Metretek Technologies, Inc. 10-Q
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
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þ |
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 2006
or
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o |
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File Number 0-19793
METRETEK TECHNOLOGIES, INC.
(Exact name of registrant as specified in its charter)
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Delaware
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84-1169358 |
(State or other jurisdiction of
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(I.R.S. Employer |
incorporation or organization)
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Identification No.) |
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303 East Seventeenth Avenue, Suite 660 |
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Denver, Colorado
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80203 |
(Address of principal executive offices)
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(Zip code) |
(303) 785-8080
(Registrants telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days. Yes þ No o
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
o Accelerated filer o Non-accelerated filer þ
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Act). Yes o No þ
As of November 1, 2006, 15,777,836 shares of the issuers Common Stock were outstanding.
METRETEK TECHNOLOGIES, INC.
FORM 10-Q
For the Quarterly Period Ended September 30, 2006
TABLE OF CONTENTS
2
PART I.
FINANCIAL INFORMATION
Item 1. Financial Statements
METRETEK TECHNOLOGIES, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(unaudited)
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September 30, |
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December 31, |
|
|
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2006 |
|
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2005 |
|
ASSETS |
|
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|
|
|
|
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CURRENT ASSETS: |
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
18,005,317 |
|
|
$ |
2,188,310 |
|
Trade receivables, net of allowance for doubtful accounts
of $163,370 and $95,144, respectively |
|
|
34,359,571 |
|
|
|
12,031,539 |
|
Other receivables |
|
|
95,729 |
|
|
|
36,669 |
|
Inventories |
|
|
11,644,294 |
|
|
|
3,450,267 |
|
Prepaid expenses and other current assets |
|
|
745,347 |
|
|
|
527,269 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets |
|
|
64,850,258 |
|
|
|
18,234,054 |
|
|
|
|
|
|
|
|
|
|
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|
|
|
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PROPERTY, PLANT AND EQUIPMENT: |
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|
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Equipment |
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|
6,362,858 |
|
|
|
5,669,788 |
|
Vehicles |
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|
166,894 |
|
|
|
132,988 |
|
Furniture and fixtures |
|
|
590,253 |
|
|
|
550,863 |
|
Land, building and improvements |
|
|
636,682 |
|
|
|
517,511 |
|
|
|
|
|
|
|
|
Total property, plant and equipment, at cost |
|
|
7,756,687 |
|
|
|
6,871,150 |
|
Less accumulated depreciation and amortization |
|
|
3,862,698 |
|
|
|
3,657,856 |
|
|
|
|
|
|
|
|
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|
|
|
|
|
|
|
|
Property, plant and equipment, net |
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|
3,893,989 |
|
|
|
3,213,294 |
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|
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|
|
|
|
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|
|
|
|
|
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OTHER ASSETS: |
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|
|
|
|
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Goodwill |
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|
8,840,148 |
|
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|
8,840,148 |
|
Intangible rights and capitalized software costs, net of
accumulated
amortization of $1,519,799 and $1,280,019, respectively |
|
|
1,830,131 |
|
|
|
479,221 |
|
Investment in unconsolidated affiliate |
|
|
4,636,421 |
|
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|
2,299,218 |
|
Assets of discontinued operations |
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|
144,490 |
|
|
|
192,821 |
|
Other assets |
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|
178,427 |
|
|
|
60,170 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Total other assets |
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|
15,629,617 |
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|
11,871,578 |
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|
|
|
|
|
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|
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|
|
|
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|
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TOTAL |
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$ |
84,373,864 |
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|
$ |
33,318,926 |
|
|
|
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|
See accompanying notes to unaudited consolidated financial statements.
3
METRETEK TECHNOLOGIES, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(unaudited)
|
|
|
|
|
|
|
|
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|
September 30, |
|
|
December 31, |
|
|
|
2006 |
|
|
2005 |
|
LIABILITIES AND STOCKHOLDERS EQUITY |
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CURRENT LIABILITIES: |
|
|
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Accounts payable |
|
$ |
8,780,995 |
|
|
$ |
3,283,898 |
|
Accrued and other liabilities |
|
|
21,801,838 |
|
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|
8,786,830 |
|
Notes payable |
|
|
|
|
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|
1,248,286 |
|
Capital lease obligations |
|
|
5,708 |
|
|
|
3,884 |
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Total current liabilities |
|
|
30,588,541 |
|
|
|
13,322,898 |
|
|
|
|
|
|
|
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LONG-TERM NOTES PAYABLE |
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3,593,523 |
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|
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|
|
|
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|
NON-CURRENT CAPITAL LEASE OBLIGATIONS |
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|
7,835 |
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|
3,210 |
|
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|
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|
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COMMITMENTS AND CONTINGENCIES |
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MINORITY INTEREST IN SUBSIDIARY |
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169,755 |
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|
|
|
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STOCKHOLDERS EQUITY: |
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|
Preferred stock undesignated, $.01 par value; 2,000,000
shares
authorized; none issued and outstanding |
|
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|
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|
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|
Preferred stock Series C, $.01 par value; 500,000 shares
authorized; none issued and outstanding |
|
|
|
|
|
|
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|
Common stock, $.01 par value; 25,000,000 shares
authorized; 15,768,671 and 12,577,530 shares issued
and outstanding, respectively |
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|
157,687 |
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|
|
125,775 |
|
Additional paid-in-capital |
|
|
102,012,205 |
|
|
|
72,321,099 |
|
Deferred compensation |
|
|
(16,500 |
) |
|
|
(66,000 |
) |
Accumulated deficit |
|
|
(48,375,904 |
) |
|
|
(56,151,334 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stockholders equity |
|
|
53,777,488 |
|
|
|
16,229,540 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL |
|
$ |
84,373,864 |
|
|
$ |
33,318,926 |
|
|
|
|
|
|
|
|
See accompanying notes to unaudited consolidated financial statements.
4
METRETEK TECHNOLOGIES, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
(unaudited)
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Three Months Ended |
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Nine Months Ended |
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|
September 30, |
|
|
September 30, |
|
|
|
2006 |
|
|
2005 |
|
|
2006 |
|
|
2005 |
|
REVENUES: |
|
|
|
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|
|
|
|
|
|
|
|
|
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|
Sales and services |
|
$ |
33,125,164 |
|
|
$ |
10,074,442 |
|
|
$ |
83,767,976 |
|
|
$ |
31,720,110 |
|
Other |
|
|
319,969 |
|
|
|
102,346 |
|
|
|
752,897 |
|
|
|
303,076 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
|
33,445,133 |
|
|
|
10,176,788 |
|
|
|
84,520,873 |
|
|
|
32,023,186 |
|
|
|
|
|
|
|
|
|
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|
|
|
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|
COSTS AND EXPENSES: |
|
|
|
|
|
|
|
|
|
|
|
|
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|
|
|
Cost of sales and services |
|
|
24,055,211 |
|
|
|
7,146,321 |
|
|
|
60,580,104 |
|
|
|
22,844,583 |
|
General and administrative |
|
|
5,535,861 |
|
|
|
2,007,820 |
|
|
|
13,473,641 |
|
|
|
5,817,286 |
|
Selling, marketing and service |
|
|
936,415 |
|
|
|
692,186 |
|
|
|
2,868,346 |
|
|
|
1,989,167 |
|
Depreciation and amortization |
|
|
306,332 |
|
|
|
134,778 |
|
|
|
682,636 |
|
|
|
392,783 |
|
Research and development |
|
|
163,411 |
|
|
|
189,430 |
|
|
|
536,095 |
|
|
|
515,287 |
|
Interest, finance charges and other |
|
|
13,898 |
|
|
|
201,604 |
|
|
|
148,609 |
|
|
|
495,444 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total costs and expenses |
|
|
31,011,128 |
|
|
|
10,372,139 |
|
|
|
78,289,431 |
|
|
|
32,054,550 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing
operations
before minority interest and
income taxes |
|
|
2,434,005 |
|
|
|
(195,351 |
) |
|
|
6,231,442 |
|
|
|
(31,364 |
) |
Equity in income of unconsolidated
affiliate |
|
|
627,020 |
|
|
|
418,690 |
|
|
|
1,878,462 |
|
|
|
1,340,731 |
|
Minority interest |
|
|
|
|
|
|
(51,789 |
) |
|
|
(72,464 |
) |
|
|
(168,354 |
) |
Income taxes |
|
|
(150,496 |
) |
|
|
(2,405 |
) |
|
|
(262,010 |
) |
|
|
(15,690 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations |
|
|
2,910,529 |
|
|
|
169,145 |
|
|
|
7,775,430 |
|
|
|
1,125,323 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from disposal of discontinued
operations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(300,000 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
2,910,529 |
|
|
$ |
169,145 |
|
|
$ |
7,775,430 |
|
|
$ |
825,323 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
PER SHARE AMOUNTS (Note 1): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
0.19 |
|
|
$ |
0.01 |
|
|
$ |
0.52 |
|
|
$ |
0.09 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted |
|
$ |
0.17 |
|
|
$ |
0.01 |
|
|
$ |
0.47 |
|
|
$ |
0.08 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
0.19 |
|
|
$ |
0.01 |
|
|
$ |
0.52 |
|
|
$ |
0.07 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted |
|
$ |
0.17 |
|
|
$ |
0.01 |
|
|
$ |
0.47 |
|
|
$ |
0.06 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
|
15,730,954 |
|
|
|
12,289,743 |
|
|
|
14,818,667 |
|
|
|
12,248,096 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted |
|
|
17,250,856 |
|
|
|
13,456,174 |
|
|
|
16,507,783 |
|
|
|
12,912,244 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to unaudited consolidated financial statements.
5
METRETEK TECHNOLOGIES, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
|
2006 |
|
|
2005 |
|
CASH FLOWS FROM OPERATING ACTIVITIES: |
|
|
|
|
|
|
|
|
Net income |
|
$ |
7,775,430 |
|
|
$ |
825,323 |
|
Adjustments to reconcile net income to net cash
provided by (used in) operating activities: |
|
|
|
|
|
|
|
|
Loss on disposal of discontinued operations |
|
|
|
|
|
|
300,000 |
|
Depreciation and amortization |
|
|
682,636 |
|
|
|
392,783 |
|
Minority interest in subsidiary |
|
|
72,464 |
|
|
|
168,354 |
|
Loss on disposal of property, plant and equipment |
|
|
33,294 |
|
|
|
2,880 |
|
Equity in income of unconsolidated affiliate |
|
|
(1,878,462 |
) |
|
|
(1,340,731 |
) |
Distributions from unconsolidated affiliate |
|
|
361,302 |
|
|
|
1,128,453 |
|
Stock compensation expense |
|
|
578,141 |
|
|
|
49,500 |
|
Changes in other assets and liabilities: |
|
|
|
|
|
|
|
|
Trade receivables, net |
|
|
(22,328,032 |
) |
|
|
(1,607,610 |
) |
Inventories |
|
|
(8,194,027 |
) |
|
|
(2,649 |
) |
Other current assets |
|
|
(277,138 |
) |
|
|
(147,051 |
) |
Other noncurrent assets |
|
|
(118,257 |
) |
|
|
91,153 |
|
Accounts payable |
|
|
5,497,097 |
|
|
|
112,944 |
|
Accrued and other liabilities |
|
|
13,095,743 |
|
|
|
986,912 |
|
|
|
|
|
|
|
|
Net cash provided by (used in) continuing operations |
|
|
(4,699,809 |
) |
|
|
960,261 |
|
Net cash provided by (used in) discontinued operations of MCM |
|
|
48,331 |
|
|
|
(675,592 |
) |
|
|
|
|
|
|
|
Net cash provided by (used in) operating activities |
|
|
(4,651,478 |
) |
|
|
284,669 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES: |
|
|
|
|
|
|
|
|
Purchases of property, plant and equipment |
|
|
(1,117,194 |
) |
|
|
(780,550 |
) |
Additions to intangible rights and software development |
|
|
(1,590,690 |
) |
|
|
(148,417 |
) |
Investment in unconsolidated affiliate |
|
|
(1,260,360 |
) |
|
|
(58,045 |
) |
Proceeds from sale of property, plant and equipment |
|
|
16,375 |
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities |
|
|
(3,951,869 |
) |
|
|
(987,012 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES: |
|
|
|
|
|
|
|
|
Proceeds from private placement, net |
|
|
26,221,123 |
|
|
|
|
|
Proceeds from stock warrant and option exercises |
|
|
2,973,254 |
|
|
|
330,117 |
|
Net payments on line of credit |
|
|
(1,314,200 |
) |
|
|
(806,115 |
) |
Proceeds from equipment loan |
|
|
|
|
|
|
335,247 |
|
Principal payments on long-term notes payable |
|
|
(3,375,494 |
) |
|
|
(910,222 |
) |
Cash distributions to minority interests |
|
|
(381 |
) |
|
|
(96,075 |
) |
Payments on preferred stock redemptions |
|
|
(80,735 |
) |
|
|
(450,648 |
) |
Payments on capital lease obligations |
|
|
(3,213 |
) |
|
|
(2,571 |
) |
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities |
|
|
24,420,354 |
|
|
|
(1,600,267 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS |
|
|
15,817,007 |
|
|
|
(2,302,610 |
) |
|
|
|
|
|
|
|
|
|
CASH AND CASH EQUIVALENTS AT
BEGINNING OF PERIOD |
|
|
2,188,310 |
|
|
|
2,951,489 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH AND CASH EQUIVALENTS AT END OF PERIOD |
|
$ |
18,005,317 |
|
|
$ |
648,879 |
|
|
|
|
|
|
|
|
See accompanying notes to unaudited consolidated financial statements.
6
METRETEK TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements
As of September 30, 2006 and December 31, 2005 and
For the Three and Nine Month Periods Ended September 30, 2006 and 2005
1. Summary of Significant Accounting Policies
Organization The accompanying consolidated financial statements include the accounts of
Metretek Technologies, Inc. and its subsidiaries, primarily Southern Flow Companies, Inc.
(Southern Flow), PowerSecure, Inc. (PowerSecure) (and its wholly-owned subsidiaries,
UtilityEngineering, Inc., PowerServices, Inc. and EnergyLite, 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 or we or
us or our.
These consolidated financial statements have been prepared pursuant to rules and regulations
of the Securities and Exchange Commission. The accompanying consolidated financial statements and
notes thereto should be read in conjunction with the consolidated financial statements and notes
thereto included in the Companys Annual Report on Form 10-K for the year ended December 31, 2005.
In the opinion of the Companys management, all adjustments (all of which are normal and
recurring) have been made which are necessary for a fair presentation of the consolidated financial
position of the Company and its subsidiaries as of September 30, 2006 and the consolidated results
of their operations and cash flows for the three and nine month periods ended September 30, 2006
and September 30, 2005.
Basic
and Diluted Earnings Per Share Earnings per share is computed by dividing
net income (loss) by the weighted average number of shares outstanding during the period on a basic
and diluted basis. Diluted earnings per share reflects the potential dilution that would occur if
stock options and warrants were exercised using the average market price for the Companys stock
for the period. Diluted earnings per share excludes the impact of potential common shares related
to stock options and warrants in periods in which the option or warrant exercise price is greater
than the average market price of the Companys common stock during the period. The following table
sets forth the calculation of basic and diluted earnings per share:
7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2006 |
|
|
2005 |
|
|
2006 |
|
|
2005 |
|
Income from continuing operations |
|
$ |
2,910,529 |
|
|
$ |
169,145 |
|
|
$ |
7,775,430 |
|
|
$ |
1,125,323 |
|
Loss from discontinued operations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(300,000 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
2,910,529 |
|
|
$ |
169,145 |
|
|
$ |
7,775,430 |
|
|
$ |
825,323 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic weighted-average common
shares outstanding in period |
|
|
15,730,954 |
|
|
|
12,289,743 |
|
|
|
14,818,667 |
|
|
|
12,248,096 |
|
Add dilutive effects of stock options
and warrants |
|
|
1,519,902 |
|
|
|
1,166,431 |
|
|
|
1,689,116 |
|
|
|
664,148 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted weighted-average common
shares outstanding in period |
|
|
17,250,856 |
|
|
|
13,456,174 |
|
|
|
16,507,783 |
|
|
|
12,912,244 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings (loss) per common share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations |
|
$ |
0.19 |
|
|
$ |
0.01 |
|
|
$ |
0.52 |
|
|
$ |
0.09 |
|
Loss from discontinued operations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(0.02 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per common share |
|
$ |
0.19 |
|
|
$ |
0.01 |
|
|
$ |
0.52 |
|
|
$ |
0.07 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings (loss) per common share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations |
|
$ |
0.17 |
|
|
$ |
0.01 |
|
|
$ |
0.47 |
|
|
$ |
0.08 |
|
Loss from discontinued operations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(0.02 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per common share |
|
$ |
0.17 |
|
|
$ |
0.01 |
|
|
$ |
0.47 |
|
|
$ |
0.06 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock
Based Compensation As of January 1, 2006, the Company 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 the Companys 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, the Company 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 because the grant
price equaled or was above the market price on the date of grant for options issued by the Company.
Net income for the three months ended September 30, 2006 includes $188,013 of compensation
costs related to outstanding stock options and $16,500 of compensation costs related to restricted
stock awards that vested during the period. Net income for the nine months ended September 30,
2006 includes $528,641 of compensation costs related to outstanding stock options and $49,500 of
compensation costs related to restricted stock awards that vested during
8
the period. Net income
for the three months ended September 30, 2005 includes $16,500 of compensation costs related to
restricted stock awards that vested during the period. Net income for the nine months ended
September 30, 2005 includes $49,500 of compensation costs related to restricted stock awards that
vested during the period. There were no net income tax benefits related to the Companys
stock-based compensation arrangements during the three or nine months ended September 30, 2006
because a valuation allowance has been provided for 100% of the Companys net deferred tax assets
at September 30, 2006. All of the stock-based compensation expense is included in general and
administrative expenses for each reporting period.
The Company maintains stock plans under which the Company may grant stock awards, incentive
stock options, and nonqualified stock options to employees and officers, consultants, and
non-employee directors. Nonqualified stock options have been granted in prior years to our
directors (which generally vest immediately) under both our 1991 Directors Stock Plan and under
our 1998 Stock Plan. Nonqualified and incentive stock options have been granted in prior years to
our officers and employees (which generally vest over periods up to four years) under our 1991
Stock Option Plan and our 1998 Stock Plan. During the nine months ended September 30, 2006, 22,500
nonqualified stock options were issued to the directors of the Company under the 1998 Stock Plan.
During the nine months ended September 30, 2006, 140,000 nonqualified stock options were issued to
new employees of the Company outside of the Companys existing stock option plans pursuant to an
exception provided by the American Stock Exchange and 131,000 qualified stock options were issued
to employees of the Company under the 1998 Stock Plan. On June 12, 2006, 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 by 1,000,000 shares to a total of 3,750,000 shares of common stock of the
Company. At September 30, 2006, there were 806,366 options available for grant under the Companys
1998 Stock Plan and there were no options available for grant under the Companys 1991 Stock Plans.
A summary of option activity for the nine months ended September 30, 2006 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average |
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
Remaining |
|
|
Aggregate |
|
|
|
|
|
|
|
Average |
|
|
Contractual |
|
|
Intrinsic |
|
|
|
Shares |
|
|
Exercise Price |
|
|
Term (years) |
|
|
Value |
|
Balance, December 31, 2005 |
|
|
2,289,143 |
|
|
$ |
2.98 |
|
|
|
|
|
|
|
|
|
Granted |
|
|
293,500 |
|
|
|
12.78 |
|
|
|
|
|
|
|
|
|
Exercised |
|
|
(473,669 |
) |
|
|
2.53 |
|
|
|
|
|
|
|
|
|
Canceled |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forfeited |
|
|
(12,500 |
) |
|
|
8.57 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, September 30, 2006 |
|
|
2,096,474 |
|
|
$ |
4.42 |
|
|
|
6.74 |
|
|
$ |
7.52 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable, September 30, 2006 |
|
|
1,544,932 |
|
|
$ |
3.00 |
|
|
|
5.90 |
|
|
$ |
8.94 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The weighted average grant date fair value of the 22,500 options granted to the Companys
9
directors during the nine months ended September 30, 2006 was $11.22. The weighted average grant
date fair value of the 271,000 options granted to employees during the nine months ended September
30, 2006 was $8.33. In each case, the fair value was measured using the Black-Scholes valuation
model with the following assumptions: expected stock price volatility of 88%; risk free interest
rate of 4.68%; no dividends; and an expected future life of 4.1 years for employees and 6
years for directors. The fair value of the stock option grants are amortized over the respective
vesting period using the straight-line method and assuming a forfeiture rate of 5%.
As of September 30, 2006, there was $2,409,000 of total unrecognized compensation costs
related to stock options. These costs are expected to be recognized over a weighted average period
of 1.91 years.
The total intrinsic value of stock options exercised was $520,000 and $5,254,000 during the
three and nine months ended September 30, 2006, respectively. The total fair value of stock
awards vested was $36,000 and $245,000 during the three and nine months ended September 30, 2006,
respectively.
Cash received from stock option exercises for the three and nine months ended September 30,
2006 was $285,000 and $1,198,000, respectively. Cash received from stock option exercises for the
three and nine months ended September 30, 2005 was $69,000 and $180,000, respectively.
The following table illustrates the pro forma effect on net income and earnings per share if
the Company had applied the fair value recognition provisions of FAS No. 123(R) for the three
and nine month periods ended September 30, 2005:
|
|
|
|
|
|
|
|
|
|
|
Three Months |
|
|
Nine Months |
|
|
|
Ended |
|
|
Ended |
|
|
|
September 30, 2005 |
|
|
September 30, 2005 |
|
Net income as reported |
|
$ |
169,145 |
|
|
$ |
825,323 |
|
|
|
|
|
|
|
|
|
|
Deduct: Total stock-based employee
compensation expense determined
under fair value based method |
|
|
(78,356 |
) |
|
|
(263,666 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income pro forma |
|
$ |
90,789 |
|
|
$ |
561,657 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income per basic common share: |
|
|
|
|
|
|
|
|
As reported |
|
$ |
0.01 |
|
|
$ |
0.07 |
|
|
|
|
|
|
|
|
Pro forma |
|
$ |
0.01 |
|
|
$ |
0.05 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income per diluted common share: |
|
|
|
|
|
|
|
|
As reported |
|
$ |
0.01 |
|
|
$ |
0.06 |
|
|
|
|
|
|
|
|
Pro forma |
|
$ |
0.01 |
|
|
$ |
0.04 |
|
|
|
|
|
|
|
|
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: stock price
10
volatility of 46%; risk-free interest rate of 4.42%; 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.
Statement
of Cash Flows Cash and all highly liquid investments with a maturity of three
months or less at the date of purchase, including money market mutual funds, short-term time
deposits, and government agency and corporate obligations, are classified as Cash and cash
equivalents.
Minority
Interest The minority shareholders interest in the equity and the income of CAC
LLC is included in minority interest in the accompanying consolidated financial statements.
Effective April 1, 2006, the assets (consisting principally of the investment in MM 1995-2) and
liabilities of CAC LLC (consisting principally of a long-term note payable) were distributed to its
shareholders (including MGT), the separate operating activities of CAC LLC ceased, and the minority
shareholders interest in the equity and income CAC LLC has been eliminated.
Reclassification
Certain 2005 amounts have been reclassified to conform to current year
presentation. Such reclassifications had no impact on the Companys net income (loss) or
stockholders equity.
2. Significant Equity Transactions
Stock
Warrant Exercises At December 31, 2005, 892,518 stock purchase warrants that had been
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,
the Company exercised its 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 common stock of the Company. At September 30, 2006, 91,001 warrants remained outstanding
due to restrictions placed upon one group of the warrant holders to limit its holdings of the
Companys common stock to 9.999% of total shares outstanding.
Private
Placement On April 7, 2006, the Company completed a private placement of 2,012,548
shares of its 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). The Private Placement
was made pursuant to a Securities Purchase Agreement, dated as of March 29, 2006. In addition, the
Company entered into a Registration Rights Agreement, dated March 29, 2006, with the investors,
pursuant to which the Company 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, that was declared effective by the SEC on May 9, 2006. The Company is obligated to
use its 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 the volume restrictions under Rule
144(k) of the Securities Act of 1933, as amended (the Securities Act).
11
The Company received net cash proceeds of approximately $26 million from the Private
Placement, of which it used $5,064,000 for the retirement of long-term debt, and the balance of
which it has and intends to continue to use for capital expenditures and for working capital
purposes. The Company paid a cash commission in the amount of $1,856,419 to Roth Capital Partners,
LLC, its 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 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.
3. Investment in Unconsolidated Affiliate
During the first and third quarters of 2006, the Company acquired additional equity interests
in MM 1995-2, its unconsolidated affiliate. The purchase price of $1,260,000 was financed from a
combination of cash on hand and borrowings on the Companys lines of credit. As a result, the
Company, through MGT, now owns a 36.26% economic interest in MM 1995-2. The Company utilizes the
equity method to account for its investment in MM 1995-2. Summarized financial information for MM
1995-2 at September 30, 2006 and December 31, 2005 and for the three and nine months ended
September 30, 2006 and 2005, are as follows:
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
December 31, |
|
|
|
2006 |
|
|
2005 |
|
Total current assets |
|
$ |
5,744,715 |
|
|
$ |
2,173,222 |
|
Property, plant and equipment, net |
|
|
5,896,470 |
|
|
|
6,180,090 |
|
Total other assets |
|
|
10,166 |
|
|
|
15,429 |
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
11,651,351 |
|
|
$ |
8,368,741 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities |
|
$ |
877,215 |
|
|
$ |
1,151,906 |
|
Long-term note payable |
|
|
487,037 |
|
|
|
912,799 |
|
Total shareholders equity |
|
|
10,287,099 |
|
|
|
6,304,036 |
|
|
|
|
|
|
|
|
|
Total liabilities and shareholders equity |
|
$ |
11,651,351 |
|
|
$ |
8,368,741 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2006 |
|
|
2005 |
|
|
2006 |
|
|
2005 |
|
Total revenues |
|
$ |
2,866,781 |
|
|
$ |
2,332,456 |
|
|
$ |
8,357,557 |
|
|
$ |
7,397,103 |
|
Total costs and expenses |
|
|
1,137,685 |
|
|
|
1,008,545 |
|
|
|
3,374,494 |
|
|
|
3,105,245 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
1,729,096 |
|
|
$ |
1,323,911 |
|
|
$ |
4,983,063 |
|
|
$ |
4,291,858 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Companys equity investment in unconsolidated affiliate balance at September 30,
2006 includes approximately $795,000 of unamortized purchase price premium on interests acquired. The
purchase price premium is being amortized over a period of 14 years, which represents the weighted
average useful life of the underlying assets acquired.
12
4. Intangible Contract Rights Acquired
During the third quarter of 2006, PowerSecure purchased contract rights to provide services to
federal customers of an investor-owned utility. The rights acquired include four existing
contracts; rights to five existing proposals; a three-year non-compete agreement from the seller;
and a three-year master service agreement with the utility. The purchase price for the contract
rights was $1,500,000 which has been allocated to the individual rights acquired and is being
amortized over the respective expected lives of the assets acquired.
5. Debt
The balance of notes payable at September 30, 2006 and December 31, 2005 consists of the
following:
|
|
|
|
|
|
|
|
|
|
|
September 30 |
|
|
December 31 |
|
|
|
2006 |
|
|
2005 |
|
Lines of credit |
|
$ |
|
|
|
$ |
1,314,200 |
|
Term loans: |
|
|
|
|
|
|
|
|
Settlement note payable |
|
|
|
|
|
|
1,687,500 |
|
Equipment and project loans |
|
|
|
|
|
|
1,210,604 |
|
Investment loan |
|
|
|
|
|
|
629,505 |
|
|
|
|
|
|
|
|
Total notes payable |
|
|
|
|
|
|
4,841,809 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less current maturities: |
|
|
|
|
|
|
|
|
Settlement note payable |
|
|
|
|
|
|
(750,000 |
) |
Equipment and project loans |
|
|
|
|
|
|
(300,453 |
) |
Investment loan |
|
|
|
|
|
|
(197,833 |
) |
|
|
|
|
|
|
|
Current maturities of notes payable |
|
|
|
|
|
|
(1,248,286 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term maturities of notes payable |
|
$ |
|
|
|
$ |
3,593,523 |
|
|
|
|
|
|
|
|
Upon completion of the Private Placement described in Note 2, in April 2006 the Company
paid down its lines of credit and term loan balances to $0 and has extinguished all of its term
loan debt. The Company has retained its lines of credit and has amended its credit agreement with
its lender to eliminate the annual facility fee, reduce the unused line fee, reduce the interest
rate on any borrowings and to reduce or eliminate certain compliance reporting requirements until
such time as the Company may borrow under the lines of credit.
6. 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
13
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. All obligations of the
Company under the settlement were extinguished during the second quarter of 2006.
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.
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 Other Party Claims or that it will prevail
on the counterclaims brought against it by the Other Parties. However, should the Company realize
any recovery (net of litigation expenses) from the resolution of such claims and/or counterclaims,
50% of such net recovery would be allocated to the Company, and the remaining 50% would be
allocated as additional settlement funds payable to the Class.
Other Matters On March 14, 2006, the Company received a letter from the Market Regulation
Department of the National Association of Securities Dealers (the NASD), on behalf of the
American Stock Exchange, advising that it is conducting a review of trading activity in the
Companys common stock from November 2005 until the present. In that letter, the NASD requested
various documents and information in connection with the Companys announcements, contracts and
orders during that time period. Management of the Company is cooperating fully with this review and
has provided to the NASD the documentation that confirms all such contracts and orders supporting
the Companys 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.
On May 17, 2006, the Company received a letter from the Securities and Exchange Commission
(the SEC) notifying the Company that the SEC is conducting an informal, non-public inquiry
regarding the Company. The inquiry requested the voluntary provision of a chronology of recent
events relating to announcements made by the Company in February and March 2006 of orders received
by the Companys PowerSecure subsidiary, which includes events that were the subject of the
previous review by the NASD. The SEC has advised the Company that the inquiry should not be
construed as an indication by the SEC that any violation of law has
occurred, and should not be considered a reflection upon any person or entity. Management of
the Company is cooperating fully with this inquiry and has provided to the SEC the information
requested.
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
14
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.
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.
Preferred Stock RedemptionDuring the nine months ended September 30, 2006, the Company
retired an additional 55 shares of its Series B Preferred Stock at a redemption value of $81,000.
The balance of the unpaid redemption obligation at September 30, 2006 and December 31, 2005, was
$324,000 and $405,000, respectively, and is included in Accrued and other liabilities in the
accompanying consolidated balance sheets.
7. Segment Information
The Companys 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 Companys reportable business segments include: natural gas measurement
services; distributed generation; and automated energy data collection and telemetry.
The operations of the Companys natural gas measurement services segment are conducted by
Southern Flow. Southern Flows 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 Companys distributed generation segment are conducted by PowerSecure.
PowerSecure commenced operations in September 2000. The primary elements of PowerSecures
distributed generation products and services include project design and engineering, negotiation
with utilities to establish tariff structures and power interconnects, generator acquisition and
installation, process control and switchgear design and installation, and ongoing project
monitoring and servicing. PowerSecure markets its distributed generation
products and services directly to large end-users of electricity and through outsourcing
partnerships with utilities. Through September 30, 2006, the majority of PowerSecures 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,
15
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 PowerSecures utility, commercial and industrial
customers. Utility Engineering provides fee-based, technical engineering services to PowerSecures
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 PowerSecures segment results. In addition, during the third
quarter of 2006, PowerSecure purchased contract rights to provide services to federal customers of
an investor-owned utility. The rights acquired include four existing contracts; rights to five
existing proposals; a three-year non-compete agreement from the seller; and a three-year master
service agreement with the utility.
The operations of our automated data collection and telemetry segment are conducted by
Metretek Florida. Metretek Floridas 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, the Company discontinued the contract manufacturing
business.
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 Companys 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 (primarily interest and finance charges) not allocated to
reportable segments. The table information excludes the revenues, depreciation, and losses of the
discontinued MCM operations for all periods presented.
16
Summarized Segment Financial Information
(all amounts reported in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2006 |
|
|
2005 |
|
|
2006 |
|
|
2005 |
|
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Southern Flow |
|
$ |
3,941 |
|
|
$ |
3,096 |
|
|
$ |
12,255 |
|
|
$ |
9,683 |
|
PowerSecure |
|
|
28,221 |
|
|
|
5,980 |
|
|
|
68,964 |
|
|
|
19,525 |
|
Metretek Florida |
|
|
964 |
|
|
|
999 |
|
|
|
2,549 |
|
|
|
2,512 |
|
Other |
|
|
320 |
|
|
|
102 |
|
|
|
753 |
|
|
|
303 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
33,446 |
|
|
$ |
10,177 |
|
|
$ |
84,521 |
|
|
$ |
32,023 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment profit (loss) (1): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Southern Flow |
|
$ |
710 |
|
|
$ |
296 |
|
|
$ |
2,196 |
|
|
$ |
1,323 |
|
PowerSecure |
|
|
2,767 |
|
|
|
159 |
|
|
|
6,563 |
|
|
|
849 |
|
Metretek Florida |
|
|
(5 |
) |
|
|
(7 |
) |
|
|
(134 |
) |
|
|
(334 |
) |
Other |
|
|
(1,038 |
) |
|
|
(643 |
) |
|
|
(2,394 |
) |
|
|
(1,869 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
2,434 |
|
|
$ |
(195 |
) |
|
$ |
6,231 |
|
|
$ |
(31 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Southern Flow |
|
$ |
26 |
|
|
$ |
19 |
|
|
$ |
72 |
|
|
$ |
93 |
|
PowerSecure |
|
|
1,759 |
|
|
|
170 |
|
|
|
2,587 |
|
|
|
746 |
|
Metretek Florida |
|
|
20 |
|
|
|
32 |
|
|
|
21 |
|
|
|
87 |
|
Other |
|
|
|
|
|
|
3 |
|
|
|
28 |
|
|
|
3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
1,805 |
|
|
$ |
224 |
|
|
$ |
2,708 |
|
|
$ |
929 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Southern Flow |
|
$ |
30 |
|
|
$ |
32 |
|
|
$ |
90 |
|
|
$ |
100 |
|
PowerSecure |
|
|
228 |
|
|
|
65 |
|
|
|
446 |
|
|
|
173 |
|
Metretek Florida |
|
|
29 |
|
|
|
31 |
|
|
|
90 |
|
|
|
98 |
|
Other |
|
|
19 |
|
|
|
7 |
|
|
|
57 |
|
|
|
22 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
306 |
|
|
$ |
135 |
|
|
$ |
683 |
|
|
$ |
393 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
|
2006 |
|
|
2005 |
|
Total assets: |
|
|
|
|
|
|
|
|
Southern Flow |
|
$ |
11,564 |
|
|
$ |
9,521 |
|
PowerSecure |
|
|
49,907 |
|
|
|
13,887 |
|
Metretek Florida |
|
|
3,875 |
|
|
|
3,960 |
|
Other |
|
|
19,028 |
|
|
|
2,583 |
|
|
|
|
|
|
|
|
Total |
|
$ |
84,374 |
|
|
$ |
29,951 |
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Segment profit (loss) represents income from continuing operations before equity income
in our unconsolidated affiliate, minority interest and income taxes. |
17
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
Introduction
The following discussion of our results of operations for the three and nine month periods
ended September 30, 2006 (referred to herein as the third quarter 2006 and nine month period
2006, respectively) and 2005 (referred to herein as the third quarter 2005 and nine month
period 2005, respectively) and of our financial condition as of September 30, 2006 should be read
in conjunction with our consolidated financial statements and related notes thereto included
elsewhere in this report.
Overview
We are a diversified provider of energy technology products, services and data management
systems primarily to industrial and commercial users and suppliers of natural gas and electricity.
As a holding company, we conduct our operations and derive our revenues through our three operating
subsidiaries, each of which operates a separate business:
|
|
|
PowerSecure, which designs, sells and manages distributed generation systems; |
|
|
|
|
Southern Flow, which provides natural gas measurement services; and |
|
|
|
|
Metretek Florida, which designs, manufactures and sells data collection and energy
measurement monitoring systems. |
In addition to these operating subsidiaries, we also own an approximate 36% economic interest
in an unconsolidated business, Marcum Midstream 1995-2 Business Trust (MM 1995-2), which owns and
operates water disposal facilities in northeastern Colorado.
We commenced operations in 1991 as an energy services holding company, owning subsidiaries
with businesses designed to pursue service opportunities primarily in the natural gas industry.
Since then, our business has evolved and expanded through acquisitions of companies, businesses and
new product lines that have allowed us to reach not only a broader portion of the energy market
(including the electricity market) but also markets outside of the energy field. 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.
Our revenues and results of operations, on a quarterly, period and annual basis, are dependent
upon, and are the consolidated result of, the revenues and results of operations of each of our
operating subsidiaries, our economic interest in MM 1995-2 and our corporate overhead. While we
operate generally in the energy technology products, services and data management industry, our
businesses are diversified and each of our business segments is operated independently of the
others and influenced and affected by many factors that may apply only to
18
that segment. Accordingly, our consolidated results of operations are an aggregation of
different 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 PowerSecures utility, commercial and industrial customers.
UtilityEngineering provides fee-based, technical engineering services to PowerSecures 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
PowerSecures future growth opportunities beyond its core distributed generation business. In
addition, during the third quarter of 2006, PowerSecure purchased contract rights to provide
services to federal customers of an investor-owned utility. The rights acquired include four
existing contracts; rights to five existing proposals; a three-year non-compete agreement from the
seller; and a three-year master service agreement with the utility. The purchase price for the
contract rights was $1,500,000.
Notwithstanding the addition of these business units and the acquisition of these contract
rights, 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 Publix Super Markets, Inc.
(Publix), 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 third quarter 2006,
PowerSecures revenues and segment profit showed substantial increases over the third quarter 2005
primarily due to the increased revenues from the Publix projects as well as the growth of
PowerSecures core distributed generation business and its new businesses as well as normal
quarter-to-quarter fluctuations inherent in its operations. During the third quarter 2006,
PowerSecures revenues were $28,221,000 (of which $17,137,000 was attributable to the Publix
projects), an increase of $22,241,000, or 372%, over the third 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 Flows business in the
second half of fiscal 2005 was adversely affected by Hurricanes Katrina and Rita. During the first
quarter 2006, Southern Flows Gulf Coast operations returned to normal levels. Southern Flows
revenues increased by $845,000, or 27%, during the third quarter 2006 as compared to the third
quarter 2005, due, in part, to increased field work and equipment
sales and services related to repairing
customer facilities that incurred 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 Floridas business and discontinue its contract
19
manufacturing operations. Metretek Floridas 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 decline in revenues but also a slight
reduction in its segment losses during the third quarter 2006 compared to the third 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
affiliate and included in our income from continuing operations and our net income. During the
first and third quarters of 2006, we acquired 9.375% of additional equity interests in MM1995-2.
The purchase price of $1,260,000 was financed from a combination of cash on hand and borrowings on
our lines of credit. As a result, we now own a 36.26% economic interest in MM 1995-2.
Due principally to an increase in revenues by PowerSecure, our consolidated revenues during
the third quarter 2006 increased by $23,269,000, representing a 229% increase over third quarter
2005 consolidated revenues. We recorded income from continuing operations and net income of
$2,911,000 during the third quarter 2006, including $627,000 equity in income from MM 1995-2, as
compared to income from continuing operations and net income of $169,000 during the third quarter
2005, which included $419,000 equity in income of MM 1995-2.
During the nine month period 2006, PowerSecures revenues and segment profit increased
significantly over the nine month period 2005 due to the commencement of revenues from the Publix
projects. Southern Flows revenues and segment profit also showed improvements during the nine
month period 2006 over the nine month period 2005 as a result of generally improved market
conditions and equipment sales and service revenues related to repairing customer facilities that
received hurricane damages in 2005. Metretek Floridas revenues also increased slightly during the
nine month period 2006 as compared to the nine month period 2005, due to normal fluctuations in its
business.
As a result of the aforementioned increases in our segment revenues, our consolidated revenues
during the nine month period 2006 increased by $52,498,000, representing a 164% increase over the
nine month period 2005 consolidated revenues. We recorded income from continuing operations of
$7,775,000 during the nine month period 2006, including $1,878,000 equity in income from MM 1995-2,
as compared to income from continuing operations of $1,125,000 during the nine month period 2005,
which included $1,341,000 equity in income of MM 1995-2. Our net income after discontinued
operations was $7,775,000 during the nine month period 2006, as compared to net income after
discontinued operations of $825,000 during the nine month period 2005, which included a loss on
discontinued operations of $300,000.
During the nine month period 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
20
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 $5.1 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
Managements discussion and analysis of our financial condition and results of operations are
based on our consolidated financial statements, which have been prepared in conformity with
accounting principles generally accepted in the United States of America. The preparation of these
financial statements requires management to make estimates, judgments and assumptions that affect
the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities
at the date of the financial statements and the reported amounts of revenues and expenses during
the reporting period. On an on-going basis, we evaluate our estimates, including those related to
revenue recognition and percentage of completion, fixed price contracts, product returns, warranty
obligations, bad debt, inventories, cancellations costs associated with long term commitments,
investments, intangible assets, assets subject to disposal, income taxes, restructuring, service
contracts, contingencies and litigation. We base our estimates on historical experience and on
various other assumptions that are believed to be reasonable under the circumstances, the results
of which form the basis for making estimates and judgments about the carrying value of assets and
liabilities that are not readily apparent from other sources. Estimates, by their nature, are based
on judgment and available information. Therefore, actual results could differ from those estimates
and could have a material impact on our consolidated financial statements, and it is possible that
such changes could occur in the near term.
We have identified the accounting principles which we believe are most critical to
understanding our reported financial results by considering accounting policies that involve the
most complex or subjective decisions or assessments. These accounting policies are described in our
Annual Report on Form 10-K for the year ended December 31, 2005 in Item 7. Managements 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
21
income taxes for all
periods presented.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2006 |
|
|
2005 |
|
|
2006 |
|
|
2005 |
|
|
|
(all amounts reported in thousands) |
|
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Southern Flow |
|
$ |
3,941 |
|
|
$ |
3,096 |
|
|
$ |
12,255 |
|
|
$ |
9,683 |
|
PowerSecure |
|
|
28,221 |
|
|
|
5,980 |
|
|
|
68,964 |
|
|
|
19,525 |
|
Metretek Florida |
|
|
964 |
|
|
|
999 |
|
|
|
2,549 |
|
|
|
2,512 |
|
Other |
|
|
320 |
|
|
|
102 |
|
|
|
753 |
|
|
|
303 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
33,446 |
|
|
$ |
10,177 |
|
|
$ |
84,521 |
|
|
$ |
32,023 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Profit: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Southern Flow |
|
$ |
1,092 |
|
|
$ |
682 |
|
|
$ |
3,377 |
|
|
$ |
2,451 |
|
PowerSecure |
|
|
7,468 |
|
|
|
1,675 |
|
|
|
18,337 |
|
|
|
5,080 |
|
Metretek Florida |
|
|
510 |
|
|
|
571 |
|
|
|
1,474 |
|
|
|
1,345 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
9,070 |
|
|
$ |
2,928 |
|
|
$ |
23,188 |
|
|
$ |
8,876 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment Profit
(Loss) (1): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Southern Flow |
|
$ |
710 |
|
|
$ |
296 |
|
|
$ |
2,196 |
|
|
$ |
1,323 |
|
PowerSecure |
|
|
2,767 |
|
|
|
159 |
|
|
|
6,563 |
|
|
|
849 |
|
Metretek Florida |
|
|
(5 |
) |
|
|
(7 |
) |
|
|
(134 |
) |
|
|
(334 |
) |
Other |
|
|
(1,038 |
) |
|
|
(643 |
) |
|
|
(2,394 |
) |
|
|
(1,869 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
2,434 |
|
|
$ |
(195 |
) |
|
$ |
6,231 |
|
|
$ |
(31 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Segment profit (loss) represents income from continuing operations before equity income in
our unconsolidated affiliate, minority interest and income taxes. |
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 Flows 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 PowerSecures 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
22
installation, and ongoing project monitoring and servicing. PowerSecure markets its distributed
generation products and services directly to large end-users of electricity and through outsourcing
partnerships with utilities. Through September 30, 2006, the majority of PowerSecures 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 PowerSecures utility, commercial and industrial customers.
UtilityEngineering provides fee-based, technical engineering services to PowerSecures 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 PowerSecures segment results. In addition, during the third quarter of 2006, PowerSecure
purchased contract rights to provide services to federal customers of an investor-owned utility.
The rights acquired include four existing contracts; rights to five existing proposals; a
three-year non-compete agreement from the seller; and a three-year master service agreement with
the utility.
The operations of our automated data collection and telemetry segment are conducted by
Metretek Florida. Metretek Floridas 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.
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.
Third Quarter 2006 Compared to Third Quarter 2005
Revenues. Our revenues are derived almost entirely from the sales of products and
services by our subsidiaries. Our consolidated revenues for the third quarter 2006 increased
$23,269,000, or 229%, compared to the third quarter 2005 due to increase in revenues at
23
PowerSecure and Southern Flow.
PowerSecures revenues are influenced by the number, size and timing of various projects as
well as the percentage completion on in-process projects. PowerSecures revenues have fluctuated
significantly in the past and are expected to continue to fluctuate significantly in the future.
PowerSecures revenues increased $22,241,000, or 372%, during the third quarter 2006 compared to
the third quarter 2005. The increase in PowerSecures revenues during the third quarter 2006
compared to the third quarter 2005 was due to a $20,734,000 increase in distributed generation
turn-key system project sales and services together with an increase of $1,507,000 in revenues from
shared savings projects, professional services, monitoring and other service related revenues,
including $1,390,000 of increased revenues contributed by PowerServices, UtilityEngineering,
EnergyLite, and government sector projects. The increase in PowerSecures 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 third quarter 2006
compared to the third quarter 2005. The increase in the number of distributed generation projects
was primarily due to the positive effects of the Publix projects, as well as an expansion of
PowerSecures projects into new geographic markets as a result of increased marking efforts and the
growth and market acceptance of new products and services by PowerSecure.
Southern Flows revenues increased $845,000, or 27%, during the third quarter 2006, as
compared to the third quarter 2005, due, in part, to increased field work and equipment sales and
service revenues related to repairing customer facilities that incurred hurricane damages in 2005,
as well as favorable market conditions in the oil and gas sector.
Metretek Floridas revenues decreased slightly by $35,000, or 4%, during the third quarter
2006 compared to the third 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 Floridas revenues have fluctuated significantly in the past
and are expected to continue to fluctuate significantly in the future.
Other revenues increased $218,000 during the third quarter 2006, as compared to the third
quarter 2005. This increase was comprised principally of interest earned on cash and cash
equivalents balances which resulted from the net proceeds of our recent Private Placement as well
as an increase in fees earned from managing our unconsolidated affiliate.
Costs and Expenses. The following table sets forth our costs and expenses during the periods
indicated:
24
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter-over-Quarter |
|
|
|
Quarter Ended September 30, |
|
|
Difference |
|
|
|
2006 |
|
|
2005 |
|
|
$ |
|
|
% |
|
|
|
(In thousands) |
|
|
|
|
|
|
|
|
|
Costs and Expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs of Sales and Services |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Southern Flow |
|
$ |
2,849 |
|
|
$ |
2,414 |
|
|
$ |
435 |
|
|
|
18 |
% |
PowerSecure |
|
|
20,752 |
|
|
|
4,305 |
|
|
|
16,447 |
|
|
|
382 |
% |
Metretek Florida |
|
|
454 |
|
|
|
427 |
|
|
|
27 |
|
|
|
6 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
24,055 |
|
|
|
7,146 |
|
|
|
16,909 |
|
|
|
237 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General and administrative |
|
|
5,536 |
|
|
|
2,008 |
|
|
|
3,528 |
|
|
|
176 |
% |
Selling, marketing and service |
|
|
936 |
|
|
|
692 |
|
|
|
244 |
|
|
|
35 |
% |
Depreciation and amortization |
|
|
306 |
|
|
|
135 |
|
|
|
171 |
|
|
|
127 |
% |
Reserarch and development |
|
|
163 |
|
|
|
189 |
|
|
|
(26 |
) |
|
|
-14 |
% |
Interest, finance charges and other |
|
|
14 |
|
|
|
202 |
|
|
|
(188 |
) |
|
|
-93 |
% |
Income taxes |
|
|
150 |
|
|
|
2 |
|
|
|
148 |
|
|
na |
|
Costs of sales and services include materials, personnel and related overhead costs
incurred to manufacture products and provide services. The 237% increase in cost of sales and
services for the third quarter 2006, compared to the third quarter 2005, was attributable almost
entirely to the increase in sales at PowerSecure and Southern Flow.
The 382% increase in PowerSecures costs of sales and services in the third quarter 2006 is
almost entirely a direct result of the 372% increase in PowerSecures revenues. PowerSecures
gross profit margin decreased to 26.5% during the third quarter 2006, as compared to 28.0% during
the third quarter 2005, reflecting additional personnel and capacity costs incurred to effectively
meet customer delivery expectations, in the third quarter 2006 compared to the third quarter 2005.
The 18% increase in Southern Flows costs of sales and services in the third quarter 2006 is
the result of the 27% increase in its revenues. Southern Flows gross profit margin increased to
27.7% for the third quarter 2006, compared to 22.0% during the third quarter 2005. The third
quarter 2006 gross profit margin is within the normal range of Southern Flows historical margins;
however, the third quarter 2005 gross profit margin is well below Southern Flows historical
margins reflecting the adverse effects on gross profit margins of Hurricanes Rita and Katrina
during that period.
The 6% increase in Metretek Floridas costs of sales and services in the third quarter 2006,
notwithstanding a 4% decline in Metretek Floridas revenues, was due primarily to recent cost
increases in component parts of its products. As a result, Metretek Floridas gross profit margin
decreased to 52.9% for the third quarter 2006, compared to 57.2% for the third quarter 2005.
General and administrative expenses include personnel and related overhead costs for the
support and administrative functions. The 176% increase in general and administrative expenses in
the third quarter 2006, as compared to the third quarter 2005, was due to increases in personnel
and related overhead costs associated with the development and growth of PowerSecures business,
and increased corporate overhead costs related to personnel costs,
25
expenses associated with implementing the requirements
of Sarbanes-Oxley, stock compensation expense and other 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 35% increase in selling, marketing and service expenses in the third quarter 2006, as
compared to the third 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 third 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 127%
increase in depreciation and amortization expenses in the third quarter 2006, as compared to the
third quarter 2005, primarily reflects an increase in depreciable assets acquired by PowerSecure in
the latter portions of fiscal 2005 and fiscal 2006 as well as an increase in amortization expense
associated with contract rights acquired by PowerSecure in the third quarter of 2006 and our
purchase of additional equity interests in MM1995-2 in the first and third quarters of 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 14% decrease in research and development expenses in the third quarter
2006, as compared to the third quarter 2005, primarily reflects
third-party product development costs
incurred in the third quarter 2005 which were not incurred in the third quarter 2006.
Interest, finance charges and other expenses include interest and finance charges on our
credit facility as well as other non-operating expenses. The 93% decrease in interest, finance
charges and other expenses in the third quarter 2006, as compared to the third quarter 2005,
reflects the repayment of all of our long-term debt obligations, during the second quarter 2006.
Income tax expenses include state income taxes in various state jurisdictions in which we have
taxable activities as well as federal alternative minimum tax. Historically, we have incurred no
federal income tax expense because of our consolidated net operating losses. During the third
quarter 2006, however, we determined that we would likely incur federal alternative minimum tax
during fiscal 2006. The increase in income taxes in the third quarter 2006, as compared to the
third quarter 2005, was due to increases in state income taxes incurred by PowerSecure and Southern
Flow in states in which they generated taxable income as well as federal alternative minimum tax.
Nine Month Period 2006 Compared to Nine Month Period 2005
Revenues. Our consolidated revenues for the nine month period 2006 increased
$52,498,000, or 164%, compared to the nine month period 2005. The increase was due to an
26
increase in revenues at each of our operating subsidiaries.
PowerSecures revenues are influenced by the number, size and timing of various projects as
well as the percentage completion on in-process projects. PowerSecures revenues have fluctuated
significantly in the past and are expected to continue to fluctuate significantly in the future.
PowerSecures revenues increased $49,439,000, or 253%, during the nine month period 2006 compared
to the nine month period 2005. The increase in PowerSecures revenues during the nine month period
2006 compared to the nine month period 2005 was due to a $46,605,000 increase in distributed
generation turn-key system project sales and services together with an increase of $2,834,000 in
revenues from shared savings projects, professional services, monitoring and other service related
revenues, including $2,041,000 of increased revenues contributed by PowerServices,
UtilityEngineering, EnergyLite, and government sector projects. The increase in PowerSecures
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 nine
month period 2006 compared to the nine month period 2005. The increase in the number of
distributed generation projects was primarily due to the positive effects of the Publix projects,
as well as an expansion of PowerSecures projects into new geographic markets as a result of
increased marking efforts and the growth and market acceptance of new products and services by
PowerSecure.
Southern Flows revenues increased $2,572,000, or 27%, during the nine month period 2006, as
compared to the nine month period 2005. The increase in Southern Flows revenues was primarily
attributable to increased field work and equipment sales and service revenues related to repairing
customer facilities that incurred hurricane damages in 2005, as well as favorable market conditions
in the oil and gas sector.
Metretek Floridas revenues increased $37,000, or 1%, during the nine month period 2006
compared to the nine month period 2005. The increase in Metretek Floridas revenues during the
nine month period 2006 compared to the nine month period 2005 was due to normal fluctuations in its
business. As discussed below under Quarterly Fluctuations, Metretek Floridas revenues have
fluctuated significantly in the past and are expected to continue to fluctuate significantly in the
future.
Other revenues increased $450,000, or 149%, during the nine month period 2006, as compared to
the nine month period 2005. This increase was comprised principally of interest earned on cash
and cash equivalents balances which resulted from the net proceeds of our recent Private Placement
as well as an increase in fees earned from managing our unconsolidated affiliate.
Costs and Expenses. The following table sets forth our costs and expenses during the periods
indicated:
27
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended |
|
|
Period-over-Period |
|
|
|
September 30, |
|
|
Difference |
|
|
|
2006 |
|
|
2005 |
|
|
$ |
|
|
% |
|
|
|
(In thousands) |
|
|
|
|
|
|
|
|
|
Costs and Expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs of Sales and Services |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Southern Flow |
|
$ |
8,878 |
|
|
$ |
7,232 |
|
|
$ |
1,646 |
|
|
|
23 |
% |
PowerSecure |
|
|
50,627 |
|
|
|
14,445 |
|
|
|
36,182 |
|
|
|
250 |
% |
Metretek Florida |
|
|
1,075 |
|
|
|
1,168 |
|
|
|
(93 |
) |
|
|
-8 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
60,580 |
|
|
|
22,845 |
|
|
|
37,735 |
|
|
|
165 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General and administrative |
|
|
13,474 |
|
|
|
5,817 |
|
|
|
7,657 |
|
|
|
132 |
% |
Selling, marketing and service |
|
|
2,868 |
|
|
|
1,989 |
|
|
|
879 |
|
|
|
44 |
% |
Depreciation and amortization |
|
|
683 |
|
|
|
393 |
|
|
|
290 |
|
|
|
74 |
% |
Reserarch and development |
|
|
536 |
|
|
|
515 |
|
|
|
21 |
|
|
|
4 |
% |
Interest, finance charges and other |
|
|
149 |
|
|
|
495 |
|
|
|
(346 |
) |
|
|
-70 |
% |
Income taxes |
|
|
262 |
|
|
|
16 |
|
|
|
246 |
|
|
|
1538 |
% |
The overall 165% increase in cost of sales and services for the nine month period 2006,
compared to the nine month period 2005, was attributable almost entirely to increased revenues at
Southern Flow and PowerSecure.
The 250% increase in PowerSecures costs of sales and services in the nine month period 2006
is almost entirely a direct result of the 253% increase in PowerSecures revenues. PowerSecures
gross profit margin increased to 26.6% during the nine month period 2006, as compared to 26.0%
during the nine month period 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.
The 23% increase in Southern Flows costs of sales and services in the nine month period 2006
is the result of the 27% increase in its revenues. Southern Flows gross profit margin improved to
27.6% for the nine month period 2006, compared to 25.3% during the nine month period 2005. While
the gross profit margins experienced during these periods are within Southern Flows normal
historical ranges, the gross profit margin during the nine month period 2005 was adversely affected
by Hurricanes Rita and Katrina.
The 8% decrease in Metretek Floridas costs of sales and services in the nine month period
2006, notwithstanding a 1% increase in Metretek Floridas revenues, was due primarily as the result
of overall lower costs in component parts of its products. As a result, Metretek Floridas gross
profit margin increased to 57.8% for the nine month period 2006, compared to 53.5% for the nine
month period 2005.
The 132% increase in general and administrative expenses in the nine month period 2006, as
compared to the nine month period 2005, was due primarily to increases in personnel and related
overhead costs associated with the development and growth of PowerSecures business. In addition,
increased corporate costs related to personnel costs, expenses associated with implementing the
requirements of Sarbanes-Oxley, stock
compensation expense and professional services together with smaller increases in personnel and
related overhead costs at Southern Flow and Metretek Florida also contributed to the overall
increase in general and
28
administrative expense during the nine month period 2006, as compared to
the nine month period 2005.
The 44% increase in selling, marketing and service expenses in the nine month period 2006, as
compared to the nine month period 2005, was due primarily to increased personnel and business
development expenses associated with the development and growth of the business of PowerSecure
during the nine month period 2006.
The 74% increase in depreciation and amortization expenses in the nine month period 2006, as
compared to the nine month period 2005, primarily reflects the effects of an increase in
depreciable assets acquired by PowerSecure as well as an increase in amortization expense
associated with contract rights acquired by PowerSecure in the third quarter of 2006 and our
purchase of additional equity interests in MM1995-2 in the first and third quarters of 2006.
The 4% increase in research and development expenses in the nine month period 2006, as
compared to the nine month period 2005, primarily reflects an increase in personnel costs.
The 70% decrease in interest, finance charges and other expenses in the nine month period
2006, as compared to the nine month period 2005, reflects the repayment of all of our long-term
debt obligations, in the second quarter 2006.
The increase in income taxes in the nine month period 2006, as compared to the nine month
period 2005, was due to increases in state income taxes incurred by PowerSecure and Southern Flow
in states in which they generated taxable income as well as an increase in federal alternative
minimum tax.
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 the recent significant Publix orders at PowerSecure, as well as the
effects of 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 PowerSecures new |
29
|
|
|
businesses, and the growth of their markets; |
|
|
|
the timing, pricing and market acceptance of our new products and services
such as Metretek Floridas 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; |
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changes in the prices charged by our suppliers; |
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our ability to make and obtain the expected benefits from acquisitions of
technology or businesses, and the costs related to such acquisitions; |
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changes in our operating expenses; and |
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the development and maintenance of business relationships with strategic
partners. |
Because we have little or no control over most of these factors, our operating results are
difficult to predict. Any substantial adverse change in any of these factors could negatively
affect our business and results of operations.
Our revenues and other operating results are heavily dependant upon the volume and timing of
customer orders and payments and the date of product delivery. The timing of large individual
sales is difficult for us to predict. Because our operating expenses are based on anticipated
revenues and because a high percentage of these are relatively fixed, a shortfall or delay in
recognizing revenue could cause our operating results to vary significantly from quarter-to-quarter
and could result in significant operating losses in any particular quarter. If our revenues fall
below our expectations in any particular quarter, we may not be able to reduce our expenses rapidly
in response to the shortfall, which could result in us suffering significant operating losses in
that quarter.
Over PowerSecures six 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. PowerSecures revenues
depend in large part upon the timing and the size of projects awarded to PowerSecure, such as the
recent significant
30
orders received by PowerSecure, and the timing of the completion of those
projects. As PowerSecure develops new related lines of business, its revenues and costs will
fluctuate as it takes time for revenues to develop, but also requires start-up expenses. Another
factor that could cause material fluctuations in PowerSecures quarterly results is the amount of
recurring, as opposed to non-recurring, sources of revenue. Through September 30, 2006, the
majority of PowerSecures revenues constituted non-recurring revenues.
Southern Flows 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 Flows 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 Flows future revenues and net
income. In addition, Southern Flows Gulf Coast customers are exposed to the risks of hurricanes
and tropical storms, which can adversely affect Southern Flows 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.
Liquidity and Capital Resources
Capital Requirements. We require capital primarily to finance our:
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operations; |
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inventory; |
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accounts receivable; |
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research and development efforts; |
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property and equipment acquisitions, including investments in shared savings projects; |
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software development; |
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debt service requirements; and |
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business and technology acquisitions and other growth transactions. |
31
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 September 30, 2006, we had working capital of $34,262,000, including $18,005,000 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.
Net cash used in operating activities was $4,651,000 in the nine month period 2006, consisting
of approximately $7,625,000 of cash provided by operations, before changes in assets and
liabilities, approximately $12,324,000 of cash used by changes in working capital and other asset
and liability accounts, and approximately $48,000 of cash provided by discontinued operations of
MCM. This compares to net cash provided by operating activities of $285,000 in the nine month
period 2005, consisting of approximately $1,527,000 of cash provided by operations, before changes
in assets and liabilities, approximately $566,000 of cash used in changes in working capital and
other asset and liability accounts, and approximately $676,000 of cash used by discontinued
operations of MCM.
Net cash used in investing activities was $3,952,000 in the nine month period 2006, as
compared to net cash used in investing activities of $987,000 in the nine month period 2005. The
majority of the net cash used by investing activities during the nine month period 2006 was
attributable to contract rights acquired by PowerSecure, the purchase of our additional investment
in our unconsolidated affiliate, and the purchase of equipment and leasehold improvements at
PowerSecure. The net cash used by investing activities during the nine month period 2005 was
attributable to equipment purchases for two shared savings distributed generation projects.
Net cash provided by financing activities was $24,420,000 in the nine month period 2006,
compared to net cash used in financing activities of $1,600,000 in the nine month period 2005. The
majority of the net cash provided by financing activities during the nine month period 2006 was
attributable to cash proceeds from the Private Placement and exercise of stock warrants and
options, partially offset by net payments on our line of credit and principal payments on our
long-term notes payable. The majority of the net cash used by financing activities during the nine
month period 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 $536,000 during the nine month period 2006
compared to $515,000 during the nine month period 2005. Virtually all of
our nine month period 2006 research and development expenses were directed toward the
enhancement of Metretek Floridas business, including the development of its M2M communications
products. During the remainder 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
32
$715,000, virtually all of which will be directed to Metretek Floridas business.
Our capital expenditures during the nine month period 2006 were approximately $2,708,000, the
vast majority of which was incurred for the purchase of contract rights, miscellaneous equipment
items, and leasehold improvements at PowerSecure. During the nine month period 2005, our capital
expenditures were approximately $929,000, including $439,000 of capital expenditures incurred in
building three PowerSecure shared savings distributed generation projects. We anticipate capital
expenditures in fiscal 2006 of approximately $2.9 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 PowerSecures shared savings distributed generation projects during the remainder
of fiscal 2006.
Project Loans. On May 9, 2005, Caterpillar Financial Services Corporation (referred to
herein, collectively with its affiliate Caterpillar Power Finance, as Caterpillar) offered
PowerSecure a $5,000,000 line of credit (the Caterpillar Equipment Line) 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 the Caterpillar Equipment Line, 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. PowerSecure had three shared savings project loans and one equipment loan
outstanding to Caterpillar in the aggregate amount of $1,137,000 at March 31, 2006. 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.
On May 18, 2006, Caterpillar notified PowerSecure that Caterpillar renewed the Caterpillar
Equipment Line until April 30, 2007, and increased its size to $7,500,000. The letter setting forth
the terms of the renewed and increased Caterpillar Equipment Line confirms the intent of
Caterpillar to finance equipment purchases by PowerSecure, but provides that it is not an
unconditional binding commitment to provide such financing. The Caterpillar Equipment Line is
contingent upon the continued credit-worthiness of PowerSecure in the sole discretion of
Caterpillar. At September 30, 2006, PowerSecure had the full $7.5 million available for additional
equipment purchases under the Caterpillar Equipment Line.
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), which was modified August 7, 2006 to reduce the interest rate on borrowed
funds, reduce the unused line fee, eliminate the annual fee and relax certain financial covenants
and reporting requirements. Southern Flow and PowerSecure are the borrowers under the Credit
Facility. Amounts, if any, borrowed under the Credit Facility currently bear interest at
33
the lenders prime rate. The Credit Facility matures on September 1, 2007. The Credit Facility had
been used primarily to fund the operations and growth of PowerSecure, as well as the operations of
Southern Flow and Metretek Florida. In April 2006, upon completion of the Private Placement
described above, we paid down our Credit Facility balances to $0.
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 PowerSecures eligible accounts receivable, plus 25% of the sum of
PowerSecures unbilled accounts receivable less the amount of PowerSecures unearned revenues or
advanced billings on contracts, plus 25% of PowerSecures inventory. Borrowings under the Southern
Flow Facility are limited to a borrowing base consisting of the sum of 80% of Southern Flows
eligible accounts receivable plus 20% of Southern Flows inventory. At September 30, 2006, the
aggregate borrowing base under the Credit Facility was $4,500,000, all of which was available for
borrowing.
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 current assets to current
liabilities ratio for PowerSecure, minimum tangible net worth for Southern Flow and maximum debt to
tangible net worth ratios of the Company. 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 FNBCs 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.
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 September 30, 2006 is approximately
$324,000.
Term Loan. CAC LLC had a term loan outstanding to a commercial bank in the amount of $579,000
at March 31, 2006. The term loan financed our purchase of additional equity
34
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. In April 2006, upon completion of the Private Placement described above, we
distributed the assets (consisting principally of the investment in MM 1995-2) and liabilities
(consisting principally of the term loan) of CAC LLC to its shareholders (including MGT), paid down
our share of the term loan balance 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. In April 2006, upon completion of
the Private Placement described above, 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. To the extent we borrow under
our Credit Facility or under the Caterpillar Equipment Line, we are obligated to make future
payments under those facilities. The following table sets forth our contractual obligations and
commercial commitments as they existed at September 30, 2006.
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Payments Due by Period (1) |
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Remainder of |
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Years |
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Years |
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After |
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Total |
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2006 |
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2007-2008 |
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2009-2010 |
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2010 |
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Contractual Obligations |
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Credit Facility (2) |
|
$ |
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|
$ |
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|
|
$ |
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|
|
$ |
|
|
|
$ |
|
|
Capital Lease Obligations |
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|
17,000 |
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|
|
2,000 |
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|
|
9,000 |
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|
|
6,000 |
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|
|
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|
Operating Leases |
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|
3,838,000 |
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|
186,000 |
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|
|
1,257,000 |
|
|
|
771,000 |
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|
|
1,624,000 |
|
Series B Preferred Stock |
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324,000 |
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324,000 |
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Caterpillar Equipment Line (2) |
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Total |
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$ |
4,179,000 |
|
|
$ |
512,000 |
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|
$ |
1,266,000 |
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|
$ |
777,000 |
|
|
$ |
1,624,000 |
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|
|
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|
|
|
|
|
|
|
|
|
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|
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|
(1) |
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Does not include interest that may become due and payable on such obligations in any
future period. |
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(2) |
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Total repayments are based upon borrowings outstanding as of September 30, 2006, not
projected borrowings under the Credit Facility or the Caterpillar Equipment Line. |
Off-Balance Sheet Arrangements. During the nine month period 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.
35
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, including
for working capital, research and development, capital expenditures and debt service commitments,
for at least the next 12 months. 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 in this Item and Part II, Item 1A Risk Factors below. We continually evaluate
opportunities to raise additional capital from sales of equity or debt securities, to improve or to
expand our credit facilities, or otherwise to strengthen our financial position. We also
continually evaluate opportunities to expand our current, or to develop new, products, services,
technologies and businesses that could increase our capital needs. In addition, from time to time
we consider the acquisition of, or the investment in, complementary businesses, products, services
and technologies that might affect our liquidity requirements. 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 nine month period 2006 includes $529,000 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 nine month period 2006
because a valuation allowance has been provided for 100% of the Companys net deferred tax assets
at September 30, 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
36
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 nine month period 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.
In June 2006, the FASB issued Interpretation No. 48, Accounting for Uncertainty in Income
Taxesan Interpretation of FASB Statement No. 109 (FIN 48). FIN 48 clarifies the accounting for
uncertainty in income taxes recognized in a companys financial statements and prescribes a
recognition threshold and measurement attribute for the financial statement recognition and
measurement of a tax position taken or expected to be taken in a tax return. FIN 48 will become
effective for us on January 1, 2007. We are currently evaluating the impact of adopting FIN 48 on
our financial position and results of operations.
In September 2006, the FASB issued FAS No. 157, Fair Value Measurements (FAS 157). FAS
157 defines fair value to measure assets and liabilities, establishes a framework for measuring
fair value, and requires additional disclosures about the use of fair value. FAS 157 is applicable
whenever another accounting pronouncement requires or permits assets and liabilities to be measured
at fair value. FAS 157 does not expand or require any new fair value measures. FAS 157 is
effective for our fiscal year beginning January 1, 2008. We are currently evaluating the impact
that the adoption of FAS 157 will have 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
37
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:
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our prospects, including our future revenues, expenses, net income, margins,
profitability, cash flow, liquidity, financial condition and results of operations; |
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our products and services and the markets therefor, including market position, market
share, market demand and benefits to customers; |
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our ability to successfully develop, operate and grow our businesses; |
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our business plans, strategies, goals and objectives; |
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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; |
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industry trends and customer preferences; |
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the nature and intensity of our competition, and our ability to successfully compete in
our markets; |
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business acquisitions, combinations, sales, alliances, ventures and other similar
business transactions and relationships; |
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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 |
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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
subsequently filed Quarterly Reports on Form 10-Q and Current
Reports on Form 8-K, 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
38
speaks only as of the date it is 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, 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.
Managements Discussion and Analysis of Financial Conditions and Results of Operations of this
Report.
At September 30, 2006, our cash and cash equivalent balance was approximately $18 million and
our Credit Facility had a zero balance. All of our cash equivalents are currently invested in
money market mutual funds and short-term corporate obligations, 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.
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 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 the effectiveness of our disclosure controls and procedures (as defined in Rules
13a-15(e) under the Exchange Act) as of September 30, 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
39
effective to provide reasonable assurance 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 SECs rules and forms, and that such information is accumulated and communicated
to our management, including our Chief Executive Officer and our Chief Financial Officer, as
appropriate, to allow timely decisions regarding disclosure.
Changes in Internal Control over Financial Reporting
No change in our internal control over financial reporting occurred during our most recent
fiscal quarter that has materially affected, or is reasonably likely to materially affect, our
internal control over financial reporting.
Limitations in Control Systems
A control system, no matter how well designed 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.
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PART II
OTHER INFORMATION
Item 1. Legal Proceedings
From time to time, we are involved in disputes and legal proceedings. For a description of
these legal proceedings, see note 6 to our consolidated financial statements, Commitments and
Contingencies, which is contained in Item 1 of Part I of this Report and incorporated herein by
this reference.
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, and the risk factors set forth in Item 1.A Risk Factors in
our Quarterly Reports on Form 10-Q for the quarters ended March 31, 2006, and June 30, 2006.
Item 6. Exhibits
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31.1 |
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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). |
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31.2 |
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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). |
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32.1 |
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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 (Furnished herewith). |
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32.2 |
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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 (Furnished herewith). |
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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.
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METRETEK TECHNOLOGIES, INC. |
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Date: November 6, 2006
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By:
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/s/ W. Phillip Marcum |
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W. Phillip Marcum |
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President and Chief Executive Officer |
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Date: November 6, 2006
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By:
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/s/ A. Bradley Gabbard |
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A. Bradley Gabbard |
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Executive Vice President |
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and Chief Financial Officer |
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