years.
The base salary under Mr. Hinton's employment agreement is currently set at
$315,000, subject to annual upward adjustments at the discretion of the Board of
Directors. In addition to the base salary, Mr. Hinton's employment agreement
provides, among other things, for standard benefits commensurate with the
management level involved, as well as an annual bonus of 7% of PowerSecure's
cash flow from operations.
If Mr. Hinton's employment is terminated for any reason, other than by us
for "cause" (as defined in the employment agreement), including termination by
death, by disability, by us without cause, by Mr. Hinton voluntarily, or due to
the expiration of the employment term or any renewal period, then Mr. Hinton
will be entitled to receive a severance package, payable over the subsequent two
years, in the amount of two times the sum of his most recent base salary plus
his average bonuses for the two years before and for the year of the date of
termination, if he had remained employed. Under his employment agreement, Mr.
Hinton is prohibited from competing with the
58
business of PowerSecure or its affiliates for a period of two years after the
termination of his employment. The employment agreement also contains certain
restrictions on Mr. Hinton's use of confidential information and use of
inventions and other intellectual property.
Mr. Hinton's employment agreement also includes a change in control
provision designed to provide for continuity of management in the event we or
PowerSecure undergoes a change in control. If within three years after a change
in control, Mr. Hinton is terminated by us for any reason other than for
"cause", or if Mr. Hinton terminates his employment for "good reason" (as such
terms are defined in Mr. Hinton's employment agreement), then Mr. Hinton is
entitled to receive a lump-sum severance payment equal to the amount of his
severance package discussed above, together with certain other payments and
benefits, including continued participation in our insurance plans for a period
of two years.
John D. Bernard. On October 15, 2005, Southern Flow entered into an
employment and non-competition agreement with John D. Bernard, the President and
Chief Executive Officer of Southern Flow. Mr. Bernard's employment agreement
provides for an employment term through December 31, 2007, and is renewable for
additional one-year renewal periods when the term expires, unless either
Southern Flow or Mr. Bernard gives 30 days prior written notice of termination.
In addition, Mr. Bernard's severance period and the post-employment
non-competition period was extended to two years.
The base salary under Mr. Bernard's employment agreement, which is subject
to annual upward adjustments at the discretion of the Board of Directors, is
currently set at $170,000. In addition to the base salary, the employment
agreement provides, among other things, for Mr. Bernard's participation in
Southern Flow bonus plans generally and for standard employee benefits.
If Mr. Bernard's employment is terminated for any reason, other than by us
for "cause" (as defined in the employment agreement), including termination by
death, by disability, by us without cause, by Mr. Bernard voluntarily, or due to
the expiration of the employment term or any renewal period, then Mr. Bernard
will be entitled to receive a severance package, payable over the subsequent two
years, in the amount of one-half (1/2) times, if his employment terminates on or
before December 31, 2006, or one (1) time, if his employment terminates on or
after January 1, 2007, the sum of his most recent base salary plus his average
bonuses for the three years before the date of termination. Under the employment
agreement, Mr. Bernard is prohibited from competing with the business of
Southern Flow or its affiliates for a period of six months, if his employment
terminates on or before December 31, 2006, or one year, if his employment
terminates on or after January 1, 2007, after the termination of his employment.
The employment agreement also contains certain restrictions on Mr. Bernard's use
of confidential information and use of inventions and other intellectual
property.
Mr. Bernard's employment agreement also includes a change in control
provision designed to provide for continuity of management in the event we or
Southern Flow undergoes a change in control. If within three years after a
change in control, Mr. Bernard is terminated by us for any reason other than for
"cause", or if Mr. Bernard terminates his employment for "good reason" (as such
terms are defined in the employment agreement), then Mr. Bernard is entitled to
receive a lump-sum severance payment equal to the amount of his severance
package discussed above, together with certain other payments and benefits,
including continued participation in of our insurance plans for a period of six
months or one year, depending on the date of termination, matching the period of
his non-competition covenant discussed above.
59
STOCK OPTION GRANTS
The following table sets forth certain information with respect to stock
options granted during fiscal 2005 to the Named Executive Officers. We did not
grant any stock appreciation rights, alone or in tandem with stock options,
during fiscal 2005.
OPTION GRANTS IN LAST FISCAL YEAR
INDIVIDUAL GRANTS
---------------------------------------------------------- POTENTIAL REALIZABLE VALUE
NUMBER OF AT ASSUMED ANNUAL RATES OF
SECURITIES % OF TOTAL STOCK PRICE APPRECIATION FOR
UNDERLYING OPTIONS GRANTED EXERCISE OPTION TERM($)(5)
OPTIONS GRANTED TO EMPLOYEES IN PRICE EXPIRATION ----------------------------
NAME (#)(1) FISCAL YEAR (2) ($/SH)(3) DATE (4) 5%($) 10%($)
---- --------------- --------------- --------- ---------- -------- ----------
W. Phillip Marcum ..... 100,000 16.2% $6.65 12/05/15 $418,219 $1,059,811
A. Bradley Gabbard .... 30,000(6) 4.9% 3.06 02/04/15 57,733 146,237
25,000 4.1% 6.65 12/05/15 104,555 264,953
Sidney Hinton ......... 25,000 4.1% 4.22 09/26/15 66,349 168,135
25,000 4.1% 6.65 12/05/15 104,555 264,953
John Bernard .......... 25,000 4.1% 4.22 09/26/15 66,349 168,135
25,000 4.1% 6.65 12/05/15 104,555 264,953
Daniel J. Packard ..... 25,000(6) 4.1% 3.06 02/04/15 48,111 121,918
----------
(1) These options are incentive stock options granted under our 1998 Stock
Incentive Plan, have ten year terms and were fully vested on the grant
date, except as otherwise noted.
(2) Based upon options to purchase an aggregate of 616,000 shares of Common
Stock granted to employees during fiscal 2005.
(3) The exercise price of these options is equal to or greater than the fair
market value of the Common Stock on the date of grant, based upon the last
sale price of the Common Stock on such date as reported on the American
Stock Exchange (for options granted on or after August 10, 2005) or on the
OTC Bulletin Board (for options granted prior thereto).
(4) These options may terminate before their terms expire due to the
termination of the optionee's employment or the optionee's disability or
death.
(5) The dollar amounts in these columns set forth the hypothetical gains that
could be achieved for the respective option grants, assuming that the
market price of our Common Stock appreciates in value from the date of
grant through the term of the options at the annualized rates of 5% and
10%, respectively, contained in the table, which rates are specified by SEC
rules and do not represent our estimate or projection of the future
appreciation of the price of our Common Stock. There is no assurance that
the rates of appreciation set forth in this table can be achieved or that
the amounts reflected will be received by the optionees. In addition, the
potential realizable value set forth in these columns is net of the option
exercise price but before taxes associated with any exercise. Actual gains,
if any, on option exercises will be dependent on, among other things, the
timing of such exercises and the future performance of our Common Stock.
(6) These options vest in three equal installments, commencing on the grant
date, subject to immediate vesting upon a change in control.
60
STOCK OPTION EXERCISES AND VALUES
The following table sets forth information with respect to stock options
held by the Named Executive Officers on December 31, 2005. No Named Executive
Officer exercised any stock options during fiscal 2005.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION VALUES
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED OPTIONS IN-THE-MONEY OPTIONS AT
AT FISCAL YEAR-END(#) FISCAL YEAR-END ($)(1)
------------------------------ ---------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- ------------- ----------- -------------
W. Phillip Marcum........ 383,334 16,666 $2,263,837 $ 98,163
A. Bradley Gabbard....... 289,167 28,333 1,932,319 166,881
Sidney Hinton............ 195,000 -- 1,148,500 --
John Bernard............. 85,876 8,333 405,653 49,081
Daniel Packard........... 41,666 18,334 209,829 107,171
----------
(1) For purposes of this table and in accordance with SEC rules, the value of
unexercised in-the-money options is calculated based solely upon the excess
of $8.95, the closing sale price of our Common Stock on December 31, 2005
as reported on the American Stock Exchange, over the exercise price of the
option. An option is "in-the-money" if the fair market value of the
underlying shares of Common Stock exceeds the exercise price of the option.
However, the actual value, if any, that an optionee may realize upon
exercise of a stock option will be dependent upon the future market price
of our Common Stock and the optionee's continued employment through the
vesting period.
DIRECTOR COMPENSATION
Directors who are also our officers or employees do not receive any
additional compensation for serving on the Board of Directors or its committees.
All directors are reimbursed for their out-of-pocket costs of attending meetings
of the Board of Directors and its committees. Directors who are not also our
officers or employees ("Non-Employee Directors") receive a monthly retainer for
their service on our Board of Directors and any committees thereof, including
attending meetings. In 2005, the monthly retainer was $2,500, and in 2006 the
monthly retainer is $3,000. Non-Employee Directors also receive stock options
under an annual formula ("Annual Director Options") under our 1998 Stock
Incentive Plan. Under the formula for these Annual Director Options, each person
who is first elected or appointed to serve as a Non-Employee Director is
automatically granted an option to purchase 5,000 shares of Common Stock. On the
date of the annual meeting of stockholders each year, each Non-Employee Director
is automatically granted an Annual Director Option to purchase that number of
shares of Common Stock equal to the annual retainer payable to directors
($36,000 for 2006) divided by the closing sale price of the Common Stock, as
reported on the American Stock Exchange, unless he was first elected within six
months of that date. All Annual Director Options vest and become exercisable
immediately upon grant. Additional non-formula options can be granted to
Non-Employee Directors under the 1998 Stock Incentive Plan in the discretion of
the Board of Directors.
All Annual Director Options granted to Non-Employee Directors are
non-qualified stock options exercisable at a price equal to the fair market
value of the Common Stock on the date of grant and have ten year terms, subject
to earlier termination in the event of the termination of the optionee's status
as a director or the optionee's death. Annual Director Options remain
exercisable for one year after a Non-Employee Director dies and for that number
of years after a Non-Employee Director leaves the Board of Directors (for any
reason other than death or removal for cause) equal to the number of full or
partial years that the Non-Employee Director served as a director, but not
beyond the original ten year term of the option. Any other option granted to a
director may contain
61
different terms at the discretion of the Board.
As of March 3, 2006, options to purchase 247,238 shares of Common Stock
were outstanding to our current Non-Employee Directors, at exercise prices
ranging from $0.46 to $17.38 per share.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The members of the Compensation Committee of our Board of Directors are
Basil M. Briggs, Chairman, Anthony D. Pell and Kevin P. Collins. No member of
our Compensation Committee is or has ever been an officer or employee of ours or
of any of our subsidiaries. None of our executive officers serves as a member of
the board of directors or of the compensation committee of any other entity that
has one or more executive officers serving as a member of our Board of Directors
or of our Compensation Committee.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
The following table sets forth information regarding the beneficial
ownership of our Common Stock as of March 3, 2006 (except as otherwise indicated
in the footnotes below) by:
- each person who is known by us to beneficially own 5% or more of the
outstanding shares of our Common Stock;
- each of our directors;
- each of the Named Executive Officers; and
- all of our directors and executive officers as a group.
The share ownership information in the following table is based upon
information supplied to us by the persons named in the table and upon filings
made by such persons with the SEC. Beneficial ownership is determined in
accordance with the rules of the SEC and generally includes either voting or
investment power with respect to securities. Unless otherwise indicated below,
to our knowledge, each person named in the table below has sole voting and
investment power with respect to the shares of Common Stock beneficially owned
by such person, subject to applicable community property laws. In computing the
"Number" and the "Percent of Class" beneficially owned by a person, beneficial
ownership includes any shares of Common Stock issuable under options, warrants,
conversion rights and other rights that are exercisable on or within 60 days of
March 3, 2006. These underlying shares, however, are not included in computing
the "Percent of Class" of any other persons. The "Percent of Class" is based
13,443,251 shares of Common Stock outstanding on March 3, 2006. The business
address for all of our Named Executive Officers and directors is 303 East
Seventeenth Avenue, Suite 660, Denver, Colorado 80203.
SHARES OF COMMON STOCK
----------------------------
NAME OF BENEFICIAL OWNER NUMBER PERCENT OF CLASS
------------------------ --------- ----------------
Gruber & McBaine Capital Management, LLC (2)... 1,338,939 9.97
50 Osgood Place, Penthouse
San Francisco, CA 94133
DDJ Capital Management, LLC (1)................ 1,024,769 7.6
141 Linden Street, Suite 4
Wellesley, Massachusetts 02482
Sidney Hinton (3).............................. 805,101 5.9
W. Phillip Marcum (4).......................... 641,635 4.6
A. Bradley Gabbard (5)......................... 459,453 3.3
Anthony D. Pell (6)............................ 183,175 1.4
Basil M. Briggs (7)............................ 148,249 1.1
Kevin P. Collins (8)........................... 129,276 1.0
John Bernard (9)............................... 86,234 0.6
Daniel J. Packard (10)......................... 61,667 0.5
All directors and executive officers
as a group (9 persons)(11).................. 2,580,255 17.5
62
----------
(1) Information based, in part, on Amendment No. 9 to Schedule 13D filed with
the SEC on January 17, 2006, by DDJ Capital Management, LLC ("DDJ"), B
III-A Capital Partners, L.P. ("B III-A Capital Partners") and GP III-A, LLC
("GP III-A"), indicating beneficial ownership as of January 5, 2006.
Information also based, in part, on Amendment No. 4 to Schedule 13G filed
with the SEC on February 13, 2006 by General Motors Trust Company, as
trustee for GMAM Investment Funds Trust II ("GMAM") and General Motors
Investment Management Corporation ("GMIMCO"), indicating beneficial
ownership as of January 5, 2006. Includes 168,498 shares of Common Stock
held by B III-A Capital Partners, 519,284 shares of Common Stock held by
DDJ Canadian High Yield Fund, and 336,987 shares of Common Stock held by
GMAM. GP III-A is the general partner of, and DDJ is the investment manager
for, B III-A Capital Partners. DDJ is the investment advisor to the DDJ
Canadian High Yield Fund. DDJ is an investment manager for GMAM.
(2) Information based, in part, upon Schedule 13G filed with the SEC on
February 3, 2006 by Gruber & McBaine Capital Management, LLC ("GMCM"), Jon
D. Gruber ("Gruber"), J. Patterson McBaine ("McBaine"), Eric B. Swergold
("Swergold"), J. Lynn Rose ("Rose") and Lagunitas Partners LP
("Lagunitas"), indicating beneficial ownership as of December 31, 2005.
GMCM is the manager of GMI and the general partner of Lagunitas, an
investment limited partnership. Messrs. Gruber and McBaine are the
managers, controlling persons and portfolio managers of GMCM and have
voting control and investment discretion over the securities held by
Lagunitas and GMI. GMCM, Messrs. Gruber, McBaine and Swergold and Ms. Rose
constitute a group within the meaning of Rule 13d-5(b). Lagunitas is not a
member of any group and disclaims beneficial ownership of the securities
with respect to its ownership is reposited.
(3) Includes 195,000 shares that may be acquired by Mr. Hinton upon the
exercise of currently exercisable stock options. Also includes 5,000
restricted shares that are subject to risk of forfeiture prior to vesting.
(4) Includes 383,334 shares that may be acquired by Mr. Marcum upon the
exercise of currently exercisable stock options. Also includes 16,666
restricted shares that are subject to risk of forfeiture prior to vesting.
(5) Includes 2,187 shares owned by immediate family members of Mr. Gabbard and
299,167 shares that may be acquired by Mr. Gabbard upon the exercise of
currently exercisable stock options. Also includes 8,333 restricted shares
that are subject to risk of forfeiture prior to vesting.
(6) Includes 2,937 shares held by Mr. Pell's wife. Also includes 117,026 shares
that may be acquired by Mr. Pell upon the exercise of currently exercisable
stock options.
(7) Includes 105,952 shares that are owned jointly with Mr. Briggs wife and
11,000 shares held in a family trust of which Mr. Briggs is a trustee. Also
includes 3,186 shares that may be acquired by Mr. Briggs upon the exercise
of currently exercisable stock options.
(8) Includes 127,026 shares that may be acquired by Mr. Collins upon the
exercise of currently exercisable stock options.
(9) Includes 85,876 shares that may be acquired by Mr. Bernard upon the
exercise of currently exercisable stock options.
(10) Includes 51,667 shares that may be acquired by Mr. Packard upon the
exercise of stock options that are currently exercisable or that are
exercisable within 60 days of March 3, 2006.
(11) Includes 1,317,949 shares that may be acquired upon the exercise of
currently exercisable stock options. Also includes 29,999 restricted shares
that are subject to risk of forfeiture prior to vesting. See note notes (3)
through (10).
EQUITY COMPENSATION PLAN INFORMATION
We have three compensation plans that have been approved by our
stockholders under which our equity securities have been authorized for issuance
to directors, officers, employees, advisors and consultants in exchange for
goods or services:
63
- our 1991 Stock Option Plan;
- our Directors' Stock Option Plan; and
- our 1998 Stock Incentive Plan.
The following table sets forth information about the shares of our Common
Stock that may be issued upon the exercise of outstanding options, warrants and
other rights under all of our existing equity compensation plans as of December
31, 2005, all of which were approved by our stockholders:
NUMBER OF SECURITIES
REMAINING AVAILABLE FOR
NUMBER OF SECURITIES TO BE FUTURE ISSUANCE UNDER
ISSUED UPON EXERCISE OF WEIGHTED-AVERAGE EXERCISE EQUITY COMPENSATION PLANS
OUTSTANDING OPTIONS, WARRANTS PRICE OF OUTSTANDING (EXCLUDING SECURITIES
AND RIGHTS OPTIONS, WARRANTS AND RIGHTS REFLECTED IN COLUMN (A))
PLAN CATEGORY (A) (B) (C)
------------- ----------------------------- ---------------------------- -------------------------
Equity compensation plans
approved by security holders (1) 2,349,143(2) 2.98(3) 0
Equity compensation plans not
approved by security holders -- N/A --
--------- ----- ---
Total ............................. 2,349,143(2) $2.98(3) 0
========= ===== ===
----------
(1) Represents options to purchase shares of Common Stock granted under our
1991 Stock Option Plan, our Directors' Stock Option Plan and our 1998 Stock
Incentive Plan. We will not grant any future options under our 1991 Stock
Option Plan or our Directors' Stock Option Plan.
(2) Includes 60,000 shares of restricted stock that were unvested as of
December 31, 2005.
(3) This calculation excludes shares subject to restricted stock awards, as
there is no exercise price associated with those awards.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
During fiscal 2005, Mr. Hinton's son was employed by PowerSecure in a sales
and administrative capacity and received total compensation, including salary
and bonus, of $73,666 for services rendered as an employee during fiscal 2005
and was granted options to purchase 35,000 shares of our Common Stock at an
exercise price of $5.89 per share, the closing sale price of the Common Stock as
reported in the American Stock Exchange on the date of grant. In addition,
during fiscal 2005, Mr. Hinton's brother-in-law was employed by PowerSecure as a
project manager and received total compensation, including salary and bonus, of
$53,969 for services rendered as an employee during fiscal 2005 and was granted
options to purchase 10,000 shares of our Common Stock at an exercise price of
$6.65 per share, the closing sale price of the Common Stock as reported in the
American Stock Exchange on the date of grant.
We have entered into indemnification agreements with each of our directors
and certain of our executive officers. These agreements require us to indemnify
such directors against certain liabilities that may arise against them by reason
of their status or service as officers or directors, to the fullest extent
permitted by Delaware law, to advance their expenses incurred as a result of any
proceeding against them as to which they could be indemnified. We maintain an
insurance policy covering our officers and directors under which the insurer has
agreed to pay the amount of any claim made against our officers or directors
that such officers or directors may otherwise be required to pay or for which we
are required to indemnify such officers and directors, subject to certain
exclusions and conditions, up to policy limits.
Any material transaction between us and any related party must be approved
by our Audit Committee, which is comprised solely of independent directors.
64
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
On September 30, 2004, we engaged Hein & Associates LLP ("Hein") to serve
as our independent registered public accounting firm and dismissed Deloitte &
Touche LLP ("Deloitte"). Deloitte audited our financial statements as of and for
fiscal 2003 and for all prior fiscal years, and reviewed our first two quarterly
reports on Form 10-Q during fiscal 2004, and Hein audited our financial
statements as of and for fiscal 2004 and fiscal 2005 and reviewed all subsequent
Form 10-Q's. See "Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure."
FEES
The aggregate fees for professional services rendered to us by Deloitte in
fiscal 2004 prior to its dismissal and for professional services rendered by
Hein in fiscal 2004 and fiscal 2005 were as follows:
FISCAL 2004 FEES FISCAL 2005 FEES
------------------- ----------------
HEIN DELOITTE HEIN
-------- -------- ----------------
Audit Fees (1)........... $100,000 $20,000 $120,000
Audit-Related Fees (2)... 16,939 21,683 23,192
Tax Fees (3)............. 20,295 0 22,800
All Other Fees........... 0 0 0
-------- ------- --------
Total................. $137,234 $41,683 $165,992
======== ======= ========
----------
(1) "Audit Fees" represents fees billed for professional services rendered for
the audits of our consolidated annual financial statements and for the
reviews of our consolidated interim financial statements included in our
Quarterly Reports on Form 10-Q.
(2) "Audit-Related Fees" represents fees billed for professional services
rendered by Deloitte in connection with two registration statements filed
by us with the SEC in connection with a private placement transaction, and
for professional services rendered by Hein relating to the audit of our
401(k) plan and the audit of MM 1995-2, an unconsolidated affiliate.
(3) "Tax Fees" represents fees billed for professional services rendered by
Hein for tax compliance, tax advice and tax planning for us and for MM
1995-2.
The Audit Committee has determined that the provision of non-audit services
by Hein in fiscal 2004 and 2005 was compatible with maintaining their
independence.
AUDIT COMMITTEE PRE-APPROVAL POLICY
Our Audit Committee has adopted a policy that requires the Audit Committee
to pre-approve all audit and non-audit services to be provided by the
independent registered public accounting firm. The Audit Committee may delegate
this pre-approval authority to one or more of its members. Such a member must
report any decisions to the Audit Committee at the next scheduled meeting. In
accordance with this pre-approval policy, all professional services provided by
our independent registered public accounting firm during fiscal 2005 were
pre-approved by the Audit Committee.
65
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
(a) DOCUMENTS FILED AS A PART OF THIS REPORT:
1. Financial Statements
The following consolidated financial statements of Metretek
Technologies, Inc. are included on pages F-1 to F-34 of this Report:
Report of Independent Registered Public Accounting Firm
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets as of December 31, 2005 and 2004
Consolidated Statements of Operations for the Years Ended December 31,
2005, 2004 and 2003
Consolidated Statements of Stockholders' Equity for the Years Ended
December 31, 2005, 2004 and 2003
Consolidated Statements of Cash Flows for the Years Ended December 31,
2005, 2004 and 2003
Notes to Consolidated Financial Statements
2. Financial Statement Schedules
The following financial statement schedule is filed as part of this
Report:
Schedule II - Metretek Technologies, Inc. Valuation and Qualifying
Accounts For the Years Ended December 31, 2005, 2004 and 2003
The following consolidated financial statements of Marcum Midstream
1995-2 Business Trust are included on pages G-1 to G-11 of this
Report:
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets as of December 31, 2005 and 2004
Consolidated Statements of Income for the Years Ended December 31,
2005, 2004 and 2003
Consolidated Statements of Shareholders' Equity for the Years Ended
December 31, 2005, 2004 and 2003
Consolidated Statements of Cash Flows for the Years Ended December 31,
2005, 2004 and 2003
Notes to Consolidated Financial Statements
All other financial statement schedules are omitted because the
required information is not applicable or required or is presented in
our consolidated financial statements and notes thereto.
3. Exhibits
The following exhibits are filed with, or incorporated by reference
into, this Report:
Number Description
------ -----------
(3.1) Second Restated Certificate of Incorporation of Metretek Technologies,
Inc. (Incorporated by reference to Exhibit 4.1 to Metretek's
Registration Statement on Form S-3, Registration No. 333-96369.)
(3.2) Amended and Restated By-Laws of Metretek Technologies, Inc.
(Incorporated by reference to Exhibit 4.2 to Metretek's Registration
Statement on Form S-8, Registration No. 333-62714.)
(4.1) Specimen Common Stock Certificate. (Incorporated by reference to
Exhibit 4.1 to Metretek's Registration Statement on Form S-18,
Registration No. 33-44558.)
(4.2) Amended and Restated Rights Agreement, dated as of November 30, 2001,
between Metretek Technologies, Inc. and Computershare Investor
Services, LLC. (Incorporated by reference to Exhibit 4.1 to Metretek's
Registration Statement on Form 8-A/A, Amendment No. 5, filed November
30, 2001.)
(4.3) Amendment No. 1, dated as of April 22, 2004, to Amended and Restated
Rights Agreement between Metretek Technologies, Inc. and ComputerShare
Investor Services, LLC. (Incorporated by reference to Exhibit 10.6 to
Metretek's Current Report on Form 8-K filed May 6, 2004).
(4.4) Form of Securities Purchase Agreement, dated as of April 29, 2004, by
and among Metretek Technologies, Inc. and the purchasers a signatory
thereto ("Investors"). (Incorporated by reference to Exhibit 10.1 to
Metretek's Current Report on Form 8-K filed May 6, 2004).
66
(4.5) Form of Registration Rights Agreement, dated as of April 29, 2004, by
and among Metretek Technologies, Inc. and the Investors. (Incorporated
by reference to Exhibit 10.2 to Metretek's Current Report on Form 8-K
filed May 6, 2004).
(4.6) Form of Warrant, dated May 3, 2004, issued by Metretek Technologies,
Inc. to the Investors. (Incorporated by reference to Exhibit 10.3 to
Metretek's Current Report on Form 8-K filed May 6, 2004).
(10.1) 1991 Stock Option Plan, as amended and restated December 5, 1996.
(Incorporated by reference to Exhibit 10.2 to Metretek's Annual Report
on Form 10-KSB for the year ended December 31, 1996.)*
(10.2) Directors' Stock Option Plan, as amended and restated December 2,
1996. (Incorporated by reference to Exhibit 10.3 to Metretek's Annual
Report on Form 10-KSB for the year ended December 31, 1996.)*
(10.3) Second Amended and Restated Employment Agreement, dated as of March
20, 2006, by and between Metretek Technologies, Inc. and W. Phillip
Marcum. (Filed herewith.)*
(10.4) Second Amended and Restated Employment Agreement, dated as of March
20, 2006, by and between Metretek Technologies, Inc. and A. Bradley
Gabbard. (Filed herewith.)*
(10.5) Metretek Technologies, Inc. 1998 Stock Incentive Plan, amended and
restated as of June 14, 2004. (Incorporated by reference to Exhibit
4.3 to Metretek's Registration Statement on Form S-8, Registration No.
333-116431.)*
(10.6) Form of Incentive Stock Option Agreement under the Metretek
Technologies, Inc. 1998 Stock Incentive Plan, as amended..
(Incorporated by reference to Exhibit 10.1 to Metretek's Current
Report on Form 8-K, filed August 25, 2004)*
(10.7) Form of Non-Qualified Stock Option Agreement under the Metretek
Technologies, Inc. 1998 Stock Incentive Plan, as amended.
(Incorporated by reference to Exhibit 10.2 to Metretek's Current
Report on Form 8-K, filed August 25, 2004)*
(10.8) Form of Restricted Stock Agreement under the Metretek Technologies,
Inc. 1998 Stock Incentive Plan, as amended. (Incorporated by reference
to Exhibit 10.3 to Metretek's Current Report on Form 8-K, filed August
25, 2004)*
(10.9) Form of Indemnification Agreement between Metretek Technologies, Inc.
and each of its directors. (Incorporated by reference to Exhibit 10.21
to Metretek's Annual Report on Form 10-KSB for the year ended December
31, 1999.)
(10.10) Prototype - Basic Plan Document for the Metretek - Southern Flow
Savings and Investment Plan. (Incorporated by reference to Exhibit 4.7
to Metretek's Registration Statement on Form S-8, Registration No.
333-42698.)*
(10.11) Adoption Agreement for the Metretek - Southern Flow Savings and
Investment Plan. (Incorporated by reference to Exhibit 4.8 to
Metretek's Registration Statement on Form S-8, Registration No.
333-42698.)*
(10.12) Amended and Restated Employment and Non-Competition Agreement, dated
as of November 15, 2005, between PowerSecure, Inc. and Sidney Hinton.
(Incorporated by reference to Exhibit 10.1 to Metretek's Current
Report on Form 8-K filed November 21, 2005)*
(10.13) Employment and Non-Competition Agreement, dated as of November 15,
2005, between Southern Flow Companies, Inc. and John Bernard.
(Incorporated by
67
reference to Exhibit 10.2 to Metretek's Current Report on Form 8-K
filed November 21, 2005)*
(10.14) Employment and Non-Competition Agreement, dated as of February 6,
2006, between EnergyLite, Inc. and Ronald W. Gilcrease (Incorporated
by reference to Exhibit 10.1 to Metretek's Current Report on Form 8-K
filed February 10, 2006)*
(10.15) Form of Stock Purchase Agreement, dated as of September 10, 2004, by
and between Metretek Technologies, Inc. and the employee-shareholders
of PowerSecure, Inc. (Incorporated by reference to Exhibit 10.1 to
Metretek's Current Report on Form 8-K, filed September 13, 2004)*
(10.16) Amended Stipulation of Settlement, filed March 3, 2004, among Douglas
W. Heins on behalf of himself and all others similarly situated, and
Metretek Technologies, Inc., et. al. (Incorporated by reference to
Exhibit 10.39 to Metretek's Annual Report on Form 10-K for the year
ended December 31, 2003.)
(10.17) Order Granting Final Approval of the Partial Settlement, dated June
11, 2004. (Incorporated by reference to Exhibit 99.1 to Metretek's
Current Report on Form 8-K filed June 14, 2004.)
(10.18) Summary Sheet of Compensation of Non-Employee Directors. (Filed
herewith.)
(10.19) Lease Agreement, dated March 2005, between H & C Holdings, LLC and
PowerSecure, Inc. (Filed herewith.)
(14.1) Metretek Technologies, Inc. Code of Ethics for Principal Executive
Officer and Senior Financial Officers. (Incorporated by reference to
Exhibit 14.1 to Metretek's Annual Report on Form 10-K for the year
ended December 31, 2003.)
(14.2) Metretek Technologies, Inc. Code of Business Conduct and Ethics.
(Incorporated by reference to Exhibit 14.2 to Metretek's Annual Report
on Form 10-K for the year ended December 31, 2003.)
(21.1) Subsidiaries of Metretek Technologies, Inc. (Filed herewith.)
(23.1) Consent of Hein & Associates LLP (Filed herewith.)
(23.2) Consent of Deloitte & Touche LLP (Filed herewith.)
(31.1) Certification of Chief Executive Officer pursuant to Rule 13a-14(a) or
15d-14(a) under the Securities Exchange Act of 1934, as amended, as
adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
(Filed herewith.)
(31.2) Certification of Chief Financial Officer pursuant to Rule 13a-14(a) or
15d-14(a) under the Securities Exchange Act of 1934, as amended, as
adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
(Filed herewith.)
(32.1) Certification of Chief Executive Officer pursuant to 18 U.S.C. Section
1350 and Rule 13a-14(b) or 15d-14(b) under the Securities Exchange Act
of 1934, as amended, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 (Filed herewith.)
(32.2) Certification of Chief Financial Officer pursuant to 18 U.S.C. Section
1350 and Rule 13a-14(b) or 15d-14(b) under the Securities Exchange Act
of 1934, as amended, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 (Filed herewith.)
----------
* Management contract or compensation plan or arrangement.
68
(B) ITEM 601 EXHIBITS
The exhibits required by this Item are listed under Item 15(a)(3) of this
Report, above.
(C) FINANCIAL STATEMENT SCHEDULES
The financial statement schedules required by this Item are listed under
Item 15(a)(2) of this Report, above.
69
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
By: /s/ W. Phillip Marcum
------------------------------------
W. Phillip Marcum, President and
Chief Executive Officer
Date: March 20, 2006
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, THAT each of the undersigned directors and
officers of Metretek Technologies, Inc. hereby constitutes and appoints W.
Phillip Marcum, A. Bradley Gabbard and Paul R. Hess, and each of them, as his
true and lawful attorneys-in-fact and agents, each with full power of
substitution and re-substitution for him and in his name, place and stead, in
any and all capacities, sign any and all amendments to this report, and the file
the same, with exhibitions thereto and other documents in connection therein
with the Securities and Exchange Commission hereby ratifying and confirming all
that said attorneys-in-fact and agents, or his substitute or substitutes, may do
or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated:
SIGNATURE TITLE DATE
--------- ----- ----
/s/ W. Phillip Marcum Chairman of the Board, President, March 20, 2006
------------------------- Chief Executive Officer and Director
W. Phillip Marcum (Principal executive officer)
/s/ A. Bradley Gabbard Executive Vice President, Chief Financial March 20, 2006
------------------------- Officer, Treasurer, Secretary and Director
A. Bradley Gabbard (Principal financial officer)
/s/ Gary J. Zuiderveen Vice President, Controller, Principal March 20, 2006
------------------------- Accounting Officer and Secretary
Gary J. Zuiderveen (Principal accounting officer)
/s/ Basil M. Briggs Director March 20, 2006
-------------------------
Basil M. Briggs
/s/ Kevin P. Collins Director March 20, 2006
-------------------------
Kevin P. Collins
70
INDEX TO FINANCIAL STATEMENTS
PAGE
----
CONSOLIDATED FINANCIAL STATEMENTS OF
METRETEK TECHNOLOGIES, INC. AND SUBSIDIARIES
Report of Independent Registered Public Accounting Firm F-2
Report of Independent Registered Public Accounting Firm F-3
Consolidated Balance Sheets as of December 31, 2005 and 2004 F-4
Consolidated Statements of Operations for the Years Ended
December 31, 2005, 2004 and 2003 F-6
Consolidated Statements of Stockholders' Equity for the Years
Ended December 31, 2005, 2004 and 2003 F-7
Consolidated Statements of Cash Flows for the Years Ended
December 31, 2005, 2004 and 2003 F-8
Notes to Consolidated Financial Statements F-9
F - 1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Stockholders
Metretek Technologies, Inc
We have audited the accompanying consolidated balance sheets of Metretek
Technologies, Inc. and subsidiaries (the "Company") as of December 31, 2005 and
2004, and the related consolidated statements of operations, stockholders'
equity, and cash flows for the years then ended. Our audit also included the
financial statement schedule listed in the index at Item 15. These financial
statements and the financial statement schedule are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements and the financial statement schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Metretek
Technologies, Inc. and subsidiaries at December 31, 2005 and 2004, and the
results of their operations and their cash flows for the years then ended, in
conformity with U.S. generally accepted accounting principles. Also, in our
opinion, the financial statement schedule, when considered in relation to the
basic consolidated financial statements taken as a whole, presents fairly, in
all material respects, the information set forth therein.
HEIN & ASSOCIATES LLP
Denver, Colorado
March 1, 2006
F-2
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Stockholders
Metretek Technologies, Inc.
We have audited the accompanying consolidated statements of operations,
stockholders' equity, and cash flows of Metretek Technologies, Inc. and
subsidiaries (the "Company") for the year ended December 31, 2003. Our audit
also included the financial statement schedule listed in the Index at Item 15.
These financial statements and the financial statement schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements and the financial statement schedule based
on our audit.
We conducted our audit in accordance with standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the results of operations, stockholders' equity, and cash
flows of Metretek Technologies, Inc. and subsidiaries for the year ended
December 31, 2003, in conformity with accounting principles generally accepted
in the United States of America. Also, in our opinion, the financial statement
schedule, when considered in relation to the basic consolidated financial
statements taken as a whole, present fairly, in all material respects, the
information set forth therein.
As disclosed in Note 3 to the consolidated financial statements, the Company
discontinued the MCM operations in December 2004. The results of MCM prior to
the disposition are included in loss on discontinued operations in the
accompanying consolidated financial statement for the year ended December 31,
2003. Also, as disclosed in Note 1 to the consolidated financial statements, the
Company adopted EITF 03-6, "Participating Securities and the Two-Class Method
Under FASB Statement No. 128".
DELOITTE & TOUCHE LLP
Denver, Colorado
March 25, 2004 (March 11, 2005
as to the effects of the discontinued
operations described in Note 3 and
the adoption of EITF 03-6 described
in Note 1)
F-3
METRETEK TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31,
-------------------------
ASSETS 2005 2004
------ ----------- -----------
CURRENT ASSETS:
Cash and cash equivalents $ 2,188,310 $ 2,951,489
Trade receivables, net of allowance for doubtful accounts
of $95,144 and $740,742, respectively 12,031,539 8,702,437
Other receivables 36,669 25,850
Inventories 3,450,267 3,190,653
Prepaid expenses and other current assets 527,269 524,508
----------- -----------
Total current assets 18,234,054 15,394,937
----------- -----------
PROPERTY, PLANT AND EQUIPMENT:
Equipment 5,669,788 5,052,664
Vehicles 132,988 61,041
Furniture and fixtures 550,863 543,127
Land, building and improvements 517,511 796,182
----------- -----------
Total property, plant and equipment, at cost 6,871,150 6,453,014
Less accumulated depreciation and amortization 3,657,856 3,715,884
----------- -----------
Property, plant and equipment, net 3,213,294 2,737,130
----------- -----------
OTHER ASSETS:
Goodwill (Notes 1 and 5) 8,840,148 8,840,148
Patents, intangibles and capitalized software development, net of
accumulated amortization of $1,280,019 and $1,135,843, respectively 479,221 233,390
Investment in unconsolidated affiliate 2,299,218 2,077,301
Assets of discontinued operations (Note 3) 192,821 780,000
Other assets 60,170 148,010
----------- -----------
Total other assets 11,871,578 12,078,849
----------- -----------
TOTAL $33,318,926 $30,210,916
=========== ===========
See accompanying notes to consolidated financial statements.
F-4
METRETEK TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31,
---------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY 2005 2004
------------------------------------ ------------ ------------
CURRENT LIABILITIES:
Accounts payable $ 3,283,898 $ 3,206,094
Accrued and other liabilities 8,786,830 5,896,493
Notes payable (Note 6) 1,248,286 1,171,988
Capital lease obligations (Note7) 3,884 3,477
------------ ------------
Total current liabilities 13,322,898 10,278,052
------------ ------------
LONG-TERM NOTES PAYABLE (NOTE 6) 3,593,523 6,075,065
------------ ------------
NON-CURRENT CAPITAL LEASE OBLIGATIONS (NOTE 7) 3,210 7,094
------------ ------------
LIABILITIES OF DISCONTINUED OPERATIONS (NOTE 3) 843,649
------------ ------------
COMMITMENTS AND CONTINGENCIES (NOTE 8)
MINORITY INTEREST IN SUBSIDIARIES (NOTE 10) 169,755 89,792
------------ ------------
STOCKHOLDERS' EQUITY (NOTE 10):
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; 12,577,530 and 12,186,741 shares issued
and outstanding, respectively 125,775 121,867
Additional paid-in-capital 72,321,099 71,413,120
Deferred compensation (66,000) (132,000)
Accumulated deficit (56,151,334) (58,485,723)
------------ ------------
Total stockholders' equity 16,229,540 12,917,264
------------ ------------
TOTAL $ 33,318,926 $ 30,210,916
============ ============
See accompanying notes to consolidated financial statements.
F-5
METRETEK TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31,
---------------------------------------
2005 2004 2003
----------- ----------- -----------
REVENUES:
Sales and services $46,748,658 $34,700,954 $36,332,145
Other 503,894 475,969 141,591
----------- ----------- -----------
Total revenues 47,252,552 35,176,923 36,473,736
----------- ----------- -----------
COSTS AND EXPENSES:
Cost of sales and services 32,749,798 23,897,325 25,686,448
General and administrative 8,820,560 6,834,960 6,105,010
Selling, marketing and service 2,595,200 2,112,203 1,600,684
Depreciation and amortization 563,889 578,516 514,640
Research and development 712,725 667,293 626,760
Interest, finance charges and other 608,963 480,110 285,437
----------- ----------- -----------
Total costs and expenses 46,051,135 34,570,407 34,818,979
----------- ----------- -----------
Income from continuing operations before
minority interest, income taxes, and equity income 1,201,417 606,516 1,654,757
Equity in income of unconsolidated affiliate 1,689,537 1,254,509 468,790
Minority interest (Note 10) (210,875) (238,389) (207,280)
Income taxes (Note 9) (45,690) (47,590) (56,980)
----------- ----------- -----------
INCOME FROM CONTINUING OPERATIONS 2,634,389 1,575,046 1,859,287
----------- ----------- -----------
DISCONTINUED OPERATIONS OF MCM (NOTE 3)
Loss on disposal of MCM (300,000) (3,355,301) --
Loss from operations of MCM -- (1,463,285) (980,302)
----------- ----------- -----------
LOSS ON DISCONTINUED OPERATIONS (300,000) (4,818,586) (980,302)
----------- ----------- -----------
NET INCOME (LOSS) $ 2,334,389 $(3,243,540) $ 878,985
=========== =========== ===========
PER SHARE AMOUNTS (NOTE 1):
INCOME FROM CONTINUING OPERATIONS:
Basic $ 0.21 $ 0.03 $ 0.11
=========== =========== ===========
Diluted $ 0.20 $ 0.03 $ 0.11
=========== =========== ===========
NET INCOME (LOSS):
Basic $ 0.19 $ (0.47) $ (0.06)
=========== =========== ===========
Diluted $ 0.18 $ (0.45) $ (0.06)
=========== =========== ===========
WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING:
Basic 12,287,107 9,531,199 6,043,469
=========== =========== ===========
Diluted 13,360,515 10,035,730 6,051,580
=========== =========== ===========
See accompanying notes to consolidated financial statements.
F-6
METRETEK TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003
COMMON STOCK ADDITIONAL
--------------------- PAID-IN DEFERRED ACCUMULATED
SHARES VALUE CAPITAL COMPENSATION DEFICIT TOTAL
---------- -------- ----------- ------------ ------------ -----------
BALANCE, JANUARY 1, 2003 6,043,469 $ 60,435 $55,092,132 $(53,987,204) $ 1,165,363
Net income 878,985 878,985
Minority interest stock
compensation 15,000 15,000
Preferred stock
distribution (890,191) (890,191)
---------- -------- ----------- --------- ------------ -----------
BALANCE, DECEMBER 31, 2003 6,043,469 60,435 55,107,132 (53,998,410) 1,169,157
Net loss (3,243,540) (3,243,540)
Private placement, net 3,510,548 35,105 9,793,586 9,828,691
Conversion of preferred stock 1,329,173 13,292 4,413,996 4,427,288
Stock issued in acquisition of
PowerSecure minority Interest 950,000 9,500 1,492,925 1,502,425
Stock option exercises 263,551 2,635 408,381 411,016
Stock awards 90,000 900 197,100 $(198,000)
Amortization of deferred
compensation 66,000 66,000
Preferred stock
distribution (1,243,773) (1,243,773)
---------- -------- ----------- --------- ------------ -----------
BALANCE, DECEMBER 31, 2004 12,186,741 121,867 71,413,120 (132,000) (58,485,723) 12,917,264
Net income 2,334,389 2,334,389
Stock warrant and option
exercises 390,789 3,908 907,979 911,887
Amortization of deferred
compensation 66,000 66,000
---------- -------- ----------- --------- ------------ -----------
BALANCE, DECEMBER 31, 2005 12,577,530 $125,775 $72,321,099 $ (66,000) $(56,151,334) $16,229,540
========== ======== =========== ========= ============ ===========
See accompanying notes to consolidated financial statements.
F-7
METRETEK TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31,
----------------------------------------
2005 2004 2003
------------ ----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 2,334,389 $(3,243,540) $ 878,985
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Loss on disposal of MCM operations 300,000 3,355,301 --
Loss from discontinued operations of MCM -- 1,463,285 980,302
Depreciation and amortization 563,889 578,516 514,640
Minority interest in subsidiary 210,875 238,389 222,280
Loss on disposal of property, plant and equipment 13,497 262 13,327
Equity in income of unconsolidated affiliate (1,689,537) (1,254,509) (468,790)
Distributions from unconsolidated affiliate 1,507,956 807,732 332,137
Stock compensation 66,000 66,000 --
Changes in operating assets and liabilities, net of acquisitions:
Trade receivables, net (3,209,526) (2,834,777) (2,403,211)
Inventories (226,971) (1,235,077) (775,449)
Other current assets (63,580) (1,241) 14,195
Other noncurrent assets 87,840 (71,940) (18,069)
Accounts payable 77,804 1,227,868 381,356
Accrued and other liabilities 3,379,151 476,609 1,661,378
------------ ----------- -----------
Net cash provided by (used in) continuing operations 3,351,787 (427,122) 1,333,081
Net cash used by discontinued operations of MCM (610,546) (1,441,705) (804,083)
------------ ----------- -----------
Net cash provided by (used in) operating activities 2,741,241 (1,868,827) 528,998
------------ ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Investment in unconsolidated affiliate (58,045) (955,784) --
Patent, software and other intangible assets acquired (390,007) (47,467) (2,000)
Purchases of property, plant and equipment (939,808) (2,229,640) (294,067)
Minority interest acquired -- (80,979) --
Proceeds from sale of property, plant and equipment -- 5,700 800
------------ ----------- -----------
Net cash used in investing activities (1,387,860) (3,308,170) (295,267)
------------ ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from private placement -- 9,828,691 --
Proceeds from stock warrant and option exercises 911,887 411,016 --
Net (payments) borrowings on line of credit (1,307,081) 75,863 1,074,390
Proceeds from equipment and project loans 335,247 1,212,570 30,169
Proceeds from investment loan -- 960,784 --
Principal payments on long-term notes payable (1,433,410) (979,867) (71,049)
Distributions to minority interests (130,912) (55,701) --
Payments on preferred stock redemptions (488,814) (5,344,660) --
Payments on capital lease obligations (3,477) (81,885) (50,409)
------------ ----------- -----------
Net cash provided by (used in) financing activities (2,116,560) 6,026,811 983,101
------------ ----------- -----------
NET (DECREASE) INCREASE IN CASH
AND CASH EQUIVALENTS (763,179) 849,814 1,216,832
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 2,951,489 2,101,675 884,843
------------ ----------- -----------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 2,188,310 $ 2,951,489 $ 2,101,675
============ =========== ===========
See accompanying notes to consolidated financial statements.
F-8
METRETEK TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE
YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION - The accompanying consolidated financial statements include
the accounts of Metretek Technologies, Inc. ("Metretek Technologies") and
its subsidiaries, primarily Southern Flow Companies, Inc. ("Southern
Flow"), PowerSecure, Inc. ("PowerSecure") (and its wholly-owned
subsidiaries, UtilityEngineering, Inc. and PowerServices, Inc.), 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."
Metretek Technologies was incorporated on April 5, 1991. The focus of the
Company's business operations is currently in the following areas: 1)
Southern Flow provides natural gas measurement services; 2) PowerSecure
designs and installs distributed generation equipment and related services;
and 3) Metretek Florida is engaged in automated energy data management. See
Note 11 for more information concerning the Company's reportable segments.
PRINCIPLES OF CONSOLIDATION - The consolidated financial statements include
the accounts of Metretek Technologies and its subsidiaries after
elimination of intercompany accounts and transactions. The Company uses the
equity method to account for its investment in unconsolidated affiliate.
USE OF ESTIMATES - The preparation of the Company's consolidated financial
statements in conformity with accounting principles generally accepted in
the United States of America requires management to make estimates 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. Actual results could differ from those
estimates. Significant estimates include percentage-of-completion
estimates, allowance for doubtful accounts receivable, inventory valuation
reserves, and deferred tax valuation allowance.
REVENUE RECOGNITION - Equipment and supply sales are recognized when
delivered, and natural gas measurement revenues are recognized as services
are provided. The Company utilizes the percentage-of-completion method of
revenue recognition for PowerSecure's contracts. Under the
percentage-of-completion method of accounting, PowerSecure recognizes
project revenues (and associated project costs) based on estimates of the
value added for each portion of the projects completed. Revenues and gross
profit are adjusted prospectively for revisions in estimated total contract
costs and contract values. Estimated losses, if any, are recorded when
identified. Amounts billed to customers in excess of revenues recognized to
date are classified as current liabilities. The Company recognizes revenues
on PowerSecure's shared savings distributed generation projects as the
customer realizes energy savings at their site.
F-9
STATEMENT OF CASH FLOWS - The Company considers all highly liquid
investments with a maturity of three months or less from the date of
purchase to be cash equivalents.
2005 2004 2003
-------- ---------- --------
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest $577,458 $ 404,030 $202,668
State income taxes 53,217 12,958 56,980
Supplemental schedule of non-cash investing and
financing activities:
Capital lease obligations incurred for the
purchase of equipment -- 526,395 98,424
Acquisition of minority interest in PowerSecure
through issuance of stock -- 1,202,249 --
Issuance of restricted stock compensation -- 198,000 --
Note receivable in payment for sale
of discontinued MCM operations -- 780,000 --
Conversion of preferred stock -- 4,427,288 --
ACCOUNTS RECEIVABLE - The Company performs ongoing credit evaluations of
its customers' financial condition and generally does not require
collateral. The Company continuously monitors collections and payments from
its customers and regularly adjusts credit limits of customers based upon
payment history and a customer's current credit worthiness, as judged by
the Company. The Company maintains a provision for estimated credit losses.
The December 31, 2004 balance of the allowance for doubtful accounts
includes $587,000 provided for losses on receivables from the discontinued
operations of the Company's MCM business (see Note 3).
INVENTORIES - Inventories are stated at the lower of cost (determined
primarily on a first-in, first-out basis) or market. Inventories at
December 31, 2005 and 2004 are summarized as follows:
2005 2004
---------- -----------
Raw materials and supplies $1,636,966 $ 3,013,759
Work in process 477,616 471,270
Finished goods and merchandise 1,501,944 1,253,894
Valuation reserve (166,259) (1,548,270)
---------- -----------
Total $3,450,267 $ 3,190,653
========== ===========
The raw materials and supplies inventory at December 31, 2004, includes
$1,567,000 of inventory from the discontinued operations of the Company's
MCM business (see Note 3), of which $1,199,000 was reserved for losses
expected upon disposal of that inventory.
In November 2004, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("FAS") No. 151, "Inventory
Costs, an amendment of ARB No. 43, Chapter 4". FAS No. 151 amends the
guidance in Chapter 4, "Inventory Pricing," of
F-10
Accounting Research Bulletin No. 43, "Restatement and Revision of
Accounting Research Bulletins," to clarify the accounting for abnormal
amounts of idle facility expense, freight, handling costs and wasted
material. FAS No. 151 also clarifies the circumstances under which fixed
overhead costs associated with operating facilities involved in inventory
processing should be capitalized. The provisions of FAS No. 151 are
effective for fiscal years beginning after June 15, 2005, which the Company
will be required to adopt for fiscal 2006. The Company does not expect that
the adoption of FAS No. 151 will have a material effect on its consolidated
financial position or results of operations.
PROPERTY, PLANT AND EQUIPMENT - Property, plant and equipment are stated at
cost and are generally depreciated using the straight-line method over
their estimated useful lives, which depending on asset class ranges from 2
to 30 years. Property, plant and equipment includes items under capital
lease with a net book value of $8,536 and $10,813 at December 31, 2005 and
2004, respectively.
INVESTMENT IN UNCONSOLIDATED AFFILIATE -The Company, through MGT, holds a
minority interest in Marcum Midstream 1995-2 Business Trust ("MM 1995-2")
which it acquired in early 1996. During the third quarter of 2005 and the
first quarter of 2004, the Company acquired additional equity interests in
MM 1995-2 at a purchase price of $58,000 and $956,000, respectively. As a
result of these additional investments, the Company currently owns an
approximate 27% economic interest in MM 1995-2. MM 1995-2 owns and operates
five water disposal well facilities in northeastern Colorado.
To facilitate the acquisition of the additional equity interests in the
first quarter of 2004, MGT formed CAC LLC, a majority-owned subsidiary.
Financing of the acquired equity interests was provided by a $961,000 term
loan from a commercial bank to CAC LLC. The loan is collateralized 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 are being used to fund the monthly payments on the term
loan.
The Company utilizes the equity method to account for its investment in MM
1995-2. The minority shareholder's interest in CAC LLC at December 31, 2005
and 2004, is included in minority interest in the accompanying consolidated
financial statements.
Summarized financial information for MM 1995-2 at December 31, 2005 and
2004 and for the three years ended December 31, 2005 are as follows:
F-11
DECEMBER 31,
-----------------------
2005 2004
---------- ----------
Total current assets $2,173,222 $1,766,687
Property, plant and equipment, net 6,180,090 5,158,373
Total other assets 15,429 16,537
---------- ----------
Total assets $8,368,741 $6,941,597
========== ==========
Total current liabilities $1,151,906 $ 812,796
Long-term note payable 912,799 419,559
Total shareholders' equity 6,304,036 5,709,242
---------- ----------
Total liabilities and shareholders' equity $8,368,741 $6,941,597
========== ==========
YEAR ENDED DECEMBER 31,
-------------------------------------
2005 2004 2003
----------- ---------- ----------
Total revenues $10,263,085 $7,208,648 $5,311,822
Total costs and expenses 4,868,291 3,299,248 2,480,899
----------- ---------- ----------
Net income $ 5,394,794 $3,909,400 $2,830,923
=========== ========== ==========
GOODWILL AND OTHER INTANGIBLE ASSETS - Effective January 1, 2002, the
Company adopted the provisions of FAS No. 141, "Business Combinations" and
FAS No. 142 "Goodwill and Other Intangible Assets." FAS No. 141 eliminated
the pooling-of-interests method of accounting for business combinations and
further clarifies the criteria to recognize intangible assets separately
from goodwill. FAS No. 142 states that goodwill and intangible assets with
indefinite lives are no longer amortized but are reviewed for impairment
annually (or more frequently if impairment indicators arise). Separable
intangible assets that do not have an indefinite life continue to be
amortized over their estimated useful lives. Effective June 30, 2002, the
Company completed the initial testing of the impairment of goodwill
required by FAS No. 142. The Company also tests for goodwill impairment
annually on October 1. As a result of these tests, the Company has
concluded that there has been no impairment of goodwill as of each of the
respective testing dates.
The Company capitalizes software development costs integral to its products
once technological feasibility of the products and software has been
determined. Software development costs are being amortized over five years,
using the straight-line method. Unamortized software development costs at
December 31, 2005 and 2004 are $180,141 and $233,390, respectively. Patents
and license agreements are amortized using the straight-line method over
the lesser of their estimated economic lives or their legal term of
existence, currently 3 to 5 years. Unamortized patent and license costs at
December 31, 2005 and 2004 are $299,080 and $0, respectively.
F-12
ACCRUED AND OTHER LIABILITIES - Accrued and other liabilities at December
31, 2005 and 2004 are summarized as follows:
2005 2004
---------- ----------
Accrued project costs $3,977,009 $ 829,615
Payroll, employee benefits and related liabilities 2,191,619 1,441,216
Sales, property and other taxes payable 634,892 229,366
Advance billings on projects in progress 634,404 1,601,773
Preferred stock redemption obligation 405,143 893,957
Deferred revenue 402,113 408,097
Insurance premiums and reserves 172,713 416,786
Warranty reserve 71,446 67,229
Other 297,491 8,454
---------- ----------
Total $8,786,830 $5,896,493
========== ==========
CONDITIONAL ASSET RETIREMENT OBLIGATIONS - In March 2005, the FASB issued
Interpretation No. 47, "Accounting for Conditional Asset Retirement
Obligations" ("FIN 47"). FIN 47 clarifies that the term "conditional asset
retirement obligation" as used in FASB Statement No. 143, "Accounting for
Asset Retirement Obligations," refers to a legal obligation to perform an
asset retirement activity in which the timing and/or method of settlement
are conditional on a future event that may or may not be within the control
of the entity. However, the obligation to perform the asset retirement
activity is unconditional even though uncertainty exists about the timing
or method of settlement. FIN 47 requires that the uncertainty about the
timing or method of settlement of a conditional asset retirement obligation
be factored into the measurement of the liability when sufficient
information exists. FIN 47 also clarifies when an entity would have
sufficient information to reasonably estimate the fair value of an asset
retirement obligation. The Company adopted the provisions of FIN 47 during
the year ended December 31, 2005. The adoption of FIN 47 had no effect on
the Company's financial position or results of operations.
INCOME (LOSS) PER SHARE - Basic income (loss) per share is computed using
the weighted average number of shares outstanding. Diluted income (loss)
per share reflects the potential dilutions that would occur if stock
options were exercised using the average market price for the Company's
stock for the period. The Emerging Issues Task Force ("EITF") issued EITF
Issue No. 03-6, "Participating Securities and the Two-Class Method under
FASB Statement No. 128, Earnings per Share" ("EITF 03-6"). The Company
adopted EITF 03-6 as of April 1, 2004, and has retroactively adjusted prior
periods pursuant to its provisions. EITF 03-6 provides guidance for the
computation of earnings per share using the two-class method for
enterprises with participating securities or multiple classes of common
stock as required by Statement of Financial Accounting Standards No. 128.
The two-class method allocates undistributed earnings to each class of
common stock and participating securities for the purpose of computing
basic earnings per share. The Company's Series B Redeemable Preferred Stock
was a participating security under the provisions of EITF 03-6 for periods
prior to its redemption on December 9, 2004. No undistributed earnings are
allocable to the Company's Series B Redeemable Preferred Stock for the
years ended December 31, 2005 and 2004 since such shares have been redeemed
effective December 9, 2004.
F-13
The following table sets forth the calculation of basic and diluted
earnings per share:
YEAR ENDED DECEMBER 31,
--------------------------------------
2005 2004 2003
----------- ----------- ----------
Income from continuing operations $ 2,634,389 $ 1,575,046 $1,859,287
Less preferred stock
deemed distribution (1) -- (1,243,773) (890,191)
----------- ----------- ----------
Income from continuing
operations to be allocated 2,634,389 331,273 969,096
Less allocation of undistributed earnings
to participating preferred stock -- -- (327,302)
----------- ----------- ----------
Income from continuing operations
attributable to common shareholders 2,634,389 331,273 641,794
Loss from discontinued operations (300,000) (4,818,586) (980,302)
----------- ----------- ----------
Net income (loss) attributable
to common shareholders $ 2,334,389 $(4,487,313) $ (338,508)
=========== =========== ==========
Basic weighted-average common
shares outstanding in period 12,287,107 9,531,199 6,043,469
Add dilutive effects of stock options 1,073,408 504,531 8,111
----------- ----------- ----------
Diluted weighted-average common
shares outstanding in period 13,360,515 10,035,730 6,051,580
=========== =========== ==========
Basic earnings (loss) per common share:
Income from continuing operations $ 0.21 $ 0.03 $ 0.11
Loss from discontinued operations (0.02) (0.50) (0.16)
----------- ----------- ----------
Basic earnings per common share (2) $ 0.19 $ (0.47) $ (0.06)
=========== =========== ==========
Diluted earnings (loss) per common share:
Income from continuing operations $ 0.20 $ 0.03 $ 0.11
Loss from discontinued operations (0.02) (0.48) (0.16)
----------- ----------- ----------
Diluted earnings per common share (2) $ 0.18 $ (0.45) $ (0.06)
=========== =========== ==========
(1) The preferred stock deemed distribution for the year ended December 31,
2004 includes a non-cash charge (expense) of $593,000, which represents the
estimated fair market value of inducement conveyed to the converting
Preferred Stockholders in connection with the Private Placement discussed
further in Note 2.
(2) Basic and diluted earnings per share for the year ended December 31, 2003
differ from the amounts originally presented in the Company's Annual Report
on Form 10-K dated December 31, 2003 for the effects of the allocation of
earnings to participating preferred stock as required by the provisions of
EITF 03-6.
DEFERRED COMPENSATION - During the third quarter 2004, the Company awarded,
subject to restrictions, 90,000 shares of common stock to certain
executives of the Company. The stock awards vest in one-third increments
over a three-year period. The Company recorded deferred compensation
expense in the amount of $198,000 for the fair market value of the stock on
the date of the award. The deferred compensation is being amortized over
the remaining vesting
F-14
period. The Company amortized $66,000 of the deferred compensation expense
during each of the years ended December 31, 2005 and 2004.
STOCK BASED COMPENSATION - In December 2004, the FASB issued its final
standard on accounting for employee stock options, FAS No. 123 (Revised
2004), "Share-Based Payment" ("FAS No. 123(R)"). FAS No. 123(R) replaces
FAS No. 123, "Accounting for Stock-Based Compensation" ("FAS No. 123"), and
supersedes Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees". FAS No. 123(R) requires companies to measure
compensation costs for all share-based payments, including grants of
employee stock options, based on the fair value of the awards on the grant
date and to recognize such expense over the period during which an employee
is required to provide services in exchange for the award. The pro forma
disclosures previously permitted under FAS No. 123 will no longer be an
alternative to financial statement recognition.
In March 2005, the Securities and Exchange Commission ("SEC") issued Staff
Accounting Bulletin No. 107, (Share-Based Payment" ("SAB 107"). SAB 107
provides the SEC staff's position regarding the application of FAS 123(R),
contains interpretive guidance related the interaction between FAS 123(R)
and certain SEC rules and regulations, and also provides the SEC staff's
views regarding the valuation of share-based payment arrangements for
public companies. In April 2005, the SEC amended Rule 4-01(a) of Regulation
X under the Exchange Act to defer the effective date of FAS 123(R) to the
first fiscal year beginning on or after June 15, 2005.
The Company is required to adopt FAS No. 123(R) on January 1, 2006, and
will use the modified prospective transition method and apply the expense
recognition provisions of FAS No. 123 to all awards granted, modified,
repurchased or cancelled on or after that date, and to the unvested
portions of previously issued and outstanding awards beginning on January
1, 2006. The Company believes its adoption of FAS No. 123(R) and
application of SAB 107 will result in expense amount that are similar to
the current pro forma disclosures under FAS No. 123.
At December 31, 2005, the Company has three stock-based employee and
director compensation plans, which are described more fully in Note 10.
Through December 31, 2005, the Company accounted for stock-based
compensation related to stock options issued under these plans using the
intrinsic value method prescribed in APB Opinion No. 25, "Accounting for
Stock Issued to Employees", and related Interpretations. Accordingly, no
compensation cost has been recognized for stock option grants to employees
and directors, as all options granted under those plans had an exercise
price 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 income (loss) and income
(loss) per share if the Company had applied the fair value recognition
provisions of FAS No. 123, as amended by FAS No. 148 and FAS No. 123(R),
for the years ended December 31, 2005, 2004 and 2003:
F-15
YEAR ENDED DECEMBER 31,
------------------------------------
2005 2004 2003
---------- ----------- ---------
Net income (loss) applicable to common
shareholders - as reported $2,334,389 $(4,487,313) $(338,508)
Deduct: Total stock-based employee
compensation expense determined
under fair value based method (971,944) (193,047) (76,437)
---------- ----------- ---------
Net income (loss) applicable to common
shareholders - pro forma $1,362,445 $(4,680,360) $(414,945)
========== =========== =========
Income (loss) per basic common share:
As reported $ 0.19 $ (0.47) $ (0.06)
========== =========== =========
Pro forma $ 0.11 $ (0.49) $ (0.07)
========== =========== =========
Income (loss) per diluted common share:
As reported $ 0.18 $ (0.45) $ (0.06)
========== =========== =========
Pro forma $ 0.10 $ (0.47) $ (0.07)
========== =========== =========
The fair values of stock options were calculated using the Black-Scholes
stock option valuation model with the following weighted average
assumptions for grants in 2005, 2004 and 2003: expected volatility of 50%,
58% and 107%, respectively; risk-free interest rate of 4.19%, 3.53% , and
3.50%, respectively; dividend rate of $0.00 per year; and an expected life
of 4 years for options granted to employees and 10 years for options
granted to directors.
RESEARCH AND DEVELOPMENTS COSTS - Research and development costs relating
principally to the design and development of products (exclusive of costs
capitalized under FAS 86) are expensed as incurred.
FINANCIAL INSTRUMENTS - In February 2006, the FASB issued FAS No. 155,
"Accounting for Certain Hybrid Financial Instruments-an amendment of FASB
Statements No. 133 and 140". FAS 155 eliminates the exemption from applying
FAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities," to interests in securitized financial assets. The Company will
be required to adopt FAS 155 effective January 1, 2007. The Company does
not expect adoption of FAS 155 will have a material impact on its financial
position or results of operations.
IMPAIRMENT OR DISPOSAL OF LONG-LIVED ASSETS - The Company evaluates its
long-lived assets whenever significant events or changes in circumstances
occur that indicate that the carrying amount of an asset may not be
recoverable. Recoverability of these assets is determined by comparing the
forecasted undiscounted future net cash flows from the operations to which
the assets relate, based on management's best estimates using appropriate
assumptions and projections at the time, to the carrying amount of the
assets. If the carrying value is determined not to be recoverable from
future operating cash flows, the asset is deemed impaired and an impairment
loss is recognized equal to the amount by which the carrying amount exceeds
the estimated fair value of the asset.
RECLASSIFICATIONS - During the third quarter of 2004, the Board of
Directors of the Company approved a plan to discontinue the business of MCM
and sell all of its manufacturing assets (See Note 3). The operations of
the discontinued MCM disposal group have been reclassified to
F-16
discontinued operations for all periods presented in the accompanying
consolidated statements of operations. Certain other 2004 and 2003 amounts
have been reclassified to conform to current year presentation. Such
reclassifications had no effect on net income or loss.
2. PRIVATE PLACEMENT AND CONVERSION OF SERIES B PREFERRED STOCK
In May 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 $10,883,000. 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 $9,829,000 from the Private
Placement, after deducting transaction expenses including the placement
agent's fee. The net proceeds from the Private Placement were 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 matured on December 9, 2004 (the "Mandatory Redemption
Date"), 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. 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 and
which could also be exercised on a cashless basis. 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.
The Company filed a registration statement with the Securities and Exchange
Commission (the "SEC"), covering resales of shares of common stock issued
in the Private Placement or upon the exercise of the warrants.
During the year ended December 31, 2005, the Company received $514,000 from
the exercise or redemption of 160,646 of the warrants issued in the Private
Placement. At December 31, 2005, 892,518 of the warrants remained
outstanding. On January 19, 2006, the Company exercised its right to call
the remaining outstanding warrants by requiring the exercise of all
remaining outstanding and unexercised warrants on or before February 19,
2006. Through February 19, 2006, 801,517 of the warrants outstanding at
December 31, 2005 had been exercised resulting in an additional $1,774,000
proceeds to the Company and the issuance of 705,000 shares of common stock
of the Company.
In addition, as a condition precedent to the closing of the Private
Placement, certain holders of the Company's outstanding shares of Series B
Preferred Stock converted a total of 2,500 shares of Series B Preferred
Stock, including accrued and unpaid dividends thereon. The purpose of this
conversion was to reduce the Company's potential preferred stock mandatory
redemption liability at the Mandatory Redemption Date from approximately
$10.3 million to approximately $6.6 million, a reduction of $3.7 million.
Upon conversion, the converting Preferred Stockholders received 1,209,133
shares of common stock (inclusive of 55,871 additional shares of common
stock ("Additional Shares") intended to compensate the converting Preferred
Stockholders for
F-17
dividends that they would otherwise receive on the converted preferred
shares between the Private Placement closing date and the Mandatory
Redemption Date) and new warrants to purchase 1,209,133 shares of common
stock. The new warrants were exercisable at a strike price of $3.0571 per
share of common stock and expired unexercised on June 9, 2005. The strike
price of the new warrants was the same price as the conversion price of the
Series B Preferred Stock. The Company included both the Additional Shares
and the shares of common stock issuable upon exercise of the new warrants
in the registration statement filed with the SEC in connection with the
Private Placement.
As a result of the Preferred Stock conversion described in the immediately
preceding paragraph, the Company recorded a second quarter of 2004 non-cash
charge (expense) in the amount of $543,000 as an additional preferred stock
deemed dividend. This charge represents the approximate fair market value
of inducement conveyed to the converting Preferred Stockholders. The
inducement amount relates principally to the estimated fair market values
of the new warrants and the Additional Shares. See also Note 1 - "Income
(Loss) per Share."
During the third quarter of 2004, additional holders of the Company's
outstanding shares of Series B Preferred Stock converted a total of 250
shares of Series B Preferred Stock, including accrued and unpaid dividends.
The conversion terms were identical to those terms offered to holders who
converted their shares of Series B Preferred stock in connection with the
Private Placement. Upon conversion, the converting Preferred Stockholders
received 120,040 shares of common stock and new warrants to purchase
120,040 shares of common stock at a strike price of $3.0571 per share of
common stock. These new warrants also expired unexercised on June 9, 2005.
The Company recorded a third quarter 2004 non-cash charge in the amount of
$25,000 as an additional preferred stock deemed dividend, representing the
fair market value of inducement conveyed to the converting Preferred
Stockholders.
3. DISCONTINUED OPERATIONS OF MCM
During the third quarter of 2004, the Board of Directors of the Company
approved a plan to discontinue the business of MCM and sell all of its
manufacturing assets. The Company made its determination to exit the
contract manufacturing business as the result of recent unacceptable losses
in that business that have adversely affected the consolidated financial
results of the Company, as well as industry and market factors and recent
projections of operations that are not favorable to the Company in the
foreseeable future.
On December 30, 2004, the Company sold the contract manufacturing assets
and business of the MCM disposal group to InstruTech Florida, LLC
("InstruTech Florida"), a newly formed wholly-owned subsidiary of
InstruTech, Inc., a Colorado-based contract manufacturer of printed circuit
boards and other instrumentation products. InstruTech Florida issued a
promissory note in the amount of $780,000 to the Company for the assets and
business acquired. In connection with the sale to InstruTech Florida, the
Company provided $50,000 in the form of a bridge loan to InstruTech
Florida. The Company recorded a loss during the fourth quarter of 2004 in
the amount of $3,355,000 on the disposal of MCM, including a loss of
$2,835,000 on the disposal of the MCM assets.
On May 9, 2005, the Company received notice that InstruTech Florida
intended to discontinue the acquired business. As a result, the Company
took possession of the purchased equipment from InstruTech Florida and
commenced liquidating the equipment. The Company also completed an estimate
of the net recoverable value of the equipment, including the effect on the
recovery of the
F-18
note receivable from InstruTech Florida and amounts advanced under terms of
the bridge loan. As a result, the Company recorded an additional provision
for loss on the disposal of MCM (and its remaining net assets) by $300,000
during the first quarter of 2005.
Management has updated its estimated net recovery values of MCM assets
through December 31, 2005, and believes no additional loss on disposal of
the discontinued assets will be required. However, the Company cannot
provide any assurance of the timing and amounts that will ultimately be
recovered from the liquidation of the remaining inventory and equipment,
and recovery of accounts receivable.
At December 31, 2005, all liabilities of the MCM disposal group have been
paid. The remaining assets of the MCM disposal group in the aggregate
amount of $192,821 at December 31, 2005, consists of the Company's best
estimate of the recovery value of accounts receivable, miscellaneous
production equipment and inventory.
The assets and liabilities of the MCM disposal group at December 31, 2004,
consisted of the following:
Assets:
Accounts receivable, net $416,370
Inventory, net 368,265
--------
$784,635
========
Liabilities:
Capital lease terminations $580,446
Operating lease obligations 97,738
Employee severance obligations 165,465
--------
$843,649
========
Revenues of the MCM disposal group for the years ended December 31, 2004
and 2003 were $3,976,000 and $2,369,000, respectively. Operations of the
MCM disposal group had previously been included in the Company's Metretek
Florida operating segment.
4. SERIES B PREFERRED STOCK
On February 4, 2000, the Company completed a $14,000,000 private placement
(the "Units Private Placement") of 7,000 units ("Units"), with each Unit
consisting of 200 shares of common stock, 1 share of Series B Preferred
Stock and warrants ("Unit Warrants") to purchase 100 shares of common
stock. In the Units Private Placement, the Company issued 1,400,000 shares
of common stock, 7,000 shares of Series B Preferred Stock and Unit Warrants
to purchase 700,000 shares of common stock. The Series B Preferred Stock
was subject to a mandatory redemption date of December 9, 2004. The Unit
Warrants expired unexercised on December 9, 2004.
The proceeds from the sale of the Units were allocated to common stock, the
Unit Warrants, and the Series B Preferred Stock based on the relative fair
value of each on the date of issuance. This allocation process resulted in
certain Series B Preferred Stock being initially recorded at a discount of
$141 per share from its $1,000 per share liquidation value. The
amortization of the discount, along with the preferred stock dividend at a
rate of 8%, was recorded as a distribution over the term of the Series B
Preferred Stock.
F-19
In connection with the Private Placement (see Note 2), a total of 2,750
shares of the Series B Preferred Stock were converted to common stock
during 2004. The remaining 4,250 shares of Series B Preferred Stock were
redeemable on December 9, 2004 at a liquidation preference of $1,000 per
share plus accrued and unpaid dividends at an annual rate of 8%. The total
redemption obligation of the 4,250 Series B Preferred Stock shares at
December 9, 2004 was $6,239,000. During the year ended December 31, 2004,
the Company fully retired 3,641 of the preferred stock shares at a total
redemption value of $5,345,000. During the year ended December 31, 2005,
the Company retired an additional 333 shares of the preferred stock at a
redemption value of $489,000. At December 31, 2005, the Company's
redemption obligation on the remaining 276 preferred stock shares is
$405,000. The Company expects to retire the remaining preferred stock
shares during 2006 as the holders of the remaining preferred shares present
such shares to the Company for redemption.
5. ACQUISITION OF MINORITY INTEREST IN POWERSECURE
Effective January 1, 2003, PowerSecure authorized the issuance of shares
totaling up to 15% of its outstanding common stock to its employees,
including 7% to the President and Chief Executive Officer of PowerSecure,
as equity incentive compensation. At December 31, 2003, shares representing
13.88% of the outstanding shares of PowerSecure had been issued to
PowerSecure employees.
The Company recognized compensation expense in the amount of $15,000 during
the first quarter of 2003 upon the issuance of shares of PowerSecure to its
employee shareholders based on the estimated fair value of the shares on
the date of issuance, net of amounts owed by PowerSecure to the Company.
The minority interest in the income of PowerSecure for the year ended
December 31, 2003, was $207,280, and is included as a separate line-item in
the consolidated statements of operations.
During the third quarter of 2004, the Company entered into agreements to
exchange 950,000 shares of the Company's common stock for the 13.88%
minority interest in PowerSecure. Upon approval by certain shareholders of
the Company and the receipt of a fairness opinion, the exchanges occurred
on November 22, 2004, at which time PowerSecure became a wholly-owned
subsidiary of the Company. Accounting for the acquisition of the minority
interest was based upon the fair value of the stock of the Company issued
in the acquisition. As a result of the transaction, the Company's
obligation to the PowerSecure's minority shareholders in the amount of
$300,000 was eliminated, 950,000 shares of the Company's common stock was
issued, and goodwill in the amount of $1,202,000 was recorded on the books
of PowerSecure representing the excess of the fair value of the shares
issued in the acquisition over the historical book basis of the minority
interest acquired.
F-20
6. DEBT
The balance of notes payable at December 31, 2005 and 2004 consists of the
following:
2005 2004
----------- -----------
Lines of credit $ 1,314,200 $ 2,621,281
Term loans:
Settlement note payable 1,687,500 2,437,500
Equipment and project loans 1,210,604 1,138,203
Investment loan 629,505 824,171
Mortgage loan -- 225,898
----------- -----------
Total notes payable 4,841,809 7,247,053
----------- -----------
Less current maturities:
Settlement note payable (750,000) (750,000)
Equipment and project loans (300,453) (225,027)
Investment loan (197,833) (187,769)
Mortgage loan -- (9,192)
----------- -----------
Current maturities of notes payable (1,248,286) (1,171,988)
----------- -----------
Long-term maturities of notes payable $ 3,593,523 $ 6,075,065
=========== ===========
LINES OF CREDIT - On September 2, 2005, the Company, along with Southern
Flow, PowerSecure and Metretek Florida, entered into a Credit Agreement
(the "Credit Agreement") with First National Bank of Colorado (the "FNBC"),
providing for a $4.5 million revolving credit facility (the "Credit
Facility"). Southern Flow and PowerSecure are the borrowers under the
Credit Facility. Amounts borrowed under the Credit Facility bear interest
at a rate of prime plus one and a half percent (prime + 1.50%) (7.75% at
December 31, 2005). The Credit Facility matures on September 1, 2007. The
Credit Facility refinanced the Company's existing credit facility with
Wells Fargo Business Credit, Inc. ("Wells Fargo"). The Credit Facility is
expected to be used primarily to fund the operations and growth of
PowerSecure, as well as the operations of Southern Flow and Metretek
Florida.
The Credit Facility is structured in two parts: a $2.5 million facility for
PowerSecure (the "PowerSecure Facility") and a $2.0 million facility for
Southern Flow (the "Southern Flow Facility"). Borrowings under the
PowerSecure Facility are limited to a borrowing base consisting of the sum
of 75% of PowerSecure's eligible accounts receivable, plus 25% of the sum
of PowerSecure's unbilled accounts receivable less the amount of
PowerSecure's unearned revenues or advanced billings on contracts, plus 25%
of PowerSecure's inventory. Borrowings under the Southern Flow Facility are
limited to a borrowing base consisting of the sum of 80% of Southern Flow's
eligible accounts receivable, plus 20% of Southern Flow's inventory, plus
70% of Metretek Florida's eligible accounts receivable. As of December 31,
2005, the aggregate borrowing base under the Credit Facility was
$4,500,000, of which $1,314,000 had been borrowed, leaving $3,186,000 in
unused Credit Facility availability.
The obligations of PowerSecure and Southern Flow, as borrowers, under the
Credit Agreement are secured by security agreements (the "Security
Agreements") by Southern Flow, PowerSecure and Metretek Florida and are
guaranteed by the Company in a guaranty (the "Guaranty"). The Security
Agreements grant to FNBC a first priority security interest in virtually
all of the assets of each of the parties to the Credit Agreement.
F-21
The Credit Agreement contains customary representations and warranties and
affirmative and negative covenants, including financial covenants
pertaining to minimum cash flow coverage ratios and maximum debt to
tangible net worth ratios of the Company and PowerSecure, minimum current
assets to current liabilities ratios of PowerSecure and Southern Flow, as
well as a minimum tangible net worth by Southern Flow. The Credit Agreement
does not contain any financial covenants pertaining to Metretek Florida.
The Credit Agreement contains other customary covenants that apply to the
Company, PowerSecure, Southern Flow and Metretek Florida, limiting the
incurrence of additional indebtedness or liens, restricting dividends and
redemptions of capital stock, restricting their ability to engage in
mergers, consolidations, sales and acquisitions, to make investments, to
issue guarantees of other obligations, to engage in transactions with
affiliates to or make restricted payments and other matters customarily
restricted in secured loan agreements, without FNBC's prior written
consent.
The Credit Agreement contains customary events of default, including
payment defaults, breach of representations and warranties, covenant
defaults, cross-defaults, certain bankruptcy or insolvency events, judgment
defaults and certain ERISA-related events. The Credit Facility also
contains an annual unused credit line fee.
In connection with entering the Credit Agreement described above, the
Company terminated its credit facility with Wells Fargo (the "Wells Fargo
Credit Facility"). The Wells Fargo Credit Facility was a $3.26 million
secured revolving line of credit that previously constituted the Company's
primary credit facility and was scheduled to expire on September 30, 2006.
In connection with the termination of the Wells Fargo Credit Facility, the
Company paid Wells Fargo a $32,600 termination fee, which is included in
interest and finance charges in the accompanying consolidated statements of
operations, representing one percent (1%) of the maximum line of
$3,260,000.
TERM LOANS - In connection with the settlement of the class action
litigation more fully described in Note 8, the Company issued a term note
payable in the amount of $3.0 million (the "Settlement Note"). The
Settlement Note bears interest at the rate of prime plus three percent
(8.25% at December 31, 2005) is payable in 16 quarterly installments, each
of $187,500 principal plus accrued interest. The Settlement Note is
guaranteed by all of the Company's subsidiaries. The Company commenced
payments on the Settlement Note on June 30, 2004. At December 31, 2005 and
2004, the principal balance due on the Settlement Note was $1,687,500 and
$2,437,500, respectively.
During the first quarter of 2004, the Company acquired additional equity
interests in MGT's unconsolidated affiliate, which acquisition was financed
through a $961,000 term loan from a commercial bank to CAC LLC (the
"Investment Loan"). The Investment Loan is collateralized 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 loan. The Investment Loan provides for 60
monthly payments of principal and interest (at a rate of 5.08%). Cash
distributions from MM 1995-2 to CAC LLC have been used to fund the monthly
payments on the Investment Loan. At December 31, 2005 and 2004, the
principal balance due on the Investment Loan was $629,505 and $824,171,
respectively.
PowerSecure currently has three shared savings project loans outstanding to
Caterpillar Financial Services Corporation ("Caterpillar") at December 31,
2005. PowerSecure had two shared savings project loans outstanding to
Caterpillar at December 31, 2004. The project loans are collateralized by
the distributed generation equipment purchased from Caterpillar as well as
the revenues generated
F-22
by the PowerSecure projects. The project loans provide for 60 monthly
payments of principal and interest (at rates ranging from 6.75% to 7.85%)
in the aggregate amount of approximately $31,000 per month. Monthly
payments on the project loans are being funded through payments from
customers utilizing the distributed generation equipment on their sites. At
December 31, 2005 and 2004, the principal balance due on the Caterpillar
project loans was $1,200,133 and $1,120,069, respectively.
On May 9, 2005, Caterpillar offered PowerSecure a $5,000,000 line of credit
to finance the purchase, from time to time, of Caterpillar generators to be
used in PowerSecure projects, primarily in shared savings arrangements,
pursuant to a letter by Caterpillar to PowerSecure containing the terms of
this credit line. Under this line of credit, PowerSecure may submit
equipment purchases to Caterpillar for financing, and Caterpillar may
provide such financing in its discretion at an interest rate, for a period
of time between 12 and 60 months and upon such financing instruments, such
as a promissory note or an installment sales contract, as are set by
Caterpillar on a project by project basis. With respect to any equipment
financed by Caterpillar, PowerSecure must make a 10% cash down payment of
the purchase price and grant to Caterpillar a first priority security
interest in the equipment being financed as well as other equipment related
to the project.
The line of credit expires on April 30, 2006 (subject to renewal, if
requested by PowerSecure and accepted by Caterpillar in its sole
discretion), or at an earlier date upon notice to PowerSecure given by
Caterpillar in its sole discretion. The letter setting forth the terms of
the line of credit confirms the intent of Caterpillar to finance equipment
purchases by PowerSecure, but is not an unconditional binding commitment to
provide such financing. The line of credit is contingent upon the continued
credit-worthiness of PowerSecure in the sole discretion of Caterpillar. At
December 31, 2005, PowerSecure had $3.8 million available for additional
equipment purchases under the Caterpillar line of credit.
During 2003, PowerSecure financed the acquisition of certain construction
equipment with proceeds of a loan from Caterpillar Financial Services
Corporation (the "PowerSecure Equipment Loan"). The PowerSecure Equipment
Loan is collateralized by the equipment purchased from Caterpillar. Amounts
borrowed under the PowerSecure Equipment Loan bear interest at 3.2%. The
term of the PowerSecure Equipment Loan is 48 months and monthly principal
and interest payments in the amount of $671 commenced May 1, 2003. At
December 31, 2005 and 2004, the principal balance due on the PowerSecure
Equipment Loan was $10,471 and $18,134, respectively.
In December 2001, Southern Flow entered into a $250,000 loan agreement (the
"Mortgage Loan") with a mortgage lender, which was modified in April 2003.
On December 20, 2005, the outstanding balance on the Mortgage Loan in the
amount of $216,706 was paid to the mortgage lender and the Mortgage Loan
was extinguished. There was no gain or loss on the early extinguishment of
the Mortgage Loan. Prior to its extinguishment, the Mortgage Loan was
collateralized by land and a building owned by Southern Flow in Dallas,
Texas; it bore interest at 9%; it required monthly principal and interest
installment payments in the amount of $2,429; and it was due and payable on
November 1, 2007. At December 31, 2004, the principal balance due on the
Mortgage Loan was $225,898.
Aggregate annual maturities of long-term debt for the years 2006 to 2010
are $1,248,000, $2,588,000, $746,000, $231,000, and $29,000, respectively.
F-23
7. CAPITAL LEASE OBLIGATIONS
Capital lease obligations at December 31, 2005 and 2004 consist of an
equipment lease at Metretek Technologies payable in monthly installments,
including interest, at 11.13%. The scheduled annual payments on the
Metretek Technologies capital lease obligation are as follows:
YEAR ENDING DECEMBER 31:
2006 $4,480
2007 3,360
------
Total minimum lease payments 7,840
Less: Interest included in the lease payments 746
------
Present value of minimum lease payments $7,094
======
8. COMMITMENTS AND CONTINGENCIES
CLASS ACTION AND RELATED LITIGATION - In January 2001, a class action was
filed in the District Court for the City and County of Denver, Colorado
against the Company and certain affiliates and parties unrelated to the
Company. The class action alleged that the defendants violated certain
provisions of the Colorado Securities Act in connection with the sale of
interests in an energy program of which MGT was the managing trustee.
A settlement to fully resolve all claims by the class against the Company
and its affiliates was submitted and granted final approval by the district
court on June 11, 2004. The loss that occurred as a result of the class
action and settlement was recorded by the Company in the fourth quarter of
2002.
The Company is vigorously pursuing cross-claims and third party claims
("Other Party Claims"), including claims against the prior owners of the
assets and against attorneys, consultants and a brokerage firm (the "Other
Parties") involved in the transactions underlying the claims in the Class
Action, seeking recovery of damages and contribution, among other things,
from the Other Parties. Some of the Other Parties have asserted
counterclaims against the Company, which the Company is aggressively
defending and believes are without merit. Out of any net recovery from the
resolution of any of these claims, which is calculated by deducting the
Company's litigation expenses and any counterclaims against us that result
in a recovery by Other Parties related to the Other Parties' liability to
the Class (but is calculated without deducting any other counterclaims
successfully asserted against us by the Other Parties), 50% would be
allocated to offset our obligations under the Settlement Note, and the
remaining 50% would be allocated to additional settlement funds. The
Company cannot provide any assurance that it will be successful on any of
these Other Party Claims or the Other Party counterclaims or, even if
successful, on the amount, if any, or the timing of any recovery from any
of these claims.
A trial on all remaining claims is currently set for August 2007. The
Company cannot provide any assurance that it will be successful on any of
the remaining claims by or against the prior owners of the assets or the
Other Parties or, even if successful, on the amount, if any, or the timing
of any recovery from any of these claims.
F-24
From time to time, the Company is involved in other disputes and legal
actions arising in the ordinary course of business. The Company intends to
vigorously defend all claims against us. Although the ultimate outcome of
these claims cannot be accurately predicted due to the inherent uncertainty
of litigation, in the opinion of management, based upon current
information, no other currently pending or overtly threatened dispute is
expected to have a material adverse effect on our business, financial
condition or results of operations.
OTHER MATTERS - (Unaudited) During the first quarter 2006, the Company
received a letter from the Market Regulation Department of the NASD, on
behalf of the American Stock Exchange, advising that it is conducting a
review of trading activity in the Company's common stock from November 2005
until the present. The NASD has requested various documents and information
in connection with the Company's announcements, contracts and orders during
that time period. Management of the Company is cooperating fully with this
review and is providing to the NASD the documentation that confirms all
such contracts and orders supporting the Company's announcements. The NASD
letter states that its inquiry should not be construed as an indication
that the NASD has determined that any violations of American Stock Exchange
rules or federal securities laws have occurred, or a reflection upon the
merits of the securities involved or upon any person who effected
transactions in such securities. While the Company believes it has complied
with all applicable laws, rules and regulations in the reviewed activity,
the Company cannot provide any assurance of the outcome of this inquiry.
From time to time, the Company hires employees that are subject to
restrictive covenants, such as non-competition agreements with their former
employers. The Company complies, and requires our employees to comply, with
the terms of all known restrictive covenants. However, the Company has in
the past and may in the future receive claims and demands by some former
employers alleging actual or potential violations of these restrictive
covenants. While the Company does not believe any pending claims have
merit, the Company cannot provide any assurance of the outcome of these
claims.
OPERATING LEASES - The Company leases business facilities and vehicles
under operating lease agreements which specify minimum rentals.
Substantially all leases have renewal provisions. Rental expense for the
years ended December 31, 2005, 2004 and 2003 totaled $1,183,102, $1,048,892
and $1,327,828, respectively. Future minimum rental payments under
noncancelable operating leases having an initial or remaining term of more
than one year are as follows:
YEAR ENDING DECEMBER 31:
2006 $ 699,024
2007 683,391
2008 513,265
2009 409,344
2010 and thereafter 1,968,864
----------
Total $4,273,888
==========
EMPLOYEE BENEFIT PLAN - The Company has adopted a defined contribution
savings and investment plan (the "401(k) Plan") under Section 401(k) of the
Internal Revenue Code. All employees age 21 or older with at least one year
of service are eligible to participate in the 401(k) Plan. The 401(k) Plan
provides for discretionary contributions by employees of up to 15% of their
eligible compensation. The Company may make discretionary matching
contributions up to 50% of participant contributions, subject to a maximum
of 6% of each participant's eligible compensation. The Company's 401(k)
Plan expense for the years ended December 31, 2005, 2004 and 2003 was
$221,576, $216,114 and $188,336, respectively.
EMPLOYMENT AGREEMENTS - The Company has employment agreements with its
executive officers and with other key employees which provide for base
salary, incentive compensation, "change-in-control" provisions,
non-competition provisions, severance arrangements, and other normal
employment terms and conditions.
9. INCOME TAXES
Income tax expense included in the consolidated statements of operations
represents state income taxes in various state jurisdictions in which the
Company has taxable activities. The Company's income tax (provision)
benefit is summarized as follows:
F-25
2005 2004 2003
----------- --------- -----------
Current:
Federal $ -- $ -- $ --
State (46,000) (48,000) (57,000)
----------- --------- -----------
Total current (46,000) (48,000) (57,000)
----------- --------- -----------
Deferred:
Federal -- -- --
State -- -- --
----------- --------- -----------
Total deferred -- -- --
----------- --------- -----------
Total (provision) benefit $ (46,000) $ (48,000) $ (57,000)
=========== ========= ===========
No federal income tax expense or benefit has been recognized during the
years ended December 31, 2005, 2004 and 2003 because of net operating
losses incurred and because a valuation allowance has been provided for
100% of the net deferred tax assets at December 31, 2005 and 2004.
Total income tax expense from continuing operations differs from the amount
computed by applying the statutory federal income tax rate to income from
continuing operations before income tax expense. Following is a table
reconciling such differences:
2005 2004 2003
----- ----- -----
Federal statutory rate 34.0% 34.0% 34.0%
Increases (decreases) in tax from:
State income taxes, net of federal benefit 1.7% 2.9% 3.0%
Valuation allowance -34.0% -34.0% -34.0%
------ ------ ------
Total effective income tax rate from
continuing operations 1.7% 2.9% 3.0%
====== ====== ======
The components of the Company's federal and state deferred tax assets and
liabilities at December 31, 2005 and 2004 are shown below:
2005 2004
------------ ------------
Deferred tax assets:
Net operating loss carryforwards $ 18,810,000 $ 19,672,000
Tax credit carryforwards 45,000 45,000
Allowance for bad debts 37,000 289,000
Lease termination costs 264,000
------------ ------------
Total deferred tax assets 18,892,000 20,270,000
------------ ------------
Deferred tax liabilities:
Differences between book and tax basis of
property and equipment and intangible assets 2,659,000 1,637,000
Other 74,000 154,000
------------ ------------
Total deferred tax liabilities 2,733,000 1,791,000
------------ ------------
Net deferred tax asset 16,159,000 18,479,000
Valuation allowance (16,159,000) (18,479,000)
------------ ------------
Total $ 0 $ 0
============ ============
F-26
Because of the Company's history of losses, management believes that based
on all available evidence, it is more likely than not that the net deferred
tax assets will not be fully realized. Further, because the Company has
only recently been profitable and future profitability is not certain,
management has recorded a valuation allowance for 100% of the net deferred
tax asset at December 31, 2005 and 2004.
At December 31, 2005, the Company had unused federal net operating losses
to carry forward against future years' taxable income of approximately
$48,229,000 and various state carryforwards that expire in various amounts
from 2006 to 2017. At December 31, 2005, the Company also had unused
investment tax credits, general business tax credits, and research and
development tax credit carryforwards expiring in various amounts from 2006
to 2008.
10. CAPITAL STOCK
MINORITY INTEREST - The Company, through MGT, owns a 73.75% interest in CAC
LLC. CAC LLC was formed in January 2004 to acquire additional interests in
the Company's unconsolidated affiliate, MM 1995-2. The minority
shareholder's interest in the income of CAC LLC at for the years ended
December 31, 2005 and 2004 was $210,875 and $145,071, respectively, and is
included in minority interest in the accompanying consolidated financial
statements. Distributions to CAC LLC's minority interest shareholder during
the years ended December 31, 2005 and 2004 were $130,912 and $55,701,
respectively.
Effective January 1, 2003, PowerSecure authorized the issuance of shares
totaling up to 15% of its outstanding common stock to its employees,
including 7% to the President and Chief Executive Officer of PowerSecure,
as equity incentive compensation. At December 31, 2003, shares representing
13.88% of the outstanding shares of PowerSecure had been issued to
PowerSecure employees. The Company acquired the minority interest shares
held by the PowerSecure employees in November 2004 (see Note 5). The
minority interest in the income of PowerSecure for the period from January
1, 2004 to November 22, 2004 was $92,896. The minority interest in the
income of PowerSecure for the year ended December 31, 2003, was $207,280.
These amounts are included in minority interest in the accompanying
consolidated financial statements. There were no distributions to
PowerSecure's minority interest shareholders during the years ended
December 31, 2004 or 2003.
STOCKHOLDER RIGHTS PLAN - On December 12, 1991, the Board of Directors of
the Company adopted a Stockholder Rights Plan, which was amended and
restated on October 25, 2001 in order to extend, renew and modify its terms
(as amended and restated the "Rights Plan"), to protect stockholder
interests against takeover strategies that may not provide maximum
shareholder value. Pursuant to the Rights Plan, a dividend of one preferred
stock purchase right ("Right") was issued with respect to each share of
common stock outstanding on December 9, 1991, and attaches to each share of
common stock issued there after by the Company. No separate certificates
representing the Rights have been issued. Each Right entitles the holder to
purchase one one-hundredth of a share of Series C. Preferred Stock of the
Company at an exercise price of $15.00 per share under certain
circumstances. This portion of a preferred share provides the holder with
approximately the same dividend, voting and liquidation rights as one share
of common stock. If any person or group (referred to as an "Acquiring
Person") becomes the beneficial owner of, or announces a tender offer that
would result in the Acquiring Person becoming the beneficial owner of, 15%
or more of the Company's common stock (subject to certain exceptions), then
each Right, other than Rights held by the Acquiring Person which become
void, will become exercisable for common stock of the Company, or of the
Acquiring
F-27
Person in the case where the Acquiring Person acquires the Company, having
a then current market value of twice the exercise price of the Right. At
the option of the Board of Directors, the Rights may be redeemed for $0.01
per Right or exchanged for shares of Company common stock at the exchange
rate of one share per Right, in each cases subject to adjustment. Until a
Right is exercised, the holder thereof, as such has no rights as a
stockholder of the Company. The Rights will expire on November 30, 2011,
unless such date is extended prior thereto by the Board of Directors.
STOCK OPTIONS - The Company has granted stock options to employees,
directors, advisors and consultants under three stock plans. Under the
Company's 1991 Stock Option Plan, as amended (the "1991 Stock Plan"), the
Company granted incentive stock options and non-qualified stock options to
purchase common stock to officers, employees and consultants. Options
granted under the 1991 Stock Plan contained exercise prices not less than
the fair market value of the Company's common stock on the date of grant
and had a term of ten years, the vesting of which was determined on the
date of the grant, but generally contain a 2-4 year vesting period. Under
the Company's Directors' Stock Plan as amended ("Directors' Stock Plan"),
the Company granted non-qualified stock options to purchase common stock to
non-employee directors of the Company at an exercise price not less than
the fair market value of the Company's common stock on the date of grant.
Options granted under the Director's Stock Plan generally had a term of ten
years and vested on the date of grant. Certain options granted to officers
and non-employee directors under the 1991 Stock Plan and the Directors
Stock Plan contain limited rights for receipt of cash for appreciation in
stock value in the event of certain changes in control.
In March 1998, the Board of Directors of the Company adopted the Metretek
Technologies, Inc. 1998 Stock Incentive Plan (the "1998 Stock Plan"), which
was approved by the Company's stockholders at the Annual Meeting of
Stockholders held on June 12, 1998. The 1998 Stock Plan authorizes the
Board of Directors to grant incentive stock options, non-qualified stock
options, stock appreciation rights, restricted stock, performance awards
and other stock-based awards to officers, directors, employees, consultants
and advisors of the Company and its subsidiaries for shares of the
Company's common stock. The 1998 Stock Plan replaced the Company's 1991
Stock Plan and Directors' Stock Plan (the "Prior Plans"), and no new awards
have been made under the Prior Plans since the 1998 Stock Plan was adopted,
although options outstanding under the Company's Prior Plans remain in
effect under these terms. On February 3, 2000, the stockholders of the
Company adopted a proposal by the Board of Directors to increase the number
of shares available under the 1998 Stock Plan from 250,000 to 750,000
shares of common stock. On June 11, 2001, the stockholders of the Company
adopted a proposal by the Board of Directors to increase the number of
shares available under the 1998 Stock Plan to a total of 1,750,000 shares
of common stock of the Company. On June 14, 2004, the stockholders of the
Company adopted a proposal by the Board of Directors to increase the number
of shares available under the 1998 Stock Plan to a total of 2,750,000
shares of common stock of the Company. The following table summarizes the
Company's stock option activity since January 1, 2003:
F-28
1998 STOCK DIRECTORS STOCK 1991 STOCK
INCENTIVE PLAN OPTION PLAN OPTION PLAN
-------------------- ----------------- ------------------
WEIGHTED WEIGHTED WEIGHTED
NUMBER AVERAGE NUMBER AVERAGE NUMBER AVERAGE
OF OPTION OF OPTION OF OPTION
SHARES PRICE SHARES PRICE SHARES PRICE
--------- -------- ------ -------- ------- --------
Outstanding at
January 1, 2003 1,518,681 $2.03 37,500 $2.00 167,409 $2.00
Granted 271,500 1.54
Expired (131,165) 1.97 (7,500) 2.00 (44,000) 2.00
--------- ------ -------
Outstanding at
December 31, 2003 1,659,016 1.96 30,000 2.00 123,409 2.00
Granted 389,500 3.11
Exercised (240,332) 1.52 (7,500) 2.00 (15,719) 2.00
Expired (11,334) 6.53 (7,500) 2.00 (2,188) 2.00
Forfeited (21,000) 2.26
--------- ------ -------
Outstanding at
December 31, 2004 1,775,850 2.24 15,000 2.00 105,502 2.00
Granted 649,333 4.71
Exercised (234,333) 1.66 (2,500) 2.00 (1,375) 2.00
Expired (7,500) 4.93 (7,500) 2.00
Forfeited (3,334) 2.13
--------- ------ -------
Outstanding at
December 31, 2005 2,180,016 $3.03 5,000 $2.00 104,127 $2.00
========= ====== =======
Exercisable at
December 31:
2005 1,761,072 $2.88 5,000 $2.00 104,127 $2.00
========= ====== =======
2004 1,432,434 $2.09 15,000 $2.00 105,502 $2.00
========= ====== =======
2003 1,529,183 $1.99 30,000 $2.00 123,409 $2.00
========= ====== =======
The weighted average grant date fair values of options granted during the
years ended December 31, 2005, 2004 and 2003 were $2.07, $1.03 and $0.42
per share, respectively. The fair values of stock options were calculated
using the Black-Scholes stock option valuation model with the following
weighted average assumptions for grants during the years ended December 31,
2005, 2004 and 2003: expected volatility of 50%, 58% and 107%,
respectively; risk-free interest rate of 4.19%, 3.53% and 3.50%,
respectively; dividend rate of 0% annually; and an expected life of 4 years
for options granted to employees and 10 years for options granted to
directors.
During the year ended December 31, 2005, incentive stock options to
purchase 616,000 shares of common stock were granted to employees and
non-qualified stock options to purchase 33,333 shares of common stock were
granted to non-employee directors of the Company. During the year ended
December 31, 2004, incentive stock options to purchase 382,000 shares of
common stock were granted to employees and non-qualified stock options to
purchase 7,500 shares of common stock were granted to non-employee
directors of the Company. During the year ended December 31, 2003,
incentive stock options to purchase 264,000 shares of common stock were
granted to employees and non-qualified stock options to purchase 7,500
shares of common stock
F-29
were granted to non-employee directors of the Company. The following table
summarizes information about all of the Company's stock options outstanding
at December 31, 2005:
RANGE OF NUMBER OF WEIGHTED AVERAGE WEIGHTED AVERAGE
EXERCISE PRICES SHARES EXERCISE PRICE REMAINING LIFE (YEARS)
--------------- --------- ---------------- ----------------------
$ 0.46 to $1.74 1,014,500 $1.49 5.18
$ 1.75 to $2.99 165,625 2.19 3.62
$ 3.00 to $4.49 693,000 3.31 8.66
$ 4.50 to $5.99 115,672 5.06 5.33
$6.00 to $17.38 300,346 6.85 8.69
--------------- --------- ----- ----
$ 0.46 - $17.38 2,289,143 $2.98 6.59
=============== ========= ===== ====
11. SEGMENT AND RELATED INFORMATION
In accordance with FAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information," the Company defines operating segments
as components of an enterprise for which discrete financial information is
available and is reviewed regularly by the chief operating decision-maker,
or decision-making group, to evaluate performance and make operating
decisions. The Company's reportable segments are strategic business units
that offer different products and services. They are managed separately
because each business requires different technology and marketing
strategies. The Company's reportable business segments include: natural gas
measurement services; distributed generation; automated energy data
management; and Internet-based energy information and services.
The operations of the Company's natural gas measurement services segment
are conducted by Southern Flow. Southern Flow's services include on-site
field services, chart processing and analysis, laboratory analysis, and
data management and reporting. These services are provided principally to
customers involved in natural gas production, gathering, transportation and
processing.
The operations of the Company's distributed generation segment are
conducted by PowerSecure. PowerSecure commenced operations in September
2000. The primary elements of PowerSecure's distributed generation products
and services include project design and engineering, negotiation with
utilities to establish tariff structures and power interconnects, generator
acquisition and installation, process control and switchgear design and
installation, and ongoing project monitoring and servicing. PowerSecure
markets its distributed generation products and services directly to large
end-users of electricity and through outsourcing partnerships with
utilities. Through December 31, 2005, the 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. During the second half of fiscal 2005, PowerSecure added two
new business units, UtilityEngineering, Inc. and PowerServices, Inc., to
its operating segment and in February 2006, it announced a third addition
to its operations, EnergyLite, Inc. PowerServices provides rate analysis
and other similar consulting services to PowerSecure's utility, commercial
and industrial customers. Utility Engineering provides fee-based, technical
engineering services to PowerSecure's utility partners and customers.
EnergyLite assists customers in reducing their use of energy through
investments in more energy-efficient technologies. Each business unit
F-30
operates in a distinct market with distinct technical disciplines, but each
business unit share a common customer base which PowerSecure intends to
service and grow through shared resources and customer leads. Accordingly,
these units will be included within PowerSecure's segment results in future
periods.
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. During the third quarter of 2004,
the Board of Directors of the Company approved a plan to discontinue the
business of MCM and sell all of its manufacturing assets. See Note 3.
The accounting policies of the reportable segments are the same as those
described in Note 1 of the Notes to Consolidated Financial Statements. The
Company evaluates the performance of its operating segments based on
operating income (loss) before income taxes, nonrecurring items and
interest income and expense. Intersegment sales are not significant.
Summarized financial information concerning the Company's reportable
segments is shown in the following table. The "Other" column includes
corporate related items, revenues and expenses from managing MM 1995-2,
results of insignificant operations and, as it relates to segment profit or
loss, income and expense (including nonrecurring charges) not allocated to
reportable segments. The table information excludes the revenues,
depreciation, and losses of the discontinued MCM operations for all periods
presented.
F-31
SUMMARIZED SEGMENT FINANCIAL INFORMATION
(all amounts reported in thousands)
2005 2004 2003
------- ------- -------
REVENUES:
Southern Flow $13,307 $12,759 $11,805
PowerSecure 30,200 18,630 17,122
Metretek Florida 3,242 3,312 7,405
Other 504 476 142
------- ------- -------
Total $47,253 $35,177 $36,474
======= ======= =======
SEGMENT PROFIT (LOSS):
Southern Flow $ 1,824 $ 1,940 $ 1,619
PowerSecure 2,639 1,342 1,574
Metretek Florida (488) (247) 709
Other (2,774) (2,428) (2,247)
------- ------- -------
Total $ 1,201 $ 607 $ 1,655
======= ======= =======
CAPITAL EXPENDITURES:
Southern Flow $ 131 $ 163 $ 103
PowerSecure 1,107 1,967 124
Metretek Florida 87 144 65
Other 5 3 4
------- ------- -------
Total $ 1,330 $ 2,277 $ 296
======= ======= =======
DEPRECIATION AND AMORTIZATION:
Southern Flow $ 130 $ 127 $ 129
PowerSecure 273 130 66
Metretek Florida 132 289 298
Other 29 33 22
------- ------- -------
Total $ 564 $ 579 $ 515
======= ======= =======
TOTAL ASSETS:
Southern Flow $10,182 $ 9,589 $ 9,339
PowerSecure 16,644 12,836 5,701
Metretek Florida 3,663 5,262 7,098
Other 2,830 2,524 1,189
------- ------- -------
Total $33,319 $30,211 $23,327
======= ======= =======
F-32
The following table presents revenues by geographic area based on the
location of the use of the product or service:
2005 2004 2003
----------- ----------- -----------
United States $46,548,607 $34,362,625 $35,335,902
Canada 258,671 388,068 627,564
Europe 290,989 338,301 376,090
South America 117,563 60,262 44,980
Asia 10,865
Other 36,722 16,802 89,200
----------- ----------- -----------
Total $47,252,552 $35,176,923 $36,473,736
=========== =========== ===========
12. UNAUDITED QUARTERLY CONSOLIDATED FINANCIAL DATA
Summarized quarterly consolidated financial information (unaudited) for the
years ended December 31, 2005 and 2004 is as follows (in thousands, except
per share amounts):
F-33
QUARTER
------------------------------------
2005 FIRST SECOND THIRD FOURTH
---- ------ ------- ------- -------
Total revenues $7,811 $14,036 $10,177 $15,229
Operating income (loss) (451) 615 (195) 1,232
Equity income 557 365 419 349
Minority interest (71) (46) (52) (42)
Income taxes (13) -- (3) (30)
Income from continuing operations 22 934 169 1,509
Loss on discontinued operations (300) -- -- --
Net income (loss) $ (278) $ 934 $ 169 $ 1,509
Basic earnings (loss) per common share:
Income from continuing operations $ -- $ 0.08 $ 0.01 $ 0.12
Loss from discontinued operations (0.02) -- -- --
------ ------- ------- -------
Basic earnings (loss) per common share $(0.02) $ 0.08 $ 0.01 $ 0.12
====== ======= ======= =======
Diluted earnings (loss) per common share:
Income from continuing operations $ -- $ 0.07 $ 0.01 $ 0.11
Loss from discontinued operations (0.02) -- -- --
------ ------- ------- -------
Diluted earnings (loss) per common share $(0.02) $ 0.07 $ 0.01 $ 0.11
====== ======= ======= =======
QUARTER
----------------------------------
2004 FIRST SECOND THIRD FOURTH
---- ------ ------ ------- ------
Total revenues $8,415 $8,372 $ 9,181 $9,208
Operating income (loss) 58 174 (33) 407
Equity income 368 253 270 364
Minority interest (74) (67) (60) (37)
Income taxes (12) (12) (12) (12)
Income from continuing operations 340 348 165 722
Loss on discontinued operations (335) (305) (3,870) (309)
Net income (loss) $ 5 $ 43 $(3,705) $ 413
Basic earnings (loss) per common share (1):
Income from continuing operations $ 0.01 $(0.04) $ -- $ 0.05
Loss from discontinued operations (0.05) (0.03) (0.35) (0.03)
------ ------ ------- ------
Basic earnings (loss) per common share $(0.04) $(0.07) $ (0.35) $ 0.02
====== ====== ======= ======
Diluted earnings (loss) per common share (1):
Income from continuing operations $ 0.01 $(0.04) $ -- $ 0.05
Loss from discontinued operations (0.05) (0.03) (0.35) (0.03)
------ ------ ------- ------
Diluted earnings (loss) per common share $(0.04) $(0.07) $ (0.35) $ 0.02
====== ====== ======= ======
(1) Per share amounts for all 2004 quarters presented include the effects of
preferred stock deemed distributions. Per share amounts for all 2004
quarters except for the fourth quarter 2004 include the effects of
allocation of earnings, if applicable, to participating preferred stock as
required by the provisions of EITF 03-06. The preferred stock deemed
distribution for the second and third quarters of 2004 includes charges of
$593,000 in the aggregate which represents the estimated fair market value
of inducement conveyed to preferred stockholders who converted their shares
to common stock in connection with the Company's private placement in the
second quarter of 2004.
* * * * *
F-34
SCHEDULE II
METRETEK TECHNOLOGIES, INC.
VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003
(IN THOUSANDS)
ADDITIONS:
BALANCE AT CHARGED TO BALANCE AT
BEGINNING OPERATING DEDUCTIONS: END OF
DESCRIPTION OF PERIOD EXPENSES WRITE-OFFS PERIOD
----------- ---------- ---------- ----------- ----------
Allowance for doubtful accounts:
Year ended December 31, 2005.... $ 741 $ 12 $ (658)(1) $ 95
Year ended December 31, 2004.... 201 892 (352)(1) 741
Year ended December 31, 2003.... 281 54 (134)(1) 201
Inventory reserve:
Year ended December 31, 2005.... $1,548 $ 161 $(1,543)(2) $ 166
Year ended December 31, 2004.... 288 1,614 (354)(2) 1,548
Year ended December 31, 2003.... 395 152 (259)(2) 288
----------
(1) Represents amounts written off as uncollectible, less recoveries.
(2) Represents amounts written off against reserve, less recoveries.
MARCUM MIDSTREAM 1995-2 BUSINESS TRUST AND SUBSIDIARY
TABLE OF CONTENTS
PAGE
----
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM G-2
CONSOLIDATED BALANCE SHEETS AS OF DECEMBER 31, 2005 AND 2004 G-3
CONSOLIDATED STATEMENTS OF INCOME FOR THE YEARS ENDED
DECEMBER 31, 2005, 2004 AND 2003 G-4
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY FOR THE YEARS ENDED
DECEMBER 31, 2005, 2004 AND 2003 G-5
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED
DECEMBER 31, 2005, 2004 AND 2003 G-6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS G-7
G-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Trustees
Marcum Midstream 1995-2 Business Trust
Denver, CO
We have audited the accompanying consolidated balance sheets of Marcum Midstream
1995-2 Business Trust and subsidiary (the "Trust") as of December 31, 2005 and
2004, and the related consolidated statements of income, shareholders' equity,
and cash flows for each of the years in the three-year period ended December 31,
2005. These financial statements are the responsibility of the Trust's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Marcum Midstream
1995-2 Business Trust and subsidiary as of December 31, 2005 and 2004, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 2005, in conformity with U.S. generally
accepted accounting principles.
HEIN & ASSOCIATES LLP
Denver, Colorado
February 6, 2006
G-2
MARCUM MIDSTREAM 1995-2 BUSINESS TRUST AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2005 AND 2004
2005 2004
---------- ----------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 734,040 $ 617,815
Trade receivables (net of allowance for doubtful accounts
$9,777 and $9,777, respectively) 1,439,182 1,148,872
---------- ----------
Total current assets 2,173,222 1,766,687
---------- ----------
PROPERTY, PLANT AND EQUIPMENT, AT COST:
Wells and storage tanks 6,008,642 5,141,545
Equipment 2,496,013 2,077,762
Land and improvements 1,483,892 1,149,060
---------- ----------
Total 9,988,547 8,368,367
Less accumulated depletion and depreciation 3,808,457 3,209,994
---------- ----------
Property, plant and equipment, net 6,180,090 5,158,373
---------- ----------
OTHER ASSETS:
Deferred loan charges (net of accumulated amortization
of $21,439 and $16,788, respectively) 4,263 4,037
Intangible assets (net of accumulated amortization
of $8,834 and $7,500, respectively) 11,166 12,500
---------- ----------
Total other assets 15,429 16,537
---------- ----------
TOTAL $8,368,741 $6,941,597
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 530,713 $ 105,373
Administration fee 4,708 4,708
Management fee 54,980 80,371
Operator fee 8,528 6,444
Note payable (Note 3) 540,862 601,002
Accrued expenses 12,115 14,898
---------- ----------
Total current liabilities 1,151,906 812,796
---------- ----------
LONG-TERM NOTE PAYABLE (Note 3) 912,799 419,559
COMMITMENTS AND CONTINGENCIES (Note 4)
SHAREHOLDERS' EQUITY 6,304,036 5,709,242
---------- ----------
TOTAL $8,368,741 $6,941,597
========== ==========
See notes to consolidated financial statements.
G-3
MARCUM MIDSTREAM 1995-2 BUSINESS TRUST AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003
2005 2004 2003
----------- ---------- ----------
REVENUE:
Disposal fees and mineral product sales $10,239,782 $7,202,537 $5,285,104
Interest and other 23,303 6,111 26,718
----------- ---------- ----------
Total revenue 10,263,085 7,208,648 5,311,822
----------- ---------- ----------
COSTS AND EXPENSES:
Cost of operations 2,778,138 1,899,622 1,587,581
Depreciation and amortization 601,020 455,836 386,921
Well development costs 360,096
General and administrative costs 391,799 354,590 45,409
Administration fee 56,500 56,500 56,500
Management fee 511,989 360,127 214,255
Operator fee 102,332 77,332 77,332
Interest and finance charges 66,417 95,241 112,901
----------- ---------- ----------
Total costs and expenses 4,868,291 3,299,248 2,480,899
----------- ---------- ----------
NET INCOME $ 5,394,794 $3,909,400 $2,830,923
=========== ========== ==========
See notes to consolidated financial statements.
G-4
MARCUM MIDSTREAM 1995-2 BUSINESS TRUST AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003
PERFORMANCE PREFERRED
SHAREHOLDERS SHAREHOLDERS TOTAL
------------ ------------ -----------
BALANCE, JANUARY 1, 2003 $ 1,787,477 $ 1,731,442 $ 3,518,919
Cash distributions paid or payable (825,000) (825,000) (1,650,000)
Payment of deferred distributions (Note 6) (300,000) (300,000)
Net income 1,608,923 1,222,000 2,830,923
----------- ----------- -----------
BALANCE, DECEMBER 31, 2003 2,271,400 2,128,442 4,399,842
Cash distributions paid (1,050,000) (1,550,000) (2,600,000)
Net income 1,933,497 1,975,903 3,909,400
Conversion of 100 performance shares
into 113 preferred shares (3,154,897) 3,154,897
----------- ----------- -----------
BALANCE, DECEMBER 31, 2004 5,709,242 5,709,242
Cash distributions paid (4,800,000) (4,800,000)
Net income 5,394,794 5,394,794
----------- ----------- -----------
BALANCE, DECEMBER 31, 2005 $ $ 6,304,036 $ 6,304,036
=========== =========== ===========
See notes to consolidated financial statements.
G-5
MARCUM MIDSTREAM 1995-2 BUSINESS TRUST AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003
2005 2004 2003
----------- ----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 5,394,794 $ 3,909,400 $ 2,830,923
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 601,020 455,836 386,921
Changes in other assets and liabilities:
Trade receivables, net (290,310) (241,837) (159,380)
Accounts payable 425,340 2,241 (19,578)
Administration fee -- (9,417) --
Management fee (25,391) (1,046) 47,441
Operator fee 2,084 (12,889) --
Accrued expenses (2,783) 5,934 2,387
Prepaid expenses and other 7,206 5,931 8,391
----------- ----------- -----------
Net cash provided by operating activities 6,111,960 4,114,153 3,097,105
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of assets -- -- 2,650
Asset acquisitions and development (1,231,640) (589,047) --
Other capital expenditures (397,195) (341,930) (219,847)
----------- ----------- -----------
Net cash used in investing activities (1,628,835) (930,977) (217,197)
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from note payable 1,004,658 -- --
Payments on note payable (571,558) (568,628) (537,997)
Distributions to preferred shareholders (4,800,000) (1,550,000) (825,000)
Distributions paid or payable to performance shareholders (1,050,000) (825,000)
Deferred performance shareholder distributions -- -- (300,000)
----------- ----------- -----------
Net cash provided by (used in) financing activities (4,366,900) (3,168,628) (2,487,997)
----------- ----------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 116,225 14,548 391,911
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 617,815 603,267 211,356
----------- ----------- -----------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 734,040 $ 617,815 $ 603,267
=========== =========== ===========
See notes to consolidated financial statements.
G-6
MARCUM MIDSTREAM 1995-2 BUSINESS TRUST AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION - The accompanying consolidated financial statements includes
the accounts of Marcum Midstream 1995-2 Business Trust and its wholly-owned
subsidiary, Marcum Midstream 1995-2 EC Holding, LLC ("MM95-2 EC Holding"),
collectively referred to as the "Trust". The Trust commenced operations on
February 8, 1996. The Trust owns and operates five oil field production
water disposal facilities located in northeastern Colorado. MM95-2 EC
Holding was formed by the Trust in July 2002 for the purpose of acquiring
additional operating assets.
Marcum Gas Transmission, Inc. ("MGT"), a wholly-owned subsidiary of
Metretek Technologies, Inc., is the managing trustee of the Trust, and
Conquest Oil Company ("Conquest") operates certain Trust assets under an
operating agreement with the Trust. Collectively, MGT and Conquest or their
affiliates own 138.3, or 61.2%, of the 226 outstanding preferred shares of
the Trust at December 31, 2005.
In November 2004, all of the performance shares outstanding, including
those held by MGT and Conquest or their affiliates, were converted to
preferred shares of the Trust at an exchange ratio of 1.13 preferred share
for each performance share. After the conversion, there are no longer any
performance shares outstanding.
PRINCIPLES OF CONSOLIDATION - The consolidated financial statements include
the accounts of the Trust and its subsidiary. All intercompany accounts and
transactions have been eliminated in consolidation.
REVENUE RECOGNITION - Revenues from disposal fees are recognized upon
delivery and acceptance of water to be disposed. Revenues from mineral
product sales are recognized upon delivery to the customer.
INCOME TAXES - For federal and state income tax purposes, the Trust is
treated as a partnership and is not subject to federal or state income
taxes. Accordingly, no provision for federal income taxes is included in
the financial statements of the Trust and the tax effects of its activities
accrue to the shareholders. The Trust's tax returns, the qualification of
the Trust as a partnership for federal income tax purposes, and the amount
of taxable income or loss are subject to examination by federal and state
taxing authorities. If such examinations result in changes to the Trust's
taxable income, the tax liability of the shareholders could change
accordingly.
STATEMENTS OF CASH FLOWS - The Trust considers all investments with an
original maturity of three months or less at time of purchase to be cash
equivalents. Supplemental statement of cash flow information is as follows:
2005 2004 2003
------- ---------- --------
Cash paid for interest $61,939 $ 73,880 $104,510
Non-cash transaction --
Conversion of performance shares
to preferred shares of the Trust $ -- $3,154,897 $ --
G-7
RECEIVABLES AND CREDIT POLICIES - Trade receivables consist of
uncollateralized customer obligations due under normal trade terms
requiring payment within 30 days of the invoice date. The Trust reviews
trade receivables periodically and reduces the carrying amount by a
valuation allowance that reflects management's best estimate of the amount
that may not be collectible.
PROPERTY, PLANT AND EQUIPMENT - Property, plant and equipment is stated at
cost. The majority of the Trust operating assets are depreciated based upon
a units-of-production method while equipment and land improvements are
depreciated on the straight-line basis over estimated useful lives ranging
from 5 to 15 years. Management has evaluated future asset retirement
obligations and has concluded that estimated asset retirement obligations
of the Trust are not material.
OTHER INTANGIBLES - Other intangible assets are being amortized on the
straight-line basis over 15 years.
USE OF ESTIMATES - The preparation of the Trust's financial statements in
conformity with accounting principles generally accepted in the United
States of America requires management to make estimates and assumptions
that affect the amounts reported in these financial statements and
accompanying notes. Actual results could differ from those estimates.
MAJOR CUSTOMERS - Three customers have historically generated the majority
of the Trust's disposal fee revenues. In addition, revenues from mineral
product sales are currently generated from purchases by one customer,
however management believes other customers would purchase such products at
substantially the same volumes and at prevailing market prices in the event
the current customer discontinued purchasing from the Trust.
2. ASSET ACQUISITIONS
In the fourth quarter of 2004, the Trust acquired additional operating
assets and operations. The assets and operations acquired have been
included in the consolidated financial statements of the Trust since the
date of acquisition. The aggregate purchase price for the acquired assets
was $500,000, and was financed from cash generated by operations of the
Trust. The following table summarizes the estimated fair values of the
assets acquired at the date of acquisition.
Intangibles $395,600
Equipment 104,400
--------
$500,000
========
Subsequent to the acquisition and through December 31, 2005, the Trust
incurred $103,000 in renovation costs to enhance the operating efficiency
of the assets in anticipation of future growth in customer demand.
3. NOTE PAYABLE
In connection with the Trust's acquisition of certain operating assets in
the third quarter of 2002, the Trust, through MM95-2 EC Holding, entered
into a Term Loan Agreement (the "Loan Agreement") with Wells Fargo Bank
West, National Association (the "Lender") for a $2,300,000 note payable.
The Loan Agreement provided for monthly principal and interest payments on
the note to the Lender in the amount of $53,542 through the maturity date,
August 22, 2006.
G-8
In August 2005, the Trust and the Lender amended the Loan Agreement to
borrow an additional $1,005,000; to extend the term of the Loan Agreement
to August 22, 2008; and to reduce the scheduled principal and interest
payments on the note to $50,660 per month. Proceeds from the additional
borrowings were used by the Trust to develop backup capacity through the
development of a fifth facility and enhance operations at two of its
existing sites.
Interest accrues on the unpaid balance of the note at a fixed annual rate
of 5.55% per year. The Loan Agreement contains various financial and other
affirmative and negative covenants and the note is collateralized by a
first priority interest in virtually all of the assets acquired. Fees
incurred in connection with obtaining the Loan Agreement and subsequent
amendment in the amount of $25,702 have been deferred and are being
amortized over the term of the Loan Agreement. The obligations contained in
the Loan Agreement have been guaranteed by the Trust. At December 31, 2005,
scheduled principal payments on the note payable over the remaining term of
the note are as follows:
Years Ended
December 31,
------------
2006 $ 540,862
2007 571,656
2008 341,143
----------
$1,453,661
==========
4. COMMITMENTS AND CONTINGENCIES
In December 2002, after the Trust completed an acquisition of certain
operating assets, the Trust discovered certain contamination of the soils
under the site. Shortly thereafter, the Trust filed a complaint against the
seller in Colorado State District Court, for enforcement of seller
indemnifications in the asset purchase agreement. The Trust engaged an
environmental engineering firm to evaluate the extent of the contamination,
and that firm concluded that approximately 1% of the property area had been
contaminated. The environmental firm developed, and with their assistance
the Trust commenced, a remediation plan that the firm advised should bring
the assets back into compliance with applicable environmental requirements.
The seller posted a letter of credit with his bank in favor of the Trust in
the amount of the expected remediation costs plus the Trust's legal costs.
In August of 2004, under the direction of the environmental engineering
firm, the remediation plan was revised to facilitate what was believed to
be a more timely and final solution. This plan was implemented and the
Trust accepted from the seller full reimbursement for the remediation at
which time the Trust withdrew its legal action against the seller.
In early 2005, the Trust began a planned upgrade to various components of
another of its operating facilities. As the improvement project began,
soils under the facility were found to be contaminated. The environmental
firm used in the above remediation was engaged to direct the Trust on the
appropriate course to return the soils to a level in compliance within
regulatory limits. Recent results of samples from two of the monitoring
wells on the remediation sites indicate that ongoing sampling and further
vacuum extraction will likely be required over the intermediate term.
The Trust, at its expense, has and will continue a soil vapor extraction
process implemented by the environmental engineering firm overseeing the
continuing remediation work at both of the affected sites. Trust management
believes the contamination can be successfully abated by the end of 2007
with no material adverse effects to the financial position or results of
operations of the Trust. However, the nature of environmental contamination
matters is inherently uncertain, and Trust management cannot
G-9
provide any guarantee or assurance that all environmental contamination has
been identified, or that the continuing remediation efforts will be
successful. Additional contamination, either currently undetected or
undetectable or arising in the future, could later be discovered.
5. TRUST GENERAL AND ADMINISTRATIVE COSTS
During the year ended December 31, 2004, the shareholders of the Trust
approved an Amended and Restated Declaration of Trust. The Amended and
Restated Declaration of Trust authorized certain changes to fees relating
to operations of the Trust. Pursuant to the Declaration of Trust and the
Amended and Restated Declaration of Trust, the Trust incurred $218,000 and
$202,000 of Active Trustee and Trust Officer consulting and retainer fees
and compensation, and personal debt guarantee fees paid to MGT, Conquest,
or their affiliates during the years ended December 31, 2005 and 2004,
respectively. Also, during the year ended December 31, 2005, the Trust paid
$143,347 to MGT and Conquest for project management services incurred in
connection with the development of backup capacity and enhanced operating
capacity at two of the Trust's facilities. Finally, during the year ended
December 31, 2004, the Trust reimbursed Conquest $63,107 for acquisition
costs that were incurred by Conquest prior to the Trust's fourth quarter
2004 acquisition of operating assets described in Note 2.
6. CASH DISTRIBUTIONS AND PROFIT ALLOCATIONS
Cash distributions and profit and loss allocations are determined by terms
set forth in the Declaration of Trust, as amended and restated during the
year ended December 31, 2004. Generally, the Trust distributes all cash
provided by operating activities less amounts paid for acquisitions and
capital expenditures, and debt service requirements.
Upon the approval of and in accordance with the Amended and Restated
Declaration of Trust in 2004, all of the performance shares outstanding,
including those held by MGT and Conquest or their affiliates, were
converted to preferred shares of the Trust at an exchange ratio of 1.13
preferred share for each performance share. After the conversion in 2004,
there are no longer any performance shares outstanding. All profits and
cash distributions are now allocated to preferred shareholders in amounts
equal to their percentage ownership of the preferred shares of the Trust.
Prior to the approval of the Amended and Restated Declaration of Trust in
2004, all cash available for distribution subsequent to December 27, 1999
had been allocated 50% to the preferred shareholders and 50% to the
performance shareholders. Profits realized and losses incurred by the Trust
were allocated among the preferred and performance shareholders, first, to
the performance shareholders to the extent of any cash distributed or
distributable to such shareholders, and second, to preferred shareholders.
During the year ended December 31, 2002, the Trust temporarily deferred
$300,000 of the cash distributions allocated to the performance
shareholders in order to allow the Trust to expedite capital improvements
and to maintain sufficient cash reserves for debt service payments. The
deferred distributions payable to the performance shareholders at December
31, 2002 were subsequently paid to the performance shareholders of the
Trust in January 2003.
7. OTHER RELATED PARTY TRANSACTIONS
Pursuant to the Amended and Restated Declaration of Trust, MGT, as managing
trustee, is entitled to compensation for services rendered to the Trust.
The compensation includes an annual Trust administration fee equal to 1% of
the total subscriptions of preferred shareholders and an annual Trust
management fee of 5% of Trust revenues, paid quarterly in arrears. The
Trust management fee is reduced to 4% for any quarter that Trust revenues
during the prior four consecutive calendar quarters do
G-10
not exceed $3 million. Conquest, as operator, has been reimbursed for
direct operating expenses incurred during the years ended December 31, 2005
and 2004 in the amount of $963,885 and $810,552, respectively, which costs
are included in cost of operations in the accompanying statements of
income, and is paid an annual operator fee of $100,000 ($25,000 per
facility), adjusted upward or downward annually based on changes in the
consumer price index. Accounts payable at December 31, 2005 and 2004
includes a liability in the amount of $39,000 and $30,000, respectively,
payable to Conquest for unreimbursed direct operating expenses.
In December 1999, Conquest and MGT agreed to share equally all future fees
received from the Trust. These fees include the administration fee,
management fee, and operator fee.
In September 2003, the Trust entered into a License Agreement (the
"Agreement") with an entity wholly owned by the principals of the Operator.
The Agreement runs "month-to-month" and provides the Trust with an
alternative source to service the accounts of certain customers of the
Trust. The Trust is obligated to pay a monthly fee of $5,000 for rights
under the Agreement. During the year ended December 31, 2005 and 2004, the
Trust earned a net $3,094 and $2,759, respectively, under the Agreement,
which is included in interest and other revenues in the consolidated
statements of income.
* * * * *
G-11
METRETEK TECHNOLOGIES, INC.
FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 2005
EXHIBIT LIST
Number Description
------ -----------
(3.1) Second Restated Certificate of Incorporation of Metretek Technologies,
Inc. (Incorporated by reference to Exhibit 4.1 to Metretek's
Registration Statement on Form S-3, Registration No. 333-96369.)
(3.2) Amended and Restated By-Laws of Metretek Technologies, Inc.
(Incorporated by reference to Exhibit 4.2 to Metretek's Registration
Statement on Form S-8, Registration No. 333-62714.)
(4.1) Specimen Common Stock Certificate. (Incorporated by reference to
Exhibit 4.1 to Metretek's Registration Statement on Form S-18,
Registration No. 33-44558.)
(4.2) Amended and Restated Rights Agreement, dated as of November 30, 2001,
between Metretek Technologies, Inc. and Computershare Investor
Services, LLC. (Incorporated by reference to Exhibit 4.1 to Metretek's
Registration Statement on Form 8-A/A, Amendment No. 5, filed November
30, 2001.)
(4.3) Amendment No. 1, dated as of April 22, 2004, to Amended and Restated
Rights Agreement between Metretek Technologies, Inc. and ComputerShare
Investor Services, LLC. (Incorporated by reference to Exhibit 10.6 to
Metretek's Current Report on Form 8-K filed May 6, 2004).
(4.4) Form of Securities Purchase Agreement, dated as of April 29, 2004, by
and among Metretek Technologies, Inc. and the purchasers a signatory
thereto ("Investors"). (Incorporated by reference to Exhibit 10.1 to
Metretek's Current Report on Form 8-K filed May 6, 2004).
(4.5) Form of Registration Rights Agreement, dated as of April 29, 2004, by
and among Metretek Technologies, Inc. and the Investors. (Incorporated
by reference to Exhibit 10.2 to Metretek's Current Report on Form 8-K
filed May 6, 2004).
(4.6) Form of Warrant, dated May 3, 2004, issued by Metretek Technologies,
Inc. to the Investors. (Incorporated by reference to Exhibit 10.3 to
Metretek's Current Report on Form 8-K filed May 6, 2004).
(10.1) 1991 Stock Option Plan, as amended and restated December 5, 1996.
(Incorporated by reference to Exhibit 10.2 to Metretek's Annual Report
on Form 10-KSB for the year ended December 31, 1996.)*
(10.2) Directors' Stock Option Plan, as amended and restated December 2, 1996.
(Incorporated by reference to Exhibit 10.3 to Metretek's Annual Report
on Form 10-KSB for the year ended December 31, 1996.)*
(10.3) Second Amended and Restated Employment Agreement, dated as of March 20,
2006, by and between Metretek Technologies, Inc. and W. Phillip Marcum.
(Filed herewith.)*
(10.4) Second Amended and Restated Employment Agreement, dated as of March 20,
2006, by and between Metretek Technologies, Inc. and A. Bradley
Gabbard. (Filed herewith.)*
X-1
(10.5) Metretek Technologies, Inc. 1998 Stock Incentive Plan, amended and
restated as of June 14, 2004. (Incorporated by reference to Exhibit
4.3 to Metretek's Registration Statement on Form S-8, Registration No.
333-116431.)*
(10.6) Form of Incentive Stock Option Agreement under the Metretek
Technologies, Inc. 1998 Stock Incentive Plan, as amended..
(Incorporated by reference to Exhibit 10.1 to Metretek's Current
Report on Form 8-K, filed August 25, 2004)*
(10.7) Form of Non-Qualified Stock Option Agreement under the Metretek
Technologies, Inc. 1998 Stock Incentive Plan, as amended.
(Incorporated by reference to Exhibit 10.2 to Metretek's Current
Report on Form 8-K, filed August 25, 2004)*
(10.8) Form of Restricted Stock Agreement under the Metretek Technologies,
Inc. 1998 Stock Incentive Plan, as amended. (Incorporated by reference
to Exhibit 10.3 to Metretek's Current Report on Form 8-K, filed August
25, 2004)*
(10.9) Form of Indemnification Agreement between Metretek Technologies, Inc.
and each of its directors. (Incorporated by reference to Exhibit 10.21
to Metretek's Annual Report on Form 10-KSB for the year ended December
31, 1999.)
(10.10) Prototype - Basic Plan Document for the Metretek - Southern Flow
Savings and Investment Plan. (Incorporated by reference to Exhibit 4.7
to Metretek's Registration Statement on Form S-8, Registration No.
333-42698.)*
(10.11) Adoption Agreement for the Metretek - Southern Flow Savings and
Investment Plan. (Incorporated by reference to Exhibit 4.8 to
Metretek's Registration Statement on Form S-8, Registration No.
333-42698.)*
(10.12) Amended and Restated Employment and Non-Competition Agreement, dated
as of November 15, 2005, between PowerSecure, Inc. and Sidney Hinton.
(Incorporated by reference to Exhibit 10.1 to Metretek's Current
Report on Form 8-K filed November 21, 2005)*
(10.13) Employment and Non-Competition Agreement, dated as of November 15,
2005, between Southern Flow Companies, Inc. and John Bernard.
(Incorporated by reference to Exhibit 10.2 to Metretek's Current
Report on Form 8-K filed November 21, 2005)*
(10.14) Employment and Non-Competition Agreement, dated as of February 6,
2006, between EnergyLite, Inc. and Ronald W. Gilcrease (Incorporated
by reference to Exhibit 10.1 to Metretek's Current Report on Form 8-K
filed February 10, 2006)*
(10.15) Form of Stock Purchase Agreement, dated as of September 10, 2004, by
and between Metretek Technologies, Inc. and the employee-shareholders
of PowerSecure, Inc. (Incorporated by reference to Exhibit 10.1 to
Metretek's Current Report on Form 8-K, filed September 13, 2004)*
(10.16) Amended Stipulation of Settlement, filed March 3, 2004, among Douglas
W. Heins on behalf of himself and all others similarly situated, and
Metretek Technologies, Inc., et. al. (Incorporated by reference to
Exhibit 10.39 to Metretek's Annual Report on Form 10-K for the year
ended December 31, 2003.)
(10.17) Order Granting Final Approval of the Partial Settlement, dated June
11, 2004. (Incorporated by reference to Exhibit 99.1 to Metretek's
Current Report on Form 8-K filed June 14, 2004.)
(10.18) Summary Sheet of Compensation of Non-Employee Directors. (Filed
herewith.)
(10.19) Lease Agreement, dated March 2005, between H & C Holdings, LLC and
PowerSecure, Inc. (Filed herewith.)
X-2
(14.1) Metretek Technologies, Inc. Code of Ethics for Principal Executive
Officer and Senior Financial Officers. (Incorporated by reference to
Exhibit 14.1 to Metretek's Annual Report on Form 10-K for the year
ended December 31, 2003.)
(14.2) Metretek Technologies, Inc. Code of Business Conduct and Ethics.
(Incorporated by reference to Exhibit 14.2 to Metretek's Annual Report
on Form 10-K for the year ended December 31, 2003.)
(21.1) Subsidiaries of Metretek Technologies, Inc. (Filed herewith.)
(23.1) Consent of Hein & Associates LLP (Filed herewith.)
(23.2) Consent of Deloitte & Touche LLP (Filed herewith.)
(31.1) Certification of Chief Executive Officer pursuant to Rule 13a-14(a) or
15d-14(a) under the Securities Exchange Act of 1934, as amended, as
adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
(Filed herewith.)
(31.2) Certification of Chief Financial Officer pursuant to Rule 13a-14(a) or
15d-14(a) under the Securities Exchange Act of 1934, as amended, as
adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
(Filed herewith.)
(32.1) Certification of Chief Executive Officer pursuant to 18 U.S.C. Section
1350 and Rule 13a-14(b) or 15d-14(b) under the Securities Exchange Act
of 1934, as amended, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 (Filed herewith.)
(32.2) Certification of Chief Financial Officer pursuant to 18 U.S.C. Section
1350 and Rule 13a-14(b) or 15d-14(b) under the Securities Exchange Act
of 1934, as amended, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 (Filed herewith.)
----------
* Management contract or compensation plan or arrangement.
X-3