businesses and
thus dependent upon a variety of factors applicable to each of these businesses.
PowerSecure is an expanding company that has developed a distributed generation turn-key
business. 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. These units are intended to increase
PowerSecure’s future growth opportunities beyond its core distributed generation business.
Notwithstanding the addition of these business units, PowerSecure is still in large part dependent
upon the size and timing of projects, and its results of operations can be significantly impacted
by large, individual projects. In November 2005 and March 2006, PowerSecure announced that it had
received orders from a large commercial customer for distributed generation projects that are
expected to generate $115 million in revenues in the aggregate, of which approximately $65 million
is scheduled to be completed during 2006 and the remainder during 2007. During the first quarter
2006, PowerSecure’s revenues and segment profit showed substantial increases over the first quarter
2005 primarily due to an increase in the number of completed or in-process projects as well as
normal quarter-to-quarter fluctuations inherent in its operations. PowerSecure’s revenues
increased by $5,845,000, or 153%, during the first quarter 2006 as compared to the first quarter
2005.
Southern Flow is a well established, strong and expanding oil field services company that
renders natural gas measurement and other services to oil and gas production companies. Due to the
location of the production assets of many of its key customers, Southern Flow’s business in the
second half of fiscal 2005 was adversely affected by Hurricanes Katrina and Rita. During the first
quarter 2006, Southern Flow’s Gulf Coast operations returned to normal levels. Southern Flow’s
revenues increased by $1,104,000, or 34%, during the first quarter 2006 as compared to the first
quarter 2005, due, in part, to increased field work and equipment sales related to repairing
customer facilities that received hurricane damages in 2005, as well as favorable market conditions
in the oil and gas sector.
Metretek Florida has been in operation since 1977 with a core business of designing,
manufacturing and selling data collection and energy measurement monitoring systems. In late 2004,
we decided to restructure Metretek Florida’s business and discontinue its contract manufacturing
operations. Metretek Florida’s future results of operations will be largely dependent upon its
ability to successfully address its core markets, as well as its ability to generate incremental
sales from certain new markets into which it has recently introduced new telemetry products.
Metretek Florida experienced a small increase in revenues and a reduction in its segment losses
during the first quarter 2006 as compared to the first quarter 2005, due to normal fluctuations in
its business.
In addition to our operating subsidiaries, our results of operations are significantly
impacted by our interest in MM 1995-2, which is recorded as equity in income of unconsolidated
19
affiliate and included in our income from continuing operations and our net income. During the
first quarter 2006, we acquired additional equity interests in MM1995-2. The purchase price of
$1,246,000 was financed from a combination of cash on hand and borrowings on our lines of credit.
As a result, we now own a 36% economic interest in MM 1995-2.
Due principally to an increase in revenues at our PowerSecure operating segment, our
consolidated revenues during the first quarter 2006 increased by $7,022,000, representing a nearly
90% increase over first quarter 2005 consolidated revenues. We recorded income from continuing
operations of $638,000 during the first quarter 2006, including $730,000 equity in income from
MM 1995-2, as compared to income from continuing operations of $22,000 during the first quarter
2005, which included $557,000 equity in income of MM 1995-2. Our net income after discontinued
operations was $638,000 during the first quarter 2006, as compared to a net loss after discontinued
operations of $278,000 during the first quarter 2005, which included a $300,000 loss on the
disposal of the discontinued operations of MCM.
During and subsequent to the first quarter 2006, we took substantial steps to improve our
balance sheet and liquidity, to reduce our long-term debt obligations, and to provide financial
resources to support the expansion of our operations. In January 2006, we exercised our right to
call the remaining outstanding warrants that had been issued in connection with a private placement
in May 2004. As a result of the warrant call, 801,517 warrants were exercised resulting in
$1,775,000 proceeds to the Company and the issuance of 705,000 shares of common stock of the
Company. Further, on April 7, 2006, we completed a private placement of 2,012,548 shares of our
common stock to certain institutional and accredited investors at a price of $14.00 per share,
raising gross proceeds of $28,175,672 (the “Private Placement”).
Of the approximately $26 million in net cash proceeds we received from the Private Placement,
we used approximately $5.6 million to retire long-term debt, and we intend to use the remainder for
capital expenditures and for working capital purposes. Upon completion of the Private Placement we
paid down our lines of credit and term loan balances to $0 and extinguished all of our term loan
debt.
Critical Accounting Policies
Management’s discussion and analysis of our financial condition and results of operations are
based on our consolidated financial statements, which have been prepared in conformity with
accounting principles generally accepted in the United States of America. The preparation of these
financial statements requires management to make estimates, judgments and assumptions that affect
the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities
at the date of the financial statements and the reported amounts of revenues and expenses during
the reporting period. On an on-going basis, we evaluate our estimates, including those related to
revenue recognition and percentage of completion, fixed price contracts, product returns, warranty
obligations, bad debt, inventories, cancellations costs associated with long term commitments,
investments, intangible assets, assets subject to disposal, income taxes, restructuring, service
contracts, contingencies and litigation. We base our estimates on historical experience and on
various other assumptions that are believed to be reasonable under the
20
circumstances, the results
of which form the basis for making estimates and judgments about the carrying value of assets and
liabilities that are not readily apparent from other sources. Estimates, by their nature, are
based on judgment and available information. Therefore, actual results could differ from those
estimates and could have a material impact on our consolidated financial statements, and it is
possible that such changes could occur in the near term.
We have identified the accounting principles which we believe are most critical to
understanding our reported financial results by considering accounting policies that involve the
most complex or subjective decisions or assessments. These accounting policies are described in
our Annual Report on Form 10-K for the year ended December 31, 2005 in “Item 7. Management’s
Discussion and Analysis of Financial Condition and Results of Operations.”
Results of Operations
The following table sets forth selected information related to our primary business segments
and is intended to assist in understanding our results of operations for the periods presented.
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.
| |
|
|
|
|
|
|
|
|
| |
|
Three Months Ended |
|
| |
|
March 31, |
|
| |
|
2006 |
|
|
2005 |
|
| |
|
(all amounts reported in thousands) |
|
Revenues: |
|
|
|
|
|
|
|
|
Southern Flow |
|
$ |
4,340 |
|
|
$ |
3,236 |
|
PowerSecure |
|
|
9,663 |
|
|
|
3,818 |
|
Metretek Florida |
|
|
734 |
|
|
|
644 |
|
Other |
|
|
95 |
|
|
|
112 |
|
|
|
|
|
|
|
|
Total |
|
$ |
14,832 |
|
|
$ |
7,810 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Profit: |
|
|
|
|
|
|
|
|
Southern Flow |
|
$ |
1,117 |
|
|
$ |
877 |
|
PowerSecure |
|
|
3,020 |
|
|
|
1,074 |
|
Metretek Florida |
|
|
468 |
|
|
|
310 |
|
|
|
|
|
|
|
|
Total |
|
$ |
4,605 |
|
|
$ |
2,261 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment Profit
(Loss): |
|
|
|
|
|
|
|
|
Southern Flow |
|
$ |
681 |
|
|
$ |
458 |
|
PowerSecure |
|
|
256 |
|
|
|
(134 |
) |
Metretek Florida |
|
|
(45 |
) |
|
|
(185 |
) |
Other |
|
|
(824 |
) |
|
|
(590 |
) |
|
|
|
|
|
|
|
Total |
|
$ |
68 |
|
|
$ |
(451 |
) |
|
|
|
|
|
|
|
21
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 collection and
telemetry.
The operations of our natural gas measurement services segment are conducted by Southern Flow.
Southern Flow’s services include on-site field services, chart processing and analysis, laboratory
analysis, and data management and reporting. These services are provided principally to customers
involved in natural gas production, gathering, transportation and processing.
The operations of our distributed generation segment are conducted by PowerSecure. The
primary elements of PowerSecure’s distributed generation products and services include project
design and engineering, negotiation with utilities to establish tariff structures and power
interconnects, generator acquisition and installation, process control and switchgear design and
installation, and ongoing project monitoring and servicing. PowerSecure markets its distributed
generation products and services directly to large end-users of electricity and through outsourcing
partnerships with utilities. Through March 31, 2006, 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
are included within PowerSecure’s segment results.
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 InvisiConnectTM, 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 contract
manufacturing operations. During fiscal 2004, we discontinued that contract manufacturing business.
22
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 (primarily interest and
finance charges) not allocated to its operating segments. Intersegment sales are not significant.
First Quarter 2006 Compared to First Quarter 2005
Revenues. Our revenues are derived almost entirely from the sales of products and
services by our subsidiaries. Our consolidated revenues for the first quarter 2006 increased
$7,022,000, or 90%, compared to the first quarter 2005 due to increase in revenues at each of our
operating subsidiaries.
PowerSecure’s revenues increased $5,845,000, or 153%, during the first quarter 2006 compared
to the first quarter 2005. The increase in PowerSecure’s revenues during the first quarter 2006 compared to the first quarter 2005 was due to a $5,241,000 increase in distributed
generation turn-key system project sales and services together with an increase of $604,000 in
revenues from shared savings projects, professional services, monitoring and other service related
revenues. The increase in PowerSecure’s distributed generation turn-key system project sales and
services revenues was largely attributable to a substantial increase in the total number of
projects completed or in process during the first quarter 2006 compared to the first quarter 2005.
The increase in the number of distributed generation projects is due to an expansion of
PowerSecure’s projects into new geographic markets as a result of increased marking efforts, the
commencement of revenues from PowerSecure’s recently announced significant orders and the growth
and market acceptance of new products by PowerSecure. The increase in PowerSecure’s service
related revenues included $294,000 from PowerServices and UtilityEngineering, PowerSecure’s
recently formed operating subsidiaries. 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 $1,104,000, or 34%, during the first quarter 2006, as
compared to the first quarter 2005, due, in part, to increased field work and equipment sales
related to repairing customer facilities that received hurricane damages in 2005, as well as
favorable market conditions in the oil and gas sector.
Metretek Florida’s revenues increased $90,000, or 14%, during the first quarter 2006 compared
to the first quarter 2005 due to normal fluctuations in its business as it continues to develop its
M2M business and create new sales opportunities. 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.
Other revenues decreased $17,000 during the first quarter 2006, as compared to the first
quarter 2005. This decrease was comprised principally of a decrease in fee revenues earned
23
from
managing MM 1995-2, our unconsolidated affiliate.
Costs and Expenses. The following table sets forth our costs and expenses during the periods
indicated:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
Quarter-over-Quarter |
|
| |
|
Quarter Ended March 31, |
|
|
Difference |
|
| |
|
2006 |
|
|
2005 |
|
|
$ |
|
|
% |
|
| |
|
(In thousands) |
|
|
|
|
|
|
|
|
|
Costs and Expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs of Sales and Services |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Southern Flow |
|
$ |
3,222 |
|
|
$ |
2,359 |
|
|
$ |
863 |
|
|
|
37 |
% |
PowerSecure |
|
|
6,643 |
|
|
|
2,744 |
|
|
|
3,899 |
|
|
|
142 |
% |
Metretek Florida |
|
|
266 |
|
|
|
335 |
|
|
|
(69 |
) |
|
|
-21 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
10,131 |
|
|
|
5,438 |
|
|
|
4,693 |
|
|
|
86 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General and administrative |
|
|
3,435 |
|
|
|
1,816 |
|
|
|
1,619 |
|
|
|
89 |
% |
Selling, marketing and service |
|
|
759 |
|
|
|
574 |
|
|
|
185 |
|
|
|
32 |
% |
Depreciation and amortization |
|
|
172 |
|
|
|
124 |
|
|
|
48 |
|
|
|
39 |
% |
Reserarch and development |
|
|
178 |
|
|
|
162 |
|
|
|
16 |
|
|
|
10 |
% |
Interest, finance charges and other |
|
|
88 |
|
|
|
147 |
|
|
|
(59 |
) |
|
|
-40 |
% |
Income taxes |
|
|
89 |
|
|
|
13 |
|
|
|
76 |
|
|
|
585 |
% |
Costs of sales and services include materials, personnel and related overhead costs
incurred to manufacture products and provide services. The 86% increase in cost of sales and
services for the first quarter 2006, compared to the first quarter 2005, was attributable almost
entirely to the increase in sales at PowerSecure and Southern Flow.
The 142% increase in PowerSecure’s costs of sales and services in the first quarter 2006 is
almost entirely a direct result of the 153% increase in PowerSecure’s revenues. PowerSecure’s
gross profit margin increased to 31.3% during the first quarter 2006, as compared to 28.1% during
the first quarter 2005, reflecting both cost efficiencies in project installation and construction
as well as a higher percentage of professional service revenues, which have higher associated
profit margins, in the first quarter 2006 compared to the first quarter 2005.
The 37% increase in Southern Flow’s costs of sales and services in the first quarter 2006 is
the result of the 34% increase in its revenues. Southern Flow’s gross profit margin declined
slightly to 25.7% for the first quarter 2006, compared to 27.1% during the first quarter 2005,
which is within the range of normal fluctuations for Southern Flow.
The
21% decrease in Metretek Florida’s costs of sales and services in the first quarter 2006,
notwithstanding a 14% increase in Metretek Florida’s revenues, was due primarily as the result of
cost reductions in component parts of its products. As a result, Metretek Florida’s gross profit
margin increased to 63.8% for the first quarter 2006, compared to 48.1% for the first quarter 2005.
General and administrative expenses include personnel and related overhead costs for the
support and administrative functions. The 89% increase in general and administrative expenses in
the first quarter 2006, as compared to the first quarter 2005, was due to increases in personnel
24
and related overhead costs associated with the development and growth of PowerSecure’s business,
and increased corporate overhead costs related to stock compensation expense and professional
services.
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 32% increase in selling, marketing and service expenses in the first quarter 2006, as
compared to the first quarter 2005, was due primarily to increased personnel and business
development expenses associated with the development and growth of the business of PowerSecure
during the first quarter 2006.
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 39%
increase in depreciation and amortization expenses in the first quarter 2006, as compared to the
first quarter 2005, primarily reflects an increase in depreciable assets at PowerSecure in the
latter portions of fiscal 2005 as well as an increase in amortization expense associated with our
purchase of additional equity interests in MM1995-2 in the first quarter 2006.
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 10% increase in research and development expenses in the first quarter
2006, as compared to the first quarter 2005, primarily reflects an increase in personnel costs.
Interest, finance charges and other expenses include interest and finance charges on our
credit facility as well as other non-operating expenses. The 40% decrease in interest, finance
charges and other expenses in the first quarter 2006, as compared to the first quarter 2005,
reflects a lower level of debt outstanding, partially offset by higher interest rates, in the first
quarter 2006 compared to the first quarter 2005.
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 increase in income taxes in the first quarter 2006, as compared to the first
quarter 2005, was due to increases in state income taxes incurred by PowerSecure in North Carolina
and other states in which it generated taxable income.
Quarterly 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 large customer
orders, such as |
25
| |
|
|
the recent significant orders at PowerSecure, customers delaying, deferring
or canceling purchase orders or making smaller purchases than expected; |
| |
• |
|
the effects of severe weather conditions, such as hurricanes, 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 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 M2M 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 effects of litigation, claims and other proceedings; |
| |
| |
• |
|
the effects of governmental regulations and regulatory changes in our markets; |
| |
| |
• |
|
economic conditions in the energy industry, especially in the natural gas and
electricity sectors including the effect of cyclical changes in energy prices; |
| |
| |
• |
|
changes in the prices charged by our suppliers; |
| |
| |
• |
|
our ability to make and obtain the expected benefits from acquisitions of
technology or businesses, and the costs related to such acquisitions; |
| |
| |
• |
|
changes in our operating expenses; and |
| |
| |
• |
|
the development and maintenance of business relationships with strategic partners. |
Because we have little or no control over most of these factors, our operating results are
difficult to predict. Any substantial adverse change in any of these factors could negatively
affect our business and results of operations.
Our revenues and other operating results are heavily dependant upon the volume and timing of
customer orders and payments and the date of product delivery. The timing of large individual
sales is difficult for us to predict. Because our operating expenses are based on anticipated
revenues and because a high percentage of these are relatively fixed, a shortfall or delay in
recognizing revenue could cause our operating results to vary significantly from quarter-
26
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, such as the recent significant orders
received by 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 entrant 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 March
31, 2006, 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 during 2005.
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 this Report and in our Annual
Report on Form 10-K for the fiscal year ended December 31, 2005, you should not rely on
quarter-to-quarter, period-to-period or year-to-year comparisons of our results of operations as an
indication of our future performance. Quarterly, period, or annual comparisons of our operating
results are not necessarily meaningful or indicative of future performance.
27
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 March 31, 2006, we had working capital of $6,187,000, including $877,000 in cash and
cash equivalents, compared to working capital of $4,911,000 on December 31, 2005, which included
$2,188,000 in cash and cash equivalents. Subsequent to March 31, 2006, we closed on the Private
Placement and increased our working capital by approximately $22 million and reduced our debt
balances to $0.
Net cash used in operating activities was $2,275,000 in the first quarter 2006, consisting of
approximately $303,000 of cash provided by operations, before changes in assets and liabilities,
approximately $2,610,000 of cash used by changes in working capital and other asset and liability
accounts, and approximately $32,000 of cash provided by discontinued operations of MCM. This
compares to net cash provided by operating activities of $71,000 in the first quarter 2005,
consisting of approximately $241,000 of cash provided by operations, before changes in assets and
liabilities, approximately $74,000 of cash provided by changes in working capital and other asset
and liability
accounts, and approximately $244,000 of cash used by discontinued operations of MCM.
Net cash used in investing activities was $1,659,000 in the first quarter 2006, as compared to
net cash used in investing activities of $506,000 in the first quarter 2005. The majority of the
net cash used by investing activities during the first quarter 2006 was attributable to the
purchase of our additional investment in our unconsolidated affiliate. The net cash used by
investing activities during the first quarter 2005 was attributable to equipment purchases for two
shared savings distributed generation projects.
Net cash provided by financing activities was $2,622,000 in the first quarter 2006, compared
to net cash used in financing activities of $1,182,000 in the first quarter 2005. The majority of
the net cash provided by financing activities during the first quarter 2006 was attributable to
cash proceeds from the exercise of stock warrants and options and net borrowings on our lines of
credit, partially offset by principal payments on our long-term notes payable. The
28
majority of the
net cash used by financing activities during the first quarter 2005 was attributable to net
payments on our line of credit, principal payments on debt obligations, and cash payments made on
our preferred stock redemptions.
Our research and development expenses totaled $178,000 during the first quarter 2006 compared
to $162,000 during the first quarter 2005. Virtually all of our first quarter 2006 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, virtually all of which will be directed to Metretek Florida’s
business.
Our capital expenditures during the first quarter 2006 were approximately $428,000, the vast
majority of which was incurred for the purchase of miscellaneous equipment items at PowerSecure.
During the first quarter 2005, our capital expenditures were approximately $506,000, including
$335,000 of capital expenditures incurred in building two PowerSecure shared savings distributed
generation projects. We anticipate capital expenditures in fiscal 2006 of approximately $1.5
million, the vast majority of which will be for the benefit of the business of PowerSecure. In
addition, we may incur additional capital expenditures for PowerSecure’s shared savings distributed
generation projects during fiscal 2006.
Project Loans. We had three shared savings project loans and one equipment loan outstanding
to Caterpillar Financial Services Corporation (“Caterpillar”) in the aggregate amount of $1,137,000
at March 31, 2006. The project loans were secured by the distributed generation equipment
purchased from Caterpillar as well as the revenues generated by the PowerSecure projects. The
project loans provided 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. Upon completion of the
Private Placement described above, in April 2006 we paid down our term loan balances to $0 and
extinguished all of our obligations to Caterpillar under the term loans.
Working Capital Credit Facility. We have a credit facility (“Credit Facility”) 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 has
been 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
29
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. At March 31, 2006, the aggregate borrowing base under the Credit
Facility was $4,500,000 of which $2,000,000 had been borrowed, leaving $2,500,000 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.
Upon completion of the Private Placement described above, in April 2006 we paid down our
Credit Facility balances to $0. At present, we have retained our Credit Facility and have
requested the lender to reduce the annual facility and unused line fees and to eliminate the
compliance reporting requirements until such time as we may borrow under the Credit Facility. In
the event the Lender is unwilling to reduce the annual fees or eliminate the compliance reporting
requirements, we may terminate the Credit Facility.
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 remaining redemption obligation at March 31, 2006 is approximately $371,000.
Term Loan. CAC LLC had a term loan outstanding to a commercial bank in the amount
30
of $579,000 at March 31, 2006. The term loan financed our purchase of additional equity
interests in our unconsolidated affiliate, MM 1995-2, in fiscal 2004. The term loan was secured by
our interests in MM 1995-2, and we provided a guaranty of $625,000 of the term loan. The term loan
provided for 60 monthly payments of principal and interest (at a rate of 5.08%) in the amount of
approximately $18,500 per month. Upon completion of the Private Placement described above, in
April 2006 we distributed the assets (consisting principally of the investment in MM 1995-2) and
liabilities of CAC LLC to its shareholders (including MGT), paid down our share of the term loan
balances to $0, and extinguished all of our obligations to the lender under the term loan.
Settlement Note. We had a settlement note outstanding in the amount of $1,500,000 at March
31, 2006 as a result of class action litigation that was settled in fiscal 2004. The settlement
note bore interest at the rate of prime plus three percent and was payable in 16 quarterly
installments of $187,500 principal plus accrued interest each. Upon completion of the Private
Placement described above, in April 2006 we paid down the settlement note balance to $0 and
extinguished all of our obligations to the class action settlement note holders.
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 are required to make
certain payments under the terms of the class action Settlement Note. The following table sets
forth our contractual obligations and commercial commitments as they existed at March 31, 2006.
The table information does not include the effects of payments and debt extinguishments made in
April 2006, subsequent to completion of the Private Placement described above:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Payments Due by Period (1) |
|
| |
|
|
|
|
|
Remainder of |
|
|
Years |
|
|
Years |
|
|
After |
|
| |
|
Total |
|
|
2006 |
|
|
2007-2008 |
|
|
2009-2010 |
|
|
2010 |
|
Contractual Obligations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit Facility (2) |
|
$ |
2,000,000 |
|
|
$ |
— |
|
|
$ |
2,000,000 |
|
|
$ |
— |
|
|
$ |
— |
|
Capital Lease Obligations |
|
|
6,000 |
|
|
|
3,000 |
|
|
|
3,000 |
|
|
|
— |
|
|
|
— |
|
Operating Leases |
|
|
4,099,000 |
|
|
|
524,000 |
|
|
|
1,196,000 |
|
|
|
755,000 |
|
|
|
1,624,000 |
|
Series B Preferred Stock |
|
|
371,000 |
|
|
|
371,000 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Settlement Note |
|
|
1,500,000 |
|
|
|
562,000 |
|
|
|
938,000 |
|
|
|
— |
|
|
|
— |
|
Term Loan |
|
|
579,000 |
|
|
|
149,000 |
|
|
|
430,000 |
|
|
|
— |
|
|
|
— |
|
Project Loans |
|
|
1,137,000 |
|
|
|
225,000 |
|
|
|
653,000 |
|
|
|
259,000 |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
9,692,000 |
|
|
$ |
1,834,000 |
|
|
$ |
5,220,000 |
|
|
$ |
1,014,000 |
|
|
$ |
1,624,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (1) |
|
Does not include interest that may become due and payable on such obligations in any
future period. Also does not include the effects of payments and debt extinguishments made in
April 2006, subsequent to the completion of the Private Placement described above. |
| |
| (2) |
|
Total repayments are based upon borrowings outstanding as of March 31, 2006, not projected
borrowings under the Credit Facility. |
31
Off-Balance Sheet Arrangements. During the first quarter 2006, 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, proceeds from our
recent Private Placement, 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”
and Part II, Item 1A “Risk Factors” below. We cannot provide any assurance that our actual cash
requirements will not be greater than we currently expect.
Recent Accounting Pronouncements
As of January 1, 2006, we adopted Financial Accounting Standards (FAS) No. 123 (Revised 2004),
“Share-Based Payment” (“FAS 123(R)”), using the modified prospective transition method, which
requires measurement of compensation cost for all stock-based awards at the fair value on date of
grant and recognition of compensation over the service period for awards expected to vest. The
fair value of restricted stock is determined based on the number of shares granted and the quoted
price of our common stock, and the fair value of stock options is determined using the
Black-Scholes valuation model. Such value is recognized as expense over the service period, net of
estimated forfeitures.
Prior to January 1, 2006, we accounted for stock-based compensation using the intrinsic value
method prescribed in Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock
Issued to Employees,” and related interpretations. Under APB Opinion No. 25, no compensation
expense was recognized for stock options issued to employees or directors because the grant price
equaled or was above the market price on the date of grant for options issued by the Company.
Our net income for first quarter 2006 includes $131,000 of compensation costs recognized under
the provisions of FAS 123(R) related to outstanding stock options. There were no net income tax
benefits related to our stock-based compensation arrangements during the first quarter 2006 because
a valuation allowance has been provided for 100% of the Company’s net deferred tax assets at March
31, 2006. All of our stock-based compensation expense is included in general and administrative
expenses in our consolidated statement of operations.
In May 2005, the Financial Accounting Standards Board (“FASB”) issued FAS No. 154, “Accounting
Changes and Error Corrections” (“FAS 154”). FAS 154 changes the requirements
32
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. The adoption of FAS 154 had no effect on our financial position or
results of operations during the first quarter 2006.
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.
Cautionary Note Regarding Forward-Looking Statements
This Quarterly Report on Form 10-Q (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 |
33
| |
|
|
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 identified in our Annual Report on Form 10-K for the fiscal year
ended December 31, 2005, as amended or supplemented in Item 1A of Part II of this Report, as well
as other risks, uncertainties and other factors discussed elsewhere in this Report and in our other
reports and documents filed from time to time with the 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 speaks
only as of the date it is made. We do not intend, and we undertake no duty or obligation, to
update or revise any forward-looking statement for any reason, whether as a result of changes in
our expectations or the underlying assumptions, the receipt of new information, occurrence of
future or unanticipated events, circumstances or conditions or otherwise.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
We are
exposed to certain 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 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 2. Management’s Discussion and Analysis of Financial Conditions and Results of
Operations” of this Report.
After
the receipt of the net proceeds of the Private Placement and the repayment of
outstanding interest-bearing indebtedness, our cash equivalents were approximately
$21.8 million. All of our cash equivalents are currently invested in money market mutual funds,
the income of which generally increases or decreases in proportion to increases or decreases,
respectively, in interest rates. We do not believe that changes in interest rates have had a
material impact on us in the past or are likely to have a material impact on us in the
foreseeable future. For example, a change of 1% (100 basis points) in the interest rate on
either our investments or any future reasonably likely 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 exchange risk. However, from time
to time we are subject to market risk from fluctuating commodity prices in certain raw materials
we use. See the risk factor added in “Item 1A. Risk Factors” in Part II of this Report.
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.
34
Item 4. 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 our disclosure controls and procedures (as defined in Rules 13a-15(e) and
15d-15(e) under the Exchange Act) as of March 31, 2006, 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.
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 first quarter 2006 that has materially
affected, or is reasonably likely to materially affect, our internal control over financial
reporting.
35
Limitations in Control systems
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.
36
PART II
OTHER INFORMATION
Item 1. Legal Proceedings
From time to time, we are involved in disputes and legal proceedings. There has been no
material change in our pending legal proceedings as described in “Item 3. Legal Proceedings” in our
Annual Report on Form 10-K for the fiscal year ended December 31, 2005.
Item 1A. Risk Factors
Our business
and operating results are subject to many risks,
uncertainties and other factors. If any of these risks were to occur, our business, affairs,
assets, financial condition, results of operations, cash flows and prospects could be materially
and adversely affected. These risks, uncertainties and other factors include the information
discussed elsewhere in this Report as well as the risk factors set
forth in “Item 1A. Risk Factors” in
our Annual Report on Form 10-K for the fiscal year ended December 31, 2005, which have not materially
changed as of the date of this Report, except for the addition of the following risk factor:
Price increases in some of the key components in our products could materially and
adversely affect our operating results and cash flows.
The prices
of some of the key components of our products and services are subject to fluctuation
due to market forces beyond our control. If we incur price increases from our suppliers for key
components in our products or from our contractors, we may not be able to pass all of those price
increases on to our customers in the form of higher sales prices, which would adversely affect
our operating results and cash flows. For example, most of
PowerSecure’s revenues are generated
from fixed price distributed generation projects, and increases in the prices of key components
in those projects, such as generators, diesel fuel, copper and labor,
would increase PowerSecure’s
operating costs and accordingly reduce its margins in those projects. Although we intend to
adjust the pricing for future projects based upon long-term changes in these components, we
generally cannot pass on short-term price increases on fixed pricing projects, and we may not be
able to pass on all long-term price increases. Such price increases could occur from time to
time due to spot shortages of commodities or labor, or from longer-term shortages due to market
forces beyond our control. An increase in our operating costs due to price increases from
these components causing a reduction in PowerSecure’s margins could materially and adversely
affect our consolidated results of operations and cash flows.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
On April 7, 2006, we completed a private placement of 2,012,548 shares of our common stock to
certain institutional and accredited investors at a price of $14.00 per share, raising gross
proceeds of $28,175,672 (the “Private Placement”). In addition, certain of our officers and
directors (the “Selling Stockholders”) sold a total of 390,452 shares of common stock to the
investors in the Private Placement at the same purchase price per share, for total gross proceeds
of $5,466,328. The Selling Stockholders entered into 180 day lock-up agreements covering virtually
all of the remainder of the shares they beneficially own.
The Private Placement was made pursuant to a Securities Purchase Agreement, dated as of March
29, 2006. In addition, we entered into a Registration Rights Agreement, dated March 29, 2006, with
the investors, pursuant to which we have filed with the Securities and Exchange Commission (the
“SEC”) a registration statement to register the resale of the shares purchased in the Private
Placement by the investors, which registration statement was declared
effective by the SEC on May 9, 2006. We are obligated to use our reasonable best efforts to keep the registration statement
continuously effective until the earliest of five years after its effective date or until all of
the shares covered by the registration statement have been sold or may be sold without volume
restrictions under Rule 144(k) of the Securities Act of 1933, as amended (the “Securities Act”).
We received net cash proceeds of approximately $26 million from the Private Placement, which
we used for the retirement of long-term debt, and we intend to use for capital expenditures
37
and for working capital purposes. We paid a cash commission in the amount of $1,856,419 to
Roth Capital Partners, LLC, our placement agent in the Private Placement. The shares were issued
in the Private Placement only to accredited investors in a transaction exempt from the registration
requirements of the Securities Act. The issuance of the shares by the
Company to the investors was not registered under the Securities Act,
and may not be offered or sold by the investors except pursuant to the
registration statement discussed above or pursuant to an applicable exemption.
At December 31, 2005, 892,518 stock purchase warrants that were issued in connection with a
private placement in May 2004 remained outstanding. The warrants have an exercise price of $3.41
per share of common stock and expire in May 2009. On January 19, 2006, we exercised our right to
call the remaining outstanding warrants by requiring the exercise of the warrants prior to February
19, 2006. As a result of the warrant call, 801,517 warrants were exercised resulting in $1,775,000
proceeds to the Company and the issuance of 705,000 shares of our common stock. At March 31, 2006,
91,001 warrants remained outstanding due to restrictions placed upon one group of the warrant
holders to limit its holdings of our common stock to 9.999% of total shares outstanding.
During the first quarter 2006, we issued options to purchase 140,000 shares of our Common
Stock as inducement grants to new employees outside of our existing stock option plans. These
options vest over a three to four year period, contain an exercise price equal to the closing stock
price of our Common Stock as reported on the American Stock Exchange on the date of grant (which
was a weighted average exercise price of $10.63), and expire ten years after the date of grant.
These options were issued in a private placement transaction exempt from the registration
requirements of the Securities Act by virtue of Section 4(2) thereof, and no shares will be issued
upon exercise unless such issuance is either registered under, or exempt from the registration
requirements of, the Securities Act.
38
Item 6. Exhibits
| |
4.1 |
|
Notice of Redemption of Warrants, dated January 19, 2006, issued by
Metretek Technologies, Inc. (Incorporated by reference to Exhibit 10.2 to the
Metretek Current Report on Form 8-K filed January 20, 2006). |
| |
| |
10.1 |
|
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 the Metretek Current Report on Form 8-K filed
February 10, 2006). |
| |
| |
10.2 |
|
Second Amended and Restated Employment Agreement, dated as of March
20, 2006, between Metretek Technologies, Inc. and W. Phillip Marcum (Incorporated
by reference to Exhibit 10.3 to the Metretek Annual Report on Form 10-K for the
fiscal year ended December 31, 2005). |
| |
| |
10.3 |
|
Second Amended and Restated Employment Agreement, dated as of March
20, 2006, between Metretek Technologies, Inc. and A. Bradley Gabbard (Incorporated by
reference to Exhibit 10.4 to the Metretek Annual Report on Form
10-K for the fiscal year ended December 31, 2005). |
| |
| |
10.4 |
|
Securities Purchase Agreement, dated as of March 29, 2006, by and
among Metretek Technologies, Inc., the selling stockholders named therein and the
investors named therein (Incorporated by reference to Exhibit 10.1 to the
Metretek Current Report on Form 8-K filed March 30, 2006). |
| |
| |
10.5 |
|
Registration Rights Agreement, dated as of March 29, 2006, by and
among Metretek Technologies, Inc. and the investors named therein (Incorporated
by reference to Exhibit 10.2 to the Metretek Current Report on Form 8-K filed
March 30, 2006). |
| |
| |
10.6 |
|
Amendment No. 2, dated March 29, 2006, to the Amended and Restated
Rights Agreement by and between Metretek Technologies, Inc. and ComputerShare
Investor Services, LLC (Incorporated by reference to Exhibit 10.3 to the Metretek
Current Report on Form 8-K filed March 30, 2006). |
| |
| |
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.) |
39
| |
| |
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.) |
40
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| |
|
|
|
|
| |
METRETEK TECHNOLOGIES, INC.
|
|
| Date: May 15, 2006 |
By: |
/s/ W. Phillip Marcum
|
|
| |
|
W. Phillip Marcum |
|
| |
|
President and Chief Executive Officer |
|
| |
| |
|
|
| Date: May 15, 2006 |
By: |
/s/ A. Bradley Gabbard
|
|
| |
|
A. Bradley Gabbard |
|
| |
|
Executive Vice President
and Chief Financial Officer |
|
| |
41